Philippines - Seventh Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 8574 PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) APRIL 20, 1990 Operations 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. CURRENCY EQUIVALENTS Name of Currency (abbreviation): Peso (P) Appraisal Year Average 1977 US$1 - P 7.50 Intervening Years Average 1978-1984 - P 17.46 Completion Year 1985 - P.19.00 GOVERNMENT OF THE PHILIPPINES FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washongton. OC 20433 USA Okce ni OCtearCenrAl Opwreount Ivalusiscn April 20, 1990 iEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Philippines Seventh Power Project (Loan 1460-PH) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Philippines - Seventh Power Project (Loan 1460-PH)" prepared by the Operations Evaluation Department. Attachment 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 authoriation. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) TABLE OF CONTENTS Page No. PREFACE ........ ....................................................... . i BASIC DATA SHEET .................................................1.. .iii EVALUATION SUMMARY .................................................... v PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND ................................................. 1 II. PROJECT PREPARATION AND JUSTIFICATION .................... 2 A. Historical Overview ................................... 2 B. Project Preparation ................................... 3 III. PROJECT JUSTIFICATION ...................................... 3 A. NPC's Investment Program .............................. 3 B. Technical and Economic Justification .................. . 3 C. Financial Performance ................................. 4 D. Debt Control Covenant ................................. 4 E. Overall Project Justification ......................... 5 IV. PROJECT IMPLEMENTATION AND HIATUS IN BANK LENDING ... 6 A. Project Costs ......................................... 6 B. The Hiatus in Lending to NPC (1977-1988) .............. 7 V. OTHER ISSUES ............................................. 9 A. Cooperation and Coordination with ADB ................. 9 B. The Nuclear Plant ..................................... 10 VI. CONCLUSIONS ................................................ 10 ANNEX 1 Coordination within the Bank and with ADB .................. 12 ATTACHMENT Comments from the Borrower ................................. 13 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 (Cont.) Paue -No.- PROJECT COMPLETION REPORT I. INTRODUCTION .............................................. 15 II. PROJECT PREPARATION AND APPRAISAL ......................... 17 III. PROJECT IMPLEMENTATION .................................... 18 IV. OPERATING PERFORMANCE ..................................... 23 V. FINANCIAL PERFORMANCE ..................................... 23 VI. INSTITUTIONAL PERFORMANCE ................................. 25 VII. ECONOMIC REEVALUATION ..................................... 26 VIII. PERFORMANCE AND ROLE OF THE BANX .......................... 27 IX. CONCLUSIONS ............................................... 28 PCR ANNEXES 1. Transmission Subprojects ........................ .......... 30 2. Project Implementation Chart ................................. 35 3. Uncompleted Subprojects ..................................... 36 4. Comparison of Project Costs .................................. 37 5. Accumulated Disbursements .................................... 38 6. Disbursements from the Loan .................................. 39 7. Status of Operations of Transmission Lines and Substations ... 41 8. NPC Organization Chart ....................................... 43 9. Comparative Financial Statements, 1977-83 .................... 44 10. Status of Covenants as of January 10, 1986 ................... 48 11. Economic Reevaluation Tables ................................. 54 IBRD 20239R i PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PREFACE 1. This report sets forth the results of a performance audit of the Seventh Power Project in the Philippines. which National Power Corporation, the Government owned electricity utility responsible for generation and transmission of bulk power for public consumption, carried out with Bank assistance through Loan 1460-PH of US$58 million. The Bank's Board approved the operation in June 1977; the loan became effective in January 1978, two months later than specified in the Loan Agreement, and was closed in December 1985, 3-1/2 years after the Closing Date foreseen in the Loan Agreement. The reasons for the delays are essentially due to slow project implementation, partly related to changes in the economic and political environment, partly to institutional weaknesses in the sector in general and NPC in particular. 2. The Project Performance Audit Report (PPAR) consists of a Project Performance Audit Memorandum (PPAM) and a Project Completion Report (PCR) prepared by the Operations Evaluation Department and by the Industry and Energy Division of Country Department II, Asia Region, respectively. The PCR incorporates, inter alia, information available in the Bank or provided by NPC and its consultants as well as by other Philippine authorities. OED, in turn, has reviewed the PCR, the Staff Appraisal Report, the President's Report, the legal documents, and the transcripts of the meeting of the Executive Direc- tors at which the loan was approved. It also studied the documents related to the project and the sector as available in the Bank files. Further, OED staff interviewed Bank staff familiar with the project and its implementation. It proceeded to the Philippines, where it extensively discussed with the authori- ties which had been involved in the operation, NPC in particular, the issues related to the project audited here and to later operations, still underway. It also exchanged views on the power sector's performance with staff from the Asian Development Bank (ADB) and visited several installations implemented in the context of the project as well as some of NPC's other main facilities, especially the Kalayaan pump storage plant, which, at project preparation stage, was long considered the main physical component of the Seventh Power Project. 3. The audit finds that the PCR accurately describes the salient fea- tures of the project and its execution, as well as the main issues that faced PLN and the Bank during project implementation. The report also supports in proper detail the conclusions that emerge. The PPAK summarizes, and tries not to repeat the facts set forth in the PCR. It also analyzes slightly further than done in the PCR some of the issues, in particular project preparation and costs. It further attempts to put the project into the wider perspective of Bank involvement in the Philippine energy sector and power subsector, espe- cially since (i) the institutional measures associated with the project were ii part of a continuous effort spanning three decades and (ii) the Bank, after it made the loan for the Seventh Power Project, for eleven years did not lend to NPC. 4. Following standard OED procedures, copies of the draft PPAR were sent to the Government, the Borrower and the cofinancing agency. The comments received from the National Power Corporation are reproduced as an Attachment to the PPAR. iii PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Item expectation current estimate Total Project Cost (US$ million) 92.34 83.82 Underrun - 9% Loan/Credit Amount (US$ million) 58.00 58.00 Disbursed ) 58.00 58.00 Cancelled ) - . Repaid to ) December 31 1986 - 16.83 Outstanding to )December 31 1986 - 41.17 Date Physical Components Completed 12/31/81 12/31/85 Proportion Completed by Above Date (%) 95% Proportion of Time Overrun (2) = 220% (52 mo) Economic Rate of Return (2) 10% 12% Financial Performance Satisfactory Fair Instituti.nal Performance Satisfactory Satisfactory OMJLATIVE ESTIMATED AND ACTUAL DISaS99TS (US$ miI1ion) EM EE79 EI Ew E82 EX83 FY84 Ex8 EY8 Appraisal Etasimte 0.9 12.8 38.7 84.8 - - - - - Actual * 0.5 5.5 20.6 29.1 85.4 51.1 53.6 58.0 Actual as X of Appraisal (X) - 4 14 86 50 $1 88 92 100 Date of Final Disbursement: January 6, 196 PROJECT DATES Original Actual or Item Plan Revisions Est. Actual First Mention in Files or Timetable / / / / 09/ /75 Government's Application _7_7- 017-77 Negotiations / / 0 5 20/77 Board Approval Date -7-7- 77T0 77r Loan/Credit Agreement Date 1/ /09777 Effectiveness Date W1706778 Closing Date _T_7_ _12/3 185 iv STAFF INPUTS (staff weeks) FY75 FY78 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 Fy88 1987 1988 Total Preappralsal 0.0 8.6 0.7 - - - - - - - - - - * 9.3 Appraisal - 72.6 43.8 - - - - - - - * - - - 116.4 Negotiations - - 13.4 - - - - - - - - * - - 13.4 Supervision - - 0.6 9.0 18.9 9.2 16.8 16.4 5.2 1.3 8.0 12.8 8.8 0.3 93.8 Other - --.8 - - - - - - 8.4 Total 0.0 81.2 68.5 9.0 18.9 9.2 16.4 21.8 5.2 1.8 8.0 12.8 8.8 0.3 288.3 MISSION DATA Sent No. of No. of Date of Item Month, Year Weeks Persons Man-weeke Identification 11/75 3.0 2 6.0 12/02/75 Preappralsal. 04/76 2.5 2 5.0 0427-76 Appraisal 02177- 2.0 2 4.0 -0572776 Total 7 Supervision I 10/77 2.5 2 5.0 03/20/78 Supervision II 07/78 20 2 4.0 08/16/78 Supervision III 04/79 1.7 2 82- 05/02/79 Supervision IV 02/80 0.7 1 0.7 03-1W Supervision V 1178r- 7. 0 2 2.0 01/07/181 Supervision VI 06/81 1.1 2 22067-/S Supervision VIT 0318Y2 0-.7 3 2.1 04/23/82 Supervision VIII 11/82 0.5 2 12/15/82 Supervision 1X 04/83 1.0 2 2.0 - T Supervision X 11/83 1r1 1.0 1 716T8 Supervision KI 12/8- 2. 0 2 ---7 12/18TI8 Supervision XII 09/___5__ 0.5- 2 1.0 09/20/8 5 Supervision XIII 03/87 1.0 1 1.0CR Total M_3 OTHER PROJECT DATA Borrower: National Power Corporation (NPC) Executing Agency: National Power Corporation (NPC) Follow-on Project: Name: Bacon Manito Geothermal Power Project Loan/Credit No.: Project under preparation Amount (US$ million): - Approval Date: V PROJECT PERFORMANCE AUDIT REPORT PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) EVALUATION SUMMARY Introduction 1. The Seventh Power Project in the Republic of the Philippines, approved in 1977, was the continuation of a series of operations the Bank Group had with the National Power Corporation (NPC), the Government owned utility essentially responsible for bulk power supply in the country. Between 1956 and 1988, IBRD and IDA lent NPC over US$280 million in the context of eight projects. The US$58 million loan for the project discussed here was to finance the foreign exchange component of a US$92 million project, that, at the time of appraisal, represented less than 2Z of NPC's 1976-1983 investment program. Project Objectives 2. In view of the modest share of the project in NPC's investment plan, the operation's main objective was improving NPC's organization and manage- ment, as well as achieving progress towards setting tariffs reflecting eco- nomic costs (PCR, paras. 2.2 and 2.3). Though not explicitly set forth, the Bank, throigh this operation wanted to maintain and, if possible, improve the quality of its dialogue with Government, the energy sector, and the power sub-sector on the issues relevant to these areas of the economy (PPAM, para. 18). Project Content 3. The project's main components were: (i) the construction of some 1360 km of 230, 115, and 69 kV transmission lines and associated substations on Luzon, (ii) the installation of the first phase of a communications system with a control center, also on Luzon, (iii) overseas training for selected NPC staff and the creation, within NPC, of a training center, and (iv) the provi- sion of advisors to help NPC improve its management and to study organization and tariffs. (PCR, para. 2.2) Implementation 4. Project implementation took some seven years instead of the four anticipated. In the early phases it was slowed down inter alia by inadequate preparation, poor coordination between the organizations involved, procurement delays, right-of-way problems, all factors that had similarly affected earlier Bank Group projects with NPC. From 1982 on, Government proved unable to vi supplement NPC's poor internal cash generation to cover the local currency cost of the project, which further slowed down execution. In 1983, under the Bank's Special Assistance Program, NPC was permitted to cover part of the shortfalls in local currency with funds from the Bank loan. However, this implied the elimination of NPC's training center as an item to be financed in part through the loan. Ultimately, in order to free funds for higher priority items of NPC's investment program, building the center had to be cancelled altogether (PCR, paras. 3.2 to 3.9). 5. Overall project costs resulted slightly lower than estimated at appraisal. However, the actually implemented items considerably differed from thase originally planned (PCR, paras. 3.10 and 3.11). The audit's rnugh analysis suggests that the appraisal estimate of base cost and physical contingencies was quite accurate for the transmission and substations compo- nent of the project but about 30Z too low for the communications and control items (PPAM, paras. 10 to 12). Project Justification 6. The main justification for the project was the need for the measures aimed at institutional strengthening. Project implementation confirmed the validity of these measures, which contributed to improvements in NPC's or- ganization and operation (PCR, paras. 6.1 to 6.4). 7. The executed physical components of the original project have proven to be part of NPC's investment program that were well justified, even after the radical changes in the economy of the Philippines that occurred during the 1980s. Further, it would still seem that there would not have been a solution providing the transmission and control capacity at lesser cost. The economic justification of the project, both ex-ante and ex-post as part of a viable investment program for NPC's Luzon system is not convincing, but this does not affect the intrinsic justification of the facilities, which seems well es- tablished. (SAR, paras. 6.03 and 6.04; PCR, paras. 7.1 to 7.5; and PPAM, para. 14). Sustainability of Benefits 8. The benefits that the Philippines are reaping from the project audited here are sustainable. Indeed, NPC has demonstrated that it is able to operate and maintain its plant properly under difficult conditions. Now, that the policy environment has improved, this should continue to be possible. For the same reasons, NPC should be able to continue to benefit from the re- organization and tariff studies carried out under the project and the con- clusions of which have led or are likely to lead to measures to improve NPC's institutional performance. Conclusions 9. The project was technically and economically well justified. Howe- ver, it was part of an exceedingly large investment program, and NPC's perfor- mance under the preceeding Bank operation and during project preparation was less than satisfactory. Further, the SAR foresaw during 1977-83, i.e. during vii project implementation and even beyond, an unsatisfactory financial perfor- mance with revenues contributing less than 5Z to investment with little improvement over time. Therefore, the setting for a further Bank operation was poor. Beyond the envisaged institutional improvements, the main jus- tification for proceeding nevertheless with the operation was, though not made explicit, the desirability of a continuous dialogue with Government and NPC on energy and power sector policy, an objective that, at che time of project preparation, the Bank apparently felt would elude it if it did not lend (PPAM, paras. 32 and 33). 10. The unexpected economic dovnturn of the early 1980s, accompanied, in the mid-1980s. ' political unrest, surprisingly led to an environment that promoted sc .. the main institutional changes that, inter alia, the Bank had advocated all along, but with little success. Therefore, the project, which had started under inauspicious circumstances, ended on a definitely up-beat note (PPAA, para. 34). 11. Lessons suggested by this operation are in part similar to some identified in previous projects both with NPC and with other utilities outside the Philippines. They call for: - comprehensive implementation planning taking into account all project activities and all interfaces with other projects and operations (PCR, para. 9.5 (a)); - an early start of procurement and of right-of-way negotiations (PCR, paras. 9.5 (a) and (b)); - a reasonably comprehensive presentation of all major factors affect- ing a borrower, even if some, like the nuclear plant issue in the case of NPC, have a very sensitive character (PPAM, para. 31); - strict coordination within the Bank before taking position towards Government and the Borrower (PPAM, para. 30). 12. The limitation of resources available to the Bank (and presumably also to ADB) suggests that it might be worthwhile to strengthen further the coordination of the activities of the two institutions in order to reduce duplication of efforts to a minimum. Such streamlining would also ease duplication of work for the Borrower which, too often, has to face similar but not identical demands from the various financiers, which, with improved coordination, could be met by one ringle response (PPAM, para. 30). This might also apply to sectors other than electric power or countries other than the Philippines. PROJECT PERFORMANCE AUDIT MEMORANDUM PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) I. BACKGROUND 1. The project audited here is part of a collaboration between the Government of the Philippines, the country's power sector, and the Bank that has now lasted some thirty five years. Indeed, in 1956, the Bank made its first loan to NPC, then a Government-owned utility generating electric energy mainly from hydroelectric plants and selling such energy in bulk to distribut- ing entities, especially the largest among these, the privately-owned Manila Electric Company (MERALCO). For a long time MERALCO was also the largest producer of electricity in the country. In 1977, the Government assigned NPC the primary responsibility of electricity generation for public consumption. In 1978, NPC took over most of MERALCO's generating plant and thus became itself the largest power generating utility. Against this background, NPC's installed capacity increased from 134 MW in 1956 to 1006 MW in 1977, when the Bank operation audited here was prepared, and to 5788 MW in 1987. 2. Until 1988, the Bank Group has had fifteen operations in the sector: nine (including one involving a US$10 million IDA credit) supported NPC's development by providing US$281 million; two assisted the Philippine National Oil Company (PNOC) in tapping, in association with NPC, the country's substan- tial geothermal resources, the associated loans amounting to US$77 million; after IFC had had two operations with MERALCO involving loans for US$22 million, in 1989 the Bank made a US$65.5 million loan to the Development Bank of the Philippines with MERALCO as the ultimate beneficiary; finally, a US$60 million Bank loan to the National Electricity Administration (NEA) supported the Philippine Government's rural electrification program. Thus, all in all, until 1988, the Bank Group has committed a total of US$515 million to the sector, and this despite a near stop in lending between 1978 and 1988. This hiatus is discussed below. 3. The Asian Development Bank (ADB), in turn, made 14 operations in the sector with total lending of US$679 million, all to NPC, except for US$88 million, which went to NEA for rural electrification. Both, ADB and the Bank, also helped finance components of multi-purpose projects. Thus, ;ne Bank was involved in Magat I, II, and III, which had a large power component (360 MW). Whereas the Bank provided finance for dam and canals, the construction of which was the responsibility of the National Irrigation Administration (NIA), it did not assist NPC in the construction of the power plant proper. 2 II. PROJECT PREPARATION AND JUSTIFICATION Historical Overview 4. Until August 1975, the Bank envisaged a project with one of the plants of the Chico River hydroelectric development as its physical nucleus. However, at the August 1977 Annual Meeting of the Bretton Woods institutions, the Philippine delegation suggested to substitute the Kalayaan pumped storage plant for the Chico project in the Bank's program of power sector opera- tions.1/ This seemed to make sense, as NPC had started to construct its first nuclear plant, which was expected to provide a large amount of base load energy. The pump storage plant was to upgrade the value of part of this energy by transforming it into energy usable during peak hours. As the operation was planned to be submitted to the Board's consideration in early FY77, the Bank, already in October 1975, sent a mission with the unusual task to appraise a project of which Bank staff had not even seen the first project report. Fortunately, management left the door open for the mission to limit itself to a pre-appraisal of the project, if the available information was insufficient for an appraisal, which proved to be the case. Indeed, it soon came out, that NPC and its consultants had not even been aware of Government's decision to assign first priority to the Kalayaan project.2/ Under these circumstances, the Bank postponed project appraisal, which took place in March/April 1976 and focussed on (i) project scope and cost estimate, (ii) loan amount and financing package, (ii) the tariff adjustments called for, (iv) NPC's reorganization, manpower planning, and management, and (v) NPC's long term development program.3/ 5. In June 1976, when the appraisal mission was preparing its report, the Bank received a letter from the Philippines' financial secretary request- ing the diversion of the Bank funds earmarked for Kalayaan to the Magat hydro project. At the same time, the secretary requested, as required in the context of earlier Bank operations with NPC, the Bank's concurrence with financing of a turnkey contract for Kalayaan offered by an Italian group.4/ Despite this turn of events, on the basis of conflicting information from the Philippines, Bank staff went ahead with the processing of the Kalayaan opera- tion, and in October submitted it to the Loan Committee, which gave the green light for loan negotiations. On December 3, 1976, the Bank set forth a detailed plan for such negotiations. However, sometime before November 30, it had received the text of a Memorandum of Agreement between Government and the Italian group. This led Projects Department management to suggest a postpone- ment of the negotiations. In fact, at the very last moment they were can- celled. Had they been concluded, the Bank would have found itself competing with the Italian group for the financing of the plant, a situation it had to avoid.5/ 6. By January/February 1977 it had become reasonably clear that Govern- ment would ultimately reach final agreement with the Italian group. The Bank, still faced with conflicting requests from the Philippines, did not yet entirely abandon the idea of financing the pump storage plant, but it evalu- ated the feasibility of substituting part of NPC's transmission program for the Kalayaan plant in the Seventh Power Project. In the course of the spring 3 of 1977, the substitution took place and, in June 1977, the Board approved the project amended accordingly. Project Preparation 7. The PCR (para. 3.2) states that the project would have needed more thorough preparation. The audit agrees with this finding. Indeed, against the above background, the appraisal defined a project that included a trans- mission component covering some fifty sub-projects, i.e. a package difficult to oversee properly with a reasonably limited use of resources in particular for procurement supervision. Further, due to an element of improvisation in project definition, the technical and economic appraisal of the physical elements of the final Bank project was based on rather preliminary plans. Indeed, a supervision report prepared in August 1978, i.e. one-and-a-half years after appraisal, states that even by then only about 75? of the neces- sary surveys had been carried out and only the sites of the principal substa- tions selected.6/ 8. To the discharge of the appraisal, it seems important to emphasize that the substantial changes that the physical project components subsequently suffered are only in part a consequence of poor project preparation. Indeed, implementation was greatly affected by the slowdown in the economy, which drastically reduced demand growth with respect to the projections (in 1983 NPC sales were only about two third of those anticipated at project appraisal), and which triggered acute shortages in local funds and made major program adjustments necessary. III. PROJECT JUSTIFICATION NPC's Investment Program 9. Whereas the SAR had little difficulty to justify the project in technical and economic terms, it was less confident about the physical, economic and financial feasibility of NPC's 1977-83 program of US$5.8 billion, of which the US$92 million proposed Bank project represented less than 2%. As a matter of fact, the Bank's doubts about NPC's ability to develop its im- plementation capability as quickly and as vastly as required to carry out the mammoth program envisaged, permeate the SAR (see e.g. SAR, para. 11 of sum- mary); several internal Bank documents spelled out the misgivings 7/. Part of these were related to Government's decision to go ahead with construction of the Philippines's first nuclear plant, which the Bank apparently did not consider to be part of the least cost development of NPC's system. OED did not find any official statement of this position, but it is evident from oral testimony and the way the Bank dealt with the issue (see paras. 10 and 31). Technical and Economic Justification 10. The Bank appraisal justified the project technically as part of NPC's transmission investment necessary to transfer the energy produced at the 4 power plants to the main consumption centers. Once the project completed, the whole of Luzon Island, except for a few remote areas, was expected to be covered by NPC's grid (SAR, para. 6.01). For the economic project justifica- tion, the Bank had ascertained that the envisaged facilities represented either the least cost alternative to provide the envisaged service or the only solution to achieve the objective. In a further step, the appraisal justified the project as an integral part of NPC's generation and transmission invest- ment program on Luzon. Though the SAR does not explicitly say so, the plan it considered excluded the nuclear plant, on which, at the time the Board came to consider the Seventh Power Project, construction had started and which there- fore, had to be considered a "fait accompli." Therefore, the value of the demonstration in the SAR is limited, the more so as, even in the context of the program for the Luzon system, the project represented only 15% of the investment considered. Had the plan included the nuclear plant, the project presumably would have represented an even lower percentage of total program cost. In any event, the SAR calculated the IERR of the program it had ex- amined at 10% using the rather low tariffs projected. The PCR (para. 7.3) confirms this figure for a program, that again excluded the nuclear plant, now more justifiably so, as the plant has been mothballed. The calculation uses the high fuel costs prevalent in 1985. With the lower subsequent fuel costs, the ex-post IERR results at 12%. In OED's view, under the given circumstan- ces, the SAR's and the PCR's determination of the IERR add little to project justification. C. Financial Performance 11. NPC's financial performance has been a major issue in the dialogue between Government, NPC, and the Bank since the latter started its involvement in the Philippine power sector in the 1950s. The Seventh Power Project was presented to Board consideration on the basis of a financial outlook that can only be qualified as bleak. Indeed, the SAR sets forth projections that foresee, for the period 1976-83, net internal cash generation reduced by debt service and increases in working capital contributing some 4% to the invest- ment foreseen (SAR, para. 5.04). By itself, the Bank accepting this low average is to an extent surprising. But even more unusual is the fact that the financing plan did not foresee any improvement of substance over the project period. Indeed, only for the year 1983 was the self-financing ratio expected to exceed 10%, and even then only barely so (SAR, Annex 5.13). The key point was the exceedingly large investment program (see para. 9) that did not allow to assume that implementable tariffs could lead to revenues that would provide a reasonable contribution to investment. Indeed, refinancing of the debt for the nuclear plant and exclusion of acquisition of the MERALCO thermal plants would have improved average self-financing only to a still unsatisfactory 10%. Further, tariffs 10% higher in real terms than those anticipated at appraisal would have generated a return on net fixed assets in operation of some 12% but still only a 13% self-financing ratio. Philippine authorities considered such an increase as politically utterly unfeasible. D. Debt Control Covenant 12. In connection with earlier Bank operations, NPC had agreed to abide by the traditional debt control covenant providing for the Borrower to seek 5 Bank concurrence to new major investment whenever internal cash generation during a 12 months period preceding the time new debt would be incurred failed to exceed 1.3 times the debt service expected in a following 12 month period (SAR, para. 5.12). During the time the Bank and NPC were preparing the project audited here, NPC did not meet the above test, but more than once, failed to advise the Bank in time of the planned start of new large invest- ment. This was due, in part, to Government signing agreements with other lenders on behalf of NPC without full knowledge of the utility, a further indication of the then lacking dialogue between Government and NPC. 13. In order to avoid the recurrence of the type of defaults referred to above, and, apparently, to take into account the limited Bank contribution to NPC's investment, under the Seventh Power Project, the Bank agreed to give NPC more freedom in the area of debt control. Therefore, the loan documents called for (i) NPC to submit annually its updated 10-year investment and financing programs for Bank review, (ii) investments in excess of US$50 million requiring Bank approval, which the latter should grant upon proof that the proposed facilities are part of NPC's least cost development, and (iii) a limitation of medium term debt. E. Overall Project Justification 14. In the audit's view, at the time the project was submitted to Board consideration, the situation could be characterized as follows: - There was a clear lack of communication between Government and the sector, which implied that the signals the Bank was getting were in part contradictory. - The Bank project, a small part of NPC's large investment program, was technically and economically justified. - The Bank was uneasy about NPC's investment program both with respect to size (too large) and content (nuclear plant, see para. 10). - The Bank had grave doubts about NPC's ability to implement the envisaged program. - NPC had a history of defaults on the revenue covenants and, although it did not meet the debt service test of earlier Bank projects, had variously failed to advise the Bank in time of the start of new major investments requiring it to incur further debt. - The proposed operation calculated from the start with an inadequate resource mobilization. - At the time of Board presentation of the Seventh Power Project (June 1977), the Fifth Power Project (Loan 809 and Credit 296) was still far from completion and less than 15Z of the Sixth Power Project (Loan 1034) were executed though completion of the operation was plannned for the same year.8/ 6 These points, taken together, suggest that, although the project included the provision of elements of infrastructure that NPC needed in any event and measures to improve NPC's institutional capability, a good case could be made against the proposed operation. Indeed, several Bank staff saw it as the Bank rewarding poor performance with lending under less stringent conditiona- lity.9/ In fact, though not documented, the rationale for the operation was largely based on more general considerations like the need for the Bank to preserve the influence it yielded in the power sector, which was likely to represent an increasingly large burden on Government finances. To this end, the Bank wanted to continue and improve the dialogue with Government, the energy sector, and the power sub-sector on sector and sub-sector issues. Apparently, the Bank felt that it could not achieve these objectives without further lending. IV. PROJECT IMPLEMENTATION AND HIATUS IN BANK LENDING Project Costs 15. To complement The PCR's discussion on costs (PCR, paras. 3.10 and 3.11), OED carried out for the two main components of the project, the trans- mission program and the communications and control elements, a rough cost com- parison that nevertheless goes somewhat beyond the straight comparison of estimated and actual costs. It calculated (i) an "actual base cost" which can be compared to the estimated base cost increased by the physical contingencies and (ii) the increase that estimated base costs and physical contingencies would have suffered under actual inflation. This increase can be compared to the price contingencies. OED's re-evaluation does not isolate the effects of the appreciation of the US$ with respect to other currencies in the early 1980s. As it uses throughout US$ as the reference currency, it tends to underestimate the costs in local currency, as they were perceived by the Philippine authorities and NPC. 16. The transmission program actually carried out corresponds, in physical extent to 80 to 85% of that envisaged at appraisal. After taking into account this reduction, the actual base cost of the transmission facili- ties results some 5Z below estimate, with local costs some 20% less than anticipated and foreign costs about at that level. Actually, as set forth in para. 3.11 of the PCR, foreign costs had been substantially overestimated. But, the 1983 Special Assistance Program permitted NPC to use the Bank loan to cover 60% of civil works cost, which was more than the foreign exchange component of such costs. The costs covered in this way now appear in full as a foreign currency expenditure. 17. The communications and control component of the project experienced a substantial cost overrun due to an underestimate of base costs by some 30%. The origin seems to be related to a low estimate of unit costs and to modifi- cations in design which increased the ultimate cost. Similar to what occurred with the transmission component, the local cost expressed in US$ resulted 7 substantially lower than estimated, which partly made up for the massive increase in foreign cost. B. The Hiatus in Lending to NPC (1977-1988) 18. One year after lending to NPC for the Seventh Power Project, the Bank made a loan to NEA for rural electrification (see OED audit of July 1985, Report No. 5732). This was the last Bank operation in the sector until 1982, when the Bank supported technical assistance to prepare the development of geothermal resources (Geothermal Exploration Project with PNOC, Loan 2203 for US$36 million). The next operation with NPC had to wait until 1988, when the Bank lent to both NPC and PNOC for a project centering in the implementation of the 110 MW first stage of the Bacon Manito geothermal plant in southern Luzon. The hiatus in Bank lending to the electric power sector has to be seen against the complex background discussed below. 19. Implementation of the Seventh Power Project did not proceed as expected (PCR, Chapter III), as the shortcomings in project preparation mentioned in paras. 4 to 8 above postponed the start of procurement and construction. Further, NPC failed to take, at the time agreed, covenanted measures to start establishing its training center. It also fell short of earning the 8Z return on net revalued fixed assets in operation foreseen in the Loan Agreement. Therefore, a year after the loan became effective, the operation appeared in the Bank's list of problem projects. 20. The Philippine economy had started deteriorating in the late 1970s. But, when in 1979 the second series of large increases in oil prices hit the world economy, Government, assisted inter alia by the Bank, had to rethink its economic policies. This resulted, in 1980, in the first structural adjustment program which concentrated on industrial and trade policy. Although this program, supported by the first SAL (Loan 2071, audited in 1985, see OED Report No. 5813) did not address the aspects of the economy directly related to the power sector, the dialogue between Government and the Bank increasingly focussed on the energy sector policy in general and the desirability of developing the use of local resources in particular. The 1978-1982 Develop- ment Plan had already included this development as one of its major objec- tives. For the power sector, the most important local fuel resources are: coal and geothermal energy. Therefore, coal-fired and geothermal plants became the focus of the Bank's and NPC's search for a new project that the Bank could help finance. 21. The development of the details of a new energy sector strategy started with a joint Bank/ADB energy sector survey mission in 1980 carried out at the invitation of the ministries of Finance and Energy. The survey con- tributed to the formulation of the structural adjustment program supported by the second SAL made in 1983 (Loan 2354, avifted together with thq first SAL in 1985, see OED Report No. 5813). 22. In connection with the second SAL, Government agreed to pass on the full cost of petroleum products to the consumer and to restore financial viability to the power sector, thereby taking a heavy financial burden off the public finances. Indeed, during the early 1980s Government had become unable 8 to contribute to the power sector the amounts required to cover the gap in local currency funding left by inadequate revenues; thus, in 1983, Government could mobilize less than half of the sum budgeted. For NPC, the new sector policy meant that the company could charge higher rates, which resulted in substantial improvements in its financial position. In fact, starting in 1985, NPC not only met the Bank's 8Z rate of return covenant, but revenues allowed it to cover, beyond debt service and adjustments to working capital, a substantial part of investment. 23. During the first ,lIf of the 1980s, recession increasingly accom- panied by political unrest, reduced dramatically demand growth (e.g. from 13? per year projected in 1977 for 1980-83 to 72). This had the effect of limit- ing the need for investment. It also reduced the urgency for further Bank financing, the more so as ADB, on its part, had stepped up its financial support of NPC by providing during the hiatus in Bank lending over US$320 million and thus replacing to some extent the financing NPC did not get from the Bank. 24. A further development that affected NPC in a major way during the entire implementation period of the Seventh Power Project was the growing uncertainty about the fate of the nuclear plant. In 1980, the project was already experiencing major difficulties, inter alia vast cost increases, in part associated with additional safety measures required after the Three Mile Island incident in the USA and after major geological difficulties had ap- peared at the plant site inducing a temporary stop in construction. In 1986, in the aftermath of the Chernobyl accident in the USSR, Government decided to mothball the plant and, subsequently, to take the financial impact off NPC's books. 25. The mothballing of the nuclear plant, the downgrading of the Tiwi geothermal plant and, in 1987, the resumption of substantial demand growth suddenly raised the scepter of shortages in supply capacity in the short term. To help Government and the sector face this new situation, the Bank, in 1988, carried out an energy sector study which is to form the base for future Bank involvement in the Philippine energy sector beyond its current participation in the Bacon Manito project. The Bank is also seeking ways it can support private investment in the power sector in the context of BOOT (Build, Own, Operate and Transfer) projects, an area in which NPC is one of the most advanced utilities in developing countries, as it recently entered into such a contract for a small gas turbine power plant. 26. The preceding paragraphs show that the Bank, although it waited until the late 1980s to resume direct lending to the power sector at a sub- stantial scale, was indeed sustaining an intensive dialogue with Government on energy and especially on electric power. However, though the dialogue was continuous and fruitful, there is evidence of contradicting positions taken by various departments of the Bank and, regrettably, perceived as such by the Guarantor and the Borrower. These contradictions doubtlessly contributed to the postponement of a new Bank operation. 9 V. OTHER ISSUES Cooperation and Coordination with ADB 27. In connection with its research for the present audit, OED found many references to discussions the Bank and other lenders, in particular ADB, had on energy and power sector issues, in general and NPC, in particular. Until the late 1970s both, IBRD and ADB, were lending for specific projects and the Bank essentially concentrated on ventures on Luzon whereas ADB sup- ported projects on other Islands. Thus, the separation of the fields of activities was even geographic. Under these circumstances, the coordination of the two lenders had to be assured at the level of the measures envisaged to improve the Borrower, in the present case NPC, as an institution. The audit found that there were only minor inconsistencies between the conditions imposed by the lenders, mostly related to differences in definitions. The main difference was in the financial covenants and is to be found in the debt limitation covenant, which In the case of ADB is expressed as a limit on debt service coverage by net cash generation adjusted for changes in working capital, whereas the Bank, in connection with the Seventh Power Project discussed here abandoned its traditional major investment clause for a cove- nant essentially covering medium term debt and leaving the monitoring of decisions about major investments to an annual review of the investment and financing program (para. 13). 28. More recently, the other differences in definition have led to vast differences in the financial statements, which, at first sight seem to send diverging messages. A case in point is NPC1s actual self-financing ratio for the years 1984-86, which the Bank states to have been 19, 56, and 117? 10/, respectively, whereas ADB calculated it at 36, 41, and 39? 11/. The dif- ference essentially is due to different definitions of interest during con- struction, and of the changes in working capital considered in the computation of funds available for investment. These and similar inconsistencies, while not fundamental, tend to induce a measure of confusion. They, most certainly, do not ease the Borrower's monitoring and reporting job. 29. Since 1984, ADB is making loans that tend to cover a wider part of the sector. Now that the Bank, on its part, is resuming lending to the sector and to NPC, the physical components financed by the two institutions are less easy to separate. Therefore, it seems of special importance that the coor- dination between the two lending institutions be particularly close. In the years immediately preceding the Bank's re-organization, the two institutions made a major effort to achieve such coordination. OED concludes that the time might have come, to update the coordination and to re-think the co-opera- tion between the two agencies in the power sector (and perhaps in other sectors, too). In these times of extremely tight budgets, it might be pos- sible, without affecting the individual organizations' integrity, to find ways to further reduce duplication of efforts, the more so as the methods of project evaluation and supervision do not differ that much. It is quite possible, that this issue is best addressed at a different level, i.e includ- ing other sectors and other countries. The streamlining suggested here should also allow NPC and, most likely, other common borrowers, too, to reduce the 10 duplication of work involved in preparing e.g. different sets of projections and other information for the different financial agencies. This is the more desirable as, at times, borrowers like NPC, in order to accommodate the various agencies, produce such sets that are not entirely compatible (see Annex). 30. Further, OED found that, reading the various official Bank reports, the reader could easily conclude that the Bank and ADB work in splendid isolation of the other, which is manifestly not true. Therefore, it suggests that the Bank, at least in the main documents that it submits to its Board of Directors, document that this crucial coordination takes place. The Nuclear Plant 31. Within the Bank, the paper trail concerning the Philippine nuclear plant is surprisingly modest when compared to the prominence this very sensi- tive issue had since the first half of the 1970s. The audit does not wish to review with hindsight how the Bank dealt with this problem, except to raise the question whether all but ignoring the issue in its reports concerning the power sector was the best stance to take. Obviously, Government, the power sector, and the Bank fundamentally disagreed on the desirability of the pro- ject, which represented, by far the largest single item in the power sector's investment program. As such, it was a major burden on NPC's finances. Therefore, for the benefit of a realistic presentation of the power sector and its problems, it deserved, in OED's view, a more explicit treatment in Bank documents dealing with power (and energy) sector issues. VI. CONCLUSIONS 32. Although Government, the power sector, and the Bank had planned the Seventh Power Project for a long time in advance as a sequel to the six operations previously carried out with NPC, the physical component of the operation was defined at a very late stage. Indeed, changing financing prospects for the exceedingly large power sector investment considered to be needed at the time forced the Bank to adjust several times the physical content of the project. The last such major change occurred even after a first appraisal. In this shifting situation, project preparation seems to have suffered. However, the additions to NPC's transmission facilities and the control center selected as the central project items and, with adequate modifications, ultimately executed, turned out to be components of NPC's investment program whose justification survived the major upheavals the Philippines experienced during project implementation, which, due in part to these developments, lasted substantially longer than anticipated at appraisal. 33. At the time the operation was processed within the Bank, there was an obvious shortfall in communication between Government, NPC, and the Bank, which had led NPC to default on the major projects covenant included in the loan documents for the earlier operations. NPC also failed to comply with the corresponding revenue covenant. Further, from Bank files and the SAR, it is 11 evident that the Bank had grave doubts about NPC's physical, institutional, and financial capability to carry out tle vast construction program which it had determined to be required to meet tL. east increasing demand and of which the Bank project was a minute part. Finaily, the SAR projected that NPC would continue to generate internally only an inadequate contribution to its invest- ment, with little improvement over the project implementation period. There are certainly many cases when, under similar circumstances, the Bank has refused to lend. In this case, it went ahead with the operation to a large extent because it felt the continuity of the link to NPC should be prejerved through lending. 34. Ultimately, the project outcome was much better than the unauspi- cious start suggested and this, although the Bank did not further lend to NPC until the late 1980s. Indeed, beyond the execution of the physical compo- nents, the project implementation period witnessed a substantially expanded dialogue between Government, the energy sector, and the Bank, an exchange that helped bring about major adjustments in broad sector policies, which, in turn, led to vast improvements in electricity rates, allowing the company to generate its covenanted returns. These, in the meantime, had resumed their role as a meaningful benchmark for a satisfactory revenue generating perfor- mance, which they had lost when an 81 return on ..et fixed assets in operation barely allowed to meet debt service after operating costs. In the same period, NPC was successfully reorganized and its performance has improved, as suggested, inter alia, by the steady increase of the ratio between sales and number of employees. As in most cases of Bank involvement in a large sector with many actors, it is difficult to identify the part of success attributable to its activity. Nevertheless, it seems fair to state that the Seventh Power Project in spite of the subsequent hiatus in lending contributed to the improvements mentioned above. 12 ANNEX 1 Coordination within the Bank and with ADB In analyzing the most recent developments and expectations, the audit was surprised by the rather large differences in projected demand resulting from various nearly contemporaneous documents. Indeed, as an example, the estimated annual generation required in the Luzon System in PY1993 is some 202 higher in ADB's October 1988 Appraisal Report for the Fourteenth Power Project than in IBRD's May 1988 Staff Appraisal Report for the Bacon Manito Geothermal Power Plant. The three scenarios in the Bank's September 1988 Energy Sector Study lead to values 5 to 152 higher than that projected in connection with the Bacon Manito project and 5 to 152 lower than estimated by ADB. The deviations are of about the same order in the case of the Mindanao System and substantially smaller for the Visayas System. The differences in the Bank evaluations seem to have resulted from the difference in outlook at the appraisal of Bacon Manito in the third quarter of 1987, when NPC's final figures for FY87 which had ended in June 1987, were not yet available. It is, nevertheless, surprising that the Bank, presumably using NPC data, estimated the growth during the year at some 4.12 when it actually was double that value. If one introduces the actual value for 1987 into the Bacon Manito projection, the latter nearly coincides with that appearing in the low growth scenario of the Energy Sector Study. But the difference with the ADB figures remain in excess of 15% for the 1993 genera- tion required in Luzon, because ADB, obviously based on mid-1988 results, projects a 7.52 growth rate, which is still substantially less than the 82 annual growth experienced during the first half of 1988. ATTACHMENT 13 COMMENTS FROM THE BORROWER RESIDE .. REPUBLIKA NO PILIPINAS Pambansang Korporasyon Sa Elektrisidad (NATIONAL POWER CORPORATION) January 3, 1990 Mr. FARU:H JOBAL, Room 200, Multi-storey Bldg. Central BanP of the Phils. Rovas Blvd., Metro Manila SUBJECT; Seventh Power Project (Loan No. 1460-PH) Project Performance Audit Report Dear Mr. Iqbal: In response to the letter of Mr. Alexander Nowicki, Chief, Policy-Based Lending, Industry, Public Utilities and Urban Sectors Division, Operations Evaluation Department, dated November 7, 1989, provided hereunder are our comments: 1. On page 22. Annex 3, the status of the following projects as of November 30, 1989 are as follows: a. Dasmarinas-Rosario (Gen. Trias) 115 IV Transmission Line - Completed and energized on bec. 2b, 188. b. San Esteban Substation, 50 MVA - Completed on December 28, 1988. c. Rosario Substation, 50 MVA - Completed and ener gized on January 18, 1989. d. Tagaytay Substation, 5. MVA - 94.56/. completed. Delayed due to inavailability of woodpoles for incoming transmission line. Scheduled fcr completion in January 19O. 2. On pages 27 and 28, Annex 7, status of Items 2.1.1 and 4.".4 can be obtained on the above data. 3. Right location of Bicol and Zambales Regions reflected in the attached map. Very t l> yours, .. LGADO Senior Vice President Engineering & Nuclear CL.: Mr. E. M. Aboitiz NPC President 14 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Industry and Energy Operations Division Country Department II Asia Region 15 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT I. INTRODUCTION The Power Sector 1.1 Until early 1986 the power sector came under the aegis of the Ministry of Energy (MOE) which administered and set policy for the entire energy sector including the generation, transmission and distribution of elec- tric power. With the change in government in February 1986 MOE was abolished and its responsibilities temporarily placed under the Office of the President by Executive Order No. 20 in June 1986. 1.2 Ownership of electric power systems has been divided between the Manila Electricity Company (MERALCO) the largest privately owned utility company in the country, the National Power Corporation (NPC), the government- owned electric power enterprise and numerous small publicly and privately held utilities and cooperatives which both generate and distribute electric power on a small scale. MERALCO, which was the largest electric power utility in the country as of project appraisal, operated its own generating facilities until 1978 and 1979 when they were taken over by NPC in accordance with the Government's policy of concentrating responsibility for power generation under NPC. The company continues to hold the power distribution franchise in the greater Manila area where its franchise area has greatly expanded, covering cities and municipalities falling within a radius of about 60 km, as a result of government initiated take-overs of local utilities and cooperatives. In 1977 the Government assigned total responsibility for the construction and operation of all power generation in the country to NPC which since then has undergone rapid growth as it extends its services throughout the major islands. A rural electrification program was initiated by the Government in 1969 under the administration of the National Electrification Administration (NEA) which was responsible for providing technical and financial assistance in establishing local cooperatives to carry out the program. By 1985 about half of the rural population had been provided with electricity. 1.3 At the time of project appraisal, the three major regions of the Philippines had experienced different rates of electric power development. By far the greatest power development had taken place on the island of Luzon where about half the Philippine population lived and where most of the indus- trialization had taken place, especially in the North where cheap hydro power was available. Some grid development had taken place in the large southern island of Mindanao; in the Visayas, the main islanas in the central part of the Philippine archipelago, grid construction was only just beginning to take place. By 1985 NPC had extended services to about 90% of the nation's popula- tion, but there still was a major regional imbalance in the degree of electri- city generation and installed generating capacity when comparing Luzon with 16 the rest of the country as illustrated in Table 1.1. The table also shows that there was a decided shortfall in expectations and achievement in regard to future capacity and generation gains, largely due to overoptimistic growth projections. Table 1.1: ELECTRIC POWER-INSTALLED CAPACITY AND PRODUCTION Installed Capacity SAR Projection Actual 1974 1985 Actual 1985 Region (MW) (%) (MW) ( NO (%) Luzon 2,246 72 5,097 60 4,101 74 Visayas 387 12 1,537 18 542 10 Mindanao 687 16 1,882 22 907 16 Total 3,120 100 8,516 100 5,550 100 Production SAR Projection Actual 1974 1985 Actual L985 (CWh) (M (CWh) (%) (GWh) (%) Luzon 8,848 74 21,048 58 14,449 77 Visayas 1,405 12 6,980 19 1,343 7 Mindanao 1,671 14 8,499 23 2,965 16 Total 11,924 100 35,527 100 18,757 100 The Borrower 1.4 The Borrower, NPC, is a stock corporation with all shares subscribed by the Government. NPC was originally chartered for the single purpose of developing hydroelectric resources in the country, but over time the Govern- ment has expanded its mandate to the point where it now comprises the develop- ment, construction and operation of all electric power generation and trans- mission facilities in the country. The Corporation has been given no role in power distribution which is the responsibility of private utilities and coop- eratives. The corporate powers of NPC are exercised by its Board of Directors which includes seven members. The present Board was appointed by the Philippines president; appointments are normally for a five-year term. The management of NPC is vested in its president who serves as its chief executive officer and is a member of the Board of Directors in the capacity of ex- officio vice chairman. 17 1.5 Including the loan under review, the Bank Group has made nine loans totaling US$290.2 million (including an IDA credit of US$10 million) to the power sector in the Philippines. Seven of these loans (including the IDA credit) totaling US$218.2 million were made to NPC to help finance various parts of its power generation and transmission program. Except for substan- tial slippage in the construction schedules and cost overruns experienced on the last two loans, on the whole, the projects were completed without major problems and are operating satisfactorily. In addition to the NPC loans, IFC committed US$12 million in 1967 in support of MERALCO's power distribution operations and an IBRD loan of US$60 million was advanced to NEA in 1978 to help finance rural electrification. 1.6 This PCR is based on (i) information available in Bank files; (ii) reports and data submitted by NPC; (iii) a completion report prepared by NPC; and (iv) a PCR mission during March 1987. II. PROJECT PREPARATION AND APPRAISAL Origin of the Project 2.1 The Bank's lending program for the Philippines was, and still is, directed at providing support for the country's development efforts which include the power sector. In this context, the Bank was ready to follow up the Sixth Power Project with additional assistance to NPC's power expansion program. The project (Seventh Power Project) then under consideration was prepared by NPC and appraised by a Bank mission in March/April 1976. The project's major component consisted of construction and equipping of a pumped storage plant at Kalayaan in Luzon. However, when the Government subsequently received financing offers from another source for this component, it was mutu- ally agreed that the Bank loan would support an urgently needed NPC transmis- sion project instead. A follow-up mission appraised the revised project in February 1977. Project Description 2.2 The project was designed to support the Government's power expansion program, which was essential to further economic development, and to improve NPC's capacity to carry out its share of this program effectively. The main components were: (a) Transmission System Expansion. Installation of about 1,360 km of new transmission lines (230 kV, 115 kV and 69 kV service) and sub- stations having 25 MVA capacity (230 kV and 115 kV service), all in Luzon. (b) Control Center. Installation of the first phase of a communication network and control system located in the Manila area for NPC's Luzon grid. (c) Training. Support for NPC's training activities through overseas training and establishment of a training center. 18 (4) Management Improvement. Provisions for a team of advisors to imple- ment a management improvement program and the carrying out of an organization study and a tariff study. Role of the Project in the Power Sector 2.3 As noted in the highlights a primary objective of the project was institution building by providing a wide range of assistance aimed at improv- ing NPC's capacity to carry out effectively its increasingly extensive and complex role in the power sector. The central communication and control system provided under the project was an essential element needed by NPC for improving service to its Luzon customers. Regarding the transmission system, the new transmission lines and substations extended NPC's Luzon grid to cover essentially the entire island. The 230 kV and 115 kV lines enabled power to be brought to areas undergoing rapid industrial development and provided the additional capacity needed to prevent the danger of overloading prevailing at the time. The 69 kV lines extended electric power into the rural areas and supplied electricity to NEA's rural electrification program. III. PROJECT IMPLEMENTATION Loan Effectiveness and Start-up 3 1 Board approval of the project took place on June 14, 1977; the loan was signed on August 9, 1977, and it became effective on January 6, 1978. Although NPC had gained valuable experience with implementing transmission projects through the Fifth and Sixth Power Projects, NPC agreed with the Bank's recommendation to employ management consultants to assist its efforts and ensure adequate coordination and timely completion of the numerous sub- projects. The consultants were appointed in November 1977 and the project got underway, about 6 months later than the originally planned May 1977 start-up. Changes in Project Scope 3.2 During implementation of the project, several changes in trans- mission line routing and substation locations took place. These changes did not alter the original project objectives, but they were responsible for implementation delays. However, the scope and number of these changes do point to a need for much more thorough project preparation. Annex 1, which compares the transmission work planned and actually performed, notes the changes in project scope. The changes were mainly due to: (a) transmission lines and substations not installed because they were designated for installation in areas already adequately supplied; (b) load-end substations not required and the equipment relocated because cooperatives had already installed such units; and (c) transmission lines having to be rerouted because of right-of-way problems or because they were needed for supplying power to areas where it was more critically needed than those specified. 19 3.3 Changes in project scope were also necessitated for financial reasons. By 1983 the Government's acute shortage of local funds, and the resulting severe cuts in budgetary allocations to NPC, threatened NPC's abil- ity to complete all the transmission components included in the project. To assist NPC in dealing with this problem, the Bank agreed in September 1983 to restructure the project under the Special Assistance Program (SAP) then in effect for the purpose of helping birrowers complete high-priority ongoing projects which were being delayed by the shortage of foreign exchange or bud- getary resources. The specific measures initiated under the SAP are discussed in para. 3.12. Implementation Performance Transmission and Control Center 3.4 The Project Implementation Chart (Annex 2) compares the actual implementation performance with that originally planned, for the individual major project components and for the overall project performance. The chart shows that implementation got underway about six months later than originally scheduled and steadily lost ground so that by end-1981, when the project was scheduled to have been completed, only about 63% of the project was actually completed. At that point, overall project implementation progress was 18 months behind schedule, and extrapolating the rate of progress experienced up to that point, the project could have been completed some time in late 1982 or early 1983. However, implementation progress slowed as the country's economic problems deepened. The project was only essentially completed by 1984-85. Annex 3 gives the completion status of the project. 3.5 The delays encountered on this project were essentially the same as those experienced during implementation of the Sixth Power Project, namely a combination of the following: (a) inadequate project preparation; (b) poor coordination between organizations involved in or affected by the project; (c) lengthy procurement delays; (d) right-of-way access problems; (e) the necessity to defer work because essential services could not be interrupted; and (f) lengthy delivery delays by suppliers who did not honor their promised delivery schedules. 3.6 A new source of delays appeared in 1982 when the Government began to experience local currency shortfalls. By 1983 this problem had become so severe that NPC's budget allocations had to be cut by 50% with the result that NPC had to slowdown ongoing transmission subprojects and defer work on those 20 not yet started. The Bank's SAP provisions (para. 3.12) allowed NPC to keep the transmission components intact but only after considerable disruption resulting from the financial difficulties. Control Center and Communication System 3.7 Engineering design and preparation of procurement documents for the control center and communication network got off to a fairly good start. Bids covering equipment and materials for these facilities were received in July 1979; however, almost two years were lost in obtaining the necessary Govern- ment clearances and approvals for contract award. As a consequence construc- tion start-up was delayed until mid-1983, almost two years later than origi- nally planned, and physical completion was correspondingly delayed beyond the end-1983 project completion target date. Reporting 3.8 As provided for under the Loan Agreement, quarterly progress reports were sent to the Bank on a regular basis. The reports were not always received within the required 30 days after the end of each calendar quarter, a matter which had to be called to NPC's attention. Procurement 3.9 Equipment and materials financed under the Bank loan were procured through international competitive bidding in accordanii with the Bank's pro- curement guidelines. Except for the control center contract which was awarded to a foreign company, civil works and erection contracts were awarded to local contractors in accordance with local procurement procedures which were satis- factory to the Bank. As on previous projects financed by the Bank, procure- ment delays were a major source of poor implementation performance. The experience with the control center and communication system noted above is an example of how procua ment problems can delay project implementation. There is scope for NPC to - :eamline its internal procurement processing, but there is at least as great a need to minimize the delays not of its own making. Appropriate procedural reforms are needed to reduce procurement delays, to which governmental clearance and approval procedures have contributed their fair share in the past. Project Cost and Financing 3.10 The actual total project cost was US$83.82 million against the appraisal estimate of US$92.34 million. Annex 4 shows the itemized estimated costs at appraisal and the corresponding actual expenditures. The following table gives a comparison of the estimated and actual costs of the major project components. 21 Table 3.1: COMPARISON OF ESTIMATED AND ACTUAL PROJECT COSTS /a (US$ million) SAR estimate /b Actual /c Local Foreign Total Local Foreign Total Transmission lines and substations 14.02 29.15 43.17 14.67 36.53 51.20 Engineering and administration 2.20 - 2.20 3.31 - 3.31 Communications and controls 3.59 8.77 12.36 2.82 19.57 22.39 Training and advisory services 2.45 3.54 5.99 1.02 1.90 2.92 Total Base Cost 22.26 41.46 63.72 21.82 58.00 79.82 Physical Contingency 3.81 3.96 7.47 - - - Price Contingency 8.57 12.58 21.15 - - - Uncompleted Portion (estimate) - - - 4.00 - 4.00 Total Project Cost 34.34 58.00 92.34 25.82 58.00 83.82 /a As of end-Fetruary 1987. T Exchange rate: US$1.00 = P 7.50 7c Exchange rate (weighted average): US$1.0 = P 17.46 3.11 The project cost comparison shown above is based on project expendi- tures incurred through February 1987. An additional US$4.0 million is estima- ted to be needed to complete the partially finished subprojects (see Annex 3). On this basis, the project will be completed with a 9% cost underrun which is due chiefly to (a) an overestimate of the foreign exchange requirements for the project at appraisal, (b) cancellation of the training center and (c) other minor changes in subprojects. The underexpenditure of local funds is due to the increasing use of proceeds from the Bank loan for works contracts. 3.12 The financing plan at project appraisal required NPC to raise from its own resources and budgetary allocations from the Government the US$34.34 million equivalent estimated local costs. However, because of an increasingly severe shortage of funds, especially after the Government cut its budgetary allocation by 50% in early 1983, NPC was forced to slowdown work on ongoing subprojects of the transmission system expansion part of the project and defer altogether any work on those subprojects not yet started. To deal with this critical problem, the Bank agreed to restructure the project as provided for under the Special Assistance Program (SAP); the specific measures taken were to (a) cancel construction of the training center, (b) reallocate these funds 22 along with unutilized balances in the loan account to the transmission expansion component and (c) increase the disbursement percentage for civil works from 15% to 60%. The funds expended against the SAP effort amounted to US$7.9 million which caused about a 10% increase over the Bank's established 60% cost-sharing ratio for the Philippines, but NFC was able to fund fully work on the transmission subprojects, a matter of high priority to the country's electrification and industrialization programs. Disbursement 3.13 Annex 5 compares actual loan disbursements with the disbursement profile expected at the time of project appraisal. The comparison shows that actual disbursements required an additional two years beyond the two and a half years originally estimated. The delayed disbursement is entirely due to the implementation problems and delays (para. 3.5) which were not anticipated at appraisal. The loan amounts under the various loan categories were reallo- cated as shown in the following Table 3.2. The final disbursement was made on January 6, 1986 and the loan was officially closed on January 6, 1986. Annex 6 lists the disbursements made from the loan. Table 3.2: REALLOCATION OF THE LOAN AMOUNTS (US$ million) Amount allocated under Revised the loan agreement allocation Equipment and materials 36.60 48.17 Civil works 2.80 7.90 Consultants' services 2.10 1.93 Unallocated 16.50 - Total 58.00 58.00 Performance of Consultants, Suppliers and Contractors 3.14 According to NPC all consultants assigned to the project performed their tasks in a satisfactory manner; this is also the view of Bank staff associated with the project. Major problems with suppliers and contractors were failure to keep delivery promises, schedule slippages and extra costs, which are partly the result of weaknesses in procurement and overall project management. 3.15 The project included financing of consultants' services to carry out a program to improve the managerial capabilities of NPC and a comprehensive study of costs and tariffs in the electric power sector. Management improve- ment recommendations developed by an international consulting group (during 1979) were well received by NPC and led to a major restructuring of NPC, down 23 to the departmental level and to the adoption and implementation of the prin- cipal recommendations. The program included training of 14 key staff in various management and operating skills; however, this part of the program had to be canceled because the consultant encountered difficulties that were beyond NPC's control. Comparable training was provided under the training component of the project. 3.16 A tariff study was carried out in 1977 by a special unit established by NPC with technical assistance from the Bank. However, no comprehensive conclusions or recommendations were drafted because the Government and NPC did not accept the marginal cost pricing principle on which the study was based. This pricing principle remained an issue with the Bank until a tariff study (not financed by the Bank) conducted in 1986 by international consultants led to a Presidential Decree in January 1987 requiring all power utilities to adjust their charges in line with Lng-run marginal costs. Environmental Impact 3.17 The project presented no air or water pollution problems. Any damages during construction along the transmission system rights-of-way were of a temporary nature and were made good after completion. Adequate compensation was provided for damage to crops and properties. IV. OPERA1_.4C PERFORMANCE 4.1 The electric power transmission expansion subprojects installed under this project are working satisfactorily. The operational status of the project components is shown in Annex 7. V. FINANCIAL PERFORMANCE 5.1 NPC's financial performance, comparing actual results with the appraisal forecasts, is given in Annex 9. This covers the period 1977-83, during which NPC's financial performance was somewhat below expectations, subsequently, NPC's revenues improved substantially as a result of hefty tariff increases from 1984 onard and from a major financial restructuring in 1987. 5.2 Through 1983, profitability was lower than expected, with NPC realizing its agreed rate of return target only in 1983. Although NPC handled substantial amounts of cash and equivalents throughout the period, its contribution to investment was well below forecast throughout the period. Except for 1981 and 1983, when NPC's working capital position declined precipitously, its debt service coverage was also well also below forecast. 5.3 During the period, except for 1981 and 1983, NPC's internal funds available for investment were below forecast; this indicator was actually negative during 1978-80. In the early years, this was due primarily to three factors: (a) delays relative to forecast in assuming control over MERALCO's generation and transmission facilities; (b) demand growing more slowly than 24 projected; and (c) tariffs increases which, through 1980, were more modest than required. NPC's healthier cash generation in the period 1981 and thereafter was the result of substantially greater than expected tariff increases and accounts payable, principally to PNOC, that were stretched. In that sense, NPC's healthier levels of cash and equivalents for the later years did not result from improved financial fundamentals. 5.4 Through 1983, operating expenses were higher than appraisal estimates and fuel costs accelerated sharply beginning in 1980 after the se..ond oil price shock. Revenues kept pace with these fuel cost increases because NPC's tariff includes a clause enabling an automatic monthly fuel adjustment. 5.5 NPC had envisioned implementing an extremely ambitious investment program during the 1977-83 period. In fact, that program encountered sub- stantial slippage; and the largest component of that program, the Philippine Nuclear Power Plant (PNPP) encountered major cost overruns. Most of the proj- ects that should have been commissioned by 1983 were completed only by 1985/86; PNPP was considered only about 90-95% complete when it was mothballed in mid-1986. The project implementation delays were exacerbated by chronic counterpart funding problems encountered by NPC throughout the period. The Government had been expected to infuse about P 14.4 billion of fresh equity capital into NPC during 1977-1983; the amount actually infused was slightly more than P 6.1 billion, or about 42% of expected levels. NPC met this short- fall partly by extending its accounts payable. The cost overruns resulted in part from higher than projected levels of international inflation and in other part from the substantial design changes needed for PNPP (the substantial depreciation in the exchange value of the Peso only began in late 1983, the final year of the period under consideration). While the aggregate level of long-term borrowings of P 29.4 billion is only about 15% more than the P 25.8 billion projected for the period, those borrowings only enabled 75% completion of the projects under implementation. 5.6 After 1983, as economic conditions worsened, NPC altered its tariff to include an automatic foreign currency exchange rate adjustment clause; in addition, it was given scope to increase its rates to the maximum levels allowable under its charter. Thereafter, it began realizing rates of return that consistently equalled or exceeded 8% on revalued net fixed assets. Also, as new investments were curtailed and NPC's investment program was redefined to include only completion of projects that were under construction, its self- financing and debt service coverage ratios improved to healthy levels. However, NPC continued to experience liquidity problems; as its consumers were increasingly slow in paying NPC's charges, NPC became increasingly slow in paying its creditors (para. 5.8). 5.7 The project included a covenant requiring NPC to review annually its investment program with the Bank. In the early years, these reviews were useful; however, subsequently they were often fruitless exercises because of the severe design and cost problems with PNPP, which so dominated NPC's investment program. 25 5.8 In the course of the period, NPC became more efficient at collecting its bills; however, these improvements were suddenly nullified in late 1983 when, as a result of the deep recession, most of NPC's creditors encountered cash flow problems and delayed their payments for electricity. Foremost among the defaulting creditors was MERALCO, which accounted for more than 50% of VPC's sales. Because of the importance of electricity supply in the Metro hanila area, KPC had only limited leverage to enforce collections from MERALCO, which itself was encountering severe cash coustraints thet were exa- cerbated by a Government led decision to absorb a number of failing rural electricity cooperatives along the fringes of its franchise area. Under the project, NPC was to have continued trying to meet the three-month accounts receivable targets that had been agreed under previous projects; in fact, progress toward this objective, was both painstakingly achieved and fragile. VI. INSTITUTIONAL PERFORMANCE Organization and Performance 6.1 NPC's latest (1987) organization chart is present in Annex 8. In 1985 NPC consolidated the operations and construction branches of the organi- zation under the three regional vice presidents, each vice president being fully responsible for the operation and construction activities taking place in his jurisdiction. This decentralization move should bring about some improvement in those activities which were previously hampered by the coordi- nation and communication problems resulting from the extensive geographic spread of NPC's system. Undoubtedly the decentralization will also benefit project implementation performance to some extent, particularly if the project construction activities fall within one region. However, overcoming the implementation shortcomings typified by this project will require introduction of project management principles and tools successfully employed in the industrialized countries. 6.2 In 1986 NPC had 10,500 employees compared to 5,800 in 1976 when the project was appraised. This twofold increase in the work force is reasonable when account is taken of the ct that during that period its power generation increased by a factor of six It is interesting to note that a manpower study carried out in 1976 by the College of Public Administration of the University of the Philippines estimated that by 1985 NPC would need more than 10,000 employees of all skills and disciplines. 6.3 NPC must be given credit for the progress it has made in setting up effective employment policies covering all its operations and personnel. These policies are administered by the Human Resource Development Department which started as a training division in 1977 on recommendation by the Bank and now reports directly to the president and chief executive officer of NPC. Up until 1983 NPC like many other organizations in Asia had a problem with losing skilled and experienced staff to better financial prospects in the Middle 1/ A total of 18,757 GWh generated in 1985 compared to 3,140 Gh in 1976. 26 East. Now annual personnel turnover, excluding normal retirement, is less than 0.5%, and there is no difficulty in finding qualified replacements. This situation is probably due to a large extent to NPC's competitive benefit policy. Except for management staff, which are at about a 20% disadvantage compared to their private sector counterpart, NPC salaries and benefits are essentially equal to those in the private sector. 6.4 Although the training center was canceled to make local funds avail- able for more critical project components, there were no adverse affects on NPC's training program. The training provided for in the project, as well as training funded by other lenders, was carried out as planned. NPC has a con- tinuing effective in-house training program covering the needs of all its employees including management staff. A centrally located modern facility would be a desirable addition. Loan Covenants 6.5 By the final loan closing date, NPC had complied with virtually all the conditions of the loan (Annex 10). However, throughout the project there were recurring compliance problems with three loan covenants: (a) agreement on policy change recommendations from the tariff study, (b) achievement of an 8% rate of return on NPC's revalued fixed assets by appropriate price increases and (c) implementation of the training center project component. A tariff study was completed in 1977, but the principle of marginal cost pricing was not agreed to by the Government and NPC until 1987 following another tariff study. However, the tariff question became a moot issue from 1984 on when NPC was able to raise its rates to the extent that it met the 8% rate of return condition. NPC had a problem agreeing on a location for the training center, and later local fund shortages delayed implementation. The center was subsequently canceled altogether. VII. ECONOMIC REEVALUATION 7.1 Since the project was a time slice of NPC's transmission expansior program in Luzon and formed a part of the generation-transmission-distribution chain of power supply, the SAR had computed the internal rate of return on a long-range program basis, rather than on a project basis. The same approach was adopted for reevaluation of the internal rate of return, a major point of difference being that reevaluation was made for the period 1980 to 1986 (as data prior to 1979 was not available) whereas the SAR had considered the period 1977 to 1982. 7.2 The streams of (a) capital investments in generation (excluding the nuclear power plant) and transmission; (b) operation and maintenance costs; (c) fuel costs and (d) energy sold and revenues realized; for the Luzon grid alone are tabulated in Annex 11. The capital investments were deflated to constant 1979 pesos using the fixed capital formation deflation factors whereas all other costs and benefits were deflated to 1979 pesos using the GDP deflation factors. The SAR had shadow priced foreign exchange at 10% above official rate; however as NPC has not been able to provide a breakdown of foreign and local costs, the peso values of all costs were multiplied by 1.06 27 to arrive at economic costs. The internal rare of return was calculated by discounting the streams of incremental costs and incremental benefits from 1980 to 1986, with the net benefit (Revenue - O&M cost - Fuel cost) remaining constant from 1987 to 2011. 7.3 The internal rate of return (IRR) worked out to 12.1%. It was observed that there was a large drop in fuel price after 1985, due to reduc- tion in the price of oil. The IRR dropped to 10.3% when the constant net benefit from 1986 to 2010 took into account the much higher 1985 fuel cost. 7.4 The average annual capital investment, fuel and O&M costs and average tariff in constant 1976 pesos are presented in Table 7.1 for compari- son. Table 7.1: COMPARISON OF SAR AND REEVALUATED FIGURES (million pesos) Average Average Average annual annual annual Average capital fuel O&M tariff IRR investment cost cost (P/kWh) (%) SAR (1977-82) 700 1,515 100 0.207 10.0 Reevaluation (1980-86) 1,757 2,484 183 0.289 12.1 7.5 Thus although the average capital, fuel and O&M costs were much higher than projected at SAR, these were more than compensated for by a 40% higher than projected average tariff and a reduction in fuel cost from 1986 onwards. VIII. PERFORMANCE AND ROLE OF THE BANK 8.1 A cooperative working relationship was maintained by Bank staff with NPC and Government officials. NPC confirmed that complying with Bank proce- dures and requirements created no problems of any consequence in carrying out the project. Bank staff undertook 13 supervision missions between October 1977 and March 1987. These missions along with the quarterly progress reports submitted by NPC were adequate for effective supervision of the project. 8.2 The project comprised some 50 small subprojects for expanding NPC's power distribution system in Luzon, which provided little opportunity for the Bank to play a meaningful role in the technical aspects of the project. How- ever, the Bank was able to make two positive contributions. For one, the Bank cooperated closely with the Government and NPC to ensure that sufficient local 28 funding was made available to implement the critical power distribution compo- nents of the project. In this regard, the Bank's Special Assistance Program was used to good purpose in providing proceeds of the Bank loan for the pay- ment of local expenditures. Secondly, the Bank made an important contribution to NPC's future financial health through its requirement that NPC obtain at least an 82 rate of return on its annually revalued fixed assets. NPC has been able to realize this rate of return, or better, from 1984 on and should in time be able to finance the local expenditures on its future power projects. IX. CONCLUSIONS 9.1 The project's objectives were all largely accomplished (Preface para. ii). The works identified for inclusion 4n the project were virtually all built, with the result that the electric transmission system in Luzon acquired the capability to accommodate the expected growth. NPC's management is functioning more effectively and its manpower development program is vastly improved. Although NPC suffered liquidity and counterpart funding constraints, it has increased its tariff regularly and met its financial performance targets, particularly after 1984. In 1986, the Government finally decided that NPC and the other utilities should reform their tariffs based on LRMC pricing. 9.2 Except for some minor ongoing work, the project was completed within the budget, and its power distribution components are operating satisfacto- rily. Like its predecessor projects, implementation ran into lengthy delays; however, in this case, the implementation problems were further exacerbated by a critical shortage of local funds. 9.3 The shortage of local funds made it necessary to cancel the trainin6 center component of the project. This move produced no adverse effects on NPC's training program, which continued to be carried out effectively. 9.4 The Bank's Special Assistance Program played an important role by making proceeds of the Bank loan available to fund a greater proportion of local expenditures than previously eligible. This measure made it possible to complete vital power transmission facilities, which otherwise could not have been completed. 9.5 Until the shortage of local funds began to affect project imple- mentation, NPC was making reasonable progress considerinq that this was a relatively complex project which comprised about 50 widely scattered subprojects each having its own individual implementation problems. Nevertheless, there is room for NPC to improve its project implementation performance, and some of the steps it should take in that direction are: 29 (a) As a top priority and first step, prepare and maintain a comprehen- sive implementation plan by the critical path method, incorporating all project activities as well as all interfacing activities with other projects and operations. (b) Start procurement activities as early as project design permits and set up a responsive procuremert processing system which should include the ccoperation of involved governmental review bodies. (c) Start right-of-way negotiations as early as possible and resort to legal measures promptly if there is no progress. (d) Set up strict procurement qualification criteria which will make it possible to reject unqualified bidders and bidders who have per- formed unsatisfactorily on previous contracts awarded to them. PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Transmission Subprojects - Appraisal Estimates vs Actual (as of February 1987) As appraised As built Voltage Length Capacity Voltage Length Capacity Regions (kV) (ka) (MVA) (kV) (km) (MVA) Remarks Cagayan Valley Transmision Lines Lal-lo-Gonzaga 69 40 - - - - Revised/rerouted to Comolanlugon-Gonzaga Tuguegarao-Solana 69 10 - - - - Revised/rerouted to Tuguegarao- Solana-Piat Santiago-Jones 69 28 - - - - Rerouted to Santiago- Cabarruguis Jones-Saguday 69 17 - - - - Rerouted to Santiago- Cabarruguis Cauayan-Roxas 69 29 - - - - Rerouted to Tap (Gammu) Junction-Roxas Solana-Tap Casinsingan 69 13 - - - - Revised/reroutcd to Tuguegarao- Solana-Piat Tap-Baggao 69 8 - - - - Cancelled/aborted Toguegarao-Cansan 69 27 - - - - Revised to Solana-Tabuk Comolanlugan-Garzaga - - - 69 33.04 - Completed as of Oct 24, 1983 Tuguegarao-Solana-Piat - - - 69 36.08 - Completed as of Jun 15, 1983 Santiago-Cabarruguis - - - 69 30.83 - Completed as of Feb 27, 1983 Tap (Gammu) Junction-Roxas - - - 69 33.04 - Completed as of Feb 27, 1983 Solana-Tabuk - - - 69 47.30 - Completed as of Jun 15, 1983 Gonzaga-Casambalangan - - - 69 27.75 - Extension of Comolanlugan- Gonzaga Lins; completed as of Feb 29, 1984 Solano-Lagawe - - - 69 47.00 - Completed as of Dec 5, 1985; (additional project) o M 0 As appraised As built Voltage Length Capacity Voltage Length Capacity Re.,tons (kV) (km) (MVA) (kV) (km) (MVA) Remarks Ilocos Region Transmis-ion Liaes Lubuagan-Narvacan, 1/2 LC 230 90 - - - - Rerouted/revised to Narvacan- Batong-Buhay Ambuklao-Binga, SC 230 12 - 230 9.5 - Completed as of Jan 14, 1982 Guiroang-Junction, SC 69 30 - - - - Revised/Rerouted to Guinoang- Bontoc Bontoc-Junction-Banave, SC 69 40 - - - - Bangued-Licuan, SC 69 43 - - - - Cancelled/aborted Tap-Manabo, SC 69 23 - - - - Baueng-San Fernando, record 69 5 - - - - Temporarily deferred upon com- pletion of San Esteban S/S w BCI-San Fernando, record 69 21 - - - - Temporarily deferred upon com- plition of San Esteban S/S Narvacan-Batong Buhay - - - 230 82.89 - Completed as of Sep 8, 1984 Guinoeng-Bontoc - - - - - - Revised/rerouted to Guincang- Sagada Guinoang-Sagada - - - 69 46.97 - Completed as Feb 28, 1983 Substation Narvacan 230/115 - 50 - - - Change to San Esteban Ambuklao, IF 230 - - 230 - - Installed/completed by CVEP Binga, 2F 230 - - 230 - - Completed as of Mar 31, 1983 Beckel, IF 69 - - 69 - - Installed by 6th Power Project San Esteban 230 - 50 230 - 50 Ongoing with 64% completion 0 As appraised As built Voltage Length Capacity Voltage Length Capacity Regions (kV) (km) (MVA) (kV) (km) (MVA) Remarks Central Luzon Region Transmission Line Pantabangan-Baler, SC 69 76 - - - - Revised/rerouted to Bongabon- Baler Cabanatuan-Cruz na Daan, 69 42 - - - - Revised/rerouted to Cabanatuan- reconductering Balualto-Cruz na Daan Bongabon-Baler - - - - - - Revised/rerouted to Bongabon- San Luis Bongabon-Ma Aurora - - - 69 - - Revised/rerouted to Bongabon- San Luis Bongabon-San Luis - - - 69 47.08 - Completed Aug 15, 1982 Cabanatnan-Balualto - - - 69 21.00 - Completed Dec 18, 1982 Balualto-Crus na Daan - - - 69 21.00 - Cancelled - completed by Spe- cial Project Substation Prado, 7F 230 - - 230 - - Cancelled - completed by Spe- cial Project Zambales Region Transmission Lines Olongapo-Sta. Cruz, SC, St 230 123 - 230 112.96 - Completed as of Feb 11, 1983 Substation Sta. Cruz 230/69 - 50 - - - Change to Botolan Olongapo, IF 230 - - 230 - - Completed Mar 18, 1982 Ectolan - - - 230 - 50 Completed May 15, 1983 O 0 As appraised As built Voltage Length Capacity Voltage Length Capacity Regions (kV) (km) (MVA) (kV) (km) (MVA) Remarks Laguna-Batangas Region Transmission Lines Malaya-Kalayaan Tap, add 230 17 - 230 - - Completed Jan 27, 1980 1/2 DC Tap-Kalayaan 230 1.5 - - - - Included in Makban Geothermal Project Binan-Trece Martinez, DC 115 22 - - - - Revised to Binan-Dasmarinas Trece-Martinez-Ternate, SC 115 15 - - - - Revised to Dasmarinas-Ternate Trece Martinez-Rosario, SC 115 16 - - - - Revised to Dasmarinas-Gen. Trias Trece Martinez-Mendez, SC 115 15.5 - - - - Revised to Dasmarinas-Tagaytay Siniloan-Baras 69 28 - - - - Cancelled/Aborted Binan-Dasmarinas - - - 230 13.92 - Completed May 30, 1982 Dasmarinas-Ternate - - - - - - Funded by Virata Loan Dasmarinas-Gen. Trias - - - - - - 72.81% completed Dasmaranas-Tagaytay - - - - - - Not yet implemented Substation Ternate 115/13.8 - 50 115/13.8 - 50 Completed Nov 28, 1983 Rosario 115/34.5 - 50 - - - Award pending Trece Martinzez, 5F 115 - - - - - Change to Dasmarinas Mendez 115/13.8 - 25 - - - Change to Tagaytay Dasmarinas, 2F - - - 230 - - Completed Nov 18, 1983 Tagaytay 115/13.8 - 50 - - - Award pending Binen - - - - - - Completed Dec 30, 1984 o1 0 As appraised As built Voltage Length Capacity Voltage Length Capacit* Regions (kV) (ka) (MVA) (kV) (ka) (MVA) Remarks Southern Luzon Region Transmission Kalayaard-Tap Gumaca, add 230 116 - 230 - - Completed Apr 14, 1980 1/2 DC Gumaca-Labo, add 1/2 DC 230 86 - 230 - - Completed Aug 23, 1980 Labo-Naga, add 1/2 DC 230 97 - 230 - - Completed Aug 23, 1980 Naga-Legaspi, add 1/2 DC 230 81 - 230 281.24 - Completed Aug 23, 1980 San Jose-Caramoan, SC 69 43 - 69 44.81 - Cancelled/Aborted Pitogo-Nulanay, SC 69 50 - 69 54.84 - Completed Aug 21, 1979 Siniloan-Infanta, SC 69 46 - 69 50.13 - Completed Dec 31, 1982 Tap (Sorsogon)-Gubat, SC 69 19 - 69 7.75 - Completed Oct 30, 1981 Trp (Naga)-Tinambac, SC 69 27 - 69 33.19 - Completed Oct 30, 1981 Substation Gumaca 2F 230 - - 230 - - Completed Oct 30, 1981 Labo 2F 230 - - 230 - - Completed Apr 30, 1980 Naga 2F 230 - - - - - Completed Sep 6, 1980 Legaspi 2F 230 - - - - - Change to Daraga Daraga 2F - - - 230 - - Completed Sep 6, 1980 o REPUBLIC OF THE PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460 - PH) OVERALL PROJECT IMPLEMENTATION PROJECT COMPONENT % 1977 1978 1979 1980 1981 1982 1983 1984 198S 1986 ACC1 23 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1. SOUTHERN 100 ..... A SECOND CIRCUITMALAYA-LEGASPILINE 1 '00 a) Design Procurement & Delivery --0 b) Construction 90 B. GUMACA LABO.NAGA.LEGASPI & EPZA S/S / d) Design. Procurement & Delivery b) Construction 80 2. OTHER-230 KV SYSTEM A VARIOUS 230 KV T/L a) Design Procurement & Delivery 70 b) Construction B VARIOUS 230/115 KV S/3 a) Design Procurement & Delivery 60 b) Construction 3. 69 KV SYSTEM A 69 KV T/L (EAcept Cagayon Valley) 50 a) Design Procurement & Delivery b) Construction tCo 40*- - - - * * * -* - - * * B CAGAYAN VALLEY 69 KV T/L a) Design Procurement & Delivery b) Construction 30 -- 4. COMMUNICATION & CONTROL CENTER a) Design Procurement & Delivery b) Construction ilncluding Installation) 20 5. TRAINING A OVERSEAS TRAINING B TRAINING CENTER 10 6. ADVISORY SERVICES A MANAGEMENT ADVISORY TEAM B TARIFF STUDY 0 Scheduled Actual - - - (OGI= On Going EKkW41224C 36 ANNEX 3 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Uncompleted Subprojects (as of End-February 1987) Subproject Status Uncompleted Transmission Line Subprojects Bauang-San Fernando Reconductoring As to the last report, the work was temporart- ly deferred due to request of BC1, LUECO and BCI-San Fernando Reconductoring DDMSU who cannot afford to incur long periods of interruptions since there are no alternative lines to serve them. Dasmarinas-Rosario (General Trias) The subproject is now 78.86% completed. The work t15 kV 3-phase wood pole has been suspended since May 14, 1986 due to an unresolved right-of-way problem and rerouting a portion of the line (DR21-26). Expropriation of lands is now being negotiated to those landowners who do not want to give way to the contractor. Uncompleted Substation Subprojects San Estehan Substation, 50 MVA To date, the subproject is now 70.14% completed. The 50 MVA transformer was energized December 8, 1985. Uncompleted/remaining works to be done are concreting of the retaining wall and roadway and other minor civil and architectural works, which is all equivalent to 30%. Rosario, 115 kV, 50 MVA In the absence of a contract, the contractor has started the work at his own risk. The contract is at the COA's office for review and approval. Tagaytay, 15 kV, 50 MVA As previously reported, the subproject was bid December 9, 1982 and was awarded to ABESCO Con- struction. However, it was not immediately implemented due to lack of funds. This year (CY87), the National Power Board has decided to rebid the contract since ABESCO Construction was found incapable of doing the works based on their other projects, which up to now still remain uncompleted. Aoorted Subprojects Tap-Baggao Sometime in February 1981, the National Electri- fication Administration (NEA) requested/recommen- Banaue-Lagawe ded some rerouting, deletion and/or addition to be undertaken on our various 69 kV transmission Bangued-Licuan-Manabo line subprojects under the Seventh Power Project. A joint effort (NPC and NEA) was conducted to Lagonoy-Caramoan determine the actual route and termination points of these lines to effect the most advantageous EPZA (Substation) project implementation schedule. Siniloan-Baras This line was aborted following the decision of the management not to implement the line in view of the prime reason that Rizal Electric Coopera- tive (RIZELCO) at Baras, Rizal, is no longer interested to obtain power from the said line since RIZELCO will be turned over to the Manila Electric Company (MECO). 37 ANNEX 4 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Comparison of Project Costs (US$ million) Appraisal estimate /a Actual expenditure /b Local Foreign Total Local Foreign Total Transmission Lines and Substations Ilocos Region 4.35 8.06 12.41 5.36 10.18 15.54 Central Luzon Region 1.07 3.08 4.15 0.35 2.08 2.43 Zambales Region 1.97 3.78 5.75 2.69 8.04 10.73 Laguna-Batangas 3.37 4.43 7.80 2.85 6.27 9.12 Southern Luzon 2.07 8.11 10.18 1.76 7.59 9.35 Cagayan Valley 1.19 1.69 2.88 1.66 2.37 4.03 Engineering and administration 2.20 - 2.20 3.31 - 3.31 Subtotal 16.22 29.15 45.37 17.98 36.53 54.51 Communication and control 3.59 8.77 12.36 2.82 19.57 22.39 Training and advisory services 2.45 3.54 5.99 1.02 1.90 2.92 Total Base Cost 22.26 41.46 63.72 21.82 58.00 79.82 Physical contingency 3.51 3.96 7.47 - - - Price contingency 8.57 12.58 21.15 - -- Uncompleted portion (estimated) - - - 4.0 - 4.0 Total Project Cost 34.34 58.00 92.34 25.82 58.00 83.82 /a Exchange rate: US$1.00 = P 7.50. /b Exchange rate (weightpd average): US$1.00 P 17.46. 38 ANNEX 5 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Accumulated Disbursements (US$ million) IBRD fiscal year Actual Appraisal Actual as % and semester disbursements estimate of appraisal 1978 December 31, 1977 0.4 June 30, 1978 - 0.9 - 1979 December 31, 1978 0.4 4.0 8 June 30, 1979 0.5 12.3 4 1980 December 31, 1979 1.3 28.8 5 June 30, 1980 5.5 38.7 14 1981 December 31, 1980 9.9 48.1 21 June 30, 1981 20.6 54.8 36 1982 December 31, 1981 23.7 58.0 49 June 30, 1982 29.1 - 50 1983 December 31, 1982 32.1 - 55 June 30, 1983 35.4 - 61 1984 December 31, 1983 42.5 - 73 June 30, 1984 51.1 - 88 1985 December 31, 1984 52.2 - 90 June 30, 1985 53.6 - 92 1986 December 31, 1985 57.8 - 99 January 6, 1986 58.0 - 100 Loan closing date January 6, 1986 June 30, 1982 39 ANNEX 6 Page3 of 2 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) rROJECT COMPLETION REPORT Disbursements from the Loan Committed contract value Disbursement Particulars Beneficiary L/C no. -- (US$ equivalent) -- Contract No. Sp77 D1m-348 Suspension insulators Sumitomo 10772559 311,431.62 311,431.62 Hardwares and accesnories Allis Electric 10772521 144,316.40 144,316.40 Subtotal 455,748.02 455,748.02 Contract No. Sp78 Dle-380 Erection and superintendence Ranemateu -19/79 7,559.70 7,559.70 Circuit breakers Kanemastsu i. 18/79 755,724.49 755,724.49 Lightning arresters Bowthorope 10772571 90,912.91 90,912.91 Transformer Mitsui 10772573 58,538.92 58,538.92 Insulated power and control cables Kavatetsu Bussaa 10772564 53,751.94 53,751.94 Steel towers/structures, etc. Sumitomo 10772572 192,840.53 192,840.53 Control switchboard Connel Bros. 10772563 63,677.00 63,677.00 Station batteries, etc. Allied Reimb. 13,744.26 13,744.26 Subtotal 1,236,749.75 1,236.749.75 Contract No. p78 Dlm-418 0H95 dUy wire Walsin Lihwa 10772739 682,873.96 682,873.96 Suspension insulators Sumitomo (HOK) 10772657 672,584.22 672,584.22 Conductors and OHGW clamps ENC 10772669 935,547.19 935,547.19 Subtotal 2.291,005.37 2,291,005.37 Contract No. Sp78 Dle-392 Substation equipment Kanematau 01/4075/80 4,667,155.92 4,667,155.92 Lightning arresters ASEA 10772725 114,582.00 114,582.00 Potential transformers Connel Bros 10772723 58,936.41 58,936.41 Station service Hyundai 10772724 15,924.00 15,924.00 Insulated cables control Toyo 10772730 269,094.09 269,094.09 Switchboard Sumitomo 10772726 673,566.30 673,566.30 Subtotal 5,799.258.72 5.799,258.72 Contract No. Sp78 DLm-424 Double-circuit towers Hyundai 01/5833/81 559,638.98 559,638.98 Double-circuit towers Hyundai 10772727 1,763,295.60 1,763,295.60 Siagle-cIrcuit steel tower Societs Anonizs 10772738 1,440,068.98 1,440,068.98 Power conductors Chinawire 10772728 1,924,315.57 1,924,315.57 Suspension insulators Sumitomo 10772739 275,192.82 275,192.82 Suspension insulators Sumitomo 10773031 135,109.59 135,109.59 Condactors and OHGW clamps PMC 10772756 146,248.95 146,248.95 Subtotal 6t243,870.49 6,243,870.49 Contract No. Sp82 Clc-558 Power circuit breakers Sumitomo 82175-F 2,863,875,00 2,863,875.00 Power circuit breakers Sumitomo 82211-F 33,718.00 33,718.00 Disconnect switches, transformers Kanemetsu-C 09/7072 1,258,658.00 1,258,658.00 Power control cables, AVESCO . Lihva 09/6716 157,100.05 157,100.05 Potential transformers and accessories ASEA AB 09/7019 153,330.16 153,330.16 Potential transformers and accessories ASEA AB 09/7005 14,324.81 14,324.81 Power transformer station service Hyosung 09/7010 50,542.13 50,542.13 Control switchboard, etc. Connel Bros. 83313-F 472,279.75 472,279.75 Various current transformers ASEA AB 83089-F 273,165.44 273,165.44 Various current transformers ASEA AB 83088-F 24,285.41 24,285.41 Steel structures, grounding materials UA Withya 83173-F 328,030.44 328,030.44 Steel structures, grounding materials Merchantech 83172-F 479,910.88 479,910.88 Outdoor metering panel ASEA 09/7694 185,776.89 185,776.89 Subtotal 6,294,996.96 6,294,996.96 Contract Ho. Sp78 D1a-430 Power conductors Kanemateu 01/4076/80 649,277.85 649,277.85 0HGW structures Sumitomo 10772734 706,156.56 706,156.56 Conductors and OHGW clamps Allias Electric 10772735 382,418.97 382,418.97 Subtotal 1,737.853.38 1,737,853.38 ANNEX 6 40 Page 2 of 2 Committed contract value Disbursement Particulars Beneficiary L/C no. --- (US$ equivalent) Contract No. Sp78 Dle-402 PLC, line relays and communications BBC 10772737 2,045,467.66 2,045,467.66 Additional PLC equipment for LEP BBC 01/5782/81 700,857.06 700,857.06 PLC equipment for the Luzon grid dispatch system BBC 01/3786/81 291,936.98 291,936.98 Subtotal 3,038,261.70 3,038,261.70 Additional Orders Tower type DT Hyundai 10043744 52,177.95 52,117.95 Steel towers Societa Anonima 10043744 70,491.00 70,491.00 Steel towers Societa Anonima 10043751 49,948.20 49,948.20 Subtotal 172,557.15 172,557.15 Furnishing/Installing of Control Center Equipment Phase A and B Harris 10772868 16,659,795.65 16,659,795 65 PLC equipment BBC 327,697.00 327,697.00 SP81 3le-559 Generator set and accessories G.A. Machineries, Inc. 99,493.00 99,493.00 Transformer, switchgear, oil and accessories Siemmens & Co. 01/6157/82 323,528.92 323,528.92 Subtotal 17,410,514.57 17,410,514.57 Electrowatt 1,370,402.24 1,370,402.24 Subtotal 1,370,402.24 1,370,402.24 Consulting Services ESB consulting services 364,222.29 364,222.29 NEWJEC 01/3724/84 85,900.00 85,900.00 Geothermex, Inc. 09/8356 110,140.00 110,140.00 Subtotal 560,262.29 560,262.29 Civil Works (15%) Pitogo-Mulanay 69 kV transmission line Reimb. 43,295.95 43,295.96 Second stringing of Malaya-Legaspi 230 kV transmission line Reimb. 126,733.92 126,733.92 Expansion of Gumaca, Labo, Naga and Daraga 230 kV S/S Reimb. 16,547.86 16,547.86 Various contractors Reimb. 7,711,922.89 7,711,922.89 Subtotal 7,898,500.63 7,898,500.63 Price Adjustment Direct payment /a Mitsubishi 995,924.58 995,924.58 Bank charges D.P. Citibank 1,026.77 1,026.77 Bank charges D.P. Citibank N.A. 11,743.56 11,743.56 Bank charges D.P. Citibank N.A. 8,155.89 8,155.89 Bank charges D.P. Citibank N.A. 5,286.65 5,286.65 Bank charges D.P. Citibank N.A. 836.24 836.24 Bank charges D.P. Citibank N.A. 7,959.26 7,959.26 Bank charges D.P. C4ibank N.A. 150.14 150.14 Bank charges D.P. Citibank N.A. 391.55 391.55 Bank charges D.P. Citibank N.A. 880.98 880.98 Bank charges D.P. Citibank N.A. 1,228.97 1,228.97 Subtotal 1,033t584.59 1,033,584.59 Additional 75 MVA power transformer Sumitomo 10783127 463,781.70 463,781.70 Additional switchboard for San Esteban, etc. Sumitomo 10046515 80,647.24 80,647.24 100 and 300 MVA power transformer Kanematsu 81135/F 1,912,005.20 1,912,005.20 Subtotal 2,456,434.14 2,456,434.14 Total 58.000.000.00 58,000,000.00 /s Price adjustment of the Sixth Power Project contract with Mitsubishi charged to the Seventh Power Loan (IBRD) 1460-PH. 41 ANNEX 7 Page 1 of 2 REPUBLIC OF THE PHILIPPINES SEVENTH POWER PROJECT PROJECT COMPLETION REPORT Status of Operations of Transmission Lines and Substations Date of Name of Projects Completion Status 1.0 69 KV Transmission Lines 1.1 Cagayan Valley 1.1.1 Camalaniugan-Conzaga 10-24-83 Operational 1.1.2 Gonzaga-Casambalangan 02-28-84 Operational 1.1.3 Tuguegarao-Solana-Oiat 06-15-83 Operational 1.1.4 Santiago-Cabarruguis 02-27-83 Operational 1.1.5 Tap (Gamu) Junction-Roxas 02-27-83 Operational 1.1.6 Solana-Tabuk 06-15-82 Operational 1.2 Ilocos Region 1.2.1 Guinaoang-Sagada 02-28-83 Operational 1.2.2 Solano-Lagawe 11-24-85 Operation was suspsended due to the shutdown of 5 MVA Lagawe S/S 1.2.3 Bauang-San Fernando (Reconductoring) 1.2.4 BCI-San Fernando (Reconductoring) 1.3 Central Luzon 1.3.1 Bongabon-Baler 08-15-82 Operational 1.3.2 Cabanatuan-Balualto 12-18-83 Operational 1.3.3 Balualto-Cruz na Daan 12-18-83 Operational 1.4 Southern Tagalog 1.4.1 Pitogo-Mulanay 12-13-82 Operational 1.4.2 Siniloan-Infanta 10-30-81 Operational 1.5 Bicol Region 1.5.1 Tap (Sorsogon)-Gubat 10-30-81 Operational 1.5.2 Tap (Naga)-Tinambac 10-30-81 Operational 2.0 115 KV Transmission Lines 2.1 Southern Tagalog 2.1.1 Dasmarinas-Gen Trias Not yet completed due to ROW expropriation 42 ANNEX 7 Page 2 of 2 3.0 230 KV Transmission Lines 3.1 U1ocus Region 3.1.1 Narvacan-Batong Buhay 09-08-84 Operational 3.1.2 Ambuklao-Binga 01-14-82 Operational 3.2 Central Luzon 3.2.1 Olongapo-Sta. Cruz 02-11-83 Olongapo-Botolan line is in operation Botolan-Sta. Cruz is in operation at 69 KV line 3.3 Southern Tagalog 3.3.1 Binan-Dasmarinas 05-30-82 Operational 4.0 Substations 4.1 Ilocus Region 4.1.1 San Esteban Not yet completed 4.1.2 Binga 03-31-83 Operational 4.2 Zambales Region 4.2.1 Botolan 05-15-83 Operational 4.2.2 Olongapo 03-18-82 Operational 4.3 Southern Tagalog 4.3.1 Binan 12-12-84 Operational 4.3.2 Dasmarinas 11-18-83 Operational 4.3.3 Ternate 11-26-83 Operational 4.3.4 Tagaytay Not yet bidded Contract not yet approved 4.3.5 Rosario Construction on- going 4.3.6 Gumaca 04-30-80 Operational 4.3.7 Labo 09-06-80 Operational 4.3.8 Naga 09-06-80 Operational 4.3.9 Daraga Operational 5.0 Second Stringing (230 KV T/L) 5.1 Southern Tagalo/Bicol Region 5.1.1 Kalayaan-Cumaca 04-14-80 Operational 5.1.2 Gumaca-Labo 08-23-80 Operational 5.1.3 Labo-Naga 08-23-80 Operational 5.1.4 Naga-Legaspi 08-23-80 Operational PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460 - PH) NATIONAL POWER CORPORATION ORGANIZATION CHART NATIONAL POWER BOARD PRESIDENT AND CHIEF EXECUTIVE OFFICER OVP OVP OVP OVPD OVPD CORPORATE GEN.COUNSEL FINANCE HUMAN ADMNTRATION SERVICES & CORP.SEC F 1ESOURCES A OSVP OSVP OPERATIONS ENGINEERING & NUCLEAR OVP OVP OVP PHILIPPINE OPERATIONS OPERATIONS ENGINEERING NUCLEAR E (LUZON) I(VIS/MIN) (MAIN) POWER PLANT II I I OVP OVPI OVP NORTHERN LUZON SYSTEM VISAYAS REGIONAL CENTER OPERATIONS REGIONAL CENTER OVP OVP METRO MANILA MINDANAO 1 REGIONAL CENTER REGIONAL CENTER OVP SOUTHERN LUZON REGIONAL CENTER EK\W41224A x lcD PHILIPPINES SEVENTH POWER PROJECT NATIONAL POWER CORPORATION Comparative Income Statements (Pesos million) Financial Year Ended Dec. 31 1977 1978 1979 1980 1981 1982 1983 Proj. Act. Proj. Act. Proj. Act. Proj. Act. Proj. Act. Proj. Act. Proj. Act. Sales increase (%M 28.7 -3.1 207.8 51.0 17.1 149.1 11.1 8.4 10.9 7.4 14.3 5.4 11.8 7.3 Energy sales (SMh) 4374 3360 13467 5075 15774 12640 17522 13697 19441 14716 22229 15505 24849 16630 Average price per kWh 14.97 13.30 21.97 15.66 25.24 22.12 29.07 34.23 31.97 41.66 34.72 42.99 35.54 57.90 Energy revenue 655 447 2958 795 3969 2796 4844 4688 5885 6131 7317 6665 8346 9629 Other revenue 0 18 0 18 0 40 0 220 0 204 0 175 0 220 TOTAL REVENUES 655 465 2958 813 3969 2B36 4844 4900 5885 6335 7317 6840 8346 9849 Operating expenses Fuel 292 171 2145 337 2637 2018 3020 3398 3576 4504 4349 4968 4734 6682 Operations 73 96 151 103 248 224 320 2B6 377 345 512 428 610 542 Depreciation 134 79 257 113 425 219 571 386 718 546 928 663 1138 919 TOTAL EXPENSES 499 346 2553 553 3310 2461 3911 4070 4671 5395 5799 6059 6482 8143 Operating income 156 119 405 260 659 375 933 8 1214 940 1528 781 1864 1706 Net income before interest 156 119 405 260 659 375 933 838 1214 940 1528 781 1864 1706 Interest charged to operations 70 16 107 71 172 221 275 437 345 507 536 619 601 1087 NET INCONE 86 103 298 189 487 154 658 401 869 433 992 162 1263 619 Rate base 2944 2590 5062 4072 8234 6085 11659 9120 15176 11813 19099 13565 23296 18175 Rate of return 'I) 5.3 3.9 8.0 5.9 8.0 5.5 8.0 6.8 8.0 6.2 8.0 4.5 8.0 8.2 Operating Rati, () 76.2 77.4 86.3 69.6 83.4 88.0 80.7 86.8 79.4 88.0 79.1 90.9 77.7 84.6 Z i Revenue/Avera4e gross plant ) 16.6 12.7 46.7 15.3 39.9 36.6 34.6 42.6 32.1 41.5 31.". 36.9 28.9 40.3 M tM - - - - - - - - - - - - - - - - - - - - 0 PHILIPPINES SEVENTH POWER PROJECT NATIONAL POWER CORPORATION Comparative Balance Sheets lPesos Hillion) Financial Year Ended Dec. 31 1977 197B 1979 1980 1981 1982 198 Proj. Act. Proj. Act. Proj. Act. Proj. Act. Proj. Act. Proj. Act. Proj. Act. ASSETS Fixed Assets Plant in service 4790 4023 7871 6345 12020 8923 15992 13106 20716 16424 25994 19700 31856 28106 (less) Depreciation 1097 995 1442 1186 1982 1424 2712 2081 5647 3691 4866 5025 6393 6876 Operating plant 3693 3028 6429 5159 10038 7500 13280 11026 17069 12733 21128 14675 25463 21230 Work in progress 3773 4670 6542 7305 8702 11141 11250 12035 15901 17123 19447 22326 22828 35265 Investments 40 2628 40 2724 40 2451 40 1163 40 1451 40 1052 40 757 Current Assets Cash 59 694 206 750 266 952 206 944 275 910 271 2327 307 1849 Inventories 228 330 375 301 566 628 745 1097 961 1055 1204 1238 1471 2035 Receivables 440 234 BOB 555 1052 1185 1149 1442 1360 1880 1477 1471 1662 3277 Current drawdowns of credits 94 340 499 921 298 47 9 4 ----------------- ------------------------------------------------------------------------------------------------------------------ 'otal 727 1352 1389 1946 1884 3264 2100 4405 2596 4142 2952 5061 3440 7169 Other Assets 161 188 161 182 161 353 161 424 161 603 161 1126 161 6829 TOTAL ASSETS 8394 11866 14561 17316 20825 24709 26831 29053 35767 36052 43728 44263 51932 71250 EQUITY & LIABILITIES Equity Paid-in capital 2629 2511 56B7 3696 8281 5052 9791 7412 11931 8761 13981 11359 16351 13544 Retained Earnings 348 598 646 926 1133 1033 1791 1296 2660 1930 3652 2156 4915 2916 Revaluation reserve 1271 1311 1567 1592 2081 2383 2864 2669 3946 3787 5312 4161 7002 6468 Total Equity 4248 4420 7900 6314 11495 8467 14466 11377 18537 14477 22945 17676 28268 22928 Long-term debt 3640 6574 5800 8994 8404 12457 11357 13607 15962 15108 19502 19797 22370 36716 Current :iabilities Payables 297 194 652 1022 717 1622 799 2079 1059 3606 1072 3861 1085 7400 0 Other 38 299 38 630 38 723 36 830 38 1130 38 1741 38 3157 ------------------- ------ ------ ------- ------ ------- ------ ------- ------ ------- ----- ------- ------------------- Total 335 493 690 1651 755 2345 837 2917 1097 4736 1110 5602 1123 10557 Other liabilites 171 379 171 357 171 1439 171 1151 171 1730 171 1188 171 14 TOTAL EDUITY & LIABILITIES 8394 11866 14561 17316 20825 24709 26831 29053 35767 36052 43728 44263 51932 71250 PHILIPPINES SEVENTH POWER PROJECT NATIONAL POWER CORPORATION Comparative Cash Flow Statements (Pesos Iillion) Financial Year Ended Dec. 31 1977 1978 1979 1980 1981 1982 1983 Proj. Act. Proj. Act. Proj. Act. Proj. Act. Proj. Act. Proj. Act. Proj. Act. Internal Sources of funds operating income 156 119 405 260 659 375 933 93B 1214 940 1528 781 1864 1706 Dereciation 134 79 257 113 425 219 571 386 718 546 928 663 1138 919 Total internal funds 290 191 662 373 1084 594 1504 1224 1932 1486 2456 1444 3002 2625 Operating requirements Incr./Ocr. in working capital 49 -752 160 -393 370 526 194 577 167 -2048 347 -1343 439 -2389 lncr.IDtr. in other assets 780 66 -65 279 240 865 -700 Interest chrgd. to operations 70 16 107 71 172 221 275 437 345 507 536 619 601 1087 Debt repayments 68 44 231 759 322 1307 1017 521 1189 555 1325 1161 1144 601 Total operational Reqs. 187 BB 499 503 864 1989 1486 1913 1701 -746 2208 1302 2184 -1402 Int. funds Available for invs. 103 110 164 -131 220 -1395 18 -589 231 231 248 142 918 4027 Capital investments 0% Construction 3224 2102 5466 3567 5680 4839 5559 4669 8096 6161 7169 7114 7163 7919 Purchase of assets 1100 911 Total capital investment 3224 2102 5466 4667 5690 5750 5559 4669 8096 6161 7168 7114 7163 7919 Balance to be financed 3121 1992 5302 4797 5460 7145 5541 5257 7865 3929 6920 6971 6345 3892 Financed by . Borrowings 1920 1825 2391 4125 2926 6531 3971 3789 5794 2810 4866 7031 4011 3274 Equity 1150 509 3058 729 2594 815 1510 1461 2140 1085 2050 1357 2370 140 Total capital sources 3070 2334 5449 4954 5520 7346 5481 5250 7934 3995 6916 9386 6391 3414 Cash increaseldecrease -51 341 147 56 60 202 -60 -9 69 -34 -4 1416 36 -479 Cash at beginning of year 110 352 59 694 206 750 266 952 206 944 275 910 271 2327 Cash at year end 59 694 206 750 266 952 206 944 275 910 271 2327 307 1949 Debt Service Coverage 1.75 2.82 1.49 0.84 1.45 0.09 1.01 0.39 1.15 3.10 1.13 1.08 1.47 3.39 Contribution to Investment 3.2 5.2 3.0 -2.8 3.9 -24.3 0.3 -12.6 2.9 36.2 3.5 2.0 11.4 50.8 47 ANNEX 9 PHILIPPINES Page 4 of 4 SEVENTH POVER PROJECT NATIONAL PONER CORPORATION KeV Financial Indicators: 1984-1987 A--E - 9-- Financial Year Ended Deceaber 31 1984 1995 1996 1987 Page 4 o44 WWIA"t----------- POWER SOLD (Mkih) 17 006 17140 17645 18 359 AVERAGE REVENUE (Ctvs.Ik6h! 0.54 104.85 9.6 94.50 OPERATINE REVENUE (P En) 14,390 17,91 16,514 19,268 TOT. OPERATING EIPS. (P An) 11,334 14,069 12,206 13,354 NET OPERAIING INCOME (P On) 3,056 3,902 4,306 4,914 NET INCOME (P On) 1,069 1,096 715 1,049 DIVIDEND (P Mn) 0 0 0 36 ANNUAL INVESTMENT PROGRAM (P fn) 9909 7383 6104 &LRP'Nf"FRIA (IF mt 30,W~ 45,1H~ %,M 63,311 PRIMARY RATIOS: RATE OF RET.-REVAL. ASSETS 10% 1 8% a SELF FINANCIN RATIO 191 561 117C 9 DEBT SERVICE COVERAGE 1.3 1.7 1.3 1.7 DEBTIDEBT PLUS EQUITY 71% 721 721 661 DIVIDEND YIELD 0.0% 0.0% 0.0% 0.1% OPERATING RATIO 791 7e1 741 73% CURRENT RATIO 43 371 5n 107% ACCOUNTS RECEIVABLE-HOS. 2.0 2.6 3.5 2.6 ACCOUNTS PAYABLE- SONTHS 5.7 6.3 9.6 2.5 48 ANNEX 10 Fage of 2 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT National Power Corporation Status of Covenants as of January 10, 1986 Covenant Status as of January 10, 1986 (a) NPC will (i) retain by October 1, 1977 a (a) (i) done (ii) done management advisory team on terms and conditions acceptable to the Bank; and (ii) implement the recommendations of the team within twelve months of such recommendations. (b) NPC will appoint by Decem6er 31, 1977, a highly (b) Done qualified and experienced financial manager. (c) NPC will (i) establish by December 31, 1979 a (c) (i) Dedicated training center training center; and (ii) implement the training not established, but training program with proper planning and review procedures. improved extensively; (ii) Training program substantially improved. (d) NPC will set up by September 30, 1977 a special (d) Study was conducted, but reco- unit to carry out the power sector tariff study mendations not adopted because and, if necessary, employ outside consultants to Government did not accept LRMC assist the unit in the study. The Government will as pricing principle. Later study consult the Bank on the power sector tariff not financed by Bank led to policy from time to time. Government decision in 1986 that electric utilities should use LRMC as basis for electricity tariffs. (e) the Government will implement a program, in (e) done agreement with the Bank, to improve the auditing procedures by October 1, 1978. ANNEX 10 49 Page 2 of 2 Covenant Status as of January 10, 1986 (f) NPC will establish a special project unit for the f) done project directly responsible to the Luzon regional manager. (g) NPC will (i) engage qualified engineering (g) i) done; (ii) done consultants for the communication and control center; and (ii) seek agreement of the Bank before finalizing the scope and design of the control center as a condition of disbursement against this item. (h) NPC will earn a rate of return on its revalued ((h) In compliance net fixed assets in operation of 8% in 1978 and thereafter and the Government and NPC will consult the Bank not later than June 30, 1979 on the feasibility of achieving higher than 8% rate of return. (i) NPC will revalue its net fixed assets in Ci) In compliance operation every four years. (j) NPC will submit each year by October 31 its (j) In compliance ten-year development program with supporting financial plan to the Bank for review. (k) NPC will not undertake any major project of (k) In compliance $50 million or more without first satisfying the Bank that it Ci) forms part of the least cost development program; (ii) will be under- taken at a reasonable cost; and (iii) will be financed under a reasonable finarcing plan. (1) NPC's short and medium term borrowings will be (1) Covenant had to be waved because limited to $50 million, cost overruns and exchange rate problems affecting earlier investments. However, NPC's debt situation became acceptable as a result of debt restructuring agreed during 1987. (m) NPC will take all steps to reduce consumers (m) Previously in compliance; accounts receivable to less than 3 months however nationwide economic billing by December 31, 1978. problems made compliance with this covenant impossible during 1985- 86. NPC's receivables were restructured during 1987, bringing this covenant back into compliance. 50 ANNEX 10 Table 1 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Cagital Investments (million pesosT Year Generation Transmission Total Deflator 1979 Pesos 1979 759 264 1,023 1.00 1,023 1980 3,800 188 3,988 0.88 3,509 1981 668 387 1,055 0.78 823 1982 1,504 249 1,753 0.73 1,280 1983 4,516 670 5,186 0.64 3,319 1984 4,000 548 4,548 0.42 1,910 1985 10,315 1,333 11,648 0.35 4,077 1986 3,908 1,189 5,097 0.33 1,682 51 ANNEX 10 Table 2 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Operation Cost (mittion pesos) Year Fuel O&M Total Deflator 1979 pesos Incremental 1979 2,085 91 2,176 1.00 2,176 - 1980 3,509 207 3,716 0.93 3,455 1,279 1981 4,571 261 4,832 0.78 3,769 1,593 1982 4,879 293 5,172 0.72 3,724 1,548 1983 6,290 340 6,630 0.64 4,243 2,067 1984 7,870 621 8,491 0.43 3,651 1,475 1985 9,240 893 10,133 0.36 3,647 1,471 1986 6,649 881 7,530 0.36 2,710 534 ANNEX 10 52 Table 3 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Benefits (million pesos) Average Energy sold Incremental tariff Year (CWh) Revenue Deflator 1979 pesos benefit (P/kWh) 1979 11,304 2,574 1.00 2,574 - 0.23 1980 11,391 4,329 0.93 4,026 1,452 0.35 1981 12,664 5,673 0.78 :.,425 1,851 0.35 1982 12,909 6,029 0.72 4,341 1,767 0.34 1983 13,683 8,418 0.64 5,388 2,814 0.39 1984 12,682 12,352 0.43 5,312 2,738 0.41 1985 12,920 15,621 0.36 5,623 3,049 0.43 1986 13,561 14,417 0.36 5,190 2,616 0.38 53 ANNEX 10 Table 4 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Computation of IRR (million pesos) Incremental costs Net Year Capital O&M and fuel Total Revenue benefit 1980 3,509 1,279 4,788 1,452 -3,336 1981 823 1,593 2,416 1,851 -565 1982 1,280 1,548 2,828 1,767 -1,061 1983 3,319 2,067 5,386 2,814 -2,572 1984 1,910 1,475 3,385 2,738 -647 1985 4,077 1,471 5,548 3,049 -2,499 1986 1,682 534 2,216 2,616 +400 1987-2011 534 2,616 2,082 IRR = 12.1% ANNEX 11 Table 1 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Computation of IRR of 1980-86 Investment Program for Luzon Catital Investments (million pesos) Year Ceneration Transmission Total Deflator 1979 Pesos 1979 759 264 1,023 1.00 1,023 1980 3,800 188 3,988 0.88 3,509 1981 668 387 1,055 0.78 823 1982 1,504 249 1,753 0.73 1,280 1983 4,516 670 5,186 0.64 3,319 1984 4,000 548 4,548 0.42 1,910 1985 10,315 1,333 11,648 0.35 4,077 1986 3,908 1,189 5,097 0.33 1,682 ANNEX 11 55 Table 2 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Computation of IRR of 1980-86 Investment Program for Luzon Operation Cost (million pesos) Year Fuel O&M Total Deflator 1979 Pesos Incremental 1979 2,085 91 2,176 1.00 2,176 - 1980 3,509 207 3,716 0.93 3,455 1,279 1981 4,571 261 4,832 0.78 3,769 1,593 1982 4,879 293 5,172 0.72 3,724 1,548 1983 6,290 340 6,630 0.64 4,243 2,067 1984 7,870 621 8,491 0.43 3,651 1,475 1985 9,240 893 10,133 0.36 3,647 1,471 1986 6,649 881 7,530 0.36 2,710 534 56 ANNEX 11 Table 3 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Computation of IRR of 1980-86 Investment Program for Luzon Benefits (million pesos) Average Energy sold Incremental tariff Year (GWh) Revenue Deflator 1979 Pesos benefit (P/kWh) 1979 11,304 2,574 1.00 2,574 - 0.23 1980 11,391 4,329 0.93 4,026 1,452 0.35 1981 12,664 5,673 0.78 4,425 1,851 0.35 1982 12,909 6,029 0.72 4,341 1,767 0.34 1983 13,683 8,418 0.64 5,388 2,814 0.39 1984 12,682 12,352 0.43 5,312 2,738 0.41 1985 12;920 15,621 0.36 5,623 3,049 0.43 1986 13,561 14,417 0.36 5,190 2,616 0.38 ANNEX 11 57 Table 4 PHILIPPINES SEVENTH POWER PROJECT (LOAN 1460-PH) PROJECT COMPLETION REPORT Computation of IRR of 1980-86 Investment Program for Luzon Computation of IRR (million pesos) Incremental costs Net Year Capital O&M and fuel Total Revenue benefit 1980 3,509 1,279 4,788 1,452 -3,336 1981 823 1,593 2,416 1,851 -565 1982 1,280 1,548 2,828 1,767 -1,061 1983 3,319 2,067 5,386 2,814 -2,572 1984 1,910 1,475 3,385 2,738 -647 1985 4,077 1,471 5,548 3,049 -2,499 1986 1,682 534 2,216 2,616 400 1987-2011 - 534 534 2,616 2,082 IRR = 12.1% IBRD 20239R I io i2 Area of Map LUZON Abulug .acag ungan . - -- 6aonzago VISA AS 18. / LOCOS MINDANAO Bant ed 'Tuguegarao Batong-Buhay CAGA YAN 8ontoc Tabuk 124' Rxas REGION Amw PHILIPPINES Gammu B* toLUZON GRID POWER STATION Sono-nacloO6 usu. AND TRANSMISSION SYSTEM AMUKiAO ekel 75 A Sagyday Janes ON-GOING PREVIOUS 7TH OTHER BANK POWER EXISTING PROJECTS PROJECTS PROACTS S - - 230 kV TRANSMISSION LINES 6. Ani- Colasio: 16A- a- 115 kV TRANSMISSION LINES S rlos CEN-RAL ------ 69 kV TRANSMISSION LINES so, Cados bangan Bayambang& Baler. LUZON k A A 230 kV SUBSTATIONS Poniqui- A A 115kV SUBSTATIONS ZAM ES .T..REGION * * 0 69 kV SUBSTATIONS VOA iCot *bo HYDRO POWER PLANTS REGI *THERMAL POWER PLANTS NUCLEAR POWER PLANTS n Fernando - n Li Bo A. Baseg C Dean - PROVINCE BOUNDARIES n A lo , GAT Oa ' Up Apolit p 12MW - REGION BOUNDARIES /H I S. lay 0 10 Ig0 150 p art el o.l / Rok 7"oKILOMETERS Marireles 6 T - O16ardnr 5W Binan KLaraa rP Temoate nd c I AY BICOL1 -14o N ugbu an36 M frnt . Dae 14*- %oan n6 Atmoo a Aa Ta REGIONH LAGUNA B'""" aw an an sensmessr0gBhi TIWI awmarmereaon a 2.5 MW UGA aspi C-P 3.0 'meduwstb..ft"e.. MINDORO moan (AUAYAN 0 Gubot ena0.4 MW 122' 124- APRIL 1990