Report and Recommendation of the President to the Board of Directors

Project Number: 32298 February 2007

Proposed Multitranche Financing Facility India: Madhya Pradesh Power Sector Investment Program

CURRENCY EQUIVALENTS (as of 28 February 2007)

Currency Unit – Indian rupees/s (Re/Rs)

Rs1.00 = $0.0226

$1.00 = Rs44.22

ABBREVIATIONS

ADB – Asian Development Bank CDM – clean development mechanism CEA – Central Electricity Authority CMD – chairman and managing director CO2 – carbon dioxide CSP – Country Strategy Programme DFID – Department for International Development of the United Kingdom DISCOM – distribution company DISCOM-C – Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Limited DISCOM-E – Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited DISCOM-W – Madhya Pradesh Paschim Kshetra Vidyut Vitaran Company Limited EA – executing agency EARF – environmental assessment and review framework ECF Energy Conservation Fund EIRR – economic internal rate of return EMP – environmental management plan EPA – Environmental Protection Agency CERC – Central Electricity Regulatory Commission FFA – Framework Financing Agreement FIRR – financial internal rate of return FMA – Financial Management Assessment FRP – Financial Restructuring Plan FY – fiscal year GDP – gross domestic product GENCO – Madhya Pradesh Power Generating Company Limited GOMP – Government of Madhya Pradesh GRC – grievance redress committee HVDS – high-voltage distribution system ICB – International Competitive Bidding IEE – initial environmental examination IPDF – indigenous peoples development framework IPP – independent power producer LIBOR – London interbank offered rate MFF – multitranche financing facility MOP – Minister of Power MP – Madhya Pradesh

MPPSDP – Madhya Pradesh Power Sector Development Program

MPSEB – Madhya Pradesh State Electricity Board MPERC – Madhya Pradesh Electricity Regulatory Commission

MIS – Management Information Systems MYT – Multi Year Tariff NEP – National Electricity Policy O&M – operation and maintenance OCR – ordinary capital resources PFR – periodic financing request PMU – Project Management Unit PPA – power purchase agreement PPP – Private Public Partnership RF – Resettlement Framework RP – Resettlement Plan SCADA – Supervisory Control and Data Acquisition TRADECO – Madhya Pradesh Power Trading Company Limited TRANSCO – Madhya Pradesh Power Transmission Company Limited WACC – Weighted Average Cost of Capital

WEIGHTS AND MEASURES

GWh – gigawatt-hour (1,000 megawatt-hours) ha (hectare) – Unit of area km (kilometer) – 1,000 meters kV – kilovolt (1,000 volts) kW – kilowatt (1,000 watts) kWh – kilowatt-hour MVA – megavolt-ampere(1,000,000 volt-amperes) MW – megawatt (1,000 kilowatts) MWh – megawatt-hour VA – Volt-ampere

NOTES

(i) The fiscal year (FY) of India and its agencies runs from 1 April to 31 March of the following year. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2006 ends on 31 March 2006.

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

Vice President L. Jin, Operations Group 1 Director General K. Senga, South Asia Department (SARD) Director T. Kandiah, Energy Division, SARD Team leader N. T. Anvaripour, Senior Energy Specialist (Finance), SARD Team members M. Canonica, Energy Specialist, SARD I. Caetani, Social Development Specialist, SARD A. Djusupbekova , Senior Counsel, Office of the General Counsel V. Karbar, Project Implementation Specialist, India Resident Mission D. Millison, Senior Energy Specialist, SARD N. Sakai, Energy Specialist (Private Participation), SARD L. B. Sondjaja, Energy Specialist, SARD

CONTENTS Page

MULTITRANCHE FINANCING FACILITY AND INVESTMENT PROGRAM SUMMARY i

MAP xiii

I. THE PROPOSAL 1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1 A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 3

III. INVESTMENT PROPOSAL 12 A. Impact and Outcome 12 B. Outputs 12 C. Technical Justification and Selection Citeria 13 D. Special Features 14 E. Investment Program and Financing Plan 15 F. Implementation Arrangements 16

IV. BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 18 A. Technical Analysis 18 B. Financial Analysis 19 C. Financial Management 19 D. Past and Projected Financial Performance 20 E. Economic Analysis 21 F. Environmental Analysis 21 G. Social Assessment 22 H. Poverty Assessment 23 I. Potential Risks 23

V. ASSURANCES 24 A. Financial 24 B. Commercial 24 C. Human Resources 25 D. Safeguards 25

VI. RECOMMENDATION 27

APPENDIXES 1. Design and Monitoring Framework and Sector Road Map 27 2. Power Sector Reforms, Restructuring, and Capacity Development 35 3. Power Sector Assessment 39 4. External Assistance to Power Sector 45 5. Detailed Cost Estimates 46 6. Investment Program Implementation Structure and Readiness 50 7. Investment Program Implementation Schedule 53 8. Procurement Plan 54 9. Financial Analysis of Tranche 1 and Tranche 2 59 10. Financial Management 63 11. Past Financial Performance and Projections for Sector Companies 64

12. Economic Analysis of Tranche 1 and Tranche 2 68 13. Summary Initial Environmental Examination 73 14. Summary Poverty Reduction and Social Strategy 81 15. Summary Resettlement Plan 84

SUPPLEMENTARY APPENDIXES (available on request) A. Tariff Structure B. Energy Efficiency and System Loss Reduction C. Private Sector Participation D. Review of MP Program and Project Loan E. Financial Assessment F. Financial Management Assessment G. Past and Projected Financial Performance of Executing Agencies H. Economic Analysis I. Environmental Assessment Review Framework J. Short Resettlement Plans by Project Components K. Environmental Management Plan

FACILITY INVESTMENT PROGRAM SUMMARY Borrower India Classification Targeting classification: General intervention

Sector: Energy Subsector: Transmission, distribution, energy efficiency, and energytrading Themes: Sustainable economic growth, governance, sector-wide capacity development, institutional and financial restructuring, and private sector development Subthemes: Fostering physical infrastructure development

Environment Assessment

Tranche 1 – Category B Tranche 2 – Category B

Overview India’s goal to establish universal power supply at an affordable

price by 2012 will require an estimated 100,000 megawatts (MW) of new generating capacity, as well as downstream networks to evacuate, transmit, and distribute the power. The main policy instrument in the power sector is the National Electricity Policy, which calls for power for all by 2012 (including rural electrification), reduced aggregate technical and commercial losses, better cost recovery, greater private sector participation, full development of hydropower, use of information technology for greater operational efficiencies, and protection of consumers’ interests. The Electricity Act, 2003 (the Act) is the cornerstone legislation for the power sector, providing the legal framework for the efficient development of the sector. The act is concerned primarily with unbundling of state electricity boards, open access, and competition. The act also mandates full metering for all consumer classes, multiyear tariff determinations, and tariffs set within 20% of the deemed cost of supply, as well as availability-based tariffs and 100% rural electrification. Reform of the Madhya Pradesh (MP) power sector has progressed within the policy and legislative framework of India. The Government of Madhya Pradesh (GOMP) has demonstrated its commitment to reforms and has made encouraging progress. In December 2001, the Asian Development Bank (ADB) approved the Madhya Pradesh Power Sector Development Program that combined program lending with physical investment financing that addressed key reform areas. It also increased delivery capacity of the power sector, including substantial reduction in transmission losses. With substantial support from ADB’s program loan, restructuring of the power sector was completed. Five companies were established for generation, transmission, and distribution. GOMP

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achieved a comprehensive financial restructuring that included injecting equity and taking over loan arrears in lieu of rural electrification loans and subsidies. Transmission losses, targeted through physical investments, were reduced to an internationally acceptable level. Throughout the reform process, the MP Electricity Regulatory Commission (MPERC)—an independent, state-level regulatory agency—adopted a realistic and supportive position through its regulatory mechanisms. To facilitate economic growth by increasing electricity supply to its urban and rural population, GOMP conducted a diagnostic assessment of earlier reforms and physical investments. Based on the diagnostic work, the challenges in the power sector can be summarized as follows: Generation. MP has suffered from chronic peak capacity and energy shortages in recent years. The peak deficit has exceeded 20% and the energy deficit consistently has been about 13% for the past 3 years. Installed capacity in or available to MP is about 6,300 MW, with about 3,000 MW owned and operated by the generating company. Generating capacity available to meet peak demand is significantly less than required to eliminate the energy deficit. Therefore, new physical investments, as well as renovation and modernization of existing generating facilities, are essential. Transmission. Since 2002, transmission circuit length has increased almost 14%, while transformation capacity has risen 41%. Transmission losses have been reduced to an acceptable level of about 5%, and availability of the transmission network has exceeded 98% for the past year. However, due to continued growth in demand, the transmission capacity is inadequate to serve peak demand. During 2006, the transmission system served the highest ever maximum demand of 5,780 MW. Peak demand is expected to grow on average at about 9% to 2012. The transmission network will require significant investment if capacity is to be increased to match this forecast demand growth. Distribution. GOMP policy targets 100% village electrification by 2008 and 100% household electrification by 2012. The distribution network needs significant investment to reach these targets. Loss reduction and reliability improvement are also sector policy imperatives for the distribution subsector. Losses for distribution companies exceed 35%, and power quality is poor due to undersized conductors, long low-voltage circuits, and overloading of distribution transformers. Private Sector Participation. GOMP recognizes the need for further private sector participation to meet the sector’s overall financing requirements and to enhance operational efficiencies. Through implementation of power sector reforms under the ADB-financed Madhya Pradesh Power Sector Development Program

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(2001), GOMP has created the enabling environment for private sector participation and public-private partnerships (PPP). However, private sector contributions have been slow to develop. The financial fragility of the sector is perceived to be the key impediment to private investment. Opportunities for private sector involvement include (i) electricity generation from renewable and nonrenewable resources, (ii) transmission network ownership and leasing, (iii) further distribution network franchising and leasing, (iv) bilateral electricity trading, and (v) maintenance contracting. Pilot distribution system franchising schemes have been implemented, and some minor maintenance functions have been outsourced. In generation, GOMP has proposals for independent power producer thermal projects in the next 5 years with a combined capacity of 12,000 MW, although the number of projects implemented is expected to be a small subset of this total. Capacity Constraints. ADB’s 2001 program loan included a capacity development component to address the policy environment. This assistance was successful, and GOMP has demonstrated the capacity to formulate and execute sector policy since 2001. However, the diagnostic assessment by GOMP demonstrated technical, commercial, financial, and management constraints in the new power sector companies. Key areas identified include design and implementation of a “backbone” enterprise resource planning system covering (i) billing and collection; (ii) finance and accounting; (iii) metering data management, (iv) management information systems; (v) maintenance management; (vi) materials management; (vii) project systems; (viii) human resources and e-mail solutions, together with the appropriate network infrastructure and support. Capacity development also is required to improve the companies’ internal audit and control capability. The constraint being addressed through a comprehensive functional support and capacity-building program. ADB and the Department for International Development of the United Kingdom (DFID) are partnering in capacity development. ADB and DFID jointly have supported the MP power sector since the initial stage of reforms. DFID is providing £18.5 million $35.2 million as of 21 September 2006) in technical assistance (£14.5 million) and financial assistance (£4million) covering 2006–2010. The DFID program under implementation across the sector emphasizes (i) mapping further reforms by supporting GOMP, (ii) capacity building in MPERC, and (iii) financial management and human resources development in all companies. In addition to these principal areas of work, socioeconomic impact studies also are being conducted. ADB has included an additional $10 million under the investment program for a selective capacity development program. This

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program focuses on implementation support of Supervisory Control and Data Acquisition (SCADA) systems in the distribution companies; and development of a trading and settlements support system, metering, and communications for the new trading company, whose future role is pivotal in the effective commercial operation of the reformed sector. In addition, ADB’s capacity development program will support energy efficiency activities and strategic PPP.

Sector Road Map and Investment Program Description

Key constraints, challenges, and opportunities identified through diagnostic work paved the way for defining a strategic framework, a new sector strategy, and action plans over the short to medium term. The action plans are sequenced and complement transactions involving the private and public sectors. These are encapsulated in a medium-term sector road map (2007–2012). The sector road map is linked to a comprehensive investment program covering physical investments and nonphysical interventions in further sector reforms, capacity development, fiduciary oversight and governance, knowledge management, safeguards, procurement, disbursements, project implementation, evaluation, supervision, monitoring, and reporting. Physical Investments. Reserve Bank of India forecasts a significant improvement in MP’s economic performance from 2007 to 2012, which is expected to drive strong growth in demand for electricity. The objective of full household electrification by 2012 is expected to generate further growth in electricity demand. Based on consistent growth in the national and state economy, and moderate increases in tariffs to bring them in line with the true cost of supply, unrestricted consumer demand for electricity in MP is forecast to increase by 7% from 2007 to 2012. With energy losses currently at about 41%, more than 6,000 MW of peak generation and network capacity will have to be added over the next 5 years to serve this demand. A coherent and realistic state and regional plan for expansion of generation capacity is in place with contributions from public and private financial resources. The need to transmit an additional 6,000 MW of peak power is the main driver of the investment program for the transmission and distribution systems. The investment program is predicated on building sufficient capacity to evacuate power from existing and planned power stations and substations, and delivering power reliability and efficiency to consumers. It also targets significant reductions in technical and commercial losses, reducing the requirement for additional capacity by more than 1,000 MW and returning to a capacity and energy surplus by 2011. The total investment program for the power sector is estimated to be $5.3 billion (2007–2012), with $3.0 billion needed for transmission and distribution. The financing plan involves the

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state government budget, as well as the private sector and institutions such as ADB. In this context, India requested ADB support for the investment program in the form of a multitranche financing facility (MFF). Such support provides a platform for financial and expert assistance, blending reform and capacity development with investments. ADB support will be extended for the transmission and distribution segments of the sector since a joint venture between state and central power utilities, private sector investments, and central-level generating projects (e.g., ultra mega power projects) are planned to eliminate the generation deficit. The impact of the transmission component will be further reductions in losses and increased capacity for electricity transmission to meet forecast demand growth. The impact of the distribution component will be reduced technical and nontechnical losses, improved voltage profiles, power quality and reliability, and more efficient revenue collection. The project component of the earlier ADB loan covered the transmission and distribution subsectors. The program component assisted GOMP in (i) implementing key policy reforms and establishing a policy framework, including a fully operational, independent state regulatory commission; (ii) unbundling the MPSEB into five companies; (iii) improving sector governance through more functional independence; and (iv) restructuring tariffs and issuing new tariff orders that allow revenue realization. Remaining policy issues are currently being addressed. The Investment Program will be a logical replication of the project component of the previous ADB loan, covering transmission and distribution subsectors by taking into account the interrelated nature of the subsectors. Subprojects are designed in a repeater nature in the transmission and distribution subsectors, and one set of project from each subsector is presented in the Report and Recommendation of the President. The executing agencies (EAs) have gained substantial experience from implementing the previous ADB project. The MFF is particularly well suited for the Investment Program because (i) the aim of the Investment Program is to support GOMP’s long-term objectives, as stated in the sector road map; (ii) the performance of the previous loan can guide the provision of subsequent loans, thereby offering proper incentives for implementation; and (iii) the MFF can offer the flexibility required for the Investment Program to support the participation of four companies with different levels of readiness. Nonphysical Investments. ADB is providing $10 million for capacity development in various areas to maximize the synergy with the DFID-funded capacity development program. ADB’s

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capacity development program will focus on implementation support of SCADA systems in the distribution companies; and developing a trading and settlements support system, metering, and communications for the new trading company, whose future role is pivotal in the effective commercial operation of the reformed sector. In addition, nonphysical investments will provide substantial support for the establishment of (i) an energy conservation fund and other energy efficiency initiatives (e.g., Clean Development Mechanism); and (ii) strategic PPP with the intention of achieving the requisite reduction in distribution losses and improving the quality of service to consumers.

Sector Investment and Financing Plan

Table 1: Power Sector Financing Plan, 2007–2012 Investment Program 2007–2012 $ Million % Investments Generation 2,300 43.1 Transmission 1,400 26.2 Distribution 1,600 30.0 Nonphysical Investments 40 0.7 Total Investments 5,340 100.0 Financing Sources Domestic Financial Institutions 2,585 48.8 Asian Development Bank 620 11.6 Department for International Development , UK 35 0.7 Private Investors 700 13.1 Internal Funds 800 15.0 Government of Madhya Pradesh 600 11.2 Total Funding 5,340 100.0

Sources: Asian Development Bank estimates. Table 2: Transmission and Distribution Financing Plan, 2007–2012 Financing Sources $ Million % Domestic Financial Institutions 1,345 44.8 Asian Development Bank 620 20.7 Department for International Development, UK 25 1.2 Private Investors 100 3.3 Internal Funds 610 20.0 Government of Madhya Pradesh 300 10.0 Total Funding 3,000 100.0

Sources: Asian Development Bank estimates Multitranche Financing Facility

India has asked ADB to extend financing of $620 million (included in the Country Operations Business Plan 2007-2009) over 8 years through an MFF for its power sector investment program. This financing represents 11.6% of the total financing plan and 20.7% of the financing plan for the transmission and distribution segment. The MFF will allow financing of individual subprojects, as projects and conditions warrant, by linking financing to project readiness, reforms, capacity, and work on various themes. The tentative implementation schedule of the MFF envisages five tranches covering transmission, distribution, and nonphysical

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investments. Due diligence in key areas, such as technical, economic, financial, and safeguards, has been completed for Tranche 1 and Tranche 2. It is underway for further tranches.

Framework Financing Agreement

India has entered into a financing framework agreement (FFA) with ADB. The FFA satisfies the requirements established in Appendix 4 of the Pilot Financing Instruments and Modalities. The FFA records the full set of warranties and representations of ADB operating policies and procedures on all crosscutting themes, covering safeguards, governance, anticorruption, financial management, procurement, and disbursement and subproject selection criteria. Before ADB accepts a Periodic Financing Request (PFR), India, MP, and sector companies will ensure full compliance with the terms and conditions of the FFA. The capacity development component will provide support if necessary. ADB teams will evaluate all funding requests, and will ensure that they adhere to representations made and will continue to do so. ADB teams will provide ongoing guidance to the authorities, and make available additional experts under the capacity development component, if needed. ADB staff will inform the Government of India (the Government), and report to Management, and the Board on the status of individual loans, including the performance on warranties and representations. Failure to comply with any of these automatically will hold back additional financing under the MFF.

Periodic Financing Requests

The MFF transaction is accompanied by two PFRs, one for Tranche 1 for transmission components and another for Tranche 2 for distribution components that are ready for implementation. PFR 1, Transmission Capacity Expansion. This component includes construction of (i) 2 circuit kilometers (cct-km) of 400 kilovolt (kV) and about 1,500 cct-km of 220 kV transmission lines across the state of MP; (ii) eight new 220/132 kV substations, with transformer capacity of 160 megavolt-ampere (MVA) each; and (iii) one new 400/220/132 kV substation with 315 MVA transformer capacity. PFR 2, Distribution Efficiency Enhancement. The distribution component will undertake (i) construction of high-voltage distribution systems in six distribution circles in the eastern distribution zone of MP, including conversion of about 7,400 km of low-voltage lines to high-voltage lines; (ii) remote metering of about 2,000 industrial consumers; (iii) metering of about 250,000 consumers; and (iv) renovation of the protection system at about 100 substations.

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Amount and Terms The MFF will provide up to $620 million, secured from the ordinary capital resources of ADB, with final terms and conditions to be established under individual loan agreements based on prevailing ADB policies. Pursuant to the FFA, the Government has submitted two PFRs to ADB totaling $151 million for Tranche 1 and Tranche 2 to finance transmission and distribution subprojects. Both PFRs are presented to the Board with the MFF and the FFA. Tranche 1 and Tranche 2 loans will have a principal repayment period of 20 years, not including a grace period of 5 years. However, each future tranche may be financed under terms different from the financing terms of previous or subsequent tranches. Financing will be made available under ADB’s London interbank offered rate (LIBOR)-based lending facility. The Government can choose from eligible currencies and interest rate regimes, which can change with each loan. Currency and interest rate swaps will be made available during the financing period. Repayment schedules can be structured to satisfy the needs of individual loans. Each tranche under the MFF would be at least $40 million, except for the nonphysical investments component, which would have a minimum loan amount of $5 million.

Allocation and Relending Terms

The Government will make loans available to GOMP on the same terms and conditions as the ones applicable to the Government. GOMP will onlend to sector companies, as the EA, with a 1 percentage point spread, through respective onlending agreements.

Retroactive Financing Retroactive financing may be possible under individual loans for

expenditures incurred 12 months before the signing of the corresponding loan agreement, with a ceiling of up to 20% of the loan amount, in accordance with the Board paper on Cost Sharing and Eligibility of Expenditures for Asian Development Bank Financing: A New Approach. The Government, GOMP, and EAs have been informed that approval of advance procurement action and retroactive financing does not commit ADB to financing any of the proposed subprojects. Each PFR will specify the nature of expenditure if retroactive financing is requested.

Period of Utilization Until 30 June 2015, with the last PFR submission by 31 December

2010. Estimated Project Completion Date

31 December 2014.

Executing Agencies and Implementation Arrangements

The EAs will be Madhya Pradesh Power Transmission Company Limited (TRANSCO), Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Limited (DISCOM-C), Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited (DISCOM-E), Madhya

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Pradesh Paschim Kshetra Vidyut Vitaran Company Limited (DISCOM-W), and the Madhya Pradesh Power Trading Company Limited (TRADECO).

The EAs will be guided by a coordinating committee chaired by the chairman and managing director of TRANSCO, who has extensive experience at major project delivery and loan disbursement through an earlier ADB loan. This approach will ensure the sharing of best practices within the state. The EA for the energy efficiency component will be identified in the future. The Government will be responsible for the implementation of the MFF and loans in accordance with the FFA and individual loan agreements. The Energy Department (ED) of GOMP handles overall investment program management in MP. Based on national policies, the Energy Department formulates state power sector policies, road map, and long-term investment plan. It also is responsible for creating an enabling environment for private sector investment in the state. The ED will monitor and evaluate the implementation of the approved investment program and report it to Ministry of Power. MPERC will take part in monitoring since it conducts due diligence for all investment proposals and reviews detailed project reports from the state power companies or private sector before warrant approval. Once an investment program is approved, the companies will implement and be responsible for it. They also will oversee professionally and efficiently the investment operations planned over the next few years. The staff of all power sector companies has acquired substantial experience, including management skills and systems in the previous ADB-financed project. Teams have been set up to conduct best practices in technical, financial, project management, procurement, and environmental and social safeguards. Evaluation, monitoring, and reporting systems will be part of the work.

Procurement Procurement to be financed under the MFF will be undertaken in

accordance with ADB’s Procurement Guidelines, (2006, as amended from time to time), and will be in line with ADB’s Environmental Assessment Guidelines (e.g., environmentally responsible procurement). International competitive bidding (ICB) will be used for supply and construction of the facilities being funded under the investment program (substations, transmission lines, equipment, and transformers, etc.). ICB will be utilized for supply contracts estimated to cost the equivalent of or more than $1 million. Limited international bidding or national competitive bidding will be used for supply contracts estimated at $250,000–

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$1 million, and shopping for contracts estimated at less than $250,000. Contract packages will be prepared to ensure maximum competition under ICB.

Consulting Services Consultants will be selected and engaged in accordance with

ADB’s Guidelines on the Use of Consultants (2006, as amended from time to time). Consulting firms will be chosen through international competition using the quality- and cost-based selection method. Individual experts may be recruited following ADB’s procedures for engagement of individual consultants based on resume submitted in response to specific terms of reference for the assignment.

Project Benefits and Beneficiaries of the Facility

The MFF is designed to benefit all grid-connected consumers with adequate and reliable supply of electricity. This would support the Government’s projections for growth in energy demand, as well as its plan to make affordable grid-based electricity supplies available to the entire population by 2012. Substantial investments in rehabilitation, augmentation, and expansion of the power transmission system will increase reliability of supply to the residential, agricultural, commercial, and industrial consumers within the state of MP. A secure and predictable electricity supply will enable social and economic benefits to materialize, and will ensure improved conditions for schools, hospitals, and other social services. At the state level, the economic and financial cost of supplying electricity will be reduced by directly addressing inherent inefficiencies. The investment program will enable urban and rural domestic consumers to receive a supply of electricity at an acceptable voltage level, and with minimal scheduled and unscheduled outages. Rural consumers in particular will see a significantly improved electricity supply, unaffected by the lengthy scheduled outages that are currently experienced. This will have positive outcomes for educational and social activities, and will open up opportunities for energy-dependent rural enterprises. Industrial and commercial consumers also will benefit from improved supply reliability and quality, thereby enhancing production and output and reducing equipment failures. In addition, the investment program will create short-term and long-term employment opportunities and tax revenues.

Risks and Assumptions The MFF is accompanied by some risks, particularly cost

overruns, commissioning delays, investment timing mismatches, and stalled sector reforms. Given the cost-plus tariff setting mechanism employed in MP and in other Indian states, cost overruns can be passed through to consumers. If tariff increases are substantial, the demand growth upon which the investment program is predicated could be constrained, undermining the

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economic and financial viability of investments. This risk is deemed to be small. Cost projections are thorough and conservative, and have been based on a basket of tender prices submitted over the past 12 months. Moreover, turnkey contracting will be used where appropriate, thereby transferring a large part of price and implementation risk to turnkey contractors. Investment

components are interrelated to some extent. Benefits expected to flow from one component might be reduced if commission delays are experienced in other components. Such risk will be contained and managed through contractual mechanisms that include provisions for liquidated damages when commissioning delays are the fault of contractors. Sufficient slippage provision will be built into the implementation program to minimize the risk of commissioning delays outside the control of contractors. TRANSCO’s experience in managing and disbursing major loans and capital programs provides further comfort. Capacity building and public policy reform are essential to the long-term growth and sustainability of the sector. The risk of a slowdown or reversal in the reform process is very unlikely. The Government and GOMP remain committed to the reform process as a secure and reliable power supply is viewed as a key enabler for economic growth and poverty reduction.

Warranties and Representations

MP has a well-defined power sector road map, a clear investment and capacity development program, and the people and institutions to deliver on the objectives and targets. The provision of ADB finance through an MFF requires an agreement on key warranties and representations, which are intended to ensure program success. The FFA captures critical provisions for ADB financing, including (i) subproject eligibility criteria; (ii) selection, and implementation, capacity building, safeguards framework; (iii) procurement and disbursement procedures; (iv) financial management and fiduciary oversight; (v) monitoring, administration, and reporting. ADB will provide direct support to the EAs responsible for program implementation, from headquarters and through the India Resident Mission. A program support office has been established that will coordinate specific implementation tasks, including procurement, subproject management, monitoring, and supervision. The office will comprise professional, experienced staff, especially in the areas of safeguards, financial management, administration, and reporting. Although an MFF can be a flexible instrument for the authorities, its viability requires a strong local presence and quality resources allocated to implementation. Each new financing request to be converted into a new loan will require an evaluation of the performance of the previous one. ADB will conduct periodic review missions, which will include due diligence on warranties and representations made to ADB. In addition, staff will report on any issues or problems faced by the authorities and the EAs under the program, and the remedial actions suggested to overcome them.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed multitranche financing facility (MFF) to India for the Madhya Pradesh Power Sector Investment Program (Investment Program). Design and Monitoring Framework is in Appendix 1.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

A. Background, Performance Indicators, and Analysis

2. India faces formidable challenges in achieving balanced infrastructure development, where the provision of adequate energy plays an essential role in reducing poverty through sustainable economic growth. The Government of India (the Government) has confirmed its “Power for All” initiative to provide universal power supply by 2012, which will require 100,000 megawatt (MW) of new generation capacity and related transmission and distribution facilities. Cognizant of the vast impact on the global environment and energy security, the Government developed the Integrated Energy Policy 1 . The policy encapsulates the vision to meet the demand for energy services of all sectors reliably with safe, clean, and convenient energy in a technically efficient, economically viable, and environmentally sustainable manner. The Integrated Energy Policy provides for specific measures, including (i) optimizing the power supply mix through greater use of indigenous hydropower resources and renewable energy; (ii) pursuing technologies that maximize energy efficiency, demand-side management, and conservation; and (iii) continuing related power sector reforms to control technical and commercial losses of the state transmission and distribution utilities, with the restructuring supported by the Accelerated Power Development and Reform Program. 3. The past poor performance of state electricity boards was a roadblock to private sector investment. In 2001, the Government adopted a program of unbundling, open access, tariff restructuring, and rationalization. An independent central regulatory body was established, and the formation of state-level regulatory bodies was made mandatory. The Electricity Act, 2003 was intended to improve governance in the power sector through continued institutional restructuring and improved management of sector entities to ensure long-term sustainability. Compulsory metering, open access to transmission systems, facilitation of power trading, lifeline tariff for the poor and rural consumers and rationalization of tariffs have been initiated. Separation of generation, transmission, and distribution has been made obligatory. The Central Electricity Regulatory Commission has prescribed detailed rules for cost accounting and allowable tariffs. Further, the Electricity Act, 2003 mandated full metering for all consumer classes, multiyear tariffs (MYT), tariffs to be within 20% of the deemed cost of supply by 2012, availability-based tariffs, and 100% rural electrification. 4. Power sector reforms (Appendix 2) in Madhya Pradesh (MP), which began in 2001, received additional impetus from the Electricity Act, 2003, and have accelerated in the past two years. The government of Madhya Pradesh (GOMP) has demonstrated its commitment to reforms and has made encouraging progress. In December 2001, the Asian Development Bank (ADB) approved the Madhya Pradesh Power Sector Development Program (MPPSDP), which had a $150 million program component and a $200 million project component. The objectives of the program component were to (i) establish independent regulation, (ii) improve sector governance through institutional and organizational actions, (iii) establish and begin operations of new sector companies, (iv) reduce system losses, and (v) increase the delivery capacity of the power system. With substantial support from ADB’s program loan, unbundling has been 1 Planning Commission, Government of India, 2006. Integrated Energy Policy. India

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completed, all sector companies have been given cost-reflective tariffs that will gradually move to full cost recovery, and capacity is being developed in all companies to operate in the evolving commercial and competitive sector. 5. Following the unbundling of the Madhya Pradesh State Electricity Board (MPSEB), five power sector companies have been incorporated: MP Power Generating Company Limited (GENCO), MP Power Transmission Company Limited (TRANSCO), and three distribution companies (DISCOMs2). GENCO has been vested with MP’s electricity generation assets and has taken over their operation. TRANSCO has become the sole transmission company in the state. The three DISCOMs have taken over the distribution and supply activities in three geographic areas (east, central, and west). In June 2005, the companies started to operate independently. The formation of the MP Power Trading Company Limited (TRADECO) was announced in June 2006 for the bulk procurement of electricity from generators in order to sell to DISCOMs. All power purchase agreements for which MPSEB was the purchasing counterparty have been transferred to TRADECO. To provide an avenue for sector companies to reach financial sustainability, GOMP undertook sector financial restructuring that included injecting equity and taking over loan arrears in lieu of rural electrification loans and subsidy arrears in 2005–2006. MPSEB will remain in place until the successor entities have built enough capacity to handle their own corporate affairs and financial management. 6. Throughout the reform process, the MP Electricity Regulatory Authority (MPERC), an independent, state-level regulatory agency formed in 1999, has adopted a realistic and supportive position through its regulatory mechanisms. In 2001, it issued its first tariff orders (Supplementary Appendix A) for all sector companies—offtake tariffs for GENCO, allowable costs and returns for TRANSCO, and uniform retail tariffs for DISCOMs. In September 2002, MPERC introduced a time-of-day tariff applicable to some classes of consumers. Between 2001 and 2004, a single 1-year tariff was ordered. In the revised tariff philosophy of December 2003, MPERC proposed to determine a full-cost tariff for all consumer categories with the objective of ensuring that the sector companies receive enough income to cover expenditures and provide a reasonable return on assets. In March 2006, MPERC passed the first MYT orders for generation and transmission covering 2007–2009. However, the distribution retail tariff order still covered a single year, 2007. The first multiyear retail tariff will cover 2008–2010. DISCOMs filed MYT applications on 31 October 2006 to be effective as on 1 April 2007. B. Analysis of Key Problems and Opportunities

7. The Government’s and GOMP’s main objective for the power sector is increasing electricity supply to its urban and rural population to facilitate economic growth. Based on diagnostic work undertaken by GOMP, achieving this objective in MP faces the following challenges (Appendix 3):

1. Sector Constraints

8. Generation. Installed capacity in or available to MP is about 6,300 MW, with about 3,000 MW owned and operated by GENCO. Less than 100 MW of net installed generating capacity has been added in MP in the past 5 years. However, plant utilization has increased from 63% in 2002 to more than 70% in 2006, which has helped in meeting the growth in energy demand during this period. Electricity demand is estimated to have grown at an average of 5%

2 Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company Limited (DISCOM-C), Madhya Pradesh Poorv Kshetra

Vidyut Vitaran Company Limited (DISCOM-E), Madhya Pradesh Paschim Kshetra Vidyut Vitaran Company Limited (DISCOM-W).

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over the same period, whereas actual sales have increased by more than 7% on average. The supply-demand balance is now critical. MP has suffered from chronic peak capacity and energy shortages in recent years. The peak deficit has exceeded 20% and the energy deficit consistently has been about 13% for the past 3 years. Annual energy demand is estimated to exceed supply by more than 13% in 2007, and is forecast to grow by approximately 7% through 2012. 9. Investments in capacity are planned to remove the peak deficit by 2012. The bulk of planned generation capacity expansion will be coal-fired thermal plants, reflecting the availability of coal to MP, relatively short project development cycle, and low development risk of coal-fired plants. Approximately 800 MW of additional hydropower capacity is planned, primarily as peaking plants. Development of planned generation expansion will be shared equally by the state, central, and private sectors. The current portfolio of MP state projects, which are under construction or in the planning phase, are all thermal-based. These are expected to increase the installed capacity by approximately 700 MW by the end of 2007. Private sector contributions will come through competitively bid and greenfield projects. Private sector projects are expected to be predominantly coal-fired thermal plants. MP will receive an allocation from the central sector and joint venture hydropower and thermal projects that are in development, including the 500 MW Omkareshwar hydropower project. MP also will receive an allocation of approximately 400 MW of new capacity from the Kawas and Gandhar gas-based projects. In addition, the Government is developing ultra mega power projects under tariff-based competitive bidding. These projects will meet the power needs of some states, including MP, through the transmission of power regionally and nationally. MP has consented to take 12,000 MW based on the power securing agreement with the Ministry of Power. 10. Transmission. Since 2002, transmission circuit length has increased almost 14%, while transformation capacity has risen 41%. Consequently, transmission losses have been reduced to an acceptable level of about 5%, and availability of the transmission network has exceeded 98% for the past year. However, transmission capacity within MP is inadequate to serve peak demand due to continued growth in demand. An (n-1) security level is used for transmission planning. 3 Investment in the transmission network has not matched the consistently high demand growth in recent years, which means that supply security is significantly less than (n-1) for parts of the transmission network—in other words failure of a major network component might necessitate load shedding. 11. Distribution. In broad terms, the distribution system is the primary bottleneck in electricity delivery in MP. It is characterized by high ratios of Low Voltage (LV) circuit length to Medium Voltage (MV) circuit length (about 64% in central and east zones, and 47% in west zone), overloaded power transformers (20% of all power transformers were overloaded at some stage in 2005), and overloaded distribution transformers (10% of all distribution transformers were overloaded at some stage in 2005). By most measures, the MP distribution system suffers from such a severe capacity shortage that it is incapable of providing adequate quality and reliability of supply to all customers. Safety is compromised on the networks of the three DISCOMs due to shoddy installation of equipment and inadequate maintenance practices. Losses arising from poorly executed connections at distribution transformers exceed standards.

2. System Losses

12. The high network losses (Supplementary Appendix B ) are a pressing energy efficiency issue for MP. Previous investments have successfully targeted transmission losses, which are 3 Supply can be maintained to all customers with the outage of one major item of equipment.

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now about 5%. As this is a reasonable level for a transmission network, only minor further improvements are anticipated. Distribution network losses in many areas are 40%–45%, which is unacceptably high. Comparing the DISCOMs with a notional international benchmark distribution network indicates that—after correction for different system characteristics, load factor, and energy supplied—a reasonable target for technical distribution losses in MP is about 19%. DISCOMs and MPERC have agreed on loss reduction targets, which form part of distribution tariff determinations. DISCOMs will be penalized financially if they fail to achieve these targets, and will be rewarded if they exceed the targets. The distribution component of the MFF will address losses, among other things. The high-voltage distribution system (HVDS) subproject in particular will impact directly technical and nontechnical losses. Other measures, such as consumer and distribution transformer metering, will help in identifying and isolating losses. As a result, MPERC will be able to more accurately measure and report on the technical performance of DISCOMs. Incorrect and manipulated meter reading for high-value customers is suspected of causing significant commercial losses, and remote metering of these customers will address the issue.

3. Private Participation

13. Through its National Electricity Policy (NEP)4, and in keeping with open access and other provisions in the Electricity Act, 2003, the Central Electricity Authority (CEA) has stated that private participation in the sector is desirable and is to be encouraged. GOMP has been cognizant of the need for further private sector participation to meet the sector’s financing requirements and to enhance operational efficiencies. ADB and GOMP has continued policy dialogue since processing the MPPSDP in 2001, and agreed that further private sector participation would be a critical medium-term objective. Through implementation of power sector reforms under MPPSDP, GOMP has created enabling environments for private sector participation and public-private partnerships (PPP). In 2005, MPERC defined the terms and conditions for intrastate open access in MP with the intention of further enabling private sector participation in the generation and retail subsectors (Supplementary Appendix C). Despite these initiatives, the private sector is not yet playing a major role in the MP power sector. The financial fragility of the sector is perceived to be the main impediment to private investments. ADB’s intervention has the potential improve the sector’s financial viability, so that the private sector increasingly will see investment reward as commensurate with risk and will begin to participate as intended under federal and state policy. 14. In generation, GOMP has proposals for independent power producer thermal projects in the next 5 years with a combined capacity of 12,000 MW, although the number of projects implemented is expected to be a small subset of this total. The first project is in the bidding phase, and 15 private investors have been short-listed. In addition, further opportunities in renewable energy generation—small to medium hydroelectric, wind, and biomass—abound. In transmission, opportunities for PPP include outsourcing operation and maintenance. In distribution, DISCOMs are piloting franchising schemes for rural distribution systems. They also are exploring a strategic partnership schemes in urban distribution systems for achieving the requisite reduction in distribution losses, as well as improving the quality of service to consumers. To this end, GOMP has started a scoping exercise with ADB involving potential investors and other stakeholders.

15. Energy efficiency initiatives are another area where PPPs might play a key role (Supplementary Appendix C). The private sector is expected to participate in the establishment of an Energy Conservation Fund (ECF) as financier, fund operator, and financing recipient. The 4 Ministry of Power. Government of India, 2005. National Electricity Policy. India.

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ECF could provide technical assistance for project development, as necessary. The fund also could help finance revenue-generating energy efficiency projects implemented mainly by the private sector and through PPP schemes, Energy Service Company (ESCOs), power developers, and other entities, including community-owned energy service providers. ADB’s direct participation would open the opportunity for additional credit enhancements in the form of partial credit guarantees, and cofinancing from new carbon and energy efficiency funds expected to be operational by 2007 and 2008. ADB participation in the fund also would add substantial value to the MFF proposal as it presents innovative financing, mobilizes private participation, and could capitalize on carbon credit opportunities. Design and operational procedures of the ECF, which are mandated under the Energy Conservation Act 2001, will be detailed following due diligence for Tranche 4 of the MFF.

4. Financial Sustainability of the Sector

16. Achieving financial sustainability of the sector is a key objective of GOMP power sector reforms. Sustainability currently is undermined by energy inefficiency, specifically the level of technical and nontechnical losses in the distribution subsector. In addition to reducing these losses, systematic billing and collection by distribution companies, payments of intercompany obligations, and timely remittance of subsidies by the Government are essential for the financial sustainability of the sector. 17. Before the sector reforms, MPSEB’s financial position was critical due to inadequate tariffs, nonremunerative investments in rural electrification schemes to meet social obligations, delays in tariff subsidy from GOMP, and high commercial and technical losses in the transmission and distribution networks. To meet cash flow requirements, MPSEB has been defaulting on payment obligations to its suppliers and lenders by reducing capital investments and pursuing suboptimal repair and maintenance practices. Following the unbundling of MPSEB in 2002, GOMP prepared a financial restructuring plan (FRP) with the objective of restoring the sector’s financial sustainability. Sector companies began operating independently in June 2005. In line with this, GOMP undertook financial restructuring of the sector, which included injecting equity and taking over loan arrears and rural electrification loans in lieu of subsidy arrears in 2005–2006. GOMP is updating the FRP to reflect the results of the financial restructuring and to map further reforms in the sector. However, shortfalls in sector revenues are likely to continue for next 3 to 5 years as a result of high distribution losses. In this context, targeted loss-reduction investments are critical to bring the cost of supply in line with average retail tariffs by the end of the Eleventh Plan (2008–2012), and to achieve sector profitability and eventually financial sustainability. 18. GOMP continues to extend subsidies to various customer groups, such as domestic consumers and small farmers (for irrigation). However, GOMP is reducing progressively the number of categories and the level of subsidies to be paid. Currently, power sector subsidies are reflected as a line item in the state budget. Sector companies collect development cess of 10 paisa per kilowatt-hour (kWh) and electricity dues on behalf of GOMP. Rather than pass these through to GOMP, they are set off against electricity tariff subsidies. In this way, subsidies are not paid upfront. Instead, the companies deduct subsidy payments before they remit the cash to the MPSEB. 19. MPERC is determining tariffs in compliance with the NEP of CEA. The tariff orders support the rationalization of operating costs and the commercialization of overall system operations. Most importantly, the tariff orders reflect the official viewpoint that electric power will be provided on a cost-of-supply basis, and that all consumers will pay for electric service. Tariffs include consideration of good governance, financial sustainability, distributive justice, economic

6

efficiency, and fair pricing. They also are consistent with ADB guidance. In 2006, MPERC passed a distribution and retail tariff order for 2007, as well as the first MYT order for generation and transmission covering 2007–2009. MPERC allowed TRANSCO to base its tariff on full cost recovery of loan capital, depreciation, return on equity, operation and maintenance expenses, administrative and general expenses, repairs and maintenance expenses, interest on working capital, MPERC fee, and income taxes. With the proper implementation of the tariff policy, TRANSCO is projected to maintain profitability, while DISCOM-E is expected to achieve profitability by 2008.

5. Capacity Development

20. The early stages of reform led to the creation of successor companies that have assumed operating responsibilities for generation, transmission, distribution, and recently trading. They have inherited assets, liabilities, procedures, systems, and the work regime from MPSEB. Staff have been allocated to the new companies on an “as is where is” basis. Boards have been appointed. Below this level, organization structures in the new companies have been evolving. Concerns have been raised that earlier efforts to contain costs in the loss-incurring MPSEB have led to shortages of skills in strategically significant disciplines and work areas. In addition, sector companies in the transition phase face resource constraints for financial management and reporting, as well as for enhancing their internal audit and control capability. 21. Recognizing these constraints, GOMP included a $45 million nonphysical investment component for capacity development to support physical investments. Department for International Development of the United Kingdom (DFID) is providing assistance5 for further capacity development, specifically in financial management, technical planning, and human resources development, as well as in commercial areas. DFID assistance, which will cover 2006–2010, will complement ADB’s physical investments included under the MFF. ADB also included an additional $10 million under the MFF for capacity development to support energy efficiency activities, such as the establishment of ECF and other energy efficiency initiatives, e.g., Clean Development Mechanism (CDM). The funds also will support information technology and management information systems (MIS)6 for TRADECO that are not covered under the DFID program. Since the initial stage of reforms, ADB and DFID have supported jointly the MP power sector. 22. From 2002 to 2006, ADB (Supplementary Appendix D) helped GOMP (i) improve the policy environment and governance of the sector, (ii) initiate the establishment of a commercial and competitive business environment to promote efficiency gains and loss reduction, and (iii) introduce a computerized information and revenue management system. The Canadian International Development Agency worked with ADB from 2002 to 2004, providing extensive support for the development of financial restructuring plans, as well as the assessment of pension fund liabilities. From 2002 to 2005, DFID provided complementary support to the reform process through detailed needs assessments for accounting and information and technology systems for the successor companies. DFID’s capacity development assistance covers (i) defining the commercial relation ships between sector companies, including market operation support during the transition to the new market mechanisms, energy billing arrangements, and preparation of PPAs; (ii) financial management through setting financial policies, cost and revenue centers, planning, modeling, controls, and reporting; (iii) accounting systems, including

5 DFID is providing £18.5 million in technical assistance (£14.5 million) and financial assistance (£4.0 million) from

2006 to 2010. 6 A needs assessment will be conducted to design the capacity building component for TRADECO. Therefore, this

component will be included in the third tranche that is scheduled for April 2008.

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specification of long-term accounting requirements and preparation of chart of accounts; (iv) human resource strategies, needs assessment, organizational structure, and development of recruitment procedures and supporting mechanisms (e.g., job descriptions); (v) development, procurement, and implementation of integrated MIS solutions, including components such as billing, accounting, materials management, project management, asset maintenance management, and technical applications; and (vi) regulatory support, including filing tariff applications and interaction with MPERC. DFID assistance also supports technical areas, such as distribution investment planning, facilitation of decentralization and standardization, load forecasting, power quality and reliability, benchmarking, and equipment standards for all DISCOMs and transmission investment planning studies to meet demand growth and open access requirements for TRANSCO.

6. Sector Road Map

23. To overcome these challenges, GOMP has developed a sector road map linked to a comprehensive investment program. The sector road map’s objective is to establish the route to achieving the sustainable growth of the power sector in MP. The road map aims to deliver the following outcomes: (i) strengthening power supply capacity to improve access to reliable and affordable electricity, (ii) enhancing efficiency and quality of power supply, and (iii) ensuring financial health of the power sector through continued power sector reform at the sector and corporate levels. Based on the sector road map, the MP power sector needs an estimated $5.3 billion in investments through to 2012. The largest component is generation, accounting for $2.3 billion of planned investment (43%). This is followed by $1.6 billion for distribution, including rural electrification (30%), and $1.4 billion for transmission (26%). The investment program includes $40 million for a comprehensive capacity building program to meet the sector’s increasing management capacity requirements. The physical investments will address current unserved energy demand and provide additional capacity to meet forecast demand growth. The installed generating capacity of thermal and hydropower plants will be increased, while technical and nontechnical losses will be reduced through enhanced transmission capacity and the adoption of more appropriate voltage levels for distribution. The need for load shedding also will be reduced during peak demand periods (A matrix that summarizes the sector road map is in Appendix 1).

7. Asian Development Bank’s Strategy

24. Cognizant of the strong nexus between infrastructure and poverty reduction, ADB’s overall assistance has taken a balanced infrastructure development approach, comprising road systems, water transport, railways, hydrocarbons, and energy. Within the energy sector, the country strategy and program 2003–2006 (CSP) focused investment programs on clean energy development, including run-of-the-river hydropower projects, other forms of renewable energy, rural electrification, and energy efficiency improvements. Guided by the CSP, the 2004 and 2005 CSP updates7 outlined six priorities of ADB’s power sector assistance: (i) reforming the power sector, (ii) promoting higher efficiency and low-carbon power sources, (iii) expanding and optimizing transmission and distribution systems, (iv) strengthening institutions to implement reforms required by the 2003 Electricity Act, (v) promoting private sector participation, and (vi) encouraging energy conservation and ensuring environmental and social sustainability. 25. Under its energy efficiency and carbon market initiatives, ADB is providing a comprehensive technical assistance program that began in 2005. The program includes: (i)

7 ADB. 2004. Country Strategy and Program Update (2004–2006): India. Manila; ADB. 2005. Country Strategy and

Program Update (2005–2007): India. Manila.

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CDM8, which provides capacity building for financial and municipal sectors, with an ultimate goal of reducing greenhouse gasses through CDM projects; (ii) support the inception of the energy efficiency initiative in developing member countries9 for country-level assessment of near-term energy efficiency opportunities focusing on conservation and demand-side management; and (iii) assistance for renewable energy in rural areas through the ADB Renewable Energy and Climate Change Program. 26. ADB will continue to expand its promotion of and support for power sector reforms in other states. ADB also will intensify its efforts in the states where it is already active, such as Assam, Gujarat, MP, and Uttaranchal. The interventions will promote knowledge transfer in relation to best practices in the international power sector, improve corporate governance in state-owned utilities, and ensure that appropriate environmental and social safeguards are incorporated into new power sector investments. The proposed intervention in MP is consistent with the strategy of supporting state-level sector reforms, in this case with the emphasis on the transmission and distribution subsectors.

8. Lessons

27. In the past, ADB extended assistance to discrete power projects in various states, as well as to the central power sector agencies. Although this policy enabled ADB to support many projects, it spread ADB’s resources too thinly. As a result, ADB could not achieve fully its desired goal of policy reforms with its power sector borrowers. In most states, the power sector was the largest recipient of state resources in terms of subsidies and capital investments. India recognized that macro management of the state’s finances needed to be improved to turn around the power sector. 28. Since 2000, ADB has focused its lending on states committed to reforming and restructuring their power sectors on the premise that improving the power sector toward financial sustainability will increase the ability of state governments to allocate resources for poverty reduction. In 2003, ADB conducted project performance audits of energy projects in India, which identified the following lessons: (i) ADB needs to be flexible and adaptable to changing conditions in India, (ii) land acquisition should be carried out expeditiously to minimize implementation delays, (iii) construction contracts should be properly packaged to facilitate implementation and coordination, and (iv) loan covenants should be appropriate. These issues were taken into consideration when selecting the subprojects, finalizing procurement packages, and implementing subprojects under the ongoing loan. The experience is reflected in the preparation of the proposed MFF, and ensured that these lessons are incorporated into MFF design and project preparedness criteria agreed between India and ADB.

9. External Assistance

29. The power sector in India has received assistance from various international development partners (Appendix 4). The World Bank has been the major source of external funding to the sector, focusing on reforms in generation, rehabilitation and improvement, and development of renewable energy resources. The United States Agency for International Development has supported policy aspects of private sector participation, with studies on state sector reforms, and has provided assistance for energy management. Kreditanstalt für

8 ADB. 2004. Technical Assistance to India for Capacity Development for Clean Development Mechanism. Manila

(TA 4496) 9 ADB. 2006. Technical Assistance to India for Support the Inception of the Energy Efficiency Initiative in Developing

Member Countries. Manila (TA 6346-REG)

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Wiederaufbau of the Government of Germany has focused on improving the energy efficiency of thermal power plants and clean electricity production in various states. Japan Bank for International Corporation has supported the expansion of public sector generation, transmission, and distribution, including rural electrification. 30. ADB has been coordinating with other development partners to maximize the value of sector reforms and physical investments10. The Canadian International Development Agency worked with ADB from 2002 to 2004 on MP power sector reform, and has provided extensive support for development of financial restructuring plans, reconfiguration of distribution operations, and assessment of pension fund liabilities. DFID has provided technical and financial assistance for power sector restructuring in Andhra Pradesh, Haryana, Orissa, and West Bengal, as well as in MP in cooperation with ADB.

10. Policy Dialogue

31. Energy Efficiency. GOMP is aware that energy efficiency and renewable energy potential to bridge supply gaps, specifically in distributed and decentralized generation application, is substantially unrealized. Total potential of energy efficiency, renewable energy, and distributed and decentralized generation is roughly equivalent to current state-wide power imports. The main sources of this potential are conservation and demand-side management, solar water heating and photovoltaic systems, wind power, small hydropower, biomass-biogas, and biofuels. Cofinancing of energy efficiency projects is possible through the Kyoto Protocol, second-tier carbon markets, commercial clean energy investment funds, and the global environment facility. The Energy Conservation Act 2001 mandates the creation of state-level ECF. GOMP approved on 26 September 2006 a new policy for unconventional resource development, including directing 5% of the Rs0.10 per kWh cess on power sales into a state-level ECF to be created. MP will be among the first few states in India to create the ECF.11

32. Cash Management. Sector cash management, in terms of revenues and payments, is centralized under MPSEB. Although the five companies are operated separately and independently, the revenues from their businesses are consolidated and utilized by MPSEB in accordance with a prescriptive cash flow mechanism. Priority is given to payment of salaries and wages, coal and oil supplies, power purchases, debt service, essential operation & management expenses, and administrative and capital expenditures. The cash flow mechanism is expected to be retained until the sector is returned to profitability in 2011, according to projections in the FRP. However, TRANSCO’s projections show that it will make a profit, and will be capable of meeting its own operating costs and debt repayments, in 2007. Similarly, DISCOMs’ financial projections indicate that DISCOM-E will achieve profitability in 2009, while DISCOM-C and DISCOM-W are expected to reach that milestone in 2010 with only small operating losses in 2009. Accordingly, the cash flow mechanism could be discontinued beginning 1 April 2008. 33. Governance Measures. Companies are introducing an enterprise resource planning-based procurement system, which will increase transparency, accountability, and efficiency in procurement. Use of ADB guidelines on procurement and consulting services and standard bidding documents will provide an opportunity for better monitoring. Bid specifications and packaging will ensure maximum competition under international competitive bidding procedures.

10 Appendix 4 provides further details. 11 Further details are discussed in para. 44.

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34. Recruitment of financial management experts and establishment of internal control systems supported with advanced information and communication technology-based financial management systems will ensure efficiency and accountability. External auditors will audit the financial statements, which will be published regularly and reported to the shareholders and MPERC. Measurable financial performance indicators for each company will be set, evaluated, and benchmarked by MPERC. ADB review missions will have regular access to the executing agencies’ (EA) accounting and control systems to monitor expenditures and other financial transactions, and ensure safe custody of project-financed assets. 35. The appointment of independent board members in the sector companies will clarify and enhance their role as custodians of stakeholder interests. Revisions to board recruitment procedures and establishment of board-level committees will encourage diversity and facilitate the introduction of additional private sector expertise. The development of a formal code of conduct for board members, as well as public disclosure of operational and financial performance of the sector entities on the MPERC web site, will ensure transparency in the power sector in MP. A summary of governance measures is in Table 1.

Table 1: Governance Measures Area Measure Procurement • Use of the Asian Development Bank (ADB) guidelines on procurement and

consulting services. • Use of ADB’s standard bidding documents and standard request for proposal

documents for procurement and recruitment of consultants. • Bid specifications and packaging to be prepared to ensure maximum

competition under international competitive bidding procedures. • Capacity development of sector entities on e-procurement to increase

transparency, accountability, and efficiency in procurement. Financial Management and Audit

• Regular access to the Executing Agency’s accounting and control systems to monitor expenditures and other financial transactions and safe custody of project-financed assets.

• Capacity development of the sector companies in accounting and internal control systems, financial management, and audit capabilities.

• Expanded use of advanced information and communication technology-based financial management systems will ensure efficient and accountability.

• External auditors acceptable to ADB to audit financial statements, which will be published regularly and reported to the shareholders.

• Measurable financial performance indicators for each company to be established, evaluated, and benchmarked.

• Introduction of an appropriate internal audit system through the capacity building program.

• Implementation of an operational risk mitigation action plan and undertaking a joint operational risk assessment with development partners.

Institutional and/or Corporate Governance

• Public disclosure of operational and financial performance of the sector companies to improve transparency.

• Fully functional sector regulator to ensure equal opportunities for all sector entities and to improve sector governance.

• Continued introduction of a new corporate culture through further commercialization.

• Appointment of independent board of directors. • Revision of board recruitment procedures. • Development of formal code of conduct for board of directors. • Delegation of powers to companies’ management. • Promotion of private sector participation and public-private partnership. • Expansion of computerized billing system.

Source: ADB assessment.

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III. INVESTMENT PROPOSAL

36. The Investment Program will address directly sector issues and provide a solid foundation for the sustainable growth of the reformed power sector in MP. Consequently, quality and reliability of supply to consumers will improve, productive uses of electricity will escalate economically, and quality of life will improve. Additionally, the direct benefit to electricity consumers will underpin the expected economic value of the reforms. A secure and predictable electricity supply will enable social and economic benefits to materialize, and will ensure improved conditions for schools, hospitals, and other social services. The targeted loss-reduction investments will bring the cost of supply in line with average retail tariffs by the end of the Eleventh Plan (2008–2012), and will achieve sector profitability and eventually financial sustainability. The proposed Investment Program to be supported by ADB will require 8 years for full implementation, and will require flexibility in subproject selection to achieve overall objectives and to mitigate risk. 37. The EAs have gained substantial experience from implementing the previous ADB project. The project component of the earlier ADB loan covered the transmission and distribution subsectors. The program component assisted GOMP in (i) implementing key policy reforms and establishing a policy framework, including a fully operational, independent state regulatory commission; (ii) unbundling the MPSEB into five companies; (iii) improving sector governance through more functional independence; and (iv) restructuring tariffs and issuing new tariff orders that allow revenue realization. Remaining policy issues are currently being addressed. The Investment Program will be a logical replication of the project component of the previous ADB loan, covering transmission and distribution subsectors12 by taking into account the interrelated nature of the subsectors. The transmission component will complete the establishment of a backbone for transmission, while the distribution component will extend power to end connections and target physical and nonphysical system losses. Subprojects are designed in a repeater nature in the transmission and distribution subsectors, and one set of project from each subsector is presented in the Report and Recommendation of the President (RRP). The MFF is particularly well suited for the Investment Program because (i) the aim of the Investment Program is to support GOMP’s long-term objectives, as stated in the sector road map; (ii) the performance of the previous loan can guide the provision of subsequent loans, thereby offering proper incentives for implementation; and (iii) the MFF can offer the flexibility required for the Investment Program to support the participation of four companies with different levels of readiness. A. Impact and Outcome

38. The transmission and distribution component of MP’s investment program from 2007 through 2012 is predicated on building sufficient capacity for evacuation of power from existing and planned power stations and substations, and delivering power reliability and efficiently to consumers. ADB will finance key components of the transmission investment program from 2007 through to 2012 ($250 million of an estimated total investment requirement of $1.4 billion), as well as part of the distribution investment program ($360 million of a total estimated investment requirement of $1.6 billion). The construction of new transmission lines will remove constraints to power flow, and will provide additional operational flexibility to TRANSCO in its role as an independent system operator in MP. Supply reliability will be improved further, and will promote open access and development of intrastate and interstate power trading by

12 The generation expansion will be shared equally by the state, central, and private sectors. See para. 9. for details.

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providing sufficient excess substation and line capacity to handle unplanned power transfers. From the perspective of consumers, the impact of the distribution component will be more pronounced and apparent. Improvements in voltage profiles will be evident through better lighting and fewer equipment failures. Supply will be more consistent and momentary outages will be reduced significantly. The distribution component also will impact directly technical and nontechnical losses, and eventually sector profitability and financial sustainability.

B. Outputs

39. The ADB supported subset of the investment program will cover three areas:

(i) Transmission capacity expansion. Time-critical transmission lines, substations, and auxiliary equipment will be constructed to evacuate and transmit power from new power stations and substations to consumers. The scope of transmission work will comprise the construction of (a) 2 cct-km of 400 kV13 and 1,435 cct-km of 220 kV transmission lines across the state; (b) eight new 220/132 kV substations with transformer capacity of 160 MVA14 each; and (c) one new 400/220/132 kV substation with 315 MVA transformer capacity.

(ii) Distribution efficiency enhancement. Targeted capital works will be designed

to improve efficiency through loss reduction and to enhance supply reliability in all DISCOMs. Subprojects will include (a) rollout of an HVDS; (b) remote metering of high-value customers (metering of unmetered consumers and distribution transformers metering); (c) renovation of substation protection, and modernization of substations and substation Supervisory Control and Data Acquisition (SCADA); and (d) expansion of the village lighting scheme (feeder separation scheme).

(iii) Nonphysical investments. A number of nonphysical investments will

complement physical investments, including implementation of SCADA systems in DISCOM-E, development of a trading and settlements support system for TRADECO, facilitation of strategic PPP, and establishment of ECF and other energy efficiency initiatives such as CDM.

C. Technical Justification and Selection Criteria

40. Transmission components form part of the least-cost expansion plan of the Government, MP, and TRANSCO. TRANSCO’s planning process uses investment signals provided through the national and regional demand forecast produced by the CEA, and from state energy and demand forecasts produced with the assistance of DISCOMs. TRANSCO’s transmission network was modeled using power system analysis framework software, and this model was the primary transmission planning tool for assessing the technical benefits of the transmission components. Distribution components were modeled and analyzed using power systems analysis software, and are focused on network augmentation and reinforcement rather than expansion. The expansion program is technically, financially, and economically viable. It can be implemented with minimal environmental and social impact. Best practice design standards and construction techniques will be applied to all investments. 41. The following are the criteria for selecting each subproject:

13 Kilovolt (kV) 14 Megavolt-ampere 1,000,000 volt-amperes (MVA).

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(i) Subproject designs will be consistent with overall least-cost expansion plans

designed on a least cost basis and reflect “best practice” design, construction, and operations and maintenance features.

(ii) Subprojects will display performance-based design consistent with international

benchmarks for system efficiency and operational risk. Subprojects should have quantifiable energy efficiency improvements.

(i) Subproject designs will be consistent with the environmental management plan

(EMP), the resettlement framework (RF), and the indigenous people development framework (IPDF). Land acquisition and resettlement plans (RP) and indigenous people development plans (IPDP) based on the agreed IPDF and the RF will be prepared as necessary for additional subprojects before ADB approves funding.

(ii) All subprojects require environmental assessments in accordance with ADB’s

Environment Policy (2002). Category A subprojects will require a summary environmental impact assessment (SEIA), category B subprojects will require a summary initial environmental examination (SIEE). SEIA and SIEE for category A and B-sensitive subprojects respectively must be prepared and made available to the public 120 days before a Periodic Financing Request (PFR) is submitted to ADB. EMPs with budgets will be prepared for each subproject.

D. Special Features

42. High-Voltage Distribution System. The objective of HVDS is a virtual elimination of theft-related commercial losses, as well as significant reduction in technical losses. This will be achieved by replacing the overhead open wire low-voltage (0.4 kV) distribution system with a high-voltage (11 kV) distribution system, and placing additional, lower-rated transformers close to consumers’ premises. By extending the 11 kV network closer to consumers’ service connections, illegal connections from lengthy low-voltage lines will become difficult. In the absence of LV voltage drop, voltage profiles also will improve and interference between neighboring customers’ loads will be decreased. Further, unscheduled supply interruptions are expected to be reduced from fewer overloaded transformers and circuits. A pilot study undertaken by DISCOM-W confirmed the viability of the HVDS scheme, with distribution loss in the study area reduced from 26.7% to 8.4%. 43. Strategic Public-Private Partnership Scheme. Under the Investment Program, a strategic partnership with the private sector will be developed in selected urban areas under the franchising modality with the intention of achieving the requisite reduction in distribution losses and improving the quality of service to consumers. If successful, this scheme will be extended into other semi-urban and urban areas in MP. Under the modality, the strategic partnerships with the private sector, selected through competitive bidding process, would buy power from the incumbent’s distribution licensee at bulk import points. The PPP would be responsible for all downstream distribution-related activities, including long-term capital investment and operation and maintenance. These franchises will be at least long enough to recover the investments in network augmentation and expansion. Gwalior city under DISCOM-C has been selected for pilot testing the scheme. 44. Energy Conservation Fund. ADB funds will partly capitalize a new special purpose vehicle created for the ECF. Operations of the ECF will be outsourced through competitive

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bidding to a consortium of an ESCO with experience in project implementation and a financial institution with professional experience in fund management. Additional equity contributions by power sector companies and private financiers will be possible. ADB’s direct participation will create the opportunity for additional credit enhancements in the form of partial credit guarantees, cofinancing from the new CDM and energy efficiency funds expected to be operational by 2007 and 2008. The ECF investments will be repaid from revenue generated directly by the projects. ADB participation in the ECF offers innovative financing, mobilizes private participation, and capitalizes on carbon credit opportunities. Various parties will need to be consulted during the development of the ECF. For this reason, it will be included in one of the further tranches of the MFF, tentatively scheduled for April 2008. 45. Carbon Emissions Trading. Cofinancing of alternative energy projects is possible through the Kyoto Protocol CDM, second-tier carbon markets, commercial clean energy investment funds, and the Global Environment Facility. CDM and second-tier carbon markets might be the best options for carbon credit transactions. ADB will provide indirect support through an ongoing technical assistance project executed by the Ministry of Environment and Forests, the designated national authority for CDM. The HVDS is the only component confirmed for ADB funding that appears to be a promising CDM candidate based on expected emissions reductions. ADB will assist in preparing a project concept note for submission to the ministry to estimate the relative prospects for CDM. ADB will assist in further development accordingly through a technical assistance.15

E. Investment Program and Financing Plan

46. The total power sector investment program and indicative financing for 2007–2012 is shown in Table 2. Indicative cost estimates for appraised subprojects are in Appendix 5.

Table 2: Madhya Pradesh Power Sector Investment Program, 2007–2012

Investment Program 2007–2012 $ (million) % Investments Generation 2,300 43.1 Transmission 1,400 26.2 Distribution 1,600 30.0 Nonphysical Investments 40 0.7 Total Investments 5,340 100.0

Financing Domestic Financial Institutions 2,585 48.4 Asian Development Bank 620 11.6 Department for International Development , United

Kingdom 35 0.7

Private Investors 700 13.1 Internal Funds 800 15.0 Government of Madhya Pradesh 600 11.2 Total Funding 5,340 100.0

Sources: Asian Development Bank estimates. 47. The Government has requested financing up to the equivalent of $620 million (included in the Country Operations Business Plan 2007-2009) from ADB’s ordinary capital resources to help finance part of the Investment Program covering transmission, distribution, capacity building, and energy efficiency. ADB’s participation as a partner (i) reduces the cost of funds, (ii)

15 ADB. 2006. Technical Assistance for Supporting the Inception of the Energy Efficiency Initiative in Developing

Member Countries. Manila (TA 6346-REG).

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establishes standards in various thematic areas, and (iii) helps to attract other long-term financiers to the sector. The Government and GOMP have asked ADB to extend this finance in the form of an MFF. 48. The financing will be provided under an MFF in accordance with ADB policy.16 The Staff Instructions on the Use of MFF17 was followed in processing the MFF. The MFF will extend multiple loans to finance a range of projects under the Investment Program, subject to the submission of a related periodic financing request (PFR)

Pilot Financing Instruments and Modalities

by the Government and execution of the related loan and project agreements. Each PFR will be accompanied by a detailed cost estimate, as well as an implementation schedule. The Framework Financing Agreement (FFA) satisfies the requirements set forth in Appendix 4 of the

(footnote 35). The Government is required to comply with the FFA requirements. The loans under the MFF will finance equipment supply and erection, consulting services, and other capacity building activities. The minimum amount of a PFR will be $40 million, except for the capacity building component, which will have a minimum loan amount of $5 million. 49. All provisions of the ordinary operations loan regulations applicable to London interbank offered rate (LIBOR)-based loans18 will apply to each loan, subject to any modifications that might be included under any loan agreement. The Government can choose from eligible currencies and interest rate regimes for each loan. The specific terms of each loan will be based on the related PFR, with interest to be determined in accordance with ADB’s LIBOR-based lending facility. The Government has provided ADB with (i) the reasons for its decisions to borrow under ADB’s LIBOR-based lending facility, and (ii) an undertaking that these choices were its own independent decision and not made in reliance on any communication or advice from ADB. The Government will make loans available to GOMP on the same terms and conditions as the ones applicable to the Government. GOMP will onlend to sector companies, as the EAs, with a 1 percentage point spread, through the respective onlending agreements. 50. If the Government requests any cofinancing arrangements or related assistance for projects under the MFF from ADB, ADB may assist with these, subject to related ADB policy and procedures. 51. The Government will provide the proceeds of the loans under the MFF in local currency to the state and through the state to the EAs. GOMP will bear the foreign exchange risk on the loans. 52. The MFF transaction is accompanied by Tranche 1 and Tranche 2 PFRs to finance a set of subprojects consisting transmission and distribution components, respectively, which are ready for implementation.

(i) PFR 1, Transmission Capacity Expansion. This component includes construction of (a) 2 circuit kilometers (cct-km) of 400 kV and 1,435 cct-km of 220 kV transmission lines across MP; (b) eight new 220/132 kV substations, with transformer capacity of 160 MVA each; and (c) one new 400/220/132 kV substation with 315 MVA transformer capacity.

16 ADB. 2005. Pilot Financing Instruments and Modalities. Manila. 17 ADB. 2006. Staff Instructions on the Use of MFF 18 ADB. 2001. Ordinary Operations Loan Regulations Applicable to LIBOR-Based Loans Made from ADB’s Ordinary

Capital Resources. Manila.

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(ii) PFR 2, Distribution Efficiency Enhancement. The distribution component will undertake (a) construction of HVDS in six distribution circles in the eastern distribution zone of MP, including conversion of about 7,400 km of low-voltage lines to high-voltage lines; (b) remote metering of about 2,000 industrial consumers; (c) metering of about 250,000 consumers; and (d) renovation of protection system at about 100 substations.

F. Implementation Arrangements

53. Executing Agencies. TRANSCO will be the EA for the transmission component; DISCOM-E, DISCOM-C, and DISCOM-W will be the EAs for the distribution components in their respective areas. A coordinating committee comprising the chairman and managing director of the EAs, and led by the chairman and managing director of TRANSCO, will be established to monitor and coordinate the overall implementation of the Investment Program. The coordinating committee will report to the Energy Department of GOMP. At the state level, the Energy Department will monitor the implementation of reform policy and overall power sector investment. The MPERC will monitor the performance and improvement of service delivery of the EAs at the state level. At the central level, the Ministry of Power will monitor state sector policy and investment program implementation. All EAs have established their project management units (PMU), headed by a full-time project manager. Each PMU will have technical, financial, procurement, and safeguards divisions. Since the PMU staff of TRANSCO and DISCOMs has substantial experience from implementing the previous ADB-financed project, they are fully conversant with ADB’s guidelines and procedures. TRADECO will implement the capacity building component included in the third tranche, while the EA for energy efficiency will be determined once the design is finalized. 54. Investment Program Management. The EAs will be responsible for the appraisal, processing, and implementation of the Investment Program. The responsibilities will include the preparation of technical reports (feasibility studies, preliminary design reports, environmental assessment reports, resettlement and indigenous people’s development plans, detailed design reports), and bidding documents to ensure compliance with requirements of the Government and ADB. Overall investment progress will be considered when new financing requests are submitted. The Investment Program Implementation Structure is in Appendix 6. 55. As the staff of TRANSCO and the three DISCOMs are technically competent and fully familiar with ADB’s policies and guidelines, they will not require assistance from consultants for project design and implementation. However, TRADECO will require consulting services for (i) design, procurement, and implementation of a power trading system; (ii) capacity building and training in power trading; and (iii) implementation of information technology and MIS design. In addition, ADB assistance will be extended for design and implementation of the energy efficiency component, as well as monitoring the overall implementation of the Investment Program, if necessary. 56. Performance Monitoring and Evaluation. Performance will be monitored and evaluated based on indicators and targets stipulated in the design and monitoring framework. The ADB team will prepare periodic reports to inform the ADB Board of Directors (the Board) of overall progress. A Board information report will be submitted annually, and supplemental progress reports will be submitted before Management approves individual loan agreements. 57. Review. ADB will field an Inception Mission within 3 months of the approval of each tranche. ADB will review the implementation and operations, including resettlement, and environmental aspects based on quarterly progress reports. Further, ADB will meet with GOMP

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and the EAs semiannually to discuss implementation progress. A midterm review to be carried out 2 years after each tranche becomes effective will focus on the engineering, resettlement, environmental, and social aspects of the ADB-supported investments, and will review the financial status of EAs. Representatives of ADB and the EAs will take part in the review. The review will allow for any necessary midcourse corrections to ensure successful implementation and achievement of objectives. A completion report will be submitted within 3 months of the completion of each tranche. An MFF completion report will be prepared after the completion of all ADB-supported activities and projects under the Investment Program. 58. Implementation Period. The Investment Program will be implemented over 8 years, including procurement and construction activities, from 2007 to 2014. The loan agreements are expected to have implementation periods of 4–5 years (Appendix 7). The last PFR should be submitted no later than the end of 2010. 59. Procurement and Consulting Services. Procurement to be financed under the MFF will be in accordance with ADB’s Procurement Guidelines (2006, as amended from time to time). International competitive bidding (ICB) will be used to procure equipment (conductors, transformers, etc.) and turnkey construction of the facilities being funded under the Investment Program (transmission lines, HDVS, etc.). ICB will be utilized for supply contracts estimated to cost the equivalent of or more than $1 million. Limited international bidding or national competitive bidding (NCB) will be used for supply contracts estimated at $250,000–$1 million, and shopping for contracts estimated at less than $250,000. Under NCB the bidding documents and procurement procedures agreed between EAs and ADB, as also set out in the procurement plan will be followed. Any modification to these will be agreed between EAs and ADB and further reflected in the procurement plan. Contract packages will be prepared to ensure maximum competition under ICB. In accordance with these arrangements, a procurement plan for the subprojects under Tranche 1 and Tranche 2 are presented in Appendix 8. 60. Consultants will be selected and engaged in accordance with ADB’s Guidelines on the Use of Consultants (2006, as amended from time to time). Consulting firms will be selected through international competition using the quality- and cost-based selection method. Individual experts may be recruited following ADB’s procedures for engagement of individual consultants based on resume submitted in response to the terms of reference for the assignment. Full technical proposals will be required for contracts valued at more than $1 million. Simplified technical proposals will be used for contracts worth between $600,000 and $1 million, and the resume for technical proposals for those less than $600,000. 61. Disbursement Arrangements. Loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). For each loan, the Government will establish, operate, and maintain a first generation imprest account (FGIA) in Reserve Bank of India in accordance with ADB’s Loan Disbursement Handbook. The FGIA account will be a current account, which will facilitate withdrawal of funds to meet project expenditures whenever needed. The initial advance to an imprest account will be 6 months of estimated expenditures or 10% of the loan amount, which ever is lower. A second generation imprest account (SGIA) will be established for each loan in the name of each EA to receive funds from the FGIA to meet project expenditures incurred. The SGIA will be established in a non-interest bearing current account at a commercial bank acceptable to ADB and the Government. Interest income earned from the SGIA, if any, will be utilized by the relevant EAs for project purposes only. ADB’s statement of expenditures will be used to reimburse eligible expenditures and to liquidate advances to the FGIA and SGIA. This will be applicable to expenditures of $100,000 or less. ADB will conduct a training seminar on its disbursement procedures for DISCOMs.

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62. Advance Contracting. To expedite the implementation of Tranche 1 and Tranche 2 subprojects, ADB approved the request of the Government for advance contracting. ADB has reviewed and approved bidding documents for transmission subprojects, which were issued in December 2006. The bidding documents for distribution subprojects are being prepared. Once ADB reviews and approves the documents, they will be issued in February 2007. For each future tranche, the Government will request ADB’s approval for advance contracting. 63. Retroactive Financing. ADB’s Management may consider and allow retroactive financing of eligible expenditures when included in PFRs. Except as otherwise agreed with ADB, the expenditures incurred for equipment and consulting services will be eligible for advanced contracting, provided that these are incurred before the effectiveness of the related loan agreement, but not earlier than 12 months preceding the signing of the related loan agreement, and as long as they do not exceed an amount of 20% of the individual loan. The Government and EAs have been informed that approval of advanced contracting and retroactive financing does not commit ADB to finance any of the proposed subprojects. Each PFR will specify the nature of expenditure if retroactive financing is requested. Retroactive financing will apply from the third tranche onward. 64. Anticorruption Policy. ADB’s policy on Anticorruption (1998, as amended up to date) was explained to and discussed with GOMP and the EAs. Consistent with its commitment to good governance, accountability, and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive, or coercive practices relating to subprojects under the MFF. To support these efforts, relevant provisions of ADB’s policy on Anticorruption are included in the loan regulations and the bidding documents for the MFF. In particular, all contracts financed by ADB in connection with subprojects under the Investment Program will include provisions specifying ADB’s right to audit and examine the records and accounts of the EAs and all contractors, suppliers, consultants, and other service providers as they relate to the subprojects and components under the Investment Program (see para. 38 for governance measures in these areas). 65. Accounting, Auditing, and Reporting. Quarterly progress reports will be prepared for the individual components for review by ADB. The reports will include a description of physical progress and problems, and a summary of financial accounts that will consist of loan expenditures during the period, year to date, and total to date. Progress on environmental and social compliance, overall progress, and compliance with conditions of the FFA and individual loan and project agreements also will be included in the progress reports. Further, the progress reports will include an evaluation of issues or problems faced by the EAs and recommended remedial actions. A project completion report will be submitted within 3 months of the completion of each component. The EAs will maintain separate accounts for each loan (tranches). Within 6 months of the close of the financial year, the EAs will submit audited project accounts and financial statements. An independent auditor acceptable to ADB will be hired by the EAs to conduct the audit.

IV. BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Financial Analysis

66. Institutional and financial analyses of the Tranche 1 and Tranche 2 subprojects (Appendix 9 and further details are in Supplementary Appendix E ) have been carried out in accordance with Guidelines for the Financial Governance and Management of Investment

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Projects Financed by the ADB19. The analysis was conducted for 2008–2032 for TRANSCO, the EA for Tranche 1, and DISCOM-E, the EA for Tranche 2. The financial evaluation of subprojects was undertaken in real terms using constant 2006 prices. Incremental costs and benefits attributable to investments were derived by comparing “with” and “without” project scenarios. The financial internal rate of return (FIRR) is estimated to be 4.8% for Tranche 1 transmission subprojects and 8.3% for Tranche 2 distribution subprojects. This compares favorably with their weighted average cost of capital (WACC) for this period, which is 3.4% for TRANSCO and 2.3% for DISCOM-E. When discounted at WACC, investments have net present values of Rs1.2 billion for the transmission subprojects and Rs2.8 billion for the distribution subprojects. Tranche 1 and Tranche 2 investments, therefore, are considered financially viable and sustainable. Sensitivity and risk analysis indicates that the FIRR for Tranche 1 and Tranche 2, as well as the overall Investment Program, are robust with (i) 10% increase in capital costs, (ii) 10% increase in operational and maintenance costs, (iii) 10% reduction in benefits, (iv) 2-year delay in project completion plus 20% increase in costs, and (v) no residual value. B. Financial Management

67. A financial management assessment (FMA) was carried out using ADB’s FMA questionnaire to review the capacity of the sector companies to manage financial aspects of the MFF. The FMA is an independent assessment based on discussions with officials of sector companies and review of reports prepared for the sector companies under the earlier DFID-sponsored technical assistance. The unbundled power sector companies inherited billing, accounting, and management information systems from MPSEB that were developed to meet the Electricity Supply Association Accounting Rules established in 1985. These systems are not suitable to meet the management and reporting requirements of commercial companies operating under the Companies Act 1956. The current systems have limitations and are not fully computerized. While these systems can meet the companies’ statutory reporting requirements, they cannot provide useful and timely online information for management of the new companies and meet the information requirements of MPERC. As part of the capacity building support, funding has been allocated to meet the £18.5 million cost of new systems, covering billing, accounting, and MIS for the three DISCOMs and TRANSCO to purchase software and hardware, 20 implementation, training, and 5-year service support. Under the capacity development program, companies have been updating the chart of accounts and accounting policies to comply with the Companies Act 1956, as well as preparing their long-term business plans. In addition, the new companies are receiving comprehensive training on revised accounting procedures, preparing cost accounting manuals, assisting with the preparation of tariff petitions to MPERC, and developing internal audit procedures. C. Past and Projected Financial Performance

68. Over 2001–2005, the MPSEB reduced annual financial losses from a high of Rs13.7 billion in 2002 to Rs2.7 billion in 2005. The improvement of the financial situation is mainly attributable to an increase in electricity sales and in average revenues from Rs2.53 per kWh to Rs3.05 per kWh. In addition, as a result of sector financial restructuring, interest charges declined from Rs11.373 billion to Rs3.121 billion in 2005.

19 ADB. 2002. Guidelines for the Financial Governance and Management of Investment Projects Financed by the

ADB. Manila. 20 Approximately 50% of the cost will be met by the DFID grant with the companies providing the balance of the

funding for the proposed software and hardware.

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69. MPERC has introduced MYT determinations for generation and transmission companies. Following single-year price determinations in 2006 and 2007 for distribution companies, MPERC will provide a 3-year tariff determination covering 2008 to 2010. This will provide certainty for companies and customers. At the same time, per the Electricity Act, 2003 and National Tariff Policy, all tariffs are to be plus or minus 20% of the cost of supply by the end of 2011. Thus, progressive increases in tariffs, coupled with a reduction in losses from the current level of 41% for transmission and distribution to 24% by 2012, will continue to improve the companies’ financial performance over the next 5 years. 70. For Tranche 1, TRANSCO’s projected financial performance indicators improve over the forecast period with a debt service coverage ratio exceeding 1.2 in all years from 2008. The self-financing capacity of the company improves towards the end of the forecast period, with TRANSCO able to meet at least 20% of capital expenditures from internal sources from 2013 onward. The debt to debt-plus-equity ratio of 67% in 2007 falls steadily to 45% by 2016. ADB will fund about 63% of the capital expenditures, with the balance financed by internal funds, GOMP equity, and PFC loans. TRANSCO’s financial position is improving as a result of increasing tariffs and revenues. The improving self-financing ratio and adequate debt service ratio assure the financial sustainability of the company with the ADB investment (Appendix 11, Supplementary Appendix G). 71. For Tranche 2, DISCOM-E tariff increases approved by MPERC allow profitability to be achieved by 2008. DISCOM-E return on equity will be positive from 2008. Return on historic average net fixed assets will increase to 19.3% in 2009 and remain above 16% thereafter. Debt to debt-plus-equity ratio is forecast to fall from 68.3% in 2006 to 39.6% by 2012. ADB will fund about 57% of the proposed project with the balance funded by equity from GOMP, retained earnings, and PFC loans. Grants from the Government will fund 90% of rural electrification with 10% financed by loans through the rural electrification corporation. Full electrification of MP state is projected to be achieved at the end of 2009. At the proposed tariffs, DISCOM-E exhibits a strong cash flow with a debt service ratio of at least 1.3 in all years. The self-financing capacity of DISCOM-E exceeds 20% from 2009. The projections for DISCOM-E show sustained financial improvement from 2007 through to 2016, and indicate that the company is capable of absorbing the proposed investments under the MFF (Appendix 11, Supplementary Appendix G).. D. Economic Analysis

72. Economic analysis (Appendix 12) was undertaken for transmission and distribution components to be funded under the Tranche 1 and Tranche 2 in accordance with the Guidelines for Economic Analysis of Projects21. Economic internal rates of return (EIRR) were calculated by comparing “with” and “without” project scenarios. The main economic benefits are displaced thermal electricity generation and incremental consumption. These benefits arise from a reduction in technical and nontechnical losses, removal of network constraints, and improved reliability of supply. Benefits were quantified through load flow analyses and from pilot studies undertaken in other states. Demand forecasts, prepared by TRANSCO for Tranche 1, were based on projections of historical sales data, modified by population growth, the impact of real tariff increases, and the impact of real increases in household income. Non-incremental output from the subprojects was valued based on the displaced generation from coal-fired thermal plants. Incremental output was valued using consumers’ willingness to pay for incremental consumption. Initial estimates indicate that Tranche 1 transmission subprojects have an overall EIRR of 15.0% and Tranche 2 distribution subprojects an overall EIRR of 14.7%. These EIRRs indicate that Tranche 1 and Tranche 2 components are economically viable. Sensitivity analysis 21 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila.

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revealed that expected economic outcomes from transmission subprojects are robust under a range of downside scenarios, reflecting the urgent need for augmentation of the transmission network. Distribution subprojects are also robust, although sensitivity to forecast demand growth is apparent for some subprojects. E. Environmental Analysis

73. A draft environmental assessment and review framework (EARF) has been prepared for the Investment Program, outlining the policy, procedures, and institutional requirements for the overall Investment Program and each tranche (Supplemental Appendix K). The EAs are responsible for preparing the required environmental assessments and obtaining ADB concurrence before implementation. Environmental assessment of the proposed investments has been and will continue to be conducted following ADB’s Environment Policy (2002); Environmental Assessment Guidelines (2003) ; ADB Staff Instructions on the Use of the Multitranche Financing Facility (2006)

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23 ;the EARF; and the Government’s environmental assessment regulations and guidelines. The first and second tranche investments are classified as category B24 in accordance with ADB’s Environmental Assessment Guidelines. The EAs (TRANSCO and DISCOM-E) have prepared IEEs for Tranche 1 and Tranche 2 components. Environmental assessment also will be prepared in due course for the remaining components in each tranche, as outlined in the EARF. A summary IEE (Appendix 13) for Tranche 1 and Tranche 2 outlines environmental benefits and negative impacts, proposed mitigation measures, and preliminary EMP (Supplementary Appendix L). Public consultations indicate strong local support for the proposed investments. 74. Based on the environmental assessments and reconnaissance surveys, most of the impacts will occur during construction. The principal impacts are related to acquisition of rights-of-way for transmission lines, earthmoving and initial clearing of vegetation for construction, and periodic clearing of vegetation during operations. These impacts will be mitigated by selective routing of transmission lines, appropriate erosion-control measures, proper management of construction-related wastes, and provision of compensation for reforestation, as necessary. No endangered, rare, or threatened species of flora or fauna have been reported at any project sites. Adequate provisions have been made for the environmental mitigation and monitoring requirements and their associated costs. The project sites are mostly on government-owned land. The land acquired for new substations is mostly uninhabited, unused, and outside towns and villages. Mitigation measures related to construction and specified in the EMP will be incorporated into civil works contracts. Although the contractors will have primary responsibility for implementation of mitigation measures during construction, the implementing agencies will be responsible for overall implementation of site-specific EMPs. 75. The proposed Investment Program has potential cumulative and induced impacts, which are considered largely positive. Distribution and transmission system efficiency improvements will result in energy savings of at least 1,200 gigawatt-hour (GWh) per year, with equivalent carbon dioxide (CO2) reductions of more than 1 million tons per year. Environmental and social benefits of the investment components and long-term program objectives outweigh the negative impacts. The EARF will guide environmental management activities robustly for the life of the MFF.

22 ADB. 2003. Environmental Assessment Guidelines. Manila. 23 ADB. 2006. Staff Instructions on the Use of the Multitranche Financing Facility. Manila. 24 Each tranche will be subject to environmental categorization. All tranches are expected to be Category B or C.

Tranches will be re-categorized as necessary if Category A- or B-sensitive projects and/or subprojects are identified.

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F. Social Assessment

76. In full consultation with stakeholders and affected persons, an RF, RP, and IPDF were prepared, which will be the basis for preparing subsequent RPs and IPDPs for additional subprojects in accordance with ADB’s policy on Involuntary Resettlement (1995), Policy on Indigenous Peoples (1998), and relevant sections of the Operations Manual. Tranche 1 and Tranche 2 will have no impacts on indigenous people. The RP, RF, and IPDF were disclosed to the affected persons in their local language in December 2006 (Appendix 14, Appendix 15 and Supplementary Appendix J). Future RPs and IPDPs will be prepared and disclosed to affected persons, and all compensation will be paid before the start of civil works. GOMP has agreed to monitor the implementation of both frameworks, and to endorse the frameworks for future tranches. Frameworks that are part of the FFA will be considered a prerequisite to apply for financing by the EAs. Appraisal of successive tranches will require a review of the RF and IPDF, as well as the preparation of the RPs and IPDPs, if needed, or the appropriate indigenous people (IP) actions for all subprojects with IP issues. 77. Minimal land acquisition is required for the transmission network expansion under Tranche 1. One of the 18 substations will require the acquisition of 3 hectares (ha) of private land, affecting three households. If land acquisition from private owners is required, the EA has allocated sufficient budgetary resources to cover the compensation packages provided in the RP. A maximum of 612 ha of land is estimated to be acquired temporarily for transmission lines, affecting a maximum of 1,528 people (for less than 10% of their assets). Since the EA has ensured that all the transmission lines will pass through agricultural land, substantial loss of land value is not expected on any of the affected plots. The EA also has ensured that scheduling the construction of towers and the stringing to minimize crop disruption is common practice. No private land is required permanently or temporarily for the expansion of the distribution system under Tranche 2. 78. Impacts of Tranche 1, and future tranches, if any, are expected to be minimal. Compensation packages and a short RP have been prepared for the subproject components of Tranche 1. The short RP also covers the transmission network expansion to be financed under Tranche 3. However, the short RP, will be updated during the preparation of Tranche 3. G. Poverty Assessment

79. The MFF is designed to benefit all grid-connected consumers with adequate and reliable supply of electricity, which would support the Government’s projections for growth in energy demand and its intent to make affordable grid-based electricity supply available to the entire population by 2012. Government policy includes support to poor households via a lifeline tariff for the first 1 kWh of consumption per household per day. A secure and predictable electricity supply will enable social and economic benefits to materialize, as well as ensure improved conditions for schools, hospitals, and other social services. Improvements in quality and reliability of supply that will accrue from targeted investments are expected to improve living conditions in the rural areas through the creation of job and income opportunities. Farmers and small business owners are expected to increase their productivity. Demand for electric installations, supplies, and maintenance is expected to increase, creating additional new job opportunities. In addition, a reliable electricity supply improves quality of life of households, especially for women who are traditionally responsible for the activities inside the house.

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H. Potential Risks

80. Risks include (i) inability of DISCOMs to reduce losses as agreed with MPERC, resulting in lower revenues and failure to meet debt service on subproject investments; (ii) delays in power sector reforms, resulting in limited financial independence of companies and continued centralization of cash flow mechanisms; (iii) delays in construction of power projects not financed by ADB, leading to further energy and peak capacity shortages, as well as lower electricity sales and revenues than forecast; (iv) increases in the prices of construction materials, resulting in financially nonviable investments; (vi) failure to mobilize the necessary counterpart funds; (vii) delays in procurement and contract awards; and (vii) increases in the cost of delivered electricity due to suboptimal power purchasing and other factors, leading to lower-than-expected demand for electricity. These risks are regarded as low, or have been minimized to the extent possible in project formulation and implementation as follows: (i) investment has been provided to achieve the targeted loss reduction; (ii) GOMP is committed to ongoing sector reforms and full financial independence of the operating companies; (iii) the energy balance demonstrates that adequate excess will be available for purchase within MP and from outside of MP to meet electricity sales forecasts; (iv) adequate physical and price contingencies are provided to meet quantity and cost escalations, cost estimates have been based on a basket of recent tender prices, and MPERC’s tariff-setting principles allow costs of approved investments to be passed through in the tariff; (vi) GOMP has provided assurances on the timely provision of counterpart funding; (vii) tender documents are prepared for Tranche 1 transmission subprojects and are being prepared for Tranche 2 distribution subprojects, and advance action for procurement has been requested; and (viii) appropriate risk management mechanisms will be incorporated in the evolving corporate governance framework.

V. ASSURANCES

81. In addition to the standard assurances, the Government and GOMP have given the following assurances, which have been largely incorporated in the FFA, and will be incorporated in the individual loan agreement(s) and project agreement(s) as applicable and mutually agreed between the Government and ADB for each project under the MFF. A. Financial and Sector Reforms

82. Sector Reforms. The Government and GOMP will continue to emphasize and support the autonomy of DISCOMs, TRANSCO, and TRADECO with respect to commercial, administrative, and operational activities. 83. Capacity Development. GOMP will ensure timely implementation of the capacity development program (financed by DFID). 84. Counterpart Funding. The Government and GOMP will ensure and cause the availability and timely release of counterpart funding for the timely implementation of each subproject. 85. Cash Management Responsibilities. GOMP will ensure that the cash management responsibilities are transferred to TRANSCO from 1 April 2008 and DISCOMs from 1 April 2009, so that the EAs can commence commercially independent operations, with any deficits met by commercial borrowings or other satisfactory means. 86. Audits. The EAs will engage independent private audit firms to conduct annual finmancil and procurement audits. In addition the EAs will ensure that independent auditors whose

24

qualifications, experience, and terms of reference are acceptable to ADB and GOMP conduct (i) energy audit for distribution reconfiguration and corporatization and divestment, and (ii) business process and performance audits in all operational areas. 87. Corporate Governance. The GOMP will ensure the accountability and transparency of EAs is maintained through the stakeholders meeting and publication of its agendas, actions through the duration of the investment program. The EAs will ensure that the following measures to strengthen corporate governance will have been completed by 31 December 2007: (i) independent directors at the board level are recruited; (ii) board-level committees, including audit and risk management committees, are formed; (iii) internal audit functions strengthened and internal audit guidelines in line with best practices are developed (internal audit scope to cover revenue audit and internal audit reports to the audit committee of the board); (iv) internal controllers reporting to the chairmen and managing directors of the respective EAs on a regular basis are appointed. 88. Debt Service Coverage Ratio. The EAs will maintain a debt service coverage ratio of 1.2 from 2007 and onwards. 89. Self Financing Ratio. The EAs will maintain historic self-financing ratio of 20% from 2010 onwards (3 years moving average capital expenditure). B. Commercial

90. Corporate Social Responsibility. DISCOMs will conduct extensive public awareness campaigns through installing appropriate signs, issuing flyers to the public, and placing newspaper and television ads in local language to ensure that people are aware that HVDS networks may result in serious injury or death in case of attempts to illegally connect to overhead circuits. 91. Tariff. DISCOMs’ MYT will be effective as of 1 April 2007. 92. Customer Service Centers. By not later than 31 March 2009, DISCOMs will have established, made operational, and fully staffed with specialists with appropriate skills a number of customer service centers in large cities and a customer service center in small towns. 93. Billing and Collection Efficiency. DISCOM-E will ensure improved collection efficiency from 92% in 2006 to 96% by not later than 31 December. 94. Loss Reduction. DISCOM-E will ensure that agreed loss-reduction targets are met as follows; by 31 December 2007 to 32.5%, by 31 December 2008 to 29.5%, and by 31 December 2009 to 26.5%. 95. Turnkey Contracts. The EAs will (i) ensure utilization of turnkey contracts, where appropriate; (ii) negotiate longer terms of guarantees on equipment; and (iii) include long-term maintenance provisions in the turnkey contracts. C. Human Resources

96. Recruitment. By not later than 31 December 2008, the EAs will have appointed directors for operations, information technology, commercial functions, and finance; and will have recruited (i) chartered accountants, (ii) information technology specialists, and (iii)

25

specialists in commercial areas. The EAs will have established management training programs in finance, operations, and commercial functions. 97. Pension Funds. The EAs will have legally established trust funds to cover pension arrears by 31 December 2008. D. Safeguards

98. Land Availability, Resettlement and Indigenous Peoples. GOMP will cause respective EAs, subject to compliance with the relevant provision of the RF and RPs and EARF and EMP and in accordance with all applicable laws and regulations of the Government and MP, to acquire or make available the land and rights to land free from any encumbrances, and cleared the utilities, trees, and any other obstruction from such land, required for commencement of construction activities in accordance with the schedule agreed under the related civil works contract. 99. GOMP will cause respective EAs to ensure that all land and rights-of-way required by the subprojects will be made available in a timely manner and that the provisions of the RPs, including compensation and entitlements for affected households and persons, will be implemented in conformity with all applicable laws and regulations of the Government, GOMP and ADB’s policy on Involuntary Resettlement (1995), and the agreed RF. 100. GOMP will cause respective EAs to ensure that affected persons by each subproject are fairly compensated in a timely manner on replacement values in accordance with the related RPs and RF, such that their living standards are not adversely affected. The EAs will submit progress and completion reports on land acquisition and resettlement under the quarterly progress reports for each subproject. In addition, the external monitoring report shall be submitted to ADB on a semiannual basis for review. 101. GOMP will cause respective EAs to ensure that prior to land acquisition and any resettlement under each subproject, the related RP including its update based on consensus of AP, is disclosed with all necessary information made available to persons affected by the subproject and confirm that it be uploaded onto ADB’s web site. EAs will ensure that essential public infrastructure that may be affected under land acquisition and resettlement is replaced as appropriate in an expeditious manner in accordance with the RPs. 102. GOMP will cause respective EAs to ensure that construction contracts contain binding requirements for construction contractors to fully reinstate pathways, other local infrastructures, and agricultural land to at least their pre-project condition upon construction completion. Provision should be made for adequate recording of the condition of roads, agricultural land, and other infrastructure prior to transport of material and construction commencement. 103. GOMP will cause respective EAs to ensure that the requirements set out in the IPDF and the Government’s and GOMP’s applicable loans on IP will be implemented. 104. In order to strengthen the effectiveness of stakeholder consultation and participation in the implementation of the Investment Program, GOMP will cause each EA to undergo a full consultation and participation (C and P) process including: (i) stakeholder analysis, (ii) provision and disclosure of documents to the stakeholders, (iii) announcement of the date for consultation on specific issues, and (iv) adequate monitoring of the C And P process.

26

105. Environmental. GOMP through the EAs will ensure that proposed investments under the MFF are undertaken and that all subproject facilities are operated and maintained in accordance with all applicable laws, rules, and regulations of the Government and ADB’s Environment Policy (2002). For each subproject, EAs will prepare and implement the necessary IEE, environmental impact assessment, and EMP (with budget) in accordance with the EARF. For subprojects not defined prior to approval of the MFF, the environmental categorization and assessment procedures defined in the EARF will be followed as part of subproject appraisal. For any category A or B sensitive subprojects, a Summary Environmental Impact Assessment (SEIA) or IEE for subsequent tranches will be prepared and made available to the general public 120 days before a PFR is submitted to ADB. EAs will monitor, audit, and report to ADB twice a year on the implementation of the EMPs for each subproject.

VI. RECOMMENDATION

106. I am satisfied that the proposed multitranche financing facility would comply with the Articles of Agreement of ADB and recommend that the Board approve the provision of loans under the multitranche financing facility in an aggregate principal amount not exceeding $620 million equivalent to India for the Madhya Pradesh Power Sector Investment Program from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s LIBOR based lending facility; and such other terms and conditions as are substantially in accordance with those set forth in the Framework Financing Agreement presented to the Board.

Haruhiko Kuroda President

8 March 2007

Appendix 1 27

DESIGN AND MONITORING FRAMEWORK

A. Investment Program

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

Impact Contributed to sustaining economic growth and social development in Madhya Pradesh. Contributed to meeting the energy demand growth in Madhya Pradesh.

Gross state product (GSP) grows by at least 6% annually in 2007–2012. Energy deficit is reduced from 13% in 2007 to 0% in 2012.

Annual economic review and performance reports.a

Assumption Central and state governments remain committed to power sector reforms.

Outcome Sustainable and commercially operated power sector companies. Transmission expansion: Improvement in operational efficiency, voltage profile, and power delivery capacity of Madhya Pradesh. Distribution enhancement: Reduction in system losses and improved supply quality and reliability. Capacity of sector institutions strengthened.

Reduced dependence of the sector on direct state support from approximately 30% of total investment funding to 0% by 2012. Eliminate financial losses in the sector by 2011 (from Rs2.70 billion in 2005). Increase transmission capacity from 5,563 MW in 2005-2006 to 8,170 MW in 2008-2009. Enhance system availability from 95% in 2005-2006 to 97.5% in 2008-2009. Reduce technical losses in transmission system from 5.2% in 2005-2006 to 4.9% in 2008-2009. Reduce distribution losses from 40%–45 in 2005-2006 to 19% in 2012. Improve system reliability, substantial reduction in fault restoration time. Reduce customer complaints about quality of electricity supply MP Energy Department able to conduct further reform.

Annual reports of the transmission and distribution companies. Reports of the MPERC.

Assumptions • Operation and maintenance

of the installations are carried out according to standard requirements.

• Availability of adequate

competent staff in the companies.

• Load growth as projected. • Consistency of regulatory

mechanisms and intervention.

• Successful implementation

of DFID capacity development program.

Risks • Delays in implementation of

related power grid transmission projects.

• Generating capacity,

including associated facilities not financed by ADB, not commissioned in a timely manner.

28 Appendix 1

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

Improved energy efficiency. Increased private sector participation.

Improved capacity of MPERC. Improved human resources in all sector companies. Improved financial management and accounting in all sector companies. Capacity for interstate power trade built. Energy conservation funds that supports small-scale projects promoting energy efficiency fully operational. Private investment in power sector substantially increased.

Outputs Transmission expansion: Construction of transmission lines for power evacuation and strengthening of transmission systems. Distribution enhancement in east distribution zone: Installation of remote metering and high-voltage distribution systems; renovation of substation protection system and customer service lines; implementation of SCADA.

By 2011: 400 kV substation: 315 MVA 400/220 kV 220 kV substation: 8x160 MVA 220/132kV 3x100 MVA 220/33 kV 220 kV lines: 1,506 cct-km. 132 kV substation: 10x40MVA 132/33 kV 33x40 MVA 132/33 kV additional transformers 132 kV lines: 1,545 cct-km. By 2012: High-voltage distribution systems: 16,500 km conversion of LT lines to HV lines 11/0.4 kV distribution transformers: 24,000 numbers of 25

Quarterly project progress reports, loan review missions.

Assumptions • Counterpart funds for timely

project implementation are made available

• Timely approval of contract

awards by relevant authorities

• Timely land acquisition and

regulatory approval of construction of transmission lines and substation.

Risks • Regulatory approval for

rights-of-way in forest areas is not obtained in a timely manner

• Increase in prices of raw

materials exceeds contingency and inflation forecasts.

Appendix 1 29

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

Distribution enhancement in central distribution zone: Installation of high-voltage distribution system and remote metering for industrial consumers, and consumer metering; renovation of substation protection system, and distribution system strengthening; and distribution transformer metering. Distribution enhancement in west distribution zone: Installation of high-voltage

kVA 30,000 numbers of 16 kVA Remote metering: 2,000 industrial customers Consumer metering: 250,000 three phase 500,000 single phase Substation protection system: 330 33/11 kV substations. SCADA: Installation of SCADA system for Jabalpur city circle. Jyoti Gram Yojna: 3,800 km 11 kV line 1,800 x 25 kVA distribution transformers By 2013: High-voltage distribution systems: 13,100 km conversion of LT lines to HV lines 11/0.4 kV distribution transformers: 22,000 nos. of 25 kVA 32,000 nos. of 16 kVA Remote metering: 3,800 industrial customers Consumer metering: 131,000 three phase 187,600 single phase Substation protection system: 40 33/11 kV substations Distribution system strengthening: 500 km 33 kV line 2,300 km 11 kV line 21 new 33/11 kV substations Distribution transformers metering: 23,200 nos. of meters

30 Appendix 1

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

distribution system, substation protection system, SCADA, Jyoti Gram Yojna, distribution system strengthening, distribution transformer metering, and capacitor banks. Nonphysical investments: Development of MIS for power trade function. Establishment of Energy Conservation Fund. Facilitation of private sector participation in distribution through piloting strategic partnership modality and expanding franchising scheme. Financial sustainability of power sector.

By 2013: High-voltage distribution systems: 3,900 km conversion of LT lines to HV lines 11/0.4 kV distribution transformers: 580 nos. of 25 kVA 19,400 nos. of 16 kVA Substation protection system: 400 33/11 kV substations SCADA: Installation of SCADA system Jyoti Gram Yojna: 5,100 km 11 kV line 2,000 x 25 kVA distr transf Distribution system strengthening: 580 km 33 kV line 2,500 km 11 kV line 21 new 33/11 kV substations Distribution transformers metering: 23,000 meters Capacitor banks: 10 nos 1,200 kVAR 115 nos 600 kVAR Fully functioning power trading system by 2009. ECF established by 2010 in line with Energy Conservation Act 2001. Pilot scheme is implemented in Gwalior city, in the areas of Dwas, Ratlam and Ujjain districts. Cash management responsibilities transferred to sector companies by April 2001.

Appendix 1 31

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

Independent directors at the board level are recruited; board-level committees, including audit and risk management committees, established; internal audit guidelines developed and internal controllers recruited by December 2007. EAs have appointed directors for operations, commercial functions, and finance by December 2008. DISCOMs MYT effective by April 2007. Loss-reduction targets agreed with MPERC are achieved. Billing and collection efficiency is achieved by December 2006 at 96% by DISCOM-E, 94% by DISCOM-W, and 90% by DISCOM-C. Annual financial statement; and energy, business process, and performance audits are conducted by independent private auditors.

32 Appendix 1

Activities with Milestones 1. Transmission: 1.1 Procurement of major equipment: issuance of bidding documents by February

2006 and contract awards by September 2007 1.2 Land acquisition for substations by July 2007 1.3 Construction started by January 2008 1.4 Commissioning by 2011 2. Distribution-East: 2.1. Procurement of major equipment: issuance of bidding documents by June 2007

and contract awards by February 2008 2.2 Construction started by May 2008 2.3. Commissioning by 2011 Distribution-West: 3.1. Procurement of major equipment: issuance of bidding documents by January 2008

and contract awards by October 2008 3.2 Construction started by December 2008 3.3. Commissioning by 2013 Distribution-Central: 3.1. Procurement of major equipment: issuance of bidding documents by January 2008

and contract awards by October 2008 3.2 Construction started by December 2008 3.3. Commissioning by 2013

Inputs • ADB: $620 million • Domestic Financiers:

$1.345 billion • DFID: $25 million • Private investors: $100

million • Internal Funds: $610 million • GOMP: $300 million

ADB = Asian Development Bank, cct-km = circuits kilometers, DFID = Department for International Development of the United Kingdom, DISCOM = distribution company, GOMP = Government of Madhya Pradesh, GWh = gigawatt-hour, HV = high voltage, kV = kilovolt, kVA = kilo volt ampere, kVAR = kilo volt ampere reactive, LT = low tension, MFF= multitranche financing facility, MP = Madhya Pradesh, MPERC = Madhya Pradesh Electricity Regulatory Commission, MVA = megavolt ampere, MW = megawatt, MYT = multi year tariff, PFR = periodic financing request. SCADA = Supervisory Control and Data Acquisition a Handbook of Statistics on Indian Economy. Available at: http://www.rbi.org.in/scripts/publications.aspx and updated

monthly.

Appendix 1 33

B. Sector Road Map

Objective Impact Performance Measurement Responsible Party

Achieve financially viable power sector.

Reduced burden on the state and release resources for more productive use.

Final phase of FRP consolidated in MYT orders. Implement final elements of transfer scheme; deal with residual MPSEB functions. Review of agricultural subsidy complete and implemented. Cross-subsidies addressed. A tariff policy implemented; costs contained.

Unbundling process complete and new structure consolidated. Business plan targets achieved.

Sector companies GOMP GOMP MPERC

Continue the reform process.

More autonomous, commercially focused, and performance-orientated successor companies to MPSEB developed. Competition in generation; benchmark surrogate competition in transmission and distribution facilitated. Climate for private sector participation enhanced.

Make TRADECO operational; consolidate and then develop market structure. Distribution companies to have full control over their revenues and the power procurement process. Consolidate MYT; introduce intrastate ABT and open access regime (1 MW customers by 2007 ahead of Jan 2009 EA deadline). Implement organization structure and build capacity of the six successor companies (and supervisory institutions of Energy Department, MPERC) through successful utilization of DFID-funded support program. Adoption of high standards of corporate governance. “Backbone” management support (ERP) systems specified and implemented. Human resource planning, resourcing, and productivity addressed

TRADECO trading; market relationships established and fully operational Choice of supplier available to major customers Boards of companies working to appropriate standards of governance Audited financial statements prepared to time Companies’ access to finance and services MPERC orders result in progressive performance improvements

Boards of companies GOMP MPERC

Improve power system performance.

Power system capable of meeting forecast demand. Economic development through access to competitively priced energy supplies facilitated.

Improve companies’ capacity to deliver by restructuring and capacity development. Power from generators evacuated to the grid and supplied to customers. Implement program for reducing system technical and nontechnical

MPERC targets for availability and losses met. Improving trend in internationally accepted network performance measures, (SAIFI, SAIDI, CAIFI, CAIDI).

Companies (delivery) MPERC (target and monitor)

34 Appendix 1

Objective Impact Performance Measurement Responsible Party

losses, by HVDS, network construction standards, capacity development, training, provision of tools and equipment. Improve standard of staff and public safety.

Improving trend in safety indicators.

Improve power quality.

Customers provided with a continuous supply of power.

Ensure compliance with license conditions. Ensure transformer loading within ratings; system voltages within prescribed limits etc.

MPERC targets met.

Companies (delivery) MPERC (target and monitor)

Improve access to power.

All potential customers have the option to take power supplies from their distributor.

System extension to 100% of villages by 2008 and 100% of customers by 2012. Meet increased demand to connect new customers; reduce time to connect.

GOMP and MPERC targets met.

Companies (delivery) MPERC (target and monitor)

ABT = , CAIDI = Customer Average Interruption Duration Index , CAIFI = Customer Average Interruption Frequency Index , DFID = Department for International Development of the United Kingdom, FRP = Financial Restructuring Plan, GOMP = Government of Madhya Pradesh, HVDS = High Voltage Distribution System, MPERC = Madhya Pradesh Electricity Regulatory Commission, MPSEB = Madhya Pradesh State Electricity Board, MYT = multi year tariff, MW = megawatt, TRADECO = Madhya Pradesh Power Trading Company Limited, Source: Asian Development Bank Assessment.

Appendix 2 35

POWER SECTOR REFORMS, RESTRUCTURING, AND CAPACITY DEVELOPMENT A. Power Sector Reforms

1. Guided by the National Electricity Act, 2003, the Government of Madhya Pradesh (GOMP) has been driving power sector reforms with the aim of strengthening its physical and/or nonphysical capacities and enhancing financial viability. Reforms comprise unbundling of the Madhya Pradesh State Electricity Board (MPSEB), tariff rationalization, and sector financial restructuring, as well as significant changes in regulatory approaches, open access to the grid, and power trading. 2. MPSEB was unbundled into five wholly state-owned government companies: Madhya Pradesh Power Generating Company Ltd (GENCO), Madhya Pradesh Power Transmission Corporation Company Ltd (TRANSCO), and three distribution companies (DISCOM-E, DISCOM-C, and DISCOM-W). In June 2006, the single electricity buyer and/or seller role of MPSEB was transferred to a newly incorporated company (TRADECO).

Figure A2.1: Reorganization of Madhya Pradesh State Electricity Board

GENCOGeneration Company

TRANSCOTransmission

Company

DISCOM-CDistribution Company

DISCOM-EDistribution Company

DISCOM-WDistribution Company

TRADECOTrading

Company

MPERCState Regulator

Consumers

Energy Flow

Consumers

MPSEB Madhya

Pradesh State Electricity

Board

Power Purchase from Other States

and IPPsPower

Purchase from Other States and

IPPs

Energy Flow

<Before> <After Unbundling of the Power Sector>

Source: ADB assessment 3. MPERC’s framework is in place, and the Madhya Pradesh Electricity Regulatory Commission (MPERC) has implemented the tariff order system aggressively. In December 2005, MPERC issued multiyear tariff (MYT) determinations for the generating and transmission companies. Distribution companies filed MYT petitions on 31 October 2006 and will be effective on 1 April 2007.

36 Appendix 2

4. The Asian Development Bank (ADB), with Department for International Development (DFID) of United Kingdom and other development partners, has assisted this reform agenda with the Madhya Pradesh Power Sector Development Program (MPPSDP) as described in Figure A2.2.

Figure A2.2: Progress of the Madhya Pradesh Power Sector Reform Progress

Unbundling of MPSEB

Tariff Rationalization

Internal Reforms

Financial Restructuring

�Organizational unbundling completed-MPSEB segregated into six successor companies for generation, transmission, distribution, and trading.

�Operational efficiency improved-Considerable net loss reduction-Position and effectiveness of the regulator consolidated

�Multi Year Tariff framework adopted -MPERC has issued the regulations for MYT implementation for the generating company and transmission and distribution licensees (Dec. 2005)

�Financial restructuring undertaken -Actual losses of MPSEB have been lower than those forecasted in the 2001 RRP. (Cumulative forecast losses over this period FY 2001 to FY 2005 were Rs 56,000 million compared with actual losses of Rs 25,000 million.)

�Final transfer and absorption of the employees in the new companies (by 2007).

�Further reduction in transmission / distribution system and enhancement of collection needed-Losses to 19% in all Discoms by 2012.-Overall collection efficiency is targeted to increase from a current average of 85% to 96% from 2005 to 2012.

�Implementation of scheduled tariff increases in real terms -As per the tariff policy, by the end of 2010/11, tariffs for each category of consumers should reflect ± 20% of the average cot of supply.

�Continuity of financial restructuring is essential for the power sector’s financial health. -Abolition of centralized cash management mechanism -Transparent transfer of subsidies from GOMP budget

<Key Pillars><Achievement> <Way Forward>

Madhya Pradesh Power Sector Development Program (approved in 2001) ADB

DFID Support for the Reform of the Power Sector in MP SRPSMP Phase II (2005)

MP Power Sector Investment Program 2007-

Other Depeloment Partners,e.g., CIDA has been also involved.

FY = fiscal year, GOMP = Government of Madhya Pradesh, MPERC = Madhya Pradesh Electricity Regulatory Commission, MPSEB = Madhya Pradesh State Electricity Board, MYT = multi year tariff, RRP = Report and Recommendation of the President Source: Asian Development Bank Assessment B. Financial Restructuring

5. In 2003, GOMP’s MPSEB developed a financial restructuring plan (FRP) with the objectives of (i) consolidating the financial performance and position of the sector, (ii) ensuring accurate and transparent transfer of assets and liabilities from GOMP to the sector entities, (iii) developing a plan to achieve sector financial sustainability through the targeted allocation of financial obligations, and (iv) introducing increases in real tariffs and providing a platform for open access. 6. In November 2005, the FRP was revised to reflect latest changes, such as coal price increases, new generation and power purchase planning, and the tariff order for 2006. The update was formulated considering MPSEB as an integrated utility, offsetting the cross-

Appendix 2 37

company transactions taking place after implementation of the transfer scheme. The revised FRP included (i) additional provisioning for doubtful debts, and write-off of Rs3.85 billion and a further Rs0.6 billion of bad debts in MPSEB’s balance sheet, and expensed before devolution to the companies; (ii) conversion of all overdue loans and bonds from GOMP into equity; (iii) transfer of Rural Electrification Corporation loan to GOMP through adjustments against receivables toward free electricity bill waiver (Rs14.140 billion); and (iv) adjustment of cross dues, receivables and payables and power purchase receivable and payables toward, Maharashtra, Rajasthan and Uttar Pradesh state electricity boards. 7. As the result of the FRP, cleaning up of balance sheets largely has been completed (Table A2.1). The power sector is expected to achieve an accounting profit in 2011 with a healthier debt-equity ratio (Table A2.2). The revised FRP planned to focus on several pending issues; (i) remaining pension liabilities, (ii) contingent liabilities, and (iii) provisioning for non-moving items. The final phase of the FRP will be included as part of the next MYT review, thereby completing and consolidating the financial restructuring.

Table A2.1 : Balance Sheet of Madhya Pradesh State Electricity Board (Rs million)

2001 2002 2003 2004 2005

Assets

119,935 106,548 116,043 143,077 154,853Equity (1,965) (14,647) (15,634) (13,170) 44,189

Liabilities

48,202 57,025 61,401 75,690 51,455Debt/Debt Plus Equity (%) 102.7 129.6 128.6 119.5 57.3Current Assets/Current Liabilities 1.02 0.61 0.66 0.69 1.26

(-) = Negative Note: 2001 accounts are for 15 April 2000 to 31 March 2001 (as per 2002 audited accounts). Balance Sheet of 2005 was not audited.

Table A2.2: Sector Financial Projections

(Rs million) Item 2006 2007 2008 2009 2010 2011 2012

Revenues 643 772 1,017 1,221 1,378 1,532 1,671 Expenditure 719 850 1,064 1,262 1,414 1,468 1,594 Profit or Loss (76) (78) (46) (41) (36) 64 77 Provision for Income Tax - - - - - 5 7 Profit or Loss After Tax (76) (78) (46) (41) (36) 58 70 Return on Average Equity (%) (10) (4) (2) (1) (1) 2 2 Balance Sheet Assets 1,673 1,933 2,196 2,439 2,567 2,560 2,510 Pension Liability 484 468 447 419 383 340 288 Long-Term Liabilities 745 937 1,091 1,223 1,320 1,256 1,216 Equity 444 528 658 798 863 964 1,006 Total Equity and Liabilities 1,673 1,933 2,196 2,439 2,567 2,560 2,510 Debt/Debt Plus Equity (%) 45 48 50 50 51 49 48 (-) = Negative Source: Financial Restructuring Plan November, 2005.

38 Appendix 2

C. Capacity Development

8. Since the initial power sector reforms, ADB has taken a joint approach in capacity development with other Development Partners (DPs). In tandem with the power sector financial and organizational restructuring, ADB’s earlier program loan and sector investment project helped GOMP to (i) improve the policy environment and governance, (ii) initiate the establishment of a commercial and competitive business environment to promote efficiency gains and loss reduction; and (iii) introduce a computerized information and revenue management system. Contemporaneously, DFID implemented its £10 million capacity building program.

Figure A2.3: Overview of Capacity Development Program (ADB & DFID)

Final Unbundling of MPSEB

Continued Development of Enabling Environment

Further Internal Reforms

Enhancement of Financial Viability

�Policy coordination and reform programme management (GOMP) -including communications, socio-economic and environmental issues <GBP 4m (+GBP 0.4m reviews and GBP 0.5m contingencies)>�Strengthened Regulation FunctionSupport to MPERC, including management systems, stakeholder participation, recruitment and training <GBP 2m>

�Transfer of employees, etc.-HR support to the five companies, including staff transfer, needs assessment, recruitment, training, reward and service rules <GBP 1m>

�Backbone MIS-MIS/IT support, to deliver an ERP solution for the five companies <GBP1.5m + 4m>

�Financial Position Strengthening -Support to DISCOMs, including financial management and accounting, commercialisation, investment and business planning, regulation, technical support, trading and market operations <GBP 3.6m>

-Support to GENCO and TRANSCO, including financial management, commercialisation, investment and business planning, regulation, trading and market operations <GBP1.5m>

�Empowering Trading Function -Support to TRADECO for development systems and capacity building

�System Loss Reduction and Reliability Enahncement -Support to DISCOMs for implementing SCADA systems

<Remaining Issues of MPPSDP>

<DFID £18.5M ($35.2M) >

<Non Physical Investment $10M>

<Phisical Investment $610M>

�Phisical Capacity Expansion

-Transmission -TRANSCO -Distriburion-DISCOM-E -DISCOM-W -DISCOM-C TRADECO

<ADB $620M >

Source: Asian Development Bank Assessment 9. ADB and DFID have been exploring a similar collaborative arrangement during implementation of the Investment Program. DFID is providing up to £18.5 million ($35.2 million as of 21 September 2006) in technical assistance (£14.5 million) and financial assistance (£4 million) from 2006 to 2010, which will include (i) support to GOMP for mapping further reforms; including subsidy review and communications; (ii) capacity development in MPERC; (iii) technical, business planning, and financial management support to all sector companies together with MIS and human resources development. 10. To maximize the synergy with the DFID program, a selective capacity development program is envisaged by ADB, focusing on implementation support of SCADA systems in the DISCOMS and TRADECO, whose future role is pivotal for the effective commercial operation of the reformed sector.

Appendix 3 39

POWER SECTOR ASSESSMENT A. National Sector Structure

1. India has confirmed its intent to provide universal power supply at an affordable price by 2012, which will require an estimated 100,000 megawatt (MW) of new generating capacity. The Government also intends to use more indigenous hydropower resources, thereby shifting the supply mix in favor of hydropower at the expense of coal-fired thermal plants. Recognizing that the poor performance of state electricity boards in the past was a roadblock to private sector investment, The Government adopted in 2001 a program of unbundling, open access tariff restructuring, and rationalization. Independent regulatory bodies also were established at central and state levels. The Electricity Act, 2003 mandated full metering for all consumer classes, multiyear tariff determinations, tariffs to be within 20% of the deemed cost of supply, availability-based tariffs, and 100% rural electrification. 2. The Government’s Ministry of Power (MOP) provides overall guidance to the sector through the Central Electricity Authority (CEA). MOP owns central power utilities, such as the National Thermal Power Cooperation, National Hydroelectric Power Cooperation, Nuclear Power Cooperation, and the Powergrid Corporation of India, which are engaged in generation and interstate power transmission. The Rural Electrification Corporation and the Power Finance Corporation are Government-owned institutions dedicated to financing power sector activities. A power trading corporation was established recently to take responsibility for power trading among states, as well as between states and central power utilities. 3. In technical and economic matters, MOP is assisted by CEA, a statutory body constituted under the Electricity (Supply) Act, 1948, which was replaced by the Electricity Act, 2003. CEA, an attached office of MOP, is responsible for the technical coordination and supervision of programs, and also is entrusted with some statutory functions. Headed by a chairman, CEA comprises six full-time members. CEA is responsible for preparing a national electricity plan in accordance with the National Electricity Policy (NEP). 4. The Indian Parliament passed the Electricity Regulatory Commissions (ERC) Act in 1998, the same year the Central Energy Regulatory Commission (CERC) was established. The ERC Act gives CERC full autonomy to regulate central power utilities and to set bulk tariffs. The ERC Act also encourages the states to establish state electricity regulatory commissions with full authority to regulate state-level power utilities. B. Provisions of Electricity Act, 2003

5. The Electricity Act, 2003 is the cornerstone legislation for the power sector, and provides the legal framework for the efficient development of the sector. The act is concerned primarily with unbundling of state electricity boards, open access, and competition. Salient provisions of the Electricity Act, 2003 are (i) exemption from licensing requirements for electricity generation, (ii) open access in electricity transmission, (iii) licensing for electricity trading, (iv) arrangement of licenses for laying lines for private transmission, (v) promotion of competition by allowing more than one distribution company in one area of supply, (vi) ensuring electricity supply to the consumers at minimum standards, and (vii) provision for establishment of tribunals in place of the High Court for appeals against the orders of CERC. 6. The act includes a provision for MOP to update regularly and publish a NEP. The current policy document is dated 12 February 2005. Its broad policy objectives include (i) access to

40 Appendix 3

electricity for all households by 2010; (ii) demand to be fully met by 2012, and energy and peaking shortages to be overcome with adequate spinning reserve available; (iii) efficient supply of reliable and quality power of specified standards at reasonable rates; (iv) per capita availability of electricity to be increased to more than 1,000 kilowatt-hour (kWh) by 2012; (v) minimum lifeline consumption of 1 kWh per household per day by 2012; (vi) financial turnaround and commercial viability of the sector; and (vii) protection of consumers’ interests. C. Madhya Pradesh Power Sector Structure

7. A vertically integrated monopoly, the Madhya Pradesh Electricity Board (MPEB), operated the Madhya Pradesh (MP) power sector under state direction. MPEB interacted with the central power utilities for planning and coordination. In the early 1990s, MPEB faced negative equity, increases in transmission and distribution losses, power shortages, and poor quality of power supply. From 1992, it was unable to reach the minimum return of 3% on fixed assets, as required by the Electricity Supply Act, 1948. As a consequence, revenue subsidies from the state government increased from 19% in 1993 to 40% in 1999 of total revenues. The inability to invest in generation, transmission, and distribution due to lack of funds eroded the already weak condition of the MP power sector. 8. Madhya Pradesh State Electricity Board. In 2000, the state of Chhattisgarh was carved out of Madhya Pradesh state, and the MPEB was divided in Madhya Pradesh State Electricity Board (MPSEB) and Chhattisgarh State Electricity Board. The assets and project-related liabilities were allocated geographically, while non-project related-liabilities were distributed based on population. MPSEB assumed about 79% of the long-term debt, only 67% of the revenue base, and 94% of agricultural consumers, with excess power generation allocated to the Chhattisgarh State Electricity Board. This imbalanced allocation had a negative impact on MPSEB. 9. The Electricity Act, 2003, the central legislation, came into force on 9 June 2003. With the State Act, it envisaged the reorganization of MPSEB and introduced significant changes in regulatory approaches, open access to the grid, and power trading. Under the power sector reform program, and in line with the Electricity Act, 2003, Government of Madhya Pradesh (GOMP) has unbundled the MPSEB into five wholly state-owned government companies: Madhya Pradesh Power Generating Company Ltd (GENCO), Madhya Pradesh Power Transmission Corporation Company Ltd (TRANSCO), and three distribution companies (DISCOM-E for the Eastern area, DISCOM-C for the Central area, and DISCOM-W for the Western area). GENCO has been vested with MPSEB’s generation assets and has taken over their operation, while TRANSCO has become the sole transmission company in the state. The bulk power trading function was transferred from MPSEB to the three DISCOMs. The most recently incorporated company is the power trade company (TRADECO), which took over the role of single electricity buyer and seller from MPSEB in June 2006. 10. Although MPSEB retains few functions and staff, it is still a key stakeholder in the sector as it manages cash flow for sector companies and retains the corporate planning function for the sector through its corporate planning group. In June 2005, the companies started to operate independently, with each distribution company responsible for collections. However, these collections are transferred to the escrow account of MPSEB, which is in charge of paying the liabilities of the companies. The year-end balance sheet for MPSEB as of 31 March 2005 takes into account the restructuring intended by GOMP. MPSEB is completing accounts to 31 May 2005, which represent its final accounts. Thereafter, successor companies will report separately, with the final accounts for MPSEB representing the opening position for each of the

Appendix 3 41

companies from 1 June 2005. The corporate planning group’s role will diminish thereafter, although MPSEB plans to continue to manage cash flows until the cash deficit in the revenue earnings and expenditure requirements is resolved to the satisfaction of all companies.

Figure A3.1: Madhya Pradesh Power Sector Structure

Source: ADB estimate

GENCOGeneration Company

TRANSCOTransmission

Company

DISCOM-CDistribution Company

DISCOM-E Distribution Company

DISCOM-WDistribution Company

TRADECOTrading

Company

MPSEBResidual of State Electricity Board

Power Purchase & IPP

MPERCState Regulator

GOMP State Government

Subsidy

PPA PPA

Consumers

Revenue FlowEnergy Flow

Capital Flow

Cess/ED

Note: Taxable income of the operating companies goes to the Government.

11. State Regulatory Affairs. The Electricity Regulatory Commission Act, 1998, provided for the establishment of central and state electricity regulatory commissions. The primary objective of these regulatory bodies was to introduce transparency and economically sound regulation to the sector, while improving the financial health of state electricity boards and electricity utilities. Key functions of Madhya Pradesh Electricity Commission (MPERC) include (i) rationalization of electricity tariffs; (ii) regulation of power systems operation; (iii) reliability and quality standard setting; (iv) issuance of licenses and regulation of licensees; and (v) promotion of competition, efficiency, and economy in the electricity industry. MPERC determines tariffs for wholesale, bulk, grid, or retail electricity based on tariffs made to it, and determines the tariff payable for use of the intrastate transmission facilities. MPERC has the same powers as are vested in a civil court—it can pass interim orders in any proceeding, hearing, or matter before it; summon books and accounts related to generation, transmission, distribution supply, or utilization of electricity for examination; and impose penalties for contravention of provisions of licensing. 12. Alternative Energy Board. The MP Urja Vikas Nigam Ltd., a state government entity, leads alternative energy development, including energy efficiency. This entity is responsible for verification of energy production and consumption.

42 Appendix 3

D. Madhya Pradesh Power Sector

1. Government Strategy

13. The provision of reliable, affordable electricity is a prerequisite for economic and social development in MP. GOMP is driving a power sector reform process with the core objective of strengthening the ability of public and private entities to deliver such an electricity supply to all consumers. The reforms are underpinned by a realistic investment program, designed to remove current constraints and to meet forecast demand growth though capacity augmentation and loss reduction, as well as a regulatory regime that recognizes actual and reasonable operating costs in tariff setting and encourages efficient use of capital. During the Eleventh Plan 2008–2012, $5.3 billion in investments are planned, divided among generation (43%), transmission (26%), and distribution (30%). GOMP has requested external financial assistance for implementing critical parts of this investment program.

2. Capacity and Constraints

14. Generation. India’s western region, which includes MP, has 37,000 MW of installed generating capacity. Coal-fired thermal plants account for 27,000 MW of this capacity. The Western Region is an importer of capacity during peak periods and an exporter during off-peak periods. Generation is predominantly thermal (74%), with coal-fired plants representing 58% of installed and available capacity; hydropower capacity represents 19%. The GOMP power sector road map under the Eleventh Plan 2008–2012 is predicated on an increase in the percentage of hydropower in the generation mix, improvement in the plant factors of thermal stations, and loss reduction through targeted investments in transmission and distribution. 15. MP has suffered from chronic peak capacity and energy shortages in recent years. The peak deficit has exceeded 20% and the energy deficit has been about 13% for the past 3 years. Installed capacity in or available to MP is about 6,300 MW, with GENCO owning and operating about 3,000 MW. Generating capacity available to meet peak demand is significantly less than installed capacity (Table A3.1).

Table A3.1: Peak Generating Capacity Available to Madhya Pradesh (MW)

Sector Hydro Thermal Current Total

Planned Additions

FY07

Planned Capacity

31/3/07State (MW) 733 1,718 2,451 71 2,522Private / JV 1,399 222 1,621Central (MP Share) 1,396 86 1,482Eastern Region Electricity Board (EREB) 43 0 43TOTAL 5,289 379 5,668

Joint Venture (JV) Source: Asian Development Bank estimates 16. Based on consistent growth in the national and state economy, as well as moderate increases in tariffs to bring them in line with the true cost of supply, unrestricted consumer demand for energy in MP is forecast to increase at 7% a year during the Eleventh Plan 2008–2012. This means that approximately 17,000 gigawatt-hour (GWh) of additional demand will be added by early 2012. With total energy losses currently at about 41%, more than 6,000 MW of

Appendix 3 43

peak generation and network capacity would need to be added over the next 5 years to serve this demand. 17. MP’s power sector investment program is predicated on a significant reduction in technical and commercial losses, which would reduce the additional capacity requirement by more than 1,000 MW and return to a capacity and energy surplus by 2011. Meeting peak demand is problematic and expensive, given the short duration and nature of the peak. Consequently, planned new generation is mostly base- and mid-load thermal plants. 18. The Electricity Act, 2003 enables a competitive power market for all sector players, including generation companies, to expand their market base. As generation is de-licensed, major competition is expected from independent power producers, merchant plants, and captive plants in addition to initiatives from the existing plants inside and outside states where they are located to increase their market share. GENCO’s past and projected performance is open to the scrutiny of potential competitors, many of which could be in a position to cherry-pick the most profitable bilateral power wholesaling opportunities. New entrants benefit from considerably more flexibility in choosing and timing their investments to respond to the market’s new and evolving needs. GENCO must improve its performance to take on the competition from other players entering into the market, and to move away from being an asset-driven company to one with a commodity and trading focus. 19. Transmission. Since 2002, transmission circuit length has increased almost 14%, while transformation capacity has risen 41%. Consequently, transmission losses have been reduced to an acceptable level of around 5%, and availability of the transmission network has exceeded 98% for the past year. However, due to continued growth in demand, the transmission capacity is inadequate to serve peak demand. During 2006, the transmission system served a record maximum demand of 5,780 MW. The peak demand is expected to grow on average about 9% to 2012. The transmission system is connected with all neighboring states: Chhattisgarh, Gujarat, Maharashtra, Rajasthan, and Uttar Pradesh.. TRANSCO has 382 connection points with DISCOMs and 43 connection points with GENCO at the outgoing feeders of power stations. 20. Notwithstanding the obvious short- and long-term need for investment to increase capacity, the transmission system is in good condition, maintains acceptable voltage and stability levels most of the time, and has reasonable levels of losses. The challenge—and the opportunity—is to ensure that transmission standards do not slip in the face of ramping demand, increasing generation levels, and the additional uncertainty that open access and reduced centralized planning impose on the transmission operator. 21. With the advent of nondiscriminatory open access, TRANSCO is receiving capacity building assistance, funded by Department for International Development of the United Kingdom (DFID), to (i) improve the reliability and availability of its network, (ii) increase its understanding of network technical capacity under normal and contingency conditions, (iii) introduce balancing and settlement mechanisms, and (iv) improve its ability to meter and account for transmission transactions. 22. Distribution. The sector road map targets 100% village electrification by 2008 and 100% household electrification by 2012. This requirement increases the burden on MP’s DISCOMs to meet forecast demand growth, reduce losses, and improve reliability of supply. Performance in these areas has been poor, and historical investment has failed to keep pace with growth. Losses for DISCOMs still exceed 35%, power transformer capacity is inadequate to

44 Appendix 3

meet diversified demand on 11 kilovolt (kV) feeders in many areas, 33 kV and 11 kV feeders are being loaded in excess of thermal limits, and distribution failure rates are about 19%. Power quality is poor due to undersized conductors, long Low Voltage (LV) circuits, and distribution transformer overloading. The introduction of computerized power systems analysis has underscored the widespread nature of these problems throughout the state. 23. Inadequate maintenance practices and poor installation of equipment have compromised safety on the networks of the three DISCOMs. Losses arising from poorly executed connections at distribution transformers are suspected to be far higher than normal. While improving and modernizing these practices will be a challenge, it is essential if targeted systems and corporate performance improvements are to be realized.

3. Investment Program

24. In summary, the power sector faces the following challenges: (i) generation capacity is insufficient to meet peak demand, necessitating scheduled and unscheduled load shedding, which constitutes a major impediment to economic development in MP; (ii) transmission capacity is barely adequate and security of supply is at risk; and (iii) the absence of a framework for long-term distribution planning and a lack of funding has led to significant underinvestment in the distribution network and poor maintenance of equipment. Consequently, the network is overstretched, losses are high, and reliability and quality of supply is poor. 25. The economic performance of MP has lagged that of India in recent years. Gross state product grew at 2.5% in 2004–2005, compared with Indian gross domestic product growth of about 7%. Energy intensity of output is also relatively low compared to the rest of India. However, forecasts indicate a significant improvement in MP’s economic performance, which is expected to match or exceed that of neighboring states during the Eleventh Plan 2008–2012. This, in turn, will drive strong growth in electricity demand. The objective of full household electrification by 2012 is expected to generate further growth in electricity demand. Table A3.2 summarizes demand projections through the end of the Eleventh Plan.

Table A3.2: Demand Projections per Eleventh Plan (GWh)

2007 2008 2009 2010 2011 2012

Forecast demand (including T & D losses) 39,183 41,808 44,943 48,545 52,114 55,142Annual growth 6.7% 7.5% 8.0% 7.4% 5.8%CAGR 7.1%

Eleventh Plan

CAGR = , GWh = giga watt, T & D = Transmission and Distribution Source: ADB estimate 26. To meet this demand growth and to reinforce existing system constraints, an investment of approximately Rs248 billion ($5.3 billion) will be required. Investments are closely linked—the generation requirement is predicated on loss-reduction targets at the distribution level being achieved, while the transmission investment is driven by the requirement to evacuate power from new generating plants, and to supply peak capacity to distribution off-take points. In this context, investment plan components are interdependent, and the timing of physical implementation is important if purported benefits are to be delivered.

Appendix 4 45

Loan No.Public Sector Pro

EXTERNAL ASSISTANCE TO THE POWER SECTOR 1. India’s power sector has received a major portion of its external assistance from the Asian Development Bank (ADB), the Canadian International Development Agency, the Department for International Development of the United Kingdom, the Japan Bank for International Cooperation, Kreditanstalt für Wiederaufbau of the Government of Germany, the United States Agency for International Development, and the World Bank. Previous ADB loan assistance is listed in Table A4.1.

Table A4.1: Previous ADB Loans to the Power Sector in India

ject0798-IND North Madras Thermal Power 150 18-Nov-860907-IND Unchahar T 880988-IND Rayalaseem -891029-IND Second Nor 901081-IND Special Assi -911117-IND Gandhar Fi -911148-IND Hydrocarbon -911161-IND Power Effici -921212-IND Energy Cons -921222-IND Gas Flar -931285-IND Gas Reh -931343-IND Industrial En -941405-IND Power Trans -951465-IND Renewable E 961591-IND LPG Pipeline -971764-IND Power Trans 001803/1804-IND Gujarat Po -001868/1869-IND Madhya Pr -011968-IND State Power -022036/2037-IND Assam Po -032152-IND Power Grid T -04

_ Uttarancha Subtotal

7058/1036 Calcutta El 907082/1142 Calcutta El -917138 Infrastructur 977183/1991 Tala–Delhi T 037192 Dahej Lique 047227 Central Utta 067242/2249 Ntpc Capaci 06 SubtotalC-19-IND Power Financ -902193(L)-IND Energy Effic 94 Subtotal Total

Private Sector

Amount

hermal Power Extension 160 29-Sep-a Thermal Power 230 21-Novth Madras Thermal Power 200 30-Aug-stance 150 04-Apr

eld Development 267 14-Nov Sector Program 250 17-Dec

ency (Sector) Project 250 26-Marervation and Environment Improvement 147 17-Dec

ing Reduction 300 30-Marabilitation and Expansion 260 07-Dec

ergy Efficiency 150 13-Decmission (Sector) 275 16-Novnergy Development 100 26-Sep-

150 16-Decmission Improvement (Sector) 250 06-Oct-

wer Sector Development Program 350 13-Decadesh Power Sector Development Program 350 06-Dec

Sector Reform 150 12-Decwer Sector Development Program (Program Loan) 250 10-Dec

ransmission (Sector) Project 400 22-Decl Power Sector Investment Program 300

5,089

ectricity Supply Company Transmission 18 04-Oct-ectricity Supply Company Thermal Power Plant 32 13-Dece Development Finance Company, Ltd. 30 14-Oct-ransmission Project 62 16-Jan-

fied Natural Gas Terminal Project 75 13-Jan-r Pradesh Gas Limited (CUGL) 3 17-Jan-ty Expansion Financing Facility 300 27-Jul-

519e Corporation for Tamil Nadu and Andhra Pradesh 111 13-Nov

iency Support 3 27-Oct-114

5,722

($ million) ADate

pproved

Source: Asian Development Bank assessment.

DETAILED COST ESTIMATES 46 Appendix 5

Item Foreign Local Total Foreign Local Total % of TotalExchange Currency Cost Exchange Currency Cost Base Cost

A. EquipmentTower Parts, Conductors, and Insulators 1,018.8 0.0 1,018.8 21.9 0.0 21.9 20Power Transformers 1,700.4 0.0 1,700.4 36.6 0.0 36.6 34Circuit Breakers 185.7 0.0 185.7 4.0 0.0 4.0 4Current Transformers 78.0 0.0 78.0 1.7 0.0 1.7 2Solid Core Insulators 103.7 0.0 103.7 2.2 0.0 2.2 2Isolators 46.2 0.0 46.2 1.0 0.0 1.0 1Switchyard Structures 303.7 0.0 303.7 6.5 0.0 6.5 6Control & Protection Equipment 63.4 0.0 63.4 1.4 0.0 1.4 1Lightning Arrestors 32.1 0.0 32.1 0.7 0.0 0.7 1Subtotal Equipment 3,532.1 0.0 3,532.1 76.0 0.0 76.0 71

B. Civil Works, including erection & stringing 0.0 940.2 940.2 0.0 20.2 20.2 19C. Project Management and Construction Supervision 0.0 178.9 178.9 0.0 3.8 3.8 4D. Environment Mitigation and Monitoring 0.0 51.2 51.2 0.0 1.1 1.1 1E. Resettlement 0.0 120.9 120.9 0.0 2.6 2.6 2F. Taxes and Duties 0.0 177.5 177.5 0.0 3.8 3.8 4

Subtotal Base Costs 3,532.1 1,468.6 5,000.8 76.0 31.6 107.5 100

Physical Contingencies 176.6 73.4 250.0 3.8 1.6 5.4 5Price Contingencies 353.2 146.9 500.1 7.6 3.2 10.8 10

Total Project Costs 4,061.9 1,688.9 5,750.9 87.4 36.3 123.7

Commitment Charges 39.0 0.0 39.0 0.8 0.0 0.8 1Interest During Implementation 390.4 0.0 390.4 8.6 0.0 8.6 11

Total Costs To Be Financed 4,491.3 1,688.9 6,180.3 96.8 36.3 133.1 124

Table A5.1: Detailed Cost Estimates for Transmission Component by Expenditure Category(Rs million) ($ million)

Source: Asian Development Bank estimate

CostItem Amount % of Cost Amount % of Cost Amount % of Cost

Category Category Category

A. EquipmentTower Parts, Conductors, and Insulators 21.9 21.9 100 0.0 0 0.0 0Power Transformers 36.6 36.6 100 0.0 0 0.0 0Circuit Breakers 4.0 4.0 100 0.0 0 0.0 0Current Transformers 1.7 1.7 100 0.0 0 0.0 0Solid Core Insulators 2.2 2.2 100 0.0 0 0.0 0Isolators 1.0 1.0 100 0.0 0 0.0 0Switchyard Structures 6.5 6.5 100 0.0 0 0.0 0Control & Protection Equipment 1.4 1.4 100 0.0 0 0.0 0Lightning Arrestors 0.7 0.7 100 0.0 0 0.0 0Subtotal Equipment 76.0 76.0 100 0.0 0 0.0 0

0B. Civil Works, including erection & stringing 20.2 8.0 40 12.2 60 0.0 100C. Project Management and Construction Supervision 3.8 0.0 0 0.0 0 3.8 100D. Environment Mitigation and Monitoring 1.1 0.0 0 0.0 0 1.1 100E. Resettlement 2.6 0.0 0 0.0 0 2.6 100F. Taxes and Duties 3.8 0.0 0 3.8 100 0.0 0

Subtotal Base Cost 107.5 84.0 78 16.0 15 7.5 70

Physical Contingencies 5.4 4.2 78 0.8 15 0.4 0Price Contingencies 10.8 8.4 78 1.6 15 0.8 0

Total Project Costs 123.7 96.6 18.4 8.6

Commitment Charges 0.8 0.8 100 0.0 0 0.0 0Interest During Implementation 8.6 8.6 100 0.0 0 0.0 0

Total Costs To Be Financed 133.1 106.0 80 18.4 14 8.6 6

Table A5.2: Detailed Cost Estimates for Transmission Component by Financier($ million)

ADB PFC TRANSCO

Source: Asian Development Bank estimate

Appendix 547

48 Appendix 5

Item Foreign Local Total Foreign Local Total % of TotalExchange Currency Cost Exchange Currency Cost Base Cost

A. EquipmentHigh Voltage Distribution Systems (HVDS) 1,038.5 0.0 1,038.5 22.3 0.0 22.3 42Remote Metering 19.5 0.0 19.5 0.4 0.0 0.4 1Consumer Metering 0

Single Phase Meters 129.3 0.0 129.3 2.8 0.0 2.8 5Three Phase Meters 89.0 0.0 89.0 1.9 0.0 1.9 4Cables and Wires 113.4 0.0 113.4 2.4 0.0 2.4 5

Renovation of Substation Protection Systems 167.8 0.0 167.8 3.6 0.0 3.6 7Subtotal Equipment 1,557.5 0.0 1,557.5 33.5 0.0 33.5 62

B. Civil works, including erection & stringing 0.0 668.0 668.0 0.0 14.4 14.4 27C. Project Management and Construction Supervision 0.0 120.0 120.0 0.0 2.6 2.6 5D. Environment Mitigation and Monitoring 0.0 32.6 32.6 0.0 0.7 0.7 1E. Resettlement 0.0 0.0 0.0 0.0 0.0 0.0 0F. Taxes and Duties 0.0 120.9 120.9 0.0 2.6 2.6 5

Subtotal Base Costs 1,557.5 941.5 2,499.0 33.5 20.2 53.7 100

Physical Contingencies 77.9 47.1 124.9 167.5 101.2 268.7 5Price Contingencies 155.8 94.1 249.9 335.0 202.5 537.4 10

Total Project Costs 1,791.2 1,082.7 2,873.8 535.9 323.9 859.9 0

Commitment Charges 18.2 0.0 18.2 0.4 0.0 0.4 1Interest During Implementation 159.6 0.0 159.6 3.5 0.0 3.5 10

Total Costs To Be Financed 1,969.0 1,082.7 3,051.7 539.8 323.9 863.8 122

Table A5.3: Detailed Cost Estimates for Distribution East Component by Expenditure Category(Rs million) ($ million)

Source: Asian Development Bank estimate

Appendix 549

CostItem Amount % of Cost Amount % of Cost

Category CategoryA. Equipment

High Voltage Distribution Systems (HVDS) 22.3 22.3 0 0.0 0Remote Metering 0.4 0.4 0 0.0 0Consumer Metering

Single Phase Meters 2.8 2.8 0 0.0 0Three Phase Meters 1.9 1.9 0 0.0 0Cables and Wires 2.4 2.4 0 0.0 0

Renovation of Substation Protection Systems 3.6 3.6 0 0.0 0Subtotal Equipment 33.5 33.5 0 0.0 0

B. Civil works, including erection & stringing 14.4 2.0 0 12.4 0C. Project Management and Construction Supervision 2.6 0.0 0 2.6 0D. Environment Mitigation and Monitoring 0.7 0.0 0 0.7 0E. Resettlement 0.0 0.0 0 0.0 0F. Taxes and Duties 2.6 0.0 0 2.6 0

Subtotal Base Costs 53.7 35.5 0 18.2 0

Physical Contingencies 2.7 1.8 0 0.8 0Price Contingencies 5.4 3.5 0 1.8 0

Total Project Costs 61.8 40.9 0 20.9 0

Commitment Charges 0.4 0.4 0 0.0 0Interest During Implementation 3.5 3.5 0 0.0 0

Total Costs To Be Financed 65.7 44.8 0 20.9 0

($ million)ADB DISCOM-E

Table A5.4: Detailed Cost Estimates for Distribution East Component by Financier

Source: Asian Development Bank estimate

50 Appendix 6

INVESTMENT PROGRAM IMPLEMENTATION STRUCTURE AND READINESS A. Implementation Structure

INVESTMENT PROGRAM IMPLEMENTATION STRUCTURE

ADB INDIACERC

Central Electricity Regulatory

Commission

STATEEnergy Division

MPERCMP Electricity

Regulatory Commission

Sector Investment Program Coordinating Group Chaired by Secretary Power, GOMP

�Policy & Planning�Overall Sector Investments�Due Diligence�Evaluation, Monitoring & Reporting

TRANSCO

PMU

�Technical�Financial�Procurement�Safeguards

DISCOM-E

PMU

�Technical�Financial�Procurement�Safeguards

DISCOM-C

PMU

�Technical�Financial�Procurement�Safeguards

DISCOM-W

PMU

�Technical�Financial�Procurement�Safeguards

�Policy�Planning�Evaluation�Reporting�Monitoring

Project Implementation Project Implementation Project Implementation Project Implementation

�Investments Program �Financing Plan�Due Diligence�Evaluation, Monitoring & Reporting

Consultant Support

�Due Diligence �Implementation�Evaluation, Monitoring & Reporting

�Non-physcal Invesment Program

Source; Asian Development Bank Assessment

Appendix 6 51

B. Project Readiness

TRANCHE 1 Status as of 31 January 2007

Readiness Criteria Target Status Responsibility

Date and Actions ____________________________________________________________________________________ 1. Government project approval Approved Govt 2. Project Management

a. Project Management Unit Done EA b. Staffing Done EA c. Project administration memorandum 19 Feb 2007 Under preparation ADB

3. Allocation of counterpart funding Available EA 4. Recruitment of consultants Not required

a. Shortlist b. Request of proposals c. Award of contract(s) for first phase

5. Procurement

a. Procurement plan Done EA b. Prequalification (civil works) Not required EA c. Bidding documents Issued in Dec 2006 EA d. Award of contract(s) for first phase Sep 2007 Bid submission on Mar 2007 EA

6. Financial Management Done EA

a. Financial Management System b. Auditing arrangements c. Disbursement plan

7. Governance and Anticorruption Measures Done EA 8. Project Performance Management System Done EA 9. Project–specific (as appropriate):

Land acquisition for first-phase packages Jul 2007 Undergoing EA Resettlement plan(s) for first-phase packages Done EA Environment assessment for first-phase packages Done EA Cofinancing Not required ADB = Asian Development Bank, EA = executing agency Source: Asian Development Bank assessment.

52

Appendix 6

TRANCHE 2 Status as of 31 January 2007

Readiness Criteria Target Status Responsibility

Date and Actions ____________________________________________________________________________ 10. Government project approval Approved Govt 11. Project Management

a. Project Management Unit Done EA b. Staffing Done EA c. Project administration memorandum 19 Feb 2007 Under preparation ADB

12. Allocation of counterpart funding Available EA 13. Recruitment of consultants Not required

a. Shortlist b. Request of proposals c. Award of contract(s) for first phase

14. Procurement

a. Procurement plan Done EA b. Prequalification (civil works) Not required EA c. Bidding documents Mar 2007 Under preparation EA d. Award of contract(s) for first phase Feb 2008 EA

15. Financial Management Done EA

a. Financial Management System b. Auditing arrangements c. Disbursement plan

16. Governance and Anticorruption Measures Done EA 17. Project Performance Management System Done EA 18. Project–specific (as appropriate):

Land acquisition for first-phase packages Not applicable EA Resettlement plan(s) for first-phase packages Not applicable EA Environment assessment for first-phase packages Done EA Cofinancing Not required ADB = Asian Development Bank, EA = executing agency Source: Asian Development Bank assessment.

Appendix 7

Tranches and Components

First TrancheTransmission

Land Acquisition

Supply and Delivery of Equipment

Turnkey Contract for selected transmission lines

Construction of substations and transmission lines

Distribution East

High Voltage Distribution System

Remote Metering

Consumer Metering

Renovation of Substation Protection System

Source : Asian Development Bank estimates

Investment Program Implementation Schedule

2007 2008 2009 2010

Procurement Supply and Delivery

Procurement

Procurement

Supply, Delivery, and Construction

Construction

Procurement Supply, Delivery, and Construction

Procurement Supply, Delivery, and Installation

Procurement Supply, Delivery, and Installation

Procurement Supply, Delivery, and Installation

53

54

Appendix 8

PROCUREMENT PLAN (Tranche 1 and Tranche 2)

Project Information Country India Name of Borrower India Investment Program Name Tranche 1 Tranche 2

Madhya Pradesh Power Sector Investment Program Transmission Capacity Expansion Distribution Efficiency Enhancement

Loan or TA Reference Date of Effectiveness Total Amount Tranche 1 Tranche 2

$151 million $106 million $45 million

Of which committed Executing Agencies Madhya Pradesh Power Transmission Company

Limited (TRANSCO) Madhya Pradesh Poorva Kshetra Vidyut Vitran

Company Limited (DISCOM-E) Approval Date of Original Procurement Plan Not applicable Approval of Most Recent Procurement Plan Not applicable Publication for Local Advertisement January 2007 Period Covered by This Plan 18 months

Procurement Threshold, Goods and Related Services, Works, and Supply and Install

Procurement Method To be used for contract value International Competitive Bidding (ICB) Goods

> $1.0 million

ICB Design, Supply and Install > $1.0 million Exceptional Methods Limited International Bidding National Competitive Bidding Shopping

<$1 million <$1 million

<$0.25 million

Procurement Thresholds, Consultants Services Procurement Method To be used for contract value No consultants will be required Alternative Methods None

Table A8.1: List of Contract Packages Exceeding $100,000: Goods, Works, and Consulting Services

Ref Contract Description Estimated Cost

($ million)

Procurement Method

Expected Date of

Advertisement

Prior Review

(Y/N) A. Transmission Component 1. Power transformers:

Lot I: 1 unit of 400 kV, 315 MVA Lot II: 18 units of 220 kV, 160 MVA Lot III: 3 units of 220 kV, 100 MVA

2.7

30.2 3.6

ICB

Dec 2006

Y

2. Circuit breakers Lot I: 5 units of 400 kV, SF6 Lot II: 93 units of 220 kV, SF6

0.5 3.5

ICB

Dec 2006

Y

3. Current transformers Lot I: 15 units of 400 kV CT Lot II: 279 units of 220 kV CT

0.3 1.4

ICB

Dec 2006

Y

4. Isolators Lot I: 19 units of 400 kV Lot II: 364 units of 220 kV

0.2 0.8

ICB Dec 2006

Y

5. Lightning arrestors Lot I: 9 units of 400 kV 231 units of 220 kV Lot II: 495 units of 132 kV 645 units of 33 kV

0.3

0.4

ICB

Dec 2006

Y

6. Solid core insulators Lot I: 185 units of 400 kV 4,580 units of 220 kV

2.2

ICB

Dec 2006

Y

7. Control and protection equipment Lot I: 5 units of 400 kV 93 units of 220 kV

1.4

ICB

Dec 2006

Y

8. Switchyard structures Lot I: 226 mt for 400 kV Lot II: 4,017 mt for 220 kV

0.3 6.2

ICB

Dec 2006

Y

Appendix 855

9. Tower parts

Lot I: 76 mt for 400 kV towers 3,373 mt for 220 kV towers

4.5

ICB

Dec 2006

Y

10. Supply and erection of transmission line Lot I: 97 km Bhopal 400-Ashta 200 kV DCDS Lot II: 90 km LILO one circuit Satpura-Itarsi 220 kV

DCDS line for Handiya 220 kV Lot III: 135 km Chhindwara-Betul 220 kV DCDS Lot IV: 70 km 400 kV Shujalpur 220 kV Rajgarh 220

kV DCDS Lot V: 75 km Jabalpur-Narsinghpur 220 kV DCDS Lot VI: 110 km Chhegaon-Nimrani 220 kV DCDS

4.2 4.1

5.8 3.0

56 Appendix 8

3.5 4.8

Dec 2006

ICB Y

B. Distribution Component 1. Remote metering of 25 HP and above LT industrial

connection including installation and commissioning (1,508 nos) Remote metering of HT connections, including installation and commissioning (527 nos)

0.62

ICB

Mar 2007

Y

2. Single-phase meter (200,000 nos) 4.13 ICB Mar 2007 Y 3. Three-phase meter (50,000 nos) 2.84 ICB Mar 2007 Y 4. Installation of new meters, including shifting of existing

meters to accessible location and replacement of single-phase service lines (200,000 nos)

3.63

ICB

Mar 2007

Y

5. Installation and commissioning of 33 kV VCB: 134 nos Installation and commissioning of 11 kV VCB: 401 nos Renovation of 33/11 kV s/s: 100 nos

4.58 ICB Mar 2007

Y

6. Renovation of 33/11 kV s/s: 100 nos 0.78 ICB Mar 2007 Y 7. Turnkey contract for HVDS in Gadarwara Dn. 11.5 ICB Mar 2007 Y 8. Turnkey contract for HVDS in Sihora Dn. 6.24 ICB Mar 2007 Y 9. Turnkey contract for HVDS in Prithivur Dn. 7.91 ICB Mar 2007 Y

10. Turnkey contract for HVDS in Damoh (S) Dn. 6.4 ICB Mar 2007 Y 11. Turnkey contract for HVDS in Rewa (O&M) Dn. 6.3 ICB Mar 2007 Y 12 Turnkey contract for HVDS in Satna (O&M) Dn. 9.58 ICB Mar 2007 Y

Table A8.2: List of Contract Packages Exceeding $100,000: Goods, Works, and Consulting Services

Ref Contract Description Estimated

Cost ($ million)

Procurement Method

Expected Date of Advertisement

Prior Review Y/N

Comment

A. Transmission Component 1. Power Transformers:

Lot I: 1 unit of 400 kV, 315 MVA Lot II: 18 units of 220 kV, 160 MVA Lot III: 3 units of 220 kV, 100 MVA

2.7

30.2 3.6

ICB

Jan 2007

Y

2. Circuit Breakers Lot I: 5 units of 400 kV, SF6 Lot II: 93 units of 220 kV, SF6

0.5 3.5

ICB

Jan 2007

Y

3. Current transformers Lot I: 15 units of 400 kV CT Lot II: 279 units of 220 kV CT

0.3 1.4

ICB

Jan 2007

Y

4. Isolators Lot I: 19 units of 400 kV Lot II: 364 units of 220 kV

0.2 0.8

ICB

Jan 2007

Y

5. Lightning Arrestors Lot I: 9 units of 400 kV 231 units of 220 kV Lot II: 495units of 132 kV 645 units of 33 kV

0.3

0.4

ICB

Jan 2007

Y

6. Solid Core Insulators Lot I: 185 units of 400 kV 4,580 units of 220 kV

2.2

ICB

Jan 2007

Y

7. Control & Protection Equipment Lot I: 5 units of 400 kV 93 units of 220 kV

1.4

ICB

Jan 2007

Y

8. Switchyard Structures Lot I: 226 mt for 400 kV Lot II: 4,017 mt for 220 kV

0.3 6.2

ICB

Jan 2007

Y

Appendix 857

58 Appendix 8

Ref Contract Description Estimated Cost

($ million)

Procurement Method

Expected Date of Advertisement

Prior Review Y/N

Comment

. Tower parts Lot I: 76 mt for 400 kV towers 3,373 mt for 220 kV towers

4.5

ICB

Jan 2007

Y

10. Supply and erection of transmission line Lot I: 97 km Bhopal 400-Ashta 200 kV DCDS Lot II: 90 km LILO one circuit Satpura-Itarsi 220 kV

DCDS line for Handiya 220 kV Lot III: 135 km Chhindwara-Betul 220 kV DCDS Lot IV: 70 km 400 kV Shujalpur 220 kV Rajgarh 220 kV

DCDS Lot V: 75 km Jabalpur-Narsinghpur 220 kV DCDS Lot VI: 110 km Chhegaon-Nimrani 220 kV DCDS

4.2 4.1

5.8 3.0

3.5 4.8

ICB

Jan 2007

Y

B. Distribution East Component 1. Remote metering of 25 HP and above LT industrial

connection, including installation and commissioning (1,508 nos) Remote metering of HT connections, including installation and commissioning (527 nos)

0.62

ICB

Jun 2007

Y

2. Single-phase meter (200,000 nos) 4.13 ICB Jun 2007 Y 3. Three-phase meter (50,000 nos) 2.84 ICB Jun 2007 Y 4. Installation of new meters, including shifting of existing

meters to accessible location and replacement of single- phase service lines (200,000 nos)

3.63

ICB

Jun 2007

Y

5. Installation and commissioning of 33 kV VCB: 134 nos Installation and commissioning of 11 kV VCB: 401 nos Renovation of 33/11 kV s/s: 100 nos

4.58 ICB Jun 2007 Y

6. Renovation of 33/11 kV s/s: 100 nos 0.78 ICB Jun 2007 Y 7. Turnkey contract for HVDS in Gadarwara Dn. 11.5 ICB Jun 2007 Y 8. Turnkey contract for HVDS in Sihora Dn. 6.24 ICB Jun 2007 Y 9. Turnkey contract for HVDS in Prithivur Dn. 7.91 ICB Jun 2007 Y 10. Turnkey contract for HVDS in Damoh (S) Dn. 6.4 ICB Jun 2007 Y 11. Turnkey contract for HVDS in Rewa (O&M) Dn. 6.3 ICB Jun 2007 Y 12 Turnkey contract for HVDS in Satna (O&M) Dn. 9.58 ICB Jun 2007 Y

ICB = international competitive bidding; KV DCDS = kV s/s = kV VCB = HVDS = high voltage distribution system; HP = LILO = MVA = O & M = overhead and maintenance Source: Asian Development Bank Assessment

Appendix 9 59

FINANCIAL ANALYSIS OF TRANCHE 1 AND TRANCHE 2

A. Introduction

1. The financial analysis of the proposed subprojects under Tranche 1 and Tranche 2 has been carried out in accordance with the Asian Development Bank’s (ADB) Financial Management and Analysis of Projects. The financial evaluation covers Madhya Pradesh Power Transmission Company Limited (TRANSCO) and Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited (DISCOM-E). All financial costs and benefits have been expressed in constant 2006 prices. Cost streams used for the purposes of determining the financial internal rate of return (FIRR)—i.e., capital investment, operation and maintenance (O&M), and administration—are those costs of delivering the estimated benefits. The weighted average costs of capital (WACC) of TRANSCO for the proposed subprojects under Tranche 1 and of DISCOM-E for the proposed subprojects under Tranche 2 also were calculated. These were compared with the FIRRs to ascertain the financial viability of the subprojects. The sensitivity of the FIRR to adverse movements in the underlying assumptions also was assessed. Based on this analysis, the investment program under Tranche 1 and Tranche 2 is financially viable. B. Tariff Policy

2. In compliance with the National Electricity Policy (NEP), Madhya Pradesh Electricity Regulatory Commission (MPERC) promulgated in 2006 a distribution and retail tariff order for 2007, as well as the first multiyear tariff (MYT) order for generation and transmission covering 2007–2009. MPERC requires TRANSCO to base its tariff on full cost recovery of the loan interest costs, depreciation, return on equity, (O&M) expenses, administrative and general expenses, repair and maintenance expenses, interest on working capital, MPERC fee, and income taxes. For distribution, MPERC has approved the full cost recovery tariff for 2007 (Rs3.49 per unit on average), with the MYT for distribution to be approved by March 2007 for 2008–2010. Given the proper implementation of the tariff policy, TRANSCO is projected to maintain profitability over the years, while DISCOM-E will achieve profitability by 2008. C. Methodology and Assumptions

3. Incremental costs and benefits were computed based on “with” and “without” project scenarios for each of the components. The costs of each component include land acquisition, civil works, equipment, incremental operating and maintenance costs, and distribution cost. Taxes and duties were included, while price contingencies and interest during construction were excluded. The anticipated capital mix of debt and equity was used for estimating the WACC for each component. 4. TRANSCO charges a one-part (Rs/Mega Watt/month) uniform tariff for access to its transmission network. This tariff is determined based on full cost recovery and an adequate return on investment. Therefore, the projected financial benefit stream for TRANSCO is simply the recovery of allowable expenses—primarily additions to its asset base.1 Since tax is a tariff pass-through item, financial analysis for TRANSCO was carried out on a pre-tax basis.

1 Although TRANSCO is subject to MYT for FY2007–2009, it is entitled to petition MPERC to have assets added to

its regulated asset base within the regulatory period, allowing it to earn revenue immediately on the new assets. In other words, TRANSCO does not need to wait until the subsequent regulatory period to have revenue-earning assets added to its asset base.

60 Appendix 9

5 For the distribution subprojects, the incremental financial benefits are the additional electricity sold and reduced electricity purchased, both of which arise from decreased losses, increased distribution capacity, and improved reliability. In some cases, subprojects were ascribed more specific benefits, including reduction in (O&M) costs. Cost of energy purchased and end-use tariffs, as set by MPERC in its determination for 2007 and those projected for 2008–2016, were used to value benefits. 6. Capital costs were estimated in Indian rupees using a basket of tender prices submitted during 2005 and 2006. An allowance of 10% for physical contingencies was added. The evaluation was undertaken over 20 years following commissioning with residual value assumed at year 20, based on estimated remaining physical life of assets. O&M costs were estimated at 1.5%–2.0% of capital costs, although for some subprojects an expected reduction in O&M costs was included as a benefit. D. Weighted Average Cost of Capital

7. The WACC is calculated for the ADB projects in Tranche 1 and Tranche 2 during 2007–2012 (Tables A9.1 and A9.2). For estimating WACC, ADB is assumed to finance 63% of TRANSCO and 57% of DISCOM-E subprojects costs through proposed Tranche 1 and Tranche 2. The Government would onlend the funds with the same duration, 20 years with a 5-year grace period, in rupees to GOMP, which would onlend to TRANSCO at 6.8%. TRANSCO and DISCOM-E will bear the foreign exchange risk. The balance will be financed through Power Finance Corporation at an interest rate of 10.5%, internal funds, and GOMP equity. The cost of equity is assumed as per MPERC allowance of 14% in the case of TRANSCO and DISCOM-E. A domestic inflation rate of 5.4% also is assumed. The pretax WACC for TRANSCO, therefore, is estimated at 3.4%. Income tax is a pass-through item based on actual tax payments. In the case of DISCOM-E, the after-tax WACC assuming a corporate income rate of 30% is 2.3%

Table A9.1: Weighted Average Cost of Capital for TRANSCO Item Amount

($ million) Weigh

(%) Nominal

Cost (%)

Tax Adj. Nominal Cost (%)

Real Cost (%)

Composite Cost (%)

ADB Loan 106.0 62.9 6.8 — 1.32 0.83Domestic Loan 30.0 17.9 10.5 — 4.86 0.80Equity Contribution 32.0 19.2 14.0 — 8.19 1.72 Total 168.0 100.0 3.35

— = no data available, ADB = Asian Development Bank, Adj. = adjusted. Source: ADB staff estimates

Table A9.2: Weighted Average Cost of Capital for DISCOM-E Item Amount

($ million) Weigh

(%) Nominal

Cost (%)

Tax Adj. Nominal Cost (%)

Real Cost (%)

Composite Cost (%)

ADB Loan 45.0 56.6 6.8 4.74 (0.60) (0.35)Government Loan 11.0 13.4 10.5 7.34 1.87 0.26Equity Contribution 24.0 30.0 14.0 14.0 8.19 2.43 Total 80.0 100.0 2.34

( ) = negative, ADB = Asian Development Bank, Adj. = adjusted. Source: ADB staff estimates

Appendix 9 61

E. Financial Internal Rate of Return and Net Present Value Calculation

8. Incremental cash flows attributable to the proposed investments in TRANSCO and DISCOM-E were estimated based on the methodology and assumptions described on Tables A9.1 and 9.2. The FIRRs are calculated at 4.8% for TRANSCO and 8.3% for DISCOM-E. These returns compare favorably with the estimated value of WACC (3.3% for TRANSCO, 2.3% for DISCOM-E), substantiating the financial viability of the Tranche 1 and Tranche 2 investments.

Table A9.3: Calculation of Financial Rate of Return

(Rs million)

TRANSCO DISCOM-E Year Capital Operating Benefits N.C.F. Year Capital Operating Benefits N.C.F. 2008 1154 0 0 -1154 2008 1246 0 0 -1246 2009 3096 17 38 -3075 2009 1204 19 15 -1208 2010 2886 64 136 -2814 2010 468 485 131 -823 2011 5301 107 221 -5187 2011 0 640 966 325 2012 682 187 373 -495 2012 0 689 1039 351 2013 0 197 1425 1228 2013 0 705 1036 331 2014 0 197 1369 1172 2014 0 673 1036 363 2015 0 197 1315 1118 2015 0 673 1036 363 2016 0 197 1289 1092 2016 0 673 1036 363 2017 0 197 1263 1066 2017 0 673 1036 363 2018 0 197 1237 1041 2018 0 705 1036 331 2019 0 197 1213 1016 2019 0 673 1036 363 2020 0 197 1188 991 2020 0 673 1036 363 2021 0 197 1174 977 2021 0 673 1036 363 2022 0 197 1160 963 2022 0 673 1036 363 2023 0 197 1146 950 2023 0 705 1036 331 2024 0 197 1133 936 2024 0 673 1036 363 2025 0 197 1119 923 2025 0 673 1036 363 2026 0 197 1106 909 2026 0 673 1036 363 2027 0 197 1093 896 2027 0 673 1036 363 2028 0 197 1080 883 2028 0 705 1036 331 2029 0 197 1067 870 2029 0 673 1036 363 2030 0 197 1055 858 2030 0 673 1036 363 2031 0 197 1042 845 2031 0 673 1036 363 2032 0 197 1042 845 2032 0 673 1036 363 RV (3,769) 3,769 RV (789) 0 0 789 FIRR 4.8% FIRR 8.3%

( ) = negative, FIRR = financial internal rate of return, NCF = net cash flow, RV = remaining value. Source: Asian Development Bank estimates. F. Risk Assessment

1. External Risks

9. Regulatory or tariff revisions risk for Tranche 1 and Tranche 2 are minimal. The current tariff has taken the investment plan into account. If necessary, regulated entities can submit revised asset capitalization and financing plans, and MPERC will adjust the determination accordingly. The risk of tariffs being lowered does not exit, because they will not be changed

62 Appendix 9

unless MPERC is petitioned by the regulated entities to do so. Volume (i.e., demand) risk is minimal since the current system is peak-constrained and energy-constrained. Loss-reduction targets, while aggressive, are realistic as long as the proposed investment program proceeds. Geopolitical and political risks are present for all projects in India. However, the number and nature of investments, and their geographical spread, diversifies this risk. Therefore, the overall risk to the financial sustainability of TRANSCO and DISCOM-E is deemed to be minimal.

2. Project-Specific Risks

10. Financial risks at the subproject level include increases in prices of equipment, delays in project implementation, and failure to gain access to necessary counterpart funds. These risks are considered low for the following reasons: (i) the cost estimates were based on recent tenders received, and advanced procurement will lessen the time between loan effectiveness and disbursement; (ii) TRANSCO’s implementation capacity is proven based on the past ADB project, while DISCOM-E’s implementation capacity might require support as the staff have limited experience implementing ADB projects; (iii) although TRANSCO and DISCOM-E have not become fully independent in terms of cash flow management, the financial projections demonstrate satisfactory cash flows from 2008 to meet the repayment of debt associated with the investment. G. Sensitivity Analysis

11. Separate analyses were carried out for TRANSCO and DISCOM-E to examine the sensitivity of the FIRR and net present value to adverse changes in key variables. The variables considered for the sensitivity analyses were (i) 10% increase in capital costs, (ii) 10% increase in O&M costs, (iii) 10% decrease in revenues (allowable costs), (iv) 2-year implementation delay with a 20% increase in costs, and (v) no allowance for residual values. Table A9.4 demonstrates that the results are robust with the sensitivities exceeding the WACC.

Table A9.4: Financial Results of Sensitivity Analyses (%)

Sensitivity Analyses TRANSCO DISCOM-E Base Case (FIRR) 4.8 SI 8.3 SI Capital +10 4.0 16.5 7.4 10.5 Operating +10 4.6 3.9 6.5 21.0 Benefits -10 3.7 22.2 5.5 33.5 2-year delay plus 20% cost increase 3.9 4.2 No residual value 3.6 7.9 WACC 3.3 2.3

FIRR = Finance Internal Rate of Return; WACC = Weighted Average Cost of Capital Source: Asian Development Bank estimate:::

Appendix 10 63

FINANCIAL MANAGEMENT 1. Reforms in the Madhya Pradesh (MP) power sector have been undertaken. The Madhya Pradesh State Electricity Board (MPSEB) has been unbundled into six new power sector companies for generation, transmission, distribution, and most recently for trading. In 2003, Government of Madhya Pradesh (GOMP) prepared a financial restructuring plan to make the sector financially healthy. GOMP restructured the sector by injecting equity and taking over loan arrears and in lieu of rural electrification loans and subsidy arrears. Assets were transferred, while commercial and contractual mechanisms were set up. In June 2005, opening balance sheets for each new company were established, and the companies started to operate independently. The companies are still operating under the accounting system inherited from MPSEB, as required by the Electricity Supply Act, 1948; and annual statement of accounts are prepared following the Electricity Supply Annual Account Rules, 1985 (ESAAR). Per the Companies Act 1956, the new companies are required to comply with the Indian Accounting Standards. As such, they must prepare the annual financial statements an accrual basis and file audited accounts within 6 months of the financial year. 2. The sector companies are still in transition, moving from reporting under ESAAR to complying with new requirements. After the sector reforms, GOMP undertook a diagnostic needs assessment of the financial management structure capability of the companies, which identified technical, commercial, financial, and management constraints in the power sector. Key areas recognized included the design and implementation of a “backbone” enterprise resource planning system covering billing and collection, finance and accounting, metering data management and management information systems, materials management, project systems, human resources and e-mail solutions, and appropriate network infrastructure and support. The Asian Development Bank (ADB) verified the needs assessment with financial management assessment questionnaires completed by each sector company. ADB supports short-term initiatives undertaken by the companies: the request 1 of new billing, accounting, and management information systems typical for commercial power utilities operations, which will allow the companies to be ready for the proposed ADB investments. GOMP has requested assistance from the Department for International Development of the United Kingdom (DFID) to address the identified weaknesses. A nonphysical investment component for capacity development is being provided, 2 complementing ADB’s proposed physical investments. Capacity development covers (i) financial management through financial policies, cost and revenue centers, planning, modeling, controls, and reporting; (ii) accounting systems, including specification of long-term requirements and chart of accounts; (iii) human resource strategies, including recruitment procedures and supporting mechanisms; (iv) materials and asset maintenance management, project management, and technical applications; and (v) regulatory support with tariff filing applications. 3 The respective executing agencies have well-staffed project management offices. TRANSCO implemented the previous ADB loan in a timely and efficient manner. Also under the ESAAR system, the executing agencies’ accounts, projects accounts, and audit opinion have been complied with. The proposed short-term initiatives are adequate. The financial management arrangements proposed by GOMP for the sector companies are considered appropriate for proper project financial management, reporting, and implementation of the multitranche financing facility.

1 Tenders are being prepared with expected approval in January 2007. 2 DFID is providing £18.5 million in technical assistance (£14.5 million) and financial assistance (£4 million) from 2006

to 2010.

64 Appendix 11

PAST FINANCIAL PERFORMANCE AND PROJECTIONS FOR SECTOR COMPANIES A. Introduction

1. A vertically integrated monopoly, the Madhya Pradesh Electricity Board (MPEB), operated the Madhya Pradesh (MP) power sector. In the early 1990s, MPEB faced negative balance sheets, increases in transmission and distribution losses, power shortages, and poor quality of power supply. Since 1992, it was unable to reach the minimum return of 3% on fixed assets, as required by the Electricity Supply Act, 1948. In 2000, when the state of Chhattisgarh was carved out of Madhya Pradesh, the MP State Electricity Board (MPSEB) was created. MPEB assets and project-related liabilities were allocated geographically, while non-project-related liabilities were distributed base on the population. MPSEB assumed about 79% of the long-term debt, 67% of the revenue base, and 94% of agricultural consumers, with excess power generation allocated to the Chhattisgarh state. This imbalanced allocation worsened MPSEB’s financial position as follows: (i) estimated transmission and distribution losses reached about 49% in 2001, (ii) per unit cost of generation increased, and (iii) unfavorable consumer mix, and consequently lower average realization per unit compared to the Chhattisgarh State Electricity Board, resulted. The series of the power sector reforms by the government of Madhya Pradesh (GOMP), supported by the Asian Development Bank’s (ADB) Madhya Pradesh Power Sector Development Program (MPPSDP), helped to improve the financial position of the MP power sector. B. Past Financial Performance

2. The MP power sector has reduced financial losses from Rs13.71 million in 2002 to Rs2.680 billion in 2005. The improvement of the financial situation is attributable to an increase in sales in 2001–2005, and of a decline in interest charges as a result of the positive impact of the power sector financial restructuring. The financial improvements were demonstrated by actual results compared with those forecasted in the 2001 report and recommendation of the President for the Madhya Pradesh Power Sector Development Program. The forecasted loss level in 2002 was much lower than projected, and the debt to debt-plus-equity ratio declined from 103% in 2001 to 57% in 2005. Prior period adjustments of Rs15.119 billion resulted in a substantial increase in cash in 2005, allowing a decline in accumulated losses to Rs9.492 billion compared with Rs23.614 billion in 2004. In 2005, retirement of Rs35.149 billion of capital arrears and an equity injection by GOMP of Rs44.125 billion allowed reduction of debt and significant strengthening of the balance sheet before transfer of assets and liabilities to the new sector companies. Even with an improvement in the financial situation over this period, MPSEB has not been able to achieve profitability because of (i) insufficient tariff to cover the cost of supply; (ii) non-remunerative investments in rural electrification schemes for the purpose of serving the social obligations of GOMP; (iii) tariff subsidy from GOMP was received mostly through adjustments than cash in the early years, aggravating the poor cash flow; (iv) high commercial and technical losses in distribution; and (v) lower plant load factor and high station heat rate of its generating plants. The past performance of MPSEB is in Table A11.1.

Appendix 11 65

C. Opening Balance Sheets of the Companies

3. MPSEB allocated assets and liabilities to the individual companies as of 31 May 2005.1 As these balance sheets were only provisional, they were not based on the year-end balance sheets of MPSEB as at 31 March 2005. MPSEB has undertaken to provide the operating companies a final balance sheet by 30 November 2006. The Corporate Planning Group of MPSEB anticipated little change in the opening balance sheets, except that MPSEB-allocated loans might increase by Rs500 million, spread equally among the companies. Madhya Pradesh Electricity Regulatory Commission has used the companies’ opening fixed assets and work in progress (as of 31 May 2005) to determine the allocation of equity and loans between fixed assets in operation and work in progress. In some instances, however, the companies claim that assets at that date have been put into service and should be allowed to expense rather than capitalize interest and claim a return to equity. D. Financial Projections of Executing Agencies

4. This section sets out the financial projections for the executing agencies. The inflation and exchange rate assumptions are ADB estimates. Domestic inflation is projected at 5.5% for 2006, 4.5% for 2007, 4.3% for 2008, and 4.1% from 2009 on. International inflation is assumed at 1.6% for 2006, 2.8% for 2007, and 1.2% from 2008 on. Foreign exchange costs are forecasted to decline by the international and domestic inflation differential 2 to maintain purchasing power parity, and are converted to the Indian rupees by the exchange rate of the draw year. 5. Madhya Pradesh Transmission Company Limited (TRANSCO). The company’s profitability is expected to grow in line with improvements in the efficiency and effectiveness of its operational performance, moving toward the return on equity ceiling of 14% allowed under the current regulations. The project funding will enable TRANSCO to undertake the planned investment. Projected financial performance indicators improve over the forecast period and show adequate debt service coverage throughout the project. Self-financing capacity improves toward the end of the forecast period, indicating TRANSCO’s capacity to meet at least 20% of capital expenditures from internal sources from 2013 onward. From 2008 on, the debt service coverage ratio will exceed 1.2 in all years, while the debt to debt-plus-equity ratio declines from 67% in 2007 to 45% by 2016. The summary of TRANSCO’s financial projections is in Table A11.2. 6. Madhya Pradesh DISCOM East Company Limited (DISCOM-E). DISCOM-E’s financial projections show that, with the progressive tariff increases approved by MPERC, profitability will be achieved by 2008. DISCOM-E’s return on equity will be positive from 2008 on, while return on average net fixed assets will increases to 13.7% in 2008 and remain above 16% thereafter. Debt to debt-plus-equity ratio is forecasted to fall from 68.3% in 2006 to 39.6% by 2012, and then to 24.4% by 2016. ADB would fund about 56% of the proposed projects, with the balance to be funded by internal funds, equity injections by GOMP, and Power Finance Corporation at 10.5% interest repayable over 10 years. With the proposed tariffs, cash flow is strong, and the debt service ratio is expected to exceed 1.3 in all years. The self-financing capacity exceeds 20% from 2009. Cash available from operations more than doubles from Rs2.089 billion in 2008 to Rs4.342 billion in 2016, with debt service increasing from Rs1.593 1 This balance sheet is without considering the impact of the Government order, dated 4 November 2004, on the

MPSEB/ Chhattisgarh State Electricity Board split as it is being contested by MPSEB and GOMP in the Supreme Court.

2 Assuming all other assumptions do not change.

66 Appendix 11

billion to Rs3.037 billion over the same period. Capital expenditures decline from Rs8.753 billion in 2008 to Rs4.342 billion in 2016. The decline in capital expenditure is the result of the completion of the national rural electrification program with 100% rural electrification achieved by 2009 and the bulk of the states distribution network in place. The summary of DISCOM-E’s financial projections is in Table A11.3.

Table A11.1: Past Financial Performance of MPSEB (Rs million)

Financial Year Ended 31 March 2001 2002 2003 2004 2005

Estimate Audited Audited Audited Provisional Generation and Purchases GWh 26,018 26,535 27,025 28,494 30,627 Losses (%) 49.00% 43.80% 43.50% 43.90% 43.50% Sales 13,269 14,905 15,280 15,996 17,310 Average Revenue (Rs/kWh) 2.77 2.53 2.91 3.1 3.05 Income 41,352 51,800 54,625 65,068 68,770 Expenditure 50,938 65,513 56,293 64,513 71,451 Actual Profit after tax (9,308) (13,713) (1,668) 555 (2,680) Return on average NFA (%) (6.1) (4.7) 5.2 7.9 4.5 2001 RRP Profit after tax (25,362) (14,892) (5,580) (4,324) (6,049) Return on average NFA (%) (61) (38) (14) (9) (13) Long Term Loans 73,699 64,171 70,276 80,557 59,208 Total Current Liabilities 48,202 57,025 61,401 75,690 51,455 Total Liabilities and Equity 119,935 106,548 116,043 143,077 154,853 Debt/Debt plus Equity (%) 102.70 129.60 128.60 119.50 57.30 CA/CL (ratio) 1.02 0.61 0.66 0.69 1.26 Note: For 2001 Income and expenses accumulated 69% of the MPEB before the splitting in two states. Note: FY 2001 accounts are for period 15 April 2000 to 31 March 2001 (as per 2002 audited accounts)

GWh = gigawatt-hour, kWh = kilowatt-hour, NFA = Net Fixed Assets, RRP = Report and Recommendation to the President Source: ADB estimate

Table A11.2: Summary of TRANSCO Financial Projections (Rs million)

Financial Year Ended 31 March 2006 2007 2008 2009 2010 2013 2016 Available Transmission Capacity (MW) 5,563 6,011 7,220 8,170 10,001 12,885 13,262 % increase 8 20 13 22 10 0 Transmission Revenues 4,106 9,817 10,417 11,168 13,340 20,300 26,282 Other Income 34 40 48 105 170 293 378 Total Revenue 4,140 9,858 10,465 11,273 13,509 20593 26,660 Average Tariff (Rs/MW/day) 4,474 3,953 3,745 3,654 4,316 5,429 Increase in Tariff (%) (12) (5) (2) 22 6 Net Profit After Tax (1,768) 1,266 1,380 1,662 2,325 4,160 5,963 Return on Average Net Fixed Assets (%) (3) 15 14 15 14 14 12 Return on Average Equity (%) (26) 14 11 11 13 12 11 Debt Service Coverage Ratio (%) 1.2 1.22 1.34 1.49 1.38 1.34 Self Financing Ratio (%) (5) 16 16 15 20 75 Total Assets 62,304 69,918 78,757 84,050 93,147 128,726 142,939 Current Ratio, CA/CL 0.68 1.11 2.5 2.49 2.58 2.8 5.36 LT Debt /LT Debt plus Equity (%) 68 67 61 61 62 58 45

CA = Current Assets, CL = Current Liabilities, LT = long term, MW = megawatt Source: ADB estimate

Appendix 11 67

Table A11.3: Summary of DISCOM-E Financial Projections (Rs 10 million)

Financial Year Ended 31 March 2006 2007 2008 2009 2010 2013 2016Tariff Revenue 1,688 2,141 2,617 3,131 3,482 4,635 6,367Non-Tariff Income 209 129 149 169 185 223 286Total Revenue 1,897 2,270 2,766 3,300 3,668 4,587 6,653Average Cost of Supply 3.78 3.87 3.95 4.13 4.80 5.71Average Tariff LT Consumers 2.95 3.30 3.59 3.85 4.62 5.50Average Tariff HT Consumers 4.46 4.50 4.53 4.56 4.91 5.80Net Profit After Tax (42) (40) 12 106 147 320 646Return on Average Net Fixed Assets (%) (1.20) 4.00 13.70 19.30 18.10 18.50 17.60Return on Equity (%) (3.30) (4.80) 0.50 2.60 2.70 3.30 3.80Debt Service Coverage Ratio 1.2 1.31 1.81 1.64 1.88 3.Self Financing Ratio (%) 6.30 5.70 21.00 27.20 61.40 194.80Total Assets 3,561 4,082 5,240 6,200 6,868 8,777 12,006Current Ratio, CA/CL 1.01 1.00 0.99 1.00 1.01 1.13 1.37Debt / Debt plus Equity (%) 68.30 67.10 57.40 53.60 48.40 35.60 24.40

78

CA = current assets, CL = current liabilities, HT = high tension, LT = low tension Source : ADB estimate

68 Appendix 12

ECONOMIC ANALYSIS OF TRANCHE 1 AND TRANCHE 2 A. Project Cost

1. The economic analysis of the proposed subprojects has been carried out in accordance with the Asian Development Bank’s (ADB) Guidelines for Economic Analysis of Projects1. The evaluation covers Tranche 1 for Madhya Pradesh Power Transmission Company Limited (TRANSCO), and Tranche 2 for Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited (DISCOM-E). All costs and benefits have been expressed at a constant 2006 prices. A domestic price numeraire was used; tradable inputs were valued at their border price equivalent and converted into domestic equivalents using an estimated standard exchange rate factor (SERF) of 1.05. Capital costs included physical contingencies, but excluded taxes, price contingencies, and financial charges during construction. B. Project Benefits

2. The main economic benefits of the subprojects in Madhya Pradesh (MP) are displaced thermal electricity generation and incremental consumption. These benefits arise from a reduction in technical and non technical losses, removal of network constraints, and improved reliability of supply. Benefits were quantified through load flow analyses and from pilot studies in other states. Demand forecasts, prepared by TRANSCO with input from DISCOMs, were based on projections of historical sales data, modified by population growth, the impact of real tariff increases, and the impact of real increases in household income. 3. Detailed analysis by TRANSCO confirmed that the transmission component is the least-cost transmission solution to achieve the desired outcomes. It confirmed that the transmission component was overall least-cost by comparing the discounted cost with an equivalent generation project—i.e., an electricity generation plant or plants, built at or close to the load center, that would be capable of producing the same level of output as the savings in losses and incremental demand served that the transmission component of the Project delivers. At a 12% discount rate, the leveled cost of the transmission project is approximately Rs1.3 per kWh. This compares to the long-run marginal cost of the equivalent peak and off-peak plant (on a weighted average basis) of Rs3.1 per kWh. Transmission reinforcement, therefore, is the least-cost means of removing the peak constraints on the transmission network and reducing losses. 4. No viable alternatives are available for 100% consumer metering, substation projection upgrading, and remote metering. In the case of High Voltage Distribution System (HVDS), DISCOM-E has confirmed that other means to achieve similar reductions in technical and commercial losses have been explored, and HVDS has been identified as least-cost. The transmission component is concerned primarily with relieving transmission constraints. The distribution component focuses on making delivery more efficient on an isolated subproject basis. Therefore, as the two components are largely independent, they were analyzed separately rather than using the systems approach. Non-incremental outputs from transmission and distribution components were valued at the resource cost savings that would accrue if the project was to proceed. Analysis of the electrical capacity and energy demand and supply balance in MP demonstrates that (i) any reduction in peak losses will result in incremental demand being served in most years; and (ii) any reduction in off-peak load will mean that less generation will be required to serve the same level of demand, and will result in a resource cost saving.

1 ADB. 1997 Guidelines for Economic Analysis of Projects. Manila

Appendix 12 69

5. The marginal cost of electricity from coal-fired thermal plants represents the short-run marginal cost of off-peak energy in MP. Marginal costs of existing coal plants were estimated based on actual historical operating parameters contained in generating company’s most recent tariff petition. Coal fuel was initially valued at its border price equivalent value (BPEV), based on the World Bank’s coal price forecast and adjusted for the generally lower quality of coal used for power generation in India. Loading and transport costs excluding were added to base coal prices to derive a 2007 BPEV of Rs2,400 per ton. A discounted average marginal generating cost of Rs1.9 per kWh for electricity delivered at the power station gate was calculated. 6. Ideally, additional hydropower capacity or open cycle gas turbines would be added in the longer term to cope with the growth in peak demand. In practice, however, the long lead times for hydropower coupled with the additional development risk it poses, as well as the difficulties in securing long-term gas supply, have meant that few new peaking plants are planned. Instead, additional thermal base load plant is being added, moving hydropower from mid-load and peak-load duty into dedicated peaking. Therefore, it has been assumed that the short-run marginal cost of peak energy is set by the marginal cost of coal-fired thermal plant and the long-run marginal cost of peak energy by the life cycle cost of coal-fired thermal plant. International Energy Association 2 and Royal Academy of Engineering 3 data were used to establish international benchmarks for the performance and costs of modern thermal plant. Leveled life cycle cost of a new coal-fired plant was estimated to be Rs2.3 per kWh. 7. Incremental outputs were valued using consumers’ estimated willingness to pay for incremental consumption. For domestic consumption, a semi-log demand function was estimated, following the methodology outlined in ADB’s Economic Relations Division Technical Note No. 3 “Measuring Willingness to Pay for Electricity.” The demand function then was tested against MP data from earlier years and found to be a reasonable fit. Suppressed demand is around 13% of energy demand. Solving the demand function for q = 804 kWh gives a willingness to pay for additional units of consumption of Rs3.03 per kWh. For other consumer categories, the marginal tariff was taken as a conservative proxy for their willingness to pay. The weighted average willingness to pay for all MP consumers supplied at Low Voltage is Rs3.2 per kWh on this basis. For Medium Voltage customers the figure is Rs4.0 per kWh. C. Estimation of Economic Internal Rate of Return

8. The project evaluation is based on a comparison of benefits and costs between the project (base) case and the without project (alternative) case. A period of 25 years has been used for economic evaluation, including 3 years for construction. The detailed benefit-cost calculations show that the transmission and distribution components are expected to be economically viable. The transmission component has an estimated Economic Internal Rate of Return (EIRR) of 15.0%, 4 and the combined distribution component an estimated EIRR of 14.7%. Economic cost and benefit flows are in Table A12.1 for the transmission and distribution components. Detailed benefit-cost analysis at the subproject level is discussed in Supplementary Appendix N.

2 International Energy Agency (IEA). 2005. Project Costs of Generation Electricity–2005 Update. 3 The Royal Academy of Engineering. 2004. The Cost of Generation Electricity. 4 In practice, discretely and separately identifying the benefits of the two tranches is not possible. Therefore, the

benefits of TRANCO’s proposed total investment under Tranches 1 and 2 have been prorated to give a notional EIRR of Tranche 1 only.

70 Appendix 12

Table A12.1: Economic Analysis

Year Incremental

Output

Non- Incremental

Output Capital Electricity

Generation O & MNet

BenefitsIncremental

Output

Non-Incremental

Output Capital Electricity

Generation O & MNet

Benefits

2007 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.02008 0.0 0.0 487.0 0.0 0.0 -487.0 0.0 0.0 1,269.0 0.0 0.0 -1,269.02009 69.0 54.8 1,306.8 43.6 7.3 -1,233.9 24.0 160.1 1,127.8 12.5 18.4 -974.52010 259.0 189.0 1,218.3 150.3 26.9 -947.6 86.5 278.3 415.9 36.6 24.5 -112.12011 434.9 317.4 2,237.4 252.4 45.2 -1,782.8 97.7 351.5 0.0 42.5 24.5 382.22012 680.7 615.6 287.7 395.0 78.7 534.9 77.8 387.4 0.0 27.3 24.5 413.42013 799.4 583.1 0.0 463.7 83.1 835.7 107.8 387.5 0.0 46.9 24.5 423.92014 718.0 648.8 0.0 416.3 83.1 867.5 84.6 420.6 0.0 29.6 24.5 451.12015 718.0 648.4 0.0 416.1 83.1 867.3 88.1 437.5 0.0 30.9 24.5 470.32016 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22017 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22018 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22019 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22020 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22021 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22022 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22023 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22024 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22025 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22026 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22027 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22028 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22029 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22030 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.22031 718.0 672.3 0.0 416.1 83.1 891.2 92.4 443.5 0.0 28.2 24.5 483.2

EIRR 14.9% EIRR 14.7%EIRR = economic internal rate of return; O&M = operation and maintenance

Source: Staff estimates

Costs (Rs million)Transmission Distribution

Benefits (Rs million) Costs (Rs million) Benefits (Rs million)

9. The estimated EIRRs are conservative. Subprojects will improve significantly the quality of supply to consumers through improved voltage, reduced harmonic content, and more consistent frequency. Reliability will be improved through a reduction in nuisance tripping of lines and substations, and through reduced requirements for load shedding. However, a valuation of the improvement that supply quality and reliability would have on consumers’ willingness to pay for incremental consumption was not attempted. In other words, it was conservatively assumed that consumers’ demand functions would not change, despite a significant improvement in the overall quality of electricity that they receive. Moreover, the assumption of coal-fired thermal power stations as the displaced peaking plant does not reflect the need in the longer term to construct gas or hydropower peaking plants to load-following duties during peak supply periods. 10. Care was taken to avoid “double counting” of benefits across the transmission and distribution components. The transmission component is focused primarily on relieving transmission network constraints. As such, benefits are largely independent of work on removing distribution constraints. Moreover, general expansion of distribution networks will occur in both “with (transmission) project” and “without (transmission) project” cases. Furthermore, demand growth beyond the end of construction of the transmission component has not been included in benefit quantification. In this context, the EIRR for the transmission component is a conservative estimate.

Appendix 12 71

11. The project would be effective in reducing poverty. A secure and predictable electricity supply will enable social and economic benefits to materialize, as well as ensure improved conditions for schools, hospitals, and other social services. The investment program will enable urban and rural domestic consumers to receive a supply of electricity at an acceptable voltage level, and with minimal scheduled and unscheduled outages. Rural consumers particularly will see a significantly improved electricity supply, unaffected by the lengthy scheduled outages that are experienced currently. This will have positive outcomes for educational and social activities, and will open up opportunities for energy-dependent rural enterprise. Industrial and commercial consumers also will benefit from improved supply reliability and quality, enhancing production and output and leading to fewer equipment failures. In addition, the investment program will create short-term and long-term employment opportunities and tax revenues. 12. A transparent tariff-setting regime that permits full recovery of efficient costs supports the financial sustainability of the executing agencies (EAs).5

D. Sensitivity and Risk Analysis

13. The sensitivity of the EIRR to various input assumptions also was tested. For the transmission and distribution components, EIRRs exceed the assumed hurdle rate of 12% for all sensitivities tested, except for the combined downside scenario for the transmission component. Based on these results, subprojects appear to be economically robust. The results are in Table 12.2. The IRR for the transmission and distribution components increases with increasing cost of generation as the resource cost saving benefit outweighs the additional generation cost to serve incremental consumption.

Table A12.2: Sensitivity Analysis

Sensitivity Parameter Variation EIRR Switching Variation EIRR Switching(%) (%) Value (%) (%) (%) Value (%)

Base case 15.0 14.71. Capital Cost Increase + 10 13.4 18.7 + 10 13.2 18.32. WTP Reduces - 10 13.5 -20.1 - 10 14.4 -80.93. Cost of Generation Increase + 10 13.4 -70.6 + 10 25.6 -21.44. O&M Increase + 10 14.9 182.2 + 10 14.6 281.95. Delay 1 year 12.8 1 year 12.76. Combined 10.5 13.6

DistributionTransmission

Source; ADB estimate 14. To complement this deterministic analysis, risk analysis was undertaken using a probabilistic, Monte Carlo simulation approach. 6 This analysis underscored the economic viability of both project components, delivering expected EIRRs of 14.7% for transmission components and 14.5% for distribution components. 15. The distribution of costs and benefits among stakeholders was assessed by comparing financial costs and benefits to economic costs and benefits.7 As TRANSCO’s WACC is less

5 Financial sustainability and tariff setting are discussed in detail in Appendix 11 and Supplementary Appendix A,

respectively. 6 Details are in Supplementary Appendix H. 7 Details are in Supplementary Appendix H.

72 Appendix 12

than 12%, it suffers a loss when its net financial benefit streams are discounted at 12%. The economy gains overall from the project, and the difference between the financial net present value and economic net present value is distributed between electricity consumers and the Government. From an economic perspective, benefits accrue to consumers as energy is consumed incrementally based on consumers’ willingness to pay for this consumption. The benefit of resource cost savings also accrue to consumers through lower electricity prices. The sum of these benefits is greater than the incremental transmission charges that would appear in consumers’ electricity bills. Therefore, consumers are net beneficiaries. The Government is a net beneficiary of the difference between the financial and economic capital costs of the project. The economic price of foreign exchange and the official exchange rate differ. A SERF of 1.05 has been estimated for India, implying that foreign exchange costs have a higher economic than financial cost to the economy. However, taxes and duties collected on the foreign component of equipment purchases offset the loss accruing from the overvalued currency. Small gains and losses to labor have been excluded from the analysis. 16. Financial benefits accrue to DISCOM-E as soon as new assets are brought into service, principally through increased electricity sales and reduced losses. However, as DISCOM-E’s WACC is less than 12%, it suffers a loss when its net financial benefit streams are discounted at 12%. The economy gains overall from the project, and the difference between the financial net present value and economic net present value is distributed between electricity consumers and the Government. From an economic perspective, benefits accrue to consumers as energy is consumed incrementally based on consumers’ willingness to pay for this consumption. The benefit of resource cost savings also accrue to consumers through lower electricity prices. The sum of these benefits is greater than incremental distribution and retail charges that would appear in consumers electricity bills. Therefore, consumers are net beneficiaries. Residential and agricultural consumers are the two consumers that suffer most from poor quality and unreliable electricity supply. As such, they would benefit the most from the project. The Government is a net beneficiary of the difference between the financial and economic capital costs of the project. The economic price of foreign exchange and the official exchange rate differ. A SERF of 1.05 has been estimated for India, implying that foreign exchange costs have a higher economic than financial cost to the economy. However, taxes and duties collected on the foreign component of equipment purchases offset the loss accruing from the overvalued currency. The Government also is a net beneficiary of the incremental income tax that would be generated. Small gains and losses to labor have been excluded from the analysis. E. Conclusion

17. The economic analysis confirms that Tranche 1 and Tranche 2 subprojects are least-cost and economically viable. The analysis yields EIRRs of 15.0% for the transmission components and 14.7% for the distribution components. Sensitivity and risk analysis demonstrates that the expected economic performance is robust. From an economic perspective, Tranche 1 and Tranche 2 subprojects should proceed.

Appendix 13 73

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION

A. Introduction

1. Environmental assessment of the proposed investments is being carried out following the Asian Development Bank’s (ADB) Environment Policy (2002), Environmental Assessment Guidelines (2003) 1 , and the Government’s environmental assessment regulations and guidelines.2 The first and second tranche investments are classified as category B according to ADB’s Environmental Assessment Guidelines. The executing agencies (EAs), TRANSCO and DISCOM, have prepared initial environmental examinations (IEE) for the first and second tranche components. Environmental assessment also will be prepared in due course for the remaining components in future tranches. This summary IEE outlines key aspects of the proposed investment program, environmental benefits and negative impacts, proposed mitigation measures, and preliminary environmental management plan (EMP). 2. The environmental assessment and review framework (EARF) 3 is applicable to all investments funded by the multitranche financing facility, and particularly to projects included in subsequent tranches that have not been fully defined. The EARF outlines the policy, procedures, and institutional requirements for preparing subsequent projects. The EAs are responsible for preparing the required environmental assessments and obtaining ADB concurrence before implementation. These approvals must be in place before contracts are finalized and work begins. 3. A generic EMP in matrix form that will apply to additional subprojects has been prepared.4 The matrix is developed based on environmental analysis of the proposed Tranche 1 and Tranche 2 components and subprojects,5 as well as a review of environmental impacts of typical power transmission and distribution projects. The mitigation measures for the additional subprojects will be developed in the spirit of the principles agreed upon in this EMP framework. B. Description of the Madhya Pradesh Power Sector Investment Program 4. The proposed Program will sustain the reform agenda established with earlier ADB support, and is expected to help to attract other long-term financiers to the sector. The investments to be supported by ADB will (i) improve the quality and reliability of power; (ii) remove transmission bottlenecks; (iii) facilitate in-state and interregional power transfers; (iv) facilitate a reduction in overall system losses; (v) improve energy efficiency, expand renewable energy capacity, and capitalize related carbon market opportunities; and (vi) improve utility operational and financial performance. 5. Electricity Transmission Capacity Strengthening.

(i) Tranche 1, Transmission Capacity Expansion. This component includes construction of (a) 2 circuit kilometers (cct-km) of 400 kV and 1,435 cct-km of 220 kV transmission lines across MP; (b) eight new 220/132 kV substations,

1 ADB. 2003 Environmental Assessment Guidelines. Manila 2 Government of India regulations consider transmission and distribution systems to be non-polluting activities, and

as such do not require environmental assessments or prior regulatory approval from Ministry of Environment and Forests.

3 EARF is in Supplementary Appendix K 4 EMP is provided in Supplementary Appendix L 5 An IEE with EMP has been prepared for the proposed Tranche 1 and Tranche 2.

74 Appendix 13

with transformer capacity of 160 MVA each; and (c) one new 400/220/132 kV substation with 315 MVA transformer capacity.

(ii) Tranche 2, Distribution Efficiency Enhancement. The distribution component

will undertake (a) construction of HVDS in six distribution circles in the eastern distribution zone of MP, including conversion of about 7,400 km of low-voltage lines to high-voltage lines; (b) remote metering of about 2,000 industrial consumers; (c) metering of about 250,000 consumers; and (d) renovation of protection system at about 100 substations.

C. Description of the Environment 6. Physical Resources. The project components are in various geographic regions of the state, covering Bagel Khand, Bundel Khand, Chambal, Mahakaushal, Malwa and Nimar regions. Except for the Narmada river valley, the state consists of a plateau with mean elevation of about 500 meters above mean sea level, interspersed with mountains of the Satpura and the Vindhya ranges. The Narmada is an MP lifeline, which runs from east to west between Vindhya and Satpura ranges. The project area is part of a peninsular plateau consisting of sedimentary and metamorphic rocks, and is structurally part of the peninsular block. The soil of the region is rich and fertile. MP has two agro-climatic zones: (i) Central Plateau & Hill Region, and (ii) Western Plateau and Hill Region. Soil in the region is mainly black soil, ranging from shallow to deep black. In addition to high reserves of coal, the state’s other mineral resources include iron ore, manganese, copper, bauxite, limestone, dolomite, rock phosphate, diamonds etc. The area is geologically stable and not prone to earthquakes. Agriculture dominates land use, with the average area reported under forest cover at about 28%. Four major rivers crisscross MP: Mahanadi, Narmada, Sone, and Tapti. Availability of water in the state is more than 81,000 million cubic meters (m3), of which approximately 56,857 million m3 (70%) had been utilized. Surface water commonly is used for all purposes. However, groundwater use is also common. The areas directly impacted by the investment components do not have any sensitive, threatened, or endangered species. The state has a tropical climate varying from dry subumid to semiarid. Summers are hot (maximum temperature between 330C and 440C) and at some places it remains humid, while winters are reasonably comfortable (between 270C and 100C). The monsoon season runs from June to September, with average rainfall of 1,000 millimeter (mm) in the west to 2,000 mm in the eastern part of state. Average air quality in the state is good, except in a few urban and industrial centers, where air quality is deteriorated due to industrial activities and transport sources. 7. Ecological Resources. The total forest area in the state is about 9.77 million hectares, which constitutes 31.7% of total land area of MP. Of the forested area, 64% is legally reserved forest, 22% protected forest, and 14% unclassified forest. MP has nine national parks and 25 wildlife sanctuaries, covering about 10,800 square kilometers (km2) or about 3.5% of the geographic area of the state. However, none of the physical investment components is in these sensitive areas. The notable wildlife species reported are jackal, fox, monkey, wolf, squirrel, and reptiles. The common flora species are babul, chhola, jaria, keekar, neem, reonjha, etc. 8. Socioeconomic Conditions. The population of state exceeds 60 million,6 constituting about 5.9 % of country’s population. Average population density is about 196 persons per km2. About 73% of the population lives in rural areas. The literacy rate is nearly 65%. The economy

6 Statistics are taken from **Author**. **Year of publication**. Census of India, 2001. **Place of publication:

Publisher**—the latest authentic document published by Government of India and revised by every 10 years.

Appendix 13 75

is based primarily on agriculture, with predominant crops of millet, wheat, maize (corn), rice, gram, soybean, cotton, ground-nuts, pulses etc. The total cultivable area is 18,704 hectares and the net area sown is about 14,975 hectares. Mineral resources and tourism also are contributing significantly to the state’s economy. Per capacity income at current prices is about Rs5,926 per year, and the net domestic product at current prices is about Rs41,572 crores (annual basis). About 95% of villages are electrified, nearly 24% villages have all-weather road connectivity, and about one third of the population has access to improved water supply. D. Anticipated Impacts and Mitigation Measures

1. Environmental Problems Due to Project Location and Design 9. In all project areas, the project components do not encroach upon ecologically important areas. They generally traverse barren land with minimum vegetative cover and agricultural areas. Preliminary route selection was based on the topographic sheets and forest atlas (forest maps). The following principles were adopted for selection of optimum sites for project components: (i) minimize disturbance of human settlements; (ii) avoid monuments of cultural or historical importance; (iii) do not create a threat to the survival of any community with special reference to tribal communities; (iv) do not affect any public utility services such as playgrounds, schools etc.; (v) do not pass through any sanctuaries, national parks, reserve forests etc.; (vi) minimize damage to forest resources; (vii) selection new equipment (i.e., transformers, capacitors, etc.) that comply with international standards, particularly with respect to avoiding use of PCBs. Site selection for individual lines and substations is undertaken carefully. Alternative alignments and/or locations were considered to ensure that the disruption to environmentally sensitive areas would be avoided or minimal. The land required for placing new transmission towers is about 0.3 hectares, and for new substations is about 76.5 hectares. The land required is mostly government and/or agricultural land, and will be compensated per existing norms. No land acquisition will be required for augmentation of substation capacity, installation of additional transformers and circuit breakers, and extension of feeder bays, etc. The proposed project components do not pose any threat to other public utilities or wildlife.

2. Environmental Effects During Construction 10. Minor disruption to farming activities, as well as disturbance of crops, bunds, canals, and drains, could occur during construction and line maintenance. To minimize such impacts, established roads and tracks will be used wherever possible, compensation will be paid for temporary loss in agricultural production in accordance with the resettlement action plan, topsoil will be protected and reinstated after construction is completed, and damaged bunds and irrigation facilities will be maintained in working condition throughout project implementation. Temporary access roads might be needed in some locations. The environmental impacts associated with the establishment of temporary access roads will include compaction of soil structure and disruption of stream or other water bodies. To minimize the impact, the contractors will be required to limit the load of trucks in transporting construction equipment and materials. Uncontrolled soil erosion and silt runoff are likely to be minor due to the limited amount of excavation required for towers and the dry climate. In addition, measures to minimize erosion and silt runoff will be incorporated into contract documents. Substations will be sited and designed to ensure noise level from fence will not exceed 70 dB(A) at any time. Construction will generate noise for a short duration in predominantly rural locations, and is considered insignificant. Other nuisances from construction activities will be mitigated through contract clauses specifying careful construct practices and compensation paid for any losses in agricultural production. Escape of polluting material, such as oil and sewage, from construction

76 Appendix 13

camps and substations will be prevented through design and installation of appropriate oil containment and sewerage systems. Hazardous waste generated from phased out equipment and/or batteries will be disposed off according to the norms of Ministry of Environment and Forests. Health hazards from potential explosions or fire, electric shocks, and accidents to staff and the public will be minimized through implementation of measures such as (i) careful designs using appropriate technologies to minimize hazards, (ii) safety awareness raising for construction and operational staff and the public, (iii) substations equipped with modern fire control systems, (iv) provision of adequate water supply and sanitation facilities for substations and construction camps, (v) provision of adequate staff training in operations and maintenance, and (vi) security fences and barriers around substations and transmission towers in populated areas.

3. Environmental Effects During Operation 11. During construction, 3-meter wide strips of land under each conductor will be cleared, one of which will be kept clear as a maintenance right-of-way. The other strips will be allowed to be afforested. Trees will be trimmed with the assistance of the state forest department to ensure that the required vertical clearances from the top of tree to the conductor are maintained throughout the transmission corridor. This will reduce the chances of forest fires due to electric sparks. Emissions from circuit breakers, which use sulphur hexafluoride (SF6), are a concern, and have been evaluated in the context of possible opportunities under the Clean Development Mechanism (CDM). 7 While MPPTCL has investigated phasing out SF6, no technological substitute for SF6 circuit breakers is ready. Emissions of SF6 will be controlled by applying sound engineering and management practices, including leak detection and repair, use of appropriate equipment for recycling, and orientation and training of employees. To minimize the risk of accidents and exposure to electric fields, houses will not be allowed within the right-of-way. General awareness among people about potential risks due to high-voltage lines and safety aspects should be raised. Table A13.1 summarizes the anticipated impacts during construction and operations. Overall, the project’s minimal negative impacts can be mitigated cost effectively.

Table A13.1: Project Impacts and Mitigation Measures

Types of Impacts

Impact Sources Location of Sources

Pollutant or Parameter

Treatment Measures

Noise: Construction Period

Construction equipment and equipment repairing and maintenance

Construction sites, maintenance yard, and access roads

70 dB(A) at site boundary

Equipment to meet local noise standards; construction scheduling to avoid evening and nighttime disruption

Noise: Operational Period

Transmission line and associated substations

Outdoor Switchyards

70 dB(A) at site boundary

Locate facility 70–100 m from nearest receptor; walls, fencing, and/or greenbelt to provide partial sound barrier

Domestic wastewater

Work site and construction camps

BOD, COD, fecal coliform

Primary treatment if needed by larger camps

Wastewater: Construction Period

Industrial wastewater from construction equipment maintenance

Equipment maintenance yards

Petroleum and detergent

Sedimentation and biological treatment if necessary

7 SF6 is one of the six greenhouse gases covered by the Kyoto Protocol, but India is not subject to Kyoto emissions

caps and SF6 is not regulated by the Government of India as a pollutant.

Appendix 13 77

Types of Impacts

Impact Sources Location of Sources

Pollutant or Parameter

Treatment Measures

Waste oil from phased out transformers and other equipment

Construction sites and maintenance yards

Mineral oil, possible oil with PCBs

Reuse after filtration. Dispose off-site to registered vendors

Domestic wastewater

Substations and storage yard

BOD, COD, fecal coliform

Primary treatment if needed

Wastewater: Operational Period Industrial

wastewater and oils from transformer replacement

Storage and maintenance yard Transformers being taken out of service

Temperature, pH, BOD, etc. to meet CPCB standards for industrial wastewater Mineral oil; possible oil with PCBs

Off-site disposal at licensed treatment facility, or alternate on-site treatment as approved by pollution control board

Air Quality: Construction Period

Dust during construction and exhaust gases from construction machinery and vehicles

Construction sites access roads and surrounding areas

Increase TSP, NO2, SO2 levels at construction sites, and surrounding areas

Continuous management measures to be imposed at the construction sites

Air Quality: Operational Period

Release of gases in receptors from process, equipment

Equipment or process using CFCs and halons

GHGs in atmosphere

Replace equipment or process or system using CFCs, including halon, and dispose off in manner consistent with the requirements of the Government

Solid Wastes: Construction Period

Spoils from earth moving; construction debris

Construction sites and workers’ camps

Earth and domestic solid waste

Spoils to be used as base material for substations and greenbelts

Replaced equipment

Storage yard Pieces of phased out equipment

Dispose of in a manner consistent with the Government‘s requirements

Solid Wastes: Operational Period

Garbage from substations and storage yards

Substations and storage yards

Domestic solid waste and/or process waste or scrap waste

Disposed at facilities approved by local government pollution control agencies

BOD = biochemical oxygen demand, COD = chemical oxygen demand, dB(A) = decibel acoustic, NO = nitrogen dioxide, NO = nitrogen oxides, PCB = polychlorinated biphenyl, SO = sulfur dioxide, TSP = total suspended particles, CFC = chlorofluorocarbons, GHG = greenhouse gases.

2

x 2

Source: Asian Development Bank assessment

4. Potential Cumulative and Induced Impacts 12. The proposed investment program does have potential cumulative and induced impacts, which are considered largely positive. Direct impacts result from acquisition of additional RoWs and land for transmission lines and substations, and improvements in power system efficiency. Distribution and transmission system efficiency improvements will result in energy savings of at least 1,200 giga watt per hour (GWh) per year, with equivalent Carbon Dioxide (CO2) reduction of more than 1 million tons per year. Indirect impacts include: (i) expansion of thermal power generation base (facilitated by the transmission and distribution system investments); (ii) increased investment in energy efficiency and renewable energy; (iii) economic growth related to improved power supplies; and (iv) reallocation of government funding away from loss-incurring utility operations and toward social investment in education, health, water supply, and sanitation. The application of advanced power generation technologies and renovation of

78 Appendix 13

existing power stations will offset partially thermal power expansion. If the full spectrum of energy efficiency and renewable energy investments materialize, the potential savings are more than 2,000 GWh per year and more than 2 million tons per year of CO2 equivalent.

5. Institutional Requirements and Environmental Management Plan 13. While the EAs have engineering and support staff, they have varying levels of dedicated staff and/or full-time qualified personnel with environment and resettlement expertise. An environmental and social management unit, responsible for environment, resettlement, and any other social development obligations, will be established at each EA.8 All the EAs will assume primary responsibility for the environmental assessment and implementation of EMPs for their respective components. TRANSCO has an environmental and social management cell (ESMC) within its organization structure to deal with environmental and social issues. However, its capacity needs to be strengthened by providing orientation and training on monitoring and implementation of environmental good practices. A chief engineer (T&P) heads the ESMC cell, which has seven officers from T&P office, civil office, and EHT-wing. ESMC at TRANSCO will have overall responsibility for implementation and monitoring of EMPs. The field organizations of EHT: C&M cell are carrying out the field studies. The field organizations of MPPTCL and DFO of the concerned district are conducting the EIA studies jointly. The ESMC is self-sufficient for monitoring the program and submission of progress reports. However, as and if required services of external agencies could be taken for monitoring and implementation of mitigation measures. Need for additional staff is not envisaged. 14. The duties of the environmental and social management unit will include at least: (i) monitoring and implementing mitigation measures; (ii) preparing and implementing environment policy guidelines and environmental good practices; (iii) advising and coordinating effective environment management; (iv) preparing an environment and safety manual for substation operation; (v) liaising with the Ministry of Environment Forest, New Delhi, and Pollution Control Board, and seeking their help to solve the environment-related issues of project implementation; (vi) advising the project planning cell on environmental and social issues, while selecting routes for the alignment at the planning stage to avoid negative environmental impacts; (vii) providing training and awareness on environmental and social issues related to power transmission projects to the project staff. 15. The contractor will be responsible for implementation of mitigation measures during the construction stage. The environmental engineer of the environmental and social management unit will ensure inclusion of environmental mitigation measures in contract documents. ADB will (i) review and approve IEEs and EMPs before contracts are finalized and work begins; (ii) review monitoring reports; and (iii) officially disclose the IEEs on its Web site in accordance with the ADB Public Communications Policy (2005)9. The IEEs include EMPs that cover (i) summary of potential impacts, (ii) mitigation measures, (iii) environmental monitoring, (iv) public consultation processes, (v) outline of responsibilities and authorities for implementing the proposed monitoring and mitigation activities, (vi) reporting and review procedures, (vii) work plan (including staffing and schedules of assigned personnel, activities, and inputs of other government agencies and stakeholders), (viii) environmentally responsible procurement plan, (ix) cost estimates, and (x) mechanisms for feedback and adjustment. Table A13.2 presents 8 These safeguard compliance activities can be supported under DFID assistance for MP power sector reform

component. ADB advises that all EAs develop in-house capability for environmental, health, and safety (EHS) program consistent with international best practices. The EHS program should include accounting for environmental benefits resulting from the investment components.

9 ADB. 2005 Public Communications Policy. Manila

Appendix 13 79

minimum provisions for environmental monitoring related to procurement and construction for the respective components. Estimated costs for mitigation and monitoring measures are provided in Table A14.3. Detailed design work for each subproject will follow the recommendations of the IEE and EMP. The EAs will certify that the detailed designs comply with IEE recommendations (including EMP) before contracts can be made effective.

Table A13.2: Minimum Provisions for Environmental Monitoring

Environmental Monitoring Tasks10 Implementation Responsibility

Implementation Schedule

Pre Construction Phase Audit project bidding documents to ensure EMP is included.

EAs through project management office and implementation units

Before issuing bidding documents

Monitor contractor’s detailed alignment survey to ensure relevant environmental mitigation measures in EMP have been included.

EAs through project management office and implementation units

Before EA’s approval of contractor’s detailed alignment survey

Audit detailed designs of transmission lines and associated substations, and distribution system expansion to ensure environmental safeguards and mitigation measures have been included.

EAs through project management office and implementation units

Before EA’s approval of contractor’s detailed designs

Construction Phase Monitoring and report regularly on contractor’s compliance with contractual environmental mitigation measures

EAs through project management office and implementation units

Continuous throughout construction period

Operation and Maintenance Phase Observe routine maintenance inspections of substations and transmission line RoWs and phased out equipment management. Inspections will include monitoring implementation status of mitigation measures specified in EMP.

EAs Per EA’s inspection schedules

EA = executing agency Source: Asian Development assessment.

Table A13.3: Summary of Estimated Costs for EMP Implementation

Item Sub Item Total Costa ($) Monitoring activities As detailed under EMP 711,111 Mitigation measures As prescribed under EMP and IEE 2,924,511 Independent audit and monitoring agencies As described in Table A13.2 33,333 Contingency 3% contingency 110,069

Total 3,779,024 a Estimated costs are indicative only. Source: ADB estimate. E. Public Consultation, Information Disclosure, and Grievances 16. Affected communities have been consulted during preparation of the project in general and during the IEEs in particular. The communities generally support the proposed investment components, as electricity service is expected to improve and some employment opportunities will be created. Details of public consultations are incorporated in the IEEs. The consultation undertaken during fact-finding field visits are in Table A13.4. In addition, some officials from state authorities (e.g., EAs, forest department, pollution control board, etc.) were consulted during the fact-finding visit. Affected people are aware of and fully support the proposed

10 Monitoring of issues related to compensation of landowners for land acquisition and loss of production, etc. will be

included in the resettlement plan.

80 Appendix 13

projects, as the projects will benefit the area in terms of improved electricity supply and some employment opportunities.

Table A13.4: Summary of Public Consultations Date Project component Venue/No. of

participants Issues discussed/remarks11

21 Aug 400 kV substation. Proposed 220 kV DCDS line between Bhopal – Aastha – starting point

Sukhi Sevenia village / 10

21 Aug 220 kV substation at Vidisha and associated 220 kV DCDS line from Vidisha substation to location No. 292 of Bhopal – Bina 220 kV DCDS

Vidisha / 15

22 Aug Bhopal 400 kV – Ashta 220 kV DCDS line – 105 km

Jorkheda, Shyampur village / 20

23 Aug 132 kV substation at Baora Baora / 16 23 Aug 220 kV substation at Rajgarh Rajgarh / 18

• Awareness about the project and environmental pollution

• Benefits of the projects • Likely impact on direct/indirect development • Environmental problems in the region • Presence of environmental sensitive areas in

the region • Health and safety issues • Compensation payment mechanism initiatives

for minimal environmental/social impacts

Source: ADB assessment.

17. Each IEE and EMP, and the summary IEE for the investment components, will be translated into local language(s) and made available to the public. A grievance redressal committee (GRC) will be established to address the concerns and grievances of the local communities and affected parties. Further, it will provide them with a public forum to raise their concern or objections. The GRC will comprise representatives from project proponent, local authorities, affected parties, and other stakeholders, as mutually agreed with the local authorities and affected persons, and a senior official from each EA. The GRC will be established in a manner that ensures easy access to communities and affected parties. The EAs will be responsible for disseminating information about the functional norms of the GRC. The committee will meet at least twice per year, or more frequently if required. The EMPs will include provisions for internal and external monitoring. The EAs will be responsible for internal monitoring of EMP implementation, and will forward semiannual progress reports to the Government and ADB. The reports will cover EMP implementation with attention to compliance and any needed corrective actions. The EAs will hire an independent monitoring agency, with ADB concurrence, to undertake external monitoring of the project. The external monitoring agency will be selected within 3 months of approval of each loan approval, and will report semiannually directly to ADB. It will determine whether sound environmental management practices have been achieved, and suggest suitable recommendations and remedial measures for midterm correction and improvement. F. Conclusion 18. None of the Tranche 1 and Tranch2 2 investment components are in environmentally sensitive areas, and will not result in any significant adverse impacts. Minimal negative environmental impacts are anticipated, mostly during construction. These can be mitigated successfully by implementing component-specific EMPs. Environmental and social benefits of the investment components and long-term program objectives outweigh the negative impacts. Based on environmental assessment activities conducted to date, the Tranche 1 and Tranche 2 projects are confirmed as environmental category B and the IEEs, including EMPs, are considered sufficient to meet the environmental assessment requirements of ADB and India. A full environmental impact assessment study is not required. 11 Queries raised by people were answered to their satisfaction. It was assured that compensation for any loss would

be paid in a timely manner on mutually agreed terms, or after the revenue department fixed the amount.

Appendix 14 81

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY (SPRSS)

A. Links to the Country Poverty Analysis Sector identified as a National Priority in Country Poverty Analysis?

Yes

Sector identified as a National Priority in Country Poverty Partnership Agreement

Yes

Contribution of the sector or subsector to poverty reduction in India Infrastructure development is critical as a catalyst for generating economic activity and employment, accelerating growth, and providing better integration and social welfare. The power sector investment program in Madhya Pradesh will have intrinsic scope for poverty reduction. The investment program will bring direct and indirect positive social impacts. This will benefit specifically the people living in the remote areas through improved frequency and voltage levels for various uses, which will result in socioeconomic growth. Electricity is a key input for socioeconomic development process. Efficient and reliable provision of electricity contributes indirectly to poverty reduction through economic growth. It also has a direct bearing on poverty reduction as electricity access is central to the basic human needs of health and education. Poor and vulnerable consumers, as well as social utilities such as hospitals and schools, are often particularly disadvantaged by inadequate power supply, load shedding, and poor power quality. Therefore, they will benefit directly from the project. Direct positive economic and social benefits will result from the investment program. In addition, better supply of electricity will enable farmers to set up high-powered pump sets for their agricultural use, which will help increase yields. The proposed project is expected to generate considerable employment for skilled and unskilled labor during the construction.

B. Poverty Analysis Proposed Classification: General intervention The poverty level in Madhya Pradesh is, on average, higher than in the rest of India. This is indicative of the degree of vulnerability and marginalization of the population. According to the National Sample Survey 55th round, 37.43% of the population in the state lives in poverty. The poverty line in the state is set at Rs311.34 per capita per month for rural areas and Rs481.65 per capita per month for urban areas. The national poverty line is slightly higher for rural areas at Rs327.66 per month, but lower for urban areas at Rs454.11 per month. However, the national and the state poverty lines are well below the internationally accepted $1 a day poverty line, highlighting the vulnerability of population. According to the Human Development Report, the poverty level in the rural areas has fallen from 40.6% in 1993–1994 to 37.1% in 1999–2000, as per the head count ratio in Madhya Pradesh. The literacy rate is 64.11% of the total population. Of the literate population, 76.80% is male and 50.28% is female. Of the total households, 74% are in rural areas and 26% in urban areas. Net sown area under agriculture is 49%, and forest land covers about 28% of the geographic area. Of the total population, 57% is classified as nonworkers and 32% are main workers, whereas 11% is marginal workers. The sample subprojects will create significant employment opportunities for skilled and unskilled labor during implementation. Unskilled labor will be employed directly for the construction of transmission lines, substations, and other manual works. The post-construction phase also will offer opportunities for employment, especially for maintenance

C. Participation Process

Is there a stake holder analysis? Yes No Participation during project preparation: The executing agencies consulted with local officials and village leaders, raising the level of awareness, building local support, and enabling affected people to voice opinions and suggestions for project design and implementation. The poor, women, and other vulnerable groups were considered carefully in conducting participatory activities. As a part of the social assessment, stakeholders’ consultations in the project areas were carried out with the broad objective of ensuring extensive participation of all types of stakeholders. The participatory approach will be continued during

X

82 Appendix 14

implementation.

Is there participatory Strategy? Yes No Participation and consultation are based on a two-way information flow—from project authorities to people and from people to project authorities. Participation, consultation, and information dissemination were incorporated at several levels during the planning of subprojects. Public consultations were carried out as an integral component of project preparation to ensure that the community supports the project and the project supports the needs of the people. The stakeholders and the affected community were continuously involved, and their feedback has led to substantial inputs into project preparation. While the project authority retains the decision-making authority, interaction with people and their feedback allows affected populations to influence the decision-making process by raising issues that should be considered in design, mitigation, monitoring, and management plans, as well as the analysis of alternatives. The executing agencies (EA)will ensure that during implementation local groups will remain involved in (i) preparing final compensation listings and individual claim files and in the payment of compensation for acquired land and loss of assets and livelihood; and participate in any grievance redress; and (iv) the M&E process during implementation of the resettlement plan.

X

D. Gender and Development Strategy to Maximize Impacts on Women: Women will benefit from the project through improved access to electricity, which will result in better services such as health, education, and clean environment. Women have been consulted during the project preparation, and the necessary mitigations have been suggested to avoid any discrimination against women during the project implementation. Has an out put been prepared? Yes No E. Social Safeguards and other Social Risks

Item Significant/

Non-Significant/ None

Strategy to Address Issues Plan required (Full/ Short/

None)

Resettlement

Not Significant

The proposed subprojects involve the construction of transmission lines and substations. Attempts have been made to ensure that most of the construction is done on the government land. However, some land acquisition is required, although impacts on individual households are limited. According to the assessment for Tranch1 and Tranche 2, 611.30 hectares of private agricultural land will be acquired temporarily due to the construction of transmission lines, which will result in 1,528 temporarily affected households. Similarly, 162 hectares of government land will be acquired for construction of 18 substations, which will have no resettlement impact. Additionally, the remaining substations, whose sites have not been finalized, have been assessed. For the remaining substations, a maximum of three households are assumed to lose part of their land in the worst case scenario. Therefore, the assessment of land requirement and subsequent number of affected households has been done on the basis of these assumptions, and the acquisition is considered permanent and private. The losses will be compensated suitably per the entitlement provision in the short resettlement plan and in the

Short resettlement plan and resettlement framework for the future tranches

X

Appendix 14 83

Significant/ Item Non-Significant/

None Strategy to Address Issues

Plan required (Full/ Short/

None)

resettlement framework.

Indigenous People Not Signifiant As the project will benefit all population groups, it will not differentially or adversely affect any groups. The subprojects identified do not pass through areas of significant settlement or use by indigenous peoples. However, an indigenous peoples development framework has been prepared to cover any impact on indigenous people in the subprojects to be implemented under future tranches.

No Indigenous Peoples Development Paper required for Tranche 1 and Tranche 2. Indigenous Peoples Development Framework (IPDF) for the future tranches.

Labor None No job will be lost. The project is expected to generate employment opportunities for local communities during the construction and maintenance phases.

NO (Not Required)

Affordability None The subprojects are unlikely to increase prices of goods and services accessed by the poor. The investments will support the Government’s goal of affordable power for all by 2012, which is considered a pro-poor initiative. The Government regulates electricity tariffs, which include lifeline tariffs for poor consumers.

NO (Not Required)

Other Risks/or Vulnerabilities

Not Significant Considering the possible presence of laborers not from the immediate project area for construction work, EAs will take proper care during construction supervision to conduct information and education campaigns on the risks of HIV/AIDS and human trafficking, targeting construction workers at campsites. Also, EAs will ensure that the contracts for civil works require contractors (i) not to employ or use children for labor; (ii) to disseminate information at worksites on risks of sexually transmitted diseases and HIV/AIDS as part of health and safety measures for those employed during construction; and (iii) to follow and implement legally mandated provisions on labor (including equal pay for equal work), health, safety, sanitation, and working conditions.

NO

(Not Required)

84 Appendix 15

SUMMARY RESETTLEMENT PLAN

A. Project Background and Scope of Land Acquisition & Resettlement 1. The proposed Investment Program will be provided under a multitranche financing facility (MFF) over 8 years. Each tranche will be structured as a project loan that can be implemented fully within 3 to 4 years. The Investment Program will cover the following three areas:

(i) Transmission capacity expansion. Time-critical transmission lines, substations, and auxiliary equipment will be constructed to evacuate and transmit power from new power stations and substations to consumers. The scope of transmission work will comprise construction of (a) 2 cct-km of 400 kV and about 1,435 cct-km of 220 kV transmission lines across the state; (b) eight new 220/132 kV substations, with transformer capacity of 160 MVA each; and (c) one new 400/220/132 kV substation with 315 MVA transformer capacity.

(ii) Distribution efficiency enhancement. Various targeted capital works designed to improve efficiency through loss reduction and to enhance supply reliability in all DISCOMs will be undertaken. Subprojects include the rollout of a HVDS; remote metering of high-value customers; (metering of unmetered consumers; distribution transformers metering; renovation of substation protection and modernization of substations; substation SCADA; and the expansion of the village lighting scheme (feeder separation scheme).

(iii) Nonphysical investments. Some nonphysical investments will complement physical investments, including: implementation of SCADA systems in DISCOM-E 48 , development of a trading and settlements support system for TRADECO, facilitation of strategic public-private partnerships, and establishment of ECF and other energy efficiency initiatives (e.g., Clean Development Mechanism).

2. The proposed Investment Program will involve land acquisition for the construction of transmission lines and substations. Subprojects under the Tranche 1 have been appraised in detail as a requirement for loan processing and approval. Tranche 1 transmission subprojects including 19 proposed new substations and 2,068 kilometers of transmission lines (400, 220, and 132 kV). Tranche 2 will comprise of distribution subprojects for which due diligence was conducted. No resettlement and/or other social impacts are expected. The executing agencies (EA) will be Madhya Pradesh Power Transmission Company Limited (TRANSCO) for the transmission component and DISCOM-E for the distribution component. Only the transmission component will have resettlement impacts. TRANSCO prepared a resettlement plan (RP) for the implementation of the transmission component. This RP is based on the project impacts on land acquisition and resettlement per the components designed so far in the DPRs of TRANSCO. 2. This RP is prepared based on the components of the Tranche 1 and the transmission component of Tranche 3 for which an update will be provided during

48 Madhya Pradesh Poorv Kshetra Vidyut Vitaran Company Limited (DISCOM-E)

Appendix 15 85

appraisal. Therefore, it deals with aspects of TRANSCO. However, a resettlement framework is prepared as a guideline for the future subprojects in case of future resettlement impacts. The details of schemes included in Tranche 1 for transmission components are in Table A15.1.

Table A15.1: Transmission Schemes in Tranche 1

No. Description Unit Quantity A. 400 kV Works 1. 400 kV DCDS line km 1 2. 400 kV 315 MVA new substation with two 400 kV feeder No. 1 B. 200 kV Works 1. 220 kV DCDS line km 682 2. 220 kV DCSS line km 7 3. 220 kV 2nd circuit line km 135 4. 220/132 kV 160 MVA with 4 no. 132 kV feeder bay new

substation No. 2

5. 220/132 kV 160 MVA with 2 no. 132 kV feeder bay new substation

No. 4

6. 220/132 kV 160 MVA and 220/33 kV 100 MVA new substation with 2 no. of 132 kV feeder bay

No. 2

7. 220/132 kV 160 MVA additional transformer No. 10 8. 220/33 kV 100 MVA additional transformer No. 1 9. 220 kV feeder bays at existing substations No. 40 C. 132 kV Works 1. 132 kV DCDS line km 302 2. 132 kV DCSS line km 493 3. 132 kV 2nd circuit line km 448 4. 132 kV with 40 MVA and 2 no. of 132 kV feeder bay new

substation No. 8

5. 132 kV with 40 MVA and 1 no. of 132 kV feeder bay new substation

No. 2

6. 132/33 kV additional transformer No. 13 7. 132/33 kV augmentation of transformer No. 20 8. 132 kV feeder bays at existing substation No. 108

kV = kilo volt; MVA = mega volt ampere Note: The transmission component consists of 77 individual transmission lines covering about 2,068 km of overhead transmission lines and 19 new substations spread across state. Source: TRANSCO.

3. The major impacts will involve temporary land acquisition for the transmission lines, which will affect some private land. Per the detailed project report (DPR), 18 of the 19 proposed substations will be built in the government land. The remaining substation (Chicholi) will require minimal private land acquisition. The assessment has been done for the transmission lines for Tranche 1. Land acquisition and resettlement impacts have been assessed and documented in the RP for the transmission lines and substations under Tranche 1. The construction of transmission lines will require the temporary acquisition of 611.3049 hectares of private agricultural land, which will result in 1,52850 temporarily affected households. Similarly, 162.46 hectares of government land will be 49 Temporary acquisition for transmission routes have been calculated based on the amount of land required

for footings, towers, and rights-of-way. In Madhya Pradesh, about 49% of the land is used for private cultivation. Therefore, assessment of private land is done by applying 49% to the total land to be affected by the transmission components.

50 The average land holding size in Madhya Pradesh is 0.4 hectare, and the temporarily affected household is calculated applying 0.4 hectare average to the total affected agricultural land.

86 Appendix 15

acquired for construction of 18 substations (sites have been selected), which will have no resettlement impact. Only 3 hectares of private land will be acquired for one substation (Chicholi), which will affect three households and 15 persons. Details are in Table A15.2. No informal land users are expected in the existing facilities since they are mainly fenced.

Table A15.2: Land Acquisition and Affected Households by Subproject

Permanent Acquisition Temporary Acquisition

Component

Permanent Land Acquisition (ha)

Affected Households

and APs

Temporary Land

Acquisition- Private

Agricultural (ha)

Affected Households

and APs

Private Government Land

I. Transmission Component A. Transmission lines and Towers 0 0 0 611.3 1528

(8405) B. Substations 1. Katni 0 0 0 0 0 2. Rajgarh 0 8.236 0 0 0 3. Vidisha 0 0 0 0 0 4. Hoshangabad 0 0 0 0 0 5. Badod 0 5.60 0 0 0 6. Ghosla 0 1.96 0 0 0 7. Badgaon 0 1.00 0 0 0 8. Kasrawad 0 3.326 0 0 0 9. Chanera 0 5.34 0 0 0 10. Bhanegaon 0 3.00 0 0 0 11. Chhegaon 0 36.00 0 0 0 12. Betul 0 25.00 0 0 0 13. Sagar 0 25.00 0 0 0 14. Ashta 0 36.00 0 0 0 15. Bagdi 0 3.00 0 0 0 16. Betma 0 3.00 0 0 0 17. Vijaypur 0 3.00 0 0 0 18. Chicholi 3.00 0 3

(15) 0 0 19. Berchha 0 3.00 0 0 0 II. Distribution NA NA NA NA NA Total 3.00 162.462 611.30 1528 3

(15) (8405) ( ) = negative Note: Requirement for land in distribution component is nil and therefore “NA” is put in all column. Source: Calculation based on input from TRANSCO and DISCOM-E.

B. Socioeconomic Profile 4. The project influence area, Madhya Pradesh (MP), will benefit directly and indirectly. MP is the second largest state in India with an area of 308,000 square kilometers (km2). The state of MP comprises of 45 districts and 51,806 villages. The population density of MP is 196 per km2. According to the national census of 2001, the population of MP was 60,385,118 persons, of which 52% is male and 48% is female. The sex ratio (i.e., the number of females per thousand males) is 933:1000. The literacy

Appendix 15 87

rate is 64.11% of the total population. Of the literate population, 76.80% is male and 50.28% is female. Of total households, 74% are in rural areas and 26% are in urban areas. Net sown area under agriculture is 49%, and forest land covers about 28% of the geographic area. Of the total population, 57% are classified as nonworkers, 32% as main workers, and 11% as workers. According to the National Sample Survey 55th round, 37.43% of the state’s population lives in poverty. C. Indigenous People 5. The project will not affect any indigenous people. MP’s scheduled tribe population is 12,233,474, or 20.3 % of the state population. An Indigenous People’s Development Framework (IPDF) has been prepared for management of Indigenous People (IP) issues if occurs in the future. D. Policy Framework and Entitlements 6. This RP is based on the Asian Development Bank’s (ADB) policy on Involuntary Resettlement (1995), as well as on the Government’s domestic laws, particularly Land Acquisition Act of 1894 (Govt of India); National Policy on Resettlement and Rehabilitation for Project Affected Persons (NPRR) by the Ministry of Rural Development, 2003; and The Madhya Pradesh Resettlement Policy, 2002. 7. National Policy on Resettlement and Rehabilitation. The basis of the Government’s resettlement policy is the NPRR, which provides minimum conditions ensured for persons affected by acquisition of land for public purposes. The objectives of the policy are to (i) minimize displacement and identify non-displacing or least-displacing alternatives; (ii) plan resettlement and rehabilitation of project-affected families (PAF), considering special needs of tribal and vulnerable sections; (iii) provide a better standard of living for PAFs; and (iv) facilitate cooperation between the project proponent and PAFs. The Land Acquisition Act, 1894 provides the framework for facilitating land acquisition in India. It enables the Government to acquire private lands for public purposes, and seeks to ensure that no person is deprived of land except as provided under this act. 8. Resettlement and Rehabilitation Policy of Madhya Pradesh, 2002. The Madhya Pradesh Resettlement Policy of 2002 recognizes all affected persons irrespective of titles. The policy provides for project-assisted resettlement for (i) resettlement and relocation, (ii) income restoration, (iii) special attention to vulnerable groups, (iv) time-bound and fair compensation, and (v) rebuilding and/or restoration of community resources or facilities. 9. ADB’s policy on Involuntary Resettlement policy requires:

(i) avoiding or minimizing adverse project impacts where possible; (ii) consulting with affected persons (AP) in project planning and

implementation, including disclosure of RP and project-related information;

(iii) paying compensation for acquired assets at replacement value; (iv) entitling APs to receive assistance to restore income and livelihood at

pre-project standard, and entitling all vulnerable APs to receive additional assistance to improve their income and livelihood;

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(v) providing resettlement assistance to APs, including non-titled persons (informal dwellers or squatters and encroachers);

(vi) integrating APs economically and socially into their host communities, if relocated.

(vii) Safeguarding and supporting APs’ social and cultural institutions; and restoring common properties and facilities;

(viii) carrying out compensation and rehabilitation programs with equal consideration for women and men; and

(ix) providing income restoration and rehabilitation programs. 10. The basic principles adopted for the project are:

(i) Avoid negative impacts of land acquisition and involuntary resettlement on persons affected by the project to the extent possible.

(ii) Where negative impacts cannot be avoided, assist APs, particularly vulnerable groups, in improving or at least regaining their standard of living and income.

(iii) Disclose all information related to resettlement planning and implementation, and ensure APs’ participation in them.

(iv) Provide compensation for acquired assets at replacement and/or market value in accordance with the RP and resettlement framework.

(v) Provide resettlement assistance and income restoration to APs, including non-titled persons.

(vi) Provide for APs not present during enumeration. However, anyone moving into the project area after the cutoff date will not be entitled to assistance.

(vii) Provide compensation and resettlement assistance before taking possession of the acquired lands and properties.

(viii) Establish grievance redress mechanisms to ensure speedy resolution of disputes.

(ix) Ensure involvement of women and vulnerable groups in all activities related to resettlement planning, implementation, and monitoring.

(x) Ensure adequate budgetary support to cover implementation costs for RPs.

(xi) Conduct internal and external monitoring of the implementation of RPs. 11. An entitlement matrix is prepared, which provides category-wise details regarding the entitlements according to the resettlement principles. The broad entitlement of compensation and assistance will include compensation for loss of agricultural land, compensation for loss of crops and trees, assistance for loss of income, and additional assistance to vulnerable groups, etc. The entitlement matrix is described in Table A16.3.

Table A15.3: Entitlement Matrix Type of Losses Definition

of APs Entitlement Details

1. Land Loss of agricultural land

Titled owners and APs with traditional land rights

• Compensation based on replacement value

• Resettlement assistance

• Assistance to vulnerable APs

• In case of compulsory acquisition of land, compensation will be based on the Land Acquisition Act (land value + 30% solatium + 12% interest, if applicable).

• In case of land to be possessed by the project authority with mutual and voluntary

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Type of Losses Definition of APs

Entitlement Details

(female-headed households, scheduled tribal households, scheduled caste households, poor households, and households headed by physically handicapped or disabled persons)

consent of the affected people, compensation will be paid based on estimated market price as decided by the revenue department (district collector and/or competent authority).

• Transaction costs (documentary stamps, registration costs, etc.) will be borne by the project authority during registration.

• Resettlement allowance will be paid in the amount of a daily minimum wage for a maximum of 1 year to the household losing a portion of land, resulting in income generation capacity greater than minimum agricultural wage. This will be estimated by the competent authority.

• Resettlement allowance will be paid in the amount of a daily minimum wage for a maximum of 1½ years to the household losing a portion of land, resulting in income generation capacity equivalent or less than minimum agricultural wage.

• Vulnerable households falling under above categories will be provided an additional allowance according to the extent of vulnerability at a maximum of 30% of the total compensation and assistance. This will be estimated by the competent authority.

Individual tenant, share-cropper, or leaseholder

• Reimbursement for unexpired lease

• Lease rates will be determined by the project authority with the help of revenue department, and based on consultation with landowners.

Temporary loss of agricultural land

Farming households, share-croppers, tenants, untitled households

• Notice to harvest standing crops

• Compensation at market value

• Restoration

• Compensation of crop at market value for the number of seasons the crop will be affected by the implementation of the project. In any case, no less than one season.

• Additionally, temporary land losers will be in charge of land clearance. Therefore, they will be compensated for the provision of labor at the minimum agricultural wage rate for the duration of this activity.

Loss of access to forestland

Affected household with forestland access

• Provision of alternative facilities and technical assistance

• Households losing access to forestland for their basic needs, such as fuel, fodder, etc., will be provided access to alternative forest land. Communities will be involved in community social forestry schemes coordinated by the Department of Forests.

• Vulnerable APs will be provided assistance by the project for alternative sources of fuel, fodder, etc., which will minimize their traditional dependency on forests.

2. Income Income from standing crops, rent or sharecropping

Farming households, share-croppers and tenants

• Notice to harvest standing crops

• Compensation at market value

• Compensation at market value for crops. • Preferential employment in the Project will

be provided to vulnerable households.

Income from Affected • Compensation and • Compensation a equivalent to 6 months of

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Type of Losses Definition of APs

Entitlement Details

affected business and wage earnings

individuals income restoration

minimum wages. • Preferential employment in the project will

be provided to vulnerable households. Income from trees or perennial crops

Affected households

• Compensation at market value

• Fruit-bearing trees and perennial crops will be compensated according to the value of fruit for 1 year and the market value of timber.

• Trees will be compensated based on the market value determined by the Forest Department for timber species, and by the Horticulture Department for other trees.

Income from forest products and grazing land

Affected households

• Lump sum compensation

• Lump sum compensation will be given for lost income for one season based on income from the forest or grazing land determined by the Revenue department and project authority in consultation with APs.

3. Community and cultural sites

Affected households or individuals

• Conservation, protection, and compensatory replacement (schools, community centers, markets, health centers, shrines, other religious sites, places of worship, burial sites, rights to food, medicine, and natural resources)

• Impacts will be documented and mitigated. Cultural properties will be conserved through special measures, such as relocation in consultation with the community.

4. Government property (loss of land)

Relevant department

• Lump sum compensation as per government rules

• Compensation at nominal annual rate of Re1.00 for the required land for substation component.

5. Other impacts not identified, and

Affected households or individuals

• Additional assistance • Unforeseen impacts will be documented and mitigated based on the principles agreed upon in the resettlement framework.

• Vulnerable households will be provided an additional allowance according to the extent of vulnerability at a maximum of 30% of the total compensation and assistance. This will be estimated by the competent authority.

impact on vulnerable groups

• Additional assistanceb at per the bank interest on the entire compensation amount for the delayed period will be paid by the project authority.

6. Loss due to delay in payment for compensation or disbursement of compensation after the scheduled period

Affected households or individuals

• Additional assistance

aLoss of house or other structures is not foreseen. Transmission lines will be designed to avoid settlements. Distribution lines are generally designed to avoid structures. Loss of income from business is not foreseen. However, losses do occur, these will be compensated in cash for the total income loss during the period for which the business activities are damaged. The annual income of the business activities usually are registered in the tax department. Calculation of the income per day will be done by taking into account the annual income of the APs from the business sources, and the amount of compensation will be calculated accordingly for the period of damage. Tax will be paid additionally to the APs. b This will be in addition to the 12% interest mentioned in case of the Land Acquisition Act. This will be applicable to all the APs and all type of losses in case disbursement is delayed. Source: Asian Development Bank assessment.

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E. Information Dissemination, Consultation, Disclosure, and Grievance Redress 12. All stakeholders were consulted at different stages of project preparation, and issues related to local needs, problems and prospects of resettlement, compensation options, etc., were discussed. The EA has disseminated information on the project through public consultation and provision of project information. Preliminary information on the program was published in the Gazette. In addition, however, it has been agreed that the plans prepared so far for the Tranche 1 and Tranche 2 (RP, resettlement framework, and IPDF) were disclosed in relevant offices where resettlement impacts are anticipated. The EAs translated the documents into local language (Hindi). The documents were disclosed to the APs, according to the ADB and procedures of India. A grievance redress committee (GRC) will be formed to ensure APs’ grievances are addressed and to facilitate timely project implementation. The GRC will have representatives from APs, head of PMU, PMU resettlement specialist, field-level staff, district magistrate, local administration, revenue authority, implementing Non Government Organization, and local community. The GRC will meet once a month. The main responsibilities of the GRC are to provide support to APs on problems arising from land/property acquisition; and record, categorize, and prioritize AP grievances, and resolve them within 4 weeks. F. Institutional Framework 13. The respective EAs will have operational responsibility for project management and implementation of their respective components. TRANSCO will be responsible for transmission, while the DISCOMs will be responsible for distribution. A project management unit (PMU) will be set up at each company, and will function separately for their respective implementation. PMU expertise includes (i) engineering planning and design; (ii) economic and financial management; (iii) procurement and contracts management; and (iv) safeguards management, which includes social and environmental management. The proposed PMUs do not have any resettlement specialists. However, resettlement specialists who are committed to serving throughout project implementation will be added to the PMU. For subproject RPs, the PMU will have overall coordination, planning, implementation, and financing responsibilities

14. The main institutions include the government of Madhya Pradesh (Department of Energy), TRANSCO, DISCOM-E, GRC, NGO, external monitoring and evaluation agency, and APs.

G. Resettlement Budget 15. The resettlement budget is prepared for the components of the Tranche 1 with specific reference to TRANSCO. Based on the government’s rules and regulations, revenue rates, market rates, data collected during the consultation and review of previous experiences and best practices, the R&R budget has been worked out. The resettlement and RP implementation for Tranche 1, especially for the TRANSCO components, will cost Rs77 million ($6.1 million). This is a tentative budget that will be updated as the project is developed and finalized.

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H. Implementation Schedule 16. According to the conditions in the technical construction works contracts, land free from all encumbrances is to be made available to the contractors in phases for each contract package. The time frame for implementation of the RP will be synchronized with project implementation to avoid undermining commencement and progress of civil works. The RP is expected to be implemented continuously, and will be completed in a phased manner for over the project duration for each specific contract and tranches. However, the sequence might change or delays might occur due to circumstances beyond the control of the project. The tentative implementation schedule is in Table A15.4.

Table A15.4: Resettlement Plan Implementation Schedule

Activity 2006 2007 2008 2009 2010 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 A. Component A (Transmission) Census/surveys Draft RP Consultation Disclosure Notification NGO selection Cutoff Date Finalization of APs and final notification Compensation Grievance redress Beginning of civil work Monitoring and evaluation (External) B. Component B (Distribution) Public Consultation Source: Asian Development Bank estimates

I. Monitoring and Evaluation

17. The PMU will monitor closely RP implementation for the project through its field staff, and will be oversee all activities related to RP implementation. Monitoring components will include performance monitoring, impact monitoring, and external evaluation. Two broad categories of indicators will be monitored during the project: (i) input and output indicators, and (ii) outcome and impact indicators. The PMU, with the help of the implementing NGO, will carry out internal monitoring according to impact indicators related to the overall project objectives as stated in the R&R policy and in the entitlement matrix. An external monitoring consultant will be engaged to monitor and evaluate proactively the RP objectives. The external monitoring consultant will submit monthly and quarterly monitoring reports. A final evaluation will determine if the R&R objectives have been achieved according to the performance impact indicators.