World Bank Documentdocuments.worldbank.org/curated/en/749971468915050930/pdf/multi... · Ramagundam Thermal Power ... US$4.0 billion to support the National Thermal Power Corporation

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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 10854

PERFORMANCE AUDIT REPORT

INDIA

KORBA THERMAL POWER PROJECT(CREDIT 793-IN)

RAMAGUNDAM THERMAL POWER PROJECT(CREDIT 874-IN AND LOAN 1648-IN)

SECOND SINGRAULI THERMAL POWER PROJECT(CREDIT 1027-IN)

AND

1ARAKA THERMAL POWER PROJECT(CREDIT 1053-IN AND LOAN 1887-IN)

FEBRUARY 3, 1993

MICROFICHE CoPY

Report No.: 1 8.4 TN Type: (PPAR)Tit, I e: KnRBA THERMAL; PAMAGINDAN THERIAuthor: MAUPTIVEZ, M.Ext. :31709 Roorn:Ti j'73 Dept(.:0ELD

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Name of Currency - RupeeAppraisal year (1977 Average) - US$1 - Rs 8.6Completion year (1989 Average) - US$1 - Re 15.0

GLOSSARY OF ABBREVIATIONS

CEA - Central Electricity AuthorityDOP - Department of PowerDVC - Damodar Valley CorporationEdF - Electricitd de FranceGOI - Government of IndiaIDA - International Development AssociationKfW - Kreditanstalt fuer WiederaufbauLRMC - Loan Run Marginal CostMSEB - Maharashtra State Electricity BoardMOU - Memorandum of UnderstandingMPEB - Madhya Pradesh State Electricity BoardNHPC - National Hydroelectric Power CorporationNTPC - National Thermal Power CorporationOED - Operations Evaluation DepartmentPAR - Performance Audit ReportPCR - Project Completion ReportREB - Regional Electricity BoardREC - Rural Electrification BoardSAR - Staff Appraisal ReportSEB - State Electricity BoardTEC - TATA Electric CompaniesUPSEB - Utar Pradesh State Electricity BoardWIP - Work in Progress

GOVERNMENT OF INDIA

FISCAL YEAR

April 1 to March 31

THE WORLD BANKWashington, D.C. 20433

U.S.A.

Office of the Director-GeneralOperations Evaluation

February 3, 1993

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Audit Report on IndiaKorba Thermal Power Project (Credit 793-IN);Ramagundam Thermal Power Project (Credit 874-IN and Loan 1648-IN);Second Singrauli Thermal Power Project (Credit 1027-IN), andFarakka Thermal Power Proiect (Credit 1053-IN and Loan 1887-IN)

Attached is a copy of the report entitled "Project Audit Report on India- Korba Thermal Power Project (Credit 793-IN), Ramagundam Thermal Power Project(Credit 874-IN and Loan 1648-IN), Second Singrauli Thermal Power Project (Credit1027-IN), and Farakka Thermal Power Project (Credit 1053-IN and Loan 1887-IN)"prepared by OED.

The Audit covers the Second, Third, Fourth, and Fifth projects in aseries of thirteen loans/credits approved between 1977 and 1987 totallingUS$4.0 billion to support the National Thermal Power Corporation (NTPC), theCentral Government-owned thermal generation utility.

The audited projects helped reduce the chronic shortfall of electricitycountry-wide (PAR, para. 140) and contributed to make NTPC a large, efficient andviable company (PAR, para. 142). They failed in their objective to induceimprovements in the recovery of supply coste by NTPC and its sole customers, theState Electricity Boards (SEBs) (PAR, para. 146). The Audit concludes that asolution to this critical problem will require a clarification of sectorobjectives and a more effective allocation of functions between the CentralGovernment and the States responsible for the SEBs.

Follow-up is needed regarding two major issues: (i) environmentalmanagement around lake Rihand, one of NTPC's major plant sites; and (ii) improvedSEBs' financial performance which is fast becoming a prerequisite to NTPC's owncost effective expansion.

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLY


INDIA

KORBA THERMAL POWER PROJECT (CREDIT 793-IN)RAMAGUNDAM THERMAL POWER PROJECT (CRRDIT 874-IN AND LOAN 1648-IN)

SECOND SINGRAULI THERMW: POWER PROJECT (CREDIT 1027-IN) andFARAKKA THERMAL POWER PRJECT (CREDIT 1053-IN AND LOAN 1887-IN)

TABLE OF CONTENTS

Page No.

Preface..*.. .. ... ........ .... se.... . . . . . . . . . . . . . .Basic Data Sheets ........... ......................... iiEvaluation Summary................................................ xiii

I. BACKGROUND......o..o.................... o ......... 1

A. Salient Features of Power Sector Development........... IB. The Setting for the Projects Audited and Reviewed....... 3

II. BUILDING NTPC: A SUCCESS STORY ............................ 4

A. The "Secrets" of Success ............................... 4Internal Strengths........................... 4External Advantages ......... ......... ... ........ 4

B. Institutional Evolution ................................ 7C. Institutional Efficiency ..................... 00.. 9D. Personnel Indices ........... . . . 13E. The Bank Contribution ............................. 14F. Links to Other Sector Institutions .................... 15G. Sustainability ........ . ............... .........o... . 16

III. NTPC AND SECTOR CHANGE ................................... 18

A. Sector Dialogue ...................................... 18B. NTPC as an Agent of Change ... .. .......... . ......... ... 21

C. Operations ....................00...........f.............. 21D. Finances o... ..... .... ... .... ....... 22E. Overall Impact ......................................... 22

IV. INCREMENTAL COSTS AND TARIFFS ............. .... ............ 24

A. The Pre-1983 Projects with NTPC ........................ 25B. The Post-1982 Operations with NTPC ..................... 26C. Tariff Levels .................. 27D. Average Incremental Costs and Tariffs .................. 28

V. NTPC's FINANCIAL PERFORMANCE ............................. 29

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

TABLE OF CONTENTS (Cont.)

Page No.

VI. ENVIRONMENTAL ISSUES ................ .*0,................. . 41

A. Background ........... o................................ 41B. Early Development ............................... .... 42C. Post-1985 Development ...*.......... ....... ........ 43D. The Bank's Role ............................. 43

VII. CONCLUSIONS AND LESSONS .... .............. o....o........... 45

A. Accomplishments ......00.0.......................... 45B. Shortcomings ......................... .... ...... 46C. The Basis for Sector Improvement ........-........... 47D. Lessons Learned ........ 48

ATTACHMENTS

1. Power Sector Operations.................... . ............. 512. NTPC - Organizational Structure............................ 523. Bank Group-Supported NTPC and TATA Thermal Power Projects.. 554. Cost Analysis of NTPC and Other Projects.....o............. 605. Plant Availability and Loan Factors.......o....ee9e........ 646. NTPC: Non-Technical Performance Indicators................ 667. NTPC: Incremental Cost and Tariff........................ 708. Accounts Receivables....o ........... . ... ......... .. 779. Bank Involvement in the Power Sector ..................... 85

ANNEX

Comments from the Borrower..... ............. ...... ..... 93


INDIA

KORBA THERMAL POWER PROJECT (CREDIT 793-IN)RAM&GUUDAM THERMAL POWER PROJECT (CREDIT 874-IN AND LOAN 1648-IN)

SECOND SINGRAULI THERMAL POWER PROJECT (CREDIT 1027-IN)FA THERMAL POWER PROJECT (CREDIT 1053-IN AND LOAN 1887-IN)

PREFACE

1. This is a Project Performance Audit Report (PAR) on the Second,Third, Fourth, and Fifth Thermal Power Projects for which the National ThermalPower Corporation (NTPC), the thermal generation and transmission utility ownedby the Government of India (001), was the Beneficiary. The Operations EvaluationDepartment ,0ED) had audited the one operation preceding these projects alreadyin 1986.11 The 001 was the Borrower for the Bank Group operations supportingthese projects, which all included as their main physical. component thermalgeneration units, in particular the first two 500 MW coal-fired steam poweredunite installed in India. The audit covers US$1.0 billion in lending for VTPCprojects (US$925 million in International Development Association (IDA) -reditsand US$75 million in Bank loans). It specifically includes:

- NTPC's Korba Thermal Power Project (3 x 200 MW) supported by Credit 793-INof US$200 million approved in April 1978, made effective in August 1978and closed in March 1986, one year later than the date set in the creditdocuments and after cancellation of US$0.08 million;

- NTPC's Ramagundasm Thermal Power Project (3 x 200 MW) supported by Credit874-IN of US$200 million and Loan 1648-IN of US$50 million approved inJanuary 1979 and made effective in May 1979; the Credit was closed inDecember 1985, at the date expected at appraisal; the Loan, in turn, wasclosed in June 1987 some 18 months after the date originally foreseen;

- NTPC's Second Singrauli Thermal Project (2 x 200 MW and 2 x 500 MW)supported by Credit 1027-IN of US$300 million approved in May 1980, madeeffective in July 1980 and closed in July 1989, 15 months later thanforeseen in the credit documents; Kreditanstalt fuer Wiederaufbau ofGermany contributed DM 240 million (about US$140 million) to the financingof the 500 MW turbo-generator sets for the project;

- NTPC's Farakka Thermal Power Project (3 x 200 KW) supported by Credit1053-IN of US$225 million and Loan 1887-IN of US$25 million approved inJune 1980 and made effective in December 1980; the credit was closed inDecember 1988, 21 months later than planned at appraisal; the Loan, inturn, was closed in June 1989, 27 months after the date foreseen in the

11 See PPAR Singrauli Thermal Power Project, Report No. 6784 dated May 14,1987.

loan documents; at that time, US$12.2 million of the loan remained unusedand was canceled.

The PAR iA based on the Project Completion Reports (PCRs) for therespective projects as prepared by the Transport and Energy Operations Divisionof Country Department 1V and by the Energy Division of the Technizal Department,both of the former Asia Regional Office. The ORD evaluation also reviewed thecorresponding President e Reports (PRe), the Staff Appraisal Reports (SARa), theloan documents, the project files, and the transcripts of the discussions at themeetings at which the Bank Group's Executive Directors approved the operationsreviewed here. Further, in order to widen the perspective of the audit, the OEDteam studied the seven follow-on NTPC projects and the three projects for whichthe privately-owned TAT& Electric Companies (TEC) was the Beneficiary, the PCRfor the first of these projects having been sent to the Bank's Board in June1986. The team also interviewed Bank staff involved in the various projects and,in September/October 1991, visited India to discuss the effectiveness of the BankGroup's asistance with Government officials, management of NTPC, as well as withIndian personalities formerly associated with the Indian power sector in generaland NTPC, in particular. During its stay in India, the team had also thsopportunity to visit the project facilities at Ramagundam in the Southern Regionand at Singrauli in the Northern Region. The participating staff team wishes toextend its sincere thanks to all those who helped it carry out this evaluation.Unfortunately, several postponements of scheduled meetings impeded the discussionof the environmental isouee with the relevant Indian authorities.

3. All the PCRe which, in part, complement each other, set forth a goodaccount and assessment of the projects and of the experience their implementationprovided. They adequately discuss the performance of the Bank Group and of theIndian entities involved in the execution of the projects. The PAR, therefore,concentrates on the wider perspective offered by the review of the projects ina cluster and by the integration of some of the results from follow-on projectswhich, in part, are still under implementation. In particular, it analyzes insome details (i) the evolving Bank approach to the institutional sector issuesin the context of the projects reviewed herel (ii) NTPC's operational efficiencyas compared with that of other entities of the sector; (iii) bulk supply tariffsand their relation to incremental costs and to the retail tariffs of the StateElectricity Boards (SEB), and (iv) financial issues, especially the arrears asthey are dealt with in the context of NTPC.

4. Following standard procedures, OED sent copies of the draft PAR toGOI and the Beneficiary for comments. The comments received from GOI and NTPChave bo"n reproduced verbatim as an Annex to the document and, as far aspossible, incorporated in the body of the report.

PELORM=NC AMIX EPO

INDIAKOP.BA THERMAL POWER PROJECT

(CREDIT 793-IN)

BAZ-C DATA SHEET

KE1Y PROJECT DATA

Original...man.. Assnel

Projects Cost (US$ million) 405.90 491.10

Credit Amount (US$ million) 200.00 200.00

Disbursed 200.00 199.42

Cancelled - 0.58

Repaid -

Outstanding -

Date for completion of physical Sept. 83 March 84components

Proportion completed by 1001 91.4Ztarget date (Z)

Economic rate of return (%) 13.0% 14.01

Institutional Performance - Commendable

CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS

Appvaleal (US$ aillion)etiate 25.0 44.3 107.0 174.0 188.0 197.0 200.0 200.0 200.0

Actual 18.8 26.6 61.7 119.8 151.6 165.4 182.8 194.8 199.4

Actal as X ofEstimtr 75.2 60.4 57.7 68.8 80.6 84.5 91.4 97.4 99.9

(Staff Weeks)

HI 27 R I. I. HER~ WIA Ill 218i IIRZ III.

Pre-Appraisal 4.1Appraisal 17.4Negotiations 8.0ProjectSupervision 4.1. 14.1 17.6 1.8 3.3 6.5 2.1 3.5 2.4 .3

ProjectAdministration 11.4

Subtotal 40.9 4.1 14.1 17.6 1.8 3.3 6.5 2.1 3.5 2.4 .3

M1SSION DATA

Month/ No. of No. of Man- Date ofYear Xv.ekg Persons weke RE

Appraisal 8/77 - 3 - 3/78

Post-Appraisal - - - - -

Supersion 1 11/78 4 3 12 1/79

Supervision 2 11/79 4 1 4 2/80

Supervision 3 10/80 5 4 20 12/80

Supervision 4 5/83 3 2 6 8/83

Supervision 5 '/ 5/85 4 2 8 8/85

OTHER PROJECT DATA

kem Origgal Plan Revisions ALUa

Concept 1976 - -

Negotiations 2/78 - 2/78

Board/Credit Signing 5/78 - 5/78

Effectiveness 8/78 - 8/78

Closing Date 3/85 - 3/86Beneficiary Agency National Thermal Power CorporationExecuting Agency National Thermal Power CorporationFiscal Year of Borrower April 1-March 31Follow-up Project Korba II Thermal Power Project

Credit 1172-IN

Project performance v .s monitored by the Association on an ongoing basisduring the appraisal of subsequent NTPC projects, including tne follow-upof Korba II Thermal Power Project (Credit 1172-IN).

v

PERORMANCE AUDIT EPORT

INDIARAMAGUNDAM TREUMAL POWER PROJECT(Credit 87AA-1 and Loa.164-ID

EX PRICT.. DATA

OrtainalActual

Project Cost (US$ 511 693million)

Loan Amount (US$ 50 50million)

Credit Amount (US$ 200 200million)

Disbursed (US$ M) 250 250

Cancelled (US$ million) -- --

Repaid -- 13

Outstanding 250 237

Date of completion of 6/84 12/84physical component

Portion completed by 100 86.5target date (Z)

Economic rate of return 10Z 12.5

Institutional -- CommendablePerformance

CUMULATIM STIE RAD_ACTUAL DISBURSEMENTS

IRA IMA IR& IBI UIR IRU fIIS 281 fIRAppraisal 28.0 70.0 164.0 224.0 239.0 246.00 250.0 250.0 250.0estiate

Actual 20.0 28.8 84.4 152.4 186.5 207.5 216.2 243.7 250.0

Actual as 2 of 7i.4 41.1 51.5 68.0 78.0 84.3 86.5 97.5 100.0estimate

vi

(Staff Weeks)

=IA MI2 EMB I =l&E&$ I RM IA Ill.EZ Ill IIl9

Pre-Appraisal 15.9ProjectAppraisal 8.6

Negotiation3 4.3Supervision .6 .6.6 8.7 4.7 .4 6.1 5.7 1.8 1.4 .7 2.0Other .3

I 2/ Month/ No. of No. of Man Date ofIME K2.A Peonj= ][qek-t EREt

Pre-Appraisal 1/78 - 2 - 11/77(ProjectBrief)

Appraisal 4/78 - 2 - 12/78

Supervision 1 11/78 L 3 6 1/78

Supervision 2 12179 4 1 4 2/80

Supervision 3 6/84 3 1 3 8/84

Supervision 4 6/85 2 2 4 8/85

Supervision 5 10/86 2 2 4 11/86

OTRBR .PROJBCT DATA

rtem Original Agtua

Concept in Bank - 2/75

Negotiation 12/78

Loan/Credit Signing 2/79

Effectiveness 5/79

Closing Date 12/85 6/87

Last Disbursement 6/86 3/88

Beneficiary National Thermal Power Corporation Ltd.Executing Agency National Thermal Power Corporation LTd.Fiscal year of Borrower April 1 - March 31Follow-up Project Second Ramagundom Thermal Power Project Loan 2076-IN

Project performance was monitored by the Bank Group on an on-going basisduring the appraisal of subsequeni NTPC projects including the proposedRegional Power Systems Project (FT90).

|I| I.1 i d I I9

vit

PEro1fACE AUDIT REUt

INDIAFARAEMA TURZEA. POWE ?ROJCTpCREDIT 1053-IM AND LOAN 1887-iNi

BASIC DATA .SHET

CUMUJLATIVE ESTDIATED AND ACTUAL DISBURSEMENTS.

IDA/rænkFiseal Year satimated Actual Actual Z ofad, SERmestet C m-ula&.Av.eCmltv *Køiat

1981 1. - - -

2 20 23.84 119.20

1982 1 35 24.37 69.632 85 30.76 36.19

1983 1 140 30.77 21.982 170 49.18 28.93

1984 1 180 67.21 37.342 185 108.53 58.66

1985 1 190 116.51 61.322 210 151.93 72.35

1986 1 220 159.95 72.702 235 189.17 80.50

1987 1 240 192.66 80.282 250 213.86 85.54

1988 1 214.18 85.672 215.76 86.30

1989 1 215.82 86.332 218.13 87.25

1990 1 227.56 91.022 237.78 95.11

An undisbursed balance of US$1216,283.43 was cance~d fram the Loan on Februay 1, 1990.

viii

02HRILROJECT DATA

DM Rate Plaed Date Revised Date Actual

Appraisal mission 06179

Loan/Creol t 05/80Negotiation

Board Approval 06/26/80

Loan/Credit Signature 07111/80

Loan/Credit 12/10180Effectiveness

Loan/Cridit Closing 03/37 12/88 Credit 12/31/88Loan 06/30/89

Loan/Credit Completion Credit 08/08/89Loan 02/01/90 '/

(Staff Weeks)

Eal EM MI M2 Y83 84 Y85 Y7 M FY88 FY89

Preappraisal 5.0Appraisal 9.9 23.0Negotiation 7.4Supervision 1.6 5.3 9.9 13.5 7.8 1.0 3.5 5.6 3.9 2.3Other 2.3 7.4

Subtotal 16.2 38.4 5.3 9.9 13.5 7.8 1.0 3.5 5.6 3.9 2.3

The last disbursement was made on February 1, 1990, with authorization on an eceptionalbasis by the Regional Vice President.

ix

MISSION DATA

Number Number Perform.Noath/ of of Special- ance Type of

Project Cycle Year PeKgAs DaE LZAo9 'I 3 aung 6/ wm I/

Identification 8/

Preparation e/

Preappraisal 9/

Appraisal 05/79 4 25

Supervision

Supervision 1 06/82 4 19 E, LO,PA I

Supervision 2 06/83 2 20 E, FA 1

Supervision 3 06/85 1 14 E 2 I,PR

Supervision 4 09/86 4 18 E 1

Supervision 5 09/87 3 10 E, EA 1

Supervision 6 01/88 3 20 Eq PA 1 PR

Supervision 7 09/88 3 29 E, FA 1 I


Project Completion 1 9 EReport

SE: Engineer, LO: Loan Officer, FA* Financial Analyst.

1 = No or minor problem, 2 = moderate problem, 3 = major problem.

I I Implementation delays, PR: Procurement problems and delays.

* Identification was made by GOI in 1974. Preparation and preappraisal were made by NTPCin 1978.

PERLO2mmN AUI MUPR

INDIASECOND SINGRAULI THERMAL POWER PROJECT

(CREDIT 1027-IN)

BASIC DATA ISIXE

ET PROJECT DATA

Date Date DateaINMd Reised Amfil

Appraisal Mission 05/79 05/79(US$ million)

Credit 05/80Negotiation


Credit Signature 06/05/80

Credit 07/30/80Effectiveness

Credit Closing 03/31/88 06/30/89 12/31/89

ONZUATI E ETM=T AMD ACTM DISIUMENTS

IDA Fiscal Year Estimated Actual Actual Z ofand Smester Culatie uative Ettaed

1981 1 20 10.78 53.902 50 20.85 41.70

1982 1 75 24.70 32.932 140 59.35 42.39

1983 1 180 61.41 34.122 220 80.43 36.56

1984 1 250 92.93 37.20265 129.70 48.94

1985 1 275 140.38 51.052 280 182.45 65.16

1986 1 285 192.68 67.712 290.00 234.00 80.69

1987 1 295 240.19 81.422 300 273.77 91.26

1988 1 280.07 93.362 285.18 95.06

1989 1 285.18 95.062 292.84 97.61

1990 1 293.26 97.752 300.00 100.00

II

(Staff Weeks)

EL3 EI4 I EZi EZ EZI ER EM HS.M FY83

Preappraisal .3 21.5

Appraisal 75.9

Negotiation 8.2 1.3

Supervision 52.6 16.0 14.5 4.4 4.9 2.2 8.1 9.9 4.6

Other 9.5 1.2

Total .3 115.1 54.1 16.0 14.5 4.4 4.9 2.2 8.1 9.0 4.6

Ttg Date Date DatePlanned Revised Agwil

Appraisal Mission 05/79 05/79

Credit 05/80Negotiation


Credit Signature 06/05/80

Credit 07/30/80Effectiveness

Credit Closing 03/31/88 0630/89 06/30/89

Credit Completion 12/31/89 /

'The last disbursements were made in February 1990, with authorization on an enceptional basisby the Regional Vice President

Kil

Number Days Perfo.-Month/ of in Speciali- anee

P1oJect Cycle Xear Pereons Feld saio-n 0 &IAa uI

Identification"/

Preparation 121

Preappraisal 121

Appraisal 05/79 4 25

Supervision 1 12/84 2 20 qEA 1

Supervision 2 05185 1 ENV -

Supervision 3 03/86 1 NV -

Supervision 4 09187 4 18 E 1

Supervision 5 09/87 4 10 E, EA 1

Supervision 6 01/88 4 20 3, PA I

Supervision 7 09/88 4 29 1,PA,C,EC,ENV


PCR 02/90 1 9 3

10 E Engineer, FA* Financial Analyst, EC: Economist,ENV* Environmental Engineer.

n 1 = No or minor problem, 2 = Moderate problem, 3 = Major problem

~ Identification was made by GOI in 1974. Preparation and preappraisal were made by NTPCin 197&

xi


INDIA

KORBA THERMAL POWER PROJECT (CREDIT 793-IN)RAMAGUNDAM THERMAL POWER PROJECT (CREDIT 874-IN AND LOAN 1648-IN)

SECOND SINGRAULI THERMAL POWER PROJECT (CREDIT 1027-IN)FARAKKA THERMAL POWER PROJECT (CREDIT 1053-IN AND LOAN 1887-IN)

EVALUATION SUMMARY

Introduction US$300 million which closed in June1989 (i.e. 15 months late) af ter

1. This report reviews the complete disbursement; the projectfollowing four projects for which the included (i) a 2x2O0MW and 2x5OOMWGovernment of India (GOI) was the second phase of the coal fired mineBorrower and the National Thermal mouth steam power plant with anPower Corporation (NTPC), the GOI ultimate capacity of 2000MW in theowned utility created in 1975, was the Northern Power Region and (ii)Beneficiary: associated transmission facilities;

- the Korba Thermal Power Proiect the FaraWm Thermal Power Projectapproved in 1977 and supported by approved in 1980 and supported byCredit 793-IN of US$200 million Credit 1053-IN of US$225 million andclosed in March 1986 (i.e. 12 months Loan 1887-IN of US$25 million; thelate) after cancellation of US$0.08 credit was closed in December 1988million; the project included (i) a (i.e. 22 months late) after full3x200 MW first phase of a coal-fired disbursement; the loan closed inmine mouth steam power plant in the February 1990 (i.e. 37 months late)Western Power Region, with an after cancellation of US$12.2ultimate capacity of 2100MW and (ii) million; the project included (i) aassociated transmission facilities; 3x200MW first phase of the coal-

fired mine mouth steam power plant- the Ramagaundam Thermal Power Prolect with an ultimate capacity of 2100MW

approved in 1978 and supported by in the Eastern Power Region andCredit 874-IN of US$200 million and (ii) associated transmissionLoan 1648-IN of US$50 million, which facilities.both were closed in June 1987 (i.e.18 months late) after complete 2. The present report is also bnseddisbursement; the project included on the 1986 audit of the 1977(i) a 3x200MW first phase of the Singrauli Thermal Power Projectcoal-fired mine mouth steam power (Report No. 6784) as well as onplant with an ultimate capacity of results of the eight follow-on2100MW in the Southern Power Region projects for NTPC and of the threeand (ii) associated transmission Bank projects with the privately ownedfacilities; TATA Electric Companies (TEC) of which

the f irst has been covered in a PCR- the Second Singrauli Thermal Power which OED processed in 1986 (ReportProject approved in 1980 and No. 6253).supported by Credit 1027-IN of

xiv

Objectives and Setting explicit. This continued under thefollow-on projects until the mid-

3. In the mid-1970s the power eighties when the Bank'.sector, i.e. by and large the State disenchantment with progress achievedElectricity Boards (SEBEs) was unable on the issues related to the SEBs ledto meet demand and to commission to the conclusion that only throughenough generating plant to contain lending directly to SEBs couldpower shortages, let alone to catch up adequate improvement in thesewith demand. Thus, in 1975, the GOI institutions be achieved (PAR,created NTPC as a wholly-owned Attachment 9, paras. 19 and 20).utility to build large thermal powerplants and associated transmission Lmetfacilities. The Bank agreed tosupport the development of NTPC, and 6. In general, NTPC was successfulover the period 1977-87 made nine in constructing the plants inloans for about US$1.5 billion and six accordance with its schedules thatcredits for approximately US$2.5 allowed for a construction time of 4billion for thirteen projects. years for 200W units and 5 years for

500MW units. However, it usually4. All four projects audited here incurred substantial delays at theas well as the preceding and pre-construction stage (PAR, paras. 27immediately following projects aimed to 29). Costs of the 200MW unitsat (i) accelerating expansion of resulted at 1990 US$700 to US$1000 pergeneration and transmission capacity W, which, though higher than thein India and (ii) building a central appraisal estimates, is reasonableinstitution that could efficiently (PAR, para. 30).construct and operate large thermalplants and high voltage transmission 7. Implementation of the foursystems (PAR, Attachment 9, para. 9). audited projects came out as follows:Besides these NTPC-related objectives,the Bank, through its involvement, - the 200MW units of the Korba Ipursued sector objectives, in project (see Footnote 8) wereparticular: (i) long-term sector completed 6 to 7 months late becausedevelopment planning at the national award of the main contracts was latelevel and on a least cost basis; (ii) by about the same amount of time;integrated system operation, and (iii) actual cost was, in real terms,SEB reform (PAR, Attachment 9, paras. about 10Z higher than estimated at9 to 19). The Bank hoped, in appraisal (PCR, Korba 1, para. 3.02;particular, that increasing the role PAR, parase 27 and 30, andof the Centre by building up NTPC and Attachments 3 and 4);emphasizing centralized planning wouldlead to more SEB reform than it had thq 200W units rif the RamaWndam Ibeen able to induce through financing project were tompleted 4 to 5 months(with the Central Electricity late after a delay of 7 months inAuthority -- CEA -- as an the award of the main contracts; theintermediary) the development of the cost overrun (always in real terms),state entities in the context of however, was about 40Z mainly due toearlier operations. underestimated costs of preliminary

and civil works (PCR, Ramagundam 1,5. The above objectives were common paras. 3.02 to 3.10; PAR, paras. 27to all audited projects. However, and 30; Attachments 3 and 4);their formulation became increasingly

- the 200MW units of the Sinrauli 11 capacity installed for public supplyproject started operation on in India) had become the largestschedule, while the 500MW units were Indian utility in terms of generationcompleted 10 months late and nine capability (PAR, para. 10). Inmonths early, respectively, the main addition, it had become an examplecontracts having been awarded 7 (but until now followed only to amonths late; project costs in real limited degree) in many aspects ofterms were 15 to 20% higher than Indian power sector activities, interanticipated at appraisal, in part alia, throughidue to changes in the scope of boththe power station and transmission - emphasizing corporate planning;facilities (PCR, Singrauli II,paras. 11 to 14, and 19; PAR, paras. - utilizing the systems approach as a27 and 30; and Attachments 3 and 4); primary management tool;

- the completion of the 200MW - establishing a systematic qualityFarakka I units suffered delays of assurance program;15 to 22 months after the award ofthe main contracts occurred already - building up a high quality in-house5 months late; costs in constant engineering capability to be fullyterms increased by some 50% with accountable for its technicalrespect to the appraisal estimate; development;both delays and cost overruns wereclosely related to the contractor's - implementing an exemplaryindustrial relations problems and comprehensive manpower developmentthe civil unrest in the region; (PCR program; andFarakka I, paras. 9, 10, and 15;PAR, paras. 27 and 31; and - reaching agreement with the G01 onAttachments 3 and 4). annual Memoranda of Understanding

(MOU) defining the specificProiect Results performance targets the utility

would have to achieve, on the one8. The projects have been a success hand, and the G01's support on theinsofar as the two major Bank other (PAR, pars. 11 to 21).objectives spelled out in para. 4 havebeen achieved. On the one hand, they 9. The underestimation of the costhelped increase the annual growth of of the projects following Korba 1, wasthe capacity installed in India from one of the main shortcomings of the5Z in the first half of the 1970s to reviewed projects that were unrelated8% in the 1980s. On the other hand, to sector issues. It masked thethey substantially contributed to the severity of the discrepancy betweencreation of a strong and efficient tariffs and economic costs of NTPCcentral institution that strengthened power (PAR# Chapter IV) and is likelythe 001's position in the power sector to have contributed to the Bank'sas NTPC proved increasingly able to assigning, for a long time, relativelyefficiently plan, design, construct, low priority to the issue of NTPC'sand operate large thermal power plants tariffs.and extensive high-voltagetransmission facilities. By early 10. The main shortfalls in the1991, after some 8 years of operation imrlementation of the NTPC projectsNTPC, with over 10,000MW of capacity are, until now, to be found in theinstalled (i.e. about 151 of total area of broad sector objectives:

xvi

- The preparation of a long-term utilities to adjust their tariffsnational power plan, which was a downward. A less optimistic viewpart of the Bank's 1975 Power should have held that the SEBs wouldTransmission Project continued to be exercise strong pressure to keepa main topic of the sector dialogue. UTPC's tariffs low and would beIn 1982, India completed a plan tempted to delay payments to thecovering the period 1985-2000, central utility (PAR, pars. 4 andwhich, however, had little influence 76).on what went into the GOI's Five-Year Plans and annual investment 12. In the late 1970s, when theprograms; further, the audited projects were underabovementioned dialogue failed to preparation, there was ample time tochange the 001's focus from a finalize tariff arrangements in thesupply-side outlook to one including form of contracts with the SEBs, buta major energy conservation the Bank did not intensely pursue thiscomponent (PAR, paras. 56 to 58). issue. This changed in 1983 when

Singrauli started operating and the- The GOI addressed integrated systems SEBs had still not reached full

operations, a crucial factor for the agreement with NTPC on the two-partoptimal use of NTPC's facilities, tariff envisaged all along, forcingwithout conviction, producing, in the central utility to bill its salesthe framework of the national on the basis of a provisional flatdevelopment plan, a program for the rate. Despite the Bank's subsequentphysical interconnection of the continuous efforts the procedureIndian grids, but avoiding continued to be applied until 1991,discussion of grid operation. CEA's with the rates being adjusted to1289 national transmission plan does reflect general inflation andnot seem to have brought the sector fluctuations in fuel costs, etc., butnearer to the implementation of not the increased cost of investmentseconomically cost-effective grid such as those of the Ramagundam andoperation (PAR, paras. 59 to 61). Farakka plants. It is now hoped that

an agreement recently reached between- The Bank hoped that the the GOI and the state governments will

establishment of NTPC would permit NTPC to charge a more adequatestimulate reform in the rest of the two-part tariff on the basis ofsector. Though the utility has contracts including full adjustmentbecome a positive influence in the mechanisms (PAR, paras. 77 to 84).sectorg its direct impact has beenlimited (PAR, paras. 64 to 69). 13. The latest calculations of the

Bank's operations' staff and theNTPC's Tariffs results of the present audit suggest

that the previously calculated11. In connection with the economic cost of supply was much belowSingrauli I project preceding the the real figure because it had beenoperations audited here, the GOI and determined on the basis ofthe Bank had already agreed on a underestimated investment costs (PAR,minimum return on assets in operation paras. 85 and 91).to assure NTPC's financial viability.Indeed, the Bank had hoped that the NTPC's Financesfact that NTPC's tariffs were highcompared to those the SEBe could 14, Over the period FY85-FY91, NTPC'safford would encourage the state assets, sales, and cash flow have

xvii

grown at an average rate of about 40% SEBs, HTPC has not been able to complyper year. Self-financing of capital with the covenant.investment after debt service was32.7% in FY91 before adjustment for 18. Following the Bank's advice,increases in receivables, and 17.5% NTPC induced the SEBs to have theirafter such adjustments; 14.4% of Work banks issue letters of credit forin Progress represented the exchange their purchases from the centralrisk on foreign borrowing and utility. By 1991, over 50% of NTPC'saccumulated capitalized operations and sales were covered by such guaranteesfinancial costs of which large parts of payment.are usually not financed by cashflows. Accordingly, the income 19. In FY91, the utility's returnsstatements do not include as costs the on assets and on equity (PAR, pars.annual deferments mentioned above. In 107 and 108) were at a stillFY91, the capitalization referred to significant level of about 142 andabove amounted to some US$120 million 12%, respectively, after accounting(PAR, paras. 95, 97, 100, and 101). for the increases in receivables. A

better control of the growth in NTPC9s15. A remarkable development of NTPC sales is likely to reduce the yearlyhas been the issuance of domestic flow of arrears. Further, thebonds ten years after the utility was receivables are mostly late paymentsestablished and four years after it rather than uncollectibles. To datebegan to earn revenues. Until 1991 they have not compromised NTPC9sthis has added some Rp. 21 billion financial viability. Arrears become,(some US$1.5 billion) to NTPC's hmever, a serious problem in thefunding (PAR, paras. 103 and 104). perspective of meeting the high ratesNTPC has also borrowed long-term from of growth for NTPC's investment andcommercial banks, to which, by FY91 it sales that are called for in theowed some US$900 million including the future (PAR, paras. 119 and 124).appropriate exchange risk (PAR, paras.96 to 98). 20. NTPC9s sales will not be handled

in a strict commercial fashion until a16. Eighty percent of NTPC's cash political consensus emerges to imposeflows were derived from net profits this discipline in the SEBs. In theand twenty percent from depreciation. meantime, alternatives to accountsUntil 1991 depreciation was regulated receivables covenants should beon the basis of a rather low rate of considered. For instance, a currentabout 2.5% per year. An accelerated ratio covenant, while still forcingdepreciation schedule which would NTPC to pay due attention to billincrease this rate was recently collection, would encourage theapproved (PAR, para. 99). utility to take measures on the

components of current assets and17. Practically since NTPC started liabilities which are under itsselling power, accounts receivable control to a higher degree than thehave been an issue which has acquired receivables. Alternatively, a debta high profile with the introduction service coverage covenant appliedin 1985 of a covenant limiting the after accounting for increases inpermissible uncollected amounts to two receivables would also be appropriatemonths' billings. Despite the fact (PAR, paras. 125 to 128),that the GOI repeatedly paid off partof the arrears on behalf of delinquent 21. The cO, like many governments

of less developed countries, does not

xviti

receive dividends from the utility it on limiting the detrimental physicalwns. However, the Audit considers impact of new facilities on the

that paying such dividends would environment (PAR, para. 154).contributing to enhance NTPC's imagein the financial community and to the 24. In the context of the auditedtra isparency of the utility's projects, NTPC complied with the GOIoperations, although this would imply and Bank environmental standards ofa corresponding increase in the GO's the late 1970s which were required atcontributions (PAR, para. 110). project appraisal and were essentially

limited to the plants' potential22. In general, NTPC is in good physical impact on the environment.financial health. It is adhering to However, in Singrauli and Ramagundampconservative financial policies. NTPC ran intc difficulties inThere is no doubt that the high level connection with (i) resettlement,of accounts receivable represent a mostly in the mining areas and (ii)major problem. The current solution public health in the agglomerationsof having the 001 reduce financial around the plants, where theappropriations to the states and population influx had by far exceededcontribute the correspondft amounts what had been expected, i.e in areasto NTPC to pay off the receivables of where NTPC has little control. Thesethese states' SEBs was a stop gap developments, nevertheless, showed tomeasure which should be replaced by all parties that the socioeconomicmore sustainable measures on tariffs issues had to be assigned highand collections. There are at least priority at the design stage of thefour reasons to suggest that there is projects. As a consequence, latera need to adjust the rates to assure NTPC projects were submitted to a fullthat NTPC's finances continue to be environmental impact assessment at thesound: (i) the pending increase of the design stage. The 1987 Bank projectminimum return required from NTPC to for the Talcher plant was the first12% (or even beyond); (ii) the that went through this new procedure.capitalized operating and financial The Bank, on the basis of itscosts are unusually high by experience with the audited projects,international standards; (iii) the (i) induced NTPC to prepare anddesirability of the utility's paying implement a comprehensiveout dividends, and (iv) the GOe' need Environmental Action Plan and (ii)to keep for budgetary reasons its sponsored the study of the impact ofcontributions to NTPC to a minimum exiattug and planned developments (by(PAR, para. 135). This latter stance NTPC and others) in the Lake Rihandof budgetary retrenchment could have area, where NTPC runs three plantsexceedingly grave consequences for (Singrauli, Rihand, and Vindhyachal)NTPC, if not accompanied by a drastic (PAR, para. 134). Further, itchange in the way SEBs are allowed to continues its dialogue with the G01,operate. inter alia, on (i) problems posed by

nitrogen oxides and carbon dioxide,Environmental Issues still little recognized in India (PAR,

para. 135), and (ii) the need for23. At the project preparation stage streamlining the environmental projectof the audited projects, the 001, approval procedure, especially theNTPC, and the Bank were at early coordination between the Centre andstages of developing their respective the states. This would help eliminateapproaches to environmental issues. one of the main obstacles which latelyThis was characterized by an emphasis slowed down NTPCs project

development. The Bank will need to justments in the relations betweenkeep monitoring 001's handling of this central and state institutions highlyissue and of the problems around Lake political. This was the main reasonRihand. (PAR, para. 132) for the Bank's cautious approach

emphasizing persuasion rather thanSuetainability of Project Benefits leverage Another reason may have

been the heavy reliance of the Bank's25. NTPC is presently a strong lending program on power sectorinstitution with an impressive record operations (PAR, para. 72).of achievement. However, in view ofthe expected vigorous long-term 28. Progress must be made togrowth, insufficient tariffs and an establish in the SEBs the financialunchecked increase of receivables and commercial discipline needed tocould endanger NTPC's financial ensure the sustainability of thesustainability. This, in turn, depends benefits derived from the Bank's largeon improvements in the SEBes investments in NTPC The inadequacyperformance. To the extent that 001's of SEB reforms has put the sector in acontributions to NTPC are limited, parlous financial state, leading thethey could only be made up by adequate Bank to adopt a tougher stance (PM,tariffs and a much improved bill para. 73). Specifically, the Bank iscollection from SEBEs. In that respect making lending to the se0orthe Audit notes as hopeful signs the contingent on improvements in costagreements between the 001 and the recovery in line with its sectorstates on the NTPC tariffe, to be policy.implemented in the first half of 1992and the very substantial rate increas- 29. The next step ought to be takenes decided in several states. in a forum bringing together the 001

and the state governments (not only26. Some progress achieved most the SEBs)9 e.g. like that whichrecently, i.e. after the Audit recently adopted the conclusions onmission's visit to India, is set NTPC1s tariffs set forth by the K.P.forth in the 001's comments on the Rao Committee. One of the objectivesdraft of the present report (see of such a form could be to secure aAnnex). consensus for institutional change,

leading to a compact between the GO1Conclusions and the states on the way the sector

should work in the medium term and27. Most of the shortf alls in the what intermediate steps should beimplementation of the Bank projects taken in the short run. It wouldwere with respect to the broad sector involve (PAR, paras. 172 to i74)tobjectives not directly related to theprojects. Even where TPC did not - a confirmation or redefinition ofperform as expected (especially in the the set of objectives for the sectorareas of tariffs and accounts at national, regional, and statereceivable), this inadequacy was level, with emphasis on consistencylargely due to the lack of progress on and comprehensiveness; andsector organization and SE tariffissues. One of the major factors a review of the adequacy of thecontributing to these shortfalls in setup and mechanisms of the sector

performance is the fact that sector to achieve the abovementioned goalsinstitutions have to work within a and suggest ways to make them morefederal setup, making even minor ad- efficient and transparent.

been ** th heavyI reiac of th Bank

xx

Lessons Learned eliminate India's power shortages byaccelerating the expansion of

30. The principal lessons of the capacity alone has provedNTPC operations reviewed are as insufficient. India clearly needs afollows: sector strategy that gives at least

equal priority to demand management- Enclave Prolects: Where favorable and to increasing the efficiency

conditions exist, as they did in with which existing resources areIndia, the creation of new used.institutions free of establishedsector constraints can be a highly Consensus on Main Issues: A pre-effective means of getting requisite for the success of complexparticular jobs done. But, the operations or major components ofenclave is unlikely to serve as a such operations is the consensus bymodel for sector reform, and cannot all major stakeholders onescape the penalties imposed by its development objectives and the meanssurroundings, for a sustained period to achieve them. Conditionalityof time. should complement but cannot replace

such a broad common outlook. The- Support for Central Institutionst success of the build-up of NTPC

Bank support for NTPC has proved where the views of the GOI and theineffective as a vehicle for sector Bank coincided and the failure toreform, largely because it has not achieve the sectoral objectivesprovided leverage with the states where there was a divergence - firstwhere it is most needed. Support subtle, later clearer - are cases infor the Centre is likely to help point.achieve sector objectives only whereit can be tightly linked tj SEB The Bank's Pervasive fttimism: PRs,reform. SARs, and other documents addressed

to Senior Management and/or the- Public Sector Utilities: When free Board tended to convey a pervasivelyto do so, public utilities in India optimistic view of the projects, ofcan make effective use of the latest their sectoral environment, of thetechnology and management techniques difficulties the proposed or on-and achieve high standards of going operations were facing, of theefficiency in design, management, risks involved, and of the time andand operation of major power cost required to implement criticalprojects. measures (especially at the sector

level). There is a clear need for a- Su2ply Side Strategy: Even with more realistic presentation ofmassive and efficient investment by policy and project features subjectNTPC of the kind that is unlikely to to constraints and risks.be replicated, the effort to


INDIA

KORBA THERMAL POWER PROJECT (CREDIT 793-IN)RAMAGUNDAM THERMAL POWER PROJECT (CREDIT 874-IN AND LOAN 1648-IN)

SECOND SINGRAULI THERMAL POWER PROJECT (CREDIT 1027-IN)FARAKKA THERMAL POWER PROJECT (CREDIT 1053-IN AND LOAN 1887-IN)

I. BACKGROUND

A. Salient Features of Power Sector Development

1. Since 1948, when the Indian power sector was nationalized in the wake ofthe country's accession to independence, the capacity installed to provide publicelectriiity supply increased from some 1500 MW to about 61,000 MW, i.e. at anaverage rate exceeding 9% per annum. During the past two decades, the growthrate was about 10%. In terms of installed capacity, the sector now compares withthat of the UK and of France. However, despite the fast growth, India'spopulation has still limited access to electricity, as suggested by the 270kWh/year per capita consumption in the late 1980s (up from some 140 kWh/year inthe mid-1970s/l) which compares with about 300 kWh/year in Pakistan, 480kWh/year in China, and 180 kWh/year in Indonesia as well as Sri Lanka.J2

2. The principles of federalism embodied in the Indian constitution arereflected in the way the document assigns both the Centre and the states a majorrole in legislating on power. The Electricity Supply Act of 1948 more formallyestablishes the distribution of such authority. It provides, inter alia, for thecreation of the Central Electricity Authority (CEA) and of state electricityboards (SEBs). CRA, as the main arm of the Centre in the sector, was to developnational power policy, report on the progress and performance of the electricitysupply industry, provide technical assistance, promote research and, in general,facilitate efficient power supply. Thus, its role was essentially advisoryrather than executive. In contrast, the abovementioned act vested much moreeffective power in the SEBs formed and owned by the state governments, as itassigned to them the authority to build, own, and operate power systems as wellas sell the output in their respective states.

3. These basic institutional facts of life lie at the root of much of thefrustration the Bank has experienced in its quest for sector reform. The GOIcannot direct the SEBes to make desired changes in their operations, management,tariffs, or most anything else. Moreover, the COI's power of the purse islimited by the fact that it can do little in practice to control Plan allocationsto the states, as such allocations are based on negotiated formulas, which alsoapply to the annual budget shares which often substantially differ from theannual tranches of the Plan. However, there is more room for negotiation in the

Ai President's Report for Korba Thermal Power Project, para. 25.

12 India: Long Term Issues of the Power Sector, report dated 12/13/91,para. 25.

2

allocation to individual sectors within the individual state's share. This meansthat change must be pursued through persuasion and negotiation, a process thatis always lengthy, fraught with political obstacles and frequently inconclusive.These are factors the impact of which the Bank, in its presentations ofoperations in the Indian power sector, has tended to play down.J3

4. CEA was formally created in 1950. However, for many years, the CentralWater and Power Commission, the technical arm of the Ministry of Irrigation andPower, carried out CEA's functions. In 1974, 001 created a new Ministry ofEnergy. The Commission, in turn, was split and its departments dealing withpower bec-*Ae the nucleus of a revitalized CIA reporting to the Ministry ofEnergy. However, even so, CRA remained severely limited in its activities byshortages of skilled staff and other resources.LA In contrast, the 1966 AtomicEnergy Act increased the Centre's influence in the power sector by providing forthe 001 to retain control over construction, commissioning, and operation ofcommercial nuclear power generation. A further strengthening of the Centre'srole in the sector occurred in 1975 with the creation of the central generationand transmission utilities, National Thermal Power Corporation (NTPC) andNational Hydroelectric Power Corporation (NHPC), discussed further in para. 8below.

5. In parallel with this evolution of the structures within G01, theelectricity supply industry, which comprised over 300 private licensees and about270 state and municipal utilities, in 1951 achieved substantial concentration.Accordingly, in the mid-1970s, it comprised 18 SEBs, 49 private licensees (amongthem the Tata Electric Companies -- TEC), and 21 municipal utilities, the SEeaccounting for 76% of total sector sales to ultimate consumers, the other publicsector enterprises for 122, and the private licensees for the remaining 12%. Inprinciple the SEBes are largely autonomous in matters relating to operations, butare subject to state government control in many other areas such as investmentand tariffs. In practice, in many cases, state government intervention is morepervasive and covers much of day-to-day management of the utility. The privatelicensees operate mostly in states providing an environment allowing privateutilities thc minimum of autonomy and, in particular, the tariffs that arerequired to keep private capital in such ventures. It is evident that this isalso an environment in which the SEs can develop more freely. Therefore, it isnot surprising to find some of the best performing SBs in states with reasonablyflourishing private utilities. This is the case in particular for the state ofMaharashtra in which the TEC group operates.

6. The desirability of closer cooperation between utilities at regional levelbecame already apparent, in the 1960s, and led to the creation of regionalelectricity boards (REBs), a relatively loose association of the electricityutilities of a given region. The chairmen of the censtituent SEBes take turnschairing the REBs whose objective is to coordinate planning and operations of

L3 Loc. cit. paras. 1.39 to 1.42.

L4 See e.g. SAR for Nathpa Jhakri Power Project, para. 1.11.

L5 Indias Economic Issues in the Power Sector, April 1979, paras. 14 to 23.

3

power utilities in the region. However, there is no formal mechanism forenforcing the decisions of an REB, as it is essentially a voluntary association.Nonetheless, the REB's role has become more operational in particular with thebuilding of regional dispatching centers cellecting system data, preparinggeneration schedules, coordinating emergency power exchanges, and providingperiodic reports on the performance of the regional systems. The development ofNTPC into a major player in the sector has also enhanced the role of the RBswhich, as weak as they st-ill may be, constitute the best hope for the integrationof the operations of India's power systems.Lj

B. The Setting for the Proiects Audited and Revigwed

7. The past two decades cover the preparation and implementation time of theprojects audited here and of several follow-on projects, which are also discussedin this review. For India, the early 1970s were a period of slow economic growth(barely positive in real per capita terms), which the Bank attributed to a markeddecline in the efficiency of capital use resulting from capacity under-utilization, long gestation of projects, and increased emphasis on capitalintensive projects and sectors.LZ These inefficiencies at large were alsopresent in the particularly capital intensive power sector, where they reducedcapacity growth to a slow 62 per annum while consumption grew at up to 132 peryear, a discrepancy that quickly led to sharp increases in frequency and durationof power shortages, which, in the 1960s, had only played a minor role. Thereasons for the worsening sector performance in the first half of the 1970. werecomplex and, in part, closely related, on the one hand, to developments in thecountry as a whole such as poor monsoons and unreliable coal supply and, on theother hand, to weaknesses in management and operation of the power sector ingeneral and the utilities in particular.

8. The performance of many SEBe deteriorated to a degree that made it highlyimprobable that these utilities would be able to fulfill their obligations and,in particular, to develop at the pace dictated by the high growth in demand.This led the GOI, in 1975, to create the National Thermal Power Corporation(NTPC) and the National Hydroelectric Power Corporation (NHPC) as centrally ownedutilities which were to provide bulk power from thermal and hydro powerplantsrespectively. This move was to lead to a substantial strengthening of the GOI'sleverage in the sector. While, as discussed further in the following chaptersof the present report, the development of NTPC was, by and large, a majorsuccess, that of NHPC was less satisfactory, one of the main reasons for thedifference in the measure of achievement being that NTPC uses resources (coal andnatural gas) controlled by the GOI, whereas the water rights which NHPC needs tobe granted in order to build and operate its hydroplants are controlled by thestates. Therefore, the preparation of NHPC's projects is a complex processinvolving politically sensitive -- and, therefore, protracted -- negotiationsbetween Centre and states.

L6 India, Economic Issues in the Power Sector, April 1979, parse. 43 to 46.

LQ President's Report for Korba I project, para. 3.

4

II. BUILDING NTPC: A SUCCESS STORY

9. As already indicated, there was a strong techucal, economic and politicalcase for the establishment of NTPC. However, the odds on success could not havebeen high. As alluring as the notion of very large, mine-mouth power plants was,the facts that the scale of the proposed facilities was vell beyond anything seenin India, and that they would involve the introduction of advanced technologiesnew to India, made this a very risky venture that would stretch the country'sindustrial and managerial resources. Similarly, entrusting all this to a brandnew institution that would have to achieve unprecedented levels of efficiencyinvolved an act of faith in the potential of the Indian public sector for whichthere was little, if any, ground in experience to date. Yet, despite the odds,HTPC has been an all-too-rare institutional development success, achievingvirtually all that was expected of it and, in some areas, more.

A. The "Secrets" of Success

10. In a relatively short period of time, NTPC has become India's leading powerutility, operating approximately 162 of the country's generating capacity, andproducing some 191 of the nation's electricity in 1990-91. NTPC's record inplant construction, cost containment and operating efficiency has beenexceptional (see later in this report), while as an institution it has broken newground in organization and management, successfully navigated the transition fromconstruction to operating company and generally coped quite well with theproblems of rapid expansion. What made NTPC bloom in a sector that was, and is,so much of a desert? The auditors' review of the PCRs and their interviews withBank staff, 001 officials, and present and former NTPC managers indicate that theanswer lies in the combination of a number of factors, both internal (i.e.intrinsic to the NTPC concept and/or within its control) and external (i.e.,advantages given to NTPC):

Interal strengths

- starting with a clean slatel

- dynamic leadership;

- the emphasis given to organization and management systemsdevelopment and corporate planning;

- the attention paid to recruitment and training;

- the high priority accorded to quality assurance, and

- the drive for technical self-sufficiency and technologicalinnovation.

External advantages

- operating autonomy and political support;

5

- ample funding, and

- the role of the Bank.

11. Startina from scratch was NTPC's greatest opportunity as well as its mostsevere challenge. It made it possible to create a new institution that wasunencumbered by the sector's general bad habits and, in particular, by itsinefficient construction, procurement and operating practices and by itsoverstaffing and bureaucratic deadwood. Most importantly, it opened the door tobuilding a new corporate culture that was commercially oriented, rather thaninfused with the prevailing government department/public service mentality; thatprized efficiency, promoted innovation, both technical and institutional, andrewarded merit.

12. NTPC's leadership seized this opportunity. By all accounts, much of thecredit must go to D.V. Kapur, who was chosen as the aew institution's firstchairman in an act that was itself an example of "new thinking". Mr. Kapur wassomething of an outsider, coming not from the power sector but from BBBL (India'slarge equipment manufacturer), and not from BEL's central management but froma position in which he was responsible for the greenfield construction andoperation of a major new plant. From this experience, Mr. Kapur had developedfirm ideas about the effective management of such projects, and especially aboutthe importance of corporate culture. To assist in carrying out these ideas heinitially recruited a small group of top managers, mostly young and mostly fromoutside the sector, who he felt had the potential to become starters and buildersrather than bureaucrats. Last but not least, he could rely on a supportive Boardof Directors.

13. At first Mr. Kapur and his team focussed much of their effort onorganization and management issues. Early on, decisions that did much to shapeNTPC were taken to: (i) structure the new institution along basically functionallines; (ii) develop detailed management systems and procedures for all phasesof the company's operations; (iii) make project managers responsible forimplementation on-site; and (iv) give corporate planning a key role. Thefunctional organization plan adopted, under which basic technical and managementservices were provided from headquarters, marked a departure from the usual SEBpractice, which was to make project managers responsible for everything, and wasone that was well suited to the needs of a fledgling organization. Even moredistinctive was the decision to make systems development a primary managementtool, a decision that led to the preparation of detailed operational manualscovering everything from the design process to budgeting, contracting and projectoversight. This, in turn, made it possible to combine a high degree ofceutralization with adequate on-site decision making authority for projectmanagers, something that was especially important in view of the remote locationof the project sites and relatively poor communications at the time.

14. The early establishment of a high-profile corporate planning unit reflectedmanagement's determination to see the new organization develop in a long termframework. While the unit frequently undertook trouble-shooting and variousad-hoc operational tasks for the chairman, its main function was to look over thehorizon and make sure that the organization was preparing to meet the nextchallenge. Thus, even as construction was first getting underway, NTPC began to

6

focus on preparing to operate its plants by recruiting experienced senior staff,systematizing operating procedures, and planning to recruit and train operatingpersonnel.18

15. Naturally recruitment was given top priority and much time and effort wasdevoted to devising an appropriate strategy and tactics. The desired staffingmix would include recruits from both inside and outside the power sector and bothexperienced senior personnel and young peoples all would have to be not only wellqualified but highly motivated. The broadest possible pool of applicants wouldbe sought through open competition and much attention vas paid to framing thefirst advertisements to target the desired recruits. This strategy provedeminently successfull not only NTPC was able to elicit thousands of applicationsfor the few hundred positions it initially sought to fill, but it also attractedthe cream of the crop. All who were involved in the process agree that the keyto NTPC's recruiting success was not the salary and benefits it offered, whichwere not exceptional, but the extraordinary opportunities for advancement itcould offer as a new enterprise.

16. Training was another early high priority. A full one-year professionalengineering course was developed for recent graduates recruited for technicalpositions, while shorter courses were instituted in order, for example, tofamiliarize managers with the new systems and procedures and to trainsupervisors. These courses were the seeds for the progressive development, interalia in NTPC's Central Training Institute, of a much larger and more highlyspecialized training program that enabled NTPC to keep pace with its rapidlyexpanding human resource requirements.

17. The establishment of a systematic agality assurance program was anotherinnovation critical to NTPC's success. By preparing detailed construction andperformance standards, and developing the supervisory procedures necessary toenforce them, TPC was able to ensure that its needs would be met ex-ante ratherthan having to deal ex-post with defective goods and services. The effectivenessof its quality assurance program also helped NTPC to develop procurementpractices that greatly eased its initial burdens. Instead of procuring largenumbers of individual items separately, as was the usual practice in the sector,NTPC was able to order much of its equipment in large packages and to useturnkey-type contracts under which the supplier was responsible for assembly andinstallation at the project site.

18. The decision early on to acquire sufficient in-house engineerinicavabilitY to meet all of its needs lay another important foundation stone forNTPC. This was reflected in the efforts made to identify and recruit the verybest technical staff then working in the sector and related industries, and tomake advanced professional training available to recent graduates from the timethey joined the company. Becoming technically self-sufficient not only enabledNTPC to be fully accountable for carrying out its responsibilities, but gave itthe ability and confidence to identify relevant technological innovations andadapt them to its needs. As a result, NTPC has a number of technical "firsts"

/S Paraes. 9.1 to 9.4 of NTPC's comments in the Annex further discusses therole of NTPC's Corporate Planning group.

7

in India to its credit, including the development of a highly automatedmerry-go-round railway system for transporting coal from the mines and theintroduction of.gas combined-cycle power plants and EVDC transmission.

19. As for external advantages, perhaps the most important of all was the factthat NTPC grew up in that most nurturing of all environments for a publicenterprise, one in which it had operatgg autoomy counled ith effectivepolitical sunpport. Present and former NTPC managers and 001 officials agreethat, while enjoying almost a complete free hand in organizing and staffing thecompany, as well as in project implementation, NTPC could count on the Ministryof Energy to ensure that it had the needed resources and to otherwise promote andprotect its interests within the 001. This reflected the GOI officials' naturaldesire to foster the growth of their prot6g6, their confidence in NTPC'smanagement and their early recognition that their role should be essentiallysupportive rather than supervisory.

20. The second major advantage given to NTPC was that it grew up rich, havingbeen amply endowed with funds by both its parents and godparents. The 001provided NTPC with generous budget support in its early years while, as a Bankbeneficiary, it was always well supplied with foreign exchange. This meant thatNTPC could not only push ahead with its investment program without financialconstraints, but also that it could afford to invest adequately in recruitment,training and other long-term institution building efforts. In particular, NTPC'sability to pay in cash and pay promptly goes far to explain its ability to inducesuppliers to conform to its quality standards and to meet its delivery deadlinesand other requirements.

21. NTPC's relationship with the Bank not only contributed to its financialcomfort but also conferred on it a number of other advantages, as discussedbelow..L

B. Institutional Evolution

22. NTPC's organization and management have evolved in response to the twinchallenges it has faced of making the transition from construction company tooperating utility, and coping with explosive growth. As the series oforganization charts in Attachment 2 show, the overall thrust has been towardprogressive decentralization. The first major step in this direction was takenin 1982 when NTPC's initial two-tier organization was replaced by a three-tieredstructure through the addition of directorates at the regional level. Theregional directors were given broad responsibility for the oversight of projectsin their area, for the conduct of regional operations, mainly transmission, andfor liaison with the SEBes and REBs. Another major move toward decentralizationwas begun in 1989 when measures were adopted to significantly enhance theauthority of both the regional directors and project managers. However, theintended expansion in the role of the regional directors was effectively stymied,at least for the time being, when in 1990 NTPC unexpectedly lost its transmissionfunction to the newly created National Power Transmission Corporation(unbelievably, NPTC1). This deprived the regional offices of their major

19 See also Section 1.0 of NTPC's comments in the Annex.

8

activity and most of their personnel, leaving them staffed by a handful ofprofessionals and uncertain as to their mission.

23. The plant managers have, in practice, been the principal beneficiaries ofthe latest steps toward decentralization. They now have much increased authorityto make spending and operating decisions affecting all phases of theiroperations, and the managers interviewed for the audit indicated that they regardthemselves as largely free to manage their own affairs. This freedom is,however, exercised within a framework of operational and financial controls thatseem to make for effective and smooth interaction between Delhi and the field.For example, Operational Review Teams meet monthly at each plant site to reviewcurrent performance and address issues previously identified. These meetings,which are attended by Delhi and regional directorate staff, not only provide awindow on project operations but, more Importantly, serve as a means ofmobilizing technical support when needed from Delhi (not from the regions, whichhave no such technical capability). On the financial side, project managementprepares annual budgets that, after review and approval by the regional directorsand in Delhi, serve as another important monitoring tool. In addition totracking the budget, project staff prepare monthly pro-forma accounts as wellas annual accounts that are audited before being forwarded to Delhi.

24. The challenge posed by NTPC's rapid expansion is best reflected in theswift growth in employment, averaging some 232 per annum, in the eighties. Ascould be expected for a new company, the rate of growth was particularly rapidduring the early years, but then moderated to "only" about 10% annually during1985-90 as shown in Table 1.

Table 1: NTPC. Employment

Executives Non-Executives Total

1980 813 3878 4691

FY 1985 3324 10486 13810

FT 1990 6373 15379 21752

Average Annual Increase (%)

1980 - FY1985 33 22 24

FT1985 - FY1990 14 8 9.5

Source: 1980-SAR, Singrauli II; FY85 and 90-NTPC Annual Report, FY90.

25. To maintain staff quality in the face of the great increase in quantity,NTPC has broadened and deepened its training efforts. The program for newlyrecruited employees has been expanded to include, in addition to the originalprogram for engineering executives, special programs for finance and personnelexecutives, for chemists, and for supervisory personnel. In addition, a numberof in-house facilities have been established to provide advanced training toexisting staff. NTPC's Central Training Institute offers intensive short coursesin a wide variety of technical subjects ranging from "Artificial IntelligenceExpert Systems" to "Power Station Emergencies", while the Power Management

9

Institute provides training in both general and special management subjects.Moreover, training institutes at each power plant offer specialized courses inoperation and maintenance and in the development of supervisory skills.

C. Institutional Efficiency

26. The critical test for any institution is, of course, how well it does itsjob. The audit9s review-of NTPC's performance in constructing ard operating itsgeneration and transmission facilities confirms that it has, by most measures,achieved levels of efficiency that not only far exceed those in most of the restof the Indian power sector but also compares with those of the best performingutilities in the developing world. Attachments 3 to 7, summarized in paras. 47to 58 below, discuss some of the more important aspects of the company'sefficiency in comparison with other Indian utilities, especially the SEBe andTEC.

27. NTPC's claim that it is highly successful in implementing its projects inaccordance with its time schedules has been often repeated, (see e.g. para. 3.18of the SAR for Farakka II)./1O As this, at first sight, does not seem to bethe case since there were substantial delays with respect to the appraisalschedules for several NTPC projects, OED carried out the more detailed analysisset forth in Attachment 3, which also covers the TEC projects and the first stageof the Suralaya project in Indonesia to permit a measure of comparison.

28. Table 2 sumarizes the results of the abovementioned analysis which leadsto the conclusion that, although there often were substantial delays in the pre-construction phase, once the main contracts were awarded, NTPC was by and largehighly successful in constructing its power plants on schedule, even though itsschedules called for substantially shorter construction times than thosegenerally prevailing in India. Further, it seems to have been more successfulin this field when it cooperated with the Bank than when it did so with bilateralagencies. TEC's performance was also reasonably good in the construction phaseproper, in particular taking into account that the first of the two units whichthe Bank helped finance was the first 500 MW et ever to be installed in India.In turn, the audit heard only of very few cases of SEBes performing at a levelcomparable to that achieved by NTPC. NTPC (and TEC) were less successful at thepre-construction stage and will therefore have to find ways to shorten theprocedures leading to the award of the contracts as far as such procedures areunder their control. In the context of the audited projects the GOI contributedto the pre-construction delays by its reluctance to grant the necessary importpermits, a problem that was solved in connection with later projects.

29. OL) found that little can be learned from an analysis of the implementationof transmission facilities associated with NTPC's Bank supported generationprojects, as these facilities were, by and large, completed on time to release

Li0 The reference to the accuracy of the construction schedules in the FarakkaII SAR was somewhat misplaced, as in May 1984, when the document wasfinalized, it must have been evident that Farakka I would not be completedin September 1984 as foreseen at appraisal. In fact, the first unit at

the plant was synchronized in January 19861

10

the energy produced at the plants when these came on line. A somewhat differentpicture emerges from the results of the Bank supported NTPC projects thatincluded mostly transmission facilitieaLj, as illustrated by -he CentralTransmission Project (Loan 2283-IN), which suffered delays in excess of fouryears, largely because: (U) major changes in the generating plant programs forthe regions covered by the project led to drastic modifications of thecorresponding transmission system development, and (ii) NTPC was reluctant tostart major transmissiow work not directly related to its power plants withouta firm agreement with the beneficiary SBe on the charges these would have to payfor NTPC transmission services. Les dramatic but still substantial (about 18months) were the delays NTPC incurred on the implementation of the 500 kV directcurrent link between Rihand and Delhi, which, in part, was due to slow approvalof the routing by the environmental protection agencies.LU

Table 2s Imlementation TUMes of NTPM's TherMal Power Plats

Project Unit Delays with Respect to AppraisalEstimates

Pre-Construction ConstructionPhase (months) Phase (months)

Singrauli I I 5 03 x 200 M 11 3

III 1

Singrauli II IV 0 32 x 200 NW V 0

Singrauli II VI 7 -42 z 500 MW VII -11

Korba I I 6 03 x 200 MW 11 1

III 0

Korba II IV 13 -63 x 500 M V -8

VI -9

Ramagundam I I 7 -33 x 200 W II -2

III -2

Ramagundam IV 12 -4it V -103 x 500 MW VI -15

Farakka 1 I 5 103 x 200 MW II 15

III 17

La1 None of the audited projects belong in this category.

LLZ See also paras. 6.1 to 6.3 of HTPC's comments in the Annex.

11

30. The comparison of plant costs presented in detail in Attachment 4 andsummarized in Table 3, suggests that the appraisal cost estimates were reasonablygood for Singrauli I, Korba I, and to a certain extent also Singrauli II, whereaslater they became too optimistic. Although the 1980 estimates for Singrault IIand Farakka were prepared with the bidding for the main contracts for RamagundamI completed, they reflected only minor adjustments to the higher Ramagundamprices. However, it is worth emphasizing that some of the higher costs thatmaterialized at Ramagundam and Farakka are related to events that usually are notcovered by physical contingencies (e.g. the working environment at Farakka).Even so, the performance of NTPC and its contractors was remarkable, as theycompleted the construction of coal fired units at costs which were generallysimilar to, in some cases even lower than, those of comparable facilities incountries at a more advanced stage of development than India.J13

Table 3: Costs of NTPC Thermal Plants

Project Capacity Actual Cost Cost Overrun Cost Overrunin in Constant in Rp.

1990 US$/kW Terms Amount ofTotal Cost

Singrauli I 3 x 200 MSW 690 -112 02

Singrauli II 2 x 200 M1W 580 to 610 15 to 20% 41%2 x 500 tMW

Korba I 3 x 200 1AW 680 to 720 5 to 12% 352

Ramagundam I 3 x 200 BW 940 to 980 37 to 42Z 722

Farakka I 3 x 200 MW 1010 to 1040 502 78%

31. Table 3 and the two graphs of Attachment 5 show the development ofavailability and load factors of NTPC's thermal plants and compare them to thesame indicators for SBs and TEC. They illustrate the fact that TEC's Trombayplant (partly financed by the Bank) and NTPC's facilities (also implemented withsubstantial Bank support) performed at a substantially higher level than theaverage SEB thermal plant, although the latter clearly shows improvement.Indeed, some of the better SIB performances, such as those in Andhra Pradesh haverecently come quite near to those of NTPC and TEC.

32. The graphs in Attachment 5 illustrate an aspect of NTPC's performance thatmerits close attention. Indeed, whereas practically since its various plantsstarted operation, NTPC's facilities achieved an availability in the order of theutility's norm which is 81% for coal-fired 200 MW units and 772 for 500 MW unitsassuming a notional 5% of forced outages, in most recent years the availabilityhas clearly lessened. This is due in part to fuel shortages such as those atRamagundam, where in accordance with NTPC's statistics, in FY 1991, the stationcould have generated over 40Z more than it did, had the required quantity of coalbeen available at all times. During its visit to India the OED mission found

113 This also applies to the Bank financed first 500 MW unit at TEC's Trombayplant (see Attachment 2).

12

that this problem persists, as the mine associated with the plant is, at thepresent stage, only able to provide an average of 18,000 to 20,000 tons of coalper day against a need of some 25,000 tone per day. This shortfall is relatedto the fact that the development of the mine, which is not under the utility'scontrol, is several years behind schedule. Therefore, NTPC is taking measuresto procure coal from other sources, which is especially important as the laborrelations in the mine are difficult reflecting, inter alia, political instabilityin the region.

Table 4: Thermal Plant Performance 114

Plant Load Factor (%) AvailabilitySEBe NTPC SEBe NTPC

FY1981 42.5 na 65.0 na

FY1985 45.0 55.0 62.5 70.0

FY1990 53.0 66.0 71.0 82.5

FY1991 53.6 61.0 77.6

33. Another factor reducing NTPC'e performance indicators is the fact that,as discussed further in Chapter III, it has, at times, to curtail its outputbecause of limitations in the grid (according to NTPC mostly in the SEBs'systems). OED was unable to obtain a clear view of the extent to which theselimitations are due to physical constraints such as a lack of transmission andtransforming capacity or to the unwillingness of many SEBes to use what theyconsider expensive power from NTPC when not absolutely necessary.

34. The analysis of NTPC's cash operating costs, and in particular those overwhich the utility has a good measure of control confirms the general impressionof a good performance. Attachment 6 and its summary results in Table 5 belowdemonstrate that operations and maintenance costs, excluding fuel, per kWh soldcontinue to diminish in constant terms (Graph 2). The same graph demonstratesthat the Bank appraisals estimated this development fairly well. Thediscrepancies between appraisals and actuals are somewhat larger for the totalcash operating costs (Graph 1) which also show a tendency to increase in realterms in more recent years. However, this is mainly due to increasing fuel costs(Graph 3), which are not under the utility's control.

35. A similar analysis for TEC, of which the main results are also set forthin Table 5, suggests that non-fuel cash operating costs expressed in constantterms averaged at 6.8 1990 US mills/kWh sold and remained within a 10% bandaround this value. OED cannot provide a persuasive argument to explain why thesecosts are about twice as high as those of NTPC, as the differences in the typeof operation of the two utilities and economies of scale for NTPC do notsatisfactorily explain the discrepancy. The TEC resulto support the conclusions

/14 Para. 7.2 of NTPC's comments in the Annex mentions that for FY 1992, NTPCachieved a PLF of 70.2% against an all India average of 55.3%.

13

about NTPC's efficiency as do the latest figures for the SEBs as a whole (seeagain Table 5). Though not enough to indicate a trend the SEB results suggestthat the average cash operating costs per kWh excluding fuel stayed aboutconstant in FY89 and FY90 in constant terms. The encouraging decrease leadingto the FY91 value should be viewed with appropriate caution, as the lastavailable data reflect estimated rather than actual figures.

Table 5: Non-Fuel Cash Operating Costs in 1990 US millefkWh

1983 1984 1985 1986 1987 1988 1989 1990 1991

NTPC 11.8 4.2 4.1 3.0 3.2 3.1 3.0 2.9 2.7

TEC 7.1 6.3 7.3 5.9 6.3 6.3 7.3 7.6 n.a.

SEBEs 13.8 13.6 12.3

D. Personnel Indices

36. NTPC's performance also appears good in relation to trends in employment.The number of employees per GWh sold, after an expected sharp decrease in theearly years of operation, rebounded slightly in the period FY86 to FY88, whencommissio.iing of new plant slowed down.L15 This indicator resumed its fastfall as soon as sales started to increase again in FY89 (see Graph 4 inAttachment).

37. The central utility's total personnel related cost per employee shows, aslow increase in real terms over the lant seven years followed by a jump from1989 US$3200 to US$4800 per employee in FY90. This apparently alarming increase,however, seems to be explained by a change in the accounting for the socialservices (especially medical) in that year. Indeed, the remuneration and thedirectly associated benefits showed only a slow growth in real terms over thesame period. This issue of overall personnel costs deserves follow-up since thetransparency of annual reports on this matter is limited by NTPC's practice ofcapitalizing a varying portion of personnel costs.

38. For the SEBs, in contrast to the cash cost indicators which did notfeature a clear trend (para. 35), the personnel indicators seem to have improvedin average over the period FY86 to 89, in particular the number of employees perGWh sold decreased from 7.3 to 5.8.

E. The Bank Contribution

39. Although the initiative for the establishment of NTPC came from the GOI,and its institutional development has been mainly shaped by the vision of itsfounders, the Bank has made a vital contribution to the company's success throughits financial support, its role in key areas such as procurement and the use ofconsultants, and its influence on NTPC's corporate culture. The importance ofearly Bank support in making possible the establishment of NTPC, and the role of

L15 See para. 8.3 of NTPC's comments in the Annex.

14

the Bank in helping ensure that NTPC was amply funded and thus able to developas it wished, have already been discussed. In addition, being a "Bank project"and the ultimate recipient of a steady stream of Bank Group lending alsoconferred on NTPC a special statue that strengthened its management's hand andbolstered the operating autonomy and political support that were so important toits development. Moreover, GOI officials attest that Bank scrutiny of NTPC'sprojects was an important factor in building their confidence in the company andwinning prompt planning approval for its investments. They also feel that theBank's appraisals were instrumental in enabling them to secure co-financing.

40. The Bank contribution was more direct and overt in the area ofprocurement, which posed a majo. hurdle for a new company undertaking a massiveinvestment program. International Competitive Bidding (ICB) and the Bank's closeinvolvement in all phases of the procurement process, provided a framework anddiscipline that enabled NTFC to obtain not only competitive prices but alsoaccess to the latest technology. The transparency of the process, and the Bank'soversight, also helped importantly to insulate NTPC procurement from politicaland other pressures to select other than the lowest qualified bid. While BHEL,the domestic equipment manufacturer, secured a virtual monopoly of major orders,and foreign firms frequently disputed NTPC's awards, the Bank found its judgementto be sound in all but a few cases.

41. The Bank also contributed much through its emphasis on the use ofconsultants. There was initially a considerable divergence of view on thisscore, with the Bank feeling that NTPC, as a new company, should make extensiveuse of consultants in virtually all phases of its work. NTPC, being anxious todemonstrate its own capability was reluctant to employ consultants, especiallyforeign ones, except where it lacked specific skills. After the first Singrauliproject, a broad compromise emerged under which NTPC would use consultants bothto provide special skille, and also, in order to satisfy the Bankv in a "review"or "retainer" role under which they would provide general engineeringbacketopping in areas in which NTPC initially had no experience such as thedesign of 500MW units and construction management. While the role of consultantswas more limited than the Bank initially wished, there can be no doubt that asa result of its efforts they played a greater role then otherwise would have beenthe case. NTPC made adroit use of consultants from a variety of countries toobtain access to the latest technology and most advanced utility practices, andtoday regards this as one of the major benefits accruing from its relationshipwith the Bank.

42. The Bank also contributed to NTPC's development in less tangible butperhaps even more important ways. With one or more loans being made each year forseveral yeas, NTPC was a full time assignment for at least two Bank staff.According to both sides, this continuing contact led to the development ofuncommonly close and cooperative relationships at the working level. Bank staff,and particularly the senior engineers, were held in high regard and their viewscarried considerable weight in NTPC as much because of the professional andpersonal relationships they established as because they represented the Bank.In addition to themselves providing "technical assistance" in specific areas suchas project management, quality assurance and the use of financial controle, Bankstaff appear to have done much to help form NTFC's corporate culture through

1. 1 . ., . , 11 1 1 1 1 1 - ~ 1 1 .1, 1 ' 11. I -

15

their emphasis on the maintenance of high professional standards and on the needto develop the company along strctly commercial lines.J&

F. Links to Other Sector Institutingg

43. NTPC's major links to the 001 have been with the Department of Power (DOP)of the Ministry of Energy (now Ministry of Power), the GOI's apex power sectoragency, to which NTPC is responsible, and with the CEA, DOP's technical arm. TheDOP's nurturing/aupporting relationship with NTPC bes been sustained over theyears; the two institutions have generally shared the same technical andinstitutional objectives and worked together closely to accomplish them. DOP hasbeen the senior partner but not a dominating onel indeed, major initiatives likethe 1982 decentralization of NTPC and the 1983 Corporate Plan appear mainly tohave originated in NTPC and been readily accepted by DOP. The CRA played animportant role early on, having been responsible for design and engineering ofNTPC's first project, Singrauli, and served as "retainer consultant" on Korba.While CRA apparently looked forward to continuing to serve as NTPC's technicalgodfather, NTPC had other ideas. Anxious to establish its technicalself-sufficiency and institutional autonomy, it resisted any fur _r CEA role inexecuting its projects and worked to establish an arm's-length relationship withCEA. Today CEA monitors NTPC's performance and vets its investment proposals asit does with all other sector agencies.

44. NTPC'a special relationship with the DOP is reflected in the fact that,since 1987-88, this relationship has been governed by an annual Memorandum ofUnderstanding (MOU) in which, in return for committing itself to specificperformance targets, NTPC receives certain delegations of authority and promisesof assistance from the DOP. Under the MOUs, which are largely drafted by NTPC,the corporation has agreed to meet both quantitative targets for plantcommissioning, generation, operating efficiency and internal resource generationand qualitative targets in such areas as internal restructuring, environmentalprotection, corporate planning, and human resource development. In return, theGOI has committed itself to: provide a fixed amount of budgetary support; grantNTPC the right to incur without further approval expenditures in foreign exchangeand rupees up to certain limits for project preparation and for maintenanct andmiscellaneous expenditures; to expedite approval of new projects; and assistNTPC on reducing overdue payments from the SEBes.

45. The MOUs include an agreed system for rating NTPC's performance in meetingthe quantitative targets and, by this measure, it has consistently earned an"excellent" rating. NTPC officials regard the MOUs as a major contribution to'ts institutional development but point out that the GOI has not always been ableto live up to its side of the bargain (e.g., with respect to expediting projectapproval and raising NTFC's rate of return), and feel that they need an evengreater measure of autonomy.

46. Outside of the 001, HTPC's major links have of course been with itscustomers, the SEBs. Their relationship has turned on questions concerning theamounts of power sold, the tariffs charged, and payments, all of which have been

16 See also par&. 2.1 of NTPC's comments in the Annex.

16

highly contentious and are discussed in detail elsewhere in this audit. Sufficeit to say here that NTPC's relationship with the SEBs has been fundamentallyconditioned by the fact that the utility and its customers are public entitiesserving different sovereigns. The relationship has in many ways been morepolitical than commercial; some of the SEBs have been unwilling to regard MTPCas a commercial supplier and NTPC has been unable to treat them as it presumablywould treat commercial customers. The very difficult issues that have arisenhave ultimately had to be dealt with not by NTPC and the SEBs on autility-to-utility basis but between the GOI and the states through anessentially political process that has proved exceedingly slow and uncertain.

G. Sustainability

47. NTPC is presently a strong institution with an impressive record ofachievement and ambitious plans for future expansion and diversification.However, its future is clouded not only by the financial difficulties discussedlater in this report but by a number of institutional problems that could, if noteffectively addressed, make NTPC's future considerably less bright than its past.While NTPC is still a very lean organization by the standards of the Indian powersector, the company's own recent studies have confirmed the existence ofover-staffing at the plant level, amounting to approximately 10% of plantemployment. Moreover, given the continuing rapid rise in the number employed atthe executive level in recent years, the existence of similar overstaffingelsewhere in the organization would not be surprising. Several present andformer managers indicated that they were concerned that, in growing as large asit has, NTPC has lost some of the flexibility and ability to respond quickly tochanging circumstances that were among its major strengths.117

48. NTPC will thus need to slim down a bit, and to resume progress towarddecentralization in order to counter the effects of its size. Since it cannot,as a public enterprise, simply reduce staff directly, NTPC will have to attackthe overstaffing problem over time by restraining recruitment while developingwell targeted retrain7ing programs so that raiundant staff can be moved topositions where they are needed. In the wake of the lose of the transmissionfunction, the key to meaningful further decentralization would appear to lia intransfezring large numbers of staff from Delhi to the regional directorates inorder to endow the regions with the technical capability to effectively backstopproject management in all areas. This would mean limiting Delhi to a trueheadquarters role centering on such activities as planning, corporate finance andother functions that must be performed centrally.

49. There are both an actual and a potenti 1 threat to NTPC's ability to carryout its expansion plans. The actual danger comes from the drastic slowdown inthe project approval process in recent years resulting mainly from the lack ofBank and other (e.g. Soviet) external finance, and from the growing congestionin the environmental clearance process as discussed later in this report. Onlyfour of the nineteen generation projects submitted by NTPC since 1987 bave wonfinal government approval; the fifteen still pending projects, which have a

/17 Par&. 8.2 of NTPC's comments in the Annex sets forth the utility's somewhatdifferent view.

17

total capacity of more than 10,000 MW, would provide about half of the totalexpansion of capacity that NTPC is planning for the Eighth Plan period(1992-1997).

50. The potential threat to NTPC's investment program comes from the lose ofits transmission function i.e. the construction of the lines necessary to theevacuation of power from its new plants, and the operation and maintenance of newand existing facilities. While transmission is still in the good hands of formerNTPC staff, the fact remains that, from now on, NTPC will have no direct controlover the delivery of its output.iis

51. The dearth of new projects has created a situation of substantial de factounder-employment in the ranks of NTPC's large design and engineering staff, andgiven rise to worrisome resource management as well as morale problems. In itspursuit of self-sufficiency, NTPC has sought to acquire the engineeringcapability to deal with the maximum expected workload. The difficulties it nowfaces raise the question of whether NTPC might not be better advised to plan forgreater use of consultants and other outside services in order to be able toadjust to the inevitable workload fluctuations. 19

52. The need to keep its staff more fully employed is one reason NTPC has beenseeking in recent years to diversify into a wide range of new activities. Theseinclude research and development; the repair and manufacture of spare parts;non-conventional energy sources (e.g., solar and wind power); engineering andmanagement consulting at home and abroad; joint ventures with the private sectorand even foreign investment projects. While some of these "new thrusts" areattractive substantively as well as means of absorbing excess capacity, NTPC willhave to guard against the danger of scattering its efforts in ways that coulddistract from its main business and strain its management./Z0

53. Another of NTPC's problems is not new. It is the basic state enterpriseproblem of reconciling management's need for operating autonomy and commercialfreedom with accountability to government and with political realities. Thereare some areas in which NTPC faces important constraints. One of these ismanagement's tnability to adjust the wage structure and terms of employmentwithout government approval, which has exacerbated labor problems in recentyears. Another is government pressure concerning business decisions such as theopposition of other ministries and enterprises to NTPC's plans to expand R&D andbegin manufacturing its own spares. Constraints also arise in the investmentprogram area, where NTPC has not only experienced serious approval delays but

IS Para. 9.5 of NTPC's comments in the Annex, in part, disagrees with thestatements in this paragraph.

IL9 See also para. 9.7 of NTPC9a comments in the Annex.

LZO Para. 8.4 of NTPC's comments in the Annex sees the audit's reservationsabout some aspects of diversification as unfounded.

18

also has had to carry out major projects that may not have been chosen iftechnical and economic justification were the only considerations.121

54. NTPC is considering proposing that the GOI approve its investment programas a whole on the basis of consistent technical, economic, financial, andenvironmental criteria. This is a far-reaching proposal which couldsignificantly streamline the present process under which each project must wina number of governmental approvals and clearances at each stage of itsdevelopment. It could be a major advance in NTPC's institutional development.

III. NTPC AND SECTOR CHANGE

55. While the Bank's primary objective in lending to NTPC was on the expansionof capacity and the building of a major new central institution, it continued,as already discussed, to pursue its broad sector objectives. The NTPC projects'role in this was two-fold. In the first place, the projects served as vehiclesfor the sector dialogue through which the Bank directly sought to promotesector-vide long term planning, integrated operations and SEB reform. Secondly,it was hoped that NTPC itself would, by force of example and otherwise, serve asan agent of change in the sector. In neither respect is there much of a successstory to be told.

A. Sector Dialorue

56. The story of the Bank's efforts to promote the preparation of a lon termnational power plan is an unusually long and inconclusive one. Although the GOIagreed in 1976 during negotiations for the Fourth Transmission project (Cr. 604)to begin preparing such a plan, and funds were provided for consultants to assistwith "system planning studies", there was no apparent action for several years.This led the Bank, in 1979, to suggest specific terms of reference and in 1980,during negotiations for the Second Singrauli project, to press for and receiveassurances that CEA would prepare a plan in conformity with the Bank TOR byApril, 1982. In September 1982, the Bank received the Long Term Expansion Plan,1985-2000 which contained detailed region-by-region load forecasts and a leastcost expansion plan designed to meet the forecast demand. The Bank regarded theplan as a "good exercise" that was "reasonably sound" technically and thatsubstantially satisfied the TOR./22

57. After a few years, it became painfully apparent that there weresubstantial disparities between the power plan and what went into the GOI's FiveYear Plans and also between annual investment programs on the one hand and therate at which new capacity actually was being brought on-line on the other.This, as the SAR for the Rihand Transmission project noted, "undermined rationalplanning by necessitating rapid expansion of supply rather than long term least

/21 Para. 9.6 of NTPC's coments in the Annex disagrees with this finding ofthe audit.

jZ2 Central Transmission project appraisal BTO report, 11/8/82.

19

cost development".LZ3 It thus became clear that the planning effort, whilelaudable in principle, was dealing more with the symptoms of the sector'sproblems rather than their underlying causes -- the perceived need to maximize theexpansion of capacity, financial constraints, the weak implementation capacityof the SEBe and Centre-state conflicts.

58. In retrospect, the planning episode may also be seen as a missedopportunity to balance the G01's supply-s 4 de approach with some attention todemand management and energy conservation. The expansion of capacity in pursuitof ever-accelerating load forecasts is a losing game; the 1980 report of theCommittee on Power laid considerable emphasis on the role of realistic pricingand of conservation measures in steaming the growth of demand.LU However,the CEA plan like the agency's previous planning efforts, was exclusivelyconcerned with capacity expansion. The Bank TOR for the power plan did not callfor the inclusion of demand side considerations and it was not until some yearslater that Bank documents began to mention the importance of integrating planningand pricing and of energy efficiency.

59. To promote integrated sector operations, the Bank not only financed theconstruction of extensive new transmission facilities, but also pressed for theformulation of a plan to guide the construction and operation of a national grid.Although CEA employed consultants financed under the Fourth Transmission Projectfor this purpose, the work bogged down owing in large part, it seems, to theGOI's belief that it would be "premature" to try establishing policies for gridoperation since these touched on difficult Centre-state tariff and other issues.This led the Bank to abandon the idea of a separate plan and to incorporateinstead an interconnection study in the TOR for the national power plan.Although the plan dealt with the physical aspects of interconnection, it saidlittle about grid operation and the Bank seems not to have pressed the subjectagain until 1985 when, during negotiations for the Rihand Transmission project,the GOI agreed to undertake the preparation of a national long term transmissionplan to be completed by June, 1987.Lg= CIA completed the plan in 1989 afterincorporating comments by a Bank consultant.

60. Although Bank lending has done much to create the transmission links andother physical underpinnings of a national grid, there has been little progresstoward integrated sector operation. Power interchanges between states andbetween regions are still minimal owing to a number of factors: the lack of thegrid discipline on the part of the SBe necessary to make such interchangestechnically feasible; a tariff structure that provides insufficient incentives

LZ3 Rihand Transmission project, SAR, para. 1.07.

/24 A 1979 letter from Mr. Rajadhyaksha, the Chairman of the Committee onPower, to Mr. McNamara pointed to the exceptionally high energy intensityof much of Indian industry and stressed the need to raise prices toeconomic levels "to both encourage conservation and for resourcemobilization."

.Lg. Rihand, op.cit.

20

for them to seek power from the least cost sources; and the weakness of theinstitutional arrangements for power pooling. The Bank long ago abandoned itsoriginal hopes for the achievement of integration regionally by 1985 andnationally by 1990 and recent Bank reports treat integrated operations as adistant goal, using much the same wistful language that was used 10 yearsearlier.

61. The lack of sector integration results in a costly under-utilization ofgeneration and transmission capacity. A recent Bank study found that full useof the opportunities for inter regional trading afforded by existing transmissionlinks would, in FY89, have made it possible to reduce dramatically the amount ofunserved demand coating the country some US$550 million per year in foregonebenefits.Lfgi Although it is the least cost producer in most circumstances,NTPC has been badly hit by the need to back down its generating plant in the faceof insufficient demand from and operating difficulties with the grid. As Table6 shows, the company estimates that grid factors have been mainly responsible forthe sharp decline in its plant load factor (PLF) from a high of 79.6% in FY87 to61.7% in FY91.

62. The Bank also pursued a variety of initiatives mainly centering on SEEreform and, especially, the reform of SEB finances. Such reforms requiredconsensus between the Centre and the states which was usually possible only afterlong and painful negotiations. A major step was the 1980 Report of the Committeeon Power which, as already noted, contained sweeping recommendations for SEEreform (and other sector reforms) and provided the Bank with a useful means forsharpening the dialogue. By the mid-eighties, a number of the specific actionssought by the Bank had been taken. These included the amendment of theElectricity Supply Act to enable the SEBe to operate more commercially and torequire that they earn a 32 rate of return; the establishment of a uniform systemof commercial accounts for the SEBe and legislation requiring the states toprovide the SEBes with direct subsidies to compensate them for the losses theyincurred because of the low tariffs (or no tariffa) they were required to chargeagricultural consumers.

63. These measures, while stepping in the right direction, fell far short ofresolving the problem of the SEBe' finances. After an overall improvement in themid-eighties when several SEBes achieved the required rate of return, the trendwas soon reversed. Today, none of the SEBes turns a profit and in FY1990 theircombinsd deficit totaled some US$1.8 billion compared with US$1.3 billion inFY81.Lz The problem is pricing. The SEB's tariffs do not cover their averagesupply cost and are equivalent to only about 50-60% of long run marginal cost.The Bank has sponsored a large number of pricing studies over the years but thesehave served as little more than academic exercises since neither the GOI nor thestates accept the principle of cost based pricing. This reflects both politicalconstraints and the traditional tendency in india to treat electricity as a

L&6 Long Term Issues in the Power Sector, Draft, June, 1991, Vol. I,para. 1.22.

Ln SAR, Private Power Utilities Project, MHay, 1991, paras. 1.05 and 1.06.

21

social benefit and a development tool rather than as a commodity to be bought andsold commercially.

B. NTPC as an Agent of Change

64. The lope that the establishment of NTPC would stimulate reform in the restof the sector hinged on the belief that the new utility coulds (i) provide amodel of efficiency for the SEBes to emulate and (ii) by charging realisticwholesale tariffs, compel the SEBs to do the same at the retail level. RecentBank evaluations have called attention to NTPC's contribution to the sector. ThePCR for the Ramagundam project concluded that ".... lending operations to NTPC has(sic) proven to be more successful and beneficial to the sector than previousoperations with central institutions...."128 Similarly, the SAR for thePrivate Power Utilities Project declares that, "IBRD helped NTPC to grow into oneof India's model utilities and in the process IBRD also helped to improveoperational efficiency nationwide."L29 While there is some justification forthese claims, the record is patchy.130

Table 6: NTPC Operating Performance

Plant Load Factor (PLF) - %

Actual PFL Lose due PLF Lose Due Total PLFPLF to to Lost

Coal Shortage Grid

FY1983 63.6 nil 0.66 0.66

FY1987 79.6 nil 2.70 2.70

FY1991 61.7 5.69 8.46 14.15

Source: NTPC

C. Operations

65. The SEB's operating performance has improved markedly over the past 10years. As Table 4 in Chapter II shows, the average PLF of the SEB's thermalplants has risen from 42% to 53% while availability has increased from 65% to71%. Other plant efficiency indicators, such as the use of oil e.g. forignition purposes, have also shown considerable improvement. There is also someevidence, mainly anecdotal, of improved construction performance on the part ofat least some SEBs. The SEBs, while not performing at NTPC's level, are clearlydoing better overall. The question is whether NTPC has played any part in this;the answer is probably "some, but not much".

28 Report No. 8641, May, 1990, para. 9.01.

/29 Report No. 9499, May, 1991, para. 1.23.

/30 Paras. 3.0 to 5.0 of NTPC's comments in the Annex set forth the India viewaccording to which NTPC's contribution is identifiable and important.

22

66. While some of the better SEBe have adopted certain of NTPC's constructionmanagement practices and techniques for monitoring and improving plant operationsand maintenance, most observers agree that NTPC's management systems have notcome into widespread use in the sector. Similarly, NTPC's recruitment methodsand training programs have not been widely emulated by the SEBs. That NTPC'stechniques have not proved more infectious reflects both the very differentsituation of most SEBe as regards management autonomy and financial means, andthe absence of the overall corporate culture that has been so important to thedevelopment of NTPC's management tools. For these reasons, NTPC's impact as arole model has probably been less in demonstrating how to do it than in showingthat it can be done. NTPC has proven that public sector power utilities in Indiacan attain international standards of efficiency and in so doing has deprived theSEBs of their excuses for poor performance.

67. NTPC9s most direct contribution to improved sector efficiency has been inthe realm of hardware. NTPC's quality assurance efforts gave it the ability toestablish and enforce high equipment standards, while its financial clout and ICBrequirement gave it much more leverage than the SEBe with domestic suppliers.This helped bring about a general improvement in the efficiency and reliabilityof a wide range of domestically manufactured generating equipment andtransmission gear, much to the benefit of the entire sector, and particularly theSEBs, which can only buy domestic equipment. NTPC also has taken a leading rolein the deployment of advanced technology. Several of the SEBe have followedNTPC's lead in adopting such technologies as RVDC transmission, tower-typeboilers and gas-fired combined cycle generating plants.

D. Finances

68. Soon after NTPC began selling power, the flaw in the hope that it couldbe used to lover an increase in SB tariffs became apparent. Increasing theirtariffs to meet NTPC's charges was not the only option available to the SEBs.The other was to defer payments to NTPC. Letting the bills pile up has been theresponse of certain of the weaker SBs whose masters in the state governmentshave been politically unwilling or unable to permit adequate tariff increases.This might well have been expected in view of the fact that some of the SEBs werenotorious for late payment (or even non-payment) for fuel and equipment,especially where the suppliers were other public sector entities. However, thereis no evidence that either the Bank or the GOI anticipated this in setting NTPC'stariffs or making contractual arrangements with the SEBs.

69. The receivables problem is discussed later in this report. Suffice it tosay at this point that not only has NTPC proved to be ineffective as a force forimproving sector finances, but that this failure now threatens to undermine therelationship between the Bank and NTPC and, with it, the growth of theinstitution that the Bank has worked so hard to build.

E. Overall Impact

70. NTPC has unquestionably had a positive impact in the sector. In additionto providing needed massive additions to capacity in a much more timely and costeffective manner than would otherwise have been done, it has emerged as a centerof technical and managerial excellence. And, as NTPC's importance in meeting the

23

nation's power needs has grown so, tou, has the role of the Centre in sectoraffairs. On the other hand, as just discussed, the NTPC projects have not beena particularly effective vehicle for sector dialogue and NTPC itself has had onlylimited influence as an instrument of change.

71. The NTPC experience tends to confirm that new institutions established asenclaves flourish in their own right, but that their success is not necessarilyreplicated in the rest of the sector. In the case of NTPC, this inherentlimitation was exacerbated by the Bank's hesitation in pressing to achieve itssector objectives and in using project conditions for this purpose. It was notuntil the fourth loan for NTPC that the Bank sought to commit the 001 firmly topreparing a power plan by a certain date, and not until the tenth loan in theNTPC series that it obtained a similar commitment to produce a transmission plan.These commitments, and the one requiring the submission of a plan forimplementing the recommendations of the Committee on Power in the five priorityareas selected by the Bank,=1 are the only three conditions calling forspecific action on sector matters contained in the entire series of thirteen NTPCprojects financed by the Bank with loans totaling nearly US$4.0 billion. Eachof the conditions took the form of a statement in the Agreed Minutes ofNegotiation rather than a loan covenant.

72. This slow and circumspect approach to the sector appears to reflect, inthe first instance, the importance of the timely processing of these very largeprojects to both India's power sector investment program and the Bank's lendingprogram. Any attempt to move ahead with sector conditions swiftly or on a broadfront would have been almost certain to have provoked spirited resistance ftomthe GOI, if not because it disagreed with the specific action the Bank wasseeking, then because of its broad opposition to conditionality. However, theBank's approach appears to have been even more deeply rooted in the convictionthat, given the constitutional authority of the states in the power sector, basicreform could best be pursued through "a policy of persuasion rather than one ofexplicit leverage."/32 Pressing the GOI for action that it could take on itsown account was difficult enough; pressing it to press the states to take actioneffecting their own prerogatives in the sector was much more so, as shown by thelong and drawn out effort that it took to amend the Electricity Supply Act inmatters affecting the finances of the SEBs.

73. While it is true that the constitutional aitzation poses a formidableobstacle to sector reform, it is also true that the inadequacy of the SEB reformsundertaken so far has put the sector in its present parlous financial state, andimperiled NTPC. This state of affairs has now led the Bank to adopt a muchtougher stance on such matters. It seems likely that the present difficultiescould have been mitigated, if not avoided, had the Bank tried to apply earlieron a more appropriate amount and style of leverage.33

/31 This condition was sought at the insistence of the Bank's top management;its acceptance by the GOI was regarded as a "major breakthrough".

132 SAR, Singrauli II, para. 1.35.

/33 See also para. 11.2 of NTPC's comments in the Annex.

24

IV. INCREMENTAL COSTS AND TARIFFS

74. In India, as in many other countries, cost recovery and achieving betterefficiency in the power sector through appropriate pricing have been perennialissues and major topics in the Bank's dialogue with the GOI and the sector. Mostrecently, with the GOI's fiscal deficit drematically increasing and the powersector accounting for more than US$1.5 billion of it, a solution to the issue hasbecome particularly urgent. As in FY90 the SEBe' combined financial losses wereof the same order of magnitude as the sector deficit/34, it is evident thatthe main problem is improving cost recovery in the state utilities. This isparticularly important to the Bank since two of the main beneficiaries of itslending, NTPC and TEC, which, through their surpluses help limit the total sectorlosses, heavily depend on the SEBe as clients and/or suppliers. NTPC, inparticular, is almost wholly dependent on the SEBs for revenue.

75. Until 1992 the dispatching of NTPC's power and energy was done on thebasis of fixed allocations and tariff considerations were not a primary issue.However, the more the sector develops, L-s suggested by the GOI's policydeclaration, towards a more cost-oriented oper-tion, the more there will be aneed for NTPC's tariffs to reflect costs of providing power and energy. Theadopted, but (in early 1992) not yet implemented, two-part tariff is a first butstill modest step in the right direction.L:5

76. In the mid-eighties the SEBes charged tariffs to the ultimate consumerswhich were about 90% of LRMC for high voltage supply and 20 to 50% of LRMC forlow voltage consumption, i.e, overall well below average economic cost andfinancial requirements./36 Taking into account that, at the present level ofsystems losses, the SEBe have to buy some 1.25 kWh from NTPC to deliver anadditional 1 kWh to their consumers, they have to remit to NTPC about 90% oftheir incremental receipts (see Table 7). The remainder (i.e. some 10% of saidreceipts) is insufficient to cover the SEBE' associated subtransmission,distribution, and overhead costs. Under these circumstances, it is evident thatthere is substantial incentive for the state utilities to keep NTPC's tariffs lowand to delay payment of the central utility's bills. In the most recent past,the cost recovtry issue at both bulk and retail sales levels has acquired a highprofile in connection with the Bank's operations in the sector in general and inNTPC in particular. The tariff level aspect is discussed in the present chapter,whereas the deferment of payment is one focus of chapter V.

L34 See Annual Report on the Working of the State Electricity Boards publishedby the GOI Planning Commission in September 1990.

LS See also the discussion of retail tariffs and end use efficiencies in thedraft 1991 report: India: Long Term Issues in the Power Sector.

/36 See e.g. SAR Farakka II, para. 5.10.

25

A. The Pre-1983 Projects With NTPC

77. The Bank appraised the Singrauli I project, audited in 1986, as well asthe four projects audited here (Korba I, Ramagundam I, Singrauli II, andFarakka I) in the period 1977 to 1980, i.e. long before the first unit atSingrauli was planned to be commissioned and NTPC to begin earning revenues. Inthis period, the Bank was mainly concerned about the utility's abilitys (i) tocarry out the projects within the envisaged construction schedules and costestimates and (ii) to build up its institutional capability in the technicalareas, a concern that continued to dominate the Bank's approach to the follow-onprojects in 1981 and 1982 (Korba II, Ramagundam II). The Bank keenly perceivedthe risks involved, as documented in the "Project Risk" sections of the SARscovering the seven projects approved before 1983./37 The Bank was lessperceptive on the financial side, where no risks were initially anticipateddespite the lack of specific advance agreement on tariffs and the financialweakness of some of the SEBes on which NTPC would have to depend for its revenues.The Bank presumably felt that it, and NTPC, were adequately protected by thestandard revenue covenant, specifying a minimum rate of return on assets inoperation, that had been agreed under the Singrauli I project. Furthermore, theSARs prepared in the period 1978-80 state that there was agreement between theparties on the allocation of NTPC's output to the various SEBs and on theprinciple of a two-part tariff for the utility's sales. Attachment 7 shows thatthis was misreading the situation.

78. During the years preceding NTPC's start of operations, the Bank addressedpricing mainly through its overall sector dialogue with the GOI and in a somewhatmore concrete but not much more successful way, in connection with sectorplanning. Time passed with little change except for the enactment of theamendment to the Electricity Act which provides for the SEBs to earn a minimumreturn on assets, but fails to include the measures that would allow the SEBs toimplement the required tariff adjustments.

79. Until then, the Bank seems to have relied on the abovementioned amendmentto the Electricity Act and to some degree also on the prospects of "high" NTPCtariffs prodding the states and their utilities to adjust their tariffs. It didnot anticipate the SEBs' reactions i.e. a fierce opposition to NTPC tariffadjustments and late payments of billed supply from the central utility.

80. Over time, the Bank came increasingly to recognize that NTPC's financialviability would bo at risk if the SEBe' performance did not improve. However,it was at a loss when it came to inducing the parties to implement the necessarymeasures in timely fashion. Presumably for this reason, it continued to portraythe prospects for action in a favorable light long after it could have been seenthat such action was unlikely in the absence of strong incentives and/orcoercion. This is not to suggest that lending to NTPC should have been haltedearlier, but that the growing financial risks and uncertainties should have beenmore frankly identified, evaluated, and set forth in the various SARa.

LZ See e.g. SAR Singrauli II, paras. 3.16 to 3.18.

26

B. The Post-1982 Operations With NTPC

81. When in 1982, the Singrauli plant started generating, the need for firmarrangements securing NTPC adequate revenues became quickly apparent. By early1983 the Bank had received drafts (that proved to have been prepared by NTPC butnot yet discussed with the SEBs) for the contr&zts covering the sales from thefirst four NTPC plants; but the final agreements for Singrauli and Korba werestill not available, because NTPC and the SEBe involved were unable to agree onthe two-part tariff for the respective sales. Accordingly, billing for theSingrauli and later also for the Korba energy occurred on the basis of aprovisional flat rate which was meant to be retroactively adjusted when finalcontracts would be agreed. The finalization of such contracts was made acondition of effectiveness of the Central Power Transmission Project approved inMay 1983.

82. In early 1984, NTPC supplied "Memoranda of Understanding (MOUs)",L28which were interim agreements between NTPC and the SEBe concerned. Thesedocuments, by and large, formalized the provisional flat rates mentioned before.During the negotiations of the Farakka II project, which also took place in early1984, the meaning and legal status of the MOUs were clarified and the Bankaccepted the documents as "correctly including all the factors which were ofconcern to the Bank."L39 Nevertheless, the two parties agreed that, by March1986, NTPC would provide the Bank with what were called "revised" bulk supplycontracts, even though such contracts had never been agreed.I40

83. The bulk supply contracts were not finalized as agreed, a fact that e.g.the 1987 project documents for the Talcher project fail to note. Indeed, NTPCtariffs continued to be based essentially on the original MOUs. This wascomplicated by the fact that these MOUs which had been valid for five years werelapsing one by one. The Bank had obtained assurances that, in the absence of newfull fledged bulk supply agreements, the MOUs would continue to be applied. Thisoccurred insofar as tariff adjustments to compensate NTPC for increases in L telcosts and for other effects of in.lation on cash operating costs continued to beimplemented. However, the SEBe refused tariff adjustments reflecting theincreased investment cost for plants that had started operating later and hadcost more than anticipated (especially Ramagundam and Parakka).L41 Thisfrustrating situation persisted through 1991, and was one of the reasons why theBank felt unable to continue its financial support ofNTPC projects.42

L38 These are HOUs aifferent from those discussed in para. 64.

L19 SAR Combined Cycle Power Project, Annex 4.9 para. 1.01.

/40 SAR Combined Cycle Power Project, Annex 4.9, para. 1.02.

L4J See Chapter 5, para. 50.

Lag The Region's comment was that "even when agreements were in force withclauses providing that power be cut off 15 days after bills were due, theseclauses were never enforced."

27

84. The GO created the K.P. Rao Commission bringing together the Departmentof Energy, CIA, NTPC, and the SR8 to examine NTPC's tariffs and requirements.The commission's main conclusions, issued in 1990, were that the two-part tariffshould be implemented essentially as contemplated in the early 1980s, and t' ,in order to assure the financial viability of NTPC their level should be such &Ato allow NTPC to earn a minlmm return on assets (by and large along the linesof the Bank's revenue covenant). OD understands thats (i) the stategovernments, not only the SEBs, have agreed to the principles set forth by thecoaissions (ii) by September 1991, CIA was examining the proposed coefficientsto be included in the formulas to calculate the bulk tariff in order to preparea basis for a final decisions (iii) the bulk supply agreements are likely tobecome effective about the beginning of FY93 (i.e. April 1992), and (iv) NTPC wasalready billing but not collecting in accordance with the new tariff during thelast months of 1991. OD further understands that there still are some steps tobe taken before the NTPC tariff package can be implemented, but this immediategoal seems now within reach. Nevertheless, it is important not to lose eight ofthe fact that the solution for NTPC is sustainable only if the problem of theSEBes' ability to pay is resolved through increases in their tariffs, an issuethat the K.P. Rao committee, in accordance with its terms of reference, did notaddress.

C. Tariff Levels

85. Table 7 below shows the development of average revenues per kWh in variousentities and groups of entities in the Indian power sector. It illustrates someof the major issues concerning tariff levels. This audit, with its major focuson NTPC, does not address the structural problems of the rates because this issuehas lower priority than that of average levels, which is not yet solved. Thetwo-part tariff which hopefully will become effective soon provides at least abasis for the discussion of NTPC's tariff structure in the context of a hopefullyincreasingly cost oriented approach to electricity pricing.

86. As further discussed in Attachment 7, the data in Table 7 are not strictlycomparable. They nevertheless show the lack of coherence of the average revenuesof different Indian utilities. This is especially apparent when the SIB tariffsare compared to those of TEC which, as a regulated private entity, is allowed tocharge rates that cover its financial costs. Not only are TEC's revenues perunit sold much higher than the average SIB rate, they are also between 10 and 20%higher than those of the Mabarashtra SN (818) in whose general area TECoperates, although the SEB' costs must obviously be substantially higher, as ithas to cater to the low voltage consumer, which TEC does not.

87. The relation between TEC's rates and those of MSBB creates a situationsimilar to that existing between NTPC and the SEBe, in general. Indeed, thereis strong pressure to limit TEC's rates. Whereas a significant increase in thetariffs of both TEC and MSB has taken place recently the relation between theirrespective tariffs has not been reversed.

88. Graphs 1 and 2 of Attachment 7 further compare the actual average revenueper kWh achieved by NTPC with the projections in various SARe and show, asfurther discussed in Attachment 7, the increasingly unrealistic expectationsreflected in successive SARs.

28

Table 7: Averaae Revenues per kWh sold

Units 1983 1984 1985 1986 1987 1988 1989 1990 1991

NTPC 1990 36 35 34 32 33 33 33 33 32millt

TEC 1990 55 53 59 59 58 59 59 61mills

SEBs 1990 44 45 46 44 46 (43)mills

MSEB 1990 48 54 53 50 54 (49)mills

NTPC/SEB 0.74 0.73 0.73 0.74 0.73 0.74

TEC/MSEB 1.24 1.06 1.12 1.20 1.13

D. Average Incremental Costs and Tariffs

89. All appraisals of NTPC projects between 1977 (Singrauli) and 1987(Taleher) in one form or another mention that the projected or actual NTPCtariffs are or will be near LRMC. In contrast, the 1990 draft SAR for theRegional Power Projectl43 states that NTPC's tariffs were, on average, onlysome 50% of LRMC. To understand what brought about this change, OED carried outthe analysis set forth in Attachment 7, which suggests that (i) low estimates forthe future investments resulted in incremental costs that were too low and (ii)optimistic assumptions about the tariff that would be charged in future keptaverage rates in the order of magnitude of the calculated incremental costs.Only when, by the second half of the 1980s, more realistic assumptions on bothinvestment costs and rates were used as a basis for the appraisal estimates didthe vast difference between tariffs and LRMC become apparent.

90. Attachment 7 illustrates two other phenomena. First, it shows thatincremental costs are sensitive to the discount rates used in the calculations.As the 10% rate usually assumed to reflect the opportunity cost of capital issubject to substantial uncertainty, the results have to be taken with a grain ofsalt. Second, the SARa tend to assume optimistically that in the first andsecond year of the respective projects, large tariff increases in real termswould take place. Graph 2 in Attachment 7 dramatically brings home this pointwhich also emerges from the comparison of columns (7) and (8) in Table 8. OEDis aware that, in most cases, these adjustments corresponded to those needed tclead to the tariffs allowed by the tariff formulas included in the MOUs but whichwere never entirely implemented. However, the SARs usually fail to discuss the

/43 See Para. 1.08 of this draft SAR, which ultimately was not submitted forBoard consideration.

29

likelihood that such increases would be implemented. Experience should have toldthat such likelihood was modest, at best.

V. NTPC's FINANCIAL PERFORMANCE

91. The financial viability and sustainability of NTPC is evaluated in thischapter. The cut-off date for data collection for the analysis was the end ofFY1991 (with partial updates for the first half of FY92), thus prior to theeconomic reform where subsidies to the public sector would be severely limited.Over the period FY85 to FY91, NTPC has grown very rapidly, in terms of both fixedassets and sales. These increases have not upset its financial performance andstanding.j4 This chapter documents this achievement and points out some ofthe weaknesses in the utility's current financial policy.

92. NTPC 's Growth Indicators. NTPC's main indicators are very consistentover the FY85 to FY91 period. The additional fixed assets (+38% p.a.) aredriving sales up (+39%), and in turn cash flows (+40%) (see Attachment 8,Table 1). The last two years exhibited more variance: on-going investments (orWorks in Progress) slowed down (-41 p.a.) along with long-term borrowing (+15%)while self-financing through depreciation was boosted (+60%); cash flowgeneration (or Internal Cash Generation) was also more in line with reservesbuild-up (+42% and +431, respectively). During the last four years, electricitygeneration provided between 861 and 90% of NTPC's revenues. Transmission feescontributed only 8-10%, thus making the spinoff of transmission assets to the newNTPC less difficult to absorb. Consultancy which is designated as a key activityin the most recent corporate plan never provided more than 0.7% of totalrevenues, and usually less than half as much. Given this income structure, NTPCis and will remain for the foreseeable future essentially a power generatingcompany selling wholesale to a limited number of clients.

93. Financing P..-i of NTPC. The financing plan of NTPC's capital investmentssince 1984 (FY85) showed the following patterns. The share of capitalinvestments in the total uses of funds has grown rapidly but peaked at 911 inFY90. Despite recent alarm over the accounts receivable issues (seeAttachment 8), current assets have absorbed a minor portion of total resources.The contribution of cash flowsL45 has increased steadily from 10% to 301 oftotal resources mobilized. The share of other long-term loans (mainly foreign)has peaked in FY88. NTPC has relied mainly on GOI through both equity and loans(mostly World Bank and IDA) to close any financing gap. Although erratic, themobilization of domestic savings through the power bonds has been substantial(from 71 to 24% of total).

L44 Attachment 8 is divided in 2 sections: (a) a detailed analysis of theaccounts receivable situation, (b) statistical tables complementing thefindings presented in the main text.

45 Defined as the Net Profits plus Provisions for Depreciation of FixedAssets.

I .I I 1 1 1 a IIL .. I I I .

30

94. Capital 7uvestments. NTPC has been carrying out heavy investments in thecontext of the Sixth (1980-85) and Seventh (1985-89) Plans. New investments,measured by the increase of fixed assets in operation and of works in progress(WIP), have plateaued in absolute terms since FY89 at around Rp 20 billion(US$780 million at end-1991 exchange rate of Rp 25.8). Measured in constantprice, the leveling-off has started earlier (in the mid-eighties). Although duepartly to constraints outside NTPC's control (see Chapter III), the slowdown innew investments in the -last three years has strengthened its balance sheetbecause there is now a greater proportion of revenue-generating assetc. Yet, thedecline of outstanding IP in proportion of total gross fixed assets to below onethird may lead to funding problems for NTPC beconse postponed investments willlikely cost more at a future date.

95. Self-financln. Self-financing (SF) has improved steadily over recentyears. The self-financing ratio after debt-service on principal (SF-OMS)I6was 32.72 in FY91 (17.52 after corre.ition for increase in accounts receivable)(Attachment 8, Table 2). Another self-financing indicator, which favors NTPC'sviewpoint rather than the lenders', uses cash flows prior to debt-servicings theCorporate SFLA has been increasing after a decline due to the trebling ofinvestments in two years; in FY91, it reached about 402. After correction forthe i:crease in cccounts receivable which reduces the available cash flows, theactual self-financing has been more erratic, dipping as low as 5.7% in FY90: the7-year average corporate SF was only 12.5% as against 24.5% before adjustment.For this reason, a self-financing covenant would not be appropriate as long asthe a-counts receivable issue has not been settled. Confusing the issue is thefact t.-at Works in Progress is loaded with accounting items (the exchange riskon foreign borrowing, the capitalized costs of operations, and the capitalizedfinancial expenses) which usually are not supposed to be financed by cash flows.In FY91 the tvo latter items represented 14.42 of outstanding WIP, thusdecreasing the nominal Corporate SF from 46.12 to 39.52. Since TPC does notdisclose the exchange risk as a separate item in its balance sheet, itsadditional effect cannot be assessedi this audit estimates, however, that theself-financing of actual capital formation expenditures was well above 50Z inFY91. Furthermore, since these items are cumulative, they burden the denominatorof the ratio far more than the above 39.52 implies.L#_

96. Domestic Bond Issues. A remarkable development for NTPC has been to issuedomestic bonds so early after the corporation was established: Rp 20.82 billionwere mobilized through six issues every year since FY86 (Attachment 8, Table 3).Starting with the second issue, NTPC was able to offer a tax-free interest option

1i Since NTPC is not showing loan maturities under one year as a separate itemof current l!abilities, the time-series for this adjusted ratio could notbe computed. The later PCRs reading with NTPC do nct provide any data aboutself-financing.

L4J Defined as cash flows divided by the increase in totpl gross fixed assets(including Works in Progress) during the same year.

LAL Over the last four FYs, capitalization of operating costs and of interestaccounted for 14.52 of the increased in fixed assets.

31

which reduced the weighted average cost to 11.12. Although this is greater thanits average return on fixed assets, the main attraction for NTPC is the balloonrepayment feature which lowers the debt-service ratio. The drawback of theseballoon loans is that, since they are not amortized, they need to be refinancedat maturity because their average maturity is substantially shorter than thedepreciation life of the assets they financed. In the next three fiscal years(1993-95), NTPC will seek to refinance Rp 5.46 billion (US$212 million) or 311of the bonds outstanding. NTPC has anticipated this major effort by using thesinking fund approach. By the end of FY91, Rp 3.78 billion (69.2%) had been setaside to facilitate the redemption of these bonds and an additional Rp 15.8million (0.31) of the bonds issue held by the public had been already repaid.The last three issues have been private placements subscribed by commercial banksand other financial institutions attracted by NTPC's good credit rating.

97. Lon-term Borrowing. foreign BlWhange Exposure and Risk. NTPC hasborrowed long-term from six foreign banks or consortia and from one local bank.At the end of March 1991, the outstanding commercial debt amounted to Rp 24,930million (US$96f million) of which 96.7Z was foreign and 37.1% was guaranteed byGO. NTPC's success in mobilizing foreign loans carries a foreign exchange riskburden. Loans in hard currencies (Japanese yens and German marks, in particular)create additional liabilities. The accounting of accrued exchange risk isappropriate to the extent that it follows the Indian accounting rules, but thepresentation could be more transparent. The foreign borrowing for which NTPCbears the exchange risk are revalued at the end of every FT at the prevailingexchange rates. The accumulated exchange risk is, however, not shown separatelyon the liabilities side of the balance sheet, thus preventing any analysis of theimpact of NTPC's foreign exposure. Furthermore NTPC does not disclose theaccumulated exchange risk as a separate item in its balance sheet.149 Thisaudit estimated the risk accumulated between April 1988 and March 1991 at Rp7,999 million (US$310 million) for five fully disbursed loans granted by foreigncommercial banks and totalling Rp 19.1 billion (US$740 million). This 72.11exchange risk is worse than the 49.81 depreciation of the rupee vis-&-vis the USdollar over the same period. NTPC has been hedging a portion of its debt,especially the Sterling Pound denominated one (Rp 7 billion or 291 of totalforeign dabt excluding Bank funding), but has been limited in doing so byperceived constraints from the Ministry of Finance.

98. NTPC does not bear the exchange risk on Bank loans which are on-lent byGOI in Rupees. The implied subsidy is not negligible. The exchange riskdisclosed by the Bank on the loans amounted to US$31.55 million or 2.51 of thecorresponding outstanding principal as of end March 1991; the exchange risk onIDA credits is not disclosed. Part of the subsidy is, however, financed throughthe on-lending rate set by 001 (currently 141) which adds about 6 points to the

fig NTPC claims correctly (Attachment 1 of Annex) that its choice ofpresentation has been approved by its external auditors. Yet, the pointis to achieve more transparency. Other World Bank borrowers are requested- and do accept - to disclose the amount of exchange risk on theliabilities side of the balance sheet. Although IDA borrowings aretransferred to NTPC in local currency, the external audit report coulddisclose in a footnote the exchange risk borne by the Government.

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Bank rate. The additional liability (if the local currency has depreciated) dueto the exchange risk on non-Bank loans can be offset either by an increase inanother liability (another loan or equity) or by an increase in assets,preferably liquid ones (such as Cash and Banks) because the risk will eventuallybecome a lose in the case of most development countries. In NTPC's balancesheet, the exchange risk on all foreign borrowing is entirely capitalized on theassets side under Works in Progress. The effect is to defer the financing of therisk until the corresponding plants are commissioned (which takes 3-5 years).The financing is then generated at the pace of depreciation which is set by law(20 yeai whereas foreign borrowing are amortized over much shorter maturities).This choice of accounting presentation leaves the exchange risk constantlyunderfinanced. This is acceptable only insofar as the risk is not an actuallose, that is, as long as the foreign debt is not due. This mismatch ofmaturities between exchange losses and their financing is not a desirablesituation, although it currently advantages NTPC by lightening the debt-serviceburden,

99. Cash Flows/50. Despite being in the middle of major investments, NTPChas been able to generate substantial cash flows. To generate the major shareof cash flows through profits is the mark of financial strength. Because thefixed assets base increased strongly in recent years, depreciation has accountedfor a larger share of cash flows. Depreciation of fixed assets is stipulated bythe "Electricity (Supply) Act of 1948" (1948 Act hereafter). This importantsource of cash flows is, therefore, not under NTPC's control except that it willgrow at least at the same pace as fixed assets in operation (+44% and 381. p.a.over FY85 to FY91). In FY91, depreciation amounted to Rp 2,345.1 million(US$90.9 million)/1 which represented 2.54Z of fixed assets in operation byend of March 1991 or 2.89% of average assets in FY91. Recently, NTPC has beenallowed to shift from straight-line to accelerated depreciation in order toincrease its cash flows generation. The change was estimated to increase thedepreciation rate from 3.60% to 5.28%, a 40% increase.

100. Capitalization of Expenses. For a corporation with a large investmentprogram under way, it is standard practice (sanctioned by the supervisoryMinistry) to defer selected cost items which are more related to the plantconstruction activity than to the operation of already commissioned plants. Theprinciple is of not charging the full expenditure in the year when payment ismade when the benefits from this expenditure will be recovered over severalyears. The definition of such allowed deferments is, however, sometimesstretched to exhibit improved profitability. In the case of NTPC, a portion of"corporate office expenditures" (overheads) and of "expenses common to operationand construction" is allocated to Works in Progress in the same percentage as theratio of sales to annual investment expenditures (NTPC, Accounting PolicyStatement, para. 4.3). In FY91, this percentage was about 901, plus or minusdepending on whether sales are net of tax or investments are not of depreciation.

/61 In this section, cash flows are not corrected for the increase in accountsreceivable.

1I All data in US$ in this Section have been converted at the rate as ofDecember 31, 1991 (Rp. 25.80).

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This resulted in the deferment of Rp 1,032.8 million (US$40.0 million) or 8.1%of total non-financial costs in FY91./52 The capitalization practice variesconsiderably by cost category. 33.31 of labor coats were capitalized in FY91,steadily down from a high 48.1%, while only a constant 1-2% of generation costswas similarly deferred. In contrast, the practice allows massive capitalizationof overheads: 105.4% in FY91, sharply up from 78.3% in FY88. Based on thecomparison of depreciation in the income statement and the balance sheet, itappears that N".C is also capitalizing a portion of depreciation 13.2% in FY88and 9.4% in FY89.

101. Depending on the presentation, this permits NTPC to appear to operatewithout either labor costs (i.e., the FY91 deferment is greater than the entirepayroll) or overheads which is not intended, yet a benefit nonetheless. Sincethese capitalized costs are brought back into the Profits and Lose account onlythrough the depreciation of fixed assets, the accounting convention is key indisplaying a strong profit performance. In FY91, the above deferment contributed9.1% to profits before financial charges, down from 12.4% in FY88.

102. Capitalization of Interest durine Construction (IDC). Deferment ofinterest charges contributed twice as much as deferment of non-financialexpenditures, with 22.8% in FY91. As much as 40.7% of all financial charges ofFY91 were capitalized as "interest during construction" under Works in Progressalthough the latter was only 31.7% of gross fixed assets. The same discrepancywas observed in FY90, but it is a recent pattern because there was no anomaly inFY88 or FY89 (Attachment 8, Table 8), which is due in part to the higherborrowing costs of funding the recent projects.

103. The capitalization of interest provides NTPC with greater cash flows.Given that the relative slowdown in new investments reduces the amount ofinterest which can be capitalized, it is understandable that NTPC would be tryingto buffer the impact on its cash flows. If NTPC had followed closely the annualratio of WIP over fixed assets (as it would be justified to do) in computingthese interest deferments, it would have reduced its net profits by 7.0% in FY90and by 25.1% in FY91. Overall, total deferments contributed 83.71 of net profitsrecorded in FY91, which is high.I53

152 NTPC claims that the percentage was only 521 that year as for every year.However it has been computed as 89.3% in FY91, and 90.71 in FY90 (seeAttachment in the Annex).

.53 NTPC claims (see Attachment 1 to the Annex) that it is followinginternational accounting standards, yet they are subject to interpretationwhen doing the actual deferments. Furthermore, this does not contradictthe fact that the practice improves self-financing as long as NTPC remainsin heavy investment mode. The Region states that "NTPC's accountingpractice of capitalizing construction costs including financial chargesuntil an asset is put into commercial operation is fully in line withinternational utility practices. It is a matter of judgement on howoverhead is allocated between operations and capital expenditure, but wedo not believe that NTPC is unduly loading capital expenditure to show ahigher profit. Given NTPC's accounting policies it is normal that theincome statements do not include these deferred expenditures. This doesnot mean that interest due or realized foreign exchange losses are notpaid out of internal cash generation."

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104. Accounts Receivable. In practice NTPC has little recourse over itsclients in arrears. It has drawn the maximum from the letters of credit (LCe)approach. To cut electricity is an extreme measure which NTPC is understandablyreluctant to initiate. Besides affecting more harshly the end-users than thetargeted SEBs, it would result in revenue losses for NTPC in order to force therecovery of previously billed revenues. If the purpose of the current covenanton accounts receivable is to ensure that proper attention is paid to the issueof recovery from the SEBs, the objective has been achieved. To enforce thiscovenant may, however, prove to be ineffective in improving SEBes' behavior, andrisk being counterproductive inasmuch as it deprives the economy of one of themost cost effective source of electricity. NTPC's energy sales will not behandled in a strict commercial fashion until a political consensus to imposefinancial and commercial discipline in the SEBe emerges. In the meantimealternatives to the accounts receivable covenant ought to be considered.

105. Two alternative covenants are proposed. A current ratio covenant wouldallow NTPC to balance current liabilities and current assets rather thanconcentrate all efforts on one item that is only to a limited extent under theutility's control, though it represents 58.8% of current assets in FY91. Thiscovenant would be appropriate to protect NTPC against adverse financialdevelopments affecting its liquidity if it is the priority objective of the Bank.Given that the main problem facing NTPC is of servicing the debt that it willhave to contract to carry out the planned investment program, having enoughcurrent assets to cover its current liabilities is more crucial for NTPC's mediumto long-term sustainability than focusing on whether one item of current assetsis recoverable or not. To take into account the persistent nature of theaccounts receivable issue, this current ratio could be defined as current assetsless arrears of over 6 months divided by current liabilities, and it should bewell in excess of 1:1 as was the case in the last four fiscal years (Attachment8, Table 9). Alternatively, a debt-service coverage ratio covenant would achievethe minimum result of ensuring that NTPC generates enough free cash flows toservice its maturing debt. Similarly, this debt-service coverage ratio could bedefined as to consider only cash flows after correction for increase in accountsreceivable./54 The covenanted floor could even be set at a relatively highlevel (such as between 1.25 and 1.5:1) to avoid lax responses to liquidity crisis/55.

154 Earnings before Interest and Depreciation (EBID) less Increase in Accountsreceivable divided by Interest and Principal Repayments.

15_ The Region interprets this suggestion for a new covenant as a suggestionfor NTPC to increase its short-term liabilities to balance higherreceivables, and states that "we have great objection to thisrecommendation which goes against sound utilities and financial managementpractices. It would also be totally out of line with the Bank's recentlyformulated policies for lending to the power sector, and be contrary toour efforts to operate the power sector in India on a commercial basis.A debt service ratio (normally defined after taking into account workingcapital requirements) is indeed a possible alternative, but we considera self financing covenant more appropriate, because of the need tomobilize more resource from internal cash generation to help financingNT?C's investment program."

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106. Financial Covenants of Foreign Financiers Although the Saudi Fund forDevelopment (SFD) stipulated the onlending to NTPC through a subsidiary loanagreement, the 1985 loan is not listed in NTPC's balance sheet. Banker Trust(BTCO) prohibited NTPC to "materially change the scope or nature of itsbusiness", but it was not ascertained whether the bank was consulted when theGovernment ordered the spin-off of NTPC's transmission operations to NPTC in1991. The Saudi Fund agreement was the only one to specifically address theissue of cost overrun financing by putting the onus of resource mobilization onGOI. All foreign financiers agreed to request audited accounts within ninemonths of the end of the fiscal year, except Banker Trust which stipulated nomore than seven months. Also, they all insisted on being treated pari passu withall unsecured debtors. It should be noted, however, that the FY1991 report listseach of the six bond issues as secured by mortgages on all fixed and movableassets of Singrauli, Ramagundam, and Korba despite stipulations to the contraryin various co-financiers' loan agreements.L!6

107. Return on Assets. A rate of return of 9.5% on historical fixed assetsin operation (ROA) was covenanted in the Bank's loan and project agreements.Observed rates have been consistently over the targets, which attests of NTPC'sability to generate cash flows out of recently commissioned plants (Attachment8, Table 10). The return on investment defined by the OMS (ROI-OMS)121 hasbeen around 151 throughout the period. If cash flows are corrected for theincrease in accounts receivable, which reduces the available cash flows, therates were, however, discounted by an average 5.2 points. A more comprehensiveratio, the return on all gross fixed assets whether in operation or not (orCorporate return on investment, ROI)/58 produced data also reported in Table8 of Attachment 8. Despite a large on-going investment program, NTPC has beenable to steadily increase the return on total fixed assets.

108. The gap between nominal and available cash flows is substantial and it islowering the effective returns on either assets or equity. Yet, since they arelate payments rather than uncollectibles to be written off (Attachment 8), thereceivables will eventually lift the effective return close or even above thenominal rate whenever they will be resorbed. Given that one third of total fixedassets is still under construction, and assuming no worsening of the arrearssituation the estimated ROI under full capacity would be in the 13-15% range,which is consistent with the current ROA. This also compares well with the 10%net return mentioned in the most recent amendment to the Electricity Act of 1948.

109. Return on Equity. The rate of return on equity (ROE) is defined asprofits divided by the capital contributed by GOI, reserves and unallocatedprofits generated by NTPC. Given the low leverage of NTPC (the debt-equity ratiois maintained at about 1:1 by GOI) the ROE cannot be impressive, and thus it isnot as good an indicator of performance as the ROI. Despite this caveat, nominalROE have been above 101 in five out of the last seven years (Attachment 8, Table

P56 NTPC's comments (Attachment to the Annex) do not contradict the audit'sstatement.

/57 Operating Margin over Average Net Fixed Assets in Service.

/58 Net Profit after taxes plua Depreciation plus all Financial Expensescharged to income divided by the Average Total Gross Fixed Assets (i.e.,before depreciation).

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11). On the other hand, returns corrected for the increase in receivables havebeen declining. As the respective averages show, the ROE has been affected bythe receivables issue more than the ROI (discounted by 4.1 and 2.9 points,respectively) due to the lower equity base relative to fixed assets. GOI hasincreased recently the ROE allowed to private sector power utilities in order toattract investments into the sector. A consensus has also emerged among theauthorities supervising NTPC to raise its ROE to 12%. This target rate would bemore in tune with the 12% discount rate used by the Planning Commission forselecting investment projects.

110. Dividend Policy. NTPC has not paid any dividends back to the GOI despiteaccumulating Rp 23,532 million (US$912 million) of profits over the last sevenyears. This fact is noted in the Report of the Comptroller and Auditor Generalof India of 1990 (para. 11.4). GOI's position is that it is a matter ofpresentation. NTPC could distribute dividends but GOI would have to reinvestthem back in the form of equity contributions. Avoiding these transferssimplifies accounting; yet, the drawback is that retained earning are accumulatedin Reserves and Surplus whereas Government contributions go into its Capital.Furthermore, NTPC would gain in stature as a domestic borrower in the eye of thegeneral public by distributing dividend in preparation for the eventual issuanceof non-voting convertible bonds to better compete vith private borrowers.

111. NTPC's Financial Policy. NTPC has reached its large size (it is India'slargest corporate entity in terms of fixed assets) in a record time withoutjeopardizing or compromising its financial viability, even in spite of theaccounts receivable issue. This is a performance that very few utilities in thesame situation are able to achieve. The performance is even more impressivesince NTPC is still in a major investment mode. A good part of NTPC's above-parperformance is to be credited to GOI's original design (e.g., debt-equity ratioset at a conservative 1:1; tariff formula to pass on all investment, operation,and financial costs).159

112. In accordance with the policies prevailing in the Indian power sector,NTPC's revenues have by and large been satisfactory from the financial point ofview. However: (i) the pending increase of the minimum ROI required to 12% (oreven beyond); (ii) the fact that with respect to international standards, thecapitalized operating costs are unusually high, (iii) the desirability ofincreased transparency through the GOI's receiving a dividend on its investmentin NTPC, and (iv) last but not least, a likely radical change in GOI policytowards the sector tbqt would imply the GOI reducing its contributions to thesector, suggest that there is a strong need for the tariff adjustments discussedin Chapter V and for full and timely payment of NTPC's bills. However, under thenew government's envisaged policy, these improvements can only be expected ifsector mechanisms and in particular the SEBs' financial performance changesubstantially for the better.

L19 The Region emphasizes that "In FY91, NTPC was collecting may be 70 to 75%of the amounts billed; even though it was not necessary to write off theuncollected amounts the cost to NTPC (and the overall economy) in termsof additional working capital requirements and reduction of net internalcash generation or contribution to investment have been considerable.While NTPC has (fortunately) not gone bankrupt, it has certainly affectedits overall financial viability."

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113. Balance Sheet Structure. NTPC's balance sheet is exceptionally strongfor a power utility in a developing country, which has impiemented a massiveinvestment program without interruption for almost a decade. The performance hasto be appreciated against the backdrop of a structurally weak energy sector inIndia.

114. Debt-Equity Ratio. The single most important reason for NTPC's goodfinancial situation is the Government guaranteed debt-equity ratio of no morethan 1:1, which essentially indexes the equity base onto the new debt mobilized.For every Rupee of new borrowings, the Government eventually transforms half intoequity. The result is to reduce NTPC's debt service burden. This ensures thatNTPC can display a balance sheet constantly under-leveraged, which enabled it tomobilize more loans. This amounts to capital subsidies to encourage investmentsand, to that extent, they are justified. This practice makes NTPC highlydependent on continuous capital contributions from the Government to maintain the1:1 debt-equity ratio. The drawback is that the real cost of funding theseinvestments is understated and thus not fully reflected in the tariffs. It isnot proposed that the Bank insist on a change of policy as the present policyprotects NTPC against possible debt-servicing problems in the future despite thedrawback of under leveraging (see para. 117). However, it is, suggested thattariffs incorporate the true cost of funds as if NTPC had to service the debts,whether converted into equity or not, which are mobilized either directly by NTPCor by the Government on behalf of NTPC. This provision will be triggeredwhenever the cost of funds (including possible exchange risk) is greater than theguaranteed return on equity of 12%. Grants would not trigger the provision butconcessionary resources could because the exchange risk over a long period couldwork out more than 12% p.a. compounded.

115. Between FY85 and FY91 (the last year for which audited accounts areavailable), the Government injected new capital every year (albeit not funded bytaxes)160 and the subscribed capital increased threefold. During the sameperiod, fixed assets, including plants under construction (WIP), increased 5.5times. At the end of the period (March 1991), share capital had financed 47.0%of total gross fixed assets (68.8% of the portion in operation). With retainedearnings and accumulated depreciation the self-financing ratio was 70.1%. Thisis a very high figure in both absolute and relative terms. It shows that NTPCwas able to generate on its own half as much as the Government contribution. Insuch a short period, this result is remarkable. Taken year by year, this ratiohas been on a declining trend given its unsustainable initial level (92.2% inFY84-FY85). For the last three years, the GOI contribution stabilized at 45-50%of gross fixed assets which was the original target. NTPC has been able tocomplement the Government capital subsidies with self-financing under itscontrol. The self-financing of works in progress has increased continuouslysince 1985 from a low 19.8% to 73.0% in FY91. While this is partly due to theleveling-off of NTPC's investments in recent years (for reasons analyzed in

160 A document provided by NTPC shows the budget-financed support of GOIactually declining in the last three years, but other data in the samedocuments (cash flows, foreign borrowings and power bonds) do not tallywith NTPC's audited accounts, hence the net budgetary contribution cannotbe ascertained, although NTCP suggested to use audited figures (seeAttachment to the Annex).

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Chapter II) it aiso confirms that NTPC has been more and more independent oflenders for the financing of Its expansion program.L1

116. The capitalization of debts to maintain the debt-equity ratio at or below1:1 is a clear process, although it was not entirely transparent to some foreignfinanciers, including the Bank, for several years. From June 1977 to December1986, US$1,302.2 million of Bank loans and IDA credits which should have beenentirely onlent to NTPC yere partly passed as grants in accordance with the 1:1debt-equity ratio. This lasted undetected for several years although the Grants-in mechanism by the Ministry of Finance is quite clear about the practice. In1986, the Bank requested GOI to stop transferring its loans as equity, whichvoided the test of debt-servicing ability. As a result, out of US$2,759.7million disbursed (net of cancellations and repayments) between June 1977 andMarch 1991, NTPC's obligation is limited to US$1.0 billion (36.2%). Given theforce of Bank loan agreements, the balance of US$1.76 billion should have beende-capitalized back into the loans pool. In 1986, the Bank requested GOI toonlend all Bank and IDA funds to NTPC. As of end March 1991, Bank loans andcredits benefiting NTPC amounted to US$2,759.7 million which is equivalent to Rp54,145.3 million. However, in NTPC's balance sheet, "Loans from GOI", whichcovers Bank funcs onlent by GOI, was only Rp 19,634.5 million. Assuming that GOIimplemented the Bank request to onlend all funds to NTPC from January lst, 1987,Bank funds counted as loans should total US .457.5 million or Rp 28,596.5, thusleaving a discrepancy of Rp 8,962.0 million. It appears therefore that US$456.78million of Bank loans were still converted to equity after 1987. The fact thatthese repeated breaches of Loan Agreements were not enforced is not mentioned inany of the PCRs reviewed.

117. The counterpoint of the favorable debt-equity ratio is that NTPC is under-leveraged. Since 001 equity is partly financed with budget resources, it is notan optimum allocation of tax rupees when NTPC is able to generate over 10.0%return on total fixed assets (including 32% of plants under construction andafter discounting for the accounts receivable). This yield is greater than thecost of tax-free power bonds, and it would save on subsidies if NTPC was issuingbonds instead of getting tax-financed equity. The conservative financial policyfollowed by GOI was justified as long as NTPC was launching a series of ambitiousinvestments. Now that expenditures are not as massive, consideration could begiven to relaxing this limitation. Given the positive self-financing this wouldnot jeopardize NTPC's financial equilibrium. It would have the advantage ofrecognizing all borrowings according to their nature of having to be repaid aswell as their corresponding cost (although concessionary aid may be charged byGOI at market rates). The new GOI policy which limits more severely itsassistance to the public sector offers the opportunity to test the feasibilityof changes in NTPC's financing plan: namely shifting its reliance from GOI'sinjection of equity to internal cash generation end borrowing on the financialmarket.

118. Another weakness of the current financial policy is the costing practiceof investment projects which implies built-in financing gaps. Governmentregulations demand that investment costs be reported without price contingencies,thus assuming no inflation, contrary to the reality. Since price increases are

fl NTCP explains (Attachment to the Annex) that there is no discrepancybecause the changeover to full onlending of Bank/1DA funds took effect onlyfrom 1987 on.

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not factored into the initial financing plan, the latter is never closed, forcingNTPC to mobilize additional resources to finance what is considered "costoverruns" by Indian definition, but is not. Indeed, with external co-financierssuch as the Bank, NTPC deals on the basis of costs including price contingenciesand thus is left only with the problem of financing changes in project scope anddelays.

119. Provisions for Arrears. Provisions are mostly to cover doubtful debtsarising from arrears on sales payments. The provisions have increased rapidly(+72.9% p.a. since FY88), but from a low base and are still nominal relative tothe amount of arrears. Compared to sales, accumulated provisions were above 1%for the first time in FY91, but the addition to provisions was half of thepercentage of sales set aside the previous year (.3% ve .6% in FY90). Given theamount of Government contributions which have been and are still invested intoNTPC through the capitalization of borrowings, it is not consistent to interpretthe low provisioning of arrears as either imprudent or optimistic. Furthermore,the comprehensive audit of NTPC's accounts to ensure proper accountability forpublic funds (see para. 142) does not leave room for under-assessing thefinancial implications of risks. Last, NTPC's financial policy is tooconservative (1:1 debt-equity ratio, positive self-financing) to leave anysignificant exposure uncovered. In other words, there is no reason to necond-guess a consensus of independent auditors (acceptable to the Bank), of Governmentevaluators, of commercial bankers, and of subscribers of bonds (lately mainlyfinancial institutions) who concluded that NTPC is still a good credit risk. Itmight be better to focus on additional monitoring indicators which would ensurethat NTPC is never in financial jeopardy.

120. Contingent Liabilities. They more than doubled in three years afterhaving increased as much as 194% by March 1990. The main item was "claimsagainst NTPC not recognized as debts" (around 90% of total). If included in thebalance sheet, they would have added 3.8% to the current and long-termliabilities, which is not substantial.

121. Audit of NTPC's Accounts. There are two rounds of external audit. Oneis carried out by private auditors appointed by the Government but paid by NTPC.About 18 man-months divided among four teams needed to cover the widegeographical portfolio of power plants are devoted to this first audit each year.Findings are discussed with NTPC management and unresolved differences areincorporated as qualifications to the accounts. The FY89 report, for example,contained three qualifications concerning: a contingent liability for disputedtaxes on two projects in the Madhya Pradesh state; discrepancies in the linematerials consumption in the Northern Region; and the need to increase internalaudit staffing. The audit report is then submitted to the Audit Board which isthe Government body responsible for controlling public sector corporations. A5-member panel, composed of three staffs from the Audit Department attached tothe Ministry of Finance and two experts from the field (i.e., accounting in thepower sector) specially appointed, reviews the draft audited transactionaccounts. A consensus is reached between NTPC management, the Audit Board panel,and the external auditors on the final presentation of the accounts. Thisprocess has to be completed before the end of September (six months after the endof the FY), when NTPC's board is asked to approve the accounts. The fieldmission for this audit took place at the end of this process and it satisfieditself of its thoroughness. It could even be argued that the auditing of NTPCis more than adequate and somewhat redundant inasmuch as the second round does

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not add much to the mandated external audit done by CPAs, except for specificaccountability tests of public funds.

122. In addition, once every five years, public corporations are subjected tGa Comprehensive Appraisal which is comparable in substance to this audit. In1991, it was the first time for NTPC given that it started operations on a largescale in FY85. The appraisal process carried out by the same Audit Board, whichaudits the accounts, started in 1990. It involved sending the draft report tothe Ministry of Power, then to the Controller General, then to the President, andfinally to Parliament. In all it takes two years and the field mission for thisaudit occurred before the last stage. Only six pages of the report were devotedto assessing NTPC's financial performance as the focus was mainly on accountingfor the large investments carried out by NTPC since its establishment.

123. Conclusions on the Overall Financial Situation. NTPC's financial healthwas acceptable at the time of the field mission for this Audit.Lj2 NTPC isfollowing a conservative financial policy of recognizing all financial costsaccording to standard accounting practices, and of passing them on through tariffadjustments. Whether the arrears threaten the sustainability of NTPC'soperations depends on the horizon chosen. NTPC's creditworthiness is notcurrently in jeopardy -by the late payment pattern of some SEBs as shown by itscurrent ratio. The structure of the balance sheet is favorable. Solvency is notan issue at this time. The process of central appropriation of funds earmarkedto the states to pay for arrears of their SEBes is not sound since it is dependenton the fluctuations in public expenditures policies and as such introducesuncertainty in the financing of new investments, and the sustainability of NTPC'soperations. NTPC will be much more on its own than in the past as far asresources mobilization is concerned. It is, therefore, recommended that the Bankobtain assurances that the corporate plan for the next decade is fully fundedeven after debt service and refinancing. Along with its increased financialresponsibility, NTPC must be given additional leeway in the formulation and thefinancing of its investment plan and in the design and management of its salescontracts with the SEB9.

124. Conclusions on the Arrears Issue. The arrears allowed for covenantpurpose might be increased to be better adjusted to NTPC's billing and collectioncycle. A special category of arrears would be isolated: those corresponding tothe 3-4 SEBes chronically in payment difficulty. The outstanding amount of thesearrears of over 6 months should then be fully financed by either self-financedprovisions, short-term loans from commercial banks, or by the Government-orderedreallocation of budget funds earmarked to the States of SEB residency. Wheneverthe SEBs would catch up with their arrears, NTPC would bring the excess provisioninto the income statement, repay the commercial banks, or park the Governmentoffsetting funds into reserves.

125. Alternative Financial Covenants. The objective of monitoring NTPC'sfinancial viability would be better served by covenants aimed at indicators whichare under its control, such as the current ratio which can be rebalanced byraising cash through borrowings or sale of assets. To summarize NTPC's financialperformance against an accounts receivable benchmark is inadequate Lecause it istoo narrow. A current ratio covenant or, alternatively, a debt-service ratio

L16 The statement that "NTPC is in good financial health" (para. 22) is notshared by the Region because of the low collection ratio.

41

covenant would be more appropriate. Given that the main problem facing it is ofservicing its debt, having enough current assets to cover its current liabilitiesis more crucial for NTPC's medium to long-term sustainability than focusing onwhether one item of current assets is recoverable or not. A current ratio,defined to exclude accounts receivable of over six months, should cover more than1.2 times current liabilities to avoid lax responses to liquidity crises.Additionally, a 1.25 minimum debt-service coverage ratio would achieve theminimum result of ensuring that NTPC generates enough free cash flows to serviceits maturing debt.

126. Outlook on Resource Mobilization. The outlook for mobilizing resources,either new funds or refinancing, looks difficult because of the scarcity ofdomestic loan funds with the economy in an adjustment phase, the rise in interestrates and the disappearance of the U.S.S.R. as a major financier of power plants.Quality leveraging could be achieved by having NTPC borrowing abroad fromcommercial sources on the strength of its balance sheet. The benefit for theeconomy would be to free up scarce domestic resources which could be used tofinance other capital expenditures. The drawback for NTPC would be to increaseits exposure to the exchange risk which, if adverse, increases the total cost offunds. In exchange for the fungibility benefits accruing to the economy, GOIshould lessen the uncertainty of the foreign currency risk by absorbing itagainst a flat premium.

127. Improvement of Financial Disclosure. Financial reporting could beimproved by disclosing items which are relevant for assessing NTPC's exposure torisks and its cash flow generation capacity. The external audit reports ofNTPC's accounts would acquire increased relevance if they identified on separatelines the following items

- the outstanding exchange risk on foreign debts (not disclosedcurrently);

- the accumulated interest during construction (IDC) onfixed assets (only the yearly increment is shown in theincome statement);

- the operating costs capitalized under the works inprogress (same);

- the debt falling due in the current liabilities (it iscurrently a footnote on the loan funds schedule).

128. Streamlining of External Audit. The external audit process could belightened up by entrusting the current external auditors with the fullresponsibility of finalizing NTPC's accounts for public disclosure. If at allpossible in the Indian context, the Audit Board could limit its intervention toa three-year overall evaluation on the model of its 1991 Report. The gain oftime could be reflected in an earlier date for the issuing of NTPC's annualreport or at the least for the circulation of the audit report to its financiers.

42

VI. ENVIROMMNTAL ISSUES

A. Background

129. Of the thirteen NTPC projects which the Bank's Board of Director. approvedbetween 1977 (Singrauli 1) and 1987 (Talcher) nine -- among these the fouroperations audited here -- had as their main physical component a stage of a minemouth coal fired steam power plant, i.e. a facility that has a potential ofseriously affecting the environment at and around the plant site. Theseoperations also covered the construction of associated transmission facilitieswhich were found both ex-ante and ex-poet to have limited detrimentalenvironmental impact. The other projects includeds (I) three gas-fired combinedcycle plants, which are relatively problem-free from the environmental point ofview; (ii) a coal fired steam plant near Delhi for which the futl is to besupplied by rail from distant sources, and (iii) major transmission facilitiesnot directly associated with a generation project. The latter installations werefound to involve only minor detrimental environmental impact in the auditedprojects.

B. Early Development

130. In the mid-seventies I.e at the early stages of the Bank's involvement inNTPC, environmental consciousness was still at an early stage of development.Within the Bank, the systematic consideration of the projects' environmentalimpact did not go back more than four years. Further, the socio-economic issuestook a back seat with respect to the physical effects and hence the main focuswas on avoiding negative impact through appropriate design of the physicalproject components and through proper operation rules. Therefore, it is notsurprising that all SARs for the thermal projects approved until the mid 1980slisted as the main issues to be addressed: (i) plant location as a major factoraffecting health and environment of plant personnel and their families; (ii)stack emissions; (iii) heat dissipation in cooling media; (iv) ash disposal, and(v) occupational safety and health of plant personnel.LL In all cases theSARe further state that the Indian National Committee on Environmental Planningand Coordination of the Department of Science and Technology, the GOI entityresponsible at the time for environmental protection had given the green lightand that NTPC was complying with the relevant, increasingly stringentenvironmental quality standards set by the above committee. NTPC satisfactorilycarried out all the environmental measures agreed with the Bank.

131. At the time the four audited projects were appraised (i) no resettlementissues were identified and (ii) the Bank did not yet operate on the basis ofguidelines for such measures. Therefore, it is fair to state that the NTPCprojects reviewed here took into account what at the time was known about theseissues and what could reasonably be expected to occur in the given environment.It is important to note that the dominant socio-economic issues that emerged inthe context of the projects concerned (i) resettlement in the mining area and(i) public health in the agglomerations surrounding the plante, i.e. in areasover which ITPC has little control. Further, these impacts are (i) not relatedto the plants themselves but rather to the mines or even to further removed

,#, See e.g. SAR Farakka II, paras 3.15-3.161 all previous SAR. for NTPCthermal plant projects state the same points with adjustments to the plantand site characteristics.

43

facilities or (ii) the consequences of the influx of people only very indirectlyrelated to the power plants themselves. As soon as the problems materialized,the Bank used its best efforts to secure suitable action by Indian authorities.

132. These developments showed that, on the one hand, the socio-economic impactin the areas adjacent to plants, needs a thorough assessment at the project *design stage and a careful control during construction and operation. On theother hand, the difficulties demonstrated, as discussed in the PCRe forRamagundam I and Singrauli Illf4, that there is a limit to the infrastructureand services an organization like NTPC i. able to provide for the people thatsettle in the general area of the organization's facilities, but whose activitiesare essentially unrelated to construction and operation of the plants. Thus,there is an evident need for a transparent and balanced distribution betweenlocal authorities and the owner of the facilities of the responsibilities forlimiting the negative socio-economic impact of regional development of which theabove facilities only represent a minor part.

C. Post-1985 Development

133. In the mid-eighties against a background of ever growing environmentalawareness within the 001, NTPC, and the Bank, these organizations deepened theirapproach to environmental protection, in general, and to he issues related toNTPC's operations, in particular. In this context, , 1 GOY teansferred theresponsibility for dealing with such issues to a new full ledged Department ofEnvironment within the Ministry of Environment, Forests, and Wildlife, which soonmade the preparation of an Environmental Impact Assessment an integral part ofthe preparation of projects such as those of NTPC, which have to be submitted toGOI clearance. Soon the states followed suit and created their own environmentalunits and procedures for assuring environmental compatibility of design andoperation of major facilities on their territory. As a result of this pluralityof responsible agencies, projects now need to obtain multiple clearances from amultiplicity of agencies having varying standards and different procedures.Thus, there is an urgent need for the organizations at GOI and state tostrengthen coordination among themselves and to streamline their procedures.

D. The Bank's Role

134. While the Bank, from the start of its involvement in NTPC, had a fruitfuldialogue with NTPC and the 001 on the environmental issues raised by thedeveloping utility's projects, its concern and support became especiallyintensive in connection with the difficulties encountered at Singrauli andRamagundam. As a consequence, it helped induce NTPC to deal morecomprehensively, at an early stage of project preparation, with environmentalproject issues, especially those related to resettlement. The 1987 Talcherproject was the first Bank operation with NTPC that benefitted from this newapproach. It was also under the auspices of the Bank that NTPC prepared anEnvironmental Action Program including full environmental impact assessments forexisting and future plants as well as the implementation of the measures theseassessments called for. The Bank sponsored in particular the study of theexisting and planned developments in the Lake Rihand area at the border betweenUttar Pradesh and Madhya Pradesh states, where NTPC's Singrauli (2000 MW), Rihand

164 See e.g. PCR Singrauli II in the Annex to the present report, Part I,para. 16.

44

(1000 MW with planned additions), and Vindhyachal (840 MW also with further unitsplanned) plants and their associated coal mines as well as several furtherindustries (power, aluminum, chemical, and cement plants, etc) are either alreadyoperating or at the planning stage. This concentration of facilities with a highpotential for negatively affecting the environment made the assessmentparticularly urgent. Electricit4 de France (EdF) International and GroupeCharbonnages de France recently completed this study,15 which concludes thatthe direct environmental impact of existing and planned power facilities on air,water, and soil would be limited (indeed much more limited than had been fearedat the inception of the study) in the short and medium term, but that the landuse and socio-economic issues as well as the pollution genetated by newindustries called for a more comprehensive planning at regional level. Thereport also sets forth the actions and strategies that would lead to reasonableenvironmental protection.Li6

135. Today, India's approach (both at GOI and state level) to environmentalprotection is still very much in evolution. The most recent Bank-sponsored studyof "Long Term Issues in the Power Sector"Jk7 inter alia sets forth the GOI'dilemma rooted in the need to continue, even if energy conservation measures (ofwhich at present only few are under implementation) prove successful, the fastincrease of capacity burning coal, the most abundant fuel locally available. Onemeasure identified to reduce emissions country-wide, would be to apply morestrictly the existing ervironmental regulations. Furthermore, there is avehement debate going on concerning the need to control sulphur dioxide (SO.).The Bank is also concerned that there still is little recognition in India forthe problems posed by nitrogen oxide (NO.) and carbon dinxide (C0 2 ) emissions.The Bank-sponsored study of the Lake Rihand area (para. 134) should help increaseawareness of the issues related to these pollutants. With respect to the sulfurdioxide emissions, more recent NTPC projects expressly allow for the installationof flue gas deeulphurization, should that become necessary. In any event, theNTPC plants in their present state would already comply with most of theadditional regulations that can reasonably be expected and, where they would not,the necessary adjustments should not present unsurmountable difficulties. Bycontrast, it seems, at least in the Lake Rihand area, that the coal mines whichare associated with the plants but not under the utility's control still presentproblems,i8 which the environmental authorities of the states and the Centrehave to address urgently. The Bank should follow up on their resolution.

136. The audit mission, despite its efforts and those of the Bank's ResidentMission in Delhi, was unable to discuss the Bank's role with the GOI authoritiesdirectly responsible for environmental protection. However, OED understands fromits own limited observations and from the testimony of GOI officers not directlyinvolved in environmental protection as well as frow the discussions it had with

/65 Environmental Study of Singrauli Area, July 1991, by Electricitede France and Groups Charbonnages de France.

/66 Loc. cit. Main Report, pp. 16-17.

Lf7 India: Long Term Issuf - the Power Sector, draft dated July 23, 1991,three volumes.

L68 Environmentai Study of Singrauli Area, 1991, Main Report, pp. 99 to 101.

45

NTPC's specialists that the Bank's involvement in the environmental aspects ofNTPC projects has helped and is appreciated.

VII. CONCLUSIONS AND LESSONS

137. The Bank Group invested US$1.0 billion in the four projects that are thebasis of this audit and a total of US$4.0 billion in the NTPC projects it hasfinanced during the period 1977-1987. Has it gotten its money's worth? Insofaras the projects themselves are concerned, the answer is clearly yes in that theimmediate physical and instituti.onal objectives sought by the Bank weresubstantially accomplished, as the PCRs point out. What was undoubtedly a highlyinnovative and high risk venture by the Bank and the GOI, involving theintroduction of new technology on a massive scale by a new institution, has beencarried through with a success that reflects much credit on the Borrower, theBeneficiary, and the Bank.

138. Yet, looked at in the sector context, the answer to whether the Bank'sinvolvement with NTPC has been fruitful is an almost equally resounding no. Assuccessful as it has been, NTPC remains an exception (and for how long?); theBank's hopes that it would, by example and by strengthening the hand of the GOI,prove an effective vehicle for sector reform have been largely disappointed.Indeed, the reverse has happened; the sector's financial weakness is putting NTPCat risk, leading the Bank to refrain -rom lending te this utility since 1987 andraising doubts about the long term sustainability of project benefits. The auditconcludes that the roots of the dichotomy between the Bank's succeas in projectterms and its disappointment on the sector side lie principally in the divisionof responsibility for power between the Centre and the statcc. that largelyimpedes effective unilateral action from the Centre.

A. Accomplishments

139. The two main objectives in the Bank's NTPC projects, i.e. (i) accelerationof the installation of generation and transmission plant and (ii) the creationof a strong central utility were achieved.

140. First, the growth rate of installed capacity in India increased from some5% per year before 1975 to about 8% per annum in the 1v80s, when the energygeneration capability grew even at 9% per year. NTPC's plant commissioned in theperiod FY82-FY91 represents some 30% of the sector's capacity additions over theperiod and 15% of the sector's total installed capacity at the end of theperiod.L69 Through the high availability and good efficiency of its plants,NTPC's performance had also a positive influence on the overall quality of supplyin the country.

141. Further, the projects were a major factor in the creation of a strong andefficient central institution that by the start of the 1990s was in a positionto plan, design, construct, and operate large thermal power plants and extensivehigh voltage transmission facilities. In the latter aspect, NTPC's performancewas sufficiently convincing to permit the GOI tc separate the utility's

/171 SAR, Power Utilities Efficiency Improvement Project dated January 3, 1992,Annex 1.1.

46

departments dealing with all aspects of primary transmission from the company andto set them up as the nucleus of the newly created central transmission utility(NPTC).

142. NTPC has become an example to follow (but until now actually followed onlyin a few inscances) in Indian power sector activities inter alia throught

- the emphasis on corporate planning which allows management to takea long term strategic approach;

- the systems approach as a primary management tool making itpossible, at an early stage, to combine a high degree ofcentralization with adequate on-site authority, and, hopefully ata later stage, a reasonable measure of decentralization;

- the establishment of a systematic quality assurance programs

- the build-up of sufficient high quality in-house engineeringcapability to cover most of the company's needs, which permits theutility (i) to be fully accountable for its technical developmentand (ii) to identify technical innovation that it could apply to itsbenefit and that of the sector;

- the implementation of a comprehensive manpower development program,that, although the remuneration NTPC can offer is not that muchdifferent from that in other GOI organizations, contributed to makethe utility attractive for the best professionals, thus keeping thequality of staff at a very high level; and

- the introduction of Memoranda of Understanding (MOUs) between the001 and the utility representing a kind of contract defining thespecific performance targets the utility would have to achieve overthe next fiscal year on the one hand and the GOI's support to thecompany on the other.

143. With NTPC, the GOI has now a major asset which will strengthen its handin its discussions with the states on needed institutional development discussedbelow (paras. 147-150).

B. Shortcomings

144. The NTPC projects, together with those of other central agencies and ofthe SEBs, did not yet bring an elimination of power shortages in India withineight. Even an implementation of the projects within the original scheduleswould not have brought the sector substantially nearer to meeting demand.Further, expecting that NTPC should have been envisaged to grow even faster thanplanned in the mid-seventies, would have been utterly unrealistic, as the actualgrowth achieved already has been a major success.

145. A significant shortcoming of the operations reviewed was theunderestimation of the cost of the projects following Korba 1, which masked theseverity of the discrepancy between tariffs and aconomic costs of NTPC power(Chapter IV) and induced the Bank to assign for a long time low priority to theissue of NTPC's tariffs. At first sight (i.e. mainly from NTPC's point of view),the utility's recovery of financial costs seemed adequate. However, from the

47

point of view of the GOI, it should have been perceived as far less so. Indeed,inter alia, the important amounts of operating costs that India's accountingrules permit the utility to capitalize and the fact that NTPC does not paydividends on the large 001 contributions tend to make tariff performance lookbetter than it actually is, as they add to the financial burden, the GOI may inthe future not be in a position to continue carrying in full.

146. The main shortfalls in the implementation of the Bank projects were withrespect to the broad sector objectives not directly related to the projects,which the Bank made increasingly explicit in the succession of projects auditedhere and in those immediately following (see Chapter II)s (i) the introductionof long term system planning (and operation) on a nationwide least cost basis;(ii) improvements in sector organization and training, and, in particular, (iii)strengthening the finances of the SEBs. Even where NTPC did not perform asexpected (especially in the areas of tariffs and accounts receivable), thisinadequacy was largely related to the lack of progress on sector regulation and,in particular, on cost recovery in the sector as a whole both at bulk and retaillevel. In the 1970s and the early 1980s, the Bank's emphasis on adequate tariffslessened, not so much in the objectives but in the enforcement of the measuresagreed to reach these goals. Recently, the issue acquired again the high profileit deserves, a fact confirmed by the Board of Director's November 1992 approvalof a sector policy paper.,LMQ In the context of NTPC, until the mid-1980s, theBank had not stressed the issue, in part because (see para. 89) it haderroneously thought that the utility's revenue per kWh was near LRMC. Morerecently, Bank lending both to NTPC and other sector entities has been madecontingent upon improvement in cost recovery. This should continue with thequalifications raised concerning NTPC's control of its accounts receivable (seepara. 104).

C. The Basis for Sector Ipprovement

147. As already discussed in Chapter III, a substantial part of the shortfallsof the NTPC projects with respect to their objectives (implicit or explicit) isrelated to the fact that the sector institutions have to work within a federalsetup reflecting the Constitution transforming minor adjustments in the relationsbetween central and state institutions into highly political issues.

148. Most of what could be achieved in terms of sector structure and mechanismswith the traditional emphasis on central power has been achieved. However, itclearly emerges from this review that progress must be made to establish in theSEBs, the financial and commercial discipline which is needed to ensure thesustainability of the benefits derived from the Bank's huge investment in NTPC.The quest for more efficiency and transparency in the power sector is all themore important as the GOI is looking (i) for more self-sufficiency in the sector

/Z The Bank's Role in the Electric Power Sector: Policies for EffectiveInstitutional, Regulatory, and Financial Reform; Board Paper dated10/15/92.

48

that would allow the GOI to reduce its financial obligations in this area and(ii) for more private investment in public electricity suply.

149. In view of the limited follow-up that the 1980 study, prepared by theCommittee on Power, and discussions of sector issues have elicited, it is highlyunlikely that further studies would by themselves lead to actual progress.Action has now to proceed, for some time, mainly at the political level.

150. The following has to be seen as a few very general ideas distilled fromexperience in other countries where regionalism is a major force. In India, thenext steps could be taken in a forum bringing together the GOI and the stategovernments (not only the SEBs). This forum could be similar to that whichrecently adopted the conclusions on NTPC's tariffs set forth by the K.P. RaoCommittee. A short term objectivewould be to secure consensus for institutionalchange, on the basis of a reasonably formalized and structured approach.Ultimately, this process should lead to a pact between the GOI and the states onthe way the sector should work in the medium term and what intermediary stepsshould be taken in the short run. This political body would have to be assistedby a "technical" group that would ensure the operational feasibility of thesolutions contemplated in the forum.

151. Besides immediate issues, the forum would have to deal with:

- a confirmation or re-definition of the set of economic and managementobjectives for the sector at national, regional, and state level, withemphasis on consistency and comprehensiveness; and

- a review of the setup and mechanisms of the sector to achieve the abovegoals and the ways to improve them especially in terms of efficiency andtransparency; it seems of special importance to clarify& (i) where and howsocial criteria should be introduced; (ii) the balance between rights andobligations of the sector entities, in particula? that between theautonomy of the utilities and their accountability; (iii) the principlesfor measuring performance, the incentives to be applied, and (iv) the roleof the REBs which is bound to increase.

D. Lessons Learned

152. The principal lessons are as follows:

- Enclave Projects: Where favorable conditions exist, as they did in India,the establishment of new institutions free of established sectorconstraints can be a highly effective means of getting particular jobsdone. However, even if successful, the enclave is unlikely to serve asa model for sector reform and will not long escape the effects ofinadequate policies determining the performance of the sector at large.

- Support for Central Institutions: Bank support for NTPC has provedineffective as a vehicle for sector reform, largely because it has notprovided leverage with the states. Support for the Centre will helpachieve sector objectives only if directly linked to SEB reform.

- Public Sector Utilities: When free to do so, public utilities in Indiacan make effective use of the latest technology and management techniques

49

and achieve high standards of efficiency in design, management, andoperation of major power projects.

Supply Side Stratega Massive and efficient investment by NTPC, cannotalone eliminate India's power shortages. India needs a strategy thatgives at least equal priority to demand management and to increasingresources use efficiency.

Shared Views on Main Issues: A pre-requisite for success seems to be abroad vision shared by all parties of the desirable development to beachieved and the means to achieve it. Conditionality should complementbut cannot replace such a broad common outlook. The success of the build-up of NTPC where the views of the parties coincided and failure to achievethe sectoral objectives where there was substantial divergence between theGOI's and the Bank's outlook, are cases in point.LLI

The Bank's Pervasive Optimism: PRa, SARs, and documents addressed toSenior Management tended to project a pervasively optimistic view of theproject, of its sectoral environment, of the difficulties the proposed oron-going operations were facing, of the risks involved, and of the timaand cost required to implement measures (especially at the sector level)crucial to the success of the project.fl It is evident that, withouta good dose of optimism, very little can be achieved in a difficultcontext. Further, an official document of the Bank which over-emphasizes some risks, may enhance their materialization. e.g., statingthat sub-soil conditions represent a major potential obstacle to timelyproject completion provides ex-ante an excuse for delays and may weakenthe commitment to avoid such delays; emphasizing that the environment ina country is unfavorable to tariff adjustments add an obstacle on the wayto reach the objective. This stated, there is a world of differencebetween a reasonably supportive and optimistic outlook and the unrealisticone found in several of the presentations for the projects audited here.

71 See also para. 11.3 of NTPC's comments in the Annex.

1L. See in particular Section 2.3 of Colombia: Power Sector and the World Bank(1970-1987), OED, June 1990 Report No. 8893.

51

Attacbaant 1

UIDIA: 90ER PECTOR OPERATIONS

L/C No. Project Amunt Diab. Appr. Closing Eval.--- Illion US$--- Date Date Statue

1 23 First DVC: Bokaro-Konar 18.5 17.6 Apr-50 Feb-56 Pro-OED1 72 Second DVC Malthon-Panhot 19.5 10.5 Jan-53 Dec-60 Pre-OED1 106 Trbay (TEC) 16.2 13.9 RØV-54 Sep-66 Pre-OED1 164 Trmbay Extenoion (TEC) 9.8 9.7 May-57 Sep-66 Pre-OED1 203 Third DVC, Durgapur 25.0 22.0 Jul-58 Jun-65 Pre-OED1 223 Koyna Pover 25.0 18.7 Apr.59 Apr-65 Pro-OEDc 19 4th DVC, Durgapur 21.9 19.9 Feb-62 De-69 Pre-OEDc 24 2nd. Ko7ma 21.1 21.1 Aug-62 Sep-70 Pre-OEDc 37 Kotbagudem 24.1 24.1 Bay-63 Dec-68 Pre-OED1 416 Tranam ion 70.0 50.0 JuM-65 Dec-70 Pre-OED1 417 Kothagudm II 14.0 13.8 Jun-65 De-70 Pre-OEDc 89 Bea Equipænt 26.6 26.3 Jua-66 Jua-74 Bo Eval.c 242 Transmi.ion II 75.0 72.9 Apr-71 Mar-77 PPAR 3006c 377 Transmi.oion III 85.0 85.0 Nar-73 Sep-78 PCR 7652c 572 Rural Eectrification 57.0 57.0 Jul-75 Dee-80 PPAR 6307c 604 Trani.uion IV 150.0 149.9 Jan-76 Jua-83 PCR 7654c 685 Singrauli I (WTMC) 150.0 150.0 Har-77 Jua-84 PPAR 6784c 793 Korba I (MTMC) 200.0 199.9 Apr-78 Nar-86 1CR 68551 1549 Trombay III (TEC) 105.0 105.0 Apr-78 Dee-84 PCR 6253c 874 Ramaguadom I (MTPC) 200.0 200.0 Jan-79 Des-85 PCR 86411 1648 Ramagundam I (NTC) 50.0 45.6 Jan-79 Jua-84 PCR 8641c 911 2nd. Rural Electrification 175.0 171.7 ay-79 Nar-84 PPAR 6307c 1027 Singrauli II (KTMC) 300.0 300.0 Kay-80 Jan-89 PCR 9162c 1053 Farakka I (NMTC) 225.0 225.0 Jun-80 Des-88 PCR 91681 1887 Farakka I (HTMC) 25.0 2.5 Jun-80 Jun-89 PCR 9168c 1172 Korba II (NTMC) 400.0 380.3 Jul-81 De-901 2076 Ramaguna.~ II (NTHC) 300.0 290.4 Dec-81 Jua-901 2165 Third Rural Electrification 304.5 295.5 JUn-82 Jun-88c 1356 Upper Indravatt Hydro 170.0 161.3 Way-83 Jun-911 2278 Upper Indravatf Hydro 156.4 156.0 Nay-83 Jon-911 2283 Central Transa.~eion (UTC) 250.7 118.4 Way-83 mar-910 F020 Indira Sarovar Hydro 13.0 0.7 May-84 Jun-921. 2416 Indira Sarovar Hydro 17.4 5.0 May-84 Jun-921 2442 Farakka II (NTC) 300.8 180.1 Jun-84 Jan-911 2452 Trombay IV (TEC) 135.4 124.6 JUa-84 Jun-911 2544 Chandrapur Themal 300.0 174.4 Kay-s Dec-921 2555 Rh.a Tranmmi.sion (VTMC) 250.0 190.9 may-ss Dec-90a 1613 Indira Sar=var Hydro 13.2 0.0 Jua-85 Jun-921 2582 Kerala 176.0 37.4 JUa-85 Sep-911 2674 Ccabined Cyele (NTC) 485.0 448.4 Apr-86 Dae-911 2827 Karataka 330.0 40.7 Jua-87 Jaa-951 2844 National Capital (MTMC) 485.0 185.7 Jun-87 Jan-951 2845 Talcher (NTPC) 375.0 47.7 Jun-87 Har-961 2938 2ad. Karnataka 260.0 26.7 may-88 Des-96i 2957 Uttar Pradeah 350.0 47.1 JUa-88 Des-961 3024 Nathpa Jhakr± 485.0 36.7 Kar-89 Des-971 3096 aharaøhtra 400.0 23.4 JUn-89 De-961 3237 Northern Reg. Tranam. (NUIC) 485.0 22.3 Jan-90 Sep-981 3239 Private Pover Util. (TEC) 98.0 0.0 JUn-90 Jan-951 3344 Private Pover Util. (0>ba) 200.0 32.6 JUn-91 Des-96

NTC and TEC projects are characteise" as such in the Project columm.

NTPC Organisation Structure - Initial Phase

CHAIRMAN &bMAGINM

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I~EI X AONSERVIES PER AONICNc

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BADARPUR SINGRAUU KORBA RAMAGUNDAM FARAlATIERMAL SuPER SUPER SUPER sum TRANSMISSIONPOWER THERMAL I7ERMAL THERMAL THERMAL SvATMSSTATION POWER POWER POWER POWER 0IVISIONanoa/ PRRCTPROJC PCECT PROJECT

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NTPC Organisation Structure - 1991CHAIRMIAN & M4AN4AOING-[Z DIRECTRM

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F,FF P P L i- F 1

55

Attachment 3Page 1 of 5

INDIA: BANK GROUP SUPPORTED NTC AND TATA THERAL POWER PROJECTS

ANALYSIS OF TIME SCHEDULES

1. The table on Page 2 of the present attachment sets forth the main datapermitting to compare the planned with the actual implementation times of aseries of NTPC and TATA thermal plants in India with unit sizes of 200 and 500MW. The last block presents the corresponding data for a Bank project inIndonesia, where 400 NW units were installed. The list only shows plants thatwere parts of Bank Group supported projects. The picture would change somewhatwith respect to the construction times proper, if the data for NTPCs Rihand(2x500NW) and the Vindhyachal (6x2lONW) projects, supported by UK and USSRrespectively, were included. Indeed, both projects suffered delays duringproject execution which were substantially longer than those that occurred inconnection with the great majority of the Bank Group supported projects.However, the list excludes the non-Bank projects, as some of the key data thatwould have allowed the same comparisons as those carried out here were missing.

The definition of the main columns are as follows:

- Columns 3 and A list the dates of construction start defined as those ofthe award of the main contracts (i.e. those for the boilers and the turbo-generators). If the award for the two contracts took place atsubstantially different points in time, the later date is considered asthe start of construction.

- Columns 5 and 6 set forth the dates the units were considered ascompleted. As the SARs are not always clear about the definition of thisdate, i.e whether the unit is considered completed when successfullysynchronized for the first time or when commercial operation starts, or atany point in time in between, the present comparison assumes that a unitis completed at first synchronization with the grid.

Imlementation Time

2. NTPC's claim that it is highly successful in implementing its projects inaccordance with its time schedules has been often repeated, (see e.g. para. 3.18of the SAR for Farakka II). As this, at first sight, does not agree with theproject results, which in many cases show that there were substantial delays withrespect to the appraisal schedules, OED carried out the more detailed analysisset forth in the present attachment, which also covers the TEC projects and thefirst stage of the Suralaya project in Indonesia to permit a measure ofcomparison.

56


Por.11ants

3. Except at Farakka, where the contractor's labor relations problems and thecivil unrest in the region led to substantial delays, NTPC was able to install *the 200 MW units included in Bank Group projects about in the time foreseen atappraisal, i.e. within 48 months of the award of the main contracts for the firstunit and at intervals of six months for subsequent units. This seems also tobe the case for the four 210 MW units included in the National Capital PowerProject (Loan 2844) to be completed between late 1991 and mid 1993, but a similarperformance was not possible for the Vindhyachal units installed undercooperation agreements between India and the Soviet Union and where plannedinstallation times were exceeded by 5 to 14 months.

4. NTPC succeeded in installing most of the 500 MW units included in BankGroup projects in a time substantially shorter than the 60 months from maincontract award anticipated for the first unit and the 72 and 84 months envisagedfor the follow-on units of a sequence.L1 However, in the case of the Rihandpower plant constructed under a cooperation agreement between the governments ofUK and India, delays of the order of one year were incurred during theinstallLtion of the two 500 MW units. In the case of TEC projects, theinstallation times were 64 and 63 months respectively compared to an estimate of51 to 52 months calculated from the award of the boiler contract, the longer timefor the first of these units being largely related to factors not under theutility's control (deficient supplies like bent tubes, wrong sequences ofdelivery, fire aboard a ship transporting vital equipment, etc). Thus, it wouldseem that the 60 months of basic construction time assumed at the appraisals ofthe NTPC projects were on the high side taking into account normal timecontingencies. However, it appears that the times assumed in the SARs for theTEC projects were definitely too short.

5. The combined cycle plants at Anta (413 MW) and Auraiya (652 MW) wereinstalled under turnkey contracts well within the program set forth in the SARfor the project associated with the Bank's Combined Cycle Power Project (Loan2674-IN). Indeed, it seems that at appraisal, the interval between completionof the last gas turbine and that of the last steam unit was overestimated by atleast three months.

6. The main reason why, in spite of the reAsonably good performance outlinedin the previous points, the NTPC generation projects supported by the World BankGroup except the Anta and Auraiya plants (and, hopefully, the Dadri plantincluded in the National Capital Power Project), are late with respect to theschedules set forth in the SARs, lies in the fact that final design, preparationof the bidding documents, tendering, bid analysis, and the award of the contractshas most of the time taken much longer than anticipated at appraisal. In thecase of the first unit installed under TEC's Trombay III project, practically no

Ll It is, however, evident that installation times will be more than a yearlonger than planned at appraisal for the two 500 MW units included in theFarakka II Project. The reasons are those given in para.3.

57


delay was incurred in this phase; however, for the further unit installed underthe Trombay IV project, slow progress on contract agreements and approvalscompounded by a substantial postponement of the effectiveness of the Bank loanresulted in a three years' delay in starting project execution proper.

7. The conclusions from the above seem to be:

* NTPC was by and large highly successful in constructing its power plantswithin the adequate time schedules that it adopted at the planning stageand that apply for even more developed countries. Further, it seems tohave been more successful in this field when it cooperated with the Bankthan when it did so with bilateral agencies.

- TEC's -erformance was also reasonably good in the construction phaseproper, in particular taking into account that the first of the two unitswhich the Bank helped finance was the first 500 MW set ever to beinstalled in India.

- Both NTPC and TEC have to concentrate on shortening the procedures leadingto the award of the contracts as far as such procedures are under theircontrol. In the context of the audited projects the GOI contributed tothe pre-construction delays by its reluctance to grant the necessaryimport permits, a problem that was solved in the context of the laterprojects.

Transmission Lines

8. OED found that little can be learned from an analysis of the implementationof transmission facilities associated with the Bank Group supported generationprojects. Indeed, the delays incurred in the completion of these elements are,in part, related to the delays in generation plant implementation discussed aboveand, to a substantial extent to the availability of SEB facilities that were totake over the output from the NTPC plants. In any event, the measured output ofthe NTPC plants during their early operation suggests that in the vast majorityof cases NTPC completed the transmission lines and substations in time to allowa maximum use of the completed plants.

9. A somewhat different picture seems to emerge from the results of the Banksupported NTPC projects that included mostly transmission facilities, asillustrated by the Central Transmission Project (Loan 2283-IN), which suffereddelays in excess of four years, largely because (i) major changes in thegenerating plant programs for the regions covered by the project induced drasticmodifications of the corresponding transmission system development and (ii) NTPCwas reluctant to start major transmission work not directly related to its powerplants without a firm agreement with the beneficiary SEBs on the charges thesewould have to pay for NTPC transmission services. Less dramatic but stillsubstantial (about 18 months) were the delays NTPC incurred on the implementationof the 500 kV direct current link between Rihand and Delhi, which, in part, wasdue to slow approval of the routing by the environmental protection agencies.

58


10. In the case of TEC's Trombay III project, the transmission component waslimited to the switchyard at the plant, the construction of which was completedin time for the synchronization of the 500 MW unit. This also seems to apply tothA substantially delayed Trombay IV project.

a&Mul8 0 Tlg SCEUL 01 1T am o 231 TS

TIE5~fA 7~IE mL^T

Project Unit Construction Csi9onng Constructumn Dulay Delay obevationeStagt (Symbrom.L Tim .. imStart Coet.

months =uht@ aantheAppt. Act. Appr. Act. Appr. Act.

<1> <8> <8) <4) <3> <6> <7> <8> <9> <10> <11>si~ i 1 09177 0278 981 08182 40 48 5 0aam m89 11 03108 1Hift sa 57 3ånE 0982 08183 60 61 i

Stagramli II It 08379 08379 08383 11183 48 så 0 3 (1) MMTC eereleod the. otion offered c aei equipment la co~ktIon with2AM00M ' 0384 0284 54 54 0 the firat thre. umite <fl ( eyl damaged (M elnerane. bmcc, delpy.031i. 05380 0l8f :186 12186 39 7 4 Lat appontatnet of co ultamte delayed procurem~nt.Sa M 50 2VI0187 13197 Il 70 9

200 1 1 09178 03179 09183 08188 48 40 6 0 Delaye incurred la preparötiom of biddig docuete and of amord.ZU0388 838 34 SSit 09183 03184 60 60 05 1re fl IV 1081 1182 10#86 05817 60 S4 13 -6 Contrec for turbo-gemerator. marded 3 mo=he later thmn thati for0 M 10387 08 7 . 7on.r.. ba. e.ter mate cosiderun for .. trctio. tert.tos U0l0 f 088 94 75 .9

1 07379 0I80 07183 11183 48 45 7 - Bid evaluation *lom Cook 7 aotli.5 1 11 0104 011#4 54 81& .3 'Il 07384 1284 60 38 .3

tv 29 10382 8038a 10187 0638 60 %4 12 .43 1aT88 03189 72 62 -10VI 10389 101l9 84 69 -I3var~hh 1 8 18180 03381 09304 016 48 55 8 10 UAt alre M auyed ard of ila coutrete 14 moe~h efter bid cpen~ag.& a 200 0 86 ff 1 Conetr en affered frme aor dispotes emd civil mreet.lix etta N1987 87 74 17IareMa fl IT 0/835 06386 0390 06192 60 75 13 IS Copletion date teutative. Comtructiom still auffero free major3 a 300 l1 08391 08393 73 84 t2 umcertsatiec,meetated with sh. arse.~anecob.7le) 1 12186 13386 86389 01389 20 IS 0 -8U l 06389 0389 0 237 .3Ia 149 m lit 089 08389 3 9 .3n9 10389 03190 44 39 .7

ämråt temb.ce3)> 1206 I2ga6 0389 03189 27 27 0 04 a i 03 89 07388 89 31 2S a Mu r 1) iil 07389 08389 8 2 119 0989 0989 8 33 00990 13389 45 36 -9VI 12390 06390 48 42 -6TATA x 09378 10378 12182 01184 S1 64 0 13 inserug took longer. 1 dofic.cot. Fire aboard delivering *hp.2 z 300 $ f II 10381 1234 0283 03190 532 63 38 at Detyo im effectiveuffe of an m and subequently ta coPtreettmg.

Surle 9~a19) 1 OS80 06180 084 12184 46 34 8 8 Civil worke (piling) took loneger then enpectd. >fl a <co.!M 1 03800 06S80 0413 07303 st då 8 5 ccl

Colmn 7 - Colmm 5 - Colmin 3 Colum 8 - Colum 6 - Colum 4Col 9 - Colicn 4 - Colmn 3 Columa 10 - Co 8 - Columm 7

0 IDt-% :

60


INDIA: COST ANALYSIS OF NTPC AND OTHER PROJECTS

1. Cost analysis in PCRs usually is li-ited to a comparison of actual cost incurrent terms with the corresponding estiL ;.ted costs including physical and pricecontingencies. A more qualitative evaluation of the reasons for the differencesusually complements this comparison. This also applies to the PCRs reviewadhere, which highlight the large increases in Rp. terms suffered by all theprojects anlayzed. L1 This reflects to a substantial extent higher localinflation than anticipatea at appraisal and, in some cases, a higher foreignexchange content than expected translating into higher Rp. costs due to thedepreciation of the Rp.

2. For some years now, OED, in ths context of the preparation of the AnnualReview has carried out an analysis of power and telecommunications projects'costs, which - - though still rathe:: crude - - leads to a somewhat morequantitative judgement on the accuracy of the cost estimates included in theSARs. It uses the actual costs as incurred over tima (if only the total cost isavailable in the PCR, a gross estimate of annual expenditures may still be muchbetter than nothing), segregated in local and foreign components, and deflatesthem to the base year of the appraisal cost estimate using e.g. the GDP deflatorfor the local component and the Manufacturing Unit Value (MUV) index for theforeign component. The result is called here "actual base cost" and comparedwith the item "base cost plus physical contingencies" of the original es-timate./I The difference between the two values is a rough measure for theaccuracy of quantities and unit prices in the original estimate. The increaseresulting from inflating "estimated base costs and physical contingencies" usingthe above indices, leads to a value that, -hen compared to the estimated pricecontingencies provides a measure to judge the adequacy of the assumptions oninflation and exchange rate developments underlying these allowances. Finally,the difference between these inflated estimated costs (including physicalcontingencies) and the actu total costs in current terms, often allows drawingsome general conclusions ab .t the impact of delays on costs. It is crucial toemphasize that this is mota art than science, but the method is simple andpermits, in many cases, to draw at least a few very general semi-quantitativeconclusions concerning the relation between estimated and actual project costs.

11 The PCR figures for the percentages of cost overrun differ somewhat fromthose set forth in Column 8 of Attachment 4 uecause the latter refer tothe generating units proper whereas the PCRs show the results for theentire projects.

/2 Strictly speaking, tha comparison should be with the estimated base cost-proper (i.e. excluding physical contingencies), but, as the physicalcontingencies often include an indefinite amount for unspecified costexpected co be actually incurred, this analysis uses estimated base costincreased by the physical contingencies as the basis for comparison.

61


3. The table on page 4 of the present attachment sets forth the results of theabove analysis for the six projects for which, by late 1991, actual costs wereavailable. The table suggests the following conclusions:

Singraulf is the only project in which "actual base cost" was lower thanestimated base cost plus physical contingetacies. As soon as thepossibility of a cost underrun appeared, i.e. when the bids for the maincontracts for Singrauli I were in, NTVC and the Bank reduced the costestimates for the 200 KW units of follow-on projects Korba I, RamagundamI, Singrauli II, and Farakka I. It seems that, except perhaps in the caseof Korba I, these adjustments were too large.

Actual costs for 200 MW units came out t .ween 1990 US$ 600 and 700 perkW, when no unexpected events occurred as in connection with Singrauli Iand II, as well as Korba I. In the case of Ramagundam and Farakka, thecosts resulted in the order of 1990 US$ 900 to 1000, in the former caseessentially because the bid prices were substantially higher thananticipated, and in the latter case because of the implementationdifficulties experienced, to a good part related to the contractors'industrial relations problems and civil unrest in the region. Even thehigher values compare favorably with the costs of units in a stailar rangein Indonesia and Egypt. In the latter case the comparison is with oil and,as fired units, which normally are less expensive than coal fired setslike those of NTPC discussed here.

From the Singrauli II PCR it appears that calculating the actual cost of200 MW units at some 1990 US$ 700/kW 1 as suggested by the results setforth above, the cost of the 500MW units were in the order of 1990 US$600/kW, which is the same order of magnitude achieved in the case of thefirst 500 MW unit at TEC's Trombay plant. Again, the estimated base costsfor the follow-on 500 MW unit have been increasing, in part due to higherrequirements (e.g. with respect to the environmental impact), in part dueto a less optimistic evaluation of the circumstances under which theplants had to be built (e.g. in the case of Farakka II). The estimate forthe unit installed under TEC's Fourth Trombay project shows the sametrend. Unfortunately, final costs for the 500 MW sets installed after thefirst two such units at Siagrauli were not yet available to the audit.

The present analysis was made in Rp. Therefore, the actual cost increasescalculated in columns (7) and (8) of Attachment 4 reflect the factmentioned earlier that inflation in India was higher than expected atappraisal of the audited projects and that the RP. suffered a substantialdepreciation with respect to most currencies in which the foreign costaccrued. If calculated in US$, the figures provide a different andsomewhat misleading picture, as the construction period of the auditedprojects covers the early 1980s when the US$ temporarily appreciated withrespect to the other main currencies, thus reducing the US$ amounts

fL Neither the SAR nor the PCR for Singrauli II break down the cost estimatesalong 200 MW and 500 MW units.

62


accruing in these years. Therefore, the comparison between columns (6)and (7) in Attachment 3 is not so much between assumed and actualinflation than between estimated inflation, which usually does not allowfor a distortion of the exchange rates and actual inflation including theeffects of exchange rate distortions.

4. In summary, the quality of the apraisal cost estimates has been reasonablygood for Singrauli I, Korba I, Trombay III, and to a certain extent alsoSingrauli II, whereas later they became too optimistic. Although the 1980estimates for Singrauli II and Farakka were prepared with the bidding for themain contracts for Ramagundam I completed, they reflected oaly minor adjustmentsto the higher Ramagundam prices. However, it is worth emphasizing that part ofthe higher costs that materialized at Ramagundam and Farakka are related toevents that usually are not covered by physical contingencies (e.g. the workingenvironment at Farakka). Further, the performance of NTPC, TEC and theircontractors were remarkable, as they brought the construction of coal fired unitsat costs which were generally similar to, in some cases even lower than those ofcomparable facilities in countries at a more advanced stage of development thanIndia.

INDIA: EMP AND TKC TOWAL PIAMT

COST ANALYSIS

Etimated Effect of IncreaseProject C-pacity Base Cost "Actual * Increase A c t a a 1 Io Rp. Amount

*Phys.Cont. Base Cost in Base Price Inflation of Total Cost3CC ABC Cost Contingences on BCC I Rp. In 2 of Total

A990 US$1kW 1990 US$1kW 2 of BCC 2 of B00 3 of BCC Estimatedcost

(1) (23) (3) (4) (5) (6) (7) C()

Stagral 3 a 200 W 770 690 -11 20 41 0

Stagreali II 2 a 200M HR S to 520 580 to 60 15 to 20 28 48 412 a 500 W

Korba I 3 a 200 W 620 to 650 650 to 720 5 to 12 19 35 35

memageods I 3 z 200 W "0 to 690 940 to 980 37 to 42 17 33 72

WarakkaI 3 x 200 W 675 to 715 1010 to 1040 so 30 45 70

Trombay III l M500W 560 580 7 12 43 33

Rerba II 3 x 500 r1l 606

stagnandsa II 3 x 500 MW 627

Farakka II 2 z 500 MW 965

Trambay 1 I x 500 W 720

Column (3) Extracted from SAes the uncertainty reflects the vagueness of the point to time to which the cost estimate refers; thisItom also includes the contractor*s price contingencies when the etimate assumes that contract. will be let on a fixedprice be&@.

Column (4)9 Actual coste extracted from PCR. Distribution@ if not specified in PCR, assumed in accordance with actual work progress.Annual amount discounted (separately for local and foreign currency) to the referencs date of the appraisal estimate usingGDP deflator, HUV index, and average annual exchange rates.

Colim (5) ((4)-(3))I(3). Where only one figure appears, it represents the center of the area in which the actual value is most likely 1to be round.

column (7) This column abovs the price contingencies tht would have been needed, if BCC bad been correct and submitted to theInflation (and the shifts in the exchange rate) that actually occurred.

Column (8) (Total Estimated Cost, i.e. estimated base cost plus all the contingencies - Total Actual Cost in current terms) I TotalEstimated Cost.

For iorba li, Ramagundam 11, Farakka II, and Trombay W9 no final cots were available to 10191.

64

Attachment 5

Page 1 of 2

INDIA: PLANT AVAILABILITY AND LOAD FACTORS

1. The two graphs, at the end of the present attachment illustrate the latestdevelopment of availability and load factors of thermal plants of SEBs, TEC, andNTPC. They show that TEC's Trombay plant (partly financed by the Bank) andNTPC's facilities (also implemented with substantial Bank support) performed ata substantially higher level than the average SEB thermal plant, although thelatter clearly shows improvement. Indeed, some of the better SEB performances,such as those in Andhra Pradesh have recently come quite near to those of NTPCand TEC.

2. The behavior of TEC's Trombay plant appears more erratic than that ofNTPC's facilities because the number of units is small and therefore the outageof a single unit substantially affects the overall availability and the loadfactor. Indeed, a longer overhaul planned for FY 1991 is likely to have reducedavailability and plant load factor to a level below the 60% mark for this mostrecent year.

3. The mentioned graphs also illustrate an aspect of NTPC's performance thatmerits close attcntion. Indeed, whereas practically since its various p".antsstarted operation NTPC's facilities achieved an availability in the order of itsnorm which is 81% for its coal fired 200 MW units and 77% for the 500 MW unitsassuming a notional 5% of forced outages, in most recent years the availabilityhas clearly lessened. As discussed in Chapter III of the main text of thisreport, this is due in part to fuel shortages.

4. Another factor reducing NTPC's performance indicators is the fact that, attimes, though the energy could be generated and the demand at the level of theultimate consumer would exist, the power cannot be delivered because oflimitations in the grid (according to NTPC mostly in the SEBs' systems). OED wasunable to obtain a clear view of the extent of limitations due to physicalconstraints such as a lack of transmission and transforming capacity or, inparticular, to the unwillingness of many SEBs to use what they consider expensivepower from NTPC.

65 ATTACHMENT 5

Graph 1 Page 2 of 2

ni l: Therm ! Power P!Int;______ ______ Avaddaulty _ _ __ _

1

O78

0.92

0.72

0.84-__

0.21

1881 198 1986 1987 1988 iG 190 1991

SEM 4 TATA 4 NTPM A NTPC(Nom)

Graph 2

India: Thermal Power PlantsPlant Lad Foeoer

0.7

0.4

Ig11 1988 1989 1990 1981

0 SE5. 4 TATA 0 NTC NTC(Norm)

66


India: NTPCNon-Technical Performanc Indicatgrs

1. The graphs showing the development of operating costs per kWh sold in realterms, sets forth the actual values derived from data presented in NTPC's AnnualReport on the one hand and the corresponding projected values calculated on thebasis of the information contained in various SARs. P.Ko, P.Ra, and P.Fa referto the SAR for the Korba, Ramndam, and Farakka projects, respectively.

2. In Graph 5 showing personnel related costs, the curve named "Total"reflects all the personnel related costs, i.e the salaries and directly relatedbenefits (such as contribution to personnel funds) shown separately through thecurve named "direct" and the indirect benefits such as social services (medical,etc.).

3. In Graph 6, the curve denominated "Adjusted" assumes that the sharpincrease shown in the curve "Act." for FY90 is distributed over the period FY88to 90.

67

ATTACIO!ENT 6Graph 1 Page 2 of 4

!NDIA: NTPCTotal CaUh 0orting Cost Par Wh $old

jo29-

24 1

23 -

22 i

13

12

1962 1963 1884 19 1966 1967 1m 199 im0

Fesdl Yr ning Ma~ch 31A At. 4 P.Ko 0 P.Ro a PFa

Grah 2

INDIA: NTPC1O4r. and MaLnt. Ct por kWh Sold

12 -

11 -

5 -- ---- -- - --

7-

2te3 1983 1984 18 -om -ov 1- m -069 -000 -99e

. . P.KO - P- Pia

68 n 6

Graoh 3 Page 3 of 4

NDA: NTPCFucl Cost oer kWh Sold

15.

19t2 19 198 90 18 1198 198 199 199

Graph 4

INDIA: NTPCF.~ woee per Of Sold

1.7

1.9 *1

1962 1963 1964 19 7 198 19 96 196 16010

RecOeier endig Mcrch 31Ca At.

Gara| p'"P'lh 4r 1

69ATTACIOMT 6

Gravh 5 Page 4 of 4

INDIA: NTPCPer~ondl Rolated Cost per Emploe_

.4

j.G

3.0

1964~im 1l6 1M6 7 i=818910

F~a Y*wr onding M~re 31

Graph 6

INDIA: NTPCPerosnel Cmst p« kWh «Ml

3.6-4 _ _ _ _ _ _

2.6-__i____ ____1.¶94 im5 ION 197 o in w

194 195 8 1987 1957 160 10

F~sca Yer nn m 31ATo At

II 1h

70


= _ INCRE_NTAL COSTS AND TARIFFS

The Dearee of Axr2MRt between the Bank and India on Tariffs

1.- The SARs prepared in 1978-80 state that there was agreement between theparties on the following principlest1

Each of NTPC's plants would supply the SEBs loosely associated inthe Regional Electricity Board (REB) of the region in which theplant was located, i.e. Singrauli in the Northern, Rorba in theWestern, Ramagundam in the Southern, and Farakka in the Easternregion. 851 of the output of each plant would be allocated to theSEBe in the corresponding region in accordance with a fixed formula,whereas the remaining 15% would be sold in accordance withpriorities establishea by CEA.

- The tariff would ideally consist of a demand and an energy chargeresponding to the principles of marginal cost pricing, but adjustedto meet NTPC's financial requirements reflected in the rate ofreturn covenant.

2. These points suggest a substantial commonality of views between the 001and the Bank. However, ORD identified signs that the understanding between thetwo sides was never as broad as suggested. The first point implies astrengthening -- though very modest -- of the Centre as the GOI, through CIA,would inter alia have reasonably free hand in allocating at least 151 of NTPC'soutputs actually, when NTPC started operating, this energy was by and large alsodistributed among the SEBe of the region supplied by the given station inaccordance with a rigid formula. The second point refers to marginal costpricing as a Zool to be utilizedl however, there is strong evidence that for along time the serious consideration of such pricing in India was anathema. Evennow, long after most Sn. have carried out tariff studies which determined LRMCs,OD found that there is little evidence that the 001 and the sector considerelectricity pricing at economic cost desirable in principle, and even lessevidence of any intention to put it into practice. However, in recent years,concern about cost recovery and the financial plight of the sector hasdoubtlessly been growing.

3. During the year. preceding NTPC's start of operations, the Bank addressedpricing mainly through its overall sector dialogue with the 001 and in a somewhatmore concrete but not much more successful way, in connection with sectorplanning. However, time passed with little change of real substance in the areaof electricity pricing except for the enactment after several years of

a SAR Korba I, paras. 2.05 to 2.08.

71


maneuvering of the amendment to the Electricity Act which provides for the SEBsto earn a minimum return on assets, but fails to include the measures that wouldinduce the states to allow their SBs to implement the required tariffadjustments.

41 Until then, the Bank seems to have relied on the above amendment to theElectricity Act and to some degree also on the prospects of "high" NTPC tariffsprodding the states and their utilities to adjust their tariffe. Although theBank must have recognized the high ratio between NTPC's tariffs (planned andactually charged) on the one hand and those billed at retail by the SEBs(para. 15) on the other, it did not really acknowledge, at least not in anofficial document, that the above ratio could not but lead to a "tariff uprising"within the SEBa, i.e. to a fierce opposition to NTPC tariff adjustments and tolate payments of billed supply from the central utility. One can perceive suchan acknowledgement in the fact that, at the preparation of the Singrauli IIproject in 1980, the Bank spelled out a strategy relating Bank Group involvementin the power sector to "strengthening of the finances of the institutionsinvolved in the sector, particularly the 88s."2 The Bank's evolving approachis also documented by its insistence, during negotiations of the Korba II andRamagundam II projects in 1981, on receiving "more comprehensive information onthe sector".2 The Bank felt encouraged in its outlook and approach bydevelopments that had taken place earlier on the basis of the 001's traditionalway of dealing with the states by "seeking consensus through persuasion ratherthan coercion", in particular:

- the establishment of the REBs;

- the re-organization of CEA;

- the amendment of the financial provisions of the Electricity Actmentioned aboves

- the partial implementation of plans to restore in the NorthernRegion the compliance of the S8Be with the revenue covenantsestablished in connection with IDA's Transmission IV project (Credit604-IN);

- the completion, in most states of tariff studies using the conceptof LRMCs

5. A closer analysis shows that these developments were in part not new andthat only what Chap%ter discusses under the label "the Bank's pervasive optimism"allowed the PRe and SARe for the pre-1983 projects to be as positive as they were

a President's Report Singrauli II, paras. 38 and 39, as well as SARfor the same project, paras. 1.37 to 1.38.

3 SAR Korba II, paras. 1.54 and 1.55.

72

Attasbment 7Page 3 of 7

about the evolution of the tariffs in the SEBe and the repercussions on NTPC'sfinances. First, the REBs, whose establishment was mentioned as such a positivedevelopment, were created back in 1966 and, while undoubtedly providing a forumin which SEB issues could,be discussed and brought closer to a solution, untilthe early 1990s, had neither the means nor the power to monitor, appropriately,let alone control operations in the regional systems.' Second, the re-organization of CRA which followed the creation of the Ministry of Energy in 1974was not new either and by 1980 had not yet led this organization to play theregulatory function the Bank had ex-ected it to assume in the w3ctor. Third, theamendment to the Electricity Act, as important as it was as a step in the rightdirection lacked teeth (see above); and, fourth, the implication that theintroduction of marginal cost pricing was under serious consideration was at thevery least premature (see para. 97).5

The Development of Incremental Costs

6. The analysis of NTPC's incremental costs and tariffs, which OED carriedout in the context of the audit, was intended at understanding why some ten yearsall Bank document stated that NTPC's tariffs were projected and, later, were inaverage at about the level of LRMC, and all of a sudden in 1989-90, similardocuments state that tariffs were only about 502 of LRMC. The investigationincluded the following steps:

(i) Computation of average incremental costs using projections andactual results for investment and sales set forth in the SARs forKorba 1 (1978), Singrauli II (1980), Ramagundam II (1981), CentralTransmission (1983), Rihand Transmission (1985), Combined CyclePlants (1986), and Talcher (1987) as well as the PCRe for Korba 1,Ramagundam I, Singrauli II, and Farakka II.

(ii) Compilation of the actual average revenues per KWh sold and of thesimilar unit rates projected in the SARe for the two yearssubsequent to project approval.

(iii) Conversion of all cost and tariff figures to USmills/kWh in constantterms of FY90.

7. For the conversion of actual figures, the computation used the MOV indexfor foreign exchange costs and GDP deflator for the local currency amounts.Projected figures were converted into values of the year on which the SARestimates were based using the escalation coefficients indicated in the SARs andthen, in a second step, translated into US currency of 1990.

A See e.g. India: Long Term Issues in the Power Sector (1991 YellowCover Report) Volume I, para. 1.25.

See also para. 10.1 of NTPC's comments in the Annex.

73


8. The table on pages 3 and 4 of the present attachment sets forth theresults of the above analysis as followes

- Column 1 sets forth the discount rates used for computing theincremental costs (7%, 10% and 13%).

- Column 2 lists the average incremental cost in 1990 USmills per kWh.

- Column 3 shows the actual average revenue per kWh sold for the lastyear for which antual figures -mere available to the appraisal team.

- Columns 4 and 5 set forth the projected revenues per kWh for thefirst and second year of the SAR projections.

9. The figures in the block labeled "actual" correspond to the results of theanalysis using only actual investment costs and actual sales for the period 1977-90 extracted from the PCRs for the Korba I, Ramagundam I, Singrauli II andFarakka I projects as well as the SAR for the Talcher project.

10. Figures 1 and 2 on page 5 of the present attachment both set forth theprojected revenues per kWh sold as they appear in the SARs for the projectsaudited here against the actual figures. In Figure 1 the label Act. correspondsto the curve showing the actual values, whereas T. Ko, P.Ra, and P. Fa refer tothe projections in the SARs for the Korba I, Ramagundam I, and Farakka Iprojects, respectively. In Figure 2 Act. again stands for actual values derivedfrom the PCRs, whereas CPT, Rih, and Tal refer to the curves corresponding to theprojections in the SARe for the Central Power Transmission, Rihand Trensmission,and Talcher projects. Figure 2 dramatically shows the sharp departures fromprevailing trends the assumptions in the various SARe implied.

74

Attachuent iPage 5 of 7

Conparison of Tariffe vith Ineremeutal Coste

Col. i Col. 2 Col. 3 Col. 4 Col. 5Iner.Cost Actual Proj. Proj.

Year 0 Year 1 Year 2

Data fro torba I SR1982 1183 1984

LIC i:z l1OU8mills/kVb 22 Pase/kib 22 22 22LRIC 1:101 1990usmillgikvb 28 1971 Paige/kWh 11 11 11LRIC i:131 1990uSill8/kvb 36 1990 Usele/kvh 29 IQ. 29

Iecr. 0 0Data fros Biagratli II SfR------------- ...... 1982 1983 1984LRIC i:7% 1990Usaille/kwh 26 Paie/kih 29 29 30LRIC i:101 1990U8illu/kWh 33 1971 Paise/kb 21 20 19LBIC i:13% 1990U8ille/klh 41 1990 UBEISkVh 36 34 33

SIfer. -5 -4%Data fro Raasuadam II SfR

-- -- - - -. ..... 1182 1983 1984LIC iM 199U&ills/kwh 26 Paisekvh 32 3t 32LBIC i:101 199098&ill/kvh 32 1911 PaiselkTh 20 20 20LRIC 1:131 19908ill8/kNb 39 1990 USsI/kh 34 34 34

Ior. 0 0Data fro& Central Power Traeaiesion SkR

--------------- 1983 1984 1985LRIC :7% 199OUB§illu/kwb 32 Paiee/kwh 32 34 36LRIC 1:10 199tSmille/kWb 39 1982 Paiselkb 30 29 21IC i:13x 1990uSaille/kwh 47 1990 USels/kwh 31 31 30

%Ilaor. -3% -15Data frs farakka II SR------------------------. 1983 1984 1985LRIC 1:1% 19900Sille/kwh 29 Paise/k¥b 34 31 40LRIC i:10& 1990030ill8/kWh 36 1983 Paise/kgb 34 35 35LRIC 1:131 1190eUilleik1b 44 1990 USaIS/kvh 33 32 31

%Mor. -5% -11Data fro Rikad tranemissioa SR------------------ - - - - - - -- -. 1984 1985 1986LRIC i:% 19900sill/kub 34 Paise/kib 36 41 48LIWC 1:10 199eusmille/kvb 41 1984 Painekb 36 40 41LRIC 1:139 1990D8ills/kvb 49 1990 USalS/kWh 33 36 31

1Mi. 8% 4%Data fron Combined Ciele Plaate SR---------- - - - - - - - -- - - - -. 1984 1985 1986LRIC 1:% 199usille/kh 31 Paise/kgb 36 41 48LRIC 1:10% 19900sllig/kVh 44 1911 Paise/kgb 19 20 21LRIC 1:139 199DUSmills/kVb 52 1990 USlsi/kvh 33 35 36

Mer. 6% 2%

75

Attachment ?

Page 6 of 7

Col. 1 Col. 2 Col. 3 Col. 4 Col. 5Inor.Cost Actual Proj. Proj.

Year 0 Year 1 Year 2

Data from Talcker SA (projections only)-- - - - -................ 1986 198? 1988

LRIC 1:7% 1990mSaiIls/khb 31 Paise/lkb 40 51 57LUIC 1:10% 1990USaills/kVb 38 1986 Paise/kb 40 48 51LRIC L:135 lS9OUSailla/kVb 46 1990 USals/kVh 30 36 38

laor. 21% 5Data from Talcler BAR (actuals and projectionsl-.--. -.. - ............. .. 1986 1987 1988LIC i:S1 ll9908ill/kM 43 Paise/kb 40 51 57LIRC 1:105 19900si811/kh 50 1986 Paise/ik 40 48 51LUIC 1:13% 199058tills/kVh 58 1990 USals/kVk 30 36 38

laer. 21% 51

Actual FT1IS1-1990: Data trom Iorba, Iasagundas, and Farakka PCls, and from Talhe

Ia. in aa- Iax.Sales logy to Sales45th Korba 45th

red.op. SAcoot

LUIC iW 9OU8aills/kVk 32 3? 34LIC i=105 19900S illsi/kb 42 50 45LBIC 1:13 ISSOUSaills/k 56 66 58

76 eATTACIMEIIT 7Page 7 of 7

Graph 1

NTPC: Revenues per kWh :old (inc. TaxActual and Pmfcted In SARs

42 ______-

747

419 i8 i04 180 t8 1I 168 18 eo -ie

tAc.--- P.K = P. -a F

30-

-1 --

30-

19"2 19 184 1900 199 1887 1600 1988 1 88

Flusat Yea ending Marh 31At. P.KG P Rh 1 T.Fa

GraDh 2NTPC: Rýevenues per-kWh 5.'%-ld (excl.TaxN

18318 7e18 l7 i

CP T Ri T* d

77


Sections A Accounts Receivables

1. It cannot be denied that NTPC is being paid late by some clients. Thereis a need, however, to put the recent trend in the broader perspective of NTPC'srelatively short corporate life. This Audit ascertained that the arrearssituation is a concern which is drawing appropriate attention from NTPCmanagement. What is realistically under its control has been tried and is beingpursued. Requiring its clients to open letters of credit (LC) is the best toolavailable to NTPC to collect its revenues directly because payment is guaranteedby a third party. Starting in 1984 on the advice of the Bank, 17 out of 25 SEBshad opened LCs as of August 1991. It cannot be expected, however, that LCs wouldcover 100% of the most recent monthly sales to a given SEB because the commercialbank granting the LC requires a multiple of revenues as collateral. As a result,LCs will always lag behind actual NTPC sales. This lag should be more pronouncedwhen sales are surging as in FY90 when they almost doubled, yet, as shown inTable 17, this did not happen.

2. The current assets item reported as "Sundry Debtors" ("arrears" or"receivables" herein) has increased faster than sales over the recent years. Thegap between growth rates worsened over every sub-period except during last year(see Tables 2 and 3 below). The most recent upsurge in arrears occurred whensales doubled in FY90.

Table 1: Letters of Credit

FY/ 85 86 87 88 89 90 91

Amount (million Rp.) 75 175 259 303 481 991 1223

In Z of billing 25.8 38.1 45.2 36.9 40.7 50.3 51.3

Table 2: Growth of Sales and Receivables

In Z /' FY91/FY85 FY91/FY88 FY91/FY89 FY91/FY90

Sales (flow) + 39.0 + 40.7 + 39.2 + 17.9

Arrears (stock) + 45.0 + 55.0 + 58.9 + 30.6

3. Although one year is usually insufficient to confirm a break in a trend,the slowdown in sales growth is significantly correlated with that of arrears toconclude that, as of the early nineties, the growth of arrears has markedlydecelerated.

1 Compounded rate per annum.

78

Attachmn (0Page 2 of 8

Table 3: Deceleration of Arrears Build-up

85 86 81 88 89 90 91FY/Z changes ofgrowth rates

Sales 128 54 21.9 33.6 24.7 91.4 17.7

Accounts 25.8 -16.1 -17.3 126.1 56.3 190.2 -36.5receivable'

4. The data in Table 3 compares variations of a flow (sales) to variations inanother flow, that is the yearly increment of the stock of receivables. Thecomparison of these two flows is the key to assessing whether the buildup ofarrears is unsustainable or not, thus making the above variations comparableindicators. The data shows a much greater volatility of year-to-year variationsin receivables than in sales: because sales and accumulated receivables are ofclose magnitude (sales were 1.6 times receivables by the end of March 1991), aslowdown in sales growth in FY86 and FY87 coincided with a reduction in theyearly flow of receivables. Similarly, the doubling of sales in FY90 wasfollowed by a sharp rise in receivables and the reverse occurred when the salesgrowth rate (17.7Z) fell well below the 5-year average (45.1%). It seemstherefore that, if sales growth stays moderate (in the 15-30% p.a. range), theflow of receivables would decrease. The straight comparison of the flow ofreceivables and sales confirmed that the propensity of new sales to generate newarrears has come back towards the medium-term trend of less than two months ofsales after the expected surge in FY90 (Table 4).

Table 4: Relationshi, between Sales and Additional Receivables

FY/2 84 85 86 87 88 89 90 91

Flow of 41.4 22.8 12.4 8.4 14.3 17.9 27.1 14.6receiv/Sales

Same in months 5.0 2.7 1.5 1.0 1.7 2.2 3.3 1.8of Sales

5. An analysis of the available data on the age structure of arrears confirmedthe above conclusion. Although the trend worsened in FY90 when sales doubled,it turned around the following year. The additional stock of "old" receivablesof more than either 6 months or 12 months has increased more slowly than salesduring last FT (Table 5).

2 Percentage change of the growth rates of incremental receivables.

79

Page 3 of 8

Table 5S Agia of Arrears

FY/in 2 of sales 1989 1990 1991

lIcreased receivables of over 6 monthe 5.3 19.7 8.4

Same: receivables of over 12 months na 11.0 3.0

6. A confusion between what is bad debts and late payments has clouded thearrears issue. Bad debts are defined as unlikely to be collected and thus mustbe provisioned for as required by the accounting rules in force in India. At theend of March 1991, these provisions amounted to Rp 246.7 million (US$9.6 million)or 3.12 of arrears of over 6 months. Provisions were increased by 492 last FTand by more than fivefold in two years. This is not the sign that the arrearssituation has worsened dramatically, however. First, while the ratio ofprovisions over arrears of more than 6 months has increased (from 2.4% in FY1989to 3.11 in FY91), it has remained confined in relative terms given the doublingof NTPC sales in FY90. Second, a more significant indicator, the ratio of thesome provisions over arrears of more than one year, has actually remained stableas shown in Table 22 below. Furthermore, the increase in provisions over salesdecreased from 0.6Z in FY90 to 0.3% in FY91.

7. Penalty interests on arrears continue to be billed by NTPC to its clientsin arrears, but they are not recorded in the balance sheet because of their lowprobability of being collected. This shows the conservative accounting policyfollowed by NTPC with the support of its external auditors.

8. During the last three years, accounts receivable rose faster than any otherfinancial items driven by sales (e.g., cash flows, cash and banks) exceptdepreciation and short-term borrowings. As a result, receivables rose sharplyrelative to total current assets. Table 7 shows the relative problem ofreceivables. The financing of receivables by current liabilities has decreasedmarkedly during the last three years, which reflects a sensible financial policythat does not rely on expedients.

Table 6: Provisions for Unpaid Billing

FY/Rp. million 1988 1989 1990 1991

Provisions for bad debts 47.7 44.5 165.6 246.7

In 1 of 6 months arrears 3.6 2.4 2.8 3.1

In Z of 1 year arrears na 6.2 5.6 6.7

80


Table 7: Receivables in relation to Other Indicators

FYI 1988 1989 1990 1991

Receivables/Current assets 30.5 37.9 51.1 52.8

Cash & banks/Receivables 163.4 75.4 48.2 38.9

Current liabilities/Receiv. 195.0 145.2 108.4 98.6

Considered "good"/Total 98.8 99.3 98.6 98.4Receivables

Reveiv. > 6 months/Receiv. 32.1 31.2 50.6 56.2

Receiv. > 1 year/Receiv. na 15.9 29.4 28.0s

9. There are several conflicting trends within the arrears category. Theyincreased in Rupee terms (+45% p.a.) and they aged (the proportions of 6-monthand of 1-year arrears almost doubled since FY89). The focus has been on the few-SEBes which are at the core of the problem. To tag all the arrears problem ontothe SEB of Utar Pradesh (UPSEB) is simplistic. Three SEBes (GEB, MSEB, TNEB) withlow 6-month arrears ratios' (18.8%, 35.1%, 28.2% respectively on January 1991)together had 26.82 of all arrears 0f over 2 years while UP had none. If goodpayers are measured as having no arrears of over 6 months, only four SEBs (Goa,Pondychery, HPEB, UTC) were paying on time. This implies that the 2-monthbenchmark stipulated in Bank's loan agreements essentially ranks most NTPCclients as bad payers which is not the intent of the receivables covenant.

10. It can be assumed that GOI would not be prepared to accept a deteriorationin the financial position of NTPC without taking the appropriate steps tosafeguard its substantial and successful investment. The framework agreementbetween NTPC and the SEBEs is therefore twofoldt to secure payments through LCswhenever possible (which presuppose that commercial banks have room to undertakethe required factoring) and, in the last resort, through the centralappropriation mechanism when defaults accumulate such as in 1991. The mechanismof central appropriation which transfer central government funds earmarked tostates directly to NTPC essentially so far has made NTPC a secure creditor ofSEBEs. Last, while a great deal of attention is paid by NTPC's management to thearrears issue, it should not distract from the challenging issue of financing theambitious corporate plan.

3 Data on this line are from NTPC documents dated, respectively, January1980, April 1990, and January 1991.

4 In percentage of their total arrears.

81


Sectiomt B Table 8S TPC's Growth Rates

in 2 FY1991/FY1985 FY1991/FY1989

(Compounded rate per annum)

Gross Fixed Assets + 38.0 + 43.7

Deprttiation + 43.9 + 60.4

Interest (net) + 38.4 + 39.2

Work in Progress + 24.9 - 4.0

Sales of Energy + 39.0 + 37.9

Earnings before Interest + 40.4 + 43.4

Net Profits + 41.4 + 45.6

Cash Flows + 39.7 + 42.0

Reserves + 61.0 + 43.2

Paid-up Capital + 20.4 + 20.0

Long-Term Loans + 36.0 + 14.7

Short-Term Loans + 90.7 + 257.0

Working Capital + 34.0 + 33.7

Table 9: Financing Plan in Rp. million

FY/million Rp. 85 86 87 88 89 90 91Sources of fundsCash flows 1140 2207 2566 3691 4314 6856 9355Equity 4859 6808 5909 6879 3683 6594 12811001 loans 4392 3898 2989 2947 5133 3230 2356Power bonds 0 1634 4300 4394 1500 5000 4000Other Lf loans 243 1833 2876 7784 6091 1121 4699Current liabilities 645 -853 -160 1343 -536 3961 2416Uses of fundsFixed assets 4166 2684 4642 9819 14280 25188 22450Works in progress 3739 9002 13801 5998 5774 -4917 1244Construction stores 2150 1758 -649 1890 -897 216 2434Current assets 1366 3143 2830 4343 2410 6913 6002

82


Table 10s Financing Plan in Percentages

FY/% of total sources 85 86 87 88 89 90 91Sources of fmndsCash flows 10.2 14.2 13.8 20.0 20.2 24.9 30.0Equity 43.7 43.7 31.7 37.3 17.3 23.9 41.1GOI loan. 39.5 25.0 16.0 16.0 24.1 11.7 7.6Power bonds 0 10.5 23.0 23.8 7.0 18.1 12.8Other LT loans 2.2 11.8 15.4 42.2 28.6 4.1 15.1Current liabilities 5.8 .-5.5 -0.9 -7.3 2.5 14.4 7.7Uses of fundsFixed assets 37.4 17.2 24.9 53.2 66.9 91.3 72.0Works in progress 33.6 61.6 74.0 32.5 27.1 -17.8 4.0Construction stores 19.3 11.3 -3.5 10.2 -4.2 0.8 7.8Current assets 12.3 20.2 15.2 23.5 11.3 25.1 19.2

Table 11: Trend in Capital Investments

FY/million Rp.; 2 85 86 87 88 89 90 91

Investments 5230 12285 18523 15817 20046 20270 23694

Same in constant 100 223 317 249 296 271 289prices s

Outstanding Worke 11315 20917 34798 40796 46565 41648 42892in Progress

Same in constant 100 175 275 297 317 257 242prices

In I of total 45.8 56.6 62.7 57.2 51.0 37.3 31.7fixed assets

' Deflated by the wholesale price index for India (IMF, InternationalFinancial Statistics).

83


Table 128 CorporatD Self-finann

PY4" 85 86 87 88 89 90 91 AverageSF (OtS) n.a. 32.7Adj. for receivable n.a. 17.5Corporate Self- 21.7 18.0 13.9 23.3 21.5 33.8 39.5 24.5financing

Adjusted for 6.8 12.6 10.9 15.6 11.9 5.7 24.2 12,5Receivables

Table 13: Domestic Bond. apse

Isse /FT Purpose Amount (Rp billion) Interest let maturity Amount1 86 Stagrauli 1.63 142 3129193 1.632 87 Korba 4.30 14/10X 3/12/94 2.82

3 88 Ramaguandam 4.39 13/9X 3/30/95 1.02

4 89 Ramagundam 1.50 92 6/29/98 1.505 90 Xorba 5.00 92 7/11/99 5.00

6 91 Korba & 4.00 13Z 1/12/98 4.00Singrauli

Table 14s Caih Zlo

FT/Rp. million 85 86 87 88 89 90 91 total '88-'91Cash flows 1140 2207 2566 3691 4314 6856 9355 24215Net profit in 2 76.8 82.9 82.6 81.9 76.7 78.3 74.9

Table 15: Capitallsation of Interest

Capitalised interest: 1988 1989 1990 1991

In 2 of total interest 55.1 53.3 48.0 40.7

In Z of Profit before int. 35.9 40.1 31.1 22.8

Works in Prog./Fix. Assets 57.2 51.0 37.3 31.7

6 Ten percent for tax-free holdingi the maturity is also three yearslonger.

84


Table 16s Current Ratio

Times current liab. 1988 1989 1990 1991

Total current assets 1.68 1.81 1.79 1.90

Lees over 6 months rec. 1.52 1.60 1.33 1.33

Table 17: Rates of Return on Assets

FYZ 85 86 87 88 89 90 91 average

Covenanted 12.7 16.8 17.0 16.4 14.8 17.9 17.0 16.1ROW'

ROI-OMS 13.0 17.0 17.0 18.6 15.1 15.9 14.5 15.9

Adjusted for n.a. 12.3 13.8 13.4 9.6 5.3 9.7 10.7Receivables

Corporate ROI 7.9 9.0 7.4 7.7 7.4 9.5 10.4 8.5

Adjusted for 4.1 9.0 6.3 5.7 5.0 3.8 7.5 5.6Receivables

Table 18S: Rates of Return on Equity

FY/ z 85 86 87 88 89 90 91 average

Return on equity 8.4 10.4 9.8 11.0 11.5 15.5 16.4 11.9(ROB)

Adjusted for 4.4 80 8.3 8.2 7.8 6.3 6.3 7.8Receivables

' Data from the PCR for the Farrakka Thermal Project for FY85-89.

85

Page 1 of 8

The Bank's Involvement and Obectives in the Power Sector

A. Bank Involvement in the Power Sector

1. As shown in Attachment 1 listing all the Bank Group operations in theIndian power sector, the Bank started lending to the sector at a very early stageof its own development and has continued its involvement over all the yearssince. Accordingly, between 1950 and 1970, its Board approved 12 lendingoperationst four for generation and transmission facilities of the G01-ownedDamodar Valley Corporation (DVC), two for similar installations of the privateTEC group, two for a Maharashtra SEB hydroplant (TIC purchasing most of theoutput), two for a thermal plant in the Andhra Pradesh SEB's system, and one forconstruction equipment to be used in the development of the Beas River, anundertaking the Bank had agreed to support in connection with the implementationof the 1960 Indus Settlement.

2. In 1965, the Bank made a loan for strengthening interconnectior, in India,in general, through transmission lines not directly associated with generatingplants. In this operation, it used for the first time a concept it was to applysystematically through the period 1970-76. In all the operations taking placein this period (four credits totaling US$367 million, three for furthertransmission projects and the foarth for rural electrification) the SEBs were theexecuting agencies and main beneficiaries, while the Centre, through CIA and theGOI-owned Rural Electrification Corporation (REC), was responsible forcoordinating and supervising project implementation. In the context of theseprojects, the Bank dealt with the beneficiaries at arma's length, ease tiallythrough the coordinating entities, CIA and REC.

3. In the mid-1970., when it realized that che results of the above describedprojects were likely to be disappointing, the Bank modified its approach to thesector, and, for the period 1977-82 -- except for a further loan to TEC (for theThird Trombay Thermal Project) and a second rural electrification project --lent exclusively for the development of the GOI-owned NTPC. In this phase, thenew utility became the beneficiary of six credits (US$1,575 million) and 3 loans(US$375 million), to support seven projects: Singrauli I and II (2000 MW) mainlyfor the Northern Region, Korba I and II (2100 MW) for the Western Region,Ramagundam I and II (2100 MW) for the Southern Region, and Farakka I (600 MW) forthe Eastern Region. 1 The operations supporting Korba I, Ramagundam I, Parakka1, and Singrauli II are the main subject of the present audit, OD having alreadyaudited the Singrauli I operation in 1986.2

In the present report the NTPC projects are referred to using anabbreviated title such as Singrauli I for "Singrauli Thermal PowerProject" and Singrauli II for "Second Singrauli Thermal PowerProject".

2 See also Section 2.0 of NTPC's coments in Annex.

86

Page 2 of 8

4. Around the time NTPC started operatlone with the commissioning of tha firstunit at Singtauli in 1983, the Bank's approach to the sector evolved againin response to the continuing weakness of the 88B. which threatened the viabilityof the entire sector and hence posed an increasing danger to NTPC. Indeed, theinstitution concluded that it could only oefficiently assist the 001 in improvingsector performance by dealing directly with the SBe. Therefore, in the period1983-87, while still supporting TPC at an unprecedented level with six loans fora total of US$2,146.5 million, the Bank further provided three credits (US$313.1million) and five loans (US$1,119.8 million) to the 001 for the implementationof projects in selected sBe. In this period also fall the Fourth Trombayproject with TIC and the Third Rural Electrification Project, which followed thepattern of previous such projects in the context of which Bank and SB dealtwith each other at arm's length.

5. Since 1987, the power sector's financial performance has deteriorated,creating major problems for the 001, VTPC, and the Bank. Growing losses in anumber of SEBs pushed the sector's overall deficit up to US$1.8 billion by 1990,greatly adding to the government's fiscal burden. For NTPC, the SEB's plightmeant a rapid rise in receivables that has reduced internal cash generation andnecessitated greater recourse to borrowing to finance the investment program.Consequently since 1987, the Bank has refrained from further lending for NTPC,which by then had become the largest beneficiary of Bank Group lending throughsixteen operations with US$4.0 billion of lending.' However, it still madeseven loans (three to support SIBe) totaling US$2,278 million. Particularlyinteresting Is the operation for which the main beneficiary is the Nathpa JhakriPower Corporation, a joint venture between the 001 and the government of HimachalPradesh, signaling a promising development in the relations between the Centreand the states in the power sector. The US$485 million loan made in 1990 for theNorthern Regional Transmission Project was the first to VHPC, the sisterorganization to NTPC. Unfortunately, the increasingly difficult economicsituation in India, the numerous defaults of beneficiaries with respect tocovenants agreed with the Bank, and the lack of progress at the sectoral levelhave forced the Bank to re-evaluate its involvement in India. The reviewresulted in major cancellations of lending to the sector and in the suspensionof disbursements from other loans and credits for power. New lending waschannelled to performing SEs.

6. Bank support for the creation of NTPC may be viewed as the culmination ofits strategy in the Seventies of seeking to strengthen central institutions asvehicles for sector reform. However, it also represented a sharp shift in theBank's view of the role of the central institutions, which it had heretoforeviewed as mainly to plan, guide and coordinate, and channel funds to projects andprograms carried out by the 888s. This shift reflected the Bank's growingdisappointment with the SiB-implemented projects it was supporting, particularlyin transmission and rural electrification. These projects were experiencing

3 Ten loans for roughly US$2.5 billion and six credits for about US$1.5billion.

87


serious delays and cost-overruns and the numerous beneficiaries were proving hardto supervise and effectively out of the Bank's reach. Moreover, there was littleevidence of any of the hoped-for improvement in the operational or financialperformance of the SBs. This experience led the Bank to support the emerging001'. view that the Centre could only play an effective role in resolving sectorproblems by becoming itself a major player in the sector.

B. Bank Obiecties - NTP

7. The sector's major problem seemed clear enough to both the Bank and theGOI: supply was failing to catch up with the rapid growth of demand, resultingit chronic power shortages that were a major drag on the growth of the economy.The 1979 CPP leaven no doubt that the supply problem dominated the Bank'sthinking abeat the sector:

".....Although there are some pricing and institutional issuescontributing to power problems, the main problem is managingthe supply of power -- not so much managing supply from existingcapacity (although improvements are needed) but in managing aninvestment program to keep pace with the rapidly expandinggeneration and transmission needs of the economy."4

While the documents for the first several NTPC projects contain no explicitstatement of Bank objectives, this is probably because the principal objectivewas considered self-evident -- to accelerate the expansion of generating capacityand associated transmission facilities.

8. The severity of the supply shortage seemed to call for radical solutions onboth the technical and institutional sides. Technically, the only solution thatpromised a breakthrough in capacity expansion was the construction of very large,mine-mouth generating plants that would take maximum advantage of India's coalresources and provide significant economies of scale. Institutionally, thisimplied the need for an equally radical solution, to make the construction ofsuch "super thermal" plants a do-it yourself activity by the Centre. This wasnot only because the demonstrated operational and financial weakness of the SEBsmade it abundantly clear that they could not be antrusted with such projects.There wa, in addition, a strong case for a central venture because coal is aresource for which the Centre is responsible and because projects on the plannedscale would have to serve regional neede, not just individual states. Thus, theBank's second major objective was to assist in creating a new central institutionthat could efficiently construct and operate the new Cacilities.

C. Bank Obiecties - Se2toral

9. While the Bank's paramount concerns in supporting NTPC were the expansionof capacity and building of a strong central institution, it also continued

4 India CPP, January, 1979.

88


to pursue the broad sector objectives -- long-term national planning, integratedsector operations and SEB reform -- that it had been seeking through previousprojects. Until the mid-Seventies, planning in the sector, such as it was,consisted largely of the efforts of individual SB8 to identify and prepare the"next project" required to meet their states' needs. The Bank felt strongly thatthe massive additions to capacity required could only be accomplished on aleast-cost basis if power planning was put on a national basis and set in along-term framework. Indeed, the Korba SAR begins by calling attention to theneed for "a more sophisticated approach to planning", and goes on to describe the15-20 year plan to be prepared by CRA with the assistance of consultants providedunder the 1976 Fourth Transmission Project (Cr. 604) as "an essentialpre-requisite for formulating sound policies for future development of thesector."'

10. The Bank wished to see sector operations, as well as sector planning,conducted in a national, least-cost framework rather than on the existingstate-by-state basis. Despite the creation of the REBs, there was very littletrading of power between the states; each SEB tended to maximize the use of itsown facilities to meet its needs, with the result that high cost plant might beoperating flat-out in one state while lower cost capacity was beingunder-utilized in a neighboring state. In part, this was the result of theinadequacy of the existing transmission links between states, and the Bank sawthe extensive 400kV transmission facilities to be built by NTPC as critical tothe development first of regional grids, and then of a true national grid. Underthe 1976 Fourth Transmission Project the Bank was providing consultants to assistCEA with the detailed planning for a national high voltage network. The Bank' sobjective, as formulated in the 1978 Korba SAR, was that ".... eventual operationand control of the national power system should logically pass to the RegionalElectricity Boards with overall control by CRA, whose function would be tooptimize the operation of generating plant nationwide on a merit-order basis".'

11. By empowering the Centre through the creation of NTPC, and by centralizingsector planning and operations, the Bank also hoped to see more in the way of SEBreform than it had been able to bring about by financing their operations. Itwas thought this could be accomplished, in part, as a direct result of thestrategic position NTPC would occupy as a major power supplier. This was mostimportantly the case in the critical area of SEB finances, where it wasexplicitly stated that the Bank believed that, by charging marginal cost-basedtariffs, NTPC would "encourage" the SEBes to follow suit and modify their owntariffs accordingly.' In addition, while not explicit in the project documents,it is clear from interviews with the staff concerned that the Bank hoped thatNTPC would, by force of example, help to stimulate reform in the sector. By

S Report 1783b-IN, paras. 1.01 and 1.16.

6 Op. cit., para. 1.18.

Op. cit., para. 2.07.

89


demonstrating that generation and transmission facilities could be constructedand operated much more efficiently than was currently done, NTPC would, it wasexpected, provide the SEBe with a model that they could follow, or be made tofollow.

D. The GOI View

12. The initiative for the creation of NTPC came from the 001; as important asit was, the Bank's role was essentially a supporting one. It had long beenevident that the SEBs were losing the battle against power shortages and by themid-Seventies, through the appointment of the usual high level committees and theimpact of their reports, a consensus in favor of a leading role for the Centrehad been built up within the GOI. The states did not strongly oppose aninitiative which promised them access to low cost capacity without having toinvest their own funds, and their concurrence was assured by the GOI1's agreementin effect to give the SEB9 the "right" to fixed shares of NTPC's output allocatedaccording to then existing formulae.

13. This consensus on the Indian side, together with the close fit between theGOI's objectives in creating NTPC and its own view of the sector's problems andtheir solution, led the Bank readily to support the government's initiativedespite its involving a major long-term commitment of funds to a new venture.Such a commitment was reportedly made as early as 1976, when at the AnnualMeeting in Manila the President of the Bank agreed in principle to the GOI'srequest for Bank financing of the four super-thermal projects that NTPC wouldundertake.

14. In principle, the GOI also shared the Bank's sector objectives. However,there were subtle, yet important, differences between the approaches of the Bankand its borrower to sector reform. While the SARe were correct in stating thatthe GOI "accepts the need" for central planning and operations, and for SEBreform, the GOI tended to regard them as more distant objectives to be pursuedon separate, if parallel, tracks and less closely related to the success of theprojects than did the Bank. Interviews with GOI officials who were major playersat the time indicate that only the establishment of a national grid was regardedas a major sector objective relevant to the projects and, even here, the GOI feltit was premature to try to formulate agreed policies for the operation of thegrid, as the Bank wished. National power planning was considered important, butsomething quite apart, while the notion that NTPC could, by example or otherwise,help induce the necessary changes in the SEBa does not seem to have entered intothe GOI's thinking at all.

15. While at the beginning these differences were barely visible and of nopractical importance, the fact that the Bank had a broader vision than the G01of what the creation of NTPC should mean in the sector was to become ofincreasing importance.

90


R. Evolution of Bank Objectives

16. While, at the beginning, support for NTPC was presented with the Bank'ssector objectives in the background, these objectives began to come to the forein successive projects. Thus, the SAR for the 1979 Ramagundam project (the thirdin the NTPC series after the Singrauli and Korba projects) included a lengthy newsection on "future integrated sector operations" in which the Bank sought tospell out how and when it felt this objective could best be reached, (on aregional basis by 1985, and nationally after 1990). The Bank's disappointmentwith progress to date, and particularly with the GOI's reluctance to make the

requisite policy decisions on technical, economic, and institutional issues,emerges clearly from this section. Although these matters were discussed duringnegotiations, no agreements could be reached and the SAR could only promise thata "continuing dialogue" on the subject would be maintained.

17. The trend toward higher visibility for the Bank's sector objectives waseven more marked in the SARo for the next two projects, the 1980 Singrauli II andParakka projects. They contained, for the first time, an explicit statement ofthe Bank's main such goals, which were listed ass

- accelerating the expansion of capacity and improving plant operations soas to gradually eliminate power shortages;

- introducing long-term system planning on a nationwide basis;

- promoting improvements in sector organization and training, and

- strengthening the finances of the SBs.'

Progress to date in these areas was described as "encouraging", but the Bank wassaid to be still very much concerned about long-term planning and SEB financesand determined to focus its attention on them. The GOI's "agreement" duringnegotiations to prepare a least cost development plan based on Terms of Referencesuggested by the Bank, and its statement that it "envisaged" completion by April,1982, was hailed as the first fruit of this strategy. It marked the first timethat a specific sector condition had been agreed, however vaguely, in the contextof an NTPC project.'

Report 2745b, para. 1.36. The omission of integrated sectoroperations from the list is hard to explain, but the view isexpressed elsewhere in the SAR that lack of a power plan was thechief obstacle to achieving this goal.

* Op. cit., para. 1.40. The "agreement", contained in the AgreedMinutes of Negotiations, was less explicit than implied in the SAR.

91


18. This evolution toward more explicit reformulation of the Bank's sectorobjectives and further efforts to advance them through project conditionscontinued in the NTPC projects Immediatel' following those being audited. In the1981 Second Korba project, the Bank*s objectives were reformulated in accordancewith the report of the G01' Committee on Power (the "Rajadhayaksha Committee")which in September 1980 made sweeping recommendations for sector reform. The Bankfound them to be largely in accord with its own thinking and decided to givehighest priority to the Committee's recommendations fors

- improving thermal plant performance;

- demand management measures to limit growth to realistic projectionsof available supply;

- intensifying hydro development;

- strengthening the role of the Centre in generation, and high voltagetransmission, and

- improving SB finances.10

The GOI agreed that by April, 1982, (when the long-term plan was due) itwould also provide the Bank with an implementation plan outlining the steps itintended to take to carry out the Comittee's recommendations in these areas.

19. While there was little further evolution in the NTPC projects approvedduring 1983-86, the Bank continued to express at least mild satisfaction with theprogress being made toward the accomplishment of its sector objectives. Thisbegan to change in the mid-Eighties when Bank documents came increasingly toreflect disenchantment with the prospects fcr reforming SB finances, with theefficacy of the planning effort and, generally, with the GOT's failure toidentify clearly defined strategies for dealing with the long-term institutionaland financial problems of the sector. In the SAR for the Talcher project, theBank declared that it would, henceforth, focus on lending directly to those SEBethat were willing to change, while continuing to support the expansion of theCentre on the grounds that increasing the States' reliance on the Centre was thebest means of inducing them to take national policy into account and,particularly, to move toward realistic tariffs." Thus, it became clear that,with the progressive increase in the Importance the Bank attached to theachievement of specific sector objectives in supporting NTPC, what had initiallybeen more a difference of degree between the Bank and 001 had become a very realdifference in kind.

10 Report 3397a, para. 1.57.

Report 6402, para. 1.16.

92


F. Institgtional Issues

20. The Bank's increasing concern with sector objectives was paralleled by ashift in its institutional goals. In the mid-Seventies the Bank, out offrustration with its inability to reach the SEBs, turned to creating a powerfulnew role for the Centre and the building of a wholly new sector institution asthe best means both of ensuring a more rapid expansion of capacity and ofstimulating sector reform. Ten years later the Bank had, out of frustration withthe slow pace of sector reform, come almost full circle and decided to focusagain its efforts principally on strengthening the SBs. This audit, therefore,provides a good opportunity to shed some additional light on two long-standingissues in Bank lending (see chapters III and IV)s

- the efficacy of the enclave approach to institutional development, and

- the use of project lending to accomplish sector objectives.

93

Page I of 21

COMMENTS FROM THE BORROWER

FROM: SHRI M. .ARANGI,.IRECTOR,MINISTRY OF POWER,SHRAM SHAKTI BHAVAN,-NEW DELHI - 110 001.

TO : MR. YVES ALBOUY,CHIEF,INFRASTRUCTURE & ENERGY DIVISION,OPERATIONS EVALUATION DEPARTMENT,THE WORLD BANK, 1818 H STREET N.W.,WASHINGTON, D.C. 20433,U.S.A., FAX NO. 001-202-477-6391.

NO. 4/2/92-US(CT)(.) REFERENCE OUR TELEX OF EVEN NUMBER DATED

20TH JULY 1992, REGARDING COMMENTS ON THE DRAFT PROJECT

PERFORMANCE AUDIT REPORT FORWARDED WITH YOUR LETTER CF 28TH

APRIL 1992(.) WE INVITE YOUR ATTENTICN TO SOME RECENT

OEVELOPMENTS SUCH AS:-

i) THE iECISION TO ALLOW ACCESS TC PFC FUNDS TC CNLY SUCH

STATES THAT WOULD SIGN OFAP TO ENSURE THE STATUTORY 3%

RATE CF RETURN;

ii) THE COASENSUS TO FIX THE .M"INUMUM AGRICULTURAL TARIFF AT

FIFTY PAISE PER KWH;

iii) THE FACT THAT SEVERAL 'JEBs HAVE IN THE LAST YEAR RAISED

TARIFFS AND SOME AMONG THEM HAVE BEGUN EARnJI-NG A 3%

RATE OF RETURN;

iv) THE DECISION TO SET UP REGICNAL AND NATI'JAL TARIFF

ADVISORY BOARDS;

v) AMENDMENTS IN THE LAWS WITH THE CONCURRENCE LF STATES

TO PERMIT PRIVATE SECTOR PARTICIPATI..N, AND

vi) THE AGREEMENT 'IN PRINCIPLE' TO ALLOW THE .'TPC TO

PARTICIPATE IN JCINT VENTURES(.)

94

Page 2 of 21

THESE HAVE ALREADY BEEN BROUGHT TO THE NOTICE OF THE UORLD

BANK EARLIER AND SHOULD HAVE BEEN CONSIDERED BY LPERATIONS

EVALUAT:ON DEPARTMENT(.) THE COMMENTS OF NTPC ON THE PROJECT

PERFORMANCE AUDIT REPORT ARE CONTAINED IN ANEXURE-I(.) THE

FACTUAL ERRORS HAVE BEEN POINTED CUT IN ANNEXURE-II(.)

N.T.F

No. 4/2/92-US(CT)

DATED: 30.7.92 (. - AGI)DIRECT&. (THERMAL)MI-JISTRY OF POWERNEU DELHI.

To

THE FAX OPERATOR,MINISTRY OF POWER.

*o 95 * e. ... e... * * ** **r *(A Government of Indi.. Entf.' 1r-

'nowet wrw Tr '. /CORPORATF.^"NTE. NEb C ELHIP.K. VARMAE.ECUTIVIDIREC-C's :oo att £A*dt'

Page 3 of 21

Dateds 11-07-1992

Mr. Yves AlbouyChief, Infrastructure & Energy DivisionOperations Evaluation DepartmentIBRD, 1818 H Street, NWWashington, D.C. 20433, U.S.A.

Sub: Draft Project Performance Audit Report for Korba(Credit 793-IN), Ramagundam (Credit 874-IN/Loan 1648-IN);Parakka (Credit 1053-I.N/Loan 1887-IN); and Second Singrauli(Credit 1027-IR) Prolect

Dear Sir:

This is with reference to your letter dated April 28, 1992 seeking ourcoments on the draft Project Performance Audit Report (PPAR) enclosed therewithfor the projects mentioned above.

As we have already pointed out in our letter dated June 25, 1992 the reportprovides good insight on various issued related to the development and operationof TPC in the Indian Power Sector environment. We have completed review of thePPAR and our coments have been provided to the Department of Power (DOP), 001,with the request to send 001's comments formally to the Bank.

In the meantime, we are enclosing an advance copy of our comments for yourready reference please.

Thanking you,

Yours aith 11y,

arma)Executive Director (CP)

96 Page 4 of 21

comments Ah& dzatt fq Pro*I9t Performancs Andit R=or

1.0 Introduction

1.1 National Thermal Power Corporation (NTPC) was estab-

lished in 1975 with the objective of setting up regional

super thermal power stations in the Central Sector to sup-

plement the efforts of the State Electricity Boards (SEBs)

in meeting the country's growing need of power. Later with

the easy availability of natural gas in the early eighties,

the company undertook task of adding gas based combined

cycle plants also. NTPC has today grown into one of the

largest public sector enterprises in the country with an

approved investment of over Rs.225 billion and an authorised

capital of Rs.80 billion. The corporation is presently

executing Super Thermal Power Projects at 10 locations and

Combined Cycle Gas Based Projects at 5 locations. Management

of. the associated transmission lines has been vested with

NPTC since August, 1991. With effective project management,

appropriate financial controls, advanced engineering inputs

and detailed manpower planning, it has been possible to

commission, so far, a total capacity of 11570 MW, about 16%

of the country's power generating capacity making NTPC the

single largest power utility in the country. The performance

levels of these units, since commissioning, have generally

been much above those achieved by similar units of the other

organisations in the country. During 1991-92, NTPC's genera-

tion amounted to 29% of the country's thermal electricity

generation.

1.2 The audit report points out that the reasons for what

made NTPC bloom in a sector that was, and is, so much of

desert lies inter-alia in NTPC's 'Internal Strengths'. Thisincludu factors such as starting with clean slate, dynamic

97 Page 5 if 21

leadership, emphasis given to organisation and management

systems development and Corporate Planning, attention paid

to recruitment and training, high priority accorded to

quality assurance, and drive for technical self-sufficiency

and technological innovation. It may be noted that despite

NTPC's phenomenal growth and its becoming country's largest

power utility, there has been no dilution in terms of these

*Internal Strengths'. As a result, NTPC today occupies

prominent position not only in the Indian Power Sector but

in the Power Sector world over.

2.0 RelationshiP zih W.l DAk

2.1 The World Bank has been closely associated with the

Corporation since its creation and has over the past con-

tributed substantially to its development. In financing

terms, starting with NTPC's first project, the Singrauli

Thermal Power Station, the Bank and IDA have provided, in

the last over 15 years, six credits and nine loans for a

total amount equivalent to about US $ 4 billion. These

operations have provided financing to support the construc-

tion of seven thermal power stations, totaling 11350 MW

(partly under implementation), as well as extensive high

voltage transmission systems. The Bank's association withNTPC has also contributed significantly towards the institu-

tional development of the Corporation. Further, it has beencorrectly pointed out in the audit report that Bank has madevital contributions to the company's success through itsfinancial support, its role in key areas such as procurementand use of consultants, and its influence on NTPC's corpo*rate culture.

3.0 Achievemnt Ba&nk Obj_ective

3.1 Retracing the early. years of formation of NTPC a0g4considering the then prevailing power sectoz environment,the auditors have explicitly recorded "yet, despite the

98

Page 6 of 21

odds, NTPC has been an all-to-rare institutional developmentsuccesp, achieving virtually all that was expected of it and

in some areas, more." The report describes the main short-fall in Rchieving the objectives of Bank's operation in the

Indian Power sector until now is to be found in the area of

broad sector objectives relating to long term national power

plan, integrated systems operations and SEB reform. It may

be noted that NTPC has played the role of a model utility in

implementing projects and achieving optimal performance ofits power stations. The achievement or otherwise of thesector objectives through implementation of NTPC projectsneeds to be examined in the wider context of Indian power

sector which is characterised, so far, by generally a lowlevel in project implementation, station oreration, finan-cial and institutional performance. NTPC's performance has

been, in contrast to this, very impressive and NTPC hasdemonstrated to the Indian Power Sector, that a utility canbe successfully developed in the environment which appearedto others to be non-conducive. In fact, presence of NTPC has

been one of the major factors responsible for holding to-gether the Indian Power Secor. The company has providedmore and more electricity to the grid from its regionalstations to meet growing requirements of the State grids.The influence of NTPC is more pronounced in the areas ofproject implementation, operation and maintenance etc by wayof demonstration effect which is evident from the perform-ance levels achieved by some of the SEBs in the recent yearsin these areas. NTPC has also influenced SEBs to increasetheir tariff. In the last few years, a fumber of SEBs haverevised their tariff upward. In fact, NTPC has contributedsignificantly towards the improvement/development of theIndian Power sector. Some of the areas of NTPC's contribu-tion are listed in Para 4.0 below. It may be noted that NTPChas been doing its best for all round development of thesector. However, there is a limit to its area of influenceand NTPC cannot force constituents of the sector to followit. Actual improvement need.s to be brought about by SEBs

99

Page 7 of 21

themselves. It is not clear as to what more could NTPC havedone in this regard. Further, bringing about sectoral reform

through Bank's operation with NTPC is a matter between theGOI and the Bank. Accordingly, we feel that it is for the

Bank and the GOI to decide as to how these reforms have to

be brought about. However, with the Union Government havingtaken initiatives recently towards liberlisation of theIndian economy and all round improvement seen in the indus-trial environment in the country, it is expected that theoperation of Power Sector would improve and would becomemore commercial in the days to come. Further, looking at thechanging political and economic environment in the country,there should be no doubt that power sector would witness

major reforms.

4.0 NTPC_s contribtion gr tor

4.1 NTPC has played significant role in the growth ofIndian power sector by adding large capacities in relativelyshort time. The company has developed improved systems forproject implementation and contract management. With effi-cient operation and maintenance management techniques, NTPChas been able to operate its plants at very high level ofperformance. The organisation has also contributed to thebringing in of latest technology in power generation andtransmission fields. The spin off benefits of these effortshave been felt in the entire sector.

4.2 In the field of Quality Assurance, NTPC has developed

stringent quality plans to be adhered to by suppliers/con-tractors. NTPC has been creating a high level of qualityconsciousness within the organisation as well as in theindustry thereby setting standards for the benefit of thepower sector as a whole.

4.3 NTPC has a great depth of technical and managerialtalent and increasingly this talent pool is being tapped for

100Page 8 of 21

upgrading the performance of other organisations in the

Power Sector. NTPC has been training executives of other

power utilities in order to develop their capabilities in

different fields.

4.4 NTPC is the first utility in the sector to bring sale

of power under commercial agreement, thus introducing a new

concept in the sector.

4.5 The Government has expressed its confidence in NTPC by

ausigning it a prominent role in the thermal power capacity

additions programme. The organisation's privileged position

as a leading utility has gained for it significant leverage.

The Corporation is today in a position to influence policy

decisions for effecting improvements in the power sector of

the country as well as to obtain for the nation the benefits

of international assistance and latest technologies at the

most competitive prices. Further, as a premier power utili-

ty in the country, NTPC recognising its obligation has

reached out and assisted other utilities in the sector with

the objective of bringing about overall sectoral improve-

ments.

5.0 HEEn. A fD , ..

5.1 Contrary to the Bank's perception as brought out in the

Audit Report, NTPC's role as an "agent of change" in India'spower sector is acquiring increasing relevance, as explained

above. In the light of continuing institutional shortcom-

ings amongst the country's SEBs, NTPC is recognised as one

of the few vehicles GOI has to effect meaningful sectorwide

improvements.

6.0 Project IMlmentation

6.1 The Corporation has an impressive record of commission-ing its projects as per schedule and in several. cases ahead

101

Page 9 of 21

of schedule notwithstanding the fact that NTPC follows a

tight commissioning schedule of 48 months for 200 MW units

and 60 months for 500 MW from the date of order of main

plant equipment.

6.2 For timely implementation of its large projects, whicbcal.s for co-ordinated working of the various functionswithin NTPC and the outside agencies involved, NTPC hasdeveloped an Integrated Project Management and Control

System, inhouse, covering all facets of project-management

including engineering, contracts, and construction. Thissystem has proved to be very effective and has enabled NTPC

to achieve commendable results in effective project imple-

mentation.

6.3 The audit report also brings out that "NTPC's perform-

ance in constructing and operating its generation and trans-

mission facilities confirms that it has, by most measures,

achieved levels of efficiency that not only far exceed those

in most of the rest of the Indian Power Sector but also

compares with those best performing utilities in the de-

veloping world". In fact, NTPC's performance compares withbest performing utilities in the developed world too. The

audit report has correctly pointed out that certain delaysoccurred during pre-construction phase, once main contractswere awarded, NTPC was by and large highly successful inconstructing its power plants on schedule, even though itsschedules called for substantially shorter constructiontimes than those generally prevailing in India. It is perti-nent to note here that pre-construction activities, of whichinvestment approval forms significant portion, are out ofNTPC's control. The reasons for certain delays during thepre-construction phase with respect to the SAR estimateshave been brought out in the concerned PCRs. These delaysoccurred mainly on account of the factors unforeseen at thetime of the finalisation of the SAR. Further, some of thedelays during pre-construction phase have also occurred on

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Page 10 of 21

account of the fact that the procurement cycle took more timethan what was envisaged in the SARs because of certain

unforeseen circumstances. However, it is NTPC*s constant

effort to cut down the procurement time by improvement inthe procurement systems based on the experience gained so

far. NTPC has recently finalised updated Model Bidding

Documents for supply-and-erection contracts with the Banktaking into account the experience of both NTPC and Bank

with a view to streamline procurement procedure. This is

expected to result in substantial reduction in the procure-ment time. In some cases, to cut down procurement delays,

NTPC issued NITs with Department of Power's permissionpending GOI's formal investment approval.

7.0 Oneration PerformInge

7.1 NTPC has established higher norms in the sphere of

Operation and Maintenance of power stations. The operating

performance of NTPC units has been considerably above those

of similar units elsewhere in the country.

7.2 NTPC has been achieving an exemplary operating perform-ance for its units under commercial operation. NTPC recordedan average PLF of 60.9% during 1990-91 compared to all India

average of 53.8% for thermal stations. During 1991-92 also,NTPC achieved a PLF of 70.2% against all India average

thermal PLF of 55.3%.

8.0 HMAn Resource Development

8.1 One of the main strategies adopted by NTPC in itsendeavour to realise its goal of augmenting power generatingcapacity is effective development of human resources. Bymeans of a systematic approach beginning with the inductionprocess itself and through entry level and mid-career train-ing programmes, the Corporation has created a pool of powerprofessionals, who woule develop to take up future chal-

' AN10N3Page 11 of 21

lenges of Power Sector.

8.2 The audit's viewpoint that in growing as large as it

has, NTPC has lost some of the flexibility and ability to

respond quickly to changing circumstances appears to be a

general observation not supported by the facts. In this

connection, it may be noted that NTPC has been fully con-

scious of problems associated with rapid growth of an organ-

isation and has been undertaking organisational studies,

including studies of diagnostic nature, periodically, both

through internal and external resources with a view to take

suitable and timely corrective action. It is pertinent tomention here that in the recent past, NTPC has been able to

successfully complete the proceedings for taking over of

Feroz Gandhi Unchahar Power Project from Uttar Pradesh

Rashtriya Vidyut Utpadan Nigam (UPRVUN) within shortest

possible time. The takeover of Unchahar plant with over 1000employees at a cost of over Rs.9 billion involved dealing

with a multitude of agencies including GOI, UPRVUN, UPSEB,

Government of U.P. etc.

8.3 The Man/MW ratio in NTPC are by far the best and com-

pares very favourably with other utilities like SEBs etc.Whereas man/NW ratio for O&N in the power sector at national

level averages to 3 to 4, in the case of NTPC the same is

only 0.8. Optimum utilisation of manpower being a philoso-

phy of NTPC, constant efforts and endeavours are made to

further improve the man/MW ratio tending to compare with the

best at international level. As already explained, periodi-

cal exercises are carried out through internal and external

resources to review the manning pattern in NTPC.

8.4 The Bank's viewpoint that NTPC has been seeking in

recent years to diversify into a wide range of new activi-ties on account of the need to keep its staff more fullyemployed does not appear to be based on correct assessment.In fact, as a growing organisation, there is a need for NTPC

104Page 12 of 21

to diversify in its areas of specialisation for its further

growth and survival. Many power utilities wrld over (such

as BEI, EdF, EPDC etc.) have also diversified their activi-

ties. NTPC's diversification into consultancy area reflects

its desire and interest to share rich experience. gained by

it over the years with others both within and outside the

Power Sector and country. The expertise and experience

gathered by NTPC so far is being channelised through con-

sultancy for bringing about improvement in the country's

power sector. similarly, coming together of SEBs, NTPC and

enterprises from private sector under joint venture projects

would benefit the country's power sector as a whole as NTPC

would be able to provide its varied expertise to such joint

venture projects. Power generation through non-conventional

energy sources is the need of the future, in view of the

increasing trend of environmental consciousness and concern

for the 'greenhouse effect' of power generation based on

fossil fuel and endeavour world over is to achieve major

breakthrough in this field. Development of inhouse R&D

expertise has become necessary considering large operating

capacity and to undertake indepth studies of problems en-

countered in day to day operation of the plants with the

ultimate aim of improving plant performance.

8.5 NTPC is fully aware of the danger associated with

diversification by scattering its efforts in ways that could

distract from its main business. In fact, NTPC is moving inslow and steady manner in this area to guard against any

potential danger.

9.0 Future Strateaies

9.1 The audit report quite correctly points out one of thareasons for NTPC's success is early establishment of a high

profile Corporate Planning unit and key role assigned to it,which reflected management's determination to see the new

organip%tion develop in a long-term framework. The report

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Page 13 of 21

further points out that the emphasis on Corporate Planning

allows management to take a long-term strategic approach.

9.2 NTPC attaches considerable importance to the long-termstrategic planning. The first Corporate Plan of NTPC, which

incidentally was the first such exercise taken up by any

power utility in the country, was prepared in 1983 covering

a time horizon of fifteen years (1985-2000 AD). This plan

had defined the objectives of the organisation, and set

challenging goals before it. The plan had also identifiedkey result areas and had outlined strategies in each ofthese areas for achievement of desired objectives.

9.3 While NTPC has achieved a large measure of success in

the implementation of the initial phase of the Corporate

Plan, significant changes in the business and economicenvironment in the country during the intervening period

necessitated an updation of the plan along with a review of

the focus of Corporate Mission and objectives. NTPC pre-

pared an updated Corporate Plan covering the period from

1992 to 2007 AD (fifteen years). As a premier power utility

in the country, NTPC recognises that it would have to play

an important role in the overall improvement of the powersector and proposes to reach out and assist other utilities

in this task. According to the company's future growth

plans, the corporation would be among the largest utilitiesin the world by the turn of the century. To ensure that thecompany's performances compares with the internationalindustry standards, NTPC proposes to- adopt a global perspec-tive. NTPC is also contemplating, on case to case basis,integrated development of power project which would includeexploitation of captive coal mines for the power project.

9.4 NTPC's Corporate Planning group has also developed along-term computerised model for financial projectionthrough the cooperation of different units within the organ-isation. Over the years, this model has proved to be of

106

ANNXPage 14 of 21

immense importance and is now being extensively used as a

tool to assist in decision making. The Corporate Planning

group is also focal point for co-ordination with various

international financial institutions including the World

Bank in the areas of financing, Supervision Mission etc.

9.5 NTPC does not see any reason to believe that transfer

of transmission functions to NPTC is a potential threat to

NTPC's investment programme. It is true that NTPC would not

have inhouse control over the construction of lines neces-

sary to assure evacuation of power from its new generation

plants. However, it may be noted that there would be ade-

quate coordination between NTPC and NPTC in this regard.

Further, GOI's approval and monitoring agencies would pro-

vide additional safeguard to ensure. availability of matching

power evacuation arrangements. The operation and maintenance

of both new and existing facilities would also be carried

out as per the present practice based on the programmes

finalised by the REBs and transfer of transmission assets

would not, in any way, affect the same. Further, analysis

has shown that NTPC would be a viable organisation both with

and without transmission systems under its control.

9.6 Regarding the Audit Team's observation that NTPC had to

include amongst its proposed investments major projects

that it probably would not have chosen if technical and

economic justifications were the only consideration, it maybe noted that NTPC's projects are selected from the shelf of

projects identified by the CEA based on the recommendationsof the site selection committees appointed by the GOI and

subsequent studies carried out by CEA to establish suitabil-ity of project from the point of view of least cost solu-

tion. Further, the investment programme needs to be cleared

by CEA from techno-economic considerations before GOI ap-

proval. Hence, it is untrue that NTPC's investment programme

includes projects not justified on technical and economic

grounds.

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Page 15 of 21

9.7 As brought out in the audit report, it is a fact that

there is a potential threat for NTPC to carry out its ambi-

tious expansion plan on schedule due to delay in approval of

new projects, on account of several factor beyond NTPC'scontrol (including the environmental clearance process which

is still evolving). The country is passing through financial

resources problem. Further, the World Bank has also not

extended financial assistance to NTPC after 1987 because ofNTPC's accounts receivable position, and thus affectingNTPC's growth. This, coupled with increased fund require-

ment because of all round increase in costs makes it verydifficult for NTPC to carryout its expansion plan. NTPC isof the view that the Bank can consider relaxing the crite-rion of limiting accounts receivable to two months' sale.The audit report also accepts that the accounts receivablehas limited influence on the financial viability of theCorporation and could, at best, be identified as a cash flowproblem and needs to be treated in the same manner.

9.8 Regarding approval of NTPC's investment programme as awhole, as pointed out in the report, it may be noted thatNTPC expects that this approach would take care of some ofprocedural delays in project approvals. However, NTPC hasnot yet posed this proposal formally to GOI.

10.0 Tarift

10.1 NTPC's commercial activities includes setting of appro-

priate tariff and collection of revenue from the benefici-aries for the bulk power supplied. NTPC's clients are pre-determined. NTPC was the first public sector utility in thecountry to enter into commercial bulk power supply agree-ments (BPSA) with its clients (beneficiaries). NTPC hasbeen supplying its power on the basis of a flat rate tariffbased on the normative parameter (representing very highlevel of performance) under the BPSA. Tariffs normally are

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Page 16 of 21

fixed for five years and include provision for fuel cost

escalation, but are not adjustable to reflect the replace-

ment cost. While a power station is relatively new, the

station's tariff is close to NTPC's marginal cost of supply.

However, in an inflationary environment, the tariff deterio-

rates in real terms and diverges from NTPC's marginal costs

of supply. In fact, the adverse impact of using historic

iccounting data for tariff formulation has been partly

offset by increasing rate of depreciation and return on

equity. GOI has increased depreciation rate from 3.6% to

5.28% and the return on GOI equity contributions from 10% to

12%. The rate of return for projects being accorded invest-

ment approvals after March 30, 1992 has been further revised

to 16%.

11.C Future lendina tg 'MC

11.1 NTPC envisages to add substantial generating capacities

during the years to come. While it has plans to add about

6000 NW capacity during the Eighth Plan period, it expects

to add about 9000 MW during Ninth Plan period. In order to

achieve such ambitious targets, NTPC would need to mobilise

substantial financial resources both from within and outside

the country including the World Bank.

11.2 The audit has suggested that progress must be made toestablish in the SEBs the financial and commercial disci-pline which is needed to ensure the sustainability of the

benefits derived from the Bank's huge investment in NTPC and

such progress should be a condition of Bank's further in-volvement. In this context, it may be noted that the re-

source crunch being faced by the country would severelycurtail the national generating capacity addition, if Bank's

assistance to a well established Institution such as NTPC isdenied at such a crucial juncture on account of one reasonor another. This would in turn lead to an irreversiblenegative growth in the industrial and agricultural sector

109

Page 17 of 21

resulting from widespread power shortages. Further, all other

efforts being made by the GOI and being supported by a host

of Financial Institutions such as IMF/World Bank etc. to

reform the Indian economy could be non-starters for want of

adequate amount of energy. Under the above situation, there

would probably be no alternative except NTPC as a viable

institution to go ahead with a .substantial project implemen-

tation programme.

11.3 Based on the experience of operation with NTPC and many

other operations in the past several years, the audit has

suggested that a pre-requisite for the success of complex

operations or major components of such operations seems to

be a broad vision shared by all parties of the desirable

development to be achieved and the means to achieve it. In

this connection, it may be noted that NTPC, as a new strate-

gy based on its experience, is already moving towards a

Ocomposite approach' of consulting with its beneficiaries in

the setting up of new projects and agreements for sale of

power from its power stations.

12.0 Einancial Performancn

12.1 NTPC has presently a favourable financial position as a

result of prudent financial management practices followed

eince its creation and adoption of appropriate financial

control systems and standard accounting practices followed

internationally. The financial performance of NTPC has also

been impressive, with the organisation generating profits

ever since the beginning of commercial operation. The

profit in the year just concluded (FY 92) was about Rs. 10

billion. NTPC is one of the largest profit making public

sector enterprises.

12.2 NTPC's specific comments/additional information/modifi-

cations on some of the points concerning financial perform-ance are given in the attachment 1.

Page 18 of 21

Table 1 - NTPC Employment

FY 80 813 3878 4691

FY R5 3324 10486 13810

FY 90 6373 15379 21752

Average Amnal Inrease (%)

FY 1980-1985 33 22 24

FY 1985-1990 14 8 9.5

en1

111

Page 19 of 21

LONG-TERM BORROWING;FOREIGN EXCHANGE EXPOSURE AND RISK

The exchange risk on foreign borrowings is disclosed in theaccounts of the corporation as per the accepted AccountingStandards which stipulate that loan liability to be increased onone side and corresponding assets to be revalued at the end of eachfiscal year. This presentation has been accepted by the externalauditors as Comptroller & Auditor General of India. It does notprevent in any manner the analysis of the impact of foreignexposure of the Corporation.

Further, since IDA credits, which are given to Govt. of India,are onlent to NTPC in Rupees, the exchange risk on such IDA loanscannot be disclosed in the Corporation's Accounts.

The exchange risk can be capitalised till the plants arecommissioned and this is an internationally accepted Principle ofAccounting which the Corporation is following. It is not thepresentation which leaves the exchange risk under finance but therepayment schedules being shorter than the depreciation cycle ofthe plant which leaves exchange risk under financed. This supportsthe view that maturity period of loans should be more than 20 yearsinstead of 15 years as being enforced now by IBRD/IDA.

CAPITALISATION OF EXPENSES

The capitalisation of expenses before commissioning of theplant is an internationally accepted Principal of Accounting.

The contention of the audit that in fiscal year 1991, about90% of the expenses were capitalized,is incorrect as during thatyear only 52% of the expenses were capitalised and every year thispercentage has been more or less around that figure only.

In the presentation, one may conclude that the Corporation isoperating either without labour cost or overheads but the factremains that only certain percentage of the labour cost iscapitalised (in fiscal year 1991 this percentage was 33%),rest allis charged against the income.

In the stations which are not yet commercial, the expensesincluding depreciation on construction assets have to becapitalised till the plant is declared commercial and this practicehas been accepted by the external auditors.

There is no discrepancy as far as capitalisation of interestduring construction is concerned as IDC is calculated on projectto project basis. The projects under construction beyond 1989 havea higher capital cost than the projects which were implementedearlier. Moreover, the cost of borrowing funds in the later

112 AMSPage 20 of 21

projects has been much higher as compared to projects taken in theinitial years of the Corporation. This results in higher quantumof interest being capitalised.

The contention of Audit that NTPC is over capitalisingexpenses and IDC is not correct. Also that NTPC is trying to createa buffer with more cash flow in order to show higher Capital Costappears to be not justified since this Corporation has beenfollowing all the international standards of accounting whilecompiling its accounts.

Page 56 Note

In the absence of reference of NTPC document, it cannot beascertained as to how the data is different in two documents but,however, it may be relevant to add that the statement Financing ofNTPC outlay included in the Annual Report indicates the figure ofNet Budgetary Support on a year to year basis.

FINANCIAL COVENANTS OF FOREIGN FINANCIERS

The disbursement from loans like World Bank and Saudi Fund forDevelopment (SFD) which are primarily taken by GOI and arethereafter passed on to NTPC are not our direct loans and as suchdo not appear in Balance Sheet of NTPC a& loans from World Bank orloans from SFD. As such, the existing presentation in our balancesheet is correct and positions as stated in Para 148 does notreflect the correct position.

Since the SFD loan is for a specific project of NTPC, it isalso a source of International Assistance made available to NTPCfor construction of project. Accordingly, the same has been shownin the annual report (P-23) for 1990-91 along with otherInternational Assistance.

CONVERSION OF LOAN INTO EQUITY

The project financing has to be in the debt equity ratio of1:1 was quiet clear and transparent to all the financiers includingBank. The fact that IDA credits were not being onlent as loan wasknown to the Bank and Bank insisted for onlending as loan and madethe repayment schedule more stiffer with higher rate of interestafter 1986. Despite the policy of th' Government which was issuedin 1979 regarding debt equity of 1:1 Government went ahead withonlending after 1986, as per the advice of World Bank, the creditsas loans thereby violating its own policy of maintaining the debtequity ratio of 1:1.

NTPC had based all its cost estimates and tariffs on the debtequity of 1:1 which is now affecting adversely the structuring oftariff with the Banks' insistence of onlending the credits as loan.

113 AWXPage 21 of 21

There is no discrepancy as pointed out by the Audit regardingBank loans to the tune of Rs.8962 million, because NTPC has adoptedthe policy of 1:1 till 1986 and after that the disbursement wasmade as loans as per the advice of World Bank.

As regards conversion of loans into equity to the tune of USS456.78 million, it may be clarified that all these loans were takenby NTPC before the condition of onlending as loans was introducedand after 1987, all loans sanctioned by World Bank have beendisbursed as loans only which is contrary to the Government'spolicy of maintaining t'- debt equity of 1:1.

COST ESTIMATES

The audit report mentions about under-estimation of the costof the projects following Korba-I. In this connection, it may benoted that the appraisal estimates were based on the most authenticlatest costs then available. The reasons for increase in completioncosts have been explained in the concerned PCRs. Most of theincreases are generally attributable to (i) customs duty for whichallowances were not made in the original cost estimates, (ii)depreciation of rupee, (iii) higher than anticipated increase inthe price of equipment and materials, (iv) changes in the scope ofproject to inter-alia cover expenses for trial andpre-commissioning.