Public Disclosure Authorized INDIA RURAL ELECTRIFICATION CORPORATION PROJECT...

Document of

The World Bank

FOR OFFICIAL USE ONLY FILE COPY

Report No. 2413b-IN

INDIA

RURAL ELECTRIFICATION CORPORATION PROJECT II

STAFF APPRAISAL REPORT

April 26, 1979

Regional Projects DepartmentSouth Asia Projects

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

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CURRENCY EQUIVALENTS

Currency Unit = Rupee (Rs)Rs 1 = Paise 100

US$1 = Rs 8.6 1/

Rs 1 = US$0.1163 1/Rs 1 million = US$116,279.07 _/

LIST OF ABBREVIATIONS AND ACRONYMS

ARDC- - Agriculture Refinance and Development CorporationCEA - Central Electricity AuthorityGOT1 - Government of IndiaHT - High Tension

HP - Horsepower

ICICI - Industrial Credit and Investment Corporation of IndiaIDBI - Industrial Development Bank of IndiaLT - Low Tension

MG - Mini-growth SchemeMH - Mini-health Scheme

MNP - Minimum Needs Program

NHPC - National Hydro Power CorporationNTPC - National Thermal Power CorporationOA - Ordinary Advanced Area SchemeOB - Ordinary Backward Area SchemeRBI - Reserve Bank of India

RE - Rural Electrification

REB - Regional Electricity BoardREC - Rural Electrification Corporation Ltd.SEB - State Electricity Board

SI - System Improvement SchemeSPI - Special Project IndustrySPA - Special Project AgricultureSU - Specially Underdeveloped Area SchemeUSAID - United States Agency for International DevelopmentV - Volt

kV - kilovolt = 1,000 volts

kVA - kilovolt-ampere = 1,000 volt-amperes

MVA - megavolt-ampere = 1,000 kilovolt-amperes

kW - kilowatt = 1,000 wattsMW - megawatt = 1,000 kilowatts

kWh - kilowatt-hour = 1,000 watt-hoursGwh - gigawatt-hour = 1,000,000 kilowatt-hours

FISCAL YEAR

April 1 - March 31

1/ Since September 25, 1975, the Rupee has been officially valued relativeto a basket of currencies. As these currencies are floating, the US$/Rs exchange rate is subject to change. Conversions in this report havebeen made at the long-term estimated rate of US$1 to Rs 8.6.

FOR OFFICIAL USE ONLY

INDIA


STAFF APPRAISAL REPORT

Table of Contents

Page No.

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

Institutions .............. ........ ............ *................. 1

Supply and Demand . .............. .. ................ . 2Previous Bank Group Involvement .................... 2

II. RURAL SUBSECTOR ....... .................................. 3

Background ....................................................... 3

Present and Planned RE ............................. 3

Previous Bank Group Involvement ..................... 5

III. BORROWING AND EXECUTING AGENCIES: INSTITUTIONS ANDOPERATIONS....... ..... 6A. Rural Electrification Corporation (REC) ............ 6

- Role in the Power Sector 6

- Organizationi and Staff 6- Lending Procedure . ................ . .......... 7

- Scheme Formulation and Presentation .8

- Appraisal and Approval 8

- Monitoring . .......... .. .. 8- Disbursement ...................... 9.... 9- Technical Assistance to SEBs 9- Record of Operations ... ................ ......... 10

- Record of Utilization of Credit 572-IN ........ 11- Future Development of REC ..................... 11

B. State Electricity Boards (SEBs) .................... 12- Role in the Power Sector ...... ................ 12- SEBs' Organization for RE ..................... 13

- Eligibility for IDA Finance ................... 13

- RE Planning and Financing ..................... 14

- Scheme Formulation for REC and Non-REC Schemes 15- Implementation and Procure,nent .............. .. 16

- Record of RE Operations ....................... 16

This project was appraised by Messrs. K. Jechoutek (Economist), B. Lynch(Financial Analyst), W. G. Scott (Consultant) and E. Baranshamaje (YoungProfessional)

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

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Table of Contents (Cont'd.)

Page N(

IV. ECONOMIC ANALYSIS AND PROJECT SELECTION .... ............. 17Cost Comparison .................................... 17Economic Rate of Return ............................ 18Beneficiaries ...................................... 18

V. THE PROJECT AND ITS IMPLEMENTATION ...................... 20Genesis ............................................ 20Definition of the Project .......................... 20Project Costs ...................................... 21Procurement ........................................ 23Disbursement ....................................... 24Onlending Rates .................................... 24Other Financing Agencies ........................... 24

VI. FINANCIAL ANALYSIS ...................................... 25A. Rural Electrification Corporation (REC) ............ 25

- Operational Performance and Financial Condition 25- Quality of Portfolio .26- Projected Operational Performance and

Financial Condition .26- Earnings Forecasts and Debt Service Coverage 28- Audit .28- Accounts Organizations .28

B. Rural Electrification Scheme Analysis ...... ........ 29- Financial Viability of Schemes .... ............ 29

C. Rural Electrification Impact on State ElectricityBoards ...................... ....................... 30- Operating Performance ......................... 30- Tariffs and Cost of RE Supply .... ............. 31

VII. TECHNICAL ANALYSIS ...................................... 33Standards .......................................... 33Power Factor Control ................................ 34RE System Improvements ............................. 35

VIII. SUMMARY OF AGREEMENTS .................................... 37

ANNEXES

1. Villages Electrified and Pumps Energized by 3/31/78 382. REC Organization Chart 393. REC Staff Structure (11/6/78) 404. REC Staff Strength in Regional Offices as on 3/31/78 415. Types of Schemes Financed by REC 426. Viability Criteria for and Terms and Conditions Applicable

to REC Loans 447. Installments in REC Loan Disbursement (in %) 468. Development of REC Lending Activity 1969-78 47

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ANNEXES Page No.

9. Actual REC Scheme Connections as % of Forecasts 4810. Performance of SEBs with Respect to REC-Financed Schemes 4911. Economic Analysis 5012. Estimated Project Cost 62

Statewise Requirements of Materials Procured under 63the ProjectQuantities of LCB Materials to be Procured underthe Project 64Schemes sanctioned by REC between 4/1/77 and 3/2/79 65

13. Share of ICB Suitable Materials in Total Typical SchemeCost (%) 66

14. Pilot Scheme Cost Estimates 6715. Procurement and Implementation Timetable 6816. Estimated Disbursement Schedule by Calendar Quarter 7017. Summarized Income Statements for FYs 1974 through 1978

(Actual) and FYs 1979 through 1983 (Forecast) 7118. Summarized Sources and Applications of Funds Statements

for FYs 1974 through 1978 (Actual) and FYs 1979 through1983 (Forecast) 72

19. Summarized Balance Sheets for FYs 1974 through 1978(Actual) and FYs 1979 through 1983 (Forecast) 73

20. Assumptions Used in Financial Projections 7421. Statement Showing Calculation of Debt Service Coverage

FYs 1974-78 (Actual) and FYs 1979-1983 (Forecast) 7722. Statement Showing Amount of Loan Sanctions, Disbursements

and Balance Undisbursed 7823. SEBs' Gross Fixed Assets at March 31, 1977 Analyzed

Between Rural Electrification and Other Operations 7924. SEBs' Capital Expenditure Cash Flow FYs 1976 and 1977 8025. Measurement of the Net Income Contribution from Rural

Electrification and Other Operations of SEBs Relative toTotal Average Capital Base 81

26. Rates of Return Earned by SEBs' "RE Activity" and "OtherOperations" Relative to Their Own Capital Bases forFYs 1976 and 1977 82

27. Operating Performance of the RE Activities of SEBs forFY1976 83

28. Operating Performance of the RE Activities of SEBs forFY1977 84

29. Operating Performance of the RE Activities of SEBs for1977 Relative to FY1976 85

30. Increases in SEBs' Revenues for FY1977 Required (i) toEnable Interest on State Government Loans to be Paid inFull and (ii) to Produce a Self-Finance Ratio of 20% 86

31. Effects on SEBs' Rates of Return and Self-Finance Ratiosof Increases in Revenues for FY1977 '87

32. Financial Analysis of Sample Schemes 8833. Average Price and Cost of Electricity for Selected

Consumer Categories 9034. Selected Documents and Data Available in the Project File 91

Map IBRD No. 14121

INDIA


I. POWER SECTOR

Institutions

1.01 Electricity supply is within the concurrent jurisdiction of theCentral Govermnent of India (GOI) and the State Governments. Principal agen-cies in the industry are (1) the State Electricity Boards (SEBs), which areresponsible for the generation, transmission and distribution of electricitywithin each State and for the control and regulation of private sectorlicensed electricity supply undertakings; (2) the Atomic Energy Commission(AEC); (3) the Central Electricity Authority (CEA); (4) the National Thermaland Hydroelectric Power Corporations (NTPC and NHPC); and (5) the RuralElectrification Corporation (REC).

1.02 Although NTPC and NHPC were established by GOI in 1975 to constructand operate large thermal and hydro power stations, this is principally toaugment the States' development programs. In most States, the SEB will con-tinue to be the largest power undertaking, a situation which is unlikely tochange in the medium term.

1.03 Planning of generation, transmission, and distribution developmenthas traditionally been undertaken by each SEB for its own State rather thanon a regional or national basis. However, with the rapid growth of the powersector and with the resultant increasing complexity of operation, GOI seesthe necessity for an integrated national approach to sector development.

1.04 A beginning was made with the creation of Regional ElectricityBoards (REBs) during the period 1964-66, with the objective of improvingcollaboration between the SEBs and establishing power systems on a regionalbasis. The general functions of the REBs are to plan the integrated opera-tion of the constituent power systems in a region for the maximum benefitof the region as a whole, coordinate maintenance and overhaul programs,determine generation schedules to be followed and the power available fortransfer between States, and determine a suitable tariff structure for theexchange of power within the region. Progress has been slow; collaborationhas been most successful in the Southern Region, where the regional loaddispatch center at Bangalore has successfully encouraged the exchange ofpower between States and facilitated integrated operation of the power systemsin the region.

1.05 At the national level, CEA has started work on the development of a15-20 year plan which should include, inter alia, detailed demand forecasts,investigations of power generation schemes to meet load growth requirementsefficiently, development of primary grid configurations, coordination ofpower sector plans with plans for other sectors, resource requirements, andrecommendations on responsibilities and needed operational policies at theState, regional and national levels.

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1.06 The financial position of the SEBs has been the subject of con-tinuing dialogue with GOI, and improvements have been effected through rateof return covenants in connection with previous Credits. This dialogueshould be continued with particular emphasis on the steps which should betaken to improve the financial condition of the SEBs, now that financialamendments to the Electricity (Supply) Act have been enacted into law.

Supply and Demand

1.07 The total installed generating capacity for the whole of Indiain March 1978 was 26,000 MW. This includes 2,200 MW of non-utility capacity,mostly thermal, which is owned by major industrial consumers to meet theirown needs. The total generating capacity is shared as follows: 38% hydro,2% nuclear, and 60% conventional thermal. Installed capacity by March 1979is likely to be 29,500 MW. GOI is planning to expand generating capacityduring the five year period 1979/80-1083/84 by some 19,000 MW, bringinginstalled capacity up to around 46,000 MW (utilities only) by 1983/84.Additionally, the construction of some 16,000 km of high voltage transmissionline is planned. Total energy generated in 1977/78 was 98,686 GWh. In 1983/84,this is expected to reach 176,358 GWh, an increase by almost 80%. While theenergy requirement is expected to be met by this availability, a small nation-wide peak capacity demand deficit of about 600 MW is expected.

Previous Bank Group Involvement

1.08 The Bank has extended nine Loans to India for power projects amount-ing to US$334.5 million, and IDA eleven Credits totalling US$996.0 million.US$870.5 million financed or is financing the construction of generatingplant, US$23 million financed the purchase of construction equipment forthe Beas hydroelectric project, US$380 million was for high voltage trans-mission and US$57 million was for rural electrification. Nine Loans andCredits for generating plant, the Beas project (Credit 89-IN) and the firstthree transmission projects (Loan 416-IN, Credits 242-IN and 377-IN) havebeen completed. The Singrauli, Korba, Ramagundam, and Trombay thermal powerprojects (Credits 685-IN, 793-IN, and 874-IN/Loan 1648-IN, and Loan 1549-IN)which were approved between April 1977 and January 1979 are still in thepreliminary implementation stage. The fourth transmission project (Credit604-IN) and the first rural electrification project (Credit 572-IN) are underimplementation and are now proceeding satisfactorily after initial delays.

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II. RURAL SUBSECTOR

Background

2.01 The primary objective of the Government of India in its drive forrural electrification (RE) is to ensure increased agricultural output byproviding reliable and economical power for irrigation pumps. Secondaryobjectives are the provision of electricity for domestic, commercial andsmall industrial consumers in the villages, in order to improve employmentpossibilities and quality of life in rural areas.

2.02 Agricultural pumping demand accounts for approximately 15% ofIndia's total annual kWh demand. This represents a significant increase overthe last 10 years, up from a previous figure of about 9%. There is consider-

able variation among States in this respect, the share of agricultural con-sumption ranging from 0.7% in Orissa and Assam to 30% and more in UttarPradesh, Punjab and Haryana. Between 1968 and 1978, consumption for agri-cultural pumping has been growing at an annual rate of about 15%, reflectingthe rapid increase in irrigation pumps connected to the grid. Connectedagricultural load is about 28% of the Indian total; again, as in the shareof energy demand, the percentage varies widely from 3-5% in West Bengaland Orissa, to 40% and more in Tamil Nadu, Haryana, and Andhra Pradesh.

Non-agricultural rural consumption accounts for significantly less thanhalf of total rural consumption.

2.03 Electricity demand in the rural sub-sector is characterized by alow annual utilization of installed capacity and peak consumption at systempeak times. The result, together with long distribution lines because ofscattered consumers, is a high cost of supplying electricity to rural areas,both because of losses and because of the need to provide generating andtransmission capacity for demand with a low load factor (9% on average,

ranging from 3.5 to 17%). The reason for this feature of rural consumptionis the dominant share of small-scale irrigation pumping: the pumps are, on

average, operated for a few hours per day only, often at the time of the

system's peak demand.

Present and Planned RE

2.04 In June 1978, about 220,000 or 38% of the 576,000 villages inIndia were "electrified", i.e., at least some initial consumer connectionshad been established (Annex 1). The percentage varies from State to State:Punjab, Haryana, and Tamil Nadu have reached almost 100%, while in Assam andother northeastern areas only 10% of villages are electrified. For the nextfive years, it is planned to electrify an additional 110,000 villages, and toincrease the number of connections in villages already connected. By June1978, 3.35 million irrigation pumps were electrified in India. A further 2million are projected to be connected and in operation five years hence.

2.05 The other major motive power for irrigation pumping is the diesel

engine. In March 1978, an estitnated 2.5 million diesel-powered pumps were in

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operation in India, more than half of these in Uttar Pradesh and Gujarat.

Since 1973, the number of diesel pumps has increased by 10% per year, while

the number of electric pumps has grown only at a rate of about 8%. This

relationship is expected to be reversed during the coming five-year period:

diesel pumps are expected to increase at an annual rate of 7%, while the

target for electric pumps is 10%, based on a policy of replacement of

diesel pumps by less expensive electric ones, and the intensification of

the RE effort.

2.06 The potential for expansion exists: out of an estimated 7.7 mil-

lion private irrigation dugwells 1/ existing in March 1978, only about 1.5

million had electric pumps installed, the rest being worked with either

bullock or diesel power. In addition to this replacement demand, new wells

will be dug in areas with high groundwater potential.

2.07 The next Five-Year Plan (1978/79-82/83) provides for an expenditureof approximately US$470 million per year for rural electrification. Included

in this sum are $60 million per year for village electrification through the

Revised Minimum Needs Program (RMNP), a system of soft loans for backward

area schemes in States with a low level of rural electrification. This total

planned expenditure compares to an annual average of about $180 million during

the early seventies. Estimated expenditure for 1978/79 is about $400 million.

The large increase in expenditure will require additional finance: thecapacity to implement the larger program exists.

2.08 Each individual RE project is formulated, prepared and implementedby the SEB concerned in accordance with general GOI policy for rural develop-

ment. All RE investments and operations (both new schemes and intensificationof the density of consumer connections in electrified areas) in each State are

conducted and controlled by the SEBs. The SEBs finance their RE expenditurefrom a number of sources, the major ones being the State government and REC,both of which utilize GOI funds. Smaller sources of finance are the Agricul-ture Refinance and Development Corporation (ARDC, refinancing bank lending

to SEBs for irrigation pump connections), and the Agricultural FinanceCorporation (AFC, organizing bank consortia).

Table 1.1: PLANNED EXPENDITURE ON RURAL ELECTRIFICATION,1978/79-1982/83

SEBs' Source of Finance Rs Million US$ Million _

REC /a 10,800 1,256 53ARDC Ta 2,400 279 12

Banks Ia /b 1,500 174 7

State Governments 5,600 651 27

Total 20,300 2,360 100.0

/a Includes Rs 1,200 million for each institution's share in theparticipative pump connection program described in para 2.09.

/b Estimated.

Source: Revised Draft Plan, REC, ARDC.

1/ 1.8 million electrified public and private tubewells excluded.

2.09 ARDC schemes are concerned with the energization of agriculturalpumps exclusively, both for ARDC minor irrigation projects and independently.A recent agreement between REC and ARDC allows ARDC finance for pump connec-tions in REC scheme areas where the REC scheme as originally defined has beencompleted. The RE program financed out of State funds does not usually com-prise new self-contained schemes, but consists mainly of extensions in ruralareas already connected to the grid, to meet expanding demand. Recently, therehas been an agreement between REC, ARDC and the domestic banking sector toshare (one third each) the financing of a number of new irrigation pump con-nection schemes. REC is to concentrate on long-term finance, the banks onshort-term finance, and ARDC on refinancing the banks.

2.10 REC's lending is steadily developing away from pure village electri-fication. New GOI funds have been earmarked for the improvement of distribu-tion systems that are in danger of being overloaded. Greater emphasis thanhitherto is being placed on REC's role in monitoring and promoting reliabilityof rural electricity supply. Apart from the traditional REC scheme categoriesof electrifying groups of villages in economically advanced (OA schemes), lessadvanced (OB schemes), backward (SU schemes), and Minimum Needs Program areas(MNP schemes), there are now a growing number of production-oriented schemessuch as the connection of irrigation pumps (SPA) or rural industry (SPI) inan area, and system improvement (SI) schemes that reinforce local distributionsystems by increasing capacity. Details of REC scheme categories are providedin Annex 5, with analysis of their economic and financial viability inAnnexes 11 and 32.

Previous Bank Involvement

2.11 A first IDA Rural Electrification Credit (572-IN, for US$57 million)was extended to REC in July 1975, for the financing of the material componentof schemes connecting new groups of villages to State electricity grids. Inthe first Credit, the criteria and methods used by REC in appraising RE pro-jects were accepted as satisfactory at the time, and all categories ofschemes that had financial viability criteria or contributed to more efficientoperations were judged to be eligible for IDA finance. For schemes financedby the first Credit, REC has introduced administrative procedures to complywith international competitive bidding (ICB).

2.12 Thirteen SEBs (out of 21 SEBs and power departments in the country)became eligible for IDA finance through REC under the first Credit (para3.44). By March 31, 1979, US$22.2 million of the Credit had been disbursed.

2.13 Indirect support of ARDC's refinancing of irrigation pump connec-tions to the grid has been extended in two previous ARDC projects (Credits540-IN and 715-IN) as part of the total minor irrigation costs. Pump connec-tion cost financed by IDA is not included in the proposed third ARDC project,now being processed.

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III. BORROWING AND EXECUTING AGENCIES: INSTITUTIONS AND OPERATIONS

3.01 The borrower is GOI who will relend the proceeds of the IDA Creditto REC. REC, in turn, will onlend to SEBs to finance specific RE schemesmeeting its defined viability criteria. The proposed IDA Credit constitutespart of ongoing GOI lending to REC, and of REC lending to the SEBs.

A. Rural Electrification Corporation (REC)

Role in the Power Sector

3.02 REC was incorporated in July 1969 under the Indian Companies Act,1956, as a company wholly owned by GOI, under the general supervision ofthe then Ministry of Irrigation and Power (now under the Ministry of Energy).REC's chief objective is to finance rural electrification schemes throughoutIndia, acting as a financial intermediary with technical expertise, and admin-istering funds received primarily from GOI. It is REC's function to ensureefficient allocation of these funds by establishing policies, procedures,and criteria for the formulation, approval and implementation of such schemes.In doing so, REC is directed to adopt a "project approach," coordinatingelectrification with other inputs in rural development in order to achieveincreased agricultural production and overall economic development. Thisinvolves an appraisal of each scheme to confirm the availability of ground-water and the existence of sufficient demand for electricity.

3.03 The impact of REC lending to the SEBs is large in the rural sub-sector, although it is small in relation to total SEB operations. Whilemore than half of rural electrification financing is REC's responsibility,REC provides only about 5-10% of total finance needed by SEBs for generation,transmission, and distribution investment. REC, therefore, exerts more in-fluence on the SEBs by persuasion and demonstration than by leverage, andis providing valuable contributions to the training of SEB staff, methodologyof RE scheme appraisal, and local RE planning.

Organization and Staff

3.04 REC is headed by a Board of Directors, all of whom are appointedby the President of India. At the time of appraisal, the Board consistedof a part-time chairman with wide banking and financial experience, and fiveother members, all of whom are officials of GOI or of public corporations.The position of full-time Managing Director, who is an ex-officio member ofthe Board, was vacant at the time of appraisal, but a senior AdministrativeService officer was appointed in January 1979, who has since also taken overthe function of full-time Chairman.

3.05 The Managing Director is the chief executive in charge of all RECoperations. Under him, the Technical Director (a presently vacant position)

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has overall responsibility for four technical REC divisions headed by ChiefEngineers, who are responsible for the coordination of scheme preparation,approval, and monitoring in four groups of States. In addition, theyspecialize in technical matters such as standardization and system improve-ment. Seven other divisions are non-regional and provide specialized inputsin the scheme cycle and general operations such as appraisal and monitoringmethods, organization planning, research and evaluation, special programmonitoring, financial analysis and accounting (Annex 2).

3.06 About 21% of total REC staff are seconded from the SEBs, includingabout 45% at senior levels and about 60% of engineers. For staff with eco-nomic and financial background, direct recruitment is prevalent. 43% ofsenior level employees are engineers, 32% have an economic background, and25% are financial staff. Middle-level employment is dominated by financialand economic staff (Annex 3).

3.07 At the time of appraisal, total staff strength of REC was 713, upfrom 509 in March 1975. Most staff growth has occurred outside headquarters,in new regional offices opened to take over the appraisal and monitoringof schemes. Ten such regional offices, with a total of about 250 employees,are now in operation (Annex 4). An eleventh office is proposed for Bombay.The staff growth of 40% between 1975 and 1978 has coincided with an increaseof 43% in total disbursements for loans. Future staff increases, planned forthe regional offices only, amount to only 3-4% per year. The pattern andgrowth of staffing are adequate.

Lending Procedure

3.08 REC organizes its lending to the SEBs on the basis of RE schemes.Schemes are always defined to cover an area, usually not exceeding the sizeof a "block" or "taluk", and consist of either (i) the electrification ofvillages in the scheme area, (ii) connection of new consumers of one con-sumer category in the scheme area, or (iii) upgrading of the sub-transmissionand distribution system of the scheme area (Annex 5). The schemes are pro-cessed by REC in a cycle consisting of formulation and presentation, appraisal,approval, and monitoring.

3.09 The criteria employed for selecting projects for REC finance varywith the degree of general area development as assessed by REC, and with thetype of scheme. Similarly, the terms of REC loans differ according to thesame classification. Repayment periods range from one year to 30 years andthe rate of interest increases in steps to a maximum of 9.5% per year for 30-year loans (Annex 6).

3.10 REC loans usually cover the total authorized cost of approved schemes,exclusive of consumers' contributions. Exceptions to this are "advanced areaschemes" in advanced States which are covered to the extent of 60%, and otherrecently developed categories of schemes, where other financing institutionssupplement REC's financing, or where the SEBs are required to contributematching funds for the maintenance of system reliability.

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Scheme Formulation and Presentation

3.11 Since 1969, REC has gradually established a working relationshipwith the SEBs that ensures the presentation and design of RE schemes accordingto REC requirements. REC has prepared proformae and manuals for the SEB staffinvolved in the processing of scheme proposals to encourage uniformity andmeeting of specifications. The main types of schemes financed by REC at thetime of appraisal are summarized in Annex 2, the terms of loans associated withthese categories and viability criteria as of November 1978 are in Annex 6.

Appraisal and Approval

3.12 Each scheme proposal received by REC is revised if necessary to REC'ssatisfaction and then appraised by a team from the responsible regional office,usually consisting of one engineer, one economist, and one financial analyst.During the appraisal, a meeting chaired by the District Collector and attendedby local representatives of REC, SEB, Agricultural and Industrial Departments,ARDC and the banking system, is held to examine the coordination of the insti-tutions' efforts.

3.13 An integral part of the appraisal is the sample examination of thevalidity of the SEB's assumptions. Forecasts such as the availability ofcredit facilities, the expected connected load, and the availability of ground-water, are checked. The internal REC appraisal report then highlights anyinconsistencies, suggests modifications, and shows a financial return on theinvestment.

3.14 After satisfactory SEB action on suggested modifications, the schemeis presented to the REC Board of Directors for formal loan approval. During1977/78, about 400 loans were approved. For the new-style pump connectionscheme loans (SPA), an abbreviated procedure will allow REC's Chairman toapprove such loans without going to the Board, due to the large number anduncomplicated nature of these loans.

3.15 REC will now begin to introduce discounted cash flow techniquesin its feasibility calculations, ultimately designed to replace the presentlyused decision criterion of financial return on the investment in a givenyear, by the more significant net present value and/or internal rate ofreturn concept. Simultaneously, REC has embarked on a program of introducingeconomic rate of return calculations in scheme feasibility analysis, basedon the benefits of cost savings in using electricity rather than alternativesources of energy. Introduction of these appraisal techniques will be neces-sary because of the increasing volume and complexity of REC lending operations.A continuing dialogue with REC will be maintained in this matter, and anappropriate covenant has been included in the Credit documents.

Monitoring

3.16 During implementation of schemes, SEBs are required to submit toREC annual standardized reports on physical and financial progress. RECmonitoring teams visit the scheme sites from time to time to ascertain

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progress and to check on implementation problems. The usual implementationperiod for area schemes is five years, and for specialized schemes two tofour years. If any problems or significant deviations from the appraisalreport are identified during monitoring, REC follows up its findings in adialogue with the SEB concerned. The usual problems to occur are cost over-runs, delay in the construction schedule, and slow growth of connections.

3.17 Present monitoring procedures are adequate. Each scheme is visitedat least once during the implementation period, more frequently if problemsoccur.

Disbursement

3.18 For area schemes, REC disburses 35-40% of the loan as an advancewhen the loan is approved, the remainder in four unequal installments tied tothe achievement of interim physical targets. For two- or four-year specialschemes, disbursement is made in two approximately equal installments (Annex7). The timing between installments, particularly for area schemes, dependson how fast SEBs reach the targets set in the scheme report. Implementationdelays lead to a postponement of the next disbursement tranche, usuallyscheduled one year after the last.

3.19 In recent years, REC has experienced delays in disbursement: in1977/78, Rs 1,128.8 million rather than the planned Rs 1,947.1 million weredisbursed, a shortfall of 43%. In 1976/77, the shortfall was 46%. This isdue primarily to the poor withdrawal performance of large recipient Statessuch as Uttar Pradesh, West Bengal, Bihar, and Andhra Pradesh, and partly tothe temporary stopping of disbursements to Uttar Pradesh, awaiting a necessarytariff increase that was delayed.

3.20 As an incentive for speeding up loan withdrawal, REC has introduceda rebate of 0.5% off the interest cost for 6 months, if the first tranche(35-40% of the amount) is drawn within 45 days after REC Board approval. Therebate decreases with later withdrawal, and ceases if the tranche is not with-drawn within 6 months. A similar rebate system will be effective from 1979/80onwards for the following tranches, and will be combined with the targetachievement requirement.

3.21 About 80% of total annual disbursements are paid out in the fourthquarter of the REC fiscal year (January-March), because most constructionactivity (and achievement of targets) takes place during the post-monsoonwinter months in order to complete the work in time for the peak irrigationseason. During this time, consumer pressure for rapid connection of irriga-tion pumps builds up strongly.

3.22 Present disbursement procedures are adequate. REC's disbursementforecasts will be made more realistic to take account of the SEBs' performance.

Technical Assistance to SEBs

3.23 REC is providing assistance to SEBs primarily in three fields:(i) scheme design; (ii) technical standardization; and (iii) training of SEB

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staff. REC has prepared detailed guidelines and circulated them to the SEBs,dealing with identification and preparation of scheme proposals, and assess-

ment of viability. A continuing dialogue between REC and SEBs keeps thismethodological input up to date.

3.24 For standardization of RE system design, REC has published a numberof manuals for the SEBs that set out technical specifications for materialand construction standards. In addition, REC is sponsoring a number of tech-nical research projects, the results of which will be made available to theSEBs. The proposed project includes two pilot schemes using cost-savingdistribution technology, that will be implemented under REC supervision as

demonstration projects.

3.25 RE schemes require engineering and analytical skills somewhat dif-

ferent from those required for other SEB operations. To help develop these,REC has financed linemen training centers in various locations and assistedin the initial stages of instruction: in 1977/78, REC approved 20 loans,amounting to Rs 12.3 million (US$1.4 million), for this purpose. In 1976,REC started to conduct courses for SEB engineers involved in RE: thesecourses have been held in Hyderabad since 1977. REC will continue thistraining function within the framework of a newly formed society that willcoordinate all training of senior staff in the power sector. In addition,REC will prepare and implement a systematic training program for its own andselected SEB staff, and submit this program to IDA.

Record of Operations

3.26 Since its inception in 1969, REC had approved 2,195 schemes with atotal loan amount of Rs 8,469 million (US$985 million) as of September 1978.Of these, two thirds were area electrification schemes, accounting for about85% of the loan amount. Recently, a significant shift of REC lending activ-ity away from general area electrification towards specialized, more narrowlyfocussed schemes has occurred. Taking 1977/78 approvals alone, the sharesof area electrification schemes were only 50% of the number, and 57% of thetotal loan amount (Annex 8). Out of total loans committed, approximately 60%had been disbursed to SEBs by September 1978.

3.27 Under REC schemes alone, 320,000 electric irrigation pumps had been

connected by March 1978. This represented about 10% of all pumps connectedby that time. The proportion has risen steadily in recent years: for thenext five years, REC is to be responsible (either by own or joint financing)for the connection of 65% of all new pumps. In terms of villages electrified,REC's share stands at 23% (Annex 1).

3.28 The record of target achievement in the implementation of REC-financed schemes by SEBs is improving. Only 60% of annual consumer connectiontargets for all schemes under implementation since 1969 have been reached.The trend over time, however, is encouraging: target achievement of 52% forschemes approved before 1974 has increased to 76% for those approved after1974 (Annex 9). In terms of pump connections alone, the improvement is even

more impressive, namely from 56% to 83%.

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3.29 The main reasons for delayed achievement are: (i) initially over-optimistic forecasts of future load demand in REC scheme areas; (ii) ineffi-ciency and delays in the construction activity of many SEBs; (iii) shortagesof materials required for rural distribution; and (iv) bottlenecks in provid-ing other essential inputs for successful rural electrification, such ascredit for farmers for wells, pumps, etc. The improvement observed in recentyears appears to be the result of progress in all these fields: one importantcontributing factor has been REC's learning process in forecasting load andconsumption growth in scheme areas, which has led to more realistic expecta-tions. SEB estimates of future revenue from a scheme are usually reducedafter a field visit by REC staff. It is expected that schemes approved nowand in the future will show better implementation performance than in the pastbecause of the recent improvements.

Record of Utilization of Credit 572-IN

3.30 Under the first Credit, six SEBs were eligible for receiving IDAfinance initially: during subsequent years, seven more SEBs fulfilled theeligibility criteria (para 3.44). This gradual increase in the number ofparticipating SEBs, together with the slow introduction of ICB procurementprocedures, delayed the procurement process and, consequently, the disburse-ment of the Credit. Such delays are not anticipated in the proposed Credit,as the early problems have been overcome to a large extent.

3.31 A second cause for disbursement delays has been the shortage ofaluminum for conductors during recent years. The shortage has held up imple-mentation work on REC-financed schemes, causing a shortfall of physicalachievements against targets and consequently slower disbursement of RECloan installments. GOI intends to take steps to ensure a steady supply ofaluminum from domestic and foreign sources, and such difficulties areexpected to be averted at an earlier stage in the future.

3.32 The complete proceeds of the first Credit had been committed andall contracts awarded by November 1978. However, 16 contracts already awardedhave been cancelled recently, and some are likely to be cancelled due to,inter alia, manfacturer's inability to deliver, shortage of aluminum, anddelays in finalizing the contract by SEBs. New awarding of contracts isexpected shortly, and the project's closing date is expected to be June 30,1980, 18 months after the originally scheduled date.

Future Development of REC

3.33 REC is endeavoring to expand its range of activities in order togain flexibility and tap additional financial resources. Involvement of RECin small generation projects such as diesel generators or mini-hydroelectricschemes in remote areas, and its participation in organized diesel pumpreplacement schemes have been discussed with GOI, but no final decision hasyet been taken. On less conventional energy sources, only research into thefeasibility of biogas plants in rural electric cooperatives is being conductedformally by REC. A system of loans to SEBs for connecting rural water supplypumps to the RE system is being introduced.

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3.34 A new venture that was started by REC in 1978 as a pilot schemecategory has now developed into a substantial participative financing programfor irrigation pump connections (Special Project Agriculture: SPA scheme).Together with ARDC and the commercial banks, REC will extend loans to SEBsfor 2-year and 4-year schemes designed to cover the connection of pumps tothe grid in a defined area, while safeguarding that the supply system is notoverloaded. Responsibility for appraisal of these schemes will rest primarilywith REC, while each of the three institutions will finance one third of eachscheme. The plan for the period 1978/79 to 1982/83 provides for a totalexpenditure under this joint program of Rs 3,600 million (US$419 million) toconnect 600,000 pumps.

3.35 REC has recently started to approve the first schemes of a similarspecialized category: Special Projects Industry (SPI). This pilot programconsists of loans to finance the connection of rural anc, small-town indus-trial estates to the grid, and is expected to develop into another partici-pative financing venture, in this case with the Industrial Development Bankof India (IDBI) and other domestic banks.

3.36 Apart from the shift from area electrification to specializedprojects and distribution system improvement schemes, a change in corporatestructure of REC may possibly take place during the next few years: a pro-posal to change REC from a registered company into a statutory corporation isnow under discussion. The main effects would be twofold: REC would obtain amanagement structure designed specifically for its purpose under a uniquestatute; and it would gain access to long-term investment funds available fromthe Reserve Bank of India (RBI) under more favorable terms. Access to theRBI's "Agricultural Credit (Long-term Operations) Fund" might be obtained evenbefore any changes in corporate status are decided. RBI loans for the normalREC lending program would carry an interest rate of 6% p.a. rather than thepresent 7.25% p.a. for GOI loans.

3.37 A significant increase in disbursements is planned for the comingyears (Annex 22). The large increases of 45% and 32% planned for 1978/79 and1979/80 do not appear to be realistic targets, and some slippage is to beexpected.

3.38 The REC Board has approved, in principle, that the organization mayperform RE consultancy work for clients abroad and in India. Consulting hasalready been or will be conducted for the UN Economic and Social Commissionfor Asia and Pacific (ESCAP), Algeria, Bolivia, Jordan, and Egypt. Thisactivity is planned to be continued only if manpower is available, ratherthan as a major new venture.

B. State Electricitv Boards (SEBs)

Role in the Power Sector

3.39 The SEBs, constituted under Section 5 of the Electricity (Supply)Act, 1948, are corporate entities whose principal duties are to generate,transmit and distribute electricity within a State (with particular reference

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to areas not already served or inadequately served), to interconnect withneighboring States, and to set and amend electricity tariffs in supplyingelectricity to consumers. Members of the Boards of Management of the SEBsare appointed by the State Governments. While the SEBs enjoy some autonomyin their day-to-day operations, they are under control of the State Govern-ments with respect to policy matters, capital investments, borrowings, salaryscales, tariff changes and personnel policies.

3.40 The importance of rural electrification in total SEB operationsvaries with the relative size and structure of the agricultural sector inthe State (para 2.02). RE investment for distribution only represents about20% of the SEBs' total investment program, ranging from 13 to 33%.

3.41 Implementation and operation of RE schemes imposes technical andfinancial burdens on the SEBs. Financial losses are incurred chiefly becauseof too low tariffs and high costs of supply. Technical problems are createdby the pattern of agricultural demand (para 2.03), leading to voltage dropand energy losses.

SEBs' Organization for RE

3.42 Twelve SEBs have set up "Rural Electrification Cells", i.e. depart-ments at headquarters that deal with the formulation and screening of REschemes. Typically, the Cells are headed by a Chief Engineer of senior rank,and consist (in the larger SEBs) of 10-30 engineers. Their principal func-tions are the preparation of RE schemes that are suitable for REC financing,and communication with REC during the scheme cycle. In some States, the Cellalso deals with other RE operations and is responsible for planning and schemepreparation in the rural distribution system as a whole.

3.43 The actual implementation and operation of RE schemes is the respon-sibility of the SEBs' construction and regional administration departmentsrather than of the RE Cells. Although the Cells keep a close watch on theprogress, the decisions on material allocations, construction priorities, andconsumer applications are made by the operating departments. Billing andcollection in the scheme areas is handled together with other business by theregional SEB administration. Separate consumption and connection statisticsare kept for REC-financed schemes only.

Eligibility for IDA Finance

3.44 The eligibility criteria for SEBs, on which agreement was reachedduring negotiations, are essentially identical to those agreed on in Credit572-IN. They are (i) an undertaking by the State Government to annually sub-sidize its SEB's RE losses either fully, or to the extent that enables theSEB as a whole to achieve a return on assets of 9.5%, whichever is less, or(ii) that an SEB is achieving a return of 9.5% on assets. The RE losses aredefined as those attributable to operations of the rural sub-transmission anddistribution system, according to the proforma approved by IDA in connectionwith earlier Credits in the power sector. Although the return on assets con-cept has in the past been the yardstick for the measurement of SEB profit-ability, the financial amendments to the Electricity (Supply) Act 1948 will

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introduce during 1980 an alternative criterion -- that of the level of in-

ternal cash generation relative to capital investment, to be specified byState Governments to enable SEBs to finance internally a reasonable contri-bution to the cost of capital works, considered by CEA to be in the region of20 - 25%. State Governments, in consultation with their SEBs, are presentlydeveloping financial policies, which will achieve this objective. This re-presents a significant improvement in financial viability criteria. Duringnegotiations, GOI representatives stated that any major new initiatives wereunlikely to be introduced before the recomendations of a high-level committee(the "Rajadhyaksha Committee", formed to examine the working of the Indianpower supply industry at Center and State levels) become available. It isexpected that new financial policies, arising from the committee's recom-mendations, will be implemented during fiscal year 1980/81. In the meantime,however, the existing viability concept of 9-1/2% rate of return is beingaccepted for purposes of the proposed Credit. Fourteen SEBs will be eligibleto benefit from the Credit. These are the Boards of Andhra Pradesh, Assam,Bihar, Gujarat, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa,Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal.

RE Planning and Financing

3.45 The content of investment plans for RE depends to a large extent

on the availability of funds. Together with generation and transmissionplanning, each SEB prepares a distribution and rural electrification planfor the next five years (now revised annually in the rolling plan), mainlybased on targets for village electrification and pump connection. Initially,the physical details of the plan are rather general, and average unit costsare used to arrive at approximate expenditure requirements. The fundsrequired for this expenditure are partly allocated from the SEB's and theState's own resources, but mostly from central plan funds made availableby GOI according to the Planning Commission's recommendation.

3.46 Simultaneously with the State plans, the Planning Commission pre-pares a five-year expenditure plan for RE on a nationwide basis. The twoapproaches are then reconciled in discussions between the States and thePlanning Commission, and annual plan allocations are formulated for eachState. Most central plan funds specifically earmarked for RE investment arenow channelled through REC, including blocks of funds for (i) the normal RECprogram, allocated by State; (ii) the Minimum Needs Program, also by State(this went directly to the States until 1974); and (iii) the system improve-ment program, allocated as a lump sum for all States. There are, however,GOI funds made available directly to the States as general plan assistance,some of which are onlent to the SEBs as all-purpose loans, indirectly financ-ing a part of the SEBs' RE program independently of REC.

3.47 The share of total State RE expenditure financed and supervised byREC has varied significantly by State, and is illustrated by the examples inTable 3.1.

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Table 3.1: REC SHARE OF TOTAL STATE RE EXPENDITURE

Average Average 1975-78 (%) Estimated 1979-83 (%)

Andhra Pradesh 30 30 /aBihar 80 60Maharashtra 25 30 /aMadhya Pradesh 40 40 IaUttar Pradesh 48 45 /aWest Bengal 85 98All-India 45 56

/a Excluding new REC funds for joint pump connection financeand system improvement.

Source: SEBs and REC.

3.48 The priorities within each State's RE program are decided by theSEB, taking into account the local backlog of applications for connections,ease of grid extension, and the revenue potential of possible areas. Inmany States, a large influence on priorities is the existence of RE schemesthat are suitable for submission to REC. As yet, overall State planning isnot done systematically by ranking areas according to potential feasibility.REC has made a start to introduce better planning procedures by cooperatingwith the Andhra Pradesh SEB in developing a detailed district-by-districtassessment of RE potential: the results of this exercise will be used todevelop a planning model applicable to other States.

3.49 Planning for RE and coordinating it with the work of other agenciesinvolved in rural development is conducted at several levels within eachState. The most effective coordination takes place at the district level inregular meetings between the concerned institutions under the chairmanshipof the District Collector. In the past, this system has been operated withvarying degrees of success, but a general improvement is evident in the in-creasing interdependence of the activities of SEBs, REC, ARDC, banks, agri-cultural departments, and industrial departments. Cooperation at other thandistrict level, including State level, tends to be confined to general guide-lines. District coordination is most effective in monitoring ongoing REschemes and in identifying bottlenecks in the simultaneous provision ofall inputs for rural development.

Scheme Formulation for REC and Non-REC Schemes

3.50 RE schemes submitted to REC must be prepared in accordance with RECguidelines. The required format includes specification of social and economicindicators of the area, a groundwater potential certificate, a detailed tech-nical assessment, and a guarantee of supporting investment by the SEB outsidethe defined scheme. A feasibility analysis in financial terms is required,based on revenue forecasts for the scheme area. State-financed RE is smallerin scale and mainly consists of intensifying electrification in areas alreadyconnected to the grid. The forecasting of potential additional load in thiscase is easier and the schemes usually have a gestation period of two years.

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The feasibility criteria applied to non-REC schemes are less stringent thanthose imposed by REC: there are usually no requirements for a minimum netreturn. Gross return 1/ requirements for non-REC schemes in Andhra Pradeshare 12.5% for pump connection schemes and 20% for schemes with mixed loads;in Madhya Pradesh, agricultural schemes must yield 12.5% gross, but villageelectrification schemes have no required minimum return.

Implementation and Procurement

3o51 All RE schemes regardless of the source of financing, are imple-mented by the SEB's regionalized construction and operation divisions. Thereis, therefore, no distinction made between REC-financed and other schemes interms of materials in stock, allocation of construction capacity, and SEBfinancial results. Materials requirements are formulated by the SEBs annuallyfor all distribution investment, and orders are placed with suppliers forthe total quantities. The same materials such as conductors, transformers,etc. are used for REC as well as non-REC distribution investment, and forreplacement and reinforcement within the existing system0

Record of RE Operations

3.52 States show varying degrees of success in achieving their annualobjectives for RE, depending on their implementation efficiency and theirvulnerability to external delays such as material supply shortages (Annexes9 and 1O). In general, SEBs have achieved better results in the implementationof State-financed, smaller RE schemes than in REC-financed schemes; usually atleast 75-80% of the objective in terms of new connections is reached, ascompared to a recent improvement in the achievement of REC scheme targets from50% to 75%.

3o53 In many cases, the SEB has completed the laying of lines to therequested connection, but actual connection has been delayed, for instancebecause of the prospective consumer's lack of credit facilities to purchaseneeded equipment0 In the case of Madhya Pradesh, 15,405 pump connectionfacilities were fully prepared by the SEB in 1977/78, but only 12,176 pumpsactually went into operation: taking the former figure as representative fortarget achievement, the actual success rate of the SEB rises from about 60%to about 75% of targets for that year0 REC initiative has brought about moreintensive coordination among local institutions0 The effects of this will befelt in the near futureo

1/ Annual revenue as % of cumulative investment.

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IV. ECONOMIC ANALYSIS AND PROJECT SELECTION

4.01 Rural electrification in India lends itself to justification usingcost savings accruing to the economy by using electricity rather than alter-native conventional energy sources for irrigation pumping, rural industry,domestic, commercial, and street lighting. This approach yields attributablebenefits of electrification that include part of consumer surplus, and avoidsthe causality problem of allocating any incremental agricultural output toelectricity.

Cost Comparison

4.02 The cost comparison of electric and major present non-electric powersources for rural applications, taking into account all costs incurred byconsumers as well as SEBs, and valuing energy at its long-run marginal cost,yields a clear cost advantage for electric irrigation pumping, domestic andstreet lighting, and approximate equality of costs for small village industrysuch as flour mills. The economic cost advantage for the typical 5 HP electricirrigation pump over a similar diesel pump amounts to about Rs 1,400 (US$165)per year. In the case of domestic and street lighting, the advantage ofusing electricity is about Rs 80 (US$9) per connection per year. (Detailedcalculations in Annex 11, paras 6-15).

4.03 The results of the cost comparison are sensitive to changes in thelong-run marginal cost of power supply, particularly in the case of smallindustry and domestic and street lights. In the case of pumps, a reductionof marginal cost per kWh from the assumed Rs 0.68 to Rs 0.50 increases thecost advantage for electricity to about Rs 1,900 (US$220), an increase ofmarginal cost to Rs 1.00 decreases the advantage to about Rs 400 (US$47).In the typical small industry case with 10 HP load, a decrease to Rs 0.50would make electricity clearly the more economical alternative (cost differ-ence in favor of electricity of about Rs 1,500 = US$175), whereas an increaseto Rs 1.00 makes the diesel alternative preferable by about Rs 2,000 (US$233).Kerosene for domestic and street lighting would become competitive at amarginal cost of electricity of about Rs 1.10 per kWh, about 60% more thanthat assumed.

4.04 The comparison demonstrates that the mix of consumer categoriesin RE schemes is a decisive factor for economic viability. Schemes wheremost power is used for irrigation pumping yield high economic rates of return,relatively insulated from the assumptions on marginal cost of electricitysupply. Schemes with a high content of village industrial and domesticdemand can be expected to have only a modest economic rate of return, unlessthe marginal cost of electricity is quite low in the area or for the con-sumption pattern of the specific consumer groups.

4.05 Analysis of the cost of supplying isolated areas with electricityfrom diesel generators of 100 kW capacity or more shows a cost of aboutRs 1.00 per kWh at the generator, i.e. before accounting for energy lossesin the distribution system, or a consumer-level cost-of, say, Rs 1.10-1.20/kWh. This approaches the highest available marginal cost estimates for grid

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supply in India, and is well above a reasonable average estimate. This resultis of interest for the new type of RE schemes supplying small and medium in-dustries in rural estates, where the alternative to grid connection would becaptive generation. For 11 kV industrial consumers, the marginal cost ofgrid supply would be in the range of, say, Rs 0.30-0.50 per kWh, and electri-fication would be clearly preferred.

Economic Rate of Return

4.06 The major categories of schemes in the REC lending program weretested for their economic rate of return. For this purpose, OA and OB, MGand MM, and MNP and SU schemes were amalgamated into three combined typicalscheme categories because of their similarities. Costs were assumed toinclude initial and subsequent SEB investment, operation and maintenanceexpenditures by SEBs, the long-run marginal cost of energy supply to thescheme, and the initial and recurring costs incurred by consumers. Benefitswere defined as the initial and recurring costs of the non-electric alterna-tive, yielding the same output. (Other assumptions are detailed in Annex 11,para 19). For purposes of shadow pricing, appropriate weighted conversionfactors were applied to the cost and benefit streams expressed in marketprices, to obtain data in terms of border prices.

4.07 Economic rates of return for the typical scheme categories OA/OB,SPA, SPI and SI are satisfactory: the economic rates of return for the basicassumption are 18% for OA/OB, 55% for SPA, above 100% for SPI, and 41% for SI.The MG/MR type of scheme does not appear to be economically viable because ofits lack of pump connections. The large block of MNP/SU schemes, servingbackward areas, also shows a rate of return below the opportunity cost ofcapital for the basic assumptions. Given the vulnerability of RE schemes todelayed target achievement, MNP/SU schemes on average must be considered onlymarginally economically viable, although they may be socially attractive.

4.08 Based on this economic analysis, OA/OB, SPA, SPI, and SI scheme

categories were selected as eligible for the project. Selected sample schemesof these categories that had been appraised and approved by REC recently, wereused for further analysis. The economic rates of return for these sampleschemes in terms of market prices range from 38% to 76% for OA/OB, from 26%to 55% for SPA, from 83% to over 100% for SPI, and from 33% to 41% for SI.Using shadow prices, the economic rates of return are 42-66% for OA/OB, 25-45% for SPA, over 100% for SPI, and 38% for SI. These schemes show high eco-nomic rates of return, relatively insulated from varying basic assumptions(Annex 11, para 21).

4.09 Weighting the individual categories' results by their expected sharein total project cost, the average weighted economic rate of return for theproject as a whole is about 45% in terms of market prices and about 40% interms of shadow prices. This rate of return is satisfactory.

Beneficiaries

4.10 Sample evidence indicates that it is primarily the better-offmembers of a village community who obtain pump and domestic connections.

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In general, farmers with very small landholdings (except in fertile areas)rarely apply for pump connections, although the breakeven point in terms oflandholding is relative rather than absolute, depending on groundwater avail-ability, soil, type of crops, etc. Repayment of pump purchase credits on topof electricity charges could be prohibitively expensive for a one-or two-acrefarmer with the following cost/income pattern typical for Madhya Pradesh andAndhra Pradesh:

Rs/acre/yearWheat & Paddv Suarcane

Income 1,500 3,000Electricity Cost 100 200Other Input Cost 600 1,300Net Income 800 1,500Electricity cost as % of Income 7% 7%

Bearing in mind that a 5 HP electric pump can cost about Rs 4,000 installed,annual repayments even on generous terms would be a severe or impossibleburden on a farmer with 1-2 acres and a net annual household income ofRs 800-1,600. In areas where sugarcane or other high-income crops can begrown, more small farmers benefit.

4.11 Landless laborers in rural areas benefit indirectly from RE.Having no assets suited for the utilization of electricity, they benefitfrom increased employment opportunities created by the expansion of land-holders' activity through double cropping made possible by irrigation.Farmers cultivating more than 5 acres routinely hire additional laborersbeyond family labor, especially during labor-intensive cultivation andharvesting periods.

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V. THE PROJECT AND ITS IMPLEMENTATION

Genesis

5.01 This project is a follow-up to the First Rural ElectrificationCredit (572-IN), approved in July 1975. The first project was defined asa tranche of about 140 rural electrification schemes which would be identi-fied in the course of project implementation. In effect, the first Creditsupports ongoing REC disbursement for eligible projects in eligible Statesby financing materials procured on an ICB basis.

5.02 During the implementation of the first project, it was felt that,while procurement supervision was possible, overall performance monitoringpresented problems. Also, some schemes with low economic rates of returnmight be supported by the Credit. To avoid a similar situation, a modifiedapproach has been adopted in defining the second project: (i) part of theproject is composed of approved schemes with known material requirements;(ii) the number of scheme categories eligible for the credit has been narrowedto those likely to have economic rates of return well above the opportunitycost of capital; (iii) rural distribution system improvement schemes and twopilot projects to demonstrate potential cost-saving technology are included.

Definition of the Project

5.03 The project consists of:

(i) Expenditure during 1980/81 and 1981/82 on 484 identi-fied REC schemes of the categories OA, OB, SPA, SPI and SI,approved by REC between April 1, 1977 and March 2, 1979;

(ii) Expenditure during 1980/81 and 1981/82 on about 1,230as yet unidentified REC schemes of the categories OA, OB, SPA,SPI, and SI to be approved by REC between March 3, 1978and March 31, 1981; and

(iii) a single phase distribution pilot project in Rajasthan,and a power factor control (RT capacitor) pilot projectin Karnataka, to be implemented during 1980/81.

All project components will be implemented by June 1983 by the SEBs that willreceive REC loans for the schemes concerned.

5.04 Numbers and estimated costs of different scheme categories areshown in Table 5.1. The 290 OA/OB, and about 1,140 SPA schemes partiallysupported by the project will result in connecting about 15,000 new vil-lages to the grid, and electrifying about 500,000 irrigation pumps. About25,000 village industry connections will be included in the OA and OB schemes:in addition, about 6,000 new small and medium industrial consumers in ruralindustrial estates will be connected as a result of the SPI schemes.

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Project Costs

5.05 The total cost of the project is estimated at about Rs 3,440 million(US$400 million). The proposed Credit amounts to US$175 million, representingabout 44% of project cost (Table 5.1 and Annex 12).

5.06 The basis for the cost estimates is as follows:

(a) Planned expenditures on RE by REC and other financing insti-tutions are based on the Draft Plan 1978/79-1982/83 as knownin November 1978;

(b) About 85% of total planned expenditure are for REC-financedschemes in 14 States (Andhra Pradesh, Assam, Bihar, Gujarat,Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa,Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and WestBengal) which will be eligible for finance under theproposed Credit (para 3.44);

(c) Schemes of the categories OA, OB, SPA and SI are eligiblefor finance under the second Credit. These categories havebeen selected as those yielding a satisfactory range ofeconomic rates of return;

(d) The proposed Credit will cover the cost of materials suit-able for international competitive bidding for eligibleschemes as well as the cost of (paras 5.10 and 5.11)selected materials suitable for local competitive bidding.The materials requirements for the already identifiedschemes have been determined on a scheme-by-scheme basis.Similar requirements have been assumed for the as yetunidentified schemes (Annexes 12 and 13); and

(e) Total project cost is defined as estimated expenditure onall project components during 1980/81 and 1981/82, con-sidering REC disbursement patterns (Annex 7). This inc-ludes elements of (i) schemes already in progress, (ii)schemes approved or identified but not yet started, and(iii) schemes that will be identified by March 1981, butwhere estimates are available now. Materials procuredare to be installed by the project's completion date.

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Table 5.1: PROJECT COST

Number Total Expectedof cost of expenditures on schemes

schemes schemes during 1980-82(Rs million) (Rs million) (US$ Million)

(i) Schemes identifiedand approved 4/1/77-3/2/79 /a

OA/OB 124 594 260 30SPA 242 698 280 33SPI 12 20 10 1Si 106 625 170 20

Sub-total 484 1,937 720 84

(ii) Schemes to beapproved 3/3/79-3/31/81 /a

OA/OB 166 1,130 550 64SPA 895 1,500 1,155 134SPI 115 230 170 20Si 52 280 250 29

Sub-total 1,228 3,140 2,125 247

(iii) Pilot Schemes /b 2 11 11 1.5

Total /c 1,721 5,088 2,856 332.5

Physical Contingency /d 4 0.5Price Contingency /e 580 67.0

Total Project 3,440 400

/a In eligible States.

/b Including technical assistance.

/c In 1978 prices.

/d For pilot schemes.

/e 6% p.a.

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5.07 The costs for the two pilot schemes which may demonstrate cost-saving technology (para 7.05 to 7.11) are set out in Annex 14, and includespecial equipment to be incorporated in two normal area electrificationschemes, as well as some technical assistance. Detailed scheme plans andspecifications, as well as the evaluation of the schemes will be thoroughlydiscussed with IDA during implementation.

5.08 Under the first Credit, virtually all materials have been purchasedfrom Indian suppliers through international competitive bidding. Direct for-eign exchange expenditure for the second project, involving the same mate-rials, is expected to be small, perhaps including only special equipment andtechnical assistance (consultants and training of REC and SEB engineers) forthe pilot schemes. The indirect foreign component is estimated to be about40%.

Procurement

5.09 As under the first Credit, each SEB will be responsible for its ownprocurement for project materials, using REC's standard specifications, andstandard General Conditions of Contract approved by IDA. REC will provideassistance to the SEBs in the preparation of bid documentation and will monitorthat quantities specified in the bids are those required for eligible schemes.REC will also review SEB bid evaluations before seeking IDA approval to placeorders.

5.10 The SEBs will invite bids for their estimated two-year requirements(1980-82) on the basis of international competitive bidding satisfactory toIDA for conductors, transformers, insulators, meters, switchgear, capacitors,and assorted additional equipment for the pilot schemes, amounting to aboutUS$150 million. Indian manufacturers competing under international competi-tive bidding would be granted a preference margin of 15% or the current rateof import duty, whichever is less. Materials delivery schedules will bespaced over the construction period. Consultants' services and cost of train-ing abroad for the pilot schemes would amount to about US$250,000.

5.11 The SEBs will also invite bids for their estimated two-year require-ments for crossarm sets, GI wire, air break switches, insulated wire, LTcutouts, and lightning arrestors, amounting to about US$25 million, on thebasis of local competitive bidding satisfactory to IDA. The details arespecified in Annex 12. Most contracts for the above small items will notexceed the amount of US$100,000 each. All items are manufactured locally,and satisfactory local competition exists. No further bulking of orders ispossible because of the large number of SEBs procuring individually, and noneof the items is therefore suitable for international competitive bidding.Any contract awards exceeding US$100,000 will be subject to prior review byIDA.

5.12 The time schedules for procurement and implementation as agreedwith REC are set out in Annex 15. All contracts are expected to be awardedby March 1980 (May 1980 for the pilot schemes), and all materials should bedelivered to SEBs by January 1982.

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Disbursement

5.13 Disbursements from the proposed Credit will be based on SEB'sreimbursement claims and will cover the CIF cost of imported goods, or theex-factory cost of goods manufactured in India. It is expected that sub-stantial IDA disbursements could begin during the third quarter of 1980,and would be completed by March 1984. The estimated disbursement scheduleis shown in Annex 16.

Onlending Rates

5.14 GOI will onlend the Credit to REC at an interest rate of 7.25% p.a.with a repayment period of 20 years including 5 years of grace. This comparesto a rate of 6.0% for GOI onlending to ARDC, 10.25% to central power genera-ting agencies such as NTPC, and 11-13% for normal commercial credit lines toindustrial enterprises. REC, in turn, will onlend to the SEBs at its currentinterest rates of 7.0-9.5% p.a. (with grace periods of 2 to 5 years), depend-ing on the type of scheme and length of loan period. These rates compare torates of 6-7% for SEB borrowing from State Governments, and 10.5% from banks.Conclusion of a Subsidiary Loan Agreement between GOI and REC in a mannersatisfactory to the Association is a condition of Credit effectiveness.

Other Financing Agencies

5.15 SPA schemes included in the project (as defined in para 5.03) willalso be partially financed by ARDC and commercial banks, each institution(counting the banking sector as one) covering one third of the cost of eachapproved scheme. For the proposed Credit, SEBs estimate two years' mate-rials requirements for SPA schemes, but IDA disbursements will be providedonly up to REC's one third share of total SPA scheme cost.

5.16 USAID intends to support a parallel project to the extent of US$58million. Materials, States, and time period eligibility are the same as thoseof the IDA Credit. The USAID project, however, is expected to make all schemetypes eligible, including those not eligible under the proposed IDA Credit.

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VI. FINANCIAL ANALYSIS

A. Rural Electrification Corporation (REC)

Operational Performance and Financial Condition

6.01 Summarized audited Income Statements for REC for the five yearsthrough March 31, 1978, are shown in Annex 17. The increase in lending since1974 has been accompanied by substantial growth in total revenue earned, al-most three and a half times in FY1978 that of FY1974. However, because ofincreased financing through long term debt, the interest spread has narrowedfrom a gross of 3.9% of revenue in FY1974 to 2.1% in FY1978. In absoluteterms, earnings after income tax have increased at an annual rate of 14%.Return on total capitalization has increased from 2.5% in FY1974 to 4.2%in FY1978. Returns on equity were 2.0% to 2.3% during the same period. Whilethese returns might be considered low in comparison with the opportunity costof capital, they must be measured against the objectives of REC which supportslending on concessionary terms to the rural sector.

6.02 Summarized audited Balance Sheets covering the five years throughFY1978 are shown in Annex 19. During this period, REC's loan portfolio grewat an annual rate of some 32% and reached Rs 5,029 million (US$585 million)by March 31, 1978. As of that date, the long-term loan portfolio accountedfor more than 90% of total assets. REC's initial capital was entirely equity,made up of U.S. grants and equity share capital from GOI. By March 31, 1974,REC had received Rs 1,050 (US$122 million) in U.S. grants, Rs 620 million(US$72 million) from GOI in equal portions of equity capital and loans,additional GOI loans of Rs 45 million for street lighting in scheduled castesettlements and had retained earnings of Rs 48 million. At that time, capitalstructure reflected 20% long term debt, 78% equity and 2% current liabilities.Since 1974, however, funds have been provided increasingly through long termdebt, thereby increasing its proportion of capitalization to some 65% by March31, 1978. In FY1975, REC successfully floated its own bonds, guaranteed byGOI, on the financial market and has continued to do so annually since. Theseborrowings represented 12% of total debt at March 31, 1978, or 8% of totalcapital. Despite the increasing debt/equity ratio, the capital structure isacceptable. REC had, by March 31, 1978, approved 2,028 RE schemes, amountingto Rs 8,301 million (US$965 million). Against this it had disbursed Rs 5,172million, leaving undischarged commitments of Rs 3,129 million, the funds forwhich will be sought from GOI and the capital market (Annex 22).

6.03 REC has used its earnings to finance additional investment in ruralelectrification. This has been encouraged by the taxation advantages providedby the Income Tax Act 1961. Under this Act, a Special Reserve was created toenable deduction from profits subject to income tax of about 9% of annualtaxable income. Since March 31, 1977, the allowable percentage was increasedto about 20%. At that date, the Special Reserve stood at Rs 46 million. REChas also created a Special Development Reserve to:

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(a) provide special term loans to State Governments to helpthem to subscribe for share capital in RE cooperatives;

(b) provide grants to organizations for research and develop-ment;

(c) provide grants towards construction costs in speciallyunderdeveloped areas.

By March 31, 1978, this reserve stood at Rs 59 million.

Quality of Portfolio

6.04 REC's loan and investment portfolios are satisfactory, withoutarrears problems. They consist of loans to SEBs, investments in State Govern-ment guaranteed SEB RE Bonds, and temporary investments in GOI securities.

Projected Operational Performance and Financial Condition

6.05 Projected Income Statements, Statements of Sources and Applicationof Funds and Balance Sheets for the next five years through FY1983 are shownin Annexes 17 through 19. A disbursement target of about Rs 11,800 million isprovided for as REC's part of the Draft Plan for FY1979-1983. This projectionwould boost the loan portfolio to Rs 15,564 (US$1,810 million) by March 31,1983, an annual growth rate of 25% from March 31, 1978. The following tablesummarizes the financing plan during FY1979-1980 and 1981-1983 (the disburse-ment period of the proposed Credit):

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Table 6.1: REC FINANCING PLAN

FY1979-1980 FY1981-1983Rs US$ Rs US$

Million Million Million Million %

Sources of FundsInternal Cash Generation 207.5 24.1 531.0 61.7 6.2Less: Income Tax 94.2 11.0 241.3 28.1 2.8Net Internal Cash Generation 113.3 13.1 289.7 33.6 3.4

Capital SubscribedGOI Equity 265.0 30.8 265.0 30.8 3.1GOI Loans 2,113.0 245.7 4,973.2 578.3/a 58.3Market Loans 850.0 98.9 2,100.0 245.3 24.7

Total 3,228.0 375.4 7,338.2 854.4 86.1

Sales of Short-TermInvestments 183.0 21.3 - - -

Repayment of Loans bySEBs 362.7 42.2 902.8 104.0 10.5

Total Sources 3,887.0 452.0 8,530.7 992.0 100.0

Applications of FundsDisbursement of Loans 3,750.0 436.0 8,050.0 936.1 94.4Repayment of GOI Loans 59.0 6.9 311.3 36.2 3.6Working Capital Increase 20.6 2.4 87.5 10.2 1.0Short-Term Investments 39.0 4.5 47.5 5.5 0.6Dividends 17.1 2.0 32.9 3.8 0.4Fixed Assets 1.3 0.2 1.5 0.2 -

Total Applications 3,887.0 452.0 8,530.7 992.0 100.0

/a Includes IDA Credit of US$175 million and USAID Loan of US$58 million.

6.06 Because of increasing reliance on long term debt to finance thelending program, the debt/equity ratio is projected to steadily rise from65/35 at March 31, 1978, to 82/18 by March 31, 1983. While GOI will continueto be the major source of funds, the increasing issue of REC bonds is expectedto bring their share of total borrowings from 12% at March 31, 1978, to 25%by March 31, 1983. Despite the increase in the debt/equity ratio to a levelof almost 5:1, the projected capital structure is acceptable. Equivalentratios for reasonably comparable financial institutions in India such asState Financial Corporations show a range of 3:1-11:1.

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Earnings Forecasts and Debt Service Coverage

6.07 REC's projected revenue by FY1983 is equivalent to four timesthat for FY1978, an annual growth rate of 32%. Increased borrowings willcontinue to reduce the interest spread but this will be partially offset byimproving portfolio loan mix by lending for more remunerative types of schemeswhere interest rates of 9% apply. Net earnings are expected to continue toincrease in absolute terms at a growth rate of 22% per annum. Returns bothon equity and on total capitalization show improved trends, with the formerrising from 2.3% in FY1978 to 4.4% by FY1983, and the latter from 4.2% to6.1%.

6.08 Although overall projected operational performance is good, pressureon the debt service coverage ratio will be experienced in FY1982 and 1983.Annex 21 summarizes the debt service coverage ratios for the ten year periodthrough FY1983. The ratio in FY1974 was 2.6 but dropped to 1.7 by FY1978. Aratio of 1.3 is projected by FY1983, which is near the 1.2 required by IDA inthe first Credit. This was and is considered the minimum for a reasonablemargin of safety. The main reason for the contraction is the changing capitalstructure of REC, from a largely equity financed operation to a largely debtfinanced one. During negotiations, agreement was reached that (i) REC'sinternally generated funds in any fiscal year shall at least cover 1.2 timesits debt service requirement during the same fiscal year, and (ii) REC'sadministrative expenses and interest payments in any fiscal year shall notexceed 90% of its interest receipts. REC's capital structure, legal status,and the availability of long-term funds from the Reserve Bank of India arematters of continuing dialogue between REC, GOI and RBI.

Audit

6.09 The Comptroller and Auditor General of India is empowered to appointan independent auditor registered under the Indian Companies Act 1956 to auditREC's accounts. He may also direct the manner in which the REC's accountsare audited, conduct test audits as he may think fit, and make comment uponor supplement the audit report made by the professional auditor. Messrs. S.P.Chopra & Co., Chartered Accountants, have carried out audits of the accountsfor FY1976, 1977 and 1978. Recently, Messrs. S.N. Sachdev & Co., CharteredAccountants, were appointed to audit the accounts for FY1979. Satisfactoryaudit reports have been received each year. REC has agreed to furnish withinsix months of the end of each fiscal year its financial statements as auditedby independent auditors acceptable to IDA.

Accounts Organization

6.10 REC has a competent accounts department, which operates a basicallymanual accounting system. However, management has recently introduced anumber of computer applications which are presently operating concurrentlywith the manual system, in order to verify the correctness of the programs.In particular, the billing of interest and capital repayment charges toborrowers has been computerized. Considering REC's accounting growth, com-puterization should play an increasing role in the accounts function duringthe next five years. Plans have also been made to streamline internalreporting systems to allow a speed-up of decision making processes.

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B. Rural Electrification Scheme Analysis

Financial Viability of Schemes

6.11 Until now, REC has appraised schemes on the basis that schemes whichreached the breakeven point (revenues equal to cost of energy and specificoperation, maintenance and depreciation costs) after periods of 7-15 yearsand which maintained minimum rates of return on cumulative investment subse-quently, qualified for financing (Annex 6). However, most schemes generatelosses during the first half of their lifetimes, and profits during the secondhalf may easily not be sufficient to counterbalance the early losses and ensurethe payment of interest on and the repayment of loans used for scheme financ-ing. Quantification of the net present value of schemes highlights the effectthey have on the financial performance of SEBs. Using the average interestrate payable on the capital borrowed to finance the scheme as the discountrate, negative net present values indicate the level of subsidization requiredeither directly from State Governments or from other consumers.

6.12 An analysis of a sample of REC approved schemes is illustrative.Costs and revenues presented in the REC appraisals were discounted and internalrates of return and net present values determined as shown in Table 6.2. Theresults of the analysis are twofold: (i) there are no generalized rates ofreturn applicable to REC schemes. Each must be approached on an individualbasis due to disparities in costs, tariffs, existing infrastructure and loaddevelopment; (ii) rates of return range from no positive rate to 79%.

Table 6.2: DISCOUNTED FINANCIAL CRITERIA OF SAMPLE SCHEMES

Scheme Internal Rate Net Present Value at 7%Category of Return Cost of Capital

Rs Million

OA 12% +2.7OB 5% -0.9SPA Not Positive -5.8SPI 79% +10.5SI 21% +28.0MH 7% NilMG 6% -0.2SU 4% -1.0MNP 4% -1.1

6.13 Low agricultural tariffs are the main reason for the low rates ofreturn. The high return of the SPI schemes is due to their orientation torural industry; industrial tariffs are higher. Also, SPI capital costs arerelatively low because they are usually extensions and utilize existinginfrastructure. SI Schemes also utilize existing infrastructure and theirhigh return reflects savings in line losses and additional revenues fromincreased demand. While all of the sample schemes meet the existing eli-gibility criteria set by REC, those schemes which have rates of return lessthan the average cost of capital, assumed at 7% for SEB borrowing, will burden

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SEB finances. Rural electrification losses are presently being offset by acombination of direct subsidization from State Governments and cross subsi-dization from other SEB consumers to RE consumers. Alternatively, rates ofreturn could be improved by increasing tariffs to RE consumers.

6.14 Recognizing the need to improve financial analysis of RE schemes,REC has started to include discounting techniques in its investment appraisalmethodology. The intention is to use the additional data thus provided indiscussions with SEBs on the financial impact of RE schemes. The ultimateobjective would be to replace existing eligibility criteria with criteriabased on this improved methodology. During negotiations satisfactory pro-gress in the introduction of these techniques was reported, and an acceptableprogram for implementation was agreed on (Annex 15).

C. Rural Electrification Impact on State Electricity Boards

Operating Performance

6.15 GOI and State rural electrification policy has had considerableimpact on the SEBs' finances. Annex 23 shows that gross fixed assets of themajor SEBs at March 31, 1977, amounted to some Rs 75 billion (US$8.7 billion)of which RE assets accounted for some Rs 15 billion (US$1.7 billion) or about20%. Since 1969 the RE system has grown at an annual rate of almost 50%.Total capital investment (including generation and transmission) for SEBsduring FY1976 and 1977 amounted to Rs 10.2 billion (US$1.2 billion) andRs 10.8 billion (US$1.3 billion), respectively (see Annex 24), with RE's sharemaking up 12% and 16%, respectively. Total capital expenditure in FY1977increased by some 6% over FY1976, but the increased expenditures were almostentirely devoted to RE which increased by 40% compared with a 1% increase inexpenditure for everything else (see Annex 24). Figures for FY1978 are notyet available for most SEBs. However, in the SEBs of Maharashtra and MadhyaPradesh, RE investment for FY1978 was 58% and 14%, respectively, higher thanfor FY1977. Planned expenditures for FY1979-1983 amount to some Rs 21 billion(US$2.4 billion).

6.16 SEBs must bear not only the heavy cost of operation and maintenanceof the RE schemes but also the high costs of servicing the capital borrowedto finance the initial capital costs. Financial data prepared by the SEBs inaccordance with financial covenants in the Second Power Transmission Project(Credit 242-IN), whereby the RE activities are segregated from the other activ-ities of the SEBs, reflect the financial impact of RE on the SEBs overallfinancial performance. Annexes 27 and 28 show the operating performance ofthe SEBs' RE activities for FY1976 and 1977 while Annex 29 analyzes therelative performance of these years. The combined results of the thirteenSEBs noted show that total losses in FY1977 increased by 21% over those ofFY1976. If this rate of increase is maintained for the future, losses woulddouble about every 3-1/2 years.

6.17 Annexes 27 and 28 show that average net losses relative to revenuefor both years were in excess of 60%. State Government subsidization averaged

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some 20%, leaving a net average deficit after subsidization in excess of 40%to be offset by cross subsidization from other consumers. Individual perform-ance varies, from reduced losses in SEBs in Bihar (-8%) and Kerala (-17%) tosignificant increases in losses of SEBs in Andhra Pradesh (+60%), Gujarat(+52%) and West Bengal (+47%). The effects of cross-subsidization can beseen from Annex 26 which shows the return on investment for FY1976 and 1977of the separate activities of RE and "other operations" relative to their owncapital bases.

6.18 In the majority of cases, high returns from "other operations" off-set losses from RE. However, this cross-subsidization was not sufficient toenable interest on State Government loans to be met in full. Annex 30 showsthe amount of interest payable to State Governments in FY1977 which was effec-tively subsidized; it was not actually paid but made a contingent liability,provided sufficient future surpluses were earned. Percentages vary from 3% inMaharashtra to 52% in Uttar Pradesh and 61% in Haryana. To increase revenuessufficiently to cover these interest shortfalls would have required rateincreases of some 1%, 24% and 32% respectively. Were these shortfalls to berecovered only in RE operations, the RE tariff would have to be increasedby 2%, 50% and 100% respectively. Spreads are quite wide. These increasesin revenues would increase the rates of return of those SEBs by 0.3% to13.3% in Maharashtra, by 6.3% to 12.1% Uttar Pradesh, and by 8.0% to 14.4% inHaryana (Annex 31). These increases merely illustrate the wide disparity inthe levels of viability achieved by the SEBs and in the corrective actionneeded to achieve even limited improvement.

6.19 The recent enactment of the financial amendments to the Electricity(Supply) Act 1948 brings attention to the size of SEBs' internally generatedfunds relevant to their capital investments. Guidelines issued by CEA toState Governments indicate that 20% of capital investment is regarded as areasonable contribution which an SEB should make towards its expansion.Because RE is a significant share (20%) of total SEB investment, the levelof internal cash generation which must be produced by the SEBs' "other opera-tions" is increased to 25%, thus revealing the net effect of both direct andcross-subsidization policies. Accordingly RE cannot be viewed in isolation.Overall SEB financial viability is dependent on how successfully RE is integ-rated into total operations.

Tariffs and Cost of RE Supply

6.20 One of the major contributing factors to the financial pressureson the SEBs is the low level of the agricultural tariff. To date, it is GOIand State policy, implemented by the SEBs, to subsidize agricultural electri-city consumers via artificially low tariffs. In most States, all agriculturalconsumers, regardless of their circumstance or level of consumption, benefitfrom this subsidy. First steps are being taken to improve this pricingsystem, and REC will contribute to the discussion.

6.21 Where SEBs have computed the financial cost of supplying agricul-tural consumers, the evidence shows that consumer payments often do not evencover 50% of the cost. For example, in Madhya Pradesh, average revenue amounts

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to Rs 0.30/kWh versus a financial cost of supply of Rs 0.63/kWh. This averagetariff is one of the highest among major SEBs. It is reasonable to assume asupply cost of the same order of magnitude for most SEBs; since most SEBs havelower average agricultural tariffs than Madhya Pradesh, revenues must be wellbelow costs overall (Annex 33).

6.22 A comparison of average rural tariffs with marginal cost of supplyyields even greater discrepancies (Annex 33). Marginal cost of delivery ofenergy to agricultural consumers exceeds revenue by an average of 200%, i.e.the tariff recovers only about one third of marginal cost. Rural industrialand domestic consumers, who also are served by RE schemes, impose about 130%and 170% more marginal cost on the SEB than is recovered from them through thetariff. As noted in paragraph 6.20, all agricultural consumers regardless oftheir circumstances benefit from the generally subsidized tariffs. A case maybe made on social grounds for a low electricity tariff to a small farmer;further, a low tariff in that case may be necessary to make power irrigationprofitable, considering the relatively high costs of pumps, etc. It is muchmore difficult to make a case for subsidies to the non-marginal or well-to-doagriculturists. In fact, most of the benefits from the low tariff accrue tothe later group since they have the means or credit to install pumps and ascale of operation to optimize irrigation efficiency.

6.23 A possible improvement in revenue recovery from agricultural con-sumers would be the introduction of a tariff with an increasing price per kWhfor successive blocks of consumption, safeguarding the small farmer's profit-ability by a "lifeline" rate for the lowest consumption block. The Gujarat,Karnataka, and Rajasthan SEBs have introduced one or another version of theincreasing block pricing concept; it is too early to observe reactions, butthe net effect should be a higher revenue than under the one-block low-pricesystem, and allow the SEBs to increase tariffs to approach costs for thosewith the ability to pay.

6.24 Increasing charges for initial connections is another revenue elementthat could reduce the financial burden on SEBs. Six SEBs do not charge forconnecting pumps at all, and charges of most other SEBs are unlikely to coverthe average cost of running a line to the pump and connecting it: the chargeper pump ranges from Rs 90 (in Uttar Pradesh) to Rs 600 (in West Bengal)(US$10-70). For Madhya Pradesh, where specific data is available, consumersare charged Rs 300 toward the estimated connection cost of Rs 500.

6.25 In addition to considering average tariffs for the RE sector inestablishing specific tariff structures in the future, consideration shouldbe given to setting rates which will motivate consumers to use power econo-mically. Realistic demand charges and differential peak and off-peak energycharges (or regulating use to off-peak periods) are worthy of review. RECwill review agricultural tariffs and will attempt to evaluate these alternativesolutions.

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VII. TECHNICAL ANALYSIS

Standards

7.01 REC has developed a realistic and practical set of guidelines forevaluating the technical feasibility of the various types of RE projects. Ithas also developed construction standards, material standards, and manuals,and is sponsoring research and development projects. The construction manualis clear, concise and has undoubtedly been a major contribution to loweringthe cost of RE. Partially based on its research and development program,construction material categories for area electrification schemes have beennarrowed down to two sizes of prestressed concrete poles, three sizes of hightension (HT) conductors, five sizes of low tension (LT) conductors and threetransformer sizes. This minimizes the costs and problems associated with thepurchase, storage and delivery of materials, and the selection is adequate tocover most situations.

7.02 Manuals developed and printed by REC cover the planning, designand maintenance of RE systems (see Annex 34) and include a wide range of sub-jects such as pumps, safety, and repair of transformers.

7.03 REC recognizes three major technical areas as especially importantin its research and development program. They are the introduction of thesingle phase system, power factor control, and distribution system improvements.The pilot projects included in this proposed Credit will bolster R&D effortson single phase distribution and power factor control. System Improvement(SI) schemes financed under the Credit support the program for distributionsystem improvements.

7.04 Presently, RE distribution in India is based on the three phasesystem, a system originally developed in Europe to serve high load densitycities and towns. Rural areas, however, usually have low density load, whichmay result in cost and operating disadvantages when three phase systems areused. The present three phase system employs a high voltage (HT) primarysystem with 11,000 volts between the phases and 6,400 volts from phase toground. HT lines begin at a distribution substation and are generally con-structed along the major roads of an area. Along the HT distribution line,frequently at each village, three phase transformers reduce the voltage to415 volts between phases and 240 volts from phase to ground which is thendistributed over low tension (LT) lines to each consumer. In most villages,the load density is low and the irrigation pumps are far apart. Three phasetransformers are relatively expensive and spaced out. This results in ex-tremely long LT lines which are almost as costly to construct as three phaseHT lines but have higher losses and more voltage drop than HT lines for trans-porting the same load. There is usually only one transformer per village andwhen it fails, all irrigation and industrial activities come to a halt.

7.05 Single phase distribution was developed originally to serve lowdensity rural areas in North America. Rather than terminating at a village,single phase HT lines are run further, virtually to the consumers, and small,

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relatively inexpensive, transformers are mounted on the poles to reduce volt-

age at points of use. Since distribution is at higher voltage, losses are

much less; since there are a number of small transformers, the failure of one

does not shut down a whole village.

7.06 There is considerable debate about the merits of single phase versus

three phase distribution. Economic tradeoffs between the two depend on such

factors as load density and the speed of load growth. REC recognizes that

the introduction of single phase has the potential to reduce costs and has

already initiated R&D programs in this direction. However, their funds are

limited and the need for reducing costs is essential to the long run success

of RE.

7.07 Generally, REC bases HT line design on forecast loads seven years

after scheme completion which provides for some load growth and is reasonable.

At present, all HT Mains are three phase, and when their capacity must be in-

creased it is necessary to replace all the conductors. Unexpected load growth

often results in conductors being replaced prematurely. A three phase system

is actually composed of three "single phases". A single phase line could be

constructed to initially serve a village when the load level is low. When and

if load growth exceeds the capacity of the single phase line, a second phase,

and later on, as needed, the third phase can be added. This provides an import-

ant cost saving option.

7.08 A preliminary analysis, comparing the initial investment of the

three phase system as it was installed for eleven villages in Rajasthan with

a single phase system which could have been installed, indicates that the

villages could have been electrified for about 30% less initial investment

using single phase rather than three phase. This apparent initial saving

would have to be balanced against the three phase system's greater capacity,

especially in distribution transformers, and no analysis was made of voltage,

loading or losses. Nevertheless, a conservative estimate indicates a saving

of 20%. An in-depth analysis of the benefits of single phase at the village

level will be carried out as part of the pilot project.

Power Factor Control

7.09 REC recognizes that improving power factor through HT capacitors

has substantial benefits, and has authorized the installation of a few of

them in Karnataka State to gain experience. Preliminary analysis indicates

that HT capacitors could release up to 24% of rural system capacity which

could then be used to serve additional customers or would reduce initial in-

vestments. A concentrated national effort of RE power factor control could

release up to 2,500 MVA of generation and transmission capacity, or almost

10% of the all-India system. In addition, energy losses could be substan-

tially reduced, and voltage at all levels would be improved.

7.10 Evaluation of benefits of power factor correction may be approxi-

mated as follows. There were 3.3 million pumps in service as of March 1978,

expected to increase to 5.3 million by 1983. Assuming a pump average of 5.0

HP, then improving power factor from the normal 70% to 95% by using capacitors

will require an investment of about Rs 1,672 million. Even if only one third

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of the pumps are actually running at the time of system peak, the improve-ment in power factor would reduce the demand on the generation/transmissionsystem by 2.47 million kVA. Assuming, conservatively, that the average costof generation and transmission capacity is Rs 2,500/kVA, the value of capa-city saved is about Rs 6,000 million and much more than sufficient to justifythe program to install HT capacitors. This reduction in needed capacity ofabout 2,500 MW represents almost one year's planned capacity increase in Indiaas envisaged in the draft rolling plan.

7.11 Reduction of line losses is an additional benefit. Correction ofpower factor from 70% to 95% would reduce line losses by 45%. Assuming 5.3million 5 HP pumps running 800 hours per year, and a financial power costof Rs 0.14/kWh at 11 kV, improvement of power factor would result in savingsof Rs 50 million per year.

RE System Improvements

7.12 In general, SEBs implement RE schemes financed by REC in accordancewith specified standards. Schemes financed from other sources frequently con-form to REC standards to assure compatibility. The principal weakness in thelong run is the neglect of timely reinforcement and system improvement asloads increase, which results in voltage problems (leading to consumers'equipment damage) and increasing energy losses. This is often due to lack offunds for improvement because of the SEBs' mandate to expand RE rapidly.

7.13 System improvements are already needed in many locations and schemesto solve these problems are eligible under the proposed Credit. A systemimprovement (SI) scheme recently submitted to REC by the Tamil Nadu SEB pro-vides a good example of the problem. Nine HT feeders in an area serve 11,417irrigation pumps (53,250 HP), 482 small industrial consumers (4,250 HP), aswell as residential and commercial consumers. At peak demand, the voltagereduction for the last consumer on a feeder ranges from 5 to 54%, with anaverage of 22%. The annual energy loss averages about 30%, amounting to over9 million kWh (equivalent to the annual energy requirement of more than 3,000irrigation pumps).

7.14 The real problem is not only the need for SI schemes but the timeit takes to implement them. While system improvements are carried out, someconsumers in the area will be faced with at least two irrigation seasons withvoltage drops as high as 50%. Pump motors begin failing when voltage dropsexceed 10-15%; there is little doubt that many failures will occur beforesystem improvements are completed. Distribution transformers and probablysubstation equipment, as well as light industrial machinery, may also fail.Also, there will be a 30% energy loss which represents fuel and generatingcapacity.

7.15 It is probable that the SI schemes presently being approved by RECare only the tip of the iceberg of the problems to come. Adequate servicecannot be provided if SEBs are required to connect new loads without alsobeing provided funds to upgrade lines and equipment as demand grows. REChas responded to the anticipated crisis by encouraging SEBs to submit SIschemes, and by ensuring that new RE schemes which it finances contain

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adequate system safeguards. The SEBs should improve system monitoring andminimize the time it takes from detection of a potential problem to itscorrection. Progress in this matter should be discussed with GOI and RECduring negotiations. Funds to upgrade and modernize existing RE systemsmight well be a principal component of future IDA Credits for RE in India inthe mid-1980's. REC is considering a significant expansion of SI activityin future years, and should be encouraged in this.

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VIII. SUMMARY OF AGREEMENTS

Condition of Effectiveness

8.01 Satisfactory conclusion of the Subsidiary Loan Agreement betweenGOI and REC is a condition of effectiveness of the proposed Credit (para 5.14).

Other Agreements

8.02 During negotiations, agreement was reached on the following majorpoints:

(a) implementation of a program, satisfactory to theAssociation, for introduction of improved appraisaltechniques for REC schemes (para. 3.15);

(b) the proceeds of the proposed Credit may be relenteither (para 3.44):

(i) to those SEBs whose State Governments haveagreed to provide them with an annual subsidyfor RE losses either to their full extent or tothe extent required to meet a rate of return of9.5% on assets, whichever is lower; or

(ii) to those SEBs which are achieving a rate ofreturn of 9.5% on assets;

(c) REC will prepare and implement a satisfactory trainingprogram for the staff of REC and the SEBs (para 3.25);

(d) REC's internally generated funds in any fiscal yearshall at least cover 1.2 times its debt service require-ment during the same fiscal year (para. 6.08);

(e) REC's administrative expenses and interest paymentsin any fiscal year shall not exceed 90% of itsinterest receipts (para. 6.08); and

(f) GOI will ensure reliable and constant supply of rawmaterials including aluminum to domestic manufacturersof equipment procured under the proposed Credit(para. 3.31).

Recommendation

8.03 The proposed project constitutes a suitable basis for an IDA Creditof US$175 million equivalent.

-38- ANNEX 1

INDIA

SECOND RURAL ELECTRIFICATION CORPORATION PROJECT

Villages Electrified and Pumps Energized by 3/31/78

Villages Electrified Pumps ElectrifiedTotal By REC REC share Total By REC REC share

State (No.) (No.) (%) (No.) (No.) (%)

Andhra Pradesh 14,652 3,140 21 337,546 31,573 9Assam 2,176 588 27 1,054 64 6Bihar 18,695 4,130 22 139,982 11,624 8Gujarat 8,121 1,473 18 156,028 16,995Haryana 6,731 90 1 166,631 24,248 15Himachal Pradesh7,753 2,460 32 1,464 347 24Jammu & Kashmir 4,014 1,984 49 834 10 1Karnataka 15,160 1,519 10 262,362 17,261 7Kerala 1,224 147 12 58,922 5,833 10Madhya Pradesh 16,350 4,612 28 215,925 34,204 16Maharashtra 21,480 4,165 19 488,706 43,463 9Manipur 235 - - - - -Meghalaya 396 220 56 47 41 87Nagaland 236 54 23 1 - -Orissa 14,161 5,417 38 6,427 2,170 34Punjab 12,126 3,912 32 196,296 27,951 14Rajasthan 10,009 4,592 46 128,961 33,820 26Tamil Nadu 15,522 815 5 809,606 42,638 5Tripura 410 247 60 145 8 6Uttar Pradesh 35,026 5,045 14 298,750 17,191 6West Bengal 11,669 5,739 49 20,346 10,320 51Other 1,243 - - 18,961 - -

Total 217,389 50,349 23 3,308,994 319,759 10

Source: REC, CEA

-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~NE 35-CHR

ORGANIZATION CHART OF REC EApRil 19793

r ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~SE CLRTJHIHS DANRORR

+ 439e X > 31S X S ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~OA OE

X~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~CCOH HSAE OC OO

> 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ZN S TCI. COR DNEHO SPHNAJ CCRCICT

|REACCOAL OPRICES | |RENICCAL OFFICESC REGIONAL DOPFIRES |REOALOFIE |

PON HORE COICRTER ECHAOOiCOLURT WCR Wld .k

- 40 - ANNEX 3

INDIA


REC Staff Structure (11/6/78)

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

Total Staff 713 165 126 288 134

Permxanent Employees 563 92 96 241 134

Seconded 150 73 30 47 -

Seconded (%) 21.0 44.8 23.8 16.3

Source: REC

INDIA


1/

REC Staff Strength in Regional Offices as on 3/31/78

Position Calcutta Gauhati Lucknow Chandigarh Hyderabad Jaipur Jabalpur Patna Madras Bhubaneswar Bombay

Chief Project Engineer 1 1 1 1 1 1 1 1 1 1 1

Joint Director 1 - - 1 - - - - - - -

Deputy Project Engineer 4 1 1 2 3 3 2 1 1 1 2

Asst. Project Engineer 3 1 2 2 2 2 2 2 1 1 2

Deputy Director 2 1 2 3 3 2 1 2 3. 1 2 14-.

Assistant Director 3 1 1 2 2 2 1 1 1 1 2

A.C.A.O.-/ 1 1 1 1 1 1 1 1 - - 1

Accounts Officer 2 1 1 2 2 2 1 1 1 1 1

Section Officer/

Office Superintendent 1 1 1 1 1 1 1 1 1 1 1

Personal Assistant 2 1 1 1 1 1 - - n.a. n.a. n.a.

Economic Analyst 1 1 1 1 1 1 1 1 n.a. n.a. n.a.

Accountant 3 1 2 2 2 2 2 1 n.a. n.a. n.a.

Assistant Accountant 2 1 1 2 2 2 1 1 n.a. n.a. n.a.

Support Staff 16 7 9 9 9 9 9 9 n.a. n.a. n.a.

l/ Staffing of regional offices in Madras and Bhubaneswar (opened 1978) and Bombay (to be opened 1979)

is available only in preliminary form

2/ Assistant Chief Accounts Officer.

n.a. = not available

Source: REC

-42 - ANNEX 5Page 1

INDIA


Types of Schemes Financed by REC

(i) Area Schemes:

Ordinary Advanced (OA) - Electrification of groups of villages ineconomically advanced areas.

Ordinary Backward (OB) - Electrification of groups of villages insomewhat less advanced areas.

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

Rural Cooperative Societies (OC) - Electrification of groups of villagesjoined in a cooperative system

Mini Growth Centers (MG) - Electrification of several villages arounda market town.

Mini Health Centers (MH) - Electrification of several villages around atown with health center.

Minimum Needs Program (MNP) - Electrification of groups of villages outof a special GOI fund earmarked for specificbackward areas.

(ii) Special Consumer Category Schemes:

Mini Industrial (MI) - Connection of village industry in a group ofvillages.

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

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

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

Harijan Bastis (HB) - Electrification of settlementsof lowest social group.

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

- 43 -ANNEX 5Page 2

Special Project - Agriculture (SPA) - Connection of irrigation pumps ingroups of villages, co-financed by otherinstitutions (will replace MF and MF-LI).

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

(iii) System Improvement and Reinforcement Schemes:

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

Special System Loan (SS) - System improvement by capacity increase andreinforcement of distribution system.

Special Loans (SL) - Financing workshop and production facilities forSEBs.

System Improvement (SI) - Replacing SS due to the creation of a separatefund by GOI.

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

(iv) Other:

Single Wire Earth Return (MPS) - Experimental schemes using SWER technology

Potential Scheme Area Advance (AL-PPA) - Advance loan for startingelectrification of a scheme area with longgestation period, ultimately converted to areaschemes.

The terms of the loans associated with the above scheme categories,and the viability criteria applied by REC until now are set out in Annex 6).

- 44 - ANNEX 6Page 1

INDIA

79OOND RURAL ELECTRIFICATION CORPORATION PROJECT

Viability Criteria for and Terms and Conditions Applicable to REC Loans

Loan (defined Interest Rates (% per Year) Viability Criteria

in S Category Year Year Year Year Year Year Grace Deriod Year of Return on Investment (%)Annex 1) 1-5 6-10 11-15 16-20 21-25 26-30 (Years) Project Life Net 1/ 3/ Gross I/

OA 7-1/2 8 8-1/2 9-1/2 5 5 (-)2 or 20

or 7 BE7-1/2 8 8 15 3-1/2

OB 7 7-1/2 8 8-1/2 9-1/2 5 5 (-)3-1/2 or 15

or 10 BE7 7-1/2 8 8 20 3-1/2

OC 4-1/4 5-1/4 6-1/4 7-1/4 8-1/4 9-1/4 5

ST (backward) 8 8 8 2 7 BE Or serve as basis forNE schemes costing not

(advanced) 8 8 2 5 BE less than the cost ofNT schemes in MNP areas

and not less than twice

the cost of ST schemesin other than MNP areasbefore the end of theloan period in both cases.

SU 6-1/4 6-1/2 6.3/4 7-1/2 8-1/2 9-1/2 5 7 (-)6 or 10

or6-1/4 6-1/2 6_3/4 7-1/2 7-1/2 15 BE

25 3-1/2

Ss 8 8 1 5 3-1/2 _

MG,MH & MI For transmission portion same as applicable to ST category (except in MNP areas in States having

provision for transmission which will be governed by MNP terms and conditions). For area portionsame as applicable to OA, OB, SU, MNP category as the case may be.

ME 8 8 2 2 - 15

MF 8 8 2 2 - 10

MF (LI) 8 8 2 2 - 20

M (Ps) 4-1/4 6-1/4 2 - _

AL (PPA) 7-3/4 (2 years or less) 2 2 _ 10

AL (APP) 11 (1 years or less) - - -

MNP (TBD) 6 6 6-1/2 6_1/2 7-1/4 7-1/4 5 7 (-)6 or 1015 BE25 3-1/2

MNP (O) 6 6 6-1/2 6-1/2 7-1/4 7-1/4 5 5 (-)6 or 1015 BE25 3-1/2

SL 8 - - - -

RB 5 5 5 - _ _

SI 8-1/4 8-1/4 8_1/4 2 7 - 17-1/2

LT 8 - - - -

SPA 1 9 9 2 2 - 10

2 9 9 9 2 4 - 10

SPI 1 9-1/4 9-1/4 2 2 - 15

2 9-1/4 9-1/4 9-1/4 2 4 - 15

SPD 1 2 2 2 2 - 10

2 2 2 2 2 4 - 10

Net return measured as one year's revenue minus cost of energy, as % of investment. Gross return is one year's revenue as % of investment.For SPD projects, investment excludes infrastructure.MNP (Tribal, Hill and Desert Areas) end MNP (Ordinary).BE - breakeven

Source: REC

I- 45 -

ANNEx 6Page 2

NOTES:

1. In respect of the second and subsequent 'OA' schemes from same district in AA States, direct loan asistance from REC

is restricted to 60% of the project cost.

2. The 'SS' schemes aimed at providing adequate power supply to the Rural Electric Co-operative projects at 11 kV bus

at proper voltage, are not subjected to the criteria of viability.

3. Under ST category, direct loan assistance from REC is restricted to 80% of the project cost except in case of

MNP areas, Mini Project areas and areas of operation of Rural Electric Co-operative Societies.

4. Under SS category, direct loan assistance from REC is restricted to 80% of the project cost except in case of 'AA' States,and except for the schemes meant either exclusively or substantially for Rural Electric Co-operative Project areas.

5. A rebate of 1/4% is allowed by REC on interest at all stages for prompt payment except in case of AL (APP) and SPA

(1&2) loans.

6. In MNP (tribal, hill and desert) and SU areas the Investment on 11 kV (main and spur) lines is excluded from capitalbase of the project for the purpose of computations of net return.

7. In case of OA/OB/SU/MNP areas where the alternative criterion the basis of gross return is adopted for examining theviability at the first stage, the second and subsequent stages of viability are examined on the basis of net returnciiteria.

8. A penal rate of compound interest of 2S% above the stipulated rate of interest is levied on overdue installments of interestor principal or both.

9. With the introduction of SI (System Improvement) and LT (LT Capacitors) categories of loan, the SS Category of Loan hasbeen withdrawn w.e.f. 8/5/77.

10. With the introduction of SPA (1) and SPA (2) categories of loan, MF and MF (LI) categories have been withdrawn w.e.f.

5/16/78.

11. With the introduction of SPI (1) and SPI (2) categories, ME category has been withdrawn w.e.f. 5/16/78.

INDIA


Installments of REC Loan Disbursement (in %)

InstallmentsInitial 2nd 3rd 4th 5th

Normal Programme(OA, OB, SU- area schemes) 35 25 15 15 10

M.N.P. 40 30 10 10 10

SI/ST/Mini Schemes 50 50 - - -

aN

Note: The initial installment is released in two stages i.e. 60% on

execution of documents and 40% on furnishing requisite certificates.

Source: REC

INDIA


Development of REC Lending Activity 1969-78 in Major Categories of Loans

(Loan Amount in Re Million)

Particulars 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 TOTALNo. Loan No. Loan No. Loan No. l oan No. Loan No. Loan No. Loan No. Loan No. LoanNo Los

Arprovals

Ordinary,: Advanced Areas (OA) 6 29:0 51 296.4 55 310.8 104 447.7 62 251.0 42 171.8 42 158.9 39 130.7 14 76.6 415 1,872.9

Ordinary : Backward Areas (GB) 5 25.0 38 188.6 44 304.6 71 357.3 53 253.6 56 283.7 46 248.9 68 350.9 ka 193.9 421 2,206.5

Ordinary iCs-operatives (OC) - - 5 135.4 - - - - - - 3 35.3 2 31.0 1 7.9 2 39.5 13 249.1

Special Underdeveloped Areas (NillTribal & Desert etc.)(SUT)- - - - 2 8.i 16 71.0 38 146.6 12 49.8 12 57.6 15 71.6 29 117.0 124 521.7

Mini Parm Production (NP) - -- -- - - - 5 6.8 61 71.5 8o 89.7 38 44.5 184 212.5

Mini Parts Lift Irrigation(MF)- (-LI)- - - - -- - 9 10.5 7 9.0 16 19.5

Mini :Growth Centre (MG) 1 4 7.8 12 12.4 6 5.6 6 5.6 4 3.3 42 34.7

Mini H ealth Centre (MN) - -- -- - i4 7.3 *6 3.5 7 6.3 7 5.6 2 1.2 36 23.9

Mini : Industries (MI) - -- - - - - -- -- - 2 2.5 - - - - 2 2.5 a

Mini :Industrial Estates (ME) - -- - - - - -- -- -7 6.9 24 10.3 15 7.8 46 25.0

Mini :Pilot Single Wire Earth

Neturn (MPS) - - - -- - - -- -2 1.4 - - -- 2 1.4

Advance Lsan: Potential Project

Area (AL:PPA) - - - - - - - - - -- -4 5.6 8 U1.3 4 5.5 16 22.4

Special :Transmsissison STSWI 4 22.4 8 54.8 6 35.0 8 46.4 8 81.3 10 33.4 7 10.8 51 284.1

Special System Tmprovement(Ss &Si) - - - - - -1 1.4 21 38.6 20 38.8 7 17.7 9 20.4 53 319.2 111 436.1

L.T. capacitors (IT) - -- - -- - -- --- 33 69.6 33 69.6

Special Prsject: Agriculture (SPA) -- -- -- -- - 1 48.1 19 48.1

Minimum Needs Programme (MNIP) - -- - - - -- - 116 645.8 77 467.1 59 286.0 io6 46o.4 358 1,859.3

Special Lsan (SL) - -- -- -- -- - - - 2 1.2 24 13.7 06 14.9

Special Development Reserve (SOB) - -- - - - - -- -- 13.5 - 8.5 - 3.5 - 10.5 - 36.0

Advance Loan: Annual Plan Pu-rchase

(AL:APP) - - - - - -- 64.5 - 86.4 - 125.2 - 276.1

Narijan Basti (HB) Loan - -- - 10 5.5 27 14.4 33 14.6 35 8.3 4 2.2 - log-10 45.0

Source: EEC

- 48 - ANNEX 9

INDIA


Actual REC Scheme Connections as % of Forecasts

All REC schemes to REC schemes approved REC schemes approved

March 1978 befotd March 1974 after March 1974

All consumer Pumps All consumer Pumps All consumer Pumps

State connections only connections only connections only

Andhra Pradesh 63.8 80.4 56.3 73.2 70.2 80.7

Assam 12.6 17.7 10.8 22.4 17.3 13.3

Bihar 23.3 28.7 22.1 27.9 23.1 27.1

Gujarat 92.4 60.0 81.0 48.0 84.3 75.8

Haryana 97.4 92.1 83.9 75.0 116.2 119.7

Himachal Pradesh 92.7 41.2 84.8 34.3 130.3 33.0

Jammu & Kashmir 85.4 3.2 81.0 4.5 67.3 0.4

Karnataka 58.7 85.6 45e3 70.8 83.3 17.2

Kerala 70.0 74.6 52.5 59.3 102.3 95.5

Madhya Pradesh 65.2 53.6 50.5 42.7 71.5 60.5

Maharashtra 82.9 86.2 79.5 71.2 70.0 119.6

Manipur n.a n.a n.a n.a n.a n.a

Meghalaya 44.9 46.1 27.4 39.3 52.2 47.5

Nagaland 89.1 n.a n.a n.a 89.1 n.a

Orissa 37.0 10.1 25.3 6.3 84.0 43.6

Punjab 76.3 69.0 69.4 59.4 105.6 82.8

Rajasthan 64.2 72.0 53.2 57.4 84.9 101.5

Tamil Nadu 70.1 96.7 66.5 92.5 91.2 103.9

Tripura 18.2 5.5 n.a n.a 18.2 5.5

Uttar Pradesh 22.9 54.6 20.2 46.3 28.7 72.8

West Bengal 23.8 52.2 20.6 47.2 77.4 54.9

Total 59.8 66.2 52.0 56.2 75.5 82.8

n.a. Not Applicable

Source: REC

0- - - ANNEX 10

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- 50 -ANNEX 11

INDIA


Economic Analysis

Approach

1. The project has been defined as REC expenditure for eligible schemes

in eligible States during 1980/81 and 1981/82. Considering this, the optimalmethod of economic analysis of the project is the sample analysis of its compo-

nent schemes. The steps employed in the analysis are:

(a) Cost/benefit analysis of typical schemes representing themajor categories of REC's lending portfolio, based on datasupplied by REC for a wide selection of schemes;

(b) Decision on eligible scheme categories for the second Credit,based on the results of (a); and

(c) Sample analysis of several actual schemes in the REC port-folio, covering the eligible categories.

In addition, two schemes in Madhya Pradesh, approved by REC during the early

1970's, were evaluated in depth in order to gain insights about problemsencountered in implementation.

Methodology

2. The method selected for economic analysis is a cost savings approach

that attempts to quantify net benefits for users of the supply system. In thisapproach, electricity is considered as one alternative source of energy andcompared to other energy sources yielding the same results, such as dieselmotors for industry, diesel pumps for irrigation, and kerosene for domestic

lighting.

3. It is reasonable to assume that by introducing electricity in a

village, more area will be irrigated, and agricultural output will increase.However, for proper analysis, incremental agricultural output must logically

be attributed only to irrigation, not to electricity supply, which is onlyone potential source of energy for irrigation.

4. The cost saving approach implies that new electricity consumers inrural areas are either switching from alternative energy to electricity, or

if electricity would not be supplied, many would obtain alternative energy

sources. It is possible that, would electricity have not been provided in

- 51 -ANNEX 11

the area, some rural electricity consumers who have obtained electric con-nections might not have purchased an alternative power source. In suchcases, benefits might be greater or less than assumed. Available sampleevidence of consumer behavior indicates, however, that many new electricityconsumers, be:ng those with a sufficient asset base to consider evensolutions more expensive than electricity, would have turned to alter-native energy sources in the absence of electricity.

Economic Cost of Alternative Energy Sources for Rural Use

5. Renewable energy sources (solar, wind, biomass) were not incorporatedin the cost comparison because of excessive cost, unsuitability, or early stageof development. At present, none of these technologies can be treated as arealistic, reliable, large-scale alternative to electrification or dieseliza-tion for India.

Irrigation Pumping

6. The following parameters were taken to be representative for Indiaas a whole:

(a) the average electric irrigation pump has a rating of 5horsepower (HP), (3.75 kW), and is used to lift waterfrom an open, relatively shallow well. For the sameoutput of water, a diesel engine with a higher HP ratingof 6.5 is necessary;

(b) the life of an electric pump is 15 years, that of a dieselpump 10 years;

(c) the average number of operating hours per year is about800 per pump;

(d) average diesel fuel consumption in a pump is 0.31 litersper HP/hour, lubricant consumption is 0.03 liters perHP/hour; and

(e) the electric pump can operate unattended.

7. The following average cost assumptions were used (1978 prices):

- 52 -

ANNEX 11

Electric Diesel(3.75 kW) (6.5 HP)

Investment cost of the pump andrelated expenditure for install-ation (Rs per pump) 4,000 6,800

Operating and maintenance cost ofthe pump (Rs per pump per year)

- labor for operation - 1,000- repairs and maintenance 400 1,400

SEB investment cost in transmissionand distribution facilities (Rs per pump)

- higher density of pumps 7,100 -- low density of pumps 15,000 -

- close to existing lines 4,200 -

SEB operating and maintenance cost fortransmission and distribution facilities(Rs per pump per year)

- high density 210 -

- low density 450- close to lines 125 -

Fuel cost (Rs per pump per year atRs 0.90/1 diesel fuel CIF) - 1,400

Lubricant cost (Rs per pump per yearat Rs 2.80/1 lubricant CIF) - 440

Marginal cost of electricity supply tothe pump (Rs per pump per year) /a

- cost at rural substation includingsubsequent distribution losses= Rs 0.68/kWh 2,040

- cost at pump = Rs 0.77/kWh 2,310

/a The representative assumption is that the bulk of consumptionsupplied by the rural substation is irrigation pumping at thesystem peak time. All available marginal cost studies (withthe exception of Punjab) make this assumption. A factor of0.88, derived from Andhra Pradesh experience, is applied tothe average marginal cost at the pump to arrive at substation-level marginal cost plus distribution losses (i.e. excludingmarginal cost of distribution system investment and operating).

Sources: SEBs' marginal cost studies, and Andhra Pradesh powersector review mission.

- 53 -ANNEX 11

8. Applying the assumptions and costs, and using the case of a largenew scheme consisting only of pump connections at some distance from existingpower lines, the following cost comparison results from an approach convertingall public and private identifiable costs in the project area to annual figuresand using the cost of electricity at the substation level:

Rupees per year per pumpElectric Diesel

Annual charge for private investmentper pump 525 1,107

Annual charge for SEB investment perpump 753 -

Private O&M per pump per year 400 2,400SEB O&M per pump per year (for distri-bution facilities) 210 -

Marginal cost of electricity (Rs 0.68/kWh)or fuel cost per pump per year 2,040 1,840

Total cost per year of operation 3,928 5,347

Annual cost difference in favor of electricpump 1,419

9. On average, the total cost to the economy of operating a diesel pumpis higher than that of an electric pump yielding the same water output. Anadditional benefit of a diesel pump is its independence of a fixed location,enabling farmers owning scattered pieces of land with individual wells to moveone pump around. On the other hand, the greater reliability and much lowerbreakdown frequency of an electric pump constitute additional benefits in favorof electrification.

Small Industry

10. The following parameters are assumed to be representative for smallvillage industries such as a directly connected diesel engine for rice andflour milling:

(a) the average rating of the power source is 10 HP (both forelectric and diesel engines), equivalent to 7.5 kW;

(b) the average life of diesel power sources is 10 years, ofelectric sources 15 years;

(c) the average number of operating hours per unit is 800 hoursper year, implying 6,000 kWh per year;

(d) fuel consumption per HP/hour is the same as the case ofpumps; marginal cost of providing electricity to the ruralarea is applicable at the same rate as in the pump case

- 54 -ANNEX 11

reflecting the dominant irrigation consumption pattern atthe substation level; and

(e) the major distribution infrastructure investment belowsubstation level has been already attributed to the elec-trification of the area for purposes of pump connections.

Rupees per year per connectionElectric Diesel

Annual charge for private investmentcost of power source and related instal-lation expenditure 790 1,630

Private O&M per unit per year 800 1,500Fuel and lubricant cost - 2,830Marginal cost of electricity supply at

substation level 4,100 -

5,690 5,960Difference in favor of electricity 270 -

11. Based on these cost averages, the annuitized costs of both powersources are approximately equal, amounting to about Rs 6,000 each (particu-larly if a small share of electricity infrastructure cost is attributed tothe electric alternative).

Domestic Lighting

12. The obvious alternative energy source to electric lighting invillage houses is kerosene. The CEA average domestic consumption assumptionis 360 kWh/year. A lower estimate of 180 kWh/year/house is used in this cal-culation reflecting a perhaps more realistic assumption of 4 hours lightingdaily with 125 Watts in rural households.

13. The available information results in the following comparison, againassuming that the bulk of infrastructure cost below substation level is attri-buted to the pump connection scheme.

Rupees per house per yearElectric Kerosene

Initial private investmentannualized at 10% 16 5

Maintenance 10 20Marginal cost of electricity

at Rs 0.68/kWh .122 -

Kerosene cost at 0.15 1/hour/lamp,4 hours/day - 200

Total annual cost 148 225

Cost difference in favor of electricity 77

- 55 -ANNEX 11

14. There is a cost advantage for electric lighting for the same amountof lighting hours per year. (The quality of light provided by kerosene, how-ever, might be inferior to that of a high-wattage bulb).

Street Lighting

15. The assumptions for a street light are 6 hours of utilization ofa 40W light per day, amounting to 2,200 hours or 88 kWh/year.

Rupees per light per yearElectric Kerosene

Annual charge for investment cost 33 9Maintenance 10 20Marginal cost of electricity, or fuel cost 60 220

Total 103 248

Cost differential in favor of electricity 145

Generation Isolated from the Grid

16. Sample data provided by REC for a West Bengal case are the basisfor the calculation of the average cost per kWh generated by an isolateddiesel generator supplying a small rural area with electricity. The follow-ing parameters are used in the example:

Capacity : 120 kWFuel consumption : 0.4 1/kWhFuel cost : Rs 0.90/1Lubricant consumption : 0.01 I/kWhLubricant cost : Rs 2.80/1Annual generation : 101,400 kWh

(i.e. load factor lessthan 10%)

Life : 20 years

17. Based on the parameters above, the following annuitized cost ofoperating the diesel generator can be developed:

Rs

Annual charge for investment cost 49,558Maintenance 12,660Other recurrent costs 2,100Fuel cost (for 101,400 kWh) 36,504Lubricant cost 2,840

Total annual cost 103,662

Cost per kWh at generation 1.02

- 56 -

ANNEX 11

18. The generating cost of Rs 1.02/kWh would have to compete with amarginal grid cost of about Rs 0.70/kWh in West Bengal. Although the costper kWh falls rapidly with increased utilization of the diesel generating unit(e.g. to Rs 0.70 at a load factor of about 20%, and to Rs 0.60 at about 30%),the cost per kWh of the grid connection would also decrease with increasedcapacity utilization. Higher load factors improve the unit cost of bothalternatives.

19. Economic Analysis of Schemes: List of Assumptions

(a) Typical Schemes (all-India average)

OA and OB, MNP and SU, MG and MH were aggregated intoOA/OB, MG/MH and MNP/SU schemes. SPA, SPI, and SI schemesrepresent actual REC categories. The assumptions concent-rate the bulk of SEB investment in the first years.

(i) Capital Cost: Initial Investment.Investment per connection by SEB:

OA-OB Rs 1,700MNP-SU Rs 2,800SPA Rs 5,205

(Other scheme categories derived from individual appraisalreports.)

(ii) Additional minor investment by SEB for additionalconnections beyond the first five years: Rs 150-500 per connection;

(iii) Operating and maintenance costs incurred by SEB:3% of cumulative SEB investment;

(iv) Marginal cost of electricity supply at substationincluding distribution losses: Rs 0.68/kWh;

(v) Energy consumption per typical connection as inparas 6-15 of this Annex;

(vi) Average number of connections per scheme: 2,000(OA/OB, MNP/SU, and SPA), and 700 (MG/MH);

(vii) Share of consumer category in total number ofconnections:

- 57 -ANNEX 11

Consumer category OA-OB MNP-SU SPA MG/MH

Agricultural 15% 16% 100% 5%Industrial 3% 2% - 3%Domestic 73% 60% - 82%Street Light 9% 22% - 10%

Total 100% 100% 100% 100%

(viii) Phasing of investment expenditure and connections made:

(OA/OB, MNP/SU, SPA)

1st year 2nd year 3rd year 4th year 5th year

15% 20% 25% 20% 20%

(ix) From the fifth year onwards, no demand growth withoutfurther investment, or rapidly rising line losses. Iffurther growth is possible due to continuing SEB invest-ment, demand grows at 7.5% per year;

(x) Private cost per connection as in paras 6-15 of thisAnnex;

(xi) Cost savings for system improvement schemes are calcul-ated at 11 kV level comparing the "with" and "without"project case;

(xii) Cost savings for SPI schemes arise from the use ofelectricity rather than having captive diesel generators,assuming that most industrial consumption is taken at11 kV;

(b) Sample Schemes

Actual costs and actual achievements or specific assumptionsare derived from REC monitoring and appraisal reports. Whereactual achievements are below targets, consumption growthforecasts have been reduced accordingly.

20. Shadow Pricing

(a) SEB Investment: border prices for major items such asconductors and transformers were identified. Other costcomponents were revalued in terms of border prices byusing a standard conversion factor of 0.87. Unskilledlabor was valued at 75% of the market wage and convertedto border prices. The weighted conversion factor forthis cost item is 0.96, considering that domestic pricesfor aluminum conductor are lower than CIF prices;

- 58 -ANNEX 11

(b) SEB Operating and Maintenance Cost: the assumption of 80%labor and 20% materials content (valued at the shadow wagerate and using standard conversion factor) yields a weightedconversion factor of 0.70;

(c) Marginal Cost of Electricity: assuming that the cost ele-ments entering into total marginal cost are adequatelyrepresented by the basket of goods underlying the calcula-tion of the standard conversion factor, a factor of 0.87was used; and

(d) Private Cost: private investment and the cost of dieselfuel and lubricant were valued at border prices, the remain-ing cost items were converted to border prices by using thestandard conversion factor and the shadow/market wage ratiofor rural unskilled labor (0.5). The weighted conversionfactor is 0.88.

21. Economic Rate of Return: Results

(A) Typical REC Schemes:

Costs and benefits are based on all-India average or onrepresentative appraisal reports. The rates of return are:

(i) Constant 1978 market prices; demand growth and SEBinvestment until year 5 (except SI):

OA-OB = 18% SPA = 55%MNP-SU 10% MH-MG = 6%SI - 41% SPI = above 100%

(ii) Constant 1978 shadow prices; demand growth and SEBinvestment until year 5 (except SI):

OA-OB = 18% SPA = 46%MNP-SU = 10% MH-MG = 6%SI = 38% SPI = above 100%

(iii) Sensitivity to demand growth assumptions; demandand SEB investment growth until year 15; constant1978 market prices:

OA-OB = 24% SPA = 55%MNP-SU = 15% MH-MG = 10%

(iv) Increasing the marginal cost of energy by 45%

SPI = 83%

- 59 -

ANNEX 11

(v) Decrease in benefit by 25% due to either less kWhsavings or low marginal cost:

SI = 33%

(vi) Sensitivity to slower initial phasing of connections;constant 1978 market prices; demand growth and SEBinvestment until year 5:

Based on actual target achievement data, it is assumedthat the connections in the area schemes are made moreslowly, while SEB investment goes on as planned.

------------year---------------1st 2nd 3rd 4th 5th Total

OA-OB: 5% 10% 30% 25% 30% 100%MNP-SU: 1.5% 5% 20% 30% 43.5% 100%

The results are:

OA-OB = 16%MNP-SU = 9%

(B) Sample Schemes

(i) Schemes visited by the appraisal mission. For purposesof detailed evaluation, the mission visited two schemesin Madhya Pradesh which have been under implementationfor four and six years. Early in 1972, REC approved aloan for the electrification of the Patan Scheme ofJabalpur district in Madhya Pradesh. Classified in theOA category, the scheme was to cover 42 villages andto bring 7,000 additional acres under cultivation afterfive years. The total forecast connected load was esti-

mated at 5329.30 KW. During 1974, REC granted a loanto MPSEB for the electrification of Ichawar Scheme ofBhopal district. Approved as an OB scheme, the loanwas to cover 134 villages with a total connected loadof 5563.60 KW. About 4,000 additional acres were tocome under cultivation on completion of the scheme.

(a) On the basis of actual cost and actual achieve-ments, the economic rates of return are asfollows:

Market prices; demand growth and SEB investmentuntil year 5:

OA = 14% OB = 15%

- 60 -ANNEX 11

Shadow prices; demand growth and SEB investmentuntil year 5:

OA = 13% OB = 15%

Assuming demand growth until year 15; with fur-ther necessary SEB investment:

OA = 8% OB = 12%

(b) In 1972, REC appraised and approved the OA schemewith the following number of target connections:700 agricultural, 50 industrial, 1,925 domesticand 220 street light, for a total capital cost ofRs 3,247,000. These targets were to be met by the5th year. Against these, the achievements at endof 1978 amounted only to 118 agricultural, 36 indus-trial, 356 domestic, and zero street light connec-tions, that is less than 20% achievements of connec-tion targets versus 63% of planned disbursement(Rs 2,053,000). This rather disappointing perform-ance has been attributed by REC and MPSEB to:

- The failure of commercial banks and the LandDevelopment Bank to extend sufficient creditto farmers in the scheme area;

- The general shortage of aluminum supply whichdelayed implementation of RE schemes through-out the State;

- The lack of coordination among various agenciesinvolved in rural development in the area;

- Groundwater potential appeared to be signifi-cantly less than it was estimated at the timeof REC appraisal;

- REC appraisal underestimated the investmentcost which did not include a price contingency.

(c) Only slightly better results have been obtainedfor the OB scheme. Approved by REC in 1974 forRs 5,176,000 to cover the electrification of 1,200agricultural connections, 60 industrial 2,000 domesticand 1,000 street lights, the actual achievements atthe end of 1978 were 509 agricultural, 379 domestic,22 industrial, and 538 street lights for a totaldisbursement of Rs 3,978,000, that is 34% achievementof connections for 76.6% of planned disbursement.Low achievement of targets is a result of optimisticdemand forecasting in the REC appraisal report.

- 61 -ANNEX 11

(d) Using the original REC appraisal report estimates fordemand growth and costs, the economic rates of returnwould have been 47% for the OA scheme, and 39% for theOB scheme.

(ii) Other Sample Schemes

Economic rates of return are calculated for two OA, twoOB, three SPA, one SI and one SPI scheme. These cate-gories have been selected for IDA finance on the basisof the typical results in Section (A). The results aregiven below, in %:

Market Prices; demand growth and SEB investment until

year 5 (except SI):

OAl = 73 OBI = 39 SI = 40OA2 = 45 OB2 = 39 SPI = above 100SPAl = 49 SPA2 = 43 SPA3 = 26

Shadow Prices; demand growth and SEB investment untilyear 5 (except SI):

OAl = 66 OBI = 36 SI = 38OA2 = 42 OB2 = 29 SPI = above 100SPAl = 45 SPA2 = 40 SPA3 = 25

Assuming demand growth until year 15; with further SEBinvestment:

QAl = 76 OB1 = 39nA2 = 47 OB2 = 38SPAI = 55 SPA2 = 49 SPA3 = 32

Increasing the marginal cost of energy by 45%:

SPI = 83

Decrease in benefit by 25%: due to either less kWhsavings or low marginal cost.

SI = 33

-62- ANNEX 12

Page 1

INDIA


Estimated Project Cost

Item Rs million US$ million

A. Equipment

I. ICB suitable:Conductors 706 82Transformers 233 27Insulators, meters& switchgear 293 34

Single-phase equipmentand capacitors for pilotschemes 7 0.8

II. LCB suitable:Cross arms 12 1.4GI wire 10 1.2Air break switches 35 4.0Insulated wire 101 11.8LT cut outs 15 1.8Lightning arresters 21 2.4

III. Other 708 82.6

IV. Sub-total 2,141 249

B. Civil Works 585 68

C. Overheads, training,technical assistance 130 15

D. Total (1978 prices) 2,856 332

E. Contingencies 584 68

F. Total (current prices) 3,440 400

Source: REC

INDIA


Statewise Requirements of Materials Procured under the Project

Distri- Insula-

Power bution tors Cost of Cost of

Condue- TtEun- Trans- Switch- and ICB LCB Total cost of

tors formers formers gear Hardware Meters Naterials Materials materials

(Km) (No.) (No.) (No.) (No.) (No.) (Rs mn.) (Rs mn.) (Rs mn s WZma)

Andhra Pradesh 39,950 48 2,450 180 427,200 61,000 89 16 105 12

Assam 8,800 - 400 - 304,000 2,400 20 4 24 3

Bihar 47,450 36 3,510 122 2,049,850 74,150 103 18 121 14

Gujarat 32,140 - 1,942 110 605,850 47,360 74 13 87 10

Karnataka 21,625 - 1,770 - 278,250 45,040 56-/ 10 66 8

Kerala 9,000 - 800 - 304,000 32,500 25 5 30 3

Maharashtra 47,350 - 3,180 - 2,244,000 80,400 107 19 126 15a,

Madhya Pradesh 71,435 - 5,965 - 1,625,000 99,750 145 18 163 19

Orissa 11,125 - 2,136 22 139,885 12,046 36 6 42 5

Punjab 26,007 12 2,210 75 463,900 43,100 65 12 77 9

Rajasthan 38,100 36 1,740 - 1,129,350 17,300 80-1 14 94 11

Tainil Nadu 16,045 55 1,210 274 95,000 16,600 84 18 102 12

West Bengal 43,500 - 4,900 - 2,081,100 54,000 104 19 123 14

Uttar Pradesh 53,480 - 9,156 - 1,683,526 26,440 134 22 156 18

Total Quantity (units) 473,153 187 41,369 783 13,430,911 612,086 n.a. n.a. n.a. a.a.

Total Cost 1978 prices 706 49 184 29 92 62 1,122 194 1,316 153

(Rs million)

Price Contingency 6% p.a. .i04 8 30 5 15 11 173 21 194 22

(Rs million)

Total Cost (Rs million) 810 57 214 34 107 73 1,295 215 1,510 175

Total Cost (US$ million) 94 7 24 4 12 9 150 25 175 175

1/ Including cost of special equipment for pilot projects.

n.a. = not applicable

Source: REC

- 64 - ANNEX 12

Page 3

INDIA


Quantities of LCB Materials to be Procured under the Project

Quantity

1. Cross arms (No.)

(a) 'V' shape with single top support 75,000(b) 4-pin cross arms 100,000(c) 2-pin cross arms 100,000

2. Lightning Arresters (units)

52,000 sets 156,000

3. Insulated wires (coils @100 m)

(a) Pumps 500,000(b) Domestic connections (50 m. per conn.) 150,000

and Street lights(c) Transformers - different sizes 5,200

4. L.T. Cut-outs (No.)

(a) 15 amps. for - Domestic installation 600,000- Pumps 20,000,000

5. G.I. Wire (MT) 5,000

6. Air break switches (Both for Transformers 62,000and sectionalizing (No.))

Source: REC

INDIA


Schemes sanctioned by REC between 4/1/77 and 3/2/79

S1. State TotalNo. OA OB SPA SPI SI No. of Costs (Rs

No. (Rs an.) No. (Rs mun No. (Rs nn4 No. (Rs imn.) No. (Rs mn.) Schemes Million)

1. Andhra Pradesh 1 2.6 8 39.2 41 168.5 1 1.7 12 58.9 63 271.1

2. Assam - - - - - - - - - - -

3. Bihar - - 11 45.0 18 38.0 1 1.3 12 67.1 42 151.6

4. Gujarat - - 11 44.8 20 71.7 - - 7 42.4 38 159.0

5. Karnataka - - 9 46.8 3 7.1 2 6.6 5 19.9 19 80.6

6. Kerala 3 11.1 - - - - - - 3 16.9 6 28.0

7. Maharashtra - - 7 33.8 56 146.1 7 7.3 25 159.9 95 397.2 @

8. M.P. 1 5.9 11 65.0 38 93.9 - - - - 50 164.9

9. Orissa 4 11.4 8 21.7 - - - - 1 4.3 13 37.5

10. Punjab 2 9.9 - - 14 46.6 - - 18 116.0 34 172.6

11. Rajasthan 5 20.5 13 72.2 13 40.4 - - 1 2.4 32 135.7

12. Tamil Nadu 3 5.7 - - 29 52.1 1 2.8 22 137.0 55 197.7

13. U.P. 2 7.9 10 57.9 7 22.0 - - - - 19 88.0

14. West Bengal 13 81.6 2 9.8 3 11.1 - - - - 18 102.7

TOTAL 34 157.1 90 436.6 242 698.0 12 19.9 106 625.3 484 1937.1

Source: REC

xH

-66 - ANNEX 13

INDIA


Share of ICB suitable Materials in Total Typical Scheme Cost (%)

OA/OB SPA SPI SI

Conductors 30 25 15 16

Transformers 5 8 12 18

Insulators 3 n.a. 5 2

Meters 3 n.a. 1.5 -

Switchgear - n.a. 1.5 8

Total 41 33 35 44

n.a. - not applicable because beyond REC financing share of SPA schemes.

Source: REC

-67 - ANNEX 14

INDIA


Cost Estimates for Pilot Schemes

Rs'OOO

1. Power Factor Control Scheme (Karnataka)

Capacitors (17,925 RKVA for38 feeders at 8 substations) 2,151

Switching equipment 1,840

Lightning arresters, airbreakswitches, measuring equipment 188

Training for engineers 200

TOTAL 4,379

2. Single Phase Scheme (Rajasthan)

Construction of 33/11 kV substation(1.6 MVA), 14 Km new 33 kV line,20.5 Km replacement of 33 kV line 1,227

118 Km HT line, 93 Km LT line,212 distribution transformers @10 KVA 2,993

397 Single phase motors/pumps 1,985

Service connections 211

Training for engineers 200

TOTAL 6,616

3. Grand Total 10,995

- 68 - ANNEX 15

Page 1

INDIA


Procurement and Implementation Timetable

ExpectedCompletion Date

1. ICB Procurement:

(a) General

Issue of bid invitations May 15, 1979Opening of bids September 30, 1979SEBs' contract award recommendation

to REC November 30, 1979REC 's recommendations to IDA December 15, 1979Clearance by IDA January 31, 1980Contract awards by SEBs February 15, 1980Final signing of contracts March 15, 1980Commencement of materials delivery June 1, 1980Completion of materials delivery fortotal project January 31, 1982

(b) Pilot Schemes

Preparation of specifications andissue of bid invitations August 31, 1979

Preparation of detailed scheme plans November 30, 1979Opening of bids February 28, 1980Contract awards by SEBs May 31, 1980Completion of materials delivery December 31, 1980

2. LCB Procurement

Preparation of Standard bidding documentby REC June 30, 1979

Concurrence of IDA to bid document August 15, 1979Issue of bid invitations August 30, 1979Opening of bids November 30, 1979SEBs' contract award recommendationto REC February 28, 1980

REC's recommendation to IDA whereContract value is more than $100,000 March 15, 1980

(a) Clearance of contract award by IDA April 30, 1980(b) Clearance of contract award by REC where)

contract is less than $100,000 ) March 31, 1980

- 69 - ANNEX 15

Page 2

ExpectedCompletion Date

Finalization of contract May 15, 1980Commencement of material delivery July 1, 1980Completion of material delivery for totalproject January 31, 1982

3. Implementation

Completion of pilot schemes December 31, 1981Evaluation of pilot schemes December 31, 1982Project completion date June 30, 1983Project closing date March 31, 1984

4. Introduction of Discounted Cash Flow (DCF) and Economic Rate of ReturnTechniques in REC Appraisal of Schemes

First workshop for regional REC staff andselected SEB staff (in connection with anREC monitoring seminar) July 1979

Discussions with senior SEB staff August 1979Instruction of REC staff and key SEB staffconcerned December 1979

Instruction of most of concerned SEB staff April 1980One third of eligible schemes being appraisedand approved by REC to include new methodsof viability calculation April 1980

Two thirds of eligible schemes to includenew methods of viability calculation April 1981

All eligible schemes to include new methodsof viability calculation April 1982

Instruction of SEB staff within theframework of RE courses, and extension ofmethod to other REC schemes Continuous

-70 - ANNEX 16

INDIA


Estimated Disbursement Schedule by Calendar Quarter

US$ millionCalendar Years Quarterly Cumulative

1980 I Q

II Q

III Q 1 1

IV Q 3 4

1981 I Q 12 16

II Q 18 34

III Q 23 57

IV Q 27 84

1982 I Q 26 110

II Q 23 133

III Q 16 149

IV Q 12 161

1983 I Q 5 166

II Q 5 171

III Q 2 173

IV Q 1 174

1984 I Q 1 175

INDIA

SEC01.D RURAL ELECTRIFICATION CORP0RATI0N PROJECT

Rural Electrification Corporation Limited

Summarized Income Statements for Fro 1974 thrvugh 1978 (Actual)

and FYs 1979 through 1983 (Forecast)

(in millions of rupees except where otherwise stated)

-________---------A C T U A L FO--------------- -------- _----F O R E C A S T------__________Year to March 31 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

RevenueInterest on Loans Disbursed 63.0 90.3 138.7 188.6 242.2 353.1 476.0 626.4 796.8 990.1

Interest on Investments (Gross) 10.7 5.4 7.9 8.1 8.3 8.9 9.0 9.5 10.0 10.5

Total Revenue 73.7 95.7 146.6 196.7 250.5 362.0 485.0 635.9 806.8 1,000.6

ExpensesAdministration 7.3 9.5 11.7 14.9 19.1 19.0 21.0 23.5 26.0 30.0

Interest on Borrowings 12.8 23.2 62.9 103.7 152.6 257.5 342.9 467.6 606.0 760.9

Total Expenses 20.1 32.7 74.6 118.6 171.7 276.5 363.9 491.1 632.0 790.9

Operating Income (before tax) 53.6 63.0 72.0 78.1 78.8 85.5 121.1 144.8 174.8 209.7LessIncome Tax Provision for Year 28.6 32.8 38.1 39.2 36.5 32-° 55_ 66.o 79.7 29.6

Operating Income (after tax) 25.0 30.2 33.9 38.9 h2.3 46.5 65.9 78.8 95.1 114.1Less: Proposed Dividend 2.0 3.1 5.0 11.5 6.7 7.7 9.4 10.0 10.9 12.0

Transfer to Special Reserve 4-9 6.3 6.6 7.1 15.9 17.1 24.2 29.0 35.0 -. L

Total 6.9 9.4 11.6 18.6 22.6 24.8 33.6 39.0 45.9 53.9

Retained Earnings 18.1 20.8 22.3 20.3 19.7 21.7 32.3 39.8 49.2 60.2

RatiosPercentage of Revenue1. Interest on Borrowings 17.4 24.2 42.9 52.7 60.9 71.1 70.7 73.5 75.1 76.02. Administration 9.9 9.9 8.0 7.6 7.6 5.3 4.3 3.7 3.2 3.03. Total I + 2 27.3 34.1 50.9 60.3 68.5 76.4 75.0 77.2 78.3 79.04. Income Tax 38.8 34.3 26.0 19.9 14.6 10.8 11.4 10.4 9.9 9.65. Operating Income (after tax) 33.9 31.6 23.1 19.8 16.9 12.8 13.6 12.4 11.8 11.4

Percentage of Average Total Assets6. Total Revenue 4.7 4.4 5.1 5.3 5.3 6.0 6.3 6.5 6.7 6.87. Interest on Borrowings 0.8 1.1 2.2 2.8 3.2 4.2 4.5 4.8 5.0 5.28. Gross Spread 6-7 3.9 3.3 2.9 2.5 2.1 1.8 1.8 1.7 1.7 1.69. Administration 0.5 0.4 0.4 0.4 0.4 0.3 0.3 0.2 0.2 0.2

10. Income Tax 1.8 1.5 1.3 1.0 0.8 0.6 0.7 0.6 0.7 0.611. Proposed Dividend 0.1 0.1 0.2 0.3 0 0.1 0.1 0.1 0.1 0.112. Earnings for Year 1.5 1.3 1.0 0.8 0.8 0.8 0.7 0.8 0.7 0.7

Return on Average Equity 2.0 2.0 2.0 2.2 2.3 2.i4 3.1 3.4 3.8 4.3Return on Average Total Capitalization 2.5 2.5 3.14 3.9 4.2 5.2 5.4 5.7 5.9 6.1

SOURCE: RHE, November 1978

INDIA


Rural ELectrification Corporation Limited

Summarized Sources and Applications of Funds Statements for FYs 1974

through 1978 (Actual) and FYs 1979 through-1983 (Foreoatj

(in millions of rupees)

________________--- A C T U A L ------------------ ---------------- F O R E C A S T ----------------------

Year to March 31 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

SourcesInternal Cash Generation

Operating Income (after interest) 53.6 63.0 72.0 78.1 (8.8 85.5 121.1 144.8 174.8 209.7

Depreciation 0.1 0.1 0.2 0.3 0.4 0.4 0.5 0.5 O.b 0.6

Total 5r37c 63.l 72.2 7Th 79.2 85.9 121.6 145.3 175.4 210.3

Less Deductions:Income Tax Provision 28.6 32.8 38.1 39.2 36.5 39.0 55.2 66.0 79.7 95.6

Proposed Dividends 2.0 3.1 5.0 11.5 6.7 7.7 9.4 10.0 10.9 12.0

Total 30.6 35.9 43.1 50.7 43.2 46.7 64.6 7 90.6 107.6

Net Cash Generation 23.1 27.2 29.1 27.7 36.0 39.2 57.0 69.3 B4.B 102.7

Repayment of Loans sanctioned by REC 0.9 2.1 8.4 47.0 84.0 146.8 215.9 258.4 301.2 343.2

Capital RaisedUSAID 151.6 - - - - _ _ _ _ _

GOI Equity Contributions 110.0 190.0 50.0 50.0 70.0 100.0 165.0 60.0 90.0 115.0

GOI Loans 125.0 427.6 526.7 651.9 1,074.8 910.0 1,203.0 1,474.0 1,674.5 1,824.7 '

GOI Loans for Harijan Basti 1/

Program 25.0 - - - -

Market Loans - 83.2 111.0 110.2 110.0 250.0 600.0 600.0 700.0 800.0

Total 411.6 700.8 687.7 812.1 1,254.8 1,260.0 1,968.0 2, 134.0 2,464D. S 2,739.70

Working Capital (Increase)Decrease 3.1 1.4 3.2 10.6 (86.9) (3.1) (17.5) (27.4) (25.9) (34.2)

Sale of Government Securities 85.4 54.8 10.3 - - 183.0

Total Sources 524.1 786.3 738.7 897.4 1 287.9 1.625.9 2,223.4 2,434.3 2,824.6 31_51.4

Applications

Disbursement of Loans Sanctioned 522.6 781.9 734.3 881.9 1,129.9 1,600.0 2,150.0 2,350.0 2,699.8 3,000.2

Repayment of GO1 Loans 1.3 3.0 3.0 3.0 9.7 25.3 33.7 71.1 101.5 138.7

Investment in Government Securities - - - 9.9 146.5 - 39.0 12.7 22.8 12.0

Capital Expenditure 0.2 0.3 0.1 1.4 0.8 0.6 0.7 0.5 0.5 0.5

Deferred Expenditure _ 1.1 1.3 1.2 1.0 - _ - - -_

Total Applications 524.1 786.3 738.7 897.4 1_287.9 1.625,9 2.223.4 2.434.3 2,824.6 3,151.4

1/ Harijan Basti' means the underprivilaged section of the population who live in the outskirts of the villages. The loans are mainly for minimal

street lighting.

SOURCE: REC, November 1978

INDIA

SIOND IUR4L SLBETRIFICATIOI COOMPOhATION PKiJiWT

Rural Electrification Corooration Limited

Summarized Balance Sheets for FTs 1974 through 1978 (Actual)

and FTs 1979 through 1983 (Forecast)

(in millions of rupees)

--------------------- A C T U A L FO--------------- -------------- F O R E C A S T-----------------As at March 31 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

AssetsFixed Assets 0.9 1.2 1.3 2.7 3.5 4.1 4.8 5.3 5.8 6.3Less: Depreciation 0.3 0.4 0.6 0.9 1.3 1.7 2.2 2.7 3.3 3.9Net Fixed Assets 0.6 0.8 0.7 1.8 2.2 2.4 2.6 2.6 2.5 2.4

Investments in Government Securities 118.0 62.9 53.1 62.8 209.3 26.2 65.2 77.9 100.7 112.7

Loans Disbursed and Outstanding 1,642.5 2,422.7 3,148.1 3,983.1 5,029.0 6,482.2 8,416.3 10,507.9 12,906.5 15,563.5

Deferred Expenditure - 1.1 2.4 3.6 4.6 - - - - -

Current Assets 31.7 38.3 46.6 54.3 182.7 132.3 169.7 210.7 253.4 307.1

Total Assets 1,792.8 2.525.8 3,250.9 4.105.6 5,427.8 6.643.1 8.653.8 10,799.1 13. 263.1 15985.7

Capital and LiabilitiesCurrent Liabilities

Interest Accrued 2.1 3.9 9.7 18.0 26.3 - - - - -

Sundry Creditors 1.5 3.1 3.5 6.4 2.4 6.4 8.4 10.5 12.9 15.6Provision for Taxation 28.2 32.8 38.1 39.2 75.7 39.0 55.2 66.0 79.7 95.6Proposed Dividend - - - 6.0 6.7 7.7 9.4 10.0 10.9 12.0Total 31.8 39.8 51.3 3 6-9. 111.1 53.1 73.0 86.5 103.5 123.2

BorrowingsGOI Loans 353.3 777.9 1,301.6 1,950.5 3,015.7 3,900.4 5,069.7 6,472.7 8,045.5 9,731.9 0Market Loans - 83.2 194.2 304.4 414.4 664.2 1,264.2 1.864.2 2,564.2 3.364.2Total 353.3 861.1 1,495.8 2,254.9 3,430.1 4,564.6 6,333.9 8,336.9 10,609.7 13,095.5

EquityShare Capital 310.0 500.0 550.0 600.0 670.0 770.0 935.0 995.0 1,085.0 1,200.0Capital Reserve 1,050.0 1,050.0 1,050.0 1,050.0 1,050.0 1,050.0 1,050.0 1,050.0 1,050.0 1,050.0Special Fbserve 10.3 16.7 23.3 30.4 46.2 63.3 87.5 116.5 151.5 193.4Retained Earnings 37.4 58.2 80.5 100.7 120.4 142.1 174.4 214.2 263.4 323.6Total 1,407-7 1,624.9 T75 T79TT TH96 r 2 r, M7 7I57. 2,767.0

Total Capital and Liabilities 1,792.8 2.525.8 3,250.9 4.105.6 5.427.8 6.643.1 8.653.8 10,799,1 13.263.1 15.985.7

Debt/Equity Ratio 20/80 35/65 47/53 56/44 65/35 69/31 74/26 78/22 81/19 82/18

REC Commitment to disburse LoansSanctioned to Date 1,397.2 1,993.6 2,429.3 2,682.9 3,129.6 3,479.6 3,529.6 3,779.6 4,179.6 4,529.6

SOURCE: REC November 1978 I!

- 74 -ANNEX 20Page 1

INDIA


Assumptions Used in Financial Projections

1. The financial statements in this report comprise REC's auditedfinancial operations for the period FY1974 through FY1878, and its pro-jected operations for the period FY1979 through FY1983. The statementsinclude annual income statements (Annex 17), statements of sources andapplication of funds (Annex 18) and balance sheets as at March 31 eachyear (Annex 19).

2. The following assumptions have been made:

(i) Operations - REC's projected operations for the periodFY1979 through FY1983 were agreed in discussions with thePlanning Commission and Ministries of Energy and Finance:Disbursements are based on REC's agreed share of the planexpenditure during the Sixth Plan Period 1979-83, i.e.,Rs 11,800 million (US$1,372 million). Because the planis calculated at constant prices in accordance with GOIbudgetary procedure, scheme cost escalation must beaccommodated either by curtailing the physical programor by additional financing. Any shortfall in eitherinternal financing or in market borrowings as shown inthe Financing Plan will be made up by increased borrowingfrom GOI.

(ii) Interest Rates at current levels have been used. Borrow-ings from GOI carry interest of 7.25% for Normal Programsand 5.25% for the Minimum Needs Program. Market loans areassumed to carry 6% interest. Lending interest on loansadvanced are assumed at 5.5% up to FY1974, 6.6% fromFY1975-FY1978, 7.0% from FY1979-FY1983. Temporary invest-ments in Government Securities yielded 4.0% p.a. up toFebruary 9, 1975 and are assumed at 4.6% thereafter.Average interest rates are based on loan releases duringthe respective Plan periods.

(iii) Loan repayments for both loans disbursed and borrowingsis in accordance with contractual arrangements. Marketborrowings are repayable after FY1983.

(iv) Administration Expenses are assumed to increase by approxi-mately 10% p.a.

-75 -

ANNEX 20Page 2

(v) Income Tax has been calculated as 57% on chargeable incomeafter making provision for allocations to a Special Reserveof 20%, giving an effective rate of approximately 46%.

(vi) Proposed Dividends are provided at the rate of 1% onissued share capital as at the end of the financial year.

(vii) Current Assets are projected at 2% of Loans and Invest-ments as averaged for the previous 5 years.

(viii) Interest on Loans Payable and Receivable is assumed tohave been paid and received during each year.

(ix) Sundry Creditors are assumed at 0.1% of Loans Disbursedas averaged for the previous 5 years.

(x) Authorized Share Capital is assumed to increase as notedto eventually reach Rs 1,200 million at the end of FY1983.

3. Apportionment of SEBs' Financial Results Over the Separate Activ-ities of RE and Other Operations. The rationale for the above apportionmentis in accordance with Article IV, Section 4.01, Credit 242-IN, which speci-fied that financial data should be produced for SEBs which separated informa-tion relating to RE from information relating to the SEBs' other supplyfunctions. Since FY1970, proforma income statements, statements of sourcesand applications of funds, rate bases, and details of indebtedness have beenprepared both for RE and for the SEBs excluding RE on a basis of apportion-ment which is reasonable has been consistently applied and which is used tosupport SEBs' applications to State Governments for the payment of RE sub-sidies. Details are as follows:

(i) Energy sales to consumers at appropriate tariff ratesare on an actual basis with reasonable estimates usedwhere this is not possible.

(ii) Cost of energy is charged to RE by apportioning the costof supply at the EHT transmission end (comprising opera-tion and maintenance, depreciation and interest chargedfor generation and transmission up to this point) in theratio of units sold to RE consumers.

(iii) Operation and maintenance, depreciation and interestcharges in the distribution system below EHT are allo-cated on the basis that consumer services costs areapportioned in the ratio of the number of consumers,while other operation and maintenance costs depre-ciation and interest are apportioned in the ratio ofgross fixed assets in the distribution system.

- 76 -

ANNEX 20Page 3

(iv) Fixed assets are allocated on an actual basis wherepossible, otherwise, a reasonable basis of apportion-ment is used, e.g., multiplying the number of irriga-tion pumps installed each year by the average estimatedRE scheme cost per pump in that year (this cost wouldinclude the cost of domestic and other service connec-tions in the scheme) and adding to the cumulative totalbrought forward from the previous year.

INDIA


Rural ELectrification Corporation Limited

Statement Showing Calculation of Debt Service Coverage

FYs 1974-78 (actual) and FYs 1979-1983 (Forecast)(in millions of rupees except where otherwise stated)

March 31 1974 1975 1976 1577 1978 1979 1980 1981 1982 1983

------------------Actual ---------------- ----------------Forecast----------------

Total Revenue 73.7 95.7 146.6 196.7 250.5 362.0 485.0 635.9 806.8 1,000.6

Less DeductionsAdministration 7.3 9.5 11.7 14.9 19.1 19.0 21.0 23.5 26.0 30.0

Taxes 28.6 32.8 38.1 39.2 36.5 39.0 55.2 66.o 79.7 95.6

Dividends 2.0 3.1 5.0 11.5 6.7 7.7 9.4 10.0 10.9 12.0

Total 37.9 45.4 54.8 65.6 62.3 65.7 85.6 99.5 116.6 137.6

Net Revenue 35.8 50.3 91.8 131.1 188.2 296.3 399.4 536.4 690.2 863.0

Add: Depreciation 0.1 0.1 0.2 0.3 0.4 0.4 0.5 0.5 o.6 o.6

Loan repayments by SEBs 0.9 2.1 8.4 47.0 84.0 146.8 215.9 258.4 301.2 343.2

Total Generated Internally / 36.8 52.5 100.4 178.4 272.6 kL-5 61I.8 12i- 992.0 1,206.8

R3C's Debt Service:-/

Interest on Borrowings 12.8 23.2 62.9 103.7 152.6 257.5 342.9 467.6 606.0 760.9

Repayment of GOI Loana 1.3 3.0 3.0 3.0 9.7 25.3 33.7 71.1 101.5 138.7

14.1 26.2 65.9 106.7 162.3 282.8 376.6 538.7 707.5 899.6

Times Debt Service covered byInternally Generated Finds andsums repaid by borrowers(minimum 1.2 times) 2.6 2.0 1.5 1.7 1.7 1.6 1.6 1.5 1.4 1.3

1/ Internally generated funds means the aggregate revenues from all sources and the principal repayments on loans made by R3C,

less administrative expenses, dividends, taxes, surcharges and other levies, if any, but before provision for depreciationand interest and other charges on debt.

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

SOURCE: REC, November 1978

INDIA

SECOND RURAL ZLECTRIFICATION CORPORATION PROJECT

Statement Showing Amount of Loan Sanctions Disbursements and Balance Undisbursed

(In millions of mpees except where otherwise stated)

Loans Sanctioned Disbursement of Loans Sanctioned

Annual ACTUAL FORECAST

Year to Accumulated Harijan Rural Electn.31 March Total Basti Total 1974 1975 1976 1577 1978 1979 1980 1981 1982 1983

1974 3,o40.9 36.7 3,004.21975 4,419.2 8.3 1,370.01976 5,589.2 - 1,170.01977 6,72h.7 - 1,135.51978 8,301.3 - 1,576.61979 10,251.3 - 1,950.01980 12,451.3 - 2,200.01981 15,051.3 - 2,600.01982 18,151.3 - 3,100.01983 21,501.3 - 3,350.0

Total - Rural Electrification Loans 1618.7 770.7 725.5 881.9 1,129.9 1,600.0 2,150.0 2,350.0 2,700.0 3,000.0

- Harijan Basti 25.0 11.2 8.8 - - - - - - -

Total - Loan Disbursements 1.643.7 781.9 734.3 881.9 1.129.9 1.600.0 2.150.0 2.350.0 2,700.0 3.000.0

No. of Schemes Sanctioned Daring Year- Raral Electrification Projects 208 340 285 279 397 650 750 850 950 1,000- Harijan Basti Schemes 75 34 - - - - - - - -

Total No. of Schemes Sanctioned to Date- Rural Electrification Projects 618 958 1,243 1,522 1,919 2,419 3,029 3,679 14,409 5,209- Harijan Basti Schemes 75 109 109 109 109 109 109 109 109 109

Loans Sanctioned Tlring Year- Rural Electrification Projects 739.9 1,370.0 1,170.0 1,135.5 1,576.6 1,950.0 2,200.0 2,600.0 3,100.0 3,350.0

- Harijan Basti Schemes 16.8 8.3 - - - - - - - -

Total Loans Sanctioned to Date 3,040.9 4,419.2 5,589.2 6,724.7 8,301.3 10,251.3 12, 4 51.3 15,051.3 18,151.3 21,501.3

Total Disbursements to Date i,64I3.7 2,425.6 4,041.S 5,1T7.T 6,771.7 0,921.7 11,Z71.7 13,W71.7 ",971.7

Loan Repayment Dfring rear 0.9 2.1 8.4 47.0 84.0 146.8 215.9 258.4 301.2 343.2

Total Loan Repayment to Sate 1.2 3.3 11.7 58.7 142.7 289.5 505.4 763.8 1,065.2 1,408.2

Loan Disbursements not Repaid 1,642.5 2,422.3 3,148

.2 3,983.1 5,029.0 6,482.2 8,416.3 10,507.0 12,906.5 15,563.5

Undisbursed Loans 1,397.2 1,993.6 2,429.3 2,682.9 3,129.6 3,479.6 3,529.6 3,779.6 4,179.6 4,5 2 9

.6

Source: REC, November 1978

ANNEX 23

INDIA


SE8g Gross Fixed Assets at March 31, 1977 Analyzed

Between Raral Electrification and Other OPerations(In millions of rupees except where otherwise stated)

SEBs Other Operations RE Total Other Operations RE Total

Andhra Pradesh - I.S. 3,392 1,162 4,554 75 25 100-W.I,P. 1 396 - 1,396 100 - 100

Total _l; _ TM

Bihar - I.S. 2,334 1,088 3,422 68 32 100- W.I.P. 1 566 - 1 566 100 - 100

Total 314,90 0 -g T

Gujarat - I.S. 3,423 701 4,124 83 17 100- W.I.P. 1 229 - 1 229 100 - 100

Total X 70-1 t1 T_ T__

Haryana-/ - I.S. 1,172 904 2,076 56 44 100- W.I.P. 1 573 - 1 573 100 - 100

Total t2.;7 3, 7 2_ T0

Maharashtra - I.S. 4,061 2,040 6,101 67 33 100- W.I.P. 2 045 191 2,236 91 9 100

Total t 2 o.337 7 7 __

Punjab - I.S. 2,331 1,034 3,365 69 31 100-W.I.P. 2 937 - 2 937 100 - 100

Total 1, 034 z_ _ V TO0

Rajasthan - I.S. 1,815 1,019 2,834 64 36 100- W.I.P. 1,393 20 1 413 98 2 100

Total 3,7 1.039 727 27 T

Uttar Pradesh - I.S. 7,599 1,674 9,273 82 18 100-W.I.P. 5,419 - 5,419 100 - 100

Total T___ m- -81 TT TM4

West Bengal - I.S. 1,757 311 2,068 85 15 100- W.I.P. 1 357 310 1 667 81 19 100

Total 3',f aT T7

Kerala - I.S. 2,668 210 2,878 93 7 100- W.I.P. 202 - 202 100 - 100

Total 2,10 710 7

Madhya Pradesh - I.S. 2,565 1,012 3,577 72 28 100- W.I.P. 1 113 167 1 280 87 13 100

Total 1,179 76 T T

Orissa - I.S. 1,447 590 2,037 71 29 100- W.I.P. 585 57 642 91 9 100

Total 2,032 7 2,679 76 _ T_5

Tamil Nadu - I.S. 3,805 2,288 6,093 62 38 100- W.I.P. 1 089 81 1,170 93 7 100

Total tit 7263 Z 7 r To5

Grand Totals - I.S. 38,369 14,033 52,402 73 27 100- W.I.P. 21,904 826 22,730 96 4 100

Total 60234,59 75,132 __ 20 T_0

Index

I.S. - in serviceW.I.P. - work-in-progress

1/ Excludes Assam and Karnataka.

2/ Haryana not eligible for IRA finance.

SOURCE: SEBs.

INDIA

Second Rural Electrification Corporation Project

SEBs' Capital Expenditure Cash Flow FYs 1976 an' 1977

(In millions of Rupees except where otherwise stated)

SEBs~' RE F'Y 1976 _______Y_1976FY 1977 _977__ l9 iLJ.l _X97

SEBs-9-1- RE % Other RE % Other RE Other Ops. Total

Amou*t Share Operations Total Amount Share Operations Total _ Amncn t Amount % Amount %

Andhra Prades 64 9 692 756 144 16 750 894 +80 +125 +58 +8 +138 +18

Bihar 141 23 479 620 165 21 614 779 +24 +17 +135 +28 +159 +26

Gujarat 71 8 772 843 56 7 777 833 -15 -21 +5 +1 -10 -1

Haryan 2/ 49 6 535 584 77 17 364 441 +28 +57 -171 -32 -143 -25

Maharashtra 118 11 986 1104 132 10 1262 1394 +14 +12 +276 +28 +290 +26 0

Punjab 126 16 658 784 209 23 710 919 +83 +66 +52 +8 +135 +7

Rajasthan 130 31 294 424 192 34 377 569 +62 +48 +83 +28 +145 +34

Uttar Pradesh 130 5 2450 2580 213 11 1756 1969 +83 +64 -694 -28 -611 -24

West Bengal 110 20 446 556 110 18 492 602 - - +46 +10 +46 +8

Kerala 7 3 219 226 11 4 252 263 +4 +57 +33 +15 +37 +16

Madhya Prades 117 13 813 930 207 24 657 864 +90 +77 -156 -19 -66 -7

Orissa 86 48 94 180 83 16 443 526 -3 -3 +349 +371 +346 +192

Tamil Nadu 112 19 473 585 162 22 572 734 _ +50 +45 +99 +21 +149 +25

Total 1261 12 8911 10172 1761 16 9026 10787 +500 +40% +115 +1% +615 +6%

1/ Excludes Assam and Karnataka. W

2/ Haryana not eligible for IDA finance.

SOURCE: SEBs.

INDIA


1/Measurement of the Net Income Contribution from lural E:Lectrification and

Other Uperations of S83s Relative to Total Averalge Canital Baseg"

tIn Rs millions and % return on investment)

FY1976 FY1977 Increase (+) Decrease (-) FY1977 over 11976SEBs3/ RE Profit (Loss) Other Operaions Total RE Profit (Loss) Other Operations Total RE Profit (Loss) Other Operations Total

Rs. % R.. t Rs. % R % s RsRs R.. R.

Andhra Pradesh (53) (1.9) 269 9.6 216 7.7 (92) (2.7) 399 11.7 307 9.0 +(09) +(o.8) +130 +2.1 +91 +1.3

Bihar 43 1.8 120 5.2 163 7.0 47 1.9 158 6.2 205 8.1 + 4 + 0.1 + 38 +1.0 +42 +1.1

Oujarat (32) (1.5) 190 9.5 158 8.0 (52) (2.0) 308 11.7 256 9.7 +(20) +(0.5) +118 +2.2 +98 +1.7

Haryana-/ (27) (2.0) 123 9.2 96 7.2 (56) (3.7) 152 10.1 96 6.4 +(29) +(1.7) + 29 +0.9 - -0.8

Maharashtra (10) (0.2) 466 10.2 456 10.0 (31) (0.7) 597 13.7 566 13.0 +(21) +(0.5) +131 +3.5 +110 +3.0

Punjab (49) (2.1) 219 9.5 170 7.4 (53) (2.1) 269 10.3 216 8.2 + (4) - + 50 +0.8 +46 +0.8

Rajasthan 42 2.2 122 6.5 164 8.7 50 2.4 139 6.8 189 9.2 + 8 + 0.2 + 17 +0.3 +25 +0.5

Uttar Pradesh (124) (2.3) 378 6.9 254 4.6 (160) (2.3) 561 8.1 401 5.8 +(36) - +183 +1.2 +147 +1.2

West Bengal (44) (4.6) 101 10.6 57 6.0 (25) (1.5) 151 11.0 156 9.5 + 19 + 3.1 + 80 +0.4 +99 +3.5

Kerala 19 1.5 54 4.4 73 5.9 15 0.8 139 7.7 154 8.5 - 4 - 0.7 + 85 +3.3 +81 +2.6

Madhya Pradesh 31, 1.7 228 11.1 262 12.8 49 2.0 270 11.1 319 13.1 + 15 + 0.3 + 42 - +57 +0.3

Orissa 6 0.4 81 5.4 87 5.8 32 1.4 110 4.9 142 6.3 + 26 + 1.0 + 29 -0.5 +55 +0.5

Tamil Nadu 104 2.7 269 7.0 373 9.7 109 2.7 271 6.8 380 9.5 + 5 - + 2 -0.2 + 7 -0.2

Total (91) (0.3) 2.620 8.1 2.529 7.8 (167) (0.4) 3.554 9.3 3.387 8.9 +(76) +(0.1) +934 +1.2 +858 +1.1

1/ Net Income Contribution means "operating income" as defined in Article IV Sect. 4.03 Credit 604-IN with the additional apportionment of the total operating income over theseparate activities of RE and the other operations of SEBs. This apportionment is in accordance with a format defined in Article IV Sect. 4.01 Credit 242-IN and explainedin the notes on the assumptions used in the financial projections Annex 20.

2/ Total Average Capital Base includes SEBs RE and other operations and is calculated in accordance with Credit 604-IN - DCA Article IV Sect. 4.03 and means: "the sam of (A)the gross book value of fixed assets in operation, (B) the cost of intangible assets and (C) an amount on account of woricing capital equal to one-sixth (1/6) of theadninistrative, operating and maintenance expenses less (A) the amount of accumulated depreciation charged on account of fixed assets in operation, (B) the amount contri-buted by customers for fixed assets in operation, and (C) the amount of security deposits of consumers."

c/ Ikcludes Assam and Karnataka.

.X Haryana not eligible for IDA finance.

SOURCE: SEBs

INDIA

SECOND RURAL ELECTRIFICATION CORPORATION PROJET

RateB of Return Earned by S3s "RE Activity" and "Other Operations"

tielative to Their Own CJapital Bases for FYs 1576 and 1977(In % return on investment)

PY 1976 E____ ________ __________ FY 1977 Increase D ee j Y1977 over FY19762/ ' RE Net RE RE Net RE- RE Net RESEBs-' (Losses) RE (Losses) Other 1/ (Losses) RE (Losses) Other 1/ (Losses) RE (Losses) Other 1/Profits Subsidies Profits Operations Ttl_Profits Subsidies Profits Operations To7ta, Profits Subsidies Profits Operationsi Total

'ndhra Pradesh (7.2) - (7.2) 13.6 8.0 (11.9) - (11.9) 16.0 8.9 +(4.7) - +(4.7) +2.4 +0.9

3ihar (14.4) 21.3 6.9 7.5 7.3 (10.2) 16.8 6.6 8.1 7.6 -(4.2) -4.5 -0.3 +0.6 +0.3

.uj arat (10. 9) 1.2 (9.7) 12.4 8.5 (15.6) _ (15.6) 14.7 10.5 +(4.7) -1.2 +(5.9) +2.3 +2.0

Raryana (4.3) - (4.3) 18.4 7.4 (8.6) - (8.6) 18.8 6.6 +(4.3) - +(4.3) +0.4 -0.8

4aharashtra (4.8) 4.1 (0.7) 16.3 9.9 (2.7) 0.5 (2.2) 21.7 13.5 -(2.1) -3.6 +(1.5) +5.4 +3.6

'unjab (8.2) - (8.2) 13.2 7.6 (7.2) - (7.2) 14.6 8.4 -(1.0) - -(1.0) +1.4 +0.8

tajasthan (4.0) 10.7 6.7 10.1 8.9 (3.4) 10.2 6.8 11.2 9.6 -(0.6) -0.5 +0.1 +1.1 +0.7

Jttar Pradesh (12.4) - (12.4) 8.7 4.8 (14.6) - (14.6) 10.3 6.1 +(2.2) - +(2.2) +1.6 +1.3

lest Bengal (137.5) - (137.5) 11.7 6.4 (41.6) 23.4 (18.2) 13.2 10.1 -(95.9) +23.4 -(119.3) +1.5 +3.7

:erala (21.5) 35.0 13.5 5.1 6.0 (16.9) 28.1 11.2 8.5 8.7 -(4.6) -6.9 -2.3 +3.4 +2.7

ladhya Pradesh (3.6) 9.1 5.5 16.5 13.1 (4.6) 11.6 7.0 16.3 13.6 +(1.O) +2.5 +1.5 -0.2 +0.5

)rissa (11.1) 12.6 1.5 7.6 6.0 (7.5) 14.4 6.9 5.8 6.2 -(3.6) +1.8 +5.4 -1.8 +0.2

amil Nadu 3.7 3.8 7.5 11.8 10.2 (14.5) 22.2 7.7 11.7 10.2 +(18.2) +18.4 +0.2 -0.1 -

otal (6.6) 5.5 (1.1) 11.5 8.0 _ (9.7) 7.9 (1.8) 13.1 9.2 i +(3.1) +2.4 +(0.7) +1.6 +1.2

/ Total Rate of Return is calculated in accordance with Credit 242-IN LCA Article IV, Sect. 4.01. It is different from the basis for calculating overall Rate of Return as inCredit 604-IN MA Article IV, Sect. 4.03 in that working capital is excluded from the rate base. The rates of return of the separate activities of RE and the SEB' otheroperations are calculated from a format defined in Article IV Sect. 4.01 of DCA Credit 242-IN and explained in Annex 20. RE losses and profits are shown before interest.RE profits after interest will be reduced to nil.

/ Ecludes Assam and Karnataka.

/ Haryana not eligible for IDA finance.

SOURCE: SEBEs.

INDIA

SEOND 13RAL ELECTRIFICATION CORPORATION PRDJECT

Operating Performance of the RE Activities of SEBs for FY1976(In millions of repees except where otherwise stated)

1/ Andhra 2/ Uttar West Madhya Tamil Combined

SEBs Pradesh Bihar Oujarat Haryana7 Maharashtra Punjab Rajasthan Pradesh Bengal Kerala Pradesh Orissa Nadui Total

Sales - Units - Gwh 633 551 1168 903 1574 934 696 1749 96 361 863 401 1840 11769

Rs % Rs % Rs %R R % RS % Rs % R % Rs % Rs % Rs % Rs % Rs S Rs % Rs %

Sales - Revenue 186 100 108 loo 281 100 172 100 368 100 144 100 166 100 456 100 33 100 50 loo 194 100 54 100 355 100 2567 100

Other Operating Revenue 17 - 6 - 12 - 24 - 15 - 20 - 12 - 21 - -_ 7 lo - 2 - 17 171 -

Total Revenue 203 - 114 - 293 - 196 - 383 - 164 - 178 - 477 - 33 -57 - 212 - 56 - 372 - 2738 -

Operating &penses

Eiergy Cost 119 64 122 113 188 67 111 65 203 55 121 84 84 51 477 105 18 55 25 50 124 64 36 67 279 78 1907 74

Other 94 51 54 50 113 40 82 48 171 46 63 44 90 54 60 13 54 164 51 102 78 40 51 94 315 89 1276 50

Depreciation 43 23 28 26 28 10 30 17 76 21 29 20 29 17 64 14 5 15 9 18 32 17 13 24 80 23 466 18

Total 256 138 204 189 329 117 223 130 450 122 213 148 203 122 601 132 77 234 85 170 234 121 100 185 674 190 3649 142

Deficit before Interest 53 28 90 83 36 13 27 16 67 18 49 34 25 15 124 27 44 133 28 56 22 11 44 81 302 85 911 35

Add: Interest 20 11 43 40 43 15 79 46 103 28 80 56 42 25 147 32 7 21 18 3 5 30 23 43 104 29 768 30

Deficit after Interest 73 39 133 123 79 28 106 62 170 46 129 90 67 40 271 59 51 154 46 92 81 41 67 124 406 114 1679 65

Less: State GovernmentSubsidy - - 133 123 4 1 _ - 57 15 - - 67 40 - 1 _ _ 46 92 56 29 50 93 53 15 466 18

Net Deficit for Year 73 39 75 27 106 62 113 31 129 90 271 59 51 154 5 12 17 31 353 99 1213 47



SOURCE: SEBs.

INIIA

SECOND RURAL EJLECTRIFICATION CORPORATION PROJECT

Operating Performance of the RE Activities of SEBs for FY1977(In millions of ripees except where otherwise stated)

1/ Andhra 2/ Uttar West Madhya Tamil CombinedSEBs- Pradesh Bihar Gujarat Haryana- Maharashtra Punjab Rajasthan Pradesh Bengal Kerala Pradesh Orissa Nadu Total

Sales - Units - Gwh 787 524 1276 1068 2118 1014 834 1915 122 356 998 522 1847 J

Rs % Rs % Rs % Rs % Rs % Rs % Rs % Rs % Rs % Rs % Rs % Rs % as % as %

Sales - Revenue 200 100 124 100 348 100 209 100 509 100 184 100 206 100 432 100 50 loO 59 100 248 100 92 100 419 100 3080 100Other Operating Revenue 22 - 6 - 13 - 23 - 24 - 24 - 13 - 30 - - - 6 - 16 - 3 - 23 - 203 -

Total Revenue 222 - 130 - 361 - 232 - 533 - 208 - 219 - 462 - 50 - 65 - 264 - 95 - 442 - 3283 -

Operating Expenses

Energy Cost 149 75 118 95 241 69 161 77 288 57 158 86 105 51 495 115 23 46 25 42 172 69 51 55 388 93 2374 77

Other 117 59 53 431141 41 95 45 206 40 73 40 105 51 57 13 74 148 54 92 88 35 62 67 377 90 1502 49

Depreciation 48 24 34 27 31 9 32 15 77 15 30 16 34 17 70 16 10 20 9 15 36 15 17 19 90 21 518 17

Total 314 158 205 165 413 119 288 137 571 112 261 142 244 119 622 144 107 214 88 149 296 119 130 141 855 204 4394 143

Deficit before Interest 92 46 75 60 52 15 56 27 38 7 53 29 25 12 160 37 57 114 23 39 32 13 35 38 413 99 1111 36

Add: Interest 25 13 47 38 68 20 88 42 140 28 97 53 50 24 157 36 18 36 15 25 75 30 34 37 109 26 923 30

Deficit after Interest 117 59 122 98 120 35 144 69 178 35 150 82 75 36 317 73 75 150 38 64 107 43 69 75 522 125 2034 '66

Less: State GovernmentSubsidy _ - 122 98- -_ - - 7 1 - - 75 36 - - 32 64 38 64 81 33 69 75 314 75 738 24

Net Deficit for Year 117 59- - 120 35 144 69 171 34 150 82 - - 317 73 43 86- - 26 10- - 208 50 1296 42



SOURCE: SEBs. L

INDIA


Operating Performance of the RE Activities of SEBs for FY1977 Relative to FY1976

(In Rs millions and % increase of FY1977 over FT1976)

1/ Andhra 2/ Uttar West Madhya Tamil CombinedSEBs- Pradesh Bihar Gujarat Haryana Maharashtra Punjab Rajasthan Pradesh Bengal Kerala Pradesh Orissa Nadu Total

Owh % Owh % Gwh % Owh % Gwh % Owh % iwh % Owh % (wh % Gwh % Gwh % Owh % Owh % Owh %

Sales - Units +15h +2h -27 -5 +108 +9 +165 +18 +5hh +35 +80 +9 +138 +20 +166 +10 +26 +27 -5 -1 +135 +16 +121 +30 +7 - 1612 +14

Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs Rs

Sales - Revenue +1b +8 +16 +15 +67 +24 +37 +22 +141 +38 +40 +28 +40 +24 -24 -5 +17 +52 +9 +18 +54 +28 +38 +70 +64 +18 +513 +20

Other Operating Income +5 +29 - - +1 +8 -1 _4 +9 +60 +4 +20 +1 +8 +9 +43 - - -1 -14 -2 -11 +1 +50 +6 +35 +32 +19

Total Revenue +19 +9 +16 +15 +68 +23 +36 +18 +150 +39 +44 +27 +41 +23 -15 _3 +17 +52 +8 +14 +52 +25 +39 +70 +70 +19 +545 +20

Operating Expenses

Ehergy Cost +30 +25 -4 -3 +53 +28 +50 +45 +85 +42 +37 +31 +21 +25 +18 +4 +5 +28 - - +48 +39 +15 +42 +109 +39 +467 +25

Other +23 +24 -1 -2 +28 +25 +13 +16 +35 +20 +10 +16 +15 +17 _3 _5 +20 +37 +3 +6 +10 +13 +11 +22 +62 +20 +226 +18

Depreciation +5 +12 +6 +21 +3 +11 +2 +6 +1 +1 +1 +3 +5 +17 +6 +9 +5 +100 - - +4 +13 +4 +31 +10+13 +52 +11

Total +58 +23 +1 - +84 +25 +65 +29 +121 +27 +48 +23 +41 +20 +21 +3 +30 +39 +3 +4 +62 +26 +30 +30 +181 +27 +745 +20

Deficit before Interest +39 +74 -15 -17 +16 +44 +29 +107 -29 -43 +4 +8 - - +36 +29 +13 +30 -5 -18 +10 +45 -9 -20 +111 +37 +200 +22

Add: Interest +5 +25 +4 +9 +25 +58 +9 +11 +37 +36 +17 +21 +8 +19 +10 +7 +11 +157 -3 -17 +16 -27 +11 +48 +5 +5 +155 +20

Deficit after Interest +44 +60 -11 -8 +41 +52 +38 +36 +8 +5 +21 +16 +8 +19 +46 +17 +24 +47 -8 -17 +26 +32 +2 +3 +116 +29 +355 +21

Less: State GovernmentSubsidy - - -11 -8 -4 -100 - - -50 -88 - - +8 +12 - - +32 NA -8 -17 +25 +45 +19 +38 +261 +492 +272 +58

Net Deficit for Year +44 +60 - - +45 +60 +38 +36 +58 +51 +21 +16 - - +46 +17 -8 -16 - - +1 +4 -17 NA -145 -41 +83 +18

1/ axcludes Assam and Karnataka.


NA = not available.

SOURCE: SEBs

-86 - ANNEX 30

INMA

SFCND RURAL ELETRIFICATION CORPORATION PROJET

Increases in SEBs' Revenue for FY1977 Required (i) to Diable Interest on State Government Loans

to be Paid in Full and (ii) to Produce a Self Finance Ratio of 20%

Average Interest Not Paid Increase in Revenue Required Increase in Revenue Required toRevenue per to Meet Interest not Paid Meet a Self-finance ratio Of 20%

SEBs kWh - paise Rs Million % Total Interest Paise per kWh % Revenue Paise per kWh e Reveue

Andhra Pradesh 29.9 11 5% 0.3 1.1% Not Required Not Required

Bihar 27.3 Nil - - - 1.7 6.4%

Gujarat 24.7 123 35% 2.6 10.6% 4.0 16.2%

Haryana3 20.2 121 61% 6.4 31.8% 9.4 46.4%

Maharashtra 20.4 11 3% 0.1 0.6% 1.2 6.o%

Punjab 21.7 137 41% 5.7 26.3% 7.9 36.2%

Rajasthan 23.8 Nil - - - Not Required Not Required

Uttar Pradesh 24.3 435 52% 5.9 24.0% 10.4 43.0%

West Bengal 23.7 Nil - - - 1.5 5.0%

Kerala 13.2 32 19% 1.2 9.1% o.6 4.5%

Madhya Pradesh 22.0 Nil - - - Not Required Not Required

Orissa 12.6 48 43% 1.9 14.8% 1.9 14.8%

Tamil Nadu 27.6 Nil - - - Not Required Not Required

Total 22.9 918 26% 1.7 7.6% 2 i135

1/ Excludes Assam and Karnataka. Figures not yet received.

2/ Self-finance ratio means, the percentage internal cash generation (net of debt service but excluding repayment of State Governmentloans) bears to capital expenditure for the year.

3/ Haryana does not qualify for IDA finance.

SOURCE: SEBs.

INDIA

SEOND RURAL 3LETRIFICATION CORPORATION PROJECT

1/ 2/ 3/Effects on SEBs' Rates of Return and Self-Finance Ratios

of Increases in Revenues for FY1977

(I) (2) (3) (4) (5) (6) (7) (8)Target Rates of Return Increases in Revenue Required Rate of Return % of Capital Increase in Revenue Required B e of Return Neededunder Credits 6o0-IN Actual Rate to Meet Interest not Paid, in needed to Cover all Investment Self- to Meet a Self-Finance Ratio of to Finance 20% of

S33s and 416-IN - FY1977 of Return Rate of Return Terms Interest (columns Financed (by 20% in Rate of Return Terms New Investment

3 + 4) column 5) (Columns 3 7)

% % % % x % IL

Andhra Pradesh 9.5 9.0 0.3 9.3 24% Not Required 9.3

Bihar 7.0 8.1 Not Required 8.1 29% Not Required 8.1

Gujarat 9.5 9.7 4.7 14.4 12% - 7.1 7618

Haryana 9.5 6.4 8.0 14.4 3% 13.0 19.4

Maharashtra 9.5 13.0 0.3 13.3 13% 2.5 15.5

Punjab 9.5 8.2 5.2 13.4 13% 7.8 16.0

Rajasthan 9.5 9.2 Not Required 9.2 22% Not Required 9.2

Uttar Pradesh 9.5 5.8 6.3 12.1 3% 11.4 17.2

West Bengal 5.0 9.5 Not Required S.5 14% 2.1 11.6

Kerala 8.8 8.5 1.8 10.3 26% 0.9 9.4

Madhya Pradesh 9.5 13.1 Not Required 13.1 21% Not Required 13.1

Orissa 9.0 6.3 2.0 8.3 20% 2.1 8X4

Tamil Nadu 9.5 9.5 Not Required 9.5 26% Not Required 9.5

Total 8.9 8.9 2.5 11.4 18% 3.2% (12.1


2/ Rate of Return is in accordance with its definition in BCA Article IV Sect. 4.03, Credit 604-IN and *eans "operating income as a percentage of the average of the capital base at the beginning andend of the financial year. Operating income and capital base are defined in the notes attached to Annex 25.

3/ Self-finance ratio means internally generated funds net of debt service (not including repayment of State Government loans) as a percentage of capital expenditure for the year.


SOURCE: SEBs.

- 88 - ANNEX 32

INDIA


Financial Analysis of Sample Schemes

Assumptions used are taken from actual REC appraisal reports:

1. Capital Costs

SEB investments in 33 kV lines, 33/11 kV substations, LT lines,

distribution transformers and service connections.

2. Maintenance and Repair

Three percent of cumulative gross SEB investment.

3. Cost of Energy

Average accounting cost of energy sold at 33 kV for appropriate

SEBs.

4. Revenue

KWh consumption by each consumer category at current tariff

levels. Growth in consumption is assessed for each scheme in line withphysical implementation of schemes.

5. Sensitivity to inflation at 5% p.a. has been used.

6. Cost of Capital

An average financial cost of capital for RE schemes of 7% duringthe lifetime of the schemes has been used.

7. Scheme Lifetimes

Lifetimes have been estimated by the SEBs and approved by REC.

INDIA


Discounted Financial Criteria of Sample RE Schemes

Net Present Value Rates of Return - % Annual Revenue IncreasesNet Present Value At 5 % Inflation of Costs Required to Achieve an

Scheme at 7% Discount Rate At Constant At 5% Inflation Excluding Cost of Energy Internal Rate of ReturnCategory at Constant Prices Prices of All Costs (increases in which would of 7% at Constant Prices.

Rs million be passed on to tariffs)

OA +2.7 11.8 9.4 10.5 Not Required

OB -0.9 5.5 4.0 4.7 5.6 1

SPA -4.4 Not Positive Not Positive Not Positive 292.9 @

SPI +10.5 79.4 69.2 72.8 Not Required

SI +28.0 21.5 20.8 - Not Required

MG Nil 7.4 5.9 6.6 Not Required

MH -0.2 4.3 2.8 3.4 9.7

SU -1.0 4.1 2.8 3.3 13.3

MNP -1.1 4.5 3.3 3.9 18.2

P)

SOURCE: REC, SEBs.

- 9a,- ANNEX 33

INDIA


Average Price and Cost of Electricity for Selected Consumer Categories(paisa/kWh 1978)

2/ MagnlCs-Accoun5~ngAverage Price- Marginal Cost-/ Cost7

Type of LTEligible Agric.1I Agric. 3/ ural R4/ u /Agric Industrial Domestic LTState Tariff- Consumers- LT Industrial- Domestic- Consumers Consumers Consumers Average

Andhra Pradesh CEM 22 35 40 80-125 80-125 80-125 43

Assam EM 24 22 45 n.a. n.a. n.a. n.a.

Bihar E 18 32 50 67 45 83 51

Gujarat CEBOM 23 29 31 72 67 71 33

Karnataka EBM 20 25 42 n.a. n.a. n.a. 28

Kerala CEBM 12 15 52 n.a. n.a. n.a. 49

Madhya Pradesh CEM 30 22 30 82 44 65 55

Maharashtra CEMFOS 22 25 31 78 84 174 -45

Orissa EM 15 22 33 n.a. n.a. n.a. 86

Punjab F 13 21 35 18 51 115 37

Rajasthan EMB 25 23 38 55 35 56 46

Tamil Nadu CEM 17 31 35 n.a. n.a. n.a. 41

Uttar Pradesh E 15 30 41 56 80 102 43

West Bengal EM 35 37 45 101 101 120 49

1/ C = capacity charge, E = energy charge, M = minimum charge, B block concept,0 = options, F = flat rate, S - fuel surcharge.

2/ Excluding excise duty and fuel surcharge.

3/ Based on relevant annual hours of utilization of irrigation pumps and average connected loadper pump in each State. In case of options the lower option for the average use is taken.

4/ Based on 6,000 kWh/year per 10HP connection.

5/ Based on 180 kWh/year per household.

6/ As calculated in the marginal cost pricing studies prepared by selected SEBs, and in theAndhra Pradesh SEB review, updated to 1978 using 6% inflation.

7/ 1977

n.a. = not available.

Sources: CEA, SEBs, REC

- 91 -

ANNEX 34Page 1

INDIA


Selected Documents and Data Available in the Project File

A. Selected Reports and Studies on the Rural Sub-sector

A-1 National Institute of Community Development (Hyderabad): An Evaluationof Four Rural Electrification Projects in Andhra Pradesh, 1976.

A-2 V.N. Kothari and M.M. Dadi: Economic Benefits of Rural Electrificationin Gujarat, Baroda 1977.

A-3 National Council of Applied Economic Research: Cost-Benefit Study ofSelected Rural Electrification Schemes in Madhya Pradesh and UttarPradesh, 1977.

A-4 Indian Institute of Management (Ahmedabad): Electrification in RuralGujarat, three volumes, 1974.

A-5 Institute for Financial Management and Research (Madras): FinancialPlanning and Budgeting Systems in REC and SEBs, 1977.

B. Selected Reports and Studies Relating to the Project

B-1 Draft of REC Guidelines for Formulation of Schemes for Financial As-sistance by the REC.

B-2 REC Guidelines for Monitoring of Schemes.

B-3 Collection of sample REC reports (two project proposals, sevenappraisal reports, two monitoring reports).

B-4 Sample Report on a System Improvement Scheme in Tamil Nadu.

B-5 W. Scott: Draft Report on Technical Standards and Adequacy of RuralElectrification in India, 1979.

B-6 REC Specification and Construction Standards.

B-7 REC Manual 1/1974, Electric Irrigation Pumpsets (for Guidance of Farmers).

B-8 REC Manual 2/1974, Electric Irrigation Pumpsets.

B-9 REC Manual 3/1974, Safety Manual.

B-10 REC Manual 4/1975, Installation and Maintenance Manual for Medium andLow Voltage Service Connections.

B-lb REC Manual 5/1975, Installation and Maintenance Manual for DistributionTransformer Stations.

- 92 -

ANNEX 34Page 2

B-12 REC Manual 6/1975, Installation and Maintenance Manual for 33/11 kV

Sub-stations.

B-13 REC Manual 7/1975, Maintenance Manual for 33 kV, 11 kV, Medium and LowVoltage lines.

B-14 REC Manual 8/1975, Construction Manual for 33 kV, 11 kV, Medium and Low

Voltage lines.

B-15 REC Manual 9/1976, Manual for Repair of Distribution Transformers.

B-16 REC Manual 10/1976, Manual for the Design of 33/11 kV Sub-Station forRural Electrification System.

B-17 REC Manual 11/1976, Guide for Voltage Drop Calculations.

B-18 REC Manual 12/1976, Manual for Sag Tension Calculations.

B-19 REC Manual 13/1976, Manual on Manufacturing of Solid PCC Poles. Part I -Design Aspects. Part II - Manufacturing Aspects.

C. Working Papers

C-1 Details of Material Requirement for Eligible REC Schemes Approved Between

April 1977 and September 1978.

C-2 Financial and Economic Cost and Benefit Streams of Sample Schemes.

March 1979.

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