Sector Assistance Program Evaluation of Asian Development Bank Assistance to Philippines Power Sector
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Sector Assistance Program Evaluation SAP: PHI 2005-09 Sector Assistance Program Evaluation of Asian Development Bank Assistance to Philippines Power Sector September 2005 Operations Evaluation Department Asian Development Bank CURRENCY EQUIVALENT Currency Unit – peso (P) At Operations Evaluation (May 2005) P1.00 = $0.0185 $1.00 = P54.0000 ABBREVIATIONS ADB – Asian Development Bank AmCham – American Chamber of Commerce of the Philippines BOT – build-operate-transfer BTOR – back-to-office report COS – Country Operational Strategy DOE – Department of Energy EC – electric cooperative EIRR – economic internal rate of return EPIRA – Electric Power Industry Reform Act ERC – Energy Regulatory Commission FDI – foreign direct investment FIRR – financial internal rate of return GDP – gross domestic product GENCO – generation company IDC – interest during construction IPP – independent power projects JBIC – Japan Bank for International Cooperation KIST – keep it simple and transparent LRMC – long-run marginal cost MERALCO – Manila Electric Company NEA – National Electrification Administration NEDA – National Economic and Development Authority NPC – National Power Corporation OEM – Operations Evaluation Mission PCR – project completion report PCCI – Philippines Chamber of Commerce and Industry PEZA – Philippines Economic Zone Authority PPA – power purchasing agreement PPAR – project performance audit report PSALM – Power Sector Assets and Liabilities Management Corporation RRP – report and recommendation of the President SAPE – Sector Assistance Program Evaluation SCADA – supervisory control and data acquisition SEIPI – Semiconductor and Electronics Industries in the Philippines, Inc. SME – small and medium enterprises TA – technical assistance TCR – technical assistance completion report TI – Transparency International TOU – time-of-use TRANSCO – National Transmission Corporation USAID – United State Agency for International Development WESM – Wholesale Electricity Spot Market WEIGHTS AND MEASURES GWh – gigawatt-hour km – kilometer kV – kilovolt kVA – kilovolt-ampere kW – kilowatt kWh – kilowatt-hour m – meter MW – megawatt VAR – measurement of reactive power NOTE (i) In this report, "$" refers to US dollars. Director General, Operations Evaluation Department : Bruce Murray Director, Operations Evaluation Division 2 : David Edwards Evaluation Team Leader : C.C. Yu Operations Evaluation Department, SE-3 CONTENTS Page EXECUTIVE SUMMARY iii Map ix I. INTRODUCTION 1 A. Background 1 B. Objectives and Scope of Evaluation 2 C. Evaluation Methodology 3 II. THE POWER SECTOR AND ASIAN DEVELOPMENT BANK’S ASSISTANCE 4 A. Philippine’s Power Sector: A Historical Perspective (1971–2005) 4 B. ADB’s Evolving Sector Goals, Strategies, and Assistance Program 12 C. Collaboration and Coordination with Other Development Partners 14 D. Overall Assessment of Philippines Power Sector and ADB Assistance Strategies 14 III. PROJECT IMPLEMENTATION AND OPERATION 15 A. Loans and Investments 15 B. Technical Assistance 19 C. Overall Assessment of Project Implementation and Results 21 IV. SECTOR PERFORMANCE AND ASIAN DEVELOPMENT BANK’S CONTRIBUTION 23 A. Maintaining System Balance and Meeting Capacity Requirements 23 B. NPC Financial Performance and Accounting Practices 26 C. Policy and Institutional Reforms: Unbundling and Privatization 28 D. Overall Assessment of Impact of ADB’s Assistance on Sector Performance 31 V. IMPACTS ON ECONOMIC DEVELOPMENT AND POVERTY ALLEVIATION 31 A. Impact on Industrial and Commercial Activities in Urban Areas 31 B. Electrification and Economic Development 34 C. Summary of Impact on Economic Development 36 VI. MAIN ISSUES FACING THE SECTOR 36 A. Risks Facing Power Sector Reforms 36 B. Why Tariffs Are High, and Why They Should Be Even Higher? 38 C. Perception of Corruption in the Power Sector 40 D. Different Options for NPC Financing and Implications for National Fiscal Balance 42 E. Another Power Crisis Looming? 43 F. Role of Retailing in the Restructured Power Sector 44 C. C. Yu, Senior Evaluation Specialist (team leader) was responsible for the preparation of this report, and conducted document reviews, key informant interviews, and guided the fieldwork undertaken by B. Palacios, Evaluation Officer; two international consultants, W. Michael Lewis and David Parish; and two domestic consultants, Fernando Yan Roxas and Angelito Corpuz. The guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of the management of OED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. ii V. CONCLUSIONS, LESSONS, AND FUTURE RECOMMENDATIONS 44 A. Overall Assessment 44 B. Assessment of Asian Development Bank and Government/EA Performance 50 C. Lessons Learned 51 D. Recommendations: ADB’s Future Assistance Priorities 55 APPENDIXES 1. Asian Development Bank Loans and Technical Assistance 60 in the Power Sector, Philippines 2. Evaluation Matrix 62 3. Summary of Asian Development Bank-Supported Generation Projects 65 4. Assessment of Technical Assistance 71 5. Priority Areas of Power System Reinforcement and Expansion 79 6. Evaluation of Socioeconomic Impact of Asian Development Bank-Supported 81 Power Projects in the Philippines 7. Addressing the Perception of Corruption in the Power Sector 95 Attachments: Management Response DEC Chairperson Summary EXECUTIVE SUMMARY Electricity is an essential commodity. In recognition of the critical role that reliable and affordable power plays in economic development, the Asian Development Bank (ADB) has consistently supported energy development and the power sector. Approximately one fifth of ADB’s lending to its developing member countries is for the power sector. In the Philippines, this ratio is higher at 27%. Starting with its first loan for the First Mindanao Power Project in 1971,1 ADB’s assistance program in the Philippine power sector has included 23 public sector loans valued at $2.12 billion, 3 private sector loans and equity investments totaling $90.6 million, and 21 technical assistance (TA) grants for $9.42 million. ADB has been the lead development partner in the sector, providing instrumental support for the ongoing sector restructuring and reforms. To assess the impact of ADB’s assistance to the sector over the past 34 years and identify lessons for future operations, the Operations Evaluation Department included the Sector Assistance Program Evaluation (SAPE) in its 2004 work program. The goal of the SAPE is to identify ways to improve the Philippine power sector assistance program. ADB, Government, private sector, and other stakeholders need to work together more effectively to provide a reliable supply of electricity at an affordable cost, and to develop an efficient and financially viable power sector. Key Messages In the past 3 decades, the power sector in the Philippines has undergone substantial changes. The task of evaluating ADB’s performance in this complex and changing environment represented methodological and practical challenges. Several key messages emerged from the evaluation: (i) ADB has tried to meet the changing demands of the sector during different periods. The goals of the assistance program have evolved over time. Between 1971 and the late 1980s, ADB mainly focused on (i) development of indigenous energy and energy infrastructure to reduce reliance on imported fuel, and (ii) provision of reliable and affordable electricity. After the power crisis in the late 1980s and the early 1990s, ADB has mostly aimed to achieve, in addition to the two goals above, a third goal, (iii) establishment of a financially viable power sector. (ii) At the individual project level, 87% of ADB-financed energy projects were rated successful or partly successful, compared with the average of 49% for all projects in the Philippines. At the sector level, the first goal, development of indigenous energy and energy infrastructure to reduce reliance on imported fuel, was mostly achieved, particularly with a series of hydropower projects in Mindanao in the 1970s. These hydropower plants still form the backbone of Mindanao’s generation capacities and contributed to the region’s increased electrification with inexpensive hydropower. The resulting savings in foreign exchange for fuel imports are made more substantial by the current high energy prices in the world market. The second goal, provision of reliable and affordable electricity, was partly achieved. Over the last three decades, the power sector has increased the electrification rate from about 20% to 80% of the population. However, the reliability of power supply has not been fully achieved as 1 ADB. 1971. Report and Recommendation of the President to the Board of Directors on Proposed Loan to the Philippines for the Mindanao Power. Manila. (Loan 0077-PHI, approved on 2 November 1971). iv demonstrated by the power crisis during the late 1980s and the early 1990s and the continued system imbalances despite significant improvement in recent years. The affordability of power supply was not achieved as the Philippine’ electricity tariffs are among the highest in Asia in absolute terms and relative to income. The third goal, establishment of a financially viable power sector, was not achieved. At present, the sector is severely indebted and financially insolvent. (iii) The reasons for the underachievement of the sector goals were complex. There were external factors