India - Uttar Pradesh State Power Sector Reform Project

Report No. PIC4427 Project Name India-Uttar Pradesh State Power (@) Sector Reform Project Region South Asia Sector Power Product ID INPA35172 Borrower India, Acting by its President Implementing Agency Department of Energy Government of Uttar Pradesh (GOUP) Lucknow 226 001 Contact: Mr. R.R. Shah, Principal Secretary (energy) Tel: 91-522-22119; Fax: 91-522-229911 Date this PID prepared February 5, 1997 Projected Appraisal Date TBD Projected Board Date FY98 Country and Sector Background. Although electricity consumption in India is among the lowest in the world, supply shortages are common and the quality of service is often poor. There is general recognition that the largely public-owned power sector is no longer able to meet the growing demand for electricity in the country and that the lack of reliable power supply has become an impediment for further economic growth. Under the present system, the power sector is faced with critical problems, including non-remunerative tariffs, deep cross- subsidies, and high transmission and distribution losses. Non- remunerative revenues hinder not only required investments, but also system operation and maintenance at acceptable standards. To resolve these issues, tariffs must be corrected, efficiency of operation improved and resources mobilized for investment. Experience in other countries and discussions with potential private investors have shown significant reforms are required in the India power sector in order to create an environment conducive to private investments and the optimization of publicly owned facilities. Project Objectives. The Government of Uttar Pradesh (GOUP) has requested the Bank's assistance for restructuring its power sector with the objective of creating an environment conducive to the sustainable development of its power industry and to improving the efficiency and quality of the electricity services in the State. The ultimate goal of the reform process is to ensure that electric power will be supplied under the most efficient conditions to support the economic development of UP and that the state power industry ceases to be a burden to the State's budget. Project Description. The proposed power sector reform program comprises: (i) the creation of several separate corporations for generation, transmission and distribution; (ii) the creation of an independent regulatory body; (iii) related electricity tariff reforms at  bulk power, transmission and retail levels; (iv) private sector participation in selected distribution areas; and (v) a competitive selection process for new privately owned generating stations. The proposed UP Power Sector Reform Project would provide funding for: (i) selected priority investments for rehabilitation of generating stations; (ii) upgrading and expansion of transmission and distribution facilities; (iii) systems and retail consumer meters; (iv) implementation of demand side management and other efficiency improvement measures; and (v) technical assistance and training for implementing the reform program and institutional strengthening of the power sector corporations. Project Financing. The proposed first Bank loan would help finance selected priority investments and related technical assistance over a period of about 3 to 4 years at an approximate cost between US$800 million and US$1 billion (mainly for renovation of generation stations, transmission and distribution). This operation may be followed by a second Bank loan to complete the reform program and to finance additional investments. It is currently anticipated that the Bank's cost of this first operation would be in the order of US$350 million. OECF and ODA have expressed an interest in providing additional financial and technical assistance in parallel with a possible Bank loan. Project Implementation. A senior level Steering Committee chaired by the Chief Secretary of GOUP has been established to provide policy guidance and monitor the implementation of the reform program. A Reform Action Group (RAG) have been established to manage the reform program. With financing provided under a Project Preparation Facility (PPF), a US/UK/Indian consortium of management, financial and legal consultants has designed a reform program in close coordination with a UK/Indian consortium of technical consultants who have prepared a least cost power-system study. In November 1995, the Steering Committee endorsed the proposed reform program, a formal decision to implement the program is not expected until an elected State Government is in place. The State Assembly elections were held in October 1996, but a new Government has not yet been formed. President's rule is still in force. Timeframe for processing this operation is uncertain at this stage. Sustainability. The proposed tariff reforms and creation of an independent regulator are designed to ensure that the power sector will be financially viable on a sustainable basis, to provide comfort to lenders and investors in the sector, and also to ensure that consumer rights are protected. Lessons from Sector Work and Previous Bank Operations. Bank and IDA power sector investment operations in India with several states and state electricity boards in the 1980's helped strengthen their power supply systems. They were, however, accompanied by fairly limited financial and institutional improvements, and therefore provided mainly temporary relief rather than sustainable solutions to their power problems. A Bank loan (Ln. 2957-IN) for the UPSEB granted in 1988 with the primary objective of improving the State Electricity Board was canceled in July 1992, mainly due to non-compliance with financial covenants. It followed a more general pattern throughout India, and - 2 -  with the lack of autonomy and politically inspired tariffs, most state owned power utilities had weakened to the point of operational and financial crisis by the mid-90s. Such conventional operations have therefore outlived their usefulness. Uttar Pradesh may follow Orissa, as one of the first states in India to initiate a radical reform program to address the fundamental issues underlying the poor performance by restructuring and substantially privatizing the state power sector to make power supply more efficient and able to meet the investment needs of the sector. Poverty category. The proposed project is not directly targeted to the poor, and its main direct poverty consideration is related to electricity pricing. While UP's electricity pricing policy emphasizes cost recovery, the utilities would continue to provide low-cost (life- line) rates for poor electricity consumers to ensure that service for basic household uses of electricity remains affordable. The reform program will indirectly facilitate poverty alleviation, by freeing up GOUP funding (capital investment and GOUP subsidies) from the power sector to social sectors and by eliminating one of the most serious constraints to higher economic growth in Uttar Pradesh. Environmental and Social Aspects. The overall environmental impact of the reform program is expected to be significantly positive. The rehabilitation of UPSEB's existing thermal power stations will improve their efficiency and environmental performance. New generating capacity constructed and operated by private utilities will be in accordance with modern utility practices and Indian national standards, which are generally in line with Bank standards. Transmission and distribution rehabilitation, to be supported as part of the proposed Bank assistance, will significantly reduce systems losses and thereby contribute to pollution abatement. Adjustments in tariff levels and structure, metering and collection will promote energy conservation. The necessary EIAs are being prepared and will be placed in the Bank's Public Information Center. The rehabilitation of the existing plants are not expected to cause any displacement of people. The reform program is expected to result in a reduction of staff employed in the power sector entities and the reform program will include the funding of an appropriate labor transition plan and training of staff which can be redeployed. The project technical assistance component will include assistance for upgrading environmental management capabilities and DSM. Program Objective Categories are economic management (public enterprise reform), environmentally sustainable development and private sector development. Benefits. The reform program will enable Uttar Pradesh to establish and develop a viable power industry, capable of meeting UP's electricity needs in an environmentally sustainable manner. The new utilities will improve the efficiency of power supply in Uttar Pradesh and help close the chronic power demand/supply gap to the benefit of all electricity consumers and in particular industries, as they bear the brunt of the power cuts. The program will promote fiscal adjustment by cutting GOUP's power subsidies and reducing public spending. The program will provide a relevant model for state power sector reform in India, for several other states contemplating similar reform efforts for their -3 -  power utilities. Risks. The major project risk is its direct dependence on UP's political willingness and capability to implement the reform program. The government and UPSEB have demonstrated their commitment to the program: (i) through the privatization of greater NOIDA distribution area; (ii) through the submission of draft reform legislation to GOI in August 1996; and (iii) by undertaking competitive bidding for new generating stations. There have been some improvements in bill collection, and tariffs were revised in January 2997. Contact Point: Vivi Scott, Task Manager The World Bank 1818 H Street N.W. Washington D.C. 20433 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending February 21, 1997. - 4 -