Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT (SCL-42710; PPFB-P2250; TF-27056) ON A LOAN

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Energy Sector Unit South Asia Region Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT (SCL-42710; PPFB-P2250; TF-27056) ON A LOAN IN THE AMOUNT OF US$60 MILLION TO THE GOVERNMENT OF fndia FOR THE HARYANA POWER SECTOR RES,TRUCTURING PROJECT 06/27/2001 Report No: This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective ) Currency Unit = Indian Rupee (Rs.) Rs. = US$ 2.08 US$ 1.00 = Rs 48 FISCAL YEAR April 1 - March 31 ABBREVIATIONS AND ACRONYMS APL DEA DFID DHBVN DSCR FRR FY GOH GOI GWh HERC HPGC HSEB HVPN ICR IPP kwh LIC MU NPV NTPC PAD PFC PGCIL PPIP QAG REC RFQ UIHBVN USAID Adaptable Program Lending Department of Economic Affairs Department For International Development (UK) Dakshin Haryana Bijli Vitran Nigam Debt Service Coverage Ratio Financial Rate of Return Fiscal Year Government of Haryana Government of India Gigawatt hours Haryana Electricity Regulatory Commission Haryana Power Generation Company Haryana State Electricity Board Haryana Vidyut Parasaran Nigam Implementation Completion Report Independent Power Producer Kilowatt hours Life Insurance Company Million Unit (unit = 1 Kwh) Net Present Value National Thermal Power Corporation Project Appraisal Document Power Finance Corporation Powergrid Corporation of India, Ltd. Project and Program Implementation Plan Quality Assurance Group Rural Electrification Company Request for Qualification Uttar Haryana Bijli Vitran Nigam US Agency for International Development Vice President: Country Director: Sector Director: Task Team Leader/Task Manager: Mieko Nishimizu Edwin R. Lim Alastair J. McKechnie Djamal Mostefai

3 FOR OFFICIAL USE ONLY INDIA HARYANA POWER SECTOR RESTRUCTURING PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome I 1 6. Sustainability Bank and Borrower Performance Lessons Leamed Partner Comments Additional Information 32 Annex 1. Key Performance Indicators/Log Frame Matrix 35 Annex 2. Project Costs and Financing 39 Annex 3. Economic Costs and Benefits 41 Annex 4. Bank Inputs 43 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 46 Annex 6. Ratings of Bank and Borrower Performance 47 Annex 7. List of Supporting Documents 48 Annex 8. Haryana Power Utilities: Operational and Commercial Improvement Initiatives 53 Annex 9. Main Achievements of the Haryana Electriciity Regulatory Commission 57 Annex 10. Key Results of the Emergency Investment Program 62 Annex 11. Note from Haryana on the State's Achievernents 65 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4

5 ProjectlD.- P Team Leader: Djamal Mostefai Project Name: HARYANA POWER APL-I TL Unit: SASEG ICE Type: Core ICi2 Report Date: Jtne 27, Project Data Name. HARYANA POWER APL-I L/C/TF Number: SCL-42710; PPFB-P2250; TF CountryIDepartment: INDIA Region: South Asia Regional Office Sector/subsector: BI - Institutional Development; BR - Public Enterprise Reform; PD - Distributicn & Transmission KEY DATES Original Revised/Actual PCD: 05/16/94 Effective: 03/01/98 03/20/98 Appraisal: 09/15/97 MTR: Approval: 01/15/98 Closing: 12/31/ /31/2000 Borrower/lImplementing Agency: GOI/Government of lharyana; Haryana State Electricity Board (HSEB) and successor utilities Other Partners: Department For Intemnational Development (DFID). United States Agency for International Development (USAID) STAFF Current At Appraisal Vice President: Mieko Nishimizu Mieko Nishimizu Country Manager: Edwin Lim Edwin Lim Sector Manager: Alastair MckKechnie Alastair McKechnie Team Leader at ICR: Djamal Mostefai Djamal Mostefai ICR Primary Author: Djamal Mostefai 2. Principal Performance Ratings (HS=Highly Satsfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=rModest, N=Negligible) Outcome: U Sustainability: UN Institutional Development Impact: M Bank Performance: S Borrower Performance: U QAG (if available) Quality at Entry: HS Project at Risk at Any Time: Yes ICR HS

6 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: This project ("the Project") is the first of a series of Adaptable Program Lending (APL) operations aimed at providing programmatic support ("the Program") to Haryana to reform its power sector. More specifically: * The original objective of the Program was: "to ensure that by year 2007, the power requirements for Haryana's economic growth and its population are met, and that consumers are provided with reliable, high-quality and cost-effective electricity services by creditworthy and commercially-operated power utilities, functioning in a competitive and appropriately regulated power market, with significant private ownership and participation". * The original objective of the Project, consistent with the Program's objective was: "to initiate the reform process of the power sector by: (i) establishing the new legal, regulatory and institutional framework (including the creation of an independent Regulatory Commission and the new power corporations, and the initiation of the privatization of the distribution business); and (ii) removing the most critical bottlenecks of the power system with a view to demonstrate - in a few selected areas - the benefits, which could be expected from a successful reform of the power sector." The objectives of both the Program and of the Project were consistent with the Country and State's priorities and the Bank's Country Assistance Strategy (CAS) prevailing at the time of the project preparation and approval ( ) (Report IN of May 1995). Specifically, one of the CAS objectives was to aim at containing power infrastructure bottlenecks by promoting and implementing comprehensive state power sector reforms. The promotion of sectoral reforms at the state level were to contribute to state finance adjustment, institutional capacity building, and increased resource mobilization for public and private infrastructure investments. By reducing pressures on the state's public finances, and removing sectoral constraints to the State's econornic growth, power sector reforms are therefore essential to facilitate sustainable poverty reduction The project design, which built notably upon the experience available at that time from the Orissa power sector reform, was directly relevant towards achieving the above objective: * In-depth reforms were required. The Haryana State Electricity Board (HSEB), the vertically-integrated state-owned monopoly, was plagued with huge commercial losses (essentially due to theft of power), pervasive political interference, and dominated by bureaucratic behaviors; the reforms were to transform it into commercial utilities operating under a new environment where political, policy, regulatory and operational functions would be separated, and where theft of power and other leakage in distribution would be combated through changes in ownership. * There were no results available from similar experiences in India to support such a reform agenda; consequently, there was a major need to demonstrate what could be the benefits of the improvements in the quality of the electricity services that reforms were expected to bring, notably in rural areas, to improve farming productivity and incomes. Such a demonstration effect was a major step to develop a constituency for change, and ultimately, make the reform agenda politically and socially acceptable These were clear and important project objectives. But they were very complex to achieve and highly demanding for the State and other implementing agencies

7 Politically: the implementation of these key structural measures were to take place when: (i) India was undergoing a political crisis at the national level; (ii) the previous experience in Orissa power sector had generated a considerable opposition and not yet shown any tangible results; (iii) the political leadership in Haryana, who had initiated the reforms, weakened considerably; and (iv) a new political leadership emerged in mid The reform program involved a series of measures, which would hurt vested interests, generate opposition and be used for political purposes. Technically: the reforms included: (i) the enactment of a new and complex legislation (the Haryana Electricity Reform Act); (ii) the establishment of a Regulatory Commission; (iii) the un-bundling and establishment of new utilities in generation, transmission and distribution; (iv) the transfer of staff, assets, and liabilities; (v) the financial restructuring of successor companies; (vi) the functioning of the sector under a new set of regulations; (vii) preparation of distribution privatization strategy, and initiation of the transaction; and (viii) implementation of an investment program based on standards and criteria (in particular for distribution), which had never been used by the Haryana utilities. The planning, design and implementation of most of these measures involved new concepts for Haryana. Institutionally: several offices of the State were involved almost on a daily basis for the implementation of the reform program. They included: (i) the political leadership given the extreme sensitivity of the issues in the power sector reforms; (ii) at least two departments within the state administration (the energy and finance secretariats); (iii) several utilities: initially HSEB; then the transmission and generation companies following the first round of unbundling; and subsequently the two distribution companies after the second round of unbundling; and (iv) the nascent Haryana Electricity Regulatory Commission (HERC). In addition to the World Bank, Haryana's other donors including Department for Intemational Development, UK (DFID), and the US Agency for International Development (USAID), were involved since the early stages of the project. Lastly, several intemational and national consulting firms participated in the project (see para 3.3) The proposed project also included the initiation of the privatization of distribution. This project development objective was ambitious for a number of reasons: tight timeframe for implementation, poor financial condition of the sector, prevailing pervasive resistance to increasing tariffs of power supplied to agriculture, and very uncertain overall political environmrent. But given the huge losses incurred by the utilities, GOH considered, and the Bank agreed, that privatization of distribution was an objective to be pursued aggressively. 3.2 Revised Objective: The project was not restructured, and the objectives remained the same during the life of the project. 3.3 Original Components: The project comprised three main physical components: A. Support for critically needed emergency investments in transmission, sub-transmission and distribution systems (US S62,300,000). Apart from strengthening the overall system, investment for specific works comprised: * Three 220 kv, three 132 kv, six 66 kv lines and three 220 kv, two 132 kv and five 66 kv - 3 -

8 substations to expand and strengthen the grid system; and * Investments in sub-transmission and distribution systems to rehabilitate and strengthen 24 substations (33 kv) and 50 feeders (11 kv). B. Improvement of commercial and technical services to the consumers (US $1,200,000), including introduction of decentralized computerized billing at sub-divisional offices, improvement and upgradation of consumer complaint handling system, and improvement of safety and working conditions of the utility staff; and C. Technical assistance and engineering services for reform program management and implementation, communication, institutional development of new power companies and Regulatory Commnission, distribution privatization, demand side management and promotion of non-conventional energy sources and engineering services (US $13,500,000) These project components were well suited to achieve the part of the project objective aiming to demonstrate the potential benefits that improvements in the quality of electricity services would bring about. Given the financial constraints faced by the utility and the small size of the loan, they aimed at: (i) removing the most critical bottlenecks in Haryana's power transmission to evacuate additional power that would become available and stabilize voltage conditions; (ii) improving the availability, reliability and quality of power supply in a few select areas (among the worst in the state in terms of quality conditions); and (iii) creating a new image of the utilities by improving customer services in order to build support and constituency for reform and restructuring Technical assistance was critical to support the state govemment and the emerging new entities (new companies and Regulatory Commission) in implementing the first stage of the reform program, develop the capability of the new companies in commercial, financial and regulatory areas to enable them to function in the new commercial and regulated environment. Technical assistance to the newly established HERC was also essential to support them in comprehending, planning and implementing a variety of regulatory measures. 3.4 Revised Components: Marginal change was brought to the original components of the project: few evacuation lines, which were initially included in the physical scope of the project to evacuate power from the expected nine 25 MW private power plants were dropped since these power plants did not materialize. In place of these evacuation lines, Haryana procured distribution goods used for partial rehabilitation of additional 160 numbers 11 kv feeders in consistence with the project's objectives. 3.5 Quality at Entry: QAG rated the project highly satisfactory (HS) in 1998 for quality at entry based on an in-depth review. The ICR rating is in agreement with QAG's rating. The project objectives are fully consistent with the CAS objectives and the country's priorities. The project, as part of a wider programmatic support, was well designed to meet these objectives and also to mitigate the grave political risks, which were appropriately assessed during the design of the project

9 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: This project is part of a wider program, and its assessmeint cannot be done independently of the program context. With the initiation of the reform process in Haryana, the project has achieved parts of its objectives; but other parts of the objectives (notably financial improvements), have not been achieved. In a broader context, the achievement of the program's objectives would be dependent on Haryana taking the next critical step in the reform program, i.e. privatizing distribution business, a key measure to ensure sustainable improvements and development of the power sector. Due to a change in political commitment to reforms, notably to distribution privatization, the achievm,ent of the outcome of the program became very uncertain Achievement of project's objective. Key Project Performance Indicators Completion Date Actual (PAD) Comprehensive reform legislation enacted April 1998 August 1998 Regulatory Commission established April 1998 August 1998 Restructuring measures effected and new power utilities established and operational -Transmission and generation companies April 1998 August Distribution Companies September 1998 July 1999 Strategic private investor for one distribution company selected End 1998 Not done Financial restructuring measures completed as per the Haryana's Financ ial Restructuring Plan -HSEB's assets/liabilities restructured and transferred to successors April August Provision of budgetary support Substantially done -Rescheduling of debt and commercial liabilities June 1998 Partially implemented -Tariff adjusted Partially implemented a. Haryana has achieved some of the project objectives by establishing a new legal, regulatory and institutional framework, including the creation of an independent Regulatory Commission and the new power corporations, albeit with some delays To date, the unbundling of the power sector has been completed with the establishment of the Haryana Power Generation Corporation (HPGCL), responsible for power generation (along with IPPs and central generating stations); Haryana Vidyut Prasaran Nigam Limited (HVPNL), responsible for purchase of power from generating stations, transmission and bulk supply to distribution companies ; and two distribution companies Dakshin Haryana Bijli Vitaran Nigam and Uttar Haryana Bijli Vitaran Nigam (DHBVN and UHBVN), responsible for retail power supply to consumers in Haryana. These companies have started to operate along the principles underpinning the new institutional and regulatory framework. Some initial signs of commercial tension and performance improvements are evident with the segregation of the generation, transmission and distribution business: there has been improvements in the plant load factor (PLF) and fuel consumption in the power plants, where as distribution companies are focusing on consumet services, billing and collection. (Annex 8 further describes operational and commercial improvement initiatives by Haryana power utilities.) But there is also no doubt that further progress couald be achieved, notably to instill a much more -5 -

10 business-oriented culture in the management of the utilities, one the objectives of the subsequent APL operations envisioned in the program. b. The Regulatory Commission is functional: it has established important guidelines of sector regulation on annual revenue requirement, tariffs, power procurement and has issued several key orders (see Annex 9). The performance of the companies is being monitored through license conditions, directives in the tariff orders and monitoring of compliance with the Commission's guidelines and regulations, including consumer's right regulation, code of bill payments, etc. In particular, the Regulatory Commission has demonstrated its capability to take independent decisions, including on the highly controversial issue of agricultural tariffs, by ordering, in its first tariff order (December 2000), an increase in agricultural tariff of 50% (see Annex 9). c. The investment program has been substantially implemented as initially envisioned and has contributed to removing the most critical bottlenecks of the power system. In the few areas selected for implementing investments under the project, the benefits of improvement in the quality of power supply have been amply demonstrated. The transmission investment program has assisted in improving the grid voltages, meeting the load demand and improving the system reliability. Distribution investment have improved LT voltage, reduced the burning rate of distribution transformers, reduced outages and reduced the technical system losses: Section 4.2. further describes this achievement and Annex 10 provides a detailed assessment of the operational improvements (quality of power, system losses and transformer failure) resulting from the investment measures supported by the project. Consumers have reported (survey carried out by an independent agency in April 2001) perceptible improvements in quality and reliability of power supply in the areas where rehabilitation of distribution system has been achieved under the project. d. As part of the overall reform agenda, Haryana prepared a financial restructuring plan (FRP). The FRP included a series of measures (notably on tariffs, efficiency improvements, debt and commercial liabilities rescheduling, support from the state government, balance-sheet restructuring) expected to restore the creditworthiness of the power utilities. The FRP was one of the policy commnitments taken by Haryana before the loan was approved and was covenanted (for the part to be executed during the implementation of APL 1). The FRP has been implemented only partially and with delays. As a result, the actual financial requirements of the sector have increased, thus requiring deeper financial restructuring. e. Haryana was among the first states to achieve significant rescheduling - it rescheduled loans worth Rs. 415 crore ($88.3m) to LIC and REC, and prepaid to Peerless high-cost debt worth Rs. 118 crore ($25.1 rnillion), and also converted its dues to NTPC and NHPC of about Rs. 550 crore ($117 million) into long-term bonds between In addition, during FY 2001, Haryana issued bonds worth Rs. 655 crore ($ million) to suppliers such as NTPC, NHPC, PGCIL and NPC. These measures have provided temporary reprieve to the utilities but in the absence of sustainable improvements in financial and operational performance the payables will once again accumulate. f. Retail tariffs were not adjusted at the pace assumed in the FRP. Tariffs were adjusted in June 1998 by about 11-12% (with a change in the slab system which led to some reduction in revenues from agriculture) against an FRP assumption of 15% for non-agricultural categories. The next tariff increase took place two and half years later, in December 2000, amounting to 11.5% average increase. In addition, monthly minimum charges were raised very significantly, contributing an - 6 -

11 additional estimated 4-5% of revenue over a full year, and earlier in the year, a fuel surcharge of about 5% was levied. g. The State of Haryana, as the owner of the power utilities, has enabled them to file in 2000 for, and implement, as of January 2001, a substantial increase in agricultural tariffs of about 50% as per the Regulatory Commission's order, breaking what was apparently a major deadlock in the reform program. In spite of this increase, agricultural tariffs in Haryana, albeit among the highest in India, remain low (around 75 paise equivalent to 1.7 US cents). h. The Government has continued to substantially meet its financial commitment to the sector and has provided budgetary support (in the form of subsidy and equity) as required to cover the financial gap of the sector but with increasing difficulties. For FY 1999, against a commitment of Rs. 720 crore ($ million), the Government provided Rs 689 crore ($ million) in cash. For FY 2000, the Government provided Rs. 632 crore ($ million) in cash against a commitment of Rs. 760 crore ($161.7 million), the balance being adjusted against future repayment of the Bank loan to the state government (see Section ). Due to the continuing financial crisis in the sector, the Government decided to increase its support for FY 2001 from Rs. 490 crore ($ million) to Rs. 878 crore ($ million), which the Regulator further enhanced to Rs crore ($220 million). While these figures reflect the Government of Haryana's consistency in providing subsidies, they also dramatically illustrate the budgetary impact of delays in reforms: for FY 2002, the Government has decided to provide subsidy of Rs crore ($ million); for the same year, the FRP had estimated that the government support would reduce to less than Rs. 200 crore ($42.55 million). The Government's own finances are becoming increasingly constrained though, and in FY 2001 it could provide only about Rs. 450 crore against its commitment, while during the current FY 2002, it has so far been able to provide only lower amounts. i. Efficiency improvements also did not materialize to the extent projected. The FRP had envisaged a significant improvement in collection efficiency from 91% in FY 1998 to 95% in FY 2001 and a reduction in T&D losses of 3% points (from a hypothetical 33% in FY 1998 to 30% in FY 2001). Actually, collection efficiency declined to about 87% in FY 1999 before increasing dramatically to about 94% in FY This significant increase in cash collections during FY 2001 is primarily due to the exemplary efforts launched by the newly created distribution companies with the commitment and support of the state Government. T&D losses (which include a significant amount of theft of power in the distribution network) have been restated at more realistic levels by the utilities and the Regulatory Commission at 4l%, but they have not been reduced, except in the few areas for which the APL1 investment program has been implemented. As Annex 1 shows, metered data from five rehabilitated feeders indicate reduction in technical losses ranging from 1.3% to as high as 11.8% after rehabilitation Linkages with the program. A key aspect of the reform agenda undertaken by Haryana is the privatization of distribution. In the absence of private distribution, all the measures already effected would bear only limited results and, in any case, would be insufficient to achieve Haryana's reform objectives. Privatizing (even partially) distribution was not part of the project's objective, although, initiating the privatization process was a step that Haryana had decided to undertake during the implementation of this project. This linkage between the project and the program is a key element for understanding the ratings of this first APL project. * As per the Project and Program Implementation Plani (PPIP), the distribution privatization was to take - 7 -

12 place in a phased manner, with one distribution company privatized by first quarter 1999 and entire distribution privatized by December Distribution privatization of the North company was initiated by Haryana in April 1999 with the issuance of advertisement. The RFQ was issued in May Haryana received eight proposals in response to the RFQ. However, the new state government which took office in July 1999, decided to take a fresh look at the reform program, and put the distribution privatization program in abeyance. * More important than the transaction steps which have been taken (and not pursued), is the fact that the principle of distribution privatization has not yet been endorsed by the Government which came to power mid-1999, which means that a key feature of the reform agenda remains unconfirmed and not backed by political support. Therefore, albeit several aspects of the project's development objective had been achieved, the lack of clear political endorsement regarding distribution privatization makes the success of the reform program more uncertain. Based on the assessment carried out in Sections and above, the project's outcome is therefore rated unsatisfactory. 4.2 Outputs by components: Summary. The project included three components: the first two components were largely of physical nature and aimed at removing bottlenecks and demonstrating, in selected areas, the benefits of system improvements and reforms; while the third one was to support the new companies in implementation of the first phase of the reform, institutional capacity building and preparing the companies for the next phase of reform. The following table summarizes the achievement of the project's outputs. Output Indicators (PAD) Achievements Power System Strengthened in Prioritv Areas (via Emergency Action Plan) Evacuation and transmission of 650 MW additional 432 MW from NTPC Faridabad Gas Station evacuated power Additional liquid-fuel based power generation (fortunately) did not materialize. Project resources were re-allocated for rehabilitation of additional feeders. Improved voltage profile in selected areas Significant improvements (see annex 10) Reduction in system losses in selected areas Some likely improvements (see annex 10) Improved Efficiency and Effectiveness in Consumer Services for Selected Areas Gradual improvement in consumer services Limited improvements (see annexes 8 and 10) Improved consumer support to power sector policy Some improvements documented by market research survey. (survey by an independent consultant under way) Preparation Substantially Comileted for the second phase of the program Policy and institutional development programs/ Partially achieved, but a major policy measure measures initiated (distribution Privatization) in abeyance Engineering and procurement arrangements Substantially done Power system strengthened in priority areas (through an Emergency Action Plan) At the time of loan closure, about 87% of the loan had been disbursed. The implementation of this physical component has been substantially completed, and the remaining investments underway are planned to be completed by June

13 Transmission works. The project provided transraission lines to transport 650 MW of additional power. 220 kv lines and substations for evacuation of the power from the Faridabad 432 MW combined cycle gas plant have been completed. Other 132 and 66 kv lines for evacuating about 220 MW from liquid fuel based units did not materialize because the corresponding generating units were not comrnissioned (with hindsight, a fortunate outcome given the huge increase in the costs of naphta-based power generation). The transmission lines were well designed, they reduced the line losses, improved the voltage and strengthened the grid system in selected areas (see Annex 10) Sub-Transmission Works. One imnportant component was the augmentation of transformner capacities at twenty four 33kV substations. 49 transformners of 6.3/8 MVA each were procured. In spite of repeated advice provided by the supervision mnissions, the utilities did not install these transformers as initially designed (2 identical transformers in parallel). Instead, these transformers were spread over 37 substations in view of transformer capacity constraints. Now HVPN has ordered additional transformers of the same ratings and specifications. It is expected that by end December 2001, all the 24 project substations will have two transforners in parallel as originally designed Distribution works. The distribution works have been largely completed albeit behind schedule. By May 2001, in UHBVN, about 98% of HT works and 99% of LT works have been completed. In DHBVN, about 95% of HT works and 89% of LT works have been completed. All the remaining works are expected to be completed by end June, Improvement of commercial and technical services to the consumers for selected areas. This is certainly the area where progress has been the most linmited. A recent survey carried out by an independent market research consultant funded by DFID found that, although the quality of power supplied in areas covered by APLI improved significantly, there was no perception of improvements in the quality of commercial and technical services provided by the utilities: non-recording of consumer complaints, absenteeism of line staff, inaccurate billing, delays in connection release and bill verification, harassment and demand for informal payments (particularly during times of transformer bum-out in the paddy season) by utility staff have been widely reported in the survey Readiness for Phase II of the Program. One of the important outputs of the APL I was to make Haryana ready for the subsequent phase of the program. This output has been achieved only partially. Although several key policy measures had been taken (see Section above), the suspension of privatization of distribution, the uncertainty surrounding the policy position of the state government on this matter and the deterioration of the financial condition of the sector represent a major set back. 4.3 Net Present Value/Economic rate of return: The economic analysis has been carried out for the project supported by the APL 1. The economic rate of return (ERR) is estimated to be 88% for transmission component, 26% for distribution component and 22% for the total APLI project. Benefits include reduction in technical losses, both in transmission and distribution systems, resulting from the construction of new transmission lines and sub-stations and the rehabilitation of 11 kv feeders (80 feeders with ftill rehabilitation and 130 feeders with partial rehabilitation). The economic cost is estimated before taxes and duties and the benefits are estimated at the willingness to pay of the consumers, which is consistent with the methodology adopted at appraisal. Additional benefits are in the form of improvements in voltage conditions, reduction in distribution transformer failure rate and reduction in the interruptions faced by the consumers, which are well documented by Haryana and also through the consumer surveys conducted by independent consultants. These are significant benefits of the project, but are difficult to quantify. The recent sector work completed -9-

14 on "The Supply of Power to Agriculture in Haryana and Andhra Pradesh" (see Section 10) provides some estimates of the benefits to farmers of higher-quality of electricity services: the farners' incomes (notably for small and marginal farmers) would significantly increase as a result of improved irrigation and farming efficiency even if electricity tariffs were increased manyfold. 4.4 Financial rate of return: The financial rate of return of the project (APL 1) is estimated to be 18%. The benefits include reduction in technical losses, both in transmission system and distribution system through rehabilitation of 11 kv feeders. It will be extremely difficult to estimnate the benefits of reduction in non-technical losses until complete metering of all consumers is achieved, and these benefits have not been included in the estimation. To this extent, the net benefits and the ERR and FRR are underestimated. During appraisal, the reduction in non-technical losses was estimated to be 136 MUs per year; assuming that 50% of this is realized from FY2004 onwards, the FRR for the APLI project will increase to 22% While the financial and economic returns of the investment project are robust, and show the inherently essential nature of the specific investments, the financial condition of the sector continues to be critical. While, because of the way the tariffs are structured, HPGC and HVPN are likely to show a profit in FY 2001, the losses of the distribution companies is increasing, currently estimated at Rs crore ($ million) for FY 2001 (before subsidy of Rs. 769 crore ($ million) and before including a regulatory asset of Rs. 259 crore ($ million). Their deficit in FY 2000 (July 1999-March 2000, after their creation) was Rs. 720 crore ($ million) before subsidy. Even though HPGC and HIVPN are not making losses anymore, their cash shortfall is significant, deriving primarily from the inability of the distribution companies to collect their bills and therefore pay for the bulk power supplied. Receivables of HVPN from the distribution companies are estimated at Rs crore ($ million) or 7 months worth of sales in FY 2001, and as a result, HVPN had to reschedule dues worth Rs. 655 crore ($ million) to its suppliers during the year. The distribution companies have faced cash shortfalls during FY 2001 despite very dramatic increases in collection efficiency primarily because tariffs continue to be below cost, and because the Government could not pay to the full extent the committed amount of subsidy and equity to the companies (see Section 4.1.1). For FY 2002, despite optimistic assumptions of efficiency improvement, the distribution companies expect a loss of Rs. 845 crore ($ million), to be covered primarily by govermnent subsidy The mrain reasons for this continued financial crisis are well-documented: (i) continuing high T&D losses, currently officially estimated now at 41% by Haryana (but below the 47% estimated in the sector work " India: Power Supply to Agriculture" recently completed); (ii) inadequate tariffs coupled with rising costs - average tariffs are Rs. 2.9/ unit compared to average cost of supply of Rs. 3.9/ unit; and (iii) continued supply to unremunerative categories of consumers. Despite the large increase in agricultural tariffs in December 2000, the level of subsidy for agriculture is still estimated at more than Rs. 920 crore ($ million) (or Rs. 3.25/ unit), only a small part of which (Rs. 150 crore or $31.91 million) is expected to be covered by cross-subsidization from other categories. 4.5 Institutional development impact: The project has had a significant institutional development impact: a. Major changes in the legal, regulatory and structural frameworks have been implemented; b. The new power companies of the restructured sector have started to work along the principles

15 underpinning the reform agenda, the staff of erstwhile HSEB has been transferred to the new companies, separate balance sheets of the companies have been created, new organizational structures with adequate focus on specific functions of the respective companies have been prepared with guidance and support of consultants, special attention/ focus has been given to strengthen the capacity of the transmission and distribution companies in the area of regulation and finance, some pilots to demonstrate the likely benefits of efficiency improvement were carried out. The companies have started to focus more on their specific functions and this has lead to some efficiency gains. For instance efforts are being madie to reduce transmission and distribution losses, and to carry out energy audit at all levels. Distribution companies have launched drive to control theft and pilferage of energy and improve collection efficiency; HPGC, the generating company, has improved its PLF and reduced fuel consumption (see Annex 8). Several intemational and domestic consultants have assisted Haryana in to imnplementhe reform program and built capacity in the new institutions; and c. The regulatory institution HERC, established as part of the first phase of the reform program is fully functional. It has its own office, infrastructure and staff. In the span of three years since its creation, the Commission has made very good progress in building its capabilities, specifically in the areas of regulation, economics and finance The institutional development efforts need to be firther reinforced: (i) the institutional capacity of the transmission company is still limited; systems and procedures need to be developed to enable the company to operate fully on commercial principles; (ii) the boards of directors of all the utilities need to be strengthened; (iii) much more emphasis on human resource development and training of staff is required; (iv) the process of selection and promotion of staff in the utilities need to be adapted consistent with corporate commercial practices; and (v) HERC has now to operate without the support of any technical assistance. The results achieved on the institutional development front need to be consolidated, and would remain very fragile if the reform process were not to continue DFID provided support for the implementation of reform program, notably for the institutional development at the sector level. Assistance of the consultants on a variety of financial, legal, commercial, and management issues was essential for the successful and smooth unbundling and establishment of the new entities in power sector. The most important support has been in the area of regulation, which was absolutely new area. DFID supported consultants have provided significant support for establishment of HERC, training of staff on key regulatory issues and principles and supporting HERC to develop their guidelines/ process of operation, rules and regulations, tariff setting principles and approaches, etc. DFID supported consultants, on the other hand provided hands-on support and training to staff of the companies by working along them on licensing issues, ARR, tariff filing, etc. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Three main factors, outside the control of the Government of Haryana and the implementing agencies affected substantially the achievement of the project outcome and objectives: a. At the end of 1998, the central Government of India lost to a confidence motion, and new national elections were called for. This created complex political issues at the state level and contributed to the change in government in Haryana in mid This uncertainty and volatility in the Haryana

16 political context were not conducive to taking the politically difficult decisions required to implementhe reforn program; b. The reforms in the Orissa power sector generated a considerable opposition, notably among staff who actively lobbied other states and various constituencies (political parties, unions, NGOs) against these reformns. No other state had undertaken similar reforms (the next state was Andhra Pradesh which passed the Electricity Reformn Bill in 1999), and this mnade the beginning of the reform process rather difficult. However, during the implementation phase of reform in Haryana, several states initiated comprehensive power sector reform program, including Andhra Pradesh, Uttar Pradesh, Kamataka and Rajasthan which could have strengthened Haryana's decision to reform and facilitated the implementation. It should be noted that, in 1999, Haryana played a significant role in "advising" Rajasthan to undertake simnilar power sector reforms. c. Lastly, the neighboring state, Punjab, took populist measures such as providing free power to farmers. Given the proximity and close links between the Punjab and Haryana (notably within the farming community), this extemal move created a lot of embarrassment to the Haryana government and affected its capability to take hard decisions. 5.2 Factors generally subject to government control. The following factors affected the implementation and outcome of the project a. The new government which took office about 12 months after loan effectiveness, decided to revisit and review the power sector reform program. The restructuring, tariff and institutional measures were confimned or resumed after deliberations and review: but other key measures such as privatization of distribution were not endorsed. In fact, following the change in government in 1999, the reform program, as stated in the various power policy pronouncements, was not backed by a clear and strong political commitment nor promoted by reform "champions". There is no doubt that, if such a political commitment had existed and if reform "champions" had actively promoted the reform agenda, the project outcomes would have been much better; b. Significant delay on the part of GoH to sign the amended legal agreements with the Bank for the project after the establishment of the new power companies, resulted in suspension of disbursements for about eight months; this had an impact on the utilities procurement pace; and c. The allocation of high-level staff resources to guide and monitor the implementation of the reform program was very uneven: several changes took place over time in energy secretaries, chairpersons and managing directors of the utilities, reform directors. 5.3 Factors generally subject to implementing agency control: Reform Measures. The main factor, under the control of the implementing agency, relates to the intemal arrangements for managing the reform program. More specifically: a. A common reform group was created to deal with both investment and reform aspects. Given the prevailing engineering culture in the utilities, technical and engineering issues captured most of the attention of the staff in the reform group

17 b. Not enough staff have been appointed in the reforrn group; generally, posting in the reform group, in Panchkula, at the headquarters of the main utility, was not an attractive option for staff. In addition, staff in the refonn group, with few noticeable exceptions, were more interested in the technical, engineering and investment aspects; and, in many cases, they did not have the proper skills and interests to deal with reforms. The reform group was dissolved in 1999 after the complete unbundling of the sector and the establishment of all the new entities (since the management and staff of these entities would take over most of the functions played by the reform group). Between June 1997 and the dissolution of the reform group, at least six (6) reform group directors were appointed. c. The relationships with the consultants, in the early phases of their assignments, were not optimal. The relative weakness of the reform group was certainly one among the multiple reasons for this Investment Measures. a. Implementation issue: Procurement of project high voltage transmission works was done on "supply and erect" basis. This arrangement worked well and these works were generally implemented satisfactorily. However for distribution works, the approach was different: goods were procured by the utilities and erected through labor contractors, while the utilities' operation staff was entrusted with the responsibility of hiring these contractors and supervising their work. This arrangement did not work well and in fact caused substantial delays in implementation as the utility staff was very busy with day to day operational, administrative and other problems and had no time to devote to planning and construction of new distribution works. In addition the hiring of local labor contractors also caused substantial delays (one major issue being the rates to pay to labor contractors). On hindsight, new construction divisions should have been created in the beginning for this work exclusively, and distribution works should have been performed on a "supply and erect" basis. This would have certainly ensured timely and smooth completion of the works, and therefore earlier benefits. b. Procurement and Disbursement issues. The procurement actions by Haryana utilities have been generally very time consuming. In particular, they have rarely met the timeframes which had been agreed between DEA and the Bank and which were recorded in the Bank letter to DEA of July 31, Had Haryana utilities pruned their processing of bid evaluation and submission of contract award recommendation, contractors would have got ample time to manufacture and supply goods before the closing date of the loan. This would have meant probably a full utilization of the loan arnount. 5.4 Costs and financing: As per the PAD, the estimated project cost was $77 million with the Bank contribution at $60 mnillion and the remaining by Haryana. On account of loan closure on December 31, 2000 an amount of $7,653, Tnillion has been canceled out of the Bank's share Reallocation among categories. The allocation of funds over different categories was revised as follows:

18 Category Original Allocation Revised Allocation (US$) (US$) Works 12,200,000 0 Goods 40,000,000 57,750,000 Services 2,800, ,000 Refund of PPF 2,100,000 Unallocated 5,000,000 0 Total 60,000,000 60,000,000 This reallocation was essentially due to the fact that the civil works (required for erecting the transmission lines and the sub-stations, and rehabilitating the distribution feeders) were lower than anticipated and were therefore either booked under "goods" (transmission works) or funded directly by the implementing agencies (distribution works). The additional resources were used to procure distribution goods in consistence with the project's objectives. In addition, since DFID supported a comprehensive technical assistance program (see section 9), additional funding requirements for services were minimal. 6. Sustainability 6.1 Rationale for sustainability rating: Policy Measures. The achievements generated, or expected to be generated by the project, are only part of a wider and longer program. Their sustainability cannot be assessed without taking into account the longer term perspective, and therefore making assumptions about the continuation or not of the reforrn program. At this point, Haryana has laid some foundations for a reformed power sector: this would allow the State to continue and deepen the reform process. However, the absence of a clear policy Eramework to continue the reform agenda and further delay in resuming the reform process would make it more difficult and costly; this would significantly increase the risks of no resumption at all, of further deterioration of the financial condition of the utilities, and at the end a reversal of the measures already taken. This is why, in the absence of such a clear policy framework and with the uncertainties surrounding the continuation of the reform agenda, the sustainability of the results achieved so far in reforming the power sector is rated as "unlikely". a. The unbundling and functional separation of generation, transmission and distribution business has facilitated a more focused operational approach by the respective companies. As mentioned in section 4.5 and detailed in Annex 8, the utilities have taken several initiatives to contain theft of power, improve collection and increase operational efficiencies. But how sustainable would these improvements be in the absence of further reform steps, remains a question. The acquisition of separate institutional identities, as part of the process of moving toward more commercial, self-interested behavior, has been hampered by the designation of the same chairperson as head of the utilities and secretary in charge of the power sector. In the absence of real managerial autonomy, restoration of creditworthiness of the utilities, commercial behaviors, privatization of distribution, and all the other measures that were part of Haryana's reform agenda, the structural measures would have very limited effect; and in some cases, may increase the overall sector inefficiencies. b. The establishment of the regulatory commission, its functioning and establishment of processes (e.g. tariff setting, licensing), which involves consultation with various stakeholders, is expected to foster greater openness and transparency of operation and performance of the companies, reduce govemment interference, and start the process of de-politicizing tariffs. The process of tariff

19 setting has been transparently laid out by the commission and this is a significant positive step. The commnission has established its credibility in at:empting to address some fundamental issues in tariff rationalization, reduction of cross subsidy across consumer categories and balancing the interest of consumers and the utilities in the process. But again, in the absence of implementation of further reform steps and/or reversal of a key policy decision (to privatize distribution), there would be significant risks that the Regulatory Commission would not be in a position to operate as expected. Regulating only state-owned companies along the principles laid down in the Haryana Electricity Reform Act, would become rapidly impossible in a context where political and administrative interferences have been continuoulsly prevailing. There would be considerable risk of conflicts between the state administration, the state-owned utilities on one hand and the Regulatory Commission on the other, would lead to deadlock situations; another risk would be the capture of the regulator by the Government. In all cases, the new regulatory regime established by Haryana, would not achieve the objectives for wlhich it had been set up. C. In summary, more actions would be needed to achieve the full goal of the reform: and among them, improved govemance of the sector and of the utilities, full autonomy and commercialization of the utilities, privatization of distribution, tariff adjustments, continuation of financial restructuring, further electricity market reform and increased competition. If these steps were not to be taken and Haryana were not to continue the reform process, then only very little progress would have been achieved; there would be a high risk of deterioration of the prevailing conditions. In the absence of credible measures to improve the financial viability of the sector, the power shortages in the state would increase, and the supply conditions would decline. Haryana then would end up with a legal, structural, regulatory and institutional framework which would not generate all its promises because further essential steps would not have been taken The sustainability of the achievements generated or expected to be generated by the project on the technical side is also somehow unlikely. The investments made so far represent only a small share of the utilities' physical assets; the sustainability of their benefits hinges on adequate resources for regular maintenance and adoption of proper operational practices, which should not be difficult to achieve. Should Haryana continue the implementation of its reform program, then there is no doubt that the benefits of the investments already made would be sustained and enhanced. On the other hand, if Haryana were to stop the reform process and let the utilities' financial condition further decline, this situation would have an impact on the operation and maintenance of the existing network and could affect the investments funded under the project. 6.2 Transition arrangement to regular operations: At the time of loan closure at December 31, 2000, about 90% of the project activities were completed and the balance is now expected to be completed by end June 2001 (para ). The completed works, after performing the necessary tests, were integrated with the system and their operation and maintenance has posed no problem. The utilities' staff is familiar with the project's transmission, sub-transmission and distribution system, and therefore no special training is needed for their maintenance. Procurement of essential spare-parts and spare goods, under the project, will facilitate future maintenance in the foreseeable future. For smooth transition of the entire project activities to regular operation, the implementing agencies (GoH, HVPN and the distribution companies), have agreed on the following: * they would continue to maintain the construction posts, specially created for the project activities, until all activities are completed; - 15-

20 * they would provide finances to procure all goods and services needed for project completion including items to be financed by the Bank before loan closure (e.g. procurement of utility meters ). HVPN has indicated that they have already spent about $6.9 million of their own resources to cover expenditures, which would have been eligible for reimbursement by the Bank if the loan was still effective; * they would construct all project works as originally planned to derive full benefits ( e.g. the project 33/11 kv substations should have similar transformers running in parallel; see para of the ICR); and * they would maintain close monitoring of the project; continue to provide the Bank with quarterly progress reports; and would keep the Bank informed of any serious problems in completing all the activities. 7. Bank and Borrower Performance Bank 7. 1 Lending: Preparation. This project was the first APL developed as a response to India's demand for a programmatic lending approach, when it was considered necessary to provide early support and conmmitment to states engaging into complex and politically difficult power sector reforms. In 1999, following an in-depth review, QAG had rated the quality-at-entry of this project as highly satisfactory and there is no reason as of today to disagree with this rating. The Bank provided considerable assistance to Haryana through consultants (funded largely by PHRD Trust Funds) and staff to design and start the implementation of the reform program and the physical component of the project. The Bank team extensively used the results and lessons leamed from the Orissa experience and best intemational practices were also made available to Haryana through high-level, internationally reputed consultants Evaluation. The project was processed only after the Government of Haryana had confirmed its commitment to reform by adopting, in spite of widespread agitation by political opposition, a comprehensive reform policy and legislation. The considerable risks associated with this reform were also properly assessed: the overall design of the lending approach (APL), of the milestones for processing the first and subsequent loans, and of the first loan itself was done to mitigate the political risks. On the technical side, the limited capability of the implementing agencies (HSEB and its successor entities) to implement efficiently the investment program was also recognized and reflected into the design of the project (small size of the project, technical assistance to strengthen capabilities). Given the nature of the project, consistency with the Bank's safeguards did not raise any major problems Social Development Aspects. Prior to the loan approval, the Bank had assisted the Government of Haryana (GOH) in adopting a set of "Social Policy and Procedures" (SPP) to address the adverse impacts associated with land acquisition and loss of other assets resulting from the physical investments. The policy provides for assistance not only to the affected land owners but also to the affected tenants (share croppers, lease holders, encroachers, squatters, etc..). There are specific provisions for assisting the affected persons in the event of loss of livelihood, loss during the transition period, loss of access to the common priorities, etc. which were hitherto not protected under the local laws. Thus, the policy provisions were consistent with the World Bank's Operational Directive 4.30 Involuntary Resettlement. The Bank also assisted the Haryana State Electricity Board (HSEB) in preparing a Resettlement Action Plan prior to the loan approval to propose mitigation measures for the adverse impacts. The policy enabled HSEB to explore all possible options and thus avoided acquisition of any private properties. Further suitable

21 measures were proposed to the persons who suffered loss of standing crops and trees associated with the construction of transmission lines Environmental Aspects. Prior to loan approval ihe Bank had assisted Haryana in undertaking an Environmental Analysis for transmission projects. This entailed the preparation of a framework for environmental management, laying down its basic principles, as well as activities proposed to enhance the same in the future. As per the Bank's OD 4.01 at the time of preparation, the project had been rated as an Environmental Category B. Environmental Analyses for a sample of transmissions lines and substations proposed to be funded by the project was also carried out by Haryana, which was reviewed by the Bank. It was concluded that if the safeguards as laid out in the documents prepared, were adequately adhered to, there would be no significant adverse impact of transmission lines and sub-stations On the environmental aspects of generation, the Bank had engaged in a dialogue with Haryana, who at that time had initiated the rehabilitation of its main power plant with financing from KfW (Germany). Further, it was agreed with Haryana that the environmental management capabilities of HSEB's successors would be strengthened through technical assistance, and draft terms of reference had been developed for this purpose. Specific to the issue of management of Poly-Chlorinated Biphenyl's (PCB's), it was agreed to provide technical assistance using international consultants, to cover identification of PCBs in electrical equipment, management and cleanup of transformer installations, discarded equipment, and repair shops. As part of capacity building of the transmission company, it was also proposed to explore the possibility of providing a planning model developed as part of an economic and sector work (ESW) on "Environmental Issues in the Power Sector", which assesses the various environmental implications of policy and expansion options. 7.2 Supervision: The project has been closely supervised. QAG has also reviewed the supervision of this project and rated it highly satisfactory. The location of most of the team members (including the task leader) in India allowed a close interaction with the beneficiary entities, the donors and other parties (consultants, for example) involved in he project implementation. In pardcular, a close dialogue could be entertained with donors such as DFID, USAID and JBIC (ex-oecf): this contributed without any doubt to maintain the momentum for reforms. Similarly, on the technical side, a close supervision by the project procurement and technical specialists, contributed to reveal without delays shortcomings in the implementation and deal with procurement issues. The preparation of APL 2 also started and mobilization of expertise through trust funds contributed to maintaining the dynarnics between implementation and preparation of subsequent phases Social Development Aspects. The Bank has closely supervised the implementation of RAPs. There were no adverse impacts due to the construction of sub-stations. For the transmission lines, payment of compensation for crop damages and loss of trees was required. 266 persons have suffered losses due to the construction of transmission lines. The compensation for such losses is based on the rates declared by the market committee and calculated on the basis of lype and yield of the crops. 95 percent of the compensation amounts have been disbursed Environmental Aspects. While there were no significant environmental issues anticipated during irnplementation, the project could have done with better environmental supervision. Implementation of the EMPs started late, and some activities that were identified to be undertaken during project implementation, did not get started at all. These activities were envisaged in the form of one component of a technical assistance program to build overall institutional capacity in HSEB's successor utilities, essentially HVPN

22 (see section 7.1.5). Due to delays and issues in procurement, HVPN did not appoint consultants to provide the required support and therefore assist on environmental matters, in spite of repeated reminders of supervision missions. The Bank was able to provide training on the planning model referred to in section 7.1.5, which HVPN found a useful exercise, providing them with a "system" that encouraged better planning for implementation A Financial Management Specialist (FMS) was involved at the time of appraisal of this project, and was associated with 2 supervision missions thereafter. 7.3 Overall Bank perjfrmance. In summary, the overall Bank performance is rated satisfactory. Borrower 7.4 Preparation: The dialogue with Haryana started end of The performance of Haryana (government and utility) in preparing the project has been uneven and was directly linked with the strength of the political support given to the reform program: a : highly satisfactory performance. Haryana awarded consultancy contracts (under a project preparation facility) at a pace which has rarely been seen in India; mobilized a high level team to interact with the Bank; and expressed openness to engage in reforms. The dialogue stalled when Haryana did not agree to implement a 50% tariff increase that Bank management requested as an upfront action to lend. b : Haryana went through state elections, change in governments and was not in a position to engage into a bold reform process. However the Government issued in 1996 a General Policy Statement which laid down the grounds for reforms. c : again satisfactory performance. The newly elected Government, following a review of the options available, decided to continue the reform program. Haryana provided a strong political support and set up a highly performing reform team. 7.5 Government implementation performance: Similarly, the Government implementation performance has been uneven. a : in spite of an uncertain political climate, the Government took key policy decisions and provided a strong and continuing support to the reforms. During this period, the main reform measures (enactment of the Electricity Reform Act, establishment of the Regulatory Commission, successive rounds of unbundling of the utility, starting of distribution privatization, preparation and implementation of an emergency investment programme) were initiated. However, the tariff filing by the utility to HERC was delayed resulting in deterioration in the financial condition and also there was inordinate delay in signing amendments to legal agreements with the Bank, reflecting the unbundling of the Haryana State Electricity Board (HSEB) into two distinct entities (see section 8.3); b : the momentum for reform has been reduced. Privatization of distribution, a key aspect of the reform progranm, has been put on hold. The political context (state elections), the climate created by

23 the delays in signing the amendments to the legal agreements and the subsequent suspension of disbursements (see section 8.3), the absence of a clear political endorsement of the reform agenda contributed to a slow-down in the implementation of the reform program. However the utilities, with support from the government, launched several initiatives to improve the operational efficiency and financial performance; these included: (i) a drive to control theft and pilferage of electricity (during FY2001 about 50,000 theft cases were detected as against the annual average of about 16,000 in the previous three years); (ii) metering at all voltage levels to measure the flow of energy and energy accounting; (iii) collection drive to recover outstanding receivables (arrears of Rs 623 crore or $132.55m were recovered over a period of 20 months to March 2001, and nearly half a nillion consumers were disconnected). Efforts are also being made to improve customer service - for instance, collection of bills through banks has been introduced at 55 branches of different banks throughout the state. The sustainability of these efforts is however, not certain, and these efforts are likely to have limited effect in the absence of more sustainable changes like privatization. 7.6 Implementing Agency: Beyond the State Govermnent, the implementing agencies included the Haryana utilities (HSEB and then its successors, the transmission company - HVPN, and the distribution companies - UHBVN and DHBVN) and the Haryana Electricity Regulatory Commission. a. Haryana utilities. They had a double function: (i) implement the reform and restructuring measures; and (ii) carry out the investment program. For the first function, their performance mirrored the overall performance of the Haryana government and the evolution in the political endorsement given to the reform program. For the second function, the overall utilities performance has been generally satisfactory. Albeit procurement was generally slow and behind schedule; most of the works (including the rehabilitation of the 11 kv feeders) have been completed (see annex 10). The compensation to the persons affected by loss of standing crops and trees due to the execution of transmission investment program has been paid on time, under generally satisfactory conditions. b. Haryana Electricity Regulatory Commission (HERC). The overall performance of HERC was satisfactory. Although HERC took a rather long time to get proper staff and fully benefit from the extensive technical assistance sponsored by DFID, the Comnission rapidly appeared as a powerful and determined reform agent in Haryana. The Commission performed its mandate as stipulated in the Haryana Electricity Reform Act while becoming increasingly aware of the need to incorporate into its proceedings the features, constraints and requirements of a reforming sector in transition. The Commnission initiated public hearings procedures and the first tariff order issued by the Commission end 2000 is exemplary, not only for its substance but also in terms of process. In particular, the Regulatory Commission took the decision to adjust agricultural tariff, a step which was considered by many observers, as "politically" impossible Financial Management aspects A separate team for implementing the project was created within HSEB which included a Chief Accounts Officer and 2 accountants. Although separate books were not maintained for the project, the expenditure in the books of the implementing agencies was captured by way of separate account codes and the accounting was carried out by the Accounts & Audit Wing of the Implementing agency on a manual basis. Although the special account audit reports from GOI were received in time, the audit reports for the project/ SOE were generally received after the due date and were unqualified. The entity audit report for the FY 1999 and FY 2000 of the implementing agencies have not been received by the Bank till date as

24 required under the financial covenants since HSEB was unbundled in August 1998 (into HPGC and HVPN) and June 1999 (when the distribution business was unbundled out of HVPN into two distribution companies), because of which the accounts compilation and audit processes were delayed. The project is in the process of submitting the entity audit reports for FY 1999 and 2000, expected by June 30, The entity audit report for for HSEB contained auditor's observations for not adhering to the provisions of the Electricity Supply Act, 1948 like short provision of power purchased, non-provision of surcharge and interest (Rs 516 mn or $10.98m), capitalisation of interest, etc... The provision of these items in the profit and loss account would have impacted the profit /loss for the year by Rs million ($232.81m) adversely. Most of these items were restructured/ waived as a part of the balance sheet restructuring carried out during the first unbundling in August No serious accountability problems were noted The disbursements of the project in the initial period from the date of effectiveness (March, 1998) to December 1998 were made largely by way of direct payments to the suppliers and the initial deposit to the Special Account (US$ 4 million) was made only in August 1999 after 17 months of effectiveness. This was basically due to the fact that: (i) implementing agencies wanted to avoid delays in receipt of funds through the state government; and (ii) implementing agencies wanted to effect small direct payments to suppliers Although HSEB was split in August 1998, the legal agreements with the new entities were signed as late as August 2000 and as a result the disbursements under the project were suspended for the period from December, 1999 to August, During the period (August 1998-December 1999), the disbursements made to the restructured entities, was also at a risk of being classified as ineligible disbursements, which however was regularized by the legal agreements signed in August 2000 (see section 8.3) The Haryana Government in FY 2000 adjusted an amount of Rs 127 crore (US$ 28 million) from the subsidy payable to HVPNL for the year by exercising a "prepayment" of the subsidiary loan of Haryana Governmento HVPNL under the Bank project. This measure, which was flagged by supervision missions as contrary to the agreements with the Bank, has not been corrected by Haryana. This had an adverse effect on the liquidity of HVPNL's resources, since, the "adjusted" subsidy was not paid in cash Financial Covenants. The financial covenants as stipulated under the amended Assumption and Project Agreement in respect of profitability, DSCR, receivables, payables were largely not met, primarily due to the continuing poor financial condition of the sector (refer Section 4.4). The following table summarizes the performance on financial covenants. FY 1999 FY 2000 FY 2001 to Dec 2000 Profitability Covenant Cover all costs 10% Return on net Return prescribed by worth Regulator or per SUDDly Act, 1948 Compliance HPGC Data not available HVPN Loss of Rs crore -ve 2% on Net worth (after subsidy) UHBVN }included in HVPN -ve -ve

25 DHBVN -ve -ve DSCR Covenant Compliance HPGC Data not available HVPN UHBVN }included in HVPN -ve Data not available DHBVN } -ye Data not available Net Receivables Covenant 3 months 3 months 3 months Compliance HPGC Data not available HVPN 2.97 months 2.5 months 6.25 months UHBVN }included in HVPN 4 months 4.5 months DHBVN } 4.2 months 5.5 months Payables Covenant 2 months 2 months 2 months Compliance HPGC Data not available HVPN 6 months 4.4 months 6.44 months (before bond issue of Rs. 655 crore) UHIBVN }included in HVPN 2.33 months 5.9 months DHBVN } 5.7 months 9.3 months 7.7 Overall Borrower performance: All in all, the overall Borrowe performance can be rated as unsatisfactory albeit with the qualifications mentioned above. Although sor ie basic foundations for re forming the power sector have been set up and most of the investment measur s implemented, considera le challenges remain to be addressed to restore the creditworthiness of the utili es, accelerate the operatioi al and commercial improvements of the sector, let the utilities operate autonom usly, along commercial pn nciples, and privatize distribution. 8. Lessons Learned The lessons learned focus arour d two aspects: (i) the utililz tion of the APL instrument; and (ii) the design and implementation of complex state power sector reforms n India Utilization of the APL nstrument The APL proves to b a very powerful lendin instrument for dealing with complex reform program with long gestation an execution periods, within a highly sensitive and volatile environment. In this specific case, political fact rs, which had been clearlj flagged in the PAD risk analysis, affected the implementation of the project. s it turned out, time was ssential to allow deeper assessment by the state political leadership of the polic options and stakes, contim e dialogue with the Bank and other partners and take decision on the continuatio 1 of the program. The esse ntial element is that such a pause/reversal in the

26 implementation is factored in the lending approach and therefore does not lead either to: (i) a situation of conflict and ultimately to the end of a dialogue and partnership, through application of remedies; or (ii) a scaling down of the objectives and therefore less relevance to the project. Milestones resulting from a program of measures set by the client are much more efficient to entertain a policy dialogue than conditionalities. It is also important that the elements of flexibility introduced by the APL are not perceived by the clients as a relaxation of the terms of the policy measures upon which the Bank programmatic support has been premised A careful approach is needed to deal with covenants and milestones, and generally, to simplify the design of the support. With hindsight, it is seems clear that the first Haryana APL was "overloaded", with several ambitious objectives; and, most importantly, that some (essentially process-related) covenants were linked to milestones for the subsequent operation. For example, the initiation of the privatization of distribution was a covenant in APL1 while the selection of a private partner was a milestone for the APL2. This linkage is not consistent with the basic principles underlying the APL concept, and therefore, we should resist the temptation to reflect in the covenants-milestones systems, the elements of the initial program implementation plan. These elements may vary overtime, in particular, the delivery times: that should impact the processing of subsequent APLs but not the assessment of the operation under execution. This should not prevent the borrower/implementing agencies and the Bank to use ambitious targets to accelerate the implementation of the reforms, but both the client and the Bank should make a clear distinction between the means used to manage the reform process and the legal agreements and covenants upon which formal assessement of progress and outcome achievement would be made during supervision. This is particularly true when dealing with complex policy matters such as privatization of distribution Financial covenants needs to be addressed with a particular care, and certainly be given less prominence than it was in this Haryana APL. The financial crisis of the power sector is so deep and the reforms initiated by Haryana so comprehensive (and disruptive) that it would be difficult (if not impossible) to capture, over the initial two or three years of a reform program, and through standard financial covenants (profitability and financial performance of the utilities) any meaningful improvements. This is particlarly true when using the APL instrument, since the existence of triggers for a subsequent APL can provide benchmarks and leverage which could be more thoroughly assessed and be more effective means in the dialogue between the Bank and the clients than covenants. Relying on qualitative judgments -for example on the extent and quality of efforts developed to solve the financial issues in a sustainable way - or specific performance indicators (for example in distribution business) may be at least as important as relying on overall quantitative parameters subject to wide variations and uncertainties The APL is also an excellent instrument to reflect, in the subsequent operations, the lessons learned during the project implementation, in similar projects elsewhere, through intemational experiences and also to incorporate changes in the prevailing environment, including in the Bank. Compared to a traditional investment loan, additional flexibility is not limited to the timing for processing loans (when triggers and milestones are met). There is also flexibility in designing the next phases of the reform program and the Bank's support. For example: a. Lessons learned through the previous A-PL. A considerable amount of experience has been gained on managing a reform process, understanding incentives of various stakeholders, working with consultants, dealing with regulatory matters, technical standards, engineering and procurement. b. Changes in external conditions. This may relate to the Bank group (for example, utilization of new instruments to complement the APL) or to the business environment (reduced appetite of

27 private international investors for India). c. Lessons learned elsewhere. Important lessons have been learned in other Indian states: for example, on the need for reducing the regulatory risks, dealing with rural areas, making distribution business more commercially attractive to private investors. d. Incorporating findings of sector work While Hlaryana APLI was implemented, the Bank and the states of Haryana and Andra Pradesha engaged jointly a comprehensive sector work on the "Supply of Power to Agriculture in Haryana and Andhra Pradesh". This sector work provided an important analytical and information basis for decisions that Haryana had to take in 2000 about loss restatement and agricultural tariffs. In addition, the conclusions of this sector work have large implications on the design of investment and reform measures to deal with rural electricity issues, which could be incorporated into the definition of the subsequent APL operations Design and implementation of a reform program. Agriculture plays a significant role in Haryana which was a main actor in the India "green revolution": about one third of the power supplied in the state is for irrigation purposes, and there is a strong political dimension to the supply of power to agriculture. In that sense, Haryana may be a good representative of the Indian states, as far state power sector reforms are concerned; and, although Haryana has not gone through a full reform process, some lessons can already be drawn; a. Political support for the reforns, ownership, and reformn "champions" are indispensable ingredients to start and sustain a reform process. These ingredients may vary overtime, as this was the case in Haryana. It would not serve any practical purpose to take "shortcuts"; the time dimension needs to be recognized to ensure the presence of these ingredients (which, fortunately, the APL approach permits). b. The dynamics of reforms is essential. The overall political and administrative set up can change rapidly; therefore reforn agents should seize any opportunities to promote the reform agenda and focus on structural and systemic measures, with a view to create as much irreversibility as possible. Managing the transition is a critical element of the reform agenda and ensuring that various stakeholders, including the Regulatory Commission, end-users, utilities management, state officials, are associated with the preparation of a transition plan should be a high priority task, at least as important than the definition of the target market structures. One of the challenges that needs to be addressed in the design of this transtion plan is the recognition and incorporation of stakeholders' incentives. c. Communication campaigns, demonstration effects (within and outside the state), detennination to face opposition and build a constituency for change, but also education about reforms are essential. Misinforrmation is often proliferated by vested interests; educating (candidly) about reformns, and dispelling apprehension is a major task For example the impact of electricity tariffs on farming costs now and in a hypothetical future of improved service and higher charges has never been studied in detail. The sector work conducted on the "Supply of Power to Agriculture" sought to fill that void. Based on well designed studies of miany aspects of farm operations in the states of Haryana and Andhra Pradesh, it found that providing highly subsidized but poor quality power to agriculture imposed a very high impediment to agricultural growth and income; power subsidies benefited proportionally much more large farmers compared to small farmers and also thieves of power; the present pricing regime based on a -lat rate tariff structure penalized small farmers

28 compared to large farmers. These are powerful messages to communicate. At the same time, managing expectations and resisting un-realistic promises and commitments, is also essential. d. Mid-level management can (and should) play an important role for reforms. High-level officials can guide the reform agenda; but the amount of technical, financial, administrative work is considerable; and it is also essential that, should a reform "champion" be transferred, the momentum for reforms as well as the institutional memory remain. Consultants will not be able to substitute for the utilities staff. The establishment of working groups, with young and full-time staff, should be one of the early steps to take by the implementing agencies. Also important is to avoid mixing investment, procurement and reform aspects into the same structure. e. These reforms are complex and require technical assistance, a costly process. These costs can be reduced (and the overall efficiency of the reform agenda can be increased) if the clients were to draw lessons from elsewhere, reach their own conclusions about the need for reforms, speed up their own decisionmaking process, and also improve their capabilities to manage consultants. To achieve this, the clients may need to get high-level, catalytic advice: Bank staff can contribute to providing this advice (which requires a considerable involvement, well beyond what is needed to supervise a "standard" investment operation); but this will not be sufficient and the implementing agencies should hire high-caliber (preferrably individual) consultants to help them sort out policy options, advise on strategic approaches, and assist in managing "implementation" consultants. f Bank sector work in "real time" may prove extremely helpful to support reforms. The results of the study on the "Supply of Power to Agriculture", made continuously available to the implementing agencies, provided a good basis to better assess system losses, understand the impact of agricultural tariff increases, and the benefits of improvement in the quality of electricity services to farmers, key considerations for the decisions taken by HERC, GOH and the utilities regarding the re-statement of losses, and the first tariff application and order. g. The role of the Regulatory Commission during the transition phase is critical. Not only the Regulatory Commission will have to set the tone in terms of information and other regulatory requirements vis-a-vis the regulated entities, but will establish (or not) the credibility of the new new regulatory regime, and, ultimately, of the reform agenda. A close attention from HERC in what was required from a regulator to facilitate the implementation of the reform program and its active dialogue with the Government on policy matters contributed to Haryana's achievements. h. Revenue Enhancement, Theft of Power and Governance. During the transition period, several measures can be taken to contain the financial hemorrhage. These steps are commendable since they would reduce the financial requirements of the sector and instill more commercial practices. It is interesting to note that these initiatives may often be actively pursued with the purpose to demonstrate that state-owned distribution companies can reduce losses, contain theft and do certainly as well as may be expected from private companies; strong campaigns, mobilizing the utilities management, the govemment, the administration, law enforcement bodies lead to spectacular results; however, there is a risk that these exceptional efforts cannot be sustained for a long time, and, therefore, they would not be a subsitute for privatization of distribution. i. In any case, the design of an investment operation (as was the case for this APL) could focus more on addressing financial matters; for example, by supporting more extensively metering of industrial and commercial consumers, and other efforts to enhance revenues, contain theft of power and improve govemance as mentioned above

29 The development of the very basic infrastructure (for example in terms of metering, commercial arrangements among the state-owned utilities, delivery of subsidies, intemal management information systems, billing, collection, accounting, etc...) is a laborious process, not yet achieved in Haryana, more than three years after the beginning of the reform process and in spite of the considerable amount of technical assistance supported by DFID. This is due to the deeply rooted adrministrative and technical culture of the state electricity board which had prevailed for decades. It would be most unlikely that such a culture would change suddenly to evolve towards more commercial behaviors and attitudes; this means that the development of more elaborate power market mechanisms would require a long gestation period and cannot be considered as a realistic option during the initial years of the reform program. Other considerations such as the existing power demand-supply gap and the lack of creditworthiness of the utilities, would also limit the options to introduce more competitive forms of market structures, or other more sophisticated changes in the industry market; this points to the need to "keep it simple at the beginning" and think about realistic transition plans, for example, from a single-buyer model to more efficient models. k. The unbundling of the vertically SEB into a final configuration in a single shot (i.e. into generation, transmission and distribution companies) is a better approach, and minimizes risks, uncertainty, and adrninistrative issues. The transition period between corporatization and privatization of the distribution companies needs also to be as short as possible. This is critical, as is shown by the mounting losses of distribution companies. If the period is long, first, the losses go up, and second, there are that many more chances of mid-streamn change of mind or loosening of commitment. In tlie Indian context, much has been learned about corporatization and unbundling. and therefore several steps could be pursued in parallel at a much faster pace (whiclh was, for examiiple. the case for Rajasthani) Others: legal, administrative and communication matters. One issue which affected the implementation of the project was the delays in signing amendments to the legal agreements to reflect the fact that one implementing agency, the Haryana State Electricity Board (HSEB), was un-bundled into two distinct entities. Such a change was anticipated during loan negotiations and the scope and format of the amendments were agreed during negotiations and reflected into the minutes. The Govenmment of India (Gol) as borrower, and the State of Haryana and the utilities, as implementing agencies, were to sign these amendment so that they could become effective at the unbundling of HSEB. In spite of repeated efforts by the project team, the amendments were not signed for more than 20 months after the un-bundling, while disbursements continued: disbursements were suspended in December 1999 and resumed only in July 2000 after the amendments were signed and could be made effective During the first phase of the project execution (January 1998 to August 1999), signing of the agreements was delayed only by minor technical considerations raised mainly by Gol. None of the parties had any doubt that the agreements would be signed; both the project team and the client focused on urgent, substantive matters, paid limited attention to administrative aspects and under-estimated the need to rapidly regularize the situation. The project team did not report clearly to, and did not enlist the support of management to solve the issue: with hindsight, there is no doubt that such an approach would have accelerated the signing of the amendment and avoided the subsequent crisis. A key lesson leamed is to not under-estimate the legal and administrative issues that may arise as a consequence of institutional changes within the borrower's structure; and to the extent feasible., lend only when these changes have taken place. Another key lesson is the need is to pay a proper attention to legal covenants and administrative matters, and report promptly to management on these issues

30 Political dimension of simple administrative facts. During the second phase of the project execution (from September 1999 onwards), a key reason for the delays in the signing of the amendments was that the new government in Haryana was deliberating about the rationale of the reform and need for Bank support in implementing this reform, and therefore did not want to sign legal documents, which could have been interpreted as a continuation of the policy pursued by the previous government. During this period Haryana had also to go for state elections. The agreements were signed in April 2000 by Haryana, after the state elections took place, and the amendments were made effective in July 2000 when all effectiveness conditions were met (including compliance with covenants; and, for the financial covenants which were not complied with, a fonnal waiver was granted by management). The lesson leamed: do not under-estimate the political significance of apparently trivial facts, particularly in a rapidly evolving political context The usefulness of an ICR for an APL. The preparation of an ICR for one of the series of proposed operation in an APL is certainly a welcome step which can facilitate the preparation of the subsequent operation and the incorporation of the lessons learned; this would be particularly true, when like in the present situation, the preparation of the subsequent APL is delayed because of problems faced during the implementation of the project under review, and would take place only after the closing of the previous operation. However, if an APL were to be processed when the previous one is still under execution, and therefore the Project Appraisal Document (PAD) of this APL where to be prepared before the completion of the previous APL, the preparation of the ICR of the ongoing operation could be streamlined and be part of the preparation of the PAD of the subsequent one The format of the ICR should be revisited to reflect the programmatic aspect of the APL. In this context, it would be advisable to: * Introduce sections dealing with: (i) the relevance, assessment and achievement of the program's objectives and outcomes (as opposed to the project's objectives and outcomes); (ii) the revisions that the lessons learned during the APL operation under review (as well as the currently prevailing context) would bring for the design and implementation of the subsequent operation (s); Shorten the sections dealing specifically with the project's objective and outcomes; and * Consider the ICR - if and when available before the Project Appraisal Document (PAD) of the subsequent operation- as part of the documentation that is required for processing the subsequent operation, and adapt consequently the format of the PAD for the subsequent operations. This approach would minimize duplication of efforts. 9. Partner Comments (a) Borrower/implementing agency: Comments from the Department of Economic Affairs (DEA) of the Government of India We broadly agree with the analysis of the Bank as regards the achievement of development and implementation objectives of the programme. Haryana project did provide a lot of valuable experience. The project did have significant achievements, but it would have been better if the State Government of Haryana would have agreed to move over to Phase H of the project immediately upon completion of Phase

31 I. Haryana did not witness significant reduction in T&D losses during the project period. Neither was the financial position of the State improved notably. The investrnent support of Bank, on its own, had limited scope. More comprehensive treatment of all factors contributing to the ills of the sector and use of all possible instruments and other public/private sector partners would have to be brought in to really reform power utilities in any State and achieve a tum-around. Comments from the Government of Haryana [Prepared in the light of para-3 and para-1 1 of the World Bank operational Manual Operational Policies - Implementation Completion Reporting]. 1. The Haryana Power Sector Restructuring Project, which grew out of Haryana's conviction to make its power sector efficient and financially sustainable, has displayed all round sustainable efficiencies and achieved high levels of consumer satisfaction. Haryana's association with the World Bank in evolving the Project under APL-1 and thereafter in implementing it, reflected its commitment to quickly improve the sector's functioning and to discover by pursuing various alternatives, a reform structure that was best suited to the State's specific needs and characteristics. 2. Haryana's ability to take and implement hard decisions in the cause of reforms made it a pioneer in power reforms in India. While being tough, Haryana's approach has been marked by healthy pragmatism and sensitivity to the democratic process, which is the life breath of the system of governance in the State. The project implementation period saw a successive change of governments at the State level and elections at national, state and local bodies levels. The issue of reform in the power sector and its significance went through public consultation during this time and Government commitment to reforrm was validated and re-affirmed. 3. In this context, the World Bank's concept and application of the Adaptable Programme Lending (APL) approach deserves specific attention, especially since it was introduced for the first time in the world, in Haryana. The operational part of APL lies in the expression "Adaptable". It signifies flexibility and the ability to adjust to changing circumstances. On part of Haryana, it is understood that APL comprises a lending strategy, which responds to unanticipated changes in external circumstances or endogenous variables in the Project system. It does thus by adjusting the pace, with emphasis on evaluation of the project objectives' boundaries so that the momentum and direction acquired by the project is maintained or, if required, modified. As long as the project displays a basic robustness and integrity, reflected in its overall achievements and capability, as in Haryana's case, the APL approach is expected to ensure that the project is not subjected to any penal administrative or financial stress. 4. The action of the World Bank in: (a) stopping reimbursements of expenditures incurred by Haryana Utilities towards achieving targets of the Project for nine months; and (b) not allowing reimbursement of expenditures on Project material ordered before , but received after that date, did not appear consistent with the understanding of Adaptable Programme Lending approach as described above. During the period of stoppage of the reimbursement, which occurred at a time when the Govermment was in the process of consultation and obtaining validation for the power reforms and a major democratic transition was being experienced by Haryana through elections, the power utilities had to spend about Rs. 350 million ($7.44 million) from their own scarce resources on works covered under the APL Project. Similarly about US$ 7 million have remained unutilized, which have now to be spent by the power utilities from their own funds on account of action described in (b) above. The project implementation was to this extent subjected to avoidable stress and trauma. A project being implemented under APL approach

32 and possessing the positive features described above must necessarily benefit from the basic rationale and spirit of "Adaptability". 5. Another design aspect of the adaptable or flexible approach is the capacity of the World Bank to respond to the changing nature of financial requirements of the project under APL. In the Haryana APL-1, a loan of only US$ 60 million was settled/earmnarked. This sum was primarily for capital works identified under an Emergency Action Plan covering identified critical transmission and distribution works. The comprehensive reform process, with the emergence of new organizations, greater transparency in financial working, restatement of losses, and revisiting of various assumptions including assumptions about expected financial flows which formed the basis of initial Financial Restructuring Plan (FRP), very soon and conclusively established the need for adequate working capital as a part of the project loan. If cash flow support is made an integral part of project assistance, the Reform Project can get over the financial problems, which are inevitable during the crucial transition period; if these cash problems are not addressed, they can get compounded. In the case of the Haryana Power Utilities, the working capital shortage was met by raising additional funds from financial institutions and the bond markets. This enabled them to maintain and improve their operations at the desired levels and to fulfill the commitment of providing adequate power supply to the people of Haryana. Working capital infused into the project as a part of APL lending would strengthen the project considerably. It was increasingly felt that working capital should be an integral part of funding power sector projects of the World Bank. This would ensure their viability. Without a working capital component, a severe imbalance in project implementation is likely to be experienced. In the original loan plan, the adaptable approach should have enabled the introduction of working capital through an appropriate mechanism. A reforn programme of this scale cannot be sustained with a capital works programme alone. 6. While the various institutional, legal and financial changes brought about in project implementation would be mentioned elsewhere in this ICR, it is a matter of considerable satisfaction that these changes were brought about by Haryana in a very smooth and effective manner. Passage of the Reforms Act, setting up of the Haryana Electricity Regulatory Commission (HERC), implementation of the first and second transfer schemes involving reallocation of a vast number of staff, division of assets, setting up and making operational new and distinct management structures in the new power entities, working out and obtaining from HERC significant increases in tariff including agricultural tariff, applying a fuel surcharge adjustment (FSA) to the agriculture sector for the first time, introduction of energy audit on an extensive scale, setting up of profit centers at divisional levels on a commercial basis, reduction in staff strength, out-sourcing of certain services and functions, and implementation of a multi pronged recovery strategy were achieved successfully with ease and professional competence. The experience in these areas in some other states, it is understood has not been satisfactory. 7. The reform process in general and the restructuring project, in particular, benefited from the consultancy funded by DFID. The areas in which the power utilities have gained particularly include: (i) methodology of preparation of ARRs; (ii) preparation of FSA; (iii) physical asset register preparation; (iv) advice on some implementation aspects of the second transfer scheme; (v) preparation of on-line billing project; and (vi) organization of workshops connected with financial modelling, etc... While some difficulties in placement of utilities' staff in adequate numbers with consultants for transfer of skills was faced, on the whole the utilities have succeeded in building a core tearn of staff that is capable of handling regulatory works independently. The consultants have assisted the power utilities to file two tariff applications and three ARRs before the Regulatory Commission. DFID has agreed to support the consultancy till October Overall association with DFID has been very satisfactory. 8. Initiation of privatization of distribution was one of the components of the APL-1 project as

33 originally conceived. The assumption behind this was that privatization, as conventionally understood would improve distribution considerably and thereby turn around the power sector as a whole because shortcomings in distribution are at the base of the sector's inefficiencies. The process was initiated in 1999 and a set of potential bidders was short-listed. Subsequently owing to significant changes in the assumptions underlying the FRP, which impacted the disinvestment process directly, an exercise to update the FRP was conducted. Developments in privatization in other parts of the country led to a number of alternative models of disinvestment to emerge for consideration. It has been considered prudent by the Government of Haryana to arrive at a sustainable approach towards privatization in the power sector only after an in-depth and broad based process of examination and consultation. There is no case for rushing into privatization of power without adequate thought and preparation, especially when experiences of the process outside of Haryana, as well as newer models and interpretations of privatization have now become increasingly available. The matter is now under detailed consideration at the highest levels. 9. The Haryana Power Sector has benefited from the loan assistance provided by World Bank, although it has increasingly been felt that the amount of 1US$ 60 million for APL1 was very small, given the vast and complex nature of the project. The 220 KV Palla Sub Station, 220 KV Palla-Palli-Samaypur line, the Abdullahpur-Shahbad 220 KV transmission line, bifurcation of 11 KV feeders, the purchase of 14 power transformers to replace old defective ones, the purchase of electronic meters of high accuracy, installation of interface meters between HVPN and the distribution companies have been works that have added to the quality and reliability of power in several areas of the state. This has been bome out to a large extent, by a study conducted by TARU consultants (engaged by DFID) whose preliminary results were presented to the utilities recently. Technical standards and specifications laid down by World Bank have in many cases been adopted by the power utilities. The turn-key approach for execution of complex projects promoted by World Bank, has been adopted for similar works by the utilities. The Abdullahpur-Shahbad 220 KV transmission line tied up well with the critical Shahabad-Panchkula 220 KV line. Similarly, the new meters are serving as an important component of the loss deduction measures being implemented. Procurement and installation of distribution transformers in large numbers have contributed to improving consumer services by reducing bum out rate. Thus the World Bank assisted capital expenditure programme has integrated well with the comprehensive power reform programme being pursued by Haryana. 10. The Haryana power sector has taken full advantage of the synergies generated by the institutional and technical changes brought about, by various initiatives constituting the State's reform programme. During the severe drought years of and , the power sector discharged its commitment for the State's development of the economy by supplying increasing levels of power to the States (22% more over ), especially to the agriculture sector (27% increase). During this period the commercial losses of the power utilities are estimated to have come down from over Rs. 600 crores ($ million) to a little over Rs. 200 crore ($ million). 11. A note on the composite achievements of the Haryana Power Sector in-the last about two years is attached (as annex 11 of the ICR). It would give a good idea of the comprehensive scope and extent of the reforms path being pursued by the State. 12. During the process of implementation of APL- I, certain positive lessons were leamt which will certainly be helpful in the coming years. Some of these relate to: a) Need for improving the design specifications of the equipment to be procured as well as construction standards; b) Reduction in processing time of contracts;

34 c) Harnessing the potential of private sector in implementation of works/ services; d) Need for building strong core project team; e) More professional approach in financial/ economic policies; f) Better MIS network and need for building strong data base; g) Improved communication facilities; and h) Improved and well planned public/ mass communication program. We are sure that with the experience gained during the project, the power utilities would be able to take up such development projects more objectively and efficiently. The project period brought about a sea change in work culture and sense of dedication and achievement in the work force. We look forward for continued support of the Bank in future to achieve the goals and targets fixed under the overall reform agenda so as to make the State power sector a more vibrant and forward looking organization. (b) Cofinanciers: DFID Comments 1. Commencing in June 1998, DFID undertook a substantial programme of technical assistance (TA) in support of the power sector reform programme in Haryana, based on a grant allocation of 15m (approx. $21.5m). This was intended to fund external consultants to provide capacity building for HERC, institutional development for the utility companies, the preparation of the distribution companies for privatisation and the process and transaction of privatisation itself. In the event, the privatisation process did not proceed due to GoH political factors. The technical assistance progranmme was continued without interruption through the period of political uncertainty. By the end of May 2001, there remained about lm of uncommitted grant resources. These would not be sufficient to provide the expected full range of external support necessary, had GoH decided to proceed with privatisation, although this could have been deployed to quickly recommence such a process (e.g. the reissue of RFQs, preparation of the IM and related work). 2. DFID took the conscious decision to continue the provision of TA to HERC and HVPN/distribution companies throughout the period of uncertainty in late 1999 and 2000, including the period covered by the temporary suspension of WB disbursements. This was reduced to a relatively low level of activity, focused on key regulatory and financial aspects. This level of engagement maintained dialogue and retained sector reform on GoH's issues agenda. In fact the Corporatisation, Commercialisation and Distribution Privatisations (CCDP) consultants (Arthur Andersen - AA) facilitated and informed an intense debate in the GoH in late 2000 and the first quarter of 2001, on the options and implications of reform action for the sector. This built up a strong constituency for privatisation at the highest levels of the GoH administration, with the exception of a very few, but crucial, dissenters. 3. As regards the APL process, the investment made under APLI does seem to have been effective in demonstrating technical performance improvements. The careful selection of investment sub-projects, to show maximum impact benefits, is important to maintaining the incentive effect of future tranches (APL2 and beyond). GoH recognises the need for further system improvement investments. The conditionalities for proceeding from APL1 to APL 2 looks too large a step, especially the need have "selected a strategic joint venture private investor..." and "... that the sale of equity to this private investor can reasonably take place within six months...". This is a very large leap to qualify for the next tranche. Perhaps an intermediate step could have been designed at the outset, to enable the engagement and process to continue. In a sense, the APL sequence sets an incentive trail, leading the state government down a series of actions towards an ultimate goal. The sequence in which action is taken is not always important, but these do need

35 to be successfully implemented. Individual steps must involve risks that are politically acceptable. 4. The structure of the APL conditions for Haryana, did not promote early action on all important issues, particularly firm action on tariffs and on cross subsidies between customer classes. This, combined with a multi-year approach to tariff reviews, would be imnportant to the prospects of privatisation. For example, action on agricultural tariffs in not identified until APL4 and APL5. This looks far too late and could have been part of an intermediate stage after APL1. APL conditions need not be sequential. Perhaps a combination of actions, weighted for impact and importance, could be used to trigger stage lending approval. 5. An issue surprisingly raised by senior GoH officials in the May 2001 visit was the on lending of the APL to newly privatised distribution companies. The rmechanism for possible on lending was not clear. Would the loan be welcome or even acceptable to new investors? What would be the likely arrangements for on lending agreements and guarantees? Would IFC have a role? If the incentive effect of the APL is to be maintained, these questions need to be clearly addressed at an early stage. Again, this hints at the possible need for an intermediate stage in respect of the conditions for moving from APL1 to APL2 (i.e. before private investors become involved). 6. As regards the TA provided to HERC, this was ralher too focused on tariff issues and should have addressed a broader range of issues, including rural electrijfication, customer service and supply quality. A stronger communications effort to promote HERC's role and presence might also have been useful, bearing in mind the low level of public awareness of HERC' s existence. HERC has built up a considerable analytical capacity. This needs to be sustained when Comrnissioners change or capacity will be eroded. 7. Overall the TA support has been instrumental in achieving sector restructuring and a new understanding of commercial imperatives. The concem now is that unless GoH moves forward in the next year or so with privatisation, the motivation for change and improvement will be lost. The sector is continuing to lose money at an increasing rate, despite real efforts at intemal performance improvements. The culture of corrupt practices (e.g. payments made by customers not reaching the companies and other " informal" arrangements for obtaining services) at field level continues and is unlikely to change while the business is run as a public enterprise. USAID Comments 1. Under USAID's Energy Management Consultation and Training (EMCAT) project, USAID contractor Intemational Resources Group (IRG) provided Technical Assistance and training support for introduction of DSM activities in Harayana State Electricity Board (HSEB). Support under this activity was provided to help HSEB in securing World Bank loan for undertaking DSM activities. The support included setting up of a DSM cell in HSEB, identification of potential DSM projects, and preparing feasibility and detailed project reports for identified projecis 2. During the initial phase of the study, five different areas for application of DSM measure were identified. These were: i) Reduction in T&D Losses; ii) Savings in the consumption of electricity in agricultural pumps; iii) Savings in the consumption of electricity in lift irrigation pumps in the Narnaul District; iv) Savings in the consumption of electricity in municipal pumping systems of Faridabad Municipal Corporation; and v) Savings in the consumption of electricity in the industrial sector. It was expected that these projects will directly result in significant reduction in transmission and distribution losses, improved voltage profile and increased availability of power for sale to other sectors viz. industrial, commercial etc

36 3. From the aforementioned five areas, the first two areas were selected by IRG and were merged for the ease of conducting a detailed study on "Reduction in losses by upgrading of Agriculture Distribution Network". Another detailed study was carried out to assess "Savings in the consumption of electricity in municipal pumping systems of Faridabad Municipal Corporation". 4. The first activity was in direct support to HSEB to assist the DSM cell to develop large-scale DSM project and access WB funds for distribution system improvement. Feasibility Reports on "LT Less System" & "Agriculture Pumps improvements" in four rural feeders were prepared and submitted to the DSM cell and WB. 5. The second activity was carried in Faridabad Municipal Corporation to demonstrate the potential of efficiency improvements in municipal water pumping operation with substantial reduction in energy consumption. 6. In addition to the studies, support was extended to HSEB DSM cell to develop a two year workplan. Subsequent TA and training support was extended to the cell for one-year period to help build its capacity to carryout foundational work to carry out load research and forecasting statistical analysis for load shape development, market research, impact evaluation data preparation for planning (customer research, load data, technology data). 7. During the fifteen-month period, TA and training assistance of approximately $500,000 was directed to state of Harayana (HSEB and Faridabad Muncipal Corporation) for initiating various DSM activities. (c) Other partners (NGOs/private sector): 10. Additional Information The following table summarizes the technical assistance support provided to Haryana. Area of TA Funding Agency Period Status Haryana Power WB (PPF) Completed Sector Restructuring Study Haryana Power WB (PPF) Completed Development & Investment Planning Study Financial WB Completed Restructuring of HSEB Preparation of bid WB Completed documents for transmission works Limited Consultancy WB Completed for bid evaluation of important transmission works

37 Capacity building for DFID In progress Haryana Electricity Regulatory Commission Re-evaluation of DFID Completed Fixed Assets & works in progress Rescheduling of DFID Completed Debts & Liabilities. Communication DFID In progress strategy and management Enhancing billing, DFID Completed collection and customer service standards Corporatisation, DFID In progress Commercialization and Distribution Privatizations Development of MIS DFID Completed (Inventory Control & Customer Services) Training in fiannce, USAID Completed distribution system operation and maintenace, DSM DSM Projects Trust Funds DSM project (APL2) Trust Funds Socio-Economic DFID Completed. Follow Impact Assessment Phase II up stockholder survey in progress. Pension Fund & DFID Completed Trust Establishment

38 Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: L.ndicator/Matrix Projected n last PSR ual Eim e 14 August, Comprehensive reform legislabon brought into effect. 2. Regulatory commission established 17 August, Restructuring measures effected, and 14 August, 1998 (Genco and Transco) new power utilities (GENCO, TRANSCO) established and operational By end June Debt and overdue commercial liabilites rescheduling plan negotiated and agreed with HSEB's creditors. (effected in March 1999) By end September 1998 July, New distribubon companies established in July 1999 By end 1998 Resumpton of the process, notably with a The government is yet to finalize its strategy multi year tariff applicabion 6. Strategic pnvate investor for the East Zone for distributon privatizabon. distribution company selected: process started in May 1999 but put on hold by new Govemment in October 1999 By end 1998 Two tariff applications filed and Fuel Partially accomplished Surcharge Ajustment effected as a matter 7. Financial restructuring implemented as of routne. per the agreed plan. A major action (tariff increases) not yet taken by utilities. This has fully undermined the restoration of the financial condition of the utilities. Output Indicators: tndicatorimatrix Evacuation and transmission of 650 MW (end CY 2000): progress as scheduled Projected in last PSR ActuallLatst Estimathe Evacuation of additional 432 MW of power from the new combined cycle gas based power generation plant at Fandabad commissioned on October2000. None of the nine liquid fuel based power projects (25 MW capadty each), envisaged to be commissione during the project period have achieved financial closure. Due to the delays in commissioning of these projects evident during the project implementation, the investments planned for construction of lines for evacuaton and transmission form these new generation projects was re-allocated to rehabilitation of additional kv feeders

39 Improved voltage profile in selected areas with reference to baseline data Reduction in system losses Gradual improvements in measures of efficiency and effectveness for consumer services Good, perceptble progress in selected areas. All 50 feeders not fully rehabilitated, with significant improvement in quality and availability. Visible and perceptible improvements For details refer to Annex 1 (a). In the field survey conducted by an independent agency to obtain consumers' feedback, domestic and agriculture consumers have reported significant improvements in voltage profile, reduction in fluctuatons, reduced incidence of transformer damage and fewer interruptions, whereverehabilitation work has been completed under APL1. Losses in high voltage network in Abdulapur-Panipat-Shahbad area have been reduced by about 12 MW during peak load conditions as confirmed by actual measurement and system studies. For details of losses in the distribution system, refer to Annex 1 (a). DTR failure rates have reduced significantly. Outages/interruptions the feeders have also reduced significantly in areas where rehabilitation work has been completed (refer Annex 1 (a). The improvements are also perceived by the consumers as reported during the field survey carried out by the independent agency. Consumer feedback, indicates that there is much to be achieved in customer service areas induding billing, collection, and complaint handling. Improved consumer confidence in, and Based on the results of the Dhysical works, support to power sector policy more confidence needed about the expected benefits of reforms. Institutional development programs initiated TA underway for at least GEENCO and List of TA's provided to Haryana TRANCO, and privatization process DFID - HVPN restarted under way for both discoms. DFID - HERC USAID - HVPN Detailed Engineenng Planning and 100% items procured and delivered For details refer to para 4.2 of the ICR. Procurement Arrangements End of project Annex 1(a) Some Important System Improvements A. Grid Voltage (220 kv) KEY PERFORMANCE INDICATORS With the commissioning of the project 220 kv Yamnanagar-Shahabad line, the 220 kv grid voltage at Shahabad and neighboring substations has r,zgistered an increase of about % under various loading conditions. This line has provided a short load flow path for loads of Shahabad, Pehowa and Kaithal sub-stations. Earlier these loads were fed via a longer route from Panipat-Narwana. B. Low Voltage (400 volts) After the commissioning of project 220 k'v facilities, rehabilitation of 11kV feeders and

40 augmentation of 33/11 kv substations, a comparison was made between the 400 volts readings at the consumer's premises, before rehabilitation and after rehabilitation. The comparison periods were months of November 1999 to February 2000 and November 2000 to February The selected consumers were the same and located at the farthest end of the feeder; the readings were taken both at peak and off-peak time. Fifteen feeders each from UHBVN and DHBVN, which were complete in all respects at the time of study were selected for this comparison. The following table shows the summary results of peak time readings: Range of Average Voltages % improvement % reduction in voltage in number of outages S.No. Feeder details Before Afterehab (%) (%) rehab (Volts) (Volts) UHBVN 1 Three feeders in Kurukshestra Circle May Five feeders in Karnal Circle Mar Two feeders in Rohtak Circle Mar Two feeders in Jind Circle May 92 5 Two feeders in Ambala Circle One feeder in Yamunanagar Circle Sub-total: Fifteen feeders DBBVN 7 Three feeders in Sirsa Circle Three feeders in Hissar Circle Oct Two feeders in Bhiwani Circle Il-Sep Two feeders in Gurgaon Circle Aug I I Four feeders in Faridabad Circle Oct One feeder in Namaul Circle Sub-total: Fifteen feeders Total: Thirty Feeders

41 C. Outages The above table also shows that the number of outages are substantially reduced as a result of rehabilitation of feeders. The findings are based on the data collected during above mentioned four months and for thirty feeders. D. Burning Rate of Distribution Transformers As a result of rehabilitation, the burning rate has also decreased. During FY 2001, the burning rate was reported to be 21.76% compared to 25.91% during FY 2000 and 28.22% during FY 99. E. Technical Losses On account of lack of adequate metering at some of the consumers, specially the agricultural consumers, it is very difficult to determine the system losses. Haryana has, however, selected five urban supply feeders which provide metered supply to all consumers. A comparison was made for the units sent out, units sold and units lost for months of September 1999 through February 2000 (before rehabilitation) and the months of September 2000 through February 2001 (after rehabilitation) on these feeders. The following table summarizes the results: S.No. Name of the feeder Average energy sent out Energy lost as % of per year (GWh) energy sent % (Commercial and Technical Losses) Before rehab After rehab Before rehab After rehab I City feeder Bahadurgarh (UHBVN) Parvitia feeder (DHBVN) NH-3 feeder, Faridabad (DHBVN) Faridabad township feeder (DHBVN) Dabua feeder (DHBVN) The above figures are approximative due to poor metering. Haryana has started a massive program to provide meters at all unmetered premises and replace old electro-mechanical meters with more accurate electronic meters. It is only when this metering program is complete, that it will be possible to have a more clear picture of system losses

42 Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appraisal AtwtLatst Per6entae iof Estimate Estimate Apprail Piroect Cs By Component U milli' US$ million l.a Construction of critically needed transmission lines and sub-stations l.b Rehabilitation of sub-transmission & distribution systems 2. Improvement of commercial and technical services to consumers 3.Technical assistance and engineering services Total Baseline Cost Total Project Costs Total Financing Required Proect Costs by Procurement Arrangements (Appraisal Estimate) (US$ mnillion equivalent) Procurement Method' Expenditure NCB CtNB NICB Total Coti C e a _ r _._.,_,,,_. _,, 1. Works & Goods (52.80) (3.20) (0.00) (0.00) (56.00) 2. Services Improvement of (1.00) (0.00) (0.00) (0.00) (1.00) commercial & technical services to consumers 3. Technical assistance & (0.00) (0.00) (3.00) (0.00) (3.00) engineering services Total (53.80) (3.20) (3.00) (0.00) (60.00) Project Costs b Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) Procurement Method Expenditure Category 1GB NCB Other2 N.B.F Totl Cost 1. Works (48.67) (0.00) (0.00) (0.00) (48.67) 2. Goods (0.00) (0.00) (0.00) (0.00) (0.00)

43 3. Services Improvement of (0.74) (0.80) (0.00) (0.00) (1.54) commercial and technical services to consumers 4. Technical assistance and engineering services (0.00) (0.00) (2.14) (0.00) (2.14) Total (49.41) (0.80) (2.14) (0.00) (52.35) Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. Project Financing by Component (in US$ million equivalent) l ~~~~~~~~~~~~~~~~~~~~Percen Aporaisal Component Appraisal Estimate ActuaYLates Estcnate Bank Govt CoF. Bank Govt. CoF. Bank Govt. CoF. 1. Emergency lnvestment Measures: L.a Construction of critically needed trans-mission lines and sub-stations L.b Rehabilitation of sub-transmission and distribution systems 2. Improvement of commercial & technical services to consumers 3. Technical assist-ance and engineering services Total

44 Annex 3. Economic Costs and Benefits Economic and Financial Analyses of APL 1 Present Value of Flows Economic Analysis Financial Analysis Appraisal Latest Estimates Appraisal Latest Estimates A. Transmnission Cost (NPV) Rs million 52, , Benefit (NPV) Rs mnillion 58, , Net benefit (NPV) Rs million 6, , Rate of Return 86.4% 88% 63.7% 67% B. Distribution Rehabilitation Cost (NPV) Rs million 1, , (1627) Benefit (NPV) Rs rnillion 4, , (3605) Net benefit (NPV) Rs rnillion 3, , (1977) Rate of Return 46.73% 22% 54.3% 19%(24%) C. Total APLI Cost (NPV) Rs million 53, , (2367) Benefit (NPV) Rs million 63, , (4491) Net benefit (NPV) Rs million 9, , (2124) Rate of Return 52.36% 21% 53.05% 18% (22%) * Figures in bracket are based on assumption of reduction in non technical losses to the extent of 50% of the estimated savings during appraisal Notes: 1. The transmission component includes the cost and benefits of three transmission lines and one sub-station, which has benefited in reduction of technical losses in the transmission system, improvement of voltage conditions and facilitated transmission of power in the Haryana system to the load center which had been constrained and was thus a major bottleneck in the system. The evacuation lines planned at appraisal to evacuate power from short gestation IPPs were not taken up as the generation projects have not yet achieved financial closure. Thus the benefit of additional energy of about 25,000 MUs for Haryana system as assumed during appraisal, has not been considered in the present analysis. In addition the other investments in transmission component included inter-utility meters to measure flow of energy between transmission company and the two distribution companies and PLCC, which have not been included in the analysis, but have been included in the" Total APLI" analysis. 2. Cost in the distribution component includes, investments incurred in rehabilitation of 50 number 11 kv feeders, various types of consumer meters ( single phase, three phase, electronic, electromechanical etc.), cost of pick up vans, meter testing vans, jeeps and heavy duty trucks procured under the project for implementation works under the project, and the equipment procured for distribution rehabilitation which is used in 160 feeders in addition to the original 50 feeders (re-allocated from transmission evacuation component under APLI). 3. All the feeders under consideration do not have complete metering to facilitate actual measurement of losses before and after rehabilitation. The reduction in technical losses have thus been estimated based on the actual measurement of losses before and after rehabilitation in the 5 feeders where almost complete metering is present. The average savings per feeder is thus estimated to be 1.34 MUs per feeder (the savings are seen to range from 0.4 MUs in one feeder to 2.64 MUs in another; the savings per feeder estimated at the time of appraisal was about 4.7 MUs per year). In case of partial rehabilitation work on 130 feeders (out of 160 feeders, 130 are being partially rehabilitated and balance fully rehabilitated) the benefits are assumed to be 20% of that in case of full

45 rehabilitation as per the best estimates of Haryana. In the risk analysis carried out during appraisal it was estimated that if the savings in distribution losses is reduced by 50%, the ERR of the distribution rehabilitation component will drop from 46.7% to 22.5%. 4. The utility is in the process of installing/ replacing consumer meters and proposes to complete metering at various voltage levels and 100% consumer metering. It will be extremely difficult to estimate the benefits of reduction in non-technical losses until complete metering of all consumers is achieved, and is thus not included in the estimation. To this extent the net benefits and the FRR are underestimated. However, the sensitivity analysis based on assumption of reduction in non-technical losses to the extent of 50% of the estimated savings during appraisal is presented. In the risk analysis carried out during appraisal it was estimated that if the savings in distribution losses, both technical and non-technical, is reduced by 50% and the implementation requires six years instead of three (it will take another 2-3 for the utilities to complete installation of consumer meters procured under APLI, specifically for agriculture consumers), the FRR of the distribution rehabilitation component will drop from 54.3% to 27. 1%. 5. All the estimates are at FY1999 price level; inflation rate assumed to be 6%, NPV 12%, and duties and taxes as per the actual details obtained from Haryana. The evaluation of benefits in economic analysis is based on willingness to pay by the consumers and for financial analysis average per unit revenue from non-agriculture consumers is used (Rs 3.39/kWh)

46 Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle Nof. ofpersons and Specialty Performane Rating (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation June 27 - July 7, 4 B. I)avis ( ); R. Ribi ( ); 1994 S. Usgaonkar (RA); D. Mostefai (TL) July 25-28, Y. Ziv ( ); S. Usgaonkar (RA); D. Mostefai (TL) August 8-17, 3 R. Ribi ( ); S. Usgaonkar (RA); 1994 D. Mostefai (TL) October 18-27, 3 R. Ribi ( ); S. Usgaonkar (RA); 1994 D. Mostefai (TL) November 1-13, 3 D. MIostefai (TL); 1994 E. Cordova ( ); A. Mejia ( ) December 8-9, D. Mostefai (TL) September 12-15, 3 M. Manrai (PC); S. Usgaonkar 1995 (RA); D. Mostefai (TL) November 21-23, D. Mostefai (TL) Jan. 29 to Feb.2, 2 M. Manrai (PC); D. Mostefai 1996 (TL) February 6-9, 4 M. DManrai (PC); J. Barker (C); 1996 D. Mostefai (TL); J. Shirazi (RS) February 14-23, 10 K.N. Bhatia (PC); M.R Chaudhary (PC); H. Fujii (PE); J. Hedgecock (PC); M. Manrai (PC); A. Picardi ((EC); H. Salgo (PSC); T. Storm (FA); S. Usgaonkar (RA); D. Mostefai March 26-28, 3 (TL) 1996 Sawhney (PC); S. Usgaonkar (RAP); D. Mostefai (TL) May 21-23, M.R. Chaudhary (PC); M. Manrai (PC); S. Usgaonkar (RA); D. Mostefai (TL) October 23-25, 3 M. fmanrai (PC); S. Shukla 1996 (FA.); D. Mostefai (TL) October , 2 M. 'Gulati (FA); S. Shukla (FA) 1996 November 6, E. Lim (CD); M. Gulati (FA); M. Manrai (PC); D. Mostefai December 19-20, (TL) A. Plicardi (ES)

47 Appraisal/Negotiation January 21-25, 7 J. Chassard (FA); M. Gulati & February 4-6, (FA); M. Manrai (PC); IUB 1997 Reddy (SDO); H. Salgo (PSC); S. Shukla (FA); D. Mostefai (TL) March 5-6, IUB Redcly (SDO) April 22-25, J. Barker (PC); J. Zuckernick PC); D. Mostefai (TL) May 26-30, M. Gulati (FA); P. Meier (C); IUB Reddy (SDO); R. Sinha (FA); S. Shukla (FA); D. Mostefai (TL) July 28-Aug. 1, 5 B. Bhatia (EE); S. Khosla (ESP); 1997 M. Manrai (PC); S. Shukla (FA); D. Mostefai (TL) Sep. 15-Oct. 4, 13 G. Branscombe ( ); B. Bhatia 1997 (EE); M. Gulati (FA); S. Khosla (ESP); M.. Manrai (PC); P. Meier (C); D. Mostefai (TL); M.G. Rainachandran (LC); IUB Reddy (SDO); H. Salgo (C); R. Shankar ( ); S. Shiukia (FA); S. Vani ( ) Supervision Feb. 4-6, M. Manrai (PC); S. Shukla HS S (FA); D. Mostefai (TL) Feb 19-21, B. Bhatia (EE); P. Kochar (PA); HS S M. Manrai (PC); M.G. Ramachzndran (LC); S. Shukla (FA); S. Vani ( ); D. Mostefai (TL) Feb H. Salgo (PSC); S. Shukla (FA); HS S D. Mostefai (TL) April 1-10, R. Jones {DFID}; D. Mostefai HS S (TL); M. Manrai (PC); M.G. Ramachandran (LC); IUB Reddy (SDO); S. Shukla (FA) June 15-19, S. Khosla (ESP); M. Manrai HS S (PC); D. Mostefai (TL); S. Shukla (FA) July 7-9, E. Heijd-rmanns (RES) HS S July 13-18, A. McKechnie (ESM); B. Bhatia HS S (EE); S. Khosla (ESP); M. Manrai (PC); P. Meier (C); D. Mostefai (TL); M.G. Ramachandran (LC); S. Shukla (FA); P. Kochar (PA); R. Bhatia (C); Dr. S.K. Raheja (C); A. Kulshreshtha (ST) September 25, 1 S. Akbar (ES) HS S

48 Oct , P. Meier (C); H. Salgo PSC); D. HS S Mostefai (TL); S. Shukla (FA) Nov.30 - Dec.4 & 7 D. Mostefai (TL); M. Manrai HS S Dec.9, 1998 (PC); S. Shukla (FA); P. Kochar (PA); S. Akbar (ES); ); B. Bhatia (EE); H. Salgo (PSC) Dec. 7-14, C. Govindarajalu (ESP); Roger HS S Peters (C) Jan.28-29, I.U.B. Reddy (SDO) S S Feb , S. Padmnanabhan (ESP); Roger S S Peters (C) April 26-May7; 6 D. Mostefai (TL); M. Manrai U U May 17; May (PC); S. Shukla (FA); P. Kochar & May 27-28, 1999 (PA); S. Akbar (ES); ); B. Bhatia (EE) May 29-31, D. Mostefai (TL); M. Manrai U U (PC); B. Bhatia (EE) Sep , D. Mostefai (TL); M. Manrai (PC); S. Shukla (FA); B. Bhatia (EE) ICR Nov , S. Akbar (ES); I.U.B. Reddy (SDO) May 7-9, D. Mostefai (TL); M. Manrai (PC); S. Shukla (FA); B. Bhatia (EE) Legend: CD = Country Director EC = Envitonment Consultant EE = Energy Economist ES = Environment Specalist ESM = Energy Sector Manager ESP = Energy Specialist FA = Financial Analyst LC = Legal Consultant PA = Program Assistant PC = Power Consultant PE = Power Engineer PSC = Privatization Specialist Consultant RA = Research Analyst RES = Renewable Energy Specialist RS = Resident Staff (Delhi) SDO = Social Development Officer ST = Summer Trainee TL = Team Leader (b) Staff Stage of Project Cycle Actual/Latest Estimate No Staff weeks US$ ('000) Identification/Preparation Appraisal/Negotiation Supervision ICR Total

49 Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Z Macro policies O H OSUOM * N O NA N Sector Policies O H OSUOM O N O NA Z Physical O H OSUOM O N O NA I Financial O H OSUOM O N O NA Z Institutional Development O H O SU * M O N 0 NA I Environmental O H *SUOM O N O NA Social 0 Poverty Reduction O H OSUOM O N * NA Li Gender O H C SU O M O N * NA LI Other (Please specify) O H C SU O M O N * NA Z Private sector development 0 H C SU 0 M 0 N 0 NA I Public sector management 0 H 0 SU 0 M 0 N 0 NA El Other (Please specify) O H C SU O M O N * NA

50 Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating El Lending OHS Os Ou OHU M Supervision OHS OS Ou OHU M Overall OHS OS O u O HU 6.2 Borrowerperformance Rating I Preparation OHS Os O u O HU Z Government implementation performance O HS O S 0 U 0 HU 1 Implementation agency performance OHS OS *U O HU Z Overall OHS OS * U O HU

51 Annex 7. List of Supporting Documents Sector Work on "Supply of Power to Agriculture" Reports from the independant survey company Supervision Aide-memoires Consultants Reports A. Government of Haryana and Haryana State Electricity Board (HSEB) A.1. Policy and Program Statements General Power Sector Policy Statement, January 1996 Detailed Power Sector Policy Statement, November 1997 Haryana Power Sector Restructuring and Development Program: Program and Project Implementation Plan; November 1997 Emergency Action Plan, October 1997 Financial Restructuring Plan, November 1997 Financial Commitment Letter, November 1997 Social Policy and Procedures (Transmission Investments), November 1997 Haryana Power Sector Investment Program - Long Term Requirements for Transmission and Distribution System, November 1997 A.2. Assessments Environmental Analysis of Transmission Line Projects, March 1, 1997 Baseline Economic Surveys of the Proposed Sub-stations and Transmission Lines and Resettlement Action Plan, November 1997 A.3 Consultants Reports Power Sector Development and Investment Planning Siudy; September 1995 Volume 1: Optimum Utilization of HSEB's Existing Facilities Volume 2: Load Forecasting Volume 3: Integrated Least-Cost Expansion Study; Vol. I & II Volume 4: Implementation Program Final Report Criteria Document Restructuring Study for the Haryana Power Sector, 1995 Volume I: Executive Summary Volume II: Diagnostic Report Volume III: Assessment and Comparison of Options for Reform Volume IV: Recommnended Reform Program Volume V: Implementation Plan Volume VI: Technical Appendix Messrs. Chaudhary and Bhatia

52 * Detailed analysis of technical and non-technical losses on 18 feeders of HSEB (Rohtak, Sonepat and Kamal circles), 1997 * Rehabilitation and Reinforcement of HSEB Network, 1996 Environmental Consultant * Environmental Impact Assessment/Environmental Management Plan (Faridabad Power Station), August 1997 * Environmental Impact Assessment/Environmental Management Plan (Panipat Power Station), August 1997 Independent Survey Consultant * Draft final report on Impact Assessment of Pilot Investments in Haryana Power Sector Reform, June 2001 B. World Bank Assessments * Haryana Power Sector Restructuring and Development Program: Reform Agenda and World Bank Assistance; June 1997 * Haryana Power Sector Restructuring and Development Program: Economic Analysis; October 1997 * Completion of Panipat Unit 6: Issues and Options - prepared by Dr. Peter Meier, IDEA, 1995 D Financial Restructuring: Issues, Options and Simulations, May 1997 a Financial Appraisal Report, November 1997 C. Other: Demand Side Management and Co-Generation * India: Haryana State Power Sector Restructuring Project - Energy Efficiency/Demand Side Management Component - June 1997 * India: Haryana State Power Sector Restructuring Project - Bio-mass Cogeneration Project Development Study - May 1997 * Haryana State Power Sector Restructuring Project - Study on Bio-mass Cogeneration in Haryana - May 1997 * Haryana State Power Sector Restructuring Project - Energy Efficiency Services; Volume I - Main Report; Volume II - Annexures - April 1997 D. List of Aide-Memoires S.No. Aide-Memoire for: Month / Year I Preparation Mission June 27 to July 7, Preparation Mission July 25 to July 28, Preparation Mission August 8 to 17, Preparation Mission October 18 to 27, Preparation Mission November I to 13,

53 6 Preparation Mission December 8 to 9, Preparation Mission September 12 to 15, Preparation Mission Ncvember 21 to 23, Preparation Mission Jati. 29 to Feb.2, Preparation Mission February 6 to 9, Preparation Mission February 14 to 23, Preparation Mission March 26 to 28, Preparation Mission May 21 to 23, Preparation Mission July 23, Preparation Mission October 23-25, Preparation Mission October30 to 31, Preparation Mission November 6, Preparation Mission December 19-20, Appraisal/Negotiation Mission January 211to 25, 1997 & February 4 to 6, Appraisal/Negotiation Mission March 5 to 6, Appraisal/Negotiation Mission April 22 to 25, Appraisal/Negotiation Mission M.ay 26 to 30, Appraisal/Negotiation Mission Juily 28 to Aug. 1, Appraisal/Negotiation Mission Sap. 15 to Oct. 4, Supervision Mission Feb. 4-6, Supervision Mission Feb , Supervision Mission Feb , Supervision Mission April 1-10, Supervision Mission Jane 15-19, Supervision Mission July 7-9, Supervision Mission July 13-18, Supervision Mission Sept. 25, Supervision Mission Oct ,

54 34 Supervision Mission Nov.30 - Dec.4 & Dec.9, Supervision Mission Dec. 7-14, Supervision Mission Jan.28-29, Supervision Mission Feb.16-23, Supervision Mission April 26-May 7; May 17; May 19; May 20 & May 27-28, Supervision Mission May 29-31, Supervision Mission September 25-28, ICR Mission November 16-17, ICR Mission May 7 to 9, 2001 S. No. Details of Study Report Study done by: 1. DSM Upgrading of Agricultural Distribution Network for Gujarwas Consultants Feeder (DHBVN) (3 volumes) 2. Impact Assessment of Pilot Investment in Haryana Power Sector Consultants Reform (Preliminary Findings report and Inception report) 3. Socio-Economic Assessment for Haryana PSRP Consultants (4 volumes) 4. DSM: Feasibility report for upgradation of distribution system for Consultants HSEB (2 volumes) 5. DSM: Feasibility report for Pumping Efficiency System for HSEB Consultants (2 volumes) 6. Energy Efficiency/DSM Component: Haryana PSR Project (I volume) Individual Consultant for the Asia Alternative Energy Unit 7. Biomass Cogeneration Project Development Study: Haryana PRP The Asia Alternative (I volume) Energy Unit 8. DSM: Feasibility report on upgrading of Agricultural Distribution Consultants Network for Bastara Feeder (1 volume) 9. DSM: Feasibility report on upgrading of Agricultural Distribution Consultants Network for Rewar Feeder (1 volume)

55 10. DSM: Feasibility report on upgrading of Agricultural Distribution Consultants Network for Alampur Feeder (I volume) II. DSM: Feasibility report on upgrading of Agricultural Distribution DSM Cell, UHBVN Network for 11kV Alampur Feeder under Kurukshetra Circle for UHBVN (I volume) 12. DSM Pilot study on Lift Irrigation Pump Houses in Haryana Consultants (3 volumes + presentation file) 13. Pre-feasibility Draft report on LT less Distribution System and Energy Consultants Efficient Pumping system for Alampur Feeder

56 Additional Annex 8. Har yana Power Utilities: Operational and Commercial Improvement Initiatives 1. Drive to Control Theft and Pilferage of Energy A drive to control theft and pilferage of electricity was launched in Haryana in FY2001. With extensive support from the state police departrnent and the admninistration, consumer premises were checked to detect theft cases. In FY lakh consumer premises were checked and 51,411 theft cases were detected which were levied penalty of Rs 380 million, of which the utility has recovered Rs 190 million. This was a massive initiative, considering that in the previous years only about ,000 cases per year were detected. A special drive was launched in March 2001 for voluntary disclosure of unauthorized electricity load. About 57,000 consumers have disclosed their extended load. Detection of Theft Cases No. of No. of theft FIRs lodged Penalty Amount Year consumer cases Imposed Rs. realized Rs. premises detected Lacs. Lacs. checked ,243 1, ,452 1, ,204 3, ,538 6, ,453 15, ,279 10, ,022 15, ,831 16, ,748 27,455 2, ,975 8, ,991 21,771 2,310 1, ,615 14,566 11,782 1, ,665 17,642 12,892 2, ,043 15,912 5,579 1, ,899 51,411 9,061 3, , Drive for Collection of Arrears Special drive to collect arrears from various consumer categories was launched during the 1999 and This drive has yielded excellent results: about Rs 6230 million of the defaulting amount has been recovered during the last 20 months and 0.45 million consumers have been disconnected due to nonpayment of electricity bills. 3. Improvement in Collection Efficiency During FY2001 the collection efficiency of UHBVN increased to 94% from 85% in FY2000, and that of DHBVN increased to 94.85% from 90.3% in FY2000. There has been about 9% and 15.5% increase in revenue assessed during FY2001 by UHBVN and DHBVN respectively. Due to extensive drive for collections of arrears, strict adherence to disconnection policy and improvements in collections and bill

57 payment facilities to the consumers, the revenue realized lhas increased by about 2 1% in FY200 1 for both the distribution companies. Monthly revenue assessed, revenue reatlized and collection efficiency Revenue Assessed (Rs.crore) UHIBV-N Revenue Reallized Cash (Rs. Collection Efficiency() Month Crore) - ~20 FY00 F2001 inces Y00 ncrease FZQ FY2000 FY2001 Increase 1 I c e s April ; May June July August September October ' November December January February I March Apr.-Mar ~~~~~~~~DHBVN April May June July August September October November December January Februiary ) March Apr.-Mar State as a Whole April ma _ ) June , July August September October : November December January February March Apr.-Mar _ _

58 4. Consumer Metering Government of Haryana in the Memorandum of Understanding signed with the Ministry of Power, Government of India has committed to complete 100% metering of all consumers, including agriculture consumers, to be completed by December To strengthen the function of proper recording and measurement of energy the distribution companies have initiated following steps towards consumer metering (a) (b) 100% replacement of electro-mechanical meters: The work of 100% replacement of the existing single phase electro-mechanical meters has been assigned to a private firm. The orders for supply and replacement of 1.6 lakhs single phase meters has been placed on the firm. 50,000 meters have since been replaced and the balance shall be replaced in due course of time. To start with, urban areas of Faridabad, Gurgaon and Hissar have been selected where consumers have relatively more consumption per connection. Providing electronic meters of three phase domestic/non-domestic/industrial connections: The existing three phase electro-mechanical meters on domestic, non-domestic (commercial), and LT-industrial connections are being replaced by the three phase electronic meters. An order on rate contract for 30,000 meters has since been placed, another LOI issued for 14,000 three phase 4 wire Amp. electronic meters and a program of procuring another 90,000 meters is at advanced stage of finalization. During October 2000 to February 2001, a sample exercise was done on Dadri Division by installing electronic C.T. meters on 10 low tension industrial connections of Oil Mills having sanctioned load ranging between 65 kw to 69.5 kw. The electronic meters installed had the facility to record maximum demand has brought out that (i) the maximnum demand recorded in all the cases have been found 1.5 times the sanctioned load, and (ii) consumption has increased in all the cases ranging from 5 times to 15 times. Based on these results, it has been established that L.T. industrial consumers manipulate their sanctioned loads and indulge in theft/manipulation of energy consumption. Similar actions are being planned for various power consuming categories of consumers to reduce the losses and increase the revenue. (c) Providing meters on unmetered agriculture connections: Haryana has decided that all new agriculture consumers (as well as re-connection) will be provided metered connection. The existing un-metered agriculture connections (about 3 lakh) are also planned to be metered by the distribution companies by December An order for 30,000 three phase electro-mechanical meters has since been placed under World Bank Loan. Procurement of another 12,800 meters is in the process. The existing three phase electro-mechanical meters on three phase domestic, non-domestic and industrial connections that are being replaced with the electronic meters, will be tested and re-calibrated to be installed on un-metered agriculture connections. In FY2001 about 10,000 new agriculture connections were released under "Tatkal Scheme". In the first scheme 3755 cables and single pole connections were released on payment of Rs. 10,000/- and Rs. 20,000/- respectively. In the second Tatkal Scheme high tension tubewell connections were released on payment of Rs. 45,000/- up to 2 spans, Rs. 60,000/- up to 5 spans and Rs. 7000/- per additional span beyond 350 meters. The cost of distribution transformer is to be bome by the applicant. All these connections are released with metered supply

59 (d) (e) (f) (g) Providing regular metered connections where theft/direct tapping suspected: Connections in unauthorized colonies/areas were banned earlier. The instructions were issued to release metered connections so that people do not resort to thefis. It was decided to charge Rs. 20/sq.yd. in Faridabad and Gurgaon and Rs. 25/sq.yd. in other towns for plots above 100 sq.yds. Commercial/Industrial connections could be released by payment of Rs. 5000/- and Rs. 10,000/- respectively. Voluntary Disclosure Scheme: A voluntary disclosure scheme has been launched in various towns in a phased manner for the consumers to declare voluntarily their defective/tempered meters. As an incentive to the consumers to declare more and more tempered meters, the penalty has been reduced to one-third amount of the existing applicable penalty. The voluntary disclosure scheme has been launched in the tow-ns of Hissar, Sirsa, Faridabad, Ellenabad, Dabwali, Tohana, Uklana, Adampur, Faridabad and Ballabgarh. About 4846 tempered/faulty meters have been voluntarily declared by the consumers and the same has been replaced with the accurate meters. Also a penalty of Rs lakhs have been realized. Creation of Meter Bank of Single Phase Meters: To provide good quality electronic meters along with a tamper proof meter cupboard, the meter banks have been set up in the field. By creating the meter bank, the meter shall be readily available for installation on the consumer premises and the consumers will not have to arrange their own meters and meter cupboards. These meter banks will also facilitate the quick replacement of defective meters detected during checking. Energy Audit; For effective energy audit, the 100% metering on all the 11 kv feeders has been completed and interface metering is being provided in coordination with HVPNL which shall be completed by July

60 Additional Annex 9. Main Achievements of the Haryana Electricity Regulatory Commission Establishment of HERC Haryana Electricity Regulatory Commission (HERC) was set up on August 17, 1998 under The Haryana Electricity Reform Act The Commission has three members and about 30 staff, selected through open market competition. During the period of less than three 3 years the Commission has established its own infrastructure, and has initiated work on several regulatory aspects. A Commission Advisory Commnittee (CAC) has been constituted to assist and advise HERC in their regulatory roles and responsibilities. The main functions of HERC, as laid out in the Haryana Electricity Reform Act are: * To aid and advise the Govenmment in matters conceming generation, transmission, distribution and supply of electricity in the state. * To issue licenses and determine conditions governing the licensee as stipulated in the reforms act. * To regulate working of the utilities (licensee) so as to optimize costs, ensure efficiency, economy and equity. * To regulate purchase, distribution, supply and usage of electricity, the quality of service provided to the consumers and tariff and charges payable by them. * To ensure financial soundness of the utilities, consequently to see that the charges for electricity supplied are reasonable and duly realized by the utilities. * To promote competitiveness and progressively involve private participation in the development of the power sector. * To set appropriate code of conduct and standards for the electricity industry in the state. Key Regulatory Orders In the period of two years the Comnmssion has set up its own rules and regulations of functioning, established important guidelines for sector regulation, including annual revenue requirement (ARR), tariffs, power procurement, grid code etc. The Commission and the new power companies are operating effectively under the new regulatory environment in the power sector and the Commission has demonstrated its capability to take independent decisions. Some of the important regulatory decisions / orders issued by the Commission are: Rejiulations and Guidelines * Conduct of Business (HERC's) Regulation * HERC officers and employees conditions of Service Regulation * Guidelines for functioning of Commission Advisory Committee * Commission's Complaint Handling Procedures * Licensee Guidelines for Complaints Handling Procedure * Code of practice for payment of bill and procedure for disconnecting consumers for nonpayment * Guidelines for the filing of ARRs * Guidelines for Load Forecast, Resource Plan and Power Procurement * Tariff Regulations * Consultation paper on Tariff Philosophy

61 * Code of practice on payment of bills * Consumer's rights regulations Re_ulatorv Orders * Licenses to HVPNL for Transmission & Bulk Supply of Power and Distribution & Retail Supply of Power * Order giving permission to the two subsidiaries of TVPNL to operate the Distribution & Retail supply Licence granted to the HVPN * Order on the first ARR (FY2000) for the Transmission & Bulk supply business and Distribution & Retail supply business ( ) * Order for Fuel Surcharge Adjustment (FSA) * ARR FY2001 order (for transmission company) * ARR FY2001 order (for distribution companies) * First Bulk Supply Tariff Order for FY2001 * First Retail Supply Tariff Order for FY2001 Issues under review v Retail tariff for distribution companies for FY2002 * Distribution & Retail Supply License for the distribution companies * Grid Code * Planning & Security Standards for Transmission system and Planning Standards relating to generation capacity connected to the transmission system * Transmission operating standards and operating standards relating to the generation capacity connected to the transmission system * Planning and security standards for the Distribution system * Distribution Code * Bidding process and the draft PPA in respect of 500 MW Yamuna Nagar Power Plant * Metering Plan * Regulations on Fines & Penalties * Policy on Captive Power Plants 3 Policy on License exemptions Summary of ARR and Tariff Orders The Commission through its various orders, i.e. Annual Revenue Requirement (ARR), Fuel Surcharge Adjustment (FSA) and Tariff, has given policy direction to the licensee. A few important features laying the road map for the reforms process are summarized below: First Annual Revenue Reauirement (ARR) order of the Commission ( ) * Directed the Transmission and Bulk Supply licensee to adopt a scientific method for forecasting the Volume of Power Purchase as this in terms of cost accounts for more than 70% of the total cost. The scientific method involved, among other things, taking into consideration imperfections of dispatch of thermal plants and dependence of hydro plants on rainfall level etc. Further, for planning purposes the licensee was directed to adopt demand projection. * On subsidy, the Commission clearly directed that it should be reflected in the accounts of the

62 Distribution business. The subsidy should not be diluted and distributed to all consumers. * There is no alternative to metering and all consumers should be metered so that correct consumption is known. In the intervening period the licensee was directed to submit a time bound plan for installing meters for the un-metered connections, and no new un-metered connections were to be provided. * The licensee was directed to make efforts to reduce Distribution loss so that by end March, 2000 the distribution loss is brought down by 4%. * Pay particular attention to reduce the rate of damage to distribution transforners. * All investments in new Capital Works should be made in a well planned manner with proper techno-economic justification to avoid delays and consequential time and cost overruns or any undue storage at site/store. * Fix a date when plans for load research would commence, as it is important to develop accurate estimates of the cost of providing service to the various consumer category. Fuel Surcharge Adiustment (FSA) Order * Sales reported by the licensee was adjusted for the Commission approved loss level to arrive at the power purchase volume on which FSA is to be allowed. * Source wise allocation of power purchase was restricted to the volume approved by the Commission in case the volume from a particular source exceeded the approved volume in the ARR. * FSA was levied for the first time on agriculture consumers. * Utilities own consumption (so far free supply) was charged at non-domestic rates. * Low rates for H.T. industries as the cost to serve is comparatively lower. Second ARR and first Transmission and Bulk SuDPlV Order 3 Unbundling of Transmission and Bulk Supply Tariff for the first time in the state. 3 Wheeling charges introduced at the rate of Rs.0.29/kWh, in case the licensee wheeled power for a third party. 3 The Commission focused on the issues that are eroding the financial viability of the utilities. This included converting payables of Rs.550 crores into bonds, expensive power purchased from HPGCL sources, legality of the PF trust and installing inter-face meters. Distribution and Retail suopvl ARR and First Retail Tariff Order ( ) * Overall average tariff increase of 11.5% (marginally higher than the tariff filing made by the distribution companies of 10.4%). Tariffs for consumer categories were linked to their respective cost of power supply. * Attempted to reduce cross subsidy: tariffs for agriculture consumers increased by 50% (very important decision, given the sensitivities on increasing tariffs for agriculture consumers) and that for high tension industrial consumers by 4%. * Tariffs for metered agriculture consumers increased by 24% as against 50% for un-metered consumers, in order to encourage the consumers to voluntarily shift to metered supply. * A realistic assessment of agriculture consumption was made as 1452 hours of usage per pump set per year based on the load factor of 16.57% for the metered agriculture pump set. Correspondingly T&D losses have been restated at 40.76%. * Outstanding receivables, i.e. an increase of 30% in about 19 months reflects poorly on collection efficiency of the licensee. Collection efficiency has to improve. * The Commission created 'Regulatory Asset' of Rs.432 crores (Rs 223 crores remaining uncovered subsidy for agriculture committed by GOH, and Rs 208 crores from revenue not generated due to delay