TECHNICAL ASSISTANCE TO INDIA FOR PRIVATE SECTOR PARTICIPATION IN

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					ASIAN DEVELOPMENT BANK                 TAR: IND 32508




             TECHNICAL ASSISTANCE

                       TO

                      INDIA

                      FOR

         PRIVATE SECTOR PARTICIPATION IN

            ELECTRICITY TRANSMISSION




                  December 1999
                                       Currency Equivalents
                                     (as of 15 December 1999)


                 Currency Unit           –            Rupee/s (Re/Rs)
                       Re1.00            =            $0.0230
                        $1.00            =            Rs43.525




                                         ABBREVIATIONS

         ADB                   –         Asian Development Bank
         BOO/ BOT              –         build-own-operate/ build-operate-transfer
         CEA                   –         Central Electricity Authority
         ED                    –         electricity department
         IPTC                  –         independent power transmission company
         kV                    –         kilovolt (1,000 volts)
         Powergrid             –         Power Grid Corporation of India
         RFP                   –         request for proposal
         SEB                   –         state electricity board
         SERC                  –         State Electricity Regulatory Commission
         TA                    –         technical assistance




                                               NOTES

(i)    The fiscal year of the Government of India and the Power Grid Corporation of India ends
       on 31 March. In this report, FY before a calendar year denotes the year in which the
       fiscal year ends, e.g., FY1998 ends on 31 March 1998.

(ii)   In this report, "$" refers to the US dollar.
                                           I.       INTRODUCTION


1.      In 1991, the Government of India initiated countrywide power sector reforms. One of the
main objectives of the reforms is to introduce competition in the sector by increasing private
sector participation. As part of this effort, the Government and the Power Grid Corporation of
India (Powergrid) requested technical assistance (TA) from the Asian Development Bank (ADB)
to implement the 400 kilovolt (kV) Meramundali-Jeypore transmission line with the services of
the private sector. The TA is included in the 1999 country program. Fact-finding was carried out
in September 1998,1 and an understanding was reached with the Government and Powergrid
on the objectives, scope, costs, implementation arrangements, and terms of reference for the
TA. The TA framework is presented in Appendix 1.


                                II.      BACKGROUND AND RATIONALE

2.       Under the Constitution of India, electricity is a concurrent subject concerning both the
central and state governments. The Ministry of Power regulates the sector through the Central
Electricity Authority and controls the central power sector agencies, which own and operate large
generating facilities and interstate power transmission networks. State governments control the
rest of the sector through 17 state electricity boards (SEBs) and 12 electricity departments (EDs),
which are responsible for generation, transmission, and distribution in an integrated manner within
the boundary of each state or union territory. In addition, there are private utilities in major urban
agglomerations such as Ahmedabad, Calcutta, Mumbai, and Surat. The central sector agencies
generate 32 percent of the total electricity produced in the country, the SEBs and EDs 64 percent,
and the private utilities 4 percent. Power distribution is entirely in the hands of the SEBs, EDs, and
private utilities. The legal basis for the sector’s operations are the Indian Electricity Act, 1910, and
the Electricity (Supply) Act, 1948, with their several amendments, and the Electricity Regulatory
Commissions Act, 1998 (the acts).

3.      In 1991, the Government approved major amendments to the acts enabling the state
governments to invite private sector investment in generation and distribution. In 1995, with
assistance from the World Bank, ADB, and other aid agencies, the state of Orissa enacted
comprehensive legislation2 that allowed separation of the Orissa SEB’s generation,
transmission, and distribution functions, (i.e., unbundling); corporatization of the sector entities;
and appointment of an independent regulator for the sector.3 In 1998, two more laws were
approved by Parliament, the first4 providing for the creation of the Central Electricity Regulatory
Commission and state electricity regulatory commissions (SERCs) in each state if so desired by it;
and the second 5, declaring transmission an independent activity and allowing private sector
participation in this subsector, through the formation of independent power transmission
companies (IPTCs). In 1998, the state of Haryana also enacted legislation to establish a tariff and
a SERC, and to restructure the Haryana SEB into three unbundled companies. Since then,
several states have established their own SERCs under the acts.



1
    The TA first appeared in ADB Business Opportunities in October 1998.
2
    The Orissa Electricity Reform Act, 1995.
3
    The Orissa Electricity Regulatory Commission.
4
    The Electricity Regulatory Commissions Act, 1998.
5
    The Electricity Laws (Amendment) Act, 1998.
                                                        2


4.      Powergrid, a wholly Government-owned company, was established in October 1989 and
commenced operations in late 1991. It is responsible for establishing, owning, and operating the
interstate and interregional bulk power transmission systems in the country, as well as the
regional load dispatch centers. Currently, Powergrid owns and operates over 30,000 circuit
kilometers of high voltage direct current, 400 kV and 220 kV transmission lines and about
53 extra-high voltage substations, making it one of the biggest power network companies in the
world. In the past, Powergrid has received loans and TA from the World Bank and ADB 6 as well
as other bilateral aid agencies. Powergrid has also raised commercial funds through long-term
bonds.

5.       As the owner and operator of the high voltage power network, Powergrid has no
competition as this activity is a natural monopoly. Hence, to provide competition, at least in the
construction of transmission lines, the Government adopted a policy of allowing private sector
participation in the establishment of transmission lines, which would then be made available to
Powergrid for its use for an annual fee. Because there is no precedence for this type of an
arrangement in India, the Government and Powergrid requested ADB assistance to help
Powergrid draft (i) the terms and conditions of the contract between the IPTC and Powergrid,
(ii) the request-for-proposals (RFP) required for inviting international competitive offers from
interested private sector sponsors for a transmission project, and (iii) help Powergrid evaluate
the offers received. Powergrid has offered the proposed 400 kV Meramundali-Jeypore
transmission line project in Orissa state for this purpose.


                                  III.    THE TECHNICAL ASSISTANCE

A.        Objectives

6.     The objective of the TA is to assist Powergrid in implementing the Meramundali-Jeypore
400 kV transmission line project through the private sector.

B.        Scope

7.      The outline terms of reference is given at Appendix 2. The TA will provide assistance in
preparing RFP documents, evaluating offers for the work, and conducting contract negotiations. A
three-stage solicitation process will be followed:

          (i)      The first stage will involve prequalification of prospective sponsors, based on an
                   examination of their experience in establishing, operating, and maintaining large-
                   scale infrastructure projects (preferably 380/400 kV class transmission systems),
                   and their capability to raise the necessary equity and limited/ nonrecourse
                   financing. The result of this exercise will yield a list of firms that have the
                   experience and ability to execute the work if other terms and conditions are
                   mutually acceptable.

          (ii)     The second stage will be the solicitation and evaluation of technical and
                   commercial offers. The consultants will prepare a request for technical and

6
    Loan 1405-IND: Power Transmission (Sector) Project, for $275 million, approved on 16 November 1995; and TA
    1756-IND: Study of Bulk Supply and Transmission Tariffs and Transmission Regulations, for $600,000, approved
    on 29 September 1992.
                                                 3


               commercial proposals for implementing the work on a build-own-transfer/ build-
               own-operate (BOT/BOO) basis. This document will include functional technical
               specifications for site development and equipment supply drafted by Powergrid
               engineers, and a draft transmission service agreement between Powergrid and
               an independent power transmission company (IPTC) excluding prices;
               conditions, if any, imposed by any statutory authority during licensing of the work;
               a copy of the Memorandum and Articles of Association of the IPTC; the cost
               already incurred and to be incurred by Powergrid for the preparatory works;
               proforma of the guarantees to be issued by the private sponsors; and
               implementation agreement between Powergrid and the private sponsors. At the
               end of the second stage, Powergrid will have a list of firms that, in addition to the
               capacity and capability to execute the work, also have access to the identified
               equipment and skills to meet the requirements of the work.

       (iii)   The third stage focuses on pricing. The private sponsors will submit their
               respective guaranteed tariffs for the work by Powergrid under the agreement
               between Powergrid and the sponsors; this would enable them to develop the
               Project on the terms and conditions agreed in the second stage. The consultants
               will assist in evaluating the proposals.

C.     Cost Estimates and Financing Plan

8.      The cost of the TA is $830,000 equivalent, comprising $510,000 in foreign exchange
costs and $320,000 equivalent in local currency costs. ADB will finance $510,000 equivalent to
cover all foreign exchange costs and $90,000 equivalent of the local currency costs. The TA will
be financed by ADB on a grant basis from the ADB-funded TA Program. Powergrid will finance
the remaining local currency costs of $230,000 equivalent in kind through the provision of staff,
offices, and other counterpart facilities. Detailed cost estimates and financing plan are provided
in Appendix 3.

D.     Implementation Arrangements

9.       The TA will be undertaken by an international consulting firm in association with a
domestic lawyer and a domestic consulting firm. The international consulting firm will be
contracted to provide about 12 person-months of expertise in BOO/BOT procurement, commercial
operations of high voltage power systems, and financial analysis of project financing. The
international consulting firm will be supported by about 3 person-months of a domestic lawyer with
experience in power sector matters. The international consulting firm will be supported by about
5 person-months of a domestic consulting firm, in the area of environment and social impact
assessment, including surveys. The international consulting firm in association with domestic
consultants will be selected in accordance with ADB’s Guidelines on the Use of Consultants and
other arrangements satisfactory to ADB. The international consultants will be responsible to ADB
for the total scope of the work. Consultants will be selected through the submission of a simplified
technical proposal.

10.    The TA is expected to commence in April 2000 and be completed in March 2001. The
consultants will submit inception, draft solicitation documents, final solicitation documents,
evaluation report, and final completion report after one month, three months, four months, seven
months, and nine months respectively after commencement of their services. Meetings of the
Government, consultants, Powergrid, and ADB will be held to review these reports.
                                                  4


11.     Powergrid will be the Executing Agency for the TA. To facilitate implementation.
Powergrid will proceed with preparatory works such as site and route surveys and land
acquisition, application for environment and social clearances, and preliminary civil works, as
may be necessary. Powergrid will create a counterpart steering committee for the TA. The
committee will comprise members drawn from Powergrid, and the Ministry of Power. Powergrid
will provide its procurement and legal experts as counterpart staff for the consultants.

12.       Powergrid will provide the following facilities: (i) office accommodation including
facsimile, telephone, photocopying, and secretarial facilities; (ii) transportation within India;
(iii) facilities for pre-bid conferences; and (iv) engineering inputs for the consultants’ work as well
as statutory approvals that may be required. Powergrid will also bear the expenses relating to
solicitation such as communication, mailing, and advertisement.


                              IV.     THE PRESIDENT’S DECISION

13.     The President, acting under the authority delegated by the Board, has approved the
provision of technical assistance, on a grant basis, to the Government of India in an amount not
exceeding the equivalent of $600,000 for the purpose of Private Sector Participation in
Electricity Transmission, and hereby reports such action to the Board.
                                                 5
                                                                                      Appendix 1

                            TECHNICAL ASSISTANCE FRAMEWORK

    Design Summary                Project Targets            Project Monitoring       Risk/Assumptions
                                                                  Mechanisms
Goal                        To increase investment         Independent Power          Political will of the
                            efficiencies in transmission   Transmission               Government and
Improve bulk power          through competition            Company (IPTC)             the Power Grid
transmission in India.                                     charges for use of         Corporation of India
                            To increase mobilization of    facilities                 (Powergrid)
                            capital in electricity
                            transmission through private   Investment
                            sector participation           commitments

Purpose

Invite private sector       Incorporation of the           Memorandum and             Tariff
participation for one       company, drafting of the       articles of association,   rationalization
400kV transmission line     agreement between IPTC         bid documents,
                            and Powergrid and licensing    evaluation reports,        Government's will
                            by the regulatory authority.   contract agreements        to effect reforms
Establish a new company
and integrate it into the                                                             Availability of
power system as another                                                               capital for funding
independent power                                                                     the project
transmission company

Outputs

Corporatized entity
owning and maintaining
the transmission line and
substations

Contract between
Powergrid and the IPTC




                               (Reference in text: page 1, para. 1)
                                                                                        Appendix 2, page 1


                  OUTLINE TERMS OF REFERENCE FOR CONSULTING SERVICES


1.        The Consultants' terms of reference will include the following:

          1.       Part I – Identification of Terms of Bidding

2.      The consultants will review the policies and guidelines developed by the Government for
private sector participation in the transmission subsector. Based on the international practice
and such review, the requirements of financial institutions and the general expectations of
private transmission system developers, the consultants will identify and recommend the
framework, incentives, and guarantees that may be offered by Powergrid to attract the best
response from bidders for the work. Such recommendations will also be based on a study of
existing policies and regulations that govern the generation, transmission, and distribution of
electricity at the central level of India, foreign and private investment in the power sector, and
contract and company laws. The recommendations will include an assessment of the policy
framework guidelines to attract greater competition in the bidding for the work, and identification
of the corresponding changes that may be necessary in the policies, guidelines, rules and
regulations.

3.     To prepare for part II, the consultants will examine alternative modes of implementing
the work such as through incorporation of IPTC1 by Powergrid or by the selected developer
which will carry out the project.

          2.       Part II – Preparation of Request for Proposal Documents and Evaluation

4.     On the basis of the outcome of works carried out under Part I, the consultants will
develop the necessary documentation for implementation of the work under BOT/BOO scheme.
The consultants will:

          (i)      briefly review the feasibility report and engineering design prepared by Powergrid
                   to (a) confirm completeness and consistency of the work design with the
                   BOT/BOO philosophy and to (b) identify the facilities to be established by the
                   sponsor.

          (ii)     prepare request-for-proposal (RFP) documents for each of three stages of
                   bidding. The RFP documents will establish the procedures, ground rules, and
                   requirements for the submission of the bids. The RFP documents will also
                   include the criteria for evaluating the offers made by the potential bidders and
                   prescribe the format of the offers.

          (iii)    prepare a proforma implementation agreement and transmission service
                   agreement for Powergrid and the sponsor, which will be used by Powergrid for
                   entering into appropriate contracts with the sponsors.


1
    The Memorandum and Articles of Association of the IPTC will be nonrestrictive with respect to ownership and
    objectives, and will be approved by the Bank prior to incorporation.


                                        (Reference in text: page 2, para. 7)
                                                                             Appendix 2, page 2


       (iv)    Develop a computerized model for financial evaluation of the bids to help
               Powergrid compare the financial aspects and prices offers of various bidders.

       (v)     Assist Powergrid in evaluating offers at each stage of the bid process and during
               the final contract negotiations.

A.     Reports

5.     The TA will be completed in about 12 months from April 2000 to March 2001. The
consultants will prepare and submit progress and other reports to the Government, Powergrid,
and the Asian Development Bank (ADB) as follows:

       (i)     an inception report outlining the consultants’ works program within two weeks of
               commencement of the technical assistance;

       (ii)    a report at the end of work of Part I recommending rules, regulations, and
               incentives to attract good bidder response; this report will form the basis for
               discussions to be held between the Government, Powergrid, ADB, and the
               consultants;

       (iii)   drafts of various RFP documents that will be finalized after taking into account
               comments received from the Government, Powergrid, and ADB;

       (iv)    bid evaluation reports for each stage of the three-stage bidding process; and

       (v)     a final report including presentation materials on power point, overhead, and
               35 millimeter slides summarizing the key elements of the solicitation process and
               the outcome.
                                                 8
                                                                                 Appendix 3


                                    COST ESTIMATES
                                          ($)

                                                      Foreign        Local        Total
                     Item                            Exchange       Currency      Cost

A. Asian Development Bank Financing
   (Technical Assistance Special Fund)
   1. Renumeration and Per Diem
       a. International Consultant                     420,000               0     420,000
       b. Domestic Consultants                                         80,000       80,000
    2. Travel of Consultants
       a. International Consultant                      40,000               0      40,000
       b. Local Travel                                   5,000               0       5,000
    3. Communications and Reports                        5,000               0       5,000
    4. Contract Negotiations                             3,000               0       3,000
    5. Contingencies                                    37,000         10,000       47,000

                 Subtotal (A)                          510,000         90,000      600,000

B. Powergrid Financing
   1. Counterpart Staff                                         0     100,000      100,000
   2. Office Space and Local Communications                     0      70,000       70,000
   3. Solicitation Expenses                                     0      40,000       40,000
   4. Contingencies                                             0      20,000       20,000

                 Subtotal (B)                                   0     230,000      230,000

                     Total                             510,000        320,000      830,000



source: Staff estimates




                             (Reference in text: page 3, para. 8)