India - Karnataka Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15184 IMPLEMENTATION COMPLETION REPORT INDIA KARNATAKA POWER PROJECT (LOAN 2827-IN) DECEMBER 21, 1995 Energy and Infrastructure Operations Division South Asia Country Department IT This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  COUNTRY EXCHANGE RATES AND ABBREVIATIONS Currency Unit = Rupee (Rs.) Exchange Rage used in the Staff Appraisal Report Rs 13.0 =US$1 Year Rupees/US$ 1987 12.96 1988 13.92 1989 16.23 1990 17.50 1991 22.74 1992 25.90 1993 26.20/30.50 1994 31.40 1995 32.30 Average Rate dunrng project implementation period: US$ Rs 22.0 Govemment of India, KPC, and KEB Fiscal Year: April I - March 31 Measures and Equivalents I Hectare (ha) = 10.000 m' = 2.471 acres (ac) I Kilovolt (kV) = 1.000 volts (V) I Kilovolt ampere (kVA) = 1,000 volt amps I Gigawvatt-hour (GWh) 1.000,000 kilowatt-hours I Horse Power (HP) = 0.75 kilowatts (kW) I Crore (Cr) = 10 million I Lakh = 0. million ABBREVIATIONS AND ACRONYMS CEA Central Electricity Authority KEB Karnataka ElectricitV Board CWC Central Water Commission KPC Kamataka Power Corporation GO] Government of India NTPC National Thermal Power Corporation GOK Government of Karnataka PAF Project Affected Families IBRD Intemational Bank for Reconstruction and POE Panel of Experts Devclopment R&R Resettlement and Rehabilitation ICB Intemational Competitive Bidding SEB State Electricity Board  FOR OFFICIAL USE ONLY INDIA KARNATAKA POWER PROJECT (LOAN 2827-IN) IMPLEMENTATION COMPLETION REPORT Table of Contents PREFACE EVALUATION SUM M ARY ......................................................... .i PART I PROJECT IMPLEMENTATION ASSESSMENT Evaluation of Objectives ...............................................1 Achievement of Objectives ..............................................3 M ajor Factors Affecting the Project .............................................. 4 Summary of the Development on the Issues after Loan Cancellation ............... 8 Sustainability ...............................................8 Bank Group Performance ...............................................9 Borrower Performance .............................................. 10 Key Lessons Learned ...............................................11 PART H STATISTICAL TABLES Table 1 Summary of Assessments Table 2 Related Bank Loans/Credits Table 3 Project Timetable Table 4 Loan Disbursements: Cumulative Estimated and Actual Table 5 Key Indicators for Project Implementation Table 6 Key Indicators for Project Operation Table 7 Studies included in Project Table 8 Project Costs and Financing Table 9 Project Economic Evaluation Table 10 Status of Legal Covenants Table 11 Bank Resources: Staff Inputs Table 12 Bank Resources: Bank Missions This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. |  A9  INDIA KARNATAKA POWER PROJECT (LOAN 2827-IN IMPLEMENTATION COMtPLETION REPORT Preface This is the Implementation Completion Report (ICR) for the Karnataka Power Project in India, for which the Bank approved a loan (Ln. 2827-IN) of US$ 330 million equivalent on June 4, 1987. The loan became effective on April 6, 1988. The loan was made to the Government of India (GOI) and on-lent through the Government of Karnataka (GOK) to the Karnataka Electricity Board (KEB), and to the Karnataka Power Corporation (KPC). The loan was scheduled to be closed on December 31, 1995. At GOI's request, US$70 million equivalent from the loan amount was canceled on December 5, 1991, because of anticipated savings in project costs due to the devaluation of the Rupee. Later on, because of continued failure on the part of GOK, KPC and KEB to comply with a number of key covenants, the Bank suspended disbursements on April 8, 1993. No adequate remedial actions were taken by GOK, KPC and KEB. The Bank therefore canceled on August 1, 1993 the remaining funds for the part of the project executed by KPC, and on October 25, 1993 the balance of funds for the part of the project executed by KEB. The total amount disbursed from the loan proceeds was about US$69.6 million equivalent. The loan account was closed on December 16, 1993. The ICR was prepared by the Energy and Infrastructure Operations Division, Country Department II, South Asia Regional Office. This ICR is based on the material in the project files, on discussions with the officials of GOI, GOK, KEB and KPC, and on information obtaned during the ICR mission to India in September 1994, including a visit to several project sites.   INDIA KARNATAKA POWER PROJECT (LOAN 2827-lN) Evaluation Summary Introduction i. The Bank Group has been involved in the Indian power sector since 1950. Through 1987, it made 22 loans and 18 credits to finance 36 projects. These projects contributed to improvement in the supply of electricity to the country as a whole, but t}-Ey achieved little in terms of resolving several long-standing sector wide problems at the state level in areas such as tariffs, institutional development and power systems planning. In part, this lack of success of addressing state power sector problems was attributable to the fact that most of the Bank projects were executed by central government-owned institutions such as the National Thermal Power Corporation (NTPC) and the Rural Electrification Corporation (REC), whereas electricity production and distribution is primarily the responsibility of the State Electricity Boards (SEBs). With electricity on the concurrent list of the Indian Constitution, the authority of the central government over the state power sector is limited. ii. OED reports on earlier completed projects also highlighted these difficulties of effecting institutional improvements at the state level without a close working relationship between the Bank and the beneficiary SEBs. The Karnataka Power Project was one of the projects where the state power sector entities were the beneficiaries and in which an attempt was made to address tariff, financial and institutional issues directly at the state level. Proiect Objectives and Components iii. The principal project objectives were to alleviate power shortage in the state of Karnataka and the southern region by exploiting hydro resources, to provide efficient transmission capacity, and to effect institutional, operational and financial improvements in the two power utilities of the state. The Bank loan of US $330 million equivalent was made to GOI for on-lending through the Government of Karnataka (GOK) to the Karnataka Electricity Board (KEB), and to the Karnataka Power Corporation (KPC) the two state-owned utilities responsible respectively for power generation and power transmission and distribution. The project comprised: (a) two hydroelectric schemes (Kadra, 3x5OMW, and Kodasalli, 3x40MW) and the associated resettlement and rehabilitation of the project affected people; (b) construction of some 870km of 400kV and 220kV transmission lines and the associated substations, (c) renovation of an existing hydro-electric power plant; and (d) several engineering and institutional development studies.  - 11 - Implementation Experience and Results iv. The various project components were envisaged to be implemented over a period of about 8 years, but from the very beginning significant delays occurred. By early 1993, project implementation for most components was at least 2 to 3 years behind the appraisal schedule. This included the resettlement and rehabilitation of families affected by the two hydro electric power stations largely because of difficulties in acquiring adequate land for the resettlement colony. By mid-1993, virtually no one had been re-settled. Furthermore, throughout project implementation period, the two utilities failed to achieve the stipulated financial covenants largely because of inadequate tariff increases and poor bill collection. The financial problems were aggravated because of the absence of adequate budgetary support for implementing KEB's and KPC's investment programs and GOK's decision in 1992 to abolish the already subsidized tariff to the largest consumer group i.e., agricultural consumers, without providing the cash compensation KEB was entitled to under the provisions of the Electricity Act. v. The Bank had overestimated the capacity of both KEB and KPC to implement the project. The problem was compounded by the premature Board presentation of the project. Many of the project components were at early stages of preparation; the necessary government clearances had not yet been obtained and no agreement had been reached on the terms of reference for any of the major institutional studies to be undertaken. Government and political interference in the day-to- day operations of the utilities was rampant. Ultimately, the inability of GOK to ensure that KEB and KPC could achieve a reasonable level of financial viability and the resulting inability to finance their share of the project, was a major factor in the Bank's decision to first suspend and then cancel the loan vi. From 1990 onwards, the Bank gave repeated warnings to the GOK and the agencies concerned that it would suspend disbursement unless adequate remedial actions would be taken to comply with the Bank's covenants. Eventually, on April 8, 1993, the Bank suspended disbursements, and in the absence of adequate remedial measures, the loan was canceled on October 23, 1993. Only US$69 million equivalent from the loan amount was disbursed. The overall outcome of the project was highly unsatisfactory and virtually none of the project objectives was achieved. Key Lessons Learned vii. Several important lessons can be drawn: * Project Design. The project was to be implemented over an eight year period and with the exception of the two hydro-electric stations, most of the required government clearances for the transmission line components had not yet been obtained, bid documents had not yet been prepared and there was no agreement on the terms of reference for the various studies to be financed under the project. For many of the project components preparation had not been sufficiently advanced to warrant approval of a loan. In the light of the experience with this project as well as others in India, standard Bank practice for India's projects is now that required government clearances are obtained before Board approval. Invitations for consulting services and bid documents should be ready to be issued when a loan is presented  - iii - to the Board. The use of the Bank's Project Preparation Facility to better prepare the project would have been appropriate in this case. Project Management. The appraisal mission had overestimated the capacity of the executing agencies to implement the project not only on technical matters, but also for the implementation of the resettlement and rehabilitation plan for people affected by the construction of Kadra and Kodasalli power stations. Project management capabilities should have been more rigorously assessed and the project management organization designed accordingly. The Bank should have insisted with the executing agencies to avail themselves of independent advice to strengthen project implementation capabilities. * Lack of Autonomy. Even though Karnataka was a pioneer in "unbundling" by separating generation from transmission and distribution, KPC is an example that simply incorporating the state electricity board (or functional parts of it) is not sufficient to guarantee adequate operational autonomy. In the case of KPC, the Board of Directors is chaired by the Chief Minister or his Deputy and board members are all civil servants. The Managing Director has limited authority and most key decisions still need to be referred to GOK for approval. * Support from both GOI and GOK for the project was inadequate. Administrative procedures from GOI agencies and departments to obtain approval of tender documents, import licenses and foreign exchange were cumbersome, and demands from the Central Electricity Authority were often onerous. Successive changes in GOK and in its leadership resulted in frequent changes in the top management of the utilities. Required tariff revisions were not granted, electricity bills from government departments and undertakings were seldom paid in time and budgetary support was inadequate. This situation prevailed despite the fact that GOI and GOK were signatories to the legal agreements. The failure of this project has helped to shape the Bank's current thinking that without introducing fundamental changes such as the creation of an independent regulatory authority, tariff reforms, incorporation of the power sector activities and privatization of distribution, it would be difficult to insulate the state power sector from political interference, create creditworthy entities and operate the sector on a commercial basis. This new approach is already reflected in the design of Bank state power sector operations currently being prepared in India. Onlending Arrangements were sub-optimal, the executing agencies had no direct access to the Special Account and the arrangement provided few incentives for the implementing agencies to accelerate project implementation. The effectiveness of the onlending arrangements for executing agencies at the state level should be reviewed. Financial covenants should have been more focused on providing the utilities with adequate cash resources to conduct their operations and contribute to their investment program from their own resources. No assessment was carried out to assess GOK's ability to provide the required budgetary support. * Financial performance. In a situation where agreed financial targets, even if required by law (such as the minimum 3% rate of return after interest target specified in the Electricity Act) are not respected by the political decision makers, measures need to be introduced before loan approval to create an appropriate regulatory environment to ensure the creditworthiness of the  - iv - power sector entities and which would prevent the government from disallowing tariff increases for political reasons. In the case of India, this requires amendments in the existing electricity legislation.  PART I: PROJECT IMPLEMENTATION ASSESSMENT Evaluation of Obiectives Introduction 1. The Bank Group has been involved in the Indian power sector since 1950. Through 1987, it made 22 loans and 18 credits to finance 36 projects. These projects contributed to improvement in the supply of electricity to the country as a whole, but they achieved little in terms of resolving several long-standing sector wide problems at the state level in areas such as inadequate tariffs, institutional development and power systems planning. In part, this lack of success of addressing state power sector problems was attributable to the fact that most of the Bank projects were executed by central government-owned institutions such as the National Thermal Power Corporation (NTPC) and the Rural Electrification Corp.ration (REC), whereas electricity production and distribution is primarily the responsibility of the State Electricity Boards (SEBs). With electricity on the concurrent list of the Indian Constitution, the authority of the central government over the state power sector is limited. 2. OED reports on earlier completed projects also highlighted the difficulties of effecting institutional improvements at the state level without a close working relationship between the Bank and the beneficiary SEBs. The Karnataka Power Project was the fifth project where the state power sector entities were the beneficiaries and in which an attempt was made to address taiiff, financial and institutional issues directly at the state level. Objectives 3. The principal objectives of the Karnataka Power Project were to: (a) help alleviate the power shortage in Karnataka by exploiting hydro resources in the state; (b) strengthen the state transmission system to evacuate power from the Kalinadi power complex and reduce system losses, (c) extend the life of the Sharavathi power station, optimize generation from the Kalinadi complex, and prepare plans fro more efficient distribution, (d) effect institutional, operational and financial improvements in the state's two power utilities and; (e) progress towards more efficient use of the Southern region's generation facilities. 4. The project, a part of the least cost expansion program for the southern region, comprised: (a) construction of a part of the Second Stage of the Kalinadi Hydro-power System, i.e., two hydroelectric schemes, Kadra (3x5OMW) and Kodasalli (3x40MW), and the resettlement and rehabilitation (R&R) of project affected families (PAF) and compensatory afforestation; (b)  - 2 - construction of some 870 km of 400kV and 220kV transmission lines, and the associated substations; (c) renovation of an existing (Sharavathi) hydroelectric power station; and (d) several engineering and institutional development studies. 5. The total project cost estimated at appraisal at was US$947 million equivalent, and the project was scheduled for completion by December 1995. The loan of US$330 million was made to the Government of India (GOI) and the proceeds were to be on-lent through the Government of Karnataka (GOK) to the Karnataka Electricity Board (KEB) and to the Karnataka Power Corporation (KPC). The Kuwait Fund financed some of the components of the Kadra scheme. Evaluation 6. The physical objectives were fully justified at the time of appraisal. As with the rest of the country, the power system in Karnataka was incapable of meeting the ranidly growing demand, resulting in frequent power cuts and voltage drops, and forced many industries to invest in captive power plant. The problems were aggravated by high system losses, arising from inadequate maintenance and investment in transmissionl and distribution systems commensurate with the growth in generation facilities. The institutional and financial objectives of the project focused at commercialization and strengthening of the financial position of the two state utilities, albeit within the framework of the prevailing electricity legislation in India 7. The SAP, stated that the construction of the physical components involved proven technology and that KPC and KEB had adequate experience and capability to implement their respective components, except for the 400kV lines, hence only a limited provision for technical assistance was made under the loan. During the Board discussion, concern was expressed that the Government of Karnataka (GOK) did not have a satisfactory record on handling the R&R matters, as there had been major problems in the case of Upper Krishna Project (Cr. 788-IN). The SAR, however, stated that KPC's handling of R&R matters on Kalinadi Stage I (a non-Bank Project) had been satisfactory and the resettlement of about 9,000 people was reported to be "just about complete." The Bank project would displace about 2,000 people (544 families) and it was the first time that a Bank assisted power project in India included financing of R&R costs. 8. The SAR stated that the project components formed part of the least cost investment program for the southern Region and that the benefits of the components of the project could not be separated from those of other investments in the power system. Therefore, a cost-benefit analysis of the least cost expansion program for the Southern Region was carried out. Using a standard conversion factor of 0.8, the internal economic rate of return (IERR) was estimated at 4%. It was recognized that the low return was a reflection of the low level of tariffs in the Southern region and below the opportunity cost of capital. H lowever, taking into account an estimate of the willingness to pay, related to ihe cost of autogeneration for industrial and agricultural consumers, the IERR was calculated at 12%0. The SAR did not include a comprehensive risk analysis. As the project was cancele(i before most components were completed and neither KPPC or KEB was able to provide an update of funding required to complete the various project components, the EIRR could not be recalculated. At this point no economic benefits can be attributed to the project.  -3- Achievement of Objectives 9. Almost none of the project objectives were achieved, because only very few of the project components were physically completed and most of the recommendations of the institutional development studies were never implemented. The only exceptions are the renovation of the existing Sharavathi hydro-electric power station and some improvements in bill collection in the later years of the project. 10. The most important factors for not achieving the project objectives were as follows: * Project Design. The project was to be implemented over an eight year period and with the exception of the two hydro-electric stations, most of the required Government clearances for the transmission line components had not yet been obtained, bid documents had not yet been prepared and there was no agreement on the terms of reference for the various studies to be financed under the project. For a large part of the project, preparation had not been sufficiently advanced to warrant approval of a loan. * Project Management. As documented by supervision missions shortly after Board approval, the appraisal mission had overestimated the capacity of the executing agencies to implement the project not only on technical matters, but also for the implementation of the resettlement and rehabilitation plan for people affected by the construction of Kadra and Kodasalli power stations. As a result the project management organization was underdesigned. * Lack of Autonomy. Karnataka was a pioneer in unbundling by creating a separate entity for generation, KPC, in 1971. It was the successor of the Hydro Electric Construction Department, but later it operated thermal stations as well. KPC's Board of Directors is chaired by the Chief Minister or his Deputy and board members are civil servants. The managing Director has limited authority and most kev decisions need still to be referred to GOK for approval. Moreover, KPC was dependent on GOK for setting tariffs and almost of all of the funding of ils capital expenditure s)rogram. It demonstrates that being incorporated, does not provide a sufficient guarantee by itself for having adequate operational authority or for ensuring that a power sector entity can be rim on a commercial basis and be creditworthy. Despite the different legal status, KPC faced the samne level of political interference as KEB. * Support from both GOI and GOK for the project was inadequate. Administrative procedures from GOI agencies and departments to obtain techno-economic clearance, approval of tender documents, import licenses and foreign exchange were cumbersome, and the demands from the Central Electricity Authority (CEA) were often onerous. Successive changes in GOK and in its leadership resulted in frequent changes in the top management of the utilities. Required tariff revisions were not granted, electricity bills from government departments and undertakings were seldom paid in time and budgetary support (mostly expected to be provided in the form of state government loans) was inadequate. The situation was further aggravated by delays in the release of state government budgetary funds as well as payment of rural electrification subsidies to KEB.  - 4 - * Financial performance of KEB and KPC was unsatisfactory largely due to GOK's unwillingness to grant adequate tariff increases to enable the utilities to comply with the agreed financial covenants. Delays in settling arrears from government departments, undertakings and drawn out discussions on the settlement of arrears from government owned enterprises contributed to KEB's and KPC's financial difficulties. 11. Bank missions brought the above problems and shortcomings to the notice of GOI, GOK, KEB and KPC, and sought necessary action, the financial matters being almost solely within the domain of GOK. As far back as 1990, the Bank had been warning GOK, KEB and KPC of the likelihood of its suspending disbursements from the loan account. In 1992 and particularly in 1993, Bank missions listed specific conditions to be met in order to avoid suspension of disbursement. The Bank repeatedly received assurances from GOK, KEB and KPC on necessary actions but, by and large, the actions were either inadequate to achieve the desired results or the projected results were unduly optimistic. The ad hoc GOK decision to abolish agricultural tariffs from July 1992, and its refusal to reinstate them only made matters worse. On April 8, 1993, the Bank suspended loan disbursements. In the absence of adequate remedial actions by GOK and KPC to improve project management, the implementation of the R&R plan and KPC's financial performance, the Bank canceled the KPC part of the loan on August 1, 1993. At that time, the Bank held back the cancellation of KEB part of the loan, based on improvements in the implementation of the transmission and distribution components and promises that GOK would take action to reinstate the agricultural tariffs and other actions to enable KEB to comply with the Bank's financial covenants. This has not been forthcoming and the Bank canceled the KEB part of the loan on October 23, 1993. Only about US$ 69 million equivalent from the original loan amount of US$330 million was disbursed. Earlier in 1991, an amount of US$70 million was canceled at GOI's request, because of anticipated savings in project cost. Major Factors Affecting the Project 12. With respect to this project, it is difficult to make a distinction between factors under Government control and those factors solely under the control of the implementing agency. The factors have therefore been regrouped into thre- themes e.g. project management, resettlement and rehabilitation and financial performance of KEB and KPC, the implementing agencies. Project Management 13. While part of the project delays can be attributed, as described above, to cumbersome central and state government procedures and rather frequent changes in top management in the KPC and KEB, other factors have played a role. KPC is incorporated under the Companies Act; it is a fully state government-owned corporation and it has been customary to appoint either the Chief Minister or the Deputy Chief Minister as Chairman of the Board. The KPC Board of Directors delegated relatively few powers to KPC management. Project management at the site had even more limited decision making powers. As a result, many of the day-to-day decisions had to be referred either to the KPC headquarters in Bangalore or to the Board of Directors. Political interference was rampant. The appointment of panel of experts, clearance of bidding documents and award of contracts took much longer than anticipated during appraisal.  - 5 - 14. The implementation delays of the Kadra and Kodasalli hydro-electric projects were compounded by the non-performance of civil works contractors, flooding of the work area during cyclonic weather, diesel shortages during the Gulf war. Furthermore, inadequacies in the (Bank approved) contracts (particularly with respect to liquidated damages and price escalation clauses) made it extremely difficult to deal with the contractual problems. The reluctance of the KPC Board to take firm decisions made the situation worse. This was one of the factors which lead to the recommendations of staff for the cancellation of the KPC portion of the loan. 15. With respect to KEB, the initial delays occurred due to delays with land acquisition, obtaining right of way, forest and other clearances, including from CEA for some of the transmission line components as well as lengthy discussions to reach agreement on the bid documents. After increased supervision efforts during 1991 and 1992, project management improved significantly in KEB. The main problem was the lack of budgetary support, which made it difficult to implement some of the agreed schemes, although the Bank loan was to finance more than 50% of the project cost. By the time the Bank decided to cancel the loan, many of the components were, finally, ready to be implemented. That included the implementation of an institutional development program for KEB, for which most preparatory studies had just been completed. Resettlement and Rehabilitation 16. The SAR recorded that 544 families (about 2,000 persons) were expected to be displaced by the Kadra and Kodasalli hydro-electric project and a comprehensive resettlement and rehabilitation plan had been prepared. The affected families were basically given two options: land or a cash rehabilitation grant. This was over and above land acquisition compensation paid in cash and a house plot with civic amenities and free transportation to the new site. Implementation of the plan was slow, mainly because the forest land earmarked for the new resettlement colony was not released to KPC. Site preparations could therefore not be made. A detailed review of the status of implementation of the plan in 1991 revealed various other deficiencies. A new survey was undertaken and KPC prepared a revised plan, which included various proposals for enhancement of the rehabilitation package. ThL new survey identified 794 Project Affected Families (PAFs), a 50% increase over the appraisal estimate. Eventually 409 families opted for the rehabilitation grant, and the remaining 385 families for land for land. 17. The implementation of the revised R&R plan remained fraught with problems. According to Bank supervision mission reports, KPC neither showed a full grasp of all the tasks and issues involved in the R&R process. Project management arrangements remained inadequate. In January 1992, KPC finally received permission to proceed with the development work on some 777 acres of forest land (at Heggar and Halavalli villages), but this permission was withdrawn by GOK around October 1992. By the time the Bank decided to cancel the KPC component of the loan in August 1993, the land had still not been handed over to KPC for development. 18. The ICR mission in September 1994, was informed that: (i) 777 acres of land were (again) released to KPC and work was proceeding on the development. An additional 283 acres of revenue land (at Kalleshwar) had been allotted to KPC and was expected to be taken over by December 1994. The combined area of about 1,000 acres was considered adequate to meet the needs of all PAFs who opted for land for land; (ii) GOK allowed KPC to enhance the cash compensation package for the PAFs and some additional land has been made available at  - 6 - Gotagali, near Kadra village to resettle families who opted for cash rehabilitation; (iii) KPC has built 68 transition sheds at Kadra, absorbed 43 project affected persons in its regular workforce; and training programs had been enhanced. Several PAFs however, having received their monetary compensation long before they left the area, apparently used their compensation towards the purchase of consumer durables. Thereafter, some of these PAFs refused to vacate their homes on the grounds that they were short of funds to build their new homes. As of mid- 1994, only very few PAFs had been rehabilitated, but KPC planned to complete the rehabilitation plan by mid 1996. 19. It is not known to the Bank, whether KPC has been able to mobilize the funds to complete the construction of the Kadra and Kodasalli projects and whether the implementation of the resettlement and rehabilitation plan has continued and will be completed before the land will be submerged. However, the redesign of the rehabilitation plan before the loan was canceled appears to have had some positive influence. Financial Performance of KEB and KPC 20. Throughout the project implementation period (1988-93), the financial performance of KEB and KPC was poor. The covenanted rate of return of 3%'/ was not achieved for most of the time. Both utilities experienced severe liquidity problems and contribution to the investment programs from internal cash generation was negligible. Reasons for this poor performance were the lack of tariff increases, bill collection, drawn out billing disputes, non-payment of rural electrification subsidies by GOK and inadequate releases of GOK budgetary support for KEB's and KPC's agreed investment programs. 21. Retail Tariffs. The pattern of electricity sales in Karnataka dramatically changed over the last few years. In 1980, industrial consumption, i.e., High Tension (HT), accounted for about 63% of the total KEB energy sales, while agricultural i.e., Irrigation Pumps (IGP) consumption accounted for about 6%. By 1993, HT consumption had dropped to 28% of the total, while IGP consumption (most of which ceased to be metered after 1985) had increased to about 35%. The rapid increase in agricultural connections and provision of electricity reflected a deliberate policy of GOK aimed at increasing food production. During the period 1980-1992, the agricultural tariff was increased by about 100%, from Rs 50/HP per year to Rs 90-130/HP per year, but in July 1992, GOK took the decision to abolish the agricultural tariffs. This decision was aimed at achieving political gains but had neither economic nor social merits. It resulted in KEB losing substantial annual revenues at a time when GOK has found it increasingly difficult to make adequate and timely payments to KEB for rural electrification subsidies. Tariff increases granted to KEB, were disproportionally loaded on to industrial and commercial consumers and intended to protect agriculture and residential consumers. KEB's tariff structure became increasingly distorted and the level of cross subsidies between consumer categories reached unsustainable levels. I/ Defined in accordance with the Electricity Act: e.g., after deduction of interest payments charged to operations. There were differences of view regarding the accounting treatment of rural electrification subsidies due to KEB from GOK. The Bank took the view that unless paid in cash during the fiscal year it could not be considered part as KEB's revenue for the year.  - 7 - 22. It has been well documented in Karnataka and other states in India, that many of the farmers are willing to pay for electricity in exchange for an improvement of the quality of supply, many farmers have already back-up diesel sets. Poorer farmers have, in most cases no access to electricity and the prevailing system is being exploited by relatively well off farmers with strong political connections. Part of the solution for protecting low income consumers both in rural as well as urban areas, lies in the introduction of life line rates. One of the project components, was a tariff study which, among other things, required examination of tariff and metering arrangements for agricultural consumers and to make recommendations for improving the tariff structure. The tariff study was however, never carried out, because of protracted discussions on the terms of reference and shortlist of consultants. 23. KEB Bill Collection. Under the loan, KEB was required to reduce its high level of accounts receivable to two months of billing (from about 4.5 months of sales equivalent during appraisal. Over the years, KEB's efforts to reduce the level of the accounts receivable were frustrated by the problems of collecting revenues from government enterprises and local bodies, and disputes over billing. At the end of FY92 the level of accounts receivable had increased to 5.6 months of sales equivalent. KEB had some success in improving collection from residential, commercial and, private industrial consumers and it brought the receivable from these categories down to around 2.5 months of billing but the overall level of accounts receivable remained at about 3.7 months of sales equivalent. KEB never complied with the accounts receivable covenant. However, the improvement in KEBs bill collection contributed to improvement in its accounts payable and it enabled KEB to make regular payments to KPC as well as other suppliers. Furthermore, the long-standing billing disputes between KEB and KPC were finally resolved but after the Bank loan had been canceled. 24. Other Financial Restructuring Measures. As an alternative to tariff increases, GOK decided to convert some of the state government debt into equity, and extended repayment terms from 15 to 20 years. The measure improved KEB's and KPC's rate of return on assets but it did little to improve their liquidity position, because state government debt was in practice not being repaid and interest payments were largely made through compensation with amounts due from GOK at the end of the fiscal year. 25. The Bank's financial covenants were designed, on the one hand, to ensure consistency with the provisions of the Electricity Act and by requiring a reduction in accounts receivable KEB's internal cash generation was to be protected. The financial projections made during appraisal, forecasted a level of internal cash generation of about 20% with a heavy reliance on state govemrnment loans to finance KEB's investment program. KEB's inability to comply with the receivable covenant combined with a lower level of state government loans, did not only cause substantial liquidity problems, but also made it difficult for KEB to implement its investment program. In the case of KPC, similar covenants were set, but with KEB being their only client defaulting it was virtually impossible for KPC to comply with the Bank's covenants. Moreover, the SAR projected that KPC contribution to its investment program from intemal resources would only be 13% over a ten year period with the balance (87%) to be borrowed. The Bank loan was only about 8% of total estimated borrowing and the bulk was to come through loans from the GOK. While KEB's non payment of bills to KPC have contributed to KPC's financial difficulties, the financial forecast presented in the SAR was optimistic and to a certain extent unrealistic. The SAR provided no analysis of GOK ability to provide the anticipated level of  - 8 - support to KEB and KPC. As history has proven GOK failed to do so and nether KPC nor KEB became creditworthy entities. 26. Ultimately, the inability of GOK to ensure that KEB and KPC could achieve a reasonable level of financial viability and the resulting inability to finance their share of the project, was a major factor in the Bank's decision to first suspend and then cancel the loan. Summary of the Developments on the Issues after Loan Cancellation 27. A joint committee of the Karnataka legislature was appointed in 1993 to study the working of KEB and KPC. Its report was presented to the Karnataka legislature on March 31, 1994. The recommendations included: (a) creation of energy conservation board for conservation and efficient use of electricity; (b) GOK to pay directly to KEB the entire arrears due from state enterprises, local bodies, out of the government grant or financial assistance to those customers; (c) GOK to encourage private sector (domestic and foreign) to take up thermal power projects; (d) KPC to have full autonomy, and more autonomy to be given to KEB including restoration of powers withdrawn by GOK in mid-80s; and (e) as a majority recommendation, introduction of a flat rate tariff of Rs 1 00/HP per year for IGP up to 10 lP, and GOK to compensate KEB for loss of revenue due to subsidized IGP tariff. 28. All the state's political parties were represented in the joint committee, but according to recent information no concrete action has been undertaken to implement any of these recommendations and agricultural tariffs have still not been reinstated. If implemented these measures would be a step in the right direction, but not sufficient compared to the reforms the Bank is seeking in the context of the various state power sector restructuring projects. Additional main measures required would include the creation of an independent regulator and private sector involvement in distribution. 29. The long-standing billing disputes between KEB and KPC have been fully resolved and tariffs for all KPC power stations have now been agreed. However, KEB is still paying only about 90% of KPC's bill and as of September 1994, KEB had not obtained a letter of credit in favor of KPC. A bulk power supply agreement had not been finalized. 30. KEB continued to act aggressively to reduce accounts receivable from customer categories within its control, and has reportedly been able to further reduce its accounts receivable but the total is still above the covenanted two months of sales equivalent. 31. KPC has signed a new agreement with each one of its main civil works contractors to cover price escalation. In September 1994, these contractors were fully mobilized and ready to resume work as soon as the monsoon effects subsided. It is however not known whether KPC has been able to mobilize the funding to continue to implement the hydroelectric projects. Sustainabilitv 32. As the Bank loan was canceled well before the majority of the physical components of the project were completed and the financial viability of both KEB and KPC have not been restored, it is doubtful that at this stage any sustainable improvements, in economic or financial terms, can be attributed to the impact of the Bank loan. The power supply situation in the southern region  - 9 - remains critical and is the worst of India's five power regions. Systems frequency is below 50 cycles over 90 percent of the year and the systems load cannot be met even during off peak periods. The ICR mission was, however, informed that as a result of measures taken by KEB, including the implementation of some of the project components, transmission and distribution losses were reduced from 22% in 1987 to about 18% in 1993. KEB was the recipient of the Presidential Award for reduction in system losses. During the same period, energy sales per employee improved from 183 to 256 kWh. Bank Group Performance 33. The performance of the Bank in respect of project preparation and appraisal cannot be considered satisfactory. By the time the project went to the Board, very few of the components of the project had been sufficiently prepared and, as became apparent shortly after Board approval, the appraisal team had vastly overestimated the implementation capability of the both executing agencies. Project implementation arrangements were inadequate and the rationale for designing a transmission and distribution project with an eight year implementation period could be questioned. The loan was declared effective, in 1988 when both, KPC and KEB, were in default with key financial covenants. Only by 1990, the Bank started to enforce the financial covenants more seriously, but the political situation in Karnataka remained such, that GOK was not in a position to approve and implement the necessary tariff increases. The deterioration in state finances further contributed to GOK 's inability to deliver on promised financial support to the state utilities. The absence of a thorough analysis of availability of state financial resources, made the financial projections in the SAR look rather unrealistic. When it became apparent in the early stages of project implementation that GOK was not in a position to deliver on the tariff increases or on the projected budgetary support for the investment programs of both KEB and KPC, the Bank should have taken immediate remedial actions. The Bank's sustained objection to GOK's abolition of agricultural tariffs on the grounds that it was in contradiction of GOI policy and sound public utility practices was fully justified. 34. Based on comments of early supervision missions on KPC's handling of R&R issues, one would conclude that the Bank overestimated KPC's capability (which was considered satisfactory) in implementing the R&R program under Kalinadi Stage I. Furthermore, it was known to the Bank from other projects that GOK had, at best, an indifferent record of handling R&R issues. Therefore, obtaining more stringent and firm GOK commitments allocation of land should have been a requirement prior to loan approval (during the negotiations, the Indian delegation had confirmed that GOK has taken all necessary governmental actions required for implementation of R&R Plan - hence the condition for loan effectiveness was dropped by the Bank). 35. The Bank carried out regular supervision missions, but during the first three years their stay in the field was rather short. Between 1991-1993, the Bank intensified its supervision mission efforts with appropriate expertise and longer field visits. Working relations with KEB remained good and project implementation improved. With KPC relations were more difficult and it became impossible to obtain the necessary decisions from their Board on crucial contractual issues. The Bank provided ample warning to GOK, KEB and KPC to take remedial actions to comply with the loan covenants in order to avoid suspension of disbursements. Despite some improvements, particularly of KEB, the Bank was in its right to cancel the loan.  - 10- Borrower Performance 36. Government of India (GOI). Although GOI had approved the loan and formally signed the Loan Agreement, central government clearance procedures, in particular from CEA for terms of reference for studies, tender documents, contract awards, payments in foreign exchange were extremely cumbersome and contributed to implementation delays. As per the onlending arrangements, the Bank funds were released to Karnataka as part of the regular budgetary transfer process of agreed plan allocations. This provided hardly any additional financial incentives to KEB and KPC to use the proceeds of the loan nor did it give di,ect access to the Bank's special account. In practice, both KEB and KPC, already strapped for funds, could only claim reimbursement for expenditures already incurred. 37. Government of Karnataka. Much of the lack of success of this project could be blamed on the failure of GOK to grant adequate tariff increases (in line with the provisions of the Electricity Act), budgetary support (in the form of loans) and non-payment of RE subsidies and bills of government departments and undertakings. The delays in releasing the land for people affected by the Kadra and Kodasalli has been another negative factor. Would this have materialized most of the project implementation problems could have been overcome. Much of the responsibility for the failure of the project should, however, be directed towards the political levels in the government. 38. The following demonstrates some of the philosophical differences between GOK and the Bank. GOK (and to some extent KEB) officials contend that under the Loan Agreement, KEB was required to achieve a 3% rate of return; and that there was no stipulation in the agreement to retain (or abolish) agricultural tariffs. Some of the same officials also contend that a several states, including the adjoining state of Tamil Nadu, provide free electricity to agricultural customers and that, while other states have a nominal agricultural tariff, the revenue from this consumer category is very low because the revenue collection is rarely, if at all, enforced. These contentions carry little weight and are misplaced because at the time of appraisal, the Bank already expressed concern about the inadequacy of agricultural tariffs, and hence the issue was included in the tariff and metering study for subsequent action (SAR para. 4.27 (c), and Loan Agreement, Schedule 2, Part B (c) (vi). GOK's action affected KEB's ability to finance its share of the project cost, and the abolishment of agricultural tariffs was not in keeping with sound public utility practices. 39. KPC Performance. Many of the problems which adversely affected KPC's performance, arise from the fact that, KPC is a highly politicized (the Chief Minister is ex-officio Chairman of KPC Board), state-owned enterprise, with little effective autonomy. As described above, throughout the project implementation period, KPC's financial performance was short of the stipulated targets and this had its repercussions in all areas of KPC's operations; KPC was not able to make timely payments to contractors for the work done on the investment program and, on occasions, was even not able to operate its thermal units because it had no cash to pay for coal. In addition, there was significant turn-over in the top managerial levels partly arising from changes in GOK and in its leadership. These changes in KPC's senior management, including the technical committee, led to delays in various areas of project implementation, such as approval of terms of reference for studies, appointment of consultants, approval of contracts and resolving contractual disputes. The lack of autonomy at project managers level further contributed to the implementation problems.  - II - 40. KEB Performance. Just as in the case of KPC, the lack of autonomy on institutional and financial matters, significant turn over in top management and severe liquidity problems adversely affected KEB s performance. However, through internal organizational changes, KEBs project implementation performance and financial management substantially improved despite the continuing external constraints, such as the inadequate tariff policies of GOK. Key Lessons Learned 41. Several important lessons can be drawn: * Project Design. The project was to be implemented over an eight year period and with the exception of the two hydro-electric stations, most of the required government clearances for the transmission line components had not yet been obtained, bid documents had not yet been prepared and there was no agreement on the terms of reference for the various studies to be financed under the project. For many of the project components preparation had not been sufficiently advanced to warrant approval of a loan. In the light of the experience with this project as well as others in India, standard Bank practice for India's projects is now that required government clearances are obtained before Board approval. Invitations for consulting services and bid documents should be ready to be issued when a loan is presented to the Board. The use of the Bank's Project Preparation Facility to better prepare the project would have been appropriate in this case. * Project Management. The appraisal mission had overestimated the capacity of the executing agencies to implement the project not only on technical matters, but also for the implementation of the resettlement and rehabilitation plan for people affected by the construction of Kadra and Kodasalli power stations. Project management capabilities should have been more rigorously assessed and the project management organization designed accordingly. The Bank should have insisted with the executing agencies to avail themselves of independent advice to strengthen project implementation capabilities. * Lack of Autonomy. Even though Karnatal;a was a pioneer in "unbundling" by separating generation from transmission and distribution, KPC is an example that simply incorporating the state electricity board (or functional parts of it) is not sufficient to guarantee adequate operational autonomy. In the case of KPC, the Board of Directors is chaired by the Chief Minister or his Deputy and board members are all civil servants. The Managing Director has limited authority and most key decisions still need to be referred to GOK for approval. * Support from both GOI and GOK for the project was inadequate. Administrative procedures from GOI agencies and departments to obtain approval of tender documents, import licenses and foreign exchange were cumbersome, and demands from the Central Electricity Authority were often onerous. Successive changes in GOK and in its leadership resulted in frequent changes in the top management of the utilities. Required tariff revisions were not granted, electricity bills from government departments and undertakings were seldom paid in time and budgetary support was inadequate. This situation prevailed despite the fact that GOI and GOK were signatories to the legal agreements. The failure of this project has helped to shape the Bank's current thinking that without introducing fundamental changes such as the creation of an independent regulatory authority, tariff reforms, incorporation of the power sector activities and privatization of distribution, it would be  - 12 - difficult to insulate the state power sector from political interference, create creditworthy entities and operate the sector on a commercial basis. This new approach is already reflected in the design of Bank state power sector operations currently being prepared in India. * Onlending arrangements were sub-optimal, the executing agencies had no direct access to the Special Account and the arrangement provided few incentives for the implementing agencies to accelerate project implementation. The effectiveness of the onlending arrangements for executing agencies at the state level should be reviewed. Financial covenants should have been more focused on providing the utilities with adequate cash resources to conduct their operations and contribute to their investment program from their own resources. No assessment was carried out to assess GOK's ability to provide the required budgetary support. * Financial performance. In a situation where agreed financial targets even if required by law (such as the minimum 3% rate of return after interest target specified in the Electricity Act) are not respected by the political decision makers, measures need to be introduced before loan approval to create an appropriate regulatory environment to ensure the creditworthiness of the power sector entities and which would prevent the government from disallowing tariff increases for political reasons. In the case of India, this requires amendments in the existing electricity legislation.  - 13 - Part II: STATISTICAL ANNEXES Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not applicable Sector policies E OD * O Financial objectives I El * O Institutional objectives O O * U Physical objectives E O a O Environmental objectives O O a O Highly Less than B. Bank Performance Satisfactory Satisfactory Indifferent Satisfactory Identification O E * O Preparation assistance E E * O Appraisal O E E U Supervision E a E E Highly C.. Borrower Performance satisfactory Satisfactory Deficient Preparation O E o Implementation E E U Covenant compliance O E * Highly Likely to be Highly D. Assessment of Outcome satisfactory Satisfactory Unsatisfactory Unsatisfactory OD ED ED *  - 14 - .. ........l.t _........ . . .....t_ _._ - Loan/Credit Title Loan/Credit No. Year of Approval Expected Completion Precedinf Operations Ramnagundam Thermal Power Ln. 1648 01/79 Complete Farakka Thermal Power Ln. 1887 06/80 Complete Second Ramagundam Thermal Power Ln. 2076 12/81 Complete Third Rural Electrification Ln. 2165 06/82 Complete Upper Indravati Hydro Ln. 2278 05/83 Complete Central Power Transmission Ln. 2283 05/83 Complete Indira Sarovar I.n. 2416 05/84 Complete Second Farakka Thermal Power Ln. 2442 0)6/84 Complete Fourth Trombay Thermal Ln. 2452 06/84 Complete Chandrapur Thermal Power Ln. 2544 05/85 Complete Rihand Power Transmission Ln. 2555 05/85 Complete Kerala state Power Ln. 2582 06/85 Complete Combined CR cle Ln. 2674 04/86 Complete IDA Credits Preceding Operations Rural Electrification Cr. 572 07/75 Complete Fourth Power Transmission Cr. 604 01/76 Complete Singrauli Thermal Power Cr. 685 03/77 Complete Korba Thermal Power Cr. 793 04/78 Complete Ramagundam Thermal Power Cr. 874 01/79 Complete Second Rural electrification Cr. 911 05/79 Complete Second Singrauli Thermal Power Cr. 1027 05/80 Complete Farakka Thermal Power Cr. 1053 06/80 Complete Second Korba Thermal Power Cr. 1172 07/81 Complete Upper Indravati Cr. 1356 04/83 Complete Indira Sarovar Cr. 1613 05/86 Complete Fourth ower Tan.misioneCr 604~ 01i7mComle! X X~~~~~~~~Date Planned Actual Appraisal Not available 04/86 Negotiations Not available 04/07/87 Board Presentation Not available 06/04/87 Signing Not available 12/21/87 Effectiveness Not available 04/06/88 Cancellation Not available 10/25/93 Loan Closing 12/31/95 12/16/93  -15 - T.-* .4, LqwDsnsmiiu uaiVES Euiat andAeua Estimated (SAR) Actual Year Semester Cumulative % Semester Cumulative % FY88 SI 0.3 0.3 0.1 FY88 S2 4.1 4.4 1.3 14.0 14.0 20.1 FY89 SI 12.7 17.1 5.2 0.0 14.0 20.1 FY89 S2 19.3 36.4 11.( 1.5 15.5 22.3 FY90 SI 23.7 60.1 18.2 0.0 15.5 22.3 FY90 S2 29.6 89.7 27.2 9.8 25.3 36.4 FY91 SI 30.3 120.0 36.4 5.8 31.1 44.7 FY91 S2 31.7 151.7 46.0 9.5 40.6 58.3 FY92 SI 32.8 184.5 55.9 4.9 45.5 65.4 FY92 S2 30.7 215.2 65.2 17.0 62.5 89.8 FY93 Sl 26.7 241.9 73.3 7.3 69.8 100.3 FY93 S2 22.9 264.8 80.2 9.6 79.4 114.1 FY94 SI 21.4 286.2 86.7 -9.8 69.6 100.0 FY94 S2 17.8 304.0 92.1 FY95 SI 4.8 308.8 93.6 FY95 S2 13.7 322.5 97.7 FY96 SI 7.5 330.0 100.0 _ **** Reimbursement of the Special Account  - 16 - SAR Estimate Actual or Latest Estimate KADRA Power House 12/92 06/96 Dam (Reach I) 07/91 Dawn (Reach II) 06/93 06/96 Dam (Reach III) 11/92 05/94 Dam (Reach IV) 11/92 04/94 Commissioning Unit I 06/96 Commissioning Unit II 05/97 Commissioning Unit III 10/97 Dam Civil Works 71 % Complete Power House, etc., Civil Works 30% Complete Hydraulic and Electrical Works 30% Complete Partial submersion by June 1995 (Evacuation of some 100 PAFs by Apnrl 1995). Full submersion by July 1996. KODASALLI Power House 12/92 06/96 Dam 12/93 03/92 Commissioning Unit I 06/96 Commissioning Unit II 06/97 Commissioning Unit III 11/97 Dam - Civil Works 40% Complete Power House, etc., Civil Works 35% Complete Hydraulics and Electrical Works 40% Complete Partial submersion in June 1996 (few PAFs to be evacuated by April 1996) Full submersion June 1997. Rehabilitation of Sharavathi HEP 90% Complete Units Nos. I to 8 were reconditioned and upgraded from 89MW/unit to 103.5MW/unit. Units Nos. 9 and 10 are being reconditioned. Generation Management System 42% Complete Consultancy Services re. Talakalale Dam Completed  - 17 - ~~~~~~~~~...'. b, , _'""""dE_E SAR Estimate Actual or Latest Estimate TM 220kV 225km (250km) Davangere 03/85 03/90 S/S Malavatti 220/66 03/89 S/S Halli 220/66 10/92 S/S Hiriyur 220/66 03/89 11/92 TM 220kV 31km (28km) Kadra-Kodasalli 06/91 12/94 TM 220kV 40 km (34km) Kodasalli-Nagjari 06/91 12/94 TM 400kV 250km (255km) 03/91 09/94 Devangere-Nelamangala S/S Nelama 400/200 09/91 06/96 TM 400kV 120km (121km) 03/91 03/93 Davangere-Munarabad S/S Davangere 400/220 03/94 12/94 TM 400kV 140km 23/93 06/96 Sirsi-Davangere S/S Sirsi 400/220 03/94 TM 400kV 50km (70km) 12/93 06/96 Table 6: Kev Indicators for Project Oeration No key indicators for Project Operation were given in the SAR. .. .. .. : . ... .. ... . . .. ... ....... -l Bangalore Master Plan Completed OMS & MIS Studies Completed Reactive Compensation Study Completed Tariff Study Study never started  - 18 - Appraisal Estimate Actual Local Foreign Costs Costs Total Investment Costs Land, Resettlement, Rehabilitation 9.4 0.0 9.4 The project was canceled at Afforestation 5.7 0.1 5.8 mid-point. Most components Civil Works 78.8 13.6 92.4 have not been completed. KEB Turbine-Generator Sets 17.8 71.3 89.1 and KPC were unable to provide Mechanical Equipment 14.8 2.8 17.6 the required information Electrical Equipment 6.2 5.0 11.2 Generation Management System 2.2 6.1 8.4 Sharavathi Rehabilitation 7.3 20.9 28.2 Transmission Lines 400 kV 59.3 6.6 65.9 Transmission Lines 220 kV 8.4 0.9 9.3 Substation 400 kV 41.4 3.6 45.0 Substation 220 kV 8.2 0.9 9.1 Service and Maintenance Equipment 0.8 0.6 1.4 Computing Facilities 0.0 0.1 0.1 Training 0.3 0.6 0.9 Consultancy 2.3 3.3 5.6 Engineering & Administration 44.7 0.5 45.2 Total Base Line Costs 307.6 136.9 444.6 Physical Contingencies 17.2 7.3 24.8 Price Contingencies 93.1 46.7 139.8 Total Project Costs 417.9 191.3 609.2 Interest during construction Bank 180.9 180.9 Other 157.1 157.1 Total Financing Required _  -19- Appraisal Estimate (USSmm) Actual (US$mm) Local Foreign Local Foreign Source Costs Costs Total Costs Costs Total KPC Component IBRD -- 197.2 197.2 The project was canceled at rmid- point. KPC and KEB were unable to provide actual information. Kuwait Fund -- 27.0 27.0 KPC 85.0 -- 85.0 GOK 285.2 85.6 370.8 Subtotal 370.2 309.8 680.0 KEB Component IBRD 70.2 61.7 131.9 KEB 55.9 - 55.9 GOK 78.5 - 78.5 Subtotal 204.6 61.7 266.3 CEA Component IBRD 0.2 0.7 0.9 Project Total 5I7. 32 242a_ ,~~~~~~je EkE- - P*Ie The project was an integral part of the least cost expansion program for the southern region and a cost benefit analysis had been carried out on the program as a whole rather than on the project in isolation. The estimated internal economic rate of return (EIRR). However, after including additional benefits reflecting the consumers willingness to pay on the basis of alternative cost of autogeneration by agricultural and industrial consumers, the EIRR increased to 12%. As the project was canceled before most components were completed and neither KPC or KEB was able to provide an update of funding required to complete the various project components, the EIRR could not be recalculated. At this point, however, no economic benefits have materialized from the project. The power demand/supply situation in the Southern region is the worst of India's five power regions.  - 20 - . .:.:.:.:.:.:.:.:.:;.:.:.............. .... .... C w n......._ _ _ Agreement |Section | Type/Entity | Description | Comments A. Karnataka Agreement KA 2.07 ENV/KPC GOK to implement the rehabilitation and Implementation was resettlement plan unsatisfactory KA 4.01(c) AUD/KEB KEB to send its audited financial Complied up to statements and the auditor's report to the FY91. Bank not later than nine months after the end of each financial year. KA 4.02 AUD/KEB Audit - KEB (past audited accounts and Complied with. reports for FY86 and FY87 by 12/31/87). KA 4.03 FIN/KEB KEB shall take from time to time measures Not complied with. including tariffs adjustments to ensure total revenues in any year after meeting (i) expenses chargeable to revenues, (ii) taxes, (iii) depreciation, and (iv) interest, produce surplus not less than 3% of net fixed assets of KEB at beginning of such year. KA Sch. 2 FIN/GOK GOK undertakes that all loans made or to Complied with. para. 1 be made to KPC and KEB after April 1, 1987 shall include 20 years term with 5 years grace. KA Sch. 2 FIN/KEB KEB to clear its arrears due to KPC as of Not complied. 2(a) March 31, 1987 by April 1, 1990, in accordance with a program paralleling the reduction of KEB's accounts receivable. KA Sch. 2 FIN/KEB KEB to open a revolving letter of credit in Not complied with. 2(b) favor of KPC for an amount equivalent to one month's estimated purchases. KA Sch. 2 FIN/KEB KEB to clear any sums owed to KPC for Partially complied 2(c) sales after April 1, 1987, and not covered with. by the letter of credit, within 30 days of the date of the invoice. KA Sch. 2 FIN/KEB KEB to send to the Bank by December 31 Partially complied 3 of each year a report of the Board's with. forecast of operational and financial performance for the ensuing financial year specifying actions to be taken to achieve 3% ROR (Section 4.03 of the Kamataka Agreement). KA Sch. 2 FIN/KEB KEB to clear its accounts receivable as of Not complied with. 4 March 31, 1987 from its principal debtors by April 1, 1990 and maintain its accounts receivable, with respect to sales after March 31, 1987 at no more than the equivalent of the preceding two month's sales.  - 21 - A. Karnataka Agreement (Cont'd) KA Sch. 2 TEC/KEB KEB by March 31, 1989 to provide meters Partially complied 5 for all connections (except for agricultural with. customers with pumps of 10 HP or less) and reduce thereafter the number of faulty meters to I l% of the total metered connections in accordance with a monitorable action program. KA Sch. 2 FIN/KEB KEB to: (i) write off the book value of the Partially complied 6 Hirebhaskar dam and outstanding amounts with. in the Stock Incidental Account for 1989/86; and (ii) by March 31, 1988 clear the outstanding amounts in its inter unit account. B. Loan Agreement LA 4.01 AUD/CEA CEA to send to the Bank an auditor's N.A. report for its SOEs (due within nine months of the end of each financial year). LA 4.02(b) AUD/GOI Audit - SOE (audit withdrawals for KPCL Complied with up due within 7 months of FY end and to FY91. withdrawals for CEA and KEB within 9 months of FY end). LA 4.03 AUD/GOI Audit - Special Account (due within 6 Complied with. months of FY end)., LA Art. V ENV/KEB Loan will be suspended if KEB is unable to Compliance 5.01(b) obtain by October 31, 1988 forest clearance delayed. for the transmission lines. C. Project Agreement PA 3.03 FIN/KPC KPCL shall take out and maintain Complied with. insurance against risks in such amounts as shall be consistent with appropriate practice. PA 4.01(b) AUD/KPC KPCL shah send to the Bank its audited Complied with up (ii) financial statements and the auditor's report to FY9 1. (due within 7 months of FY end). PA 4.02 FIN/KPC KPCL shall from time to time take Not complied with. measures, including tariff adjustments to ensure total revenues in any year after meeting: (i) expenses chargeable to revenues, (ii) taxes, (iii) depreciation, and (iv) interest, produce surplus not less that 3% of net fixed assets of KPCL at beginning of such year.  - 22 - C. Project Agreement (Cont'd) PA Sch. 1 FIN/KPC KPC to send to the Bank by December 31 Partially complied each year, a report of its forecast of with. operational and financial performance for the ensuing financial year specifying the actions that will be taken to attain a 3% ROR PA Sch. 2 TEC/KPC KPC to: (i) review with its panel of experts Compliance the results of the investigations of the delayed. limestone formation at Kodasalli, (ii) prepare a report recommending treatment should any be necessary; and (iii) send the report to the Bank by November 30, 1987. PA Sch. 3 FIN/KPC KPC by December 31, 1987 to ensure that Complied with. its Internal Audit Unit is adequately staffed and that the unit report directly to the __________Finance_Director or the_Managing_Director._________ Stage of Project Cycle Actual Staff Weeks US$ thousand Through Appraisal 39.4 74.4 Appraisal-Effectiveness 49.4 88.1 Supervision 149.3 335.9 ICR 4.0 5.6  - 23 - Performance Rating Stage of Month/ Number Specialized Staff Implemen- Develop- Types of Project Year of Skills tation ment Problems Cycle Persons Represented Status Impact Through FY85 1 Not available appraisal FY86 Appraisal Feb. 1986 4 Not available through Apr. 1986 5 Board Oct. 1986 4 approval Supervision Dec. 1987 4 SPE, FA, CE, PE 2 'ot rated Jul. 1988 2 SPE,FA 2 Oct. 1988 1 SPE 2 Dec. 1988 2 SPE, CE 2 Jan. 1989 1 ES 2 Mar. 1989 2 SPE, CE 2 Sep. 1989 2 SPE, FA 2 Dec. 1989 2 SPE, CE 2 Jan. 1990 2 CE, SPE 2 Mar. 1990 3 SPE, HC, FA 3 2 Implementation, Financial, Feb. 1991 3 TM, PE, PO 3 2 Resettlement Aug. 1991 4 TM, PE, PO, FA 3 2 and Rehabilitation Apr. 1992 2 TM, CE 3 3 Aug. 1992 2 TM, CE 3 3 Oct. 1992 4 TM, FA, PE, RE 3 3 Jan. 1993 4 TM, FA, PE, RE 4 4 Jun. 1993 2 TM, CE 4 4 Sep. 1993 1 TM 4 4 Sep. 1994 1 Consultant Special Staff Skills: TM Task Manager SPE Senior Power Engineer FA Financial Analyst ES Environmental Specialist PE Power Engineer HC Hydro Consultant CE Consultant PO Project Officer RE Resettlement Expert    I I i ; 7 ; ' l -l