Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-4813) ON A LOAN IN THE AMOUNT OF US$400 MILLION

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Sustainable Development Unit South Asia Region Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-4813) ON A LOAN IN THE AMOUNT OF US$400 MILLION TO POWER GRID CORPORATION OF INDIA LIMITED (WITH THE GUARANTEE OF INDIA) FOR THE THIRD POWER SYSTEM DEVELOPMENT PROJECT January 30, 2012 Report No: ICR1862

2 CURRENCY EQUIVALENTS Fiscal Year Annual Average Exchange Rate Currency Unit = INR Fiscal Year: April 1 - March 31 Abbreviations and Acronyms AAD Advance Against Depreciation AC Alternating Current ADB Asian Development Bank CAS Country Assistance Strategy CAMPA Compensatory Afforestation Management and Planning Authority CEA Central Electricity Authority CERC Central Electricity Regulatory Commission ckm circuit kilometer CSR Corporate Social Responsibility CTU Central Transmission Utility DC Direct Current EHV Extra-High Voltage EMP Environment Management Plan EMS Environment Management System ESMD Environment and Social Management Department ERM Enterprise Risk Management ERP Enterprise Resource Planning ERR Economic Rate of Return ESPP Environment and Social Policy and Procedures ESS Environment and Social Safeguards FAC Forest Advisory Committee FDI Foreign Direct Investment FEAR Final Environmental Assessment Report FM Financial Management FPO Follow-on Public Offer FRA Forest Rights Act FY Fiscal Year GoI Government of India GIS Geographical Information System GW GigaWatt Gwh GigaWatt Hour HVAC High-Voltage, Alternating Current HVDC High-Voltage, Direct Current IBRD International Bank for Reconstruction and Development ICRR Implementation Completion and Results Report IEP Integrated Energy Policy IEAR Initial Environmental Assessment Report IEGC Indian Electricity Grid Code IPMCS Integrated Project Management and Control System IPO Initial Public Offer IPP Independent Power Producer 1 Handbook of Statistics on the Indian Economy, Reserve Bank of India, September 2011.

3 JBIC Japan Bank for International Cooperation JV Joint Venture km kilometer KPI Key Performance Indicator kv kilovolt M&E Monitoring and Evaluation MIS Management Information System MoEF Ministry of Environment and Forests MoF Ministry of Finance MoP Ministry of Power MoU Memorandum of Understanding MSEB Maharashtra State Electricity Board MSETCL Maharashtra State Electricity Transmission Co. Ltd. MTR Mid-Term Review MVA megavolt ampere MW megawatt MU Million Unit NEP National Electricity Policy NGO Non Governmental Organization NLDC National Load Despatch Center NTP National Tariff Policy NWTC North West Transmission Corridor O&M Operation and Maintenance PAD Project Appraisal Document PAP Project Affected Person PAT Profit After Tax PDO Project Development Objective PIP Project Implementation Plan PMR Project Management Report POSOCO Power System Operation Corporation Limited POWERGRID Power Grid Corporation of India Limited PSDP Power System Development Project PSE Public Sector Enterprise PTC Power Trading Corporation QER Quality Enhancement Review QPR Quarterly Project Report R&D Research and Development RAP Rehabilitation Action Plan RBI Reserve Bank of India RGGVY Rajiv Gandhi GrameenVidyutikaranYojana RLDC Regional Load Dispatch Center ROE Return on Equity ROW right-of-way SEBI Securities and Exchange Board of India SIL Specific Investment Loan TA Technical Assistance UCS Use of Country/Borrower Systems VLPGO Very Large Power Grid Operator WRSS II Western Region System Strengthening Scheme II

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5 CONTENTS Section 1: Project/Program Context, Development Objectives, and Design Context at Appraisal Original Project/Program Development Objectives (PDO) Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification Main Beneficiaries Original Components Revised Components Other Significant Changes... 5 Section 2: Key Factors Affecting Implementation and Outcomes Project Preparation, Design and Quality at Entry Implementation Monitoring and Evaluation Design, Implementation, and Utilization Safeguard and Fiduciary Compliance Post-completion Operation/Next Phase Section 3: Assessment of Outcomes Relevance of Project Design and Objectives Achievement of Project/Program Development Objectives Efficiency Justification of Overall Outcome Rating Overarching Themes, Other Outcomes and Impacts (if any) Section 4: Assessment of Risk to Development Outcome Assessment of Risk to Development Outcome Section 5: Assessment of World Bank and Borrower Performance Assessment of World Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1: Results Framework and Monitoring Annex 2: Project Costs and Financing Annex 3: Outputs by Component Annex 4: Economic and Financial Analysis Annex 5: Bank Lending and Implementation Support/Supervision Processes Annex 6: Beneficiary Survey Results Annex 7: Terms of Reference for Impact Assessment Study Annex 8: Stakeholder Workshop Report and Results Annex 9: Summary of Borrower's ICR Annex 10: Comments from POWERGRID/Government of India on Draft ICR... 75

6 Annex 11: Eligibility Criteria for Selection of Candidate Schemes to be Financed under PSDP III Annex 12: Comments of Co-financiers and Other Partners/Stakeholders Annex 13: List of Supporting Documents Annex 14: Maps... 79

7 1. Basic Information Country: India Project Name: Power System Development Project III Project ID: P L/C/TF Number(s): IBRD-4813 ICR Date: August 25, 2011 ICR Type: Core ICR Lending Instrument: SIL Borrower: POWERGRID Original Total Commitment: US$400.0 M Disbursed Amount: US$400.0 M Environmental Category: A Implementing Agencies Power Grid Corporation of India Limited 2. Key Dates Process Original Date Revised/ Actual Date(s) Process Original Date Revised / Actual Date(s) Concept 04/16/ /07/2004 Effectiveness: 05/31/ /15/2006 Review: Appraisal: 01/19/ /19/2005 Restructuring(s): N.A. Approval: 01/19/ /19/2006 Mid-term Review: 12/31/ /12/2010 Closing: 07/31/ /31/ Ratings Summary 3.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Highly Satisfactory Low or Negligible Satisfactory 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: Satisfactory 4. Sector and Theme Codes 1 Original Actual Sector Code (as % of total World Bank financing) Power Original Priority Actual Priority Theme Code (Primary/Secondary) Infrastructure services for private sector development Primary Primary

8 Regulation and competition policy Secondary Secondary Other financial and private sector development Secondary Secondary Climate change Secondary Secondary Pollution management and environmental health Secondary Secondary 5. Bank Staff Positions At ICR At Approval Vice President: Isabel Guerrero Praful Patel Country Director: N. Roberto Zagha Michael F. Carter Sector Manager: Jyoti Shukla Penelope J. Brook Project Team Leader: Kwawu Mensan Gaba Sunil K. Khosla ICR Team Leader: Surbhi Goyal N.A. ICR Primary Author: Ahmed El-Hamri N.A. 2

9 Section 1: Project/Program Context, Development Objectives, and Design 1. Context at Appraisal CAS/Support from the Bank: Country Background: The project, Power System Development Project III (PSDP III), was developed within the framework of the Country Assistance Strategy (CAS) ( ) with its objectives aligned with India s 10th Five Year plan ( ). The strategic principles of the CAS provided the underpinning of the World Bank s assistance to the Indian power sector as it was (and continues to be) considered a key sector whose poor performance has crippling effects on India s ability to achieve its economic growth and poverty reduction objectives. Binding constraints on the sector consisted of limited grid integration, a deficit in power sector capacity and severe power shortages as peak load shortages reached 12.1 percent and energy shortages 7.2 percent (in 2005) 2 resulting in substantial losses to the economy. In addition, given the low level of electricity access (44.2 percent of households lacked access) at the time of appraisal, Government of India s (GoI) goal of universal access by 2012 required sizable additions to generation capacity, transmission and distribution networks. The provision of adequate infrastructure being paramount to India s socioeconomic development objectives, this project was supporting GoI s continuous efforts to provide an adequate power generation, transmission and distribution infrastructure. Sector Background: Large investments in additional transmission capacity were deemed essential if power availability was not to constrain India's capacity for rapid growth. Furthermore, the capacity and efficient operation of the transmission segment was critical to the success of investments in other sectors, including those essential for the creation of employment and income. The principal responsibility for grid strengthening and increase in interstate power transmission capacity rests with the Power Grid Corporation of India Limited (POWERGRID), the government-owned central transmission utility (CTU). In recent years, there has been a manifold increase in POWERGRID s investments in its infrastructure to improve the performance of the existing network as well as provide the much needed capacity to transfer electricity from surplus regions to deficit ones. These actions were taken in tandem with the passage of the Electricity Act 2003 which had opened the way for competition in power transmission and distribution, power trading and market development, and new providers of power supply in rural areas. Rationale for World Bank Involvement: The World Bank s overall strategy for the power sector in India continues to focus on fostering the transition of the sector towards a low(er) carbon development path through the financing of relevant public investments while, simultaneously, promoting policies and regulatory measures for private sector participation. This engagement was an offshoot of the long-term strategic partnership that the World Bank had with POWERGRID since its inception in PSDP III loan formed an important part of the engagement strategy with POWERGRID that facilitated it in timely achievement of its investment plans and hence, contributing towards development of the National Grid to transfer power from surplus to deficit regions. The investment in transmission infrastructure has facilitated the establishment of generation plans in the resource rich areas and the evacuation of this power to the load centers located far away from these generation plants. Moreover, POWERGRID being a key player in the sector and an operator of the National and Regional Load Despatch Centres has contributed significantly to the policies for open access. The project was built on a successful partnership with an organization that being CTU of India is vital for the development of its power sector. 2 In 2011, the system s average peak deficit was about 10.3 percent and average energy deficit was about 8.5 percent 1

10 A series of direct loans to POWERGRID (amounting to about US$3.2 billion 3 ) under a program level engagement addressed structural and institutional constraints existing in the transmission subsector and created conditions to optimize sector development. This investment support to POWERGRID also aimed at improving the outcome-orientation and service delivery of POWERGRID, by: (i) facilitating higher economic use of generation resources and harnessing low carbon primary energy sources such as hydropower and wind that are unevenly distributed; (ii) providing optimal integration of all regions and greater grid stability; (iii) establishing the open access regime mandated in the Electricity Act 2003; and (iv) facilitating the development of a power trading market within the country and, wherever feasible, with India's neighbors. Over time, POWERGRID has emerged as a globally recognized transmission utility through consistently improving upon its institutional capacity across technical, procurement, social, environment, and financial management aspects. POWERGRID now operates one of the largest transmission networks in the world and is sharing its expertise through international consulting and construction services for transmission projects in South Asia (Afghanistan, Nepal, and Sri Lanka) and in Africa (Kenya, and Nigeria). Programmatic lending support to POWERGRID has contributed to the development of highcapacity transmission corridors which increased the interregional capacity of the National Grid from 1,500 megawatt (MW) in 1999 to 9,500 MW in 2006 and, correspondingly, significantly expanded the network of transmission lines from 35,119 circuit kilometer (ckm) to 55,121 ckm. In , at the time of PSDP III preparation, the interregional transmission capacity facilitated energy exchange of almost 35,000 Million Units (MU) across India, with 20,000 MU or 57 percent being transferred through three interregional lines financed by the World Bank (PSDP II). This is equivalent to offsetting the need for 6,800 MW of new generation capacity. 4 The World Bank s current CAS ( ) for India reaffirms the same priorities and programs with the power infrastructure at the core of project financing, especially in light of capital and Foreign Direct Investment (FDI) shortages resulting from the economic and financial crises of 2008 and Investments in the power sector aim at building upon the achievements of previous power projects, including those dedicated to energy generation and transmission. In financing PDSP III, the World Bank reaffirmed its commitment to a long-term partnership to support critical investments in the transmission segment. Project Description 2. Original Project/Program Development Objectives (PDO) As this project was part of a long-term investment and infrastructure upgrading program, it logically followed the achievement of PSDP I and PSDP II that focused on the continuous enhancement of POWERGRID s technical capacity and physical infrastructure. The objective of this project was to strengthen the transmission system in order to increase reliable power exchanges between the regions and states of India. To achieve this objective, the project focused on: (i) strengthening the transmission system in power deficit regions and increasing interregional transmission capacity; and (ii) developing POWERGRID s institutional capacity by building the tools to facilitate the implementation of open access and interregional trading. 3 PSDP I in 1993 (US$ 350 million), PSDP II in 2001 (US$ 450 million), PSDP III in 2006 (US$ 400 million), PSDP IV and additional financing in 2008 (US$ 1,000 million), and PSDP V in 2010 (US$ 1,000 million). 4 Refer Highways of Power - Story of the Second POWERGRID System Development Project, the World Bank publication. 2

11 Original Project Development Objectives (PDO) and Key Performance Indicators (KPIs) PDO Outcome Indicators To strengthen the transmission system in order to increase reliable power exchanges between the regions and states. Growth in power exchange between the regions MU Intermediate Results Results Indicators for Each Component (One per Component) Component One: Transmission system strengthening Growth in transmission capacity - ckm (investments and relevant technical support) Growth in transformation capacity - megavolt ampere (MVA) Component Two: Completion of balance works of the schemes financed by the World Bank under loan 4603-IN for POWERGRID System Development Project II beyond the loan closing date of June 30, 2006 Completion of National Load Dispatch Center (NLDC) 3. Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification The project objectives were not revised. While there were no significant changes to the project itself, other developments (as described below) influenced the overall engagement and structuring of supervision and Mid-Term Review (MTR) missions. The only outcome indicator for the project, growth in power exchange between the regions, outperformed its end year targets 5. Thus, the KPIs were rated satisfactory in terms of implementation progress. In addition to the above outcome indicator, three intermediate indicators were also monitored. The first such indicator (transformation capacity) also outperformed its end year target 6. The second indicator (transmission capacity) outperformed all the targets for intermediate years but due to delays caused by GoI s notification regarding the Forest Rights Act (FRA) in August 2009 (factors outside the control of POWERGRID), the end-year targets was revised by 4.7 percent 7 during the mid-term review (MTR) to reflect the impacts of the delays on results on the ground. The third one linked to the completion of the NLDC was also successfully met during the project implementation period. 4. Main Beneficiaries POWERGRID was the borrower and the direct beneficiary of the PSDP III loan. The loan provided resources and funds for investments needed by POWERGRID to undertake the physical expansion of the transmission system while simultaneously improving its technical, financial and institutional capacity to enhance the transfer of energy across regions and reduce transmission costs, system losses and unserved energy. Since POWERGRID is the CTU of India, the benefits of the various projects/schemes are extended to the various transmission and distribution utilities at the state level as well as to the independent power producers (IPP), which could rely on a strong network to allow them to fully benefit from the open access regime that was mandated by the Electricity Act Original Components 5 Target: 52,000 MU; actual: 56,747 MU 6 Target: 85,000 MVA; actual: 93,050 MVA 7 End year target was revised from 84,000 ckm to 80,000 ckm during MTR. The actual end year achievement for this indicator was 82,355 ckm. 3

12 PSDP III (US$400 million) was designed to contribute to the financing of POWERGRID s investment program totaling US$1.043 billion for the period (as per the project appraisal document (PAD) for PSDP III). Specifically, the loan supported the implementation of the following project components: Project Component One: Transmission System Strengthening Schemes (base cost of US$797 million). The schemes under the loan were categorized as core schemes that were identified at the time of appraisal and were advanced in the implementation cycle; and candidate schemes that were to be taken up subsequently. The core schemes identified during the appraisal are: a. Seoni-Wardha-Akola-Aurangabad transmission system The works consisted of: Transmission lines (financed under PSDP III) From Seoni to Wardha 765 kilovolt (kv) single circuit (initially to be operated at 400 kv) on a distance of 269 ckm From Wardha to Akola 400 kv double circuit on a distance of 324 ckm From Akola to Aurangabad 400 kv double circuit on a distance of 482 ckm Substations (financed under PSDP III) A new 400/220 kv Wardha substation (with a provision to upgrade to 765 kv) The extensions of 400/220 kv at Seoni, Akola and Aurangabad substations b. ±500kV, 2500 MW Balia-Bhiwadi high-voltage, direct current (HVDC) transmission system The works consisted of: Transmission lines (financed under PSDP III) From Balia to Bhiwadi ±500kV, 2,500 MW HVDC bipole line on a distance of 1,580 ckm Substations (initially proposed to be financed under PSDP III but to match commissioning of the associated generation projects, these were later financed under PSDP IV) HVDC terminal for 2,500 MW at Balia along with associated works HVDC terminal for 2,500 MW at Bhiwadi along with associated works c. Seoni-Bina 765 kv single circuit transmission link The works consisted of: A Transmission line (financed under PSDP III) from Seoni to Bina. This was a 765 kv single circuit line (initially to be operated at 400 kv) on a distance of 293 ckm. Substations (initially proposed to be financed under PSDP III but later financed by POWERGRID s own resources): the extensions of the 400/220 kv substation at Seoni and of the 400/220 kv substation at Bina. d. Candidate Schemes: A number of potential schemes were tentatively identified and included after project effectiveness, taking advantage of cost savings during implementation. Such schemes were eligible for IBRD financing provided the project implementation plans (PIP) submitted by POWERGRID established that these schemes met the eligibility criteria (Annex 11) for financing under this project. The World Bank reviewed the process followed by POWERGRID in identification and planning of the least-cost technical and economic options for each of the "core" schemes in this time slice and endorsed the eligibility criteria for "candidate" schemes in agreement with POWERGRID. These eligibility criteria also included steps that POWERGRID needed to follow for adequate social and environmental safeguards while planning and implementation of these schemes. The following two candidate schemes were included during project implementation and their work consisted of: 4

13 The North-West Transmission Corridor (NWTC) that included the Agra-Gwalior second circuit 765 kv transmission line (initially to be operated at 400 kv) (128 ckm) and the Kankroli-Zerda 400 kv double circuit transmission line (470 ckm). Extensions of 400/220 kv substations at Agra, Gwalior, Zerda and Kankroli were funded under PSDP IV; and Western Region System Strengthening Scheme-II (WRSS II) that included the Bina-Gwalior 765 kv second single circuit transmission line (initially to be operated at 400 kv) on a distance of 233 ckm. Some of the lines were established to operate at 765 kv voltage level whereas they were to be charged initially at 400 kv voltage level. POWERGRID s rationale for such planning was to proactively address right-of-way (ROW) and construction issues, and erect transmission lines whose charging at a higher voltage level was to be done at a later stage. Higher charging was anticipated over a relatively shorter timeframe because of the significant load growth and the commissioning of a large number of new generation plants over the next two Five Year plans. Technical Assistance for POWERGRID: A provision for a technical assistance (TA), as part of project component one, was retained at the appraisal with the objective of assisting POWERGRID in strengthening its institutional capacity, if the need were to arise based on the complexity of the technology to adopt for the transmission networks. It was further agreed that the selection of TA to be financed under PSDP III was to depend on the availability of alternative grant finance, an option preferred by POWERGRID and GoI. Given this context, POWERGRID decided to finance the relevant TA studies through its own resources. Project Component Two: This consisted of the completion of the PSDP II project and its estimated cost was US$75 million. The final utilization against this component was US$30.26 million. PSDP III provided funding for the: (i) completion of the NLDC; and (ii) construction of transmission lines, substations and purchase of system equipment, initiated under PSDP II and whose completion occurred after its closing date of June 30, This component was also eligible to finance balance payments, if any, from PSDP II. The following works were taken up under PSDP III against this component: (i) Eastern Region System Coordination and Control Project completed in June 2005; (ii) Western Region System Coordination and Control Project completed in August 2005; (iii) System Strengthening-III in Southern Region Grid completed in April 2007; (iv) High Capacity East-North Interconnector-II completed in August 2007; (v) POWERGRID S Diversification into Telecom Business completed; and (vi) NLDC completed in March Revised Components The project s original components were not revised. 7. Other Significant Changes The loan was appraised in January 2005, approved in January 2006, signed in May 2006 and became effective on December 15, The MTR was carried out during April 12-23, The World Bank and the borrower agreed during the appraisal of PSDP IV, which had become effective on March 28, 2008 (nine months before the original MTR date), to hold a common MTR for PSDP III and PSDP IV. During the MTR, an implementation support mission for 5

14 PSDP V, that became effective on January 8, 2010, was also undertaken. These three projects (PSDP III, PSDP IV and PSDP V) have the same PDO, support the same entity/sector and are structurally linked. Section 2: Key Factors Affecting Implementation and Outcomes 1. Project Preparation, Design and Quality at Entry a. Soundness of the Background Analysis: POWERGRID s satisfactory achievements and learning experience resulting from the implementation of PSDP I and PSDP II had a positive impact on the preparatory process of the project. Continuous and sound sector review by the World Bank resulted in an identification of key aspects specific to the project design. Furthermore, the preparation and appraisal phases benefited from a Quality Enhancement Review (QER) that took place in October In reviewing the sector strategy and the project s PDO, the QER panel endorsed the World Bank s rationale and agreed that, for the proposed project, the PDO needed to be focused on the planned investments under this project. The concept of candidate scheme, based on eligibility criteria, was also founded on sound principles under which any scheme could qualify for financing after its due diligence. b. Assessment of the Project Design: POWERGRID s strong technical design capability, including the establishment of a Research and Development (R&D) department and excellent collaboration with the Central Electricity Authority (CEA, technical regulatory institution of GoI) for the power system planning studies, and its extensive operational experience were very effective in determining the types and voltage levels required for the transmission network development. For instance, planning relevant sections of the new transmission network at higher voltage and capacity to efficiently meet the growing demand that is scattered across the country while proactively addressing ROW problems demonstrates POWERGRID s visionary acumen. The use of eligibility criteria (refer Annex 11) to identify investments as well as financing mechanisms for transmission schemes was an appropriate analytical tool adapted to carry out project design. By applying these criteria, POWERGRID ensured that the investment scheme was technically and operationally justified and had been formulated after taking into account other alternative investments. Furthermore, the scheme had to be based on the leastcost options and was part of POWERGRID s overall least-cost investment program. In addition, the project s schemes were economically and financially justified. The eligibility criteria were discussed at length with the World Bank team during the appraisal. One point to note here is that the effectiveness of the project was delayed by almost six months (from July 31, 2006 to December 15, 2006) due to the time taken by POWERGRID to prepare a financial security package to comply with the negative pledge clause in the loan agreement. Even though project effectiveness was delayed, the project successfully met its PDO and outperformed its outcome indicator (growth in power exchange across regions). c. Adequacy of Government s Commitment: Another key factor that contributed to the effective implementation of the project was a strong project ownership by the borrower and GoI. POWERGRID s commitment to the project as well as its extensive experience and close working relationship with the World Bank facilitated the analytical and preparatory work during the project s preparation and appraisal phases. Early preparation, started during PSDP II, provided valuable insight into issues to be resolved by both parties. Furthermore, the use of the eligibility criteria ensured the stakeholders and government s commitment to the project. GoI s commitment to the project translated into institutional measures and actions that were needed for project implementation within the parameters of sector growth in terms of 6

15 transmission capacity development and institutional stakeholders and civil society at the state level. These actions also included the Central Electricity Regulatory Commission s (CERC s) regulations and the operationalization of the NLDC 8, an essential institution for transmission and power exchanges. d. Assessment of Risks: The overall risk rating for project implementation was low/medium. Specific risks for the implementation of key investments were rated low. To mitigate these risks, mostly foreseen delays in implementing the project s schemes, advance procurement action was taken for the investments before the first year of the project. Moreover, POWERGRID has demonstrated its ability to plan and implement complex investments on time and to cost. Other risks were also identified and these included risks for financial performance (low), tariffs (low/medium), institutional development (low), commercial aspects (low/medium), open access (medium), and inadequate implementation of safeguards (low). The mitigation measures consisted of actions and measures that were directly relevant to POWERGRID s operations and could be put in place by POWERGRID, such as compliance with financial covenants, arrears payments, and safeguards compliance. Other measures to be implemented by GoI institutions in tandem with POWERGRID, such as approval of tariffs, continued institutional development and implementation of the open access regime were to be subject to continuous dialog with the World Bank and other stakeholders to prevent any adverse impact. Furthermore, there were no controversial aspects related to this project and no major social or environmental issues had been anticipated in POWERGRID s operations. 2. Implementation The implementation of the project components and utilization of the loan proceeds were satisfactory. POWERGRID as well as GoI were instrumental in ensuring that project implementation was successful and that all components were completed on time and became operational within the expected timeline. The transmission schemes in this project had been designed, engineered and implemented by POWERGRID, and local and foreign contractors carried out supply and installation works. The implementation arrangements, as described in the PAD, also included the use of the practices institutionalized under the previous loans, including institutional oversight by the Ministry of Power (MoP) and the Ministry of Finance (MoF), in addition to regular portfolio reviews with the World Bank. The CEA had also contributed to this project in terms of sector planning, as noted earlier. The CERC was responsible for tariff formulation and notification as well as sectoral regulation at the central level. On the ground, the implementation of this project benefited from the technical capability of POWERGRID and its past experience in World Bank-financed projects. In addition to adherence to the World Bank procurement guidelines, POWERGRID's managerial, operational culture and project management allowed for an effective monitoring of implementation. The use of Integrated Project Management and Control System (IPMCS) and the project unit s planning and problem-solving capability were instrumental in addressing and solving problems as they occurred. Close supervision by the World Bank team with day-to-day responsibilities fully delegated to Delhi-based staff, who benefitted from an excellent relationship with and effective support by POWERGRID s staff at field offices, also contributed to an efficient monitoring of project components and timely completion of the project. Both parties ensured that supervision 8 As per GoI s directive, since October 2010, the entire system operation that includes NLDC and all the RLDCs is now operated and managed by a fully owned subsidiary of POWERGRID known as Power System Operation Corporation Limited (POSOCO) that was constituted in March POSOCO became fully functional from October

16 focused on resolving key project implementation issues, including physical implementation of transmission schemes and compliance with environmental and social safeguards (issues of forestry clearance and resettlement), financial performance and arrears collection objectives. The World Bank carried out a total of seven implementation support missions, including site visits. 3. Monitoring and Evaluation Design, Implementation, and Utilization Monitoring and Evaluation (M&E) Design: Arrangements for M&E of the project consisted of targets that were linked to the completion of the transmission schemes and their impacts over a given timeframe. In addition, the design of the M&E framework was intended to provide a comprehensive view on POWERGRID s performance from every aspect. Moreover, indicators additional to KPIs and covenanted targets were also agreed upon with the World Bank to objectively measure improvements in power sector performance as well as POWERGRID's corporate performance. POWERGRID demonstrated satisfactory performance through successfully meeting all legal and financial covenants, outperforming the outcome indicator for the project, robust financial performance at the entity level and sound operational parameters. Moreover, listing of POWERGRID on the Indian Stock Exchange introduced external monitoring checks on the company, ensuring efficient implementation of its investments, which was the objective of monitoring additional indicators under the project. Hence, given POWERGRID s satisfactory performance in achieving and reporting such indicators, these were decided to be discontinued during the MTR. The M&E framework also included actual baseline data (for 2005) and focused on annual monitoring and regular reporting of the progress in achievement of PDOs and project outputs. The targets for completion of investment projects consisted of physical achievements as well as their impacts on the performance of the transmission system. During the MTR, gaps in achieving the transmission capacity targets (ckm) due to factors beyond the control of POWERGRID were noted. Although this indicator outperformed its intermediate targets, its end year targets were revised downwards by 4.7% (from 84,000 ckm to 80,000ckm) during the MTR due to right-of-way (ROW) issues and delays in obtaining forest clearances, especially after notification of GoI regarding the FRA, in August Under the FRA, POWERGRID is required to take no-objection from elected stakeholders and officials at the village level for all the proposals involving diversion of forest land under the Forest (Conservation) Act. In view of such external factors, adjustments to the indicator were made on the understanding that the end year targets for the active PSDP V (closing date in FY2015), the most recent engagement with POWERGRID with the same PDO and KPIs as PSDP III, would not be revised and remain achievable by POWERGRID. M&E Implementation: Data collection adhered to the PAD guidelines and the borrower information system. The data collected for progress achieved on the outcome (growth in power exchange) and outputs indicators (transmission and transformation capacities) were monitored through an agreed reporting format. The IPMCS provided POWERGRID with real-time monitoring of physical installation of transmission lines and the NLDC (now operated and managed by POSOCO) provided continuous monitoring and data for power exchanges and transfers. POWERGRID established and provided the World Bank with a monthly report on billing and collection, quarterly progress monitoring reports, quarterly financial management reports, annual information about progress on key entity and sectoral performance indicators, audited annual financial statements (within six months of the end of each financial year), and such other information as the World Bank required. These arrangements did work in a satisfactory manner under the project and were replicated in future projects (PSDP IV and PSDP V) as well. In addition, the World Bank team periodically conducted site visits, to 8

17 monitor compliance with environmental and social safeguards, and engage in discussions regarding benefits achieved from the investments. The World Bank team also interacted regularly with various project stakeholders including MoP, MoF, CERC and the Power Trading Corporation (PTC), which have a keen interest in seeing a sustained and high performance from POWERGRID. M&E Utilization: In addition to POWERGRID s own scoreboard that provided decision makers with a retrospective analysis on performance and inputs for planning purposes, it produced and submitted to the World Bank for review the Quarterly Project Report (QPR), containing M&E data. The quarterly reports resulted in discussions on all aspects of the project ranging from procurement, engineering, safeguards and finance to the corporate monitoring group. These reports also provided a close monitoring of covenanted targets such as the debt-equity ratio, self-financing ratio and payment of arrears. In addition to financial performance evaluation, the technical data reporting mechanism also provided valuable information to CERC, MoP, MoF, and PTC. 4. Safeguard and Fiduciary Compliance Environmental and Social Safeguards (ESS): PSDP III was rated Category A on environmental safeguards management. Aspects linked to the ESS associated with the project have been addressed in accordance with the corporate Environment and Social Policy and Procedures (ESPP) developed by POWERGRID in 1998 and revised from time to time. The corporate ESPP is in compliance with the World Bank's safeguards policies and its provisions are systematically applied to all POWERGRID projects regardless of the source of financing. The ESPP outlines POWERGRID's approach and commitment to deal with ESS issues relating to its transmission schemes and lays out management procedures to address them. The ESPP provides POWERGRID with a framework for identification, assessment and management of ESS concerns at both organizational as well as field levels. Capacity building in the Environmental and Social Management Department (ESMD) of POWERGRID contributed significantly in the update of the corporate ESPP in 2005, which also benefitted from the review of the legal and institutional framework, analysis of priority issues (gap analysis) in the power transmission sector and wide ranging discussions including national and regional consultations. The ESPP was further updated in 2009 to meet the requirements of the new policies, revised rules and guidelines including those of multilateral funding agencies and to adopt international best practices to preempt all possible safeguards issues. During this revision, even wider stakeholder consultations, including with project affected people (PAPs) and local communities, were carried out. The revised ESPP was adopted by the World Bank as a pilot for Use of Country Systems (UCS) (OP 4.00) under PSDP V. The World Bank also provided guidance and support to POWERGRID in formulating its policy on Corporate Social Responsibility (CSR) that is now being implemented by POWERGRID across the country. The safeguards process followed during the preparation and appraisal stages of a scheme under the project included the preparation of an Initial Environmental Assessment Report (IEAR) for these transmission schemes. These IEARs were reviewed by the World Bank and the comments were taken into account in the Final Environmental Assessment Report (FEAR). The World Bank team had also recommended actions for further strengthening the environmental management practices through: (i) designation and assignment of environmental management specialists in the field and regional offices to assist with implementation and reporting of Environment Management Plan (EMP) implementation at POWERGRID; (ii) undertaking of the yearly Independent Environmental Audit of a sample of transmission lines and substations; and (iii) preparation of sustainability reports (prepared once every two years). In addition, POWERGRID implemented specific actions to improve 9

18 implementation monitoring, such as tracking and collating information on actual compensatory afforestation on the ground; updating of statutory clearances from the State Pollution Control Board; extending application of the integrated Environment Management System (EMS) to regional headquarters and project locations; and strengthening environmental training and capacity building. In full cognizance of social issues, POWERGRID ensures that its projects do not result in physical displacement of the local population. The same principles were followed for PSDP III as well. Where land appropriation was required, ESPP detailed out the process to be followed during the preparation and appraisal stages of a scheme under the project. This included undertaking social assessment of areas impacted by substations (where appropriation of land was involved) and preparation of a Rehabilitation Action Plan (RAP). These RAPs also included community development activities to help improve the socioeconomic status of the communities living in the vicinity of the substations. In addition, these communities were provided access to wage employment opportunities (including small contracts, particularly during operation and maintenance (O&M) of substations) both in the construction and operation of the substation. Under PSDP III, social assessment and preparation of RAP was done for Wardha substation. This approach was reviewed by the World Bank and supervised during implementation. Besides the regular monitoring of the RAP implementation by the ESMD, an external agency was engaged to undertake an impact assessment (refer Annex 7 for Terms of Reference) to assess the effectiveness of the RAP implementation and especially that of the community development works. The impact assessment undertaken, so far, of the RAP implementation has revealed an improvement of the socioeconomic status of a majority of the affected people, reflecting intensive and focused efforts being made by POWERGRID. Issues related to the implementation of FEAR provisions concerning compliance with the Forest (Conservation) Act (beyond the control of POWERGRID) and of RAP: Although POWERGRID s safeguards policies provide for appropriate actions and compensations, in the case of afforestation, forest clearances need to be approved by the Ministry of Environment and Forests (MoEF). These applications generally take a long time to be reviewed and approved by MoEF on the recommendation of the Forest Advisory Committee (FAC). As this process had been suspended during the period starting October 2006 to October 2007, when the Supreme Court had halted the constitution of FAC, no forest proposals were processed for approval. This resulted in delaying the FEAR submission dates and, consequently, also delayed works for the transmission lines by about two to three years (though none of the lines under PSDP III were substantially impacted). Further, the implementation of the RAP was delayed due to the prolonged process involved in acquiring land and extending resettlement entitlements to affected people by the local district administration. The implementation of the community development component of the RAP was also unduly delayed due to staffing constraints faced by POWERGRID at the regional level for following up with the district administration. Towards the end of 2008, the rating for overall safeguard compliance was downgraded to moderately satisfactory, partly due to external factors and partly due to POWERGRID. To improve safeguards performance, POWERGRID was advised to strengthen its ESMD. In response, POWERGRID started taking measures to strengthen its ESMD both at its Head Office and at regional offices to manage ESS concerns of the projects. On environmental issues, the focus was on two specific aspects related to forests: (i) coordination with MoEF to reduce delays in obtaining clearances under the Forest (Conservation) Act; and (ii) coordination with the recently formed state-level Compensatory Afforestation Management and Planning Authorities (CAMPAs) to monitor the plantations to be carried out as part of compensation. In parallel, POWERGRID, through MoP, requested MoEF to streamline the clearance process under the Forest (Conservation) Act. The decision is still under review by MoEF. 10

19 On social issues, the main concern was reaching an agreement with the district administration on compensation norms that were acceptable to PAPs. POWERGRID started working on alternatives to the regular land acquisition process, including consent award, and demonstrated its success in Raichur substation (under PSDP V). Given the actions taken by POWERGRID, the rating was upgraded to satisfactory in early Corporate Governance and Financial Management (FM): As a part of the exercise to benchmark itself with major international companies in the transmission industry, POWERGRID requested the World Bank in 2006 to conduct a financial accountability review and an analysis of its corporate governance. The report concluded that POWERGRID's FM arrangements ranked suitably with peers in India. However, to become globally competitive, there was a need to enhance financial accountability and corporate governance norms. As part of the preparation for the PSDP III loan, an action plan was agreed upon to further build POWERGRID s institutional FM capacity (in the areas of financial accountability, transparency, corporate governance and internal controls), and it was implemented with excellent results. This enabled POWERGRID to tap into equity markets by making an Initial Public Offer (IPO) in the Indian equity markets and meet the required corporate governance norms as laid out in the Listing Agreement with the Securities and Exchange Board of India (SEBI) in a timely manner. FM arrangements under PSDP III were implemented in a satisfactory manner. POWERGRID s FM systems were considered to accurately account and report on the project resources and expenditures under the various projects financed by the World Bank. POWERGRID s FM systems (housed as a part of its general accounting and financial systems) generated financial and other quarterly progress reports on the project. The reporting framework for the project included a quarterly Project Management Report (PMR), an equivalent of the interim unaudited financial report, prepared by POWERGRID in an agreed format with the World Bank (detailed in the Project Implementation Plan). PMRs were prepared from information generated by POWERGRID's FM system and Management Information System (MIS) and rated satisfactory. POWERGRID strengthened its FM capabilities during its partnership with the World Bank and was able to enhance the financial accountability and transparency of its operations. The FM performance under previous loans was also rated satisfactory. Issues and Improvements to the FM System: In mid-2009, for a brief period, the rating for FM was downgraded to moderately satisfactory by the World Bank due to issues in the project audit (regarding the need for enhancing the terms of reference of audits and submission of the management letter). POWERGRID undertook corrective measures and continued to fine tune its FM system by strengthening its internal audit framework and the role of the audit committee to reach the levels of its international counterparts. As part of strengthening its FM capacity, a new computerized FM system was rolled out at all the units. In mid-2010, the rating was then upgraded to fully satisfactory as substantial improvements were noted in terms of undertaking operational audits (a unique concept that has now been mainstreamed across the organization), initiation of Enterprise Resource Planning (ERP) across the company, strengthening of the internal audit department and undertaking of the Enterprise Risk Management (ERM) exercise (Refer Annex 7 of PAD for details on FM arrangements). POWERGRID constituted a high-level team consisting of experts from finance, technical, contracts, and operations departments to carry out operational audits of selected schemes in a holistic manner to review and verify overall satisfactory administration of contracts in accordance with the contract documents. Procurement: Procurement under PSDP III was generally satisfactory with no major issues faced during the implementation, though one of the contracts (a spillover of a PSDP II contract funded under PSDP III) was referred to Integrity Vice-Presidency (INT) of the World Bank. 11

20 The pace of procurement activities was in accordance with the project implementation schedule. Some of the schemes under the project were either uniquely positioned or related to an emerging transmission technology in India. 9 Based on the World Bank s Standard Bidding Documents, the World Bank team worked together with POWERGRID in preparing various sections of POWERGRID s bidding documents for different schemes. This facilitated POWERGRID in improving its bidding documents under World Bank funding and harmonizing such bidding documents for procurement using its own resources. 10 Although POWERGRID had initially said that it had some concerns over using the new guidelines for evaluation of the bids under supply and installation contracts, the issue was resolved and procurement proceeded in a satisfactory manner, consistent with the World Bank s procurement guidelines. The Procurement Plan was prepared during appraisal and bidding documents for all the packages under the core schemes were ready by negotiation. Furthermore, as a step towards increasing transparency, POWERGRID had launched a section on procurement on their corporate website, where all active tenders are being posted. 5. Post-completion Operation/Next Phase Investments financed by the loan were successfully and progressively commissioned between 2009 and 2011, were integrated with the National Grid and their operation is being continuously monitored and maintained by POWERGRID. The NLDC was also completed in March 2009 and started commercial operation in April It is now operated and managed by POSOCO, a fully owned subsidiary of POWERGRID. POWERGRID s technical and managerial capabilities oversee all specialized areas of the power transmission business, and its infrastructure moves about 50 percent of the total power generated in India through 82,355 ckm of transmission lines (as of March 2011), 135 Extra-High Voltage (EHV) and HVDC substations and controls a transformation capacity of about 93,050 MVA. During FY , POWERGRID s inter-regional capacity of National Grid stood at 22,400 MW (later increased to 23,800 MW in July 2011) facilitating an inter-regional energy exchange of 56,747 MU. Operational capacity allows the company to achieve a transmission system availability of 99.8 percent (FY2011) and its maintenance capacity contains the number of tripping per line at 1.27 against a Memorandum of Understanding (MoU), signed with GoI for FY2011, target of 2.5. The preventive maintenance program ensures that equipment condition is assessed periodically using condition assessment techniques. These activities are planned well in advance through the implementation of annual maintenance plans. For further improvement in operational efficiency, a National Transmission Asset Management Center is being established to control and operate most of the substations remotely and the establishment of a Maintenance Service Hub facility has commenced, which caters to the maintenance needs of a group of substations rather than placing staff in each substation. This will ensure optimal utilization of manpower and resources and will also reduce the response time in case of faults and breakdowns. In line with the latest CAS ( ), and through a series of additional loans to POWERGRID (PSDP IV and PSDP V) and other sector entities, the World Bank shall continue to support the ongoing sector reform agenda and further strengthen POWERGRID's 9 For example, the Balia-Bhiwadi HVDC Bipole Transmission System at ±500 kv voltage level, transferring 2,500 MW, was a unique project of its kind considering the complexity of procurement of the HVDC Terminal Package. Similarly, some of the packages involved procurement of 765 kv equipment, which was an emerging voltage level in the transmission system in India at that time. 10 For instance, during the initial period of the project, POWERGRID often observed inconsistencies across the various sections of the bids submitted by the bidders resulting in problems in ascertaining the responsiveness of the bids. With the concurrence of the World Bank, POWERGRID incorporated a provision on Order of Preference to address this concern. 12

21 institutional and transmission capacities, to align with the standards of global operators. As a matter of fact, POWERGRID belongs to the selective group of Very Large Power Grid Operators (VLPGO), which is a voluntary initiative of the world s largest Power Grid Operators, representing together more than 60 percent of the electricity demand in the world. VLPGO was created in 2004, following several blackouts across the world, to investigate fundamental issues of common interest to its members and to develop joint action plans addressing the improvement of power system security. In 2009, VLPGO became a formal organization, with the aim of serving as leader and catalyst in the transition of the electric power industry to the power grids of the 21st century. Further, the World Bank Group is assisting POWERGRID to leverage international financial markets to fund its 12 th Five Year plan ( ) investment requirement estimated to be to the tune of US$22 billion. World Bank s Follow up on Project s Sustainability: The project KPIs: (i) transmission capacity development (in ckm); (ii) transformation capacity (in MVA); and (iii) power exchange across regions (in MU) are being monitored and updated through implementation of PSDP IV and PSDP V that is in compliance with their respective M&E systems. Section 3: Assessment of Outcomes 1. Relevance of Project Design and Objectives The World Bank s support for this project was highly relevant and the PDO reflects the importance of achieving further expansion and transformation in India s power sector infrastructure. The project s design reflected sector priorities and focused on the need for more investments not only in transmission but also in generation. Moreover, the completion of the NLDC demonstrated that the power sector requires further such structural, technical and operational improvements. As proven in previous projects that institutional transformation was needed in parallel with physical investments, this project s achievements also responded to the country s needs and attracted more financing from the private sector. Strengthening and further development of the National Grid aimed at optimal utilization of existing scarce resources that are unevenly distributed across regions in the country. The assets created under the project were to transfer power from generating stations in power surplus regions to the load centers in power deficit regions and, hence, improve access to reliable electricity by the end consumers. The current CAS ( ) for India provides a framework to deal with the challenges of achieving rapid, inclusive growth, of ensuring sustainable development, and improving service delivery, with a cross-cutting focus on improving the effectiveness of public spending, inclusive of infrastructure, and achieving results that can be monitored, all of which will help scale up the impact of the World Bank Group (WBG) assistance. The power sector is still at the core of India s growth and the WBG continues to seek (i) to deploy its dialog, analytical work, lending, engagement with GoI and other stakeholders such as the private sector, and (ii) to build capacity (physical and institutional) of the power sector in the most effective and efficient manner to drive growth so that economic activities can create jobs and distribute income. The current CAS ( ) for India reaffirms the same priorities as the previous CAS programs with the power infrastructure at the core of project finance, especially in light of capital and FDI shortages resulting from the economic and financial crises of 2008 and Thus, it is within this assistance framework that this project s achievements are to be assessed. 2. Achievement of Project/Program Development Objectives 13

22 The achievement of the PDO is rated highly satisfactory. This rating is based on the completion of all physical components (outputs) linked to the transmission schemes which have resulted in the achievement of outcomes as outlined in the results framework of the project. The PDO consisted of the strengthening of the transmission system in order to increase reliable power exchanges between the regions and states. The overall achievement of this objective is highly satisfactory based on the project s single outcome indicator that assessed the achievement of the PDO towards the end of the project which was growth in power exchange between the regions (in MU). The indicator outperformed its end year targets (target: 52,000 MU; actual: 56,747 MU). In addition, three intermediate indicators were also monitored during the project implementation: (i) growth in transformation capacity (in MVA) that also outperformed its end year targets (target: 85,000MVA; actual: 93,050MVA);(ii) growth in transmission capacity (in ckm) that were revised during MTR due to external factors but outperformed revised targets (target: 80,000ckm; actual: 82,355ckm);and (iii) completion of NLDC that was achieved in scheduled time. The commissioning of transmission schemes financed through the project have resulted in strengthening of the National Grid in terms of interregional as well as intraregional capacity including the creation of a parallel transmission corridor in the Northern-Western Region. The scope of the schemes (core and candidate) under PSDP III is given under Original Components in Section 1. Further details regarding the completion of these components and achievements of PDO are given in Annex 3. Spillover Works under PSDP II - Completion of NLDC: The transmission subsector benefitted immensely from a modern and completely computerized NLDC along with the already existing Unified Load Dispatch and Communication System in various regions. NLDC is the apex body to ensure integrated and optimal operation of the National Grid and smooth transfer of power between the regions. This system also ensures monitoring of scheduling and dispatching of power as well as the security and reliability of the grid and coordination among power exchanges. Considering the increased complexity of grid operation of such a large network in the country, facilities at NLDC and the five Regional Load Despatch Centers (RLDCs) are being upgraded on a regular basis. As a result of POWERGRID s continuous effort, the Indian grid has not experienced any major grid disturbances in the last eight years (since ). As per GoI s directive, this along with other load dispatch centres at regional and state level is managed and operated by POSOCO, a fully owned subsidiary of POWERGRID. The completion of other spillover works under the Eastern Region and Western Region System Coordination and Control Projects has resulted in the improvement of real time grid management and economic dispatch of power at the regional level. Further, the completion of balance elements has facilitated the strengthening of the transmission system. The addition of these state-of-the-art communication systems (with the use of optical fiber composite overheard ground wire, commonly called OPGW) and the extensive national coverage of the transmission lines have created opportunities for POWERGRID to diversify into the telecommunication sector, by leveraging its countrywide transmission network. The diversification into the telecom business has created a new business opportunity for the company. 3. Efficiency Economic and Financial Analysis At appraisal, the economic and financial analysis for the cores schemes was carried out and they were justified on the ground that their economic rates of return (ERRs) were higher than the 14

23 opportunity cost of capital of 12 percent. The ERRs were in the range of percent to percent in the base case and percent to percent in the most adverse case. Analysis at Completion: Using actual cost figures and applicable tariffs, the analysis covers all schemes (core and candidate). It also takes into account changes in tariffs and return on equity (ROE) objectives. During the project implementation period, the CERC tariff norms were revised in 2009 to be applicable until Since all the schemes under PSDP III were commissioned after 2009, the new tariff norms were applicable. The tariff for the schemes is based on a cost plus tariff regime. The major change in the revised tariff norms is reflected in an increase in the rate of ROE from 14 percent (2004) to 15.5 percent (2009), increase in rate of depreciation from around 3.6 percent to 5.28 percent, and upward revision of O&M rates. This has had a positive impact on the revenue generated from the schemes and is reflected accordingly in the ERR and ROE calculated and presented in detail in Annex 4. ERR: The methodology used during the appraisal was also adopted at the completion to calculate the ERR. The ERR has varied between percent for the Seoni-Wardha- Akola-Aurangabad Transmission System to percent for NWTC. In all the cases, the ERR is above the opportunity cost of the capital at 12 percent; and ROE: ROE has been taken as a proxy for the financial rate of return as was taken during the appraisal. The methodology used during appraisal was adopted to calculate ROE at completion. It has varied from percent for the Balia-Bhiwadi HVDC transmission system to percent for NWTC. In all cases, ROE was higher than the regulated ROE at 15.5 percent. The financial analysis was also carried out at the entity level and it is observed that all financial ratios (presented in Annex 4) are robust. POWERGRID also comfortably complied with all the financial and legal covenants. The debt-equity ratio was always lower than 80:20. The selffinancing ratio was also greater than 20 percent for all years from 2006 till Accounts receivable over the project life were also much lower than three months, stipulated in the Legal Covenants. POWERGRID s receivables as of March 2011 stand at 0.15 months of average billing. 4. Justification of Overall Outcome Rating Rating: Highly Satisfactory The overall rating of the project is highly satisfactory on the basis of its high relevance (as discussed in Section 3.1), highly satisfactory achievement of the PDO (as discussed in Section 3.2), and efficient implementation (as discussed in Section 2.2). During the project period, POWERGRID s performance has significantly improved in terms of safeguards (implementation of ESPP across all projects irrespective of source of financing, adoption of ESPP by the World Bank as a pilot for UCS under PSDP V, development of a CSR policy, strengthening of ESMD, undertaking yearly independent environment audit, preparing the sustainability report), strengthening of FM and corporate governance aspects ( Navratna status, strengthening of the internal audit department, initiation of ERP, implementation of ERM, listing on the stock exchange, mainstreaming the operational audit across organization), procurement (adoption of model bidding documents to facilitate faster turnaround time, conducting vendor conferences), project management (monitoring through IPMCS, regular reporting and close monitoring), and technical advancements (introducing the 765 kv transmission system, commissioning of NLDC, developing of the 1,200 kv technology financed under PSDP V). It stands today as a stronger company on technical, managerial and 15

24 institutional fronts and has undergone a tremendous transformation to reach the coveted status of a corporation with international stature. The highly satisfactory rating is also justified by the sustainability of the project components. In the coming years, the role of NLDC will become more important with further development of the electricity trading market as the transmission schemes financed by this loan as well as subsequent loans enable transfer of large quantities of power across and between the regions of the country. Moreover, the outcome indicator (growth in power exchange across regions) targets for the project were outperformed during the project period. 5. Overarching Themes, Other Outcomes and Impacts (if any) (a) Poverty Impacts, Gender Aspects, and Social Development This project will increase the availability of electricity to the Indian people and contribute to an increase in consumers connection rate to the system, especially in regions where power availability has been constrained by the lack of adequate transmission systems. Development and strengthening of the National Grid through reliable and stable operation of regional grids facilitates the timely transfer of power from surplus regions to deficit regions leading to optimal utilization of scarce energy resources. Although POWERGRID s network does not link directly to the end consumer, it facilitates power evacuation from central sector generating stations and interregional power exchange, resulting in increased availability to and access to reliable electricity by the connected consumers. The National Grid has also helped in connecting approximately 100 captive power plants across the country enabling them to avail of benefits of open access in FY2011. POWERGRID also contributes every year a certain percentage of its profit after tax (PAT) for the preceding year towards the non-lapsable budget for CSR activities, such as education, health, and infrastructure development. POWERGRID assesses the project impacts in zones limited to the areas impacted by its substations. This is done through the assessment of the results of the implementation of the RAP provisions in the project area affected by the substations. Though it is a very small proportion of the entire project undertaken by POWERGRID, the impact assessment undertaken, so far, of the RAP implementation has revealed an improvement of the socioeconomic status of a majority of the affected people reflecting intensive efforts being put by POWERGRID. In selected states, the company is also implementing the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), a GoI initiative to provide rural electricity infrastructure and household electrification. (b) Institutional Change/Strengthening POWERGRID continues to maintain high operational standards and is financially stable. It operated around 82,355 ckm of transmission lines along with 135 substations as on March 31, 2011, with an average availability of the transmission systems of 99.8 percent during FY2011. POWERGRID continues to wheel about 50 percent of the total power generated in the country through its transmission network. It also operates a 20,733 kilometer (km) of telecom optical fiber network and functions as an internet service provider. POWERGRID s financial performance continues to be healthy with a PAT, in FY2011, higher by more than 30 percent of the PAT in FY2010, while total gross revenues increased by more than 17 percent over the previous year. POWERGRID uses effectively the mechanism of Letter of Credit coverage for payment security and curtailment of supply in case of default. As a result, POWERGRID s receivables as of March 2011 stood at 0.15 months of average billing. A high-level review of corporate governance and financial accountability, conducted in 2005 by POWERGRID, developed an improvement action plan resulting in POWERGRID becoming a benchmark for corporate governance in India, especially for state- owned enterprises. In October 16

25 2007, POWERGRID, with its initial IPO, became a listed company which proved to be a milestone in further improving its FM and corporate governance performance. In May 2008, POWERGRID was notified as a Navratna company and higher powers were given to the Board of the company to undertake investment decisions on its own. In November 2010, POWERGRID issued its follow-on public offer (FPO) that received an overwhelming response and was oversubscribed 15 times. Various rating agencies in India endorse the rating of POWERGRID s outlook as stable indicating the highest degree of safety with regard to timely servicing of debt. Over the project implementation period, POWERGRID has made substantial progress in some key areas including corporate governance, financial accounting, internal audit, and ERM, successfully completing competitive selection of project auditors and piloting the Operational Audits. Its ESPP is followed across all projects irrespective of financing and has become the benchmark in the industry. It was adopted under the UCS of the World Bank during the preparation of PSDP V. Environmental considerations have been effectively mainstreamed in POWERGRID s operations, as demonstrated by the adaptation of transmission tower designs to reduce impacts in sensitive habitats such as wildlife sanctuaries. Another enhancement which has since been mainstreamed in substation designs is the provision of rainwater collection and harvesting systems in areas with low groundwater tables. POWERGRID also follows a proactive approach on tree plantation in its substations that is much higher than the mandatory requirement under the law. On social aspects, POWERGRID has substantially reduced the land required to establish a substation by improved design and layout. Other mitigation measures put in place by POWERGRID include appropriate handling and management of wastes and workers safety related provisions. To inculcate the values that its ESPP enshrines, POWERGRID regularly trains its staff on these aspects, and a substantial part of the annual curriculum is devoted to the understanding and implementation of the ESPP, reflecting the utility s concerted position and commitment to minimize, as much as possible, the overall environmental and social footprint of its operations. POWERGRID has also developed a CSR Policy and is also the first among World Bank clients to have published its first Sustainability Report covering its environment and social performance in POWERGRID, in association with the World Bank, developed the Model Bidding documents that are used for procurement in POWERGRID, irrespective of the source of funding, and has, thus, reduced the turnaround time involved in the administrative aspect of the bidding process. (c) Other Unintended Outcomes and Impacts As mentioned above, POWERGRID became a listed company and was accorded the Navratna status during the project implementation period. The Company has also undertaken the development of certain transmission lines with private parties through public-private Joint Ventures (JV). Refer to Annex 3 for further details on various JVs. Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not Applicable Section 4: Assessment of Risk to Development Outcome 1. Assessment of Risk to Development Outcome Rating: Low or Negligible The overall level of risk to the development outcome is rated low. This assessment is based on the sustainability of the physical investments financed by the loan as well as on the financial, operational and technical strength of POWERGRID. 17

26 Operations: The completed transmission infrastructure is being and will be operated and maintained in a sustainable manner by POWERGRID, which is an efficient operator with advanced technical and operational capabilities. The risk level is also rated low based on the sustainability of POWERGRID's enhanced institutional capacity and managerial performance which should enable the company to continue to achieve high performance levels. The reliability of the grid has been enhanced. Since , no major grid disturbances have been reported on the Indian power grid. This is also demonstrated by the fact that, during FY2011, the availability of the transmission system was 99.8 percent. Measures adopted by POWERGRID have resulted in an increased interregional power exchange that contributes towards an even distribution of resources by meeting the power demand in the deficit region from the power surplus regions. It has increased from 35,000 MU in to 56,747 MU in , an increase of almost 62 percent. The National Grid so established has an interregional power transfer capacity of about 23,800 MW (as in July 2011), planned to be increased to 28,000 MW by end of the 11 th Five Year Plan (2012), making it one of the largest synchronous grids in the world with an installed generation capacity of about 117 gigawatt (GW). Moreover, POWERGRID s growth strategy is to continue to rapidly increase its capacity to tap into the renewable energy sources of the country to lower the carbon footprint of the sector and remain the reliable central transmission utility as well as an enabler of steady growth of the electricity market for the benefit of the entire economy. As on March 31, 2011, POWERGRID had 25 new transmission projects in various stages of implementation. These projects involve approximately 8,000 ckm of transmission lines and 23 substations with a total power transformation capacity of approximately 32,000 MVA. Tariffs and Revenues: The risk associated with these aspects is low. Revenue generation is ensured by adequate tariffs and arrears recovery due to the implementation of the tripartite agreement, Letter of Credit, and improvements in commercial discipline. The current tariffs (as per CERC s tariff policy of 2009) will remain in place until 2014, and should ensure that POWERGRID generates revenues in line with ROE requirements (15.5 percent) and carries on with future expansion objectives. Institutional Capacity: The risk associated with this aspect is low. Over the implementation period, POWERGRID has made substantial progress. As discussed in Section 3.5.b, POWERGRID has continuously improved its corporate management model through adoption of international operational standards and implementation of a planning and strategic business model necessary for its growth and sustained harnessing of the country s renewable energy sources, such as wind and hydropower. In addition to POWERGRID s IPMCS, its ESPP was strengthened during the project period and was finally adopted by the World Bank as a pilot under its UCS policy (OP. 4.00) during the preparation of PSDP V. All these measures ensure that the risk will remain low for the foreseeable future. Section 5: Assessment of World Bank and Borrower Performance 1. Assessment of World Bank and Borrower Performance World Bank (a) World Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The World Bank s performance during identification, preparation and appraisal of the project is rated satisfactory. The World Bank had acquired valuable experience through PSDP I and II and its knowledge of the Indian power sector resulted in the formulation of a targeted PDO in keeping 18

27 with the strategic transformation of the transmission subsector sustained by POWERGRID s operational and institutional capabilities. The World Bank established a strong partnership and good working relationship with all the stakeholders including CERC, MoP, MoF and PTC. This helped the World Bank team, POWERGRID and GoI authorities to define feasible component options and setup an implementation framework in line with the World Bank s procurement and applicable safeguards. The definition of PDO focused on outcomes for which POWERGRID was held accountable and risk assessment focused on appropriate risks while the ratings were realistic. The preparation team also ensured that all required steps were taken by GoI and POWERGRID, including the final project implementation plan incorporating details of investment subprojects. The World Bank team also carried out safeguards and compliance measures assessment. Tests were carried out during the preparation phase including a financial management assessment (refer Annex 7 of PAD). The World Bank helped the borrower formulate the required ESPP framework needed for project implementation. In addition, ESPP assessment made sure that POWERGRID provided the initial environmental action plan and RAPs for the project. Moreover, a number of required measures were put in place to ensure quality at entry contributed to successful implementation. These were: Approval of the agreed upon ESPP by POWERGRID s Board of Directors; Establishment of model/standard biddings documents for procurement activities planned for the first 18 months of project implementation; and A process to expedite decisions on the evaluation criteria used for the supply and installation of goods. By loan effectiveness, the World Bank team had delivered a product tailored to POWERGRID s investments priorities and implementing capacity in compliance with procurement, FM and safeguards guidelines. The QER process (held in October 2004) contributed to the enhancement of World Bank s performance in the preparation and appraisal phases. The QER agreed that, for the proposed project, the PDOs should be focused on the planned physical investments thus justifying their narrow formulation. The QER also endorsed the team s assessment and recommendations on strengthening the ESPP framework. The QER panel did make constructive recommendations to the team on the sustainability aspects of the investments, including the need to link the open access regime with the proposed investments and to carry out dialog and Economic and Sector Work (ESW) on the sector. (b) Quality of Supervision (including of fiduciary and safeguards policies) Rating: Satisfactory The World Bank s performance during supervision is rated satisfactory. Since loan effectiveness, the World Bank supervision team carried seven implementation support missions with site visits over the five-year implementation period, and sufficient budget and staff resources were allocated as the project was adequately supervised and closely monitored, including through delegation of day-to-day supervision responsibilities to Delhi-based staff, which proved highly effective. The Implementation Completion Report (ICR) mission took place in October Supervision of the project s implementation was strengthened by a systematic collaboration between the World Bank and POWERGRID s project teams with a significant skills mix. The World Bank team was continuously involved in all aspects of implementation in order to ensure that physical investments were carried out and that disbursements occurred as planned. Submission of progress reports, PMR 19

28 and safeguards compliance reports ensured that supervision provided both parties with indicators to allow them to track progress and take corrective actions when needed. The World Bank s supervision tracking system (Implementation Status and Result Reports (ISR) and mission aide memoires) provided much needed status information about the project, and required implementation ratings and compliance with covenants. Continuous involvement by the World Bank's team and POWERGRID s use of the IPMCS were instrumental in ensuring that the project components were successfully implemented with a 100 percent disbursement rate. The World Bank team was continuously involved with POWERGRID to resolve delays due to forest management and ROW issues. These issues, which did not slowed down disbursements, were resolved and project implementation activities proceeded towards completion according to the planned schedule. FM was also closely monitored as the World Bank recommended that POWERGRID strengthen its internal audit department and take actions to hire consultants for reviewing the company s ERP and to strengthen its ERM. Active support was provided in formulating model bidding documents that were to be used for uniquely placed projects such as HVDC links and 765 kv technology. Overall World Bank Performance Rating: Satisfactory Borrower (a) Government Performance Rating: Satisfactory The Government s performance is rated satisfactory. GoI has identified the power sector as being vital for sustained and inclusive economic growth and has taken decisive steps to improve legal and policy frameworks. To bring in discipline to the National Grid, the Indian Electricity Grid Code (IEGC) was introduced in The landmark 2003 Electricity Act seeks to improve the efficiency and accountability of the sector, building upon the establishment of autonomous electricity regulatory commissions at the Center and in many states since Nondiscriminatory open access was facilitated under the Act and was implemented successfully in the interstate transmission system since May Further policies National Electricity Policy (NEP), 2006 National Tariff Policy (NTP), 2006 Rural Electrification Policy and 2007 Integrated Energy Policy (IEP) -- are intended to facilitate the goals established in the Act by detailing policy on specific issues. The NEP sets ambitious targets for providing universal access to reliable and good quality power by 2012, while also highlighting the need to mitigate power shortages as well as achieving financial viability of the electricity sector. In June 2008, CERC accorded approval to setting up of the first power exchange of the country to enable efficient price discovery by ushering in a transparent manner and neutral market through a technology-enabled electronic trading platform. As formulated in NTP, from January 2011 onwards, all projects are now being awarded through the competitive bidding route, irrespective of whether to a public or private developer. Thus, the landscape of the power sector market in India has undergone drastic change and has become more challenging since the inception of POWERGRID in 1989, to which the company has been adapting seamlessly. All stakeholders (MoP, MoF and CERC) were always available to the World Bank supervision teams and worked together to resolve issues during project supervision. Project ownership by GoI was crucial to the successful implementation of this project. Institutional support ensured 20

29 continuous monitoring and support for loan disbursement and related financial measures such as counterpart funding, and compliance with loans covenants, including arrears payments. GoI ensured an adequate legal and regulatory framework conducive to achieving the objectives of the project. CERC played a significant role in providing transparent oversight of the transmission subsector through independent leadership. Implementation of the tripartite agreement of 2003 was also critical in mitigating POWERGRID s risk of nonpayment by off-taking state utilities. In addition, GoI s and CERC s regulatory framework was designed to provide tariffs to enable the company achieve an ROE of 15.5 percent. This project was also instrumental in establishing institutional cooperation to resolve issues of forest clearances. (b) Implementing Agency or Agencies Performance Rating: Satisfactory POWERGRID was the borrower and the implementing agency and its performance is rated satisfactory. This rating is based on POWERGRID s efficiency in implementing the project as investment schemes were implemented on time, disbursements reached 100 percent of the loan and closing occurred as planned on July 31, POWERGRID has not only met but outperformed all KPIs, thus meeting all development outcomes. Compliance with financial and legal agreements was also achieved during implementation as POWERGRID s management and project team were strongly committed to the project s successful implementation. The use of IPMCS in tandem with its corporate ESPP ensured adequate mitigation of safeguards risks. In addition, POWERGRID s ESPP has evolved -- both in terms of content and application -- towards becoming an international standard so much so that these have been approved by the World Bank under the provisions of OP/BP 4.00 (Piloting the use of Borrower Systems to address Environmental and Social Safeguards Issues in Bank-Supported Projects) during the preparation of PSDP V. POWERGRID s corporate governance is already a benchmark in India; it is a "Navratna" company, a designation among public sector utilities that symbolizes confidence in the company s ability to discharge enhanced responsibilities and it, therefore, enjoys significant autonomy. It continues to improve its corporate governance through strengthening of the internal audit department, carrying out of operational audits, undertaking the ERM exercise, implementation of ERP, and Environmental and Social Impact Assessment. POWERGRID s rating as stable in outlook indicates the highest degree of safety with regard to timely servicing of debt. Overall Borrower Performance Rating: Satisfactory 2. Lessons Learned The main lessons learned from the design and implementation of the project are: Long-term programmatic approach results in successful partnership: After the completion of PSDP I and II, the successful implementation of PSDP III was followed by the implementation of two other projects --PSDP IV and V. This demonstrates that the programmatic approach for sector investments that are structurally linked could be used as an effective assistance instrument by the World Bank as long as dialog with the sector is effectively pursued while benefitting from lessons and achievement of each project. The long-term partnership between the World Bank and POWERGRID has not only contributed to the establishment of a strong transmission system but also supported 21

30 POWERGRID in its institutional strengthening through safeguards and fiduciary dialog, enabling it to become one of the best transmission utilities in the world. Impact of compliance with the negative pledge clause: This process required a careful and lengthy preparation of the security package by POWERGRID which delayed loan effectiveness by about six months (July 31 to December 15, 2006). It would have been useful to resolve this aspect earlier during preparation so that implementation could proceed according to the planned timeline. This is a broader lesson for the India portfolio. However, the resolution of this issue and experience gained during the approval process resulted in the streamlining of the approval of PSDP IV and V by the World Bank. Successful implementation has shown the importance of partnership with an efficient and strong implementing agency: Using operational and project management experience, POWERGRID has effectively contributed to the success of the project. Moreover, this project has shown that continuous reviews and improvements of POWERGRID s technical implementation, procurement and safeguards systems have elevated the standards to be followed by others. Additional Forum to interact on procurement issues: Procurement is a delicate matter and with its overlapping synergies with the technical aspects, it is always a tough and contentious issue. Thus, even though there was a regular communication (both formal and informal) between POWERGRID and the Bank during the entire project period, an additional exchange forum, which could be in the form of regular face-to-face meetings, between the Bank and POWERGRID to discuss such complex matters in even more detail shall help in future engagements. 3. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing Agencies All comments have been appropriately incorporated in the final ICR. POWERGRID s completion report (refer annex 9 for summary) reflects most of the evaluation in the Bank s ICR and also assesses the achievement of the project s PDO as Highly Satisfactory. POWERGRID s comments, which were mostly of an editorial nature have been reflected adequately in the report. The Bank team s response to each comment is indicated in Annex 10. (b) Co-financiers Not Applicable (c) Other partners and stakeholders Not Applicable 22

31 Annex 1: Results Framework and Monitoring PDO To strengthen the transmission system in order to increase reliable power exchanges between the regions and states. Intermediate Results One per Component Component One: Transmission system strengthening (investments and relevant technical support) Component Two: Completion of balance works of the schemes financed by the World Bank under loan 4603-IN for POWERGRID System Development Project II beyond the loan closing date of June 30, 2006 Outcome Indicators - Growth in power exchange between the regions Initial Baseline Value 31,000 gigawatt hour (Gwh) Results Indicators for Each Component -Growth in transmission capacity - 51,000 ckm ckm -Growth in transformation 50,000 MVA capacity - MVA -Component Two: Completion of NLDC Achieved End Target Value 56,747 Gwh 82,355 ckm 93,050 MVA Completed and commissioned in

32 Annex 2: Project Costs and Financing a. Project Cost by Component (in US$ Million Equivalent) Components Appraisal Estimate (US$ million) Actual/Latest Estimate (US$ million) Percentage of Appraisal 1. Transmission system strengthening (core schemes) 2. Completion of ongoing World Bank-financed schemes (PSDP II) Total Baseline Cost Physical contingencies 70 NA Price contingencies 36 NA Total Project Costs Interest during construction 64 NA Front-end fee IBRD 1 NA. Total Financing Required b. Financing Source of Funds Type of Appraisal Cofinancin Estimate (US$ million) g For Core Schemes and Component 2 Actual/Latest Estimate (US$ million) Borrower IBRD (plus, balance for candidate schemes) Remarks Actual estimates include POWERGRID s contribution as well as domestic financing for the components of core schemes funded under PSDP III whereas appraisal estimates include the cost estimates for complete cores schemes funded from PSDP IV as well. Total funding by IBRD is US$400 million that represents contribution towards core as well as candidate schemes 11 The appraisal estimate included the funding cost of all components under core schemes. For instance, HVDC terminals were financed under PSDP IV but appraisal cost estimates included the costs of these terminals as well. Similarly, anticipated costs of substation extensions for the 765kV Seoni-Bina transmission line were included at appraisal but were financed through POWERGRID s own resources and, thus, not included in the latest cost estimates given above. Exchange rate of US$1 = INR 43 (as used for economic and financial analysis) used. 12 Actual funding required for core schemes and component 2 under PSDP III. Refer Annex 3 for details. 24

33 c. Disbursement Graph 25

34 Annex 3: Outputs by Component The project components under PSDP III were implemented within the project period at the estimated project costs. Table A3.1compares the total project costs at the time of appraisal, the corresponding World Bank funding at that time, final committed value to be financed by World Bank funds after award of the contract, and disbursements as on December 16, The table also illustrates the status of completion of the various components. Sl. No. Project Name 1 Seoni-Wardha- Akola- Aurangabad Transmission System 2 ±500 kv, 2,500 MW Balia & Bhiwadi HVDC Bipole System kv Seoni- Bina Transmission Line 4 North-West Transmission Total Project Cost As per PAD 173 (only HVDC line portion) Table A3.1: An overview of financing Envisaged Bank Funding as per PAD Committe d Value Disburs ement All Figures in US$ Million Remarks Commissioned progressively by November2009. Component wise date of commercial operation: Seoni- Wardha 765kV single circuit (S/C) line: April 1, 2009 Wardha-Akola 400 kv double circuit (D/C) line - April 1, 2009 Akola -Aurangabad 400 kv D/C line- December 1, 2009 New 400/220 kv Wardha S/S,,Extension of Seoni and Akola substations April 1, 2009 Extension of Aurangabad substation December 1, Only Balia-Bhiwadi 500kV HVDC bipole line covered under PSDPIII loan which was completed in March 2010 Pole-I of HVDC line along with terminal stations commissioned in August 2010 and commercially operational since September 1, 2010 Pole-II of HVDC line along with terminal stations expected to be commissioned by March, 2012 (under PSDPIV loan) Commissioned in March2010 and commercially operational since April 1, Commissioned progressively by April2009. Element wise 26

35 Sl. No. Project Name Corridor Strengthening Scheme 5 Western Region System Strengthening Scheme-II 6 Completion of Spill Over Projects from PSDP-II including Emergency Restoration System 13 (NLDC) Total Project Cost As per PAD Envisaged Bank Funding as per PAD Committe d Value Disburs ement Remarks date of commercial operation: 765 kv S/C Gwalior-Agra Line April 1, kv D/C Zerda-Kankroli Line May 1, * Only 765 kv S/C Bina-Gwalior line covered under PSDPIII loan, which has been commissioned in February2010 and is commercially operational since March 1, Entire project is expected to be commissioned progressively by March 2012 (under PSDPIV &additional financing for PSDPIV loans) All projects completed Total (restricted to 400) The loan financed two set of components: schemes linked to the strengthening of the transmission system and completion of balance works under PSDP II. Under the first component on transmission system strengthening, the schemes were categorized into core and candidate. Core schemes were those that had been identified at the time of appraisal, preparatory works had commenced and the schemes would start implementation in the first year of loan effectiveness. Candidate schemes were those that were tentatively identified (or might be identified in the future) and would be eligible for World Bank financing provided the project implementation plans submitted by POWERGRID established that these schemes met the project objective and were selected as per the eligibility criteria as set out in Annex 11. Component One: Transmission System Strengthening Schemes Core Schemes The following three schemes were selected under PSDP III: a. Seoni-Wardha-Akola-Aurangabad Transmission System The objective of this scheme was to provide adequate transmission arrangements to enable the state of Maharashtra to draw power reliably from a pooling point in the central part of the Western Region, where power imported from the Eastern Region and other sources needed to be pooled This included: (i) Eastern Region System Coordination and Control Project; (ii) Western Region System Coordination and Control Project; (iii) System Strengthening-III in Southern Region Grid; (iv) High Capacity East-North Interconnector-II; (v) POWERGRID S Diversification into Telecom Business; (vi) NLDC. 27

36 Wardha (Nagpur area) is a major load center in the eastern part of Maharashtra. At project appraisal, power to Wardha was being transmitted through 220 kv lines that were inadequate to meet future demand. Therefore, to meet the then existing as well as long-term power requirements of the area with reliability and security, the establishment of a new 400/220 kv substation at Wardha had become essential. Furthermore, this substation was planned to be upgraded to 765 kv level in the future when the injection of power at Seoni (pooling point in Madhya Pradesh) from the Eastern Region would increase and higher power transfer capacity will be required by Maharashtra. Accordingly, the interconnection of this substation with the power pooling station at Seoni was proposed through a 765 kv single circuit Seoni-Wardha line, which should initially operate at 400 kv. For further dispatch of power towards the central part of Maharashtra, the establishment of 400 kv D/C Wardha-Akola and Akola-Aurangabad lines was also needed. The scheme was originally planned to be completed by June 2008, but was commissioned progressively in November 2009 due to delays in the availability of the downstream network. The completion of this transmission system has enabled the development of a parallel transmission corridor for power delivery with enhanced reliability and security from Seoni towards the eastern/central part of Maharashtra. This investment has also resulted in the establishment of a new 400/220 kv substation at Wardha which is a major load center and caters to the power demand of the region. The works consisted of: Transmission lines (financed under PSDP III) From Seoni to Wardha 765 kv single circuit (initially to be operated at 400 kv) on a distance of 269 ckm; From Wardha to Akola 400 kv double circuit on a distance of 324 ckm; and From Akola to Aurangabad 400 kv double circuit on a distance of 482 ckm. Substations (financed under PSDP III) A new 400/220 kv Wardha substation (with a provision to upgrade to 765 kv); and The extensions of 400/220 kv at Seoni, Akola and Aurangabad substations. b. ± 500kV, 2500 MW Balia-Bhiwadi HVDC Transmission System The objective of this scheme was to transfer power to the Northern and Western Regions from the Balia pooling point (in Uttar Pradesh), which gets power from surplus generated in the Eastern Region. A 2500 MW HVDC bipole between Balia and Bhiwadi was required to meet the power demand for the states of Punjab, Haryana, Rajasthan and Delhi in the Western part of the Northern Grid. This HVDC bipole was required to be used to supply power to the Western Region via the Agra-Gwalior 765 kv transmission (initially to be charged at 400 kv level) line through the 400 kv double circuit Bhiwadi-Agra line established under the Northern Region System Strengthening scheme. The entire scheme (500 kv HVDC bipole line, Pole-I and Pole-II of the HVDC line) was originally planned to be completed by September 2009 but will now be commissioned in March 2012 due to delays in supply of converter transformers at the Bhiwadi terminal station by the contractor. The component under PSDP III (500 kv HVDC bipole line) was completed in March Pole-I of the HVDC line along with the terminal station was commissioned in August The works consisted of: Transmission lines (financed under PSDP III) From Balia to Bhiwadi ±500 kv, 2,500 MW HVDC bipole line on a distance of 1,580 ckm. Substations (initially proposed to be financed under PSDP III but to match commissioning of associated generation projects, it was later financed under PSDP IV); HVDC terminal for 2,500 MW at Balia along with associated 400 kv works; and 28

37 HVDC terminal for 2,500 MW at Bhiwadi along with associated 400 kv works. c. Seoni-Bina 765 kv Single Circuit Transmission Link The objective of this scheme was to connect a major load center (Bina) in the northern part of the state of Madhya Pradesh to a power pooling point in the south-eastern part of the state (Seoni) as well as to complete the 765 kv ring interconnecting the Eastern, Western and Northern Regions of India as part of development of the National Grid. The completion of this transmission line was to help export of surplus power from the Eastern Region to the Western and Northern Regions and strengthen the transmission system within the Western Region for secure and reliable supply of power. At the appraisal, the scheme was expected to be completed during FY2010. The project was originally scheduled to be commissioned in September 2009 but was finally commissioned in March 2010 due to delays in issuance of forest clearance as the Supreme Court had issued a stay order on the reconstitution of the FAC between 2006 and The works consisted of: A transmission line (financed under PSDP III loan) from Seoni to Bina. This was a 765 kv single circuit line (initially to be operated at 400 kv) on a distance of 293 ckm; and Substations (initially planned to be financed under PSDP III but later financed by POWERGRID s own resources): the extensions of the 400/220 kv substation at Seoni and of the 400/220 kv substation at Bina. Candidate Schemes Apart from the three core schemes, a number of candidate schemes were tentatively identified with an understanding to identify and add more such schemes to this pool and to finance the schemes that met the eligibility criteria as outlined in Annex 11. The eligibility criteria also included criteria on safeguards while planning and implementing the schemes, thus, essentially implying that the same due diligence will be followed for such schemes as for core schemes. The following schemes were identified as candidate schemes at the time of appraisal: Western Region System Strengthening Scheme-II o Transmission Lines Seoni-Wardha, 765 kv second single circuit (initially to be operated at 400 kv) ckm; Wardha-Parli 400 kv double circuit (Quad) ckm; Raipur-Wardha 400 kv double circuit line along with 25 percent fixed series compensation ckm; Bhadravati-Parli 400 kv double circuit ckm ; Parli (Maharashtra State Electricity Board (MSEB))-Parli (POWERGRID) 400kV double circuit - 7 ckm; Bina-Gwalior 765 kv 2nd single circuit line (initially to be operated at 400 kv); Korba-Birsinghpur 400 kv double circuit line ckm; Birsinghpur-Damoh 400 kv double circuit line 254 ckm; and Damoh-Bhopal 400 kv double circuit 234 ckm. o New Substations Parli 400 kv switching substation; and Pune, Pandharpur and Damoh 400/220 kv substations. o Substation Extension Works Extension of Seoni, Bhadravati, Wardha, Raipur, Parli, Rajgarh and Gwalior 400 kv substations; 29

38 Extension of Parli, Aurangabad, Kolhapur, Karamsad, Limbdi (Chorania), Ranchhodpura(Vadavi), Zerda(Kansari), Bhopal, Korba, Birsinghpur 400 kv substation; and Extension of Bina 400 kv switching station. Transmission System Associated with Dispersal of Power from Panarasa Pooling Point o Transmission Lines 400 kv double circuit Panarasa pooling point -Amritsar line; and Loop-in-loop-out of 400 kvdouble circuit from Parbati-I to Koldam at Panarasa pooling point. o Substations New 400 kv Parbati pooling point geographic information system (GIS) substation; and Extension of Amritsar 400/220 kv substation. System Strengthening in South Western Part of Northern Grid o Transmission Lines Kankroli-Jodhpur 400 kv single circuit line; and Kota-Merta 400 kv double circuit line. o Substations Extensions of 400/220 kv Kota, Kankroli, Merta and Jodhpur substations System Strengthening Schemes in Eastern Region o Transmission Lines Baripada-Mendhasal400 kv double circuit line; Durgapur-Jamshedpur 400 kv double circuit line; Jamshedpur-Baripada 400 kv double circuit line; Mendhasal-Berhampur 400 kv double circuit line; Berhampur-Gazuwaka 400 kv double circuit line; and Reconductoring of Siliguri-Purnea 400 kv double circuit line. o Substations New 400/220 kv, 2x3 15 MVA substation at Berhampur. Development of High Capacity Transmission System Associated with Dispersal of Power from North Eastern Region Pooling Point o Pooling station in North Eastern Region - load point in Northern Region/Western Region kv, 4,000 MW HVDC bipole. East-West Transmission Corridor o Transmission Lines Ranchi-Rourkela 400 kv double circuit line; and Rourkela-Raigarh-Raipur 400 kv double circuit line. o Substations Extensions of Ranchi, Rourkela, Raigarh and Raipur 400/220 kv substations; and Fixed Series Compensator + Thyristor Controlled Series Compensator on Raigarh- Raipur 400 kv double circuit line. North-West Transmission Corridor o Transmission Lines Agra-Gwalior second circuit 765 kv (to be initially operated at 400 kv); and Kankroli - Zerda 400 kv double circuit. o Substations Extensions of Agra, Gwalior, Kankroli and Zerda 400/220 kv substations. 30

39 Only two schemes were finally financed under PSDP III: (i) WRSS II under which only the Bina- Gwalior 765 kv second single circuit transmission line (initially to be operated at 400 kv) was financed under PSDP III; and (ii) the NWTC (as mentioned above). Some of the proposed schemes listed above were financed under PSDP IV. Details of the candidate schemes financed under PSDP III are provided below. d. Strengthening of the Western Region System Scheme-II During the last decade, generation capacity addition in the Western Region has been meager as compared to the demand growth, creating a peak demand deficit of about 5,000-6,000 MW, resulting in a substantial increase in power import from the Eastern and Southern Regions. In India, major energy resources are concentrated in a few pockets such as the large belt of coal deposit confined to the Eastern part while most of the hydro potential is located in the North- Eastern and upper Northern parts of the country. Therefore, to meet the power requirement of deficit regions such as the Western Region, bulk power transfer over long distances from generation sources to load centers located across the country is required. It is worth noting that in the Western Region too, major generation sources are located in the eastern part while load centers are located in western and central parts of the Western Region. Therefore, to transfer power from major generation plants in the eastern part to load centers such as Wardha, Pune, Aurangabad, Gwalior, Bhopal, Indore, Karamsad, and so on, POWERGRID needed to develop transmission corridors of adequate capacity. WRSS-II was designed to strengthen various parts of the Western Region CERC, through its order dated July 29, 2005 in Petition No. 85/2004 regarding the application of grant of a transmission license to Reliance Energy Transmission Limited, directed the implementation of transmission lines under Sets A and D by POWERGRID either on its own or by forming JV companies and Sets B and C through 100 percent private participation. However, in the event of 100 percent private participation not materializing for transmission lines under Sets B and C, the projects were to be implemented by POWERGRID on its own. All substations under all sets were to be implemented by POWERGRID. In response to this, POWERGRID proposed the Bina- Gwalior 765 kv second single circuit transmission line (initially to be operated at 400 kv) on a distance of 233 ckm under PSDP III funding. At the appraisal, the entire WRSS II scheme was expected to be completed by July 2010 but is now being targeted to be commissioned by March The line under PSDP III was planned to be commissioned in July 2010 and was completed ahead of schedule in February According to estimates, this line has resulted in an intraregional energy transfer of 3,900 MU from FY2011. e. The North-West Transmission Corridor To achieve an interregional power transfer capacity of 28,000 MW by 2012, a number of interregional transmission schemes with both HVDC and heating, ventilation, and air conditioning (HVAC) technologies were designed during the 11 th Five Year Plan to strengthen and enhance the interregional power transfer capacity of the National Grid. This scheme was a part of it. Keeping in view future generation projects in the Eastern Region and increased power demand in the Western Region, further strengthening of the synchronous link through another 765 kv Agra-Gwalior line was proposed under the loan. With the establishment of all interregional links, the Northern Region was planned to be operated in a synchronous mode with Eastern and Western Regions. Therefore, to ensure stable operation of such a large system, both Western and Northern Regions would be interconnected with high capacity interregional links at two distant locations, which would help in maintaining security and stability of the interconnected grid under various operating conditions. 31

40 The commissioning of these interregional lines has increased the power transfer capacity of the National Grid by about 2,100 MW. Due to the establishment of two separate interconnections between the Northern and Western grids, the stability and security of the grid has been enhanced. The work consisted of: Transmission lines (financed under PSDP III) Agra-Gwalior second circuit 765 kv transmission line (initially to be operated at 400 kv) 128 ckm; and Kankroli-Zerda 400 kv double circuit transmission line 470 ckm. Substations (financed under PSDP IV) 400/220 kv Agra (POWERGRID) substation extension; 400/220 kv Gwalior (POWERGRID) substation extension; 400/220 kv Kankroli (POWERGRID) substation extension; and 400/220 kv Zerda (Gujarat Electricity Board) substation extension. The scheme was originally planned to be completed by January 2009 but was finally commissioned in April The minor delay was caused by the time taken in processing forest clearance proposals at the State Forest Departments of Rajasthan and Gujarat. Also, the Nathdwara Court in Rajasthan issued a stay order at three locations under the project area. This was vacated in February 2009, immediately after which the line was commissioned. As can be observed, under some schemes, some of the lines (both under core and candidate schemes) were established to handle a transfer capacity at a 765 kv voltage level whereas they were to be operated initially at the 400 kv voltage level. POWERGRID s rationale for this proactive planning approach and design was to speed up and ease (because of the increasingly complex ROW issues) future construction of higher voltage transmission lines, which were needed because of the commissioning of upcoming generation projects and fast increasing energy demand. TA for POWERGRID: The provision for TA, as part of project component one, was retained at the appraisal to assist POWERGRID and GoI undertake actions to further strengthen the interlinkages between the regions and establish a national transmission network, critical for resource optimization. It was further agreed that the selection of TA to be financed under PSDP III was to depend upon the availability of alternative grant finance, an option preferred by POWERGRID and GoI. Given this context, and because of its financial stability, POWERGRID decided to finance the relevant system and company development studies through its own resources. Component Two: Completion of Balance Works of PSDP II Project (Loan 4603-In) This consisted of the completion of the PSDP II project (IBRD Loan 4603-In) and its estimated cost was US$75 million. The final utilization against this component was US$30.26 million. PSDP III provided funding for: (i) completion of the NLDC; and (ii) transmission lines, substations and other procurements, taken up under PSDP II loan (4603-IN) after its closing date of June 30, This component was also eligible to finance balance payments, if any, from PSDP II, which may have completed before June 30, 2006 but where these payments became due after the closing date. The following works were taken up under PSDP III against this component: (i) Eastern Region System Coordination and Control Project completed in June 2005; (ii) Western Region System Coordination and Control Project completed in August 2005; (iii) System Strengthening-III in Southern Region Grid completed in April 2007; (iv) High Capacity East-North Interconnector-II completed in August 2007; 32

41 (v) POWERGRID s diversification into telecom business completed; and (vi) NLDC completed in March The implementation of spillover works (from PSDP II) for the Eastern and Western Regions System Coordination and Control Projects has resulted in the improvement of real time grid management and economic dispatch of power at the regional level. In addition, NLDC has been established as an apex body to ensure integrated operation of the national power system for the overall coordination at the national level. Further, the completion of balance elements has facilitated the strengthening of the transmission system. The diversification into the telecommunications sector has created a new business opportunity for the company by leveraging its countrywide transmission network and its state-of-the-art optical fiber embedded technology. Outcome Growth in Power Exchange between Regions: The completion of interregional lines, namely Agra-Gwalior 765 kv S/C line and Zerda-Kankroli 400 kv D/C that are part of NWTC Strengthening (candidate scheme), has resulted in an increase of interregional power transfer capacity by about 2,100 MW. The completion of the schemes has effectively increased the interregional power transfer capacity of the grid to 23,800 MW in July 2011, which is a major achievement in the context of the lingering major power deficits in India. In addition to these achievements, the completion of the strengthening schemes: Seoni-Bina 765 kv S/C line, Balia- Bhiwadi HVDC bipole line, Seoni-Wardha-Akola-Aurangabad transmission system and Bina- Gwalior 765 kv S/C line, has resulted in improving grid stability and security. The indicator outperformed targets as set in PAD for all the years, except two years (FY2006 and FY2007). During 2006, the actual was marginally lower by around 0.5percent (target: 35,000 MU; actual: 34,816 MU) whereas for 2007, the actual was lower by around 0.7percent (target: 38,000 MU; actual: 37,752 MU). The targets for this indicator were never revised. Overall, power exchange increased from 31,000 MU (2005) to 56,747 MU against a target of 52,000 MU (2011) or an increase of 83percent (Figure A3.1). Figure A3.1: Growth in power exchange among regions 60,000 Growth in Power Exchange between Regions (MU) 50,000 40,000 30,000 20,000 Baseline Target (MTR) Target (PAD) Actual 10, Completion of the NLDC: The transmission subsector benefitted immensely from a modern and completely computerized NLDC along with the already existing Unified Load Dispatch and Communication System in various regions. NLDC is the apex body to ensure the integrated 33

42 operation of the National Grid and smooth transfer of power between regions. This system also ensures the monitoring of scheduling and dispatching of power as well as the security and reliability of the grid and coordination among power exchanges. Considering the increased complexity of grid operation of such a large network in the country, facilities at NLDC and five RLDCs are being upgraded on a regular basis. As a result of POWERGRID s continuous effort, the Indian power grid has not experienced any major grid disturbances in the last eight years (since ). As per GoI s directive, this along with other load despatch centres at regional and state level are managed and operated by POSOCO, a fully owned subsidiary of POWERGRID. Output The implementation of any transmission scheme has a direct impact on the addition to the transmission capacity measured in ckm and in the transformation capacity measured in MVA of the transmission utility. Once the lines are commissioned, it contributes to the company s transmission and transformation capacity. The same holds true for POWERGRID, the central transmission utility in the Indian power sector, as well. Thus, these two measures were adopted as result indicators for Component One. Growth in Transformation Capacity (MVA): This indicator also outperformed all targets set in the PAD, except for one year (FY2007) when it was marginally lower by less than 1 percent (target: 60,000 MVA, actual: 59,417 MVA). The targets against this indicator were not revised at all. Overall, transformation capacity increased from 50,000 MVA (2005) to 93,050 MVA against a target of 85,000 MVA (2011) or an increase of 86 percent (Figure A3.2). Figure A3.2: Increase in transformation capacity Transformation Capacity (MVA) Baseline Target (MTR) Target (PAD) Actual Growth in Transmission Capacity (ckm): As can be observed from Figure A3.3, the targets as per the PAD were met successfully for the intermediate years but its end year targets were revised downwards by 4.7percent (from 84,000 ckm to 80,000 ckm) due to factors that impacted progress and were outside POWERGRID s control. In 2010, the actual was lower than target by almost 6percent (target: 80,000 ckm; actual: 75,291 ckm). Consequently, KPI targets for transmission capacity were revised downwards (compared to PAD targets) for FY2011 during MTR in April 2010 as the main reason for such underperformance was external factors: ROW issues and delays in obtaining forest clearances, especially after GoI s notification regarding FRA in August 2009 under which the project implementing authority (here, POWERGRID) had to take a no objection document from every Gram Sabha (at the village level) for all proposals involving diversion of forest land under the Forest (Conservation) Act. POWERGRID was able to successfully achieve the revised target. Since the same indicators are being measured under PSDP IV and PSDP V, the World Bank has agreed to closely monitor the achievement of the revised targets as well as the end 34

43 year target (FY2015) for PSDP V, which remains unchanged from its original target because of POWERGRID s assurance on having taken the right measures to address past ROW issues. Overall transmission capacity increased from 51,000 ckm (2005) to 82,355 ckm against a target of 80,000 ckm (2011) or an increase of 61 percent. Figure A3.3: Increase in transmission capacity Transmission Capacity (ckm) Baseline Target (MTR) Target (PAD) Actual Other Key Developments at Entity Level Some other key developments that took place at the entity level during the implementation of the project are: (i) POWERGRID was conferred the Navratna status by GoI in May 2008, implying a greater commercial and financial autonomy for the company; (ii) POWERGRID entered the capital market with an IPO during FY 2008 with 10 percent of fresh issue of existing paid-up capital along with the divestment of 5 percent of GoI s shareholding. In the post issue scenario, GoI s holding stood at percent with the balance held by the public; (iii) In FY2011, POWERGRID floated an FPO comprising fresh issue of 10 percent paidup capital along with divestment of 10 percent of GoI s shareholding. The FPO received overwhelming response and was oversubscribed by times reflecting sound corporate governance policies of the company. In the post issue scenario, GoI s holding stands at percent with the balance being held by the public; (iv) POWERGRID established and commissioned the NLDC in February 2009, as the apex structure for national grid management and operation. According to POWERGRID, this four-tier system is a complex and globally unique mode of grid operation. It minimizes grid disturbances and facilitates quick restoration in case of failure; (v) Power System Operation Corporation Limited (POSOCO) was constituted as a fully owned subsidiary of POWERGRID in March 2009 and this step represented the beginning of the separation of the role of the system operator from that of the central transmission utility, owner of transmission assets; (vi) POWERGRID s ESPP were adopted by the World Bank as a pilot under UCS (OP 4.00). This was formally adopted under PSDP V; (vii) POWERGRID developed a CSR Policy; and (viii) POWERGRID is the first amongst the World Bank s clients in India to have prepared a Sustainability Report in 2009, covering its environmental and social performance. 35

44 The Company has also undertaken the development of certain transmission lines with private parties through establishing public-private JVs. As on March 31, 2011, POWERGRID had established the following JVs: (i) Powerlinks Transmission Limited (POWERLINKS) is a JV between POWERGRID and Tata Power that hold 49% and 51%, respectively. This was POWERGRID s first publicprivate partnership in power transmission. The JV was incorporated to undertake the implementation of transmission lines associated with Tala hydropower plant, East-North interconnector, and Northern Region Transmission System from Siliguri in West Bengal via Bihar to Uttar Pradesh in the Northern region. (ii) JAYPEE POWERGRID Limited (JPL) is a JV between Jaiprakash Power Ventures Limited and POWERGRID with a holding of 74% and 26%, respectively. This JV was incorporated to evacuate power from 1,000 MW Karcham-Wangtoo hydropower plant in Himachal Pradesh in the Northern Region. (iii) Torrent Powergrid Limited (TPL) is a JV between POWERGRID and Torrent Power Limited with a holding of 26% and 74%, respectively. This JV was incorporated to establish a transmission system associated with 1,100 MW Sugen Gasbased power plant in Gujarat in the Western Region. (iv) Parbati Koldam Transmission Company Limited (PKTCL) is a JV between Reliance Energy Limited (now, Reliance Infra) and POWERGRID with a holding of 74% and 26%, respectively. This JV was incorporated to establish a transmission network associated with the 800 MW Parbati II hydropower plant and the 800 MW Koldam (v) hydropower plant in the Northern Region. Teestavalley Power Transmission Limited (TPTL) is a JV between Teesta Urja Limited and POWERGRID with a holding of 74% and 26%, respectively. This JV was incorporated to establish transmission lines associated with the Teesta III hydropower plant in Sikkim in the North-eastern region. (vi) North-East Transmission Company Limited (NETC) is a JV between POWERGRID and ONGC Tripura Power Project Company Limited (OPTC), Government of Tripura, Manipur, Mizoram, Assam Electricity Grid Corporation Limited and Meghalaya for the establishment of a transmission line associated with the 726 MW Palatana Gas based power project in Tripura. POWERGRID holds a 26% equity share in the JV. (vii) National High Power Test Laboratory Private Limited (NHPTLPL) is a JV between POWERGRID, National Thermal Power Corporation (NTPC) Limited, National Hydro Power Corporation (NHPC) Limited and Damodar Valley Corporation with an equal participation. The JV was incorporated to set up an Online High Power Test Laboratory for short circuit test facility in the country. (viii) Energy Efficiency Services Limited (EESL) is a JV between POWERGRID, NPTC Limited, Power Finance Corporation (PFC) Limited, and Rural Electrification Corporation (REC) Limited with an equal participation. The JV is set up to promote measures of energy efficiency and energy conservation to reduce climate change. 36

45 Annex 4: Economic and Financial Analysis The schemes funded under the loan were categorized into core and candidate schemes. Core schemes were those that were ready for implementation immediately after effectiveness whereas candidate schemes were to be selected during the course of the project depending on their readiness for implementation. During the appraisal, economic and financial analysis of only core schemes was presented. For the candidate schemes, such analysis was carried out during review and approval of the project implementation plan of each scheme. The sections below present the analysis for both core and candidate schemes as well as the financial analysis for the entity. Economic Analysis As mentioned above, during appraisal, the economic analysis of only three core schemes (Seoni- Wardha-Akola-Aurangabad, Balia-Bhiwadi, and Seoni-Bina transmission systems) was carried out. The economic analysis below also presents the analysis for two candidate schemes (WRSS II and NWTC). ERR calculations were based on certain assumptions (discussed later) and their values were compared with the opportunity cost of the capital of 12 percent for projects to be financed in India. ERR, after completion of the schemes, was calculated using the same methodology adopted during the appraisal. The scheme-wise ERR at the time of PAD (two cases: a) base case; and b) extreme case where cost escalation by 20 percent, delay in project commissioning by two years, ROE is lower by 1 percent and foreign exchange rate is lower by 10 percent) is compared with that at completion. Name of the Scheme Seoni-Wardha- Akola-Aurangabad ERR as in PAD/PIP (Base Case) Table A4.1: Economic analysis of schemes ERR as in PAD/PIP (Cost Escalation by 20%, Delay of 2 Years) 37 ERR at ICR Remarks 15.96% 11.06% 12.03% The commissioning of this scheme was delayed by almost 1.5 years Balia-Bhiwadi 14.83% 10.46% 18.33% Outperformed Seoni-Bina 15.02% 10.59% 14.46% The commissioning of the scheme was delayed by almost 6 months WRSS II (Bina- Gwalior) 22.44% 17.57% 14.56% ERR cannot be compared as the PIP calculated ERR for entire WRSS-II scheme whereas ERR at completion is for only Bina- Gwalior line NWTC 21.98% 15.52% 23.85% Outperformed As can be observed from Table A4.1, two of the five schemes outperformed the base case scenario. Also, ERR for all schemes is higher than the opportunity cost of capital (12 percent), implying that these schemes were economically viable. The Balia-Bhiwadi HVDC bipole transmission system has facilitated the transfer of bulk power across the regions. Even though the commissioning of the entire scheme (HVDC line, Pole I and Pole II) is deferred due to a delay in the manufacturing of converter transformers by the contractor at Bhiwadi terminal, commissioning of the HVDC line and Pole I has facilitated exchange of bulk power between the Northern and Eastern Regions. Most generation projects were/are planned in

46 the Eastern Region whereas the load centers are located in the Western Region. Bridging the demand-supply gap through this line has resulted in an ERR of percent compared to percent estimated during appraisal for this scheme. Regarding the NWTC, the ERR of percent is higher than the percent estimated under the base case during appraisal. The two interregional lines under this scheme have enhanced the interregional power transfer capacity of the National Grid by almost 2,100 MW. These lines along with the extension of the substations have also brought stability and reliability to the Indian power system. The importance of this scheme is thus reflected in a very robust ERR. For the Seoni-Wardha-Akola-Aurangabad transmission system, the ERR at completion (12.09 percent) is lower than the base case (15.96 percent) but marginally higher than the opportunity cost of capital. The reasons for the lower ERR can be attributed to delays in commissioning of the scheme by almost 1.5 years (target: June 2008; actual: November 2009), caused by delayed availability of the downstream network and commissioning of the Akola and Aurangabad substations, end nodes of the lines, to be made available by MSEB. These substations, without which the investments in POWERGRID s system would have been rendered useless, were not completed on time. To match the commissioning of the downstream network, the commissioning of this system was also adjusted. As a result, there was a cost escalation of almost 30 percent since the appraisal (estimated value at PAD: INR 7,393 million; actual completion cost: INR 9,774 million). This has negatively influenced the ERR of the scheme and, thus, it is lower than the base case. The ERR at completion for the 765 kv Seoni-Bina transmission line is percent, marginally lower than that in base case at appraisal (15.02 percent). The main reason for this was a delay in commissioning by almost six months. The line was envisaged to be commissioned by September 2009 but could be commissioned only in March The main reason for the delay was the late forest clearance. It took almost four years for POWERGRID to obtain the forest clearance for this scheme. The major factor in this delay was a stay in 2006 by the Supreme Court of India on the reconstitution of FAC that plays an important role in clearing the forest proposals. This stay was lifted in 2007 but with a condition that all recommendations of the FAC shall be approved by the Supreme Court, thus lengthening the approval process. Moreover, this line is initially charged at 400 kv, later to be upgraded to 765 kv. In any case, this project has resulted in power transfer from the power surplus Eastern Region to the power deficit Western Region. The WRSS II scheme is a cluster of four sets of transmission lines of which two sets were to be implemented by POWERGRID and the other two sets by 100 percent private players. All substations under all sets were to be implemented by POWERGRID. ERR at completion (14.56 percent) is not comparable to ERR at appraisal because, at that time, ERR for the entire scheme was calculated whereas at completion ERR of only one line funded under PSDP III (Bina-Gwalior) has been undertaken. The ERR of the entire system will always be higher than a standalone transmission line and, thus, we cannot compare the two ERRs. Like the Seoni-Bina transmission line, this line too is being charged at 400 kv, later to be upgraded to 765 kv. The same methodology as used during the appraisal was adopted to carry out the economic analysis at completion as well. During the project implementation period, the tariff norms as issued by CERC were revised in 2009 effective over a period of five years ( ). Any scheme of a centrally owned utility, to be commissioned during this period, has to apply CERC tariff norms. Revenue from tariff as calculated under CERC tariff norms 2009 (at completion) is higher than that under CERC tariff norms 2004 (at appraisal). The changes include: (i) scraping of advance against depreciation (AAD); (ii) rate of ROE increased from 14 to 15.5 percent; (iii) additional 0.5 percent 38

47 ROE to be available on timely completion of the project; (iv) rate of depreciation increased from around 3.6; to 5.28 percent; and (v) upward revision of O&M rates. Further, since the load flow studies for each line is carried out during transmission planning, the MW of power saved by implementing these lines was assumed at the same level at the time of appraisal or at the time of PIP approval. To quantify the economic benefits, for three of the five schemes located in the Western Region (Seoni-Bina, Seoni-Wardha-Akola-Aurangabad, and WRSS II), an average cost of generation projects is taken as INR 3.63 per unit. For the Balia- Bhiwadi HVDC system, the average cost of generation projects in the Northern Region is taken as INR 3.14 per unit whereas, for NWTC, an average cost of generation projects in Northern and Western Regions is taken as INR 3.17 per unit. The exchange rate of (US$1 = INR 43) used was the same as that during appraisal to nullify the impact of fluctuations in the exchange rate. Detailed calculations for the various schemes are presented in Table A4.2: Table A4.2: Detailed economic analysis of the schemes 39

48 Seoni-Wardha-Akola-Aurangabad INFLOW (Rs. Million) Sl. No. Year Net Benefit * Revenue due to reduction Interest on Capital Cost O&M Cost Total Outflow in losses in the system W.C , (1,362.29) , (4,208.34) , (1,764.27) , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Rate Of Return 12.03% Note : Year 2012 means Financial Year and so on. Costs Associated With the Scheme OUTFLOW 40

49 Balia-Bhiwadi INFLOW Costs Associated With the Scheme OUTFLOW (Rs. Million) Sl. No. Year Net Benefit * Revenue due to reduction Interest on Capital Cost O&M Cost Total Outflow in losses in the system W.C , (2,424.55) , (3,713.83) , (1,417.23) (70.26) , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Rate Of Return 18.33% 41

50 Seoni-Bina INFLOW (Rs. Million) Sl. No. Year Net Benefit * Revenue due to reduction Interest on Capital Cost O&M Cost Total Outflow in losses in the system W.C (509.83) , (2,005.96) (469.54) (9.03) Rate Of Return 14.46% Note : Year 2012 means Financial Year and so on. Costs Associated With the Scheme OUTFLOW 42

51 WRSS II (Bina-Gwalior) INFLOW (Rs. Million) Sl. No. Year Net Benefit * Revenue due to reduction Interest on Capital Cost O&M Cost Total Outflow in losses in the system W.C (183.18) , (1,223.72) (694.01) (110.81) Rate Of Return 14.56% Note : Year 2012 means Financial Year and so on. Costs Associated With the Scheme OUTFLOW 43

52 NWTC INFLOW (Rs. Million) Sl. No. Year Net Benefit * Revenue due to reduction Interest on Capital Cost O&M Cost Total Outflow in losses in the system W.C (705.28) , (2,084.79) (173.92) , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Rate Of Return 23.85% Note : Year 2012 means Financial Year and so on. Costs Associated With the Scheme OUTFLOW Financial Analysis - Schemes The financial analysis is presented for both core and candidate schemes. The rate of ROE was considered as a proxy for financial analysis of the schemes. The same proxy was used during the appraisal as well. ROE of the schemes has been calculated using the same methodology as during the appraisal. The scheme-wise ROE at the time of PAD (two cases: a) base case; and b) extreme case where cost escalation by 20 percent, delay in project commissioning by two years, ROE is lower by 1 percent and foreign exchange rate is lower by 10 percent) is compared with that at completion. 44

53 Name of the Scheme ROE as in PAD/PIP (Base Case) Table A4.3: Financial analysis of schemes ROE as in PAD / PIP (Cost Escalation by 20%, Delay of 2 years, ROE Lower by 1%) ROE at ICR Remarks Seoni-Wardha- Akola-Aurangabad Balia-Bhiwadi 13.36% 12.37% 10.65% 10.19% 23.09% 15.76% Outperformed in all the cases. Main reason is revisions in CERC tariff norms under which ROE Seoni-Bina 12.37% 10.20% 19.20% was increased from 14% (2004 WRSS II (Bina % 10.76% 20.02% norms) to 15.5% (2009 norms). Gwalior) NWTC 13.70% 11.25% 25.96% In all the cases, ROE was much higher than the base case. Amongst others, the main reason for this is the revision in CERC tariff norms, as mentioned in the section above. Under the revised tariff norms, ROE has been increased from 14 to 15.5 percent. All the schemes have an ROE higher than 15.5 percent. Thus, the schemes are financially robust. Detailed calculations for the various schemes are provided in Table A4.4: Table A4.4: Detailed financial analysis of the schemes 45

54 Seoni-Wardha-Akola-Aurangabad INFLOW Costs Associated With the Scheme OUTFLOW (Rs. Million) Sl. No. Year Revenue (Yearly Transmission Charges) Equity O&M Cost Interest on W.C. Interest Charges Debt Repayment Total Outflow Net Benefit (463.08) , (1,448.51) (673.22) , , , , , , , , , , , , (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) - (0.00) (0.00) - (0.00) (0.00) - (0.00) Rate Of Return 23.09% Note : Year 2012 means Financial Year and so on. 46

55 Balia-Bhiwadi INFLOW Costs Associated With the Scheme OUTFLOW (Rs. Million) Sl. No. Year Revenue (Yearly Transmission Charges) Equity O&M Cost Interest on W.C. Interest Charges Debt Repayment Total Outflow Net Benefit (824.37) , (1,295.09) (563.81) (124.74) , , , , , , , , , , , (0.00) (0.00) (0.00) Rate Of Return 15.76% Note : Year 2012 means Financial Year and so on. 47

56 Seoni-Bina INFLOW Costs Associated With the Scheme OUTFLOW (Rs. Million) Sl. No. Year Revenue (Yearly Transmission Charges) Equity O&M Cost Interest on W.C. Interest Charges Debt Repayment Total Outflow Net Benefit (173.32) (688.72) (193.01) (42.68) (0.00) (0.00) (0.00) Rate Of Return 19.20% Note : Year 2012 means Financial Year and so on. 48

57 WRSS II (Bina-Gwalior) INFLOW Costs Associated With the Scheme OUTFLOW (Rs. Million) Sl. No. Year Revenue (Yearly Transmission Charges) Equity O&M Cost Interest on W.C. Interest Charges Debt Repayment Total Outflow Net Benefit (62.26) (418.32) (254.30) (69.32) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) - (0.00) (0.00) - (0.00) (0.00) - (0.00) Rate Of Return 20.02% Note : Year 2012 means Financial Year and so on. 49

58 NWTC INFLOW Costs Associated With the Scheme OUTFLOW (Rs. Million) Sl. No. Year Revenue (Yearly Transmission Charges) Equity O&M Cost Interest on W.C. Interest Charges Debt Repayment Total Outflow Net Benefit (239.74) (717.94) (95.85) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) - (0.00) (0.00) - (0.00) (0.00) - (0.00) Rate Of Return 25.96% Note : Year 2012 means Financial Year and so on. Financial Analysis - Entity The financial analysis at the entity level was carried out at the appraisal and completion stage, using the same principles. Table A4.5 lays out the actual financial details at the entity level. POWERGRID has been a profit-making entity since its inception and the legacy carried over during the PSDP III implementation period as well. Net profit increased from US$183 million in 2005 to US$627 million in 2011, an increase of more than 3.4 times. The main financial risk to POWERGRID is the risk of nonpayment by off-taking utilities. The risk of recovering past debts has been mitigated through the signing of tripartite agreements between the Reserve Bank of India (RBI), state governments and GoI. Under this securitization scheme, past debts were securitized against the tax free bonds valid up to In addition, POWERGRID has adopted the Letter of Credit mechanism to ensure payment of current monthly bills by the off-taking utilities. In case of default, the utility is penalized by reducing 5 percent of power offtake when payment is delayed between days of billing date, 10 percent when delay is between days, and 15 percent if beyond 90 days. If the utilities are unable to pay the bill even beyond this timeframe, 50

59 POWERGRID can intimate MoP that further advises MoF to direct RBI to release the complete payment directly to POWERGRID from the central appropriation of the concerned state. POWERGRID s receivables as of March 2011 stand at 0.15 months of average billing and Letters of Credit are available for a gross amount of INR 5,594 crore (or US$1,300 million) 14, which were over 100 percent of the average monthly payable transmission charge. Even though the regulated ROE has increased from 14 to 15.5 percent, the ROE at entity level was at 13 percent in This is mainly due to the huge CAPEX that stood at US$3,100 million in 2011 in response to an increasing demand and need for supporting the transmission network to transfer power between power surplus and power deficit regions. The current ratio is healthy as it is below one during the project period. Table A4.5: Financial summary POWER SYSTEMS DEVELOPMENT PROJECT III Financial Summary (Figures in million USD) Description < Actual > Year PROFIT AND LOSSES Operating Revenues ,182 1,428 1,745 2,116 Operating Expenses Profit before Tax Net profit CASH FLOW Operating Cash flow post tax , ,544 1,539 1,323 Capital Expenditure 707 1,070 1,566 1,243 2,129 2,247 3,100 Pre-financing cash flow (47) (213) (556) (547) (585) (707) (1,777) Financing ,303 1,415 1,556 1,709 2,802 Cash Available for Debt Service ,002 1,025 debt service dividend paid Increase in cash balances (43) (3) Cash C/F BALANCE SHEET ITEMS Net Block 3,790 4,306 5,074 6,362 7,239 7,456 8,657 WIP 1,169 1,489 2,195 2,037 3,090 4,749 6,192 Total Fixed Assets 4,958 5,795 7,269 8,398 10,329 12,205 14,849 Investments Total Current asset ,250 1,933 2,239 2,446 Total Assets 6,003 6,926 8,543 10,053 12,633 14,782 17,612 Total Equity 2,093 2,321 2,547 3,197 3,452 3,753 5,008 Borrowings 3,113 3,494 4,494 5,178 6,620 8,004 9,508 Current Liabilities 741 1,038 1,404 1,563 2,436 2,862 2,829 Total Debt 3,854 4,533 5,898 6,741 9,055 10,866 12,337 Total Equity and Liability 6,003 6,926 8,543 10,053 12,633 14,782 17,612 FINANCIAL RATIOS Operating Ratio 39% 40% 36% 40% 37% 44% 39% Net income as % of Revenue 28% 28% 30% 29% 28% 27% 30% Return on Equity 9% 10% 11% 11% 11% 13% 13% Self Financing Ratio (3 year average) 35% 34% 35% 43% 37% 26% 30% Debt Service Coverage Current ratio Debt:Equity Ratio 63:37 63:37 67:33 64:36 68:32 71:29 68:32 Exchange rate (USD/INR) At the exchange rate of US$1 = INR 43 (same as used for the economic and financial analysis) 51

60 As can be observed from Tables A4.5 and A4.6, POWERGRID comfortably met the financial covenants. The debt-equity ratio was always lower than 80:20. The self financing ratio was also greater than 20 percent for all years from 2006 till Accounts receivable were also much lower than four months, stipulated in the Loan Agreement. Table A4.6: POWERGRID s adherence to financial covenants Name of the Covenant Units Covenant Debt Equity Ratio Ratio Less than 80:20 63:37 67:33 65:35 68:32 71:29 68:32 Self Financing Ratio Percent Greater than 20% 36.75% 35.4% 43.11% 35.34% 25.27% 29.93% Accounts Receivable Months Less than 4 months

61 Annex 5: Bank Lending and Implementation Support/Supervision Processes a. Task Team members Names Title Unit Lending Ian Alexander Consultant FEUSE HIS Sushil Kumar Bahl Senior Procurement Specialist SARPS Priya Chopra Program Assistant SASDO Senior Social Development Mohammed Hasan Specialist SASDS Fowzia Hassan Operations Analyst MNSEG Senior Financial Management Manoj Jain Specialist SARFM Sunil Kumar Khosla Senior Energy Specialist ECSS2 Judith K. Plummer Senior Financial Analyst SASDE Mantena Satyanarayana Raju Consultant SASDE Sameer Shukla Senior Energy Specialist ECSS2 Sanjay Srivastava Regional Safeguards Adviser SARDE Vladislav Vucetic Lead Energy Specialist MNSEG Pedro E. Sanchez Senior Energy Specialist ECSSD Mikul Bhatia Senior Energy Specialist SASDE Rashid Aziz Senior Energy Specialist SASDE Supervision/ICR Sushil Kumar Bahl Senior Procurement Specialist SARPS Mikul Bhatia Senior Energy Specialist SEGEN Priya Chopra Program Assistant SASDO Minerva S. Espinosa-Apurada Program Assistant SASDO SurbhiGoyal Energy Specialist SASDE Yash Gupta Procurement Specialist SARPS Senior Social Development Mohammed Hasan Specialist SASDS Senior Financial Management Manoj Jain Specialist SARFM Gaurav D. Joshi Environmental Specialist SASDI Neelima Kapur Temporary SASDA Pedro E. Sanchez Senior Energy Specialist ECSSD Gevorg Sargsyan Program Coordinator SEGEN Sanjay Srivastava Regional Safeguards Adviser SARDE Mantena Satyanarayana Raju Consultant SASDE Julia M. Fraser Senior Financial Analyst EASTS Raghuveer Y. Sharma Chief Investment Officer CN1S5 Kwawu Mensan Gaba Lead Energy Specialist SASDE Senior Power Engineer G. Ayse Cansiz (Consultant) AFTEG 53 Responsibility/ Specialty

62 Names Title Unit Kavita Saraswat Senior Power Engineer SASDE Vinod Ghosh Program Assistant SASDE Savinay Grover Financial Management Specialist SARFM Christopher L. Rytel Power Engineer (Consultant) SASDE Responsibility/ Specialty b. Staff Time and Cost Staff Time and Cost (World Bank Budget Only) Stage of Project Cycle US$ Thousands (including No. of staff weeks travel and consultant costs) Lending FY FY FY Total: Supervision/ICR FY FY FY FY FY FY FY12(till January 27, 2012) Total:

63 Annex 6: Beneficiary Survey Results Not Applicable 55

64 Annex 7: Terms of Reference for Impact Assessment Study Objective of the Study The objective of the study is to independently assess the impact of income generation measures in restoring/improving the living standards of the affected person in terms of increase in incomes, acquiring assets, and so on. The study shall cover all those who have received the benefits of rehabilitation assistance for traditional and nontraditional income generation activities. The study should also include a small control group for comparing the living standards of the people affected by the project with those of the unaffected population. Scope of the Study The following tasks will be undertaken during the assessment and evaluation of RAP: Prepare a detailed methodology including survey instruments for the evaluation study; Review the overall implementation of the income generation program and conclude whether the desired objectives of income restoration have been realized; Assess the process followed for the implementation of the income generation program; Find out the impact of income generation in respect of improving the living standards and creating productive assets; Assess the changes in the living standards of affected persons in terms of income, land ownership, material assets, debt, housing, demographic characteristics, and so on, and compare those with the controlled population; Assess whether the compensation amounts were sufficient to replace lost assets and identify how the receipts have been used to conclude whether such compensation has been used for productive purposes or not; Identify lessons learned and any remedial measures required for the realization of the objective; and Prepare an impact assessment report describing the results of the above mentioned aspects. Methodology The study shall use a variety of means to collect the information, including household surveys, group discussions, case studies and interviews with the officials. As appropriate, secondary data will be collected from POWERGRID's project files and reports. For comparison purposes, if some baseline data are not available such data will be collected on recall basis. The sample size will consist of about 50 percent of the households who have received benefits. The sample should be selected to cover all castes and different type of income generation programs. In addition, a sample size (about percent of the main sample) will be taken up from the controlled population for comparing the living standards. Output The study will be completed in about two months. The inception report outlining the methodology, timeline for various tasks and the baseline data for key indicator to be used in the report (to be collected from the baseline studies) will be available within two weeks. The draft report will be available at the end of one-and-a-half months. The final report will be produced in about two months. Inception report Draft report Final report 56

65 Annex 8: Stakeholder Workshop Report and Results Not Applicable 57

66 Annex 9: Summary of Borrower's ICR Introduction POWERGRID, the central transmission utility of the country and a Navratna Public Sector Enterprise (PSE) operating under MoP, plays a strategic role in the Indian power sector, directly contributing to the economic development of the country, by establishing large and complex transmission projects, and operating and monitoring regional grids under stringent conditions. As on March 31, 2011, POWERGRID has established a transmission network of around 82,355 ckm of transmission lines along with 135 EHV alternating current (AC) and direct current (DC) substations, with a transformation capacity of 93,050 MVA, spread over the length and breadth of the country. The company has been consistently maintaining the availability of its transmission network over 99 percent and wheels about 50 percent of the total power generated in the country on its network. POWERGRID is a listed company with a public holding of percent, the balance being held by GoI. POWERGRID has been a profit-making company since its inception. In FY2011, the company achieved a turnover of INR 9,100 crore (or US$2,116 million), net profit of INR 2,697 crore (US$627 million) and had total fixed assets worth INR 50,352 crore (or US$11,710 million) 15. The company has established a strong and reliable National Grid in a phased manner to facilitate optimum utilization of generating resources, conservation of ecosensitive ROW and with flexibility to accommodate the uncertainty of generation plans. Presently, an interregional power transfer capacity of about 23,800 MW is established that is planned to be enhanced to over 28,000 MW by Further, modernization of RLDCs, NLDC and establishment of dedicated communication facilities along with the implementation of availability based tariff in all regions have helped in improving grid stability, system availability and economy of operation. There has been no major grid disturbance in any part of India for more than eight years. Over about two decades of excellent business operations, POWERGRID has developed strong inhouse expertise in all specialised areas of the power transmission business and has carved out a niche for itself amongst the largest transmission utilities in the world. Association with the World Bank POWERGRID, since its inception, has undertaken many critical transmission projects, in association with the World Bank, which have become the backbone of the Indian power sector. POWERGRID is a key participant in several sector reform initiatives and with the World Bank s support, POWERGRID could successfully address critical issues such as the establishment of the National Grid, open access in transmission, modernization of load dispatch facilities and establishment of NLDC, and so on, besides establishing/strengthening transmission systems. During the company s formative years, the World Bank was the first multilateral lending agency to support it with funding of transmission projects. Since then, POWERGRID has availed the following loans from the World Bank: 1. Northern Region Transmission Project (NRTP- US$475 million, closed in September 2000); 2. Power System Development Project-I (PSDP I - US$350 million, closed in December 2000); 3. Power System Development Project-II (PSDP II - US$450 million, closed in June 2006); 4. Power System Development Project-III (PSDP III - US$400 million, closed in July 2011); 5. Power System Development Project-IV (PSDP IV - US$600 million, ongoing loan) including 15 At the exchange rate of US$ 1 = INR 43.0 (same as used for the economic and financial analysis). 58

67 an additional financing for PSDP IV (US$400 million, ongoing loan); and 6. Power System Development Project-V (PSDP V - US$1,000 million, ongoing loan). Association with the World Bank has led to marked improvement in the business processes of POWERGRID, especially in the field of environment sustainability, institutional development, procurement and financial management, and so on. The PSDP III loan closed in July 2011 and the following sections cover various details of the loan. PSDP III Loan: An Introduction The PSDP III loan (Loan no IN) was designed as a specific investment loan (SIL) with the flexibility to finance POWERGRID s investments priorities during the loan period. The schemes under the loan were categorised as core and candidate schemes. Accordingly, three transmission projects -- (i) 765 kv Seoni-Bina transmission system; (ii) 400 kv Seoni-Wardha- Akola-Aurangabad transmission system; and (iii) 2,500 MW HVDC Balia-Bhiwadi transmission system -- were identified under core projects and the balance two transmission projects -- (i) NWTC scheme; and (ii) WRSS-II -- were identified under candidate projects. Apart from these, financing of balance works of the projects under the PSDP II loan (closed in June 30, 2006) was also covered under the PSDP III loan. The total financing sought from the World Bank was US$1,400 million and the PSDP III loan of US$400 million was the first tranche from the World Bank. In addition, PSDP III, the third direct loan to POWERGRID from the World Bank, was signed on May 2, 2006 and became effective on December 15, The loan closed on July 31, 2011 and the repayment period of the loan is up to March 15, Project Development Objectives The objective of the loan was to strengthen the transmission system in order to increase reliable power exchanges between the regions and states and was agreed as one of the outcome indicators. Further, growth in transmission capacity (in ckm), growth in transformation capacity (in MVA) and completion of NLDC were also agreed to be monitored to achieve these objectives. The progress of the elements covered under various schemes was continuously monitored through POWERGRID s own internal mechanism and also through periodic reviews by the World Bank Missions. The PDOs together with their approach/fulfillment are outlined in Table A9.1: Table A9.1: PDOs and their fulfillment Outcome Indicator FY 06 FY07 FY08 FY 09 FY 10 FY 11 Transmission Actual Values capacity (ckm) Target Values * Transformation Actual Values capacity (MVA) Target Values Power Exchange Actual Values across regions (MUs) Target Values There was marginal lag from the targets in the respective years; however, all project development objectives have been achieved successfully by March * Revised during the MTR Mission in April 2010 in view of the FRA notification in August 2009 under which no-objection to be taken from every Gram Sabha (at the village level) for all proposals involving diversion of forest land under the Forest (Conservation) Act which resulted in delay in obtaining forest clearance. 59

68 Growth in power exchange between regions The total power exchange between regions was 56,747 MU at the end of which is significantly higher than 34,816 MU at the end of (an increase of 63 percent). Under this loan, two interregional lines, the Agra-Gwalior 765 kv S/C line and Zerda- Kankroli 400 kv D/C line, were implemented under the NWTC Strengthening Scheme. With the implementation of these lines, the interregional power transfer capacity of the National Grid has been enhanced by about 2,100 MW. Further, as per estimates, these links have facilitated exchange of about 4,700 MU of energy during FY Actual Values Target Values FY 06 FY07 FY08 FY 09 FY 10 FY 11 Growth in transmission capacity The total transmission capacity of 82,355 ckm at the end of is significantly higher than 55,121 ckm at the end of (an increase of 49 percent) Transmission lines covered under this loan contributed about 1,276 ckm of 400 kv lines, ckm of 765 kv lines and 1,580 ckm HVDC bipole line towards transmission capacity addition. Actual Values Target Values FY 06 FY07 FY08 FY 09 FY 10 FY 11 Growth in transformation capacity The transformation capacity of 93,050 MVA at the end of is significantly higher than 54,377 MVA at the end of (an increase of 71 percent). Under this loan, 2x315 MVA transformation capacity at the new 400/220 kv Wardha substation has been added apart from various substation extensions Actual Values Target Values FY 06 FY07 FY08 FY 09 FY 10 FY 11 Completion of NLDC The project was completed in March 2009 (that is, FY2009 as per PDO) and was declared under commercial operation in April This is now managed and operated by POSOCO, a fully owned subsidiary of POWERGRID. Performance Indicator Pertaining to Environment In addition to above PDOs, cumulative forest area impacted/cumulative line length in ckm was selected as a performance indicator with reference to environment. Subsequently, during the ICR Mission in October 2011, it was decided to use cumulative transmission capacity (MW) per meter width of right of way within the forest area as a performance indicator on environment (for consistency with the performance indicator being followed under the ongoing PSDP IV and PSDPV loans). Accordingly, the indicator has been calculated for the PSDP III loan considering as the base year (as mentioned in PAD). 60

69 Table A9.2: Performance indicator on environment Year KPI (MW / m) in forest area * * There is a dip during as more low capacity lines (220 kv and 400 kv) were implemented, which has dragged the bar down. It may be highlighted that PDOs agreed in the PAD of the loan have been achieved successfully, in fact, exceeded on all fronts. All the elements covered under the loan have been completed progressively well before the loan closing date of July 31, Further, POWERGRID has achieved disbursement of 100 percent under the loan. All the financial covenants as agreed under the loan have been met comfortably, and social and environment aspects have also been addressed adequately while implementing the projects under the loan. Project Design The project design was well aligned with the underlying objectives and focused on addressing capacity building for increased exchange of power across the regions. To achieve this, various interregional (NWTC Strengthening Scheme), grid strengthening (WRSS-II), and high capacity HVDC bipole links (Balia-Bhiwadi HVDC transmission line) were planned based on proven design and tested technologies such as 500 kv HVDC and 765 kv/400 kv EHV transmission lines. To achieve the required objectives under the loan on time, various pre-implementation activities such as site selection, survey and soil investigation, initiation for forest clearances, procurement process, and funding tie-up were initiated simultaneously so that sufficient time would be available for executing the project. Procurement being a vital part of project design, the entire scope of various projects was broken down to suitable contract packages keeping in mind the sources, competitiveness and, ultimately, dovetailing all contract packages to facilitate their streamlined integration to achieve the PDO. Procurement Summary Under PSDP III, of 42 packages, 10 packages were under prior review whereas 32 packages were under post review. Further, bidding documents for all type of packages were standardized resulting in a smoother procurement process and leading to streamlined implementation of the project. In fact, POWERGRID has harmonized its bidding documents across packages, irrespective of the source of funding. Project Implementation All the schemes under the loan were designed, engineered and implemented by POWERGRID. The scope covered under the loan has already been completed and the detailed status as on December 16, 2011 is provided in Table A9.3. Details of individual schemes are provided later in this Annex. 61

70 Sl. N o. Table A9.3: Detailed status of project implementation All Figures in US$ Million Project Name Total Envisaged Committe Disbur Remarks Project Bank d Value semen Cost Funding as t as per PAD per PAD 1 Seoni-Wardha- Akola- Aurangabad Transmission System 2 ±500 kv, 2,500 MW Balia & Bhiwadi HVDC Bipole kv Seoni- Bina Transmission Line 4 North-West Transmission Corridor Strengthening 5 Western Region System Strengthening 6 Completion of Spillover Projects from PSDP II including Emergency Restoration System Commissioned progressively November (only HVDC line portion) Only Balia-Bhiwadi 500 kv HVDC bipole line covered under PSDP III loan which was completed in March Pole-I of HVDC line along with terminal stations commissioned in August 2010 and under commercial operation since September 1, Commissioned in March 2010 and under commercial operation since April 1, Commissioned progressively by April * Only 765 kv S/C Bina- Gwalior line covered under PSDP III loan, which has been commissioned in February 2010 and is under commercial operation since March 1, All projects completed Total ** Partly funded under the PSDP III loan. Balance elements are being funded under PSDP IV and additional financing for PSDP IV loans. * Only 765 kv S/C Bina-Gwalior tower package was covered under the loan. The corresponding conductor and insulator of about US$23 million are covered under PSDP IV loan. ** To be restricted to US$400 million by 16 This included: (i) Eastern Region System Coordination and Control Project; (ii) Western Region System Coordination and Control Project; (iii) System Strengthening-III in Southern Region Grid; (iv) High Capacity East-North Interconnector-II; (v) POWERGRID S Diversification into Telecom Business; and (vi) NLDC. 62

71 Loan Utilization The loan was fully disbursed. The utilization of the earlier two direct loans from the World Bank to POWERGRID was about 65 percent and 98 percent for PSDP I and PSDP II, respectively. Thus, disbursement under PSDP III is the highest of all loans ever by POWERGRID. This was achieved through rigorous monitoring of the project implementation, expeditious resolution of various issues, timely submission of disbursement claims, and continuous guidance and support from the World Bank through Missions/meetings. Benefits of Projects under PSDP III The elements funded under the PSDP III loan have facilitated the strengthening of the National Grid in terms of interregional as well as intraregional capacity and also the creation of a parallel transmission corridor in the Western/Northern Regions; Interregional lines, namely Agra-Gwalior 765 kv S/C line and Zerda-Kankroli 400 kv D/C line under the NWTC Strengthening Scheme have enhanced the interregional power transfer capacity by about 2,100 MW; Successful completion of these interregional links have contributed to enhancing the total interregional power transfer capacity of the country to 23,800 MW, which is a significant milestone towards POWERGRID s mission of the establishment of the National Grid. Further, the implementation of grid strengthening schemes, that is, Balia-Bhiwadi HVDC bipole line, Seoni-Bina 765 kv S/C line, Seoni-Wardha-Akola-Aurangabad Transmission system and Bina-Gwalior 765 kv S/C line have resulted in improving grid security, quality and reliability of the Indian power system; Under the PSDP III loan, significant transmission capacity, that is,. 923 ckm at 765 kv, 1,276 ckm at 400 kv and 1,580 ckm at ±500 kv HVDC along with the new 400/220 kv Wardha substation with a 630 MVA transformation capacity was added apart from numerous substation extensions; and The establishment of a modern and computerized NLDC along with the already implemented Unified Load Dispatch and Communication Scheme in various regions (supported by the World Bank) is assisting in the smooth transfer of power between regions and synchronous operation of the National Grid. It has also helped in scheduling and dispatching of power, increasing the security and reliability of the grid, coordination among power exchanges, and so on, and aided in prevention of any major/minor grid disturbance. Operational Experience All major investments financed by the loan have resulted in further strengthening of the National Grid and enhanced its reliability, safety and security. Transmission assets of the company are being successfully operated and maintained with an availability of more than 99 percent. In the future too, all investments are expected to operate smoothly as POWERGRID has past experience and robust arrangements for O&M of similar facilities. Lessons/ Best Practices under the Loan Time slice approach The time slice lending approach, adopted in the PSDP III loan, provided flexibility to POWERGRID in identifying a basket of priority projects and financing depending upon their readiness for implementation. This also helped POWERGRID in minimizing the financing costs such as commitment charges under the loan. Procurement Under this loan, procurement of such transmission system schemes was carried out which were either uniquely positioned or pertained to emerging transmission technologies in India. For example, Balia-Bhiwadi, a long distance (approximately 800 km), bipole HVDC 63

72 transmission system for the transfer of 2,500 MW power at ±500 kv voltage level, was a unique project of its kind considering the complexity of procurement of HVDC terminal package. Similarly, certain packages in other transmission schemes involved procurement of plant, equipment and goods for 765 kv voltage level, an emerging voltage level in transmission systems in India at that time. The World Bank played a vital role in the preparation of various sections of POWERGRID s bidding documents, under the prior review category, suitable to the requirements of these schemes based on its Standard Bidding Documents. The World Bank s critical observations on the qualification requirements, special conditions of contract, technical specifications, and so on, from time to time helped POWERGRID not only to improve the bidding documents under World Bank s funding but also to harmonize such provisions in bidding documents across all funding. Efficiency and effectiveness in procurement starts with consistent bidding documents. Under this loan, as agreed with the World Bank, the initial Standard Bidding Documents for various package categories were prepared and all subsequent bidding documents under those package categories were prepared based on these Standard Bidding Documents incorporating package specific changes. The same approach has not only been adopted in subsequent loans of the World Bank but also in case of procurement of various packages under domestic funding in POWERGRID. At present, POWERGRID maintains Model Bidding Documents for various package categories under domestic funding which facilitates the preparation of consistent bidding documents in the shortest possible timeframe. Occasionally, POWERGRID faced difficulties in addressing certain comments/ deviations/ reservations/ exceptions, and so on, from bidders while evaluating their bids to ascertain substantial responsiveness of the bids as there were contradictions in such comments/ deviations/ reservations/ exceptions found in different parts of the bids. Accordingly, with the concurrence of the World Bank, POWERGRID incorporated a provision in the bidding documents on Order of Precedence of comments/ deviations/ reservations/ exceptions found in different parts of the bid (that is, letterhead, bid form, price schedules, deviation statement, technical data sheets, other parts of bids, and so on) in addressing conflict of such comments/ deviations/ reservations/ exceptions, if any. Such a provision has been incorporated in the bidding documents under subsequent loans of the World Bank as well as in bidding documents across all funding. The World Bank also facilitated POWERGRID in streamlining certain provisions in its bidding documents pertaining to deemed export benefits, changes in laws, responsiveness to critical provisions, time for completion, and so on. This has benefitted POWERGRID in streamlining such provisions in its bidding documents across all funding. Similarly, the World Bank facilitated POWERGRID in improvising its Evaluation Reports, both in content and form, which has also been implemented by POWERGRID across all funding. Environmental and Social Aspects POWERGRID, in association with the World Bank, used a proactive approach to develop a comprehensive ESPP in April 1998 for its project with the active involvement of a leading nongovernmental organization (NGO) Development Alternatives after a wide consultation involving stakeholders, general public, representatives from MoP, MoEF, CEA, state electricity boards, allied organizations, academia, NGOs, multilateral funding agencies and PAPs from its projects through a process of national consultation. The provisions of ESPP were upgraded in 2005 and 2009 to meet the requirement of new enactments, changed rules and guidelines including that of multilateral funding agency such as the World Bank, Asian 64

73 Development Bank (ADB), Japan Bank for International Cooperation (JBIC) and international best practices to preempt all possible environment and social issues. During the revisions of ESPP, the consultative process was further widened to engage all stakeholders, including PAPs and local communities. Further, during the process of PSDPV loan, POWERGRID ESPPs was selected as the first candidate for UCS in India by the World Bank. The ESPP is being implemented in all POWERGRID s projects irrespective of type of funding. Several good environmental practices have been institutionalized including technical innovations to minimize environmental impact. The project exhibited good rehabilitation and resettlement practices and community development programs. Some of the these are: i) Involvement of a ESMD representative during the substation site (land) selection process along with engineering, Regional Headquarters (RHQ) and site representative for optimization of land size as well as ensuring land having the least social impact is selected as far as possible; ii) An advisory committee comprising eminent experts on environment and rehabilitation is in place to review ESPP and oversee its implementation at site level; iii) Periodic field visits of safeguards experts from the World Bank, ADB and POWERGRID; iv) Income generation scheme implementation with the involvement of local institution such as the Mahatma Gandhi Institute for Rural Industrialization for better understanding/representation; v) Awareness on health and education created and an ambulance has also been provided to Dhanu District Hospital (near Wardha substation), Maharashtra, through the Dhanu Environmental Protection Agency; vi) vii) PAPs are provided with unskilled jobs with the contractor to boost income level; Awareness and training programs on the protection of workers; health/safety as well as safety regulations/safety manuals are included in the bidding documents and guide provisions for workers health and safety. Various aspects such as work and safety regulations, workmen's compensation and insurance are adequately covered under the Erection Conditions of Contract, a part of bidding documents; viii) POWERGRID has a dedicated unit to oversee all health and safety aspects of its projects and has framed guidelines/checklists for workers safety as its personnel are exposed to live EHV apparatus and transmission lines. These guidelines/checklists include work permits and safety precautions for work on the transmission lines both during construction and operation, and are monitored regularly by the site in-charge and Corporate Operation Services. In addition training is imparted to workers in fire-fighting and safety measures POWERGRID, in association with the World Bank, came up with the first Sustainability Report in the power sector, a first of its kind initiative among the World 65

74 Bank s borrowers in India, for measuring, disclosing and being accountable to internal and external stakeholders for organizational performance towards sustainable development. Financial Management Institutional capacity: POWERGRID values World Bank s support to further enhance its institutional capacity, started during the loan period, such as the initiation of operational audit for projects under implementation, development of organization-wide (ERM framework and ERP to improve corporate governance and financial accountability; Use of the e-disbursement method has significantly reduced the time taken for processing of claims; and Operational Audit: This is one of the best practices started during the operation of the PSDP III loan. During appraisal of PSDP V (loan no IN), it was agreed that initially a few under-construction subschemes involving World Bank financing shall be reviewed from a holistic perspective (technical, financial, contract management, operational, safety) that will help in evolving an appropriate methodology for the operational audit that could be applied to all the projects undertaken subsequently. Accordingly, during FY2011, the operational audits of such schemes were undertaken by a multidisciplinary team consisting of personnel from technical, contracts, operations and finance departments to achieve the objective of the review and verify overall satisfactory administration of contracts in accordance with the contract document. Performance of the Bank POWERGRID acknowledges the active support provided by the World Bank during the administration of the loan, and other issues pertaining to procurement, safeguards, and so on. Keeping in view the huge ongoing funding assistance to POWERGRID and also for future engagements, POWERGRID may like to provide some suggestions for further improving various processes: (i) (ii) Procurement aspects: Threshold limit: The present limit for Prior review packages under World Bank s loans is US$25 million. Considering POWERGRID s exposure to World Bank loans and procedures, it is suggested that the limit for Prior review packages be enhanced; and. Additional forum to interact with the World Bank: POWERGRID would like to commend the excellent communication that took place during the entire project period on a regular basis, between POWERGRID and the World Bank's procurement staff. Since procurement is a sensitive matter with its overlapping synergies with technical aspects, procurement is always a tough and contentious issue. Thus, even though there have been regular interactions, it is felt that there is a possibility of introducing an exchange forum, which could be in the form of regular face-to-face meetings between the World Bank and POWERGRID to discuss such complex matters in more detail. Contracts management in the World Bank s Client Connection web site Under IBRD-III Loan, the contracts funded under the loan were listed in the World Bank Client connection web site and there was a unique SAP number for each contract which proved to be a very effective system for monitoring the contract-wise disbursement of loans. While doing any disbursement by the Disbursement Division situated in Chennai, they could refer to the above contract information and ensure that there were balance available in the contract for disbursement. 66

75 However, there have been some issues with respect to loan disbursement towards the later stage of the contracts. Some of the claims raised could not be processed in time due to insufficient balance reflected under various contracts, as the changes in the contract value on account of price variation and amendments were not getting updated in the Client Connection web site. POWERGRID is maintaining a database of updated contract price and disbursement details and also reporting the same on a periodic basis to the World Bank. It is proposed that this information should be updated in the Client Connection web site of the World Bank regularly and permission may be given to the borrower to view the information so that the data can be verified by both the World Bank and POWERGRID and hence, updated in a timely manner, in case of any discrepancy. The reconciliation can also be facilitated if history of all the applications, under which disbursements are made by the World Bank for each contract, is maintained. Such system is available for other multilateral banks as well and has helped both the parties in faster processing of claims and reconciliation of contracts. Scheme-wise Project Implementation Details 1. Seoni-Wardha-Akola-Aurangaba Transmission System (Core Project) A. Project Cost a. Total anticipated completion cost: approximately INR 977 crore (or US$227 million) 17 b. Bank financing: approximately INR 517 crore (or US$120 million) B. Commissioning: The scheme was originally scheduled to be completed by June 2008 but was later revised to be completed by November The reasons for delays were: a. POWERGRID had taken advance procurement action for the subject packages covered under the loan and draft bidding documents for the packages were furnished to the World Bank progressively from September 2005 to November2005. However, for some packages, the No Objection to the bidding documents took considerable time primarily due to improvements in bidding documents suggested by the World Bank in respect of policy and procedure related changes in World Bank s Standard Bidding Documents (SBD-2005). b. The Seoni-Wardha line was delayed due to the delay in commissioning of the associated downstream network by MSEB. c. Delay in commissioning of Akola and Aurangabad substations by MSEB, where POWERGRID lines, namely Wardha-Akola & Akola-Aurangabad, were to be terminated, resulted in delay in commissioning of these lines. The scheme was finally commissioned progressively by November Componentwise details, funded under PSDP III, are provided in Table A9.4. Table A9.4: Component-wise details funded under PSDP III, Seoni-Wardha-Akola-Aurangaba Transmission System Transmission Lines: 17 Exchange rate at US$1 = INR 43 (same as used for the economic and financial analysis). 67

76 S. No Scope under PSDP III 1. Seoni (PG)- Wardha (PG) 765 kv S/C line (initially to be operated at 400 kv) ckm 2. Wardha (PG)- Akola (Maharashtra State Electricity Transmission Co. Ltd. (MSETCL)) 400 kv D/C line ckm 3. Akola (MSETCL)- Aurangabad (MSETCL) 400 kv D/C line ckm Original Commissioni ng Schedule Revised Commissioni ng Schedule Actual Commissio ning June 2008 March 2009 March 2009 June 2008 March 2009 March 2009 June 2008 November 2009 November 2009 State Madhya Pradesh Mahara shtra Mahara shtra Mahara shtra Forest Area (hectar e) Approval Status Final approval on Nov 31, Final approval on Apr 16, No forest involved 3.22 Final approval in December, 2007 Substations: S. Scope under PSDP III No 1. 2X315 MVA, 400/220 kv Wardha (PG) substation (new) with a provision to upgrade it at 765 kv kv Seoni (PG) substation (Extension) kv Akola (MSETCL) substation (Extension) kv Aurangabad (MSETCL) substation (Extension) Original Commissioni ng Schedule Revised Commissioni ng Schedule Actual Commissi oning June 2008 March 2009 March 2009 June 2008 June 2008 June 2008 November 2009 November 2009 November 2009 November 2009 November 2009 November 2009 Resettlement & Rehabilitation RAP involved acres of Maharashtra Industrial Development Corporation land. No land compensation was required to be paid to any Project Affected Families (PAFs) as land belonged to MIDC. RAP was completed in March 2008 with: Rehabilitation assistance of INR 3.62 lakh distributed to all PAFs Vocational training given to PAFs at Krishi Kendra, Wardha by Mahatma Gandhi Institute for Rural Industrialization, Wardha Not Approved 68

77 C. Other Features of the Scheme a. Procurement: Under this scheme, 14 packages, awarded progressively from August 2006 to February 2007, were funded under PSDP III. Package Type Prior Review Post Review Total Tower Conductor Insulator Substation b. Environment Assessment Reports Target date for submission (as per PIP) Actual date of submission IEAR November 2004 November 2004 FEAR November 2006 January 2008* * Forest clearance is an important input for FEAR which is a compliance report of IEAR listing all measures taken for the management of environment and social issues. During the one year period starting from October 2006 to October 2007, no forest clearances were granted by MoEF due to the intervention of the Supreme Court. Accordingly, there was delay in obtaining forest clearance and, as agreed with the World Bank, POWERGRID submitted FEAR pending final forest clearance. c. Rain Water Collection and Harvesting System at Wardha substation: This has now become part of the design in POWERGRID s substations depending on the water table in the area. In addition, based on advice of the World Bank, another such system was installed at Wardha substation colony to conserve water. D. Major Benefits of the Scheme a. A high capacity transmission corridor between Seoni (Maharashtra), a pooling center, and various load centers in the eastern and western parts of Maharashtra have been established for reliable dispersal of power beyond Seoni b. To meet the present as well as long-term power requirement of Wardha (Nagpur area), a major load center in the eastern part of Maharashtra, a new 400/220 kv substation at Wardha was also established. 2. ±500 kv, 2,500 MW Balia-Bhiwadi HVDC Bipole System (Core Project) A. Project Cost a. Total anticipated completion cost: approximately INR 974 crore (or US$226 million) b. Bank financing: approximately INR 567 crore (or US$132 million) B. Commissioning: The scheme was originally scheduled to be completed by September 2009; the date was later revised March The delay in manufacturing of converter transformers for the HVDC terminal at Bhiwadi by the contractor resulted in a delay in commissioning of Pole-I of the HVDC line. Only the Balia-Bhiwadi 500 kv HVDC bipole line was covered under the PSDP III loan and completed in March The HVDC Terminal Station for the 2,500 MW system at Balia and Bhiwadi along with associated works are covered under PSDP IV. Pole I of the HVDC line along with terminal stations was originally planned to be completed by September 2009 but were completed in August 2010 whereas Pole II of the HVDC line along with the terminal stations was originally planned to be completed by September 2009 but is now expected to be completed by March Component-wise details, funded under PSDP III, are provided in Table A