India - Second Karnataka Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15201 IMPLEMENTATION COMPLETION REPORT INDIA SECOND KARNATAKA POWER PROJECT (LOAN 2938-IN) DECEMBER 21, 1995 Energy and Infrastructure Operations Division South Asia Country Department II This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  COUNTRY EXCHANGE RATES AND ABBREVIATIONS Currency Unit = Rupee (Rs.) Exchange Rage used in the Staff Appraisal Report Rs 13.0 = US$I Year Rupees/US$ 1987 12.96 1988 13.92 1989 16.23 1990 17.50 1991 22.74 1992 25.90 1993 26.20/30.50 1994 31.40 1995 32.30 Averagc Rate during project implemcntation penrod: US$ = Rs 22.0 Government of India. KPC, and KEB Fiscal Year: Apnrl I - March 31 Measures and Equivalcnts I Hectarc (ha) = 10,000 m2 = 2.471 acres (ac) I Kilovolt (kV) = 1,000 volts (V) I Kilovolt ampere (kVA) = 1,000 volt amps I Gigawatt-hour (GWh) = 1,000,000 kilowatt-hours I Horse Power (HP) = 0.75 kilowvatts (kW) I Crore (Cr) = 10 million I Lakh = 0.1 million ABBREVIATIONS AND ACRONYMS CEA Central Electricity Authority ICB International Competitive Bidding CWC Central Water Commission KEB Karnataka Electncitv Board GOI Govemnment of India KPC Kamataka Power Corporation GOK Government of Karnataka NTPC National Thermal Power Corporation IBRD International Bank for Reconstruction and POE Panel of Experts Development SEB State Electricitv Board  FOR OFFICIAL USE ONLY INDIA SECOND KARNATAKA POWER PROJECT (LOAN 2938-IN) IMPLEMENTATION COMPLETlON REPORT Table of Contents PREFACE EV ALU A TIO N SU M M ARY ................................... ............................ .... .............i PART I PROJECT IMPLEMENTATION ASSESSMENT Evaluation of Objectives I Achievement of Objectives .2 Major Factors Affecting the Project .3 Sustainabuity .5 Bank Group Performance .5 Borrower Performance .6 Key Lessons Leared .6 P PART II STATISTICAL TABLES Table I Summary of Assessments Table 2 Related Bank Loans/Credits Table 3 Project Timetable Table 4 Loan Disburseitients: Cumulative Estimated and Actual Table 5 Key Indicators for Project Implementation Table 6 Key Indicators for Project Operation Table 7 Studies included in Project Table 8 Project Costs and Financing Table 9 Project Economic Evaluation Table 10 Status of Legal Covenants Table 1 I Bank Resources: Staff Inputs Table 12 Bank Resources: Bank Missions This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.   INDIA SECOND KARNATAKA POWER PROJECT (LOAN 2938-IN IMPLEMENTATION COMPLETION REPORT Preface This is the Implementation Completion Report (ICR) for the Second Karnataka Power Project in India, for which the Bank approved a loan (Ln. 2938-IN) of US$ 260 million equivalent on May 10, 1988. The loan, which was granted within a year of the approval of the first Karnataka Power Project (Loan 2827-IN), became effective on October 27, 1988. The loan was made to the Government of India (GOI) for on-lending through the Government of Karnataka (GOK) to the Karnataka Electricity Board (KEB) and to the Karnataka Power Corporation (KPC). The loan was scheduled to be closed on December 31,1996. At GOI's request, US$40 million equivalent from the loan amount was canceled on December 5, 1991, because of anticipated savings in project costs due to the devaluation of the Rupee. Later on, because the construction of Sharavathi Tailrace Scheme (SRTS) had been at a standstill for a considerable time on court orders while awaiting a new environmental clearance, and also because of continued failure on the part of GOK, KPC and KEB to comply with a number of the key covenants, the Bank suspended disbursements on April 8, 1993. No adequate remedial actions were taken by GOK, KPC and KEB. The Bank therefore canceled on August 1, 1993 the remaining funds for the part of the project executed by KPC and on October 25, 1993 the balance of funds for the part of the project executed by KEB. (This was done concurrently with the suspension and cancellation of the First Karnataka Power Project, Loan 2827-IN). The total amount disbursed from the loan proceeds was about US$24 million equivalent. The loan account was closed on December 16, 1993. The ICR was prepared by the Energy and Infrastructure Operations Division, Country Department II, South Asia Regional Office. This ICR is based on the material in the project files, on discussions with the officials of GOI, GOK, KEB and KPC, and on information obtained during the ICR mission to India in September 1994, including a visit to several project sites.   INDIA SECOND KARNATAKA POWER PROJECT (LOAN 2938-IN) Evaluation Summary Introduction i. The Bank loan for the Second Karnataka Power Project was made within one year of the approval of the first Karnataka Power Project loan (Loan 2827-[N, see ICR Report No. 15184, dated December 21, 1995. Most of the conclusions of the ICR of Ln. 2827-IN are applicable to the second project as well. Originally the components of this second project were to be included in the scope of the first project, but Bank management decided to split tne project. The objectives of the two Karnataka Power Projects were virtually the same. Project Objectives and Components ii. The principal project objectives were to alleviate power shortage in Karnataka and the Southern Region by exploiting hydro-electric resources, and to provide efficient transmission and distribution systems. The other objectives, though not explicitly stated, were to effect institutional, operational and financial improvements in the two power utilities of the State. The Bank loan of US$260 million equivalent was made to GOI for on-lending through the Government of Karnataka (GOK) to the Karnataka Electricity Board (KEB) and the Karnataka Power Corporation (KPC) and the two State-owned utilities responsible for power generation and power transmission and distribution. The project comprised: (a) construction of 4x60MW Sharawati Tailrace Hydro-electric Scheme (STRS) at Gersoppa, and measures for the associated compensatory afforestation; (b) repair of Talakalale dam located upstream of STRS; (c) construction of about 725 km of 400kV and 220kV transmission lines, and the associated substations; (d) laying of about 6km of 66kV underground cables and construction of associated substations; (e) reinforcement of the primary distribution grid in Bangalore; and (f) consulting services for design and construction supervision of 400kV lines and substations. Implementation Experience and Results iii. The rationale of Bank management for presenting the Second Karnataka Power Project to the Board, so quickly after the first project was not clear. Supervision missions for the first project had already reported delays in project implementation of the first project, but the SAR of the second project did not contain a comprehensive analysis of the status of the various components to be implemented under the first project. The SAR, however, did report the poor financial performance of KPC and KEB. The implementation problems were compounded by the withdrawal, in 1991 by the Ministry of Environment and Forestry (MOEF) of the environmental clearance for the STRS originally provided to KPC in 1987, following a complaint to the High Court of Karnataka by a public interest group in 1989.  - ii - iv. Although the SAR of the second project showed that both KPC and KEB were in default of the financial covenants under the first loan and little progress had been made in resolving the financial problems, the first Karnataka Power project was declared effective about a month before the Board presentation of the second project in May 1988. The only action noted in the SAR was that GOK had appointed a committee to make recommendations on the actions to be taken to assist with KPC's and KEB's financial recovery. Most of the bidding documents for the various project components were not ready to be issued. Approval of a second loan by the Bank was therefore pre-mature and inappropriate given the weak financial position of the executing agencies. Ultimately, the inability of GOK to ensure that KEB and KPC could achieve a reasonable level of financial viability and the resulting inability to finance their share of the project, was a major factor in the Bank's decision to first suspend and then cancei the loan v. From 1990 onwards, the Bank gave repeated warnings to the GCK and the agencies concerned that it would suspend disbursement unless adequate remedial actions would be taken to comply with the Bank's covenants and renew the environmental clearance for the STRS. Eventually, on April 8, 1993, the Bank suspended disbursements, and in the absence of adequate remedial measures, the loan was canceled on October 23, 1993. Only US$24 million equivalent from the loan amount was disbursed. The overall outcome of the project was highly unsatisfactory and virtually none of the project objectives was achieved, because only very few of the project components were physically completed. Key Lessons Learned vi Several important lessons can be drawn: - Project Design. For most of the project components engineering and preparation of bid documents, part of which was to be financed under the first Karnataka Power Project loan had not been completed and the necessary government clearances had not been obtained. Submission of the project to the Board was therefore premature. * When determining the most suitable options for the repair of the Talakalale dam technical as well as cost factors should have been given equal consideration. Too much time was and money was lost in discussing a technically controversial and expensive solution, while other technically acceptable, lower cost options were also being proposed. * The withdrawal of the environmental clearance for the STRS shows that changing public attitudes on issues such as the environment could adversely affect the construction progress of a project at any stage. A more rigorous risk analysis should have been carried out since not all mitigatory studies had been completed by the time the project went to the Board. * Support from both GOI and GOK for the project was inadequate. Obtaining central government clearances proved to be a cumbersome process. Successive changes in GOK and in its leadership resulted in frequent changes in the top management of the utilities. Required tariff revisions were not granted, electricity bills from government departments and undertakings were seldom paid in time and budgetary support was inadequate. This situation  - 111 - prevailed despite the fact that GOI and GOK were signatories to the legal agreements. The failure of this project has helped to shape the Bank's current thinking that without introducing fundamental changes such as the creation of an independent regulatory authority, tariff reforms, incorporation of the power sector activities and privatization of distribution, it would be difficult to insulate the state power sector from political interference, create creditworthy entities and operate the sector on a commercial basis. This new approach is already reflected in the design of Bank state power sector operations currently being prepared in India. * Onlending arrangements were sub-optimal: the executing agencies had no direct access to the Special Account and the arrangement provided few incentives for the implementing agencies to accelerate project implementation. The effectiveness of the onlending arrangements for executing agencies at the state level should be reviewed. Financial covenants should have been more focused on providing the utilities with adequate cash resources to conduct their operations and contribute to their investnLient program from their own resources. No assessment was carried out to assess GOK's ability to provide the required budgetary support. * Financial performance. The loan was approved at a time that both executing agencies were in default of essential financial covenants agreed with the Borrower less than a year before, without a credible plan to comply with these covenants within a reasonable period of time. Bank approval of the loan was therefore not appropriate. The Bank should have waited with the Board presentation for the Second Karnataka Power Project, until GOK had demonstrated through concrete action that the financial viability of KPC and KEB had been restored. That could have laid the foundation for a long lasting working relationship between the beneficiaries and the Bank to help develop the power sector in Karnataka in a sustainable manner.   PART I: PROJECT IMPLEMENTATION ASSESSMENT Evaluation of Objectives Introduction 1. The Bank loan for the Second Karnataka Power Project was made within one year of the approval of the first Karnataka Power Project loan (Loan 2827-IN, see ICR Report No. 15184, dated December 21, 1995. Most of the conclusions of the ICR of Ln. 2827-1N are applicable to the second project as well. Originally the components of this second project were to be included in the scope of the first project, but Bank management decided to split the project. The objectives of the two Karnataka Power Projects were virtually the same. Objectives 2. The principal objectives of the Second Karnataka Power Project were to: (a) alleviate the acute power shortage of generating capacity in Karnataka and the Southern Region by developing the Sharavathi Tailrace Scheme (STRS), a relatively low cost hydro-electric resource, and the necessary transmission capacity to evacuate the power; (b) reduce energy losses and improve service quality by strengthening Karnataka's transmission grid and the Bangalore distribution system; and (c) reduce the distribution system capital and operating costs by introducing new technologies and operation and maintenance procedures. 3. The project was a part of the least cost expansion program for the Southern Region and comprised: (a) construction of 4x60 MW STRS at Gersoppa, and measures for compensatory afforestation; (b) repair of Talakalale dam located upstream of STRS; (c) construction of about 725 km of 400kV and 220kV transmission lines, and the associated substations; (d) laying of about 6km of 66kV underground cables and construction of associated substations; (e) reinforcement of the primary distribution grid in Bangalore; and (f) consulting services for design and construction supervision of 400kV lines and substations. 4. The total project cost was estimated at appraisal at US$570 million equivalent, and the project was scheduled for completion by December 31, 1996. The Bank loan of US$260 million was to be on-lent through the Government of Karnataka (GOK) to the Karnataka Electricity Board (KEB) and to the Karnataka Power Corporation (KPC), the State-owned power generation, and power transmission and distribution utilities.  -2 - Evaluation 5. The physical and institutional objectives were fully justified at the time of appraisal. As with the rest of the country, the electricity supply in Karnataka was incapable of meeting the rapidly growing demand. The problems were aggravated by high system losses, arising from inadequate investment in transmission and distribution systems commensurate with the growth in generation facilities as well as poor operation and maintenance practices. 6. The rationale of Bank management for presenting the Second Karnataka Power Project to the Board, so quickly after the first project was not clear. Supervision missions for the first project had already reported delays in project implementation of the first project, but the SAR of the second project did not contain a comprehensive analysis of the status of the various components to be implemented under the first project. Although the SAR of the second project show that both KPC and KEB were in default of the financial covenants under the first loan and little progress had been made in resolving the financial problems, the first Karnataka Power project was declared effective about a month before the Board presentation of the second project in May 1988. The only action noted was that GOK had appointed a committee to make recommendations on the actions to be taken to assist with KPC's and KEB's financial recovery. The lack of financial viability of both executing agencies was a major factor in their inability to finance their share of the project cost. Most of the bidding documents for the project were not ready to be issued. Approval of a second loan by the Bank was therefore premature and inappropriate given the weak financial position of the executing agencies. 7. The economic analysis in the SAR of the second project was identical to the analysis of the first project. It stated that the project components formed part of the least cost investment program for the southern Region and that the benefits of the components of the project could not be separated from those of other investments in the power system. A cost-benefit analysis of the least cost expansion program for the Southem Region was carried out. Using a standard conversion factor of 0. 8, the internal economic rate of return (IERR) was estimated at 4%. It was recognized that the low return was a reflection of the low level of tariffs in the Southern region and below the opportunity cost of capital. However, taking into account an estimate of the willingness to pay, related to the cost of autogeneration for industrial and agricultural consumers, the IERR was calculated at 12%. The SAR did not include a comprehensive risk analysis nor had any attempt been made to update the analysis, even though it must have been evident at that time that quite a few of the anticipated investments were not going to be implemented as planned. As the project was canceled before most components were completed and neither KPC or KEB was able to provide an update of funding required to complete the various project components, the EIRR could not be recalculated. At this point no economic benefits can be attributed to the project. Achievements of Obiectives 8. Almost none of the project objectives were achieved, because only very few of the project components were physically completed. The ICR of the first Karnataka Power Project already highlighted that the first project had been presented to the Board too early, because the necessary  - 3 - government clearances had not yet been obtained and most of the bid documents were not ready to issued. The same mistake was repeated under the Second Karnataka Power Project. The only exception was the STRS for which all necessary government clearances had been obtained, but as explained below the environmental clearance was later withdrawn. By the time the loan was canceled, more than five years after Board approval, most of the bid documents for the transmission and distribution components had still not been issued, which explains why only less than 10% of the loan had been disbursed five years after Board approval. 9. As was the case in the first Karnataka Power Project, support from both GOI and GOK for the project was inadequate. Administrative procedures from GOI agencies and departments to obtain techno-economic clearance, approval of tender documents, import licenses and foreign exchange were cumbersome, and the demands from the Central Electricity Authority (CEA) were often onerous. Changes in GOK and in its leadership resulted in frequent changes in the top management of the utilities. Required tariff revisions were not granted, electricity bills from government departments and undertakings were seldom paid in time and budgetary support (mostly expected to be provided in the form of state government loans) was inadequate. The situation was further aggravated by delays in the release of state government budgetary funds as well as payment of rural electrification subsidies to KEB. 10. The poor financial performance of KPC and KEB throughout the project implementation period was described in detail in the ICR for the first Karnataka Project (ICR Report No. 15184, dated December 21, 1995 and has not been repeated. Ultimately, the inability of GOK to ensure that KEB and KPC could achieve a reasonable level of financial viability and the resulting inability to finance their share of the project, was a major factor in the Bank's decision to first suspend and then cancel the loan. 11. There are two other major factors which affected the implementation of the second Karnataka Project namely: (i) the withdrawal of the environmental clearance for the STRS; and (ii) the technical discussions for finding the optimal technical solutions for the repair of the Talakalale dam. These are discussed below. Maior Factors Affectin2 the Project Sharavathi Tailrace Scheme (STRS) 12. Implementation of the STRS proceeded reasonably well through 1989. The contractors had mobilized soon after the award of the contracts ( October 1989 for the power house, and November 1989 for the 60-meter high Dam). Prior to the award of these contracts, KPC had undertaken some initial works, such as the construction of a diversion channel, bridge downstream of the dam, etc. 13. The environmental clearance from GOI's Department of Environment and Forestry had been obtained for the STRS prior to Board approval and the SAR stated that the Bank was satisfied that the project component posed no serious environmental problems. In late 1989, a public interest group obtained a court order prohibiting KPC from felling any further trees in the  - 4 - area around Gersoppa dam. KPC tried to get the stay order lifted, but subsequently, the Karnataka High Court issued an injunction to stop all work at Gersoppa, pending re-examination of the environmental clearance by MOEF. The High Court ruled in December 1990, that GOI had not fully examined all available information when it granted its environmental clearance for the project in 1987. 14. While awaiting MOEF review, which was to be completed in April 1991, KPC on appeal to the Supreme Court of India was permitted to carry out construction activities, but only in the area already cleared of the forest. Only limited works could be carried out. Court hearings on the case were postponed several times, largely due to inordinate delays on the part of the MOEF responsible for review of environmental clearance. In July, 1992, MOEF finally withdrew the environmental clearance and the forest clearance given earlier, and asked for studies to cover more details on the environment. The additional studies took a long time to complete and after changing the consultants, were finally completed around mid- 1993. At the time the loan was canceled, the environmental clearance for the STRS had not been renewed and the work had come to a complete standstill. 15. The Bank's review of the environmental aspects during project preparation could be considered adequate, except that a more rigorous risk analysis should have been carried out since not all mitigatory studies had been completed by Board presentation. The Bank was not in a position to interfere in the legal process. KPC could possibly have been more effective in its defense of the case in the courts and in monitoring the consultants engaged to carry out the additional studies. It is understood that the environmental clearance was renewed in late 1993, but it is not known whether KPC has been able to mobilize the funding to complete the project. Repair of the Talakalale dam 16. The Talakalale Dam, a masonry dam, holds a balancing reservoir between the Linganamakki reservoir and the intake structure of the STRS. The reservoir had been losing large quantities of water for some time due to heavy seepage through the deteriorated brick-mortar joints. Under the first Karnataka Power project (Loan 2827-lN), KPC was required to engage engineering consultants to determine the best technical option for the repairs: e.g. grouting of the dam and foundation or placing an impermeable membrane on the upstream face of the dam. 17. The engagement of consultants took a long time, partly because of the involvement and interference of GOI agencies in the preparation of terms of reference. Bank supervision missions expressed concern at the delay in engaging consultants because of the potential threat to the safety of the dam structures and danger of collapse of the dam due to the seepage. In the meantime, KPC started with plugging of suction holes in September 1987. The initial results were encouraging. It was, however, realized that this was not a satisfactory long-term solution. 18. In January 1990, the international consultants offered seven feasible engineering solutions but they recommended the lining of the upstream dam surface with steel plates anchored to the face of the dam. Such repair works had never been carried out in big dams up to 60 meters deep  - 5 - as required for the Talakalale dam. It is unclear from the records why the consultants did not give more consideration to a more conventional solution of sealing and grouting of open joints in the upstream surface of the dam. 19. KPC, its panel of experts and CEA were skeptical of the main recommendation for several reasons including: (i) very high costs (nearly the same as the construction cost of a replacement dam downstream); (ii) high probability of being unable to carry out effective welding and anchoring underwater; and (iii) the fact that this had not been tried out in a dam of similar size. KPC also obtained the opinion of an internationally known expert body on dams, who recommended an alternative solution. No conclusions could be reached. 20. While discussions on the possible courses of action for implementation of the recommendations moved back and forth between KPC and the Bank, KPC went ahead with repair of the dam by (underwater) grouting of the upstream dam surface in a more systematic manner. The method used was a masonry technique of pointing and grouting of the dam, which was one of the seven solutions of the consultants report. This involves removal of mortar between joints of two adjacent bricks to a depth of about three inches, and filling the resultant wedge-shaped gap with a mixture of cement, sand and a domestically produced quick setting compound. The results so far, have been quite remarkable, and the total cost of pointing is expected to be about the same as the cost of the consultants study, and a mere fraction of the cost of the recommended solution. Pointing of the entire underwater surface of the dam was expected to be completed around mid- 1995. The seepage is expected to be reduced to less than 1.00 cusecs, which would be acceptable. Regular monitoring is being carried out by KPC and it seems that there is no danger of an immediate collapse. 21. The main concern of the Bank supervision missions was the danger of a collapse of the dam and the drawn out process to come to a decision to start repairing the dam. Expert opinions differed with respect to the danger of collapse. In retrospect, one could conclude that a grouting expert should have been engaged much earlier in the process and that the sealing and grouting solution should have been evaluated more seriously. The solution recommended by the consultant was so expensive that the sealing and grouting of the dam, even if it has to be repeated after several years, was much less expensive. It also seems that the consultants were not familiar with the latest underwater grouting techniques. Sustainability 22. As the Bank loan was canceled well before the majority of the physical components of the project were completed and the financial viability of both KEB and KPC have not been restored, it is doubtful that at this stage any sustainable improvements, in economic or financial terms, can be attributed to the impact of the Bank loan. The power supply situation in the southern region remains critical and is the worst of India's five power regions. Systems frequency is below 50 cycles over 90 percent of the year and the systems load cannot be met even during off peak periods. The only exception is that a reasonable solution appears to have been found for the repair of the Talakalale dam, but as described above the Bank should not be credited for that.  -6 - Bank Group Performance 23. The performance of the Bank in respect of project preparation and appraisal cannot be considered satisfactory. The executing agencies were in clear default of the financial covenants agreed under the first Karnataka Power project loan when the project was submitted to the Board and project preparation, particularly for the transmission line components had not sufficiently advanced. The loan was approved and declared effective when both, KPC and KEB, were in default with key financial covenants. Only by 1990, the Bank started to enforce the financial covenants more seriously, but the political situation in Karnataka remained such, that GOK was not in a position to approve and implement the necessary tariff increases. The deterioration in state finances further contributed to GOK 's inability to deliver on promised financial support to the state utilities. The absence of a thorough analysis of availability of state financial resources, made the financial projections in the SAR look rather unrealistic. When it became apparent in the early stages of project implementation that GOK was not in a position to deliver on the tariff increases or on the projected budgetary support for the investment programs of both KEB and KPC, the Bank should have taken immediate remedial actions. The Bank's sustained objection to GOK's abolition of agricultural tariffs on the grounds that it was in contradiction of GOI policy and sound public utility practices was fully justified. 24. The withdrawal of the environmental clearance was beyond the control of the Bank. In retrospect, one could conclude that the discussions regarding the repairs of the Talakalale dam could have been handled better. It was a situation were "technical experts" disagreed. Borrower Performance 25. As highlighted in the ICR of the first Karnataka Power Project, the cumbersome government clearance procedures have contributed to implementation delays. The lack of effective autonomy and GOK support for tariff increases prevented KPC and KEB from achieving a reasonable financial viability and ultimately in their inability to generate the resources to finance their share of the project. GOK and KPC had no choice than to respect the court orders to interrupt the construction of the STRS. Key Lessons Learned 26. Several important lessons can be drawn: * Project Design. For most of the project components engineering and preparation of bid documents, part of which was to be financed under the first Karnataka Power Project loan had not been completed and the necessary government clearances had not been obtained. Submission of the project to the Board was therefore premature. * When determining the most suitable options for the repair of the Talakalale dam technical as well as cost factors should have been given equal consideration. Too much time was and money was lost in discussing a technically controversial and expensive solution, while other technically acceptable, lower cost options were also being proposed.  - 7 - The withdrawal of the environmental clearance for the STRS shows that changing public attitudes on issues such as the environment could adversely affect the construction progress of a project at any stage. A more rigorous risk analysis should have been carried out since not all mitigatory studies had been completed by the time the project went to the Board. * Support from both GOI and GOK for the project was inadequate. Obtaining central government clearances proved to be a cumbersome process. Successive changes in GOK and in its leadership resulted in frequent changes in the top management of the utilities. Required tariff revisions were not granted, electricity bills from government departments and undertakings were seldom paid in time and budgetary support was inadequate. This situation prevailed despite the fact that GOI and GOK were signatories to the legal agreements. The failure of this project has helped to shape the Bank's current thinking that without introducing fundamental changes such as the creation of an independent regulatory authority, tariff reforms, incorporation of the power sector activities and privatizatiol. of distribution, it would be difficult to insulate the state power sector from political interference, create creditworthy entities and operate the sector on a commercial basis. This new approach is already reflected in the design of Bank state power sector operations currently being prepared in India. Onlending arrangements were sub-optimal; the executing agencies had no direct access to the Special Account and the arrangement provided few incentives for the implementing agencies to accelerate project implementation. The effectiveness of the onlending arrangements for executing agencies at the state level should be reviewed. Financial covenants should have been more focused on providing the utilities with adequate cash resources to conduct their operations and contribute to their investment program from their own resources. No assessment was carried out to assess GOK' s ability to provide the required budgetary support. * Financial performance. The loan was approved at a time that both executing agencies were in default of essential financial covenants agreed with the Borrower less than a year before, without a credible plan to comply with these covenants within a reasonable period of time. Bank approval of the loan was therefore not appropriate. The Bank should have waited with the Board presentation for the Second Karnataka Power Project, until GOK had demonstrated through concrete action that the financial viability of KPC and KEB had been restored. That could have laid the foundation for a long lasting working relationship between the beneficiaries and the Bank to help develop the power sector in Karnataka in a sustainable manner.  - 8 - Part II: STATISTICAL ANNEXES Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable Sector policies LI i. * Financial objectives El . Li Institutional objectives r r * Li Physical objectives n n * [ Environmental objectives L Li * I] Highly Less than B. Bank Performance Satisfactory Satisfactory Indifferent Satisfactory Identification [1 n * G Preparation assistance n r * n Appraisal Gi E C Supervision ri I Highly C. Borrowver Performance satisfactory Satisfactory Deficient Preparation El LI U Implementation b El Covenant compliance ri ri Highly Likely to be Highly D. Assessment of Outcome satisfactory Satisfactory Unsatisfactory Unsatisfactory El LI Li a  -9 - Tabk Z: ReWe Bak Lnan/Crdit .~ ~ ~ ~ ~ ~ ~ ~ ~~~~=C.. ..- ... ..: . ...-....:-;. Loan/Credit Title Loan/Credit No. Year of Approval Expected Completion Preceding Operations Ramagundam Thermal Powver Ln. 1648 01/79 Complete Farakka Thermal Power Ln. 1887 06/80 Complcte Second Ramagundam Thermal Power Ln. 2076 12/8] Complete Third Rural Electrification Ln. 2165 06/82 Complete Upper Indravati Hydroelectric Ln. 2278 05/83 Complete Central Power Transmission Ln. 2283 05/83 Complete Indira Sarovar Ln. 2416 05/84 Complcte Second Farakka Thermal Power Ln. 2442 06/84 Complete Fourth Trombay Thermal Ln. 2452 06/84 Completc Chandrapur Thermal Power Ln. 2544 05/85 Complete Rihand Power Transmission Ln. 2555 05/85 Complete Kerala State Power Ln. 2582 06/85 Complete Combined Cycle Ln. 2674 04/86 Complete Karnataka Power Ln. 2827 06/87 Canceled IDA Credits Preceding Operations Rural Electrification Cr. 572 07/75 Completc Fourth Power Transmission Cr. 604 01/76 Complete Singrauli Thermal Power Cr. 685 03/77 Complete Korba Thermal Powver Cr. 793 04/78 Completc Ramagundam Thermal Power Cr. 874 01/79 Complete Second Rural electrification Cr. 911 05/79 Complete Second Singrauli Thermal Power Cr. 1027 05/80 Complete Farakka Thermal Power Cr. 1053 06/80 Complete Second Korba Thermal Power Cr. 1172 07/81 Complete Upper Indravati Cr. 1356 04/83 Complete Indira Sarovar Cr. 1613 05/86 Complete P ~~~~~~~~~~~. . . . , . .. , , , , , , , , , , , , , , : . . . . . . . . . . . . . ..... ....... .:.. . . - . - b. .. - -. P.. . .. .'e:: . TiM e e _ __ __et__:__-_- Date Planned Actual Appraisal Not available Negotiations Not available 04/05/88 Board Presentation Not available 05/10/88 Signing Not available 07/27/88 Effectiveness Not available 10/27/88 Cancellation Not available 10/25/93 Loan Closing 12/31/96 12/16/93  - 10- Estimated (SAR) Actual Year Semester Cumulative % Semester Cumulative % FY89 SI 20.0 20.0 7.7 20.0 20.0 83.3 FY89 S2 6.4 26.4 10.2 0.0 20.0 83.3 FY90 SI 14.4 40.8 15.7 0.3 20.3 84.6 FY90 S2 14.4 55.2 21.2 0.7 21.0 87.5 FY91 SI 24.1 79.3 30.5 3.5 24.5 102.1 FY91 S2 24.1 103.4 39.8 2.2 26.7 111.3 FY92 SI 26.0 129.4 49.8 1.0 27.7 115.4 FY92 S2 26.0 155.4 59.8 4.0 31.7 132.1 FY93 SI 31.2 186.6 71.8 6.0 37.7 157.1 FY93 S2 31.2 217.8 83.8 4.0 41.7 173.8 FY94 SI 20.3 238.1 91.6 -17.7 24.0 100.0 FY94 S2 10.3 248.4 95.5 FY95 SI 3.9 252.3 97.0 FY95 S2 3.9 256.2 98.5 FY96 SI 1.9 258.1 99.3 FY96 S2 1.1 259.2 99.7 FY97 SI 0.8 260.0 100.0 **** Reimbursement of the Special Account  ...Tabl: -I - ti- SAR Estimate Actual of Latest Estimate GERSOPPA Power House Civil Works 03/94 05/97 Dam (etc.) 09/94 03/98 Commissioning Unit 1 03/94 07/97 Commissioning Unit 11 07/94 01/98 Commissioning Unit Ill 10/94 07/98 Commissioning Unit IV 10/94 01/95 Power House Civil Works 90% of excavation completed Dam Civil Works 50% of excavation completed Infrastructure (e.g. bridge, colony, etc.) Completed Value of Civil Works 10% of the total completed Talakalale Dam Repair to be completed by 1997 400 kV Transmission Line Shimoga-Nelamangala 250km 06/93 06/96 RTPS Scdam 102 km 06/90 03/93 Sedam-Humnabad 65 km 09/90 03/93 Shimoga-Mysore 225km 12/89 09/92 Lilo at Hassan 20km 12/91 03/95 400 kV Substations Talaguppa 06/93 12/95 Nelamangala 06/93 12/95 220 kV Substations NRS 03/91 03/96 Sedam 09/90 09/94 Hassan 12/91 06/95 Tumkur 09/90 03/94 Tiptur 09/92 12/94 Humnabad 03/92 04/94 Hebbal 03/92 06/95 66 kV Substations B Station 12/89 03/95 C Station 03/90 06/96 Distribution 12/91 06/96 SCADA 12/90 06/95  - 12- Table 6: Key Indicators for Project Operation No key indicators for Project Operation were given in the SAR. TableI7: Studies Included IinProject Revicx\ f KEB work planning and distributiotn Study cornplctcd. hut training program wsas never oupratioii and mainteinance procedures and training implementcd T :be 8:_roject_st_(USSMnii) :_________________:: ::______ A praisal Estimate Actual Estimatc Local Foreign Costs Costs T otal InitSItment ('oAsts Land. Reselilement. Rehabililation 6.0 (. 1 6. 1 The project was canceled at Afforestation 0.5 (. 0.5 mid-point. Most comiponents Civil Works 43.7 8.6 52.3 have not been completed. KEB Turbinie-Generator Sets 24. () 46.6 70.6 and KPC were unabie to provide Mechanical Equipimient 5.9 5.) 11.8 the required information. Electrical Equiipimieint 5.5 0.6 6.1 Field and Ofricc Equipment (.9 0.3 1.1 Repair of Talakalale Dam 7.4 3.( 10.4 Transmission Lines 4(0kV 34.8 6.9 41.7 Substation 4()kV 12.6 10.4 23.0 Transmission Lines 22(kV 15.6 1.2 16.8 Substations 22(kV 14.8 15.6 30.4 Transmission Cables 66kV 1. 5 1.3 2.8 Substations & NMobile Transformers 66kV | 1.8 1.9 3.7 Distribution Equipment I IkV 1 30.7 19.2 49.9 Tools and Equipment 2.5 2.6 5.1 Distribution SCADA System 1.2 1.3 2.5 Training 0.0 0.5 ).5 Consultarcv (0.8 0.3 1.1 Engineering and Administration 33.3 1.0 34.3 Total Base Line Costs 243.5 127.3 370.7 Physical Contingencies 20.2 9.6 29.8 Price Continigenicies 43.2 23.3 66.2 Total Pro jcc Costs 306.9 160.2 ! 467.1 Interest durinig consiruction 68.0 35.0 1(13(| lotal Financing Required 12i 12 |  - 13 - Appraisal Estimate (US$mm) Actual (US$mm) Local Foreign Local Foreign Source Costs Costs Total Costs Costs Total KPC Component IBRD 47.0 83.0 130.0 The project was canceled at mid- KPC 39.6 0.( 39.6 noint. KPC and KEB were unable to GOK 91.4 22.6 114.0 provide actual information. Subtotal 178.0 105.6 283.6 KEB Component IBRD 54.0 76.0 130.0 KEB 74.5 0.0 74.5 GOK 68.4 13.6 82.0 Subtotal 196.9 89.6 286.5 Total Financed 3570 Table- 9:. Project Economic Eval'atioix - The project was an integral part of the least cost expansion program for the southern region and a cost benefit analysis had been carried out on the program as a whole rather than on the project in isolation. The estimated internal economic rate of return (EIRR). However, after including additional benefits reflecting the consumers willingness to pay on the basis of alternative cost of autogeneration by agricultural and industrial consumers, the EIRR increased to 12%. As the project was canceled before most components were completed and neither KPC or KEB was able to provide an update of funding -equired to complete the various project components, the EIRR could not be recalculated. At this point, however, no economic benefits have materialized from the project. The power demand/supply situation in the Southern region is the worst of India's five power regions.  - 14 - ...... .... . ..... . ,g,, .......Cov..ant Agreement Section T Tye/Entity Description Comments A. Karnataka Agreement KA 2.06 TEC/KEB KEB to complete survey for 220 kV Status knot known. Gersoppa-Talaguppa line and by December 31, 1988 to make application for clearance under Forest Act of 1980. KA 3.01 FIN/KEB KEB to take out and maintain insurancec Complied with. against risks in such amounts as shall be ____________ ________ consistent with appropriate practicc. KA 3.02 FIN/KEB KEB shall: (i) by April 1. 1990 collect its Not complied with. accounts receivable from its principal debtors as of March 31, 1987, in accordance with a monitorable action program satisfactory to the Bank, and (ii) maintain its accounts receivable with respect to the sales at no more than the equivalent of the preceding two months sales. KA 3.03 TEC/GOK KEB shall retain by December 31, 1988 the Not complied with. services of a qualified firm under terms of reference satisfactory to the Bank, to review KEB's work planning procedures, introduce new tools and equipment, and train the Board's staff in their use. __________ KA 3.04 FIN/KEB All sums owed by KEB and KPCL in Partially complied respect of electricity sales and not covered with. by letter of credit are to be cleared within ~~~~~~30 days of billing. ________ KA 4. 01(c) AUD/KEB KEB to send its audited financial Complied with up statements and the auditor's report to the to FY91. Bank not later than nine months after the ___________end of each financial year. KA 4.02 FIN/KEB KEB shall take from time to time measures, Not complied with. including tariff adjustments to ensure total revenues in any year after meeting (i) expenses chargeable to revenues, (ii) taxes, (iii) depreciation, and (iv) interest, produce surplus not less that 3% of net fixed assets of KEB at beginning of such year.  - 15 - B. Loan A reement LA 4.01b) AUD/GOI Audit - SOE (audit withdrawals for KPCL Complied with up due within 7 months of FY end and to FY9 1. withdrawals for CEA and KEB within 9 months of FY end). LA 4.02 AUD/GOI Audit - Special Account (due within 6 Complied with. months of FY end). C. Proiect Agreement PA 3.03 FFN/KPC KPCL shall take out and maintain Complied with. insurance against risks in such amounts as shall be consistent with appropriate practice. PA 4.01(b) AUD/KPC KPCL shall send to the Bank its audited Complied with up (ii) financial statements and thc auditor's report to FY9 1. (due within 7 months of FY end). PA 4.02 FIN/KPC KPCL shall from time to time take Not complied with. measures, including tariff adjustments to ensure total revenues in any year after meeting: (i) expenses chargeable to revenues, (ii) taxes, (iii) depreciation, and (iv) interest, produce surplus not less that 3% of net fixed assets of KPCL at beginning of such year. : - Table- L: Ba - Rsurcs 1 :tifnu Stage of Project Cycle Actual Staff Weeks US$ thousand Through Appraisal 39.4 39.1 Appraisal-Effectiveness 49.4 97.0 Supervision 149.3 131.9 ICR 4.0 5.6  - 16- Perform ce Rating Stage of Month/ Number Specialized Implemen- Develop- Types of Project Y'ear of Staff Skills tation ment Problems Cycle Persons Represented Status Impact Through Not available appraisal Appraisal Not available through Board approval Supervision Mar. 1989 2 SPE, CE 2 Not rated Sep. 1989 2 SPE, FA 2 Dec. 1989 2 SPE, CE 2 Jan. 1990 2 CE, SPE 2 Mar. 1990 3 SPE, FA, HC 3 2 Feb. 1991 3 TM. PE, PO 3 2 Aug. 1991 4 TM 3 2 Implementation, Apr. 1992 2 TM, CE 3 3 Financial, and Aug. 1992 2 TM, CE 3 3 Environment Oct. 1992 3 TM, FA. PE 3 3 Jan. 1993 3 TM, FA. PE 4 4 Jun. 1993 2 TM. CE 4 4 Sep. 1993 1 TM 4 4 Sep. 1994 1 Consultant Special Staff Skills: TM Task Manager SPE Senior Power Engineer FA Financial Analyst PO Project Officer PE Power Engineer HC Hydro Consultant CE Consultant cngincer   -l 1r ;~~~~~~~~~~~ : lL : I - . l i; 2 - a I. ! : .1