ASIAN DEVELOPMENT BANK PCR: PHI-27231

PROJECT COMPLETION REPORT

ON THE

POWER TRANSMISSION PROJECT (Loan 1288-PHI)

TO

THE

December 2002

CURRENCY EQUIVALENTS

Currency Unit – Peso (P)

At Appraisal At Project Completion (November 1993) (November 2001) P1.00 = $0.035 $0.019 $1.00 = P29.00 P52.00

ABBREVIATIONS

ADB – Asian Development Bank CAD – computer-aided design CAP – computer-aided planning DOE – Department of Energy DOF – Department of Finance DSCR – debt service coverage ratio DSM – demand side management EDCF – Economic Development Cooperation Fund EIRR – economic internal rate of return ERB – Energy Regulatory Board ERC – Energy Regulatory Commission FIRR – financial internal rate of return FY – fiscal year GIS – gas insulated switchgear (see glossary below) ICB – international competitive bidding IDC – interest during construction IPP – independent power producer KW – Korean won LGU – local government unit Meralco – Electric Company NPC – National Power Corporation OPEC – Organization of Petroleum Exporting Countries PCR – Project completion report PPAR – Project performance audit report PSALM – Power Sector Assets and Liabilities Management Corporation PSRP – power sector restructuring program RORB – return on rate base ROW – right of way RRP – report and recommendation of the President TRANSCO – National Transmission Corporation WACC – weighted average cost of capital WTP – willingness to pay

WEIGHTS AND MEASURES ha – hectare km – kilometer

kV (kilovolt) – 1,000 volts. A volt is the basic measure of electrical potential difference. A potential difference is required to cause a current to flow in an electric circuit.

kW (kilowatt) – 1,000 watts. a watt is the basic measure of electric power, or the rate of consumption of electrical energy.

kWh (kilowatt-hour) – 1,000 watt-hours. A watt-hour is the energy consumed by an electrical appliance that uses one watt of electric power for a period of 1 hour. The kilowatt hour is the standard “unit” of electricity for billing purposes.

MVA – Megavolt-ampere, or 1 million volt amperes. A volt ampere is a measure of the apparent power of an electric circuit and is computed by multiplying volts by amperes. It is related to the actual power (watts) that is produced by the circuit by the power factor, which is analogous to an electrical efficiency factor.

MW (megawatt) – 1,000 kilowatts

GWh (gigawatt hours) – 1,000 million watt hours

GLOSSARY

Gas insulated switchgear – A gas insulated switchgear is used to switch (GIS) high voltage electric power circuits. It uses gas (normally SF6) rather than air as the insulating medium and therefore is very compact. A GIS switchgear is used if it is necessary to construct an indoor switchyard for an electricity transmission substation. This may be because of a restricted site (as at Zapote), because the environment is heavily polluted, or for aesthetic reasons.

NOTES

(i) The fiscal year (FY) of the Government and the Executing Agency ends on 31 December.

(ii) In this report, "$" refers to US dollars.

This Report was prepared by a team consisting of Y. Zhai (Team Leader), X. Jia and T. Hayakawa.

CONTENTS

Page

BASIC DATA i MAP vii

I. PROJECT DESCRIPTION 1

II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Project Formulation 2 B. Project Outputs 2 C. Project Financing and Costs 6 D. Disbursements 7 E. Project Implementation Schedule 8 F. Implementation Arrangements 8 G. Conditions and Covenants 8 H. Consultant Recruitment and Procurement 10 I. Performance of Contractors and Suppliers 10 J. Performance of the Borrower and the Executing Agency 11 K. Performance of ADB 11

III. EVALUATION OF PERFORMANCE 11 A. Relevance 11 B. Efficacy in Achievement of Purpose 12 C. Efficiency in Achievement of Outputs and Purpose 12 D. Preliminary Assessment of Sustainability 12 E. Poverty Reduction, Environmental and Social Impacts 13

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 14 A. Overall Assessment 14 B. Lessons Learned 14 C. Recommendations 15

APPENDIXES

1. Chronology of Events 17 2. Summary of Contracts Funded by the Asian Development Bank and the Organization of Petroleum Exporting Countries Fund 20 3. Schedule of Loan Disbursements 21 4. Implementation Schedule (Appraisal and Actual) 23 5. Status of Compliance with Loan Covenants 26 6. Economic Analysis 30 7. Financial Analysis 34 8. Status of Resettlement and Compensation 38 9. Project Performance Rating 40

BASIC DATA

A. Loan Identification

1. Country Philippines 2. Loan Number 1288-PHI 3. Project Title Power Transmission Project 4. Borrower National Power Corporation (NPC) 5. Guarantor Republic of the Philippines 6. Executing Agency NPC 7. Amount of Loan $164.0 million approved; $120.8 million disbursed 8. Project Completion Report PCR: PHI-27231 Number

B. Loan Data 1. Appraisal – Date Started 27 September 1993 – Date Completed 4 November 1993

2. Loan Negotiations – Date Started 10 November 1993 – Date Completed 11 November 1993

3. Date of Board Approval 14 December 1993

4. Date of Loan Agreement 20 December 1993

5. Date of Loan Effectiveness – In Loan Agreement 20 March 1994 – Actual 6 September 1994 – Extensions (no.) 3

6. Closing Date – In Loan Agreement 31 December 1996 – Actual 23 April 2001 – Extensions (no.) 3

7. Terms of Loan Interest Rate Variable – Maturity (no. of years) 20 – Grace Period (no. of years) 3

ii

8. Disbursements

a. ADB Loan 1288-PHI

i. Dates Initial Disbursement Final Disbursement Time Interval

5 April 1995 15 February 2001 71 months

Effective Date Original Closing Date Time Interval

6 September 1994 31 December 1996 28 months

ii. Amount ($ million) Original Last Revised Amount Net Amount Amount Undisbursed Allocation Allocation Canceled Available Disbursed Balance

164.0 127.5 36.5 127.5 120.8 6.7a a Cancelled on loan closure on 23 April 2001.

b. Organization of Petroleum Exporting Countries (OPEC) Loan 624P

i. Dates Initial Disbursement Final Disbursement Time Interval

5 May 1999 6 December 2001 31 months

Effective Date Original Closing Date Time Interval

20 March 1995 31 December 1997 33 months

ii. Amount ($ million) Original Last Revised Amount Net Amount Amount Undisbursed Allocation Allocation Canceled Available Disbursed Balance a

6.0 6.0 - 6.0 3.3 2.7 a Cancelled on loan closure on 2 September 2002.

iii

c. Economic Development Cooperation Fund (EDCF) Loan

i. Dates Initial Disbursement Final Disbursement Time Interval

30 June 2001 31 December 2002 18 months

Effective Date Original Closing Date Time Interval

9 October 1995 1 October 1998 36 months

ii. Amount ($ million) Original Last Revised Amount Net Amount Amount Undisbursed Allocation Allocation Canceled Available Disbursed Balance a

10.7 10.0 - 10.0 6.6 4.1

a EDCF loan is to be closed by 31 December 2002

C. Project Data

1. Project Cost, Including Interest During Construction (IDC)

Cost Appraisal Estimate Actual ($ million) ($ million)

Foreign Exchange Cost 182.9 141.8 Local Currency Cost 76.4 38.4 Total 259.3 180.2

2. Financing Plan Cost Appraisal Estimate Actual ($ million) ($ million) Implementation Costs Borrower-Financed 76.4 49.5 ADB-Financed 148.7 90.5 Other External Financing 18.0 9.6 Sub-Total 243.1 149.6 IDC Costs Borrower-Financed - - ADB-Financed 15.3 30.3 Other External Financing 0.9 0.3 Sub-Total 16.2 30.6 Total 259.3 180.2

iv

3. Cost Breakdown by Project Component Component Appraisal Estimate Actual ($ million) ($ million) Part A: Transmission 186.3 139.6 Part B: Mindanao Transmission 16.5 10.0 Part C: Reservoir Rehabilitation Study 1.4 - Part D: Engineering Services Computer 0.9 - Enhancement Part E: Demand-Side Management 2.1 - Contingencies 35.8 - IDC 16.2 30.6 Total 259.3 180.2

4. Project Schedule a. ADB-Financed Components Item Appraisal Actual Estimate (i) to Tayabas 230 kV Transmission Line Bid Opening 15 December 1993 11 February 1994 Contract Effectivity 31 March 1994 13 March 1995 Line Completion 31 May 1995 28 February 1996

(ii) Dasmariñas to Zapote 230 kV Transmission Line Bid Opening 15 December 1993 11 February 1994 Contract Effectivity 31 March 1994 13 March 1995 Line Completion 30 November 1995 30 November 2001

(iii) Biñan to Sucat 230 kV Transmission Line Bid Opening 15 December 1993 11 February 1994 Contract Effectivity 31 March 1994 13 March 1995 Line Completion 30 November 1995 22 December 1996

(iv) Tayabas to Dasmariñas 500 kV Transmission Line Bid Opening 15 December 1993 12 January 1994 Contract Effectivity 31 March 1994 14 February 1995 Line Completion 20 October 1995 28 April 1997

(v) Tayabas Substation (turnkey) Bid Opening 15 December 1993 14 January 1994 Contract Effectivity 31 March 1994 14 November 1994 Substation Completion 20 October 1995 21 March 1998

(vi) Dasmariñas Substation (turnkey) Bid Opening 15 December 1993 14 January 1994 Contract Effectivity 31 March 1994 14 November 1994 v

Substation Completion 20 October 1995 31 March 1997

(vii) Zapote Substation (turnkey) Bid Opening 15 December 1993 14 January 1994 Contract Effectivity 31 March 1994 14 November 1994 Substation Completion 20 October 1995 15 October 2001

(viii) Dasmariñas Substation (turnkey) Bid Opening 15 December 1993 14 January 1994 Contract Effectivity 31 March 1994 14 November 1994 Substation Completion 20 October 1995 15 October 2001

(ix) Biñan Substation (supply only) Bid Opening 15 December 1993 14 January 1994 Contract Effectivity 31 March 1994 14 November 1994 Equipment Delivery 20 October 1995 10 June 1997

(x) Sucat Substation (supply only) Bid Opening 15 December 1993 14 January 1994 Contract Effectivity 31 March 1994 14 November 1994 Equipment Delivery 20 October 1995 10 June 1997

b. Components funded by the OPEC Fund

Item Appraisal Actual Estimate

Supply Contracts

(i) Replacement Line Equipment Contract Effectivity 31 August 1994 15 December 1999 Equipment Delivery 31 August 1995 23 August 2000

(ii) Transformers Contract Effectivity 31 August 1994 29 September 1998 Equipment Delivery 31 August 1995 17 November 2000

(iii) Substation Equipment Contract Effectivity 31 August 1994 29 December 1998 Equipment Delivery 31 August 1995 6 August 1999

(iv) Protection and Relay Panels Contract Effectivity 31 August 1994 29 September 1998 Equipment Delivery 31 August 1995 26 April 1999

Energization

(v) Tindalo–Nabunturan Transmission Line 30 June 1996 21 December 1996a (vi) Substation Expansion 30 June 1996 26 April 1998 vi

(vii) Tagoloan Substation Expansion 30 June 1996 9 July 2000 a Line constructed by NPC using its own materials, which were replaced with equipment procured through the line equipment contract that was financed by the loan.

c. Components Financed by the Economic Development Cooperation Fund (EDCF) Item Appraisal Actual or Target Estimate Supply Contract (substation and line equipment) (i) Contract Effectivity 31 August 1994 13 June 2001 (ii) Equipment Delivery 31 August 1995 31 December 2002

Energization (iii) Montevista–Monkayo Transmission Line 30 June 1996 23 December 1997a (iv) Nuling–Midsayap Transmission Line 30 June 1996 9 June 1998a (v) - Ascuncion Transmission Line 30 June 1996 30 June 2002a (vi) Maasim–Kiamba Transmission Line 30 June 1996 31 December 2003 (vii) Bunuwan Substation (new) 30 June 1996 29 February 2004 (viii) Anislagan Badas Substation 30 June 1996 31 December 2003 (expansion) a Line constructed by NPC using its own materials, which are to be replaced with equipment procured through the line equipment contract that was financed from the loan.

D. Data on Asian Development Bank Missions

Persons Specialization Name of Mission Date (no.) of Membersa Fact Finding May 1993 7 Eng, Fin Anal, Prog Off Appraisal Oct 1993 8 Eng, Fin Anal, Ener Spec Review Dec 1994 2 Eng, Prog Off Review Aug 1996 2 Eng, Prog Off Review Dec 1997 2 Eng, Prog Off Review Nov 1998 2 Eng, Prog Off Review Aug 1999 2 Eng, Prog Off Review Dec 1999 2 Eng, Prog Off Review Oct 2000 3 Prog Off Review Oct 2001 3 Eng, Prog Off Project Completion Reviewb Aug 2002 4 Eng, Fin Anal, Prog Off, Ener Spec

a Eng = engineer, Fin Anal = financial analyst, Prog Off = program officer, Ener Spec = energy specialist. b The PCR Mission comprised Yongping Zhai, Energy Specialist; Toru Hayakawa, Financial Analyst; Xinning Jia, Economist/Program Officer; and Geoff Brown (Consultant), Engineer.

02-3145b HR

I. PROJECT DESCRIPTION

1. The principal objectives of the Power Transmission Project were to (i) expand and improve transmission networks of the National Power Corporation (NPC) of the Republic of the Philippines in Luzon and Mindanao in order to increase their capability to transfer power; (ii) provide a reliable and secure power system in the context of the ongoing generation expansion program; (iii) improve the utilization of existing reservoirs; (iv) enhance NPC’s in-house engineering capabilities; and (v) develop demand side management (DSM)-oriented power tariffs.

2. At appraisal the Project scope was as follows:

Part A: Luzon Transmission

(i) erection of 125 kilometers (km) of 500 kilovolt (kV) transmission line from Tayabas to Dasmariñas,1 30.5 km of 230 KV line from Pagbilao to Tayabas, 21 km of 230 kV line from Dasmariñas to Zapote, and 13 km of 230 kV line from Biñan to Sucat;

(ii) construction of 230 kV substations at Tayabas and Zapote; and

(iii) expansion of the 230 kV substations at Dasmariñas, Biñan, and Sucat.

Part B: Mindanao Transmission

(i) erection of 50 km of 69 kV transmission line from Maasim to Kiamba, 18 km of 69 kV line from Montevista to Monkayo, 15 km of 69 kV line from Tagum to Asuncion, 16 km of 69 kV line from Tindalo to Nabunturan, and 43 km of 69 kV line from Nuling to Midsayap;2

(ii) construction of the Nasipit substation; and

(iii) expansion of substations in Tagoloan, General Santos, Tindalao, Badas, and .

Part C: Study for Reservoir and Watershed Rehabilitation and Management for Luzon

(i) 37 person-months of foreign consulting services, plus sedimentation station equipment and surveys.

Part D: Engineering Computer Enhancement

(i) Provision of computer-aided planning (CAP) and computer-aided design (CAD) hardware, computers, plotters, and printer.

Part E: Demand Side Management

(i) Installation of programmable kilowatt (kW) demand meters and recorders.

1 Although 125 km was the line length assumed in the Report and Recommendation of the President (RRP), the installed line length was only 96.8 km. 2 Although 43 km was the line length assumed in the RRP, the installed line length was only 29 km. 2

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Project Formulation

3. At the time of loan appraisal, the Philippines was suffering from a shortage of power generation, caused partly by the Government’s decision to mothball the already completed Bataan nuclear power plant without providing substitute plants. The Government and NPC made the bridging of this power-capacity gap, as fast as possible, one of their highest priorities. But new power generation projects had to be complemented by transmission reinforcement to transmit the power from the generation to load centers, while ensuring stable and reliable operation of the overall power system.

4. The Project was an integral component of NPC’s transmission development program, which was designed to meet the system requirements for the increased power generation to cope with the anticipated growth in demand for power. Part A of the Project was especially necessary to evacuate the full 735-megawatt (MW) contracted capacity of the Pagbilao coal- fired power plant constructed by Hopewell Power Corporation and commissioned in 1996. The Project further helped NPC meet Metro Manila’s increasing demand for electricity by strengthening the connections between the NPC grid and the distribution network of the Manila Electric Company (Meralco).

5. Electricity demand in Mindanao increased by about 3% yearly from 1997 to 2001, despite the Asian economic crisis and continuous political instability. The Project has enabled NPC to support the growth of electricity demand in Mindanao by increasing the capacity of connections between the NPC grid and distributor networks.

6. At the time of appraisal, NPC considered the reservoir and watershed rehabilitation and management study important. The design energy potential of the six hydropower plants is 1,877 gigawatt hours (GWh) per year, but average output in the 10 years before 1993 was only 1,397 GWh—mainly because deforestation of watersheds caused excessive siltation. Thus, increasing generation of electricity from existing hydropower plants was seen as a cost-effective and environmentally benign way to address the power generation shortage.

7. Demand side management was a Government priority at the time of loan appraisal, given the grid’s shortage of generating capacity. The current surplus of generation, however, makes demand management initiatives less attractive. In fact, the Government has recently introduced incentives for large users to increase electricity consumption because of the “take or pay” requirement in power purchase and energy conversion agreements of some independent power producers (IPP).

B. Project Outputs

8. Appendix 1 is a chronology of major events in Project implementation. Each main Project component is discussed below.

Part A: Luzon Transmission

A1. 500 kV Transmission Line from Tayabas to Dasmariñas

9. This 96.8 km line, in southern Luzon, connects the Tayabas substation in Province to the Dasmariñas substation in . The line, constructed through a turnkey 3 contract, was completed in April 1997, but was not energized until 28 April 1998 because completion of the Tayabas substation was delayed.

A2. 230 kV Transmission Lines

10. These components, except for the line between and Zapote, were constructed through a turnkey contract. Each of the contract’s three components is discussed below.

A2.1 Pagbilao to Tayabas (31 km)

11. This line was commissioned on 11 March 1996. Its completion date was extended from 5 February to 13 March 1996, with approval of the Asian Development Bank (ADB), because of a change in tower design and rerouting due to right of way (ROW) problems.

A2.2 Dasmariñas to Zapote (21 km)

12. The original completion date for construction of this line was 2 October 1996. But NPC had major problems obtaining ROW, so decided in November 1997 to repackage the line into two sections: Dasmariñas to Imus, and Imus to Zapote. On 31 March 1998, NPC notified the contractor of partial contract termination, canceling the Imus to Zapote erection. Through the revised arrangement, which the turnkey contractor accepted on 27 May 1998, the contractor supplied the material for the line route and erected the Dasmariñas to Zapote section. This section of line was completed on 15 July 1999.

13. NPC began discussions with Meralco in April 1998 on the possibility that Meralco would erect the Imus to Zapote line. The route was in Meralco’s franchise area, and required the relocation of Meralco distribution lines. Through the agreement, Meralco offset payment for erection of the line against future purchases of power from NPC. Erection was completed on 31 May 2001. ADB staff estimate that the cost agreed with Meralco was almost 30% higher than that in the original contract, based on the exchange rate at the time of appraisal. If one considers depreciation of the peso over that period, the cost difference in dollar terms is reduced to about 15%. The use of Meralco to complete the Imus–Zapote section of the line seems to have been cost-effective for NPC, because construction over this portion of the route involved significantly more problems than were envisaged when the turnkey contract was signed in March 1995.

A2.3 Biñan to Sucat (13.5 km)

14. The original completion date for construction of this line was 2 October 1996. It was completed on 5 December 1996, and energized on 22 December 1996.

A3. 230 kV Substations

15. The turnkey contract for this component called for completion on 13 December 1994. Each of the five components of the contract is discussed below.

A3.1 Tayabas substation (new)

16. The new Tayabas 230 kV substation (one 100 MVA transformer, fourteen 230 kV power circuit breakers, and accessories and two 500 kV shunt reactors) is located on 33 hectares (ha) of land that NPC acquired in Quezon Province. An unforeseen need to drill and blast rock, 4 which required relocation of existing transmission lines and tower inside the switchyard area, delayed completion until 21 March 1998.

A3.2 Dasmariñas substation (expansion)

17. The Dasmariñas 230 kV expansion (ten 230 kV power circuit breakers and accessories and two 500 KV shunt reactors) was carried out within the existing 5-ha substation compound in Cavite. It was completed on 31 March 1997.

A3.3 Zapote substation (new)

18. The new Zapote 230 kV gas insulated switchgear (GIS) substation (three 300 MVA transformers) was built along the Cavite–Manila Coastal Road in Las Piñas, Metro Manila. It was commissioned in November 2001, 61 months after the original contract commissioning date of 2 October 1996. Reasons for the delays are discussed below.

19. Landowners of adjacent lots, encroached by the new substation, surfaced after NPC had cleared the site and compensated squatters in 36 affected dwellings. The land beneath the GIS building was found unstable, as it was a waterway of the reclaimed area of Manila Bay. Construction of a secure building foundation required the addition of unplanned piling works. Also, much of the original GIS switchgear equipment had to be replaced because it deteriorated while in storage pending resolution of such problems.

20. The substation was commissioned with three 300 MVA, 230/69 kV autotransformers— two more than envisaged at appraisal. NPC relocated these transformers, which were needed to meet load growth in Metro Manila, from its Biñan substation to the Project.

A3.4 Biñan substation (expansion)

21. The Biñan 230 kV substation (two 230 kV power circuit breakers and accessories) is in the compound of the NPC Southern Luzon regional center in Province. Expansion was completed on 31 December 1995.

A3.5 Sucat substation (expansion)

22. The Sucat 230 kV substation was expanded (two 230 kV power circuit breakers and accessories) in the compound of the Sucat Thermal Power Plant in Parañaque, Metro Manila. It was completed on 31 March 1996.

Part B: Mindanao Transmission

23. The 69 kV transmission line from Tindalao to Nabuntaruran (16 km), and expansion of three 138 kV substations at Tagoloan, General Santos, and Tindalao, were cofinanced by the Organization of Petroleum Exporting Countries (OPEC) Fund for International Development.

24. A local contractor built the Tindalao–Nabuntaruran transmission line. It was completed, using equipment from NPC stocks, and energized on 21 December 1996. The equipment was replaced with items later procured on a supply contract financed by the OPEC loan.

25. Expansion of the General Santos substation (one 69 kV PCB) was completed, and the substation was energized, on 26 April 1998. Expansion of the Tagoloan substation (one 100 5 megavolt ampere [MVA] power transformer) was completed on 9 July 2000. NPC equipment was used at General Santos because project equipment had not been delivered. The equipment was later reallocated to the Nuling substation.

26. Expansion of the Tindalao substation (one 100 MVA power transformer) was through a local contractor who was selected through competitive bidding. The transformer was energized on 23 August 2001; all cleanup and remedial work was finished by June 2002.

27. The other Mindanao work was cofinanced by the Economic Development Cooperation Fund (EDCF) of the Export-Import Bank of Korea. The EDCF-funded scope of the Project changed from that determined at appraisal. In particular:

(i) The Nasipit substation component was removed from the Project scope and replaced by the Bunawan substation. The change was necessary as the work was completed in mid-1995, before the EDCF loan became effective.

(ii) Expansion of the Butuan substation was eliminated from the Project. Neighboring substations shared the load that this expansion was to supply.

28. Equipment for the EDCF part of the Project was bought from a Korean supplier. All equipment, except for some transmission line components that failed factory acceptance tests, was delivered to the site.

29. Table 1 shows progress on the EDCF-funded components.

Table 1: Progress on EDCF Funded Components

Component Comment

Montevista–Monkayo 69 kV transmission Energized 23 December 1997. The line line. was completed using equipment borrowed from NPC, which is being replaced with equipment procured through EDCF financed contract.

Nuling–Midsayap 69 kV transmission line. Energized 9 June 1998. The line was completed using equipment borrowed from NPC, which is being replaced with equipment procured through EDCF financed supply contract.

Tagum–Asuncion 69 kV transmission line. Energized June 2002. The line was completed using equipment borrowed from NPC, which is being replaced with equipment procured through EDCF supply contract.

Maasim–Kiamba 69 kV transmission line. ROW acquisition in progress. Commissioning expected in 2003.

6

Bunawan substation (new) Design ongoing. Target completion date is February 2004.

Anislagan (Bad-as) substation (expansion) Target completion date is December 2003.

30. Closure of the EDCF loan was originally scheduled for 1 October 1998, and extended to 30 June 2002. NPC has been granted a further extension until 31 December 2002 to allow full closure of the supply contract.

Part C: Study for Reservoir and Watershed Rehabilitation Management for Luzon

31. NPC initially requested, on 5 June 1996, that this study be cancelled because the Department of Finance (DOF) thought it should be funded through a grant rather than a loan. NPC withdrew this request, after further negotiation with ADB and DOF, on 26 September 1996. But in February 1998, NPC again advised ADB that it had decided to cancel this Project component in the aftermath of the Asian economic crisis. ADB approved the cancellation on 23 December 1998.

32. Besides the financial constraints, NPC considered the study unnecessary because construction of IPP plants had addressed the generation shortage. However, it is expected that the present generation surplus in Luzon will be absorbed by the forecast growth in electricity demand by about 2007. Thus, maximizing the capacity of available hydropower generation may again become important. Furthermore, the inability of these plants to operate at design capacity may reduce the price that NPC receives for its hydropower generating plants in the forthcoming privatization. This study would therefore have been useful, but cancellation was reasonable at the time, considering the Philippines’ resource situation, and the number of more urgent projects that needed funding.

Part D: Engineering Computer Enhancement

33. This component, to provide computers and associated hardware, was part of a larger $2.9 million NPC project to implement and update computer systems. Due to delay in the effectiveness of the ADB loan, this component was funded through a World Bank project and was dropped from the scope of ADB financed-project. The equipment was delivered in December 1995.

Part E: Demand-Side Management

34. This component, consisting of the installation of programmable kW demand meters and recorders, was financed through grant resources provided by the U.S. Agency for International Development (USAID) and was dropped from the scope of the ADB-funded project.

C. Project Financing and Costs

35. At appraisal, the project cost was estimated to be $259.3 million, including $182.9 million foreign exchange costs (Table 2). ADB’s loan was allocated for financing the foreign exchange costs of the project components A and C. At the time of project appraisal, it was envisaged that NPC would pay the balance of project cost (although at the time of loan approval, ADB indicated that it would help NPC arrange the necessary cofinancing). The actual total cost of the Project was $180.2 million equivalent (a saving of 30%), comprising $141.8 million equivalent in foreign 7 exchange (a saving of 22%) and $38.4 million equivalent in local currency (a saving of 50%). The savings in foreign currency costs were mainly because of lower-than-expected contract prices, caused partly by the shortened lengths of the Dasmariñas–Tayabas and Nuling– Midsayap lines (footnotes 1 and 2). International competitive bidding (ICB) procedures have also contributed to cost savings. The saving in local cost (in $ terms) is mainly due to depreciation of the peso, over the project construction period (P29.0/$ at appraisal vs P52.0/$ at project completion).

Table 2: Estimated and Actual Project Costs

Item Appraisal Estimate Actual ($ million equivalent) ($ million equivalent) Foreign Local Total Foreign Local Total Part A: Luzon Transmission 125.6 60.7 186.3 101.6 38.0 139.6 Part B: Mindanao Transmission 13.4 3.2 16.5 9.6 0.4 10.0 Part C: Water Management Study 1.0 0.4 1.4 - - - Part D: Computer Enhancement 0.8 0.1 0.9 - - - Part E: Demand Management 2.0 0.1 2.1 - - - Subtotal 142.8 64.5 207.3 111.2 38.4 149.6 Contingencies 23.9 11.9 35.8 IDC on ADB Loan 15.3 - 15.3 30.3 - 30.3 IDC on Co-financed Loans 0.9 - 0.9 0.3 - 0.3 Total 182.9 76.4 259.3 141.8 38.4 180.2 IDC=interest during construction Source: Asian Development Bank estimates

36. With ADB assistance, NPC secured an EDCF loan of Korean won 8.6 billion ($10.7 million), and another $6 million loan from the OPEC Fund. NPC used these loans to finance the foreign exchange component of the Project’s part B. NPC also arranged funding of the foreign exchange components of part D from the World Bank, and of part E from USAID.

37. ADB was responsible for administering the OPEC loan, with equipment procurement in accordance with ADB’s Guidelines for Procurement, and eligibility requirements. Appendix 2 is a schedule of ADB-administered contracts financed by the ADB and OPEC loans.

D. Disbursements

38. The ADB loan was originally scheduled to be fully disbursed by 31 December 1996. But the closing date was extended three times, until 31 December 2000, to give NPC enough time to negotiate final payments and evaluate claims for price variations. The loan account was closed on 23 April 2001 and the undisbursed balance of $6.734 million was cancelled.

39. Appendix 3 shows ADB disbursements against Loan 1288-PHI, and OPEC disbursements against Loan 624P. Due to lower than expected project costs (para 35), actual disbursements of both loans were significantly less than forecast at appraisal. Only 74% of ADB’s original $164 million loan was disbursed; that includes interest during construction (IDC) of $30.3 million vs the budgeted $16.2 million, because the project implementation period was extended. Only 55% of the OPEC loan was disbursed.

40. Disbursements against the EDCF loan, which ADB did not administer, amounted to 62% of the loan amount. Procurement through this loan followed EDCF guidelines; bidding was restricted to Korean suppliers. 8

E. Project Implementation Schedule

41. Appendix 4 compares the appraisal implementation schedule with the actual. It shows that the Project suffered major delays (the Zapote substation was not commissioned until November 2001, 5 years after the date envisaged at appraisal). Furthermore, civil works associated with the installation of equipment procured through the OPEC-financed supply contract were only recently completed, and completion of expansions of substations using EDCF-funded equipment is scheduled for February 2004.

42. The reduced load growth caused by the Asian economic crisis probably lessened the operational impact of these delays. Nevertheless, timely completion of the Pagbilao–Tayabas and Tayabas–Dasmariñas lines would have allowed the full utilization of the 735 MW contracted capacity of the Pagbilao coal-fired power station for supplying Metro Manila. Although the Pagbilao–Tayabas line was completed ahead of the power station, delays in completion of the Tayabas substation, because of unforeseen geotechnical problems, delayed energization of the Tayabas–Dasmariñas line until 8 April 1998, i.e. almost 19 months after the commercial operation of the second unit at Pagbilao. Thus, NPC was liable for a pro-rated capacity charge of about P110 million per month over the 19-month period to the generator because the grid, without Project-funded augmentation, could only export 560 MW of the plant’s contracted capacity of 735 MW.

43. The Luzon transmission component (part A) was delayed because of delays in the effectiveness of the ADB loan because the Energy Regulatory Board (ERB) delayed approval of a tariff formula that included a foreign exchange adjustment—a precondition for loan effectiveness. This delayed contract award by 12 months from the date set at appraisal.

44. Further delays were caused by major difficulties in obtaining access to tower sites for transmission lines, and by unforeseen geotechnical problems, at Zapote.

45. Several factors delayed completion of the Mindanao component, including (i) the time required to arrange cofinancing, and for loans to become effective; (ii) the time that NPC took to effectuate supply contracts, particularly those that involved foreign exchange expenditure; and (iii) the fact that NPC waited for delivery of all equipment before beginning to prequalify contractors, or to prepare tender documents for installation works.

F. Implementation Arrangements

46. As envisaged during appraisal, NPC established a project management office, headed by a qualified and experienced director, to coordinate all Project activities. A project manager was also designated to oversee Project implementation in the field, assisted by site managers responsible for each component.

47. In Luzon, the Project was implemented as envisaged at appraisal. In Mindanao, delays caused some rearrangements of the Project’s scope (see para. 27). Furthermore, components of some projects were completed using NPC equipment, which was later replaced by equipment procured through the loan-funded supply contracts.

G. Conditions and Covenants

48. Appendix 5 shows the status of NPC’s compliance with major loan covenants, including two key financial agreements: 9

(i) A debt service coverage ratio (DSCR) of at least 1.3 from 1995. Loan 1398-PHI3 subsequently modified the DSCR requirement to 1.0 from 1995 to 1999, and not less than 1.3 afterwards.

(ii) A return on rate base (RORB) of at least 8% from 1994. Loan 1590-PHI 4 subsequently modified the RORB requirement to 7% for 1998, and 8% afterwards.

49. NPC regularly submitted quarterly progress reports, and audited financial statements, throughout project implementation. The quality of the reports was satisfactory. Independent auditors, in accordance with Section 4.07 of the Loan Agreement, audited NPC’s accounts and financial statements annually, and provided specific opinions on compliance with the loan covenants. Before 1997, energy sales increased at an average annual rate of about 7 to 9% (Table 3). But the Asian economic crisis, which began in mid-1997, slowed the growth of energy sales. The annual RORB for 1996 was higher than the required 8.0%, but fell to 7.2% in 1997, down to 2.2% in 2000. The 1996 debt service coverage ratio was 1.6, but fell to less than 1.0 from 1997 to 2001 mainly because of peso’s depreciation.

Table 3: NPC Financial Performance (1996–2001)

Indicators 1996 1997 1998 1999 2000 2001 Sales (GWh) 33,381 36,442 37,321 36,987 37,320 37,042 Sales Growth (%) 7.6 9.2 2.4 -0.9 0.9 -0.7 Average Rate (Peso/kWh) 1.91 2.12 2.32 2.42 2.68 3.12 Operating Revenue 63,635 77,144 86,611 89,686 100,119 115,698 (Peso million) Operating Expenditure 50,317 65,519 79,696 81,196 94,681 108,860 (Peso million) Operating Income 13,318 11,625 6,915 8,490 5,438 6,838 (Peso million) Net Income (Peso million) 5,543 3,055 (3,617) (5,952) (12,964) (10,337) RORB (%) 8.24 7.18 3.22 3.37 2.22 2.89 DSCR 1.56 0.98 0.92 0.92 0.74 0.70 DSCR=debt service coverage ratio, GWh = gigawatt hour, kWh = kilowatt hour, RORB = return-on-rate base. Source: Asian Development Bank staff estimates.

50. The major problems that affected NPC’s financial position were (i) a surplus in capacity caused by completion of high-priced independent power producer (IPP) contracts with take-or- pay provisions, in foreign exchange, that were arranged before the financial crisis, (ii) lower- than-expected electricity sales, (iii) inadequate equity contributions from the Government; and (iv) increased costs of debt service and payments to the IPPs resulting from peso’s depreciation.

51. When it became evident that NPC could not comply with either the RORB or DSCR covenants after the financial crisis, NPC requested ADB for waivers of both covenants for 1997– 2001. ADB approved the request as a minor change in implementing arrangements in accordance with ADB’s project administration guidelines. NPC agreed to request for a tariff

3 ADB. 1997. Loan no. 1398-PHI: Northern Luzon Transmission and Generation Project, for $244.0 million, approved on 2 November 1995. Manila. 4 ADB. 1997. Loan no. 1590-PHI: Power Transmission Reinforcement Project, for $191.4 million, approved on 16 December 1997. Manila. 10 increase, in accordance with the financial action plan approved by DOF and the Department of Energy (DOE), to reach a RORB of 8% and a DSCR of 1.0 by the end of 1999. NPC submitted a proposal to ERB in October 1998 for a tariff increase of P0.079/kilowatt hour, effective 1 January 1999. NPC’s budgetary estimates at that time indicated that timely approval of such an increase would have led to compliance with the RORB and debt service ratio covenants in 1999. But ERB did not approve the requested tariff increase until June 1999 (effective June 1999). NPC immediately filed a supplemental petition with ERB requesting retrospective tariff increase from 1 January 1999, but ERB did not approve it. This delay, combined with the lower- than-expected sales growth after the Asian economic crisis, resulted in NPC achieving an RORB of only 3.4% and a debt service ratio of 0.9 for 1999. NPC’s financial position further deteriorated in 2000 and 2001, reflecting the increasing cost of IPP payments and NPC’s inability to raise tariffs to economic levels. Current tariff levels are already among the region’s highest, leaving limited room for increases without adversely affecting economic growth. On this basis, the waiver of complying with the DSCR and RORB is considered reasonable.

52. To address problems facing the power sector, ADB is helping the Government restructure and privatize the electricity industry through the Power Sector Restructuring Program (PSRP) Loan.5 The Electricity Power Industry Reform Act, approved in June 2001, provides the blueprint for restructuring and privatizing the electric power industry. NPC generating assets will be transferred to the Power Sector Assets and Liabilities Management Corporation (PSALM) and are to be privatized. The transmission assets will be assigned to the National Transmission Corporation (TRANSCO), a separate corporate entity that will contract the grid’s operation and maintenance to a private concessionaire through a 25-year concession agreement. Under the new arrangements, PSALM will be responsible for repaying all ADB loans to NPC. The proceeds from privatization of generating assets and concession of transmission assets with a national franchise, along with a government cash injection of as much as P200 billion, are to be used to cover NPC’s financial obligations.

53. PSALM should be able to meet at least a 1.0 times DSCR, given its projected revenue sources. The RORB covenant is not relevant to PSALM because it will have no commercial operations. However, TRANSCO has clear commercial functions and its tariffs will be regulated by the newly constituted Energy Regulatory Commission (ERC). TRANSCO should be able to meet the covenanted 8% RORB and DSCR of 1.30.

54. NPC was late to comply with some other loan covenants, particularly those that required cooperation of other government agencies. As noted earlier, difficulty in securing ERB approval of a revised tariff formula delayed the loan’s effectivity.

H. Consultant Recruitment and Procurement

55. All ADB- and OPEC-financed contracts administered by ADB were procured through international competitive bidding. Part C was deleted, so no consultant was recruited with ADB financing.

I. Performance of Contractors and Suppliers

56. Performance of contractors and suppliers was generally satisfactory, and did not delay implementation. The 500 kV GIS switchgear supplied through a turnkey contract was partly

5 ADB. 1998. Loan 1662-PHI: Power Sector Restructuring Program, for $300 million, approved 16 December 1998. Manila. 11 damaged due to improper storage before installation at Zapote. The contractor could have avoided this damage by advising NPC of proper requirements for pre-installation storage.

J. Performance of the Borrower and the Executing Agency

57. NPC’s procedures for the preparation and approval of contracts were complex, resulting in implementation delays. It is doubtful that NPC could have met the procurement and implementation schedule at appraisal without streamlining contracting procedures.

58. The Mindanao transmission component took longer than the Luzon component to complete, even though it had fewer technical or ROW problems. This indicates that turnkey contracts (for Luzon components) are likely to be far more effective in project implementation than separate supply and install contracts (for Mindanao components). This could be because a turnkey contractor has a stronger incentive to implement proactive project management procedures and use simplified procedures for procurement and subcontracting.

59. There is some evidence that NPC’s Project management was reactive, and that more proactive management would have reduced implementation time. For example, the installation contract for the Tagoloan substation could have been processed as the equipment was being manufactured. Also, NPC should have foreseen the geotechnical problems that delayed implementation on reclaimed coastal land at Zapote.

60. ROW problems that NPC failed to foresee caused many delays. Time-consuming and costly legal proceedings were necessary to gain access to many sites. More effective management may have mitigated such problems. ROW problems were particularly acute at Zapote and on the northern section of the Dasmariñas–Zapote line. NPC had to work closely with Meralco, which was a project beneficiary with a closer relationship to the local people, to achieve project objectives.

61. Considering the above issues, and that the Project was eventually completed despite significant delays, NPC’s performance is considered partly satisfactory.

K. Performance of ADB

62. ADB used its standard procedures to administer both its own loan and the OPEC loan. ADB’s project administration was generally satisfactory. Although ADB’s performance did not contribute to implementation delays, its turnaround time for some required contract approvals was long, compared to schedules presented at appraisal.

63. ADB undertook annual review missions that focused mainly on delays in completing part A. The inclusion of resettlement specialists could possibly have benefited some missions, considering that problems in land acquisition and obtaining ROW caused many of the delays. Overall, ADB’s performance is considered satisfactory.

III. EVALUATION OF PERFORMANCE

A. Relevance

64. The Project was in line with ADB’s operational strategy at the time of appraisal. It continues to be relevant through its support for economic growth, an ADB priority for assistance to the Philippines. 12

B. Efficacy in Achievement of Purpose

65. Augmentations in the transmission system remain consistent with the grid’s long-term growth requirements. The Luzon transmission facilities play a particularly critical role in ensuring the transport of electricity generated in southern Luzon to the load centers in Metro Manila. This is demonstrated by subsequent construction to further reinforce the grid. In particular, the Tayabas–Dasmariñas line has already been uprated to 500 kV operation, and one circuit has been connected to a new 500 kV line connecting the new 1,200 MW Ilijan gas fired plant in Province to the grid. Furthermore, because of load growth during the Project, NPC issued a variation order to the contractor to install two more 100 MVA transformers, relocated from a Zapote substation. NPC met these additional expenses from internal sources. The additional capacity installed in Mindanao supports the growth in electricity demand, and particularly, the Government’s program to electrify all villages by 2006 (para.73).

C. Efficiency in Achievement of Outputs and Purpose

66. The economic re-evaluation was carried out on the basis of a comparison of scenarios “with” vs “without” the Project. Without the Project, the power supply, already weak, would have continued to deteriorate. With the Project, improved supply reliability will directly benefit present and future industrial, commercial, and residential consumers in Luzon and Mindanao. The Philippines as a whole will benefit through the faster economic development that a reliable power supply brings. Other benefits include higher employment during construction, operation, and maintenance.

67. The economic internal rate of return (EIRR) of the Project is calculated for a period of 32 years, including construction and operation. The EIRR is estimated at 28.1% (Appendix 6). The EIRR calculation was subjected to sensitivity analysis to test the effect of possible unfavorable changes on key variables. Results indicate that the Project is economically viable under all adverse conditions considered.

68. A distribution analysis of project net benefits was undertaken based on results of the project financial and economic analysis. The project effects were distributed among the stakeholders that gain or lose: NPC, the consumers that benefited from the Project, the Government, and labor involved in the Project. The analysis indicates that as a result of the Project, while there was an outflow from the Government investing in the Project, NPC, consumers and labor all gained economic benefits from the Project. The analysis concludes that a substantial portion of the Project benefits went directly to the consumers including the low- income households. The Project has achieved its primary objective of promoting pro-poor economic growth. The distribution analysis is detailed in Appendix 6.

D. Preliminary Assessment of Sustainability

69. At project appraisal, a “time slice” approach was adopted to evaluate its financial sustainability, because it would have been difficult to isolate and separately quantify the benefits accruing to the Project’s transmission and the substation components. A 5-year time slice covering the period FY1994 to FY1998 was used; it included all generation, transmission, and miscellaneous projects that NPC would undertake during the period. But in this report, a financial internal rate of return (FIRR) for each part of the Project is calculated on the basis of detailed information on each transmission and subtransmission component, including 13 unbundled tariffs to be applied to each component, and their estimated incremental loads (Appendix 7).

70. 2002 prices were used for the FIRR analyses for parts A and B. Financial benefits are measured by incremental electricity volumes, which result from development of the transmission and sub-transmission facilities. The financial benefits are estimated by multiplying incremental electricity sales by the unbundled transmission tariffs. The overall FIRR is also calculated by simply summing the costs and benefits of parts A and B. As a parameter, and a proxy for the financial opportunity cost of capital, the weighted average cost of capital (WACC) for the Project is calculated at 7.1%, as detailed in Appendix 7.

71. The FIRRs are calculated for a 32-year period, including construction and operation. The FIRR for part A is estimated at 13.9%, that for part B at 13.2%, and the Project FIRR at 13.8%. The FIRR calculation was subjected to sensitivity analysis to test the effect of possible changes in assumptions and key variables. Results indicate that the Project is financially viable even under adverse conditions.

72. A further condition of sustainability is good maintenance of facilities. NPC has assured that operation and maintenance of the completed transmission facilities are being financed by internal cash generated through TRANSCO. Maintenance standards of substation facilities visited during the project completion report mission were generally high. The one exception was Dasmariñas substation, where general housekeeping seemed poor (although ongoing construction in the 230 kV switchyard could have contributed to this). NPC’s Dasmariñas substation is responsible for Zapote substation’s maintenance; it is important that the Zapote’s facilities are well maintained, considering their critical role in supplying electricity to Metro Manila.

E. Poverty Reduction, Environmental and Social Impacts

73. Electricity is an input to most economic processes, and thus is an important ingredient of the economic development that is essential for poverty reduction. The Project has contributed to maintenance of acceptable levels of quality and reliability of electricity supply, and transmission network losses, considering the growth in demand for electricity in both Luzon and Mindanao. Although the impact of the Project on poverty reduction could not be quantified, the upgrading and expansion of the transmission system in Luzon and Mindanao substations helped meet the additional power demand in their service areas and facilitate rural electrification, which will benefit the poor directly and indirectly. With access to electricity, the rural poor will enjoy better education, entertainment, communication, health, comfort, convenience, and productivity. The increased capacity in Mindanao will particularly support the growth in electricity demand resulting from the Government’s O’llaw village electrification program7.

74. The Luzon transmission component (part A) serves the provinces of Quezon, Laguna, Batangas, and Cavite, plus Metro Manila. This component required acquisition of more than 1,000 ha of land, of which more than 80% was agricultural. No transmission lines passed through tourist or scenic areas. In the Mindanao component (part B), substation expansion component did not require any land acquisition, and there were no major environmental impacts. The Project’s overall environmental classification was Category B. 6 NPC has provided ADB with Environmental Compliance Certificates from the Department of Environment and

7 O’llaw (Gift of Light) is a Government program that is aimed at the electrification of all villages by 2006. 6 No Initial Environmental Examination was included in the RRP when the Project was appraised in 1993. 14

Natural Resources for the transmission lines and substations built under the Project. NPC has used international standards and practices in the design and construction of Project components. No transmission lines and substation equipment were filled with poly-chlorinated biphenyl.

75. Part A affected 2,427 landowners and tenants; part B affected 871. No indigenous minority groups were affected. Those affected are being compensated according to NPC’s relocation guidelines, which include payments for (i) land at fair market price, (ii) ROW easements and tower occupancy fees, (iii) dismantling, transfer, and reconstruction of houses and structures, (iv) crop damages and improvements, and (v) grants for resettlement assistance. Payments due totaled about P1.4 billion, and are considered consistent with ADB’s guidelines for resettlement. Appendix 8 summarizes the resettlement and compensation status as of October 2002.

76. As noted earlier, ROW problems delayed project implementation considerably. During implementation, NPC established a task force to negotiate with landowners, house owners, and tenants who were directly affected by the Project. Most of the ROW problems were resolved through negotiation. In cases where landowners absolutely refused to accept NPC’s proposal to enter and construct transmission lines, NPC filed expropriation proceedings in court, to avoid excessive implementation delays.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

77. Appendix 9 gives detailed evaluation of project performance. The transmission components are relevant to NPC goals, and will have long-term sustainability after restructuring of the power sector. But the Project’s short-term economic and financial benefits were reduced by long delays in completing the Zapote substation, and the inability to complete transmission lines before commissioning the Pagbilao power station. Nevertheless, the Project is economically and financially viable. The reservoir rehabilitation study was cancelled at NPC’s request. Addressing the reduced potential output of NPC’s hydropower plants caused by deforestation was not seen as a priority, considering the surplus of generation capacity prevailing at the time of the Asian economic crisis. However, this study would have been useful to maximize the hydropower generation potential in view of future energy demand. Overall, the Project is rated as successful. 8

B. Lessons Learned

78. Although the Project’s transmission components were generally implemented as conceived at appraisal, implementation delays became a major concern to ADB, and raised local costs significantly. NPC could have mitigated many of the delays with forward planning and effective project management. NPC’s management style was generally reactive, with little anticipation of emerging problems. The Project would also have benefited if more activities such as separate administration of supply and install contracts in Mindanao had been carried out in parallel.

8 This PCR is part of a sample of PCRs that the Operations Evaluation Department reviewed independently. The review has validated the methodology used and the rating given. 15

79. The project schedule at appraisal was unrealistic because it did not include adequate time (i) for NPC to comply with the covenants in the loan agreement, which were conditions for loan effectiveness, (ii) for arrangement of cofinancing, even though there were no firm cofinancing commitments when the ADB loan was approved, or (iii) for the evaluation and award of contracts, given the complexity of NPC’s internal contracting procedures and the need for ADB approval before contract award.

80. Parts C, D, and E of the Project were not closely integrated with parts A and B. Part C was envisaged to be financed by the ADB loan, but ADB agreed to its cancellation. The RRP did not detail the objectives and scope of parts D and E, nor their financing arrangements. ADB review missions did not monitor or supervise these two parts because the World Bank and USAID financed them, through different projects. Closer coordination with those agencies would have helped assure ADB that project objectives were met.

C. Recommendations

81. Project-related recommendations are as follows:

(i) Covenants. NPC is in the process of being restructured and privatized after passage of the Electric Power Industry Reform Act. ADB should continue its policy dialogue with the Government and closely review the financial viability of NPC and its successors.

(ii) Project implementation schedules. Project schedules are a benchmark for assessing project implementation performance. Therefore, ADB should ensure that schedules are realistic when loans are processed. The schedules should allow adequate time to arrange cofinancing and to comply with covenants that are conditions for loan effectiveness. Schedules should also ensure realistic time frames for bid evaluation and contract award, considering the contracting procedures for both the borrower and ADB.

(iii) Timing of preparation of the project performance audit report (PPAR). The PPAR is recommended for 2004, after commissioning of the EDCF-financed components.

82. General recommendations are as follows:

(i) Cofinancing. Cofinancing commitments should be in place at the time of project approval.

(ii) RORB covenant. ADB should examine the relevance of the RORB covenant for power generation, transmission and distribution companies operating in competitive markets.

(iii) Review Mission: ADB review missions should include, as far as possible, persons with expertise in resettlement, sociology or social anthropology.

Appendix 1 17

CHRONOLOGY OF EVENTS

Project Processing

May 1993 – Fact–Finding Mission October 1993 – Appraisal Mission 11 November 1993 – Loan Negotiations 14 December 1993 – Loan Approval 20 December 1993 – Loan Signing 20 March 1994 – Original date of Loan Effectiveness 6 September 1994 – Actual date of Loan Effectiveness

Implementation

7 October 1994 – Cofinancing loan agreement signed between National Power Corporation (NPC) and OPEC Fund (part B).

15 February 1995 – Effectivity of turnkey contract for construction of Tayabas – Dasmariñas 500 kV transmission line

13 March 1995 – Effectivity of turnkey contract for construction of Luzon 230 kV transmission lines.

20 March 1995 – Effectivity of turnkey contract for construction of Luzon 230 kV substations.

20 March 1995 – Effectivity of OPEC loan.

28 June 1995 – Signing of cofinancing loan agreement from the Economic Development Cooperation Fund of the Export–Import Bank of Korea (ODEF loan).

9 October 1995 – Effectivity of the ODEF loan.

11 March 1996 – Completion of Pagbilao–Tayabas 230 kV transmission line.

13 June 1996 – Commercial operation of 1st 350 MW Pagbilao unit.

14 June 1996 – Request from NPC to extend ADB loan closing date from 31 December 1996 to 31 December 1998, and to cancel $30 million of loan amount.

5 July 1996 – Request from NPC to cancel the Reservoir Rehabilitation TA (part C).

13 August 1996 – Commercial operation of second 350 MW Pagbilao unit. NPC became liable for a prorated capacity charge of about P110 million per month because the grid, without the Project-funded augmentations, could only export 560 MW of the contract 735 MW plant capacity.

18 Appendix 1

26 September 1996 – NPC withdrew request to cancel Reservoir Rehabilitation Study.

5 December 1996 – Completion of Biñan–Sucat 230 kV transmission line.

21 December 1996 – Energization of Tindalao–Nabuntaruran 69 kV transmission line.

26 December 1996 – Bank advised NPC of agreement to extend loan closing date to 31 December 1998 and cancellation of loan by $29 million. The amount cancelled was reduced to cover the cost of the Reservoir Rehabilitation TA (cancellation of that TA was not approved).

31 March 1997 – Completion of Dasmariñas 230 kV substation expansion.

28 April 1997 – Completion of Tayabas–Dasmariñas 230 kV line.

10 June 1997 – Delivery of Biñan and Sucat 230 kV substation equipment.

11 November 1997 – Request from NPC for cancellation of a further $25 million of the ADB Loan amount.

23 December 1997 – Completion of Montevista–Monkayo 69 kV line.

4 February 1998 – Request from NPC for extension of the loan closing date to 31 December 2000

6 February 1998 – Advice from NPC that it had decided to cancel the Reservoir Management TA.

21 March 1998 – Completion of Tayabas 230 kV substation.

26 March 1998 – NPC advised it was withholding the request for cancellation of $25 million of loan amount pending resolution of problems with the Imus–Zapote line.

8 April 1998 – Energization of the 500 kV Tayabas–Dasmariñas line at 230 kV. This allowed the evacuation of the full 735 MW contracted capacity of the Pagbilao power station, and removed NPC’s liability for Pagbilao capacity charges.

26 April 1998 – Completion of General Santos substation expansion

9 June 1998 – Completion of Nuling–Midayup 69 kV transmission line.

12 August 1998 – Bank advised NPC that an extension of the loan closing date was not approved.

26 August 1998 – Request from NPC for cancellation of a further $26 million of the ADB Loan amount. Appendix 1 19

29 September 1998 – Effectivity of contracts for the supply of Mindanao substation transformers and protection panels.

21 October 1998 – Further request from NPC to extend the loan closing date to 31 December 2000, and to cancel $6.5 million of the loan amount. This request, following the 1998 Review Mission, replaced the earlier request for cancellation of $25 million of the loan amount.

29 December 1998 – Effectivity of contract for the supply of Mindanao substation equipment.

4 January 1999 – Bank approved extension of the loan closing date to 31 December 2000, cancellation of $7.5 million of the loan amount, and cancellation of part C of the Project.

26 April 1999 – Delivery of Mindanao substation protection panels.

15 July 1999 – Completion of Dasmariñas–Imus 230 kV transmission line section.

6 August 1999 – Delivery of Mindanao substation equipment.

16 September 1999 – Effectivity of Mindanao line equipment supply contract.

30 September 1999 – Delivery of Mindanao substation transformers.

30 June 2000 – Delivery of Mindanao line equipment.

9 July 2000 – Energization of Tagoloan transformer.

9 July 2000 – Completion of Tagoloan substation expansion.

23 April 2001 – Closing date of ADB Loan 1288PHI and cancellation of the undisbursed loan amount of $6.73 million.

31 May 2001 – Completion of Imus–Zapote 230 kV transmission line section.

18 July 2001 – Energization of Tindalao transformer.

15 October 2001 – Completion of Zapote 230 kV substation.

30 June 2002 – Completion of Tindalao substation works.

July 2002 – Receipt of NPC’s Project Completion Report (PCR)

22 July– 9 August 2002 – ADB PCR Mission

2 September 2002 – Closing date of OPEC Loan 624P

SUMMARY OF CONTRACTS FUNDED BY THE ASIAN DEVELOPMENT BANK AND THE ORGANIZATION OF PETROLEUM EXPORTING COUNTRIES

Contract No Description / Contractor Country of Contract Amount US Dollar Mode of ADB’s (Loan) (contract type) Procurement (FC) a Equivalent Procurement Approval of Award Sp93.DLm-1169 (ADB) Luzon 230 kV substations / Korea $ 12,680,158 12,680,158 ICB 8 Jun 1994 Hyundai Engineering Co DM 23,174,405 15,246,319 SEK 1,600,889 238,228 Ltd (turnkey) Sp93.DLm-1173 (ADB) Luzon 230 kV transmission Korea US$ 26,193,896 26,193,896 ICB 15 Aug 1994 lines / Hyundai Engineering Co Ltd (turnkey)

Sp93.DLm-1174 (ADB) Luzon 500 kV Tayabas– Italy $ 32,106,297 32,106,297 ICB 24 Jun 1994 Dasmariñas transmission line JY 773,923,571 8,121,771 / ABB SAE Sadelmi, SpA (turnkey)

Sp.MSEP.Ms-0100 Mindanao substation China $ 1,374,514 1,374,514 ICB 10 Sep 1997 Schedule I (OPEC) transformers / Shaanxi Machinery and Equipment Import-Export Corporation (supply) Sp.MSEP.Ms-0100 Mindanao outdoor substation Korea $ 1,243,961 1,243,961 ICB 10 Sep 1997 Schedule II (OPEC) equipment / Hyundai DM 296,712 156,741 Corporation (supply)

Sp.MSEP.Ms-0100 Mindanao protection panels $ 283,693 283,693 ICB 10 Sep 1997 Schedule III (OPEC) (ABB Power Inc) A ppendix 2 Sp98TNTWTL.Ms-0226 Mindanao transmission line Philippines $ 247,192 247,192 ICB 13 July 1999 (OPEC) materials (Hansei Corporation–Sung Han & Kim) a Includes variations (where applicable). DM = Deutsch mark; FC = foreign currency; ICB = international competitive bidding; JY = Japanese yen; SEK = Swedish Kroner 20 Appendix 3 21

SCHEDULE OF LOAN DISBURSEMENTS

Table A3.1: ADB Loan 1288-PHI

Year Quarter Amounts Cumulative Annual ($ million) ($ million) ($ million)

1995 1 0.182 0.182 2 15.879 16.061 3 13.763 29.824 4 13.800 43.624 43.624

1996 1 10.759 54.383 2 9.441 63.824 3 7.076 70.900 4 8.565 79.465 35.841

1997 1 6.381 85.646 2 1.853 87.699 3 4.229 91.928 4 0.612 92.540 13.075

1998 1 3.497 96.037 2 0.378 96.415 3 4.457 100.872 4 0.470 101.342 8.802

1999 1 5.248 106.590 2 0.139 106.729 3 4.658 111.387 4 0.167 111.554 10.212

2000 1 3.909 115.463 2 115.463 3 4.218 119.681 4 119.681 8.127

2001 1 1.063 120.744 1.063

Source: Asian Development Bank 22 Appendix 3

Table A3.2: OPEC Loan

Year Quarter Amounts Cumulative Annual ($ million) ($ million) ($ million)

1999 1 0.000 0.000 2 0.255 0.255 3 2.171 2.246 4 0.335 2.761 2.761

2000 1 0.025 2.786 2 0.192 2.978 3 0.006 2.984 4 0.025 3.009 0.248

2001 1 0.083 3.092 2 0.000 3.092 3 0.000 3.092 4 0.207 3.299 0.290

Source: Asian Development Bank

IMPLEMENTATION SCHEDULE (APPRAISAL AND ACTUAL) Part A – Luzon Transmission – ADB Loan Components A ppendix 4

23

24

IMPLEMENTATION SCHEDULE (APPRAISAL AND ACTUAL) Part B – Mindanao Transmission – OPEC Loan Components

Appendix 4

IMPLEMENTATION SCHEDULE (APPRAISAL AND ACTUAL) Part B – Mindanao Transmission – OPEC Loan Components (Continued) A ppendix 4

25 26 Appendix 6

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Reference in Loan Covenant Agreement Status of Compliance

Plans, Design Standards, Specifications, and Work Schedules

NPC shall furnish all relevant Project 4.03 (b) Complied with documents, including material modifications, to ADB.

Reports and Information

NPC shall furnish to ADB all reports and 4.06 Partly complied with. Project information relating to the purpose of the loan completion report covers only that ADB may reasonably request. This includes the part A substation quarterly progress reports and a completion component. No completion report. report has been received for Mindanao. Audited Financial Statements

NPC shall furnish to ADB certified copies of its 4.07 Compliance was late. audited financial statements within 6 months of Submission dates were: the end of each Fiscal Year (FY). FY1997:21 September 1998 FY1998: 3 September 99 FY1999: 3 July 2000 FY2000: 1 August 2001 FY2001: 12 July 2002

Financial

NPC shall fund 20% of its annual capital 4.12 Complied with expenditures from internal sources from FY95.

Annual internal cash generation shall be greater 4.13 Not complied with than 1.3 times NPC’s debt service requirement from FY1995.

NPC shall achieve a minimum annual return of 4.14 Not complied with 8% on the value of fixed assets from FY1994.

NPC shall take all actions necessary to ensure 4.15 Complied with that the total amount of its accounts receivable through electricity sales is maintained at or below a level equivalent to 3 months sales during the previous 12 months.

Appendix 5 27

Reference in Loan Covenant Agreement Status of Compliance

Project Management

NPC shall establish a Project management 6.1 Complied with office no later than the effective date of the loan.

Land

NPC shall take all necessary steps to acquire on 6.2 Complied with, late a timely basis all land, rights in land, and rights of way required for expeditious Project implementation.

Environmental and Social Matters

NPC shall ensure that appropriate 6.3 Complied with environmental and social management measures are taken during line route selection and Project construction.

NPC shall ensure the Project is designed, 6.4(a) Complied with implemented, operated, and maintained in strict conformity with the relevant environmental laws and ADB’s Environmental Guidelines for Selected Industrial and Power Development Projects.

NPC shall ensure that PCBs are not used in the 6.4(b) Complied with Project facilities.

NPC shall ensure that resettlement of 6.5 Complied with households by the Project, and compensation for loss of livelihood, shall be carried out in an equitable manner and with due consultation with the local government units concerned.

Cofinancing

Cofinancing arrangements shall have been 6.6 Complied with, late executed by 31 December 1994.

28 Appendix 6

Reference in Loan Covenant Agreement Status of Compliance

Energy Conservation

The guarantor shall use best efforts to enact 6.7 Complied with, late draft legislation to conserve energy and enable effective demand side management by the end of FY1994.

Tariffs

The guarantor and the borrower shall, no later 6.9(a) Complied with, late than the effective date, (i) set a permanent tariff increase of 18 centavos per kWh; and (ii) ensure that the tariff structure incorporates automatic adjustment for variations in the cost of fuel and purchased power, as well as in foreign exchange rates,

The guarantor and the borrower shall ensure 6.9(b) Complied with, late that tariffs reflect long run marginal cost, and shall restructure tariff rates to incorporate initially a demand charge and an energy charge reflective, respectively, of the fixed and variable cost structure of the borrower no later than the end of FY1994.

Revaluation of Assets

The borrower shall have revalued, by an 9.10 Complied with, late independent appraiser acceptable to ADB, (i) its fixed assets as of 31 December 1992, during the first half of FY1994; (ii) its fixed assets as of 31 December 1996, promptly at that time; and (iii) its fixed assets as of a date every 4 years thereafter.

Anti-pilferage

The Guarantor shall use best efforts to enact 9.11 Complied with, late during FY1994 draft legislation to prevent pilferage of electricity, as well as pilferage and destruction of transmission and distribution facilities.

Appendix 5 29

Reference in Loan Covenant Agreement Status of Compliance

Efficiency and Operational Improvement

The Borrower and the Guarantor shall cause 9.13 Partly complied with implementation of the efficiency and operational improvement program, based on the study undertaken by consultants ESB International. ADB is to be provided quarterly progress reports on such implementation, commencing 1 April 1994.

ADB=Asian Development Bank, FY=fiscal year, kWh=kilowatt hour, NPC=National Power Corporation, PCB=polychlorinated biphenol 30 Appendix 6

ECONOMIC ANALYSIS

A. General

1. The economic analysis has been carried out on the basis of a comparison of scenarios “with” vs “without” the Project. Without the Project, the supply of power, already weak, would have continued to deteriorate. With the Project, improved reliability of supply will directly benefit present and future industrial, commercial, and residential consumers in Luzon and Mindanao. The Philippines as a whole will benefit through the economic development that a reliable power supply brings. Other benefits include increased employment during construction, operation, and maintenance.

2. The economic analysis was conducted using 2002 domestic market prices. The economic price of non-traded goods is equal to their domestic prices. A shadow exchange rate factor of 1.2 (based on the standard conversion factor of 0.83) was applied to calculate the economic price of traded goods. Because of the local conditions of the labor market, an unskilled labor conversion factor of 0.7 in domestic prices was considered. Based on these assumptions, the main costs and benefits have been broken down into traded goods, non- traded goods, and skilled and unskilled labor. Specific conversion factors were calculated to value all costs and benefits in economic terms.

B. Costs

3. The main project costs of parts A and B are capital costs of equipment, civil works, resettlement, and land acquisition; incremental operating and maintenance costs; generation cost; and distribution cost. The economic cost of capital and incremental operating and maintenance costs were estimated from financial costs, including physical contingencies. Price escalation, interest during construction, and taxes are excluded. Financial costs were converted into economic costs using specific conversion factors for capital costs and maintenance costs. The economic analysis includes the long run marginal cost of generation, which was estimated based on fuel costs of P1.21 per kilowatt hour (kWh) of gross generation for Luzon. Given that power generation in Mindanao is mainly hydro, the minimum marginal cost of generation was estimated at P0.15 per kWh. The average distribution cost was estimated at P1.75 per kWh for Luzon, and P2.02 per kWh for Mindanao, derived from data of the Manila Electric Corporation (Meralco) for Luzon and electric cooperatives in Mindanao.

C. Benefits

4. Economic benefits from expanded and improved transmission networks in Luzon and Mindanao are the Project’s main quantifiable economic benefits.

5. The economic benefits from the incremental electricity sales were based on average consumer willingness to pay (WTP) at P5.01 per kWh for Luzon, and P3.43 per kWh for Mindanao, which are net of distribution losses and costs. The used WTP was based on today’s cost of operating private generators. Considering the higher cost of self-generation, it was assumed that residential, commercial, and industrial users would only self-generate 27%, 35%, and 22%, respectively, of their normal power consumption. The WTP is also based on the current cost of using kerosene lamps for lighting among the poorer consumers in rural areas.

Appendix 6 31

D. Results of Economic Analysis

6. The Project benefits will accrue to all the power consumers including the residential, commercial, and industrial sectors. The Philippines as a whole will benefit through the economic development arising from a reliable power supply. The improved transmission networks will also enhance access to electricity, and improve local residents’ quality of life.

7. The Project’s economic internal rate of return (EIRR) is calculated for a period of 32 years, including construction and operation periods. The EIRR is estimated at 28.1%, with 28.4% for part A and 24% for part B (Table A6.1). The EIRR calculation is subject to sensitivity analysis to test the effect of possible unfavorable changes in key variables (Table A6.2). The sensitivity analysis has been carried out for the following cases: (i) costs are 10% more than estimated; (ii) sales are 10% less than expected; (iii) implementation delay of 1 year; and (iv) combination of (i) and (ii), and combination of (i), (ii) and (iii). The results indicate that the Project is economically viable under all the adverse conditions considered.

E. Distribution Analysis

8. The distribution analysis of the Project net benefits was undertaken based on results of the project financial and economic analysis. The domestic price numeraire and a discount rate of 12% were used for both financial and economic flows.

9. The table A6.3 shows the distribution of the project effects (economic minus financial present values) among the stakeholders: NPC, consumers of the Project, the Government, and labor involved in the Project. As a result of the Project, NPC gained a financial profit of P1,367 million from the investment, and consumers gained a consumer surplus of P244,279 million from the Project. It is assumed that 15 percent of the capital and O&M costs over the project life would come from the employment of labor. The labor including the poor gained a net economic benefit of P393 million because the Project pays wages in excess of the economic opportunity cost of the labor. The Government, however, will suffer an economic loss due to inefficient resource use associated with domestic market price distortion relative to the world market prices.

10. The “economic” pricing of electricity resulting from the pooling market system and the reliable power supply from transmission system improvement will benefit the consumers and labor directly and indirectly. The Project has helped support continuing economic growth and thus, indirectly contributed to programs aimed at poverty reduction, by assuring the continuing quality and reliability of electricity supply. Particularly, the installation of 2 pieces of 100 MVA power transformers would increase transmission capacity in Mindanao, and potentially help additional 20,000 households (including 25% of low-income households) to be connected to the grid system. The analysis concludes that a substantial portion of the project benefits went directly to the consumers including the low-income households and the Project has achieved its primary objective of pro-poor economic growth.

32 Appendix 6

Table A6.1: Economic Internal Rate of Return (P million in 2002 price)

Year Costs Benefits Net Capital O&M Generation Distribution Total Incremental Economic Economic Costs Costs Costs Costs Costs Energy Sale (GWh) Benefits Benefits 1994 13.56 13.56 (13.56) 1995 4136.87 4136.87 (4136.87) 1996 3319.43 3319.43 (3319.43) 1997 1186.80 1186.80 (1186.80) 1998 781.09 781.09 (781.09) 1999 882.57 29.75 284.87 1197.19 130.35 446.97 (750.22) 2000 685.35 34.40 329.38 1049.13 150.72 516.81 (532.32) 2001 88.51 422.37 36.26 347.18 894.33 158.87 544.75 (349.58) 2002 422.37 10819.37 11474.60 22716.34 6152.34 30589.23 7872.89 2003 422.37 11824.33 12439.03 24685.73 6678.37 33284.78 8599.05 2004 422.37 12862.33 13533.22 26817.92 7265.62 36209.89 9391.98 2005 422.37 13890.39 14658.37 28971.13 7865.82 39166.36 10195.23 2006 422.37 14946.98 15938.35 31307.70 8538.11 42383.22 11075.52 2007 422.37 15739.41 16996.60 33158.38 9086.39 44937.40 11779.02 2008 422.37 16528.94 18221.68 35173.00 9709.16 47727.63 12554.63 2009 422.37 17307.24 19466.76 37196.38 10339.80 50531.32 13334.94 2010 422.37 18179.53 20867.22 39469.12 11048.85 53680.81 14211.68 2011 422.37 19295.67 22351.62 42069.66 11818.24 57268.04 15198.38 2012 422.37 19324.49 22640.59 42387.45 11950.47 57721.45 15333.99 2013 422.37 19356.11 22957.52 42736.00 12095.49 58218.73 15482.73 2014 422.37 19373.77 23134.63 42930.78 12176.54 58496.63 15565.85 2015 422.37 19389.58 23293.10 43105.05 12249.05 58745.27 15640.22 2016 422.37 19389.58 23293.10 43105.05 12249.05 58745.27 15640.22 2017 422.37 19389.58 23293.10 43105.05 12249.05 58745.27 15640.22 2018 422.37 19389.58 23293.10 43105.05 12249.05 58745.27 15640.22 2019 422.37 19389.58 23293.10 43105.05 12249.05 58745.27 15640.22 2020 422.37 19389.58 23293.10 43105.05 12249.05 58745.27 15640.22 2021 422.37 19389.58 23293.10 43105.05 12249.05 58745.27 15640.22 2022 422.37 19389.58 23293.10 43105.05 12249.05 58745.27 15640.22 2023 422.37 19389.58 23293.10 43105.05 12249.05 58745.27 15640.22 2024 422.37 19389.58 23293.10 43105.05 12249.05 58745.27 15640.22 2025 422.37 19068.80 23293.10 42784.27 12249.05 58745.27 15961.00

EIRR = 28.1% NPV (12%) = 3 0,186.4 million pesos

EIRR=economic internal rate of return, NPV=net present value, O&M = Operation and Maintenance Source: Asian Development Bank estimates

Table A6.2: Sensitivity Analysis

Scenario Change EIRR NPV (12%) Sensitivity Switching (percent) (percent) (P million) Indicator a Value (%) b

1. Base Case - 28.1% 30,186.4 - - 2. Costs Increase 10 23.1% 18,758.6 3.8 26.4 3. Benefits Decrease 10 22.5% 15,740.0 4.8 20.9 4. Implementation Delay 1 year 26.2% 26,091.7 - - 5. Combination of 2 and 3 - 15.5% 4,312.2 - - 6. Combination of 2, 3 and 4 - 14.7% 3,182.9 - -

EIRR=economic internal rate of return, NPV=net present value a Sensitivity Indicator = Percentage change in NPV divided by percentage change in variable tested b Switching Value = Percentage change in variable tested required for the NPV to become zero

Appendix 6 33

Table A6.3: Distribution Analysis (P million in present value at 12% discount rate)

Net Net Difference Distribution of Project Effects Financial Economic (Econ-Fin) NPC Consumers Government/ Labor Returns Returns Economy Total

Benefits 10,316 254,595 244,279 Costs Capital Costs (7,424) (7,663) (239) (275) 36 O&M Costs (1,525) (3,313) (1,787) (2,145) 357 Generation Costs (86,979) (86,979) (86,979) Distribution Costs (98,271) (98,271) (98,271) Net Present Value 1,367 58,369 57,002 Gains and Losses 1,367 244,279 (187,670) 393 58,369 34 Appendix 7

FINANCIAL ANALYSIS

A. General

1. In the report and recommendation of the president (RRP) for this loan, a time slice approach was used to evaluate the Project’s performance, because it was difficult at the time to isolate and separately quantify the benefits accruing to the transmission components and the substation components. A 5-year time slice covering the period FY1994 to FY1998 was used, which included all generation, transmission, and miscellaneous projects that the National Power Corporation (NPC) planned during the period. But in this Project completion report (PCR), a financial internal rate of return (FIRR) for each part is calculated using the assumptions below. The evaluation methodology was changed for this PCR for two major reasons. First, the Government decided to restructure and segregate NPC into several generation companies and the National Transmission Company (TRANSCO). Therefore, NPC in its present form will not exist after 2003. Second, NPC has not been financially sound and sustainable for years. Therefore, to assume the future financial benefits of NPC based on a time slice approach under this situation might not be reasonable. Furthermore, for this analysis, NPC provided detailed information on each project component, including unbundled tariffs to be applied, and the estimated incremental loads. That enabled calculation of the FIRR for each part.

2. 2002 constant prices are used for the FIRR analyses for part A (Luzon Transmission) and part B (Mindanao Transmission). Their financial benefits were based on the incremental electricity volumes that become available because of the development of the transmission and sub-transmission facilities, and are estimated by multiplying incremental electricity loads by unbundled transmission tariffs. The tariffs used are composed of a transmission tariff for high voltage electricity transmitted though transmission facilities, and a sub-transmission tariff for low voltage electricity transmitted through sub-transmission facilities. An overall project FIRR analysis was also undertaken. This was calculated simply by summing the costs and benefits of both parts A and B.

3. Project sustainability was assessed by comparing the weighted average cost of capital (WACC) to FIRR. To test the sensitivity of the analysis to the validity of the key assumptions, a decrease of the estimated electricity volumes, and an increase of working expenses, are tested separately and jointly. Also tested in the sensitivity analysis was an assumption that the total unused capacity payments to the independent power producer in Pagbilao should be included in the project cost. The analysis covers 32 years. Tables for financial analysis are attached to this Appendix (Table A7.1).

B. Costs

4. The main project costs of parts A and B are equipment, civil works, resettlement, and incremental operating and maintenance costs. For the sensitivity analysis, the capacity payments were estimated as P110 million per month, which were assumed to be paid by NPC for 19 months from September 1996 to March 1998. The capital costs for calculating the FIRR include actual costs for parts A and B, and are recalculated in 2002 prices. The capital costs are converted from U.S. dollars to Philippine pesos at $1 = P52.

C. Financial Benefits

5. The financial benefits were measured on the basis of incremental electricity volumes made possible by the construction or expansion of the transmission and sub-transmission Appendix 7 35 facilities. Benefits were estimated by multiplying the incremental excess electricity volumes traded over the existing capacities by the unbundled transmission tariffs of 2002.

D. Assumptions

6. As a proxy for the financial opportunity cost of capital, the WACC for the Project is calculated at 7.1% (Table A7.2).

7. The construction of transmission lines and substations will enable the transmission of electricity generated at the Luzon and Mindanao power plants to the main load centers, including Metro Manila and Davao. The erection of sub-transmission lines and expansion of substations will also enable the sub-transmission facilities to meet increased system demand for distribution. The FIRRs for both parts A and B are computed based on (i) a Project life of 32 years; (ii) transmission tariffs in 2002 at P0.322 per kilowatt hour (kWh) for Luzon and P0.269 per kWh for Mindanao for projected incremental electricity transmitted through the transmission facilities, and sub-transmission tariffs at P0.037 per kWh for Luzon and P0.152 per kWh for Mindanao for projected incremental electricity transmitted by the sub-transmission facilities; and (iii) incremental operation and maintenance costs of 4% of the capital costs of the transmission and sub-transmission facilities concerned.

E. FIRR and Sensitivity Tests

8. The FIRR for part A is estimated at 13.9%. The financial net present value (FNPV), discounted at the WACC, is about P11.2 million. The sensitivity analysis showed that the FIRR would decrease to (i) 12.8% if electricity sales decreased by 10%, (ii) 13.7% if its working expenses increased by 10%, (iii) 12.7% if (i) and (ii) occurred jointly; and (iv) 11.9% if the capacity payments to the Pagbilao IPP were included in the Project costs. Under the current assumptions, part A is considered financially viable, because the FIRR exceeds the WACC.

9. The FIRR for part B is estimated at 13.2%. The FNPV, discounted at the WACC, is about P1.1 million. The sensitivity analysis showed that the FIRR would decrease to (i) 12.4% if electricity sales decreased by 10%, (ii) 11.2% if its working expenses increased by 10% and (iii) 10.1% if (i) and (ii) occurred jointly. Under the current assumptions, part B is also considered financially viable, because the FIRR exceeds the WACC in all cases.

10. The FIRR is computed by summing cash flows for parts A and B. Based on the above assumptions, the FIRR for the Project is estimated at 13.8%. The sensitivity analysis showed that the FIRR would decrease to (i) 12.8% if electricity sales decreased by 10%, (ii) 13.5% if its working expenses increased by 10% (iii) 12.5% if (i) and (ii) occurred jointly, and (iv) 12.0 % if the capacity payments to the Pagbilao IPP were included in the Project costs. The Project, as a whole, is considered financially viable, because the FIRR exceeds the WACC.

Table A7.1: Financial Internal Rate of Return A

FIRR for Part A FIRR for Part B FIRR for Part A and Part B ppendix 7 (P million) (P million) (P million) Capital O&M Total Increment- Financial Capital O&M Total Increment- Financial Capital O&M Total Increment- Financial Year Costs Costs Costs al Sales Benefits Year Costs Costs Costs al Sales Benefits Year Costs Costs Costs al Sales Benefits 1994 0.0 0.0 0.0 0.0 0.0 1994 13.1 0.0 13.1 0.0 (13.1) 1994 13.1 0.0 13.1 0.0 (13.1) 1995 3,721.8 0.0 3,721.8 0.0 (3,721.8) 1995 297.2 0.0 297.2 0.0 (297.2) 1995 4,019.0 0.0 4,019.0 0.0 (4,019.0) 1996 2,986.1 0.0 2,986.1 0.0 (2,986.1) 1996 238.7 0.0 238.7 0.0 (238.7) 1996 3,224.9 0.0 3,224.9 0.0 (3,224.9) 1997 1,063.8 0.0 1,063.8 0.0 (1,063.8) 1997 89.2 0.0 89.2 0.0 (89.2) 1997 1,153.0 0.0 1,153.0 0.0 (1,153.0) 36 1998 699.4 0.0 699.4 0.0 (699.4) 1998 59.5 0.0 59.5 0.0 (59.5) 1998 758.8 0.0 758.8 0.0 (758.8) 1999 792.4 0.0 792.4 0.0 (792.4) 1999 65.0 0.0 65.0 33.2 (31.8) 1999 857.4 0.0 857.4 33.2 (824.2) 2000 615.8 0.0 615.8 0.0 (615.8) 2000 50.0 0.0 50.0 36.1 (13.9) 2000 665.8 0.0 665.8 36.1 (629.7) 2001 78.7 398.3 477.0 0.0 (477.0) 2001 7.3 32.8 40.1 38.3 (1.8) 2001 86.0 431.1 517.1 38.3 (478.8) 2002 0.0 398.3 398.3 2,211.5 1,813.2 2002 0.0 32.8 32.8 39.0 6.2 2002 0.0 431.1 431.1 2,250.5 1,819.4 2003 0.0 398.3 398.3 2,419.3 2,021.0 2003 0.0 32.8 32.8 39.8 7.0 2003 0.0 431.1 431.1 2,459.1 2,028.0 2004 0.0 398.3 398.3 2,631.6 2,233.3 2004 0.0 32.8 32.8 44.5 11.7 2004 0.0 431.1 431.1 2,676.1 2,244.9 2005 0.0 398.3 398.3 2,840.9 2,442.6 2005 0.0 32.8 32.8 58.6 25.8 2005 0.0 431.1 431.1 2,899.5 2,468.3 2006 0.0 398.3 398.3 3,053.3 2,654.9 2006 0.0 32.8 32.8 100.5 67.7 2006 0.0 431.1 431.1 3,153.7 2,722.6 2007 0.0 398.3 398.3 3,210.3 2,812.0 2007 0.0 32.8 32.8 147.1 114.3 2007 0.0 431.1 431.1 3,357.4 2,926.3 2008 0.0 398.3 398.3 3,362.8 2,964.5 2008 0.0 32.8 32.8 206.2 173.4 2008 0.0 431.1 431.1 3,569.1 3,138.0 2009 0.0 398.3 398.3 3,512.2 3,113.9 2009 0.0 32.8 32.8 274.6 241.8 2009 0.0 431.1 431.1 3,786.9 3,355.7 2010 0.0 398.3 398.3 3,679.5 3,281.2 2010 0.0 32.8 32.8 350.4 317.6 2010 0.0 431.1 431.1 4,030.0 3,598.9 2011 0.0 398.3 398.3 3,900.6 3,502.3 2011 0.0 32.8 32.8 388.3 355.5 2011 0.0 431.1 431.1 4,289.0 3,857.8 2012 0.0 398.3 398.3 3,900.6 3,502.3 2012 0.0 32.8 32.8 434.3 401.5 2012 0.0 431.1 431.1 4,334.9 3,903.8 2013 0.0 398.3 398.3 3,900.6 3,502.3 2013 0.0 32.8 32.8 481.7 448.9 2013 0.0 431.1 431.1 4,382.3 3,951.2 2014 0.0 398.3 398.3 3,900.6 3,502.3 2014 0.0 32.8 32.8 517.5 484.7 2014 0.0 431.1 431.1 4,418.1 3,987.0 2015 0.0 398.3 398.3 3,900.6 3,502.3 2015 0.0 32.8 32.8 558.0 525.2 2015 0.0 431.1 431.1 4,458.6 4,027.5 2016 0.0 398.3 398.3 3,900.6 3,502.3 2016 0.0 32.8 32.8 558.0 525.2 2016 0.0 431.1 431.1 4,458.6 4,027.5 2017 0.0 398.3 398.3 3,900.6 3,502.3 2017 0.0 32.8 32.8 558.0 525.2 2017 0.0 431.1 431.1 4,458.6 4,027.5 2018 0.0 398.3 398.3 3,900.6 3,502.3 2018 0.0 32.8 32.8 558.0 525.2 2018 0.0 431.1 431.1 4,458.6 4,027.5 2019 0.0 398.3 398.3 3,900.6 3,502.3 2019 0.0 32.8 32.8 558.0 525.2 2019 0.0 431.1 431.1 4,458.6 4,027.5 2020 0.0 398.3 398.3 3,900.6 3,502.3 2020 0.0 32.8 32.8 558.0 525.2 2020 0.0 431.1 431.1 4,458.6 4,027.5 2021 0.0 398.3 398.3 3,900.6 3,502.3 2021 0.0 32.8 32.8 558.0 525.2 2021 0.0 431.1 431.1 4,458.6 4,027.5 2022 0.0 398.3 398.3 3,900.6 3,502.3 2022 0.0 32.8 32.8 558.0 525.2 2022 0.0 431.1 431.1 4,458.6 4,027.5 2023 0.0 398.3 398.3 3,900.6 3,502.3 2023 0.0 32.8 32.8 558.0 525.2 2023 0.0 431.1 431.1 4,458.6 4,027.5 2024 0.0 398.3 398.3 3,900.6 3,502.3 2024 0.0 32.8 32.8 558.0 525.2 2024 0.0 431.1 431.1 4,458.6 4,027.5 2025 0.0 398.3 398.3 3,900.6 3,502.3 2025 0.0 32.8 32.8 558.0 525.2 2025 0.0 431.1 431.1 4,458.6 4,027.5 NPV NPV NPV @FIRR 6,532.1 1,113.3 7,645.4 7,645.4 0.0 @FIRR 549.3 99.9 649.2 649.2 0.0 @FIRR 7,083.3 1,214.3 8,297.7 8,297.7 (0.0) @ WACC 7,938.6 2,858.6 10,797.2 22,002.6 11,205.5 @WACC 654.5 235.4 889.9 1,999.1 1,109.2 @WACC 8,593.0 3,094.0 11,687.0 24,001.7 12,314.7 FIRR 13.9% FIRR 13.2% FIRR 13.8% WACC 7.1% WACC 7.1% WACC 7.1% Base Case 13.9% Base Case 13.2% Base Case 13.8% Decrease by 10 Percent of Electricity Volume (i) 12.8% Decrease by 10 Percent of Electricity Volume(i) 12.4% Decrease by 10 Percent of Electricity Volume (i) 12.8% Increase of Working Expenses by 10 Percent (ii) 13.7% Increase of Working Expenses by 10 Percent (ii) 11.2% Increase of Working Expenses by 10 Percent (ii) 13.5% Combined Downside : (i) + (ii) 12.7% Combined Downside : (i) + (ii) 10.1% Combined Downside : (i) + (ii) 12.5% Included Capacity Payments to Pagbilao IPP 11.9% Included Capacity Payments to Pagbilao IPP 12.0%

FIRR=financial internal rate of return, NPV=net present value, O&M=operation and maintenance, WACC=weighted average cost of capital Appendix 7 37

Table A7.2: WACC Calculation

Financing Component Foreign Domestic Government EA Item ADB Loan Total Loans Loans Funds Funds

A. Amount ($ million) 120.8 9.9 0.0 0.0 49.5 180.2

B. Weighting 67.0% 5.5% 0.0% 0.0% 27.5% 100.0%

C. Nominal cost of capital 6.3% 6.3% 15.0% 15.0% 15.0%

D. Tax rate 0.0% 0.0% 0.0% 0.0% 0.0%

E. Tax-adjusted nominal cost [Cx(1-D)] 6.3% 6.3% 15.0% 15.0% 15.0%

F. Inflation Rate 0.0% 0.0% 5.5% 5.5% 5.5%

G. Real Cost [(1+E)/(1+F)-1] 6.3% 6.3% 9.0% 9.0% 9.0%

H. Weighted component of WACC [BxG] 4.3% 0.3% 0.0% 0.0% 2.5% 7.1%

Weighted Average Cost of Capital 7.1%

ADB=Asian Development Bank, EA=Executing Agency, WACC=Weighted Average Cost of Capital Source: Asian Development Bank estimates

A

STATUS OF RESETTLEMENT AND COMPENSATION ppendix 8

1. Luzon

Project Component Landowners / Landowners Total Households Total Comment Tenants Compensated Compensation Relocated Compensation (outstanding issues) Affected (no.) (no.) to Landowners / (no.) to Relocated

Tenants Households 38 (P) (P) Tayabas–Dasmariñas 1,587 1,197 648,572,139 - - Unpaid properties are mostly 500 kV line under expropriation. Pagbilao–Tayabas 230 263 254 7,902,364 - - No residential areas affected by kV line the line. Only easement fees were paid. Payment of remaining claims for easements is under negotiation. Dasmariñas–Zapote 219 52 17,557,880 150 13,524,662 Unpaid properties are under 230 kV line expropriation. Biñan–Sucat 230 kV 320 318 13,068,002 - - Reconciliation of land area for line remaining claims is in progress. Tayabas substation 33 30 21,10,096 25 398,620 Processing of payment for (new) remaining claims is in progress. Zapote substation 5 1 14,602,000 36 4,162,339 Unpaid improvements are the (new) additional 15 households affected by the proposed construction of the canals and access roads. Writs of possession issued 5 Nov 1998. One landowner agreed to price offer while others will be resolved through the legal process. Dasmariñas substation 2 2 648,582,724 - - (expansion) Biñan substation - - - - - Existing site. (expansion) Sucat substation - - - - - Existing site. (expansion)

STATUS OF RESETTLEMENT AND COMPENSATION (Continued) 2. Mindanao

Project Component Landowners / Landowners Total Households Total Amount of Comment Tenants Compensated Compensation Relocated Compensation to (outstanding issues) Affected (no.) to Landowners / (no.) Relocated (no.) Tenants Households (P) (P) Tindalo–Nabubturan 69 109 99 365,218 8 68,854 kV line Montevista–Monkayo 121 119 453,122 6 96,667 69 kV line Nuling–Midsayap 69 kV 206 295 2,351,159 10 206,569 Eleven owners still to be line compensated (7 are under expropriation, 3, ownership dispute, 1, did not sign ROW document) Tagum-Asuncion 69 kV 172 147 1,202,898 9 500,816 Three landowners under line expropriation. Implementation of expropriation plan completed. Maasim-Kiamba 69 kV 249 - - 74 6,000,000 Gathering of ROW data and line. implementation of relocation plan (based on approved is ongoing. budget) Bunawan substation 13 - - 27 1,767,058 Preconstruction activities (new) ongoing.

Anislagan (Badas) - - - - - Existing site. substation (expansion) Butuan substation - - - - - Existing site. (expansion) A

Tagoloan substation - - - - - Existing site. ppe (expansion) ndix 8 General Santos 1 - - - - The lot intended for the substation (expansion) substation expansion will be subjected to appropriation, because the lot owner is demanding a higher price. 39 Tindalo substation - - - - - Existing site (expansion) 40 Appendix 9

PROJECT PERFORMANCE RATING

A. Relevance

Subcriterion Results/Remarks

Relevance of Project preparation to Project output at the Yes time of approval

Relevance of Project output to achieve Project goals and Yes purposes at the time of approval

Priority in the context of the country’s development strategy Yes at the time of approval

Priority in the context of the development strategy of the Yes Asian Development Bank (ADB) for the country at the time of approval

Priority in the context of the country’s development strategy Yes at the time of evaluation

Priority in the context of ADB’s development strategy for the Yes country at the time of evaluation

Priority in the context of one or more of ADB’s strategic Yes objectives at the time of evaluation

Appropriate changes made at the midterm review or other No reviews to make the Project more relevant

Subcriteria that met assessment 87.5% Equivalent rating 3

B. Efficacy

Subcriterion Results/Remarks

Achievement of most Project physical outcomes Yes

Achievement of most Project intangible outcomes (e.g., No technical assistance)

Likelihood that Project outcomes will lead to Project goals Yes

Subcriteria that met assessment 66% Evaluation rating 2

Appendix 9 41

C. Efficiency

Subcriterion Results/Remarks

Manner of ADB’s internal processing of the Project Yes

Organization and management of Executing Agency and No implementing agencies

Effectiveness of Project management No

Efficiency in recruitment of consultants and other No procurement

Timely and adequate availability of counterpart funding Yes

Subcriteria that met assessment 40% Evaluation rating 1

D. Sustainability

Subcriterion Results/Remarks

Availability of adequate and effective demand for Project Yes services and products

Probable operating and financial performance of the Yes operational entity and ability to recover costs

Probability of the existence of appropriate maintenance Yes policy and procedures

Probability of fund availability (cash flow) for continued Yes operations, maintenance, and growth requirements

Probable availability of skills to continue Project availability Yes

Probable availability of appropriate technology and Yes equipment to operate the Project

Probable availability of the enabling environment (subsidies, Yes tariffs, prices, competitiveness, and political developments) in which the Project was operating at the time of evaluation

Government ownership and commitment to the Project Yes

Extent to which the operation affects the environment and Yes renewable or nonrenewable resources

42 Appendix 9

Extent to which community participation and beneficiary No incentives are adequate to maintain the Project benefits

Subcriteria that met assessment 90% Equivalent rating 3

E. Institutional Development and Other Impacts

Subcriterion Results/Remarks

Country formal laws, regulations, and procedures No

The people’s informal norms and practices No

Institutional or organizational strengthening No

Institutional skill levels and capacities Yes

Participatory attitudes of society No

Macroeconomic or sector policy framework No

Impacts on poverty Yes

Impacts on the environment No

Impacts on social organization No

Impacts on political developments No

Subcriteria that met assessment 20% Equivalent rating 1

ASSESSMENT OF OVERALL PROJECT PERFORMANCE

Criteria Weights Assessment (%) Rating Weighted Rating

Relevance 20 3 0.60 Efficacy 25 2 0.50 Efficiency 20 1 0.20 Sustainability 25 3 0.75 Institutional Development and Other 10 1 0.10 Impacts Overall Rating 2.15 (Successful)