India - Haryana Power Sector Restructuring Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 17234-IN PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$ 60 MILLION EQUIVALENT TO INDIA FOR A HARYANA POWER SECTOR RESTRUCTURING PROJECT IN SUPPORT OF THE FIRST PHASE OF THE HARYANA POWER SECTOR RESTRUCTURING AND DEVELOPMENT PROGRAM December 16, 1997 Energy Sector Unit 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 AND METRIC EQUIVALENTS (Exchange Rate Effective: December 10, 1997) Currency Unit = Indian Rupee Rupeel.00 = US$ 0.028 US$ 1.00 - Rupee 38.78 Rupee Crore - Rupee 10,000,000 1 Megawatt (MW) = 1,000 Kilowatts (kW) 1 Megawatt-hour = 1,000 Kilowatt-hours 1 Gigawatt-hour (GWh) = 1,000,000 Kilowatt-hours FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS APL = Adaptable Program Loan BSES Bombay Suburban Electric Supply CAS - Country Assistance Strategy CEM = Country Economic Memorandum CIDA = Canada International Development Agency CY = Calendar Year DFID = Department For International Development (UK) DISCOM = Distribution Company ERR - Economic Rate of Return FRR = Financial Rate of Return FY = Financial Year GENCO - Haryana, Generation Company GOH = Government of Haryana GOI = Government of India GRIDCO = Grid Corporation of Orissa HERC = Haryana Electricity Regulatory Commission HSEB = Haryana State Electricity Board IBRD - International Bank for Reconstruction and Development IFC = International Finance Corporation IPP = Independent Power Producer KfW - Kreditanstalt fur Wiederaufbau kV - Kilo Volt kWh = Kilowatt-hour MW = Megawatt NPV = Net Present Value NTPC = National Thermal Power Corporation OECF = Overseas Economic Cooperation Fund of Japan PFC = Power Finance Corporation SAR = Staff Appraisal Report SEB = State Electricity Board SOE = Statement of Expenses TRANSCO = Haryana Transmission Company Vice President: Mieko Nishimizu Country Director: Edwin R. Lim Sector Manager: Alastair J. McKechnie Task Team Leader: Djamal Mostefai  INDIA FOR OFFICIAL USE ONLY HARYANA POWER SECTOR RESTRUCTURING AND DEVELOPMENT PROGRAM HARYANA POWER SECTOR RESTRUCTURING PROJECT TABLE OF CONTENTS Page No. A. Program and Project Development Objective ..................................................................2 Program development objective and key performance indicators ....................................2 Project development objective and key performance indicators ............... .......................2 B. Strategic Context .................................................................3 Sector-related CAS goal supported by the program ........................................................3 Main sector issues and Government strategy ............................................................ 3 Sector issues to be addressed by the program and strategic choices .............................4 The Haryana Power Sector Restructuring and Development Program ............................5 Reform Program ............................................................5 Investment Program ............................................................6 Key conditions for subsequent loans .............................. ..............................7 C. Project Description Summary ..................................................................9 Project components ............................................................9 Key policy and institutional reforms supported by the project ..................... .....................9 Benefits and target population ........................................................... 10 Institutional and implementation arrangements ........................................................... 10 D. Program and Project Rationale ................................................................. 12 Alternatives considered and reasons for rejection ......................................................... 12 Major related projects financed by the Bank and/or other development agencies ......... 14 Lessons learned and reflected in proposed project design ............................................ 14 Indications of borrower commitment and ownership ...................................................... 15 Value added of the Bank support in this project ........................................................... 16 E. Summary Program and Project Analyses ................................................................ 17 Economic assessment ................................................................. 17 Financial assessment .................................................................. 17 Technical assessment ................................................................. 19 Institutional assessment ................................................................ 19 Social assessment ................................................................ 20 Environmental assessment ................................................................ 21 Participatory approach ................................................................. 22 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 Appraisal Document India Page ii Haryana Power Sector Restructuring Project F. Sustainability and Risks ................................. 22 Sustainability ............................ 22 Critical risks ............................ 23 Possible controversial aspects ............................ 24 G. Main Loan Conditions ................................. 25 Effectiveness conditions ............................ 25 Covenants ............................ 25 Proposed covenants upon restructuring ............................ 26 H. Long Term Support for the Program ................................. 28 1. Readiness for Implementation ................................. 29 J. Compliance with Bank Policies ................................. 29 ANNEXES Annex 1. Project Design Summary Annex 2. Detailed Project Description Annex 3. Estimated Project Costs Annex 4. Cost-Benefit Analysis Summary Annex 5. Financial Summary for Revenue Earning Project Entities Annex 6. Procurement and Disbursement Arrangements Table A.1 Project Costs by Procurement Arrangements Table A.2 Consultant Selection Arrangements Table B. 1 Thresholds for Procurement Methods and Prior Review Table B.2 SOE Limits Table C. Allocation of Loan Proceeds Annex 7. Project Processing Budget and Schedule Annex 8. Documents in Project File Annex 9. Statement of Loans and Credits Annex 10. Country at a Glance ADDITIONAL ANNEXES Annex 11. Detailed Power Sector Policy Statement from the Government of Haryana Annex 12. Summary of Haryana's Program and Project Implementation Plan Annex 13. Summary of the Proposed Subsequent Adaptable Program Loans Map: IBRD 29242  Project Appraisal Document Page 1 India Haryana Power Sector Restructuring Project INDIA HARYANA POWER SECTOR RESTRUCTURING AND DEVELOPMENT PROGRAM HARYANA POWER SECTOR RESTRUCTURING PROJECT Project Appraisal Document South Asia Region Date: December 12,1997 Task Team Leader: Djamal Mostefal Country Director: Edwin R. Lim Sector Manager: Alastair J. McKechnie Project ID: IN-PE-35160 Sector: Power Program Objective Category: PSD Lending Instrument: Adaptable Program Loan Program of Targeted Intervention: [ IYes [x] No Program Financing Data ........................................................................................................................................................................ .................................................................................... APL Indicative Financing Plan Estimated Implementation Period Borrower (Sector Investment Program) (Bank FY) IBRD Others Total Commitment I Closing Date Date ........... ......... .................................. ..................................... .................................... ....................................... ........................................ ........------..e------. US$ million Av.% US$ million US$ million APL 1 Loan 60 75 20 80 January 1998 December 2000 Govern- ment of India i .APL .2 Loan 150 .33 310 . 460 1999 . 2003 2 on................. d........ ; i ; ~~ ; ;g ............. APL 3 j Loan 200 44 260 460 2000-01 2004-05 APL 4 . Loan 100 . 25 300 400 2002-03 2005-06 APL 5 t Loan 90 23 310 400 t 2004-05 2007-08 Total. 600 - 33: 1200 0 .. . ....1,..00_ Notes: Partial risk guarantee operations may also be considered as separate operations outside the APL framework. Loan amounts for APL2 to APL5 are indicative only, and will be determined during project implementation. APL4 and APL5 may be consolidated into a single loan based on progress achieved in reform implementation, financing requirements and lessons learned during project implementation. Project Financing Data [X] Loan [] Credit [ Guarantee [ Other .......................... .............................. ...j........ . ... .......................j...j....... ..... . .......j.............. ............................ Amount (US$ million): 60 Proposed Terms: [ Multicurrency [X] Single currency Grace period (years): 5 [ Standard Variable [ Fixed [X] LIBOR-based Years to maturity: 20 Commitment fee: 0.75% less any waiver Service charge: Nil Financing plan (US$ million): Local Foreign Total IBRD 32.6 27A. 60 ~~~~~~~~~~~~~~~~~~~~~~~~~~............................ ...... ................. ............. .......... ......................................... ............. ; ; D5fID (subject to fin..alI ..app"ro..v"ail)` 1.0 5.5 6.5 Other ... b i.l a tie r.a.l.s . (te ntative) 10 3.0 4.0 Government of Haryana 4.0 4.0 .. .................. ................................................. ................................................ ...........................................;; Indian Financial Institutions 3.8 1.4 5.2 Total :. 42X 1 : - 37.3- 797 Borrower Government of India Guarantor: N/A Responsible agency(ies): HSEB, successor companies (TRANSCO, GENCO, distribution companies) Estimated disbursements (Bank FY/US$ million): 1998 1999 2000 2001 Annual 5 32 15 8 ................................................................................................................................ .............. .................... ; ................................. Cumulative .5 37 - 52 60 Project Implementation Period: 33 months Expected effectiveness date: March 1, 1998 Expected closing date: December 31, 2000  Project Appraisal Document Page 2 India Haryana Power Sector Restructuring Project A: Program and Project Development Objective 1. Program development objective and key performance indicators (see Annex 1): The development objective of the Haryana Power Sector Restructuring and Development Program is to ensure that, by year 2007, the power requirements for the State's economic growth and its population are met, and that consumers are provided with reliable, high-quality and cost-effective electricity services by creditworthy and commercially-operated power utilities, functioning in a competitive and appropriately regulated power market, with significant private ownership and participation. Key Program Performance Indicators at 1997 2002 2007 .................................................................................................................................................. .................. .. ........... ............... Power (energy) deficit (%) 25 8-12 0-5 ....................................................................................................................................................................... .......... ........................... Per capita consumption (kWh) 460 720-750 950-1050 Transmission and distribution losses (%) > 32 I 26 28 17-19 .......................................................................................................... ...................................................... ................... ............6............................. Contribution of the power sector to the State's budget (US$ million) - 50 -26 66 Utilities' average operating surplus as % of total capital employed b 8 19-23 24-28 Subsidies as6%-of revenue-from sales of electricity 31 4-6 . .0 Private sector participation (%) in: Generation <1 15-18 28-44 Distribution c/ O 0 > 51 70-100 a/ Haryana's Program and Project Implementation Plan (summarized in Annex 12) includes detailed annual projections of the program performance indicators. b/ After subsidies. c/ This percentage represents the share of private interests in the capital structure of the distribution companies. By end-2002, for each distribution company, the private sector is expected to have at least 51 percent of the equity; by end-2007, for each distribution company, the share of the private sector is expected to increase to at least 70 percent. This development objective will be achieved with steady progress over an agreed 10-year program including the following phases: Phase I Establishment of a new legal, regulatory and institutional framework, and removal of some of the most critical bottlenecks of the power system (1998-99); Phase ll Privatization of the distribution business; achievement of financial sustainability in the sector, and improvements in system efficiency (1999-2002); Phase 111 Consolidation of the functioning and financial situation of the new power utilities, and achievement of more reliable power supplies (2002-04); Phase IV Achievement of higher consumer satisfaction through the reduction of the power deficit, attainment of higher quality and efficiency in electricity services, and furtherance of power sector reforms to increase competition and private participation (2004-2007). 2. Project development objective and key performance indicators (see Annex 1): The development objective of the Haryana Power Sector Restructuring Project is to support the first phase of the reform process by establishing the new legal, regulatory and institutional framework (including the creation of an independent regulatory commission and of the new power corporations), initiating the privatization of the distribution business, and removing the most critical bottlenecks of the power system with a view to demonstrating - in a few selected areas - the benefits which could be expected from a successful reform of the power sector.  Project Appraisal Document Page 3 India Haryana Power Sector Restructurng Project Key Project Performance Indicators Completion Date Comprehensive reform legislation brought into effect April 1998 Regulatory Commission established a April 1998 .. .....................................................................................................................................................................L..................................................... Restructuring measures effected, and new power utilities established and operational Transmission and generation companies April 1998 .. i R 6.......................................................................................................................................................................... .................................................... Distribution companies September 1998 ................................................................................................................................................................................L............................ ........................ Financial restructuring measures completed as per Haryana's Financial Restructuring Plan (the Plan) )