Philippines - Fourth Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9 80 PROJECT PERFORMANCE AUDIT REPORT ON PHILIPPINES FOURTH POWER PROJECT (LOAN 491-PH) January 16, 1976 Operatiofis Evaluation Department 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.  FOR OFFICIAL USE ONLY PREFACE This report presents an audit of achievement under the Philippines Fourth Power Project, for which Loan 491-PH of April 5, 1967 in the amount of US$12.0 million equivalent was made to National Power Corporation (NPC) and was finally closed in February 1974. This audit is based mainly on correspondence and reports in Bank files (Loan and Guarantee Agreements, Appraisal Report, President's Report, Progress Reports, Supervision Reports, and correspondence between the Bank and the Borrower), as well as discussions with Bank staff members and National Power Corporation staff. A Project Completion Report prepared by the East Asia and Pacific Regional Office in June 1975 was also useful in the preparation of this report. In July 1975, a seven-day visit was made to the Republic of Philippines in connection with this report. The valuable assistance of National Power Corporation is gratefully acknowledged. 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.  TABLE OF CONTENTS Page No. Performance Audit Basic Data Sheet Summary......................................................... i Introduction................................................... 1 Project Description............................................. 5 Project Implementation.......................................... 6 Delays in Project Completion.................................. 8 Cost Increases................ ................................ 9 Project Operation............................................... 10 Management Consultants.......................................... 11 Institutional Aspects........................................... 12 Manpower Growth and Development................................. 1i Transmission.................................................... 15 Project Justification........................................... 15 Financial Aspects............................................... 17 Bank Performance................................................ 20 Conclusions.................................................... 22 List of Tables: Table 1: Project Completion Dates - Estimated vs. Actual Table 2: Project Costs - Estimated vs. Actual 7 Table 3: Breakdown of Costs of Management Consultancy Services 13 Table 4: External Courses/Programs Attended by NPC Employees 15 Table 5: Unit Cost of Generation 17 Table 6: financial Indicators 1A Table 7: Operating Revenue and Accounts Receivable 19 Annex Tables Annex la: Energy Generated in Philippines Annex lb: MRALCO - Key Statistics Annex Ic: Area and Population Distribution"of Philippines Annex 2: Key Dates of Principal Contracts Annex 3a: Annual Ependiture in Project Annex 3b: eperational Data on Bataan Annex 4a: National Power Corporation Organization Chart (1967) Annex 4b: National Power Corporation Organization Chart (proposed by Consutants) Annex 4mc: National Power Corporation Organization Chart QPQ Annex 5: Construction of Transmission Lines, Construction of Substations and Investment in Transmission and Substations (continued....) TABLE OF CONTENTS continued Annex 6: NPC's Manpowev and Positions Annei 7a: Generation and Sales by Regions Annex 7b: NPCts Customers Annex 8: Electrification in Philippines and NEAts Targets Annex 9: Iligan Steel's Role in Agus Grid Load Growth Annex 10: National Power Corporation Annex 11: Power and Energy Demand Estimated vs. Actual Annex 12: Estimated Cost of Bataan Generation Annex 13: Philippines - National Power Corporation (Income Statements) Annex 14: Philippines - National Power Corporation (Condensed Balance Sheets) Annex 15: Sources and Applications of Funds (Approximate) Map 1: Luzon Islana: Major Generation Sources and Transmission Lines Map 2: Mindanao Island: Proposed Extension of Maria Cristina Hydroelectric Station ABBREVIATIONS USED M4 - Million M64 - 10030 £ MWH - 1U00 KWH GW4H - Million KvWH BTU - British Thermal Unit YVA - 1000 KVA BCI - Board of Investnents ELC - Electroconsult GAI - Gilbert Associates Inc. TEC - International Finance Corporation MTHERALCC: - Manila Electric Company NEA - National Electrification Administration UFC - National Power Corporation NSA - National Water and Sewerage Administration OEC - office of Economic Coordination FSC - Public Services CommissLon p - Quarterly Progress Reports SGV - Sycip, Garres, Velayo and Compan,, PHILIPPINES FOURTH POWER PROJECT Performance Audit Basic Data Sheet 1. Loan No. 491-PH 2. Borrower National Power Corporation (NPC) 3. Amount of Loan US$12.0 million 4. Amount Disbursed US$12.0 million 5. Date of Loan Agreement April 5, 1967 6. Date of Effectiveness June 12, 1967 7. Closing Date: Original November 30, 1970 1st Extension June 30, 1972 Final December 31, 1973 8. Term of Loan 20 years 9. Grace Period 3 1/2 years 10. Interest Rate 6% 11. Commitment Charge 3/8% 12. Fiscal Year July 1 - June 30 a. President's Report No. and Date P-531; March 22, 1967 b. Appraisal Report No. TO-516; April 5, 1967 and Date Exchange Rates (Peso) Through 1969 US$1 = P3.9 1970 to October 1973 Us$1 = P6.75 October 1973 to June 1975 US$1 = R7.1  SUMMARY Loan 491-PH in the amount of US$12.0 million equivalent was made to National Power Corporation (NPC), a Goverment-owned corporation,for the purpose of financing the foreign exchange costs and interest during construction of a US$21.6 million equivalent project. The loan was approved on,April 4, 1967, after prolonged discussions on its justification, signed on April 5, 1967, and fully disbursed in February 1974. The project comprised: construction of one 75 MW oil-fired thermal station on Bataan peninsula, intended to come on Luzon Grid by mid-1970; instal- lation of an additional (No. 4) 50 MW unit in Maria Cristina hydroelectric station, scheduled to come on Mindanao (Agus) Grid by end-1968; and construc- tion of permanent regulating structures at Lake Lanao outlet to the Agus River. The purpose of the project was to provide power to meet the increasing demand on the two grids, and to provide NPC with a firming capability on the Luzon Grid. Additionally, NPC was to employ management consultants to strengthen its organi- zation and management. The project suffered a delay of more than two years in its completion and had a substantial overrun of local cost component. At Bataan, the delay was due to changes in civil engineering design following a strong earthquake, bureau- cracy in awarding contracts, financial difficulty of the main civil works con- tractor and apparently indifferent supervision from the engineering consultants, Electroconsult (ELC); the delays at Maria Cristina were due to NPC's indifferent project management and errors by the alternator manufacturer, as well as lack of urgency for the work. The increase in the costs of local components was nearly 100% in current terms, because of devaluation and 33% increase in minimum wage; but the total cost of the project, in equivalent US$, was only 18% greater than the estimate. The management consultants made useful contributions towards streng- thening NPC's managerial effectiveness particularly in the financial area. They introduced analytical techniques to determine tariffs and to re-value fixed assets, and helped to implement their recommendations. NPC's charter was amended to incorporate several improvements, in addition to a regionalization - seemingly unwarranted at the time and of dubious merit even subsequently - and its role was eventually extended to include sole responsibility for construction and operation of future bulk generation and transmission in the country. The delay in the construction of project did not seriously affect NPC's load growth; in fact, Maria Cristina unit 4 created an excess capacity on Mindanao Grid because expected developments mainly from a potentially large consumer (Iligan Steel) did not take place. On the other hand, slow progress in construc- tion of transmission lines and, to an unclear but probably small extent, the delay in the construction of Bataan, may have affected the growth of the power market in Luzon. Over the longer run, it does appear that Bataan has assisted in achieving the Government's objective of dispersing industry away from the conurbations and city centers. It has been heavily utilized and efficiently operated, but the expected fuel cost savings from the use of pitch instead of Bunker "C$ have been -ii- almosttotally eliminated by the subsequent relative increase in the price charged NPC for pitch. Because of the difficulty in obtaining adequate tariff increases, and subsequently in implementing them, and to a lesser extent because of lower than forecasted energy sales, NPC's financial performance was unsatisfactory and its rate of return was persistently much lower than the covenanted 8%. NPC also faced liquidity problems, the main one being the build-up of large accounts receivable, a problem on which there has however been substantial improvement since 1973. In agreeing to help finance this project, and thereby help launch NPC into thermal generation, the Bank made a good contribution to the development of the Philippine electric power supply, the value of which has now become much greater with NPC's greatly expanded responsibilities, leading to plans for con- struction of geothermal and nuclear plant. The Bankts cautious approach to the project is understandable, and the 3 1/2-year delay between loan request and approval cannot be criticized. On the other hand, the Bank's supervision of the physical construction of the project could have been more intensive than it actually was. The Bank could have helped more, at the time of loan appraisal and negotiations, by discussing and establishing the procedures for annual review and revision of tariffs, by agreeing to specific targets for transmission expansion, by allocating a small fraction of the loan towards management training of NPC's staff, and perhaps by promoting the use of local management consultants, supported by individual foreign specialists, in place of the very heavy reliance on expensive foreign consultants. Probably the Bank could have contributed to improvement in NPC's financial position by taking a more strict stand on the borrower's adherence to the rate of return covenant. PROJECT PERFORMANCE AUDIT PHILIPPINES FOURTH POWER PROJECT (LOAN 491-PH) I. INTRODUCTION 1.01 Loan 491-PH in the amount of US$12 million was the fourth of the six Bank loans amounting to cumulative total of US$153.7 million so far made to National Power Corporation (NPC), and also the fourth loan to the Philippine power sector. The three previous loans (183 PH - $21.0 million; 297 PH - $34.0 million and 325 PH - $3.7 million) were made for construction of hydro power generation units, and the projects financed by the last two loans were still under constructio at the time the Loan 491 PH was under consideration in the Bank. This loan-' was applied for in September 1963, approved on April h, 1967 after prolonged discussions on its justification, signed on April 5, and became effective from June 12, 1967. Disbursements were finally completed in February 1974. 1.02 NPC, a wholly Government-owned corporation, was created in 1936 to undertake generation of electric power from all sources, particularly through the development of the country's water resources. It was one of the two prin- cipal power generating companies in the country (details in Annex la). As of 1966, its plants consisted exclusively of hydroelectric units (totalling 270 MW plus 268 NW under construction) and a number of small diesel units totalling 2.6 MW; most of the hydro units supplied two grids, one in Luzon and the other in Mindanao (Agus) regions, and the diesel and small hydro units operated isolated systems in the three regions of the country. NPC sold its energy in bulk to public utilities and large industrial users and through 1967 its major customer was the Manila Electric Company (MERALCO), with whom it interchanged power through its Luzon grid. 1.03 MERALCO, a public limited company, /with an IFC involvement of US$12 million in equity and loan in 1967, was the largest electricity producer in the country, from almost exclusively thermal plants (the latest units were 100 MW capacity). It operated in its franchise area of Manila and environs, where it sold its energy mainly to the end users through its own distribution system. The Company had shown a steady and much faster growth than NPC in installed capacity and energy sales, had a fair profit record (as shown in Annex lb) and was believed to have competent management - a view supported in the Cisler Report on Philippines Electric Power Survey of 1965. The original application was for a loan of US$10.7 million for construction of Bataan thermal station. Maria Cristina Unit 4 and Lake Lanao regulation works were added to the project in August 1965. The majority interest in the Company was held by the powerful Lopez family, one of whose members was the Vice-President of the Country and the leader of the opposition party. - 2- 1.0 In 1964., MERALCO's franchise was extended for a further 30 years and, as a consequence, the company decided to increase its generating capacity through the installation of larger (150-200 MW) and higher efficiency thermal units. 1.05 The Republic of Philippines consists of around 7,000 islands divided into three regions - Luzon, Vasayas and Mindanao, with a total area of 300,000 square kilometers, and a population of nearly 32 million in 1965. The area and population distribution and the role of public utilities in the three regions are given in Annex Ic. 1.06 Manila, located in the Luzon region, is the largest city in the Philippines. Over the years, population from other regions and the lesser developed areas of Luzon had migrated to Greater Manila (and also to the Central and Southern Luzon economic centers), and while this migration has been slowing down, Manila is, and will continue to be for years to come, the center of economic and industrial activity (also reflected by the relatively higher electricity consumption, Annex Ic) for the entire country. The 1965 Power Survey had forecast a long-range requirement on the Luzon grid of around 4,300 W in new plant capacity between 1967 and 1984, with a corresponding investment of around US$450 million. Clearly, an investment of this magnitude on such a short time scale would require joint planning between NPC and MERALCO. But as of mid-1960s, though the systems of the two main generating companies were interconnected, there was no integrated operation. Therefore, while MERALCO had an agreement to buy cheap hydro energy in the wet season and the peaking energy from NPC, and exchanged its power on a 1:1 basis, it made no commitment to provide NPC with base load energy during the dry season. 1.07 The seasonal nature of NPC's power generating capability, without a committed back-up supply from MERALCO in the dry season, meant that NPC could not guarantee more than 30% of the load factor to its customers, and conse- quently could not obtain equitable prices/ for its energy; futhermore, the prospective industries near Manila, which otherwise may have located their plants away from the conurbation, to avoid congestion in the cities as desired by the Government, were naturally drawn into MERALO's franchise area - a situation which undoubtedly suited the more commercially-oriented MERALO. 1.08 In addition to being a sort of 'supplier of secondary energy', NPC, being a Government organization, was saddled with inherent handicaps relative to the private sector. Its salary scales were lower than those in the industry, certainly lower than MERALCOs, hence a disincentive to greater performance from the employees and an obstacle to recruitment of higher-caliber executives. Political patronage seemed to have played a part in the appointment A Bank mission, in a discussion with MERALCO's Chief Executive, expressed the view that his company could pay three times what it was offering, (0.0162 US 0.25*) for peaking power from NPC. Through 1971, MERALO charge R0.0182 (US0.28)* per unit on the balance of its energy delivered to NPC at the end of each month, and bought NPC's bulk energy at 90.0136 (US/0.21)* per unit; the cost of fuel alone per unit generated by any of the MERALOO machines probably was not lower than the above rates, thus suggesting that NPC did not obtain an equitable price for its energy. * At US$1.00 = P6.4 in 1971. - 3 - of Board members; the Board's functions had, inadvertently or otherwise, some- times overlapped those of the management to the extent of intrusion in the day-to-day management of the corporation. It had to follow the normal bureau- cratic systems; the procedure for increasing electricity rates was tedious (first the application for rate increases had to be approved by the Office for Economic Coordination (OEC) and subsequently by the Cabinet) - in contrast to MERALO, whose application for rate increases had to be approved only by the Public Services Commission (PSC); and even when NPC did obtain tariff increases, it could not implement them immediately, because the system per- mitted time-consuming court injunctions from the customers. 1.09 NPC's objectives for having Bataan 75 MW thermal unit on the Luzon grid by end 1967 (and a similar size unit tentatively planned to follow soon after) were: firstly, to meet the expected increase in its provincial load; secondly, to increase the commercial value of power generated from its hydro units by supporting it with firming ca ability; and thirdly, to avail of the advantageously priced residue fuel oil3/ (about 40% cost saving over Bunker 'C' fuel oil) for boiler firing from a nearby refinery. 1.10 The Bank, having earlier induced a meeting between NPC and MERALCO to prepare a forecast of the load growth and capacity requirements on the Luzon grid, came to the conclusion that the system as a whole would have surplus capacity in December 1968 from units, existing and under construction, of both utilities and that Bataan's contribution would be only marginal to the system. Specific factors against NPC's Bataan were: first, technically retrograde step to install a 75 MW unit on a grid which had 100 PW units and where higher effi- ciency units (150 MW and 200 MW units) were scheduled to come on line; second, MERALCO's proven capability in operating thermal systems and plants; and, third, NPCts indifferent management capability and its poor performance in the construc- tion of the hydro stations, and lack of operational experience of thermal sys- tems and plants. 1.11 The lukewarm support from the Bank had induced NPC, who seemed determined to go ahead with Bataan with or without the Bank's loan, to look for alternative sources of financial assistance, and had revealed a keen interest from Japanese suppliers. Discussions were held in Washington on August 12, 1965, between NPC and Bank on the project, which was now extended to include work on the Mindanao Grid - the Maria Cristina hydroelectric unit 4 and the Lake Lanao Regulation Works - to meet the large increase in power and energy demand expected mainly from Iligan Steel's installation of electric smelters for pig iron produc- tion. NPC inquired about the possibility of a waiver on the debt limitation, covenanted in the earlier loans, in the event of Bank not supporting the Bataan project. 1/ A high-viscosity fuel (i.e., pitch). 1.12 Prolonged discussion took place within the Bank, one section in the Bank looking at the Bataan project as a part of the Luzon grid system and finding little justification, and the other section viewing the project from the differing circumstances and objectives of the two utilities and finding adequate justifica- tion. A joint mission from these two sections to Manila failed to obtain assurances from MERALCO for an integrated operation of the Luzon grid; on the contrary, MERALCO disclosed that it wanted to be independent of NPCts supply and was planning to add more generating capacity. The failure of the mission's objective for integrated operation of Luzon Grid, recognition of the broader economic need for a better power supply outside the Manila metropolitan area, and the prospective Japanese involvement which would have reduced Bank's influence for strengthening NPC's weak management, induced the Bank to swing towards supporting the project. 1.13 The appraisal mission sent to Manila at the end of August 1965 confirmed NPC's need for one 75 kW unit, against the tentatively planned two such units. Discussions within the Bank on the appraisal report and thereafter resulted in decisions to require Bank approval of appointments to the Chief Executive posi- tion and retention of management consultants to strengthen NPC's organization and management; and to change the main financial covenant to the rate of return concept, which was more controllable on a yearly basis, than the 19% contribution towards capital expenditure covenanted in the previous loan - which, incidentally, had never been met. 1.14 During the two years that this loan had been under consideration, the Philippines had considerable room for further borrowing on conventional terms. But, in the second half of 1965, the Government's financial difficulties, because of its inability to collect adequate revenues, were growing rapidly, to the extent that the Bank would normally have decided to wait before making any further commitments. The Bank, however, made an exception for this loan and instead wrote to the Philippine Government on March 3, 1966 that it would be unable to present the loan proposal to the Executive Directors unless it received the Government's satisfactory assurances that all necessary peso funds for ongoing Bank-supported projects would be available as and when required. 1.15 Negotiations between NPC and the Bank were held in Washington even- tually on May 31 - having been postponed on May 19 because of a last moment intervention by the Philippine President to reexamine the relative merits between one 75 1W unit to be folowed later by a similar size unit, and one 150 MW unit. They were completed with the proviso indicated in the Bankrs letter of March 3. 1.16 The loan proposal however could not be submitted to the Executive Directors because the Government, as a guarantor, was in default over two of the Bank's loans. On the National Water and Sewerage Authority (NWSA) project, the Bank's supervision mission of April indicated that the utility would shortly be running out of peso funds; and on the other project, the Los Banos College of Agriculture, the April Quarterly Report designated "awaiting funds" as the cause of some of the delays to the project. By the time the Philippine Govern- ment took appropriate remedial action guaranteeing funds to these projects, the information in the appraisal report had become out of date. 1.17 By mid-1966, doubts seemed to be arising within the Bank on the justifica- tion of Maria Cristina, in view of the then unclear but nevertheless potentially major changes to Iligan Steel's plans. In December 1966, at Bank's request, NPC sent revised load and financial forecasts which included the postponement of Bataan comple- tion date to end 1970, and a decrease in load on Agus grid because of delays at Iligan Steel and loss of a prospective customer. 1.18 The Bank sent a mission to Manila in January 1967 to update the appraisal report, and also to clarify some of the points arising from N~PC's latest forecasts. While in Manila the mission reported problems in the construction of Angat (Loan 297-PH), with potentially serious consequences. When the Philippine Government had taken appropriate steps to deal with this problem, the proposed power loan was submitted to the Bank's Executive Directors on March 22. 1.19 A week before the loan was due for discussion, the Bank - being informed that one of its Executive Directors would raise a question at the Board meeting, which he did, on the need for Maria Cristina - made a quick re-assessment and -* came to the conclusion that Maria Cristinla was still justified despite the effect of changes at Iligan Steel and little industrial growth in the area. The loan was approved on April 4, 1967. II. THE PROJECT AND ITS IMPLEMENTATION Project Description 2.01 The project objective was to increase NPC's power generation capacity in Luzon and Mindanao, and at the same time to provide a base load generating capability in Luzon. It comprised of: A. Construction of one 75 MW thermal station, fired by residue oil, on Bataan peninsula, with provision in the site preparation for future installation of an additional similar unit. B. Installation of an additional 50 MW unit in Maria Cristina hydroelectric station; and construction of permanent regulating structures and dredging of an approach channel at the Lake Lanao outlet to the Agus River. 2.02 The Bank loan of US$12 million, amounting to about 56% of the estimated total project cost, was to finance the foreign exchange costs of plant and equip- ment, the engineering services and interest during construction. 2.03 Electroconsult (ELC) of Milan, who had made cost estimates and plant layout studies for Bataan, were to be retained to prepare initial designs and specifications, to carry out bid evaluations and detailed supervision of con- struction, to train NPC's operating personnel, and to commission Bataan station. NPC was to be directly responsible for construction supervision of Maria Cristina unit, where major equipment awards, but not payments, had already been made following international competitive bidding. 2.04 In addition to the standard covenants, the loan and guarantee agreements included undertakings itemized below, either in the form of covenants or by means of supplemental letters. 1. To employ engineering consultants and contractors acceptable to, and on terms and conditions, satisfactory to the Bank. 2. To furnish to the Bank any material modifications subsequently made to the plans, specifications and construction schedules of the project. - 6 - 3. To employ management consultants acceptable to, and on terms and conditions satisfactory to, the Bank for the purposes of (a) recommending organizational and administrative changes, (b) determining a fair current valuation of fixed assets and establishing depreciation schedules, and (c) assisting in their implementation; and to carry out without delay such changes as necessary. 4. To set and maintain rates for sales of electricity at such levels as would provide an annual rate of return of 8% on the net re-valued fixed assets in operation, and the guarantor to grant such rates. 5. To obtain the prior approval of the Bank in the appointment of the Chief Executive. 6. Not to incur debt unless certain standard debt-service coverage tests could be passed. 7. The guarantor to make arrangements satisfactory to the Bank to provide the Borrower such funds as would be needed to carry out the project, and to maintain the borrowers' cash balance at Q3 million over and above its cash require- mE.nts for any thirty-day period during 1966-68. 8. The guarantor to permit the borrower to repay the three previous Bank loans at the rate of R3.20 to US$1.00. 9. The guarantor to allocate to the borrower annual loans amounting to US$3 million equivalent out of funds from the (Japanese) Reparations Schedule for five successive years starting with the 10th year (1967), for the purposes of carrying out the electrification program. Project Implementation 2.05 Except for the fact that Lake Lanao Regulation Works were reduced in content from the originally envisaged permanent regulating structures to temporary structures the project was implemented largely as planned. However, there was a long delay and a substantial overrun of the local cost component as shown in Tables 1 and 2: Project Completion Dates - Estimated vs. Actual Table 1 Revised Appraisal Estimate Actual Bataan mid-'70 June 171 end-'72 Maria Cristina end-t68 June '69 April '71 Regulation Work (?) Aug. '70 July '70 -7- Project Costs - Zetinated vs. Actual Table 2 (in thousands) Appraisal Estimate Actual Cost Local Foreign Local Foreign (Us$) M tsIT Bataan Thermal Plant Civil Works 11,000 - 34,090 - Plant Equipment and Frection 2,668 7,359 6,491 8,661 Engineering ServicesN 1,100 40 6, 00 55 Sub-Total 1768,899 47,081 9,236 Maria Cristina Unit 4 Civil Works 17s74 - 17,619 - Plant and Equipment - 1,962 - 777 Engineering Servicee - ,o 100 - Sub-Total 17,Z4 1,962 21,619 777 Management Services - - 2,843 1,146 Contingencies 5,786 1,097 - - Interest During Construction - 1,042 010, 1065 TOTAL 78,8 12000 122 TOTAL COST IN US$ 21S7Z4. 10 / (%) 100% 118% a/ OnlyRD0.3 million out of the total 4lO.6 million was paid to ELC; the balance was allocated to NPC's engineering department. bJ Peso costs converted to US$ at the rates of excnange prevailing each year (see Annex 3a). - 8- Delays in Project Completion 2.06 The main causes for delays in Bataan, elaborated in the subsequent paragraphs, were the tedious procedures in awarding contracts, the revision/modi- fication to civil works drawings, the unforeseen problems of the civil works contractor, and the inadequate inspection/supervision of construction and erec- tion of the plant. 2.07 NPC had to follow a bureaucratic procedure in awarding contracts which, as Annex 2 indicates, in two cases took over a year from the dates the bids were opened to the dates the contracts were awarded. 2.08 The civil engineering drawings were revised to incorporate an increase in the earthquake coefficient to 0.2G from the original 0.1G, following a strong earthquake in August 1968; and they were also modified to make provision for the second unit to be 150 MW instead of the originally envisaged 75 NW. 2.09 The main civil works contractor, a Philippine enterprise, had to bring the operation almost to a halt because of financial difficulties - arising from Government-imposed 33% increase in minimum wage in July 1970, and his inability to collect payments on the work under other contracts - and because of organiza- tional problems emanating from the resignation of his key personnel assigned to Bataan. NPC's timely intervention, by providing financial assistance to the contractor, minimized further delays and potential litigation problems. 2.10 The plant was erected in time for its commissioning by therevised target date of end 1971, but the unit could not be put on load for 3 1/2 months, i.e., until March 26, 1972 because the lubricating oil lines were found to carry scale, grit and other solid matter, and therefore had to be dismantled, cleaned and reassembled-. A week later the plant had to be shut down because of a leak from a pinhole in an economizer tube caused by inadequate attention during the welding of the areas in the vicinity. The pinhole was sealed by a welder flown from Japan and the plant resumed operation on April 17. Over two months later the plant had to be stopped again because of water leakage from a field-welded joint in the economizer tube, which in turn damaged the superheater tubes. Subsequent radiographic examination of allI/ field welds of the boiler, indicated that a considerable number of them were below ASME standards. All defective welds were rectified by September 1, 1972 by a team of welders specially brought from Japan. 2.11 The main causes for delays in Maria Cristina unit were faulty erection procedures, inadequate coordination between the suppliers of interconnected equip- ment, errors and omissions of the generator manufacturer, and NPCIs lack of urgency to complete the work. Considerable additional effort and time (6 months' delay) was spent in the erection of the penstock liner, the butterfly valve and the scroll case; apparently the penstock liner was already imbedded in concrete before ensuring that all the above pieces of equipment were properly aligned and adequately secured. If The specifications called for examination of 10% of welded joints. - 9 - 2.12 Errors by the manufacturer resulted in: shipment of laminated plates of the alternator rotor 3 mm longer than required, which had to be ground and cleaned at site before they could be assembled; and defect at the joints of the two sections of the stator, which had to be ground at site before they could be assembled. Inadequate coordination between the suppliers of turbine and the generator resulted in bolt holes, for coupling these units, being out of line. Much reboring, using a special boring machine, had to be done at site. 2.13 As the envisaged load growth on the grid did not materialize, the work on this unit was confined to normal working hours of the week and to a reduced staff. 2.14 None of the problems of Maria Cristina and the changes to Bataan were reported in the Quarterly Progress Reports (QPR) nor in NPC's correspondence with the Bank, nor even in the supervision mission reports. The reduction in the scope of Lake Lanao Regulation Works was mentioned only briefly by two supervision missions; one mission report indicated the possibility of cancel- lation of US$1 million from the loan by deferring this work completely; and the subsequent mission reported that NPC was proceeding with a reduced project and expected savings only in local costs, without elaborating on the work or on the probable cost. 2.15 No entity, other than perhaps the OEC, could be held directly respon- sible for the delays in the earlier stages of Bataan,and credit has to be given to NPC for its timely intervention when the civil works contractor was in financial difficulties. But the responsibility for the problems which caused subsequent delays to Bataan would seem to be that of the engineering consultants for the apparently inadequate inspection of lubricating oil pipes prior to assembly, the inadequate care during economizer ube welding, and the faulty radiographic examination or sampling techniquesN of field-welded joints. The delays at Maria Cristina were due to NPC's unsatisfactory performance in project manage- ment - apparently faulty erection procedure of penstock and scroll case, and failure to coordinate at design stage between two suppliers of interconnected equipment - and due to the supplier's error in the manufacture of the alternator (NPC probably could have had some redress from this supplier but it was not pur- sued). Cost Increases 2.16 The actual cost of the.foreign exchange component remained virtually unaltered but the local cost component increased, in current Pesos, by almost 100% from the appraisal estimate, as indicated in Table 2. The premise here is that a 10% sample should have detected the flaws when a 100% examination indicated a considerable number of such flaws; as a precau- tionary measure, the size of the initial samples could have been greater than 10%. - 10 - 2.17 The cost increases were partly due to 33% increase in the minimum wage from P6 to 8, which naturally had repercussions at all levels of employment, to substantial devaluation of peso which, in turn and together with increase in wages, raised the costs of locally-manufactured equipment, and to the delays in project completion. Other factors which contributed to the increase were the changes made to Bataan civil works, the installation of additive injection equipment to combat the effects of high sulphur and vanadium content in the residual fuel oil, the services of management consultants (whose foreign exchange cost was almost equal to the contingency element in the appraisal estimate), the increase in engineering services and the interest on the peso component; on the other hand, cost savingsi/ were obtained on Maria Cristina's plant and equipment, but probably none from the reduction in the size and scope of Lake Lanao regulating works. 2.18 But the breakdown of the project expenditure on an annual basis, given in Annex 3a, indicates that while the actual cost of the peso component exceeded the appraisal estimate by nearly 100%, in real terms this increase would be much lower - aroind 53%, were the yearly peso expenditure adjusted for inflation; around 35%, 'were this expenditure converted to US$ at the prevailing rates of exchange; and the total cost of the adjusted project in equivalent US$ would be marginally higher (about 18%) than the estimate. Project Operation 2.19 Bataan went into commercial operation in December 1972, 18 months behind the revised schedule and, as Annex 3b indicates, has been operating satisfactorily since, with annual load factor of over 72%, utilization rate of 80%, and net heat rate of under 10,000 BTU/EWH (monthly optimum - 9,517 BTU/KWH). 2.20 To operate Bataan, its first thermal plant, NPC organized itself effec- tively. It sent 20 of its engineers for 6 months' training in MERALCO's plants, and to assist in the initial stages of its operation, it employed retired MERALCO technical staff. The operation of Bataan to date, satisfactory by any thermal plant standards, is a credit to NPC's engineers and to the manufacturers of the plant. 2.21 Maria Ciistina unit 4 was placed in commercial operation in April 1971, 22 months behind the revised schedule, and has been operating satisfactorily. Information has not been available on the operation of Lake Lanao regulation works, which was completed in July 1970, one month ahead of the revised schedule. No explanation was forthcoming as to why there was such a substantial cost saving on plant and equipment for which awards, but not payments, had already been made at the time of appraisal. - 11 - III. INSTITUTIONAL DEVELOPRENT Management Consultants 3.01 As required in one of the loan covenants, NPC appointed a firm of management consultants, Gilbert Associates, Inc. (GAI) from the U.S.A. to review the organization structure, the staffing levels, information requirements and systems, financial and accounting systems and procedures, personnel policies and training programs, the Government regulations and charter restrictions. GAI, in association with a local firm of consultants, Sycip, Gorres, Velayo and Company (SGV) carried out a detailed study which included the functions and responsibilities of various positions within the organization including those of the Board, and a comparison of salary structures with other Government and public organizations, and in October 1968, it submitted a number of recommenda- tions which included reorganization of management functions and duties and a radical change in the organization structure2/ (Annexes ha and 4b), and which involved revision of NPC Charter. 3.02 Subsequently the consultants carried out revaluation of fixed assets, established depreciation schedules for various types of plant, and devised a trending procedure - based on a combination of wholesale price index of imported manufacturedgoods and labor cost index - to keep the value of plant current on a continuing basis. In addition to assisting in the implementation of their recommendations, GAI/SGV carried out studies on Upper Pampanga River Project, introduced analytic methods for determining tariffs, prepared proposals for draft legislation aimed at bringing NPC under the PSC regulations for the purposes of tariff adjudication and subsequent implementation, organized the data for the hearing of the tariff case, and assisted in the renegotiation of the agreement with MERALCO. 3.03 Adequate records were not available on the recommendations which had been accepted or modified, nor on the precise extent of their implementation. The consensus within the NPC was that the consultants had performed satisfactorily in several areas, particularly in finance, where the reporting had improved to such an extent that the top management could now receive the information in a matter of days instead of weeks, and in the work order system which was function- ing adequately. On the other hand, doubts were raised by NPC on the effectiveness of the organization structure and the reorganization of managerial functions recommended by GAL. But, before this organization structure could be put to test, NPC, under its new Charter of 1971, was regionalized, thereby creating the 1/ The two major changes in the new organization proposed were: (1) making the General Manager the ex-officio Chairman of the Board "in the interests of maximum coordination between policy-making body and management", and (2) creating two additional Assistant General Managers "to do away with unduly heavy burden placed on one Assistant General Manager and requiring him to exercise such highly-diversified expertise as finance, legal, engineering, etc." - 12 - need for a different organization structure. The subsequent organization structure (Annex 4c), also devised with the assistance of GAI, while retaining the recommended reorganization of management functions, was more an extension of pre-1968 structure and seemed to have lacked an in-depth study and to involve unnecessary duplication of some activities or underutilization of manpower. 3.04 It would be an almost impossible task to weigh the benefits from the management consultancy services against the substantial costs incurred for these services (detail breakdown in table 3). The views ventured from various quarters of NPC which seem to have some justification, were that the same benefits could have been achieved for lower costs had the Bank given NPC greater flexibility in the appointment and use of consultants. With such a flexibility - and in the context of a Chief Executive, highly motivated towards carrying out improvements in the organization, who had himself initiated a management audit study in 1967 whose findings were much in line with those of GAI/$GV - NPC would have had the option to consider the appointment of local consultants for almost one-tenth of the cost of a foreign consultant 1/ to carry out most of the basic work, and to hire consultants from North America or Western Europe only for those activities where local talent was not available2/, NPC executives also felt that some of the GAI consultants, probably not regular employees of the organization but recruited tad hoc', were oriented more towards utilities under private ownership in the developed world, and their suggested staff training programs were too expensive for NPC's needs. Institutional Aspects 3.05 Significant developments took place in NPC's role in power generation due to amendments to its Charter in 1971 and 1974, through Presidential decrees No. 40 of 1972 and No. 269 of 1973, and through the Republic Act No. 6038 of 1969. 3.06 Amendments to NPC's Charter provide the following benefits: improvement in rate making procedures and in their implementation; definition of powers and duties of the Board and those of Management; increase in the ceiling on debt; authorization to fix rates and fees to be chargeiby the Corporation, but introduc- tion of maximum rate of return of 10% on currently valued net assets in service; exemption from taxes and other expenses such as import duties, wharfage fees on foreign goods including petroleum products required for operation; improvement in procedures to accelerate acquisition of rights of way on land to reduce long delays previously experienced in the erection of transmission and distribution lines; and provision for the conversion of bonded indebtedness to a government investment in equity capital. It also placed emphasis on regional development through regionalization and created requirement for rates in the regions to be determined independently of each other. 1 Total cost of a foreign consultant is generally around $6,000 - 7,000per month to a client from a developing country. 2 Evidence was not found of NPC having made a formal request to the Bank for such a flexibility. - 13 - Breakdown of Costs of Management Consultancy Services Table 3 (in thousands) GAI Local Total % of Project Cost (SV, etc.) US$ Cost Management Organization - Study 140.4 - 140. Valuation of Fixed Assets 168.5 - 168.5 Implementation & Assistance 749.2 - 749.2 Supplemental Services 87.5 - 87.5 Sub-Total 1,145.6 - 1,145.6 4 4A Peso Cost Management Organization Study 200 352 552.4 Valuation of Fixed Assets 200 341 540.8 Implementation & Assistance 400 766 1,166.1 Supplemental Services - 201 200.8 Upper Pampanga River Project - 55 55.2 Metropolitan Car 153 - 153.4 Income Tax 174 - 174.3 Sub-Total 1, 1,715 2,843.0 3.07 The decrees,.! aimed at achieving the national policy objective of total electrification, involving industrial development, dispersal of industry from urban areas and particularly beyond a 50 km radious from the centre of Manila, and rural electrification, by establishing island grids, integrating power generating systems and consolidation of distribution systems, gave NPC responsibility for construction of national grids, the development of all future generation supplying these grids, and ultimately for owning and operating all generation facilities. In this new role, NPC is going ahead with a program for power S1 The decrees are a part of the sweeping reforms introduced by the President after the declaration of martial law in September 1972 - to accelerate the transi- tion of a relatively agrarian society into an industrial nation, by purging some of the bureaucratic machinery, by assuming a measure of control and coordination over all economic sectors, including rationalization of industries to meet the goals of national economic development. Board of Investments (BOI) has been given the responsibility to induce industries to make optimum use of the country's underemployed and unemployed labor force without involvirg its mJigraticr into town centres, and to restrict further industrialization in Greater Manila. 14 - generation from nuclear and geothermal sources, and is expected to take over MERALCOts base load plants totalling over 1,000 MW. 3.08 Act 6038, subsequently superseded by Decree 269 in 1973, created National Electrification Administration (NEA) with the object of achieving total electrification of the countryL/ on an area coverage basis through the establishment of electric cooperatives; NEA provides technical and financial assistance to cooperatives and utilities for construction, operation and maintenance of all transmission lines below 67KV and the associated substations, and for installation of small generating units in isolated areas until such time as NPC could take over. Manpower Growth and Development 3.09 The more effective use of NPC's manpower, expected from consultants' job evaluation and reorganization of managerial duties and proposed training programs, seems to have suffered at least in the short term, as a result of the regionalization of the organization required by the Congress, in 1972, apparently with the purpose of accelerating development in the regions, one of which (see Annex lc) does seem to have been the victim of some earlier NPC neglect. The immediate effect on NPC's manpower requirements was an increase / of over 20% and 30% in the number of permanent staff and permanent positions respectively, as shown in Annex 6. It is of course, too early to judge the net benefit of regionalization and, as Annexes 5 & 7a indicate, no physical growth of any significance, either in construction or in energy sales, has taken place between 1972 and 1974. But given that NPC was a relatively small entity engaged in hydroelectric operation until the last three years, and that its present managerial and technical capability is already stretched to meet the challenge provided by the expansion programs undelUay, it may have been possible to achieve these programs' objectives through 1985 probably more effectively by alternative means such as a task force approach under a centralized2/ NPC until such time as the organization had built an adequate bank of managerial and technical capacity. Certainly 1972 seems to have been on the early side for the regionalization move, in view of the human resources available to NPC and its responsibilities. 3.10 As part of its manpower development strategy, NPC carried out 'on the job' and other internal training programs. Furthermore, from 1968 to May 1975 it sponsored its employees to 50 external courses and training programs, lasting from a few weeks to several months, conducted both within the country and abroad as indicated in the following table 4. 1 Annex 8 2 Net, after deduction of positions which arose because of Bataan, commissioned in December 1972; but without deduction of a few additional positions required due to NPC's growth. / A centralized entity does not preclude the setting up of regional offices, which is not the same thing as regionalization. - I5 - External Courses/Programs Attended by NPC Employees Table 4 Courses 1966 '67 '68 '69 '70 '71 t72 '73 '74 '75 Total Abroad 2 6 1 3 - 2 6 4 9 - 33 In the Country - 2 2 - 1 2 - 2 1 7 17 Total 2 3 3 3 1 4 6 6 10 7 50 3.11 The above courses and training programs, however, were aimed almost entirely to the development of technical knowledge and skills, and not to the development of skills - of probably greater importance, and identified or implied by the Bank missions as being also in short supply among NPC's executives - in the managerial, financial, commercial and long-term planning disciplines. Transmission 3.12 Though not an inherent part of the project, to achieve full benefits from its capital investment in generating capacity, NPC was required to carry out investment in transmission lines and substations. The Government had under- taken to allocate reparation materials amounting to US$3 million equivalent annually in the form of loans at 3% interest for five successive years from 1966. Delays from the Government in meeting this undertaking resulted in NC 's program coming almost to a halt; and when it did receive the materials, NPC felt that the values attached to these materials were substantially higher than the cost of similar materials obtainable under international tenders. The annual construc- tion of transmission lines and substations and the capital expenditure are given in Annex 5. Iv. ?ROJECT JUSTIFICATION 4.01 The appraisal justification for the project was to provide additional generating capacity to meet the increasing load demand for NPC on Luzon and Mindanao Grids. Comparison between the actual and the forecast demand on the two grids, given in Annex 11, indicates a large disparity on the Mindanao Grid, but marginal on the Luzon Grid. 4.02 The forecasted large increase in load demand on Mindanao Grid failed to materialize because of lower than expected growth of industry in the area and particularly because of changes in plans at Iligan Steel, explained in detail in Annex 9. Therefore, Maria Cristina unit 4 and the Lake Regulation Works - though reduced in scope - resulted in excess capacity on the grid which probably could have been avoided. - 16 - 4.03 Bataan, on the other hand, provided generating capacity and, more important, firming capability - the key for NPC's provincial load development particularly from the industrial sector. The delay in its completion may have somewhat affected the load growth; while peak demand has been fairly in line with the appraisal estimate, the energy demand has, since 1970, been lagging the estimate by over a year. Another factor restricting load growth below potential could have been the slowdown, due to shortage of peso funds, in the construction of transmission lines and substations. .04 The expected 40% fuel cost savings over the conventional Bunker tCt fuel had gradually dwindled to 9% in May 1974, as indicated ir1 Annex 3b. Taking into account the operational pproblems from a two-fuel system-Y and the additional capital and operating costs,i the originally envisaged overall cost savings may have been totally eliminated by the present day fuel price differential. The fuel price agreement, for whatever it is now worth - since the refinery's nationalization and the steep increases in crude oil prices - should have more appropriately linked the price of high viscosity fuel to that of Bunker 'C' fuel, instead of linking it exclusively to the landed cost of crude oil. Had there been no price incentive, it is doubtful whether Bataan I would have been the choice of site for the thermal plant at the time, in preference to some other site in Southern Luzon, say Bataangas. A further problem for NPC is the refinery's probable inability to provide adequate supply of high-viscosity fuel!/ to meet the requirements of Bataan II, 150 MW unit presently under construction. 4.05 In addition to contributing towards the dispersal of new industry from Greater Manila (and BOI reports/ confirm this trend), the project has provided a number of other benefits, more of an intangible nature, to NPC and even to the country. The firming capability through the entry into thermal technology and the efficient operation of Bataan has placed NPC on a solid footing for further expansion in thermal generation (including the nuclear and geothermal plants included in current expansion planning), and given it some standing in power generation business. The work done by management consultants, the analytic approaches to revaluation of assets and to pricing, and the improvement in salary structures, have raised the professionalism of NPC's executives, and increased their level of confidence and status in dealing with their customers including MERALCO. 1.06 Though the estimated unit cost of generation from Bataan (details in Annex 12) is higher than the unit cost of NPC's overall Luzon grid generation, nevertheless Bataan provides an inexpensive source of base load energy and thus increases the commercial value of NPC's generation on the Luzon grid. As would 1/ The stand-by fuel for the system is Bunker 'C'. 2/ Fuel additive injection equipment, etc; shutting down the plant for cleaning combustion and heating surfaces. j/ The original agreement stipulated that the type of fuel to be supplied shall be at the discretion of ESSO, provided only that such fuel shall be pumpable and burnable. 6/ Board of Investments - Eight Investment Priorities Plan, 197$. - 17 - be expected from the installation of larger capacity units and from the increase in total capacity, NPC's unit costs (at constant prices) of overall generation have fallen marginally between 1968 and 1974, despite interim increases in the wage bill. Table 5 Unit Cost of Generation 1968 1969 1970 1971 1972 1973 1974 Unit Cost of Generation (at 1968 Prices) Demand Related Cost (F) .035 .041 .042 .037 .036 .030 .029 Energy Related Cost (2) .008 .008 .009 .009 .009 .010 .012 Total Cost Per Unit (E) .043 .049 .052 .047 .045 .041 .041 Source: Annex 10 V. Financial Aspects 5.01 NPC's financial performance has been unsatisfactory. It did not meet the 8 percent rate of return covenant primarily because of the difficulty in obtaining adequate tariff increases for its contracted customers on the Luzon grid, and secondarily because of lower than forecasted energy sales. Even when tariffs were approved, their implementation was delayed by injunctions from lower courts, following appeals by customers. 5.02 The appraisal report stated that NPC had agreed "to make an annual review of tariffs not later than September 30 and impose new revised tariffs by December 1 of each year, and that any shortfalls or overruns of the preceding year would be considered in computation for the current year." But due to the inflexibility of NPC's long-term contracts with its customers, a rate revision took about 2 years in the case of retail distributors and up to 4 years for sales to MERALCO before such revised tariffs could be implemented. In fact, NPC's 1962 tariff revision was not fully implemented even in 1966, and litigation was pending before the Supreme Court in 1968. Such a situation is not expected to recur in the future, following the substantial revisions of NPC charter. Comparisons of NPCts estimated and actual Income Statements and Balance Sheets are given in Annexes 13 and 14, while similar comparison of financial indicators for 1968-74 is given in Table 6. 5.03 NPC's rate of return dropped from 7.1 percent in 1968 to 4.8 in 1969, both rates being calculated on partly revalued assets. In 1970, based on currently revalued rate base, the rate of return dipped to 2.7 percent. The Bank - 18 - iaesal IgLcatore 1968 1969 1970 1971 1972 1973 1974 let. A Et. st. Act. Est. Act. Et Act. Rst. MI. Ac:. Act. Total Sales (GWh)y 1,516 1,464 2,224 1,208 2,501 1,711 3,314 2,109 3,433 .2,385 2,389 2,364 Average Price/Unit (8) .035 .035 .035 .039 .034 .035 .030 .036 .033 .045 .052 .081 Total Sales Revensel (a million) 53.1 51.6 78.2 47.3 85.3 60.5 98.2 76.7 113.3 107.1 123.1 191.1 operating Expenses (8 million) 25.0 19.0 $2.1 24.9 37.0 40.3 43.9 43.4 53.0 49.6 66.9 130.6 2 Operating Raio() 47 37 41 53 43 66 45 56 47 46 54 68 Rate of Return (%) 6.5 7.1 8.0 4.8 8.0 2.7 8.0 3.6 8.0 5.9 4.6 3.7 Debt/squity Ratio(T) 48 39 49 41 49 35 48 38 46 38 48 33 TImes Debt Service Covered 1.2 2.1 1.5 1.2 1.5 1.2 1.2 1.2 1.3 1.8 1.3 1.6 by Net Revenue 1- Iilades not Bales to W O Net Soargy Purchase from =MiAA costing V 34.5 million waived the rate covenant subject to NPC making an application for a 73 percent tariff increase which was expected to yield an 8 percent return before taxes. The Special Committee appointed by the President for tariff rate hearings, approved only 42 percent increase and in determining the rate increase stated that "current public utility rates should not include provision for future expansion of facilities." This increase plus the subsequent rate increases of R 0.005 per KWh in Luzon in 1972 marginally improved the rate of return to 3.6 percent and 5.9 percent for 1971 and 1972, respectively, still far short of the covenanted 8 percent. Further tariff increases applied in 1973 and 1974, including a fuel surchargeI/ form July 1973, though raising the average unit price and total revenue from PO .052 and P 107 million in 1972 to F.081 and R 191 million in 1974 achieved rates of return of only 4.6 percent and 3.7 percent respectively. 5.04 Actual operating ratios were greater than the estimates from 1969 onwards, reflecting the collective effect of inadequate tariffs, .increasing costs of generation and failure to achieve the sales targets. 5.05 NPCIs debt service coverage for the 5-year period 1969-74 was, on the whole, marginally better than the appraisal forecast for 1967-72, and net internal cash generation covered a somewhat higher than expected proportion of total ccnstruction expenditures - and nearly one-third for 1969-74 (Annex 15). 5.06 NPC was also faced with liquidity problems from time to time, the most persistent one being the build-up of large sums in accounts receivable which, in 1971, amounted to 64% of the annual operating revenue. The main defaulters in this area were Government utilities, Baguio City utility, and cement companies. Other problems were the difficulty to sell NPC bonds, the inability to withdraw 1/ Fuel surcharge enables NPC to pass on to its consumers any increase in fuel cost above a base price of P1.1 per million BTUS. - 19 - P8 million deposited by NPC with the financially embarrassed Overseas Bank, the delay in the receipt of about P11 million arising out of exchange rate differqqtial on loan payments, and the devaluation of the peso. The 809-PH loan agreemen had introduced a clause to the effect that by June 30, 1973 accounts receivable would not be greater than the three previous months' billings. Although the annual accounts for 1973 and 1974 suggest that this particular requirement was not met in either year, nevertheless a substantial improvement seems to have taken place as shown in the table below. Baguio utility has now been taken over by NEA, and the cement companies, faced with glut in their market, were permitted to offset their electricity accounts against cement purchases by the Government. Operating Revenue and Accounts Receivable Table 7 1970 1971 1972 1973 1974 1. Operating Revenue (EM) 46.3 60.9 90.8 113.2 191.1 2. Accounts Receivable (RM) 21.6 38.8 48.2 39.8 53.9 Ratio (2)/(l) (4) 46 64 53 35 28 5.07 NPC now maintains its fixed assets at current values by arranging for their review every four years by an independent appraiser. In the intervening years, it up-dates the gross fixed assets and depreciation accumulation for rate base purposes by trending. Fixed assets were revalued by appraisers on two occasions during the seven years since Loan 491-PH was made in 1967. The first revaluation was made as of December 31, 1967 but was not brought into NPC's books until FY 1970, and the second as of July 1, 1972, involving an increase of P366 million and brought into the books in the same FY. 5.08 NPC's practice was to record the peso value of its foreign debt liabilities at the exchange rate in force at the time the debt was incurred. The debt was serviced on the basis of the free market rate of exchange, and the resulting foreign exchange losses were written off each year. As from June 30, 1973, NPC revalued its foreign debt on the basis of the exchange rate as of that date, which increased its long term debt by E367 million. This produced a debt/equity ratio of 43/2. In FY 1974 the Government subscribed over P160 million to NPC's equity capital by the conversion of existing bonded indebtedness, and reduced NPC debt to 33 percent of its capitalization. NPC does not declare any dividend on its share capital, which is wholly Government-owned. 5.09 The debt limitation covenant required NPC to obtain the Bank's agreement before incurring long--term debt when its current revenues are less 1/ Because of slow recovery of load from severe floods in 1972, the rate of return covenant was reduced to 6 percent in 1973. - 20 - than 1.3 times the maximum future debt service on existing debt, including the debt to be incurred. Since its net revenues did not provide the stipulated cover on the future debt service, NPC has obtained Bankrs prior approval for new borrowings . VI. BANK PERFORMANCE 6.01 The substantial delays in the approval of the loan arose from many factors, including the conflicting project information from NPC, and the Bank's actions seem to have been prudent. The Bank was right in principle to expect an integrated operation of Luzon Grid; and it was equally right in practice to eventually recognize the unrealism of such an expectation given that the background and objectives of NPC and MERALCO were so different from each other. The Bank was also right in not submitting the loan for the approval of th- Executive Directors until the Government had taken appropriate steps concerning the earlier loans. The Bank's concern on the capability of NPC to operate a thermal unit was not unreasonable, against the background of its past performance in dealing with problems emanating from a relatively simpler technology; but subsequent excellent operation of Bataan has dispelled the concern. 6.02 The Bank was also helpful to the borrower in specific ways. It advised NPC on the outdatedness of its agreement with MERALCO which placed emphasis on energy sales whereas NPC's principal contribution was capacity. It put in a large amount of time and effort interceding with Government, on behalf of NPC, for increases in tariff, and for other actions to improve NPC's organiza- tion and management. The Bank deserves the credit for initiating the first meeting between NPC and MERALCO to prepare a forecast of loads and capacity requirements of the Luzon Grid. 6.03 Employment of consultants was an important part of the project, and a necessary means to strengthen NPC's organization and management. But the appraisal estimate of project cost surprisingly did not include the cost of management services; a year later though, the Bank finally agreed to NPC's requests and a supervision missionts recommendation to finance the consultants' foreign exchange costs from the loan. More importantly, the Bank was aware of NPC's Chief Executive's interest and determination to improve the management and the organization; in such a situation the Bank could have placed greater emphasis on the objectives rather than the means; NPC would then have had the option to consider hiring foreign consultants on a piece-meal basis, and probably achieving substantial savings without harm to achievement of the desired overall improvements. Another area where the Bank could have increased the contribution towards the improvement in NPC was to earmark a small amount from the loan towards management training. Almost none of the external courses and training programs to which NPC sponsored its employees included a management discipline. 6.04 The Bank does not seem to have made any specific comments on the management consultants' recommendations, even though they were hired at its instance. There is no record of the Bank having kept track of which recommenda- tions were accepted, which rejected and which modified, or of implementation. - 21 - 6.05 Regionalization in 1972 suddenly and greatly increased NPC's manpower requirements, at a time when NPC was short in management capability, thus tending to negate one of the Bank's objectives in making the loan - to strengthen NPC's overall management. A change of this nature did not require Bank approval under the terms of the loan agreement, but there is no evidence that the consequences of this timing and the possible alternatives were discussed during Bank supervision of the project. 6.06 As regards tariffs, the presentation in the appraisal report of procedures for their regular review seems to have been overoptimistic, judged by the results. Perhaps this might have been foreseen by the length of time that it took to implement the Government-approved 1962 tariff changes, indicating that the procedures were really not feasible, given the legal framework within which NPC operated at the time of the appraisal. Further- more, since the Government was continually in default on the loan covenant dealing with the return on the rate base from the year following appraisal, and the Bank devoted substantial time and effort to attempting to rectify this, more serious consideration should have been given to making a tariff increase, sufficient to achieve the existing rate covenant, a condition for negotiating (approving, signing or making effective) the subsequent loan to the same borrower made approximately four years later (Loan 809-PH for Bataan II, 150 MW unit was under negotiation at the time of the supervision of the loan). 6.07 On the technical - economic side, the Bank seems to have given inadequate attention to the minor components of the project and the program, both at appraisal and supervision. Commitments were obtained regarding the availability of reparation payments, and the delays in releasing them were periodically followed up, but no targets were given in the appraisal report for construction of transmission lines and substations. 6.08 In retrospect, the work on Maria Cristina and Lake Lanao could have been deferred by three years, and possibly more. While the Bank had justifiably given most of its attention to the problems related to Bataan and at its instance, had even obtained a revised load forecast from NPC in December 1966, nevertheless the imprecise, rather unrealistic and, with hindsight, outdated information made avialable to the Bank on the developments at Iligan Steel - which presumably was used as a basis for the revised forecast - should have strongly suggested an earlier and a more thorough re-assessment of justification for this part of the project than that made a week before the loan was approved. - 22 - VII. CONCLUSIONS 7.01 All major parts of the project have been brought to successful physical completion, and they seem to be worthwhile, although the works on the Mindanao system accounting for some 15% of total project costs were probably done some three years ahead of the time they were really needed. The 18% cost overrun for the project as a whole was mainly accounted for by real increases in scope, at Bataan and in the form of the management consultants' services. The lengthy delays in both preparation and execution of the project do not seem to have had too serious an effect on power market growth except to an unclear, but probably relatively small extent, in Luzon. Difficulty in obtaining approval of adequate rate increases and then in implementing them effectively resulted in NPC's rate of return falling persistently short of the covenanted 8%, but this did not cause problems of local currency shortage to be a major factor in delaying project works. The impetus provided by the successful operation of Bataan, the work done by the management consultants, the amendments to NPC's charter (other than the regionalization) and the involvement,of the Office of the President have helped NPC become a more effective organization, and thus more capable of discharging the greatly increased responsibilities it has since been given. ENERGY GENERATED IN PHILIPPINES Growth ,61-167 1961 1962 1963 1964 1965 1966 1967 p..) NCP 1,132 1,169 1,376 1,465 1,430 1,436 1,586 5.8 MERALCO 1,251 1,550 1,709 2,010 2,400 2,853 3,015 15.8 Other 216 223 240 283 330 362 396 10.5 Total 2,599 2,942 3,325 3,758 4,160 4,651 4,997 11.5 Note: In 1961 there were 280 entities (76 large employing 10 people or more and 204 small) in generation business. AggEl lb MERL00 - KEY STATISTICS 1961 1962 1 196 1966 1967 Customers 368,925 385,516 403,653 419,062 440,651 461,786 483,325 Generating Capability (MW) 319 319 385 385 485 595 595 met Utility Plant (PM) 223.3 266.8 303.5 34.47 509.4 568.6 657.3 Sales 0WH) 1,689 1,939 2,175 2,493 2,721 3,055 3,431 Average Price/Unit (P) .0532 .0521 .0515 .0511 .060 .0614 .0610 Revenues (PM) 89.8 101.1 112.1 127.5 163.2 187.8 209.3 Net Income (PH) 24.6 24.3 25.0 28.1 38.1 49.8 55.1 Net Income as % of Net Utility Plant 11.0 9.1 8.3 8.2 7.5 8.8 8.4 ANNEX Ic AREA AND POPULATION DISTRIBUTION OF PHILIPPINES Mindanao Visayas Luzon (Metropolitan Total (ncl. Manila) Manila) Area (000 Km2 ) 102 58 140 n.a. 300 Population in 1965 (M) 6.4 9.1 16.4 (2.7) 31.9 /Total Bnpioyment 1,546 1,907 11,226 (5,428) 6 in Public Utilities .9/Total Payroll (Fx) 4.6 6.4 49.2 31.3 60 in Public Utilities 56w VTotal Receipts (PM) 52.9 28.3 308.9 206.8 89.1 in Public Utilities 3C.3. /NPC Sales (GWh) 225.6 6.6 1,050.0 - 1,282.3 VNPC Sales Revenue 4.60 0.43 36.59 - 41.61 (PM) 1 Corresponding figures for Electric Light and Power Iltilities. 2 Data for 1967. ANNEX 2 KEY DATES OF PRINCIPAL CONTRACTS Date Date Bid Contract Contract Contract Contract Opened Signed Awarded to Value (million) Main Machinery 8/16/67 7/29/68 Remerco $5.57 (Boiler, Turbo. alternator) Transformer 8/16/67 8/19/68 Macondray $0.36 Switchgear 8/16/67 8/19/68 (EdKeller 1/) $0.98 Civil Works 12/22/67 '6/13/68 Heights Cons P13.95 1/ Office of Economic Coordination (DEC) disapproved award to Keller. This contract was subsequently integrated with the transformer contract and awaided to Mac dray. * NORMAL PROCEDURE IN AWARDING CONTRACTS S (2 - - (3 ) - (4) Board (5 NG : (1id Committee ). (beneral Manager).()or )Board )()4 evaluation and to Board Resolves Resolution Re-evaluates recommendation to to OEC General Manager (6) OEC recommenda- > (7) Office of President ) (8) DEC to (9) Prepare * tion to Office reviews General Manager Contract of the President (10) _________-(2 Government Contract Read( Corporate for Signature Council reviews 1-2 Bid Committee (consisting of 3 representatives from NPC, and one from OEC who is the chairman, and an observer from the Office of Auditor General) evaluates bids and makes recommendations to the General Manager. 2-3 General Manager forwards the recommendations to the Board. 3-4 Board approves the recommendations through a resolution and returns to the General Manager. 4-5 General Manager forwards the Board resolution to OEC. 5-6 OEC Committee re-evaluates the bid. 6-7 Re-evaluated bid, if in excess of P 500,000 is sent to the Office of the President (otherwise directly back to the General Manager). 7-8 Office of the President Screening Committee reviews the bid and sends it back to OEC. 8-9 OEC sends it back to the General Manager. 9-10 General Manager's office prepares the contract and sends it to Government Corporate Council. 10-11 Government Corporate Council reviews the contract and returns it to the General Manager. 11-12 Contract ready for signature. NOTE: Since the disbanding of OEC and with the enlarged role played by the Office of the President in the Electricity Generation, the time span for the above procedure is reduced from one year to about 3 months. ANNUAL EXPENDITURE ON PROJECT ANNEX 3a (in millions) Total Total Peso in Fiscal Inflation M.C. No. 4 Bataan No. 1 Total Peso at Equival t Year Factor Peso US$ Peso US$ Peso US$ 1968 Prices US 1965 0.89 - - 0.83 - 0.83 - 0.93 0.21 1966 0.93 .33 - 0.08 - 0.41 - 0.44 0,11 1967 1.00 1.71 - 0.68 - 2.39 2.39 0.61 1968 1.00 4.13 - 3.96 - 8.09 - 8.09 2.06 1969 1.04 4.16 - 0.59 1.99 4.75 1.99 4.57 1.21 1970 1.28 6.37 1.02 17.78 3.63 24.15 4.65 18.87 3.75 1971 1.37 2.51 0.03 10.96 3.30 13.47 3.33 9.83 2.09 1972 1.42 0.63 - 13.40 0.60 14.03 0.60 9.88 2.09 1973 1.56 - - 2.23 1.15 2.23 1.15 1.43 0.33 1974 2.17 - - 5.13 0.28 5.13 0.28 2.36 0.73 TOTAL 19.84 1.05 55.64 10.95 75.48 12.00 58.79 13.19 aConverted from current Pesos at exchange rates prevailing each year. ANNEX3b OPERATIONAL DATA ON BATAAN Savings Hi-Vis Cost Heat Fuel Costs vs. (Fuel Load Utilization Generation Rate Bunker Bunker & Addi- Factor Rate 1/ MWH BTU/KWH Hi-Vis 'C' 'C' tives) Period % % Gross Net (net) F/MBTU F/MBTU % P/KWH (net) FY 71-72 36.48 - 61,064 58,579 10,776 - - - 0.0321 May '72 46.26 59.73 25,810 25,677 10,217 2.618 3.875 33 0.0298 FY 72-73 58.81 64.98 386,384 364,875 9,926 - - - 0.0296 May '73 68.00 75.35 38,118 34.905 10.138 2.882 4.355 33 0.0318 FY 73-74 72.08 77.43 473,540 442,831 9,730 - - - 0.0803 May '74 95.00 98.12 53,011 49,904 9,555 12.800 14.058 9 0.1238 FY 74-75 56.96 62.34 347,227 326,225 9,843 - - - 0.1319 May '75 80.18 85.06 44,743 42,354 9,530 13.695 16.698 18 0.1232 1/ The availability of the plant (probably of the order of 907.+) is much greater than the Utilization Rate. AMJ& NATIONAL POWER CORPORATION ORGANIZATION CHART (1967) NATIONAL POWER BOARD GENERAL MANAGER Management Staff Legal Service Unit Assistant General Manager and Chief Engineer Industrial Relations Treasury Dept. Accounting Dept. Engineering Dept. Pover Utilization Department Ami 4 NATIONAL POWER CORPORATION WANIZATION CHAT (proposed by Consultants) BOARD OF DIRECTORS Pubhc Re4alan A nce Psser upplyAdmiAraio wri Saem Se.i Department epanmear & ontrolUnitDepartment DEParEms Ui eatwDprmn NATIONAL POWER CORPORATION ORGANIZATION CHART (1974) BARD OP DIRECTORS <nRPORATE SECRETARY (ENERAL, MANAGE ASSISTN- EERL- AN PUUC RELAONS CR AND IPLTELLICENCE AINT. [OTACCTININAN ETNIERTNOE .CAND LU7OMN RATONAT VISAYAS REGIONA MINDANAO REGIONAL ONRU'ONOFFýCE OFF ICE OFFICE ASSRTISF S ERICES TAFF -PUBLICRELATIONSPUBLIC RELATIO OFFICER INTERAL AUDIT STS DE S. SYSTEM OPERATION MI NILTRATIVE SYSTEM GENERATION TAFF SSION DIVISION DIVISION LINES & SUBSTATION DIVISIONIC- DIVIS ON RCICESDSIGIN DIV.SSTS M DEVELOPMENT ALNSTAF -ERTICES DIVISION DIVIN DISTE DIVI NUCLEARPWR PERSONNEL SERVICESDIVISION LINES & SUB- POWER SYSTEM DIV. i-i STATION DIV. -DIVISION--C STU IO COSTCI ON -.-DEE.COIRUTO DIV ..DVISION1 D IVISI ON ADM 4(STRATIVE & HRRHALF INANCE DIVISION DIVISIONCONSTRUCTION DIVISION AMIISTRATIVE& FINANCE- ANNE CONSTRUCTION OF TRANSMISSION LINE (in1ok) 1261 1268 1969 1970 1971 172 193 1974 kV 230 Luzon Grid 481.0 481.0 483.4 680.8 680.8 680.8 115 Luson Grid 197.9 197.9 191.7 191.7 191.7 191.7 69 Luon Grid 659.5 682.5 1,047.5 915.3 957.7 1,060.7 Mindanao 99.6 99.6 118.0 118.0 102.0 102.0 23 & 34.5 Luson Grid 88.1 100.1 1,125.61/ 11.6.1 98.5 86.8 Luson Other 42.5 42.5 57.91 42.5 66.8 97.4 Visayas 54.3 54.3 95.2 54.3 54.3 54.3 Mindanao 62.6 62.6 88. 62.6 63.0 63.0 13.8 & Below Luson Grid 839.0 890.8 1,039.3 1,111.4 934.0 Luzon Other 68.0 99.6 15.4 24.0 24.0 Visayas 40.9 40.9 40.9 42.9 42.9 Mindanao 22.5 22.5 8.2 17Q 17.0 TOTAL 2,655.9 2,774.3 3,207.4 3,284.1 3,410.1 3,354.62/ CONSTRCTION OF SUBSTATIONS (in MVA) Plant Switchyards Luzon Grid 567.8 597.8 579.8 697.0) 706.6 n.a Luzon Other 5.2 5.2 3.3 3.3) Visayas 3.0 3.0 3.0 3.0 2.5 2.5 Mindanao 70.4 134.4 198.2 194.4 (a) (a) Main Substations Luzon Grid 327.5 407.5 457.5 457.5 457.5 532.5 Luzon Other - - - - - - Visayas - - - - - - Mindanao 64.4 64,4 64.4 64.4 274.3 280.0 Load Centres Substations Luzon Grid 114.0 121.0 161.1 170.1) 196.6) 222.6 Luzon Other 1.0 1.0 - - ) ) Visayas 1.0 1.0 - - - - Mindanao 12.0 12.0 12.0 12.0 (a) (a) Load End Substations Luzon Grid 31.3 31.3 28.6 28.6) 31.2) 22.9 Luzon Other 3.0 3.0 3.0 3.0) ) Visayas 2.7 2.7 2.7 3.6 3.6 3.6 Mindanao 4.2 4.2 4.2 2.7 W a TOTAL 1,207.5 1,388.5 1,536.7 1,639.6 1,672.3 1,064.12 1/ Includes 13.8 W. 2/ Turned Over 189.1 km. ./ Does not include Inzon Plant Switchyard; Turned Over 5.0 MVA. 2/ Include in Main Substations. INVESTMENT IN TRANSMISSION AND SUBSTATIONS Balance Beginning 209.65 218.01 254.73 274.61 313.64 364.45 (P million) Trending Factorl/ 1.00 1.012 1.158 1.063 1.018 1.123 1.400 Cumulative Factor?/ 1.00 1.01 1.17 1.24 1.26 1.43 1.97 Trended Balance - 212.16 252.46 270.77 279.51 352.25 510.06 (P million) Net Increase (Actual) - 5.85 2.27 3.84 34.13 12.20 24.43 (P million) Balance Ending - 218.01 254,73 274.61 313.64 364.45 534*49 (P million) Net Investment at 1967 5.79 1.94 3.03 27.09 8.65 12.40 Prices (P million) 1 Yearly Trending Factor. 2 Trending Factor relating current value of PIS to 1968 price level. AK's MANPOWER AND POSITIONS ANNEX 6 Permanent Personnel December 1967 1968 1969 1970 1971 1972 1973 1974 1975 National Power Board 22 (26) 27 (27) 27 (27) 28 (28) 26 (29) 29 (29) 24 (27) 26 (28) 26 (28) Office of the General Manager 6 ( 7) 6 ( 7) 7 ( 7) 7 ( 8) 8 (10) 8 (10) 10 (21) 18 (21) 18 (21) Legal Services Staff 15 (17) 13 (17) 12 (17) 13 (17) 23 (25) 22 (25) 16 (16) - - Internal Audit Staff 0 (10) 12 (12) 11 (12) 13 (14) - Industrial Relations & Gen. Services 71 (71) 71 (72) 69 (75) 71 (71) 92 (103) - - - - Department ADMINISTRATION DEPARTMENT . - - - 98 (100) 74 (86) 111 (117) 115 (117) Treasury Department 70 (76) 71 (78) 71 (76) 68 (68) - - - - - Accounting Department 50 (56) 53 (56) 53 (56) 54 (63) - - - - - FINANCE DEPARTMENT - - - - 103 (119) 104 (118) 102 (114) 99 (103) 106 (120) Engineering Department 176 (196) 176 (195) 176 (194) 192 (194) 196 (202) 168 (175) 163 (178) 190 (226) 192 (226) ENGINEERING & CONSTRUCTION - DEPARTMENT Power Utilization Department 845 (954) 860 (955) 840 (941) 893 (981) 852 (990) LUZON REGIONAL OFFICE I - - - - - 1042 (1206) 1121 (1177) 1154 (1213) 1177 (1212) VISAYAS REGIONAL OFFICE - - - - - 47 (104) 89 (104) 112 (132) 114 (133) MINDANAO REGIONAL OFFICE - - - - - 140 (308) 226 (294) 276 (40B) 277 (409) TOTAL (PERMANENT) 1255 (1403) 1 ) 1255(1393) 1326 (1440)1 3111490) 1692087 183 (2031) 198 (2248) 2025(2266) lZemnora.a Personnel 856 694 764 746 771 874 644 961 1146 Casual Personnel 183 15 36 97 163 670 813 1393 1501 TOTAL PERSONNEL 2294 1986 2055 2169 2246 3213 3295 4340 4672 NOTE: Figures in parentheses correspond to number of positions In the reorganization, the Industrial Relations & General Services Department became the ADMINISTRATION DEPARTMENT. The Legal Services Staff and the Internal Audit Staff were absorbed by the ADMINISTRATION DEPARTMENT in 1974. The Treasury Department and the Accounting Department became the FINANCE DEPARTMENT, while the Engineering Department became the ENGINEERING & CONSTRUCTION DEPARTMENT. LUZON, VISAYAS and MINDANAO REGIONAL OFFICES were also created. 1/ Includes Bataan June 1972 1973 1974 1975 22 (22) 111 (121) 112 (125) 130 (130) ANNEX 7a GENERATION and SALES BY REGIONS FY 1968 1969 1970 1971 1972 1973 1974 TOTAL GENERATING CAPACITY (MW) 432.2 482.9 532.6 579 650.5 653.7 654 TOTAL ENERGY GENERATED (GWH) 1,745.7 1,530.3 1,934.9 2,240.5 2,525.6 2,583.1 2,362.9 TOTAL ENERGY SOLD (GWH)2Z 841.0 1,084.8 1,336.8 1,552.4 1,745.0 2,011.3 2,363.7 TOTAL SALES REVENUE (+'000)2/ 30,775.5 37,944.4 46,337.8 60,941.3 90,849.1 113,156.3 191,111.0 UNIT PRICE (-F) average 2/ 0.0352 0.0350 0.0346 0.0392 0.052 0.056 0.0808 LUZON GRID 1/ Generating Capacity (MW) 369 419.5 419.5 419.5 494.0 494.0 494.0 Energy Generated (0WH) 1,488.6-4/ 1,204,2 1,508.3 1,826.8 2,151.4- 2,146.9 1,832.5 Energy Sold (GWH)2/ 781.4 932.7 1,140.2 1,373.3 1,595.4 1,829.5 Sales Revenue (p'o00)2/ 30,780.,5 37,550.1 50,787.3 79,526.5 100,587.6 174,924.5 Unit Price (P) average / 0.0394 0.0403 0.0445 0.058 0.063 0.095 LUZON OTHER Generating Capacity (MW) 6.6 6.6 6.6 2,9 2.9 5.9 5.9 Energy Generated (G4 15.6 18.9 - - 13.5 20.7 Energy Sold ((NH) 14.8 17.8 11.1 12.9 13.1 18.9 Sales Revenue (P'000) 1,059.0 1,271.4 1,514.5 1,030.4 1,222.5 2,453.3 Unit Price (P) average 0.071 0.071 0.136 0.0797 0.093 0.1298 VISAYAS REGION Generating Capacity (M4) 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Energy Generated (GWH) 8.0 7.0 8.1 8.8 9.8 7.5 9.7 Energy Sold (a1) 7.0 6.3 7.3 7.8 9.6 6.7 8.8 Sales Revenue (P'000) 447.5 424.8 472.4 535.1 751.5 587.4 767.6 Unit Price (F) average 0.0637 0.067 0.065 0.068 0.078 0.0872 0.0876 MINDANAO REGION 3' Generating Capacity (Mw) 54.9 54.9 105.0 154.6 152.0 152.0 152.0 Energy Generated (Gwh) 249.1 303.4 399.6 404.9 364.4 415.2 519.7 Energy Sold (Gwh) 229.7 282.3 379.0 393.1 349.0 396.2 506.5 Sales Revenue (P'000) 4,741.4 5,680.2 7,043.8 8,104.3 9,540.8 10,758.8 12,965.6 Unit Price (P) 0.0206 0.0201 0.0186 0.0206 0.0273 0.027 0.0256 1/ NPC - MERALCO Interchange Energy Sales to MRA0LCO (GWH) 962 537 668 796 893 647 376 Energy Purchase from 4RALCO (0Wi) 140 334 266 239 255 217 395 Net Revenue (or Purchase) from MERALCO (;'million) 20.8 9.4 14.1 15.8 16.2 10.6 (34.7) 2/ Excludes sales to MERALCO. 3/ Talomo System (2.9 MW) leased out ANNEX 7b / Including Luzon Other NPC's CUSTOMERS Utilities n.a. 145 151 157 165 177 148 Non Utilities n.a. 88 89 91 94 104 106 Total No. of Customers 221 233 240 248 259 281 254 ANNEX 8 ELECTRIFICATION IN PHILIPPINES Growth Rate 1971-1974 1971 97 2 197 19 74 Total Population in Cities (000's) 7,825 8,232 8,444 8,812 4.o City Population Served with Elect. Systems (0001s) 4,223 5,390 5,798 5,957 12.2 % of Total City Population Served 54.0 65.5 68.7 67.6 - Total Population in Municipalities 29,914 30,585 31,571 32,607 2.9 (000's) Town Population Served by Elect. Systems (000's) 4,319 5,432 6,523 6,780 16.2 % of Total Town Population Served 16.9 17.8 20.6 20.8 - Total Population of Country (000ts) 37,739 38,817 40,015 41,419 3.1 Total Population Served by Elect. Systems (000's) 8,538 10,822 12,321 12,737 1-43 % of Total Population Served 22.5 27.9 30.8 30.8 - Total No. of Cities 61 63 63 63 - No. of Cities Served by Elec. Systems 61 63 63 63 - % of Cities Served 100 100 100 100 - Total No. of Municipalities 1,423 1,421 1,422 1,427 - No. of Towns Served by Electric Systems 716 741 766 778 - % of Towns Served 50.3 52.1 53.9 54.5 - NEA's TARGETS 1. Total Electrification of all municipalities by 1980. 2. Total Electrification of all barrios by 1984. 3. Electricity to 95% of total population by 1990. Source: National Electrification Administration. ANNEX 9 Iligan Steel's Role in Agus Grid Load Growth The expected growth of industry in Mindanao, and the consequent increase in power and energy demandl/ particularly from Iligan Steel had created the justification for Maria Cristina unit No. 4. Iligan Steel had obtained a U.S Ex-Im Bank loan of $62 million for expansion of its annual production capacity by 300,000 tons by means of a fully integrated plant which included electric smelting furnaces - the main consumers of electrical energy - for production of pig iron. Subsequent to Ex-Im Bank's authorization of the loan in May 1961, it transpired that the costs of capital equipment for the plant had soared substantially from the estimates based on prices for earlier years. Faced with this and other problems, including the relative inflexibility of this form of integration for future capacity expansion, Iligan Steel cancelled the original plans for the fully integrated steel plant and decided to install only hot and cold rolling millsl/ with an annual steel output of 500,000 tons. The option to have an integrated plant - in this case a backward integration - was left open for the future, with a high probability that blast furnaces would replace the envisaged electric smelters. Ex-Im Bank approved Lligan's decision on rolling mills, the civil engineering work of the project started in 1965 and the plant was in operation in 1969. Electricity consumption of rolling mills is much lower relative to that expected from the proposed electric smelter. NPC, apparently not having been kept adequately informed by Iligan Steel of the actual or imminent changes to its expansion program, had already placed orders for Maria Cristina equipment by mid-1966, before the loan was approved. Financial difficulties compelled Iligan to close down its plant in August 1971. It was re-started in November 1972, and the cold strip mill was operating at 70% capacity. 1/ Steel slabs, the feedstock for these mills were to be imported from Australia and Japan. NATIONAL POWER CORPORATION ANNEX 10 Determination of Cost Per GWH of Generated Energy at 1967-68 Prices 1967-68 1968-69 1969-70 1970-71 1971-72 1972-73 1973-74 I. Generated Energy (OWH) 1746 1 10 16864 165 2205 2383 II. Operating Expenses (Energy Related Cost) at Current Prices: a. Production (P million) 5.148 5.880 9.h06 11.033 12.866 - 22.063 49*225 b. Transmission (P million) 2.357 2.348 3*396 *-480 5.889 6.524 10.236 c. Administrative & General (P million) 6 4.488 4 5 59 6.828 §k9 TOTAL (P million) 1405 12.716 17.727 20.796 Z4 - 7 Cost Per KWH (P) 0.0081 0. 2 0.0118 0.01 0.0131 0.0161 0.0265 III. Fixed Costs (Demand Related) Based on Average Revalued Assets in Service: a. Depreciation @ 2.31% (Gross) (P million) 17.98 21.08 26.25 28.60 31.26 36.10 51.04 b. Interest @ 6% (Net) (P million) 42.60 43.00 53.01 55.70 6j-7 67.98 95.16 TOTAL (P million) 60.58 64.08 79.26 84.30 93.97 104.08 146.22 Cost Per KWH (P) 0.0347 0.0419 0.0527 0.0501 0.0498 4.0472 0.0614 Total Cost (Energy Related Cost Plus Demand Related Cost) Per KWH (?) 0.042S 0.0502 0.0644 0.0624 0.0629 0.0633 0.0879 IV. Conversion Factors (Denominators) to 1967-68 Prices 1.03 1.03 1.25 1.34 1.40 1.55 2.15 Energy Related Cost per KWH Stated at 1967-68 0.0081 0.0081 0.0094 0.0092 0.0093 0.0104 0.0123 Prices (P) Demand Related Cost per KWH Stated at 1967-68 Prices (P) 0.0347 0.0407 0.0421 0.0374 0.0356 0.0305 0.0285 Total Unit Cost per K4H at 1967-68 Prices (P) 0.0428 0.0487 0.0515 0.0466 0.0449 0.0408 0.0409 POWER AND ENERGY DEMAND ESTIMATED V/S ACTUAL ANNEX 11 1967 1968 1969 1970 1971 1972 1973 1974 Est. Act. Est. Act. Est. Act. Est. Act. Est. Act. Est. Act. Est. Act. Est. Act. LUZON GRID NPC (Provincial) Power (MW) 87 121 136 132 153 170 185 190 214 224 257 250 n.a. 294 n.a. 352 MERALCO Power (MW) 659 613 735 670 820 731 913 851 1,013 912 1,124 1,002 - - - TOTAL Power (MW) 746 734 871 802 973 901 1,098 1,041 1,227 1,136 1,381 1,252 - - - - NPC (Provincial) Energy(GWh)567 746 852 773 1,081 1,026 1,303 1,097 1,549 1,248 1,798 1,467 n.a. 1,777 n.a. 1,872 MERAILO Energy(GWh)n.a. 3,629 n.a. 4,053 n.a. 4,530 n.a. 4,897 n.a. 5,147 n.a. 5,427 n.a. n.a. n.a. n.a. TOTAL Energy(GWh)n.a. 4,375 n.a. 4,826 n.a. 5,556 n.a. 5,994 n.a. 6,395 n.a. 6,894 n.a. n1a. n.a. n.a. MINDANAO (GS GRID!/ TOTAL Power 41 49 58 41 114 57 142 67 224 76 238 82 n.a. 85 n.a. 95 Iligan Power (W) 11 n.a. 20 n.a. 60 n.a. 80 n.a. 160 n.a. 170 n.a. n.a. 22 n.a. n.a. TOTAL Energy (GWh) 157 226 225 230 519 282 795 379 1,296 393 1,377 356 n.a. 396 n.a. 507 Iligan Energy (GWh) 20 n.a. 37 n.a. 240 n.a. 480 n.a. 960 n.a. 1,020 n.a. n.a. 73 n.a. n.a. (MW) 50 55 100 55 150 55 150 105 250 152 250 152 n.ma. 152 n.a. 152 Plant Capacity~ (GWh) 420 420 595 420 1,060 420 1,060 595 1,573 1,060 1,573 1,060 n.a. 1,060 n.a. 1,060 1/ Actual includes output from isolated units of very small capacity. NOTE: The actual figures for Power and Energy on Luzon Grid were taken Erom 'Load and Energy Forecast Study' by International Engineering Company in 1973. They differ slightly from NPC's records. ANNEX 12 ESTIMATED COST OF BATAAN GENERATION (US$ p P7.0) Local Foreign Total P US$ (in P equivalent) Construction Cost (million) 40.3 8.7 101.2 Interest Capitalized (million) 2.7 1.1 10.4 Engineering Services (million) 6.5 0.8 12.6 Sub-Total (million) 49.5 10.6 123.7 Annual Capital Cost;/(million) 10.9 Operation & Maintenance?/ (million) P.a. 3.7 Sub-Total 14.6 Transmission CostW (million) p.a. 4.4 Total Fixed Cost-/ (million) p.a. 19.0 Annual Generation in '73-'74 443 GWh Fixed Cost per KWH .042 Fuel Cost per IUH .011 Total Cost per KWH .053 Overall Luzon Grid Operating Expense / (million) 90.0 73-74 Annual Generation '73-174 1,832 GwH T%tal Cost per KWH .049 '73-'74 1 Capital Recovery over 30 years at 8%. 2/ Assumed 3% of Capital Cost. 3 Assumed 30% of Capital Cost. Fixed Cost includes semi-variable 0 + M cost. Less Fuel surcharge. PHILIPPIN4S NATIONAL P~NER CottPTION Inome Statments F 1966167 thrmoh 1973/74 (In Mllions of Pot-s except where otherwi.e tated) 1966167 1967/68 1968/69 199/7 ____ __ 1970/71 1971/72 1972/73 1973/74 Jun. 30 Etiatn Actual Est.matt Actm_al E-t-cate Actual V. tite Actual ELtim.t Atual tott Actual Etl=at Actuol EtInt. Actal S.1.. (Gfi) 1,233 1,282 1,516 1,653 2,224 1,085 2,501 1,337 3,314 1,544 3,433 1,745 2,325 2,051 2.679 2,355 Averago Reenu (in Pes. par Kub) 0.034 0.032 0.035 0.031 0.035 0.035 0.034 0.035 0.030 0.039 0.033 0.052 - _0.055 - 0.081 Operating Revenue 41.4 41.6 53.1 51.6 78.2 37.9 85.3 46.3 98.2 60,9 113.3 90.9 125.1 113.1 162.1 191.1 Operating Expen.e. Operating Expanseo 12.9 10.3 15.1 11.5 16.2 13.3 19.6 14.6 23.8 20.8 28.8 24.7 31.5 35.4 34.0 63.1 Real Estate and Income Tanto 0.8 0.7 0.9 0,5 3.0 1.2 3.6 3.7 3.7 - 5.3 - - - - - Deprtiation 5.8 4.8 9.0 7.0 12.9 10.4 13.8 22.0 16.4 22.6 18.9 24.9 35.7 31.5 38.2 32.7 Powor Interchange with Meralco - - - - - 94) - (14.2) - (15.8) (16.2) 8._6) (1a0) 0.2 34.8 Total - Operating Expnaea 19.5 15.8 25.0 19.0 32.1 15.5 37.0 26.1 43.9 27.6 53.0 33.4 58.6 56.9 72.4 130.6 Opeating Inm 21.9 25.8 28.1 32,6 46.1 22.4 48.3 20.2 54.3 33.3 60.3 57.5 66.5 56.2 89.7 60.5 Add: Other Inomo 1 6 - 1_5 1.0 - 0.1 - _.4 _ 5.4 0.5 5.6 0.6 7.8 Total - Incoe 21.9 27.4 28.1 34.1 46.1 23.4 48.3 20.3 54.3 35.7 60.3 62.9 87.0 1.8 90.5 68.3 Less: Dtductions Interoest on Equity 12.0 - 8.8 - 8.8 - 8.8 - - - - - - - - Intreo t on long Ter. Loan 14.8 18.0 17.5 17.7 20.5 20.0 23.2 21.8 33.0 31.3 33.1 37.0 36.2 38.0 47.9 Intorest during Construction (CO) (6,9) (7.9) (4.6) (8.1) (3.1) (5.6) (5.5> (2.7) (3.9) (8.9) (1.8) (10.9) (6.3) (4.0) (16.1) - Interest o Sitking Fund <0.6) - (0.7) - <.8 - 0 _ - <0. - (1.0) -) - -- Intere.t Charged to Operations 19.3 10.1 21.0 9.6 25.4 14.4 25.7 19.1 28.2 22.4 30.3 26.1 20.9 34.0 31.8 34.4 Exhange Rate (Loss) - 2.0 - t.2 - 3.3 - 5.6 - 11.2 - 12.6 - - - - Total - Ded-tti... 19.3 12.1 21.0 12.8 23.4 17.7 23.7 24.7 26.2 33.6 30.3 30.7 29.9 34.8 31.8 34.4 Not Srpl- fn rv 2.6 1.3 7 .3 7 57 22.6 27.8 58.7 33.9 Ratt Bat (Averge Nnt Fixd Astet. - less Contrib. to Constrtjon) 303.0 231.9 429.5 457.8 576.5 467.0 603.4 744.0 678.3 935.0 754.1 974.1 1.039 1,225 1,100. 1,626 uat nf letorn (Opoatnlg -onn fl 7 of Rate Base 7.2 11.1 6.5 7.1 8.0 4.8 8.0 2.7 8.0 3.6 8.0 5.9 6.4 4.6 8.2 3.7 Operating Ratio (perating Epentes S% of Rvene 47 38 47 37 41 41 43 56 45 45 47 37 47 50 45 68 Loan Interest covered by Nt Income (time.) 1.5 1.5 1.6 1.9 2.2 1.1 2.1 0.9 1.6 1.1 1.8 1.7 1.8 1.6 1.9 - 1/ Estiat.s for FY 1966/67-1971/72 prepared in 1967 and estimåtes for FY 1972/73 and 1973/74 prepard in 1972. 2! Rate Bas to f 1969 based on histortia. tales. Prom FY 1970 bas adjusted by 80,390 sin 1970, and On. 366 u in 1974 for aurplus aftar reapprafsal, with figurs to the interim period adju.tad on basis of indlce. adopted to mintain cotercial valus. Mach 1975 PRILUPPINES NKTIOMNAL POWER 0RPRATION Condensed Bal~nce Sheet" s of June 30, 1966/67 through 1973174 (in H511.ons of p.) 1966/67 1967/68 1968/69 1969f70 1970/71 197 172 1972173 M 13/7 J-n 30 Esiae Actual Entim-te Actual Estimate Aetual Estimmte Actual estiae Ata Estteete Actual Estimte Actua"8I nt Ata ASSE81 Fixed Assets Gro- Plant in Operation 344.5 303.2 622.5 521.6 682.0 548.2 702.9 939.7 862.0 951.5 886.9 1061.7 1465.8 1440.8 1581.4 1510.4 LeÆs: Depreciation (38.7) (36.5) (47.8) (42.5) (60.6) (51.8) (74.4) (212.4) (90.9) (218.9) (109.8) 282.5) 381.5) (359.7) 419.7 380.0 Net PFL~d AAsstz 305.8 266.7 574.7 479.1 621.4 496.4 628.5 727.3 771.1 732.6 777.1 833.2 1084.3 1081.1 1161.7 1130.4 work In Pro~... 305.7 297.6 107.3 88.1 134.3 97.2 177.3 95.5 69.0 103.2 85.6 14.7 168.7 42.3 368.7 98.0 Plant Leased or Not 8n Service 0,3 _ 6.3 15.9 15.5 Totl - Pixed Assets 611.5 564.3 682.0 567.2 755.7 593.6 805.8 822.8 840.1 8.1 1 862.7 854.2 1253.0 1139.3 1530.4 1243.9 C.rrent Asset. Net of Curet iabtliti. 65.6 57.4 61.4 82.5 61.9 83.9 72.9 84.6 62.9 69.3 66.7 82.7 47.0 107.8 46.3 145.5 01oking Pund Invstment. 20.3 21.4 22.5 24.8 25.3 28.6 28.4 26.6 31.5 30.0 34.8 33.9 37.2 16.4 46.2 - Ibn Utility Assets - - - - - - - - - 16.3 - 16.3 16.3 16.3 16.3 16.3 D.f.rted Pay t- - - - - - - - - - - .9 - 17.7 - 35.6 '182A ASSETS - _67.4 643.1 765.9 674.5 842.9 706.1 907.1 934.0 934.5 951.7 964.2 988.0 1352.5 1297.5 1639.2 14413 LTABILITUES Equity and Re..-e ordinary Stock 250.0 300.0 250.0 300.0 250.0 300.0 250.0 300.0 250.0 300.0 250.0 300.0 300.0 300.0 300.0 716.3 Capta.li.ed I.terst .n Etquity 40.7 - 49.5 - 58.4 - 67.3 - 64.6 - 61.9 - - - - - Revaluation R.ev. - - - - - - - 188.0 - 184.5 - 173.4 208.4 172.6 208.4 199.5 .and _Surpl.. 68.7 70.1 75.8 80.5 96.6 80.0 119.1 86.6 145.2 77.6 175.3 108.4 128.1 1861 186.8 40.1 T.tal - Equity end Re,rves 359.4 370.1 375.3 380.5 405.0 388.0 436.4 574.6 459.8 562.1 487.2 581.8 636.5 658.7 695.2 955.9 .g Term Debt 316.5 251.7 369.1 272.7 416.4 296.8 449.2 338.1 453.2 368.3 455.5 384.9 695.7 617.5 922.7 464.1 Contribution to Construction 21.5 21.3 21.5 21.3 21.5 21.3 21.5 21.3 21.5 21.3 21.5 21.3 21.3 21.3 21.3 21.3 IVTAL LIABILITIES - 697.4 643.1 765.9 674.5 842.9 706.1 907.1 934.0 934.5 951.7 964.2 988.0 1353.5 1297.5 1639.2 1441.3 Bet Debt/Equlty Retio 45/55 38/62 48/52 39/61 49/51 41/59 49/51 35/65 48/52 38/62 46/54 38/62 51/49 48/52 56/44 33/67 Mar.h 1975 SOURCES AND APPLICATIONS OF FUNDS (APPROXIMATE (P million) 1967 1968 1969 1970 1971 1972 L97-7 193174 1969-74 Eat. Act. Eat. Act Est. Act. Est. Act. Eat. Act. rat. L. Eat21t. Ac.8ct SOURCS OF FNDS Internal Cash Generation Net Incomel/ 21.9 26.7 28.1 32.5 46.1 22.4 48.3 13.7 54.3 21.0 60.3 50.3 259.0 61.8 67.h 236.6 Depreciation 5.8 4.8 9.0. 7.0 12.9 40.4 13.8 22.1 16.4 22.6 18.9 24.9 76.9 31.5 33.0 144.5 Others - - - - - (3.4) - (1.3) - (1.8) - (1.8) - (1.7) (0.4) (10.4) Total Internal Cash Generation 27.7 31.5 37.1 39.5 59.0 29.4 62.1 34.5 70.7 41.8 79.3 73.4 335.9 91.6 100.0 370.7 Borrowings Foreign Loans 30.4 12.4 27.9 14.6 39.2 15.1 36.1 20.2 12.0 14.5 12.0 1.1 157.5 9.6 35.9 96.4 Reparations 12.0 - 12.0 - 12.0 - 12.0 - 12.0 - 12.0 - 72.0 28.7 - 28.7 Iocal IosnaBonda 20.0 15.3 25.0 18.0 10.0 7.9 - 29.1 - 22.1 - 42.7 55.0 - 86.5 188.3 Others 18.2 12.3 1.4 - 1.4 5.0 1.4 - 1.4 - 1.4 - 25.4 25.2 0.2 30.4 Total Sources 108.3 71.5 103 72. 121.6 7. 111.6 83.8 96.1 78.4 1O.7 117.2 645.8 165.1 222.6 715.5 APPLIC&TION OF FUNDS Construction ExpenditureY 71.5 48.2 36.7 55.3 39.3 35.1 49.0 87.3 Preliminary Surveys and Investigations - - 1.7 1.6 3.5 4.8 5.9 24.9 Geothermal Exploration - - - - - - - - - - - - - 3.4 4.1 Total Construction Expenditure 81.0 71.5 74.9 7-2 83.4 77 58.4 56.9 46.8 - 39.6 37. 5 16.3 [ Interest 14.8 10.1 17.5 9.6 20.5 14.4 23.2 19.1 26.2 22.4 24.3 26.1 124.4 34.0 33.5 19.5 Amortization Payment of Foreign Ians 12.0 7.4 13.9 7.7 15.8 8.1 17.5 8.4 22.1 11.3 24.1 11.9 105.4 27.0 28.5 Sinking Fund Amortisation - 1.0 - 1.5 - 1.6 - 1.7 - 2.1 - 2.4 - 2.8 0.9 Payment of Advances and Mortgage - - - - - - - - 11.6 - 11.6 - 23.1 5.0 1.4 Total Debt Service 2 8T 31T 3. 97 3 24. 6" WT 17 3" 29. W 2 - 60.6 W-7 t3 Yr 7 Others 8.3 0.7 - 3.2 - 0.6 - 0.2 - 0.4 - 2.9 8.3 2.7 14.3 21.1 Increase in Working Capital - (19.2) - 1.8 - (5.7) - (1.6) - (0.9) - 34.0 - 25.1 37.7 88.6 Total Applications 711 -i73 D T20 119.7 W -1 d1 c,--7 - T M9 Ratio, Total Internal Cash Generation to Total Sources Ratio, Total Debt Service to Total Applications 1 Before Interest and Depreciation. Net of Disposals. MAP 1 South China Sea NPC'S AMBUKLAO AND BINGA (Loon /83 PH) HYDRO PLANTS (175Mw) Se NPC'S ANGAT (Loan 297PH) HYDRO PLANT (218 Mw.) UNDER CONSTRUCTION MERALCO'S TEGEN THERMAL PLANT,IOOMw.EXISTING, T IOOMw.UNDER CONSTRUCTION MERALCdS ROCKWELL AND BLAISDELL THERMAL PLANTS (353 Mw.) NPC'S PROPOSED BATAAN~T THERMAL PLANT (75 Mw) NPC'S CALIRAYA HYDRO PLANT (32Mu.) MERALCO'S GARDNER THERMAL PLANT FIRSTUCT UND0R MERALCOS BOTOCAN HYDRO PLANT7Mw.) CONSTRUCTION<I5OMlw 1.,.- o • LUZON ISL AND MAJOR GENERATION SOURCES AND TRANSMISSION LINES 0 HYDRO PLANTS 16 THERMAL PLANTS EXISTING TRANSMISSION LINES -------PLANNED TRANSMISSION LINES • LOAD AREA ZONES MERALCO LOAD AREA NO.6 OCTOBER 1965 IBRD 1642  MAP 2 Area covered Af/LL/ING COMPANY :by mo / / n Boy COKING CEMENT PLANT MINDANAO DAVAO IRON ORE S TEEL WORKS ILIGAN FERTIL/ZER PLANT. MC CHEMICAL o AGUS No. 7 50 MW. EXISTING MAR/A CRIST/NA 50 MW. UNDER CONSTRUCTION AGUS No. 6 POWER STATION (L 0on 325 PH) Proposed Copper-Zinc A 150 MW. PROPOSED Smelting Complex / Linomon River AGUS No. 4 Control Works (Loon325PH) AGUS No 3 MINDANAO ISLAND AGUS No 2 PROPOSED EXTENSION OF AGUS o / e on MARIA CRISTINA HYDROELECTRIC STATION FUTURE POWER STATIONS 0 EXISTING POWER STATION LaTke L ao (al. 700 Meters) OCTOBER 1965 IBRD-396R