World Bank Document · a gas-based combined cycle (CCGT) plant of 180 MW at the Trombay thermal...

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 15427

IMPLEMENTATION COMPLETION REPORT

INDIA

PRIVATE POWER UTILITIES (TEC) PROJECT(LOAN 3239-IN)

MARCH 12, 1996

Energy and Infrastructure Operations DivisionCountry Department IISouth Asia Region

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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COUNTRY EXCHANGE RATES AND ABBREVIATIONS

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

RUPEE (Rs.)/US $ EXCHANGE RATES AND CPI (Yearly Averages)Exchange Rate

Fiscal Year Rupees/US$FY 89/90 (SAR) 17.50FY 90/91 22.74FY 91/92 26.20FY 92/93 31.20FY93/94 31.46FY 94/95 32.30

Average Rate during project implementation period: US$ I = Rs. 21.60TEC Fiscal Year: April I - March 31

MEASURES AND EQUIVALENTS

I Ton (t) = I metric tonne = 1,000 Kg = 2,204 lbs.1 Kilovolt = 1,000 volts (V)1 Kilovolt ampere (kVA) = 1,000 volt-amperes (VA)I Kilowatt-hour (kWh) = 1,000 watt-hours1 Megawatt-hour (MWh) = 1,000 kilowatt-hours1 Gigawatt-hour (GWh) = 1,000,000 kilowatt-hours

ABBREVIATIONS A-ND ACRONYMS

The Act Electricity (Supply) Act of 1948, as amendedCAS : Country Assistance StrategyCCGT :Combined Cycle Gas Turbine PlantCEA : Central Electricity AuthorityFGD : Flue Gas DesulfurizationGOI Govemment of IndiaGOM : Govemment of MaharashtraIBRD : Intemational Bank for Reconstruction and DevelopmentICB : Intemational Competitive BiddingICR : Implementation Completion ReportIFC : Intemational Finance CorporationONGC : Oil and Natural Gas CorporationQA/QC Quality Assurance/Quality ControlMSEB : Maharashtra State Electricity BoardTEC : Tata Electric Companies

FOR OFFICIAL USE ONLY

INDIAPRIVATE POWER UTILITIES (TEC) PROJECT

(LOAN 3239-IN)


Table of Contents

PREFACE

EVALUATION SUMMARY ........................................................ iIntroduction ....................................................... iObjectives ...................................................... iImplementation Experience and Results ....................................................... itSummary of Findings, Future Operations, and Key Lessons Learned ................. ................. iii

PART 1: PROJECT IMPLEMENTATION ASSESSMENT ....................................................... IStatement/Evaluation of Objectives ....................................................... 1Achievement of Objective ....................................................... 2Overall Results ....................................................... 2Major Factors Affecting the Project ....................................................... 3Project Sustainability ....................................................... 5Bank Performance ...................................................... 5Borrower Performance ....................................................... 5Cofinancier Performance ....................................................... 6Summary Assessment of Outcome ............ 6..........................................6Future Operation ....................................................... 6Key Lessons Learned ....................................................... 6Evaluation of Program Objective Categories ....................................................... 7Private Sector Participation ....................................................... 7Financial Objectives ....................................................... 8Environmental Objectives ....................................................... 8

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

PART II: STATISTICAL TABLES

Table 1 - Summary of AssessmentsTable 2 - Related Bank Loans/CreditsTable 3 - Project TimetableTable 4A- Loan Disbursements (IBRD)Table 4B - Loan Disbursements (IFC)Table 5 - Indicators for Project ImplementationTable 6 - Key Indicators for Project OperationTable 7A- Project CostsTable 7B- Project FinancingTable 8 - Economic Costs and BenefitsTable 9 - Status of Legal CovenantsTable 10 - Bank Resources: Staff InputsTable 11 - Bank Resources : Missions

APPENDIX-A : Aide-Memoire of the ICR MissionAPPENDIX-B Project Review from Borrower's PerspectiveAPPENDIX-C Guarantor and Cofinancier Contribution to the ICRAPPENDIX D TEC's Financial Status and Financial TablesAPPENDIX E Environmental Objectives

INDIAPRIVATE POWER UTlIES (TEC) PROJECT

(LOAN 3239-JN)


Preface

This is the Implementation Completion Report (ICR) for the Private Power Utilities (TEC)Project for the Tata Electric Companies (TEC) in India, for which Loan 3239-IN in the amount of US$98 million equivalent was signed on October 3, 1990, and made effective September 30, 1991. Theloan closed as stipulated in the Loan Agreement, on June 30, 1995. The loan amount was fillydisbursed by December 3, 1995. Cofinancing was provided by the International Finance Corporation(IFC), Switzerland and a conglomerate of local banks led by the Industrial Credit and InvestmentCorporation of India Ltd. (ICICI). The balance amount was met by the Tata Electric Companies(TEC) from their own intemal resources, and through the issuance of convertible debentures in thedomestic financial markets.

The ICR was prepared by Mihir Mitra (Consultant) and Argun Ceyhan (Task Manager) ofSA2EI of the South Asia Region and reviewed by Jean-Francois Bauer, Division Chief, SA2EI andKazuko Uchimura, Project Adviser, SA2DR. The Borrower, Guarantor and Cofinanciers providedcomments that are included in the appendices to this ICR'.

Preparation of this ICR started during the Bank's mission in September 1995. It is based onmaterial in the project file. The implementing agency, TEC, contributed to the preparation of the ICRby providing timely input for the statistical data and by preparing a detailed ICR for its own internalevaluation and archives. This latter ICR was placed in the Project Files.

In accordance with South Asia Region's general policy as regards the management of closingdates, the loan was closed as originally scheduled when TEC had incurred eligible expenditures tocover the whole amount of the loan, although one of the components (i.e., Bhira Pumped StorageScheme) was not completed. Satisfactory completion of this component will be reported to the Boardin due course.

The Borrower's contribution is given in Appendix B. When received, the Guarantor's and Cofinanciers' contributionswill be included in the ICR.


LOAN 3239-IN)


EVALUATION SUMMARY

Introduction

i. The principal challenge facing the Government of India (GOI) in the power sector lies inimproving the balance between expansion and efficiency improvement. Electricity demand in the1990s, projected to grow at approximately 9% per annum through 2000, continues to remainsupply-constrained. To meet the demand and improve supply quality, and given the enormousinvestment the power sector needed to sustain the demand growth, GOI decided to utilize theprivate sector's ability to implement major power projects.

ii. India is one of the few developing countries with a vibrant, even though small, private sectorpresence in public power supply. The Tata Electric Companies (TEC) represent the largest electricpower utility in the private sector in India and constitute one of the principal power systems in WesternIndia. TEC is composed of three utility companies: (i) The Tata Hydroelectric Power SupplyCompany Ltd., (ii) The Andhra Valley Power Supply Company Ltd., and (iii) The Tata PowerCompany Ltd., and the three companies conduct their business basically as one single entity. TECsupplies power to consumers in the highly industrialized area of the metropolitan city of Bombay. Thereliability of TEC's power supply and the quality of its service are high. It is a well-managedcorporation with strong financial performance and an excellent record of efficient management andoperation of its plants. The loan was made to the three companies forming the TEC, under theguarantee of India, acting by its President. The project was cofinanced by the Government ofSwitzerland, International Finance Corporation (IFC) and the Industrial Credit and InvestmentCorporation of India Ltd. (ICICI). This was the fifth IBRD loan to TEC, the IBRD-TEC relationsdating back to 1954, when the first IBRD loan to the Companies was approved.

Objectives

iii. The physical objectives of the project were to increase TEC's peak generating capacity2,reduce its dependence on the Maharashtra State Electricity Board (MSEB) for power to serve itsconsumers, reduce the average cost of generation in increasing the capacity utilization of TEC'sexisting thermal power plant at Trombay, mitigate the sulphur dioxide emissions (SO2) from the coaland oil burning Trombay Unit 5 3, and improve system reliability and quality of supply in the Bombayarea. In order to achieve these objectives, the physical components of the project included: (a) the

2 At appraisal TEC's own generating capacity was 1,613.5 MW, comprising 276 MW from the three hydro stations(Khopoli - 72 MW; Bhira - 132 MW, and, Bhivputi - 72 MW) and 1,337.5 MW from one thermal station with six units(Trombay - Units 1,2 and 3: 3x62.5 MW; Unit 4: 150 MW; and Units 5 and 6: 2x500 MW).

3 Funded under Ln. 1549-IN for the Third Trombay Thermal Power Project, approved in April 1978.

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addition of a pumped storage (PS) unit at TEC's existing Bhira hydroelectric station to generate 150MW of additional peak power to meet more of the increasing demand in the Bombay area and alsoincrease the capacity utilization of TEC's existing thermal generating units at Trombay by consumningoff-peak thermal power; (b) a 220 kV transmission line to carry this power to TEC's licensed areas; (c)a gas-based combined cycle (CCGT) plant of 180 MW at the Trombay thermal power station toreduce the average cost of generation (this unit would be Trombay Unit 7); (d) a second flue gasdesulfurization (FGD) unit to control SO2 emissions from Trombay Unit 5; and (e) review of designand technical specifications and supervision of construction of the Bhira PS scheme, as well as theacquisition of know-how for the FGD facility at Trombay. The institutional and sectoral objectiveswere to: (i) support increased private sector participation in the supply of power; and (ii) encourageimproved tariff structure and load management procedures for TEC's direct consumers.

Implementation Experience and Results

iv. Project implementation was vitiated by delays, much of which were beyond the control ofTEC. Delays of several months were caused by belated environmental clearance by the GOI for theCCGT plant resulting in the loan effectiveness date having to be extended three times and theimplementation schedule, as envisaged in the SAR, requiring to be extended accordingly. In 1984,when Trombay Unit 6 was cleared by GOI, GOM and MSEB, the oldest three units of 62.5 MW each4

were scheduled to be retired when Unit 6 was commissioned. Unit 6 was commissioned in 1990, but inview of the peak power shortage still prevailing in the Bombay area, GOM and MSEB agreed toextend Units 1, 2 and 3, until the CCGT plant (Unit 7) came on stream in FY94. GOI required muchlonger than anticipated at appraisal (in October 1990) to agree on this issue and grant the saidenvironmental clearance. Upon receipt of environmental clearance, the loan was made effective fromSeptember 30, 1991. However, physical implementation was speeded up and the loan was closed asper the original schedule on June 30, 1995. The loan amount was fully disbursed by December 3,1995.

v. The overall project implementation results have been satisfactory. Except for thecommissioning of the Bhira Pumped Storage Scheme, all other project components have been placedin commercial operation. TEC's peak generating capacity has increased with the commissioning of theCCGT plant, that has also caused the average cost of TEC's generation to decrease because of itssignificantly higher overall thermal efficiency, the additional FGD unit at Trombay has helped reduceemissions from the Trombay power station. TEC' s system reliability and quality of service haveimproved. The only physical objective that has not yet been realized is the improvement in capacityutilization of TEC's existing thermal generating units at Trombay, which would occur when the BhiraPS facility is placed in operation.

vi. The 150 MW Pumped Storage Unit was mechanically completed and the generator/motor hasoperated on synchronous condenser mode since March 1995. During wet commissioning tests, asection of the penstock ruptured and caused a serious setback to the project completion targets.Detailed investigation of the causes of failure has been undertaken by experts. Preliminary estimates

4 Units I and 2, were funded under Ln. 106-IN for the Trombay Power Project, approved in November 1954; Unit 3 wasfunded under Ln. 164-IN for the Second Trombay Power Project, approved in May 1957. Ullit 6 was funded under Ln.2452-IN for the Fourth Trombay Thermal Project, approved in June 1984.

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indicate that this facility can be prepared for commissioning tests by March/April 1996. The rating ofthe project will be revised when the final report is available and an addendum to this ICR will be issuedto record the findings as well as the measures taken to resolve the problem.

vii. The upgrading of the Bhira-Dharavi transmission line from 1 10 kV to 220 kV wasaccomplished ahead of schedule; the line was charged at 1 10 kV in June 1994. It was placed inoperation at 220 kV in February 1995.

viii. The gas turbine unit of the Trombay CCGT plant was placed in operation on schedule in July1993, but its operation could not be sustained due to non-availability of gas. First synchronization ofthe CCGT Plant in the combined cycle mode was achieved in December 1994 and upon satisfactoryconclusion of its performance test, the plant was placed in commercial operation in June 1995. Theplant is able to generate 203 MW. Its operation has been satisfactory.

ix. The second flue gas desulfurization unit for Trombay Unit 5 was placed in commercialoperation in September 1994 and its performance has since been satisfactory. It is removing 85% ofthe SO2 from unit 5 flue gas.

x. In terms of the long-term sectoral objective, TEC have shown that a private utility is moreefficient in implementing, operating and maintaining its facilities, than a publicly-owned utility. Inaccordance with its commitments, GOM extended TEC's licenses for another ten years5 , thus showingto potential investors its seriousness in attracting, dealing and keeping private investments. The burdenof taxes/duties on the project was alleviated by virtue of the exemption of customs duties GOIcontinued to grant to procurement carried out under IBRD loans. While this project cannot act as amodel for private sector participation in the future, it nevertheless shows that GOI's and the Bank'sstrategies to move towards private investments in the power sector are correct. The internal economicrate of return (IERR) computations updated for this ICR show that TEC's tariffs were adjusted toorient consumer surplus from the consumers to the utility (para 1.06). Thus initial steps to fulfill theexpectations of the SAR about improving TEC's tariff structure so that TEC's direct consumers areinduced to implement demand-side management procedures and projects have been undertaken.

Summary of Findings, Future Operations, and Key Lessons Learned

xi. The project was implemented generally satisfactorily, albeit some delays as noted above. Thephysical objectives have been partially met, and full economic benefits of the project would be realizedas soon as the Bhira PS scheme starts operation on a commercial basis. In accordance with South AsiaRegion's portfolio management guidelines, the loan was closed on its original closing date when TEChad incurred eligible expenditures to cover the whole amount of the loan, although the Bhira PSScheme was not completed. Satisfactory completion of this component will be reported to the Boardin due course.

xii. The Bank remained closely involved in the implementation of the project, from preparationthrough completion. Its excellent relations with TEC throughout the execution of the project as well

5 Under Ln.2452-IN for the Fourth Trombay Thermal Power Project, TEC's licenses were extended to August 15, 2004.Under Ln. 3239-IN for the Project, the licenses were extended to August 15, 2014, the maturity date of the Loan.

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as close interaction with TEC officials, helped remove implementation bottlenecks while enhancing thequality of TEC's efficient management.

xiii. Future operations of the project are likely to be sustainable. Power continues to remain inshort supply throughout India's Western Region and the high-efficiency CCGT plant at Trombayand the Bhira PS scheme, when completed, are expected to contribute in filling the supply-demand gap. Peaking power of up to 150 MW is expected to be provided by the Bhira PS and itsoperation in the pump-motor mode will improve system operating efficiency by providing off-peak load for TEC's thermal generating units. The additional FGD unit for Trombay Unit 5employs flue gas clean up technology using sea water to improve air quality in the surroundingareas.

xiv. The key findings and lessons learned are:

(a) The Bhira PS penstock failure is still under investigation. Available data indicatesthat because not all the studies were conducted prior to implementation, designrequirements which would have been informed by the studies were not fullysatisfied. Stringent design quality control in this case appears to have been lacking(para. 1.07).

(b) The experience in this project confirms the appropriateness of the Bank's currentprocedure by which investment projects with significant environmental issues haveto obtain all the necessary environmental and other clearances from all concernedcentral and state government agencies, well ahead of the approval of any loan bythe Bank (para. 1.08).

(c) Finalizing subcontracts at the time of main contract award, along with completequality assurance/quality control (QA/QC) plans, saved significant amounts of timeand helped accelerate project implementation. Similarly, for major equipmentsuppliers, linking payment to the furnishing of essential design information requiredfor detailed engineering helped alleviate design coordination problems (para. 1.09).

(d) Single turn-key contracts for the main plant and equipment of the variouscomponents, especially for the combined cycle technology, proved easier toimplement and manage (para. 1.10).

(e) It is necessary to evaluate the manufacturing capability as well as thecorresponding shop facility of vendors through a thorough prequalificationexercise. Substantial delays were experienced because some manufacturers had torefurbish and augment their shop facilities to accommodate the work in hand (para.1.12).


(LOAN 3239-IN)


PART I. PROJECT IMPLEMENTATION ASSESSMENT

A. Statement/Evaluation of Objectives

1.01 Electricity demand in India in the 1990s was projected to grow at an annual average ofapproximately 9% through the year 2000. This huge demand had caused supply gaps arising fromscarcity of public resources on the one hand and frequent breakdown of existing plants on theother owing to nonavailability of spare parts, deteriorating fuel quality and inability of the publicsector utilities to take timely outages of the generating units for maintenance. To meet thedemand and improve the quality of power supply, the Government of India (GOI) decided to tapthe private sector and utilize its ability to implement major power projects.

1.02 India is one of the few developing countries with a vibrant, if small, private sectorpresence in the public power supply domain. The Tata Electric Companies (TEC) represent thelargest electric power utility in the private sector in India. The reliability of TEC's power supplyand the quality of its service is extremely high. TEC is a well managed corporation with strongfinancial performance and an excellent record of operation and technical innovation. The privatepower utilities are regulated by the Electricity (Supply) Act of 1948, under which the utilities mayset their tariffs to recover their full operating costs, depreciation, interest and return on equity .Their individual franchises are defined in licenses granted by their respective state governments,which cover their geographical areas of operation.

1.03 At appraisal, in October 1990, IBRD involvement with India's private power utilities hadcomprised four loans to TEC for the staged development of the Trombay Power Station nearBombay. This involvement and TEC's efficient project implementation, operation andmaintenance of its plants helped GOI to decide to invite and induce private investment into thepower sector. Additionally, IBRD and IFC participation also helped mobilize additional financingfor the project from the Government of Switzerland and a conglomerate of local banks led by theIndustrial Credit and Investment Corporation of India Ltd. (ICICI).

1.04 The project's physical objectives were to: (a) provide additional peak generating capacityto meet more of the increasing demand in the Bombay area and reduce TEC's dependence on thestate's grid; (b) increase the capacity utilization of existing thermal generating units at Trombayand add a gas based combined cycle plant, to reduce the average cost of generation; (c) mitigatethe sulfur dioxide emissions from the coal and oil burning Trombay Unit No. 5; and (d) improvesystem reliability and quality of service to consumers. The institutional and sectoral objectiveswere: (a) support increased private sector participation in the supply of power; and (b) encourageimproved tariff structures and load management procedures for TEC's direct consumers. Theproject was fully consistent with the Bank's lending strategy for the Indian power sector.

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B. Achievement of Objectives

Overall Results

1.05 The overall objectives of the project were substantially achieved, except for thecommissioning of the Bhira PS facility. TEC has been able to increase its peak generatingcapacity, which will increase further as soon as the Bhira PS facility comes into operation; TEChas been able to reduce its dependence on MSEB, the average cost of generation by TEC issignificantly reduced; and TEC's system reliability and the quality of power supply haveimproved. The air quality in the surrounding areas of the CCGT plant has improved. TEC'stechnical competence and management capabilities are well recognized.

1.06 Rate of Return. In the SAR, the economic analysis was carried out in computing theestimated internal economic rates of return (IERR) of: (i) the FY90 - FY2000 time-slice of theWestern Region development program; and, (ii) the Project. The [ERR for the FY90 - FY2000time-slice of the Western Region development program was estimated at 7% counting as benefitsonly the economic value of incremental revenues (using the tariffs as proxy) and 25% whenallowance for associated consumer surplus was made. The IERR for the Project was estimated atabout 26% (associated consumer surplus considered). For the ICR, the economic analysis for theinvestment program was updated, considering the commercial operation of the Trombay CCGTPlant at a load factor of 68.5%, as envisaged by the Central Electricity Authority (CEA), andassuming that the Bhira PS Scheme will start operation from April 1996 on the basis of 4 hoursevery day in the generating mode at full power (Part III, Table 8). The benefits of the investmentprogram relate mainly to the incremental consumption which they make possible. A minimummeasure of benefits was derived from the incremental sales revenue based on the average retailtariffs of TEC (Rs. 2.1 1/kWh), representing the minimum willingness to pay for electricity, i.e.,without taking into account consumer surplus. On this basis, the IERR achieved for the project is20.4%. If the savings from the reduced purchase of power from MSEB are also taken as aproject benefit, the IRR increases to 26.4%. Comparison of the project IERR estimated in theSAR and the ICR, shows that TEC's tariffs were adjusted to orient the consumer surplus from theconsumers to the utility.

1.07 Implementation Experience.- Loan 3239-4N was approved by the Board on June 26, 1990in the amount of US$ 98.0 million equivalent and the Loan Agreement was signed on October 3,1990. There were specific conditions of effectiveness of the proposed loan which included, interalia, the receipt by TEC of all environmental clearances from the GOI and GOM as necessary forthe construction of the Trombay CCGT plant. The loan effectiveness date had to be extendedthree times before the environmental clearance was finally obtained by TEC, upon which, theother conditions having been met, the loan became effective on September 30, 1991 (para. 1.08).Except for the commissioning of the Bhira Pumped Storage scheme, all other project componentshave been placed in commercial operation (Part III, Table 5). The gas turbine was commissionedin open cycle in July 1993, while the combined cycle module was put into commercial service inMarch 1995. The 220 kV transmission system was commissioned in June 1994 and the FGD Unitin September 1994. The 150 MW Pumped Storage Unit was mechanically completed and thegenerator/motor started operation on synchronous condenser mode in March 1995. During wetcommissioning tests, a section of the penstock ruptured and caused a serious setback to the

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project completion targets. Detailed investigation of the causes of failure has been undertaken byexperts. Preliminary estimates indicate that this facility can be prepared for commissioning testsby March/April 1996.

C. Major Factors Affecting the Project

1.08 Project Start Up. The project experienced an initial delay of almost one year due to:

(a) the long time taken by the GOI Ministry of Environment and Forests in providingenvironmental clearance for the project. In 1984, when Trombay Unit 6 was clearedby GOI, GOM and MSEB, the oldest three units of 62.5 MW each were scheduled tobe retired when Unit 6 was commissioned. The unit was commissioned in 1990, but inview of the peak power shortage still prevailing in the Bombay area, agreed to extendthese units until the CCGT plant (Unit 7) came on stream in FY94. GOI requiredmuch longer than anticipated at appraisal to agree on this issue and grant the saidenvironmental clearance; and,

(b) delay by the CEA in clearing the 180 MW CCGT unit. Because of emission limitsput by GOM Maharashtra Pollution Control Board, TEC had its engineeringconsultants determine capacity of the Trombay station making optimum use ofcoal, oil and available gas. Thus the capacity of 180 MW was defined for theCCGT unit. Clearance of the proposal by GOM and MSEB did not require longtime. However, CEA proposed a 410 MW plant to burn all the "firm" gas beingused at that time in Trombay's conventional boilers, contending that it waswasteful to burn gas in conventional boilers at 3 5% efficiency when the CCGT unitoffered to yield an efficiency of 49%. More particularly, CEA insisted thatTrombay had received clearance for the older units to burn coal only. CEA'sproposal would have entailed extensive reengineering and careful evaluation of itstechno-economic viability. In fact, the proposal would have delayed the project atleast by two years for the studies to be completed, and that too without anyassurance that they would yield any tangible results. In the end, however, CEAagreed with the project proposal as originally envisioned.

1.09 TEC did its utmost to recover the time lost owing to circumstances beyond its control.Despite the delays, TEC was always in control of the situation, optimally reduced theimplementation time table and helped completion of the major elements of the project byexpediting construction and commissioning. TEC got excellent results by insisting on thefinalization of all subcontracts at the time of main contract award, along with complete QA/QCplans. Also, for major equipment suppliers, linking payment to the furnishing of essential designdata required for detailed engineering and design coordination proved to be very helpful insecuring timely information and alleviating implementation bottlenecks. The Gas Turbine of theCCGT plant was, in fact, commissioned ahead of schedule, but its operation could not besustained because of shortage of natural gas supplied by ONGC.

1.10 Procurement. For performance guarantee reasons, the main package for the 180 MWCCGT scheme was procured as a single responsibility contract under international competitive

bidding (ICB) procedures, and on a supply-and-erect basis. The main package was divided intothree components: 120 MW gas turbine and generator; waste heat recovery boiler; and 60 MWsteam turbine and generator. This contracting strategy proved easier to implement and manage.The Industrial Model for Domestic Preference for goods manufactured in India was applied inaccordance with Bank guidelines, as agreed during negotiations. Bidders were required to priceeach of the components separately to make up the lump sum price. Each such component offeredex-works India had to have a domestic value added of not less than 20% of its price. Thosewithout domestic value added were offered on a CIF basis. For the purpose of providingdomestic preference, the CIF price of the component offered from abroad within a bid wasincreased by the applicable duty, or 15%, whichever was less.

1.11 The turbine-generator/pump-motor set for the Bhira PS was also procured under ICB, ona supply-and-erect basis. The remaining contracts, some including civil works, were procuredunder local competitive bidding (LCB) procedures. No special preference was accorded todomestic bidders when competing with foreign bidders, state-owned enterprises, small-scaleenterprises or enterprises from any given State. No negotiation on the bid price was allowed.

1.12 The CCGT plant contract was won by the least-cost bidder under a joint venture betweenSiemens of Germany and Bharat Heavy Electricals Limited (BHEL) of India, with Siemens as themain partner. ABB was the other bidder and it made a representation that it had by mistake,included the price of a component (auxiliary air compressor) as extra. However, ABB was notallowed to change the bid and the price of the component was taken into account for the purposeof bid evaluation. Even otherwise, the result of the bid evaluation would not have changed as thedevaluation of the Indian Rupee favored the Siemens-BHEL bid because of its significantly largerlocal component. BHEL, however, had to augment its manufacturing shop facilities toaccommodate the fabrication of the very large equipment components, which caused delays inproject implementation.

1.13 Prices of components quoted under ICB were about 23% higher than budgeted forfinancing under the IBRD/IFC loan. They seemed to reflect the existing global market situationconsequent upon the Gulf War raging at that time. As the prices for the parts of the contract tobe manufactured in India were higher than the estimates, it was agreed that TEC would financeexpenditures incurred in the local currency from its own resources, while Bank funds would beused for disbursing against foreign currency expenditures and expected contingencies.

1.14 The contract for Bhira PS was also awarded to the least cost bidder, Sulzer-Siemens.Sulzer, a Swiss company, was the lead partner. Following the award of this contract, and in lightof the costs exceeding the budget, GOI and Switzerland decided with TEC's concurrence, thatparts of an ongoing Swiss loan to India would be allocated to finance the expenditures in SwissFrancs incurred by the Swiss manufacturer.

1.15 Finalization of subcontracts at the time of main contract award, along with completeQA/QC plans, was insisted upon and compliance with this requirement saved significant time inproject implementation. TEC also linked progress payment to the furnishing of essential designdata required for the detailed engineering and design of the plant.

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D. Project Sustainability

1.16 The achievements of the project are likely to be sustainable. Supply of gas to theTrombay power station is quite good6 . TEC will take all the necessary actions to ensuresatisfactory operation of the Bhira PS scheme. The Operational Plans to ensure the sustainabilitythe project components have been discussed and agreed with TEC's management during the ICRrnission. These plans are presented in Part III, Table 6.

E. Bank Performance

1.17 The performance of the Bank from project preparation through project completion wassatisfactory. In particular, the Bank has successfully maintained a good working relations withTEC from identification to loan closing. A total of nine supervision missions were fielded duringthe project implementation period. Problems encountered were identified, solutions, agreedaction plans were developed and advice on problems were provided to those concerned. Suitablefollow-up actions were taken as needed and mid-course corrections were made. Interestingly, ahand-held grouting tool, simple to fabricate, light weight (28 kg), easy to operate and ready forinstant deployment on small grouting jobs, invented by one of the Bank's engineering staff, wasused very effectively on the rehabilitation of the "old" tunnel (built in the 1930s) in Bhira, eventhough the World Bank is not in the business of designing or manufacturing applicationsequipment.

F. Borrower Performance

1.18 The overall assessment of TEC' s performance is satisfactory. All commitments madeduring the negotiations and covenants under the loan were fulfilled. The financial performancehas remained very strong during the project implementation period. Given the fact that theproject included the first gas-based combined cycle power plant in the private sector, it did lay thefoundation for TEC to become fully knowledgeable in the state-of-the-art technology in respect ofengineering, construction, and commissioning. Despite the favorable outcomes, the deficienciesin project execution relate to delays in completing some of the project components on schedule,including the Bhira PS scheme. Even though much of the problems were beyond TEC's control,such as delays due to GOI's granting the clearances for Trombay CCGT unit (para 1.08), theinadequacy of shop floor facilities to manufacture the waste heat recovery boiler, or heavymonsoon in the case of Bhira PS scheme, there are interesting lessons to learn for the future. Forinstance, it is assumed that the transient hydraulic analysis of the long penstock under alloperating conditions of the pump/turbine unit, and the stringent design quality control dictated byit, were not adequately satisfied in this case, thereby causing the failure of the penstock duringwet commissioning tests with the loss of five precious human lives. This hypothesis would beverified by ongoing investigation into the causes of failure of the penstock. The findings may wellpoint towards other lessons to learn.

6 In 1994, TEC suffered from reduced supply due to some problems in the gas fields. The situation has improved since early1995, and TEC are in a position to operate the CCGT unit at full load.

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G. Cofinancier Performance

1.19 IFC cofinanced the project to the tune of US$ 68.3 million equivalent. The project wasappraised by a joint Bank-IFC mission. IFC staff deferred to the Bank (IBRD) for projectsupervision. The Government of Switzerland was also provided with Bank supervision reports.The local financial institutions were led by ICICI. ICICI staff participated in meetings Bankpreparation and appraisal missions had with TEC. They subsequently appraised the projectindependently before committing funds.

H. Summary Assessment of Outcome

1.20 The physical results of the project have been satisfactory, except for the delay incompleting the Bhira PS scheme. The components of the project that have already beencompleted meet or exceed most of the major objectives. TEC's peak generating capacity hasincreased with the commissioning of the CCGT plant, which has also caused the average cost of TEC'sgeneration to decrease because of its significantly higher overall thermal efficiency. The additionalFGD unit at Trombay has helped reduce emissions from the Trombay power station. TEC's systemreliability and quality of service have improved. The only physical objective that has not yet beenrealized is the improvement in capacity utilization of TEC's existing thermal generating units atTrombay, which would occur when the Bhira PS facility is placed in operation. In terms of the long-term sectoral objective, TEC have shown that a private utility is more efficient in implementing,operating and maintaining its facilities, than a publicly-owned utility. The internal economic rate ofreturn (IERR) computations updated for this ICR show that TEC's tariffs were adjusted to orientconsumer surplus from the consumers to the utility (para 1.06). Thus initial steps to fulfill theexpectations of the SAR about improving TEC's tariff structure so that TEC's direct consumers areinduced to implement demand-side management procedures and projects have been undertaken.

1. Future Operation

1.21 The CEA has specified that the CCGT plant at Trombay should achieve a minimum PlantLoad Factor (PLF) of 68.5% and that the overall thermal efficiency of the plant should be 49%, asdesigned. The PLF equates to a generation of about 1.2 million MWh per annum. The additionalFGD system installed at the Trombay plant (Unit 5) should continue to remove SO2 at anefficiency of 85%. The Bhira PS facility, when completed, should run in the generating mode for4 hours every day during day time, and in the pumping mode for 6 hours every night.

J. Key Lessons Learned

1.22 Several specific lessons can be drawn from this project that have both operational andstrategic implications for the design of similar projects in the future:

(a) The Bhira PS penstock failure is still under investigation. It appears, on the basisof available data, that not all the studies (such as transient hydraulic analysis of along penstock under all operating conditions of the pump/turbine unit and checkingwith respect to any risk of hydraulic resonance) were conducted prior toimplementation. The result was that design requirements as would have been

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dictated by the studies were not fully satisfied. Stringent design quality control inthis case appears to have been lacking.

(b) The experience in this project confirms the appropriateness of the Bank's currentprocedure for which investment projects withi significant environmental issues i.e.,to secure all the necessary environmental and other clearances from all concernedcentral and state government agencies, well ahead of the approval of any loan bythe Bank.

(c) Finalizing subcontracts at the time of main contract award, along with completequality assurance/quality control (QA/QC) plans saved significant amounts of timeand helped accelerate project implementation. Similarly, for major equipmentsuppliers, linking payment to the furnishing of essential design information requiredfor detailed engineering helped alleviate design coordination problems.

(d) Single turn-key contracts for the main plant and equipment of the various components,especially for the combined cycle technology, proved easier to implement and manage.

(e) It is necessary to evaluate the manufacturing capability as well as the correspondingshop facility of vendors through a thorough prequalification exercise. Substantial delayswere experienced because some manufacturers had to refurbish and augment their shopfacilities to accommodate the work in hand.

(f) Not only the implementing agency, but also other government departmentsinvolved in the approval or licensing processes, must be equally alive to the projectimplementation schedule and work in unison to meet the schedule.

Evaluation of Program Objective Categories

A. Private Sector Participation

1.23 One of the major objectives of the project was to support increased private sectorparticipation in the supply of power in India. The project has accomplished this objective andTEC has successfully implemented the project, albeit slight delays in implementation. GOI hasshown its seriousness in inviting and inducing private investments in the power sector byguaranteeing the IBRD loan for the Project and agreeing to allocation of funds form a line ofcredit provided by the Government of Switzerland to India. GOM has shown its interest inprivate power by extending the licenses of TEC and adjusting TEC tariffs in a timely manner. Thesuccess of the project is likely to encourage similar participation by private developers in thefuture and this is consistent with priorities set out in the country assistance strategy. However, itshould be noted that this project cannot act as a model for private sector participation in the futurebecause the three companies forming TEC are well established companies with an excellent record.The Project nevertheless shows that GOI's and the Bank's strategies to move towards privateinvestments in the power sector are correct.

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B. Financial Objectives

1.24 At appraisal, the only matter for concern was that most of TEC's debt was in foreignexchange, hence exposing the companies to foreign exchange risk. The SAR projected that debtservice coverage would remain above 1.25, and that about 20% of total new investment would becovered by internal cash generation by FY2000. These projections included the effect of fuel costincreases, assumed at 8% p.a., and purchased power cost increases assumed at 10% p.a., whichwere to be passed on to the consumers through automatic tariff increases. TEC' s financialperformance during the project implementation period was significantly better than the appraisalprojections, as can be seen from TEC's income statement, balance sheet and sources andapplication of funds presented in Appendix - D. Overall, TEC's financial position remained solid,with a long-term debt to net worth ratio consistently above 1.5 and a current ratio below 1.2.

C. Environmental Objectives

1.25 All the components of the Project were designed to comply with GOI and GOM as well asthe applicable environmental policies and guidelines of the World Bank. Operationalperformances of the components commissioned met the above policies and guidelines. Furtherinformation about the components is given in Appendix E. At the time environmental clearancefor the Project was given, GOI/GOM mandated that TEC must install a fly ash utilization plant toreduce the environmental impacts of the fly ash discharged by Trombay Unit 5 of 500 MWcapacity (built under Ln. 1549-IN for the Third Trombay Thermal Power Project - FY78).Accordingly, TEC installed a Fly Ash Aggregate Plant of 200,000 t/annum capacity to producecold-bonded light weight aggregates. Although this unit was not part of the Project, all thecomponents of the project were designed to comply with GOI and GOM as well as the applicableenvironmental policies and guidelines of the World Bank. Information about this unit is also givenin Appendix E.

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PART I: Statistical Tables

Table 1: Summary of Assessments

A. Achievement of Obiectives Substantial Partial Negligible Not ADDlicable

Macroeconomic policies * 0 O OSector policies * O O OFinancial objectives * O 0I OInstitutional development * E 0 OPhysical objectives O * O OPoverty reduction 0 0 0 UGender concerns O O 0 UOther social objectives O 0I 0I UEnvironmental objectives * O 0I 0IPublic sector management O O O aPrivate sector development * O O 0

B. Project Sustainability Likely Unlikely Uncertain

U L L

C. Bank Performance Highly satisfactory Satisfactory Deficient

Identification * OIPreparation assistance * O 0Appraisal * 0 0Supervision * LI

D. Borrower Performance Highly satisfactory Satisfactory Deficient

Preparation * O °Implementation O * OCovenant compliance * O OOperation * O 0

E. Assessment of Outcome Highly satisfactory Satisfactory Deficient

LI **

* As the Bhira PS scheme has been delayed due to the mishap with the penstock, the overall outcome is rated as"satisfactory". Had this facility been commissioned, as planned, the outcome would have been "highlysatisfactory". This Bhira PS scheme is currently expected to be in operation by April 1996.

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Table 2: Related Bank Loans/Credits

Loan/CreditTtitle Loan Number Prse Year of ApDroval Status

First Trombay Thermal 106-IN Constuct 2x62.5 MW (Units I& 2) 11/54 CompleteSecond Trombay Thermal 164-IN Construct Ix62.5 MW (Unit 3) 5/57 CompleteThird Trombay Thermal 1542-IN Construct lx500 MW (Unit 5) 4/78 CompleteFourth Trombay Thermal 2452-IN Construct 1xSOO MW (Unit 6) 6/84 Complete

(Unit 4 was built under a credit from USA)

Sectoral Objectives Common to the Above Projects

In addition to the above project-specificobjectives, the sectoral objective was tosupport increased private sector participationin the supply of power and to assist TECbecome a model utility in the private sector.

Table 3: Project Timetable

Steps in project cycle Date planned Date actualPreparation 1985 by TEC! _________________________ L ______________ 1989 by Bank

Identification June 1986 June 1986Appraisal March 1990 Jan-Feb 1990Negotiations May 1990 May 28-31,1990Board presentation June 1990 June 1990Signing October 3, 1990Effectiveness September 1990 September 30,

1991Project completion: Bhira Pumped March 1995Storage

Transmission Line November 1994 February 1995Trombay CCGT February 1995 June 1995Trombay Unit 5 FGD February 1994 September 1994Loan closing June 30, 1995 June 30, 1995

** Currently expected to be commissioned by April 1996.

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Table 4A: Loan disbursements (IBRD): Cumulative Estimated and Actual

FY91 FY92 FY93 FY94 FY95Appraisal Estimate 1.0 19.6 57.5 90.5 98.0Actual 0 13.3 30.7* 66.5 98.0Actual as % of estimate 0 67.9 53.4 73.5 100Date of final disbursement 3 December 1995

Table 4B: Loan disbursements (IEFC): Cumulative Estimated and Actual

FY91 FY92 FY93 FY94 FY95Appraisal Estimate 3.0 9.0 33.0 51.0 60.0Actual 4.0 20.0 68.0* -- _

Actual as % of estimate 133 222 206Date of final disbursement 30 September 1992

In September 1993, TEC decided to use about US$30 million equivalent from the IFC loan insteadof the IBRD loan to take advantage of the then prevailing exchange rates. The favorable exchange rate ofthe Japanese Yen vis-a-vis the German DM made it significantly more attractive for TEC to use the IFCloan in Japanese Yen for the CCGT contract with Siemens-BHEL. The IFC loans of US$30 million andYen 4,600 million were fully disbursed by September 1992.

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Table 5: Key Indicators for Project Implementation

1. Key Implementation Indicators in SAR/President's Report

1. Procurement

Bidding Bid Documents Bid Evaluation ContractPackage Spec. Ready On Sale Comr lete Award

Planned Actual Planned Actual Planned Actual Planned ActualBhiraCivil Works 9/90 10/91 10/90 12/91 3/91 1/92 5/91 2/92Penstock 9/90 4/92 10/90 4/92 3/91 8/92 5/91 9/92Main Plant 10/90 3/91 1/91 5/91 5/91 7/92 6/91 2/92

Trans. Line 11/90 12/90 12/90 1/91 4/91 6/91 6/91 7/91

CCGT Plant 9/90 7/90 12/90 10/90 5/91 7/91 7/91 9/91

FGD 11/90 11/91 2/91 12/91 6/91 4/92 7/91 5/92

2. Construction and Commissioning

Plant Erection Start Commissioning CommercialPlanned Actual Planned Actual Planned Actual

Bhira Pumped 10/92 10/92 9/94 6/95 3/95Storage SchemeTransmission Line 5/92 7/92 9/94 6/94**Combined Cycle PlantGT Unit (Open 7/92 7/92 7/93 7/93 7/93 7/93Cycle)STG Unit (Combined 10/93 11/93 9/94 12/94 3/95 3/95Cycle)FGD Unit 10/92 8/93 3/94 9/94 _ _ _

Experiencing commissioning problems. Expected date of commercial operation: 4/96.** Commnissioning in 110 kV: 6/94;

Commissioning in 220 kV: 2/95

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Table 6: Key Indicators for Project Operation

Combined Cycle Plant

Planned Actual

Plant Load Factor 68.5% 68.5%Efficiency 49% 49%

Bhira Pumped Stora2e

Night Operation, pump mode 6 hours Not inDay Operation, turbine mode 4 hours operation yetPumping Mode Efficiency 92%Generating Mode Efficiency 90.6%Peak Power Generation 160 GWh

FGD Plant

SO2 Removal Efficiency 85% 85%

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Table 7A: Project Costs

Project Components Appraisal Estimate (US$M) Actual (US$M)Local Foreign Total Local I Foreign Total

Bhira Pumped Storage 30.8 22.2 53.0 52.8 34.4 87.2Scheme220 kV Transmission 16.2 17.2 33.4 16.5 11.6 28.1SystemCombined Cycle Scheme, 43.9 47.1 91.0 78.7 131.3 200.0TrombayFGD Scheme, Trombay 5.6 5.2 10.8 9.8 1.3 11.1Total Base Cost 96.5 91.7 188.2Physical Contingencies 6.8 6.0 12.8Price Contingencies 16.7 13.0 29.7Total Project Cost 120.0 110.7 230.7 157.9 178.3 336.2"'Interest During 9.5 33.5 43.0 46.8Construction

Total Financing Required 129.5 144.2 273.7 383.01

I/ Taxes and Duties amounting to US$ 57 million equivalent distributed among the costsof individual contract packages.

2/ IDC, as per the Electricity Act, is not capitalized as project cost.

Table 7B: Project Financing

Appraisal Estimate Actual (US$M)(US$M)

Source Local Foreign Local Foreigncosts costs Total costs costs Total

IBRD 98.0 98.0 98.0 98.0IFC 60.0 60.0 - 68.3 68.3Local Financial 11.8 - 11.8 26.5 - 26.5InstitutionsInternal Accruals 61.5 - 61.5 52.2 52.2Debenture Issue: 26.5 - 26.5 79.1 79.1Convertible

15.9 - 15.9 - - -

NonconvertibleSwiss Mixed Credit - 12.1 12.1

Total 115.7 158.0 273.7 157.9 178.3 336.2

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Table 8: Economic Costs and Benefits(Rs. Million)

Fin. Capital O&M Fuel Total Cost Incr. Sales Net BenefitYear Exp.1991 41 41.0 - 41.01992 493 493.0 - 493.01993 4464 4464.0 -4464.01994 3502 0.1 123.3 3625.4 423.2 -3202.21995 1500 1.2 470.0 1971.2 1554.8 - 416.41996 154 166.3 627.2 947.5 2967.0 2019.61997 166.3 691.5 857.8 3341.9 2484.11998 166.3 691.5 857.8 3341.9 2484.11999 166.3 691.5 857.8 3341.9 2484.12000 166.3 691.5 857.8 3341.9 2484.12001 166.3 691.5 857.8 3341.9 2484.12002 166.3 691.5 857.8 3341.9 2484.12003 166.3 691.5 857.8 3341.9 2484.12004 166.3 691.5 857.8 3341.9 2484.12005 166.3 691.5 857.8 3341.9 2484.12006 166.3 691.5 857.8 3341.9 2484.12007 166.3 691.5 857.8 3341.9 2484.12008 166.3 691.5 857.8 3341.9 2484.12009 166.3 691.5 857.8 3341.9 2484.12010 166.3 691.5 857.8 3341.9 2484.12011 166.3 691.5 857.8 3341.9 2484.12012 166.3 691.5 857.8 3341.9 2484.12013 _ 166.3 691.5 857.8 3341.9 2484.12014 166.3 691.5 857.8 3341.9 2484.12015 166.3 691.5 857.8 3341.9 2484.12016 166.3 691.5 857.8 3341.9 2484.12017 166.3 691.5 857.8 3341.9 2484.12018 166.3 691.5 857.8 3341.9 2484.12019 166.3 691.5 857.8 3341.9 2484.12020 166.3 691.5 857.8 3341.9 2484.12021 166.3 691.5 857.8 3341.9 2484.12022 166.3 691.5 857.8 3341.9 2484.1

IRR 20.4%

If the savings from reduced purchase of power from MSEB is also taken as a benefit at Rs. 2.20/kWh(Purchased power price Rs. 4.50/kWh minus TEC tariff Rs.2.30/kWh). the IRR increases to 26.4%.

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Table 9: Status of Legal Covenants

INDIAPublic Power Utilities Prolect (Loan 3239-IN)

Ref. Covenant Complied

GA 3.02 TEC to pav GOI guarantec fee of 2¼/ % per annum. Agreement Yescopy to be sent to Bank.

3.03 (i) GOM not to take any actions. including delimiting TEC's area of Yessupply that would adversel, effect TEC's operational performanceand financial position.

3.03 (ii) GOM to extend before June 30, 1991, TEC's license to at least up Yesto September 15, 2010, the maturity date of the IBRD loan.

3.03 (iii) GOM to allow TEC the current practice of collecting certain special Yesreserves as are permissible under the Electricity (Supply) Act.

3.05 GOI to ensure availability of adequatc supplies of fuel for TEC's gas- Yesbased combined cycle unit of 180 MW at the Trombay thermal powerplant.

LA 5.02 TEC to create an equitable mortgage in a form satisfactory to IBRD. Yes

5.04 (a) TEC to limit their long-term borrowings so that their long-term debt Yesto equity ratio will not exceed 2.0 at anv given time.

5.04 (b) TEC to provide their financial projections by December of each year Yescovering their current and next four financial years projectedperformance.

Table 10: Bank Resources: Staff Inputs

Staff inputs in carrying out the various tasks through the project cycle from preparation in FY85through completion in FY94 were as follows:

Task Input (Staff-Weeks)Project Preparation 13.3Project Appraisal 24.9Loan Negotiations 10.0Board through Loan Effectiveness 9.8Project Supervision 38.2Project Completion 6.0

TOTAL 102.2

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Table II: Bank Resources: MissionsProject Cycle Month/Year Number Days in Specialization Performance Type of

of Field /a Rating ProblemsPersons lb /c

Through AppraisalIdentification /d 6/86Preparation /d 10/89 5 5 E, FA,ENV,ECPreappraisal /dAppraisal 1-2/90 12 24 E,EC,FA,ENV/e

3-4/90 1 11 ECSupervisionSupervision 1 7-8/91 2 3 E, FA ISupervision 2 4-5/92 1 4 E ISupervision 3 10/92 2 3 E, FA ISupervision 4 5/93 1 4 E ISupervision 5 11/93 2 3 E 1Supervision 6 2/94 1 2 E ISupervision 7 5/94 1 3 E 1Supervision 8 6/94 5 4 E, FA, EN ISupervision 9 11/94 3 4 E,EN ISupervision 10 7/95 1 3 E ISupervision 11 10/95 1 2 E IImplementation 10/95 1 E /fCompletion I I I

/a E: Engineer; EC: Economist/Investment Officer; FA: Financial Analyst; EN: EnvironmentalSpecialist; C: Consultant (Env)

/b I = No or Minor problems; 2 = Moderate problems; 3 = Major problems/c I = Implementation delays; PR = Procurement delays; EP = Equipment Problems;

FNIIN = Financial/Institutional Problems/d Identification by TEC in 1985. Preparation and Preappraisal by Bank in 1986./e Jointly appraised with 5 IFC officers/f Assessment of Outcome rated as "Satisfactory" (Table I of this report)

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APPENDIX- A

AIDE-MEMOIRE

This aide-memoire formalizes the observations of the special Implementation CompletionMission of the World bank for the Private Power Utilities (TEC) Project, Loan 3239-IN, andrecords the agreements reached by the mission with the Tata Electric Companies in connectionwith the preparation of an Implementation Completion Report (ICR). The mission was conductedfrom September 19 to 23, 1995, and again on October 31 and November 1, 1995 for the wrap up.The mission also visited the Trombay Thermal Power Station as well as the Bhira PumpedStorage Facility. The mission was joined by Mr. Argun Ceyhan, Senior Power Engineer, onOctober 31. The mission would like to take this opportunity to thank the management and theentire staff of TEC for the courtesies and cooperation extended to it during its work.

1. The policy of the Bank is to evaluate completed projects, and it requires Borrowers alsoto do so. The ICR is a milestone in the project cycle, making the transition from implementationto the projects future operation. It was agreed that the ICR would be prepared in accordancewith the guidelines contained in the Bank's Operational Policies OP 13.55 (April 1994), a copy ofwhich along with its annexes, had been sent earlier to TEC from Washington DC.

2. Based on this agreement, TEC prepared a draft ICR and presented a copy of the same tothe mission for discussion on October 31, 1995. The draft report contained a wealth of valuableinformation, prepared with high professional competence. The mission indicated that this reportwould be included as Part II of the ICR; however, it would need to be pruned in a manner so thatthe entire text did not exceed ten (10) pages for it to be included in the main report, in accordancewith Bank guidelines. It was also agreed that the information to be given in Part I of the reportwould not be repeated in Part II. A copy of the first draft of Part I, prepared by the Bank, hadearlier been given to TEC. In light of the discussion on the draft report, TEC would revise itsdraft to incorporate Bank comments and transmit the same to the Bank in Washington DC withintwo weeks from the date of this aide-memoire.

3. It was agreed that the project cost would be computed in accordance with the followingprinciple: the amount indicated in each contract award letter would be shown as the base cost forthat contract. Subsequent change orders issued against the contract would be lumped togetherand shown as "physical contingency", duly authorized for the contract to be completed.Similarly, any price escalation in accordance with Price Variation formulas allowed under thecontract would be captured to reflect the "price contingency" for that contract. This exercise foreach contract would serve to help compute the total base cost and total physical and pricecontingencies comprising the project cost. Interest During Construction (IDC) has already beencomputed and indicated in the draft report by TEC. IT was agreed that TEC would revise theformat of the project cost in accordance with the above guide'ines and include the same in therevised report.

4. Even though taxes and duties paid on the procurement of goods and services are includedin the base cost, the Bank would need an indication of the magnitude of these costs separately.TEC would need to capture these costs and convey the results to the Bank in its revised report.

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Status of the Project

5. Trombay Combined Cycle Plant. The gas turbine was commissioned to operate in an opencycle mode in July 1993 and in the combined cycle mode in December 1994. This plant has sincebeen in commercial operation.

6. Flue Gas Desulfurization Plant. This project component was commissioned and placed incommercial operation in September 1994. It has since been operating satisfactorily and helping toensure a cleaner atmosphere due to reduced emissions.

7. 220 kV Bhira-Dharavi Transmission System. The erection of the transmission system wascompleted and the lines charged at 1 10 kV in June 1994. The transmission system wascommissioned to operate at the rated voltage of 220 kV in February 1995.

8. Bhira Pumped Storage Facility. Completion of this component has been delayed. It wasreported to have suffered a serious set back as a result of the failure of a section of the Penstockduring commissioning tests which, in its wake, took a toll of five lives, including that of theProject Manager of the Penstock erection. Preliminary indication is that the failure has beencaused by low frequency vibration induced during commissioning that coincided with the naturalfrequency of the Penstock itself Detailed investigation by several experts, including EDF, hasbeen undertaken, and it is estimated that the delay could extend by several months. It was,however, decided that the ICR would be written in any case with the Bhira Pumped StorageFacility still outstanding.

9. The mission requested TEC to keep the Bank informed of the results of the investigationon the Bhira Penstock failure as well as the progress of repairs until final commissioning, testingand placing the facility in commercial operation.

10. The following schedule was agreed for the preparation of the ICR:

Revised draft of ICR from TEC to Bank November 13, 1995Draft Final ICR, from Bank to TEC November 22, 1995Comments on Final Draft, TEC to Bank November 30, 1995Final ICR issue December 31, 1995

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APPENDIX - B

PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

PROJECT OBJ1ECTIVES AND DESIGN

Project Objectives

Physical Objectives

The SAR envisaged the following four physical objectives., which have been largely met.

A) "Provide additional peak generation capacity and reduce TEC's dependence on theState's grid".

Since the commissioning of Gas Turbine and Generator in July '93 and Combined Cycle,Power Plant (CCPP) in December "94, TEC's purchase from MSEB has been reduced(29%).

B) "Increase the capacity utilization of existing thermal generating units at Trombay all ofwhich will reduce the average cost of generation".

The load on each of the two 500 MW Units at Trombay are reduced by 100 MW for aduration of six hours every night and during the reduced load operation these plantsoperate at a lower efficiency of 36.3% compared to 37% at full load operation. When thepumped storage plant at Bhira becomes operational, the Trombay 500 MW Units will beable to operate at their best efficiency, thereby reducing cost of generation.

C) "Mitigate the sulphur dioxide emissions for the coal and oil burning Trombay Unit No.5".

The augmentation of Flue Gas Desulphurisation Plant capacity from 25% to 50% hasbenefited Trombay Thermal Generating Station with flexibility of fuels while meetingemission regulations stipulated by Maharashtra Pollution Control Board. It has alsoimproved the air quality in surrounding areas.

D) "Improve system reliability and quality of service to consumers".

Since the commissioning of Combined Cycle Plant at Trombay, the quality and reliabilityof power supply in TEC system have improved. However, the supply continues to fallbehind demand. TEC have, therefore, proposed installation of 450 MW Combined CyclePlant at it's hydro generating station at Bhivpuri where substantial infrastructure facilitiesare available.

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Sectoral Objectives

The SAR envisaged the following institutional and sectoral objectives.

E) "Support increased private sector participation in the supply of power".

TEC's ability to finance capital intensive power projects as a private utility as well asimplement the same on schedule have strengthened Government of India's andGovernment of Maharashtra's endeavor to bring in private sector participation in power.TEC have also subsequently raised finances through GDR issue and demonstrated thatglobal financing opportunities are feasible for private sector participation in power inIndia.

F) "Encourage improved tariff structure and load management procedures for TEC's directconsumers".

The necessity for implementing time-of-the day tariff is now being increasingly recognizedand in a small way this has been initiated in Maharashtra. TEC's studies for implementingthe Load Management Center are proceeding and financial provisions have been made.

Project Design

The project design envisaged in the SAR for Bhira Pumped Storage Plant, Bhira DharaviTransmission System and Flue Gas Desulphurisation plant generally remained unchanged.However, in the case of Trombay CCPP, consequent to modular design, the rated capacity of theinstalled plant is 203 MW at site ambient conditions, instead of 180 MW envisaged duringappraisal. In addition, at the time of issue of environmental clearance for the Combined CyclePower Plant at Trombay, Government of India/Government of Maharashtra have stipulatedinstallation of fly ash aggregate project for useful utilization of fly ash from Trombay 500 MWUnit 5. Accordingly, TEC has installed a plant (200,000 T/annum capacity) for producing cold-bonded light weight aggregates using fly ash with the technology process from Aardelite HoldingB.V. (now Hoogovens Technical Services), a Dutch company. This process is well suited forTrombay as it is environment friendly with no emissions or effluent discharges. The light weightaggregates are used for civil works at Trombay and other divisions of TEC for making roads,pavements concrete blocks. etc.

PROJECT IMPLEMENTATION

Loan Effectiveness

The Project was appraised in March '90 and the loan agreement was signed on 3rdOctober '90. However, the loan became effective only on 30th September '91, on the final dayof expiry of Loan Agreement after three extensions, as one of the conditions to the effectivenessof loan agreement, viz., "Environmental Clearance for the construction of Trombay CombinedCycle Plant" was delayed from the Ministry of Environment and Forests, Government of India,though only clean fuel, viz., associated gas from Bombay High was proposed for use in the

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Combined Cycle Plant. However, in the meanwhile, TEC had completed all procurementactivities for the main plant and equipment and the contracts were awarded on the same datewhen the loan became effective.

Project Implementation and Operation Experience

Trombay Combined Cycle Plant

The SAR envisaged that the gas turbine and the combined cycle system would becommissioned within 24 and 36 months of contract award respectively which were generallyachieved. The contracts for the main plant were awarded on 30th September '91 and the opencycle was commissioned in July '93 (22 months) and combined cycle in December '94 (38months). The maximum load carried by Gas Turbine was 149 MW in January '95 when theambient temperature was 190 C. The performance test of GTG was carried out in November '93and the efficiency was found to be 31.89% compared to guaranteed 31.56%. The Steam Turbinewas synchronized on 9th December '94. The combined cycle plant achieved a maximum capacityof 214 MW in June' 95. The daily maximum generation was 4.88 GWh. The performance testswere completed in June '94. The preliminary results indicate achievement of contractual capacityof 203 MW and thermal efficiency of 49% in the combined cycle mode. The teething troubleshave been solved and the performance of the plant is satisfactory.

Bhira Pumped Storage Plant

During loan negotiations, the completion of Bhira PS Scheme was agreed upon as March'95. The project was commissioned on synchronous condenser mode in March '95. However,there has been a delay of 6 months in mechanical completion of the project for commencement ofwet tests, largely due to stringent schedules originally adopted and very heavy monsoon in '94which delayed the work. Though the wet tests commenced by end September '95 the projectsuffered a setback consequent to the rupture of penstock when the wet tests were in progress on16th October '95. The Project is expected to be in operation on generating/pumping mode in thefirst quarter of 1996.

Flue Gas Desulphurisation Plant

The SAR envisaged that "the commissioning of the Flue Gas Desulphurisation Plantwould be realized during 1991-1994 period, within 24-30 months of award". The project wascompleted in September '94 and has been in operation since then. The performance issatisfactory.

Bhira Dharavi Transmission System

The SAR envisaged that "the transmission development associated with Bhira PS Schemewould also be implemented in the 1991-1994 period, to be ready when the pumped storageproject is commissioned". This has been met. The 220 kV transmission lines were in operationat 110 kV since June '94 and at 220 kV since February '95.

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PERFORMANCE INDICATORS

Trombay Combined Cycle Power Plant

At the time of clearance of the project Central Electricity Authority had envisaged that theunit will operate at plant load factor of 68.5%, which will continue to be its performanceindicator. In addition, the Combined Cycle Power Plant is designed to operate at an efficiency of49% which will also be monitored.

Flue Gas Desulphurisation Plant

The Flue Gas Desulphurisation plant is designed to operate at 85% efficiency for a S02loading of 350 kg/hr.


The plant is scheduled to operate six hours in the night on pumping mode and four hours(two hours in the morning and two hours in the evening) in the generating mode during day timepeak. The efficiency during pumping mode is 92% and generating mode is 90.6%. The plant isexpected to generate 160 GWh of peaking power and save 33 GWh during monsoon season.

220 kV Transmission System

Consequent to upgrading the system from 1 10 kV the transmission losses are lower. Thelosses in turn depend upon generation which is dependent on monsoon.

PROCUREMENT

The procurement under ICB was done satisfactorily following IBRD guidelines. In caseof each of the packages of Trombay and Bhira Projects, there were representations by Bidderswho were not the lowest evaluated and acceptable. These issues were clarified to the Bank withadditional information and the Bank accepted the Consultant's recommendations. The contractawards were rescheduled in line with the loan effectiveness of IBRD loan and availability of fundsfor consultancy, particularly for Bhira and FGD Projects. As far as possible, all of the contractswere awarded ahead of schedule to provide adequate time for manufacturing and erection.

Though the SAR envisaged that the main plant and equipment for Trombay CombinedCycle Plant and Bhira Pumped Storage Plant would be procured on a supply-and erect basis forperformance guarantee reasons, in the case of Trombay Combined Cycle Plant Project theerection of Gas Turbine, Steam Turbine and Control Room equipment was carried out using inhouse expertise, retaining the vendor's supervision for guarantee obligations.

Wherever vendor's expertise was required for erection, contracts were awarded on supplyand erect basis, viz., Diesel Generator Set, Condenser Circulating Water Pumps, etc., whereas,TEC utilized its in-house agency to erect Transformers and switchyard equipment.

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QUALITY CONTROL

As in previous projects, the quality assurance and quality control were establishedindependent of project construction agency. The services of Tata Consulting Engineers and TataProjects Ltd. were availed for the in-process inspection at vendor's/sub-vendor's work.Performance tests were carried out at Vendor's Works whenever possible and witnessed. Theoperation and maintenance personnel were inducted right from the beginning of the project forQuality Control, which also enabled smooth handing over of the projects.

EXPEDITING

Like previous projects the Project Monitoring and Expediting Cell carried out the projectplanning, monitoring and expediting work. As a part of contracts, the Vendors submitted Level1, Level 2 and Level 3 networks for their manufacturing activity which formed a basis formonitoring. The services of Tata Consulting Engineers and Tata Projects Ltd. were also availedfor expediting.

For Trombay CCPP, while the imported items were delivered in time, substantialexpediting efforts were required to ensure sequential and timely delivery of components fromBHEL. A full time inspection and expediting engineer was posted both at BHEL (Hardwar) andBHEL (Trichy) to expedite deliveries. In addition, frequent intervention of BHEL's topmanagement was found necessary to accord priorities and expedite the work. TEC had tomobilize additional resources as BHEL's erection contractor could not mobilize adequately.

In the case of Bhira Project, for the erection of penstocks two additional agencies weremobilized at different fronts to expedite the work. Similarly, TEC mobilized it's departmentalagency for dismantling after hydro test, transportation and erection of penstock isolation valve asthe schedule indicated by the valve supplier was not at all acceptable.

LOCAL CLEARANCES

The local construction clearances of all projects were generally received in time.However, the commencement of civil works of Trombay CCPP was delayed by six months as thelocal Municipal Authorities insisted on having the approval for conversion of Trombay CCPP sitefrom 'No Development Zone' to 'Special Industrial Zone' prior to commencement of civil works.This was done by Government of Maharashtra by notification in the Gazette only in end April '92which became effective on 15th July '92.

PERFORMANCE OF CONTRACTORS AND CONTRACT MANAGEMENT

Like previous projects, while the deliveries of imported equipment were generallysatisfactory, the delivery of indigenous equipment were delayed resulting in pressure on erectionwork. The erection contractors had to compensate this with additional resources to achieve theproject schedule.

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For Trombay project, one of the reasons for the delay in supplies of main equipmentcontractors like BHEL was that the equipment (capacity and size) in their scope of supply werebeing manufactured for the first time in India, which needed substantial augmentation of theirmanufacturing resources.

In the case of the Bhira project, the contractors for penstock supply and erection, stationEOT crane and penstock isolation butterfly valve grossly under-estimated the quantum of workand the resources required, resulting in delay in commissioning of the unit.

TEC has also adopted extensive contractual management measures to expedite theprogress of work at site, which are briefly as under:

* Finalizing sub-contractors at the time of contract award, along with quality plan andcustomer hold points.

* Linking 10% payment to equipment vendors with furnishing of data for future detailedengineering and foundation design by consultants.

* Splitting of civil works between two major contractors. This ensured that in case oneof the contractors failed, work could be immediately transferred to the secondcontractor. This philosophy was extended to electrical cabling works as well.

3 In-house capabilities were mobilized for erection of gas turbine, transformers andswitchgear.

* Project Monitoring and Expediting Cell closely monitored and carried out expeditingof contract award, drawings approval, order placement on sub-vendors,commencement of manufacturing, etc.

* Departmental Erection Agency supported wherever contractors failed to meet therequired progress.

TRAINING

TEC has provided for extensive training of their personnel for the operation andmaintenance of plants at the time of finalizing the tender specifications as well as contracts. TEChas trained 12 engineers for the Combined Cycle Plant at various manufacturing /design offices ofSiemens AG. Similarly for the Bhira Project, six engineers were trained at Sulzer, Escher Wyss,Ltd. and Siemens AG and other plants. In addition, the operation and maintenance personnelwere inducted into QA/QC work right at the beginning of construction which enabled bettertraining at site. The operation personnel of Trombay were associated with simulation tests of I &C of Trombay CCPP enabling them to acquire complete plant operating particulars and sequenceof operations.

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PERFORMANCE OF THE BANK

The Bank took a very practical view at the time of making the loan effective by agreeingto extend the "loan effectiveness date", understanding the administrative and politicalinvolvement required for obtaining environmental clearance for the Trombay Project. This is verymuch appreciated. The professional approach of the Bank in formulating the quarterly reportsand precise review are also very much appreciated. Some of the Bank's recommendations werefound innovative and useful for expediting the civil works at Bhira, which included the use ofhand held grouting tools for grouting jobs. The Bank's response to the purchaserecommendations forwarded by Purchaser was very prompt and all recommendations ofconsultants were accepted by the Bank. The Bank was flexible in regard to financing items notallocated initially in Bank's financing package. The financing of steam turbine generator andcondenser package of Trombay CCPP was accepted for financing by the Bank when proposed atthe fag end of the Project so as to fully utilize the loan from the Bank. The Bank's performance isdeemed excellent with very close rapport between Project Authorities and Bank personnel.

PERFORMANCE OF THE CO-FINANCIERS

The local financial institutions were led by ICICI. Though they had appraised the Projectindependently, for the progress review they relied on the same quarterly reports as submitted tothe Bank. There were a few visits. They were also considerate and helpful and agreed to deferdisbursement of funds, when TEC had other rupee funds available for the completion of theProjects.

NEW TECHNOLOGY AND INSTITUTIONAL DEVELOPMENT

Like all TEC's previous projects, the Trombay and Bhira Projects have introduced newtechnologies in utilities. These projects also served for transfer of technology to indigenousmanufacturers in a number of areas.

Trombay CCPP

Trombay CCPP has been provided with a black start facility, a first time effort in thiscountry. The fully automated plant is provided with technological features to start withinminimum possible time and sustain for two hours with diesel fuel when gas is not available, untilthe 500 MW units are brought back on line. The heat recovery steam generator and the boilerfeed pumps of the required capacity are manufactured for the first time in India, needing improvedmanufacturing processes. Similarly the air cooled generator is also first of it's kind manufacturedby BHEL.


The 150 MW Bhira Pumped Storage Plant is the largest unit of its kind in India. TataConsulting Engineers have augmented their engineering expertise particularly for hydraulictransient studies having obtained WHAM package developed by Prof C. S. Martin of GeorgiaInstitute of Technology, USA and used for Bhira Project.

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Flue Gas Desulphurisation

This is the largest gas desulphurisation plant in this part of the world, which utilizes seawater scrubber for flue gas desulphurisation. The Gas to Gas heat exchanger with corrosionresistant glass flaked lining has been manufactured for the first time by BHEL, with back upguarantee from ABB, Germany.

Fly Ash Aggregate Project

While fly ash bricks are made in some power stations in India, a full scale plant forconversion of fly ash to light weight aggregate has been successfully implemented and operatedfor the first time in India. The technology transferred to TEC is now available for other powerstations, several of whom have shown interest in installation of similar plant.

LESSONS LEARNED

Contract Management

In earlier Trombay units, TEC and TCE had extensive experience in engineering of theplant and equipment in packages and integrating the same. For the main plant and equipment ofTrombay CCPP, the contracts were awarded on turn key basis, at the same time retainingengineering and construction of miscellaneous equipment, viz., switchyard, transformers and civilworks separately. This has been found successful particularly for timely receipt of civilengineering data for main plant foundations.

While the main plant of Bhira Project has been installed on turn key basis, the Gas TurbineGenerator (GTG) and Steam Turbine Generator (STG) of Trombay CCPP were erecteddepartmentally retaining minimum supervision for guarantee obligations, which arrangement wasfound satisfactory as well as saved substantial expatriate and supervisory expenditure.

With the experience gained in Trombay CCPP project, Tata Consulting Engineers are nowin a position to engineer individual systems for combined cycle plant and integrate the same.

Splitting of civil works between two major contractors ensured that in case one of thecontractors failed, work could be transferred to the other contractor as they operated on identicalprice rates. This philosophy was extended to cabling as well.

EQUIPMENT SUPPLIES

Though the contracts were awarded to fully qualified parties, it was found that their shopfloor needed substantial augmentation when manufacturing commenced. A typical example is themanufacturing of Heat Recovery Steam Generator (HRSG), at BHEL where substantial changeswere to be made at the Works to accommodate the 21 m long modules for assembly, heattreatment and storage, resulting in a delay of 5 months until the first module was completed.Similarly for Bhira project the contractors for station EOT crane, penstock isolation valve and

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penstock fabrication did not pay adequate attention to manufacturing facilities resulting in delay ofthe project. For future projects it is, therefore, necessary to critically review the manufacturingfacilities for specific application even if the supplier is a qualified and reputed vendor.

Equipment Design

HRSG module boxes

The HRSG of Trombay CCPP was supplied in module boxes, each consisting of 4 to 5modules of 21 m long with weight of 80 T. Considering the time requirements, costs involvedand difficulties in transportation by road of over-dimensioned consignments, BHEL havedispensed with module box construction at Works and modules will now be assemble on site.

Penstock isolation valve

The split design of 3.7m butterfly valve body to facilitate transportation needs to bereviewed as achieving the machining accuracies is difficult, in addition to the potential source ofleakage at the joint.

Expediting

The necessity of very close follow up at vendor's Works on daily basis by posting a personthere proved to be a success once again. Also taking up of the progress with the chief executiveof the vendor organization (e.g. BHEL) on a monthly basis right from the beginning has now beenfound useful, particularly for assigning additional resources at Works. With more jobs being sub-contracted by manufacturers like BHEL to reduce costs, the network for expediting had to beaugmented.

CONCLUSION

The major factors leading to successful completion of the project were active involvementof engineering, operation, maintenance and quality control personnel at all stages of the projectright from preparation of feasibility report, sound Contract Management, Expediting andContractors Management at site. The Projects have certainly fulfilled the main objective of TEC,viz., supply of adequate and reliable power at economic price.

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APPENDIX - C

GUARANTOR AND COFIANCILER CONTRIBUTION TO THE ICR

The Guarantor

Comments/contribution from the guarantor has not been received.

The Cofinanciers

Comnments by the Government of Switzerland (Letter dated February 7, 1996, from the FederalOffice for Foreign Affairs, Bundeshaus OST 3003, Berne; Ref. No: 3/861.3-IN):

I thank you for consulting our Office on the draft Implementation Completion Report for theabove mentioned project.

We agree with most of the content of the report, but feel that the subject matter of the rupture ofthe penstock, which caused the death of five persons, is not treated thoroughly. The relevantparagraph on key findings and lessons learned states, that "not all the studies (such as transienthydraulic analysis of a long penstock and checking with respect of any risk of hydraulic resonance)were conducted prior to implementation" - which is true. As a matter of fact, Sulzer Hydro, at thetime, had offered the transient hydraulic analysis, but the contract for the calculations was awarded toanother entity (Sulzer Hydro was thus involved neither in the calculation, engineering, manufacturingnor in the inspection of the penstock). Should a close supervision not have detected such a flaw beforethe accident happened? Which measures can the World Bank take to make sure that, in the future,stringent quality control is made during manufacturing as well as erection of similar works?

In this connection, we would suggest the following addition to letter (e) of paragraph xiv onpage ix, "It is necessary to evaluate the manufacturing capability as well as the corresponding shopfacility and field erection know-how through a thorough prequalification exercise."

We hope that in spite of this tragic accident the project will be completed soon and startgenerating power. Sulzer Hydro has offered to the customer (TEC) full support and cooperation toexpedite commissioning the Bhima Pumnped Storage Plant as early as possible.

With best regards,

Yours sincerelyDevelopment Policy DivisionLaurent Guye

Comments by the Intemational Finance Corporation (memorandum dated February 6, 1996):

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The following are offered on the draft ICR requested in your January 23, 1996 memo for thePrivate Power Utilities Project by TEC financed by the Bank under Loan 3239-IN for US$98 million,and by IFC under a US$68.3 million loan:

I . Page vi(para iii) Something is missing between the bottom of Page vi and the top of Page vii because

there is no item (a) and words are missing.

2. Page vii(para vi) The penstock rupture is serious because 5 men were killed and commissioning of

the pumped storage was delayed one year, yet this seriousness is not apparent untilone reads Appendix A at Page 20.

3. Page viii(para viii) The gas turbine operation was low initially due to "non-availability of gas". Is there

no backup liquid fuel in the design?

4. Page iv(para xiii) The pumped storage provides peaking power by using surplus off-peak thermal

energy to pump water for peak time generation. In reality, it is an operating tool. Itimproves system operating efficiency, not system energy efficiency, because theenergy conversion from off-peak to peak is only 800/o efficiency, i.e., pumpedstorage consumes energy, it does not produce energy.

5. Page 3(para 1.07)Concerning the penstock rupture failure, no mention is made of who is paying for

the repairs - insurance, penstock supplier, pump/generator manufacturer, TEC etc.?

6. Page 5(para 1.17)The hand-held grouting tool that Bank staff designed is hardly "light weight" at 28

kg.

7. Page 13(Table) Expand width of third column and check dates for penstock shown as bid in 4/92

and awarded 2/92, which is not possible.

8. Page 15(Table) The 220 KV transmission total should be US$33.4 million, not US$3.4 million; and

there is no explanation given to the significant cost overrun from appraisal estimatedof US$273.7 million to the actual US$383.0 million cost.

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APPENDIX - D

TEC's FINANCIAL STATUS AND FINANCIAL TABLES

TEC's Financial Status at the Time of Project Appraisal. TEC is a licensee regulatedby the Sixth Schedule to the electricity (Supply) Act, 1948. This schedule provides, inter alia,that licensees may recover the full cost associated with the sale of electricity and earn apredetermined return on the capital base. Despite the low depreciation rate allowed under theAct, TEC had been able to maintain a comfortable cash flow, mainly as a result of the specialappropriations allowed by the State under its license. These special appropriations included: (a) adebt redemption reserve, to cover the difference between the provision for depreciation andprincipal repayments; (b) a foreign exchange liabilities reserve, to cover exchange losses onforeign currency loans; (c) a project cost reserve, to raise funds for future investments; and (d) adeferred tax liability reserve, to cover an eventual tax liability of shareholders for unrealizedcapital gains (arising from different depreciation rates under the Income Tax Act and theElectricity Act) in the event the utility were taken over.

The operating costs of TEC's own generation had been contained, mainly due to the useof competitively priced gas as the main fuel, as well as the high plant load factor and overalloperating efficiency. TEC's existing generation mix comprised efficient thermal units of recentvintage as well as hydroelectric units generating about a fifth of TEC's total generation. Theabsence of losses associated with low voltage distribution enabled TEC's tariffs to be lower thanMSEB's. When the fifth Trombay unit of 500 MW, financed by IBRD loan 1549-IN, came intooperation in 1984 and natural gas from the nearby Bombay High oilfields was made available at apromotional price, TEC's average cost of generation declined. Rather than pass on the savings toconsumers through tariff reductions, TEC was able to retain them and appropriate them to theproject cost reserve (para. 2.02). TEC was thus able to finance its other projects with moreinternal accruals and less debt, which in turn reduced the interest burden and therefore, the needto adjust tariffs. The mechanism thus allowed the savings to come full circle back to theconsumer. By contrast, the cost of purchased power from MSEB had increased sharply in theprevious five years, to a about twice the cost of TEC's own generation.

Overall, TEC's financial position remained solid, with a long-term debt to net worth ratioconsistently above 1.5 and a current ratio below 1.2. The only matter for concern was that mostof TEC's debt was in foreign exchange, hence exposing the companies to foreign exchange risk.The SAR projected that debt service coverage would remain above 1.25, and that about 20% oftotal new investment would be covered by internal cash generation by FY2000. These projectionsincluded the effect of fuel cost increases, assumed at 8% p.a., and purchased power cost increasesassumed at 10% p.a., which were to be passed on to the consumers through automatic tariffincreases.

TEC's Financial Performance: Comparison with SAR Forecasts - TEC'sfinancial performance during the project implementation period was significantly better than theappraisal projections, as can be seen from TEC's income statement, balance sheet and sources andapplication of funds presented at the end of this Appendix. Tables D-I, D-II and D-III below

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provide a summary of TEC's performance in terms of energy sales, tariff rates and distributableprofits as compared to the SAR estimates:

Table D-I

Energy Sales (million kWh)FY SAR Estimate Actual Variation, %90-91 8818 8434 - 3.891-92 9289 8723 - 6.192-93 9791 8880 - 9.393-94 10,328 9459 - 8.494-95 10,901 9642 -11.6

Table D-II

TEC's Average Tariff (paise/kWh)FY SAR Estimate Actual Variation. %90-91 111.8 108.9 (-)2.691-92 118.0 123.8 4.992-93 125.3 164.7 31.493-94 142.9 195.0 36.594-95 152.2 210.9 38.6

Table D-II

TEC's Distributable Profits (Rs. million)FY SAR Estimate Actual Variation, %90-91 159.0 202.3 27.291-92 207.0 224.4 8.492-93 230.0 584.1 154.093-94 244.0 841.7 245.094-95 234.0 1,452.2 520.6

Inflation, which had been forecast at 7% during the project period, turned out to behigher, at about 11% on the average, thus leading to higher growth in operating expenses andtariffs. Higher tariffs more than made up for lower energy sales, thereby leading to higherrevenues from power sales. Overall operating expenses also grew more rapidly than projected,but less than revenues, resulting in an operating margin consistently well above appraisalestimates. Several factors other than inflation accounted for higher operating expenses: (i) fuelexpenses increased as TEC had to import higher-cost oil and coal, albeit in small quantities; (ii)large repair expenditures were incurred at Trombay and Bhira; (iii) extraordinary payments weremade to staff on account of a voluntary retirement scheme introduced in 1994/95; and (iv) higherdepreciation expenses were recorded in 1994/95 due to an increase in the allowable depreciationrate from 3.5% to 7.5% effective April 1, 1994.

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Despite a rapid increase in interest expenses and foreign exchange losses brought about bythe depreciation of the rupee, net income ("distributable profits") remained significantly higherthan forecast as TEC had unexpected income from investments (para. 2.08). In 1994/95, profitsincreased in a sizeable manner. Tariffs were revised effective August 1994 based on conservativeestimates for thermal generation for the entire financial year. However, as a result of recordthermal generation due to increased availability of fuel and the commissioning of the combinedcycle plant at Trombay, TEC earned a clear profit well in excess of the permissible return.Consequently, it appropriated some of the excess profit to the tariffs and dividends controlreserve, retained the permissible excess and set aside another portion to be refunded to consumersin 1995/96. Higher profits enabled TEC to build up their statutory reserves at a faster pace. Inparticular, the companies appropriated in advance to the debenture redemption reserve and to theproject cost reserve in 1993/94 and 1994/95.

During implementation of the Project, TEC identified various other expansion projectsinvolving capital expenditures of about Rs. 30 billion. In anticipation of their implementation, thecompanies initiated a program to mobilize financing resources, essentially in the form of equityfunds as against debt financing envisaged earlier. A rights issue of Rs. 375 crores took place in1993/94 and 1994/95. Global depositary rights (GDR), of a combined value of US$75 million,were issued in February 1994. As the projects were not implemented right away, the fundsmobilized were invested in short-term securities. The income derived therefrom had not beenprojected at time of appraisal and accounts for a significant share of the profits derived in thelatter part of the implementation of the Project.

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APPENDIX - E

ENVIRONMENTAL OBJECTIVES

Bhira Pumped Storage Scheme: The Bhira PS Scheme involved upgrading and expansionof existing facilities. The Mulshi Lake reservoir served as the head pond, while the pickup pondwas conveniently used as the tail pond. There was no increase in the overflow from the Bhiradam as a result of the additional pump-turbine unit. Given the project's planned use of theexisting facilities, the construction of the penstock on existing rights-of-way, and marginalchanges in the water level of the reservoir and the pickup pond, the environmental impacts of thiscomponent were minimal.

220 kV Transmission Line: One of the existing 1 10 kV single circuit transmission linebetween Bhira and Dharavi was dismantled and replaced by a new 220 kV double circuit line,using the existing right-of-way. At the Dharavi end, this line was connected to the substation byan underground cable to avoid any adverse environmental impact and possible resettlement issues.High voltage transformers were designed to strictly avoid the use of polychlorinated biphenyl(PCB), a hazardous chemical. Because of the use of the existing right-of-way, an environmentalclearance was not mandated for this component.

Trombay Combined Cycle Scheme: The 180 MW CCGT scheme was technically andenvironmentally the most appropriate investment that was intended to use all the available gas aseconomically as possible, while still remaining within the environmental limitations imposed by theCentral and State governments. The CCGT plant was based on conventional technology. Themajor environmental impact of the CCGT plant is in its exhaust emissions. The exhaust of the gasturbine, passing through the waste heat recovery boiler, contains oxides of nitrogen (NOJ). Theplant was designed for reduced NO, emissions, not to exceed 50 ppm, and the stack height wasdetermined based on extensive flue gas dispersion modeling, so that ground level concentrationsremained well within the limits set by the environmental guidelines. With the commissioning ofthe CCGT plant, Units 1, 2 and 3 (total capacity 187.5 MW) of the Trombay power station,funded by earlier Bank loans (First Trombay Thermal and Second Trombay Thermal) weredecommissioned. This resulted in a reduction of the total volume of cooling water discharged tothe sea at elevated temperatures. Modeling studies indicated that a cooling water outlettemperature of up to 50C above the ambient temperature had no damaging effects on the localmarine environment, because the actual thermal gradient is such that by the time the cooling watergets to the sea, its temperature is just about 1°C above the sea water temperature. Demineralizedwater needed for this plant is drawn from the existing plant and the effluent are treated toacceptable standards before being discharged into the sea.

Additional FGD Scrubber for Trombay Unit 5: The FGD Scrubber is identical to the firstFGD stream, which has been operating satisfactorily since 1988, and consistently removing SO. inexcess of 85%. The additional FGD unit was necessitated by the deteriorating quality of coalused at the Trombay power station as fuel. The performance of the additional FGD train,specifically in terms of SO, removal efficiency, is satisfactory.

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Fly Ash Utilization: At the time environmental clearance was given for the project,GOI/GOM mandated that TEC must install a fly ash utilization plant to reduce the environmentalimpacts of the fly ash discharged by Trombay Unit 5 of 500 MW capacity. Accordingly, TECinstalled a Fly Ash Aggregate Plant of 200,000 t/annum capacity to produce cold-bonded lightweight aggregates.. Although this unit was not part of the Project, all the components of theproject were designed to comply with GOI and GOM as well as the applicable environmentalpolicies and guidelines of the World Bank. This plant is already in successful operation. The lightweight aggregates are being used for civil works at Trombay and other divisions of TEC formaking roads, pavements, concrete blocks, etc. The plant is environment-friendly, easy tooperate and there is a tremendous interest to replicate the plant for other utilities in India.

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