Philippines - Leyte Cebu geothermal project

 ICRR 10605 Report Number : ICRR10605 ICR Review Operations Evaluation Department 1. Project Data : Date Posted : 06/22/2000 PROJ ID : P004584 OEDID: OEDID : L3700 Appraisal Actual Project Name : Leyte Cebu US$M ) Project Costs (US$M) 458.9 612.98 geothermal project Country : Philippines Loan /Credit (US$M) Loan/ US$M ) 211.0 193.11 Sector, Major Sect .: Thermal, Electric US$M ) Cofinancing (US$M) 174.70 327.48 Power & Other Energy L/C Number : L3700; L3702 FY ) Board Approval (FY) 94 Partners involved : BOT power plant Closing Date 06/30/1998 09/30/1999 contractors, Nordic Investment Bank/Nordic Development Fund Prepared by : Reviewed by : Group Manager : Group : Kevin Warr Fernando Manibog Ridley Nelson OEDST 2. Project Objectives and Components a. Objectives The project had four key objectives : 1. Improve the efficiency and overall performance of the energy sector; 2. Assist the Borrowers (National Power Corporation- [NPC] and Philippine National Oil Corporation-Energy Development Corporation [PNOC-EDC]) in meeting the increasing demand for electricity power in Cebu province, by expanding the geothermal power generation capacity and reinforcing its related power transmission system; 3. Strengthen the Borrowers' financial viability and institutional capabilities to enable it to undertake its long -term investment program; 4. Promote private sector participation in geothermal power generation projects in the Philippines . b. Components The project's components were divided between those relating to NPC and those relating to PNOC -EDC. NPC Components: 1. Construct an overhead transmission line in Leyte and another in Cebu; 2. Install submarine cables linking Leyte and Cebu lines; 3. Upgrade NPC's existing 138 kV and 69 kV power transmission facilities in Cebu; 4. Provide goods under the Energy Sector Project to cover the impact of the Yen revaluation under the Bank's special commitment for irrevocable letters of credit; 5. Provide technical assistance for : the design and preparation of tender documents for two hydro -projects institutional support consultancies to implement the Project, NPC's Power Distribution Program and the recommendations of the Efficiency and Operational Improvement Study (EOIS). PNOC-EDC Components: 1. Develop a 185 MW Geothermal steam field, including steam collection and power interconnection system; 2. Carry out a Build-Operate-Transfer (BOT) Contract between PNOC-EDC and private sector companies to construct and operate 185 MW geothermal power plants; 3. Provide technical assistance for project implementation c. Comments on Project Cost, Financing and Dates The cost of the project was US$ 612.98, which was US$ 154.08 million over the appraisal estimate. The Bank financed US$ 211.0 million, of which US$ 193.11 million was disbursed. The cost overrun was mainly the result of the increased cost of the BOT power plants and, to a lesser extent, NPC's cost overrun . The Bank disbursed 8 percent less than the original amount because (i) co-financing by the Nordic Investment Bank /Nordic Development Fund for NPC's components and (ii) increases in PNOC-EDC's contribution. Cofinancing came from the Nordic Investment Bank /Nordic Development Fund and various Build -Operate-Transfer (BOT) power plant contractors in the amount of US$ 327.48 million, which was US$ 152.78 million over the appraisal estimate. PNOC/NPC contributed US$ 86.83 million. The loan's closing date was extended by 15 months, from 6/30/98 to 9/30/99. 3. Achievement of Relevant Objectives : 1. Improve the efficiency and overall performance of the energy sector : This objective was not achieved . The current estimate of the Net Present Value is negative for the project . In 1999, the average production cost of NPC plants was P1.76/kWh, whereas the average cost for NPC's contracts with the independent power producers (IPPs) was P2.66/kWh, of which the geothermal plants cost P 2.80/kWh. To meet its liquidity needs, NPC has incurred huge liabilities which have exposed NPC to expensive debt service and "take-or-pay" obligations under IPP contracts . 2. Assist the Borrowers in meeting the increasing demand for electricity power in Cebu province : This objective was substantially achieved . The project substantially met increasing demand for power in Cebu using indigenous and environmentally superior geothermal energy resources . Compared to the early 1990s, consumers are unequivocally better served . Rather than suffering from undercapacity, NPC now has a high reserve margin. 3. Strengthen the Borrowers' financial viability and institutional capabilities : Financial viability (NPC): This objective was not achieved . NPC has maintained its precarious financial situation and the objective of strengthening the financial viability of the project entities has not been achieved. The high cost of meeting the project's physical components was a contributing factor to this situation, and consequently a negative Net Present Value is currently estimated for the project . Financial viability (PNOC): This objective was not achieved . Meeting the project's physical components came at a high cost, and has contributed not only to the perpetuation of NPC's poor financial position, but to a significant weakening of PNOC-EDC's liquidity position until the expiry of the BOT power purchase agreement in 2006. Institutional strengthening (NPC): This objective was achieved . The technical assistance subcomponents of the design of two hydro projects was implemented satisfactorily. NPC acquired an Integrated Resource Planning software package for its power development program and NPC personnel were trained in the use of the software . Institutional strengthening (PNOC): This objective achieved. With the assistance of consultants with extensive experience in geothermal development, PNOC -EDC demonstrated its competence by the satisfactory completion of the project in a timely and cost -effective manner. 4. Promote private sector participation in geothermal power generation projects in the Philippines : This objective was achieved. PNOC carried out two BOT contracts with private companies to construct and operate geothermal power plants in the Mahiao and Malitbog Unit 1. These power plants are owned by a private company and will be transferred to PNOC -EDC after ten years under the present BOT contract . 4. Significant Outcomes /Impacts : The promotion of private sector participation in geothermal power generation projects in the Philippines is a significant outcome. The project is the first phase of the Leyte Geothermal Project; together with the second phase of the Bank-financed Leyte Luzon Geothermal Project, geothermal power now accounts for about 80 percent of the total power generation in the Visayas system in 1999. 5. Significant Shortcomings (including non -compliance with safeguard policies ): Quality at entry: The project implementation schedule in the SAR was overly optimistic in its assumption that NPC could successfully address the long -standing implementation problems of tardy procurement and right-of-way issues. Moreover, in light of the uncertainties in the operating environments, it appears that the SAR's risk analysis was not sufficiently rigorous . NPC has not fully complied with the financial covenants for some years, even prior to the Asian financial crisis . PNOC-EDC reported non-compliance with the current ratio covenant in 1997 and 1998 and the debt service coverage ratio in 1998. In terms of NPC's resettlement component, there have been significant delays in compensation payments by NPC, particularly for land acquisition . Some of these delays are beyond the control of NPC (e.g., missing or incomplete documentation of some landowners ). The high cost of the Independent Power Producer program contributed to the failure of the Project to meet its  financial objective and has adversely affected the project economics . Frequent changes of task manager and team members have hindered the efficient and effective use of Bank inputs. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Unsatisfactory Unsatisfactory Institutional Dev .: Negligible Negligible Sustainability : Unlikely Unlikely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Exemplary 7. Lessons of Broad Applicability : 1. While fast-track BOT projects have proved crucial in alleviating power shortages, the economic efficiency of individual private investments should be improved with consideration for (i) a cohesive sectoral approach, with special attention to prudent investment planning and financial management as well as risk management; and (ii) rationalization of prices and risk -sharing arrangements within a competitive and transparent framework . 2. Conventional economic rate of return analysis is poorly suited to an environment where higher -cost, sub-optimal investments are required to eliminate power shortages . 3. The use of a "rate of return on assets" target for financial performance is inappropriate for a company /sector with a very large and diverse investment program . 4. The right-of-way problem should be given top priority in terms of (i) adequate policies and guidelines acceptable for affected landowners; (ii) adequate and qualified personnel to handle negotiations and expropriation cases; and (iii) support of other government agencies involved in the processing of right -of-way documents, including court decisions that are timely . 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : This ICR is exemplary. It is clearly organized and successfully covered the intricacies of a very complex project . Of particular note is the Lessons Learned section, which is remarkable for its clarity and insight . It is obvious that the author has given considerable thought to what lessons could be learned and how they could be usefully applied to future projects.