asian development bank rrp:ind 29694 – national hydroelectric power corporation npc – nuclear...

ASIAN DEVELOPMENT BANK RRP:IND 29694

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON

PROPOSED LOANS

AND

TECHNICAL ASSISTANCE GRANTS

TO

INDIA

FOR THE

GUJARAT POWER SECTOR DEVELOPMENT PROGRAM

November 2000

CURRENCY EQUIVALENTS(as of 14 November 2000)

Currency Unit – Rupee/s (Re/Rs)Re1.00 = $0.0215

$1.00 = Rs46.60

ABBREVIATIONS

ADB – Asian Development BankAECO – Ahmedabad Electricity Company LimitedCII – Confederation of Indian IndustryCIDA – Canadian International Development AgencyDFID – Department for International DevelopmentECCF – Electricity Consumers' Coordination ForumEIRR – economic internal rate of returnED – Electricity DepartmentFIRR – financial internal rate of returnGEB – Gujarat Electricity BoardGERC – Gujarat Electricity Regulatory CommissionGETCL – Gujarat Energy Transmission Company LimitedGOG – Government of GujaratGSECL – Gujarat State Electricity Company LimitedHT – high tensionIPP – independent power producerJBIC – Japan Bank for International CooperationKfW – Kreditanstalt für WiederaufbauLT – low tensionNDC – National Development CouncilNHPC – National Hydroelectric Power CorporationNPC – Nuclear Power CorporationNTPC – National Thermal Power CorporationOCR – ordinary capital resourcesPFC – Power Finance CorporationSEB – State Electricity BoardSECO – Surat Electricity Company LimitedSIEE – Summary of initial environmental examinationTA – technical assistanceUSAID – United States Agency for International Development

WEIGHTS AND MEASURES

MW (megawatt) – 1,000 kWkVA (kilovolt-ampere) – 1,000 VAkV (kilovolt) – 1,000 voltskW (kilowatt) – 1,000 WMVA (megavolt-ampere) – 1,000,000 VAW (watt) – unit of active powerha (hectare) – unit of areakWh (kilowatt-hour) – unit of energykm (kilometer) – unit of lengthcct-km (circuit kilometer) – unit of transmission line lengthVA (volt-ampere) – unit of power/capacity

NOTE(S)

(i) The fiscal year (FY) of the Government of India, the Government of Gujarat andthe Gujarat Electricity Board ends on 31 March. FY before a calendar yeardenotes the year in which the fiscal year ends, e.g., FY2002 begins on 1 April2001 and ends on 31 March 2002.

(ii) In this report, "$" refers to US dollars.

CONTENTS

Page

Loan and Project Summary i

I. THE PROPOSAL 1

II. INTRODUCTION 1

III. THE SECTOR 1

A. Macroeconomic Context 1

B. Sector Description and Recent Performance 2

C. Constraint and Issues 4

D. State Government Expenditure 6

E. The State Government’s Objectives and Strategy 7

F. External Assistance to the Sector 7

G. ADB’s Country and Sector Strategy 8

IV. THE SECTOR DEVELOPMENT PROGRAM 10

A. Rationale 10

B. Objectives and Scope 10

C. Policy Framework and Actions 11

D. The Investment Project 14

E. Environmental and Social Measures 15

V. THE LOANS

A. The Program Loan 16

B. The Project Loan 19

C. The Executing Agency 20

VI. THE TECHNICAL ASSISTANCE 24

VII. BENEFITS AND RISKS 28

A. Expected Impacts 28

B. Risks and Safeguards 31

VIII. ASSURANCES 32

A. Prior Actions by the State Government and GEB 32

B. Covenants 33

IX. RECOMMENDATION 35

APPENDIXES 36

LOAN AND PROGRAM SUMMARY

Borrower India

The Proposal Two loans totaling $350 million from the Asian Development Bank's(ADB's) ordinary capital resources (OCR) to support the GujaratPower Sector Development Program.

Rationale The Sector Development Program facilitates restructuring of thepower sector in Gujarat, reduces the operating costs throughimproved operating efficiencies and governance, raises additionalrevenues and, over the longer term, eliminates the need fortransfers from the state government budget. It facilitates expansionof power supplies using private generating capacity, andconservation of water and electricity. It will support economicgrowth in the state, particularly in the industry sector. It will alsoallow a shift in state government expenditures from the powersector to its other responsibilities, for example, in the education andhealth sectors. This combination of higher economic growth andshift in public expenditure will contribute to reducing poverty.

Given the present constraints on the power sector in Gujarat-politicized tariff setting and lack of a transparent competitivebusiness environment-, there is a need to change fundamentalpolicies and business practices to improve sector efficiencies.Investments on their own, without changes in policy, will not yieldresults. Therefore, a mixed-modality sector development program,which seeks to correct policies as well as support projectinvestments, is considered the best instrument for supporting aninitiative for restructuring the power sector.

Classification Economic growth

The Sector Development Program

Objectives and Scope The immediate objectives of the Sector Development Program areto (i) establish independent tariff setting and regulation; (ii) rationalizethe imposition of tariffs, duties, and imposts in the sector to maintainequity among consumer categories; (iii) change managementpractices and enhance efficiency in the power sector by introducingcompetition and commercialization; and (iv) improve conservation ofwater and electricity on a pilot basis through improved irrigationsystems.

Policy Frameworkand Actions (i) Enactment of a comprehensive Gujarat Electricity Industry

(Reorganization and Regulation) Bill 2000 (the Bill) that(a) enables the creation of a statutory, independentregulatory authority for licensing, tariff setting, and disputeresolution; (b) enables functional segregation of the Gujarat

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Electricity Board (GEB) into generation, transmission, anddistribution companies; (c) mandates, over a period of fiveyears, a gradual increase in the rate of recovery from eachconsumer category of at least 67 percent of the cost toserve; and (d) mandates compulsory metering of everyconsumer over the next three years.

(ii) Appointment of the Gujarat Electricity RegulatoryCommission (GERC);

(iii) Rationalization of tariffs and duties in the power sector;

(iv) Corporatization of the generation and transmission functionsof GEB;

(v) Support for energy and water conservation; and

(vi) Financial restructuring of the sector.

The Project The Project comprises four components:

Part A: Transmission lines and substations associated with twoprivate sector power projects and for system improvements.

Part B: Transmission lines and substations associated with Kheda(Anand), Rajkot, and Mahesana distribution circles.

Part C: Upgrading and strengthening of distribution systems,especially in Kheda (Anand), Rajkot, and Mahesana distributioncircles.

Part D: A pilot scheme for energy and water conservation throughconversion of existing irrigation systems to drip irrigation systems inMahesana district.

Cost Estimates The Project is estimated to cost $310.2 million equivalent,comprising $200.0 million in foreign exchange and $110.2 millionequivalent in local currency costs.

($ million)Financing Plan Source Foreign

ExchangeLocal

CurrencyTotalCost

Percent

ADB 200.0 0.0 200.0 64.5

GEB 0.0 110.2 110.2 35.5

Total 200.0 110.2 310.2 100.0

ADB = Asian Development Bank, GEB = Gujarat Electricity Board.Social andEnvironmental

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Measures The project component of the Sector Development Program (theProject) has been classified as Category B and a summary initialenvironmental examination (SIEE) report has been prepared.Although there are minor construction stage environmental impacts,the long-term operational impacts are positive for the environment.The Project helps conserve scarce water and energy by removingtariff distortions and by supporting a pilot scheme for introducing ofefficient irrigation techniques.

Poverty impact assessment for the Sector Development Programindicates a temporary negative impact on farmers who use pumpedgroundwater for irrigation on account of the sharp upward revisionof electricity tariffs to agriculture consumers. This is sought to bemitigated through provision of technical and financial support forintroducing of irrigation systems that use less water. In the longerterm, increase in tariffs for agricultural consumers will have apositive benefit in leading to sustainable agricultural practices.Other social impacts of the Sector Development Program are eitherneutral or positive. The Sector Development Program will releasesubstantial funds of the Government of Gujarat (the StateGovernment), so far used to subsidize the power sector-, to supportsocial sector programs.

The Program Loan

Loan Amountand Terms $150 million from ADB’s ordinary capital resources at the pool-

based variable lending rate applicable to ADB’s US dollar loans, a 1percent front-end fee and applicable commitment charges, with aterm of 15 years, including a grace period of 3 years.

Period andTranching The period of the Program Loan is December 2000 to June 2002. It

will be released in three tranches.

Tranche 1 of $50 million on (i) establishment of GERC, (ii) approvalof the Gujarat Electricity Industry (Reorganization and Regulation)Bill, 2000 (the Bill) by the State Government's Cabinet, and itssubmission for approval by the Government of India (theGovernment), (iii) first tariff award by GERC; (iv) incorporation andestablishment of Gujarat State Electricity Company Limited(GSECL) and Gujarat Energy Transmission Company Limited(GETCL), and constitution of their boards of directors, with at leasttwo directors being nongovernment experts, (v) circulation by GEBof a draft action plan for metering its consumers, for consultation, asper GERC’s order of 10 October 2000; (vi) approval of the structure,human resources, and budget of GERC for the next five years bythe State government; and (vii) payment by the State Governmentof all municipality dues owed to GEB up to 31 March 2000.

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Tranche 2 of $50 million on (i) transfer of Gandhinagar and Utranpower stations from GEB to GSECL; (ii) offset of subsidy andsubvention arrears owed by the State Government's to GEB until 31March 2000, and payment of outstanding municipality dues by theState Government's to GEB till 31 March 2001; (iii) introduction ofthe Bill in the Gujarat State Assembly for its consideration; and (iv)rationalization and reduction of electricity duty in the StateGovernment's budget for FY2002, in an amount not less thanRs1,500 million; and (v) Filing by GEB with GERC, of an action planto meter all consumers in the state within a period of three yearsfrom 10 October 2000.

Tranche 3 of $50 million on (i) transfer of transmission assets fromGEB to GETCL; (ii) agreement between the State Government,GEB, and ADB on the Reorganization Plan for GEB developedunder ADB’s proposed technical assistance (TA); (iii) readiness tosolicit offers to privatize at least one identified distribution area ofGEB, unless contrary to the agreed Reorganization Plan; (iv) therules and regulations under the Bill as enacted (the Act) laid beforethe Gujarat State Assembly and published in the Official Gazette;(v) second tariff submission by GEB to GERC; and(vi) establishment and operationalization of GERC under the Act.

Executing Agencies The Executing Agencies will be the Finance Department and theEnergy and Petrochemicals Department of the State Government.

Procurement The proceeds of the Program Loan will finance the foreignexchange costs (excluding local taxes and duties) of eligible items,produced in and procured from ADB’s member countries.

Counterpart Funds Counterpart funds to be generated by the Program Loan will betransferred from the Government to the State Government underthe normal arrangements for the transfer of external assistance andwill be treated as an “additionality” to the Government transfersallocated annually to the State Government. The State Governmentwill use Counterpart funds in accordance with arrangementssatisfactory to ADB, to support the financial restructuring of GEBand adjustment costs associated with the Sector DevelopmentProgram, including (i) reduction of GEB's accounts payable of GEBto power producers, suppliers of fuel and transport; (ii) retirement ofexpensive commercial debt, (iii) payment of outstanding municipaldues; (iv) rationalization of electricity duty; and (v) reduction ofindependent power producer tariffs through buyout of debt.

The Project Loan

Loan Amountand Terms $200 million from ADB’s ordinary capital resources at the pool-

based variable lending rate applicable to ADB’s US dollar loans, a 1percent front-end fee and applicable commitment charges, with aterm of 20 years, including a grace period of 5 years. The borrower

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will be the Government. The loan proceeds will be transferred bythe Government to the State Government under its normalarrangements for transfer of such external assistance. Theproceeds of the loan will be treated as “additional” to theGovernment’s normal transfers to the State Government. The StateGovernment will relend the loan proceeds to GEB, under asubsidiary loan agreement, at an interest rate of 12 percent with aterm of 20 years, including a grace period of 5 years. TheGovernment will bear the foreign exchange risk.

Implementation Arrangements and Executing Agency The Project will be executed by GEB, and its successor entities with

the prior approval of ADB. GEB is a statutory organization createdunder the Indian Electricity (Supply) Act, 1948. It is managed by aboard appointed by the State Government. Successor entities will becompanies registered under the Companies’ Act of 1956.

Procurement and Consulting Services Goods and services financed by GEB will be procured in accordance

with ADB’s Guidelines for Procurement. To accelerate projectimplementation, ADB has allowed advance procurement action. Forimplementing of Part D of the Project, GEB will, under its ownfinancing, appoint a suitable consultant for design, procurement, andproject supervision. Retroactive financing has not been allowed.

Time Frame The Project will be implemented from January 2001 to December2004. Disbursement under the Project Loan will continue until June2005.

Technical Assistance Three TAs are included in the Sector Development Program. Theseare (i) Preparation of a Reorganization Plan for GEB, for $600,000;(ii) Consumer Awareness and Participation in Power SectorReforms, for $50,000; and (iii) Support to GERC, for $450,000.A fourth TA for supporting GEB's Kheda (Anand) and Rajkotdistribution circles has been proposed for funding by bilateralcofinanciers.

Risks and Safeguards The major risks of the Sector Development Program are (i) failure toestablish the regulatory authority, (ii) lack of support of the StateGovernment for politically unattractive decisions of the regulatoryauthority such as raising of electricity tariffs for agricultureconsumers, and (iii) operational inadequacies. These have beenmitigated through (i) approvals by the State Government for theBill establishing the regulatory authority; (ii) GERC’s first tariffaward; and (iii) changing and strengthening organizational andmanagement structures and practices, and effective follow-upmechanisms.

I. THE PROPOSAL

1. I submit for your approval the following Report and Recommendation on proposedassistance to India for the Gujarat Power Sector Development Program, that includes(i) a program loan, and (ii) a project loan. The Report also describes proposed technicalassistance for (i) development of a reorganization plan for the Gujarat Electricity Board (GEB)(ii) consumer awareness and participation in Gujarat's power sector reforms, and (iii) support tothe Gujarat Electricity Regulatory Commission (GERC). If the proposed loans are approved bythe Board, I, acting under the authority delegated to me by the Board, shall approve thetechnical assistance.

II. INTRODUCTION

2. In 1996, the Asian Development Bank (ADB) revised its operational strategy for Indiaand decided to direct a portion of its assistance to the states. This change reflected the factsthat (i) a geographical focus, together with the ongoing selective sectoral focus, would enableADB to maximize its developmental impact on the states concerned, and through thedemonstrational impact of its operations, on other states; (ii) state-level economic reforms,which have been lagging behind initiatives taken by the Government of India, need support andincentives; and (iii) the states have considerable autonomy and have major legislative,administrative, and fiscal responsibilities in many economic and social sectors. Key elements ofthe strategy include (i) reducing the states’ fiscal deficits, (ii) reforming and restructuring publicsector enterprises to improve their operating efficiencies, and (iii) supporting reforms in keyinfrastructure sectors with a view to increasing private investment. Gujarat was the first statechosen for this type of holistic support and the first loan was made by ADB in December 1996.1

The Sector Development Program is an integral part of this assistance and is included in theIndia Country Assistance Plan for 2000. Preparatory to the Sector Development Program, ADBapproved five supporting technical assistance (TA) grants amounting to $1.98 million, forstudies.2 Preappraisal was conducted during 3-24 September 1997. Thereafter, there was abreak in processing which was resumed in May 2000. Appraisal was conducted in four stagesduring July through October 2000. 3

III. THE SECTOR

A. Macroeconomic Context

3. Gujarat is one of the most industrialized states in India and has the fourth highest percapita income in the country. The state's per capita income in real terms increased fromRs11,936 ($257) in FY1995 to RS13,709 ($295) in FY1999, compared with the FY1999national-level per capita real income of Rs11,878 ($255).4 Gujarat also has the third highest per

1 Loan 1506-IND: Gujarat Public Sector Resource Management Program, for $250 million, approved on

18 December 1996.2 The studies include (i) preparation of a power system master plan, (ii) preparation of a framework for electricity

tariffs, (iii) review of electricity legislation and regulations, (iv) financial support to Gujarat Electricity Board (GEB)for formation of two independent distribution profit centers, and (v) solicitation for private sector implementation ofthe Chhara Project.

3 The Missions comprised S. Chander, Senior Project Engineer, IWEN (mission leader); K. Gerhaeusser, SeniorPrograms Officer, PW2; B. Karunaratne, Senior Project Engineer, IWEN; E. Ouano, Senior Environment Specialist,ENVD; P. Pattison, Senior Project Implementation Officer, INRM; R. Stroem, Senior Financial Specialist, IWEN;Y. Uehara, Senior Social Development Specialist, PWOD; D. Graczyk, Project Economist, IWEN; M. Hamano,Project Engineer, IWEN; and V.S. Rekha, Counsel, OGC.

4 Data in real terms are in FY1994 constant prices.

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capita consumption of electricity in the country.5 It has experienced rapid growth in thedevelopment of its economy over the last five years, since India started liberalizing economiccontrols in 1991. However, this growth is now constrained by infrastructural bottlenecks, theprimary one being lack of electricity. GEB, which is the state’s primary executing agency in thesector, is unable to raise resources for investments due to the recurring financial deficits- ithighly suffers on account of the state’s policy of supplying electricity to agricultural consumers atextremely subsidized levels. The Government of Gujarat (the State Government) has initiatedan ambitious policy of inviting private sector participation in the power sector, but this policy isencountering difficulties because the sector revenues at current levels are insufficient to servicethe large inflow of capital that is required. The State Government is making strong efforts tomaintain fiscal discipline in its overall finances, but is constrained by its payables to GEB onelectricity subsidies to agricultural consumers which have escalated to about 20 percent of itstotal revenues. This adversely affects resource availability for other important areas ofinfrastructure as well as for social services thus causing the state to lag behind insocioeconomic indicators compared with other economically advanced states in India. Thus, acomprehensive restructuring of the power sector is essential to the state’s overall economic andsocial development.

B. Sector Description and Recent Performance

1. Organization

4. India consists of 28 states and 7 union territories with a total population of over 1 billion.Its power sector is the third largest in Asia, after that of the People’s Republic of China andJapan. Installed generation capacity grew from about 2,000 megawatts (MW) in 1950 to about98,000 MW as of 31 March 2000, with an additional 12,000 MW of captive generation capacity.More than 77 million electricity consumers and about 86 percent of villages have beenelectrified. However, the annual per capita consumption was only about 360 kilowatt-hours(kWh) in FY2000, which is lower than the consumption levels of many other developingcountries.

5. The organization of the power sector is determined by India’s federal structure. TheGovernment’s Ministry of Power provides overall guidance to the sector, mainly through theCentral Electricity Authority, and owns the central power sector utilities such as the NationalThermal Power Corporation (NTPC), the National Hydroelectric Power Corporation (NHPC), theNuclear Power Corporation (NPC), and the Powergrid Corporation of India (Powergrid), andfinancing institutions such as the Power Finance Corporation (PFC) and the Rural ElectrificationCorporation. State governments control the rest of the sector through 20 state electricity boards(SEBs) and 12 electricity departments (EDs). These SEBs and EDs provide distribution facilitiesand set retail tariffs. Power generation and transmission are split between the central powersector agencies and SEBs. The central agencies own and operate 32 percent of the country’stotal generation, while SEBs and EDs have 64 percent of the total. In addition, five privateutilities in urban agglomerations have a share of 4 percent in power generation.

6. As a result of India’s federal structure, all major issues affecting the power sector requireconcurrent action by the Government and state governments. Although the structure gives theGovernment a say in the affairs of the power sectors of the states, this shared responsibilitylimits its ability to influence the power sector policies of state governments, especially withrespect to retail tariffs.

5 Per capita consumption of 650 kilowatt-hours (kWh) per annum in FY2000 compared with the national average of

360 kWh per annum.

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2. State Electricity Boards

7. Prior to the reorganization of the power sectors in the states of Orissa (1996), Haryana(1998), Andhra Pradesh (1999), Karnataka (1999), and Uttar Pradesh (2000), the power sectorin every major state was organized through its SEB. Even today, other than in these states,SEBs still control the operations of the sector. The Electricity Act of 1910 and the Electricity(Supply) Act of 1948 with their several amendments provide the legal basis for the sector’sfunctioning and utilities’ operation. These acts allow considerable managerial and financialautonomy to the SEBs, but this autonomy is often nominal as most state governments useSEBs to pursue noncommercial objectives, particularly to provide low-priced or free electricity tothe agriculture sector. Initially, this cross-subsidization was done to provide low-cost inputs foragriculture to stimulate food production and was very successful. However, that stage is nowwell past but the practice has continued largely to attract political support. State governmentsalso tend to interfere with SEBs' day-to-day operations, thus complicating the task of SEBmanagement. These interventions have led to the SEBs’ deteriorating financial health, whichhas become the central problem of India’s power sector.

8. Several years of negative internal cash generation has impoverished SEBs, impeded theconstruction of new power facilities, and restricted the funds available for maintenance andrehabilitation of existing assets, making it impossible to close the demand-supply gap. Chronicpower shortages and poor-quality power supply continue to plague the economy in almost allparts of the country. If not remedied, the unavailability of sufficient power will be the single mostimportant constraint to economic development in the coming years and will thwart efforts toattract domestic and foreign investment.

9. A reform of the power sector at the state level is urgently needed to reduce the need forsubsidies and public spending on the sector. As a result of the state governments' interferencein SEB operation and subsidies to agricultural customers, sector losses in FY1999 reachedRs63.3 billion ($1.4 billion), but were reduced to Rs45.0 billion ($1.0 billion) by subsidies fromstate governments. Power sector reform will significantly reduce claims on the country’s fiscalresources and allow additional spending on other priority sectors such as health and education,which are essential for poverty reduction.

3. Central Power Utilities

10. Until 1972, SEBs were almost solely responsible for power generation and transmissionwithin their states, but were unable to meet the rapidly increasing demand for electricity. Toimprove the efficiency of generation, three central sector agencies - NTPC, NHPC and NPC-,were established in 1975 to generate bulk power for sale to SEBs. In 1989, Powergrid wasestablished as a transmission and dispatch company by amalgamating the transmission anddispatch assets of all central power sector agencies. In addition to these wholly ownedcompanies, the Government also has shares in special-purpose generating companies such asthe Bhakra-Beas Management Board, the Damodar Valley Corporation, the Tehri PowerCorporation, the Nathpa-Jhakhri Power Corporation, the North-East Electric Power Corporation,and the Neyveli Lignite Corporation.

11. The central agencies - NTPC, NHPC, and Powergrid - are seriously affected by the poorfinancial health of most SEBs, as was evidenced several times in the past when excessiveaccounts receivable from the SEBs seriously impaired the central agencies’ financial liquidity.To resolve this problem, NTPC has, in addition to restricting supply and obtaining Government

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appropriation to settle debts of SEBs, resorted to taking over the generation facilities of SEBs insettlement of accounts receivable.6

4. The Gujarat Power Sector

12. The power sector in Gujarat comprises GEB, the Ahmedabad Electricity Company(AECO) and the Surat Electricity Company (SECO), two private sector generationand distribution licensees in the cities of Ahmedabad and Surat, respectively. Recently, about3,000 MW capacity of captive generation and of independent power producers (IPPs) has beensanctioned. The state has experienced an increase in demand for electricity of about 9 percentper annum over the last five years. This rate of growth is expected to continue inthe foreseeable future since the state has been attracting a large share of the overseas anddomestic investments made in India following the liberalization of the Indian economy in 1991.The key indicators for Gujarat’s power sector are given in Appendix 1. In FY2000 the shares ofthe various utilities in power sector operations were as given in Table 1 below.

Table 1: Comparison of Electric Power Utilities in Gujarat in FY2000

Utility Generation Share Distribution ShareMW GWh % GWh %

GEB a 4,534 23,177 53.54 29,135 85.5AECO 510 3,393 7.84 3,173 9.3SECO 0 0 0.0 1,769 5.2Central Utilities 1,532 10,058 23.24 0 0IPPs 1,785 6,658 15.38 0 0

Total 8,361 43,286 100.0 34,077 100.0

AECO = Ahmedabad Electric Company, GWh = gigawatt-hours, GEB = Gujarat Electricity Board,IPP = independent power producer, SECO = Surat Electricity Company, MW = megawatts,

a GEB owns and operates the transmission network in the state.

C. Constraints and Issues

13. During FY1999, load shedding was experienced ranging between 50 MW and 1,450 MWon 362 days of the year. Gujarat is facing an anticipated shortfall of about 7,000 MW ofgenerating capacity over the next decade and has invited private sector proposals fordeveloping over 4,000 MW of capacity over the next five years. However, the actualization ofthis investment will be constrained by the inflow of revenues into the sector and the perceptionby domestic and international investors of an efficient and impartial regulatory system. TheState Government, therefore, wishes to amend the existing legislation and regulations with aview to enacting a new law that would address the concerns of the investors as well as createa business environment conducive to improving the sector’s (i) operational efficiencies,(ii) financial viability, and (iii) service to its consumers. It proposes to do this through (i) greatercompetition at all levels of the sector wherever practicable; (ii) corporatization andcommercialization of existing sector entities; (iii) private sector participation in the generationand distribution segments; (iv) viable tariffs that enable costs to be recovered and reasonableprofits to be made; (v) an independent regulator; and (vi) transparent, reasonable, direct, and

6 As part of the agreement to make NTPC the Executing Agency for Loan 907-IND: Unchahar Thermal Power

Project, for $160.0 million, approved on 29 September 1988,ADB, the Government of India, the Government ofUttar Pradesh, and NTPC agreed to transfer the title to the 420-MW stage I to NTPC. NTPC has since taken overthe Talcher Thermal Power Station from Orissa SEB, and the Tanda Thermal Power Station from Uttar PradeshSEB.

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quantified subsidies to vulnerable sections of consumers. In 1995, GOG revised its power policyto incorporate these principles.

14. Subsidized electricity tariffs for agricultural consumers represent a key issue that has tobe addressed in reforming sector. In line with the practice in other states in India with largeagricultural production, the State Government has been providing the agriculture sector withsubsidized electricity. The rationale was that prices of agricultural outputs are controlled and thatinexpensive inputs are required to compensate for these price controls and provide an incentive toincrease agricultural production, so that India can be self-sufficient in food. This argument hasdistorted the pricing of electricity in Gujarat to such an extent that the electricity tariffs for theindustrial and commercial sectors are higher than the long-run marginal cost of power supply,while the tariff for about 0.5 million agricultural consumers, prior to October 2000, wasRs350 ($7.50) per horsepower of load connected per year,7 which in FY2000 led to a revenuerealization of only Re0.15 per kWh ($0.003 per kWh).

15. Based on the cost of new generation, each incremental kWh of agricultural consumptionrequires a subsidy of at least Rs2.00 per kWh ($0.04 per kWh) for generation plus an additionalRe1.00 per kWh ($0.02 per kWh) for transmission and distribution. This situation has resulted in(i) GEB not having resources to finance its expansion to meet unserved demand; (ii) agriculturalconsumers not receiving a signal that electricity is a scarce resource and, accordingly, notconserving it; (iii) other consumer groups, particularly industrial consumers, paying high tariffs thatimpair their competitiveness and consequently establishing their own generation facilities, erodingGEB's consumer mix; and (iv) GEB being unable, without subsidies from the State Government,to earn a return on its investments as prescribed by law. The provision of heavily subsidizedelectricity to agriculture consumers has boosted its share of consumption from 16.7 percent of allelectricity sold in the state in FY1971 to 43.0 percent in FY2000. The loss incurred by GEB on thisaccount is estimated at Rs14.0 billion ($0.3 billion) during FY2000.

16. As a result of efforts made by the National Development Council (NDC)8, a high-levelcommittee on power was constituted in June 1993. In its report submitted in October 1994,the committee recommended (i) organizational reforms at the state level: commercialization, andunbundling of generation, transmission, and distribution of the SEBs; (ii) organizational reforms atregional and national levels to strengthen the role of the central sector agencies, freeing themfrom government control, allowing them to implement new projects on a joint-venture basis withthe private sector, and ultimately reducing Government's equity in them to not more than26 percent; (iii) large-scale involvement of the private sector in generation and distribution, withthe sponsors selected through transparent and competitive bidding procedures; (iv) depoliticizingelectricity tariff setting by creating a national tariff board for regulating bulk tariffs at the nationallevel and regional tariff boards for regulating bulk and retail tariffs for both public and privateutilities at the state level; and (v) progressive phasing out of subsidies to agricultural consumers,with a minimum tariff of not less than 50 percent of the average cost of supply to be introduced inthe first phase.9 These recommendations had been renewed in the meetings of NDC in Octoberand December 1996 and a document titled Common Minimum National Action Plan for Powerwas published by the Government based on the last meeting. However, not much progress hasbeen achieved in these reform areas to date.

7 GEB does not meter its agricultural consumers; hence, tariff is based on connected load.8 NDC is India's highest political body. It is chaired by the Prime Minister and comprises the Chief Ministers of all the

states in India.9 In the previous reports and conclusions of the conferences of power ministers, reference was made to a minimum

agricultural tariff of Rs0.50 per kWh ($0.011 per kWh). The general call for such a minimum tariff has become largelya political issue because the figure of Rs0.50 per kWh has no logical basis other than it is higher than the current tariff.To date, only seven states have increased the electricity tariff for agricultural consumers to this level.

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17. Two other major points in the sector’s restructuring are (i) introducing private sectorparticipation in the power sector, and (ii) reforming of SEBs. On account of the dualistic natureof the Indian power sector, all fundamental changes have to be effected through a politicalconsensus between the Government and the state governments. In 1991, the Governmenteffected major amendments to the Electricity and Electricity (Supply) Acts, which enabled thestate governments to invite private sector investment in generation and distribution. Althoughthe response from the investor community has been very positive, the states have not been ableto capitalize on this sentiment on account of the noncommercial environment of the sector andlack of a transparent and fair regulatory mechanism. For a start, with assistance from the WorldBank, ADB, and other aid agencies, the state of Orissa in 1995 enacted comprehensivelegislation that allowed separation of Orissa SEB’s generation, transmission, and distributionfunctions (i.e., unbundling); corporatization of the sector entities; and appointment of anindependent regulator for the sector. However, this start has not been without its share ofproblems. Lack of competitive standards in the power sector, an emphasis on privatization forits own sake rather than for effecting improvements in quality of supply and consumersatisfaction, the seeking of higher returns on investment without corresponding improvements insupply, and improper sequencing have undermined the gains made in non-political andtransparent tariff setting and private sector participation in generation and distribution.

D. State Government Expenditure

18. Under the Ninth Five-Year Plan (FY1998-FY2002), the State Government plans to getinstalled an additional 4,300 MW of generating capacity. Of this, GEB will install only fourthermal generating units for 460 MW, and IPPs will install about 4,000 MW of the additionalcapacity. GEB is making the necessary investment in transmission and distribution under theNinth Plan to evacuate the output power from new generation units and to transmit anddistribute to customers. The investment includes 1,604 circuit kilometers (cct-km) of 400 kilovolt(kV) transmission lines, 5,475 cct-km of 220 kV transmission lines, 3,100 megavolt amperes(MVA) of transformer capacity in 400 kV substations, and 5,300 MVA transformer capacity in220 kV substations. In the Ninth Plan the State Government proposes to invest Rs37.0 billion($0.8 billion) for developing of its power sector. This allocation represents an increase of41 percent over the allocation for the Eighth Five-Year Plan at Rs26.25 billion and reflects theincreased priority on this sector in the State Government’s plans. Within the sector, the planreveals a strong emphasis on upgrading the transmission and distribution network with about 69percent of the total allocation. The phasing and allocation of the proposed outlay are presentedin Table 2 .

Table 2: Power Sector Allocation in Gujarat’s Ninth Plan (FY1998-FY2002)(Rs million)

Item FY1998 FY1999 FY2000 FY2001 FY2002 Total Percent Hydro Generation 46 53 106 95 0 299 0.9 Thermal Generation 2,233 3,137 1,938 2,160 1,530 10,998 29.7 T & D a 3,746 4,708 4,886 4,780 5,500 23,621 63.7 Rural Electrification 230 325 524 510 510 2,109 5.6 Others 6 12 9 15 20 62 0.2

Total 6,261 8,245 7,463 7,560 7,560 37,041 100.0a Transmission and distribution.

19. This level of investment will be adequate to fulfill demands for electricity only if about4,000 MW of capacity ($4 billion of investment) is installed by the private sector during the planperiod. Given the negative returns now being made by GEB in the transmission and distributionsegments of the business on account of the highly subsidized agricultural tariffs, revenues will

7

not be sufficient to service this additional investment, irrespective of whether the distributionsystem is privatized or not. Thus, the key to the sustainability of operations in the sectorinvolves changing the business environment and rationalizing tariffs.

E. The State Government’s Objectives and Strategy

20. The State Government aims to create a business environment that would be conduciveto improving the sector’s (i) operating efficiencies, (ii) financial viability, (iii) service to itsconsumers, and (iv) conservation of electricity. It proposes to do this by (i) encouraging andfacilitating private sector participation in power generation and distribution and fostering atransparent and competitive environment with equal opportunities for the public and privatesectors; (ii) optimizing the operations of the power utilities; (iii) tariffs based on commercialprinciples that enable costs to be recovered and reasonable returns to be made on investments;(iv) independent regulation and tariff setting backed up by statutory provisions; and(v) transparent, reasonable, direct and quantified subsidies to targeted sections of consumers.The State Government wishes to comprehensively amend the existing legislation, regulations,and tariffs on the subject to bring into effect the above principles. It issued a comprehensivepower policy document in December 1995 followed by a Letter of Intent to ADB in March 1996.After detailed discussions with ADB as part of the policy dialogue associated with the SectorDevelopment Program, the State Government submitted its development policy letter (Appendix2), which includes a policy matrix.

F. External Assistance to the Sector

21. The power sector has received a major portion of India's external assistance. Of ADB’stotal Government-guaranteed lending to India amounting to $7.968 billion as of 31 October2000, seven loans for $1.505 billion (19 percent) had been approved for the power sector. Thefirst four projects were for power generation; the three most recent have been sector loans tosupport improvements in the efficiency of SEBs and development of the national transmissiongrid. In addition, ADB's private sector group (PSG) has approved three loans and investmentstotaling $79.8 million for one captive transmission and two generation projects 10. Powersubprojects have also been considered for financing under ADB's private sector infrastructurefacility11 and the Infrastructure Development Finance Company12. ADB also approved$12.2 million for 18 TAs, mainly advisory, at both the national and state levels. The TAs havefocused on environmental and pollution control issues related to power generation, bulktransmission tariffs, improving least-cost system planning, tariff studies at the retail level,improvement of technical and commercial operations, power sector restructuring, andestablishment of an independent regulatory authority. Previous ADB assistance to the powersector in India is listed in Appendix 3.

22. The major funding source to the sector is the World Bank group. NTPC, the WorldBank's largest client worldwide, has been a major beneficiary of this assistance. The WorldBank has supported power generation, transmission, and distribution projects, includingassistance directed to SEBs. ADB coordinates with the World Bank on the geographical

10 Loan 7058/1036-IND: CESC Limited, for $17.8 million, approved on 4 October 1990; Loan 7082/1142-IND: CESC

Limited II, for $32.0 million, approved on 13 December 1991; and Loan 7130/1499-IND: Balagarh Power CompanyLimited, for $15 million in equity and a loan of $25 million, approved on 5 December 1996.

11 Loan 1480-IND: Private Sector Facility: Industrial Credit and Investment Corporation of India Ltd.; 1481-IND:Private Sector Infrastructure Facility: Industrial Finance Corp. of India Ltd.; 1482-IND: Private Sector InfrastructureFacility: SCICI Ltd.; for a total of $300 million, approved on 7 November 1996.

12 Investment 7138-IND: Infrastructure Development Finance Company, for $30 million equity investment, approvedon 14 October 1997. The loan amount was subsequently reduced to $15.463 million due to greater than expectedsubscription from the investors.

8

demarcation of state-level operations, as well as to ensure overall complementarity of actions atboth the central and state levels. ADB and the World Bank have concurrent ongoing operationsfor different projects with three organizations: PFC, Powergrid, and NTPC. Other majoragencies funding the sector are the Japan Bank for International Cooperation (JBIC),Kreditanstalt für Wiederaufbau (KfW, for the Government of Germany), the Department forInternational Development of the United Kingdom (UK) (DFID), the Canadian InternationalDevelopment Agency (CIDA), and the United States Agency for International Development(USAID). Although the combined assistance of all aid agencies constitutes only about 8-10percent of the total investments in the sector, several key policy initiatives have been catalyzedas a result of this assistance. Major external assistance provided to the power sector by otheraid agencies is also listed in Appendix 3.

23. The World Bank is supporting power sector reforms in the states of Andhra Pradesh,Haryana, Orissa, Rajasthan, and Uttar Pradesh. In Andhra Pradesh and Uttar Pradesh, powersector reform is viewed as part of overall reform of state finances as is being supported by ADBin Gujarat and Madhya Pradesh.

24. JBIC is supporting the expansion of public sector generation, transmission, anddistribution including rural electrification. It has no geographic preferences.

25. DFID’s exclusive objective in providing assistance is poverty reduction. It is financingstudies for restructuring the power sector in Andhra Pradesh, Haryana, and Orissa. It has noplans to participate in financing hardware other than in renewable energy systems. It hasoffered to cooperate with ADB in funding studies for power sector restructuring in MadhyaPradesh and West Bengal and to assist these states in other areas also, such as the socialinfrastructure sectors.

26. USAID has extensively supported and continues to support policy aspects of privatesector participation. It has supported studies for state sector reforms through PFC, and throughprovision of grant assistance for energy management, conservation, and training. It is workingwith ADB and PFC for studies in Assam, Punjab, and West Bengal.

27. CIDA has assisted Kerala in conducting extensive studies for restructuring its powersector, and is working with ADB in conducting such studies in Madhya Pradesh, and with theWorld Bank in Andhra Pradesh. ADB is following up on CIDA's work in Kerala through its policydialogue and preparations for a possible loan project.

28. The broad policy content of the Sector Development Program has been discussed withall the aid agencies that have supported activities associated with sector reforms at the centraland state levels. All agencies have expressed general support for it.

G. ADB’s Country and Sector Strategy

1. Lessons Learned

29. The operations of ADB and other aid agencies in the power sector in India havegenerally been successful from a project point of view; i.e., the projects concerned have beencompleted, although with implementation delays, and performed to the desired technical levels.However, except for the ongoing loans to Powergrid13, these projects were not designed tochange the business environment, and sector performance has continued to deteriorate,

13 Loan 1405-IND: Power Transmission (Sector) Project, for $275 million, approved on 16 November 1995 and

Loan 1764-IND: Power Transmission Improvement (Sector) Project, for $250 million, approved on 6 October 2000.

9

although the operations of the project components, taken individually, were satisfactory. Thiswas primarily on account of (i) politicized tariff setting; (ii) rapid growth of the demand forelectricity, making conventional investment strategies unworkable; (iii) government rules andregulations and control of the SEBs that inhibited speedy decision making; and (iv) thenoncommercial setup of the sector that did not generate the market for alternative players tostep in to bridge the gap between supply and demand.

30. In the past, ADB extended assistance to discrete power projects in various states as wellas to the central power sector agencies. Although the policy enabled ADB to support manyprojects, it spread ADB's resources too thinly, with the result that it could not achieve its desiredgoal of policy reforms with its power sector borrowers. In most states, the power sector was thelargest recipient of state resources in terms of both subsidies and capital investments, and itwas realized that macro management of the state's finances needed to be improved for thesuccessful turnaround of the power sector. Therefore, ADB is now assisting selected states forpower sector reforms only in the context of a holistic change in their macroeconomicmanagement.

2. Operational Strategy

31. ADB’s operational strategy in India is to support efforts to achieve higher sustainableeconomic growth to promote employment and reduce poverty. Its contribution to higher growthfocuses on improving the supply side efficiency of the economy, especially by reducingbottlenecks in key infrastructure sectors. Emphasis is on improving the policy, institutional, andregulatory framework so as to enhance the efficiency of public sector operations and toencourage private investment. Improving resource mobilization to finance the necessaryinvestments is a key component of ADB’s assistance, and includes support for developing offinancial and capital markets as well as for improving internal resource mobilization in the sectoragencies and enhancing their creditworthiness. High priority is also given to assisting projectsthat contribute to environmental improvement.

32. ADB's strategy for India was revised in 1996 to accommodate an urgent need for aportion of its assistance to be provided in a systematic and comprehensive way at the sub-national or state level. This need reflects the facts that (i) a geographic focus, together with theongoing selective sector focus, enables ADB to maximize its developmental impact both in thestates concerned and, through the demonstrational impact of its operations, in other states aswell; (ii) state-level economic reforms, which have been lagging behind initiatives takenby the Government, need support and incentives; and (iii) the states have considerableautonomy and have major legislative, administrative, and fiscal responsibilities in manyeconomic and social sectors. Key elements of the subnational assistance include (i) improvingthe states' public resources management, (ii) reforming and restructuring public sectorenterprises to improve operating efficiencies, and (iii) supporting reforms in key infrastructuresectors with a view to increasing private investment. Gujarat was the first state chosen for thistype of holistic support and the first loan was granted by ADB in December 1996 (footnote 1).Madhya Pradesh was the second focal state and its loan was accorded in December 199914.

33. Reflecting ADB’s overall country strategy for India, and in recognition of the dualisticstructure of India's power sector, ADB's strategy for the sector, which has been pursued incoordination with the World Bank, intends to operate at two levels. At the central level,assistance to central power sector companies such as Powergrid (footnote 13) and PFC15 aims

14 Loan 1717-IND: Madhya Pradesh Public Resource Management Program, for $250 million, approved on

14 December 1999.15 Loan No. 1161-IND: Power Efficiency (Sector) Project, for $250 million, approved on 26 March 1992. The loan

account was closed on 18 December 1998.

10

to support their commercialization and use them as agents to leverage reform in their clientSEBs. Through Powergrid, ADB also seeks, at the central level, to implement nationwide powersector reforms by establishing of model cases in tariff structures, competitive pool operations,regulating power supply to delinquent SEBs, and investments based on commercial viability ofprojects. At the state level, ADB is building up the reform process from the grassroots byconsidering assistance only for states that demonstrate the political will to substantiallyrestructure and commercialize their power sectors, and by assisting them to actualize thereforms. Gujarat, Madhya Pradesh and Kerala have been identified for ADB’s holistic support.Improvements in the power sector will increase the fiscal space of the state governments andincrease their ability to allocate more resources for poverty reduction and socioeconomicdevelopment.

IV. THE SECTOR DEVELOPMENT PROGRAM

A. Rationale

34. A comprehensive program of reform-oriented studies has been initiated through ADB'stechnical assistance.16 As a subset of the total reforms and GEB’s proposed investments in theNinth Plan period (FY1998-FY2002), the Sector Development Program seeks to further the keyobjectives of the reform process that will mobilize greater resources for the power sector to enablerealization of, and a possible increase in, the total investment. It includes support and incentivesfor restructuring the power sector as program assistance, and support for actual investments forevacuation and distribution of power from proposed private sector IPP generation projects as wellas in hitherto relatively neglected areas of metering, energy end-use management, and systemloss reduction.

35. The Program has been designed to reduce GEB’s operating costs, raise additionalrevenues and progressively eliminate the need for transfers from the State Government'sbudget, allow the expansion of power supplies using private generating capacity, and improvethe environmental consequences of power use. It will support economic growth in the state,particularly in industry, and sustain production in agriculture. It will also shift the focus of theState Government's expenditures from power supply to other responsibilities, for example, in theeducation and health sectors.

36. The Sector Development Program seeks to establish a business environment in thepower sector that promotes efficiency and growth and to support critical investments required tobuild up on the new environment that is created. Since both facets of development are importantfor the success of the reforms, the sector development assistance modality has beenconsidered.

B. Objectives and Scope

37. The immediate objectives of the Sector Development Program are to provide support andincentives to the State Government and GEB for (i) sector reform activities such as independenttariff setting, tariff rationalization, and functional segregation of GEB’s activities; (ii) establishingtransmission systems linked with IPP generation projects; (iii) modernizing and upgradingdistribution systems, especially those in the Anand, Rajkot, and Mahesana distribution circles; and(iv) water and electricity conservation measures. The entire exercise is geared to improve the

16 The studies include (i) preparation of a power system master plan; (ii) preparation of a framework for electricity

tariffs; (iii) review of electricity legislation and regulations; (iv) financial support to GEB for formation of twoindependent distribution profit centers; and (v) solicitation for private sector implementation of the Chhara Project.

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power sector’s financial and economic viability over the next five years to ensure sustained growthof the sector. Appendix 4 shows the Sector Development Program framework. TA for reorganizingof GEB, consultation with electricity consumers, and supporting the Gujarat Electricity RegulatoryCommission (GERC) are part of the Sector Development Program.

C. Policy Framework and Actions

38. The Sector Development Program will assist Gujarat in effecting matching reforms to takeadvantage of the 1991 policy of the Government. To make its interventions more policy orientedand focused, it concentrates assistance in the power sector to a state that is undertaking reformsin its macro finances and has agreed to restructure its power sector and includes comprehensive,albeit gradual approach to restructuring the sector allowing for development of (i) successororganizations to GEB, (ii) a commercial culture, (iii) consumer benefits in terms of quality ofsupply, and (iv) rationalized tariffs and duties.

39. ADB has been conducting policy dialogue on the Sector Development Program at threelevels; (i) with the Government on countrywide changes that need to be done to prepare anenabling framework for sector reforms; (ii) with the State Government for the policy aspects ofthe reforms in the state; and (iii) with GEB for the Project and organizational aspects of thereforms. The issues discussed are as follows.

1. Metering

40. At present, agriculture and socially disadvantaged consumers are provided electricitywithout meters on the premise that the revenues realized from them do not justify the costsincurred in installing meters and using them. However, this practice has led to a sharp increase inconsumption from such connections, a large part of which is theft of electricity. A recent surveyindicates that over 43 percent of GEB's sales is through unmetered supply. Hence, installation ofmeters on all consumer connections is a priority for GEB.

2. Private Sector Participation

41. One of the main objectives of the Sector Development Program is to facilitate privatesector participation in the power sector in Gujarat. It is expected that structured introduction ofsuch participation will (i) provide additional capital, (ii) lead to greater commercialization in thesector, (iii) improve operational efficiencies in the sector, and (iv) provide a competitiveenvironment. Structuring this participation is essential to realize the stated benefits since it isimportant that the profit motive of the private sector be appropriately channeled. Gujarat hashad a long tradition of private sector generation and distribution, but on account of aninadequate business environment, the investments have not been as efficient as they shouldbe. Restructuring requires three key actions: (i) formulation of a least-cost expansion plan thatdovetails investments from both the public and private sectors so as to maximize the overallbenefits of investments; (ii) setting up a tariff regime that does not distort costs and prices sothat market-driven indicators are provided to optimize operations; and (iii) creating a statutoryregulatory authority independent of the State Government that ensures freedom of entry into themarket, transparent procedures, nonpartisan resolution of disputes, and fostering ofcompetition.

3. Electricity Rates to Agricultural Consumers

42. Currently, GEB charges a “per horsepower installed” flat tariff to its agricultural consumers.Since there is no incremental charge based on the actual withdrawal of energy, there is no

12

incentive to conserve electricity. A major social disbenefit caused by this scheme is theindiscriminate use of groundwater by farmers in the relatively dry northern districts of the State togain short-term benefits of higher cropping yields per acre through multicropping and growingwater-intensive cash crops instead of the traditional dry area crops grown earlier. As a result, thewater table has dropped from an estimated 10-12 meters (m) below ground in the 1970s to anaverage of 150-200 m today and is dropping by an estimated 12 m every year. The water nowcontains heavy traces of fluorides and other minerals, and it is feared that in two or three years thewater may turn saline, thereby severely and permanently damaging soil quality and erodingagricultural activity in the area. Lowering of the water table has also increased the consumption ofelectricity per acre of irrigated land since more energy is required each year to pump up the samequantity of water. Hence, for the Sector Development Program, the issues of water conservationand electricity conservation have become inextricably linked. ADB Missions visited severalvillages in Mahesana district in north Gujarat and discussed the issue with about300 representatives of the farming community. The Missions' impression is that (i) many farmersin this district would not mind paying higher rates for electricity provided the quality and reliabilityof power supply improved; and (ii) farmers were hoping that some agency will show themalternative techniques of conserving water while maintaining their current levels of production andincome.

43. The only option available that would fulfill the needs of water and energy conservation,protect the earnings of the farmers and improve the financial viability of the sector is to helpfarmers change the method of irrigation from the present “flood irrigation” technique to “dripirrigation” which has been successfully practiced in dry areas such as Israel and southwest UnitedStates. Some small schemes have also been implemented in Rajasthan and Gujarat withsuccess. The Program, therefore, includes assistance for a pilot scheme for converting ofirrigation systems in Mahesana district.

4. Delegation of Powers to Independent Profit Centers

44. While generation and transmission are activities that are remote from the end users ofelectricity, distribution is closely linked to its consumers. Hence, for improvements to be effected inthis segment, effective delegation of administrative decision-making needs to be made to themanagers that are directly responsible. To make a beginning in this respect, GEB created pilotindependent profit centers at Kheda (Anand circle) and Rajkot. GEB has since delegated thefollowing powers to the superintending engineers (managers) of the centers. The managers ofeach center will be directly accountable for its performance and the manager and the staff will begiven with incentives for good performance.

(i) Procurement. Materials to be procured by GEB headquarters (HQ) will be listed.Except for items on this list, the centers will be allowed to procure all necessarymaterials and sufficient financial powers will be delegated for such procurement.Further, there should be a maximum waiting time for supply of materials by GEB(HQ) to any indent from the centers, even for items on the list of materials to beprocured by GEB (HQ). If GEB (HQ) cannot satisfy the indent in a given time, or incase of an emergency, the centers should be allowed a much higher level ofauthority to effect their own procurement.

(ii) Money Transfers. Based on the approved budget for the year, the centers willwithhold the required funds from their collections, instead of the present practice ofsending in all money collected to GEB (HQ) and then having their funds transferredback. The centers will be debited for all electricity sold to them at 66 kV and alsofor all the materials supplied to them by GEB (HQ). If any non-remunerative work is

13

requested to be undertaken by the centers, GEB (HQ) will pay for the works aswell as the differential revenue loss to the centers for the operation andmaintenance of such schemes.

(iii) Personnel matters. Once GEB (HQ) selects the superintending engineers(managers) of the centers, they will not be transferred or recalled until theycomplete their tenures, except in the gravest of circumstances. Important postingsof officers and staff to the centers will be made by GEB (HQ) only after consultingwith the concerned manager. Further, GEB (HQ) will withdraw from the centers allstaff identified by the managers as redundant, undesirable or inefficient. Themanagers will be provided an annual operations and maintenance budget, whichmay be used for salaries or equipment and facilities. Further, managers will havethe flexibility to reorganize their divisions to extract more efficiencies and may eveninterchange categories of staff.

(iv) Priority. GEB will give priority to the centers for all support as well as for reliablepower supplies up to the extent of the electricity paid for by them.

5. Rationalization of Electricity Duty

45. Prior to FY1998, there was a high level of electricity duty on GEB's supplies to hightension (HT) and low tension (LT) industrial consumers (averaging about Re0.50 per kWh)whereas captive generators paid a much lower rate (averaging at about Re0.05 per kWh after aduty-free concession period of 10 years). This put GEB at a disadvantage in retaining its industrialconsumers, especially in the wake of the liberal licensing policies for captive generation adoptedby the state, which provides other benefits such as sales tax waivers on finished products, andhigher depreciation rates. Apart from cross-subsidization in the agriculture sector, the burden ofwhich was principally borne by GEB’s industrial consumers, this was the main factor leading toincreasing captive generation in Gujarat which has reached a sanctioned capacity of 3,100 MWas of 31 March 2000. The State Government has since raised the rate of duty on electricityproduced by captive generators to Re0.2-0.4 per kWh and has agreed to reduce electricity dutyon GEB for its sales to its industrial consumers to make competition fair to GEB.

6. Governance

46. Tariff setting in the power sector in Gujarat has been heavily politicized, with agriculturalconsumers being heavily subsidized. This has led to distortion in consumption and avoidablewastage of both electricity and water. There is an urgent need to depoliticize and rationalizetariffs if the sector's operations are to be viable. Competition in the sector has also beenunstructured and loose as often happens in a near monopoly. Power purchase agreementshave largely been negotiated and there is no competition among similar business segmentswithin the organization. Management of the sector is another key issue. GEB's management[other than its Member (Technical)] comprises political and bureaucratic deputies appointed bythe State Government. Transfers are frequent and there is little attempt at taking long-termperspectives on organizational development and strategies. The solution to these governance-related issues is to (i) reorganize the sector along functional lines; (ii) appoint an independentregulatory commission to set tariffs and structure competition in the sector; and (iii) graduallyreplace appointees of the State Government on the boards of management of the sectorcompanies with experts. As a consequence of this policy dialogue, the State Government(i) established GERC in 1998 under the Central Acts, (ii) agreed to restructure the sectorgenerally along functional lines either, and (iii) agreed to progressively professionalize themanagements of sector entities.

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D. The Investment Project

1. Project Description

47. The investment project has four components (details are in Appendix 5):

(i) Part A. Transmission lines and substations linked with IPP power projectsand for system improvement.

(ii) Part B. Transmission lines and substations associated with Anand, Rajkotand Mahesana distribution circles.

(iii) Part C. Upgrading and strengthening of distribution systems especially inAnand, Rajkot, and Mahesana distribution circles.

(iv) Part D. A pilot scheme for energy and water conservation by convertingexisting flood irrigation systems to drip irrigation systems in Mahesanadistrict.

2. Cost Estimates and Financing Plan

48. The summary cost estimates of the Project are in Table 3 (details are in Appendix 6).

Table 3: Cost Estimates($ million)

Item Foreign Exchange Local Currency Total Cost

Project ComponentsPart APart BPart CPart D

Subtotal Base Cost (Oct 2000)

72.9 20.0 56.9 7.8157.6

37.813.525.1 2.679.0

110.733.582.010.4236.6

ContingenciesPhysical a

Price b

Subtotal

15.8 9.1 24.9

7.98.015.9

23.717.140.8

Interest During Construction 17.5 15.3 32.8

Total Project Cost 200.0 110.2 310.2

a Computed at 10 percent of base cost.b Computed on the basis of 2.4 percent foreign currency inflation and 6.5 percent local currency inflation.

49. The proposed financing plan for the Project component is summarized in Table 4.

15

Table 4: Financing Plan for Project Component($ million)

Forei gn Exchan ge Local Currency Total Cost Percent

ADB 200.0 - 200.0 64.5

GEB - 110.2 110.2 35.5

TOTAL 200.0 110.2 310.2 100.0

ADB = Asian Development Bank, GEB = Gujarat Electricity Board, - = magnitude zero.

E. Environmental and Social Measures

1. Environment

50. The Sector Development Program has been classified as category B and a summary ofthe initial environmental examination (SIEE) report is given in Appendix 7. Of the various projectcomponents, minor land acquisition and tree cutting are required only for transmission lines andsubstations. The Project has no long-term negative environmental impacts.

51. During Project implementation, GEB will submit to ADB an annual report consisting of(i) monitoring results; and (ii) copies of permits, licenses, and clearances that may be issued bythe Gujarat State Pollution Control Board and other state and national agencies responsible forenforcing of environmental safety regulation and standards. If any project component is cited forviolating laws or standards, the report will include a certification from the relevant agency that thedefect has been corrected or that a time-bound action plan for its correction has been accepted.

52. No significant rehabilitation or resettlement is required for the Project. Specific LandAcquisition and Resettlement Plans (LARPs) to be applied by GEB (or its successor entities) tocompensate those affected by the Project will be drawn up for each component during projectexecution since they can be determined only at the time of actual construction.

2. Social Dimensions

53. The Sector Development Program is designed to promote economic growth by increasingelectricity supply in Gujarat, including the rural areas. It will provide a reliable and quality powersupply, thereby improving industrialization. As a result of faster economic growth due to thegrowth of industry and commerce, employment opportunities are expected to expand, thuscontributing to poverty reduction. Reliable electricity supply will also enhance education, health,and other social infrastructure facilities directly and indirectly. Moreover, since the funds currentlyused to subsidize the power sector will be available for social sector users, the poor will directly bebenefited. Small residential consumers will not be affected since the tariff system incorporates hasa lifetime rate of Rs2.70 per kWh for the first 50 kWh of consumption.

54. During the preparation of the Sector Development Program, GERC held consultationswith the major consumer groups and representatives, including farmers, household heads, andindustrialists. While their views on the tariff structure vary, inefficiency was found to be acommon concern. Transparency in electricity consumption and cross-subsidy provision was amajor concern of industrial and household consumers. There was a strong demand for aplatform to continue the dialogue with GERC/GEB, and the need for educating consumers andtheir raising awareness was suggested. In addition to informing the consumer groups of reform

16

actions and their implications, and seeking feedback from them, consumer education shouldinclude energy conservation and environmental concern.

55. Among the farmers’ groups, water availability is the major concern. It was reported thatthe water table in a village has been dropping an average of 4.5 to 6 m every year and the watertable is now 150-200 m below the ground compared with 60-75 m a decade ago. Farmers areaware of water scarcity and the need for conservation; however, the current per horsepowerinstalled flat tariff gives them little incentive to conserve water. In fact, it drives them toindiscriminate use of groundwater. This causes a vicious cycle of water wastage anddegradation. Sole dependence on the tubewell makes it difficult for farmers to diversify theirfarming. Therefore, the proposed pilot project on drip irrigation will have a positive outcome interms of efficient water use and shift of cultivation to high-value crops.

56. A poverty impact assessment is given in Appendix 8. Tariff increase on agriculturalconsumers may result in a short-term negative impact. However, the impact on the small andmarginal farmers may not be serious, since at present these farmers, who do not own tubewells, buy water from large farmers at a high rate. The richer farmers tend to control watersupply in rural areas, and the small and marginal farmers do not necessarily benefit from thecurrent subsidies. Rationalizing the tariff structure will increase efficiency, and will give endusers water equitable access to water. Overall, the Sector Development Program will have abeneficial impact on the poor.

V. THE LOANS

57. ADB will provide two loans totaling $350 million from its ordinary capital resources(OCR) to the Government, as the Borrower for forwarding to the State Government and GEB (orits successor entities with the prior approval of ADB). The loans will carry interest at the ADB’spool-based variable lending rate for US dollar loans, and will also be subject to a 1 percentfront-end fee, as well as applicable commitment charges in accordance with ADB's policy onOCR loans. The loans are (i) a Program Loan of $150 million with a maturity of 15 yearsincluding a grace period of 3 years, to be disbursed in three equal tranches of $50 million eachupon compliance with policy conditions as specified in paras. 65-67, and (ii) a Project Loan of$200 million with a term of 20 years including a 5-year grace period.

A. The Program Loan

1. Amount, Terms, and Sources of Funds

58. The Program Loan of $150 million will be provided from ADB's OCR resources. Thecounterpart funds to be generated from the loan proceeds will be transferred from theGovernment to the State Government under normal arrangements for the transfer of externalassistance. The funds transferred to the State Government will be treated as “additional” to theGovernment's transfers allocated annually to the State Government. The Government will bearthe foreign exchange risk on the loan.

59. The State Government is expected to incur the following costs of adjustments over thereform period.

(i) Rationalizing of electricity duty is expected to cause a revenue loss of aboutRs1,500 million ($33 million) each year in the next five years for a total of$165 million.

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(ii) Long-term loans to GEB to retire expensive commercial debt and adjust IPP priceswill be about Rs2,000 million ($43 million).

(iii) Payment of arrears of dues of municipalities and other local bodies until FY2000will cost about Rs700 million ($15 million). It is expected that in FY2001, anadditional $5 million may be required.

(iv) About 700,000 consumer meters will be procured and installed over the next threeyears. While the meters will be procured under the Project, their installation will befinanced by the State Government. At $10 per meter, this works out to $7 million.

60. The total cost of adjustment to be incurred by the State Government over the reformperiod is estimated at $235 million. It is felt that the Program Loan of $150 million is adequate andjustified considering the cost of adjustments incurred by the State Government on account of thereforms and the political costs it will incur during implementation.

2. Executing Agencies

61. The Executing Agencies will be the Finance Department and the Energy andPetrochemicals Department of the State Government.

3. Procurement and Disbursement

62. The proceeds of the Program Loan will be utilized to finance the full foreign exchangecosts (excluding the local duties and taxes) of imports produced in and procured from ADB’smember countries, other than those specified in the list of ineligible items (Appendix 9) andimports financed by other bilateral and multilateral sources. All procurement will be throughnormal commercial practices in case of procurement by the private sector, or prescribedprocedures acceptable to ADB in the case of procurement by the public sector, having dueregard for the principles of economy and efficiency.

4. Counterpart Funds

63. Counterpart funds generated by the Program Loan will be transferred by theGovernment to the State Government and will be used by the State Government underarrangements satisfactory to ADB, to support the financial restructuring of GEB and adjustmentcosts associated with the Sector Development Program, including (i) reduction of the accountspayable of GEB to power producers and suppliers of fuel and transport, (ii) retirement of theexpensive commercial debt of GEB, (iii) payment of outstanding municipal dues,(iv) rationalization of electricity duty, and (v) reduction of IPP tariffs through buyout of debt.

5. Monitoring and Tranching

a. Tranche 1: $50 million

64. The first tranche of $50 million of the Program Loan will be released upon fulfillment ofthe following actions. This release is anticipated in December 2000.

(i) establishment of the GERC;

(ii) approval of the Gujarat Electricity Industry (Reorganization and Regulation) Bill,2000 (the Bill) by the State Government’s Cabinet, and its submission by theState Government to the Government for its approval;

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(iv) first tariff award by GERC;

(v) incorporation and establishment of Gujarat State Electricity Company Limited(GSECL) and Gujarat Energy Transmission Company Limited (GETCL).Constitution of their boards of directors, with at least two directors being fromnon-governmental sector who are experts in their related fields;

(vi) circulation by GEB of a draft action plan to meter all consumers for consumerconsultation, in accordance with GERC’s order of 10 October 2000;

(vii) approval by the State Government of the structure, human resources, andbudget of GERC for the next five years; and

(viii) payment by the State Government of all municipality dues owed to GEB up to 31March 2000.

b. Tranche 2: $50 million

65. The second tranche of $50 million of the Program Loan will be released upon fulfillmentof the following actions. This release is anticipated in June 2001.

(i) transfer of Gandhinagar and Utran power stations from GEB to GSECL;

(ii) offset of subsidy and subvention arrears owed by the State Government to GEBuntil 31 March 2000, and payment of outstanding municipality dues by the StateGovernment to GEB until 31 March 2001;

(iii) introduction of the Bill in the Gujarat State Assembly for its consideration;

(iv) rationalization and reduction of electricity duty in the State Government’s budgetfor FY2002, in an amount not less than Rs1,500 million; and

(v) filing by GEB before GERC of the action plan to meter all consumers in the state,in a phase manner over a period of three years from 10 October 2000, the dateof GERC' first tariff award.

c. Tranche 3: $50 million

66. The third tranche of $50 million of the Program Loan will be released upon fulfillment ofthe following actions. This release is anticipated in June 2002.

(i) transfer of transmission assets from GEB to GETCL;

(ii) agreement between the State Government, GEB, and ADB on theReorganization Plan for GEB and solicitation for privatization of at least oneidentified distribution area of GEB, unless contrary to the Reorganization plan;

(iii) the rules and regulations under the Bill as enacted (the Act) laid before theGujarat State Assembly and published in the Official Gazette;

(iv) second tariff submission by GEB to GERC; and

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(vi) establishment and operationalization of GERC under the Act.

B. The Project Loan

1. Amount of Loan, Terms, and Source of Funds

67. The Project Loan of $200 million will be provided from ADB's OCR resources. The loanproceeds will be transferred by the Government to the State Government under normalarrangements for transfer of such external assistance and will be treated as “additional” to theGovernment’s normal transfers to the State Government. The State Government will onlend theloan proceeds to GEB, under a subsidiary loan agreement, at an interest rate of 12 percent perannum with a term of 20 years, including a grace period of 5 years. The interest rate of12 percent per annum is in line with the interest being charged by commercial institutions inIndia for lending to power utilities. The Government will bear the foreign exchange risk on theProject Loan.

2. Implementation Arrangements

68. GEB (or its successor entities with prior agreement of ADB) will be the Executing Agencyfor the Project. Separate groups have been created in GEB to implement the project components.GEB assisted by its Planning Group will monitor the implementation of Project components on aquarterly basis and direct suitable action as may be required to support the implementing groups.Since GEB has no expertise in formulating and executing drip irrigation systems, it will seek thesupport of the Water Resources Engineering and Management Institute of the University atBaroda, or other consultants who have had experience in implementing such systems. Forbeneficiary participation during implementation, a review committee comprising representatives ofthe State Government, GEB, the consultant, and the village leaders/farmers will be constituted.

3. Implementation Schedule and Performance Review

69. Project Implementation will commence in January 2001 and be completed in December2004 (Appendix 10). Direct supervision of implementation and monitoring the operationalperformance of the components will be the responsibility of GEB, which will submit semi-annualprogress reports to the State Government and ADB within 30 days from the end of each half-year.ADB will review the implementation and operation of the Project based on these reports and meetwith GEB, the State Government, and the Government at least semiannually to discuss Projectprogress. ADB will also monitor the overall financial and technical performance of the state’spower sector, and the State Government's fiscal position.

4. Procurement

70. ADB financed goods and services will be procured in accordance with ADB's Guidelinesfor Procurement. For such procurement, bidding documents will be prepared in a manner toensure maximum competition under international competitive bidding (ICB). Each supply contractestimated to cost the equivalent of $500,000 or more will be awarded on the basis of ICB. Eachcontract estimated to cost less than the equivalent of $500,000 will be awarded on the basis ofinternational shopping. ADB's funds will not be used to fund procurement under local competitivebidding procedures. A list of the major contract packages under the Project with their costestimates is in Appendix 11. Advance procurement action has been allowed and about sixcontract packages with a total bid value of $105 million will be approved for bidding by December2000. Retroactive financing has not been allowed.

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5. Consulting Services

71. For the drip irrigation component, GEB will appoint within three months of loaneffectiveness, the Water Resources Engineering and Management Institute of the MS Universityat Baroda or any other competent consultant, under its own financing, to design drip irrigationsystems for the areas identified, prepare specifications for the materials to be procured,coordinate with GEB for procurement, oversee installation, and provide post installationmonitoring and assistance to GEB and the farmers for two years. Since these services are beingfinanced entirely by GEB, ADB's guidelines for selection of consultants will not apply.

6. Disbursement Procedures

72. Since the disbursements under the Project will be mainly for supply of goods, ADB'scommitment and direct payment procedures will be used for disbursement purposes.

7. Reports, Accounts, and Audits

73. GEB will prepare separate progress reports for its respective components and submitthem to ADB on a semi-annual basis within 30 days of the end of each half-year. The reports willbe a narrative description of progress made during the period, changes to the implementationschedule, problems or difficulties encountered, the performance of the project implementationconsultants, and work to be carried out in the upcoming period. The reports will include asummary financial account for the Project consisting of project expenditures during the period,year to date, and total expenditure to date. ADB will review the implementation and operation ofthe Project based on these reports and meet with the Executing Agencies and the StateGovernment at least semiannually to discuss progress of the Project. Completion reports will besubmitted to ADB within three months of Project completion.

74. GEB will have its annual financial statements, including the income statement, balancesheet, and sources and application of funds statement, audited by a professional auditing firmacceptable to ADB. Audited statements will be submitted to ADB within nine months of the closeof the financial year. GEB will also submit to ADB audited project accounts and the auditors'observations with respect to compliance with the loan covenants.

C. The Executing Agency

1. Responsibilities

75. GEB is a statutory body created under the Indian Electricity (Supply) Act of 1948. Itsobjectives are to generate, transmit, and distribute electricity in the state of Gujarat except in thoseareas licensed to other distributors. Over the years, GEB also promoted organizations in thepower sector in Gujarat such as the Gujarat Power Corporation (50 percent share) and theGujarat Industrial Power Corporation (about 25 percent share). In addition, GEB supports theState Government in the sector through assistance on sector development plans and safety andinspection functions.

2. Organization Structure

76. GEB is governed by a board appointed by the State Government comprising a full-timechairperson and three full-time members for technical, financial, and administrative functions(Appendix 12).

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a. Past Financial Performance

77. GEB’s income statement, balance sheet, and cash flow statement, both past andprojected, are given in Appendix 13. Financial performance for FY1997-FY2000 is summarizedin Table 5, and cost of power and tariffs are shown in Table 6.

Table 5: Summary of GEB’s Past Financial Performance a

(Rs million)

Item FY1997 FY1998 FY1999 FY2000(Provisional)

Power Generation & Purchase(GWh)

31,919 34,200 36,100 40,006

T & D Losses (%) 18.2 19.8 18.2 20.2Power Sales (GWh) 25,295 26,783 28,828 31,178

Sales Revenue 43,200 50,631 56,978 57,443Gross Profit 5,148 4,173 (462) (14,724)Net Income Before Subsidy (9,321) (12,923) (19,106) (35,631)Net Income After Subsidy 1,312 (2,463) (2,374) (22,857)

Net Fixed Assets 45,785 49,238 49,805 50,463Long-Term Loans 27,702 26,890 27,123 31,429Funds from State Government 31,265 33,704 37,423 40,238

GWh = gigawatt-hour, T&D = transmission and distributiona Ratios cannot be calculated because the revenue and profit figures are negative.

Table 6: Average Cost of Power and Tariff (Rs/kWh) by Category and Share (%)

FY1997 FY1998 FY1999 FY2000Share Tariff a Share Tariff Share Tariff Share Tariff

Average Cost of Power b 1.57 2.44 2.41 2.59Overall Retail Average 100.0 1.63 100.0 1.84 100.0 1.90 100.0 1.78

Domestic 8.8 1.49 9.0 1.64 9.2 1.88 8.9 2.10Commercial 2.5 3.19 2.6 3.30 2.6 3.60 2.6 3.84Industrial (LT) 9.6 2.81 9.8 2.98 9.4 3.27 8.7 3.49Industrial (HT) 28.8 2.90 26.8 3.53 24.2 3.83 20.7 4.09Public Lighting 0.4 1.91 0.4 2.03 0.4 2.36 0.4 2.63Railways 1.3 3.16 1.3 4.05 1.2 4.39 1.2 4.63Agriculture 39.3 0.20 40.2 0.18 42.4 0.17 47.8 0.15Public Water 1.3 1.48 1.3 1.05 1.3 1.09 1.4 1.24Others 8.0 2.13 8.7 2.56 9.2 2.83 8.2 2.36

HT = high tension, kWh = kilowatt-hour, LT = low tension.a Tariff is net of electricity duty, sales tax, and subsidiesb (Fuel cost + cost of power purchase + administration cost + depreciation + financial charges) / sales volume.

78. Sales revenue has consistently increased from Rs43.2 billion in FY1997 to Rs57.4 billionin FY2000. However, net income before subsidy has been negative mainly due to the heavilysubsidized agriculture tariff. Agricultural consumers, the largest consumer category of GEB’ssales mix, were charged only Re0.15 per kWh, which is less than one tenth of the cost of powerin FY2000.

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79. In FY2000, GEB’s profitability continued to decline mainly because (i) the average costof power purchases significantly increased from Rs2.41per kWh to Rs2.59 per kWh, (ii) share ofpower purchase from non-GEB generation increased from 41.2 percent to 46.6 percent, and (iii)retail tariffs had not been raised since May 1993 despite the increase in the cost of power. InOctober 1996, tariffs were increased for limited consumer categories: industrial (LT) by10 percent, industrial (HT) by 28 percent, railway by 31 percent, and Bulk by 11 percent. As aresult, net deficit before subsidy reached Rs35.6 billion in FY2000. With subsidy, GEB hasbeen allowed to calculate only a zero percent rate of return on net fixed assets and not the threepercent rate of return as stipulated by the Electricity (Supply) Act 1948.

80. The profit and net income figures of GEB continue to deteriorate far below the break-even point. The usual calculation of financial ratios has been abandoned due to its lack ofrelevant numbers; both the debt service coverage ratio and self-financing ratio are negative.

b. Projected Financial Performance

81. GEB’s projected financial performance is summarized in Table 7. With the reformmeasures to be implemented under the Sector Development Program, GEB's financialperformance is expected to improve significantly in the coming years. While the actual levels oftariffs will be set by the GERC, the minimum cost recovery requirements set by the Bill willfavorably influence tariff awards by GERC. The compulsory metering of all consumers will helpreduce unaccounted for sales of energy. Rationalization and reduction in electricity duty areexpected to halt further deterioration of consumer mix. On the other hand, due to the state'sbudget constraints, subsidy to GEB is being capped at Rs11,000 million every year. As a result,a substantial tariff increase is necessary for the heavily subsidized agriculture consumers.

Table 7: Summary of GEB’s Projected Financial Performance(Rs million)

Item FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009Power Generation

& Purchase(GWh)

45,040 45,758 46,451 47,278 49,655 52,564 56,050 59,831 63,936

T & D Losses (%) 30.0 26.0 23.0 20.0 19.0 18.0 18.0 18.0 18.0Power Sales

(GWh)31,528 33,861 35,767 37,822 40,221 43,102 45,961 49,062 52,428

Sales Revenue 71,544 92,344 109,831 125,042 140,662 158,578 176,205 195,666 217,563Gross Profit (9,166) (1,731) 4,408 10,176 8,125 9,853 9,471 16,061 24,078Net Income

Before Subsidy(31,800) (26,132) (20,159) (14,804) (17,115) (18,227) (19,120) (13,255) (4,508)

Net Income AfterSubsidy

(18,640) (15,132) (9,159) (3,804) (6,115) (7,227) (8,120) (2,255) 6,492

Subsidy 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000Net Fixed Assets 84,075 74,751 74,964 74,236 70,859 63,935 58,496 52,941 47,270Long-Term Loans 39,727 40,539 42,124 44,416 45,738 44,300 42,972 41,644 40,316Funds from State

Government44,077 47,967 47,967 47,967 47,967 47,967 47,967 47,967 47,967

ROR on Net FixedAssets (%)

(39.7) (31.0) (16.6) (7.2) (11.8) (14.3) (16.9) (5.3) 17.7

Debt Service Coverage Ratio

(times)

(0.2) 0.1 0.4 0.7 0.6 0.6 0.6 0.9 1.3

Source: staff estimates

GWh = gigawatt-hour, ROR = rate of return, T&D = transmission and distribution.

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82. The projected average retail tariff per kWh for each consumer category is presented inTable 8. The projected tariff increases are necessary for GEB to recover from its currentfinancial position and to become a financially sound corporation by FY2009. The first tariffaward given by GERC in October 2000 was very encouraging in this regard. The agriculturetariff was increased from Re0.15 per kWh to approximately Re0.80 per kWh. It is anticipatedthat GERC will continue to fulfill its mandate of ensuring a sustainable electricity sector inGujarat, in terms of both efficiency and financial soundness.

Table 8: Average Cost of Power and Category-wise Tariff(Rs/kWh, excluding electricity duty and sales tax)

FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009(Prov) (Budget) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj)

Overall AverageRetail Tariff

1.79 2.20 2.42 2.97 3.20 3.39 3.56 3.71 3.86 4.02

Domestic/Residential

2.10 2.19 2.41 2.53 2.66 2.79 2.93 3.07 3.23 3.39

Commercial 3.84 4.05 4.46 4.68 4.91 5.00 5.00 5.00 5.00 5.00Industrial (LT) 3.49 3.70 4.07 4.27 4.49 4.71 4.95 5.00 5.00 5.00

Industrial (HT) 4.09 4.17 4.59 4.82 5.00 5.00 5.00 5.00 5.00 5.00Public Lighting 2.63 2.74 3.01 3.16 3.32 3.49 3.66 3.85 4.04 4.24Railways 4.63 4.70 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00

Agriculture a 0.15 0.80 1.00 1.15 1.32 1.52 1.75 2.01 2.31 2.6Public Water

Works1.24 1.29 1.42 1.49 1.56 1.64 1.72 1.81 1.90 2.00

Bulk Supply 2.36 2.42 2.66 2.80 2.93 3.08 3.24 3.40 3.57 3.75

Source: Staff estimates

HT = high tension, LT = low tension, Prov. = Provisional, Proj. = Projected

a The agriculture tariff shown is net of subsidies. With subsidies, the legal requirement of covering 67 per cent of costof supply is met from FY2003 onwards.

83. The financial projections in Table 7 and Appendix 13 present a likely scenario during theProgram period. It includes accounting for possible slippages in the metering program, resultingin a slower rate of reclassification of consumption from agricultural to other categories, and aslower increase in the tariff for agricultural consumers than that mandated by law. To achievethe results shown, GEB needs to improve both its technical operations and financialmanagement. The financial results also depend on GERC continuing with modest annual tariffincreases of about 10 percent for each category. This scenario, including the StateGovernment's subsidies, is fully consistent with the medium-term fiscal consolidation plan of theState Government for achieving sustainability of the public finances.

84. A higher performance scenario is indeed feasible if three specific actions take place. If (i)the large number of meters required to meter all consumers are bought and installed during athree-year period as mandated by the Act; (ii) as a result of the metering and consequentreclassification of consumers, agricultural consumption, as a percentage of total consumption,decreases from the existing 43 percent to 25 percent, and the consumption above 25 percent isreclassified on an equal basis among the domestic, commercial, and LT industrial consumers;and (iii) bold annual actions are taken by GERC on agricultural tariff increases to achieve67 percent of cost of supply by FY2006 without subsidies, GEB will achieve a positive netincome (without subsidies) of Rs2,340 million in FY2004. This means that from FY2004onward, the annual subsidy of Rs11,000 million could be fully phased out, or, alternatively, the

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tariff for supply to industry and commercial sectors decreased. In this more optimistic scenario,reduction in budgetary subsidies could be achieved even earlier.

VI. THE TECHNICAL ASSISTANCE

1. Reorganization Plan for GEB

a. Objectives and Scope

85. ADB and the State Government have discussed and agreed that there are severalmodels that could be applied for restructuring of GEB. All have merits and demerits. Thefollowing common aspects of restructuring were agreed to by both sides.

(i) One generation company (GSECL) has been created to which all units of GEB’sGandhinagar thermal power station and Utran thermal power station will betransferred within six months of the date of Loan approval.

(ii) A statewide transmission company (GETCL) has been created (incorporated butyet to be operationalized). GEB’s transmission assets pertaining to voltage levelsof 66 kV and above will be transferred to GETCL within the first year after Loanapproval.

(iii) the State Government, GEB, and ADB will jointly develop the model forrestructuring under a reorganization plan, before the release of the third trancheof the Program component of the Sector Development Program Loan. This isexpected to be completed within 18 months after the date of Loan approval.Further, work needs to be done to finalize the model: (a) segregating the assetsand liabilities for the identified distribution areas; (b) establishing the tariffs to becharged to consumers in each distribution area based on a range of consumermix and generation scenarios; and (c) developing a mechanism for addressingsubsidies within and across distribution areas. The suitability of each model willbe judged against such criteria as (a) efficiency of delivery, (b) maximizing thebenefits of competition, (c) least cost to the consumers, and (d) maximizingcontribution to sustainable public finances by lowering subsidies and limitingcross-subsidies.

86. ADB will provide TA to (i) help establish the optimal model for the sector structure andprepare a reorganization plan; (ii) identify the distribution area for privatization, or other modesof reorganization as recommended by the plan; (iii) conduct the necessary studies and preparethe documents necessary for inviting bidders; and (iv) help in evaluating the offers received forpurchase of shares in the distribution entity. The TA will also assist in matters relating to(i) rationalization of GEB’s personnel; (ii) unfunded liabilities of GEB; and (iii) costs ofadjustments. It is agreed that all privatization and reorganization will be done in an open,competitive, and transparent manner. Outline terms of reference for the TA and cost estimatesare given in Appendix 14.

b. Implementing Arrangements

87. The TA will be implemented starting March 2001 and be completed in 18 months. TheState Government and GEB will be the Executing Agencies. Formulating the reorganization planwith all its associated studies will be completed within the first six months after consultants areappointed. Workshops for sensitizing GEB staff will also be completed within this period.

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Immediately thereafter, implementation will start. If so indicated under the plan, the firstdistribution area will be privatized shortly thereafter.

c. Reporting Requirements

88. The consultants will submit the following reports to the State Government, GEB andADB:

(i) inception report within four weeks after the start of the TA. In addition to outlininga detailed work program and describing the work steps proposed to fulfill theterms of reference, the report will outline the approaches to be adopted inreorganizing public enterprises.

(ii) interim report within 2 months of the start of consulting services. This will include

the preliminary blueprints for reorganizing and divestment of shares in publicsector companies including the required financial and labor reorganization. Thereport will also outline the arrangements for the workshop and the training andinformation seminars to be conducted. After a review of the interim report, theState Government, GEB, ADB, and the team of consultants will meet to discussprogress under the TA and to finalize the arrangements for theworkshop/seminars.

(iii) Draft final report on the reorganization plan within four months of the start of

consulting services. This report will include the consultants’ findings andrecommendations on reorganizing, divestment and public enterprises, details onmeasures already implemented and their impact, as well as feedback from theconsultants’ participation in the seminars. The report will also outline the strategyto foster private sector enterprise development. The recommendations of thedraft final report will be discussed at a meeting between the State Government,GEB, ADB and the consultants. The final report, incorporating the comments ofthe State Government, GEB, and ADB, will be prepared within two weeks of themeeting.

(iv) If consistent with the reorganizing strategy as proposed in the final report on thereorganization plan, the Consultants will prepare documents for inviting privatesector participation in one distribution area of Gujarat, within one month of theapproval of the Report. The document will include (a) prequalification documentswith the associated evaluation criteria and bid form; and (b) bid documents withassociated evaluation criteria and bid form.

(v) Evaluation reports of the bidding at each stage of the process.

d. Cost Estimates and Financing Plan

89. It is anticipated that 24 person-months of consulting services (9 international and 15domestic) will be required over 18 months. The total cost of the TA is estimated at $770,000equivalent, comprising $500,000 in foreign exchange and $270,000 equivalent in local currency.ADB will finance $600,000, consisting of the entire foreign exchange portion of the costs and$100,000 equivalent in local currency from the ADB-funded TA program. GEB will finance alocal currency cost of $170,000 equivalent that will include provision of the counterpart facilities(para. 91).

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e. Counterpart Facilities

90. GEB will provide counterpart facilities to the TA consultants as follows:

(i) Internet connection,(ii) local telephone, fax connection,(iii) photocopying facilities,(iv) transport within Gujarat,(v) office accommodation with secretarial staff support,(vi) venue and services for workshops and seminars, and(vii) counterpart staff for conducting surveys, preparation of literature, etc.

2. Consumer Awareness and Participation in Power Sector Reforms


91. There was a felt need to educate consumer groups and, through them, the generalpublic, regarding the changes being introduced in the sector. After consultations with the StateGovernment, GEB and several consumer groups, it was agreed that ADB would fund TA tofacilitate consumer awareness and participation in power sector reforms. The TA will fund acoordination group of consumers’ representative bodies (tentatively named as the ElectricityConsumers Coordination Forum or ECCF) that would meet periodically to be informed by theState Government and GEB of reform actions taken and their implications for consumers, and toseek feedback from them. These representatives would then hold seminars to disseminate theinformation and views to their members. Direct access to the public, through the media, mayalso be necessary to broaden understanding of the reforms. The terms reference for the TA aregiven in Appendix 15.


92. The TA will commence in February 2001 and be completed one year thereafter. TheConfederation of Indian Industry-Gujarat Chapter (CII) will act as the organizer and secretariatfor the ECCF and be Executing Agency for the TA. For each workshop to be funded under theTA, ECCF, through CII, will forward to ADB its proposal for the workshop, indicating (i) thevenue and other arrangements; (ii) the likely participants amongst consumer groups and otherstakeholders; (iii) experts, if any, to be invited to address the workshop; and (iv) a summary ofcosts to be incurred. ADB will indicate its concurrence with the proposal with suggestions forpossible changes, if so desired. At the conclusion of each workshop ECCF will submit a shortreport on (i) its salient conclusions; (ii) materials prepared to disseminate its conclusions; and(iii) a detailed account of the expenditure pertaining to the items financed by ADB under the TA.

c. Cost Estimates and Financing Plan

93. The total cost of the TA will be $ 65,000 equivalent, of which $30,000 will be in foreignexchange and $35,000 equivalent in local currency. ADB will fund from the ADB-funded TAprogram, the entire foreign exchange cost plus $20,000 equivalent in local currency for a total of$50,000 equivalent. ECCF will finance the balance of $15,000. Cost estimates are in Appendix15.

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d. Counterpart Facilities

94. The non-governmental organizations constituting ECCF will provide all personnelrequired to support the ECCF, free of cost to the ECCF. CII will also provide, free of cost toECCF, day-to-day secretarial and communications assistance, for which a lump sumreimbursement of $1,000 per quarter, will be considered under the TA.

3. Support to GERC


95. ADB and the State Government have agreed on the need to support GERC during theinitial phase of its establishment and operation to enable it to prepare key rules and regulationsunder the Act. Outline terms of reference for the TA are given in Appendix 16.


96. The TA will be implemented starting February 2001 and be completed in 18 months. Fulloperationalization of GERC, including drafting of all required codes, rules, regulations andprocedures, will be completed within the first six months after consultants are appointed. Theworkshop for GERC and utilities staff should also be completed within this period. External andin-house training and operational support to GERC will end after one year.

97. As a first step, key regulations and codes, which are required immediately after passingof the Act and a tariff and regulations concept paper will be drafted. The draft regulations andcodes and the tariff concept paper will be discussed in a workshop comprising of a wide-selection of stakeholders in the sector. After the workshop, GERC will give the consultantsdetailed comments, based on which the regulations will be finalized.

98. Parallel with the drafting of regulations, a training needs analysis will be undertaken forGERC’s staff on the basis of which an appropriate external and in–house training program willbe developed. The final external training program, indicating objectives, duration, costestimates, and staff who should attend, will be discussed and agreed upon with ADB before itsimplementation. The in-house training program will complement the external training programand will include presentations by staff who have participated/will participate in external training.

99. The external training program will be implemented after the first draft of regulations iscompleted. At such time, the training participants will have already gained a deeper appreciationof the key elements of the role of GERC, the different pricing concepts and their implicationsand alternative structures of power sector regulation. The lessons from external training will bedisseminated by the training participants through a series of workshops and seminars for otherGERC staff as well as other sector stakeholders.

100. Operational support to GERC will be provided in parallel with the drafting of the keyregulations. The contribution of GERC staff to the final drafting of key regulations and ofsecondary regulations will reflect the increased sense of ownership and operationalunderstanding of the regulatory framework following external training. The workshops bringingtogether a broad segment of sector participants will also contribute to more transparency in theregulatory process and thus, to a broader acceptance of the role and independence of GERC.

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c. Reporting

101. A list of key deliverables will be produced under the TA:

(i) regulatory procedures,(ii) rules for the regulatory commission,(iii) transmission and distribution licenses,(iv) codes and standards,(v) tariff and regulations concept paper, and(vi) scheme and training needs analysis.

d. Cost Estimates and Financing Plan

102. It is anticipated that the TA will require a total of 10 person-months of consultants’ inputover 18 months. The team of consultants (person-months are in parenthesis) include aninternational lawyer (3), technical expert (3), tariff and commercial expert (3), and a humanresources development expert (1). The total cost of the TA is estimated at $600,000 equivalent,comprising $450,000 in foreign exchange and $150,000 equivalent in local currency. ADB willfinance $450,000, consisting of the entire foreign exchange portion of the costs from the ADB-funded TA program. GERC will finance the local currency cost of $150,000 equivalent in kindthrough counterpart facilities (para. 103).

e. Counterpart Facilities

103. GERC will provide counterpart facilities to the TA consultants as follows:

(i) Internet connection,(ii) local telephone, fax connection,(iii) photocopying facilities,(iv) tansport within Gujarat,(v) office accommodation with secretarial staff support,(vi) venue and services for workshops and seminars, and(vii) domestic consultants for conducting surveys, preparation of literature, etc.

4. Support to Distribution Profit Centers

104. GEB expressed a requirement for medium-term multidisciplinary training of itssuperintending engineers who are the managers of its Kheda and Rajkot distribution circles aswell as for their immediate subordinates who will be responsible for managing the distributiondivisions in these circles. ADB has sought the assistance of bilateral cofinanciers who areinterested in organizing such training from reputed electricity distribution companies in theircountries.

VII. BENEFITS AND RISKS

A. Expected Impacts

1. Financial Analysis

105. Financial evaluation was undertaken for components A, B, and C together since they arerelated, and separately for component D because of its “stand-alone” nature. The financialinternal rate of return (FIRR) of each project component is satisfactory compared with GEB’sweighted average real cost of capital (WACC) of 6.2 percent. The FIRR for each individual

29

subproject and the sensitivity analysis are summarized in Table 9. The major assumptions usedin the financial evaluation of the Project and detailed calculations are in Appendix 17.

Table 9: Sensitivity Analysis of the Financial Internal Rate of Return

Components A, B, and C Component DScenarioBase Case 8.9 15.3a. 10% Increase in Capital Cost 8.3 13.3b. One Year Delay 6.6 13.4c. 10% Decrease in Tariffs Negative 13.1d. a + b 6.3 11.6

106. The sensitivity analysis for components A, B, and C confirmed the evident knowledgethat any decrease in tariffs would result in a negative financial contribution of the projectcomponents. The likelihood of this event-taking place is minimal since the GERC has beenestablished and is mandated to award tariffs as per the Act. The FIRR does react negatively toa 10 percent increase in the capital cost and a one-year delay in project completion. However,the reduction in the FIRR does not go below the WACC of 6.2 percent. Accordingly, the Projectcomponents are financially sound to withstand such exigencies. The drip irrigation componenthas proven to withstand all sensitivities tested due to its robust base FIRR.

2. Economic Analysis

107. As part of its private power generation policy, the Government has invited private sectorinvestment to increase generation capacity in Gujarat. Proposals have been solicited for about4,400 MW of generating capacity on a build-own-operate basis. A number of power purchasingagreements have been signed, among which are those for the Reliance and Akrimota IPPs witha combined capacity of 750 MW. For evacuation of power from the new plants, complementaryinvestments in transmission and distribution facilities are required. Component A of the Projectincludes the construction of dedicated transmission facilities for the two IPPs, while componentsB and C are dedicated to overall system upgrading. The system-strengthening investments alsowill indirectly benefit evacuation from the IPPs in addition to minimizing losses and utilizingsurplus capacity available at other, state and central, power stations. Therefore, thetransmission components were evaluated together with the proposed IPP plants they will serve,and also together with the distribution components of the project investments.

108. The base case economic internal rate of return (EIRR) for the Project is estimated at25.36 percent. The EIRR was calculated for a period of 20 years, including a four-yearconstruction period, corresponding to the estimated useful life of the Project. No residual valuewas considered. Comprehensive sensitivity analysis indicated that the EIRR is adequate exceptfor changes in the overall benefit stream. A 4 percent reduction of the overall benefit stream willresult in an EIRR of 12 percent. However, expected that as a result of the reforms, the benefitstream will improve and not deteriorate. Details of the sensitivity analysis are in Appendix 18.

109. The economic analysis was carried out at border price level using FY2000 prices. Toconvert financial capital cost into economic cost, taxes and duties were deducted. No pricecontingencies are included in the base capital cost but, the economic capital costs include 10percent physical contingencies. The costs were separated into foreign exchange, indirectforeign exchange and local currency costs. Local costs were further separated and specificconversion factors used for unskilled labor. The remaining local costs were converted to borderprice level by applying a standard conversion factor. Annual operation and maintenance cost

30

were also calculated in economic prices as a percentage of the total capital investment cost.The cost of energy at generation level is valued at the IPP takeoff prices for project componentA, separately for each IPP, and at GEB’s power purchase pool price for the additional unitsresulting from components B and C. Transmission and distribution losses of 20 percent werededucted from the IPP send-out volume, but the full send-out volume was priced in the cost ofenergy.

110. The economic benefits of electricity consumption were calculated for each majorconsumer category. Nonincremental electricity consumption benefits were based on thealternative economic costs of other energy sources such as diesel generators and kerosenelamps that will be replaced by using electricity. Incremental, or induced, consumption wasvalued at the estimated average willingness to pay for electricity based on a weighted averageof the alternative costs of providing similar energy-related services and the current electricitytariff for each consumer category. The evaluation is described in more detail in Appendix 18.

111. For project component D no quantitative economic evaluation was undertaken due to thechallenge of determining the depletion premium for groundwater. In Mahesana district, whichwas selected for implementing of a pilot scheme for converting of irrigation systems, the watertable has dropped by about 160 m over the last 25 years. A GEB-supported study17 in the foursubdistricts in Mahesana to be covered by the pilot scheme found a negative net draft rechargeranging from minus 20 to minus 33 million cubic meters (m3) year. If groundwater depletioncontinues at this rate, in a few years time irrigated agricultural activity in the district will beseverely limited or might even have to be replaced entirely by rainfed agriculture. Some deeptubewells have yielded high contents of fluorides and other salts, and there is danger ofpermanent damage to soil quality.

112. The use of tubewell (lift) irrigation by farmers without detailed knowledge of the irrigationmethodology, and in an environment of almost no financial costs for water and electricity, hasresulted in highly inefficient resource use. The study found very low water use efficiency and lowproductivity per irrigated hectare. Yields per hectare could double for most typical crops with ashift from lift to drip irrigation, in addition to conserving water and electricity.

113. A sample calculation for five different crops showed that the average discharge of atubewell is 108 m3 water for per hour or in an annual discharge of 194,400 m3 of water for 20hectares. With drip irrigation only 40,800 m3 water will be required for the same area. The netwater saving of about 70percent, would allow a sustainable recharging of the tubewells leadingto sustained agricultural activities. Data on depletion rates, recharging rates, and water use willbe collected from the pilot scheme and the Project could be expanded after analysis of the data.

3. Environmental and Social Dimensions

114. The Sector Development Program is designed to promote economic growth by increasingelectricity supply in Gujarat, including the rural areas. It will provide a reliable power supply therebyimproving industrialization and providing employment opportunities. A reliable supply of electricitywill also enhance education, health, and other social facilities. The Sector Development Programdirectly addresses poverty reduction because many of the beneficiaries are unserved domesticconsumers, both rural and urban who, until now, have not secured connections from GEB due tolack of funds. The Sector Development Program yields very attractive economic returns since it also

17 Final Report of ‘Installing Drip Irrigation System in the area of Mahesana District’ prepared by Water Resources

Engineering and Management Institute, M.S. University of Baroda, commissioned by GEB, January 1999.

31

helps industrial and commercial consumers; with increasing employment opportunities as a result offaster economic growth, it further helps the poor.

115. Although the Sector Development Program is essentially gender neutral, benefits to womenas a result of electricity supply are education, security, and more comfortable living. Increasingindustrialization will also enable women to obtain jobs and enhance their security and status insociety.

116. The Sector Development Program improves the delivery of social services such aseducation, health, and water supply and sanitation, especially to the poor, by making available forsuch activities funds that today are being used to subsidize the electricity sector.

B. Risks and Safeguards

117. The Sector Development Program has several perceived risks. The risks and theircorresponding mitigating measures are summarized here.

(i) Establishment of regulatory authority. The success of the entire reform effort isbased on the premise that actions in the power sector will be commerciallyoriented, including rationalization of the tariff structure which would encourageimprovements in operating efficiencies and enable utilities to earn a fair return oncapital invested commensurate with their performance. Recognizing thatpoliticization of the tariff-setting process has been a major factor for thedeterioration of the electricity supply industry all over India, the SectorDevelopment Program envisages the establishment of a statutory regulatoryauthority whose responsibilities will include tariff setting and licensing. The Billcreating the regulatory authority also incorporates provisions setting stringenteligibility requirements for its members so as to ensure appropriate working of theauthority. As advance preparation action, the draft Bill has already been approvedby the State Government and has been referred to the Government for clearanceprior to its introduction in the Gujarat Legislative Assembly for its consideration.

(ii) Enforcement of Decisions. Decisions of the regulatory authority have to beenforced by the sector entities, often with the support of the State Government.Therefore, there has to be confidence that decisions of the regulatory authority,especially those that are politically unattractive, will be supported by the StateGovernment. To demonstrate its will to make difficult political decisions and as ameasure to substantially ease the burden on GEB, GERC has raised the tariff foragriculture consumers fourfold from Re0.15 per kWh to Re 0.80 per kWh. Thislevel is higher than that recommended by the Council under its Common MinimumNational Action Plan for the power sector and is higher than that in states thathave significant agriculture activities based on electricity-dependent irrigation.

(iii) Availability of counterpart funds. The Ninth Five-Year Plan for the Gujarat powersector represents the largest comparable investment in the sector by the stateand one of the largest by any state in India. Consequently, there is a risk ofshortfall of local counterpart funds. To mitigate this risk, the State Governmenthas budgeted sufficient funds for power sector investments under the Ninth Planand has assured budgeting and transfers of sufficient counterpart funds eachyear for the Project.

32

(iv) Operational effectiveness. The operational effectiveness of GEB and other powersector entities that will be created during the reform period will be critical indetermining success or failure. To improve effectiveness, processes are beingbuilt into the system both to demand completion of critical activities by the sectorentities and to strengthen their capacity to deliver them on time.

(a) The GERC. The constitution of GERC, initially under the central ElectricityRegulatory Commission Act and its subsequent confirmation under theproposed Act, sets up a platform for consumers to scrutinize theperformance of GEB and other sector entities, adding to the pressure onthem to perform. In consultation with all stakeholders, GERC has alsoidentified key activities such as metering of consumers, and hasmandated a time-bound monitoring program for its completion. This willspur GEB, AECO, and SECO to complete these activities on time.

(b) Managerial focus. The establishment of GSECL and GETCL and transferof a part of GEB's responsibilities to them reduces the span ofresponsibility of GEB's management, allowing it to focus on distribution asits main key result area. GSECL and GETCL will also have sharper focusin their activities, leading to overall improvements in the sector.

(c) Independent profit centers. Delegation of powers reinforced by improvedmanagerial systems and processes, and capital investments to reducelosses are being introduced in Kheda (Anand), Rajkot, and Mahesanacircles. Support from external consultants under a bilateral cofinancier isalso being sought to help the managements of these circles. Theseimprovements at grassroots levels will greatly enhance the effectivenessof sector operations.

(d) Advance procurement action. Bids will be invited for about $100 millionworth of procurement under advance procurement action, by December2000. They include all critical equipment for system strengthening andloss reduction that will be required over the next two years. Thus,implementation of key activities will not be constrained by supply ofequipment.

(e) Induction of Experts. Action has been initiated by the State Governmentand GEB to induct experts into the boards of directors of GEB, GSECLand GETCL. Induction of experts into the management is being initiated.The performance of these entities is expected to improve as a result ofthese measures.

VIII. ASSURANCES

A. Prior Actions by the State Government and GEB

118. In order to demonstrate its commitment to the structural changes proposed as part of theProgram, the following key actions have been completed by the State Government and GEB.

(i) Completion of environmental investigations and preparation of a summary initialenvironmental examination report acceptable to ADB.

33

(ii) GERC announced its first tariff award on 10 October 2000. The average rates ofrealization (exclusive of electricity duty) for FY2001 have been raised to thefollowing levels:

Category Tariff(Rs/kWh)

Increase(%)

Residential 2.19 9.8Commercial 4.05 13.4Industry (LT) 3.07 14.2Industry (HT) 4.17 4.8Public Lighting 2.74 10.4Railways 4.70 3.8Public Water Works 1.29 9.3Agriculture 0.80 433.0

Source: Staff estimates based on GERC's order dated 10 October 2000.

(iii) The State Government has agreed to initiate rationalization of duties and taxes onsale of electricity from FY2002. It has also initiated changes in the charges incidentupon the supplies of electricity by GEB and captive generators to industrialconsumers so as to put them on an equal footing.

(iv) GERC, in its award of 10 October 2000, has directed that all consumers bemetered within 3 years of its award. GEB has circulated a proposal of installingmeters on all consumer connections within this defined time frame to its consumergroups for consultations. GEB has commenced installing meters on thetransformer feeders of agriculture connections and about 50,000 meters havealready been installed.

(iv) The State Government’s Cabinet, on 23 October 2000, approved the draft Bill andhas forwarded it to the Government for its approval.

B. Covenants

119. In addition to the standard assurances, the following specific assurances have beengiven by the Government and the State Government that have been incorporated in the legaldocuments.

1. General

120. The policies adopted and actions taken prior to the date of the Loan Agreements, asdescribed in the Development Policy Letter, will continue in effect at least for the duration of theSector Development Program.

121. The State Government will ensure that sufficient budgetary allocations are made to theGEB and the Implementing Agencies in a timely manner for the efficient and timelyimplementation of the Project. The Government will make available, counterpart funds for theimplementation of the Program.

122. The State Government and GEB agree to take all steps to implement therecommendations of the TAs not later than 31 December 2002, in a manner satisfactory to ADB.

34

123. GEB will ensure that proper metering of all consumers is carried out in a phased mannerin the state within not more than four years from the date of Loan approval.

2. Administrative

124. To enable the proper functioning of GEB’s successor entities, the Government and StateGovernment will expedite, and assist in expediting, issue of due permits and licenses as may berequired by law;

125. Within a period of 12 months from Loan effectiveness, the State Government will ensurethat a majority of the officers in the senior management positions of GSECL and GETCL will berecruited through open competitive selection processes by the boards of directors of thesecompanies. Further, the State Government shall ensure that the tenure of these officers shall befor at least three years. The State Government will also progressively recruit experts inmanagement positions in GEB.

3. Financial

126. The State Government will make timely and adequate budgetary appropriations to meetits subsidy payment liabilities so as to ensure that all subsidy dues are paid to GEB (or itssuccessor entities) and other electricity utilities within not more than six months of the raising ofthe claim by such entities. Further, the State Government shall limit agriculture subsidies toRs11 billion a year.

127. In order to enable GEB to meet its operating deficits, GOG will support, throughproviding its guarantee, domestic market borrowings that GEB may raise for an amount of up toRs19,200 million during FY2001 and FY2002.

4. Environment and Social Measures

128. The State Government and GEB will ensure that the Project is implemented incompliance with all applicable rules and regulations and comply with all applicable environmentassessment procedures under the environmental guidelines of ADB and the Government.

5. Program Implementation and Benefit Monitoring

129. The State Government and GEB will undertake together with ADB, periodic reviewsduring implementation of the Program to evaluate the scope, implementation arrangements,progress and achievement of scheduled targets and agenda for policy reform, and the Project.

6. Restructuring of the Power Sector

130. The development of a Reorganization Plan for GEB will be undertaken in a fair,transparent manner, and the formulation of the privatization and other schemes thereunder, to theextent commercially practicable, in a competitive manner.

131. Any voluntary retirement schemes as may be recommended under the ReorganizationPlan will be implemented with full participation and consultation of the affected persons, inaccordance with applicable laws and regulations. GOG will make the necessary funds availablefor such schemes in a timely manner.

132. The Gujarat Electricity Industry Act shall be notified by GOG not later than 31 December2001.

35

7. Conditions For Loan Effectiveness

133. In addition to the conditions set forth in ADB’s Ordinary Operations Loan Regulations,the following shall be conditions of Loan Effectiveness for each of the Program Loan and ProjectLoan: that The Loan and Program/Project Agreements in form and substance satisfactory toADB shall have been duly executed and delivered on behalf of the Government, the StateGovernment and GEB respectively and all conditions precedent to its effectiveness (other thanthe condition requiring the effectiveness of the Agreements) shall have been fulfilled.

IX. RECOMMENDATION

134. I am satisfied that the proposed loans would comply with the Articles of Agreement ofADB and recommend that the Board approve:

(i) the loan of $150,000,000 from ADB's ordinary capital resources to India for theGujarat Power Sector Development Program, with a term of 15 years, including agrace period of 3 years, and with interest to be determined in accordance withADB's pool-based variable lending rate system for US dollar loans, and suchother terms and conditions as are substantially in accordance with those set forthin the draft Program Loan and Program Agreements presented to the Board; and

(ii) the loan of $200,000,000 from ADB's ordinary capital resources to India for theGujarat Power Sector Development Project, with a term of 20 years, including agrace period of 5 years, and with interest to be determined in accordance withADB's pool-based variable lending rate system for US dollar loans, and suchother terms and conditions as are substantially in accordance with those set forthin the draft Project Loan and Project Agreements presented to the Board.

TADAO CHINO President

17 November 2000

36

APPENDIXES

Number Title Page Cited on(page, para.)

1 Key Sector Indicators 37 4, 12

2 Development Policy Letter 38 7, 20

3 External Assistance to the Power Sector 45 7, 21

4 Program Framework 50 10, 37

5 Project Description 53 14, 47

6 Project Cost Estimates 56 14, 48

7 Summary Initial Environmental Examination 60 15, 50

8 Poverty Impact Assessment 63 16, 56

9 List of Ineligible Items 67 17, 62

10 Project Implementation Schedule 68 19, 69

11 Contract Package List 69 19, 70

12 Organogram of GEB 70 20, 76

13 Financial Performance and Projections of GEB 71 21, 77

14 Reorganization Plan for GEB

- Terms of Reference Consulting Services

77 24, 86

15 Consumer Awareness and Participation

- Terms of Reference for Consulting Services

81 26, 91

16 Support to GERC

- Terms of Reference for Consulting Services

82 27, 95

17 Financial Evaluation of the Project 84 29, 105

18 Economic Evaluation of the Project 89 29, 108

37Appendix 1

A. Installed Capacities in FY2000Unit

1. GEB/ AECO/ Utilities MW 5,044 2. Share in central utilities MW 1,532 3. IPPs MW 1,785 4. Captive capacity installed MW 3,086 5. EHV transmission Circuit km 29,386 6. EHV Substations no. 685 7. Consumers no. 6,879,473

B. Demand Supply Balance in FY2000 (excluding captive generation)

Unit Gujarat Western Region

1. Peak demand MW 6,970 20,494 2. Peak demand (met) MW 6,587 22,052 3. Peak shortage MW (%) 1,337 (19.1) 4,151 (19.0)4. Energy demand TWh 48.60 161.50 5. Energy demand (met) TWh 48.00 163.14 6. Energy shortage TWh (%) 0.60 (1.2) -1.64 (-1.0)

C. Operational Performance in FY2000Unit Gujarat

1. Average plant load factor % 64.3 2. Plant load factor of best station % 82.3 3. Average aux power consumption % 9.3

4. Average T&D losses % 20.0 a

5. Employees per million kWh sold nos. 1.7 6. Employees per 1000 consumers nos. 7.4 7. Average cost of power supply Rs/kWh 3.04 8. Average tariff Rs/kWh 1.78

aSubject to revision.

GEB = Gujarat Electricity Board AECO = Ahmedabad Electric CompanyEHV = Extra high voltage MW = megawattsTWh = Terra-watt-hour T&D = transmission and distributionkWh = kilowatt-hour

KEY SECTOR INDICATORS

Appendix 2, page 138

DO No.5/8/ZO00-ADB. ~ t1~q)rx

~~

~i:I)Ti;f~

GOVERNMENT OF INDIAMINISTRY OF FINANCE

Department of Economic Affairs

~ ~/NEW DELHI

15th November , 2000

~~FINANCE SECRET ARY

Dear Mr. Chino ,

This is regarding the Gujarat Power Sector Development Programme

Loan.

2. I endose a copy of the letter dated lOth November I 2000! addressed

by the Chief Minister of Gujarat to the Union Finance Minister I expressing

the unequivocal commitment of the State to implement the Gujarat Power

Sector DeveloF'ment Programme. and for this purpose seeking ADS's

assistance of $ 350 miftion.

3.. I am pleased to convey the full support of the Government of India to

the Government of Gujarat in implementing the Program, and request ADB.to

lend $ 350 million from its ordinary capital resources so as to enable the

Government of :rndia to reJend these funds to the Government of Gujarat .

4 I take thjs opportunity to convey my good wishes to you.

With war.m regards,

~y.(Ajit .

~: As above. ...

Mr. T adao ChirtO

President

Asian Development Bank

Manila

PhiJiQQines

39 Appendix 2, page 2Sardar Bhavan, Sachivalaya.Block No. 1. Sth Roor.Gandhinagar-382 010. Guiarat.Tel. No. : (0) (02712) 32611

to 32619Fax : No." : (02712) 22101

10e1 November,2000

KESHUBHAJ PATE1..

Chief Minister

Guiarat State

Objectives of Power Sector ReformsA.

The objectives of the povver sector reforms are2.

To achieve commercial efficiency and financial viability so that the sector does

not absorb Gujarars financial resources that are needed for socio-economic

development;

(a)

To improve delivery of services and achieve cost effe~Jveness through technical

managerial and administrative restructuring of the utilities.(b)

To increase the operating efficiency of all power sector utilities through greater

competition. managerial autonomy and higher accountability .(c)

To create an environment which will attract private capital, both domestic and

foreign to supplement public sector investment;(d)

(e)

Approach to the Refom1s83. The Government of Gujarat has been encouraging and facilitatin.9 private sectorparticipation in the field of generation. Transmission and distribution of power supply will also beconsidered for further development in a phased manner through public-private partnership inaccordance with the Business Plan prepared for the purpose by GOG. In support of this, theState's approach will be to foster a transparent and competitive environment which will providea level playing field both for the private and public sectors and also by separating sectorregulation from operations. The legislative basis for restructuring and regulating the State'spower sector will be Gujarat Electricity Industry (Reorganization and Regulation) Bill, 2000

which is expected to be enacted soon.

Residence. 1, Chief Minister's Bunglow, Sector.20, Gandhinagar-382 020

Tel. No. (02712) 32601 to 32604 Fax No: (02712) 22020

40 Appendix 2, page 3

calfed the Gujarat Sltate EIectlicity Company Limited (GSECL), incorporated a b"3nsrnissionCompanY caned the Gujarat Energy Transmission Company Umited (GETCL) and has agreed toconvert its distribution cirdes at Kheda and ~~jkot into independent "Profit Centers" withsubstantial delegation of po'wers to local managements. .

..5.. Under the rn~ structure of the power sedor, the ~Ujarat EIedricity RegulatoryCommissio~ (GERC) a new statutory, independerrt r:egulatcrj authority has been created whichwill be responsible for: .

(a)

(b)

{c)

(d)

setting el~city tariffs and detem1ining the corresponding perfom1ance nom1S;

collecting, verifying and disseminating sedor statistics;

coordinating long term power planning;

creating and maintaining a non-discriminatory and commercial businessenvironment in this sector;

(e) adjudicating disputes between sector entities; and

(f) 1icensing.

6. In the power generation segment of the sector, it is expected that in the long-term. therewould be several generating companies, both public and private. The latter could be of various

types including:

(a) independent power producers;

(b) cooperative generators;

(c) captive generating units selling their surplus energy to the grid: and

(d) private generating and distribution companies.

7. At present Gujarat's power grid is beirJg maintained by GEE. After restructuring, in orderto facilitate power pooling and wheeling between suppliers and consumers, the State's powergrid will be maintained by GETCl, which will be responsible for operation, system expansionand maintenance of proper parameters in the grid- under the supervision of the regulator. Thisentity will also be responsible for the interconnections wfth-other power systems of the country.

8. With regard to ~)ower distribution, there is already a mix of private and public entities...There is scope for involvement of private initiative through various public private ownershipstructures as also in.dicated in the para .~' above.

C. Corporatisation & Private Sector Participation

9. Gujarat is a pioru~er State in bringing private :sector in the field of generation. rt has alsotaken lead in corporatizing activities of the State Electricity Board in the fired of generation andtransmission by setting up GSEC and GETCL respelctively. Gujarat is committed to strengthenfurther corporatisation and encourage involvement of private sector in generation anddistribution in a phased manner, in line with the model of restructuring developed by GaG. It isneedless to mention th.at this will be done in a transparent and competitive manner. It isrecognized that to pro'W'ide incentives for better technical performance, there has to becompetition. To enable this, GEB has created distribution circles at Kheda and Rajkot as -ProfitCentres" which will, with technical and financial assistance from ADa, establish standards ofperformance and serve as role models for other distribution entities.

Appendix 2, page 441

TariffsD.10. Th.e Government of Gujarat reccIQnizes the fact. that there ~; to be a tariff rationalizationif more investments are to be forthcclming in the power sedor. IUtirrties should operate oncommercial principles and earn .adequcite rates of return on capital investments. On the otherhand, grant of unrestrained- freedom to fix the taiiff by power ub1ities wilr lead to consumer

interest being adversely affected. Looking to this Gujarat has set up an independent statutorypower tariff and reguratory commissiorl. While the Government of Gujarat recognizes. on the

one hand, the need for the continuance of subsidized tariff for agricul:b.Jraland socially obligatoryactivities like drinking water and street lighting and lighting for urban and rural poor, on the otherhand, it also recognizes that these su~)idies WI] have to be expficit, quantified, reasonable andtargeted and that. while cross-subsidiz:ition cannot be fulty enmi.nated. it has to be kept withinreasonable limits. Thus. in the finaJj~ .Gujarat Bedricity Industry (R~anization andRegulation) BU1. 2000. a ceiling of 33% ,of the cost to serve for each category of consumers hasbeen fixed as the maximum limit in ttle year 2005 that GERC cctn permit by way of cross-subsiolZation in the tariffs. GERC has raised the effective tariff :for electricity supply to theagriculture sector from Rs.O.15 per Kwf'1 to Rs.0.80 per Kwh with effE!ct from 10ttl October, 2000.

Cons.ervatjon of Water and ElttCtlicityE.

11. In the agriculture sector, the Go'l/emment of Gujarat recogni2:es that the only sustainablesolution lies in the optimal use of resoul-ces, both water and electric~ty. It, therefore, proposes totake comprehensive steps to induce falrmers to. adopt energy conservation measures such asdrip irrigation. A pilot project to enable E~valuation of this strategy is ilncluded in the GPSDP. TheGPSDP also envisages a gradual redlJction in the transmission al'd distribution loss throughmetering at aJllevels, computerized erJergy accounting, and upgraljing of distribution systemswith introduction of modem technology., An target of less than 18 -t)ercent loss, as against the

current loss of over 20 percent, has beE!n set for GEB to be achieve(] over the next fc;u--c years.

ConclusionF.12. The economy of the State of Gujarat has been experienc:ing rapid growth in all thesectors. Only a reliable and efficient electricity infrastructure will pave the way for the continuedexpansion of the state's economy and, the welfare of its people. lrhe Government of Gujaratonce again affirms its commib11ent to restructure the power sec1:or along commercial lines.Given its vast experience in the reforms process in the power sectors of its develop!ng membercountries, ADB can playa major role in assisting Gujarat in restructuring the sector. On behalfof the Government of Gujarat. I wish to convey our unequivocal commitment to the GPSDP andrequest you to kindly forward this letter to the President of ADB for the purpose of seeking

ADB's assistance for its implementatiorl.

A Policy Matrix outlining the proposed actions by the Government of Gujarat is enclosed.13,

With regards,

yours sincerely,

f<,S.~(Keshubhai Patel)

Shri Yashwant Sinha

Hon'ble Finance Minister

Government of India

~ew Delhi

"~

POLICY MATRIX

Policy

Areas/Objectives

Conditions for First

Tranche Release

(Expected by

December 2000)

Conditions for Second

Tranche Release

(Expected by June

2001)

Conditions for Third or

final Tranche Release

(Expected by June

2002)

Other Actions

(with indicative timingof implementationwhere applicable)

1. Legislative ReformMeasures

1.Setting up of theindependent GujaratElectricity RegulatoryCommission (the“GERC”).

2. Approval of the Bill bythe State cabinet, andits submission by theState Government to theGovernment of India forits approval.

1. Introduction of theGujarat ElectricityIndustry (Reorganizationand Regulation) Bill (the“Bill”) in the StateAssembly for itsconsideration.

1. The rules andregulations draftedunder the GujaratElectricity Industry(Reorganization andRegulation) Act, 2001(the “Act”) laid beforethe State Assembly andpublished in the OfficialGazette by the State.

2. Establishment andoperationalization of theGERC under the Act.

1. Drafting of the Bill.(September 2000)

2. The State to take allsteps necessary toexpedite theconsideration of the Billby the State Assemblyso that it can be sent forthe assent of thePresident of India by 31October 2001.

3. The rules andregulations under theBill to be draftedcommencing latest byJune 2001, to ensurethat these are laidbefore the StateAssembly by June 2002.

2. Tariff and revenuerealization.

3. First tariff award byGERC.

4. Draft action plan formetering all consumersin the State sent to allconsumers forconsultations, inaccordance with

2. Offset of subsidy andsubvention arrears owedby the State to GEB till31 March 2000 againstdues of GEB owing tothe State, and paymentof outstandingmunicipality dues owingto GEB till 31 March

3. Second tariffsubmission by GEB toGERC.

4. GEB shall finalizeplan for installing metersfor all consumers byDecember 2000.

5. GEB shall place orderby March 2001, for atleast 500,000 meters.

42A

ppendix 2, page 5

GERC’s order of 10October 2000.

2001.

3. Filing by GEB beforeGERC, of the actionplan to meter allconsumers in the State,in a phased mannerover a period of threeyears from October 102000 that is the date ofGERC’s order.

6. Installation of metersshall be completed atleast by March 2005.

7. The TA for consumerawareness to beimplemented on as widebasis as possible withspecial emphasis on therural consumer.

8. Demand sidemanagement andenergy conservationmeasures and systemfor “time-of day”metering to beintroduced by GEB.

3. Restructuring andReorganization of GEBand the State’s powersector

5. Incorporation andestablishment of GSECLand GETCL.Constitution of theirBoards of Directors withat least two directorsbeing from non-governmental sectorand who are experts intheir fields.

6. Approval by the StateGovernment of thestructure, humanresources and budget ofGERC for the next fiveyears from the date ofApproval of the Loan byADB.

4. Transfer of the assetsand management ofGandhinagar and Utranpower stations in theState from GEB toGSECL.

4. Transfer of thetransmission assetsfrom GEB to GETCL.

5. Agreement betweenthe State, GEB and theADB on theReorganization Plan,and solicitation forprivatization of at leastone identifieddistribution area of GEB,unless contrary to theagreed ReorganizationPlan.

9. Creation ofindependent distributioncircles at Kheda andRajkot as “ProfitCenters” formodernizing distribution.According of fiscal andadministrative autonomyto such “Profit Centers”by GEB.

10. Encouragement byGOG of private sectorparticipation and public-private partnerships inline with theReorganization Plan.

11. Upgrading of

43A

ppendix 2, page 6

distribution systems withintroduction of moderntechnology with a targetof less than 18 percentloss as against currentloss of over 20 percent,at the Profit Centersover the next four years.

12. The State and GEBshall enableparticipation anddialogue of allconcerned or affectedby the restructuring andreorganization of theGEB under theReorganization Plan toenable maximumacceptance.

4. Fiscal Reforms 7. Payment by the StateGovernment of allmunicipality dues owedto GEB up to 31 March2000.

5. Rationalization andreduction of electricityduty in the State’sbudget for FY 2002, inan amount not less thanRs.1,500 million.

13. State to limitagricultural subsidies toRs.11 billion a year.

14. State to declareproposed subsidies foreach year at thebeginning of the year tothe State Assembly.(February 2000onwards).

44A

ppendix 2, page 7

45Appendix 3, page 1

EXTERNAL ASSISTANCE TO THE POWER SECTOR

Table A3.1: Previous ADB Loans to the Power Sector in India

Amount DateLoan No. Project ($ million) Approved

1. Public Sector

798-IND: North Madras Thermal Power Plant 150.0 18 Nov 1986

907-IND: Unchahar Thermal Power Project 160.0 29 Sep 1988

988-IND: Rayalaseema Thermal Power Plant 230.0 21 Nov 1989

1029-IND: Second North Madras Thermal Power Plant 200.0 30 Aug 1990

1161-IND: Power Efficiency (Sector) Project 250.0 26 Mar 1992

1405-IND: Power Transmission (Sector) Project 275.0 16 Nov 1995

1764-IND: Power Transmission Improvement (Sector) Project 250.0 06 Oct 2000

Subtotal 1,515.0

2. Private Sector

7058/1036: CESC Transmission Project 17.8 04 Oct 1990

7082/1142: CESC Thermal Power Plant 32.0 13 Dec 1991

7138 Infrastructure Dev. Finance Co. Ltd. 30.0 14 Oct 1997Subtotal 79.8

Complementary Cofinancing toC-19-IND: Power Finance Corp for TNEB and APSEB 110.8 13 Nov 1990

Power Transmission Improvement (Sector) Project 120.0 06 Oct 2000

Total 1,825.6

APSEB = Andhra Pradesh State Electricity BoardCESC = Calcutta Electricity Supply CompanyTNEB = Tamil Nadu Electricity Board

46 Appendix 3, page 2

Table A3.2: Previous ADB Technical Assistance to the Power Sector

TA Amount DateNo. Project ($'000) Approved

1119 - IND: Power Sector Loan 50 06 Feb 1989

1228-IND: APSEB Operational Improvement Support 1,000 21 Nov 1989

1229-IND: National Program for EnvironmentalManagement for Coal-Fired Generation 664 21 Nov 1989

1365-IND: TNEB Operational Improvement 740 30 Aug 1990

1366-IND: Environmental Monitoring and Pollution Control 490 30 Aug 1990

1701-IND Training Workshop on Environmental IssuesRelated to Electric Power Generation 100 25 May 1992

1756-IND: Study of Bulk Power and TransmissionTariffs and Transmission Regulations 600 29 Sep 1992

2116 -IND: Power System Planning in Orissa 600 28 Jun 1994

2193(L)-IND Energy Efficiency Support 3,000 27 Oct 1994

2490-IND Development of a Framework for ElectricityTariffs in Andra Pradesh 300 20 Dec 1995

2738-IND: Preparation of a Power System Master Plan/ Gujarat 600 17 Dec 1996

2739-IND: Development of a Framework for Electricity Tariffs/Gujarat 300 17 Dec 1996

2740-IND: Review of Electricity Legislation & Regulations in Gujarat 235 17 Dec 1996

2741-IND: Financial Management Support to Kheda &Rajkot Distribution Profit Centers of GEB 580 17 Dec 1996

2742-IND: Solicitation of Private Sector Implementationof the Chhara Combined Cycle Project 375 17 Dec 1996

2980-IND: Madhya Pradesh Power Sector Development 1,000 07 Jan 1998

3305-IND: Support to Power Finance Corporation 1,000 24 Nov 1999

3380-IND: Private Sector Participation in Electricity Transmission 600 28 Dec 1999

Total 12,234

APSEB = Andhra Pradesh State Electricity BoardGEB = Gujarat Electricity BoardTNEB = Tamil Nadu Electricity Board


Table A3.3: External Assistance to Powergrid in India by ADB, OECF, and the World Bank(Investment Projects – Loan Financed)

Project YearApproved

Source Amount($ million)

Powergrid System Development 1993 IBRD 350

Subtotal 350

Assam Gas Turbine Power Station and Transmission Line 1988 OECF 105

Northern India Transmission System 1966 OECF 80

Subtotal 185

Power Transmission (Sector) Project 1995 ADB 275

Total 810

ADB = Asian Development Bank, IBRD = International Bank for Reconstruction and Development,OECF = Overseas Economic Cooperation Fund

Table A3.4: World Bank Assistance to the Power Sector in India over last 10 years(Investment Projects, as of August 2000)

Project YearApproved

Amount($ million)

Maharastra Power 1989 400

Power Utilities Efficiency Improvement 1992 265

Renewable 1993 115

Power System Improvement 1993 350

NTPC Power 1993 400

Hydrology Project 1996 142

Orissa Power Sector 1996 150

A.P. Emergency Cyclone Relief 1997 50

A.P. Emergency Cyclone Relief 1997 100

Haryana Power Sector Restructuring 1998 350

Andhra Pradesh Power 1999 210

Uttar Pradesh Power 2000 150

Total 2,682

AP = Andhra Pradesh, NTPC = National Thermal Power Corporation Limited


Table A3.5: JBIC (formerly OECF) Assistance to the Power Sector in India:(Investment Projects, 1990-2000)

Projects YearApproved

Amount(¥ million)

Gandhar Gas Based Combined Cycle Power Project (I) 1990 13,046

Bhavabi Kattalai Barrage Hydro Electric Project (I) 1990 5,410

Basin Bridge Gas Turbine Project 1990 11,450

Subtotal 29,906

Anpara ‘B’ Thermal Power Station Construction Project (III) 1991 49,801

Teesta Canal Hydroelectric Project (II) 1991 6,222

Subtotal 56,023

Gandhar Gas Based Combined Cycle Power Project (II) 1992 42,599

Anpara ‘B’ Thermal Power Station Construction Project (IV) 1992 13,224

Gandhar Gas Based Combined Cycle Power Project (III) 1992 19,538

Subtotal 75,361

Anpara ‘B’ Thermal Power Station Construction Project (V) 1994 17,638

Bakreswar Thermal Power Project 1994 27,069

Faridabad Gas Based Power Station and Associated Transmission 1994 23,536

System Project

Subtotal 68,243

Assam Gas Turbine Power Station and Transmission Line 1995 15,821

Construction Project (III)

Kothagudem ‘A’ Thermal Power Station Rehabilitation Project 1995 5,092

Srisailam Left Bank Power Station Project (Phase II) 1995 22,567

Bakreswar Thermal Power Station Unit 3 Extension Project 1995 8,659

Purulia Pumped Storage Project 1995 20,520

Subtotal 72,659

Dhauliganga Hydroelectric Power Plant Construction Project 1996 5,665

Subtotal 5,665

Umiam Hydropower Station Renovation Project 1997 1,700

Simhadri Thermal Power Station Project 1997 19,817

Tuirial Hydroelectric Power Station Project 1997 11,695

West Bengal Transmission System Project 1997 11,087

Northern India Transmission System Project 1997 8,497

Simhadri and Vizag Transmission System Project 1997 10,629

Srisailam Left Bank Power Station Project (III) 1997 14,499

Dhauliganga Hydroelectric Power Plant Construction Project (II) 1997 16,316

Bakreswar Thermal Power Station Project (II) 1997 34,151

Subtotal 128,391

Bakreswar Thermal Power Station Project (III) 1999 11,537

Total 447,785

JBIC = Japan Bank for International Cooperation, OECF = Overseas Economic Cooperation Fund of Japan


Projects YearApproved

KFW Financing

Energy Investment Programme 1993 DM 23.25 FCDM 23.25 MF

Renovation Uran Power Plant 1994 DM 14.87 FCDM 14.87 MF

Promotion of Renewable Energy through IREDA 1997 DM 70.00 FCDM 50.00 MF

Total DM 196.24

EIB Financing

Southern Region Loan Despatch Centre 1993 EUR 55.00

EIB = European Investment BankFC = Financial Cooperation FundsIREDA = Indian Renewable Energy Development AgencyKfW = Kreditanstalt fur WiederaufbauMF = Market Funds

Amount(million)

Table A3.6: Other Assistance to the Power Sector in India

SECTOR DEVELOPMENT PROGRAM FRAMEWORK

Design Summary Project Targets Project MonitoringMechanisms

Risks/ Assumptions

1.0 GoalTo meet present and future demandsfor electrical energy in Gujarat

No load shedding by 2005No applications for electricalconnection pending for more than2 months by 2005

Utility interruption reportsMIS report of sectorentities

Enough funds are availablefor implementation of Gujaratpower sector expansion.Sector entities’ operations aresatisfactory.

2.0 Purpose

2.1 To expand and strengthennetwork

Network to be able to handle12,000 megawatts (MW) peak loadin 2002

Operations reports Load growth as per powersystem master plan, 1997

2.2 To collect adequate revenue foroperation and maintenance (O&M)and expansion

Return on equity (ROE) to begreater than 15 percent

Self financing ratio (SFR) to begreater than 40 percent

Annual accounts of powersector entities

Tariff rationalization

The State Government’s willto effect changes

2.3 To establish sustainable andefficient power sector institution(s).

Functional segregation of theGujarat Electricity Board (GEB)and incorporation of successorentities under Companies’ Act1956. Board members to includeexperts from related fields.

Memoranda and Articles ofAssociationBoard nominations

Establish an independent statutoryregulatory authority.

Passing of the law for thesetting up of the regulatoryauthority

2.4 To reduce the sector’s fiscaldeficits and make the sectorcontribute to the fiscalconsolidation of Gujarat State’sfinances.

Limit subsidization and increasecost recovery.

Improve sector efficiencies.

Tariff policy notifications

Restructuring andimproved managementprocesses

Appendix 4, page 1

50


Risks/ Assumptions

3.0 Components/Outputs

3.1 New institutions establishedRegulatory authority, generationcompany, transmission company,independent profit centers.

Registration certificates

3.2 New plant installed. Establishment of transmissionlines:

- 1,293 circuit kilometer (km)400/220 kilovolts (kV)

- 783 circuit km 132/ 66 kV

- 278 circuit km 11/ 0.415 kV

Substation capacity augmented by950 megavolt amperes (MVA)

New generating capacity installed

- 500 MW by GEB/GSECL- 4,000 MW by independent

power producers

Progress reports

Progress reports

Progress reports

3.3 New consumers connected Consumers connected

Residential - 223,000

Commercial - 72,000

Industrial - 13,000

Others - 23,000

GEB’s consumerdatabase

3.4 System loss reduced Less than 18 percent of dispatchby 2005.

490 MVA of capacitors installed

Operations data Appendix 4, page 2

51


Risks/ Assumptions

3.5 Use of electricity for irrigationreduced

Percentage of electricity usereduced to 25 percent of all energysold, through conversion ofirrigation systems

Operations data

3.6 Power system properly maintained Max. loss of 72 hours per year forany consumer

Operations data

3.7 Tariffs restructured and raised Average tariff (excluding duties andtaxes) increased from the presentRs2.20/ kWh to Rs3.56/ kWh byFY2006

Tariff notification

3.8 System established for regular tariffadjustments

Automatic tariff adjustment linkedto fuel costs/ power purchase costs Tariff notification

3.9 Effective billing and collection Collection/Billing ratio >99 percent. Monthly operations data3.10 Metering of all consumers All consumers to be metered by

2003Progress reports

4.0Activities

1. Final Project Report drafted byGEB on 1.10.2000.

2. State Government of Policy Matrixapproval by 1.12. 2000.

3. Announcement of GERC’s first tariffaward on 10.10.2000.

4. Preparation of corporatization planand revised delegation of powers/incentives by GEB by 31.12.2001.

5.0 Inputs

5.1 Finance:

- Foreign exchange $200.0million

- Local currency $110.2 million

5.2 Consulting Services - 50person-months

5. State Government’s approval ofreorganization plan by 30.06.2001.

6. Implementation of pilot project forconversion of irrigation systems

Appendix 4, page 3

52


PROJECT DESCRIPTION

A. Part A: Transmission Systems Linked with the IPP Power Projects andfor System Improvement

1. This project component has 220 kilovolts (kV) transmission lines and associatedsubstation bays to evacuate the output electric power whose installed capacity is750 megawatts (MW) in Gujarat. The associated IPP power projects in the western region ofGujarat are indicated in Table A5.1.

Table A5.1: Associated Power Projects

Project Name Installed Capacity District Name Status as of October 2000

Reliance 2x250 MW Jamnagar PPA is signed.Akrimota 2x125 MW Kutch PPA is under preparation.

MW = megawatts, PPA = power purchase agreement

2. The total length of the 220 kV transmission lines will be about 866 circuit-kilometer(cct-km). The total additional number of 220 kV substation bays will be eight bays. Thesetransmission systems will connect new IPP power plants to the existing 220 kV bulktransmission systems of Gujarat Electricity Board (GEB). The output electric power will bedelivered to all GEB distribution circles. The IPP power projects will be fostered and securedby the installation of these transmission systems. This component will be physicallycompleted in June 2004.

3. The project components also have transmission systems to improve power systemstability, attaining loss reduction and to meet load growth. Materials and equipment will be bybulk purchase in conjunction with those in Part B. The total augmentation is indicated inTable A5.2.

Table A5.2: Total Additional Transmission Systems

Description Quantity220/66 kV Substations 2,700 MVA220 kV Transmission Lines 240 cct-km66/11 kV Substations 2,815 MVA66 kV Sub-transmission Lines 629 cct-km

cct-km = circuit kilometer, kV = kilovolt, MVA = mega volt-ampere

B. Part B: Transmission Systems Associated with Profit Centers

4. Three districts (distribution circles) are selected as independent profit centers in GEB,which will be given management autonomy in accounting, personnel, and procurement ofmaterials. The annual load growth of the three districts is expected to be about 8 percentduring the next four years. Transmission systems between the bulk system and thedistribution systems of the three districts should be augmented to meet this load growth. Thetotal augmentation is in Table A5.3.


Table A5.3 Augmentation of Transmission Systems

Description Quantity400/220 kV Substations 630 MVA400 kV Transmission Line 80 cct-km220/66 kV Substations 200 MVA66/11 kV Substations 595 MVA66 kV Subtransmission Lines 208 cct-km


C. Part C: Modernization and Upgrading of Distribution System

5. This project component will support the independent profit centers to be establishedin Kheda (Anand) and Rajkot distribution circles as well as Mahesana distribution circlewhere a pilot system of drip irrigation system will be installed. Power systems from 220 kVtransmission systems to 0.4 kV distribution lines including meters will be modernized andupgraded under the comprehensive investment of GEB. Mobility, logistics, engineering, andadministration will also be modernized by providing computer systems, office equipment,communications equipment and system, and tools and tackles. Operation of the two profitcenters will be strengthened by this modernization and upgrading of the power system alongwith the establishment of autonomous and commercial management in the profit centersunder the Asian Development Bank’s TA and training offered by other bilateral aid agencies.

6. This project component also comprises of (i) replacement of burnt and faileddistribution transformers for five distribution circles (Palanpur, Jamnagar, Porbandar, Bhuj,Surendranagar), and (ii) replacement of conventional energy meters by high-quality staticmeters on 500,000 installations for 12 distribution circles. These replacements are expectedto attain (i) the increase in utilization factor from 0.90 to 0.95, and (ii) the accurate billing andincrease in revenue. In addition, the Vapi industrial area in Valsad distribution circle isselected as the pilot project for remote reading of 100 high tension (HT) consumers. The totaltentative investment for this project component is indicated in Table A5.4.

Table A5.4: Estimated Total Investment for Component C

Description Quantity 11 kV Distribution Lines 4,380 cct-km11/0.4 kV Distribution Transformers 11,300 cct-km0.4 kV Distribution Lines 2,800 cct-kmConventional Meters 630,000High-Tension High-Precision Meters 400Low-Tension High-Precision Meters 2,56011 kV Feeder Shunt Capacitor 42.5 MVA


D. Part D: Efficiency Upgrading of GEB Customers

7. Under the current tariff scheme, “per installed horsepower”, there is no incentive forfarmers to conserve electricity. In northern districts including Mahesana, farmers tend to useirrigation pumps to get as much groundwater as possible. This is because farmers can gainshort-term benefits from higher cropping yields by growing water-intensive cash crops. As a


result, the groundwater level has dropped from about 10 meters below ground in the 1970sto an average of 150 meters today. This water level drop is still continuing and will result insaline water. This lower water level also leads to more electricity consumption. In Gujarat,this chain reaction is already recognized and several institutes in the state madecomprehensive studies. As a result, modern irrigation methods for dry weather wereproposed and small-scale pilot plants were implemented. However, these pilot schemeswere not large enough to show their positive impact on both water level and electricityconsumption. Therefore, a pilot study covering several villages is proposed to demonstratethe potential impact of the modern irrigation method and cropping arrangements. Based onan assessment of the soil conditions and cropping pattern in Mahesana district and a reviewof the power consumption due to the current irrigation methods, alternative economicirrigation methods such as drip irrigation will be proposed and a pilot project for about 18,000acres (360 wells, 3,600 farmers) will be conducted.


Foreign Local CostProject Component Exchange $ million

($ million) Rs million equivalent

A-1 Reliance Power Project (2x250MW)1. 220kV D/C Motikhavadi-Motipanoli 2.83 59.35 1.28 4.11 (68km, Zebra, 2 Bays at Motipanoli) 2. 220kV D/C Motikhavadi-Rajkot 5.21 102.51 2.20 7.41 (130km, Zebra, 2 Bays at Rajkot)

Subtotal 8.04 161.86 3.48 11.52

A-2 Akrimota Power Project (2x125MW)1. 220kV D/C Akrimota-Nakhatrana 3.88 77.78 1.67 5.55 (95km, Zebra, 2 Bays at Nakhatrana)2. 220kV D/C Nakhatrana-Chitrod 5.83 120.94 2.60 8.43 (140km, Zebra, 2 Bays at Both Ends)

Subtotal 9.71 198.72 4.27 13.98

A-Addl. Transmission Systems for System Improvement1. 220kV D/C Bardoli-Chikhali 1.54 27.43 0.59 2.13 (40km, Zebra)2. 220kV D/C Rajkot-Morbi 2.69 48.56 1.04 3.73 (70km, Zebra)3. 220kV LILO Deodar-Anjar at Chitrod 0.38 7.19 0.15 0.53 (10km, Zebra)4. 220kV Chitrod S/S 1.51 59.80 1.29 2.80 (2x50MVA, 220/66kV)5. 220kV Substation Expansion 11.60 173.55 3.73 15.33 (6x100MVA, 220/132kV, 20x100MVA, 220/66kVA)6. 66kV Substation Expansion 11.09 177.59 3.82 14.91 (93x15MVA)7. 66kV Substation Expansion 10.77 223.45 4.81 15.58 (92x10MVA)8. 66kV New Substation 9.88 517.94 11.14 21.02 (50 Substation, 500MVA )9. 66kV S/C Lines for S/S 5.64 161.41 3.47 9.11 (628.5km, Dog)

Subtotal 55.10 1,396.92 30.04 85.14

Total 72.85 1,757.50 37.80 110.65

Part A : Transmission Systems Associated with IPP Power Projectsand for System Improvement

PROJECT COST ESTIMATES

$1.00=Rs46.50Total Cost($ million)


Part B : Transmission Systems Associated with Profit Centers

Foreign Local CostProject Component Exchange $ million

($ million) Rs million equivalent

B-1 Rajkot

1. 400kV Rajkot Substaion 6.99 235.59 5.07 12.06 (400/220, 2X315MVA+220/66kV, 2x100MVA)2. 400kV LILO Chorania-Jetpur at Rajkot 3.29 45.41 0.98 4.27 (40km, Moose)3. 66kV New Substations 0.99 51.70 1.11 2.10 (5 Substaions, 50MVA)4. 66kV Substation Expansion 0.87 24.28 0.52 1.39 (7 Substaion, 75MVA)5. 66kV Subtransmission Lines 0.87 24.73 0.53 1.40 (89km, Dog/Panthar, Tower/H Frame)

Subtotal 13.01 381.71 8.21 21.22

B-2 Kheda

1. 66kV New Substations 0.20 10.34 0.22 0.42 (1 Substaions, 10MVA)2. 66kV Substation Expansion 1.32 36.42 0.78 2.10 (12 Substaion, 130MVA)3. 66kV Subtransmission Lines 0.11 2.88 0.06 0.17 (12km, Dog/Panthar, Tower/H Frame)

Subtotal 1.63 49.64 1.07 2.70

B-3 Mahesana

1. 66kV New Substations 1.78 93.07 2.00 3.78 (9 Substaions, 90MVA)2. 66kV Substation Expansion 2.38 65.64 1.41 3.79 (22 Substaion, 240MVA)3. 66kV Subtransmission Lines 1.15 35.97 0.77 1.92 (107km, Dog/Panthar, Tower/H Frame)

Subtotal 5.31 194.68 4.19 9.50

Total 19.95 626.03 13.46 33.41

$1.00=Rs46.50Total Cost($ million)


Part C: Modernization & Upgrading of Distribution Systems(Rajkot, Kheda, and Mahesana)

$1.00=Rs46.50Foreign Local Cost

Project Component Exchange Rs million $ million($ million) equivalent

C-1 Rajkot District

1. 11kV Distribution System 4.08 215.36 4.63 8.71 2. 0.4kV Distribution System 2.63 110.60 2.38 5.01 3. 11&0.4kV System Renovation 1.80 50.80 1.09 2.89

Subtotal 8.51 376.76 8.10 16.61

C-2 Kheda District

1. 11kV Distribution System 1.58 79.58 1.71 3.29 2. 0.4kV Distribution System 0.83 34.17 0.73 1.56

Subtotal 2.41 113.75 2.45 4.86

C-3 Mahesana District

1. 11kV Distribution System 5.53 143.87 3.09 8.62 2. 0.4kV Distribution System 1.15 48.56 1.04 2.19

Subtotal 6.68 192.43 4.14 10.82

C-4 High Precision Meters 1.15 26.53 0.57 1.72 (for Three Districts)

C-5 Shunt Capacitors 0.46 14.84 0.32 0.78 (for 3 Districts)

C-6 Conventional Meters 1.20 36.42 0.78 1.98 (for 3 Districts)

C-7 Management Upgrade of Two Profit Centers

1. Financial Management System 6.85 128.59 2.77 9.62 (Accounting, Billing, Collection, Inventory) 2. Engineering Support System 4.80 14.39 0.31 5.11 (Mobilization, Communication, Maintenance) 3. Consulting Services and Training a 1.34 40.15 0.86 2.20

Subtotal 12.99 183.13 3.94 16.93

C-8 Distribution System Improvement 1. 11kV Distribution System 11.52 120.49 2.59 14.11 (Distribution Transformer) 2. Conventional Meters (for 12 Districts) 11.68 99.81 2.15 13.83 3. Remote Reading Meters 0.33 3.15 0.07 0.40 (100 Static Meters for LT Consumers)

Subtotal 23.53 223.45 4.81 28.34

Total 56.93 1,167.31 25.10 82.03 a Under consideration for grant financing by bilateral aid agencies.

Total Cost($ million)


Part D: Drip Irrigation Systems$1.00=Rs46.50

Foreign Local CostProject Component Exchange Rs million $ million

($ million) equivalent

D-1 Conversion of Irrigation System (Mahesana District Pilot Plant)

1. Installation of Drip Irrigation System 7.80 84.52 1.82 9.62

2. Engineering Service - 35.00 0.75 0.75

Total 7.80 119.52 2.57 10.37

Grand Total 157.53 3,670.36 78.93 236.46

kV = kilovolt D/C = double circuit MVA = megavolt-ampereS/C = single circuit S/S = substation KVA = kilo volt-amperekm = kilometer LT = low tension

Total Cost($ million)


SUMMARY INITIAL ENVIRONMENTAL EXAMINATION

A. Introduction

1. Transmission line projects are exempted from environmental examination by theGovernment of India (the Government) and require only a No Objection Certificate from theDepartment of Forests. The project passes through mostly desert wasteland and grazing land.As such, the Department of Forest has issued a No Objection Certificate. However,transmission line projects are classified in category B under the Asian Development Bank's(ADB’s) classification of environmental impacts. Gujarat Electricity Board (GEB) has preparedan initial environmental examination (IEE) using the overlay technique. Not all the sites for newsubstations have been identified, and for purposes of IEE analysis a typical site is used. GEBwill submit a report on the substation sites once those are identified and submit to ADB achecklist of the expected environmental impacts and mitigating measures in accordance withADB’s Environmental Guidelines for Selected Industrial and Power Development Projects.However, given the nature of the area and that many of these substations are within existingfacilities of GEB, it is expected that the environmental impact will be minor.

B. Project Description

2. A description of the Project is given in para. 47 of the main RRP report and Appendix 5.

C. Description of the Environment

3. Gujarat is located in the western part of India. Deserts characterize the western andnorthwest sections of the state. Mudflats and mangrove swamps are the dominant featuresalong the coastline of the Arabian Sea. There is no major river system west of Ahmadabadbecause of the extremely low rainfall. The southeast and eastern sections are affected by thesouthwest monsoon from July to October. A number of major river systems in northern andcentral India pass through the state before discharging to the Arabian Sea. The major riversystems are located in the southeastern part of the state. The major river systems are Narmada,Tapi, Mahi, and Sabarmati. All empty into the Gulf of Khambhat. Except for the mountains in theeastern and southeastern boundaries, the southeast section of Gujarat is relatively flat plain.

4. Most of the population live in the central and eastern sections of the state. In the easternsection, which is affected by the monsoon or where irrigation water is available, a wide variety ofcash crops are grown. Wheat, rice, sugarcane, and sorghum are cultivated. In recent years,higher value crops such as banana, vegetables and other fruit are cultivated for export and thedomestic market. In areas with less rainfall, peanuts and pulses are cultivated. The semiaridsections are normally used for grazing and are sparsely populated. The western andnorthwestern sections are mostly the salt desert of the Rann of Kachchh.

1. Akrimota-Nakhatrana-Chitrod Area

5. The southwest coastline of Gujarat is lined with mangrove swamps stretching to thePakistan border. The swamp width varies from few a meters at Kandla port to a few hundredmeters close to the Pakistani border. Behind the mangrove swamps, the area is dotted withmudflats that extend up to 20 kilometers (km) inland during the summer months. The area isarid and during the summer months is bare except for a few acacia trees. During the monsoonseason, the area is covered with grass and used primarily for grazing. Groundnuts and other


crops tolerant of drought are cultivated during the monsoon months. Due to the low agriculturalproductivity of the area, the population density is very low.

6. In recent years with the development of port facilities along the coastline, a number ofheavy industries have established in the area especially around Kandla port. The heavyindustries have stimulated the growth of medium-scale industries serving primarily the exportmarket and the needs of the oil industry. Due to its proximity to the Gulf states, the port alongthe coastline is the main entry point for oil and other hydrocarbons. The area is crossed by gasand oil pipelines serving the heavily populated northern states including the capital, Delhi. Anumber of power plants have been built in the area talking advantage of the vast tract of openspace, proximity to fuel supply, and large industrial users.

2. Motikhavadi-Motipanoli/Motikhavadi-Rajkot/Rajkot-Morbi Area

7. The area is part of the semiarid western section of the peninsula surrounded by the Gulfof Kachchh, the Arabian Sea, and the Gulf of Khambhat. Jamnagar on the coast of the Gulf ofKachchh is the major town and the traditional port before the development of Kandla. Unlike thefishing, port, and industrial areas along the coastline, the interior is thinly populated. The mainoccupation of the people is herding goats and sheep. Rajkot is the major trading town in theinterior being at the crossroads of the highway from Porbandar to Delhi and the highwayconnecting to Kandla. With to the development of new industries in Kandla, Jamnagar, and thecoastal areas, and availability of vast tracts of wastelands, a number of independent powerproducers are locating in the area. There is no major river system in the area because of lowrainfall. The main tree species - acacia and eucalyptus - are sparsely distributed along dryriverbeds and depressed areas that hold some water during the short rainy season.

3. Bardoli-Chikhali Area

8. The 40-km line is located in the southeastern section of Gujarat running parallel to theeastern coast of the Gulf of Khambhat. The soil in the area is primarily fertile alluvial depositfrom the four major rivers passing through Gujarat. The area has flat rolling hills planted withsugarcane, wheat, and rice. During the dry season peanut is planted. The area is located alongthe major transport road connecting Delhi and Mumbai. A number of heavy industries arescattered in the area and, in recent years the newer industries have settled in industrial estates.The industries produce mostly chemicals such as dyes, agrochemicals, and various types ofplastic resins. There are also a number of manufacturers of textiles and consumer products.

4. Substations

9. The substations are located in various towns along the transmission line routes. The 220kV transmission lines will not pass through built-up areas, since 66 kV lines connect substationsto the service areas. Fifty-five substations will be expanded. The expansion will be carried outwithin existing substation facilities and will not require any land acquisition. Sixty-five newsubstations will be built each requiring 1-5 hectares (ha). The exception is the 440 kV substationin Rajkot, which will require 33.4 ha. Fifteen new substation sites have been identified mostly onwasteland owned by the State Government. Two substation sites in Chitrod will be acquiredfrom private land owners, one in Jakhwada and another one in Sundarphur. The two substationsites will have an area of 5 ha each. The private lands are primarily grazing land. Noresettlement is involved.


D. Screening of Environmental Impacts and Mitigation Measures

10. The transmission system route was selected to avoid the mangrove swamps and willpass through the mudflats. The transmission towers and conductors will be a prominent featurein the area. This is a residual impact of the project. However, there is no important landmarkwhose aesthetics could be affected by the project. For safety purposes, the foundation of thetransmission towers are built away from dry river beds that normally overflow during flash floodsthat infrequently occur in the semiarid areas. The transmission towers will not have anysignificant impact on the river flows.

11. Rehabilitation of old substations along the distribution network may involve the collectionand disposal of PCB materials in old transformers and other substation equipment. The extentof PCB to be collected and disposed of has not been determined. The GEB consultant willdetermine the extent of PCB used in those materials. If PCB is present, it will be collected inairtight containers and stored in a secured area within one of the GEB power plants until asuitable incinerator is available in India. Temporary storage of PCB in airtight containers is anaccepted practice even in developed countries that do not have high temperature incinerationfacilities.

E. Institutional Requirement and Environmental Monitoring Program

12. The upgrading will most likely require the appointment of a senior official to head theenvironment and safety unit at the main office. The head of the unit will report directly to themanaging director in line with current practices adapted worldwide. Although the Project doesnot require any environmental impact assessment under the existing regulations of theGovernment of India, during construction the project management office will continuouslymonitor the rehabilitation of the substation to ensure conformity with acceptable standards,especially if PCBs are identified.

F. Findings and Conclusion

13. The Project components will pass through desert and semiarid areas in the north andnorthwest sections of Gujarat State. They will not dislocate any agricultural activity nor will theypass through any built-up areas. One section of the transmission line passes throughagricultural land. The impact of the Project during construction is limited as the area is cultivatedwith groundnuts, wheat, and sugarcane. The area under the transmission line could continue tobe used for those agricultural activities.

14. The land acquired for the new substations are mostly wasteland outside towns andindustrial zones developed near the port facilities.

15. The project environmental benefits exceed the negative impacts. A detailedenvironmental impact assessment is not required.

POVERTY IMPACT ASSESSMENT

Matrix 1. Functional Reorganization

Type of EffectChannel

Direct Indirect Macro Non-poorLabor Market • No effect in the short term

• In the medium-term, depending onthe staffing of GSECL and GETCL,likely to be a moderate decrease inthe requirement of unskilled laborwith adoption of moderntechnologies and improvement ofthe output per employee

• In the long term, highergrowth rates will helpincrease the requirementfor labor.

• Potential increase in demandfor labor

• Positive impact.

Producer andConsumerPrices

• No direct impact in the short term. • Lower prices in the longterm, as more efficientservices will depresscosts.

• Transparent regulatoryframework will depoliticizeprice setting.

Net PublicTransfers

• No impact as it has no direct costimplications for public financing.

Access toPublic Goodsand Servicesfor the Poor

• Will lead to changes in thedistribution system or in the accessof public goods and services to thepoor

• Decentralizeddistribution andfunctional segregationwill improve thesensitivity of the publicutilities to publicrequirements.

• Improvement in theaccess of goods andservices by all, includingthe poor in the long term

• Improved corporategovernance will increaseallocative efficiency, thuscontribute to economicgrowth.

Total NetEffects

No major direct negative impact on the poor. No displacement/retrenchment of workers is planned in the short term in connection with thereorganization.

Assumptions Functional reorganization will improve corporate governance and increase allocative efficiency in the long term. Appendix 8, page 1

63

Matrix 2. Tariff Rationalization


Direct Indirect Macro Non-poorLabor Market • Impact on the demand for labor in

the agriculture sector may benegative in the short term. Higherelectricity costs may reduce thecultivation of low-value crops.However, the displaced labor forcecould be shifted to high-yielding on-farm activities such as raisinglivestock, which has already beentaking place in some areas.

• The lowering of electricity costs tocommerce and industry will boostcompetitiveness and increaseindustrial expansion, thus createincreased demand for labor.

• In the medium and longterm, improvedresource availability isexpected to have apositive impact onemployment in allsectors.

• Improved cost recovery willcontribute to sustainabilityof public finance, thus fostereconomic activities. This willcreate more employmentopportunities.

• Increase in demand for laborwill have positive impact onthe non-poor as well.


• In the short term, prices ofagricultural commodities willincrease, but prices of industrialproducts will be stabilized ordecrease.

• Efficient use ofelectricity and newtechniques (e.g., dripirrigation) will reducecosts to the farmers inthe long term, thusprices will stabilize.

• Nominal rise of prices, butthe quality-adjusted pricelevel may remainunchanged or lowered.

• Enhanced cost recoverythrough lower subsidies willreduce factor pricedistortions.

• Higher prices of goods andservices purchased mostlyby the non-poor

Net PublicTransfers

Not applicable • Increased cost recoverywill have a positiveimpact on the poor dueto reduction inbudgetary subsidies,which can reallocatefunds to other economicand social services.

• Increased allocativeefficiency of publicresources

• More resources availablefor economic and socialservices

• Cost recovery andincremental tariffs willproportionately burden thenon-poor.


Not applicable. • With better costrecovery and resourceavailability, social andpoverty reductionprograms could beexpanded.

• Non-poor will have betteraccess and utilization, butwill also need to pay more.

Total NetEffects

Potential short-term negative impact on the farmers, including the marginal and poor farmers, will be offset by (i) increased demand for labor inother sectors due to increased competitiveness, (ii) shift to high-value crops and high-yielding on-farm activities, and (iii) reallocation of publicresources for economic and social services.

Assumptions Improved cost recovery will contribute to sustainability of public finance and reallocation of resources. Expansion of new farming methods suchas drip irrigation and crop diversification will increase farm income.

Appendix 8, page 2

64

Matrix 3. Privatization in Distribution Area


Direct Indirect Macro Non-poorLabor Market • Potentially positive impact as private

sector investment will lead to anincrease in the demand for laborboth for construction and operationand maintenance.

• Increased privateinvestment will improveallocative efficiency, fostereconomic growth andproduce new employmentopportunities.

• New employmentopportunities will be sharedby the non-poor.


• Rise in electricity prices will partlydepend on the scale of expectedinvestments by the private sectorand the need to service the newdebts incurred.

• With the adoption of the slab systemof electricity pricing, the poorerconsumers, who are covered by alifeline tariff, will not be affected.

• With efficiencyimprovements and theadvent of superiorprivate sectormanagement practices,it is expected that in thelong term, electricityprices will be reduced,leading to a stabilizingeffect on prices of othercommodities.

• Increased market-orientation and enhancedallocative efficiency willproduce dynamic gains anddraw positive supplyresponse, which will lowerinflation.

• Higher prices of goods andservices purchased mostlyby the non-poor

Net PublicTransfers

Not applicable • Positive impact on thepoor. The introductionof private capital in thepower sector willrelease funds for socialand economic servicesin other sectors.

• Increased privateinvestment will easebudgetary pressure, andmake public funds availableto expand economic,social, and povertyreduction programs.

• Sustainability of publicinvestment will beenhanced.

• Non-poor will also benefit.


• Neutral. Private sector participationwill not lead to changes in thedistribution system or in the poor'saccess to public goods andservices.

• Greater public-privatecollaboration will increasethe quality of servicedelivery.


Total NetEffects

Rise in electricity prices has negative impact on the consumers, including the poor. However, this short-term negative impact will be offset byimproved allocative efficiency due to increased private investment and resulting economic growth. New employment opportunities will becreated.

Assumptions Considerable scale of investments by the private sector and reduction in budgetary pressure

Appendix 8, page 3

65

Matrix 4. Creation of Enabling Policy Environment


Direct Indirect Macro Non-poorLabor Market • No effect on the demand for labor

in the short term• In the medium term, faced with a

competitive situation, the demandfor labor will be reduced, especiallyin the semi skilled and unskilledcategories.

• In the long term therewill an increasingdemand for labor due tothe expansion of thepower system as wellas growth of commerceand industry.

• Increase in allocativeefficiency will fostereconomic growth andexpand the demand forlabor.



• Prices will increase In the shortterm.

• In the medium term, reform willhave a positive impact on pricessince rationalization andcompetition will force a reduction inprices.

• Safety, environmental aspects, andconsumer-oriented services, whichhitherto had not been appropriatelyemphasized, will result in amarginal increase in costs ofservice.

• Removal ofinfrastructurebottlenecks andcreation of an efficientand environment-friendly power sectorwill lead to reducedproduction costs andtherefore lower pricesand health and medicalexpenditures to thepublic.

• Transparent regulatoryframework will depoliticizeprice setting.

Net PublicTransfers

• No direct impact in the short term • In the long termmobilization of privatesector funds will allowthe diversion of morefunds for economic andsocial services.

• Ease budgetary pressureand reallocation ofresources.

Access to PublicGoods andServices for thePoor

• No significant effect on access topublic goods and services for thepoor in the short term.

• Access to improvedinfrastructure will beenhanced in the longerterm.

Total Net Effects Price increase in the short term will have negative impact on consumers, including the poor. In the medium to long term, reform will have apositive impact due to reduced costs as well as budgetary pressure.

Assumptions Enabling and transparent policy framework will depoliticize price setting, mobilize private sector funds, and increase allocative efficiency.

Appendix 8, page 4

66

67Appendix 9

LIST OF INELIGIBLE ITEMS

1. The proceeds of the loan will be utilized to finance the foreign currency expenditures in respectof the reasonable cost of imported goods (exclusive of taxes and duties) required duringimplementation of the Program.

2. Notwithstanding the statement in para. 1, no withdrawals will be made in respect of

(i) expenditures for goods included in the following Standard International TradeCommodity chapters or headings:

Chapter Heading Description of Items

112 Alcoholic beverages

121 Tobacco, unmanufacturers; tobacco refuse

122 Tobacco, manufactured (whether or not containingtobacco substitutes)

525 Radioactive and associated materials

667 Pearls, precious and semiprecious stones, unworkedor worked

718 718.7 Nuclear reactors, and parts thereof, fuel elements(cartridges), nonirradiated for nuclear reactors

897 897.3 Jewelry of gold, silver, or platinum group metals(except watches and watch cases) and goldsmiths' orsilversmiths' wares (including set gems)

971 Gold, nonmonetary (excluding gold ores andconcentrates)

(ii) expenditures in the currency of India or goods supplied from within India;

(iii) payments made for expenditures incurred more than 180 days prior to loan effectivity.

(iv) expenditures for goods supplied under a contract that any national or internationalfunding agency will have financed or agreed to finance, including any contract financedunder any loans from ADB;

(v) expenditures for goods intended for military or paramilitary purposes or for luxuryconsumption; or

(vi) expenditures for pesticides categorized as extremely hazardous or highly hazardous inClass 1a and 1b, respectively, of the World Health Organization's Classification ofPesticides by Hazard and Guidelines to Classification.

IMPLEMENTATION SCHEDULE

Project Component 2000 2001 2002 2003 2004 2005

9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Part A : Transmission Systems Linked with IPP Power Projects and System Improvement

TF CA CS CE ES EE C

1.Reliance Power Project

TF CA CS CE ES EE C

2. Akrimota Power Project

TF CA CS CE ES EE C

3. T/L System Improvement

Parts B & C: Transmission Lines for Profit Centers and Modernization & Upgrading of Distribution System

TF CA CS CE ES EE C

1. Kheda District

TF CA CS CE ES EE C

2. Rajikot District

TF CA CS CE ES EE C

3. Mahesana District

68

TF CA CS CE ES EE C

4. Distribution System Improvement

Part D : Efficiency Upgrading of GEB Customer

TF CA CS CE ES EE C

1. Installation of Drip Irrigation System

2. Consulting Services

Technical Assistance

1. Restructuring of GEB

2. Consumers' Consultative Forum

3. Gujarat Electricity Regulatory Commission

NOTE:C = commissioning DA = design approval GEB = Gujarat Electricity Board, T/L = transmission line, IPP = independent power producer.CA = contract award EE = completion of erectionCE = commencement of erection ES = completion of supplyCS = commencement of supply TF = Tender FloatCW = commencement of work

Appendix 10

69Appendix 11

CONTRACT PACKAGE LIST

Contract Items Contract ProcurementNo. Type Mode

Part A: Transm iss ion Systems Linked with IPP Power Pro jectsPart B: Transm iss ion Systems Assoc iated with Profi t Centers

1 Galvanized Tower Steel (400, 220, 66 kV Lines) S ICB 8.3

2 Conductor & Groundwire S ICB 14.1(Moose, Zebra, Panther, Dog)

3 Insulators (400, 220, 66kV) S ICB 2.7

4 Transformers (400/220, 220/132, 220/66, 66/11kV) S ICB 37.2

5 SF6 Circuit Breakers (400, 220, 132, 66kV Substations) S ICB 8.6

6 CTs, CVTs, and PTs (400, 220, 66kV Substations) S ICB 2.7

7 Isolators (400, 220, 66kV Substations) S ICB 2.2

8 Surge Arrestors (400, 220, 66kV Substations) S IS 0.4

Total (Parts A, B) 76.2

Contract Items Contract ProcurementNo. Type Mode

Part C: Modern ization an d Upgra ding o f Distr ibut ion System

1 Distribution Transformers (11/0.4kV) S ICB 20

2 Conductors (50mm2) S ICB 10

3 High Precision Meters (High Tension, Low Tension) S ICB 2

4 Conventional Meters (High Tension, Low Tension) S ICB 14.7

5 11kV VCB S ICB 1

6 11kV XLPE Cables S ICB 1.4

7 11 kV Shunt Capacitor S ICB 0.5

8 Financial Management System (including Hardware) S+C ICB 7

9 Communication Equipment, Computer S+C ICB 5

10 (JICA) Consultancy Services and Training for Profit Centers 2

Tota l (Part C) 63.6

Contract Items Contract ProcurementNo.

Type Mode

Part D: Convers ion o f Irr igat ion Systems(Mahesana Distr ict Pilot Irr igat ion Plant)

1 Drip Irrigation System (Water Pump, Pipe, Filter, etc.) S ICB 5.5

Tota l (Part D) 5.5

($ milli on)

Est imatedValue

($ milli on)

($ million)

S = supply, S+C = supply and commissioning, ICB = international competitive bidding, IS = international shopping

Est imatedValue

($ milli on)

Est imatedValue


FINANCIAL PERFORMANCE AND PROJECTIONS OF GEB

A. General

1. The projected financial statements are in current terms. The domestic and international inflationrates used in the projections are presented in Table A13.1. The rupee is assumed to depreciate againstthe dollar at the end of every fiscal year by the difference between the two inflation rates according to“purchase power parity theory”. Forecasted foreign exchange rates are also given in Table A13.1.

Table A13.1: Inflation and Foreign Exchange Rates

Item FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009Inflation Rate

Domestic 6.50 6.50 6.50 6.50 6.50 6.50 6.50 6.50 6.50International 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40

ForeignExchangeRate (Rs/$)

46.50 48.36 50.30 52.31 54.41 56.58 58.85 61.21 63.66

B. Income Statements

1. Sales Revenues

2. Given the GEB’s cost structure, electricity tariff is calculated according to GERC’s tariff awardas of 10 October 2000. The tariff award by GERC combined with the new Act envision further tariffincreases to bring GEB back on a sound financial footing. Projected electricity tariff net of electricityduty (ED) and sales tax (ST) are presented in Table A13.2. Please note that the agricultural tariff is netof subsidy as the subsidy is added to the net income on the income statement.

Table A13.2: Electricity Tariff per Consumer Categoryand Weighted Average Tariff (Rs/kWh, excluding ED/ST)

Category FY2000 FY2001 a FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009(Prov) (Budget) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj)


2.10 2.19 2.41 2.53 2.66 2.79 2.93 3.07 3.23 3.39

Commercial 3.84 4.05 4.46 4.68 4.91 5.00 5.00 5.00 5.00 5.00Industrial (LT) 3.49 3.70 4.07 4.27 4.49 4.71 4.95 5.00 5.00 5.00

Industrial (HT) 4.09 4.17 4.59 4.82 5.00 5.00 5.00 5.00 5.00 5.00Public Lighting 2.63 2.74 3.01 3.16 3.32 3.49 3.66 3.85 4.04 4.24Railways 4.63 4.70 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00Agriculture 0.15 0.58 1.00 1.15 1.32 1.52 1.75 2.01 2.31 2.66Public WaterWorks

1.24 1.29 1.42 1.49 1.56 1.64 1.72 1.81 1.90 2.00

Bulk Supply 2.36 2.42 2.66 2.80 2.93 3.08 3.24 3.40 3.57 3.75Interstate 2.21 2.21 2.43 2.55 2.68 2.81 2.95 3.10 3.26 3.42

WeightedAverage Tariff

1.79 2.20 2.64 2.97 3.20 3.39 3.56 3.71 3.86 4.02

Source: ADB staff estimateED = electricity duty, HT = high tension, LT = low tension, Proj = projected, Prov = provisional, ST = sales tax.a This reflects the 10 October 2000 tariff increases as per the GERC award given in para. 82, page 23.

3. The total sales volume is projected based on availability of IPPs and central stations in additionto GEB’s own installed generation capacity, together with the estimated annual load growth. Forconsumer mix, it is assumed that consumption by domestic/residential, commercial, industrial (LT), andindustrial (HT) will contribute to the load growth, whereas agricultural consumption will decrease (Table


A13.3). It is also expected that some consumers will be reclassified from agriculture to commercial andindustrial (LT).

Table A13.3: Sales Volume(GWh)

Category FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009(Prov) (Budget) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj)


2,813 3,066 3,833 4,216 4,637 5,101 5,611 6,172 6,790 7,468

Commercial 816 898 1,032 1,535 1,766 1,942 2,137 2,350 2,585 2,844Industrial (LT) 2,696 2,966 3,410 4,451 4,674 5,141 5,656 5,938 6,235 6,547Industrial (HT) 6,451 7,419 8,161 8,977 9,874 10,862 11,948 13,143 14,457 15,903Public Lighting 122 128 134 141 148 156 163 172 180 189Railways 379 425 446 469 492 517 542 570 598 628Agriculture 14,914 13,632 13,632 12,532 12,532 12,532 12,783 13,038 13,299 13,565Public Water

Works434 445 458 472 486 501 516 531 547 564

Bulk Supply 2,553 2,550 2,754 2,974 3,212 3,469 3,747 4,047 4,370 4,720Sales Volume 31,178 31,528 33,861 35,767 37,822 40,221 43,102 45,961 49,062 52,428Source: ADB staff estimateGWh = gigawatt-hour, HT = high tension, Proj = projected, Prov = provisional.

2. Operating Expenses

4. GEB’s own power generation and its fuel cost are presented in Table A13.4. Auxiliaryconsumption and transmission and distribution losses are estimated at 9.5 percent of gross generationand 19.5 percent of total available for sale, respectively.

Table A13.4: Own Power Generation and Fuel Costs

FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009Gross

Generation(GWh)

23,177 24,494 24,494 23,394 23,394 23,394 23,394 23,394 23,394 23,394

Total Fuel Cost(Rs Mn)

28,304 32,170 33,296 34,461 35,667 36,916 38,208 39,545 40,929 42,362

Source: ADB staff estimateGWh = gigawatt-hour.

5. Volume and costs of power purchase are presented in Table A13.5.

Table A13.5: Power Purchase Volume and Costs

FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009PowerPurchased(GWh)

19,325 23,291 23,659 25,345 26,172 28,549 31,458 34,944 38,725 42,830

Total Cost(Rs Mn)

43,863 48,540 60,778 70,961 79,199 95,621 110,517 127,188 138,676 151,123

Source: ADB staff estimateGWh = gigawatt-hour.

6. The administrative costs are projected as follows:

(i) Operation and maintenance. Cost for operation and maintenance is estimated at 2.5percent of gross fixed assets.


(ii) Employee costs. The number of employees is unchanged over the projected period. Forcosts per employee, salaries and wages, allowances, and other fringe benefit areescalated every year by 3 percent, 20 percent, 10 percent, respectively.

(iii) Depreciation. Fixed assets are depreciated, on average, at the rate of 7.0 percent withstraight line method.

(iv) Others. Other expenses are escalated by domestic inflation rates.

3. Other Income

7. Other income includes investment income and deferred payment for power sales.

4. Financial Charges

8. For outstanding loans, financial charges are calculated based on the actual borrowing rates.Interest rate for the Project is estimated at 12 percent in rupees.

C. Balance Sheet

1. Current Assets

(a) Cash & Bank Balances 0.5 month worth of sales(b) Accounts Receivable 3 months worth of sales(c) Stocks 15 days worth of fuel plus

5.0 percent of gross fixed assets(d) Loans & Advances 20 percent of capital work in progress(e) Sundry Receivables 2 month worth of fuel(f) Subsidy Receivables liquidated over four years

9. The projected annual capital investments for GEB are given in Table A13.6.

Table A13.6: Capital Investment

FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009Capital Investment

(Rs Mn)6,018 10,890 3,000 4,000 4,000 2,700 1,000 1,000 1,000 1,000

2. Current Liabilities

(a) Fuel-Related Liabilities 1.5 months worth of fuel cost(b) Liabilities for Power Purchase 2 months worth of power purchase(c) Liabilities for Supply/Works 25 percent of capital work in progress(d) Electricity Duty Payable 1.5 months worth of electricity duty(e) Deposit for Electrification 1 month worth of sales(f) Security Deposit 1 month worth of sales(g) Others 4 months worth of employee cost

plus 0.5 month worth of sales(h) short-term Borrowings 0.5 month worth of sales

3. Fixed Liabilities

(a) Contributions 8 percent of gross fixed assets

FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009(Actual) (Actual) (Prov) (Budget) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj) (Proj)

Revenue from Sales of Power 50,631 56,978 57,443 71,544 92,344 109,831 125,042 140,662 158,578 176,205 195,666 217,563

Cost of Power Sold 46,458 57,440 72,167 80,710 94,074 105,422 114,867 132,537 148,725 166,733 179,605 193,484 Purchase of Power 19,257 30,389 43,863 48,540 60,778 70,961 79,199 95,621 110,517 127,188 138,676 151,123 Generation of Power 27,201 27,051 28,304 32,170 33,296 34,461 35,667 36,916 38,208 39,545 40,929 42,362

Gross Profit 4,173 (462) (14,724) (9,166) (1,731) 4,408 10,176 8,125 9,853 9,471 16,061 24,078

General & Administration Expenses 10,595 12,277 13,231 14,154 15,604 16,540 17,448 18,461 19,477 20,350 21,129 21,950 Repairs & Maintenance 1,932 1,720 1,960 2,150 2,537 2,775 2,933 3,114 3,290 3,423 3,525 3,631 Employee Costs 4,859 7,045 6,967 7,400 7,792 7,794 8,183 8,594 9,031 9,497 9,993 10,522 Depreciation 4,786 5,149 5,918 6,348 7,105 7,769 8,212 8,719 9,213 9,585 9,870 10,166 Others 680 680 680 680 724 771 821 875 932 992 1,057 1,125 Less: Expenses Capitalised (1,662) (2,318) (2,294) (2,424) (2,555) (2,570) (2,701) (2,841) (2,989) (3,147) (3,315) (3,494)

Operating Profit (6,422) (12,739) (27,955) (23,320) (17,334) (12,132) (7,272) (10,335) (9,625) (10,879) (5,068) 2,128

Other Income 2,016 2,546 2,408 1,544 1,967 2,320 2,637 2,959 3,323 3,684 4,085 4,351

Other Expenses 8,517 8,914 10,084 10,024 10,765 10,347 10,169 9,739 11,926 11,924 12,272 10,987

74

Financial Charges 7,684 8,344 9,894 9,874 10,731 10,610 10,802 10,690 11,776 11,774 12,122 10,837 Less: Financial Charges Capitalised - - - - (116) (413) (783) (1,101) - - - - Others 833 570 190 150 150 150 150 150 150 150 150 150

Income Before Subsidies/ (12,923) (19,106) (35,631) (31,800) (26,132) (20,159) (14,804) (17,115) (18,227) (19,120) (13,255) (4,508) Tax

Subsidies & Grants 10,460 16,732 12,774 13,160 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000

Income Before Tax (2,463) (2,374) (22,857) (18,640) (15,132) (9,159) (3,804) (6,115) (7,227) (8,120) (2,255) 6,492

Income Tax

Net Income (2,463) (2,374) (22,857) (18,640) (15,132) (9,159) (3,804) (6,115) (7,227) (8,120) (2,255) 6,492

Net Prior Period Adjustment

Net Income for the Year (2,463) (2,374) (22,857) (18,640) (15,132) (9,159) (3,804) (6,115) (7,227) (8,120) (2,255) 6,492

Financial Ratio

Rate of Return on Net Fixet -6.0% -5.5% -50.8% -39.7% -31.0% -16.6% -7.2% -11.8% -14.3% -16.9% -5.3% 17.7%Assets

Proj = projected, Prov = provisional

Appendix 13, page 4

Income Statement Pro jections for Gujarat Electricity BoardRs million


Current Assets 45,387 47,907 43,780 45,146 45,613 49,040 54,206 59,257 64,586 70,271 76,513 83,489 Cash & Bank Balances 2,110 2,374 2,393 2,981 3,848 4,576 5,210 5,861 6,607 7,342 8,153 9,065 Receivable Against Supply 12,658 14,245 14,361 17,886 23,086 27,458 31,261 35,166 39,644 44,051 48,917 54,391

of Power Stocks 4,726 5,064 5,506 6,082 6,795 7,127 7,527 7,953 8,339 8,594 8,859 9,134 Loans & Advances 3,897 4,253 4,340 5,372 3,872 4,135 4,264 4,126 3,627 3,693 3,763 3,838 Sundry Receivables 4,534 4,509 4,717 5,362 5,549 5,744 5,945 6,153 6,368 6,591 6,822 7,060 Subsidy Receivable from 17,463 17,463 12,463 7,463 2,463 - - - - - - -

Government

Fixed Assets 66,390 69,305 72,237 84,075 74,751 74,964 74,236 70,859 63,935 58,496 52,941 47,270 Tangible Assets 43,296 45,023 46,903 48,867 55,076 52,977 51,748 50,513 47,942 42,346 36,623 30,771 Capital Expenditure in 17,697 18,619 19,133 24,135 16,492 17,804 18,305 17,463 14,810 14,968 15,136 15,315

Progress Investment 5,214 5,480 6,018 10,890 3,000 4,000 4,000 2,700 1,000 1,000 1,000 1,000 Others 183 183 183 183 183 183 183 183 183 183 183 183

Total Assets 111,777 117,211 116,017 129,221 120,364 124,004 128,441 130,116 128,520 128,767 129,454 130,758

Current Liabilities 26,929 30,529 33,143 39,421 45,154 51,894 57,601 64,462 71,217 78,916 78,090 85,309 Fuel Related Liabilities 3,400 3,381 3,538 4,021 4,162 4,308 4,458 4,614 4,776 4,943 5,116 5,295

Liability for Purchase of Power 4,012 5,065 7,311 8,090 10,130 11,827 13,200 15,937 18,420 21,198 23,113 25,187

75

Liability for Supplies/Works 4,424 4,655 4,783 6,034 4,123 4,451 4,576 4,366 3,702 3,742 3,784 3,829 Electricity Duty 816 835 828 924 1,056 1,253 1,379 1,514 1,664 1,816 1,982 2,164 Deposit for Electrification 4,219 4,748 4,787 5,962 7,695 9,153 10,420 11,722 13,215 14,684 16,306 18,130 Security Deposit 4,219 4,748 4,787 5,962 7,695 9,153 10,420 11,722 13,215 14,684 16,306 18,130 Others 3,729 4,722 4,716 5,448 6,445 7,174 7,938 8,726 9,618 10,507 11,484 12,573 Short-Term Borrowings 2,110 2,374 2,393 2,981 3,848 4,576 5,210 5,861 6,607 7,342 - -

Fixed Liabilities 79,354 83,562 102,610 128,176 128,718 134,777 137,312 138,241 137,118 137,786 141,554 129,146 Capital Liabilities 23,276 34,263 36,095 39,727 40,539 42,124 44,416 45,738 44,300 42,972 41,644 40,316 Funds from State Government 33,727 37,397 40,517 44,077 47,967 47,967 47,967 47,967 47,967 47,967 47,967 47,967 Additional Borrowings 9,022 (1,781) 10,571 27,888 23,097 27,165 26,741 25,798 25,038 26,715 31,306 20,523 Repayments due on Capital 4,040 3,590 3,960 3,960 3,130 3,130 3,130 3,130 3,130 3,130 3,130 3,130

Liabilities Interest due on Capital Liabilities 3,540 3,794 4,545 4,937 5,334 5,285 5,393 5,345 5,888 5,887 6,061 5,419 Contributions 5,748 6,299 6,922 7,587 8,652 9,106 9,665 10,263 10,795 11,114 11,446 11,791

Total Liabilities 106,283 114,091 135,753 167,597 173,873 186,671 194,913 202,703 208,335 216,701 219,643 214,455

Reserves 5,494 3,120 (19,736) (38,377) (53,509) (62,668) (66,472) (72,587) (79,814) (87,934) (90,189) (83,696)

Total Liabilities and 111,777 117,211 116,017 129,221 120,364 124,004 128,441 130,116 128,520 128,767 129,454 130,758 Reserves

Gross Fixed Assets 71,856 78,732 86,529 94,841 108,155 113,826 120,809 128,293 134,934 138,923 143,070 147,385 Accumulated Depreciation 28,560 33,709 39,627 45,975 53,080 60,849 69,061 77,780 86,993 96,578 106,447 116,613 Proj = projected, Prov = provisional

Balance Sheet Projections for Gujarat Electricity BoardRs million

Appendix 13, page 5


Sources:

Internal Cash Generations: 10,007 11,119 (7,045) (2,418) 2,704 9,221 15,210 13,293 13,761 13,239 19,737 27,496 Net Income After Taxes (2,463) (2,374) (22,857) (18,640) (15,132) (9,159) (3,804) (6,115) (7,227) (8,120) (2,255) 6,492 Capital Reserve - - - - - - (0) - (0) - 0 - Depreciation 4,786 5,149 5,918 6,348 7,105 7,769 8,212 8,719 9,213 9,585 9,870 10,166 Interest Expenses 7,684 8,344 9,894 9,874 10,731 10,610 10,802 10,690 11,776 11,774 12,122 10,837

Consumer Deposit 361 1,058 78 2,350 3,467 2,914 2,535 2,603 2,986 2,938 3,244 3,649 Consumer Contributions (210) 550 624 665 1,065 454 559 599 531 319 332 345

Borrowings: Loans and Government Funds 14,311 8,831 24,643 31,971 7,820 16,293 11,983 10,936 9,638 11,519 6,531 (2,077)

Total Sources 24,469 21,557 18,300 32,568 15,056 28,882 30,287 27,431 26,917 28,016 29,843 29,414

Applications:

76

Capital Expenditures 6,931 7,798 8,312 13,314 5,671 6,983 7,484 6,642 3,989 4,147 4,315 4,494

Debt Service: 12,314 13,252 16,093 15,965 17,747 20,579 20,051 20,692 21,779 22,212 22,385 22,155 Principal Repayment 4,630 4,908 6,200 6,483 7,475 9,960 9,373 9,954 10,546 10,436 10,436 10,676 Interest Expenses 7,684 8,344 9,894 9,482 10,272 10,619 10,678 10,738 11,233 11,775 11,948 11,479

Increase (Decrease) in Working 4,333 890 (1,844) 2,839 3,732 2,861 2,679 1,438 2,221 1,716 3,043 3,496 Capital

Increase (Decrease) in Other 560 (646) (4,281) (530) (13,421) (2,261) (684) (1,943) (2,362) (792) (884) (1,002) Assets

Total Applications 24,138 21,293 18,280 31,588 13,730 28,162 29,529 26,828 25,627 27,282 28,859 29,143

Net Cash Flow 331 264 19 980 1,326 720 758 603 1,289 733 985 270 (Change in Cash on (1,023) 264 19 588 867 729 634 651 746 734 811 912

Balance Sheet)

Debt Service Coverage Ratio 0.81 0.83 (0.47) (0.18) 0.12 0.43 0.74 0.63 0.60 0.57 0.87 1.29 Proj = projected, Prov = provisional

Cash Flow Statement for Gujarat Electricity BoardRs million

Appendix 13, page 6


REORGANIZATION PLAN FOR GUJARAT ELECTRICITY BOARDTERMS OF REFERENCE FOR CONSULTING SERVICES

A. Introduction

1. To improve operational efficiencies in its electricity sector and make it financially viable andself-sustaining, as well as to improve the delivery of electric power to the citizens of Gujarat, theGovernment of Gujarat (the State Government) has embarked on a plan to restructure and reformthe sector over the next five years. During the reform process, several major changes will be madein the structure of the sector, its governance, the tariff structure, and the customer orientation of itsemployees.

2. The major utility involved in the delivery of electricity to consumers is the Gujarat ElectricityBoard (GEB), an autonomous entity of the State Government, established under the Electricity(Supply) Act of 1948. GEB is a vertically integrated monopoly serving consumers in all areas ofGujarat, other than Ahmedabad and Surat cities, which are served by the Ahmedabad ElectricCompany Limited and the Surat Electric Company Limited. Both are private sector licensees, whichare also vertically integrated monopolies in their respective distribution territories. Over the years,GEB policies and procedures have fallen behind the times and, coupled with an nonviable tariffand subsidy policy, have driven the organization into near financial ruin. Morale of GEB staff andthe quality of service consumers have also fallen. Consequently, a central part of the reforms liesin reorganizing GEB.

3. GEB has commenced reorganizing by establishing the Gujarat State Electricity CompanyLimited (GSECL), which will be an independent power producer owning and operating itsGandhinagar and Utran power stations, and the Gujarat Energy Transmission Company Limited(GETCL), which will be responsible for owning and operating the transmission network of GEB.Both GSECL and GETCL have been incorporated under the Companies’ Act, which provides moreflexibility regarding their shareholding, staff, and decision making. It is expected that in due course,more generating units of GEB would be similarly entrusted to GSECL or to another company.However, reorganizing the distribution segment is more critical, since it is the one that incur themost losses, is poorly organized, and is the primary cause of dissatisfaction among GEB’sconsumers.

4. The Asian Development Bank (ADB) is assisting the State Government in the reforms beingundertaken, by providing of (i) policy advice, (ii) technical assistance grants for studies andconsultations to prepare and implement the reforms, (iii) funds to cover part of the costs ofadjustment during the reforms; and (iv) investments in the sector. ADB has agreed to providetechnical assistance to assist the State Government and GEB over the next 18 months toformulate and implement a reorganizing strategy for GEB, focusing on its distribution business.

B. Scope

5. In consultation with the State Government and GEB and after discussing alternativemodels, the consultants will, (i) prepare an overall strategy for reforming of the distribution sector,(ii) segregate the assets and liabilities of the identified distribution areas, (iii) establish the imputedtariffs in each distribution area based on a range of consumer mix and generation scenarios, and(iv) develop a mechanism for addressing subsides within and across distribution areas. Thesuitability of each model will be judged against the criteria that will include (i) efficiency of delivery,(ii) maximizing the benefits of competition, (iii) least cost to the consumers, and (iv) maximizingcontribution to sustainable public finances by lowering subsidies and limiting cross-subsidies. The


consultant will also examine matters relating to (i) rationalization of GEB’s personnel, (ii) unfundedliabilities of GEB, and (iii) costs of adjustments.

6. After the model under the reorganization plan has been developed and the necessarystudies completed, the Consultant will, if studies show the feasibility and practicability of privatizinga distribution area, (i) prepare documents necessary for solicitation of private sector participation inone distribution entity, and (ii) help in evaluating the offers received. Privatization will be done inan open, competitive, and transparent manner.

1. International Consultants

a. Corporate Reorganizing Policy Expert/ Team Leader(4 person-months)

7. The corporate reorganizing policy expert will be the team leader for the team ofinternational and domestic consultants. The team leader will coordinate the work of theconsultants including effective interaction with the Chairman of GEB and Principal Secretary(EPD), of the State Government, and will be responsible for preparing reports. As consultant oncorporate reorganizing policy, the team leader will

(i) advise on the approaches and modalities of reorganizing and divestment ofGEB, related public policy issues; and develop an action plan and timetablefor preparatory steps;

(ii) in conjunction with the international valuation/financial reorganizing expert,

prepare/review corporate and financial reorganizing plans to facilitate theirreorganizing and/or divestment; discuss the reorganizing and divestmentproposals with GEB management, and develop the required consensus;

(iii) Advise on changes in the sector policies, legislation, and rules and

regulations in consultation with the domestic legal expert;

(iv) In collaboration with other consultants, act as resource person for thetraining and information seminars for staff of the State Government andGEB, oversight agencies, and other concerned groups; and assist indisseminating information on public enterprises reform.

b. Valuation/Financial Reorganizing Expert (3 person-months)

8. The consultant will:

(i) inventory all assets and liabilities of the enterprise identified for full or partialdivestment and prepare a list of secured and unsecured creditors;

(ii) prepare a valuation report in respect of the enterprises’ assets and liabilitiesso as to arrive at a reserve price for the sale of part or the whole of theenterprise.

(iii) advise on valuation approaches and undertake valuation of enterprises;

(iv) in collaboration with other consultants, act as resource person for thetraining and information seminars for staff of the State Government andGEB, oversight agencies, and key personnel of other concerned groups.


c. Legal Expert (2 person-months)

9. The consultant will have in-depth knowledge of the international legal framework related toreorganizing plans and models of similar entities, and will provide similar advise on the frameworkfor the reorganization, reorganizing and divestment based on exercise in other countries. Incoordination with the domestic consultant, the legal expert will assist in developing the legalframework to implement the reorganization plan.

2. Domestic Consultants

a. Financial Reorganizing/Accounting Expert (4 person-months)

10. The Expert will have a background in finance and in-depth knowledge of financialreorganizing issues of GEB. In addition to supporting the international valuation/financialreorganizing and international corporate reorganizing policy experts, the consultant will:

(i) review and assist in updating the financial accounts of GEB; and assessGEB’s financial position;

(ii) evaluate the enterprises’ accounting and financial systems, including major

divergences from international standards; and propose changes, ifwarranted, in the accounting practices of individual companies;

(iii) develop options and recommendations for reorganizing financial/ accountingsystems to increase efficiency and to present adequate information topotential investors and lenders;

(iv) review the existing financial data on the cooperative sector; assess theiravailability, quality, coverage, and timeliness; suggest improvement in datacollection and reporting systems; and, on the basis of available data, reviewthe financial performance of cooperatives and their impact on the stategovernment finances; and

(v) In collaboration with other consultants, act as resource person for thetraining and information seminars for staff of GEB, oversight agencies, andkey personnel of other concerned groups.

b. Investment Banker (3 person-months)

11. The investment banker will:

(i) advise the State Government/GEB on financial aspects of reorganizing anddivestment;

(ii) advises on procedures and modalities of divestment;

(iii) in conjunction with the companies law expert, prepare documents forsale/initial public offerings; and

(iv) in collaboration with other consultants, act as resource person for thetraining and information seminars for staff of GEB, oversight agencies, andkey personnel of other concerned groups.


c. Valuation Expert (4 person-months)

12. The valuation expert will:

(i) in conjunction with the international valuation/financial reorganizing expert,prepare an inventory of all assets and liabilities of the enterprises identifiedfor full or partial divestment; prepare a list of secured and unsecuredcreditors; and prepare a valuation report in respect of the enterprises’ assetsand liabilities to arrive at a reserve price for the sale of part or the whole ofthe enterprise.

(ii) in conjunction with the international valuation/financial reorganizing expert,

advise on the approaches for valuation of enterprises; and

(iii) in collaboration with other consultants, act as resource person for thetraining and information seminars for staff of the State Government,oversight agencies, key personnel of power sector companies, and otherconcerned groups.

d. Legal Expert (2 person-months equivalent)

13. The legal expert will be a lawyer with in-depth knowledge of the corporate law, electricityrelated laws, labor and industrial laws, and other relevant legislation. The expert will:

(i) advise on legal aspects of reorganizing/divestment and assist in developinga reorganization plan that includes on voluntary retirement schemesconsistent with applicable laws;

(ii) in case of divestment of a distribution area, ensure that all legal assets of theenterprise are included in relevant documents; advise and develop proposalsfor settling enterprise liabilities; and ensure that third-party interests (e.g.,financial institutions, minority shareholders, employees) are identified and allissues arising in this respect are resolved prior to divestment; and

(iii) prepare relevant legal documents and provide assistance in closing theenterprises’ sale or initial public offering.

e. Social Sector/Training Expert (2 person-months)

14. The expert will:

(i) assess the social impact of public enterprise reform and recommendappropriate mitigating measures;

(ii) identify measures to facilitate the shift of GEB employees to private sectorenterprises; and

(iii) assist the State Government/GEB in designing the social safety net,identifying training requirements for people affected by reorganization ofpublic enterprises, and developing appropriate training programs.

81Appendix 15

CONSUMER AWARENESS AND PARTICIPATION IN POWER SECTOR REFORMSTERMS OF REFERENCE

A. Introduction

1. To improve operational efficiencies in its electricity sector to make it financially viableand self-sustaining, and to improve the delivery of electric power to the citizens of Gujarat, theGovernment of Gujarat (the State Government) has embarked on a plan to restructure andreform the sector over the next five years. During this reform process, several major changeswill be made in the structure of the sector, its governance, the tariff structure, and the customerorientation of its employees. These changes may temporarily put pressure on some of thesector’s stakeholders, who may perceive some of the changes as being inimical to theirinterests. The State Government believes that the anxiety of the affected groups and theirtendency to oppose the reform process will greatly diminish if all stakeholder groups areregularly consulted during the reform process, and are able to contribute to it in terms of ideas,in disseminating information and in providing feedback as to its success. There is also a greaterpurpose in initiating this consultative process at this time, since the Gujarat Electricity RegulatoryCommission (GERC) has been constituted and will, over the next year, formulate the long-termvision for tariff setting and regulation for the sector.

2. The Asian Development Bank (ADB) is assisting the State Government in the reformsbeing undertaken, through provision of (i) policy advice, (ii) technical assistance grants forstudies and consultations to prepare and implement the reforms, (iii) funds to cover part of thecosts of adjustment during the reforms, and (iv) investments in the sector. To improve theconsultative and participatory processes for the reform process, ADB acting on a request fromthe State Government, agreed to provide technical assistance to enable Nongovernmentorganizations (NGOs) representing the major consumer groups in Gujarat, to form aconsultative forum called the Electricity Consumers’ Consultative Forum (ECCF) of Gujarat.

3. Three consumer categories represent a majority of the electricity consumers in Gujarat:(i) residential consumers who are largely represented by the Consumer Education and ResearchCentre (CERC); (ii) agriculture consumers who are largely represented by the Bharatiya KisanSangh (Indian Farmers' Union-BKS); and (iii) industrial consumers that are represented by theConfederation of Indian Industry–Gujarat Chapter (CII). When the reform program was firstdiscussed in 1996 with the State Government, the preparatory TAs funded by ADB did includeconsultations and workshops with these stakeholders. These organizations also represented theconsumer groups in the public hearings organized by GERC over the past one year.

B. Terms of Reference

4. The TA will fund

(i) four consumer information workshops in different parts of Gujarat over one year;

(ii) travel, stay costs, and honorarium fees of domestic experts, so that they canprovide inputs to the working of the ECCF; and

(iii) preparation of information materials to further disseminate information to theconstituents of the ECCF.


SUPPORT TO GUJARAT ELECTRICITY REGULATORY COMMISSIONTERMS OF REFERENCE FOR CONSULTING SERVICES

A. Introduction

1. To improve operational efficiencies in its electricity sector and make it financially viableand self-sustaining, as well as to improve the delivery of electric power to the citizens of the Stateof Gujarat in India, the Government of Gujarat (the State Government) embarked a plan torestructure and reform the sector over the next five years. During the reform process, severalmajor changes will be made in the structure of the sector, its governance, the tariff structure, andthe customer orientation of its employees. As part of this reform, the Gujarat ElectricityRegulatory Commission (GERC) was established in 1998 and mandated to discharge a largespectrum of functions including determining tariffs and corresponding performance norms, issuinglicenses and ensuring a nondiscriminatory and commercial business environment. GERC, whichwas established under the Electricity Regulatory Commissions Act, 1998 of the Indian Parliament,will be formalized under the Gujarat Electricity Industry (Reorganization and Regulation) Bill, 2000(the Act), which is expected to be enacted in 2001. GERC currently consists of a chairman,2 members and 24 supporting and auxiliary staff. The small size of its permanent staff reflects theintention of the State Government to maximize the use of outside consultants for specific tasksinstead of keeping all technical expertise required as part of the permanent workforce.

2. The Act requires the framing of regulations related to the general conduct of GERC’s affairand its discharge of functions, to enable GERC to function in a transparent manner. Further,GERC desires to it frame and adopt long-term tariff and regulatory policies that will provide astable tariff and regulatory regime conducive to the proper growth and development of the sector.

3. The Asian Development Bank (ADB) is assisting the State Government in the reforms, byproviding of (i) policy advice, (ii) technical assistance grants for studies and consultations toprepare and implement the reforms, (iii) funds to cover part of the costs of adjustment during thereforms, and (iv) investments in the sector. ADB has agreed to provide technical assistance tosupport GERC over the next 18 months to (i) help draft a tariff and regulatory policy valid for thenext five years; (ii) help adapt the draft regulations in force in other states of India and abroad, tomake them applicable to Gujarat; (iii) provide expert advice to interpret the regulations and tariffpolicies; and (iv) train key GERC staff in administering the regulations.

B. Scope of Work

1. Preparation of Regulations and Codes

4. The consultants will review the regulations in force in other states in India and abroad andadapt such regulations for application by GERC. If appropriate regulations do not exist, new oneswill be prepared. Each regulation will be drafted and submitted in five hard copies to GERC andone copy to ADB, and in a MSWord 2000 electronic format to both. After comments are receivedand incorporated, the final versions will be submitted in five hard copies to GERC and one copyto ADB, with MSWord 2000 electronic versions to both. The regulations will cover the followingareas:

(i) Structure and modalities of regulatory control. These regulations include rules,technical, legal and price regulations, licenses and operational codes as listedbelow:


(a) grid and distribution code,(b) metering,(c) interconnection,(d) sharing of assets and common facilities,(e) standards of performance (including customer service standards),(f) supply regulations,(g) supply regulations,(h) access to facilities,(i) class exemptions from Licensing, etc.,(j) planning standards;(k) competitive procurement; and(l) demand side management.

(ii) Business conduct regulations. These regulations relate to the procedures of GERCwith reference to the sector entities and processes, and covers specific matterssuch as

(a) license application,(b) power procurement process,(c) price regulation,(d) revenue and tariff determination and fixation,(e) captive generating units,(f) fees, fines and charges, and(g) dispute resolution.

(iii) Internal regulations of GERC. These regulations pertain to the internal working ofthe GERC and cover

(a) appointment of chairman and members,(b) appointment of staff and consultants,(c) HRD issues and organizational structure,(d) conditions of service of staff, and(e) functions and procedures of GERC.

2. Training and Operational Support to GERC

5. The consultant will organize a human development exercise for GERC staff as follows:

(i) External training for selected officers and staff. Within the budget indicated in theTA, the consultant will prepare and implement a training program for key officersand employees of GERC, including (a) in-house training and workshops inunderstanding and application of the new regulations at Ahmedabad (this willinclude staff from other power sector entities); and (b) visits by GERC senior staffGERC to attend international seminars and conferences.

(ii) Analytical and operational support in interpreting regulations and codes. For oneyear after the new regulations are approved and published, the consultants willassist GERC in interpreting and operationalizing them. This would include(a) providing of reference cases pertaining to application of the regulations;(b) suggesting for modifications of the regulations considering experience gainedin their application.


FINANCIAL EVALUATION OF THE PROJECT

1. The major assumptions used in the financial evaluation of the investment project arediscussed in this appendix.

A. General

2. The financial evaluation of the Project was carried out on an incremental basis and alsoon a subproject basis due to its discrete nature. Income tax is not considered since the GujaratElectricity Board (GEB) is exempted from income tax payment. All prices are in constantOctober 2000 value. Foreign exchange rate is assumed at Rs46.50 to $1.00.

3. The capital cost of each subproject and its disbursement schedule were reviewed by theMission. Physical contingency is provided at 10 percent of the base cost.

4. GEB’s cost of capital is calculated for the Project as a whole. The Project will befinanced by foreign debt (60 percent) and local debt. The cost of debt for the Project in Rupeesis 12 percent and 15 percent, respectively, for the Asian Development Bank (ADB) loan andcommercial loan. The weighted average cost of capital is estimated in real terms and shown inTable A17.1.

Table A17.1: Weighted Average Cost of Capital (WACC)

Source Amount(Rs million)

Cost (%) Weighted Cost (%)

Asian Development Bank Debt 9,300 5.16 3.27 3.30Domestic Commercial Debt 5,166 7.98 2.95 2.90WACC 6.22 6.20

B. Project Parts A, B, and C: Transmission and Distribution

1. Capital Cost

5. It is assumed that the Project will commence operation in two years and reach fullcapacity in four years after the start of construction. The operating life of the Project is 20 yearswith no salvage value. The total cost amounting to Rs13,764 million is scheduled to bedisbursed as presented in Table A17.2.

Table A17.2: Disbursement Schedule(Rs million)

Item FY2002 FY 2003 FY 2004 FY 2005

Disbursement 2,753 4,129 4,129 2,753


2. Sales Revenues

a. Tariff

6. It is assumed that of the total incremental power sales realized under the Project, powersales corresponding to 18,740 million kWh would be at the distribution level with overall averageretail tariff for GEB.

b. Sales Volume

7. The transmission system financed by the Project is utilized to evacuate power from twonew independent power producer's (IPPs) and, through the establishment of new substationsGEB has an estimated additional 18,740 million kWh to provide to its customers. The annualpower purchase volume is estimated at 2,292 gigawatt-hours (GWh) in FY2004, 6,125 GWh inFY2005, and 18,740 GWh in FY2006 onward.

3. Operating Cost

a. Variable Cost

8. The weighted average of self-generation costs and power purchase prices from IPPs isused as variable cost for the Project.

b. Fixed Cost

9. Fixed cost comprises only operation and maintenance cost, which is estimated at2.5 percent of capital investments.

C. Project Part D: Pilot Project for Energy and Water Conservation – Drip Irrigation

1. Capital Cost

10. It is assumed that the Project will commence operation at the end of three years andreach full operation at the end of four years. The operating life of the Project is 10 years with nosalvage value. The total cost amounting to Rs660 million is scheduled to be disbursed aspresented in Table A17.3.

Table A17.3: Disbursement Schedule(Rs million)

Item FY2002 FY 2003 FY 2004 FY 2005

Disbursement 132 198 198 132

2. Number of Wells To Be Converted

11. The cost of converting the irrigation system associated with each well is estimated atRs1.35 million based on the pilot survey. Of this total cost, 25 percent will be borne by GEB, andthe rest will be paid by the Government as subsidy. The total number of wells to be convertedunder the Project is 1,289.


3. Sales Revenues

12. It is assumed that the energy saved by converting the irrigation system can be sold toend users at an expected overall average retail tariff. Please note that this is an incrementalanalysis using the same pump. Therefore, the costs are identical, with no additional fixed orvariable operating costs.

a. Expected Overall Average Retail Tariff

13. The values are assumed to remain constant beyond FY2010.

Table A17.4: Average Retail Tariffs(Rs per kWh)

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010

Average Retail Tariff 2.89 2.93 2.93 2.93 2.93 2.94

b. Energy Savings

14. Each well uses a 40 HP motor pump. It is assumed that the pump runs for nine monthsof the year for six hours a day under the current flood irrigation. After conversion, each pumpneeds to run for nine months of the year for one hour a day. Therefore, total energy saved bythe conversion is projected to be 52 GWh annually.

15. The estimated financial internal rates of return for the four project components are inTables A17.5 and A17.6.


Revenue Operating CostVolume Tariff Total Variable Fixed Total Profit Capital Net Cash

Year mn (kWh) Rs/kWh Revenue Cost Cost Cost Before Investment FlowTax

FY2002 (2,753) (2,753)FY2003 (4,129) (4,129)

FY2004 2,292 2.84 6,521 6,037 172 8,970 (2,449) (4,129) (6,578)

FY2005 6,125 2.89 17,722 16,803 275 23,802 (6,080) (2,753) (8,833)

FY2006 18,740 2.93 54,847 51,764 344 55,026 (179) (179)

FY2007 18,740 2.93 54,953 51,792 344 57,508 (2,555) (2,555)

FY2008 18,740 2.93 54,965 50,540 344 55,896 (931) (931)

FY2009 18,740 2.93 54,991 49,653 344 54,619 372 372

FY2010 18,740 2.94 55,031 47,905 344 52,696 2,335 2,335

FY2011 18,740 2.94 55,086 46,343 344 50,862 4,224 4,224

FY2012 18,740 2.94 55,158 64,128 344 49,171 5,986 5,986

FY2013 18,740 2.94 55,158 54,637 344 49,171 5,986 5,986

FY2014 18,740 2.94 55,158 54,637 344 49,171 5,986 5,986

FY2015 18,740 2.94 55,158 54,637 344 49,171 5,986 5,986

FY2016 18,740 2.94 55,158 54,637 344 49,171 5,986 5,986

FY2017 18,740 2.94 55,158 54,637 344 49,171 5,986 5,986

FY2018 18,740 2.94 55,158 54,637 344 49,171 5,986 5,986

FY2019 18,740 2.94 55,158 54,637 344 49,171 5,986 5,986

FY2020 18,740 2.94 55,158 54,637 344 49,171 5,986 5,986

FY2021 18,740 2.94 55,158 54,637 344 49,171 5,986 5,986

FIRR = 8.9%

Table A17.5: Financial Internal Rate of Return forProject Parts A, B, and C: Transmission and Distribution

(Rs million)


Revenue Operating CostVolume Tariff Total Variable Fixed Total Profit Capital Net Cash

mn (kWh) Rs/kWh Revenue Cost Cost Cost Before Tax Investment FlowYear

FY2002 (132) (132)FY2003 (198) (198)FY2004 (198) (198)

FY2005 26.32 2.89 76 0 76 (132) (56)

FY2006 52.65 2.93 154 0 154 154

FY2007 52.65 2.93 154 0 154 154

FY2008 52.65 2.93 154 0 154 154

FY2009 52.65 2.93 154 0 154 154

FY2011 52.65 2.94 155 0 155 155

FY2012 52.65 2.94 155 0 155 155

FY2013 52.65 2.94 155 0 155 155

FY2014 52.65 2.94 155 0 155 155

FY2015 26.32 2.94 77 0 77 77

FIRR = 14.2%

Project Part D: Pilot Project for Energy and Water Conservation - Drip Irrigation(Rs million)

FINANCIAL INTERNAL RATE OF RETURNTable A17.6: Financial Internal Rate of Return for


ECONOMIC EVALUATION OF THE PROJECT

1. As part of its private power generation policy, the State Government invited privatesector investment to increase generation capacity in Gujarat. Proposals have been solicited forabout 4,400 megawatts (MW) of generating capacity on a build-own-operate basis. A number ofpower purchasing agreements have been signed, among which are those for the Reliance andAkrimota independent power producers (IPPs) with a combined capacity of 750 MW. To allowevacuation of power from the new plants, complementary investments in transmission anddistribution facilities are required. Component A of the Project includes the construction ofdedicated transmission facilities for the two IPPs, while components B and C are dedicated tooverall system upgrading. The system strengthening investments will indirectly also benefit theevacuation from the IPPs in addition to saving losses and utilizing surplus capacity available atother state and central power stations. Therefore, the transmission components were evaluatedtogether with the proposed IPP plants they will serve, and also together with the distributioncomponents of the project investments.

A. Capital Cost

2. The economic capital cost of project components A, B, and C were estimated on thebasis of the financial costs, with appropriate adjustments made to reflect the true resource(economic) costs of the different components. The estimated capital costs for the projectcomponent were broken down into direct foreign exchange items, indirect foreign exchangeitems, local goods and services and skilled and unskilled labor for purposes of the economicanalysis. All elements were valued at border prices with all taxes and duties excluded. No pricecontingencies are included in the base capital cost. However, the economic capital costsinclude 10 percent physical contingencies. A standard conversion factor of 0.9 has been appliedto all non-tradable items and a shadow wage rate of 0.85 was used for unskilled labor.

3. Annual operation and maintenance cost were also calculated in economic prices as apercentage of the total capital investment cost. All prices are in constant October 2000 values.The cost of energy at generation level was valued at the IPP take-off prices for projectcomponent A, separately for each IPP, and at GEB’s power purchase pool price for theadditional units resulting from project components B and C. Transmission and distributionlosses of 20 percent were deducted from the IPP send-out volume, but the full send-out volumewas priced in the cost of energy.

B. Benefits

4. Economic benefits of electricity consumption were calculated for all major consumercategories. For nonincremental consumption they were based on the alternative economic costsof other energy sources such as diesel generators and kerosene lamps that will be replaced byusing electricity. For incremental electricity consumption, the benefits were estimated by valuingadditional or induced energy consumption at the estimated willingness to pay.

5. A balance between power demand and supply was recently achieved in Gujarat State,and therefore nonincremental consumption was assumed to be marginal for all consumergroups. The shares of electricity supply assumed to replace an alternative energy source werethus 10 percent for domestic, commercial and low tension (LT) industry, and seven percent for


agriculture. The latter value is based on a 7 percent ownership of diesel pumps amongagricultural users identified in an Asian Development Bank (ADB) study.1 GEB tariff for hightension (HT) consumers is currently equal to or higher than the equivalent unit costs for differenttypes of captive generation except for captive units running on naphtha. Approximately 23percent of captive units are operated with naphtha and this percentage was used as thereplacement share for HT consumers. The economic benefit of fuel substitution is the resultingeconomic resource cost saving that is, the economic cost of alternative energy that the countrysaves by using electricity.

6. Induced consumption was valued by estimating the consumer’s willingness to pay forthis part of incremental electricity supply and adding the related consumer surplus benefits tothe tariff-based revenues. Given the sensitivity of demand to price for the various categories ofconsumers, only a portion of the maximum consumer’s surplus benefits was assumed for thevaluation of induced sales.

7. The ADB study found that all HT industries own at least one captive generation uniteach, varying in size from 160 kilowatt (kW) diesel generators to 50 megawatt (MW) gas plants.Captive power production is on average cheaper than power supplied from the grid especiallyso for co-generating plants. This is mainly due to high cross-subsidization and the electricityduty that is levied on the grid tariff, but which does not have to be paid in full for captiveproduction. Changes to the tariff structure and the electricity duty (ED) are addressed under theProgram and are expected to have a gradual positive impact on HT share of consumptionstarting in FY2001/02. For the economic evaluation a conservative approach was chosen andHT consumers were valued at only 23 percent of the HT consumption share for the benefitcalculation. No induced consumption was assumed for the remaining 77 percent as theirwillingness to pay is limited by the cost of self-generation which, for a 160 kw diesel generator iscurrently Rs per kWh 4.15 compared with a total financial price of Rs per kWh 5.25. While it isexpected that grid supply for HT consumers will become much more attractive in the mediumterm as a result of the policy changes, a cautious approach was considered appropriate to invaluing benefits to HT consumers. The remaining 77 percent share of HT was distributedproportionally over the LT, commercial, and domestic user categories.

8. Alternative sources of power used by the LT industry, commercial, domestic, andagricultural users were determined and their respective costs were estimated. It was found that

the dominant source of alternative power in the rural domestic sector is kerosene lamps. In caseof urban domestic consumers, liquefied petroleum gas (LPG) lights (“Petromax”) are used morefrequently than kerosene lamps. Further, ownership of generators increases rapidly with the rise

in household income - all households having an income of more than Rs40,000 a month (incurrent 1997 prices) reported ownership of a small diesel generator. Even among lower middle-

income households, with income of Rs5,000-Rs15,000, eight percent own a small kerosenegenerator. Roughly around 40 percent of total end consumption in the domestic sector is used

for lighting purposes. In the rural areas these numbers are considerably higher due tosignificantly lower ownership of electrical appliances. Therefore, economic benefits for the

domestic sector were calculated for only 40 percent of total incremental domestic consumption.This 40 percent reflects ownership of a variety of alternative energy sources that have been

valued separately. The remaining 60 percent share of domestic consumption is 89

1 TA No. 2739-IND: Development of a Framework for Electricity Tariffs in Gujarat, for $300,000 approved on

17 December 1996. Data on the ownership of alternative energy sources used in this Appendix is based on theTA study.


considered indifferent as the consumers do not own alternative energy sources. This share wasvalued at the average tariff for the residential category.

9. The 40 percent share reflecting ownership of alternative energy generation wasallocated over the four alternative energy sources. Given Gujarat’s relative wealth, it can beassumed that 5 percent of domestic consumers own kerosene generators and 5 percent adiesel generator set. Another 50 percent are assumed to own a Petromax, while the remaining40 percent rely on kerosene lamps and candles for alternative energy. Induced consumptionwas valued using the willingness-to-pay method plus the related consumer surplus with acurvature factor of 0.3.

10. Commercial sector use of alternative sources of power also differs between urban andrural areas. While in the urban areas the commercial sector uses a mix of small diesel andkerosene generators and Petromax, in the rural areas kerosene lamps and candles aredominant. However, the large commercial sector segment shows user patterns more similar tosmall and medium-size industries. Typically, hotels, hospitals, office complexes, and universitieswould be considered large commercial sector. Commercial sector consumers are defined ashaving a contractual load below 25 kilovolt-amperes (kVA). The average economic cost ofalternative energy sources for commercial establishments was estimated at Rs3.96 per kWh fora 54 kW generator.

11. LT industry consumers can also be divided into small and large users depending on thecontracted load. Small LT consumers are similar to large commercial consumers in terms ofalternative energy sources. Among the LT consumer category, 46 percent of industries with acontractual load between 25 and 100 kVA own diesel generators with an average capacity of 70kW. The estimated financial cost of production of these units was estimated at Rs.3.87, whichwas used in the benefit calculation.

12. Agricultural tariffs in Gujarat are historically very low and have shown little change overthe last 10 years. The low power tariffs have resulted in ownership of electric pumps by92.5 percent of households and an increase in agriculture's share of total GEB consumption to43 percent. Only 7.5 percent of households own diesel pump sets. Capital costs of diesel pumpsets are on average considerably lower than those of an equivalent capacity electric pump set.However, considering the larger size and higher utilization of electric pump sets and theconsiderably lower fuel costs, the average cost per kWh of output is lower for the electric pumpset. The financial cost for a unit produced by a diesel pump set is estimated at Rs4.73compared with Rs0.47 for an electric pump. Even at the increased agricultural tariff of Rs.0.58,which results in a total unit cost of Rs.0.9, diesel pumps are not competitive with electric pumps.

13. With the projected increase of tariff for agriculture and the mandated metering of allconsumers, it is expected that agricultural consumption will decrease significantly in the future.Therefore, no induction benefits were calculated for the 92.5 percent share of households withelectric pumps. As for HT consumers, this volume was distributed over the LT, commercial, anddomestic consumer categories according to their share in total GEB consumption.

C. Conclusion

14. On the basis of a comparison of economic cost and benefits over a 20-year period, theproposed transmission and distribution component shows an economic internal rate of return(EIRR) of 25 percent. This value comfortably exceeds ADB's minimum cut off level for project


acceptability. Comprehensive sensitivity testing found that the Project is robust except forchanges in the overall benefit stream. A four percent reduction of the overall benefit streamwould result in an EIRR of 12 percent. Based on that finding, the sensitivity to changes in eachindividual benefit stream for the five consumer categories was tested. The analysis shows thatthe EIRR is most sensitive to changes in benefits of the LT and domestic consumer categories,but remains above the cut off rate of 12 percent for all tested situations except for a 20 percentreduction in domestic benefits. Further testing was done for the LT and domestic consumercategories to determine how vulnerable the project is to changes in key parameters underlyingthese two benefit flows.

15. In the LT category the base case for induction and replacement proportion is 90:10. Thisproportion has been changed to 50:50 and 10:90, the most adverse scenario. However, in bothcases the EIRR remains well above the cutoff rate. The sensitivity of the EIRR to changes in theLT benefit stream appears to be mainly the result of its high share (33 percent) in total benefits,which magnifies the impact of modest changes in the underlying benefit stream.

16. The base case for induction and replacement proportions for the domestic category isthe same as for the LT category and the same sensitivity testing was done. In both cases theEIRR increased significantly. This was expected as the base case reflects the mostconservative scenario. However, as a further test, the share of domestic consumers owningalternative energy sources (kerosene lamps, etc) as opposed to indifferent consumers notowning alternative energy sources was varied. The base case proportion was 40:60. If theproportion is assumed to be equal, then the EIRR increases by nine percentage points.However, if the share changes to 30:70, the EIRR drops to 13 percent, displaying a sensitivityindicator of 9.15 percent. Given that Gujarat is the third richest Indian State in terms of statedomestic product per capita, a 40 percent ownership of alternative energy sources appears tobe a realistic assumption, particularly as four categories of captive energy were considered. Asin the case of LT consumers, the sensitivity of the EIRR to changes in the domestic benefitstream appears to be driven by its high share (48 percent) in total benefits. It should be recalledthat these high shares are the result of the distribution of 78 percent of HT and of 92.5 percentof agriculture consumption over the remaining three consumer categories that were included inthe benefit calculation. Public lighting, railways, public waterworks and bulk supply, whichaccount for 11.2 percent of total consumption, were excluded from the benefit calculation.

17. To account for the sensitivity to changes in fuel cost, a switching value test was carriedout. The test showed that for an 8 percent increase in total fuel cost, the EIRR would drop to 12percent. However, in the financial projections the average annual GEB pool fuel cost increase(for self-generated and IPP power) was assumed to be 4 percent.

ECONOMIC INTERNAL RATE OF RETURN For Components A, B and C (Rs Million)

HT Industry Domestic Commercial Agriculture LT Industry

Capital Operating Cost Total Share in Cost Share in Cost Share in Cost Share in Cost Share in Cost T otal Net CashYear Cost Fixed Variable Cost MkwH Saving M/kWh Saving MkwH Saving MkwH Saving MkwH Saving Benefits Flow

2001/02 2,235 2,235 (2,235) 2002/03 3,352 3,352 (3,352) 2003/04 3,352 140 9,028 12,520 357 1,080 129 1,533 75 298 80 311 249 837 4,059 (8,461) 2004/05 2,235 223 25,369 27,827 934 2,826 344 4,096 201 795 214 830 665 2,237 10,784 (17,043) 2005/06 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2006/07 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2007/08 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2008/09 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2009/10 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2010/11 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2011/12 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725

2012/13 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725

93

2013/14 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2014/15 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2015/16 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2016/17 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2017/18 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2018/19 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2019/20 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725 2020/21 279 60,515 60,795 1,014 3,069 2,843 33,894 2,081 8,222 567 2,201 6,875 23,135 70,519 9,725

EIRR = 25.36%NPV = 21,579 Rs million

Appendix 18, page 5

94

Sensitivity Testing for Project Components A, B and C

Variable EIRR Sensitivity Switching NPV ChangeIndicator Value

Base Case 25.36 21,579

Capital Cost +10% 24.4 0.39 323% 20,732 -4%+20% 23.51 0.39 19,885 -8%

Fuel Cost 8%

BenefitsAll -10% 3.12 14.94 4% (10,650) -149%LT -10% 19.19 4.93 10,943 -49%

-20% 12.25 4.92 346 -98%Agriculture -10% 24.69 0.52 20,462 -5%

-20% 24.04 0.51 19,359 -10%Commerical -10% 23.23 1.75 17,799 -18%

-20% 21.05 1.75 14,034 -35%Domestic -10% 15.97 7.29 5,856 -73%

-20% 4.11 7.27 (9,794) -145%HT -10% 24.14 0.86 19,732 -9%

-20% 23 0.84 17,936 -17%

One-year delay 24.35 25 1.24 18,910 -12%Two-year dealy 22.08 26 2.45 16,285 -25%

Changes in Induction & Replacement Shares

LT base case: 90:10 50:50 share 23.49 1.56 18,218 -16%10:90 share 21.57 3.12 14,857 -31%

Domestic base case 90:150:50 share 53.31 28.27 82,574 283%10:90 share 75.05 56.53 143,569 565%

Domestic using alternative energy sources versus not using alternative energy sources Base case: 40:60 50:50 share 34.93 9.25 41,546 93%

30:70 share 13.37 9.15 1,839 -91%

Appendix 18, page 6

asian development bank rrp:ind 29694 – national hydroelectric power corporation npc – nuclear...

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