India - Second Karnataka Power Project

 Second Karnataka power project Report No: ; Type: Report/Evaluation Memorandum ; Country: India; Region: South Asia; Sector: Thermal; Major Sector: Electric Power & Other Energy; ProjectID: P009901 India: Second Karnataka Power Project (Loan 2938-IN) The Implementation Completion Report (ICR) for the India Second Karnataka Power project (Loan 2938-IN, approved in FY88) was prepared by the South Asia Regional Office. The Bank loan for US$260 million equivalent was approved on May 10, 1988. Only about US$24 million was disbursed. Of the balance, about US$40 million equivalent was canceled in December 1991 because of anticipated savings due to the devaluation of the Rupee, and about $196 million was canceled in August and October 1993 because of continued Borrower failure to comply with a number of key covenants. The loan was closed on December 16, 1993, vis-a-vis the original loan closing date of December 31, 1996. No contribution to the ICR was received from the Borrower. The principal project objectives were to alleviate the power shortage in the state of Karnataka and India's southern region by exploiting hydroelectric resources and to provide efficient transmission and distribution capacity in the two power utilities of the state: the Karnataka Power Corporation (KPC) and the Karnataka Electricity Board (KEB). The project was comprised of: (i) construction of the 240 MW Sharavati Tailrace Hydroelectric Scheme (STRS); (ii) repair of heavy seepage in the Talakalale dam, located upstream of STRS; (iii) construction of some 725 km of transmission lines and associated substations; (iv) laying of about 6 km of underground transmission cables and associated substations; and (v) reinforcement of the primary distribution grid in Bangalore. Almost none of the project objectives were achieved because only very few of the project components were physically completed. The only exception was the repair of the Talakalale dam, which KPC carried out on its own, outside the framework of the project, as it did not accept the recommendations of the panel of experts financed by the loan. The project was canceled before most of the components were completed because of continued failure on the part of the Government of Karnataka to ensure that KPC and KEB could achieve a reasonable level of financial viability and the resulting inability to finance their share of the project. Implementation of the STRS proceeded reasonably well through 1989, when work was halted because of the withdrawal of an environmental clearance by the GOI's Department of Environment and Forestry. By the time of the ICR mission, in September 1994, it was understood that the environmental clearance had been reinstated, but it was not known whether KPC had been able to mobilize funding to complete the project. In regard to the remaining components, the ICR reports that they had not been completed, but provides no information on the extent to which they were implemented. The economic rate of return of the project was estimated at 12 percent at appraisal, but was not reestimated for the ICR as the loan was canceled before project completion. The outcome of the project is rated as highly unsatisfactory, as virtually none of the project objectives were achieved. The sustainability of the physical achievements of the project is rated as unlikely, as it is doubtful that any sustainable improvements can be attributed to the project. In particular, the sustainability of the repairs to the Talakalale dam is a matter of concern, as its collapse would have catastrophic consequences. At the time of the ICR mission, the repairs had not been completed and, even if they have since been completed, there is no assurance, given KPC's precarious financial condition, of its ability to continuously monitor the seepage and repeat the repairs as required. Given the concerns expressed above, the Bank should continue to monitor this matter. Institutional development was negligible. The Bank's performance is rated as unsatisfactory, mostly because of the project's poor appraisal. Given the importance of this issue, the Bank should continue to monitor this matter. Very few of the components had been sufficiently prepared from a technical standpoint, the Borrower's implementation capacity had been vastly overestimated, and the financial appraisal was based on unrealistic assumptions at a time when both executing agencies were in clear default of essential financial covenants under the earlier Karnataka Power Project (Loan 2827-IN), without a credible plan to comply with these covenants within a reasonable period of time. These ratings are in agreement with those in the ICR. The Bank's submission of this project to the Board was inappropriate, as both executing agencies were in default on essential financial covenants agreed with the Borrower less than a year before. The Bank should have waited until the GOK had demonstrated, through concrete action, that the financial viability of KPC and KEB had been restored. The broader lesson here is that the Bank should not appraise a second project with executing agencies that are in default of essential covenants from earlier projects. The ICR is satisfactory, as it provides a candid discussion of the implementation problems of the project and draws the appropriate lessons. No audit is planned.