Philippines - Energy Sector Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.:17651 PERFORMANCE AUDIT REPORT PHILIPPINES ENERGY SECTOR PROJECT (LOANS 3163-PH, 3164-PH, 3165-PH) April 3, 1998 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 (annual averages) Currency Unit = Philippine Peso (P) P1.00 = 100 Centavos (ctv.) US$1.00 = 121.5 (end-July 1989) US$1.00 = P262 (end-Dec. 1995) US$1.00 = P26.3 (end-Dec. 1996) Weights and Measures kWh Kilowatt-hour (1,000 watt-hours) MW Megawatt (1,000 kilowatts) GWh Gigawatt-hours (million kilowatt-hours) Fiscal Year Government: January 1-December 31 Abbreviations and Acronyms ADB Asian Development Bank BOT build-own-transfer DOE Department of Energy EMB Environmental Management Bureau ERB Energy Regulatory Board FCDS fluid collection and disposal system GOP Government of the Philippines IBRD International Bank for Reconstruction and Development IPP independent power producer JEXIM Export Import Bank of Japan NEA National Electrification Administration NPC National Power Corporation OEA Office of Energy Affairs OED Operations Evaluation Department PAR Performance Audit Report PNOC Philippine National Oil Company PNOC-EDC PNOC-Energy Development Corporation PPA power purchase agreement REC rural electricity cooperative SAR Staff Appraisal Report Director-General, Operations Evaluation Mr. Robert Picciotto Director, Operations Evaluation Dept. : Ms. Elizabeth McAllister Acting Manager, Sector and Thematic Evaluations Group Mr. Roger Slade Task Manager : Mr. Alain Barbu FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation April 3, 1998 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Philippines Energy Sector Project (Loans 3163-PH, 3164-PH, 3165-PH) Attached is the Performance Audit Report prepared by the Operations Evaluation Department (OED) on the above project, which was supported by Loans 3163-PH (to the National Power Corporation), 3164-PH (to the Philippines National Oil Company), and 3165-PH (to the government) for a total of US$390 million equivalent. The loans were approved in FY90 and closed in June 1995, December 1995, and April 1996, respectively 6 months, one year, and 16 months behind schedule. A total of US$19.4 million was canceled. Cofinancing of US$150 million was provided by the Export Import Bank of Japan. The objectives of the project were to (a) develop a sector-wide capability to plan energy resource development and coordinate policy implementation; (b) adopt least-cost development strategies for energy subsectors; (c) strengthen regulatory activities in order to rationalize consumer energy prices and improve product standards and the quality of service; (d) encourage private sector participation in the energy sector through joint ventures and other schemes; (e) improve environmental standards and monitoring in areas of high energy use or resource development; and (f) enhance the technical capabilities of sector institutions, particularly the Office of Energy Affairs (OEA), the Energy Regulatory Board (ERB), and the Environmental Management Bureau (EMB). The loans were to help finance a time-slice of the sectoral investment program, with specific items to be determined and agreed with the Bank during project implementation. The project's objectives were wide-ranging and involved the participation of seven entities, including one outside the energy sector. The objectives were generally relevant, but despite a looming power shortage (which materialized in 1991), they missed a most critical one, i.e. to ensure an adequate power supply to support economic recovery. The loans financed a diverse mix of investments (a generation plant, power distribution equipment, geothermal drilling, refinery upgrading, spare parts, civil works equipment) and working capital. Project start up took place amid a major power crisis to which the government responded by negotiating with private investors a series of fast-track build-own-transfer projects (resulting in additional capacity of 1,300MW by 1994). Achievement of the project's physical objectives was mixed. The National Power Corporation's (NPC) main component-the Paliminon 80MW geothermal plant-was completed two years late at a 30 percent cost overrun (other items financed by the Bank loan included fuel, spare parts, and transmission lines). 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. 2 The loan to the Philippines National Oil Company (PNOC) financed the drilling of geothermal steam wells, a steam gathering system, and a large stock of drilling materials and civil works equipment. Of the 38 wells drilled, only 13 are useable for production or reinjection. Moreover, the firm production capacity gained by PNOC as result of the component is about one fourth of what was anticipated at appraisal. The other components (Petron's refinery upgrading investments for US$20 million and the National Electrification Administration's (NEA) investments in power distribution equipment for US$40 million) were completed satisfactorily. The project's stated institutional objectives were only partially achieved. The project failed to strengthen the Department of Energy's technical capability to plan resource development and coordinate policy implementation. Despite support from the project, ERB remains overstretched and lacks financial autonomy. The institution-building impact of the project on NEA was modest-its loan portfolio management systems remain weak. On the other hand, the project's provision of equipment and logistical support to EMB substantially strengthened the board's operational capacity. But, most important, the project clearly failed to put the power sector on a financially sustainable footing: NPC's finances are still very fragile, and estimated 1997 internal cash generation was negative, in contravention of loan covenants. NPC is already over-indebted and urgently needs a substantial equity injection and/or debt relief. Furthermore, it faces paying very large penalties to several independent power producers for unused power (the result of delays in NPC's completion of major transmission lines). The audit rates overall project outcome as marginally unsatisfactory (instead of satisfactory in the ICR) because the physical and institutional benefits directly attributable to the project were both substantially less than projected at appraisal and seriously delayed. In light of the above shortcomings, the project's institutional development impact is rated as modest (substantial in the ICR)--there is no evidence that the government's success in attracting private capital to invest in power generation can be attributed to this project, or to the Bafik's overall involvement in the sector. Sustainability is rated as uncertain (likely in the ICR), given NPC's precarious finances. The Bank's project-related performance through loan closing (end-1995) is rated as unsatisfactory owing to the project's design weaknesses, gaps in the project's appraisal, uneven quality of supervision, and weak enforcement of financial covenants. Broader Bank performance, particularly relating to the policy dialogue on sector restructuring in the closing stages of this project and during implementation of subsequent operations, was satisfactory. Two lessons can be extracted from this project. First, it is unrealistic to expect power projects developed with private funds to be "least-cost" in the traditional sense (the additional cost over the hypothetical "least-cost" alternative is the price to pay for mobilizing resources that would otherwise not be available to the sector). Second, there are no shortcuts to a successful "sectoral" lending operation; success requires (a) very substantial inputs of Bank resources; (b) broad staff skill mixes for project design, appraisal, and supervision; (c) application of normal project appraisal standards to all project beneficiaries and components; (d) true synergies among major components and subloans; and (e) clearly defined processes and criteria for joint reviews and Bank approval of investment proposals to be funded by the loan but not defined at appraisal. Attachment Contents Ratings and Responsibilities ................... ................................ 3 Preface..... .................................................. 5 1. Background ........................................... .......7 2. Project Objectives, Design, and Quality at Entry... .................................8 One Project or Three?............................................9 Choice of Loan Covenants..................... ....9 Choice of Subprojects for Bank Financing..................... ............10 Assessment of Implementation Capacity...............................10 Assessment of Environmental Impact..................................10 Assessment of Project Risks........................................10 3. Project Implementation..........................................12 Summary of Project-Funded Components..............................12 Geothermal Energy Development by PNOC (Ln. 3164)...................................... 12 Petron Oil Refining Component...................................... 14 Institutional Strengthening of Sector Utilities (Ln. 3165) .....................14 4. Key Issues .................................... .......... .....8. NPC's Financial Difficulties................................... .....18 Power Shortages: A Failure of Planning or of Decisionmaking ............ ..... 19 Powne Sector Planning ................... ............. ........ ..20 NPC's Restructuring ............................................ 21 Other Sectoral Issues (n.. 3.65)........ ...................................22 5. Bank and Borrower Performance.......................................24 Bank Performance ................. ................ ......24 Borrower Performance..........................................25 Overall Project Assessment and Ratings.........................................25 6. Conclusions and Lessons Learned ............................. .....27 Current Sector Status ...........................................27 Lessonsr..... ......... ...... . ............... .......... ....28 Annexes A. Basic Data Sheet..............................................29 B. Tables: 1. Loan363toNPC ............................ ........38 2. Loan 364 to PNOC ...................................38 3. Loan365 to GOP .............................. ...... 39 4. NPC Monitoring Indicators ...............................40 C. Comments from the Borrower ....................................43 This report was prepared by Messrs. Alain Barbu (Task Manager) and Sunil Mathrani (Consultant).  3 PRINCIPAL RATINGS Loans 3163-PH 3164-PH, 3165-PH Audit ICR Outcome Marginally unsatisfactory Satisfactory Sustainability Uncertain Likely Institutional Development Modest Substantial Bank Performance Unsatisfactory Satisfactory Borrower Performance Unsatisfactory Satisfactory KEY STAFF RESPONSIBLE Loans 3163-PH, 3164-PH, 3165-PH Task Manager Division Chief Country Director Appraisal H. Razavi I. Sud G. Kaji Midterm C. Fernandez V. Nayar C. Madavo Completion J. Irving J. Shivakumar C. Madavo  5 Preface This is a Performance Audit Report (PAR) on the Philippines Energy Sector Project for which the World Bank approved three loans (3163-PH, 3164-PH, 3165-PH), a total amount of US$390 million, on February 1, 1990. The original closing date of December 31, 1994, was extended until April 30, 1996. A total undisbursed balance of US$19.4 million was canceled. This report is based on the Implementation Completion Report (ICR) prepared by the East Asia and Pacific Region, issued on May 23, 1996, the Staff Appraisal Report, loan documents, project files, and discussions with Bank staff. An Operations Evaluation Department (OED) mission visited the Philippines in May 1997 to discuss the effectiveness of the Bank's assistance with the government and the various project implementing agencies. The cooperation and assistance of government officials and PNOC, NPC, EMB, ERB, and NEA management and staff are gratefully acknowledged. Following standard OED procedures, the draft of this PAR was sent to the Borrowers for comments before finalization. All comments received are included in Annex C.  7 1. Background 1.1 The economic and political crises in the Philippines during the early 1980s, when the economy shrank, were followed by recovery during 1986-89, when annual growth rose to an average 5.5 percent. The energy sector was ill prepared to cope with the surge in demand brought about by higher economic growth. Its investment program had been cut sharply and in 1986 was only a third of its 1979 level (in constant price terms). The Bank limited its lending for the energy sector from the mid-i 970s to the late 1980s to small petroleum and geothermal exploration operations, and it conducted no dialogue on policy issues. After the fall of the Marcos regime in 1986, the new government's decision to mothball the nearly completed 620MW nuclear power plant and to abolish the Ministry of Energy added to the energy sector's problems. No new generating plant came into service on Luzon between 1984 and 1989, leaving the National Power Corporation (NPC) in a weak position to respond to growing demand resulting from the economic recovery. The early 1990s saw severe power shortages throughout the country. The Bank conservatively estimated the annual economic losses to the Philippines during this period to have been US$600-800 million.' 1.2 In 1988, the Bank conducted a major review of the sector.! That review provided the framework for the 1989 Energy Sector Project, the subject of this Audit Report. Since the sector study-over eight years from 1988 to 1996-the Bank has lent large sums to energy projects in the Philippines: it committed almost $1.5 billion dollars to nine operations (incl. this one), more than to any other sector. Since 1982, the Bank has lent a total of US$879 million to NPC and US$377 million to the Philippines National Oil Company (PNOC). 1. Using US$0.5/kWh as the cost of unserved energy. 2. Philippines Energy Sector Study, Report No. 7269-PH, September 1988. 8 2. Project Objectives, Design, and Quality at Entry 2.1 According to the Staff Appraisal Report (SAR), the Energy Sector Project grew directly out of the Energy Sector Study. Discussions of this report had resulted in agreement between the government of the Philippines (GOP) and the Bank on a development strategy for the sector. The project was therefore designed to help the government implement the agreed strategy and to help finance a time-slice of the 1989-93 sectoral investment program. Specifically, the project sought to: (a) develop a sector-wide capability to plan the development of energy resources and coordinate policy implementation; (b) adopt least-cost development strategies for energy subsectors; (c) strengthen regulatory activities in order to rationalize consumer energy prices and improve product standards and the quality of service; (d) encourage private sector participation in the energy sector through joint ventures and other schemes; (e) improve environmental standards and monitoring in areas of high energy use or resource development; and (f) enhance the technical capabilities of sector institutions, particularly the Office of Energy Affairs (OEA), the Energy Regulatory Board (ERB), and the Environmental Management Bureau (EMB). 2.2 The project's objectives were wide-ranging and generally relevant. Despite a looming power shortage, however, they missed a most critical objective, i.e. to ensure an adequate power supply to support economic recovery. The project's measures to reinforce the OEA were too modest, even though the need for an effective planning and coordinating agency with authority over energy entities (resulting from the abolition of the Ministry of Energy) had been rightly identified. The lack of a Ministry of Energy undoubtedly contributed to the costly delay in taking action to solve the power crisis that hit the Philippines in the early 1990s. The project also should have been more ambitious regarding reform of NPC's finances, given the diagnosis carried out by the sector study less than a year before project preappraisal. 2.3 Achieving objective (a) above required a satisfactory institutional framework for the sector, which was lacking due to the ineffectual arrangements to replace the Ministry of Energy. In a major lending operation such as this, more substantial measures should have been included to address this shortcoming. Objective (b) reflected a perennial Bank preoccupation that rapidly turned out to be irrelevant under the circumstances prevailing in the largest energy subsector, power. Least-cost power system planning is predicated upon the existence of a "normal" system where supply and demand are in balance and reserve capacity is adequate to cover unforeseen outages and demand growth until the commissioning of new plant. In the Philippines power sector in the late 1980s and early 1990s these conditions clearly did not prevail; the selection of new generation investments ultimately depended upon the speed with which projects could be put on line. Objective (d) was highly relevant and desirable and has succeeded far beyond the 9 expectations of GOP and the Bank. However, the project contained little in the way of conditionality or financing to promote this objective. One Project or Three? 2.4 The project design was unusual. It consisted of three separate loans packaged together in a single "project," even though the subprojects were not interlinked. The project designers and appraisers felt this was a way to combat the fragmentation in the energy sector at that time. They saw it as responding to the need to bring the different entities together to take an overall view of the sector's development, particularly in the absence of a Ministry of Energy and the noticeable lack of coordination and collaboration between NPC and PNOC over geothermal development and steam pricing. Only a single SAR was prepared and its coverage of the borrowers was limited. 2.5 The decision to produce a single SAR with limited coverage of the project entities was presumably justified by the availability of the recently completed sector study and the desire to keep loan processing costs down. In hindsight this decision clearly led to insufficiently thorough scrutiny of the borrowing entities, particularly NPC. The SAR did not contain any financial analysis of NPC or PNOC.' Had NPC's finances been fully reviewed at appraisal, its negative internal cash generation may have come to light then, rather than when the government had to bail out the company in early 1991 (para. 4.1). Choice of Loan Covenants 2.6 The loan conditions were overwhelmingly "boiler plate," and few policy reforms were covenanted. Yet the sector report that preceded the loan contained an excellent analysis of the sector and had numerous recommendations that could have been incorporated in loan conditionality.4 The choice of financial covenants for NPC was inappropriate because Bank staff already knew from the preceding sector study that an 8 percent rate of return on assets was insufficient to generate adequate cash to meet the local component of NPC's investment program. In these circumstances, it would have been more appropriate to aim for an internal cash generation target, as the Asian Development Bank (ADB) did in its loans to NPC.' Neither did the loan covenant a debt-to-equity ratio for NPC, although this also would have been appropriate. 2.7 Although the sector study highlighted the difficulty NPC was likely to face in raising adequate local resources to cover its share of the very large 1989-93 investment program (US$2.7 billion), the project did not address this issue. Even when earning the maximum allowable 10 percent return on revalued assets, NPC could not generate sufficient cash internally to meet its local cost funding needs. At the time, NPC could not borrow long-term on the local capital market. The sector study therefore correctly recommended that the government help NPC to float long-term (peso) debt while also increasing its own equity in NPC. These proposals 3. The SAR also did not provide a balance sheet or income statement for these borrowers. 4. For example, reform of the royalty structure for geothermal steam development (see para. 4.17). 5. However, because NPC's charter limits it to a 10 percent rate of return, meeting a 20 percent internal cash generation covenant like ADB's might have been impossible because it could have led to a rate of return higher than the 10 percent ceiling. 10 should have been incorporated in the project's loan conditions. The failure to address this problem was a major contributory factor to NPC's financial collapse in 1991 (para. 4.1). Choice of Subprojects for Bank Financing 2.8 The sector study was very explicit about the looming power shortages,' but the SAR did not treat the problem adequately. It is difficult to explain why the NPC did not use the Bank's loan for the urgently needed gas turbines rather than for generation plants with longer gestation periods. The items to be financed by the Bank were not irrevocably determined at appraisal, and the loan agreement permitted a very wide range of eligible project components. The list of items to be financed by the Bank was to be agreed annually with NPC based on the availability of other funding and related procurement constraints. The Bank and NPC should have focused their efforts on averting or rapidly mitigating the power supply problem by allocating the loan funds to the highest priority investments, but they did not do so. Assessment of Implementation Capacity 2.9 Despite the participation of seven project entities (including one outside the energy sector), some of which had no prior experience of Bank projects, the appraisal team concluded that the project required no special implementation arrangements. All the executing agencies were assessed as having adequate implementation capacity to carry out the project. This proved not to be the case, particularly with NPC, which encountered considerable difficulties with bid evaluation, contract award, acquisition of rights of way, etc.,' leading to major delays and significant cost overruns (para. 3.2). Assessment of Environmental Impact 2.10 Because the exact list of Bank-funded subprojects was not fixed at appraisal, the SAR could not provide an environmental impact summary. According to the SAR., environmental impact assessments were to be prepared for each subproject for review by both EMB and the Bank. OED found little evidence in the project files of such reviews by Bank environmental staff. For projects of this sort, it is good practice for the Bank to require a sector impact study at an early stage to identify the issues and mitigatory measures associated with the options (fuel and plant study) retained in the strategic plan. Assessment of Project Risks 2.11 The assessment of risks in the SAR was weak in several areas. In particular the lack of a technical, financial or economic evaluation of PNOC's geothermal exploration program in the SAR meant that the geological and financial risks PNOC faced were glossed over. This was 6. The sector study (Executive Summary, para. 36) says: "In the short-run (1989-90) the power sector will face a shortage of capacity due to the rapid recovery of electricity demand, mothballing of the nuclear plant and the downgrading of the [existing] geothermal plant." 7. These problems also beset the Bacon-Manito Geothermal Power Project (Ln. 2969-PH), which was concurrently implemented with the Energy Sector Project. The experience with the Bank's follow-on projects (Leyte geothermal development; ongoing), which incorporated project implementation units and specifically nominated project directors, shows them to be still unresolved today, despite these additional design features. 11 probably due to PNOC's high success rate until then, which led the Bank to over-optimism. The geothermal prospects on Luzon turned out to be highly disappointing, and the results on other islands were mixed. About half the wells drilled under the project have no prospect of being used for geothermal production. Other Bank-financed drilling under a parallel project on Luzon was also unproductive. With hindsight, the contribution of geothermal energy to increased power production in Luzon appears to have been greatly overestimated. 2.12 The Bank's appraisal completely failed to identify the risks arising from NPC's precarious financial situation or to acknowledge the difficulty NPC was likely to face in generating resources internally to finance its share of a very large investment program. 2.13 The SAR mentioned the risk of difficulties in project implementation, but it did not anticipate or acknowledge the extent of problems the projects under NPC's responsibility were likely to encounter. 12 3. Project Implementation 3.1 Because the specific components to be financed by the Bank were not determined at appraisal, the Implementation Completion Report (ICR) should have contained a more complete description of what was actually financed and the costs and benefits of these components. (The ICR offered no economic analysis of the very substantial geothermal investments by PNOC.) Hence, this section contains descriptive material normally provided in an ICR. Summary of Project-Funded Components 3.2 The project financed a diverse mix of investments and working capital, as shown in Annex B Tables 1-3. For NPC, the largest single subproject was the construction of the Palimpinon 80MW geothermal power plant. This plant was commissioned two years late and cost US$105 million, 30 percent more than the original estimate, partly because of unforeseen soil problems affecting the foundations and to appreciation of the Yen. The cost of this plant (more than US$1,300/kW) is also much higher than the Bank-financed 110MW Bacman I geothermal plant (US$980/kW) that was completed shortly before Palimpinon. Other items funded by the loan to NPC included US$38 million of fuel for power stations, US$29 million for spare parts, and US$19 million for transmission lines. The fuel and spare parts together represent a substantial injection of working capital to NPC. 3.3 The loan to PNOC-Energy Development Corporation (EDC) financed the drilling of38 geothermal steam wells, a steam gathering system, and a large stock of drilling materials and civil works equipment, together totaling US$118 million. Again, the Bank loan was used to finance a significant increase in working capital. Petron's US$20 million share of the loan was spent on investments to improve LPG output and diesel quality from the Bataan refinery. 3.4 The largest part of the US$40 million loan to GOP was passed on as an equity contribution' to the National Electrification Administration (NEA), which spent US$16 million on power distribution investments in many locations throughout the country. The three non- revenue earning beneficiaries essentially used their allocations from the loan to purchase office equipment, studies, technical assistance, and training, amounting to US$13 million. Over 20 percent of the loan was not used, partly because of difficulties in raising counterpart funds. The counterpart funding shortage for institutional development was a recurrent theme throughout implementation and was indicative of weak GOP commitment to the institutional strengthening component of the project. Geothermal Energy Development by PNOC (Ln. 3164) 3.5 Of the US$150 million lent to PNOC, US$133 million was earmarked for geothermal investments. The project envisaged a large program of investments: 76 wells, fluid collection and disposal systems (FCDS) for 380MW of power plant, and consultancy services for geothermal resource assessment and engineering. Given the size of the program and the high average cost of 8. The necessary legislation increasing NEA's capitalization by the amount of the IBRD loan had still not been passed by Congress more than a year after the final loan closing date. 13 wells (more than US$1.5 million each), this allocation was inadequate.' Unsurprisingly, implementation fell far short of these targets; only 38 wells were drilled, and 40MW of FCDS capacity installed. Loan disbursements (US$118 million) were also below expectations because US$15 million was reallocated to, but not fully used by, Petron (para. 3.12). 3.6 Neither the SAR nor the ICR offers a technical, economic, or financial evaluation of PNOC's geothermal exploration program. The drilling program undertaken was very different from that expected at appraisal. The 76 wells to be drilled were divided across six different areas in Luzon. Only six wells were eventually drilled in Luzon, three for exploration in Mount Labo and three for production and reinjection as part of the Bacman II project. Exploration in Northern Negros, where four wells were drilled, and in Mount Labo (Luzon) was also unfruitful. Twenty- eight wells were drilled on Leyte, which did not figure as one of the six areas identified at appraisal. At that time, the Leyte-Luzon and Leyte-Cebu electrical grid interconnections had not been adequately studied to justify concentrating more drilling effort on Leyte, particularly as the area's potential was already relatively well known. However, as Luzon's geothermal potential did not live up to initial expectations,"o PNOC correctly refocused its drilling program to Leyte once it was clear that NPC was also committed to developing the geothermal potential of the Greater Tongonan area on Leyte for power generation. 3.7 PNOC drilled in several locations on Leyte, some of them exploratory in nature, such as in the Alto Peak area. Here the Bank financed the first 6 of 10 wells drilled by PNOC before it abandoned the area. The encouraging result of a 20MW output from the second well was the principal reason for PNOC's unwillingness to abandon the area sooner, as advised by Bank staff. The remote location and difficult access mean that it is not viable to develop the resource for just 20MW of power output. Most of the Bank-funded wells (20) were concentrated in the Greater Tongonan area; 10 of these will serve as production or reinjection wells for the Bank-funded follow-on Leyte-Luzon and Leyte-Cebu geothermal power projects. Seven wells are unusable and the remaining three are reserve or re-entry wells. 3.8 In summary, of38 wells drilled, 13 are useable for production or reinjection." The firm production capacity gained by PNOC as result of the project is about 100MW, rather than the 380MW projected at appraisal. Of this new capacity, only 20MW is actually in production (one unit of the Bacman II power plant), due to delays in completing NPC's portion of the Leyte geothermal project (para. 4.15). 3.9 OE1D also found that PNOC used the Bank loan to purchase US$62 million of drilling "consumables," about US$30 million more than required for the 38-well program. According to PNOC, these items have been used in the drilling operations of the two follow-on Leyte projects. PNOC does not appear to have sought Bank approval for its decision to procure extra drilling consumables as a way of fully using the loan. 9. PNOC commented that 'had the drilling program proved to be successful, the additional funding requirements could have been generated through private sector participation'. 10. Nine exploration wells on Luzon were financed by the Bacon-Manito Geothermal Project (Ln. 2969-PH), which was being implemented in parallel (1989-93). 11. This excludes two potential reinjection wells in Northern Negros, an area that is unlikely to be developed. 14 3.10 PNOC estimates the average cost of the 94 wells financed by the Bank under the three projects to be US$1.6 million" per well. This includes rig rental costs but not equipment and civil works required for site access and preparation. Following Bank advice, in recent years PNOC has increased its use of specialized drilling services and international contractors in an effort to obtain better results during drilling operations and thereby cut delays and costs. 3.11 The remaining US$10 million the Bank disbursed to PNOC-EDC was used to finance the FCDS for the 40MW Bacman II power plant. The FCDS was completed in April 1994, but only the first 20MW unit has been commissioned by NPC, due to major completion delays of the second unit arising from a contractual dispute between NPC and its contractor. 3.12 In view of the implementation experience described above, OED rated the outcome of this component as marginally unsatisfactory, " although PNOC's performance under this component was satisfactory. Institutional development was a very minor part of the project and was thus rated as negligible. Petron Oil Refining Component 3.13 Petron, the downstream petroleum subsidiary of PNOC, received US$20 million as on- lending in order to upgrade the Bataan refinery. The rest of the necessary funding (US$18 million) was internally generated by Petron, which has always been financially very healthy. The company borrowed from IBRD mainly because it was unable at that time to raise long-term funds in the local capital market. The refinery upgrade was to increase LPG production and improve diesel quality by reducing its sulfur content to comply with stricter exhaust emission standards. OED's audit mission was told that Petron carried out an ex-ante economic and financial analysis of these investments, but there is no mention of it in the SAR. PNOC and Petron did not respond to an OED request for an ex-post economic evaluation. 3.14 Petron was privatized in 1994, when 60 percent of the shares were soldl4 for a total of 18 billion pesos (US$720 million). GOP allowed PNOC to retain 8 billion pesos from the proceeds of the sale mainly for reinvestment in future geothermal projects. Petron has since prepaid the loan to PNOC, and PNOC subsequently made an initial request to the Bank proposing prepayment of this portion of the IBRD loan. The Bank has taken no further action because PNOC apparently prefers to keep up the level of its cash reserves. Institutional Strengthening of Sector Entities (Ln. 3165) Department ofEnergy Component 3.15 Following a period in which the OEA/Energy Coordinating Council arrangement for policymaking and coordination (set up under the project) failed to work satisfactorily, the government finally created a Department of Energy in late 1992. NPC, PNOC, and NEA were 12. According to PNOC, its average well drilling costs, using its own rigs, currently range between US$1.2 and 1.5 million, depending upon the hole diameter. 13. PNOC feels that outcome was satisfactory because the initial funding for the component was unrealistically low for a 76-well program and that actual performance should be measured against more realistic objectives. 14. Aramco holds 40 percent of the shares; the remainder were sold to the public on the local stock market. 15 put under its control while ERB remained attached to the Office of the President. The Department of Energy (DOE) has been operating since February 1993 and sector policymaking and coordination has improved considerably. The Energy Sector Plan of January 1993 was drawn up concurrently with the reestablishment of DOE, in consultation with the Bank, and an exchange of views on its implementation was incorporated in the conditions of the Power Transmission and Rehabilitation Project (Ln. 3626-PH) approved in mid-1993. 3.16 The impact of the project on the institutional development of DOE was minor: a small amount of technical assistance, training, and equipment was provided to set up an energy database and for power system planning. The impact of the studies funded by the project was also marginal. The only lasting project impact on the DOE was the construction of its new office building, to which the Bank loan contributed US$1.1 million, or 40 percent of the total disbursed from the loan to DOE. Although this was part of the program envisaged at appraisal, OED considers it a substantial use of Bank funds and believes the government should have funded the construction from its own budget. 3.17 It is clear from the content of supervision mission aide-memoires that the policymaking, planning, and coordination objectives of the project were neglected in the later years of implementation, when the Bank focused its attention mainly on NPC and PNOC. This was unfortunate because DOE, as a new institution, could have benefited more from the project, particularly for training new staff. The underuse of the available funds shows the lack of Borrower commitment to pursuing these institutional strengthening objectives. OED concludes that the project failed in its objective to strengthen DOE's technical capability to plan resource development and coordinate policy implementation." The need to reinforce DOE is as important today as at the beginning of the project because the tasks it faces have become more complex with the growing participation of private firms in the energy sector. It is also in charge of the restructuring and privatization of NPC, which have yet to begin. Environmental Management Bureau Component 3.18 The project helped EMB with a significant injection of equipment and logistical support. EMB has wide responsibilities for environmental monitoring throughout the Philippines and also issues Environmental Compliance Certificates, which are required for all new energy sector projects before construction starts. During the early 1990s, EMB's annual budget of about 25 million pesos (US$1 million) was entirely for recurrent costs and contained no allocation for capital expenditures. The US$6.6 million of Bank funds drawn by EMB when averaged over the project life thus exceeded EMB's total annual budget. It had a substantial positive impact on EMB's ability to a carry out its work, particularly for air quality monitoring. The country still has only three mobile air quality monitoring vans, all of them purchased under the project. The project also funded consultants to review environmental impact analysis guidelines, which have since been streamlined. Many more air and water quality monitoring stations are needed than the nine funded by the project," but EMB failed to use its share of the loan (more than US$10 million), despite the 16-month extension of the closing date. 15. Comments received from DOE (see Annex C), providing additional information on activities undertaken as part of the project, do not lead OED to revise this assessment. 16. Fifty air quality monitoring stations (30 of which were to be located at power stations) were envisaged at appraisal, but only three of the nine acquired under the project have been sited at power plants. 16 3.19 Apparently underspending was due to delays arising from the lengthy clearance process for procurement and DMB's slowness in releasing funds. Some equipment supply contracts were only signed in December 1995, just a few months before final loan closure, while no disbursements at all had taken place during the first three years of the project." This shows a low level of EMB and GOP commitment to the pursuit of project objectives. On the Bank side, better results may have been obtained if environmental staff had supervised this component. OED was unable to assess the degree to which Bank-funded equipment is in use or the extent of follow-up actions in terms of compliance enforcement. However, it concludes that the project partially achieved the stated objective of improving environmental standards and monitoring and enhancing EMB's technical capabilities. Energy Regulatory Board Component 3.20 ERB was allocated US$3.5 million from the loan to finance various essential office and communications systems, including computers. These investments have helped the board meet the enlarged workload arising from the 1992 law setting up DOE. This law redefined ERB's role and significantly increased its responsibilities by giving it authority for price regulation of NPC and about 120 small rural electricity cooperatives (RECs). More tasks were added to ERB's already large mandate by the Anti-Pilferage of Electricity Law (1994)" and the DOE directive that all utilities submit their demand-side management plans to ERB every two years. Despite the extra responsibilities, however, the DOE gave the board no significant increases in staff or budget. The project also financed several pricing studies done by external consultants and provided staff with legal and financial training. Implementation suffered delays from a lack of timely counterpart funding from GOP. OED concludes that the project succeeded in strengthening regulatory activities and the technical capabilities of ERB, albeit on a modest scale. 3.21 Despite support from the project, ERB is overstretched and requires financial autonomy if its progress is to be sustainable. ERB should not depend upon GOP's budget allocations but should be self-financing through a small levy. It should have the right to delink its pay scales from the civil service. Training of existing staff, recruiting of additional. staff, and larger offices are also essential because its role and importance will increase further under the proposed new power sector structure. National Electrification Administration Component 3.22 The Bank had carried out a detailed review of rural electrification" in the Philippines just a few months before the appraisal of this project. The NEA component in this project should therefore be seen as a stopgap intervention before a full-scale rural electrification project, which followed in 1991.2 The NEA used 85 percent of the funds to purchase distribution equipment 17. DOE commented that 'the major factor that hindered loan availment during the first two years was the implementation of the procedure on special account mechanism wherein NEA and EMB had a common special account. NEA had been slow in their disbursement, correspondingly delaying EMB's loan availment.' 18. This act requires an ERB representative or law officer to be present as witness at the time the REC "charges" the consumer with pilferage at the location it takes place. 19. Rural electrification: An Integrated Program to Revitalize the Sector, Report. No. 8016, November 1989. 20. The Rural Electrification Revitalization Project (Ln. 3439-PH) channeled US$91.3 million to 54 RECs. 17 that was installed in RECs. It used the balance (US$2.1 million) for its own needs, which consisted of office and warehouse space and communications equipment and test vans. It also paid for a small amount of technical assistance and training. Total disbursements were 20 percent below the initial allocation. 3.23 The impact of the component was modest, both physically" and institutionally. More could have been achieved with NEA's loan portfolio management, which is still done manually, by the full use of the available funds to hire consultants, particularly as the necessary computer hardware had already been acquired. Overall progress in NEA's institutional development needs to be assessed in a future performance evaluation of the follow-on project, which overlapped with this one from 1991 through 1995, and which addressed rural electrification lending policy as well as NEA's financial restructuring. 21. Total peak demand of RECs in 1992 was about 1,330MW. Meeting demand growth of 5 percent p.a. at US$1,000/kW of new distribution capacity would mean investing US$70 million annually, compared to the US$16 million spent under the project. 18 4. Key Issues NPC's Financial Difficulties 4.1 In 1991, NPC had insufficient cash to meet its short-term operating needs. This was due, inter alia, to: a rate base used to calculate its rate of return on assets which had not been revalued despite high inflation since 1987, delays in tariff increases, increased fuel costs following the Gulf War, and sharp depreciation of the peso, which increased the foreign debt service burden. Internal cash generation, which NPC's accounts showed as positive from 1987 to 1990, was in fact negative.22 This situation was unsustainable and necessitated a government bailout-to the tune of 3.6 billion pesos (US$135 million)-to enable NPC to meet its obligations. The cash injection was later converted into an equity contribution. NPC's losses in 1991 were 3 billion pesos and the corporation was also in violation of World Bank and ADB loan covenants during 1990-91. Key indicators of NPC's performance are shown in Annex B, Table 4. 4.2 While the initial years of project implementation were characterized by delayed tariff increases due to political and legal opposition, significant improvements in the structure of electricity tariffs, as well as greater "automaticity" in adjustments to tariff levels were introduced from 1992 onwards, in the wake of the NPC financial crisis. The introduction of demand (capacity) charges envisaged under the project was not achieved until 1995. The progress in electricity tariff reform was largely the result of conditionality linked to the Bank's follow-on projects rather than a result of the sector loan. 4.3 NPC's financial situation improved after 1992, but it remains precarious for several reasons: (a) a very high and rapidly rising level of foreign debt (including for the financing of local peso expenditures), with the attendant foreign exchange risk (on the interest portion); (b) insufficient paid-in equity; (c) a very large investment program (exceeding US$1 billion in 1997), mainly for critical high-voltage transmission links, which has to be overwhelmingly foreign-funded; and (d) a rate of return ceiling of 10 percent, which prevents NPC from substantially increasing its internal cash generation. After an improvement in 1994, NPC's self- financed contribution to investment was once again negative in 1995-96 (3-year average). This is unacceptably low by international standards. Delays in commissioning ongoing transmission projects are meanwhile increasing the heavy burden of financial penalties paid to independent power producers (IPPs) for failure to take the contracted power. Because the government has neither the financial resources nor the wish to increase its stake in the power sector, and because tariffs cannot be raised beyond the 12 percent rate of return ceiling (increased from 10 percent in 1993), the only way to put NPC's finances on a prudent footing is to reduce its indebtedness. This can only be done by using resources obtained from the privatization of NPC. A bill to permit the sale of power sector assets has been under consideration by Congress over the past several years (para. 4.12), but its final passage is very unlikely before the 1998 presidential elections. 4.4 Since its severe liquidity problems of 1991, NPC's financial recovery has been only partial because it has not received an injection of fresh equity capital from either the government 22. Due to incorrect accounting practices, financing provided by restructured/rescheduled loans was deducted from debt service instead of treated as new loans. 19 or the private sector. Its debt is increasing exponentially" (see Annex B, Table 4) and it risks exceeding its capacity to service that debt. At the end of 1996, the corporation's debt-equity ratio was unacceptably high (over 90:10), and without a government guarantee it would be extremely difficult for NPC to borrow. NPC's debt service burden has worsened further in 1997. Power Shortages: A Failure of Planning or of Decisionmaking ? The Causes and Consequences 4.5 The mothballing of the 620MW nuclear plant in 1986 caused major disruption to NPC's system expansion plans. This plant represented about 15 percent of Luzon's generating capacity at that time and had absorbed virtually all the investment resources available for new power generation projects in the early and mid-1980s. The 1988 Energy Sector Study projected a need for more than 700MW of new capacity by 1992 in Luzon alone, in order to avoid shortages. It drew up a least-cost sequence of investments, but these did not take place in a timely fashion.24 NPC was thus forced to opt for those projects with the shortest lead times, regardless of cost. At the same time, NPC's aging thermal plant" increasingly suffered unplanned outages due to heavy usage combined with neglected maintenance. Finally, a drought in 1991 severely reduced the output of hydro plants, which accounted for about 20 percent of installed capacity. The resulting four plus hours per day of load shedding in Luzon" had very damaging consequences for the economy. The extent of suppressed demand can be seen from NPC's Luzon sales, which remained roughly constant during 1991-93, before leaping by 18 percent in 1994, once the supply constraint had been eliminated. 4.6 OED's audit mission learned that NPC was unable to get the government's approval to invest in sufficient new capacity before the onset of serious load shedding. A contributory factor was the lack of a Ministry of Energy to argue the case for timely investment." The Solution 4.7 The passage of Executive Order 215 in mid-1987 ended NPC's monopoly over power generation and opened the door to private sector participation. The first build-own-transfer (BOT) scheme was successfully concluded in 1989 and the 210MW plant began operation in 1991. As this was clearly insufficient to meet demand, a series of other "fast-track" BOTs were rapidly negotiated in 1991-92. Given the urgency, these BOT schemes all featured gas turbine 23. Long-term debt (almost all in foreign currency) has doubled in four years to US$5 billion at the end of 1996. This excludes another US$6.5 billion equivalent of peso debt on account of long-term lease obligations for BOT capacity fees. 24. The program included the Bank-financed Bacon-Manito 110MW geothermal plant, which was commissioned in 1993, more than two years late. The 300MW Calaca II coal plant, projected for 1992, was delayed to 1995, partly because of difficulties in obtaining environmental clearances. 25. The average age was more than 20 years in the early 1990s. 26. The situation in Mindanao, where the power system is dominated by hydro plants, was even worse. 27. Apparently, in the eyes of the Aquino government the power sector was "tainted" by association with the controversial nuclear plant built by the previous regime. The President's Office, to which the NPC and OEA were attached, was unwilling to commit scarce resources to the power sector and did not heed NPC's advance warnings about the shortage of generation capacity until load shedding actually began. 20 plants with short implementation periods, generous incentives, take or pay provisions and GOP guarantees. In all cases, NPC provides the fuel and purchases the power generated, thereby enabling investors to avoid dealing with small, financially weak distribution companies. The risks to private firms were thus kept to a minimum. These BOTs were intended to add more than 900MW of new capacity to the Luzon system within 12 to 18 months. Similar steps were taken to boost capacity in the Visayas and Mindanao grids. By early 1994, 12 private power plants with a total capacity of 1,300MW, or about 20 percent of total generation capacity, were in service. Load shedding had thus been eliminated in the Philippines faster than most people thought possible. 4.8 The Bank had serious reservations about the apparent high cost (more than US$0.09/kWh)" of the fast-track BOTs, failing to appreciate GOP's lack of alternatives and limited bargaining power in a context of supply constraints, excess demand, high willingness to pay for electricity, and NPC's inability to implement projects as rapidly as the private sector. In retrospect, the BOT route clearly was the right approach to ending the damage to the economy from power shortages. The high cost of the electricity produced by these BOT schemes was still several times less than the economic cost of outages (at least US$0.50/kWh on average). Neither NPC nor GOP could have easily mobilized the funds or implemented the projects rapidly enough to solve the power crisis within a reasonable time. The attractive terms29 offered helped ensure a strong degree of foreign interest in investing in the power sector, which has been sustained despite the less favorable terms offered to later entrants. 4.9 After the fast-track program, NPC's board decided to seek BOT proposals on a competitive basis for all its new generation requirements. Very large (700-1,000MW) coal and hydro plants are now being developed as build-own-transfer/build-own-operate schemes,30 which will account for the majority of power supplies by the end of the decade. The competitive bidding process has helped to bring down sharply the cost of power from these plants compared to the early BOTs. NPC's most recent contracts with IPPs have a levelized power purchase price of about US$0.06/kWh. Distribution utilities are also entering into supply contracts with IPPs for significant volumes of power as they are no longer obliged to purchase all their requirements from NPC. In total, over 40 power purchase agreements (PPAs) have been signed in the Philippines, more than in all other developing countries combined. There is no evidence that the Bank was involved in any advisory role in improving the terms and conditions of PPAs. Power Sector Planning 4.10 "Traditional" least-cost power sector planning cannot apply to an increasingly fragmented power sector featuring both public and private entities. But strategic planning (by DOE) is still required to ensure that supply and demand are balanced and that the fuel mix of power plants matches local resource availability while ensuring adequate supply diversity. Without it, DOE would be unable to judge the need for new BOT schemes and grant accreditation to IPPs. However, this type of planning is also more difficult because of the higher degree of uncertainty arising from 28. Philippines Power Sector Study, Report No. 13313-PH, November 1994. 29. The Region has pointed out that the take-or-pay capacity charges on the early BOTs are an unavoidable cost to NPC because they remain in force for 15 years. 30. Some are now without sovereign guarantees. 31. MERALCO, the largest distributor, intends to get all its incremental power needs from IPPs. 21 difficulties new IPPs may encounter in coming to financial closure and the need to incorporate the effects of measures to improve demand-side management. 4.11 Despite a potential conflict of interest, the NPC, which has the country's only pool of experienced power planning staff, still prepares the annual national power sector development plan. This planning should be done at the DOE, especially now that the distribution companies are increasingly signing up for bulk supplies directly from IPPs and NPC will be less and less able to keep track of investments in power generation being made by others. The transfer of NPC power planners to DOE is likely to prove problematic, however, given the substantially better employment conditions at NPC. NPC's Restructuring 4.12 Partly as a result of the power shortages and the backlash to them, GOP decided to privatize NPC as long ago as late-1992. The issue became so politicized, however, that in 1993 bills were introduced in Congress32 to simply split the corporation along regional lines. This approach presents numerous disadvantages without addressing the underlying problems. The government's preferred structure for the power sector would create several private generation companies out of NPC's existing power plants and a single transmission company, that would initially be partly state- owned. The draft legislation (the Omnibus Electric Power Industry Bill), reflects advice contained in the Bank's 1994 study of the structural framework for the power sector." It also contains incentives to encourage consolidation in the over-fragmented& distribution subsector. 4.13 The legislative process needed to pass these proposals has taken much longer than hoped: for the past two years a bill has been under review by the Senate and a separate one has been filed in the House since September 1996. It is unlikely that the legislative process can be completed during the life of the present Congress, which means the process would have to begin again in the new Congress after the Presidential elections in mid-1998. Given the substantial depreciation of the peso since mid-1997 that has aggravated NPC's foreign debt service burden, GOP will have to step in with a financial restructuring package for NPC. Some combination of debt rescheduling, equity injection and tariff increases looks unavoidable. 4.14 It will take at least two to three years to put in place the agreed new structure once congressional approval has been given. During this transition phase many complex operational issues will require solutions, such as power trading and regulatory oversight of newly privatized generation companies, consolidation among RECs, wheeling charges for bulk power, pricing mechanisms to recover the subsidies required by the small-island (non-grid-connected) power systems, etc. 32. NPC's legal status as public corporation means that legislation is required to privatize it. 33. Philippines Power Sector Study: Structural Framework for the Power Sector, Report No. 13313-PH, November 1994. 34. Electricity distribution is carried out by MERALCO, 14 investor-owned utilities and 119 RECs. 22 Other Sectoral Issues 4.15 Coordination of transmission and generation investments. Several large private power plants have been commissioned," but will sit idle for long periods, pending completion of the transmission lines by NPC. The Bank's own follow-on projects, the Leyte-Cebu and Leyte- Luzon geothermal projects face the same problem. The PNOC steam supply systems (Bank- financed) and four BOT power plants amounting to nearly 400MW capacity are idle because of major delays in completing NPC's transmission system (also Bank-financed). One of the main causes of the delay is difficulty in obtaining timely rights-of-way for the transmission lines. This waste of resources is now "externalized" in the new "mixed" sectoral set-up, because the IPPs have to be compensated financially for the delays under take-or-pay contracts with NPC. The latter is now incurring large costs for power it is unable to transmit and sell. In some cases, NPC has arranged to take at a later date the energy it has already paid for and considers these penalties to be equivalent to "stored energy." 4.16 The short-term cash flow consequences are still very severe. For example, since July 1996, under the terms of the PPA between NPC and PNOC for the output from Leyte-Cebu, NPC has to pay PNOC-EDC about 200 million pesos (US$8) million per month for power it is unable to draw. For its part, PNOC-EDC paid the IPP 947 million pesos (US$37 million) for capacity charges on the idle power plant during the second half of 1996. In addition, NPC owed PNOC- EDC more than 1 billion pesos (US$39 million) at the end of 1996 for steam sales, excluding these financial penalties. The further build-up of NPC debt to PNOC-EDC was very rapid in 1997. This will be a hindrance to the forthcoming public sale of shares in PNOC-EDC, whose total accounts receivable at the end of 1996 were already 55 percent of its net sales in that year. 4.17 Enabling environment for investment in geothermal development. It was (and still is) impossible to get private sector participation in geothermal development without a more incitative GOP policy on royalties, a reduced state share, and tax treatment comparable to other private investments. Under current policy, which dates from 1978 (P.D. 1442), cost recovery is limited to 90 percent of gross revenues, while 60 percent of the net proceeds from any geothermal project flows to GOP, which is a disproportionate share. By way of comparison, an IPP operating with imported fuel receives more favorable treatment and is taxed at 35 percent. This distortion is unsatisfactory and hinders private investment in geothermal development. 4.18 The Bank's 1988 sector study recommended altering the legislation, and the SAR suggests that the government was planning to do so, but this has not yet occurred. A bill to reform this policy has been pending in Congress since 1993 but has not been passed, despite having been certified as an Administration Bill, which was supposed to give it priority in consideration for passage. Not surprisingly, there has been no private sector investment in geothermal field development. Yet at the time of appraisal, the Bank expected joint ventures with PNOC to be set up and the Bank loan was available for financing PNOC's share of such ventures. Currently PNOC is also handicapped by P.D. 1442, which makes returns on investment marginal (below 10 percent), and drives up the steam sale price for power. Action on this issue 35. For example, the 700MW Pagbilau BOT plant (Hopewell). 23 has never been covenanted in any of the four recent Bank loans for geothermal development, despite its importance for promoting private sector geothermal projects. 24 5. Bank and Borrower Performance Bank Performance 5.1 As discussed in Section 2, the project's quality at entry suffered from the decision to consolidate a collection of discrete and unrelated projects into a single project package. In the end, there was little synergy among the many components of the project. 5.2 Supervision. Total resources devoted to supervision over the five-year period were only 170 staff weeks. This was low for an operation of this scale and with so many implementing agencies. It was also low in comparison with sector loans in other countries. Furthermore, the Bank was also formally responsible for supervision of the Japanese cofinancing of the project. The representation of skills required to supervise such a diverse operation was insufficiently broad: the Bank had no power engineer on its team from the end of 1991 to the end of 1993 to supervise the Palimpinon power plant construction. No environmental staff participated in supervision, and Bank files contain no references to any internal review of the environmental assessment of the Palimpinon geothermal power plant funded under the project. Joint annual reviews of the investment plans of PNOC and NPC, which were envisaged in the project design, do not appear to have been carried out in the later years of project implementation. The Bank's technical supervision of PNOC's drilling program was satisfactory until late 1992, but it was not continued during the three subsequent years of project implementation when most of the drilling took place. It resumed in late 1995 as part of the follow-on projects, but by then the loan had closed. 5.3 Policy dialogue. The Bank's input into the design and implementation of the government's BOT initiative aimed at solving the power shortages of the early 1990s (para. 4.7) was minimal. At best the Bank was unenthusiastic, at worst it opposed the GOP solution. Despite this difference of opinion, the Bank maintained its dialogue with the government on sector issues and the preparation of a new power project continued in 1992-93. Although the Bank was slow to realize the severity of NPC's financial problems, it was thereafter heavily involved in working out an acceptable financial recovery plan for NPC, particularly as the unanticipated commitment of budgetary resources by GOP had implications for the ceilings agreed with the International Monetary Fund at that time. A formal threat to suspend disbursements was issued in December 1991 to keep up pressure on the government to approve a tariff increase that was critical to NPC's recovery. 5.4 Subsequently, the dialogue switched to the structural framework for the power sector once GOP had decided in late 1992 on the principle of privatizing NPC. The Bank committed substantial staff resources to study the sectoral framework, culminating in a formal reporte issued in late 1994. The government has subsequently adopted many of this study's proposals in its own approach to restructuring and privatizing the power sector. The Bank thus appears to have been useful in helping GOP to determine its preferred long-term sector structure. This assistance was provided primarily in the context of follow-up Bank loans for the development of the Leyte geothermal project, which were under preparation in 1993-94, having been delayed 36. Philippines Power Sector Study: Structural Framework for the Power Sector, Report No. 13313--PH, November 1994. 25 since mid-1991, mainly because of the NPC financial crisis. Furthermore the government committed itself under the most recent Bank loan (Ln. 4571 -PH) to NPC to reintroduce enabling legislation for sector restructuring to Congress by mid-1996. Unfortunately, implementation of the restructuring now depends upon the passage of the necessary legislation (para. 4.13), which is delayed indefinitely. 5.5 The Bank's project-related performance through Loan closing (end- 1995) is rated as unsatisfactory (satisfactory in the ICR) in light of the project's design weaknesses (paras. 2.3- 2.6), unsatisfactory appraisal (paras. 2.7-2.12), uneven quality of supervision (para. 4.3), and weak enforcement of financial covenants. However, broader Bank performance in the sector, particularly relating to the policy dialogue on sector restructuring in the closing stages of this project and during the implementation of subsequent operations, was satisfactory,7. Borrower Performance 5.6 Borrower performance varied according to the implementing agency, as shown in Table 5.1. The government's overall performance is rated as unsatisfactory because of the failure in timely decisionmaking, which allowed the damaging power shortages to develop, and because of inadequate commitment to the institutional development goals of the project, which led to underuse of the available funds despite pressing needs in the implementing agencies. Overall Project Assessment and Ratings 5.7 The overall project outcome is rated as marginally unsatisfactory because the physical and institutional benefits directly attributable to the project were both substantially less than projected at appraisal and seriously delayed. There is no evidence that the Government's success in attracting private capital to invest in power generation can be attributed to this project, nor to the Bank's overall involvement in the sector. The overall institutional development impact of the project is rated as modest in light of the ratings for each component shown in Table 5.1. Sustainability of the project benefits is rated as uncertain due to NPC's financial problems, which remain unresolved. These ratings differ from those in the ICR, which rated overall project outcome as satisfactory, the performance of the Borrower and the Bank as satisfactory, institutional development as substantial, and sustainability as likely. 37. The region pointed out that NPC's precarious financial situation has been discussed extensively with senior policy makers during 1997. Actions are now being considered within the context of a proposed adjustment loan for public sector management reform. 26 Table 5.1: Summary of Performance Ratings Entity/ Outcome Institutional Borrower performance Sustainability Component devt. impact during project NPC unsatisfactory negligible unsatisfactory uncertain PNOC-EDC marginally unsatisfactory negligible satisfactory likely Petron satisfactory negligible satisfactory likely DOE unsatisfactory negligible unsatisfactory unlikely ERB satisfactory modest satisfactory likely EMB marginally satisfactory substantial marginally satisfactory likely NEA marginally satisfactory modest marginally satisfactory uncertain 27 6. Conclusions and Lessons Learned Current Sector Status 6.1 Compared to five years ago, when the country was suffering from power shortages, consumers are unequivocally better served, even though the introduction of IPPs has raised the cost of electricity. The generation reserve margin is healthy and growing, and no supply constraint is foreseen between now and 2005. On the contrary, if demand growth slows sharply there could be a short-lived supply glut before 2000. However, transmission network bottlenecks persist and the distribution sector (excluding MERALCO), which has unacceptably high technical and non-technical losses, continues to suffer from underinvestment. 6.2 NPC's finances are still very fragile, despite progress under subsequent Bank loans. NPC is again li]kely to be in contravention of its financial covenants with the Bank in 1997. The corporation urgently needs a substantial equity injection and/or debt relief to help it deal both with its existing over-indebtedness and with a serious additional debt problem arising from penalties NPC has to pay to PNOC and IPPs for generation plant capacity it is unable to use. The Bank has lent over US$800 million to a non-creditworthy NPC over the past decade." The substantial recent depreciation of the peso has further aggravated NPC's foreign debt burden. The severe liquidity problems of 1991, when net internal cash generation was also negative for several years, do not appear to have served as a lesson to NPC and the Government. 6.3 The Philippines experience has shown that traditional least-cost planning criteria are of little use where power supply shortages are acute. Eliminating these shortages requires more costly but quicker solutions. Given the broader economic costs imposed on the country at large by the load shedding, the Government's fast-track BOT approach was clearly correct in the prevailing circumstances. 6.4 PNOC-EDC's exploration program had mixed results. Recouping the costs of unsuccessful exploration fully through the sale of steam for power is not possible under the current fiscal regime. In retrospect, risky exploration should have been funded from GOP equity contributions or PNOC's retained earnings, rather than from IBRD loans-which have financed more than 20 unsuccessful exploration wells at cost of over US$40 million under this project and its predecessor (Ln. 2969). 6.5 In sum, despite the clear progress made in attracting private capital to invest in power generation, the privatization of Petron, and the full deregulation of the downstream oil industry, (including petroleum product pricing) there remains a great deal of unfinished business in the energy sector. 38. In its comments, NPC points out that it has never defaulted on its loans (see Annex C). 28 Lessons 6.6 The following lessons can be drawn from developments in the Filipino power sector during the 1990s: (a) Governments' bargaining power to secure the best contractual terms from private investors is severely limited where there are power shortages. (b) It is preferable to use international competitive bidding to select IPPs because bidding generally results in better terms than negotiated contracts. (c) It is unrealistic to expect power projects developed with private funds to be least-cost in the "traditional" sense: the additional cost over the hypothetical "least-cost" alternative is the price to pay for mobilizing resources that would otherwise not be available to the sector. 6.7 Other lessons that can be drawn from this operation are as follows: (a) The use of a "rate of return on assets" target for financial performance is inappropriate for a company/sector with a very large and lumpy investment program. (b) Geothermal exploration can be as risky as oil and gas exploration but yields lower returns because the end product is less valuable and impossible to transport over long distances. Accordingly, greater caution is required to evaluate risks and a relatively generous fiscal regime is needed to allow geothermal investors to recoup their costs. (c) There are no short cuts to a successful "sectoral" lending operation; success requires: (i) very substantial (and above average) inputs of Bank rescurces; (ii) broad staff skill mixes for project design, appraisal, and supervision; (iii) the application of normal project appraisal standards to all project beneficiaries and components; (iv) true synergies among major components and subloans; and (v) clearly defined processes and criteria for joint reviews and Bank approval of investment proposals to be funded by the loan but not defined at appraisal. 29 Annex A Basic Data Sheet ENERGY SECTOR PROJECT (LOANs 3163-PH, 3164-PH, 3165-PH) Key Project Data (amounts in US$ million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Total project costs 3,509.20 2,936.10 84% Loan amount 390.00 370.60 95% Cofinancing 150.00 150.00 100% Cancellation N/A 19.40 N/A Date physical components completed 12/31/94 12/31/95 N/A Economic rate of return 17%1 13.5%' N/A 1. NPC only; no ERR calculated for other components. Cumulative Estimated and Actual Disbursements (US$ million) Fiscal Year FY90 FY91 FY92 FY93 FY95 FY95 FY96 Appraisal estimate 15.00 70.00 160.00 280.00 372.00 390.00 - Actual 15.00 82.53 155.90 234.18 315.01 368.96 370.77 Actual as percent of appraisal 100 115 93 83 82 94 95 a) Loan 3163-PH: National Power Corporation Fiscal Year FY90 FY91 FY92 FY93 FY95 FY95 FY96 Appraisal estimate 6.00 26.00 62.00 127.00 189.00 200.00 - Actual 15.00 53.32 100.04 159.00 188.18 200.00 - Actual as percent of appraisal 250 211 161 124 96.0 100 - 30 Annex A a) Loan 3164-PH: Philippines National Oil Company Fiscal Year FY90 FY91 FY92 FY93 FY95 FY95 FY96 Appraisal estimate 6.0 28.0 64.0 112.0 142.0 150.0 - Actual 0.0 19.82 36.97 54.61 105.05 139.21 139.31 Actual as percent of appraisal 0 7168 58 49 105.05 93 93 b) Loan 3164-PH: PNOC-EDC Fiscal Year FY90 FY91 FY92 FY93 FY95 FY95 FY96 Appraisal estimate * 2.5 33.3 65.5 122.1 133.0 133.0 - Actual 0.0 19.0 33.7 49.6 84.3 117.9 118 Actual as percent of appraisal 0 57 51 40 63 89 89 * Revised appraisal estimate with appraisal disbursement for the loan as a whole. c) Loan 3164-PH: Petron Corporation (Part A (2) of Loan Agreement) Fiscal Year FY90 FY91 FY92 FY93 FY95 FY95 FY96 Appraisal estimate* - - - - - Actual 0.0 0.52 2.94 4.36 19.97 19.97 - Actual as percent of appraisal - - - - - - * Planned disbursement of part A(2) of the loan not available in appraisal document. Figure only for total loan. d) Loan 3165-PH: Republic of the Philippines Fiscal Year FY90 FY91 FY92 FY93 FY95 FY95 FY96 Appraisal estimate 3.0 16.0 33.3 40.0 - - - Actual 0.34 6.50 14.88 22.16 25.83 28.61 32.70 Actual as percent of appraisal 0 41 44 55 64 72 80 e) Loan 316-PH: Department of Energy (DOE/formerly OEA) Fiscal Year FY90 FY91 FY92 FY93 FY95 FY95 FY96 Appraisal estimate 0.50 2.50 4.30 - - - Actual 0.34 0.53 0.68 1.26 1.91 2.53 3.11 Actual as percent of appraisal 68 21 16 29 44 59 72 31 Annex A f) Loan 3163-PH: Energy Regulatory Board (ERB) Fiscal Year FY90 FY91 FY92 FY93 FY95 FY95 FY96 Appraisal estimate 0.50 2.50 3.00 - - - - Actual 0.00 0.08 1.21 1.97 2.39 3.45 3.45 Actual as percent of appraisal 0 3 40 66 80 115 - g) Loan 3165-PH: National Electrification Administration (NEA) Bank FY FY90 FY91 FY92 FY93 FY95 FY95 FY96 Appraisal estimate 1.00 7.00 16.60 22.30 - - - Actual 0.00 8.78 16.87 16.87 16.87 18.33 18.33 Actual as percent of appraisal 0 87 90 80 80 81 - h) Loan 3165-PH: Environmental Management Bureau (EMB) Fiscal Year FY90 FY91 FY92 FY93 FY95 FY95 FY96 Appraisal estimate 1.00 4.00 9.40 10.40 - - - Actual - - 0.13 0.47 0.61 5.44 1.80 Actual as percent of appraisal - - 1 5 6 52 75 Loan 3163-PH final transaction on February 23, 1995. Loan 3164-PH final transaction on April 15, 1996. Loan 3165-PH final transaction on May 3, 1996. 32 Annex A Project Dates Steps in project cycle Date planned Date actual/latest estimate Identification October 1988 October 1998 Preparation May 1989 May 1989 Appraisal June 1989 June 1989 Negotiations October 1989 October 1989 Board presentation January 1990 February 1, 1990 Signing March 1990 March 16, 1990 Effectiveness May 1990 June 12, 1990 Project completion December 31, 1994 December 31, 1995 Loan closing (Loan 3163-PH) December 31, 1994 June 30, 1995 Loan closing (Loan 3164-PH, 3165-PH) December 31, 1994 December 31, 1995 Staff Inputs (Staff Weeks) Stages ofproject cycle Staff weeks US$ ('000) Through Appraisal 98.8 180.9 Appraisal Effectiveness 47.0 98.8 Supervision 169.5 373.0 Completion 12 22.5 Total/planned 327.3 6674.3 33 Annex A Mission Data Date No. of Staff days Specializations Performance Rating Types ofproblems (month/year) persons infield represented' Implement Development statusb impact Identification/ Preparation Through November/ 9 N/A Eec, ES, FA(2), Appraisal December PrS, PE, Ree, SC EM June/July 1989 11 N/A ES(2), PE, PE, PrS,PE,L,FA, EM, L November 1989 5 11/19/89 PE(2), ES,FA, advance NPC to reduce procurement of to Constant procurements 20MW Geothermal Modular steam 12/8/89 turbine generators to 10; procurement to proceed in two stages, first submission of technical bids, and following their evaluation, price bids and financial proposals to be invited in second stage. NPC's revaluation of assets and increase in fuel prices may require significant changes in price to meet the 8% Rate of Return. Supervision I June 1990 2 6/18/90 EE, PE 1 1 Difficulties in international to competitive bidding procurement 6/30/90 e.g., 20MW geothermal modular units, transmission line, equipment and materials Supervision II March 1991 4 3/11/91 Eec, FA, PE, PS 1 1 Disbursement progressing as to scheduled for NPC, PNOC. No 3/22/91 disbursement for NEA due to delays on-lending arrangements between the government and NEA. Delays in budget appropriation may affect procurement of OEA, ERB. Request for 100% Bank financing. Bank agreed to amend the loan agreement as requested, except 95% for works on 7/23/91. Delays in implementation of long- run marginal cost pricing. Implementation to be made by end September 1991. Cofinancing with Japan not finalized. Supervision Ha June 1991 1 6/24/91 FA NPC financial performance in 1990 to was unsatisfactory. Government 7/04/91 bailout of US$280 million and tariff increase from January 1992 of about 0.27kWh required. Supervision II aJune 1991 1 5/30/91 ES PNOC needs to sign a steam price (limited to contract with NPC, as agreed in the supervision) 6/13/91 case of all Luzon. NPC in financial crisis and delays in tariff increase based on revalued assets. 34 Annex A Date No. of Staff days Specializations Performance Rating Types ofproblems (month/year) persons infield represented' Implement Development status impact Geothermal projects not commercially feasible at Natib and Pinatubo; delays in obtaining environmental clearance at Bulusan. Supervision IIb September- 1 9/23/91 FA 1990 financial performance (limited October 1991 to unsatisfactory and could deteriorate mission) 10/2/91 further. Require government bailout of about US$280 million. Financial irregularities and inefficiencies in financial management observed. New conditions: 6% rate of return on revalued assets; satisfactory cash position with out additional government contributions; potential difficulties for all NPC loans. Supervision IIc 1 8/10/91 PE Reviewed issues related to small (limited to hydro-power development, e.g., mission) 12/10/91 avoided cost, implementation options, etc. Supervision III November 1991 4 11/18/91 FA(2), PE, ES 2 1 Financial crisis likely to delay to projects like Leyte Geothermal, an 11/28/91 Japanese loan of US$150 million not likely to be approved. NPC's and PNOC's loans are being executed satisfactorily. Sector coordination and other legislation lagging. Difficulties in confirming BOT/BTO and/or because of delays of environmental decisions. Potential energy crisis. Bank mission recommended loan suspension. Disbursement slow for Loan 3165- PH due to counterpart funding. Delays in approving bills to establish DOE. Delays in approving ECC for Bulusan for three years. Supervision IV June/July 1992 4 06/17/92 FA (2), PE, ES NPC: defaulted on financial to covenants (ROR %) below 8%. 07/3/92 Required government bailout partly due to delays on PO. 17/kWh increase approved by the board in February 1991. Under the agreed Reform Program of September '91 Bank waived the 8% ROR for 92, if NPC achieve 6%, and not require cash contribution from GOP. 35 Annex A Date No. of Staff days Specializations Performance Rating Types ofproblems (month/year) persons infield represented' Implement Development status impact Restructuring of NPC tariffs, a revenue-neutral way designed to introduce demand charges equivalent to 30% of present billings delayed (expected implementation by September 1992). Sucat plant had four blackouts after being rehabilitated at cost of US$130 million. Delays in training program implementation and in sending audit reports for SOE and special account. PNOC-EDC: Pinatubo (acid wells), Natib & Cagua areas due to lack of commercially viability of the steam reserves. Bulusan awaiting environmental clearance of DENR. Use of loan uncertain due to uncertainty over drilling of wells at Labo and Bulusan. PNOC-Petron: implementation behind. Cost of project US$27.3 compared to $65.5m at appraisal. OEA's Energy Policy Frame: satisfactory; but DENR has yet to release the ECC for Masinloc and Pagbilao Plants. Similar delays (Calaca II coal and Bulusan geothermal) has stopped for more than three years. Delays in elimination of the 8 years royalties to give incentive for geothermal development. Restructuring relationship between petroleum prices requires the completion of energy pricing. Out of US$4.4 million only US$0.52 million disbursed. NEA: audit report for SOE was overdue; Need to set a Steering Committee (ERB, OEA, NPC, PNOC, NEA) to review the energy pricing study, so that its conclusions can be applied EMB: only 2% of US$10.4 million loan disbursed due to government budgetary appropriation. 36 Annex A Date No. of Staff days Specializations Performance Rating Types ofproblems (month/year) persons infield represented" Implement Development b b status impact Supervision November 1992 1 11/2/92 PS Problems associated with drilling IVb to low-pressure volcanic rocks under 11/6/92 the extremely high temperature characterized most of PNOC-EDC geothermal fields resulting in hole drilling fluid loses, stuck drilling strings and inadequate casing cementing. PNOC-EDC coping well. But need to contract out international experience and improve its drilling capacity. Supervision V August 1993 3 N/A to FA,EE,ES 2 1 NPC: Audit report not received as (supervision 8/30/93 of September 1993. Disbursement done with was to stop if audit not received by evaluation of October 30, 1993. Tariff approval the Sector needed to ensure ROR 8%. PNOC: Structure) legislative change on royalty and provision of other incentive needed for privatization Loan 3165-PH: loan disbursement substantially delayed for DOE and EMB. EMB suffers from reduced budgetary appropriation. Supervision VI June 1994 2 6/6/94 to PE, FA S S NPC: extension of loan requested 6/30/94 to complete civil works and foundation works at Palimpinon Geothermal stations due to unexpected ground condition found during construction. Implementation of JEXIM component delayed due to the prolonged brownout and transfer some components to loan 3163-PH. PNOC: Contracts for refinery awarded in March 1994 after delays. Extension of loan required. Loan 3165-PH: Delays in disbursement, loan extension required. Supervision January 1995 1 1/15/95 E Reviewed the status of EMB. VIa (limited to agreed on use of the remaining supervision) 1/26/95 fund under loan. Availability of counterpart funding was still an issue. Completion February/March 1 2/25/95 FA ICR mission 1996 to 03/95 a. ES= Energy Specialist; FA=Financial Analyst; PE=Power Engineer; EE=Energy Economist; PS=Petroleum Specialist. b. 1=Minor problems; 2=Moderate problems; 3=Major problems; S=Satisfactory. 37 Annex A Other Project Data Borrower/Executing Agency: RELATED BANK LOANS Operation Purpose Year of Status Approval Preceding Operations: Petroleum Exploration Promotion Project Promote private oil companies in petroleum 1982 Closed (Loans 2201-PH & 2202-PH) exploration and strengthen the exploration capabilities of Bureau of Energy and PNOC. Geothermal Exploration Project Improve national strategy for geothermal 1982 Closed (Loan 2203-PH) exploration, government geothermal development policy and institutions; facilitate private involvement in geothermal exploration, etc. Bacon-Manito Geothermal Power Project Support the least-cost source incremental 1988 Closing (Loan 2969-PH) capacity for Luzon grid; and strengthen institutional capabilities and financial viability. Manila Power Distribution Improve MERALCO's subtransmission and 1989 Active (Loan 3084-PH) distribution system and its institutional capacity. Following operations: Japanese NPC-JEXIM component of First phase of a least-cost energy sector 1992 Active (Loan 3163-PH) development program. Rural Electrification Revitalization Project Enhance National Electrification 1992 Active (Loan 3430-PH) Administration's effectiveness, REC's Investment Program for 1992-95. Power Transmission & Rehabilitation Project Alleviate power shortage in Luzon. 1993 Active (Loan 3626-PH NPC) Leyte-Cebu Geothermal Project Develop geothermal resources for power 1994 Active (Loan 3700-PH/Loan 3702-PH NPC) generation, strengthen institutions and their financial viability. Leyte-Luzon Geothermal Project Develop geothermal resources for power 1994 Active (Loan 3746-PH/Loan 3747 3747-PH NPC) generation, strengthen institutions and their financial viability. Power Transmission & Rehabilitation Support the government's plan to restructure 1996 Appraisal (Loan - PH) the National Power Corporation and power stage sector privatization.  39 Annex B Table 1. Loan 3163 to NPC (in US$ millions) Palinpinon 80MW Geothermal Plant 105.1 Various 69 kV Transmission Lines 19.2 Sucat Thermal Plant rehabilitation 2.3 Spare Parts 28.9 Fuel for power stations 38.3 Hydro plant feasibility studies 6.3 GRAND TOTAL 200.0 Table 2. Loan 3164 to PNOC Bacman II Steam gathering System 9.6 Cosumables for drilling operations 61.7 Drill Pipe 3.1 Tools 2.7 Technical services (incl. rig rental) 24.2 Equipment for civil works 13.0 Consultancy services 3.6 SUBTOTAL (PNOC-EDC) 118.0 PETRON COMPONENT 20.0 - Gasoil desulfurization unit -LPG treatment facilities upgrade CANCELED PORTION OF LOAN 10.7 GRAND TOTAL 50.0 40 Annex B Table 3. Loan 3165 to GOP DOE component 2.8 - Construction of office building 1.1 - Studies 0.7 - Institutional Strengthening (TA & Training) 0.9 ERB component 3.5 Studies and TA Training Office equipment EMB component 6.6 Monitoring & lab equipment, vehicles 6.2 TA/Consultancy services 0.3 Training 0.1 NEA component 18.3 Office & communication equipment 1.0 Equipt.& materials: Rehab.of REC distbn. networks 8.0 Testing equipment 1.2 Transformer & substation packages 7.6 Training & TA 0.6 CANCELLED PORTION 8.7 GRAND TOTAL 40.0 41 Annex B Table 4. NPC Monitoring Indicators 1992 1993 1994 1995 1996 ACHIEVEMENT OF GOALS: Total Energy Sales (GWh) 23,958 24,805 28,745 31,031 33,381 Net Sales (Excluding Test-Run) 23,875 24,712 28,520 30,356 32,549 Power Sold/Total Pop. (kWh/person) 395 409 474 452 487 MANAGEMENT/EFFICIENCY: # Days Accounts Receivable 38 39 36 38 37 % Receivables on Billing 10.7% 11.9% 10.3% 11.1% 11.2% Total No. of Employees 14,208 14,560 15,794 14,742 13,119 # of Operational Employees 11,185 13,142 12,448 12,164 11,024 Personnel Cost on Revenues 3.8% 3.9% 5.0% 6.4% 6.4% Sales per Oper. Employee (MWh) 2,142 1,887 2,309 2,551 3,028 % Total Energy Losses 6.8% 6.8% 6.1% 6.8% 6.3% FINANCIAL RATIOS: Average Tariff - P/KWh 1.5768 1.6385 1.7717 1.7282 1.9551 Average Tariff Increase P/KWh 0.18 0.06 0.13 -0.04 0.23 Average Tariff - USc/KWh 6.3 5.9 7.3 6.6 7.4 Working Ratio 62.4% 60.3% 61.1% 56.9% 59.5% Operating Ratio2 81.2% 83.5% 76.1% 78.0% 79.1% Rate of Return - NPC's Charter? 6.8% 5.7% 8.0% 7.0% 7.9% Rate of Return on Reval. assets4 7.1% 5.9% 8.3% 7.3% 8.2% Return on Capital Employeds 10.7% 13.9% 18.2% 21.5% 8.6% Net Profit - Million P 2,440 1,365 7,460 3,914 5,543 Net Profit on Equity 6.1% 1.9% 7.2% 3.7% 5.6% Self-Financing Ratio (3-Year Av.)6 5.9% -12.0% 17.4% -3.3% -5.3% Debt Service Coverage7 1.13 1.49 1.15 1.15 1.31 Interest Coverageg 1.28 2.32 2.37 2.39 2.75 Debt/Equity Ratio9 84% 86% 75% 83% 93%* Long Term Debtlo 67,306 96,004 103,750 152,220 297,839 1. Operational expenses excluding depreciation/operational revenues. 2. Total operational expenses (including depreciation & provision for d/a). 3. Operating income on net average fixed assets plus one sixth of cash operating expenditures. 4. Operating income on net average revalued fixed assets in operation. 5. Profit before interest and taxes/total equity and reserves. 6. Cash available from operations/3-year average capital expenditures. 7. Operating cash flow divided by debt service (principal plus operational interest. 8. Profit before interest and taxes/total interest (operational and capitalized). 9. Long-term debt/(long-term debt plus total equity) [* 1996 is estimated]. 10. Includes lease obligations for BOT plants amounting to: P35,429m. in 1995 & P169,544m. in 1996. Sources: NPC & Bank SAR # 14844-PH.  43 Annex C Comments from Borrowers IRepublic ar:hehilippines . DEPARTMENT OF ENERCY 12 Mach Ip98 Mr. VIny Bargava .COatry DIrector Phluppine East Asia and,Pacift Regius the WMrld.Dank Resident,Missi Philippinu§ 23 d Floor TRipan Plao Emerld Avenue, Ordgas Centcr Pasig City Daar Mr. lehargava: This is in responu ta your roquett for o=mm= on.he DrfR Adit Perormwne Rgport on the Phiippine EnergyStor Loan Prqojet No. 3165, '~1tio y céithe vaious componnts fnder thå institui~nl strengthsning of sector entite1 Plas bé advised of the: project's positive impa=t. on jhcingf/ru ~thein DOE's. cpabiities in t=ms of planning and progrm iplementatioit as 'el as in the,ethbHhmcnt of an efctive monitorig and ärcoimting asystera 'Fr a oE· detailed commnt on our evaluaion of th governmänt portion of the bon, nclosed pluase findour input to the d andit report. We tst you fnd everything in ordr, Very tralJy yours, 44 Annex C Comments on the WB-Energy Sector Loan No. 3165 L Department of Energy A., Institutionaijzation of Methods and Procedres f6r Logo N- Conventonal EIrm. Plaznina at the Rosio1nal nd Sub-Re anal Levels (Non-conventions1 Eniery PSropam) The Framework Study under this component pavt4 the way for the implementation of new and renewable energy accountmg and coordation syat*ms. It established the ooordination network in 3iOionovenionAI. or renewable sector among the different government and.private. agencis and groups. It likewise established the vertical and horizontal ieishis of the various sertors and organizations that are directly affiotingenergy uses. The "Cesus of National Capital Region" study on the other hanW, illed up one of the'DOEs data gajs as it provided the atual atabase for new and renieable eneWy in the Metro Manila ar. On the raimng seminar and equipment outay, the IAP softwPare mode4 seminars, conducted under this project was abic to provide the skills in enabling these planer to analyze available resources and prevailing consumption putterns and in the process forecast f&Utre qnrgy situtiomk Through the hardware procured under this compomwt, the non. conventional encrgy database was established. Similarly. the laboratory and field instrwots gave the -proponent first hand, quantitative dat* on the local ccrgy resources available in the country allowing [mulatio of reliable estimates of non-conventional onergy contribution to the eiergy mix. B. Power System.Elanninromint As envisaged in the appraisal report, training on the Power Sytt:A Planning (PSP) Software was conducted among conccrncd, agencies namely, Nadonal Power Corporation, National .':Electriflat6on Adutinistration, and private utilities. like MERALCO. As an offshoot. the PSP is now being utilized as a basic planning tool on toe flmuilaCan 'and updatimg of the Power Development Proguam whic4 lays down, the log, 45 Annex C term plan tomeet the futue power requirements of the country,V&s4-Vs the coiny's economic growth rates. C. MraDatab Despite the' non-completiot of this project duo to ftLe failum .of the contractor to deliver the required database systemt, systems developmet activities such as rescarch. programming and systems analysis which provided useful data were undertakcn. D. En3onmentaL Imnacis of Accelerated Geothermal Deveopasi The: recommndaions of this stu4 reafarmed the DOE's policy thrust of putting in place 'initruments that will guarantee .an in a*d .anMry- Gavirofl2mAt approach in energy project developient. The one top ebop coucept in scoing environmental permiuts for encrgy projects is: now in place in line with the DOE's role to facilitate the srOung of:the Environmenthl Compliance Certificate of.all projects which is ndtakmn by the Environmental Protection -and Management Division,e'f Fur.DOE. Further, the Memorandum of Agreement .definig the role 0nd responsibility of DOE in lnvirOnMental permits i coordinai with the- Depustment of Environmet and Natural Resources is schedu 4 to be signed during the second quarter ci the year. E.' Mannower Tranin zud Building ExpansionProrm The above cited impact of institutional strengtheningca4 also IN qnindc iz oras of the number of employees that were able to-avaiI'WS-ESL ,d4I for training. As of the end of the Project a total of 431 DOE kmploye. availed of the fud. The construction of the new building responded to the Aued'for hritional spacs for oMos, working areas, supplies and necessary equipment in view of.. the transfomation of, the then Offic of Funcrgy Alfars .into a. Depadment lovel. II, E%vironmental Managemeut Bureau A. Fo Line 11tem 3 &18. P 15E* Requests deletion of the.phrae "EMB's Qmssion to requems GOl budge appropriations" inasmuch as the project undertook soe of the activ 46 Annex C during the second year of its implementation despite t&e non-relase of th. loan allocation. utilizing only the GOP couaterpart,amounting to six millioan five hundrd pesos (P6.5 m). B. Line 5. hM 3 &18. Dage 15 Requests the deletion of the sentence 'This shows a low lvel of EMB and GOP commitment to the pursuit of project objectives." since the project ba sudcessfully achieved its yearly target and satisfavtorily disbursed,: the budget annual allotmet as released by the Philippine Depasthntsof Budget and Management. The maior factor that hindered loan ava t during the first two years was the implementation of the procedure 'on special account mcchanism wherein the National Eletiation Adminisation (NEA) and the EMB have a common-special account The NEA .had been slow in their disbursement, Corrsponingly.. dlaying EMB's loan availment. In view of this, the.Bureau opled to ;ue direct payment scheme to expedite implementOWion of the project. 47 Annex C PNOC ENERGY DEVELOPMENT CORPORWIoN9 AHl1: P... PNOC Energy Compania SIdg.. Mefritt Road. Fort Sonifacio. 1201 Makati Ciy. Philippines P.O. Box 2102 MCPO Tel. No. 93-6001/1320 March 6, 1998 Mr. Vinay Bhargava Post-V Fax Note 7671 Dale # Country Director, Philippines F , m' 4 East Asia and Pacific Region To F. w& R dk Resident Mission Philippines CoMept. _Co_W&_A_4P_ 23rd Floor, Taipan Place Phone # Shwe *(;Z) 9/7- 3007 Emerald Avenue, Ortigas Center SR:Z / F-* t Pasig City Subject: Ene'= Sector Projects Draft Audit Performance Report We have reviewed the World Bank (WB/Bank) draft Audit Performance Report for the Energy Sector Projects and below are our comments and suggestions. 1. Reference: Page 1, Par. 3; Page 13, Par. 3.8 "... of the 38 wells drilled only Lare useable for production or reinection. Please change the figure 13 to 15 based on the attached submission to the WB audit representatives in May 1997 - "Status of 38 Wells Charged to IBRD Loan 3164-PH" (highlighted for your easy reference). 2. Reference: Pages 2, 3 and 26 - Principal Ratiugs/Performance Ratings The report provided explanations on the principal ratings given on page 3 for the Energy Sector Project as a whole. We suggest that explanations corresponding to the performance ratings found in Table 5.1 on page 26 for each implementing agency be also provided. The Bank should qualiy its rating of "marginally unsatisfactory" on PNOC EDC in terms of "Outcome" (Table 5.1) as the project outcome were based on 76 wells and 380 MW FCDS using a WE funding of USS133 million which the WB had indicated to be inadequate. If we will count the total investment required for the 76 wells and the 380 JvIW FCDS it will require a funding of (USSI 14 +USS380) US$494 million. The project output of 38 wells and 40 MW FCDS is commensurate with the WB input of US$133 million and should therefore be satisfactory. 48 Annex C 3. Reference: Page 10, Par. 2.11 "The assessment of risks was weak in several areas. First, the geological andfinancial risks PNOC faced in its geothermal drilling program were glossed over." The appraiser should give recommendation on how the assessment of risks could have been strengthened in the light of the facts and circumstances available during the time of project appraisal. It is very easy to make this statement now since thesewere based on hindsight. Had drilling been successful, it is doubtful whether the appraiser will still make these statements. 4. Reference: Page 11, Par. 2.11 "... Other Bank-financed drilling under a parallel project on Luzon was also unproductive. The contribution of geothermal energy to increased power production in Luzon was thus greatly- overestimated" This is unfair, since at the time of the project appraisal this may be the best estimate available in the light of successful experiences with available geothermal projects such as Bacman I, Tongonan I, and Palinpinon I. 5. Reference: Page 12, Par. 3.2 "... The cost of this plant (more than USS1,30/kW) is also much higher that the Bank- financed IIOMW Bacman I geothermal plant (USS9804cW) that was completed shortly before Palimpinon. It also compares unfavorably with the most recent privately financed geothermalplants on Leyte, which average under USS1,000/kW " This is not true since the BOT power plant projects contracted cost is from S 1,200/kW to 31,500/kW. 6. Reference: Pages 12 & 13, Par. 3.5 "Of the USS150 million lent to PNOC, US$13J million was earmarkedfor geothermal investments ... Given the size of the program and the high average cost of wells (more than US$1.5 million each), this allocation was inadequate. Unurprisingly, implementation fell far short of these targets; only 38 wells were drilled, and 4-0MW of FCDS capacity installed Had the exploration drilling program proved to be successful, the additional funding requirements could have been generated through private sector participation which is one of the objectives of the project. 7. Reference: Page 13, Par. 3.6 "Neither the SAR nor the ICR offers a technical, economic, or financial evaluation of PNOC's geothermal exploration program. The drilling program undertaken was very different from that expected at appraisal. The 76 wells to be drilled were divided across six different areas in Lzon. Only six wells were drilled in Luzon ... Twenty-eight wells were drilled in Leyte which did not even figure as one of the six areas idennfied at 49 Annex C appraisal At that time, the Leyte-Luzon and Leyte-Cebu electrical grid nterconnections had not been adequately studied to justify concentrating more driling effort on Leyte. particularly as the area's potential was already relatively well known." PNOC adopted a prudent approach in its drilling program by concentrating first in Luzon and later on in Leyte. Had the Luzon drilling activity been successful it could have avoided the Leyte-Luzon interconnection since the bulk of the power dena'nd is in Luzon. The fact that not all programmed wells were drilled is to minimize losses by not pursuing drilling in areas where the results of initial drilling indicated low probability of success. S. Reference: Page 13, Par. 3.9 "OED also found that PNOC used the Bank loan to purchase USS62 million of drilling "consumables ", about USS30 million more than required for the 38-well program. According to PNOC these items have been used in the drilling operations of the two follow-on Leyte projects. PNOC does not appear to have sought Bank approval for its decision to "over-procure" drilling consumables as a way offidly using the loan. " PNOC followed WB procurement guidelines and did not "over-procure" since the procurement were based on -program requirements. If PNOC EDC had adopted a piecemeal procurement it could have become costly and could have resulted in project delay. Anyway, there have been no losses since the excess materials were later used in the Leyte project 9. Reference: Page 14, Par. 3.11 "... The FCDS was completed in April 1994, but only the first 20MW unit has been commissioned by VPC. due to major completion delays arising from a contractual dispute. Please change the above statement to read: The FCDS was completed in April 1994, but only the first 20 MW unit has been commissioned by NPC, due to major completion delays of the second 20MW unit of NPC arising from a contractual dispute. We would like to clarify that the subject dispute is between NPC and its contractor. 10. Reference: Page 22, Par. 4.15 The PNOC steam supply systems (Bank financed) and Lre BOT power plants amounting to... Please change the word three to four.. II. Reference:. Page 22, Par. 4.16 NPC has to pay PNOC EDC about USS7 million per month for power it is unable to draw. For its part. PNOC paid the IPP 977 million pesor (USS38 million) for capacity charges on the idle power plant during the second hal of 1996." 50 Annex C We prefer the US$7 million above be expressed in currency used in billing, i e., peso. The amount is about P200 million per month. Please change 977 milhon pesos to 947 million pesos and accordingly, the corresponding US Dollar equivalent based on the applicable exchange rate used by the Bank. 12. Reference: Page 24, Par. 5.3 "... The Bank's inpu into the design and implementation of the government 's BOT ininative aimed at solving the power shortages of the early 1990's was mmnimal. At best the Bank was unenhusiastic, at worst it opposed the GOP solution." This is not true as the Bank supported the BOT scheme for Leyte- Cebu and Leyte-Luzon. 13. Reference: Page 27, Par. 6.4 "PNOC-EDC's explorazion program has been costly and the results have been mixed Recouping the costs of unsuccessful exploration filly through the sale of steam for power is not possible under the current fiscal regime."' It is only costly because of the unsuccessful wells. However, since we have factored in the cost of these unsuccessful wells as part of the total cost of geothermal drilling and PNOC had adopted a prudent approach to minimize these drilling losses, the exploration program has not been costly. With 40MW discovered for a WB input of USSl33 million, the outcome has adequately covered the cost. 14. Reference: Page 28, Par. 6.7 (b) "Geothermal exploration can be as risky as oil and gas exploration but yields lower returns because the end product is less valuable and impossible to transport over long distances. Accordingly, greater caution is required to evaluate risks and a relatively generous fiscal regrme is needed to allow geothermal investors to recoup their costs. While we agree that a relatively generous fiscal regime is needed to improve the return on investment we do not agree that it is as risky as oil and gas exploration based on the result of the project. We hope that the above comments and suggestions be considered in the final report. Very tru) yours, R/PI /BPL NAZARI VASQUEZ President Attach 51 Annex C Attach. STATUS OF 38 COMLVPLETED WELLS CHARGED TO IBRD LOAN 3164 P. PROJECT/AREA WELL STATUS 7'70 DESIGNATION I. Luzon 1. BacMan II OP-6D Production Well, Botong 20 MWe Plant CN-2RD RI Well, Cawayan 20 MWe Plant CN-3RD RI Well, Cawayan 20 MWe Plant. 2. Mou4t Labo LB-4D Potential RI Well LB-5D Potential RI Well LB-6D Acidic, Will not be used . Visayas 1. No. Negros HG-ID Non-Commercial (WHP) Well, Potential RI Well PT-ID Plugged and abandoned CT-ID Non-Commercial, Potential RI Well PT-2D Will be acidized to increase permeability and commercial viability 2. Greater Tongonan/ 4R.2D RI Well, Upper Mahiao 125 MWe Plant Alto Peak 4R3D RI Well, Upper Mahiao 125 MWe Plant 4R4D (Top Hole) Re-entered and completed as RI Well, Upper Mahiao 125 MWe Plant 5R2D Very tight Well, will not be used MG-IRD Very tight Well, will not be used MG-2RD Very tight Well, will not be used MG-3RD Very tight Well, w;I not be used MG-4RD Very tight Well, will not be used MG-3D Production Well, MG-A 120 MWe Plant IMG-4D RI Well , MG-A 120 MWe Plant MG-7D Production Well, MG-A 120 MWe Plant MG-SD Very tight Well, will not be used MG-9D Acidic, reserve RI Well, MG-A 120 MWe Plant 52 Annex C PROJ WELL STATUS DESIGNATION _ I MG-IOD Very tight Well, will not be used ' MG-i1D (Top Mole) For re-entry MG-12D (Top Hole) For re-entry MG-13D Production Well, MG-A 120 MWe Plant NIC-14D -Production Wall. MG-A 12C MWe Plant MG-15D Pl Well, MG-B 60 MWe Plant MG-16D Production Well, MG-A 120 MWe Plarnt AP.1D' 2 MWe Production Well A.P.2D' 17 MWe Production Well AP-3D Non-Commercial AP-4D Nqn-Cormmercial AP-5D' Non-Commercial AP-6D Plugged and Abdndoned 2 Mahagpao NMI-TD Limited permeability. for further test NUIT-2D Cold Well, may not be commercial Entire Alto Peak'devclopmen abandoned in nid-1996 as resource area is small and acidic. 53 Annex C REPUSUKA No PILIPINAS Pambansang Korporasyon Sa Elektrisidad (NATIONAL POWER CORPORATroN) CASRSQ 98-055 April 3, 1998 Mr. Vinay Bhargava Country Director, Philippines East Asia and Pacific Region The World Bank 23rd Floor Taipan Place Emerald Avenue, Ortigas Center, Pasig City Dear Mr. Bhargava Subject: World Bank Report - Energy Sector Projects (Loan Nos. 3163,3164, and 3165) Thank you for furnishing us your draft performance report on your Loan Nos. 3163, 3164, and 3165. We find the report incisive and on the whole acceptable. But, we woLid like to make some clarificatory comments on the points you have raised particularly on some portion of the preface and on key issues 4.1 - 4.5, '5.5, 6.2 and 6.6 to put things. in their proper perspective:. 1. On Preface a. 40 Paragraph 6 sentence- "... the- projectCclearly--failed- to put the power sector on a ffnancially sustainablelfooting: NPCt finances are still very fragile,-" For a project with a loan amount of only $200 million, we don't expect it will ;ropel NPC into having a sustainable financial footing. We have to remember that a project has considerable gestation period before it can be self-sustaining. If ever it is able to do so, it can only contribute to a certain extent to NPC's Iquidity but never to a point of making the whole NPC's finances stabia. There is obviously a mismatch in assessing the actual purpose of the loan with what the report purports it to be. b. 4't Paragraph 7th sentence - "...NPC already over-indebted and urgently needs a substantial equity Injection..." and 51h Paragraph 2" sentence - " ...no evidence that the governments success in attracting private capital to invest in power generation can be attributed to this project ..' We have always pointed out to the. government that the major problem of NPC is undercapitalization. But the government is also in dire straihs so we have to resort to BOT as a means of providing capital to power projects and later orivatization. 54 Annex C inasmuch as the level of investor confidence was on the low side at the time, the BOT terms we had were not necessarily on the least cost side. The priority then was just to address the power crises. But now, with increased level of investor confidence, we are able to attract more investor and solicit better terms. 2. On 2.9 and 3.2 - Delays in project implementation While admittedly there were delays in the implementation of the project, we cannot say however, that NPC does not have the capability to carry out the project because it was able to overcome all the problems: commonly attendant in govemment bureaucratic processes. The lessons, learned prod. us to further streamline the process. 3. On 4.1 - NPC's insufficient cash in 1991 to meet its short-term operating needs The tight cash position of NPC at the time was primarily brought about by external adverse events not of NPC's making: the eruption of Mt. Pinatubo where NPC's operations in and near the area were wildly disturbed; the severe drought that caused NPC to use expensive fuel where the additional cost was not 100% recoverable despite the implementation of the Fuel Compensating Charge; increase, at the same time, in fuel prices as a result of the Gulf War; and followed by the precipitate depreciation of the peso which made debt servicing quite a burden. We had wanted to increase our tariff in 1990 and 1991, when we sustained operational losses, but given its unfavorable social impact and the bleak economic scenario enveloping the country at the time as described above, the proposed increase was implemented only in 1993. The NP Board had actually approved this increase but was suspended by a Temporary Restraining Order issued by the Supreme Court upon request of consumer-.groups. and labor, sector. To top all of the above, NPC's. tax exemption -privileges were. questioned- that resulted to the non-refund of about. P15 billion cumulative taxes:and duties. It was only on June 8, 1993 that the Supreme Court reaffirmed with finality NPC's tax and duty exemptions. In the meanwhile, the government, to enable NPC to meet its obligations, had to infuse R3.6 billion (US$135 million)' in 1994. The rate base used to compute the rate of return on assets was not revalued, in termis of local indices, during 1988 - 1990. But in terms of foreign exchange fluctuations, the rate base was effectively appraised as the revaluation of foreign loans at the end of each year is added to the asset account. The result of the independent appraisal done for this period i.e. 1988-1990, was recorded in 1992. Hence the basis of the latest basic rate increase in 1993 was already reflective of the appraised values of operating assets. Gross internally generated funds after changes in working capital accounts for the years 1987 - 1990 were positive before the debt service. The deficit resulted only after deducting the total debt service inclusive of both the restructured loans and the amount due for tlocking which was considered as new loan. Later converted into an equity contribution. 55 Annex C 4. On .4.3 - Reasons proffered for the continuing. precarious financial situation of NPC a. 1st sentence (1st clause) - "... with attendant foreign exchange risk..." This refers only to the interest expense portion of the foreign debt. FOREX fluctuations on the principal debt-servicing of foreign loans, foreign denominated purchased power and other operating expenses are automatically passed on through the recovery adjustment mechanisms implemented starting 1994. Since INPC's interest payments are greatly affected by-the peso's depreciation,:, NPC is looking into various measures,to. reduce, the;same NPC.is:thust pursuing! with the Bangko' Sentral. ng:. Pilipinas,- the- approval- of" NPC's- entry into cross,. currency and interest swaps and possible refinancing of maturing loans with zero coupon bonds or other financial instruments with lower interest costs. b. 1t sentence (3rd clause) - "... large investment..,(exceeding US $1Billion annually)" NPC investment program exceeded US$1 9 only in 1997. In 1998, investment is estimated at less than US$600 million. c. 1" sentence (4mh clause) "...ceiling of 10%... prevents NPC from increasing its internal cash generation." The rate of return ceiling was increased from 10% to 12% pursuant to the Electric Power Crisis Act of 1993. However. even at .10%, the return could not be met because NPC's basic rate has remained stationary for three years, even though there were substantial additions to operating assets. Besides, there is a limit to what the public, can bear.. Thus- only- autonatic..recovery-adjustmentsiwere implemented- startingA 994-to-:recover, -changes;iin fuel. prces,purchased::power- costs as well as foreigr exchangefluctuations-on the principal idebt- service and foreign denominated operatingeexpenses._ d. 2nd sentence - "_ NPC3s self financed contribution to investment was once again negative in 1995"7." After the improvement in 1994, NPC's self-financed contribution to investment was negative only in 1995 when principal debt-service rose due to full payment of restructured Paris Club loans. This left NPC with no ICG to finance 20% of capital expenditures. However, following World Bank computation where capital expenditure is an average of a three-year period, self-financed contribution to investment was negative for 1995 and 1996 only. Be that as it may, perhaps it would do well for the World Bank to likewise reconsider imposing a certain self-financing ratio as the ADB has already removed its previously mandated 20% self-financing ratio. It just stuck to a debt- service ratio of 1. 56 Annex C e. 4" sentence - "Delays in commissioning on-going transmission projects..." An addendum agreement was executed between PNOC-EDC and NPC wherein the contracted energy would be paid by NPC upon the commercial operation of Leyte A. But said contracted energy was treated as stored energy which would be lifted in the future based on agreed schedule. 5. On 4.4 - "Since its near bankruptcy In 1991..." The more appropriate term to use is severe! liquidity problem as fortified by the current ratio of 0.70 and Fixed Assets. to Long-Term Debt.of. 1.09: From 1990 - 1994, there were equity infusion in the form ofl cash and equity conversion of the government's advances for NPC's debt service amounting to P5.5 billion and R6.5 billion, respectively. Notwithstanding such equity infusion, NPC remains undercapitalized as the total equity Infusion at 223.3 Billion as of 1997 represents only 3.77% of total assets. At the end of 1996, NPC's debt to equity stood at 75:25 mainly due to the increase in loans and capital lease obligation with the coming in of Pagbilao Coal Fired Power Plant amounting to P144 Billion. The ratio catapulted to 80:20 at the t -d of 1997 attributable to the revaluation of said loans and capital lease obligation 8: a result of the hit sustained from the regional currency crisis. 6. On 5.5 - The Bank's unsatisfactory rating of its project-related performance through Loan closing (end - 1995) More than the review done on the project itself, there. is a -need to emphasize that the financial crunch that. NPC finds itself-in is'mainly due to under-capitalization. Paid-up capital is only P26.45TBillionout of the authorized capitalization ofEP50 Billion; compared to. total., assets-.it is just roughly 4 3%. This, compared with the extensive capital outlay required to continuously put up new facilities an& upgrade existing ones, there is no way for NPC to get out of the quagmire except to resort to foreign borrowings, making it highly leveraged in the end. The regional meltdown further worsened the condition. Also, the mismatch between the average life of the assets at 19 years as against that of the loans at 9 years, need to be lo:ked into, in so far as it directly affects NPC's liquidity. 7. On 6.2 4"' sentence - "...lent over $800 million to a non-creditworthy NPC..." We have attached an updated Indicator (Table 4 of the WB report) up to 1997. As presented, there were improvements in some of the ratios compared to 1996. NPC, though in tight financial condition in the past and even now, has never defaulted in any of its loans. Given also the discussion in no. 4 and the various reforms2 being instituted, the adjective 'non-creditworthy' should be reconsidered. 2Open Access Transmission Service, One-day Power Sales Contract. Bulk Power Supply, Unbundling of Tariff, etc. 57 Annex C The raison d' etre or reason for being of the World. Bank is to help distressed countries and put it in good stead. If NPC or the whole Philippines for that matter has been non-credit worthy for the last ten years, to whose succor would NPC or the national government turn to - to the commercial lenders? If that be the case, then the World Bank would have been a big letdown. 8. On 6.6@ - "It is unrealistic to expect power developed with private funds to be least-cost in the "traditional" sense..." This may not be true. The early projects developed with the use of private funds. were procured during the impending occurrence and-during,the occurrenceof power shortages. They are really far from "least-cost." But, projects, procured,with the private funds after the crisis showed a downward trend and the costs are approaching the "least-cost" For your consideration. .A. ELGADO *- President cc: M. T. Nufiez Project Director, IBRD