Document of The World Bank Report No: 64732 v1 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF RAMPUR HYDROPOWER PROJECT (LOAN 4870-IN) September 13, 2007 TO THE SJVN LIMITED October 4, 2011 CURRENCY EQUIVALENTS (Exchange Rate Effective: September 2011) Currency Unit = India Rupees (`) ` 45.3 = US$1 FISCAL YEAR April 1 – March 31 ABBREVIATIONS AND ACRONYMS CAT Catchment Area Treatment CERC Central Electricity Regulatory Commission CPSU Central Public Sector Undertaking CO2 Carbon Dioxide DEA Department of Economic Affairs EMP Environment Management Plan ERR Economic Rate of Return FIRR Financial Internal Rate of Return GoHP Government of Himachal Pradesh GoI Government of India GWh Giga-watt Hour HRT Head Race Tunnel IBRD International Bank for Reconstruction & Development ICR Implementation Completion Report LADA Local Area Development Authority Km Kilometer kWh kilowatt hour MTR Mid Term Review MW Mega Watt NJHP Nathpa Jhakri Hydroelectric Project/ “Nathpa Jhakri� PAD Project Appraisal Document PDO Project Development Objective RAP Resettlement Action Plan RHEP Rampur Hydroelectric Project/ “Rampur� RoE Return on Equity SCDP Sustainable Community Development Plan SJVNL SJVN Limited TA Technical Assistance TAP Tunnel Acceleration Plan Regional Vice President: Isabel M. Guerrero Country Director: N. Roberto Zagha Sector Manager / Director: Jyoti Shukla/ John Henry Stein Task Team Leader: Rohit Mittal/ Kwawu M. Gaba 2 INDIA RAMPUR HYDROPOWER PROJECT P095114 CONTENTS Page A. SUMMARY ............................................................................................................... 4 B. PROJECT STATUS ................................................................................................. 4 C. PROPOSED CHANGES .......................................................................................... 6 D. APPRAISAL SUMMARY ....................................................................................... 8 ANNEX 1: RESULTS FRAMEWORK AND MONITORING.................................. 10 3 RAMPUR HYDROPOWER PROJECT RESTRUCTURING PAPER SUMMARY This restructuring is based on a request received from the borrower (SJVNL) through the Department of Economic Affairs (DEA) letter dated August 4, 2011. The following changes are being proposed under the project restructuring: • Extension in the loan closing date from March 31, 2013 to December 31, 2014 - necessitated as the implementation of the main component A (i.e. construction of the 412 MW Rampur run-of-river hydroelectric scheme) has been delayed due to poor geology being encountered in the head rate tunnel excavation; • Re-appropriation of funds under the Component B to Component A - since the investment measures for ensuring higher availability of the existing upstream Nathpa Jhakri hydropower project (NJHP) earlier envisaged under this component have been implemented by the Borrower using their own resources. The available funds under the component are proposed to be entirely reallocated to the main component; and • Change in the implementation responsibility for the Sustainable Community Development Program (SCDP) to include the State of Himachal Pradesh (in addition to the Borrower). This change is in line with the Himachal Pradesh’s request that the project authorities, as per provisions of the State’s Hydro Power Policy, should deposit the funds for local area development with the Local Area Development Authority (LADA) that will sanction, execute and monitor these schemes (against the earlier arrangement of only the Borrower implementing these works). The restructuring does not trigger any new safeguard policies and also does not change the safeguard categorization of the project, which remains A. There are no pending Financial Management and audit issues for the project. PROJECT STATUS Background: The Rampur Hydropower Project (RHP) was approved by the Bank’s Board of Executive Directors on September 13, 2007 (Loan No. 4870-IN). The Project became effective on April 14, 2008, and is being implemented by SJVN Limited or SJVNL (earlier known as Satluj Jal Vidyut Nigam Limited). SJVNL is the direct borrower of the IBRD Loan, with the Government of India (GoI) as the Guarantor. In addition, there is a Project Agreement with the Government of Himachal Pradesh to ensure support in facilitating the implementation of the Project as well as to reiterate its responsibilities for the implementation of the environmental management plan (EMP), resettlement action plan (RAP), catchment area treatment (CAT) plan and afforestation plan. 4 The Project Development Objective (PDO) is (a) to improve the reliability of India's Northern Electricity Grid through the addition of renewable, low carbon energy from the Rampur hydropower project; and (b) to improve the effectiveness of Satluj Jal Vidyut Nigam Limited (SJVNL) with respect to the preparation and safe implementation of economically, environmentally, and socially sustainable hydropower projects. The Project consists of three components: • Component A -- construction of the 412 MW Rampur run-of-river hydroelectric scheme (US$ 365 million); • Component B -- investment support to implement measures for ensuring higher availability of the existing upstream Nathpa Jhakri hydropower project (US$ 30 million); and • Component C -- technical assistance for institutional reform and capacity building to assist the Borrower, SJVN, in moving towards international good practices in hydropower development and operations, and improving its standards of project preparation for future projects (US$ 5 million). (the figures in brackets above indicate estimated share of Bank funding for the components at the time of loan approval) Key Project Data and Project Performance Ratings: Project Data Project Performance Ratings Board Approval: September 13, 2007 Achievement of PDO Satisfactory Effectiveness Date: April 14, 2008 Implementation Progress Moderately Satisfactory Original Closing Date: March 31, 2013 Financial Management Satisfactory MTR Date (Actual): November 14, 2010 Project Management Moderately Satisfactory Original Ln./Cr. Amt: US$ 400 Million Counterpart Funding Highly Satisfactory Amount Disbursed: US$ 210.20 Million1 Procurement Satisfactory Monitoring and Evaluation Satisfactory Ratings: HS=Highly Satisfactory; S=Satisfactory; MS=Moderately Satisfactory; MU=Moderately Unsatisfactory; U=Unsatisfactory; HU=Highly Unsatisfactory Current Status: The current loan closing date is March 31, 2013. By that time, while the implementation of the main project Component A will be sufficiently advanced, it will not be complete. The implementation of Component A has been delayed by 18 months from the originally scheduled completion date of March 31, 2012, due to difficulties being encountered in the underground tunneling work on account of poor geology. With the help of the Advisory Board and of the World Bank, SJVNL has finalized and agreed to a revised project completion schedule with all the three main contractors2. SJVNL and the contractors have been implementing the Tunnel Acceleration Plan (TAP) with satisfactory results and the current progress on underground tunnel excavation is in line with the agreed revised schedule for project completion. About 92.4 percent of 15 km of total Head Race Tunnel (HRT) has been excavated by September 30, 2011. Currently, the balance critical stretch to be excavated is less than 1.4 km (of 2.6 km) which is being advanced from two faces, with current average progress rate of 2.18 m per day on each face (against 0.8 m per day in June 2010). Concurrent benching (the drill and blast exercise to excavate the lower half of the tunnel after the upper half, or 1 As on September 30, 2011 2 There are two civil works contract awarded to a joint venture of M/s Gammon India Limited and M/s Patel Engineering Limited and there is one electro-mechanical contract awarded to M/s BHEL. 5 heading, has been completed) and concrete lining is being carried out wherever practically possible in order to eventually minimize delays in project commissioning. In about 59 percent of the tunnel length benching has been completed, and this has enabled the contractor to complete, the concrete-lining of 31 percent of the HRT. PROPOSED CHANGES • Results/indicators {refer Annex 1}- There is only one change in PDO level results indicator one from “Increased power supply available for Northern region off-takers reducing shortages (equivalent per annum)� to “Increased power availability to Northern region off-takers (GWh equivalent per annum)�. This edit in the language is to better reflect the outcome that is being monitored. Further, although the closing date is proposed to be extended, as discussed in detail below, the ICR level targets remain unchanged and they will automatically be monitored as on the revised closing date. • Components: o Component A – The amount allocated to Component A is proposed to be increased from US$ 365 million to US$ 395 million to partly cover the increased costs due to construction delays and the changes to the price index (refer paragraph on financing below) through reallocation from Component B (refer next paragraph). As noted above, the implementation of the component has been delayed by 18 months from the originally scheduled completion date of March 31, 2012, due to difficulties being encountered in the underground tunneling work on account of poor geology encountered. The new completion date is September 30, 2013, as per the revised project implementation schedule agreed by SJVNL with the contractors. This delay will likely result in a cost overrun of about 20 percent in rupee terms as per latest estimates, however no impact is anticipated on the Bank loan amount, and balance funds will be contributed by SJVNL from its own resources. o Component B – Loan proceeds (US$ 30 million) originally allocated to this component are now proposed to be reallocated to Component A as project activities under this component have been funded through counterpart funds. SJVNL has utilized its internal resources to procure the required spares (i.e. bye pass needle valves, upper & lower labyrinth seals, cheek plates, runners, guide vanes, blanking panel and dredging pump for intake) from the Original Equipment Manufacturer/ Supplier and successfully implemented additional measures for ensuring higher availability of the existing upstream Nathpa Jhakri Hydro Power Station. The other proposed investment measure of using a diversion tunnel for silt management didn’t yield satisfactory results in eliminating the silt during the model test studies and hence is being dropped. The outputs and outcomes of the component have been fully met and the same is reflected in the relevant PDO indicator “significant reduction in the number of days of outage of NJHP in wet season�, which remains valid. • Institutional arrangements: The local area development works under Sustainable Community Development Program (SCDP), which were earlier being implemented only by SJVNL, are now proposed to be also implemented by the State Government through the Local Area Development Committee (LADC). The LADC will approve and share the annual shelf of projects to be taken up under local area development by June 30 of each 6 year3. In addition, quarterly progress monitoring reports will also be shared. The works under SCDP are not funded by the Bank. SJVNL, during project preparation, had prepared a standalone Sustainable Community Development Program (SCDP) to build small infrastructure in the surrounding villages and undertake major community development initiatives in the project area during project construction at an estimated cost of ` 263 million (US$ 6.3 million). The program includes: (i) implementation of basic infrastructural facilities in the affected villages; (ii) operation of mobile health van; (iii) award of scholarships to the wards of affected people and local people; (iv) sponsoring children to industrial training institutions for acquiring technical skills; and (v) support services to agricultural and horticultural activities. Under the SCDP, the original allocation towards local area development was ` 125 million that was later revised upwards to ` 307.5 million due to changes effected by the State in its Hydro Power Policy. Under this policy, 1.5 percent of the estimated project cost has to be deposited by the hydropower developer with the LADC which will sanction, execute and monitor the schemes to be financed under this fund. The current status of implementation of local area development component under the SCDP is provided below: S. Outlay Status Scheme(s) No (` in Millions) 1 Construction of HRTC Bus Stand, Rampur 114.1 Completed Construction of Senior Secondary School, 2 20 Completed Rampur 3 Drinking Water Sources 7.8 Completed Committed Shelf of Projects (before 2011- Works worth `17.8 4 21 12) million completed 5 Shelf of Projects for 2011-12 44.5 Under award Balance (to be committed during 2012-13 6 100.1 To be committed and 2013-14) TOTAL 307.5 (100.0%) The proposed infrastructure works for 2011-12 includes activities related to: renovation of temples, construction of additional primary and middle schools class rooms, toilet blocks, water supply in schools, metalled roads, play grounds, irrigation tanks, repair of irrigation drainages, panchayat buildings, etc. In addition, SJVNL will continue to run the mobile health van in the affected villages, provide merit scholarships to the people in the affected villages, sponsor the youth for technical education, conduct awareness camps and promote culture and sport activities though sponsored programs from time to time. • Financing: o Project Costs: Project cost estimates are being modified to reflect construction delays, acceleration measures adopted to handle the poor geology encountered in the project and the changes to the price index. As per current estimates, the revised RHP cost is ` 30,660 million, reflecting an increase of about 20 percent from the 2007 appraisal estimate of ` 25,520 million. This translates into 10 percent increase in project cost when converted into US dollars (due to exchange rate variation4). The increase in costs is being borne by SJVNL out of its own funds (refer paragraph below). 3 The approved shelf of projects to be undertaken during 2011-12 has been already shared. 4 At the time of appraisal, the base exchange rate was assumed at US$ 1 = ` 41.5 compared to exchange rate of US$ 1 = ` 45.3 assumed now 7 (US$ Million) Components Cost As Latest Revised Share per Cost of Bank PAD Figures Financing A. Construction of the 412 MW Rampur run-of- 615 677 395 river hydroelectric scheme B. Investment support to implement measures for 45 10* 0 ensuring higher availability of the existing upstream Nathpa Jhakri hydropower project. C. Technical assistance for institutional reform and 10 10 5 capacity building to assist the borrower, SJVN, in moving towards international good practices in hydropower development and operations, and improving its standards of project preparation for future projects. Total Project Cost 670 697 400 * Actual figures based on equivalent of Euro 6,155,253 plus ` 104,448,800 converted in US$ dollars o Financing Plan: The financing plan has also undergone a slight change consequent to the small increase (4 percent) in the overall project costs. While there is no change to the World Bank loan to the project, there is a 10 percent increase in the contribution of the borrower, because the significant reduction in the cost of investment measures implemented by SJVNL for component B (US$ 10 million compared to the appraisal estimate of US$ 45 million) has not completely offset the cost increase for Component A. The borrower contribution to the financing plan has increased from US$ 270 million to US$ 297 million, and the increment will be fully being covered by SJVNL out of its own funds. • Closing date: Closing Date is proposed to be extended by 21 months to December 31, 2014, in line with the request of GoI. The main component A is now expected to be completed by September 2013, based on the revised project completion schedule finalized and agreed by SJVNL with all the three main contractors for the same5. However, the achievement of outcome for main PDO level indicator “Increased power availability to Northern region off-takers� can be assessed only after one full year of commercial operation of the project, as properly documented at the time of loan appraisal. This revised closing date will provide adequate time to allow for completion of construction of the main component i.e. construction of Rampur Hydropower Project and satisfactory full commissioning of the plant (Component A). • Implementation schedule: Please refer the paragraph above for details. APPRAISAL SUMMARY The restructuring does not trigger any new safeguard policies and also does not change the safeguard categorization of the project, which remains a Category A Project. There are no pending Financial Management and audit issues for the project. 5 SJVNL's Board of Directors has also recently approved the extension of time contract amendment for the two civil works package. 8 • Financial analysis: SJVNL, being a Central Sector Public Utility (CPSU), is regulated by Central Electricity Regulatory Commission (CERC) that governs the tariff to be charged by respective project from the beneficiary states. These tariff norms are revised periodically (after every 5 years). Tariff norms that were applicable when the Rampur project was approved in September 2007 were revised by CERC in April 2009 and the new tariff norms are applicable till March 2014 by when the project will be commissioned. As per the latest cost estimates and the latest CERC tariff norms, the financial internal rate of return (FIRR) for the project declines marginally to 9.14 percent (pre-tax) compared to the appraisal figure of 9.53 percent, due to the delayed revenue flows from the project on account of delay in commissioning. The tariff in the first year is now expected to be about ` 3.44/kWh, with average tariff over the life of the project expected to be about ` 3.29/kWh and the levelized tariff (assuming a discount factor of 12 percent) expected to be about ` 3.23/kWh. An assessment of tariff with the revised cost estimates under the old tariff regulatory regime (of 2004) of CERC was also carried out and presented below in the table. As can be observed, the increase in tariff under the old regime is much smaller than the one anticipated under the new tariff regime. Despite all these changes, the Rampur Hydropower Project is still a very competitive one compared to thermal plants that will operate in a base load mode. A quick review of thermal plants across various states reveals that the tariff discovered through the Case 2 competitive bidding process (location specific) ranges between ` 2.80 per kWh and ` 3 per kWh6. Components/Activities As per Projections based on old Projections based on new PAD CERC norms (2004) and CERC norms (2009) and Latest Cost Estimates Latest Cost Estimates Project FIRR (pre-tax) 9.53% 7.69% 9.14% Return on Equity 12.04% 11.68% 12.71% Average Tariff (`/Unit) 2.14 2.54 3.29 Levelised Tariff (`/Unit) 2.25 2.43 3.23 First Year Tariff (`/Unit) 2.40 2.47 3.44 • Economic Analysis: As per the latest cost estimates, the economic rate of return (ERR) (to project completion) is 16.3 percent (compared to appraisal figure of 20 percent), with the 12 percent hurdle rate achieved in year 2023 after nine years of operation. The ERR has changed due to the delayed revenue flows from the project on account of delay in commissioning. The ERR, after taking into account the environmental benefits, as assessed during the appraisal, declines from 26.8 percent to 22.8 percent with carbon price assumed at the same level as at appraisal (US$ 5/tCO2 increasing at 5% p.a). Based on the Emission Reduction Purchase Agreement (ERPA) negotiation, the price per ton of CO2 would be higher than the appraisal figure and will consequently have a positive upward impact on the ERR. 6 Source: ‘Transition from MoU to Competitive Bidding: Good take-off but turbulence ahead’, Prayas Energy Group (March 2011) 9 ANNEX 1: Results Framework and Monitoring INDIA: RAMPUR HYDROPOWER PROJECT Project Development Objective (PDO): The Project Development Objective is (a) to improve the reliability of India's Northern Electricity Grid through the addition of renewable, low carbon energy from the Rampur hydropower project; and (b) to improve the effectiveness of Satluj Jal Vidyut Nigam Limited (SJVN) with respect to the preparation and safe implementation of economically, environmentally, and socially sustainable hydropower projects. Revised Project Development Objective: Not Applicable D=Dropped Cumulative Target Values** C=Continue Core PDO Level Results N= New Unit of Data Source/ Responsibility for Baseline Frequency Indicators* R=Revised Measure Baseline MTR Current ICR Methodology Data Collection Indicator One: Increased R GWh8 0 0 0 0 17709 At project Reports from SJVNL power availability to Northern completion SJVNL, Bank region off-takers (GWh implementation equivalent per annum)7 support visits 7 The original language was “Increased power supply available for Northern region off-takers reducing shortages (equivalent per annum)�. The edit in the language is to better reflect the outcome that is being monitored. 8 There was a printing error in PAD. It should read “GWh� instead of “kWh� 9 There is no change in the end target value 11