ASIAN DEVELOPMENT BANK

Transcription

1 ASIAN DEVELOPMENT BANK PCR: IND PROJECT COMPLETION REPORT ON THE NORTH MADRAS THERMAL POWER PROJECT (Loan No. 798-IND) IN INDIA March 2001

2 CURRENCY EQUIVALENTS Currency - Indian Rupee/s (Re/Rs) At Appraisal At Project Completion Re1.00 = $0.08 $0.02 $1.00 = Rs12.12 Rs43.00 For the purpose of cost comparison in this Report, local currency costs were converted into US dollars at the rate prevailing during each transaction. ABBREVIATIONS CEA - Central Electricity Authority EA - Executing Agency ECHS - external coal handling system EIRR - economic internal rate of return FIRR - financial internal rate of return I&C - instrumentation and control ICHS - internal coal handling system MAUP - Madras city augmentation and upgradation project NMTPP - North Madras Thermal Power Project NO x - oxides of nitrogen SERC - State Electricity Regulatory Commission SO 2 - Sulphur Dioxide SPM - suspended particulate matter TNEB - Tamil Nadu Electricity Board TNPCB - Tamil Nadu Pollution Control Board WEIGHTS AND MEASURES. GWh (gigawatt-hour) - 1,000,000 kwh ha (hectare) acre kv (kilovolt) - 1,000 volts kwh (kilowatt-hour) - 1,000 Wh kcal (kilo-calorie) - 1,000 calories kg (kilogram) - 1,000 grams L (liter) - 1,000 cubic centimeters MU (million unit) - 1,000,000 kwh MW (megawatt) - 1,000,000 watts NOTES (i) (ii) The fiscal year (FY) of the Government and of Tamil Nadu Electricity Board ends on 31 March. FY before a calendar year denotes the year in which the fiscal year ends. For example, FY1999 begins on 1 April 1998 and ends on 31 March In this report, $ refers to US dollars.

3 CONTENTS Page BASIC DATA MAPS I. PROJECT DESCRIPTION ii vi, vii 1 II. EVALUATION OF IMPLEMENTATION Project Components Implementation Arrangements Project Costs Project Schedule Engagement of Consultants, and Procurement of Goods & Services Performance of Consultants, Contractors, and Suppliers Environmental and Social Impacts Disbursements Conditions and Covenants Performance of the Borrower and the Executing Agency Performance of the Asian Development Bank III. EVALUATION OF INITIAL PERFORMANCE AND BENEFITS A. Financial Performance B. Economic Performance C. Attainment of Benefits IV. CONCLUSIONS & RECOMMENDATIONS A. Conclusions B. Lessons Learned C. Recommendations APPENDIXES

4 ii A. Loan Identification BASIC DATA 1. Country India 2. Loan Number 798-IND 3. Project Title North Madras Thermal Power Project 4. Borrower India 5. Executing Agency Tamil Nadu Electricity Board (TNEB) 6. Amount of Loan $150 million 7. PCR Number 623-IND B. Loan Data 1. Appraisal - Date Started - Date Completed 2. Loan Negotiations - Date Started 1 September September October October Date Completed 3. Date of Board Approval 18 November Date of Loan Agreement 21 January Date of Loan Effectiveness - In Loan Agreement - Actual - Number of Extensions 6. Closing Date - In Loan Agreement - Actual - Number of Extensions 7. Terms of Loan - Interest Rate - Maturity (number of years) - Grace Period (number of years) 8. Terms of Relending - Interest Rate - Maturity (number of years) - Grace Period (number of years) - Second-Step Borrower 9. Disbursements a. Dates 21 April April 1987 Nil 30 June June The Asian Development Bank s (ADB s) pool-based variable lending rate 25 5 Not less than ADB s variable rate 25 5 Tamil Nadu Electricity Board Initial Disbursement Final Disbursement Time Interval 5 April January months Effective Date Original Closing Date Time Interval 10 April June months

5 iii b. Amount ($ million) Category 1 Original Allocation 2 Last Revised Allocation 3 Amount Cancelled Amount Available Net Amount Disbursed Undisbursed Balance 01A B C D (15.00) E Total Local Costs (ADB-financed) - None C. Project Data 1. Project Cost ($ million) Item Appraisal Estimate Actual Foreign Exchange Cost Local Cost Total Cost Financing Plan ($ million) Item Appraisal Estimate Actual Foreign Local Total Foreign Local Total ADB GOI GOI/ TNEB GOI/ TNEB Plant & Equipment Civil Works Erection & Testing TNEB / Miscellaneous IDC Consulting Services Taxes & Duties Total GOI = Government of India, TNEB = Tamil Nadu Electricity Board, IDC = Interest During Construction. 1 01A Turbine Generator and Auxiliary, 01B Steam Boilers & Auxiliary, 01C Other Equipment, 01D Internal Coal Handling System, 01E External Coal Handling Equipment, 02 Unallocated. 2 At signing of the Loan Agreement on 21 Jan Resulting from the cancellation of loan savings of $30 million approved on 8 Oct 1996 and $7.02 million approved on 28 Oct Including turbine generators, steam generators, coal and ash handling, miscellaneous mechanical equipment, transformers, switchgears, instrumentation and control, switch house equipment, miscellaneous electrical equipment, and spares.

6 iv 3. Cost Breakdown by Project Components ($ million) Appraisal Estimate Actual Foreign Local Total Foreign Local Total A. Base Cost Turbine Generators & Auxiliaries Steam Generators & Auxiliaries Instrumentation & Control Switch-House Equipment Water Treatment Plant Protection, Control & Testing Equipment Transformers Switchgears Coal & Ash Handling Miscellaneous Mechanical Equipment Miscellaneous Electrical Equipment Preliminary Equipment Civil Works Residential Colony Civil Works Power Station Erection, Testing & Commissioning TNEB Miscellaneous, Freight, and Insurance Consulting Services Taxes and Duties Subtotal (A) B. Contingencies Physical Contingencies Price Escalation Subtotal (B) C. Interest During Construction ADB Loan Other Loans Subtotal (C) Total (A+B+C) ADB = Asian Development Bank, TNEB = Tamil Nadu Electricity Board.

7 v 4. Project Schedule Appraisal Actual Start End Start End Land Acquisition Jan 86 Dec 86 Apr 85 Oct 93 Civil Works Jul 87 Jun 91 Sep 89 Jan 96 Steam Generator System Nov 86 Mar 93 Nov 87 Mar 96 Turbine Generator System Jan 86 Dec 92 Feb 88 Mar 96 Control & Instrumentation Mar 88 Dec 92 Apr 90 Dec 99 Coal Handling Feb 88 Mar 92 Jun 91 Dec 99 Mechanical Jan 88 Sep 91 May 94 Dec 99 Transformers Jan 88 Mar 92 Dec 93 Aug 96 Switchgears Feb 88 Mar 92 Dec 91 Aug 96 Switchyard Apr 88 Dec 91 Nov 93 Jan 95 Electrical Mar 88 Dec 92 Nov 92 Apr 99 Transmission Apr 86 Mar 92 Jan 92 Apr 96 D. Data on Asian Development Bank Missions Name of Mission Date No. of Persons No. of Person- Days Specialization of Members 1 Contact Nov BTOR dated 10 Dec 1985 Fact-Finding (1) 29 Jan-7 Feb F, D, I and A (2) May Pre-appraisal Aug C, D and A Appraisal 1-11 Sep C and D Inception Jan A Review Jan A Review Aug A Review 7-15 Mar A and B Review Nov A and H Review 6-7 May A Review Nov A Review Nov A Review July A and B Review Mar A Review Sep A Review 5-7 Apr A and E Review Nov A and D Review Nov A Review Feb A Review 8-11 June A Review 30 Mar-2 Apr A PCR 3 to 6 Aug A BTOR = Back to Office Report. 1 A - Project Engineer, B - Financial Analyst, C - Counsel, D - Economist, E - Procurement Specialist, F- Control Officer, G - Programs Officer, H - Loan Administration Staff, and I Environment Specialist.

8 vi Map 1

9 vii

10 I. PROJECT DESCRIPTION 1. The North Madras Thermal Power Project (NMTPP) 5 of the Tamil Nadu Electricity Board (TNEB) was developed as a component of the Government of India s long-term National Power Development Program for the country s southern region. The installed power generating capacity of Tamil Nadu State was 2,649 megawatts (MW) in 1986 when the Asian Development Bank (ADB) appraised the Project. TNEB s share from central Government generating stations and other states was another 1,084 MW. TNEB found it difficult to meet the demand for power, which increased by about 10 percent every year. Moreover, TNEB s major generating capacity was hydroelectric power (1,389 MW), which made power supplies vulnerable in years of poor rainfall. With the development of a few thermal stations (1,080 MW) in areas of high demand along the sea coast, there has been some improvement in system stability, but not enough to offset shortages, particularly in the dry seasons. Thus, considering the frequent power shortages, TNEB and the Government decided to build large thermal power stations with shorter gestation periods to meet the medium-term requirements for power. ADB provided a loan 6 to support the implementation of the first stage of this program consisting of two units of 210 MW capacity to produce a net annual electricity output of about 2,575 gigawatt hours. 2. India has large reserves of coal. To make productive use of this resource, the Government decided to set up a number of coal-based thermal power plants and the NMTPP is among the projects identified under this strategic power sector development. Coal reserves are not evenly distributed throughout the country, 73 percent being concentrated in eastern India. A concentration of generating facilities at a few locations near the coalfields would lead to serious environmental problems, shortage of cooling water, and instability in the power system. It was therefore considered technically and economically feasible to set up a load center power plant near Chennai (formerly Madras), the capital of Tamil Nadu state, using coal from Talcher in Orissa state. The coal required for the Project (1.4 million tons in 1992 for both units) was to be transported initially by rail and subsequently by rail and sea. 3. The Project had the following components: (i) (ii) civil works for site preparation, foundations, power station building, cooling water, and other systems; two 690 tons per hour capacity coal-fired steam boilers and auxiliaries; (iii) two reheat steam turbine generators each with a rated capacity of 210 MW and auxiliaries; (iv) (v) instrumentation and control systems; coal and ash handling systems; 5 6 The Project was initially planned to be developed in three stages, three units of 210 megawatts (MW) in the first stage, two units of 210 MW in the second stage, and two units of 500 MW in the third stage. This configuration was subsequently changed to three units of 210 MW in the first stage, two units of 525 MW in the second stage, and one unit of 525 MW in the final stage to bring the ultimate capacity to 2,205 MW. Loan No. 798-IND: North Madras Thermal Power Project for $150 million, approved on 18 November 1986.

11 2 (vi) water treatment and other miscellaneous mechanical equipment; (vii) (viii) transformers, switchyard equipment, and other miscellaneous electrical equipment; and consulting services. II. EVALUATION OF IMPLEMENTATION 4. The main events in the implementation of the Project are given in chronological order in Appendix 1. A. Project Components 5. At appraisal, the project scope included the two steam and turbine generators, and eight auxiliary systems, comprising the instrumentation and control contract, two contracts for the internal coal handling system (ICHS), and five for miscellaneous electrical substation equipment. In 1992, ADB and the Government agreed to utilize the savings under the loan to partly finance the external coal handling system (ECHS) required to transport the coal from Ennore Port to the NMTPP coal yard. The remaining cost of the ECHS was to be financed under the second ADB loan 7 to TNEB. Subsequently, in 1996, to rationalize ADB s loan portfolio in India, ADB decided to transfer the entire funding for the ECHS to the second loan, cancel the available savings of the first loan and close it at the current closing date of 30 June Thus, no major changes were made in the scope of the Project. B. Implementation Arrangements 6. Implementation arrangements envisaged at appraisal were adequate, with the Member (Generation), TNEB, as the authority in charge of the Project. The Chief Engineer (Thermal), TNEB, was responsible for coordination with the consultants, procurement, and monitoring. The Chief Engineer (Civil Designs), TNEB, was responsible for the procurement of civil works. Actual project implementation was supervised by the Chief Engineer assigned to the Project who was supported by about 200 experienced professional staff. The Chief Engineer (Planning), TNEB, was the overall coordinator with ADB. This arrangement, though normally considered satisfactory in terms of organizational structure, adversely affected TNEB s project management because of the high turnover of senior staff in all the three divisions due to promotion or retirement. TNEB s organizational chart is in Appendix 2. C. Project Costs 7. At appraisal, in October 1986, the total project cost was estimated at $628 million equivalent, consisting of $254 million (40 per cent of the total cost) in foreign exchange costs and $374 million equivalent (60 per cent of the total cost) in local currency costs. 7 Loan No IND: Second North Madras Thermal Power Project for $200 million, approved on 30 August 1990.

12 3 The total actual project cost at completion was $522.8 million equivalent, consisting of $ million (21 per cent of total cost) in foreign exchange costs and $ million equivalent (79 per cent) in local currency costs. Appendix 3 provides the average exchange rates used in converting the local currency to dollar equivalent. Considerable savings in foreign exchange costs resulted mainly from (i) a major depreciation of the rupee during project implementation; and (ii) less than estimated value of the international competitive bidding contracts for the ADB-financed packages as local bidders prices were generally lower than those of foreign bidders. A summary of contracts according to the loan category is given in Appendix 4. The unused loan amount of $39.61 million was canceled in phases. D. Project Schedule 8. The actual implementation period compared with the appraisal schedule is shown in Appendix 5. At appraisal, the commissioning dates for units 1 and 2 were scheduled for March and December 1991, respectively. However, protracted land acquisition problems; procurement delays; and unsatisfactory implementation of many of the contracts, especially that for the internal coal handling system (ICHS); resulted in a substantial delay. Although the two units were eventually commissioned in October 1994 and March 1995, respectively, optimum utilization of the generating facilities was not possible due to the delay in the commissioning of the ICHS, which became fully operational only in June Thus, project implementation was delayed by seven and a half years. E. Engagement of Consultants and Procurement of Goods and Services 9. As indicated in the appraisal report, TNEB, in August 1985, had engaged an experienced domestic engineering firm for (i) project engineering, (ii) preparation of technical specifications and bidding documents, (iii) bid evaluation, and (iv) review of vendors drawings and operation and maintenance manuals. Equipment financed under the loan was procured in accordance with ADB s Guidelines for Procurement, using the international competitive bidding procedure. Civil works and other procurement contracts not financed by ADB were procured by TNEB according to its own tendering procedures. F. Performance of Consultants, Contractors, and Suppliers 10. The domestic consulting firm engaged for the implementation of the Project effectively assisted TNEB in all tasks with adequate expertise. The consultants conducted their assignments professionally and in accordance with their terms of reference. Accordingly, the consultants performance was evaluated by TNEB as generally satisfactory and the Project Completion Review Mission endorsed TNEB s evaluation. TNEB reported that the performance of all the contracts except that for the first ICHS has generally been satisfactory. All the goods met the required specifications.

13 4 G. Environmental and Social Impacts 11. The power plant was designed to meet the statutory environmental standards laid down in the environmental clearance certificates issued by the Ministry of Environment and Forests and the Tamil Nadu Pollution Control Board (TNPCB). The equipment installed for environmental mitigating measures are (i) a multi flue chimney with a height of 275 metres; (ii) electrostatic precipitators 8 of 99.5 percent efficiency; (iii) an ash disposal area which is designed to hold ash for about nine years, after which the height of the ash pond will be raised using the available ash; (iv) an ash water recycling system; (v) dust extraction and ventilation systems; and (vi) effluent monitoring equipment. The total expenditure incurred by TNEB for these environmental mitigation measures is about Rs860 million (about $19 million). An environmental monitoring cell has been set up at the power station to conduct regular tests specified in the environmental management plans. TNPCB also conducts its own tests. Details of test results and compliance with the conditions set by the Ministry of Environment and Forests are in Appendix 6. A review of the test results indicates full compliance with standards related to ambient air quality, stack emission, and liquid effluent. However, due to a delay in the commissioning of the coal handling plant and its dust extraction and ventilation system, the quantity of suspended particulate matter around the coal handling area was more than specified. This has since been mitigated with the commissioning of the ventilation system. The monitoring of liquid effluents, including testing condenser cooling water, boiler blowdown (wastewater from the boiler), ash pond effluent, hot water discharge, sewage and drainage water, and runoff from the coal handling area, indicates that total suspended solids are beyond the standard limit. This is mainly attributable to the sea water that is being used. TNEB has been advised to measure the properties of the seawater to confirm that high total suspended solids is due to seawater and not due to other suspended solids. However, in spite of the actions taken for environmental mitigation, the TNPCB has not yet conveyed its consent to operate the power plant, pending since This is mainly due to disagreement on the location of the discharge point for the cooling water. Other environmental protection measures that should be taken by TNEB are testing heavy metals in the ground water near the ash pond and installing piezometers in the ash dike to monitor the magnitude and direction of pressure in the dike. Any existence of heavy metals in the ground water or collapse of the dike walls would adversely affect the health of the residents in the adjoining area. Furthermore, TNEB needs to ensure that workers are provided with safety belts, boots, and helmets. 12. The total land acquired for the Project is 3,584 acres (1,433.6 hectares [ha]) for the plant, port, railway siding, roads, residential area, ash pond, and ash pipelines. Of this, about 1,104 acres (441.6 ha) was handed over to the Ennore port authorities for the construction of the port. The notification under the Land Acquisition Act was issued in 1985 and possession of a major portion of the land was taken in October The compensation rates were Rs3,000, Rs5,000 and Rs6,750 per acre (0.40 ha) for dry, wet, or village land, respectively. The total amount of compensation paid by TNEB was Rs23.5 million (about $0.55 million). Acquisition of land for the Project substantially affected three villages, namely, Ennore, Puzhudivakam, and Mugerthuwarakuppam and a few small hamlets involving a total of 1,010 families. Although no resettlement laws 8 Electrostatic precipitators collect solid particles (ash) from exhaust gases. These particles are then discharged at specific locations instead of being discharged into the atmosphere.

14 5 are in place, TNEB provided substantial assistance to those affected by the Project. Families whose houses were acquired during the land acquisition process were rehabilitated in resettlement colonies where each family was provided a plot of land of acres ( ha) for constructing a house. The amenities provided in the three resettlement colonies and the costs incurred are shown in Appendix 7. A total of 1,408 project-affected persons were offered jobs at the power station and 1,346 accepted. These include 510 fishermen whose earnings were affected due to the dredging of Ennore creek. In general, TNEB s resettlement and rehabilitation efforts satisfied the prevailing norms in India at the time of acquisition and project implementation. However, these measures fall considerably short of ADB s Policy on Involuntary Resettlement of If ADB is to support any other power sector project in Tamil Nadu, ADB should consider a stricter compliance with its resettlement policy in the new Project as well as earlier ADB-financed projects. A draft resettlement and rehabilitation act has been prepared and is under review by various organizations, with the Central Government s Ministry of Rural Development as the nodal agency responsible for the preparation of the act. H. Disbursements 13. The overall delay in project implementation, including a delay in land acquisition, resulted in an overall delay in disbursements. The actual and projected disbursements under the loan are compared in Appendix 8. I. Conditions and Covenants 14. The status of compliance with key conditions and covenants under the loan is in Appendix 9. In general, the Government of Tamil Nadu met all its obligations by providing the required land (although delayed), coal, and part of the subsidies. TNEB too complied with the key covenants, except for two covenants relating to tariff rationalization and productivity. No charges are levied for the consumption of electricity in the agriculture sector. Although the state government provided subsides to TNEB for the free supply of power, the amount was limited to that required to meet the minimum rate of return as specified under the Electricity Supply Act. Trends in tariff revision from 1987 to 1998 are in Appendix 10. Details of the losses incurred by TNEB due to free power supply to the agriculture sector and the subsidies received from the state government are in Appendix 11. TNEB s financial statements audited by the Office of the Comptroller and Auditor General of India are in Appendix 12. A tariff study was conducted in to identify the economic costs and associated prices of supplying different categories of consumers at different voltage levels. However, the recommendations of the study were not taken into consideration in fixing the tariffs for various categories of consumers. As required by the project agreement (schedule 3, paras. 12 & 13), TNEB conducted two technical studies on (i) upgrading the distribution system of Greater Metropolitan Madras (now Chennai) and developing a master plan for the progressive reinforcement and expansion of the system over the next 10 years; and (ii) defining the system and identifying equipment required to upgrade TNEB s load dispatch center to enable TNEB to use the center for efficient system operation and load management. These studies were completed in March Based on the recommendations of the studies, TNEB prepared a feasibility report for the Madras City Augmentation and Upgradation Project (MAUP), for which ADB financing was provided

15 6 under the second loan 9 of which $50.6 million was utilized for the MAUP component. TNEB has implemented all the components of MAUP. The benefits of MAUP will be examined at the time of preparation of the project completion report for the second loan. 15. The transmission system in Tamil Nadu is well designed and developed. Consequently, the total length of transmission lines required for the power plant was only about 80 km. The construction of the transmission system began in 1992 and all the five feeders were charged well in time for the commissioning of the first 210 MW unit. Details of the five feeders, indicating length, date of commissioning, and expenditure incurred are in Appendix 13. J. Performance of the Borrower and the Executing Agency 16. Given the high priority accorded to the loan, the first extended by ADB to India, the Government of India had, in close cooperation with the Government of Tamil Nadu, arranged to provide the necessary counterpart financing for the Project. 17. When the Project was appraised, it was assessed that TNEB had the technical competence as demonstrated by the successful completion of three thermal power stations. However the management of the Project has not been satisfactory. Initial delays are attributable to persistent litigation against the land acquisition process. Procurement delays were also encountered, mainly due to a lack of familiarity with international bidding procedures, litigation and representations by bidders, and numerous clarifications on bid evaluation by TNEB and review by several state and central government agencies. There has been a very high turnover of key personnel. The Project was supervised by 15 chief engineers from 1986 to 1999, when the Project was completed. Similar turnover were seen in the planning and thermal design wings of TNEB. K. Performance of the Asian Development Bank 18. Both the Government of India and TNEB appreciate the assistance and cooperation extended to them by ADB and consider ADB s performance satisfactory. During implementation, ADB closely monitored progress, regularly fielded review missions, and provided valuable assistance in resolving conflicts with some of the contractors. TNEB viewed ADB s guidelines, procedures, and requirements as reasonable. However, TNEB was disappointed when ADB did not agree to finance the additional funds needed for the ICHS which was mainly due to miscalculations of costs by the contractor and not to a variation in scope. 9 Loan No IND: Second North Madras Thermal Power Project for $200 million, approved on 30 August 1990.

16 7 III. EVALUATION OF INITIAL PERFORMANCE AND BENEFITS A. Financial Performance 19. For the financial evaluation, the current average tariff of Rs1.96 per kilowatt-hour (kwh) ($0.049/kWh) has been used 10. As assumed during appraisal, the persistent power shortages and the increase in the number of consumers absorbed the total output of the Project. Accordingly, these additional sales have been valued at tariff revenue. 20. The financial internal rate of return (FIRR) of the Project is 4.0 percent, while at appraisal it was estimated at 7.4 percent. Details are in Appendix 14. The lower FIRR is due mostly to the extensive delay in the implementation of the Project, nonremunerative tariff, and inadequate subsidy compensation resulting in lower revenue. B. Economic Performance 21. The economic internal rate of return (EIRR) calculated on the basis of incremental costs and benefits is 15.6 percent, which is considered satisfactory. Capital, operating, and maintenance costs were adjusted to inflation and to remove taxes, duties, and other transfer payments. Since all expenditures were incurred in local currency, they are expressed in border price terms by applying a standard conversion factor of The costs of oil and coal are also valued at border prices. The incremental energy available for sale is valued in terms of resource cost savings and consumers willingness to pay, which has been assumed as the cost of alternate sources at FY1999 prices. All costs and revenues have been adjusted to 1999 levels using official inflation rates. The EIRR of 15.6 percent is consistent with the EIRR of 15.7 percent assumed at appraisal. C. Attainment of Benefits 22. The Project met the objectives set at the time of appraisal, although implementation fell considerably behind schedule. With the commissioning of the two units and the timely completion of the transmission lines linked to the TNEB network, the Project became an integral component of the power system in Tamil Nadu. TNEB has confirmed that the Project has met the key objectives of increasing the reliability of power supply and reducing electricity shortages in areas of high demand in Tamil Nadu. The Project has resulted in the creation of about 1,500 new jobs. However, the demand for electricity still exceeds supply by a wide margin, which would justify the urgent implementation of the proposed second stage of the NMTPP, requiring three generating units of 525 MW to be set up by the private sector using the existing facilities of the power station. 10 At appraisal, the average tariff was Rs0.55/kWh. 11 The same standard conversion factor has been used in the evaluation as in the appraisal report (Appendix 15).

17 8 23. FY1996 was the first year when both the units were under effective operation. The availability factor, the percentage of time per year that the plant is available for use, has been more than 80 percent, which is comparable with the all-india average. The plant load factor (more than 60 percent) could have been higher but for forced outages mainly attributable to the incomplete coal handling plant. Auxiliary consumption, specific coal consumption, and the plant heat rate 12 have been satisfactory. Oil consumption is quite high which is again due to problems in the coal handling plant. In 1996, TNEB used coal imported from Indonesia which had a calorific value of 6,000 to 6,300 kilocalories (kcals) compared to 3,500 kcals for domestic coal. Due to its high calorific value, the imported coal had to be blended with domestic coal. Nevertheless, plant technical performance during this period was quite satisfactory. Details of the plant s performance are in Appendix 15. IV. CONCLUSIONS & RECOMMENDATIONS A. Conclusions 24. The Project has been implemented substantially as conceived during appraisal. Although there has been considerable delay, the appraisal schedule was realistic and feasible when compared to the implementation period required by other organizations in India for setting up power stations of similar size and capacity. The main causes for delay were startup problems such as the lack of a proper project report, delayed land acquisition due to litigation, and procurement and implementation problems. In the absence of a computerized integrated project scheduling and management system, such complicated projects are difficult to manage. Furthermore, even with clearly identified centers of responsibility, constant turnover of key project personnel detracted from a sense of project ownership. Issues related to the environment were not fully addressed and the state pollution control authorities have not formally issued a consent order to TNEB to allow it to operate the plant. Safety issues have also not been addressed and safety-related equipment such as helmets, safety shoes, and belts were not given to the workers. Considerable loan savings were realized through the depreciation of the rupee. However, surplus loan savings were identified as late as 1996 when an amount of $30 million was canceled. This should have been done earlier when all contracts under the loan were awarded. In respect of the covenants relating to improvement in productivity, although attempts were made to reduce the total staff strength, in 1992 and 1993 TNEB had to provide regular employment to a large number of contract laborers as directed by a labor tribunal. The covenant requiring tariffs that would ensure a 3 percent rate of return was not complied with. Due to political reasons, the state government insisted on high cross subsidization and free power to agricultural consumers. There were periodic tariff revisions, but the tariff levels were not remunerative. This has resulted in inadequate cash generation by TNEB. The state government partially reimbursed TNEB for the free power supply to ensure that TNEB maintains the statutory requirement of a 3 percent rate of return on net fixed assets. This politically-driven tariff policy has seriously affected TNEB s financial resources, due to which it has not been able to invest in 12 Auxiliary consumption is the amount of power used by the plant to operate its own systems such as coal or ash handling systems, pumps, and motors; specific coal consumption is the amount of coal used to generate one unit of electricity; and the plant heat rate is the amount of heat energy required for one unit of work and is a factor in calculating the efficiency of a machine.

18 9 important activities such as capacity addition, renovation, modernization, and upgrading of the distribution facilities. 25. In view of the achievement of the Project s main objectives, considerable delays in project implementation, non compliance of key loan covenants, and a low FIRR of 4 percent, the Project is classified as partly satisfactory. B. Lessons Learned 26. The preparation of a project is the key to successful implementation and derivation of benefits. Delays in initial activities like the preparation of detailed project reports, land acquisition, soil investigation, survey, preparation of bidding documents, and procurement can contribute substantially to overall delay in the implementation of a project. Although the past performance of an executing agency (EA) may have been satisfactory, it is essential to critically review the project management system and capabilities of the EA during the initial stage of appraisal. Wherever shortfalls are observed, ADB should provide adequate advice and assistance to the EA to enhance its project management capabilities and to use modern computer-based project scheduling and management systems. Once a proper management tool is built into the system, high turnover of staff or conflicts in procurement will have minimal effect on project implementation. Review missions under the Project should have clearly identified the issues contributing to the delays and helped to resolve the problems, as was done in the case of the first ICHS in Potential loan savings need to be identified as soon as possible and canceled in consultation with the Borrower and the EA. Such timely cancellation rationalizes ADB s portfolio and the Borrower avoids paying unnecessary commitment charges. Although certain developmental and financial covenants are built into the loan and project agreements, a single power project does not have sufficient leverage to ensure compliance of loan covenants with political implications. Future assistance should be based on a more comprehensive approach aimed at reforming the state power sector. To this end, ADB should consider providing program loans and technical assistance to help make the states power sector sustainable. C. Recommendations 1. Project-Related a. Future Monitoring 27. All the components of the Project have been implemented and the two units are in commercial operation. However, some components under the second loan 13 are expected to remain under implementation until June ADB should continue to monitor the performance of the Project until 2002, when the project completion report for the second loan is expected to be completed. 13 Loan No IND: Second North Madras Thermal Power Project for $200 million, approved on 30 August 1990.

19 10 b. Covenants 28. Most of the covenants of the Project have been implemented, although two very important covenants relating to tariff rationalization and productivity were not complied with. This was mainly due to the Tamil Nadu government s involvement in tariff setting and the decision to offer all contractual workers regular employment with TNEB. Efforts were made to reduce nontechnical losses but overall losses are still high at 16.9 percent. It is essential for TNEB to install meters for all consumer connections to separately identify the technical and nontechnical losses so that suitable remedial action can be taken. c. Further Action or Follow-up 29. The Project does not require any specific future action. The reliability and future performance of the power plant are closely monitored by TNEB s operation unit and the office of TNEB s Member (Generation). 30. During project implementation, few steps were taken to rationalize TNEB s tariff structure to reduce the heavy cross-subsidization of agricultural and residential consumption. The Tamil Nadu government setup a state electricity regulatory commission (SERC) to review TNEB s tariff proposals and finalize statewide tariffs. However, the SERC could not be made fully functional as some of the selected members did not accept their assignment. The operation of the SERC will need to be monitored as this is the first step toward restructuring the state s power sector. TNEB needs to improve its management of environment-related issues to ensure compliance with statutory norms. Safety issues should be addressed immediately. d. Additional Assistance 31. TNEB has planned that all future power generation projects will be set up in the private sector. Considerable initiatives have been taken in this regard. Memorandums of Understanding have been signed with 12 prospective private sector promoters for a planned capacity addition of about 4,600 MW. One project is already in commercial operation and another project has achieved financial closure. Others are in various stages of approval and financial negotiation. Therefore, ADB should not consider additional financial assistance to TNEB to set up generation facilities. Financing, if any, could be made available through ADB s private sector facilities or loans through developmental financial institutions. e. Project Performance Audit Report 32. Since the NMTPP has been funded under two ADB loans, and the second loan is likely to be completed in the second quarter 2001, a mission may be fielded to prepare the project performance audit report in the fourth quarter of 2002 after a project completion report has been prepared for the second loan.

20 11 2. General 33. In spite of strong technical and managerial capabilities, TNEB or any other state electricity board (SEB) is unable to operate in a commercial and professional manner. Nonremunerative tariffs dictated by state governments make SEBs commercially unviable and unable to invest in capacity addition, distribution upgrading, computerization, and metering. A financial restructuring of SEBs is considered necessary. Taking these factors into consideration, ADB should support comprehensive state-level power sector reforms, including the appointment of independent SERCs; metering of consumers; corporatization of the generation, transmission, and distribution entities; renovation and modernization of old power plants; improvements in the transmission and distribution systems; demand-side management; and enhancement of the managerial and technical capabilities of power sector organizations. Such initiatives have already been taken by ADB while processing the power sector program loan for Gujarat state.

21 12 APPENDIXES Number Title Page Cited On (page, para.) 1 Project History-Main Events 13 2, 4 2 Tamil Nadu Electricity Board-Organizational Chart 3 Currency Equivalents-Average Rate of Exchange 17 2, , 7 4 Project Costs-Summary of Contracts 19 3, 7 5 Implementation Schedule 20 3, 8 6 Environmental Monitoring Data & Statement of Compliance with Ministry of Environment and Forests conditions 21 4, 11 7 Resettlement and Rehabilitation Measures 25 5, 12 8 Projected and Actual Disbursements 26 5, 13 9 Status of Compliance with Key Conditions and Covenants 27 5, Trends in Tariff Revision 31 5, Details of State Government Subsidy Payments 32 5, Income Statements and Balance Sheet 33 5, Associated Transmission System 36 6, Economic and Financial Evaluation 37 7, Plant Performance 41 8, 23

22 13 PROJECT HISTORY MAIN EVENTS Appendix 1, page Nov - The Country Economic Mission identified the Project for possible financing in CY1987. A loan amount of $150 million was earmarked for the Project Jan-7 Feb - The Preliminary Fact-Finding Mission assessed the Project and advised TNEB to prepare and submit to the Asian Development Bank (ADB) a draft project report. ADB advised the need of a feasibility study to establish the least-cost solution for transporting coal from Talcher to Chennai May - The Fact-Finding Mission reviewed the draft project report prepared by Tamil Nadu Electricity Board (TNEB) and identified points that need to be strengthened in the final report. 25 Jul - Management Review Meeting Aug - The Pre-Appraisal Mission visited India to discuss key issues relating to the Project Sep - Appraisal. 1 Oct - Staff Review Committee Meeting. 3 Oct - Loan and Technical Assistance Coordination Committee Meeting Oct - Loan negotiations. 18 Nov - Board meeting and approval of the Project Jan - Inception Mission. 21 Jan - Loan signing. 10 Apr - Loan effectivity. 30 Oct - Contract awarded for the steam generators.

23 14 Appendix 1, page Feb - Contract awarded for the steam turbine generators Feb - ADB fielded the Fact-Finding Mission for the proposed second North Madras Thermal Power Project. During of the course of this mission, a detailed review was carried out of the Project. Progress was considered to be proceeding very satisfactorily and substantially on schedule Aug - Review Mission. TNEB requested ADB financing for the coal handling system out of the available savings Mar - Review Mission. Contract for internal coal handling system (ICHS) delayed. Physical implementation satisfactory. 6 Apr - Contract awarded for the instrumentation and control equipment system Nov - Review Mission. The Mission noted that the construction of Units 1 & 2 was progressing well with about 22 percent of the work completed. The Mission also noted that Unit 1 was expected to be commissioned in March 1993, some two years behind the appraisal schedule May - Review Mission. Construction was progressing well with about 30 percent of the project completed. 19 Jun - Contract awarded for ICHS-I Nov - Review Mission. Slow rate of progress in contracts award & procurement and Nov - Review Mission. Further delay in contracts award and procurement. Some of the contracts approved by ADB earlier in the year had not been awarded.

24 15 Appendix 1, page Jul - ADB approved TNEB s request for partial financing for the external coal handling system ($23 million). Loan closing date extended to 30 June Jul - Review Mission. The Mission reviewed progress of the Project and inspected the construction site. The Mission noted that there would be 6-9 months delay in commissioning all units Mar - Review Mission. The Mission noted that all major contracts (except for the ICHS-II and dredger) had been awarded by December Sep - Review Mission. The Mission discussed with TNEB the status of the two remaining contracts, namely (i) Dredger and (ii) ICHS-II. A revised award schedule for these package was drawn out Apr - Review Mission. Overall progress of the Project is unsatisfactory and the rate of progress appeared to have deteriorated during the last year. Construction of a part of the ICHS-I consisting of wagon tippler, primary and secondary crushers and coal conveyors is behind schedule by one year. The Mission observed that the contractor is not able to fulfil its contractual obligations Jun - Review Mission. The Mission observed that the ICHS-I, implemented by Engineering Projects India Ltd. was in a stalemate situation. No concrete action was taken by TNEB, Engineering Projects India Ltd. or the Government of India to resolve the issue. 20 Oct - TNEB withdraws the dredger contract from the loan Nov - Joint Review Mission fielded consisting of staff from ADB s headquarters and India Resident Mission. The Mission noted that Units 1 and 2 have been commissioned and Unit 3 was expected to be commissioned by the end of February 1996.

25 16 Appendix 1, page Jan - Project transferred to the India Resident Mission for administration. 8 Oct - Savings of $30 million canceled. Entire financing of external coal handling system transferred to the second loan Nov - Review Mission. The Mission noted that there has been considerable delay in the implementation of the Project. The power plant has not been fully operational due to nonavailability of the ICHS-I Feb - TNEB canceled ICHS-II contract and withdrew the contract from ADB financing Feb - Review Mission. The Mission noted that all the components of the Project were complete except for the ICHS-I. In the absence of the coal handling system, temporary arrangements have been made to supply the coal to the plant. The Mission noted that the plant was operating at about 65 percent of its rated capacity. The slow progress in the completion of the ICHS-I was attributed to the inability of the contractor to make payments to its sub-contractors on a timely basis. The situation had improved after an arrangement was made between the contractor and TNEB to allow direct payments to the sub-contractors by TNEB as recommended by ADB in April Oct - Savings of $7.02 million canceled Jun - Review Mission. The Mission noted that ICHS-I was still under construction with the first stream to be completed by 31 July 1998 and the entire system by the end of October Jan - Loan account closed. 30 Mar-2 Apr - Review Mission. All components under the Project are complete except the ICHS-I. TNEB has taken over the ICHS-I from the contractors and has undertaken to complete the remaining works on its own. 30 Jun - ICHS-I commissioned.

26 TAMIL NADU ELECTRICITY BOARD - ORGANIZATIONAL CHART CHAIRMAN MEMBER MEMBER ACCOUNTS GENERATION DISTRIBUTION MEMBER CE/PLANNING CE/PROJECTS CE/CIVIL CE/NMTPP SE/PLANNING SE/ELECTRICAL/ DESIGNS-NMTPP SE/CIVIL THERMAL SE/CIVIL SE/CIVIL/PROJECT SE/ELECTRICAL SE/PURCHASE & SE/MECHANICAL SE/OPERATIONS MAINTENANCE SYSTEMS MATERIALS NMTPP NMTPP MANAGEMENT CE = Chief Engineer, SE = Superintending Engineer, NMTPP = North Madras Thermal Power Plant. Source: Tamil Nadu Electricity Board. SE/MECHANICAL - II NMTPP 17 Appendix 2

27 18 Appendix 3 CURRENCY EQUIVALENTS AVERAGE RATE OF EXCHANGE Rs to $ FY (1 April - 31 March) Rs to $ Source: Reserve Bank of India's Bulletin.

28 19 Appendix 4 PROJECT COSTS SUMMARY OF CONTRACTS PCSS 1 No. Contract No. Contractor/Supplier Description Contract Amount $Equivalent Category 01A Equipment & Material Turbine Generators & Auxiliaries 0002 NMTPP-1-4 Bharat Heavy Electricals Ltd. Turbine Generator Rs 900,603,379 43,053,001 Category 01B Equipment & Material Steam Boilers & Auxiliaries 0001 NMTPP-1-3 Bharat Heavy Electricals Ltd. Steam Generator Rs 941,443,101 48,999,001 Category 01C Equipment & Material Other Equipment 0003 NMTPP-I-11 TATA Honeywell Instrumentation & Control Eqpt. Rs 79,873,942 2,6844, NMTPP-I-45-B G.R. Power Switchgear 245 kv Isolators Rs 5,134, , NMTPP-I-45-A Crompton Greaves SF6 Circuit Breakers Rs 13,277, , NMTPP-I-45-C W.S. Industries Transformers Rs 15,611, , NMTPP-I-45-D W.S. Industries Voltage Transformers Rs 5,284, , NMTPP-I-45-E Oblum Elect. Industries Ltd. Lightning Arrestors Rs 2,508,559 80,245 Category 01D Equipment & Material Internal Coal Handling System 0004 NMTPP-I-19 Engineering Projects India Ltd NMTPP-I-19-II Elecon Engineering Co. Ltd. ICHS-I Rs 298,490,139 9,474,539 ICHS-II Rs 137,816,991 4,783,640 1 PCSS = Procurement Contract Summary Sheet. Source: ADB s Loan Financial Information System.

29 IMPLEMENTATION SCHEDULE ACTIVITY I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV Land Acquisition Civil Works Steam Generators Turbine Generators Control & Instrumentation Coal Handling System Mechanical Services 20 Transformers Switchgear Switchyard Equipment Electrical Services : Appraisal Schedule. : Actual Implementation. Appendix 5