FILE COPY. Document of The World Bank. Report No. 2413b-IN

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY INDIA RURAL ELECTRIFICATION CORPORATION PROJECT II STAFF APPRAISAL REPORT April 26, 1979 FILE COPY Report No. 2413b-IN Regional Projects Department South Asia Projects 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 Currency Unit = Rupee (Rs) Rs 1 = Paise 100 US$1 = Rs 8.6 1/ Rs 1 = US$ / Rs 1 million = US$116, _/ LIST OF ABBREVIATIONS AND ACRONYMS ARDC- - Agriculture Refinance and Development Corporation CEA - Central Electricity Authority GOT 1 - Government of India HT - High Tension HP - Horsepower ICICI - Industrial Credit and Investment Corporation of India IDBI - Industrial Development Bank of India LT - Low Tension MG - Mini-growth Scheme MH - Mini-health Scheme MNP - Minimum Needs Program NHPC - National Hydro Power Corporation NTPC - National Thermal Power Corporation OA - Ordinary Advanced Area Scheme OB - Ordinary Backward Area Scheme RBI - Reserve Bank of India RE - Rural Electrification REB - Regional Electricity Board REC - Rural Electrification Corporation Ltd. SEB - State Electricity Board SI - System Improvement Scheme SPI - Special Project Industry SPA - Special Project Agriculture SU - Specially Underdeveloped Area Scheme USAID - United States Agency for International Development V - Volt kv - kilovolt = 1,000 volts kva - kilovolt-ampere = 1,000 volt-amperes MVA - megavolt-ampere = 1,000 kilovolt-amperes kw - kilowatt = 1,000 watts MW - megawatt = 1,000 kilowatts kwh - kilowatt-hour = 1,000 watt-hours Gwh - gigawatt-hour = 1,000,000 kilowatt-hours FISCAL YEAR April 1 - March 31 1/ Since September 25, 1975, the Rupee has been officially valued relative to a basket of currencies. As these currencies are floating, the US$/ Rs exchange rate is subject to change. Conversions in this report have been made at the long-term estimated rate of US$1 to Rs 8.6.

3 FOR OFFICIAL USE ONLY INDIA RURAL ELECTRIFICATION CORPORATION PROJECT II STAFF APPRAISAL REPORT Table of Contents Page No. I. POWER SECTOR... 1 Institutions... *... 1 Supply and Demand Previous Bank Group Involvement... 2 II. RURAL SUBSECTOR Background... 3 Present and Planned RE... 3 Previous Bank Group Involvement... 5 III. BORROWING AND EXECUTING AGENCIES: INSTITUTIONS AND OPERATIONS A. Rural Electrification Corporation (REC) Role in the Power Sector 6 - Organizationi and Staff 6 - Lending Procedure Scheme Formulation and Presentation.8 - Appraisal and Approval 8 - Monitoring Disbursement Technical Assistance to SEBs 9 - Record of Operations Record of Utilization of Credit 572-IN Future Development of REC B. State Electricity Boards (SEBs) Role in the Power Sector SEBs' Organization for RE Eligibility for IDA Finance RE Planning and Financing Scheme Formulation for REC and Non-REC Schemes 15 - Implementation and Procure,nent Record of RE Operations This project was appraised by Messrs. K. Jechoutek (Economist), B. Lynch (Financial Analyst), W. G. Scott (Consultant) and E. Baranshamaje (Young Professional) 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.

4 2- Table of Contents (Cont'd.) Page N( IV. ECONOMIC ANALYSIS AND PROJECT SELECTION Cost Comparison Economic Rate of Return Beneficiaries V. THE PROJECT AND ITS IMPLEMENTATION Genesis Definition of the Project Project Costs Procurement Disbursement Onlending Rates Other Financing Agencies VI. FINANCIAL ANALYSIS A. Rural Electrification Corporation (REC) Operational Performance and Financial Condition 25 - Quality of Portfolio.26 - Projected Operational Performance and Financial Condition.26 - Earnings Forecasts and Debt Service Coverage 28 - Audit.28 - Accounts Organizations.28 B. Rural Electrification Scheme Analysis Financial Viability of Schemes C. Rural Electrification Impact on State Electricity Boards Operating Performance Tariffs and Cost of RE Supply VII. TECHNICAL ANALYSIS Standards Power Factor Control RE System Improvements VIII. SUMMARY OF AGREEMENTS ANNEXES 1. Villages Electrified and Pumps Energized by 3/31/ REC Organization Chart REC Staff Structure (11/6/78) REC Staff Strength in Regional Offices as on 3/31/ Types of Schemes Financed by REC Viability Criteria for and Terms and Conditions Applicable to REC Loans Installments in REC Loan Disbursement (in %) Development of REC Lending Activity

5 -3- ANNEXES Page No. 9. Actual REC Scheme Connections as % of Forecasts Performance of SEBs with Respect to REC-Financed Schemes Economic Analysis Estimated Project Cost 62 Statewise Requirements of Materials Procured under 63 the Project Quantities of LCB Materials to be Procured under the Project 64 Schemes sanctioned by REC between 4/1/77 and 3/2/ Share of ICB Suitable Materials in Total Typical Scheme Cost (%) Pilot Scheme Cost Estimates Procurement and Implementation Timetable Estimated Disbursement Schedule by Calendar Quarter Summarized Income Statements for FYs 1974 through 1978 (Actual) and FYs 1979 through 1983 (Forecast) Summarized Sources and Applications of Funds Statements for FYs 1974 through 1978 (Actual) and FYs 1979 through 1983 (Forecast) Summarized Balance Sheets for FYs 1974 through 1978 (Actual) and FYs 1979 through 1983 (Forecast) Assumptions Used in Financial Projections Statement Showing Calculation of Debt Service Coverage FYs (Actual) and FYs (Forecast) Statement Showing Amount of Loan Sanctions, Disbursements and Balance Undisbursed SEBs' Gross Fixed Assets at March 31, 1977 Analyzed Between Rural Electrification and Other Operations SEBs' Capital Expenditure Cash Flow FYs 1976 and Measurement of the Net Income Contribution from Rural Electrification and Other Operations of SEBs Relative to Total Average Capital Base Rates of Return Earned by SEBs' "RE Activity" and "Other Operations" Relative to Their Own Capital Bases for FYs 1976 and Operating Performance of the RE Activities of SEBs for FY Operating Performance of the RE Activities of SEBs for FY Operating Performance of the RE Activities of SEBs for 1977 Relative to FY Increases in SEBs' Revenues for FY1977 Required (i) to Enable Interest on State Government Loans to be Paid in Full and (ii) to Produce a Self-Finance Ratio of 20% Effects on SEBs' Rates of Return and Self-Finance Ratios of Increases in Revenues for FY1977 ' Financial Analysis of Sample Schemes Average Price and Cost of Electricity for Selected Consumer Categories Selected Documents and Data Available in the Project File 91 Map IBRD No

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7 INDIA RURAL ELECTRIFICATION CORPORATION PROJECT II I. POWER SECTOR Institutions 1.01 Electricity supply is within the concurrent jurisdiction of the Central Govermnent of India (GOI) and the State Governments. Principal agencies in the industry are (1) the State Electricity Boards (SEBs), which are responsible for the generation, transmission and distribution of electricity within each State and for the control and regulation of private sector licensed electricity supply undertakings; (2) the Atomic Energy Commission (AEC); (3) the Central Electricity Authority (CEA); (4) the National Thermal and Hydroelectric Power Corporations (NTPC and NHPC); and (5) the Rural Electrification Corporation (REC) Although NTPC and NHPC were established by GOI in 1975 to construct and operate large thermal and hydro power stations, this is principally to augment the States' development programs. In most States, the SEB will continue to be the largest power undertaking, a situation which is unlikely to change in the medium term Planning of generation, transmission, and distribution development has traditionally been undertaken by each SEB for its own State rather than on a regional or national basis. However, with the rapid growth of the power sector and with the resultant increasing complexity of operation, GOI sees the necessity for an integrated national approach to sector development A beginning was made with the creation of Regional Electricity Boards (REBs) during the period , with the objective of improving collaboration between the SEBs and establishing power systems on a regional basis. The general functions of the REBs are to plan the integrated operation of the constituent power systems in a region for the maximum benefit of the region as a whole, coordinate maintenance and overhaul programs, determine generation schedules to be followed and the power available for transfer between States, and determine a suitable tariff structure for the exchange of power within the region. Progress has been slow; collaboration has been most successful in the Southern Region, where the regional load dispatch center at Bangalore has successfully encouraged the exchange of power between States and facilitated integrated operation of the power systems in the region At the national level, CEA has started work on the development of a year plan which should include, inter alia, detailed demand forecasts, investigations of power generation schemes to meet load growth requirements efficiently, development of primary grid configurations, coordination of power sector plans with plans for other sectors, resource requirements, and recommendations on responsibilities and needed operational policies at the State, regional and national levels.

8 The financial position of the SEBs has been the subject of continuing dialogue with GOI, and improvements have been effected through rate of return covenants in connection with previous Credits. This dialogue should be continued with particular emphasis on the steps which should be taken to improve the financial condition of the SEBs, now that financial amendments to the Electricity (Supply) Act have been enacted into law. Supply and Demand 1.07 The total installed generating capacity for the whole of India in March 1978 was 26,000 MW. This includes 2,200 MW of non-utility capacity, mostly thermal, which is owned by major industrial consumers to meet their own needs. The total generating capacity is shared as follows: 38% hydro, 2% nuclear, and 60% conventional thermal. Installed capacity by March 1979 is likely to be 29,500 MW. GOI is planning to expand generating capacity during the five year period 1979/ /84 by some 19,000 MW, bringing installed capacity up to around 46,000 MW (utilities only) by 1983/84. Additionally, the construction of some 16,000 km of high voltage transmission line is planned. Total energy generated in 1977/78 was 98,686 GWh. In 1983/84, this is expected to reach 176,358 GWh, an increase by almost 80%. While the energy requirement is expected to be met by this availability, a small nationwide peak capacity demand deficit of about 600 MW is expected. Previous Bank Group Involvement 1.08 The Bank has extended nine Loans to India for power projects amounting to US$334.5 million, and IDA eleven Credits totalling US$996.0 million. US$870.5 million financed or is financing the construction of generating plant, US$23 million financed the purchase of construction equipment for the Beas hydroelectric project, US$380 million was for high voltage transmission and US$57 million was for rural electrification. Nine Loans and Credits for generating plant, the Beas project (Credit 89-IN) and the first three transmission projects (Loan 416-IN, Credits 242-IN and 377-IN) have been completed. The Singrauli, Korba, Ramagundam, and Trombay thermal power projects (Credits 685-IN, 793-IN, and 874-IN/Loan 1648-IN, and Loan 1549-IN) which were approved between April 1977 and January 1979 are still in the preliminary implementation stage. The fourth transmission project (Credit 604-IN) and the first rural electrification project (Credit 572-IN) are under implementation and are now proceeding satisfactorily after initial delays.

9 -3- II. RURAL SUBSECTOR Background 2.01 The primary objective of the Government of India in its drive for rural electrification (RE) is to ensure increased agricultural output by providing reliable and economical power for irrigation pumps. Secondary objectives are the provision of electricity for domestic, commercial and small industrial consumers in the villages, in order to improve employment possibilities and quality of life in rural areas Agricultural pumping demand accounts for approximately 15% of India's total annual kwh demand. This represents a significant increase over the last 10 years, up from a previous figure of about 9%. There is considerable variation among States in this respect, the share of agricultural consumption ranging from 0.7% in Orissa and Assam to 30% and more in Uttar Pradesh, Punjab and Haryana. Between 1968 and 1978, consumption for agricultural pumping has been growing at an annual rate of about 15%, reflecting the rapid increase in irrigation pumps connected to the grid. Connected agricultural load is about 28% of the Indian total; again, as in the share of energy demand, the percentage varies widely from 3-5% in West Bengal and Orissa, to 40% and more in Tamil Nadu, Haryana, and Andhra Pradesh. Non-agricultural rural consumption accounts for significantly less than half of total rural consumption Electricity demand in the rural sub-sector is characterized by a low annual utilization of installed capacity and peak consumption at system peak times. The result, together with long distribution lines because of scattered consumers, is a high cost of supplying electricity to rural areas, both because of losses and because of the need to provide generating and transmission capacity for demand with a low load factor (9% on average, ranging from 3.5 to 17%). The reason for this feature of rural consumption is the dominant share of small-scale irrigation pumping: the pumps are, on average, operated for a few hours per day only, often at the time of the system's peak demand. Present and Planned RE 2.04 In June 1978, about 220,000 or 38% of the 576,000 villages in India were "electrified", i.e., at least some initial consumer connections had been established (Annex 1). The percentage varies from State to State: Punjab, Haryana, and Tamil Nadu have reached almost 100%, while in Assam and other northeastern areas only 10% of villages are electrified. For the next five years, it is planned to electrify an additional 110,000 villages, and to increase the number of connections in villages already connected. By June 1978, 3.35 million irrigation pumps were electrified in India. A further 2 million are projected to be connected and in operation five years hence The other major motive power for irrigation pumping is the diesel engine. In March 1978, an estitnated 2.5 million diesel-powered pumps were in

10 - 4 - operation in India, more than half of these in Uttar Pradesh and Gujarat. Since 1973, the number of diesel pumps has increased by 10% per year, while the number of electric pumps has grown only at a rate of about 8%. This relationship is expected to be reversed during the coming five-year period: diesel pumps are expected to increase at an annual rate of 7%, while the target for electric pumps is 10%, based on a policy of replacement of diesel pumps by less expensive electric ones, and the intensification of the RE effort The potential for expansion exists: out of an estimated 7.7 million private irrigation dugwells 1/ existing in March 1978, only about 1.5 million had electric pumps installed, the rest being worked with either bullock or diesel power. In addition to this replacement demand, new wells will be dug in areas with high groundwater potential The next Five-Year Plan (1978/79-82/83) provides for an expenditure of approximately US$470 million per year for rural electrification. Included in this sum are $60 million per year for village electrification through the Revised Minimum Needs Program (RMNP), a system of soft loans for backward area schemes in States with a low level of rural electrification. This total planned expenditure compares to an annual average of about $180 million during the early seventies. Estimated expenditure for 1978/79 is about $400 million. The large increase in expenditure will require additional finance: the capacity to implement the larger program exists Each individual RE project is formulated, prepared and implemented by the SEB concerned in accordance with general GOI policy for rural development. All RE investments and operations (both new schemes and intensification of the density of consumer connections in electrified areas) in each State are conducted and controlled by the SEBs. The SEBs finance their RE expenditure from a number of sources, the major ones being the State government and REC, both of which utilize GOI funds. Smaller sources of finance are the Agriculture Refinance and Development Corporation (ARDC, refinancing bank lending to SEBs for irrigation pump connections), and the Agricultural Finance Corporation (AFC, organizing bank consortia). Table 1.1: PLANNED EXPENDITURE ON RURAL ELECTRIFICATION, 1978/ /83 SEBs' Source of Finance Rs Million US$ Million _ REC /a 10,800 1, ARDC Ta 2, Banks Ia /b 1, State Governments 5, Total 20,300 2, /a Includes Rs 1,200 million for each institution's share in the participative pump connection program described in para /b Estimated. Source: Revised Draft Plan, REC, ARDC. 1/ 1.8 million electrified public and private tubewells excluded.

11 2.09 ARDC schemes are concerned with the energization of agricultural pumps exclusively, both for ARDC minor irrigation projects and independently. A recent agreement between REC and ARDC allows ARDC finance for pump connections in REC scheme areas where the REC scheme as originally defined has been completed. The RE program financed out of State funds does not usually comprise new self-contained schemes, but consists mainly of extensions in rural areas already connected to the grid, to meet expanding demand. Recently, there has been an agreement between REC, ARDC and the domestic banking sector to share (one third each) the financing of a number of new irrigation pump connection schemes. REC is to concentrate on long-term finance, the banks on short-term finance, and ARDC on refinancing the banks REC's lending is steadily developing away from pure village electrification. New GOI funds have been earmarked for the improvement of distribution systems that are in danger of being overloaded. Greater emphasis than hitherto is being placed on REC's role in monitoring and promoting reliability of rural electricity supply. Apart from the traditional REC scheme categories of electrifying groups of villages in economically advanced (OA schemes), less advanced (OB schemes), backward (SU schemes), and Minimum Needs Program areas (MNP schemes), there are now a growing number of production-oriented schemes such as the connection of irrigation pumps (SPA) or rural industry (SPI) in an area, and system improvement (SI) schemes that reinforce local distribution systems by increasing capacity. Details of REC scheme categories are provided in Annex 5, with analysis of their economic and financial viability in Annexes 11 and 32. Previous Bank Involvement 2.11 A first IDA Rural Electrification Credit (572-IN, for US$57 million) was extended to REC in July 1975, for the financing of the material component of schemes connecting new groups of villages to State electricity grids. In the first Credit, the criteria and methods used by REC in appraising RE projects were accepted as satisfactory at the time, and all categories of schemes that had financial viability criteria or contributed to more efficient operations were judged to be eligible for IDA finance. For schemes financed by the first Credit, REC has introduced administrative procedures to comply with international competitive bidding (ICB) Thirteen SEBs (out of 21 SEBs and power departments in the country) became eligible for IDA finance through REC under the first Credit (para 3.44). By March 31, 1979, US$22.2 million of the Credit had been disbursed Indirect support of ARDC's refinancing of irrigation pump connections to the grid has been extended in two previous ARDC projects (Credits 540-IN and 715-IN) as part of the total minor irrigation costs. Pump connection cost financed by IDA is not included in the proposed third ARDC project, now being processed.

12 -6- III. BORROWING AND EXECUTING AGENCIES: INSTITUTIONS AND OPERATIONS 3.01 The borrower is GOI who will relend the proceeds of the IDA Credit to REC. REC, in turn, will onlend to SEBs to finance specific RE schemes meeting its defined viability criteria. The proposed IDA Credit constitutes part of ongoing GOI lending to REC, and of REC lending to the SEBs. A. Rural Electrification Corporation (REC) Role in the Power Sector 3.02 REC was incorporated in July 1969 under the Indian Companies Act, 1956, as a company wholly owned by GOI, under the general supervision of the then Ministry of Irrigation and Power (now under the Ministry of Energy). REC's chief objective is to finance rural electrification schemes throughout India, acting as a financial intermediary with technical expertise, and administering funds received primarily from GOI. It is REC's function to ensure efficient allocation of these funds by establishing policies, procedures, and criteria for the formulation, approval and implementation of such schemes. In doing so, REC is directed to adopt a "project approach," coordinating electrification with other inputs in rural development in order to achieve increased agricultural production and overall economic development. This involves an appraisal of each scheme to confirm the availability of groundwater and the existence of sufficient demand for electricity The impact of REC lending to the SEBs is large in the rural subsector, although it is small in relation to total SEB operations. While more than half of rural electrification financing is REC's responsibility, REC provides only about 5-10% of total finance needed by SEBs for generation, transmission, and distribution investment. REC, therefore, exerts more influence on the SEBs by persuasion and demonstration than by leverage, and is providing valuable contributions to the training of SEB staff, methodology of RE scheme appraisal, and local RE planning. Organization and Staff 3.04 REC is headed by a Board of Directors, all of whom are appointed by the President of India. At the time of appraisal, the Board consisted of a part-time chairman with wide banking and financial experience, and five other members, all of whom are officials of GOI or of public corporations. The position of full-time Managing Director, who is an ex-officio member of the Board, was vacant at the time of appraisal, but a senior Administrative Service officer was appointed in January 1979, who has since also taken over the function of full-time Chairman The Managing Director is the chief executive in charge of all REC operations. Under him, the Technical Director (a presently vacant position)

13 -7- has overall responsibility for four technical REC divisions headed by Chief Engineers, who are responsible for the coordination of scheme preparation, approval, and monitoring in four groups of States. In addition, they specialize in technical matters such as standardization and system improvement. Seven other divisions are non-regional and provide specialized inputs in the scheme cycle and general operations such as appraisal and monitoring methods, organization planning, research and evaluation, special program monitoring, financial analysis and accounting (Annex 2) About 21% of total REC staff are seconded from the SEBs, including about 45% at senior levels and about 60% of engineers. For staff with economic and financial background, direct recruitment is prevalent. 43% of senior level employees are engineers, 32% have an economic background, and 25% are financial staff. Middle-level employment is dominated by financial and economic staff (Annex 3) At the time of appraisal, total staff strength of REC was 713, up from 509 in March Most staff growth has occurred outside headquarters, in new regional offices opened to take over the appraisal and monitoring of schemes. Ten such regional offices, with a total of about 250 employees, are now in operation (Annex 4). An eleventh office is proposed for Bombay. The staff growth of 40% between 1975 and 1978 has coincided with an increase of 43% in total disbursements for loans. Future staff increases, planned for the regional offices only, amount to only 3-4% per year. The pattern and growth of staffing are adequate. Lending Procedure 3.08 REC organizes its lending to the SEBs on the basis of RE schemes. Schemes are always defined to cover an area, usually not exceeding the size of a "block" or "taluk", and consist of either (i) the electrification of villages in the scheme area, (ii) connection of new consumers of one consumer category in the scheme area, or (iii) upgrading of the sub-transmission and distribution system of the scheme area (Annex 5). The schemes are processed by REC in a cycle consisting of formulation and presentation, appraisal, approval, and monitoring The criteria employed for selecting projects for REC finance vary with the degree of general area development as assessed by REC, and with the type of scheme. Similarly, the terms of REC loans differ according to the same classification. Repayment periods range from one year to 30 years and the rate of interest increases in steps to a maximum of 9.5% per year for 30- year loans (Annex 6) REC loans usually cover the total authorized cost of approved schemes, exclusive of consumers' contributions. Exceptions to this are "advanced area schemes" in advanced States which are covered to the extent of 60%, and other recently developed categories of schemes, where other financing institutions supplement REC's financing, or where the SEBs are required to contribute matching funds for the maintenance of system reliability.

14 - 8- Scheme Formulation and Presentation 3.11 Since 1969, REC has gradually established a working relationship with the SEBs that ensures the presentation and design of RE schemes according to REC requirements. REC has prepared proformae and manuals for the SEB staff involved in the processing of scheme proposals to encourage uniformity and meeting of specifications. The main types of schemes financed by REC at the time of appraisal are summarized in Annex 2, the terms of loans associated with these categories and viability criteria as of November 1978 are in Annex 6. Appraisal and Approval 3.12 Each scheme proposal received by REC is revised if necessary to REC's satisfaction and then appraised by a team from the responsible regional office, usually consisting of one engineer, one economist, and one financial analyst. During the appraisal, a meeting chaired by the District Collector and attended by local representatives of REC, SEB, Agricultural and Industrial Departments, ARDC and the banking system, is held to examine the coordination of the institutions' efforts An integral part of the appraisal is the sample examination of the validity of the SEB's assumptions. Forecasts such as the availability of credit facilities, the expected connected load, and the availability of groundwater, are checked. The internal REC appraisal report then highlights any inconsistencies, suggests modifications, and shows a financial return on the investment After satisfactory SEB action on suggested modifications, the scheme is presented to the REC Board of Directors for formal loan approval. During 1977/78, about 400 loans were approved. For the new-style pump connection scheme loans (SPA), an abbreviated procedure will allow REC's Chairman to approve such loans without going to the Board, due to the large number and uncomplicated nature of these loans REC will now begin to introduce discounted cash flow techniques in its feasibility calculations, ultimately designed to replace the presently used decision criterion of financial return on the investment in a given year, by the more significant net present value and/or internal rate of return concept. Simultaneously, REC has embarked on a program of introducing economic rate of return calculations in scheme feasibility analysis, based on the benefits of cost savings in using electricity rather than alternative sources of energy. Introduction of these appraisal techniques will be necessary because of the increasing volume and complexity of REC lending operations. A continuing dialogue with REC will be maintained in this matter, and an appropriate covenant has been included in the Credit documents. Monitoring 3.16 During implementation of schemes, SEBs are required to submit to REC annual standardized reports on physical and financial progress. REC monitoring teams visit the scheme sites from time to time to ascertain

15 - 9 - progress and to check on implementation problems. The usual implementation period for area schemes is five years, and for specialized schemes two to four years. If any problems or significant deviations from the appraisal report are identified during monitoring, REC follows up its findings in a dialogue with the SEB concerned. The usual problems to occur are cost overruns, delay in the construction schedule, and slow growth of connections Present monitoring procedures are adequate. Each scheme is visited at least once during the implementation period, more frequently if problems occur. Disbursement 3.18 For area schemes, REC disburses 35-40% of the loan as an advance when the loan is approved, the remainder in four unequal installments tied to the achievement of interim physical targets. For two- or four-year special schemes, disbursement is made in two approximately equal installments (Annex 7). The timing between installments, particularly for area schemes, depends on how fast SEBs reach the targets set in the scheme report. Implementation delays lead to a postponement of the next disbursement tranche, usually scheduled one year after the last In recent years, REC has experienced delays in disbursement: in 1977/78, Rs 1,128.8 million rather than the planned Rs 1,947.1 million were disbursed, a shortfall of 43%. In 1976/77, the shortfall was 46%. This is due primarily to the poor withdrawal performance of large recipient States such as Uttar Pradesh, West Bengal, Bihar, and Andhra Pradesh, and partly to the temporary stopping of disbursements to Uttar Pradesh, awaiting a necessary tariff increase that was delayed As an incentive for speeding up loan withdrawal, REC has introduced a rebate of 0.5% off the interest cost for 6 months, if the first tranche (35-40% of the amount) is drawn within 45 days after REC Board approval. The rebate decreases with later withdrawal, and ceases if the tranche is not withdrawn within 6 months. A similar rebate system will be effective from 1979/80 onwards for the following tranches, and will be combined with the target achievement requirement About 80% of total annual disbursements are paid out in the fourth quarter of the REC fiscal year (January-March), because most construction activity (and achievement of targets) takes place during the post-monsoon winter months in order to complete the work in time for the peak irrigation season. During this time, consumer pressure for rapid connection of irrigation pumps builds up strongly Present disbursement procedures are adequate. REC's disbursement forecasts will be made more realistic to take account of the SEBs' performance. Technical Assistance to SEBs 3.23 REC is providing assistance to SEBs primarily in three fields: (i) scheme design; (ii) technical standardization; and (iii) training of SEB

16 staff. REC has prepared detailed guidelines and circulated them to the SEBs, dealing with identification and preparation of scheme proposals, and assessment of viability. A continuing dialogue between REC and SEBs keeps this methodological input up to date For standardization of RE system design, REC has published a number of manuals for the SEBs that set out technical specifications for material and construction standards. In addition, REC is sponsoring a number of technical research projects, the results of which will be made available to the SEBs. The proposed project includes two pilot schemes using cost-saving distribution technology, that will be implemented under REC supervision as demonstration projects RE schemes require engineering and analytical skills somewhat different from those required for other SEB operations. To help develop these, REC has financed linemen training centers in various locations and assisted in the initial stages of instruction: in 1977/78, REC approved 20 loans, amounting to Rs 12.3 million (US$1.4 million), for this purpose. In 1976, REC started to conduct courses for SEB engineers involved in RE: these courses have been held in Hyderabad since REC will continue this training function within the framework of a newly formed society that will coordinate all training of senior staff in the power sector. In addition, REC will prepare and implement a systematic training program for its own and selected SEB staff, and submit this program to IDA. Record of Operations 3.26 Since its inception in 1969, REC had approved 2,195 schemes with a total loan amount of Rs 8,469 million (US$985 million) as of September Of these, two thirds were area electrification schemes, accounting for about 85% of the loan amount. Recently, a significant shift of REC lending activity away from general area electrification towards specialized, more narrowly focussed schemes has occurred. Taking 1977/78 approvals alone, the shares of area electrification schemes were only 50% of the number, and 57% of the total loan amount (Annex 8). Out of total loans committed, approximately 60% had been disbursed to SEBs by September Under REC schemes alone, 320,000 electric irrigation pumps had been connected by March This represented about 10% of all pumps connected by that time. The proportion has risen steadily in recent years: for the next five years, REC is to be responsible (either by own or joint financing) for the connection of 65% of all new pumps. In terms of villages electrified, REC's share stands at 23% (Annex 1) The record of target achievement in the implementation of RECfinanced schemes by SEBs is improving. Only 60% of annual consumer connection targets for all schemes under implementation since 1969 have been reached. The trend over time, however, is encouraging: target achievement of 52% for schemes approved before 1974 has increased to 76% for those approved after 1974 (Annex 9). In terms of pump connections alone, the improvement is even more impressive, namely from 56% to 83%.

17 The main reasons for delayed achievement are: (i) initially overoptimistic forecasts of future load demand in REC scheme areas; (ii) inefficiency and delays in the construction activity of many SEBs; (iii) shortages of materials required for rural distribution; and (iv) bottlenecks in providing other essential inputs for successful rural electrification, such as credit for farmers for wells, pumps, etc. The improvement observed in recent years appears to be the result of progress in all these fields: one important contributing factor has been REC's learning process in forecasting load and consumption growth in scheme areas, which has led to more realistic expectations. SEB estimates of future revenue from a scheme are usually reduced after a field visit by REC staff. It is expected that schemes approved now and in the future will show better implementation performance than in the past because of the recent improvements. Record of Utilization of Credit 572-IN 3.30 Under the first Credit, six SEBs were eligible for receiving IDA finance initially: during subsequent years, seven more SEBs fulfilled the eligibility criteria (para 3.44). This gradual increase in the number of participating SEBs, together with the slow introduction of ICB procurement procedures, delayed the procurement process and, consequently, the disbursement of the Credit. Such delays are not anticipated in the proposed Credit, as the early problems have been overcome to a large extent A second cause for disbursement delays has been the shortage of aluminum for conductors during recent years. The shortage has held up implementation work on REC-financed schemes, causing a shortfall of physical achievements against targets and consequently slower disbursement of REC loan installments. GOI intends to take steps to ensure a steady supply of aluminum from domestic and foreign sources, and such difficulties are expected to be averted at an earlier stage in the future The complete proceeds of the first Credit had been committed and all contracts awarded by November However, 16 contracts already awarded have been cancelled recently, and some are likely to be cancelled due to, inter alia, manfacturer's inability to deliver, shortage of aluminum, and delays in finalizing the contract by SEBs. New awarding of contracts is expected shortly, and the project's closing date is expected to be June 30, 1980, 18 months after the originally scheduled date. Future Development of REC 3.33 REC is endeavoring to expand its range of activities in order to gain flexibility and tap additional financial resources. Involvement of REC in small generation projects such as diesel generators or mini-hydroelectric schemes in remote areas, and its participation in organized diesel pump replacement schemes have been discussed with GOI, but no final decision has yet been taken. On less conventional energy sources, only research into the feasibility of biogas plants in rural electric cooperatives is being conducted formally by REC. A system of loans to SEBs for connecting rural water supply pumps to the RE system is being introduced.

18 A new venture that was started by REC in 1978 as a pilot scheme category has now developed into a substantial participative financing program for irrigation pump connections (Special Project Agriculture: SPA scheme). Together with ARDC and the commercial banks, REC will extend loans to SEBs for 2-year and 4-year schemes designed to cover the connection of pumps to the grid in a defined area, while safeguarding that the supply system is not overloaded. Responsibility for appraisal of these schemes will rest primarily with REC, while each of the three institutions will finance one third of each scheme. The plan for the period 1978/79 to 1982/83 provides for a total expenditure under this joint program of Rs 3,600 million (US$419 million) to connect 600,000 pumps REC has recently started to approve the first schemes of a similar specialized category: Special Projects Industry (SPI). This pilot program consists of loans to finance the connection of rural anc, small-town industrial estates to the grid, and is expected to develop into another participative financing venture, in this case with the Industrial Development Bank of India (IDBI) and other domestic banks Apart from the shift from area electrification to specialized projects and distribution system improvement schemes, a change in corporate structure of REC may possibly take place during the next few years: a proposal to change REC from a registered company into a statutory corporation is now under discussion. The main effects would be twofold: REC would obtain a management structure designed specifically for its purpose under a unique statute; and it would gain access to long-term investment funds available from the Reserve Bank of India (RBI) under more favorable terms. Access to the RBI's "Agricultural Credit (Long-term Operations) Fund" might be obtained even before any changes in corporate status are decided. RBI loans for the normal REC lending program would carry an interest rate of 6% p.a. rather than the present 7.25% p.a. for GOI loans A significant increase in disbursements is planned for the coming years (Annex 22). The large increases of 45% and 32% planned for 1978/79 and 1979/80 do not appear to be realistic targets, and some slippage is to be expected The REC Board has approved, in principle, that the organization may perform RE consultancy work for clients abroad and in India. Consulting has already been or will be conducted for the UN Economic and Social Commission for Asia and Pacific (ESCAP), Algeria, Bolivia, Jordan, and Egypt. This activity is planned to be continued only if manpower is available, rather than as a major new venture. B. State Electricitv Boards (SEBs) Role in the Power Sector 3.39 The SEBs, constituted under Section 5 of the Electricity (Supply) Act, 1948, are corporate entities whose principal duties are to generate, transmit and distribute electricity within a State (with particular reference

19 to areas not already served or inadequately served), to interconnect with neighboring States, and to set and amend electricity tariffs in supplying electricity to consumers. Members of the Boards of Management of the SEBs are appointed by the State Governments. While the SEBs enjoy some autonomy in their day-to-day operations, they are under control of the State Governments with respect to policy matters, capital investments, borrowings, salary scales, tariff changes and personnel policies The importance of rural electrification in total SEB operations varies with the relative size and structure of the agricultural sector in the State (para 2.02). RE investment for distribution only represents about 20% of the SEBs' total investment program, ranging from 13 to 33% Implementation and operation of RE schemes imposes technical and financial burdens on the SEBs. Financial losses are incurred chiefly because of too low tariffs and high costs of supply. Technical problems are created by the pattern of agricultural demand (para 2.03), leading to voltage drop and energy losses. SEBs' Organization for RE 3.42 Twelve SEBs have set up "Rural Electrification Cells", i.e. departments at headquarters that deal with the formulation and screening of RE schemes. Typically, the Cells are headed by a Chief Engineer of senior rank, and consist (in the larger SEBs) of engineers. Their principal functions are the preparation of RE schemes that are suitable for REC financing, and communication with REC during the scheme cycle. In some States, the Cell also deals with other RE operations and is responsible for planning and scheme preparation in the rural distribution system as a whole The actual implementation and operation of RE schemes is the responsibility of the SEBs' construction and regional administration departments rather than of the RE Cells. Although the Cells keep a close watch on the progress, the decisions on material allocations, construction priorities, and consumer applications are made by the operating departments. Billing and collection in the scheme areas is handled together with other business by the regional SEB administration. Separate consumption and connection statistics are kept for REC-financed schemes only. Eligibility for IDA Finance 3.44 The eligibility criteria for SEBs, on which agreement was reached during negotiations, are essentially identical to those agreed on in Credit 572-IN. They are (i) an undertaking by the State Government to annually subsidize its SEB's RE losses either fully, or to the extent that enables the SEB as a whole to achieve a return on assets of 9.5%, whichever is less, or (ii) that an SEB is achieving a return of 9.5% on assets. The RE losses are defined as those attributable to operations of the rural sub-transmission and distribution system, according to the proforma approved by IDA in connection with earlier Credits in the power sector. Although the return on assets concept has in the past been the yardstick for the measurement of SEB profitability, the financial amendments to the Electricity (Supply) Act 1948 will

20 introduce during 1980 an alternative criterion -- that of the level of internal cash generation relative to capital investment, to be specified by State Governments to enable SEBs to finance internally a reasonable contribution to the cost of capital works, considered by CEA to be in the region of 20-25%. State Governments, in consultation with their SEBs, are presently developing financial policies, which will achieve this objective. This represents a significant improvement in financial viability criteria. During negotiations, GOI representatives stated that any major new initiatives were unlikely to be introduced before the recomendations of a high-level committee (the "Rajadhyaksha Committee", formed to examine the working of the Indian power supply industry at Center and State levels) become available. It is expected that new financial policies, arising from the committee's recommendations, will be implemented during fiscal year 1980/81. In the meantime, however, the existing viability concept of 9-1/2% rate of return is being accepted for purposes of the proposed Credit. Fourteen SEBs will be eligible to benefit from the Credit. These are the Boards of Andhra Pradesh, Assam, Bihar, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal. RE Planning and Financing 3.45 The content of investment plans for RE depends to a large extent on the availability of funds. Together with generation and transmission planning, each SEB prepares a distribution and rural electrification plan for the next five years (now revised annually in the rolling plan), mainly based on targets for village electrification and pump connection. Initially, the physical details of the plan are rather general, and average unit costs are used to arrive at approximate expenditure requirements. The funds required for this expenditure are partly allocated from the SEB's and the State's own resources, but mostly from central plan funds made available by GOI according to the Planning Commission's recommendation Simultaneously with the State plans, the Planning Commission prepares a five-year expenditure plan for RE on a nationwide basis. The two approaches are then reconciled in discussions between the States and the Planning Commission, and annual plan allocations are formulated for each State. Most central plan funds specifically earmarked for RE investment are now channelled through REC, including blocks of funds for (i) the normal REC program, allocated by State; (ii) the Minimum Needs Program, also by State (this went directly to the States until 1974); and (iii) the system improvement program, allocated as a lump sum for all States. There are, however, GOI funds made available directly to the States as general plan assistance, some of which are onlent to the SEBs as all-purpose loans, indirectly financing a part of the SEBs' RE program independently of REC The share of total State RE expenditure financed and supervised by REC has varied significantly by State, and is illustrated by the examples in Table 3.1.

21 Table 3.1: REC SHARE OF TOTAL STATE RE EXPENDITURE Average Average (%) Estimated (%) Andhra Pradesh /a Bihar Maharashtra /a Madhya Pradesh Ia Uttar Pradesh /a West Bengal All-India /a Excluding new REC funds for joint pump connection finance and system improvement. Source: SEBs and REC The priorities within each State's RE program are decided by the SEB, taking into account the local backlog of applications for connections, ease of grid extension, and the revenue potential of possible areas. In many States, a large influence on priorities is the existence of RE schemes that are suitable for submission to REC. As yet, overall State planning is not done systematically by ranking areas according to potential feasibility. REC has made a start to introduce better planning procedures by cooperating with the Andhra Pradesh SEB in developing a detailed district-by-district assessment of RE potential: the results of this exercise will be used to develop a planning model applicable to other States Planning for RE and coordinating it with the work of other agencies involved in rural development is conducted at several levels within each State. The most effective coordination takes place at the district level in regular meetings between the concerned institutions under the chairmanship of the District Collector. In the past, this system has been operated with varying degrees of success, but a general improvement is evident in the increasing interdependence of the activities of SEBs, REC, ARDC, banks, agricultural departments, and industrial departments. Cooperation at other than district level, including State level, tends to be confined to general guidelines. District coordination is most effective in monitoring ongoing RE schemes and in identifying bottlenecks in the simultaneous provision of all inputs for rural development. Scheme Formulation for REC and Non-REC Schemes 3.50 RE schemes submitted to REC must be prepared in accordance with REC guidelines. The required format includes specification of social and economic indicators of the area, a groundwater potential certificate, a detailed technical assessment, and a guarantee of supporting investment by the SEB outside the defined scheme. A feasibility analysis in financial terms is required, based on revenue forecasts for the scheme area. State-financed RE is smaller in scale and mainly consists of intensifying electrification in areas already connected to the grid. The forecasting of potential additional load in this case is easier and the schemes usually have a gestation period of two years.

22 16 - The feasibility criteria applied to non-rec schemes are less stringent than those imposed by REC: there are usually no requirements for a minimum net return. Gross return 1/ requirements for non-rec schemes in Andhra Pradesh are 12.5% for pump connection schemes and 20% for schemes with mixed loads; in Madhya Pradesh, agricultural schemes must yield 12.5% gross, but village electrification schemes have no required minimum return. Implementation and Procurement 3o51 All RE schemes regardless of the source of financing, are implemented by the SEB's regionalized construction and operation divisions. There is, therefore, no distinction made between REC-financed and other schemes in terms of materials in stock, allocation of construction capacity, and SEB financial results. Materials requirements are formulated by the SEBs annually for all distribution investment, and orders are placed with suppliers for the total quantities. The same materials such as conductors, transformers, etc. are used for REC as well as non-rec distribution investment, and for replacement and reinforcement within the existing system 0 Record of RE Operations 3.52 States show varying degrees of success in achieving their annual objectives for RE, depending on their implementation efficiency and their vulnerability to external delays such as material supply shortages (Annexes 9 and 1O). In general, SEBs have achieved better results in the implementation of State-financed, smaller RE schemes than in REC-financed schemes; usually at least 75-80% of the objective in terms of new connections is reached, as compared to a recent improvement in the achievement of REC scheme targets from 50% to 75%. 3o53 In many cases, the SEB has completed the laying of lines to the requested connection, but actual connection has been delayed, for instance because of the prospective consumer's lack of credit facilities to purchase needed equipment 0 In the case of Madhya Pradesh, 15,405 pump connection facilities were fully prepared by the SEB in 1977/78, but only 12,176 pumps actually went into operation: taking the former figure as representative for target achievement, the actual success rate of the SEB rises from about 60% to about 75% of targets for that year 0 REC initiative has brought about more intensive coordination among local institutions 0 The effects of this will be felt in the near futureo 1/ Annual revenue as % of cumulative investment.

23 IV. ECONOMIC ANALYSIS AND PROJECT SELECTION 4.01 Rural electrification in India lends itself to justification using cost savings accruing to the economy by using electricity rather than alternative conventional energy sources for irrigation pumping, rural industry, domestic, commercial, and street lighting. This approach yields attributable benefits of electrification that include part of consumer surplus, and avoids the causality problem of allocating any incremental agricultural output to electricity. Cost Comparison 4.02 The cost comparison of electric and major present non-electric power sources for rural applications, taking into account all costs incurred by consumers as well as SEBs, and valuing energy at its long-run marginal cost, yields a clear cost advantage for electric irrigation pumping, domestic and street lighting, and approximate equality of costs for small village industry such as flour mills. The economic cost advantage for the typical 5 HP electric irrigation pump over a similar diesel pump amounts to about Rs 1,400 (US$165) per year. In the case of domestic and street lighting, the advantage of using electricity is about Rs 80 (US$9) per connection per year. (Detailed calculations in Annex 11, paras 6-15) The results of the cost comparison are sensitive to changes in the long-run marginal cost of power supply, particularly in the case of small industry and domestic and street lights. In the case of pumps, a reduction of marginal cost per kwh from the assumed Rs 0.68 to Rs 0.50 increases the cost advantage for electricity to about Rs 1,900 (US$220), an increase of marginal cost to Rs 1.00 decreases the advantage to about Rs 400 (US$47). In the typical small industry case with 10 HP load, a decrease to Rs 0.50 would make electricity clearly the more economical alternative (cost difference in favor of electricity of about Rs 1,500 = US$175), whereas an increase to Rs 1.00 makes the diesel alternative preferable by about Rs 2,000 (US$233). Kerosene for domestic and street lighting would become competitive at a marginal cost of electricity of about Rs 1.10 per kwh, about 60% more than that assumed The comparison demonstrates that the mix of consumer categories in RE schemes is a decisive factor for economic viability. Schemes where most power is used for irrigation pumping yield high economic rates of return, relatively insulated from the assumptions on marginal cost of electricity supply. Schemes with a high content of village industrial and domestic demand can be expected to have only a modest economic rate of return, unless the marginal cost of electricity is quite low in the area or for the consumption pattern of the specific consumer groups Analysis of the cost of supplying isolated areas with electricity from diesel generators of 100 kw capacity or more shows a cost of about Rs 1.00 per kwh at the generator, i.e. before accounting for energy losses in the distribution system, or a consumer-level cost-of, say, Rs / kwh. This approaches the highest available marginal cost estimates for grid

24 supply in India, and is well above a reasonable average estimate. This result is of interest for the new type of RE schemes supplying small and medium industries in rural estates, where the alternative to grid connection would be captive generation. For 11 kv industrial consumers, the marginal cost of grid supply would be in the range of, say, Rs per kwh, and electrification would be clearly preferred. Economic Rate of Return 4.06 The major categories of schemes in the REC lending program were tested for their economic rate of return. For this purpose, OA and OB, MG and MM, and MNP and SU schemes were amalgamated into three combined typical scheme categories because of their similarities. Costs were assumed to include initial and subsequent SEB investment, operation and maintenance expenditures by SEBs, the long-run marginal cost of energy supply to the scheme, and the initial and recurring costs incurred by consumers. Benefits were defined as the initial and recurring costs of the non-electric alternative, yielding the same output. (Other assumptions are detailed in Annex 11, para 19). For purposes of shadow pricing, appropriate weighted conversion factors were applied to the cost and benefit streams expressed in market prices, to obtain data in terms of border prices Economic rates of return for the typical scheme categories OA/OB, SPA, SPI and SI are satisfactory: the economic rates of return for the basic assumption are 18% for OA/OB, 55% for SPA, above 100% for SPI, and 41% for SI. The MG/MR type of scheme does not appear to be economically viable because of its lack of pump connections. The large block of MNP/SU schemes, serving backward areas, also shows a rate of return below the opportunity cost of capital for the basic assumptions. Given the vulnerability of RE schemes to delayed target achievement, MNP/SU schemes on average must be considered only marginally economically viable, although they may be socially attractive Based on this economic analysis, OA/OB, SPA, SPI, and SI scheme categories were selected as eligible for the project. Selected sample schemes of these categories that had been appraised and approved by REC recently, were used for further analysis. The economic rates of return for these sample schemes in terms of market prices range from 38% to 76% for OA/OB, from 26% to 55% for SPA, from 83% to over 100% for SPI, and from 33% to 41% for SI. Using shadow prices, the economic rates of return are 42-66% for OA/OB, 25-45% for SPA, over 100% for SPI, and 38% for SI. These schemes show high economic rates of return, relatively insulated from varying basic assumptions (Annex 11, para 21) Weighting the individual categories' results by their expected share in total project cost, the average weighted economic rate of return for the project as a whole is about 45% in terms of market prices and about 40% in terms of shadow prices. This rate of return is satisfactory. Beneficiaries 4.10 Sample evidence indicates that it is primarily the better-off members of a village community who obtain pump and domestic connections.

25 In general, farmers with very small landholdings (except in fertile areas) rarely apply for pump connections, although the breakeven point in terms of landholding is relative rather than absolute, depending on groundwater availability, soil, type of crops, etc. Repayment of pump purchase credits on top of electricity charges could be prohibitively expensive for a one-or two-acre farmer with the following cost/income pattern typical for Madhya Pradesh and Andhra Pradesh: Rs/acre/year Wheat & Paddv Suarcane Income 1,500 3,000 Electricity Cost Other Input Cost 600 1,300 Net Income 800 1,500 Electricity cost as % of Income 7% 7% Bearing in mind that a 5 HP electric pump can cost about Rs 4,000 installed, annual repayments even on generous terms would be a severe or impossible burden on a farmer with 1-2 acres and a net annual household income of Rs 800-1,600. In areas where sugarcane or other high-income crops can be grown, more small farmers benefit Landless laborers in rural areas benefit indirectly from RE. Having no assets suited for the utilization of electricity, they benefit from increased employment opportunities created by the expansion of landholders' activity through double cropping made possible by irrigation. Farmers cultivating more than 5 acres routinely hire additional laborers beyond family labor, especially during labor-intensive cultivation and harvesting periods.

26 V. THE PROJECT AND ITS IMPLEMENTATION Genesis 5.01 This project is a follow-up to the First Rural Electrification Credit (572-IN), approved in July The first project was defined as a tranche of about 140 rural electrification schemes which would be identified in the course of project implementation. In effect, the first Credit supports ongoing REC disbursement for eligible projects in eligible States by financing materials procured on an ICB basis During the implementation of the first project, it was felt that, while procurement supervision was possible, overall performance monitoring presented problems. Also, some schemes with low economic rates of return might be supported by the Credit. To avoid a similar situation, a modified approach has been adopted in defining the second project: (i) part of the project is composed of approved schemes with known material requirements; (ii) the number of scheme categories eligible for the credit has been narrowed to those likely to have economic rates of return well above the opportunity cost of capital; (iii) rural distribution system improvement schemes and two pilot projects to demonstrate potential cost-saving technology are included. Definition of the Project 5.03 The project consists of: (i) Expenditure during 1980/81 and 1981/82 on 484 identified REC schemes of the categories OA, OB, SPA, SPI and SI, approved by REC between April 1, 1977 and March 2, 1979; (ii) Expenditure during 1980/81 and 1981/82 on about 1,230 as yet unidentified REC schemes of the categories OA, OB, SPA, SPI, and SI to be approved by REC between March 3, 1978 and March 31, 1981; and (iii) a single phase distribution pilot project in Rajasthan, and a power factor control (RT capacitor) pilot project in Karnataka, to be implemented during 1980/81. All project components will be implemented by June 1983 by the SEBs that will receive REC loans for the schemes concerned Numbers and estimated costs of different scheme categories are shown in Table 5.1. The 290 OA/OB, and about 1,140 SPA schemes partially supported by the project will result in connecting about 15,000 new villages to the grid, and electrifying about 500,000 irrigation pumps. About 25,000 village industry connections will be included in the OA and OB schemes: in addition, about 6,000 new small and medium industrial consumers in rural industrial estates will be connected as a result of the SPI schemes.

27 Project Costs 5.05 The total cost of the project is estimated at about Rs 3,440 million (US$400 million). The proposed Credit amounts to US$175 million, representing about 44% of project cost (Table 5.1 and Annex 12) The basis for the cost estimates is as follows: (a) Planned expenditures on RE by REC and other financing institutions are based on the Draft Plan 1978/ /83 as known in November 1978; (b) About 85% of total planned expenditure are for REC-financed schemes in 14 States (Andhra Pradesh, Assam, Bihar, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal) which will be eligible for finance under the proposed Credit (para 3.44); (c) Schemes of the categories OA, OB, SPA and SI are eligible for finance under the second Credit. These categories have been selected as those yielding a satisfactory range of economic rates of return; (d) The proposed Credit will cover the cost of materials suitable for international competitive bidding for eligible schemes as well as the cost of (paras 5.10 and 5.11) selected materials suitable for local competitive bidding. The materials requirements for the already identified schemes have been determined on a scheme-by-scheme basis. Similar requirements have been assumed for the as yet unidentified schemes (Annexes 12 and 13); and (e) Total project cost is defined as estimated expenditure on all project components during 1980/81 and 1981/82, considering REC disbursement patterns (Annex 7). This includes elements of (i) schemes already in progress, (ii) schemes approved or identified but not yet started, and (iii) schemes that will be identified by March 1981, but where estimates are available now. Materials procured are to be installed by the project's completion date.

28 Table 5.1: PROJECT COST Number Total Expected of cost of expenditures on schemes schemes schemes during (Rs million) (Rs million) (US$ Million) (i) Schemes identified and approved 4/1/77-3/2/79 /a OA/OB SPA SPI Si Sub-total 484 1, (ii) Schemes to be approved 3/3/79-3/31/81 /a OA/OB 166 1, SPA 895 1,500 1, SPI Si Sub-total 1,228 3,140 2, (iii) Pilot Schemes /b Total /c 1,721 5,088 2, Physical Contingency /d Price Contingency /e Total Project 3, /a In eligible States. /b Including technical assistance. /c In 1978 prices. /d For pilot schemes. /e 6% p.a.

29 The costs for the two pilot schemes which may demonstrate costsaving technology (para 7.05 to 7.11) are set out in Annex 14, and include special equipment to be incorporated in two normal area electrification schemes, as well as some technical assistance. Detailed scheme plans and specifications, as well as the evaluation of the schemes will be thoroughly discussed with IDA during implementation Under the first Credit, virtually all materials have been purchased from Indian suppliers through international competitive bidding. Direct foreign exchange expenditure for the second project, involving the same materials, is expected to be small, perhaps including only special equipment and technical assistance (consultants and training of REC and SEB engineers) for the pilot schemes. The indirect foreign component is estimated to be about 40%. Procurement 5.09 As under the first Credit, each SEB will be responsible for its own procurement for project materials, using REC's standard specifications, and standard General Conditions of Contract approved by IDA. REC will provide assistance to the SEBs in the preparation of bid documentation and will monitor that quantities specified in the bids are those required for eligible schemes. REC will also review SEB bid evaluations before seeking IDA approval to place orders The SEBs will invite bids for their estimated two-year requirements ( ) on the basis of international competitive bidding satisfactory to IDA for conductors, transformers, insulators, meters, switchgear, capacitors, and assorted additional equipment for the pilot schemes, amounting to about US$150 million. Indian manufacturers competing under international competitive bidding would be granted a preference margin of 15% or the current rate of import duty, whichever is less. Materials delivery schedules will be spaced over the construction period. Consultants' services and cost of training abroad for the pilot schemes would amount to about US$250, The SEBs will also invite bids for their estimated two-year requirements for crossarm sets, GI wire, air break switches, insulated wire, LT cutouts, and lightning arrestors, amounting to about US$25 million, on the basis of local competitive bidding satisfactory to IDA. The details are specified in Annex 12. Most contracts for the above small items will not exceed the amount of US$100,000 each. All items are manufactured locally, and satisfactory local competition exists. No further bulking of orders is possible because of the large number of SEBs procuring individually, and none of the items is therefore suitable for international competitive bidding. Any contract awards exceeding US$100,000 will be subject to prior review by IDA The time schedules for procurement and implementation as agreed with REC are set out in Annex 15. All contracts are expected to be awarded by March 1980 (May 1980 for the pilot schemes), and all materials should be delivered to SEBs by January 1982.

30 Disbursement 5.13 Disbursements from the proposed Credit will be based on SEB's reimbursement claims and will cover the CIF cost of imported goods, or the ex-factory cost of goods manufactured in India. It is expected that substantial IDA disbursements could begin during the third quarter of 1980, and would be completed by March The estimated disbursement schedule is shown in Annex 16. Onlending Rates 5.14 GOI will onlend the Credit to REC at an interest rate of 7.25% p.a. with a repayment period of 20 years including 5 years of grace. This compares to a rate of 6.0% for GOI onlending to ARDC, 10.25% to central power generating agencies such as NTPC, and 11-13% for normal commercial credit lines to industrial enterprises. REC, in turn, will onlend to the SEBs at its current interest rates of % p.a. (with grace periods of 2 to 5 years), depending on the type of scheme and length of loan period. These rates compare to rates of 6-7% for SEB borrowing from State Governments, and 10.5% from banks. Conclusion of a Subsidiary Loan Agreement between GOI and REC in a manner satisfactory to the Association is a condition of Credit effectiveness. Other Financing Agencies 5.15 SPA schemes included in the project (as defined in para 5.03) will also be partially financed by ARDC and commercial banks, each institution (counting the banking sector as one) covering one third of the cost of each approved scheme. For the proposed Credit, SEBs estimate two years' materials requirements for SPA schemes, but IDA disbursements will be provided only up to REC's one third share of total SPA scheme cost USAID intends to support a parallel project to the extent of US$58 million. Materials, States, and time period eligibility are the same as those of the IDA Credit. The USAID project, however, is expected to make all scheme types eligible, including those not eligible under the proposed IDA Credit.

31 VI. FINANCIAL ANALYSIS A. Rural Electrification Corporation (REC) Operational Performance and Financial Condition 6.01 Summarized audited Income Statements for REC for the five years through March 31, 1978, are shown in Annex 17. The increase in lending since 1974 has been accompanied by substantial growth in total revenue earned, almost three and a half times in FY1978 that of FY1974. However, because of increased financing through long term debt, the interest spread has narrowed from a gross of 3.9% of revenue in FY1974 to 2.1% in FY1978. In absolute terms, earnings after income tax have increased at an annual rate of 14%. Return on total capitalization has increased from 2.5% in FY1974 to 4.2% in FY1978. Returns on equity were 2.0% to 2.3% during the same period. While these returns might be considered low in comparison with the opportunity cost of capital, they must be measured against the objectives of REC which supports lending on concessionary terms to the rural sector Summarized audited Balance Sheets covering the five years through FY1978 are shown in Annex 19. During this period, REC's loan portfolio grew at an annual rate of some 32% and reached Rs 5,029 million (US$585 million) by March 31, As of that date, the long-term loan portfolio accounted for more than 90% of total assets. REC's initial capital was entirely equity, made up of U.S. grants and equity share capital from GOI. By March 31, 1974, REC had received Rs 1,050 (US$122 million) in U.S. grants, Rs 620 million (US$72 million) from GOI in equal portions of equity capital and loans, additional GOI loans of Rs 45 million for street lighting in scheduled caste settlements and had retained earnings of Rs 48 million. At that time, capital structure reflected 20% long term debt, 78% equity and 2% current liabilities. Since 1974, however, funds have been provided increasingly through long term debt, thereby increasing its proportion of capitalization to some 65% by March 31, In FY1975, REC successfully floated its own bonds, guaranteed by GOI, on the financial market and has continued to do so annually since. These borrowings represented 12% of total debt at March 31, 1978, or 8% of total capital. Despite the increasing debt/equity ratio, the capital structure is acceptable. REC had, by March 31, 1978, approved 2,028 RE schemes, amounting to Rs 8,301 million (US$965 million). Against this it had disbursed Rs 5,172 million, leaving undischarged commitments of Rs 3,129 million, the funds for which will be sought from GOI and the capital market (Annex 22) REC has used its earnings to finance additional investment in rural electrification. This has been encouraged by the taxation advantages provided by the Income Tax Act Under this Act, a Special Reserve was created to enable deduction from profits subject to income tax of about 9% of annual taxable income. Since March 31, 1977, the allowable percentage was increased to about 20%. At that date, the Special Reserve stood at Rs 46 million. REC has also created a Special Development Reserve to:

32 (a) provide special term loans to State Governments to help them to subscribe for share capital in RE cooperatives; (b) provide grants to organizations for research and development; (c) provide grants towards construction costs in specially underdeveloped areas. By March 31, 1978, this reserve stood at Rs 59 million. Quality of Portfolio 6.04 REC's loan and investment portfolios are satisfactory, without arrears problems. They consist of loans to SEBs, investments in State Government guaranteed SEB RE Bonds, and temporary investments in GOI securities. Projected Operational Performance and Financial Condition 6.05 Projected Income Statements, Statements of Sources and Application of Funds and Balance Sheets for the next five years through FY1983 are shown in Annexes 17 through 19. A disbursement target of about Rs 11,800 million is provided for as REC's part of the Draft Plan for FY This projection would boost the loan portfolio to Rs 15,564 (US$1,810 million) by March 31, 1983, an annual growth rate of 25% from March 31, The following table summarizes the financing plan during FY and (the disbursement period of the proposed Credit):

33 Table 6.1: REC FINANCING PLAN FY FY Rs US$ Rs US$ Million Million Million Million % Sources of Funds Internal Cash Generation Less: Income Tax Net Internal Cash Generation Capital Subscribed GOI Equity GOI Loans 2, , /a 58.3 Market Loans , Total 3, , Sales of Short-Term Investments Repayment of Loans by SEBs Total Sources 3, , Applications of Funds Disbursement of Loans 3, , Repayment of GOI Loans Working Capital Increase Short-Term Investments Dividends Fixed Assets Total Applications 3, , /a Includes IDA Credit of US$175 million and USAID Loan of US$58 million Because of increasing reliance on long term debt to finance the lending program, the debt/equity ratio is projected to steadily rise from 65/35 at March 31, 1978, to 82/18 by March 31, While GOI will continue to be the major source of funds, the increasing issue of REC bonds is expected to bring their share of total borrowings from 12% at March 31, 1978, to 25% by March 31, Despite the increase in the debt/equity ratio to a level of almost 5:1, the projected capital structure is acceptable. Equivalent ratios for reasonably comparable financial institutions in India such as State Financial Corporations show a range of 3:1-11:1.

34 Earnings Forecasts and Debt Service Coverage 6.07 REC's projected revenue by FY1983 is equivalent to four times that for FY1978, an annual growth rate of 32%. Increased borrowings will continue to reduce the interest spread but this will be partially offset by improving portfolio loan mix by lending for more remunerative types of schemes where interest rates of 9% apply. Net earnings are expected to continue to increase in absolute terms at a growth rate of 22% per annum. Returns both on equity and on total capitalization show improved trends, with the former rising from 2.3% in FY1978 to 4.4% by FY1983, and the latter from 4.2% to 6.1% Although overall projected operational performance is good, pressure on the debt service coverage ratio will be experienced in FY1982 and Annex 21 summarizes the debt service coverage ratios for the ten year period through FY1983. The ratio in FY1974 was 2.6 but dropped to 1.7 by FY1978. A ratio of 1.3 is projected by FY1983, which is near the 1.2 required by IDA in the first Credit. This was and is considered the minimum for a reasonable margin of safety. The main reason for the contraction is the changing capital structure of REC, from a largely equity financed operation to a largely debt financed one. During negotiations, agreement was reached that (i) REC's internally generated funds in any fiscal year shall at least cover 1.2 times its debt service requirement during the same fiscal year, and (ii) REC's administrative expenses and interest payments in any fiscal year shall not exceed 90% of its interest receipts. REC's capital structure, legal status, and the availability of long-term funds from the Reserve Bank of India are matters of continuing dialogue between REC, GOI and RBI. Audit 6.09 The Comptroller and Auditor General of India is empowered to appoint an independent auditor registered under the Indian Companies Act 1956 to audit REC's accounts. He may also direct the manner in which the REC's accounts are audited, conduct test audits as he may think fit, and make comment upon or supplement the audit report made by the professional auditor. Messrs. S.P. Chopra & Co., Chartered Accountants, have carried out audits of the accounts for FY1976, 1977 and Recently, Messrs. S.N. Sachdev & Co., Chartered Accountants, were appointed to audit the accounts for FY1979. Satisfactory audit reports have been received each year. REC has agreed to furnish within six months of the end of each fiscal year its financial statements as audited by independent auditors acceptable to IDA. Accounts Organization 6.10 REC has a competent accounts department, which operates a basically manual accounting system. However, management has recently introduced a number of computer applications which are presently operating concurrently with the manual system, in order to verify the correctness of the programs. In particular, the billing of interest and capital repayment charges to borrowers has been computerized. Considering REC's accounting growth, computerization should play an increasing role in the accounts function during the next five years. Plans have also been made to streamline internal reporting systems to allow a speed-up of decision making processes.

35 B. Rural Electrification Scheme Analysis Financial Viability of Schemes 6.11 Until now, REC has appraised schemes on the basis that schemes which reached the breakeven point (revenues equal to cost of energy and specific operation, maintenance and depreciation costs) after periods of 7-15 years and which maintained minimum rates of return on cumulative investment subsequently, qualified for financing (Annex 6). However, most schemes generate losses during the first half of their lifetimes, and profits during the second half may easily not be sufficient to counterbalance the early losses and ensure the payment of interest on and the repayment of loans used for scheme financing. Quantification of the net present value of schemes highlights the effect they have on the financial performance of SEBs. Using the average interest rate payable on the capital borrowed to finance the scheme as the discount rate, negative net present values indicate the level of subsidization required either directly from State Governments or from other consumers An analysis of a sample of REC approved schemes is illustrative. Costs and revenues presented in the REC appraisals were discounted and internal rates of return and net present values determined as shown in Table 6.2. The results of the analysis are twofold: (i) there are no generalized rates of return applicable to REC schemes. Each must be approached on an individual basis due to disparities in costs, tariffs, existing infrastructure and load development; (ii) rates of return range from no positive rate to 79%. Table 6.2: DISCOUNTED FINANCIAL CRITERIA OF SAMPLE SCHEMES Scheme Internal Rate Net Present Value at 7% Category of Return Cost of Capital Rs Million OA 12% +2.7 OB 5% -0.9 SPA Not Positive -5.8 SPI 79% SI 21% MH 7% Nil MG 6% -0.2 SU 4% -1.0 MNP 4% Low agricultural tariffs are the main reason for the low rates of return. The high return of the SPI schemes is due to their orientation to rural industry; industrial tariffs are higher. Also, SPI capital costs are relatively low because they are usually extensions and utilize existing infrastructure. SI Schemes also utilize existing infrastructure and their high return reflects savings in line losses and additional revenues from increased demand. While all of the sample schemes meet the existing eligibility criteria set by REC, those schemes which have rates of return less than the average cost of capital, assumed at 7% for SEB borrowing, will burden

36 SEB finances. Rural electrification losses are presently being offset by a combination of direct subsidization from State Governments and cross subsidization from other SEB consumers to RE consumers. Alternatively, rates of return could be improved by increasing tariffs to RE consumers Recognizing the need to improve financial analysis of RE schemes, REC has started to include discounting techniques in its investment appraisal methodology. The intention is to use the additional data thus provided in discussions with SEBs on the financial impact of RE schemes. The ultimate objective would be to replace existing eligibility criteria with criteria based on this improved methodology. During negotiations satisfactory progress in the introduction of these techniques was reported, and an acceptable program for implementation was agreed on (Annex 15). C. Rural Electrification Impact on State Electricity Boards Operating Performance 6.15 GOI and State rural electrification policy has had considerable impact on the SEBs' finances. Annex 23 shows that gross fixed assets of the major SEBs at March 31, 1977, amounted to some Rs 75 billion (US$8.7 billion) of which RE assets accounted for some Rs 15 billion (US$1.7 billion) or about 20%. Since 1969 the RE system has grown at an annual rate of almost 50%. Total capital investment (including generation and transmission) for SEBs during FY1976 and 1977 amounted to Rs 10.2 billion (US$1.2 billion) and Rs 10.8 billion (US$1.3 billion), respectively (see Annex 24), with RE's share making up 12% and 16%, respectively. Total capital expenditure in FY1977 increased by some 6% over FY1976, but the increased expenditures were almost entirely devoted to RE which increased by 40% compared with a 1% increase in expenditure for everything else (see Annex 24). Figures for FY1978 are not yet available for most SEBs. However, in the SEBs of Maharashtra and Madhya Pradesh, RE investment for FY1978 was 58% and 14%, respectively, higher than for FY1977. Planned expenditures for FY amount to some Rs 21 billion (US$2.4 billion) SEBs must bear not only the heavy cost of operation and maintenance of the RE schemes but also the high costs of servicing the capital borrowed to finance the initial capital costs. Financial data prepared by the SEBs in accordance with financial covenants in the Second Power Transmission Project (Credit 242-IN), whereby the RE activities are segregated from the other activities of the SEBs, reflect the financial impact of RE on the SEBs overall financial performance. Annexes 27 and 28 show the operating performance of the SEBs' RE activities for FY1976 and 1977 while Annex 29 analyzes the relative performance of these years. The combined results of the thirteen SEBs noted show that total losses in FY1977 increased by 21% over those of FY1976. If this rate of increase is maintained for the future, losses would double about every 3-1/2 years Annexes 27 and 28 show that average net losses relative to revenue for both years were in excess of 60%. State Government subsidization averaged

37 some 20%, leaving a net average deficit after subsidization in excess of 40% to be offset by cross subsidization from other consumers. Individual performance varies, from reduced losses in SEBs in Bihar (-8%) and Kerala (-17%) to significant increases in losses of SEBs in Andhra Pradesh (+60%), Gujarat (+52%) and West Bengal (+47%). The effects of cross-subsidization can be seen from Annex 26 which shows the return on investment for FY1976 and 1977 of the separate activities of RE and "other operations" relative to their own capital bases In the majority of cases, high returns from "other operations" offset losses from RE. However, this cross-subsidization was not sufficient to enable interest on State Government loans to be met in full. Annex 30 shows the amount of interest payable to State Governments in FY1977 which was effectively subsidized; it was not actually paid but made a contingent liability, provided sufficient future surpluses were earned. Percentages vary from 3% in Maharashtra to 52% in Uttar Pradesh and 61% in Haryana. To increase revenues sufficiently to cover these interest shortfalls would have required rate increases of some 1%, 24% and 32% respectively. Were these shortfalls to be recovered only in RE operations, the RE tariff would have to be increased by 2%, 50% and 100% respectively. Spreads are quite wide. These increases in revenues would increase the rates of return of those SEBs by 0.3% to 13.3% in Maharashtra, by 6.3% to 12.1% Uttar Pradesh, and by 8.0% to 14.4% in Haryana (Annex 31). These increases merely illustrate the wide disparity in the levels of viability achieved by the SEBs and in the corrective action needed to achieve even limited improvement The recent enactment of the financial amendments to the Electricity (Supply) Act 1948 brings attention to the size of SEBs' internally generated funds relevant to their capital investments. Guidelines issued by CEA to State Governments indicate that 20% of capital investment is regarded as a reasonable contribution which an SEB should make towards its expansion. Because RE is a significant share (20%) of total SEB investment, the level of internal cash generation which must be produced by the SEBs' "other operations" is increased to 25%, thus revealing the net effect of both direct and cross-subsidization policies. Accordingly RE cannot be viewed in isolation. Overall SEB financial viability is dependent on how successfully RE is integrated into total operations. Tariffs and Cost of RE Supply 6.20 One of the major contributing factors to the financial pressures on the SEBs is the low level of the agricultural tariff. To date, it is GOI and State policy, implemented by the SEBs, to subsidize agricultural electricity consumers via artificially low tariffs. In most States, all agricultural consumers, regardless of their circumstance or level of consumption, benefit from this subsidy. First steps are being taken to improve this pricing system, and REC will contribute to the discussion Where SEBs have computed the financial cost of supplying agricultural consumers, the evidence shows that consumer payments often do not even cover 50% of the cost. For example, in Madhya Pradesh, average revenue amounts

38 to Rs 0.30/kWh versus a financial cost of supply of Rs 0.63/kWh. This average tariff is one of the highest among major SEBs. It is reasonable to assume a supply cost of the same order of magnitude for most SEBs; since most SEBs have lower average agricultural tariffs than Madhya Pradesh, revenues must be well below costs overall (Annex 33) A comparison of average rural tariffs with marginal cost of supply yields even greater discrepancies (Annex 33). Marginal cost of delivery of energy to agricultural consumers exceeds revenue by an average of 200%, i.e. the tariff recovers only about one third of marginal cost. Rural industrial and domestic consumers, who also are served by RE schemes, impose about 130% and 170% more marginal cost on the SEB than is recovered from them through the tariff. As noted in paragraph 6.20, all agricultural consumers regardless of their circumstances benefit from the generally subsidized tariffs. A case may be made on social grounds for a low electricity tariff to a small farmer; further, a low tariff in that case may be necessary to make power irrigation profitable, considering the relatively high costs of pumps, etc. It is much more difficult to make a case for subsidies to the non-marginal or well-to-do agriculturists. In fact, most of the benefits from the low tariff accrue to the later group since they have the means or credit to install pumps and a scale of operation to optimize irrigation efficiency A possible improvement in revenue recovery from agricultural consumers would be the introduction of a tariff with an increasing price per kwh for successive blocks of consumption, safeguarding the small farmer's profitability by a "lifeline" rate for the lowest consumption block. The Gujarat, Karnataka, and Rajasthan SEBs have introduced one or another version of the increasing block pricing concept; it is too early to observe reactions, but the net effect should be a higher revenue than under the one-block low-price system, and allow the SEBs to increase tariffs to approach costs for those with the ability to pay Increasing charges for initial connections is another revenue element that could reduce the financial burden on SEBs. Six SEBs do not charge for connecting pumps at all, and charges of most other SEBs are unlikely to cover the average cost of running a line to the pump and connecting it: the charge per pump ranges from Rs 90 (in Uttar Pradesh) to Rs 600 (in West Bengal) (US$10-70). For Madhya Pradesh, where specific data is available, consumers are charged Rs 300 toward the estimated connection cost of Rs In addition to considering average tariffs for the RE sector in establishing specific tariff structures in the future, consideration should be given to setting rates which will motivate consumers to use power economically. Realistic demand charges and differential peak and off-peak energy charges (or regulating use to off-peak periods) are worthy of review. REC will review agricultural tariffs and will attempt to evaluate these alternative solutions.

39 VII. TECHNICAL ANALYSIS Standards 7.01 REC has developed a realistic and practical set of guidelines for evaluating the technical feasibility of the various types of RE projects. It has also developed construction standards, material standards, and manuals, and is sponsoring research and development projects. The construction manual is clear, concise and has undoubtedly been a major contribution to lowering the cost of RE. Partially based on its research and development program, construction material categories for area electrification schemes have been narrowed down to two sizes of prestressed concrete poles, three sizes of high tension (HT) conductors, five sizes of low tension (LT) conductors and three transformer sizes. This minimizes the costs and problems associated with the purchase, storage and delivery of materials, and the selection is adequate to cover most situations Manuals developed and printed by REC cover the planning, design and maintenance of RE systems (see Annex 34) and include a wide range of subjects such as pumps, safety, and repair of transformers REC recognizes three major technical areas as especially important in its research and development program. They are the introduction of the single phase system, power factor control, and distribution system improvements. The pilot projects included in this proposed Credit will bolster R&D efforts on single phase distribution and power factor control. System Improvement (SI) schemes financed under the Credit support the program for distribution system improvements Presently, RE distribution in India is based on the three phase system, a system originally developed in Europe to serve high load density cities and towns. Rural areas, however, usually have low density load, which may result in cost and operating disadvantages when three phase systems are used. The present three phase system employs a high voltage (HT) primary system with 11,000 volts between the phases and 6,400 volts from phase to ground. HT lines begin at a distribution substation and are generally constructed along the major roads of an area. Along the HT distribution line, frequently at each village, three phase transformers reduce the voltage to 415 volts between phases and 240 volts from phase to ground which is then distributed over low tension (LT) lines to each consumer. In most villages, the load density is low and the irrigation pumps are far apart. Three phase transformers are relatively expensive and spaced out. This results in extremely long LT lines which are almost as costly to construct as three phase HT lines but have higher losses and more voltage drop than HT lines for transporting the same load. There is usually only one transformer per village and when it fails, all irrigation and industrial activities come to a halt Single phase distribution was developed originally to serve low density rural areas in North America. Rather than terminating at a village, single phase HT lines are run further, virtually to the consumers, and small,

40 relatively inexpensive, transformers are mounted on the poles to reduce voltage at points of use. Since distribution is at higher voltage, losses are much less; since there are a number of small transformers, the failure of one does not shut down a whole village There is considerable debate about the merits of single phase versus three phase distribution. Economic tradeoffs between the two depend on such factors as load density and the speed of load growth. REC recognizes that the introduction of single phase has the potential to reduce costs and has already initiated R&D programs in this direction. However, their funds are limited and the need for reducing costs is essential to the long run success of RE Generally, REC bases HT line design on forecast loads seven years after scheme completion which provides for some load growth and is reasonable. At present, all HT Mains are three phase, and when their capacity must be increased it is necessary to replace all the conductors. Unexpected load growth often results in conductors being replaced prematurely. A three phase system is actually composed of three "single phases". A single phase line could be constructed to initially serve a village when the load level is low. When and if load growth exceeds the capacity of the single phase line, a second phase, and later on, as needed, the third phase can be added. This provides an important cost saving option A preliminary analysis, comparing the initial investment of the three phase system as it was installed for eleven villages in Rajasthan with a single phase system which could have been installed, indicates that the villages could have been electrified for about 30% less initial investment using single phase rather than three phase. This apparent initial saving would have to be balanced against the three phase system's greater capacity, especially in distribution transformers, and no analysis was made of voltage, loading or losses. Nevertheless, a conservative estimate indicates a saving of 20%. An in-depth analysis of the benefits of single phase at the village level will be carried out as part of the pilot project. Power Factor Control 7.09 REC recognizes that improving power factor through HT capacitors has substantial benefits, and has authorized the installation of a few of them in Karnataka State to gain experience. Preliminary analysis indicates that HT capacitors could release up to 24% of rural system capacity which could then be used to serve additional customers or would reduce initial investments. A concentrated national effort of RE power factor control could release up to 2,500 MVA of generation and transmission capacity, or almost 10% of the all-india system. In addition, energy losses could be substantially reduced, and voltage at all levels would be improved Evaluation of benefits of power factor correction may be approximated as follows. There were 3.3 million pumps in service as of March 1978, expected to increase to 5.3 million by Assuming a pump average of 5.0 HP, then improving power factor from the normal 70% to 95% by using capacitors will require an investment of about Rs 1,672 million. Even if only one third

41 of the pumps are actually running at the time of system peak, the improvement in power factor would reduce the demand on the generation/transmission system by 2.47 million kva. Assuming, conservatively, that the average cost of generation and transmission capacity is Rs 2,500/kVA, the value of capacity saved is about Rs 6,000 million and much more than sufficient to justify the program to install HT capacitors. This reduction in needed capacity of about 2,500 MW represents almost one year's planned capacity increase in India as envisaged in the draft rolling plan Reduction of line losses is an additional benefit. Correction of power factor from 70% to 95% would reduce line losses by 45%. Assuming 5.3 million 5 HP pumps running 800 hours per year, and a financial power cost of Rs 0.14/kWh at 11 kv, improvement of power factor would result in savings of Rs 50 million per year. RE System Improvements 7.12 In general, SEBs implement RE schemes financed by REC in accordance with specified standards. Schemes financed from other sources frequently conform to REC standards to assure compatibility. The principal weakness in the long run is the neglect of timely reinforcement and system improvement as loads increase, which results in voltage problems (leading to consumers' equipment damage) and increasing energy losses. This is often due to lack of funds for improvement because of the SEBs' mandate to expand RE rapidly System improvements are already needed in many locations and schemes to solve these problems are eligible under the proposed Credit. A system improvement (SI) scheme recently submitted to REC by the Tamil Nadu SEB provides a good example of the problem. Nine HT feeders in an area serve 11,417 irrigation pumps (53,250 HP), 482 small industrial consumers (4,250 HP), as well as residential and commercial consumers. At peak demand, the voltage reduction for the last consumer on a feeder ranges from 5 to 54%, with an average of 22%. The annual energy loss averages about 30%, amounting to over 9 million kwh (equivalent to the annual energy requirement of more than 3,000 irrigation pumps) The real problem is not only the need for SI schemes but the time it takes to implement them. While system improvements are carried out, some consumers in the area will be faced with at least two irrigation seasons with voltage drops as high as 50%. Pump motors begin failing when voltage drops exceed 10-15%; there is little doubt that many failures will occur before system improvements are completed. Distribution transformers and probably substation equipment, as well as light industrial machinery, may also fail. Also, there will be a 30% energy loss which represents fuel and generating capacity It is probable that the SI schemes presently being approved by REC are only the tip of the iceberg of the problems to come. Adequate service cannot be provided if SEBs are required to connect new loads without also being provided funds to upgrade lines and equipment as demand grows. REC has responded to the anticipated crisis by encouraging SEBs to submit SI schemes, and by ensuring that new RE schemes which it finances contain

42 adequate system safeguards. The SEBs should improve system monitoring and minimize the time it takes from detection of a potential problem to its correction. Progress in this matter should be discussed with GOI and REC during negotiations. Funds to upgrade and modernize existing RE systems might well be a principal component of future IDA Credits for RE in India in the mid-1980's. REC is considering a significant expansion of SI activity in future years, and should be encouraged in this.

43 VIII. SUMMARY OF AGREEMENTS Condition of Effectiveness 8.01 Satisfactory conclusion of the Subsidiary Loan Agreement between GOI and REC is a condition of effectiveness of the proposed Credit (para 5.14). Other Agreements 8.02 During negotiations, agreement was reached on the following major points: (a) implementation of a program, satisfactory to the Association, for introduction of improved appraisal techniques for REC schemes (para. 3.15); (b) the proceeds of the proposed Credit may be relent either (para 3.44): (i) to those SEBs whose State Governments have agreed to provide them with an annual subsidy for RE losses either to their full extent or to the extent required to meet a rate of return of 9.5% on assets, whichever is lower; or (ii) to those SEBs which are achieving a rate of return of 9.5% on assets; (c) REC will prepare and implement a satisfactory training program for the staff of REC and the SEBs (para 3.25); (d) REC's internally generated funds in any fiscal year shall at least cover 1.2 times its debt service requirement during the same fiscal year (para. 6.08); (e) REC's administrative expenses and interest payments in any fiscal year shall not exceed 90% of its interest receipts (para. 6.08); and (f) GOI will ensure reliable and constant supply of raw materials including aluminum to domestic manufacturers of equipment procured under the proposed Credit (para. 3.31). Recommendation 8.03 The proposed project constitutes a suitable basis for an IDA Credit of US$175 million equivalent.

44 -38- ANNEX 1 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Villages Electrified and Pumps Energized by 3/31/78 Villages Electrified Pumps Electrified Total By REC REC share Total By REC REC share State (No.) (No.) (%) (No.) (No.) (%) Andhra Pradesh 14,652 3, ,546 31,573 9 Assam 2, , Bihar 18,695 4, ,982 11,624 8 Gujarat 8,121 1, ,028 16,995 Haryana 6, ,631 24, Himachal Pradesh7,753 2, , Jammu & Kashmir 4,014 1, Karnataka 15,160 1, ,362 17,261 7 Kerala 1, ,922 5, Madhya Pradesh 16,350 4, ,925 34, Maharashtra 21,480 4, ,706 43,463 9 Manipur Meghalaya Nagaland Orissa 14,161 5, ,427 2, Punjab 12,126 3, ,296 27, Rajasthan 10,009 4, ,961 33, Tamil Nadu 15, ,606 42,638 5 Tripura Uttar Pradesh 35,026 5, ,750 17,191 6 West Bengal 11,669 5, ,346 10, Other 1, , Total 217,389 50, ,308, , Source: REC, CEA

45 -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~NE 35-CHR ORGANIZATION CHART OF REC EApRil r ~ ~ ~ ~ ~~~~~~~~~~~~SE DANRORR CLRTJHIHS + 439e X > 31S X OE S ~~~~~~~~~~~~~~~~ X~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~CCOH HSAE OC OO > 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ZN S TCI. COR DNEHO SPHNAJ CCRCICT REACCOAL OPRICES RENICCAL OFFICESC REGIONAL DOPFIRES REOALOFIE PON HORE COICRTER ECHAOOiCOLURT WCR Wld.k

46

47 ANNEX 3 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT REC Staff Structure (11/6/78) Staff Class I Class II Class III Class IV Characteristics Total (Senior) (Middle Level) (Clerks) (Support) Total Staff Permxanent Employees Seconded Seconded (%) Source: REC

48

49 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT 1/ REC Staff Strength in Regional Offices as on 3/31/78 Position Calcutta Gauhati Lucknow Chandigarh Hyderabad Jaipur Jabalpur Patna Madras Bhubaneswar Bombay Chief Project Engineer Joint Director Deputy Project Engineer Asst. Project Engineer Deputy Director Assistant Director A.C.A.O.-/ Accounts Officer Section Officer/ Office Superintendent Personal Assistant n.a. n.a. n.a. Economic Analyst n.a. n.a. n.a. Accountant n.a. n.a. n.a. Assistant Accountant n.a. n.a. n.a. Support Staff n.a. n.a. n.a. l/ Staffing of regional offices in Madras and Bhubaneswar (opened 1978) and Bombay (to be opened 1979) is available only in preliminary form 2/ Assistant Chief Accounts Officer. n.a. = not available Source: REC

50 -42 - ANNEX 5 Page 1 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Types of Schemes Financed by REC (i) Area Schemes: Ordinary Advanced (OA) - Ordinary Backward (OB) - Electrification of groups of villages in economically advanced areas. Electrification of groups of villages in somewhat less advanced areas. Specially Underdeveloped (SU) - Electrification of groups of villages in economically backward areas. Rural Cooperative Societies (OC) - Electrification of groups of villages joined in a cooperative system Mini Growth Centers (MG) - Electrification of several villages around a market town. Mini Health Centers (MH) - Electrification of several villages around a town with health center. Minimum Needs Program (MNP)- Electrification of groups of villages out of a special GOI fund earmarked for specific backward areas. (ii) Special Consumer Category Schemes: Mini Industrial (MI) - Connection of village industry in a group of villages. Mini Industrial Estate (ME) - Connection of small and medium industry in a rural industrial estate. Mini Farm (MF) - Connection of irrigation pumps in a group of villages. Mini Farm - Lift Irrigation (MF-LI) - MF connection for lift irrigation only. Harijan Bastis (HB) - Electrification of settlementsof lowest social group. Special Project - Industry (SPI) - Connection of small and medium industry in rural industrial estates (will replace MI and ME).

51 ANNEX 5 Page 2 Special Project - Agriculture (SPA)- Connection of irrigation pumps in groups of villages, co-financed by other institutions (will replace MF and MF-LI). Special Project - Drinking Water (SPD) - Connection of pumps on wells supplying drinking water in rural areas. (iii) System Improvement and Reinforcement Schemes: Special Transmission (ST) - Transmission lines to serve scheme and non-scheme areas in specific districts. Special System Loan (SS) - System improvement by capacity increase and reinforcement of distribution system. Special Loans (SL) - Financing workshop and production facilities for SEBs. System Improvement (SI) - Replacing SS due to the creation of a separate fund by GOI. Low Tension Capacitors (LT) - Installation of capacitors in a defined scheme area. (iv) Other: Single Wire Earth Return (MPS) - Experimental schemes using SWER technology Potential Scheme Area Advance (AL-PPA)- Advance loan for starting electrification of a scheme area with long gestation period, ultimately converted to area schemes. The terms of the loans associated with the above scheme categories, and the viability criteria applied by REC until now are set out in Annex 6).

52 ANNEX 6 Page 1 INDIA 79OOND RURAL ELECTRIFICATION CORPORATION PROJECT Viability Criteria for and Terms and Conditions Applicable to REC Loans Loan (defined Interest Rates (% per Year) Viability Criteria in S Category Year Year Year Year Year Year Grace Deriod Year of Return on Investment (%) Annex 1) (Years) Project Life Net 1/ 3/ Gross I/ OA 7-1/ /2 9-1/2 5 5 (-)2 or 20 or 7 BE 7-1/ /2 OB 7 7-1/ /2 9-1/2 5 5 (-)3-1/2 or 15 or 10 BE 7 7-1/ /2 OC 4-1/4 5-1/4 6-1/4 7-1/4 8-1/4 9-1/4 5 ST (backward) BE Or serve as basis for NE schemes costing not (advanced) BE less than the cost of NT schemes in MNP areas and not less than twice the cost of ST schemes in other than MNP areas before the end of the loan period in both cases. SU 6-1/4 6-1/2 6.3/4 7-1/2 8-1/2 9-1/2 5 7 (-)6 or 10 or 6-1/4 6-1/2 6_3/4 7-1/2 7-1/2 15 BE /2 Ss /2 _ MG,MH & MI For transmission portion same as applicable to ST category (except in MNP areas in States having provision for transmission which will be governed by MNP terms and conditions). For area portion same as applicable to OA, OB, SU, MNP category as the case may be. ME MF MF (LI) M (Ps) 4-1/4 6-1/4 2 - _ AL (PPA) 7-3/4 (2 years or less) 2 2 _ 10 AL (APP) 11 (1 years or less) MNP (TBD) /2 6_1/2 7-1/4 7-1/4 5 7 (-)6 or BE /2 MNP (O) /2 6-1/2 7-1/4 7-1/4 5 5 (-)6 or BE /2 SL RB SI 8-1/4 8-1/4 8_1/ /2 LT SPA SPI 1 9-1/4 9-1/ /4 9-1/4 9-1/ SPD Net return measured as one year's revenue minus cost of energy, as % of investment. Gross return is one year's revenue as % of investment. For SPD projects, investment excludes infrastructure. MNP (Tribal, Hill and Desert Areas) end MNP (Ordinary). BE - breakeven Source: REC

53 I ANNEx 6 Page 2 NOTES: 1. In respect of the second and subsequent 'OA' schemes from same district in AA States, direct loan asistance from REC is restricted to 60% of the project cost. 2. The 'SS' schemes aimed at providing adequate power supply to the Rural Electric Co-operative projects at 11 kv bus at proper voltage, are not subjected to the criteria of viability. 3. Under ST category, direct loan assistance from REC is restricted to 80% of the project cost except in case of MNP areas, Mini Project areas and areas of operation of Rural Electric Co-operative Societies. 4. Under SS category, direct loan assistance from REC is restricted to 80% of the project cost except in case of 'AA' States, and except for the schemes meant either exclusively or substantially for Rural Electric Co-operative Project areas. 5. A rebate of 1/4% is allowed by REC on interest at all stages for prompt payment except in case of AL (APP) and SPA (1&2) loans. 6. In MNP (tribal, hill and desert) and SU areas the Investment on 11 kv (main and spur) lines is excluded from capital base of the project for the purpose of computations of net return. 7. In case of OA/OB/SU/MNP areas where the alternative criterion the basis of gross return is adopted for examining the viability at the first stage, the second and subsequent stages of viability are examined on the basis of net return ciiteria. 8. A penal rate of compound interest of 2S% above the stipulated rate of interest is levied on overdue installments of interest or principal or both. 9. With the introduction of SI (System Improvement) and LT (LT Capacitors) categories of loan, the SS Category of Loan has been withdrawn w.e.f. 8/5/ With the introduction of SPA (1) and SPA (2) categories of loan, MF and MF (LI) categories have been withdrawn w.e.f. 5/16/ With the introduction of SPI (1) and SPI (2) categories, ME category has been withdrawn w.e.f. 5/16/78.

54 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Installments of REC Loan Disbursement (in %) Installments Initial 2nd 3rd 4th 5th Normal Programme (OA, OB, SU- area schemes) M.N.P SI/ST/Mini Schemes an Note: The initial installment is released in two stages i.e. 60% on execution of documents and 40% on furnishing requisite certificates. Source: REC

55 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Development of REC Lending Activity in Major Categories of Loans (Loan Amount in Re Million) Particulars TOTAL No. Loan No. Loan No. Loan No. l oan No. Loan No. Loan No. Loan No. Loan No. LoanNo Los Arprovals Ordinary,: Advanced Areas (OA) 6 29: ,872.9 Ordinary : Backward Areas (GB) ka ,206.5 Ordinary ics-operatives (OC) Special Underdeveloped Areas (Nill Tribal & Desert etc.)(sut) i Mini Parm Production (NP) o Mini Parts Lift Irrigation (MF)- (-LI) Mini :Growth Centre (MG) Mini H ealth Centre (MN) i4 7.3 * Mini : Industries (MI) a Mini :Industrial Estates (ME) Mini :Pilot Single Wire Earth Neturn (MPS) Advance Lsan: Potential Project Area (AL:PPA) U Special :Transmsissison STSWI Special System Tmprovement (Ss &Si) L.T. capacitors (IT) Special Prsject: Agriculture (SPA) Minimum Needs Programme (MNIP) io6 46o ,859.3 Special Lsan (SL) Special Development Reserve (SOB) Advance Loan: Annual Plan Pu-rchase (AL:APP) Narijan Basti (HB) Loan log Source: EEC

56 ANNEX 9 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Actual REC Scheme Connections as % of Forecasts All REC schemes to REC schemes approved REC schemes approved March 1978 befotd March 1974 after March 1974 All consumer Pumps All consumer Pumps All consumer Pumps State connections only connections only connections only Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Jammu & Kashmir Karnataka e Kerala Madhya Pradesh Maharashtra Manipur n.a n.a n.a n.a n.a n.a Meghalaya Nagaland 89.1 n.a n.a n.a 89.1 n.a Orissa Punjab Rajasthan Tamil Nadu Tripura n.a n.a Uttar Pradesh West Bengal Total n.a. Not Applicable Source: REC

57 ANNEX 10 Ca Co ' t - 0- t UN 0 C) 0 0' ' O04ONONO C..C * ON 0-a 0 0 C H 00- H 0 '0 ON -t CCJ C' C ONHOONO.-. 0-a ON CC Cap fl CC C0ONI ON ON 0CC CCC 044 H 04 ON ON 0- ao 0-0-.N0040 CC 0 0 ON I 0- 'C 'C ON 0. 0 g C C C 0 ON 0 ON 6 04 ON ON 1C ON H 00 0 ON ON ON ON 04 ON H 'C H ON 8' 'C H 0 0C 0-0 CCOI ON O C.CI ON 'C 'C 'C 0 0 * 0 'C ON 0 'C 0 0- H ONONONO 0-0-ONOaO0- ON 0 ON 0 000'C ON 0-a 0-ON0H000000a 0404H8'8'8' 0-0- ON 04 CaN 0 8 ON 0 'C 0 0 CNO'CON ON 'C C ON 0-0 COO O t8 0) 00-C CN0-ON0-04O ON ONOONONO ON H00- ON ON 'CON 'C 'C 'C0-000CN *' ON 04 ON ON ON ON 'CON'CONON C0aa ONON0ONHON ON 0 0 ON H ON ON ON C ' 0 C C' 0-8' 0 H ON 0 H ON V 8' 8 0 a H H H H ON ON 0- ON ON ON 0 0 OHOONO ON H HOONHONO H ON ONONHHONONON H ON ONCNONO0-040ON000 0 C 'Co N. 0- ON a a ON 0 a a 0 a a 0. ON a OC' 0- H 8' C.Ca H 0- ON 0 'C ONONO ON 0 04 ON ON 0 ON 0- ON CO 0-i ONOOONONONO0404ONO 04 ONON ON 10- O H ON ON ON ON 0 C0-* ON 0 ON I ON C 0 ON 04 0 ONONO Car 0 0 ON ON ON H H 0 H H ON ON S< a. C CI 0 0 ON 0 ON ON ON ON ON a a ON 0 ON 0- ON 04 ON ON CC a H C. 0 0 a, C CC 00-C' 0400 ONONON0-0400ON OOONH I Cr 0 ON ON 0 ON a ONCa 04 C-, C0-CI ON CC. H OC I OOON ,0'COON'C O C 0 00 C 0 C C 0 C. 8 C a C a8" 0 NC OC.C8 04C0CCC0aa C C C 0 0 C C C 0 0 C C 0 0 CO C 8 COO 0C0CCC CCC. C CCOC C) C

58 ANNEX 11 INDIA RURAL ELECTRIFICATION CORPORATION PROJECT II Economic Analysis Approach 1. The project has been defined as REC expenditure for eligible schemes in eligible States during 1980/81 and 1981/82. Considering this, the optimal method of economic analysis of the project is the sample analysis of its component schemes. The steps employed in the analysis are: (a) Cost/benefit analysis of typical schemes representing the major categories of REC's lending portfolio, based on data supplied by REC for a wide selection of schemes; (b) Decision on eligible scheme categories for the second Credit, based on the results of (a); and (c) Sample analysis of several actual schemes in the REC portfolio, covering the eligible categories. In addition, two schemes in Madhya Pradesh, approved by REC during the early 1970's, were evaluated in depth in order to gain insights about problems encountered in implementation. Methodology 2. The method selected for economic analysis is a cost savings approach that attempts to quantify net benefits for users of the supply system. In this approach, electricity is considered as one alternative source of energy and compared to other energy sources yielding the same results, such as diesel motors for industry, diesel pumps for irrigation, and kerosene for domestic lighting. 3. It is reasonable to assume that by introducing electricity in a village, more area will be irrigated, and agricultural output will increase. However, for proper analysis, incremental agricultural output must logically be attributed only to irrigation, not to electricity supply, which is only one potential source of energy for irrigation. 4. The cost saving approach implies that new electricity consumers in rural areas are either switching from alternative energy to electricity, or if electricity would not be supplied, many would obtain alternative energy sources. It is possible that, would electricity have not been provided in

59 ANNEX 11 the area, some rural electricity consumers who have obtained electric connections might not have purchased an alternative power source. In such cases, benefits might be greater or less than assumed. Available sample evidence of consumer behavior indicates, however, that many new electricity consumers, be:ng those with a sufficient asset base to consider even solutions more expensive than electricity, would have turned to alternative energy sources in the absence of electricity. Economic Cost of Alternative Energy Sources for Rural Use 5. Renewable energy sources (solar, wind, biomass) were not incorporated in the cost comparison because of excessive cost, unsuitability, or early stage of development. At present, none of these technologies can be treated as a realistic, reliable, large-scale alternative to electrification or dieselization for India. Irrigation Pumping 6. The following parameters were taken to be representative for India as a whole: (a) the average electric irrigation pump has a rating of 5 horsepower (HP), (3.75 kw), and is used to lift water from an open, relatively shallow well. For the same output of water, a diesel engine with a higher HP rating of 6.5 is necessary; (b) the life of an electric pump is 15 years, that of a diesel pump 10 years; (c) the average number of operating hours per year is about 800 per pump; (d) average diesel fuel consumption in a pump is 0.31 liters per HP/hour, lubricant consumption is 0.03 liters per HP/hour; and (e) the electric pump can operate unattended. 7. The following average cost assumptions were used (1978 prices):

60 ANNEX 11 Electric Diesel (3.75 kw) (6.5 HP) Investment cost of the pump and related expenditure for installation (Rs per pump) 4,000 6,800 Operating and maintenance cost of the pump (Rs per pump per year) - labor for operation - 1,000 - repairs and maintenance 400 1,400 SEB investment cost in transmission and distribution facilities (Rs per pump) - higher density of pumps 7, low density of pumps 15, close to existing lines 4,200 - SEB operating and maintenance cost for transmission and distribution facilities (Rs per pump per year) - high density low density close to lines Fuel cost (Rs per pump per year at Rs 0.90/1 diesel fuel CIF) - 1,400 Lubricant cost (Rs per pump per year at Rs 2.80/1 lubricant CIF) Marginal cost of electricity supply to the pump (Rs per pump per year) /a - cost at rural substation including subsequent distribution losses = Rs 0.68/kWh 2,040 - cost at pump = Rs 0.77/kWh 2,310 /a The representative assumption is that the bulk of consumption supplied by the rural substation is irrigation pumping at the system peak time. All available marginal cost studies (with the exception of Punjab) make this assumption. A factor of 0.88, derived from Andhra Pradesh experience, is applied to the average marginal cost at the pump to arrive at substationlevel marginal cost plus distribution losses (i.e. excluding marginal cost of distribution system investment and operating). Sources: SEBs' marginal cost studies, and Andhra Pradesh power sector review mission.

61 ANNEX Applying the assumptions and costs, and using the case of a large new scheme consisting only of pump connections at some distance from existing power lines, the following cost comparison results from an approach converting all public and private identifiable costs in the project area to annual figures and using the cost of electricity at the substation level: Rupees per year per pump Electric Diesel Annual charge for private investment per pump 525 1,107 Annual charge for SEB investment per pump Private O&M per pump per year 400 2,400 SEB O&M per pump per year (for distribution facilities) Marginal cost of electricity (Rs 0.68/kWh) or fuel cost per pump per year 2,040 1,840 Total cost per year of operation 3,928 5,347 Annual cost difference in favor of electric pump 1, On average, the total cost to the economy of operating a diesel pump is higher than that of an electric pump yielding the same water output. An additional benefit of a diesel pump is its independence of a fixed location, enabling farmers owning scattered pieces of land with individual wells to move one pump around. On the other hand, the greater reliability and much lower breakdown frequency of an electric pump constitute additional benefits in favor of electrification. Small Industry 10. The following parameters are assumed to be representative for small village industries such as a directly connected diesel engine for rice and flour milling: (a) the average rating of the power source is 10 HP (both for electric and diesel engines), equivalent to 7.5 kw; (b) the average life of diesel power sources is 10 years, of electric sources 15 years; (c) the average number of operating hours per unit is 800 hours per year, implying 6,000 kwh per year; (d) fuel consumption per HP/hour is the same as the case of pumps; marginal cost of providing electricity to the rural area is applicable at the same rate as in the pump case

62 ANNEX 11 reflecting the dominant irrigation consumption pattern at the substation level; and (e) the major distribution infrastructure investment below substation level has been already attributed to the electrification of the area for purposes of pump connections. Rupees per year per connection Electric Diesel Annual charge for private investment cost of power source and related installation expenditure 790 1,630 Private O&M per unit per year 800 1,500 Fuel and lubricant cost - 2,830 Marginal cost of electricity supply at substation level 4,100-5,690 5,960 Difference in favor of electricity Based on these cost averages, the annuitized costs of both power sources are approximately equal, amounting to about Rs 6,000 each (particularly if a small share of electricity infrastructure cost is attributed to the electric alternative). Domestic Lighting 12. The obvious alternative energy source to electric lighting in village houses is kerosene. The CEA average domestic consumption assumption is 360 kwh/year. A lower estimate of 180 kwh/year/house is used in this calculation reflecting a perhaps more realistic assumption of 4 hours lighting daily with 125 Watts in rural households. 13. The available information results in the following comparison, again assuming that the bulk of infrastructure cost below substation level is attributed to the pump connection scheme. Rupees per house per year Electric Kerosene Initial private investment annualized at 10% 16 5 Maintenance Marginal cost of electricity at Rs 0.68/kWh Kerosene cost at /hour/lamp, 4 hours/day Total annual cost Cost difference in favor of electricity 77

63 ANNEX There is a cost advantage for electric lighting for the same amount of lighting hours per year. (The quality of light provided by kerosene, however, might be inferior to that of a high-wattage bulb). Street Lighting 15. The assumptions for a street light are 6 hours of utilization of a 40W light per day, amounting to 2,200 hours or 88 kwh/year. Rupees per light per year Electric Kerosene Annual charge for investment cost 33 9 Maintenance Marginal cost of electricity, or fuel cost Total Cost differential in favor of electricity 145 Generation Isolated from the Grid 16. Sample data provided by REC for a West Bengal case are the basis for the calculation of the average cost per kwh generated by an isolated diesel generator supplying a small rural area with electricity. The following parameters are used in the example: Capacity : 120 kw Fuel consumption : 0.4 1/kWh Fuel cost : Rs 0.90/1 Lubricant consumption : 0.01 I/kWh Lubricant cost : Rs 2.80/1 Annual generation : 101,400 kwh (i.e. load factor less than 10%) Life : 20 years 17. Based on the parameters above, the following annuitized cost of operating the diesel generator can be developed: Annual charge for investment cost 49,558 Maintenance 12,660 Other recurrent costs 2,100 Fuel cost (for 101,400 kwh) 36,504 Lubricant cost 2,840 Total annual cost 103,662 Cost per kwh at generation 1.02 Rs

64 ANNEX The generating cost of Rs 1.02/kWh would have to compete with a marginal grid cost of about Rs 0.70/kWh in West Bengal. Although the cost per kwh falls rapidly with increased utilization of the diesel generating unit (e.g. to Rs 0.70 at a load factor of about 20%, and to Rs 0.60 at about 30%), the cost per kwh of the grid connection would also decrease with increased capacity utilization. Higher load factors improve the unit cost of both alternatives. 19. Economic Analysis of Schemes: List of Assumptions (a) Typical Schemes (all-india average) OA and OB, MNP and SU, MG and MH were aggregated into OA/OB, MG/MH and MNP/SU schemes. SPA, SPI, and SI schemes represent actual REC categories. The assumptions concentrate the bulk of SEB investment in the first years. (i) Capital Cost: Initial Investment. Investment per connection by SEB: OA-OB Rs 1,700 MNP-SU Rs 2,800 SPA Rs 5,205 (Other scheme categories derived from individual appraisal reports.) (ii) Additional minor investment by SEB for additional connections beyond the first five years: Rs per connection; (iii) Operating and maintenance costs incurred by SEB: 3% of cumulative SEB investment; (iv) Marginal cost of electricity supply at substation including distribution losses: Rs 0.68/kWh; (v) Energy consumption per typical connection as in paras 6-15 of this Annex; (vi) Average number of connections per scheme: 2,000 (OA/OB, MNP/SU, and SPA), and 700 (MG/MH); (vii) Share of consumer category in total number of connections:

65 ANNEX 11 Consumer category OA-OB MNP-SU SPA MG/MH Agricultural 15% 16% 100% 5% Industrial 3% 2% - 3% Domestic 73% 60% - 82% Street Light 9% 22% - 10% Total 100% 100% 100% 100% (viii) Phasing of investment expenditure and connections made: (OA/OB, MNP/SU, SPA) 1st year 2nd year 3rd year 4th year 5th year 15% 20% 25% 20% 20% (ix) From the fifth year onwards, no demand growth without further investment, or rapidly rising line losses. If further growth is possible due to continuing SEB investment, demand grows at 7.5% per year; (x) Private cost per connection as in paras 6-15 of this Annex; (xi) Cost savings for system improvement schemes are calculated at 11 kv level comparing the "with" and "without" project case; (xii) Cost savings for SPI schemes arise from the use of electricity rather than having captive diesel generators, assuming that most industrial consumption is taken at 11 kv; (b) Sample Schemes Actual costs and actual achievements or specific assumptions are derived from REC monitoring and appraisal reports. Where actual achievements are below targets, consumption growth forecasts have been reduced accordingly. 20. Shadow Pricing (a) SEB Investment: border prices for major items such as conductors and transformers were identified. Other cost components were revalued in terms of border prices by using a standard conversion factor of Unskilled labor was valued at 75% of the market wage and converted to border prices. The weighted conversion factor for this cost item is 0.96, considering that domestic prices for aluminum conductor are lower than CIF prices;

66 ANNEX 11 (b) SEB Operating and Maintenance Cost: the assumption of 80% labor and 20% materials content (valued at the shadow wage rate and using standard conversion factor) yields a weighted conversion factor of 0.70; (c) Marginal Cost of Electricity: assuming that the cost elements entering into total marginal cost are adequately represented by the basket of goods underlying the calculation of the standard conversion factor, a factor of 0.87 was used; and (d) Private Cost: private investment and the cost of diesel fuel and lubricant were valued at border prices, the remaining cost items were converted to border prices by using the standard conversion factor and the shadow/market wage ratio for rural unskilled labor (0.5). The weighted conversion factor is Economic Rate of Return: Results (A) Typical REC Schemes: Costs and benefits are based on all-india average or on representative appraisal reports. The rates of return are: (i) Constant 1978 market prices; demand growth and SEB investment until year 5 (except SI): OA-OB = 18% SPA = 55% MNP-SU 10% MH-MG = 6% SI - 41% SPI = above 100% (ii) Constant 1978 shadow prices; demand growth and SEB investment until year 5 (except SI): OA-OB = 18% SPA = 46% MNP-SU = 10% MH-MG = 6% SI = 38% SPI = above 100% (iii) Sensitivity to demand growth assumptions; demand and SEB investment growth until year 15; constant 1978 market prices: OA-OB = 24% SPA = 55% MNP-SU = 15% MH-MG = 10% (iv) Increasing the marginal cost of energy by 45% SPI = 83%

67 ANNEX 11 (v) Decrease in benefit by 25% due to either less kwh savings or low marginal cost: SI = 33% (vi) Sensitivity to slower initial phasing of connections; constant 1978 market prices; demand growth and SEB investment until year 5: Based on actual target achievement data, it is assumed that the connections in the area schemes are made more slowly, while SEB investment goes on as planned year st 2nd 3rd 4th 5th Total OA-OB: 5% 10% 30% 25% 30% 100% MNP-SU: 1.5% 5% 20% 30% 43.5% 100% The results are: (B) Sample Schemes OA-OB = 16% MNP-SU = 9% (i) Schemes visited by the appraisal mission. For purposes of detailed evaluation, the mission visited two schemes in Madhya Pradesh which have been under implementation for four and six years. Early in 1972, REC approved a loan for the electrification of the Patan Scheme of Jabalpur district in Madhya Pradesh. Classified in the OA category, the scheme was to cover 42 villages and to bring 7,000 additional acres under cultivation after five years. The total forecast connected load was estimated at KW. During 1974, REC granted a loan to MPSEB for the electrification of Ichawar Scheme of Bhopal district. Approved as an OB scheme, the loan was to cover 134 villages with a total connected load of KW. About 4,000 additional acres were to come under cultivation on completion of the scheme. (a) On the basis of actual cost and actual achievements, the economic rates of return are as follows: Market prices; demand growth and SEB investment until year 5: OA = 14% OB = 15%

68 ANNEX 11 Shadow prices; demand growth and SEB investment until year 5: OA = 13% OB = 15% Assuming demand growth until year 15; with further necessary SEB investment: OA = 8% OB = 12% (b) In 1972, REC appraised and approved the OA scheme with the following number of target connections: 700 agricultural, 50 industrial, 1,925 domestic and 220 street light, for a total capital cost of Rs 3,247,000. These targets were to be met by the 5th year. Against these, the achievements at end of 1978 amounted only to 118 agricultural, 36 industrial, 356 domestic, and zero street light connections, that is less than 20% achievements of connection targets versus 63% of planned disbursement (Rs 2,053,000). This rather disappointing performance has been attributed by REC and MPSEB to: - The failure of commercial banks and the Land Development Bank to extend sufficient credit to farmers in the scheme area; - The general shortage of aluminum supply which delayed implementation of RE schemes throughout the State; - The lack of coordination among various agencies involved in rural development in the area; - Groundwater potential appeared to be significantly less than it was estimated at the time of REC appraisal; - REC appraisal underestimated the investment cost which did not include a price contingency. (c) Only slightly better results have been obtained for the OB scheme. Approved by REC in 1974 for Rs 5,176,000 to cover the electrification of 1,200 agricultural connections, 60 industrial 2,000 domestic and 1,000 street lights, the actual achievements at the end of 1978 were 509 agricultural, 379 domestic, 22 industrial, and 538 street lights for a total disbursement of Rs 3,978,000, that is 34% achievement of connections for 76.6% of planned disbursement. Low achievement of targets is a result of optimistic demand forecasting in the REC appraisal report.

69 ANNEX 11 (d) Using the original REC appraisal report estimates for demand growth and costs, the economic rates of return would have been 47% for the OA scheme, and 39% for the OB scheme. (ii) Other Sample Schemes Economic rates of return are calculated for two OA, two OB, three SPA, one SI and one SPI scheme. These categories have been selected for IDA finance on the basis of the typical results in Section (A). The results are given below, in %: Market Prices; demand growth and SEB investment until year 5 (except SI): OAl = 73 OBI = 39 SI = 40 OA2 = 45 OB2 = 39 SPI = above 100 SPAl = 49 SPA2 = 43 SPA3 = 26 Shadow Prices; demand growth and SEB investment until year 5 (except SI): OAl = 66 OBI = 36 SI = 38 OA2 = 42 OB2 = 29 SPI = above 100 SPAl = 45 SPA2 = 40 SPA3 = 25 Assuming demand growth until year 15; with further SEB investment: QAl = 76 OB1 = 39 na2 = 47 OB2 = 38 SPAI = 55 SPA2 = 49 SPA3 = 32 Increasing the marginal cost of energy by 45%: SPI = 83 Decrease in benefit by 25%: due to either less kwh savings or low marginal cost. SI = 33

70 -62- ANNEX 12 Page 1 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Estimated Project Cost Item Rs million US$ million A. Equipment I. ICB suitable: Conductors Transformers Insulators, meters & switchgear Single-phase equipment and capacitors for pilot schemes II. LCB suitable: Cross arms GI wire Air break switches Insulated wire LT cut outs Lightning arresters III. Other IV. Sub-total 2, B. Civil Works C. Overheads, training, technical assistance D. Total (1978 prices) 2, E. Contingencies F. Total (current prices) 3, Source: REC

71 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Statewise Requirements of Materials Procured under the Project Distri- Insula- Power bution tors Cost of Cost of Condue- TtEun- Trans- Switch- and ICB LCB Total cost of tors formers formers gear Hardware Meters Naterials Materials materials (Km) (No.) (No.) (No.) (No.) (No.) (Rs mn.) (Rs mn.) (Rs mn s WZma) Andhra Pradesh 39, , ,200 61, Assam 8, ,000 2, Bihar 47, , ,049,850 74, Gujarat 32,140-1, ,850 47, Karnataka 21,625-1, ,250 45, / Kerala 9, ,000 32, Maharashtra 47,350-3,180-2,244,000 80, Madhya Pradesh 71,435-5,965-1,625,000 99, Orissa 11,125-2, ,885 12, Punjab 26, , ,900 43, Rajasthan 38, ,740-1,129,350 17, Tainil Nadu 16, , ,000 16, West Bengal 43,500-4,900-2,081,100 54, Uttar Pradesh 53,480-9,156-1,683,526 26, Total Quantity (units) 473, , ,430, ,086 n.a. n.a. n.a. a.a. Total Cost 1978 prices , , (Rs million) Price Contingency 6% p.a..i (Rs million) Total Cost (Rs million) , , Total Cost (US$ million) a, 1/ Including cost of special equipment for pilot projects. n.a. = not applicable Source: REC

72 ANNEX 12 Page 3 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Quantities of LCB Materials to be Procured under the Project Quantity 1. Cross arms (No.) (a) 'V' shape with single top support 75,000 (b) 4-pin cross arms 100,000 (c) 2-pin cross arms 100, Lightning Arresters (units) 52,000 sets 156, Insulated wires m) (a) Pumps 500,000 (b) Domestic connections (50 m. per conn.) 150,000 and Street lights (c) Transformers - different sizes 5, L.T. Cut-outs (No.) (a) 15 amps. for - Domestic installation 600,000 - Pumps 20,000, G.I. Wire (MT) 5, Air break switches (Both for Transformers 62,000 and sectionalizing (No.)) Source: REC

73 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Schemes sanctioned by REC between 4/1/77 and 3/2/79 S1. State Total No. OA OB SPA SPI SI No. of Costs (Rs No. (Rs an.) No. (Rs mun No. (Rs nn4 No. (Rs imn.) No. (Rs mn.) Schemes Million) 1. Andhra Pradesh Assam Bihar Gujarat Karnataka Kerala Maharashtra M.P Orissa Punjab Rajasthan Tamil Nadu U.P West Bengal TOTAL Source: REC x H

74 -66 - ANNEX 13 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Share of ICB suitable Materials in Total Typical Scheme Cost (%) OA/OB SPA SPI SI Conductors Transformers Insulators 3 n.a. 5 2 Meters 3 n.a Switchgear - n.a Total n.a. - not applicable because beyond REC financing share of SPA schemes. Source: REC

75 -67 - ANNEX 14 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Cost Estimates for Pilot Schemes Rs'OOO 1. Power Factor Control Scheme (Karnataka) Capacitors (17,925 RKVA for 38 feeders at 8 substations) 2,151 Switching equipment 1,840 Lightning arresters, airbreak switches, measuring equipment 188 Training for engineers 200 TOTAL 4, Single Phase Scheme (Rajasthan) Construction of 33/11 kv substation (1.6 MVA), 14 Km new 33 kv line, 20.5 Km replacement of 33 kv line 1, Km HT line, 93 Km LT line, 212 distribution KVA 2, Single phase motors/pumps 1,985 Service connections 211 Training for engineers 200 TOTAL 6, Grand Total 10,995

76 ANNEX 15 Page 1 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Procurement and Implementation Timetable 1. ICB Procurement: (a) General Expected Completion Date Issue of bid invitations May 15, 1979 Opening of bids September 30, 1979 SEBs' contract award recommendation to REC November 30, 1979 REC 's recommendations to IDA December 15, 1979 Clearance by IDA January 31, 1980 Contract awards by SEBs February 15, 1980 Final signing of contracts March 15, 1980 Commencement of materials delivery June 1, 1980 Completion of materials delivery for total project January 31, 1982 (b) Pilot Schemes Preparation of specifications and issue of bid invitations August 31, 1979 Preparation of detailed scheme plans November 30, 1979 Opening of bids February 28, 1980 Contract awards by SEBs May 31, 1980 Completion of materials delivery December 31, LCB Procurement Preparation of Standard bidding document by REC June 30, 1979 Concurrence of IDA to bid document August 15, 1979 Issue of bid invitations August 30, 1979 Opening of bids November 30, 1979 SEBs' contract award recommendation to REC February 28, 1980 REC's recommendation to IDA where Contract value is more than $100,000 March 15, 1980 (a) Clearance of contract award by IDA April 30, 1980 (b) Clearance of contract award by REC where) contract is less than $100,000 ) March 31, 1980

77 ANNEX 15 Page 2 Expected Completion Date Finalization of contract May 15, 1980 Commencement of material delivery July 1, 1980 Completion of material delivery for total project January 31, Implementation Completion of pilot schemes December 31, 1981 Evaluation of pilot schemes December 31, 1982 Project completion date June 30, 1983 Project closing date March 31, Introduction of Discounted Cash Flow (DCF) and Economic Rate of Return Techniques in REC Appraisal of Schemes First workshop for regional REC staff and selected SEB staff (in connection with an REC monitoring seminar) July 1979 Discussions with senior SEB staff August 1979 Instruction of REC staff and key SEB staff concerned December 1979 Instruction of most of concerned SEB staff April 1980 One third of eligible schemes being appraised and approved by REC to include new methods of viability calculation April 1980 Two thirds of eligible schemes to include new methods of viability calculation April 1981 All eligible schemes to include new methods of viability calculation April 1982 Instruction of SEB staff within the framework of RE courses, and extension of method to other REC schemes Continuous

78 -70 - ANNEX 16 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Estimated Disbursement Schedule by Calendar Quarter US$ million Calendar Years Quarterly Cumulative 1980 I Q II Q III Q 1 1 IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q II Q III Q IV Q I Q 1 175

79 INDIA SEC01.D RURAL ELECTRIFICATION CORP0RATI0N PROJECT Rural Electrification Corporation Limited Summarized Income Statements for Fro 1974 thrvugh 1978 (Actual) and FYs 1979 through 1983 (Forecast) (in millions of rupees except where otherwise stated) A C T U A L _----F FO O R E C A S T Year to March Revenue Interest on Loans Disbursed Interest on Investments (Gross) Total Revenue ,000.6 Expenses Administration Interest on Borrowings Total Expenses Operating Income (before tax) Less Income Tax Provision for Year _ 66.o Operating Income (after tax) h Less: Proposed Dividend Transfer to Special Reserve L Total Retained Earnings Ratios Percentage of Revenue 1. Interest on Borrowings Administration Total I Income Tax Operating Income (after tax) Percentage of Average Total Assets 6. Total Revenue Interest on Borrowings Gross Spread Administration Income Tax Proposed Dividend Earnings for Year Return on Average Equity i Return on Average Total Capitalization SOURCE: RHE, November 1978

80 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Rural ELectrification Corporation Limited Summarized Sources and Applications of Funds Statements for FYs 1974 through 1978 (Actual) and FYs 1979 through-1983 (Foreoatj (in millions of rupees) --- A C T U A L F O R E C A S T Year to March Sources Internal Cash Generation Operating Income (after interest) ( Depreciation O.b 0.6 Total 5r37c 63.l Th Less Deductions: Income Tax Provision Proposed Dividends Total Net Cash Generation B4.B Repayment of Loans sanctioned by REC Capital Raised USAID _ GOI Equity Contributions GOI Loans , , , , ,824.7 ' GOI Loans for Harijan Basti 1/ Program Market Loans Total , , , , ,464D. S 2, Working Capital (Increase) Decrease (86.9) (3.1) (17.5) (27.4) (25.9) (34.2) Sale of Government Securities Applications Total Sources , , , _51.4 Disbursement of Loans Sanctioned , , , , , ,000.2 Repayment of GO1 Loans Investment in Government Securities Capital Expenditure Deferred Expenditure _ _ - - -_ Total Applications _ , , , / Harijan Basti' means the underprivilaged section of the population who live in the outskirts of the villages. The loans are mainly for minimal street lighting. SOURCE: REC, November 1978

81 INDIA SIOND IUR4L SLBETRIFICATIOI COOMPOhATION PKiJiWT Rural Electrification Corooration Limited Summarized Balance Sheets for FTs 1974 through 1978 (Actual) and FTs 1979 through 1983 (Forecast) (in millions of rupees) A C T U A L FO O R E C A S T As at March Assets Fixed Assets Less: Depreciation Net Fixed Assets Investments in Government Securities Loans Disbursed and Outstanding 1, , , , , , , , , ,563.5 Deferred Expenditure Current Assets Total Assets 1, , , , Capital and Liabilities Current Liabilities Interest Accrued Sundry Creditors Provision for Taxation Proposed Dividend Total Borrowings GOI Loans , , , , , , , , Market Loans , , Total , , , , , , , ,095.5 Equity Share Capital , ,200.0 Capital Reserve 1, , , , , , , , , ,050.0 Special Fbserve Retained Earnings Total 1, ,624.9 T75 T79TT TH96 r 2 r, M7 7I57. 2,767.0 Total Capital and Liabilities 1, , ,799, Debt/Equity Ratio 20/80 35/65 47/53 56/44 65/35 69/31 74/26 78/22 81/19 82/18 REC Commitment to disburse Loans Sanctioned to Date 1, , , , , , , , , ,529.6 SOURCE: REC November 1978 I!

82 ANNEX 20 Page 1 INDIA RURAL ELECTRIFICATION CORPORATION PROJECT II Assumptions Used in Financial Projections 1. The financial statements in this report comprise REC's audited financial operations for the period FY1974 through FY1878, and its projected operations for the period FY1979 through FY1983. The statements include annual income statements (Annex 17), statements of sources and application of funds (Annex 18) and balance sheets as at March 31 each year (Annex 19). 2. The following assumptions have been made: (i) Operations - REC's projected operations for the period FY1979 through FY1983 were agreed in discussions with the Planning Commission and Ministries of Energy and Finance: Disbursements are based on REC's agreed share of the plan expenditure during the Sixth Plan Period , i.e., Rs 11,800 million (US$1,372 million). Because the plan is calculated at constant prices in accordance with GOI budgetary procedure, scheme cost escalation must be accommodated either by curtailing the physical program or by additional financing. Any shortfall in either internal financing or in market borrowings as shown in the Financing Plan will be made up by increased borrowing from GOI. (ii) Interest Rates at current levels have been used. Borrowings from GOI carry interest of 7.25% for Normal Programs and 5.25% for the Minimum Needs Program. Market loans are assumed to carry 6% interest. Lending interest on loans advanced are assumed at 5.5% up to FY1974, 6.6% from FY1975-FY1978, 7.0% from FY1979-FY1983. Temporary investments in Government Securities yielded 4.0% p.a. up to February 9, 1975 and are assumed at 4.6% thereafter. Average interest rates are based on loan releases during the respective Plan periods. (iii) Loan repayments for both loans disbursed and borrowings is in accordance with contractual arrangements. Market borrowings are repayable after FY1983. (iv) Administration Expenses are assumed to increase by approximately 10% p.a.

83 -75 - ANNEX 20 Page 2 (v) Income Tax has been calculated as 57% on chargeable income after making provision for allocations to a Special Reserve of 20%, giving an effective rate of approximately 46%. (vi) Proposed Dividends are provided at the rate of 1% on issued share capital as at the end of the financial year. (vii) Current Assets are projected at 2% of Loans and Investments as averaged for the previous 5 years. (viii) Interest on Loans Payable and Receivable is assumed to have been paid and received during each year. (ix) Sundry Creditors are assumed at 0.1% of Loans Disbursed as averaged for the previous 5 years. (x) Authorized Share Capital is assumed to increase as noted to eventually reach Rs 1,200 million at the end of FY Apportionment of SEBs' Financial Results Over the Separate Activities of RE and Other Operations. The rationale for the above apportionment is in accordance with Article IV, Section 4.01, Credit 242-IN, which specified that financial data should be produced for SEBs which separated information relating to RE from information relating to the SEBs' other supply functions. Since FY1970, proforma income statements, statements of sources and applications of funds, rate bases, and details of indebtedness have been prepared both for RE and for the SEBs excluding RE on a basis of apportionment which is reasonable has been consistently applied and which is used to support SEBs' applications to State Governments for the payment of RE subsidies. Details are as follows: (i) Energy sales to consumers at appropriate tariff rates are on an actual basis with reasonable estimates used where this is not possible. (ii) Cost of energy is charged to RE by apportioning the cost of supply at the EHT transmission end (comprising operation and maintenance, depreciation and interest charged for generation and transmission up to this point) in the ratio of units sold to RE consumers. (iii) Operation and maintenance, depreciation and interest charges in the distribution system below EHT are allocated on the basis that consumer services costs are apportioned in the ratio of the number of consumers, while other operation and maintenance costs depreciation and interest are apportioned in the ratio of gross fixed assets in the distribution system.

84 ANNEX 20 Page 3 (iv) Fixed assets are allocated on an actual basis where possible, otherwise, a reasonable basis of apportionment is used, e.g., multiplying the number of irrigation pumps installed each year by the average estimated RE scheme cost per pump in that year (this cost would include the cost of domestic and other service connections in the scheme) and adding to the cumulative total brought forward from the previous year.

85 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Rural ELectrification Corporation Limited Statement Showing Calculation of Debt Service Coverage FYs (actual) and FYs (Forecast) (in millions of rupees except where otherwise stated) March Actual Forecast Total Revenue ,000.6 Less Deductions Administration Taxes o Dividends Total Net Revenue Add: Depreciation o.6 o.6 Loan repayments by SEBs Total Generated Internally / kl-5 61I.8 12i ,206.8 R3C's Debt Service:-/ Interest on Borrowings Repayment of GOI Loana Times Debt Service covered by Internally Generated Finds and sums repaid by borrowers (minimum 1.2 times) / Internally generated funds means the aggregate revenues from all sources and the principal repayments on loans made by R3C, less administrative expenses, dividends, taxes, surcharges and other levies, if any, but before provision for depreciation and interest and other charges on debt. 2/ Debt service requirements means the aggregate amount of amortization, interest and other charges in respect of debt. SOURCE: REC, November 1978

86 INDIA SECOND RURAL ZLECTRIFICATION CORPORATION PROJECT Statement Showing Amount of Loan Sanctions Disbursements and Balance Undisbursed (In millions of mpees except where otherwise stated) Loans Sanctioned Disbursement of Loans Sanctioned Annual ACTUAL FORECAST Year to Accumulated Harijan Rural Electn. 31 March Total Basti Total ,o , , , , , ,72h.7-1, , , , , , , , , , , , ,350.0 Total - Rural Electrification Loans , , , , , , Harijan Basti Total - Loan Disbursements , No. of Schemes Sanctioned Daring Year - Raral Electrification Projects ,000 - Harijan Basti Schemes Total No. of Schemes Sanctioned to Date - Rural Electrification Projects ,243 1,522 1,919 2,419 3,029 3,679 14,409 5,209 - Harijan Basti Schemes Loans Sanctioned Tlring Year - Rural Electrification Projects , , , , , , , , , Harijan Basti Schemes Total Loans Sanctioned to Date 3, , , , , , , , , ,501.3 Total Disbursements to Date i,64i3.7 2, ,041.S 5,1T7.T 6, , ,Z ,W71.7 ",971.7 Loan Repayment Dfring rear Total Loan Repayment to Sate , ,408.2 Loan Disbursements not Repaid 1, , , , , , , , , ,563.5 Undisbursed Loans 1, , , , , , , , , , Source: REC, November 1978

87 ANNEX 23 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT SE8g Gross Fixed Assets at March 31, 1977 Analyzed Between Raral Electrification and Other OPerations (In millions of rupees except where otherwise stated) SEBs Other Operations RE Total Other Operations RE Total Andhra Pradesh - I.S. 3,392 1,162 4, W.I,P , Total _l; _ TM Bihar - I.S. 2,334 1,088 3, W.I.P Total 314,90 0 -g T Gujarat - I.S. 3, , W.I.P Total X 70-1 t1 T_ T Haryana-/ - I.S. 1, , W.I.P Total t2.;7 3, 7 2_ T0 Maharashtra - I.S. 4,061 2,040 6, W.I.P , Total 2 o.337 t 7 7 Punjab - I.S. 2,331 1,034 3, W.I.P Total 1, 034 z V TO0 Rajasthan - I.S. 1,815 1,019 2, W.I.P. 1, Total 3, T Uttar Pradesh - I.S. 7,599 1,674 9, W.I.P. 5,419-5, Total T m- -81 TT TM4 West Bengal - I.S. 1, , W.I.P Total 3',f at T7 Kerala - I.S. 2, , W.I.P Total 2, Madhya Pradesh - I.S. 2,565 1,012 3, W.I.P Total 1, T T Orissa - I.S. 1, , W.I.P Total 2, , _ T_5 Tamil Nadu - I.S. 3,805 2,288 6, W.I.P , Total tit 7263 r Z 7 To5 Grand Totals - I.S. 38,369 14,033 52, W.I.P. 21, , Total 60234,59 75, T_0 Index I.S. W.I.P. - in service - work-in-progress 1/ Excludes Assam and Karnataka. 2/ Haryana not eligible for IRA finance. SOURCE: SEBs.

88 INDIA Second Rural Electrification Corporation Project SEBs' Capital Expenditure Cash Flow FYs 1976 an' 1977 (In millions of Rupees except where otherwise stated) SEBs~' RE F'Y 1976 Y_1976FY 1977 _977 l9 ilj.l _X97 SEBs-9-1- RE % Other RE % Other RE Other Ops. Total Amou*t Share Operations Total Amount Share Operations Total _ Amncn t Amount % Amount % Andhra Prades Bihar Gujarat Haryan 2/ Maharashtra Punjab Rajasthan Uttar Pradesh West Bengal Kerala Madhya Prades Orissa Tamil Nadu _ Total % % % 1/ Excludes Assam and Karnataka. W 2/ Haryana not eligible for IDA finance. SOURCE: SEBs.

89 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT 1/ Measurement of the Net Income Contribution from lural E:Lectrification and Other Uperations of S83s Relative to Total Averalge Canital Baseg" tin Rs millions and % return on investment) FY1976 FY1977 Increase (+) Decrease (-) FY1977 over SEBs3/ RE Profit (Loss) Other Operaions Total RE Profit (Loss) Other Operations Total RE Profit (Loss) Other Operations Total Rs. % R.. t Rs. % R % s RsRs R.. R. Andhra Pradesh (53) (1.9) (92) (2.7) (09) +(o.8) Bihar Oujarat (32) (1.5) (52) (2.0) (20) +(0.5) Haryana-/ (27) (2.0) (56) (3.7) (29) +(1.7) Maharashtra (10) (0.2) (31) (0.7) (21) +(0.5) Punjab (49) (2.1) (53) (2.1) (4) Rajasthan Uttar Pradesh (124) (2.3) (160) (2.3) (36) West Bengal (44) (4.6) (25) (1.5) Kerala Madhya Pradesh 31, Orissa Tamil Nadu Total (91) (0.3) (167) (0.4) (76) +(0.1) / Net Income Contribution means "operating income" as defined in Article IV Sect Credit 604-IN with the additional apportionment of the total operating income over the separate activities of RE and the other operations of SEBs. This apportionment is in accordance with a format defined in Article IV Sect Credit 242-IN and explained in the notes on the assumptions used in the financial projections Annex 20. 2/ Total Average Capital Base includes SEBs RE and other operations and is calculated in accordance with Credit 604-IN - DCA Article IV Sect and means: "the sam of (A) the gross book value of fixed assets in operation, (B) the cost of intangible assets and (C) an amount on account of woricing capital equal to one-sixth (1/6) of the adninistrative, operating and maintenance expenses less (A) the amount of accumulated depreciation charged on account of fixed assets in operation, (B) the amount contributed by customers for fixed assets in operation, and (C) the amount of security deposits of consumers." Ikcludes c/ Assam and Karnataka..X Haryana not eligible for IDA finance. SOURCE: SEBs

90 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJET RateB of Return Earned by S3s "RE Activity" and "Other Operations" tielative to Their Own CJapital Bases for FYs 1576 and 1977 (In % return on investment) PY 1976 E FY 1977 Increase D ee j Y1977 over FY1976 2/ ' RE Net RE RE Net RE- RE SEBs-' Net RE (Losses) RE (Losses) Other 1/ (Losses) RE (Losses) Other 1/ (Losses) RE Profits Subsidies (Losses) Profits Other Operations 1/ Ttl_Profits Subsidies Profits Operations To7ta, Profits Subsidies Profits Operationsi Total 'ndhra Pradesh (7.2) - (7.2) (11.9) - (11.9) (4.7) - +(4.7) ihar (14.4) (10.2) (4.2) uj arat (10. 9) 1.2 (9.7) (15.6) _ (15.6) (4.7) (5.9) Raryana (4.3) - (4.3) (8.6) - (8.6) (4.3) - +(4.3) aharashtra (4.8) 4.1 (0.7) (2.7) 0.5 (2.2) (2.1) (1.5) 'unjab (8.2) - (8.2) (7.2) - (7.2) (1.0) - -(1.0) tajasthan (4.0) (3.4) (0.6) Jttar Pradesh (12.4) - (12.4) (14.6) - (14.6) (2.2) - +(2.2) lest Bengal (137.5) - (137.5) (41.6) 23.4 (18.2) (95.9) (119.3) :erala (21.5) (16.9) (4.6) ladhya Pradesh (3.6) (4.6) (1.O) )rissa (11.1) (7.5) (3.6) amil Nadu (14.5) (18.2) otal (6.6) 5.5 (1.1) _ (9.7) 7.9 (1.8) i +(3.1) (0.7) / Total Rate of Return is calculated in accordance with Credit 242-IN LCA Article IV, Sect It is different from the basis for calculating overall Rate of Return as in Credit 604-IN MA Article IV, Sect in that working capital is excluded from the rate base. The rates of return of the separate activities of RE and the SEB' other operations are calculated from a format defined in Article IV Sect of DCA Credit 242-IN and explained in Annex 20. RE losses and profits are shown before interest. RE profits after interest will be reduced to nil. / Ecludes Assam and Karnataka. / Haryana not eligible for IDA finance. SOURCE: SEBEs.

91 INDIA SEOND 13RAL ELECTRIFICATION CORPORATION PRDJECT Operating Performance of the RE Activities of SEBs for FY1976 (In millions of repees except where otherwise stated) 1/ Andhra 2/ Uttar West Madhya Tamil Combined SEBs Pradesh Bihar Oujarat Haryana7 Maharashtra Punjab Rajasthan Pradesh Bengal Kerala Pradesh Orissa Nadui Total Sales - Units - Gwh Rs % Rs % Rs %R R % RS % Rs % R % Rs % Rs % Rs % Rs % Rs S Rs % Rs % Sales - Revenue loo loo Other Operating Revenue _ 7 lo Total Revenue Operating &penses Eiergy Cost Other Depreciation Total Deficit before Interest Add: Interest Deficit after Interest Less: State Government Subsidy _ Net Deficit for Year / Excludes Assam and Karnataka. 2/ Haryana not eligible for IDA finance. SOURCE: SEBs.

92 INIIA SECOND RURAL EJLECTRIFICATION CORPORATION PROJECT Operating Performance of the RE Activities of SEBs for FY1977 (In millions of ripees except where otherwise stated) 1/ Andhra 2/ Uttar West Madhya Tamil Combined SEBs- Pradesh Bihar Gujarat Haryana- Maharashtra Punjab Rajasthan Pradesh Bengal Kerala Pradesh Orissa Nadu Total Sales - Units - Gwh J Rs % Rs % Rs % Rs % Rs % Rs % Rs % Rs % Rs % Rs % Rs % Rs % as % as % Sales - Revenue loo Other Operating Revenue Total Revenue Operating Expenses Energy Cost Other Depreciation Total Deficit before Interest Add: Interest Deficit after Interest '66 Less: State Government Subsidy _ _ Net Deficit for Year / Excludes Assam and Karnataka. 2/ Haryana not eligible for IDA finance. SOURCE: SEBs. L

93 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Operating Performance of the RE Activities of SEBs for FY1977 Relative to FY1976 (In Rs millions and % increase of FY1977 over FT1976) 1/ Andhra 2/ Uttar West Madhya Tamil Combined SEBs- Pradesh Bihar Gujarat Haryana Maharashtra Punjab Rajasthan Pradesh Bengal Kerala Pradesh Orissa Nadu Total Owh % Owh % Gwh % Owh % Gwh % Owh % iwh % Owh % (wh % Gwh % Gwh % Owh % Owh % Owh % Sales - Units +15h +2h hh Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Sales - Revenue +1b Other Operating Income _ Total Revenue _ Operating Expenses Ehergy Cost Other _3 _ Depreciation Total Deficit before Interest Add: Interest Deficit after Interest Less: State Government Subsidy NA Net Deficit for Year NA / axcludes Assam and Karnataka. 2/ Haryana not eligible for IDA finance. NA = not available. SOURCE: SEBs

94 -86 - ANNEX 30 INMA SFCND RURAL ELETRIFICATION CORPORATION PROJET Increases in SEBs' Revenue for FY1977 Required (i) to Diable Interest on State Government Loans to be Paid in Full and (ii) to Produce a Self Finance Ratio of 20% Average Interest Not Paid Increase in Revenue Required Increase in Revenue Required to Revenue per to Meet Interest not Paid Meet a Self-finance ratio Of 20% SEBs kwh - paise Rs Million % Total Interest Paise per kwh % Revenue Paise per kwh Reveue e Andhra Pradesh % % Not Required Not Required Bihar 27.3 Nil % Gujarat % % % Haryana % % % Maharashtra % % o% Punjab % % % Rajasthan 23.8 Nil Not Required Not Required Uttar Pradesh % % % West Bengal 23.7 Nil % Kerala % % o.6 4.5% Madhya Pradesh 22.0 Nil Not Required Not Required Orissa % % % Tamil Nadu 27.6 Nil Not Required Not Required Total % % 2 i135 1/ Excludes Assam and Karnataka. Figures not yet received. 2/ Self-finance ratio means, the percentage internal cash generation (net of debt service but excluding repayment of State Government loans) bears to capital expenditure for the year. 3/ Haryana does not qualify for IDA finance. SOURCE: SEBs.

95 INDIA SEOND RURAL 3LETRIFICATION CORPORATION PROJECT 1/ 2/ 3/ Effects on SEBs' Rates of Return and Self-Finance Ratios of Increases in Revenues for FY1977 (I) (2) (3) (4) (5) (6) (7) (8) Target Rates of Return Increases in Revenue Required Rate of Return % of Capital Increase in Revenue Required B e of Return Needed under Credits 6o0-IN Actual Rate to Meet Interest not Paid, in needed to Cover all Investment Self- to Meet a Self-Finance Ratio of to Finance 20% of S33s and 416-IN - FY1977 of Return Rate of Return Terms Interest (columns Financed (by 20% in Rate of Return Terms New Investment 3 + 4) column 5) (Columns 3 7) % % % % x % IL Andhra Pradesh % Not Required 9.3 Bihar Not Required % Not Required 8.1 Gujarat % Haryana % Maharashtra % Punjab % Rajasthan Not Required % Not Required 9.2 Uttar Pradesh % West Bengal Not Required S.5 14% Kerala % Madhya Pradesh Not Required % Not Required 13.1 Orissa % 2.1 8X4 Tamil Nadu Not Required % Not Required 9.5 Total % 3.2% (12.1 1/ Excludes Assam and Karnataka. 2/ Rate of Return is in accordance with its definition in BCA Article IV Sect. 4.03, Credit 604-IN and *eans "operating income as a percentage of the average of the capital base at the beginning and end of the financial year. Operating income and capital base are defined in the notes attached to Annex 25. 3/ Self-finance ratio means internally generated funds net of debt service (not including repayment of State Government loans) as a percentage of capital expenditure for the year. 4/ Haryana not eligible for IDA finance. SOURCE: SEBs.

96 ANNEX 32 INDIA RURAL ELECTRIFICATION CORPORATION PROJECT II Financial Analysis of Sample Schemes 1. Capital Costs Assumptions used are taken from actual REC appraisal reports: SEB investments in 33 kv lines, 33/11 kv substations, LT lines, distribution transformers and service connections. 2. Maintenance and Repair 3. Cost of Energy Three percent of cumulative gross SEB investment. SEBs. Average accounting cost of energy sold at 33 kv for appropriate 4. Revenue KWh consumption by each consumer category at current tariff levels. Growth in consumption is assessed for each scheme in line with physical implementation of schemes. 5. Sensitivity to inflation at 5% p.a. has been used. 6. Cost of Capital An average financial cost of capital for RE schemes of 7% during the lifetime of the schemes has been used. 7. Scheme Lifetimes Lifetimes have been estimated by the SEBs and approved by REC.

97 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Discounted Financial Criteria of Sample RE Schemes Net Present Value Rates of Return - % Annual Revenue Increases Scheme Net Present Value at 7% Discount Rate At 5 % Inflation of Costs At Constant At 5% Inflation Excluding Cost of Energy Required to Achieve an Internal Rate of Return Category at Constant Prices Prices of All Costs (increases in which would of 7% at Constant Prices. Rs million be passed on to tariffs) OA Not Required OB SPA -4.4 Not Positive Not Positive Not Positive SPI Not Required SI Not Required MG Nil Not Required MH SU MNP P) SOURCE: REC, SEBs.

98 - 9a,- ANNEX 33 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Average Price and Cost of Electricity for Selected Consumer Categories (paisa/kwh 1978) 2/ MagnlCs-Accoun5~ng Average Price- Marginal Cost-/ Cost7 Type of LT Eligible Agric. 1 I Agric. 3/ ural R4/ u /Agric Industrial Domestic LT State Tariff- Consumers- LT Industrial- Domestic- Consumers Consumers Consumers Average Andhra Pradesh CEM Assam EM n.a. n.a. n.a. n.a. Bihar E Gujarat CEBOM Karnataka EBM n.a. n.a. n.a. 28 Kerala CEBM n.a. n.a. n.a. 49 Madhya Pradesh CEM Maharashtra CEMFOS Orissa EM n.a. n.a. n.a. 86 Punjab F Rajasthan EMB Tamil Nadu CEM n.a. n.a. n.a. 41 Uttar Pradesh E West Bengal EM / C = capacity charge, E = energy charge, M = minimum charge, B block concept, 0 = options, F = flat rate, S - fuel surcharge. 2/ Excluding excise duty and fuel surcharge. 3/ Based on relevant annual hours of utilization of irrigation pumps and average connected load per pump in each State. In case of options the lower option for the average use is taken. 4/ Based on 6,000 kwh/year per 10HP connection. 5/ Based on 180 kwh/year per household. 6/ As calculated in the marginal cost pricing studies prepared by selected SEBs, and in the Andhra Pradesh SEB review, updated to 1978 using 6% inflation. 7/ 1977 n.a. = not available. Sources: CEA, SEBs, REC

99 ANNEX 34 Page 1 INDIA SECOND RURAL ELECTRIFICATION CORPORATION PROJECT Selected Documents and Data Available in the Project File A. Selected Reports and Studies on the Rural Sub-sector A-1 National Institute of Community Development (Hyderabad): An Evaluation of Four Rural Electrification Projects in Andhra Pradesh, A-2 V.N. Kothari and M.M. Dadi: Economic Benefits of Rural Electrification in Gujarat, Baroda A-3 National Council of Applied Economic Research: Cost-Benefit Study of Selected Rural Electrification Schemes in Madhya Pradesh and Uttar Pradesh, A-4 Indian Institute of Management (Ahmedabad): Electrification in Rural Gujarat, three volumes, A-5 Institute for Financial Management and Research (Madras): Financial Planning and Budgeting Systems in REC and SEBs, B. Selected Reports and Studies Relating to the Project B-1 Draft of REC Guidelines for Formulation of Schemes for Financial Assistance by the REC. B-2 REC Guidelines for Monitoring of Schemes. B-3 Collection of sample REC reports (two project proposals, seven appraisal reports, two monitoring reports). B-4 Sample Report on a System Improvement Scheme in Tamil Nadu. B-5 W. Scott: Draft Report on Technical Standards and Adequacy of Rural Electrification in India, B-6 REC Specification and Construction Standards. B-7 REC Manual 1/1974, Electric Irrigation Pumpsets (for Guidance of Farmers). B-8 REC Manual 2/1974, Electric Irrigation Pumpsets. B-9 REC Manual 3/1974, Safety Manual. B-10 REC Manual 4/1975, Installation and Maintenance Manual for Medium and Low Voltage Service Connections. B-lb REC Manual 5/1975, Installation and Maintenance Manual for Distribution Transformer Stations.

100 ANNEX 34 Page 2 B-12 REC Manual 6/1975, Installation and Maintenance Manual for 33/11 kv Sub-stations. B-13 REC Manual 7/1975, Maintenance Manual for 33 kv, 11 kv, Medium and Low Voltage lines. B-14 REC Manual 8/1975, Construction Manual for 33 kv, 11 kv, Medium and Low Voltage lines. B-15 REC Manual 9/1976, Manual for Repair of Distribution Transformers. B-16 REC Manual 10/1976, Manual for the Design of 33/11 kv Sub-Station for Rural Electrification System. B-17 REC Manual 11/1976, Guide for Voltage Drop Calculations. B-18 REC Manual 12/1976, Manual for Sag Tension Calculations. B-19 REC Manual 13/1976, Manual on Manufacturing of Solid PCC Poles. Part I - Design Aspects. Part II - Manufacturing Aspects. C. Working Papers C-1 Details of Material Requirement for Eligible REC Schemes Approved Between April 1977 and September C-2 Financial and Economic Cost and Benefit Streams of Sample Schemes. March 1979.

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