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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 BankBOO/ BOT build-own-operate/ build-operate-transferCEA Central Electricity AuthorityED electricity departmentIPTC independent power transmission companykV kilovolt (1,000 volts)Powergrid Power Grid Corporation of IndiaRFP request for proposal

SEB state electricity boardSERC State Electricity Regulatory CommissionTA technical assistance

NOTES

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

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

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I. INTRODUCTION

1. In 1991, the Government of India initiated countrywide power sector reforms. One of themain objectives of the reforms is to introduce competition in the sector by increasing privatesector 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 ofthe private sector. The TA is included in the 1999 country program. Fact-finding was carried outin September 1998,1 and an understanding was reached with the Government and Powergridon the objectives, scope, costs, implementation arrangements, and terms of reference for theTA. 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 thecentral 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 largegenerating facilities and interstate power transmission networks. State governments control therest 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 withinthe boundary of each state or union territory. In addition, there are private utilities in major urbanagglomerations such as Ahmedabad, Calcutta, Mumbai, and Surat. The central sector agenciesgenerate 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, andprivate utilities. The legal basis for the sectors operations are the Indian Electricity Act, 1910, andthe Electricity (Supply) Act, 1948, with their several amendments, and the Electricity RegulatoryCommissions Act, 1998 (the acts).

3. In 1991, the Government approved major amendments to the acts enabling the stategovernments to invite private sector investment in generation and distribution. In 1995, withassistance from the World Bank, ADB, and other aid agencies, the state of Orissa enactedcomprehensive legislation2 that allowed separation of the Orissa SEBs 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 wereapproved by Parliament, the first4 providing for the creation of the Central Electricity RegulatoryCommission 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 sectorparticipation in this subsector, through the formation of independent power transmissioncompanies (IPTCs). In 1998, the state of Haryana also enacted legislation to establish a tariff anda 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 Opportunitiesin 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.

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4. Powergrid, a wholly Government-owned company, was established in October 1989 andcommenced operations in late 1991. It is responsible for establishing, owning, and operating theinterstate and interregional bulk power transmission systems in the country, as well as theregional load dispatch centers. Currently, Powergrid owns and operates over 30,000 circuitkilometers of high voltage direct current, 400 kV and 220 kV transmission lines and about53 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 wellas other bilateral aid agencies. Powergrid has also raised commercial funds through long-termbonds.

5. As the owner and operator of the high voltage power network, Powergrid has nocompetition as this activity is a natural monopoly. Hence, to provide competition, at least in theconstruction of transmission lines, the Government adopted a policy of allowing private sectorparticipation in the establishment of transmission lines, which would then be made available toPowergrid for its use for an annual fee. Because there is no precedence for this type of anarrangement in India, the Government and Powergrid requested ADB assistance to helpPowergrid 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 evaluatethe offers received. Powergrid has offered the proposed 400 kV Meramundali-Jeyporetransmission 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-Jeypore400 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 inpreparing RFP documents, evaluating offers for the work, and conducting contract negotiations. Athree-stage solicitation process will be followed:

(i) The first stage will involve prequalification of prospective sponsors, based on anexamination 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/ nonrecoursefinancing. The result of this exercise will yield a list of firms that have theexperience 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 andcommercial 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 TA1756-IND: Study of Bulk Supply and Transmission Tariffs and Transmission Regulations, for $600,000, approvedon 29 September 1992.

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commercial proposals for implementing the work on a build-own-transfer/ build-own-operate (BOT/BOO) basis. This document will include functional technicalspecifications for site development and equipment supply drafted by Powergridengineers, and a draft transmission service agreement between Powergrid andan 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 costalready incurred and to be incurred by Powergrid for the preparatory works;proforma of the guarantees to be issued by the private sponsors; andimplementation agreement between Powergrid and the private sponsors. At theend of the second stage, Powergrid will have a list of firms that, in addition to thecapacity and capability to execute the work, also have access to the identifiedequipment and skills to meet the requirements of the work.

(iii) The third stage focuses on pricing. The private sponsors will submit theirrespective guaranteed tariffs for the work by Powergrid under the agreementbetween Powergrid and the sponsors; this would enable them to develop theProject 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 exchangecosts and $320,000 equivalent in local currency costs. ADB will finance $510,000 equivalent tocover all foreign exchange costs and $90,000 equivalent of the local currency costs. The TA willbe financed by ADB on a grant basis from the ADB-funded TA Program. Powergrid will financethe 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 providedin Appendix 3.

D. Implementation Arrangements

9. The TA will be undertaken by an international consulting firm in association with adomestic lawyer and a domestic consulting firm. The international consulting firm will becontracted to provide about 12 person-months of expertise in BOO/BOT procurement, commercialoperations of high voltage power systems, and financial analysis of project financing. Theinternational consulting firm will be supported by about 3 person-months of a domestic lawyer withexperience in power sector matters. The international consulting firm will be supported by about5 person-months of a domestic consulting firm, in the area of environment and social impactassessment, including surveys. The international consulting firm in association with domesticconsultants will be selected in accordance with ADBs Guidelines on the Use of Consultantsandother 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 simplifiedtechnical proposal.

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

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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 landacquisition, application for environment and social clearances, and preliminary civil works, asmay be necessary. Powergrid will create a counterpart steering committee for the TA. Thecommittee will comprise members drawn from Powergrid, and the Ministry of Power. Powergridwill provide its procurement and legal experts as counterpart staff for the consultants.

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

IV. THE PRESIDENTS DECISION

13. The President, acting under the authority delegated by the Board, has approved theprovision 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 inElectricity Transmission, and hereby reports such action to the Board.

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5Appendix 1

TECHNICAL ASSISTANCE FRAMEWORK

Design Summary Project Targets Project MonitoringMechanisms

Risk/Assumption

Goal

Improve bulk powertransmission in India.

To increase investment

efficiencies in transmissionthrough competition

To increase mobilization ofcapital in electricitytransmission through privatesector participation

Independent Power

TransmissionCompany (IPTC)charges for use offacilities

Investmentcommitments

Political will of the

Government andthe Power GridCorporation of Indi(Powergrid)

Purpose

Invite private sectorparticipation for one

400kV transmission line

Establish a new companyand integrate it into thepower system as anotherindependent powertransmission company

Incorporation of thecompany, drafting of the

agreement between IPTCand Powergrid and licensingby the regulatory authority.

Memorandum andarticles of association,

bid documents,evaluation reports,contract agreements

Tariffrationalization

Government's willto effect reforms

Availability ofcapital for fundingthe project

Outputs

Corporatized entity

owning and maintainingthe transmission line andsubstations

Contract betweenPowergrid and the IPTC

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

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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 forprivate sector participation in the transmission subsector. Based on the international practiceand such review, the requirements of financial institutions and the general expectations ofprivate transmission system developers, the consultants will identify and recommend theframework, incentives, and guarantees that may be offered by Powergrid to attract the bestresponse from bidders for the work. Such recommendations will also be based on a study ofexisting policies and regulations that govern the generation, transmission, and distribution ofelectricity at the central level of India, foreign and private investment in the power sector, andcontract and company laws. The recommendations will include an assessment of the policyframework guidelines to attract greater competition in the bidding for the work, and identificationof 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 implementingthe work such as through incorporation of IPTC1 by Powergrid or by the selected developerwhich 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 willdevelop 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 Powergridto (a) confirm completeness and consistency of the work design with theBOT/BOO philosophy and to (b) identify the facilities to be established by thesponsor.

(ii) prepare request-for-proposal (RFP) documents for each of three stages ofbidding. The RFP documents will establish the procedures, ground rules, andrequirements for the submission of the bids. The RFP documents will alsoinclude the criteria for evaluating the offers made by the potential bidders andprescribe 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 forentering 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.


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Appendix 2, page 2

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

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

A. Reports

5. The TA will be completed in about 12 months from April 2000 to March 2001. Theconsultants 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 ofcommencement of the technical assistance;

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

consultants;

(iii) drafts of various RFP documents that will be finalized after taking into accountcomments 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, and35 millimeter slides summarizing the key elements of the solicitation process andthe outcome.

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Appendix 3

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

COST ESTIMATES

($)


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