Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 19236

IMPLEMENTATION COMPLETION REPORT

INDIA

SECOND MAHARASHTRA POWER PROJECT(LOAN 3498-IN)

June 25, 1999

Energy Sector UnitSouth Asia Region

This document has restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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COUNTRY EXCHANGE RATES

Currency Unit Rupee (Rs.)Rs. I Paise 100

RUPEE (Rs.)/US $ EXCHANGE RATES

At SAR Rs. 25.5 per US$At closing date Rs. 39.8 per US$

MSEB Fiscal Year: April 1 - March 31

MEASURES AND EQUIVALENTS

I Ton (t) I 1 metric tonne = 1,000 Kg = 2,204 lbs.I Kilovolt = 1,000 volts (V)I Kilovolt ampere (kVA) = 1,000 volt-amperes (VA)I Kilowatt-hour (kWh) = 1,000 watt-hoursI Megawatt-hour (MWh) = 1,000 kilowatt-hoursI Gigawatt-hour (GWh) = 1,000,000 kilowatt-hours

ABBREVIATIONS AND ACRONYMS

CEA ---- Central Electricity AuthorityGOI ---- Govemment of IndiaHVDC --- High Voltage Direct CurrentIBRD ---- Intemational Bank for Reconstruction and DevelopmentICB --- Intemational Competitive BiddingICR ---- Implementation Completion ReportIERR ---- Intemal Economic Rate of RetumILFS ---- Infrastructure leasing and financing serviceIPP ---- Independent Power ProducerMSEB ---- Maharashtra State Electricity BoardNGO ---- Non-Govemmental OrganizationsPAFs ---- Project Affected FamiliesPFC ---- Power Finance CorporationPIB --- Public Investment BoardPLF ---- Plant Load FactorPPA --- Power Purchase AgreementR&R ---- Resettlement and RehabilitationRAP ---- Rehabilitation Action PlanRBI ---- Reserve Bank of IndiaSEB -- State Electricity Board

Vice President: Mieko NishimizuCountry Director: Edwin R. LimSector Director: Alastair J. McKechnieTask Leader: Anthony E. Sparkes

FOR OFFICIAL USE ONLY

INDIA - SECOND MAHARASHTRA POWER PROJECT - (LOAN 3498-IN)

IMPLEMENTATION COMPLETION REPORT

TABLE OF CONTI ENTS

PRE]FACE

EVALUATION SUMMARY ............................................... i

PART i: PROJECT IMPLEMENTATION ASSESSMIENT ............................................... I

A. Project Objectives ............................................... lB. Achievement of Objectives .............................................. 5C. Major Factors Affectinig the Project .............................................. 9D. Project Sustainability ............... . 12E. Bank Performance ........................... , 12F. Borrower Perforrnance ........................... 13G. Assessment of Project Outcome ........................... 14H. Future Operations ........................... 141. Key Lessons Learned ........................... 15

PARTI'l: STATISTICAL TABLES

Table I - Sulimmary of Assessiicints ............................ 17Table 2 - Related Bank Loans/Credits ........................... 18Table 3 - Project Timetable ........................... 18Table 4 - ILoan Disbursemcnts: CLumI ulative I'stimated and Actual ........................................................... 19Table 5 - Key Indicators for Project Impleilcintationi ....................................................................... 19Table 6 - Key System Indicator-s ....................................................................... 19Table 7 - Studies Included in the Project........ ..................... ........... ........-..........- ... 20Table 8A - Project Costs ........................................................................ 20Table 8B - Project Financing ........................................................................ 20Table 9 - Economii c C'osts a and 13eniel'its ....................................................................... 21Table 10 - Status of Legal C rov iealnts ....................................................................... 22TableI 11 - Complianice withi ()peraltional an/i 1uatl l Statemcnts ....................................................................... 23T'able 12 - Bank lResources: Staft'f ipills ....n................................................................... 23Table 13 - Bank lResources Missionis . 23

APPENDIX - A: Project Rexvicw troili Bolrrow\ er's Perspective - Contribution by MSEB.....- ... 24APPENDIX - B: IMinvironi cntaC I Impact ISSuIes .............................................................................. 35APPENDIX - C: I an1(d Acquisiltom. IRescttlement an(d Rehabilitation Issues .................................. 37APPENDIX - D: Financiail Osvrcisi\\c. .............................................................................. 44

This docunent has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld EBank authorization.

INDIA - SECOND MAHARASHTRA POWER PROJECT - LOAN 3498-IN

IMPLEMENTATION COMPLETION REPORT

PREFACE

This is the Implementation Completion Report (ICR) for the Second Maharashtra PowerProject in India, for which Loan 3498-IN in the amount of US$350 million equivalent wasapproved on June 25, 1992 and made effective on June 18, 1993. The Borrower was India,acting by its President. The Implemenitinig Agency for the project was the Maharashtra StateElectricity Board (MSEB). The project comprised a generation componenit and an associatedtransmission component, a distribution componient, and studies perfonred by consultants toadvise MSEB on demand side management and environmental impact management.

Because of non-compliance with several of the loan's financial covenants and becauseGovernment of Maharashtra (GOM) failed to pass on to MSEB part of the proceeds of the loan,the Bank suspended disbursements as of October 22, 1996. Although most of these covenantswere later complied with, MSEB's receivables position did not improve, and remains to-date atabout 4 months instead of the 2.5 months covenanted. Thus the suspension remained in place,and US$237.7 million was canceled, effective June 30, 1998, when the loan account closed onthe originally scheduled loan closing date.

The developmental objectives to strengthen1 the power sector in Maharashtra, to provideMSEB with managerial autonomy, and enable the sector to access sources of private investmentsand improve external resource mobilization, were only partially met. There were substantialsavings in the project cost due to continlLoLus devaluation of the Indian rupee vis-a-vis the USdollar (luring the project implemenltationi period. Besides the Bank loan, the project was financedwith the help of export credits and by MSEB's own resources.

This ICR was prepared by Anthioniy E. Sparkcs (Task Leader), South Asia Energy SectorUnit (SASEG), Sameer Shukla (Finanicial Analyst), and 1. U. B. Reddy (Social DevelopmentOfficer), and reviewed by Kari Nyman, lndia Encrgy Tcamii Leader, SASEG.

Preparation of this ICR began durinig a Bank ICR mission in May 1998, and was finalizedduring a follow-up mission in Decembcr 1998. It is based on material in the project file and site-specific information collected durinig the ICR missioni. The implementing agency, MSEB,contributed to the preparation of this K('R by providing technical data, the details of the finalcosts of the project, and finanicial rccords and projections. MSEB's evaluation of theimplemrentation exercise is providcd in Appendix A of this ICR.

INDIA - SECOND MAHARASHTRA POWER PROJECT - LOAN 3498-IN

IMPLEMENTATION COMPLEI ION REPORT

EVALUATION SUMMARY

Introduiction

I. In 1991 the Government of India opened the power sector in generation to privateinvestment, by changing the law to provide for ownership of generating companies by the privatesector, and for private generating companies and captive plants to sell power to the SEBs.However, in 1992, when the project was appraised, the poor Finanacial positionl of most stateelectricity boards lead to the conclusion that significanlt investmiielnts from tlle private sector werestill some years away. Also the ability of the SEBs, including the Malharaslhtra State ElectricityBoard, to mobilize internal resources was hampered by their weak financial conditionis. Theproject was thus designed to assist the state develop its private power policy wvithin the newnationial guidelines, to increase MSEB's generationi and transmission capacity, and help the stateconitract with private developers for major power generationi projects (Part 1, paragraplh 2).

Project Objectives

2. The main objectives of the project were to (a) support operational efficiency improvements;(b) improve internal and external resource mobilizationi and (c) promote institutional reformns,including the enhancement of the role of thc private scctor. The maini benefits of the projectwere in-tenided to be (i) iiicreased power supplies an(d improvements in the quality of electricityservices in Maharashtra; (ii) the strengthening of MSEB's finances and managerial autonomy;(iii) more economic use of generatinig capacity througlh better pr-icinlg policies, demandmanagement and loss reduction mcasurcs; (iv) reductions in rcliallce onl the central governmentfor financing investmenlt requirclllemets by incrcasing MSEB's self-finianicinig capabilities andimproving external resource mobilization as well as Facilitatinig private sector investments; and(v) strengthening of MSEB's environlmicnital impact m11anagenient capability (Part 1, paragraph 3).

3. The project, as part of MSEB's lcast-cost devcloplmcnit program, included (a) a 500 MWcoal-fired unit at Chandrapur; (b) a ±500 kV, 1,50()( MW capacity HVDC line and the relatedterminaal stations; (c) a distribuLtion reinforcciemcln coilipolcnit; and (d) consulting services to beprovided in the following four arcas: (i) load research ianid preparation of electricity demandmanagement measures; (ii) development ol MSl 2B's cnivi ronimiiental maniagement capabilities atthe corporate level; (iii) preparationl of privatc power projccts in Maharashtra; and (iv)institutional review of the power sector in Maharashtra (Part I, paragraph 4).

4. Loan 3498-IN was for US$ 350 millionl cquivalent, and was approved on June 25, 1992,signed on July 8, 1992, and became effective on Junc 18, 1993. Financing was also provided viaexport credits to help finance the terminial stations, and from MSEB's self-generated resources

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5. The implementation by MSEB of the main component of the project, the coal-fired 500 MWChancdrapur Unit 7 was completed, commissioned and connected to the grid for commercialoperation in October 1997, about three months ahead of schedule. Implementation andcommissioning by MSEB of the ±500 kV direct current transmission line and the associatedconverter stations was completed in mid-June 1999, and a fifteen day trial operation is due tobegin on July 1, 1999. MSEB is effecting the recommendations of consultant's demand-sidemanagement study, and has implemented consultant's advice on how MSEB can strengthen itsenvironmental impact management capacity.

Implementation Experience and Results

6. Developmnental outcomiie (Part I; paragraphs 14, 24 and 25) The main factor whichprevented the achievement of the developmental objective of the project was clearly theinterference of GOM, which issued directives that restricted MSEB from operatingcommercially. Also, MSEB's tariffs and their timing were decided by GOM, and seeminglywere heavily influenced by political consideration. MSEB, as a result of the directives, has beenunable to effectively collect from certain categories of consumers. MSEB's tariffs are highlydistorted, with agricultural and domestic consumers paying tariffs substantially lower than theaverage cost of supply.

7. Ihupj?lem;ienitation (Part I; paragraph 2land 22) A well-experienced project team in MSEBensured that the project's main physical component, the 500 MW generating unit at Chandrapur,was completed ahead of time and below the cost estimate.

8. Project costs, savings antd canicellationi (Part I; paragraphs 33, 34 and Table 8A) Mostcontracts were awarded to local suppliers, and because of the devaluation of the Rupee during theproject implementation period, the costs in dollar temis of the Bank-funded items weresignificantly lower than the appraisal estimates. However, disbursements from the loan weresuspended in October 1996, when only US$ 112.3 millioni had been disbursed. The suspensionwas not lifted, and the loan closed as originially schcdluled on1 Junle 30, 1998, when US$ 233.7million was cancelled.

9. Rate of Retutrn. (Part I; paragraph 35 and Table 9) The IERR for the investmentprograrn of the Western Region, of whichi the project is part, is calculated to be 15 percent, takinginto account consumer surplus, and based on NISEB's present tariff's, which is the same as theappraisal estimate. However, in a scenario where MSEB's demand projections fail to materializein full, and its high-cost IPPs start genieratinig anid oust its older, cheaper plants, the EIRR wouldbe lower.

10. Sustainability. (Part l; paragraph 40 and 41) The physical achievements of the project arelikely to be sustained. Operational plans to ensure the sustainability of the project have beendiscussed and agreed with MSEB's management, including the provision of start-up spares, andthrough the annual budgeting of adequate funds for maintenance and operations. MSEB hassufficient suitably qualified staff to operate and maintain the equipment through its design life.

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I1. The marginal improvements in MSEB's financial position brought about in 1996, followingthe threat to suspend and the suspension, were sustained until the loan closed in June 1998. Atariff increase of 13%, mainly falling on industrial consumers, was allowed in 1998. However,MSEB's position continues to be weak, and dependent on Government subsidies. Tariffscontinue to be inappropriately heavy on industry and commerce, and losses, mainly theft,amongst the otlher consumner groups, persist at high levels. In the absence of further CentralGovemnment guarantees, the sector is unlikely to be able to attract investments in the amountsneeded for electricity developments to support Maharashtra's economic development. It isdoubtful if the positionl will improve unless Maharashtra enters into a program of reform, broadlyalong the lines of the recommendations contained in the RajadhYaksha Committee Report.

12. Resettlement andil rehabilitationi (Part I, paragraphs 37, 38 and 39) The project did notinvolve any new displacemenit of people, but the prior constructioll of units 5 and 6 atChandrapur and the need for land for ash disposal ponds had led to the displacement of about800 faimilies, not all of whlomii had been adequately resettled. The project was therefore used as avehicle to assess, via the use of consultants, the number of families (787) wvho needed to beresettled, and to correct any shortcomings. Of these, 350 families have been resettled. Theremaining families have not relocated, and they continue to practice cultivation on the land theypreviously owned and which MSEB has acquired from them, but will not need for ash disposalfor several years yet. MSEB has carefully detailed and recorded the acquisitions, and agreed thedetails with the families. MSEB will resettle the remaining families, as and when (about fouryears hence) the land is required for ash disposal. The South Asia Region will budget forsufficient staff resources to review the situation on an anllual basis, and when resettlement iscompleted will recommend that MSEB undertake an impact evaluation study to detenrine thelevels of living standards amongst the affected persons related to the known base data.

Summary of Findings, Future Operations, Key Lessons Learned

13. Bank Perform?anice. (Part I; paragraph 42) The performanice of the Bank, in helpingMSEEB identify a suitable package of project componcnits, was satisfactory. Advice provided toMaharashtra as to how it should reform its power sector, preccded the fomlal Bank Policy onpower sector reforn, which was published about a year later. In 1 992, wvhcn the project wasappraised, the poor financial position of most state clectricity boards (SEBs) led to theconclusion that significant investments from thc private sector weIe still some years away. Theability of the SEBs to mobilize internal resources was hamilper-ed by their weak financialconditions. However, the strongest of India's state power sectors and its utility, the MaharashtraState E]lectricity Board (MSEB) were expected to be ablc to improve operations with Banksupport. Thus the project was designed to assist the state develop its private power policy andregulatory framework within the national guidelinies, to increase MSEB's generation andtransmission capacity, and help the state contract witlh private dcveloper-s for major powergeneration projects. The Staff Appraisal Report recognlized that there was a risk that the pace ofinstitutional reform in Maharashtra might be slow, and that has proved to be the case.

14. Borrower Performance. (Part I; paragraph 44 and 45) MSEB prepared well a least-cost,economical and sustainable investment project, and utilized the experience it had acquired indesigning and engineering 500 MW thernal units, which had been constructed previously at

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ChancLrapur (Loan 2544-IN). However, compliance by Maharashtra and by MSEB with severalcovenants of the loan was unsatisfactory. Interference by the Government of Maharashtra.(GOMI) in the operations of MSEB resulted in MSEB being unable to perform as a commercialutility. In contravention of the covenants, which required that GOM ensure that MSEB operatesalong commercial lines, GOM did not allow MSEB to charge appropriate tariffs and insisted(and insists) that MSEB provide low and heavily subsidized tariffs to agriculture users and to alarge rural cooperative, which in turn meant placing a huge burden on industrial consumers, andGOM having to provide MSEB with large annual subsidies. Instead of producing returns toGOM on the investments made in the sector, MSEB is Using3 up scarce resources, which areneeded for investments in other fund-starved sectors, whichI Vwould benefit the poor, such aseducation and health (Part I; paragraph 9).

15. Inadequate and untimely tariff increases caused severe strain on MSEB's finanices. MSEBwas also restricted from taking much needed actions to recover dues from non-payingc consumersleading to an ever increasing burden of receivables, most of which1, because of their age, havenlow become an un1collectable bad debt. In addition, GOM issued directives to MSEB to provideand maintain additional electricity supplies to agricultural users, leading to shortages for otherpaying categories of consumers. Besides weakening MSEB financialiy, this operationalinterference by GOM has over the years led to a lack of accountability in MSEB, and aslackerning of commercial discipline.

16. Assessmiienit of Ouitcomle anid Fututzre Operations. (Part I; paragraph 46, 47 and 48) Theresults of the project are mixed. The physical componenits of the project were completed, mainlyahead of time and under budget, and benefits will be sustainied. However, the developmentaloutcome to strengthen MSEB was only marginially successful and is unlikely to be sustained.The project has served to ensure that Mlaharaslhti-a studied the need to restructure its power sector,but seemingly the State Govenmenlcit has decidcd that it is not necessary. The Bank has offeredon several occasions, last in October 1998 durinig thc visit of a highi-level Maharashtra delegationto the Bank, to assist the Govement in the preparation and implciiiemetation of sector reforms.

17. Key Lessonis Learniedl. (Part l; paragraph 49, 50 and 51 ) Operational control by the stategovernment results in a financially weak SEB. 'I'hc state governmen11cit treats the SEB as adepartment, and exerts direct and indirect control over mlost aspects of business - tariffs, staffingand wag!es, operations, investmlcnit and Finiancilg. (O0M did not allow MSEB to raise tariffs forcertain categories of consumers. This resulteCd in thlC othlel consum.1ers cross-subsidizing theseconsumers. Industry in Mahlarashtra is paying almost 70%, miorc thani the average cost of supply,while agriculture pays only about I 0% of thie average cost of electricity production. GOM alsodoes not allow MSEB to take action agaillst non1-payilng consLumIers, resulting in a huge build upof receivables which have eventually becomc un-collcctible. MSEB lacks the commercialattitude needed to be successful in the business of distributioni, and unless private majorityownership is brought about, the distributioni businiess will continlue to suffer from large-scalerevenue leakages.

18. The project did not result in the hopcd-for operational and financial improvements, and assuch it confirmed the position taken in the power sector by the South Asia Region. Beginning in

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the midL-1980s, the Bank had attempted to improve the performance of SEBs by directinvolvement at the state level. This approach was generally unsuccessful and the revitalizationof institutionally and financially weak SEBs did not turn out to be feasible. Projects failed tomeet expectations beyond the physical construction of facilities, and the Bank was forced to takesuch strong measures as suspending disbursement and subsequently canceling loans. It hasbecome clear that a sustainable solution to the sector's problems requires a focus on restructuringthe state power sector rather than revitalizin.g the SEBs as attempted in the past Thisrestructuring includes, iuuter alia, the unbundling of monopoly utilities, corporatization,establishment of independent regulatory commilission, tariff reforms, and privatization ofdistribuition. This lessoIn has been applied in the on-going power sector reform projects in Orissa,Haryarila and Andlhra Pradesh.

INDIA - SECOND MAHARASHTRA POWER PROJECT - LOAN 3498-IN

IMPLEMENTATION COMPLETION REPORT

PART I. PROJECT IMPLENMENTATION ASSESSNIENT

A. PROJECT OBJECTIVES

1. With a per capita consumption of only about 380 kWh per annum, electricity use inIndia is among the lowest in the world. Demand by the country's 970 million populationis expanding at an average growth rate of 8% per annum, and massive investments inadclitional generation, transmissioni and distribution will continuously be required. By theend of the 1980s it had been recognized that central and state government funding of thepower sector investment programs would be in-sufficient, and that the state and centralgovernment-owned utilities would have to rely increasingly on their own internalresources and in particular on investments from the private sector. In 1991 GOI openedthe power sector in generation to private investment, by modifying the law so thatelectricity production was removed from the list of activities reserved for the publicsector, in the Industrial Policy Resolution, and the 1948 Act was amended, so that manyof the regulatory disincentives to private investment in the power sector were lifted. Inparticular these changes provided for ownership of generatinig companies by the privatesector, and for private generating companies and captive plants to sell power to the SEBs.Foreign companies were also allowed to implement power projects. In October 1991,GOI established a Board to promote, accelerate and clear private investment proposals inpower projects.

2. However, in 1992, when the Second Maharashtra Power Project was appraised, thepoor financial position of most state electricity boards (SEBs) led to the conclusion thatsig.nificant investmenits from the private sector were still some years away. The ability ofthe SEBs to mobilize internal resources, was hampered by their weak financialconditionis. The strongest of India's state power sectors and its utility, the MaharashtraState Electricity Board (MSEB)', was however expected to be able to improve itsoperations with Bank support. Thus the project was designed to assist the state developits private power policy and regulatory framework within the national guidelines, toincrease MSEB's generation and transmission capacity, and help the state contract withprivate developers for nmajor power generation projects.

3. The specific developmental objectives of the project were to (a) support operationaleff'iciency improvements; (b) improve internal and external resource mobilization and (c)promote institutional reforms, including the enhancement of the role of the private sector.

At the time of appraisal (and currently) MSEB operated the largest state power system in India. In 1992,MSEB's system had a generating capacity of about 7,000 MW, with a transmission and distributionnelwork of 500,000 km supplying 8½2 million consumers, served by an MSEB staff of about 120,000regular and non-permnanent skilled employees. (See text and tables for further details.)

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The results of the project were expected to be (i) increased power supplies and improvedquality of electricity services in Maharashtra; (ii) the strengthening of MSEB's financesand managerial autonomy; (iii) more economic use of generating capacity through betterpricing policies, demand management and loss reduction measures; (iv) reductions inreliance on the central government for financing investment requirements by increasingMISEB's self-financing capabilities and improving external resource mobilization as wellas facilitating private sector investments; and (v) strengthening of MSEB's environmentalimpact management capability.

4. The physical components of the project were consistent with the developmentalobjectives, and included, as part of MSEB's least-cost development program: (a) theconstruction of the final stage of the Chandrapur thermal power station by the addition ofa 500 MW coal-fired unit; (b) the construction of a 1,500 MW capacity, ±500 kV, HVDCline from Chandrapur, in the east of Maharaslitra, 736 km to Padghe, near Mumbai(Bombay), and the related termninal converter stations; (c) the implementation of anaccelerated electricity distribution reinforcemenit program aimed at reducing losses inselected areas; and (d) consulting services to be provided in the following four areas: (i)load research and preparation of electricity demand management measures; (ii)development of MSEB's environmental managenmenit capabilities at the corporate level;(iii) preparation of private power projects in Maharashtra; and (iv) institutional review ofthe power sector in Maharashtra.

Re-evaliuationi of the project objectives

5. In 1993, the Bank published its Policy Paper The World Banik's Role in the ElectricPoiver Sector. Its findings were that the Bank had contributed to the rapid expansion ofthe power sector in maniy developing countries, that access to service had increased, andthat power sectors generally perform better tlharn most other sectors. But, the Paperconcluded, overall power sector performance had deteriorated since the 1970s, broughtabout by higlh oil prices, and overwhelming interest rates and inflation; declining accessto foreign loans and hugely insufficient sources of capital investment; inappropriatepolicies on pricing; inadequate encouragemenit of demand-side management, and a scantregard for environmental protection; with utilities operated through weak or non-existentfinancial practices, because of govemnment interference, mainly resulting from costly andinefficient, politically motivated attempts to supposedly solve social inequities, whichfrequently favored the rich consumer of electricity at the cost of the generally poorremainder of society (see also paragraph 9). Thus the Bank's power sector borrowers hadmade little or no progress in achieving autonomy or financial and technical viability,which would have enabled them to attract the much needed investment capital fromoverseas and domestic, commercial and private sources, at least, not without the supportof sovereign guarantees.

6. Most, if not all, of these concerns applied (and apply) to the state power sector inIndia. The Paper stated that the Bank would encourage private investment in the powersector by using some of its financial resources to support programs that would facilitate

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the involvement of private investors. Bank lending for electric power will in future focuson countries with clear commitments to improving sector performance, and that therequirement for power lending will be an explicit country movement towards theestablishment of a legal framework and regulatory processes satisfactory to the Bank. Tothis end, in conjunction with other economy-wide initiatives, the Bank will requirecotntries to set up transparent regulatory processes that are clearly independent of powersuppliers and that avoid government interference in day-to-day power companyoperations, regardless of whether the company is publicly or privately owned. In settingout the Bank's future policy, the Paper confirmed that the objectives of the SecondMaharashtra Power Project had been correct. However, it became painfully clear thatmuch more fundamental actions were required to actually achieve these objectives inIndlia's state power sector.

7. The Policy Paper, also, recognized that because of the capital intensity of the powersector, an adequate private supply response would take time to materialize, and powerdeficiencies would worsen. Therefore some transitional investment by the Bank wouldbe needed, but that this must be linked to progress in corporatization andcornmercialization. Thus, the Paper also confirmed that the continued Bank support toMSEB, for funding the transmission and generation components of the project, wasjustified, when linked to hoped-for reform objectives. Again, it turned out that suchcomnmercialization, or revitalization, was not possible in practice in India's state powersector.

8. Beginning in the mid-1980s, the Bank had attempted to improve the performance ofSEBs by direct involvement at the state level. This approach was generally unsuccessfuland the revitalization of institutionally and financially weak SEBs did not turn out to befeasible. Projects failed to meet expectations beyond the physical construction offacilities and the Bank was forced to take such strong measures as suspendingdisbursemiienit and subsequenitly canceling loans. Thus it became clear that a sustainablesolution to the sector's problems would need to focus on restructuring the state powersector rather than revitalizing the SEBs as had been attempted in the past. Therestructuring, i)?ter alia, would need to involve the unbundling of monopoly utilities,coiporatization, establishment of independent regulatory commission, tariff reforms, andprivatization of distribution, and with the inclusive goals of the distancing the sector fromgovernment, changing the corporate structure, reducing losses and pilferage in thesystem, leading eventually to a sector which generates revenues to the state.

9. Such programs of state power sector reform will benefit the poor by helping to lift theburden the power sector has placed on the state government finances (which mostly thepoor indirectly have to bear), and simultaneously removing the power supply bottleneck,which is restricting economic activity and growth. Poverty is widespread in India. In thelong term, its eradication is fundamentally dependent on growth and employment. Byimiproving electricity supply, the power sector reform programs will eliminate one of themost serious constraints to higher economic growth. By bringing about a permanent shiftin public expenditure in the power sector, i.e. from being a major drain on state budgetsto being a contributor of funds, the programs provide for the social sectors and for other

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priority areas of public investment. Thus the reformn in the power sector is among themost important aspects of structural and fiscal reform in Indian states.

10. However, the political commitment for change in the power sector in Maharashtra,despite the Bank's assessment at appraisal that GOM was agreeable to reform, was not(and is still not) there. GOM seems as yet to see little merit in power sector reform;probably because the sector is not facing an immediate financial crisis, and perhapsbecause the majority of the state's consumers currently receive supplies of electricity that,although subject to rotational supply cuts, are still among the best in India. The Bank hadhelped finance two previous power sector operations2 in Maharashtra. The results ofthese, but more so the substantial financial support provided by GOM has given MSEBan aLpparent strength, which has enabled it to continue with its 'business as usual'. Itneeds to be stressed here that this support has been given at the expense of investmentswhich should have taken place in other sectors, such as health and education. IndeedMSEB should be making substantial returns to GOM on the enornous investments it hasmacde in the sector over the last several decades.

11. 'The Staff Appraisal Report recognized that there was a risk that the pace ofinstitutional reform might be slow, and that has proved to be the case. To keep MSEBviable, without appropriately increasing tariffs, GOM has converted large amounts ofMS'EB's debt to equity, and provided other subventions in the form of adjustment ofinterest and lease rent payable.

12. With State Government support (and in some cases, Central Government guarantees)MSEB has contracted energy from independent private producers (IPPs), including theDabhol project. In response to a 1993 GOI request to help finance Dabhol, the Bankreviewed the project proposal, which was for a 2,015 MW combined cycled scheme. In aBank-financed report entitled Ani Econiomiiic Anialysis of the Dabhol Project, seriousconcerns were raised to GOI and Maharashtra. These concerns were with regard to thesize., phasing and timing of the project, the commitment-to-utilization proposed3 , and theoverall cost of the proposed scheme. However, GOI was also informned by the Bank thatit considered it worthwhile for GOI to pursue the benefits which LNG4-based generation,by a reformulated Dabhol project, could bring to the overall efficiency of a growingsystem in the Western Regions of India. The Bank also offered to provide technicalassistance for such a refornulation, but, GOM chose to proceed with the first phase (740

2 The Chandrapur Thermal Power Project (Ln. 2544-IN) in 1985, and the (First) Maharashtra PowerProject (Ln. 3096-IN) in 1989, which helped MSEB expand its generation, transmission and distributionfacilities, renovate and modernize existing power plants, and enhance its capabilities in many areas ofutility operation, management and project implementation.3 The size and inflexibility of the proposal, i.e. that the scheme must be operated at no less than 90% annualcapacity factor would force MSEB to dispatch the schemes output in lieu of less expensive coal-fired andgas-fired units in the dispatch order. Compounding this inefficiency, would be the added substantial costto MSEB of additional maintenance for these coal and gas-fired units, caused by thermally cycling themwith a rapidity for which they were not designed.4 LNG - liquefied natural gas, to be imported from the Middle East.'The Western Region network serves the electrical energy demands of Maharashtra, Gujarat and MadhyaPradesh.

5

MW) of the scheme, but without IBRD financial or technical support. This first phase isbeing fueled by naphtha, and began commercial operations in May 1999. Plans are closeto completion for the second phase of the scheme, which it has been decided should havea capacity, which will bring the total Dabhol output to 2,450 MW. When Phase II comeson stream it is intended that the whole scheme will switch to the use of LNG.

13. Bolstered by State subsidization, MSEB has so far been able to finance and completemost of its investments on or before schedule, including the Second Maharashtra PowerProject. The power sector in Maharashtra seemingly only in 1998 seriously began to beconstrained in raising finance for major capital investments, perhaps as a result of theconcerns signaled by the Bank's action to suspend disbursements from the loan, becauseof MSEB's poor financial health. Further financial problems will be inevitable inMaharashtra's power sector, when MSEB begins to receive power it has contracted topurchase from the state's independenit power producers, when they first come on streamin 1999. But these are predicamenits that GOM seems unwilling to start addressing, atleast for the time being.

B. ACHIEVEMENT OF OBJECTIVES

This section of the ICR includes an account of the sequence of events leading up to thesuspension in October 1996 of loan disbursements, which persisted until the loan closedin June 1998. It also describes the parallel efforts made by the Bank in its attempt tobring about power sector refornm in Maharashtra, the success of such efforts in otherStates, and the partially successful efforts to effect the specific developmental objectiveof the project, to strengthen MSEB's position.

Developmizeiital objectives anid sector policy

14. In 1992 Maharashtra committed to reviewing the issues and options in its powersector, but preferred to do so without direct Bank assistance. Eventually, in 1994,Maharashtra engaged, at its owIn cost, intemational consultants to advise it on how tostrengthen the position of MSEB, with a view to making changes in the sector to thiseffect. But just after the first phase of the advice had been provided a change ofGovernment occurred, and the recommendations of the consultants were not heeded, andMSEB's condition failed to improve. Receivables continued to be high, losses were notcontained, and Maharashtra prevented MSEB from operating in accordance with thecovenants. The February 1996 mid-term review of the project confirmed the Bank'smounting concern, that MSEB's financial position was weak, and that several covenantswere not being fulfilled. In particular, MSEB's operations in FY1996 resulted in a netloss of Rs. 2.8 billion (about US$80 million), without subsidy, and with receivablesstanding at the end of that year at the equivalent of almost four months' sales. Also, inFY1996 GOM did not pass on to MSEB the full amount of the loan that had been madeavailable to it by India under the Central Plan Assistance.

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15. The Bank was concerned not so much with the covenant defaults' but with what theysignaled, i.e. MSEB's overall fragile financial health and the expected increasing pressurewhen IPP projects come on stream. Besides not allowing MSEB to raise its tariffs toadequate levels, and issuing directives not to pursue certain delinquent consumer classes,GOM was also intending to announce free connections and free electricity to domesticconsumers who used less than 50 kWh per month, wvhich would have further weakenedMSEB's finances. This deteriorating position was especially disquieting, because, as perthe developmental objectives of the project, MSEB wvas expected to lead Maharashtra'spower sector into mobilizing the resources needed for the proposed privately-financedpower generating facilities in the State, for which GOI had agreed to provide a counter-guarantee. MSEB's creditworthiness was also essential to enable it to raise the financingfor the supporting transmission and distribution infrastructure.

16. In May 1996, the Bank informed GOI and GOM of its intention to suspenddisbursenments if GOM did not address these fundamental issues so as to ensure thatMSEB complied with the covenanits. In response, GOM allowed MSEB to increase itstariff, but only by 17%, instead of the 24% recommiaenided by MSEB and confirmed byBank staff as being necessar-y. This inadequate increase resulted in the projected MSEBreturn for FY1997 being less thani that covenanted. By mid-August 1996, the Bank hadreceived confirmation from GOM that it had decided to provide MSEB with a non-plansubsidy of Rs. 7.4 billion, retrospectively to bring MSEB's return for FY1996 to thecovenanted 4.5%. GOM acknowledged its concern at MSEB's weak position, andinformled the Bank that it had comnissioned V.G. Rajadhyaksha, Chairman of theAdvisory Board on State Public Sector Enterprises, to review MSEB's position and toadvise GOM on suitable measures to correct the situation. The Rajadihv cvksha CommnitteeReport was eventually produced in December 1996 and described a broad range ofme;3sures that GOM and MSEB could take to improve the sector's financial position. Inthe nmeantimie, the Bank mounited several missions to Maharashtra, and used theopportunity of visits by a Bank Managing Director and the Bank's President to draw theattentioni of India and the GOM to the seriousness of the situation, and the concerns thatthe Bank had regardinig MSEB's financially weak position.

6 Specifically, Maharashtra failed to comply with several covenants which required (a) GOM to re-lend toMSEB a portion of the proceeds of Loan 3498-IN, made available to Maharashtra by India under the Plan;(b) CiOM to cause MSEB to take measures to achieve an annual return of not less than the covenanted4.5°/O of the average net value of its fixed assets in operation. In FY1996 MSEB's return was 1.3% (afterexcluding that portion of the subsidy that could not be attributed to FY 1996); (c) GOM to cause MSEB toreduce total commercial accounts receivable to less than the covenanted 2.5 months of revenues. At year-end, MSEB's commercial accounts receivable stood at 4.2 months of revenues; and (d) GOM to ensure thatMSEB carry out its operations and conduct its affairs in accordance with sound administrative, financialand public utility practices, and contrary to such requirement, Maharashtra had issued directives to MSEBto delay the collection of arrears from certain categories of consumers, mainly agricultural, and not todisconnect electricity supplies to them.

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17. The Bank decided that the actions taken and/or promised by GOM were inadequateand that covenants were still not being met7 , and thus in its letter of October 22, 1996, theBank notified GOI of its decision to suspend disbursements for the remaining US$238nmillion of the loan. In that letter the Bank proposed, as an exception to the covenant, thatin its calculation of its return for 1997, MSEB need not take the corresponding loss fromthe write-off of bad debts into account, if GOM decided not to compensate MSEB for theloss. In its December 1996 session of its Legislative Assembly, Maharashtra madebudgetary provisions to ensure that MSEB would comply with the covenants for FY1996and FY1997 pertaining to its rate of return. But in March 1997, GOM was still taking theposition that the Rs. 7.3 billion of bad debts should not be written off.

18. At the same time as MSEB's performance was slipping, developments were takingplace in other state power sectors in India. Orissa launched its pioneerinig reformprogram and in May 1996 the Bank approved a loan to support Orissa's program torestructure its power sector. Since late 1993, at a steadily intensifying pace, the Bank hadalso been in dialogue and working with several other states. In Haryana, this would lead,in January 1998, to the approval of the Bank's first ever Adaptable Program Loan (APL).A similar APL program was approved for Andhra Pradesh in February 1999.[eliberations and preparations continue in Delhi, Rajasthan and Uttar Pradesh,

19. Against this emerging willingness to reform the power sector elsewhere in India, theBank, in April 1997, responded to a request from the GOM to lift the suspension, basedon the actions it had so far taken. The Bank pointed out that MSEB had only been able tomove towards compliance with the agreed covenants, with the help of accountingadjustments. The Bank reiterated that the real issue was not about mere technicalcompliance with covenants, but concerned the more fundamental issue regarding thesustainable financial viability of MSEB and the Maharashtra power sector as a whole.The Rajadlivakssha Committee Report had provided a detailed diagnosis of thedeficiencies of the sector and outlined measures that would be necessary to restore thelong-term financial viability of the state power sector. They included unbundling ofMSEB, privatization of its distribution functions, tariff adjustments, metering, andindependent regulation. The Bank offered to explore with GOM and MSEB whether theC'ommittee's recommendations could be developed into a meaningful state power sectorreform program and indicated that it would be prepared to consider lifting the suspensionif-GOM provided the Bank with a meaningful reform program, as a first step toestablishing an efficient and financially strong power sector in Maharashtra.

20. Though in suspension, the loan remained in place, in an effort to be able to respond inthe event that Maharashtra opted to reform the sector, or comply with the existing loan

7By mid-October 1996, (a) evidence had not been provided that the funds of the loan had been passed onby GOM to MSEB; (b) it was evident that MSEB's FY1997 return would be inadequate; (c) all of thedirectives, interfering with MSEB's activities, had not been withdrawn; and (d) MSEB's receivablesposition was unacceptable, and the Bank had opined that MSEB needed to acknowledge that a significantportion of its accounts receivable were (and still are) unrecoverable, and that they be written off inFY1997. MSEB had itself estimated that these bad debts amounted to about Rs. 7.3 billion (US$200million equivalent).

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covenants. Eventually in April 1998 GOM wrote to inform the Bank that reforms werein the offing. However, analysis by the mission which the Bank mounted in response tothis information, indicated that the proposed reforms did not constitute sufficient basis forlifting the suspension. The reforms which GOM proposed fell short both of the Bank'sexpectations and the Government's own Rajadlnvaksha Conmmittee's recommendations.With the cancellation of the undisbursed funds of US$237.7 million, the loan closed twomonths later on June 30, 1998.

Achievement of specified objectives and project implementatioln

21. Olbjective (A) - to increase power supplies and improve the quality of electricityservices in Maharashtra. The objective to increase power supplies was achievedthrough the implementation by MSEB of the main component of the project. The coal-fired '500 MW Chandrapur Unit 7 was competed, commissioned and connected to the gridfor commercial operation in October 1997, about three months ahead of the maincontraLctor's original contract schedule.

22. The objective to improve the quality of electrical services will also be achieved. Theimplementation and commissioning by MSEB of the 736 km ±500 kV direct currenttransmission line and the associated converter stations connecting the 2,500 MWChanclrapur power station complex to the Bombay area will be completed in early 1999.This vvill result in reduced transmission losses, improved supplies and better voltageslevels in the metropolitan Bombay area. Grid system collapses, with both industrial andcommercially-devastating results, have been numerous in recent years, because of theweak system linkages across Maharashtra. It is expected that MSEB will be able toreduce practically to zero the incidence of these collapses through the operation of theHVDC line between Chandrapur and Bombay.

23. Olbjective (B) - to strengthen MSEB's finances and managerial autonomy. Thisobjective was only marginally achieved. As detailed above, MSEB's financial positionimproved only slightly. However, MSEB's autonomy improved with the withdrawal ofGOM's directives to MSEB's management not to pursue certain delinquent consumers.No further similar directives have been issued to MSEB since September 1996. GOMallowed MSEB to raise its tariffs, but belatedly. It also provided MSEB with subsidies toensure that it complied with the letter of the law of the covenants. But, MSEB's books ofaccount continued to paint a false picture of its strength, with the inclusion of fourmonthis of receivables, to a great extent, formed of bad, doubtful and unrecoverable debts.

24. Olbjective (C) - to make more economic use of generating capacity through betterpricing policies, demand management and loss reduction measures. This objectivewas partially achieved. MSEB employed consultants, who advised MSEB on demand-side rrmanagement procedures. But their recommendations stressed that in the absence ofappropriate tariffs, especially time-of-use tariffs, demand-side initiatives could only havea marginal impact. The Rajadhyaksha Report also encouraged MSEB to employappropriate supply rates and time-of-use tariffs, but MSEB has not responded to these

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recommendations. MSEB is carrying out a publicity campaign about the various demandside initiatives recommended, but it is too early to judge the result.

25. Objective (D) - to reduce reliance on the central government for financinginvestment requirements by increasing MSEB's self-financing capabilities andimproving external resource mobilization as well as facilitating private sectorinvestments. This objective was achieved only marginally, as MSEB continues todepend on assistance from the government. While MSEB has been able to raise fundsfrom commercial sources, it has remainied largely dependent on the government andcentral and state government-owned institutions such as insurance companies. MSEB'sself-financing capacity is coming increasingly under strain as operating, working capitaland debt servicing needs are increasing. With no improvement in efficiency, it is unlikelythat even in the future, MSEB will be able to substantially contribute internally towardsits capital investmenlt programii. Further details are contained in Appendix D.

26. Objective (E) - to strengthen MSEB's environmental impact managementcapability. This objective was achieved. MSEB utilized loan funds to employedconsultants in September, 1994, to study MSEB's needs, and to advise and train staff, andhlelp MSEB establish an Environmental Protection Cell (EPC). MSEB has since taken apro-active approach to environmental management activities, and is implementing theseat all of its thermnal power stations, not just at Chandrapur. The efforts of the EPC to-dateare impressive. MSEB has undertaken various environmental impacts studies, and whereappropriate has implemented the results. These have included coal quality impacts onpower station financial and environmental performnance, comparison of upstream anddownstream environmental controls, alternative boiler technologies and an optimizationanalysis of coal washer usage and location, water management systems redesign andconstruction to minimizes water usage and for "zero discharge" of surface effluent; airemissions control improvements, *ash utilization studies and pilot projects; occupationalhealth and safety audits, the institution of a safety audit and safety rating system,environmental audits; environmental data base, dispersion modeling, and disastermanagement plans. Further details are contained in Appendix B. The Chandrapur UnitNo. 7 design included a stack with a height of 275 meters, which has helped withemissions dispersion, and an electrostatic precipitator with an efficiency to arrest over99.9% of particulates.

C. MAJOR FACTORS AFFECTING THE PROJECT

27. Developmental objective One main factor affecting the sector was the interference ofGOM resulting in MSEB's inability to perform as a commercial utility. GOM has, on anumber of occasions, issued directives that have restricted MSEB from operatingcommercially. MSEB's tariffs are decided by GOM, and are typically heavily influencedby political considerations. Even the timings of tariff increases are driven by politicalconstraints. As a result of these encumbrances, MSEB has not been able to effectivelycollect the dues that certain categories of consumers owe to it for sale of power. MSEB'stariffs are highly distorted, with agricultural and domestic consumers paying tariffs lowerthan the average cost of supply. Agriculture pays, on average, just Rs. 0.21/ kWh (only

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about 10% of the average cost of supply). Thus MSEB continues to remain dependent onsubsidies from GOM. In an attempt to limit GOM's margin of interference, the Bankinsisted that the financial covenants, agreed with GOM, be complied with. Realityproved that it was an impossible task, and that only a complete restructuring of the state'spower sector could achieve this.

28. Financial managenment At the time the Bank decided to suspend India's rights toaccess Loan 3498-IN, MSEB and GOM were not in compliance with a number ofcovenants (paragraph 15 above). MSEB was not meeting the accounts receivablescovenant and the rate of return covenant, while GOM had failed to pass on the proceedsof the Bank loan to MSEB. While some of these defaults were partially the outcome oftraditionally poor financial management practices in both MSEB as well as GOM, theywere also symptomatic of a larger malaise affecting most states, i.e., that of a lack ofcommercial accountability in the state government as well as in the SEB resulting fromyears of political interference in most aspects of the operational, administrative andfinancial functioning of the power sector.

29. MSEB is governed by the Electricity (Supply) (Annual Accounts) Rules, 1985, whichapply to all the SEBs in the country. Though these rules are exhaustive in nature, theyallow significant flexibility to the SEBs to set their own financial policies. MSEB thus,did not make adequate provisions for bad and doubtful debts even though it knew that asignificant portion of its receivables were uncollectible, and showed subsidies in itsincome statement without properly accounting for them. Thle Bank, though it acceptedthe Electricity (Supply) (Annual Accounts) Rules, 1985, expected MSEB to followprudent financial policies. Although MSEB lacks strategic financial planning, it doeswell in managing its day-to-day working capital position. As is common in India,separate project account audit reports were not submitted to the Bank. MSEB however,regulairly furnished audited financial statements which were consolidated from projectaccounts.

30. Procuremnent Procurement of the seventeen ICB packages, which were to befinanced from the loan, proceeded in accordance with the implementation of the 500 MWcoal-fired Chandrapur Unit 7, which was completed ahead of schedule.

31. However, the completion of the ±500 kV HVDC line, and the commissioning of itand its associated converter terminal substations was delayed, because of delays in theexercise to procure the suspension insulators for the transmission line. These were to befinanced from the loan, and procured via international bidding procedures. In accordancewith its consultant's advice, MSEB decided to use glass or porcelain insulators, whichhad been used extensively for HVDC lines. This decision was objected to by amanufacturer of composite insulators. Because world-wide experience on HVDC lineswith this type of insulator was very limited, the Bank decided to employ consultants tostudy and advise whether the objection should be upheld, and if so to encourage MSEB toallow bidders to offer composites.

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32. While the study was being performed, and so as not to delay construction of the line,the Bank agreed to finance enough glass or porcelain insulators to support about half ofthe line length. MSEB awarded this contract to the lowest bidder for the supply ofporcelain insulators. The consultants eventually recommended that composite insulators,although possibly having a shorter life than glass or porcelain, could be specified,manufactured, tested and maintained to be as reliable as glass or porcelain, but that theselection would need to be based on present worth analysis comparing the various bidsreceived. The consultant's study and the exercise to design a procedure to evaluate thebids, which MSEB reluctantly incorporated into the bidding documents, took more thantwo years to complete. In the meantime, the Bank suspended India's right to makeclisbursements for the loan, and MSEB financed the procurement of the remaininginsulators from its own resources, awarding the contract to the manufacturer of glassinsulators. As a result of this protracted exercise, the line's completion was delayed byabout nine months.

33. Costs. Project cost estimates were prepared at appraisal on the basis of internationalprices of various plant components. The final cost of the project is summarized in TableSA. The cost of Chandrapur unit 7 was about US$ 317 million equivalent compared withUS$ 462 million estimated at appraisal in 1992. The considerable decrease in the cost inclollar terms is attributed to the devaluation of the rupee (Rs. 25.5 to the US$ at appraisalin 1992, which by closure was about Rs. 40 to the US$) linked to the fact that most ofcontracts were awarded, following international competitive bidding, to Indian suppliers,wvho were well able to match the appropriate standards of the specifications, which MSEBhad included in the bidding documents. The cost of the HVDC component increased toabout US$ 444 million from the US$ 315 million estimated at appraisal, mainly becauseof the increase in the cost, in dollar terms, of the converter terminals, which weresupplied from Europe.

34. Savings, Cancellationis, and Closing Date. Because most contracts were awarded tolocal suppliers, and because of the devaluation of the Rupee during the projectimplementation period, the costs in dollar terms of the Bank-funded items weresignificantly lower than the appraisal estimates (see Table 8A). However, disbursementsfrom the loan were suspended in October 1996, when only US$ 112.3 million had beendisbursed. The suspension was not lifted, and the loan closed as originally scheduled onJune 30, 1998, when US$ 233.7 million was cancelled.

35. Rate of Return. At appraisal, the IERR for the investment program of the WesternRegion, of which the project is part, were estimated to be about 3 percent and 15 percent,respectively, without and with consumer surplus. Based on MSEB's present tariffs , theElIRR of the project is calculated (see Table 9) to be 15 percent, which the same as theappraisal estimate. However, in a scenario where MSEB's demand projections fail tomaterialize in full, and its high-cost IPPs start generating and oust its older, cheaperplants, the EIRR would be lower.

36. Environmental protection. Details of how MSEB is pro-actively moving to improvethe impacts its thermal stations have on the environment are contained in Appendix B.

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37. Resettlement and rehabilitation. The extension of the Chandrapur power station didnot involve any new displacement of population because adequate space was alreadyavailable on the existing plant site for the installation of the seventh and last unit, and nonew land needed to be acquired. However, the construction of units 5 and 6, and the needfor land for ash disposal ponds, had led to the displacement of about 800 families towhom a rehabilitation compensation (in addition to the compensation for land/housestructure acquisition, when applicable) had been paid. Although this cash compensationhad enabled a large number of families to resettle in satisfactory conditions, somefamilies still remained to be fully resettled and rehabilitated. Thus the subject project wasused as a vehicle to accurately assess the number of people affected by the construction ofunits 5 and 6, and to evaluate their needs, and to correct any shortcomings in theresettlement and rehabilitation.

38. A study by consultants identified that 787 families were displaced. By loan closing350 of these families had been resettled to resettlement villages, or had resettled tolocations of their own choice. The remaining families have not relocated, and theycontinuie to practice cultivation on the land they previously owned and which MSEB hasacquired from them, but will not need for ash disposal for several years yet. MSEB hascarefully detailed and recorded the acquisitions, and agreed the details with the families.

39. MSEB has agreed to resettle the remaining families, as and when (about four yearshence) the land is required for ash disposal. The South Asia Region will budget forsufficient staff resources to review the situation on an annual basis, and whenresettlement is completed will recommend that MSEB undertake an impact evaluationstudy to deternine the levels of living standards amongst the affected persons related tothe known base data.

D. PROJECT SUSTAINABILITY

40. The physical achievements of the project are highly likely to be sustained.Operatlional plans to ensure the sustainability of the project have been discussed andagreed with MSEB's management. These include the provision under the variouscontracts of start-up spares for the first few years of the project's life, and through theannual budget of adequate funds for the appropriate maintenance and operation of thegeneration and transmission plant and equipment. MSEB has sufficient suitably qualifiedstaff to operate and maintain the equipment through its design life.

41. The marginal improvements in MSEB's financial position brought about in 1996,following the threat to suspend and the suspension, have been sustained. GOM has notsince issued instructions to MSEB with regard to any particular consumer groups; and atariff increase of 13%, mainly falling on industrial consumers, was allowed in 1998.However, MSEB's position continues to be weak, and dependant on Governmentsubsidies. Thus the sector is unlikely to be able to attract investments in the amountsneeded for electricity developments to support Maharashtra's economic development. Itis doubtful if the position will improve unless Maharashtra enters into a program of

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reform, to implement the recommendations contained in the Rajadhivakslha Comm710itteeReport.

E. BANK PERFORMANCE

42. Identtification atnd appraisal The performance of the Bank, in helping MSEBidentify a suitable package of project components was satisfactory. Advice provided toMaharashtra as to how it should reform its power sector, preceded the formal Bank Policyon power sector reform, which was published about a year later. In 1992, when theproject was appraised, the poor financial position of most state electricity boards (SEBs)led to the conclusion that significant investments from the private sector were still someyears away. The ability of the SEBs to mobilize internal resources, was hampered bytheir weak financial conditions. However, the strongest of India's state power sectorsand its utility, the Maharashtra State Electricity Board (MSEB) was expected to be able toimprove its operations with Bank support. Thus the project was designed to assist the,state develop its private power policy and regulatory framework within the nationalguidelines, to increase MSEB's genieratioln and transmission capacity, and help the statecontract with private developers for major power generation projects. The StaffAppraisal Report recognized that there was a risk that the pace of institutional reform inMaharashtra might be slow, and that has proved to be the case.

43. Suipervisioni During project implementation, the Bank successfully maintained agood working relationship with GOI, GOM and MSEB. Procurement issues, includingnumerous complaints from bidders in the ICB process were handled as expeditiously astheir complexities allowed. The insulator procurement issue (paragraph 27), for which itwas decided the Bank should seek outside advise, took about a year to resolve. A total ofeleven supervision missions were fielded. Problems were identified solutions weredeveloped, and action plans were agreed with MSEB for their resolution. Advice wasprovided to MSEB in the areas of environmental protection, financial management, andproject management and control. This included advice and guidance on the installation ofa computer-aided implementation program, which undoubtedly helped MSEBsuccessfully implement, and ahead of schedule, the main component of the project. Amid term review of the project took place in February 1996, which confirmed the Bank'sconcerns over MSEB's weak financial position, and eventually led to the suspension inan attempt to ensure that the concems were addressed. During the supervision of theproject the Bank continued to hold a policy dialogue with GOM and MSEB on thereforms that would be required to improve the operations and finances of the sector.

F. BORROWER PERFORMANCE

44. MSEB prepared well a least-cost, economical and sustainable project. MSEButilized the experience it had acquired in designing and engineering the two 500 MWthermal units, which had been constructed at Chandrapur (Units 5 and 6). Similarly,NMSEB's extensive experience at procuring and building 400 kV transmission lines andsubstations, enabled it successfully design and construct, through the use of local erectioncontractors, the ±500 kV HVDC line, and through European contractors in joint venturewith India partners, the associated AC-DC and DC-AC converter sub-stations. MSEB 's

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performance in project management and implementation was excellent, and resulted inthe completion of the main component on time and under budget.

45. Compliance by Maharashtra and by MSEB with several covenants of the loan wasunsatisfactory. Interference by the Government of Maharashtra (GOM) in the operationsof MSEB resulted in MSEB being unable to perform as a commercial utility. Incontravention of the covenants, wlhichI required that GOM ensure that MSEB operatesalong commercial lines, GOM did not allow MSEB to charge appropriate tariffs andinsisted (and insists) that MSEB provide low and heavily subsidized tariffs to agricultureusers and to a large rural cooperative, which in turn meant placing a huge burden onindustrial consumers, especially when these favored consumer groups fail to pay.Inadequate and untimely tariff increases caused severe strain on MSEB's finances.MSEB was also restricted from taking much needed actions to recover dues from non-paying consumers leading to an ever increasing burden of receivables, most of which,because of its age, has now become an uncollectable bad debt. In addition, GOM issueddirectives to MSEB to provide and maintain additional electricity supplies to agriculturalusers, leading to shortages for other paying categories of consumers. Besides weakeningMSEB finanicially, this operational interference by GOM has over the years led to a lackof accountability in MSEB, and a slack-ening of commercial discipline.

G. ASSESSNIENT OF PROJECT OUTCONIE

46. The results of the project are mixed. The physical components of the project werecompleted, mainly ahead of time and under budget, and the resulting benefits will besustained. However, the developmiienital outcome to strengthen MSEB was onlymarginally successful and is unlikely to be sustained. However, the project has served toensure that Maharashtra studied the need to restructure its power sector, but seemingly ithas decided that it is not necessary yet. The Bank has offered on several occasions, last inOctober 1998 during the visit of a high-level Maharashtra delegation to the Bank, toassist ithe Government in the preparation and implementation of sector reforms.

H. FUTURE OPERATION

47. MSEB is one of the better performing SEBs, yet its financial position is precariousand its future outlook is alarming, threatening increasingly to constrain state finances andeconomic development in Maharashtra. The makings of a deep crisis are very muchevident. The scope for continuing and increasing Government subsidy support mainly onthe basis of adjustments such as debt to equity conversions, and loan and equity write-offs, is being exhausted. The Government's own financial position does not allow largecash subsidies. The Bank has urged the Government to start addressing this loomingpower and fiscal crisis before it becomes an acute reality. Maharashtra Government couldexamine the experience of Andhra Pradesh in this respect. The AP Government hasrecently launched a comprehensive program of reforms in the power sector, but only afterAPSEB had reached a crisis situation. MSEB is headed towards a similar crisis, andMSEB's burden on the Government is rising. It would be much easier to launch and

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implement a comprehensive power sector reform programn now, rather than 3-5 yearsdown the line when options are limited and implementing them has become much moredlifficult.

48. The Government is in the process of establishing a tariff commission under thecentral Electricity Regulatory Commissions Act. This is a good start, as an effort toreduce politicization in tariff setting,, but it is a limited one because such a commissionwould not have the proper power with a legal basis to regulate as required all the aspectsof the sector. Indeed, much more is needed for the power sector to become efficient andcreditworthy, and able to raise its finanicing needs without state subsidies and centralgovernment guarantees. In the Bank's view, distribution privatization and independentregulation of such private utilities are the only effective means to addressing thef'undamental managerial, operational and financial challenges in India's state powersystems. The Bank would be ready to help, should the Govemment wish to utilize Banktechnical and financial assistance to launch and implement a comprehensive program ofpower reformn.

1. KEY LESSONS LEARNED

49. Operational control by the state governments results in SEBs becoming incapable oftaking commercial decisions. The state government treats the SEB as a department, andexerts direct and indirect control over most aspects of the SEB's business - tariffs, staffingand wages, operations, investment and financing. GOM did not allow MSEB to raisetariffs for certain categories of consumers. This resulted in the other consumers cross-subsidizing these consumers. GOM also does not allow MSEB to take action againstnon-paying consumers, resulting in a huge build up of receivables which have eventuallybecome collectible. MSEB lacks the commercial attitude needed to be successful in thebusiness of distribution, and unless private majority ownership is brought in, thedistribution business will continue to suffer from large-scale revenue leakages. Therecent decision of GOM to create a state tariff commission denotes some progress, but itwill by no means be adequate to serve as a basis for a comprehensive reform program.

50. The project did not result in the hoped-for operational and financial improvements,and as such it confirmed the position taken in the power sector by the South Asia Region.Beginning in the mid-1980s, the Bank had attempted to improve the performance ofSEBs by direct involvement at the state level. This approach was generally unsuccessfuland the revitalization of institutionally and financially weak SEBs did not turn out to bef'easible. Projects failed to meet expectations beyond the physical construction off'acilities, and the Bank was forced to take such strong measures as suspendingclisbursement and subsequently canceling loans. It has become clear that a sustainablesolution to the sector's problems requires a focus on addressing the root causes of thecrisis:- the politicization of decisions, non-technical losses due to theft, lack of acommercial culture, which can be achieved only through structuring the state powersector, rather than revitalizing the SEBs as attempted in the past This restructuringincludes, initer alia, the unbundling of monopoly utilities, corporatization, establishment

16

of independent regulatory commission, tariff reforms, and privatization of distribution.This lesson has been applied in the on-going power sector reform projects in Orissa,Haryana and Andhra Pradesh.

51. Several useful lessons were learned in the implementation of the R&R program(Appendix C; paragraph 13): (a) The success of the relocation program under this projectis partly attributed to self-relocation. (b) There was no approved plan forimplernentation of R&R program at the beginning of the project. An advanced andupstream plan including a well laid out time-table, a committed budget as part of theoverall cost of the project, and proper institutional arrangements are necessary for speedyand successful implementation of such a program. (c) Decisions related to resettlementimplernentation should take into account people's needs and their concerns, for successfulimplernentation via a process of public consultation. (d) Intense and continued Banksupervision during implementation will contribute significantly in the timelyimplernentation of an R&R program. (e) The unit of entitlement for economicrehabilitation should be the adult individual rather than families.

17

PART II: STATISTICAL TABLES

Table 1: Summary of Assessments

A. Achievement of Objectives Substantial Partial Negligible N Not applicable

ceconomic policies - ___

Sctor policies

1Financial objectives

Institutional dcvelopment

Physical objectives - i

Poverty reduction

Gender issues I

Other social objectives

Environmental objectives

Public sector management __t_

Private sector development

Otlici-

Other 1 Likely Unlikely Uncertain

B. P'roject Sustainability IC. Bank performance Highly Satisfactory - Satisfactory Marginally satisfactory Deficient

Identification…-___ - - ---- - - --- - ______ ----. , -t--------__-_-___ _

IPreparation assistance _ _,_ -__ _______ _ _

Appraisal _____

Supervision

D. Borrower performance Highly Satisfactory Satisfactory Marginally satisfactory Deficient

Preparation (physical elements)i I -_ _ _ . _ _ _ _ _

Implementation ( physical elements)

Covenant compliance - |

Operation (physical elements) | . -

Highly satisfactory Satisfactory Unsatisfactory Highlyunsatisfactory

E. Assessment of outcome -

18

Table 2: Related Bank Loans/Credits

Loan/Crediit Title Purpose Year of Approval StatusIBRD LoansPreceding OperationsRamagundam Thermal 3x200 MW January 1979 CompleteFarakka Thermal 3x200 MW June 1980 CompleteSecond Ramagundam Thermal 3x500 MW December 1981 CompleteCentral Power Transmission 400k\'-220kV tranismission May 1983 CompleteSecond Farakka Thermal 2x500 MW Junle 1984 CompleteRihand Power Transmissioni 500kV HVDC+400kV AC tr. May 1985 CompleteCombined Cycle Power 413 MW (Anta) April 1986 CompleteCapital Power Supply 4x210 MW (Dadri) June 1987 CompleteTalcher Thermal 2x500 MW June 1987 CompleteChandrapur (Maharashtra) 2x500 MW May 1985 CompleteNathpa Jhak:ri 6x250 MW January 1989 Under

construction(First) Maharashtra Power 4x250 MW (Koyna hydro) May 1989 Under

conistlructionFollowing OperationsOrissa Power Sector Restructurinii Transmission and Distribution May 1996 Under-

imiplementationHaryana Po,wer APL I Transmission and Distributioni January 1998 Under

implementationTotal IBRD Loans: 14IDA CreditsPreceding OperationsSingrauli Thermal 3x200 MW April 1977 CompleteRamagundam Thermal 3x200 MW January 1979 CompleteKorba Thermal 3x200 MW April 1970 CompleteSecond Sinarauli Thermal 2x500 MW May 1980 CompleteFarakka Thermal 3x200 MW June 1980 CompleteSecond Korba Thermal 3x200 MW July 1981 CompleteTotal IDA Credits: 6

Table 3: Project Timetable

Steps in project cycle Date planned Date actualIdentification 11/1990 11/1990Preparation 6/1991 6/1991Appraisal 02/192 02/1992Negotiations 05/18/1992 05/22/1992Board presentation 06/23/1992 06/03/1992Signing 07/8/1992 07/08/1992Effectiveniess 02/28/1993 06/18/1993Project completion (physical elements) 06/30/1997 10/01/1997Loan closing 06/30/1998 06/30/1998

19

Table 4: Loan Disbursements: Cumulative Estimated and Actual

~Appraisal estimate (US$ million) 39.8 74.7 146.5 259.7 342.8 350.0Actual (US$ miHion) 0.0 20.3 51.5 96.1 112.3 112.3Actual as % of estimate (%) 0 27 34 37 33 32Pate of final disbursement _ 12/10/19961

Table 5: Key Indicators for Project Implementation

Construction and Commissioning

SAR Contract Actual SAR Contract Actual SAR Contraci Actual

Unit 7 (500 MW) 6/92 1/94 1/94 3/97 7/97 1/97 6/97 5/97 3/97+/- 500 kVtransmission

Pole 1 5/92 5/94 5/94 10/96 4/98 2/99 11/96 5/98 3/99

Pole 2 5/92 5/94 5/94 2/97 6/98 4/99 3/97 7/98 5/99

Table 6: Key System Indicators

1991/2 199213 1993/4 1994/5 1995/6 1996/7 1997/8State system annual load factor % 73.2 75.4 72.0 75.9 77.9 78.0 nyaMSEB thermal plant availability factor % 77.4 77.7 79.8 81.9 83.8 85.2 84.2

Reserve margin MW NilMSEB coal consumption (kg/kWh) 0.770 0.800 0.800 0.798 0.804 0.788 0.800Number of system collapses 1/ 3 1 1 - 7 3 1MSEB installed capacity (MW) 7,503 7,503 7,593 7,725 7,725 7,725 8,281MSEB annual generation (GWh) 31,360 31,030 34,110 38,210 39,390 41,020 41,630MSEB annual sales (GWh) 30,960 34,560 37,760 41,620 42,700 nyaTotal losses % 15.7 15.3 15.2 15.3 15.4 15.3 nyaMSEB average tariff incomep/kWh 107 136 150 161 169 199 213MSEB income from sales Rs. crores 3,285 4,306 5,202 6,081 7,034 8,498 9,888

MSEB rate of return % 3.0 5.2 4.8 4.7 4.8 4.5 4.5Self financing ratio 11.6 27.5 11.2 38.3 36.0 53.6 44.9Receivables (days) 138 137 139 134 128 112 107Collections to billing ratio n/a n/a 93.2 94.3 94.4 92.5 91.6Payables (days) 140 153 57 58 54 54 52Debt service ratio 0.97 1.20 1.18 1.41 1.55 1.39 nyaNo. of consumers (million) 8.84 9.27 9.75 10.27 10.87 11.42 nyaNo. employees (regular) 107,450 111,514 111,514 111,514 110,662 110,874 110,681Consumers/employee 82.2 83.1 87.4 92.1 98.3 103.0 nyaEmployee/MW installed 14.3 14.9 14.7 14.4 14.3 14.4 13.4Transmission I IlkV & above (km) 177,000 - - - 208,887 214,593 nyaDistribution belowll 1kV(kmn) 317,000 --- 396,113 397,348 nyaTransmission s/s capacity (MVA) 43,000 --- 43,542 46,163 nya,

1/ System collapses will likely reduce in number with commissioning in 1999 of±500 kV HVDC line, betweenChandrapur and Bombay.

20

Table 7: Studies Included in the Project

MSE]B chose to finance from its own resources the studies aimed at strengthening itsfinancial position. The State Govemment commissioned the Rajadhyaksha Committee toreview and advise it on the need to reform the sector (see text at Part 1, paragraphs 12-17).

The loan financed work by consultants to strengthen MSEB's environmentalcapabilities. The consultant began work in September, 1994, and the study and trainingwas completed in 1996. (see text at Part 1, paragraph 24.) Details are contained inAppendix B.

The loan also financed consultants, who advised MSEB regarding Demand SideManagement (see text at Part 1, paragraph 22).

Table 8A: Project Costs

Appraisal Estimate (Rs.m) Actual (Rs. m)Local Foreign Total Local Foreign Total

Chandrapur Unit 7 5,781 8,526 14,307 8,569 3,843 12,050

+/- 500 kV line and 4,628 6,773 11,401 9,440 7,452 16,892converter stationsDistribution expansion 2,293 1,668 3,961 3,400 - 3,400

Consultancy studies 18 51 69 10 240 250

Total Project Cost (Rs. m) 12,720 17,018 29,738 21,417 11,175 32,592

Ttal from Cost 54 / 54 9 . 4 294- 858

Interest During Construction 4,438 4,168 8,606 b/ b/ b/

Total Financing Required 17,158 21,186 38,344

a/ Bank staff estirnatesb/ Not provided by MSEB

Table 8B: Project Financing

Appraisal Estimate (US$m) Actual c/ (US$m)

Source Local Foreign Total Local Foreign TotalIBRD - 350 350 8 104 112

Export credits - 200 200 - 190 190

PFC - - - 31 - 31

ILFS - - 111 111

MSEB/GOM 409 - 409 414 - 414

Total d/ 409 550 959 564 294 858c/ Not provided by MSEB, but based on Bank staff estimates by updating 1996 mid-term mission reviewand analysis.d/ Excludes interest during construction (see footnote b/ above).

21

Table 9: Economic Costs and Benefits(Rs. Million)

FY Chandrapur Unit 7 T&D TOTAL Netj lncr.Capital cost O&M Fuell Capital cost O&MI COST Generation Revenue Net Benefits

1.992 -

1993 1 36 37 - (37)1.994 395 235 630 - (630)1995 786 2,748 3,534 - (3,534)1]996 1,741 1,530 3,271 - (3,271)11997 2,535 1,964 4,499 - (4,499)L1998 2,624 1,781 4,405 - (4,405):1999 1,558 193 150 6,427 74 8,401 256 588 (7,812)2000 - 193 1,794 856 78 2,921 3,069 7,058 4,1382001 - 193 1,794 856 82 2,925 3,069 7,058 4,1332002 - 193 1,794 - 82 2,069 3,069 7,058 4,9892003 - 193 1,794 - 82 2,069 3,069 7,058 4,9892004 - 193 1,794 - 82 2,069 3,069 7,058 4,9892005 - 193 1,794 - 82 2,069 3,069 7,058 4,9892006 - 193 1,794 - 82 2,069 3,069 7,058 4,9892007 - 193 1,794 - 82 2,069 3,069 7,058 4,9892008 - 193 1,794 - 82 2,069 3,069 7,058 4,98912009 - 193 1,794 - 82 2,069 3,069 7,058 4,9892010 - 193 1,794 - 82 2,069 3,069 7,058 4,989:2011 - 193 1,794 - 82 2,069 3,069 7,058 4,9892012 - 193 1,794 - 82 2,069 3,069 7,058 4,989:2013 - 193 1,794 - 82 2,069 3,069 7,058 4,989:2014 - 193 1,794 - 82 2,069 3,069 7,058 4,9892015 - 193 1,794 - 82 2,069 3,069 7,058 4,9892016 - 193 1,794 - 82 2,069 3,069 7,058 4,9892017 - 193 1,794 - 82 2,069 3,069 7,058 4,9892018 - 193 1,794 - 82 2,069 3,069 7,058 4,9892019 - 193 1,794 - 82 2,069 3,069 7,058 4,9892020 - 193 1,794 - 82 2,069 3,069 7,058 4,9892021 - 193 1,794 - 82 2,069 3,069 7,058 4,9892022 - 193 1,794 - 82 2,069 3,069 7,058 4,989

Internal Economic Rate of Return: 15 percent.At appraisal, the IERRs for the investment program of the Westem Region, of which the project is part, were estimated to be about 3percent and 15 percent, respectively, without and with consumer surplus. Based on MSEB's tariffs, current in 1998, the EIRR of theproject is calculated to be 15 percent, which is the same as the appraisal estimate.

22

Table 10: Status of Legal Covenants

Loan Agreement DescApdon of Covenant Covenant Stats2.02 (b) GOI to open and maintain a Special Deposit Account in dollars with the Complied with

Reserve Bank of India.3.04 GOI to take actions to ensure adequate coal supplies for the efficient Complied with

operation of the project's power plant.4.01 (b) (ii) GOM shall, jointly with the Bank, carry out a mid-term review in the 3rd Performed in

year of the project to assess overall progress of the project. February 1996Project 4greemnent Descripton of Covenant Covenant Status2.02 GOM/MSEB onlending arrangement Complied with4.01 (b) (ii) GOM: Project account to be audited and audit report to be furnished to Complied with

the Bank no later than 9 months after FY end4.04 MSEB to make necessary financial arrangements for the acquisition and Complied with

installation of HVDC terminals required under Part A(ii) of the projectSchedule 2.2 GOM shall (a) establish a commission to review institutional (a) complied with

arrangements in the power sector in Maharashtra, and (b) not later than in 1994Dec. 31, 1993, discuss the findings and recommendations of the said (b) complied withcommnission with the Bank. in 1996

Schedule 2.3 GOM shall, jointly with the Bank, carry out a mid-term review in the 3rd Performed inyear of the project to assess overall progress of the project February 1996

Schedule 2.3 MSEB to furnish to the Bank no later than March 31 Of each year, a work Complied withplan, including the list of distribution lines and substations to beconstructed under the project in the following year

Schedule 2.5 MSEB to implement various environmental mitigatory measures at Complied withChandrapur, including inter alia, the implementation of a waste watertreatment & management scheme, the installation of a dust suppressionacquisition and maintenance of various monitoring equipment.

3.01 (iii) MSEB to take out insurance against risks in such amounts as will be Complied withconsistent with appropriate practices.

3.02 (i) Ln 3498-TN: MSEB to reduce commercial receivables (less any disputed Not compliedamounts) to less than 2.5 months of revenue. with

3.02 (ii) MSEB to reduce commercial payables to less than 2.0 months of Complied withconsumption of fuel and consumables, plus purchase of power.

4.02 (c) MSEB to furnish to the Bank, certified financial statements within 9 Complied withmonths of FY end, and auditor's report within 12 months.

4.03 (a) (i) MSEB to generate funds from internal sources (excluding GOM Complied withsubsidies) equivalent to not less than 20% in FY93 and FY94, and 25%from FY95 onwards, of the annual average of its capital expenditureincurred, or expected to be incurred, for the previous, current andfollowing fiscal year.

4.03 (a) (ii) MSEB to earn a return on net fixed assets of no less than 4.5% from Complied vwithFY93 onwards.

4.04 MSEB to ensure that Debt Service Coverage is at least 1.0 in FY90/91 Complied withand 1.2 thereafter

Schedule 2.1 MSEB to furnish to the Bank, no later than Dec. 31 of each year, annual Complied withrevisions to the 5-year revolving capital investment and associatedfinancing plan of MSEB

23

Table - 11: Compliance with Operational Manual Statements

Statement Number and Title Comments on lack of compliance

All Bank policies were complied with, with the exception of OP/BP 10.02 (see text at paragraph 29). Forany future operations with state governments or utilities, the Bank will need to carefully address financialmanagement issues, taking full cognizance of the guidance contained in OP/BP 10.02.

Table 12: Bank Resources: Staff Inputs

Stage of Project Cycle Planned Revised ActualWeeks USS Weeks USS Weeks US5

('000)

Through Appraisal 57.0 141.6Appraisal-Board 52.3 177.7

Board-Effectiveness 48.0 131.6Supervision 90* 91.8 343.3

Completion 7* 14.5 32.5 14.5 32.5TO]TAL 263.6 826.7

estimates in SAR

Table 13: Bank Resources: Missions

Stage ot P roject Month, No. oI Days in Spccialization (see key below)Cycle Year P'ersons ticid

Identification M /90 i 3 FAPre-appraisal 09/91 6 1 2 FA,FA,E,E,ECON,ENV

12/91 l 5 ENVSPAppraisal 02/92 7 7 18 FA,FA,ENVS,E,E,IT,ES,To effcctiveness 06/92 2 2 FA/ESStage of Project Month/ No. ot Days in Specialization Performance RatingCycle Year Persons field Implementation Development

Supervision 1 07/93 3 7 ES,FA,FA I SSuprervision 2 03/94 3 5 E.FA.ENV I SSupervision 3 11/94 2 5 E,E I SSupervision 4 3/95 3 5 E,E,IT I SSupervision 5 5195 1 4 SOC I S

Supervision 5 11/95 3 5 E,E,FA I SSupervision 6** 2/96 6 9 E,E,FA,FA,ENV,SOC I USupervision 7 9/96 1 4 ES I USupervision 8 11/96 3 5 E,E,FA I USupervision 9 6/97 1 7 E 1 USupervision 10 1/98 2 4 E,SOC I USupervision Il*** 6/98 5 5 E,E,ES,FA,SOC I UICR review mssn 11/98 4 5 E,FA,FA,SOC I UFA - financial analyst; E - engineer; Econ - economist; IT - information technology specialist; ES - energy specialist;SOC - sociologist; ENV - environmental protection specialisti* - mid term review

- and ICR mission

24

APPENDIX A

Project Review from Borrower's Perspectives

A. PREFACE

1. This is the Borrower's perspective part of the Implementation Completion Report [ICR] for theSecond Maharashtra Power Project [partly] covered under financing of IBRD Loan 3498-IN foran amount equivalent of US$350 million, The project has been an important and ambitious one,having multiple targets for the executing agency [MSEB]. The physical objectives were toenhance MSEB's capability/efficiency in terms of additional power generation, evacuation ofpower with reduced transmission losses, and finally a stabilized and more reliable distributionsystem. Implementation of this project has become significant as it has sustained against facingconsequences of financial constraints, during the time of suspension. The balance cost of theproject has been arranged through internal resources and PFC financing.

B. A CHIEVEMIENT OF OBJECTI VES

2. Providing a least-cost effective power addition in the Western region has been successfullyachieved, by way of commissioning Chandrapur Unit 7 of 500 MW, in a record time of 44months [as compared with other 500 MW Units so far commissioned in India].

3. The power evacuation from the Eastern part to the Western part of Maharashtra is expected tobe achieved soon with completion of HVDC project, the least-cost option of HVDC TransmissionLink between Chandrapur and Padaghe. With the present progress, the HVDC project isscheduled to be completed by March 1999.

4. Improving the efficiency of MSEB's distribution system has been taken up with MSEB'sown financial alternative resources through loans from nationalized and cooperative banks.However, this project has suffered unavoidable delays due to procedural constraints. The projectis likely to be completed by 1999-2000.

5. Consultancy services have been completed and their recommendations in respective areas arebeing irnplemented.

C. IMPLEMENTA TION SCHEDULE

6. Clhcundrapur Uniit 7 fJx500 AMW] Comiiponrent: One of the major components of SecondMaharashtra Power Project was the installation and commissioning of an additional 500 MW coalfired unit at Chandrapur TPS, expanding its present generation capacity [1,840 MW] to itsultimate potential of 2,340 MW generation. The original commissioning schedule duringappraisal was June 1997. The main plant equipment (boiler, turbine, and auxiliaries) wereordered on M/s BHEL, India in January 1994 with a target of 48 months commissioning schedule[i.e., January 19981. However, considering the power shortages experienced in Maharashtra, themanagement of MSEB and BHEL agreed to make every effort to achieve the commissioning in42 months, or six months ahead of the contractual commissioning schedule. In the end, Unit 7was synchronized in 44 months--on October 1, 1997. The coal-firing operation took place on

s This section is MSEB's contribution, and is not attributable to the Bank.

25

]December 21, 1997, and subsequent to successful trial operation, the Unit started generating atfull load. As of October 1998, the Unit had generated 1,402 million kWh . Expenditure on 67contracts [including various E&M, Civil & General packages] of Rs.1072.669 Crores has beenincurred. Shown below are tables indicating the program that was achieved to implement Unit 7,it subsequent performance, and details of loan usage.

a. Mlajor hilestones for C/handrapur l /nit 7

Sr. 42 NMonths DateNo. M%lajor .lile Stones Schedule Achieved

Zero date ot'lProject 27.1.94 27.1.942 B3oiler Foundation start Feb'94 1.2.943 Boiler lErection start Jan'95 17.1.954 iloiler l)rum Litting July'95 30.9.955 T(I D)eck completion Nov'95 29.9.956 NMaini T(i lErection start Mar'96 24.2.967 lloiler I lydraulie 'I'cst Sep'96 16.12.96

8 Generator Stator Lil'ting Aug'96 30.11 1969 I G llox up Nov'96 14.1.971 0 Generator 13ox up Dec'96 17.5.97II (C'omposite B3oiler I lydraulic 1 C.t Nov'96 1.6.97

12 Boiler Light up Mar'97 25.6.9713 13oiling out start Mar'97 1.7.9714 Boiling out compietion Mar'97 3.7.97S B13oiler Acid cleaning start Apr'97 16.7.9716 Boiler Acid cleaning completion Apr'97 21.7.9717 Steam Blow ofT start May'97 1.9.97IX 8 Steam Blow ofl completion May'97 17.9.9719 'GTC on B3arring Giear May'97 28.7.9720 Rolling Jul'97 30.9.9721 Synchronization Jul'97 1.10.97

b. Pci'fornatnce Summarv Report

Month Plant l.oad Factor Availability Generation inF:actor Million Units

(MUS)Dec'97 8.26 55.64 12

Jan'98 9.05 32.5

Feb'98 38.28 74.61 129

Mar'98 24.77 44.89 92

97-98 total 266

Apr'98 47.63 68.11 171

May'98 71.21 93.36 265

June'98 64.26 80.65 231

July'98 66.55 91.28 248

Aug'98 47.77 73.58 178

Sep'98 12.2 18.25 44

Oct'98 0 0 0

Nov'98 48.08 73.36 173

Dec'98 63.1 82.27 235

Jan'99 85.39 96.87 318

Feb'99 53.6 68.17 180

Mar'99 90.19 100 335

26

98-99 total 54.29 70 oS 2378

c. CoonsolidatedS Stulmmsay lof lo(on I iil:aton(L'SSmil/lion)

Sr.| I oan Componeint Loan Loan ILoan UtilizedNo Amount Anmount Till date ot loan

_ _ [Originall [Rex isedi suspensionI Chandrapur U# 7 1 x500 INIWI Project 221 195 94.8662 Chandrapur-Padaghe fIVIc I'ransniission l-inie Project 1538 3 9)592A Additional Transmi5sion l-Iiine 0 ] Nil3 Acceleratedl Dlstribution Reinforcement Prourainm 7() Nil3A ILatur Farthquake Re! hetWorks Schlicmes 0 4 2 5324 C(onsultancv Serv ices 2 7 5.8525 Reserve for Contingency 2) 10 ----

6 Total for loan 3498 IN 350 351) 107 209

7. HVDC Linie Project: Both at the Chandrapur and Padaghe terminals, most of the civil workshave been completed. The fir-st and second pole comnissioning was scheduled in August 1997and February 1998. Commissioniing for both poles I and 2 are now rescheduled for mid-1999.

3. Acceleratedl Distributtioni Rein forcenent Progtrimmzze:

(a) Rehabilitation schemes of afftected villages of Latur earthquake. The materia'procurement under this scheme is almost completed.

(b) Accelerated Distribution Reinforcement Programme. (i) bid evaluation reports for 17schemes were forwarded to the Bank for its concurrence during October 1997 andJanuary 1998. However, because the loan was under suspension [beginning October 22,1996), no further correspondence took place. While tenders for 14 items were canceled,MSEB proceeded with award of a contract for other items; (ii) out of 71 new sub-stations, MSEB commissioned 16 sub-stations during FY1997-98 by using its ownreserve stock of materials.

8. Conis.ultaccv Services. Works of all the consultancy services undertaken by theconsultants have been completed, generally as per the scheduled timeframe. Therecommendations of these consultants are being implemented by MSEB in the respective areas.

D. DESIGN FEA TURES

9. Chandrapur Unit 7 Component: MSEB has already acquired sufficient experience ininstallation and commissioning of a number of 210 MW thermal projects at its power stations,namely Nashik, Koradi and Khaperkheda, Bhusawal. Parli and Chandrapur along with two500MW' units at Chandrapur. With the association of consultants M/s DESEIN, New Delhi(whose technical collaborators are M/s Black & Veach, USA), all the technical specifications ofthe main plant and various E&M packages of Chandrapur Unit 7 were prepared, tenders floated,bids received and evaluated, and contracts were awarded by MSEB's Project Design Office atMumbai, headed by Chief Engineer (Gen. Projects and Planning). Similarly, the projectimplementation was executed by MSEB's Generation Construction Office, headed by ChiefEnginee:r (Generation Construction) and Chandrapur Project Site Office, headed by Deputy.Chief Engineer (Generation Projects). The design of Chandrapur Unit 7 is on the basis of, andvery much similar to, the earlier commissioned Chandrapur Units-5&6 (2 x 500 MW), main plantequipment which were also supplied by M/s BHEL.

27

* Environmental Aspects: The environmental impacts likely to be posed by Chandrapur TPS,assuming a generation potential of 2,340 MW, were examined by MSEB's consultants (M/sAssociated Industrial Consultants India Pvt. Ltd). While granting the environmentalclearance for commissioning of Unit 7, GOI made it contingent on construction of a chimney[stack] with a minimum of 275 meters height and installation of a flue gas desulpherisation[FGD] unit [pending MSEB's request to GOI to relax this mandated condition]. A noobjection from the National Airport Authority for construction of a 275 meter chimneyenabled MSEB to proceed with Unit 7 project works. The ground level chemicalconcentration of S02 & NOx at various locations were reviewed. The chimney [stack]height of 275 meters has helped emission dispersion over a wider area. NOx generation iscontrolled in the pulverized coal fired boiler. (for use of worst quality coal), by way ofproperly designed bumers that use a low excess air combustion system. The onlineinstrumentation installed at the chimney enables continuous monitoring of emissions (seeAnnex for details of recent results). Levels of the following constituents are well within thepermissible limits of ambient air quality is as follows:

Constituents Limits [for Ambient Air Actual ValuesQualityi as per MPCB

NormsS02 120 microgm. /N-Cubic meter 15 to 20 microgm./N-Cubic

meterNox 120 microgm. IN-Cubic meter 20 to 25 microgm./N-Cubic

meterParticulate Discharge 500 microgm. /N-Cubic meter 300 to 400microgm./N-Cubic

meter

The effects of burning the worst quality of coal, and thus the gas emitted from the plant[when all the seven units would be in full-load operation], would not exceed the permissiblelimits. Therefore, this will comply with the guidelines of GOI/ GOM and the Bank.

Inistallaition of ESPS: MSEB has commissioned ESPs in all the power stations, which hasvery high efficiency [exceeding 99%]. Regular maintenance is carried out to restrictparticulate discharge well within the limits. MSEB is meeting SPM regulations for 50% ofits thermal generation capacity, i.e., 3,046 MW out of 5,976 MW . This is as per the targetset by MSEB. The target for meeting SPM regulations for the remaining thermal generationcapacity will be achieved by the year 2005.

* Zero Discharge Objective.' In order to reduce pollution of water bodies and to provide afriendly and pollution-free environment, MSEB has adopted a Environment Health SafetyPolicy. For implementation, MSEB's objective is to achieve ZERO DISCHARGE from itsthermal power stations by the year 2000. For meeting this objective, Effluent TreatmentPlants are being set up. The effluents from the various places located at the power stationsare collected at one location, and after providing necessary treatment to these effluents, thewater is recovered/recycled for re-use. As a consequence of such recycling of water, thewater consumption per unit of electricity generated is brought down, leading ultimately to theconservation of natural resources. Water quantity recycled at Chandrapur from January 1997to March 1998 was I1 million cubic meters, which is more than the water requirement forone 210 MW unit in one year.

28

* Ash Water Recovery Systenm Wet ash is collected in bunds which are compartmentalized inlagoons. This arrangement leads to more residual time in the lagoon for resettlement of thesuspended fly ash, and clear water is discharged which is available for recovery/recyclingand re-use. At Chandrapur, the ash water recovery scheme is expected to clear about 2,680cubic meters per hour for its ash bunds for its ash slurry.

* Improvemnent Measures.: Use of bag filters technology is presently being implemented atKoradi Unit 6 and is under observation. These improvement measures will be implementedin other units in phases.

* Tree Plantation (Irilve (it Chandrapur: MSEB has implemented a green belt development bytree plantation at all thermal power stations in the open space area, and so far, 25.55 lacs oftrees have been planted in 2,514 acres of land. At Chandrapur TPS, 9.6 lacs of trees havebeen planted over 914 acres of land.

10. If 1VDC Project. MSEB has also acquired sufficient experience of installing, commissioningand maintenance of various transmission lines, and has developed a team of well-experiencedengineers who can design and implement tasks of such a nature. The project has been designedby the Transmission Planning Dept. of MSEB, headed by Chief Engineer (TransmissionPlanning) at Mumbai. The tender documents were prepared, bids received and evaluated andcontracts awarded. MSEB has adequate, experienced in-house staff for undertakinginstallation/commissioning as well as operation and maintenance (O&M) activities of HVDC linkbetween Chandrapur and Padaghe.

11. Accelerated Distribuitioni Reirlforceirmenit Programrmirre: A consultant was appointed forfinalizing this loan component according to World Bank guidelines; MSEB appointed M/sWorley International, New Zealand as a consultant, and MSEB prepared the schemes for thiscomponent in line with their recommendations. MSEB's Distribution Dept., headed by ChiefEngineer (Distribution) has undertaken implementation of this project. Technical specificationshave been prepared. tenders floated, bids received and evaluated and contracts awarded asdescribed above.

12. Consultancy Services: MSEB secured consultant services in the following three areas:

* Development of MSEB's environmental management capabilities at the corporate level.MSEB had placed an order for Environmental Management Consultancy on an internationalconsultant M/s ERM, U.K. During the tenure of M/s ERM consultancy services, anEnvironmental Task Force Group was set up at MSEB's Corporate office in Mumbai forconsistently coordinating with the consultants. The consultancy period was for 18 monthsfrom September 1994 to March 1996. At the end of the consultancy period, M/s ERMsubmitted their final report, which was accepted by MSEB. Accordingly, MSEB has set up aCorporate Environment Health and Safety Unit at Headquarters, Mumbai, designated asChief Engineer (Corporate Environment H&S Unit) from February 1997. The Chief Engineeris assisted by one Sr. Executive Engineer, two Executive Engineers, one Executive Chemist,one Assistant Engineer and other secretarial staff. MSEB has adopted an EnvironmentalHealth and Safety Policy, and set up long-term quantified objectives, which are underimplementation through the Environment Health and Safety Unit. Environmental issues arediscussed regularly in the monthly review meetings which are convened by the TechnicalDirector (Gen. O&M) and all Power Station Heads/Chief Engineers participate and discussvarious issues pertaining to the power stations.

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* Load research and preparation of electricity demand management measure. MSEB is thelargest electric utility in India with an installed capacity of plus 8,000 MW. The additionalpower demand is met by purchasing power from NTPC and Tarapur Atomic Power Station.MSEB shares power with Tata Electric Company and other State Electricity Boards/RegionalElectric Utilities to meet the power demand in the State of Maharashtra and otherneighboring States. MSEB supplies power in Maharashtra excluding Mumbai City where thepower supply is served by Tata Electric Company and BSES. However, MSEB has been justmeeting the power demand in Maharashtra, and sometimes during peak hours, load sheddingmust be imposed [more prominently during winter season]. Given the estimated 7.5% annualgrowth expected in power demand, the situation was quite alarming, and called forimprovement. The cost of power is another major determinant in the equation. Currently,power from the central government owned stations has been available at low rates to MSEB.MSEB, thus has been able to meet revenue requirements in most of the years, despite a ratestructure which stabilizes the agricultural and domestic consumers at the cost of the industrialand commercial consumers. This would change with the installation of the new powerplants, which have considerable higher costs relative to the presently installed power plants.With higher supply costs, MSEB would be unable to maintain the current rate structure andmeet revenue requirements without substantial subsidies from the state govemment. Thiswould not be a desirable situation, given the tight fiscal situation and the ongoingliberalization programs which do not favor subsidies. Given this background, MSEB is keento reduce future load demand by considering Demand Side Management options as anavenue to meet some of its capacity needs. Therefore, MSEB commissioned SRCInternational to conduct a study on Load Research and Demand Side Management. SRCInternational, working with Ontario Hydro International of Canada and the Tata EnergyResearch Institute of New Delhi, developed a detailed work plan based on terms of referencedefined by MSEB. The scope of the study is detailed in the inception report prepared inAugust 1994.

* Financial and legal consultants in the area of private power projects in Maharashtra. Apartfrom the contribution of power generation along with its transmission and distribution byMSEB [in the state of Maharashtra], other prime sources of power from private sector are (i)Tata Electric Company, having their power station at Trombay [station capacity of 1330MW); (ii) Tarapur Atomic Power Station [Maharashtra's share:160 MW); and (iii) BombaySuburban Electric Supply Company, presently having its 2x250MW capacity power stationin Dahanu, near Mumbai. Therefore, the presence of private power sector companies areconsistently contributing appreciably in keeping pace with the continuously increasing powerdemand in Maharashtra and neighboring states. Further, because of financial resources aswell as to benefit from GOI's policies of promoting private power sectors, MSEB and GOMhave initiated steps to encourage private sectors to occupy a wider share of power generationin Maharashtra. The first such power station is being built at Dabhol in the district ofRatnagiri. MSEB has also signed a PPA with Central India Power Company who will besetting up a 1,082 MW [2 x 541 MW] coal-based power station at Bhadravati. Forformulating and executing the policies concerning the private power sectors, MSEB has setup an exclusive cell, headed by the Technical Director [Corporate Planning]. Further, theChief Engineer [Corporate Planning] is assisted by one Deputy Chief Engineer, threeSuperintending Engineers, and four Executive Engineers along with other finance andsecretarial staff. In response to GOI's policy announcements inviting private investment inthe private sector in India, MSEB has proceeded with the finalization of signingmemorandums of understanding with various prospective private sector companies. This

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procedure is new to MSEB and involves financial and legal complexities. To becomeacquainted with these procedures, and to comply with the queries relating to so manyformalities for getting clearances from numerous authorities, MSEB has secured the servicesof' the following financial and legal consultants: M/s Vanguard Capital International Limited,London; M/s Freshfields, London; and M/s West Merchants, London.

F. LESSONS LEARNED

12. Chandrapur Unit 7 Component: MSEB had to face initial problems while seeking statutoryclearances before proceeding with this component. During the tendering stage, MSEB wasrequired to extend the tender opening date when the prospective tenderers were allowed topurcha[se the tender documents till the date of tender opening as per the suggestions of the Bank.This process contributed to slight delays in awarding the contracts for the main plant equipment.The other major experience of MSEB was to tackle the financial crunch which developed due toloan suspension. However, MSEB has succeeded in implementing the commissioning of Unit 7in record minimum time.

13. HVDC: The procurement of insulators was the most difficult part for MSEB. Though theexercise provided very good information about DC insulators and non-ceramic insulators, theWorld Bank's insistence for consideration of non-ceramic insulators, (which are not widely usedfor DC applications) on par with ceramic insulators resulted in delay. The delay in theprocurement of insulators was the sole reason for delay in completion of the project. Otherwise,by this time both the poles would have become operational. Similarly, in the case of BersimisACSR (which was to have been procured using funds of Loan 3096-IN), the World Bank's strictapproach regarding the validity of offers resulted in some dclay. It may be noted that the biddersdo not have any reason to go on extending validity of their offers unless asked for. ThereforeWorld Bank's action of declaring mis-procurement of part quantity of Bersimis ACSR couldhave been avoided.

14. Accelerated Distribution Reinforcement Programme: Only a meager amount of loan couldbe utilized towards earthquake rehabilitation works. No amount of the loan was drawn for thereinforcement programme. MSEB looks forward to completing this project by securing loansfrom national as well as cooperative banks.

15. Consultancy Services: The works of consultancy services were completed smoothly, andwithout any notable difficulty.

16. Lessons: Several specific lessons can be drawn from the project that have both operationaland strategic implications for similar projects likely to be implemented in the future:

* Sound financial health is a key element to the success and for stability.

* The procurement cycle right from start of the bid issue to the stage of the award of thecontract should be simplified and shortened.

* Due to a deficit in achieving the performance relating to financial covenants, as perexpectations, the situation led initially to the suspension of loan by the World Bank effectiveOctober 22, 1996, and finally loan closing effective June 30, 1998 [the scheduled date of loanclosing], thus causing about 70% of the loan amount to be unutilized. MSEB/GOM fell short

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in achieving the covenanted target of receivables of 2.5 months by 17 days (the latestachieved receivables are 107 days), while other covenants have been achieved.

F. PERFORMANCE OF CO-FINANCIERS

17. Chandrapur Unit 7: MSEB had to secure alternative arrangements to overcome the financialshortfalls caused in the wake of suspension beginning October 1996, the time when the suppliesunder various IBRD and other non-funded contracts were in full momentum. Though the loansuspension caused a source of constant worry, MSEB spared no efforts to achieve thecommissioning schedule of Chandrapur Unit 7 in 44 months, which is a record minimum time.Funds from MSEB's internal resources and fundings through PFC loans were utilized to offsetthe deficit of funds due to the unavailability of the loan amount subsequent to the period of loansuspension.

1 8. HVDC: The performance of co-financiers for the HVDC project viz. ANZ Banking group,SEB Sweden, SIDA, Credit Suisse, KfW Gerrnany and Power Finance Corporation, has beenexcellent. The disbursements were in time, and the Credit Suisse and KfW promptly respondedto MSEB's requests for validity extensions.

19. Consultancy Services: All works were completed; no other resources were required for thiscomponent.

i3. PROJECT SUSTAINABILITY

:20. The project is clearly sustainable which is obvious from the following facts:

The major component of the loan (construction of I unit of 500 MW at Chandrapur ThermalPower Station, Chandrapur Unit 7) has provided the optimum utilization of existing infrastructure(including the required land), which was already available/developed for Chandrapur Units 5&6[2x500 MW). The project site is justified particularly due to its proximity around coal mines andwater availability from Erai reservoir. Two very important factors are responsible for economicavailability of primary resources for power generation. Chandrapur Unit-7 has beencommissioned in a record minimum time of 44 months. After a successful trial operation, theunit achieved a full load of 500 MW. Likewise, HVDC and the Accelerated DistributionReinforcement Programme are being implemented by MSEB with alternative financial resources.As such, the objectives of cost effective power addition and improvement in transmission anddistribution capacity/ efficiency have been achieved and are sustainable. The results of the tasksbeing implemented as per the recommendations of the consultants appointed for variousconsultancy services are also satisfactory and result oriented.

22. The demand projections in terms of the peak demand and energy requirements for theMaharashtra system has been assessed by the 15th Electric Power Survey [EPS] Committeeformulated by CEA. The projection of peak demand up to the end of I Ith plan (i.e., up to theyear 2011-12 ) are as indicated below.

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Peak Demand Projection

PEAK DEMANDIMWI YEAR ENERGY REQUIREMENT REMARKS_ MUsJ

9911 1997-1998 b251010764 1998-1999 67889

11029 1999-2000 7334912460 2000-20001 7858613147 2001-2002 82921 I.ast year of lX Plan1831 I ] 2006-2007 115488 Last year of X Plan25087 ' 2011-2012 158229 LastyearofXI Plan

23. It may be seen that the anticipated increase per year in power demand is between 650 MW to850 MW. The following table indicates actual maximum demands recorded every year up to1997-98 and up to September 1998 during the year 1998-99. The maximum demand during1994-95 and 1995-96 are more than the estimation of 15th EPS.

Alaxvinnn Dema(nd of Maharashtra - Projections & Actu11als

YI AR AS PER 15"' FPS ACTI UAL DEMAND[IN MWI I IN MWI

1994-95 7854 79061995-96 8486 85781996-97 9208 90181997-98 9911 94731998-99 10764 9537

24. As regards the years 1996-97 and 1997-98, the recorded maximum demands are a little lessthan the EPS estimation. But considering the fact that the maximum demands have beenrecorded at an average frequency of 49 Hz. and the power number of Maharashtra State is around450 MW per Hz., the maximum demands can be said as keeping pace with the EPS estimation.During the ninth five-year plan, the load is estimated to increase by 3,236 MW as per EPS,whereas the generation addition will be 2,604 (2,184 MW of Dabhol Stage-I & 11 + 420 MW ofKhaperkheda Units-3&4). Eventually, the addition of 500 MW Unit 7 at Chandrapur is fullyjustified. Chandrapur TPS provides generation capacity of 2,340 MW (4x210 MW + 3 x 510MW) . Further, the Chandrapur sub-station is also connected to NTPC's Korba Power Station,[whose generation capacity is 2,100 MW], over 400 kV DC line via Bhilai [in Madhya Pradesh)and Bhadravati [near Chandrapur] in which Maharashtra has 29% share (i.e., 209 MW).POWERGRID has recently commissioned a 1,000 MW HVDC "Back To Back" [BTB] station atBhadravati, which enables interconnection of the Westem Region with the Southern Region.Even without considering any power assistance from the Southern Region through 1,000 MWHVDC BTB station at Bhadravati, the total power availability at Chandrapur Bus is around 2,700MW. The existing three 400 kV circuits emanating from Chandrapur Sub-Station are providedwith line connected reactors. Therefore, they are designed to carry 1,200 MW of power withoutconsidering any contingency. The remaining 1,500 MW power has to flow over HVDC link.During the initial 2-3 years of operation and also during off peak hours, the power flow may beless. However, MSEB has also signed a Power Project Agreement with Central India PowerCompany who will be setting up a 1,082 MW (2x541 MW) coal- based power station atBhadravati, 25 km. from Chandrapur. The proposed plant is expected to be commissioned duringNinth Plan Period with a guaranteed availability factor of 87%. For evacuation of power fromBhadravati, due to availability of the HVDC system, interconnection of Bhadravati withChandrapur and 400 kV single circuit line from Bhadravati to Bhusawal would suffice. After thecommissioning of the Bhadravati project, a continuous flow of 1,200 MW to 1,500 MW isexpected on the HVDC line. The DC link will also be useful for improving system stability.

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25. In view of the above facts, the project of Chandrapur-Padghe Transmission Lines forevacuation of surplus power [at Chandrapur, which is the eastern part of Maharashtra] and itstransmission to Padghe [a major load centre in Westem Maharashtra] was envisaged which isquite justified, and hence sustainability has been established.

H. BORROWER' S PERFORAMANCE

265. MSEB's performance on execution was satisfactory. Commissioning of Chandrapur Unit 7was achieved ahead of schedule, and has set record of minimum commissioning time ascompared to other 500 MW units so far commissioned in India. The HVDC project thoughsuffered some delay. MSEB performance and efforts in achieving commissioning of this projectis satisfactory. Implementation of schemes under the Accelerated Distribution ReinforcementProgramme is being achieved through alternative finance resources, and MSEB expects theircompletion without being able to utilize any amount from the loan. The works of ConsultancyServices have been undertaken as per schedule and to the satisfaction of MSEB.

1. EVALUATION OF BANK' S PERFORMANCE

27. The appraisal review undertaken by the World Bank was adequately guided and motivatedby MSEB's earlier achievements to pave the way for qualifying MSEB to undertake more vitaland ambitious tasks and components covered under Second Maharashtra Power Project. TheBank was consistently involved from project identification through its implementation stage. Theassistance provided by the Bank has adequately assisted in upbringing the physical tasks ofSecond Maharashtra Power Projects. The Bank provided a number of visits ofsupervisory/review missions. The efforts of the World Bank have undoubtedly contributedtowards MSEB's attempts for realization of project objectives. The relations between MSEB andBank officials were quite cordial. Frequent reviews undertaken by Bank missions through thetenure of the project have helped MSEB to appreciate and adopt broader sectoral concerns intlheir operations. The performance of the Bank from the project preparation through the projectcompletion stage was satisfactory. Involvement by Bank delegates during theirsupervisory/review missions and through correspondence and communication has always beenappreciated and contributed to project implementation.

28. However, the Bank could render more realistic assistance by giving due consideration to thespecific conditions in a country like India. Often circumstances are in contrast to prevailingstandards, and are not always comparable to, nor compatible with, those of other countries.

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APPENDIX AANNEX

STACK EMISSIONS INCLUDING UNIT 7 AT CHANDRAPUR

SPM :150 Mg/NM3 (National Standard).S02 2000 Mg/NM3 (World Bank Standard).Nox 750 Mg/NM3 (World Bank Standard).

March 1999

Unit No. Date SPM S02 NOx(Mg/Nni) (Mg/Nm3 ) (Mg/Nm3 )

Unit -- 1 27.03.99 211.3 896.0 257Unit --2 24.03.99 154.4 960.3 280Unit-- 3 08.03.99 126.0 909.5 244Unit --4 09.03.99 96.00 873.9 230Unit-5 12.03.99 146.9 627.4 248Unit- 6 25.03.99 116.6 769.2 _261Unit- 7 06.03.99 98.40 904.8 254

April 1999.

Unit No. Date SPM S02 NOxI____________ l(Mg/Nm 3) (Mg/Nm3) (Mg/Nm3)

Unit - 1 17.04.99 228.00 1069.00 290.00Unit - 2 16.04.99 229.33 992.68 260.00Unit - 3 12.04.99 174.50 924.53 246.00Unit-4 09.04.99 180.15 977.20 237.00Unit - 5 05.04.99 144.46 991.25 250.00Unit - 6 19.04.99 117.35 756.86 252.00Unit- 7 06.04.99 82.15 960.00 238.00

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APPENDIX BEnvironmental Impact Issues

1. A technical assistance component to strengthen MSEB's environmentalcapabilities, including international consulting expertise, was financed under the loan forChandrapur Unit 7. The consultant began work in September, 1994, and the study andtraining was completed in 1996. MSEB has taken a pro-active approach to theenvironmental management activities included in the technical assistance, and hasimplementing these actions at all its thermal power stations, not just Chandrapur. MSEBestablished an Environmental Protection Cell, whose efforts to-date have includedvarious environmental impacts studies, and where appropriate the implementation of theresults.

2. M[SEB has undertaken the coal quality studies viz. evaluation of coal quality impactson power station & financial performance. Some environmental management activitieshave already been initiated by the EPC, including water management systems redesignand construction for "Zero discharge" of effluent, air emissions control improvements,ash utilization studies and occupational health and safety audits, risk ratings andassessments, completed pilot study and measurement of fugitive dust emission andexposure to workmen at Chandrapur, Koradi, Klhaperkkheda, and Bhusawal, with a viewto initiate action for prevention & suppression of fugitive respirable dust in order toreduce healtlh impacts on the workmiien working in coal handling and ash handling plants.The EPC has also performed a safety audit and safety rating system, created anenvironmiiiental data base, dispersion modeling, disaster management plans, and begun toencourage energy conservation with the inherant target of reducing pollution.

3. NISEB set a target in 1995 to use 5% of the ash it produces. In 1997-98 ashutilization amounlted to 3.8% (0.92% for brick production 0.23% for agricultural use and2.65%0 for creating ash buLid dyke walls). Water conservation measures at theChandrapur site from January 1997 to 30th March 1999 reduced use by I I million m3 byrecycling, which was sufficient for the conltinluous annual generation of about 250 MW.Three effluent treatment plants of capacity 1600 m3/hr, 500 m3/hr and 100 m3 /hr havebeen commissioned.

4. MSEB has adopted an Environment Health and Safety Policy, inter alia, with theobjective to achieve ZERO DISCHARGE of effluents from its thermal powerstatilons by the year 2000. The various effluents at the power stations are collectedand after treatment the water is recovered/recycled for appropriate re-use. Wet ash iscollected in compartmentalized lagoons, settled, and the clear water is available forrecycling and reuse. To prevent fly-ash from being wind-blown, MSEB has planted over2 million trees on about 1,000 hectares of thermal power station grounds.

5. Project results The 500 MW, seventh thermal unit at Chandrapur, which wasinstalled under the loan, along with the other two 500 MW units are in compliance withGOI's discharge requirements for Suspended Particulate Matter (SPM), SO, and NO,

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from all three stacks. However, the smaller and older 210 MW units do not comply, andMSEB is actively planning to retrofit these with Bag Filters. It is currently installingthese at other stations on its system, and is awaiting the results before proceeding atChandrapur. With the commissioning of Unit 7, the overall average discharge per MWhhas reduced. Waste water discharge parameters are in compliance with GOI regulationsfor the whole of the Chandrapur site. The improvements in overall per site outputaverage discharges as a result of the project are indicated in the Tables annexed to theborrower's Appendix A.

6. MSEB has an environmental monitorin, plan, approved by its Board, for the wholeof the Chandrapur site, and a team in place onl-site, whiclh is monitoring results, andadvising on day-to-day operations to improve the facilities discharges.

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APPENDIX C

Land Acquisition and Resettlement and Rehabilitation Issues

Background

1. The outcome of project objectives are best assessed by comparing the actual resultsand outputs with those determined at the time of commencement of the project. Theextension of Chandrapur Power Station, i.e. the construction of Unit 7 under this loan,did not involve any new displacement of population. This was because adequate landwas already available at the existing plant site for the installation of seventh unit.However, private land was acquired for units 5 and 6 amounting to 2,700 hectares whichhad resulted in displacement of about 800 families. The aim of including the R&Rprogram under this loan (3498-IN) was to support MSEB/GOM's efforts to improve thewelfare of persons affected by earlier investments related to the construction of Unit 5and 6. The objective under this program was limited therefore to the satisfactorycompletion of resettlement and rehabilitation of those families affected due to landacquisition for unit 5 and 6.

2. Originally, at the time of project appraisal (1992), it was agreed that this programwould be completed over a period of 18 months. However, monitoring of progress wasoverlooked until mid-1995. In October 1995, the Bank drew to GOM's attention someseriouis concerns. These concerns include: (a) absence of clear goals and targets forsatisfactory resettlement and rehabilitation; (b) need for monitoring indicators and benchmarks to measure the progress; and, (c) lack of dependable baseline data about theaffected families. Therefore, a retrofit socio-economic survey was recommended toidentify the affected families and their existing living standards. Based on the surveyresults, a plan was to be drawn up to extend the assistance to all those affected families toimprove their overall living standards compared to the pre-displacement standards.

Summary of Implementation Performance

3. In order to assess the performance of the borrower for satisfactory completion ofR&R program, overall progress on different activities was assessed as of the loan closingdate of June 30, 1998. Based on this progress, it is concluded that still some part of thiscomponent, mostly related to relocation of displaced families and implementation ofeconomic rehabilitation, is yet to be completed . The key activities that have beencompleted successfully so far include: (a) a new resettlement colony has been developedat Godepeth and basic amenities have been provided. However, this has attracted so faronly 50 families and most of the other families are yet to be shifted; (b) About 70families from Chargaon have resettled on their own, while GOMI/MSEB had providedbasic amenities in this new village; and (c) MSEB had provided regular employment toabout 450 PAPs in various plant operations. The key R&R activators that are yet to becompleted include: (a) satisfactory completion of economic rehabilitation to those whoare identified to be living below the poverty line. This program consist of: (i) developingan alternative resettlement colony and offering alternative agricultural land to those

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eligible for land for land; (ii) providing regular employment to those PAPs who arefound to possess required qualifications and experience for absorbing in MSEB; and, (iii)imparting suitable training and extending assistance to start self employment activities orproviding assistance under various ongoing govemment programs in case of thosefamilies who are identified living below the poverty line; and, (b) encouraging in the nextfew years the remaining families to move to the resettled village; and, (c) completion ofthe program of providing regular employment with MSEB to those who are on thewaiting list. The summary of R&R activities is shown in Table C-i.

Table C-I: Status of the Resettlement and Rehabilitation Activities (as of June 30, 1998)

Si. Activity Target Achievement RemarksNo.

I Enumeration Through Completed Revised list of 787 familiesConsultant was prepared

2 Physical relocation 787 350(45%O completed) The shifting of remainingfamilies has been delayedsince the affected peoplearc continuing to practicecultivation in the acquiredland since these land arenot required by MSEBimmediately.

3 Civic amentias in * 3 bore wells Balance works will beresettlement colonies * I dug well taken up based on the( New Godapeth and * 2 school buildings requircment after theNew Chargaon) * 2 community halls additional families move to

* Individual toilets to 68 the resettlement coloniesfamilics

* Internal and approachroads

* Opcn draining* Street lightingThe required facilities for theexisting families is found to beadequate.

3 Employment in MSEB 563 449 (80 % achievement) The rest will be provided asand when suitablevacancies arise

4 Rehabilitation Grant 487 457 (94% are given) The Rehabilitation Grant to30 families is pending dueto court cases or disputes asto legal heirs .

5 Assistance to those 198 29 ( given jobs in MSEB) only MSEB is yet to finalize theliving below the 15 % were given assistance type of assistance (otherpoverty line than land-for-land to the

eligible) to those livingbelow the poverty line.These include employmentin MSEB, assistance undergovernment programs,training and assistance forself employment.

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Current Status of Implementation

Completion of Relocating the Displaced Families

4. In order to complete the relocation of all those displaced families, GOM had offereda resettlement grant of Rs. 35,000 to the agricultural families and Rs. 15,000 to the non-agricultural families with a view that that will utilize this money to relocate themselvesaccording their own choice. However, this relocation grant has had a limited impact.Only the villagers of Chargaon have utilized this grant for buying alternative land andreconstructing their own houses. In the case of the other villages, even after receivingthis grant, people continue to live in the existing place and have spent the resettlementgrant for some unproductive uses. In view of this, the Bank had recommended forconstruction a new resettled village and to move those affected to this new site. Further,because of an amendmenit in the Maharashtra Project Affected Peoples Act in 1986, thepayment of rehabilitation grant was withdrawnl in those cases where the assets have beenacquired after the amendment in the Act. The details of those who have not been paid thegrant is provided in Table C-2

Table C-2: Details of Payment of Resettlement Grant (as on June 30, 1998)

No Name of the village No. of families No. of familiesidentified for offeredResettlement ResettlementGrant Grant

Charuaon 92 912 Saiwan 105 1033 Gunjala 115 914 Awandha 153 1505 Kacharala 22 22

Total 487 457** the paymenit to 30 families is pending due to court cases and dispute of

legal heir.

Development of Resettlement Colony

5. K,eeping in view the Bank's recommendations, MSEB/GOM have developed aresettlement colony at Godepeth about 8 km from their ancestral villages for resettlingthose affected. Basic civic amenities such as bore and dug wells, school buildings,internal and approach roads, street lights were being provided. Individual plots have beendeveloped and allotted to all those affected at a very nominal cost. So far, only 50families have been shifted to the new resettlement colony. However the villagers ofChargaon have resettled on their own by purchasing the plot adjacent to their ancestralvillage. They have made their own arrangements for constructing their houses. MSEBprovided the basic amenities such as drinking-water well, school building, internal andapproach roads, individual toilets, street lighting, drainage etc. The details of those

40

shifted to the new site and those who have made their own alternative arrangements arefarnished in Table C-3.

Table C-3: Details of Displacement and Resettlement (as on June 30, 1998)

Name of No. of families No. of families shifted No. of families Totalthe village proposed to be to resettlemenit resettled on resettled

displaced colonies their ownChargaon 92 68 24 92Saiwan 105 46 59 105Gunjala 115 - _Awandha 153 4 149 153Kacharala 322 -

Total 787 118 232 350

6. The remaining families have not relocated, and they continue to practice cultivationon the land they previously owned and which MSEB has acquired from them, but will notneed for ash disposal for several years yet. MSEB has carefully detailed and recorded theacquisitions, and agreed the details with the families.

Provision of Employment Opportunities

7. As per the policy formulated by MSEB and GOM, one person from each affectedfamily will be provided employment with MSEB subject to availability and suitability.These affected families were categorized into three categories based on the degree ofimpact. Category I includes those who have lost their entire land and house. Category IIare those PAFs whose land holdings have become uneconomically small. Category IIIare those PAFs who did not have any land holding. The jobs will be provided accordingto the priority category. Based on this criteria MSEB had identified 563 PAPs foremploymenit in MSEB. By June 30, 1998, 449 had been offered employment, and thusabout 80% of the identified PAPs have been given employment and the remaining 1 14are on the waiting list and will be offered employment as and when suitable vacanciesarise.

Retrofit Socio-economic Survey and Economic Rehabilitation

8. Based on the land records available with the revenue authorities, 787 families wereidentified as those affected by MSEB's acquisition of the land for units 5 and 6. Aretrofit soc-io-economic and tracer survey was carried out through consultants in 1996among these 787 families. The objective of this survey was to discover them and theirexisting living standards, and to deternine the type of assistance required to improvetheir living standards. The consultants could only trace and identify 612 families, andconcluded that the remaining 175 families had migrated elsewhere. Various efforts suchas paper advertisement, distribution of brochures and open publicity in the neighboringvillages were employed in an attempt to trace these affected families. Out of the 612

41

families located, 198 (32.3%) were found to be living below the poverty line. In order toimprove the living standards of those living below the poverty line, suitable alternativeeconomic rehabilitation measures were proposed. These include: (a) providingalternative agricultural land to all those show found eligible for land-for-land underMaharashtra Project Affected Persons Act. Accordingly 88 families were identified to beprovided with alternative land; (b) offering regular employment in MSEB subject toavailability and suitability; and, (c) imparting suitable training and later assisting them tostart self employment activities.

Implernentation of Economic Rehabilitation Program

9. In order to provide alternative agricultural land to all those identified to be providedland, the district Collectorate identified land about 40 km from the existing site at Parodhivillage. Further, a resettlement colony will also be established. Out of the remaining 1 10families, it is proposed to proved suitable regular employment to those who posses therequired qualification and skills and the remainder will be giving suitable training andassistance in starting self-employed activities or will be covered under variousgovernment programs. However, amonig those who are identified for land-for-landoption, 29 were given jobs in the MSEB. MSEB is currently identifying those livingbelow the poverty line to identify those eligible for providing assistance undergovernmenit programs. Thus, the economic rehabilitation program is yet to be finalized.

Progress of Providing Basic Civic Amenities in Resettled villages

10. As part of the R&R program, MSEB/GOM committed to provide basic civicamenities in the resettled villages. These basic amenities included the provision ofdrinkinig water, approach and internal roads, street lightning, upgrading and additioneducation facilities etc. As part of R&R programi, a new resettlement colony atGodepeth has been developed, while villagers belong to Chargaon have developedalternative village on their own. Further, another resettlement colony is being planned todevelop at Parodhi village in order to resettle all those who have been identified to beoffered alternative agricultural lands. The various facilities developed in these twocolonies include: four drinking water wells, the construction two school buildings, twocommunity halls, individual toilets, internal and approach roads,, open draining systemand street lighting. For the development of all these facilities and estimated amount ofRs. 5.73 million ( USD 0. 14 Million) was incurred. Further facilities will be createdwhen the families move to the resettled villages.

Actionl Program for Completing Balance Activities

11. At the time of project appraisal, the Government of Maharashtra undertook tocomplete the resettlement and rehabilitation related to families affected by unit 5 and 6and issued a Government Order to complete the R&R program within 18 months fromFebruary 1992 (SAR, Annex 3. 10, page 3). Due to various reasons, the program is stillunder implementation and will take some time to complete all the actions related to

42

satisfactory implementation of R&R program. The outstanding R&R activities of thisprogram as on loan closing date (June 30, 1998) are:-

(a) physical relocation of 437 families;(b) providing land-for-land to those eligible families. Out of SS identified unlder this

option, 29 have been given employment in MSEB;(c) extending assistance for economic rehabilitationi to those 110 families living below

the poverty line (excludinug those 88 identified land for lanid option);(d) completing the provision of employment in MSEB to those 114 wh1o are on the

waiting list; and(e) creation or upgradinig of civ-ic ameneities in the resettlemenit colony, dependillg up on

the number people who move to the resettlemiienit colonies.

Major Factors Affected the Satisfactory and Timely Implementation

12. The following are the major factors affecting, the timely implemelntation of R&Rprogram.

(a) Absence of Proper Institutional Arrangements: The program was supposed to beimplemenited jointly by the district resettlement office under the overall coordinalionof the district Collectorate and MSEB. There were no designated persons in MSEBfor lookinig after this programii exclusively. This task was usually assigned to aEngineer in addition to hlis primary responsibilities. As a result, the implementationof R&R activities suffered considerably. Further, there is imperfect coordinationamonig the district officials and MSEB. This is because the MSEB considers that it isthe state's responsibility to hanidle R&R issues. On the other hand the state positionis that the entity which causes the displacement should take an active role in thewelfare of the people and should take the lead in implementation.

(b) Non-availability of sufficient Funds: The R&R component did not have anycommiiitted fuLnds at the comm1ilenicemiienit of the project implementation. The requiredfunds were used to be sanctionled from time to time on ad-hoc basis. The non-availability of committed funds has affected to a great extent the timelyimplementation of this program.

(c) Lack of Proper Monitoring Arrangements: Proper monitoring arrangements willgo a long way for timely implementation of any program. Due to absence of definedmonitoring arrangements, the implementation of program was not followed closely.

Lessons Learned

13. The following are the key lessons learned from the implementation of R&R programin this project:

(a) Self-relocation: The partial success of relocation program under this project isattributed to self-relocation. Families belonging to Chargaon village have relocated

43

themselves on their own. The interaction with those relocated by themselves on theirown and those shifted to planned resettlement colony reveals that those who haverelocated on their own are far more satisfied than those who have been forcibleshii^ted to the planned colonies. This confirms that self relocation is a betteralternative to forced relocation.

(b) Upstream Planning: There was no approved plan for implemiienitation of R&Rprogram at the beg,inning, of the project. The specific resettlemenit problems wereidentified from time to time durin, the project supervision. As a result, new issuesemerged as project implementation advanced. T'herefore, the implemiienitation of R&Rprogram could not be completed by loan closing date. Thc lesson leanit hiere is thatadvanced, upstream planningii should include a well laid-out time-table, a commilittedbudget (part of the overall cost of the project), andi proper institutional arrangementsare all necessary for timely and successful impleme1nltationl of suchi a program.

(c) Participatory Approach in Decision Making: A numnber of decisions related toresettlement implementation were made without taking into account the affectedpeople's views and concenis. For instance, the issue of payment of resettlementgrant, provision of individual toilets, selection of resettlement sites are some of theexamples. In these cases the success was eithier limited or negative. This confirmsthat any decision related to resettlemenlt implemiienitation should take into the accountpeople's needs and concerns.

(d) Continued Bank supervision: The improved and continual Bank supervision in thelast two years of the subject project's implemiienitation has improved theimplementation of the R&R componecnit for the those affected by the construction ofunits 5 and 6. As a result of contilnued supervision some of the issues, such as theexpediting of thc comi1plctioin of retrofit socio-economic survey, identifying the peopleliving below the poverty line and proposing measures for improving their livingstandards, establishinlg a coordiniationi between the district administration and MSEB,etc. wcrc cvcntually addr-esscd satisfactorily. The lesson learned is that continuedBank supervision duLillg implemllenitationi will go a long way to successful and timelyiimpleilcnctationi of suchi a plan.

(e) Unit of entitlement lor rehabilitation: The unit of entitlement used was the familyanid accordinlgly onlC Imcimlbeir of eaclh of the families was provided with ajob in theMSEB. Thlis has resultcd in a few cases of family intra-resentment. The personsprovided cmploymlecnit wcre separated and other members of the family continue toIcad a subsistcncc livings. The lesson learned here is that the unit of entitlement foreconomlic reliabilitationl should be adult individuals rather than families.

44

APPENDIX D

Financial Overview

1. MSEB's Financial Positioii at Project Appraisal. At appraisal, in FY1992,MSEB was performing vwell technically, but there were already signs of financialproblems looming in the future. While MSEB sold about 29 billion units (kWh) at anaverage rate of Rs. 1 .09/kWh, wvhich was among thel higlher tariffs prevailing in India atthat time, the Board still needed a subsidy of Rs. 2 billion to achieve the statutory rate ofreturn of 3%. The rate of return for SEBs is mandated bvy law, as net proFit to net fixedassets. Because most SEBs do not have any equity capita l, thc Indialni Electricity SupplyAct, 1948 allows interest as an expense and mandclates the SEB to carn a 3%1o return overthe cost of borrowed funds on assets created by borrovcd (an(d own/equity) funlds.

2. For an SEB, with a highly geared capital structure (as most SEBs have, even today) a3% return, after interest, on net fixed assets provides a reasonable return, equivalenlt to12-15% before interest. Also, although MSEB was covering its debt service requiremiienitsafter taking the subsidy into accouLnt, it was uLnable to generate enough internal resourcesto significantly contribute towards financing capital expenditure. As a result, capitalexpenditure was financed primarily out of long term loans from GOM and other sources.MSEB's receivables positioin from sale of power had started to decline, and in FY1992,stood at 4.5 months of sales. Maharaslhtra agreed at negotiations to ensure that startingFY 1993, MSEB would reduce its receivables to 2.5 months of sales, and earn an annualreturn of not less than 4 .5 % on its historical net fixed assets in operation.

3. MSEB's Current Financial Position at Project Completion. MSEB performedbetter than other state electricity boards durinig the project period, but its financialposition has deteriorated. In FY1996, FY1997 and FY 1998, MSEB needed significantamounts of subsidy to achieve a 4.5°% return on its net fixed assets. In FY 96, whileMSEB booked a subsidy from GOM of Rs. 6.3 billion it actually received much less(only about Rs. 3.8 billion by adjustmiienit against interest and lease rent due to GOM),leading to a retumn on net fixed assets of about 1.3%. Even if the write-off of Rs. 1.65billion is excluded, the return would have been 3.4%. MSEB's operating revenues havecovered debt service requitemiienits, and it has been able to reduce payables on account offuel and power purclhase from 4.6 months of expenses in FY1992 to 1.5 months inlFY 1 998, ancd has consistenitly miet the commercial accounts payables covenant of 2.0niionitlhs.

4. MSEB's performianice on receivables however, has not been creditable, althouglh it hascontainied tllc receivables position at slightly above 4 months of sales (mainly throughwrite-offs of uncollectible dues) over the project duration. While MSEB's collection(excluding write-offs) of current bills has improved from 90% in FY1992 to 94% inFYI 998, it has been unable to recover dues from specific categories of consumers such asthe Mula Pravara Society. Despite the Bank's recommendations, MSEB has not beenable to write off the large amounts which are due from the Society and other consumers,even though MSEB itself considers these to be uncollectible. As is evident from the table

45

below, the majority of receivables (as a proportion of sales to the respective categories)are frorn the Mula Pravara society and agriculture. The other significant contributor to thedefaults is the category of public bodies (government departments), accounts which aredirectly or indirectly controlled by the government.

AnahNsis of Receivables for Sale of Pow er (For the year ended Nlarch 31, 1998)

Sales Receivables for sale of powera'

(Rs. Million) < 2 mths 2-6 mths 6-12 mths 1-2 years 2-3 >3 years Total Receivable________________ _________ ___________ j vyears s (m ths)

Domestic 8107 568 722 438 366j 298 426 2817 4

~Commercial 4902 326 337 256 1901 164 224 1496 4

Industrial 51986 634 895 701 0 2) 2 2 1380 2409 S052 2

Agriculture 33t)1 284 1519 1442 1120 1)(03 1106 6473 24

Mula Pravara 58 0 0 () 0 3108 3108 641

Public bodies 6536 590 523 496 195 228 1051 3083 6

Others 16765 0 0 1) 27 654 19 700

Total 91656 2401 3996 3332 3926 3732 8342 25729 3

a/: The totals do not match the audited figures since these nuilbers do not include some accounts.

5. MSEB is a clear case of a good utility being constrained by the priorities of the stategovernment. An example of this is the fact that MSEB's request for a tariff increase of13%, effective April 1998, was delayed unitil September because of elections in the state.Similarly, althouglh MSEB's receivables from certain categories of consumers have beenincreasing, GOM has frequently issued orders restricting MSEB from taking correctiveor punitive action against them. MSEB's dependence on GOM for tariff increases,belatedly allowed, has resulted in a tariff structure which penalizes commerce andindusti-y too higlhly for their use of bulk-generated electrical energy.

6. Duc to Maharashtra's uLnwillillglness to allow increases in the tariffs for agriculturalconsumers, commllercial and industrial consumers have experienced repeated tariffincreases, and this has resulted in large cross-subsidization. The consumer categorywhichi includes large industrial users, currently pays about Rs. 3.7/kWh, whileagricultural consuLm]ers pay only about Rs. 0.25/kWh, compared to an average MSEB costof supply of about Rs. 2.3 1/kWh. As a result, and to avoid paying the industrial tariff,industries arc increasingly depending on captive generation at uneconomic costs, i.e.above MSEB's costs of production; and the position will worsen further (see nextparagraph), wheln tariffs again have to be increased.

7. While MSEB has been able to raise the requisite level of finances to meet its plannedcapital expenditures, the situation is expected to deteriorate in the next few years. Whenthe expensive private power comes on stream, MSEB's finances will be badly impacted,and the situation will worsen because MSEB will have to frequently back down its ownlow-cost generation in order to fulfil the contractual obligations which MSEB has enteredinto with the independent power producers. MSEB's ability to generate sufficient internalresources to contribute meaningfully towards capital expenditure will be impaired

46

severely, and MSEB will increasingly have to depend on borrowings to finance itsinvestment plan, and perhaps even for operating and working capital needs.

The ability of the Maharashtra power sector to avoid this scenario, and indeed, its veryfinancial viability, hinges (a) on it having the requisite operational and managerialautonomy, along with an incentive system which encourages reduction of inefficiencies,to enable it to operate effectively as a commercially oriented utility, and (b) on it beingallowed tariffs which increasingly (even if gradtially, in some cases) move towardsrecovering cost of supply from each categoiy of consumers. It is unlikely that these willhappen in the absence of coniprelhensive reforms whiclh distance the sector from the stategovemment, which enables independent regLulationl and wliclh brings in commercially-oriented, private management in distributioni.

47

IndiaSecond Maharashtra Poiier Project (1,N 3498-IN)

MSEB's Financial Performance - FY 92 to FY 02Table 9 - Actual performance vis-Aj-vis SAR forecasts

(Values in Rs. Million)Financial Year ended I:Y 92 IFY 93 FY 94 FY '5 IY 96 I:Y 97 FY 98March 31 Act SAR est. Act SAR est. Act SAR est. Act SAR est. Act SAR est. Act SAR est. Act SAR est.

Sales (GWh) 30,472 29,287 31,454 32,060 34,562 34,545 37,763 35,435 41,619 36,370 42,698 37,047 43,894 40,058Average Tariff (Rs./ kWh) 1.08 1.09 1.37 1.31 1.51 1.44 1 61 1.60 1.69 1.69 1.99 1.79 2.09 1.85Operating Income 6,719 6,896 9,258 8,454 10,164 10,643 10,226 13.117 10,840 14,163 11.095 14,998 12,264 15,942Net Income 1,253 1,453 2,721 2,360 2,8X9 3,656 3,208 5.476 3,496 5,596 3.460 5,703 3,423 4,903

Intemal Sources 10,805 9,637 15,643 12,899 17,938 15,210 19.362 17.830 18,092 1.95') 24.X2s 20.277 22,520 22,475Borrowings 8,348 9,190 9,103 9,396 8,033 12,348 11,304 16.359 7,652 13.247 1I.525 13.570 24,700 13,814Total Sources 19,153 18,827 24,746 22,295 25,971 27,558 3(0.726 34,189 25,744 35,20(6 39(,53 33.847 47,220 36,288

Capital Expenditure 12,680 9,972 13,736 13,865 11,784 15,560 15,145 21.142 15,448 21. 90 19.931 18.142 20,431 18,648WorkingCapital Changes (2,533) 609 449 (1.191) 1,841 1,071 3,404 998 (2.214) 350 3.820 1,082 10,092 1.878DebtService 9,007 8,246 10,562 9,621 12,344 10,928 12,178 12,049 12,510 12.947 14.902 14.622 16,697 15,763Total Applications 19,154 18,827 24,747 22,295 25,969 27.558 30,727 34,189 25,744 35.20(6 38,(.53 33.847 47,220 36,288

CurrentAssets 22,771 21,354 29,383 20,704 28,628 23,741 33,775 26,320 44,214 28.021 41,797 30,503 54,779 34,300Less Current Liabilities 30,551 17,972 38,335 18,925 37,766 21,391 34,834 23,078 44,239 25.359 42,158 26,168 47,596 29,805

(7.780) 3,382 (8,952) 1,779 (9,138) 2,350 (1,059) 3,241 (26) 2.002 (301) 4,335 7,183 4,494Net Fixed Assets 82,909 79,897 93,164 91,071 100,698 103,453 108,930 121,042 115,969 138,987 126,794 152,743 141,513 166,176Total Assets 75,129 83,279 84,212 92,850 91,561 150,803 107,871 124,283 115,944 141,649 1 26,433 157,079 148,696 170,671

Debt 65,019 72,617 70,096 78,073 73,060 85,980 64,478 97,825 66,964 108,762 73,516 117,595 90,361 124,939Equity 10,111 10,662 14.115 14,777 18,502 19,823 43,394 26,459 48,980 32,887 52,918 39,483 58,336 45,732Total Debt+ Equity 75,130 83,729 84,211 92,850 91,562 105,803 107,872 124,283 115,944 141,649 126,434 157,079 148,696 170,671

48

FY 92 FY 93 [FY 94 FY 95 [ )96 FY 97 FY 98Ratios Act SAR est. Act SAR est Act SAR est. Act SAR est Act SAR est Act SAR est. Act SAR est.

Rate of Retum 3.% 3.56, 5.2'% 48% 48%/. 6.0% 4.70% 8.1% 1.3%. 7.7%, 4.5%1 7,0%V,. 4.5%1X 5.7%Rate of Return (Before 16.2%h, 12 TX, 17.98%M 12.4% 16.9%,. 1 390/, 1 5 1 %X 15.8% 13 9(%, 15.2%N, 14.4%XI 15. 1PX 16. 1 12.2%Interest)

NICG as%ofCapital 11.60/, 8.1% 27.4A% 30.8% 11.2% 20.0%Y, 38.3'% 25.0%1 -2.3%V,1 25.(t%V, 40.1% 250%T, -7.0% 25.0%ExpenditureDebtServiceCoverage 1.0 1 2 1.2 1.3 1.2 1.4 1 4 I.5 1.5 1.5 1.4 1.4 1.3 1.4

CurrentRatio 0.7 1.2 0.8 1.1 0.8 1.1 1.0 1.1 1.( 1 1 1 0 1.2 1.2 1.2Debt as 'Y. of 1)ebt +[quity 0.87 0.87 0.83 0.84 0.80 0.79 0.60 0.79 0 58 0.77 0)58 0.75 0.61 0.73

CovenantsReturn on Net F:ixed Assets

Covenant 0 4 51X% 4.5'%, 4 5%fo 4 5',, 4.5',, 4.5%Actual 3.0% 5 2% 4 8% 4.7%, 1i.3f,, 4 5, 4.5%

Receivables (mofiths)Covenanit 0.0 2 5 2.5 2.5 2.5 2.5

Actual 4.5 4.6 4 6 4.4 4 2 3 7 4.0Payables - fuel, power (months)

Covenant 0.0 2.0 2 0 2.0 2 6 2 0 2.0Actual 4.6 5.0 1 9 1.7 1.( I 8 1.5

DSCRCovenant 1.2 1.2 1 2 1.2 1 2 i 2 1.2

Actual 1.0 1.2 1.2 1.4 1.5 1.4 1.3Actual (Institutional, O.6 1.4 1.3 1 6 1 1 1.3 1.2excluding subsidies)

SFR (excluding subsidies)Covenant 0 20.0(6 20 0'%o 25.0%/o 25.00%, 25.0% 25.0%

Actual 11.60/% 27 4% 11.2% 38.3%N, -2.3% 40. /' -7.0%1