India - Third and Fourth Power Transmission Projects

Document of The WVorld Bank FOR OFFICIAL USE ONLY Repr No. 7652 PROJECT COMPLETION REPORT INDIA THIRD AND FOURTH POWER TRANSMISSION PROJECTS (CREDITS 377-IN AND 604-IN) March 3, 1989 Transport and Energy Operations Division Asia Country Department 1V 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 authori7ation.  Measures and Equivalents One Kilovolt (KV) - 1,000 volts One megawatt (MW) - 1,000 kilowatts One megavolt ampere (MVA) - 1,000 kilovolt-amperes One kilometer (km) - 0.62 miles One gigawatt hour (GWh) - One million kilowatt hours Acronyms and Abbreviations BCB - Beas Construction Board CEA - Central Electricity Authority CWPC - Central Water and Power Commission DESU - Delhi Electricity Supply Undertaking GOI - Government of India LIC Life Insurance Corporation of India NHPC - National Hydro-Electric Power Corporation NTPC - National Thermal Power Cornoration RE - kural Electrification REB - Regional Electricity Board REC - Rural Electrification Corporation SEB - State Electricity Board  THE WORLD IANK 7F0R OMCIAL USE ONLY Washtnslon. DC 20433 IIA O1w. no OvI( EW Ci'w.ai 0,ahw d Dujiuus March 3, 1989 MEMORANDZJM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on India Third and Fourth Transmission Projects (Credits 377-IN and 604-IN) Attached, for information, is a copy of a report entitled "Project Completion Report on India - Third and Fourth Transmission Projects (Credits 377-IN and 604-IN)" prepared by the Transport and Energy Operations Division, intry Department IV, Asia Regional Office. Attachment This document huas arestrited distribution and may be used by focipients only in the performance of theif official duties Its contents may not otherwise be discksod without World Bank sutho-i-stion.  FOR OMCIAL USE ONLY INDIA THIRD AND FOURTH POWER TRANSMISSION PROJECTS CREDITS 377-IN AND 604-IN PROJECT CONPLETION REPORT TABLE OF CONTENTS Page No. Preface ................................... i Basic Data Sheets ............... ... ii Highlights ..vi I. Introduction . II. The Power Sector. 1 III. Project Formulation. 2 Project Orgnanization. 5 Cost Estimates. 5 Project Justification. 7 IV. Project Implementation. 7 Overview. 7 Procurement. 8 Lead Despatch .10 Trarsmission .11 Disbursements ........... 12 Beneficiaries under Credit 377-IN .13 Assam State Electricity Board .13 Karnataka Electricity Board .13 Madhya Pradesh Electricity Board .13 Orissa State Electricity Board .13 Tamil Nadu Electricity Board .13 Beas Construction Board .13 Kerala Electricity Board .14 Delhi Electric Supply Undertaking (DESU) .14 Tata Electric Company .14 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.  Table of Contents (Cotit.) Page No. Seneficiariet; under Credit 604-IN ...................... 14 Bihar State Electlicity Board ..... ................... 1.4 Gujarat State Electricity Board ..... ................. 15 Maharashtra State Electricity Board .... .............. 15 West Bengal Electricity Board ..... ................... 1S V. Financial Performance .................................. 15 General ............. ................................. 15 Tariffs ............................................... 16 Rural Electrification Subsidies ........................ .16 Unpaid Interest on Loans ............................. 17 Capitalization of Interest During Construction ........ 18 Long-Rurn Marginal Cost Study ......................... 18 Audit . ............................................... 18 Amendments to Electricity Supply Act .................. 18 VI. Development of the Power Sector During Project Implementation ...... ............................ 18 Transtnission .......................................... 19 VII. Justif,cation .19 VIII. Institutional DeveloDment .20 IX. Borrcwer and Bank Performance ..........................21 X. Project Impact .21 XI. Conclusions .23 ANNEXES 1. Cost Estimate, Credit 377-IN ... 25 2. Cost Estimate, Credit 604-IN . . 27 3. Utilization of Credit by Beneficiaries, Credit 377-IN . 29 4. Utilization of Credit by Beneficiaries, Credl*; 604-IN . 30 5. Status of Transmission Line Implementation. .. ,, 31 6. Disbursement Schedule ............................... .. 37 7. Rate of Return ...................................... 39 8. Contingent Liabilities .... 40 9. Installed Cap.city, Investment, Consumption, Losses and Tariffs. . 41 10. Borrower's Comments to the Report .. ...... 56  THIRD AND FOURTh POWEk TRANSMISSION PROJFCTS CREDITS 377-IN AND 604-IN PROJECT COMPLETION EPORT Preface This Project Completion Report (PCR) is for the Third Power Trauismission Project, Credit 377-IN for US$ 85 million, made in May 1973, and for the Fourth Power Transmission Project, Credit 604-IN for US$ 150 million, made in January 1976, to India. Credit 377-IN, which was to be closed in September 1977, was closed September 3, 1978. Credit 604-IN was to be closed in June 1981 but was closed June 30, 1983. Both projects financed materials, equipment and services and were effectively fully disbursed. However the construction of the transmission facilities described in the respective project descriptions in the credit agreements continued long after the Credits were closed. In fact, a few facilities provided for under Credit 604 will probably not be completed until l.989. Because of the high price inflation experienced in the mid-seventies, the funds provided under Credit 377 were not sufficient to procure the goods envisaged. An amount of US$ 30 million was therefore included in Credit 604 for this purpose. The PCR was originally prepared by the former South Asia Projects Department and subsequently updated and finalized by the Asia Country Department IV. The PCR is based on the the Appraisal Reports, President's Reports, Credit Agreements, correspondence files and discussions with staff who had been associated w5th the projects. The section of the PCR describing physical implementation and status of the facilities is based on a field PCR prepared by two Indian consultants who visited the State Electricity Boards and other beneficiaries during 1984-85 and 1988. In accordance with the revised procedures for project performance audit reporting, this Project Completion Report was read by the Operations Evaluation Department (OED), but the project was not audited by OED staff. OED sent copies of the draft report to the Borrower and Executing Agency for comments. Borrower's comments are attached as Annex 10.  ii INDIA THIRD POWER ?RANSKISSIOU PROJECTS Cr. 377-IN PROJECT COSPLITTIOU EPORT Basic Data Shet Appraisal Estimate Actual Total Project Cost (US$ Million) 15C.7 NA la Overrun (1) NA /a Credit Amount (US$ Million) 85.0 85.0 Supplementary Credits (US$ million) /a - Disbursed 85.0 Cancelled - - Date for Completion of Physical Components 12/76 8/82 Proportion Completed by Appraisal Target Z 100 75 Economic Rate of Return Z /b Financial Performance - Fair Institutional Performance Poor Estimated and Actual Cumulative Credit Disbursements (US$ Million) 1974 1975 1976 1977 11978 (i) Appraisal Estimate 1.0 32.0 72.5 85.0 - (ii) 'ctual 0 0 19.2 60.0 P5.0 (iii) expressed as Z of (i) 0 0 25.0 71.0 100.0 /a Not available (para 3.14-3.15). /b ERR was not calculated at -praisal.  iii OTHER PROJECT DATA Original Plan Actual First Mention in Files - 1/71 Negotiations - 2/73 Board Approval - 5/5/73 Credit Agreement Signed - 5/9/73 Effectiveness - 9)28/73 Closing Date - 9/30/78 Borrowers India Executing Agencv: State Electricity Boards /a Follow-on Project: Fourth Transmission Project (Cr. 604-IN) Mission Data No. of No. of Date of Month/Year Weeks Persons Manweeks Report Identification 2/73 - - - - Appraisal 6/72 2 3 6 2/26/73 Supervision /b i 7/76 2 2 4 9/15/76 ii 3/77 1/2 3 1-1/2 4/02/77 iii 1/78 1 2 1-1/2 3/30/78 Exchange Rates Name of Currency : Rupees Appraisal Year Average (1973) : US$1 = Rs 7.35 Intervening Years Average : US$1 - Rs 8.90 Project Completion (1982) : US$1 - Rs 8.44 Fiscal Year of Borrower : April 1 - March 31 /a State Electricity Boards of Assam, Kerala, Karnataka, Madhya Pradesh, Orissa and Tamil Nadu. The Beas Construction Board, Delhi Electric Supply Undertaking and Tata Electric Co., Northern and Southern Regional Electricity Boards and the Central Electricity Authority. /b Missions supervised both the third and fourth transmission projects.  iv DIA FOURTH POWER TRANSMISSION PROJECTS Cr. 604-IN PROJECT CONPLETIOW DEPORT Basic Data Sheet Appraisal Estimate Actual Total Project Cost (US$ Million) 207.3 NA /a Overrun (2) _ _ Credit Amount (US$ Million) 150.0 150.00 Disbursed - 149.87 Cancelled - 0.13 /b Date for Completion of Physical Components 12/79 1987 /c Proportion Completed by Appraisal Target Z 100.0 40.00 Economic Rate of Return /d Financial Performance Fair Institutional Performance Poor Estimated and Actual Cumulative Loan Disbursements (US$ Million) 1977 1978 1979 1980 1981 1982 1983 (i) Appraisal Estimate 16.0 62.0 125.0 147.0 150.0 - - (ii) Actual C 19.5 50.6 78.2 99.1 125.0 149.87/b (iii) expressed as I of (i) 0 13.0 34.0 52.0 66.0 83.0 99.0 /a Not avdilable (pars 3.14-3.15). /b An amount of US$134,000 of the credit was cancelled 4/9/84. /c Construction of some of the transmission works financed is still underway. /d ERR was not calculated at appraisal.  v OTHER PROJECT DATA Original Plan Actual First Mention in Files - 11/73 Negotiations - 11/75 board Approval - 12/23/75 Credit Agreement Signed - 1/22/76 Effectiveness 4/22/76 10/22/76 Closing Date 6/30/81 6/30/83 Borrower- India Executing Agency: State Electricity Boards la Follow-on Project: None Mission Data No. of No. of Date of Month/Year Weeks Persons Manweeks Report Identification 73 - - - - Appraisal 5/74 2 3 6 12/23/75 Supervision /I i 7j06 1/2 2 1-1/2 9/15/76 lb ii 3/77 1/2 3 1-1/2 4/02/77 /b iii 1/78 1/2 2 1-1/2 3/30/78 /b iv 1/79 1 1 1 2/01/79 v 1/81 1/2 2 1 4/14/81 Exchange Rates (Nepal Rupees -Rs) Name of Currency Rupees Appraisal Year Average (1973) US$l = Rs 8.0 Intervening Years Average US$l - Rs 8.7 Project Completion (1983 US$l - Rs 10.0 Fiscal Year of Borrower April 1 - March 31 /a State Electricity Boards of Bihar, Gujarat, Maharashtra and West Bengal. The Beneficiary SEbs under the Third Transmission Project, the Eastern and Western Regional Boards and the Central Electricity Authority. /b Missions supervised both the third and fourth transmission projects.  vi INDIA TIRID AND FOUTE POTAM TRANSHISSION PROJECTS CREDITS 377-Il AND 604-Il PROJECT CONFLETIOP IDOl? limhliaht. The Third and Fourth Power Transmission Projects, Credit 377-IN in 1973 and Credit 604-IN in 1976, provided for nearly 700 km of high-voltage transmission line- and associated substations for ten State Electricity Boards and three independent supply licensees; however, the projects failed to achieve most of the financial objectives set out for the SEBs in the appraisal report. There was delay in completing disbursements as evidence by one-year and two-year delays, respectively, in the Closing Dates but there were much more substantial delays in completing the physical works. Virtually all facilities are now in service but a few are still under construction with final completion expected in 1989. The most serious delays were exp2rienced by five SEBs. There were several causes: delay in procurement of materials and equipment, mainly of a self-inflicted nature; delay in construction due to weak SEB organization and contract management; and shortages of raw materials which led to some very late deliveries of parts and equipment. Some regional load dispatching facilities provided under the projects have only recently been made fully operational, and flexibility in the control and interchange of power on the regional systems was accordingly reduced and substantial benefits foregone. The procuremert proceedings of the load dispatch equipment were marked by considerable delays (para 4.07). These delays impacted adversely on power service and costs and service did not improve as much ur as rapidly as planned. The Association administered the projects through the Central Electricity Authority (CEA), to which it confined most of its supervision activities. As a consequence, tne Association had little direct contact with the ultimate beneficiaries. The SEBs made little progress in institutional development in the areas of management, organization and procedures. Greater progLess would probably have been achieved in this area had they had the more usual Bank-beneficiary hands-on relationship. The Association used the projects as a vehicle to improve the financial practices and viability of the sector, in particular those of the SEBs. Improved rates of return, state subsidization of rural electrification losses, waiver of the interest owed the States by their SEBs or. capital contributions, and capitalization of interest during construction were covenanted in the projects. Some progress was made and SEB finances improved, but on the whole the results were below that expected by the Association. By and large the SEBs did not respond to the initiatives of Central Government in the area of financial discipline.  vii The experience with tha projects raises some important issues for this type of project, although mainly in the Indian context: - If the Bank were to undertake similar projects in the future, consideration should be given to tieing disbursements to the rate of progress rather than to invoices of shipment of gocis, which resulted, in this case, in disbursement being completed and the Credits closed long before the works were finished. - The amount of supervision provided by the Association seems to havu been less than required by these multi-state, multi-agency projects, resulting in virtually no direct superv.sion of work progress to the considerable disadvantage of the project and the SEBs. This aspect sh3uld be carefully taken into account in possible projects of a similar nature. - The Bank-country arrangemenLts devised for the projects hindered a direct relationships and contact between the Bank and the SEBs, a situation that continued under Rural Electrification lending. Improvements of institutions at the center has been the focus, with the intent that the leverage provided can enable SEB capability and practices to be moved in the direction of sound utility practice, at least in the financial sphere. But this has happened only to a limited extent and the SEBs do not appear to have moved forward as a whole. Collectively, the SEBs cor.stitute the most important public presence in the sector; they have the largest role, and the one in which potential economies (and diseconomies) are greatest. Given this, Bank lending should also emphasize the SEBs so that a direct and continuing relationship emerges that allows for more effective joint action. In the early 1980's, the Bank became aware of the small progress being made by SEBs despite the large amournt of lending to the Center and the Center's efforts through obligations and covenants to improve -sBs. The Bank began to take measures in 1984 to reestablish direct contact with the SEBs. It shifted the emphasis on power projects from the Central Government domain to that of the State Governments. Since then, six hydroelectric power loans and a thermal power loan have been made to six states (the SEBs are executing agents); several others are in preparation. Continuation of this policy should enable the recipient SEBs and Bank to work together to eventually raise the capability and performance of the SEBs. At the same time the Bank should continue to support the institutions of the Central Government, mainly those that are in a position to add power capacity to the different regions expeditiously (NTPC and NHPC), so that some relief is provided for the States which lack implementation capacity and, also importantly, so as to ensure that the Center has a meaningful role in the sector in each Region to guide and discipline system expansion and operation.  INIA THIRD AND FOURTH POwER TRANSHISSION PROJRC.S CREDITS 377-IN AND 604-IN PROJECT COMPLETION RZPORT I. INTRODUCTION 1.01 The Third Power Transmission Project, for which Credit 377-IN for US$85 million was made in 1973, was the fourteenth Bank Group operation in the power sector in India. The Fourth Power Transmission Project, for which Credit 604-IN for US$150 million was made in 1976, was the sixteenth. 1.02 The Credits had been preceded by two other transmission projects, Loan 416-IN, US$70 million in 1965, and Credit 242-IN, US$7s million in 1971. Otherwise Bank-Group lending had been mainly for generating plant. The previous projects were completed satisfactorily but it was evident that there was still insufficient transmission to match installed generatin; capacity, with various degrees of imbalance experienced in the different regions. The 3ubject projects marked an intensive effort by the Bank Group to improve the transmission situation. 1.03 Most of the operating utilities (SEBs) were involved in the programs financed by Cr. 377-IN and Cr. 604-IN. The implementation period covered about ten years and saw a massive increase in the size of the power sector as well as considerable development of the country's capacity to manufacture power equipment and materials. 1.04 The Bank Group provided important financing to the power sector in the 1970's. For this reason, and the long period of project implementation, considerable data is provided in the PCR on sector growth, finances, and institutional development to show where the sector stood at the beginning, its advances, and where it is at now. The report is therefore retrospective and does not deal only with these projects. 1.05 The main source of procurement information in the PCR is the Bank's correspondence files. As for the construction history, problems and status, two reports were prepared in the field by Indian consultants who visited most of the entities involved and obtained whatever information was available. Without their efforts, it would have been difficult to prepare a PCR. II. THE POWER SECTOR 2.01 Electricity supply is within the concurrent jurisdiction of the Central and State Governments. The industry was organized on the basis of the Electricity (Supply) Act, 1948, under which the State Electricity Boards (SEBs) were established and made responsible for generation, transmission and distribution of electricity within their respective States. There are a few private licensees operating in urban areas, which  -2- require the approval of the respective SEB to expand facilities. Though conceived as autonomous bodies, SEBs have limited scope for independent action, being under the control of the State Governments. The coordination of the activities of the SEBs with national power development policy is the responsibility of the Central Electricity Authority (CEA). At the time of appraisal of the Third Transmission Credit, control at the national level was not effective as CEA, although already established in 1950, had become largely inactive. The Government of India decided to reactivate it in October 1974. The Central Water and Power Commission (CWPC), which had de facto been the operative age-cy at the national level, was reorganized and its power function transferred to the CEA, which was made to report to the newly established Ministry of Energy. The CEA was given responsibility, inter alia, for the formulation of plans for power development, training of personnel, interconnected system operation, and research and development. 2.02 Other agencies in the industry include: (i) the Rural Electrification Corporation (REC); (ii) tne National Thermal Power Corporation (NTPC) for design, construction and operation of thermal generating stations; (iii) the National Hydro-Electric Power Corporation (NHPC), with the same function for hydro development, both established by GOI to provide large amounts of new generating capacity efficiently in the regions, which are listed below; and (iv) the Regional Electricity Boards (REB) in the five regions, Northern, Southern, Western, Eastern and North-eastern, established to improve the collaboration of the SEBs in the respective Regions and co-ordinate the operation of the regional systems to maximum benefit. 2.03 The Ministry of Energy, the Planning Commission and the Ministry of Finance are involved in decisions regarding major investments in the sector. The CEA monitors the progress of the projects authorized under the Five Year Plan and, after coordinating with the States, assists the Planning Commission to decide on provision for projects in the Plan annual budgets. III. PROJECT FORMULATION 3.01 With the rapid growth of the power sector, the need to coordinate the growth of transmission and distribution networks with generation is essential. It was with this need in mind that the Bank decided to assist in financing transmission facilities. 3.02 The Third Power Transmission Project was originally conceived by the CWPC, in consultation with the beneficiary SEBs and other entities. The Association appraised the project in 1972. It comprised 4000 km of transmission lines, operating at voltages of 400 KV and 110 KV, 60 substations wit"h an aggregate capacity of 4600 MVA. It included provision of communication and load control equipment for the Northern and Southern Regions. 3.03 The Fourth Power Transmission Project, a continuation of the third Project, was prepared by the CEA in consultation with the beneficiary SEBs and REBs. It comprised provision of about 2800 km of 400 KV and 220 KV transmission lines and a small amount of 220 KV and 132 KV underground  -3- cable, 30 substations with a capacity of 2,700 MVA, and other imiscellaneous equipment including communication and load despatch facilities. Some of the 400 KV lines were to be operated initially at 220 KV. The Credit also made provision for completion of certain sub-projects provided for but not taken up under Credit 377-IN. It included provision of engineering services to undertake system planning studies. 3.04 The beneficiaries under the two projects were as follows: Third Power TLansmission Credit - Assam State Electricity Board - Kerala State Electricity Board - Madhya Pradesh Electricity Board - Mysore State (Karnataka) Electricity Board - Orissa State Electricity Board - Tamil Nadu Electricity Board - Beas Construction Board - Delhi Electric Supply Undertaking - Tata Power Company - Southern Regional Electricity Board - Northern Regional Electricity Board Fourth Power Transmission Credit - Bihar State Electricity Board - Gujarat State Electricity Board - Maharashtra State Electricity Board - West Bengal State Electricity Board - Western Regional Electricity Board - Eastern Regional Electricity Board 3.05 lnstitutional development of the power sector was a paramount consideration during project formulation. Considerable effort had been made over the years under other Bank Group financed power projects to improve sector organization, policies and finances, but prog.ess had been slow and uneven. The Third and Fourth Transmission Projects afforded an opportunity to address the problems on a sectorial basis as they embraced most of the sector entities. 3.06 The issues addressed during formulation included the following: (a) central government authority had been vested in the CEA, which however had played a declining role (para 2.01) and had become mainly a vehicle for the channeling of State-Central Government sector affairs. The Power Wing of CWC exercised the real Central Government authority in the sector, though it had no statutory authority. A reorganization in which the CEA would emerge as the single Central Government authority with clearly defir.ed powers was decided; (b) the Bank Group had long been discussing the need for SEBs to become financially viable through appropriate tariff level and  -4- other practices, and avoid dependence on state subsidization. It was agreed that the SEBs would be entitled to a specified rate of return on net fixed assets although achieving that objective might take a few years; (c) because of the need of most SEEs for state financial assistance which when received was accounted for as SEB debt, many states had accumulated a m&seive sum of overdue interest. Since some SEBs were unlikely to ever be able to repay the sum, the situation called for some rationalization. It was agreed to waive or cancel the amounts of accumulated interest in due course; (d) the Association advocated the capitalization of interest during construction; and, (e) as Rural Electrification (RE) grew, predominantly a matter of electrification of tubewells for irrigation and RE tariffs were maintained well below cost, SEBs were accumulating large deficits on this account. The Association agreed that a subsidy to offset RE deficits would be paid by the State Governments to the SEBs. 3.07 Covenants: The above undertakings by the states were embodied in the following covenants under Cr. 377-IN: (a) subsidize losse. from rural electrification programs either fully or partially to enable the respective SEEs to earn a rate of ieturn of 9.5Z on non-revalued average net fixed assets in operation; (b) waive their claims against the SEB's unpaid accrued interest as of March 31, 1970 (for SEB beneficiaries under Cr.604-IN the applicable date was March 31, 2.976); and (c) cause their Boards to capitalize interest during construction in accordance with guidelines to be established. Other covenants in Cr. 377-IN included: (a) improvement in the coordination of the planning of power sector development with that of other sectors; (b) amendment of the Electricity (Supply) Act in regard to certain financial and accounting provisions; 3.08 Aside from a reiteration of these covenants, Cr. 604-IN provided that SEBs would carry out a pricing study of the electric power supply based on marginal cost principles. 3.09 Both the Credit Agreements further specified that no disbursements would be made for goods and services awarded more than 18 months after the date of the respective Credit Agreement. The objective was to expedite procuremenit and to cause the CEA and SEBs to focus on the preparation of bid documents, calling of tenders and awarding of contracts, without delay. Section V gives the status of covenants compliance.  Project Organization 3.10 This was the first time the Bank addressed, on a national basis, the financial situation of the SEBs. Heretofore individual SEBs, as the beneficiaries of specific credits, committed themselves to certain financial performances and the fulfillment of covenants especially designed for the respective SEBs. Bank missions supervised the projects and visited the states, discussing the problems with the SEBs. When the Third Transmission Project was formulated, it was the Bank's intention to have the Central Government exercise discipline in an attempt to improve the States' financial performance and meet covenant obligations, but it was not its intention to discontinue a dialogue with the individual SEBs nor to discontinue dealing with them directly. 3.11 In the Fourth Transmission Project CEA was appointed coordinating agency for the project. In particular it was to act as a review body for procurement, and all SEB procurement documents were to be routed through it to the Association. Subsequently the CEA was asked by the Association to have the SEBs organize a Project Progress Reporting system under which SEB quarterly reports would be reviewed and summarized by CEA for submission to the Association. Cost Estimates 3.12 The Third Transmission Project was estimated to cost US$150.7 million, including 102 for physical and 7Z for price contingencies on base price. The estimate was prepared by the SEBs and other beneficiaries in consultation with CWPC. Details are given in Annex 1. 3.13 The Fourth Transmission Project was estimated to cost US$207.3 million. This comprised US$158.8 for transmission facilities including 52 for physical contingency, and 19.62 for equipment and 27.8Z for civil works price contingencies, for which the estimates were prepared by the SEBs in consultation with CEA (following the 1973 oil crisis price contingencies increased substantially). The remainder of the cost was for regional control equipment and for works included in but not completed under the Third Transmission Project. Details are given in Annex 2. 3.14 Cost estimates for each SEB or each transmission line are not contained in the appraisal reports and were probably not prepared per se. Rather, an estimate of the total cost and local costs of the equipment supplies was made for each state. 3.15 The only information available on actual cost is that provided in the field PCR (para 1.05) and consists of the list of contracts and their cost, by state. This information, which is voluminous,l/ is in the Asia Central Files and refers only to contracts for procurement and materials. However, the usual PCR presentation of actual costs and comparison with estimated ones was not possible owing to the following main factors: 1/ The two credits entail nearly 400 contracts.  -6- (a) these credits had the characteristic of a program loan in that they supported India's ongoing transmission development program, providing financing for material, equipment and services, but not civil works, involving hundreds of works executed throughout a large part of India; (b) the projects were executed over a period of about ten years even though disbursements under the Credits were largely completed in about fivre years, after vhich the Bank's supervision was discontinued; and (c) the individual transmission lines and substations, which together formed the Projec;, were constructed by the beneficiaries numbering eleven SEB and two other entities. At the time of execution of the major part of these projects, the SEBs' accounting systems were being developed and were generally ineffective in providing meaningful costing data. Furthermore, part of the erection works was carried out by the SEB's own forces and no separate cost record was kept. 3.16 An attempt has been made, however, to estimate the actual project cost. The estimate was based on: (i) the actual disbursements in foreign currency; (ii) an estimated profile of local expenditures derived from transmission schemes for the South Asia countries; and, (iii) the historic price variations for non-agricultural products in India, applied to the local component over the implementation period. The resulting figures should be considered only as indicative orders of magnitude of the likely actual cost. In estimating actual cost for the Third Project, records show that the foreign exchange cost increased by $46 million (54Z), from $85 million to $131 million due mainly to inflation stemming from the oil crisis. To enable those works scheduled for execution under the Third Project to be carried out, $30 million was included under the Fourth Project and GOI provided the remaining $16 million. In calculating the estimated local cost, it was assumed that local costs increased at the average annual rate equal to that of non-agricultural products in India,2/ net of the 5? price contingency provided in the original cost estimate. On this basis, local costs are estimated to have increased by about 777 from $65.7 million estimated at appraisal to about $117 million. The local cost increase substantially exceeds that of foreign costs because the material and equipment involving foreign exchange was procured during a five-year period, while civil works required an additional five years of project execution. Based on the foregoing, the Third Project's estimated total cost was about $247 million, about 642 higher than the appraisal estimate of $150.7 million. 3.17 Devaluation of the Indian Rupee subsequent to appraisal of the Fourth Transmission Project in 1975, together with an excess provision for 21 FY74-0, FY75-27.0, FY76-2.8, FY77-2.8, FY78-2.3, FY79-3.3, FY8O-21.2, FY81-21.7, FY82-8.1, FY83-1.3, FY84-7.2, FY85-7.0, FY86-4.8,  -7- price contingencies, which reflected sensitivity to inflation influenced by the oil crisis, resulted in a slightly lower cost for the project as a whole. While there was an under-expenditure in foreign exchange, local costs increased. This was despite an over-provision for local price inflation and was a result of the Project's execution taking six years longer than estimated at appraisal. The excess of foreign exchange amounted to about $23 million and the Bank approved a supplementary program of work amounting to $23.3 million for inclusion in the Fourth Project comprising extensions and additional equipment for the Maharashtra, West Bengal, Gujarat and Bihar SEBs. In calculating the Fourth Project's estimated local cost, the Indian non-agricultural product index was applied to the estimated annual expenditures during the period of project execution. On this basis, the increase in local cost was estimated at about 452 from $40.8 million to about $59 million. In calculating the total cost, the Fourth Project was considered separately from the supplementary funding of $30 million to complete the Third Project, and which is included in the calculation of the total cost for the Third Project, and excluding the $23.3 million additional works. On this basis, the estimated total cost of the Fourth Project was about $157 million, about 3Z lower than the appraisal estimate of $161.5. Project Justification 3.18 The rationale for the Third Transmission Project given in the Appraisal Report was that the Credit-financed transmission was part of the interregional transmission system under development in the country and would therefore share the benefits expected of the interregional system. These include inter alia reduction in the future amount of generation capacity needed resulting from the diversification of load and capacity achieved through interconnectors, installation of efficient larger units and plants given interconnection of main load areas, and the achievement of fuel savings from the optimal operation and balancing of thermal and hydro capacity enabled through interconnection. All of this is valid. The rationale for the Fourth Transmission Project was identical. It was noted that it was not possible to calculate the economic rate of return on the project, given the complexity of the massive transmission systema. 3.19 Cr. 377-IN was approved by the Board in May 1973 and became effective in September 1973. Cr. 604-IN was approved by the Board in December 1975 and became effective in October 1976. The lengthy delay was mainly due to the time taken by beneficiary States to validate or agree to obligations undertaken by their SEBs. IV. PROJECT IHPLEKN 'ATION Overview 4.01 The two transmission projects provided expanded transmission capabilities, albeit late, as intended but were much less effective in achieving their financial and institutional objectives. Most of the facilities provided under the projects are fuiictioning, but certain of those provided under the Fourth Transmission Project have been delayed several years and even a few still are under construction. This long delay  -8- has hindered improvement of power services. The load despatch and frequency control systems provided to optimize the benefits of systems interconnection were also delayed by procurement and administrative problems. Overall, the progress of the sector during the ten years of implementation has been considerable, but lags well behind the original intentions (Section V). The accomplishments of the two projects must be viewed in the context of the experience of other power projects financed by the Bank Group during the project implementation period, particularly from the institutional perspective. 4.02 Credit 377-IN. Standardization of Bid Documents to meet the Association's Guidelines was done by CEA in consultation with the Bank. The cut-off date for placing orders was November 1974. Bid enquiries were issued beginning November 1973, but by October 1974 orders for only $29.5 million had been issued though bids of $29.7 million were under consideration. Accordingly, the cut-off date was extended six months and orders committing the full amount of the Credit were placed by the new date. 4.03 There was unprecedented escalation in prices during 1973-74 following the major increase in oil prices. Consequently the price contingency of 52 provided for the project was totally inadequate. The cost of overrun was estimated at about US$30 million. At the request of GOI, the Association made available the amount as a supplementary funds, components under the Fourth Power Transmission project. Cr. 377-IN was closed in June 1978, when fully disbursed. 4.04 Except from some deviR.ions, the contracts under Cr. 377-IN were filled by the suppliers satisfactorily. However, there were delays, sometimes considerable, in the supply which hindered completion of the works. 4.05 Cr. 604-IN. Tne cut-off date for placing orders was October 15, 1976. This was extended several times, however, to July 31, 1979 because of the serious procurement difficulties which developed, which were a contributing cause of the great implementation delays of some transmissions line and substations (para 4.15). 4.06 It became evident that due to devaluation of thi Rupee and to overestimation of project costs, the Credit was likely to be underspent by US$20 million. GOI asked, therefore, to include additional works under the Credit, and inclusion of US$22.26 million for such goods was agreed with the Association. Annexes 3 and 4 give the allocations for each beneficiary and their actual reimbursement claims for Cr. 377-IN and Cr. 604-IN respectively. Procurement 4.07 Because of the number of beneficiaries there were many individual procurement actions. In Cr. 377-IN the SEBs, following past practice, handled their own procurement. To speed it, it was agreed that in the case of awards to foreign contractors the SEBs would be given permission to import the goods immediately and that review by other bodies would no longer be necessary. It was also agreed that all SEBs would use the  standard conditions of contract agreed under the pervious transmission project, Cr. 242-IN. But under Cr. 604-IN (all contracts under Cr. 377-IN having being awarded prior to Cr. 604-IN being made) the procedure for handling procurement was changed (para 3.11). Procurement became a shared responsibility of SEBs, which prepared specifications and tender documents. evaluated bids and proposed awards, and the CEA, which vetted them and submitted them to the Association for approval. The relative authority of SEBs and CEA probably varied from state to state, and little is known of their interaction. ,ften long delays occurred in submitting bid evaluations and proposing awards to the Bank. 4.08 The frequent changes in CEA (and/or SEB) posture with regard to individual procurement issues, exemplified by the disproportionate weight they at times attached to minor bid deviations and, at other times, the small weight they gave to major ones, mirrored a variety of influences. These included, inter alia, the tendency to maximize the number of domestic awards (which was co=,cnted upon in the Third Transmission Project Appraisal Report as having been a problem in the second one (Cr. 242-IN)), the frequent exaggeration of production capabilities by domestic suppliers and a certain lack of technical knowledge or know-how. The end result was to substantially delayed fieldwork. This was exacerbated by the inability of some domestic nanufacturers to meet contract schedules and/or quantities, due in part to the shortage of raw materials in the Indian economy. 4.09 Long delays resulted from inaction, for example: (a) CEA sometimes informed the Association six months or more after receipt of bids that the SEB had found that the foreign bids were technically not responsive and the domestic bids overpriced (or had not included a bid bond, etc.), and therefore the SEB wished to call for new tenders. (b) CEA would advise that certain bids (mainly foreign) contained deficiencies, which often in fact were minor, sometimes proposing that the contracts in which similar deficiencies were excused should be awarded to another bidder (usually domestic). The Association would object to the inconsistency. Subsequent communications between parties might take several months, and/or end in a new round of bidding. (c) SEB/CEA sometimes invited bids from Indian suppliers with questionable qualifications. In some instances they acknowledgedly lacked the know-how; in one case their agreement with a foreign firm to provide know-how had lapsed. In another, the licence of the foreign firm to do business in India appeared to have expired, but in all cases months would go by before disentangling the situation.  -10. 4.10 The Association queried many of the proposed awards, but in nearly all cases eventually agreed to them after long discussions. In two instances it threatened misprocurement and cancellation of the equivalent amount of the Credit, but this never occurred. It is debatable whether the exercise of such discipline by the Association might not have resulted in more objective bid analyses, or at least speeded-up the process. 4.11 Some of the results of the procurement process were counter- productive. In Bihar State the transmission line towers and fittings were rebid because of alleged price collusion among the bidders, but construction was then greatly delayed by the inability of the eventual domestic supplier to provide anything like the amount of steel tonnage ordered. In a second case, no fozeign manufacturers responded directly to tenders for the supply of 220 KV ACBs (air blast circuit breakers) as they no longer made them. Instead they made a proposal to supply 220 KV SF6 breakers (sulpha-hexafloride) which the Borrower rejected, awarding the contract to a domestic supplier. This was in 1976, when air blast breakers had become largely obsolecent because of SF6's superior qualities.31 4.12 Argument went on for two years concerning the award of load despatch and frequently control facilities for the Western Region EB and Maharashtra State. Foreign firms provided a variety of such controls but there were no qualified domestic supplies unless reliant on a foreign firm. Neither the CEA, SEBs, nor Association itself were entirely up-to-date on this rapidly developing field. The CEA and SEBs changed their approach to bid evaluation and their thinking of the most suitable equipment characteristics several times. The Association becamt highly involved. Suppliers made several representations to protect their interests. But in the end the load despatching equipment installed at Regional headquarters and at the Maharashtra SEB despatching office were fourd to be incompatible (para 4.14), which required a complicated sof+:ware interlink developnent completed only in December 1987. Load Despatch 4.13 Load despatch facilities had been identified as necessary for interconnection of the five regional systems, each of which was also to become well interconnected within. By 1985 much progress had been made in physical interconnection. But delay in completing and making operative the load despatch facilities limited interconnection performance from the standpoint of transfer of power capability and the intraregional sale and scheduling of power. The program for provision of load despatch required but lacked single management and responsibility for overall design and installation. The status is as follows: 4.14 Southern Region: The installation was completed in the early 1980s and load despatch facilities are being fully utilized, but frequency- control equipment is not in use because there is no margin of generating capacity reserve. 3/ More recently, SF6 breakers are imported by India.  -11- Northern Region: The facilities are fully operational. Eastern Region: The equipment, which was received in 1982-83, was involved in a fire in a clearing agent storage. The equipment needing repair, and that which he! to be replaced, were to be delivered in 1985. The facility became fully operational in April 1986. Western Region: The facilities were substantially completed in 1982, but the Western Region's load despatching equipment is not compatible with that of Maharashtra state, the systems of two manufacturers having been installed. Apparently there was no CEA or SEB coordinative mechanism to oversee this aspect. A software method of interfacing them was completed only in late 1987. Transmission 4.15 The following paragraphs give a brief history and the present status of each beneficiary's transmission facilities, and discusses the administrative, logistical and supervision limitations which developed. 4.16 Scme of the contracts ran into difficulty, particularly those for conductors atid towers, in part due to the rise in cost of raw materials. Moreover, there was a shortage of pertinent materials in the late 1970s. Price escalation went far beyond the ceiling stipulated in the bid documents and in some cases contract renegotiation became necessary. 4.17 At the outset of the project, the Association overestimatee the capability of the respective SEBs/utilities for transmission design and specifications, procurement, award of equipment and construction contracts, and monitoring and supervision of ^onstruction. Between all entities the transmission program, of which the projects formed a part, aggregated over US$1 billion, spread over hundreds of coaLtracts including civil works. Some en.ities had not undertaken work of the scale envisaged by the project before, and their weaknesses became cleat in the course of project implementation. The establishment of specific norms and arranRgements for executing and monitoring these processes would have been useful, if not essential. This was an area where the Association could have been active as this vacuum was beyond the capacity of CEA to fill. However, it would have been a very large and time consuming task for the Association, and would have likely required full time supervision by specialized staff from the New Delhi office. 4.18 To quote the first joint supervision mission for the Third and Fourth Transmission Projects: "Thcse (two projects) are in essence, program credits to assist in financing India's ongoing transmission deve1opment program. In view of the difficulty in establishing precise details of the program, the changes subsequent to appraisal, and overall costs, it is not possible to provide meaningful figures of current project cost. Also since supervision of work in the field beyond a spot check would be impracticable, project supervision is confined to monitoring the procurement position, the position with regard to outstanding covenants,  -12- and the financial position of the SEBs relative to their covenanted rates of return". 4.19 The amount of supervision for this two projects appears in hindsight less than required; there were only three joint supervisions for the Third and Fourth Transmission projects, and two subsequent ones for the Fourth. The last supervision report for the Fourth Transmission project was the only one to include a review of construction. On this occasion the project officer called the Chief Engineers of the beneficiary SEBs together and obtained some information on the status of their subprojects, but it was difficult to obtain information in any depth. As an example, there was an SEB which, having constructed and strung with conductor a 60 KV transmission line, left it deenergized, and had the entire 70 km of conductor stolen. The impression was that there were many irregularities. This mission found that the CEA officials responsible for the two transmission projects focussed only in procurement and knew little about project construction and its progress. Aside from the general supervision missions, there were a few procurement missions at intervals of six months when procurement activity was at a peak. A more intense supervision by the Association and more direct contact with the SEBs could have eventually prevented some of the problems in the making, but it is doubtful whether it would have been sufficient to overcome the SEB's weak implementation capabilities. 4.20 The Associatio-i clearly overestimated CEA's supervisory capabilities. The CEA, as "Coordinating Agency", was to provide summary quarterly project progress reports to the Association but little was forthcoming despite Association reminders. Given the dispersed and extensive nature of transmission construction, the multiplicity of SEBs and other entities and their limited technical staff and the weakness of CEA, this might have been anticipated. Consequently, information about progress of construction and installation was virtually nil throughout implementation. In retrospect one could say that a more direct contact of the Association with the beneficiaries could have been instrumental in providing advice, instill project discipline and institute adequate monitoring particularly in the weakest States, such as Bihar, Orissa and West Bengal. More field supervision would have been clearly beneficial; the stationing of a Bank Power Engineer in Delhi would have contributed greatly to achieving this. 4.21 The performance of the individual beneficiaries under the two y ojects is given below. Annex 5 gives the data on scheduled completions and the date of actual completion of the various transmission lines. 4/ Disbu.sements 4.22 Annex 6 shows a comparison of projected an actual disbursements for both credits. By the original closing date (9/30/78) of Cr. 377-IN, disbursements represented 822 of the total credit amount and it took 372 4/ The two Credits provided for the installation of substation facilities in conjunction with the transmission lines. They experienced similar delays but were completed well before the transmission.  -13- more time than forecast to entirely disburse it. The disbursement performance of Cr. 604-IN was worse; only 711 of the credit was disbursed by the original closing date (6/30/81) and it took 611 more than the forecast time to entirely disburse the credit. These delays are a reflection of the protracted procurement process. Bereficiaries under Credit 377-IN Assam State Electricity Board 4.23 Procurement action was taken promptly by the SEB, bids opened in May 1974 and orders placed December 1974. Construction was started in 1974/75 and the works completed in 1977/78. Karnataka Electricity Board 4.24 Bids were opened in May 1974 for most equipment and Letters of Intent issued September 1974, but delay occurred in the supply of power transformers and other equipment of from 4 months to 2 years. All the works were completed by December 1981, up to three years late. Madhya Pradesh Electricity Board 4.25 Bids were opened in May 1974 and orders placed between November 1974 and April 1975. Host of the works were to have been commissioned between 197416 but materials started arriving only in 1976. All the works were completed by December 1977. Orissa State Electricity Board 4.26 Bids were opened over mid-1974 through mid-1978 and orders placed from 1975 to 1978. The works were completed over 1978 through 1983 compared with the 1978/80 targets. 5/ Tamil Nadu Electricity Board 4.27 The tenders were received at various times during 1974 and orders placed by late 1975. Major delays in supplies occurred, particularly of towers and conductors (1-2 years). Nevertheless, of the six transmission lines, one was completed each year in 1977, 1978 and 1979. The remainder was completed by 1982, with the exception of the Avadi-Thiruvallore line which was completed much later. Beas Construction Board 4.28 Works under the Credit covered the 400 KV transmission line between Dehar-Panipat and associated substation installations. Bids were 5/ Distinction is made between the expected project completion date shown on the Key Project Data Sheet, which is based on the Appraisal Report/Credit Agreement, and the (target) completion date stated in this section and Annex 5. The latter reflects the SEB expectations at the time equipment orders were placed.  -14- opened during 1974/75 and orders placed over 1975/76. Major delays in delivery, both by domestic and foreign firms, occurred in the supply of conductor accessories (18 months), vibration dampers (4 years), ground wire accessories (3 years), preformed armor rods (1 -year), insulators (1 year) and towers (6-18 months). The transmission line was completed in June 1979. Xerala Electricity Board 4.29 Bids were opened in April 1974 and orders placed end-1974. There were delays in the supply of materials of from 5-20 months but the transmission lines was comuissioned in 1978. Delhi Electric Supply Undertaking (DESU) 4.30 The single 220 KV transmission line and other works were commissioned on schedule in 1978. Tata Electric Company 4.31 Works were completed as scheduled. Beneficiaries under Credit 604-IN Bihar State Electricity Board 4.32 Bids were called in September 1976. When those for towers and accessories for the 400 KV and 220 KV lines were opened, it was found that the suppliers had in effect formed a cartel and quoted nearly identical prices. The bids were rejected and the participants requested to submit new ones in April 1977, 11 months after bid opening. However, a controversy then developed over the size of cond'rtor to be used on the 400 KV line: BSEB had stipulated one size but the CEA had standardized another. A year elapsed before the SEB agreed to the CEA standard. New bids were received in June 1978 but it was only in August 1979 that orders were placed. Several lines are still u,:er construction, with completion not expected before mid-1989. CEA has yet to agree to import by BSEB of a 900 meter long, single core cable to replace the stolen stand-by Ganga Crossing power cable. 4.33 These contracts ran into serious cost escalation given the long delays noted above. Promptness in decision making by BSEB and appropriate monitoring and proper follco-up by CEA and the Ministry would have resulted in considerable saving of money and time. 4.34 The load despatch facilities were completed and are functional. The transmiesion lines to be built by BSEB consisted of (i) the 400 KV line from Patratu to Biharsharif via Tenughat, instead of Patratu-Ganga as originally planned; (ii) the 220 KV line Bodhgaya-Biharsharif-Patwah- Muzzafarpur; (iii) the 220 KV river-crossings of the Ganga and Fatwah; and (iv) a 132 KV cable crossing beneath the Ganga. The lines are very important to the strengthening of the power system in Bihar, as the Bihar- sharif substation is in the geographical center of the state and the 400  -15- KV line would link it with Patratu generating station in the south and generating stations elsewhere, and the 220 KV line to a new thermal station in the north. Lacking these facilities, little over 100 MW can be transmitted over the existing 110 KV system to the north compared with about 450 MW that could be made available with the lines. Power supply in Bihar ccntinues to be poor, and is marked by frequent power interruptions. Although the Credit was closed in mid-1983, some of the works were still in the initial stages by the (Annex 5). The Board therefore had to procure substantial material with its owv funds. Gujarat State Electricity Board 4.35 The Board took prompt procurement action but encountered difficulties with contracts for conductors and accessories. It made alternative arrangements for obtaining these materials and completed the extensive program almost on original schedule. Maharashtra State Electricity Board 4.36 Bids were invited in 1976/77. There were delays in the supply of conductors of from 6 months to 3 years, the main reason being the non- availability of raw material. An acute shortage of the proper grade of aluminum developed because production in most aluminum plants was restricted due to power curtailment. Also delayed were the synchronous condenser (1 year), shunt capacitors (3 years), and switchgear (1-3 years). Three of the transmission lines were completed in 1978/79, two in 1979/80, seven lines between 1980/83, and the rest by 1986. The MSEB load despatch center is fully operational. West Bengal Electricity Board 4.37 The bids were opened in 1976 and 1978 and most of the equipment/ material received during 1979/81. However, work progress was far from satisfactory with line completion as late as 1988. The Durgapur-Jeerat Kasba 220 KV line, 290 km, is not being constructed as it has become in the meantime redundant given the development of the NTPC grid in the region. The SEB however has completed the load despatch facilities included under the credit. The reason for not having expedited and built the transmission appear to have been the more urgent need, for new lines (and substations) outside the program of Cr. 604-IN as the result of changed system requirements, and the inability of the SEB to raise funds for both the additional works and the works under Cr. 604-IN. This is one instance where the project was delayed by the beneficiary's lack of funds. Apparently, the delay in Cr. 604-IN works did not result in any constraints in evacuating the power generated. But service in West Bengal continues to be poor with frequent power interruptions and power curtailment on a rotating basis. V. FINANCIAL PERFORMANCE General 5.01 During project implementation there was erratic but positive  -16- movement of SEBs' financial position. Because of the long time required for preparation of accounts, the financial results were available only until 1982. While in 1974 only three of ten SEBs earned a rate of return of 9.5Z, seven were earning a return of this level during the period 1979-81, (Annex 6). This ROR requirement was changed by the 1983 Amendment of the Electricity Act, which became effective in April 1985, establishing a minimum 3Z ROR on assets after interest. Tariffs 5.02 Tariffs were increased during this period irf an erratic pattern, reflecting, inter alia, social and political considerations by the State Governments. There was not noticeable change during this period in the SEB's approach to tariff setting. Increases in electricity rates were implemented at two or three years intervals in amounts which barely kept pace with general price increases. Some rates actually deteriorated in real terms and in some cases subsidies, particularly to the agricultural consumers, increased. Moreover, tariff structures became in several cases more cumbersome to administer. In several instances the low tension rates departed more from the economic cost of supply on account of the subsidies. In summary, there is no evidence that the two projects were instrumental in introducing any changes of notice in the level or structure of electricity rates or in the principles or practices of the SEBs in this respect. Rural Electrification Subsidies 5.03 Under the two credits, undertakings require State Governments to subsidize losses from rural electrification, either fully or partially to enable the SEBs to earn a rate of return of 9.51.6/ This policy was put in practice by most of the States except Assam (no subsidies have been paid despite representations by the SEB) and Kerala (due to achievement of return without the subsidy). However, as discussed below, payments have been irregular and late. Assam - The Board was unable to achieve a return of 9.52. The losses due to RE operations over 1975-83 aggregated approximately Rs. 360 million. The State Government has made no response to the SEB's representations to ameliorate the situation. Kerala - The rate of return of the Board was about 9.52 from 1979 onwards. The SEB claimed a subsidy for losses in the 1975-1978 period, but there has not been a favorable response from the State Government. The SEB is still pursuing the matter. 6/ Under a subsequent loan, cash generation equal to at least 202 of annual capital investment was, instead, convenanted. Subsequent to this, a rate of return covenant was re-introduced in loans made to two states. The rural electrification subsidy was subsequently limited to a maximum of 102 of SEB gross revenue under the Rural Electrification III Loan Agreement.  -1~'- Karnataka - The Board earned a rate of return of more than 9.5? from 1975-82 except during 1978, when it wys 8.4X. The State Government has since paid Rs. 58 million subsidy to make up the deficiency that year. Madhya Pradesh - The Board earned a return of more than 9.52 except for 1981 and 1982. However the Board claimed reimbursement of RE losses irrespective of the rate of return achieved, which the State paid. From 1975-1983 the State paid Rs. 2145 million against claims of Rs. 2741 million. Orissa - The State reimbursed RE losses up to 1977 amounting to Rs. 346 million. For the period 1978-83 net interest owed the State by the SEB was Rs 428 million, which is considered a contingent liability; the State is considering offsetting this against the ciaims for RE losses. Tamil Nadu - The Board earned more than 9.5Z return since FY 1977. Some subsidies (1974 and 1975) were paid. Bihar - The SEB earned a return of 9.52 in 1983 and 1984. For 1976-1981 the SEB has fully reimbursed RE losses of Rs. 1179 million. Gujarat - From 1977, except for 1980, the SEB earned a return of 9.5Z. RE losses for 1980 have been paid. Maharashtra - The Board has generally earned a return in excess of 9.5? from 1975. RE losses aggregating about Rs. 250 million were paid through 1985. West Bengal - The State has paid the subsidy since 1977. Of the Rs. 815 million RE losses incurred since then, Rs. 400 million have been paid. 5.04 As the finalizing of annual accounts and their audit takes an inordinately long time, the claims for the RE loss subsidy are often made a year or two late. Verification of Government takes additional time and the subsidy may be paid a couple of years or more after the loss is experienced. Unpaid Interest on Loans 5.05 Both Credits 377-IN and 604-IN stipulate that State Governments undertake "to waive or dispose off their claims against their respective SEBs for unpaid interest on loans advanced to such Boards". Waiver of interest accumulated up to March 31, 1970 under Credit 377, and up to March 31, 1976 under Credit 604 was to be effected. Annex 8 gives the situation in 1975 and 1980 of all states. It can be seen from the Annex that the State Governments did not comply with this agreement and that the situation indeed worsened.  -18- Capitalization of Interest Durint Construction 5.06 Both credit agreements incorporated covenants which would lead to the capitalization of interest during construction. Guidelines were prepared for this purpose but many SEBs objected because they said it would seriously affect their financial position and federal tax liability. The decision to capitalize interest during construction was only notified in late-1986. However, no decision has been taken regarding the revision of the federal income tax as applicable to SEBs. Long-Run Marginal Cost Study 5.07 Under Cr. 604-IN, Bihar, Gujarat, Maharashtra and West Bengal SEBs were required to carry out a pricing study based on long-run marginal cost principles. Eventually nine SEBs made such studies. They were commented upon by the Bank, which found them quite accurate but recommended improvement in the definition of the information used, the use of shadow pricing when relevant, and the making of the calculation on the basis of average marginal cost rather than incremental cost, that is, on the long term investment program. It is difficult to say what impact these studies have had on SEB tariffs since neither GOI nor State Governments adhere to long-run marginal cost pricing principles. Audit 5.08 Covenants in both credits provided that the SEBs should have their accounts ready and audited within six months of the end of the fiscal year, a demanding expectations given the long-known status and tardiness of many SEB account. Delays of more than two years affected submission o5 a few SEB audited accounts. Amendments to Electricity Supply Act 5.09 Under Cr. 377-IN the Borrower undertook to amend certain of the financial and accounting provision of the Act. This was carried out through the Amendment of the Electricity Act of 1983 (para 5.01). VI. DEVELOPKENT OF THE POWER SECTOR DURING PROJECT IKPLDMENTATION 6.01 The two transmission projects wire integral to power sector development in it entirety. This section describes sector growth during project implementation, 1974-1985, and the weaknesses and limitations which remain. In brief, generating capacity increased very substantially but was still unable to meet the increasing demand; transmission capacity was increased but continues to lag behind generating capacity; and electricity service improved somewhat and, of course, served an increasingly large share of the population. The installation of tubewells increased spectacularly under the Rural Electrification Prograri. 6.02 Gross planned and actual outlays for the power sectee during the Sixth Plan (1980-85) are given below:  -19- SLITM PLAN POWER INVSTHENT (1980-1985) Transmission Rural and Distri- Electrifi- Miscel- Generation bution cation laneous Total -(M-----------------(Million Re.)------------------------ Proposed 118,000 54,200 15,800 4,500 192,500 outlay Actual 91,600 36,700 13,300 2,400 144,000 Actual as Z 77 67 84 53 74 of proposed Actual as Z 63 26 9 2 100 sector investment Transmissior 6.03 When the Bank Group started financing transmission, the expenditure on generation had been 55Z compared to 242 on transmission. It was considered that the outlays on transmission should be much greater. -his imbalance has not really changed much since then, reflecting the relative paucity of the resources allocated to transmission. The situation is manifested by unsatisfactory voltage conditions, high transmission losses and less than optimal utilization of generating facilities. Table 3, Annex 8 indicates that the annual investment on transmission and distribution averages only 26Z. In a country of India's size, with widespread distribution of population, comerce and industry, and scattered energy resources, a higher figure on the order of 45Z should be expected. Table 4, Annex 8 gives statistics on the national growth of transmission and distribution facilities, 1974-82, and indicates an average annual increase of 8.3Z in transmission lines (kms). 6.04 Annex 8 describes the growth in load, generation capacity and transmission facilities during the project implementation period. It discusses tariffs and power losses. The tables in Annex 8 provide statistics on the foregoing. VII. JUSTIFICATION 7.01 The project justification in the appraisal report was made in qualitative terms: the benefits obtained by building transmission lines to interconnect systems, with attendant savings in the amount of generating capacity and improved reliability (para 3.16). Had the justification been framed in economic rate of return (ERR) terms, it is evident that the recalculation of the ERR on project completion would be much lower in view of the great delays in commissioning the facilities and their increased cost. This aside, it is also obvious that the transmission facilities had  -20- to be provided sooner or later as there is no substitute for them in the long run. Their rationale at appraisal continues to be valid. 7.02 The justification may also be considered in terms of the cost of the inefficiency of implementation, that is, benefits foregone. It would be difficult to measure them but for example, in the States of West Bengal (para 4.37) and Bihar (para 4.32) where something is known of the impact of the delay on power supply, and in Maharashtra, Orissa and others, it was obviously economically very costly. VIII. INSTITUTIONAL DIVELOPHEUT 8.01 Measured by appraisal objectives and their degree of achievement ten years later, institutional development was minimal and largely confined to the financial side of the sector. The quality of implementation of the two projects by SEBs was on average poor and there was no significant organizational and administrative development of notice. 8.02 The Association had little or no immediate contact with the SEBs during the implementation of the two projects (para 4.20) and therefore could not provide advice on management/organization improvement, nor on project implementation. Clearly, unless the Association works with the SEBs directly it can have little impact on them. 8.03 The Project Performance Audit Report dated June 10, 1980, on the Second Power Transmission Project, pointed out the difficulty facing the Bank Group in adequately carrying out supervision work, other than procurement, since subprojects were scattered all over India and due to the absence of a close working relationship between the Bank Group and the SEBs. It suggested a more direct involvement with the SEBs in projects of this nature. 8.04 This is also the case of the Third and Fourth Transmission Projects and, indeed, of the Rural Electrification Projects. In fact, it has been the continuing dilemma of the Bank Group's power sector lending in India. The process of dealing with or influencing SEBs entirely through intermediaries - GOI/CEA in the case of the two transmission projects and the Rural Electrification Corporation for rural electrification - demonstrated its limitations. The SEBs were requ?.red to achieve certain rates of return, ratios of self-investment and so forth, but with little hands-on Bank contact. As a 1982 appraisal report puts it, despite legislative changes (in 1978) little attempt was made by the SEBs to give practical effect to the 'measures' because of conflicts arising from the interpretation of amendments and because the technical aspects had not been fully evaluated by SEBs and State Governments. There was a failure to convince SEBs of the desirability of certain changes, and it is in this context that their limited institutional development must be assessed. 8.05 Possibly because of the supervision experience (para 4.19 & 4.20), there have been no further transmission projects of this type finarLced by the Bank. NTPC was subsequently given the task of constructing multi-state transmission lines. However, NTPC is confined to construction of bulk  -21- power transmission, mainly 400 KV, and does not construct, for example, 110 KV or 60 KV lines, which the SEBs will have to continue to provide. IX. IOUOVU AND MM PZUFORMWC 9.01 The Borrower's performance is, in this case, that of GOI/CIA, SEBs and other entities. CKA's performance was disappointing. Following reorganization, it functioned neither as a catalytic force nor as one which provided sector leadership. To be fair, as time went on its duties were increased to the point that it could not cope vith them all. In particular, it was not equipped to act as the coordinator of the Third and Fourth Transmission Projects beyond its role of procurement intermediary. Few of the SEBs made much institutional progress and half of them carried out the project's physical implementation very poorly. This is disappointing, but given the vell-recognized execution capacity weakness of many SEBs and the absence of a "hands on* approach by the Bank, it is not too surprising. 9.02 The Association's performance is largely covered in Section VIII. The Association does not seem to have had a proper appreciation of the demands made by the two projects in terms of implementation, organization and logistics, nor of what its own supervision objectives should be. It supervised the project predominantly from a procurement viewpoint, on which it expended considerable effort. It closed the Credits when fully disbursed, at a point where the projects' objectives of providing transmission facilities were far from being accomplished. The majority of the physical implementation accomplishments, and problems, occurred after closing of the second credit. The tieing of disbursements to progress, instead of merely disbursing against invoice, might have been effective. The direct contact of the Association during the construction phase with executing agencies could have been highly beneficial. 9.03 A project officer had another perspective of the Association's performance: the history must place in perspective what the Bank tried to do with these sector-wide credits which cannot be seen in isolation (the Third and Fourth Transmission Projects were sector-wide in that, together, they embraced most SEBs). The Bank really did not try to straighten out the SEBs, although many of them were beneficiaries of the two credits, but tried to maintain a sector dialogue with a view to strengthening the coordination function of the center. In doing so the Bank fostered the creation of NTPC which should become the main vehicle of its power lending and sector dlalogue in subsequent years. The Bank started and continued the discussion on improvements in sector legislation and it initiated the cumbersome proccss of improving SEB accounting and finance. From this perspective, the Association's accomplishments can be seen to be brighter. X. PROJECT IMPACT 10.01 The overall impact of the projects is difficult to assess. They helped to improve the country's transmission facilities and enabled a significant load growth to be s,pnlied. They assisted the momentum toward improving the rate of return of the SEBs through reimbursement of rural electrification losses, but had relatively little impact on tariff levels,  -22- or on the resolution of the SEB problem arising out of the accumulated interest on debt owed State Governments. Some SEBEs are becoming interested in long renge marginal cost analyses, but even here the effect on tariffs is uncertain. Under the Third Transmission project a system planning study of national power development was made, which seems largely illustrative so far. The two transmission projects entailed construction on a scale large enough for it to offer the opportunity of being used as a vehicle to develop the organizational and administrative abilities of the SEBs. However, this was not done as is otherwise usual under Bank project lending. 10.02 Of course, other power projects financed by the Bank Group were carried out during this period and must share with the two transmission projects the attribution of any project impact. From the pattern of sector investment and sector growth (Section VI), it is apparent that total investment (including those financed by the Bank Group) managed to keep facilities broadly abreast of load growth. Transmission investments have also improved the efficiency of the power system in the country by facilitating power interchange within and among the states. The record on transmission losses itself is however all but impressive; transmission and distribution losses did in fact increase over those years, although much oi it is due to the expansion of the system and the weak distribution networks, especially in rural areas (Annex 8, para 7 and Table 17). 10.03 But the projects provided no impetus to improve the SEBs institutionally and organizationally. The Bank Group, in focussing its efforts on the Center, may in effect have preempted the growth of informal relationships between the SEBs and the Center and the development of greater autonomy for the SEBs to handle their own affairs which might have otherwise taken place over a ten year period of rapid sector growth. 10.04 The perception of this situation in the Bank was slow to evolve. Finally it was recognized in 1984 that the strategy of improving SEBs by lending to, and increasing leverage of, the Center was having little discernible positive effect on SEB's capabilities. This was especially marked by the SEBs' failure to generally adopt the financial undertakings and principles set forth by the Center. Consequently the Bank came to realize that it mus; work with the SEBs directly - rather than by a form of remote control. Accordingly, a considerable volume of lending is now to be channelled directly to the SEBs and Bank staff has resumed direct contacts with them and the State governments. 10.05 Three Bank loans made in 1985 already signalled this change: (a) Indira Sarovar Hydroelectric Project, US$157.4 Million and SDR 134.4 Million, in which the Madhya Pradesh SEB is the executing agency; (b) Chandrapur Thermal Power Project, US$300 Million, in which the Maharashtra SEB is the executing agency; and (c) Kerala Hydroelectric Project, US$176 Million, in which the Kerala SEB is the executing agency.  -23- 10.06 The Appraisal Reports for the projects contain explanations of this change as follows: 'Over the last few years the Bank has assisted GOI substantially expanding its centrally owned generating capacity. In the past two years, however, the emphasis of Bank lending has begun to shift from the projects owned and operated by the Central Government to projects owned and operated by SEBs.' Further, with regard to institution building, 'the Bank's efforts will be broadened to encompass individual SEBs, where substantial efforts are needed to strengther. management, operation and finances'. XI. CONCLUSIONS 11.01 The Third and Fourth Transmission Projects had mixed results. Virtually all the facilities the Association financed were completed and commissioned, but many only after long delay. The cost of the facilities increased substantially because of delay and price escalation. The actual project cost is not known, because of inability to obtain subproject costs, because of deficiencies in the accounting system and record keeping of the beneficiaries. Service conditions on the national grid improved somewhat. However, because of the increase in generation investments over the period, the share of transmission in sector investment remained about the same as before these projects were initiated, only 262, and the need remains to increase it substantially. 11.02 Some progress was made on the financial side, inter alia with respect to improvement in the SEBs' rate of return. Institutional development of the SEBs was minimal. Only about half the SEBs completed the physical works within the original schedule. The remainder completed (or are completing) them very late, and their construction performance was poor. There were many procurement difficulties arising from the tardiness and indecisiveness of the entities involved, an important factor in the delays. Another factor was the shortage of certain goods and materials in the country. 11.03 The Association overestimated CEA's supervision capabilities. It might have improved project results by studying the level of capability and organization of each SEB and providing advice at the outset to set up the construction organization and supervision arrangements. It could have bettered the SEBs institutionally had supervision missions visited them regularly to review the financial position, discuss problems and so forth. Questions which arise in this respect include whether the Association could have provided adequate supervision, and if not, whether it should be doing transmission projects of this nature at all. The project experience indicates that the Bank did not have the staff resources to supervise the widely dispersed transmission projects under the responsibility of mostly weak SEBs. If the Bank were to again operate under similar circumstances, it would be advisable to set up a supervision group in Delhi. 11.04 The projects introduced a pattern which was to last ten years, the divorce of SEBs from Bank contact. In the transmission project the  CEA functioned as an intermediary through which all SEB procurement and progress reporting were channelled to the Association. This was replicated in a series of concurrent credits for rural electrification, the REC serving as intermediary with regard to SEB obligations. The adverse effect of this state of affairs has been described in the body of the report. Inasmuch as the SEBes are collectively much the largest and widespread body in the sector, the impact of this situation on sector development was similarly negative. 11.05 The Bank came to recognize in 1983 that this system had isolated the SEBs from any meaningful dialogue with the Bank on institutional development. Consequently the bank modified its position by shifting the emphasis of projects from the Central Government domain to the States' domain, with the intention of improving the operational and project implementation capability and the financial viability of the SEBs, on the individual SEB basis. To this effect three loans for hydroelectric power and one for thermal power were made to the states by 1985. Provided the momentum of this shift is maintained by making several such SEB loans a year an improvement in the SEBs is likely in the future.  AMEX 1 -25- Page 1 of 2 INDIA THIRD TRANSMISSION PROJECT (Credit 377-IN) PROJECT COMPLETION REPORT COST ESTIMATE 1973-77 Entire Transmission Transmission under Program Credit 377 I ~~~~~~~~~~~~~~~Project Total Financed by (US Million) Credit Northern Region (BEAS) Punjab/Haryana 91.7 22.1 15.8 Rajasthan 52.9 Delhi Desu 8.7 8.7 4.9 Western Region Madhya Pradesh 85.5 20.3 8.9 Tata Power 1/ 127.4 8.6 5.8 Eastern Region Orissa 88.5 22.0 12.8 North Eastern Assam 26.4 5.0 2.5 Southern Region Kerala 26.7 25.0 8.5 Myso:e 65.3 22.7 12.4 Tamil Nadu 43.5 10.9 8.4 GOI Northern Regional Board 5.0 5.0 5.0 Southern Regional Board 0.4 0.4 0.4 TOTAL 622.0 150.7 85.0 1/ For Maharashtra State, of which the Tata facilities form part.  -26- ANNEX 1 Page 2 of 2 Estimated Costs US$ Equivalent Million Conductors and Groundwire 20.4 Towers 8.5 Insulators 2.9 Transformers 13.2 Switchgear 8.4 Capacitors 3.3 PLCC/Load Despatch 9.7 Control and Relay Panels 1.3 Power Cables 2.4 Miscellaneous Equipment 2.6 Sub-total 73.24 Contingencies: (i) Physical 7.4 (ii) Price 4.4 TOTAL 85.00  -27- ANNEX 2 Page 1 of 2 INDIA FOURTH TRANSMISSION PROJECT (Credit 604-IN) PROJECT COMPLETION REPORT COST ESTIMATE Transmission Projects financed under Credit 604 1977-79 Entire Financed by SEB Transmission Program Total Credit US Million US Million US Million Maharashtra 213 60.9 37.2 Gujarat 117 44.4 30.0 Bihar 89 24.6 20.3 West Bengal 90 28.9 22.5 TOTAL 509 111.0 Western Regional Board 5.0 Eastern Regional Board 5.0 120.0 TOTAL 158.8 Breakdown by Category Transmission Line and US Million Substation Equipment Conductors 19.9 Towers 18.6 Insulators 3.9 Power Transformers 10.4 Switchgear 10.1 Capacitors 3.7 PLCC/Load Dispatch 21.9 Control Panels 1.0 Power Cables 3.0 Miscellaneous 1.2 Sub-total 93.7 Physical Contingencies 4.9 Price Contingencies 19.4 Sub-total 116.0  -28- ANNEX 2 Page 2 of 2 Associated Civil Works Civil Works, Erection and Overheads 30.5 Physical Contingencies 1.5 Price Contingencies for Civil Works 8.8 Sub-total 40 8 TOTAL 158.7 Total Cos Financed by of Project Credit 604 US Million 158.8 120.0 45.8 30.0 1/ 207.3 150.0 1/ Amounted included in Cr. 604-IN to complete works originally provided for in Cr. 377-IN.  -29- ANNEX 3 INDIA THIRD TRANSMISSION PROJECT (Credit 377-IN) PROJECT COMPLETION REPORT UTILIZATION OF CREDIT BY BENEFICIARIES Allocations Amount Import Allocation under Part Utilized Component under Credit 'B', Credit Rs. M US$ M US$ M Beneficiary 377-IN ($ M) 604-IN Assam SEB 2.47 - 24 2.71 0.50 Kerala SEB 8.39 - 104 11.54 - Madhya Pradesh SEB 8.93 - 82 9.20 1.40 Mysore (Karnataka EB) 12.21 - 177 19.88 0.04 Orissa SEB 12.69 - 207 23.24 2.53 Tamil Nadu SEB 8.49 - 110 12.36 1.45 Delhi Electric Supply Undertaking 4.56 - 57 6.40 4.02 Beas Construction Board 15.89 - 178 19.98 5.26 Tata Power Co. 5.89 - 43 4.85 4.34 Southern Regional EB 0.48 - 16 1.88 1.18 Northern Regional EB 5.00 - 38 4.29 3.58 TOTAL 85.00 30.00 1/ 1,036 116.33 1/ 20.40 1/ US$30 million provided in Cr. 604 for facilities included in Cr. 377-IN but not done under it. Thus total amount allocated from both Credits 377-IN and 604-IN is $115.00 M versus actual utilization US$116 million.  -30- ANNEX 4 INDIA FOURTH POWER TRANSMISSION PROJECT (Credit 604-IN) PROJECT COMPLETION REPORT UTILIZATION OF CREDIT BY BENEFICIARIES Amount Import Allocation Utilized Component under Credit Rs M US$ M US$ M Beneficiary (uS$ M) Bihar SEB 16.00 148.671 17.138 6.12 Gujarat SEB 24.00 219.639 25.307 6.16 Maharastra SEB 30.25 381.017 43.901 5.09 West Bengal SEB 17.75 169.327 19.510 0.28 Western RegionaL Electricity Board 5.00 39.732 4.578 4.23 Eastern Regional Electricity Board 5.00 63.79 7.350 5.78 Provision for Facilities under Credit 377-IN 30.00 271.930 31.332 - Consultant Services (CEA) 0.758 0.758 Unallocated 20.00 Cancelled 0.134 TOTAL 150.00 150.000 28.41  -31- ANNEX 5 Page 1 of 6 INDIA POWER TRANSMISSION PROJECT IIT (Credit 377-IN & Credit 604-IN) PROJECT COMPLETION REPORT STATUS OF TRANSMISSION LINE IMPLEMENTATION Length Km. Date of Comple- Project Voltage Esti- Actual tion of works mated Scheduled Actual/ or anti- cipated ASSAM ELECTRICITY BOARD TRANSMISSION LINES Samagiri-Mirani S/C 220 176 kms 176 kms 3/75 3/78 BEAS CONSTRUCTION BOARD Dehra-Pampat S/C 400 280 kms 262 kzs 1/79 6/79 KARNATAKA (MYSORE) ELECTRICITY BOARD Hootgalli-Bavalisatra 220 90 kms 80.5 kms 3/78 3/78 S/S. (Mysore-Kerala Border) Sharavathi-Munirabad 220 230 kms 271 kms 3/78 9/80 S/C Peenya-Hoodi D/C 220 35 kns 35 kms 3/78 1/79 Nagjhari-Hubli D/C 220 65 kms 63 kms 3/78 9/79 Hubli-Munirabad II 220 137 kms 137 kms 3/78 3/80 Ckt. Munirabad-Shahabad 220 234 kms 236 kms 3/78 9/80 SC  -32- ANNEX 5 Page 2 of 6 KADHYA PRADESH ELECTRICITY BOARD TRANSMISSION LINES Itarsi-Barwaha II 220 1