Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 3612b-IN

STAFF APPRAISAL REPORT

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

May 7, 1982

Regional Projects DepartmentSouth Asia Regional Office

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

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CURRENCY EQUIVALENTS

Currency Unit Rupee (Rs)Rs 1 = Paise 100US$1 Rs 8.0 1/Rs 1 = US$ 0.125 1/Rs 1 million = US$ 125,000 1/

LIST OF ABBREVIATIONS AND ACRONYMS

,ARDC - Agricultural Refinance and Development CorporationCAG - Comptroller and Auditor GeneralCEA - Central Electricity AuthorityDCF - Discounted Cash FlowGOI - Government of IndiaHT - High TensionHP - HorsepowerLT - Low TensionMNP - Minimum Needs ProgramNHPC - National Hydro Power CorporationNTPC - National Thermal Power CorporationOA - Ordinary Advanced Area SchemeOB - Ordinary Backward Area SchemeRE - Rural ElectrificationREB - Regional Electricity BoardREC - Rural Electrification CorporationRMNP - Revised Minimum Needs ProgramSEB - State Electricity BoardSI - System ImprovementSPI - Special Project IndustrySPA - Special Project AgricultureV - VoltkV - kilovolt = 1,000 voltskVA - kilovolt-ampere = 1,000 volt-amperesMVA - megavolt-ampere = 1,000 kilovolt-ampereskW - kilowatt = 1,000 wattskWh - kilowatt = 1,000 watt-hoursGwh - gigawatt-hour = 1,000,000 kilowatt-hours

FISCAL YEAR

April 1 - March 31

1/ The US$/Rs exchange rate is subject to change. Conversions in this reporthave been made at the long-term estimated rate of US$1 to Rs 8.0.

FOR OFFICIAL USE ONLY

INDIA

STAFF APPRAISAL REPORT

THIRD RURLL' ELECTRIFICATION PROJECT

Table of Contents

Page No.

I. THE POWER SECTOR ........................................ 1

Background ............ .................................. I

Energy Resources ...... ......... . .1

Past Bank Group Involvement in the Sector . . ............. 2

Sector Institutions ...................................... 3Existing Facilities - All India ..... .................. 4

Power Supply and Demand ................................. 4Bank Group's Strategy .................................. . 6

II. RURAL ELECTRIFICATION ................................... 10

Background .............................................. 10

Development ............................... . ... 12Future Program .......................................... 12

III. BORROWING AND EXECUTING AGENCIES: INSTITUTIONS ANDOPERATIONS ..... 15

A. Rural Electrification Corporation (REC)- Role in the Power Sector .......................... 15

- Organization and Staff ............................ 16- Scheme Appraisal and Monitoring .... ............... 17- Disbursement . ...................................... 19

- Technical Assistance to SEBs ...................... 19- Record of Operations .............................. 20- Future Development of REC ......................... 20

B. State Electricity Boards (SEBs) ..................... 21

- SEBs' Organization for RE ......................... 21- RE Planning and Financing .21

- Record of RE Operations .22

This project was appraised by Messrs. K. Jechoutek (Economist), B. Lynch and

B. Davis (Fin. Analysts), J. Ryan (Engineer), R. Pradhan (Researcher), andE. Mbi (Young Professional).

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

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Table of Contents (Continued)

Page No.

IV. THE PROGRAM AND THE PROJECT .............................. 23

Genesis of the Project ...... ........................ . 23Description of the Project .............................. 24Normal REC and SPA Schemes ........ ...................... 24System Improvement (SI) Schemes .........................e e 24Training Facility .25

Project Cost and Financing .............................. 25Procurement ....................................... ............ *.. 27Implementation Schedule ...... ............................. 27Disbursement .. .......................... ................ 28Onlending Rate ............................................. 28

V. FINANCIAL ANALYSIS ...................................... 28

A. Rural Electrification Corporation (REC)- Past Financial Performance ........................ 28- Present Financial Position .................. .... 30- Financing Plan .................................................. 31- Future Finances ..................... . 32- Audit ..... ........................................ 34- Accounting Organization and Systems ....... ........ 34

B. SEB Financial Performance: Rural Electrification(RE) Sub-Sector

- RE Investment ................................ ......... 34- Financial Performance on RE Activities ........... . 34Impact of RE Losses on Overall SEB FinancialPerformance ............-.... 36

C. Reform of SEB Finances- Background .. 37- Reform of Financial Objectives and Policies . .38- Reform of Accounting Practices. 42- Eligibility under the Proposed Credit . .43

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Table of Contents (Continued)

Page No.

VI. ECONOMIC ANALYSIS AND JUSTIFICATION ..... ................ 43

Cost Comparison ......................................... 44Economic Rate of Return ...... ........................... 44Financial Rate of Return ...... .......................... 45Tariffs and Cost of Supply .... 45Beneficiaries ... ........................................ 47

VII. SUMMARY OF AGREEMENTS ................................... 47

Agreements During Negotiations . . .47Condition of Effectiveness . ...................... 48Recommendation ............. . ..... ......... .. .. .... . 48

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Table of Contents (Continued)

Page No.

ANNEXES

1. All India Sales and Energy Data 1969/70 - 1979/80 492. All India Power Supply Position 1980 - 90 50

CEA Norms for Estimating Capacity and Energy Availability 513. Villages Electrified and Pumps Energized (REC & SEB

Programs) 524. Progress of Pump Electrification (Nos.) 535. Planned Statewise Expenditure on RE During Sixth Plan

1980/81 - 1984/85 546. Organization Chart (IBRD No. 23042) 557. REC Staff Structure (3/31/81) 568. Types of Schemes Financed by REC 57-589. Terms and Conditions for REC Loans to SEBs 59-6010. Typical Pattern of Installments of REC Loan Disbursement

( in % of total loan) 6111. Development of REC Lending Activity 1969-81 in Major

Categories of Loans 62-6312. Achievement of Village Electrification Plan Targets (Nos.) 64

Achievement of Pump Connection Plan Targets (Nos.) 6513. Project Cost Estimate 66

Project Cost Estimate REC Schemes 67

Schemes Approved by REC from 4/1/78 to 1/31/82 68Expenditure on Materials by State 69Central Institute for Rural Electrification:Preliminary Cost Estimate 70

14. Targets for Electrification of Villages & Energization ofPumps in 1983/84 and 1984/85 71

15. Disbursement Schedule 7216. Income Statement for the period FYs 1979 through 1986 7317. Sources and Application of Funds Statement for the period

FYs 1979 through 1986 7418. Balance Sheets for the period FYs 1979 through 1986 7519. Statement of Debt Service Coverage for the period FYs 1979

through 1986 7620. Statement of Loans Sanctioned, Disbursed and Undisbursed 7721. Assumptions for Financial Projections 78-79

22. Rates of Return of SEBs FY1976 - FY1981 80

Table of Contents (Continued)

Page No.

ANNEXES

23. SEBs' Gross Fixed Assets at March 31, 1979 8124. SEBes Capital Expenditure FYs 1977-78 82

SEBs' Capital Expenditure FYs 1978-79 8325. SEBs' Operating Performance - RE Activities (FY1978) 84

SEBs' Operating Performance - RE Activities (FY1979) 85SEBs' Operating Performance - RE Activities (FY1980) 86

26. SEBs' Rate of Return for FY1979: analysed between REActivities and Other Operations 87

27. Average Tariffs, Subsidies for Rural Electrification,Contribtution to Investment, and Rate of ReturnFYs 1983-85 88

Projected Contribution to Investment FYs 1983-1985 8928. Introduction of Commercial Accounting Arrangements 9029. Economic Analysis 91-9i

- Table 1 .- Characteristics of Sample, Actual and Average Schemes 94

- Table 2- Economic Rate of Return and Net Present Value ofSample Schemes 95

- Table 3- Economic Rate of Return and Net Present Value ofActual Schemes 96

- Table 4- Economic Rate of Return and Net Present Value ofAverage Schemes 97

- Table 5- Financial Internal Rate of Return and Net PresentValue 98

30. Development of Average Tariffs for Domestic and IndustrialConsumers 1977/78 - 1981/82 99

Electricity Tariffs vs. Long-run Marginal Cost (LRMC)(paisa/kWh) 100

Tariff Systems: Flat Rate per HP vs. Metered Tariffs 101-10331. Selected Documents and Data Available in the Project File 104

MAP

IBRD No. 15858 - Project Targets and Degree of Electrification

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

I. THE POWER SECTOR

Background

1.01 The development of India's economy and the improvement of itspeople's standard of living depend to a large degree on the development ofthe power sector. Over the last two decades, power demand has grown twice asfast as the economy, and the power sector now takes the largest share ofpublic investment (12% of the Sixth Five-Year Plan outlay). This was due tothe rapid development of power-intensive industry and the expansion of ruralelectrification for irrigation.

1.02 In spite of an increase in generating capacity from 5,600 MW in1960 to about 33,000 MW in 1981, power shortages have been experienced invarious parts of the country for a number of years, and gaps between supplyand demand will impose major constraints for some years to come.

1.03 Before 1975, power facilities were planned, constructed andoperated by each State to meet its own needs. Because of the rapid growth ofthe power sector, the Government of India (GOI) decided to create newinstitutional structures in the power sector, and to emphasize centralplanning of generation and high voltage transmission with the ultimateobjective of central control through a national grid. The CentralElectricity Authority (CEA) performed studies of a national power system, andGOI decided to proceed with the construction of four large centrally-ownedthermal power stations located at coal fields, supplying bulk power to theStates through an interconnected 400 kV transmission system. Theconstruction of these power stations (2,000 MW at Singrauli, 2,100 MW atKorba, 2,100 MW at Ramagundam, and 2,100 MW at Farakka) was begun withIDA/Bank financial assistance. The first phase of the program comprised thefirst stage of 600 MW at each plant, and its associated transmission. Inaddition, IDA Credits for the second stage of Singrauli (1,400 MW) and thesecond stage of Korba (1,500 MW) have been approved, and a proposed Creditfor the second stage of Ramagundam (1,500 MW) is being processed.

Energy Resources

1.04 Commercial energy accounts for about 46% of total energy used, thebalance (54%) coming mainly from non-commercial sources such as firewood andagricultural and animal wastes. The main commercial energy resources arecoal, oil, natural gas and hydro-power. There are also resources of nuclearfuels, principally uranium and thorium. Some geothermal energy sites havebeen identified, but their potential appears to be small. Over the past tenyears, total energy consumption has grown at an annual rate of about 4%.Consumption of commercial energy has increased by about 5% per year, slightly

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faster than that of non-commercial. Coal and hydro-power meet about 70% ofthe country's commercial energy requirements. The consumption of petroleumis relatively low in comparison with other developing countries, accountingfor less than 20% of total demand for commercial energy.

Past Bank Group Involvement in the Sector

1.05 The Bank has made eleven loans for Indian power projectsamounting to US$658.5 million, and fifteen IDA credits totalling US$2,096million. Of these amounts, US$ 2,120 million involves generating plant;US$23 million the purchase of construction equipment for the BeasHydroelectric Project; US$380 million the provision of high voltagetransmission; and US$232 million the purchase of rural electrificationequipment. Fourteen projects financed under the following loans and creditishave been completed: nine generating projects, the Beas Project (Credit89-IN), the first three transmission projects (Loan 416-IN, Credits 242-INand 377-IN) and the First Rural Electrification Project (Credit 572-IN). TheFourth Transmission Project (Credit 604-IN) had its closing date extended toDecember 31, 1982, in order to ensure full implementation and the major partof the credit of US$150 million has been committed. The Third TrombayThermal Power Project (Loan 1549-IN), the Singrauli (Credit 685-IN), Korba(Credit 793-IN), and Ramagundam (Credit 874-IN and Loan 1648-IN) ThermalPower Projects, and the Second Rural Electrification Corporation Project(Credit 911-IN) are in an advanced stage of implementation. The credit forthe Second Singrauli Thermal Project (Credit 1027-IN) and the credit/loan forthe first stage of the Farakka Thermal Power Project (Credit 1053-IN and Loan1887-IN) were approved in May and June 1980, respectively. An extension toKorba (Korba II) was approved in July 1981, and an extension to Ramagundam(Ramagundam II) in December 1981. The Singrauli, Korba and Trombay projectsare on schedule. The Farakka and Ramagundam projects, and the Fourth PowerTransmission Project are proceeding satisfactorily after initial delays. TheSecond Rural Electrification Corporation Project's disbursements are ahead ofschedule, amounting to US$ 115 million by March 31, 1982, as compared to anappraisal estimate of US$ 110 million.

1.06 A Project Performance Audit Report on the Second Power TransmissionProject (Credit 242-IN) was issued on June 3, 1980. The Report stated thatthe project had been successful in assisting nine State Electricity Boards(SEBs) in extending their transmission systems to help meet their growingrequirements. Utilization of generating capacity in the nine SEBs exceededthe appraisal forecast. Institutional objectives mainly concerned therehabilitation of the finances of the SEBs, and while the results achieved byproject completion were modest, improvement was continued by the Third andFourth Power Transmission Projects (Credits 377-IN and 604-IN). In FY 1980,seven of the nine participating SEBs reached their target rate of return of9.5%. The conclusions of the Report pointed to: (a) the difficulty for theBank Group in adequately supervising work other than procurement on the

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project, since it consisted of many sub-projects scattered all over India,and (b) the absence of a close working relationship between the Bank Groupand the beneficiary SEBs, which denied opportunities for effectinginstitutional improvements. The Report suggested that a more directinvolvement with the SEBs in projects of this nature, where an efficientintermediary is not available would be beneficial.

Sector Institutions

1.07 The principal agencies in the industry are: the State ElectricityBoards; the Atomic Energy Commission; the Central Electricity Authority; theRegional Electricity Boards; the central power corporations National ThermalPower Corporation (NTPC) and National Hydro Power Corporation (NHPC); andthe Rural Electrification Corporation Ltd. (REC; see paras 3.02 to 3.24).

1.08 The SEBs were constituted by the State Governments under theprovisions of the Electricity (Supply) Act, 1948, to promote the coordinateddevelopment of generation, transmission and distribution of electricity inthe most efficient and economical manner, and to control and regulate privatelicensees and utilities. The States effectively own or control over 90% ofelectricity supply facilities. While the SEBs are corporate entities andenjoy some autonomy in the management of their day-to-day operations, theyare under the control of State Governments in such matters as capitalinvestment, tariffs, borrowings, pay scales and personnel policies.

1.09 The CEA was constituted in 1950 with responsibility for developingnational power policy and coordinating the activities of the various agenciesinvolved in electricity supply. Its powers were enlarged by amendments in1976 to the Electricity (Supply) Act, 1948. It is now also responsible forthe formulation and coordination of plans for power development, optimizationof investments in the power sector for the whole country, development ofinterconnected system operation, training of personnel, and research anddevelopment. Its Thermal Department takes responsibility for monitoring theperformance and maintenance records of thermal power stations, and fororganizing the training of power station personnel. The Economic andCommercial Department accumulates data on economic, financial and accountingaspects of the power industry, both at Center and State levels, withparticular reference to the operations of the SEBs, and advises SEBs onfinancial matters.

1.10 As a means of improving collaboration between SEBs and establishingRegional rather than State power systems, REBs have been set up for each ofthe Northern, Southern, Eastern, Western and North-Eastern Regions. Thegeneral function of an REB is to operate its system to the maximum benefit ofthe Region as a whole, to coordinate overhaul and maintenance programs, todetermine generation schedules and power available for transfer betweenStates, and to determine tariffs for the transfer of power within the Region.At present, REBs function mainly in an advisory role.

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1.11 The country has for years suffered crippling power shortagesbecause of SEBs' inability to build and maintain enough plant to meet risingdemand. To provide more power, GOI in 1975 incorporated NTPC and NHPC, whosemain purpose is to construct, own and operate large Central power stations.NTPC is at present building four thermal stations aggregating 8,300 MW, whileNHPC is building three hydro stations totalling 975 MW. Both NTPC and NHPCare also building transmission lines and substations associated withgenerating stations. A new Central organisation may soon be formed to assiumeownership of these lines and to develop national or regional grids.

Existing Facilities - All India

1.12 The total installed generating capacity in the country on March 31,1981 was just over 33,000 MW, including 2,736 MW of non-utility capacity.The generating capacity is shown in Table 1.1 below. The peak demandsupplied in 1980/81 was 19,080 MW under conditions of constrained supply.

Table 1.1: INSTALLED GENERATING CAPACITY AS OF MARCH 31, 1981(MW)

ConventionalRegion Thermal Nuclear Hydro Total

Northern 4,318 440 4,033 8,791

Western 6,138 420 1,811 8,369

Southern 2,824 - 4,828 7,652

Eastern 4,080 - 972 5,052

North-eastern 260 - 147 407

Total Utilities 17,620 860 11,791 30,271

Non-utility Capacity (31.3.80) 2,733 3 2,736

Total 20,353 860 11,794 33,007

Source: CEA.

Power Supply and Demand

1.13 Installed generating capacity increased at an annual rate of 10%during the 1950s and 1960s, while gross electricity generation grew at justunder 12%, due to better utilization of generating capacity. Although local

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and intermittent shortages did occur, system failures were not a majorproblem. However, by the early 1970s, demand consistently outpaced supply ina number of States. This was due to several factors, such as failure toimplement projects on schedule, inadequate transmission development,operating and maintenance problems leading to low plant availability,inadequate budget allocations, and poor monsoon rains leading to low hydrooutput. Shortages were most serious in 1974/75, 1977/78 and 1979/80,particularly in the Eastern Region. The estimated deficit of energy duringthe 1970s ranged between 5% and 15%. Estimates for the year 1980/81 indicatethat the deficit was about 10%. The growth of the power sector and thepattern of consumption during the last 10 years are shown in Annex 1.

1.14 Power shortages have decreased the country s economic output, andtheir cost in terms of industrial production foregone has been substantial.Energy restrictions have generally fallen on industry, with relatively littleloss to the economy due to power shortages in the residential andagricultural sectors. Loss of value added in industrial production becauseof power restrictions has been estimated to be about 3% of GDP in 1977/78.1/

1.15 The Sixth Five-Year Plan was finalized early in 1981. The programanticipates an expansion of generating capacity during the 10-year period1980/81-1989/90 of about 50,000 MW, so as to eliminate supply shortfalls bythe end of the decade. Installed capacity by March 1990 would be about80,000 MW, an increase of about 180% over March 1980. Only about 60% of thisadditional capacity had been approved by GOI at the time of appraisal.Further approvals are expected as the availability of resources in futureyears becomes clearer. The construction of some 15,000 km of 400 kVtransmission lines is planned, to enable full integration of regional systemsand to carry the output from the proposed new power stations to load centers.

1.16 Annex 2 shows projections of planned installed capacity, availablepeak capacity, potential peak demand, and a forecast of energy requirementsand availability (not taking diversity into account) until 1990. The data onthe peak demand and energy requirements in 1979/80 and 1980/81 show demandconstrained by supply; the estimated unsuppressed power and energy demandwould have been higher.

1.17 Both unconstrained peak demand and annual energy requirements areprojected by CEA to grow at an average annual rate of about 10% until 1990.If the program of generation development can be achieved, the presentshortage of energy (about 10% of potential demand) would be eliminated from1984/1985 onwards, but there would still be a peak capacity deficit

1/ See: India, Economic Issues in the Power Sector, 1979 (World Bank ReportNo. 2335-IN, paragraph 68).

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throughout the 1980s, not to be eliminated until 1990. The forecast deficitdecreases from 15% of potential demand to about 2-3% in the late 1980s, amargin less than the accuracy of the data. CEA's projections employ a verylow availability factor for generating plant. The peak availability underpresent operating conditions is about 63% of installed capacity, and thenorms used by CEA in forecasting future availability reflect this (Annex 2).In fact, some improvement in availability is likely because of systeminterconnections and better maintenance practices. A small improvement after1985 could eliminate the deficit before 1990. In the short run to 1985,little can be done to eliminate the present shortage of capacity.

Bank Group's Strategy

1.18 The Bank Group's strategy in the Indian power sector has been tocooperate with GOI in selecting solutions to the many difficult andpolitically sensitive problems confronting the Indian electricity supplyindustry. The Bank's main objectives in the sector are:

(a) to eliminate power shortages by the installation of generationiand transmission capacity, and the promotion of measures toimprove the operation and maintenance of existing plant;

(b) to introduce long range system planning on anationwide basis so as to assure implementation of aleast-cost power development program;

(c) to promote improvements in sector organization and training;and

(d) to strengthen the finances of the institutionsin the sector, particularly of the State ElectricityBoards.

1.19 The States, through their Electricity Boards, operate and developmost of the power facilities. Under the Constitution, however, power supplyis a concurrent subject, which means that the responsibility for supplyingelectricity is shared between the Central Government and the StateGovernments, requiring full agreement between them before action can betaken. Despite many difficulties, improvements achieved so far have beenencouraging:

(a) With the establishment of REBs, NTPC and NHPC.important steps towards an improved organizational structureof the power sector have been made. GOI intends tostrengthen the REBs and increase theirrole in coordinating the SEBs in matters of power developmentand operations.

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(b) CEA was reorganized and had its powers enlarged through theamendment in 1976 of the Electricity (Supply) Act, 1948.

(c) The amendment in June 1978 of the financial provisions of theElectricity (Supply) Act, 1948 required that tariffs be set atlevels sufficient to enable the SEBs to finance from internalsources a reasonable proportion of their investment programs.

(d) During FYs 1979 and 1980, SEBs were developing and implementingplans to improve their financial performance at least to theextent of achieving a rate of return of 9.5% on unrevalued netfixed assets as agreed under previous projects (para 1.21).These plans included substantial tariff increases,rationalization of manpower requirements, improved maintenancepractices and other measures.

(e) With a view to the reassessment of tariff policies, the majorityof the SEBs have completed tariff studies based onmarginal cost pricing principles. The Bank's review ofthese studies recommended the standardization of certainassumptions so as to produce a uniform methodology forapplication by all SEBs. While revisions and improvementsto these tariff studies are under way, and the remainingstudies for major SEBs are being finalized, significantimprovements in the level of total payments per kWh byconsumers have taken place. Consumers bills include notonly the base tariff accruing to SEBs, but also duties andfuel surcharges. Total recovery per kWh from industrial andcommercial consumers (representing about 65% of all-Indiaelectricity consumption) has been increasing rapidly duringrecent years, bringing payments by these consumer categoriesclose to long-run marginal cost (para 6.07 and Annex 29).While domestic and agricultural tariff levels are still wellbelow marginal cost for socio-political reasons, averagerecovery from consumers of electricity is moving much closerto strict long-run marginal cost estimates than in the past.Duties now form a substantial element of consumer paymentsand should not be neglected as contributions to sector funding.

(f) NTPC's generation and transmission construction programwill make an important contributionto the elimination of deficits of power.

1.20 Two areas have been a particular cause for concern to the Bank Groupand have been the subject of a continuing dialogue with GOI. They are:

(a) the lack of nationwide long-range planning for powerdevelopment;

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(b) the weak financial position of certain SEBs.

CEA has now prepared, in accordance with agreements during negotiations forthe Second Korba Thermal Power Project, a national long-term powerdevelopment plan. First chapters of this plan have been submitted to theBank during negotiations for the proposed project, the remainder will besubmitted within three months.

1.21 While the financial performance of some SEBs, measured in terms ofachieving the 9.5% rate of return covenanted under previous lendingoperations for power transmission and rural electrification projects has beenunsatisfactory in the past, there was a big improvement during FY1979 andFY1980 when, out of a total of 14 major SEBs, 10 reached or exceeded thetarget (Annex 22).1/ The implementation by these SEBs of programs designed torestore or maintain their target rates of return together with the payment: ofsubsidies in respect of RE losses2/ has proved effective in most cases. Inthe case of Uttar Pradesh, the subsidy by the State Government of ruralelectrification losses in FY1980 enabled the SEB to reach its target rate ofreturn for the first time and to meet the conditions of eligibility for theSecond Rural Electrification Corporation Project. SEBs' performance forFY1981 is expected to have been maintained at the FY1980 level (in some casesthe RE subsidy still has to be settled).

1.22 Because of the rapid expansion of the power industry, all aspects ofthe sector needed to be reviewed and solutions found for its variousproblems. Consequently, GOI established in 1978 the Committee on Power,which submitted its conclusions to GOI in September 1980. They refer to allmajor aspects of the power sector including planning, project formulation andimplementation; operation and maintenance; organization and management;finance, financial management and tariffs; rural electrification; andresearch and development. The recommendations of the Committee on Power,most of which are satisfactory in light of the Bank Group's strategy, form auseful basis for improvement of all aspects of the power sector. -Implementation of the Committee's recommendations has already started withaspects that do not require GOI-s formal approval, such as better planningprocedures and improved operating and maintenance management.

1/ Of the four SEBs not making the 9.5% in FY1980 Bihar is receiving fullsubsidy for RE losses and thereby remains eligible under previous RECredits, Gujarat has performed satisfactorily in earlier years and isnegotiating a subsidy for RE losses in FY1980, Haryana is not eligibleunder previous RE Credits and finally, Orissa has consistently failed tomake 9.5% (para 5.11). Reliable recent data for Assam is not available.

2/ In accordance with Credits 604-TN, 572-IN, and 911-IN, subsidies inrespect of rural electrification losses are to be included in operatingincome when calculating the annual rate of return.

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1.23 The Bank Group considers that actions to accelerate improvements inthe following areas are of high priority:

(a) Performance of thermal power plants: measures should focus onachieving better utilization of capacity by improvingmaintenance practices, overcoming delays in the supply of spareparts, reducing the duration of maintenance shut-downs,improving the quality and flow of coal supplies and upgradingthe skills of personnel engaged in operation and maintenance.

(b) Co-ordination between power development and growth in othersectors: in connection with the long-range power developmentplan, demand forecasting, which is currently done on the basisof unrestricted power supply, should be related to realisticprojections limiting the growth of demand to the availablesupply; this would be accomplished by adjusting the policy forconnecting new consumers and by stressing conservation anddemand management for existing consumers.

(c) Acceleration of hydroelectric development: only 11% of theeconomically exploitable potential has so far been developed.Measures should include not only increased investment, but alsoappropriate project preparation through managerial, technicaland administrative improvements.

(d) Strengthening of the role of the Centre in power generation andinter-State high-voltage transmission: the transition fromlocal grids to regional grids, and later to a national system,should go in parallel with the implementation of adequateinstitutional structures, so as to permit gradual shifting ofthe responsibility for planning and operating power plants andinter-State transmission from the State to the national level.

(e) Establishment of financial objectives and policies for theirimplementation, evolution of a rational tariff policy, andimprovements in management information and accounting systemsfor each SEB: to comply with the provisions of the financialamendments to the Electricity (Supply) Act, 1948, so that theSEBs can finance themselves to the extent of making reasonablecontributions towards their capital investment programs.

1.24 During negotiations for the Second Korba Thermal Power Project,agreement was reached that GOI would provide to the Bank Group a program andtime schedule for the implementation of measures to reach the aboveobjectives. A program was submitted on time to the Bank Group during thenegotiations for the proposed project, thus complying with the aboveagreement, and is under review. Furthermore, agreement was reached during the

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negotiations to accelerate the implementation of financial improvements inSEBs (para 1.23e): these improvements are spelt out in paras'5.16 to 5.23.

II. RURAL ELECTRIFICATION

Background

2.01 The primary objective of the Government of India in its drive forrural electrification (RE) is to ensure increased agricultural output byproviding reliable and economical power for irrigation pumps, involvingmostly groundwater pumping by individual farmers. Secondary objectives arethe provision of electricity for domestic, commercial and small industrialconsumers in the villages, in order to improve employment possibilities andquality of life in rural areas.

2.02 Agricultural pumping demand accounts for approximately 17% of India'stotal annual kWh demand. This represents a significant increase over thelast 10 years, up from a previous figure of about 9%. There is considerablevariation among States in this respect, the share of agricultural consumptionranging from negligible levels in West Bengal, Orissa, and Assam to 30-40% inUttar Pradesh, Punjab and Haryana. Between 1970 and 1980, consumption foragricultural pumping has been growing at an annual rate of about 13%,reflecting the rapid increase in irrigation pumps connected to the grid.

2.03 Electricity demand in the rural sub-sector is characterized by a lowannual utilization of connected load (concentrated in the irrigation season)and frequent consumption at system peak times. This, together with longdistribution lines because of scattered consumers, is the reason for the highcost of supplying electricity to rural areas. The reason for this feature ofrural consumption is the dominant share of small-scale irrigation pumping,the pumps are, on average, operated for a few hours per day only. In areaswith ample groundwater, however, utilization times per day in the irrigatlonseason are longer.

2.04 Nearly all parts of the country are subject to load shedding. Ruralfeeders in some areas may have supply up to 18 hours per day, although muchof this will be at night, whilst other areas may at certain timies of yearhave only 5-6 hours per day. In order to allow farmers to plan their work,rosters are published showing the days and hours when each feeder or areawill be energized. Having lived for long periods with power interruptionsand rostering, consumers have adapted to them, an indication of this beingthe unusually high system load factors experienced. Under the circumstances,the methods used are generally satisfactory and fulfill their purpose.

2.05 REC has developed and produced standards, guidelines and manualscovering most aspects of rural electrification. These have been adopted andapplied by SEBs, where they have made major contributions to improving the

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effectiveness and lowering the costs of RE in general. While the standardsmay not be flexible enough to allow distribution system cost minimizationeverywhere, they are substantially well suited to the Indian circumstances.A pilot project under the previous credit is in progress to promote bettercontrol of power factor by the use of both fixed and switched capacitors on11 kV feeders. The use of capacitors will be of great benefit to mostsystems in reducing energy losses and releasing capacity for productive use,and REC will promote this as rapidly as possible. The use of single-phaselines has recently been investigated as another pilot project under theprevious credit but has been demonstrated to have less application in Indiathan elsewhere: by far the most important use of RE here is for drivingirrigation pumps, and for this application a three-phase supply is generallymore economical. REC is now sponsoring research and testing of a transformertype enabling SEBs to provide two-phase supply under low load conditions, anapproach allowing cost savings.

2.06 As a further practical apprach, pump motors have been designed thathave an inherently high power factor even on part load. Farmers can nowobtain advice and help from ARDC in selecting pumps of the right size andspecification for their purposes, and ARDC and the banks will now financeonly pumps that have been properly selected and meet the required standards.These measures will take time to take effect and will not improve the severalmillion irrigation pumps already in service, so only gradual improvement canbe expected.

2.07 Many rural distribution systems show excessive losses of energy (andhence revenue), both technical and unaccounted. Three things account forthis. First, the law dealing with theft of electricity is weak. Moves areafoot to amend the Indian Penal Code, but it is uncertain when this willhappen. Secondly, distribution engineers have little chance to reward goodwork and no power to hire and fire. The fact that some SEBs perform betterthan others in similar circumstances suggests that differences in results maybe attributable to differences in quality of higher management. Thirdly,distribution engineers are hampered in their work by the absence of meteringequipment on feeders. It is estimated that in the south, 90% of feeders aremetered, whereas in the north 90% are unmetered. However, in the north theconsumers themselves are usually unmetered, and where this is so there isrelatively little benefit from metering the feeder. Where REC is involved inthe building of new substations or modifying existing ones, metering will beprovided on all feeders. This development, together with increasingsupervision of rural electrification by REC, should ensure gradualimprovement in the analysis and prevention of losses. REC plans to encourageand improve loss monitoring systems in SEBs by urging them to establish"System Improvement and Loss Monitoring Cells", as already practiced by someSEBs.

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Development

2.08 In October 1981, about 279,000 or 48% of the 576,000 villages inIndia were "electrified", i.e., at least some initial consumer connectionshad been established. The percentage varies from State to State: Kerala,Punjab, Haryana, and Tamil Nadu have reached 100%, while in Assam and othernortheastern areas only 15-40% of villages are electrified. By October 1981,4.48 million irrigation pumps had been electrified. The largestconcentrations are in Tamil Nadu, Maharashtra, Uttar Pradesh, and AndhraPradesh (Annex 3).

2.09 The other major motive power for irrigation pumping is the dieselengine. In March 1980, an estimated 2.6 million diesel-powered pumps werein operation in India, concentrated in Uttar Pradesh (31%), Gujarat (21%),Punjab, and Maharashtra. During most of the 1970's, the number of dieselpumps increased at a higher rate than that of electric pumps. In recentyears, GOI policy has reversed this relationship, as the diesel pump growthat about 3% per year has been lagging well behind the expansion of electriLcpumping (about 14% per year). The potential for further expansion of pumpelectrification exists: out of an estimated 10 million tubewells and dugwellsexisting in India in 1980, 4.2 million (42%) had electric pumps installed and2.6 million (26%) diesel pumps. The remaining 32% were operated with animalor human power. In addition to this replacement demand, new wells will besunk in areas with high groundwater potential.

2.10 Since 1970, the number of villages connected to the grid has grownat an annual rate of about 10%. While REC's share in financing thisdevelopment was small during the early 1970's, it has grown to about 40% ofannual achievements by 1980. Similarly, the pump connection growth of 11.5%per year during the decade has been financed by REC to an increasing degree,amounting to a share of about 25% in 1975, and about 50% in 1980/81 (Annex4). In terms of expenditure, total outlay on RE has increased from about Rs80 million (US$10 million) in the First Five-Year Plan in the early 1950's,to about Rs 23,000 million (US$2,900 million) in the ongoing Sixth Plan, witha rising share of REC finance (para 2.14).

Future Program

2.11 A continuing high growth rate in the numbers of irrigation pumpconnections (about 10% p.a.) is envisaged by GOI for the coming decade, whilethe growth rate in village electrification is planned to taper off to about6% per year to reach a nation-wide level of 80% of villages with access toelectricity by 1990. The heavy emphasis on RE as vehicle for increasingagricultural production is to be maintained and intensified: a desirabledevelopment.

2.12 The Sixth Five-Year Plan (1980/81-1984/85) provides for theconnection of about 100,000 new villages to the grid, and the energization

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of about 2.5 million additional pumps. Of this total, 90% of villages and63% of pumps are to be connected with REC finance or supervision. (Table2.1).

Table 2.1

Physical Targets for the Sixth Five-Year Plan (1980-85)

Normal RECState Program and MNP/RMNP SPAPlan Cooperatives Program (REC) Program Total

Villages to beelectrified 10,000 46,470 43,600 - 100,070

Pumpsets to beenergized 922,800 610,500 148,000 818,700 2,500,000

The "Special Projects Agriculture" (SPA), which are co-financed by REC, theAgriculture Refinance and Development Corporation (ARDC), and Indiancommercial banks (one third each), are one of the most important elementsof the plan in terms of pump connections.

2.13 All RE investments and operations (both new schemes andintensification of the density of consumer connections in electrified areas)in each State are conducted and controlled by the SEBs. The SEBs financetheir RE expenditure from a number of sources, the major ones being ARDC andREC, both of which utilize GOI funds. ARDC refinances bank lending to SEBsfor irrigation pump connections, and the banks provide funds themselves.Total expenditure on RE under the Sixth Plan is expected to amount to aboutRs 23,000 million (US$2,900 million) in constant 1980 prices. Thisexpenditure is to be financed as shown in Table 2.2 (a detailed breakdown byState is shown in Annex 5):

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Table 2.2

Financing of the Indian RE Program

Expenditure 1980/81-1984/85Source ofFinance Program Component Rs million US$ millioin

State Planl/ Scattered village electri- 6,800 850fication and pump connection

REC Normal area electrification 5,955 744schemes

REC Minimum Needs Program (RMNP) 3,010 376area electrification schemes

REC Pump connection schemes (SPA) 2,100 263

ARDC Pump connection schemes (SPA) 2,100 263

Banks Pump connection schemes (SPA) 2,100 263

REC Cooperatives, and Harijan 330 41settlement electrificationschemes

REC System improvement (SI) schemes 420 53

State Plan System improvement under REC 450 56supervision2/

23,265 2,909

2.14 The share of REC direct financing in the Sixth Plan is about 51%.REC appraisal, approval and supervision activities, however, will cover about71% of total RE expenditure in India, as REC responsibility extends to the

1/ Including ARDC refinance of pump connections independently ofREC-supervised schemes.

j1 Out of total GOI Plan funds for transmission and distribution construc-tion and improvement of Rs 42,700 million.

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full amount of the co-financed pump connection schemes and to some systemimprovement schemes financed out of the State Plan rather than through REC.In future (apart from ongoing REC-financed System Improvement schemes), allnew reinforcement and upgrading of existing rural distribution networks willbe financed directly out of State funds, and no longer as loans from REC. Aprovision under the proposed project, however, ensures that REC will beinvolved in the scrutiny and implementation of such improvement schemes (para4.05).

2.15 The pump connection program (SPA), co-financed by REC, ARDC, andbanks involves (i) a reinforcement of existing distribution networks toaccommodate more pumping loads, and (ii) the connection of pumps only inthese reinforced areas. The schemes under this program have a shortimplementation period, and yield significant economic benefits at relativelylow levels of investment per schemes. Outside these joint efforts, ARDCcontinues to refinance the pump connection expenditures of SEBs under theState Plan without REC involvement, but is intending to phase out thisactivity gradually, and coordinate more with REC as the SPA program grows.This development is satisfactory, and is expected to result in an improvedcoordination of the bulk of RE finance.

III. BORROWING AND EXECUTING AGENCIES: INSTITUTIONS AND OPERATIONS

3.01 The borrower is GOI who will (i) relend part of the proceeds of theIDA Credit to REC, and (ii) make available the balance of the Credit to SEBsdirectly or through their State Governments. REC, in turn, will onlend toSEBs to finance specific RE schemes meeting its defined viability criteria.The part of the proposed IDA Credit onlent to REC constitutes part of ongoingGOI lending to REC, and of REC lending to the SEBs. The part of the Creditmade available to SEBs directly covers part of Plan allocations for SEBexpenditure.

A. Rural Electrification Corporation (REC)

Role in the Power Sector

3.02 REC was incorporated in July 1969 under the Indian Companies Act,1956, as a company wholly owned by GOI, under the general supervision of thethen Ministry of Irrigation and Power (now under the Ministry of Energy).REC's chief objective is to finance rural electrification schemes throughoutIndia, acting as a financial intermediary with technical expertise, andadministering funds received primarily from GOI. In doing so, REC isdirected to adopt a "project approach," coordinating electrification withother inputs in rural development in order to achieve increased agricultural

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production and overall economic development. This involves an appraisal ofeach scheme to confirm the availability of groundwater and the existence ofsufficient demand for electricity.

3.03 The impact of REC lending to the SEBs is large in the ruralsubsector, although it is small in relation to total SEB operations. Whilemore than half of rural electrification financing is REC's responsibility,REC provides only about 10%1/ of total finance needed by SEBs for generation,transmission, and distribution investment. REC, therefore, exerts moreinfuence on most SEBs by persuasion and demonstration than by leverage, andis providing valuable contributions to the training of SEB staff, methodologyof RE scheme appraisal, and local RE planning.

Organization and Staff

3.04 REC is headed by a Board of Directors, all of whom are appointed bythe President of India. At the time of appraisal, the Board consisted of afull-time Chairman and Managing Director, the REC Financial Director, threeofficials of GOI, the managing director of ARDC, and two officials of StateBanks. Three more members are expected to be appointed shortly.

3.05 The Chairman and Managing Director is the chief executive in charge!of all REC operations. Under him, the Technical Director (a presently vacantposition that will be filled shortly) has overall responsibility for fourtechnical project divisions headed by Chief Engineers who are fullyresponsible for the coordination of the project cycle including schemepreparation, approval, monitoring, and disbursement in four groups of States("zones"). In addition, they specialize in technical matters such asstandardization, system improvement, and training. Five other divisons arenon-regional and provide specialized inputs in the project cycle and generaloperations. Finance, accounting, and corporate planning is taken care of bya department under the Finance Director. This department is also responsiblefor IDA liaison. Proposed new divisions under Chief Engineers will deal wLthlending for micro-hydro schemes and new energy sources (Annex 6).

3.06 At the time of appraisal, total staff strength of REC was 798, upfrom 713 in November 1978. Staff growth of about 5-6% per year has occurredboth in headquarters and in the Regional Offices that are increasingly takLngover the appraisal and monitoring of schemes. Eleven such RegionalOffices2/, with a total of about 260 employees, are now in operation. The

1/ This proportion is much higher in Karnataka where generation investmentis the responsibility of a separate entity, the Mysore Power Corporation.

2/ In Bhubaneshwar, Calcutta, Chandigarh, Gauhati, Hyderabad, Jabalpur,Jaipur, Lucknow, Madras, Patna, and Baroda.

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total staff growth of about 8% from March 1979 to March 1981 (approximatelyin line with expectations at the time of appraisal of the Second REC project)has coincided with an increase of disbursements to SEBs of about 18%, and anincrease in loan commitments of about 30%. The planned annual increase of2-3% in total staff strength in the next years is adequate. Emphasis will beplaced on strengthening Regional Office staff in States with weakimplementation performance such as Uttar Pradesh, Bihar, and West Bengal.

3.07 About 15% of total REC staff are seconded from the SEBs, includingabout 40% at senior levels, mostly engineers (Annex 7). For staff witheconomic and financial background, direct recruitment is prevalent. About45% of senior level employees are engineers, about 33% have an economicsbackground, and the remainder are financial and business-oriented staff.Middle-level employment is dominated by financial staff. The pattern ofstaffing is appropriate for the function REC is performing.

Scheme Appraisal and Monitoring

3.08 REC organizes its lending to the SEBs on the basis of RE schemes.Schemes are always defined to cover an area, usually not exceeding the sizeof a "block" or "taluk" 1/, and consist of either (i) the electrification

of villages in the scheme area, (ii) connection of new consumers of oneconsumer category in the scheme area, or (iii) upgrading of the sub-transmission and distribution system of the scheme area (Annex 8). Theschemes are processed by REC in a cycle consisting of formulation andpresentation, appraisal, approval, and monitoring.

3.09 The terms of REC loans differ according to the type of scheme andarea classification by degree of general area development. Repayment periodsrange from one year to 30 years and the rate of interest increases in stepsto a maximum of 9.5% per year for long-term loans (Annex 9). REC loansusually cover the total authorized cost of approved schemes, exclusive ofconsumer's contributions with the exception of recently developed categoriesof schemes, where other financing institutions or SEBs supplement REC'sfinancing.

3.10 Since 1969, REC has gradually established a working relationship withthe SEBs that ensures the presentation and design of RE schemes according toREC requirements. REC has prepared satisfactory proforma procedures andmanuals for the SEB staff involved in the processing of scheme proposals toencourage uniformity and meeting of specifications.

1/ Administrative subdivisions below district level.

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3.11 Each scheme proposal received by REC is revised if necessary to REC'ssatisfaction and appraised by a team from the responsible Regional Office.During the appraisal, a meeting is held to examine the coordination of theinstitutions' efforts. An integral part of the appraisal is the sampleexamination of the validity of the SEB's assumptions. Forecasts such as theavailability of credit facilities, the expected connected load, and theavailability of groundwater and infrastructure, are checked. The internalREC appraisal report then highlights any inconsistencies, suggestsmodifications, and shows the viability of the scheme. Formal approval of theloan is obtained from the REC Board of Directors.

3.12 REC has now begun to introduce discounted cash flow techniques in itsfeasibility calculations, and has replaced the previously used assessment offinancial return on the investment in a given year, by more significant netpresent value and internal rate of return concepts. REC is well advanced inthe program of introducing economic rate of return calculations in schemefeasibility analysis, based on the benefits of cost savings in usingelectricity rather than alternative sources of energy. Since June, 1981, theeconomic internal rate of return is the main decision criterion for approvalof schemes, accompanied by a DCF-based analysis of the scheme's financialimpact.

3.13 In the course of monitoring of the implementation of schemes, SEBsare required to submit to REC regular standardized reports on physical andfinancial progress. REC monitoring teams visit the scheme sites occasionallyto ascertain progress and to check on implementation problems. If anyproblems or significant deviations from the appraisal report are identifiedduring monitoring, REC follows up its findings in a dialogue with the SEBconcerned. The usual problems to occur are cost overruns, delay in theconstruction schedule, and slow growth of connections.

3.14 Schemes that had been sanctioned by REC in the early 1970's are nowreaching completion or are being reviewed by REC if implementation times areexceeding the original estimates. Due to REC's lack of forecasting andcosting experience in the early years, the majority of these schemes haveexhausted either the allocated funds or the allowed time, and need to bere-evaluated. REC has now developed a scheme closing procedure that includesa scheme completion report and an analysis of actual scheme viability, aswell as instructions to SEBs to provide more detailed data after theoriginally anticipated implementation period. Schemes which prove to beeconomically viable on reappraisal are closed, and a new scheme may beapproved in an adjoining area. Schemes which are not yet viable arereformulated and an additional load for cost overruns may be approved. REChas submitted to IDA draft guidelines for project closure reporting, whichare satisfactory. REC has introduced these procedures for all closingschemes in September, 1981.

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Disbursement

3.15 For area schemes, REC disburses 35-40% of the loan as an advance whenthe loan is approved, the remainder in four unequal installments tied to theachievement of interim physical targets. For two-year special schemes,disbursement is made in two approximately equal installments (Annex 10). Thetiming between installments, particularly for area schemes, depends on howfast SEBs reach the targets set in the scheme report. Implementation delayslead to a postponement of the next disbursement tranche, usually scheduledone year after the last. These procedures and incentives are satisfactory.

3.16 Earlier delays in REC disbursement, due to poor withdrawalperformance of large recipient States, had been virtually eliminated by1978/79. Some disbursement shortfall was experienced in 1979/80 because ofuncertainty about the financing of system improvement schemes (para 2.10) butdisbursement in 1980/81 was in line with the revised projections. Adisbursement growth rate of about 10% per year is expected for the next fiveyears.

Technical Assistance to SEBs

3.17 REC is providing assistance to SEBs primarily in three fields: (i)scheme design; (ii) technical standardization; and (iii) training of SEBstaff. REC has prepared detailed guidelines and circulated them to the SEBs,dealing with identification and preparation of scheme proposals, andassessment of viability. A continuing dialogue between REC and SEBs keepsthis methodological input up to date.

3.18 For standardization of RE system design, REC has published a numberof manuals for the SEBs that set out technical specifications for materialand construction standards (para 2.05). In addition, REC is sponsoring anumber of technical research projects, the results of which are being madeavailable to the SEBs.

3.19 RE schemes require skills somewhat different from those required forother SEB operations. To help develop these, REC has financed linementraining centers in various locations and assisted in the initial stages ofinstruction: by 1981, 23 such centers had been established, training morethan 1,800 workers annually. In 1976, REC started to conduct courses for SEBengineers involved in RE: these courses have been held in Hyderabad since1977. REC will continue and expand this training function both for SEBs andfor its own staff. The training program is comprehensive and well-designed.As part of the proposed project, REC is requesting IDA to finance theconstruction and equipment of new facilities for the Hyderabad trainingcenter, to enable them to consolidate the training activities in suitablepremises (para 4.06).

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Record of Operations

3.20 From its inception in 1969 until March, 1981, REC had approved about4,500 schemes with a total loan amount of about Rs 15,000 million (US$1,900million). Half of these were area electrification schemes, accounting forabout 73% of the loan amount. Recently, a significant shift of REC lendingactivity away from general area electrification towards specialized, morenarrowly focussed schemes has taken place. Taking 1980/81 approvals alone,the shares of area electrification schemes were only 30% of the number, and60% of the total loan amount (Annex 11). Out of total loans committed,approximately 68% had been disbursed to SEBs by March 1981.

3.21 Under the first Credit (572-IN), six SEBs were eligible for receivingIDA finance initially: during subsequent years, seven more SEBs fulfilled theoriginal eligibility criteria (para 5.11). This gradual increase in thenumber of participating SEBs, together with the slow introduction of ICBprocurement procedures, delayed the procurement process and, consequently,the disbursement of the Credit. A second cause for disbursement delays hasbeen the domestic shortage of aluminum for conductors during 1978/79 and1979/80. The shortage has held up implementation work on REC-financedschemes, causing a shortfall of physical achievements against targets and,consequently, slower disbursement of REC loan installments. The first Credithas been closed as of December 31, 1980, and all procured materials andequipment have been installed in eligible scheme areas. A draft completionreport has been prepared by REC, and a Project Completion Report has beensubmitted to OED in April, 1982.

3.22 Under the second Credit (911-IN), adequate safeguards were introducedbased on the first Credit's experience: these included a streamlining of theprocurement process (coupled with increased procurement supervisionexperience within REC), and a system of priority allocation ofconductor-grade aluminum to conductor suppliers holding REC-financedcontracts. The results are encouraging: implementation of the second Creditto date has been smooth, and disbursement of Credit proceeds is well ahead ofschedule.

Future Development of REC

3.23 REC is endeavoring to expand its range of activities in order to gainflexibility and satisfy a wider-range of rural energy needs. Involvementof REC in small generation projects such as mini-hydro schemes in remoteareas is being discussed with GOI. On less conventional energy sources,research into the feasibility of biogas plants in rural electric cooperativesis being conducted by REC, and REC is planning to finance installation ofsuch plants, possibly with dual-fuel generators. New ventures for RECinclude research and experimental scheme finance for solar pumping, windenergy, and integrated energy solutions for rural areas. This activity is tobe coordinated with research institutes, and SEBs.

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3.24 The shift away from traditional area electrification schemes (para.3.20) towards specialized schemes dealing with pump connections (SPAschemes), industry (SPI), drinking water well connections (SPD), and systemreinforcement (SPA and SI) is expected to continue. In particular, theirrigation pump connection activity (cofinanced with ARDC and Indiancommercial banks) will continue its expansion, as rural electrificationemphasis will remain on productive agricultural and small industrial use.The planned increase in disbursements and commitments for the coming yearsis realistic, and REC is well prepared for the level and structure of thelending program ahead.

B. State Electricity Boards (SEBs)

SEB's Organization for RE

3.25 All major SEBs have set up "Rural Electrification Cells" or similardepartments at headquarters that deal with the formulation, screening, andmonitoring of RE schemes. Typically, the Cells are headed by a ChiefEngineer of senior rank, and consist (in the larger SEBs) of 10-30 engineers.Their principal functions are the preparation of RE schemes that are suitablefor REC financing,- and communication with REC during the scheme cycle. Insome States, the Cell also deals with other RE operations and is responsiblefor planning and scheme preparation in the rural distribution system as awhole.

3.26 The actual implementation and operation of RE schemes is theresponsibility of the SEB-s construction and regional administrationdepartments rather than of the RE Cells. Although the Cells keep a closewatch on the progress, the decisions on material allocations, constructionpriorities, and consumer applications are made by the operating departments.Billing and collection in the scheme areas is handled together with otherbusiness by the regional SEB administration. Separate consumption andconnection statistics are kept for REC-financed schemes only.

RE Planning and Financing

3.27 The content of investment plans for RE depends to a large extent onthe availability of funds. Together with generation and transmissionplanning, each SEB prepares a distribution and rural electrification planfor five years, mainly based on targets for village electrification and pumpconnection. Initially, the physical details of the plan are rather general,and average unit costs are used to arrive at approximate expenditurerequirements. The funds required for this expenditure are partly allocatedfrom the SEB's and the State's own resources, but mostly from Central planfunds made available by GOI according to the Planning Commission'srecommendation.

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3.28 Simultaneously with the State plans, the Planning Commission preparesa five-year expenditure plan for RE on a nationwide basis. The twoapproaches are then reconciled in discussion between the States, REC, and thePlanning Commission, and annual plan allocations are formulated for eachState. Most Central plan funds specifically earmarked for RE investment arenow channelled through REC, including blocks of funds for (i) the normal RECprogram, allocated by State; (ii) the Minimum Needs Program, also by State;and (iii) the irrigation pump connection program (REC's share is providedas an annual lump sum, the Statewise distribution to be left to REC'sdiscretion). There are also GOI funds made available to the States asgeneral plan assistance, some of which are onlent to SEBs. These are either(i) all-purpose loans for SEB capital expenditure, or (ii) funds earmarkedfor transmission and distribution system improvement.

3.29 The priorities within each State's RE program are decided by the SEB,taking into account the local backlog of potential consumers' applicationsfor connections, ease of grid extension, and the revenue potential ofpossible areas. In many States, a large influence on priorities is theexistence of RE schemes that are suitable for submission to REC.

3.30 Planning for RE and coordinating it with the work of other agenciesinvolved in rural development is conducted at several levels within eachState. The most effective coordination takes place at the district level inregular meetings between the concerned institutions under the chairmanshipof the District Collector. In the past, this system has been operated withvarying degrees of success, but a general improvement is evident in theincreasing interdependence of the activities of SEBs, REC, ARDC, banks,agricultural departments, and industrial departments.

Record of RE Operations

3.31 The record of target achievement in the implementation ofREC-financed schemes by most weaker SEBs is improving consistently. RECdistinguishes (i) original scheme appraisal targets; (ii) "phased schemetargets" which change according to the amounts of the REC loan withdrawn; and(iii) annual global plan targets, which are arrived at in annual plandiscussions independently of individual schemes. While original appraisaltargets and phased scheme targets are useful in assessing individual schemes-progress, the annual plan targets show the SEB's overall performanceaccording to realistic short-term expectations. During the Fifth Five-YearPlan (1974/75 to 1978/79), REC-financed activity was dominated byelectrification of new villages, resulting in a 112% target achievement ascompared to only 46% achievement in terms of new pump connections. Theshifting emphasis towards productive use in recent years has increased theREC-financed pump connection achievement rate to more than 80% by 1980, whilethe good performance in REC-financed village electrification was maintained.In comparison, the SEB performance in non-REC pump connections was muchbetter (about 100% target achievement) than their record in non-REC village

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electrification (43%). This may be due to the relative ease of adding

connections to an existing system (Annex 12).

3.32 The performance of individual SEBs varies widely. Consistently goodperformers such as Maharashtra, Gujarat, Haryana, and Punjab arecounterbalanced by SEBs with poor implementation records such as Assam,Bihar, Orissa, Uttar Pradesh, and West Bengal. The main reasons for delayedachievement are: (i) initially over-optimistic forecasts of future loaddemand in REC scheme areas; (ii) inefficiency and delays in the constructionactivity of many SEBs; (iii) shortages of materials required for ruraldistribution; and (iv) bottlenecks in providing other essential inputs forsuccessful rural electrification, such as credit for farmers for wells,pumps, etc. The improvement observed in recent years appears to be theresult of progress in all these fields: one important contributing factor hasbeen REC's learning process in forecasting load and consumption growth inscheme areas, which has led to more realistic expectations.

3.33 Most weak performers among the SEBs have improved theirimplementation records with respect to pump connections significantly in1980/81, due to intensive REC monitoring and pressure. This is particularlynoticeable in Uttar Pradesh, Bihar, and Orissa. In Assam, plan targets weretoo optimistic, and pump irrigation has not been easily accepted by farmers.Consequently, Assam will not be a beneficiary under the proposed project.Karnataka and Kerala are slipping in implementation, but are expected torecover because of the temporary nature of the delays. West Bengal, althoughimproving its village electrification performance, has been lagging behindseverely in pump connections. However, satisfactory institutional measureshave been taken recently that will enable the West Bengal SEB to improve itsperformance gradually. REC will intensify its supervision effort in theStates with weak performance.

IV. THE PROGRAM AND THE PROJECT

Genesis of the Project

4.01 This project is a follow-up to the First (Credit 572-IN) and Second(911-IN) Rural Electrification Corporation Projects. The First Project wasapproved in July 1975, and closed on December 31, 1980. The Second Projectwas approved in May 1979, and is under implementation. Both Creditssupported the ongoing REC lending program for eligible schemes in eligibleStates by financing materials which were mostly procured through ICB.

4.02 Continuing the approach adopted in the Second Project, the onlyschemes eligible for onlending of proceeds of the Loan are those in RECcategories that are likely to have economic rates of return well above the

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opportunity cost of capital. More than 50% of RE schemes benefitting underthe proposed project have already been identified and approved by REC; theremaining eligible schemes will be approved before March, 1984. FourteenSEBs are eligible to benefit under the proposed project, according to theiracceptance of the financial performance criteria (para 5.24): they areAndhra Pradesh, Bihar, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh,Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and WestBengal.

Description of the Project

4.03 The project consists of: -

(a) Expenditure during 1983/84 and 1984/85 on 1,780 REC schemes ofcategories OA, OB, SPA and SPI (Annex 8) already identified andapproved by REC between April 1,, 1978 and January 31, 1982; andabout 1,700 new REC schemes of the same categories to beapproved by REC between February 1, 1982 and March 31, 1984.

(b) Expenditure during 1983/84 and 1984/85 on about 110 systemimprovement schemes, to be financed by SEBs from funds partlymade available by GOI to States as Plan allocations, andpartly generated by States themselves, and lent by Statesto the SEBs, but to be appraised, approved and monitored byREC.

(c) Buildings, furniture and equipment for the Central TrainingInstitute for Rural Electrification.

Normal REC and SPA Schemes

4.04 The first component of the project [para 4.03 (a)], covers the costof all eligible REC projects in eligible States in progress in 1983/84 and1984/85. Annex 13 page 3 shows the distribution by State and by category ofscheme, of the 1,890 schemes and associated loans previously approved by RECbetween April 1, 1978 and January 31, 1982 that will be eligible under theThird Project. Annex 13 page 4 shows the total expenditure under the ThirdProject on all eligible REC schemes (about 3,500 in total) during 1983/84 and1984/85, broken down by State. Achievements expected during the projectperiod are the electrification of 18,760 villages and the connection of543,000 irrigation pumps, 25,000 small industries and 600,000 domestic andcommercial consumers (Annex 14).

System Improvement (SI) Schemes

4.05 Many of REC's schemes under the previous credit provided funds tocarry out improvements needed in the existing systems to which the schemeswere to be connected. GOI has now decided that in future REC funds will be

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used for system improvements only as part of electrification schemes ratherthan as separate schemes. The second component of the project fpara 4.03(b)] provides funds for such separate improvement schemes and also for urgentsystem improvements not necessarily directly associated with REC schemes.SI schemes of this kind will be appraised and monitored by REC, who will alsoprocess the procurement of materials for them under the proposed ThirdProject. The funds for these schemes will not be lent by REC but will beprovided by SEBs from their Plan funds (para 2.14). GOI has undertaken toobtain assurances from each eligible State that the necessary funds will beso directed; the procedure will be similar to that in effect under the FourthTransmission Project (Credit 604-IN). Similarly, REC has undertaken toappraise and supervise such schemes.

Training Facility

4.06 GOI has decided that REC will continue to run the Central TrainingInstitute for Rural Electrification in Hyderabad, and also that itsactivities should be expanded to include not only the existing courses forassistant and junior engineers from the SEBs, but also workshops and seminarsfor the SEBs' upper and middle level officers of other disciplines. US$ 1million has been provided under the loan to construct, furnish and equipbuildings for the Institute and hostel to replace the present unsuitablerented accommodation (Annex 13, page 5).

Project Cost and Financing

4.07 The total cost of the project is estimated at Rs 6,326 million(IJS$791 million). A detailed breakdown is provided in Table 4.1 and Annex13. Physical contingencies were allowed only on the training facility;purchases under the other headings will be limited to the funds available.The base cost of materials and equipment was derived by using pricesprevailing at the beginning of 1982. Price contingencies amounting to 22% ofthe project-s base were calculated using the following rates of inflation:

FY 82/83 83/84 84/85 85/86 86/87

Rate % 8.5 8.0 7.5 7.0 6.0

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TABLE 4.1: PROJECT COST SUMMARY

(Rs million) (US$ million)Foreign Local Total Foreign Local Total

REC Schemes 695 4,070 4,765 86.8 508.8 595.6SI Schemes 55 345 400 6.9 43.1 50.0Training Facility - 12 12 - 1.5 1.5

750 4,427 5,177 93.7 553.4 647.1

Physical contingency - 1 1 - 0.2 0.2Price contingency 166 982 1,148 20.8 122.7 143.5

Total Project Costl/ 916 5,410 6,326 114.5 676.3 790.8

Front-end Fee2/ 36 - 36 4.5 - 4.5Total FinancingRequirement 952 5,410 6,362 119.0 676.3 795.3

4.08 The total cost of the project was determined by considering the RECprogram for 1980/81 through 1984/85, as defined in the Sixth Plan, and taking40% of this as the estimated expenditure in the two years covered by theProject. It is assumed that 85% of REC's normal program, and 100% of its SPAprogram would be eligible for Bank financing. The expenditure on majormaterials is derived from previous experience, as follows: conductors 30%,distribution transformers 10%, and insulators 1.5% of total cost (Annex 13).A sum equivalent to about 8% of the cost of major REC scheme materials hasbeen provided for system improvement under REC supervision.

4.09 Under the two previous RE credits, virtually all contracts subjectto international competitive bidding were won by Indian suppliers. Direct:foreign exchange expenditure under the Third Project is expected also to beonly a small proportion of the cost. The indirect foreign component isexpected to be about 14% of total project cost. The amount necessary topurchase all major materials suitable for ICB procurement would exceed US$350million equivalent. In the light of limited availability of funds, an IBRDloan of US$300 million is recommended, to cover the purchase of about 90% ofconductors, distribution transformers, HT insulators, GI Wire, power

1/ Including duties and taxes on local expenditure amounting to Rs 260million (US$32 million).

2/ Bank loan assumed as US$300 million equivalent.

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transformers, and switchgear, and 70% of construction and equipment costs ofthe REC Training Center. The remainder of the cost of the project (mostlylocal expenditures) would be provided by GOI from own resources.

Procurement

4.10 As with the previous two credits, each SEB will be responsible forprocuring its own project materials, using REC's standard specifications, andstandard General Conditions of Contract approved by the Bank Group. REC willprovide assistance to the SEBs in the preparation of bid documents and willensure that quantities specified in the bids are those required for eligibleschemes. REC will also review SEBs' bid evaluations before seeking the BankGroup's approval to place orders.

4.11 SEBs will invite tenders, using international competitive biddingprocedures satisfactory to the Bank, for their estimated requirements forthe two years 1983/84 and 1984/85 of conductors, distribution transformers,HT insulators, and GI wire for REC-financed schemes that are to be procuredusing Loan proceeds. Indian manufacturers will receive a margin ofpreference of 15%, or the current rate of customs duty, whichever is less.

The same procedures will be followed when procuring conductors, powertransformers and switchgear for SI schemes. In view of the expected largenumber of small contracts and the present smooth functioning of theprocurement process under REC supervision, agreement was reached atnegotiations to require prior Bank approval of contract awards only forcontracts exceeding US$ 500,000 equivalent. Civil works for the constructionof the REC training center, and appropriate equipment for this center, willbe procured locally using procedures acceptable to the Bank. The procurementprocedures for project materials procured without using loan proceeds aresatisfactory.

Implementation Schedule

4.12 The following timetable has been agreed:

Activity Latest Date

Issue invitations to tender June 15, 1982Tender opening September 15, 1982SEBs' recommendations to REC January 15, 1983REC's recommendations to IDA February 15, 1983IDA's clearance March 15, 1983Contract awards by SEBs April 15, 1983Contracts signed by SEBs May 15, 1983Commence delivery of materials June 30, 1983Complete delivery of materials June 30, 1985Project completion December 31, 1985Credit closing June 30, 1986

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Disbursement

4.13 The proceeds of the proposed loan will be disbursed against fulldocumentation as follows: (i) 100% of foreign expenditures for directlyimported equipment; (ii) 100% of local expenditure ex-factory for locallymanufactured equipment; 70% of total expenditures for local equipment andfurniture; and 70% for civil works. Disbursements by the Bank would begin inthe fourth quarter of FY1983. The estimated disbursement schedule is givenin Annex 15. The rate of disbursement is somewhat faster than the typicalrate experienced in power projects, running about 2 years ahead of thetypical profile. This is based on experience with the ongoing Second Projectand is due to the nature of the proposed project as support of REC's lendingprogram during 2 years.

Onlending Rate

4.14 GOT will onlend the part of the Loan supporting the REC lendingprogram to REC at an effective interest rate of 7.75% p.a. with a repaymentperiod of 20 years including 5 years of grace. This compares to a rate of6.5-8.25% for GOI lending to ARDC, and 11.75% to central power generationagencies such as NTPC. REC, in turn, will onlend to the SEBs at interestrates ranging mostly between 7.5 and 10%, with grace periods of 2 to 5 years,depending on the type of scheme and length of loan period. These ratescompare to rates of 6-11% for SEB borrowings from State Governments, and9.5-11% from ARDC. In the light of GOI policy favoring the rural sector ingeneral, these onlending arrangements are satisfactory. The part of theproposed Loan not routed through REC will be made available by GOI to SEBsthrough their State Governments as part of Plan allocations. StateGovernments will onlend funds to their SEBs at interest rates ranging between6 and 11%. The foreign exchange risk will be borne by GOI. The conclusionof a Subsidiary Loan Agreement between GOI and REC satisfactory to theAssociation will be a condition of Loan effectiveness.

V. FINANCIAL ANALYSIS

(A) RURAL ELECTRIFICATION CORPORATION (REC)

Past financial performance

5.01 REC's financial performance through FY 1981 was satisfactory. Actual

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financial operations for the three years FY 1979 through 1981 are summarizedin Table 5.1 below and are shown in greater detail in Annex 16.

TABLE 5.1

REC FORECAST 1/ AND ACTUAL INCOME STATEMENT

(FYs 1979 THROUGH 1981)(Rupees million)

1979 1980 1981Forecast Actual Forecast Actual Forecast Actual

Loans Disbursed to SEBs 1,600 1,561 2,150 1,671 2,530 1,844

Revenues 362 332 485 431 636 549

Less Expenses 277 248 364 328 491 424(Admin and Interest)

Net Income before Tax 85 84 121 103 145 125

Less Tax 39 39 55 44 66 54Net Income after Tax 46 45 66 59 79 71

Ratios

1. Operating Ratio(Admin and Interestas % Revenues) 76 75 75 76 77 77

2. Debt Service Coverage 1.6 1.7 1.6 1.7 1.5 1.7

3. Interest spread onAverage TotalAssets (%) 1.8 1.7 1.8 1.7 1.7 1.6

4. Return on AverageTotal Capitali-zation (%) 5.2 4.5 5.4 4.8 5.9 5.1

5. Return on AverageEquity (%) 2.4 2.3 3.1 2.8 3.4 3.2

1/ Second Rural Electrification Project - Credit 911-IN

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5.02 REC is a financial lending institution rather than a public utilityand the conventional Bank Group rate of return and cash generation covenantsfor the power sector are not suited to REC's operations. A covenant,designed under previous lending operations to REC (IDA Credits 572-IN and911-IN) to ensure the solvency of REC, requires REC to ensure that, in anyfiscal year:

a) internally generated funds are not less than 1.2 timesdebt service and

b) administrative expenses and interest payments do not exceed90% of total interest received from all sources (i.e. lendingoperations and investments).

REC satisfactorily met this requirement through FY 1981 and, in viewof its continuing appropriateness, this covenant was repeated under theproposed project.

5.03 REC's lending program in FYs 1980 and 1981 was lower than forecast,following a reduction in GOI's plan expenditure and discontinuance of lendingto SEBs for new system improvement schemes. Loan disbursements were alsoslower than forecast in these years because of slippage in some SEB programs.Lower interest earnings were offset by lower interest charges and REC'sactual after tax income was similar to the earlier forecast. Financialindicators - operating ratio, debt service coverage and interest spread -were all satisfactory. The return on average total capitalization was lowerthan forecast, following the reduction in REC's lending program. Afterpaying a 1% dividend on GOI equity REC has in past years appropriated a partof its earnings (a) to a Special Reserve to take advantage of concessionsunder the Income Tax Act 1961 and (b) to a Special Development Reservecreated to enable REC to subscribe to the shares of RE Cooperatives and toprovide grants for research and development and to "specially underdeveloped"areas.

Present Financial Position

5.04 REC's position at March 31, 1981, based on audited accounts, issummarized as follows:

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TABLE 5.2

REC BALANCE SHEET

(at March 31, 1981)

(Rupees Million)

ASSETS

Net Fixed Assets 3

Loans Outstanding 9,385Deferred Expenses 5Current Assets/Investments 518Less Current Liabilities 154 364

9,757

FINANCED FROM:

Equity:GOI/USAID 2,050Reserves andRetained Earnings 317 2,367

Loans:coi 6,324Market 1,066 7,390

9,757

5.05 Outstanding loans to SEBs account for 94% of REC's assets. Therepayment record of the SEBs is satisfactory. REC's current ratio (includingthe short-term investment of surplus cash) was 3.4:1. The debt/equity ratioat March 31, 1981 was 76/24 reflecting REC's increasing reliance in recentyears upon loan capital from GOI and market sources. REC bonds, issued forten years and guaranteed by GOI, were first floated in FY 1975 and nowrepresent about 14% of REC-s loan debt: the interest rate of 6.75% comparesfavourably with GOI's onlending rate of 7.75%. REC's financial position isexpected to remain satisfactory in FY 1982; an operating ratio and debtservice coverage of 79% and 1.6 respectively are forecast while a grossinterest spread of 1.6% will be maintained. The forecast returns on averagetotal capitalization and on average equity are 5.6% and 3.6% as against 5.1%and 3.2% in FY 1981.

Financing Plan

5.06 REC's requirements and sources of funds for the period of Creditdisbursements under the proposed project (FY's 1983 through 1986) aresummarized in table 5.3 and shown in greater detail in Annex 17. Theproposed financing plan is satisfactory. REC will continue to rely heavily

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upon loan capital (about 77% of total requirements) from GOI, including theproceeds of the proposed US$ 300 million Bank loan, and from market bonds tofinance its approved lending program for the Sixth Five-Year Plan periodthrough FY 1985. This plan calls for a considerable expansion of REC'slending activities; by end FY 1985 the loan portfolio is expected to rise toRs 17,309 million, an increase of 120% over the plan period. REC'sauthorized share capital was increased to Rs 1,500 million in September 1980and further GOI equity is planned to this level by end FY 1985. Thedebt/equity ratio will increase slightly to 81/19 by end 1985 but issatisfactory for this type of lending institution.

Table 5.3

REC FINANCING PLAN (FY's 1983 THROUGH 1986)Rupees US$ MilTion PercentageMillion Equivalent (Z)

Requirements:

Loan disbursementsto SEBs 10,576 1,322.0 99.5

Dividends 57 7.1 0.5Capital Expenditure 2 0.3 -

10,635 1,329.4 100

Sources of Funds:

Net cash generation 531 66.4 5.0Working Capital 228 28.5 2.2Loan repayments by SEB's 2,288 286.0 21.5

3,047 380.9 28.7Less

Loan repayments to GOI (1,220) (152.5) (11.5)Contribution to Investment 1,827 228.4 17.2Equity - GOI 550 68.7 5.2Loans - GOI (incl Bank Loan) 6,758 844.8 63.5

- Market 1,500 187.5 14.110,635 1,329.4 100.0

5.07 Future Finances

Salient features of REC's future finances through FY 1986 are setout in Table 5.4. Financial projections through FY 1986 and assumptionsrelating thereto are shown in Annexes 16-21. REC's future finances aresatisfactory. REC's forecasts are based upon the continuation of current

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lending and borrowing rates. 1/: debt service coverage will fall to 1.3times, slightly above the 1.2 times required by IDA, reflecting the higherdebt/equity ratio. A satisfactory interest spread of 1.7% on total assetswill be maintained through FY 1986. REC's operating ratio will remain atabout 79%, well within the covenanted figure of 90%.

Table 5.4

REC FUTURE FINANCES

(FYs 1982 through 1986)

1982 1983 1984 1985 1986

1. Loans to SEBs 2,215 2,410 2,535 2,731 2,900(Rs million)

2. Revenues (Rs millions) 702 847 1,002 1,154 1,310

3. Percentage (%) ofAverage Total Assets(a) Revenues 6.4 6.6 6.8 6.9 7.0(b) Interest on

borrowings 4.8 5.0 5.2 5.2 5.3(c) Gross "spread" 1.6 1.6 1.6 lt 1.

4. Operating Ratio(Interest and Admin. as% Revenues) 79 79 79 79 80

5. Debt Service Coverage 1.6 1.5 1.4 1.3 1.3

6. Debt/Equity Ratio 78/22 79/21 80/20 81/19 82/18

7. Current Ratio 3.1 2.3 1.8 1.4 1.4

8. Return on AverageTotal Capitalization (%) 5.6 5.8 5.9 6.1 6.1

9. Return on AverageEquity (%) 3.6 4.0 4.3 4.5 4.6

1/ Annexes 9 and 21 respectively.

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Audit

5.08 Under the Companies Act, 1956, GOI, on the advice of the Comptrollerand Auditor General (CAG), may direct the manner in which REC's accounts areaudited, may conduct test audits as he thinks fit and may comment on thereport of the professional auditors. This arrangement is satisfactory toIDA. REC has previously agreed to submit its audited financial statementstogether with the auditor's report within six months of the financial yearend. Satisfactory reports have been received through FY 1981 and thisrequirement will be repeated under the proposed project.

Accounting Organization and Systems

5.09 REC has a competent accounts department which operates a satisfactoryaccounting system. Until recently the accounts were kept on a basicallymanual system. Loan accounting, including the billing of interest and loanrepayments from SEBs, has been computerized. Further computer applicationsare in progress or envisaged to assist REC in monitoring the progress of allschemes and for internal reporting purposes.

(B) SEB FINANCIAL PERFORMANCE: 1/ RURAL ELECTRIFICATION (RE) SUB-SECTOR

RE Investment

5.10 Capital invested (gross fixed assets and work in progress) by themajor SEBs in rural electrification amounted to Rs 20,778 million (US$2,597million) by March 31, 1979: 2/ this represents about 20% of total investmentin power facilities by theseTSEBs (Annex 23). Since FY1977, SEBs annualcapital expenditure has grown overall by about 13% per annum with investmentin RE assets increasing at a faster rate than investment in "OtherOperations": 21% as against 11% per annum (Annex 24). Planned RE investmentfor the Sixth Plan period, FYs 1981-1985, amounts to about Rs 23,000 million(US$2,875 million). Financial Performance on RE Activities

5.11 The financial results of RE operations for FYs 1978 - 1980 are setout in Annex 25. While the performance of individual SEBs variesconsiderably, the gross deficit on RE operations increased substantially in

1/ Excluding Assam SEB for which data is not available and which will notparticipate in the proposed project.

2/ FY 1979 is the last year for which full data is available for all SEBs.

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those years: expressed as a percentage of RE sales revenues the deficitincreased from 66% in FY1976 to 89% in FY1979 to about 112% in FY1980(Table 5.5). In FY1980, however, while data for all SEBs is not yet available,there was a significant reduction in the net deficit on RE operations as aresult of the substantial increase in State Government subsidization of SEBsrural losses required as conditions of eligibility under the First and SecondRE Credits (572-IN and 911-IN).l/ In particular, Uttar Pradesh SEBreceived an RE Subsidy in FY1980 to become eligible for the first time.In recent years, all but three SEBs, Guiarat, Karnataka and Maharashtra,have received a regular annual subsidy. Maharashtra SEB required a subsidy inFY1980 to achieve a 9.5% rate of return while in 1981, the indications arethat all but Kerala would require an RE subsidy to maintain eligibility underCredit 911-IN.

Table 5.5:

SUMMARY OF SEB FINANCIAL LOSSES ON RE OPERATIONS

Sales Deficit Net DeficitRevenues (before subsidy) Subsidy (after subsidy)( Rs ) ( Rs ) (% Sales) ( Rs ) (% Sales) ( Rs ) (% Sales)

FY (million) (million) (Revenues) (million) (Revenues) (million)(Revenues)

1976 2,656 1,764 66 466 18 1,298 48

1977 3,194 2,108 66 738 23 1,370 43

1978 3,336 2,773 83 952 28 1,821 55

1979 3,979 3,542 89 1,106 28 2,436 612/

1980(a) 4,184 4,693 112 2,510 60 2,183 52

(b) 4,461 4,968 111 2,657 60 2,311 52

1/ Eligibility requires either that SEBs achieve a 9.5% rate of return orthat State Governments subsidize RE operations to the full extent of anyloss or to the extent needed to achieve a 9.5% rate of return, whicheveris lower.

2/ FY 1980 data is incomplete - line (a) represents data received from 11SEBs and line (b) represents the same 11 with FY 1979 data added forKerala, Orissa and West Bengal.

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The impact on SEBs' finances of planned RE investment between FYs 1981-85,which will double the level of RE assets employed, and the consequent needfor additional State Government subsidies to meet growing deficits has notbeen assessed in the context of the Plan. However, attempts will be made toquantify the impact as part of the improvements in sector financing andreporting (paragraphs 5.17-5.23).

Impact of RE Losses on Overall SEB Financial Performance

5.12 The impact of RE losses on SEB overall financial performance can beseen from an analysis of the SEBs' rates of return for FY1979 (Annex 26).Five of the fourteen SEBs had a positive rate of return (which is expressedbefore interest) on RE assets which indicates that State Government REsubsidy was sufficient to meet the whole or a part of the interest costs ofRE activities. In the case of the other nine SEBs, which had a negative rateof return on RE assets, cross-subsidization by other consumers was needed tomeet all or a part of the deficit, including interest, on RE operations. TenSEBs reached the required 9.5% rate of return, with or without the aid of REsubsidy. Of the remaining three SEBs, Bihar failed to achieve the 9.5% rateof return but received full RE subsidy, thereby retaining eligibility toparticipate in the ongoing rural electrification proJects, while Orissa andRajasthan failed to meet the eligibility criteria: the shortfall inRajasthan occurred only in that year whereas Orissa has consistently fallenshort of requirements.l/ Recent tariff actions in that State indicate thatfrom FY 1981 the position will be significantly improved in future years.In FY 1980 ten SEBs reached the required 9.5% rate of return with or withoutRE subsidy: Bihar, Haryana and Orissa were the exceptions. Bihar againreceived a full RE subsidy to retain its eligibility and Haryana is not aparticipant under ongoing projects.

5.13 SEB financial performance has improved in recent years: the overallposition, measured in terms of rate of return on historically-valued netfixed assets in FY1976 as compared with that in FY1979 was as follows:

FY RE Operations Other Operations Combined Operations

1976 (0.3%) 8.1% 7.8%

1979 (2.2%) 10.6% 8.4%

1/ Until recently Orissa SEB was unable to raise tariffs to major industrialconsumers but these difficulties have now been resolved. The State Govern,-ment has in recent years imposed a very high rate of duty equivalent to 4-5%of the SEB s asset base partially to compensate for the inability to raisetariffs. (Annex 22).

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While the rate of return on RE activities has deteriorated despite theincreasing level of subsidization of RE operations, that on "OtherOperations" has shown a marked improvement. In part this improvement isattributable to actions taken to increase SEB tariffs which have risenoverall as follows:

FY Paise/kWh

1976 21.51977 23.51978 24.31979 26.71980 29.51981 33.8

(C) REFORM OF SEB FINANCES

Background

5.14 The financial operations of the SEBs are governed by the provisionsof the Electricity-(Supply) Act, 1948. In June 1978, after intensiveconsultation with the Bank Group, amendments to the financial provisions ofthe Act were enacted so as to enable the SEBs to reorganize their financesalong commercial lines by the introduction of:

(a) financial policies and accounting practices which require an SEBto adjust its tariffs to produce annual revenues sufficient tocover all operating costs, including full depreciation on fixedassets,and interest, and leave a surplus (specified by the StateGovernment) which with depreciation, is sufficient to meet loanrepayments and provide a reasonable contribution to investmentand return on any State Government equity capital; and

(b) a capital structure which is less debt-oriented through theconversion of State Government loans into equity share capitaland/or the financing of a part of future expansion by way ofState Government equity rather than debt.

Despite these legislative changes, little attempt has been made by the Statesto give practical effect to these measuresl/ as they were awaiting the

1/ Indeed, there is now evidence to show that because of conflicts arisingfrom the interpretation of the amendments, some SEBs are not providingfor depreciation of fixed assets in full or in part (so as not to show anoperating loss in their accounts) but are paying interest on StateGovernment borrowings by way of a priority charge.

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publication of the recommendations of the Committee on Power beforeintroducing changes. Furthermore, while the CEA has spelled out the optionsavailable, the technical aspects of the amendments and their impact on SEBfinances have not been fully evaluated by the SEBs and their StateGovernments: so far no State Government has specified "the reasonablecontribution to investment" which its SEB is required to achieve.

5.15 Since the enactment of the financial amendments in June 1978, theBank Group has regularly sought progress towards their implementation while!recognizing, however, that real progress would only be achieved after theCommittee on Power had reported and GOI and the States had reviewed itsrecommendations. During negotiations of the Second Korba Thermal PowerProject in May 1981, GOI agreed to prepare, by April 1982, an implementationplan and schedule outlining the steps to be taken in each of five priorityareas of power sector improvements. One of these areas concerns theestablishment of revised sector financial objectives and policies for theirimplementation, rational tariff policies and improved information andaccounting systems. During appraisal of the proposed project the financialand accounting issues were discussed further with GOI and understandings werereached which should accelerate progress in implementing this part of thefive point program. Furthermore, because of the far-reaching implicationsthat these understandings would entail, it became a matter of some urgencyduring appraisal to reach agreement with GOI on revised financial eligibiliLtycriteria for SEB participation in the proposed project. The understandingsrelate to two major developments: (i) reform of financial objectives andpolicies, and (ii) reform of accounting practices.

Reform of Financial Objectives and Policies

5.16 A rate of return of 9.5% on historically-valued net fixed assets,first recommended by a GOI Committee in 1964, has been used in previous BankGroup lending as the principal measure of financial performance for the SEBs.The concept of fixed asset revaluation is not generally practised in Indiaand is unacceptable to GOI. The 9.5% rate of return is no longer valid as itis insufficient to enable SEBs to meet their obligations under the amendedElectricity (Supply) Act, 1948, and, in particular, to provide a reasonablecontribution to their expanding investment programs. All SEBs dependheavily, if not exclusively, upon their State Governments to provide loancapital to finance capital expenditure. The terms of such loans vary fromState to State and many SEBs are unable to meet, in full, their debt serviceobligations to their State Governments; in some instances, the interestpayments have not been made to the State Government and have accumulated over

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many years as a contingent liability.l/ Furthermore, in several instances

much of SEB borrowing from their State Governments is not scheduled for

repayment while in Gujarat and Maharashtra much of the borrowing is on a

perpetual basis. The 1978 Act amendments were designed, in part, to

eliminate these problems and improve the capital structure of the SEBs byintroducing State Government equity capital and/or by converting StateGovernment loans to equity.

5.17 During appraisal of the proposed project, it was agreed with GOI thatan adequate level of self-financing might be acceptable to the Bank Group,

GOI and the States as a satisfactory measure of financial performance. Thisconcept conforms to the SEBs revised statutory obligations. Having regard tothe significant resources generated from the sector by way of State duties onelectricity sales and the central excise tax on generation it was agreed with

GOI that the SEBs should provide a contribution to investment of not less

than 20% from FY 1983. (para. 5.19). The formula for expressing this conceptwill ensure:

(a) satisfactory capitalization of interest during construction (apractice hitherto not followed by SEBs despite earlierassurances from GOI under Credit 604-IN to prepare the necessaryguidelines2/);

(b) satisfactory arrangements for the disposal of arrears ofinterest on existing State Government loans.

(c) full provision for depreciation of fixed assets.

5.18 The contribution to investment for each SEB will be expressed as apercentage of capital expenditure, including interest during construction,averaged over a three-year period, comprising the previous, the present and

the next succeeding year and would be arrived at after deducting from anSEB's annual internal cash generation:

1/ Credits 377-IN and 604-IN for the Third and Fourth Transmission Projectsrequired GOT to make satisfactory arrangements to dispose of SEB interestarrears to their State Governments. The matter was never satisfactorilyresolved and was referred to the Committee on Power, which has recom-mended conversion to interest bearing loans. Further amendments to the1948 Act would be required to implement this (para 5.18).

2/ Again GOI referred this matter to the Committee on Power which recom-mended against adoption of the practice of capitalizing interest: despitethis, GOI agreed during negotiatons to adopt this practice. Pending thenecessary statutory amendments, GOI will issue guidelines to SEBs forthe notional calculation of interest to be capitalized for the purposesof the cash generation covenant.

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(a) full debt service (comprising all interest chargeable tooperations, after deducting the proper capitalization ofinterest during construction of capital works, loan repaymentsdue in that year) on all existing and future SEB long-term debt,including the phased repayment over 25 years of arrears ofprincipal and interest on State Government loans (except to theextent that such arrears are repaid from new borrowings).

(b) any dividends on share capital, if the option for creating sharecapital now permitted under the amended Electricity (Supply)Act, 1948, is exercised;

Internal cash generation would comprise:

(a) an SEB's net income after tax and after adding back depreciationin respect of fixed assets which should henceforth be providedin full as an operating expense;

(b) any consumers' capital contributions and security deposits;

(c) any subsidy received by an SEB from the State Government forfinancial losses on rural electrification operations (para.5.19).

5.19 Under the eligibility criteria for the First and Second RuralElectrification projects, State Governments were permitted to subsidize th,eRE operations of their SEBs in arriving at the 9.5% rate of return on netfixed assets, subject to the subsidy not exceeding the total RE loss ascalculated in accordance with a formula previously agreed with IDA. However,as indicated above (paras 5.11 - 5.12), under these arrangements some SEBshave come to rely heavily upon RE subsidy to achieve their financial targets.Whereas in FY 1976, RE subsidies totalled Rs 466 million, in FY 1981 a figureof about Rs 5886 million is estimated. As a proportion of SEB salesrevenues, RE subsidy represented about 24% in FY 1981 as against 4% in FY1976. The Bank Group proposed that the amount of a State Government'ssubsidy to its SEB for losses on RE operations be limited to the lesser ofthe full RE loss or 10% of the SEB's sales revenues: such a limitation wouldhave a major impact upon future tariffs in a number of SEBs whose RE subsidyis projected to exceed significantly 10% of its sales revenues. GOI wasunable in the time available to discuss this major proposal in full detailwith the States. At negotiations, agreement was reached on the principle oflimiting RE subsidy from FY1984 to a "reasonable" proportion of an SEB'ssales revenues based on programs for the progressive reduction in the amountof the RE subsidy provided to SEBs, to be submitted to the Bank Group by

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December 31, 1982. 1/ These programs, recognizing the varying conditions ofdifferent States, will be based upon the following objectives:

(a) In SEBs where the existing subsidy exceeds 25% of sales revenues(Bihar, Haryana, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh)a reduction of 10 percentage points between FYs 1984-86 anda further reduction in FYs 1987 and 1988 will be sought.

(b) In SEBs where the existing subsidy is between 15% and 25% ofsales revenues, a reduction of 5 to 10 percentage points will besought.

(c) In all other cases, the subsidy will be contained at a levelnot exceeding 10% of an SEB's sales revenues.

5.20 GOI has submitted financial projections for the period FYs 1983-1985for each of the fourteen proposed participating SEBs. The projections wereprepared at FY 1981 constant prices and on the understanding that GOI willcontinue to require SEBs to achieve not less than the present 9.5% rate ofreturn. While they would require to be adjusted for cost and tariffincreases arising from inflation they provide a satisfactory basis forassessing the impact of the above requirements upon SEBs and their consumers.Salient features are summarized at Annex 27.

5.21 The financial projections indicate that nine 2/ of the fourteen SEBswould exceed the proposed 20% contribution to investment in the period FY's1983-1985. Four of these SEBs - Andhra Pradesh, Gujarat, Karnataka andKerala - would achieve 30% or more. In achieving the 20%, six of the nineSEBs would require tariff increases, from the FY 1981 level, ranging from 7%to 58%. Several SEBs have already increased tariffs significantly in FY1982. Of the nine SEBs, Rajasthan, Tamil Nadu and possibly Punjab, (forwhich full data is not yet available) would be heavily dependent upon the REsubsidy to achieve the proposed 20% contribution to investment. However, inview of the proposal to limit such RE subsidy from FY 1983 (para 5.19), theseSEBs may require further tariff increases to offset the proposed limitationon RE subsidy and to maintain the 20% contribution to investment. MadhyaPradesh SEB would require only a small additional tariff increase to meet therequired 20% contribution to investment.

1/ An undertaking by the State Governments to this effect is one of thecriteria establishing initial eligibility of an SEB to participate inthe project (para 5.24).

2/ Orissa SEB, whose financial performance has been unsatisfactory inprevious years, would exceed the 20% contribution: significant tariffincreases were made after FY 1979.

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5.22 The financial projections for the remaining four SEBs - Bihar,Haryana, Uttar Pradesh and West Bengal - indicate that they would not achievethe required 20% contribution to investment, although with the exception ofBihar, all would achieve a 9.5% rate of return. With the exception of WestBengal, these SEBs would also be affected by the proposed limitation on REsubsidy. Many of the problems which these SEBs face are of amanagerial/operational nature and cannot be resolved simply by increasingtariffs which in Bihar and West Bengal are already amongst the highest inIndia. In order to achieve an overall improvement in the performance of theweaker SEBs, it is essential that they participate in the proposed project.During negotiations, agreement was reached with GOI on the preparation andsubmission to the Bank Group by December 31, 1982 of specific programs ofactions to be taken to improve the management and operation of the SEBs ofBihar, Haryana, Uttar Pradesh and West Bengal so as to ensure their phasedattainment of the proposed 20% contribution to investment as follows:

FY FY FY FY1983 1984 1985 1986

Bihar 10% 12% 14% 20%Haryana 6% 8% 12% 20%Uttar Pradesh 12% 18% 20% 20%West Bengal 5% 10% 15% 20%

Reform of Accounting Practices

5.23 Improvements to the standard of accounting practices among SEBs hasbeen the subject of continuing dialogue with GOI: the agreements reachedduring negotiations are expected to lead to much needed reform. CEA had hopedto prepare an accounting manual for introduction by the SEBs and StateElectricity Departments from April 1, 1982, prescribing a uniform commercialsystem of accounting for all SEBs in accordance with generally acceptedaccounting principles. This has not been possible, given the lack ofsuitable staff at CEA. During negotiations, GOI agreed to formulate a modelsystem of commercial accounting for SEBs, submit it to the Bank Group by June30, 1983 and, after taking into account any comments thereon, to cause theSEBs to introduce the system from April 1, 1984. GOI also agreed toestablish and staff by August 31, 1982 a special unit to assist theintroduction of commercial accounting. GOI proposes to appoint consultantsto design and assist implementation of such a system and is also consideringurgent further amendments to the Electricity (Supply) Act 1948 to eliminatepresent anomalies (para 5.14). A timetable of key events for theintroduction of commercial accounting is at Annex 28; it aims at the SEBspresenting their annual audited accounts within six months after the close ofthe fiscal year, as required by the Electricity (Supply) Act, 1948. As mostSEBs are currently taking between 12 to 18 months to do this, it is hoped toimprove progressively the timeliness in presenting their audited results and

-43-

to ensure full implementation of these improvements by March 1985. Theproposed program of improvements would extend to the scope and quality ofaudit as well as to the standard of accounting.

Eligibility under the Proposed Project

5.24 Initial eligibility of SEBs to participate in the proposed projectwould be established upon the submission by GOI to IDA of satisfactoryundertakings to accept and thereafter to achieve the following criteria ofeligibility:

(a) from SEB's (except Bihar, Haryana, Uttar Pradesh and WestBengal), endorsed by their respective State Governments,to achieve at least a 20% contribution to investment fromFY1983 and to introduce from April 1, 1984, the prescribedsystem of commercial accounting; such undertakings shouldstate clearly the acceptance of the principles set out inparas. 5.17 and 5.18;

(b) from the SEBs of Bihar, Haryana, Uttar Pradesh and WestBengal, endorsed by the State Governments, to achieve thepercentage contribution to investment specified at para 5.22 inFYs 1983 through 1986; to submit by December 31, 1982 theprogram of actions proposed to achieve these targets; and tointroduce from April 1, 1984 the prescribed system of commercialaccounting.

(c) from State Governments, to limit any RE subsidy to their SEBs inaccordance with programs to be submitted by December 31, 1982,and based on the principles set out in para. 5.19.

5.25 GOI and REC will be monitoring and determining the initial andcontinuing eligibility of SEBs by examining each participating SEB-s budgetforecast prior to the beginning of any fiscal year, and will forward therelevant data to the Bank Group by March 31 of each year. Apart frominforming the Bank Group about the status of each SEB's eligibility, GOI andREC will also take any appropriate measures needed to ensure continuingeligibility of SEBs.

VI. ECONOMIC ANALYSIS AND JUSTIFICATION

6.01 Rural electrification in India lends itself to justification usingcost savings accruing to the economy by using electricity rather thanalternative conventional energy sources for irrigation pumping, ruralindustry, domestic and commercial use, and street lighting. This approachyields attributable benefits of electrification that include part of consumer

-44-

surplus, and avoids the causality problem of allocating any incrementalagricultural output to electricity alone.

Cost Comparison

6.02 The cost comparison of electric and major present non-electric powersources for rural applications, taking into account all costs incurred byconsumers as well as SEBs, and valuing energy at its long-run marginal cost,yields a clear cost advantage for all uses of electricity. The economic costadvantage for the typical 5 HP electric irrigation pump over a similar dieselpump amounts to about Rs 2,700 (US$340) per year. In the case of domesticlighting, the advantage of using electricity is about Rs 390 (US$49) perconnection per year and, in the case of small industry about Rs 5,100(US$640). The results of the cost comparison are sensitive to changes inlong-run marginal cost of power supply, but do not encroach on the costadvantage for the use of electricity within a wide range of marginal costvariation. For pumping and small industry, the diesel alternative onlybecomes attractive if marginal cost of power more than doubles from theassumed all-India average at rural retail level, which takes into accountthe characteristics of the dominant pumping load.

Economic Rate of Return

6.03 The major categories of schemes proposed by REC to be eligible forfinancing under the proposed project are OA, OB, SPA, and SI, with a smallcomponent of SPI (industrial estate) schemes. These categories of schemeswere selected as those with securely high economic rates of return under theongoing Second REC Project. In continuation of this approach, only thesescheme categories are included in the proposed project, and their economicinternal rate of return recalculated in the light of recent experience andfurther analysis. Costs were assumed to include initial and subsequent SEBinvestment, operation and maintenance expenditures by SEBs, the long-runmarginal cost of energy supply to the scheme, and the initial and recurringcosts incurred by consumers. Benefits were defined as the initial andrecurring costs of the non-electric alternative, yielding the same output.(Other assumptions are detailed in Annex 29). For purposes of shadowpricing, appropriate weighted conversion factors were applied to the cost andbenefit streams expressed in market prices, to obtain data in terms of borderprices.

6.04 Economic internal rates of return were calculated for (i) selectedsample schemes recently approved by REC, (ii) ongoing REC schemes underimplementation, and (iii) typical scheme categories based on an all-Indiaaverage. The results are satisfactory: the average OA scheme yields a rateof return of about 70% (base assumption), the average OB scheme one of about27%, and the average SPA scheme one of about 60%. Only extremelyconservative assumptions on the valuation of benefits (cases 2 and 4 in Annex29) result in negative rates of return. The analysis is sensitive to changes

-45-

in the marginal cost of power supply, but the rate of return remainssatisfactory unless extreme increases in marginal cost are assumed (Annex 29,Table 4).

6.05 The analysis of sample approved and ongoing schemes yields aneconomic rate of return range of 17-64% for OA schemes, 20-50% for OBschemes, and 23-78% for SPA schemes, using the base case assumption forvaluation of benefits. SI schemes are not suitable for averaging, as theneeds for system improvement vary widely: the sample schemes reviewed show arate of return of 19% and 43% (Annex 29, Tables 2 and 3). Weighting theindividual scheme categories' results by their expected share in totalproject cost, the average weighted economic rate of return for the project asa whole is about 53%.

Financial Rate of Return

6.06 Under average assumptions of demand development and costs, and withpresent tariff levels, even the economically attractive RE schemes show anegative financial internal rate of return. This is due mainly to the lowlevel of tariffs for irrigation pumping, which dominates rural electricityconsumption (see paras 6.07-6.10). Average tariffs in a scheme area wouldhave to increase by more than 50% to enable the scheme to achieve anacceptable financial rate of return (Annex 29, Table 5). In view of theresistance to increases in agricultural tariffs encountered by SEBs,financial safeguards have been allowed in the proposed project to compensatefor the rural revenue shortfall (para 5.19).

Tariffs and Cost of Supply

6.07 The average level of tariffs charged by most SEBs had been belowreasonable measures of cost of supply until recently, as well as belowlong-run marginal cost. Since 1978, however, base tariffs, duties and taxes,and fuel surcharges (all items appearing on the consumer's bill) have beenrising significantly, particularly for industrial and commercial consumers.Total payments per kWh by industrial consumers, for instance, have beenrising by an average rate of more than 17% per year between 1977/78 and1981/82, well beyond the rate of inflation. In some instances these tariffincreases reached a rate of 20-30% per year (Annex 30). Tariffs for theseconsumer groups are approaching marginal costs in most major States: evidencefrom recent marginal-cost-based tariff studies shows that total payments byindustrial consumers in Madhya Pradesh, Uttar Pradesh, West Bengal,Maharashtra, Gujarat, Haryana, Bihar, Orissa, and Andhra Pradesh already areclose to strict long-run marginal cost levels (Annex 30). It is important toinclude duty and fuel surcharge in the consumer payments, although duty doesnot accrue directly to the SEB (the impact of the duty on sectoral internalgeneration of funds is illustrated in Annex 22). While industrial andcommercial marginal cost recovery has improved, cross- subsidization ofdomestic and agricultural consumers has increased. This is due to

-46-

socio-politcal considerations by State Governments and SEBs to keep tarifflevels low for economically weaker consumers: residential tariff levels haveincreased by about 5% per year, and irrigation pump tariffs have remainedapproximately constant. However, the momentum of industrial and commerciaLtariff increases has carried total average revenue per kWh closer to aneconomically satisfactory level: the share of these two consumer groups intotal electricity consumption in India amounts to about 65%, andsignificantly more in such major states as West Bengal and Maharashtra.Although tariff levels in general still are below strict long-run marginalcost, the emerging trend is encouraging and constitutes a significantimprovement towards the long-term goal of tariffs reflecting marginal cost.

6.08 Among rural consumers, irrigation pump connections benefit fromsignificantly preferential tariffs, while industrial, commercial and domesticconsumers are charged at considerably higher rates. Agricultural tariffs areoften held well below average cost, and always much below marginal cost ofpump supply (Annex 30). The main reason for low agricultural tariffs is theinclusion of electricity supply in the general GOI policy of preferentialtreatment of the agricultural sector by means of price subsidies, andfavorable taxation and credit principles, to encourage rural development.In spite of this policy, farmers' margins have been decreasing in absoluteterms in recent years.

6.09 Evidence from tariff and agricultural pricing studies indicates thatagricultural consumers' demand elasticity for power with respect to tariffsis small, a fact that would allow significant tariff increases. On the otlherhand, demand with respect to total energy cost can be assumed to be moreelastic: the farmers operating diesel pumps tend to be those in higherincome brackets, and there is a significant expansion of pump use whenelectricity become available. Farmers' margins have been steadilydecreasing, but the tariff component amounts only to about 4% of total costof irrigated farming. While there does not appear to exist a clear economiccase for subsidized agricultural tariffs, resistance to increases is highbecause of (i) the traditional nature of electricity prices as one of thevehicles of favoring the agricultural sector, and (ii) the low reliabilityand limited supply times in rural areas. Taking into account these obstaclesto significant agricultural tariff increases, a State Government compensatLonto SEBs for RE financial losses has been allowed in the calculation of SEB1sfinancial performance for purposes of eligibility under the proposed project(para 5.19).

6.10 An increasing tendency among SEBs to switch from metered supply forpumps to a flat-rate tariff per HP installed is apparent. While there areshort-term advantages to non-metering such as administrative cost savings andelimination of meter tampering, the long-term negative effects (waste,inability to measure consumption, and technical losses) may outweigh them.The level of the flat rate per capacity unit also presents problems: userswith above-average utilization benefit significantly more than small farmers

-47-

with low utilization rates (Anne: 30). Preliminary results of theagricultural tariff studies being prepared under Credit 911-IN point to theconclusion (consistent with the findings of the Committee on Power) thatflat-rate tariffs are less desirable than metering. Final drafts of thestudies will be submitted to the Bank Group by June 82, and to GOI by August82, and their findings will be discussed with States and SEBs thereafter toensure that negative effects of flat-rate tariffs are avoided.

Beneficiaries

6.11 Sample evidence indicates that it is primarily the better-off membersof a village community who obtain pump and domestic connections: the bulkof pump connections is obtained by farmers with landholdings of more than5 acres, a size that enables them to utilize pump irrigation efficiently.In general, farmers with very small landholdings (except in fertile areas)rarely apply for pump connections, although the breakeven point in terms oflandholding is relative rather than absolute, depending on groundwateravailability, soil, type of crops, etc. Repayment of pump purchase creditson top of electricity charges could be prohibitively expensive for a smallfarmer. Bearing in mind that a 5 HP electric pump can cost about Rs 4,000installed, annual repayments even on generous terms would be a severe orimpossible burden on a farmer with 1-2 acres.

6.12 Landless laborers in rural areas benefit indirectly from RE. Havingno assets suited for the utilization of electricity, they benefit fromincreased employment opportunities created by the expansion of landholdersactivity through multiple cropping made possible by irrigation. Farmerscultivating more than 5 acres routinely hire additional laborers beyondfamily labor, especially during labor-intensive cultivation and harvestingperiods.

VII. SUMMARY OF AGREEMENTS

Agreements During Negotiations

7.01 During negotiations, the following agreements were obtained from GOIand REC.

(i) GOI will ensure that SEBs will use Loan proceeds forsystem improvement (SI) schemes in accordance with BankGroup guidelines, and that procurement for andimplementation of these schemes will be subject toREC supervision. REC has undertaken to appraise andsupervise SI schemes under the proposed project(paras 2.14 and 4.05).

-48-

(ii) REC will ensure that:

(a) its internally generated funds in any fiscalyear shall at least cover 1.2 times its debt servicerequirement during the same fiscal year (para 5.02); and

(b) its administrative expenses and interest payments inany fiscal year shall not exceed 90% of its interestreceipts (para 5.02).

(iii) Participation in the proposed Loan will be restrictedto SEBs:

(a) who have undertaken to and will achieve a contributionof at least 20% to their investment program by 1982/83or a specified later year, and to introduce acommercial system of accounts satisfactory to the BankGroup by the fiscal year 1984/85 (paras 5.17-5.25);and

(b) whose State Governments have undertaken to limit thesubsidies for the financial losses incurred by SEBsfrom their RE operations to an amount acceptable tothe Bank Group, and have endorsed the SEBs- undertakingat (a) above (paras 5.19 and 5.24).

(iv) GOI will formulate and, by June 30, 1983, submit to the BankGroup a model commercial system of accounting for SEBs, andwill cause SEBs to adopt it from April 1, 1984. For thispurpose, GOI will establish a special unit by August 31,1982 (paras 5.23-5.24).

Condition of Effectiveness

7.02 The conclusion of a Subsidiary Loan Agreement between GOI and RECsatisfactory to IDA (para 4.14) will be a condition of effectiveness.

Recommendation

7.03 The proposed project constitutes a suitable basis for an IBRD Loan ofUS$300 million equivalent.

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

All India Sales and Energy Data 1969/70 - 1979/80

1969-70 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81

Installed Capacity (excl. non-utilityplant MW 14,102 18,317 20,117 21,814 23,770 26,681 28,448 30,271

Electricity Generated GWh 57,988 70,191 79,231 88,333 91,206 102,432 104,716 111,514

Electricity sold GWh 41,061 52,682 60,246 66,608 68,693 77,293 78,226 n.a.

Electricity Generation per capita kWh 96.2 119.2 132.5 147.2 146.7 159.6 163.6 n.a.

Electricity Consumption per capita kWh 76.0 89.9 100.3 111.0 110.9 120.7 119.6 n.a.

Proportion of Sales (M)

Agricultural and Irrigation 9.2 14.5 14.5 14.4 14.5 15.6 16.9 n.a.

Railway Traction 3.5 2.9 3.1 3.3 3.5 2.8 2.9 n.a.

Industry 69.1 62.1 62.4 62.5 61.6 61.7 59.7 n.a.

Commerce 6.5 8.5 7.3 7.3 7.3 5.6 5.3 n.a.

Domestic 8.6 8.5 9.7 9.5 10.0 9.8 10.8 n.a.

Other (Public Lighting, Waterworksetc.) 3.1 3.5 3.2 3.0 3.0 4.5 4.4 n.a.

Average Annual Growth of Sales (%) 9.9 5.3 14.5 10.5 3.2 12.5 1.2 n.a.

Losses as percentage of kWh sent out 16.8 20.5 19.4 19.7 19.6 20.0 20.5 n.a.

n.a.: not available !-

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

All India Power Supply Position 1980 - 90

(Excluding non-utility)

Actual Estimated

1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 -1989-90

Installed Capacity MW 28,448 30,271 33,483 38,027 43,414 48,114 53,741 59,227 64,309 71,134 79,253

Peak Availability MW '19,139 19,080 20,970 23,855 27,525 31,152 34,476 38,457 42,112 46,826 52,857

Peak Demand MW 19,1391/1 19,080-l 24,922 27,296 29,718 32,703 35,972 39,586 43,574 47,972 52,5460~

Surplus (Deficit) MW - - (3,952) (3,441) (2,193) (1,551) (1,496) (1,129) (1,462) (1,146) 311

2/Energy Availability- GWh 99,480 104,782 132,263 141,990 161,710 183,459 203,041 226,466 249,947 275,318 306,400

Energy Requirement/ GWh 99,480-' 104,782-/ 138,929 152,142 165,304 182,077 200,429 220,716 243,108 267,832 293,373

Surplus (Deficit) GWh _ (6,666) (10,152) (3,594) 1,382 2,612 5,750 6,839 7,486 13,027

1/ Suppressed by load shedding2/ At station busbars

Source: CEA

Io f'JJ

-51- ANNEX 2Page 2 of 2

CEA Norms for Estimating Capacity and Energy Availability

1. Thermal

(i) Effective Capacity: For existing thermal generating

units the derated capacity is considered. Fornewly commissioned thermal units, no benefit is taken

during the first three months after the unit is commissioned,50% of the capacity during the next 9 months, and thereafterfull capacity is taken.

(ii) Retirement of old sets: Deductions are made at the rate of 1/2percent per year of the installed capacity available at the end

of the base year 1977-78.

(iii) Planned Maintenance: The figures for planned boiler andcapital maintenance have been obtained from a computer studyconducted to optimise the maintenance schedule. A period of4 weeks per year for boiler maintenance and an extra allowance

of 4 weeks once in three years for capital maintenance havebeen taken.

(iv) Forced Outage: This is calculated at 18.5% of the balance

of capacity available each month after allowing for retirement,planned and capital maintenance.

(v) Partial Outage: This is calculated at 10% of the capacityavailable for operation after allowing for forced outage.

(vi) Auxiliaries: This is calculated at 9% of the capacity availablefor operation after allowing for forced outage.

(vii) Norms for energy calculations: For new units 2,500 kWh/kWgross during the first year, 4,000 kWh/kW gross during the

second year, 5,000 kWh/kW gross during the third year and

5,350 kWh/kW gross during the fourth and subsequent years.These figures allow for energy losses due to planned

maintenance and all types of outage.

2. Hydro

(i) Generating Availability: The generating availability figures

are based on the designed head conditions and water flows ona month-to-month basis computed for a 90% dependable year.

(ii) Retirement: Deductions are made at the rate of 1/2 percent peryear of the installed capacity available at the end of the base

year 1977-78.

(iii) Planned maintenance: It is assumed that as far as possiblethe hydro generating units are maintained during low flowperiods, keeping in view the peak system demand to be met and

the hydro availability in each month of the year.

(iv) Capital Maintenance: This is worked out at 3% of the effective

generating capability after deducting retirements from thegross availability.

(v) Forced Outage: An allowance of 5% of the effective generating

capability is made towards forced outage.

(vi) Auxiliaries: From the balance available after the above

allowances a further allowance of 1/2% is made for consumptionof auxiliaries.

(vii) Spinning Reserve: A spinning reserve of 5% of the capacityavailable on bars is taken.

(viii) Energy output from hydro generating units: Monthly energyfigures are based on the 90% dependable year for each station.

ANNEX 3-52-

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Villages Electrified and Pumps Energized (REC and SEB Programs)

No. of Villages Villages Elec-Existing in trified as on Pumps Energized

States States 10/31/81 as on 10/31/81Nos. % Nos.

Andhra Pradesh 27,221 18,006* 66.1 468,877 *Assam 21,995 5,913 26.9 1,906Bihar 67,566 22,499* 33.3 161,891 *Gujarat 18,275 12,921 70.7 243,848Haryana 6,731 6,731 100.0 233,715Himachal Pradesh 16,916 10,606 62.7 1,760Jammu & Kashmir 6,503 5,059*(a) 77.8 1,010Karnataka 26,826 17,233 64.1 319,087Kerala 1,268 1,268 100.0 97,333Madhya Pradesh 70,883 26,740 (b) 37.7 320,631 (b)Maharashtra 35,778 28,143 78.7 700,939Manipur 1,949 334 (a) 17.1 10 (a)Meghalaya 4,583 765 (b) 16.7 47Nagaland 460 408 42.5 NilOrissa 46,992 18,892 40.2 17,030Punjab 12,188 12,126(+) 100.0 291,845Rajasthan 33,305 15,440 46.4 213,762Sikkim 405 67 (a) 16.5 NilTamil Nadu 15,735 15,589 99.1 933,928Tripura 4,727 1,030 21.8 449Uttar Pradesh 112,561 42,780 38.0 418,312West Bengal 38,074 15,195 39.9 25,226

Total (States) 571,441 277,745 48.6 4,451,606

Total (Union Territories) 4,685 1,581 33.7 23,080

Total (All India) 576,126 279,326 48.5 4,474,686

(*) - Figure provisional(+) - 62 villages have been declared uninhabited(a) - As on 3/31/81(b) - As on 9/31/81

Source: Rural Electrification Corporation

-53-ANNEX

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Progress of Pump Electrification (Nos.)

Year All India Under REC Schemesl/

1975-76 189,796 43,367

1976-77 240,651 75,529

1977-78 266,911 88,814

1978-79 298,874 94,161

1979-80 349,733 148,967

1980-81 381,317 191,694

l/ Including SPA schemes co-financed with ARDC and banks.

Source: REC

-54-ANNEX 5

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Planned Statewise Expenditure on RE During Sixth Plan 1980/81 - 1984/85

(Rs Million)

REC RECState Normal RMP SPA

State Plan Program Program Program 1/ Total

Andhra Pradesh 945.6 312.4 42.0 786.0 2,086.0Assam 50.0 178.6 350.0 39.0 617.6Bihar 150.0 443.5 330.4 600.0 1,523.9Gujarat 280.0 286.0 36.4 339.0 941.4Haryana 408.7 141.3 - 180.0 730.0Himachal Pradesh 52.0 188.1 24.0 - 264.1Jammu & Kashmir 50.0 221.5 25.0 - 296.5Karnataka 302.9 183.1 14.0 210.0 710.0Kerala 80.0 87.2 - 66.0 233.2Madhya Pradesh 397.8 716.7 485.5 960.0 2,560.0Maharashtra 1,209.0 391.0 - 750.0 2,350.0Manipur 6.0 7.0 37.6 - 50.6Meghalaya - 74.6 31.8 - 106.4Nagaland 31.9 15.5 12.6 - 60.0Orissa 200.0 343.6 203.4 240.0 987.0Punjab 396.0 317.4 - 480.0 1,193.4Rajasthan 303.0 447.0 281.0 360.0 1,391.0Sikkim 12.0 - 6.0 - 18.0Tamil Nadu 971.4 178.6 - 240.0 1,390.0Tripura 5.0 76.3 22.9 - 104.2Uttar Pradesh 840.0 644.9 887.9 810.0 3,182.8West Bengal 22.3 700.4 138.8 240.0 1,101.5

Sub Total Statewise 6,713.6 5,954.7 2,929.3 6,300.0 21,897.6

REC lumpsum funds

Coops & Harijan Bastis 330.0 330.0System Improvement 420.0 420.0

Union Territories 86.3 81.2 167.5

System Improvement 450.0 450.0(under REC supervision)

Grand Total 6,844.9 6,704.7 3,010.5 6,300.0 23,265.1

1/ REC, ARDC, and banks one third each.

INDIATHIRD RURAL ELECTRIFICATION CORPORATION PROJECT

ORGANIZATION CHART

| en,.,illror I,g,n,,, ~ ~ Oh,,, W,,,, Ch.~f. p.,A,h,I Ofl,,f. p .A

... .... ....

r~~~~~~~~~~~~~~~~~~~~~~,,1 _ 0111 $0, *1,1, 010.0,01

| Tlehmeal Oireevol i | O+orlof F/oonc l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C1010,,,. 01,r*,o,*1101

X I= _ 2-_t § =' _ ,00.._ .101, 0,,_-f

~~~~~~~~l0,,0 9 1 C,efEualCbfLser* eHam_*ee sh_( shnsBd rWasE0,

0,000., OI,, 0,,,001, 0.,,, n,ioI01

{ E ~~~~~~~~~~~~~~~~~~~~~~~~~~~~T,D0.o., Poo0 II ,,[10l

10 Al11, 01,111000 P00 00, 011,0, 00,0,,100k111,0 ,,,1S 01,llol0,00,- 3,

-56-ANNEX 7

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

REC Staff Structure (3/31/81)

Staff Class I Class II Class III Class IVCharacteristics Total (Senior) (Middle Level) (Clerks) (Support)

HQ RO HQ RO HQ RO HQ RO HQ RO

Total Staff 537 261 105 79 91 45 241 95 100 42

PermanentEmployees 483 198 72 34 86 34 225 88 100 42

Seconded 54 63 33 45 5 11 16 7 - -

Seconded (X) 10 24 31 57 5 24 7 7 - -

HQ = HeadquartersRO = Regional Offices

Source: REC

-57-ANNEX PPage 1 ot X

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Types of Schemes Financed by REC

(i) Area Schemes:

Ordinary Advanced (OA) - Electrification of groups of villagesin economically advanced areas.

Ordinary Backward (OB) - Electrification of groups of villagesin somewhat less advanced areas.

Special: Underdeveloped (SU) - Electrification of groups of villagesin economically backward areas.

Rural Cooperative Societies (OC)- Electrification of groups of villagesjoined in an electric cooperativesystem with consumer membership.

Mini Growth Centers (MG) - Electrification of several villagesaround a market town.

Mini Health Centers (MH) - Electrification of several villagesaround a town with health center.

Revised Minimum Needs Program (RMNP)- Electrification of groups of villagesout of a special GOI fund earmarkedfor specific particularly backwardareas.

Tribal, Hill, and Desert Areas (RER{P - THD)- RMNP areas with special social andgeographical features.

Mini OA, OB, SU, and MNP - Electrification of previously left outvillages and hamlets in OA, OB, SU, andMNP scheme areas.

(ii) Special Consumer Category Schemes:

Mini Industrial (MI) - Connection of village industry in agroup of villages.

Mini Industrial Estate (ME) - Connection of small and medium industryin a rural industrial estate.

Mini Farm (MF) - Connection of irrigation pumps in agroup of villages.

-58- ANNEX 8Page 2 of 2

Mini Farm - Lift Irrigation (MF-LI)- MF connection for lift irrigation only.

Harijan Bastis (HB) - Electrification of settlements of lowestsocial group.

Special Project - Industry (SPI)- Connection of small and medium industryin rural industrial estates (replacingMI and ME).

Special Project - Agriculture (SPA)- Connection of irrigation pumps ingroups of villages, co-financed byother institutions (replacing MF andMF-LI).

Special Project - Drinking Water (SPD)- Connection of pumps on wells supplyingdrinking water in rural areas.

(iii) System Improvement and Reinforcement Schemes:

Special Transmission (ST) - Transmission lines to serve scheme andnon-scheme areas in specific districts.

Special System Improvement (SS)- System improvement by capacity increaseand reinforcement of distributionsystem.

Special Loans (SL) - Financing workshop and productionfacilities for SEBs.

System Improvement (SI) - Replacing SS due to the creation of aseparate fund by GOI for distributionsystem reinforcement and improvement.

Low Tension Capacitors (LT) - Installation of capacitors in a definedscheme area.

(iv) Other:

Single Wire Earth Return (MPS)- Experimental schemes using SWERtechnology.

Potential Scheme Area Advance (AL-PPA)- Advance loan for starting electrificationof a scheme area with long gestation,period, ultimately converted to areaschemes.

Advance Loan: Annual Plan Purchase (AL-APP)- purchase of equipment for schemes withinannual electrification plan.

Special Development Reserve (SDR)- program loan not related to specificscheme area.

-59- ANNEX 9Page 1 of 2

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Terms and Conditions for REC Loans to SEBs

Normal Period tesFinancial Period of mora- Rates-of Interest_(Per cent.per annum)Outlay of loan torium Year Year Year Year Year Year

Category (million Rs) (years) (years) 1-5 6-10 11-15 16-20 21-25 26-30

OAA! 7.5-8.0 20 5 8 8 1/2 9 10 - -

OB 7.5-8.0 25 5 71/2 8 81/2 9 10 -

OC 15.0 30 5 41/4 51/4 6 1/4 71/4 8 1/4 9 1/4

SU 7.5-8.0 30 5 63/4 7 7 1/4 8 93/ 9 3/4

5/ST-5 15.0 10 2 8 3/4 8 3/4 - - - -AA-/StaesAB/- 15.0 12 2 8 8 8 - - -

States

SS-/ 30% of the 8 1 8 8 - - - -

market valueof existingassets in thearea to bebenefitted bySS schemes orRs 7.5 millionwhichever isless

9/S 1- 9/ 9.0 12 3 8 3/4 8 3/4 - - - -

9/LLT- 5.0 5 - 8 - - - - -

MG 1.0-1.5 )For transmission portion: same as applicable to ST category: for area portion:

MH 1.0-1.5) same as applicable to OA/OB/SU/MNP category as the case may be.

MI 1.0-1.5

MIp2l 1.5 10 2 8 8 - - - -

2.5 10 2 8 8 - - -(LI)

ME -l 1.5 10 2 8 8 - _ _ _

M(PS) 0.5-1.0 10 2 4 1/4 6 1/4 - - _ -

SPA- (1) 3.0 8 2 9 9

(2) 1.5-5.0 14 2 9 9 9 - - -

SPI-l(l) 2.5 8 2 91/4 9 1/4 - - _ _

(2) 4.0 14 2 91/4 9 1/4 9 1/4 - _

SDR 1.5 5 -- 21/4 4 1/4 5 1/4 - _(for 2 (3-5 (6-15years) years) years)

-60- ANNEX 9

Page 2 of 2

Normal Period 7Financial Period of mora- Rates of Interest-' (Per cent per annum)Outlay of loan torium Year Year Year Year Year Year

Category (million Rs) (years) (years) 1-5 6-10 11-15 16-20 21-25 26--30

SL 2.5 5 - 8 - - - -

HB 1.5 15 - 5 5 5 - -

AL:PPA 2.0 2 or less - 73/4 - - - -

AL:APP - l or less - 11 - - - -

RMNP (THD) 7.5-8.0 30 5 61/2 6 1/2 7 7 7 3/4 7 3/4

RMNP 7.5-8.0 30 5 61/2 6 1/2 7 7 7 3/4 7 3/4

SPD (1) 1.5 8 4 4 4 - - -

SPD (2) 3.0 14 4 4 4 4 - -

Mini OA 1.5 ), ~~~~~~~~)

Mini OB 1.5 Same as applicable to OA/OB/SU/RMNP category as the case may be.

Mini SU 1.5 )

Mini RMNP 1.5 )

Notes:

1/ If repaid by the 15th year, interest for 6-15 years will be 8.5%.2/ If repaid by the 20th year, interest for 16-20 years will be 8.5%.3/ If repaid by the 25th year, interest for 21-25 years will be 8%.4/ In respect of the second and subsequent 'OA' schemes from same district in AA States,

direct loan assistance from Corporation is restricted to 60% of the project cost.5/ Under ST category, direct loan assistance from the Corporation is restricted to 80% of the

project cost except in case of RMNP areas, Mini Project areas and area of operation of RuralElectric Cooperative Societies.

6/ Under 'SS' category, direct loan assistance from the Corporation is restricted to 80%of the project cost in case of 'A' States except for the schemes meant either exclusivelyor substantially for Rural Electric Cooperative Project areas.

7/ A rebate of l/4% is allowed by the Corporation in interest at all stages for prompt paymentexcept in case of AL:APP Loans,SPA loans, SPD loans.

8/ AA States mean above Average States and 'AB' States mean Average and Below States in villageelectrification.

9/ With the introduction of SI (System Improvement) and LT (LT Capacitors) categories of loan,the SS Category of loan has been withdrawn w.e.f. 5-8-1977.

10/ With the introduction of SPA (i) and SPA (2) categories of loan, MF and MF (LI) categorieshave been withdrawn w.e.f. 18-5-1978.

ll/ With the introduction of SPI (1) and SPI (2) categories, ME category has been withdrawn w.e.f.18-5-1978.

-61-ANNEX 10

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Typical Pattern of Installments of REC Loan Disbursement (in % of total loan)

InstalmentsFive Year Project Intlet

Five Year Project Initial 2nd 3rd 4th 5th

Normal Programme(OA, OB, SU- area schemes) 35 25 15 15 Ic

R.M.N.P. 40 30 10 10 10

SI/ST/Mini Schemes 50 50 - - -

Four Year Project

Normal 35 25 20 20

R.M.N.P. 40 30 15 15

Three Year Project

Normal 35 35 30 -

R.M.N.P. 40 30 30

SPA

Infrastructure part 40 same as 4-year project

Pump connection part 40 reimbursement basis (actual workprogress)

Note: The initial instalment is released in two stages i.e. 60% on executionof documents and 40% on furnishing requisite certificates.

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Development of REC Lending Activity 1969-81 in Major Categories of Loans(Loan Amount in Rs. MiLlion)

Particulars 1996fibL 1971-72 1972-73 1973i74 1±974 75 197&-7&No. Lan NO on Loan NO No Loan _ b an mm Loan

Ordinary: Advanced Areas(OA) 6 29.0 51 296.4 55 310.8 104 447.7 62 251.0 42 171.8 42 158.9Ordinary: Backward Areas(OB) 5 25.0 38 188.6 44 304.6 71 357.3 53 253.6 56 283.7 46 248,9Ordinary: Co-operatives (OC) - - 5 135.4 - - - - - 3 35.3 2 31.0

Special: Underdeveloped Areas(Hill Tribal & Desert

etc.) (SU) - _ 2 8.1 16 71.0 38 1466 12 49.8 12 57 6Mini: Farm productions(MF) - - - - - - 5 6.8 61 71.5Mini: Farm LiftIrrigation

(MF X LI) - - - - - - - - - - - - -

Mini: Growth Centre (MG) - - - - - - - - 14 7.8 12 12.4 6 5i 6

Mini: Health Centre (MH) - - _ - - - - - 14 7.3 6 3.5 7 6.3

Mini: Industrial (MI) - - - - - - 2 2.5Mini: Industrial Estate(ME) - - - - - - - - - - 7 6.9Mini: Pilot Single Wire

Earth Return (MPS) - - - - - - - - - - - - 2 1.4Mini: Ordinary Advanced

Area (MOA) - - _ _ - - _ _ _ _ _ _ _ - SMini: Ordinary Backward

Areas (MOB) _ _ _ _ _ _ _ _ _ _ _ _Mini: Special Underdeveloped

Areas (MSU)

AdvM1cdLa" Potential ProjectArea (AL:PPA) _ _ _ _ _ _ _ - _ _ _ 4 U

Special: Transmission(ST) - - - 4 22.4 8 54.8 6 35.0 8 46.4 8Special: System lmprovement

(Ss &SX) _ _ _ 1 Ib.4 21 38.6 20 38,8 7 17.7L.T.CapOicitors(LT) - _ _ _ _ _ _ _ _ _ _ - - -

Special Project: Agriculture(SPA) - - _ _ _ _ _ _ _ _ _ _ -

Minimum Needs Programe(MNP/PMNP) _ _ _ _ _ _ _ _ _ 116 648.6 77 k 467r-1Special Loan (SL)

Special Development Reserve(SDR) _ _ _ _ _ _ _ _ _ _ _ 13.5 _ WtSAdvance Loan:Annual Plan Purchase

(AL:APP) _ _ _ _ a _ _ 64.--Harijan Basti Loan (HB) _ _ - 1 5 - - 4 33 14.6 35 8.3 4 242Special Project Drinking Water(SPD)- _ _ _ _ _ _ _ _ _ _ -_Special Project: Industrial(SPI) - _ _ _ _ _ _ _ _ _ _ _Mini: Revised Minimum Needs

Programme (M-RMANP)

DeveLopment of REC Lending Activity 1969-81 in Major Categories of Loans(Loan Amount in Rs. MiLLion)

Particulars 1971977 I9 -81 Ttal

Ordinary: Advanced Areas(OA) 39 130.7 14 76.6 31 151.1 17 75.2 34 140.10 497 2239.3Ordinary: Backward Areas (OB) 68 350.9 40 193.9 60 310.8 51 259.7 62 295.9 594 30721.9Ordinary: Co-operatives (OC) 1 7.9 2 39.5 2 24.9 1 26.6 5 83.2 16 2A.4Special: Underdeveloped Areas (Hill

Tribal & Desert(SU) etc. 15 71.6 29 117.0 39 168.4 79 367.9 58 308.4 3CO 136%Mini: Farm Productions (MF) 80 89.7 38 445 - - - - - - 184 212XMini: Farm LiftirriqFtion

(MF X LI) 9 10.5 7 9.0 - - - _ _ _ 16 19.Mini: Growth Centre (MG) 6 5.6 4 3.3 3 4.2 - - - - 45 38.9Mini: Health Centre (MH) 7 5.6 2 1.2 7 6.1 5 6.1 2 2.4 50 38.5Mini: Industrial (MI) - - - - 2 2.3 - - - - 4 4.1VMini: Industrial Estate (ME) 24 100.13 15 7.8 - - - - - 46 25.0Mini: Pilot Single wire Earth

Return (MPS) - - - - - _2 1.4Mini: Ordinary Advanced Area

(W)A) - - - - - 0.5 7 7.1 7.6Mini: Ordinary Backward Area

(MOB) - - - - - - 4 6.2 12 17.9 16 24.1Mini: Special Underdeveloped

Area (MSU) - - - - - - 3 4.9 14 19.1 17 24.0Advance Potential Project AreaLo an: (AL:PPA) 8 11.3 4 5.15 1 04.9 - - - - 17 203.3Special: Trnsmission(ST) 10 33'.4 7 10.'8 11 70.7 13 99.0 22 83.9 97 537.7Special: System Tmprovement(SS&SI) 9 20.4 53 319.2 57 341.8 - - 52 218.9 220 ,996.

L.T. Capacitors (LT) - - 33 69.6 - - - - - - 33 69.6Special Project: AgricultuM(SPA)* - - 19 48.1 308 411.3 318 296.2 483 535.4 1128 1291.0Minimum beds Programme 1RPF-MWPT 59 286.0 106 460.4 148 736.6 136 8)9.0 89 546.5 731 3951.4Special Loan (SL) 2 1.2 24 13.7 9 6.3 9 6.B 4 3.1 48 31.1Special Development Reserve ,DR) - 3.5 - 10.5 - 7.0 - 3.5 - 17.5 - 64.0Advance Loan: Annual plan purchase 86.4 125.2 _ 105.7 - _ _ _ _ 381.8(AL: APP) 8. 2. 0. 8.Harijan Basti Loan (HB) - - - _ 2 1.4 78 24.1 104 67.7 293 138,2Special Project Drinking Water (SPD) - _ _ - 20 18.6 32 36.4 10 9.6 62 64.6Special Project: Industrial (SPI) -. - - 19 34.1 29 73.7 18 51.0 66 158.8Mini: Revised Minimum INeds Programme _

(M-FR.fxp) -- -- -- -- 6 6.9 6 6.9

* IncLudes REC's portion only for participative schemes.

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Achievement of Village Electrification Plan Targets (Nos.)

Fifth Plan-/ 2

(1974/75 to 1978/79) _ 1979/80-/ 1980/81_ State Plan Target Achievement Plan Target. A_hievement Plan Target Achievement 3/

State State 3EC

Andhra Pradesh 5,781 2,063 3,210 1,220 912 900 1,087

Assam 3,310 609 1,246 1,000 1,130 1,000 1,400

Bihar 9,042 5,097 4,001 2,200 715 2,500 1,987

Gujarat 1,030 2,226 1,582 460 503 600 650

Haryana - -Himachal Pradesh 930 1,704 2,125 1,100 596 850 1,129

Jammu & Kashmir 1,000 972 2,121 590 337 450 125

Karnataka 3,947 1,586 1,490 925 513 550 243

Kerala 150 1 74 - 15 - -

Madhya Pradesh 9,003 3,564 5,083 2,120 2,029 2,100 4,026

Maharashtra 3,110 3,755 2,858 450 964 750 1,289

Manipur 650 61 - 70 41 30 20 4

Meghalaya 1,000 11 295 160 78 90 140

Nagaland 200 52 82 20 33 40 47

Orissa 4,626 2,566 4,925 1,018 2,191 1,350 1,601

Punjab 2,132 1,670 3,378 - - - -

Rajasthan 3,542 1,555 4,978 1,400 894 1,000 927

Tamil Nadu - 2 88 - - 40 21

Tripura 1,000 61 402 200 187 200 240

Uttar Pradesh 11,416 1,957 4,576 1,380 1,340 2,500 2,487

West Bengal 6,660 50 3,598 1,350 749 1,600 1,156

All-India State Program68,529 29,565Achievement 43%

in %All-India REC Program 41,108 46,112 15,663 13,217 16,500 18,575

Achievement 112% 84% 113%

in %

1/ State Program targets statewise, REC program targets global.

2/ REC Program only.I/ PrnviAinnal, O

Source: REC o t~,1h

Achievement of Pump Connection Plan Targets (Nos.)

Fifth Plan-/

(1974/75 to 1978/79) 1979/80- 1980/811-State Plan Target Achievement Plan Target Achievement Plan Target Achievement:

State State REC

Andhra Pradesh 97,070 52,512 36,287 20,400 13,621 27,500 16,850Assam 9,540 352 193 1,600 376 2,500 210Bihar 28,620 36,236 10,457 9,700 1,920 19,000 7,000Gujarat 15,500 56,590 18,525 9,200 8,727 13,500 10,000Haryana 51,500. 26,800 26,485 9,400 10,618 4,700 6,466Himachal Pradesh 990 157 359 100 88 70 77Jammu & Kashmir - 344 101 125 5 50 201Karnataka 59,880 70,591 17,203 6,650 3,773 6,500 3,655Kerala 30,000 22,233 6,346 2,500 2,316 4,600 1,402Madhya Pradesh 38,160 90,429 38,864 26,350 19,205 25,000 28,777Maharashtra 64,320 152,477 42,553 17,000 22,240 19,500 26,856Manipur - - - 35 - 50 -

Meghalaya 6 41 140 _ 30 _Nagaland - - 0'

Orissa 47,240 3,408 3,099 2,570 1,786 6,100 3,129 i

Punjab 39,160 61,039 42,541 13,000 25,244 13,000 11,058Rajasthan 28,620 38,467 43,001 14,000 17,766 15,000 17,685Tamil Nadu 143,000 119,869 41,972 21,000 11,510 10,000 8,146Tripura - 105 39 100 26 300 120Uttar Pradesh 114,480 75,374 15,323 10,750 8,750 14,000 14,151West Bengal 43,000 6,312 9,579 10,000 996 9,100 752All-India State Program 811,080 813,301

Achievement 100%in %

All-India REC Program 763,200 352,968 1,74,620 1,48,967 1,90,500 1,56,535Achievement 46% 85% 82%in %

1/ State Program targets statewise, REC program targets global.2/ REC Program only._/ Provisional.

Source: REC

o N~

-66-ANNEX 13Page 1 of 5

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Project Cost Estimate

(Rs Million) (US$ Million)FOREIGN LOCAL TOTAL FOREIGN LOCAL TOTAL

REC Schemes

Conductors 564.8 847.2 1,412.0 70.6 105.9 176.5Dist. Transformers 122.5 367.3 489.8 15.3 45.9 61.2Insulators - 70.0 70.0 - 8.8 8.8Solid and StandardGI Wire - 48.0 48.0 - 6.0 6.0

Meters 7.2 82.8 90.0 0.9 11.3 11.3Cables - 90.0 90.0 - 11.3 11.3Lightning Arrestors - 23.0 23.0 - 2.9 2.7Poles - 741.8 741.8 - 92.7 92.7Other Materials - 600.0 500.0 - 75.0 75.0Labor and Transport - 721.8 721.8 - 90.2 90.2overheads - 478.2 478.2 - 59.7 59.7

694.5 4,070.1 4,764.6 86.8 508.8 595.6

S.I. Schemes

Conductors 32.0 48.0 80.0 4.0 6.0 10.0Power Transformers 20.0 60.0 80.0 2.5 7.5 10.0Switchgear 3.2 36.8 40.0 0.4 4.6 5.0Other Costs - 200.0 200.0 - 25.0 25.0

55.2 344.8 400.0 6.9 43.1 50.0

Training Facility - 12.0 12.0 - 1.5 1.5Base Cost (early1982 prices) 749.7 4,426.9 5,176.6 93.7 553.4 647.1

Physical Contingency 1/ - 1.2 1.2 - 0.2 0.2Price Contingency 166.3 982.3 1,148.6 20.8 122.7 143.5

Total Project Cost 916.0 5,410.4 6,326.4 114.5 676.3 790.8

Front-end fee on Bankloan 2/ 36.0 - 36.0 4.5 - 4.5

Total Financing Required 952.0 5,410.4 6,362.4 119.0 676.3 795.3

1/ Applies only to training facility.

2/ Bank loan assumed as US$300 million.

-67- ANNEX 13Page 2 of 5

Project Cost EstimateREC Schemes

(Rs million)REC Program 1980/81 - 1984/85

Normal 5,193SPA 6,261Total 11,454

Part of REC Program 1980/81 - 84/85 eligible under IDA creditNormal 85% of 5193.1 4,414SPA 100% of 6261.0 6,621Total 10,675

Expenditure on eligible program in 1983/84 - 84/85Normal 40% of 4414.1 1,766SPA 40% of 6261.0 2,504

4,270

Expenditure 1982/83- 83/84 by cost component:

Quantity % of 4,270

Consumers 640,4501 m 30.0 1,280.9Distribution Transformers 59,800- 10.0 427.1HT Insulators 1,993,000 1.5 64.0GI Wire 8,400 t 1.0 42.8Meters 2.0 85.3Cables 2.0 85.3Lightning Arrestors 0.5 21.4Poles 15.0 645.0Other materials 13.0 545.2Labor and transport 15.0 645.0Overheads 10.0 427.0

100.0 4,270.0

1/ at 60 KVA each

NOTE: Prices at early 1981

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Schemes Approved by REC from 4/1/78 to 1/31/82

(Rs Million)

OA OB SPA-I SPA-II SPI-I SPI-II SI TotalState No Loan No Loan No Loan No Loan No Loan No Loan No Loan No. Amt.

Andhra Pradesh 8 34.06 15 74.99 20 13.83 140 218.94 3 2.53 6 21.22 10 34.26 202 399.83

Bihar - - 33 142.79 84 60.10 37 45.50 3 5.18 - - 8 31.68 165 285.25

Gujarat - - 12 42.17 20 19.09 50 73.99 - - - - 9 44.74 91 179.990P.

Haryana 1 4.05 - - 7 4.78 23 30.35 8 11.82 - - 5 32.97 44 83.97

Karnataka 2 8.44 20 111.37 3 2.36 47 76.52 - - 3 9.24 6 22.78 81 230.71

Kerala 2 7.71 3 15.57 3 1.57 14 20.64 - - - - - - 22 45.49

Madhya Pradesh 1 7.14 18 101.92 123 106.66 41 58.16 3 3.68 - - 3 13.85 189 291.41

Maharashtra - - 17 74.42 82 54.92 107 135.17 11 13.12 5 13.43 25 151.10 247 442.16

Orissa 7 14.26 11 34.75 2 2.59 53 58.22 - - 4 11.53 2 10.13 79 131.48

Punjab 48 190.14 - - 2 1.51 57 94.07 - - - - 16 86.96 123 372.68

Rajasthan 4 20.26 16 114.34 43 27.47 55 76.23 - - - - - - 118 238.30

Tamil Nadu 1 2.81 - - 35 18.87 108 126.98 5 8.32 30 96.07 20 109.33 199 362.38

Uttar Pradesh 10 46.45 39 196.04 58 51.56 153 209.83 - - - - 6 28.39 266 532.27

West Bengal 16 98.89 31 159.06 6 8.51 10 9.86 - - - - 1 5.32 64 281.64 m x

0 WLTOTAL 100 434.21 215 1067.42 488 373.82 895 1234.46 33 44.65 48 151.49 111 571.51 1890 3877.56 "'

U'

-69- ANNEX 13

Page 4 of 5

Expenditure by State (in early 1981 prices)(Rs million)

Total TotalREC program Eligible Program

State 1980-85 1982/84

Andhra Pradesh 1,098.4 420.6Bihar 1,043.5 390.8Gujarat 625.0 232.8Haryana 321.3 120.0Karnataka 393.1 146.2Kerala 153.2 56.0Madhya Pradesh 1,676.7 627.7Maharashtra 1,141.0 432.9Orissa 583.6 212.8Punjab 797.4 299.9Rajasthan 807.0 296.0Tamil Nadu 418.6 156.7Uttar Pradesh 1,454.9 543.3West Bengal 940.4 334.1Total 11,454.1 4,269.8

-70-1- ANNEX 13

Page 5 of 5

Central Institute for Rural Electrification: Preliminary Cost Estimate

Rs '0001. Buildings including electrification and water

supply:Institute 5,000Hostel 30.00 3,000

2. Furniture, fixtures including air conditionerand cooler for:

Institute 500Hostel including Kitchen 500

3. Equipment: 500(various types of relays, hand crimping tools,hydraulic crimping machine, meter testinglaboratory, transformer repair workshopequipment, relay testing kit, stringingequipment, etc.)

4. Instruments: 200(Megger 500V and lOOOV, earth tester, tongtester, voltmeter, power factor meter,schering bridge, standard energy meter etc.)

5. Demonstration Equipment: 500(Circuit breakers, pole-mounting substationsrole manufacturing equipment, model 11 KVand LT lines (2 to 3 spans), working models ofvarious equipment used in R.E.

6. Audio-visual equipment: 500(16mm projector, overhead projector, synchronisedslide projectors, video tape equipment, viewers,public address system, etc.)

7. Mini Computer 600

8. Transport vehicles 300

9. Development of course material 400

Total: 12,000

-71- ANNEX 14

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Targets for Electrification of Villages& Energization of Pumps in 1884and 1984IR5

Name of SEB Villages to be Pumps to beelectrified energized

Andhra Pradesh 1,640 55,360

Bihar 2,600 58,000

Gujarat 1,360 34,840

Haryana - 16,120

Karnataka 916 18,192

Kerala 20 8,440

Madhya Pradesh 2,660 90,920

Maharashtra 1,696 46,392

Orissa 1,728 31,348

Punjab 20 40,660

Rajasthan 1,012 32,804

Tamil Nadu 68 18,256

Uttar Pradesh 3,400 64,200

West Bengal 1,640 27,800

18,760 543,332

Source: REC

-72- ANNEX 15

INDIA

THIPR RURAL ELECTRIFICATION PROJECT

Disbursement Schedule

Bank Fiscal US$ MillionYear Quarters Quarterly Cumulative

1983 IV 7 7

1984 I 14 21II 28 49III 39 88IV 53 141

1985 I 47 188II 33 221III 26 247IV 20 267

1986 I 18 285II 9 294III 3 297IV 3 390

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Rural Electrification Corporation

Income Statement for the period FY4 1979 through 1986

(Rupees Million)-------- ACTUAL -------- ------------ FORECAST-------------------

Year to-March 31 1979 1980 1981 1982 1983 1984 1985 1986

RevenueInterest on Loans Disbursed 313.4 409.9 514.0 672.1 817.0 971.7 1,124.4 1,275.0Interest on Investments 18.8 20.7 35.3 30.0 30.0 30.0 30.0 35.0

Total Revenue 332.2 430.6 549.3 702.1 847.0 1,001.7 1,154.4 1,310.0

ExpensesAdministration 19.7 22.5 25.5 32.5 35.0 38.0 41.0 44.0Interest on Borrowings 228.7 305.1 398.6 521.0 633.8 758.9 875.0 1,002.3

Total Expenses 248.4 327.6 424.1 553.5 668.8 796.9 916.0 1,046.3

Operating Income (before tax) 83.8 103.0 125.2 148.6 178.2 204.8 238.4 263.7Less: Income tax provision 33.9 43.8 53.6 59.8 71.8 82.5 96.0 106.2Operating Income (after tax) 44.9 59.2 71.6 88.8 106.4 122.3 142.4 157.5

Less: Proposed Dividend 7.7 8.7 10.0 11.0 12.0 13.5 15.0 16.5 1Transfer to Special Reserve 16.8 29.6 36.3 42.5 50.9 58.5 68.1 75.3

24.5 38.3 46.3 53.5 62.9 72.0 83.1 91.8Retained Earnings 20.4 20.9 25.3 35.3 43.5 50.3 59.3 65.7

Ratios:Percentage of Revenue; % % % % % % % %1. Interest on Borrowing 68.9 70.9 72.6 74.2 74.8 75.8 75.8 76.52. Administration 5.9 5.2 4.6 4.6 4.1 3.8 3.6 3.43. Total(l + 2) 74.8 76.1 77.2 78.8 78.9 79.6 79.4 79.94. Income Tax 11.7 10.2 9.8 8.5 8.5 8.2 8.3 8.15. Operating Income (after tax) 13.5 13.7 13.0 12.7 12.6 12.2 12.3 12.0

Percentage of Average Total Assets:6. Total Revenue 5.3 5.7 6.0 6.5 6.7 6.8 6.9 7.07. Interest on Borrowings 3.6 4.0 4.3 4.8 5.0 5.1 5.2 5.38. Gross Spread 6-7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.79. Administration 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.210. Income Tax 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.611. Proposed Dividend 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.112. Retained Earnings 0.7 0.7 0.7 0.7 0.7 0.7 0.8 0.8 M

Return on Average Equity (Z)- 2.3 2.8 3.2 3.6 4.0 4.3 4.5 4.6

Return on Average TotalCapitalization (X) 2/ 4.4 4.8 5.1 5o6 5.8 5.9 6.1 f 1/ Operating Income after tax2/ Operating Income after tax and after adding back interest on Boa. owings

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Rural Electrification Corporation

Sources and Application of Funds Statement for the period FYs 1979 through 1986

--- ACTUAL ----- - -- O_LR2eEes million)

Year to Miarch 31 1979 1980 1981 1982 1983 1984 1985 1986

SOURCES OF FUNDS:

Internal cash generation:

Operating Income (after interest) 83.8 103.0 125.2 148.6 178.2 204.8 238.4 263.7

Depreciation 0.4 0.5 0.6 0.6 0.6 0.6 0.7 0.7

84.2 103.5 125.8 149.2 178.8 205.4 239.1 264.4

Less: Income Tax provision 38.9 43.8 53.6 59.8 71.8 82.5 96.0 106.2

Proposed Dividend 7.7 8.7 10.0 11.0 12.0 13.5 15.0 16.5

46.6 52.5 63.6 70.8 83.8 96.0 111.0 122.7

Net Cash Generation 37.6 51.0 62.2 78.4 95.0 109.4 128.1 141.7

Loan Repayments (by SEBs) 162.2 228.9 327.9 363.9 441.6 540.8 620.0 685.4 1

Capital:

GOI Equity 100.0 100.0 130.0 100.0 100.0 150.0 150.0 150.0

GOI Loans 876.8 1,228.7 1,332.3 1,465.0 1,540.0 1,515.0 1,753.0 1,950.0

Bank Loan 99.4 - - - - -

Market Loans 200.7 200.8 250.3 300.0 300.0 350.0 400.0 450.0

1,276.9 1,529.5 1,712.6 1,865.0 1,940.0 2,015.0 2,303.0 2,550.0

Working Capital:

decrease (increase) 110.2 20.2 (3.9) 8.2 83.9 90.3 70.4 (16.6)

Total Sources 1,586.9 1,829.6 2,098.8 2 2 2,755.5 3,121.5 3,360.5

APPLICATION OF FUNDS:

Loan disbursements (to SEBs) 1,561.0 1,670.5 1,843.5 2,215.0 2,410.0 2,535.0 2,731.0 2,900.0

GOI Loan repayments 25.3 33.7 71.1 100.0 150.0 220.0 306.8 349.0

Bank/Market Loan repayments - 26.0 73.4 - - - 83.2 ;11.0

Short term deposits - 98.9 110.0 _ _ _ _ _

Capital Expenditure 0.6 0.5 0.8 0.5 0.5 0.5 0.5 0.5

Total Applications 1,586.9 1,829.6 2,098.8 2,315.5 2,560.5 2,755.5 3,121.5 3,360.5

INb IA

THIRD RURAL ELECTRIFICATION PROJECT

Rural Electrification Corporation

Balance Sheets for the period FYs 1979 through 1986

------- ACTUAL ------- --------------FORECAST-----------------

Year to March 31 1979 1980 1981 1982 1983 1984 1985 1986

ASSETSFixed Assets 4.2 4.7 5.5 6.1 6.6 7.1 7.6 8.1Less: Depreciation 1.8 2.3 2.9 3.4 4.0 4.6 5.3 6.0Net Fixed Assets 2.4 2.4 2.6 2.7 2.6 2.5 2.3 2.1

Deferred Expenditure 4.7 4.8 4.9 5.0 5.1 5.2 5.3 5.4Loans Outstanding 6,427.8 7,869-1 9,384.7 11,235.8 13,204.2 15,198.4 17,309.4 19,524.0Investments/short term deposits 181.1 280.0 390.0 298.0 208.0 110.0 33.6 39.0Current Assets 155.6 161.0 128.3 230.1 268.0 306.3 346.9 391.3

Total Assets 6,771.6 8,317.3 9,910.5 11,771.6 13,687.9 15,622.4 17,697.5 19,961.8

LIABILITIES

Equity

Share Capital 770.0 870.0 1,000.0 1,100.0 1,200.0 1,350.0 1,500.0 1,650.0Capital Reserve 1,050.0 1,050.0 1,050.0 1,050.0 1,050.0 1,050.0 1,050.0 1,050.0Special Reserve 63.1 92.7 129.0 171.5 222.4 280.9 349.0 424.3Retained Earnings 141.1 162.5 187.8 223.1 266.6 316.9 376.2 441.9

2,024.2 2,175.2 2,366.8 2,544.6 2,739.0 2,997.& 3,275i- 3,566.2

Borrowings

GOI Loans 3,867.2 5,062.3 6,323.5 7,688.5 9,078.5 10,373.5 11,816.5 13,386.5Market Loans 615.0 815.7 1,066.0 1,366.0 1,666.0 2,016.0 2,336.0 2,706.0Bank Loan 99.4 73.4 - - - - - -

4,581.6 5,951.4 7,389.5 9,054.5 10,744.5 12,389.5 14,152.5 16,092.5Current Liabilities

Interest Accrued 32.6 52.1 75.3 90.5 107.4 123.9 141.5 160.9Sundry Creditors 10.9 10.6 15.3 11.2 13.2 15.2 17.3 19.5Provision for Taxation 114.6 119.3 53.6 59.8 71.8 82.5 96.0 106.2Proposed Dividend 7.7 8.7 10.0 11.0 12.0 13.5 15.0 16.5

165.8 190.7 154.2 172.5 204.4 235.1 269.8 303.1

Total Liabilities 6,771.6 8,317.3 9,910.5 11,771.6 13,687.9 15 622.4 17,697.5 19,961.8Loan Commitments (Sanctions~

notn dommisbused (Sntons 3,583.6 4,011.5 4,766.2 5,921.2 7,111.2 8,376.2 9,845.2 11,345.2not disbursed) -Debt/Equity Ratio 69/31 73/27 76/24 78/22 79/21 80/20 81/19 82/18Current Ratio 1/ 2.0 2.3 3.4 3.1 2.3 1.8 1.4 1.4

1/ Current assets plus term deposits divided by current liabilities.

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Rural Electrification Corporation

Statement of Debt Service Coverage for the period FY8 1979 through 1986

----- ACTUAL ----- ---------------- FORECAST--------- ---

Year to March 31 1979 1980 1981 1982 1983 1984 1985 1986

Internally Generated Funds 1/:

Total Revenue 332.2 430.6 549.3 702.1 847.0 1,001.7 1,154.4 1,310.0

Less:Administration 19.7 22.5 25.5 32.5 35.0 38.0 41.0 44.0Taxes 38.9 43.8 53.6 59.8 71.8 82.5 96.0 106.2Dividends 7.7 8.7 10.0 11.0 12.0 13.5 15.0 16.5

Total 66.3 75.0 89.1 103.3 118.8 134.0 152.0 166.7

Net Revenue 265.9 355.6 460.2 598.8 728.2 867.7 1,002.4 1,143.3

Add:Depreciation 0.4 0.5 0.6 0.6 0.6 0.6 0.7 0.7

Loan repayments (by SEBs) 162.2 228.9 327.9 363.9 441.6 540.8 620.0 685.4

Total 428.5 585.0 788.7 963.3 1,170.4 1,409,1 1,623.1 1,829.4

Debt Service: 2

Interest on Borrowings 228.7 305.1 398.6 521.0 630.8 758.9 875.0 1,002.3Repayment of GOI Loans 25.3 33.7 71.1 100.0 150.0 220.0 390.0 460.0

Total 254.0 338.8 469.7 621.0 783.8 978.9 1,265.0 1,462.3

Times Debt Service coveredby Internally GeneratedFunds and sums repaid by 1.7 1.7 1.7 1.6 1.5 1.4 1.3 1.3

borrowers (minimum 1.2times)

1/ Internally generated funds means the aggregate revenues from all sources and the principal vepayments onloans made by REC, less administrative expenses, dividends, taxes, surcharges and other levies, if any,but before provision for depreciation and interest and other charges on debt.

2/ Debt service requirements means the aggregate amount of amortization, interest and other charges inrespect of debt.

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Rural Electrification Corporation

Statement of Loans Sanctioned, Disbursed and Undisbursed

- -ACTUAL-- ---- -FORECAST----------Through

1978 1979 1980 1981 1982 1983 1984 1985 1986

1. Number of schemes sanctioned - 703 769 1,035 1,120 1,200 1,260 1,400 1,485

2. Total number of schemessanctioned to date 2,028 2,731 3,500 4,535 5,655 6,855 8,115 9,515 11,000

(Rs. million)3. Loans Sanctioned during year - 2015.0 2098.4 2598.2 3370.0 3600.0 3800.0 4200.0 4450.0

4. Total Loans Sanctioned to-date 8301.3 10316.3 12414.7 15012.9 18382.9 21982.9 25782.9 29982.9 34432.9

5. Loans Disbursed during year - 1561.0 1670.5 1843.5 2215.0 2410.0 2535.0 2731.0 2950.0

6. Total Loan Disbursements to-date 5171.7 6732.7 8403.2 10246.7 12461.7 14871.7 17406.7 20137.7 23087.7

7. Loan Repayments during year - 162.2 228.9 327.9 363.9 441.6 540.8 620.0 685.4

8. Total Loan Repayments to-date 142.7 304.9 534.1 862.0 1225.9 1667.5 2208.3 2828.3 3513.7

9. Total Loans Outstanding (6-8) 5029.0 6427.8 7869.1 9384.7 11235J.8 13204.2 15198.4 17309.4 19574.0

10. Total Undisbursed Loans (4-6) 3129.6 3583.6 4011.5 4766.2 5921.2 7111.2 8376.2 9845.2 11345.2

ANNEX 21

Page 1 of 2

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Assumptions for Financial Projections

(A) Rural Electrification Corporation

1. Financial projections of REC's lending operations have been preparedfor the period through FY1986, using as a base REC's share (Rs 11,800million) of the RE program approved by GOI for the Sixth five-year Planperiod (FYs 1981 through 1985) and extended for a further one year. The Planis in constant prices (FY1981) and REC's lending operations through FY1986are similarly expressed. Cost escalation over the plan period would beaccommodated either by a curtailment of the volume of lending or byadditional GOI funding.

2. The financial statements -- Income (Annex 22), Sources andApplication of Funds (Annex 22), Balance Sheets (Annex 24) and Debt ServiceCoverage (Annex 25) include historical data for the years FYs 1979 through1981.

3. The following assumptions have been made in preparing REC's financialprojections:

(a) Interest rates:

(i) Borrowing rates on GOI loans are 7.75% for Normal Programs,including IDA Credit onlending and 5.75% for the MinimumNeeds Program;

(ii) lending rates on loans to SEBs vary according to the typeof scheme: details are set out in Annex 11.

(b) Loan repayments: for both borrowing and lending operations arein accordance with contractual arrangements. Market borrowingsare repayable from FY1985.

(c) Administration Expenses: are projected to increase by about 8%annually from the approved budget for FY1982.

(d) Income Tax: is calculated after providing for transfers to theSpecial Reserve at 28.57% and represents an effective rate of40% on chargeable income.

(e) Proposed Dividends: are provided at 1% of issued share capitalat the year-end.

(f) Current Assets: are provided at 2% of loans outstanding at theyear-end.

(g) Current Liabilities: are provided as follows:

- year-en *Accrued at 1% of borrowings outstanding at the

- Sundry Creditors at 0.1% of loans disbursed outstanding atthe year-end.

-79-

ANNEX 21Page 2 of 2

(h) Authorized Share Capital: has been increased to RS 15,000million by reso;ution of REC's Board in September 1980:issued share capital is projected to reach this ceiling inFY1985 by further GOI equity contributions. A further formalauthorization would be required by FY1986 to permit a furtherincrease in the issued share capital.

(B) State Electricity Boards - apportionment of financial results betweenrural electrification and other operations

The rationale for the above apportionment is in accordance withArticle IV, Section 4.01, Credit 242-IN, which specified that financial datashould be produced for SEBs which separated information relating to RE frominformation relating to the SEBs' other supply functions. Since FY1970,proforma income statements, statements of sources and applications of funds,rate bases, and details of indebtedness have been prepared both for RE andfor the SEBs excluding RE on a basis of apportionment which is reasonablehas been consistently applied and which is used to support SEBs' applicationsto State Governments for the payment of RE subsidies. Details are asfollows:

(i) Energy sales to consumers at appropriate tariff rates are onan actual basis with reasonable estimates used where this isnot possible.

(ii) Cost of energy is charged to RE by apportioning the cost ofsupply at the EHT transmission end (comprising operation andmaintenance, depreciation and interest charged for generationand transmission up to this point) in the ratio of units soldto RE consumers.

(iii) Operation and maintenance, depreciation and interest chargesin the distribution system below EHT are allocated on thebasis that consumer services costs are apportioned in theratio of the number of consumers, while other operation andmaintenance costs depreciation and interest are apportionedin the ratio of gross fixed assets in the distribution system.

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

INDIA

THIRD RURAL ELECTRIFICATION PFOJECT

Rates of Return ' of SEEs FY 1976 - FY 1981

(based on audited data, unless otherwise stated)

FY 1976 FY 1977 FY 1978 FY 1979 FY 1980 | FY 1981il Forecast

Return Return Return Return Return Return Return Return Return Return Return Returnto SEB incl. to SEB incl. to SEB inel. to SEB incl. to SEB incl. to SEB incl.

State State State State State StateDuties Duties Duties Duties Duties Duties

% x Z X 2 X Z Z

Andhra Pradesh 7.7 7.7 9.0 9.0 9.5 9.5 9.5 9.5 9.5 9.5 9.5A 9.5A

Assan 6.4 7.4 12.3 13.9 9.3 10.4 7.1F 8.2F 3.9F 4.8F 1.9 2.5

Bihar 7.0 8.5 8.1 9.5 8.0 9.4 1.4 2.6 5.2 6.3 1.4A 2.4A

Gujarat 7.9 11.0 9.7 13.9 9.7 13.5 9.7 14.0 8.34/ 12.4 6.4k' 10.3

Haryana-/ 7.2 11.4 6.4 10.9 6.6 10.6 10.0 14.4 5.5 9.2 0.3A 3.4A3'

Karnataka 10.0 14.9 15.8 20.7 8.7 13.4 15.7 20.6 12.5 16.7 13.3 17.4 .00

Kerala 5.9 8.1 8.5 10.5 8.6 10.5 15.7 18.0 13.9F 15.8F 14.3 16.2

Madhya Pradesh 12.8 15.4 13.1 15.3 14.7 16.7 11.2 14.1 13.4 16.9 8.2A 11.2A

N4aharashtra 10.0 11.5 13.0 14.5 15.5 17.0 14.2 15.7 9.5 11.0 9.5A 12.2A

Orissa 5.8 9.1 6.3 9.9 4.4 8.3 1.6 7.2 3.9F 8.OF 9.5 14.5

Punjab 7.4 10.1 8.2 11.4 9.5 11.9 9.5 11.9 9.5 11.7 9.5A 11.7A

Rajasthan 8.7 9.9 9.2 10.5 7.9 9.0 8.6 9.7 9.5 10.7 5.3 6.4

Tamil Nadu 9.7 10.4 9.5 10.3 9.5 10.3 9.5 10.4 9.5 9.9 9.5 9.8

Uttar Pradeslf- 4.6 .5.4 5.8 6.6 0.9 1.6 1.8 2.4 9.5 10.1 6.4 7.2

West Bengal 6.0 8.0 9.5 11.1 9.5 11.0 9.5 11.0 9.5F 10.7F 9.5 10.8

F - Forecast A Audited Actual

/ Target rate of return in general is 9.5%. When this was established in 1964, it was also conceived that an averageelectricity duty equivalent to a return of 1.5% would be applied, making the total expected return 11%. EffectiveMarch 1978, GOI levied an additional excise tax of 2 paise/kWh on generation which is not included above. Thiswould add an estimated 2-3 percentage points to the returns noted. M

2/ Not eligible for assistance under Credits 572-IN and 911-IN.

3 State Government has since agreed to RE subsidy to achieve 9.5%.

4/ Subsidy to achieve 9.5% is under discussion with State Government.

-81- ANNEX 23

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

SEB's Gross Fixed Assets at March 31, 1979

(Rs.million)RE i Other

SEBs / RE Other i Operation OperationsSEBs RE Operations Operations Total _

Andhra Pradesh I.S. 1,547 5,083 6,630 23.4 76.6W.I.P. - 1,761 1.761 - 100.0

Total 1,547 6,844 8,391 18.4 81.6

Bihar I.S. 1,257 3,381 4,638 27.1 72.9W.I.P. - 1,481 1.481 - 100.0

Total 1,257 T7 6 2 20.5 79.5

Gujarat I.S. 962 4,597 5,559 17.3 82.7W.I.P. - 1,808 1,808 100.0

Total 962 6,405 7.367 18,1 86.9

Haryana I.S. 1,073 2,394 3,467 31.0 69.0W.I.P. - 1,191 1.191 - 100.0

Total } 1,073 3,585 4.658 23.0 77.0

Karnataka I.S. 1,176 2,162 3,338 35.2 64.8W.I.P. - 78 78 - 100.0

Total 1,176 2,240 3.416 34.4 65.6

Kerala I.S. 1 227 3,122 3,349 6.8 93.2W.I:P. - 286 286 - 100.0

Total 227 3,408 6.2 93.8

Madhya Pradesh I.S. 1,518 3,680 5,198 29.3 70.7W.I.P. 283 1,328 1,611 17.6 82.4Total 1,801 5,008 6,809 26.5 73.5

Maharashtra I.S. 2,371 5,144 7,515 31.6 68.4W.I.P. | 380 5,717 6.097 6.2 93.8Total j 2,75I 10,861 13.612 20.2 79.8

Orissa I.S. 757 1,569 2,326 32.6 67.4W.I.P. 74 933 1,007 7.4 92.6Total i 831 2,502 3,3333 24.9 75.1

Punjab I.S. 1,440 5,045 6,485 22.3 77.7W.I.P. - 1,288 1,288 - 100.0

Total r 1,o - 6,333 7.773 18.5 81.5

Rajasthan I.S. 1,670 2,796 4,466 37.4 62.6W.I.P. t 48 1,300 1.348 3.6 96.4Total T 1,718 4,096 5,814 29.5 70.5

Tamil Nadu I.S. 2,644 4,490 7,134 37.1 62.9W.I.P. 96 1,745 1-841 5.2 94.8Total 2,740 6,235 8.975 30.5 69.5

Uttar Pradesh I.S. 2,462 10,002 12,464 19.8 80.2W.I.P. - 6,913 6 913 100.0

Total 2,462 16 915 19,377 12.7 87.3

West Bengal I.S. 318 2,227 2,545 12.5 87.5W.I.P. 475 2,270 2,745 17.3 82.7

Grand Total - _T 793 4,497 5,290 150 85.0Grand_ Total20,778 83,791 t104,569 19.9 80.1

I.S. - In Service.

W.I.P. - Work in Progress.

1/ Excluding Assam.

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

SEBs' Capital Expenaiture (FYs 1977 and 1978)(Rs million)

FY 1977 FY 1978 Increase (+) Decrease (-) FY1978 over FY1977

1/ ~~~RE Other RE Other RE Other Opts. TotalSEBs- Amout 2 Operations Total Amount % Operations Total Amount % Amount % Amount %

Andhra Pradesh 144 16 750 894 196 15.7 1053 1249 +52 +36 +303 +40 +355 +40

Bihar 165 21 614 779 123 21.4 453 576 -42 -25 -161 -26 -203 -26

Gujarat 56 j 7 777 1 833 82 9.3 801 883 +26 +46 +24 +3 +50 +6

Haryana 77 17 364 441 80 16.2 414 494 +3 +4 +50 +14 +53 +12

Maharashtra 132 10 1262 1394 209 8.7 2194 2403 +77 +6 +932 +74 +1009 +72

Punjab 209 23 710 919 172 24.2 538 710 -37 -18 -172 -24 -209 -23

Rajasthan 192 34 377 569 281 41.9 390 671 +89 +46 +13 +34 +102 +18

Uttar Pradesh 213 11 1756 1969 393 18.5 1732 2125 +180 +85 -24 -1 +156 +8

West Bengal 110 18 492 602 79 10.9 659 738 -31 -28 +167 +34 +136 +23

Kerala 11 4 252 263 8 2.7 291 299 -3 -27 +39 +15 +36 +14

Madhya Pradesh 207 24 657 864 236 24.6 723 959 +29 +14 +66 +10 +95 +11

Orissa 83 16 443 526 93 27.3 248 341 +10 +12 -195 -44 -185 -35

Tamil Nadu 162 ! 22 572 734 180 24.7 548 728 +18 +11 -24 -4 -6 -1

Total 1761 16 9026 10787 2132 j 17.5 10044 12176 +371 +21 +1018 +11 +1389 +13

1/ Excluding Assami and Karnataka

SEBs' Capital Expenditure (FYs 1978 and 1979)(Rs million)

FY 1978 FY 1979 Increase (+) Decrease (-) FY1979 over FY19781/ RE Other RE Other RE Other Opts. TotalSEBs Amount rOperations Total Amount Z Operations Total Amount Amount % Amount

Andhra Pradesh 196 15.7 1053 1249 189 15.9 1003 1192 -7 -3.5 -50 -4.7 -57 -4

Gujarat 82 9.3 801 883 179 16.9 881 1060 +97 +108 +80 +10 +177 +20

Haryana 80 16.2 414 494 89 17.3 426 515 +9 +11 +12 +3 +21 +4

Maharashtra 209 8.7 2194 2403 311 10.7 2596 2907 +102 +49 +402 +18 +504 +21

Punjab 172 24.2 538 710 234 29.0 572 806 +62 +36 +34 +6 +96 +14

Rajasthan 281 41.9 390 671 398 44.4 498 896 +117 +42 +108 +28 +225 +34

Uttar Pradesh 393 18.5 1732 2125 395 15.4 2166 2561 +2 +1 +434 +25 +436 +21

Kerala 8 2.7 291 299 9 3.5 248 257 +1 +12 -43 -115 -42 -14

Madhya Pradesh 236 24.6 723 959 386 38.9 607 993 +150 +64 -116 -16 +34 +4

Orissa 93 27.3 248 341 98 32.3 218 322 +11 +11 -30 -12 -19 -6

Bihar 123 21.4 453 576 46 8.3 509 555 -77 -63 +56 +12 -21 -4

Tamil Nadu 180 24.7 548 728 191 19.4 793 984 +11 +6 +245 +45 +256 +35

West Bengal 79 10.9 659 738 79E 10.9E 659E 738E - - - - - -

Total 2,132 17.5Z 10,044 12,176 2,610 18.9% 11,176 13,786 478 22% 1,132 11% 1,610 13%

1/ Excluding Assam and Karnataka

o Q

IN~DIA

THIRD RURAL. ELECTRIFICATION PROJECT

SEBS' O/peratigPromne R ciities (FY 1978)(Rs .million)

Andhra iMadhya Maharashtra Tmlltar Ws oa

Pradesb Bihauay~KantkaKrl Pradesh tra Orissa Punjab Rajastha Nadu Pradesl Bengal (Rs/kWh)

es: ts(Gwh) 825 3955 14041 961 40 36 11 1834 653 1126 _ 929 97 26 2

Sales Revenue 185 396 205 -102 6 8 g~ l 216 228 443 440 50 3336 (0.23)

Other Operating

Revenue 22 5 ~~17 24 4 5' 251 26 6 125 20 18 28 - 25(0.02)r

Total Revenue 207 113 I413 229 106 74 311 519 ___121 241 248 461 468 50 3561 (0.25)i

Operating Expenses:

Energy Cost 156 91 286 152 35 25 195 278 73 181 147 375 654 I26 2674 (0.19)~

Other 118 57 131 106 117 68 114 252 69 94 124 371 225 82 1928 (0.13)1

Depreciation 53 35 35 35~ 23 9 46 81 20:38* 39 95 79 14 602 (0.04)1

Total Expenses 327 183 452 11 293 175 2 35 61 162 313 31 84 95 12504(.6

Deficit Before ,

Interest 120 70 39 64 69 28 44 92 41 72 62 380 490 72 1643 (0.11)

___ 27 58 75 1 ~~~ ~~~89 51 13 97 170 54 103 _ _64 129 I171 29 1130 (0.08)

Deficit After 1Interest ~147 128 114 153 120 - 41 141 262 95 175 126 509 661 101 2773 (0.19)

Less: State Govt.

Subsidy 43 128 - - - ~~~~~41 1107 3 0 171 126 217 - 66 952 (0.07)

Net Deficit for Year 14 - 14 153 120 --- - -34 29 45 4 292 1 661 35 1821 (0.12)

Overall Rate of Return 9.5 8.0 9.7 6.6 8.0. 47155 44 95 7. . . .

Subsidy Fomula OK OK ~~~I O K O O 2 OSubsidy Fonnula OK OK OK 2/ 3/ OK OKOK N OKK OK 2

1/ Excluding Assam2/ Haryana and Uttar Pradesh not eligible under Credits 572-IN and 911-IN3/ State Government has since agreed to RE Subsidy to achieve 9.5%

INDIA

HrlIRI) - RAL ELECTIFICATIONI PROJECT

SFBs'2Oetm ig efomace1!R Activities (FY1979)

F ~~~~~~Andhra~ Karna-9 Madhya Maharash- I TCamil lUttar West TotalPradesh Bihar L~jarat'Haryana taka KeralaiPradesh tra Orissa .Punjab iRajasthan Nadu lPradesh Beng~al (Rs/kWh)

Sales: Units (Gwh) 868 466 t0 1346 391 I375~ 1181 2958 712 ;1716 I10-81 26 247 139 17082

Sales Revenue 185 179 456 260 106 64 336 680 1159J 24r9 277 446 528 54 3979 (0.22)

Other OperatingRevenue 38 6 42 32 3 6 28 97 6~ 30 ~ 28 35 424. 33(C.02'

Total Revenue 223 185 498 292 109 70 364 777 165 279 305 481 570 54 4372 (0.24

Operating Expenres I-Energy Cost 183I 142 369 198 39 30 259 52910 27 162 493 816 33 3633 (0,20)

Other 137 115 141 118 134 61 185 308 91 121 181 389 250 95 2326 (0.13) jDenreciation 61 44 39 38 28 9 55 84 23 43 4 0 7 1 8 00

Deficit Before -__ __14 64227 (0.37)Interest 158 116 51 62 92 30 135 144 53 161 85 502 593 88 270(.3

Add: Interest33 5 88 8 55 1 1220 67 96 79 142 203 23 1272 (0.07)

Deficit After Interest 191 172 139 147 147 44 259 351 120 257 164 644 796 III 3542 (0.20)

Less: State Govt. ~ 1 2- I- - 411 14 __

Net uefiityfo3 Ye1r214844 191 - 190: 4 146 264 - 84 1106 (0.06)

SubsDe idyt fo-ea 4 139 147 147 - 68 351 I 1114 18 380 796 27 2436 (0.14)

Return 9.5 1.4 9.7 10.0 15.7 15.7 11.2 14.2 1,6 9.86 9.-5 18----------4

Subsidy Formula [ KOK OK 2/ OK OK OK OK NO' OK NOOK OK

1/Excluding Assam.

2/ Haryana and Uttar Pradesh not eligible under Credits 572-IN4 and 911.-IN.

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

SEB's Operating Performance - RE Activities (FY 1980)

(Rs.million)

Andhra 2/ Madhya Mahara RaJa- Tamil Uttar | West TotalPradesh Bihar Gujarat Haryana Karnataka Kerala Pradesh shtra Orissa Punjab sthan Nadu Pradesh Bengal (Rs/kWh)

Sales: Units (Gwh) 985 614 1729 1768 427 1225 3086 1966 1462 2410 2762 , 18434Sales Revenue 212 188 555 346 121 397 714 277 331 481 562 4184 (0.22)Other Operating

Revenue 35 7 19 41 4 30 102 33 43 18 28 (0.02)Total Revenue 247 195 574 387 125 427 816 310 374 499 590 4544 (0.25)Operating Expenses:

Energy Cost 244. 207 482 300 51 320 695 397 249 556 1008 4509 (0.24)Other 157 124 174 141 153 225 374 170 189 466 389 2562 (0.14)Depreciation 74 46 45 42 30 67 94 51 61 1C7 110 727 (0.04)Total Expenses 475 377 701 483 234 612 1163 618 499 1129 1507 7798 (0.42)Deficit Before

Interest 228 182 127 96 109 185 347 308 125 630 917 3254 (0.17)Add: Interest 54 79 99 89 74 158 257 111 102 143 273 1439 (0.08)Deficit After

Interest 282 261 226 185 183 n/a 343 604 n/a 419 227 773 1190 n/a 4693 (0.25)Less: State Covt.

35/'( 3Subsidy 95 261 - - - (60F) - 236 (23F) 419 190 299 1010 (181F) 2510 (0.13)

Net Deficit for Year 187 - 226 1 185 183 N/A 343 368 NJA _ 37 474 180 N/A 2183 (0.12)Overall Rate of

Return 9.5 5.2 8.3 5.5 12.5 13.9F 13.4 9.5 3.9F 9.5 9.5 9. 9.5 n/aSubsidy Formula OK OK No 21 OK OK OK OK No OK OK OK OK OK

1/ Excluding Assam n/a = not available.

2/ Haryana not eligible under Credits 572-IN and 911-IN.

3/ Total excludes forecast (F) subsidies towards RE losses of Kerala, Orissa, West Bengal SEBs. o x

i-,

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

SEBs'-/ Rates of Return for FY1979: analyzed between RE Activities a_nd Other Oerations

Surplus/ Surplus/ lSEBs Average (Deficit) (Deficit) Total

Rate Base on RE 2/ on other Surplus Rates of Returnoperations operations RE Other Operations Total

(Rs.million) (Rs.million) kRs,million) Rs.million) % % %

Andhra Pradesh 4,574 (115) 552 437 (2.5)' 12.0 9.5

Bihar 3,414 56 (8) 48 1.6 (0.2) 1.4

Gujarat 3,861 (51) 425 374 (1.3) 11.0 9.7

Haryana 2,536 (62) 315 253 (2.5) 12.5 10.0

Karnataka 1,839 (92) 380 288 (5.0) 20.7 15.7

Kerala 2,581 14 391 405 0.5 15.2 15.7

Madhya Pradesh 3,604 56 348 404 1.5 9.7 11.2 X

Maharashtra 5,441 (144) 917 773 (2.6) 16.8 14.2

Orissa 1,734 (34) 62 28 (2.0) 3.6 1.6

Punjab 4,965 (18) 490 472 (0.4) 8.5 9.5

Rajasthan 3,281 61 221 282 1.8 6.8 8.6

Tamil Nadu 4,400 (238) 656 418 (5.4) 14.9 9.5

Uttar Pradesh 9,763 (593) 774 181 (6.1) 7.9 1.8

West Bengal 1,610 (4) 156 152 (0.3) 9.7 9.4

Total 53,603 (1164) 5679 4515 (2.2) 10.6 8.4

l/ Excluding Assam for which no RE accounts available.

2/ RE surplus (deficit) is after taking credit for State Government subsidies of RE losses. RE surplusesshown are due to those portions of subsidies which reiuburse interest costs - the rates of return beingcalculated before interest.

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

State Electricity Board6 (SE8s)

Average Tariffs, Subsidies for Rural Electrification

Contribution to Investment and Rate of Return FYs 1983-85

1 . _ SEB PROJECTION (FY 1981 PRICES) FY 1985 AVERAGE TARIFF REQUIREMENT

FY 1976 FY 1981 FY 1982 - -RATE OF

ACTUAL ! ACTIJAI FORECAST FT 1985 CONTRIBUTION TO RETURN TO ACHIEVE TO LIMIT RE SUB-

(paise/kWh) (paise/kWh) (paise/kWh) (paise/kWh) ANE EY 208 TONTRVESTMEN SIDY TO 101 SEBs_____ ___________ ______________ ~FT 1983-85 AVERAGE FY 1985 TO DTrVSTNN SAESREENE

Average RE Average RE Average RE Average RE Average with dutv with-

SEB Tariff Subsidy Total Tariff Substdy Total Tariff Subsidy Total Tariff Subsidy Total Tariff out with but net of out with Pai-eWkWh Increase Paise/klh Increase

(inc. (inc. (inc. (inc. increase duty duty subsidy duty duty on FF1982 on FY198 SEB

duty) duty) duty) duty) 2 I X % 2_

Andh,raPradesh 30.1 - 30.1 37.3 2.2 39.5 39.5 3.4 42.9 37.8 - 37.8 -4 45 55 52 9.7 11.4 AP

( - ) (1.7) (1.9) (1.8)

Bihar 26.1 4.7 30.8 43.2 12.6 55.8 50.1 13.5 63.6 54.3 1S.7 70.0 8 j9 14 -14 7.3 8.8 6O.' 21 69.3 38 BI

(1.2) (2.1) (2.2) (2.8)

Gujarat 23.6 0.1 23.7 40.1 5.4 45.5 52.3 0.5 52.8 55.8 - 55.8 7 30 56 36 9.5 14.7 GU

(1.6) (5.0) (6.0) (5.7)

Haryaaa 17.9 - 17.9 29.6 9.6 39.2 35.2 8.4 43.6 35.6 9.7 45.3 1 3 31 3 9.5 15.0 40.7 16 45.8 30 NA

(2.4) (5.0) (6.3) (6.2)

Karnataka 14.7 - 14.7 29.2 0.3 29.5 31.4 - 31.4 31.2 - 31.2 -1 34 62 62 8.6 12.7 RA

(1.5) (2,0) (1.8) (1.6)

Kerala 13.3 1.9 15.2 24.4 - 24.4 24.6 - 24.6 30.1 - 30.1 22 38 65 65 12.5 17.0 EE

(1.2) (3.3) (4.3) (3.8)

MadhyaPradesh 21.4 1.6 23.0 40.2 6.1 46.3 40.6 7.0 47.6 39.8 4.8 44.6 -2 17 31 18 10.6 15.2 41.0 1 41.6 2 MP

(1.6) (5.7) (6.2) (5.6)

Maharashtra 19.9 0.8 20.7 28.2 5.7 33.9 36.3 4.1 40.4 44.6 - 44.6 23 21 34 34 9.5 13.3 MA

(1.0) (3.3) (3.5) (3.8)

Orissa 14.1 1.8 15.9 31.6 3.3 34.9 32.7 0.5 33.2 34.3 0.3 34.6 5 24 91 80 9.5 18.9 OR

(2.0) (8.5) (8.7) (8 .8)

Punjab 15.8 - 15.8 23.3 14.0 37.3 25.8 12.1 37.9 n/a n/a u/a n/a 24 n/a n/a 9.5 n/a - - n/a n/a PU

(1.9) (4.1) (4.2)

Rajasthan 21.1 2.9 24.0 28.0 6.9 34.9 36.5 6.7 43.2 44.0 7.1 51.1 21 21 29 8 9.5 11.0 - - 46.5 27 RA

(0.9) (2.4) (3.3) (2.7)

Tamil Nadu 25.1 0.8 25.9 30.6 12.5 43.1 30.6 12.9 43.5 30.5 12.8 43.3 -1 25 29 -23 9.5 10.7 - - 39.4 29 TN

(0.4) (1.2) (1.2) (1.1)

UttarPradesh 26.2 - 26.2 35.6 17.8 53.4 39.2 14.8 54.0 40.0 8.4 48.4 2 15 22 4 9.5 11.4 42.0 7 45.8 17 UP

(0.7) (2.6) (2.9) (2.6)

West Bengal 24.7 - 24.7 40.8 5.7 46.5 43.4 5.4 48.8 40.0 - 40.0 -8 4 11 11 9.5 12.9 46.1 6 - - WB

(0.9) (2.6) (2.5) (2.6)

J_

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

State Electricity Boards:

Projected Contribution to Investment FYs 1983-1985

(in constant FY 1981 prices)

FY 1983 FY 1984 FY 1985

Contri- Contribution ContributionCapital l/ Net Cash bution to Capital 2/ Net Cash to Capital 3/ Net Cash toInvestment Generation Investmen Investment Generation Investment Investment Generation Investment(Rs.mill) (Rs.mill) % (Rs.mill) (Rs.mill) % %

Andhra Pradesh 1659 633 38 1731 794 46 1831 895 49

Bihar 1888 181 10 2176 176 8 2288 227 10

Gujarat 1929 492 26 2287 718 31 2395 882 37

Haryana 1233 76 6 1468 10 1 1566 33 2

Karnataka 428 167 39 468 156 33 494 1.51 31

Kerala 666 204 31 746 344 46 790 306 39

Madhya Pradesh 3469 507 15 3804 635 17 4060 815 20

Maharashtra 4734 921 19 5485 1213 22 5832 1298 22

Orissa 491 112 23 530 123 23 560 144 26

Punjab 1621 371 23 1797 422 23 1890 501 27

Rajasthan 1431 256 18 1589 364 23 1684 394 23

Tamil Nadu 2293 596 26 2635 644 24 2813 772 27

Uttar Pradesh 5061 629 12 5891 902 15 6191 1126 18

West Bengal 2045 102 5 2283 137 6 2434 34 1

TOTAL 28948 5247 18 32890 6638 20 34828 7578 22

1/ Average of FYs 1982-1984>

2/ Average of FYs 1983-1985. N)

3/ Average of FYs 1984-1986: FY 1986 data not available s d VY 1985 data repeated for that Yenr,

ANNEX 28-90-

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

State Electricity Boards

Introduction of Commercial Accounting Arrangements

(A) Amendments to the Electricity (Supply) Act 1948:

1982

i) by March 31 CEA to draft proposals and submit to Department of Power.

ii) by May 15 Inter-ministerial and State Government consultations.

iii) by June 15 Comptroller and Auditor-General consultations.

iv) by July 31 Cabinet paper in consultation with Ministries of Lawand Finance.

v) by September 15 Cabinet approval.

vi) by October 15 Draft bill to Law Ministry.

vii) by November 1 Notice to Parliament.

(timetable thereafter not predicted)

(B) Formulation and Implementation of Commercial Accounting Systems:

1982

i) by June 30 - organizational structure at centre

- identification of local accounting firm as consultants.

- discussion on scope of work and TOR, methodology,time schedule.

1983

ii) by June 30 Draft manual.

iii) by September 30 Comments of SEBs and CAG and further discussionsof major issues and policy.

iv) from October 30 Training programs.

1984

v) by February 29 Final report of consultants.

vi) by March 31 Decision on manner of introducing new system and extentof professional help required in initial years.

1985

vii) between April 1 Introduction of new system,- March 31, 1985 - resolution of problems and staff training "on the

job".

viii) between April 1 Preparation of accounts for audit and report- September 30,1985 of CAG thereon.

-91-ANNEX 29Page 1 of 8

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Economic Analysis

A. Methodology

1. The method selected for economic analysis is a cost saving approach thatattempts to quantify net benefits for users of the supply system. In thisapproach, electricity is considered as one alternative source of energy andcompared to other energy sources yielding the same result, such as diesel motorsfor industry, diesel pumps for irrigation, and kerosene for domestic lighting.Sample schemes of eligible categories and 3 typical average schemes wereexamined with respect to economic internal rate of return, and net presentvalue. Schemes analyzed consisted of proposed (appraised by REC), actual (underimplementation) and typical (representative) schemes, data for which wereobtained from REC, and from consultants' economic analysis. OA, OB, SPA, and SIschemes were examined. Costs, achievements, and specific assumptions that werederived from REC reports are shown in Table 1.

2. The cost saving approach implies that new electricity consumers in ruralareas are switching from alternative energy to electricity, or if electricitywould not be supplied, many would obtain alternative energy sources. It ispossible that, had electricity not been provided in the area, some rural elec-tricity consumers who have obtained electric connections might not have pur-chased an alternative power source. The underlying assumption is a downwardsloping demand curve for rural energy inputs with respect to price.

3. The cost streams consist of the SEB investment cost, recurrent cost inSEB-installed facilities, marginal cost of energy, and private costs (excludingtariff) associated with the proposed project and incurred by retail consumers,including house wiring investment in electricity-using facilities and equipment,and their maintenance. Thirty years was chosen as an appropriate lifetime ofthe schemes. The demand growth and associated SEB capital investment requiredwere obtained from REC reports. The bulk of the SEB investment is concentratedin the first five years of the schemes for OA, OB and SPA. Full potentialdemand is met in five years in SPA schemes. Further growth is possible in OAand OB schemes with further investment after the fifth year until the fifteenthto twentieth year when full demand is met.

4. The benefit stream is represented by the total cost of the alternative,adjusted to reflect a realistic mix of valuation of energy supply by the con-sumer. If a significant part of expected electricity demand is due to conver-sion of existing or expected alternative energy sources, this share of projectoutput is valued at full alternative cost. The remainder, i.e. demand thatwould not be present in the absence of the project, should be valued at lessthan full alternative cost, the upper value limit, but more than the minimum

-92- ANNEX 29

Page 2 of 8

value of electricity depending on the shape of the demand curve. The minimumvalue of electricity as seen by the consumers is the total cost of running theelectric alternative, which consists of capital, 0 & M and tariff costs.

5. For the purpose of this report, the economic analysis is performed undersix different demand curve assumptions. They are as follows:

(a) Case 1: The energy demand is inelastic with respect to price, or the areahas reached saturation by using alternative energy. The demand for the projectoutput is fully due to conversion of existing or expected alternative energysource users. (Maximum value of benefits).

(b) Case 2: The energy demand is due solely to first time users of any formof energy and the observed value of electricity to these consumers is theirtotal cost of running the electric alternative. (Minimum value of benefits).

(c) Case 3: The demand curve is linear, with the upper value limit representedby full cost of alternative energy source (Case 1) and the minimum value by thecost of electricity use (Case 2).

(d) Case 4: The demand curve is concave with the same upper and lower valuelimits as in Case 3.

(e) Case 5: 50% of the demand is due to replacement (value as in Case 1) andthe remainder is represented by a linear demand curve. Based on existingevidence, this is considered to be the best central estimate and constitutesthe base case.

(f) Case 6: 50% of the demand is due to replacement and the remainder isrepresented by a concave demand curve.

6. Shadow Prices

(a) SEB Investment: Standard conversion factor of 0.80 was used to revaluecosts in border prices.

(b) SEB 0 & M Costs: The assumption of 80% labor and 20% materials content(valued at the shadow wage rate and using standard conversion factor) yieldsa weighted conversion factor of 0.70.

(c) Marginal Cost of Electricity: Recent SEB and REC calculations to deterninemarginal cost of power supply at 11 kV (the point of entry for the schemes) wereutilized. Assuming that the cost elements entering into total marginal cost areadequately represented by the basket of goods underlying the calculation of thestandard conversion factor, a conversion factor of 0.80 was used.

-93- ANNEX 29Page 3 of 3

(d) Private Cost and Benefits: Private investment and the cost of diesel fueland lubricant were valued at border prices, the remaining cost and benefit itemswere converted to border prices using the standard conversion factor. For ruralunskilled labor, the shadow/market wage ratio of 0.6 was used.

(e) Discount Rate: The discount rate (the opportunity cost of capital) usedto annuitize capital costs is 10%, as specified in the REC economic analysis.

7. Economic Rate of Return: Results

(a) Sample Proposed REC Schemes (OA, OB, and SPA): The economic rate ofreturn, net present values and sensitivity to marginal energy cost of each ofnine sample proposed schemes are shown in Table 2.

(b) Sample Actual Schemes: Four schemes under implementation for the past fiveand nine years and two SI schemes were analyzed. The four schemes include OAschemes in Madhya Pradesh and Tamil Nadu, and OB schemes in Rajasthan andMaharashtra, and SI schemes in Maharashtra and Tamil Nadu. The benefit streamused in SI schemes is the marginal cost-based value of loss savings due tosystem improvement under the assumption of no demand growth. Cost and benefitsare derived from REC economic analysis. The economic rate of return and itssensitivity to marginal energy cost, and net present values of each actualscheme are shown in Table 3.

(c) Typical OA, OB and SPA schemes: Costs and benefits of the schemes arebased on an all-India average provided by REC. The rates of return, the netpresent values, and sensitivity to marginal cost are shown in Table 4.

8. Financial internal rate of return

The cost streams consist of SEB investment cost, recurrent cost in SEBinstalled facilities and accounting cost of electricity at 11 kV. The tariffrevenue represents the benefit stream. The net present value of the schemes ata range of discount rates from 8% to 12%, the financial internal rate of returnand its sensitivity to energy cost and tariffs are shown in Table 5.

TABLE 1

Characteristics of Sample, Actual and Average Schemes

Capital Units Marginal Accouutingj Number of Connections (Tariff Rates)Scheme Cost Consumed Energy CosV Energy Cost2/l D State

(Rs. Mill) (MU) (P/kWh) (P/kWh) Agriculture Industrial Domestic StreetSTate Others TotalCommercial Lihtin7 Tube-Well O

OA/Andhra Pradesh 5.3 3.6 93 16.79 67 36 (20 HP) 2,284 864 _ _ 3,39516 P/kWh 50 P/kWh (D) 43 P/kWh (D) 42 P/kWhRs 2/HP/Month 144 (3 HP) 90 P/kWh (C) 42 P/kWh

__ __ _ _ _4L5 P/kWh _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _OA/Uttar Pradesh 5.2 98 23.98 435 130 1,700 320 565 3,150

Rs 14/HP/Month 41 P/kWh 45 P/kWh 45 P/kWh _ 45 P/kWh15.1 5.2 47 18.32 3,010 200 3,600 (D) 2,050 _ _ 9,760

OA/Tamil Nadu-/ 14 P/kWh 34 P/kWh 42 P/kWh 30 P/kWh900 (C)

____________ __________ ~78 P/kwh1/ 1. 4.8 7 7 15.43 1.350 82 620 700 -2,752

OA/Madhya Pradesh-/ 11 7 4 7 77 1679 16 P/kWh 22 P/kWh 30 P/kWh 31 P/kWh

6.7 ~~4.7 9316.79 328 82 3,664 700 -- 4,774OB/Andhra Pradesh 16 P/kWh 45 P/kWh 40 P/kWh 42 P/kWh

Rs 2/HP/MonthOB/Uttar Pradesh 9.1 7.0 98 23.98 190 150 5,900 700 30 370 7,340

____________ _____________ Rs 14/HP/Month 41 P/kWh 45 P/kWh 45 P/kWh Rs 480/HP/Year 45 P/kWh9.8 7.5 75 14.28 1,565 135 3,250 1,400 _ _ 6,350

OB/Maharashtra 1/ 75 22 P/kWh 25 P/kWh 30 P/kWh (D) 30 P/kWh___________ ____________ ____________ ~~~~ ~~~40 P/kWh (C)

5.1 4.2 53 13.10 690 73 1,660 132 2,555OB/Rajasthan- 31 P/kWh 30 P/kWh 38 P/kWh (D) 33 P/kWh

_____ ____ _ __ ____ ___ _____ ____ _ __ ____ ____ ____50 P/kWh (C)3.3 1.7 47 - 11.42 600 950 _ 1,550

SPA/Haryana 20 P/kWh 40 P/kWh____________ ___________Rs 2/HP/Month

5.1 2.6 93 16.79 800 3 180 100 - 1,083SPA/Andhra Pradesh 16 P/kWh 45 P/kWh 43 P/kWh 42 P/kWh

Rs 2/HP/Mouth 90 P/kWhSPA/Mharahtra2.4 09 - 75 14.-28 600 73 ~ 70 90 -- 965

SPA/Maharashtra 2.4 0.9 75 14.28 22 P/kWh 25 P/kWh 30 P/kWh 30 P/kWh

SPA/Mahdya Pradesh 5.2 1.9 77 15.43 850 30 880__________________ ___________ ~~~~~~~~~~16 P/kWh 22 P/kWh

2.5 1.1 36 11.79 129 _ 175 (D) _ _ - 329SPA/Orissa 17 P/kWh 32 P/kWh

25 (C)

- - __ __ __52 P/kWh _ _ _ _A A 8.5 5.6 68 15.42 1.061 92 2,202 237 3,592

Average______ OA__________ .20 P/kWh 40 P/kWh 35 P/kWh 35 P/kWhAverage OB 7.8 6.6 68 15.42 838 164 1,741 268 3,011 _

Average 08 ~~~~~~~~ ~ ~~~~~~~~~ ~~~20 P/kWh 40 P/kWh 35 P/kWh 35 P/kWh _________ _________

Average SPA 3.7 1.6 68 15.42 596 8 320 38 P/W 962 o20 P/kWh 40 P/kWh 35 P/kWh 35 P/kWh o____

1/ Actual Scheme

2/ REC estimates at time of appraisal

-95- ANNEX 29Page 5 of 8

TABLE 2

Economic Rate of Return and Net Present Value of Sample Schemes

A. Economic Rate of Return:

*Sample 1/ 2/ 3/ 4/5 6Scheme Case 1-/ Case 2-/ Case 3- Case 4-/ Case 5-_ Case 6/

OA/Andhra Pradesh 74.6 None 23.8 None 48.9 36.4

OA/Uttar Pradesh 38.4 None None None 17.3 None

OB/Andhra Pradesh 33.8 None 5.3 None 20.4 13.5

OB/Uttar Pradesh 36.1 None 10.5 None 24.9 18.4

SPA/Haryana 117.3 -2.4 47.0 22.4 77.7 61.4

SPA/Andhra Pradesh 42.5 None 4.5 None 23.3 12.3

SPA/Maharashtra 72.2 3.1 36.5 19.3 53.9 45.1

SPA/Madhya Pradesh 50.2 None 18.2 3.0 33.2 25.5

SPA/Orissa 33.7 None 12.0 -1.6 22.7 17.3

B. Sensitivity to Marginal Energy Cost and Present Value (Base case 5 only):

Sample Sensitivity to Net PresentScempe Mar in l Energy Cost (Case 5) Value at (Rs 1000)

+50% +25% -25% -50% 8% 10% 12%

OA/Andhra Pradesh 19.5 34.4 63.4 78.2 11,909 8,884 6,716

OA/Uttar Pradesh None None 37.8 55.8 2,107 1,351 815

OB/Andhra Pradesh None 8.3 31.0 41.5 6,076 3,951 2,466

OB/Uttar Pradesh 4.2 16.1 32.7 39.9 15,952 10,732 7,096

SPA/Haryana 55.9 66.3 90.0 103.5 13,540 10,747 8,682

SPA/Andhra Pradesh None 9.6 37.7 53.5 5,693 4,078 2,903

SPA/Maharashtra 38.5 46.1 62.0 70.4 8,800 6,820 5,366

SPA/Madhya Pradesh 15.4 24.0 43.0 53.7 8,132 5,966 4,387

SPA/Orissa 13.4 18.0 27.4 32.3 2,959 2,251 1,734

1/ Case 1: Maximum value of benefits.2/ Case 2: Minimum value of benefits.3/ Case 3: Average value of benefits (linear demand curve).4/ Case 4: Concave demand curve.5/ Case 5: 50% due to replacement and the remainder represented by a linear demand

curve.6/ Case 6: 50% due to replacement and the remainder represented by a concave

demand curve.

-96- ANNEX 29E'age 6 of 8

TABLE 3

Economic Rate of Return and Net Present Value of Actual Schemes

A. Economic Rate of Return:

ActualScheme Case 1 Case 2 Case 3 Case 4 Case 5 __Case 6

OA/Tamil Nadu 98.1 None 31.4 None 63.7 47.8

OA/Madhya Pradesh 29.2 None 4.5 None 21.4 13.2

OB/Maharashtra 72.9 None 24.0 -7.4 46.7 35.0

OB/Rajasthan 67.9 None 33.6 15.9 50.5 42.0

B. Sensitivity to Marginal Energy Cost and Present Value (Base case 5 only):

Actual Sensitivity to Net PresentScheme Marinal Energy Cost (Case 5) Value at (Rs 1000)

+50% +25% -25% -50% 8% 10% 12%

OA/Tamil Nadu 26.8 46.2 81.3 99.6 51,165 38,304 29,165

OA/Madhya Pradesh 10.2 16.5 25.5 29.3 8,860 5,806 3, 648

OB/Maharashtra 19.5 32.9 61.3 77.1 21,000 15,548 11,663

OB/Rajasthan 37.3 43.9 57.2 63.9 2,941 1,761 949

C. SI Schemes-/

Economic Rate of Return and Net PresentScheme Sensitivity to Mar inal Cost Value at (Rs 1000)

Base +50% +25% -25% -50% 8% 10% 12%

-SI/Tamil Nadu 42.7 57.0 50.1 34.7 25.6 60,564 45,948 35,358

SI/Maharashtra 19.1 26.2 j_22.8 14.9 9.9 7,307 4,915 3,198

.1/ Marginal cost-based value of loss savings is the benefit stream.

ANNEX 29Page7 of 8

TABLE 4

Economic Rate of Return and Net Present Value of Average Schemes

A. Economic Rate of Return:

AverageScheme Case 1 Case 2 Case 3 Case 4 Case 5 Case 6

OA 145.8 None 25.6 None 69.8 45.3

OB 45.8 None 3.3 None 27.3 17.5

SPA 100.1 None 30.1 5.5 59.9 44.0

B. Sensitivity to Marginal Energy Cost and Present Value (Base case 5 only):

Average SSensitivity to Net PresentScheme Marginal Energy Cost (Case 5) Value at (Rs 1 000)

+50% +25% -25% -50% 8% 10% 12%

OA 24.1 46.6 95.6 125.5 16,596 12,889 10,194

OB None 13.4 38.7 49.8 7,421 5,392 3,934

SPA 34.4 46.6 74.5 90.5 10,261 8,060 6,437

TABLE 5

Financial Internal Rate of Return and Net Present Value

Scheme Internal Rate of Return Net Present Value (Rs 1,000) atBase Sensitivity oEnergy Cost Sensitivit to Tariff

Case -50% -25% +25% +50% -50% -25% +25% +50% 8% 10% | 12%

OA/Andhra Pradesh 13.1 18.6 15.9 10.1 6.8 None 5.0 19.9 26.2 1,916 954 282

OA/Uttar Pradesh 1.8 15.2 9.6 None None None None 11.6 18.6 -1,500 -1,634 -1,699

OA/Tamil Nadu / None 7.5 -7.7 None None None None -11.9 6.2 -14,952 -12,829 -11;223

OA/Madhya Pradesh-/ None -5.8 None None None None None -8.9 -1.4 -8,922 -8,187 -7,572

OB/Andhra Pradesh 9.4 13.4 11.5 7.1 4.6 -16.3 3.0 14.3 18.8 817.8 -311 -1,068

OB/Uttar Pradesh 5.1 11.1 8.4 0.7 -9.4 None -6.2 10.7 15.0 -1,873 -2,619 - -3,091

OB/MaharashtraJ 2.2 8.3 5.5 -2.3 -11.5 None -9.5 8.0 12.7 - -3,950 -4,133

OB/Rajasthan- 6.8 11.2 9.1 4.2 1.0 None -0.2 11.8 16.1 -458 -980 1,312

SPA/Haryana 1.7 6.3 4.1 -1.2 -5.3 None -6.8 6.7 11.0 -1,405 -1,572 -1,678

SPA/Andhra Pradesh None 0.1 -5.3 None None None None -3.5 2.2 -4,733 -4,517 -4,325

SPA/Maharashtra 4.3 7.7 6.1 2.3 0 None -2.3 9.1 13.3 -641 -828 -951

SPA/Madhya Pradesh -11.0 -0.6 -4.1 None None None None -1.8 2.6 -4,223 -4.107 -3,991

SPA/Orissa None -4.8 -12.4 None None None None -8.3 -2.0 -2,319 -2,192 -2,083

Average OB -27.8 2.7 -2.6 None None None None 0.64 5.3 -4.999 -4,673 -4,394

Average OA -7.5 3.7 -0.6 None None None None 1.5 7.0 -5,243 -5,004 -4,772

Average SPA None -7.2 -2.1 None None None None -4.7 0.6 -3,340 -3,192 -3,060

1/ Actual Scheme.

None stands for value highly negative.

jU

-99-

ANNEX 30Page 1 of 5

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Development of Average Tariffs for Domestic and Industriall. Consumers 1977/78 - 1981/82

Average 1977/78 (p/kWh) Average 1981/82 (p/kWh)Cons.category/ Base Duty/ Fuel Base Duty/ FuelState tariff tax surcharge Total tariff tax surcharge Total

Domestic-/

Andhra Pradesh 40 - - 40 45 - - 45

Assam 45 3 - 48 57 3 - 60

Bihar 40 7 - 47 51 7 - 58

Gujarat 30 7 - 37 38 7 13 58

Haryana 25 10 - 35 30 10 - 40

Earnataka 38 5 - 43 42 5 - 47

Kerala 38 3 - 41 35 4 - 39

Madhya Pradesh 30 7 - 37 33 7 - 40

Naharashtra 31 5 - 36 33 5 - 38

Orissa 28 5 - 33 32 5 - 37

Punjab 28 10 - 38 42 8 - 50

Rajasthan 38 6 - 44 40 6 - 46

Tamil Nadu 35 - - 35 45 - - 45

Uttar Pradesh 41 2 - 43 50 2 - 52

West Bengal 45 3 - 48 48 3 - 51

Bombay Suburban 14 6 9 29 24 6 26 56

Average domestic 40 48

Industrial-/

Andhra Pradesh 23 - - 23 47 - - 47

Assam 19 - 10 29 55 - - 55

Bihar 20 2 8 30 40 2 8 50

Gujarat 17 3 6 26 36 5 12 53

Haryana 14 6 - 20 24 7 - 31

Karnataka 10 2 - 12 29 2 - 31

Kerala 12 3 - 15 16 4 - 20

Madhya Pradesh 15 2 7 24 30 3 16 49

Maharashtra 15 1 6 22 33 3 10 46

Orissa 14 5 1 20 27 11 2 40

Punjab 15 4 - 19 34 5 - 39

Rajasthan 18 1 - 19 32 2 - 34

Tamil Nadu 25 3 - 28 30 3 - 33

Uttar Pradesh 15 1 8 24 41 2 5 48

West Bengal 20 2 5 27 39 1 17 57

Bombay Suburban 16 1 9 26 31 4 24 59

Average industrial 23 43

1/ Lights and fans, 30 kWh/month.2/ Heavy industry, 5,000 KW, 60g LF.

2. Electricity Tariffa vs. LonE-Run Marginal Cost (LRMCC) (paisa/Kwh)

Average tariffs in force C eo

by March 1981 /Average Revenue- Il/IIC estimate f Y81 2

Average FY82 SEEBs where indus-

SEB Pomesic Inustr Agriultue r~8 ___ _______ _____ Average LRMC at 11 kV in trial tariffSEP Diomesti8c Industr2 Domestic Industry Agriculture Sales-weighted rural areas 4/ approaches LRMC

Andhra Pradesh 43 39 20 37 40 110 30-40 100-120 68

Assam 51 32 18 | .a. n.a. n.a. -. a. n.a. n.a. 72 n.a.

Bihar 53 37 7 43 50 110 35 90 45 79 x

Gujarat 42 40 33 40 52 90-100 40-45 90-100 59 78 x

Haryana 40 39 31 30 35 80-90 35-40 60-70 55 n.a. x

Karnataka 50 25 22 29 31 n.a. n.a. n.a. n.a 65 n.a

Kerala 39 18 13 24 25 95-100 30-35 70-80 48 90

Madhya Pradesh 40 33 25 40 41 110 35-40 110-120 53 77 x

Maharashtra 38 33 30 28 36 140-200 35 100 72 74 x

Orissa 37 34 18 32 33 200 35-40 15-202-/ 52 70 x

Punjab 42 21 13 23 n.a. 140-150 30-35 25-30- 46 75

Rajasthan 44 25 21 28 37 75-80 35-40 75-80 55 79

Tamil Nadu 38 33 16 31 31 80-]00 50-60 80-100 72 79

UP 50 41 28 36 39 130-140 40-50 80-100 71 85 x m

WB 51 45 35 41 43 150 35 100-130 65 66 x 0 o

Average 44.4 33 22 33 38 121 38 82 63 6 76

US ~ 4.9 3.7 2.4 3.7 4.2 13.5 4.2 9.1 7 . 8.4

1/ Including fuel surcharges and duties/taxes.2/ From available SEB studies, 1977-81, updated.3/ Off-peak use only.4/ REC estimate.5/ CEA estimate.6/ Sales-weighted average.

n.a. = not available.

March 1982

ANNEX 3 ,-101- Page 3 0

3. Tariff Systems: Flat Rate per HP vs. Metered Tariffs

In the States where the flat rate system has been adopted or is beingcontemplated, the main justifications given have been as follows:

(a) reduction in administrative costs--i.e. billing, calculations,ledgering, collections, audit;

(b) simplification of the billing procedure, elimination ofsupervision problems such as the need to check on meterreaders, malpractices, etc.

(c) elemination of tampering with meters, and meter readings byunscrupulous consumers and employees;

(d) the problems of non-availability of meters, wires, insulators,non-recording and faulty meters as well as procurementof meters would be eliminated; and

(e) the unwillingness of the States to increase the rates chargeableto agricultural consumers increases the need for the SEBs toraise their revenues through other means such as the reductionin administrative costs.

Such short-run benefits are negated by possible short-run direct revenuelosses. The table below, shows that the financial impact of the unmeteredversus metered system in Karnataka with 1979/80 as a reference year, is nega-tive. It is argued, however, that the benefits due to savings on investments asa result of not metering new pumpsets would compensate the revenue loss of someRs 8.9 million. The fact remains that the revenues of the SEBs are inadequate,and in this case would even be less under the unmetered system as indicated bythe figures from Karnataka. In the long run, a flat rate system may result in anumber of problems. These problems (involving not knowing the quantity ofenergy consumed by pump sets) would render the assessment of line losses impos-sible. Assessment of the trend in energy consumption for future revision ofcharges, even if possible, would become difficult and/or costly if energy metershave to be installed at the feeding transformer points.

The flat rate system as opposed to metering has in most cases resultedin all pumpset consumers having to pay the fixed charge per HP installed,irrespective of the energy actually consumed by the individual consumer. Smallfarmers, it has been shown, consume much less energy than big farmers, but inmost cases would have to pay the same charges per HP. The prevailing rate inKarnataka as recommended by the Government is Rs 50/HP upto 10 HP. The actualaverage monthly energy consumption by small farmers is 100 units and, at the1978 tariff of 23 paise per unit for the first 200 units, the small farmers paidRs 276 per annum for energy. On the other hand, the actual average monthlyconsumption of energy by big farmers is about 700 units. At the prevailing(1978) tariff of 23 paise per unit for the first 200 units and 20 paise per unitfor consumption in excess of 200 units, big farmers paid Rs 1,752 per annum.

-102- ANNEX 30Page 4 of 5

With the prevailing flat rate of Rs 50/HP installed, a small farmer with a 3 HPmotor would pay Rs 150 per annum. While this is lower than the 276 he had topay under the metered system, he does not benefit to the same extent as a bigfarmer who owns, say, a 5 HP set and has to pay Rs 250 per annum as compared toRs 1,752 that he had to pay under the metered system.

Financial Implications of Metered vs.Unmetered Systems for Irrigation Pump in Karnataka

(Reference Year 1979/80)

A. (Rs. in Millions)Metered System Unmetered System

Energy Charges 66.4 50.0Meter Hire 3.4 -

69.8 50.0

Less Direct Recurring Costs

1. Meter reading, billing,calculations, etc. (-8.6) -1.7

2. Cost of energy lost due tometer running (-3.0)

3. Meter repair, maintenance,servicing, etc. (-1.0) _

NET REVENUE 57.2 48.3

Revenue Loss due to Unmetering 8.9

B. Savings on Investment on FutureEnergisation of 20,000 IrrigationPumps/Year due to Unmetering

Meter 4.0Meter Board 1.4Sealable cutouts 0.74th (Neutral) Squirrel conductor 11.2Pin Insulator 0.6Strain Insulator 0.1Labor 0.7

18.7

-103- ANNEX 3QPage 5 of 5

Notes: (1) Revenues for metered system reflects actual 1979/80 receiptsby KEB based on existing tariffs and consumption.

(2) Revenues for unmetered system calculated on the basis of therecommended flat rates per HP installed taking into accountthe existing number of pumps. The flat rates as set (seeAnnex I) results in even lower costs to consumers as could beseen above.

(3) Energy conservation due to metering is not taken into account.

(4) Unmetering results in direct loss of revenue to KEB which it isexpected would be offset by the benefits from the release ofsavings on investment due to unmetering.

Source: "A Comparative Cost Analysis Study of Metered and Unmetered Systemsfor I.P Sets", KEB Report No. M(M)12/80/81, August 9, 1980.

ANNEX 31-104--

INDIA

THIRD RURAL ELECTRIFICATION PROJECT

Selected Documents and Data Available in the Project File

A. Selected Reports and Studies on the Rural Sub-sector

A.1 The Institute of Economic and Marketing Research: An Assessment of LoadDemand and Employment Potential (A case study in selected rural areas),1979.

A.2 Small Industry Extension Training Institute (Hyderabad): Impact ofElectrification on Rural Industrial Development.

A.3 S.V.R. Rao: Rural Electrification: Its relevance to Country's Development,1981.

B. Selected Reports and Studies Relating to the Project

B.1 Cost savings calculations for different consumer categories by REC.

B.2 Collection of REC economic appraisals (three average schemes, eighteensample schemes, and three operational schemes).

B.3 REC Project Report on a System Improvement Scheme in Tamil Nadu.

B.4 Project Report of Rural Electric Cooperative Society in Sircilla(A.P.) and Manasa District Mandsaur (M.P.).

B.5 Cost-Benefit Analysis of Rural Electrification Schemes prepared byConsultants.

C. Working Papers

C.1 Financial and Economic Cost and Benefit Streams of Sample, Averageand Actual Schemes.

C.2 Computer Output of Economic and Financial Internal Rates of Returnand Sensitivity Analysis for Schemes.

C.3 REC Regional Office Staff Structure.

C.4 REC Appraisal Report Format.

C.5 Memorandum to REC Board on New Fonomic Viability Criteria.

C.6 REC Monitoring of Schemes.

C.7 SEBs' Organizational Setup for RE.

C.8 Achievement of Phased Scheme Targets, Schemewise.

C.9 Economic Analysis of RE Schemes.

C.10 Agricultural Tariff Analysis.

C.ll Technical Analysis of RE

October 1981

IBRD 15858R- '-._ U.S. $ U.S.S.R. -S 800 OCTOBER 1981

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of Corol tTHIRD RURAL ELECTRIFICATIONt / > ~~~Ape,ox-nnae Lire of Control

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