India - Third Rural Electrification Project

Document of The World Barnk FOR OFMICIAL USE ONLY Report No. 10 7 8(0 PROJECT COMPLETION REPORT INDIA THIRD RURAL ELECTRIFICkTION PROJECT (LOAN 2165-IN) JUNE 26, 1992 MICROFICHE COPY R{eport No. lo0780-IN Type: (FC'R) DE WEILLE,J X:31708 / T'102/ OEDID. Fnergy Operations Division Country Department II South Asia Region 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.  CURRENCY EQUIVALENTS At time of appraisal (1981): 1 US$ = 8.0 rupees At time of completion (1988): 1 US$ - 140 rupees ACRONYMS AND ABBREVIATIONS ERR - Economic Rate of Return FRR - Financial Rate of Return GOI - Government of India LRMC - Long-run Marginal Cost of Electricity OA * Ordinary Advanced Group of Villages OB - Ordinary Backward Group of Villages PB - Project Brief PCR D Project Completion Report PPAR - Project Performance Audit Report RE - Rural Electrification REC - Rural Electrification Corporation Rs - Rupees SAR - Staff Appraisal Report SEB - State Electricity Board SI - System Improvement Schemes SPA - Special Project - Agricultural Pumps SRI - Special Project - Rural Industry FISCAL YEAPR OF BORROWER April 1 - March 31  FOR OFFCIL1 USE ONLY THE WORLD SANK Washington, D.C. 20433 U.S.A. Ofice of Directo,wGenwal Opantiomn Evaatimn June 26, 1992 MEMORENDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on India Third Rural Electrification Project (Loan 2165-IN) Attached, for information, is a copy of a report entitled "Project Completion Report on India Third Rural Electrification Project (Loan 2165- IN)" prepared by the South Asia Regional office with Part II of the report contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment 2~ This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OMCIuL USE ONLY PROJECT COMPLETION REPORT INDIA THIRD RURAL ELECTRIFICATION PROJECT (LOAN 2165-IN) TABLE OF CONTENTS Page No. PREPACE . . . . . ..*... EVALUATION SUMMARY . .. ..... .. .. .. ...... .. .. .. * ii PART I: PROJECT REVIEW FRDOM BANK'S PERSPECTIVE Background . . . . . . . . . . . . . . . . . . . . . . . . .* Project Design and Organization . . . . . . .. . . . . . . . . . . . . .. 1 Project Objectives and Description . . . . . . . . . . . . . . . . . . . . 3 Project Implementation and Results . . . . . . . . . . . . . . . . . . . . 4 Bank Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Borrower Perforance . . . . . . . 9 FART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE Preface . . . . . . . . . . . . . . . . . . . . . . . . . 9 9 9 9......... 9 11 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Project Implementation . . . . . . . . . . . . . . .. . . . . . . . . . . 13 C-onclusions .. ... .. . . . . . . 0 . .. . . . . . 20 Annexes .*. . . . . . . . . . . . . . .... .. . 21 -37 PART III: STATISTICAL TABLES Table 1. Related Bank loans ...................... 38 Table 2. Project Timtable . . . . . . . . . . . . . . . . . . .. ...39 Table 3. Cumulative Estimated and Actual Disbursements . . . . . . . . . 40 Table 4. Project Implementation Indicators . . . . . . . . . . . . . . . 41 Table 5. Project Costs . . . * * 9a * ** * . . . . . . . . . . * .42 Table 6. Project Financing . . . . . . . . . . . . . . . . . . . . . . 43 Table 7. Project Results . . . . . . . . . . . . . . . . 9 9 . . . . . . 44 Annez 1. Economic Analysis . . . . . . . . . . . . . . . . . . . . . . 45 Table 8. Status of Covenats . . o . . . *. . o . . . . . . . * * .49 Table 9. Staff Inputs . . . . 9 9 . . . . . . . . . . . . . . . . . . . . 51 Table 10. Major Project Missions . . . . . . . . . . . . . . . . . . . . . 52. 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.  PROJECT COMELETION REPORT INDIA THIRD RURAL ELECTRIFICATION PROJECT (LOAN 2165-IN} _ PREFACE Thls is the Project Completion Report (PCR) for the Third Rural Zlectrification Project in India, for which the Bank approved Loan 2165-IN, in the amount of US$ 304.5 million on June 1, 1982. The loan closed on June 30, 1988, two years behind schedule. The Bank disbursed 97Z of the loan, cancelled the undisbursed portion (us$ 9 mili_on) and made the final disbursement in January 1989. The Bank's Energy Operations Division of the India Country Department of the South Asia Regional office prepared the Preface, Evaluation Summary and Parts I and III of the PCR. The Borrower, the Rural Electrification Corporation (REC), prepared Part II. The Bank based its portions of the PCR on the Staff Appraisal Report (SAR), the Loan, Guarantee and Project Agreements, supervision reports, internal BDank documents and discussions with the Borrower held in Hay 1990.  - ii - PROJECT COMPLETION REPORT INDIA THIRD RURAL ELECTRIFICATION PROJECT (LOAN 2165-IN) EVALUATION SUMMARY Background 1. Over the past two decades, the Government of India (GOI) has promoted rural electrification (RE) to: (a) raise agricultural output by harnessing groundwater through electrified pumpsets; and (b) enhance the quality of life and employment opportunities in village areas. It created the Rural Electrification Corporation (REC) in 1969 to administer COI expenditures on RE, provide technical guidance to the State Electricity Boards (SEBs) in RE project implementation, and make RE loans to SEBs. To date, the Bank has supported three rural electrification projects (Part I, paras. 1 and 2). Proiect Oblectives 2. The Project under review, Rural Electrification III (RE III), received a Bank loan (US$304.5 million) to finance, in part, 3,480 RE schemes in 14 states, electrify 18,700 villages and energize 543,000 irrigation pumpsets (Part I, paras. 10 and 14). The Project also specified financial objectives for strengthening the participating SEBs. In order to participate in RE lending under the Project, SEBs were supposed to satisfy stated eligibility criteria. These criteria concerned attaining a self-financing for investments at a ratio of 20Z by a specified date. Furthermore, States were to gradually reduce subsidies for eligible SEBs to *reasonable proportions' of sales revenues, through action programs acceptable to the Bank (Part I, para. 11). Implementation Experience and Results 3. The delays of SEBs in establishing their eligibility for REC onlending of the loan proceeds slowed the disbursement of the loan. By the initial loan closing date (6/86), disbursements amounted to only 59Z of the total loan amount. A two-year extension of the closing date led to disbursement of 97Z of the original loan amount and cancellation of the remaining US$ 9 million. The physical achievements of the Project far exceeded SAR estimates -- financing 9,322 RE schemes, electrifying 83,000 villages and energizing 1,960,000 irrigation pumpeets. The achievement of higher targets for the same loan amount resulted from the extension of the loan closing date and favorable developments in materials prices and exchange rates, which increased the number of projects the Bank loan was able to support (Part I, paras. 13 and 14). However, except for the introduction of commercial accounting systems in the SEBs, the Project did not meet its major financial objectives. GOI believed that the targets set for achieving self- financing ratios were not attainable in practice. Although a new amendment to the Electricity (Supply) Act required SUBs to generate a surplus of at least 3Z on their net fixed assets, there was no viable mechanism to enforce it.  - iii SustainabilitZ 4. Agricultural electricity tariffs have fallen in real terms during the la8t decade and now cover less than 10X of the long-run marginal cost and less an 202 of the averege financial cost of supply of the state electriclty boards. Partly as a result of this heavy subsidization, agriculture's share in total electricity consumption in India has grown from about 171 in PY1982 to 222 in FY1990. Compounding the problem is the poor bill collection from farmers, high technical and non-technical system losses estimated to be well over the average 22Z system loss level, leading to a heavy and increasing financial burden imposed by agriculture on the power sector. Most state governments have not allowed electricity tariffs to be adjusted nor have they paid subsidies to compensate SEBs for the financial losses caused by their pricing policies. As a result, most SEBs have not met even the minimum statutory financial requirement and they make no contribution at all from internal cash generation towards future capital investment. In this environment, the PCR has to conclude that the rural electrification program (including the investments supported under the project) is not sustainable. Lessons Learned S. During later years of project implementation, it became evident th-t the Bank should give considerable thought to what it realistically may be able to achieve through financial covenants given the existing institutional structures. Setting targets without a viable enforcement mechanism is likely to achieve vcry little. Furthermore, having set realistic targets, the Bmnk should be prepared to cancel funds if the beneficiaries fail to comply with the basic financial objectives of the loan and the status of compliance is unlikely to change (Part I, paras. 3q and 31). These lessons had an important bearing on the design of the January 1992 Bank loan to the Power Finance Corporation (PFC). 6. Zconomic and financial evaluation (Part I, paras. 19-25)s (a) concluded rural electrification as currently practiced to bB unsustainable and a financial and an economic burden; and (b) highlighted the potential for improving its economic viability and reducing its financial burden with load management, realistic pricing and electricity conservation in agricultural pumping, the main load of rural electrification schemes in India.  PROJECT COMPLETION REPORT INDIA THIRD RURAL ELECTRIFIC4TION PROJECT _ (LOAN 2165-IN) PART I_ PROJ9A T REVIEW FROM BANK'S PERSPECTIVE Project Identity Project Names Rural Electrification (CII) Loan No.s 2165-IN Vice Presidencys South Asia Country: India Sector: Energy Sub-sector: Electric Power Backaround 1. The Govsr:.ant of India's (GOI) main objective in rural electrification (RE) has been to increase agricultural output by providing rural areas with rely. P. economic power for irr