AllainDuhanganII

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	26500
Company name	AD Hydro Power Limited
Country	India
Sector	Utilities
Environmental category	A
Department	Infrastructure
Status	Pending Disbursement

Date SPI disclosed	December 7, 2007
Projected board date	February 7, 2008
Previous Events	Signed: April 23, 2008 Approved: February 21, 2008

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The project involves additional financing to support the completion of a 192MW run-of-the-river hydroelectric power plant (HPP) in the Kullu District of Himachal Pradesh (Northern India). The project is being implemented by AD Hydro Power Limited (ADHPL). Construction began in early 2005 and is approximately 60% complete. The project is facing cost over-runs due to inflation in steel, cement and labor prices, new regulatory requirements, and geological problems experienced in the tunneling works. In 2004, IFC’s Board previously approved financing of an A Loan of Rs1,840 million ($46.0 million) and equity of $7.0 million towards the construction of the plant (project 11632). IFC publicly disclosed project information and environmental and social documentation prior to that approval.

Project sponsor and major shareholders of project company

ADHPL is currently approximately 90% owned by Malana Power Company Limited (MPCL) and 10% by IFC. MPCL is owned 51% by Bhilwara Energy Limited (“BEL”) and 49% by Stratkraft Norfund Power Limited (SNP) of Norway.

BEL is part of the LNJ Bhilwara Group (LNJB), a diversified industrial group with interests in textiles, graphite electrodes, power generation and information technology. Other members of the LNJ Bhilwara Group include HEG Limited (HEG), and Rajasthan Spinning and Weaving Mills Limited (RSWM). BEL is the holding company through which LNJB intends to increase its exposure in the Indian power sector. LNJB has successfully undertaken two other hydro-electric power projects to date: the 86MW Malana HPP in Himachal Pradesh and the 13MW Tawa HPP in Madhya Pradesh.

The sponsors of the project are HEG, RSWM, MPCL, and SNP.

RSWM, established in 1959, is India’s largest producer and exporter of polyester/viscose yarns and one of India’s five largest textile houses. Turnover for the year ending March 2007 was approximately $230 million, of which 50% was from export sales.

HEG was established in 1977 by RSWM in technical and financial collaboration with Societe Des Electrodes Et Refractaires Savoie, a subsidiary of Pechiney. HEG’s principal products are graphite electrodes and power generation. Turnover for the year ending March 2007 was $181 million, of which 50% was from export sales. Both HEG and RSWM are publicly listed companies in India.

MPCL, commissioned in 2001, is an 86MW run-of-the-river hydro-electric power plant located in the Kullu District of Himachal Pradesh. MPCL generates approximately 340GWh of power to the Northern grid on an annual basis. The company is currently operating on a merchant basis with a very good collection record.

SNP was established in 2002 as a joint venture between Statkraft SF and the Norwegian Investment Fund for Developing Countries. SNP was established with a capital base of $150million and is the vehicle through which both entities now invest in international hydropower plants. As of December 31, 2006 SNP had revenues, net income and assets of $52.6million, $10.3million and $183.9million respectively.

Total project cost and amount and nature of IFC's investment

The original project cost proposed in 2004 was Rs. 8,956 million (approximately $223.90 million). IFC’s revised estimate of total project cost is Rs. 16,359 million (approximately $408.98 million). In 2005, IFC committed $7.0 million of equity to the project and in 2006 it committed Rs.1,840 million (approximately $46.00 million) of debt. IFC is expected to invest an additional Rs. 1,310 million (approximately $32.75 million) in the form of an A loan and an additional $9.25 million in equity.

Location of project and description of site

ADHPL is located near Prini, in the Kullu District of Himachal Pradesh. The project site lies east of the Beas River and extends within the villages of Prini, Hamta and Jagatsukh. The area of the site is sparsely populated due to the high elevation and steep slopes. In addition to project roads, the construction of ADHPL will contribute bridges and paved roads to the surrounding community. While ADHPL will maintain staff at the project site, the company will be headquartered in Delhi (Noida), India.

Anticipated development impact of the project

The positive development impact of the project remains as identified in the original Allain Duhangan Summary of Project Information and includes:

- providing much needed incremental peaking power to the Northern grid;
- helping to improve the hydro-thermal mix in the country;
- being among the first power projects to be selling power on a merchant basis to third parties and hence providing a strong demonstration effect for private hydropower development in the country;
- helping the local economy through creation of contractual local jobs during construction and permanent jobs during operation (over 3,500 contracts have been given to local firms);
- private investment in the power sector will reduce the need for public investment and allow the government to deploy more resources to meet poverty alleviation and social development objectives;
- supporting the competitiveness of the manufacturing sector by providing reliable power at a competitive tariff;
- providing royalties to the GOHP (12% of power for the first 12 years and 18% thereafter); and
- reducing carbon emissions in Northern India (an average of approximately 600,000 tons of Carbon Emission Reductions per year).

Due to rapid economic growth, India as a whole and Northern India in particular are experiencing acute power shortages, so the need for this project and its benefits are greater today than they were when it was first approved.

IFC's expected development contribution

IFC has already provided substantial additionality to the project. It acted as lead lender in the initial financing, catalyzing local lender support to what was the first project-financed merchant hydro plant in India. IFC’s involvement also ensured a level of social and environmental management that far surpasses the normal standard for the sector in India. IFC has also endeavored to ensure that the company conforms to high standards of environmental and social performance, employee health and safety, and corporate governance. As part of this effort, IFC assisted the sponsor in conducting public hearings and developed mitigation plans for any adverse impact the project might have on the local community and ecology. By considering additional debt and equity investment, IFC is demonstrating flexibility as a lender to respond to changing conditions and is signaling confidence in the project at a time when ADHPL must raise additional debt.

Environmental and social issues - Category A

This is a Category A project according to IFC’s Procedure for Environment and Social Review of projects. The environmental, health, safety and social (EHSS) issues associated with this project that were identified in the original project review included:

- land acquisition and compensation;
- fisheries and riverine hydrology;
- loss of forests and common property resources such as grazing land;
- environmental and social impacts of the influx of a temporary construction work-force;
- environmental management of construction activities;
- worker health and safety during project construction and operations phases;
- employment of child labor during construction;
- dam safety;
- international waterways and the cumulative impacts of river basin development.

IFC’s ongoing review and supervision of the existing investment in ADHPL (since construction commenced in 2005) has shown the EHSS performance of the project is, for the most part, sound, especially given the size and complexity of the construction, coupled with the challenges of the site’s terrain and geology. IFC’s Independent Engineer also reports quarterly on environmental, social and health and safety aspects of the project.

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