PCR 2520-with no. coding - Asian Development Bankfinancial internal rate of return global positioning system ... Installing meters and IT/SCADA systems Jan 2010 Apr 2013 Jun 2010 Apr

Completion Report

Project Number: 32298-063 Loan Number: 2520 July 2017

India: Madhya Pradesh Power Sector Investment

Program (Tranche 5)

This document is being disclosed to the public in accordance with ADB’s Public Communication

Policy 2011.

CURRENCY EQUIVALENTS

Currency Unit – Indian rupee/s (`)

At Appraisal At Project Completion (12 December 2006) (22 July 2015)

`1.00 = $0.0223 $0.015961 $1.00 = `44.83 `62.65

ABBREVIATIONS

ADB DISCOM-C DISCOM-E DISCOM-W DMF EIRR EMP FIRR GPS HVDS ICB MFF MPERC O&M PFC PFR PMU REC SCADA WACC

– – – – – – – – – – – – – – – – – – ––

Asian Development Bank Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Limited Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited Madhya Pradesh Paschim Kshetra Vidyut Vitaran Company Limited design and monitoring framework economic internal rate of return environmental management plan financial internal rate of return global positioning system high-voltage distribution system international competitive bidding multitranche finance facility Madhya Pradesh Electricity Regulatory Commission operation and maintenance Power Finance Corporation Limited periodic financing request project management unit Rural Electrification Corporation supervisory control and data acquisition weighted average cost of capital WEIGHTS AND MEASURES

GWh – gigawatt-hour km – kilometer kV – kilovolt kVA kVAR

– –

kilovolt-ampere kilovolt-ampere reactive

kWh – kilowatt-hour

NOTES

(i) The fiscal year (FY) of India and its agencies ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2017 ends on 31 March 2017.

(ii) In this report, “$” refers to United States dollars.

Vice-President W. Zhang, Operations 1 Director General H. Kim, South Asia Department (SARD) Director K. Yokoyama, Country Director, India Resident Mission, SARD Team leader J. Banerjee, Senior Project Officer (Energy), SARD Team member N. Munjal, Senior Project Assistant, SARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

BASIC DATA i

I. PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 2

A. Relevance of Design and Formulation 2

B. Project Outputs 2

C. Project Costs 4

D. Disbursements 5

E. Project Schedule 5

F. Implementation Arrangements 6

G. Conditions and Covenants 6

H. Consultant Recruitment and Procurement 7 I. Performance of Consultants, Contractors, and Suppliers 7

J. Performance of the Borrower and the Executing Agency 8

K. Performance of the Asian Development Bank 8

III. EVALUATION OF PERFORMANCE 9

A. Relevance 9

B. Effectiveness in Achieving Outcome 9

C. Efficiency in Achieving Outcome and Outputs 11

D. Preliminary Assessment of Sustainability 11

E. Impact 12

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12

A. Overall Assessment 12

B. Lessons 13

C. Recommendations 14

APPENDIXES

1. Design and Monitoring Framework 15 2. Cost Breakdown for the Distribution Companies 19 3. Summary of Contracts 22 4. Project Financing Plan 25

5. Projected and Actual Disbursement of Loan Proceeds 26

6. Chronology of Main Project Events 27

7. Organizational Chart of the Distribution Companies 28

8. Status of Compliance with Loan Covenants 29

9. Economic Reevaluation 36

10. Financial Reevaluation 42

11. Contribution to ADB Results Framework 46

BASIC DATA A. Loan Identification

1. Country India

2. Loan Number 2520-IND

3. Project Title Madhya Pradesh Power Sector Investment Program (Tranche 5)

4. Borrower India

5. Executing Agency Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited (DISCOM-E)

Madhya Pradesh Madhya Kshetra Viduyt Vitaran Company Limited (DISCOM-C) Madhya Pradesh Paschim Kshetra Viduyt Vitaran Company Limited (DISCOM-W)

6. Amount of Loan $166 Million

Part A, DISCOM-C: $50 million

Part B, DISCOM-E: $63 million

Part C, DISCOM-W: $53 million

7. Project Completion Report Number 1629

B. Loan Data

1. Financing Facility Appraisal – Date Started – Date Completed

12 December 2006 14 December 2006

2.

Date of Board Approval

21 August 2007

3.

Loan Negotiations – Date Started – Date Completed

31 March 2009 1 April 2009

4.

Date of Loan Agreement

27 May 2009

5.

Date of Loan Effectiveness – In Loan Agreement – Actual

25 August 2009 (90 days) 7 September 2009

6. Closing Date – In Loan Agreement – Actual – Number of Extensions

30 June 2013 22 July 2015 2

7. Terms of Loan – Interest Rate – Maturity (number of years)

– Grace Period (number of years)

London interbank offered rate-based Sum of the London interbank offered rate and 0.6%, less a credit of 0.40%. 20 years 5 years

8. Terms of Relending (if any)

– Interest Rate

Relending between the Government of India and the Government of Madhya Pradesh is on the same terms and conditions as those applicable to the Government of India.

ii

– Maturity (number of years) – Grace Period (number of years)

– Second-Step Borrower

20 years 5 years Government of Madhya Pradesh on-lending to the distribution companies, with a 1 percentage point spread.

9. Disbursement a. Dates

b. Amount ($ million)

a Two cancellations, on 4 June 2014 ($9 million) and 23 September 2014 ($5 million).

10. Local Costs (Financed) - Amount ($) Not applicable - Percent of Local Costs Not applicable - Percent of Total Cost Not applicable

C. Project Data

1. Project Cost ($ million)

2. Financing Plan ($ million)

Cost Appraisal Estimate Actual

ADB 166.00 134.02

Distribution Companies (PFC/REC/SBI)a

104.20 29.79

Total 270.20 163.80 a The distribution companies funded local currency from lines of credit with the PFC, REC, and

SBI. ADB = Asian Development Bank, PFC = Power Finance Corporation Limited, REC = Rural

Electrification Corporation, and SBI = State Bank of India.

Initial Disbursement Final Disbursement Time Interval

10 December 2009 9 June 2015 66.97 months

Effective Date Original Closing Date Time Interval

7 September 2009

30 June 2013

45.77 months

Category Original

Allocation Last Revised

Allocation Amount

Canceleda

Net Amount Available

Amount Disbursed

Undisbursed Balance

1. Equipment 154.70 152.00 14.00 152.00 134.02 17.98

2. Unallocated 11.30 0.00 0.00 0.00 0.00 0.00

Total 166.00 152.00 14.00 152.00 134.02 17.98


Foreign Currency Cost 166.00 134.02

Local Currency Cost 104.20 29.79

Total 270.20 163.80

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3. Cost Breakdown by Project Component ($ million)

Component Appraisal Estimate Actual

Foreign Local Total Foreign Local Total

Total base-line costs 154.70 58.90 213.60 134.02 26.00 160.02

Unallocated 11.30 18.60 29.90 0.00 0.00 0.00

IDC and commitment chargesa 0.00 26.70 26.70 0.00 3.79 3.79

Total 166.00 104.20 270.20 134.02 29.79 163.80

IDC = interest during construction. a Paid by the borrower, not disbursed from the Asian Development Bank loan.

4. Project Schedule

Item Appraisal Estimate Actual

Start End Start End

Installation of new HVDS

Aug 2009 Mar 2012 Oct 2010 Aug 2014

Augmentation of existing HVDS Aug 2009 Oct 2011 Dec 2010 Jun 2014

Installing meters and IT/SCADA systems Jan 2010 Apr 2013 Jun 2010 Apr 2014

Bifurcation of village/agricultural distribution

Aug 2009 Jun 2012 Mar 2010 Dec 2014

Renovation of existing substations Aug 2009

Dec 2012

Feb 2010

Dec 2013

Supply of DTRs, VCBs, and capacitor banks Jan 2010

Dec 2012

Mar 2010

Dec 2013

Construction of new substations

Jan 2010

Dec 2012

Aug 2010

Oct 2014

Conversion of lines from low to high voltage Jan 2010 Dec 2012 Aug 2010 Mar 2014

DTRs = distribution transformers, HVDS = high-voltage distribution system, IT = information technology, SCADA = system control and data acquisition, VCB = vacuum circuit breaker.

5. Project Performance Report Ratings

Implementation Period

Ratings

Outcome Implementation Progress

From 1 October 2009 to 31 December 2009 Satisfactory Satisfactory

From 1 January 2010 to 31 December 2010 Satisfactory Satisfactory



From 1 January 2013 to 31 December 2013 On track

From 1 January 2014 to 31 December 2014 On track

From 1 January 2015 to 22 July 2015 On track

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D. Data on Asian Development Bank Missions1

Name of Mission Date No. of Persons

No. of Person-Days

Specialization of Members

Financing Facility Fact Finding

16–24 Oct 2006

5

45

a/i,c,f,k,l

Appraisal 12–14 Dec 2006 5 15 a/i,b,c,d,l

ADB Board Approval 21 Aug 2007

Tranche 5 Preparation

15 Oct–3 Nov 2008

1

6

c

Inception Special Loan Administration a

Special Loan Administration a

5–15 Oct 2009 24–27 Nov 2009 6–16 April 2010

3 3 3

15 5 15

a/i,f i,h,g i,h,g

Loan Review 23–30 Sept 2010 2 3 c/i,e,f

Loan Review 31 Jan–4 Feb 2011 3 6 c/i,b,d

Loan Review 11–14 Oct 2011 2 2 d/i,e,j

Loan Review 11–20 Mar 2012 3 15 d/i,e,j,k

Loan Review 10–14 Dec 2012 2 6 d/i,e,j

Loan Review Loan Review

31 Jan–9 Feb 2013 1–9 Oct 2013

3 2

6 6

d/i,g,e d/i,e

Midterm Review 10–19 Feb 2014 2 10 d/i,e

Loan Closure 22 Jul 2015

PCR Mission

3–10 Jan 2017 2

16

d/i,m

a = senior finance specialist (energy), b = senior project implementation specialist, c = energy specialist, d = project implementation specialist, e = assistant project analyst, f = project officer (energy), g = resettlement and social development officer, h = environment officer, i = team leader (energy), j = senior project assistant, k = social development specialist, l = energy specialist (private sector participation), m = PCR consultant, PCR = project completion report. a Mission for conducting workshops on safeguards, monitoring, remedial action, and reporting. These workshops were done in conjunction with a safeguards review for projects under the third and fourth tranches. The number of person-days shown was estimated to be specifically for the fifth tranche, Loan 2520, safeguard requirements.

1 The various missions reviewed all of the active loans under the multitranche finance facility. The person-days indicated

in Table D is an estimate of the days applicable to Loan 2520.

I. PROJECT DESCRIPTION

1. During the preparation of the Madhya Pradesh Power Sector Investment Program, the state of Madhya Pradesh in India was suffering from high electricity losses and poor service levels caused by antiquated electrical distribution systems, particularly in rural areas. This was the result of many years of insufficient funding for the expansion and maintenance of the system to accommodate the rapid increase in the number of consumers. Over time, the decades-old wiring and equipment caused numerous and prolonged power outages, low voltage, and an increasing inability to connect new consumers. This was exacerbated by extensive power theft through tens of thousands of illegal connections and a lack of metering. As the state’s population grew and farmers relied increasingly on irrigation to grow crops, the need for better power distribution became acute. The Government of India’s Integrated Energy Policy1 (2006) specifically targeted the modernization of transmission and distribution systems, as well as power sector reform to reduce technical and commercial losses from state transmission and distribution utilities. 2. Based on this policy, the Government of Madhya Pradesh initiated a comprehensive review of its power sector and developed a road map calling for the expansion of the power transmission system followed by a major rehabilitation and systemic refurbishment of the distribution system. Another major objective was the elimination of the power system subsidies prevalent in 2005–2006. However, before any investment programs were implemented, the Madhya Pradesh State Electricity Board, which had been responsible for all power transmission and distribution across the state, was restructured through the establishment of five independent companies, including one generation company 2 , one transmission company, and three distribution companies—Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Limited (DISCOM-C), Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited (DISCOM-E), and Madhya Pradesh Paschim Kshetra Vidyut Vitaran Company Limited (DISCOM-W). This was done to achieve more efficient operation and meet consumer needs more effectively. The newly established entities were given the authority to generate their own revenues and become financially independent over time. The cost of the works identified in the road map was estimated at $1 billion. The state government, through the Indian Ministry of Finance, requested a loan of $620 million from the Asian Development Bank (ADB) to cover the cost of equipment and some of the necessary local currency investments. The Madhya Pradesh Power Sector Investment Program3 was developed as a multitranche financing facility (MFF) to facilitate individual loans to the transmission and distribution companies over a 5-year implementation period. The MFF was delivered through six tranches developed as individual loans, as requested by the state government through periodic financing requests (PFRs). 3. Two of the projects (tranches 1 and 3) under the MFF involved the expansion and refurbishment of the transmission system improvements in the eastern part of the state. The three power distribution companies established under the restructuring cover the entire state from their headquarters in the cities of Bhopal (DISCOM-C, in the central part of the state), Jabalpur (DISCOM-E, in the eastern part of the state), and Indore (DISCOM-W, in the western part of the state). The four remaining projects (tranches 2, 4, 5, and 6) under the MFF were intended sequentially to improve the distribution systems in the least efficient and most needy areas prioritized by the distribution companies, with a focus on rural areas. The PFR for the fifth tranche loan included estimates as to the required works based on those completed under the earlier

1 Government of India, Planning Commission. 2006. Integrated Energy Policy: Report of the Expert Committee. New

Delhi. 2 The power generation company improvements were not included under the ADB program. 3 ADB. 2007. Report and Recommendation of the President to the Board of Directors, Proposed Multitranche Financing

Facility for the Madhya Pradesh Power Sector Investment Program. Manila.

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tranches in areas where power coverage and services remain poor. As with earlier tranches under the MFF, it was agreed that the works would be carried out under turnkey contracts requiring the contractors to (i) conduct detailed surveys, (ii) test new and existing systems, and (iii) supply and install the required equipment and materials.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

4. The project was designed to synergize with India’s Five Year Plan and align with ADB’s corporate and country partnership strategies,4 both of which focus on infrastructure projects in key sectors that aim to alleviate poverty through economic growth. As the fifth tranche under the MFF, the project focused on the most urgently necessary distribution system improvements following the earlier tranches. The multitranche approach was used to implement successive interventions based on the distribution companies’ priorities. The MFF was considered the appropriate intervention to implement large-scale distribution works in Madhya Pradesh. The distribution companies used a district approach, focusing particularly on the districts where the quality of the existing power supply was the poorest, and where intervention would provide the most benefits. This project was similar in scope to tranches 2 and 4, but focused on rural areas not yet improved under the program. To achieve the intended output, the international competitive bidding (ICB) contracts required technical optimization and actual on-the-ground conditions to be applied, and the designs, specifications, and scope of works to be adjusted accordingly. 5. The MFF program was implemented concurrently with several other initiatives to improve the state’s electrical distribution systems, including (i) the Rajeev Gandhi Scheme for Electrification of Villages, 5 (ii) the Restructured Accelerated Power Development Reform Program,6 (iii) the ADB-supported Feeder Separation Program,7 and (iv) ongoing programs of each distribution company financed by the Rural Electricity Corporation (REC) and Power Finance Corporation Limited (PFC). To use the ADB loan funds optimally, each successive tranche was specifically designed to fill gaps not covered by the various ongoing schemes. The distribution companies indicated that the multitranche approach helped them address priorities in their challenging implemented districts. The project ensured that no overlap with other initiatives occurred. The MFF modality was therefore appropriate and relevant. B. Project Outputs

6. The project focused on rural areas of each region and included, as per the ADB loan agreement, the following general works:

(i) Part A (DISCOM-C): (a) the construction of high-voltage distribution systems (HVDSs) in four distribution circles, including the conversion of about 4,400 kilometers (km) of low-voltage 440-volt lines to high-voltage 11-kilovolt (kV) lines; (b) the renovation and modernization of approximately 580 33/11 kV transformer substations; and (c) the installation of meters and facilities for automatic remote meter reading for approximately 71,000 customers.

4 ADB. 2004. Country Strategy and Program Update: India, 2005–2007. Manila. 5 This is a national government scheme for the electrification of villages across the country. 6 This is a national government scheme. 7 ADB. 2011. Report and Recommendation of the President to the Board of Directors for the Proposed Multi-Tranche

Financing Program for the Madhya Pradesh Energy Efficiency Improvement Investment Program (Loans 2764 and 2830). Manila.

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(ii) Part B (DISCOM-E): (a) the construction of HVDSs in eight distribution divisions, including the conversion of about 7,579 km lines from low- to high-voltage; and (b) the construction of approximately 1,250 km of 11 kV lines to separate agricultural and village feeders.

(iii) Part C (DISCOM-W): (a) the augmentation, renovation, and modernization of approximately 50 33/11 kV transformer substations; (b) the construction of 15 new 33/11 kV substations; (c) the installation of approximately 290 capacitor banks in 33/11 kV substations; (d) the construction of new 33/11 kV lines; (e) the augmentation of approximately 400 km of existing 11 kV lines and construction of approximately 1,700 km of new 11 kV lines; and (f) the enhancement of information technology systems through both the introduction of a supervisory control and data acquisition (SCADA) system in priority 33/11 KV substations and distribution transformer metering.

7. The details of the various equipment and works are in the design and monitoring framework (DMF) in Appendix 1. The project (i) helped improve voltage profiles; (ii) reduced distribution system losses by converting thousands of km of lines from low- to more efficient high-tension; (iii) reduced power outages by replacing aging transformers and capacitors; (iv) addressed non-technical losses by increasing metering, billing, and collection; and (v) improved financial operations by strengthening corporate operations, transparency, and human resource development. Institutional 8. As required under the program, the distribution companies were established as separate entities by the end of 2007 with independent boards, management committees, and internal audit functions. Senior personnel (managers, accountants, and financial management) were appointed before the end of 2008. Distribution company personnel were trained through specific programs focused on head office, district, and service center staff. The capacity building initially focused on project planning, design, and implementation of an externally financed initiative, including ADB ICB procedures, quality control, environment and social safeguards, accounting, and audits. As the sequential projects progressed, the distribution company staff were trained in operational and management procedures, including (i) routine maintenance and the replacement of defective equipment and parts, (ii) computerized billing and collection, (iii) remote metering, (iv) public awareness with a focus on the dangers of the HVDS systems in relation to theft through illegal tapping, (v) the monitoring of power consumption patterns and vigilance regarding increased consumption with a focus on agricultural consumers, and (vi) financial management and information technology. District and subdistrict service center personnel are well-versed in routine maintenance, billing and collection (including the collection of arrears, which remains challenging), the monitoring of power use patterns used to adjust the flat rate for agricultural consumers, and monthly reporting. The institutional impact and outcome required in the MFF document were achieved as detailed in the DMF in Appendix 1. Physical Infrastructure Part A: Madhya Pradesh Madhya Kshetra Vidyut Vitaran Limited 9. The outputs proposed at loan appraisal were generally achieved, although some works were reduced. Some were adjusted to take advantage of technical optimization, to provide better service to the beneficiaries living in the subproject area. DISCOM-C achieved several physical outputs, including the conversion of 1,165 km of 440-volt lines to 11 kV, and the construction of 3,028 km of new 11 kV lines. As part of the technical optimization, it was determined that new 11 kV lines were needed more urgently than upgraded low-tension lines. The conversion of existing

4

lines and installation of new lines resulted in the installation of 8,460 11/0.4 kV, 25-kilovolt-ampere (kVA) distribution transformers and 1,477 11/0.4 kV, 15 kVA distribution transformers. Only 21,500 single-phase meters and 153 three-phase meters were installed under tranche 5 because DISCOM-C had procured meters from another ongoing REC-funded project in the meantime. The remaining meters, both single- and three-phase, were installed under other ongoing projects funded by the REC and PFC, which purchased such meters in bulk at reduced prices. Four contracts were terminated before project completion due to poor performance by the ICB contractor (para. 20). The remaining works under these contracts were completed through DISCOM-C’s own resources. The appraised and actual outputs are detailed in the DMF, Appendix 1.

Part B: Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited

10. DISCOM-E executed the project as per the appraisal and included in the periodic financing request (PFR). It included (i) the upgrading of 5,300 km of low-voltage lines to 11 kV lines; (ii) the construction of 750 km of new 11 kV lines; (iii) the upgrading of 1,500 km of 11 kV lines; (iv) the conversion of 1,797 km of low-voltage lines to low-voltage underground cable circuits; and (v) the installation of 11,200 11/0.4 kV, 25 kVA distribution transformers and 13,700 11/0.4 kV, 16 kVA distribution transformers. The outputs are detailed in the DMF (Appendix 1).

Part C: Madhya Pradesh Paschim Kshtra Vidyut Vitaran Company Limited

11. The actual constructed works were carried out as per the appraisal and included in the PFR. These included (i) the renovation and augmentation of 44 33/11 kV substations (with 47 33/11 kV, 5.00 megavolt-ampere (MVA) distribution transformers upgraded from 3.15 MVA, and 10 33/11 kV, 8 MVA transformers upgraded from 5 MVA); (ii) the installation of (a) 10 new 33 kV line bays at 132/33 kV substations, (b) 10 new 33 kV line bays at 33/11 kV substations, and (c) 48 33kV and 50 11kV vacuum circuit breakers; (ii) the construction of 15 new 33/11 kV, 3.15 MVA substations with interconnecting 33 kV and 11 kV lines; (iii) the installation of 136 1,200 kilovolt-ampere reactive (kVAR) capacitor banks and 15 600 kVAR, 11kV capacitor banks (the estimated 20,550 low-voltage capacitor banks were not required since the installation of the 1,200 and 600 kVAR capacitor banks at the 33/11kV transformer stations eliminated the need for low-voltage capacitors); (iv) the construction of 1,600 km of new 11 kV lines and upgrading of 362 km of 11 kV lines; (v) the construction of 1,439 km of 11 kV lines with 88 11 kV vacuum circuit breaker line bays and 1050 11/0.4 kV, 25 kVA distribution transformers; and (vi) 92 priority 33/11 kV substations modernized through the use of SCADA systems and 12,000 distribution transformer meters (the other 11,000 meters were installed under other ongoing projects). The actual output was based on a ground survey and detailed techno-economic assessment of system needs. Eight contracts were terminated before completion due to the ICB contractors’ poor performance. DISCOM-W completed the remaining works from their own resources. The estimated works at appraisal and actual works completed are summarized in the DMF (Appendix 1). C. Project Costs

12. As indicated in the PFR,8 the total cost at appraisal was estimated at $270.20 million, comprising $166.00 million in foreign currency and $104.20 million in local currency. Actual project costs totaled $163.80 million, comprising $134.02 million in foreign currency and $29.79 million

8 PFR 5 from the distribution companies through the state to the Government of India, Ministry of Finance, Department

of Economic Affairs.

5

in local currency costs. The cost breakdown by category for each DISCOM is in Appendix 2. The foreign currency ADB loan was only utilized for the ICB contracts,9 which included equipment supply and installation on a turnkey basis. The contracts procured by each distribution company are summarized in Appendix 3. DISCOM-C utilized $49.9 million of its $50.0 million loan allocation, DISCOM-E utilized $49.3 million of its $63.0 million allocation, and DISCOM-W used $34.9 million of its $53.0 million allocation. DISCOM-E and DISCOM-W attributed the unutilized loan funds under the ICB contracts to (i) competitive bidding prices with ADB financing, (ii) the devaluation of the rupee from the date that the PFR was prepared and the bids were submitted, (iii) the Ministry of Finance exemption of the excise duty on ICB contracts under the ADB loan, (iv) competitive prices resulting from the optimization created by field conditions,10 and (v) the implementation of the remaining part of the terminated contracts from the distribution companies’ own resources due to the termination of the ICB contracts before they were completed.11 13. The distribution companies accessed loans from the PFC, REC, and the state government to cover their local currency costs. The project financing plan is summarized in Appendix 4. Local currency costs decreased significantly, from the $104.30 million estimated in the PFR to the $29.79 million that the distribution companies actually spent. The unutilized loan funds comprised (i) $32.90 million equivalent in equipment installation costs, as this was included under the ICB contracts (the distribution companies’ counterpart financing included the costs of environment consultants, third-party inspectors, and completing the terminated contracts to ensure that system integrity was maintained;12 the distribution companies also supported the project through ongoing regular upgrading programs); (ii) $18.60 million equivalent in unallocated costs for price contingencies; and (iii) $22.91 million in IDC and commitment fees attributed to the distribution companies in the PFR at appraisal but paid directly by the borrower. D. Disbursements

14. Projected disbursements were based on a loan amount of $166 million and a project completion date of 30 June 2013. However, this was revised during the midterm review in February 2014 based on the lower than expected project costs and the need to extend the loan closing date to July 2015. ADB disbursements from ordinary capital resources totaled $134.02 million (80.17%) out of the original loan amount of $166.00 million. Three loan cancellations occurred as a result of loan fund underutilization: $9 million was cancelled on 4 June 2014 and $5 million on 23 September 2014 during the loan period, and a final cancellation of $17.98 million occurred after loan closure on 22 July 2015. These cancellations reflect loan reductions from $63 million to $54 million for DISCOM-E and from $53 million to $48 million for DISCOM-W, due to the reasons in paras. 11 and 12. The projected and actual disbursement of loan proceeds are in Appendix 5. E. Project Schedule

15. At the appraisal of the MFF in December 2006, all physical subprojects were scheduled to be completed by 31 December 2013, with the last PFR submitted by 31 December 2010. With respect to tranche 5, the ADB loan agreement states that withdrawals from the loan account will be completed by 30 June 2013, with loan closure at the end of

9 The borrower paid the IDC and commitment charges. 10 The contractors’ scope of works was adjusted based on detailed surveys and the testing of existing conditions. 11 The distribution companies’ own forces completed the terminated contracts and charged the related costs to their

operating funds, thereby reducing loan utilization. 12 It was necessary to complete the original works in the terminated contract to ensure that the new systems would

work.

6

2013, or such other date as may from time to time be agreed. The loan closing date was extended twice (at the distribution companies’ request, duly endorsed by the government and ADB) from 30 June 2013 to 22 July 2015. The implementation period was longer than estimated for two reasons. First, the ICB procurement packages were based on a design–build model that required the contractors to finalize the preliminary designs through technical optimization to confirm the length of new and upgraded lines and revise the equipment requirements. Only after that had been done could the distribution cable and equipment be ordered. This took about 1 year, which was not accounted for when the project schedule was developed. Second, the early termination of 12 ICB contracts due to the contractors’ poor performance forced the distribution companies to complete the remaining works. A chronological listing of the main project events is in Appendix 6. F. Implementation Arrangements

16. The implementation arrangements were as envisaged at appraisal. These were adequate and were used for each tranche. The executing agencies/distribution companies, under the direction of their respective managing directors, were responsible for overall project implementation. A dedicated project management unit (PMU) in each distribution company led by a senior chief engineer and staffed by experienced technical, project construction management, and administrative staff provided day-to-day overall project coordination. To ensure that ADB’s procurement guidelines were complied with consistently and efficiently, the existing procurement units in the distribution companies guided and facilitated the design and procurement of all of the packages. Executive engineers for each distribution circle were placed in charge of project works (i.e., the installation of mechanical and electrical equipment, erection of power poles, testing of equipment, and commissioning of distribution works). The distribution companies’ chief financial officer exercised due diligence with respect to financial matters, and project progress was documented through quarterly progress reports submitted to ADB. The project organization of each distribution company and titles of unit heads varied slightly, but were generally similar. The generic organizational chart for the project is in Appendix 7. G. Conditions and Covenants

17. The loan covenants were mostly met and no covenants were modified, suspended, or waived during implementation. However, the two loan covenants for compliance with the debt-service coverage and self-financing ratios (Loan Agreement (LA), Schedule 5, paras. 9 and 10) could not be fully met within the project timeframe. The distribution companies continue to pursue systemic physical distribution system improvements, management reforms, human resources training, strengthening of billing and collection (including the collection of arrears), and better cash flow management, which will aid in meeting these two covenants. In addition, the Madhya Pradesh Electricity Regulatory Commission (MPERC) is currently holding public hearings as precursors to increasing the power tariffs. DISCOM-C was unable to achieve the 95% collection efficiency in full (LA, Schedule 5, para. 13), mainly due to the slow collection of arrears from agricultural connections. However, the current collection efficiency of 92.6% is expected to improve as the new distribution system improves agricultural income. These three covenants are expected to be complied with by the end of 2018, as the ongoing loss reduction and rationalization programs concerning the power distribution tariffs are completed. The delay in meeting these covenants did not impact project execution or the ongoing operation of project-supplied facilities. The status of compliance with the loan covenants is in Appendix 8.

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H. Consultant Recruitment and Procurement

1. Consultants 18. At appraisal, it was found that the distribution companies had the required technical design, procurement, construction management, financial, and administrative institutional capacity to implement the project, and that a project implementation consultant was not required. This was in part due to the design of the ICB packages, which required the contractors to complete detailed surveys, test equipment, and adjust the project scope based on the existing systems’ actual conditions. The distribution companies’ experienced in-house engineers were able to oversee construction, although they did recruit independent safeguard consultants to handle social and environmental management, and all related monitoring and reporting. The distribution companies also recruited third-party inspectors to conduct technical monitoring and testing of project equipment and materials. These inspectors checked the equipment specifications at the factory and tested completed equipment prior to shipment. They also checked the equipment specifications again upon delivery to the project sites, and tested the equipment’s operational efficiencies after installation before the new systems were connected to the grid. The distribution companies funded these consultants. 2. Procurement 19. The distribution companies took advance action to prepare the ICB bids, and awarded the first ICB contracts in March 2010. Most contracts under the project (38 of 43) were awarded by the end of 2010, and the last ICB contract was awarded in July 2013. The turnkey contracts were designed to ensure that the contractor would complete a specified number of km or quantities of works, whereby the contractors would supply all equipment, materials, and installation, adjusted as necessary to match actual conditions. Payment was based on the successful completion of the designated works rather than on monthly progress claims. ADB supported the project’s implementation through expeditious procurement approvals, enabled by regular review missions and day-to-day support from the India Resident Mission, to ensure that ADB’s requirements were met. The procurement of turnkey equipment and installation contracts under all 43 contracts (DISCOM-C, 11; DISCOM-E, 7; and DISCOM-W, 25) followed ICB procedures in accordance with ADB’s Procurement Guidelines (2006 as amended from time to time). I. Performance of Consultants, Contractors, and Suppliers

20. The distribution companies provided their own construction supervision engineers, as approved by ADB at the time of the MFF’s appraisal. The distribution companies recruited environmental management consultants to implement and monitor the environmental management plans (EMPs), which performed satisfactorily. ADB helped strengthen the capacity of the distribution companies’ staff and their independent environmental consultants through regular review missions and safeguards workshops, and also regularly reminded the distribution companies to implement the EMPs as part of the ICB contracts. The third-party inspectors recruited by the distribution companies to oversee and test all equipment and materials at the factory, on delivery, and after installation submitted properly prepared and detailed quality control reports, and generally performed satisfactorily. 21. Most of the ICB contractors and their suppliers implemented the works in accordance with the specifications and quality controls as per their contracts; however, the distribution companies

8

did terminate 12 contracts due to poor contractor performance.13 The performance of all other contractors was generally satisfactory. The distribution companies completed the remaining works with their own resources. With the exception of the problematic contracts, the equipment, materials, and installation works complied with the specifications and operational performance standards. J. Performance of the Borrower and the Executing Agency

22. The performance of the borrower and executing agencies was satisfactory. The borrower was India and the executing agencies were the three Madhya Pradesh distribution companies. All project ICB contracts were procured, constructed, and commissioned successfully before the extended loan completion date and under budget. Although some loan funds were not utilized due to conditions beyond the distribution companies’ control, the outputs estimated at appraisal were generally achieved. 23. Overall, the distribution companies demonstrated their ability to formulate technically, appraise, and arrange their own counterpart financing and engineer, procure, and construct a variety of technically complex electrical distribution projects. However, the distribution companies overestimated the local currency costs because they were unfamiliar with the turnkey contracts, which included most installation and erection costs. The distribution companies also failed to use more than $10 million in loan funds because they terminated 12 ICB contracts due to contractor nonperformance. The distribution companies successfully completed the remaining works with their own resources or through other locally funded ongoing contracts. K. Performance of the Asian Development Bank

24. ADB monitored the project’s progress closely through 10 periodic review missions (four were fielded from the ADB headquarters in Manila and included India Resident Mission staff, and the remaining six were fielded from the resident mission) and the assessment of quarterly progress reports. ADB also provided useful and proactive day-to-day advice on procurement, project management, and safeguards capacity building, especially with regard to the environmental monitoring procedures. However, during the first 2 years of implementation the project was administered from the headquarters in Manila making a hands-on approach difficult, and the distribution companies did not actively seek implementation support, such as the preparation of PFRs, leading to the overestimation of project costs. ADB’s support was strengthened once the project was transferred to the resident mission, which actively built the procurement capacity of the distribution company staff through specific procurement and contract management clinics. ADB accorded timely approvals that made it possible to achieve the revised project milestones and smoothed the project execution. ADB also held workshops on safeguards monitoring both in the field and in the resident mission. Furthermore, ADB, the executing agency, and government officials (from the Ministry of Power and Department of Economic Affairs) conducted annual tripartite meetings with senior distribution company managers and project staff, supporting project execution through corrective actions. ADB’s overall performance was satisfactory.

13 The contractors’ poor performance was due either to internal financial or cash flow problems or to a lack of experience

with turnkey contracts, particularly equipment installation.

9

III. EVALUATION OF PERFORMANCE

A. Relevance

25. The project is rated relevant. The reform of the Madhya Pradesh power sector carried out under the project aligned with India’s policy and legislative framework. The indicators developed for tranche 5 were based on ADB’s extensive experience in the energy sector, and the parameters and criteria in the project’s monitoring framework were appropriate. The MPERC carried out due diligence for the project, and relevant government units monitored project performance. The project incorporated technical optimization to improve the design based on actual conditions, and was ultimately implemented within the revised time period and budget. The resulting improved electricity service contributed to the growth of economic activity in the project areas. The project was therefore relevant and will continue to improve distribution system planning, operation and maintenance (O&M) of physical facilities, and the distribution companies’ financial procedures. The cost savings related to findings made during the detailed global positioning system (GPS) surveys and testing, as well as technical optimization, including tapping at the nearest connection point, reduced the length of conversion of distribution lines from low-voltage to high-tension and high-voltage, and are a successful example of technical optimization in rural electrification. 26. Including detailed GPS surveys, testing existing equipment, carrying out technical optimization, and consequently revising the scope of works was an efficient means of fine-tuning the actual equipment and materials under the project to maintain and improve the design. The distribution companies prepared the appraised schedule of quantities based on estimates of the actual conditions, with the understanding that the actual output would be adjusted based on the contractors’ detailed surveys and designs while maintaining the project outcomes. The actual works required were also adjusted based on the works being completed under the program tranches and ongoing projects implemented by the distribution companies with their own funds. This made it possible to target successive, most-urgently-required works and timely project execution. While this led to some changes and reductions in as-built quantities and outputs compared to the appraisal estimates, it not only saved substantial funds and time but strengthened the project’s strategic direction and relevance. B. Effectiveness in Achieving Outcome

27. The project is rated effective as both physical and institutional outcomes and outputs were achieved. The program was designed to overcome the distribution companies’ capacity constraints by breaking the scope of work into six manageable tranches. The works contracts were designed to provide flexibility in scope to incorporate ground realities. The distribution companies closely monitored and coordinated the project, and were able to complete the works of terminated contractors. The previous electrical power shortage has been alleviated partly through the augmentation of the transmission system under the first MFF tranche, and partly through the improved efficiencies achieved in the distribution systems, which freed up power to be transferred to other areas within the state. The distribution system’s reliability has been greatly improved, with fewer faults and a much shorter length of time to restore power. Distribution losses in the project areas were reduced significantly from 2008 to 2015, as follows: from 41.58% to 25.13% for DISCOM-C, from 37.23% to 22.50% for DISCOM-E, and from 35.50% to 22.58% DISCOM-W. The reduced losses meet those envisaged at appraisal. The estimated savings or reduced losses attributable to the project are 750 gigawatt-hours (GWh) per year.

10

28. Since project completion, customer complaints have been reduced by half14 based on a 60% reduction in power interruptions or tripping at transformer stations, as recorded at all feeder lines. Similarly, the duration of such interruptions has been reduced by 25% in 11 kV feeders and 50% in 33 kV feeders. The rural supply increased from 4 to 10 hours per day, while the urban supply increased from 12 to 24 hours per day. The project also improved power security and voltage levels, reduced distribution system losses, and reduced nontechnical and commercial losses. These improvements were due to the conversion of low-voltage lines to high-voltage, the installation of remote metering for high-usage consumers, and the metering program in urban project areas. 29. The project was classified as environment category B in accordance with ADB’s Environment Policy (2002). The construction works targeted existing distribution systems located along existing road alignments, rights-of-way, and transformer distribution stations. New substations were constructed on unoccupied government land kept available at regular intervals along major roads. An environmental assessment and review framework was prepared for the MFF program, and was used as a guide for the successive tranche projects, including for this project. An initial environmental examination report, including environmental management and monitoring plans, was prepared and disclosed as Appendix 13 of the Report and Recommendation of the President for the MFF. The ICB contracts incorporated environmental-related mitigation to minimize minor construction-related impacts of temporary road closings, safety measures for workers, and danger signage on power poles with high-voltage (11 kV and 33 kV) lines. ADB held environment and social safeguards workshops with the distribution companies during two special loan review missions before construction began. The distribution companies and their environmental consultants also participated in various ADB-sponsored workshops in the resident mission and at other venues. No complaints were received from the public regarding the project’s environmental aspects, and there were no reported safety issues. Reports on the implementation of the Environmental Management Plans (EMPs) and related monitoring were submitted to ADB from 2012 when fieldwork on most of the contracts was initiated,15 and these were posted on ADB’s website every quarter from 2012 through March 2015. The project was classified as category C for involuntary resettlement and indigenous peoples in accordance with ADB’s Involuntary Resettlement Policy (1995) and Policy on Indigenous Peoples (1998). These classifications did not change through the project’s implementation and no grievances were received. 30. The distribution companies have made major progress in addressing their capacity constraints and have improved their billing and collection efficiencies as required in the loan covenants. As of 2016, DISCOM-C had achieved 92.6%16 collection. While this is slightly below the target of 95.0%, the distribution company is continuing to collect arrears from smaller farmers who struggle with payments in the non-crop seasons. The other two distribution companies have surpassed the targets; DISCOM-E has achieved 100.0% collection and DISCOM-W has achieved 96.2%. The distribution companies have installed remote meters, and their new SCADA systems lead to better meter reading, billing, and collection, including that of arrears. This has improved their financial positions. In addition, the distribution companies are facing ongoing and future projects to continue renovating and improving their systems, with a focus on reducing system losses further. All project outputs

14 Based on the Quarterly Progress Report of EA for India: Madhya Pradesh Power Sector Investment Program

(Tranche 5). 15 After the initial project implementation, it took 18 months to complete the ICB procurement, manufacturing, and

delivery of the equipment before any work on the ground began. 16 DISCOM-C has established a program enabling farmers to pay their bills on a quarterly basis and as crops are sold.

However, their ability to pay in a timely manner is affected by fluctuations in crop yield and prices.

11

are operating as designed and the new infrastructure is being maintained. The efficiency of the distribution system continues to improve as the distribution companies learn to operate and maintain their systems more effectively and reduce non-technical losses through ongoing consumer education and metering programs. The project generally achieved its objectives.17 C. Efficiency in Achieving Outcome and Outputs

31. The project is rated efficient in achieving its outcome and outputs. The project was implemented under budget but required a 2-year extension to complete all of the works (para. 14). The project faced no institutional, technical, environmental, or social risks as it provided much-needed improvements and expanded power distribution systems throughout Madhya Pradesh, and had strong government and public support. As all works were completed within existing rights-of-way, there were no major safeguard issues. The economic internal rate of return (EIRR) for all of the aggregated distribution companies’ outputs is calculated at 25.3%, slightly lower than the appraisal estimate of 27.2% and higher than the assumed hurdle rate of 12.0%. A sensitivity analysis of the three main parameters that could affect the project (increased O&M cost, reduced value of saved energy losses, and reduced incremental consumption) indicated that the impact of these combined risks would only reduce the EIRR to 19.6%, further underscoring the robust nature of the project’s economic performance. Appendix 9 provides details of the methodology and assumptions underlying the EIRR reevaluation. 32. The new assets created under the project are being well maintained and operated, with adequate budget provisions for the repair and replacement of parts and equipment. The distribution companies’ institutional capacity has been continuously improved under the MFF program through almost 10 years of support from the successive tranche projects, and is now well ingrained. All of the management indicators are positive, as summarized in the DMF (Appendix 1). The project’s immediate and longer term impacts are positive and are creating positive economic growth, as confirmed by the increase in average income in the state (more than fivefold since 2003), which can be attributed in part to the project, mainly due to much better power availability in the agricultural and industrial sectors. The improved standard of living has led to a better quality of life and better opportunities for tens of millions of beneficiaries. D. Preliminary Assessment of Sustainability

33. The project is considered likely sustainable. The financial internal rate of return (FIRR) of the aggregated outcomes of the three distribution companies is calculated at 13.5%, substantially higher than the project’s estimated weighted average cost of capital (WACC) of 1.0%. The FIRR calculations are detailed in Appendix 10. The reevaluated FIRR is slightly lower than that calculated at appraisal, which was 16% for the overall project. The lower FIRR is primarily a consequence of the distribution companies’ lower actual equity contribution; however, a real rate of return of 13.5% in a regulated sector is considered a good achievement, and reflects the high returns that can be achieved from network loss reduction. The distribution companies’ financial performance and position has also improved due to the project, with an aggregate increase in net cash flow of more than `1,500 million in 2015. The ongoing institutional training and capacity building, strengthening of billing and collection procedures, and expected tariff increases will continue to improve the distribution companies’ financial performance, as well as the sustainability of the improved power systems. Electricity tariffs are set by the MPERC, which

17 The distribution companies showed strong commitment to the project, provided flexibility in approving required

changes, as well as close monitoring during implementation as per the project monitoring and evaluation systems and mitigated risks.

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is conducting public hearings in 2017 in preparation for a proposed tariff increase to help sustain the distribution companies’ financial performance. E. Impact

34. The project’s overall impact in terms of socioeconomic indicators was satisfactory. At completion, the project supported sustained economic growth and social development in the project areas. The enhanced distribution capacity and reliability facilitated (i) higher productivity in terms of agricultural outputs; (ii) decreased energy charges and lower maintenance costs with regard to electric appliances, irrigation pumps, and equipment thereby improving the economic opportunities of farmers, industrial and commercial users, and domestic consumers. Due to lower losses, the improved electricity supply contributed significantly to increased agricultural production, with some farmers increasing annual crop rotations from one to two or from two to three, as an improved power supply enables more irrigation during the dry season. As a result, agricultural production and incomes have increased substantially. The implementation of the project provided opportunities for job creation, income growth, and the upgrading of local infrastructure, thus contributing to poverty reduction and sustainable development in both agricultural and village or urban project areas. The improved electricity services achieved through the program, other interventions, and the project contributed to the increase in the state per capita income from `25,278 in FY2008 to `37,180 in FY2012. 35. The electrical equipment of industrial, commercial, agricultural, and domestic consumers is operating more efficiently due to proper voltage and reduced surges, yielding power cost and equipment maintenance savings. As a result, all electrical equipment and irrigation pumps will now have a substantially longer operational life, a major benefit for the rural economy.18 The improved power supply has contributed to increased economic activity. The project implementation process has strengthened the distribution companies’ institutional capacity as well as the managerial and operational competence of their managers and staff. The project’s economic viability has been confirmed with a better-than-projected EIRR, and financial sustainability is also confirmed, with an FIRR well above the WACC, although lower than estimated at appraisal. The projected direct benefits have been fully realized; these will be maintained throughout the life of the project facilities in the longer term.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

36. Overall, the project is rated successful. It was relevant, efficient, and effective, and its benefits are likely sustainable. The project resulted in the outcome envisaged at appraisal, and fully aligned with the government’s development strategy and ADB’s sector policy. The project also helped the distribution companies become more sustainable by improving the efficiency of the distribution systems, improving O&M, and strengthening human resources. Revenues increased due to the installation of consumer meters, including remote meters for major power consumers, better billing and collection procedures, and better financial management of the distribution companies. 37. Through the joint efforts of the project stakeholders, including the contractors, executing agency, and ADB, the project was completed, although 2 years later than originally scheduled. 18 The distribution companies report that the irrigation pump motors’ operating life has increased from one crop season

before the project to four–five seasons after the project.

13

This was ambitious considering the project’s size and complexities and the need for the newly formed distribution companies to build their capacities. The 24-month extension required to complete the various works and conduct as-built operational testing caused no undue impact and led to better overall efficiency and operation of the distribution systems. The project implementation aligned with the rules and regulations of the borrower as well as with ADB’s procurement, safeguard and oversight/auditing requirements, and loan covenants. The cost savings related to findings made during the detailed GPS surveys and testing as well as technical optimization, including tapping at the nearest connection point, reduced the length of conversion of distribution lines from low-voltage to high-tension and high-voltage, and is an example of successful technical optimization in rural electrification. B. Lessons

38. The project demonstrated the benefit of the MFF approach whereby successive tranches help train and build the experience of the implementing agencies. This was the fifth project under the MFF, and the distribution companies’ experience of the earlier projects (tranches 2 and 4) smoothed the project implementation, resulting in better use of the loan funds. More importantly, the continual improvements in O&M, human resource development, and financial management resulted in better and more sustainable power distribution entities well on their way to full independence from state support (expected by 2018). This is a significant achievement, as the distribution companies were not established until 2007 and will have achieved independence in terms of operations and financial management in just over a decade. The project further demonstrated the benefit of having experienced and sufficiently ranked technical managers to run the PMUs, with autonomy to plan, design, and implement the project. 39. The project implementation schedule set during the MFF appraisal was ambitious as it assumed that procuring the ICB contracts would not take much time; however, this takes 6–9 months in most ADB-assisted projects. Moreover, the successful contractors needed another 6–9 months to finalize the detailed scope of works, and a further 6 months to have the equipment manufactured and delivered to the sites. Consequently, the project took 2 more years to implement than envisaged at appraisal. This is a common issue encountered in ADB-assisted projects. To shorten the implementation time, the projects under the MFF would have to be fully designed and tendered before the loan signing. This is usually difficult as executing and implementing agencies have insufficient resources prior to loan approval, although ADB does allow retroactive financing for such activities. Further, the time allotted prior to loan signing is insufficient and would need to be extended to enable the recruitment of consulting services well before loan negotiations. 40. ADB’s support for the distribution companies improved substantially after the project’s administration was assigned to an experienced staff in the resident mission. ADB needs to support the implementing agencies closely in preparing and appraising the first tranches under an MFF. As this was the fifth MFF tranche, the distribution companies were familiar with ADB’s safeguard requirements, and regular 6-month monitoring reports were submitted and uploaded to ADB’s website. The quality of monitoring had improved from earlier tranches since the resident mission took over the project’s administration before construction began. 41. To reduce the number of problems caused by poorly performing contractors, the bid evaluation criteria for financial and technical experience of bidders need to be appropriately tightened while maintaining procurement efficiency in the future projects, to control the entry and selection of bidders with insufficient capacity or qualification.

14

42. During the preparation of an MFF, ADB may consider building in flexibility to reduce the number of tranches, by making it possible to increase the scope and loan amounts for later tranches if desired by the implementing agencies, the borrower, and ADB. For example, four tranches may have been sufficient under this MFF. This would have reduced the administrative cost for the PMUs and ADB, and made it possible to complete the project early by saving the time required to prepare the PFRs, loan agreements, and ICB bidding procedures for the last two tranches. Such a decision would be made once all stakeholders were satisfied that the PMUs could properly implement fewer but larger tranches than envisaged at the MFF appraisal. This could take place after the first or second tranches are well underway and the scope of works and costs are better defined. C. Recommendations

1. Project-Related 43. Future monitoring. The project has been implemented and the resulting facilities are operating as planned. The distribution companies will continue to monitor and evaluate the project’s impact and report their findings to ADB through the established project performance management system to ensure that the project facilities are managed effectively and the benefits are maximized. Routine maintenance and equipment repairs and replacement should be carried out expeditiously. The distribution companies’ distribution centers should continue to conduct due diligence and monitoring of local consumers, and continue installing three-phase meters for all irrigation pumps and other electrical equipment of more than 10 horsepower. The ongoing metering programs should be expanded to include all consumers over time. 44. Further action or follow-up. The project requires no specific future action from ADB, as most performance targets have been met. However, the distribution companies will continue to report annually on the progress of meeting their debt-service ratios as required in the loan covenants through 2018 when these are expected to have been achieved. 45. Timing of the project performance evaluation report. All of the facilities under the project are operating normally. ADB could undertake a project performance evaluation review in 2019–2020.

2. General 46. ADB’s favorable experience with this project demonstrates that it is relatively easy to improve power distribution significantly. The resulting improved supply translates quickly into economic growth for the consumers, and is a major contributor to poverty alleviation. ADB may consider supporting more power distribution projects designed to maximize efficiency by reducing distribution system technical losses and metering programs to reduce nontechnical losses.

Appendix 1 15

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets/Indicators

Results

Impact GSP grows by at least 6% annually during 2008–2012. The energy deficit is reduced from 13% in 2007 to 0% in 2012.

The average GSDP grew by 9.2% during 2008–2012. The state distribution system had a peak demand shortage of 1,005 MW in FY2006–FY2007. Peak demands were met in FY2013–FY2014 and there was a statewide energy surplus of 1,310 million units (MU) in FY2014–FY2015.

A better quality and more reliable power supply to meet the demand for sustainable economic growth in Madhya Pradesh

Outcome Reduced electric distribution system losses, improved reliability of power, increased system capacity and improved customer connectivity

a. Loss targets for the distribution companies as determined by the MPERC in its tariff determination for the year starting on 1 April 2009 are met.

a. Loss targets for distribution companies as determined by the MPERC in its tariff determination for the year starting on 1 April 2009 have been met. Losses are reduced as follows: (i) from 41.58% in FY2009 to 25.13% in FY2016 for DISCOM-C; (ii) from 37.23% in FY2009 to 22.50% in FY2016 for DISCOM-E; and (iii) from 35.50% in FY2009 to 22.58% in FY2016 for DISCOM-W.

b. Reduced average number of interruptions and average duration of interruptions.

b. Average number of interruptions measured in number of tripping (interruption of power) per year per feeder are as follows: (i) DISCOM-C: reduced from 12 tripping per year per feeder in FY2009 to 8 in FY2016; (ii) DISCOM-E: reduced from 11 tripping per year per feeder in FY2009 to 6.5 in FY2016; and (iii) DISCOM-W: reduced from 10.15 tripping per year per feeder in FY2009 to 6.76 in FY2016. The average duration of interruptions declined by 25% for 11 kV feeders and by 51% for 33 kV feeders.

c. Reduced customer complaints about the supply quality

c. Power supply reliability improved: 10 hours per day in rural or agricultural areas, 24 hours per day in urban or village areas, fewer interruptions, improved voltage, and fewer power surges. Customer complaints about the supply quality reduced by 50%.

Outputs DISCOM-C: .

By 2012 High voltage distribution system

• Conversion of 4,382 km low-voltage lines to 11 kV lines

• 1,165 km of low-voltage lines converted to 11 kV lines

• Construction of 94 km of new 11 kV lines

• 3,028 km of new 11 kV lines

• 9,804 11/0.4 kV, 25 kVA distribution transformers



• 1,477 11/0.4 kV, 16 kVA distribution transformers Note: The changes in actual installed improvements as compared to those targeted at appraisal were due to system optimization as determined during detailed surveys of needs.

16 Appendix 1

Design Summary


Results

Automatic meter reading • 41,877 single-phase meters

• 21,500 single-phase meters

• 29,545 three-phase meters • 153 three-phase meters Note: The remaining meters, either single-phase or three-phase, were installed under other ongoing projects that purchased such meters in bulk for lower prices, funded by the REC and PFC.

Substation renovation and modernization 511 33 kV VCBs

549 33 kV VCBs

1,929 11 kV VCBs 1,106 11 kV VCBs

576 33/11 kV substation renovations

443 33/11 kV substation renovations

DISCOM-E:

High voltage distribution system • Conversion of 5,305 km low-voltage lines to 11 kV lines

• 5,300 km of low-voltage lines to 11 kV lines.

• Construction of 758 km of new 11 kV lines

• 750 km of new 11 kV lines

• Upgrading of 1,516 km of 11 kV lines

• 1,500 km of 11 kV lines

• Conversion of 1,797 km low-voltage lines to low-voltage underground cable circuits

• 1,797 km low-voltage lines to low-voltage underground cable circuits





Separation of village feeders from agricultural feeders • Construction of 1,250 km of 11 kV lines

1,250 km of 11 kV lines

• Construction of 250 km of single-phase, three-wire, low-voltage lines

250 km of single-phase, three-wire, low-voltage lines


1,100 11/0.4 kV distribution transformers

Appendix 1 17

Design Summary


Results

DISCOM-W:

Augmentation, renovation, and modernization of 33/11 kV substations

• Augmentation of 47 33/11 kV transformers from 3.15 MVA to 5.00 MVA

• 47 33/11 kV transformers augmented from 3.15 MVA to 5.00 MVA

• Augmentation of 10 33/11 kV transformers from 5 MVA to 8 MVA

• 10 33/11 kV transformers augmented from 5 MVA to 8 MVA

•10 new 33 kV line bays at 132/33 kV substations

• 10 new 33 kV line bays at 132/33 kV substations

• 10 new 33 kV line bays at 33/11 kV substations

• 10 new 33kV line bays at 33/11 kV substations.

• Renovation and modernization of 50 33/11 kV substations

• 44 33/11 kV substations renovated and modernized

• 50 33kV VCBs • 48 33 kV VCBs

• 50 11kV VCBs • 50 11 kV VCBs

Construction of new 33/11 kV substations

• Construction of 15 33/11 kV, 3.15 MVA substations, including interconnecting 33 kV and 11 kV lines

• 15 33/11 kV, 3.15 MVA substations with interconnecting 33 kV and 11 kV lines

Installation of capacitor banks

• Installation of 136 1,200 kVAR, 11 kV capacitor banks

• 136 1,200 kVAR, 11kV capacitor banks

• Installation of 150 600 kVAR, 11 kV capacitor banks

• 150 600 kVAR ,11 kV capacitor banks

• Installation of 20,500 low-voltage capacitor banks on 11/0.4 kV distribution transformers

• Installation of 1,200 kVAR and 600 kVAR capacitor banks to meet the system requirement

Construction of new and augmentation of existing 11 kV lines • 1,671 km of new 11 kV lines • 1,600 km of new 11 kV lines constructed

• 400 km of upgraded 11 kV lines • 362 km of 11 kV lines upgraded

Separation of agricultural feeders from village feeders • Construction of 1,750 km of 11 kV lines

• 1,439 km of 11 kV lines

• 88 11kV VCB line bays • 88 11 kV VCB line bays



18 Appendix 1

Design Summary


Results

Enhancement of IT systems with SCADA and remote metering

• Construction of SCADA (data acquisition) for priority 33/11 kV substations

• 92 priority 33/11 kV substations constructed with SCADA systems

• Installation of 23,000 distribution transformer meters

• 12,000 distribution transformer meters installed under this project. The remaining 11,000 distribution transformers installed under other schemes funded by the REC and PFC due to economic prices.

ADB = Asian Development Bank, C = central, DTR = distribution transformer, E = eastern, FY = financial year, GSDP = gross state domestic product, GSP = gross state product, GWh = gigawatt-hour, hr = hour, HT = high-tension (11kV), HVDS = high-voltage distribution system, IDC = interest during construction, IT = information technology, kWh = kilowatt-hour, kV = kilovolt, kVA = kilovolt-ampere, kVAR = kilovolt-ampere reactive, LA = loan agreement, LT = low-tension (440 volt), MU = million kWh, MPERC = Madhya Pradesh Electricity Regulatory Commission, MVA = megavolt-ampere, MW = megawatt, PFC = Power Finance Corporation Limited, PFR = periodic financing request, REC = Rural Electrification Corporation, SCADA = system control and data acquisition, SBI = State Bank of India, VCB = vacuum circuit breaker, W = western.

Appendix 2 19

COST BREAKDOWN FOR THE DISTRIBUTION COMPANIES

2.1 Loan Amount and Disbursements for the Distribution Companies ($ million)

Part A: DISCOM-C

Part B: DISCOM-E

Part C: DISCOM-W

a There were no works contracts, only turnkey contracts for equipment supply and installation.

Category Category Original (PFR) Last Revised Amount Undisbursed

No. Subloana Allocation Allocation Disbursed Balance

1.

Equipment 46.80 50.00 46.80 0.15

2. Unallocated 3.20 0.00 0.00 0.00

Total 50.00 50.00 49.85 0.15

Category Category or Original Last Revised Amount Undisbursed


1.

Equipment 60.00 54.00 49.30 4.70

2. Unallocated 3.00 0.00 0.00 0.00

Total 63.00 54.00 49.30 4.70

Category Category or Original Last Revised Amount Undisbursed


1.

Equipment 47.90 48.00 34.86 13.14

2. Unallocated 5.10 0.00 0.00 0.00

Total 53.00 48.00 34.86 13.14

20 Appendix 2

2.2 Project Cost for the Distribution Companies ($ million) Part A: DISCOM-C

Part B: DISCOM-E

Part C: DISCOM-W

a Includes the cost of completing the terminated contracts.

2.3 Cost Breakdown for the Distribution Companies Part A: DISCOM-C



Total Baseline Costs 46.80 35.10 81.90 49.85 8.20 58.05

Unallocated 3.20 8.70 11.90 0.00 0.00 0.00

IDC and Commitment Chargesa

0.00 9.80 9.80 0.00 1.14 1.14

Total 50.00 53.60 103.60 49.85 9.34 59.19



Local Currency Cost 53.60 9.34a

Total 103.60 59.19



Local Currency Cost 26.30 8.16

Total 89.30 57.46



Local Currency Cost 24.30 12.29a

Total 77.30 47.15

Appendix 2 21

Part B: DISCOM-E




Unallocated 3.00 6.80 9.80 0.00 0.00 0.00


0.00 9.70 9.70 0.00 1.44 1.44

Total 63.00 26.30 89.30 49.30 8.16 57.46

Part C: DISCOM-W




Unallocated 5.10 3.10 8.20 0.00 0.00 0.00


0.00 7.20 7.20 0.00 1.21 1.21

Total 53.00 24.30 77.30 34.86 12.29 47.15 a Paid by the borrower.

DISCOM-C = Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Limited, DISCOM-E = Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited, DISCOM-W = Madhya Pradesh Paschim Kshetra Vidyut Vitaran Company Limited, IDC = interest during construction.

Sources: ADB and Distribution Companies.

22 Appendix 3

SUMMARY OF CONTRACTS

PCSS No. Category No. Item Description

(Supply and Install Turnkey Contracts)

Contract Amount

(ADB Financing) ($)

Actual Disbursed

($)

Part A: DISCOM-C

0007 01A Reno 33/11 kV S/S in Hoshangabad

3,224,909.81 3,224,909.81

0008 01A Reno 33/11 kV S/S in Gwalior

2,497,938.02 2,497,938.02

0009 01A Reno 33/11 kV S/S in Morena

2,576,961.68 2,576,961.68

0010 01A Reno 33/11 kV S/S in Bhopal

2,968,976.06 2,968,976.06

0011 01A HVDS separation of rural and urban

1,719,594.86 1,719,594.86

0012 01A HVDS separation of rural and urban

1,582,872.11 1,582,872.11

0013 01A Upgrading of existing 33/11 kV S/S

2,482,820.92 2,482,820.92

0014 01A Separation of HVDS feeders (Hoshangabad)

8,328,821.16 8,328,821.16

0015 01A Separation of HVDS feeders (Gwalior)

8,708,498.68 8,708,498.68

0016 01A Separation of HVDS feeders (Morena)

5,486,919.01 5,486,919.01

0017 01A Separation of HVDS feeders (Bhopal)

10,274,825.05 10,274,825.05

Total 49,853,137.36 49,853,137.36

Part B: DISCOM-E

0001 01BA HVDS in Tikamgarh District

5,415,722.45

5,409,495.45

0002 01B HVDS in Damoh District

3,815,836.75

3,786,698.48

0003 01B HVDS in Rewa District 3,953,696.62 3,943,462.44

Appendix 3 23



Contract Amount

(ADB Financing) ($)

Actual Disbursed

($)

0004 01B HVDS in Satna District 4,961,629.20 4,959,527.00

0005 01B HVDS in Jabalpur District

12,165,227.60 11,794,143.15

0006 01B HVDS in Narsinghpur District

19,254,305.51 16,165,519.51

0022 01B 11 kV feeders in Sagar District

4,940,515.97 3,240,929.82

Total 54,506,934.10 49,299,775.85

Part C: DISCOM-W

0018 01C New 11 kV feeders/bays/VCBs in S/Ss

1,801,566.42 1,172,595.70

0019 01C New 11 kV feeders/bays/VCBs in S/Ss

194,776.34 66,641.51

0020 01C Augmentation of bays/VCBs in S/Ss

5,971,736.28 3,781,492.61

0021 01C Augmentation of bays/VCBs in S/Ss

757,241.39 310,107.54

0023 01C New 11 kV capacitors for Indore

2,182,644.75 2,158,323.38

0024 01C New 11 kV capacitors for Ujjain

453,030.62

268,296.19

0025 01C New 33 kV bays and VCBs

1,448,435.06 1,012,493.53

0026 01C Augmentation of 33 kV bays/VCBs

218,779.75 152,365.95

0027 01C New 33 kV lines in Indore District

1,322,457.88 444,635.29

0028 01C New 33 kV lines in Khargone District

167,113.61 43,172.08

0029 01C New 33/11 kV S/Ss in Indore and Khandwa

5,649,455.74 5,642,573.72

0030 01C Augmentation of 33/11 kV S/Ss in Indore

364,863.85 262,031.29

24 Appendix 3



Contract Amount

(ADB Financing) ($)

Actual Disbursed

($)

0031 01C New 11 kV lines for Dhar District

4,861,605.90 3,840,383.10

0032 01C

Separation of rural and urban lines, Dhar

1,633,316.14 1,102,396.64

0033 01C New 11 kV lines for the Dewas region

2,289,131.24 1,904,789.70

0034 01C New 11 kV lines for Ujjain District

806,494.35 498,455.30

0035 01C

Supply a computerized IT system for metering, Indore

1,375,840.23 1,182,7775.99

0036 01C Install a computerized IT system in Indore District

164,774.09 144,943.52

0037 01C Supply 11 kV lines/bays/VCBs/DTRs

1,953,922.51 1,527,677.26

0038 01C Install 11 kV lines/bays/VCBs/DTRs

236,962.83 128,823.27

0039 01C Augment 33 kV lines in Indore City

3,852,619.89 1,057,611.44

0040 01C Augment 33 kV lines in Ujjain City

875,409.28 163,484.21

0041 01C Augment 33 kV lines in Khargone

3,236,981.42 2,965,757.86

0042 01C Augment 33 kV lines in Khandwa

814,494.11 421,944.00

0043 01C Supply 100 kVA DTRs for Indore

4,611,073.16 4,611,073.16

Total 47,244,726.84 34,864,844.24

ADB = Asian Development Bank; bays = areas in S/Ss for installing various DTRs, VCBs, or kVAR; DISCOM-C = Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Limited; DISCOM-E = Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited; DISCOM-W = Madhya Pradesh Paschim Kshetra Vidyut Vitaran Company Limited; DTR = distribution transformer; HVDS = high-voltage distribution system; IT = information technology; kV = kilovolt; kVA = kilovolt-ampere; kVAR = kilovolt-ampere reactive; No. = number, PCSS = procurement contract summary sheet; Reno = renovation and upgrading; S/S = substation; VCB = vacuum circuit breaker. Source: ADB.

Appendix 4 25

PROJECT FINANCING PLAN ($ million)

Source Appraisal Estimate Actual


ADB 166.00

0.00 166.00 134.02 0.00 134.02

Distribution companies—PFC/REC/SBI

0.00 104.20

104.20

0.00 29.79

29.79

Total 166.00 104.20 270.20

134.02 29.79 163.80

ADB = Asian Development Bank, PFC = Power Finance Corporation Limited, REC = Rural Electrification Corporation, SBI = State Bank of India.

Source: ADB.

26 Appendix 5

PROJECTED AND ACTUAL DISBURSEMENT OF LOAN PROCEEDS ($ million)

Calendar Year Projected Actuala

For the year Cumulative For the year Cumulative

2009 2.38 2.38 2.38 2.38

2010 23.88 26.26 23.88 26.26

2011 34.45 60.71 34.46 60.72

2012 29.27 89.98 29.25 89.97

2013 19.55 109.53 19.53 109.50

2014

2015

10.20 119.73

12.31

12.21

121.81

134.02

a Excludes actual interest during construction and commitment charges of $3.79 million, paid by the borrower. Source: ADB.

0

5

10

15

20

25

30

35

40

45

50

2009 2010 2011 2012 2013 2014 2015

Dis

bu

rse

me

nt

($ M

illi

on

)

Calendar Year

Disbursement

Projected

Actual

Appendix 6 27

CHRONOLOGY OF MAIN PROJECT EVENTS

Date Event

Financing Facility

2006

16–24 Oct Fact-Finding for Financing Facility

11 Dec Management Review Meeting 12–14 Dec Appraisal Mission

2007

19 Jan Staff Review Committee

21 Aug

Tranche 5

Asian Development Bank Board Approval

2009

31 Mar-1 Apr

27 May

Loan Negotiations

Loan Agreement Signed

7 Sep Loan Effectiveness

5–15 Oct 24–27 Nov

Loan Inception Mission Special Loan Administration

2010 6–16 Apr

Special Loan Administration

23–30 Sep Review Mission 2011

31 Jan–04 Feb Review Mission

11–14 Oct Review Mission

2012

11–20 Mar Review Mission

10–14 Dec Review Mission

2013

31 Jan–9 Feb Review Mission

1–9 Oct Review Mission

2014

10–19 Feb 4 Jun 30 Jun 23 Sep 31 Dec

Review Mission 1st Partial Loan Cancellation 1st Extension 2nd Partial Loan Cancellation 2nd Extension

2015

22 Jul Loan Closure

2017

3–10 Jan Project Completion Report Mission

Source: Asian Development Bank.

28 Appendix 7

ORGANIZATIONAL CHART OF THE DISTRIBUTION COMPANIES

ACE = additional chief engineer, ADB = Asian Development Bank, AO = accounts officer, CE = chief engineer, CFO = chief financial officer, CGM = Chief General Manager, DIR = director, Dy = deputy, ED = executive director, EE = executive engineer, Equip = equipment, JR = junior, MD = managing director, SE = superintendent engineer, SR = senior, Stn = station. Source: Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited. Note: This organization chart is generic for the three distribution companies; each established a dedicated office for the ADB-financed project. While the responsibilities were similar for each cell or activity, the specific titles of the assigned personnel varied among the distribution companies.

MD

Leadership, Coordination, and Guidance

ED/CGM (Works)

CE (ADB) Turnkey

contracts and procurement

CFO All works related to finance

CE/SE Construction of

lines/ substations

CE/SE Construction of

lines/ substations

CE/SE Construction

of lines/ substations

ACE (Civil) SE (Works)

EE/Equip

Joint DIR

Dy DIR

AO

SE Office SE Field

SE Office SE Field

SE Office SE Field

Appendix 8 29

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan

Agreement

Responsible Agencies

Status of Compliance

Project Implementation

The Borrower shall cause the State, acting through the DISCOMs, to implement the Project in accordance with the provisions of this Loan Agreement, the Project Agreement, and the FFA including its Schedules, Annexes and Attachments.

LA, Schedule 5, para 1

Borrower, State, DISCOMs

Complied with.

The State, acting through the DISCOMs, shall be the Project Executing Agency and shall be responsible for the execution of the Project. The Project shall be implemented as follows: Part A-by DISCOM-C; Part B-by DISCOM-E; and Part C-by DISCOM-W.


State/ DISCOMs

Complied with.

Each Project Management Unit (PMU) established within the DISCOMs for the Investment Program shall implement the subprojects for which the relevant DISCOM is responsible. Each PMU shall be headed by a PMU Manager. The PMU Manager shall report all Project related matters to the Chairman and the Managing Director of the respective DISCOM. The PMU shall comprise technical, financial, procurement and safeguard sections


DISCOMs Complied with.

The Investment Program Coordinating Committee, chaired by the Chairman and the Managing Director of Madhya Pradesh Power Transmission Company Ltd. shall coordinate and monitor the overall implementation of the Investment Program. The Coordinating Committee shall report to the ED through the Program Implementation Unit (PIU) established within the ED and to MPERC. At the State level, the ED shall monitor the implementation of reform policy, planning process and overall power sector investment, while MPERC shall conduct review and due diligence for new project proposals submitted by the companies prior to approval, and monitor the performance and improvement of service delivery of DISCOMs. At the national level, the Ministry of Power of the Borrower shall also monitor the state sector policy and Investment Program implementation.


Borrower/ State/ DISCOMs

Complied with.

Corporate and Financial Management

Counterpart funding. The Borrower and the State, acting through the DISCOMs, shall ensure the availability and timely release of counterpart funds for the timely implementation of each subproject. The State, acting through the DISCOMs, shall provide, as

LA, Schedule 5, para 5 (a)

Borrower/ State

Complied with.

30 Appendix 8

Covenant

Reference in Loan

Agreement



necessary, counterpart staff, land facilities, and counterpart funds for related subprojects in accordance with the agreed financing plan. It shall do so in a timely manner through approved annual budget allocations, including the cost of making land available for the subprojects, and environment monitoring including cost of mitigating unforeseen environmental impacts, and general management expenses.

On-lending Agreements. The State shall ensure that the Loan proceeds are promptly made available to each of DISCOMs on terms and conditions referred to in Section 3.01(b) of this Loan Agreement. The State shall ensure that the Onlending Agreements, in form and substance satisfactory to ADB, are submitted to ADB within one (1) month from the Effective Date.

LA, Schedule 5, para 5 (b)

State Complied with.

Cash Management Responsibilities. The State shall ensure that the cash management responsibilities are transferred to DISCOMs w.e.f a date not later than 2 April 2011, so that DISCOMs can commence commercially independent operations, with any deficits met by commercial borrowings or other satisfactory means.


State/ DISCOMs

Complied with.

Audits. Without limiting the generality of Section 2.09 of the Project Agreement, DISCOMs shall engage independent private audit firms, whose qualifications, experience and terms of reference are acceptable to ADB, to conduct annual financial audits and procurement audits, and submit reports to ADB promptly after their preparation but in any event not later than 6 months after the close of the fiscal year to which they relate. The DISCOMs shall ensure that in addition to the financial statement audits, (i) energy audits, and (ii) business process and performance audits in all operational areas are conducted annually by independent auditors whose qualifications, experience and terms of reference are acceptable to ADB.

LA, Schedule 5, para 7 LA, Schedule 5, para 8

DISCOMs DISCOMs

Complied with. Complied with.

Debt Service Coverage Ratio. The DISCOMs will maintain a debt service coverage ratio of 1.2:1 from financial year 2010-2011 and onwards. Self-financing Ratio. The State shall ensure that the DISCOMs maintain a historic self financing ratio of 20% from financial year 2010-11 and onwards, based on a three years moving average capital expenditure.


DISCOMs State/ DISCOMs

Efforts are being made to achieve compliance. Expected to be complied with by the end of 2018. Efforts to achieve

Appendix 8 31

Covenant

Reference in Loan

Agreement



Financial Management. The State, acting through the DISCOMs, shall ensure that the current capacity development program that covers financial management and human resources development is implemented on a timely basis and finalized by 31 December 2010. Corporate Social Responsibility. The State shall ensure that the DISCOMs conduct extensive public awareness campaign through installing appropriate signs and issuing fliers to public to ensure that people are aware that HVDS networks may result in serious injury or death in case of attempts to illegally connect to overhead circuits.


State/ DISCOMs State/ DISCOMs

compliance are ongoing. Complied with. Complied with.

Billing and Collection Efficiency; Loss Reduction. The State shall ensure that the DISCOMs improve collection efficiency by 31 December 2010 as follows: DISCOM-E to 96%; DISCOM-C to 95%; and DISCOM-W to 96%.


State/ DISCOMs

Generally complied with. DISCOM-C: 92.6% DISCOM-E: 100.0% DISCOM-W: 96.0%

The State, through the DISCOMs, shall ensure that losses do not exceed the targets as determined by MPERC in its tariff determination for the relevant financial year.


State/ DISCOMs

Complied with. DISCOM-C: 25.3% DISCOM-E: 22.5% DISCOM-W: 19.1%

Pension Funds. The State shall ensure that the DISCOMs have established trust funds by 31 December 2011.


State/ DISCOMs Complied with.

Subprojects Implementation

Selection Criteria and Approval Process for Subprojects. The Borrower and the State, acting through the DISCOMs, shall ensure that all subprojects are selected and approved in accordance with the criteria and approval process stipulated in Schedule 4 to the FFA.



Complied with.

Turnkey Contracts. DISCOMs shall (i) ensure utilization of turnkey contracts, where appropriate, (ii) negotiate longer terms of guarantees on equipment; and (iii) include long-term maintenance provisions in the turnkey contracts.


DISCOMs Complied with.

Safeguards and Social Issues

Land Availability and Resettlement. Without limiting the generality of Schedule 5 to the FFA, including its Annexes and Attachments, the DISCOMs shall, subject to compliance with the relevant provisions of the RF and EARF and in

LA, Schedule 5, para.18

State/ DISCOMs

Complied with.

32 Appendix 8

Covenant

Reference in Loan

Agreement



accordance with all applicable laws and regulations of the Borrower, ensure continuous monitoring of implementation of subprojects. In the event of any unforeseen social or economic negative impact caused by implementation of the Project, the State, through the DISCOMs, shall prepare and submit to ADB for approval, a resettlement plan prepared in accordance with the relevant provisions of the RF and IPDF, ADB's Policy on Involuntary Resettlement

(1995), ADB’s Policy on Indigenous Peoples (1998) and all applicable laws and regulations of India and the State, prior to the commencement of construction activities. The State, through the DISCOMs, shall ensure that people affected by a subproject are fairly compensated in a timely manner in accordance with ADB’s Policy on Involuntary Resettlement (1995), the RF, related RPs, and laws and regulations of the Borrower and State. In the event a DISCOM needs to acquire or make available the land and rights to land free from any encumbrances, and cleared the utilities, trees and any other obstruction from such land, all compensation shall be paid prior to commencement of construction activities in accordance with the schedule agreed under the related civil works contract.

LA, Schedule 5, para. 19

State/ DISCOMs

Complied with.

The State, through the DISCOMs, shall ensure that prior to any land acquisition or resettlement under a subproject, the related resettlement plan including its update based on consensus of affected peoples, is endorsed and is disclosed with all necessary information made available to persons affected by the subproject and confirm that it be uploaded onto the ADB website. The DISCOMs will ensure that essential public infrastructure that may be affected under land acquisition and resettlement is replaced as appropriate in an expeditious manner in accordance with the relevant RPs. The State, through the DISCOMs, shall ensure that construction contracts contain binding requirements for construction contractors to fully reinstate pathways, other local infrastructures, and agricultural land to at least their pre-Project condition upon construction completion. Provision should be made for adequate recording of the condition of roads, agricultural land and other infrastructure prior to

LA, Schedule 5, para. 20 LA, Schedule 5, para. 21

State/ DISCOMs State/ DISCOMs


Appendix 8 33

Covenant

Reference in Loan

Agreement



transport of material and construction commencement. DISCOMs shall ensure that all contractors, subcontractors and consultants, if any, comply with the Borrower’s labor legislation, including but not limited to safe working conditions and core labor standards. Without limiting the generality of Schedule 5 to the FFA, including its Annexes, the State, acting through the DISCOMs, shall design and implement the Project and operate and maintain all Project facilities in accordance with the EARF, IEE, EMP, ADB’s Environment Policy (2002) and the Borrower’s and the State’s applicable laws, rules, and regulations. The DISCOMs shall ensure that subproject bidding documents include all recommendations from the IEE, and related contracts incorporate mitigation measures specified in the relevant EMP. The DISCOMs shall ensure that the recommendations of the IEE and EMP approved by ADB and relevant government agencies are adhered to during design, construction and operation phases of the subprojects.





State/ DISCOMs

State/ DISCOMs

Complied with.

Complied with.

Complied with.

DISCOMs shall monitor, audit, and report to ADB twice a year on the implementation of the EMP related to each subproject. DISCOMs shall verify that all associated power projects not financed by ADB will be constructed and commissioned in compliance with the laws and regulations of the Borrower and the State prior to connecting such facilities to the ADB-supported transmission and distribution networks.


State/ DISCOMs

Complied with.

Execution of civil works. The DISCOMs shall ensure that, subsequent to award of civil works contract under any subproject, no section or part thereof under the civil works contract shall be handed over to the contractor unless the applicable provisions of the RF and the EARF/EMP have been complied with. Any changes to the location, land alignment, or environmental impacts on account of detailed designs of a subproject shall be subject to prior approval by ADB and/or DISCOMs, as the case may be, in accordance with the selection criteria and process stipulated in Schedule 4 to the FFA.

LA, Schedule 5, para. 26 LA, Schedule 5, para. 27

DISCOMs DISCOMs


34 Appendix 8

Covenant

Reference in Loan

Agreement



Performance Monitoring and Reporting

The Borrower shall ensure that within 3 months of the Effective Date, a Project Performance Monitoring System (PPMS) shall have been established by DISCOMs in a form and with a composition acceptable to ADB in accordance with the Investment Program and Project performance indicators. DISCOMs shall undertake periodic Project performance review, and also for the Investment Program in accordance with the PPMS to evaluate the scope, implementation arrangements, progress and achievements of objectives of the related subproject and overall Investment Program. Without limiting the generality of Section 2.08 (b) of the Project Agreement, the State, acting through DISCOMs, shall prepare quarterly progress reports and submit these to ADB within 30 days of the end of each quarter. These reports shall provide (i) a narrative description of progress made during the period (progress on compliance with environmental and social requirements including EMP and RF shall also be included), (ii) changes in the implementation schedule, (iii) problems or difficulties encountered, and (iv) work to be carried out in the next period. The progress reports shall also include a summary financial account for the components, including subprojects, consisting of expenditures during the period, total expenditure to date, and reports on environmental, resettlement and benefit monitoring. Without limiting the generality of Section 2.08 (c) of the Project Agreement, the Borrower shall ensure the submission to ADB of a Project completion report within 3 months of physical completion of the Project by the State, acting through DISCOMs, and the Facility completion report within 3 months of physical completion of the Investment Program. These reports shall cover a detailed evaluation of the Project and the Facility respectively, covering the design, costs, contractors’ and consultants’ performance, social, environmental and economic impact, economic and financial rates of return, and other details of the Project and the Facility, as may be requested by ADB.

LA, Schedule 5, para. 28 LA, Schedule 5, para. 29 LA, Schedule 5, para. 30

Borrower/ State/ DISCOMs State/ DISCOMs Borrower/ State/ DISCOMs

Complied with. Complied with. Complied with.

Review. ADB, the Borrower and the State, acting through the DISCOMs, shall meet regularly as required to discuss the progress of the Project and any changes to implementation arrangements or remedial measures required to be undertaken


Borrower/ State/ DISCOMs/ ADB

Complied with.

Appendix 8 35

Covenant

Reference in Loan

Agreement



towards achieving the objectives of the Project and the Investment Program. A mid-term review of the Project shall be undertaken by ADB and the State, acting through the DISCOMs. The mid-term review shall include a review of issues and any problems or weaknesses in implementation arrangements, and agree on any changes needed to achieve the objectives of the Project and the Investment Program.


State/ DISCOMs/ ADB

Complied with.

ADB = Asian Development Bank, DISCOM = power distribution company, EA = executing agency, EARF = environmental assessment and review framework, EMP = environmental management plan, FFA = financing facility agreement, IEE = initial environmental examination, State = Government of Madhya Pradesh, LA = loan agreement, PMU = project management unit, RF = resettlement framework, RP = resettlement plan.

36 Appendix 9

ECONOMIC REEVALUATION A. General 1. This economic reevaluation considers the total project investment as a whole. The reevaluation is based on estimated cost and benefit streams expressed in constant 2015 dollars.1 Figures from the appraisal evaluation, which were expressed in 2008 values, have been adjusted to 2015 values for the purposes of comparison. The project boundary was defined as the distribution networks of the three distribution companies, and the existing and prospective customers in Madhya Pradesh that they serve. An analysis was conducted at the subproject level for each distribution company following the approach taken at appraisal, and then aggregated to calculate an overall economic internal rate of return (EIRR) for the project. B. Economic Costs 2. Project investments. The domestic price numeraire was used for this reevaluation. Traded inputs were valued at their border price equivalent values and then adjusted to the domestic price numeraire by multiplying by the shadow exchange rate factor calculated at appraisal (1.04). Non-traded inputs were valued at domestic prices. It was assumed that there are no significant distortions in the wage rates for skilled labor. In the case of unskilled labor, underemployment exists in the economy, and a shadow wage rate of 0.75 was adopted. Taxes, financing charges, and price contingencies were excluded. The annual economic costs used in the economic reevaluation are summarized in Table A9.1.

Table A9.1: Financial and Economic Costs of the Project, 2015 (` million)

Financial Yeara

Project Financial Costs

Project Economic Costs

2009 178.3 172.9 2010 1,788.7 1,732.0 2011 2,640.4 2,557.8 2012 2,216.1 2,157.8 2013 1,516.6 1,480.8 2014 959.4 938.4 2015 936.8 918.6 Total 10,236.4 9,958.2

a The fiscal year (FY) of India and its agencies ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2017 ends on 31 March 2017. Source: Asian Development Bank estimates, based on annual financial disbursements.

3. Operation and maintenance costs. As many of the subprojects would result in a decrease in operation and maintenance (O&M) costs, O&M costs were assessed at the subproject level. For most subprojects, the Madhya Pradesh regulatory allowance for O&M costs was adopted (typically 2.5% of capital costs, a figure based on the recommendation and experience of India’s central regulatory authority).2 In the case of upgrades to fault protection facilities at 33/11 kilovolt (kV) substations, there is expected to be a significant reduction in costs

1 2015 was the year of project completion and the basis on which costs were restated for the financial reevaluation. 2 Because the regulatory allowance represents the expenditure that distributions are certain to be able to recover

through tariffs, actual O&M expenditure has tended to trend towards the regulatory allowance across India.

Appendix 9 37

to repair downstream equipment damaged through the incorrect operation of circuit breakers at upstream substations (initial indications support this). Similarly, the installation of capacitor banks has led to a decrease in distribution transformer failures. O&M costs for these subprojects were estimated based on initial indications from the field and the distribution companies’ expectations. Overall, the weighted average O&M cost was estimated at approximately 2.1% of capital costs. The specific conversion factor for O&M costs was estimated to be approximately 1.0 and therefore no shadow pricing of O&M costs was undertaken. It was assumed that O&M costs would be applied to the completed portion of each subproject from the second year after the first disbursement. C. Economic Benefits 5. Demand. Actual demand during FY2008–FY2015 was incorporated in the analysis. For the sake of conservatism, demand growth beyond FY2015 was ignored for the purposes of this reevaluation, as ongoing investments in other parts of the network will likely be required to meet demand growth. 6. As noted at appraisal, the principal economic benefits of the investment are incremental consumption and displaced thermal electricity generation. These benefits arise from a reduction in technical and non-technical losses (attributable to the high-voltage distribution system subproject and the distribution line augmentation and upgrading subproject), the removal of network constraints (capacitor bank, system strengthening subprojects, and substation augmentation subprojects), and improved reliability of supply (all subprojects). 7. For subprojects that remove network constraints and improve supply reliability, it was assumed that these alternative energy sources would meet some but not all of the electricity demand in the “without project” case (that is, electricity consumers would use other sources of energy to meet some, but not, all of their unserved demand for grid electricity). This means that these subprojects result in increased electricity consumption (valued at consumers’ willingness to pay) and displace alternative sources of energy (kerosene lamps in the case of domestic consumers and diesel generation for other consumers). 8. Reducing technical losses in the distribution network may create benefits in two ways: (i) in an energy deficit power system, saved energy causes the energy deficit to be lower than otherwise, allowing for incremental consumption of electricity by consumers (valued at their willingness to pay); or (ii) in an energy surplus system, energy saved in reduced distribution losses would reduce output from the marginal generator (a resource cost saving). Overall, although Madhya Pradesh was running an energy deficit until about FY2015, load shedding has now been almost completely eliminated. Current projections indicate that surpluses will continue for the foreseeable future. Over-forecasting of demand growth during the 12th plan period (2012–2017) by the Central Electricity Authority and consequential overinvestment in base-load thermal generation also supports an expectation of energy and capacity surpluses in the medium term for Madhya Pradesh and neighboring states.3 On this basis and for the purposes of this reevaluation it was assumed that peak loss reduction would have resulted in incremental output up to and including FY2014, and thereafter would have resulted in non-incremental output. 9. Overall, the distribution companies’ efforts to reduce losses have been successful: aggregate energy losses declined from 44% in 2008 to around 25% in 2015. However, the project

3 Without a detailed analysis, it is an oversimplification to say that any surplus energy from Madhya Pradesh would be

used in other energy- and capacity-deficit states.

38 Appendix 9

was one of a number of interventions made by the three distribution companies over this period to reduce technical and non-technical losses (many of the subprojects in this investment targeted improved supply reliability and quality rather than loss reduction). To estimate the actual loss reduction that can be reasonably attributed to the project, subproject analysis conducted during the appraisal (which was based on load flow analysis conducted by the distribution companies) was updated to reflect the actual capital costs and physical outcomes of the project. A study conducted under the multitranche financing facility regarding the impact of the introduction of high-voltage distribution system on losses was also reviewed and its findings incorporated.4 On this basis, aggregate loss reduction achieved by the project (by 2015) was estimated at 717 gigawatt-hours (GWh) per year (including low-voltage, 11kV, and 33kV losses), representing approximately 1.5% (out of a total loss reduction of 19.0%). This is a very conservative estimate and only includes 50.0% of the estimated non-technical loss reduction accruing from the project. Because the project components were commissioned progressively, a benefit proportional to the value of the assets commissioned each year was assigned from 2011 onwards. From 2015 onwards, the full benefits of the reduced losses were included. The loss reduction attributed to the project may increase after FY2015 when increasing customer demand results in the delivery of more power through the distribution companies’ distribution networks; however for the sake of conservatism it was assumed to remain constant throughout the evaluation period. As noted above, peak loss reduction was assumed to result in incremental output up to and including 2015, and non-incremental output thereafter. 10. Incremental electricity supplied from the grid due to the removal of network constraints was estimated at 90 GWh per year, on the basis of the actual incremental network capacity constructed through the project and the distribution companies’ reported system load factors. Incremental electricity supplied due to improved network reliability was estimated at 71 GWh on the basis of fault statistics supplied by the distribution companies. Expected increases in these benefits as demand grows over time (beyond 2015) were ignored for the purposes of this reevaluation (as ongoing investments in other parts of the network will likely be required to meet demand growth). Other minor economic benefits incorporated at appraisal included reductions in distribution transformer failures, and in staff and vehicle costs (arising from a reduction in the need to travel to read consumers’ meters physically). Whilst these benefits appear reasonable, they cannot be easily quantified and have therefore been excluded from this reevaluation.

11. The non-incremental output arising from loss savings (beyond 2014) was valued on the basis of the economic cost of supplying electricity in Madhya Pradesh. Based on a review of the current and expected generation mix in Madhya Pradesh, it was assumed that the marginal cost of electricity from existing coal-fired thermal plants represents the short-term marginal cost of energy in Madhya Pradesh, and the lifecycle cost of a new coal-fired thermal plant represents the long-term marginal cost of energy. Marginal costs of existing coal plants were estimated based on actual historical operating parameters contained in recent tariff petitions submitted by Madhya Pradesh’s state-owned generating company. International benchmarks and local data were used to establish the economic capital costs of a new plant. Coal fuel was initially valued at its border price equivalent value based on the World Bank’s coal price forecast and adjusted for the generally lower quality of coal used to generate power in India. On this basis, the non-incremental output was valued at an average of `3.0 per kilowatt-hour (kWh) up to and including FY2020 and `3.4 per kWh beyond FY2020. The non-incremental output arising from the removal of downstream constraints (capacity and reliability) was valued at the short-term marginal cost of

4 ADB. 2011. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing

Facility and Technical Assistance Grant to India for the Madhya Pradesh Energy Efficiency Improvement Investment Program. Manila.

Appendix 9 39

kerosene lamps for domestic consumers (`17.5 per kWh) and at the short-term marginal cost of diesel generators for other consumers (`9.5 per kWh). 12. The incremental output (arising from improved reliability, the removal of network constraints, and loss reduction prior to FY2015) was valued conservatively at the weighted average end-use consumer tariff in FY2015 (`4.7 per kWh adjusted for low-voltage losses), ignoring any consumer surplus likely to accrue (due to inherent difficulties in estimating it). 13. Table A9.2 summarizes the quantification and valuations of the benefits. As noted above, to reflect the expectation that ongoing investments in other parts of the network will likely be required to meet demand growth, no increase in benefits is assumed beyond 2015.

Table A9.2: Project Benefit Calculations

Item Unit 2011 2012 2013 2014 2015 H2020

Quantification

Loss reduction (estimated by the distribution companies through load flow analysis and initial field indications)

Incremental output GWh 5.2 42.3 44.1 28.5 0.0 0.0

Non-incremental output GWh 20.9 239.8 397.3 541.4 716.7 716.7

Total GWh 26.1 282.1 441.5 569.9 716.7 716.7

Increased capacity (estimated based on actual capacity added on actual load factors)



Total GWh 11.9 18.7 65.7 78.1 90.3 90.3

Improved reliability (estimated from fault statistics provided by distribution companies and average substation and feeder loads)



Total GWh 0.0 2.5 31.7 61.6 71.0 71.0

Total Incremental Output (a) GWh 11.0 53.0 103.1 116.7 101.4 101.4

Total Non-Incremental Output (b) GWh 27.0 250.3 435.7 592.9 776.5 776.5

Valuation

Incremental output (weighted average end-use tariff adopted as a conservative proxy)

Weighted average willingness to pay (c) `/kWh 4.5 4.6 4.6 4.7 4.7 4.7

Non-incremental output

Avoided alternative energy sources (domestic)

`/kWh 7.5 17.5 17.5 17.5 17.5 17.5

Avoided alternative energy sources (other) `/kWh 9.5 9.5 9.5 9.5 9.5 9.5

Avoided grid generation `/kWh 3.0 3.0 3.0 3.0 3.0 3.0

Weighted average value of non-incremental output

(d) `/kWh 4.3 4.1 4.1 3.9 3.6 3.6

Summary

Total Value of Incremental Output (a)*(c) ` million 49.5 243.7 472.3 547.4 479.6 479.6

Total Value of Non-Incremental Output (b)*(d) ` million 116.7 1,014.3 1,784.7 2,285.3 2,771.6 2,771.6

DISCOM = distribution company, GWh = gigawatt-hour, kWh = kilowatt-hour. Source: Asian Development Bank estimates.

40 Appendix 9

D. Economic Reevaluation

14. Based on the estimates of economic costs and benefits described above, the aggregate economic internal rate of return (EIRR) was recalculated at 25.3%. This value is slightly lower than the appraisal evaluation of 27.2%, principally due to the more conservative valuation options adopted, particularly ignoring consumer surplus, assuming no capacity and energy deficits beyond 2014, and ignoring the possible growth in benefits arising from demand growth beyond 2015. The estimated EIRR exceeds the assumed EIRR hurdle rate of 12.0%. Detailed calculations are shown in Table A9.3.

Table A9.3: Reevaluated Economic Costs and Benefits of the Project, 2015 (` million)

Fiscal Benefits Costs Net Year

Incremental

Output

Non-Incremental

Output Capital Supplya O&M

Benefits

2009 0.0 0.0 172.9 0.0 0.0 (172.9) 2010 0.0 0.0 1,732.0 0.0 0.1 (1,732.2) 2011 49.5 116.7 2,557.8 20.1 14.9 (2,426.6) 2012 243.7 1,014.3 2,157.8 111.2 79.4 (1,090.4) 2013 472.3 1,784.7 1,480.8 356.4 136.0 283.9 2014 547.4 2,285.3 938.4 377.5 166.5 1,350.3 2015 479.6 2,771.6 918.6 408.7 185.9 1,738.0 2016 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2017 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2018 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2019 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2020 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2021 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2022 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2023 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2024 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2025 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2026 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2027 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2028 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2029 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2030 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2031 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2032 479.6 2,771.6 0.0 408.7 204.9 2,637.6 2033 479.6 2,771.6 0.0 408.7 204.9 2,637.6

EIRR 25.3% ( ) = negative, EIRR = economic internal rate of return, O&M = operation and maintenance. a Incremental variable cost of generation to supply incremental output. Source: Asian Development Bank estimates.

15. Sensitivity analysis. Three parameters in this reevaluation may adversely affect the project’s economic viability: increased O&M costs, reduced value of saved energy losses, or reduced incremental consumption. For each of these risks, the sensitivity of the aggregate EIRR

Appendix 9 41

was tested and switching values were calculated.5 The sensitivity analysis results, which are summarized in Table A9.4, reflect the project’s robust economic returns even under a combined downside scenario. It is clear from this reevaluation that the decision to construct the project facilities was correct from an economic perspective.

Table A9.4: Results of Sensitivity Analysis

Sensitivity Parameter Variation EIRR Switching Value

Base case 25.3% 1. Value of saved losses –20% 20.0% –51% 2. Value of incremental consumption –20% 24.2% –257% 3. O&M costs +20% 24.9% 702% 4. Combined (1–3) 18.6%

EIRR = economic internal rate of return, O&M = operation and maintenance.

5 A switching value measures the percentage change in the variable required to reduce the EIRR to the assumed

hurdle rate.

42 Appendix 10

FINANCIAL REEVALUATION A. Background 1. This financial reevaluation considers the project investment as a whole based on actual cost and benefit streams. The unit of account selected was the Indian rupee (`). Financial benefits flowing to the Madhya Pradesh distribution companies consist primarily of increased regulated revenue accruing from newly constructed distribution facilities: the jurisdictional regulator, Madhya Pradesh Electricity Regulatory Commission (MPERC), determined an annual revenue allowance for the distribution companies based on the MPERC’s view of reasonable and efficient capital costs, power purchase costs, operation and maintenance (O&M) costs, overhead costs, depreciation, interest on loans and working capital, and return on equity. To assess the project’s financial viability, the weighted average cost of capital (WACC) of the investment was calculated and compared with the total investment’s financial internal rate of return (FIRR). B. Evaluation of Project Costs 2. Project costs. The project capital costs include equipment, civil engineering and erection costs, project management costs, expenditure on safeguards, purchase of land, and taxes and duty. No physical or price contingencies were charged to the project, nor any financial charges during construction. Total annual expenditure against the project was estimated from actual annual loan disbursements and from the distribution companies’ reported total expenditure from counterpart funds. The project was completed in 2015 and all monetary values were converted to 2015 equivalent values in accordance with Asian Development Bank (ADB) guidelines, as summarized in Table A10.1.1

Table A10.1: Conversion of Project Costs to 2015 Price Levels

Year Foreign Cost

Local Cost Foreign Price Index

Local Price Index

Foreign Cost

Local Cost

Total Cost

($ million) (` million) (2015 base) (2015 base) (` million, 2015 levels)

2009 2.4 2.2 105.6 66.58 144.8 33.5 178.3

2010 23.9 21.2 102.2 73.70 1,501.5 287.1 1,788.7

2011 34.5 31.2 98.1 81.53 2,258.3 382.2 2,640.5

2012 29.3 30.3 100.1 89.48 1,877.6 338.5 2,216.1

2013 19.5 22.2 97.5 96.63 1,287.1 229.5 1,516.6

2014 12.3 14.6 96.7 102.81 817.7 141.7 959.4

2015 12.2 15.2 100.0 100.00 784.6 152.2 936.8

Total 134.0 136.8 8,671.8 1,564.8 10,236.5 Note: The foreign price index is based on dollars compared with a basket of currencies (http://www.fxstreet.com/rates-charts/usdollar-index/). The local price index is based on the consumer price index published by the Reserve Bank of India.

3. Operation and maintenance costs. Actual incremental O&M costs attributable to the project cannot be calculated with any accuracy. The MPERC’s regulatory allowance for O&M costs (for the renovation and maintenance of physical assets) is 2.3% of gross fixed assets, escalated annually at a rate set periodically by the MPERC (this means that the distribution companies are allowed to recover annual O&M costs equal to 2.3% of the project’s capitalized asset value). This O&M cost was used in the revenue allowance calculation; however, as noted in Appendix 9, many of the subprojects would actually result in a reduction in O&M costs. Therefore, O&M costs were estimated at a subproject level as discussed in the economic

1 Asian Development Bank, Independent Evaluation Department. 2013. ADB Guidelines for Preparing Performance

Evaluation Reports for Public Sector Operations. Manila

Appendix 10 43

reevaluation, resulting in an overall O&M cost of approximately 2.1% of the capitalized project cost. C. Evaluation of Project Benefits 4. Regulated revenue from new assets. As noted above, most of the incremental revenue earned by the distribution companies for the new distribution facilities is calculated in accordance with regulations set by the MPERC. The MPERC allows distribution companies to recover electricity purchase costs, interest costs, depreciation charges, O&M costs, working capital charges, and corporate taxes in distribution companies’ end-use tariffs.2 A 16% return on invested equity (post-tax) is also included in the annual revenue allowance. For the purposes of this reevaluation, it was assumed that the project assets were transferred from capital work in progress to fixed assets progressively from 2011 (that is, it was assumed that regulated revenue was only earned from 2013 onwards). Total incremental regulated revenue earned in 2015 was estimated at approximately `1,050 million (in 2015 terms). 5. Incremental revenue from reduced distribution losses. The MPERC sets distribution loss trajectories for the three distribution companies at the start of each regulatory period. The distribution companies can recover electricity purchase costs in accordance with the MPERC’s loss trajectories. If the distribution companies achieve loss levels lower than the trajectories set by the MPERC, they retain the savings in electricity purchase costs. Conversely, if the distribution companies cannot meet the MPERC’s distribution loss trajectories, some electricity purchase costs cannot be recovered from customers and must instead be absorbed by the distribution companies. That the distribution companies have not yet met the MPERC’s loss trajectories is the main cause of the distribution companies’ financial losses. As noted in the economic reevaluation above, the project has reduced distribution loss by an estimated 750 gigawatt-hours (GWh) each year. This creates incremental net revenue for the distribution companies. With the state moving to energy and capacity surpluses from FY2015, loss reduction accrues as reduced electricity purchases; this was valued at the distribution companies’ average variable electricity purchase cost of approximately `1.2 per kWh (also expressed in 2015 terms). That is, the reduction in losses arising from the project resulted in net incremental revenue of approximately `900 million per year in addition to the regulated revenue arising from the distribution companies’ increased regulatory asset bases (discussed in the preceding paragraph).

D. Evaluation Basis, Period, and Remaining Value 6. Incremental cash flows earned by the distribution companies from project assets were estimated based on the methodology and assumptions described above. The evaluation period was 25 years from 2009. Assets were assumed to have an average economic life of 35 years, and terminal values were ascribed based on remaining regulatory book value at the end of the evaluation period.3 Project assets were depreciated on a straight-line basis in accordance with the depreciation rates set by the MPERC. The project’s overall financial internal rate of return

2 The annual revenue requirement (ARR) is the total electricity revenue that the jurisdictional regulator has agreed to

allow the electricity distributor to recover during the subsequent year. The tariff subsequently calculated is just the mean by which the ARR is recovered from customers. The distribution companies are not incentivized to under-forecast sales quantity (and thereby increase tariffs) because the over-recovery of revenue (compared to the ARR) is recovered in subsequent years (through a reduction in the ARR).

3 As cash flow beyond the evaluation period would reflect the remaining asset regulatory book value, this is considered a good approximation for asset residual value.

44 Appendix 10

(FIRR) was reevaluated at 13.5% (pre-tax real), as shown in Table A10.2.4 This is considered a very high real rate of return, reflecting the significant loss reduction achieved under the project.

Table A10.2: Financial Reevaluation of the Project, 2015

(` million)

Fiscal Incremental Revenue

Costs Net Cash Flow Year Capital O&M

2009 0.0 178.3 0.0 (178.3)

2010 0.0 1,788.7 3.0 (1,791.7)

2011 58.0 2,640.4 33.4 (2,615.9)

2012 392.0 2,216.1 78.3 (1,902.4)

2013 1,454.9 1,516.6 116.0 (177.7)

2014 1,740.0 959.4 141.8 638.8

2015 1,968.5 936.8 158.1 873.7

2016 1,908.2 0.0 174.0 1,734.2

2017 1,848.9 0.0 174.0 1,674.9

2018 1,777.2 0.0 174.0 1,603.2

2019 1,709.8 0.0 174.0 1,535.8

2020 1,646.4 0.0 174.0 1,472.4

2021 1,586.8 0.0 174.0 1,412.8

2022 1,530.7 0.0 174.0 1,356.7

2023 1,478.0 0.0 174.0 1,304.0

2024 1,428.5 0.0 174.0 1,254.4

2025 1,381.8 0.0 174.0 1,207.8

2026 1,338.0 0.0 174.0 1,164.0

2027 1,296.8 0.0 174.0 1,122.8

2028 1,258.0 0.0 174.0 1,084.0

2029 1,221.5 0.0 174.0 1,047.5

2030 1,050.8 0.0 174.0 876.7

2031 998.9 0.0 174.0 824.9

2032 965.5 0.0 174.0 791.5

2033 951.1 0.0 174.0 777.1

Terminal value: 777.9 FIRR (Post-tax real): 13.5%

( ) = negative, FIRR = financial internal rate of return, O&M = operation and maintenance.

7. Benchmark financial internal rate of return. The assumed hurdle rate for this reevaluation is the project’s overall real pre-tax WACC. The main sources of finance were the ADB loan (approximately 83% of total project costs), which was on-lent to the distribution companies on a back-to-back basis as a local currency loan with a 100 basis point on-lending margin, and local currency loans from the Power Finance Corporation Limited (from existing lines of credit) and from other domestic sources carrying an average interest rate of 11.5% (approximately 17.0% of total project costs). There was no equity financing. As shown in Table A10.3, the project WACC was reestimated at 1.0%.5 The project’s reevaluated FIRR of 13.5% comfortably exceeds this hurdle rate. Neither an aggregate FIRR nor an aggregate WACC was

4 Due to years of tax losses, the distribution companies are not expected to pay significant levels of tax for the

foreseeable future. Therefore, and since corporate taxes are a pass-through cost anyway, project pre-tax was calculated instead of post-tax cash flows.

5 In accordance with ADB’s methodology for calculating the WACC, the minimum real cost of each finance source was set at zero. However, the actual real WACC is negative because the nominal cost of on-lent ADB funds is less than the rate of inflation.

Appendix 10 45

calculated during appraisal; however, based on the information provided, at appraisal the aggregate FIRR was estimated at 16% and the aggregate WACC was estimated at 4.0%. The lower WACC is primarily due to a much lower equity contribution than assumed at appraisal (approximately 30%, while the actual equity contribution was zero).6 On this basis, although the reevaluated FIRR is slightly lower than estimated at appraisal, the project’s actual financial performance is acceptable and, from a financial perspective, the investment was justified because the reevaluated FIRR still comfortably exceeds the reevaluated hurdle rate.

Table A10.3: Reestimation of the Project’s Weighted Average Cost of Capital

Source Amount (` million)

Weight (%)

Pre-Tax Nominal

Cost (%)

Inflation Rate

(%)

Pre-Tax Real Cost

(%)

Weighted Pre-Tax

Real Cost

(%) ADB loan 7,051.9 83.2 2.7 5.4 0.0 0.0 Domestic loans 1,425.0 16.8 11.5 5.4 5.8 1.0 Total 8,477.0 100.0 1.0 ADB = Asian Development Bank, REC = Rural Electricity Corporation.

6 Price regulation (such as that used in India’s electricity sector) is designed to return efficiently incurred cost to

electricity distributors, and to allow them earn an FIRR no lower than the WACC. A lower equity contribution typically results in a lower WACC and therefore a lower FIRR (although in the case at hand, the significant loss reduction achieved by the distribution companies generates substantial net incremental cash flow, more than offsetting the reduction in regulated revenue arising from the lower equity contribution).

46 Appendix 11

CONTRIBUTION TO ADB RESULTS FRAMEWORK

Level 2 Results

Framework Indicator

Original Target

Revised Target

Aggregate Output

Methods/Comments

Distribution lines installed or upgraded (km)

19,200

km

N/A

18,440 km

The use of GPS in new power line alignments and tapping from the nearest feasible point resulted in optimized line length, related cost savings, and improved efficiency. The intended project coverage and consumers were still fully met and serviced.

km = kilometer, GPS = global positioning system, N/A = not applicable.

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