Completion Report

Project Number: 34374 Loan Number: 2009 August 2008

Bhutan: Rural Electrification and Network Expansion

CURRENCY EQUIVALENTS

Currency Unit – Ngultrum (Nu) At Appraisal At Project Completion July 2003 March 2007 Nu1.00 = $0.0217 $0.023 $1.00 = Nu46.10 Nu43.43

ABBREVIATIONS ADB – Asian Development Bank BEA – Bhutan Electricity Authority BPC – Bhutan Power Corporation DOE – Department of Energy EA – executing agency EIRR – economic internal rate of return FYP – Five-Year Plan ICB – international competitive bidding PCR – project completion report PPMS – project performance monitoring system PPTA – project preparatory technical assistance SDR – special drawing right TA – technical assistance

WEIGHTS AND MEASURES cct-km (circuit kilometer) – unit of transmission or distribution line lengths GWh (gigawatt-hour) – 1,000,000 kilowatt-hours kV (kilovolt) – (1,000 volts) kVA (kilovolt-ampere) – 1,000 volt-amperes kW (kilowatt) – 1,000 watts kWh (kilowatt-hour) – 1,000 watt-hours MVA (megavolt-ampere) – 1,000,000 volt-amperes MVAR – 1 MVA of reactive power MW (megawatt) – 1,000,000 watts MWh (megawatt-hour) – 1,000,000 watt-hours V (volt) – unit of electrical voltage W (watt) – unit of active power Wh (watt-hour) – unit of electrical energy

NOTES

(i) The fiscal year (FY) of Bhutan Power Corporation ends on 31 December. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2007 ends on 31 December 2007.

(ii) In this report, "$" refers to US dollars.

Vice President B. N. Lohani, Vice-President in-Charge (Operations 1) Director General K. Senga, South Asia Department (SARD) Director T. Kandiah, Energy Division, SARD Team leader M. Khamudkhanov, Senior Energy Specialist, SARD Team member M.C. Nunez, Assistant Project Analyst, SARD

CONTENTS

Page

BASIC DATA i

MAP vi

I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 1

A. Relevance of Design and Formulation 1 B. Project Outputs 2 C. Project Costs 3 D. Disbursements 3 E. Project Schedule 3 F. Implementation Arrangements 4 G. Conditions and Covenants 5 H. Related Technical Assistance 6 I. Consultant Recruitment and Procurement 7 J. Performance of Consultants, Contractors, and Suppliers 8 K. Performance of the Borrower and the Executing Agency 8 L. Performance of the Asian Development Bank 8

III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Effectiveness in Achieving Outcome 9 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 11 E. Impact 12

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 13 A. Overall Assessment 13 B. Lessons 13 C. Recommendations 14

APPENDIXES 1. Project Design and Monitoring Framework 15 2. Appraisal and Actual Project Costs 20 3. Projected and Actual Disbursements 21 4. Chronology of Major Events 22 5. Project Implementation Schedule 24 6. Status of Compliance with Loan Covenants 25 7. Financial Statements 29 8. Summary of Contracts Funded by the Asian Development Bank 32 9. Economic Analysis of the Project 33 10. BPC Operating Statistics (2005-2007) 37

i

BASIC DATA A. Loan Identification

1. Country Bhutan 2. Loan Number 2009-BHU(SF) 3. Project Title Rural Electrification and Network Expansion 4. Borrower Kingdom of Bhutan 5. Executing Agency Bhutan Power Corporation (BPC) 6. Amount of Loan SDR 6.755 million ($9.4 million equivalent) 7. Project Completion Report Number PCR: BHU 1048

B. Loan Data

1. Appraisal - Date Started 14 July 2003 - Date Completed 18 July 2003

2. Loan Negotiations - Date Started 25 August 2003 - Date Completed 26 August 2003

3. Date of Board Approval 30 September 2003 4. Date of Loan Agreement 15 December 2003

5. Date of Loan Effectiveness

- In Loan Agreement 14 March 2004 - Actual 31 March 2004 - Number of Extensions 1

6. Closing Date - In Loan Agreement 31 March 2007 - Actual 19 December 2006

7. Terms of Loan - Interest 1% per annum during the grace period and 1.5% per annum thereafter - Maturity (number of years) 32 years - Grace Period (number of years) 8 years

8. Disbursements

a. Dates

Initial Disbursement Final Disbursement Time Interval 22 November 2004 19 December 2006 25 months Effective Date Original Closing Date Time Interval 31 March 2004 31 March 2007 36 months

ii

b. Amount ($/SDR)

Categorya Original

Allocationb Last Revised

Allocation Net Amount

Available Amount

Disbursed Undisbursed

Balancec 01 8,846,528

5,965,000 9,765,241 6,590,000

9,773,987 6,590,000

9,702,196 6.545.250

71,791 44,750

02 158,754 108.000

0 0 0 0

03 241,864 165,000

241,864 165,000

242,081 165,000

56,627 33,983

185,454 126,017

04 759,959 517,000

0 0 0 0

Total 10,007,105 6,755,000

10,007,105 6,755,000

10,016,068 6,755,000

9,758,823 6,584,233

257,245 170,767

a 01=Equipment; 02=Consulting Services; 03=Interest Charge; 04=Unallocated b The difference between the original amount and the revised amount was due to the exchange rate

variation between the SDR and US dollar. c The undisbursed loan amount of $257,244.79 (SDR 170,766.78) was canceled at loan closing on 19

December 2006. Source: Asian Development Bank

9. Local Costs (Financed) Appraisal Actual - Amount ($ million) 3.6 3.6 - Percentage of Total Costs 27.7 26.7

C. Project Data 1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost 9.4 9.7 Local Currency Cost 3.6 3.6 Total 13.0 13.3

iii

2. Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Borrower Financed 3.6 3.6 ADB Financed 9.2 9.7 Total 12.8 13.3 IDC Costs Borrower Financed 0.0 0.0 ADB Financed 0.2 0.1 Total 0.2 0.1

ADB = Asian Development Bank; IDC = interest during construction

3. Cost Breakdown by Project Component ($ million)

Component Appraisal Estimate Actual Foreign Local Total Foreign Local Total A. Base Cost 1. 33 kV Overhead Lines 2.2 0.2 2.4 2.6 0.0 2.6 2. 11 kV Overhead Lines 1.4 0.1 1.5 1.7 0.0 1.7 3. Distribution Substations 33/0.4 kV Transformers 0.7 0.0 0.7 0.4 0.0 0.4 11/0.4 kV Transformers 0.8 0.0 0.8 0.4 0.0 0.4 4. Low-voltage Distribution 2.4 0.2 2.6 4.0 0.0 4.0 5. Service Connections 0.8 0.0 0.8 0.6 0.0 0.6 6. BPC Administration and Overheads 0.0 0.5 0.5 0.0 0.7 0.7 7. Consulting Services (remuneration and out of pocket)

0.2 0.0 0.2 0.0 0.0 0.0

8. Civil Works (Erection) 0.0 2.0 2.0 0.0 2.8 2.8 Subtotal (A) 8.5 3.0 11.5 9.7 3.6 13.3 B. Contingencies 1. Physical Contingencies 0.4 0.2 0.6 0.0 0.0 0.0 2. Price Contingencies 0.3 0.4 0.7 0.0 0.0 0.0 Subtotal (B) 0.7 0.6 1.3 0.0 0.0 0.0 C. Interest and Other Charges During Construction

0.2 — 0.2 0.1 0.0 0.1

Total Project Cost (A+B+C) 9.4 3.6 13.0 9.7 3.6 13.3 BPC = Bhutan Power Corporation, kV = kilovolt Note: Totals may not add due to rounding.

iv

4. Project Schedule

Item Appraisal Estimate Actual A. Implementation Consultant 1. Contract Date October 2003 — 2. Completion — — B. Domestic Consultant 1. Contract Date — — 2. Completion — — Completion of Engineering Designs Equipment and Supplies Dates First Procurement November 2003 18 May 2004 Last Procurement October 2005 9 March 2006 Completion of Equipment Installation August 2006 March 2007 Other Milestones

7 November 2006: Reallocation of loan categories. 5. Project Performance Ratings Ratings Implementation Period

Development Objectives

Implementation Progress

From 1 September 2003 to 31 December 2003 Satisfactory Satisfactory From 1 January 2004 to 31 December 2004 Satisfactory Satisfactory From 1 January 2005 to 31 December 2005 Satisfactory Satisfactory From 1 January 2006 to 31 December 2006 Satisfactory Satisfactory From 1 January 2007 to 31 March 2007 Satisfactory Satisfactory

v

D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Membersa

Fact-Finding 29 Apr–9 May 2003 5 55 A, D, G, H Appraisal 14-18 Jul 2003 6 30 A, C, E, G, H Inceptionb 26 Apr–6 May 2004 2 22 A, F Review 1 15-20 Sep 2004 1 6 A Review 2b 25-28 Apr 2005 1 4 A Review 3b 9-16 Nov 2005 1 8 A Review 4b 22-30 Mar 2006 1 9 A, E Project Completion Reviewc 28 Apr–10 May 2008 3 36 A, F, I a A–project specialist, B–programs officer, C–counsel, D–project economist, E–financial analyst/specialist, F–project

analyst, G–poverty specialist, H–energy specialist, I-energy economist/engineer. b Fielded concurrently with other missions. c The project completion report was prepared by Mukhtor Khamudkhanov, Senior Energy Specialist/Mission Leader;

Maria Carmen Nunez, Assistant Project Analyst; and an energy expert-economist/engineer (staff consultant).

vi

I. PROJECT DESCRIPTION

1. The Rural Electrification and Network Expansion Project1 was developed to provide access to electricity and to improve the standard of living and quality of life of people living in rural areas of Bhutan. Although Bhutan has substantial clean and renewable hydropower generation capacity, distribution of the electricity throughout the country is limited. When the Project was formulated in 2003 approximately 65% of the population lacked access to electricity. The overarching objective of the project was to alleviate poverty by promoting local economic development through provision of electricity to previously unserved rural areas. 2. The project comprised an extension of the existing electricity distribution network to connect approximately 8,000 new consumers in eight of Bhutan’s 20 districts. The eight districts covered all three regions of the country, and included four of the five districts in the eastern region, where the prevalence of poverty is particularly high due to the region’s remoteness and relative inaccessibility. 3. To support the project, the Asian Development Bank (ADB) approved a project loan of special drawing rights 6,755,000 ($9.4 million equivalent) from its special funds resources on 30 September 2003. The borrower was the Government of Bhutan, and the executing agency (EA) was the Bhutan Power Corporation (BPC), a government-owned corporation that supplies electricity to domestic consumers and owns and operates electricity transmission and distribution networks throughout the country. A subsidiary loan agreement, acceptable to ADB, between the government and BPC was a condition for loan effectiveness. 4. The project also included two technical assistance (TA) grants: (i) a TA grant supported the government in investigating the establishment of the Druk Hydro Power Corporation to operate the nation’s power generation facilities and manage power trading with India;2 and (ii) the second TA assisted the government build the capacity of the Bhutan Electricity Authority (BEA), the technical and economic regulator for the power sector.3

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

5. The project was formulated as part of the government’s 9th Five-Year Plan (FYP) 2003–2007, and was consistent with Bhutan’s long-term rural electrification objective, which had a target of 100% electrification of the country by 2020.4 Consistent with this objective, the 9th FYP set a target of electrifying 15,000 rural consumers in all 20 districts of the country over the period of the plan. The project was designed in consultation with the government to contribute toward the achievement of this objective.

1 ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance Grants to the Kingdom of Bhutan for the Rural Electrification and Network Expansion. Manila. 2 ADB. 2003. Technical Assistance Grant to the Kingdom of Bhutan for Establishment of Druk Hydro Power

Corporation. Manila. 3 ADB. 2003. Technical Assistance Grant to the Kingdom of Bhutan for Capacity Building of Bhutan Electricity

Authority. Manila. 4 In 2005, the government, with the assistance of consultants funded by the Government of Japan, produced a rural

electrification master plan, which targeted increasing the rural electrification ratio to 100% by the end of the 11th FYP in 2017. The government currently believes it has the technical and resource capacity to complete the rural electrification program by 2013, if additional funding can be found.

2

6. ADB’s country strategy for Bhutan identifies infrastructure limitations as a binding constraint to the success of initiatives to reduce rural poverty. The strategy focuses on improvements in key transport and energy infrastructure. The extension of the electricity distribution network to provide access to electricity to households in unelectrified parts of the country is consistent with this strategy, and was expected to reduce poverty in rural areas by increasing employment opportunities and access to improved social services (e.g., education and health). The project was the third ADB loan for rural electrification in Bhutan. The first loan of $7.5 million was provided in September 1995 to electrify about 3,100 households and was completed in June 2000.5 The second loan of $10.0 million was provided in October 1999 to electrify a further 6,010 new consumers and was completed in January 2006.6 7. In developing the 9th FYP the government identified 15,000 rural households for electrification through an extensive structured process that involved consultation with district, geog7 and village leaders. This consultation was consistent with the objective of decentralizing decision making to support good governance, one of the government’s strategic priorities in implementing its national poverty reduction strategy. The ADB-funded project preparatory TA (PPTA)8 prepared the various analyses (design, financial, economic, social and environmental) for the rural electrification proposed for the FYP. On the basis of these analyses, the project was formulated to fund the electrification of 8,000 households in eight districts, which were selected using poverty alleviation and economic criteria.9 A copy of the project design and monitoring framework is given in Appendix 1. 8. The PPTA was extensive and covered in detail all elements relevant to the design and formulation of the project. It also formed the basis for successful extension of the electricity distribution network to unelectrified areas in districts that did not form part of the project. Over the period of the 9th FYP, BPC also provided access to electricity to 5,711 consumers in unelectrified rural areas in districts not included in the project with the assistance of grant aid from the governments of Austria and the Netherlands, and to an additional 457 households with funding provided by the Government of Bhutan. 9. The rural electrification master plan (footnote 4) was prepared during the project; implementation of the plan will further extend the networks constructed under the project to provide electricity access to households in other unelectrified areas. It will also guide the formulation of future rural electrification projects, including any projects funded by ADB, to ensure that they are consistent with a countrywide least-cost development strategy. B. Project Outputs

10. The following extensions to the existing distribution system were constructed under the project:

(i) installation of 210 circuit kilometers (cct-km) of 33 kilovolt (kV) overhead line; 5 ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance Grant to the Kingdom of Bhutan for the Rural Electrification Project. Manila. 6 ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and

Technical Assistance Grant to the Kingdom of Bhutan for the Sustainable Rural Electrification Project. Manila. 7 A geog is a cluster of neighboring villages within a district that are grouped together for administrative purposes. 8 ADB. 2001. Technical Assistance to the Kingdom of Bhutan for Preparing the Rural Electrification and Network

Expansion Project. Manila. 9 Rural electrification projects in the eight districts included in the project had an economic internal rate of return at

appraisal of over 12%. Furthermore a total of 17 geogs, which included 43% of the households to be electrified under the project, were classified as vulnerable on the basis of socioeconomic criteria.

3

(ii) installation of 227 cct-km of 11 kV overhead line; (iii) installation of 160 load break switches rated at both 33 kV and 11 kV; (iv) installation of 7,749 kilovolt-ampere (kVA) of 33/0.4 kV transformer capacity

and 9,776 kVA of 11/0.4 kV transformer capacity; (v) installation of 906 kilometers (km) of 0.4 kV line using aerial bundled cable; (vi) installation of service lines and meters to supply 8,857 households and 349

institutions. 11. These extensions to the distribution system provided access to electricity to 9,206 potential new consumers, 15% more than envisaged at appraisal. This increase was primarily due to the connection of new houses within the project areas that were constructed before and during project implementation. BPC noted that rural electrification has historically stimulated new construction in project areas as potential beneficiaries take advantage of the benefits available from the project.10 C. Project Costs

12. Appendix 2 gives a detailed comparison of the project cost at appraisal and completion. At appraisal, the total project cost was estimated at about $13.0 million equivalent, including $9.4 million (72.3%) in foreign exchange costs and $3.6 million (27.7%) equivalent in local currency costs. The actual cost of the project was $13.3 million, comprising $9.8 million (73.7%) in foreign exchange costs and $3.6 million (26.3%) equivalent in local costs. As there was no increase in the loan amount, the apparent increase in foreign exchange cost is attributed to changes in the value of special drawing rights during the course of the project. The actual cost per connected customer was $1,447 versus $1,625 estimated at appraisal, a reduction of 11%. D. Disbursements

13. A comparison of projected and actual disbursements under the loan is provided in Appendix 3. Loan proceeds were disbursed in accordance with ADB’s Loan Disbursement Handbook. The loan became effective on 31 March 2004. The original closing date of the loan was 31 March 2007, but the loan was closed ahead of schedule on 19 December 2006. The undisbursed loan amount of SDR 170,767 was cancelled at loan closing. E. Project Schedule

14. The chronology of major events in project implementation is shown in Appendix 4, and the planned and actual schedules are shown in Appendix 5. At appraisal, the project was estimated to take 3 years, with completion by 30 September 2006. Major construction work was

10 The mission noted discrepancies between the asset quantities for the project as (i) scheduled in the report and

recommendation of the President (RRP), and (ii) actually installed. In particular, the total length of the medium-voltage line as installed was only 63% of the total length scheduled in the RRP. BPC assured the mission that all villages included in appraisal electrification plans were in fact electrified. It also provided a survey report from local consultants engaged during the PPTA that estimated that only 75% of the total medium-voltage line length scheduled in the RRP was required. Resolution of these discrepancies would require a time consuming and detailed review of the engineering drawings prepared at different stages of the project, and the mission consequently accepted BPC’s assurances that there was no material change to the project scope as envisaged at appraisal. The mission noted that BPC is in the process of completing detailed engineering surveys and designs for all rural electrification planned under the 10th FYP, including those components planned for funding under the proposed new ADB loan. Undertaking detailed design before a project commences should reduce the probability of such discrepancies in future rural electrification projects.

4

essentially completed by 31 December 2006, but connection of a small number of consumers in the project area using equipment procured under the project continued beyond that date. 15. Loan effectiveness was delayed while the subsidiary loan agreement was completed with terms acceptable to ADB. However, procurement activities continued over the period between loan approval and loan effectiveness and a number of contracts were ready for signing by the time the loan became effective. It was originally planned that much of this work would be undertaken by the international consultants (para. 30). 16. There was a further approximately 6 month delay at the beginning of the project in the procurement of poles, which were initially bid as a single contract using international competitive bidding (ICB). This was a substantial contract, and project construction works could not commence until initial pole deliveries had commenced. While there were a number of bidders, bid prices were substantially higher than estimated at appraisal. Furthermore the lowest bidders, which included contractors that had previously supplied BPC with similar poles, did not meet the financial and experience criteria specified in the bid documents. BPC wanted to immediately rebid the contract in three smaller packages,11 as this would allow the financial and experience criteria to be lowered and, in BPC’s view, increase competition. ADB instead required BPC to first negotiate with the lowest qualified bidder. These negotiations were not successful, and ADB subsequently permitted the contract to be rebid in the proposed smaller packages; the final contract prices were substantially lower than the initial bids. 17. Subsequent equipment procurement was completed within the time allotted in the appraisal schedule, and the loan was closed ahead of schedule, with the proceeds essentially fully disbursed. Construction delays compared to the appraisal schedule were minor, with only residual work remaining at loan closure. F. Implementation Arrangements

18. BPC has established a rural electrification department, which is responsible for the implementation of all grid extensions into unelectrified areas, irrespective of funding.12 The rural electrification department coordinates with other departments and divisions within BPC but was ultimately responsible for all project works. The rural electrification department has a field office in each of the three regions to manage project construction. An experienced project manager from within the rural electrification department was directly responsible for the project. The implementation arrangements proved very successful and BPC now has significant expertise in the implementation of rural electrification projects. 19. BPC is seeking to improve the efficiency of project implementation. A computerized inventory control system, developed through ADB-funded TA,13 will be used for future rural electrification projects. To reduce the cost of transport to the project sites, the rural electrification department is also planning to have equipment procured for future projects delivered directly to its regional stores rather than to BPC’s central store in Phuentsholing. It is conducting more detailed medium and low-voltage line surveys and designs using global positioning system technology, prior to preparation of bills of quantities. This should lead to more accurate forecasting of equipment requirements and more efficient installation. 11 The original contract would be split into three packages based on pole length. 12 The rural electrification department was a division of BPC’s development and construction department at the time

of appraisal but was upgraded to a full department during the course of the project. 13 ADB. 2005. Technical Assistance to the Kingdom of Bhutan for Capacity Building of the Bhutan Power Corporation.

Manila

5

G. Conditions and Covenants

20. Compliance with loan covenants is presented in Appendix 6. Compliance with the financial covenants has been highly satisfactory, with BPC easily meeting the debt-service ratio, debt–equity ratio and self-financing ratio covenants in the loan agreement. This reflects the fact that current debt servicing requirements are still relatively low. While there was no rate of return covenant in the loan agreement, BPC is now profitable and achieved rates of return of approximately 4.9% in FY2006 and 4.7% in FY2007 (Appendix 7).14 Annual tariff increases have been implemented since 2005, and the current tariff schedule provides for automatic tariff increases on 1 July 2008 and 1 July 2009. BPC introduced a performance-based incentive scheme for all operational staff in 2006,15 which is focused on increasing operational efficiency, and appears to have improved profitability. BPC also assumed responsibility for the transmission system associated with the recently commissioned Tala hydropower plant (1,020 MW) on 1 July 2007, and this has brought the additional transmission wheeling revenues from this plant to BPC. 21. The loan agreement required that BPC establish, not later than 6 months prior to the first electrification, a project performance monitoring system (PPMS) that included monitoring of social and poverty benefits. The consultancy services provision in the loan amount included funds for the engagement of a local consultant to assist with the establishment of the PPMS and in particular the social and poverty benefits monitoring component. A possible design for a social and poverty benefits monitoring system, which envisaged using the PPTA phase 1 survey16 for baseline data, was included in the PPTA final report. 22. Instead of relying on a local consultant, BPC itself designed a PPMS that was included in the quarterly progress reports regularly submitted to ADB. However this reported only on the progress of network extension construction work and the number of unelectrified customers given access to the network. No reports on the social and poverty benefits of the project were included. 23. Consistent with the overarching poverty reduction objective of the project, BPC was required by the loan agreement to ensure that vulnerable households, determined in accordance with criteria agreed between BPC and ADB, received free electrification kits 6 months after electrification. The agreed criteria were based on the recommendations in the PPTA final report and required electrification kits to be provided to households that (i) had only two rooms, including a kitchen; (ii) were single storey mud houses or stones houses with wood roofing; (iii) were vulnerable, including households headed by females, landless households or households without cash income; and (iv) had not connected 6 months after other households in the village had been connected. The Sustainable Rural Electrification Project (footnote 6) had a similar requirement but the up-take was very low and most of the kits purchased for this project remained in store. BPC wrote to the district heads advising of the availability of the kits and the eligibility criteria, and asking them to coordinate with the heads of beneficiary villages to

14 BPC’s profit increased by 61% in 2007. However, this was not reflected in its rate of return, due to a 70% increase

in the magnitude of the fixed asset base. This was largely due to the acquisition of the transmission assets associated with the Tala hydropower project.

15 The performance-based incentive scheme gave all staff an opportunity to earn a bonus of up to 25% of basic annual salary, depending on the extent to which the corporation and its component departments and divisions met objectively measurable performance targets.

16 The PPTA phase 1 survey covered 3,000 households (both electrified and unelectrified) in 13 districts.

6

determine eligibility. The kits were issued through the BPC district offices. Far fewer village electrification kits (236) have been distributed than envisaged at appraisal (para. 54). 24. Another loan covenant required BPC to take all necessary steps to ensure that its overall system losses, after expansion of the rural electrification network, do not exceed 13%. It is difficult to make a meaningful assessment of BPC’s system losses due to the need to allocate transmission losses between electricity generated for export and electricity generated for local consumption. The loan covenant covering system losses did not specify how these losses were to be measured, but the overall medium and low-voltage distribution system losses appear to be the most relevant indicator, and BPC does not reach the 13% threshold for this measure. BPC’s performance-based incentive scheme places a relatively high weighting on the need to reduce system losses, and BPC management appears to be taking appropriate action to minimize non-technical losses. H. Related Technical Assistance

25. As noted above (para. 4), two TA grants were attached to this loan, both of which were rated successful.17,18 One grant (footnote 17) provided for an investigation into the potential benefits and feasibility of merging the three separate hydropower corporations. As a consequence of this TA, the Druk Green Power Corporation was established on 1 January 2008 and will be responsible for all government-owned hydropower generation projects in Bhutan. With the assistance of ADB,19 the government is currently preparing a hydropower policy that will provide for the involvement of the private sector in hydropower generation. Should it be decided to proceed with a public-private partnership for new hydropower generation, the investment will be made through Druk Green Power Corporation. 26. The second TA grant (footnote 18) provided for the institutional strengthening of BEA through development of an institutional structure, preparation of draft regulations and standards and staff training. While the Bhutan Electricity Act provides for the BEA to be independent of the government, it is currently a functionally separate and financially autonomous entity within the Department of Energy (DOE). It is run by a separate commission and is funded from license fees received from regulated entities.20 Arguably, this structure is currently appropriate given that the regulated entities are both government-owned and the domestic power sector reliant on government subsidies, although a case could be made for private sector or consumer representation on the commission. 21 The government recognizes that the current structure would not be appropriate should the private sector become involved in hydropower generation, and is currently targeting complete separation of BEA from DOE in 2009, to clear the way for private sector involvement. 27. Staffing of BEA remains a problem. The founding chief executive officer resigned soon after the completion of the ADB-funded TA project and two subsequent appointees to the position have also resigned. The position is currently vacant and the government has indicated a willingness to make an appointment from outside Bhutan should this prove necessary. Two

17 ADB. 2006. Technical Assistance Completion Report, Establishment of Druk Hydro Power Corporation. Manila (TA

4189-BHU). 18 ADB. 2007. Technical Assistance Completion Report, Capacity Building of the Bhutan Electricity Authority. Manila

(TA 4188-BHU). 19 ADB. 2006. Preparing the Bhutan Power Development Project. Manila 20 Currently there are two regulated entities: Druk Green Power Corporation and BPC. Both are government-owned. 21 Currently all commissioners are senior government officials. There was a commissioner from the private sector but

he was recently appointed to a senior government position.

7

staff who received training under the TA are still employed by BEA and two other engineers who received ADB-funded training were subsequently granted leave to undertake postgraduate degrees. One had just returned at the time of the mission with the second due to return in June. If the staff members remain with BEA the training provided under the TA will not have been wasted, although more experienced staff will be needed before BEA can effectively undertake its full mandate. 28. In accordance with a loan covenant and with the assistance of Danish consultants, BEA reviewed BPC’s finances and developed a new tariff structure that was implemented on 1 July 2007. The 3-year schedule incorporates predetermined adjustments on 1 July 2008 and 1 July 2009. I. Consultant Recruitment and Procurement

29. The loan provided for the recruitment of an international consulting firm to assist BPC in: (i) evaluating bids and answering post-tender queries to finalize equipment contracts; (ii) reviewing and approving technical designs submitted by the contractors and witnessing equipment tests; (iii) planning and managing the implementation program; and (iv) preparing quarterly project reports and BPC’s project completion report (PCR) to ADB. In addition, a domestic consulting firm with experience in benefits monitoring and evaluation was to be separately engaged to assist BPC in (i) reviewing and refining the existing framework for benefits monitoring; (ii) improving BPC’s management information system to ensure that project benefits related to social and poverty benefits could be incorporated into the system; (iii) defining key baseline values for each expected indicator and the expected or target values at specified dates during implementation and for evaluation; and (iv) defining the most useful form for presenting data and reporting to enable timely project implementation and monitoring and establishment of an appropriate information database. It was a condition of the loan agreement that the consultants be selected and engaged using the quality-and-cost-based selection method. Furthermore there was a special clause in the loan agreement requiring that the international consultants collaborate with the domestic consultants22 and that the collaboration arrangements be submitted to ADB pursuant to the provisions for consultant selection. 30. ADB approved advanced procurement action for both equipment procurement and consultant selection. However, the terms of reference for the international consultant were not fully consistent with the outline terms of reference in the report and recommendation of the President in that they replaced project monitoring with training in live line network maintenance. This training is most effectively provided by trade-experienced experts, which most professional consultants would not employ in-house. Recruitment of international consultants proceeded in accordance with the Guidelines on the Use of Consultants by ADB and its Borrowers; contract negotiations were completed by early February 2004 and the consultant was ready to mobilize. ADB quite properly advised BPC to defer consultant mobilization until after the loan became effective, with the result that by the time of loan effectiveness, most of the procurement-related work included in the consultant’s terms of reference had already been undertaken by BPC’s own staff. After consultation with ADB, BPC offered the selected consultant a reduced scope of work, including only the live line training. The offer was declined, possibly because the reduced scope provided no work for the consultant’s own employees. Following the selected consultant’s refusal to mobilize, ADB agreed that there was no need to engage an international consultant, and that the loan funds provided for the engagement of the international consultant could be reallocated to equipment procurement.

22 The loan agreement notes that this requirement was made at the request of the borrower.

8

31. BPC did not recruit a local consultant to design and implement the PPMS but instead undertook the design itself (see paras. 21 and 22). 32. Materials for the project were procured using both ICB and international shopping, in accordance with ADB’s Procurement Guidelines. A schedule of contracts under which equipment for the project was procured is given in Appendix 8. All equipment was delivered to a central project store at Phuentsholing on the Indian border before being delivered to rural electrification department stores throughout the country. Construction of the distribution network extensions was outsourced to local installation contractors, who hired labor from beneficiary villages to assist with construction. BPC now has approximately 40 local contractors available, but the construction work needs to be broken down into small jobs that do not exceed the implementation capacity of the contractors. J. Performance of Consultants, Contractors, and Suppliers

33. Contractors and suppliers generally performed well. In spite of a delay in commencing construction due to delays in finalizing contracts for poles, construction works were substantially completed in accordance with the appraisal schedule. K. Performance of the Borrower and the Executing Agency

34. BPC and the borrower provided all resources needed to allow the project to proceed. Installation of the project works was substantially completed in accordance with the appraisal schedule, in spite of an initial delay executing the subsidiary loan. BPC also proved that it has the capability to successfully manage substantial rural electrification projects, although better technical supervision could have prevented problems related to the operation of drop-out fuses (para. 40). However, BPC did not recruit local consultants to assist with the monitoring of social and poverty benefits as envisaged at appraisal and did not include the monitoring of such benefits in its PPMS, as required by the loan agreement. Nevertheless, the performance of the borrower and BPC is considered satisfactory. 35. BPC is a competently managed organization with good business systems in place. It is now operating profitably (para. 20) and in a position to fund a significant proportion of its capital investment (footnote 28). In particular it has implemented a very sophisticated employee incentive scheme, which requires it to set achievable business targets and apply performance indicators across the organization that are consistent with meeting these targets. This has resulted in a significant improvement in operating efficiency. However, there is some evidence of weak technical management (footnote 26), possibly due to a shortage of experienced engineering staff. BPC may need to better utilize its available engineering resources if it is to optimize its performance. L. Performance of the Asian Development Bank

36. The Borrower and the EA appreciated the assistance and cooperation ADB extended to them and considered ADB’s performance satisfactory. ADB monitored progress, fielded review missions, and generally reviewed documents provided for approval in a timely manner. It is possible that better communication between BPC and ADB could have resulted in more rapid initial procurement of poles, but this would not necessarily have resulted in procurement costs

9

being lower than were achieved.23 Furthermore, in monitoring the project ADB focused on procurement matters and physical construction progress and should have been more forceful in raising concerns about the lack of monitoring of social and poverty benefits. However, on balance, the performance of ADB was satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

37. The project is rated “highly relevant”. The government’s objective of 100% electrification throughout the country is expressed in its Vision 2020, Electricity for All and has been supported by successive FYPs. Socioeconomic surveys in both Bhutan and other developing member countries have underlined the importance of electrification to social development and poverty alleviation in rural communities. ADB’s country strategy for Bhutan 24 focuses on rural electrification as a primary means of fostering pro-poor growth, and the project is thus consistent with both ADB’s operational strategy and the country’s development objective. ADB has been supportive of the government’s full rural electrification objective; the project was the third of a series of rural electrification loans either funded or currently under appraisal by ADB. B. Effectiveness in Achieving Outcome

38. The project is considered “highly effective” in achieving its appraisal outcome. It exceeded the appraisal expectations in achieving physical outputs and provided access to electricity to 9,206 new rural consumers (15% more than envisaged at appraisal) in all the project villages included in the appraisal design. The cost per connection was $1,447, 11% below the appraisal estimate. 39. The mission visited the beneficiary villages located in (i) Punakha District of the Western Region (Gubgi village with 18 households, Khawa and Jwara village with 21 households); and (ii) Sarpang District of the Central Region (Upper Chaskhar with 19 households, Middle Chaskhar village with 36 households, and Tashiling village with 24 households). The mission also visited a basic health unit, and a school within the project area in Punakha District. None of these villages or institutional consumers had access to electricity prior to the project. Kerosene lamps had been replaced by incandescent or fluorescent lights in all households visited.25 Depending on the income levels, electrical appliances in the houses visited included (i) rice and curry cookers, (ii) a water boiler, (iii) electric fan(s), (iv) a refrigerator, and (v) radio and television. Discussions with the villagers revealed that their first priority after getting access to electricity is to install electric bulbs and/or fluorescent lights and to buy rice cookers. The use of electricity for cooking and water boiling reduced the consumption of fuel wood and improved indoor air quality. A rice mill in one of the villages visited was powered electrically, as the owner had replaced an old mill requiring a new diesel engine with a new rice mill with an electric motor in order to save fuel costs. In another village the rice mill had not been converted to electricity because of the capital cost of the conversion. 40. The mission noted a problem with the use of the drop-out fuse assemblies associated with the distribution transformers installed under the project. In all distribution substations visited 23 The price of poles was largely driven by the price of steel; it was very high at the time bids were initially called, but

may have dropped by the time the contract was rebid. 24 ADB. 2005. Country Strategy and Program for Bhutan (2006-2010). Manila. 25 Beneficiaries generally installed both a fluorescent light and an incandescent lamp in the same room because of

concerns that the fluorescent light would not work if the voltage was low.

10

by the mission, ordinary fuse wire was used in place of specially designed fuse links, meaning fuses would not “drop out” as designed. As a result, many of the fiberglass fuse barrels were damaged; replace of a fuse now necessitates isolation of the high-voltage line supplying the transformers. The correct fuse links were procured under the project but the mission understands that these were not issued to project sites with the cut-out fuse assemblies. Furthermore, BPC’s operations staff were unaware how to correctly install and operate this equipment. BPC management expressed its appreciation to the mission for bringing the issue to its attention and indicated that it would take urgent action to address the problem. If the international consultant had been mobilized (either as envisaged at appraisal, or under the reduced scope of work that was subsequently offered), it is likely that this problem would have been identified and addressed during project implementation. 41. Apart from the drop-out fuse problem, the project is well designed and constructed and is being effectively operated. While the mission regards the ineffective use of drop-out fuses as serious,26 it notes BPC’s recognition of the problem and the managing director’s instruction that prompt action be taken to address it, and considers that this one issue should not affect the rating of a project that is considered highly effective in all other respects. C. Efficiency in Achieving Outcome and Outputs

42. The project is rated “highly efficient” on the basis of the detailed analysis of its economic internal rate of return (EIRR), as presented in Appendix 9. The evaluation determined an EIRR of 24.4%, significantly higher than the 12.7% calculated at appraisal. The economic analysis undertaken for this PCR was based on consumers’ willingness to pay and used a similar methodology to that at appraisal. However, the PCR analysis assumed an initial average monthly household energy consumption in rural electrification areas of 65 kWh, which is below the average consumption of 90.5 kWh assumed at appraisal. By contrast, the 6% domestic growth rate assumed for this EIRR analysis was much greater than the 2.5% assumed at appraisal, and the substantial increase in the unsubsidized price of kerosene since appraisal has meant that the economic benefits of displaced kerosene consumption are much greater.27 Based on actual outputs, the analysis took into account the greater number of connected consumers than assumed at appraisal and the lower capital cost per connected customer. These revised inputs had both negative and positive impacts on the EIRR, but the higher EIRR calculated for this PCR indicates that the negative impact of lower initial demand was more than offset by the lower capital costs and the higher economic value of kerosene (the latter was the most significant factor). 43. The EIRR analyses undertaken at appraisal and completion did not take into account socioeconomic benefits that cannot be easily quantified, but which the various socioeconomic surveys indicate to be very real. These benefits relate largely to improvements in beneficiaries’ homes (better lighting and a more hygienic environment) resulting from switching from kerosene to electric lamps. Social benefits include increased business opportunities for home-based industry and increased educational opportunities for children. Furthermore, the analyses did not attempt to quantify the environmental benefits from substituting electricity generated from hydropower plants (a renewable energy source with zero carbon emissions) for kerosene and fuel wood. An additional economic benefit not factored into the analysis is the use of the project for the connection of unelectrified consumers in the 10th and 11th FYPs. Based on an analysis

26 The use of drop-out fuses for the protection and isolation of pole-mounted transformers is standard industry

practice worldwide, and the mission is concerned the problem was not identified and remedied earlier. 27 The current economic price of kerosene is almost four times that assumed for the appraisal economic analysis.

11

of the rural electrification master plan (footnote 4), the mission conservatively estimates that an additional 6,000 currently unelectrified consumers will be connected to the network through the project over the period of the 10th FYP, and another 1000 during the 11th FYP. 44. The sensitivity studies undertaken as part of the EIRR analysis confirmed the efficiency of the project was not significantly impacted by the assumed input values. The bottom-up assessment of electricity demand by project beneficiaries indicated that initial demand could be lower than assumed for the base-case analysis. There is also an economic argument that the cost of energy should be based on the opportunity cost of electricity sales to India rather than on the average cost of generation. Nevertheless, even if these alternative input assumptions are both used in the analysis, the EIRR is still very satisfactory. D. Preliminary Assessment of Sustainability

45. While the project will rely on ongoing subsidies indefinitely, its sustainability is rated “likely”, in part because the power sector in Bhutan is inherently profitable, given the revenues received from sales of electricity to India, and partly because it is government policy to ensure that sufficient funds are diverted to BPC to ensure the sustainability of its rural electrification program. The sector’s revenues from electricity sales to India have increased substantially with the recent commissioning of the 1,020 MW Tala hydropower plant. BPC recorded its first net profit in FY2006 after 3 years of operation, and the transmission wheeling revenues from the Tala plant should enable it to further improve its profitability. 28 46. The subsidies required for the project are high, as the electricity tariff in Bhutan is the lowest in South Asia, while connection costs per customer are unusually high due to the low population density and unfavorable terrain. Currently, subsidies for rural electrification are provided through (i) the sale of energy to BPC for local consumption at a rate that is less than the cost of production,29 and (ii) cross subsidies from the sale of electricity to large industrial customers, which have a relatively low cost of supply.30 The government has effectively capped the total subsidy available from the sale of power and requires payment at the full cost of power sales to India for all local consumption in excess of 15% of Bhutan’s current hydropower generation capability. This means that the subsidy will eventually extend only to low-voltage domestic customers, with medium and high-voltage customers paying the full cost of supply. 47. The tariff structure has been undergoing regular revisions since BPC was established in July 2002. A three-block progressive tariff structure was introduced on 1 January 2003 and the two-part tariff structure for medium and high-voltage customers was implemented on 1 July 2004. In June 2005, BEA was established as the sector regulator in accordance with the Electricity Act of Bhutan, 2001. On 8 June 2007, BEA approved tariff revisions to apply from 1 July 2007 for the next 3 years. The recent revision also included the abolition of meter rental

28 BPC is currently reinvesting these increased revenues in its network. It is funding a 220 kV single circuit

transmission line between Basochuu and Tisirang (currently under construction) from its own resources. It is also self-funding a recently completed double circuit 33 kV line between Tisirang. The 220 kV line will form a component of the interconnection between the east and west transmission grid, the final link of which is planned for funding under ADB’s proposed Bhutan Green Power Development loan. The double circuit 33 kV line will allow consumers in Dagana District to be supplied from the transmission grid.

29 The average production cost of electricity from hydropower generation in Bhutan was Nu 1.19/kWh in 2006. Electricity for local consumption is sold to BPC for Nu 0.3/kWh. Electricity is sold to India for Nu 1.8/kWh, except for electricity from the Chukkha project, which is sold for Nu 2.0/kWh.

30 The economic and social benefits to Bhutan from the operation of large industries are limited. These industries, which accounted for 64% of total electricity sales in 2007, are all located close to the Indian border and employ mainly Indian labor.

12

charges and minimum charges, which will benefit low-use customers, particularly poorer rural households. 48. In order to further assess the impact of continuing rural electrification on BPC’s operations, and to assess the sustainability of internal cross subsidies (para. 46), the mission analyzed the proportion of BPC’s sales to different customer classes (Appendix 10). In 2007, 74% of BPC’s total sales were to industrial consumers directly connected at medium or high voltage, while only 4.6% of sales were to rural domestic consumers, who are the main beneficiaries of internal cross subsidies. While this proportion will increase with greater penetration of the rural electrification program—approximately half (55%) of potential consumers that can economically be connected to the grid now have access to electricity—the total sales to rural consumers will not increase to the extent that their impact on BPC’s operations renders the subsidies unviable or unsustainable.31 E. Impact

49. BPC confirmed that there were no problems with private owners relating to resettlement or land acquisition for rights-of-way under the project.32 The project also had no significant environmental impacts. BPC attempted to minimize negative impacts on the environment by using distribution transformers rated at not more than 160 kVA.33 These small transformers were pole mounted, thereby avoiding the need to take land for fenced enclosures. The use of small transformers will also limit the potential loading on low-voltage lines, which in turn should reduce network losses and result in an improved quality of supply to beneficiaries. 50. The mission found a general consensus at all levels of Bhutanese society regarding the social and poverty benefits of electrification. The secretary of the Ministry of Economic Affairs emphasized the government’s ongoing commitment to meeting its rural electrification targets, a message that was reinforced by the director general of DOE. Staff at all levels within BPC showed a determination to continue that organization’s role in managing and implementing the rural electrification program. Discussions with the beneficiaries and institutional consumers indicated that they valued the benefits provided by electricity and that the cost of electricity was not resented. 51. The mission found that its ability to analyze project impacts was constrained by a lack of objective data. This was due in part to BPC’s failure to implement the poverty impact survey envisaged at appraisal. However, given that there is an established link between poverty reduction and electricity consumption in electrified areas, the mission considers that a robust analysis of project beneficiary electricity consumption would have been a good substitute for a poverty impact survey and could have led to more reliable and objective conclusions. Such an analysis would also have improved the accuracy of the economic analysis used for the assessment of project efficiency and could have provided useful data for planning future rural electrification projects. If necessary the electricity consumption data could have been

31 As of December 2007 there were 40,954 rural domestic consumers. The rural electrification master plan estimates

that a further 32,800 unelectrified households can economically be connected to the grid. Hence it is unlikely that sales to rural domestic consumers will ever exceed 10% of BPC’s total sales.

32 BPC paid only land demarcation fees to register the land of a governmental municipal body under BPC in accordance with the government rules.

33 BPC set up the environmental cell to ensure compliance with all environmental regulations and guidelines. The cell also functioned under other projects.

13

complemented by a limited survey designed to profile large, medium and small consumers in different project areas.34 52. A reliable electricity consumption analysis could have been made if BPC maintained a project database that uniquely identifies all project beneficiaries and is linked to BPC’s billing system, so that individual consumer demands could be downloaded. As new consumers were connected in project areas they would be added to the project database. Such a database would provide reliable information on electricity consumption in different project areas, and would also accurately measure consumption growth rates. To be most effective the database should be maintained until any project performance evaluation report had been completed. It is likely that the services of an experienced information technology consultant would have been required to design the database and its interface to the billing system.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

53. Based on a review of its relevance, effectiveness, efficiency, and sustainability, the Project is rated “highly successful”. The project rationale for increasing rural electrification continues to be highly relevant to Bhutan. The project works were considered successful in that more customers were connected at a lower cost than envisaged at appraisal. Furthermore, the revised EIRR is highly favorable and the project is likely to be sustainable given appropriate subsidy inputs. B. Lessons Learned

54. The provision of free house wiring kits under the project to some customers and not others has been unsuccessful, in part because many beneficiaries do not like to be identified as poor and in need of charity, and partly because the agreed eligibility criteria excluded a much higher number of beneficiaries than was envisaged at appraisal. In addition, BPC indicated that it did not consider its staff to be social workers and for this reason asked the district authorities to be responsible for determining eligibility. In spite of the poor uptake of village electrification kits the mission understands that very few potential consumers in project areas remain unelectrified. If this is the case, it is possible that such kits are not needed. However, if there is a proven need to assist marginalized potential consumers connect to the supply, the mission considers that the allocation of such assistance should be more flexible; BPC is not well positioned to make the assessments that such flexibility implies. A project database would assist relevant authorities address the issue, as it would allow consumers that were provided access to electricity under a project but who failed to connect to the supply to be readily identified and proactively helped. It would also be useful to examine alternative, more socially acceptable mechanisms for helping poor households install the internal house wiring needed before electricity can be supplied. One approach being studied with advisory TA 35 is the provision of low interest loans that would be repaid in installments following energization as part of a consumer’s electricity account.

34 Climatic conditions and hence electricity consumption patterns vary significantly with the altitude of different project

areas. For example, consumers in low-lying areas live in a tropical climate where the demand for fans is high, winter space heating is not needed. Consumers at higher altitudes have less need for fans but must heat their houses during winter. Wood is currently the preferred fuel for heating, even for wealthy households.

35 ADB. 2006. Technical Assistance to the Kingdom of Bhutan for the Accelerated Rural Electrification. Manila.

14

55. The mission has noted significant variations in the assumptions made in various ADB reports regarding initial electricity consumption and consumption growth rates in newly electrified project areas. Individual consumption must be accurately measured for billing purposes, meaning actual consumption and growth rates in project areas could be directly measured though a project database linked to BPC’s billing system. Given the strong link between electricity consumption and poverty alleviation, poverty impact assessments would benefit from greater reliance on data that can be accurately measured. Such data would also permit more accurate economic and financial analyses to be undertaken of both existing and proposed projects. Bhutan is unique in that almost all its electricity is generated from a renewable resource; encouraging the use of electricity as a substitute for traditional energy sources will have a positive environmental impact. Accurate data on electricity consumption in different project areas may assist relevant government agencies plan such initiatives. C. Recommendations

1. Project Related

56. The sustainability of the project will depend on the government providing continuing subsidy inputs to BPC for rural electrification. Inadequate subsidies are likely to be quickly reflected in a deterioration of BPC’s financial performance. Therefore, it is recommended that monitoring of compliance with the key financial covenants and the requirement for regular submission of audited financial accounts both continue. 57. The project achieved its appraisal outcome and outputs and exceeded the appraisal targets in providing access to electricity to new rural customers. Based on the government’s continuing willingness to invest in and subsidize rural electrification and the overall efficiency of BPC’s operations, problems with the operation and maintenance of the project are unlikely. If considered necessary, a project performance evaluation may be undertaken in 2010 to assess the overall project impact.

2. General

58. ADB should consider requiring that future rural electrification projects accurately measure electricity consumption by project beneficiaries through PPMS. Such a system should uniquely identify each project beneficiary and be linked to the utility’s computer-based billing system. It is likely that the services of an experienced information technology consultant would be required to design the project database and its interface with the billing system. 59. Project designs should give more consideration to how assistance for project’s poorest beneficiaries should be delivered. There may be a need for greater flexibility in the allocation of such assistance, particularly if the criteria for eligibility are not well aligned with the needs of beneficiaries. This flexibility may require on-the-ground assessments that EAs are not well positioned to make, and it may be beneficial to enlist assistance from outside agencies responsible for delivering social services and poverty alleviation initiatives within the project area. Ideally the plans should be made and the relevant agencies identified at the time of project appraisal.

Appendix 1 15

PROJECT DESIGN AND MONITORING FRAMEWORK

Design Summary

Appraisal Performance

Indicators/Targets

Project Achievements

Key Issues and Recommendations

Impact Improved quality of life for rural residents in Bhutan

• Increased electrification in rural areas

and enhanced quality of life • Increased income in rural areas • Improved health and education facilities

through electrification

• 8,857 previously unelectrified

rural households provided with access to electricity

• 349 previously unelectrified monasteries, offices, shops, industries, schools and basic health units were also provided with access.

• BPC advises that an overwhelming majority of project beneficiaries are now connected to the supply and using electricity for lighting and other purposes.

• Although all electricity

use is measured for billing purposes, project beneficiaries are not identified. This prevents accurate measurement of total electricity consumption of beneficiaries, and makes it difficult to objectively and accurately assess the project impact.

Outcome Expand the delivery of electricity from existing national hydropower stations, as an important and necessary input to rural residents in Bhutan to improve their living standards, conditions for education, and health service delivery Provide opportunities for the rural poor to increase their economic productivity, thus creating jobs and raising income

• Increased access to electricity by logical

economic extension of the existing network, with emphasis where practicable on poverty intervention

• Electricity affordable to all consumers

• Economic analysis performed

for this PCR indicates that the economic benefits experienced by project beneficiaries are significantly higher than estimated at appraisal.

• Beneficiaries interviewed by the project completion review mission indicated that electricity to meet their basic needs was affordable and represented a good value.

• The removal of a

minimum charge in BPC’s July 2007 tariff review has made electricity more affordable for the poor with low electricity demand.

16 Appendix 1

Design Summary

Appraisal Performance

Indicators/Targets

Project Achievements

Key Issues and Recommendations

Outputs Development of project for sustainable rural electrification by (i) providing electricity to approximately 8,000 households; (ii) targeting 43% of the beneficiaries to be below the poverty line, and (iii) providing electricity kits for poorest households

• 8,000 households electrified by 2007 in

Chhukha, Lhuentse, Mongar, Pemagatsel, Punakha, Samtse, Sarpang, Trashigang

• 43% of beneficiaries below the poverty

line • Electrification kits provided to poorest

households

• 8,857 households and 349

institutions were provided with access to electricity in the 8 districts.

• While the actual income of

project beneficiaries was not directly measured, a review of BPC billing records indicated a high proportion of beneficiaries had relatively low consumption, despite Bhutan’s low electricity tariffs. It can be inferred that such beneficiaries were close to or below the poverty line.

• 236 electrification kits were

distributed to vulnerable households.

• Although fewer kits were distributed than forecast at appraisal, there is no evidence that this has prevented the poorest beneficiaries from connecting to the supply.

• Eligibility criteria for obtaining the kits were rigorously applied and not well aligned with the circumstances of the poorest project beneficiaries.

Appendix 1 17

Design Summary

Appraisal Performance

Indicators/Targets

Project Achievements

Key Issues and Recommendations

Construction of (i) 390 cct-km of 33 kV overhead lines; (ii) 300 cct-km of 11 kV overhead lines; (iii) installation of 160 33/.04 kV and 170 11/.04 kV distribution transformers with associated drop-out fuse assemblies; (iv) installation of low-voltage 570 cct-km aerial bundled conductors, and (v) installation of service cables and energy meters to 8,000 households Improved technical, financial and corporate management through the preparation and approval of a strategy and time-bound action plan

• Call international bids for plant and

materials by last quarter 2003 • Call local bids for construction works by

first quarter 2004 • Maximize number of local construction

contractors to work concurrently in prescribed areas

• Completion of project by December

2006 to international electric standards • System losses to be kept below 13% • Preparation of an O&M and asset

replacement strategy and budget with appropriate performance indicators that measure the adequacy of the O&M activities and their cost-effectiveness and efficiency

• Notwithstanding an initial

delay in procurement of the poles, equipment was procured in compliance with ADB’s requirements; the project was completed with only minor delays.

• 16 local civil works

contracting firms were utilized • Project was substantially

complete by December 2006 and loan was closed ahead of schedule.

• BPC’s distribution system

losses were 10.3% in 2007. • BPC developed this strategy

with the assistance of consultants funded by TA 4599-BHU.

• Greater flexibility may be required in allocation of the kits; if this is the case, BPC is not well positioned to make the required decisions.

• Contracts for equipment that can be manufactured locally (e.g., poles) may be split into small packages so that local suppliers will be eligible to participate.

18 Appendix 1

Design Summary

Appraisal Performance

Indicators/Targets

Project Achievements

Key Issues and Recommendations

Institutional capacity building for BEA through (i) short- and medium-term training programs; (ii) national standards and codes; (iii) consumer awareness of BEA’s role, and (iv) exploring the possibility of establishing a combined national regulatory body

• Assessment of BPC’s weighted average

tariff earned and tariff structure to (i) define a reasonable rate of return; and (ii) evaluate cross-subsidies (between customer classifications) that are appropriately justified and targeted

• Short-and long-term training program for

BEA • BEA staff drafting national standards

and codes for the sector • BEA established as an independent

sector regulator • Policy paper on the feasibility of

establishing a combined national regulatory body

• Policy paper on the feasibility of establishing time-bound action plan, asset valuation, registration, organizational setup, and registration

• BEA reviewed BPC’s

finances and set a new tariff structure, which was implemented on 1 July 2007

• Training for BEA staff was

provided under ADB-funded TA 4188-BHU.

• Draft national standards and

codes were prepared under ADB-funded TA 4188-BHU.

• BEA is currently a

functionally separate department of DOE, which is financed from license fees received from BPC and Druk Green Power Corporation.

• The position of CEO

of BEA is currently vacant and the government is having difficulty recruiting a suitable replacement.

• BEA is not functioning effectively due to a lack of a CEO and experienced staff.

• The government

recognizes that full separation from DOE will be necessary if the private sector is to be involved in electricity generation; this is targeted for 2009.

• It is understood that

this initiative will not proceed.

Appendix 1 19

Design Summary

Appraisal Performance

Indicators/Targets

Project Achievements

Key Issues and Recommendations

Exploring the possibility of establishing the Druk Hydropower Corporation (DHPC)

• DHPC serving as the corporate holding

company for Bhutan’s hydropower stations

• DHPC, renamed Druk Green

Power Corporation, was established on 01 January 2008.

Inputs • Detailed engineering and

preparation of tender documents • Procurement of civil works • Construction supervision • Capacity-building consulting

services

Project Cost

• Civil works, equipment and consulting services: $13.0 million

Financing Plan

• ADB financing: $9.4 million • Government resources: $3.6 million • TA:

Capacity Building of DEA • ADB financing: $400,000 • Government resources: $80,000 Establishment of DHPC • ADB financing: $500,000 • Government resources: $100,000

Project Cost on Completion • Civil works, equipment and

consulting services: $13.3 million

Financing Plan • ADB Financing: $9.7 million • Government resources: $3.6

million • TA: Capacity Building of BEA • ADB Financing: $397,135

Establishment of DHPC • ADB financing: $479,217

• The apparent budget

overrun arises from changes in the SDR exchange rate over the course of the project.

ADB = Asian Development Bank , BEA = Bhutan Electricity Authority, BPC = Bhutan Power Corporation, cct-km = circuit kilometers, CEO = chief executive officer, DOE = Department of Energy, kV = kilovolt, O&M = operations and maintenance, SDR = special drawing rights, TA = technical assistance Sources: (i) Asian Development Bank (2003), Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical

Assistance Grants to the Kingdom of Bhutan for the Rural Electrification and Network Expansion. Manila (Loan 2009-BHU approved on 30 September 2003);

(ii) Asian Development Bank (2006), Technical Assistance Completion Report, Establishment of Druk Hydro Power Corporation. Manila (TA 4189-BHU); (iii) Asian Development Bank (2007), Technical Assistance Completion Report, Capacity Building of the Bhutan Electricity Authority. Manila (TA 4188-

BHU); and (iv) Bhutan Power Corporation.

Appendix 2

20

APPRAISAL AND ACTUAL PROJECT COSTS ($'000)

Foreign Local Foreign Local Exchange Currency Total Exchange Currency Total

A. Base Cost 1. 33-kV Overhead Lines 2,247.00 171.00 2,418.00 2,636.00 0.00 2,636.002. 11-kV Overhead Lines 1,364.00 117.00 1,481.00 1,718.00 0.00 1,718.003. Distribution Substations:

a. 33/0.4-kV Transformers 660.00 1.00 661.00 382.00 0.00 382.00b. 11/0.4-kV Transformers 789.00 1.00 790.00 382.00 0.00 382.00

4. Low Voltage Distribution 2,417.00 210.00 2,627.00 3,976.00 0.00 3,976.005. Service Connections 824.00 0.00 824.00 608.00 0.00 608.006 BPC Administration and Overheads 0.00 500.00 500.00 0.00 633.00 633.007. Consulting Services 150.00 50.00 200.00 0.00 0.00 0.008. Civil Works (Erection) 0.00 2,028.00 2,028.00 0.00 2,675.00 2,675.00

Subtotal (A) 8,451.00 3,078.00 11,529.00 9,702.00 3,308.00 13,010.00

B. Contingencies .1. Physical Contingencies a 440.00 154.00 594.00 0.00 0.00 0.002. Price Contigencies b 280.00 368.00 648.00 0.00 0.00 0.00

Subtotal (B) 720.00 522.00 1,242.00 0.00 0.00 0.00

C. Interest During Construction 1. Service charge on Bank Loan 229.00 0.00 229.00 57.00 0.00 57.00

Subtotal (C) 229.00 0.00 229.00 57.00 0.00 57.00

Total 9,400.00 3,600.00 13,000.00 9,759.00 3,308.00 13,067.00

BPC = Bhutan Power Corporation, kV = kilovolt.Note: $1.00 = Nu43.43 at projected completion.a Excluding taxes and duties.b 2.4% per annum for foreign exchange costs; 7.4% for local currency costs.Sources: (i) Asian Development Bank (2003), Report and Recommendation of the President to the Board of Directors on a Proposed Loan

and Technical Assistance Grants to Bhutan for the Rural Electrification and Network Expansion. Manila (Loan 2009-BHU approved on 30 September 2003). (ii) Asian Development Bank's loan financial information system; and(iii) Bhutan Power Corporation.

Item Appraisal Estimate Actual

Appendix 3

21

PROJECTED AND ACTUAL DISBURSEMENTS ($ million)

Year Projected Actual

2004 0.052 0.913 2005 4.900 6.630 2006 4.444 2.216 2007 0.004 0 Total 9.400 9.759

Source: Asian Development Bank.

22 Appendix 4

CHRONOLOGY OF MAJOR EVENTS Date Event 2003 29 Apr–9 May Asian Development Bank (ADB) fact-finding mission fielded. 2 Jul ADB management review meeting held; project appraisal and advance

action for procurement and recruitment of consultant approved. 14–18 Jul Appraisal mission fielded. 8 Aug Staff review committee meeting held and further project processing

project approved. 25–26 Aug Loan negotiations conducted at ADB headquarters in Manila. 30 Sep ADB approved a loan of SDR6.755 million ($9.4 million equivalent) for the

Rural Electrification and Network Expansion Project. 15 Dec Loan agreement signed. 2004 31 Mar Loan declared effective. 26 Apr–6 May Inception mission fielded. 7 May ADB approved award of contracts for the following: Package 2A – LV

ABC cables; Package 2B – LV ABC fittings and accessories; Package 3 – MV overhead ACSR conductors; Package 3B – MV overhead accessories; and Package 7 – Insulators and accessories.

24 May ADB approved award of contract for Package 1B – Steel crossarms,

fittings and accessories. 15–20 Sep First review mission was fielded. 13 Oct ADB approved award of contracts for Package 5 – Switching equipment

and accessories; and Package 6 – Earthing equipment. 27 Oct ADB approved award of contract for Package 8 – Energy meters. 16 Nov ADB approved award of contracts for Package 1A(3) – Steel poles, 7.5

meters; Package 1A(1) – Steel poles, 10 meters; and Package 1A(2) – Steel Poles, 9 meters.

Appendix 4 23

Date Event 2005 29 Mar ADB approved award of contract for Package 4 – Distribution

transformers and accessories. 25–28 Apr Second review mission fielded. 8 Nov ADB approved award of contracts for Package 2A (AD) – ABC Cables

and PVC Cables; Package 4(AD) – Distribution transformers; and Package 9 – Tools/Equipment and training.

9–16 Nov Third review mission fielded. 2006 20 Feb ADB approved award of contract for Package 2A(IS) – LV ABC and PVC

cables; Package 2B(IS) –ABC accessories; 5(IS) – Switching equipment; and 8(IS) – Energy meters

22–30 Mar Fourth review mission fielded. 19 Dec Undisbursed loan balance of $257,244.79 (SDR 170,766.78) canceled,

and loan amount reduced to SDR6,584,233.22 ($9,758,822.70 equivalent).

2007 2008 28 Apr–9 May Project completion review mission fielded.

24 Appendix 5

7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3

A Project Commencement1 Loan approval2 Loan effectivityB Consultant Selection1 Request for proposals2 Evaluation3 ADB Approval4 Start of consulting servicesC Procurement1 Preparation of bidding documents

2 Tender period

3 Evaluation

4 ADB approval and negotiation

5 Contract award

6 Letter of credit

7 Manufacturing

8 Inspection and testing

9 Delivery

D Construction

E Testing

Appraisal EstimateActual

Source: Asian Development Bank.

Particulars

PROJECT IMPLEMENTATION SCHEDULE

20062003 2004 2005 2007

Appendix 6 25

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenant

Reference in Loan

Agreement

Status of

Compliance Project Implementation 1. The Rural Electrification Division in BPC’s Development and Construction Department, headed by a full-time Project Manager, shall act as the PIU and be responsible for the day-to-day implementation of the Project. The Project Manager shall be assisted by an engineer and additional administrative staff in the PIU.

Schedule 6, para. 2

Complied. The Rural Electrification Division has now become a stand-alone department of BPC.

2. Project set-up, responsibilities and activities shall, to the extent possible, be integrated with BPC’s regular administrative set-up, responsibilities and activities. Therefore the project manager shall seek the services and assistance of BPC’s Procurement Services Department for procurement-related matters. Construction activities shall take place under the supervision of the relevant Distribution Construction Section, which shall report directly to the project manager for all project-related activities.

Schedule 6, para 3.

Complied When the Rural Electrification Division was upgraded to a department, it assumed responsibility for all new distribution network construction in rural areas.

3. At the latest by 31 December 2003, the Borrower shall have appointed a full-time Managing Director for BPC.

Schedule 6, para 4.

Complied A full time Managing Director was appointed on 1 January 2004.

4. Within six months at the end of the technical assistance (TA No. 4188) as mentioned in the Loan Agreement, the Borrower shall ensure that the BEA shall be established and shall operate as a fully independent sector regulator. The Borrower shall ensure that the operation of BEA, as independent sector regulator, shall be done in accordance with the findings and recommendations of the TA. These findings and recommendations shall have been agreed upon between the Borrower and the ADB.

Schedule 6, para. 5

Partly complied. While BEA is functionally separate and financed directly from license fees it remains a part of DOE.

5. The Borrower shall ensure the establishment of the DHPC, if such establishment is feasible, in accordance with the findings, recommendations and time-schedule of the technical assistance (TA No. 4189) mentioned in the Loan Agreement, all of which shall be agreed upon between the Borrower and ADB.

Schedule 6, para. 6

Complied. DHPC, renamed Druk Green Power Corporation, was established on 1 January 2008.

26 Appendix 6

Covenant

Reference in Loan

Agreement

Status of

Compliance 6. BPC shall take all necessary measures to ensure that its overall system losses, with the expansion of the rural electrification network, do not exceed 13%.

Schedule 6, para. 7

Complied. Distribution system looses were 9% in 2006 and 10.3% in 2007.

Financial 1. Within one year after the completion of the end of the TA No. 4188, BEA shall review and assess the BPC’s weighted average tariff earned and its tariff structure to: (i) define a reasonable rate of return for BPC; and (ii) prepare and approve a strategy and time-bound action plan to rationalize and target the cross subsidies (between customer classifications) to ensure they are appropriately justified, and targeted.

Schedule 6, para. 8

Complied. The TA was completed in September 2006. BEA approved a revised tariff structure with automatic annual increases that applied from 1 July 2007.

2. Within one year of the Effective Date, BPC shall have prepared an operations and maintenance, and asset replacement strategy, action plan and budget that shall include appropriately defined performance indicators.

Schedule 6, para. 9

Complied late. Complied in 2006. TA 4599-BHU assisted BPC in meeting the requirements.

3. As of FY2005, BPC shall maintain at all times during Project implementation at least the following financial performance targets: (a) a debt service ratio of 1:5; (b) a debt equity ratio of 60:40; and (c) a self-financing ratio of twenty per cent, based on the moving three year average of the previous year’s, the ongoing year’s and the next year’s capital expenditures. The annually updated corporate development plan of BPC shall include measure to achieve these targets.

Schedule 6, para. 10

Complied. All three financial covenants were met in FY2006 and 2007. BPC’s debt servicing requirements remain relatively low.

Social Resettlement 1. The Borrower shall ensure that no Project-related activities entail land acquisition or voluntary land donations and that all distribution transformers to be constructed under the Project shall be pole-mounted on government land free of encumbrances. In the event that involuntary resettlement is unavoidable, the Borrower shall ensure or cause to ensure that this is done in accordance with the Bank’s policy and guidelines on Involuntary Resettlement and shall submit resettlement plans to the Bank for its review and approval. The Borrower shall ensure that no construction for that particular transformer will commence until approval of the Bank of the resettlement plan has been obtained.

Schedule 6, para. 11

Complied. The project did not require land acquisition or resettlement.

Appendix 6 27

Covenant

Reference in Loan

Agreement

Status of

Compliance 2. The Borrower shall ensure that, to the extent possible, all angle and distribution poles (a) shall be placed close to bunds, leaving adequate space for house expansion; (b) shall not in any way obstruct either public or private access; and (c) shall not be placed on lands that belong to households either owning or occupying less than one acre of land.

Schedule 6, para. 12

Complied.

3. The Borrower shall ensure that vulnerable household, determined in accordance with criteria agreed upon between BPC and the Bank, shall receive free electrification kits, six months after electrification.

Schedule 6, para. 13

Complied Free electrification kits were made available to project beneficiaries that District and Geog authorities advised BPC met the agreed criteria. However the take-up was much lower than envisaged at appraisal.

4. The Borrower shall ensure that civil works contractors comply with all applicable labor legislation. Contract documents shall include a clause on the prohibition of child labor, as defined in national legislation, for construction and maintenance activities as well as a clause regarding the respect of equal pay for men and women for work of equal value. Compliance with these provisions shall be strictly monitored during Project implementation through BPC’s routine supervisions.

Schedule 6, para. 14

Complied

Environmental

1. BPC shall ensure that all mitigation measures stated in the IEE report will be properly implemented and monitored during project implementation.

Schedule 6, para. 15-17

Complied.

2. BPC shall obtain the Environment Clearance from the National Environment Commission prior to commencing any construction.

Schedule 6, para. 18

Complied.

Safety and Health

The Borrower shall ensure that contractors provide adequately for health and safety, including emergency situations. To that extent, bidding documents shall include a clause on how contractors shall address this issue.

Schedule 6, para. 19

Complied.

28 Appendix 6

Covenant

Reference in Loan

Agreement

Status of

Compliance Project Performance Monitoring System (PPMS) At the latest, six months prior to the first electrification, BPC, in close coordination with the consultant, shall have established a PPMS, which shall include monitoring on social and poverty benefits.

Schedule 6, para. 20

Not complied. BPC itself designed a PPMS. However this reported only on the progress of network extension construction work and the number of unelectrified customers given access to the network. No reports on the social and poverty benefits of the Project were included.

Others 1. BPC shall furnish quarterly progress reports on the execution of the Project and on the operation and management of the Project facilities in such form and such details within thirty (30) days at the end of each quarter.

PA, Section 2.8(b)

Complied.

2. BPC shall (i) maintain separate accounts for the Project and for its overall operations; (ii) have such accounts and related financial statements (balance sheet, statement of income and expenses, and related statements) audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors; and (iii) furnish to ADB promptly but not later than nine (9) months after the close of the fiscal year to which they relate, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors’ opinion on the use of the Loan proceeds and compliance with the covenants of the Loan Agreements), all in the English language.

PA, Section 2.09(a)

Complied.

3. BPC shall furnish ADB a Project Completion Report promptly after physical completion of the Project, but in any event not later than three (3) months thereafter.

PA, Section 2.09(c)

Complied. A Project Completion Report was submitted in December 2007.

Appendix 7 29

2003 2004 2005 2006 2007Financial Year Audited Audited Audited Audited Audited

Power purchase (domestic) 590 680 708 714 950 Power available for export 1,265 1,759 1,540 2,027 4,534 Import from India 3 2 2 3 3 Other (own) generation 23 21 18 22 23 Total Energy Sources (GWh) 1,880 2,463 2,268 2,766 5,510

Domestic energy sales (from low voltage customers) 143 165 191 214 231 Domestic energy sales (from medium voltage customers) 83 93 95 87 83 Domestic energy sales (from high voltage customers) 328 331 334 357 589 Total Energy Sales (GWh) 554 589 620 658 903

Income Electricity revenue 709 583 652 797 1,193 Wheeling charges 348 220 222 253 567 Other revenue 34 56 54 81 25

Total 1,091 858 928 1,132 1,785

Expenditure Purchase of power 295 225 225 218 422 Employee cost 317 203 274 260 323 Operation and maintenance expense 117 83 104 97 120 Administration and other expenses 47 33 28 24 34 Interest 1 6 7 19 24 Prior period writebacks/bad debts 4 8 3 Loss due to impairment of asset 67 Less current expenses capitalized Total 777 550 709 626 926

Profit before depreciation 314 308 219 506 859 Depreciation 382 336 349 236 286 Profit (loss) after depreciation (68) (28) (130) 269 573

Taxation 0 0 0 0 118 Profit (loss) after taxation (68) (28) (130) 269 455

Transfer to insurance reserve - - - - 23 Profit (loss) for period (68) (28) (130) 269 432 ( ) = negative, GWh = gigawatt-hours.Source: Bhutan Power Corporation.

FINANCIAL STATEMENTSTable A7.1: Bhutan Power Corporation

Income Statement (Nu million)

30 Appendix 7

2003 2004 2005 2006 2007 Financial Year Audited Audited Audited Audited Audited

A. Assets Cash 521 900 1,085 1,038 803 Accounts receivables 88 104 51 33 162 Inventory 199 425 626 527 412 Other current assets 58 25 98 255 257 Gross fixed asset 3,858 5,294 5,687 5,739 9,574 Accumulated depreciation 382 732 1,061 1,288 1,571 Net fixed assets 3,476 4,562 4,626 4,451 8,002 CWIP 636 279 391 1,033 1,298 Total 4,978 6,295 6,878 7,337 10,934

B. LiabilitiesCurrent liabilities 241 309 326 449 745 RE loan 658 700 1,010 1,113 2,417 Total 900 1,009 1,336 1,562 3,162

C. Equity Paid up capital 4,139 5,375 5,748 5,713 5,885 Retained earnings (68) (96) (225) 43 476 Grants Capital reserve 7 7 20 19 1,410 Total 4,078 5,286 5,543 5,775 7,771

Total 4,978 6,295 6,878 7,337 10,933

Return on fixed assets (1.7%) (0.6%) (2.6%) 4.9% 4.7% Debt equity ratio 16% 13% 18% 19% 31% ( ) = negative; CWIP = construction work in progress; RE = rural electrificationSource: Bhutan Power Corporation.

Table A7.2: Bhutan Power CorporationBalance Sheet (Nu million)

Appendix 7 31

2003 2004 2005 2006 2007Financial Year Audited Audited Audited Audited Audited

Operations Net profit before tax (68) (28) (130) 269 573 Add backDepreciation 382 336 349 236 286 Interest 1 6 7 19 24 Other 7 5 50 (23) (13) Sub total 322 319 276 501 870 Net saundry debtors (88) (16) 53 18 (129) Net saundry creditors 241 68 17 123 179 Net change in inventories (199) (225) (221) 100 115 Net change in other current assets (2) (6) 2 (2) (2) Taxes paid - - - - - Net cash flow from operations 274 140 127 740 1,033

Investment Net interest - 3 12 3 (13) Net capital expenditure (4,494) (1,067) (582) (703) (4,099) Net cash flow from investments (4,494) (1,064) (570) (700) (4,112)

FinancingPaid in capital 4,139 1,235 386 (35) 173 Loan taken 657 42 310 103 1,304 Loans repaid 0 0 0 0 0Grants - - - - 1,367 Net cash flow from financing 4,796 1,277 696 68 2,844

Change in cash balance 576 353 253 108 (235)

Debt service coverage ratio 279.7 51.0 31.7 28.0 43.0 Self financing ratio 1.1% 8.0% 53.3% 27%( ) = negative a Financial year 2003 covers period 1 July 2002 – 31 December 2003.Source: Bhutan Power Corporation.

Table A7.3: Bhutan Power CorporationCash Flow Statement (Nu)

32 Appendix 8

SUMMARY OF CONTRACTS FUNDED BY THE ASIAN DEVELOPMENT BANK

PCSS Contract $ No. Contractor/Supplier Description Amount Equivalent

Category 01: Equipment

0001 PEC Limited Steel Cross Arms, Fittings, Accessories 732,746 732,746 0002 PT. Sucaco, TBK LV ABC cables, LV cables and PVC 1,455,526 1,455,526 0003 PEC Limited MV Overhead ACSR Conductors 683,224 683,224 0004 A. Damiano and Co. MV Overhead Accessories 104,730 104,730 0005 Zhejiang Zhongda Tech Export Co LV ABC Accessories & Fittings 620,209 620,209 0006 Asia TCLink Intl. Group Ltd. Insulators and Accessories 324,373 324,373 0007 Asian TCLink Intl. Group Ltd. Switching Equipment & Access 730,076 730,076 0008 A. Damiano and Co. Earthing Equipment 142,440 142,440 0009 Holley Metering Ltd. Energy Meters 91,520 91,520 0010 BMW Industries Ltd., India Steel Poles, 7.5 meters 1,426,033 1,426,033 0011 Dhendup Hume Industries Steel Poles, 10 meters 851,066 851,066 0012 Dhendup Hume Industries Steel Poles, 9 meters 529,173 529,173 0013 Uttam Bharat Electricals Ltd. Distribution Transformers 602,561 602,561 0014 PEC Limited ABC Cables and PVC Cables 440,775 440,775 0015 PEC Limited Distribution Transformers 140,775 140,775 0016 Zhejiang Zhongda Tech Export Co. Tools/Equipment and Training 255,502 255,502 0017 Zhejiang Zhongda Tech Export Co. LV ABC and PVC Cables 248,123 248,123 0018 Asia TCLink Intl. Group Ltd. LV ABC Accessories & Fittings 154,689 154,689 0019 V.K. Udyog Ltd. Switching Equipment & Access 142,415 142,415 0020 Asia TCLink Intl. Group Ltd. Energy Meters 26,240 26,240

Total 9,702,196 9,702,196 LV = low voltage, LV ABC = low-voltage aerial bundle cable, MV = medium voltage, PCSS No. = procurement contract summary sheet number; PVC = polyvinyl chloride Source: Asian Development Bank.

Appendix 9 33

ECONOMIC ANALYSIS OF THE PROJECT A. General 1. The economic internal rate of return (EIRR) was calculated based on with- and without-project scenarios, using constant 2007 prices and covering the period from 2004 to 2029. The life of the network expansion was taken to be 25 years as assumed at appraisal. Table A9 shows the results of the economic analyses. B. Electricity Demand 2. Average household electricity demand was assumed to be 65 kilowatt-hours (kWh) per month at project commencement, which is lower than the 90.5 kWh per month assumed at appraisal. BPC has not undertaken an analysis of electricity consumption in the project areas, and the mission therefore estimated the average electricity consumption of domestic consumers in the project areas using three different approaches.

(i) A top-down analysis of aggregated annual sales data provided by Bhutan Power Corporation (BPC) indicated that the average monthly sales to rural domestic consumers in the eight districts covered by the project was 78 kWh.36 The mission believes that the average domestic consumption in the project areas will be significantly lower than this because (a) new consumers will typically have a lower consumption than established users and (b) the project was specifically designed so that a significant number of beneficiaries would be below the poverty level.

(ii) The mission requested that BPC provide billing data, extracted from its billing

system, for a sample of project beneficiaries from each of the eight project districts. Billing data for periods ranging from 4 months to 1 year was provided for a total of 958 beneficiaries in six of the eight districts.37 The average monthly consumption of project beneficiaries in each district ranged from 35 kWh in Mongar to 95 kWh in Punakha. When weighted by the total number of connections in each of the six districts sampled, the average monthly domestic consumption across the project areas, as estimated from this bottom-up analysis, was 54 kWh.

(iii) The mission also considered the probable consumption of the appliances typically

installed by project beneficiaries. The wealthier houses visited by the mission had approximately four rooms, each with a single fluorescent and incandescent light, a fan in most rooms, a rice cooker, a curry cooker, a refrigerator and possibly a water boiler and a television.38 The average monthly consumption of such a household was up to 140 kWh, which is consistent with the rating and expected usage pattern of these appliances. Higher consumption would require either a larger house with more lights and fans, or the use of appliances such as washing machines, which were not typically installed by project beneficiaries.

36 For this analysis, the total number of customers supplied was assumed to be the average of the number of rural

domestic consumers at the beginning and end of the year. 37 The required information was not available at BPC headquarters and had to be requested from the district offices of

BPC’s Customer Services Department. 38 Time constraints allowed the mission to visit only readily accessible beneficiary villages. BPC advised that these

houses tended to be wealthier due to their ease of accessibility, and hence not typical of project beneficiaries. Consumption data provided by BPC corroborated this observation.

34 Appendix 9

3. The mission believes that the bottom-up analysis validates its view that the top-down analysis provided a result that overestimates actual consumption in project areas. However, the bottom-up analysis is not rigorous, in that the selection of the sample billing data was not random and the data covered all consumers in selected areas of each district. There is no way of knowing the extent to which the areas selected for analysis were typical of all the areas electrified by the project in that particular district. This economic analysis therefore uses an estimated domestic consumption of 65 kWh per month for the base case and tests for lower consumption levels using a sensitivity analysis. 4. The initial consumption of institutional consumers is assumed to be 300 kWh per month, based on the consumption of the two institutions visited in the Punakha district. This is considered reasonable when compared with the average institutional consumption in the districts covered by the project.39 Household electricity demand within the project areas is assumed to grow by 6% per annum, both from the connection of new houses and from increased demand in existing installations. There is significant scope for increased household demand as electricity displaces fuel wood for cooking and also for space heating in colder areas. The current consumer resistance to the use of electricity for cooking and space heating appears to be based primarily on cultural rather than affordability factors and is likely to diminish over time as a younger generation better appreciates the convenience of electricity as a source of energy. Growth in institutional demand is likely to be lower and was assumed to be 3% per annum. C. Cost Assumptions 5. The actual capital cost for the project was used for the analysis. Foreign currency costs were converted to local currency using the prevailing exchange rate for the year in which the expenditure occurred. These costs were then added to the local currency costs and total project costs then inflated to 2006 prices using the historic consumer price indices. The project was not subject to any taxes. 6. The annual operation and maintenance (O&M) costs of the project are estimated to be 2.5% of the capital costs, which is consistent with BPC advice and experience in other countries. System losses (during transmission and distribution) are assumed to be 15%, as end consumption occurs at low voltage levels; this is consistent with the general level of losses in rural areas as reported by BPC. 7. The economic cost of the project is derived from its financial costs measured at the border prices where the non-tradable components were converted to world price numeraire using a standard conversion factor of 0.9. D. Cost of Energy 8. For this analysis the economic cost of energy is taken to be the average cost of generation, which was estimated at Nu1.19 at 2006 prices. To obtain an estimated 2007 price the cost was inflated using the 2007 consumer price index. The economic cost of energy was 39 The estimated average monthly institutional consumption in the eight project districts is 607 kWh. However,

Chukkha has an estimated average institutional consumption of 1,397 kWh due to the institutional load in Phuentsholing, Bhutan’s second largest city. This is comparable with the average institutional consumption in Thimphu and not considered representative of institutional consumption in rural areas. If Chukkha is treated as an outlier and excluded from the analysis the estimated average monthly institutional consumption in the seven other project districts is reduced to 386 kWh.

Appendix 9 35

assumed to remain constant in real terms throughout the life of the project. The base case analysis did not consider the opportunity cost of not selling electricity used for domestic consumption to India at a higher rate,40 although this cost was included in a sensitivity analysis. E. Benefit Assumptions 9. At completion the project connected 9,206 consumers in eight districts. The market mix was 8,857 household consumers, with the balance comprised of commercial, social, and government sector consumers such as schools, basic health units, and monasteries. The economic benefits were assumed to comprise both non-incremental and incremental benefits. The non-incremental benefit represented the cost savings from the displaced use of alternative energy due to the project. In this case, it is primarily kerosene for lighting, which is fully imported. This benefit was estimated at 50% of the total sales forecast and was valued at the economic cost of kerosene. The incremental benefits are derived from induced electricity consumption (estimated at 50% of the sales forecast), and were valued based on willingness to pay, or the weighted average price of the prevailing electricity tariffs and economic price of kerosene. A factor of 0.8 was applied to this weighted average to account for the concave shape of the typical demand curve. 10. The financial price of kerosene in Bhutan is typically Nu10 per liter. At present, all kerosene is purchased from India and the price paid is the same price as paid by Indian customers. This price is highly subsidized; for this analysis the subsidy was taken to be Nu 34 per liter. The replacement value derived from kerosene was based on the assumption that a kerosene lamp consumes 0.025 liter per hour, which is equal to a 40-watt incandescent bulb. The cost of owning and maintaining the kerosene lamps and electric bulbs have been considered to be of the same order and excluded from the analysis.

40 Electricity from the Chukkha hydropower plant is currently sold to India at Nu 2.0 per kWh and electricity from the

Tala and Kurichhu hydropower plants is sold to India at Nu 1.8 per kWh. India will buy all electricity generated that is not required by domestic consumers.

36 Appendix 9

Table A9: Economic Internal Rate of Return(Nu Million)

Fiscal Capital Energy O&M Total Economic Benefits Total NetYear Cost Cost Cost Cost Household Other Benefits Benefits

2004 55.42 55.42 0 (55.42) 2005 358.72 0.54 5.87 365.13 5.41 0.98 6.39 (358.75) 2006 171.95 4.92 12.50 189.38 50.92 9.24 60.16 (129.22) 2007 54.49 10.13 15.33 79.95 124.65 20.13 144.78 64.83 2008 11.69 16.01 27.70 145.98 0.32 146.31 118.60 2009 14.40 16.01 30.41 184.04 0.33 184.38 153.97 2010 15.22 16.01 31.23 195.12 0.34 195.46 164.23 2011 16.08 16.01 32.10 206.86 0.36 207.22 175.12 2012 17.00 16.01 33.02 219.31 0.37 219.68 186.66 2013 17.97 16.01 33.99 232.50 0.38 232.89 198.90 2014 19.00 16.01 35.01 246.49 0.40 246.89 211.88 2015 20.08 16.01 36.10 261.32 0.41 261.74 225.64 2016 21.24 16.01 37.25 277.05 0.43 277.48 240.23 2017 22.45 16.01 38.47 293.72 0.45 294.16 255.70 2018 23.74 16.01 39.76 311.39 0.46 311.85 272.10 2019 25.11 16.01 41.12 330.13 0.48 330.61 289.49 2020 26.55 16.01 42.57 349.99 0.50 350.49 307.92 2021 28.08 16.01 44.10 371.05 0.51 371.57 327.47 2022 29.70 16.01 45.72 393.38 0.53 393.91 348.19 2023 31.42 16.01 47.43 417.05 0.55 417.60 370.17 2024 33.24 16.01 49.25 442.19 0.57 442.76 393.51 2025 35.16 16.01 51.17 468.85 0.59 469.44 418.27 2026 37.20 16.01 53.21 497.11 0.61 497.72 444.51 2027 39.35 16.01 55.37 527.08 0.64 527.71 472.35 2028 41.64 16.01 57.65 558.85 0.66 559.51 501.86

O&M = operation and maintenance, kWh = kilowatt-hour, NPV = net present valueSource: Asian Development Bank estimate.

EIRR 24.4%NPV (10%) Nu 974.2 million

Sensitivity Analyses EIRR NPV

Base Case 24.4% Nu 974.2 million1 Increase energy costs by 10% 24.2% Nu 960.9 million2 Decrease benefits by 10% 22.1% Nu 800.2 million3 Opportunity cost (Nu 1.8) as energy cost 21.4% Nu 741.4 million4 Decrease monthly domestic consumption to 54 kWh 20.9% Nu 704.2 million Combinations3+4 18.2% Nu 509.8 million

Appendix 10 37

BPC Operating Statistics (2005-2007)

Item 2005 2006 2007 2005 2006 2007Low VoltageDomestic - Rural 26,179 34,225 40,954 30,745 34,812 41,400Domestic - Urban 18,963 20,794 22,973 58,317 62,767 67,049Commercial 5,373 6,363 6,943 25,801 28,397 30,457Industrial 126 143 152 15,224 15,523 8,722Agriculture 277 318 355 768 678 722Institutions 2,698 2,894 3,315 25,866 27,681 31,137Street Lighting 131 147 169 1,152 1,297 1,390Bulk Customers 702 703 692 27,010 35,561 40,368Power House Auxiliaries 14 20 19 809 1,135 769Temporary Connections 1,331 1,790 1,826 5,222 6,613 8,721Subtotal 55,794 67,397 77,398 190,914 214,464 230,735Medium VoltageSubtotal 26 18 31 94,761 87,103 82,734High Voltage Subtotal 3 3 4 333,906 356,785 588,997Total 55,823 67,418 77,433 619,581 658,352 902,466 MWh = megawatt-hours. aAs at 31 December. Source: Bhutan Power Corporation.

No of Customersa Sales (MWh)