India - Haryana Power Restructuring Project

Report No. PID5675 Project Name India-First Haryana Power Sector Restructuring (+) Region South Asia Sector Power Sector Product ID INPE35160 Borrower Government of India (GoI) Loan Amount US $ 60 million Implementing Agencies Government of Haryana (GoH) Haryana State Electricity Board (HSEB) New Haryana power utilities Contact Mr. Ranjit Issar Chairman, HSEB Panchkula, Haryana Tel: 91 172 560579/560652 Fax: 91 172 560087/565746 PID Preparation Date October 16, 1997 Appraisal Date September 1997 Projected Board Date January 1998 Country and Sector Background 1. Haryana State Electricity Board (HSEB) is a vertically integrated utility fully owned by the Government of Haryana (GoH), which supplies power in Haryana. Haryana's installed capacity is 2, 380 MW, consisting of HSEB's own power stations (863 MW), joint- sector projects (899 MW), and shares in central utilities' power stations (618 MW). The system serves about 3 million consumers. In FY96, total energy available was 12,738 GWh, of which 8,745 GWh were sold to ultimate consumers. Agriculture is the main consuming sector (45%), followed by industry (23%) and domestic sector (19%). In FY96, peak demand was about 2,840 MW. HSEB is not able to meet that demand; in FY97 power shortages in the State have exceeded 25%. Load shedding is thus frequent; priority of supply is given to agricultural consumers, especially during the two peak crop seasons. 2. HSEB's generation is characterized by a low average plant load factor (PLF) of about 45%-. The poor physical condition of generating stations, the low quality of coal and irregularity of supply (partly due to HSEB's poor payment record) are among the main factors for this mediocre performance. System losses are recorded at 32% but are more likely to be of the order for 40%. 3. HSEB, like most other SEBs in India, is in a very difficult financial situation, and for several years now has failed to meet its investment needs. HSEB's management has tried to improve this situation by increasing tariffs and improving efficiency of bill collection. Tariffs have been revised at regular intervals, for non-agricultural consumers: by about 14% in November 1990, 10% in  June 1992, 15% in December 1993, 209 in December 1994, and latest, by about 21% in July 1996. Haryana is one of the very few states in India where power supplied to agricultural consumers is charged at above 50 paise/kWh. Collection, as a percentage of the revenue billed during the year, is about 909. Reform of Haryana's Power Sector 4. GoH has informed the Bank of its decision to restructure and substantially privatize its power sector. GoH's ultimate objective is to withdraw from the power sector as an operator of utilities and to establish commercially-operated utilities functioning in a competitive and appropriately-regulated power market, with significant private ownership and participation. GoH has formally endorsed the reform policy (Cabinet meeting of 28 December 1995) and sent a General Policy Statement to the Bank (January 1996) confirming the above objectives. 5. Haryana's power sector reform program involves: (i) the restructuring of generation, transmission, and distribution into separate services to be provided by separate companies; (ii) incorporation of the new companies under the Companies Act; (iii) corporatization and privatization of the entire distribution system; (iv) private sector participation in generation and transmission utilities (GENCO; TRANSCO); (v) competitive bidding for new generation; (vi) development of an autonomous power sector regulatory agency (Regulatory Commission); (vii) supply and end-use efficiency improvements and enhanced environmental protection; and (viii) reform of electricity pricing at the bulk supply, transmission, and retail levels. A reform legislation (Haryana Electricity Reform Bill) has already been approved by the State Assembly and is awaiting Presidential Assent. 6. The reform process upon which Haryana is prepared to embark is complex. A variety of actions have to be carried out, in a coordinated and consistent way. The establishment of a credible and transparent regulatory framework is key for the success of privatization of distribution. Changes in management culture and attitudes are also essential. Improvement in the quality of power supplied is needed for the acceptance of tariff adjustments. The Program 7. The Bank is prepared to support the reform efforts of GoH with a series of Adaptable Program Loans, a new lending instrument recently approved by Bank's Board of Directors. This approach would include the following: a. The Bank would enter into a long-term agreement with India and Haryana indicating that the Bank would be ready to provide up to US$ 600 million assistance over the next ten years through a series of loans to support Haryana's power sector reforms, and stating the main conditions under which the Bank's support would be provided; - 2 -  b. The first of the series of loans (US$ 60 million) would be extended to facilitate the engagement of the reform process. It would help the Government of Haryana (GOH) to take the first steps in the reform agenda and implement critically needed investments; c. Subsequently, three or four loans would be extended based on progress achieved by Haryana in implementing its reform program. The exact amount and timing of each loan would be agreed between the Bank, India and Haryana based on investment requirements and implementation progress; and d. These operations would contribute mainly to financing: (i) rehabilitation and expansion of the transmission and distribution systems; (ii) demand-side management initiatives; and (iii) technical assistance. Each operation would be committed upon the completion of milestones agreed between the Governments of India and Haryana, and the World Bank. The Project 8. The first operation will be the proposed First Haryana Power Sector Restructuring Project. The main thrust of this operation will be to assist GoH in: a. Removing some very critical bottlenecks in transmission and sub-transmission systems, which constrain the availability of power; b. Improving the interfaces between HSEB (or its successors) and consumers; c. Improving the quality of supply in carefully selected areas to ensure maximum visibility and to demonstrate the positive impact of the process initiated by Haryana; and d. Initiate implementation of the reform measures, and prepare the next phases of the reform and investment programs. 9. Components. Investments and services to be financed under the proposed project will include: a. High voltage transmission works (220 kV) to transport power from the Nathpa Jhakri and NTPC (Faridabad) power stations to Haryana's grid system; b. High voltage transmission works (132 or 66 kV) to connect up to ten small power stations for 25 MW each to the grid system; c. Rehabilitation and expansion of the most critically overloaded sub-transmission systems (33 kV), 11 kV feeders, and their low tension service connections; - 3 -  d. Procurement of meters, meter testing equipment and capacitors; e. Procurement of distribution transformers, 11 kV circuit breakers, LT molded circuit breakers, LT cable and linesman's tools/plants and safety devices; f. Establishment of a decentralized computerized billing system for consumer revenue accounting; g. Establishment of a computerized complaint system with radio communication facilities so that complaints may be dealt with more efficiently; h. Procurement of utility vehicles to the line staff to improve their mobility, and procurement of safety equipment to reduce the presently very high rate of accidents; and i. Technical assistance and engineering services to carry out the above measures, start the institutional development of the regulatory commission and the new power utilities, and privatize the first distribution area. 10. Present Status of the Project. HSEB and its consultant (Power Grid Corporation of India) have prepared most of the bidding documents for all of the above goods and works. Most of the bids are expected to be invited by December, 1997. GOH and HSEB have also requested Department for International Development (UK) / CIDA (Canada) and USAID to contribute to supporting some of the technical assistance activities. The project has been substantially appraised in September 1997, and loan negotiations are expected to take place by end November 1997. 11. Financing. The total cost of the proposed project (including IDC) is estimated at about US$ 77 million over the next two years, which will be financed to the extent of US$ 60 million by the Bank. The balance is expected to be financed by GoH/HSEB and bilateral donors. 12. Project Implementation. The project will be implemented first by HSEB and thereafter by HSEB's successor companies (TRANSCO, GENCO and the distribution companies) when they are established. Project Sustainability 13. By implementing the power sector reform program outlined above, Haryana can make its utilities commercially viable and mobilize resources to finance the rehabilitation and expansion of its power system. Investments in support of the reform program will not only contribute to reducing today's power gap, but will also create the basis for sustainable future growth of the system. Closing the chronic supply-demand gap will benefit all electricity consumers. GoH expects that the state's improved power supply position will contribute to attract additional investment and encourage existing industries to expand their production facilities. Lessons Learned from Past Operations - 4-  14. Over the 1980s and up to the early 1990s, the Bank followed a three-pronged strategy in its lending to the power sector in India. It supported Government-owned agencies - NTPC in particular - as a means of effecting sector-wide improvements. It financed a selected number of SEBs whose management and state governments appeared to be committed to revitalization, improving their performance in a gradual fashion. In cooperation with IFC it financed existing private power utilities and encouraged the Government to lower entry barriers for new investors. The success of this strategy has been uneven, reflecting fundamental sectoral weaknesses. Operations with central and private utilities have been generally successful; state-oriented activities have not. The revitalization of institutionally and financially weak SEBs did not turn out to be feasible. Projects in these states failed to meet expectations beyond the physical construction of facilities and the Bank was forced to take strong measures such as suspension of disbursements and subsequently loan cancellation. 15. Based on the lessons of the past, the Bank decided in 1993 to lend its financial support only to those states that demonstrate a commitment to implement a comprehensive reform of the their power sector. The first state to move along these lines was Orissa. The SEB has been unbundled and OHPC, the hydro power corporation, and GRIDCO, the transmission company, have started operating on their own. The privatization of distribution is under way. The Regulatory Commission has been established and is now up and running. Although it is too early to draw definite lessons about this operation, the reform program in Haryana and the design of the proposed project have benefited extensively from a close observation of this first state power restructuring operation. Environmental and Social Aspects 16. The overall environmental impact of the reform program is expected to be significantly positive. Electricity tariffs that cover the supply costs, together with properly designed tariff structures and improved metering and collection, will encourage the efficient use of electricity. The proposed transmission and distribution rehabilitation, DSM and technical assistance will significantly reduce power losses, helping to contain environmental emissions for the same level of electricity service. Investments in the existing generating facilities will set these stations in compliance with GoI environmental standards. The new generating stations, anticipated to be financed by private investors in the reformed power sector, will conform to GoI's environment standards. These new grid generating stations will alleviate urban air pollution by eliminating diesel self generation typically located in densely populated urban areas. The investment program in transmission (lines and sub-stations) will be designed and implemented in accordance with environmental standards and guidelines of the GoI and World Bank. The impact of this investment program on land acquisition will be minimal; and will be mitigated as per the Social Policy Framework under discussion between GoH and the Bank. -5-  Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending October 24, 1997. - 6 -  Annex Environmental Environmental Analysis: A Summary 1. The environmental issues associated with the proposed project are typical for transmission and distribution systems as defined in Bank's Environment Source Book. Haryana State Electricity Board (HSEB) follows strict procedures to comply with India's environmental standards regarding transmission works (lines and substations) and select options with minimal or no adverse environmental and social impact. With the assistance of a Bank- funded consultant, HSEB has carried out detailed environmental analyses for 15 transmission lines and sub-stations (including the lines and sub-stations to be funded by the proposed project); these analyses, reviewed by the Bank, conclude that the construction of the proposed transmission lines and sub-stations will have no adverse environmental impact. 2. The project is expected to have positive environmental impacts through improved efficiency in supply and demand sides. The design of lines and substations would incorporate safety features, and their route/location be defined to minimize any adverse environmental impact. In parallel, on the generation side, HSEB has initiated the rehabilitation of the Panipat power station with a private company with financing from KfW (Germany). Haryana has also engaged a dialogue with KfW for financing the rehabilitation of the Faridabad power station. In both cases, the rehabilitation will aim at bringing the stations into compliance with environmental standards. 3. In addition, by eliminating the supply curtailments, the impacts associated with diesel self-generation (street level emissions in densely populated commercial areas) will be largely eliminated. GoH has agreed to strengthen the environmental management capabilities of HSEB's successors. The project will include a series of technical assistance activities, which will include, when appropriate, components to improve the environmental management capability of HSEB's successors. - 7-