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Transcript
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'N >CURRENCYOEQUIVALENS;
-.Z Currency Unit - Rupees (Rs)= Y il;Rs 1,00 - ,Paisa 100j U/g; tS$1+O .00.... =/-' -Rs 13.00
CAS - Commercial Accoutfifiig SystemCEA - Central Electricity AuthorityCIF - Cost Insurance FreightcWC - Central Water CommissionDOPW - Department.of-Forests and WildlifeGO1 -, -Governwent of.Incdia,GOK - Government of XarnatakaGOKDF - Government of Karnataka Department of ForestsIBRD. - International Bank for Reconstruction and DevelopmentICB - International Competitive Bidding ''IDA - International Development AssociationKEB - Karnataka Electricity BoardKPC - Karnataka Power torporationLCB - Local Competitive BiddingLIB - Limited International BiddingLRMC - Long Run Marginal CostMIS - Management Information SystemNHPC - National Hydro Electric Power CorporationNPP - National Porr Plan P..NTPC - National Thermal Power Corporation06M - Operation and Maintenance ,PFC - Power Finance Corporation 7
POE - Panel of ExpertsREB - Regional Electricity BoardREC - Rural Electrification CorporationSCADA - System Control and Data AcquisitionSEB - State Electricity BoardSOE - Statement of ExpendituresSREB - Southern Regibnal Electricity BoardSTRS - Sharavathi Tailrace Scheme
Beneficiari,is financial year ends March 31
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FOR OrFcIAL US ONLY
INDIA
SECOND KARNATAKA POWER PROJECT
Loan and Project Summary
Borrower: India, acting by its President.
Beneficiaries: Karnataka Power Corporation (KPC)s andKarnataka Eleptricity Board (KES).
Amount: US$260 million equivalent.
Terms: Twenty years, including a five-year grace period,at the-Bank's standard variable interest rate.
Onlending Terms: Government of. India (GOI) to Government of Karnataka(GOK): As part of Central assistance to Karnatakafor development projects on terms and conditionsapplicable at the time.
0OK to KPC: About US$130 million. Repayment overtwenty years, including a five-year grace period, atGOK's interest rate applicable at tfi time for itslending to KPC, but not less than ll.51 per unnum.
CDK to KEB: About US$130 million. Repayment overtwenty years, including a five-year grace period, atCOK's interett rate applicable at the time for itslending to KEB, but not less than ll.5S per annum.
-I will bear the foreign exchange and interest raterisks.
Project Descriptiont The Project's main objectives are to: (a) alleviate, theacute shortage of generating capacity in Karnataka andthe Southern Region by doveloping the 240 MW Sharavathi.Tailrace (STRS) Hydroelectric Station; (b) provideadequate transmission capacity to evacuate power fromthe STRS; (c) reduce energy losses to economic levelsand improve service quality by strengthening theState's transmission grid and Bangalore's distributionsystem; (d) reduce distribution system capital andoperating costs by introducing new technologies; and(e) reduce indtallation, operation, and maittenancecosts by providing modern training, tools, andequipment. With the exception of those riskspertaining to the Talakalatle dam, there are no unusualtechnical risks associated with the project,Geological investigations have confirmed good rock
Th dAmumnt bo' naM disutfibbn nd mube md tin0*stns onb [a f pefoenue|ofttoflk dufblm Is ontnts my t oftewibbe ticsoud _hou Wodd Oankauc"w
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-formation in the area of the hydroelectric scheme. Therisks related to the Talakalale dam are being minimisedby the use of specialised consultants. KPC and K83ha*A sufficient staff who ate experienced insupervising and executing activities similar to thoseincluded in the propose4.Project. Consultants will beused in all areas in which their in-house expertise islac14king.
I. SECTORAL CONTEXT ..................Coaercial Energy Resources ... ,.......................... 1Electricity Supply and Demand - 2Organization of the Powe 8ubsector ........................ 3Finance and Pricing *............................... 4Power Subsector Plauning .............................. ,Management and Operations 5..... .......................... SOOI's Strategy in the Power Subsector....................... 6Bank Croup Strategy in the Power Subsector a... .8
Bank Group Participation o.....................*........... 10
II. THE BENEFICIARIES 11Introduion 1
ARANATAKE POWER CORPORATION ....................... . . 11Background 11Organization **e**,*.. ......... 0* o .. ..... e* 12P ersonnel and Staffing ........ ... * * ...*...*.. .*o..... l i00*Planning *e-Oooooooo,0e9000006e;00-00..- ..-.... 12Project Implementation ., 13Operation and Maintenance 13Training * ........................... 0......... 13
This report which is based on the findings of an appraisal mission to Indiain May/June 1987, was prepared by Messrs. A. Guletone (Power Engineer),W. Jones (Senior Economist), R. Sharma (Financial Analyst), COK. Teng(Financial Analyst), and A. Posada (Consulting Engineer).
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III. THE PROJECT .............. , 17 `Project Setting ..... ............. e.g...... 17Project Objectives *co.... oece.e- *c..e.e...ecgcoe ogce 19Project Description . ............... 19Project Engineering 20.......0Project Implementation and Construction Schedule 21Project Costs 2.......... 22Project Financing ........ 25Procurement 26Disbursements 27-Project Operation and Maintenance 28Project Monitorini ... 28Project Ri$ks ......... o 29Water Rights ... 29Rese$tlement egece ... ge....eggggoc*c ecceo .* eg... ,* *.g. 29Forestry and Environmental Aspects ....... e...ge.. . 29
IV. FINANCE .. 31
KARPATAKA PCtOW CORPORATION ........... .oe.. 31Background . ........ g 31Accounting Systems and Financial Organization ..g.... ...e 32Audit Arrangements ce..c..... 32Fixed Asset Accounting c3......e.............. e eec... 33Insurance a ...... , ,, ,...... eec.... 33Accounts Receivable ... , 33Tariffse 33Past Financial Performance cccee..egggegg*og. ecoe.ce.o.c 34Present Financial Position oee.egeeee.geee*egceoe.eoge7*ioooo 36Financial Recovery Program ... .cecoeog -c 37Forecast Investment and Financing Plans ........ ..... o 37Income Taxes cg 39Forecast Financial Pev£ormance ' 39Financial Reporting and Monitoring 40
KABNATAKA ELECTRICITY BOARD geggo.g.........c.cc. ............ ;41Background -, 41Accounting Systems and Financial Organization ................ 41Audit Arrangements ............... g 42Fixed Asset Accounting .... c.. ococegoc. oc.....cc.egg...... 43Insurance ...... e . 44Metering and Billing .. occc.geo.cceoco.gccoc.ggeceeoeeoeoe 44Accounts Recivable ceeee..geeeceeggegg..e.c.c...c......c....e. 44Accounts Payable .co..e.........*0 ....................... c 45Tariffs .........c....c..ccocccgecCcceecec.cgceegegc.eecccoe 46Past Piinancial Performance gocccocecogoggoo................. gg 46Present Financial Position o.gcccecoeoceccgeececcececoeeee 48Financial Recovery Program .. e.... eec .... ...... 49Forecast Investment and Financing 'Plans .4.....9............ 49
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Income Taxes ......... s6.....e.....e..... .. e*,*e 50Forecast Financial Performance ............................. 51Financial Reporting and Monitoring 52
V. PROJECT JUSTIFICATION AND ECONOMIC ANALYSIS 53Least Cost Analysis *eeeqee.oe..*e..........eOee...e*.*..eeeeee 53Internal Economic Rate of Return .. o........................... 53Justification for Bank Involvement ............................ 54
VI. AGREENTS AND RECOMMENDATION SS.....**.. 55Agreementsion ... . * ....... * ..... *............,......... 56Recoammedation ..... '56
1.1 Electricity Generation, Sale and Pattern of Hoeogy Consumption - All India1.2 Forecast of Regional Power Demand, 1987/18 - 1996/971.3 Previous Loans and Credits to Indian Power Sector (March 31, 1988)
2.1 Organization Chart of RC2.2 Organization Chart of US
3.1 Detailed Project Description3.2 Construction Schedules If KED and KPC Project Components3.3 Project Cost Estimates3.4 Procurement Timetable3.5 Schedule of Dank Disbursements
4.1 Method for Computation of Rate of Return on Assets4.2 KPC Financial Projections4.3 KEB Financial Projections
5.1 Internal Economic Rate of Return
6.1 Documents and Data Available in Project File
MAPS
IBRD Nos. 20892 and 20893
INDIA
9EC0U KARtNATAKAPOE PROJCT
STAFF APPRAISAL REPOT
I B ECTORAL CONTEX
Commercial Energy Resources
1.01 India's principal cormmercial energy sources consist of coalp,oil,gas, hy4ro and nuclear energy. Of the nonrenewable resources, coal is themost abundant. Reserves of thermal coal hive been estimated at slighttj morethan 100 billion tons, of which 25 billion are proven. Although reserves areample, most of the coal produced is of poor and deteriorating quality. Thehigh ash content,, up to 502j, increases the capital and operating costs ofpower st:ati6rs and has exacerbated problems of coal transpoit. cOI'(,emphasis on concentrated development of pithead stations helps to alleviatetransport problems but will noat reduce the other costs associated with poor,coal quality. -Moreover, pithead&,development will be constraiWied by pollutionproblems and-,the avai1ibility of water for coal washing and condensercooling. .
1.02~ GOI appointed the Fasal Commit,tee to examine the problems of coal,supply to thermal power stations. This committee, which reported in October1983, made several recommnendations affecting all aspects of supply,, from coalpreparation to raiwape =tions (para 1.19)~ Although GOI has' accqpted
most~ ~ ~ of thes reome' -
most f thee reomue~~n~ t, has been slow to implmnttem owever,00I has agreed, under tbeC~\Mining and Coal Quality'Improveomet Project(Loan 2796-IN), to provid:e "k Bank with a timetable for implementing theFasal Committee recommendati(' a by March 31, 1988.
1.03 Proven and probable petroleum reserves consist of approximately510 Million tons of oil and 390 million too of natural gas. Despite recentincreasses in domestic production, India still imports aWgut one-third of itsoil -requirements, which in FY84 cost'the equivalent of 402 of its merchandiseexporti'. With domestic-bil production likely to start declining towards the,end of the decade, exploration for new hydrocarbon resources is of the utumstimportance to India; in this context, the Government has recently invitedthe international oil industry into the higher~ rilik, 'offshore areas tocompleomet the exploration'being undertaken by Inidia's two national oij,companies. At the same time,, it-has imolemented measures, including economic'pricing,--to restrain -the rapidly growing demand for oil products,particularly middle distillates. Nevertheless, the oil supply-demand deficitis likely to increase agaibi over the medium term unless significant-newhydrocarbon resources are brought onstream quickly. In the meantime, some ofthe deficit can be reduced by substituting natural gas for liquid, petroleu'mproduicts. In the pastg 001 has limited natural gas to premium markets such
as petrochemicali and fertilizer; however, delays in the construction of gasinfrastructure have resulted in substantial volumes of gas being flared. TheBank has encouraged GOO to develop the necessary infrastructure and to allowother economic uses of gas, including power generation. In response, GOI hasbegun to invest in pipelines and has recently revised its policy on the useof gas for power generation (paras 1.19 and 1.20).
1.04 India's hydroelectric potential is equivalent to about 100,000 Mv.At present only 14,000 MW have been developed, 4,700 MW are underconstruction, and a further 23,000 MW are being studied for futuredevelopment. The prominent role of hydro generation in regional least-costpower development plans has led GOI to emphasize the need to accelerate hydrodevelopment; however, progress has been slow due to the lack of financialresources in states with the greatest hydro potential, the time required toresolve water rights and environmental issues, and the li"Ated technicalresources available for the simultaneous preparation of a large number ofhydro schemes. Attempts to address these 'ssues through increased centralsector involvement so far have met with limited success (para 1.10).
1.05 The country's uranium reserves could support a modest nuclear program(8,000 - lO,OOO MW), and thorium reserves are enough -to support a large fastbreeder program. India currently has 1,095 MW of nuclear power generatingcapacity.
Electricity Supply and Demand
1.06 In PY86, gross power generation in the utilities amounted toapproximately 188,000 CWh from an installed capacity of just over 50,000 MS.Almost 601 of generation came from coal, 34Z from hydro, and the rest fromoil, nuclear energy, and natural gas. Electricity losses have risen slowlybut steadily over the last few years and now exceed 261 of gross 3eneration.Station-use, now about 101 of gross generation, has increased because of thedeteriorating quality of coal, and system losses hate increased because ofthe large expansion in very low load density rural-ilectrification togetherwith otherwise inadequate investment in transmission and distributionfacilities. The Bank has stressed the importance of balanced investment toreduce system losses and improve service quality and will continue to supporttransmission and distribution investments designed to achieve theseobjectives.
1.07 Over the past two decades, the consumption of electricity has grownapproximately twice as fast as total co"mercial energy consumption and nowaccounts for more than 301 of the latter. Even though the power subsectorreceives 20-25X of total public investment, electricity supply has not keptpace with demand and shortages have been prevalent throughout the country.Total consumption has grown at an average annual rate of 8Z, although theincreassng severity-of power shortages shows that potential demand has grownmore rapidly. The Central Electricity Authority (CEA) has forecast demandgrowth in the range of 9-10X per year between 1987/88 and 1996/97
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(Annex 1.2). However, actual growth will continue to be constrained bysupplyt The principal sectoral shares of electricity consumption are:industrial, 571; agricultural, 181; and domestic, 131. Agriculture's sharehas grown steadily due to increased electrical irrigation pumping madepossible by rural electrification and encouraged by heavy subsidies.
Organization of the Power Subsector
1.08 The Central and State Governments shate the responsibility forsupplying electricity. The Central Government controls the CIA, the NationalThermal Power Corporation (NTPC), the National Hydro-Ilectric PowerCorporation (NHPC), and the Rural Electrification Corporation (REC). TheStates control the State Electricity Boards (SEBs) and the RegionalElectricity Boards (REBs). CEA is part of the Department of Power within theMinistry of Energy. NTPC, NHPC and REC are public corporations reporting tothe Department of Power. SEBes were instituted under the Electricity (Supply) -Act, 1948 (the Act), to promote the development of the power subsector and toregulate private licensees such as the Tata Electric Companies. AlthoughSEBs are pupposed to be autonomous in managing their day-to-day operations,in-practice they are under the control of State Governments in such mattersas capital investment, tariffs, borrowings, pay scales, and personnelpolicies. As a fir.t step towards national integration, the SEBes have beengrouped inLto five regional systems, each coordinated by an REB. The REB'scoordination responsibilities include overhaul and maintenance programs,generation schedules, interstate power transfer' and concomitant.tariffs.
1.09 CIA was created in 1950 to develop a national power policy and tocoordinate the various agencies involved in supplying electricity. It isformally responsible for vetting investment proposals, providing consultingsupport to BEBs, assisting in the integration of supply systems, training ofpersonnel, and research and devielopment. However, in its execution of theseresponsibilitiest CEA has been severely limited by shortages of skilled staffand other resources. Without any direct responsibility for providingfinancet it has not been able to assume a very positive role in thedevelopment of the subsector. In view of this, OOI formed the Power FinanceCorporation (PFC) in April 1986 to complement CEA in fostering development ofthe subsector (para 1.20).
1.10 NTPC and NHPC were formed in 1975 to construct and operate largepower stations and-associated transmission facilities. They -sell bulk powerto the SEBs for distribution. NTPC has had marked success since thecovuissioning of its first unit in 1982. At present, it contributes around101 of the country's installed cepacity and is growing rapidly. In contrast,UHPC is still struggling to establish aixole for itself; the states controlwater rights and are reluctant to relinquish hydro sites to the Center. Thishas prompted GOI to explore joint ventures with the states to develop hydroschemes. RBC was established in 1969 to coordinate rural electrification andprovide financial and technical expertise for SEB schemes. Currently, RECfinaces more than 701 of the total investment in rural electrification. At
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present there is no organisation responsible for developing a nationaltransmission grid, although GOI is contemplating the formation of such a body(para 1.21).
iace nd Pricis
1.11 Although four SEBs made a profit in FY84, the SEBs as a wholeincurred a combined loss in that year of approximately Rs 11,230 million(US$935 million) exclusive of subsidies. This corresponds to a return of2.31 on historically valued net fixed assets before interest and -8.1% afterinterest. Internal cash generation, which was equivalent to only about 2.71of capital expenditure in FY84, has been correspondingly poor. Almost allSEB capital expenditure is financed by dett - primarily loans from stategovernments. Recognizing the unsatisfactory state of SEB finances, GOI hasamended the Act in April 1985 to require each SEB to earn an annual return ofat least 3% on its historically valued net fixed assets after meetingoperating expenses, taxes, depreciation and interest (GOI does-not accept theprinciple of revaluation of assets). The Bank supports this initiative byOI and has changed the form of its financial covenant to reflect this.Although the Bank's conventional method of calculation makes the returnspecified in the Act, corresponding in some cases to 4 to 6% on revaluedassets, appears modest, this return nevertheless represents a very -
substantial improvement on past performance. Many SEBs, particularly thoseof the poorer states, are experiencing considerable diffi-cultr .n' achievingthis level of performance.
1.12 Although MTPC's tariffs are approximately equal to its long-runmarginal costs (LRMC), there are deficiencies in its tariff structure. GOIhas agreed to commission, in close cooperatIon with the Bank, a study toaddress these deficiencies. A recent analysis of SEB tariffs suggests thatthey are now 60-702 of LRMC, which represents a significant improvement overtheir 502 level in 1981. The average ratio will continue to improve as ratesare increased to achieve the stipulated rate of return. However, thestructure of tariffs remains unsatisfactory. -Tariffs frequently areexcessively complex, and very little has been done through tariffs either toachieve load management or, to selectively tap consumers' willingpess to pay,which in many cases substantially exceeds existing tariff levels. Althoughthey have espoused energy prices "which reflect true costs" in both theirSixth and Seventh Plans, 001 and the states continue to resist economicpricing of power as this conflicts with social and agricultural objectives.
1.13 In lending to individual SUB's, the Bank will continue to addressstate-specifi. programs to improve resource mobilization, for example, bydeveloping fin ncial programs capable at least of achieving the rate ofreturn specified in the Act. Where higher returns are both feasible anddesirable the Bank will press state governments to use their discretion underthe Act to require a higher rate of return. As far as tariff structure isconcerned, the Bank will continue to require SEBs to carry out tariff studieswherever tariff structures appear to be badly distorted, in order to impress
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on the relevant authorities the true costs of cross-subsidization. However,resistance to economic pricing is likely to inhibit progress in pricingreform (para 1.22).
Power Subsector Planning
1.14 The Bank has consistently encouraged GO to pursue integratedplanning and coordinated operation of the country's electricity supplysystems. In response, GOI has prepared a set of regional least costdevelopment plans, published as the National Power Plan (NPP) in 1983.Although the NPP represents a good first step towards integrated planning,it needs further refinement and regular updating. In addition, such a plancan only lead to effective improvements if complemented by measures to bringabout coordinated system operation. At present only the Northern Region isapproaching this. GOI is encouraging states to reach the necessaryagreements on operating parameters, but progress is likely tt, be slow as longas severe power shortages exist. Even if coordinated intra-regionaloperation is achieved, inter-regional tranafers will be very difficultwithout the use of direct current facilities to overcome problems offrequency control. The first such facility, a link between Northern andWestern Regions, is a component of the Central Power Transmission Project(Loan 2283-IN). A second direct current link has been included in the RihandPower Transmission Project (Loan 2535-IN). To facilitate further integrationOI has agreed, under the latter project, to undertake a study of thelong-term development of a national transmission system and to examinerelated ir-stitutional and commercial issues.
1415 Substantiail disparities exist between the long-term NPP, nationalfive-year plans, short-term budgets, and actual performance. Due to a lackof resources, fewer projects have been included in the five-year plans thanin the NPP and, because adequate allowance was not made for escalation anddelays in project implementationt still fewer have been executed. Theresulting power deficit has undermined rational planning by necessitatlng-raMid expansion of supply rather than long-term least-cost development. Forexample, shorter gestation thermal plants have be4n favored at the expense oflower cost hydro plants. Furthermore, the power deficit has promptedoverinvestment in captive plant, a second-best measure leading to excessiveuse of high value petroleum products for power generation. In addition tosupporting 001's efforts to increase the supply of power, the Bank willcontinue to stress to GOI the role of pricing and load management ineliminating the deO.,cit, and the importance of integrating planning andpricing.
Management and Operations
1.16 In contrast to the good performance of NTPC, the SEBs' management andoperational capabilities have not kept pace with the expansion of supply. Ingeneral, SEBs have adequately qualified engineering staff but lackexperienced personnel in financial planning and control. The significant pay
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differential between the public and private sectors makes it difficult torecruit competent staff. Management practiCeb are generally outmoded andinadequate. Accounts have been maintained principally to track cash receiptsand ezpenditures, and there has been little use of accounting information formanagerial purposes. Consequently, the Bank has encouraged GOI to develop anew uniform accounting system for SEBs. After initial delays, implementationis now proceeding. The Bank will continue to support institutionaldevelopment programs through lending to individual SEBs.
1.17 The operations of many SEBs are hampered by the poor condition oftheir plant and equipment. Factors that have contributed to the poor stateof thermal plant include inadequate maintenance (in pixt due to capacityshortages), deficiencies in manufacture, lack of spares, and the poor qualityof coal. In gener41, these problems have been recognized by the relevantauthorities and corrective steps are being taken. Distribution systems havesuffered from inadequate maintenance, overloading owing to inadequateinvestment, and deficiencies in the manufacture of equipment.Rehabilitation, particularly of thermal plant and distribution networks,appears to be a very cost-affective way to improve efficiency and augment-system capacity. COX recently initiated a rehabilitation program for thermalplant but is less able to effect improvements in distribution. Wheneverappropriate, the Bank will continue to include rehabilitation componentsunder its loans.
suI's Strategy in the Power Subsector
1.18 The Five-Year Plan constitutes the only formal statement of GOI'senergy and power policies. Although the formalization of power policy, inparticular. is made difficult by the constitutional arrangement in whichresponsibility for power is shared between central and state governments(para 1.08), the Seventh Plan reflects a broad consensus of the objectivesof energy and power policies,i The principal objectives of GOI's energypolicy are to: (a) develop energy supplies economically, at a ratecommensurate with growth in the economy and social needs; (b) substituteindigenous energy resources for imported petroleum wherever this iseconomically feasible; and (c) encourage the rational and efficient use ofenergy resources. Power policy is governed by essentially the sameobjectives, although GOI's short-term strategy focuses on alleviating theacute power shortages suffered nationwide. Over the longer term, achievingleast-cost development assumes greater importance. In addition to theinitial steps of its long-term strategy, GOI's short-term strategy providesfor a number of specific measures to address power shortages, including:
(a) rehabilitating thermal plant - a program involving some 30 plantsis currently being implemented (para 1.17);
(b) accelerating the implementation of ongoing projects - a recentreorganization of Government created a new ministry specifically tomonitor and improve the implementation of public sector projects;
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(c) adopting a more liberal attitude towards captive generation;-
(d) permitting the construction of shorter gestation gas or oil-firedplants (para 1.03); and
(a) improving th 'ualit and reliability of coal supplies byimplementing the majority of the Fazal Committee's recommendations(para 1.02).
1.19 GOI's long-term strategy requires a blend of policies designed toaddress investment, organizational, institutional and financial 'issues. Theamount ef investment available-to the power subsector is limited. TheSeventh Plan allocation is about half the sum sought by the Working Group onPower, a sum which was itself inadequate to elimina'te power shortages.L- ong-term investment priorities ares
(a) accelerated hydro development (para 1.04);
(b) an increased proportion of investment in transmission anddistribution (para 1.06);
:c' the formation of a national grid (pira L1JO);
5d) coal beneficiation to improve both quality and homogeneity_I°-para 1.01);
(e) diversificati#s of the modes for transporting coal used in powergeneration, such as the introduction of coastal shipping or slurrypipelines;
(f) diversification.of the fuels used for power generations GOI nowrecognizes that gas-fired plant, especially combined cycle, has aneconomic role to. play in system development (para 1.03); and
(g) steady growth in the. developumet of nuclear power (para 1.05).
1.20 Long-term orgatiizational/institutional. and financial issues are morecontroversial and OI still needs clearly defined strategies in these areas.0G1 recognizes the institutional and financial weakness of many of the SEBs
but constitutional constraints limit the rate at which it can bring aboutimprovement. QOI is making use of the following measures:
(a) increasing the role of efficient (central sector) institutions,particularly NTPC Cpara 1.10);
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(b) implementing a uniform system of commercial accounting for all SUBs(para 1.16);
(c) requiring, through recent amendment of the Act, that SUBs earn a rateof return of not less than 3X after all expenses and interest (par.1.11), a significantly more stringent financial requirement thanhithertQg and
(d) giving more favorable treotment to private sector proposals for powergeneration, particularly When such developments can be demonstratedto be mobilizing resources that would not otherwise be available tothe public sector.
In addition, as noted, GOT has formed the PPC as a financial intermediary toserve the subsector (para 1.09). It is expected t)'at funds lent by the PFCwould be attractive to SUBs because, at least in part, they would beadditional to agreed plan outlays. However, loans would be subject toconditionality designed to improve the efficiency and financial strength ofbeneficiaries. -
1.21 GOI recognizes that the development and operation of an integratednational grid will be difficult to achieve with the present organization ofthi subsector. Therefore, GOI is contemplating the Vormation of a separatebody with responsibility for the grid (para 1.10). Nevertheless, manycoamercial and institutional problems remain. As yet, GOI has no strategyfor solving them, although, under the Rihand Power Transmission Project, ithas acknowledged that these problems of grid development need to be addressed(para 1.14).
Bank Group Strategy in th! Power Subsector
1.22 The Bank supports the elements of 0 's strategy identified above butbelieves that, while these elements are desirable in themselves, they do notaddress all of the serious deficiencies in the subsector. Additional effortsare needed particularly to address problems in the areas of planning,pricing/load managementt institutional development, and finance. Theprevalent nature of these problems suggests that a sector-wide approachshould be sought. However, the comparative autonomy of the states/SUBs fromthe Center makes it difficult to implement such an approach. Except for theintroduction of unifolrm comercial accounting in SUB., few improvements atthe state level have been realized through umbrella projects coordinated byC&A or REC, primarily because these institutions lack control over SUBs.Consequently, the BaAk is changing the mix of its lending away from umbrellaprojects towards a more direct involvement with individual SBes, wherestate-specific programs can be designed to address areas of deficiency.Initial experience with individual SUBs suggests that the prospects forimprovement are encouraging. Pricing and finance are the most problemtic
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areas (para 1.11) and the Bank has indicated that it will only work withthose snBs that are prepared to improve their financial performance.
1.23 In parallel with lending to individual SEBs, the Bank proposescontinued support for expansion of the central sector, beceise:(a) increased reliance of the states on central sector gen%uation appears tobe the best way to encourage decisions at the state level consistent with thenational interest; and (b) a higher nroportion of total generation providedat economic tariffs by the central sector will help to improve tariff levelsfor final consumers. The difficulties that GOI has experienced in bringinghydro projects into the central sector mean that NTPC will continue to be themain vehicle for the Bank's support of the central sector. NTPC's record todate is impressive. However, it is still far from being a mature institutionand, owing to its rapid-development, it will continue to face problems inwhich it could benefit from Bank support. In the wider context, the Bankbelieves that an institutional review of the power subsector is needed andshould include a review of the organization and functions of CEA. The Bankalso will pursue with GOI the possibility of Bank-financed technicalassistance to improve CEA's capabilities.
1.24 In gddition to identifying new aspects of GOI's strategy, it isappropriate that the Bank also focus on existing aspects of the strategywhere it can do the most to catalyze progress. In this respect, the Bank hasidentified the following:
(a) integration of power supply including the formation of the nationalgrid -- the Bank will continue to support projects such as theCentral and Rihand Power Transmission Projects; the latter will allowthe Bank to be actively involved in studies of long-term transmissiondevelopment (para 1.14);
(b) accelerated hydro development - by broadening lending operations toencompass individual SEBs, the Bank is able to support hydro projectsand, where Bank funds are a crucial supplement to plan outlays, it isable to bring about developments that might not otherwise take place;
(c) elements of strategy that involve concerted action by organizations,both inside and outside the power subsector - the Bank can \coordinate its own lending operations within the different subsectorsin order to improve intersectoral cooperation. Priority examplesconcern improvements in coal quality and transportation, and the useof natural gas for power generation; and -
(d) support of private sector power generation.
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Bank Croup Participation
1.25 The Bank has made 25 loans (US$4.384 billion) and 17 IDA Credits(US$2.424 billion) for Indian power projects (Annex 1.3). Twenty-oneprojects have been completed: 15 for generation, 4 for transmission, and 2for rural electrification. Projects currently under implementation includet11 for generation, 2 of which are hydro, 2 for transmission, 1 for ruralelectrification, and the Kerala, Karnataka and National Capital Phase IProjects which include a mix of generation, transmission and distribution.With respect to NTPC projects, the first-phase projects at Singrauli, Korba,and Ramagundam were commissioned on or ahead of schedule and the plants havebeen operating at high efficiency. The second-phase extensions at thesesites, the Farakka, the Rihand Power Transmission, and the Combined CycleProjectst are proceeding satisfactorily. The Third Rural ElectrificationProject, which has suffered significant procurement problems, is about threeyears behind schedule.
1.26 Through its participation in the sector in recent years, the Bankhas contributed to the creation and development of NTPC which, with 2,500 MWcommissioned in the last five years and around 3,000 NW under construction,is becoming a large and efficient generating company by internationalstandards. The Bank also has assisted one of the few private utilities inthe country, the Tata Electric Companies, in supporting the construction ofthe first 500-MW thermal unit in India at Trombay. Similarly, the Bankpromoted -- through two transmission projects, the Central and Rihand PowerTransmission Projects - the introduction of high voltage, direct currenttechnology. In addition to contributing in a substantive way to the supplyof power, the projects financed by the Bank also have promoted thedevelopment in India of a large public and private manufacturing sector forthe construction of the required equipment (e.g. steam generators,turbo-generators, auxiliary and transmission equipment). While theseindustries still lack the quality and efficiency of their internationalcounterparts, the competition resulting from international competitivebidding will encourage further improvements in the quality and technologyemployed in the equipment they produce.
1.27 A performance audit conduczed in 1980 for the Second PowerTransmission Project (Credit 242-IN) concluded that the project succeeded inhelping the nine beneficiary SEBs extend their transmission systems to meettheir growing power requirements. Utilization of generating capacity inthese SEBs exceeded the appraisal forecast. However, the audit highlightedthe difficulties of effecting institutional improvements in the absence of aclose working relationship between the Bank and beneficiary SEBs. -Anotherperformance audit, conducted in 1985 for the First and Second RuralElectrification Projects (Credits 572-IN and 911-IN), concluded that India'srural electrification program, of which the projects were a part, has helpedthe country to achieve food self-sufficiency, alleviate poverty, andtransform the rural economy. In common with the previous audit, this one
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also emphasized that the Bank should devote resources to deal with the 8BBsindividually.
II. THE BENEFICIARISS
Introduction
2.01 Two entities are responsible for electricity operations in the Stateof Karnatakat the Karnataka Powar Corporation (KPC) and the KarnatakaElectricity Board (KEB). Both are wholly owned by the Government ofKarnataka (GOK) and report to the State's Ministry of Power. KPC isresponsible for generation and KEB is responsible for transmission anddistribution. The Ministry of Power is responsible for overall policy. Toensure coordination between the two entities in policy implementation, KEB'sChairman is a director of KPC, and KPC's Nanaging Director is a member ofKED's Board of Management.
KCARNATAKA POWER CORPORATION
Background
2.02 The Karnataka Power Corporation was incorporated in 1971 as a limitedcompany under the Companies Act.l/ KPC, being the successor to COK's HydroElectric Construction Departmenet received the assets-;under construction ofthe Sharavathi Hydroelectric Project. Initially the Corporation wasconceived as a construction company, but its activities have expanded intothe operation and maintenance of hydro stations, as well as into theconstruction, operation and maintenance of thermal stations. The Corporationcurreptly owns and operates six power stations, with a total generatingcapacity of 2,309 MS, of which 420 MS is thermal. KPC's investment programfrom 1988/89 to 1996/97 (Annex 4.2) comprises 2,522 MW of hydroelectriccapacity and 840 MV of thermal capacity. The Companies Act stipulates, interaliat that the affairs of the Corporation be governed by a Board ofDirectors. The Chief Minist2r of Karnataka is the Chairman of Board withthe Minister of Power as the Vice-Chairman. Thereforep although KPC is not astatutory bodyt 00K exerts considerable influence on the Corporation'saffairs, particularly in the areas of tariffs, planning, and capitalexpenditure.
1/ Originally known as Mysore Power Corpooation, it was renamed in 1974following the change in the State'i name from Mysore to Karnataka.
,;
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Organization
2.03 KPC's organization chart is presented in Annex 2.1. Its Board ofDirectors currently consists of 17 directorst including the Chairman andVice-Chairman. Day-to-day management is the responsibility of the ManagingDirector, usually a senior officer from the Indian Administrative Service,who serves full-time. He is supported by two other full-time directors, theFinance Director and the Technical Director. Two of GOK's secretaries arepart-time Directors, as is KEB's Chairman. The remaining nine part-timedirectors are technical experts: five are members of the Electrical Committeeand four are members of the Civil Committee. The Committecs, which togetherform the Joint Committee, advise the Managing Director and other members ofthe Board on technical matters relating to their respective disciplines.
Personnel and Staffing
2.04 Personnel management is the responsibility of the Company Secretarywho reports to the Managing Director. KPC's personnel at the time offormation consisted of staff deputed from KEB and COK's Public WorksDepartment in addition to the erstwhile Hydro Electric ConstructionDepartment's staff. KPC's staffing as of October 31, 1987, is given inTable 2.1.
Of the 7,985 persons employed by KPC, 4,975 (621) were engaged inconstruction activities, 1,998 (251) in operation and maintenance, and 1,012(132) in other activities. Most of the deputed staff have stayed on apermanent basis. Further recruitment, dictated by growth in hydropoweractivities, was predominantly at junior levels. In contrast, KPC's recentexpansion into thermal generation has necessitated recruitment of seniorstaff. This has been complemented by the extensive use of consultants andre-training of staff.
Planning
2.05 KPC's planning activities are of three main types: generationexpansion planning to meet the demand that is forecast jointly by CMA andKES; project planning from prefeasibility through commissioning andoperation and maintenance planning for the existing generating plants. Inview of the sub&tautial increase in its activities, and the resulting
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complexities in planning, the Corporation is introducing computevs to aid insome of its planning activities. Specificatins have been prepared for thenecessary hardware, software, and technical assistance which are financedunder the first Karnataka Power Project.
Project Implementation
2.06 KPC has satisfactory project implementation capabilities,particularly for hydroelectric projects. The Corporation designs itshydroelectric projects in-house and has recently acquired the samecapabilities for thermal power. plants with the help of Tata ConsultingEngineers. KPC uses its own personnel to erect and commissionelectra-mechanical equipment but uses contractors for major civil works. TheCorporation is guided in the implementation of its hydroelectric projects bya Panel of Experts (POE) which currently includes experts in dam design,.,damsafety geology, foundation engineering, and hydroelectric plant operation.
Opiration and Maintenance
2.07 KPC has competent personnel to operate and maintain its hydrostations and its methods and procedures for operation and maintenance ofindividual hydro schemes are generally satisfactory. The Corporation,however, lacks experience in the modern methods available for optimizing theoperation of tomplex interdependent hydro schemes such as there will be inthe Kalinadi basin. Therefore, in order to optimize plant operation in theRalinadi Hydro Power Complex, a computerized Generation Management Systemis being financed under the first Karnataka Power Project. KPC has prepareda shortlist of consulting firms to specify the system and is finalizing theterms of reference. As yet, KPC also lacks sufficient experience inoperation and maintenance of thermal plants since Raichur Thermal PowerStation is its first thermal power station. Accordingly, the Corporationhas hired Tata Consulting Engineers to assist in the operation of the Raichurunits and to train KPC personnel in operation and maintenance of thermalplant.
Training
2.08 KPC has established extensive in-house training for hydroelectricplant operations and maintenance but also makes regular use of externaltraining both in India and abroad. Training in thermal plant operation andmaintenance is entirely external and has included extensive use of oOI'sPower Engineers Training Institute, deputation to other SEBes operatingthermal plants and to manufacturer's facilities, and use of the 500 MMsimulator owned by the Tata Electric Companies. In addition, Tata PowerProjects' Chief Training Officer is on a two-year deputation to KPC. Incontrast with technical training, the training of finance staff isinadequate, particularly, in relation to financial reporting, monitoring, andplanning. To support KPC's efforts to keep abreast of technical developmentsand to rectify the deficiencies in financial training, the Bank is financing
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"an appropriate training program as a component of the first Karnataka PowerProject. XPC has prepared the training program and wilt shortly inviteproposals from institutions to implement it.
KARNATAKA ELECTRICITY BOARD
Background
2.09 The Karnataka llectricity Board was formed in 1957 in accordance withthe provisions of the Electricity (Supply) Act, 1948. After KPC was formedin 1971, KEB's main function has been to transmit and distribute electricitygenerated either by KPC or imported from other States and centrally-opAratedpower stations. However, the Board also owns and operates four small hydroelectric generating stations with a total capacity of 2% MW. KEB's rYstemcomprises about 17,000 km of transmission lines and aliout 279,000 km ofdistribution lines. As of August 31, 1987, KEB served about 4.1 millionconnections comprising: 2.4 million domestitc; 0.4 million commercial;0.2 million industrial; 0.5 million public lighting; and 0.6 millionagricultural. Legally, KEB is an autonomous entity reporting to QOK'sMinistry of Power. However, although KEB enjoys considerable independence inmanaging its day-to-day affairsp GOK strongly influences decisions relatingto pricing, planning, capital expenditure, and staffing.
Organization
2.10 KU'1s Board of Management is reiponsible for establishing internalpolicies. The Board of Management consists of seven official memberst threeof whom - the Chairman, Member (Finance), and ember (Technical) servefull time. The four part-time members comprise three secretaries to GOX andthe Managing Director of KPC. Additionally,'the leader of KEB's largestlabour union is an unofficial member. Seven chief engineers, the Chief-Vigilance Officer, the Director of Research, and the Financial Adviser/ChiefAccounts Officer are responsible for implementing the Board policies. Fourof the chief engineers are zonal chief engineers in charge of operation,maintenance and capital works (except rural electrification) in the fourzones into which the State is divided.-h!e Chief Engineer (RuralElectrification) is responsible for the preparation and implementation ofrural electrification schemes throughout the State. The remaining two chiefengineers are the Chief Engineer Electricity (General) And the Chief EngineerMaterials Management,*
2.11 In 1984, KE was reorganized to: (a)-facilitate decentralizeddecision making; (b) improve control of critical areas of opr2oation, e.g.materials management; and (c) broaden the responsibilities of the zonal chiefengineers to include capital works (prior to reorganization, theirresponsibilities were limited to operation and maintenance). The Btard'srevised organization chait is presented in Annex 2.2. Although the benefitsof the reorganization are yet to be fully realize4p some progress can be
… ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
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seen, particularly in materials management. However, one impediment torealizing the full benefits of reorganization and the recently introducedcommercial accounting system is the absence of a modern managementinformation system (MIS). An M18, tailored to the new organizationalstructure, is needed to establish appropriate reporting arrangements andstreamline information flows within the Board. COK agreed, duringnegotiations of the first Karnataka Power Project, to cause KEB to engageconsultants, by June 30, 1988, to develop and implement a modern ManagementInformation System for the Board, in accordance with terms of reference anda timetable satisfactory to the Bank. KEB is preparing the terms ofreference for this study.
Personr,.il and Staffing
2.12 KEB's staffing as of September 30, 1987, distributed according toskills, is presented in Table 2.2.
Table 2.2: KEB 8taffing
NUN- of Employees % -
Engineers and Professionals 2,503 6Technicians 8,250 19Clerical and Technical Support 33 480 75
Total 44,233 100
Of the 44,233 persons employed by the Board, about 36,000 are regularemployees and the remainder are contracted for particular construction works.In addition,- KEU employs about 1,066 casual labourers for construction works.eMB's consumer to employee ratio in September 1987 stood at 93:1, which is atimprovement over 79:1 in March 1985. This improvement is primarilyyattributable to the general hiring freeze imposed by OK in 1981. Since1981, the Board's consumer base has increased at an average rate of 300,000per year. Although the biring f-reeze hAs been fairly strict, the policy isflexible enough to enable KEB to hire key personnel where necessary,particularly in areas of finance, accounting and materials management.
Planing
2.13 The Chief Engineer Electricity (General) is responsible for 128'splanning. The Planning Cell is headed by a superintending engineer. KEB'splanning activities have primarily focussed on high voltage transmissionlines and substations. While transmission planning has been generallysatisfactory KEU would benefit from periodic specialist-advice in the areasof protection and reactive compensation. The first Karnataka Power Projectincludes consulting services for this purpose. K(B's distribution planning,currently carried out manually, would benefit greatly from the introductionof computerized planning techniques. This will be achieved under the first----
. .. . .. * -~~~~~~~~~~~~~~.
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Karnataka Power Project through training provided by consultants engaged toprepare a Distribution Master Plan for Bangalore and to provide supervisory.assistance fiSr the preparation of similar plans for other cities inKarnataka. KID has signed a contract with British Electricity International"Ltd. of the United Kingdom to perform the Distribution Planning Study.
Operation and Maintenance
2.14 Eight O01 circles (two per zone) each'headed by a superintendingengineer are responsible for operation and maintenance. KEB's operation andcorrective maintenance of its transmission system are generally satisfactory.It also has adequate procedures for preventive maintenance of itstransmission system. In contrast, only corrective maintenance is done on thedistribution system. Planned preventive maintenance is virtually impossiblesince KEB's net*ork maps and related data are incomplete. The firstKarnataka Power Project includes a component to correct the deficiency byestablishing or updating technical data for the distribution system.
2.15 The productivity of KEB's work crews that build and maintain itstransmission and distribution systems could be improved considerably byintroducing improved work and materials planning along with modern tools andequipment. Improvements in productivity and workmanship are essential toenable KEB to cppe,with the additional work load of rehabilitating itsdistribution system while avoiding excessive staff increases. GOK agreedduring negotiations to caust KEB to engage the'services of an electric,utility or consulting firm by December 31, 1988, under terms of referencesatisfactory to th' Bank, to review KEB's work planning and procedures,introduce new tools and equipment, 'and train KEB's staff in their use.
Load Dispatch
2.16 IA addition to operation of the transmission and distributionnetworks K1B is also responsible for load dispatch in the State. Inpriroiiple, the Southern Region Electricity Board (SRED) is responsible forco,rdinating load dispatch among the States in the Southern Region(K4#rnataka, Andhra Pradesh,'Tamil Nadu and Kerala). However, none of theStates nor the SREB has adequate facilities to,9ptimie load dispatch.Dispatch centres are old and ill-equipped and telemetering and communicationsystems are inadequate. Modern compatible load dispatch facilities areneeded to rectify these deficiencies and facilitate integrated operation ofpower stations in the Southern Region. The BREB, with the technical supportof CIA, has recently completed"a prefeasibility study for such facilities.This has been reviewed by the Bank and found satisfactory. The next step isa full design study. The Bank is financing consulting se'rvices for thedesign study as part of the first Karnataka,Power Project. CEA is preparingterms of reference for the necessarr study.,
..
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Materials Management
2.17 Prior to reorganization, the Chief Engineer, Electricity (General)was in charge of materials management in addition to planning, commercial,'and administrative activities. Under this arrangementp materials managementreceived inadequate attention, resulting in unsatisfactory materials supplywhich in turn necessitated field offices making local purchases. Theprocedures for making these purchases and the equipment bought were oftenunsatisfactory. KEB's reorganization assigned responsibility for materialsmanagements to the newly created position of Chief Engineer, Electricity(Materials Management and Purchases). This position is responsible not onlyfor procurement but aloe for the distribution of materials. The revisedarrangements have resulted in improvements to both the supply and quality ofmaterials. More recently, KEB has started to computerize its inventorycontrol, initially with transmission and distribution line materials,constituting about SOX of total purchases. In parallel, it has establishedcodes for all inventory items with a view to total computerization ofinventory control.
Training
2.18 KBB trains its lower level staff, i.e. technicians, meter readers,operators etc., at its own training centers. Two of the training centersare situated ia Bangalore and one each in Hubli, Mangalore and Gulbarga.Engineers are trained on entry to the Board but, prior to 1983, receivedalmost no subsequent training. In 1983 about 150 engineers attended a 5-weektraining program on technical aspects of electricity utility management,sponsored by GOI's Ministry of Power, at the Indian Institute of J4anagement,Bangalore. mED is currently making arrangements to repeat this program on aregular basis. As noted (para 2.13), training in distribution planning willbe provided by the consultants responsible for preparation of the BangaloreDistribution Master Plan. Training of financial personnel has beeninadequate but this shortcoming is being addressed under the first KarnatakaPower Project.
III. THE PROJECT
Project Setting
3.01 Karnataka has no indigenous coal resources and so, apart from importsfrom the National Thermal Power Corporation or neighboring states, the supply-of power in the State depends primarily on the development of localhydroelectric resources. The potentially exploitable resources are sizable(equivalent to about 7750 MN) and economically attractive but lengthy project-.-:preparation, primarily caused by the need to obtain environmental clearancfs,have left the State with chronic power shortages.
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3.02 The Karnataka Electricity Board (KES) has tried to cope with theishortages by imposing restrictions on the use of electricity by its largeconsumers. The level of these restrictions has been increasing so that largeconsumers now are allowed to use only 40Z of their contracted demand and 80Xof their historical energy consumption. Industries have reacted to theserestrictions by installi:ig thair own generating capacity, usually in the formof diesel generators. Although industries should be permitted to invest incaptive plants as a second best solution, the use of diesel -- a high valueimported fuel -- is sn expensive way to meet thco State's power requirement.It therefore is vital that development of the State's low cost hydroelectricresources be accelerated to meet the power demand. In this regard, theSharavathi Tailrace Scheme (STRS), a component of the proposed Project, isparticularly attractive sinc6 it benefits from the regulation provided byupstream reservoirs and involves no resettlement and minimal submergence offorest land.
3.03 Karnataka is a large state with an area of 191,800 sq. km. Over1,900 MW of its 2,300 MW of generating capacity is located in the southwestof the State, while its major demand centers such as Bangalore are located inthe southeast, 400 km away. Over 1,700 kW of transmission lines at voltagesof 220 kV, 66 kV and 33 kV form the transmission grid. About 279,000 km ofAl kV and 400/230 volt distribution lines and 350 MVA of distributiontransformers complete the link with the final consumers. Underinvestment inboth the transmission and distribution networks has led to two problems: poorquality electrical service and high energy losses. Outages are frequent andlarge voltage fluctuations are widespread. The outages result in a loss ofproduction, and the voltage fluctuations impose a substantial cost onconsumers in the form of equipment daAage and the expense of installingvoltage stabilizers. Energy losses, which average about 222 of netgeneration, also represent a substantial cost to the economy. Although someof these losses are due to non-technical problems involving metering andbilling, others are clearly technical in naiture. Technical losses could bereduced by at least 52, saving the economy about US$27 million per year.
3.04 The first Karnataka Power Project is making it possible for the Stateto develop the second stage of the Kalinadi hydroelectric complex (270 MW)and reinforce part of the transmission network by adding a 400 kV link fromKaiga in the northwest to Bangalore in the southeast, and about 300 km of220 kV lines. The first project also includes: a study to determine aneffective treatment for the leak in the Talakalale dam, upstream of the StRS;a reactive compensation study of the transmission system; and preparation of,a 20-yeir distribution master plan for a=ngalore, the largest city in theState. The proposed Second Karnataka Power Project is designed to complementthe first one by assisting the State in developing atu additional 240 MW ofhydroelectric plant and repairing the serious and potentially dangerous leakin the Talakalale dam, and, in parallel, increasing the emphasis on neededihvestment in transmission and distribution. The transmission component isintended to improve reliability and reduce energy losses in the bulk powersystem; it is based on studies recently completed by KES. The distributiin
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component addresqes needs in the Bangalore system that are so critical theyare justified independently of the long-term master plan about to beprepared. Distribution improvements will help KEB avoid furtherdeterioration in service, especially in the commarcial2 and industrial areasof the city, and prevent damage to equipment. In addition, the proposedSupervisory Control and Data Acquisition (SCADA) system will allow KEB torespond more quickly to system disturbances, thereby reducing outage times.The Project will also introduce to Karnataka cost-effective new technologiessuch as mobile transformers.
3.05 In terms of institutional development, the first Karnataka PowerProject focuses primarily on the management and financial performance of KEBand KPC. The proposed Second Project complements this initiative byemphasizing improvement of KEB's operational efficiency. KEB's procedures,equipment and tools for building and maintaining its transmission anddistribution systems have not kept pace with modern developments. TheProject includes a provision to obtain assistance from a modern electricutility to revise these procedures, specify the necessary tools and equipmentand train KEB personnel in their use.
Project Objectives
3.06 The main objectives of the proposed project are tos
(a) alleviate the acute shortage of generating capacity in Karnataka andthe Southern Region by developing-the STRS, a low cost indigenoushydroelectric resource; -
(b) provide adequate transmission capacity to evacuate power from theSTR;
(c) reduce energy losses to economic levels and improve service qualityby strengthening the State's transmission grid and Bangalore's -'
distribution system;
(d) reduce distribution system capital and operating costs by introducingnew technologies; and
(e) reduce installation, operation and maintenance costs by providingmodern training, tools, and equipment.
Project Description
3.07 The main features, of the p'roposed project, being implemented by KPCare:
(a) construction of the 240 MS Sharavathi Tailrace Hydroelectric Scheme(STRB) at Gersoppa;
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(b) compensatory afforestation associated with the STRS; and
(c) repair of the Talakalale dam which is leaking and is located upstreamof the STRS.
3.08 The main features, of' the proposed project, being implemented by KEBare:
(a) construction of about 2SO km of double circuit 400 kV, 250 km ofdouble and single circuit 220 kV transmission lines, and 225 km ofsingle circuit 220 kV transmission lines on existing towers, togetherwith the associated substations;---
(b) laying of about 6 km of 66 kV underground cable together withconstructon of the associated substations;
(c) reinforcement of the 11 kV primary distribution grid in Bangalore;
(d) implementation of a computerized distribution system control center;
(e) acquisition of tools and equipment and training in their use fortransmission and distribution construction and maintenance; and
(f) consulting services for design and construction supervision of 400 kV- lines and substations.
Annex 3.1 describ a the project's components in detail.
Project Engineering
3.09 KPC has completed final design and has prepared draft bid documentsfor the Sharavathi Tail!ace hydroelectric scheme.
3.10 The rock conditions at thi site of the hydroeltcttic scheme are goodand do not present unusual features beyond KPC's experience and establishedcompetence. However, given the size of the Gersoppa dam, KPC agreed, duringnegotiations, to retain the services of the Panel of Xperts (POE), appointedunder the first Karnatak4 Power Project forr,Kadra and"Kodasalli, to reviewthe design of the STRE dam and monitor its construction, including any designmodifications during construction. Since the integrity'of the STRS dependson the safety of upstream structures, KPC agreed that the terms of referencefor the POw-will include a periodic review of the safety of, and thereforemaintenance programs relating to, upstream structures.s
3.11 WKPC is investigating the internal conditions of the Talakalale dam tofind an effective way of eliminating the leak through this 6E0 m high masonry
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structure which is a critical component of the Sharavathi hydroelectriccomplex. The Corporation, under the first Karnataka Power Project, hasagreed to supplement its in-house engineering capability by retaining theservices of a consulting firm, with experience in this highly specializedarea of engineering. It has evaluated proposals from three consulting firms.[PC expects to award a contract to the winning firm by June 5, 1988 with aschedule that will lead to the preparation of bid documents for the remedialwork by June 30, 1989. Annex 3.1 gives more details of the leak through theTalakalale dam and the proposed remedial measures recozended from thepreliminary diagnostic work undertaken to date.
3.12 KEB has completed feasibility studies for the transmissioncomponents. It will complete detailed route surveys for all of the linesby December 1988, and bid documents for the steel transmission towers andother transmission items by March 1989.
3.13 KEB's staff has adequate experience in the design and construction of220 kV transmission lines and substations, but it does not have adequateexperience with 400 kV facilities. To remedy this deficiency, KEB has agreedto employ consultants to design a&. supervise construction of the 400 kVfacilities. 'I
3.14 [EB's staff has completed the design and specification of most of thedistribution equipment. Exceptions are items, such as mobile transformersand gas-insulated substations,.which are being introduced into Karnataka forthe first time. KEB has agreed to amend the terms of reference of BritishElectricity International Ltd4t engaged under the first Karnataka PowerProject to prepare a distribution master-plan for Bangalore, to-include thepreparation of specifications for these items. About 501 of the biddocuments for the distribution equipment have been completed and theremainder will be completed by June 1988. The engineering and detailedspecification of the proposed Supervisory Control and Data Acquisition(SCADA) system for Bangalore's distribution network are included in the termsof reference of the same consultants. Bid documents for this component ofthe project will be completed by December 31, 1988.
Project Implementation and Construction Schedule
3.15 KPC will manage the construction of the ST7R and the repair of theTalakalale dam. It has successfully completed more complex hydroelectricschemes than the STRS, for example, KalinAdi Stage I. KPC's projectorganization for the proposed project is similar to that used for Kalinadistage I. The Bank is satisfied that [PC is capable of completing the projectaccording to the planned implementation schedule.
3.16 KPC will retain the Central water Commission (CWC) to provideengineering support during const'uction of the STRS. It has also agreed tohire a specialist consulting firm to formulate a procedure for repairing theTalakalale dam and supervise the remedial work (para 3.11). The Bank has
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cleared KCC's report evaluating the consultants' proposals, for formulatingand supervising a repair procedure for the Talakalale dam, and recommending acontract award.
3.17 Preparatory work for the M$TR including access roads to quarries anda temporary construction camp was started in October 1987. The contract forriver diversion was also awarded and work has started in October 1987. Workon the diversion will be suspended during the monsoon. Very heavy rainfallat the project site during the monsoon -- about 4,400 mm 'n four monthslimits construction work to the eight months per year between monsoonseasons.
3.18 Work on the dam will begin in October 1989 once the river has beendiverted. According to the detailed implementation schedule given in Table Iof Annex 3.2, the first generating unit will be commissioned by April 1994and the fourth and final unit by October 1994.
3.19 The schedule for the Talakalale dam repair will be finalized afterthe field investigations are completed and the scope of the remedial work isbetter defined. Based on the available information, it is anticipated thattwo stages of grouting will be required: an initial grouting program lasting6 to 8 months starting in October 1989, followed by regrouting one year laterto eliminate any remaining seepage. To ensure the safety of the Talakalaledam before significant construction is done on the STRS, during negotiations,KPC agreed to present to the Bank a satisfactory plan for repairing theTalakalale dam and sign a contract with a qualified firm ,y October 31, 1989to perform the necessary work.
3.20 KEB will manage the implementation of the transmission anddistribution components of the proposed project. The Bank is satisfied thatKXi's project organization, with the help of consultants (paras 3.13 and3.14), is adequate to complete the project according to the proposed schedule(Table 2, Annex 3.2). The work on the transmission and distributioncomponents, including the remaining design activities, will span a period ofabout five years. All lines and substations will be commissioned byJune 1993.
Project Costs
3.21 Table 3.1 shows a summary of project costs. The total cost of theProject including physical and price contingencies (but excluding aboutUS$82 million equ^valent of taxes and duties) is US$385 million equivalent,of which US$160 million (421) represents the foreign exchange costs.Interest during construction adds US$103 million to the financing required.The Project costs are based on March 1988 prices which are derived from:(a) recent quotations for the civil works of the Kadra and Kodasallihydroelectric schemes of the Kalinadi complex; (b) recent quotations forworks and equipment similar to other project components; and(c) manufacturers' proforma quotations. US$12 million (net of taxes and
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duties) is allowed for the repair of the Talakalale dam. This figurereflects the assumption, based on the advice of a geotechnical expert, thatthe remedial action will comprisi a two-stage grouting program. Designs forthe hydroelectric scheme and the distribution components are in sufficientdetail to provide a reliable basis for cost estimates. The cost ofconsulting services is based on an estimated total of 300 manmonthat of whichabout 40 manmonths are expected to be from expatriate experts. Average costsfor consulting services are estimated at US$14,000 per expatriate manmonthand US$2,000 per-local manmonth inclusive of fees, overheads and expenses.An allowance is also made for non-time based services. Engineering andadministration is assumed to be 10 of base cost.
3.22 Physical contingencies of 10% on civil works and 400 kV transmissionfacilities, 8X on transmission facilities of 200 kV and below and 5% onmechanical and electrical equipment are allowed. These result in overallphysical contingencies of about 8% of the base cost. Physical contingenciesfor civil works are in line with the degree of knowledge of site geology, thecurrent status of design and the relatively simple nature of the works to beexecuted. Physical contingencies for the transmission lines are consistentwith the relatively flat and open terrain they will traverse.
3.23 Price contingencies, which amount to about 18% of the US$371 millionbase cost plus physical contingencies, are based on annual inflation ratesfor local costs of 8X for 1988/89, 7% for 1989/90 and 6% thereafter, andannual inflation rates for foreign costs of 4X. The exchange rate used forthe base year 1988/89 is 13.0 Rupees per US$. Interest during constructionis calculated on the basis that loan finance for the Project will bear aninterest rate of 11.5% per azuum, which is the current interest rate for QOKloans to KPC and KEB. Annex 3.3 presents detailed project cost estimates.
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Table 3.1: Project Costs 8ua_ary
-Rupess Million-- ------US$ Hillion-"Inesetment costs Local, Foreign Total Local Foreign Total
Total Financing Required 5347 2805 8152 374.9 195.2 570.1ur _m m, mam a
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Project Financing
3.24 The proposed Bank loan of US$260 million equivalent amounts to about531 of the total project cost, net of duties and taxes, and is equivalent tothe estimated foreign exchange component of US$160 million plusUS$100 million of the local cost component. The loan will be to theGovernment of India (GOI) and GOI will onlend it to the Government ofKarnataka (00K), which will in turn onlend approximately US$130 million toKPC and US$130 million to KEB. The onlending terms from COI to GOK will bethose applicable to Central assistance to Karnataka for development projects.The onlending terms from GOK to KPC and KEB will be repayment over twentyyears, including a five-year grace period, at an interest rate of not lessthan 11.5% p.a. GOI will bear the exchange and interest rate risks. TheProject financing plan is given in Table 3.2. GOI may consider suppliers' orexport credits for the major equipment packages if a successful bidder orother agency provides an acceptable financing proposal for the lowestevaluated bid in cash terms. In this event, the Bank would considerreallocating the funds no longer needed for financing these items to otheritems in the project, as appropriate.
Table 3.2: Project Financing Plan(US$ Million equivalent)
I of ComponentSource Local Foreign Total Financing
Any cost overruns will be financed initially by GOK, but will ultimately beborne by KPC and/or KRB, as applicable.
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Procurement
3.25 The procurement arrangements for the proposed project are sumoarizedin Table 3.3. All contracts for civil works estimated to cost tUS$5 millionor more, and all contracts for the supply of goods estimated to costUS$200,000 or more, will be procured by international competitive bidding(ICB). Bidders for civil works contracts will be prequalified. ICBcontracts represent about 92% of all project procurement. The contracts forcivil works are expected to attract bids from local firms; the contracts forthe supply of goods are expected to attract bids from firms manufacturingsuch goods in India. In these cases, the Bank's standard domestic preferenceprovisions will be applied in the evaluation and comparison of bids forcontracts procured by ICB.
3.26 Only US$ 28.1 million worth of works, goods, and services will notbe procured by ICB, consisting of:
(a) US$ 25.1 million of miscellaneous civil works and switchyards, andoffice and field equipment which will be procured by localcompetitive bidding (LCB) procedures that have been reviewed by theBank and are considered acceptable (foreign contractors and supplierswill not be precluded from participating in LB);
(b) US$0.8 million of equipment for limiting fault current at existing11 kV substations which is proprietary and will thesefore be procuredby direct contracting;
(c) Us$ 1.6 million of training and consulting services which will beprocured following the Bank's Guidelines for the Use of Consultants;and
^(d) US$ 0.6 million of compensatory afforestation which will consist ofplanting and maintaining trees on an area equivalent to thatsubmerged by the project and will be executed by GOKDF using ForceAccount, the most economic way of implementing the compensatoryafforestation.
3.27 Bank financing will cover approximately 30 packages. Vorks contractsworth US$5 million or more and goods contracts worth US$1 million or more,representing more than 901 of the amount to be financed by the Bank, will besubject to prior review by the Bank. The remainder will be subject toselective post-award review.
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Table 3.3 Summary of Procurement ranento(Us$ Million) al
Procurement MethodICB b/ LCB Other c/ Total
STk8 Dam and Powert-4use 68.6 7.1 75.7(44.6) (-) (44.6)
at Amolpts include taxes an4 duties (US$82 million), and figures inbrackets indicate the Bank-financed portion.
b/ Including US$0.8 million procured by direct contracting.e/ Others: Force account and administrative overheads.
Disbursements
3.28 Bank funds will be disbursed against: (a) 100Zj1a-f the CIP (ex-factoryif manufactured in India) cost of equipment and materials procured under ICB;.(b) 701 of the cost of repair of the Talakalale dam which will be subject toICR; (c) 651 of the cost of other civil works 4ubject. to ICR; (d) 80 'of thecosts of compensatory afforestation; and (d) 1001 of the total cost of
. ] ,~~~~~~~~~
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consultants' and training services. Disbursement will be fully documentedezcept for payments against civil works, training, equipment, materials,consultant, and compensatory afforestation contracts each less thanUS$20o0000 equivalent. Such disbursements will made against statements ofexpenditures (80Es), the documentation of which will not be sent to the Bankbut will be retained, by KPC or KEB as appropriate, for inspection bysupervision missions. Standard procedures for auditing SOBs will apply. Tofacilitate disbursements a special account will be established with anauthorised allocation of US$20 million. Annex 3.5 shows the estimateddisbursement schedule as derived from the standard profile for power projectsin India. The closing dtte will be December 31, 1996.
Project Operation and Maintenance
3.29 The Sharavathi Tailrace Hydroelectric Scheme will form an integralpart of the Sharavathi hydroelectric complex. The total catchment area of.the Sharavathi river upstream of the STRS is about 2,143 sq km, including151 sq km of free catchment area downstream of the existing Sharavathihydroelectric station. About 93Z of the annual inflow into the STRSreservoir is fully regulated upstream by the head reservoir at Linganmakki.This reservoir has a live storage of 4,294 million cubic meters, equivalentto 941 of the average annual flow at that point in the river. The majorhydroelectric stations in Karnataka are designed for annual load factors inexcess of 601. Other hydroelectric stations have limited storage capacity orpower generation is conditioned by water use for irrigation purposes. TheKarnataka power system is thus short of peaking capacity. The STRS isideally suited for peaking duty since the available flow is fully regulatedupstream and headrace conduits would be extremely short (80 m). Optimizationstudies have confirmed that the optimum installed capacity should be 240 MSwith an annual load, factor of 301. On the basis of operation studies for theexisting generating stations and reservoirs on the Sharavathi river and theproposed STRS, annual firm generation at Gersoppa will be 622 GWh with, onaverage, about 32.6 GWh per year of secondary energy. With respect tomaintenance of the STRS, KPC agreed, during negotiations, to send to theRank, no later than one year before the expected completion of thesvtructures, details of its arrangements for inspecting and maintaining theSTRS dam and associated structures to ensure their continued safety. Giventhe dependence of the dam on upstream structures the maintenance program willalso encompass these.
Proje,t Monitori-ng
3.30 During negotiations, GOK agreed to cause KEB, and KPC agreed to sendto the Bank quarterly progress reports covering physical works, consultants'work, costs, disbursements, and administrataive aspects of the Project, thefirst of which should be for the quarter ending December 31, 1988. Inaddition, KID and KPC agreed to prepare and send to the Bank annualfinancial, statistical, and administrative reports.
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ProJect Risks
3.31 Except for those risks pertaining to the Talakalale damp there are nounusual technical risks associated with the Project. The risks related tothe Talakalale dam are being minimized by the use of specialized consultantsto investigate and supervise the repairs needed. There is a risk that thoseconsultants will find that more extensive repairs are required than thetwo-stage grouting program currently envisaged. However, if *Nis occursneither the rationale for nor appropriate timing of the STR, will beaffecte4. The geological and geotechnical information relating to the STRSis adequate and indicates good foundation conditions. KPC and KEB havesufficient staff available to carry out the work who are experienced insupervising and executing activities similar to those of the project.Consultants will be used in all areas in which their in-house expertise islacking.
Water Rights
3.32 The Sharavathi river lies entirely within the State of Karnataka.GOK owns the water rights and there are no pending water rights disputes thatcould affect the Project's construction or operation.
Resettlement
3.33 The STRS involves no resettlement since there are no humansettlements in the area that will be inundated by the reservoir, or in theareas earmarked for compensatory afforestation. This has been confirmed by aforestry consultant who visited all the sites and Bank staff who visited thedam site. Furthermore, there is no indication that the residents of thesparse settlements surrounding the proposed reservoir are in any way usingthe area to be inundated.
3.34 One small Hindu temple containing a Hero Stone is the only existingstructure in the area to be inundated. KPC will relocate the temple prior tocompletion of the dam.
Forestry and Environmental Aspects
3.35 About 700 ha of forest will be lost as a result of the constructionof project infrastructure and submergence by the reservoir. The loss offorest, equivalent to about 3 ha per MW, is low for a hydroelectric project.GOI's Department of Forests and Wildlife (DOFW) has cleared the STRS inaccordance with the Forest (Conservation) Act, 1980. The principal conditionof DOWF's clearance is a requirement for compensatory afforestation and thenecessary provision for this has been made in the proposed Project (pars3.07). KPC intends to eniage the services of the Government of Karnataka'sDepartment of Forests (GOKDF) to perform the compensatory afforestation.
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3.36 GOKDF has already prepared a c.kmpensatory afforestation plan completewith cost estimates. The Bank is satisfied that the plan, budget, andinstitutional arrangements are adequate to cultivate an area of new forestplantations equivalent to the area of forest lost"due to construction of theSTRS.1/ The non-forest land required for the compensatory'afforestation hasbeen transferred to GOKDF. Forests planted on this land will be protectedunder the Forest (Conservation) Act, 1980, of the Government of India.
3.37 Between 50 and 70 ha of forest will be lost as a result of theconstruction of the 35 km of transmission line from the STES to Talaguppa.A relatively small loss is expected from the construction of the othertransmission lines which cross terrain largely devoid of forest. AlthoughDOFW clearance for the STRS constitutes "in princlple" clearance for theassociated transmission line from the STRS to Talaguppa, formal clearancesfor this and certain other lines included in the proposed project are stillrequired. During negotiations, GQK agreed to cause KEB to complete thedetailed route surveys and make formal applications for~'DOFW 'clearance for--all transmission lines in the proposed project requiring such clearance, byDecember 31, 1988. J
3.38 The STRS has been cleared by GOI's Department of Savironment and thelank is satisfied that the project poses no serious environmental problems.The dam site is located on the edge of the Sharavathi Valley WildlifeSanctuary and only about 100 hectares of the area to be inundated are withinthe wildlife sanctuary'. Furthermore, there is nothing to suggest that theforest that will be lost is more valuable as a wildlife hAbitat than theremainder of the forest that will be left intact. The loss of 100 hectiresof the sanctuary may result in the loss of about 0.25X of the wildlifehowever, exhaustive studies of the wildlife reserves in the Western Chatsindicate that rare species of wildlife such as panthers, tigers,bison andelephants inhabit higher elevations, typically above 450 m. Therefore,submergence, which will be at an elevation of 55 m, will have no significantimpact on these species, especially since there -is no natural corridor acrossthe river in the project area. The compensatory forests which are in smallpatches will be useful primarily in meeting basic hulmn needs because theyare located near villages and will contain a wide variety of commerciallyvaluable tree species.
3.39 Vector and water borne diseases such as malaria, filaria and Japaneseencephalitis could potentially increase in the area ofj the STRS. KPC willtake the appropriate preventative and containmetnt measures, one of which isto establish a health unit at the construction site. There are-no industries
1/ COI s Department of Environment requires that forest land lost to ahydroelectric project be compensated by either: afforestation of anequivalent area of non-forest land; or forest improvement-on two timesthe area of degraded forest land.
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or urban areas upstream with effluents to affect the quality of the water inthe STUS reservoir.
3.40 Forest cover around the reservoir is good and GOR's watershedconservation measures are good since the entire watershed is a forest andwildlife reserve. Erosion and sedimentation are not expected to be problemsgiven the thick forest cover over almost the entire catmhment area of theSharavathi river.
3.41 After the STRS reservoir is filled, there will be minimal change fromthe present river flow conditions downstream. At present the water flowfollows the daily cycle of electticity demand with a low flow at night, ahigher flow during the day, and two peaks around 7 AM and 7 PM. While thereservoir is being filled, there will be a reduction in the downstream flow.KPC is preparing a diagram of downstream flow as a function of reservoirfilling and is performing an analysi; of the effects of the interruption ofdownstream flow on the potintial for salt water intrusion. This study willenebte KPC to fl l -th1reservair in a -way to_mtimize adverse environmentaleffects. GOK has formed a committee, chaired by the Chie"t Sectaty,vtth--the responsibility of ensuring that environmental safeguards are respected.
-IV. ~FINANCE -
KARNATAKA POWER CORPORATION
Background
4.01 The financial fiairs of KPC are governed prigaritr by the CompaniesAct-=of 1956. However, as a generating company, KPC is also subject to theElectricity (Supply) Act of 1948. The Electricity (Supply) Act requiresState Electricity Boards to earn a minimum,return of 31 after interest, andgenerating companies to earn a minimum rett1rn as specified by the promotinggovernments. The Act also permit State Governments to legislate a higher-return when appropriate. For KPC, a minimum return of 31 after interest isrequired by OOK.
4.02 From 1981t82 to 1985/86, KPC expanded its capital investment by about401. 'Despite its high growth, KPC was able to earn a satisfactory rate ofreturn (after interest), averaging 3.41 per annum for the period, on its eetfixed assets (Annex 4.2). While this performance weakened in 1986187, du_,primarily to high interest charges cnd the failure of the monsoon, it isforecast to recover slightly in 1987/88 as a result of an average tariffincrease of about 331. Assuming normal hydrologic conditions' resulting incamore favorable hydro-thermal power mix, KPC's revenue-in 1988/89 is expectedto improve to a level sufficient to earn the required minimum-return of 3Xafter interest. Because the financial viability of both KEB and KPC isheavily dependent on the success or 'failure of the monsoon, KRB has agreed toinclude in a tariff study (para 4.09 and 4.32), being carried out under the
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first Karnataka Power Project (Loan 2827-IX), a component to examine thefeasibility of establishing a Hydroelectric Stabilization fund. The studywill investigate the role of GOK, KPC and KEB, the sources for creating theinitial cash reserves, the tariff levels required to support the fund, themethod of operation, and analyses of watershed hydrology. The followingparagraphs review the finances of KPC. Several actions proposed under thefirst Karnataka Power Project to enable KPC, inter alia, to achieve theminimum 3X rate of return stipulated by COY in accordance with theElectricity (Supply) Act are reaffirmed un4er the proposed second KarnatakaPower Project. -
Accounting 8ystems and Financial Organization
4.03 KPC's finance division is headed by a Finance Director who is asenior member of the Indian Audit and Accounts Service. The daily managementof the financial operations is the responsibility of the Financial Controllerand his supporting staff. In general, KPC's financial personnel haveadequate qualifications and experience. However, it lacks staff trained inusmig computer software and hardware for financial reporting and pLanning.The largely manual reporting and planning systems-result in delays in fixedasset reconciliation and delaya in effecting internal financial controls.KPC practices an accrual-based, double entry accounting system withwell-defined eight-digft code of accounts suitable for computerization. Inview of KPC's rapid growth in investments over the next decade, its manualfinancial reporting and planning systems would no longer accommodate itsneeds efficiently. The first Karnataka Power Project includes financing forappropriate computer hardware and software, technical assistance, and -training to improve KPC's performance in financial reporting, monitoring, andplanning. KPC is now in the process of-acquiring computer systems for itsTeebnical and Finance Divisions.
Audit Arrangements
4.04 Internal Audit. KPC's organization includes an internal audit unitheaded by a Deputy Controller of Accounts reporting to the FinancialDirector. The unit is responsible for auditing all divisiobs of theCorporation, and preparing manuals detailing appropriate internal auditprocedures. Recently, KPC strengthened its internal audit unit by havingqualified,accounts personnel working full-time in the unit. Previously, thestaff of the unit had several unrelated responsibilities. With full-timestaff, and the computerization of KPC's accounts, the unit is expected tooperate more effectively in the future. However, in view of KPC s rapid ,expansion of its investment program, additional staff will be needed in thenear future. /
4.05 External Audit. KPC's accounts are audited, in accordance withguidelines issued by the Accountant General of India (AC), by Chartered.xAccountants appointed by the Company Law Board (constituted by GOI) for aperiod of one year renewable up to three years. The audit is 2reviewed by
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the AG. The guidelines issued by the AG and the quality of past audits aresatisfactory. The Corporation is required by the Companies Act to finaliseits accounts and have them audited within six months of the end of thefinancial year. XPC has generilly been able to adhere to this time schedulealthough minor delays have arisen, particularly when new auditors have beenappointed. XPC agreed, under the first Karnataka Power Project, to furnishits audited accounts together with the auditor's and AG's reports to the Bankwithin seven months of the end of each financial year. Its 1986/87 accountswere audited and sent to the' Bank on schedule. This agreement has beenrepeated for the proposed Loan.
Pixed Asset Accounting
4.06 KPC maintains its fixed asset registers at historical- cost, asrequired by GOI.. In order to reconcile fixed asset registers with actualassets, RPC conducts a physical verifiv4tion of fixed assets once every threeyears. However, the subsequent reconciliation and concomitant adjustment ofaccounts has frequently taken too long. The April 1983 physical verificationof fixed assets exercise is nearing completion. The next physical fixedassets verification is scheduled for 1989. KPC agreed, under the firstKarnataka Power Project, that its reconciliation and adjustment of fixedasset accounts will in future be completed within six months of the date ofthe verification. The Bank will monitor KPC's efforts-in maintaining properfixed asset accounts during implementation of the proposed loani;
Insurance
4.07 During construction, KPC's assets are insured against risk of damagedue to fire, explosion, etc. by contractors. After commissioning,-KPC holdsinsurance policies which conform to accepted utility standards in India.
Accounts Receivable
4.08 KPC bills its sole customer, ReB, monthly and payment is due within,30 days. However, despite concerted eff arts by KPC, accounts receivable atthe end of 1986/87 were Rs 1,237 million representing about 8.1 months'sales. KBB has been unable to settle its bills promptly because it in turn,has been unable to collect receivables owed by several public sector -
customers (para 4.30). As noted in para 4.30, through the adjustments ofaccounts among GOK, KPC and KRB, KPC's receivables is expected to be clearedby 1989/90 as agreed upon under the first Karnataka Power Project.
Tariffs
4.09 KPC's tariffs, like KID's, are de facto set by GOK in the light ofthe recommendations of a tariff committii which includes representatives ofGOK, XS, KPC, the Karnataka Chamber of Commerce & Industry and the KarnatakaConsumers Association. KPC' s-tariffs have generally been flat rate and havebeen set on a station specific basis to cover the relevant historic costs.
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Historicallyt tariffs have generally been such as to allow KPC to comply withGOK's directive in accordance with the Electricity (Supply) Act although,prior to a recent amendmentt the financial performance requirement was onlyloosely specified. Average revenue has increased from 7.1 paisa/kWh in1980/81 to an estimated 33.9 paisa/kVh in 1987/88 (Annex 4.2), representingan annual average increase of 26X, well above the prevailing rate ofinflation. Compliance with the amended Electricity (Supply) Act (para 4.01)would increase the average tariff in constant 1987 price terms from 24.6paisa/kWh in 1988/89 to 38.9 paisa/kWh in 1995/96, representing an increaseof 582 in real terms. Although, in general, flat rate-tariffs will fail togive appropriate economi-c signals to KEB which is responsible for loaddispatcht the prevailing shortages of power in Karnataka and the SouthernRegion are such that this is unlikely to be causing significant distortioncurrently. However, further study is necessary to derive a tariff structurewhich would reflect as closely as possible the long run marginal costs ofelectricity supply. This exercise is included in the terms of reference forthe tariff study being carried out under the first Karnataka Power Project(para 4.32).
Past Financial Performance
4.10 Detailed financial statements for 1982/83 - 1986/87 are presented inAnnex 4.2. Key dota and financial ratios are summarized in Table 4.1.
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TAb1i64.13 Sumary of KPC's Performance 1982/83 - 1986/87
1982/83 1983/84 1984185 1985/86 1986/87
Generation (CMb) 7,326 7,316 7,927- 7,222 7,465Sales of Blectricity (0Mb) 7,175 7,159 7,741 7,016 7t169Ave. Revenue (Paisa/kWh) 9.9 14.0 f 15.8 17.8 25.4Total Revenue (Rs M) 718 1,021 1,233 1,330 1,936Operating Expenses (Rs M) 405 544 >784 792 1,174Operating Income (Rs M) 313 476 450 538 762Operating Ratio (Z),' 56 53 64 60 61Net. Income (Rs K) 1/ 56 192 155 205 19Rat4 of Returnas per Covenant 2/ 1.6 4.9 3.8 5.2 0.3
Rate of ReturnBefore Interest 3/ 8.3 11,8 11.2 9.3 9.3
Debt Service Coverage Ratio 0.6 1.7 1.7, 1.1 0.9Contribution to Investment -
Program (2) 4/ 4 13 5 '5 -26
1/ After interest. i=i2/ Income after interest as a percent of historically valued net f
assets. '2 -
!MJ Incoaie before interest as a percent of historically valued average netfixed assets.
41 Based on 3-year moving average.,
Kc's finuancial performance during the period 19833/84-19,85/86, as measured by'-the return on assets (after int rest)', met 'the requirement 'of- the-Electricity -
(Supply) Act '(para.4.01). In , 82/83, its return on,assets (after interest)fell short of the Act's requireaipnt due largely to highepr interest paymentsduring the year. 11,1986/87, despite of a 431 increase in the averagetariff, the-return on assets (after interest) was 'only 0.3Z due to theinterest charged to operatipps during that year. In the period from'19"2/83-1986/870 KPC's contribution to investment was low'primarily d4ie to:(i) a heavy debt service burden as a result of the practice of financinginvestment mostly through debt, exacerbated by GOK's conversion of it& loans(since 1984/85) from 30 -td 15, yearn repayment terms with no grace; and (ii)low tariff levels. To help alleviate this situation, OOK agreed under thefirst Karnataka Power Project tot (i)'reduce the debt-service burden of KWPCby lengtbening the loan repayment terms of all new loans to KPC; and(ii) assist kPC ip recovering its receivables. Vith respect to the lowtariff, under the Electricity (Supply) Act, GMK can legislate higher tarifflevels to enable KPC to earn the required 31 rate of return (after interest).The Bank will monitor closely COK's action in rehabilitating KPC's finances(pare 4.12) and KPC's compliance with the Bank's financial covenants.
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Present Financial 4osition
4.11 KPC's Balance Sheet (budget) at the end of 1987/88 is presented inAnnex 4.3 and summarized in Table 4.2.,
'Table 4.2: KPC'- Balance Sheet (Budget), March 31,- 1988-(Re Million)
12,127Current Assets 2,280Lesst Current Liabilities 684Net Working CapitalE 1,596Total Assets 13,124
Equity and Liabilities
wOK Equity 560General and Other Reserves 931 -
Total Equity 1,491Long Term Debt 12 233Total Equity and Liabilities 13,724
COK's equity contribution of Rs 560 million was made at the tite of formationof the Corporation in 1071 (para 2.02). Subsequent capIta-expeaditure hasbeen financed primarily by debt, resiulting in an estimated debt/equity ratioat the end of 1987/88 of 89/11.. The Corporation's debt service coverage isestimated to improve to-1.5 in 1987/88, due to GOK's'action (pare 4.30) inoffsetting accounts among GOK, KPC and KEB in accordance with an action,program aimed at reducing KPC*s and K8B's receivables. Despite a 332increase in the average tariff, the Corporation's rate of return (afterinterest) in 1987/88 is estimated to be marginally below the 32 stipulated bythe glectricity (Supply) Act, due to the large Aount of.interest chatged tooperations during the year. KPC's substantial debt service and the seiveredrought conditions experienced at the same time continued to impede 'itsfinancial performance, and overshadowed its achievements in: (i) recoveringits receivables'(para 4.30); (ii) revising significantly its tariff levels(pare 4.09); and (iii) str'engthening its8institutional capabilities(para 4.03-4.05). OOK has recently formed a comittee comprising high levelrepresentatives..from ,OK KPC and KRB to address the weak fitancial positionsof KPC'and KU,# and to evaluate actions needed to rehabilitate the finances
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of these electric utilities (pare 4.12). The Bank, under the proposedproject, will monitor the progress of the committee's work.
Financial Recovery Program
4.12 [PC's and [E8's financial recovery is dependent on: (i) theoccurrence of good monsoons; and (ii) the progress of the committee inrehabilitating the finances of both organizations. With respect to theimpact of the drought, a Hydroelectric Stabilization Fund study has beenincluded as a component of a tariff study (para 4.02) to examine thefeasibility of creating financial reserves and using the reserves tosafeguard the financial performances of KPC and KEB in the event of futuredroughts. The methods of creating and operating the Fund will beinvestigated under the study. Aside from the drought effect, other financialdifficulties faced by KPC and [RB isclude: ti) high debt/equity ratiorepresenting inadequate equity contributions and/or substantial debt burdenas a result of financing investments mainly by debt; (ii) excessively highreceivable levels; and (iii) COK loans with onerous repayment terms, of 15years with no grace, which are not commensurate with the nature of the assetsbeing financed. GOK has formed a tripartite committee involving high levelrepresentatives from GOK [PC and KEB to 'address [PC's and KER's financialdifficulties. To restore [PC's and KEB's financial position, the committeeis expected to address the following specific issues and recommendappropriate actions to improve them shortly: (i) level of accountsreceivable; (ii) tariff levels; (iii) loan repayment terms on all newORKloans; (iv) equity contribution through cash infusion; (v) equitycontribution through conversion of outstanding GOK loans to equity;(vi) adjustment of investment programs in line with available financialresources; (vii) cost reduction measures; and (viii) recovery of lossesincurred by KESB in rural electrification. Under the first Karnataka PowerProject, the entities have agreed to: (i) maintain acceptable levels ofaccounts receivable; and (ii) revise the tariffs sufficiently to comply withthe minimum 3X rate of return (after interest). G0K has agreed to make allnew loans to KPC and KEB with repayment terms of 20 years including 5 years'grace. The Bank will monitor closely the progress of the committee inaddressing the needed financial recovery program described above, and thoseactions agreed under the first project, during supervision of the proposedproject. The progress in restoring a strong financial position to bothinstitutions is expected to be gradual, particularly in the case of KER whosefinancial performance has been most severely affected by the recent drought.
Forecast Investment and Financing Plans
4.13 KPC's investment plan for 1988/89 to 1995/96 is presented inAnnex 4.2. The Corporation plans to invest about Rs 32.9 billion(US$2,533 million) over the period. About Rs 12.4 billion (US$950 million)will be invested in thermal capacity and about Rs 20.5 billion(US$1,583 million) in hydro capacity.
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4.14 KPC's financing plan for the investment program is summarized inTable 4.3.
Table 4.3:t KPC's Financing Plan 1988/89 - 1995/96
During the investment period from 1988/89 to 1995/96J, the requiirement forfunds is estimated at Rs 46,456 million (US$3,573 million). Net internalcash generation is expected to account for Rs 3,784 million (US$291 million)representing 82 of the total requirements. The remaining 922, amounting toRs 42,672 million (US$3,282 million) will be financed through borrovingsincluding ITCs9 share of the proposed loan, Rs '1,690million (US$90million). Given past experience, it is expected that the financingrequirements will be adequately met in a timely mannebf/
4.15r 001 wilt be the recipient of the proposed loan of US$260 million andwill onlend the proceeds to GOK as per standard terms of central assistanceto 'arnataka. GOK proposes to relend about US$130 million of the proceeds tothe Corporation at its normal interest rate for loans to KPC, which currentlyiV 11.51. 00I will carry the fooeign exchange, interest rate and-guaranteerisks. The conclusion of a Subsidiary Loan Agreement between 001 and KPC,satisfactory to the Bank, specifying (a) an interest rate of not less than11.5Z pa; and (b) a repayment term of 20 years including 5 years' grace, willbe a condition of effectiveness of the proposed loan.
. . . .~~~~~~~~~~~~~~
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Income Taxes
4.16 KPC is liable for income tax. However, its investment program, theaccelerated depreciation allowed for tax purposes, and its past tax ldsesare such that tax relief is provided well beyond the period i)f the financialprojections. A tax equalisation reserve is, therefore, not necessary.
Forecast Financial Performance
4.17 KPC's projected financial statements for the period 1988/89 - 1995/96and the assumptions on which these are based are presented in Annex 4.2. TheCorporation's projected operating results are summarized in Table 4.4.
Debt ServiceCoverage Ratio 1.1. 1.7 1.3 1.2 1.f 1.2 1.3 1.2Contri. to Invest-ment Program (X)4/ 5 37 8 2 3 0 8 5
1/ After Interest'.2/ Income after interest as a percent of historically valued net fixed assets.3/ Income before interest as a percent of historically valued average net
fixed assets. -: +.-.4/ Based on 3-year moving average.
The financial proJections are based on normal hydrologic conditions, loanrepayment terms of 20 years with 5 years' grace, and reflect tariff increases
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driven by compliance with the required minimu 3Z rate of return afterinterest (para 4.01). The tariff increases would be slight in the initialyears and more significant in the later years of the period. During theperiod from 1988/89 to 1995/96, it is estimated that KPC's tariff would haveto be increased at an average annual rate of 14X in current terms, almost 81in real terms given average projected inflation of about 6S per annum.
4.18 As noted in para 4.14, internal cash generation will financeapproximately 81 of total capital investment and working capitalrequirements. However, the time profile of internal cash generation needsclarification. The relatively good performance in 1989/90 is partlyattributable to GOIC's action in offsetting outstanding accounts between GOK,KPC and KEB. Contribution to investments in the other years are low due tothe heavy investment taking place at that time (Annex 4.2) and the impact ofthe heavy debt-service burden resulting from the practice of financinginvestment almost exclusively through debt. As a consequence, thedebt/equity ratio is expected to remain on the high side at about 90/10 from1988/89 to 1995/96. The bulk of the debt is owed to COR. GOK is now lookinginto ways to correct this situation (para 4.12). The Corporation's projecteddebt service coverage ratio is expected to remain abowe 1.1, an improvementover the performance of the most recent years.
Financial Reporting and Monitoring.
4.19 Under the first Karnataka Power Project, KPC agreed to: (i) furnishto the Dankt by December 31 of eath year, a report of [PC's forecastoperational and financial performance for the ensuing finaneial year,specifying the t4tions that will be taken to strengthen the financialposition of KPC to enable it to comply with the financial covenants; (ii)furnish its audited accounts together with the auditor's and AG's reports tothe Dank within seven months of the end of each financial year (para 4.05);and (iii) take all measures necessary including adjustment of tariffs toenable it to earn the minimum rate of return (after interest) of 31 per annum(para 4.01). During negotiations, an understanding was reached that [PCwould continue to send to the Bank its forecast operational and financialperformance for the ensuing year by December 31 of each year. The otheragreements have been repeated under the proposed loan. Under the proposedproject, in addition to monitoring the above agreements and those under thefirst Karnataka Power Project, the Bank will monitor closely the progress ofthe committee in its efforts to rehabilitate the finances of [PC and KID(para 4.12).
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KARNATARA ELECTRICITY BOARD
Background
4.20 KEB's financial activities-are governed by the Electricity (Supply)Act of 1948. The Act stipulates, among other things, the classification ofassets for depreciation purposes, audit procedures and the financialperformance criterion for the Board. The Act requires electricity entitiesto earn a minimum return of 3Z after interest (para 4.01). KEB was aprofitable utility until 1984/85. However, KEB has incurred losses from1985/86 owing to: the burden of interest on accumulated debt; lossesincurred in rural electrification; its failure to increase tariffssufficiently in a period of rising costs; insufficient power available forsale; and high technical and non-technical losses. Consequently, under thefirst Karnataka Power Project, several actions designed to complement K[E'sown initiatives -- e.g. in the areas of accounting systems (para 4.21),internal audit (para 4.23), tariff measures (para 4.32) -- were agreed uponwith the Bank to assist the Board's financial recovery and thereafter improveits financial viability. [SB has consistently increased its tariffs st anaverage annual rate of 131, the latest of which was in May 1987 with a 161increase. In addition to the tariff increase, the other actions srecurrently being implemented. However, the severity of the recent drought inKarnataka bas further weakened the financial position of [E8 and it isestimated that in 1987/88 [EB's rate of return of net fixed assets will be atits lowest level for more than a decade. A period of gradual financialrecovery is nee4ed, which will be closely monitored under the proposedproject, before KEB's financial position is restored. To this effect, GOKrecently established a committee that will make recommendations on theactions that need to be taken to assist KEB's financial recovery (para 4.12).To mitigate the impact of future drought conditions on [EB's finances, astudy to examine the feasibility of establishing a Hydroelectricstabilization fund is being financed under the first Karnataka Power Project(para 4.02). K[B'-s finances are discussed in the following paragraphs.
Accounting Systems and Financial Organization
4.21 Under the Third Rural Electrification Project (Loan 2165-IN), GOI*agreed to cause all SEBs to introduce a uniform Commercial Accounting System(CAS). Accordingly, KRB introduced the CAS with the help of consultants in1984/85, thus making it the first SEB in India to do so. The Board has hadabout three full years operation under the CA8 and is currently compiling theaccounts for 1987/88 in accordance with the new system. Accounting staffhave been trained in the operation of the CAS and a special unit, headed by aDeputy Controller of Accounts, has been set up for trouble shooting.Initially, capitalization of interest during construction had been optionalunder the CAS. However, GOI has issued a notification to all 8EBE, includingKEB, requiring capitalization of interest during construction.
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4.22 KID's finance function is headed by the Finance Member (para 2.10)who i; a senior member of the Indian Audit and Accounts Service. A PinancialMAvisor/Chief Accounts Officer is responsible for day-to-day management offinancial operations; he, in turn, is assisted by three Controllers ofAccounts, one each for the finance, accounts and commercial functions, andtheir supporting staff. The qualifications and experience of KIB's financialstaff is generally satisfactory. However, in order to: (a) facilitate thesmooth operation of the CAS; (b) define clearly the duties andresponsibilities of accounting and internal audit staff; and (c) assist KEBin establishing a financial planning unit, the Board needs an organizationand management study of its Finance Wing. Under the first Karnataka PowerProject, GOK agreed to cause KEB to engage consu'ltants, by December 31, 1987,to carry out this study. KIE subsequently requested that this study alsoincorporate the objectives of the Fixed Asset Accounting Study (para 4.26)which was agreed to, largely because it involved the same finance function.KEB is currently finalizing the terms of reference for the combinedOrganization/Management and Fixed Asset Accounting Study, which is nowexpected to get underway by June 30, 1988.
Audit Arrangements
4.23 Internal Audit. KEB has an internal audit unit headed by acontroller of Accounts who reports directly to the Finance Member. Theunit's responsibilities include audit of all monetary transactions,I.e. capital expenditure, stores purchases, billing and collection, amongothers. The Board on its own initiative engaged consultants to undertakea study of its internal audit unit with a view to increasing itseffectiveness and consisterdy with the CAB. The Bank has reviewed theresults and recommendatioas of the study and found them to be satisfactory.The internal audit will be quicker and more effective once the implementationof the study's recommendations, currently in progress, is completed. -
4.24 External Audit. The Comptroller and Auditor General of India,through his representative, the Accountant General of Karnataka (AG), isresponsible for audit of U8B's accounts. The AG has his staff resident atKUB, engaged in concurrent audit of the Board's accounts. The quality ofthe audit is satisfactory. The Board is required by the Electricity (Supply)Act to finalize its accounts and have them audited within six months of theend of the financial year. In the three years prior to 1981/82, KES had itsaccounts audited in about eight to nine months. In 1981/82, however, owingprimarily to a dispute over workload tnorms for clerical staff, thefinalization of that year's accounts was substantially delayed, resulting indelays in finalizing the accounts of subsequent years. The dispute overworkload norms has largely been resolved and UEB has made substantialprogress in clearing the backlog as evidenced by the recent completion of the1986/87 audit. UEB is currently preparing the 1987/88 accounts. 00K agreed,under the first Karnataka Power Project, to cause UEB to furnish to the Bankits audited accounts, together with the Auditor's Report within nine months
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of the end of the financial year under consideration beginning with 1986/87.This covenant has been repeated for the proposed Loan.
4.25 In its audited acccunts for 1984/85, KEB was carrying about-Re 690million in Inter-Unit Accounts, which were used to record transactionsbetween divisions until the accounts department received supportingdocumentation. However, incomplete documentation has been a chronic problemand many items in this account should have been reallocated to otheraccounts.* KEB estimates that about 60% of the assets recorded in theInter-Unit Account have been used in capital works and therefore should havebeen reallocated to work-in-progress or gross fixed assets. The balance isbelieved to have been used for operation and maintenance purposes and henceshould have been expensed. KEB also carries a 'Stock Incidentals Account'which amounted to Rs 135 million as of March 31, 1984. This account whichwas used for maintenance works, needs to be expensed entirely. Accordingly,KEB has expensed about Rs 51 z'illion in its accounts for 1984/85 leaving abalance of Rs 84 million in its Stock Incidentals Account as of March 31,1985. The CAS requires all transactions to be charged directly to therelevant head of account i.e., capital works, maintenance, etc. andtherefore suspense accounts would cease to exist once those mentioned aboveare cleared. In order to ensure their prompt clearance in a manner whichwi-ll not jeopardise KEB's ability to meet the rate of return requirement infuture years (para 4.20), the Board would need to make the necessaryadjustments to its accounts for 1985/86. GOK agreed, under the firstKarnataka Power Project, to cause KRE to (a) make an extraordinary write-offof the balance of the Stock Incidentals Account as of March 31, 1985 in theaccounts for 1985/86; and (b) clear, by March 31, b988, the balance of theInter-Unit Account as of March 31, 1985, by appropriately capitalizing orexpensing-the contents of the account. KEB has written-off the balance ofRs 84 million in its Stock Incidentals Account, and to date has reduced theInter-Unit Account to Rs 432 million. This amount is expected to be clearedby 1988/89.
Fixed Asset Accounting
4.26 KEB's fixed asset registers reflect historical costs as required byCOI. These registers do not accurately reflect the value of the Board'splant an4 equipment. The value of some assets is understated owing toanomalies in recording (para 4.27). Under the first Karnataka Power Project,the Board agreed to undertake a Fixed Asset Accounting study in order toestablish: (a) a physical inventory of its fixed assets; (b) appropriatedepreciation charges; and (c) fixed asset registers at the division level asrequired by the CAS. Following REB discussions with the Bank, the Bankagreed that the Fixed Asset Accounting study be combined with theOrganization and Management of'its Finance Wing (para 4.22) since bothstudies involved the finance function. As noted in para 4.22, KRB iscurrently finalizing the terms of reference for the combined study.
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4.27 -The investments and intangibles accownt on KBB's balance sheetpreviously included the cost of a submerged dam at the town of Hirebhaskar,the book value of which amounted to Rs 19 million at the and of 1984/85. KIDin line with an agreement under the first Karnataka Power Project, has nowwritten-off the book value of the submerged dam.
Insurance
4.28 During construction KEB's assets are insured a8ainst risk of damagedue to fire, explosion, etc. by contractors. After commissioning, KEB holdsinsurance policies which conform to acceptable utility standards in India.
Metering and Billin;
4.29 KEI bills all of its consumers monthly except those in the domestic-lighting and agricultural categories. Domestic lighting consumers are billedbionthly and agricultural consumers having irrigation pumps above 10 HP arebilled quarterly. Those with pumps 10,. AP or below are billed semi-annually.With the exception of this last group, 'all of the: Board's consumers aresupposed to be metered. However, o*ing partly to the lack of adequate funds,many new connections that should,have had meters were made without them.Furthermore, many faulty meters' were not replaced. Imputing bills for theseconnections is problematic and has resulted in a substantial understatementof revenue. To address -thi, the Board issued a directive that, beginningApril 1, 1985, no new coAsumers, who should be metered, will be connected Ywithout a meter. At tit time, to meter all connections that should bemetered, t1e Board needed to procure and connect about 400,000 meters. Underthe first Karnataka'Power Project, GOK agreed to cause Ml, by March 31, -1989: (a) to prpoide meters for' all connections that shoild be inetered; and(b) reduce, an4"maintain thereafter the number of 'faulty meters at less than1.5X of the total number of metered connections,, in accordance with amonitorable"action program acceptable to the Bank. Since 1985/86, in e*esof 430,000'meters have been connected, however as of December 1987, th%number of faulty meters exceeded 2.2X of the total number of metei`e4<-connections. The Bank will continue to monitor KEB's efforts in rducing thenumber of faulty meters-to-less than 1.5ZTof metered connections/4
Accounts Receivable
4.30 In collecting against electricity bills, KUS is aided by theKarn=taka Electricity Board (Recovery of dues) Act, 1976, a progressive pieceof legislation that enables KEI to collect overdue ariears owed to it withthe assistance of COK revenue officials who ensure'. tecovery by attachment of,the property of defauLters, iif necessary. The Board's collection proceduresrequireS all bills are to be paid within 15 daye of their presentation withdefaulting cone-mers paying penalties at the, Fate of 22 per month. Chronicdefaulters are being systematically disconnected and reconnection charges arehigh. With such measures, KmB has been able to maintain good control ofaccounts receivale from the vast majority of its consumers. However,
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collection from the public sector has still proved problematic. A limitednumber of public sector debtors accounted for more than 752 of the Boardsreceivables of Rs 1,142 million, representing 3.1 months' sales as ofMarch 31, 1987. The principal debtors includet 5 COX industrialundertakings, 10 water supply boardst 12 municipalities and several villageauthorities. A consequence of these arrears is that RI8B has itself beenunable to pay all that it owes to KPC (paras 4.08 and 4.31). GOK agreed,under the first Karnataka Power Project, to cause the Board to collect, byApril 1, 1990, its accounts receivable from its principal debtors, as ofMarch 31, 1987, in accordance with a monitorable action program satisfactoryto the Bank. During negotiations, GOK presented a satisfactory actionprogram involving the adjustments of aecounts among GNK, KPC and KEB whichwould reduce KEB's receivables from its principal debtors (as of March 31,i987), and in turn would reduce KPC's receivables by 1989/90. However, asiseable amount of KEB's receivables from its non-principal debtors,totalling approximately Rs. 709 million remain in arrears. A high levelcommittee has recently been formed to address the receivables situation ofboth KEB and KPC (para 4.12). The Bank will monitor KEB's receivablesituation and the progress of the committee closely under the proposedproject. To prevent KEB from accumulating excessive new receivables, OKalso agreed, under the first Karnataka Power Project, to cause KEB tomaintain its accounts receivable with respect to sales after March 31, 1987,at no more than the equivalent of the preceding 2 months' sales. Thiscovenant has been repeated under the proposed Loan.
Accounts Payable
4.31 KIB's accounts payable to KPC, its main supplier of electricity,stood at Rs 1,237 million as of March 31, 1987, almost exactly equal to theamount owed to the Board by its principal debtors (para 4.30). As noted inpara 4.30, GOK has taken action to resolve the receivables of both KPC andKEB, and clear the amount outstanding as of March 31, 1987 by 1989/90. Inorder to ensure that the problem of high accounts payable on account ofelectricity purchases from KPC, the converse of which are KPC's receivables,does not re-occur (para 4.08), GOK also agreed to cause KEB to: (a) open arevolving letter of creditt beginning October 1, 1981, in favour of KPC foran amount equivalent to one month's estimated purchases from KPC; and(b) clear any sums owed to KPC with respect to sales after April 1, 1987,not covered by the letter of credit, within 30 days. KEB has made progressin opening a revolving letter of credit which now covers about 801 of theestimated electricity purchases from KPC. However, due to the severity ofthe drought which created a significant revenue shortfall, and increased costof power purchases from neighboring states, KEB is currently unable to payoff the 201 shortfall not covered by the letter of credit within the 30 daystimeframe. The proposed project will closely monitor KEB's efforts inreducing its arrears.
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Tariff,
4.32 As noted in para 4.09, KEB's tariffs are in effect set bt GOK in thelight of recommendations of a Tariff Committee. Including a 271 tariffincrease in October 1985 and a 161 increase in May 1987, KEB's average tariffhas increased from 27.1 paisa/kWh in 1980/81 to an estimated 63.2 paisa/kMhin 1987/88, an average annual increase of 131. Compliance with theElectricity (Supply) Act would raise the average tariff in constant priceterms to over 88 paisa/kWh by 1995/96. Although the trend in the averagetariff is encouraging, structural aspects of KEB's tariffs also need to beconsidered. A tariff study is needed, in particular,-to:
(a) analyse the economic costs (marginal costs) of supply to the variousdifferent classes of consumer, taking into accoutt the voltage ofsupply and the particular time profiles of demand;
(b) examine thPe case for introducing time-of-day tariffs for largeconsumersi particularly industrial -- at present, industrialconsumers face energy and demand charges which are independent oftime of use; and
(c) examine tariff/metering arrangements for agricultural consumersincluding a cost benefit analysis of the policy whereby consumerswith pumps of 10 HP or less are offered unmetered supplies(para 4.29).
A study to address these and other issues is to be carried oat under thefirst Karnataka Power Project. As noted in para 4.09, a study is alsorequired' of KPC's tariffs and, given the interdependency of the tariffstudies and the Hydro Stabilization Fund studies (para 4.02), they will becombined into one study. A steering group including representatives fromKEB, KPC and OOK will be formed to oversee the combined study.
Past Financial Performance
4.33 KIB's financial statements for the years 1981/82 - 1986/87 are givenin Annex 4.3 and summarized in Table-4.5.
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Table 4.51 KIB's SummaEry Operating Results 1981/82 - 1986/87 i
1981/82 1982/83 1983/84 1984/85 1985/86 1986/87
Energy Available to 7,896 8,112 8,234 9,213 9,619 1,015KEB (GVh)
Losses (X) 21.6 22.3 21.4 22.8 21.3 22.98nergy Sales (GWh) 6,193 6,299 6,475 7,114 7,573 7,831Average Revenue/kvh (Paisa) 31.1 32.0 34.2 41.3 49.5 57.3Total Revenue (Re M) 2,142 2,376 2,825 .3,601 4,328 5,134Operating Expenses (Re M) 1,803 1,915 2,489 3,239 4,182 5,312Operating Income (Rs M) 339 461 336 362 146 -178Operating Ratio (Z) 84 81 .88 90 97 103Net Income (Rs M) 1/ 178 285 132 109 -267 *> -739Rate of Return (X)as per Covenant 2/ 7.1 10.2 4.2 3.1 -6.8 -17.1
Debt Service Coverage Ratio 1.5 2.1 1.4 0.9 0.4 0Contribution to InvestmentProgram (X) 4/ 61 28 15 3 5 -81
1/ After interest.21 Income after interest as a percent of bistorically valued net fixed
assets.31 Income before interest as a percent of histovically valued average
net fixed assets.V/ Based on 3-year moving average.
4.34 XEB's.financial performance from 1981/82 to 1982/83 was satisfactorybut deteriorated significantly during 1983/84 to 1986/87. In the period1983/84 to 1986/87, REB had to purchase a much greater proportion of itsenergy at high cost-from neighboring states, which resulted in the Board'soperating costs/kWh sold increasing by 75X during those years. During thesame period KEB's average revenue/kWh sold increased only by 50X 1/.Consequently, the Board's operating ratio, which averaged about 831 during1981/82-1982/83, deteriorated to an average of 95% during 1983/84 to 198$/86.Similarly, unsatisfactory trends were exhibited by other financialindicators: return on,assets, debt service coverage and-internal cash
1/ -Tariff rates were on average incteased by 501 during this period butthe mis of consumption was adversely affected by disproportionate tbadshedding of industrial and commercial consumers who pay the highestrates.
. 0~~~
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generation. In 1986/87, KEB's return on net fized assets (after interest)was -17X due largely to high interest charges, the impact of the recentdrought, and insufficient tariff to cover rising cost. To alleviate thissituation, under the first Karnataka Power Project, GOK agreed to:(i) reduce the debt-service burden of KEB by lengthening the loan repaymentterms of all new loans to KEB; and (ii) assist KEB in recovering its,receivables. With respect to the tariff, under the Electricity (Supply) Act,COK can legislate higher tariff levels to enable KID to comply with thefinancial covenant. The Bank will monitor closely GOK's action inrehabilitating KEB's finances (para 4.12) and its compliance with the Bank'sfinancial covenants.
Present Financial Position
4.35 KEB's Balance Sheet (Budget) as of March 31, 1988 is presented inAnnex 4.4 and summarized in Table 4.6.
Table 4.6: KEB's Balance Sheet (Budget), March 31, 1988(Re Million)
Investments & Intangibles 19Inter Unit Accounts 282Current Assets 3,267
12,438
Equity and Liabilities
Capital Contribution 363General and Other Reserves -1,010Total Equity -647StMff Superannuation Fund 530Security Deposits 1,023Long Term Debt 7,417Current Liabilities 4,115Total Equity and Liabilities 12,438
KaD's estimated rate of return (after interest) in 1987/88 is about -281 dueprincipally to the impact of the severe drought ad hi gh interest charges.As a consequence of the accumulated losses incurred during the -last threeyears, and the fact that 'KE has not received additional equity from COK
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except at formation, its equity is estimated to be negative in 1987/88. Porthe same reasons, the Board's current ratio, debt-service coverage andcontribution to investment deteriorated to the lowest levels of the pastdecade. Despite a 1OX average tariff increase and reduction in itsreceivables of about Rs 790 million, KEB's substantial debt-service and itsrevenue losses as a result of the drought continued to impede its financialperformance. O0K has recently formed a committee to address both KPC's andRBB's financial difficulties (para 4.12).
Financial Recovery Program
4.36 The financial difficulties of REB are similar to those of KPC exceptfor their magnitude. As noted in para 4.35, it is estimated that in 1987/88,its equity will be negative and its rate of return (after interest) will beat its lowest in a decade. While the financial recovery period wouldprobably be somewhat longer than that of KPC, the actions needed torehabilitate its finances remain essentially the same of those required ofRPC (para 4.12).
Forecast Investment and Financing Plans
4.37 RIB's investment plan for the period 1988/89 to 1995/96 is presentedin Annex 4.3. The Board plans to invest about Rs 16.5 billion (US$1,269million) over the period. About Rs 3.1 billion (US$239 million) will beinvested to counstruct 400 kV and 220 kV transmission lines and Rs 2.8 billion(US$213 million) to erect related substations. In addition, KEB plans toinvest Rs 4.1 billion (US$318 million) in distribution improvement anddevelopment, s 1.9 billion (U$144. million) in rural electrificationschemes, and the remainder Rs 4.6 billion (US$355 million) for non-Planprojects.
4.38 REB's financing plan for the above investment program and increasedworking capital requirements are summarized in Table 4.7.
Table 4.7: KXB's Financing Plan 1988/89 - 1995/96'
Re' Million MU$ Million 5-',
Reuirements
Capital Investment 1/ 19,456 '1,497 83Working Capital Increase 440g 314 17Total Requirements .3,S4 . 1,811
Total Borrowings 18,856 so__'Total Sources . 23,542 1,811 100
I/ Includes interest during constructiqo., it Includes internal cash generation, capittl contribution,' staff
:perennuPtson fund and security deposits.
During,the 1988/89 to 1995/96 period, "the total requirement for funds isestimated at about Rs\'24 billion (US$1,811 million). Net internal sourceswouldaccount for 201 of'the total requirements. The remaining 80X, would be'financed though borrowings including KM's share of the propoeed loan. It isexpected that tbh financing requirement will e adequately;met in a timelymanner, asbais been the practice in palt years.
4.39 /OI will be the recipient of the proposed loan of U 260 million andwill #ilena the proceeds:to OOK as pei'standard terms of central assistanceto Karnataka. OK proposes to relend.`about US$130 mi)ison ofAthe proceedsto KXB at its normal interest rate fot loans to KEB, witch cutrently is1l.SZ. Under the proposed loan, ONK .greed to onlend the proceeds to KmD atan interest rate of not less than lliZ per annum with a repayment period of20 year including 5 years' grace. 00K will"carry the foreign exchange,interest ratehand guarantee risks.
Income Taxes
4.40 KRB is liable for income tax. Mowever, its investment program, the.ac.c4elratdAdpreciAtion,allowed. for-taxputrposes, AndAit- past tax l2osses--, -
= > .e q ~~~~~~~~~~~~~- * , *. -'- * V
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are such that tax relief is provided well beyond the period of financialprojections. A tax equalisation reserve is, therefore, not necessary.
Forecast Financial Performance
4.41 KEBls projected financial statements for the period 1988/89 - 1995/96and assumptions on which these are based oe presented in Annex 4.4. TheBoard's projected operating results are gumarized in Table 4.8.
1/ After interest2/ Income after interest as a percent of historically valued net fixed assets.3/ Income before interest as a percent of historically valued average net
fixed assets.4/ Based on 3-year moving average
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The projections are based on projected KPC sales (para 4.17), and? loanrepayment period of 20 years with 5 years' grace, and future tariff increasesdriven by compliance with the requirement to earn a minimum 32 rate ofreturn. Assuming normal hydrologic conditions, to satisfy the minimum 32rate of return, K[B's tariffs are expected to be revised after 1989/90 atan average annual rate of about 152 in current terms, or about 92 per annumin real terms assuming an average projected inflation rate of 62.
4.42 KEB's gross fixed assets in operation are projected to increase fromRs 9 billion in 1988/89 to Re 23 billion in 1995/96, representing an increaseof about 1602. Over the same period, the rate of return (before interest) onhistorically valued assets will average 8.52, and internal cash generation asa percentage of its investment program will average 20%. The capitalstructure is expected to improve from a negative equity of Rs 1,263 millionin 1988/89 to a positive position of R,- 1,716 million in 1995/96. TheBoard's projected debt service coverage ratio is estimated to improve from0.4 in 1988/89 to 1.2 in 1995/96. The good financial performance projectedin 1989/90 is in part due to GOK's plan of offsetting accounts among GOK, KPCand KERB (para 4.30) during the year. GOK along with [PC and KEB have formeda committee to study ways to rehabilitate the finances of both KPC and KEB(para 4.12). The Bank will monitor closely the progress of the committee.
Financial Reporting and Monitoring
4.43 Under the first Karnataka Power Project, GOK agreed to cause KEB to:(i) furnish to the Bank, by December 31 of each year, a report of KEB'sforecast operational and financial performance for the ensuing financialyear, specifying the actions that will be taken to strengthen the financialposition of [EB to enable it to comply with the financial covenants; (ii)furnish its audited accounts together with the auditor's and AG's reports tothe Bank within nine months of the end of each financial year (para 4.24);and (iii) take all measures necessary including adjustment of tariffs to earna minimum rate of return (after interest) of 32 per annum (para 4.20).During negotiations, an understanding was reached that [EB would continue tosend to the Bank forecast operational and financial performance £or theensuing year by December 31 of each year. The other agreements have beenrepeated under the proposed loan. Under the proposed project, aside frommonitoring the above agreements and those under the first Karnataka PowerProject, the Bank will monitor closely the progress of the committee in itsefforts to rehabilitate the finances of KPC and KEB (para 4.12).
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V. PROJECT JUSTIFICATION AND ECOOMIC ANALYSIS
Least Cost Analysis
5.01 The principal components of the proposed Project are the STES, to beimplemented by KPC, and the transmission and distribution program to beimplemented by KEB. During project preparation, KPC and CEA carried outstudies to determine the optimum installed capacity of the Sharavati Tailracescheme, based on estimates of the cost of alternative generation in theSouthern Region. These studies indicate that the appropriate installedcapacity is 240 MW (i.e. 4 x 60 MW) as proposed. In addition, CIA hasprepared a least cost system expansion plan for the Southern Region, based onthe load forecast given in Annex 1.2. The earliest feasible implementationof the STRS forms an integral part of the least-cost plan. The assumptionsused, including the load forecast, and the results of the optimizationmodelling have been reviewed by the Bank and found satisfactory. With regardto the transmission and distribution components, an appropriate range ofoptions (involving different configurations, voltage levels and timing) wereanalyzed with respect to capital costs, operating costs and losses, and theBank is satisfied that the transmission and distribution program chosenconstitutes part of the least cost development of power supply to Karnatakaand the Southern Region.
Internal Economic Rate of Return
5.02 Benefits of the components in the proposed Project cannot readily beseparated from those of other investments in generation, transmission anddistribution. Therefore, having established that these form part of theleast cost expansion plan for the Southern Region, it is appropriate to carryout a cost-benefit analysis of the plan as a whole in order to ensure thatthe expansion envisaged is desirable. For this purpose, a "time-slice" ofthe Southern Region's investment program has been analyzed. Capital costs ofthe investment program (covering generation, transmission and distribution)together with incremental operating and fuel costs are given in Annex 5.1.The benefits of the investment program relate mainly to the incrementalconsumption which it makes possible.l/ A minimum measure of benefit, ignoringconsumer surplus, can be derived from incremental sales revenue. In theabsence of adequate class-specific consumption conversion factors, thestandard conversion factor (estimated to be 0.8) has been applied to convert
1/ The program may also lead to benefits in terms of a reduction in thecost of meeting existing demand, particularly through fuel savings.However, the energy deficit is such that by far the greater part of theoutput available from-plants in this program will lead to increased sales.Fuel savings resulting from this program are likely to be small and thiselement of the benefits has therefore been ignored.
Ir
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financial revenue into a measure of economic benefit. On this basis theminimum internal economic rate of return achieved by the Southern Regionprogram is 4X.
5.03 However, this estimate is more a reflection of the level of tariffsthan of the economic merit of the investment program. The estimated minimumeconomic rate of return, 41 is less than the established opportunity cost ofcapital, and this is indicative of the fact that retail tariffs in theSouthern Region, particularly agricultural tariffs, are substantially lessthan LRMC (para 1.12). In reality, the program will confer benefits inexcess of those described above. There will be consumer surplus associatedwith the incremental consumption; consumers' reactions to the severeshortages of power experienced at present, and expected for the foreseeablefuture, suggest that willingness to pay substantially exceeds present tarifflevels. In addition there will typically be other external benefits.
5.04 In order to derive a more realistic internal economic rate of return,it is useful to estimate a measure of consumer surplus, at least forindustrial and agricultural consumers. Their willingness to pay will berelated to the costs of autogeneration and diesel pumping respectively. Manyconsumers are presently observed to find these options economic when publicsupply is not available. Annex 5.1 presents an estimate of dieselautogeneration costs at Rs 1.88/kUh. It wouldt however, be unreasonable toassume that all industrial consumers would be willing to pay this price forthe whole of their consumption from the public supply system. Therefore, asa conservative measure, it has been assumed that the consumer surplusattributable to incremental sales can be derived from an average of the costof autogeneration and the prevailing tariff. Similarly, for agriculturalconsumers the equivalent cost of diesel pumping has been estimated atRs 2.21lkVh and average willingness to pay has been estimated at halfwaybetween the average agricultural tariff and this alternative cost. This morerealistic measure of the benefit of consumption results in an internaleconomic rate of return of 121 for the Southern Region. However, it mustagain be stressed that this represents a lower bound estimate as domesticconsumer surplus and other external benefits, have still not been included.
Justification for Bank Involvement
5.05 This project presents the Bank with an opportunity to support GOI'sand GOK's efforts (para 3.05) to:
(a) alleviate power shortages in the Southern Region by exploitingindigenous hydra resources; and
(b) augment transmission and distribution capacity, thereby reducingsystem losses aMd improving service quality.
In addition it is an opportunity for the Bank to:
-55-
(a) introduce improved tools and work methods in relation to constructionand maintenance of the transmistion and distribution systems;
(b) introduce new technologies, e.g. mobile transformers, to reducedistribution costs;
(c) help Km to respond more quickly and more effectively to networkdisturbances through the installation of a SCADA system; and
(d) continue to effect institutional and financial improvements, in- relation to both KPC and KEB, started under the first Karnataka Power
Project.
VI. AGREEMENTS AND RECOMMEATION
Agreements
6.01 During negotiations, it was agreed that the conclusion of aSubsidiary Loan Agreement. between GOK and KPC, satisfactory to the Bank,specifying: (a) an intetest rate of not less than 11.5X per annum; and (b) arepayment term of 20 yeazs including 5 years' grace, will be a condition ofeffectiveness of the proposed Losn (pats 4.15).
6.02 During negotiations, GOK agreed to onlend the proceeds of the loanapplicable to KEB at an interest rate of not less than 11.5 per annum, witha repayment term of 20 years including 5 years' grace (para 4.39).
6.03 During negotiations, GOX agreed to cause KXB to:
(a) engage the services of an electric utility or consulting firm byDecember 31, 1988, under terms of reference satisfactory t.o the Bank,to review KEB's work planning and procedures, introduce new tools andequipment' and train KID's staff in their use (para 2.15); -- -
(b) complete 'the detailed route surveys and make formal application forDOW clearance for all transmission lines in the proposed projectrequiring such clearance, by December 31, 1988 (para 3.37);
(c) send to the Bank KEB's audited accounts together with the Auditor'sReport within nine months of the end of the financial year underconsideration beginning with 1986187 (para 4.24);
(d) collect, by April 1, 1990, its accounts receivable from its principaldebtors, as of March 31, 1987, in accordance with a monitorableaction program satisfactory to the Bank (pars 4.30);
-56-
(e) maintain its accounts receivable, with respect to sales after March31, 1987, at no more than the equivalent of the preceding 2 months'sales (para 4.30); -
(f) clear any sums.,owed to KPC with respect to sales after April 1, 1987,not covered by a letter of credit, within 30 days (para 4.31); and
(g) take all measures necessary to ensure that the Board shall in eachfinancial year eatn a rate of return, after interest, of at least 3X(para 4.43).
6.04 During negotiations, KPC agreed tos
(a) present to-the Bank a satisfactory plan for repairing the Talakalaledam and 'sign a contract.for the repair with a qualified firm,satisfactory to the Bank, by October 31, 1989 (para 3.19);
(b) present to the Bank, no later than one year before the expectedcompletion date of thSe structures a comprehensive maintenance programthat,will ensure the continued safety of the STES dam and associatedstructures (para 3.29);
(c) send its audited accounts together with the Auditor's and AccountantGeneral's reports to the Bank within seven months of the end of eachfinancial year (para 4.05); and
(d) take all measures necessary to ensure that the Corporation shall ineach financial year earn a rate of return, after interest,- of atleast 3Z (para 4.19). '
6.05 Understandings regarding the following items were reached'duringnegotiations?
(a) KEB will send to the Bank, by December 31 of each year, a report ofits forecast operational and financial performanee for the ensuingfinancial'year, specifying the actions that will be taken to fulfillfinancial covenants (para 4.43); and
(b) KPC will send to the Bank, by December 31 of each year, a report ofits forecast operational and financial performance for the ensuingfinancial year, specifying the actions that will be taken to fulfillfinancial covenants (para 4.19).
Recommendation
6.06 The proposed Project is suitable for a Sank loan of US$260 millionequivalent.
S-e.tricity Geuneration. Mae and Pattern of "nrn Caugowtio, -,8n bnds,
., jt .,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C
-61- nx .
-|g~~~~~~~~~~~~~~~~~i:::- -Al] 1 W ' X ) - '~~~~~~~~~~
*;0 IJ<
j.)
-62- ANNEX 3.1Page I of 7
INDIA
SECOND KARNATAKA POWER PROJECT
Detailed Project Description
I. KPC Component
Sharavatii Tailrace Hydroelectric Scheme
Principal Features
1. T1e main features of the Sharavathi Tailrace Hydroelectric Scheme(STRS) are,as follows:
Average Flow 186.3 cu.m/sReservoir Storage (full supply levei) 156 million cu.mArei at FSL 7.11 sq.kmn-Type of Dam ,Center: Concrete Gravity
-Lateral Dykes: Homogeneousaplled Fill with ConcreteOut-offSadsdle Dam: HomogeneousRolled Fill with ConcreteCut-off
KNxmium Dam Height over Foundation 0.O0 m'Crest LengthTotal Dam plus Saddle Dam 736 mSpillway 141,mNon-overflow Section 133 mPower Dam aO, mEarth Dqkes -172;.,m, ','Saddle'-am 190 ?
Type of-Spillway C Gated Overflow with Flip BucketNumber of Radial, gates 8Size of Gates 15 m 1 2i mDesign Flood (Routed) 9,769 cu.m/sProbable Nazimum Flood (PMF) Inflow 10,230 cu.m/sNumber of Penstocks 4Diameter of Penstocks 5.60 mlumber of Generating Units 4Capacity of Generating Units, each 60 MNTotal Installed Capacity 240 NWType of Turbines Vertical FrancisPower Flow, Continuous 176.00 cu.m/sPower Flow per Unit at Full Load 147.25 cu.m/sPeaking Capability 240 MWAverage Annual Load Factor 3' 30SAnnual Gross Generation, Firm 622 GWhTransmission Link to Talaguppa Subt. 38 km of douWle
circuit 220 kVline
-63-
ANNEX 3.1Page 2 of 7
Power Development of the Sharavathi River
2. The proposed STRS would harness the head still available (51.4 m)in the Sharavathi River downstream of the existing 890 MS SharavathiHydropower station. The STRS power units would use the tail water releasesfrom the Sharavathi hydropower station plus the yield from the small catch-ment area downstream of this power station. IBRD Map No. 20893 shows thegeneral location of the STRS and the existing reservoirs and hydropowerstations in the Sharavathi river valley. Multi-annual river regulation isprovided upstream of the Sharavathi hydropower station by the 4,435 millioncu.m Linganamakki reservoir. A 130 million cu.m reservoir at Talakalale actsas a balancing reservoir between the Linganamakki reservoir and the surgetanks of the Sharavathi hydropower station.
Geology
3. The dam-site exploration has been thorough and reveals satisfactoryfoundation conditions for the dam and powerhouse. The foundation consistsof compact hornblend schist, which is exposed at the river bed, and withoverburden at the flanks reaching a thickness of about 30 m. The schistpermeability is negligible while that of the flanks' overburden is low, ofthe order of 0.00001 cm/s. Consolidation grouting is expected to be requiredas well as a grout curtain to ensure watertightness of the dam foundation.Th reservoir bedrock is entirely in hard stable granite and no leakage fromthe-reservoir is expected. The proposed STRS is located in a zone ofmoderate-seismic activity for which the Indian Standard (IS) Code prescribesa horizontal seismic ground acceleration of 0.12 g (horizontal) and 0.06 g(vertical). These are considered adequate in view of the rather moderateheight of the proposed dam (60 m) for which additional provisions forreservoir-induced earthquakes are not required.
Hydrology
4. Rainfall data from 12 rain gauging station both in and around thecatchment area have been used to determine the long-term annual yield at theSTRS damsite. Some of these rain gauging stations have rainfall data fromas early as 1895. Inflow data into the Linganamakki reservoir are availablesince 1965 and prior to the commissioning of this reservoir and since 1945,from Kargal Anicut, the intake for the 120 MW Mohandas Gandhi HydropowerStation located downstream of Jog Falls. Long-term yields for the 35-year(1945 to 1980) period were worked out by multivariateWcorrelation betweenrainfall and run-off for the monsoon months on the basis of the Linganamakkireservoir operation from 1965 onwards. The resulting long-term yield is 5875million m3 per annum on average (186.3 cu.m/s). However, on the basis ofoperation studies for the existing generating stations and reservoirs on theSharavathi river, and the proposed STRS for a 20-year cycle - 1960 to 1980 -the stream flow usable for firm power generation at STRS would be 176 cu.m/s.(Annual firm power gross generation would be 622 GWh and net power supply to
-64-
ANNEX 3.1Page 3 of 7
the Karnataka power system would be 619 GWh). The unregulated streamflowcould produce on average 33 GWh per year of secondary energy at the STRS.
5. During the planning of the existing Sharavathi hydroelectric stationthe design flood for the spillway at the Linganamakki dam (which controls901 of the total cachment area at the 8TR8) was assessed by thehydrometereological method at a Probable NMaimum Flood (P1W) of 14,368cu.m/s. The maximum routed flood is 7,539 cu.m/s. is thus computed at 10,230cu.m/s. The inflo peak into the STRS reservoir is 10,230 cu.m/s. This iscomputed by adding the peaks of the routed flood, the flood from theTalakalale reservoir and the flood from the free catchment of the STRS dam.To check the design, this flow was routed thiough the STRS reservoir with oneof the spillway gates inoperative. In addition, a further check was made withthe extreme condition of two gates inoperative and with a flood equivalent tothe routed PMF, to ensure that the dam would not be overtopped. Energydissipation would be provided at the tip of the spillway by a conventionalflip bucket arrangement.
Sediments
6. The catchment area is well covered by forest which are subject toextensive conservation measures. Sedimentation is therefore not expectedto cause difficulties in project operation or to shorten significantly theeconomic life of the proposed hydrcpower scheme.
Installed Capacity
7. The major hydroelectric stations feeding the Karnataka power systemare designed for annual load factors in excess of 601. Other hydroelectricstations have limited storage capacity or power generation is conditionedby water use for irrigation purposes. the power system is thus considerablyshort of peaking capacity and load shedding must be applied during peakingperiods. The STRS is ideally suited to furnish peaking capacity since theavailable stream flow is fully regulated upstream and since the headraceconduits would be extremely short. Optimization studies have confirmed thatthe optimum installed capacity is about 240 SW for discount rates between 8Xand 122 and valuing the benefits in terms of costs avoided from combustionturbines of equivalent rating burning light distillate priced at the interna-tional level.
B. The Talakalale Dam
8. The Talakalale dam, completed in 1964, is a 60 m-high gravity dambuilt in masonry, partly with red cement mortar (cement, sand, and brickpowder) and partly with lime-surkhi mortar (burned brick powder ground withhydrated lime). The dam holds a balancing reservoir (130/ million/ m3capacity) between the Linganamakki reservoir and the intake structure of theSharavathi power station. It is a crucial component of the existing 900 KW
-65-
ANNEX 3.1Page 4 of 7
hydroelectric plant, which is the main source of power for the State ofKarnataka. Since its completion, heavy seepage has occurred through the bodyof the dam with leaching of the mortar, particularly of its lime constituent.Although groutipg was resorted to on several occasions to reduce the seepage,the treatment hoe only had temporary results and seepage has been steadilyinereasing, reaching in May 1987, about 250 liters per second. Fear for thestability of the structure prompted Karnataka Power Corporation (KPC) tobuttress the dam with an earthen embankment on the downstream face of thedam. This embankment, equipped with a filter, was completed in 1979.
9. In 1986, an expert in geotechnics visited the dam on behalf of theBank to evaluate its condition. He concluded that the seepage was a poten-tial threat to the safety of the structures and had to be controlled. Thepossible technical options for doing this were:
(a) grouting of the dam and foundation -estimated cost US$8-10 million;
(b) placing impermeable membrane on the upstream face of the dam -estimated cost, if done with the reservoir filled, US$40 million;If done with the reservoir empty, US$21 million.
The expert cautioned that it was difficult to predict if grouting would besuccessful and that the best expertise in the field should be used to inves-tigate and design this procedure. The next option would be placing an imper-meable membrane with the reservoir filled since draining the reservoir wouldcost the economy over US$200 million per year (using the cost of the energynot generated and ignoring the true opportunities cost of the energy). Withthese options in view, the mission presented KPC with draft terms ofreference for consultants to do detailed studies of the condition of the dam,design a procedure for its repair and supervise the implementation of thework.
10. The first Karnataka Power Project provides funds for KPC to employthe consultants and, during negotiations, KPC gave an undertaking to initiatethe study by July 1, 1987. A civil engineering consultant inspected the damon behalf of the Bank on May 19, 1987, and found that the structure is inpoor ondition and concluded that if no proper treatment is done, it mayeventually collapse with catastrophic consequences for the economy ofKarnataka and, possibly, with heavy loss of lives (about 10,000 people livedownstream of the dam). The condition of the dam at this time was asfollows:
(a) heavy water seepage through the body of the dam;
(b) serious leaching of the lime in the mortarl
-66-
ANNEX 3.1Page 5 of 7
(c) no apparent cracks in the drainage gallery or in the dam crest(this suggests that so far there has been no significantsettlement of the foundation);
(d) a sinkhole had developed on the second berm of the embankment;and
(e) downstream of this sinkhole, the sound of the rushing waterunderneath could be heard,
11. After reviewing the condition of the dam, the consultant suggestedthat the terms of reference proposed by the geotechnic expert should beepanded to include the sinking of at least two exploratory pits on theembankment to ascertain the condition of this structure. In addition, hesuggested that surveying benchmarks should be established on the crest of thedam, on the embankment, and on the abutments to monitor movements of thesestructures.
Present situation
12. The most recent mission found that after the Bank's last visit inMay, KPC arranged for the Indian Navy to send divers down along the face ofthe dam to plot the location of visible holes and to plug as many as=possiblewith lead wool and epoxy mortar. Preliminary measurements indicate that thistreatment reduced the seepage by one-third. Although plugging, the visibleholes by itself will not lead to a satisfactory solution, the'reduction inflow increases the likelihood that a well designed grouting program will besuccessful in controlling the seepage. The misoion believes that althoughfailure of the dam or the embankment does not appear to be imminent, there isenough uncertainty about the condition, especially of the earth-fillembankment, to require prompt hiring of the consultants to investigate theproblem.
. . I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
-67-
ANNEX 3.1Page 6 of 7
13. KPC has agreed to hire the consultants and has evaluated proposalsfrom three consulting firms. The proposed schedule for further action is asfollows:
Action Date
1. Award of contract by KPC June 5, 19882. Start of work by consultants July 1, 1988
a) Initiating report by consultants August 1, 1988b) Submission of draft report and draft tender , December 14, 1988c) KPC's comments February 2, 1989d) Receipt of draft report and draft tender March 2, 1989
by Banke) Clearance of draft-report and draft tender, March 31, 1989
by Bank3. Receipt of consultant's final report and May 31, 1989
bid documents by KPC4. Receipt of final *eport and bid documents June 30, 1989
by Bank5. Issue of bid documents May 31, 19896. Bid opening July 19897. Award of contract, = Detober 19898. Start of work on *emedial measures Noveg*ber 1989
. . ~ ~ LA ..w
, '\z' ~II. K8BB CkMPinfT
SaTB8Transmission Linp and einforcement of Trunk T1ansmission in Karnataka
14. The STRS power switchyard would be linked with the Karnatakapower system by means of a 38 km double circuit 220 kV transmission line.The transmission line would terminate at a new 220/400 kV-substationto be established by KEB at Talaguppa. KEB is currently building adouble-circuit 400 kV transmission line from Talaguppa to Shimoga (to beoperated initially at 220 kV). This line is necessary to relieve theoverloaded transmission lines from the existing Sharavathi power stationto Bangalore. Sharavathi is now connected with Bangalore via two doublecircuit 200 kV double circuit lines ia-and-out of the proposed Talaguppasubstation and to construct immediately one more double circuit 220 kVline from the Sharavathi power station to Talaguppa. KEB proposes also tobuild a 400 kV trunk transmission link between Shimoga and Bangalore(Nelamangala Substation) to be commissioned around 1995-96 and tooperate from that year onwards the whole trunk transmission link (Talaguppato Nelamangala) at 400 kV. Howev0r, with-and-without load flow studiesshowed that the-Karnataka power system could not be operated without the new400 kV transmission link and that the annual cost of losses valued at thelong-run mar;inal cost of power for Karnataka would exceed the annual cost
-68-
AMNEX 3.1Page 7 of 7
of investment in the proposed 400 kV link in years 1994/95 and 1993/94 at 401per annum opportunity cost of capital. KEB therefore decided to includein the Project the Talaguppa to Nelamnangala 400 kV line, to be in operationby 1993-94. The ProJect also includes the 220/400 kV 500 NVA substation atTalaguppa and the addition of two 400 kV incoming linebays at the Nelamangalasubstation being financed under the Karnataka Power I Project loan. Thetransmission component of the Project is shown on IBRD Map No. 20892.
B. 1. 100 NVA, 220/66 kV ad 220/11 kV 3-phase 100 WVA.Star - Star transformers 2 1210
2. 220 kV, 110 kV and 66 kY instrument transformers,circuit breakers, disconnecting switches, control,metering and relay pan.ls, DOT crane, lightningarresters, battery, battery charger and D.C.panels, control cables, LT AC panels and auxiliaryAC supply equipment and PLCPtequipment . 2. 1348 0
D. 1. Conductor and ground wire2. Hardware, conductor accessories and ground )
wire accessories ) 1 48553. Insulators . )
220 kV Transmission Lines
8. 1. 220 kV DC and SC towers and erection 2 18342. Conductor and ground wire3. Hardware, conductor accessories and ground
wire accessories4. Insulators
Fe 66 kV 8L? cables 1 360C. 66 kV Substation equipment 1 303,H. 110 XV 30 WAR capacitors 1 60Ie 66 kV 30 WhAR capacitors 1 120J. 11 kV 600 KVAR switched capacitors .1 175
K. Distribution tquipmentsi) 11 kV ring main units 1 1200ii) 11 kV cablesiii) Distribution transformers -iv) Distribution boxes, LT cables, etc.
-' . .TOTAL 19 13748
.R~~~~~~~~~~~~~~~~~~~~~~
- 76 - i ANVSX.J5
76 -~~~~~~~~~~~~'
-ECOD tABATAK POVEt PROJECT
. Z5chedule of Bank Disbursemets
- ~Total Proi st. Cumulstive Disbi_ement
IBD-financialYear & Semester US$ Nillion X
1989 81 20.0 882 26.4 10
1990 81 40.8 1682 55.2 21
1991 81 79.3 - 3152 103.4 - 40
1992 81 129.4 SO-.82 155.4 . 60
1993 81 SI186 7292 217.8 -84
1994 -91 238. - 9292 - 248.4 s 95
~~~~~~~~~~~~~~~~~~~~~~~~$ ' c is.
s995 S1. , 252.3 G 97
52 .256.2 98
, 1996 Si: , 258.1 9982 259.2 99
1997 81 260.0 100
.1
0~~~~~~~~~
5 . . 5- ~ ~~~ ~ ~ ~ -. S
.. .3 5
(5> ~ ~ ~ ~ ~ ~ ~ ~~~. .
25 .. i ,
77 Annex 4.1-77-
INDIA
SECOND KARANTAKA POWER PROJECT
Method for Computation of Rate of Return on Assets
As per the Electricity (Supply) Act, KPC and KEB are required to takeall necessary actions to ensure that total revenues in any financial yearshall, after meeting (i) all expenses properly chargeable to revenues,including operating, maintenance and management expenses; (ii) taxes onincome and profits; (iii) depreciation; and (iv) interest payable on alldebentures, bonds and loans; produce such surplus of not less than 3% orhigher as notified by GOK, of their respective net fixed assets in serviceat the beginning of the financial year. Critical terms listed above would bedefined as follows:
(a) "total revenues" means revenues from the sale of electricity andother services, and miscellaneous income. For KE8, this would inaddition include rural electrification subsidies, state electricityduties received, and such other subventions received from O0K tocover extraordinary costs which are borne by KEB and which shouldnot reasonably be borne by its customers;
(b) "expenses" means the cost of power generated/purchased, fuel,operating, maintenance, management and administrative expenses, andall taxes and duties accruing during the financial year, other thantaxes on income and profits;
(c) "taxes on income and profits" consist of income taxes and otherlevies accrued according to the provisions of any applicable legis-lation or regulation;
(d) "depreciation" means a provision, based on gross fixed assets inservice at the beginning of the year, derived by using the straightline method in conjunction with the schedule of useful life ofassets that was notified according to provisions of Section 68 ofthe Act, on April 3, 1985;
(e) "interest payable on all debentures, bonds and loans" means allinterest (whether paid or vaived), ex^luding interest duringconstruction, accrued during the financial year, and all othercharges on debt; and
(f) "net fixed assets in service" means the original cost of fixedassets reduced by the aggregate of the cumulative depreciation takenon those assets. For R3E, this would furhter be reduced byconsumers' contribution for service lines, also reduced by theaggregate of the cumulative depreciation taken on that portion ofthe service lines which were financed by consumer contributions.
1 u gs 009 OTC : 961 6 00- 951 £OC- -ts S n s s-ff T t d p we
Go "t 9 SOt sN 9m- n1- *9- a- Ca Lt 101- t- 19- qs 0 0111 ug 901 UT gt 0 aS £91 1£ tt- t n 6-
ME tug £061 01£? 9t11 11T 4qt1 99 ou "it MC 1t 19 1 t 1 91 LU @1*303 216t Team
Go1- 0 Tin 19" Ott ST9 a1 Ut £9 959 119 A"1 Ls f61 on1 et2
1 9131m "CT 6301 £03 Su aLO tO 19£ 1£ se £6t Ca . La 19" o0n
S--V
UW o"I *V9A *ToNS U96 Sgo n "a "O Cott SLT VTt Zt9t cm t86 6SS _ d axomz _u
am0 out 6069 tug NOS nuC L@1Z COZ9T t9Lt SLt t 9TtC+ gm us iStot aLt fF ObZ 9 Oft OI 06 isot -
cnzt Ot1 SOOt 69 9"o OngS am Mc oti# 8 nc 8ZtZ94 uaz gSf 9UXt T"t TWD
^ cSo U S"L n9 twu WCm flm gmt tzn goZtt n ;ZOm 8 T_14o
---- ---------- --- - - - - ---
T~~~~n t on c on TI a _oooe13g 13S L30 U6 99 09£ 09 a1 at0 Ca 91 mSZ "6 9go 0 L9 90 000a3 1ML a" cs ff9 VOs"X tOo 961 LS an *t tot on 69t% t9" M, _>4 un4 sF
OmW Om9 *tZ cm t L St gm t Ctan tnt LO CU tZ X .*T ZG -14 Toe W
Sales Revenue : hfriff increases assumed to satisfy the 31 Rate ofReturn (after interest) Covenant.
Other Revenue s Income on KPC's Construction Equipment rentalsetc.,tassumed as 2,5Z of Construction Program.
Fuel Cost i 'Coal at Rs 411/Tonne increasing by 151 annually;Oil at RS 3.39/liter i)creasing by 10 annually.
Operation 4 Maintenance s 1.51 of gross fixed assets in operation.
Establishment Ex#enses : 151 annual increases except in 1989/90 and 1993/94when a 201 increase is assumed due to expectedgeneral wage increases.
Royalty on Generation s Pfyment to COK for water used for electricity;eieration, currently at 4 paisa/kWh.
Depraciation s 31 of gross fixed assets in operation.
Balaxkpe Sheet
Cash s 2 month's cash operating expenses.*
Inventories s 31 of gross fixed assets in operation.
Accounts Receivable s Forecast in months of sales as follows:; .,1987/88 to 1989/90 - COK action in reducing KPC'sand KEB's receivables (pars 4.30);1990/91 and after - 1.0.
, &9
Other Current Assets S 51 increase annually.
Current Liabilities s Forecast at 301 of current assets.
Sources and Applications of Funds statements
Investment Program 3 KPC's 10-year investment program includinginterest during constructio. ;
Debt kpayment I Term of 20 years, including 5 years' gracetassumed for Bank Icon and all COK loans.
KMMTAKA Ponm II swickKABUATAK ELECTRICtTY BO8
POOSINVESINE PUOEAN(nCw om fut wittilion)
MM Of Sohus art lat.Cost MOM/8 1969/90 I900/1" M99M 1992/9 199/9 1994/95 19g5/96
Ceneretion Available for Sale *s Based on PC's 8ales Forecast and lower Purchases fromVIighboring States and Central Stations.
Sales Revenue i Tariff increases assumed to satisfy the 32 Rate ofReturn (after interest) Covenant.
Electricity Duty s Collected on Behalf of COK. Assumed at an Avwrage Rateof 7 Paisa/IWh on 865 of Energy Sales since RuralC6operativesp Public and Street Lighting Consumers donot pay this duty.-
Other Revenues s Income from Building Rentals, Meter Rentals etc.,assumed to increase by 10 annually.
Cost of Power Purchases t Baed on KPC's Average Revenue/kUh and forecast pricesfor interstate/Centr4l Station Purchases.
Operation & Maintenance s 32 f gross fixed assets in oper#tion.
Eetablishment Etpen*s I 152 annual increases except in 1989/90 and 1993/94 whena 202 increase is assumed due to expected general w"eincreases. -
Depreciation s 32 of gross fixed aasets in operation.
-°Balance Sheet =
Cash I m1onth's operating expenses.
Inventories Z 12 of gross fixed assets in operation.
Accounts Receivable s"Forecast as followss1987/88 to 1989/90 - GOK action in reducingkPC's and KCe's receivables (para,4.30);thereafter about 25 months' sales ofelectricity.
Other Current Assets s Increases by 122 annually.
C uwrenMLiabilities s Forecast as 'a ratio of current assets,as followst1988/89-1.29 1989/90-1.01 1990/91-0.81
- > and thereafter 0.7.
Sources and Applications of Funds Statements
tonsumed Contributions a Increases by 102 annually.0
Staff Superannuation Fund I Increases by an aerage of 102 annually.
iectrity Deposits s Increases by an average of 102 annually.
Investment Program I MEE's 10-year investment program including interest.during construction..
Debt Repayment I Teom of 20 ye&rs, including 5 years' grace assumed forBank loan and all 0OK loans.
-89- 5 > Annex 5.1
Page 1 of 3INDIA
SECOND KARNATAKA POWER PROJECT
Internal Economic Rate of Return
1. As described in Chapter 5, the proposed Project forms an integralpart of the expansion program for tlo Southern Region and, therefore,cost-benefit analysis needs to be carried out on the program as a wholerather than on the Project in isolation. A time-slice of the SouthernRegion's investment program has, therefore, been analyzed. Capital cost,incremental operation and maintenance, incremental fuel cost and benefitstreams for the Southern Region are shown in Table 1. Assumptions underlyingthese figures are detailed below.
Capital Costs
2. Anticipated cipital expenditure on generatioa at financial priceshas been converted to economic prices by: (a) expressing the importe'4 contentat cif prices; (b) valuing unskilled local labo' at 0.75 of the market wagerate; and (c) applying the estimated standard conversion factor, 0.8, tolocal costs. Transmission and distribution capital expenditures have beenestimated at 50Z of generation expenditure.
Operation and Maintenance Costs
3. Incremental annual operating and maintenance costs have bee*-estimated as the following percentages of capital value: thermal generatingplant 2.51, hydroelectric 1.13X, and transmission and distribution 1.02.
Fuel Costs
4. Average fuel consumption of new coal-fired plant has been estimatedat 0.645 kglkWh. The economic cost 2f coal at the pit head has beenestimated at Rs 164lton. The economic cost of delivering coal to load centerstations has been estimated at Rs 0.54/ton mile.
Case 1. Benefits
5. Case 1. benefits are based solely on incremental revenue at exist-ing tariff levels. These allow for system losses which are assumed to remainconstant at 211 of net generation in the Southern Region. The average finan-cial tariff in FY'85 was Rs 0.56/kWh. After allowing for (a) general infla-tion of approximately 71 per year from FY'85 to date; and (b) a standardconversion factor of 0.8, the corresponding average economic tariff at cur-rent prices is Rs. 0.50/kWh.
Case 2. Benefits
6. In Case 2, the benefits of incremental consump*ion include elementsof consumers' surplus for both industrial and agricultural consumers.Surplus has been imputed at half of the difference between the average tarifffor each category and the alternative costs of autogeneration for indueirialconsumers and diesel pumping for agricultural.
Annex 5.1Page 2 of 3
7. The cost of i*dustrial autogeneration, at mid-PY'85 prices, hasbeen estimated as folloiss:
Purchase price (incl. installUtion) is 4,300/kWLife of set - 15 yearsAverage utilization 15,Discount rate 12% ,
Operation and maintenance cost' Rs 215/kw per anpnm Fuel and lubricant Rs 1.24/kWhAverage cost Rs 1.88/kWh
The cost of electricity'which would equate the cost of electricalpumping with that of diesei is calculated at mid-FY'85 prices as follows:
Electric Diesel
Motor/engine size, 5.0 HP 7.0 HPLife Years 15.0 -10.0
Investment Cost As. 4000 Rs. 10250Cost of diesel/hr- Rs. 4.82
Aninual Costs '
Annual Charges Rs. 526 Rs. 1668 r
OM LRs. 890 Rs. 2500Electricity/diesel(800 hrs/year),Electricity costingX /kWh Rs. 2984 X - Is. 3853,,
Total annual cost Rs. 1416 i Rs. 80212984 X
Marginal cost of electricity X - (8021-1416)/2984at which diesel and electricity 4 s. 2.21/kWhare equivalent
.1, 8. Average industrial and agricultural financial tariffi; during FY'85in the 80uthern Region are eitimated at Rs. 0.64/kwh and Rs. 0.20/kwh respec-tively. After allowing for inflation between did-FY'85 and end FY'86, theaverage estimated willingness to pay, converted into economic terms at astandard conversion factor of 0.8, is Rs. 0.78/kWh for industrial andRs. 1.02/kWh for agricultural. Combining these p Ah revenue estimates ofthe benefits to other consumers gives an average bieiefit of Rs. 0.70/kwh ineconomic terms. -'
s s , . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7
Table 1SOUTHERN RESION WNESTENEt-PROIRAN Page 3 of 3
ECUNONIC RT FRTR
fin. CaP. tip. a & N fuel Cap. Exp. 0 & N Total lncr. NetI Not 2Year son. Son. Cast TI& 0 t I 0 Cost Sales enof it Benefit
