Document of

The World Bank

Report No: ICR1862

IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IBRD-4813)

ON A

LOAN IN THE AMOUNT OF US$400 MILLION

TO

POWER GRID CORPORATION OF INDIA LIMITED

(WITH THE GUARANTEE OF INDIA)

FOR THE

THIRD POWER SYSTEM DEVELOPMENT PROJECT

January 30, 2012

Sustainable Development Unit

South Asia Region

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CURRENCY EQUIVALENTS

Fiscal Year Annual Average Exchange Rate1

2006-07 41.29

2007-08 43.42

2008-09 48.36

2009-10 45.74

Currency Unit = INR

Fiscal Year: April 1 - March 31

Abbreviations and Acronyms

AAD Advance Against Depreciation

AC Alternating Current

ADB Asian Development Bank

CAS Country Assistance Strategy

CAMPA Compensatory Afforestation Management and Planning Authority

CEA Central Electricity Authority

CERC Central Electricity Regulatory Commission

ckm circuit kilometer

CSR Corporate Social Responsibility

CTU Central Transmission Utility

DC Direct Current

EHV Extra-High Voltage

EMP Environment Management Plan

EMS Environment Management System

ESMD Environment and Social Management Department

ERM Enterprise Risk Management

ERP Enterprise Resource Planning

ERR Economic Rate of Return

ESPP Environment and Social Policy and Procedures

ESS Environment and Social Safeguards

FAC Forest Advisory Committee

FDI Foreign Direct Investment

FEAR Final Environmental Assessment Report

FM Financial Management

FPO Follow-on Public Offer

FRA Forest Rights Act

FY Fiscal Year

GoI Government of India

GIS Geographical Information System

GW GigaWatt

Gwh GigaWatt Hour

HVAC High-Voltage, Alternating Current

HVDC High-Voltage, Direct Current

IBRD International Bank for Reconstruction and Development

ICRR Implementation Completion and Results Report

IEP Integrated Energy Policy

IEAR Initial Environmental Assessment Report

IEGC Indian Electricity Grid Code

IPMCS Integrated Project Management and Control System

IPO Initial Public Offer

IPP Independent Power Producer

1 „Handbook of Statistics on the Indian Economy‟, Reserve Bank of India, September 2011.

JBIC Japan Bank for International Cooperation

JV Joint Venture

km kilometer

KPI Key Performance Indicator

kV kilovolt

M&E Monitoring and Evaluation

MIS Management Information System

MoEF Ministry of Environment and Forests

MoF Ministry of Finance

MoP Ministry of Power

MoU Memorandum of Understanding

MSEB Maharashtra State Electricity Board

MSETCL Maharashtra State Electricity Transmission Co. Ltd.

MTR Mid-Term Review

MVA megavolt ampere

MW megawatt

MU Million Unit

NEP National Electricity Policy

NGO Non Governmental Organization

NLDC National Load Despatch Center

NTP National Tariff Policy

NWTC North West Transmission Corridor

O&M Operation and Maintenance

PAD Project Appraisal Document

PAP Project Affected Person

PAT Profit After Tax

PDO Project Development Objective

PIP Project Implementation Plan

PMR Project Management Report

POSOCO Power System Operation Corporation Limited

POWERGRID Power Grid Corporation of India Limited

PSDP Power System Development Project

PSE Public Sector Enterprise

PTC Power Trading Corporation

QER Quality Enhancement Review

QPR Quarterly Project Report

R&D Research and Development

RAP Rehabilitation Action Plan

RBI Reserve Bank of India

RGGVY Rajiv Gandhi GrameenVidyutikaranYojana

RLDC Regional Load Dispatch Center

ROE Return on Equity

ROW right-of-way

SEBI Securities and Exchange Board of India

SIL Specific Investment Loan

TA Technical Assistance

UCS Use of Country/Borrower Systems

VLPGO Very Large Power Grid Operator

WRSS II Western Region System Strengthening Scheme II

CONTENTS

Section 1: Project/Program Context, Development Objectives, and Design .................................. 1

1. Context at Appraisal ...................................................................................................... 1

2. Original Project/Program Development Objectives (PDO) ................................................... 2

3. Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification .............................................................................................................. 3

4. Main Beneficiaries ................................................................................................................. 3

5. Original Components ............................................................................................................. 3

6. Revised Components.............................................................................................................. 5

7. Other Significant Changes ..................................................................................................... 5

Section 2: Key Factors Affecting Implementation and Outcomes ..................................................... 6

1. Project Preparation, Design and Quality at Entry .................................................................. 6

2. Implementation ...................................................................................................................... 7

3. Monitoring and Evaluation Design, Implementation, and Utilization ................................... 8

4. Safeguard and Fiduciary Compliance .................................................................................... 9

5. Post-completion Operation/Next Phase ............................................................................... 12

Section 3: Assessment of Outcomes ................................................................................................ 13

1. Relevance of Project Design and Objectives ....................................................................... 13

2. Achievement of Project/Program Development Objectives ................................................ 13

3. Efficiency ............................................................................................................................. 14

4. Justification of Overall Outcome Rating.............................................................................. 15

5. Overarching Themes, Other Outcomes and Impacts (if any) ............................................... 16

Section 4: Assessment of Risk to Development Outcome ............................................................... 17

1. Assessment of Risk to Development Outcome .................................................................... 17

Section 5: Assessment of World Bank and Borrower Performance ................................................ 18

1. Assessment of World Bank and Borrower Performance ..................................................... 18

2. Lessons Learned ................................................................................................................... 21

3. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ...................... 22

Annex 1: Results Framework and Monitoring ................................................................................. 23

Annex 2: Project Costs and Financing ............................................................................................. 24

Annex 3: Outputs by Component..................................................................................................... 26

Annex 4: Economic and Financial Analysis .................................................................................... 37

Annex 5: Bank Lending and Implementation Support/Supervision Processes ................................ 53

Annex 6: Beneficiary Survey Results .............................................................................................. 55

Annex 7: Terms of Reference for Impact Assessment Study .......................................................... 56

Annex 8: Stakeholder Workshop Report and Results ...................................................................... 57

Annex 9: Summary of Borrower's ICR ............................................................................................ 58

Annex 10: Comments from POWERGRID/Government of India on Draft ICR ............................ 75

Annex 11: Eligibility Criteria for Selection of Candidate Schemes to be Financed under PSDP III

......................................................................................................................................................... 76

Annex 12: Comments of Co-financiers and Other Partners/Stakeholders ....................................... 77

Annex 13: List of Supporting Documents ....................................................................................... 78

Annex 14: Maps ............................................................................................................................... 79

1

1. Basic Information

Country: India Project Name: Power System

Development Project III

Project ID: P086414 L/C/TF Number(s): IBRD-4813

ICR Date: August 25, 2011 ICR Type: Core ICR

Lending Instrument: SIL Borrower: POWERGRID

Original Total

Commitment: US$400.0 M Disbursed Amount: US$400.0 M

Environmental Category: A

Implementing Agencies Power Grid Corporation of India Limited

2. Key Dates

Process Original

Date

Revised/

Actual

Date(s) Process Original Date

Revised /

Actual

Date(s) Concept

Review: 04/16/2004 06/07/2004 Effectiveness: 05/31/2006 12/15/2006

Appraisal: 01/19/2005 01/19/2005 Restructuring(s): N.A.

Approval: 01/19/2006 01/19/2006 Mid-term Review: 12/31/2008 04/12/2010

Closing: 07/31/2011 07/31/2011

3. Ratings Summary

3.1 Performance Rating by ICR

Outcomes: Highly Satisfactory

Risk to Development Outcome: Low or Negligible

Bank Performance: Satisfactory

Borrower Performance: Satisfactory

3.2 Quality at Entry and Implementation Performance Indicators

Implementation Performance Indicators QAG Assessments (if any) Rating:

Potential Problem Project at any

time (Yes/No): No Quality at Entry (QEA): None

Problem Project at any time

(Yes/No): No Quality of Supervision (QSA): None

DO rating before Closing/Inactive status:

Satisfactory

4. Sector and Theme Codes

Original Actual

Sector Code (as % of total World Bank financing)

Power 100 100

Original Priority Actual Priority

Theme Code (Primary/Secondary)

Infrastructure services for private sector development Primary Primary

2

Regulation and competition policy Secondary Secondary

Other financial and private sector development Secondary Secondary

Climate change Secondary Secondary

Pollution management and environmental health Secondary Secondary

5. Bank Staff

Positions At ICR At Approval

Vice President: Isabel Guerrero Praful Patel

Country Director: N. Roberto Zagha Michael F. Carter

Sector Manager: Jyoti Shukla Penelope J. Brook Project Team Leader: Kwawu Mensan Gaba Sunil K. Khosla

ICR Team Leader: Surbhi Goyal N.A.

ICR Primary Author: Ahmed El-Hamri N.A.

1

Section 1: Project/Program Context, Development Objectives, and Design

1. Context at Appraisal CAS/Support from the Bank:

Country Background: The project, Power System Development Project III (PSDP III), was

developed within the framework of the Country Assistance Strategy (CAS) (2004-07) with its

objectives aligned with India‟s 10th Five Year plan (2002-07). The strategic principles of the CAS

provided the underpinning of the World Bank‟s assistance to the Indian power sector as it was

(and continues to be) considered a key sector whose poor performance has crippling effects on

India‟s ability to achieve its economic growth and poverty reduction objectives. Binding

constraints on the sector consisted of limited grid integration, a deficit in power sector capacity

and severe power shortages as peak load shortages reached 12.1 percent and energy shortages 7.2

percent (in 2005)2 resulting in substantial losses to the economy. In addition, given the low level

of electricity access (44.2 percent of households lacked access) at the time of appraisal,

Government of India‟s (GoI) goal of universal access by 2012 required sizable additions to

generation capacity, transmission and distribution networks. The provision of adequate

infrastructure being paramount to India‟s socioeconomic development objectives, this project was

supporting GoI‟s continuous efforts to provide an adequate power generation, transmission and

distribution infrastructure.

Sector Background: Large investments in additional transmission capacity were deemed essential

if power availability was not to constrain India's capacity for rapid growth. Furthermore, the

capacity and efficient operation of the transmission segment was critical to the success of

investments in other sectors, including those essential for the creation of employment and income.

The principal responsibility for grid strengthening and increase in interstate power transmission

capacity rests with the Power Grid Corporation of India Limited (POWERGRID), the

government-owned central transmission utility (CTU). In recent years, there has been a manifold

increase in POWERGRID‟s investments in its infrastructure to improve the performance of the

existing network as well as provide the much needed capacity to transfer electricity from surplus

regions to deficit ones. These actions were taken in tandem with the passage of the Electricity Act

2003 which had opened the way for competition in power transmission and distribution, power

trading and market development, and new providers of power supply in rural areas.

Rationale for World Bank Involvement: The World Bank‟s overall strategy for the power sector

in India continues to focus on fostering the transition of the sector towards a low(er) carbon

development path through the financing of relevant public investments while, simultaneously,

promoting policies and regulatory measures for private sector participation. This engagement was

an offshoot of the long-term strategic partnership that the World Bank had with POWERGRID

since its inception in 1989. PSDP III loan formed an important part of the engagement strategy

with POWERGRID that facilitated it in timely achievement of its investment plans and hence,

contributing towards development of the National Grid to transfer power from surplus to deficit

regions. The investment in transmission infrastructure has facilitated the establishment of

generation plans in the resource rich areas and the evacuation of this power to the load centers

located far away from these generation plants. Moreover, POWERGRID being a key player in the

sector and an operator of the National and Regional Load Despatch Centres has contributed

significantly to the policies for open access. The project was built on a successful partnership with

an organization that being CTU of India is vital for the development of its power sector.

2 In 2011, the system‟s average peak deficit was about 10.3 percent and average energy deficit was about 8.5 percent

2

A series of direct loans to POWERGRID (amounting to about US$3.2 billion3) under a program

level engagement addressed structural and institutional constraints existing in the transmission

subsector and created conditions to optimize sector development. This investment support to

POWERGRID also aimed at improving the outcome-orientation and service delivery of

POWERGRID, by: (i) facilitating higher economic use of generation resources and harnessing

low carbon primary energy sources such as hydropower and wind that are unevenly distributed;

(ii) providing optimal integration of all regions and greater grid stability; (iii) establishing the

open access regime mandated in the Electricity Act 2003; and (iv) facilitating the development of

a power trading market within the country and, wherever feasible, with India's neighbors. Over

time, POWERGRID has emerged as a globally recognized transmission utility through

consistently improving upon its institutional capacity across technical, procurement, social,

environment, and financial management aspects. POWERGRID now operates one of the largest

transmission networks in the world and is sharing its expertise through international consulting

and construction services for transmission projects in South Asia (Afghanistan, Nepal, and Sri

Lanka) and in Africa (Kenya, and Nigeria).

Programmatic lending support to POWERGRID has contributed to the development of high-

capacity transmission corridors which increased the interregional capacity of the National Grid

from 1,500 megawatt (MW) in 1999 to 9,500 MW in 2006 and, correspondingly, significantly

expanded the network of transmission lines from 35,119 circuit kilometer (ckm) to 55,121 ckm. In

2005-06, at the time of PSDP III preparation, the interregional transmission capacity facilitated

energy exchange of almost 35,000 Million Units (MU) across India, with 20,000 MU or 57

percent being transferred through three interregional lines financed by the World Bank (PSDP II).

This is equivalent to offsetting the need for 6,800 MW of new generation capacity.4 The World

Bank‟s current CAS (2009-12) for India reaffirms the same priorities and programs with the

power infrastructure at the core of project financing, especially in light of capital and Foreign

Direct Investment (FDI) shortages resulting from the economic and financial crises of 2008 and

2011. Investments in the power sector aim at building upon the achievements of previous power

projects, including those dedicated to energy generation and transmission. In financing PDSP III,

the World Bank reaffirmed its commitment to a long-term partnership to support critical

investments in the transmission segment.

Project Description

2. Original Project/Program Development Objectives (PDO)

As this project was part of a long-term investment and infrastructure upgrading program, it

logically followed the achievement of PSDP I and PSDP II that focused on the continuous

enhancement of POWERGRID‟s technical capacity and physical infrastructure. The objective of

this project was to strengthen the transmission system in order to increase reliable power

exchanges between the regions and states of India. To achieve this objective, the project focused

on: (i) strengthening the transmission system in power deficit regions and increasing interregional

transmission capacity; and (ii) developing POWERGRID‟s institutional capacity by building the

tools to facilitate the implementation of open access and interregional trading.

3 PSDP I in 1993 (US$ 350 million), PSDP II in 2001 (US$ 450 million), PSDP III in 2006 (US$ 400 million), PSDP IV

and additional financing in 2008 (US$ 1,000 million), and PSDP V in 2010 (US$ 1,000 million). 4 Refer „Highways of Power - Story of the Second POWERGRID System Development Project‟, the World Bank

publication.

3

Original Project Development Objectives (PDO) and Key Performance Indicators (KPIs)

PDO Outcome Indicators

To strengthen the transmission system in order to increase

reliable power exchanges between the regions and states.

Growth in power exchange between the

regions – MU

Intermediate Results

(One per Component)

Results Indicators for Each Component

Component One: Transmission system strengthening

(investments and relevant technical support)

Growth in transmission capacity - ckm

Growth in transformation capacity -

megavolt ampere (MVA)

Component Two: Completion of balance works of the

schemes financed by the World Bank under loan 4603-IN for

POWERGRID System Development Project II beyond the

loan closing date of June 30, 2006

Completion of National Load Dispatch

Center (NLDC)

3. Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification

The project objectives were not revised. While there were no significant changes to the project

itself, other developments (as described below) influenced the overall engagement and structuring

of supervision and Mid-Term Review (MTR) missions. The only outcome indicator for the project,

growth in power exchange between the regions, outperformed its end year targets5. Thus, the KPIs

were rated satisfactory in terms of implementation progress. In addition to the above outcome

indicator, three intermediate indicators were also monitored. The first such indicator

(transformation capacity) also outperformed its end year target6. The second indicator

(transmission capacity) outperformed all the targets for intermediate years but due to delays caused

by GoI‟s notification regarding the Forest Rights Act (FRA) in August 2009 (factors outside the

control of POWERGRID), the end-year targets was revised by 4.7 percent7 during the mid-term

review (MTR) to reflect the impacts of the delays on results on the ground. The third one linked to

the completion of the NLDC was also successfully met during the project implementation period.

4. Main Beneficiaries

POWERGRID was the borrower and the direct beneficiary of the PSDP III loan. The loan

provided resources and funds for investments needed by POWERGRID to undertake the physical

expansion of the transmission system while simultaneously improving its technical, financial and

institutional capacity to enhance the transfer of energy across regions and reduce transmission

costs, system losses and unserved energy.

Since POWERGRID is the CTU of India, the benefits of the various projects/schemes are extended

to the various transmission and distribution utilities at the state level as well as to the independent

power producers (IPP), which could rely on a strong network to allow them to fully benefit from

the open access regime that was mandated by the Electricity Act 2003.

5. Original Components

5 Target: 52,000 MU; actual: 56,747 MU 6 Target: 85,000 MVA; actual: 93,050 MVA 7 End year target was revised from 84,000 ckm to 80,000 ckm during MTR. The actual end year achievement for this

indicator was 82,355 ckm.

4

PSDP III (US$400 million) was designed to contribute to the financing of POWERGRID‟s

investment program totaling US$1.043 billion for the 2006-11 period (as per the project appraisal

document (PAD) for PSDP III). Specifically, the loan supported the implementation of the

following project components:

Project Component One: Transmission System Strengthening Schemes (base cost of US$797

million). The schemes under the loan were categorized as „core schemes‟ that were identified at the

time of appraisal and were advanced in the implementation cycle; and „candidate schemes‟ that

were to be taken up subsequently. The core schemes identified during the appraisal are:

a. Seoni-Wardha-Akola-Aurangabad transmission system The works consisted of:

Transmission lines (financed under PSDP III)

From Seoni to Wardha 765 kilovolt (kV) single circuit (initially to be operated at 400 kV) – on a distance of 269 ckm

From Wardha to Akola 400 kV double circuit on a distance of 324 ckm

From Akola to Aurangabad 400 kV double circuit on a distance of 482 ckm

Substations (financed under PSDP III)

A new 400/220 kV Wardha substation (with a provision to upgrade to 765 kV) The extensions of 400/220 kV at Seoni, Akola and Aurangabad substations

b. ±500kV, 2500 MW Balia-Bhiwadi high-voltage, direct current (HVDC) transmission system

The works consisted of:

Transmission lines (financed under PSDP III)

From Balia to Bhiwadi ±500kV, 2,500 MW HVDC bipole line on a distance of 1,580 ckm

Substations (initially proposed to be financed under PSDP III but to match commissioning of

the associated generation projects, these were later financed under PSDP IV)

HVDC terminal for 2,500 MW at Balia along with associated works HVDC terminal for 2,500 MW at Bhiwadi along with associated works

c. Seoni-Bina 765 kV single circuit transmission link

The works consisted of:

A Transmission line (financed under PSDP III) from Seoni to Bina. This was a 765 kV

single circuit line (initially to be operated at 400 kV) on a distance of 293 ckm.

Substations (initially proposed to be financed under PSDP III but later financed by

POWERGRID’s own resources): the extensions of the 400/220 kV substation at Seoni and

of the 400/220 kV substation at Bina.

d. Candidate Schemes: A number of potential schemes were tentatively identified and included after project effectiveness, taking advantage of cost savings during

implementation. Such schemes were eligible for IBRD financing provided the project

implementation plans (PIP) submitted by POWERGRID established that these schemes

met the eligibility criteria (Annex 11) for financing under this project. The World Bank

reviewed the process followed by POWERGRID in identification and planning of the

least-cost technical and economic options for each of the "core" schemes in this time slice

and endorsed the eligibility criteria for "candidate" schemes in agreement with

POWERGRID. These eligibility criteria also included steps that POWERGRID needed to

follow for adequate social and environmental safeguards while planning and

implementation of these schemes. The following two candidate schemes were included

during project implementation and their work consisted of:

5

The North-West Transmission Corridor (NWTC) that included the Agra-Gwalior

second circuit 765 kV transmission line (initially to be operated at 400 kV) (128 ckm)

and the Kankroli-Zerda 400 kV double circuit transmission line (470 ckm). Extensions

of 400/220 kV substations at Agra, Gwalior, Zerda and Kankroli were funded under

PSDP IV; and

Western Region System Strengthening Scheme-II (WRSS II) that included the

Bina-Gwalior 765 kV second single circuit transmission line (initially to be operated at

400 kV) on a distance of 233 ckm.

Some of the lines were established to operate at 765 kV voltage level whereas they were to be

charged initially at 400 kV voltage level. POWERGRID‟s rationale for such planning was to

proactively address right-of-way (ROW) and construction issues, and erect transmission lines

whose charging at a higher voltage level was to be done at a later stage. Higher charging was

anticipated over a relatively shorter timeframe because of the significant load growth and the

commissioning of a large number of new generation plants over the next two Five Year plans.

Technical Assistance for POWERGRID: A provision for a technical assistance (TA), as part of

project component one, was retained at the appraisal with the objective of assisting POWERGRID

in strengthening its institutional capacity, if the need were to arise based on the complexity of the

technology to adopt for the transmission networks. It was further agreed that the selection of TA

to be financed under PSDP III was to depend on the availability of alternative grant finance, an

option preferred by POWERGRID and GoI. Given this context, POWERGRID decided to

finance the relevant TA studies through its own resources.

Project Component Two: This consisted of the completion of the PSDP II project and its

estimated cost was US$75 million. The final utilization against this component was US$30.26

million. PSDP III provided funding for the: (i) completion of the NLDC; and (ii) construction

of transmission lines, substations and purchase of system equipment, initiated under PSDP II

and whose completion occurred after its closing date of June 30, 2006. This component was

also eligible to finance balance payments, if any, from PSDP II. The following works were

taken up under PSDP III against this component:

(i) Eastern Region System Coordination and Control Project – completed in June 2005; (ii) Western Region System Coordination and Control Project – completed in August

2005;

(iii) System Strengthening-III in Southern Region Grid – completed in April 2007; (iv) High Capacity East-North Interconnector-II – completed in August 2007; (v) POWERGRID‟S Diversification into Telecom Business – completed; and (vi) NLDC – completed in March 2009.

6. Revised Components

The project‟s original components were not revised.

7. Other Significant Changes

The loan was appraised in January 2005, approved in January 2006, signed in May 2006 and

became effective on December 15, 2006. The MTR was carried out during April 12-23, 2010.

The World Bank and the borrower agreed during the appraisal of PSDP IV, which had become

effective on March 28, 2008 (nine months before the original MTR date), to hold a common

MTR for PSDP III and PSDP IV. During the MTR, an implementation support mission for

6

PSDP V, that became effective on January 8, 2010, was also undertaken. These three projects

(PSDP III, PSDP IV and PSDP V) have the same PDO, support the same entity/sector and are

structurally linked.

Section 2: Key Factors Affecting Implementation and Outcomes

1. Project Preparation, Design and Quality at Entry

a. Soundness of the Background Analysis: POWERGRID‟s satisfactory achievements and learning experience resulting from the implementation of PSDP I and PSDP II had a positive

impact on the preparatory process of the project. Continuous and sound sector review by the

World Bank resulted in an identification of key aspects specific to the project design.

Furthermore, the preparation and appraisal phases benefited from a Quality Enhancement

Review (QER) that took place in October 2004. In reviewing the sector strategy and the

project‟s PDO, the QER panel endorsed the World Bank‟s rationale and agreed that, for the

proposed project, the PDO needed to be focused on the planned investments under this project.

The concept of „candidate‟ scheme, based on eligibility criteria, was also founded on sound

principles under which any scheme could qualify for financing after its due diligence.

b. Assessment of the Project Design: POWERGRID‟s strong technical design capability,

including the establishment of a Research and Development (R&D) department and excellent

collaboration with the Central Electricity Authority (CEA, technical regulatory institution of

GoI) for the power system planning studies, and its extensive operational experience were very

effective in determining the types and voltage levels required for the transmission network

development. For instance, planning relevant sections of the new transmission network at

higher voltage and capacity to efficiently meet the growing demand that is scattered across the

country while proactively addressing ROW problems demonstrates POWERGRID‟s visionary

acumen. The use of eligibility criteria (refer Annex 11) to identify investments as well as

financing mechanisms for transmission schemes was an appropriate analytical tool adapted to

carry out project design. By applying these criteria, POWERGRID ensured that the investment

scheme was technically and operationally justified and had been formulated after taking into

account other alternative investments. Furthermore, the scheme had to be based on the least-

cost options and was part of POWERGRID‟s overall least-cost investment program. In

addition, the project‟s schemes were economically and financially justified. The eligibility

criteria were discussed at length with the World Bank team during the appraisal. One point to

note here is that the effectiveness of the project was delayed by almost six months (from July

31, 2006 to December 15, 2006) due to the time taken by POWERGRID to prepare a financial

security package to comply with the negative pledge clause in the loan agreement. Even

though project effectiveness was delayed, the project successfully met its PDO and

outperformed its outcome indicator (growth in power exchange across regions).

c. Adequacy of Government’s Commitment: Another key factor that contributed to the effective implementation of the project was a strong project ownership by the borrower and

GoI. POWERGRID‟s commitment to the project as well as its extensive experience and close

working relationship with the World Bank facilitated the analytical and preparatory work

during the project‟s preparation and appraisal phases. Early preparation, started during PSDP

II, provided valuable insight into issues to be resolved by both parties. Furthermore, the use of

the eligibility criteria ensured the stakeholders‟ and government‟s commitment to the project.

GoI‟s commitment to the project translated into institutional measures and actions that were

needed for project implementation within the parameters of sector growth in terms of

7

transmission capacity development and institutional stakeholders and civil society at the state

level. These actions also included the Central Electricity Regulatory Commission‟s (CERC‟s)

regulations and the operationalization of the NLDC8, an essential institution for transmission

and power exchanges.

d. Assessment of Risks: The overall risk rating for project implementation was low/medium. Specific risks for the implementation of key investments were rated low. To mitigate these

risks, mostly foreseen delays in implementing the project‟s schemes, advance procurement

action was taken for the investments before the first year of the project. Moreover,

POWERGRID has demonstrated its ability to plan and implement complex investments on

time and to cost. Other risks were also identified and these included risks for financial

performance (low), tariffs (low/medium), institutional development (low), commercial aspects

(low/medium), open access (medium), and inadequate implementation of safeguards (low).

The mitigation measures consisted of actions and measures that were directly relevant to

POWERGRID‟s operations and could be put in place by POWERGRID, such as compliance

with financial covenants, arrears payments, and safeguards compliance. Other measures to be

implemented by GoI institutions in tandem with POWERGRID, such as approval of tariffs,

continued institutional development and implementation of the open access regime were to be

subject to continuous dialog with the World Bank and other stakeholders to prevent any

adverse impact. Furthermore, there were no controversial aspects related to this project and no

major social or environmental issues had been anticipated in POWERGRID‟s operations.

2. Implementation The implementation of the project components and utilization of the loan proceeds were

satisfactory. POWERGRID as well as GoI were instrumental in ensuring that project

implementation was successful and that all components were completed on time and became

operational within the expected timeline. The transmission schemes in this project had been

designed, engineered and implemented by POWERGRID, and local and foreign contractors

carried out supply and installation works. The implementation arrangements, as described in

the PAD, also included the use of the practices institutionalized under the previous loans,

including institutional oversight by the Ministry of Power (MoP) and the Ministry of Finance

(MoF), in addition to regular portfolio reviews with the World Bank. The CEA had also

contributed to this project in terms of sector planning, as noted earlier. The CERC was

responsible for tariff formulation and notification as well as sectoral regulation at the central

level. On the ground, the implementation of this project benefited from the technical capability

of POWERGRID and its past experience in World Bank-financed projects.

In addition to adherence to the World Bank procurement guidelines, POWERGRID's

managerial, operational culture and project management allowed for an effective monitoring of

implementation. The use of Integrated Project Management and Control System (IPMCS)

and the project unit‟s planning and problem-solving capability were instrumental in addressing

and solving problems as they occurred.

Close supervision by the World Bank team with day-to-day responsibilities fully delegated to

Delhi-based staff, who benefitted from an excellent relationship with and effective support by

POWERGRID‟s staff at field offices, also contributed to an efficient monitoring of project

components and timely completion of the project. Both parties ensured that supervision

8 As per GoI‟s directive, since October 2010, the entire system operation that includes NLDC and all the RLDCs is now

operated and managed by a fully owned subsidiary of POWERGRID known as Power System Operation Corporation

Limited (POSOCO) that was constituted in March 2009. POSOCO became fully functional from October 2010.

8

focused on resolving key project implementation issues, including physical implementation of

transmission schemes and compliance with environmental and social safeguards (issues of

forestry clearance and resettlement), financial performance and arrears collection objectives.

The World Bank carried out a total of seven implementation support missions, including site

visits.

3. Monitoring and Evaluation Design, Implementation, and Utilization

Monitoring and Evaluation (M&E) Design: Arrangements for M&E of the project consisted

of targets that were linked to the completion of the transmission schemes and their impacts

over a given timeframe. In addition, the design of the M&E framework was intended to

provide a comprehensive view on POWERGRID‟s performance from every aspect. Moreover,

indicators additional to KPIs and covenanted targets were also agreed upon with the World

Bank to objectively measure improvements in power sector performance as well as

POWERGRID's corporate performance. POWERGRID demonstrated satisfactory performance

through successfully meeting all legal and financial covenants, outperforming the outcome

indicator for the project, robust financial performance at the entity level and sound operational

parameters. Moreover, listing of POWERGRID on the Indian Stock Exchange introduced

external monitoring checks on the company, ensuring efficient implementation of its

investments, which was the objective of monitoring additional indicators under the project.

Hence, given POWERGRID‟s satisfactory performance in achieving and reporting such

indicators, these were decided to be discontinued during the MTR. The M&E framework also

included actual baseline data (for 2005) and focused on annual monitoring and regular

reporting of the progress in achievement of PDOs and project outputs. The targets for

completion of investment projects consisted of physical achievements as well as their impacts

on the performance of the transmission system.

During the MTR, gaps in achieving the transmission capacity targets (ckm) due to factors

beyond the control of POWERGRID were noted. Although this indicator outperformed its

intermediate targets, its end year targets were revised downwards by 4.7% (from 84,000 ckm

to 80,000ckm) during the MTR due to right-of-way (ROW) issues and delays in obtaining

forest clearances, especially after notification of GoI regarding the FRA, in August 2009.

Under the FRA, POWERGRID is required to take no-objection from elected stakeholders and

officials at the village level for all the proposals involving diversion of forest land under the

Forest (Conservation) Act. In view of such external factors, adjustments to the indicator were

made on the understanding that the end year targets for the active PSDP V (closing date in

FY2015), the most recent engagement with POWERGRID with the same PDO and KPIs as

PSDP III, would not be revised and remain achievable by POWERGRID.

M&E Implementation: Data collection adhered to the PAD guidelines and the borrower

information system. The data collected for progress achieved on the outcome (growth in power

exchange) and outputs indicators (transmission and transformation capacities) were monitored

through an agreed reporting format. The IPMCS provided POWERGRID with real-time

monitoring of physical installation of transmission lines and the NLDC (now operated and

managed by POSOCO) provided continuous monitoring and data for power exchanges and

transfers. POWERGRID established and provided the World Bank with a monthly report on

billing and collection, quarterly progress monitoring reports, quarterly financial management

reports, annual information about progress on key entity and sectoral performance indicators,

audited annual financial statements (within six months of the end of each financial year), and

such other information as the World Bank required. These arrangements did work in a

satisfactory manner under the project and were replicated in future projects (PSDP IV and

PSDP V) as well. In addition, the World Bank team periodically conducted site visits, to

9

monitor compliance with environmental and social safeguards, and engage in discussions

regarding benefits achieved from the investments. The World Bank team also interacted

regularly with various project stakeholders including MoP, MoF, CERC and the Power

Trading Corporation (PTC), which have a keen interest in seeing a sustained and high

performance from POWERGRID.

M&E Utilization: In addition to POWERGRID‟s own scoreboard that provided decision

makers with a retrospective analysis on performance and inputs for planning purposes, it

produced and submitted to the World Bank for review the Quarterly Project Report (QPR),

containing M&E data. The quarterly reports resulted in discussions on all aspects of the

project ranging from procurement, engineering, safeguards and finance to the corporate

monitoring group. These reports also provided a close monitoring of covenanted targets such

as the debt-equity ratio, self-financing ratio and payment of arrears. In addition to financial

performance evaluation, the technical data reporting mechanism also provided valuable

information to CERC, MoP, MoF, and PTC.

4. Safeguard and Fiduciary Compliance Environmental and Social Safeguards (ESS): PSDP III was rated “Category A” on

environmental safeguards management. Aspects linked to the ESS associated with the project

have been addressed in accordance with the corporate Environment and Social Policy and

Procedures (ESPP) developed by POWERGRID in 1998 and revised from time to time. The

corporate ESPP is in compliance with the World Bank's safeguards policies and its provisions

are systematically applied to all POWERGRID projects regardless of the source of financing.

The ESPP outlines POWERGRID's approach and commitment to deal with ESS issues relating

to its transmission schemes and lays out management procedures to address them. The ESPP

provides POWERGRID with a framework for identification, assessment and management of

ESS concerns at both organizational as well as field levels. Capacity building in the

Environmental and Social Management Department (ESMD) of POWERGRID contributed

significantly in the update of the corporate ESPP in 2005, which also benefitted from the

review of the legal and institutional framework, analysis of priority issues (gap analysis) in the

power transmission sector and wide ranging discussions including national and regional

consultations. The ESPP was further updated in 2009 to meet the requirements of the new

policies, revised rules and guidelines including those of multilateral funding agencies and to

adopt international best practices to preempt all possible safeguards issues. During this

revision, even wider stakeholder consultations, including with project affected people (PAPs)

and local communities, were carried out. The revised ESPP was adopted by the World Bank as

a pilot for Use of Country Systems (UCS) (OP 4.00) under PSDP V. The World Bank also

provided guidance and support to POWERGRID in formulating its policy on Corporate Social

Responsibility (CSR) that is now being implemented by POWERGRID across the country.

The safeguards process followed during the preparation and appraisal stages of a scheme under

the project included the preparation of an Initial Environmental Assessment Report (IEAR) for

these transmission schemes. These IEARs were reviewed by the World Bank and the

comments were taken into account in the Final Environmental Assessment Report (FEAR).

The World Bank team had also recommended actions for further strengthening the

environmental management practices through: (i) designation and assignment of

environmental management specialists in the field and regional offices to assist with

implementation and reporting of Environment Management Plan (EMP) implementation at

POWERGRID; (ii) undertaking of the yearly Independent Environmental Audit of a sample of

transmission lines and substations; and (iii) preparation of sustainability reports (prepared once

every two years). In addition, POWERGRID implemented specific actions to improve

10

implementation monitoring, such as tracking and collating information on actual compensatory

afforestation on the ground; updating of statutory clearances from the State Pollution Control

Board; extending application of the integrated Environment Management System (EMS) to

regional headquarters and project locations; and strengthening environmental training and

capacity building.

In full cognizance of social issues, POWERGRID ensures that its projects do not result in

physical displacement of the local population. The same principles were followed for PSDP III

as well. Where land appropriation was required, ESPP detailed out the process to be followed

during the preparation and appraisal stages of a scheme under the project. This included

undertaking social assessment of areas impacted by substations (where appropriation of land

was involved) and preparation of a Rehabilitation Action Plan (RAP). These RAPs also

included community development activities to help improve the socioeconomic status of the

communities living in the vicinity of the substations. In addition, these communities were

provided access to wage employment opportunities (including small contracts , particularly

during operation and maintenance (O&M) of substations) both in the construction and

operation of the substation. Under PSDP III, social assessment and preparation of RAP was

done for Wardha substation. This approach was reviewed by the World Bank and supervised

during implementation. Besides the regular monitoring of the RAP implementation by the

ESMD, an external agency was engaged to undertake an impact assessment (refer Annex 7 for

Terms of Reference) to assess the effectiveness of the RAP implementation and especially that

of the community development works. The impact assessment undertaken, so far, of the RAP

implementation has revealed an improvement of the socioeconomic status of a majority of the

affected people, reflecting intensive and focused efforts being made by POWERGRID.

Issues related to the implementation of FEAR provisions concerning compliance with the

Forest (Conservation) Act (beyond the control of POWERGRID) and of RAP: Although

POWERGRID‟s safeguards policies provide for appropriate actions and compensations, in the

case of afforestation, forest clearances need to be approved by the Ministry of Environment

and Forests (MoEF). These applications generally take a long time to be reviewed and

approved by MoEF on the recommendation of the Forest Advisory Committee (FAC). As this

process had been suspended during the period starting October 2006 to October 2007, when

the Supreme Court had halted the constitution of FAC, no forest proposals were processed for

approval. This resulted in delaying the FEAR submission dates and, consequently, also

delayed works for the transmission lines by about two to three years (though none of the lines

under PSDP III were substantially impacted). Further, the implementation of the RAP was

delayed due to the prolonged process involved in acquiring land and extending resettlement

entitlements to affected people by the local district administration. The implementation of the

community development component of the RAP was also unduly delayed due to staffing

constraints faced by POWERGRID at the regional level for following up with the district

administration. Towards the end of 2008, the rating for overall safeguard compliance was

downgraded to moderately satisfactory, partly due to external factors and partly due to

POWERGRID. To improve safeguards performance, POWERGRID was advised to strengthen

its ESMD. In response, POWERGRID started taking measures to strengthen its ESMD both at

its Head Office and at regional offices to manage ESS concerns of the projects. On

environmental issues, the focus was on two specific aspects related to forests: (i) coordination

with MoEF to reduce delays in obtaining clearances under the Forest (Conservation) Act; and

(ii) coordination with the recently formed state-level Compensatory Afforestation Management

and Planning Authorities (CAMPAs) to monitor the plantations to be carried out as part of

compensation. In parallel, POWERGRID, through MoP, requested MoEF to streamline the

clearance process under the Forest (Conservation) Act. The decision is still under review by

MoEF.

11

On social issues, the main concern was reaching an agreement with the district administration

on compensation norms that were acceptable to PAPs. POWERGRID started working on

alternatives to the regular land acquisition process, including „consent award,‟ and

demonstrated its success in Raichur substation (under PSDP V). Given the actions taken by

POWERGRID, the rating was upgraded to satisfactory in early 2011.

Corporate Governance and Financial Management (FM): As a part of the exercise to

benchmark itself with major international companies in the transmission industry,

POWERGRID requested the World Bank in 2006 to conduct a financial accountability review

and an analysis of its corporate governance. The report concluded that POWERGRID's FM

arrangements ranked suitably with peers in India. However, to become globally competitive,

there was a need to enhance financial accountability and corporate governance norms . As part

of the preparation for the PSDP III loan, an action plan was agreed upon to further build

POWERGRID‟s institutional FM capacity (in the areas of financial accountability,

transparency, corporate governance and internal controls), and it was implemented with

excellent results. This enabled POWERGRID to tap into equity markets by making an Initial

Public Offer (IPO) in the Indian equity markets and meet the required corporate governance

norms as laid out in the Listing Agreement with the Securities and Exchange Board of India

(SEBI) in a timely manner. FM arrangements under PSDP III were implemented in a

satisfactory manner. POWERGRID‟s FM systems were considered to accurately account and

report on the project resources and expenditures under the various projects financed by the

World Bank. POWERGRID‟s FM systems (housed as a part of its general accounting and

financial systems) generated financial and other quarterly progress reports on the project. The

reporting framework for the project included a quarterly Project Management Report (PMR),

an equivalent of the interim unaudited financial report, prepared by POWERGRID in an

agreed format with the World Bank (detailed in the Project Implementation Plan). PMRs were

prepared from information generated by POWERGRID's FM system and Management

Information System (MIS) and rated satisfactory. POWERGRID strengthened its FM

capabilities during its partnership with the World Bank and was able to enhance the financial

accountability and transparency of its operations. The FM performance under previous loans

was also rated satisfactory.

Issues and Improvements to the FM System: In mid-2009, for a brief period, the rating for

FM was downgraded to moderately satisfactory by the World Bank due to issues in the project

audit (regarding the need for enhancing the terms of reference of audits and submission of the

management letter). POWERGRID undertook corrective measures and continued to fine tune

its FM system by strengthening its internal audit framework and the role of the audit

committee to reach the levels of its international counterparts. As part of strengthening its FM

capacity, a new computerized FM system was rolled out at all the units. In mid-2010, the

rating was then upgraded to fully satisfactory as substantial improvements were noted in terms

of undertaking operational audits (a unique concept that has now been mainstreamed across the

organization), initiation of Enterprise Resource Planning (ERP) across the company,

strengthening of the internal audit department and undertaking of the Enterprise Risk

Management (ERM) exercise (Refer Annex 7 of PAD for details on FM arrangements).

POWERGRID constituted a high-level team consisting of experts from finance, technical,

contracts, and operations departments to carry out operational audits of selected schemes in a

holistic manner to review and verify overall satisfactory administration of contracts in

accordance with the contract documents.

Procurement: Procurement under PSDP III was generally satisfactory with no major issues

faced during the implementation, though one of the contracts (a spillover of a PSDP II contract

funded under PSDP III) was referred to Integrity Vice-Presidency (INT) of the World Bank.

12

The pace of procurement activities was in accordance with the project implementation

schedule. Some of the schemes under the project were either uniquely positioned or related to

an emerging transmission technology in India.9 Based on the World Bank‟s Standard Bidding

Documents, the World Bank team worked together with POWERGRID in preparing various

sections of POWERGRID‟s bidding documents for different schemes. This facilitated

POWERGRID in improving its bidding documents under World Bank funding and

harmonizing such bidding documents for procurement using its own resources.10

Although POWERGRID had initially said that it had some concerns over using the new

guidelines for evaluation of the bids under “supply and installation” contracts, the issue was

resolved and procurement proceeded in a satisfactory manner, consistent with the World

Bank‟s procurement guidelines. The Procurement Plan was prepared during appraisal and

bidding documents for all the packages under the core schemes were ready by negotiation.

Furthermore, as a step towards increasing transparency, POWERGRID had launched a section

on procurement on their corporate website, where all active tenders are being posted .

5. Post-completion Operation/Next Phase

Investments financed by the loan were successfully and progressively commissioned between

2009 and 2011, were integrated with the National Grid and their operation is being

continuously monitored and maintained by POWERGRID. The NLDC was also completed in

March 2009 and started commercial operation in April 2009. It is now operated and managed

by POSOCO, a fully owned subsidiary of POWERGRID. POWERGRID‟s technical and

managerial capabilities oversee all specialized areas of the power transmission business, and

its infrastructure moves about 50 percent of the total power generated in India through 82,355

ckm of transmission lines (as of March 2011), 135 Extra-High Voltage (EHV) and HVDC

substations and controls a transformation capacity of about 93,050 MVA. During FY 2010-11,

POWERGRID‟s inter-regional capacity of National Grid stood at 22,400 MW (later increased

to 23,800 MW in July 2011) facilitating an inter-regional energy exchange of 56,747 MU.

Operational capacity allows the company to achieve a transmission system availability of 99.8

percent (FY2011) and its maintenance capacity contains the number of tripping per line at 1.27

against a Memorandum of Understanding (MoU), signed with GoI for FY2011, target of 2.5.

The preventive maintenance program ensures that equipment condition is assessed periodically

using condition assessment techniques. These activities are planned well in advance through

the implementation of annual maintenance plans. For further improvement in operational

efficiency, a „National Transmission Asset Management Center‟ is being established to control

and operate most of the substations remotely and the establishment of a „Maintenance Service

Hub‟ facility has commenced, which caters to the maintenance needs of a group of substations

rather than placing staff in each substation. This will ensure optimal utilization of manpower

and resources and will also reduce the response time in case of faults and breakdowns.

In line with the latest CAS (2009-12), and through a series of additional loans to

POWERGRID (PSDP IV and PSDP V) and other sector entities, the World Bank shall

continue to support the ongoing sector reform agenda and further strengthen POWERGRID's

9 For example, the Balia-Bhiwadi HVDC Bipole Transmission System at ±500 kV voltage level, transferring 2,500 MW,

was a unique project of its kind considering the complexity of procurement of the HVDC Terminal Package. Similarly,

some of the packages involved procurement of 765 kV equipment, which was an emerging voltage level in the

transmission system in India at that time. 10 For instance, during the initial period of the project, POWERGRID often observed inconsistencies across the various

sections of the bids submitted by the bidders resulting in problems in ascertaining the responsiveness of the bids. With

the concurrence of the World Bank, POWERGRID incorporated a provision on „Order of Preference‟ to address this

concern.

13

institutional and transmission capacities, to align with the standards of global operators. As a

matter of fact, POWERGRID belongs to the selective group of Very Large Power Grid

Operators (VLPGO), which is a voluntary initiative of the world‟s largest Power Grid

Operators, representing together more than 60 percent of the electricity demand in the world.

VLPGO was created in 2004, following several blackouts across the world, to investigate

fundamental issues of common interest to its members and to develop joint action plans

addressing the improvement of power system security. In 2009, VLPGO became a formal

organization, with the aim of serving as leader and catalyst in the transition of the electric

power industry to the power grids of the 21st century. Further, the World Bank Group is

assisting POWERGRID to leverage international financial markets to fund its 12th

Five Year

plan (2012-2017) investment requirement estimated to be to the tune of US$22 billion.

World Bank’s Follow up on Project’s Sustainability: The project KPIs: (i) transmission

capacity development (in ckm); (ii) transformation capacity (in MVA); and (iii) power

exchange across regions (in MU) are being monitored and updated through implementation of

PSDP IV and PSDP V that is in compliance with their respective M&E systems.

Section 3: Assessment of Outcomes

1. Relevance of Project Design and Objectives

The World Bank‟s support for this project was highly relevant and the PDO reflects the importance

of achieving further expansion and transformation in India‟s power sector infrastructure. The

project‟s design reflected sector priorities and focused on the need for more investments not only

in transmission but also in generation. Moreover, the completion of the NLDC demonstrated that

the power sector requires further such structural, technical and operational improvements. As

proven in previous projects that institutional transformation was needed in parallel with physical

investments, this project‟s achievements also responded to the country‟s needs and attracted more

financing from the private sector. Strengthening and further development of the National Grid

aimed at optimal utilization of existing scarce resources that are unevenly distributed across

regions in the country. The assets created under the project were to transfer power from generating

stations in power surplus regions to the load centers in power deficit regions and, hence, improve

access to reliable electricity by the end consumers.

The current CAS (2009-12) for India provides a framework to deal with the challenges of

achieving rapid, inclusive growth, of ensuring sustainable development, and improving service

delivery, with a cross-cutting focus on improving the effectiveness of public spending, inclusive of

infrastructure, and achieving results that can be monitored, all of which will help scale up the

impact of the World Bank Group (WBG) assistance. The power sector is still at the core of India‟s

growth and the WBG continues to seek (i) to deploy its dialog, analytical work, lending,

engagement with GoI and other stakeholders such as the private sector, and (ii) to build capacity

(physical and institutional) of the power sector in the most effective and efficient manner to drive

growth so that economic activities can create jobs and distribute income. The current CAS (2009-

12) for India reaffirms the same priorities as the previous CAS programs with the power

infrastructure at the core of project finance, especially in light of capital and FDI shortages

resulting from the economic and financial crises of 2008 and 2011. Thus, it is within this assistance

framework that this project‟s achievements are to be assessed.

2. Achievement of Project/Program Development Objectives

14

The achievement of the PDO is rated highly satisfactory. This rating is based on the completion of

all physical components (outputs) linked to the transmission schemes which have resulted in the

achievement of outcomes as outlined in the results framework of the project. The PDO consisted of

the “strengthening of the transmission system in order to increase reliable power exchanges

between the regions and states.”

The overall achievement of this objective is highly satisfactory based on the project‟s single

outcome indicator that assessed the achievement of the PDO towards the end of the project which

was growth in power exchange between the regions (in MU). The indicator outperformed its end

year targets (target: 52,000 MU; actual: 56,747 MU). In addition, three intermediate indicators

were also monitored during the project implementation: (i) growth in transformation capacity (in

MVA) that also outperformed its end year targets (target: 85,000MVA; actual: 93,050MVA);(ii)

growth in transmission capacity (in ckm) that were revised during MTR due to external factors but

outperformed revised targets (target: 80,000ckm; actual: 82,355ckm);and (iii) completion of

NLDC that was achieved in scheduled time.

The commissioning of transmission schemes financed through the project have resulted in

strengthening of the National Grid in terms of interregional as well as intraregional capacity

including the creation of a parallel transmission corridor in the Northern-Western Region. The

scope of the schemes (core and candidate) under PSDP III is given under „Original Components‟ in

Section 1. Further details regarding the completion of these components and achievements of PDO

are given in Annex 3.

Spillover Works under PSDP II - Completion of NLDC: The transmission subsector benefitted

immensely from a modern and completely computerized NLDC along with the already existing

Unified Load Dispatch and Communication System in various regions. NLDC is the apex body to

ensure integrated and optimal operation of the National Grid and smooth transfer of power

between the regions. This system also ensures monitoring of scheduling and dispatching of power

as well as the security and reliability of the grid and coordination among power exchanges.

Considering the increased complexity of grid operation of such a large network in the country,

facilities at NLDC and the five Regional Load Despatch Centers (RLDCs) are being upgraded on a

regular basis. As a result of POWERGRID‟s continuous effort, the Indian grid has not experienced

any major grid disturbances in the last eight years (since 2003-04). As per GoI‟s directive, this

along with other load dispatch centres at regional and state level is managed and operated by

POSOCO, a fully owned subsidiary of POWERGRID.

The completion of other spillover works under the Eastern Region and Western Region System

Coordination and Control Projects has resulted in the improvement of real time grid management

and economic dispatch of power at the regional level. Further, the completion of balance elements

has facilitated the strengthening of the transmission system. The addition of these state-of-the-art

communication systems (with the use of optical fiber composite overheard ground wire, commonly

called OPGW) and the extensive national coverage of the transmission lines have created

opportunities for POWERGRID to diversify into the telecommunication sector, by leveraging its

countrywide transmission network. The diversification into the telecom business has created a new

business opportunity for the company.

3. Efficiency

Economic and Financial Analysis

At appraisal, the economic and financial analysis for the cores schemes was carried out and they

were justified on the ground that their economic rates of return (ERRs) were higher than the

15

opportunity cost of capital of 12 percent. The ERRs were in the range of 14.83 percent to 15.96

percent in the base case and 10.46 percent to 11.06 percent in the most adverse case.

Analysis at Completion: Using actual cost figures and applicable tariffs, the analysis covers all

schemes (core and candidate). It also takes into account changes in tariffs and return on equity

(ROE) objectives. During the project implementation period, the CERC tariff norms were revised

in 2009 to be applicable until 2014. Since all the schemes under PSDP III were commissioned after

2009, the new tariff norms were applicable. The tariff for the schemes is based on a cost plus tariff

regime. The major change in the revised tariff norms is reflected in an increase in the rate of ROE

from 14 percent (2004) to 15.5 percent (2009), increase in rate of depreciation from around 3.6

percent to 5.28 percent, and upward revision of O&M rates. This has had a positive impact on the

revenue generated from the schemes and is reflected accordingly in the ERR and ROE calculated

and presented in detail in Annex 4.

ERR: The methodology used during the appraisal was also adopted at the completion to calculate the ERR. The ERR has varied between 12.09 percent for the Seoni-Wardha-

Akola-Aurangabad Transmission System to 23.85 percent for NWTC. In all the cases, the

ERR is above the opportunity cost of the capital at 12 percent; and

ROE: ROE has been taken as a proxy for the financial rate of return as was taken during the appraisal. The methodology used during appraisal was adopted to calculate ROE at

completion. It has varied from 15.76 percent for the Balia-Bhiwadi HVDC transmission

system to 25.96 percent for NWTC. In all cases, ROE was higher than the regulated ROE

at 15.5 percent.

The financial analysis was also carried out at the entity level and it is observed that all financial

ratios (presented in Annex 4) are robust. POWERGRID also comfortably complied with all the

financial and legal covenants. The debt-equity ratio was always lower than 80:20. The self-

financing ratio was also greater than 20 percent for all years from 2006 till 2011. Accounts

receivable over the project life were also much lower than three months, stipulated in the Legal

Covenants. POWERGRID‟s receivables as of March 2011 stand at 0.15 months of average billing.

4. Justification of Overall Outcome Rating

Rating: Highly Satisfactory

The overall rating of the project is highly satisfactory on the basis of its high relevance (as

discussed in Section 3.1), highly satisfactory achievement of the PDO (as discussed in Section

3.2), and efficient implementation (as discussed in Section 2.2). During the project period,

POWERGRID‟s performance has significantly improved in terms of safeguards

(implementation of ESPP across all projects irrespective of source of financing, adoption of

ESPP by the World Bank as a pilot for UCS under PSDP V, development of a CSR policy,

strengthening of ESMD, undertaking yearly independent environment audit, preparing the

sustainability report), strengthening of FM and corporate governance aspects („Navratna‟

status, strengthening of the internal audit department, initiation of ERP, implementation of

ERM, listing on the stock exchange, mainstreaming the operational audit across organization),

procurement (adoption of model bidding documents to facilitate faster turnaround time,

conducting vendor conferences), project management (monitoring through IPMCS, regular

reporting and close monitoring), and technical advancements (introducing the 765 kV

transmission system, commissioning of NLDC, developing of the 1,200 kV technology

financed under PSDP V). It stands today as a stronger company on technical, managerial and

16

institutional fronts and has undergone a tremendous transformation to reach the coveted status

of a corporation with international stature. The highly satisfactory rating is also justified by the

sustainability of the project components. In the coming years, the role of NLDC will become

more important with further development of the electricity trading market as the transmission

schemes financed by this loan as well as subsequent loans enable transfer of large quantities of

power across and between the regions of the country. Moreover, the outcome indicator (growth

in power exchange across regions) targets for the project were outperformed during the project

period.

5. Overarching Themes, Other Outcomes and Impacts (if any)

(a) Poverty Impacts, Gender Aspects, and Social Development This project will increase the availability of electricity to the Indian people and contribute to an

increase in consumers‟ connection rate to the system, especially in regions where power

availability has been constrained by the lack of adequate transmission systems. Development and

strengthening of the National Grid through reliable and stable operation of regional grids facilitates

the timely transfer of power from surplus regions to deficit regions leading to optimal utilization of

scarce energy resources. Although POWERGRID‟s network does not link directly to the end

consumer, it facilitates power evacuation from central sector generating stations and interregional

power exchange, resulting in increased availability to and access to reliable electricity by the

connected consumers. The National Grid has also helped in connecting approximately 100 captive

power plants across the country enabling them to avail of benefits of open access in FY2011.

POWERGRID also contributes every year a certain percentage of its profit after tax (PAT) for the

preceding year towards the non-lapsable budget for CSR activities, such as education, health, and

infrastructure development. POWERGRID assesses the project impacts in zones limited to the

areas impacted by its substations. This is done through the assessment of the results of the

implementation of the RAP provisions in the project area affected by the substations. Though it is a

very small proportion of the entire project undertaken by POWERGRID, the impact assessment

undertaken, so far, of the RAP implementation has revealed an improvement of the socioeconomic

status of a majority of the affected people reflecting intensive efforts being put by POWERGRID.

In selected states, the company is also implementing the Rajiv Gandhi Grameen Vidyutikaran

Yojana (RGGVY), a GoI initiative to provide rural electricity infrastructure and household

electrification.

(b) Institutional Change/Strengthening

POWERGRID continues to maintain high operational standards and is financially stable. It

operated around 82,355 ckm of transmission lines along with 135 substations as on March 31,

2011, with an average availability of the transmission systems of 99.8 percent during FY2011.

POWERGRID continues to wheel about 50 percent of the total power generated in the country

through its transmission network. It also operates a 20,733 kilometer (km) of telecom optical fiber

network and functions as an internet service provider. POWERGRID‟s financial performance

continues to be healthy with a PAT, in FY2011, higher by more than 30 percent of the PAT in

FY2010, while total gross revenues increased by more than 17 percent over the previous year.

POWERGRID uses effectively the mechanism of Letter of Credit coverage for payment security

and curtailment of supply in case of default. As a result, POWERGRID‟s receivables as of March

2011 stood at 0.15 months of average billing.

A high-level review of corporate governance and financial accountability, conducted in 2005 by

POWERGRID, developed an improvement action plan resulting in POWERGRID becoming a

benchmark for corporate governance in India, especially for state- owned enterprises. In October

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2007, POWERGRID, with its initial IPO, became a listed company which proved to be a milestone

in further improving its FM and corporate governance performance. In May 2008, POWERGRID

was notified as a Navratna company and higher powers were given to the Board of the company to

undertake investment decisions on its own. In November 2010, POWERGRID issued its follow-on

public offer (FPO) that received an overwhelming response and was oversubscribed 15 times.

Various rating agencies in India endorse the rating of POWERGRID‟s outlook as „stable‟

indicating the highest degree of safety with regard to timely servicing of debt. Over the project

implementation period, POWERGRID has made substantial progress in some key areas including

corporate governance, financial accounting, internal audit, and ERM, successfully completing

competitive selection of project auditors and piloting the Operational Audits.

Its ESPP is followed across all projects irrespective of financing and has become the benchmark in

the industry. It was adopted under the UCS of the World Bank during the preparation of PSDP V.

Environmental considerations have been effectively mainstreamed in POWERGRID‟s operations,

as demonstrated by the adaptation of transmission tower designs to reduce impacts in sensitive

habitats such as wildlife sanctuaries. Another enhancement which has since been mainstreamed in

substation designs is the provision of rainwater collection and harvesting systems in areas with low

groundwater tables. POWERGRID also follows a proactive approach on tree plantation in its

substations that is much higher than the mandatory requirement under the law. On social aspects,

POWERGRID has substantially reduced the land required to establish a substation by improved

design and layout. Other mitigation measures put in place by POWERGRID include appropriate

handling and management of wastes and workers‟ safety related provisions. To inculcate the

values that its ESPP enshrines, POWERGRID regularly trains its staff on these aspects, and a

substantial part of the annual curriculum is devoted to the understanding and implementation of the

ESPP, reflecting the utility‟s concerted position and commitment to minimize, as much as possible,

the overall environmental and social footprint of its operations. POWERGRID has also developed

a CSR Policy and is also the first among World Bank clients to have published its first

Sustainability Report covering its environment and social performance in 2009.

POWERGRID, in association with the World Bank, developed the Model Bidding documents that

are used for procurement in POWERGRID, irrespective of the source of funding, and has, thus,

reduced the turnaround time involved in the administrative aspect of the bidding process.

(c) Other Unintended Outcomes and Impacts

As mentioned above, POWERGRID became a listed company and was accorded the „Navratna‟

status during the project implementation period. The Company has also undertaken the

development of certain transmission lines with private parties through public-private Joint

Ventures (JV). Refer to Annex 3 for further details on various JVs.

Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

Not Applicable

Section 4: Assessment of Risk to Development Outcome

1. Assessment of Risk to Development Outcome Rating: Low or Negligible

The overall level of risk to the development outcome is rated low. This assessment is based on

the sustainability of the physical investments financed by the loan as well as on the financial,

operational and technical strength of POWERGRID.

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Operations: The completed transmission infrastructure is being and will be operated and

maintained in a sustainable manner by POWERGRID, which is an efficient operator with

advanced technical and operational capabilities. The risk level is also rated low based on the

sustainability of POWERGRID's enhanced institutional capacity and managerial performance

which should enable the company to continue to achieve high performance levels. The reliability

of the grid has been enhanced. Since 2003-04, no major grid disturbances have been reported on

the Indian power grid. This is also demonstrated by the fact that, during FY2011, the availability

of the transmission system was 99.8 percent. Measures adopted by POWERGRID have resulted

in an increased interregional power exchange that contributes towards an even distribution of

resources by meeting the power demand in the deficit region from the power surplus regions. It

has increased from 35,000 MU in 2005-06 to 56,747 MU in 2010-11, an increase of almost 62

percent. The National Grid so established has an interregional power transfer capacity of about

23,800 MW (as in July 2011), planned to be increased to 28,000 MW by end of the 11th

Five

Year Plan (2012), making it one of the largest synchronous grids in the world with an installed

generation capacity of about 117 gigawatt (GW). Moreover, POWERGRID‟s growth strategy is

to continue to rapidly increase its capacity to tap into the renewable energy sources of the country

to lower the carbon footprint of the sector and remain the reliable central transmission utility as

well as an enabler of steady growth of the electricity market for the benefit of the entire economy.

As on March 31, 2011, POWERGRID had 25 new transmission projects in various stages of

implementation. These projects involve approximately 8,000 ckm of transmission lines and 23

substations with a total power transformation capacity of approximately 32,000 MVA.

Tariffs and Revenues: The risk associated with these aspects is low. Revenue generation is

ensured by adequate tariffs and arrears recovery due to the implementation of the tripartite

agreement, Letter of Credit, and improvements in commercial discipline. The current tariffs (as

per CERC‟s tariff policy of 2009) will remain in place until 2014, and should ensure that

POWERGRID generates revenues in line with ROE requirements (15.5 percent) and carries on

with future expansion objectives.

Institutional Capacity: The risk associated with this aspect is low. Over the implementation

period, POWERGRID has made substantial progress. As discussed in Section 3.5.b,

POWERGRID has continuously improved its corporate management model through adoption of

international operational standards and implementation of a planning and strategic business

model necessary for its growth and sustained harnessing of the country‟s renewable energy

sources, such as wind and hydropower. In addition to POWERGRID‟s IPMCS, its ESPP was

strengthened during the project period and was finally adopted by the World Bank as a pilot

under its UCS policy (OP. 4.00) during the preparation of PSDP V. All these measures ensure

that the risk will remain low for the foreseeable future.

Section 5: Assessment of World Bank and Borrower Performance

1. Assessment of World Bank and Borrower Performance

World Bank

(a) World Bank Performance in Ensuring Quality at Entry

Rating: Satisfactory

The World Bank’s performance during identification, preparation and appraisal of the project is

rated satisfactory. The World Bank had acquired valuable experience through PSDP I and II and

its knowledge of the Indian power sector resulted in the formulation of a targeted PDO in keeping

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with the strategic transformation of the transmission subsector sustained by POWERGRID‟s

operational and institutional capabilities. The World Bank established a strong partnership and

good working relationship with all the stakeholders including CERC, MoP, MoF and PTC. This

helped the World Bank team, POWERGRID and GoI authorities to define feasible component

options and setup an implementation framework in line with the World Bank‟s procurement and

applicable safeguards. The definition of PDO focused on outcomes for which POWERGRID was

held accountable and risk assessment focused on appropriate risks while the ratings were realistic.

The preparation team also ensured that all required steps were taken by GoI and POWERGRID,

including the final project implementation plan incorporating details of investment subprojects.

The World Bank team also carried out safeguards and compliance measures assessment. Tests

were carried out during the preparation phase including a financial management assessment (refer

Annex 7 of PAD). The World Bank helped the borrower formulate the required ESPP framework

needed for project implementation. In addition, ESPP assessment made sure that POWERGRID