IEG Report Number: ICRR14748 ICR Review Independent Evaluation Group 1. Project Data: Date Posted: 06/29/2015 Country: India Project ID: P101653 Appraisal Actual Project Name: Power System Project Costs (US$M): 2,114 1,300.72 Development Project Iv L/C Number: Loan/Credit (US$M): 1,000 855.22 Sector Board: Energy and Mining Cofinancing (US$M): Cofinanciers: Board Approval Date : 03/18/2008 Closing Date: 07/31/2013 07/31/2014 Sector(s): Transmission and Distribution of Electricity (100%) Theme(s): Infrastructure services for private sector development (100%) Prepared by: Reviewed by: ICR Review Group: Coordinator: Fernando Manibog John R. Eriksson Christopher David IEGPS1 Nelson 2. Project Objectives and Components: a. Objectives: The project development objective (PDO) is "to strengthen the transmission system in order to increase reliable power exchange between regions and states of India" according Schedule 1, page 4 of the Loan Agreement dated March 28, 2008 between IBRD and the Power Grid Corporation of India Limited (POWERGRID). According to the Project Restructuring and Additional Financing Paper dated May 15, 2014, there was no change in the PDOs. The Project Appraisal Document (PAD) and the Implementation Completion and Results Report (ICR) state the same PDO. Note: Through the Power System Development Projects (PSDP) series, the Bank has supported POWERGRID's emergence as one of the world's largest transmission utilities through a series of investments. Bank financing for the PSDP series has amounted to US$3.7 billion since 1993 and has included intensive capacity-building support during POWERGRID's formative years. The Bank has financed the following projects, with the loan amounts indicated:  Northern Region Transmission Project (NRTP) for US$475 million (closed in September 2000)  First PSDP (PSDP I) for US$350 million (closed in December 2000)  Second PSDP (PSDP II) for US$450 million (closed in June 2006)  Third PSDP (PSDP III) for US$400 million (closed in July 2011) The project under review is the Fourth PSDP, and the Fifth PSDP is presently under implementation. b.Were the project objectives/key associated outcome targets revised during implementation? No c. Components: This repeater project (see costs below) had only one major component - the Transmission System Strengthening Schemes - which consisted of the partial construction of the following, including transmission lines and substations: 1. East-West Transmission Corridor 2. Western Region Strengthening II 3. Eastern Region Strengthening I and also the completion of construction of the following: 4. 2,500 MW, +/- 500 kV Balia-Bhiwadi HVDC Bipole System 5. Northwest Transmission Corridor The above works included transmission lines and substations. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: Costs and Financing: The project contributed to POWERGRID's 2006-2014 investment program totaling US$2.125 billion. Of this total, the Bank financed US$600 million under the original loan and US$400 million under Additional Financing approved on May 15, 2014. The Borrower financed the remaining amount. Restructuring The project had a Level 2 restructuring requiring Country Director approval in May 2014 -- with no change in the PDO -- to utilize the significant savings of US$145 million (US$60 million under the original loan and US$85 million under the Additional Financing) that resulted mainly from the highly competitive market and the continuing devaluation of the Indian rupee against the U.S. dollar since loan approval. The restructuring included: 1. Southern Region System Strengthening Scheme XIII (SRSS 13), which was a new scheme 2. System Strengthening in Western Region for Sasan Ultra Mega Power Project (UMPP), which was shifted from the new Power V project to the Additional Financing of this Power IV project. Dates: Appraised in January 2008, the project was approved by the Board on March 18, 2008, and became effective on May 16, 2008. The midterm review was conducted from April 12 to 23, 2010. As explained above, the project was restructured in May 2014. The original closing date of July 31, 2013 was extended by one year to July 31, 2014, 3. Relevance of Objectives & Design: a. Relevance of Objectives: High The project's objective was substantially relevant at the time of appraisal and remains so today, both in terms of the Government's sector strategy and the Bank's country assistance strategies. During the years surrounding project appraisal (January 2008), a rapidly growing demand and electricity shortages seriously affected India's energy sector. Consequently, the Government's sector strategy in its 10th Year Plan (2002-2007) gave high priority to addressing the limitations of grid integration, deficits in generation and transmission capacity, and severe peak load shortages -- all of which had resulted in high losses to the economy. The PDO was especially relevant to the dire need for expanding the regional transmission network and inter-regional capacity to transmit power. Project completion (2014) coincided with the consolidation of the National Grid that was being pursued under the 12th Five Year Plan (2012–17). Also at appraisal, the Bank's Country Assistance Strategy (2004–2007) cited as its priority areas of engagement infrastructure as one of its priority areas of engagement, together with human development and rural development. Operationally, this translated into prioritizing the expansion of POWERGRID’s inter-regional and state-level transmission capacity, and improving electricity access. Currently, within the umbrella of its Country Partnership Strategy (2013–2017), the Bank's power sector strategy centers on: (i) addressing bottlenecks in generation, transmission, and distribution at both the state as well as national level through the financing of relevant public investments; (ii) supporting policies and regulatory measures to foster private sector participation and efficient sector operations; and (iii) promoting economically and financially sustainable access to electricity. b. Relevance of Design: Substantial The project’s design is substantially relevant to the over-arching goal of achieving grid integration, by supporting investments in transmission capacity to transfer power from surplus to deficit regions. This synchronization of the Southern Region grid with rest of the country's grid is essential to truly achieve one National Grid. More specifically, the focus of the project's design on transmission lines and substations directly serve POWERGRID's need to reinforce its capability to manage and operate the national grid, which it is pursuing through the Power System Operation Corporation Limited (POSOCO), a fully owned subsidiary of POWERGRID. POSOCO has state-of-the-art Unified Load Dispatch and Communication (ULDC) facilities that are designed to carry out efficient and transparent operation and management of the national grid. To this end, the National Load Dispatch Center (NLDC) and Regional Load Despatch Centers (RLDCs) have also been continuously upgraded and modernized. The relevance of project design has been further enhanced by capitalizing on the accumulated technical experience of POWERGRID and using the eligibility criteria under the immediately preceding Third PSDP to identify investments and financing mechanisms for transmission systems. Through the latter, POWERGRID was able to establish that the selected transmission investments were technically justified, operationally sound, and selected on the basis of having been the least-cost option after consideration of alternative investments. However, the Results Framework as presented in the PAD (Annex 3, pages 22 to 23) is rudimentary as it basically states the PDO and only shows physical growth in (i) units of power exchange within and across regions, and (ii) circuit-kilometers of transmission capacity. None of the key activities and no intermediate indicators are shown. Critical factors of performance related to institutional capacity are totally absent. However, given the straightforward PDO of expanding the transmission system to increase power exchange, and the technical strength of POWERGRID built with Bank support since 1993, this is considered a relatively minor shortcoming. 4. Achievement of Objectives (Efficacy): Substantial The objective of the project is to strengthen the transmission system in order to increase reliable power exchanges between regions and states of India. Overview: By 2013. the project had exceeded the targets that were set in the PDO-level and intermediate outcome indicators. During the September 2013 Bank supervision mission for this PSDP IV project (also the midterm review for the ongoing PSDP V), the indicators were revised upward to lay the basis for the project restructuring that was approved in May 2014. Subsequently, the revised targets were also exceeded by POWERGRID, except for the small gap of 0.18% in transmission capacity. The project's over-arching achievement was to increase the availability of electricity via the national grid, especially in deficit regions, thus promoting the optimal utilization of scarce transmission system resources and increasing access to reliable electricity supplies. Outputs: PDO Indicator: Inter-regional power exchange grew to 78,384 million units (MU) in 2014, compared to the baseline of 37,752 MU set at the 2007 appraisal. This represents a 108% actual increase, compared to the appraisal estimate of a 54% increase from the baseline. Intermediate Output Indicators: Transformation capacity grew to 205,923 megavolt-amperes (MVA) in 2014, compared to the baseline of 59,417 MVA set at the 2007 appraisal. This represents a 247% actual increase, compared to the appraisal estimate of a 55% increase from the baseline. Transmission capacity grew to 106,804 circuit kilometers (ckm) in 2014, compared to the baseline of 59,400 ckm set at the 2007 appraisal. This represents an 80% actual increase, compared to the appraisal estimate of a 60% increase from the baseline. Outcomes: The project's development outcomes include the following (these may not be fully attributable to PSDP IV alone given the cumulative effects from previous operations in the PSDP series):  POWERGRID’s operational performance in terms of transmission system availability improved from 99.2% to 99.9% from 2007 to 2014.  The number of trippings per line was reduced from 3.64 to 0.56 during the 2007 to 2014 period.  Power traded as a percentage of total power generated has increased from 3.6 percent in 2007 to 11 percent in 2014, which would indicate an improved utilization of existing transmission capacities, i.e., the ability when needed to easily transfer electricity from surplus regions/states to regions and states that are experiencing deficits.  Measures have been adopted to bring the frequency within the prescribed band. As a result, POWERGRID and POSOCO are now running one of the largest transmission networks in the world that operate at a single frequency.  Grid security is now better ensured and distribution utilities have greater incentives to procure power through contracts in organized markets.  The Southern Region was also connected synchronously with the rest of the National Grid in December 2013.  Corporate-level indicators show a continuation of POWERGRID's strong performance across several technical and financial metrics (see Section 5 below on Efficiency).  Private sector participation has increased by more than 4.5 times in terms of circuit kilometers of line constructed from 2007 to 2014.  Improved corporate governance and financial accountability has resulted in the successful listing of POWERGRID in local and international stock exchanges. 5. Efficiency: Substantial Economic Efficiency At appraisal, the economic rate of return (ERR) ranged from 14.8% to 22% in the base case and 10% to 16% in the most adverse case. At completion, and using the same methodology at appraisal, the ERR varied between 11% for the Eastern Region System Strengthening 1 (ERSS1) and 24% for the Northwest Transmission Corridor (NWTC). The recalculated ERRs at completion are all above the 12% opportunity cost of capital except for ERSS1. Financial Efficiency Return on Equity (ROE) was used as the proxy for a financial rate of return calculation during appraisal. Using the same methodology, the ROE at completion for all the cases of the different schemes varied between 14% for ERSS I and 29% for NWTC. Corporate Financial Viability POWERGRID has complied with all the financial and legal covenants in the Loan Agreement. Financial ratios are robust compared to those stipulated by the covenants:  The debt-equity ratio was always less than 80:20  The self-financing ratio was also greater than 20 percent for all the years from FY2008 to FY2014.  Accounts receivable over the project life were also much lower than the 3 months of billing  POWERGRID’s receivables as of July 31, 2014 stand at 0.34 months of average billing. Administrative and Implementation Efficiency There were no major delays. The Southern Region System Strengthening XIII (SRSS 13) was delayed due to severe Right Of Way issues that were faced at the state level, which is beyond the control of POWERGRID. The expected completion date is March 2015. a. If available, enter the Economic Rate of Return (ERR)/Financial Rate of Return (FRR) at appraisal and the re-estimated value at evaluation : Rate Available? Point Value Coverage/Scope* Appraisal Yes 22% 100% ICR estimate Yes 24% 100% * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: The relevance of the objectives of this repeater project was substantial; the relevance of project design was also substantial, having benefitted greatly from the accumulated knowledge and experience from previous projects in the PSDP series. Efficacy was substantial, although it should be noted that while the outputs were achieved and have exceeded their targets, the outcomes while impressive may not necessarily be all attributable to PSDP IV given the cumulative effects from previous PSDP series operations. Efficiency was substantial, on all the criteria of economic and financial rates of return, corporate financial viability, and implementation efficiency, except from a relatively slight delay in one of the schemes (SRSS13). a. Outcome Rating: Satisfactory 7. Rationale for Risk to Development Outcome Rating: The physical investments are expected to be sustainable, given POWERGRID's financial, operational, and technical strength. POWERGRID has been proven to have an adaptive corporate and operational structure that enables it to manage and run its infrastructure facilities flexibly and efficiently. There is also a likelihood that POWERGRID will continue to attain high performance levels technically and financially, given its strong institutional capacity and managerial performance track record. Private participation in terms of circuit kilometers of transmission lines constructed has also increased (by over four-fold, as indicated in Section 4 above), thus giving further assurances that high technical and commercial standards would be maintained. a. Risk to Development Outcome Rating : Negligible to Low 8. Assessment of Bank Performance: a. Quality at entry: The Bank's knowledge and experience gained from PSDP I, II, and III had a positive impact on the preparation of PSDP IV, notably by helping ensure that lessons learned and a deep understanding of the sector context were reflected in project design and appraisal. For example, at appraisal, the implementation of several PSDP IV schemes were already underway under PSDP III. POWERGRID had also already initiated advanced procurement of all packages to be financed under PSDP IV. The objectives under PSDP IV and III were also fully consistent, namely, to increase inter-regional power exchange capacity. Thus, in practice, the Project Implementation Plans (PIPs) for all the PSDP IV schemes had already been reviewed and approved by the Bank early in the appraisal stage, since they had already met the eligibility criteria under PSDP III. At entry, the Bank already had a deep knowledge of the Indian power sector, the transmission subsector, and POWERGRID's operational and institutional capabilities. This enabled the Bank to capitalize on already established strong partnerships and good working relationships with the sector’s stakeholders, including POWERGRID, POWERGRID's subsidiary POSOCO, the Central Electricity Regulatory Commission, the Ministry of Power, and the Ministry of Finance. This enabled the Bank to more efficiently carry out a financial management assessment, as well as a safeguards and compliance measures assessment. The Bank was able to more readily ensure that effective Environmental and Social Policy (ESPP) framework and procedures had already been established. As a result, POWERGRID provided the initial Environmental Action Plan (EAP) and Rehabilitation Action Plans (RAPs) early on. Quality-at-Entry Rating: Satisfactory b. Quality of supervision: The Bank project team conducted 9 supervision missions during the 6-year implementation period, which included site visits that focused on monitoring compliance with environmental and social safeguards. Given the high profile of the PSDP series, the team also interacted regularly with diverse stakeholders including the Ministry of Finance, Ministry of Power, the Central Electricity Authority, relevant State Electricity Boards, Project Affected Peoples, and NGOs (ICR, page 93). Close supervision was delegated to country-based staff, which had a counterpart staff in POWERGRID. This facilitated the implementation and monitoring of the project's activities. The ICR indicates that the Bank team was provided adequate budgetary resources and an appropriate skills mix. The Implementation Status and Results Reports (ISRs) provided timely information on compliance with covenants, disbursements, and any corrective actions thay may have been needed. By the mid-term review of April 2010, the targets of the performance indicators had already been exceeded. The forest management and Right Of Way issues, which resulted in a delay in one of the PSDP IV schemes, required close collaboration between the Bank team and POWERGRID. The issues were eventually resolved. The Bank team also closely monitored the financial management (FM) performance of POWERGRID and took actions to strengthen its internal audit department, including the hiring of consultants to (i) review the company's Enterprise Resource Planning and (ii) strengthen its Enterprise Risk Management. POWERGRID’s internal systems are robust enough to enable its listing on stock exchanges in India and abroad. POWERGRID's FM performance has benefitted from its long-term partnership with the Bank through several previous operations. Quality of Supervision Rating : Satisfactory Overall Bank Performance Rating : Satisfactory 9. Assessment of Borrower Performance: a. Government Performance: The Government placed strong emphasis on the energy sector as being critical for India's sustained and inclusive economic growth. This was consistently reflected in its Five-Year Plans and continued actions to invest heavily in the transmission subsector so that electricity demand can be met by a reliable delivery network. The Government's broad-based commitment -- including the Ministry of Planning, Ministry of Finance, and the Central Electricity Regulatory Commission --- was evident in its willingness and readiness to engage with the Bank during project supervision, as well as in the larger dialogue that pervaded the PSDP series. The key stakeholder made themselves available to the Bank supervision teams and worked together to resolve issues during project supervision. When necessary, the Government took the actions through strategic and managerial directives for the power sector. The Government provided regular monitoring of loan disbursement and counterpart funding, and compliance with loan covenants, including payment of arrears. The Government provided an adequate legal and regulatory framework for achieving the PDO and promoting POWERGRID’s sustainability. For example, the regulatory framework allowed for tariffs that enabled POWERGRID to achieve adequate and satisfactory rates of Return On Equity. Government Performance Rating Satisfactory b. Implementing Agency Performance: POWERGRID was the Borrower and implementing agency for PSDP IV. Its strong institutional capacity was built through sustained strengthening under the preceding PSDP projects, which the Bank had supported since 1993. POWERGRID has the managerial strength, operational culture, and project management capabilities needed for effective monitoring of implementation. As a result, POWERGRID demonstrated its efficiency in implementing most investment schemes on or near schedule. As discussed in Section 4 on Efficacy, POWERGRID was able to exceed its Output targets under the project (disbursements were 96% of the original loan, and 100% of the Additional Financing loan). POWERGRID complied with the financial and other legal covenants, as well as the Bank's Procurement Guidelines. It employed its Integrated Project Management and Control System (IPMCS), its corporate Environmental and Social Policy and Procedures (ESPP), and Corporate Social Responsibility (CSR) to mitigate safeguard risks. This allowed corrective actions to be taken in a timely manner. According to the ICR (page 28), "POWERGRID continues to improve its corporate governance, environmental, and social responsibility through strengthening of the ESPP and CSR, internal audit department, carrying out of operational audits, implementing of the ERM framework, and the ERP system." Implementing Agency Performance Rating : Satisfactory Overall Borrower Performance Rating : Satisfactory 10. M&E Design, Implementation, & Utilization: a. M&E Design: M&E design was keyed exclusively to the implementation and completion of the transmission schemes. Thus, the M&E framework focused the reporting on the achievement of physical output targets and the operational performance of the transmission system as well as POWERGRID's own performance, including legal covenants with the Bank, financial reporting, and contracts monitoring. This was evident from how the PDO and intermediate indicators for the project were formulated. b. M&E Implementation: Using an agreed reporting format, POWERGRID utilized its Integrated Project Control and Management System (IPCMS) to collect real-time data on the progress of physical installations, as well as increases in transmission and transformation capacities, while the National Load Dispatch Center (NLDC) monitored growth in power exchange. In addition, POWERGRID monitored billing and collection and provided the Bank a monthly report. In addition, POWERGRID also produced quarterly progress reports (QPRs), quarterly financial management reports, audited annual financial statements (within six months of the end of each financial year), and annual information on progress with sector performance indicators. c. M&E Utilization: The data generated in the quarterly reports were utilized in addressing all aspects of the project including procurement, engineering, safeguards, financial management, and corporate finance, as well as POWERGRID's covenanted targets with the Bank such as the debt-equity ratio, the self-financing ratio, and payment of arrears. M&E Quality Rating: Substantial 11. Other Issues a. Safeguards: The original project and its Additional Financing were both rated ‘Category A’ on safeguards. In 1998, POWERGRID developed its corporate Environment and Social Policy Procedures (ESPP), which has been updated in 2005. The ESPP, which is systematically applied to all POWERGRID projects whatever the financing source of financing, is in compliance with the Bank's safeguards policies and its provisions, according to the ICR (page 13). The ICR further indicates that "The ESPP outlines POWERGRID's approach and commitment to deal with the environmental and social issues relating to its transmission schemes and lays out management procedures to address them. The ESPP provides POWERGRID with a framework for identification, assessment, and management of environmental and social concerns at both organizational as well as field levels." The 2005 ESPP update was accompanied by capacity-building in POWERGRID's environmental and social management department, and national and regional consultations; the ESPP was further updated in 2009 to meet the guidelines of multilateral funding agencies and adopt international best practices. This revised ESPP was adopted by the Bank as a pilot for Use of Country Systems under PSDP V. (ICR, page 13) The ICR (page 14) further indicates that In line with the Bank’s social safeguards, the Corporate Social Responsibility (CSR) policy is aimed at promoting community development around its establishments and substations with a focus on education, health care, infrastructure development, ecology and environment conservation, and disaster relief in the country. The CSR initiatives are aimed to improve the quality of life of the local population and bring the marginalized people to the mainstream of development. POWERGRID has articulated a ‘Social Entitlement Framework’ based on the National Resettlement and Rehabilitation Policy of 2007 and other progressive trends in its ESPP applicable for the affected families. In line with its land acquisition policy (for the construction of substations), POWERGRID acquires land with minimal social impact on account of land loss. Site selection is planned on the basis of avoiding irrigated land, homestead land/houses, religious structures, cultural property, or public infrastructure. Overall, implementation of ESPP along with measures adopted under CSR has played a major/vital role in mitigation of social impacts of the project." At completion, the rating for safeguards compliance was Satisfactory. All the transmission schemes were completed except for SRSS 13, for which completion has been delayed due to "severe RoW issues being faced in the state of Karnataka, which were out of the control of POWERGRID. Monitoring of implementation of this scheme will now be done under PSDP V." (ICR, page 15) b. Fiduciary Compliance: Previous Bank support under the PSDP series included the strengthening of POWERGRID’s internal audit department, as well as the development and implementation of an organization-wide frameowrk for Enterprise Risk Management (ERM) and Enterprise Resource Planning (ERP) aimed at improving corporate governance and financial accountability. In July 2008 as the project started, financial management (FM) was rated as Moderately Satisfactory due to outstanding issues and subsequently to the delay in submission of the project audit report for FY2013 (caused by the delay in appointing an auditor). Moreover, the FY2013 audit report was qualified due to the diversion of Bank-funded materials to other projects. The FY2014 audit report was submitted on time but the qualification remained on POWERGRID's diversion of materials from the sites where issues and delays occur (e.g., the Right-of-Way issues in SRSS 13) to sites that are higher priority for the National Grid. The ICR (pages 15-16) indicates that "A proper arrangement is formulated between the sites where the material has been diverted to return the material of the same specifications and diligently followed. Both the Bank and POWERGRID are working together to resolve the issue at the earliest and this will be closely monitored under PSDP V." The ICR (page 16) indicates that that "POWERGRID’s FM system accurately accounted and reported for the project resources and expenditures" and that "its FM performance under previous loans has been rated Satisfactory." Procurement In terms of procurement, all 73 packages (39 packages under PSDP IV and 34 packages under PSDP IV AF) were awarded according to the Bank’s procurement procedures. c. Unintended Impacts (positive or negative): d. Other: 12. Ratings: ICR IEG Review Reason for Disagreement/Comments Outcome: Satisfactory Satisfactory Risk to Development Negligible to Low Negligible to Low Outcome: Bank Performance: Satisfactory Satisfactory Borrower Performance : Satisfactory Satisfactory Quality of ICR: Satisfactory NOTES: - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate. 13. Lessons: Some of the key lessons provided by the ICR (pages 29-31) are quoted below:  Long-term programmatic engagement results in a successful partnership . The Bank's long-term support for POWERGRID has resulted both in a strong transmission system and deep institutional strengthening, as shown by the continuous improvements in POWERGRID's technical implementation, procurement, and safeguards systems, which are now used as standards by other companies.  Repeater operations contributed toward effective implementation of POWERGRID projects . Early preparation while the previous PSDP III was still being implemented helped to minimize the issues for PSDP IV. Moreover, the use of the same eligibility criteria helped to maintain the Government's commitment to the project.  Timely measures are required for overcoming Right -of-Way (RoW) issues. POWERGRID seeks early assistance from local government authorities and has adopted an innovative tower design that reduces the width of RoW requirements, thus minimizing conflicts and delays in obtaining RoW.  Due focus on safeguards help in obtaining forest clearances with a shorter turnaround time . The strengthening of POWERGRID's environment and social department, and its allocation of one officer in each region for regular follow-up and monitoring of forest proposals with the relevant officials, helped expedite obtaining forest clearances. 14. Assessment Recommended? Yes No 15. Comments on Quality of ICR: The ICR is clearly written and provides a large amount of quantitative evidence, although it is long at 31 pages partly because of repetitive texts and elaboration of detailed procedural matters. Overall, it complies with OPCS guidelines for ICR preparation. However, the financing figures in Annex 1(b) do not exactly add up to the project cost figures in Annex 1(a). Moreover, the ICR is almost entirely focused on physical outputs as formulated in the Key Performance Indicators, thus leading the ICR to say that "POWERGRID has satisfactorily achieved the PDO and has not only met but outperformed all KPIs, thus meeting all development outcomes." The physical outputs embedded in the KPIs are not the same as development outcomes. As indicated in the M&E section above, which has been rated Modest, there has been no effort (apart from physical bean-counting) to conduct an impact evaluation or a similar effort to assess the welfare impacts (particularly on the poor) of the expansion of India's transmission system and the ensuing increase in electricity access. a.Quality of ICR Rating : Satisfactory