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Karnataka power reforms hinge upon IBRD loan -- World Bank far from satisfied over pace of progress

C. Shivkumar

BANGALORE, Nov. 22

THE Karnataka Government's fiscal correction and power sector reforms are now entirely dependent on the loan from the World Bank. The State Government has virtually no other back up strategies as an alternative to this loan.

State Government officials indicated to Business Line that the requirement of the power sector is now Rs 8,500 crore, which is about 70 per cent of the total loan component. The loan disbursement is to be staggered over a period of five years.

The loan for power sector reforms is to be utilised for meeting a part of the VRS funding in the power sector, and funding some of the existing liabilities and rehabilitation of some of the existing transmission network in the State.

However, the sources indicated that the Bank was far from satisfied over the pace of the fiscal and power sector reforms -- a pre-condition for disbursement of the loan. This is despite, the World Bank President, Mr James D. Wolfensohn's statement to the contrary made during his review visit here last week. In a confidential Aide Memoire to the State Government, a copy of which was made available to Business Line, the Bank has raised many critical issues in the medium term fiscal adjustment plan.

The Bank has contested some of the estimates on agricultural consumption in the State. The State Government's energy department had estimated a power consumption of 6,200 units per irrigation pumpset. However, the Bank document has commented, ``It is far more likely that the agricultural consumption is lower and therefore commercial losses are higher. A sensitivity analysis on restating losses to a higher level by reducing agricultural consumption would be needed.''

The Bank document has also contested the State Government's proposals to reduce capital expenditure during the fiscal adjustment period. This is to rein in the fiscal deficit of the State, to be brought down to three per cent of state domestic product b y bringing down revenue deficit to zero. However, during the period, the State Government has estimated that increased revenue expenditure would have to be incurred.

Under the proposal, certain sectors are to be provided support in the form of `critical upfront revenue expenditure'. This revenue expenditure proposal includes the power sector. But such increased revenue expenditure would mean that capital expenditur e would have to be cut in the initial years. Capital expenditure in 2001-2002 is to be cut by 30 per cent.

But the Bank document has commented, ``This is not

credible, and a smoother path of investment has to be found within available borrowing limits''.

The document was also critical of the State Government's Independent Power Projects (IPP) policy , which has shown a high proclivity for liquid natural gas-based power stations. The document said, ``since most of the additional capacity that Karnataka i s considering will be for base load, there is a real risk that Karnataka would incur the high costs with take or pay conditions''.