Completion Report

Project Number: 29242 Loan Number: 1712 September 2007

Bhutan: Sustainable Rural Electrification Project

CURRENCY EQUIVALENTS

Currency Unit – ngultrum (Nu) At Appraisal At Project Completion 15 October 1999 1 June 2007 Nu1.00 = $0.023 $0.022 $1.00 = Nu43.35 Nu42.50

ABBREVIATIONS ADB – Asian Development Bank ADTA – advisory technical assistance BEA – Bhutan Electricity Agency BPC – Bhutan Power Corporation DOE – Department of Energy DOP – Department of Power EA – executing agency EIRR – economic internal rate of return ICB – international competitive bidding IS – international shopping O&M – operation and maintenance PCR – project completion report PPTA – project preparatory technical assistance SCADA – system control and data acquisition system SDR – special drawing right TA – technical assistance

WEIGHTS AND MEASURES kV (kilovolt) – (1,000 volts) kVA (kilovolt-ampere) – 1,000 volt-amperes kW (kilowatt) – 1,000 watts kWh (kilowatt-hour) – 1,000 watt-hours MW (megawatt) – 1,000,000 watts V (volt) – unit of electrical voltage W (watt) – unit of active power – 1VA Wh (watt-hour) – unit of 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., FY2000 ends on 31 December 2000.

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

Vice President L. Jin, Operations Group 1 Director General K. Senga, South Asia Department (SARD) Director T. Kandiah, Energy Division, SARD Team leader K. Ogino, Energy Specialist, SARD Team member A. Vizcarra, Assistant Project Analyst, SARD

CONTENTS

Page

BASIC DATA i

MAP v

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 4 F. Implementation Arrangements 4 G. Conditions and Covenants 5 H. Related Technical Assistance 6 I. Consultant Recruitment and Procurement 6 J. Performance of Consultants, Contractors, and Suppliers 7 K. Performance of the Borrower and the Executing Agency 7 L. Performance of the Asian Development Bank 8

III. EVALUATION OF PERFORMANCE 8 A. Relevance 8 B. Effectiveness in Achieving Outcome 8 C. Efficiency in Achieving Outcome and Outputs 9 D. Preliminary Assessment of Sustainability 10 E. Impact 10

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons 12 C. Recommendations 13

APPENDIXES 1. Project Framework 14 2. Appraisal and Actual Project Costs 17 3. Projected and Actual Disbursements 18 4. Chronology of Major Events 19 5. Project Implementation Schedule 23 6. Status of Compliance with Loan Covenants 24 7. Financial Statements 28 8. Summary of Contracts Funded by the Asian Development Bank 31 9. Economic Analysis of the Project 32

BASIC DATA A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan 7. Project Completion Report Number

Bhutan 1712-BHU(SF) Sustainable Rural Electrification Project Kingdom of Bhutan Bhutan Power Corporation (BPC) SDR7.206 ($10 million equivalent) 988

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years)

18 July 1999 31 July 1999 13 October 1999 14 October 1999 25 November 1999 12 January 2000 12 April 2000 14 January 2000 0 31 March 2004 12 January 2006 2 1% per annum during the grace period and 1.5% per annum thereafter. 32 years 8 years

8. Disbursements a. Dates Initial Disbursement

25 May 2000

Final Disbursement

12 January 2006

Time Interval

67.5 months

Effective Date

14 January 2000

Original Closing Date

31 March 2004

Time Interval

51.5 months

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b. Amount ($)

Categorya

Original Allocation b

Last Revised Allocation

Net Amount Available

Amount Disbursed

Undisbursed Balancec

01 8,306,464 8,889,048 8,889,048 8,746,500 138,153 02 249,943 330,226 330,226 258,895 69,132 03 243,000 248,880 248,880 248,880 0 04 1,206,672 0 0 0 0

Total 10,006,081 9,468,154 9,468,154 9,254,275 207,285 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 SDR and US dollar. c The undisbursed loan amount of $207,285 equivalent (SDR 143,311.01) was cancelled at loan closing on 12 January 2006. Source: Asian Development Bank. 9. Local Costs (Financed) - Amount ($) 2.4 - Percentage of Total Costs 20.7

C. Project Data

1. Project Cost ($ million) Cost Appraisal Estimate Actual Foreign Exchange Cost 10.0 9.2 Local Currency Cost 2.5 2.4 Total 12.5 11.6

2. Financing Plan ($ million)

Cost Appraisal Estimate Actual Implementation Costs Borrower Financed 2.5 2.4 ADB Financed 9.8 9.0 Total 12.3 11.4 IDC Costs Borrower Financed 0.0 0.0 ADB Financed 0.2 0.2 Total 0.2 0.2 ADB = Asian Development Bank, IDC = interest during construction, SDR = special drawing rights.

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3. Cost Breakdown by Project Component ($ million)

Component Appraisal Estimate Actual Foreign Local Total Foreign Local Total A. Base Cost RE by distribution system 8.2 2.1 10.3 8.6 2.4 11.0 RE by solar panels 0.1 0.0 0.1 0.1 0.0 0.1 Small-scale pilot SCADA 0.3 0.0 0.3 0.3 0.0 0.3 Subtotal (A) 8.6 2.1 10.7 9.0 2.4 11.4 B. Contingencies 1. Physical Contingency 0.9 0.2 1.1 0.0 0.0 0.0 2. Price Contingency 0.3 0.2 0.5 0.0 0.0 0.0 Subtotal (B) 1.2 0.4 1.6 0.0 0.0 0.0 C. Financial Costs 1. IDC and Service Charge 0.2 0.0 0.2 0.2 0.0 0.2 Subtotal(C) 0.2 0.0 0.2 0.2 0.0 0.2 Total Project Cost 10.0 2.5 12.5 9.2 2.4 11.6 IDC = interest during construction, RE = rural electrification, SCADA = system control and data acquisition system 4. Project Schedule

Item Appraisal Estimate Actual A. Implementation Consultant

1. Contract Date 2. Completion

September 1999 June 2002

25 February 2000 9 November 2005

B. Consultant – Human resources (HR) Administrator

1. Contract Date 2. Completion

12 April 2002 31 July 2003

C. Consultant – Information technology (IT) Manager

1. Contract Date 2. Completion

10 May 2002 31 July 2003

D. Consultant – Finance Manager

1. Contract Date 2. Completion

10 June 2002 31 July 2003

Completion of Engineering Designs March 2001 September 2001 Equipment and Supplies Dates First Procurement June 2000 4 January 2001 Last Procurement December 2000 31 January 2003 Completion of Equipment Installation March 2003 31 December 2005 Other Milestones:

1. 4 March 2002: Approval to reallocate loan proceeds to finance the services of three (3) domestic experts (HR administrator, IT manager and finance manager).

2. 8 March 2004: Approval of first extension of loan closing date to 31 March 2005. 3. 11 November 2004: Reallocation of loan categories. 4. 28 March 2005: Approval of second extension of loan closing date to 31 December 2005.

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5. Project Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

From 1 December 1999 to 31 December 1999 Satisfactory Satisfactory From 1 January 2000 to 31 December 2000 Satisfactory Satisfactory From 1 January 2001 to 31 December 2001 Highly Satisfactory Satisfactory From 1 January 2002 to 31 December 2002 Highly Satisfactory Satisfactory From 1 January 2003 to 31 December 2003 Highly Satisfactory Highly Satisfactory From 1 January 2004 to 31 December 2004 Highly Satisfactory Highly Satisfactory From 1 January 2005 to 31 December 2005 Highly Satisfactory Satisfactory From 1 January 2006 to 30 April 2006 Highly Satisfactory Satisfactory D. Data on Asian Development Bank Missions

Name of Missiona

Date

No. of Persons

No. of Person-Days

Specialization of Membersb

Fact-Finding 21 Feb–6 Mar 99 4 56 A, E, I and J Appraisal 19–30 July 99 6 63 A, B and D, C,

E, I and J Inception 6–17 Mar 2000 2 11 A and E Review 1 4–11 Dec 2000 2 8 A and E Review 2 13–23 Mar 2001 3 9 A, F and G Review 3 25–29 Jun 2001 1 5 A Review 4 28 Oct–2 Nov 2001 2 7 A and G Review 5 9–12 Apr 2002 2 8 A and H Review 6 2–6 May 2004 2 10 A and F Review 7 16–17 Sep 2004 1 2 H Review 8 25–28 Apr 2005 1 4 H Review 9 9–12 Nov 2005 1 4 H Review 10 22–23 Mar 2006 2 4 H and E Project Completion Reviewc a Fielded concurrently with other missions. b 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 – social development specialist, J – project engineer c The project completion report was prepared by Kaoru Ogino, Energy Specialist/Mission Leader; Annie Vizcarra,

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

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I. PROJECT DESCRIPTION

1. The Sustainable Rural Electrification Project1 (the Project) 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 had substantial clean and renewable hydropower generation capacity, distribution of electricity throughout the country was limited, with approximately 80% of the population lacking access to electricity when the Project was formulated in 1999. The overarching objective of the Project was to alleviate poverty by promoting local economic development in rural districts through provision of an electricity supply. 2. The Project consisted of three major components. Part A was an extension of the existing electricity distribution networks to connect approximately 6,010 new consumers in 15 of Bhutan’s 20 districts. Part B was the provision of 28 photovoltaic lighting systems in community facilities such as schools, hospitals and monasteries located in areas where grid access was impractical. Part C included the installation of a pilot system control and data acquisition (SCADA) system within Thimphu city to monitor generation stations and substations that fed power into Thimphu. This last component was intended primarily as a pilot project to give experience to Department of Power (DOP) staff in the application of SCADA technology. 3. To support the Project, the Asian Development Bank (ADB) approved a project loan of SDR7,206,000 ($10 million equivalent) from its special funds resources on 25 October 1999. The borrower was the Government of Bhutan (the Government), and the executing agency (EA) of the Project was initially the DOP, Ministry of Trade and Industry, and then the Bhutan Power Corporation (BPC), following the disaggregation of DOP. 4. The Project also included one technical assistance (TA) grant,2 which supported the Government in unbundling DOP into (i) the Department of Energy (DOE), serving as the Government’s policy and planning agency; and (ii) the BPC, as the utility service company looking after transmission, distribution, and supply of electricity within the country.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

5. The Project was formulated as part of the Government’s 8th Five Year Plan (1998–2002). Therefore, it was consistent with Bhutan’s long-term rural electrification objective, which currently has a target of 100% electrification of the country by 2020.3 6. Expansion of rural electrification was in line with a primary element of ADB’s country strategy for Bhutan, because the provision of electricity was expected to reduce poverty in rural areas by increasing opportunities for employment and access to improved social services, such as education and health. The Project was the second ADB loan for rural electrification in Bhutan. The first loan of $7.5 million was provided to electrify about 3,100 households in September 1995 and was completed in June 2000. 4 To further extend rural electrification to poor

1 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. 2 ADB. 1999. Technical Assistance Grant to the Kingdom of Bhutan for the Corporatization of Division of Power.

Manila. 3 In 2005, the Rural Electrification Master Plan set the rural electrification ratio target to 100% by 2020. 4 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.

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households, the Project promoted rural electrification through grid extension (part A) and off-grid renewable energy sources through provision of solar panels in some isolated areas (part B). 7. The first loan project was rated “successful”,5 but procurement was delayed due to the lack of institutional capacity and skilled human resources within DOP. In addition, following the first loan project, the overall performance of the power sector remained weak and unstable, with no rational tariff structure and no regular tariff adjustments. To tackle these sector-wide obstacles, the Project included technical support for the sector reforms, which was also integrated into the country strategy to assist Bhutan in establishing sustainable economic growth. 8. A key input to the design and formulation of any rural electrification project is the forecast electricity demand, as this directly impacts both the required capacity of the project works and the economic rate of return. As a basis for the design and formulation of the Project, the project preparatory TA (PPTA) undertook a socioeconomic survey covering both unelectrified households in the project areas and households in rural areas that had already been electrified.6 The detailed socioeconomic survey indicated that more than two thirds of the target households fell below the estimated poverty line of Bhutan. The Government finalized its selection of rural villages proposed for electrification in close consultation with the individual district administrations and also with ADB. A copy of the project framework is given in Appendix 1. B. Project Outputs

1. Part A: Rural Electrification by Distribution System 9. The following extensions to the existing distribution system were constructed under part A of the Project:

(i) installation of 272 circuit kilometers (cct-km) of 33 kilovolt (kV) overhead line; (ii) installation of 144 cct-km of 11 kV overhead line and replacement of 11 cct-

km of existing 11 kV conductor; (iii) installation of load break switches and auto-reclosers rated at both 33 kV

and 11 kV; (iv) installation of 10,402 kilovolt-amperes (kVA) of 33/0.4 kV transformer

capacity and 5,577 kVA of 11/0.4 kV transformer capacity; and (v) installation of 758 kilometers (km) of 0.4 kV aerial bundled cable.

10. These extensions to the distribution system provided 8,090 new consumers with access to electricity, 32% more than envisaged at appraisal. This increase was due to (i) the connection of new houses that were constructed just before and during project implementation within the project areas, (ii) the addition of new villages along the route of the distribution line extensions, and (iii) the inclusion of additional villages that had been deleted during appraisal for budgetary reasons. As a result of these additional consumers, the transformer capacity installed under the Project was 61% more than envisaged at appraisal, and the total length of 0.4 kV aerial bundled cable installed was over twice the appraisal provision.

5 ADB. 2002. Project Completion Report for the Rural Electrification Project (Bhutan). Manila; and ADB. 2004.

Project Performance Audit Report for the Rural Electrification Project (Bhutan). Manila. 6 ADB. 1997. Technical Assistance to the Kingdom of Bhutan for the Second Rural Electrification Project. Manila.

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2. Part B: Rural Electrification by Solar Panels

11. Compared with the appraisal target of 28 solar system installations, a total of 100 solar panel units were purchased under part B of the Project. They were provided directly to the districts for installation in schools, monasteries, health clinics and other community facilities. Each of the solar panel systems contained four 11-watt (W) lights.

3. Part C: System Control and Data Acquisition System

12. Savings under the loan were utilized to extend the scope of part C of the Project. The SCADA system finally installed covered 10 power stations and substations, 5 more than envisaged at appraisal. This change in scope was driven by the construction of additional substations funded by BPC, following its decision to construct a 66 kV transmission ring to supply electricity to Thimphu. The installed SCADA system enabled the remote control of the network, as well as remote monitoring.

4. Consulting Services 13. The TA attached to the loan supported the Government in restructuring DOP into DOE and BPC. The loan was also utilized to employ the services of specialist consultants in finance, information technology and human resources to help DOP prepare for the establishment of BPC. Since personnel with the required skills were not available in Bhutan, both ADB and DOP considered that this recruitment was necessary to ensure disaggregation of DOP by the target date of 1 July 2002. C. Project Costs

14. Appendix 2 gives a detailed comparison of the project cost at appraisal and at completion. At appraisal, the total project cost was estimated at about $12.5 million equivalent, including $10.0 million (80.0%) in foreign exchange costs and $2.5 million (20.0%) equivalent in local currency costs. The actual project cost was $11.6 million, comprising $9.2 million (79.3%) in foreign exchange costs and $2.4 million (20.7%) equivalent in local costs. Part A of the Project represented the major cost, with parts B and C accounting for less than 3% of the total project cost. 15. A reliable normalized measure of project efficiency is cost per connected customer. The actual cost per connected customer was $1,454, compared to $2,080 estimated at appraisal; this represents a satisfactory cost reduction of 30%. D. Disbursements

16. 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 (as amended from time to time). Disbursement of loan proceeds was in accordance with the appraisal schedule, except for funds for the procurement of the SCADA system. The loan became effective on 14 January 2000. The original closing date of the loan was 31 March 2004, but this was extended twice at the request of the borrower, due to delays in the delivery of

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the pilot SCADA system. The actual loan closing date was 12 January 2006. The undisbursed loan amount of SDR 143,311.01 was cancelled at loan closing. E. Project Schedule

17. The chronology of major project implementation events is shown in Appendix 4, and the planned and actual schedules are shown in Appendix 5. At appraisal, the Project duration was estimated at 4 years, with completion in late 2003. The extension of the distribution network and installation of photovoltaic systems under parts A and B of the Project were completed on schedule. However implementation of the SCADA system under part C was delayed, with this component not becoming operational until late 2005. 18. The Project suffered an early delay of around seven months due to problems encountered in letting international competitive bidding (ICB) and international shopping (IS) packages, and delays in the delivery of some equipment. Construction of the distribution system extensions did not gain momentum until late 2001. Nevertheless this component of the work was completed by mid-2003, three months ahead of the appraisal schedule. BPC is to be commended for its performance in the installation of this major project works component. 19. Installation of the pilot SCADA system was not completed until late 2005, almost three years behind the appraisal schedule of March 2003. The original contract included the monitoring of some substations that had not been built when the contract was signed in October 2001, and delays were initially caused by the late completion of these new substations.7 However, the turnkey supply contract was renegotiated in January 2003 to provide for (i) the inclusion of substation control as well as monitoring, (ii) the inclusion of an additional substation in the system, and (iii) a change of system architecture resulting in an improved design. The renegotiated contract was finalized in June 2003, after the wording of the contract change had been agreed by BPC, ADB and the contractor. Subsequent delays were experienced due to the inability of the supplier to maintain the revised manufacturing and delivery schedule. As a result of these delays there were two extensions to the loan closing date, first from 31 March 2004 to 31 March 2005 to accommodate the delays in substation construction, and subsequently to 31 December 2005, to accommodate manufacturing delays. F. Implementation Arrangements

20. At the time of loan effectiveness, the EA was the DOP, a government department within the Ministry of Trade and Industry. BPC assumed responsibility for implementing the Project after the disaggregation of DOP on 1 July 2002. Prior to the establishment of BPC, the project was implemented by the Rural Electrification Project Implementation Unit within DOP. Following disaggregation of DOP, implementation has been undertaken by the Rural Electrification Department of BPC. 21. Project management was complicated by Project’s dispersed nature. Project implementation was the responsibility of a project manager to whom some 30 staff reported. These staff were responsible for contract and procurement management, management of equipment deliveries to project sites, project accounting, and construction supervision. As each part of the Project was commissioned and energized, it was handed over to BPC’s Customer Services Department for operation.

7 Construction of these new substations was not part of the Project. However the SCADA system could not be

installed until these substations were substantially complete.

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22. The 100 photovoltaic systems were procured under the Project and distributed to district authorities for installation in remote schools, health clinics and monasteries. While all 100 systems were issued to district administration authorities for installation, there was no further monitoring by the project implementation unit. Due to the lack of records, BPC’s project completion report initially indicated that only 76 of the photovoltaic systems had been installed by early 2007. G. Conditions and Covenants

23. The compliance with loan covenants is presented in Appendix 6. Compliance with the financial covenants has generally been satisfactory, except that BPC has been unable to achieve a 6% rate of return on net revalued assets. However, BPC substantially improved its profitability in FY2006 through a combination of tariff increases and improved operating efficiency. Tariff increases were implemented on both 1 July 2005 and 1 July 2006, and BPC introduced a performance-based incentive scheme for all operational staff in 2006.8 These initiatives have enabled BPC to generate net profits and resulted in a 4.6% return net revalued assets as of 31 December 2006. On 8 June 2007, the Bhutan Electricity Authority9 approved a further tariff increase from 1 July 2007, and additional increases which are to be implemented over the next three years. Since BPC also assumed responsibility for the transmission system associated with the recently commissioned Tala hydropower plant (1,020 megawatts [MW]) on 1 July 2007, BPC will receive the additional transmission wheeling revenues from this plant. These changes to its operating position should ensure that BPC will meet its covenanted rate of return in FY 2007. BPC’s debt service coverage and self-financing ratios have been maintained well above the covenanted targets of 1.5 times and 20%, respectively. BPC’s historic financial statements are summarized in Appendix 7. 24. Consistent with the overarching poverty reduction objective of the Project, BPC was required by the loan agreement to prioritize service connections to poor households. In order to meet this loan covenant, BPC purchased a total of 1,850 village electrification kits under the Project. These kits provided internal wiring for four lights and one power point to needy households that wanted electricity but could not afford the installation costs. Objective criteria were agreed upon with ADB to determine how these kits would be allocated to beneficiaries. It was found, however, that despite the use of objective criteria, the scheme caused social disharmony within beneficiary communities, mainly because it provided free internal wiring to some beneficiaries, while requiring others to pay in full. In addition, some consumers resisted the design of the kits, because it was perceived they would not accommodate future connection of additional lights and electrical appliances. BPC is uncertain how many electrification kits were installed, but many of the kits purchased under the Project have not been installed and remain in store. Nevertheless, BPC advised that very few households in areas covered by the Project remain unenergized. 8 The performance-based incentive scheme gave all staff an opportunity to earn a bonus of up to 25% of their basic

annual salary, depending on the extent to which the corporation and its component department and divisions met objectively measurable performance targets. This scheme has resulted in a significant improvement in BPC’s operating efficiency.

9 When DOP was disaggregated in July 2002, the Bhutan Electricity Authority (BEA) was to be established, but, BEA became effective by the Government’s notification in June 2005.

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25. Another important loan covenant was the obligation to transform DOP into a commercial corporation, with the law to be ratified by 30 June 2002.10 ADB considered this an important milestone in the development of the power sector in Bhutan. Accordingly, TA was provided under the Project to assist DOP in meeting this covenant. DOP also used a small part of the loan to engage additional specialist consultants to assist with the corporatization process. DOP was successfully disaggregated into a policy making unit (renamed DOE) and a commercial utility service company (renamed BPC) as of 1 July 2002. 26. Corporatization of DOP appears to have been highly successful. Notwithstanding the fact that the BPC failed to make a profit in its first three years of operation, BPC succeeded in generating net profits as of 31 December 2006. It has also maintained its overall system loss at 9%. However, BPC’s future financial performance will be influenced by the very high proportion of rural electrification within its network and the need to work within tariff policies that incorporate a high level of cross-subsidization.11 While financial performance is an effective indicator of whether the subsidies provided are adequate to ensure long term sustainability in this environment, it would be preferable to measure BPC’s operational efficiency using non-financial indicators. This is because non-financial indicators can independently measure the BPC’s own performance achievements while financial indicators are dependent on the subsidy level. BPC already recognizes the importance of effectively measuring its operating efficiency and has developed a comprehensive performance-based incentive scheme, whereby the corporation’s performance has a significant impact on staff remuneration. This scheme was implemented for the first time in FY 2006 and has resulted in a significant and demonstrable improvement of BPC’s operating efficiency. Advisory TA (ADTA) also supported BPC’s capacity-building efforts, assisting it to effectively manage its inventory and management information systems and accounting and financial framework, including development of the key performance indicators.12 H. Related Technical Assistance

27. As noted above (para. 25), the technical assistance was provided under this loan to help DOP prepare for restructuring. Overall the TA was rated “highly successful”. 13 The Government accepted and implemented the consultant’s findings and major recommendations. The DOP found the training given under the TA to be useful and timely, and the TA was instrumental in achieving the successful disaggregation of DOP. I. Consultant Recruitment and Procurement

28. Consultancy services were provided under the loan to: (i) review the bid documents prepared by the EA and assist with bid evaluation and contract finalization; (ii) approve contractors’ drawings, technical design and manufacturing programs, and inspect equipment 10 On 26 July 2001, the Bhutan National Assembly passed the Electricity Act of Bhutan, 2001 to implement the power

sector reforms. 11 Under the new tariff structure from 1 July 2007, low-voltage domestic customer tariffs currently range from Nu 0.75

to 1.55 per kWh. The lowest blocked tariff rate (Nu 0.75 per kWh for consumption of up to 80kWh per month) is cross-subsidized, since it is lower than the average cost of generation (Nu 1.19 per kWh), and very few rural electrification consumers are paying this cost of supply. Furthermore, BPC is substantially subsidized by the Government through purchases of electricity from the Government’s own generation companies at a favorable price (Nu. 0.3 per kWh), which is below the cost of generation.

12 ADB. 2005. Technical Assistance to the Kingdom of Bhutan for Capacity Building for the Bhutan Power Corporation. Manila. The TA tasks were completed in December 2006.

13 ADB. 2003. Technical Assistance Completion Report for Corporatization of the Division of Power (Bhutan). Manila.

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upon delivery; (iii) develop a project construction manual; and (iv) train counterpart staff in the use of new equipment and techniques and assist in undertaking a socioeconomic survey. The consultant was appointed by DOP in accordance with ADB’s Guidelines on the Use of Consultants (as amended from time to time) and was mobilized within six weeks of the loan becoming effective. 29. DOP also used a small portion of the loan proceeds to employ three specialist consultants to assist with the establishment of BPC (para. 13). These consultants were appointed by DOP using ADB’s procedures for the recruitment of individual consultants. After disaggregation, these consultants were employed in senior management roles within BPC. 30. Materials for the Project were procured with the assistance of an international consultant funded from the loan, using both ICB and IS in accordance with ADB’s Procurement Guidelines (as amended from time to time). A schedule of contracts under which equipment was procured for the Project is given in Appendix 8. All equipment was delivered to a central project store at Phuntsholing on the Indian border before being delivered to the various project sites. Construction of the distribution network extensions was undertaken primarily by DOP and BPC staff, assisted by local contract laborers and volunteers from the villages benefiting from the Project. However, about 25% of the network extensions were completed through outsourcing to local installation contractors, a practice which was trialed under the Project. This trial proved very successful and efficient, and local contractors were used exclusively in the subsequent rural electrification project funded by ADB. BPC now has approximately 35 experienced local contractors available to it. J. Performance of Consultants, Contractors, and Suppliers

31. With the exception of the SCADA supplier, contractors and consultants generally performed well. While some deliveries were late, this was accommodated by the EA and had no significant impact on completion of parts A and B of the Project. 32. However, the loan was extended twice to allow the SCADA contract to be completed (paras 17–19). The first loan extension was caused by delays in substation construction that were outside the scope of the project component. Subsequently, the supplier failed to meet the revised implementation schedule for manufacturing and delivery. This manufacturing delay resulted in the second extension of the loan closing date. In the event, while installation and commissioning of part C were completed, BPC deducted liquidated damages from the final payment to the contractor, as provided for in the contract. K. Performance of the Borrower and the Executing Agency

33. The first extension to the loan closing date was due to delays that were mostly within the EA’s control, although the second one was caused by the supplier’s failures. Nevertheless, the EA and the borrower provided all necessary resources to allow the Project to proceed and the installation of the Project’s main component was completed ahead of the appraisal schedule, in spite of initial delays in procurement of the required equipment. Therefore, the performance of the borrower and the EA is generally satisfactory.

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34. BPC recently completed a subsequent rural electrification loan project before the original loan closing date of 31 March 2007, with no extensions or consultancy support. 14 This demonstrated improving performance by BPC in undertaking project implementation and management. L. Performance of the Asian Development Bank

35. The Borrower and the EA appreciated the assistance and cooperation ADB extended to them and considered ADB’s performance to be satisfactory. ADB monitored progress, fielded review missions, and provided assistance in resolving conflicts with contractors. ADB undertook one inception mission and ten review missions. These missions included visits to the project site and head offices of the EA. The EA recognized the assistance of the ADB missions in providing advice on technical issues, procurement, sector reforms, and loan administration. The overall performance of ADB was satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

36. The Government’s objective of 100% electrification throughout the country is expressed in its document Vision 2020, Electricity for All and has been supported by successive 5-year development plans. 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. In ADB’s country strategy for Bhutan,15 rural electrification is one of the major focuses for fostering pro-poor growth. Therefore, the Project is 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 and the Project is the second of a series of three rural electrification loans funded by ADB. The Project is therefore rated “highly relevant”. B. Effectiveness in Achieving Outcome

37. The Project exceeded appraisal expectations in achieving physical outputs. The grid extension component (part A) provided access to electricity to 8,090 new rural consumers, 32% more than envisaged at appraisal, at a cost per connection of $1,454, a reduction of 30% on the appraisal estimate (paras. 10, 15). The off-grid electrification component (part B) provided 100 solar panels, 72 more than the appraisal target. Part C achieved the remote monitoring of more substations than envisaged at appraisal and included provision for the network control as well as monitoring. 38. Under part B, the solar power systems were intended for installation in monasteries and other community institutions located remote from the existing grid, where a grid connection was not economically feasible. Once procured, the systems were provided to the various district authorities, who were responsible for selecting the appropriate beneficiaries and arranging for installation. However, there was no formal follow-up by the EA. While it is believed that the systems have been installed in institutions that met the criteria established under the Project with respect to the type of beneficiary, some of the systems are no longer required in their 14 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 Project. Manila.

15 ADB. 2005. Country Strategy and Program for Bhutan (2006–2010). Manila.

9

original locations, as a grid connection is now available. However, it is not known whether these systems have been relocated. While electrification kits were intended to be freely provided to poor households, many of the kits have not been installed (para. 24). Given the long-term objectives of the Project, these activities are considered to be “less effective”. However, they accounted for around 1% of the total project cost and overall the Project is still considered to be “effective” in achieving its appraisal outcome. C. Efficiency in Achieving Outcome and Outputs

39. The detailed analysis of an economic internal rate of return (EIRR) is presented in Appendix 9. The evaluation determined the project achieved an EIRR of 14.9%, higher than the 13.0% determined at appraisal. EIRR analyses of parts B and C were not undertaken at appraisal and have not been undertaken for this project completion report (PCR).16 40. The economic analysis undertaken for the PCR was based on consumers’ willingness to pay and used the same methodology as at appraisal. However, the PCR analysis conservatively assumed an initial average monthly household energy consumption in rural electrification areas of about 50 kWh, which was less than half the average consumption assumed at appraisal.17 Furthermore, since there was no evidence of substantial quantities of electricity being used for industrial motive power, the analysis did not consider economic benefits from the displacement of diesel fuel. However, the increased price of kerosene has meant that the economic benefits of displaced kerosene consumption are much greater than assumed at appraisal. Based on actual outputs, the analysis took into account the greater number of connected consumers than assumed at appraisal, and the significantly 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 lower capital costs and the higher economic value of kerosene more than offset the negative impact of lower demand. 41. 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 improved lighting and a better hygienic environment inside houses because of the change 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 realized from replacing kerosene and fuelwood with electricity generated from hydropower plants that use a renewable, zero carbon emissions energy source. 42. The economic analysis proved relatively insensitive to changes in input assumptions, with the most sensitive driver of the EIRR being the capital cost of the project. In this respect, the actual project outcome was particularly favorable, with the actual capital cost per connected

16 Parts B and C accounted for less than 3% of the total project cost. 17 The average monthly electricity consumption of all metered electrified households surveyed by the PPTA was 62

kWh. The PPTA further concluded from the survey that (i) electricity costs represented only a small proportion of household income, (ii) there was a strong willingness to pay a higher tariff for electricity should this be necessary, and (iii) the elasticity of demand for electricity was very low. These findings indicated that an average household consumption exceeding 62 kWh would be unlikely, particularly if the Project specifically targeted poorer households. In spite of this, the economic analysis undertaken at appraisal assumed an average household electricity consumption of 120 kWh per month, increasing to 180 kWh per month after 10 years of electrification. It is unclear why the Project was formulated using almost twice the assumed average electricity consumption that was indicated by the findings of the socioeconomic survey. BPC advised the project completion review mission that the average monthly electricity consumption of domestic households in rural areas is currently only 49 kWh, validating the socioeconomic analysis.

10

customer being approximately 30% less than estimated at appraisal (para. 15). Given that the EIRR is similar to that estimated at appraisal, the Project is rated “efficient”. D. Preliminary Assessment of Sustainability

43. It is not unusual for rural electrification projects to require operating subsidy inputs to ensure sustainability. While the Project will rely on ongoing subsidies indefinitely, its sustainability is rated “likely”. This is partly 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. 44. The sector’s revenues from electricity sales to India will increase substantially with the recent commissioning of the 1,020 MW Tala hydropower plant. BPC recorded its first net profit in FY2006 after three years of operation, and the transmission wheeling revenues from the Tala plant should enable it to further improve its profitability. 45. The subsidies required for the Project are particularly high because the electricity tariff in Bhutan is the lowest in South Asia and 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 power from generation companies to BPC at a rate that is less than the cost of production,18 and (ii) cross subsidies from the sale of electricity to large industrial customers, which have a relatively low supply cost.19 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 (Nu 2.0 per kWh) for all local consumption in excess of 15% of Bhutan’s current hydropower generation capability. This means the subsidy will adequately cover low-voltage rural domestic customers, with medium- and high-voltage customers paying the full cost of supply. 46. 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, the Bhutan Electricity Authority (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 for three years from 1 July 2007; the revisions included abolition of meter rental charges and minimum charges, which will benefit low-use customers, including rural households. For the reasons noted above, the Project’s sustainability is considered to be “likely”. E. Impact

47. BPC confirmed that there was no resettlement or land acquisition relating to right-of-way problems under the Project. The Project also had no significant environmental issues. BPC attempted to minimize negative environmental impacts by using only distribution transformers

18 The average production cost of electricity from hydropower generation in Bhutan is Nu 1.19/kWh. Electricity for

local consumption is sold to BPC for Nu 0.3/kWh. Electricity is sold to India for Nu 2.0/kWh, except in eastern Bhutan, where electricity from the Kirichhu hydropower project is sold to India for Nu 1.75 / kWh.

19 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 2006, are all located close to the Indian border and employ mainly Indian labor.

11

rated up to 160 kVA.20 These small transformers could be pole mounted, thereby avoiding the need to acquire 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. 48. While there have been a number of studies of the socioeconomic impact of rural electrification in Bhutan, the analysis undertaken has been based on “with-and-without” electrification surveys of households rather than “before-and-after” electrification surveys. A with-and-without socioeconomic survey conducted as part of the PPTA provided socioeconomic data on unelectrified project areas. However, the survey data has been aggregated to district level, and is insufficient to form the baseline for a more meaningful before-and-after survey. In order to make a project-specific impact assessment on poverty alleviation, a before-and-after methodology involving a comparison of the socioeconomic conditions in the project areas before and after electrification is needed. This is not possible because of the lack of suitable baseline data on the socioeconomic conditions in specific project areas before the Project commenced. 49. To attempt a sample survey after electrification, the project completion review mission (the mission) visited one beneficiary village, Kawang, located in a rural area on the outskirts of Thimphu. Initially 171 households and other community facilities were connected under the Project but there are now 235 consumers in the village. Due to the increased number of connections, and to the increased use of electricity by individual consumers, at least one transformer installed under the Project has subsequently been replaced by a larger unit. The mission found that kerosene lamps had been replaced with electric bulbs or fluorescent lights. Electrical appliances in the houses visited included (i) rice cookers, (ii) water boilers, (iii) refrigerators, (iv) radios and televisions and (v) an electric frying pan. None of the houses visited used electricity for space heating, but open wood stoves had been replaced with closed wood burners that used a closed flue to exhaust the smoke. The use of electricity (or gas in one case) for cooking and the installation of more efficient burners reduced the consumption of fuelwood by about 80% and improved air quality within the houses. However, a rice mill in the village had not been connected to electricity because the owner considered that any fuel cost savings would be insufficient to cover the cost of replacing the existing diesel engine with an electric motor. 50. The mission further examined the most recent billing records for two villages included in the Project, Kawang in the Thimphu district in western Bhutan, and Chaskar in the Mongar district in eastern Bhutan. Average consumption in Kawang was 189 kWh per month, and median consumption 120 kWh per month; in contrast, the average consumption in Chaskar project area, located in a much poorer area was 26 kWh per month and median consumption was 21 kWh per month. It should be noted that Kawang is not considered typical of a project beneficiary area in that it is located within a short drive of Thimphu. While some villagers still rely on subsistence agriculture for their income, other villagers commute into Thimphu for work, either using their own cars or public transport. The village consequently benefits from an income stream that is unavailable to beneficiaries in more remote areas. On the other hand, Chaskar is located in a relatively poor district in eastern Bhutan, and may well be poorer than many beneficiary villages. 51. While the mission’s observations indicated that the project impact varied widely, depending in particular on the location of the beneficiary area and the ease of access, they

20 BPC set up the environmental cell to ensure compliance with all environmental regulations and guidelines. The cell

also functioned under other projects.

12

confirmed the socioeconomic survey findings regarding the impact of rural electrification. The surveys indicate that all beneficiaries use electricity for lighting, but only about 50% use it for cooking, and then often only for cooking rice. Other appliances such as water boilers, refrigerators, televisions and frying pans or curry cookers are less common. Beneficiaries, even in higher income households, prefer to use fuelwood for space heating and also for the cooking of food other than rice. The mission estimates the consumption of a single household that uses electricity for lighting and rice cooking only would typically be around 50 kWh per month, supporting BPC’s analysis that average domestic consumption in rural areas is typically 50 kWh per month. 52. Irrespective of consumption, BPC has levied a minimum monthly energy charge of Nu 30 and a Nu 5 monthly meter rental, equivalent to consumption of 44 kWh. Therefore, most consumers surveyed in the Chaskar project area are paying for electricity they do not use; only 18% had monthly consumption exceeding the minimum monthly level. BEA has decided to eliminate minimum charges for all customers from 1 July 2007, meaning customers will be billed only for the actual amount consumed.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

53. Based on a review of its relevance, effectiveness, efficiency, and sustainability, the Project is rated “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 relatively favorable and the Project is likely to be sustainable given appropriate subsidy inputs. B. Lessons

54. The provision of free house wiring kits under the Project to some customers and not others has been unsuccessful for two reasons: because (i) the limited design capacity of these kits is seen as a barrier to possible future increases in a household’s electricity consumption, and (ii) many beneficiaries do not like to be identified as poor and in need of charity. It is necessary to examine more socially acceptable mechanisms for helping poor households install internal house wiring before electricity can be supplied. One approach being studied under an ADTA project21 is the provision of low-interest loans, which would be repaid in installments as part of a consumer’s electricity account following energization. 55. A grid connection is now available, and some of the solar systems installed under the Project have consequently been relocated, but their present location is not known. Any projects that include the provision of photovoltaic lighting systems should be designed so that (i) appropriate beneficiaries are targeted, (ii) installation activities are recorded and monitored to ensure that the systems are correctly installed and operational at the end of the project, and (iii) processes are designed and implemented to ensure that the project is sustainable and that systems are properly maintained over time. The ongoing ADTA is also developing a process for ensuring sustainable photovoltaic installations. DOE is proposing, during the 10th Five-Year Plan, to revisit 4,000 photovoltaic systems installed under previous aid programs. If this

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

13

proposal is accepted, the revisited systems, which could include those installed under the Project, will be refurbished and returned to full working order. C. Recommendations

1. Project Related

56. The only loan covenants requiring ongoing monitoring are the key financial covenants22 and the requirement for regular submission of audited financial accounts. The sustainability of the Project will depend on the Government providing continuing subsidy inputs (i.e., tariff adjustment) to BPC for rural electrification; inadequate subsidy inputs will quickly result in deterioration of BPC’s financial performance. Therefore, it is recommended that these covenants remain unchanged. 57. The Project will require project performance evaluation assessments after at least 3 years of project operation. This should ensure that sufficient time has elapsed for the socioeconomic benefits to become apparent. Given the Government’s demonstrated willingness to invest in rural electrification and the overall efficiency of BPC’s operations, problems with the operation and maintenance of the Project are unlikely. It is recommended that the Project’s performance evaluation report focus on identifying the socioeconomic benefits, in order to assess how successful the Project has been in meeting its overarching poverty reduction objective.

2. General

58. Bhutan has a very low electricity tariff, and the socioeconomic studies have shown a high willingness to pay and a low elasticity of demand. Nevertheless, actual electricity consumption in the rural areas of Bhutan is much lower than assumed at appraisal. This low consumption appears to be driven by cultural rather than economic factors. It also appears that electricity is not an energy source of choice for space heating or for non-rice cooking, even in relatively high-income households. An assessment of project benefits that is both objective and robust requires a before-and-after socioeconomic study. This is a long-term assessment that should be designed and planned at the project preparatory stage, at which time baseline data should also be collected. As a consequence, any socioeconomic study undertaken during project preparation should be designed with the objective of providing baseline data for future use. Furthermore, the monitoring and assessment of project outcomes should be systematically developed. 59. The PCR’s findings have confirmed (i) the need for ADB’s current initiatives to find an alternative mechanism for supporting the energization of the poorest rural households, and (ii) the need to develop a process to provide for the sustainability of photovoltaic systems in villages where a grid connection is not economically feasible. These requirements are being studied under the ongoing ADTA.

22 The minimum rate of return can be set by the regulator. The key financial covenants include at least a debt to

equity ratio and a debt service coverage ratio.

14 Appendix 1

PROJECT FRAMEWORK

Design Summary Appraisal Performance Indicators/Targets Project Achievements Key Issues and Recommendations

Impact Reduce poverty and increase economic growth in Bhutan, particularly in rural areas and in sustainable power sector development.

a. Increase electrification in rural areas and

improve quality of life. b. Increase gross domestic product (GDP)

per capita.

a. Electricity grid extended

to additional 66 village groupings in 15 districts.

b. GDP per capita

increased by 66% from $659 in 1999 to $1,108 in 2005.

Insufficient project-specific data is available to objectively assess the impact of the Project on beneficiaries.

Outcome a. Facilitate rural electrification in a

sustainable manner and provide access to electricity by the poor in remote villages.

b. Improve the quality of life and

provide business and job opportunities.

c. Support sustainable power sector

restructuring.

a. Use a participatory approach to

introduce comprehensive rural electrification by using renewable energy as well as a grid system.

b. Segregate policy making and regulation

from operation. c. Achieve financial and management

autonomy of the corporatized Department of Power (DOP), now the Bhutan Power Corporation (BPC).

a. 100 photovoltaic

systems were issued to districts for installation in community facilities.

b. The DOP was

disaggregated into BPC and the Department of Energy (DOE) as of 1 July 2002.

c. BPC is functioning

effectively.

After procurement of the photovoltaic systems there was no follow-up to ensure the systems were installed at appropriate locations.

Outputs a. Creation of a model project of

sustainable rural electrification through • Provision of electricity to

6,010 customers in 15 districts (more than two

a. Completion by September 2003

a. The grid extension was

completed ahead of schedule and provided access to electricity to 8,090 consumers.

The sustainability of the Project will be dependent on continuing operational subsidies; the financial performance of BPC will be a good indicator as to

Appendix 1 15

Design Summary Appraisal Performance Indicators/Targets Project Achievements Key Issues and Recommendations

thirds of the project beneficiaries live below the poverty line)

• Electrification by solar panels in remote villages of three districts (schools, hospitals)

• Efficient load dispatch in Thimphu area by introduction of Supervisory Control and Data Acquisition (SCADA).

b. Corporatization of DOP

• Management autonomy of DOP

c. Tariff Adjustment

• Financial viability and autonomy of the corporatized DOP

b. Milestone events for corporatization of

DOP • Asset valuation and registration

(FY2001) • Financial planning (FY2002) • Registration of the company (FY2002) • Organizational setup (FY2003) • Management and staff training

(FY2000–2003) c. Implement the tariff adjustment by the end

of 2001. • Increase overall tariff to meet the

financial targets (rate of return = 6%, debt service coverage ratio = 1.5, self-financing ratio = 20%)

• Implement two-part tariff for high- and

b. 100 photovoltaic systems were procured under the project and issued to districts authorities.

c. A SCADA system has

been installed that is capable of monitoring and controlling ten transmission substations located around Thimphu.

d. BPC is well managed

and its financial performance is improving. BPC generated net profits in FY2006

e. Tariffs have been

restructured in accordance with the loan covenants.

f. BPC has not met its

covenanted rate of

whether sufficient subsidy funding is available to support rural electrification.

16 Appendix 1

Design Summary Appraisal Performance Indicators/Targets Project Achievements Key Issues and Recommendations

medium-voltage customers • Implement three-block tariff for low-

voltage customers • Gradual overall tariff increase to meet

the financial targets by the end of FY2005

return but is expected to do so in FY 2007.

Activities 1. Detailed engineering and preparation of tender documents 2. Procurement 3. Civil works 4. Construction supervision 5. Capacity-building consulting services

Inputs Project Costs - Civil works, equipment and consulting services, $11.6 million Financing Plan - Asian Development Bank (ADB) financing, $9.2 million - Government resources, $2.4 million Technical Assistance (Corporatization of DOP) - ADB financing, $600,000 - Government resources, $170,000

Sources: Bhutan Power Corporation and ADB. 2007. Asian Development Outlook 2007. Manila. ADB = Asian Development Bank, BPC = Bhutan Power Corporation, DOE = Department of Energy, DOP = Division of Power, GDP = gross domestic product, SCADA = supervisory control and data acquisition.

Appendix 2 17

Foreign Local Foreign LocalExchange Currency Total Exchange Currency Total

A. Base Cost1. 33 kV Overhead Lines 2,224.00 485.00 2,709.00 2,286.60 489.34 2,775.94

including Load Break Switchesand Auto-reclosers

2. 11 kV Overhead Lines 998.00 248.00 1,246.00 1,015.81 250.22 1,266.03including Load Break Switches

3. Distribution Substations:33/0.4 kV Transformers 663.00 99.00 762.00 191.82 99.84 291.6611/0.4 kV Transformers 390.00 60.00 450.00 112.83 60.54 173.37

4. Low Voltage Distribution 2,193.00 522.00 2,715.00 2,570.83 526.67 3,097.505. Service Connections 753.00 167.00 920.00 1,063.98 168.49 1,232.476 Administrative and Overheads 0.00 300.00 300.00 0.00 783.03 783.037. Consulting Services 250.00 85.00 335.00 258.90 0.00 258.908. Solar Panels 100.00 0.00 100.00 61.26 0.00 61.269. SCADA System 250.00 0.00 250.00 281.40 0.00 281.4010. Misc. (Vehicles, Tools,

Communication Equipment and Computers)

730.00 100.00 830.00 1,161.96 0.00 1,161.96

Subtotal (A) 8,551.00 2,066.00 10,617.00 9,005.39 2,378.12 11,383.51

B. Contingencies .1. Physical Contingencies a 851.00 178.00 1,029.00 0.00 0.00 0.002. Price Contigencies b 308.00 252.00 560.00 0.00 0.00 0.00

Subtotal (B) 1,159.00 430.00 1,589.00 0.00 0.00 0.00

C. Financial Costs1. Service charge on Bank Loan 243.00 0.00 243.00 243.00 0.00 243.00

Subtotal (C) 243.00 0.00 243.00 243.00 0.00 243.00

Total 9,953.00 2,496.00 12,449.00 9,248.39 2,378.12 11,626.51

kV = kilovolt; SCADA = Supervisory Control and Data Acquisition system.Note: $1.00 = Nu42.50a 10%b 2.4% per annum for foreign exchange costs; 7.4% for local currency costs.

Appraisal Estimate ActualItem

APPRAISAL AND ACTUAL PROJECT COSTS($'000)

Source: Bhutan Power Corporation

18 Appendix 3

Year Projected Actual

2000 0.060 0.0502001 4.153 4.2512002 0.960 2.9712003 1.103 1.2692004 0.354 0.1982005 0.650 0.3832006 0.350 0.132

Total 7.630 9.254Source: Asian Development Bank's Loan Financial Information Services.

PROJECTED AND ACTUAL DISBURSEMENTS($ million)

Appendix 4 19

CHRONOLOGY OF MAJOR EVENTS Date Event 1999 21 Feb–6 Mar - Asian Development Bank (ADB) Fact-Finding Mission was fielded. 5 May - ADB Management Review Meeting was held and appraisal of the

Project, and advance action for procurement and recruitment of the consultant were approved.

18–31 Jul - The Appraisal Mission was fielded. 3 Sep - The Staff Review Committee meeting was held and further processing of the Project was approved. 13–14 Oct - The loan negotiations were conducted at the ADB Headquarters in Manila. 25 Nov - ADB approved a loan of SDR7.206 million ($10.0 million equivalent) for the Sustainable Rural Electrification Project. 2000 12 Jan - The loan agreement was signed. 14 Jan - The loan was declared effective. 6–17 Mar - The inception mission was fielded. 12 Jun - Commencement of consulting services to assist in the transition of

Division of Power (DOP) from a Government department to a self-sustained corporation.

11 Oct - ADB approved award of contracts for the following: Package 1A –

MV overhead conductors; Package 1B – MV overhead accessories; Package 3 – insulators and fittings; Package 5A – distribution transformers; Package 5B – pole top switching equipment; and Package 5C – earthing equipment.

19 Oct - ADB approved award of contract for Package 4 – support poles and steel items. 4–11 Dec - The first review mission was fielded. 18 Dec - ADB approved award of contract for Package 2 – LV ABC and accessories.

20 Appendix 4

Date Event 2001 3 Jan - ADB-approved contract variation for the change in quantities under Packages 5A and 5B. 13–23 Mar - The second Review Mission was fielded. 25–29 Jun - The third Review Mission was fielded. 30 Aug - ADB approved award of contract for Package 6A – customer service equipment; Package 6B – test equipment; Package 6C – construction tools and equipment; Package 7 – vehicles; Package 8A – communication equipment; Package 8B – office equipment; Package 9 – solar home lighting systems; and Package 10 – SCADA system. 10 Oct - ADB expressed no objection to the use of direct payment procedure instead of the commitment letter procedure for contract packages 8A and 8B. 28 Oct-2 Nov - The fourth Review Mission was fielded. 2002 11 Jan - ADB approved award of contract for Package 8B – office equipment. 28 Feb - ADB received a request from the Ministry of Finance (MOF) to reallocate loan proceeds to finance the services of

three (3) domestic consultants for the positions of (i) chartered accountant, (ii) information technology specialist and (iii) human

resource specialist. 4 Mar - ADB approved MOF’s request to reallocate loan proceeds to finance the services of the three (3) domestic experts. 31 Mar - Attached TA 3307-BHU was financially closed. 9–12 Apr - The fifth Review Mission was fielded. 1 Jul - Division of Power (DOP) was disaggregated into the Department

of Energy (DOE) and the Bhutan Power Corporation (BPC). 6 Jul - ADB expressed no objection to the procurement of the balance of materials under Package 6A through International Shopping/ Direct Purchase procedure.

Appendix 4 21

Date Event 24 Jul - ADB approved reallocation of loan proceeds to finance the procurement of additional materials under Packages 1A, 1B, 2, 3, 4, 5A, and 5B. 9 Dec - ADB approved award of contract for Package 6A-I – LV distribution boards, and Package 6A-II – MCB, RCCB, village electrification kits and customer meter boards. 2003 23 Apr - ADB approved minor change in scope to apply surplus funds to

the procurement of additional materials under Packages 1A, 2, 3, 4, 5B, 5C and 10, and associated reallocation of loan proceeds of $673,000 from category 02 (consulting services) and category 04 (unallocated) to category 01 (equipment). 2004 8 Mar - ADB approved the first request for extension of the loan closing date (from 31 March 2004 to 31 March 2005). 2–6 May - The sixth Review Mission was fielded. 16–17 Sep - The seventh Review Mission was fielded. 11 Nov - ADB approved minor change in scope to apply surplus funds to

the (i) procurement of additional materials under Packages 2, 6B and 6C using direct purchase procedure, and (ii) inclusion of the cost of training of BPC engineers under Package 10 (SCADA contract); and reallocation of loan proceeds of $88,049 from category 02 (consulting services) and category 04 (unallocated) to category 01 (equipment).

2005 29 Mar - ADB approved the final request for extension of the loan closing date (from 31 March 2005 to 31 December 2005). 25–28 Apr - The eighth Review Mission was fielded. 9–12 Nov - The ninth Review Mission was fielded. 31 Dec - ADB approved BPC’s request to further extend the loan closing date to 31 December 2005.

22 Appendix 4

Date Event 2006 22–23 Mar - The tenth Review Mission was fielded. 7 Jun - ADB advised BPC that the loan account was closed effective

12 January 2006, and SDR143,311.01 ($207,492.85 equivalent) was cancelled. Hence, the loan amount was reduced to SDR7,062,689 ($9,254,275 equivalent). 2007 18–31 Mar - Project Completion Review Mission was fielded. ____________________________________________________________________________ ADB = Asian Development Bank, BPC = Bhutan Power Corporation, DOE = Department of Energy, DOP = Division of Power, LV ABC = low voltage aerial bundled conductors, MCB = Miniature Circuit Breaker, MV = medium voltage, MOF = Ministry of Finance, RCCB = Residual Current Circuit Breaker, SCADA = supervisory control and data acquisition, SDR = special drawing right. Sources: Bhutan Power Corporation and Asian Development Bank

Appendix 5 23

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1. Project CommencementLoan Effectivity

2. Consultant SelectionCommencement of Consulting Services

3. Procurement (Tender)Tender Period (Staggered Tendering)

Evaluation

ADB Approval and Contract Negotiation

Contract Award

Letter of Credit

4. Procurement (Manufacture)Appoval of Drawings

Manufacturing

Inspection and Testing

Deliverya

5. Distribution Detailed PlanningRoute Survey

Construction Planning

6. Detailed Planning of Solar System

7. Detailed Planning of SCADA

8. ConstructionDistribution Construction

Solar System

SCADA System

Legend:Appraisal EstimateActual

a During January –June 2003, the contract variation was made to expand the SCADA's function from monitoring to control activities.Source: Bhutan Power Corporation

2004 200520001999

SCADA = Supervisory Control and Data Acquisition.

Particulars 20032001 2002

PROJECT IMPLEMENTATION SCHEDULE

24 Appendix 6

STATUS OF COMPLIANCE WITH LOAN COVENANTS Covenant

Reference in Loan

Agreement

Status of Compliance I. Audited Project Accounts and Financial Statements 1. The Borrower shall (i) maintain, or cause to be maintained, separate accounts for the Project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience and terms of reference are acceptable to the Bank; (iii) furnish to the Bank, as soon as available but in any event not later than nine (9) months after the end of each related fiscal year, 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 this Loan Agreement) all in the English language; and (iv) furnish to the Bank such other information concerning such accounts and financial statements and the audit thereof as the Bank shall from time to time reasonably request. 2. Promptly after physical completion of the Project, but in any event not later than three (3) months thereafter or such later date as may be agreed for this purpose between the Borrower and the Bank, the Borrower shall prepare and furnish to the Bank a report, in such form and in such detail as the Bank shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by the Borrower of its obligations under this Loan Agreement and the accomplishment of the purposes of the Loan. II. Implementation of the Project 3. The selection, engagement and services of the consultants shall be subject to the provisions of this Schedule and the provisions of the “Guidelines on the Use of Consultants by Asian Development Bank and its Borrowers”

Article IV, Section 4.06(b) Article IV, Section 4..07(c) Schedule 5, para. 2

Complied with. Complied late. A project completion report was not submitted until 9 March 2007. Complied with. Consultants commenced their services in March 2000.

Appendix 6 25

Covenant

Reference in Loan

Agreement

Status of Compliance dated October 1998, as amended from time to time, which have been furnished to DOP. 4. Before and after corporatization, the DOP shall maintain a Project Implementation Unit (PIU) in its O&M Division to ensure timely implementation of the Project. III. Legal and Institutional Reforms A. Corporatization of DOP 5. The Borrower shall cause DOP to be changed into a commercial corporation by law and the law transforming DOP into a commercial corporation will be ratified by the end of FY 2002. 6. The Borrower shall provide sufficient human resources to undertake the corporatization of DOP in consultation with the Bank and shall ensure that DOP shall have the number of personnel to operate and maintain the corporatized DOP efficiently and effectively based on the finding of the Corporatization TA. 7. Upon corporatization of DOP, the Borrower shall provide adequate asset, equity, and liability structures with debt equity ratio of maximum 60:40, and other financial arrangements to maintain financial viability of the corporatized DOP. 8. Starting from FY2005, the corporatized DOP shall maintain at all times a rate of return of at least 6 percent on the net revalued fixed assets, debt service ratio of at least 1.5, and self-financing ratio of at least 20 percent.

Schedule 6, para. 4 Schedule 6, para. 6 Schedule 6, para. 7 Schedule 6, para. 8 Schedule 6, para. 9

Complied with. Complied with. DOP was disaggregated into the Department of Energy (DOE) and the Bhutan Power Corporation (BPC) on 1 July 2002. Complied with. Complied with. Partly complied. BPC’s rate of return on the assets was 4.6% in FY2006. BPC is likely to achieve a rate of return of 6 percent on net revalued assets for the first time in FY2007. Other ratios have been maintained well above the covenanted targets.

26 Appendix 6

Covenant

Reference in Loan

Agreement

Status of Compliance B. Tariff Adjustment 9. The Borrower shall increase on 1 January 2000 the urban and industrial domestic tariffs to Nu 0.70 per kWh and on or prior to 1 July 2001 shall further increase the urban and industrial domestic tariffs to Nu 0.80 per kWh. 10. The Borrower shall implement a two-part tariff for the transmission level and primary distribution level voltage consumers and a three-block tariff for the secondary voltage consumers by end of FY2001. IV. Environmental and Social Measures 11. The Borrower and DOP shall ensure that all environmental laws, regulations, guidelines and standards are complied with during the Project construction and operational stages. 12. During the implementation phase, DOP shall make the service connections to the poor households as a priority. 13. The Borrower and DOP shall take all necessary action to ensure that all land, right of way, and other rights in land or privileges required for the Project shall be made available on a timely basis. V. Monitoring, Studies and Evaluation 14. DOP shall monitor the Project implementation with benchmark information to be agreed upon with the Bank. During the implementation period, DOP shall furnish the Bank with a quarterly report including a description of physical progress, problems and

Schedule 6, para. 11 Schedule 6, para. 12 Schedule 6, para. 14 Schedule 6, para. 16 Schedule 6, para. 17 Schedule 6, para. 18

Complied with. Complied late. The three-block tariff was introduced on 1 January 2003. The two-part tariff structure for medium and high voltage customers was implemented on 1 July 2004. Complied with. BPC has set up an Environmental Cell to ensure compliance with all environmental regulations and guidelines. Partly complied. While the issue of free village electrification kits was not successful, very few households in project areas remain unenergized. Complied with. Complied with. Quarterly progress reports were submitted on a timely basis.

Appendix 6 27

Covenant

Reference in Loan

Agreement

Status of Compliance difficulties encountered, and summary of the financial accounts for the Project, which shall consist of Project expenditures during the period, year to date, and total to date. DOP shall submit a project completion report to the Bank within three months after completion of the Project. 15. DOP shall perform the social and environmental monitoring activities and shall report the result of the monitoring and mitigation measures to the Bank through the quarterly progress reports on Project implementation and an evaluation report after completion of the Project VI. Other Measures 16. The Borrower and DOP shall make adequate budgetary allocations for the Project for each related fiscal year to ensure timely and effective implementation of the Project.

Schedule 6, para. 19 Schedule 6, para. 22

Complied with. Complied with.

28 Appendix 7

FINANCIAL STATEMENTS

2003 2004 2005 2006Financial Year Audited Audited Audited Audited

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

Domestic energy sales (from low voltage customers) 143 165 191 240 Domestic energy sales (from medium voltage customers) 83 93 95 65 Domestic energy sales (from high voltage customers) 328 331 334 357 Total Energy Sales (GWh) 554 589 620 661

IncomeElectricity revenue 709 583 652 797 Wheeling charges 348 220 222 253 Other revenue 34 56 54 81

Total 1,091 858 928 1,132

ExpenditurePurchase of power 295 225 225 218 Employee cost 317 203 274 260 Operation and maintenance expense 117 83 104 97 Administration and other expenses 47 33 28 24 Interest 1 6 7 19 Prior period writebacks / Bad debts 0 0 4 8 Loss due to impairment of asset 0 0 67 0Less current expenses capitalized Total 777 550 709 626

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

Taxation 0 0 0 0Profit (loss) after taxation (68) (28) (130) 269 Gwh = gigawatt-hour.Source: Bhutan Power Corporation

Bhutan Power CorporationIncome Statement

Nu million

Appendix 7 29

2003 2004 2005 2006Financial Year Audited Audited Audited Audited

AssetsCash 521 900 1,085 1,038 Accounts receivables 88 104 51 33 Inventory 199 425 626 527 Other current assets 58 25 98 255 Gross fixed asset 3,858 5,294 5,687 5,739 Accumulated dep'ion 382 732 1,061 1,288 Net fixed assets 3,476 4,562 4,626 4,451 CWIP 636 279 391 1,033 Total Assets 4,978 6,295 6,878 7,337

LiabilitiesCurrent liabilities 241 309 326 449 RE loan 658 700 1,010 1,113 Total Liabilities 900 1,009 1,336 1,562

EquityPaid up capital 4,139 5,375 5,748 5,713 Retained earnings (68) (96) (225) 43 GrantsCapital reserve 7 7 20 19 Total Equity 4,078 5,286 5,543 5,775

Total Equity and Liabilities 4,978 6,295 6,878 7,337

Return on fixed assets -1.7% -0.6% -2.6% 4.9%Debt equity ratio 16% 13% 18% 19%CWIP = construction work in progress, RE = rural electrification.Source: Bhutan Power Corporation

Bhutan Power CorporationBalance Sheet

Nu million

30 Appendix 7

2003 2004 2005 2006Financial Year Audited Audited Audited Audited

OperationsNet profit before tax (68) (28) (130) 269 Add backDepreciation 382 336 349 236 Interest 1 6 7 19 Other 7 5 50 (23) Sub-total 322 319 276 501 Net saundry debtors (88) (16) 53 18 Net saundry creditors 241 68 17 123 Net change in inventories (199) (225) (221) 100 Net change in other current assets (2) (6) 2 (2) Taxes paid 0 0 0 0Net cash flow from operations 274 140 127 740

InvestmentNet Interest 0 3 12 3 Net capital expenditure (4,494) (1,070) (594) (703) Net cash flow from investments (4,494) (1,067) (582) (700)

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

Change in cash balance 576 350 241 108

Debt service coverage ratio 279.7 51.0 31.7 28.0 Self financing ratio 1.1% 8.0% 53.3%Note 1: Financial year 2003 covers period 1 July 2002 – 31 December 2003Source: Bhutan Power Corporation

Nu million

Bhutan Power CorporationCash Flow Statement

Appendix 8 31

PCSS $No. Contractor/Supplier Description Equivalent

A. Category 01: Equipment

0002 Neccon MV Overhead Conductors Rs 29,396,661 617,0640002 Neccon MV Overhead Conductors $ 16,036 16,0360003 Jaguar Overseas Ltd. MV Overhead Conductors $ 167,062 167,0620004 W S Industries Insulators and Fittings $ 404,347 404,3470005 Dhendup Hume Industries Support Poles and Steel Items $ 2,724,993 2,724,9930007 A. Damiano & Co. Earthing Equipment $ 50,052 50,0520008 W S Industries Pole top Switching Equipment $ 478,534 478,5340009 Zhejiang Zhongdu Tech Export LV ABC & Accessories $ 1,968,307 1,968,3070010 V.K. Udyog Distribution Transformers $ 254,598 254,5980011 F&S Marketing Computer Accessories $ 23,920 23,9200012 Oracle Corp. Singapore Oracle Software for the CAS $ 3,944 3,9440013 JSR Far East Marketing Printer and Toner for CAS $ 3,855 3,8550014 State Trading Corp of Bhutan Indian Maruti Vans Nu 693,924 14,5660015 Westekemper Engr GmbH Test Equipment DM 755,652 385,3300015 Westekemper Engr GmbH Test Equipment EUR 17,754 22,5860016 Westekemper Engr GmbH Construction Tools and Equipment DM 396,269 200,5940016 Westekemper Engr GmbH Construction Tools and Equipment EUR 37,331 47,4890017 State Trading Corp of Bhutan Vehicles Y 41,206,688 343,5680017 State Trading Corp of Bhutan Vehicles Nu 2,542,995 52,5050018 Ugyen Trading House Communication Equipment $ 24,890 24,8900019 Tata BP Solar India Ltd Solar Lighting Systems Rs 3,022,300 61,2650020 M/S Alstom Ltd SCADA System $ 281,400 281,4000021 CB Schlumberger Elect Mgmt Customer Service Equipment $ 195,394 195,3940022 Dhendup Informatics Office Equipment $ 38,714 38,7140028 Zhejiang Zhongdu Tech Export LV Distribution Boards $ 58,836 58,836

0029 Gaki Enterprise, BhutanMCB, RCCB, VEK, and Customer Meter Boards $ 306,652 306,652

Subtotal (A) 8,746,501

B. Category 02: Consulting Services

0001 Tata Consulting Engineers Project Implementation Consultant $ 175,965 175,9650024 Krishnan D.G. Consultant - HR Administrator Rs 175,568 3,5870025 Sourav Kumar Howlader Consultant -