Philippines - Rural Electrification Revitalization Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 19001 IMPLEMENTATION COMPLETION RE1$ORT PHILIPPINES RURAL ELECTRIFICATION REVITALIZATION PROJECT (LOAN 3439 - PH) January 15, 1999 Energy and Mining Development Sector Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS As of Januarv 15, 1998 Currency Unit: = Philippines Peso (P) P1.00 - US$0.025 US$1.00 = P38.50 P 1.00 = 100 Centavos FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS DOE Department of Energy EIRR Economic Internal Rate of Return EMB Environmental Management Board ERB Energy Regulatory Board EVAT Expanded Value Added Tax JEXIM The Export - Import NEA National Electrification Administration NEDA National Economic & Development Authority NPC National Power Corporation OECF Overseas Economic Development Fund PBAC Pre- and Postqualification Bid and Award Committee PIP Performance Improvement Program PNOC Philippines National Oil Corporation RERP Rural Electrification Revitalization Project REC Rural Electric Cooperative SAR Staff Appraisal Report SGS Societe Generale De Surveillance USAID United States Agency for International Development Vice President : Jean - Michel Severino, EAP Country Director : Vinay K. Bhargava, EACPF Sector Manager : Yoshihiko Sumi, EASEG Staff Member : Heinz Pape, Energy Specialist, EASEG  CONTENTS Preface ........ Evaluation Summary ................ ii PART I: PROJECT IMPLEMENTATION ASSESSMENT . .........................1 A. Project Background .................... ' . 1 B. Project Objectives ..................2 C. Project Components .. - 2 D. Evaluation Of Objectives ..................2 E. Achievement Of Project Objectives .............................. ..3 F. Procurement And Implementation Record ...............................5 G. Major Factors Affecting The Project .............................. ..8 H. Project Sustainability ..1.............................. 1 I. Bank Performance ................................ 12 J. Borrower Performance ................................ 12 K. Assessment Of Outcome ............. ................... 13 L. Future Operation ..13 M. Key Lessons Learned ................................................ 13 PART II: STATISTICAL TABLES ................................................... 15 Table 1: Summary Of Assessments ................................................ 15 Table 2: Related Bank Loans ................................................ 16 Table 3: Project Timetable ................................................ 17 Table 4: Loan Disbursements: Cummulative Estimate And Actual .. 17 Table 5: Key Indicators For Project Implementation ............................................. 18 Table 6: Key Performance Indicators For Project Operation . ................................. 19 Table 7: Studies Included In Project .......................................... 20 Table 8A-1: Project Costs In Millions US$ ................................................ 20 Table 8A-2: Project Costs In Millions Pesos ................................................ 21 Table 8B: Project Financing ................................................. 21 Table 9: Economic Costs And Benefits ..................... ........................... 22 Table 10: Status Of Legal Covenants .. . .............................................. 23 Table 11: Compliance With Operational Manual Statements ................................. 24 Table 12: Bank Resources: Staff Inputs ................................................ 24 Table 13: Bank Resources: Missions .......................................... 25 Annex 1: Procurement History of Wood Poles ................................... 26 Annex 2: Procurement History of Concrete Poles ............. .. .................... 28 Annex 3: Financial Statements of NEA ................................... 29 Annex 4: Aide Memoire of ICR Mission .................................... 31 Annex 5: Borrower's Final Evaluation Report .................................... 33 Annex 6: Borrower's Comments on the Draft ICR ............... ..................... 36 MAP (IBRD 30084)  IMPLEMENTATION COMPLETION REPORT PHILIPPINES RURAL ELECTRIFICATION REVITALIZATION PROJECT (LOAN 3439 - PH) Preface This is the Implementation Completion Report (ICR) for the Rural Electrification Revitalization Project in the Philippines for which Loan 3439 - PH in the amount of $91.3 million was approved on February 25, 1992 and made effective on October 22, 1992. The project was scheduled to be closed on December 31, 1996. A first extension was granted until December 31, 1997, and a second extension until April 30, 1998. The request for a third extension was rejected and the loan was closed on April 30, 1998. The total disbursed amount was $54, 642,441.76. The ICR was prepared by Heinz Pape (EASEG) with the assistance of Janmil Sopher (WBGSA) and Leonardo Rodaje and Rene Manuel from the Resident Mission in the Philippines. The ICR was reviewed by Mr. Yoshihiko Sumi, Sector Manager of EASEG and Mr. Vinay K. Bhargava, Country Director, Philippines. The Borrower's own evaluation of the project and comments on the draft ICR are included as an Annex to the ICR. Preparation of the ICR began in October 1998, about one month before the ICR mission was conducted around the end of November 1998. The ICR is based on the Staff Appraisal Report, the Loan and Project Agreements, supervision reports, correspondence between the Bank and the Borrower, internal Bank memoranda and discussions with Bank staff and staff from the Borrower and the Beneficiaries involved in project implementation.   - iii - IMPLEMENTATION COMPLETION REPORT PHILIPPINES RURAL ELECTRIFICATION REVITALIZATION PROJECT (LOAN NO. 3439-PH) Evaluation Summary Background 1. In 1989, the Bank had produced a report entitled An Integrated Prograrn to Revitalize the Sector (Report No. 8016-PH) which pointed to a number of weaknesses in the power distribution sector of the Philippines. High system losses and precarious finances were the most visible weaknesses. The report contained recommendations on how to improve the performance of the sector and provided the foundation for the Rural Electrification Revitalization Project (RERP). The project was appraised in March 1991 and approved by the Bank's Board on February 25, 1992. The loan of US$91.3 million became effective on October 22, 1992. The planned closing date was December 31, 1996. Two extensions were granted but a request for a third extension was rejected. The loan was closed on April 30, 1998. Project Objectives 2. Objectives. The project had three objectives. One objective was to strengthen the National Electrification Administration (NEA), the Government's core agency for implementing rural electrification policy. NEA was ultimately to be transformed into an "interested lender" and the project was aimed at supporting this through improving "interested lender" functions and changing NEA's organization. The second objective was to improve the performance of rural electric cooperatives (RECs). The third objective was to increase the reliability and availability of power supply in rural areas. 3. Components. The project consisted of an investment component and a capacity building component. Under the investment component, material for rehabilitation and expansion projects was delivered to 46 RECs and seven regional staging areas with warehouses were established. Including interest during construction, physical and price contingencies, US$ 90.3 million was made available by the Bank for the investment component. The capacity building component was mainly financed by USAID through a loan of US$9 million. The Bank made US$1 million available for this component. 4. Evaluation of Objectives. The project did not aim at major reforms but rather to lay the foundations for such reforms by strengthening key institutions, NEA and the RECs. Starting with strengthening measures rather than major reforms was realistic. The RECs and NEA are part of the political texture of the country and major reforms of the distribution sector would meet a lot of political resistance. The Omnibus Power Bill which was discussed in the last Congress (1996 - 98) included major reforms, but this legislation did not pass. 5. The objective to improve the reliability and availability of power supply in rural areas was important. In the early 1990s, about 50 percent of the population in rural areas had no access to electricity and those who had were hampered by frequent outages.  - iv - Implementation Experience and Results 6. Achievement of Objectives - NEA. The objective to strengthen NEA has been partly achieved. The project has improved NEA's evaluation and selection of investment proposals, and further, the construction of staging areas owned and operated by the RECs has enormously reduced NEA's role in material handling. (This should only be a support function for a core agency). However, NEA's organization remains a major weakness. In order to become an "interested lender" NEA's organization will need to more closely reflect that of a banking concern. Proposals in that direction were only partially implemented. Another major weakness is NEA's finances. The Government had agreed to a financial restructuring plan for NEA before the project was appraised, but the plan has not been implemented to date. 7. Achievement of Objectives - RECs. The objective to improve the performance of the RECs has been partly achieved. Overall, the performance of the participating RECs has improved as is most impressively indicated by the decline of average system losses from 20.0 percent in 1992 to 14.9 percent by October 1998. Target values which were specified in performance improvement programs were not fully achieved, however. Most RECs met the targets for debt service coverage, the current ratio and the self-financing ratio but most failed to meet the loss reduction targets and the targets for days receivable and non-power cost per customer. 8. Achievement of Objectives - Electricity Supply. The objective to increase reliability has been partly achieved. System reliability in terms of outages did not improve, but the situation would have been much worse without the delivery of, above all, transformers and substations since the distribution networks had to cope with a sharp increase in power demand. The project also improved the quality of power supply in terms of voltage stability. Only modest contributions were made towards the objective to increase the availability of power supply as the project failed to supply wood poles and conductors. 9. Procurement. The history of the project has mainly been a history of procurement problems. Various factors, ranging from NEA's reorganization in the wake of the elections in 1992, to poor project management and technical issues, caused considerable delays. The SAR had assumed that shipments would start in early 1993 and end mid 1994. In reality, shipments started in September 1995 and ended in April 1998. 10. Bidding was originally done for 47 schedules under IFB 72. Two schedules thereof were later cancelled and five schedules were rebid under IFB 74. Contracts were signed for 36 schedules and deliveries were obtained from 31 thereof. The suppliers of wood poles and conductors (four schedules) defaulted on their contracts. Rebidding of these contracts was done under IFB 78. When the loan was closed on April 30, 1998, deliveries of material procured under IFB 74 had not been completed and only the bid evaluation of IFB 78 had been finalized. 11. Disbursement. Total disbursement reached US$ 54.6 million, corresponding to 60 percent of the loan amount. The amount of US$ 36.7 million was cancelled after loan closing. 12. Implementation. The implementation of all rehabilitation and expansion projects should have begun before the end of December 1994 and been completed by June 30. 1996. In reality, the implementation began in early 1996 and is still ongoing. 13. A source of concern is the large amount of material which is still in stock. By the end of October 1998, material in the staging areas exceeded 25 percent of the delivered quantities for about 45 percent of all material schedules. While that is partly due to the non availability of  v - complementary material, in particular wood poles and conductors, two other reasons must be noted: some material has not yet been allocated to RECs, and there is allocated material which is not needed or wanted any longer. 14. It has not been possible to determine the ex-post EIRR of the project. A lot of material has not yet been utilized and NEA does not have up-to-date files which show for which projects material has been utilized. A lot of material has not been and will not be used for the originally scheduled projects because, due to the considerable delays in deliveries, many of those projects have already been implemented with material obtained from other sources. While it is not possible to determine the ex-post EIRR, the achieved reduction of system losses can be taken as an indicator of sound economic rates of return. Major Factors Affecting the Project 15. Considerable delays and excess material are the two key problems of the project. The major factors which caused these problems are described below. 16. The Elections in May 1992 and NEA's Subsequent Reorganization in Early 1993 had a devastating impact on the project. Very little progress was made in the months before and after the elections as management devoted little time to the project. During the reorganization in early 1993, NEA's entire management was changed and over 20 staff who had been trained under the Energy Sector Loan and had already started working on the project were assigned other tasks or decided to leave NEA. Staff who replaced them were not trained and were much less committed to the project. 17. Overestimation of NEA's Capability. From previous smaller projects (Loan 1546-PH and Loan 3165-PH), NEA was known to have weaknesses in procurement-related issues. It was unfortunate that trained staff were lost during the reorganization in early 1993. But given the size of the project and the absence of a proper project management system, it must be doubted that NEA would have been able to handle procurement in a timely manner even if the trained staff had been available. NEA would have needed more support from consultants right from the beginning. In fairness, it must be said that the Bank had expected more assistance, based on a loose agreement with USAID that the consultant in charge of the USAID-financed capacity building component would help NEA with procurement issues. Unfortunately, that did not materialize. 18. Unrealistic Assumptions Regarding Procurement and Delivery. The project time schedule was based on overly optimistic assumptions regarding the processing of procurement and the delivery schedule. In view of the size of the project it is surprising that the SAR assumed that delivery of materials would virtually be completed within 18 months. Even if NEA had been an efficient procurement agency, the probability would have been high that more time would have been required. Some serious delays had to be expected in view of the mere size of the project. 19. No Results-Oriented Approach by NEA. Throughout the project there was no drive for results on NEA's side. The Bank acknowledges that NEA had to observe numerous regulations as it would otherwise have been accused of wrongdoings by suppliers and certain factions within NEA. The regulations certainly affected the execution of tasks but NEA could have been much more efficient nevertheless.  - vi - 20. Other factors which caused delays were inherent weaknesses in the procurement process, possible favoritism, complaints received from bidders, and the technical issue of whether poles made from Chinese larch are adequate for the Philippines. 21. Inconsistencies Between Needed Material and Delivered Material were the origin of the excess material problem. The bidding documents were based on preliminary lists which had been prepared by mid 1993. The contracts which the RECs signed with NEA between April 1995 and October 1997 reflected material requirements which had usually been determined after bidding. As a consequence, for many material schedules, the ordered quantities exceeded the quantities allocated to the RECs by a substantial margin. The resulting excess material increased further because some RECs did not need or want certain material any longer once it arrived after a considerable delay. Outcome and Bank/Borrower Performance 22. Project Sustainability. The prospects for project sustainability are uncertain. The project has contributed to an improved performance of the RECs but significant further improvements will require major institutional reforms such as their transformation into stock coops. NEA's new administration supports such reforms but other interest groups have, and will continue to oppose them. The project has strengthened some of NEA's functions but NEA's role in a reformed distribution sector remains unclear. Regarding the physical component, the fast utilization of material is not guaranteed in view of the substantial excess material. 23. Bank Performance. The Bank's performance was satisfactory during project identification and preparation but had deficiencies during project appraisal and supervision. NEA was not provided with sufficient support from consultants in the procurement process. The Bank also made naive assumptions regarding the duration of the project. That no supervision mission was conducted between May 1996 and November 1997 prevented the excess material problem from being addressed earlier. 24. Borrower Performance. The borrower's performance was satisfactory during project implementation but highly unsatisfactory during most of the time of project implementation. NEA has to assume responsibility for poor project management. no drive for results, and puzzling award recommendations. 25. Assessment of Outcome. The project outcome is rated unsatisfactory as the objectives have only been partly achieved. The excess material problem could have even justified a highly unsatisfactory rating. But the Bank is confident that the establishment of a task force, which was done by NEA's new administrator in December 1998, will soon solve the problem. Future Operations and Key Lessons Learned 26. Future Operations. NEA has agreed to inform the Bank at the end of each quarter about the status of utilization of delivered material. Staff at the resident mission, and supervision missions of the Bank's still ongoing energy projects, will monitor utilization. 27. Key Lessons. Projects with highly politicized agencies such as NEA, where the risk is high that key personnel will be changed after general elections, should not be initiated shortly before such elections. Alternatively, commitments should be obtained from the borrower that key personnel will not be changed. 28. At the time of Board presentation, at least the first bidding document should be available.  29. A project implementation unit should be in place at the beginning of a project. The unit should be staffed adequately or the project director should be authorized to assign personnel from other departments for certain tasks. 30. Procurement should be based on a cautious assessment of the capability of the procurement agency. Two or three small packages should be established rather than one large package. 31. Consultants which reside in the country should not be selected for assistance in procurement as they may not be considered impartial by the borrower. 32. If there are indications that favoritism plays a role, then the Bank should consider getting out of the project at the first signs, since chances are very low that favoritism will not be present in the later phases of the project. 33. Small items such as hardware and tools should not be included in the list of material funded by World Bank projects if they can be purchased locally. 34. The Bank's procurement tasks should be shifted to the resident mission. 35. Time schedules should be based on conservative assumptions regarding the duration of bid evaluation and delivery schedules. A buffer for delays should be added to the normally expected duration.  IMPLEMENTATION COMPLETION REPORT PHILIPPINES RURAL ELECTRIFICATION REVITALIZATION PROJECT (LOAN NO. 3439-PH) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT BACKGROUND 1. In 1969, the National Electrification Administration (NEA) was established to serve as the core agency for implementing the Government's rural electrification policy. NEA was made responsible for providing support to rural electrification by financing investments in distribution networks and providing technical assistance and operating guidelines to distribution companies. The establishment of distribution companies in the form of Rural Electric Cooperatives (RECs) started in 1971. Their number grew quickly in the 1970s and reached 110 by the end of 1979. By the end of 1998, there were 119 RECs in the Philippines. The RECs are organized as non-stock, non-profit membership corporations to distribute electric power in designated and predominantly rural franchise areas. 2. Until the mid 1980s. the Government pushed NEA to expand electrification without sufficient regard for cost. That was possible because foreign funds for electrification were flowing abundantly. NEA was even given a number of other roles such as to finance uneconomic mini-hydro and dendro thermal projects. When foreign funding was cut back drastically in the mid 1980s, serious financial and other weaknesses soon became evident. In almost all years of the 1980s, NEA had incurred large losses and its financial losses of 707 million Pesos in 1990 exceeded twice its total revenues. The finances of the RECs were in the same dismal state. The total net worth of all RECs was negative, 92 RECs were in arrears with their NEA obligations and the RECs typically only managed to collect 90 percent or less of revenues. The poor performance of the RECs was caused by low tariffs, inefficient operation, negligent maintenance, and uneconomic expansion programs imposed by highly politicized Boards. System losses averaged 25 percent, reaching 50 percent in some RECs. 3. The Bank had been involved in the sector since 1978 when a US$ 60 million loan was made through the Government to NEA to finance electricity distribution investments (Loan 1546- PH). The project was completed in 1983. It largely met its objectives but experienced difficulties in procurement. In 1989, the Bank provided NEA with $ 22.2 million under the Energy Sector Loan to support (i) the rehabilitation requirements of 12 RECs, (ii) power supply upgrades of eight other R.ECs, and (iii) substantial institutional development for NEA itself. 4. In 1989, the Bank had also produced a report entitled An Integrated Program to Revitalize the Sector (Report No. 8016-PH) which contained recommendations on how to solve the various problems of the rural power sector. NEA embraced the Bank's recommendations and took the lead in trying to implement its provisions. In the early 1990s, some progress had been made. The Government agreed to a financial restructuring plan for NEA which, unfortunately, has not been implemented to date. The RECs had substantially raised their tariffs and brought down system losses to about 22 percent in 1991. In November 1991, NEA's Board approved a Statement of Operating Policy which streamlined its operations and was considered a first step towards transforming NEA into an "interested lender". 5. NEA had developed an investment program for 1991 - 1995, composed of investments with a minimum economic rate of return of 15 percent. The program formed the basis for the Bank's Rural Electrification Revitalization Project (RERP). The project was appraised in March  - 2 - 1991 and approved by the Bank's Board on February 25, 1992. The loan of US$ 91.3 million became effective on October 22, 1992. The planned closing date was December 31, 1996. 6. A project of almost the same size was funded by the OECF. A loan of Yen 11.4 billion has been made available to support the rehabilitation of 44 RECs. The Bank-financed project supported 46 RECs.' The OECF loan became effective in October 1994 and is scheduled to be closed in October 2001. B. PROJECT OBJECTIVES 7. The project had three objectives. One objective was to strengthen the National Electrification Administration (NEA), the Government's core agency for implementing the rural electrification policy. NEA was ultimately to be transformed into an "interested lender" and the project aimed at supporting this through improving "interested lender" functions and changing NEA's organization. The second objective was to improve the performance of rural electric cooperatives (RECs) through performance improvement programs. The third objective was to increase the reliability and availability of power supply in rural areas by financing part of NEA's investment program for the years 1992 - 1995. C. PROJECT COMPONENTS 8. The project consisted of an investment component and a capacity building component. 9. Under the investment component, equipment and material for rehabilitation and expansion programs was delivered to 46 RECs. The participating RECs were required to implement performance improvement programs (PIPs) in order to obtain funding from the loan. Monitoring was done through monthly reports which the RECs submitted to NEA. The establishment of seven staging areas with warehouses was also funded by the loan. Including interest during construction, physical and price contingencies, US$ 90.3 million was made available by the Bank for the investment component. 10. The capacity building component was mainly financed by USAID. A loan of US$9 million was made available by USAID to finance consulting services and training to assist NEA and the RECs in project execution, operation and management, including upgrading technical and financial skills. The Bank's loan included US$ 1.0 million for consultant services to finance unanticipated, highly specialized technical assistance. D. EVALUATION OF OBJECTIVES 11. The project did not aim at major reforms but rather to lav the foundations for such reforms by strengthening key institutions, NEA and the RECs. The strengthening should be done via PIPs for participating RECs and by improving functions of NEA which would be important for it to become an "interested lender". The evaluation of investment proposals and the funding of only such proposals which had a sound rate of return were among these functions. Though not explicitly mentioned in the SAR, the project was also intended to promote the reorganization of NEA. The Accounts Management and the Loan Processing Department were to be given a stronger role, and activities such as training or technical assistance, which would be support activities under the "interested lender" concept, were to be phased out. The SAP mentions about 54 RECs as beneficiaries. In fact, 54 RECs originally applied for an on-lending agreement with NEA. Two applicants later merged, four backed out and no loan was approved by NEA for another three.  - 3 - 12. Starting with strengthening measures rather than major reforms was realistic. The RECs and NEA are part of the political texture of the country and major reforms would have met a lot of political resistance and also required changes in legislation. The Statement of Operating Policy which NEA's Board had approved in November 1991 promnised that the strengthening objectives could largely be achieved as far as NEA was concerned. Regarding the RECs, they had to subscribe to PIPs but the problem was that no real enforcement mechanism existed. NEA can take over the management of poorly performing RECs but that is limited to extremely poor performers in practice. The RERP did not introduce other enforcement mechanisms but it is hard to see which other mechanisms could have been successfully implemented without major reforms of the legal and institutional framework. 13. The objective to improve the reliability and availability of power supply in rural areas was important. In the early 1990s, about 50 percent of the population in rural areas had no access to electricity and those who had were hampered by frequent outages. The outages were mainly caused by the shortage of generation capacity but failures of distribution components also made significant contributions. It was realistic to assume that there would be no major problems with the installation of delivered material, since that was a traditional strength of NEA, and even the capability of most RECs was advanced in that they only needed assistance with sophisticated equipment. The flow of material had been a problem before when NEA had only one central warehouse. Goods were then shipped to the RECs soon after arrival but the RECs could often not put them to use because complementary goods were still outstanding. The establishment of regional staging areas with warehouses promised to end this. Procurement was a known weakness of NEA. However, it was assumed that the risk of delays was within acceptable bounds because NEA staff had been trained in procurement through the Energy Sector Project, and because USAID had verbally agreed that their consultant would assist NEA right from the beginning. E. ACHIEVEMENT OF PROJECT OBJECTIVES 14. Enhancing NEA's capability to function as an effective core agency for the sector. This objective has been partly achieved. NEA has applied sound methods to evaluate and select investment proposals submitted by RECs and only projects with a healthy rate of return, usually 15 percent, are nowadays funded by NEA. The institution also formulated performance improvement programs for the RECs which is a necessary component of the supervision function of a core agency. The construction of staging areas owned and operated by the RECs, enormously reduced NEA's role in material handling. (This should only be a support function for a core agency). Support services should also be rendered on a fee basis and NEA's policy to charge cost-covering fees for training services, which began in 1994, is a first step in this direction. 15. A major remaining weakness is NEA's organization. In order to become an "interested lender" NEA's organization will need to more closely reflect that of a banking concern. But proposals in that direction, which were submitted by a local consulting firm funded under the Energy Sector Project, met with stiff internal resistance from NEA managers and ended inconclusively. The proposals of a local banking consultancy funded from the RERP loan were partly implemented. Finance, Loans and Accounts Management Departments have been established but NEA's Technical Services and Coop Operations groups, which would render support services in the "interested lender" concept, remain the largest and strongest elements in NEA's organization.  - 4 - 16. Another major weakness is NEA's finances. The Bank only agreed to appraise the project after the Government committed itself to the financial restructuring of NEA. One key component was the passage of a bill to increase NEA's authorized capital from PhP 5 billion to PhP 25 billion. The bill passed the House of Representatives during the 8th (1992 - 1994) and 9th (1994 - 1996) Congress but failed to do so in the Senate. Technically, NEA has been bankrupt for many years. The Government has kept NEA solvent through a patchwork of financial measures such as relieving NEA of debt service obligations related to foreign loans. 17. Encouraging operational and financial reforms among the RECs. Progress has been mixed. In the contract with NEA, each participating REC had to agree to a performance improvement program. Most RECs met the targets for debt service coverage, the current ratio and the self-financing ratio, but most failed to meet the loss reduction targets and the targets for days receivable and non-power cost per customer. Table 6 in Part II of this report provides details. 18. Reducing losses has been the most important target. In 1996, only 38 percent of the RECs met the loss reduction targets. The corresponding figures for 1997 and the first ten months of 1998 are 46 percent and 23 percent respectively. This disappointing result is to a significant extent due to the non delivery or delayed delivery of material by the project. The target values were based on the assumption that material deliveries would be obtained as scheduled. The perfornance of the RECs was much better when using another benchmark, the cap on system losses which can be recovered through the tariff. In 1996, almost 90 percent of the participating RECs had system losses of less than 22 percent which was the cap in that year. In 1997, the cap of 20 percent was met by 87 percent of the participating RECs. In the first ten months of 1998, almost 75 percent of the RECs met the 18 percent cap. On average, system losses of participating RECs declined from 20.0 percent in 1992 to 14.9 percent by October 1998.2. 19. Improving the availability of reliable electricity supply in rural areas. This objective has been partly achieved. The project improved the reliability and quality of power supply, but made only modest contributions towards increasing the availability of power supply. 20. Statistics do not show a decline in the annual outage hours, but the situation would have been much worse without the project. The distribution networks had to cope with a sharp increase in power demand which led to overloaded lines and transformers and, consequently, reliability problems. The delivery of, above all, transformers and substations helped to keep those problems within acceptable levels. Recipient coops also confirmed that material obtained from the project improved the quality of power supply in terms of voltage stability. The average electrification ratio of participating RECs increased from 55 percent by the end of 1990 to 65 percent by the end of 1998, but the project made only modest contributions because it failed to deliver wood poles and conductors. Numerous problems ranging from the default of suppliers to technical issues, prevented any wood poles, and all but negligible quantities of conductors, from being delivered. On the one hand, the reduction cannot be solely attributed to material delivered by the project. Other material was used as well. On the other hand, without the material obtained from the project, system losses would have been higher. All RECs experienced a sharp increase in power demand which led to overloaded lines and transformers and consequently high losses. Material obtained from the project helped to alleviate the problem of overloaded distribution capacity.  F. PROCUREMENT AND IMPLEMENTATION RECORD 21. Procurement. The history of the project has mainly been a history of procurement problems. As a consequence, procurement-related issues also dominate this ICR. 22. Procurement was done under IFB 62 for support equipment (mainly software and testing equipment) and IFB 72 for the equipment and material needed for network rehabilitation and expansion. Rebidding for schedules which could not be settled under IFB 72 was done under IFB 74 and IFB 78. Contracts for the construction of warehouses were procured under IFB 73. 23. It was originally planned to establish two tender documents for the material needed for network rehabilitation and expansion. In May 1993, when the bidding process was far behind schedule, it was decided to consolidate the entire procurement activity into a single tender document to recover some of the lost time. The document, referred to as JiB 72, received the Bank's clearance in December 1993. The document contained 47 schedules. Bids for most schedules were received by late April 1994. The submission of award recommendations started in August 1994 and, except for two schedules for which recommendations were submitted in May 1995, ended in December 1994. The Bank required numerous clarifications which delayed processing. The Bank finally gave its no objection to 38 out of the 47 schedules between September 1994 and August 1995. Two schedules, steel poles and associated crossarms, were cancelled, because it turned out that there was no demand. Five schedules were rebid under IFB 74. 24. Contracts were signed for 36 out of the 38 schedules for which the Bank gave its no objection. No contracts were signed for two deliveries of kilowatt-hour meters because, when being asked to extend the bid validity, the supplier informed NEA that it would only do so at a higher price. The price would have still been lower than the price of other bidders but NEA considered this to be a violation of procurement guidelines. 25. Deliveries were obtained for 31 of the 36 signed contracts. Shipments started in September 1995 and ended in April 1998. The SAR had assumed that shipments would start in early 1993 and end mid 1994. The supplier of wood poles and the supplier of conductors (four contracts) defaulted on their contracts. Several suppliers were behind the agreed delivery schedule but delays usually did not exceed three months.3 Quality problems were experienced with some schedules4 but all problems were finally solved. 26. IFB 74 included nine schedules: four schedules for which no responsive bids were obtained under IFB 72; the two schedules for kilowatt-hour meters mentioned in para 24; one schedule, concrete poles, which had not obtained the Bank's no objection; and an additional schedule each for wood poles and anchor logs. 3 Major exceptions were hardware, clamnps and Class 100 kWh meters. The final shipment of hardware and clamps was delayed by one year when production facilities of the supplier were destroyed by a fire in February 1997. Class 100 kWh meters were delivered as scheduled by the end of 1996 but without sockets. The manufacturer of the meters had stopped the production of sockets in 1992, i.e. before bid submission. In early 1998, NEA finally accepted the bidder's proposal to deliver locally manufactured sockets at a discount. 4 Major quality problems were experienced with the first shipment of distribution transformers which arrived in August 1996. Several transformers were damaged because of inadequate crating. The supplier repaired all rejected transformers until the end of 1997. Other rejects concerned hardware, Class 200 kWh meters, and hydraulic compression tools. The complaints about delivered hardware were not mainly caused by defects but by the coops' strong preference for otlher brands.  -6 - 27. Bidding for IFB 74 was done in the period October - December 1995. Bid evaluation and contract award proceeded relatively smoothly for seven schedules but not for wood poles and associated anchor logs. In fact, the schedules became a nightmare for NEA and the Bank. The various problems which affected these schedules are discussed in Annex I. It took until November 1997 before the contracts were finally awarded. When loan was closed in April 1998, no deliveries of wood poles and anchor logs had been made and deliveries of concrete poles and kWh meters were not completed. The legal status of the corresponding contracts is unclear. The suppliers will probably not insist on delivery as they know that NEA does not have the funds to pay them. 28. IFB 78 comprised five schedules: four schedules for conductors and one schedule for wood poles. The schedules were originally included in IFB 72 but the suppliers had defaulted on these schedules. The bidding document was issued in December 1997. Bid evaluation started mid February 1998. By the end of April, NEA had submitted award recommendations for all four conductor schedules and had finalized the evaluation of the bids for wood poles. No award recommendations were made because NEA had well founded concerns that the three lowest bidders offered poles of non-acceptable quality. NEA therefore proposed to conduct pre-award inspections. The proposal was not carried out, nor were contracts signed for the delivery of conductors, because the loan was closed on April 30, 1998. 29. Implementation. According to the SAR and the project definition in the Loan Agreement, the implementation of all rehabilitation and expansion projects should have begun before the end of December 1994 and been completed by June 30, 1996. The procurement delays meant that implementation activities only started in early 1996. Due to the delays, the project was classified as a problem project in mid 1995. A year later, when deliveries were ongoing, the project was reclassified as satisfactory. However, it was obvious that the duration of the project had to be extended beyond December 1996 in order to achieve the objectives. A first extension until the end of December 1997 was granted in November 1996. A second extension until the end of April 1998 was granted in December 1997. NEA was informed at that time that another extension may be granted if it fulfilled certain conditions linked to IFB 78 and a revised material allocation schedule. As NEA failed to meet the latter, the loan was closed on April 30, 1998. 30. While most material has been withdrawn from the staging areas, large quantities are still in stock. That is partly due to the non availability of complementary material; in particular wood poles and conductors. But two other reasons must also be noted: some of the delivered material has not yet been allocated to RECs and some of the allocated material is not needed or wanted any longer. That the delivered quantities would not exactly match the needed quantities was inevitable. Distribution projects are often subject to changes and some excess material was, therefore, to be expected. Excess material of up to 10 percent of the delivered quantities must be considered as normal. The problem is that for more than one-fourth of all schedules, the non allocated material already exceeds the ten-percent margin. In addition there is material that is not needed or wanted any longer. The exact quantities are not known as only few RECs have informed NEA. Most RECs have simply not withdrawn the not needed or not wanted quantities from the staging areas. 31. Some of the participating RECs do not need the three-phase meters delivered under IFB 72 any longer. The reason behind this is that some coops have meanwhile switched to time-of-use meters for their industrial and large commercial customers. By the end of October 1998, only a small percentage of the delivered three-phase meters had not been allocated to RECs. However, almost 75 percent of the allocated meters were still in the staging areas.  - 7 - 32. There is also a large stock of kilowatt-hour meters delivered under IFB 74. Some RECs refuse to withdraw them from the staging areas as they believe that the meters are of poor quality. They had received meters from the same manufacturer about 12 years ago and those meters really were of poor quality. At the time of bidding for the RERP, the manufacturer was already producing meters under a licensing agreement with a highly reputable manufacturer. The delivered meters fulfill the technical specifications listed in the bidding document. But some RECs nevertheless refuse to withdraw the meters, citing non-compliance with specifications which go beyond those of the bidding document. By the end of October 1998, about 42 percent of the delivered meters under IFB 74 were still in the staging areas. 33. The fact that almost 50 percent of the delivered hardware was still in the staging areas by the end of October 1998, is due to a similar reason: the preference for other brands which are available on the local market. 34. By the end of October 1998, the status of unallocated material and material in the staging areas was as shown below. Material in the staging areas includes material which has been rejected because of defects. Except for concrete poles, only minor quantities of defective material were in the staging areas. All non-allocated material was delivered under IFB 72. The non- allocated material does not include the material which some RECs do not need or want any longer, which mainly relates to kilowatt-hour meters and hardware. Number of Schedules Percent of Number of Schedules Percent of (IFB 62, 72 & 74) Delivered Material (IFB 62, 72 & 74) Delivered Material In Staging Areas Not Allocated 9 < 10 16 0 8 > 10-15 8 >0-5 6 > 15-25 6 >5-10 12 > 25-50 8 >10-20 5 > 50 3 >20 Comments Deliveries comprised four schedules under IFB 62, 31 schedules under IFB 72 and seven schedules under IFB 74. The statistic excludes voltage regulators delivered under IFB 72 because the exact status was unknown. The statistic for the staging areas also excludes concrete poles delivered under IFB 74 because 52 percent of the delivered quantity were rejected due to missing holes. The supplier has started drilling the required holes. 35. Project implementation was largely satisfactory as regards the handling of delivered material. It is true that the warehouses were only completed between August 1996 and December 1997, i.e. when material had already been delivered, but sensitive material which had arrived before the completion of the warehouses had been adequately stored indoors, usually either in facilities of the consignee REC or in rented facilities. The inspection of four warehouses in November 1997 found that all had up-to-date files which showed the allocated, delivered, rejected and withdrawn quantities. In general, material was adequately stored and random checks revealed no discrepancies between the actual quantities in stock and the quantities shown in the files. The original idea, that the RECs wait to withdraw material until all the material needed for a project has arrived, has been abandoned by most staging areas. As wood poles and conductors will not be supplied by the project, most staging areas now ask the RECs to withdraw material within one month after notification of arrival. Storage charges are levied by most staging areas and at least one area has started charging penalties for late withdrawal.  - 8 - 36. It is not possible to determine the ex-post EIRR of the project. A lot of material has not yet been utilized and NEA does not have up-to-date files which show for which projects material has been utilized. Only small quantities of material has been or will be used for the originally scheduled projects because, due to the considerable delays in deliveries, many of those projects have already been implemented with material obtained from other sources. While it is not possible to determine the ex-post EIRR of the project, the achieved reduction of system losses can be taken as an indicator of sound economic rates of return. G. MAJOR FACTORS AFFECTING THE PROJECT 37. Procurement Process. The procurement process had some inherent weaknesses which contributed to the delays. Bid evaluation was done by NEA's technical evaluation committee. The committee checked whether the bids met the specifications and produced a ranked order of technically responsive bids giving the lowest bidder the top position. The findings of the technical evaluation committee were reviewed by the Bank's consultant and then submitted to the PBAC for award recommendation. The PBAC's award recommendation was submitted to the Bank's headquarters in Washington for no objection. Once the Bank had given its no objection, the contract was awarded by NEA's Board. After notification of contract award, the award winner had to submit the performance guarantee before the contract was signed. Thereafter NEA had to open the letter of credit in order for the contract to become effective. 38. One factor which caused delays was that NEA's Board normally only met once a month and that board meetings were occasionally cancelled. Furthermore, the Bank often sought additional clearances and the mere distance between Manila and Washington then added to delays. Some issues which could have been clarified quickly had Bank staff been based in Manila were only clarified after a lengthy exchange of faxes. The large number of clarifications sought by the Bank is surprising, because a Bank consultant had reviewed NEA's bid evaluation and had usually reached a consensus with NEA on award recommendations. The fact that the consultant had a residence and business interests in the Philippines affected his cooperation with NEA as he was not considered impartial by some of NEA's staff. The time it took some award winners to submit the performance guarantee - in one case more than half a year - and the time it sometimes took NEA to open the letter of credit were also factors which delayed the project. 39. The Elections in May 1992 and NEA's Subsequent Reorganization in Early 1993. The general elections in May 1992 meant that very little progress was made over a period of several months. In the last two or three months before the elections, management devoted little time to the project. The elections were followed by a seven month period of uncertainty regarding the impact on NEA's management. That certainly affected the motivation of the management and explains why again little time was devoted to the project. 40. The reorganization began in January 1993 with the installation of the new administrator. Within one month, NEA's entire management was changed. While that was bad for the project it was even worse that over 20 staff who had been trained under the Energy Sector Loan, and had already started working on the project, were assigned other tasks or decided to leave NEA. Staff who replaced them were not trained and were much less committed to the project. As a consequence, NEA staff were much less efficient than could have been expected. 41. Overestimation of NEA's Capability. Both the Bank and NEA overestimated NEA's capability to handle the bidding process in a timely manner. NEA was known from previous smaller projects to have weaknesses in procurement-related issues. Knowing NEA's weaknesses, the Bank had trained NEA staff in the Energy Sector Project (Loan 3165-PH). It was unfortunate that trained staff were lost during the reorganization in early 1993. But given the size of the  - 9 - project and the absence of a project management system, it must be doubted that NEA would have been able to handle the project in a timely manner even if the trained staff had been available. 42. As a consequence of the overestimation, the Bank initially provided NEA with insufficient support from consultants. The consultant who was assigned in September 1992 to assist NEA in the preparation of the technical specifications was given an enormous workload. It was only in May 1993 when further consultants were added that real progress was made with the preparation of IFB 72. In fairness, it must be said that the Bank had expected that NEA would get more assistance right from the beginning.5 The expectation was based on the loose agreement with USAID that the consultant in charge of the USAID-financed capacity building component would help NEA with procurement. When that did not happen, time was lost due to bidding for consulting services.6 43. Efficient project management would have required a project implementation unit which was never established. Tasks were carried out by staff from departments who remained under the authority of the head of department. The project director could not order staff to carry out certain tasks but needed the agreement of the head of department. Delays were almost unavoidable. 44. Unrealistic Assumptions Regarding Procurement and Delivery. The project time schedule was based on overly optimistic assumptions regarding the processing of procurement and the delivery schedule. In view of the size of the project - 46 RECs which are scattered over the Philippines participated in the project, the project comprised more than 50 contracts for delivery of equipment and material and seven contracts for the construction of warehouses - it is surprising that the SAR assumed that it would only take three years from the preparation of tender documents to the delivery of all material. Even if NEA had been an efficient procurement agency, the probability would have been high that some schedules would not proceed smoothly. Some serious delays simply had to be expected in view of the mere size of the project. It should be noted in this context that the planned duration of the OECF-funded project which is of the same size is 7 years which compares with the original 4Y/2 years of the Bank-financed project. The SAR pointed to the risk that NEA might confront problems in meeting the time schedule but no buffer was provided for delays. 45. Single Tender Document for IFB 72. The decision in May 1993 to consolidate the entire procurement activity into a single tender document in order to recover lost time certainly contributed to the delays. The resulting tender for IFB 72 contained 46 separate schedules. It was the first time that NEA had dealt with such a huge procurement package in a single bidding process. 46. Expanded Value Added Tax. In January, 1996, imports of equipment and material for RECs became subject to the expanded value added tax (EVAT). NEA delayed shipments in early 1996 while trying to make the Government exempt the RECs from EVAT. It may be argued that assistance from more consultants right from the beginning would not have been effective in view of the adverse impact of the general elections. However, the consultants could probably have largely compensated for the poor project management during that time. 6 When NEA was about to award the consultancy contract after the bidding process, the USAID consultant intervened and the original concept, that the consultant should help NEA, was finally pursued.  - 10 - 47. No Results-Oriented Approach by NEA. Throughout the project there was no drive for results on NEA's side. The presence of Bank staff during supervision missions usually made NEA act quickly but when Bank staff had left, NEA again followed a no-need-to-hurry approach. The long time it often took NEA to prepare bidding documents, provide clarifications, or open letters of credit, and NEA's lackluster handling of the excess material problem, all indicate that there was no drive for results. 48. The Bank acknowledges that NEA had to strictly observe numerous regulations as it would otherwise have been accused of wrongdoings. Non-successful bidders were usually looking for any reason for complaints. After the reorganization in 1993, there were also two factions within NEA, one with linkages to the former Government and one with linkages to the new Government, with both looking for reasons to undermine the other faction. These reasons understandably made NEA closely follow existing regulations and may sometimes have prevented a speedy execution of tasks. However, no regulation would have prevented NEA from detecting the excess material problem and solving it in a timely manner, and there were various other instances where NBA showed no drive for results.7 49. Wood Poles. The procurement of wood poles under IFB 74 provides an extreme example of how technical issues caused delays. Procurement of wood poles was affected by several other problems, too, and became a nightmare for both NEA and the Bank. The procurement history of wood poles is described in detail in Annex II. The technical issue which ultimately delayed procurement by about 18 months was whether poles made from Chinese Larch are suitable for the Philippines. 50 Favoritism. Unfortunately, favoritism may have played a role in the bidding process and contributed to the delays. Favoritism may have already delayed the establishment of bidding documents. One reason for the long time it took NEA to produce the technical specifications can have been that NEA staff tried to tailor the specifications to the products of certain suppliers. Another indicator of favoritism is that confidential correspondence between the Bank and NEA reached bidders. Non successful bidders used the information to accuse NEA of irregularities; partly via public media. Other indications are that the Bank had on several occasions reasons to doubt that NEA handled procurement correctly. The procurement history of concrete poles which is described in Annex II is an outstanding example. Procurement of distribution transformers, kilowatt-hour meters, mobile substations and heavy equipment also saw puzzling award recommendations. 51. An investigation which made headlines in local newspaper in September and October 1997 must be mentioned in the context of favoritism. Both the Bank's project and the OECF-funded project were investigated in 1997 by the House Committee on Energy. The Committee's report of September 3, 1997, recommended the prosecution of seven NEA officials for several reasons, including corrupt practices, illegal procedures, unlawful acts, irregularities, mismanagement, inexcusable negligence and costly delays. The report also accused the Bank of "undue meddling". A similar complaint which had been made by a bidder had been investigated by the Bank in 1996. The investigation concluded that Bank staff had acted properly. In its response of September 29, 1997, NEA denied all accusations. Politics may have played a role in the investigations and unsuccessful bidders have probably supported if not instigated the The handling of the sockets for Class 100 kWh meters is another example. Contrary to the signed contract, the meters were delivered without sockets. When being notified by NEA, the supplier responded that the manufacturer had stopped the production of the sockets five years ago. The supplier offered to deliver locally manufactured sockets at a discount. NEA continued for almost nine months to insist on delivery by the manufacturer and only accepted the supplier's proposal after one of the Bank's supervision mnissions strongly recommended to do so.  investigations. The investigation ended inconclusively - no NEA official was prosecuted - but left a bitter after-taste. 52. Complaints. The Bank and NEA received an unprecedented number of complaints from bidders, their representatives (most bids were submitted by trading companies which acted as representatives of the manufacturer) and even embassies of manufacturers' countries. It also happened that complaints were directed to local media before they reached NEA or the Bank. One complaint which reached the Bank in early August 1996 accused the task manager and another Bank staff of unfair treatmnent of the complainant's company. An internal investigation carried out by the Bank did not find any substantiation for the allegations. But the Bank decided to change the task manager in autumn 1996 since he might possibly have been considered not to be impartial in subsequent procurement activities. 53. Most complaints were related to the procurement of wood poles - more than 10 - but other schedules (e.g. concrete poles, kWh meters) also saw several complaints. Most complaints lacked substance but it took time for NEA and the Bank to respond to the complaints and in at least one case the complaints contributed to substantial delays. This case concerned the procurement of wood poles under IFB 74 and is described in Annex I. 54. Inconsistencies Between Needed Material and Delivered Material. The list of needed material was based on investment proposals submitted by RECs for appraisal. At the start of the project in September 1992, NEA had appraised the proposals of 30 RECs and was working on the appraisal of proposals received from 24 other RECs. Since the first batch of proposals (30) had been established some time previously, the Bank asked NEA to update these proposals. In mid 1993, while the updating continued and had been extended to all proposals, a preliminary list of material had been established by NEA and agreed upon by the participating RECs. This list was basically reflected in the bidding document IFB 72. It was intended to finalize the list of required material before the award of contracts. At the time of contract award, quantities could have been corrected within the allowable limit of 15 percent of the bid price for each lot. The updating continued with the assistance of consultants until mid 1996. The updating led to revised material lists for the RECs and the revised lists were reflected in the contracts which the RECs signed with NEA between April 1995 and October 1997. The updating also led to the cancellation of the schedule for steel poles and associated crossarms in IFB 72 but had otherwise no impact on IFB 72. As a consequence, the ordered material was not consistent with the material lists carried in loan agreements between NEA and the RECs. That was of no concern as long as excess material was within reasonable bounds of up to 10 percent. For many schedules, excess material was much higher, however. NEA showed the excess material in its material lists under the heading "NEA Buffer". NEA made no effort to find users for excess material and the Bank only started to get concemed in November 1997. H. PROJECT SUSTAINABILITY 55. The prospects for project sustainability are uncertain. The project has contributed to the improved performance of the participating RECs. Significant further improvements will require major institutional reforms such as the transformation of RECs into stock cooperatives and mergers of RECs. NEA's new administrator supports the reforms and there are indications that they may gain momentum. But there is a lot of resistance on the side of the coops and some politicians which threatens that progress will be very slow, The project strengthened functions of NEA which would be important in the interested lender concept. But the concept itself is questionable if the RECs undergo the institutional reforms mentioned above. 56. Serious problems related to the sustainability of the project are the non delivery of wood poles and conductors and the excess material, consisting of large quantities of unallocated  - 12 - material and allocated material which the RECs do not need or want any longer. The non availability of wood poles and conductors will prevent all delivered equipment from being installed soon. Insulators, wires, distribution transformers, and hardware are mainly concerned. The Bank has been informed by NEDA that the Government intends to fund the wood poles and conductors but no firm dates could be provided. Regarding excess material, the new administrator established a task force in December 1998 to tackle the problem. It is hoped that the task force will quickly solve the problem but NEA's past performance does not guarantee that. I. BANK PERFORMANCE 57. Identification and Preparation. Bank performance was satisfactory. Strengthening the distribution sector was not only necessary in view of the weaknesses of NEA and the poor performance of the RECs, but also because it was obvious that the planned reforms of the upstream sector, which promised to introduce competition into, power generation, would not fully bear fruit if the distribution sector remained weak. Furthermore, the Bank had trained staff from NEA under the Energy Sector Loan. The trained staff promised that. with some support from consultants, the project would be handled efficiently by NEA. 58. Appraisal. The Bank's performance had deficiencies. Staff which had been trained under the Energy Sector Loan had begun with the appraisal of projects, the formulation of performance improvement programs, and the preparation of material lists and tender documents, but the works were still at an early stage. Against that background and the absence of a project management system, far too optimistic assumptions were made. In view of the size of the project - the project supported 46 RECs - even an efficient procurement agency would probably have had problems completing all procurement related activities within 18 months. Furthermore, to assume that delivery would be completed within 30 months was naive in view of the large number of material schedules; ultimately more than 50. The Bank had trained staff from NEA in procurement related activities under the Energy Sector Loan and it was unfortunate and beyond the Bank's control that trained personnel were lost in the wake of NEA's reorganization in early 1993. But since only 20 RECs were supported under the Energy Sector Loan, whereas 46 were supported by the project, the Bank should have provided more assistance to NEA in procurement related activities. In fairness, it must be noted that more assistance was foreseen. It had been loosely agreed with USAID that the consulting company which was financed by USAID for the capacity building component would assist NEA with procurement. While it was unfortunate that that was not realized, it was unwise for the Bank to base the ambitious time schedule on non-binding agreements. 59. Supervision. Bank performance is rated deficient. The Bank made efforts to assist NEA when supervision missions found deficiencies, but the provided assistance was often too little or too late. The consultant who started assisting NEA in September 1992 could not compensate for all of NEA's weaknesses. Real progress was only made when additional consultants were engaged in May 1993. During bid evaluation of IFB 72, only one consultant assisted NEA. J. BORROWER PERFORMANCE 60. Identification. The borrower's performance during project identification was satisfactory. NEA had developed a reasonable investment program for the period 1991 - 1995 which formed the basis of the project. NEA had also embraced the Bank's reform recommendations as most convincingly demonstrated by the Statement of Operating Policy which was approved by NEA's Board in November 1991.  - 13 - 61. Implementation. The borrower's performance during project implementation was highly unsatisfactory during most of the time. NEA cannot be blamed for the delays which were caused by the change of its management and key personnel in the wake of the general elections in 1992. Every institution would have been hurt by the loss of trained personnel in project evaluation and procurement. But NEA has to assume responsibility for poor project management, no drive for results, and puzzling award recommendations. K. ASSESSMENT OF OUTCOME 62. The project outcome is rated unsatisfactory because the objectives have only been partly achieved. The excess material problem could have even justified a highly unsatisfactory rating. But the Bank is confident that the establishment of a task force, which was done by NEA's new administrator in December 1998, will soon solve the problem. All material is standard material and it should, therefore, not be a big problem to find users. In fact, the Bank learned from the coops, during the supervision missions in November 1997 and November 1998, that there are a number of coops which would like to be allocated excess material. L. FUTURE OPERATION 63. NEA has agreed to inform the Bank at the end of each quarter about the status of utilization of delivered material. Staff at the resident mission will occasionally visit NEA to check the material utilization schedule. Staff from RMP may also visit staging areas or participating RECs if missions made for other projects bring them into the corresponding areas. Supervision missions for the Bank's still ongoing projects will be used to monitor operation, mainly through contacts with NEA. The ongoing projects are the Leyte - Luzon Geothermal Project (Loan 3746 and 3746) which will be closed in June 1999, the Leyte - Cebu Geothermal Project (Loan 3700) with September 1999 as the closing date, and the Transmission Grid Reinforcement Project (Loan 3996 and 3997) which will be closed in December 2000. M. KEY LESSONS LEARNED 64. Projects with highly politicized agencies such as NEA, where the risk is high that even key operational personnel will be changed after general elections should not be initiated shortly before such elections. Altematively, commitments should be obtained from the borrower that key personnel will not be changed. 65. At the time of Board presentation, at least the first bidding document should be available. 66. A project implementation unit should be in place at the beginning of a project. The unit should be staffed adequately or the project director should be authorized to assign personnel from other departments for certain tasks. 67. Procurement should be based on a cautious assessment of the capability of the procurement agency. Two or three small packages should be established rather than one large package. 68. Consultants which reside in the country should not be selected for assistance in procurement as they may not be considered impartial by the borrower. 69. If there are indications that favoritism plays a role, then the Bank should consider getting out of the project at the first signs, since chances are very low that favoritism will not be present in the later phases of the project.  - 14 - 70. Small items such as hardware and tools should not be included in the list of material funded by World Bank projects if they can be purchased locally. 71. The Bank's procurement tasks should be shifted to the resident mission. 72. Time schedules should be based on conservative assumptions regarding the duration of bid evaluation and delivery schedules. A buffer for delays should be added to the normally expected duration.  - 15 - PART II: STATISTICAL TABLES Table 1: SUMMARY OF ASSESSMENTS Achievement of Objectives Not A. Achievement of Objectives Substantial Partial Negligible Applicable x Macroeconomic policies X Sector policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender concems X Other social objectives X Environmental objectives Public sector management X Private sector development X B. Project Sustainability Likely Unlikely Uncertain x C. Bank Performance Highly Satisfactory Deficient Satisfactory Identification X Preparation assistance X Appraisal X Supervision X D. Beneficiary Performance Highly Satisfactory Deficient Satisfactory Preparation X Implementation X Covenant compliance X E. Assessment of Outcome Highly Satisfactory Satisfactory Unsatisfactory Highly Unsatisfactory x  - 16 - Table 2: RELATED BANK LOANS Loan Title Purpose Year of Status Approval Loans 2201-PHI 2202-PH Promote private oil companies in petroleum 1982 Closed Petroleum Exploration exploration and strengthen the exploration Promotion Project capabilities of Bureau of Energy and PNOC Loan 2203-PH Geothermal Improve national strategy for geothermal 1982 Closed Exploration Project exploration, government geothermal development policy and institutions; facilitate private involvement in geothermal exploration etc. Loan 2969-PH Support the least cost source incremental capacity 1988 Closed Bacon-Manito Geothermal for Luzon grid; and strengthen institutional Power Project capabilities and financial viability Loans 3163/3164-PH Orient the development strategy of the energy 1990 Closed Energy Sector Project sector-National Power Corporation component JEXIM component of Loan First phase of a least-cost energy sector 1992 Active 3163-PH (administered by development program The World Bank) Loan 3165-PH Orient the development strategy of the energy 1990 Closed Energy Sector Project sector-Government component (DOE, ERB, EMB, NEA) Loan 3626-PH Alleviate power shortages in Luzon and 1993 Closed Power Transmission & strengthen NPC 's financial viability Rehabilitation Project Loans 3700/3702-PH Development of geothermal resources for power 1994 Active Leyte-Cebu Geothermal generation and strengthen the financial viability of Project NPC and PNOC-EDC Loans 3746/3747-PH Leyte- Development of geothermal resources for power 1994 Active Luzon Geothermal Project generation and strengthen the financial viability of NPC and PNOC-EDC Loans 3996/3997-PH Support the Government's plan to restructure and 1996 Active Transmission Grid privatize the National Power Corporation. Reinforcement Project  - 17 - Table 3: PROJECT TIMETABLE Steps in project cycle Date planned Date actual Identification N/A November, 1989 Preparation N/A April, 1990 Appraisal N/A March, 1991 Negotiations December 9-12, 1991 Board presentation September, 1991 February 25, 1992 Signing N/A June 3, 1992 Effectiveness N/A October 22, 1992 Project completion June 30, 1996 Still ongoing Loan closing December 31, 1996 April 30, 1998 Table 4: LoAN DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL Bank FY FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 Appraisal estimate (US$ million) 2.0 8.0 23.0 58.0 86.0 91.3 91.3 91.3 Revised estimates (US$ million) 2.0 8.0 18.0 24.5 48.0 84.0 91.3 Actual (US$ million) 2.0 17.3 45.0 55.3 54.6 Actual as percent of appraisal 3.4 20.1 49.3 60.6 59.8 estimate. I_I Actual as percent of revised est. __11.1 70.6 93.8 65.8 59.8 Comment Actual cumulated disbursements in FY99 reflect cumulated disbursements as of December 31,1998. Difference between FY98 and FY99 values mainly due to refund of US$ 0.9 million from Special Account.  - 18 - Table 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION Indicators Appraisal estimate Actual Comparison REC Distribution System International Tendering First tender Single tender only. Delay of more than two completed in first Issued in early 1994 years when excluding quarter of 1992; (IFB 72). Bid rebidding and using the second tender in mid evaluation completed planned completion of 1993 in August 1995. the second tender as reference date, Rebidding under IFB 78 in early 1995. Bid evaluation completed in November 1997. Rebidding under IFB 78 in early 1998. Bid evaluation completed in April 1998. Delivery of materials From early 1993 From early 1996 Delivery started with a throughout mid 1994. throughout April delay of three years. 1998. Wood poles and conductors were not delivered Substation and Line Design Mid 1991-Mid 1993. Started in 1991 but enormous delays in delivery often required changes in design. Still ongoing. Line and Substation Construction 1993-1995 Started in 1996. Still ongoing Consumer Connection 1993-Mid 1996 Project made no significant contribution as wood poles and conductors were not delivered. Support Facilities (Staging Areas) Tendering 1992-Mid 1993 Second half of 1995. More than two years delayed. Delivery of Materials and construction End of 1992 till end Completion of Completion of of 1994. warehouses between construction delayed by May 1996 and almost three years. November 1997. Training and Technical Assistance Recruitment of Consultants 1992-Mid 1993 Last quarter of 1992 and Mid-1993. Services Last quarter of 1992 Last quarter of 1992 till end of 1995. till Mid-1 996.  - 19 - TABLE 6: KEY PERFORMANCE INDICATORS FOR PROJECT OPERATION The table reflects targeted and actual values for 1 998 of performance improvement indicators for recipient RECs. The targeted values are for 1998 Except for losses. the actual values reftect the values at the end of the first six months of 1998. Actual losses refer to the first ten months in 1998. Losses include electricity use of the coop and are expressed in percent of purchases plus Own generabton. No. REC Losses Days Receivable Debt-Service Ratio Current Rabo Non-Pow. Cost I Cust Self-Financing Ratio (percent) (Pesos) (percent) Target Actuai Target Actual Target Actual Target Actual Target Actual Target Actua Inec 14.00 12.03 30.00 33.00 1.20 2.99 1.10 1.38 779 844 20 78 2 Iseco 14.00 17.88 45.00 47.00 1.20 3.94 1.10 1.98 600 738 20 205 3 Luelco 15.00 19.91 33.00 25.00 1.20 1.68 1.00 1.56 835 884 4 Panelco I 18.00 20 37 44.00 37.00 1.69 1.76 1 20 1.38 799 1,036 20 79 5 Cenpelco 16.00 25.46 48.00 74.00 1.29 0.20 1.38 0.90 605 591 23 (18) 6 Panelco III 18.00 19.30 77.00 67.00 1.20 3.86 1.10 1.34 786 1,181 20 52 7 Pelco III 14.00 19.68 35.00 91.00 1.20 n.a. 1.10 1.41 1,024 837 20 (103) 8 Tarelco I 16.00 20.79 55.00 64.00 1.20 1.34 1.10 1.07 770 807 20 76 9 Zameco I 16.00 25.71 31.00 80.00 1.23 n.a. 1.05 1.16 889 914 20 (204) 10 Zameco II 16.00 20.96 37.00 44.00 1.73 1.79 2.88 1.32 1,127 1.056 20 272 11 Aurelco 10.00 10.16 67.00 75.00 1.57 1.80 2.48 9.36 965 1.104 12 Batelec I 16.00 14.35 49.00 53.00 2.13 1.92 1.37 1.28 837 851 33 55 13 Fleco 16.00 23.96 30.00 87.00 1.23 0.47 1.00 0.54 1,034 1,141 20 445 14 Quezelco I 12.00 12.22 32.00 48.00 1.93 1.20 3.23 2.22 1,128 1,234 15 Canoreco 10.00 14.76 74.00 124.00 1.83 1.00 1.73 1.83 1,748 1,607 20 56 16 Casureco I 12.00 18.24 31.00 59.00 1.58 0.56 1.58 1.02 1.417 1,076 20 (24) 17 Casureco II 14.00 18.17 58.00 71.00 1.15 2.29 2.32 2.80 878 1,995 25 104 18 Casureco III 14.00 18.96 45.00 94.00 2.21 0.39 3.30 0.59 1,139 1,475 20 (23) 19 Casureco IV 19.00 20.30 61.00 53.00 1.09 0.89 0.57 0.43 941 1,022 36 309 20 Akelco 16.00 17.81 50.00 74.00 1.20 0.98 1.10 2.87 1,130 1,031 20 1 21 Capelco 12.00 10.21 37.00 51.00 1.20 1.18 1.00 3.51 770 1,202 20 38 22 lleco I 12.00 12.78 37.00 34.00 1.20 3.58 1.10 3.37 770 1,248 20 97 23 lleco II 12.00 15.45 36.00 62.00 1.20 2.02 1.00 1.61 770 1,194 20 68 24 Ceneco 14.00 15.82 46.00 70.00 2.45 1.35 1.99 1.34 1,170 1,792 25 Vresco 13.12 17.80 31.00 53.00 1.28 1.16 1.80 0.19 1,336 1,361 20 37 26 Boheco I 10.00 7.92 32.00 26.00 4.02 0.63 5.28 3.05 1,051 807 27 CebecoI 9.00 10.23 34.00 35.00 1.20 1.11 1.00 1.72 722 913 20 3 28 Cebeco II 4.00 5.64 34.00 35.00 4.99 3.84 2.48 3.16 1,219 954 29 Cebeco III 9.00 6.83 34.00 29.00 1.20 1.41 1.00 1.72 772 944 20 18 30 Samelco II 16.00 16.06 30.00 47.00 1.20 1.56 3.20 0.90 686 1,016 31 Zamelco 16.00 12.80 30.00 47.00 1.22 3.05 1.24 1.72 1,139 1,557 21 182 32 Zaneco 15.00 16.86 32.00 41.00 1.20 2.17 1.10 2.05 1,143 1,086 20 111 33 Zamsurecol 11.00 11.19 44.00 37.00 2.54 2.54 4.03 5.58 1,281 1,425 91 165 34 Zamsurecoll 8.00 11.86 16.00 26.00 1.65 1.99 1.68 2.93 1,128 882 20 78 35 Aneco 13.00 10.69 34.00 41.00 1.39 3.37 2.43 3.08 1,127 1,576 36 Aselco 13.00 10.49 31.00 58.00 1.44 1.67 2.07 1.53 1,430 861 37 Fibeco 15.00 13.76 45.00 55.00 1.20 2.14 1.00 1.34 951 1,058 20 109 38 Moresco I 3.79 6.69 47.00 59.00 4.25 1.98 2.41 1.89 1,458 1.497 41 47 39 Moresco II 16.05 3.81 49.00 94.00 1.50 2.50 1.02 4.46 1,278 1,062 25 48 40 Daneco 11.00 12.16 38.00 59.00 1.20 2.84 1.00 3.59 1,416 1,573 20 54 41 Doreco 9.00 n.a. 46.00 44.00 1.83 1.24 1.38 1.39 1,128 1,173 20 10 42 Dasureco 10.50 10.97 45.00 44.00 1.20 4.32 1.00 2.58 1,270 1,004 20 168 43 Socoteco I 10.00 11.56 37.00 48.00 3.13 2.11 3.28 2.70 1,128 1.270 44 Socoteco II 15.00 n.a. 49.00 52.00 1.20 1.48 1.00 1.46 770 1.725 45 Magelco 12.00 12.24 45.00 57.GO 1.20 2.45 1.10 2.59 1,311 1.336 20 93 46 Cotelco 13.00 17.76 45.00 39.00 1.20 1.48 1.10 2.48 1,080 1,234 20 68 Average 12.97 14.92 41.61 55.28 1.66 1.91 1.70 2.14 1.038 1.156 24 79 Percent Meeting Target 22.7 23.9 59.1 65.2 28.3 74.3 NEA Standard 18.00 45 - 60 1.20 1.00 1,130 notdefined Percent Meetng Standard 75.0 45 days 34.8 75.0 87.0 54.3 60 days 69.6 Commnent average values are unweighted values except for actual losses.  - 20 - Table 7: STUDIES INCLUDED IN PROJECT Study Purpose as Defined Status Inpact of Study at Appraisal NEA - PDCP Reorganization of Final Report Finance, Loans and Banking NEA towards Submitted in June Accounts Management Consultancy becoming an 1997. Departments Project "interested lender". strengthened. Technical Assistance Development of Final Report submitted Materials handling in For Materials Handling systems and in July 1996. staging areas Phase 2 procedures for satisfactory. materials handling at warehouses. Table 8A - 1: PROJECT COSTS IN MILLION US$ Appraisal estimate ($m) ActualAatest ($m) Item Local Foreign Total Local Foreign Total REC Distribution System (1) 8.2 63.4 71.6 5.7 38.3 44.0 Support Facilities (2) 7.0 7.0 1.9 11.4 13.3 Mobile Substation 2.5 2.5 0.1 1.9 2.0 ZonalRepairCenter 2.0 2.5 4.5 Cancelled Training and TA (3) 1.0 5.0 6.0 1.6 1.6 Administration 1.0 1.0 Unknown Total Base Cost 12.2 80.4 92.6 7.7 53.2 60.9 Physical Contingencies 1.2 8.1 9.3 Price Contingencies 3.3 6.7 10.0 Total Project Cost 16.7 95.2 111.9 7.7 53.2 60.9 Interest During Construction 3.0 3.6 6.6 1.3 5.3 6.6 Total Financing Required 19.7 98.8 118.5 9.0 58.5 67.5 (1) The SAR does not provide a breakdown of costs by type of material and no files were found which indicate how the aggregated figures shown in the SAR were obtained. (2) Maintenance and utility trucks, lineman's and construction tools, communication equipment, testing and recording equipment, computers. (3) Actual values do not include unknown USAID-financed costs of training and TA.  - 21 - Table 8A - 2: PROJECT COSTS IN MILLION PESOS Appraisal est. (Peso million) Actual/latest (Peso million) Item Local Foreign Total Local Foreign Total REC Distribution System (1) 230.0 1,776.0 2,006.0 168.1 1,123.3 1,291.4 Support Facilities (2) 195.8 195.8 51.3 307.1 358.4 Mobile Substation 70.0 70.0 2.7 51.5 54.2 Zonal Repair Center 56.0 70.0 126.0 Cancelled Training and TA (3) 28.0 140.0 168.0 42.6 42.6 Administration 28.0 28.0 Unknown Total Base Cost 342.0 2,251.8 2,593.8 222.2 1,524.5 1,746.7 Physical Contingencies 34.2 225,2 259.4 Price Contingencies 117.0 235.3 352.3 Total Project Cost 493.2 2,712.3 3,205.5 222.2 1,524.5 1,746.7 Interest During Construction 99.0 119.0 218.0 50.6 206.1 256.7 Total Financing Required 592.2 2,831.3 3,423.5 272.7 1,730.6 2,003.3 See the comments made under Table 8A-1. Table 8B: PROJECT FINANCING Appraisal estimat (I million Actalatest ($ milion) Item Local Foreign Total Local Foreign Total IBRD 4.0 87.2 91.3 1.4 53.3 54.6 USAID (1) 1.0 8.6 9.0 Unknown NEA (2) 6.0 3.6 9.6 2.5 5.3 7.8 RECs (3) 8.6 8.6 5.1 5.1 Total 19.7 98.8 118.5 8.9 58.6 67.5 Comments: (1) Actual contribution could not be determined but was less than planned. (2) Mainly reflecting payments made for transportation from port of entry to staging area and foreign IDC. (3) Actual contribution estimated at 10 percent of costs of material and equipment for the distribution system plus local IDC.  - 22 - Table 9: ECONOMIC COSTS AND BENIEFITS Projects of 50 RECs are listed in the SAR, all of which had an economic rate of return of 15 percent or higher. Projects which did not yield at least 15 percent were not financed from the loan. The average economic rate of return of the selected projects of the 50 RECS was 36 percent. It has not been possible to estimate the ex-post economic rate of return for the following reasons: a) A lot of material has not yet been utilized. In fact, some material has not even been allocated to RECS and some material has to be reallocated as the RECs do not need or want it any longer. In December 1998, NEA established a task force which is expected to soon find users for the excess material. b) NEA could not provide an up-to-date list which shows for which projects material has been utilized. NEA's task force will produce a corresponding list which will be updated quarterly. Due to the enormous delay in delivery, most of the material has been and xvill be used for other projects than the ones which were considered at the time of project appraisal. Most of the delivered material has been or will be used for rehabilitation projects. In Region III, some material was even used for emergency rehabilitation when two typhoons struck coops in that region in September and October 1998. The use of material for rehabilitation projects makes it difficult to estimate the economic rate of return as it is usually impossible to isolate the effects of rehabilitation projects.  - 23 - TABLE 10: Status of Legal Covenants Agreement Section Covenant Present Original Revised Type status Fulfillment fulfillnent Date date Description of covenant Comments Guarantee 3.02 11 NC The Government has Not in Article III agreed to make the compliance necessary annual budgetary allocations to ensure the timely implementation of the financial restructuring of NEA. Project 4.03 05 C Borrower shall cause In compliance Article IV Rural Electrical Cooperatives to maintain adequate insurance. 5.01 01 CP RECs to provide audited Not complied Article V financial statements by with all RECs. every September. 5.02 10 CP NEA shall review its Not strictly Article V investment program for followed up by the succeeding five years the Bank. and make agreed upon recommendations. 6.01(a) 04 C 5/31/92 Arrange a satisfactory In compliance. Article VI amendment to the USAID Project Agreement, not later than May 31, 1992. 6.01$ 05 C Tariff Manual shall not In Compliance. Article VI be amended wvithout prior approval by the Bank. 6.01@ 05 C The Statement of In Compliance. Article VI Operating Policy shall not be amended without prior approval by the Bank. 7.01(a) 05 C NEA Board of hi Compliance. Article VII Administrators shall adopt a Tariff Policy Manual. 7.01(b) 10, 05 C Consultants shall be Study was Article VII retained to conduct a completed mid materials handling study. 1996. 7.01 05 C Consultants shall provide Assistance ended Article VII loan administration mid 1996. assistance to NEA. Schedule 09 CD NEA shall fumish the Complied with 5(l) Bank a copy of each on- after delay. lending agreement betveen the Borrower and the REC not later than one month following signature.  - 24 - Table 10: (CONT'D) Agreement Section Covenant Present Original Revised Type Status Fulfillment fulfillment Date date Description of Comments covenant Project Schedule 02 CP NEA shall ensure that No enforcement 5(2) RECs adhere to long- mechanism tenn fmnaial existing. perfonnance targets. Financial performrance of most RECs improved, however. Schedule 09 C NEA shall furnish Complied with. 5(3) evaluation reports covering REC investment programs. Table 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS NOT APPLICABLE Table 12: BANK RESOURCES: STAFF INPUTS Stage of project cycle Staff Weeks - Actual Amount US$('000) - Actual Through appraisal 85.4 257.4 Appraisal-effectiveness 43.9 144.1 Supervision 87.0 265.3 Completion 10.5 17.5 TOTAL 226.8 684.3  - 25 - Table 13: BANK RESOURCES - MISSIONS Performance Rating Specialized staff Imple - Develop- Comments / Type Stage of Month/ No. of Days skills mentation ment of project cycle year persons in field represented /a status objectives Problems Through Appraisal 2/90 4 5 FA, EC, PE, C 7/90 4 5 FA, PE, EC, C 11190 2 4 FA, EC 3/91 4 12 FA, EE, PE, FA Appraisal Mission Appraisal through 9/91 3 3 FA, PE, EE Post Appraisal Board Approval Board approval 9/92 2 2 FA, ED S S Inconsistencies through effectiveness between NEA's evaluation reports and subprojects designed by its engineering department. Supervision 5/93 4 2 FA. PE, EE, C U S No progress with procurement since September 1992. 9/93 2 3 F.k PE U S Delays estimated at up to 18 m*onths. 6/94 1 2 PE S S Timely completion of staging areas and reimbursement of consignee RECs urged 8/94 1 7 FA U S Serious slippage noted. 6/95 1 7 FA U U Extremely disappointing progress 5/96 1 7 FA S S Substantial progress with procurement. 11/97 3 10 ES, PS, OP LT S Procurement much behind schedule. Excess material problem identified. 11/98 2 7 ES. OP U S Excess material problem not yet solved. FA: Financial Analyst, PE: Power Engineer, EE Energy Economist, EC: Economist, ES: Energy Specialist, PS: Procurement Specialist, C: Consultant, OP: Operations Officer  - 26 - ANNEX 1 ANNEX 1: PROCUREMENT HISTORY OF WOOD POLES 1. Problems with wood poles started with the default of the supplier who had been awarded the contract under IFB 72. The supplier notified NEA in May 1996, one month before the scheduled first delivery, that they would be unable to fulfill the contract. The contract was officially terminated by NEA on September 30, 1996. 2. Before the contract was terminated, an additional order for wood poles had already been included in IFB 74 because in 1994 it turned out that more wood poles would be required than initially estimated. IFB 74 listed several wood species as acceptable, but allowed bidders to offer other species provided they were of equal or higher performance than the explicitly mentioned ones. 3. On February 14, 1996, NEA informed the Bank that it had rejected the lowest bidder on several grounds, including that a non-acceptable wood species, Chinese Larch, had been offered. NEA recommended award to the second lowest bidder. On March 8, 1996, the Bank asked NEA to review its stance pointing to the fact that Chinese Larch is an acceptable species if it meets the technical specifications. NEA contacted the Forest Products Research & Development Institute in the Philippines to comment on the suitability of Chinese Larch. The institute provided several ambiguous and partly contradictory assessments. In view of the unclear situation and complaints received from the third lowest bidder' the Bank decided in October 1996 to seek the advice of an expert. 4. The third lowest bidder had started complaining in April 1996. The complaints were aimed at rejecting Chinese Larch as a suitable wood species for the Philippines. The bidder had previously sent letters of complaint in connection with other schedules. Among others, the company had accused Bank staff of unfair treatment for which no substantiation was found. The company was the one which NEA had in vain recommnended several times to be awarded the contract for concrete poles. The company sent letters of complaint to several Bank staff including the President, the Executive Director of the US, a US Senator, and a US law firm. 5. The expert who was hired by the Bank provided an ambiguous assessment. But as the Bank had no strong indications that poles made from larch are not suitable, the Bank gave its no objection to the award of contract to the lowest bidder on November 6, 1996. On December 10, NEA informed the Bank that it had ordered SGS, the inspection company, to conduct a pre-award inspection which was done in the same month. The inspection found no indications that the supplier would not fulfill the contract. 6. NEA had intended to have the award recommendation approved on the next meeting of its Board but an unfortunate fax from the Bank caused further delays. On January 21, 1997, the Bank requested NEA to carry out a study on the suitability of larch for wood poles in the Philippines. The results of the study were intended to be used for future procurement activities. But since that was not explicitly mentioned, NEA was confused and asked the Bank on February 10, 1997, whether the study was also considered relevant for IFB 74. The Bank did not directly respond to NEA's question in its fax of March 10 but mentioned that additional issues had been raised by one The third lowest bidder, a company which had become notorious for its complaints., had in principle become the second lowest bidder as the latter could probably not have used domestic wood as offered because of logging restrictions in the Philippines.  - 27 - ANNEX 1 of the bidders and asked NEA to submit the bidding documents of the bidder. NEA again asked the Bank on March 17 how to proceed with IFB 74. On April 17, 1997, the Bank reconfirmned its no objection. 7. It was only in September 1997, however, that the contract award was approved by NEA's Board. Between April and September 1997, NEA had not dealt with the wood poles contract in order to await the outcome of the study on the suitability of larch. NEA had instructed the Forest Products Research & Development Institute in the Philippines to conduct the study. In August 1997, the institute concluded, based on samples of Chinese Larch, that poles made from Chinese Larch are suitable if properly treated. The Bank did not consider this to be a proper study, but that did not further influence the award of IFB 74. 8. When NEA's Board approved the recommended award in September 1997, it was made subject to the condition that a Vietnamese customer of the supplier confirmed the import of wood poles as stated in the bidding documents. The confirmation, which NEA could already have asked for 18 months earlier, arrived by the end of October 1997. The supplier was notified of the contract award on November 10. Problems with the performance bond delayed the signing of the contract until March 13, 1998. The contract became effective on April 16, 1998 when the letter of credit was opened. The loan was closed soon thereafter as NEA had not met all conditions for a further extension. It is not clear whether the contract is still valid. Deliveries were scheduled to start in January 1999 at the latest but it seems that the supplier will not insist on delivery in view of NEA's shortage of funds to pay for the delivery. 9. The technical issue whether poles made from Chinese Larch are suitable for the Philippines continued to be an issue in IFB 78. The Bank had recommended that NEA exclude any larch from the list of acceptable wood species in IFB 78. NEA had done so which led to several complaints by the company which had won the contract under IFB 74. Letters of complaint were also received from the company's representative in the Philippines and the embassy of the company's country in the Philippines. The complaints did not delay IFB 78, however. Bid evaluation was finalized in April 1998, i.e. within two months after bid opening. NEA had proposed pre-award inspections as it had well-founded concerns that the poles of the lowest responsive bidders would not fully meet the technical specifications. The pre-award inspections were not carried out because the loan was closed soon after the proposal on April 30, 1998.  - 28 - ANNEX 2 ANNEX 2: PROCUREMENT HISTORY OF CONCRETE POLES 1 The initial evaluation of bids received for concrete poles under IFB 72 by the technical evaluation committee showed that company X was the lowest responsive bidder. The PBAC requested clarifications from the lowest (but non responsive) bidder on the non-compliance with the technical specs. The bidder responded that components were included in the bid which would ensure compliance. In October 1994, the PBAC recommended contract award to that bidder. Between November 1994 and June 1995, the Bank repeatedly rejected the recommended award while NEA repeatedly argued in favor of its proposal. Among others, the Bank pointed to the fact that, contrary to NEA's calculation, the bidder was not eligible for domestic preference since they did not have a manufacturing facility in the Philippines. In June 1995, NEA proposed rebidding. The Bank agreed, only to learn in September 1995 that NEA's Board did not agree with the rebidding and recommended contract award to the bidder recommended by the PBAC. Rebidding was finally done under IFB 74 in autumn 1995. Three bids were received. In February 1996, NEA proposed awarding the contract to the second lowest bidder, citing that all three bidders failed to fully meet the technical specs, but that the second lowest bidder only failed by a minimal margin. The second lowest bidder was the same company which NEA had recommended for contract award under IFB 72. The Bank sought several clarifications and finally rejected NEA's proposal in April 1996. In May, NEA proposed contract award to the lowest bidder. The Bank gave its no objection in June subject to the condition that an additional bank guarantee would be provided. 2. Unfortunately, the additional bank guarantee caused further delays. The guarantee should have been provided by the parent company of the award winner. In August 1996, the winner proposed to submit a higher performance guarantee of 20% of contract value instead of 10% as requested in the bidding document. NEA agreed. The Bank initially rejected the proposal but later tacitly accepted it. The award winner had enormous problems to obtain the 20% guarantee and repeatedly asked NEA for an extension of the submission date. It took until April 1997 before the guarantee was finally submitted. The contract was signed on April 13. 3. When the loan was closed about a year later on April 30, 1998, almost two-thirds of the ordered 17,678 poles had been delivered. About two-thirds thereof were not accepted because of missing holes in the upper section. By the end of 1998, the manufacturer was still busy drilling the required holes.  Table 1: INCOME STATEMENT (Million Pesos) Year ended December 31 1991 1992 1993 1994 1995 1996 1997 Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Z Income Interest on Loans 312.0 385.8 470.0 532.5 649.0 292.3 970.0 508.3 1,271.0 526.0 1,595.0 577.5 1,783.0 636.2 X Income from Dep. & Sec. 20.0 47.5 44.0 46.8 71.0 59.3 30.0 72.6 31.0 105.6 83.0 96.6 114.0 77.8 Other Income (1) 28.0 4.7 94.0 42.1 131.0 40.5 177.0 33.7 162.0 35.2 151.0 35.0 155.0 35.9 Total 360.0 437.9 608.0 621.4 851.0 392.0 1,177.0 614.6 1,464.0 666.9 1,829.0 709.1 2,052.0 749.9 Expenses Salaries&Personnel 104.0 102.7 114.0 101.2 126.0 93.1 138.0 118.6 152.0 125.4 167.0 150.6 184.0 206.2 General & Administration 57.0 35.9 63.0 73.2 69.0 83.1 76.0 86.4 84.0 103.7 92.0 105.8 101.0 108.3 Interests 326.0 280.7 402.0 280.7 500.0 308.8 595.0 300.2 695.0 299.7 848.0 340.4 940.0 312.5 Deprec. &Amortization 5.0 15.0 8.0 15.5 28.0 16.9 46.0 16.0 46.0 13.5 46.0 16.6 46.0 16.6 Total Expenses 492.0 434.3 587.0 470.5 723.0 501.9 855.0 521.2 977.0 542.2 1,153.0 613.4 1,271.0 643.6 NetIncomefromOperat. (132.0) 3.6 21.0 150.8 128.0 (109.9) 322.0 93.5 487.0 124.7 676.0 95.7 781.0 106.3 Forex Diff. On New Loans - (32.0) (78.0) (11.0) (165.0) 104.3 (299.0) (123.3) (338.0) 19.1 (313.0) (38.3) : Income Tax - (17.0) (55.0) (12.3) (66.0) (14.0) (118.0) (6.4) (164.0) (2.0) Net Income (132.0) 3.6 (11.0) 150.8 33.0 (120.8) 102.0 185.4 122.0 (12.6) 220.0 108.5 304.0 66.1 (1) Including materials handling fees and income from coop support services Table 2: FUNDS OBTAINED, SUPPORT OF RECS, RETAINED EARNINGS (Million Pesos) vt Year ended December 31 1991 1992 1993 1994 1995 1996 1997 > Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Obtained Funds Foreign Grants &Aid 689.0 282.8 373.0 13.8 241.8 95.0 273.1 67.0 92.8 71.0 54.1 17.4 Govemment Subsidies 300.0 2,821.7 250.0 591.0 200.0 524.0 150.0 575.7 150.0 250.4 150.0 482.2 150.0 196.2 Government Equity 200.0 Borrowings 731.0 893.0 1,941.0 2,020.0 1,090.0 490.0 Other 0.2 0.0 (0.0) 0.1 Total 1,189.0 3,104.7 1,354.0 604.8 1,093.0 765.8 2,186.0 848.9 2,237.0 343.1 1,311.0 536.3 640.0 213.6 Support of RECs Subsidies RECs 85.4 379.9 101.0 284.2 305.4 191.2 86.4 Customs Duties 193.0 222.9 114.9 23.0 Other 59.9 6.7 306.6 Total 338.3 609.4 215.9 613.9 305.4 191.2 86.4 C Retained Earnings Beginning of Year (2,475.6) 249.0 1,652.7 2,086.0 2,786.5 2,421.8 2,727.3 t Net Income 3.6 150.8 (120.8) 185.4 (12.6) 108.5 66.1 Obtained Funds 3,104.7 604.8 765.8 848.9 343.1 536.3 213.6 Support of RECs (338.3) (609.4) (215.9) (613.9) (305.4) (191.2) (86.4) Correction Prior Years Earnings (45.4) 1,257.5 4.3 280.1 (389.8) (148.1) (224.6) Retained Eamings End of Year 249.0 1,652.7 2,086.0 2,786.5 2,421.8 2,727.3 2,695.8 Comment: StaffAppraisal Report does not provide sufficiently detailed data to allow calculation of retained earnings.  Table 3: BALANCE SHEET (Million Pesos) Yearending Decem. 31 1991 1992 1993 1994 1995 1996 1997 Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual Current Assets Cash 946.0 714.0 1,418.0 412.3 577.0 1,227.1 714.0 1,289.7 1,695.0 1,232.1 2,319.0 1,331.7 2,535.0 1,224.0 Matured Portion of Loans 285.0 891.1 369.0 987.5 485.0 984.3 662.0 1,149.9 928.0 1,222.6 1,155.0 1,188.7 1,385.0 1,251.6 Inventories 525.0 1,243.9 307.0 1,389.7 431.0 1,678.5 589.0 1,527.5 520.0 1,101.4 461.0 1,472.7 461.0 1,459.6 Other Receivables (1) 75.0 1,020.4 115.0 1,124.9 160.0 1,233.9 241.0 1,106.8 316.0 825.7 398.0 771.3 444.0 601.6 Total CurrentAssets 1,831.0 3,869.4 2,209.0 3,914.4 1,653.0 5,123.8 2,206.0 5,074.0 3,459.0 4,381.8 4,333.0 4,764.4 4,825.0 4,536.8 Loan Portfolio 5,725.0 9,231.8 6,525.0 10,341.8 7,807.0 10,330.6 9,656.0 11,208.4 10,775.0 11,539.8 11,307.0 12,095.5 11,525.0 12,893.2 Flxed Assets 25.0 21.0 74.0 32.5 402.0 40.2 356.0 38.1 310.0 62.7 264.0 89.6 218.0 248.3 Other Assets (2) 1,603.7 1,343.3 1,906.7 1,859.5 2,403.3 2,458.0 3,211.7 Total Assets 7,581.0 14,725.9 8,808.0 15,632.0 9,862.0 17,401.4 12,218.0 18,180.0 14,544.0 18,387.6 15,904.0 19,407.5 16,568.0 20,890.0 Current Liabilities Curr. Portion of Debt (3) - 3,166.2 8.0 4,225.0 27.0 4,728.1 55.0 5,471.7 222.0 5,617.3 377.0 6,096.9 384.0 6,181.8 Other Current Liabilities 16.0 66.3 22.0 66.4 24.0 116.3 27.0 93.0 23.0 75.7 25.0 137.6 28.0 254.6 Total Current Liabilities 16.0 3,232.5 30.0 4,291.4 51.0 4,844.4 82.0 5,564.7 245.0 5,693.0 402.0 6,234.4 412.0 6,436.4 Long-Term Liabilities - 6,372.4 761.0 4,760.7 1,722.0 5,263.8 3,796.0 4,602.7 5,746.0 5,049.9 6,588.0 5,227.4 6,878.0 6,589.6 Capital & Surplus Paid-in Capital 8,093.0 4,636.5 8,093.0 4,675.9 8,093.0 4,951.5 8,093.0 4,970.5 8,093.0 4,970.5 8,093.0 4,970.5 8,093.0 4,970.5 Foreign Grants 827.0 282.8 1,200.0 296.6 1,200.0 538.4 1,295.0 811.5 1,362.0 904.3 1,433.0 958.4 1,433.0 975.8 Govemm. Subsidies 811.0 2,821.7 1,061.0 3,412.7 1,261.0 3,936.7 1,411.0 4,512.4 1,561.0 4,762.8 1,711.0 5,245.0 1,861.0 5,441.2 Retained Eamings (2,165.0) (2,855.5) (2,337.0) (2,056.6) (2,465.0) (2,389.1) (2,459.0) (2,537.4) (2,464.0) (3,245.3) (2,323.0) (3,476.1) (2,108.0) (3,721.2) Other Capital & Surplus 235.4 251.3 255.7 255.6 252.5 247.9 197.7 Total Capital& Surplus 7,566.0 5,120.9 8,017.0 6,579.9 8,089.0 7,293.2 8,340.0, 8,012.6 8,552.0 7,644.7 8,914.0 7,945.6 9,279.0 7,864.0 Total Liab. & Capital 7,582.0 14,725.9 8,808.0 15,632.0 9,862.0 17,401.4 12,218.0 18,180.0 14,543.0 18,387.6 15,904.0 19,407.5 16,669.0 20,890.0 (1) Mainly matured interest on loans granted to RECs. (2) Mainly forex losses on foreign loans. As of December 31, 1989 the Government has assumed all of NEA's foreign loans, including forex differentials. (3) Mainly matured portion of NEA's foreign loans; including interests.  - 31 - A4NNEX 4 ANNEX 4: AIDE MEMOIRE OF ICR MISSION (December 7, 1998) 1. A World Bank mission comprising Messrs. Heinz Pape (Task Manager, EASEG) and Leonardo Rodaje (RMP) spent some time between November 17 and December 8 on the ICR of the Rural Electrification Revitalization Project. The mission would like to sincerely thank NEA for the gracious hospitality which it received from NEA's management and staff during the supervision mission. The mission is grateful that NEA arranged the meeting with representatives from rural electric coops in San Fernando and the visit of the staging area in Tarlac on November 23. 2. The mission received NEA's Final Evaluation Report which will become part of the Implementation Completion Report (ICR). 3. A draft of the Bank's ICR was discussed with NEA. The mission very much appreciates that, if NEA wants to comment in writing on the ICR, NEA will send its comments to the task manager not later than Tuesday, December 15, 1998. 4. The mission is very much concerned about the large quantities of material which are still in the staging areas. It is understandable that some coops have not withdrawn material because the material cannot be (fully) utilized without wood poles and conductors. However, large quantities are also still in the staging areas because the material has not yet been allocated to coops or because some coops do not need or want certain material any longer. 5. The supervision mission wvhich was conducted in November 1997 found a serious mismatch between delivered material and material carried on in the contracts with recipient RECs. For many schedules, more material had been delivered than ordered by the coops. While excess material in the order of 5% and, for some schedules, of up to 10% was acceptable, the excess material often exceeded the acceptable levels. NEA had been instructed to find coops which would absorb the excess material. NEA had also been told to check whether all allocated material would actually be withdrawn by the coops and to find users for those materials which coops do not want to withdraw. While NEA could probably insist on withdrawal in view of the contracts signed by the coops, an amicable solution of this problem should be sought. Since all material is standard material, it should in principle not be a big problem to find users. In fact, the Bank learned from coops during the supervision mission in November 1997 and again this time that there are coops which would like to be allocated excess material. That only a small percentage of the excess material has so far been reallocated is mainly due to NEA's lackluster pursuit of the matter. 6. There are indications that NEA does not even know the exact amount of excess material. The mission had informed NEA almost six weeks before the start of the mission that NEA should prepare a list showing for each schedule the contracted, delivered, issued and unallocated quantities. NEA had not prepared that schedule when the mission arrived on November 17, 1998. In fact, it took NEA till November 26 before a first list was produced. The list covered 30 schedules of IFB 72 (schedule R was missing) but not IFB 74. A second list, including IFB 74 was given to the mission on December 3. Surprisingly, for all but seven schedules, the contracted quantities shown in that list for IFB 72 differed from the numbers given to the mission on November 27. Regarding delivered material, only three schedules showed identical quantities. That  - 32 - ANNEX 4 casts serious doubt on the accuracy of the other numbers shown in the list: the material withdrawn from the staging areas, the material in the staging areas and the unallocated material. As there is no on-line connection between the staging areas and NEA's headquarter, NEA's numbers cannot exactly reflect the inventory and the actual status of withdrawals. NEA is, however, to blame for not having established a regular reporting system with the staging areas and for poor supervision of tasks carried out by NEA's staff. The supervision mission in November 1997 had already urged NEA to improve the communication with the staging areas. 7. The mission is pleased to learn that NEA has established a task force which will address the unallocated material issue and the issue that some of the allocated material is not needed or wanted any longer. In fact, the task force should have been established long ago. 8. NEA has agreed to submit to the Bank an updated material list within two weeks after the end of each quarter. The first list will be submitted for the quarter ending in December 1998. The list will reflect the status of material allocation, delivery, rejects and withdrawal and the inventory in the staging areas at the end of the quarter. 9. The mission asked NEA to follow up on the material withdrawn by the coops. Not all withdrawn material is immediately used by the coops. Most is stored in facilities owned by the coops before being put to use. The coops inform NEA in non-regular intervals about the utilization of material. NEA monitors the utilization by checking the proper installation of the material. NEA's present list of utilized material is far from being up to date. The task force mentioned under para 7 is understood to also cover the utilization and to produce up-to-date lists. NEA agreed to send material utilization lists together with the lists mentioned under para 8. The utilization lists will show for which projects which quantities of delivered material have been utilized. The lists should indicate whether a project is a rehabilitation or expansion project and whether the project was foreseen in the loan agreement between the coop and NEA. The first utilization list will be sent in April 1999. 10. Bank staff may visit NEA to check the material allocation and utilization status. NEA will help the Bank to arrange visits of staging areas or discussions with coops when Bank staff considers such activities as necessary. ll The mission was informed by Director Ruben Reinoso from NEDA that the overnment intends to fund the delivery of the wood poles and conductors which were not obtained from the project. Funding in the order of approximately US$ 30 million will be required. The mission asked the administrator to use his well-established relations with the Government to obtain the funds soonest. NEA should then also inform the participating coops that they will not receive wood poles and conductors from the Bank-funded project but that the Government will fund . The mission was surprised to learn that the coops have not yet been informed that the loan was closed on April 30, 1998. The coops still expect the delivery of wood poles and conductors from the project. 12. NEA has been informed by the Bank that US$ 1,099,337.76 still remains in the Special Account. The mission urged NEA to refund the amount soonest.  - 33 - ANNEX 5 ANNEX 5: BORROWER'S FINAL EVALUATION REPORT Implementation Assessment 1. Project Objectives 1.1 The objective of enhancing NEA's effectiveness as the core agency for the sector through its use of sound processes for prioritizing investments, supervising the implementation of schemes, and financing of the ECs was successfully attained. Investment guidelines that provided the framework for an annual planning exercise and the methodology to be followed for evaluating and prioritizing investments was put in place. The account management function was institutionalized and made part of the organizational structure of NEA. Loans administration activities became more rationalized. 1.2 The application of loan conditionality in the ECs encouraged the needed reforms to improve their viability and efficiency. A Performance Improvement Program (PIP) that addressed the areas for improvement in the operation of the ECs was made part of conditionality to loan NEA extended to these ECs. 1.3 The objective of improving the reliability of electricity supply in the rural areas by financing a portion of NEA's 1992-1995 investment program was satisfactorily met. The materials and equipment procured to support this component were installed and resulted to minimize interruption, correct voltages and lower power outages. Delays in the procurement of critical materials such as poles and conductors were encountered which affected the expansion projects but additional consumer connections were achieved out of he materials procured. The non-extension of the loan closing date in April 30, 1998 led to the total procurement failure of these items. 1.4 The provision of technical assistance and training to NEA and EC was not sufficient to equip the borrower and the ECs in implementing the project. The gains realized in the Banking Consultancy and the Materials Handling Consultancy were very modest. 2. Implementation and Operation The project implementation is the responsibility of each recipient EC while NEA supervised the construction activities. The concept of staging the materials at strategically located areas was adopted under the project. The approach calls for goods to be stored and released only when the full complement needed to implement the project has been assembled. This approach however was modified in such a way that the release of materials will be based on construction timetable. This approach has minimized most of the materials handling problems that NEA used to be confronted with. However, because  - 34 - ANNEX 5 of the delays encountered in the procurement and the default of two suppliers of wood poles and conductors, the advantages and gains of the staging concept was not seemed to be felt. Evaluation of Borrowers Performance 3. Procurement 3.1 Delays during the start-up of implementation were encountered because of the sudden change in NEA's leadership. It took some time for the agency to reorganize and look seriously on the project. 3.2 In order to catch up the lost time, a single procurement approach was adopted. The volume of materials procured was too much for NEA to handle. This further contributed to the delays in the procurement because of the volume of bid proposals received. Pressure from losing bidders affected much the evaluation and recommendation process. 3.3 The shift in the mode of shipment from CIF to DDU made monitoring of materials deliveries to staging sites and contract administration arduous. Reports from the staging areas and the ECs were not coming on time in spite of previous seminars conducted to this effect. 4. Project Implementation 4.1 The staging sites (regional warehouses) were still under construction when the first batch of material arrived. However, delivery of goods at the staging areas was considerably smooth except for the default of suppliers of wood poles and conductors. 4.2 Withdrawal by the ECs of the materials allocated to them was not regular. Because of the missing critical materials the ECs does not want to withdraw other items which they cannot use. 4.3 Some ECs were hesitant to withdraw materials coming from manufactureRs with known or experienced inferior quality especially Harbin meter from China. It took several months before the ECs were convinced to withdraw the items. The same thing happened for transformers supplied by Vijai of India. 5. Loan Appraisal and Administration 5.1 The borrower was able to prepare and fumish the Bank on schedule the required Project Appraisal Report (PARs) for all the recipient ECs. Corresponding on-lending agreements were presented to the NEA Board and were approved. The Bank was fumished copy of these documents. 5.2 Implementation and monitoring of compliance to loan conditionalities was regularly made.  - 35 - ANNEX 5 6. Disbursement 6.1 As of September 30, 1998 the amount of US$78.7 million (86 percent of the available loan) have been committed and contracted for the procurement of goods, civil works and technical assistance. This includes however the amount of US$11.2 million for 4 contracts on conductors where the supplier failed to deliver and subsequently cancelled. Out of this committed funds, the amount of US$55.5 million (70 percent of the committed amount) have been disbursed. Overall, the amount of US$35.79 million of the loan was unavailed at the closing date of the loan. Of the total unavailed amount, US$12 million represent unavailed portion of the existing contracts whose delivery period extends beyond April 30, 1998. The US$18 rnillion represent estimated amount of contracts for rebid but was not completed, as the loan was not extended. The remaining US$5.79 million represent unprogrammed amount resulting from the reduction of quantity order and cancellation of steel pole procurement. 7. Financial Covenants 7.1 The Borrower was able to furnish the Bank by September of each year its financial statements as audited by the Commission of Audit (COA). Evaluation of Bank's Performance 8. Provision of Technical Assistance 8.1 The Bank was able to identify the necessary technical assistance needed by the Borrower to effectively implement the project. The project however did not gain much on the retention of consultants as mentioned in para. 1.4. The materials handling consultancy contract ended at the time the materials were just arriving. An assessment as to the need of a follow-up activity along this line should have been made. 8.2 The hiring of a World Bank Consultant to oversee the procurement process complicated the bid evaluation process. There were instances of conflict of opinion between the procurement consultant and procurement specialist in Washington. 9. Review of Contract Awards 9.1 In some recommendations for award, several communications and exchange of opinions transpired between the Bank and NEA causing some delays in the procurement process. The Bank should have been more specific and direct in the exercise of its role in the review of contract awards.  - 36 - ANNEX 6 ANNEX 6: BORROWER'S COMMENTS ON DRAFT ICR -v Republic of the Philippines NATIONAL ELECTRIFICATION ADMINISTRATION December 14, 1998 MR. HEINZ PAPE Energy Economist Energy Sector Unit East Asia and Pacific Region The World Bank SUBJECT: Implementation Completion Report Philippines Rural Electrification Revitalization Project Loan3439-PH Dear Mr. Pape: We appreciate your sincerity and vigorous efforts in coming up with a straightforward Implementation Completion Report (ICR) for the Rural Electrification Revitalization Project (RERP). Attached are our comments on the draft ICR which intend to correct some impressions and clarify issues as indicated in the report. While the project was implemented during the past administration, it is inevitable that this dispensation has to address the implications of the enormous problems it has experienced. What we can offer now is an assurance that all efforts Nvill be made to improve our performance. Very truly yours, ATRELLA, Il  - 37 - ANNEX 6 COMMENTS ON THE DRAFT IMPLEMENTATION COMPLETION REPORT RURAL ELECTRIFICATION REVITALIZATION PROJECT (Loan 3439-PH) Project Objectives We believe that the objective to strengthen NEA as the Government's core agency for implementing the Rural Electrification program has been successfully attained. The ICR had mentioned the progress on how NEA evaluates, identifies and selects investment proposals. While NEA shifted to function as an "interested lender", this has to be balanced with its social development agent role. Procurement and Implementation Record The project admittedly encountered enormous procurement related problems which may be considered normal taking into consideration the volume and the amount of the procurement package. In addition to the pressure from business community and the political environment this agency has to deal with. The non-extension of the loan closing date because of the unacceptable material reallocation placed NEA vulnerable to legal suits from suppliers with existing contracts. Had the Bank considered funding at least those with existing contracts, it could have minimized the effects of the procurement problems of the past. All materials procured are pre-allocated. However, due to the necessity to immediately construct or rehabilitate the EC's distribution lines, some materials were procured by the EC. When materials procured for the project arrive these will serve as replacement or reimbursement of what the ECs used in advance. There are efforts to reallocate materials but there are certain loan procedures to be observed. With the creation of a task force to address this issue, we believe this will be settled. Major Factors Affecting the Project The inconsistencies between needed materials and delivered materials arouse from the fact that rural electrification projects are very dynamic. Priorities often change when there is a change in the management. With the lag-time between project identification and procurement, this cannot be avoided. It is always the intention of NEA to have proper utilization of the materials procured for the project. Efforts have been made by NEA to reallocate the NEA Buffer Stock even before the bank started to get concemed. Request from various ECs has been received for this purpose. The procurement process is well defined and established. NEA in its best efforts had complied and observed this procedure. The handling of the sockets for Class 100 kWh meters is an isolated case and is not an indication of no drive for results. NEA operates under certain audit rules and regulations, it has to comply with certain control control procedures. thus making decisions take some time.  - 38 - ANNEX 6 Outcome and Bank/Borrower Performance The prospect for project sustainability may be uncertain at this point. With the increased effort in resource mobilization, we would be able to obtain the support of the National Government in providing the necessary funds to procure the critical materials needed to sustain the project. The project outcome may be unsatisfactory but not highly unsatisfactory, as the lack of poles and conductors affected only the expansion projects. The rehabilitation and upgrading projects are being undertaken using available materials. Future Operation and Key Lessons Learned NEA agreed to update the Bank at the end of each quarter about the status of utilization of delivered material. The NEA management has created a task force to address this commitment. We support the recommendations outlined in the ICR to avoid what the project had experienced. It is also worth considering that the SAR defines the organization and nature of the project implementation until that would be responsible for the project implementation. This can be part of the condition for effectiveness of the loan the Bank will extend.  1 20: f~~~~~~~~~~~~~~~~-a, 25 18' 120- 022' 4~~~~~~~~~~~~~~~~~~~~~~~~~~~J~ UL AC-A N ROVINkC PHILIPPINES Ilns