India - Karnataka Power Project

 Karnataka power project Report No: ; Type: Report/Evaluation Memorandum ; Country: India; Region: South Asia; Sector: Thermal; Major Sector: Electric Power & Other Energy; ProjectID: P009948 India: Karnataka Power Project (Loan 2827-IN) The Implementation Completion Report (ICR) for the India Karnataka Power Project (Loan 2827-IN, approved in FY87) was prepared by the South Asia Regional Office. The Bank loan for US$330 million equivalent was approved on June 4, 1987. Only US$69.6 million were disbursed from the loan. Of the balance, about US$70 million equivalent was canceled in December 1991 because of anticipated savings due to the devaluation of the Rupee, and about $190.4 million was canceled in August and October 1993 because of continued non-compliance by the borrower with a number of key covenants. The loan was closed on December 16, 1993, vis-a-vis the original loan closing date of December 31, 1995. Cofinancing was provided by the Kuwait Fund. No contribution to the ICR was received from the Borrower. The principal project objectives were to alleviate the power shortage in the State of Karnataka and India's southern region by exploiting hydroelectric resources, to provide efficient transmission capacity and to effect institutional, operational, and financial improvement in the two power utilities of the state: the Karnataka Power Corporation (KPC) and the Karnataka Electricity Board (KEB). The project comprised: (i) construction of two hydroelectric schemes at Kodasalli and Kadra (for a total of 270 MW) and the associated resettlement and rehabilitation of the population affected by the project (about 794 families); (ii) construction of some 870 km of transmission lines and associated substations; (iii) renovation of the existing Sharavathi hydroelectric plant; and (iv) several engineering and institutional development studies. Almost none of the project objectives were achieved because only very few of the project components were completed, and most of the recommendations of the institutional development studies were never implemented. The only exceptions are the renovation of the existing Sharavathi hydroelectric station, some transmission lines, and some reduction in accounts receivables in the later years of the project. The loan was canceled before most of the components were completed because of continued failure on the part of the Government of Kamataka--particularly in granting sufficient tariff increases--to ensure that KPC and KEB could achieve a reasonable level of financial viability and the resulting inability to finance their share of the project. The resettlement component had made a slow start, and its implementation was fraught with problems, but this was not a factor in the cancellation of the project. At the time of the ICR mission in September 1994, the two power utilities were planning to continue implementation of the projects, including the resettlement component, but no information is available on their current status. The economic rate of return of the project was estimated at 12 percent at appraisal, but was not reestimated for the ICR as the loan was canceled before project completion. The outcome of the project is rated as highly unsatisfactory, as virtually none of the project objectives was achieved. The sustainability of even the limited physical achievements of the project (some transmission lines, the Sharavati renovation) is rated as uncertain, given the uncertain current status of the project and the uncertain financial viability of both KPC and KEB. The institutional development is rated as negligible, as none of the recommendations made by the institutional development studies have been implemented. The Bank's performance is rated as unsatisfactory, because very few of the components of the project had been sufficiently prepared, the implementation capacity of both executing agencies had been vastly overestimated, financial appraisal was based on unrealistic financial projections, and project supervision was insufficient, particularly in the earlier years. These ratings are in agreement with those in the ICR. One important lesson mentioned in the ICR is that even though Karnataka was a pioneer in "unbundling" the power sector by separating generation from transmission and distribution, and in "corporatizing" KPC and KEB, these measures were not sufficient to guarantee effective and efficient operation of the sector because of limited autonomy for the enterprises and continuing political interference in corporate affairs, funding, and tariff setting. This points to the need to follow a more comprehensive approach to sector reform, including an appropriate regulatory framework and tariff reform. A second lesson, not mentioned in the ICR, is that attention needs to be paid to clear warning signals, such as non-compliance with tariff covenants at the time of loan effectiveness, to take decisive action early during project implementation, rather than allowing the problem to remain unresolved. The ICR is satisfactory; it provides a candid discussion of the implementation problems of the project and draws most of the appropriate lessons. No audit is planned.