28354 NUMBER 45 * EDPrecism rations Evaluation Department May 1993 Electric Power in India: Institutional Development, Sectoral Issues In 1977-87, the Bank invested $4 Per capita consumption, at 270 dialogue with the Bank (see box). billion in India's National Thermal Kwh/year, is still quite low; it Today, few of the SEBs turn a Power Corporation (NTPC), making compares with about 300 Kwh/year profit and in FY90 their combined NTPC the Bank's largest single in Pakistan and 480 Kwh/year in deficit was $1.8 billion. The main borrower worldwide. A series of 13 China, problem is pricing. Typically, the projects, some still in progress, involved SEBs' tariffs are equivalent to only the introduction of advanced technolo- Sector structure 50-60 percent of long-rn marginal gy, on a scale unprecedented in India, costs. Given the fiscal situation, by a newly created public sector At the federal level, the Central both the GOI and the states institution. A new OED audit reviews Electricity Authority (CEA) devel- acknowledge the need to raise the four most recently completed NTPC ops national power policy and power prices. But movement projects, which accounted for $1 billion coordinates sector activities within toward cost-based pricing has of loans and credits.* the framework of India's federal been hindered by a long-standing structure. The state electricity view of electricity as a social NTPC's development was a boards (SEBs) owned by state benefit and development tool, striking success. The corporation governments have authority to rather than a service to be bought rapidly emerged as India's leading build, own, and operate power and sold commercially. power utility and largest corporate systems and sell power in their entity in terms of fixed assets. But respective states. Together they The power sector in general hopes that the NTPC projects would generate about 75 percent of elec- urgently needs to become more help to secure needed sectoral reforms tricity supply and provide most of efficient, both to reduce the fiscal were largely disappointed. Persistent the distribution to final consumers. burden created by SEB deficits and financial weakness in the sector at large The regional electricity boards are to encourage more private invest- put NTPC itself at risk, and bill relatively loose associations of ment in public electricity supply. collection became such a problem that it utilities. The federal structure of the started to undermine NTPC's financial sector means that any adjustment in position. The audit outlines the factors relations between central and state behind NTPC's successful development institutions is politically sensitive. 'Performance Audit Report, and draws lessons from the attempt to India: Korba Thermal Power use a single agency to promote sector- In 1975, growing power short- Project; Ramagundam Thermal wide reform. ages led the government to create Power Project; Second Singrauli the NTPC and the National Hydro- Thermal Power Project; Farakka i electric Power Corporation as Thermal Power Project", Report Background centrally owned utilities to sell bulk No. 10854, February 1993. OED power to SEBs and other entities. reports are available to Bank Since 1948, India's installed Executive Directors and staff power capacity has grown by more Efficiency from the Internal Documents than 9 percent a year to a size Unit and from Regional Informa- (70,000 MW) broadly comparable Cost recovery and efficiency in hon Services Centers. with that of the United Kingdom. power have featured recurrently in Power shortfalls persist and in the collection of accounts receiv- Bank Support for Power 1992 were equivalent to about 9 able-reflect the lack of progress in in India percent of total energy needs. reforming the sector, its regulatory Government power policy still framework, and its cost recovery Early Bank support was concentrates disproportionately on policies and practices. NTPC's directed to individual utilities. In expanding supply, with too little managerial techniques have not 1965-75, the Bank sought to attention to the efficiency of proved infectious. SEBs do not address broader issues through supply and to pricing, have NTPC's freedom of action or loans to government agencies financial means, and they lack the which onlent to SEBs for transmius-I sion and rural electrification Bank assistance in the 1970s corporate culture that has been so proecn an rur eletration and 1980s helped to create the important in the development of projects in their state.transmission links and other NTPC. When the government created physical underpinnings of a NTPC, the Bank concentrated its national grid, but little progress Issues support in operations with NTPC was made toward integrated sector as the beneficiary. Between 1977 operation. The result was a costly The Bank saw the NTPC and 1987, S-1 billion of loans and underuse of generation and lending program as a promising credits made the new agency the ransmission capacity, which vehicle to promote sector largest beneficiary of Bank lending persisted until recently. long-term planning, integrated worldwide. operations, improvements in sector Project achievements organization and training, and Eight of the NTPC projects reform of SEB finances. Recogniz- supported mine-mouth, coal-fired The main goals of the NTPC ing that these goals were not thermal power plants (two projects were to expand capacity entirely shared by the government, projects for each plant): and build a major new central the Bank's approach to sectoral * Singrauli (2,000 MW) for the institution. Though there was a reform through this program was Northern Region; strong technical, economic, and slow and circumspect. It outlined political case for establishing broad sectoral reform objectives at Korba (2,100 MW) for the NTPC, this was a risky undertak- the start of the series of projects, Western Region; ing-in size and technological and made them increasingly sophistication the proposed explicit as the series progressed. * Ramagundam (2,100 MW) for facilities had no precedents in Given the constitutional authority the Southern Region; and India. Despite the risks, NTPC of the states, the Bank believed that achieved almost all that was basic reform was best pursued * Farakka (2,100 MW) for the expected of it and, in some areas, through "a policy of persuasion Eastern Region. more. rather than one of explicit lever- age." Indeed, the whole $4 billion Two further projects were for The projects helped increase series of projects contained only transmission only, and another the annual growth of India's three conditions calling for specific three supported coal-fired and oil- installed capacity from 5 percent in action on sector matters; none of fired combined-cycle facilities. 1970-75 to 8 percent in the 1980s. these was covenanted or complied In 1983, seeing that the NTPC They reduced India's chronic with. projects were not leading to the shortage of electricity. Sector reform fundamental changes needed in the sector-in particular, higher NTPC is now India's leading efficiency and more economic power utility, with an installed tariffs in the SEBs-the Bank capacity of more than 11,000 MW, ened the government's leverage in began lending to well-managed producing a fifth of India's elec- the sector. But the projects did not SEBs and the private Tata Electric tricity. As an institution it has induce major changes in sector reg- Companies in parallel with NTPC. broken new ground in organiza- ulation and operation. tion and management, successfully From 1987 on, the Bank progressed from construction to Finances stopped direct lending to the operation, and generally coped public power companies and well with the problems of rapid The NTPC program did not SEBs. Instead it has supported improve the recovery of power private utilities and, through a financial intermediary for the powr scto, pbli utbtis ~ithAreas where NTPC did not began selling power, the flaw in the power sector,anc i perform as expected-specially hope that it could be used to "lever" good pan increase in the tariffs of SEBs-its May 1993 How Did NTPC Succeed? Internal strengths its comprehensive manpower support early on, while as a development program helped Bank borrower it was always Being newly created, with no attract and retain very high- well supplied with foreign a priori limitations on its quality staff. exchange. It could afford to managers' freedom of action. invest adequately in recruit- sDnmclaesi.External advantages ment, training, and other * Dynamic leadership. long-term institution-building C prtn uoon n efforts. And its ability to pay * Emphasis on corporate planning, taking a long-term political upport: NTP had a in cash, and promptly, gave planig,tainga on-trmfree hand in organizing and suppliers a strong inducement strategic approach. staffing as well as in project to meet its quality standards, implementation. It could count deliverNy deadlines, and other * Use of the suitems approach as on the Ministry of Energy to requirements. a primary management tool. provide the resources it needed This makes it possible to and to otherwise promote and Financial policy: NTPC combine a high degree of protect its interests within the reached its large size in record centralization with adequate government. This reflected the time without compromising authority on-site. desire of ministry officials to its financial viability, despite foster the growth of their the accounts- receivable issue. * Strong emphasis on quality protege, their confidence in An important reason is the assurance. NTPC's management, and their government's original de- early recognition that their role sign-for example, a debt/ * Drive for technical self should be supportive rather equity ratio set at a conserva- sufficiency and technological than supervisory. tive 1:1; and a tariff formula innovation. (even though not fully ap- *Ainple resources: No other plied) to pass on all invest- * Attention to recruitment and utilitv in the developing world ment, operation, and financial training: NTPC can pay its staff has received comparable costs. little more than other central financial support. NTPC government organizations, but received generous budgetaryv Bank assistance. main customers-became apparent. two months covenanted with the Bank assistance NTPC and the SEBs are public Bank. entities serving different constituen- As well as financial resources cies, and many aspects of their *aMinimized their use of NTPC on a large scale, Bank support relationship have thus been more power, which they saw as expen- conferred on NTPC a status that political than commercial. Some of sive. helped reinforce the operating the SEBs have been unwilling to autonomy and political support regard NTPC as a commercial Strenuously opposed any that were so important in its supplier and NTPC has been unable increase in NTPC's tariffs, development. Bank scrutiny of to treat them as it would treat NTPC projects helped build commercial customers. By 1987, difficulties with cost confidence in the company, making recovery led the Bank to stop it easier to secure prompt planning Though NTPC's own tariffs lending to NTPC. Project approvals approval and cofinancing for were much below economic cost, drastically slowed down, partly for investments. they were equivalent to 90 percent, lack of external finance, and partly on average, of the SEBs' unit reve- because of growing congestion in Consultants nues. The SEBs' low sales revenues the environmental clearance on power purchased from NTPC left process. Recently, however, NTPC made adroit use of them too little to cover their other NTPC's collection performance has consultants from several countries costs. Rather than raising their tariffs improved. Structural improve- to obtain access to the latest to meet NTPC's charges, the SEBs: ments in electricity tariffs are being technology and advanced utility implemented, and new investment practices, and today regards this as Delayed the payments they and commercial policies are being a major benefit from its relation- owed NTPC, beyond the average of introduced. (See box on page 4.) ship with the Bank. fED Pris Working relationships Bank and NTPC staff developed Recent Developments close working relationships. As Since the audited projects were a To encourage reforms in the SEBs, well as giving advice on project completed, the government has established the Power Finance management, quality assurance, implemented the following Corporation to lend to SEBs that and the use of financial controls, reforms: implement action plans, endorsed Bank staff seem to have helped by their state governments, to form NTPC's corporate culture Established the Pouergrid improve resource mobilization through their emphasis on the Corporation, a transmission and operational efficiency. maintenance of high professional compan' and grid operator, to standards and on the need to operate a national grid to improve Adopted new investment and develop the company along strictly efficiency in power transmission commercial policies and electricity commercial lines. and system operations. N7PC is tariffs for fTPC. The policies, now a generating company only, approved (October 1992) after Overoptimismhaving devolved its transmission prolonged dialogue with the Oveopimsmoperations on to Potvergrid. Bank, are designed to improve Over time, the Bank increasing-financial Overtim, te Bnk ncrasig- a Further opened the sector to performance and help it recover ly recognized the risk to NTPC's private investment in generation, its costs, while also promoting financial viability if the SEBs' transmission, and distribution, reforms by SEBs. performance did not improve, but it continued to portray the pros- pects for institutional improve- ments, including tariff reform, in an sector at large, these agencies will India needs a strategy that gives at unduly favorable light. Unfortu- not be adopted as models by least equal priority to the efficiency nately, many of the Bank's docu- established agencies and will not of resource use and to demand ments on the NTPC program long escape the penalties imposed management. lacked realistic presentations of by their surroundings. constraints and risks. * Shared views: Loan condition- * Public sector: When free to do ality should complement but Lessons so, public utilities in India can cannot replace broad agreement on achieve high standards of efficien- ends and means between the * Enclave projects: New agencies cy, making use of modern manage- borrower and the Bank. free of established sector con- ment techniques. straints can be highly effective, for Bank optimism: There is a clear a time, in getting particular jobs Efficiency: Massive and efficient need for more realistic description done. But unless policies and investment by NTPC cannot alone of constraints and risks affecting incentives are favorable in the eliminate India's power shortages. proposed projects. S lD Pr&is is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. Please address comments or enquiries to the managing editor, Rachel Weaving, E-1204, World Bank, telephone 473-1719. May 1993