Document of The World Bank IMPLEMENTATION COMPLETION REPORT (CPL-35770) ONA LOAN INDIA FOR A. June 20, 2001

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Energy Sector Unit South Asia Region Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT (CPL-35770) ONA LOAN IN THE AMOUNT OF US$ 350 MILLION TO INDIA WITH THE GUARANTEE OF INDIA FOR A POWERGRID SYSTEM DEVELOPMENr PROJECT June 20, 2001 Report No: This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective ) Currency Unit = Rupees (Rs) Rs 1,000,000 = US$ 21,286 US$ 1.00 = Rs FISCAL YEAR April 1 March 31 ABBREVIATIONS AND ACRONYMS AC = Altemating Curent ADB = Asian Development Bank CEA = Central Electricity Authority CERC = Central Electricity Regulatory Commission DC = Direct Current DFID = Department of International Development EIB = European Investment Bank ESPP = Environmental and Social Policy and Procedures HVDC = High Voltage Direct Current ICB = International Competitive Bidding IREDA Indian Renewable Energy Development Agency IPP = Independent Power Producer IPTC = Independent Power Transmission Company JEXIM = Export-Import Bank of Japan KfW = Kerditanstalt fur Wiederaufbau MOP = Ministry of Power NHPC = National Hydroelectric Power Corporation NPTC = National Power Transmission Corporation NREB = Northern Region Electricity Board NTPC = National Thermal Power Corporation OECF = Overseas Economic Cooperation Fund PIP = Project Implementation Plan PFC = Power Finance Corporation POWERGRID = POWERGRID Corporation of India, Limited SEB = State Electricity Board USAID = United State Agency for International Development Vice President: Country Manager/Director: Sector Manager/Director: Task Team Leader/Task Manager: Mieko Nishinmizu Edwin R.Lim Alastair J. McKechnie Kari J. Nyman

3 FOR OFFICIAL USE ONLY INDIA POWERGRID SYSTEM DEVELOPMENT PROJECT IMPLEMENTATION COMPLETION REPORT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 6 6. Sustainability 7 7. Bank and Borrower Perforrnance 8 8. Lessons Learned Partner Comments Additional Information 12 Annex 1. Key Perfornance Indicators/Log Framne Matrix 13 Annex 2. Project Costs and Financing 17 Annex 3. Economic Costs and Benefits 19 Annex 4. Bank Inputs 23 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 25 Annex 6. Ratings of Bank and Borrower Performance 26 Annex 7. List of Supporting Documents 27 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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5 Preface This is the Implementation Completion Report (ICR) for the POWERGRID System Development Project in India, for which Ln IN in the amount of US$ 350 million was approved on March 23, 1993 and made effective on March 25, The Loan was closed on December 31, The ICR was prepared by Kari J. Nyman, Lead Energy Specialist and Task Team Leader of the project with the assistance of Rajesh Sinha, Financial Analyst; Ramon Lopez -Rivera, Consultant; and Fowzia Hassan, Team Assistant, (SASEG). It was reviewed by inter alia Messrs. Alastair J. McKechnie, Sector Director and Christopher J. Hoban, Operations Adviser. The ICR is based on the findings of the Implementation Completion Mission, as well as documentation in the project files. The Borrower contributed to the preparation of the ICR by providing its own evaluation and by commenting on the draft ICR.

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7 Project ID. P Project Name: POWERGRID SYSTEM DEVELOPMENT PROJECT Team Leader: Kari J. Nyman TL Unit: SASEG ICR Type: Core ICR Report Date: June 20, Project Data Name: POWERGRID SYSTEM DEVELOPMENT PROJECT Country/Department: INDIA Sector/subsector: PD - Distribution & Transmission; PY - Other Power & Energy Conversion L/C/TF Number: CPL Region: South Asia Regional Office KEY DATES Original Revised/Actual PCD: 02/19/1992 Effective: 03/25/ /25/1993 Appraisal: 06/04/1992 MTR: 12/31/ /04/1996 Approval: 03/23/1993 Closing: 06/30/ /31/2000 Borrower/lImplementing Agency: Other Partners: POWER GRID CORPORATION OF INDIA LIMITED/POWER GRID CORPORATION OF INDIA LIMITED Asian Development Bank (ADB), Department for International Development (DFID), European Investment Bank (EIB) STAFF Current At Appraisal Vice President. Mieko Nishimizu D. Joseph Wood Country Manager: Edwin Lim Heinz Vergin Sector Manager: Alastair McKechnie Jean-Francois Bauer Team Leader at ICR: Kari Nyman Kari Nyman ICR Primary Author: Kari Nyman 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: H Bank Performance: S Borrower Performance: S QAG (if available) Quality at Entry: Project at Risk at Any Time: No ICR S

8 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Restructure the power transmission sub-sector, improve coordination in system operations and promote inter-regional and inter-state power trading through regulatory, tariff and institutional reforms. Support POWERGRID's institutional development and introduce financial performance and commercial arrangements. Assist POWERGRID in the development of modem system coordination and control facilities and reinforcement of its transmission system by financing selected components of POWERGRID's investment program. 3.2 Revised Objective: Project objectives remained unchanged through implementation. 3.3 Original Components: The project had three main components: (a) The transmission system reinforcement component originally consisted of two large transmission systems, Vindhyachal-Dhule the Western region of India and Ramagundam-Hyderabad in the Southern region, the latter a part of the interconnection of Western and Southern region power systems. In addition, the completion of transmission projects originally funded under two earlier Bank loans was supported; (b) the system coordination and control component was a regional project for the Southern region. It provides the required facilities for both POWERGRID and the state utilities, through a three-tier coordination and control system: SCADA at the field level and EMS at the state (dispatch) and regional (coordination) levels, and the required communications. These projects are technically and organizationally among the most complex and high-tech in power development; and (c) a comprehensive program of technical assistance to support POWERGRID's institutional development. 3.4 Revised Components: The original components all remained in the scope of the project. At POWERGRID's request, an additional transmission system linked to the Kayamkulam Combined-Cycle Power Project was added to the scope of the transmission component of the project in 1996, utilizing a part of the substantialoan savings that had been realized by POWERGRID. The scope of the technical assistance component remained unchanged, but additional activities were financed in support of POWERGRID's institutional development, most notably preparatory work for POWERGRID's possible diversification into telecommunications. 3.5 Quality at Entry: Quality of entry is rated satisfactory: (1) Technical preparation/design of the transmission component was satisfactory and the component was ready for procurement at the time of project approval. Technical preparation/design of the system coordination and control component was limited and detailed work was left for consultants to be engaged during implementation; (2) A major part of the project preparation was focused on helping India define the role of POWERGRID in the sector. The project was presented for Board consideration after agreements on key policy issues and objectives had been reached and an ordinance for the transfer of assets, liabilities and staff from various agencies to POWERGRID had been approved by the Govemment of India. The project provided for a comprehensive program of technical assistance to support POWERGRID's institutional developmento help the company achieve the agreed objectives. -2-

9 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Project objectives were broad and ambitious, in line with India's national reform program for power transmission and system operations. Objectives have been substantially achieved and POWERGRID's growth and institutional development has been generally satisfactory. It has completed several transmission projects, including all financed under the project, and put them into commercial service, providing much-needed strengthening of transmission capacity. The system coordination and control component is still under implementation but is expected to be successfully completed. POWERGRID has developed into a very large, well-functioning and commercially viable transmission utility. This is a remarkable accomplishment given its difficult operational environment in India's power sector. As an integral component of institutional development, POWERGRID has recognized the importance of integrating environmental and social considerations into its operations. An Environmental Management Cell was established during the processing of the project, with initial staffing arrangements and work program satisfactory by the Bank. The Cell was subsequently upgraded into a the Environmental and Social Management Department (ESMD). POWERGRID has formulated, in close consultation with the Bank, its Environmental and Social Policy and Procedures (ESPP). The ESPP provides POWERGRID with a formal framework for the identification, assessment and management of environmental and social issues at corporate and project levels. Under the ESPP, POWERGRID has created Environmental and Social Management Cells (ESMCs) in its six regional offices and Environmental and Social Management Teams (ESMTs) at its field divisions; and carried out a training program at corporate, regional and divisional levels. POWERGRID is implementing the ESPP in all its projects, regardless of source of funding. Just like during its preparation, since the formal adoption of the ESPP, the staff of the Environmental and Social Management Department have been in frequent contact with the Bank, seeking guidance on preparation and implementation of Rehabilitation Plans for proposed investments under POWERGRID II, specifically for substations under the East-North Interconnector I (in Sasaram, Bihar) and the East-South Interconnector II (in Kolar, Kamataka). The quality of these plans is high and improving reflecting POWERGRID's increased capacity to deal with these issues. In addition, issues arising out of public consultations along the transmission lines are discussed, and POWERGRID is improving their consultation methodology and its ability to respond to public concems. POWERGRlD's financial performance has been satisfactory and POWERGR1D has accordingly complied with covenants with a generauly satisfactory performance, with the exception of accounts receivable. The submission of audited financial statements and reports, investment plans and financial projections, and related quarterly and monthly information, has been generally satisfactory. POWERGRID has demonstrated a satisfactory growing trend of intemal resources, which have enabled it to maintain a satisfactory self-financing and debt service coverage (with the exception of , when a bullet repayment of working capital bonds resulted in an unusually large debt service obligation - however, this was normal refinancing of working capital borrowing). Timely recovery of dues from its customers has been the biggest challenge for POWERGRID. In the first months of FY94, POWERGRID's first months of independent bill collection, realization rates were only about 30%, and disbursements were suspended in the first half of 1994 (section 7.2). While bill collection has since mid-1994 remained under control, POWERGRID has only temporarily (and only with special measures) been able to comply with the 2 months receivable covenant Given the financial condition of it's state electricity boards, POWERGRID's collection performance has been commendable with more than 90% collection of current billing. However, at less than 100% collection, receivables have accumulated. Receivables have also mounted on account of delayed notification of tariffs for POWERGRID transmission lines, often with retroactive effect. Accounts receivables were at about 6.5 months as of March POWERGRID's financial projections - 3 -

10 demonstrate that it can sustain a much higher level of receivables and still continue to maintain adequate intemal resources to implement its large investment program with a manageable expansion in debt and envisioned private sector participation in transmission. Recognizing POWERGRID's operating environment for bill collection, it has therefore been agreed to modify the accounts receivable covenant under the proposed POWERGRID II, from two months to four months of billing. Under an action plan agreed with the Bank in March 2001, from the current 6.5 months, POWERGRID is expected to reach 4.0 months by December 2001, (and then reduce its receivables further, to 3.5 months by March 2002, and 2.0 months by September 2002). The action plan is premised on special arrangements including securitization for the recovery of past arrears. At the time of project appraisal, it was expected that financing might constrain POWERGRID's expansion. The SAR includes references to the possible need to scale down the investment program, close reviews were agreed (including covenanted annual reviews of investments and financing) and possible need for Bank guarantees to help mobilize commercial funding was also highlighted. Review of past performance shows that POWERGRID has not faced difficulties in funding its investment program, in fact, it could have invested more if needed (if justified by the pace of power reform, which fundamentally sets the pace of IPP development and determines the need for several potential major POWERGRID projects). POWERGRID credits the Bank for its catalytic cofmancing impact: following the Bank's 1993/94 $1.5 billion package to POWERGRID, multilateral and bilateral donors (including ADB, EIB, and JBIC (OECF)) and British, French, German/Swiss and Indian commercial financiers, have come to support POWERGRID. POWERGRID is starting a program of private participation in transmission, and if the pace of power reform accelerates, this will have to be pursued aggressively as POWERGRID's financial constraints would otherwise start to limit its capability to implement its transmission program. Through private participation, POWERGRID has the capability to manage its investment plan in spite of its own financial constraints. This will be a key indicator of its performance in the future as investment requirements increase. 4.2 Outputs by components: POWERGRID's performance under the transmission component was highly satisfactory. The original transmission component was completed on schedule and below original cost estimate. Vindhyachal-Dhule transmnission reinforcement in the Western region reduced system losses, improved voltage and enabled better utilization of generation capacity. Ramagundam-Hyderabad transmission reinforcement provides similar benefits in the Southem region, plus better utilization of the interconnector between Southern and Western regions. Part of loan savings were used to implement a transmission system for the Kayamkulam power station. That system has also been completed, ahead of schedule and below original cost estimate, and enables the the power station to feed the Southern region power system. The system coordination and control component has been implemented in a satisfactory manner since the award of major contracts in early 1998 and is expected to be successfully completed (with Bank financing under POWERGRID II); however, major delays had been incurred before 1998 (see section 5.3). These achievements are discussed further in POWERGRID's implementation completion review. The whole project is projected to be comnpleted well below the original cost estimates, and POWERGRID has realized substantial loan savings (section 5.4). Five institutional development/sector policy activities were carried out, all successfully, under the technical assistance component of the project: (a) A study of bulk power and transmission tariffs and regulation was completed with the support of a technical assistance grant from the Asian Development Bank (ADB). Implementation started in the Southern region in April 2001 and Eastern region in May Other regions are scheduled to follow in - 4 -

11 the course of However, it is going to be a major challenge for India to make the new bulk power tariff and trading system fully functional, and problems were immediately encountered in the Southem and Eastern regions; (b) An institutional development study was completed with funding under the Bank loan. Based on its recommendations, POWERGRID has refined its corporate plan and partly restructured its organization including a streamlining and flattening of its regional field organization; (c) consultancy services were provided under the loan for transmission planning, training and related computer facilities and project preparation. A long-term transmission plan was prepared by POWERGRID with the assistance of the consultants. The new facilities and skills have been put to regular use in system planning and project preparation. Further, POWERGRID obtained skills and equipment for tuning power system stabilizers; (d) A twining arrangement with the National Grid Company (NGC) of England & Wales was supported by UK's Department for International Development. This arrangement gave POWERGRID direct access to highly relevant managerial and technical expertize and experience and was found useful and appreciated by POWERGRID, both at management and technical levels; and (e) consultancy services were provided under the loan for POWERGRID's possible diversification into telecommunications. A business plan and an investment program have been prepared, and the first phase of the program is proposed to be supported by the Bank under POWERGRID II. 4.3 Net Present Value/Economic rate of return: POWERGRID's entire investment prograrn including the project was analyzed during the processing of the project. That analysis was updated for the ICR. During the period 1993 to 2001 the economic rate of return on investments was satisfactory at 21.3% (estimate at appraisal was 22.1%). Net present value of economic benefits at 12% discount rate was estimated at about Rs. 25,476 million (about Rs 27,432 million at appraisal). For the period 2001 to 2006 the ERR is estimated at 20.3% in the base case and is robust across scenarios. Details including the results of sensitivity analysis are given in Annex 3. Corporate-level analysis approach was adopted at appraisal and ICR, as Bank support to POWERGRID is corporate-level institutional and financial support in the context of sectoral reforrn. 4.4 Financial rate of return: The financial viability of POWERGRID's entire investment program is attractive and robust. ICR analysis of the financial performnance for the period 1993 to 2001 shows that POWERGRID achieved a financial rate of return of 16.8% on its investments. For the period 2001 to 2006 the FRR is estimated at 18.2% in the base case and is robust across scenarios. The FRR is well in excess of POWERGRID's estimated cost of capital of 13.5%. (financial rate of return analysis was not carried out during project preparation). Details including the results of sensitivity analysis are given in Annex Institutional development impact: POWERGRID's institutional growth has been generally satisfactory, in fact quite remarkable given its difficult operational environment in India's power sector, and the Bank through this project and the restructured Northern Region Transmission Project made a major contribution to POWERGRID's success. POWERGRID has taken over transmission and coordination and control systems and projects of several central and joint sector companies. It has amalgamated staff coming from various organizations into a homogenous team. It has developed its management, financial and operational systems, personnel policies and working regulations and procedures. It has become one of the world's largest transmission utilities with over 40,000 circuit-km (ckm) transmission lines, and has put its facilities into effective use with high system availability. Three broad factors, namely: (a) effective management with reasonable operational autonomy; (b) competent and experienced staff, with a continuing human resource development function; - 5 -

12 and (c) adequate financial support, most notably, by the Bank, explain POWERGRID's success. Beyond direct financing and the comnprehensive technical assistance program under the project, POWERGRID credits the Bank for its catalytic cofinancing impact and the lead in consistently supporting its institutional development and related sector reforms. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Sectoral reorganization and the creation of POWERGRID's creation involved in takeovers of transmission and coordination and control systems and projects from several central and joint sector organizations, including NHPC and CEA, the original executing agencies of the Northem Region Transmission project, and the National Thermal Power Corporation (NTPC). While they are public sector agencies, NHPC and NTPC are corporations and CEA is a statutory body, and they participated in the reorganization process from their perspectives and understandably promoting their interests. POWERGRID's clients and the prospective beneficiaries of the reorganization, are state electricity boards (SEBs), owned by their respective state governnents. The formulation and implementation of the reorganization program and the behaviour of POWERGRID's clients was therefore not entirely within the direct control of the Government of India. After considerable initial difficulties, POWERGRID has developed good working relationships with NTPC and NHPC. In contrast, some arnount of tension still remains between POWERGRID and CEA. The reorganization also required negotiations with lenders, inter alia agreements with the Bank for the transfer of the US$485 million loan for the project and transfers of the transmission components of earlier Bank loans and IDA credits to NTPC (amounting to a total of about US$691 million). Along with a new US$350 million Ln lN for POWERGRID I, these transfers brought the Bank's total investment in POWERGRID to about US$1.5 billion. 5.2 Factors generally subject to government control: The Government of India has generally been supportive of the project and of POWERGRID as an institution (section 7.5). This overall satisfactory performance however includes problems in a few areas: (1) There was a period of over one year in , following the retirement of POWERGRID's long-standing first Chairman and Managing Director and other key personnel changes and resulting vacancies in the Board of Directors, when POWERGRID lacked both effective leadership and autonomy. The adverse results became evident quickly, but it took some time for the Government to address the problems. A new management team was put in place in 1996 and has been able to restore POWERGRID's growth and development momentum; and (2) while the Government has generally supported POWERGRID's efforts to operate on commercial lines, bill realization from a few clients (including Bihar, Delhi, and Uttar Pradesh) remains a chronic challenge. POWERGRID (and NTPC) do not enjoy the required freedom and Government support to effectively regulate supply to such chronic defaulters. Satisfactory bill realization might still not have been achieved, but the build-up of arrears would have been better contained. Instead, the Government supported POWERGRID through central plan appropriations (deductions of arrears from the central plan assistance to the states). Open confrontations with the states and possible system collapses in regional networks (strong possibilities had supply been aggressively regulated) were avoided and POWERGRID's bill realization improved. Reduced central plan assistance is expected to have contributed to some states moving ahead with state power reforms, but maybe also have led to some states making cuts in spending in social and other priority sectors, instead of taking action to address their fundamental problems in the power utilities. 5.3 Factors generally subject to implementing agency control: POWERGRID's overall performance has been generally satisfactory (section 7.6). This overall satisfactory performance however includes also problems in a few areas: (1) POWERGRID started with a centralized decision-making structure and though need for decentralization has been recognized and - 6 -

13 significant progress has been made, this remains an area of further attention. Consistent and strong encouragement by top management will be required as field organization is not always willing to fully use its delegated powers. A particular area of attention is the processing of variation orders, where particularly non-routine cases tend to take longer than expected due to tendency to prolong reviews, defer decisions and/or refer them to headquarters; (2) the two system coordination and control projects, Southern under the project and Northern under the Northern Region Transmission project, experienced considerable delays in the period. These projects are POWERGRID's highest priority projects as they are essential for accomplishing its mission to improve the coordination and efficiency of power system operations in India. These high-tech projects are among the most complex in the power sector and therefore implementation delays are to be expected, based on global experience from similar projects. POWERGRID contributed to the delays by taking an extraordinary time to engage consultants to help implementhe projects and again during the first (technical phase) of the two-stage bidding process through a time-consuming series of reviews of the work of its project teams (staff and consultants). During the construction phase, these projects in particular have been affected by the less than fully effective decentralization, as by nature they require numerous variations and related reviews and variation orders; and (3) POWERGRID's bill realization has been and remains a challenge as has been discussed elsewhere in this ICR. 5.4 Costs and financing: Actual/latest estimated project cost is about US$433 million, compared to appraisal estimate of US$625 million, a reduction of about USS 193 million (reduction would have been US$49 million higher, US$242 million or almost 40%, had the Kayamkulam transmission system not been added to the scope of the project). POWERGRID's ICR credits savings to competitive procurement and exchange rate variations. However, actual depreciation was very close to projections at appraisal (Rupee depreciated from about Rs 33 to 46 against US$ during the project period, and most of the decline took place only in the last year or so, while appraisal projected steady depreciation to about Rs 41 by 2001). All project components experienced similar cost savings, and it therefore appears possible that the addition of physical and price contingencies (which added about 26% to the base cost) led to systematic over-estimation of the costs of each project component at appraisal. Such systematic over-estimation could therefore explain a part of the almost 40% reduction in costs, with POWERGRID'successful/competitive procurement another major factor. Disbursements under Ln 3577-IN amounted to US$237.5 million. US$75 million was cancelled during implementation and another US$37.5 million at closing. Cofmancing was similarly reduced, from about US$96 million estimated at appraisal to about US$72 million. This was provided mostly by EIB and local financial market, with smaller but important financing of the TA component by ADB and DFID. About US$22 million is going to be financed by the Bank under POWERGRID II, which inter alia is designed to supporthe completion of components not completed upon the closing of Ln iN. This will bring total Bank financing to about US$259 million, compared to the original US$350 rnillion loan amount of Ln IN (details are given in Annex 2). 6. Sustainability 6.1 Rationale for sustainability rating: POWERGRID's growth and institutional development has been generally satisfactory. It has completed several transmission projects and put them into commercial service. It has developed into a very large, well-functioning and commercially viable transmnission utility. This is a remarkable accomplishment given its difficult operational environment in India's power sector. As power reforms continue to make progress in Indian states, the financial position of its clients will improve, and POWERGRID's bill realization challenge will slowly ease. Possibility of a large-scale further deterioration, such as a simultaneous financial collapse in the state power sector in several states, is unlikely. Apart from such a collapse, -7 -

14 sustainability of the project and more importantly the sustainability of POWERGRID as a whole is highly likely. Project sustainability is therefore conservatively rated as likely. 6.2 Transition arrangement to regular operations. The various transmission lines and substations under transmission component of the project have moved from construction into operation smoothly, without special transition difficulties or arrangements. The system coordination and control project will be commissioned in phases, state by state, and one communication link at a time. The bulk of that process of commissioning will take place during the course of 2002, and will be a major undertaking for POWERGRID and its consultants and contractors. Commercial arrangements include a transition, where during the period of transmission or coordination and control system being in operation, but not yet with a formal notified tariff, POWERGRID will charge a lower interim tariff. This transition arrangement enables POWERGRID to recover a substantial portion of the expected regular charges during the regulary process for determining the actual regular charges. This system has been in place since POWERGRID's establishment, initially with the Ministry of Power and from 1999 with the Central Electricity Regulatory Commission (CERC) in charge of notifying the tariffs. CERC had been expected to be able to substantially accelerate the tariff setting process. This benefit has so far not materialized, tariff reviews tend to take time and then approvals often come with a retroactive effect, making bill collection very difficult. However, CERC is still at the very early stages of its functioning and should be able to streamline its operations as its experience (and experience of its regulated entities) increases. 7. Bank and Borrower Performance Bank 7.1 Lending: A major part of the project preparation was focused on helping India define the role of POWERGRID in the sector. Project was presented for Board consideration after agreements on key policy issues and objectives had been reached and an ordinance for the transfer of assets, liabilities and staff from various agencies to POWERGRID had been approved by the Government of India. This process involved the transfer of the US$485 million loan for the Northern Region Transmission project and transfers of the transmission components of earlier Bank loans and IDA credits to NTPC (amounting to a total of about US$691 million), and along with the US$350 million project loan, brought the Bank's total investment in POWERGRID to about US$1.5 billion. The transmission component was ready at the time of project approval and has been successfully completed. The relative lack of readiness of the system coordination and control component was recognized during preparation, but the component was retained in the scope of the project (and a similar component for the Northem region was kept in the restructured Northern Region Transmission project when it was transferred to POWERGRID, in spite of its lack of readiness). Funding of coordination and control systems was considered highly desirable, as such systems are essential for POWERGRID and the state utilities for improving the efficiency of power system operations. This component, though now under implementation in a satisfactory manner, is yet to be completed. One of the Bank's early project preparation missions was strengthened by a two-man consultant team, jointly funded by the Bank and the Asian Development Bank (ADB). ADB also provided a grant to help finance a part of the technical assistance component of the project, and has subsequently provided two major investment loans to POWERGRID. JK's Department for International Development provided a grant for another part of the TA component. The European Investment Bank (EIB) participated in project preparation and subsequently cofinanced the project by funding the telecommunication part of the Southern region coordination and control system

15 7.2 Supervision: The project and the restructured Northern Region Transmission project have run in parallel. They have been supervised by brief but frequent supervision missions, usually four times per year. At the outset, an immediate crisis was faced in bill realization, which was running at 30-40% in 1993 during the initial months after the management company phase and POWERGRID becoming a utility. In early 1994, disbursements were discontinued, under a mutually agreed informal suspension arrangement (the Government under Ln IN and POWERGRID under Ln IN did not submit withdrawal applications). Situation improved and disbursements resumed in mid Once procurement for the transmission components was completed and implementation commenced and consultants for system coordination and control components were in place, attention was also paid to POWERGRID's next task, inter-regional transmission connections, for possible support under POWERGRID II. It was initially envisioned for 1996 Board consideration, but instead, POWERGRID's management crisis had to be faced first, and the Bank had to defer the new operation to help focus attention to helping POWERGRID regain its momentum. Subsequently, a crisis of a different kind came with the sanctions in mid-may 1998, on the eve of the Board presentation of POWERGRID scheduled for May 26, In order to continue its supporto POWERGRID while POWERGRID II was being deferred, the Bank extended the closing date of Ln IN once, in June 2000, and the loan was closed on December 31, Overall Bank performance: The Bank made a significant contribution to India's program to restructure transmnission and system operations, by assisting in strategy formulation and operationalization and providing critical funding support. In the early 1990s, Bank made a major staff resource investment in this effort, and then followed it with a very large financial investment, total of about US$1.5 billion (see section 7.1). At a time when the Bank had stopped lending to the state electricity boards - POWERGRID's primary clients - this was an extraordinary step to support India's power sector. Subsequent supervision effort has also been intensive, and through frequent missions the Bank has been able to provide timely support to POWERGRID. Staff continuity has been noteworthy. Two members of the original project preparation team continued to supervise the project through completion, and the financial analyst changed only once, in Beyond direct financing and technical assistance support, POWERGRID credits the Bank for its catalytic cofinancing impact and the lead in consistently supporting its institutional development and related sector reforms, both during the project preparation stage and during the subsequent supervision stage. Borrower 7.4 Preparation: Project preparation effectively started in July 1991 and was completed by early The quality of preparation was satisfactory and the pace must be characterized as impressive, given the complex and controversial nature of the programn. In July 1991, POWERGRID was about to take over the management of the transmnission system, and the Government of India requested that the Bank transfer its existing transmission loans and credits to POWERGRID by August However, as only limited preparations and planning/strategy work had been done about what the role of POWERGRID would be, beyond the management company phase, it was not possible to readily agree to the request. By the time the project was submitted for Board consideration in March 1993, these preparations had been completed (involving intense discussions with affected corporations and agencies including NTPC, NHPC and CEA, and lenders who had financed their transmission projects), and an ordinance for the transfer of assets, liabilities and staff to POWERGRID had been approved by the Government of India. Technical preparation/design of the transmission componento be financed under the Bank loan was satisfactory and the component was ready for procurement at the time of project approval. Technical preparation/design of the system coordination and control component was limited to a detailed feasibility study by reputable consultants -9-

16 (section 7.1). 7.5 Government implementation performance: The Government of India has generally been supportive for the project and for POWERGRID as an institution. This is to be expected, POWERGRID being the creation and the vehicle for implementing the Government's reform program for transmission and system operations, but the Government's major positive contribution to two of POWERGRID's three broad factors (section 7.7) is worth highlighting. The Government put in place an effective management and gave it reasonable operational autonomy, and enabled POWERGRID to secure adequate financial support. 7.6 Implementing Agency: POWERGRID's institutional growth has been generally satisfactory, in fact quite remarkable given its difficult operational environment in India's power sector. POWERGRID has taken over transmission and coordination and control systems and projects of several central and joint sector companies. It has amalgamated staff coming from various organizations into a homogenous team. It has developed its management, financial and operational systems, personnel policies and working regulations and procedures. It has become one of the world's largest transmission utilities with over 40,000 circuit-km (ckm) transmission lines, and has put its facilities into effective use with high system availability. About one third (30,000 MW) of the total generating capacity in India is transmitted through POWERGRID system, including most of the inter-state movement of power. 7.7 Overall Borrower performance: Overall, the performance of the Government of India and POWERGRID, in the implementation of the project and in the broader program to restructure transmission and system operations, has been generally satisfactory. Three broad factors, namely: (a) effective management with reasonable operational autonomy; (b) competent and experienced staff, with a continuing human resource development function; and (c) adequate financial support, most notably, the Bank's US$1.5 billion, explain POWERGRID's success. It is particularly noteworthy that in 1991, when the Government decided to follow through with its earlier decision to establish a national grid company, the Govemment appointed a Chairman & Managing Director (CMD) and gave the CMD a high degree of freedom in putting together his management team. Several members of this original core team, which consisted of about 30 professionals, are still in place at POWERGRID today, including one of them as the current CMD. 8. Lessons Learned The project confirms once again a lesson learned from several other Bank projects. A well-prepared project can be expected to be implemented in a satisfactory manner, while inadequate preparation leads into slow implementation. In this project, the transmission component was ready for implementation at the time of project approval and has been completed in a highly satisfactory manner (ahead of schedule and below original cost estimate). The system coordination and control component was not ready for implementation, was largely prepared after project approval, and is well behind original schedule (it has been implemented in a satisfactory manner since 1997 and is expected to be successfully completed). If a major reform program is expected in the near future, its impact on project implementation should be carefully considered when making a decision about when to proceed with a major investment project. The project supported a controversial and complex sectoral program to reorganize - 10-

17 power transmission and system operations. The reorganization and the establishment of POWERGRID involved takeovers of transmission and coordination and control systems and projects from several central and joint sector organizations. The project succeeded in part because by the time the project was submitted for Board consideration in March 1993, reform preparations had been completed (involving intense discussions with affected corporations and agencies including NTPC, NHPC and CEA, and lenders who had financed their transmission projects), and an ordinance for the transfer of assets, liabilities and staff to POWERGRID had been approved by the Government of India. Necessary preparations had been done up front, putting POWERGRID in a position to implementhe project. In striking contrast, the Northern Region Transmission project was approved in June 1990, ahead of the restructuring with NHPC and CEA as its original executing agencies of the project. That project became a casualty of the restructuring process, and could be put into imnplementation only after it had been transferred to POWERGRID. POWERGRID has developed into a very large, well-functioning and commercially viable transmission utility. Three broad factors, namely: (a) effective management with reasonable operational autonomy; (b) competent and experienced staff, with a continuing human resource development function; and (c) adequate financial support, explain POWERGRID'success (section 7.7). Attention should be paid to reviewing and ensuring the existence of these success factors when considering support utilities/companies. Particularly in the public sector, it is not common to have all three success factors in place. The project included a comprehensive program of technical assistance, funded under ADB and DFID grants and the Bank loan. POWERGRID (and other concerned agencies in the case of the study of bulk power and transmission tariffs and regulation) invested considerable staff and budget resources into the various activities under this program, and as a result, benefited significantly from the program. Sectoral reform and restructuring, establishing new companies and developing them into functioning entities, can be a long process. Beyond direct financing support and the comprehensive program of technical assistance, POWERGRID credits the Bank for its catalytic impact and the lead in consistently supporting its institutional development and related sector reformns, both during the project preparation stage and during the subsequent supervision stage. This required a substantial and sustained commitment of resources from the Bank. At the time of tight budgets, selectivity should be exercised at the time of engagement, with full recognition of the necessary long-term nature of the commitment of resources, including readiness to provide the most intensive supervision effort at times of greatest challenges. 9. Partner Comments (a) Borrower/implementing agency: POWERGRID's ICR, inter alia comments on the Bank's performance (in its Section 6) and on some of the Bank's commnents about POWERGRID made in this ICR (in its Section 7). POWERGRID's observations about the Bank are favorable and do not raise any particular concerns about the Bank's performance or this ICR As POWERGRID's own ICR is included, these comrnents are not elaborated here. (7) Cofinanciers: Asian Development Bank (ADB) and Department for Intemational Development (DFID) cofinanced the technical assistance component of the project, and ADB has subsequently (in 1995 and 2000) provided also financial assistance to POWERGRID. DFID supported a utility collaboration arrangement with the National Grid Company of England & Wales (NGC). DFID's commented that: (1) POWERGRID demonstrated a high level of interest in and up-take of the technical assistance provided, primarily due to and reflecting the level of competence of the staff involved. The NGC/POWERGRID twinning arrangement had benefits to both parties; and (2) the working relationship between ODA/DFID and the

18 Bank team was highly coordinated and cooperative. European Investment Bank (EIB) cofinanced the Southern region system coordination and control component of the project, by funding the main telecommunications packages. EIB commented that in "early 1993, the Council of the European Union invited the EIB to commence operation in Asia and Latin America. The project is EIB's first intervention in Asia under this new mandate. Cofinancing with the Bank provided an interesting opportunity to gain operational experience in an environment new to the EIB, taking advantage of the Bank's long India experience and POWERGRID's need for financing for high tech telecommunication equipment available from EU countries. Regular interaction with the Bank supervision missions helped EIB to monitor the progress of the project and administer the loan in a cost-effective manner. EIB appreciated the Bank's continuous efforts towards the successful implementation of the project, and the Bank's decisive assistance extended to India in connection with the institutional strengthening of POWERGRID and the introduction of new bulk power tariff and trading system in the country. Lessons learnt in the course of the project implementation, through the cooperation with the Bank, assisted other EIB operations elsewhere in Asia." (c) Other partners (NGOs/private sector): 10. Additional Information POWERGRID I ran in parallel with the Northern Region Transmission project and Ln IN was closed on September 30, Implementation Completion Review for that project was prepared in parallel and contains post-evaluation of a project that was approved in 1990, ahead of the restructuring, and transferred to POWERGRID in 1994 when the restructuring process had been largely completed. The long-delayed POWERGRID II was approved by the Bank on May 3, The April 1998 PAD and the April 2001 Project Update contain additional information about POWERGRID

19 Annex 1. Key Performance Indicators/Log Frame Matrix Outcome I Impact Indicators: Indicator/Matrix Prjecled in last PSRI ActualLatest Estimate I (a) Consolidation of Regional Highly satisfactory. POWERGRD has Highly satsfactory. Same as end-of-project. Transmission Systems. completed the takeover of the transmission Togetherwith II, India has successfully lines and substations of seven central and established a national grid company. joint sector utilities. I (b) Takeover of Regional Load Dispatch Highly satsfactory. POWERGRD has Highly satsfactory. Same as end-of-project. Centers (RLDCs). taken over the five existing Regional Load Togetherwith II, India has sucressfully Dispatch Centers (RLDCs) from the Central established a national grid company. Electricity Authority (CEA) as per program agreed under Ln N. Improved operating procedures for system operations and transmission are being developed on a region-to-region basis following the RLDC takeovers. The Indian Electricity Grid Code has been processed and became effective on 1/11/2000. I (c) Tariff and Regulatory Reforms. Satisfactory (after substantial delays as Satisfactory. Update to point (2): Delhi reported in earlier versions of the previous High Court review in early March 2001 F590 system). (1) Following the resulted in further changes in performance enactment of the Electricity Regulatory norms, but also cleared the way for the Commissions Act, 1998, the Central introduction of the new bulk power tariff and Electricity Regulatory Commission (CERC) trading system, starting from April 2001 in has been oonstititued. (2) CERC the Southern region of India. This action conducted hearings on the new bulk power completed a long preparatory process tariffs and issued its tariff order in January (launched under POWERGRID I with a 2000, to become effective on April 1, technical assistance grant from the Asian CERC put is order on hold, following Development Bank). Implementation appeals and NTPC's review petition. A progress will be monitored during the revised order, plus related orders on tariff implementation of the POWERGRID 11 norms, were issued in December project. It is expected to be a major (3) Private investment in transmission is challenge for India to make the new bulk tariff now possible, following the enactment of the and trading system fully operabonal. Electricity Laws (Amendment) Act. (4) POWERGRID's legal status has been clarified by the Govemment under the same amendment, as the Central Transmission Ublity

20 11 (a) POWERGRID's Institutional Growth Satisfactory. POWERGRID has become a Satisfactory. POWERGRID's institutional and Development. functoning utility, has established its position growth and financial performance has been and now enjoys wide support in the Indian generally satisfactory, in fact quite power sector. POWERGRID has bumed the remarkable given its difficult operational situation where transmission system environment in India's power sector. investments were constrained by lack of POWERGRID has consistently met or funding and low priority, into a posibon of a exceeded its annual performance targets set surplus of potential financing. The by the Ministry of Power (MOP). Three reconstitution of POWERGRID's Board of broad factors explain POWERGRID's Directors has been completed, and success: (a) effective management with POWERGRID is implementing an reasonable operational autonomy; (b) institutional development plan for further competent and experienced staff, with a improvements prepared under the technical continuing human resource development assistance component of Ln N. functon; and (c) adequate financial support, most notably the Banls US$1.5 billion under Environmental and Social Aspects: During Ln IN and earlier transmission bans the processing of POWERGRID II, and credits to India which were transferred to POWERGRID prepared and formarly POWERGRID from original executng adopted its Environmental and Social Policy agencies as part of the nabonal program to and Procedures (ESPP), and upgraded a restructure India's power transmission and cell created during the preparabon of system operabons. POWERGRID I into a full-fledged department to lead the corporate-wide implementaibon of the ESPP. As part of the preparation of the ESPP, POWERGRID and its NGO consultants reviewed the impacts of investmentsupported under POWERGRID I and Northem Region Transmission Project (Ln N), and no impacts requiring additional mitigation measures were discovered

21 11 (b) POWERGRID's Financial Performance. Satisfactory. POWERGRID is in Satisfactory. POWERGRID's institutional complianoe with the financial performance growth and financial performance has been targets agreed under Ln IN, except for generally satisfactory, in fact quite accounts receivable. The December 1997 remarkable given its difficuit operational tariff notification gives POWERGRID the environment in India's power sector. Apart rght to charge its dients retroactively from from the two months accounts receivable April 1997, ahead of the actual tariff covenant, POWERGRID has complied wth notifications, which are being issued in a financial covenants (20% self-finandng ratio progressive manner, region by region. As and debt 1imitation covenant) agreed under expected, in spite of its commendable POWERGRID I, and they have been realization of undisputed notfied bills, retained under POWERGRID II. An analysis POWERGRID is in default with the accounts of POWERGRID's financial projections receivable oovenant on account of arrears reveal that it can sustain a much higher level from these and other pending tariff of receivables and still continue to maintain notifcations on new transmission assets. adequate intemal resources to implement an ambitious investment program with a The Bank had placed high expectabons on manageablexpansion in debt and CERC to speed up the Govemment's envisioned private sector participaton in extraordinary slow tariff processes, but so transmission. Recognizing POWERGRID's far, this has not materialized. operating environment for biml collecton, it has therefore been agreed to modify the Financial performanoe is rated as accounts receivable covenant under satsfactory, as adequate surpluses are POWERGRID II, from two months to foal being generated in spite of higher level of months of billing. Under an acton plan receivables, i.e., POWERGRID is able to agreed with the Bank in March 2001, from maintained adequate self-financing for its the current 6.5 months, POWERGRID is investments after payment of dividends to the expected to reach 4.0 months by December Govemment of India, and has been able to 2001, (and then reduce its receivables finanoe its investment program. further, to 3.5 months by March 2002, and 2.0 months by September 2002). The action pian is premised on special arrangements induding securitizabon for the recovery of past arrears. Finandal projections assume that recovery of current bills will be less than 100% for reasons explined in the end-of-project column. 11 (c) POWERGRID's Financial Performance. Satisfactory. POWERGRID has established good working relationships with all dients Satisfactory. Same as end-of-project. and has signed transmission service contracts in all five regions. Bill realization remains commendable for items where tariffs have been notified (as discussed above, the issue has been the slow processing of such notifications). Letters of credit (LCs) cover about 85% of notified bills, and 65% of all bills (including those for which formal tariff notifications are still pending). The establishment of the Central Electricity Regulatory Commission (CERC) and the opening of the power transmission sector to private investment were not part of the package of institutional and regulatory reforms agreed as part of the original project objectives. They were added to the reform agenda as India's power reforms progressed and deepened during project implementation. Similarly, the upgrading of the environment cell created during projct preparation into a full-feldged environment department to lead corporate-wide implementation of POWERGRID's Environment and Social Policy and Procedures was a "natural" corporate development, not a project mandate. Output Indicators:

22 Indicator/Matix Projeed In last PSR ActuaULatest Estimate Modern System Coordination and Control Satisfactory. POWERGRID has talen over Satisfactory. Northem and Southem region Facilities. from CEA its project to develop the Northem projects continue to be implemented in a region system (and Ln IN) and has generally satsfactory manner, and their formulated a similar project for the Southern complebon will now be supported by the region (Ln IN). Both have made slow Bank under POWERGRID II. Under that progress and were rated unsatisfactory by new project, main contracts for the Eastem three missions in late 1996/early region project have been awarded, and Implementa6on has since improved to procurement for the Westem region project satisfactory: the main EMSISCADA and is underway. Telecommunicabon were awarded in January 1998 and are under implementation. Some slippages (in microwave and optic fibre packages) from the January 1998 schedules have occured (as expected based on experiences for such projects elsewhere in the world), but overall, these two oomplext projects are making good progress. POWERGRID has formulated (under Ln IN) similar projects for the Eastem, Westem and North-Eastern regions and is initiating their implementabon. The first two are to be fnanced under POWERGRID II, the last by ADB under a loan approved in December Westem region project is being reactivated, now that its main constituents have approved the final scope of the project. Reinforcement of Regional Transmission Highly satisfactory. POWERGRD has Highly satisfactory. Systems. initiated and is implementng major regional programs of transmission system reinforcement. Ln N supports such programs in the Southem and Westem regions, Ln IN in the Northem region. Implementation progress under POWERGRID I has been hghly satisfactory and the transmission component has been completed. Development of a National Grid. Satisfactory. POWERGRID is developing Satisfactory. POWERGRID i1 Board date inter-regional transmission interconnections, moved to May 3, That project which through the system coordinaton and supports interconnectors between Eastem control facilities, will form the national grid and Northern and Eastem and Southern system. The most immediate priority projects regions. Main contracts have all been are to be launched launched under the awarded and both projects are under proposed POWERGRID i1 - its Board construction. consideration is been scheduled for February Technical Assistance. Satisfactory. Five institutional Satisfactory. Same as end-of-project. development/sector policy activities were carried out all successfully, under the technical assistance component of the project: End of project POWERGRID's performance under the transmission component of the project exceeded expectations: transmission pojects were completed on or ahead of schedule, and substantial loan savings were realized. In contrast, under the system coordination and control component, POWERGRID's initial progress was slow and disappointing, and after prolonged delays, the project got off the ground and into construction only in early Since then, progress has been generally satisfactory, and completion will be supported by the Bank under the new POWERGRID II project

23 Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appraisal Esimate Actual/Latest Percentage of Estimate Appraisal Project Cost By Component US$ million US$ million Vindhyanchal Additional Ramagundam-Hyderabad CTP-Rihand Kayamkulam Southem Region ULDC Services / Training Total Baseline Cost Total Project Costs Total Financing Required Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) Procurement Method' Expenditure Category ICB NCB Other 2 N.8.F. Total Cost 1. Works (26.20) (0.00) (0.00) (0.00) (26.20) 2. Goods (307.50) (0.00) (0.00) (0.00) (307.50) 3. Services (0.00) (0.00) (16.30) (0.00) (16.30) 4. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous (0.00) (0.00) (0.00) (0.00) (0.00) Total (333.70) (0.00) (16.30) (0.00) (350.00) Miscellaneous (NBF) = Project Costs by Procuremet Arrangements (Actual/Latest Estimate) (US$ million equivalent Procurement Method' Expenditure Category ICB NCB Other N.B.F. Total Cost 1. Works (26.44) (0.00) (0.00) (0.00) (26.44) 2. Goods (189.57) (0.00) (0.00) (0.00) (189.57) 3. Services

24 (7.95) (0.00) (0.00) (0.00) (7.95) 4. Miscellaneous (0.00) (0.00) (1.94) (0.00) (1.94) 5. Miscellaneous (0.00 (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous (0.00) (0.00) (0.00) 0.00 (0.00) Total (223.96) (0.00) (1.94) (0.00) (225.90) Services includes expenditure towards following: (i) Consultancy services for NR, SR and ER LD & C projects (ii) Consultancy services for assisting POWERGRID into Telecom business (iii) Technical assistance for Institutional Development, Transmission planning and computer facilities " Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. Project Financing by Component (in US$ million equivalent) Percentage of Appraisal Component Appraisal Estimate Actual/Latest Estimate : -: IBank Govt C6F. Bank Govt. CoFa. _ak Govt. CoF. Vindhyachal- Dhule Ramagundam- Hyderabad CTP-Rihand and meters Kayamkulam Southern Region ULDC Services TOTAL

25 Annex 3. Economic Costs and Benefits Economic Analysis of POWERGRID'S Investment Program (Time Slice ) (Figures in Rs _Million) Year Investment O&M expenditure Revenue Net Benefit _ N with RV Discount 12.0% Rate ERR 21.28% - 19-

26 SCENARIO ERR % Base Case % Investment up bylo% % O&M up by 10% % 2& % Revenue up by 10% % 2& % 3&5 ERR & SENSITIVITY ANALYSIS(TIME SLICE: ) 30.00% 25.00% SCENARIO

27 Financial Analysis of POWERGRID'S Investment Program (Time Slice ) (Figures in Rs Mllion) Year Investment O&M expenditure Revenue Net Benefit _ NPV with Discount 13.5% Rate FRR 16.83%

28 SCENARIO FRR I % Base Case % Investment up by10% % O&M up by 10% % 2& % Revenue up by 10% % 2& % 3& % - FRR & SENSITIVITY ANALYSIS (TIME SLICE: ) 20.00% % 5.00% U-~~~~~~~~~~2 0.00% SCENARIO

29 Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No, of Persons and Specialty (e.g. 2 Economists, I FMS, etc.) Perform Rating Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 02/92 Eco/TM, Eng 03/92 Eco/TM, FA, Env Appraisal/Negotiation Eco/TM, FA, Eng, Env 02/93 Eco/TM, FA, Eng, Env Supervision 07/93 Eco/TM, Cons(2), FA U U 12/93 Eco/TM, Trans U U 05/94 Eco/TM, FA, Con S S 10/95 Eco/TM, Con, FA S S 06/96 Eco/TM S S 10/96 PrA, Cons, Eco/TM, Soc, FA, S S Env 12/96 Eco/TM, FA S S 03/97 Eng, Eco/TM S S 07/97 Eng, Eco/TM,Con S S 10/97 Eco/TM S S 02/98 Eco/TL, FA S S 07/98 Eco/TL, Eng, Con S S 11/98 Eco/TL, Con, Eng S S 04/99 Eco/TL, Con, Eng S S 10/99 Eco/TL, TelS, FA, S S 04/00 Eco/TL, Eng, FA, TelS S S 12/00 Eco/TL, Eng, FA S S ICR 12/00 FA, EngS, PrA 3/01 & 6/01 Eco/TL Eng= Engineer; FA= Financial Analyst; TL Team Leader; Con=- Consultant; TeIS Telecom Specialist; TM= Task Manager; Eco= Economist; PrA= Procurement Advisor, Env= Enviornment Specialist; Sco= Socialogist; Trans= Transportation Specialist; EngS = Energy Specialist (b) Staff Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation Appraisal/Negotiation Supervision CR Total In the period, environmental and social work on POWERGRID as a whole, including analysis of

30 the project, was carried out for the preparation of Environmental and Social Policy and Procedures (ESPP), staff time has been recorded on POWERGRID II. Since 1998, same for the implementation of ESPP

31 Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H-High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating OJ Macro policies O H OSUOM O N * NA El Sector Policies * H O SU O M O N O NA C Physical O H * SU O M ON O NA O Financial O H *SUOM O N O NA O Institutional Development * H 0 SU 0 M 0 AN 0 NA El Environmental O H *SUOM O N O NA Social El Poverty Reduction O H OSU*M O N O NA El Gender OH OSUOM ON *NA El Other (Please specify) O H OSUOM ON * JNA El Private sector development El Public sector management 0 H O SU * M 0 N 0 NA 0 H O SU O M 0 N 0 NA NA El Other (Please specify) 0 H O SU0M O 0 N

32 Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU-Highly Unsatisfactory) 6.1 Bank performance Rating O Lending OHS *S OU OHU O Supervision OHS OS OU OHU O Overall OHS OS O U O HU 6.2 Borrowerperformance Rating O Preparation OHS OS O U O HU O Government implementation performance O HS O S 0 U 0 HU a Implementation agencyperformance OHS OS O U O HU O Overall OHS OS O U O HU Highly satisfactory ratings for Government and POWERGRID implementation performance were considered in view of the generally satisfactory project implementation. Final ratings were "limited" to satisfactory, for for Government mainly due to issues in POWERGRID management in the period, chronic bill collection contraints throughout the project, and the slow progress of bulk power tariff and trading reforms; for POWERGRID mainly due chronic bill collection problems, the slow pace of implementation and centralized/slow management of system coordination and control projects

33 Annex 7. List of Supporting Documents POWERGRID's Quarterly Progress Reports. POWERGRID's hnplementation Completion Review. Report and ERR & FRR Calculations

34 Assessment of POWERGRID on Completion of POWERGRID System Development Project-I (PSDP-I) World Bank Assistance (Loan No IN) 1.0 INTRODUCTION POWER GRID CORPORATION OF INDIA LIMITED, a Government of India Enterprise registered under the Companies Act, 1956, was incorporated in October, 1989, with an initial authorised share capital of Rs crores. POWERGRID has been entrusted the responsibility to establish, operate and maintain Regional and National Grids, which shall help to evacuate and spread the power in an effective and reliable manner. The initial consolidation process entailed taking over of transmission system from Central & Central-State Joint venture organisations such as NTPC, NHPC, NEEPCO, NLC, NPC and THDC along with related manpower. POWERGRID, while taking over the assets of NTPC and NHPC, inherited various Loans and IDA credits from the Bank (US$ 475 million for NRTP and US$ 691 million from NTPC). In order to support the role of POWERGRID in the power sector, the World Bank offered this direct loan to POWERGRID. 2.0 THE PROJECT The main objective of the project was aimed at restructuring the Power transmission sector, improve co-ordination in System operation and promote inter-regional & inter-state power trading through regulatory, tariff and institutional reforms. Towards achieving the sarne, the project comprises of the following major components: a) Transmission System Reinforcement * Vindhyachal-Dhule Transmission System * Ramagundam-Hyderabad Transmission System * Completion of Augmentation of CTP and Rihand-I Transmission systems * Kayamkulam Transmission System b) System Co-ordination and Control Centre in Southern region * Installation of a load despatch and control system; * Consulting services for design, procurement and supervision; and * Training c) Technical Assistance * Institutional Development * Bulk Power Tariff, Transmission Tariff and Regulatory Studies * Transmission System Planning In addition, the Consultancy services towards POWERGRID's Diversification into Telecom business and Consultants' requirements for SC&C project in Eastern region, the projects covered under Second POWERGRID System Development project. L:\Fowzia\PSDP l\psdp-l-lcr.doc I

35 3.0 ASSESSMENT OF ACHElEVEMENT OF PROJECT OBJECTIVES 3.1 Transmission System Reinforcement Vindhyachal-Dhule Transmission System. The Vindhyachal-Dhule transmission system is intended to take care of the insufficiency & provide for essential redundancy in the Western regional grid. The transmission system initially planned to evacuate power from Vindhyachal STPP (1260MW) of NTPC was not sufficient and hence hampering delivery of power to distant beneficiaries i.e the states of Maharashtra and Gujarat. Further, the transmission system associated with Korba STPP (2100 MW) of NTPC, which is in the vicinity of Vindhyachal, had also been facing similar difficulties. In order to avoid overloading and also keeping the security of the grid in view, the generation of Korba-Vindhyachal complex was curtailed to about 2600 MW against a capacity of about 3000 MW. In order to provide relief and strengthen the system, the proposed transmission system was envisaged under Bank's financing. After completing the Vindhyachal-Dhule transmission system in December 1997, all the restrictions in generation were removed and there was substantial voltage improvement in the grid, enabling delivery of power to all beneficiaries with better quality of power. This Transmission system is, therefore, become very vital in maintaining the stability of Westem Region. It is worthwhile to mention that the redundancy created has also enabled to transfer large chunks of power from Northern Region through HVDC back-to-back station at Vindhyachal either for consumption in Western region or for onward export to Southern Region Ramagundam-Hyderabad Transmission System: The Ramagundam-Hyderabad Transmission line is planned to strengthen the existing transmission system in Southern Region so as to import additional power from Western Region through 1000 MW HVDC back-to-back link at Chandrapur. The Transmission system associated with Ramagundam STPP (2100 MW), one of the major generating station in Southern Region, is mostly loaded critically and did not have any redundancy. Often difficulties had been experienced to take certain lines under maintenance. POWERGRID, at the same time, planned to establish a 2x500 MW HVDC back-to-back link at Chandrapur to import large surplus power available in the Western Region and other regions to power deficit Southern Region. However, there were no margins available in the transmission system in Southern Region to import additional power from Western Region. In addition, low voltage conditions in Southern Region many a times hampered the import of power. Therefore, POWERGRID took up the construction of the Ramagundam-Hyderabad line and completed the same in July 1997 against a SAR schedule of September The commissioning of this line has provided the required additional capacity & redundancy and relieved the existing 400kV transmission network from critical loading conditions. In addition, the line enhanced the reliability of power supply in Southern Region, especially to Hyderabad, the major load center in Andhra Pradesh. Further, this line also provides enough capacity for transfer of power imported from Western Region at Ramagundam, through HVDC back-toback link at Chandrapur L:\Fowzia\PSDP 1\psdp-l-lCR.doc 2

36 3.1.3 Completion of Augmentation of CTP and Rihand-I Transmission systems As part of strengthening the transmission system in various regions and enhancing the reliability of power system, POWERGRID envisaged to augment the transformation capacity at Khammam and Hyderabad sub-stations and install Shunt reactors at Gazuwaka, Agra, Chandrapur and Cuddapah. By installing 400/220kV transformers at Khammam, the switching station was converted into a sub-station and a facility was created to draw power from 400kV network. This ensured reliable power to the industrial areas around Khammam in Andhra Pradesh. A 400/220kV transformer was envisaged to be installed at Munirabad under Bank financing. However, during the same time, phenomenal growth of load around Hyderabad was observed and the existing transformation capacity was found to be inadequate. Often, due to overloading of the transformers, load shedding in and around Hyderabad was resorted to. At the same time, due to commissioning of generation plant at Raichur TPS of Karnataka, the existing transformer at Munirabad was found to be sufficient to meet the requirement. Accordingly, the proposed transformer meant for Munirabad was shifted to Hyderabad and was commissioned. This relieved the existing overloaded transformers and improved the reliability of power supply. The commissioning of Shunt reactors at Gazuwaka, Agra, Chandrapur and Cuddapah helped in controlling the steady state over-voltages in these stations Kayamkulam Transmission System The scope of the transmission system associated with Kayamkulam Gas Project of NTPC was included in the scope of the Loan at a later date, in order to utilize balance loan. The project was completed in September 1999 against a schedule of March In order to optimize the size of the scarcely available land, Gas Insulated Sub-station was established. This technology at 220 KV level was adopted for the first time in India. The timely completion of the project has enabled evacuation of power from Kayamkulam Gas project of NTPC. 3.2 System Co-ordination and Control Centre in Southern region: To improve Operating efficiency and ensure proper grid management of the Southern regional power system, it was essential to establish a State of Art Unified Load Despatch and Communication system at the Regional Load Despatch Centre as well as establishment/ upgradation of State Load Despatch centres & sub-load despatch centres. In order to achieve this objective, SC&C project in Southern region was envisaged to be taken up and scheduled to be completed by February 1998 as per SAR. However, extensive interaction with SEBs for data related to S/Ss owned by them, finalisation of project specifications in consultation with SEBs and procurement process through three stage bidding with the help of Consultants etc. took considerable time. The awards could only be placed in January 1998, with a commissioning schedule of January POWERGRID had taken all necessary steps to expedite the works and the project is now in final stages of L:\Fowzia\PSDP l\psdp-l-lcr.doc 3

37 implementation and is expected to be completed by the contractual schedule of January Once completed, the project would provide dedicated & reliable communication system among various control centres, equip the operator in the control centres with most advanced Energy Management tools. These tools would facilitate in assessing the status of criticality of Grid parameters and ensuring suitable prompt measures leading to most optimal utilisation of all resources and minimise any untoward incidence like brown/black outs, thus achieving the objectives of the project component. 3.3 Technical Assistance In order to address various issues relating to power sector reforms being undertaken on a large scale in India during the time of loan negotiation, the changes in global power scenario, future development of power sector in India and amalgamation of varied work cultures brought in by transferred entities to create POWERGRID etc., the Bank had proposed to fund certain Technical Assistance as a part of the loan. Accordingly, the following Studies were undertaken: i. Institutional Development ii. Study of Bulk Power & Transmission Tariff and Regulation iii. Transmission system Planning, Computer facilities and Project Preparation While the Study of Bulk Power & Transmission Tariff and Regulation was completed with a grant from Asian Development Bank, the other two studies were completed under this loan. The achievements of the studies are enumerated below Institutional Development A study was undertaken by Coopers & Lybrand, UK to review the overall sectoral and organizational set-up under POWERGRID Institutional Development Study. The Study consisted three tasks, which are as under: i. Task 1 : The refinement of POWERGRID's role in the Indian power sector, including the institutional and financial relationship between POWERGRID and other members of the industry, including examining the scope for private participation in transmission investment. ii. Task 2: The commercial and technical arrangements for establishing regional power pools; and iii. Task 3: The planning of POWERGRID's internal organization, covering its management structure, its policies on human resources and arrangements for financial management. Both Task- 1 and Task-2 have an outward focus and deal with the different roles/ responsibilities that POWERGRID should exercise in the power sector. The recommendations of Cooper & Lybrand these tasks addressed POWERGRID's relationships with SEBs and central sector generators as well as other important bodies such as Regional Electricity Board (REB), Central Electricity Authority (CEA) etc. The Task-3 had an inward focus and concerned the way POWERGRID should be organized and managed to fulfill its mission and discharge its various responsibilities. The Consultants submitted their reports suggesting various recommendations during February-April, The reports of the Consultants were forwarded to GOI for their approval. L:\Fowzia\PSDP l\psdp-l-lcr.doc 4

38 The recommendations of the Consultants in Tasks 1 &2 were accepted by the Govt. of India and many structural changes were attempted in the sector. The recommendations regarding the internal organization have been implemented and the positive results of such re-organisation are being recognised Study of Bulk Power & Transmission Tariff and Reizulation. In order to rationalize in the generation tariff, infuse grid discipline in the State Electricity Boards by way of commercial incentives/disincentives, a study was initiated by the consultants, M/s ECC. The Consultants submitted their report on February 1994 to Ministry of Power, GOI. While accepting the recommendations in its entirety, Ministry of Power had drawn an action plan to implement the recommendations and set up various task forces at National and regional level to prepare detailed notifications in the aegis of CEA. After lot of deliberations, at first, Option-C market Mechanism was agreed by all the players in the power sector, though the central sector Generating companies expressed their reservations in achieving overall economy of operation. Subsequently, CEA discussed norms for various parameters in fixing the tariff for generation & the bulk power inter-change and prepared the draft notification of the Availability Based Generation Tariff. The finalisation of the same in consultation with state utilities and central generating Companies took quite some time. Meanwhile Central Electricity Regulatory Commission (CERC) was established which became effective from May 15, As part of legislative changes, CERC was entrusted the task of determining tariff and related issues. In order to infuse discipline in grid operation, CERC notified its regulation related to availability based tariff after public hearing & consultation and specified its implementation schedule in various regions. However, the implementation was withheld due to various review petitions in CERC and appeals in Delhi High court by the Central sector Generating companies. CERC, after further consultations, revised its order and issued fresh implementation schedule starting from April, 2001 in Tariff was to commence in Southern Region from April, However, some of the utilities in Southern Region have obtained stay from courts, thus withholding its implementation. The implementation would pave way for better discipline and improvement in system operation Transmission system Planning and Computer facilities. When the Loan assistance was being offered, the development of POWERGRID as organization was in nascent stage of development, with a responsibility of establishment and operations of Regional National Grids. To facilitate POWERGRID to achieve its objective, availability of modern Planning tools was felt essential. Therefore, the Bank offered a Technical Assistance under which international consultants were appointed i. To strengthen the Planning Tools available with POWERGRID and CEA, ii. Suggest a Planning Criteria, iii. Work out a Long Term Transmission Plan Accordingly, M/s PTI, USA was appointed as Consultants in November, 1994 on the basis of International competition. Under this assistance, POWERGRID acquired the latest computing facilities and obtained training in various facets of Power System Planning and design. These tools and training helped POWERGRID extensively in developing the skills of planning and design of EHV systems. L:\Fowzia\PSDP I\psdp-I-1CR.doc 5

39 Indian Power System was plagued with instability problems as most of the Power System Stabilizers (PSS) were not tuned to their optimum utilization. In order to address the issue, POWERGRID took up the matter with M/s PTI and the Bank to include Tuning of PSS in the scope of M/s PTI. After obtaining the concurrence, M/s PTI supplied Dynamic System Monitor equipment to POWERGRID and collected data of Generators & PSS in various generating stations for analysis. Simultaneously, detailed training was provided to many Engineers from POWERGRID & other Indian utilities. The suggestions of M/s PTI were implemented and the settings of PSS were modified. POWERGRID is now able to offer consultancy in this area to other utilities. 3.4 Consultancy services towards POWERGRID's Diversification into Telecom business The emerging technology in the Telecom sector facilitates convergence of power and telecommunication sectors and promises unique opportunities as has already been established world-wide in various developed countries. For power utilities world-wide, it has been possible to exploit excellent business opportunities by providing tele-communication services, compared to other utilities, by capitalizing upon the power utilities' inherent infrastructural advantages. In line with these, POWERGRID also envisaged venturing into telecom arena through leveraging its huge transmission network throughout the country. POWERGRID has planned to embark upon telecommunication business utilizing its additional communication capacity, which will also accelerate application of Information Technology in urban and rural areas thus helping to increase the tele density. The Bank supported POWERGRID's proposal and agreed to finance the Consultany assignment under this loan. For this purpose, POWERGRID engaged renowned international consultants viz. IVO Power Engineering, Finland in August 1999 for advising POWERGRID in defining, planning and implementing the project. M/s IVO Power Engineering, Finland (a transmission utility which has diversified into telecom business successfully), a provider of consultancy and turnkey services to the global power and telecom industry, supported by the sub-consultants PricewaterhouseCoopers, UK and Simmons and Simmons, UK (the international law firm for legal and regulatory aspects) is advising POWERGRID on commercial Telecom Business Plan. The Consultancy assigrnent is being undertaken in three phases; > Phase-I included activities like understanding POWERGRID's objectives; overall analysis including regulatory framework in telecommunications and the electricity sectors in India; market analysis; international reviews; SWOT analysis and evaluation of Business Options. > Phase II included activities like comparison of business options developed in Phase-I and advising details of company structuring, capital structuring, revenue and market projections of the selected options > Phase-III included activities namely technical activities like network design, preparation of specification and tender documents, development of administrative, billing and maintenance and manpower development and advising on implementation strategy. L:\Fowzia\PSDP l\psdp-1-lcr.doc 6

40 The Consultants, under Phase-I have assessed various policy guidelines announced by Gol from time to time, reviewed regulatory framework in telecommunications and the electricity sectors; undertake overall market analysis & SWOT analysis on POWERGRID etc. An analysis of about major 50 utilities world over was made by Consultants which have diversified into this business and are operating successfully. After overall assessment, the Consultants have recommended that no change in current electricity legislation is required and POWERGRID would need to obtain a license for the business under existing provisions of telegraph act. Consultants have recommended two business options viz. (1) Incremental Business - initially providing end-to-end capacity and adding higher value added services as and when permitted by Gol, (2) National Long Distance Operations (NLDO) - becoming full fledged national operators by forming a joint venture with suitable strategic partner(s). They have also assessed that risks in diversification are manageable and the project is financially viable and attractive. Based on the recommendations of the Consultants, POWERGRID plans to enter telecom business initially as Infrastructure Provider-II i.e. leasing capacity on its fibre optic network and shall add advance/ higher value services at the appropriate time within regulatory framework. POWERGRID has already been granted Infrastructure Provider-II license by DOT (licensing authority). As per the advice of the Consultants, POWERGRID plans to build up broadband optic fibre backbone telecom network of about 14,000 kms by December 2003, which will span entire length and breadth of the country. 4.0 EVALUATION OF POWERGRID'S PERFORMANCE POWERGRID executed all the transmission elements below SAR costs and ahead of SAR schedules. However, the System Control & Co-ordination project is likely to be commissioned in January, 2002 against a schedule of February, Long time taken for preparation of new set of Bidding documents, pre-qualification of bidders followed by two-stage bidding contributed to the delays with respect to schedules of SAR. However, the process helped POWERGRID to enrich its knowledge in these areas. The bidding under World Bank financing facilitated considerable competition, which resulted in very low prices for most of the contracts, thus leading to large savings in the Loan assistance. The monitoring agencies, including the Bank, appreciated POWERGRID's efforts in completion of the projects, well ahead of schedules. Right from inception, POWERGRID gave adequate attention towards Environment and Social issues, though the impact of the transmission lines on these issues is minimal. With the encouragement from the Bank, POWERGRID developed its Environrmental and Social Policy & Procedures (ESPP) which were appreciated by all agencies including many multilateral agencies. 5.0 OVERALL KEY LESSONS LEARNT a) Project preparation: Under preparation of a project resulted in delayed implementation of SC&C project. Therefore, more attention is being accorded to Project preparation. L:\Fowzia\PSDP 1\psdp-1-iCR.doc 7

41 b) Engineering Challenges: The execution of System control and co-ordination packages that involved highly sophisticated electronic equipment, which gets obsolete in short time, development of specification was a quite challenging job. POWERGRID could complete the same with active co-operation the consultants and gained considerable knowledge in these areas. c) Procurement Procedures: After formation of the organization with amalgamation of personnel from various organizations, POWERGRID adopted the procurement procedures being followed by the Generating Companies mainly of NTPC, as these were already developed in association with the World Bank. However, under this loan, the Bank reviewed these practices in order to enhance the transparency and induce more competition. Accordingly, new set of Standard Bidding Documents for various packages were adopted with additional clauses like Dispute Resolution Panel (DRP). It is worth mentioning that DRP proceedings had resolved the contractual disputes between POWERGRID and the foreign contractor, M/s Cobra and led to successful completion of the project. Further, the most significant area under this loan was adoption of three-stage bidding, involving Pre-qualification of bidders followed by un-priced technical bidding followed by price bidding, for the highly sophisticated SC&C projects. It was a novel experience for POWERGRID to undertake such elaborate tendering/procurement methodology. Such process helped POWERGRID to identify the right agencies that can undertake the projects with requisite technical knowledge and financial strength. 6.0 BANK'S SUPPORT AND CO-OPERATION TO POWERGRID IN EXECUTION OF PROJECTS: Right from the inception of the Loan assistance, the World Bank has been quite co-operative and considerate. The Bank has always been encouraging POWERGRID's initiative in establishing the National Grid and its other Corporate objectives such as establishment of power pools, modernized control centers etc. Further, the Bank oriented its efforts towards the restructuring the Power sector in the right earnest and supported institutional development as a whole. Further, it is pertinent to mention the encouragement provided by the Bank with respect to POWERGRID's Environmental and Social Policy and Procedures (ESPP). It is very important to place Bank's co-operation on the record in accommodating POWERGRID's requests for modification of Terms & Conditions, Time schedules etc. and expeditious approval of bid documents and award recommendations regarding Procurement issues. Bank's support in this area really rejuvenated POWERGRID's efforts in completing the process and meeting the schedules. Further, POWERGRID would remain grateful to the Bank for its flexibility. The Bank always concurred for inclusion of new elements in the' Loan assistance, modification of Consultant's scope to include additional studies etc. in the overall interest of the Organisation. Besides, timely disbursement of claims ensured that progress of works is not hampered on that count. L:AFowzia\PSDP I\psdp-1-ICR.doc 8

42 The Bank had shown interest in continued support to POWERGRID's operations. The same is evident through their support for second POWERGRID System Development Project, to fund important Inter-regional transmission schemes, balance System Co-ordination & Control Center Schemes in Eastern & Western regions and POWERGRID's Diversification into Telecom business. 7.0 POWERGRID'S COMMENTS ON THE BANK'S PORTION OF ICR While appreciating POWERGRID's efforts in completion of transmission projects under the Loan, that too, much below the SAR costs, the World Bank expressed their displeasure regarding the delays occurred in implementation of System Co-ordination & Control projects. However, the Bank acknowledges the fact that such projects are quite complex and delays are inevitable in such project based on Global experience. While discussing commercial bill realisation, the Bank has remarked that POWERGRID (and NTPC) do not enjoy the required freedom and Govt. support to effectively regulate supply to such chronic defaulters. In this regard, it is pertinent to mention that POWEiRGRID has enough freedom to regulate power supply to the defaulting states. However, while attempting such regulation, grid stability need to be maintained. Since, Indian power system lacks redundancy, often large scale regulation of power to a beneficiary state is difficult. 8.0 PROJECT IMPLEMENTATION 8.1 Vindhyachal-Dhule Transmission System POWERGRID initiated the tendering process for the project immediately after loan effectiveness and after approval of bidding documents and subsequently the award recommendations by the Bank, all the line design & erection contracts have been placed in August 1994 with a target date commissioning of Dec The transmission project was completed as committed in Dec. 1997, well ahead SAR schedule of June Ramagundam-Hyderabad Transmission System: The contract for the transmission line design & erection package was awarded in August 1994 along with similar packages of Vindhyachal-Dhule Transmission system. The project was completed in July 1997 ahead of SAR schedule of September Completion of Augmentation of CTP and Rihand-I Transmission systems All the transmission lines and sub-stations covered under Central Transmission Project in Southem region have been commissioned and are under operation. Similarly, all the lines and sub-stations associated with Rihand-I transmission project were also completed and are in operation. However, certain final payments against various contracts placed earlier and Performance guarantees could not be made due to closing of the respective loans. These payments were released under this loan assistance. Further, certain equipment were procured for commissioning the Reactors and transformers procured under CTP. L:\Fowzia\PSDP l\psdp-l-lcr.doc 9

43 The Transformers at Hyderabad and Khammam were commissioned April 1995 and April 1996 respectively. The Shunt reactors at Cuddapah, Agra, Chandrapur and Gazuwaka have been commissioned by March 1997 progressively. 8.4 Kayamkulam Transmission System The transmission system associated with Kayamkulam Gas Project was included in the scope of the loan to utilize the anticipated large surplus of loan funds. The project was completed in September 1999 against a schedule of March The execution of project had posed a challenge to POWERGRID due to very short gestation period of the associated generation project and difficult terrain and right of way constraints in the state of Kerala. The works were affected several times due to severe flash floods. Due to incessant rains in Kerala, the working period was very less. The lines had to traverse the areas full of cash crops in spite of care taken in route alignment. In spite of all these difficulties, POWERGRID completed the lines and Gas insulated sub-station well ahead of the generating units. 8.5 System Co-ordination and Control Centre in Southern region Initially, the Feasibility report of the Project was prepared by Central Electricit-y Authority, Govt. of India. After POWERGRID become operational in November 1991, the task of implementing all the Load Dispatch and Communication Schemes in a Unified manner was entrusted to POWERGRID. Accordingly, the project was transferred to POWERGRID. Since the project needed to dovetail the requirements of the constituents at large, POWERGRID prepared the feasibility report with extensive interaction with them and renamed the project as System Control and Co-ordination (SC&C) Project. As the LD&C technology was new to the Indian Power Sector and is undergoing rapid advancements, it was felt prudent to engage reputed International consultants to assist POWERGRID in the project. Accordingly, M/s MACRO CORPORATION was engaged as the consultant for ULDC scheme. The scope of services of the Consultants include preparation of tender documents and its evaluation, detail engineering, supervision for installation, testing & commissioning etc. Considering the complexity and large size of the project, it was recommended by World Bank/ Consultant to adopt three stage bidding i.e. pre-qualification of bidders followed by two stage bidding for award viz. first stage comprising of un-priced techno-commercial bidding and second stage involving price bidding to maintain transparency in the process of evaluation and smooth execution of the project. Pre-qualification of bidders was considered necessary due to large and complex nature of the project requiring tailor-made equipment and specialized service. The project was divided into the following major components: * EMS/SCADA * Telecommunication, comprising of Opiical Fiber and Digital Microwave packages * PLCC & PABX * Auxiliary Power Only the EMS/SCADA package of the scheme is being financed by the Bank, while the Telecommunication packages are being funded by European Investment Bank. L:\Fowzia\PSDP 1\psdp-1-lCR.doc 10

44 After release of Notice Inviting Tender (NIT), at the advice of World Bank, extensive modifications were carried out in the bid documents as per their latest Standard Bidding Document and amendments were issued to bidders. The bids for EMS/SCADA package were opened in April Considering the normal evaluation time of about 6 to 8 months, it was envisaged that the evaluation of bids could be completed by December However, after opening of the bids it was found that the bidders have submitted their bids having various technical and commercial alternatives. This made the evaluation very complex and called for protracted deliberation with all the bidders to bring all offers at par in technical and commercial aspects. This process took considerable time, as the exercise under taken was a mammoth one keeping in view the new technology. In the mean time, there was a takeover of bidding company by another company, which created legal and contractual problems. This again delayed the evaluation process by 2-3 months. The evaluation could be completed only in June 1997 and evaluation report was forwarded to World Bank for their concurrence. After World Bank approval in July' 1997, price bids were invited and evaluated and contracts were placed in January It may be mentioned that though POWERGRID took a little longer time in completion of the evaluation to maintain transparency, all the contracts of such complex project were awarded with out any controversy maintaining full transparency at every stage. After the award of the contracts, the contractor carried out survey in association with SEBs. During the survey it was observed that substantial changes were required in the inputs mentioned in the specifications due to changes in the power system during intervening period. Further, changes in Bills of quantity were also required due to restrictions imposed by statutory bodies like Standing Advisory Committee on Frequency Allocation (SACFA) or Wireless Planning and Co-ordination (WPC) and unsuitability of locations/transmission lines with respect to frequency spectrum. Thus, the implementation of Microwave communication package suffered initial setbacks due to delays in obtaining the SACFA Clearance and frequency allocation. However, all the issues have been resolved and the progress is matching with schedules of EMS/SCADA package. There has been commendable progress on Optic fiber installation and installation of RTUs in various locations. The progress on installation of sub-ldc has also been encouraging. Presently, project is in advanced stage of implementation and all out efforts are being made by POWERGRID to complete the project by January Technical Assistance Institutional Development Following the agreement signed on July 1, 1994, the Consultants, M/s Coopers & Lybrand, UK had undertaken the study, with the following scope: i. Task 1: The refinement of POWERGRID's role in the Indian power sector, including the institutional and financial relationship between POWERGRID and other members of the industry, including examining the scope for private participation in transmission investment. L:\Fowzia\PSDP l\psdp-l-lcr.doc 11

45 ii. Task 2: The commercial and technical arrangements for establishing regional power pools; and iii. Task 3: The planning of POWERGRID's internal organization, covering its management structure, its policies on human resources and arrangements for financial management. The final reports of the study were submitted during March/April 1996 which were forwarded to Ministry of Power for their perusal and concurrence. The detailed analysis of the Technical Assistance is enclosed as Annexure-I to this report Study of Bulk Power & Transmission Tariff and Regulation. M/s ECC was awarded a contract In February, 1993 for carrying out a study on Bulk Power Tariff, Transmission Tariff and Regulation. The Consultants submitted their report in February, 1994 which was forwarded to Ministry of Power, GOI and CEA. After receipt of comments from CEA and various SEBs, Ministry of Power prepared an action plan to implement the recommendations and set up various Task Forces at National and regional level to prepare detailed notifications in the aegis of CEA. As a part of deliberations, the issue of Market Mechanism was taken up at first. Most of the SEBs opted for Option-C i.e decentralised despatch mechanism, while the central sector Generating companies suggested Option-A i.e centralised despatch mechanism, stressing that this only would result into overall economy of operation. Accordingly, Option-C of Market Mechanism was decided by the National Task Force. Subsequently, CEA discussed the issue of norms for various parameters in fixing the generation tariff & the bulk power inter-change tariff and prepared the draft notification of the Availability Based Generation Tariff, alongwith a programme for implementation. The same was submitted to MOP for notification. MOP planned to notify the Tariffs for Southern and Eastern regions simultaneously. Necessary inputs from Ministry of Coal and Department of Atomic Energy also were received. Meanwhile Central Electricity Regulatory Commission (CERC) was established which became effective from May 15, As part of legislative changes, CERC was entrusted the task of determining tariff and related issues. Accordingly, CEA/POWERGRID have filed petition regarding the Availability Tariff with CERC. CERC have sought objections from general public through newspaper advertisement. A public hearing was also held in the month of July' 99. CERC have given its order during January, 2000 finalising the basic parameters for fixation of generation tariff and to infuse discipline in grid operation, alongwith the implementation in the four regions as mentioned below: Southern Region Eastern Region Northern Region Western Region L:\Fowzia\PSDP l\psdp-l-lcr.doc 12

46 However, the Central generating companies namely NTPC, NHPC and NLC have filed review petitions to CERC raising objections to order of CERC. CERC, therefore, withheld the implementation of Availability Based generation Tariff for some time.. CERC, after further consultations, revised its order and issued fresh implementation schedule starting from April, 2001 and to be completed in August, 2001 in Western region. The implementation of the Availability Based Tariff was to commence in Southern Region from April, However, the utilities in Andhra Pradesh have obtained legal stay from courts, thus withholding its implementation. The implementation would pave way for better discipline and improvement in system operation Transmission system Planning and Computer facilities The contract for these studies was signed with M/s PTI Inc., USA in November, M/s PTI accomplished the goal of the project by completing the following major tasks: i. Evaluation of Planning Tools and methodologies used by POWERGRID prior to the project and preparation of recommendation for the future. ii. Setting up and conducting short, medium and long range transmission planning studies for the entire nation iii. Evaluation of two specific transmissions needs namely the evacuation of large amounts of power from North Eastern Region and the application of Static Var Compensators. As the studies progress a need developed to extend the original scope to accommodate two special additional short term projects. a) Investigate Feasibility of eliminating pre-insertion resistors in high-voltage circuit-breakers. b) Tuning of power system stabilizers. Under the Task-I, POWERGRID acquired state of art computers and suite of advanced transmission planning software tools (PSS/E), formal training on various aspects of power system planning. Further, M/s PTI have recommended a planning criteria in line with international practices that will lead to lowest possible net cost. Under the Task-II, M/s PTI have reviewed the transmission system of all the regional grids corresponding to 8h, 9th & 1 Oth plan conditions, in which the suggested planning criteria and -practices have been adopted. Based on these review the consultants have recommended the interconnection of various regions and evolved the transmission system associated with various generation projects likely to be matured during that period. The consultants have also analysed the options of HVAC and HVDC transmission systems. Under Task-Ill the consultants have recommended an action plan for development of transmission system for transmitting 20GW of power through chicken neck area. Further, an analysis of the application of SVCs in the Western Region during 9th plan period for improving the damping of oscillations along with comparison of cost for improvement by use of SVCs vis-a-vis power system stabilizers. L:\Fowzia\PSDP l\psdp-1-lcr.doc 13

47 M/s PTI have completed and submitted their final report on Tuning of Power System Stabilizers in December 1999 and accomplished all the tasks assigned to them. 9.0 ANALYSIS OF PROJECT COSTS The project was executed much below the costs (in US$ terms) anticipated at the time of SAR. It was anticipated that the total project cost would be US$ million considering the assistance of US$ 350 million from the Bank. However, there has been considerable savings in the Loan assistance during the period of project execution. The reasons for the same are enumerated below: a) Through structuring and techno-commercial provisions of the bidding documents, a good competitive environment was created. This resulted in competitive bidding. The costs quoted for most of the packages were substantially lower than estimated. Accordingly, there has been significant reduction in the project costs. b) During the period of project implementation, there was substantial devaluation in Rupee vis-a-vis US$. It may be observed that at the time of preparation of SAR, One US$ was about Rs. 30. However, by the time the validity of the Loan expired, the One US$ appreciated to about Rs. 45. This has also resulted in higher availability of funds in Rupee terms. Accordingly, the total cost of the projects included under the Loan ultimately worked out to US$ 433 million and till validity of Loan expired i.e. by December, 2000, POWERGRID could utilize about US$ 226 million from the Loan assistance. The details of the project cost as per SAR vs. Actual are given at Annexure-II ENVIRONMENTAL AND SOCIAL POLICY & PROCEDURES The transmission lines do not affect the environment directly and therefore do not attract any Environmental clearance from any statutory agencies. However, while laying the transmission lines, cutting of trees along the right of way at times is unavoidable which may affect the environment indirectly. Therefore, POWERGRID generally takes adequate care to avoid forest and ecologically sensitive areas while selecting routes for laying lines. POWERGRID has been compensating the Forest authorities suitably towards the afforestation, in line with prevailing statutory requirements. In addition to these environmental issues, POWERGRID encounters issues having social implications. In order to address these issues, POWERGRID developed its Environmental and Social Policy & Procedures with the help of various consultants, consultations with NGOs, public and active co-operation from multi-lateral funding agencies, especially the World Bank, and has been following this ESPP for all of its projects whether aided or not. L:\Fowzia\PSDP l\psdp-l-lcr.doc 14

48 Annexure-I Status Report on Implementation of Recommendations of M/s. Coopers & Lybrand, UK on the POWERGRID Institutional Development Study 1.0 Introduction After formation of POWERGRID, through amalgamation of assets and manpower from various Central Generating Companies in , POWERGRID negotiated and contracted a direct loan, Power System Development Project-I (3577-TN) from the World Bank. In order to address various issues relating to reforms in power sector being undertaken in large scale in India during that time, the changes in global power scenario, future development of power sector and amalgamation of various work cultures in POWERGRID etc., World Bank had suggested that a study may be undertaken to review the overall sectoral and organizational set-up under POWERGRID Institutional Development Study. The Bank offered Technical Assistance to include the consultancy work under the PSDP loan. The consultancy work was undertaken by Coopers & Lybrand, UK. The Study consisted three tasks, which are as under: a) Task 1: The refinement of POWERGRID's role in the Indian power sector, including the institutional and financial relationship between POWERGRID and other members of the industry, including examining the scope for private participation in transmission investment. b) Task 2: The commercial and technical arrangements for establishing regional power pools; and c) Task 3: The planning of POWERGRID's internal organization, covering its management structure, its policies on human resources and arrangements for financial management. Both Task-i and Task-2 have an outward focus and deal with the different roles/ responsibilities that POWERGRID should exercise in the power sector. The recommendations of these tasks addressed POWERGRID's relationships with SEBs and central sector generators as well as other important bodies such as Regional Electricity Board (REB), Central Electricity Authority (CEA) etc. The Task-3 had an inward focus and concerned the way POWERGRID is organized and managed to fulfill its mission and discharge its various responsibilities. The Consultants submitted their reports suggesting various recommendations during February-April, The reports of the Consultants were forwarded to GOI for their approval. 2.0 Task 1: Institutional Arrangements and Private Sector Participation Recommendations of Task 1 of the study dealt with roles / responsibilities of different entities within the power sector that relate to POWERGRID. The recommendations of the Consultants include the following: i. Approaches to contract for new transmission assets:

49 Proposed a deep connection policy with specific beneficiaries and a shallow connection policy for the region as a whole ii. iii. iv. Role of POWERGRID and other agencies were defined in the following areas: a. Transmission planning b. Investment sanctioning c. Project clearances d. Transmission pricing Institutional arrangement in power sector Proposed certain committees like Regional Electricity Board, Management committee, Standing committees for commercial operation, protection and technical, operation planning and regional transmission planning and investment committees Proposed six types of agreements among various players in the sector, including Grid Code v. Suggested various steps for private sector participation in transmission Government of India has addressed various issues enumerated above and brought in comprehensive amendments in the Indian Electricity Rules. With this effect, Central Electricity Regulation Commission (CERC) / State Electricity Regulation Commissions (SERC) were formed which will look into Fixation of tariff for all services like generation, transmission and distribution. POWERGRID have prepared a Draft Grid Code and submitted to CERC. After reviewing and public consultations, the samne has since been notified. The Grid Code would address the Connection Conditions of various entities to get access to the Grid. In order to bring in the private sector participation in the transmission sector, a series of policy initiatives have been taken by Government of India through series of amendments in the Indian Electricity Act, 1910 and Electricity (Supply) Act, Through these amendments, a legal framework has been established by recognizing the power transmission as a distinct activity from the generation and also permitting private sector participation exclusively in the field of transmission as a "Transmission Licensee". The concept of Central Transmission Utility at the Central level and State Transmission Utility at the State level has also been established by the above mentioned legislative changes. CTU shall be responsible to undertake inter-state transmission of power including its supervision and control. Similarly, the STU shall be responsible for undertaking intra-state transmission of power. The "Transmission Licensee" shall operate their systems under the overall supervision and control of CTU/STUs in the respective areas. Further, in order to attract large Private Investment in Power transmission, Govt. of India have issued Guidelines in January 2000, covering both the routes of Joint Venture and Independent Power Transmission Company. POWERGRID have already identified a project each for both the routes and prepared the related Documents for Qualification, and Selection. 3.0 Task 2: Power Pooling

50 The Consultants suggested various technical and commercial arrangements for establishing regional power pools in the report. The consultants have made their recommendations on the form, operations bilateral contract and associated arrangements of a loose power pools known as "interchange pool". They further recommended that POWERGRID can go ahead with the frequency linked pricing scheme as a first step the implementation plan for loose power pools. During the period when these recommendations were submitted to Govt. of India, deliberations were already going on among various task forces constituted to implement the recommendations of study made by M/s ECC. Subsequently, a draft notification for implementation of availability based generation tariff was prepared. After formation of CERC the same notification was reviewed and was notified in January The CERC have notified a schedule for implementation of the tariff in all the regions, starting in Southern region from 1 st April 2001 and to be completed by October 2001 in other regions, excepting in North-Eastern region. 4.0 Task 3: POWERGRID's Organizational Structure, Systems and Procedures The Consultants examined the prevailing Systems and Procedures and suggested Devolved Organizational Structure to establish a new Strategic Management Style. In the proposed structure, the Regions would have greater degree of role and responsibility in the development of the Organization. The Consultants have made certain recommendations which require endorsement and approval from MOP, which are as follows: a) Structure of the Board of Directors of POWERGRID b) Formation of Energy Accounting and Settlement Administration (EASA) under various RLDC/RSCCs c) Strengthening of planning & extension, operations and commercial groups in regions for representation in proposed new REB structure The Grid Code that has been recently notified by CERC stipulates the responsibility of energy accounting and settlement administration with REB, which is in administrative control of Central Electricity Authority. The responsibility of RLDCs is limited to providing necessary inputs to REBs for preparative of EASA. POWERGRID is augmenting various RLDCs by state-of-art Load Despatch and Communication facilities through Unified projects in all regions by assistance from the World Bank. The broad organization structures recommended by the consultants is enclosed at Annexure-I. 5.0 Implementation of Organization Structure The organization structure recommended by the consultants includes following at corporate level: (i) Formation of Projects and Central Services Division (P&CS) for providing a single area of responsibility for Project Management and essential services in the Corporate office and Regions

51 (ii) (iii) (iv) A Private Power Project Department under Director (P&CS) System Operation Division responsible for performance of RLDCs/ RSCCs including Energy Accounting and Settlement Administration (EASA). An Executive Committee comprising of CMD, Director (System Operation) along with Regional Executive Directors for coordinating and overseeing the day-to-day management of the transmission network. At Regional Level (i) (ii) (iii) Separation of responsibility for Operational and Maintenance from project Construction activity Set up establishment for Engineering, Planning, Contracts, Finance and Commercial functions in the region. Change the 4-tier approach of management (i.e. S/S, GHQ, DHQ & RHQ) to 3-tier approach. Thus, Manager-in-change or Site Manager in either of the activities would report directly to RHQ. The recommendations of the reports were approved by the Board of Directors in their meeting held in May 1997, with a schedule to complete implementation by March POWERGRID have started implementation of the recommendations related to the regional level re-organisation, as per Board's approval, starting from Southern Region 5.1 Implementation of the Recommendations at the Regional level The implementation of the recommendations towards the Regional level re-organisation in Southern region are as under: a) 3-tier organization structure was adopted in place of 4-tier structure. Accordingly, GHQ/DHQ were abolished. b) The head of the sub-station would be in-charge of operation and maintenance of not only the sub-station but also the lines associated with it. Accordingly, lines under O&M are distributed among existing 15 sub-stations. c) Area offices at Hyderabad, Vizag, Madras, Bangalore and Trichy have been established, and the manpower at DHQ/GHQs in the region was diverted to Area offices. d) Further, as recommended to transfer the Engineering, Contracts, Finance and Commercial functions, a decision was taken to shift the complete post-award activities to the region. A separate Finance, Commercial establishment already existed in the regional set up and the same have been strengthened. e) To facilitate smooth transition from existing structure to new structure, steps have been taken simultaneously to design Management Information System and processes, development of various system manuals keeping in view the new structure alongwith reviewing/redefining the aspects like Delegation of Powers, Human Resources, Financial & Operational policies. Thus, the revised structure in Southern region was implemented by March In order to implement the same in other regions, it was felt prudent to obtain a feedback on the