Document of The World Bank

Report No: 28957

IMPLEMENTATION COMPLETION REPORT(CPL-39960 SCL-3996A SCL-39970 TF-29163)

ON A

LOAN

IN THE AMOUNT OF US$250 MILLION EQUIVALENT

TO THE

PHILIPPINES

FOR A

TRANSMISSION GRID REINFORCEMENT PROJECT

June 29, 2004

Energy and Mining Sector UnitEast Asia and Pacific Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of February 23, 2004)

Currency Unit = Peso (P) P 1 = US$ 0.018

US$ 1 = P 56.2Average Exchange Rates during Project Years

1996 US$1= P26.2 1997 US$1= P29.61998 US$1= P40.91999 US$1= P39.12000 US$1= P44.22001 US$1= P51.02002 US$1= P51.62003 US$1= P54.2

FISCAL YEARJanuary 1 -- December 31

ABBREVIATIONS AND ACRONYMS

ADB Asian Development BankEPIRA Electric Power Industry Reform ActIPP Independent Power ProducerJBIC Japan Bank for International CooperationPSALM Power Sector Assets and Liabilities Management CorporationNPC National Power CorporationPPA Power Purchase AgreementROW Right-of-WayTRANSCO National Transmission Corporation

Vice President: Jemal-ud-din KassumCountry Director Robert Vance PulleySector Manager Junhui Wu

Task Team Leader: Selina Shum

PHILIPPINESTRANSMISSION GRID REINFORCEMENT PROJECT

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 35. Major Factors Affecting Implementation and Outcome 86. Sustainability 97. Bank and Borrower Performance 108. Lessons Learned 129. Partner Comments 1310. Additional Information 13Annex 1. Key Performance Indicators/Log Frame Matrix 14Annex 2. Project Costs and Financing 17Annex 3. Economic Costs and Benefits 20Annex 4. Bank Inputs 22Annex 5. Ratings for Achievement of Objectives/Outputs of Components 24Annex 6. Ratings of Bank and Borrower Performance 25Annex 7. List of Supporting Documents 26Annex 8. NPC's Financial Indicators (1995-2002) 27Annex 9. Borrower's ICR 28

Project ID: P004571 Project Name: TRANSMISSION GRID REINFORCEMENT PROJECT

Team Leader: Selina Wai Sheung Shum TL Unit: EASEGICR Type: Core ICR Report Date: June 29, 2004

1. Project DataName: TRANSMISSION GRID REINFORCEMENT

PROJECTL/C/TF Number: CPL-39960; SCL-3996A;

SCL-39970; TF-29163Country/Department: PHILIPPINES Region: East Asia and Pacific

Region

Sector/subsector: Power (100%)Theme: Rural services and infrastructure (P); State enterprise/bank

restructuring and privatization (S)

KEY DATES Original Revised/ActualPCD: 10/14/1994 Effective: 11/12/1996

Appraisal: 04/17/1995 MTR: 01/26/1999Approval: 04/04/1996 Closing: 12/31/2000 12/31/2003

Borrower/Implementing Agency: NPC/NPCOther Partners: Asian Development Bank (ADB); Japan Bank of International Cooperation

(JBIC); KfW

STAFF Current At AppraisalVice President: Jemal-ud-din Kassum Russell CheethamCountry Director: Robert V. Pulley Callisto E. MadavoSector Manager: Junhui Wu J. ShivakumarTeam Leader at ICR: Selina Shum John IrvingICR Primary Author: Selina Shum; John Irving

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: U

Sustainability: UN

Institutional Development Impact: M

Bank Performance: S

Borrower Performance: U

QAG (if available) ICRQuality at Entry: U

Project at Risk at Any Time: Yes

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

The development objectives were to: (i) assist in meeting demand for electric power in the Philippines by expanding and reinforcing NPC's power transmission and local dispatch system; (ii) promote private sector participation in the operation of said transmission systems; and (iii) support the continued restructuring of NPC. The above objectives, as stated in the Loan Agreement, are outcome-oriented and thus appropriate as development objectives. However, they are different from the Project objectives stated in the Staff Appraisal Report (SAR), which are output-oriented (see section below on achievement of physical objectives).

The above development objectives were consistent with the country's priorities and the Bank's Country Assistance Strategy (CAS) prevailing at the time of project preparation/loan approval (1994-96). Specifically, the CAS aimed at assisting the country to regain a sustainable high growth path led by the expansion of an internationally competitive private sector through such priority measures as improved policy and project implementation as well as reduction of infrastructure bottlenecks. The Project design is directly relevant towards achieving the above objectives which are consistent with the country's current development priorities and with the Bank's current country and sectoral assistance strategies.

3.2 Revised Objective:

The project objectives remain unchanged.

3.3 Original Components:

Northwest Luzon transmission improvement comprising: (a) developing a double-circuit transmission 1.line interconnection at 230 kV from Masinloc to a new substation at Labrador, and thence at 500 kV extending about 225 km to 500/230 kV substations at San Manual and San Jose; (b) associated 230 kV interconnections from Labrador to the Sual power station; (c) reinforcing eight 230/69 kV substations supplying the central Luzon subtransmission networks; and, (d) supplying conductors for the rehabilitation of the southern Luzon Naga-Tayabas 500 kV line.

Installing a new National Load Dispatch Center (NLDC), including communications, metering, and 2.protection equipment in Luzon and the Visayas;

A Visayas subtransmission component to reinforce the 138/69 kV systems in Negros, Panay and Cebu;3.

Technical assistance comprising: (a) engineering services for the design and implementation of the 4.NLDC facilities; (b) project management services for transmission and substations; (c) management consulting services to support NPC’s privatization program through the provision of office equipment, MIS facilities and architectural services associated with the new headquarters of the National Transmission Corporation (TRANSCO).

3.4 Revised Components:

During the mid-term review in 1999, the Bank approved NPC's request for the use of loan savings to add the following subcomponents: (a) Optical Line Terminal Equipment (OLTE) and multiplexing equipment on the Naga - Tayabas Line; (b) NLDC additional facilities for communications, metering, test

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equipment and RTUs for Minadanao; and (c) Y2K implementation program.

In 2000, the Bank approved NPC's request for further use of loan savings to cover the cost of the interim Wholesale Electricity Spot Market (WESM) facilities. However, this subcomponent was subsequently canceled as the government decided to pursue a full fledged WESM (financed by ADB/JBIC) without going through an interim period.

3.5 Quality at Entry:

This Project is the last in a series of operations (in the 1990s) through which the Bank supported the implementation of energy sector reform and reduction of bottlenecks in power transmission to promote economic growth. As such, the Project design was appropriately framed within a sound power sector restructuring program planned by the government, which was broadly consistent with the Bank's recommendation in its study entitled "Structural Framework for the Power Sector" (Report No. 13313-PH, November 30,1994). The technical design of the Project is also sound, and the adoption of a turnkey contract for the construction of a key project component proves to be critical for its timely implementation. The procurement activities were well advanced during project preparation, resulting in more rapid loan disbursement than the appraisal estimate during the initial period of project implementation. However, the initial momentum in procurement activities was not sustained, in part due to changes in key NPC personnel and subsequent curtailment of project management consulting services.

On hindsight, even though this proved to be a high risk operation, there was inadequate up-front attention paid to risk assessment and related mitigation measures; the appraisal expectations were overly optimistic for the implementation schedule of both the reform agenda and physical project components, and for project outcome related to NPC's finances and Project economics. In particular, substantial shortcomings during project preparation included the following: (a) NPC's long-standing problems of right-of-way (ROW) issues were not adequately addressed, resulting in serious issues of non-compliance with the Bank's social safeguard policy for land acquisition compensation payments; (b) in light of the substantial uncertainties of the operating environment, there should have been rigorous risk analysis on the following: (i) the risks related to fixed obligations under the "take-or-pay" provisions of the contracts with IPPs, taking into account potential implementation delays, market risks and mismatch in currencies between the revenues and liabilities of NPC; (ii) the risks of delayed and lower power tariff adjustments; (iii) the impact of competition from new IPPs and self-generation by industrial users; and (iv) the impact of combination of adverse factors on the Project economics and NPC's finances; and (c) while the financial recovery of NPC and the successful outcome of this Project are critically dependent on the timely approval and implementation of the Omnibus power restructuring bill, there were insufficient up-front actions to address the high risks of roadblocks to reforms and consequent delays commonly associated with such an ambitious restructuring program. As part of the risk mitigation measures, the Project design should have provided adequate implementation support for power sector reform, including, for example, stakeholder analysis and strategic communications to facilitate consensus-building among key stakeholders. On balance, the overall quality at entry is rated marginally unsatisfactory.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:

Despite the achievement of physical objective, and the partial achievement of sector reform and promotion of private sector participation, the overall project outcome is rated marginally unsatisfactory

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mainly because (a) the financial objective, with the minimum financial performance targets set out in the Loan Agreement, is not achieved. Indeed, NPC is faced with a serious financial crisis; its growing deficit is a major factor in the deteriorating fiscal position of the country; and (b) the economic efficiency objective has not been achieved, as indicated by a negative economic rate of return currently estimated for the Project.

Physical Objective. The Project substantially achieved the physical objective as articulated in the SAR: (i) evacuate power from two major generation plants at Sual and Masinloc; (ii) reinforce overloaded substations and extend the EHV grid in northwest Luzon and western Visayas; and (iii) strengthen the transmission system and load dispatch operations that would support the creation of an autonomous transmission subsidiary which may later be privatized.

Sector Reform Objective. On balance, this objective is partially achieved. After protracted delays, the enactment of the Electric Power Industry Reform Act (EPIRA) in June 2001, and related implementation rules and regulations (IRR) promulgated in February 2002, would provide the overall framework for far reaching structural reform towards the development of an open and competitive power sector. In accordance with the provisions of the EPIRA, reform progress to date included the following: (a) unbundling of NPC into six generation companies (GENCOs) and a transmission company, TRANSCO; (b) promulgation of the Distribution Code, Grid Code, the rules of Wholesale Electricity Spot Market (WESM) and a performance-based regulatory framework for transmission; (c) approval of the NPC privatization plan; and (d) bidding for the privatization of TRANSCO operation and GENCOs.

However, while the above milestones are important for the privatization process, the ones that have significant fiscal impact are the actual sales of NPC assets, which have encountered difficulties and delays in implementation. Indeed, the recent failed bid of TRANSCO highlighted a host of intractable issues, including (a) the decision by Congress not to pass the Franchise Bill that is critical for attracting qualified investors and maximizing privatization proceeds for TRANSCO; and (b) poor investment climate both globally and in the country, and in the power sector in particular. The apparent lack of investor confidence can be attributed to a combination of factors, including the perception of high regulatory and political risks faced by the power sector in the country.

NPC Corporate Restructuring. This objective is substantially achieved. In 1999, NPC started to implement a reorganization program in preparation for the restructuring of the power sector. As noted above, its generation operations have been unbundled from its transmission function. The Power Sector Assests and Liabilities Management Corporation (PSALM) was created under EPIRA to (a) assume ownership of all of NPC’s liabilities, Independent Power Producer (IPP) contracts and generating assets; and (b) oversee the privatization of these assets and the liquidation of these liabilities. EPIRA also created TRANSCO, which is wholly owned by PSALM, to take over from NPC all the transmission assets and the nationwide franchise for operation of the transmission system.

Promotion of Private Sector Participation in the Operation of Transmission System. This objective is partially achieved. Potential private concessionaire for TRANSCO's operation is being sought and contract award is expected in due course. On the other hand, the Project achieves the objective of promoting private investment in power generation through the evacuation of power from the private IPP, Sual. However, subsequent overcontracting of power purchase from IPPs and related fixed financial obligations have exacerbated the already precarious financial position of NPC.

Financial Objective. This objective is not achieved. The original Loan Agreement under this Project included the following financial performance covenants for NPC: (a) a minimum of 8% rate of

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return (ROR) on revalued net fixed assets; and a minimum debt service coverage ratio of 1 time until 1999, and 1.3 times thereafter. During project implementation, the Loan Agreement was amended to reflect the Bank's agreemet with NPC’s request to (a) reduce the minimum debt service coverage ratio covenant from 1.3 times to 1 time from 2000 onwards, as it is no longer realistic for the financial target set at the time of project appraisal to be achieved; and (b) eliminate the covenant for a minimum rate of return of 8% on its revalued net fixed assets for a number of reasons, including: (i) the use of a "rate of return on assets" target for financial performance is inappropriate for a company/sector with a very large and lumpy investment program; and (ii) under the provisions of the EPIRA, NPC will be unbundled and privatized, and power generation market will be competitive and unregulated in pricing. In this context, rate of return on revalued assets is not a meaningful indicator for NPC since no explicit provision needs to be made for replacing assets and NPC has a limited life in its present form.

Appraisal Expectations. At the time of project appraisal (in 1995), it was recognized that NPC’s financial constraints mainly stemmed from insufficient equity capital which, in turn, resulted in a very high level of foreign debt to finance its capital expenditures. The factors identified as critical for NPC’s financial sustainability included: (a) the injection of equity capital; and (b) its charging the maximum allowable rates (up to 12% return on rate base). In this context, power sector restructuring and privatization of NPC assets were considered a compelling response to a serious financial problem; if implemented successfully, it would result in minimizing the government’s financial and risk exposure to the power sector. In recognition of the fact that the success of the privatization program was well beyond the control of NPC, it was agreed at negotiations that the government (as Guarantor) would provide equity injection, as necessary, and take all measures to enable NPC to adjust its tariffs to meet its agreed financial targets.

Actual Financial Performance. However, the above actions envisioned at the time of project appraisal to place NPC on a sound financial footing failed to materialize. Thus, the vicious circle of too much foreign debt and too little equity has remained, and NPC’s actual financial performance fell considerably short of appraisal expectations. Indeed, during most of the project implementation period, NPC was not in compliance with the minimum financial performance indicators covenanted under the Bank loan, notwithstanding the aforementioned Bank’s agreement to NPC’s request to reduce the minimum debt service coverage ratio covenant and to eliminate the covenant for a minimum rate of return of on its revalued net fixed assets. A comparison of appraisal expectations and actual NPC's financial indicators is presented in Annex 8.

The Asian financial crisis in 1997 triggered a rapid deterioration of finances at the NPC. The Corporation has been particularly hard hit by the sharp devaluation of the peso. This is mainly due to a mismatch of currencies between its revenues (in local currencies) and its huge foreign financing requirements for (a) fuel payments which have increased sharply with recent global oil/coal price hikes; (b) onerous foreign debt service burden; and (c) high, fixed (take-or-pay) capacity charges under power purchase agreements (PPAs) with IPPs, even though there is excess generation capacity over the short to medium term in Luzon. In 2003, average IPP load factor was only 34%, resulting in a high unit cost of P4.45/kWh, as compared against average NPC generation selling price of P2.87/kWh. The results of sensitivity analysis indicated that had the IPPs achieved the average load factor of 80%, approximating the minimum power purchase quantities committed by NPC in their PPAs, the average IPP costs would have been reduced to P2.72/kWh.

NPC is currently faced with a serious financial crisis. Its net loss ballooned to P117 billion ($2.2 billion) in 2003. Its aggregate long term liabilities had reached P1.17 trillion ($20.9 billion, including IPP financial obligations) and the company had a negative net worth of P 327 billion pesos ($5.8 billion) by end

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2003. Recent steep increases in global prices of oil and coal have exacerbated the already high costs of NPC. On the other hand, NPC tariffs have fallen in US dollar terms in recent years; they were not adequate for NPC to cover even its operating costs and its net operating loss amounted to P5.5 billion ($99 million) in 2003. In the absence of immediate remedial actions, the finances of NPC/PSALM will deteriorate even further.

The government is aware that the Corporation’s heavy reliance on foreign debt finance is unsustainable in the long run. The EPIRA provides for the government to assume NPC debt and the following new sources of funding to PSALM: (i) universal charge to cover eligible stranded IPP contracts; and (iii) privatization proceeds. However, none of the above actions materialized during the Project implementation period.

4.2 Outputs by components:

Physical Components:

Northwestern Luzon Grid Extension component

While the 500 kV transmission lines were completed on schedule under various turnkey contracts, the 230 kV substation reinforcement subcomponent was delayed substantially due to protracted procurement by NPC and counterpart funding problems after the Asian financial crisis in 1997. Overall, this component was completed in February 1999, about 18 months behind the appraisal schedule, but was commissioned in time to evacuate full power from the Masinloc and Sual power plants which were also delayed due to commissioning problems. The relative success of this project component is, however, marred by NPC’s slow settlement of claims for compensation, some of which are still outstanding. Overall, this component is rated satisfactory.

Installation of a new National Load Dispatch Center (NLDC), communications, metering and protection systems in Luzon and Visayas

Based on the agreement reached at mid-term review, the scope of this component was increased to include additional microwave and fiber optic links, a new building for the NLDC, a backup EMS system in Luzon, new commercial metering facilities, complete (rather than partial) replacement of Visayas RTU facilities, additional protection relays and test equipment and support for NPC’s Y2K program. The main NLDC component was completed in December 2003, about three years behind the original schedule. The scope of the communications network was developed to provide key facilities for the proposed new power market. However the design of the power market structure at the time was not well defined, resulting in protracted delays in finalizing the technical design and procurement documents. Overall, this component is rated marginally satisfactory.

The Visayas Grid Extension component to reinforce the 138/69 kV systems in Negros, Panay and Cebu.

Materials were procured and delivered in 2000 but were stored, waiting for local counterpart funds and ROW arrangement to be finalized for this component. As a consequence of the delays, the local contractors were able to claim significant cost overruns and ROW compensation increased 400%. Installation work for the Negros IV-Panay IV components is still in progress, about three years behind schedule. Overall, this component is rated unsatisfactory.

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Resettlement and Land Acquisition

There have been significant delays in compensation payments by NPC, particularly for land acquisition, which are partly beyond the control of NPC. After mid-term review, suspension of Bank loan disbursement was averted after the Bank and NPC reached an agreement on intensified NPC efforts to implement a revised time-bound resettlement action plan and an improved monitoring and reporting system was put in place by NPC. By the time of the ICR mission, compensation for land acquisition has been mostly completed. As agreed with the Bank, NPC/TRANSCO is (i) keeping its escrow account to ensure that funds are available for payment of unresolved claims; (ii) maintaining the teams implementing resettlement-compensation; and (iii) hiring the Commission of Audit (COA), to conduct and complete the post-resettlement evaluation as soon as possible. Overall, this component is rated highly unsatisfactory.

Environmental Safeguard

The Project was assigned an Environment Category B. For each project subcomponent, NPC completed a satisfactory Environmental Assessment (EA) report in the form of an Initial Environmental Examination (IEE). These IEE reports provided the Department of Environment and Natural Resouces (DENR) the basis for the issuance of Environmental Compliance Certificates (ECCs) or Certificates of Non-Coverage (CNC). During project implementation, NPC complied substantially with the environmental mitigation/enhancement measures stated in the IEE reports and the conditions stipulated in the ECCs and other applicable government regulations/standards for individual project subcomponents. Overall, environmental safeguard is rated satisfactory.

4.3 Net Present Value/Economic rate of return:

The current estimates of the economic rate of return (ERR) are negative for both (a) the overall transmission interconnection program, including all components of the Project; and (b) the northwest Luzon 500/230 kV transmission system component (67% of total Project cost), as compared against the appraisal estimates of 27.2% and 20.3% (in real terms), respectively. This is mainly attributable to the combination of various adverse factors noted above, including (a) NPC's tariff adjustments have not been adequate; (b) Asian financial crisis and sharp devaluation of the pesos; (c) substantially lower electricity demand than expected and the capacity savings by reducing reserve requirements were not realized (during the period 1996-2003); and (d) over-contracting of IPP contracts with related high fixed costs to NPC. It should be noted that the current ERR is based on NPC's conservative assumptions, including (a) NPC average tariff for generation and transmission from 2004 onwards remain the same as that of the current tariff in 2004 in real terms, viz US 6.2 cents/kWh, and (b) average costs of power transmitted under the Project remain the same as the actual average costs of 2003 in real terms, viz variable cost of US 1.5 cents/kWh plus fixed costs of $422 million per annum. The results of sensitivity analysis indicated the following: (a) even if the capacity savings of $1.6 billion (in 1995 constant prices) projected at project appraisal were to be actually realized, the current estimate of the ERR for the overall Project would only be 4%; and (b) in the event NPC's average generation tariff were to be increased sufficiently for it to cover fully its operating costs in 2004, which together with transmission fees estimated to total about P5/kWh (US 9 cents in 2004 prices, or US 7.4 cents in 1995 constant prices, which is similar to the price assumed in the ERR calculation in the SAR), and to remain at this level in real terms thereafter, the current estimate of the ERR for the overall Project and the northwest Luzon 500/230 kV transmission system component would be increased to 18% and 15% (in real terms), respectively. This indicates the extent of cost recovery through tariff is a critically important factor for the Project economics.

4.4 Financial rate of return:

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The SAR did not calculate a financial rate of return (FRR), but implied that it is similar to the ERR, "because the investments consist mainly of hardware systems, and because NPC is exempt from duties and taxes, the computation of the FRR is identical to that of the ERR, except for the application of the conversion factor." Based on the same reasons, the current estimate of the FRR is similar to the ERR noted above.

4.5 Institutional development impact:

Institutional Support and Project Management

The scope and duration of consulting services for project management actually availed by NPC were substantially more limited than the appraisal expectation. This, in turn, contributed to protracted delays in project implementation. Regarding the MIS system, the first stage was completed early in 1998. The subsequent plan to extend the MIS facilities was put on hold and later cancelled to enable the newly formed NPC successor companies to determine their own MIS needs. Overall, the institutional development impact is negligible and this component is rated marginally unsatisfactory.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

Asian financial crisis was a significant external factor beyond the control of the government and the limplementing agencies. Consequent sharp devaluation of the peso and slowdown of power demand growth contributed to the unsatisfactory outcome of this Project, both in terms of project economics and the objective to ensure the financial viability of NPC. Recent unfavorable investment climate globally for power sector investments contributed to the failed lbid of TRANSCO in its recent bidding for a private concessionaire. Recent price hike of oil and coal globally contributed to the ballooning of NPC deficits.lThere have been significant delays in compensation payments by NPC, particularly for land lacquisition, which are partly beyond the control of NPC in such cases as missing or incomplete documentation of some landowners.

5.2 Factors generally subject to government control:

Pace and scope of energy sector reform

In the wake of the power crisis, the Executive Order 215 in 1990 repealed the Marcos decree on NPC's lmonopoly on power generation and allowed for private sector development of power plants and infrastructure facilities. In addition, development and implementation of the Energy Sector Plan by the government also contributed positively to the realization of this Project. Ironically, introduction of competition from new IPPs contributed to NPC's loss of market share and lexacerbated its financial difficulties. The protracted delays in the approval and implementation of the power sector restructuring bill have, in lturn, hampered the implementation of financial recovery action plan by NPC. The levels and timeliness of power tariff adjustments fell short of the appraisal expectation, and lgovernment equity injection did not materialize, thus contributing to the unsatisfactory outcome in terms of the finances of NPC, project economics and sustainability.

5.3 Factors generally subject to implementing agency control:

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Project Management, including among others, coordination among the relevant departments, procurement procedures and resettlement policies, has a significant impact on the performance of project implementation.

5.4 Costs and financing:

The total project cost is currently estimated at $461.5 million, against the appraisal estimate of $694 million. The total financing requirement, including interest during construction of $32.4 million, totaled $493.9 million, or 34% lower than the appraisal estimate. The largest single factor is related to the substations financed by ADB/JBIC, which cost $139 million less than the appraisal estimate of the base cost. The significant savings were primarily because of the intense competition resulting from excess international manufacturing capacity during the Asian financial crises and devaluation of the peso from P25 to P56 to the US dollar. The cost of the technical assistance component was also lower than expected due to the cancellation of both the second phase of the MIS and the planned TA for market forecasts. There was also a lower than expected use of technical consulting services for supervision of the 500 kV transmission project.

Of the total Bank loan of $250 million, US$175 million (70%) were disbursed. The loan was closed on December 31, 2003, after three years of extension from the original loan closing date. Total loan cancellation amounted to about US $90 million, due to cost under-run,, appreciation of the Yen loan against US dollars and the use of Bank loan savings (totaling $28.8 million) under the Leyte-Cebu and Leyte-Luzon Geothermal Projects. ADB/JBIC loans totaled $129 million, representing 47% less than the appraisal estimate, as a result of the aforementioned cost underrun. Additional co-financing from KfW amounted to $25 million, or 13% less than the appraisal estimate. Finally, internal cash generation from NPC amounted to $136 million, or 40% less than the appraisal estimate.

6. Sustainability

6.1 Rationale for sustainability rating:

Overall, the prospect for sustainability is uncertain as it is critically dependent on the implementation of the unfinished power sector reform agenda, the outcome of which is considerably uncertain in light of the following factors: (a) uncertainties in the timing of privatization of NPC's assets; in the case of TRANSCO, it has been adversely affected by delays in Congressional approval of the bill authorizing the transferability of transmission franchise to a private concessionaire; (b) uncertainties related to the timing and magnitude of tariff increase and government assumption of NPC debt which are critical for the recapitalization and financial recovery of NPC/PSALM; and (c) successful implementation of WESM is critically dependent on the resolution of a host of difficult issues.

It is unlikely that a nationwide "power crisis" will happen again in the foreseeable future. There is, however, a very urgent need to improve the business environment in the power sector in order to ensure that private operators make timely investments when they are needed. This will entail such actions as substantial increases in electricity tariffs and drastic reduction in regulatory risks. The prospect for a successful outcome is uncertain at this point.

6.2 Transition arrangement to regular operations:

(a) Transition Arrangements for the Project's Future Operation

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As soon as each project component was commissioned, it became an integral part of the respective transmission networks with existing staff for operation and maintenance. On the other hand, there will be a need for continuous training in working with 500 kV networks and specialized training to operate and extend new software and control systems associated with the NLDC operation. During the next few months, NLDC will become the System Operator and will be responsible for providing the necessary market information to WESM. This will require (a) the completion of the installation of commercial metering; (a) the completion of the installation of RTU facilities mainly in Luzon and Mindanao as a matter of priority over the next two years. Over the medium term, a private concessionaire is expected to take over the operation of TRANSCO, including this Project.

(b) Operational Performance Indicators

The SAR included a target of reducing reserve capacity from 44% in 1999 to 26% in 2000, reflecting better usage of generation facilities in a more tightly operated power system. However, due to the unexpectedly low load growth and consequent surplus generation capacity, this has not proved to be a good measure of the operational performance of the transmission operations.

During the mid-term review, additional indicators were agreed to measure transmission system losses and reliability in Luzon, Visyas and Mindanao systems. These indicators show that there has been no significant improvement in the quality of transmission operations during the reporting period from 1995-2000 (Annex 1). However, in the absence of adequate metering at the NPC generating stations, the transmission loss figures are open to question. Likewise, without a fully functional NLDC to record outage statistics, the system reliability numbers are also questionable and do not reflect the generally poor regard that consumers have for the reliability of NPC’s operations.

7. Bank and Borrower Performance

Bank7.1 Lending:

Substantial inputs were provided by Bank staff in the development of a sound power sector reform agenda and in Project design. However, risk assessment and mitigation measures proved to be inadequate for such a high risk operation. There were unrealistic expectations for both the pace of reform and project implementation schedule, and problems were encountered in project implementation, including non-compliance with the Bank's social safeguard policy. The dated covenant for the power sector restructuring bill to be submitted to Congress after Board approval proved to be ineffective. On balance, the overall Bank performance in project identification, preparation and appraisal is rated marginally unsatisfactory.

7.2 Supervision:

The overall Bank performance in project supervision is considered satisfactory, as rated by two QAG reviews which noted that the project team focused on the right issues and remained focused on the development objectives. Despite inadequate follow-up actions with NPC on resettlement issues during the initial period of project implementation, the Bank's supervision efforts were intensified after the mid-term review. Indeed, even after the loan closing of earlier NPC projects (Leyte-Cebu and Leyte Luzon Geothermal Projects), the Bank continued to supervise the resettlment aspect of these earlier projects along with that of this Project. Moreover, the Bank has demonstrated its flexibility and responsiveness to the Borrower's requests by reallocation of Bank loan, use of loan savings to cover increased project scope, amendment of financial covenants, and extension of loan closing dates. The Borrower's ICR (Annex 9),

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noted that (a) the email has been fully harnessed by the Bank to relay its comments, findings and recommendation for immediate action by the Borrower; and (b) the Bank staff of both Headquarters and Country office gave full support to addressing concerns of the Borrower. In addition, the Bank team coordinated closely with the co-financier ADB, as exemplified by the amendment of the loan agreement to define "debt service" to include, inter alia, the IPP lease obligations, which was fully consistent with the approach of the ADB. Also notworthy is the Country Office's effective use of the quarterly ODA Portfolio Review, held jointly with the government, ADB and JBIC, to highlight major project implementation issues and needed remedial actions.

7.3 Overall Bank performance:

On balance, overall Bank performance is rated satisfactory.

Borrower7.4 Preparation:

Extensive preparation efforts were made for this Project, and procurement activities were well advanced during project preparation, resulting in more rapid loan disbursement than the appraisal estimate during the initial period of project implementation. However, the protracted delays encountered by NPC in the implementation of the resettlement action plan indicated that the long-standing ROW issues were not adequately addressed during project preparation. Overall, the performance of NPC is rated marginally unsatisfactory.

7.5 Government implementation performance:

The EPIRA generally provides a sound framework of far-reaching power sector reform towards an open and competitive power sector. However, protracted delays in the approval and implementation of the EPIRA, inadequate and delayed tariff adjustments, as well as the absence of government actions (e.g. injection of equity, debt relief) to recapitalize NPC, have significant adverse impact on the finances of NPC, project economic viability and sustainability. Nevertheless, it should be noted that the executive and legislative branches of the Philippine Government are independent of each other. While the executive branch can make several commitments to the Bank regarding policy (such as certifying a proposed bill), the passage of legislation is not within its sole control. Overall, the performance of the government is rated marginally unsatisfactory.

7.6 Implementing Agency:

The Project performance in terms of delayed completion of land acquisition compensation payment is highly unsatisfactory, notwithstanding the intensified efforts of NPC to address the intractable ROW issues and improve substantially the monitoring and reporting arrangements after mid-term review. Its procurement activities were also tardy during most of the project implementation period, partly due to its cumbersome internal clearance procedures and its unwarranted decision to curtail the scope and duration of project management consulting services under the Project. It is recognized that NPC's performance was hampered, in part, by changes in key management personnel that was inevitable during its corporate restructuring. Separately, NPC did not comply with the minimum financial performance indicators covenanted under the Bank loan, although as noted above, a number of the critical factors contributing to this result were outside the direct control of NPC during the project implementation period. Overall, performance of the implementation agency is rated marginally unsatisfactory.

7.7 Overall Borrower performance:

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On balance, overall Borrower performance is rated marginally unsatisfactory.

8. Lessons Learned

Private investments in IPPs are not substitutes for the fundamental need to address a utility’s liquidity lproblems and restore the financial sustainability. The issue of excess capacity under IPP contracts indicates a need to improve the economic efficiency of individual private investments with due consideration for (a) a cohesive sectoral approach, with special attention to prudent investment planning and financial management as well as rigorous risk analysis and management; and (b) rationalization of prices and risk sharing arrangements within a competitive and transparent framework. It may not be realistic to expect power projects developed with private funds under the "fast-tracked" lIPP Program to be least cost in the "traditional" sense; the additional cost over the hypothetical "least-cost" alternative is the price to pay for mobilizing resources that would otherwise not be available to the sector/country.Conventional economic rate of return analysis is poorly suited to an environment where higher-cost, lsub-optimal investments are required to eliminate power shortages. In the case of NPC, the transmission investments to bring power from higher-cost plants are likely to be underutilized now that the power crisis is over. The main economic benefits were reaped in the first few years when power was scarce and the value of avoiding outages was very high. The quantification of benefits and the estimation of the economic rate of return is therefore critically dependent on the estimated value of unserved energy. For the resettlement component, resolution of the ROW issue and completion of compensation payment lis one of the pre-conditions prior to project construction. A major legislative action (e.g. power sector restructuring bill) that is critical for the development lobjective of the Project should be a pre-condition for Board approval rather than a dated covenant. Project design should include adequate implementation support for power sector restructuring, lincluding for example stakeholder analysis and strategic communications to facilitate consensus-building among key stakeholders. Massive power sector restructuring, compounded by the need for new legislation as well as for the lfinancial workout of a large but under-capitalized national power company, is a complex undertaking, fraught with political sensitivity and uncertainty. It involves a multi-year process and a phased-approach. Project design should be based on realistic expectations of project implementation timeline/outcome. While the benefits of stretch targets are recognized, it is important to avoid creating unrealistic implementation expectations for power sector reform and privatization, which then have to be managed when the inevitable delays occur. In addition, sufficient flexibility in project implementation schedules need to be incorporated to allow for mid-course correction, as and when needed, and to tackle the overall restructuring in a phased manner. The use of a "rate of return on assets" target for financial performance is inappropriate for a lcompany/sector with a very large and lumpy investment program. In cases where such obligations as IPP contracts have significant impact on the entities' finances, the llegal agreements should make explicit reference to the treatment of such obligations in the definition of financial covenants. There are no short cuts to a successful complex operation; above-average inputs of Bank resources and lbroad staff skill mix for project design, appraisal and supervision are required. The Country Portfolio Performance Review (CPPR) process, carried out jointly with other key donors, lcould be used effectively to highlight major sector problems/issues to complement the supervision

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efforts of the project team.

9. Partner Comments

(a) Borrower/implementing agency:

NPC/TRANSO/PSALM provided data which have been incorporated in the ICR and no comments were received on the draft ICR provided to them. The borrower's ICR is presented in Annex 9.

(b) Cofinanciers:

The draft ICR was provided to the co-financiers. No comments were received from ADB/JBIC and the following comments were received from KfW: "The German Government, through KfW, has cofinanced the Transmission Grid Reinforcement Project (parallel financing) in financing the transmission line Masinloc - Labrador. This component is part of the overall transmission grid reinforcement in Northern Luzon. Primary objective was to contribute to a safe and economic power supply to the transmission grid in Luzon. The component financed by us had been put in operation in April 1999. We share your assessment to rate this component as satisfactory. We also share your assessment that the overall development of the power sector had been unsatisfactory. This is due to international developments (Asian crisis) and internal Philippine policies. The restructuring of the sector has been delayed and the financial situation of the NPC deteriorated. We hope that now after the elections decisive progress will be made. We appreciated the cooperation with the World Bank during the preparation and implementation of the Project."

(c) Other partners (NGOs/private sector):

10. Additional Information

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Annex 1. Key Performance Indicators/Log Frame Matrix

Key Performance Indicators: Appraisal vs. Actual

Calendar Year 95 96 97 98 99 00 01 02

Project Monitoring

TRANSCO Organization Announced Appraisal Dec.

Actual Dec.

TRANSCO Headquarters Building Site Identified Appraisal June

(To be located in the NPC Head Office, Quezon City) Actual Mar

500 KV T/L contract effectivity Appraisal Oct.

Actual Dec.

Design Report for NLDC Completed Appraisal Nov.

(Requirement Reports & Specifications) Actual Aug

NLDC Equipment Contracts placed Appraisal June

(Only for main contracts for EMS, Telecomm & Protection Systems) Actual June

Visayas ( Negros–Panay IV ) Subtransmission Contracts Effective Appraisal Dec.

(Note: assumed supply contracts only) Actual Mar

Luzon-Visayas Generation Reserve Appraisal 44% 40% 38% 34% 30% 26% 42%

Actual = [(System Peak-Capacity)/System Peak] x 100% Actual

Luzon 77% 84% 66% 73% 71% 38% 41% 29%

(Capacity includes Non-NPC) Visayas 48% 48% 99% 119% 94% 91% 11% 43%

NPC Financial & Restructuring Program

Rate of Return (%) Appraisal 6.00% 7.00% 8.00% 8.00% 8.00% 8.00%

Actual 7.26% 8.24% 7.25% 3.27% 3.37% 2.20% 2.89 1.3

Debt Service Coverage Ratio Appraisal 1.08 1.00 1.00 1.00 1.00 1.30

Actual 0.75 1.29 0.9 1.18 0.92 0.7 0.96 0.4

Self Financing Ratio Appraisal 5% 0% 0% 0% 0% 30%

Actual 0% 14% 0% 27% 0% 0% 0% 0%

Additional Capital (billion Peso) Appraisal 0 0 9.0 9.0 9.0 5.0 0

(Sale of shares & Assets of Government equity) Actual 0 0 0 0 0.6 0 0

Regulatory Policy

DOE Electricity Omnibus Law Appraisal Dec.

Actual June

ERB Wheeling Policy Regulation Appraisal Dec.

Actual June

- 14 -

Appraisal Actual System Lossess (%)

Luzon and Visayas Luzon 1995: 2.30 1996: 2.73 1997: 2.46 1998: 1.16 1999: 2.29 2000: 2.94 Visayas 1995: 3.77 1996: 2.08 1997: 4.40 1998: 4.46 1999: 4.99 2000: 5.66

Luzon: 1995: 2.66 1996: 2.00 1997: 1.95 1998: 1.91 1999: 2.90 2000: 2.95 Visayas 1995: 3.47 1996: 3.97 1997: 4.18 1998: 4.16 1999: 5.14 2000: 3.87

System Losses (%) Mindanao and Philippines Mindanao

1995: 3.97 1996: 4.88 1997: 4.29 1998: 4.18 1999: 4.00 2000: 4.10 Phils 1995: 2.68 1996: 2.98 1997: 2.92 1998: 1.94 1999: 2.80 2000: 3.38

Mindanao: 1995: 4.29 1996: 4.19 1997: 4.20 1998: 3.03 1999: 3.92 2000: 4.39 Phils: 1995: 2.98 1996: 2.52 1997: 2.50 1998: 2.28 1999: 3.24 2000: 3.23

- 15 -

System Reliability (%) Luzon and Visayas

Luzón 1995: nd 1996: 99.71 1997: 99.70 1998: 99.90 1999: 99.92 2000: 99.99 Visayas 1995: nd 1996: nd 1997: nd 1998: nd 1999: 99.51 2000: nd nd = no data available

Luzon 1995: 99.60 1996: 99.93 1997: 99.92 1998: 99.90 1999: 99.89 2000: 99.99 Visayas 1995: 99.73 1996: 99.54 1997: 99.67 1998: 99.33 1999: 99.54 2000: 99.61

System Reliability (%) Mindanao and Phils Mindanao

1995: nd 1996: nd 1997: nd 1998: nd 1999: 99.78 2000: nd Phils 1995: nd 1996: nd 1997: nd 1998: nd 1999: 99.86 2000: nd nd=no data available

Mindanao 1995: 99.69 1996: 99.79 1997: 99.78 1998: 99.75 1999: 99.74 2000: 99.52 Phils: 1995: 99.63 1996: 99.87 1997: 99.88 1998: 99.82 1999: 99.84 2000: 99.84

No. of FLY (days/year) Luzon 1995: nd 1996: 322 1997: 340 1998: 340 1999: 339 2000: 364

Luzon 1995: nd 1996: 357 1997: 352 1998: 332 1999: 348 2000: 361

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Annex 2. Project Costs and Financing

A. Project cost by Component (in US$ Million equivalent)

Project Components Total Total Percentage of Appraisal

A Northwest 500KV/230KV Grid Extension 479.40 368.40 77%

Masinloc Labrador (funded by KfW) 32.90 39.41 120%500 KV Transmission line 137.00 139.49 102%500/230 KV Substation (funded by ADB & JBIC) 266.00 127.88 48%Naga-Tayabas & Luzon Substations 43.50 61.63 142%

B. Transco HQ, NLDC, Protection & Communications 49.40 61.70 125%

Transco HQ & Office Equipment 6.00 - 0%National Load Dispatch and RTU facilities 17.20 13.99 81%Upgrading Communciation System 16.90 33.73 200%Upgrading Protection Facilities 6.50 6.73 104%Engineering and Architectural Services 2.80 - 0%Others 7.25

C. Visayas 138 KC Grid Extensions 26.90 37.63 140%

- -

- D. Institutional Support and Project Management 18.00 5.11 28%

MIS 10.40 3.35 32%Technical Assistance for Privatization 7.00 1.50 21%Project Management and NPC Engineering Support 0.26 Total Base Cost 573.70 472.84 82%

Physical Continecies 57.60 Price Contingencies 62.60

Total price with contingencies 693.90 472.84 68%Interest during construction 56.20 32.41

Total project Financing 750.10 505.25 67%

- 17 -

Project Costs by Procurement Arrangements (Appraisal Estimate, in US$ Million)

Expenditures Category ICB NCB Other NBF Total

Works - 14.3 - 6.4 20.7 - (8.8) - - (8.8)

Goods 78.5 - - - 78.5 (76.7) - - - (76.7)

Goods & Installation/Turnkey - - - TL & SS 151.6 353.4 505.0

(120.7) (120.7) -

NLDC 41.3 41.3 (39.3) - - - (39.3)

Consultancies - - 4.4 - 4.4 - - (4.4) - (4.4)

NPC Admin and Project Cost - - - - Land Acquisition/ROW 33.7 33.7 Engg & Admin 9.9 9.9

- - - - - Total 271.4 14.3 4.4 403.4 693.5

(236.7) (8.8) (4.4) - (250.0) Note: Figures in parenthesis are the respective amounts financed by the Bank loans

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Project Costs by Procurement Arrangements (Actual/Latest Estimate, in US$ Million)

Expenditures Category ICB NCB Other NBF Total

Works 10.9 10.9 (0.6) (0.6)

Goods 46.6 46.6 (46.0) (46.0)

Goods & Installation/TurnkeyTL & SS 154.3 150.2 304.5

(102.2) (102.2)

NLDC 61.7 61.7 (49.9) (49.9)

Consultancies 5.8 4.3 10.1 (5.2) (5.2)

NPC Admin and Project Cost - Land Acquisition/ROW 24.5 24.5 Engg & Admin 46.9 46.9

- Total 262.6 10.9 5.8 226.0 505.3

(198.1) (0.6) (5.2) - (203.9)

B. Project Financing (in US$ Million equivalent)

Appraisal Estimate Actual/Latest Estimate Percentage of AppraisalWorld Bank Loan 250.0 203.9 82%ADB/JEXIM 246.0 129.4 53%KfW 29.0 25.2 87%NPC 224.0 146.8 66%

Total Financing 749.0 505.3 67%

Note: World Bank Loans include $175.1 million under this Project and $28.8 million of total loan savings from the Leyte-Cebu and Leyte-Luzon Geothermal Projects.

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Annex 3. Economic Costs and Benefits

Overall Interconnection Program (In 1995 Constant US$ Million)

Year Investment O&M Energy Total Incremental Electricity Capacity Total NetCost Cost Cost Costs Energy Benefit Savings Benefits Benefit

Sales Benefit

US$M US$M US$M US$M (GWh) US$M US$M US$M US$M

1996 23.78 23.78 0.00 -23.781997 163.30 163.30 0.00 -163.301998 93.37 93.37 0.00 -93.371999 89.26 7.01 129.39 225.66 2462 114.87 114.87 -110.792000 28.77 9.24 225.47 263.48 5550 248.59 248.59 -14.892001 14.43 9.96 241.20 265.59 6302 278.55 278.55 12.952002 25.82 10.32 212.44 248.58 4855 183.45 183.45 -65.132003 19.93 10.97 212.18 243.08 4036 149.02 149.02 -94.062004 3.08 11.47 551.46 566.00 17278 590.68 590.68 24.682005 11.54 550.13 561.68 17168 586.91 586.91 25.232006 11.54 548.87 560.41 17063 583.31 583.31 22.902007 11.54 455.59 467.14 9303 318.04 318.04 -149.102008 11.54 452.69 464.23 9061 309.77 309.77 -154.462009 11.54 458.92 470.46 9580 327.50 327.50 -142.962010 11.54 453.02 464.57 9089 310.73 310.73 -153.842011 11.54 446.66 458.21 8560 292.64 292.64 -165.562012 11.54 477.96 489.50 11164 381.65 381.65 -107.862013 11.54 509.51 521.05 13788 471.37 471.37 -49.682014 11.54 509.51 521.05 13788 471.37 471.37 -49.682015 11.54 509.51 521.05 13788 471.37 471.37 -49.682016 11.54 509.51 521.05 13788 471.37 471.37 -49.682017 11.54 509.51 521.05 13788 471.37 471.37 -49.682018 11.54 509.51 521.05 13788 471.37 471.37 -49.682019 11.54 509.51 521.05 13788 471.37 471.37 -49.682020 11.54 509.51 521.05 13788 471.37 471.37 -49.682021 11.54 509.51 521.05 13788 471.37 471.37 -49.682022 11.54 509.51 521.05 13788 471.37 471.37 -49.682023 11.54 509.51 521.05 13788 471.37 471.37 -49.682024 11.54 509.51 521.05 13788 471.37 471.37 -49.682025 11.54 509.51 521.05 13788 471.37 471.37 -49.682026 11.54 509.51 521.05 13788 471.37 471.37 -49.682027 11.54 509.51 521.05 13788 471.37 471.37 -49.682028 11.54 509.51 521.05 13788 471.37 471.37 -49.68

ERR: negativeNPV @ 12% (625)NPV @ 10% (720)NPV @ 8% (847)

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Northwest Luzon 500/230 kV Transmission Grid Extension Component (In 1995 Constant US$ Million)

Year Inv. Cost O&M Energy Total Incremental Total NetCost Cost Costs Energy Benefits Benefits

Sales (GWh)

1996 20.62 20.62 0.00 -20.621997 140.73 140.73 0.00 -140.731998 65.44 65.44 0.00 -65.441999 69.52 5.670 129.39 204.57 2,462 114.87 -89.702000 18.38 7.408 225.47 251.26 5,550 248.59 -2.672001 7.867 241.20 249.06 6,302 278.55 29.482002 7.867 212.44 220.31 4,855 183.45 -36.862003 7.867 212.18 220.04 4,036 149.02 -71.022004 7.867 551.46 559.33 17,278 590.68 31.352005 7.867 550.13 558.00 17,168 586.91 28.912006 7.867 548.87 556.74 17,063 583.31 26.582007 7.867 455.59 463.46 9,303 318.04 -145.422008 7.867 452.69 460.55 9,061 309.77 -150.782009 7.867 458.92 466.79 9,580 327.50 -139.292010 7.867 453.02 460.89 9,089 310.73 -150.162011 7.867 446.66 454.53 8,560 292.64 -161.892012 7.867 477.96 485.83 11,164 381.65 -104.182013 7.867 509.51 517.37 13,788 471.37 -46.002014 7.867 509.51 517.37 13,788 471.37 -46.002015 7.867 509.51 517.37 13,788 471.37 -46.002016 7.867 509.51 517.37 13,788 471.37 -46.002017 7.867 509.51 517.37 13,788 471.37 -46.002018 7.867 509.51 517.37 13,788 471.37 -46.002019 7.867 509.51 517.37 13,788 471.37 -46.002020 7.867 509.51 517.37 13,788 471.37 -46.002021 7.867 509.51 517.37 13,788 471.37 -46.002022 7.867 509.51 517.37 13,788 471.37 -46.002023 7.867 509.51 517.37 13,788 471.37 -46.002024 7.867 509.51 517.37 13,788 471.37 -46.002025 7.867 509.51 517.37 13,788 471.37 -46.002026 7.867 509.51 517.37 13,788 471.37 -46.002027 7.867 509.51 517.37 13,788 471.37 -46.002028 7.867 509.51 517.37 13,788 471.37 -46.00

ERR: negativeNPV : @ 12% (508.47)NPV : @ 10% (592.33)NPV : @ 8% (705.98)

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Identification/Preparation02/18/95 8 POWER ENG. (1), FINANCIAL

(1), RESETTLEMENT SPEC. (1), ENERGY ECONOMIST (1), ENVIRONMENTAL ENG. (1), PROCUREMENT ADVISOR (1), RESERVOIR ENG. (1), FINANCIAL ANALYST (1)

Appraisal/Negotiation06/16/95 5 POWER ENG. (1),

FINANCIAL ANALYST (1), RESETTLEMENT SPECIALIST (1), M/S PROJECT SPECIALIST (1) PROJECT MANAGEMENT ADVISOR (1)

12/07/95 4 POWER ENGINEER (1), ENERGY SPECIALIST (1), PROJECT MANAGEMENT ADVISOR (1), TRANSMISSION ADVISOR (1)

02/08/96 5 SR. POWER ENGINEER (1), PRINCIPAL COUNSEL (1), OPERATIONS OFFICER (1), PRINCIPAL FINANCIAL ANALYSTS (1), SR. ECONOMIST (1)

Supervision

06/30/1996 4 ELECTRICITY TARIFFS (1); POWER ENGINEER (1); RESETTLEMENT (1); PROJECT MANAGEMENT (1)

S S

01/22/1997 1 RESETTLEMENT (1) S S02/13/1998 4 TASK MANAGER (1);

ENERGY SPECIALIST (1); RESETTLEMENT (1); FINANCIAL SPECIALIST (1)

S S

06/19/1998 4 TASK MANAGER (1); ENERGY CONSULTANT (1); FINANCIAL SPECIALIST (1); ENERGY ECONOMIST (1)

U U

12/08/1998 2 ENERGY SPECIALIST (1); OPERATIONS OFFICER (1)

U U

- 22 -

05/20/1999 2 TASK MANAGER (1); RESETTLEMENT EXPERT (1)

U U

11/05/1999 5 TASK TEAM LEADER (1); POWER ENGINEER (1); SOCIAL IMPACT SPEC. (1); OPERATIONS OFFICER (1); FINANCIAL ANALYST (1)

U U

05/31/2000 4 FINANCIAL ANALYST (1); POWER ENGINEER (1); SOCIAL IMPACT SPECIALI (1); OPERATION OFFICER (1)

U U

10/12/2000 1 TASK TEAM LEADER (1) U U01/19/2001 3 TASK MANAGER/FINANCIAL

(1); OPERATION OFFICER (1); POWER ENGINEER (1)

U U

11/23/2001 2 TASK MANAGER (1); PROCUREMENT OFFICER (1)

S S

07/12/2002 4 TTL, FINANCIAL ANALYSI (1); POWER ENGINEER (1); PROCUREMENT (1); SOCIAL SAFEGUARD (1)

S S

10/25/2002 5 TTL/FINANCIAL ANALYST (1); POWER ENGINEER (1); SOCIAL SAFEGUARD (2); PROCUREMENT (1)

S S

07/08/2003 2 TASK TEAM LEADER (1); SOCIAL SPECIALIST (1)

S S

07/08/2003 2 TASK MANAGER/FINANCIAL (1); SOCIAL SPECIALIST (1)

S S

10/10/2003 2 TASK MANAGER/FINANCIAL (1); SOCIAL SPECIALIST (1)

S U

ICR01/19/2004 2 TASK

MANAGER/FINANCIAL (1), POWER ENGINEER (1)

S U

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 29.0 107.1Appraisal/Negotiation 41.0 130.4Supervision 116.2 456.4ICR * *Total 186.2 693.9

* ICR SWs and the corresponding cost are included in the estimates under Supervision.

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

- 24 -

Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

1. Electric Power Industry Reform Act (EPIRA); and Implementation Rules and Regulations of EPIRA

2. NPC audited financial statements (1995-2002)

3. Spreadsheets on detailed project cost and financing (appraisal vs. actual)

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Additional Annex 8.

NPC's Financial Indicators (1995-2002) (Millions of Pesos)

Financial Year Ending December 31 1995 1996 1997 1998 1999 2000 2001 2002

Energy Sales (GWh) Appraisal 30,682 34,209 37,068 38,722 41,203 43,096 Actual 31,031 33,381 36,442 37,321 36,987 37,320 39,948 34,369

Energy Sales Growth (%) Appraisal 6.7% 11.5% 8.4% 4.5% 6.4% 4.6%Actual 8.0% 7.6% 9.2% 2.4% -0.9% 0.9% 7.0%

Average Operating Revenue Appraisal 1.81 2.28 2.44 2.60 2.89 3.07 (P/kWh) Actual 1.73 1.96 2.12 2.38 2.42 2.68 2.90 Net Operating Revenues, P Million Appraisal 54,733 77,594 90,425 96,966 118,294 132,114

Actual 52,462 63,635 77,144 86,611 89,686 100,119 115,698 116,433 Net Operating Income, P Million Appraisal 9,843 15,166 20,006 20,053 26,857 26,064

Actual 11,544 13,318 11,624 6,916 8,490 5,437 6,837 Net Income (Loss), P Million Appraisal 2,992 6,609 9,201 8,323 11,191 7,985

Actual 3,914 5,543 3,054 (3,617) (5,953) (12,964) (10,377) (33,735) Percentage Tariff Increase Appraisal 2.3% 26.0% 6.9% 6.7% 11.2% 6.0%

Actual -2% 13% 8% 12% 2% 11% 8%Rate of Return on Rate Base (%) Appraisal 6.3% 9.1% 10.2% 9.3% 11.0% 9.3%

Actual 7.3% 8.2% 7.2% 3.2% 3.4% 2.2% 2.9%Debt/Debt + Equity Ratio Appraisal 81% 81% 76% 72% 68% 64%(excludes appraisal surplus) Actual 81% 89% 92% 93% 96% 98% 100%Debt Service Coverage Ratio (time) Appraisal 1.08 1.00 1.00 1.00 1.00 1.30

Actual 0.75 1.29 0.90 1.18 0.92 0.70 0.96 Self-Financing Ratio (%) Appraisal 5% 0% 0% 0% 0% 41%

Actual 0% 14% 0% 27% 0% 0% 0%Operating Ratio Appraisal 0.82 0.80 0.78 0.79 0.77 0.80

Actual 0.78 0.79 0.85 0.92 0.91 0.95 0.94

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Additional Annex 9. Borrower’s Implementation Completion Report

A. STATEMENT OBJECTIVES

Project Objectives:

The objectives of the Transmission Grid Reinforcement Projects (TGRP) are to (a) Transmit power from two major generation plants at Masinloc and Sual, both located in Northwestern Luzon (b) Reinforce overloaded substations in Luzon grid, (c) Reinforce the Central and Western Visayas Grids and (c) Strengthen the transmission system and load dispatch operations that would support the creation of an autonomous transmission subsidiary, which would later be privatized.

Project Components:

1. Northwestern Luzon (NWL) EHV T/L & S/S ProjectThis project is intended to carry the bulk power from the Masinloc Coal-fired Power Plant (2x300 MW) in Zambales and Sual Coal-fired Power Plant (2x500 MW) in Pangasinan to the main load center in Metro Manila and surrounding areas of Central Luzon. The subcomponent projects are as follows:

• Labrador-San Manuel-San Jose 500KV (EHV) T/L - 225 km of 500 KV double circuit-steel tower transmission line from Labrador thru San Manuel to San Jose • Sual-Labrador 230 KV T/L - 24 km of 230 kV double circuit-steel tower transmission line from Sual (Pangasinan) to Labrador (also in Pangasinan)• Labrador, San Manuel and San Jose EHV Substations – 500/230 KV substations at Labrador, San Manuel and San Jose. This was funded by ADB and co-financed by JBIC, formerly JExim). The ADB loan also included (a) Project Management services for the substation projects (b) Consulting Services for Valuation of NPC’s assets and (c) Grant for consulting services on the formation of a Transmission Subsidiary to support NPC’s privatization program.• Masinloc-Labrador 230 KV T/L (funded by KfW) - 95 km. of 230 kV double circuit, steel tower transmission line from Masinloc to Labrador. It also includes consulting services for this particular project.

2. Luzon Substation Reinforcement Projects The main objective of the project is to reinforce eight (8) 230/69 KV substations in Luzon to ensure efficient, stable and reliable delivery of electrical power to the load centers, averting any overloading of their existing transformers. The original include the reinforcement of Tuguegarao, Botolan, Hermosa, Labrador, Caliraya & Makban, Beckel & Olongapo S/S. Due to revised expected load growth and/or earlier reinforcements, Beckel and Olongapo S/S were excluded and Rosario S/S was added.

3. Naga-Tayabas 500KV T/L Rehabilitation Project This involves the supply of conductors for the rehabilitation of the Southern Luzon Naga-Tayabas 500 KV line. The line when completed would reinforce the power transfer capability in the Bicol Area and will be an important link of the Leyte-Luzon HVDC transmission line.

4. National Load Dispatch Center (NLDC) or National Control Center (NCC) Project This project will establish a National Control Center (NCC) which shall coordinate and supervise

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the operation of the Interconnected Luzon, Visayas and Mindanao Power Grid. The NCC will also be the hub of the TRANSCO. This project will also upgrade the existing SCADA/EMS Telecommunications and Protection Systems in Luzon and Visayas. This will optimize generation and improving distribution of electric power nationwide. It will optimize generation and will improve distribution of electric power nationwide. It also includes replacement and higher reliability and accuracy of telemetered data. The components include Upgrading of (a) EMS/SCADA System, (b) Protection System Facilities, (c) Communication System and (d) NCC Buildings with a Main NCC Building in Manila and a Backup Building in Cebu.

5. Visayas Grid Reinforcement Projects This component will reinforce the 138/69 KV systems in Negros, Panay and Cebu. There are two subprojects as follows:

• Negros IV- Panay IV 138 KV T/L Project The objectives of the Negros IV/Panay IV Project are to (a) provide a stable and wider power distribution, (b) address and support the basic industrialization need, (c) sustain the rapidly increasing demand for power and (d) improve the voltage requirement and (e) enhance system reliability in the area through the electric cooperatives in Negros and Panay Islands. This project involves the construction/installation of the (a) Dingle-Panit-an-Sta. Barbara 138 KV T/L, (b) Bacolod-Cadiz T/L 138 KV, (c) New Cadiz Substation, and (d) Dingle, Sta. Barbara and Panit-an S/S Reinforcement

• Cebu Grid 138 KV T/L Reinforcement Project The main objectives are to (a) Upgrade the power transformation and transmission system from Naga and Talavera generating plants to the distribution system supplying Metro Cebu and outlying municipalities, and, (b) Reinforce the 138 KV woodpole line connecting both the Cebu Diesel Power Plant II (CDPP II) in Talavera, Toledo City and the Mirant Philippines Generating Plants (formerly Toledo Power) to the Salcon Power Complex in Naga, Cebu. This project involves the construction of the (a) Naga-Sigpit-Talavera 138 KV T/L, (b) New Quiot S/S, and (c) Naga, Sigpit and Talavera S/S Reinforcement

6. Institutional Support and Project Management This comprises the following (a) Engineering services for the design and implementation of the NLDC facilities (b) Project Management services for the Northwestern Luzon 500KV transmission line project and (c) Management Information Systems (MIS) facilities and architectural services associated with new TRANSCO headquarters

7. Y2K remediation Project This was a new component, added in 1999, to address the Y2K risk for power utilities which mainly lies in computer controls that can potentially disrupt or abnormally alter the operations of mission-critical equipment, thus leading to plant shutdown or transmission blackouts.

8. Interim Market Structure of the Wholesale Electricity Spot Market (WESM) This was also new component, added in 2000, to address the - The establishment of an interim market is one of the major provisions of the Electric Power Industry Reform Act or Republic Act (RA) 9136. The Act specifically provides for the establishment of the wholesale electricity spot market (WESM) one (1) year after the passage of the Act. In view of this provision, the need to have an interim market resembling a competition was targeted in 2002. This project was eventually

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excluded from the loan due to procurement problems.

Considering the magnitude of the project, resettlement and environmental aspects are major areas of concerns, noting their respective requirements as follows: Resettlement Aspect / RAP Monitoring As one of the covenants in the loan, NPC will implement a satisfactory resettlement Plan which is acceptable to the Bank. As early as appraisal, it was agreed between NPC and the Bank that the Commission on Audit, as an independent agency will be contracted to carry out monitoring and evaluation of the resettlement Plan implementation. The relocation Action Plan has 2 phases, RAP-I deals mainly on policies and procedures, organizational responsibilities for plan and monitoring. RAP II contains the project descriptions, socioeconomic survey results, plan, implementations schedules and budget estimates. These RAPs were the focus of COA’s Monitoring activities.

Environmental SafeguardsUnder WB Operational Policy (OP) 4.01, this project is classified as Category B projects – those that have potential environmental impacts which are site specific and mostly reversible; mitigation measures already exist or can be easily designed. For Category B projects, WB OP 4.01 requires the (a) preparation of environmental assessment (EA) documents; (b) convening of public consultation and disclosure; (c) compliance with agreed measures in the EA/EMP; and (d) monitoring and reporting of EMP implementation.

B. ACHIEVEMENT OF PROJECT OBJECTIVES

Physical Objectives:

Overall, the implementation of the TGRP is considered satisfactory in terms of achieving the physical objectives, with the components mostly now completed, as follows:

Northwestern Luzon (NWL) EHV T/L & S/S Project The NWL T/L project was completed in February 1999 about 18 months behind schedule but commissioned in time to evacuate full power from the Masinloc and Sual Power stations which were also late due to commissioning problems. It was envisaged during appraisal (May 1995) that the 500 kV transmission lines would be completed by September 1997, the substations by February 1998, and Unit 2 of the Masinloc thermal power plant by December 1998. The actual dates of completion were March 1999 for the transmission lines (a delay of 18 months – although the existing 230 kV capacity was sufficient to evacuate power form the first units commissioned), February 1999 for the substations (a delay of 12 months), and December 1998 for Unit 2 (on schedule). The WB funded 500 kV transmission lines were contracted under various turnkey projects and completed expeditiously within the budget estimates for the contracts.

The relative success of this project component is, however, marred by NPC’s slow settlement of claims for compensation, some of which are still outstanding. While it might be argued that NPC should not have proceeded without all its easements right in place, the decision to advance construction was justified on the basis the high take-or-pay penalty costs NPC would have incurred if it had been unable to evacuate the full amount of power from both Sual and Masinloc.

Overall, the project was a major success and the Corporation was even able to increase its financial coffer by PHP 1.98B when the contractor for the Sual plant, suffered delay on the scheduled

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energization of said plant and had to pay the corresponding penalty. .

Luzon Substation Reinforcement Projects This was delayed by two years partly due to protracted procurement by NPC, but also due to the lack of counterpart local funding during 1997-2000. The Delivery of Materials for Schedule II (Other various S/S equipment and accessories) was completed in July 2003 while the delivery of the materials for Schedule I (Power Transformers) was completed in December 2003. Installation works for Labrador S/S in South Luzon is being prioritized and eligibility screening for prospective bidders for the contract is ongoing. For the other substations, Hermosa, Botolan, Caliraya, Rosario and Makban installation will be undertaken by administration. However, installation is expected to be scheduled much later. As earlier mentioned, either earlier reinforcement has already been effected or demand in the area has not substantially increased as expected during appraisal.

Naga-Tayabas 500KV T/L Rehabilitation Project Project was completed in April 1998. This was also covered in the Bank’s ICR for the Leyte-Luzon Geothermal Project (IBRD Loan No. 3746-PH), issued on October 16, 2000. Only the power conductors were financed by the TGRL (IBRD Loan 3996/3997). The other T/L materials, including the turnkey contract for the rehabilitation project was financed by IBRD Loan No. 3746.

National Control Center (NCC) Project This base cost US$ 49 m (final value US$ 62 m) component included new items which taken together with the original component were designed to improve the coordination and operational reliability of the power system and to establish commercial metering arrangement at the boundaries of the transmission system.

The main NLDC component was completed in December 2003 about three years behind schedule. During the MTR the scope of work incorporated in this component was expanded to extend the scope of the communications network and to provide key facilities for the proposed new power market. However, the design of the power market structure at the time was not well defined, resulting in protracted delays in finalizing the technical design and procurement documents. Eventually, some items were cancelled from the loan due to problems with procurement which persisted until loan closing.

The main reasons for the delays includes (i) the non-passage of the Omnibus Power Bill which prevented NPC from establishing TransCo as a separate legal entity; (ii) the Bank’s requirement for two stage bidding for EMS/DAC and telecommunication components (instead of one stage bidding); (iii) prolonged resolution of complaints received from one bidder for telecom equipment; (iv) changes in the internal NPC contract approval system.

The remaining installation activities are being funded by TransCo’s own funds. Overall, the NCC project is now substantially completed. The delivery of materials and equipment eligible for funding by World Bank was completed in Dec 2002. Installation is either already completed and/or currently ongoing. The Main NCC Building in Diliman, Quezon City was inaugurated on June 26, 2003, serving as one of the highlights of TransCo’s 2nd Anniversary celebration. Entire project would be completed in December 2004.

Visayas Grid Reinforcement Projects Under this base cost US$ 29 m (final estimate US$ 38 m) component materials and installation for subtransmission facilities in the Visayas (Negros and Panay) are financed, complementing similar projects financed under the Energy Sector Project (Loan 3163) and the Leyte-Cebu Project (Loan

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3700).

• Negros IV-Panay IV 138 KV T/L Project Originally, all project components under the Negros IV/Panay IV Project had been programmed for completion in the last quarter of year 2000. However, this was reset due to World Bank requirement for a hundred (100) per cent Right-of-Way compensation before the construction/erection starts especially on the overhead transmission lines. While complying the requirement, several problems had cropped up that further delayed the completion of the project. Foremost among them are the perennial Right-of-Way problems.

Portion of the Dingle – Panit-an –Sta. Barbara 138 KV DC/ST Transmission Line was re-routed to avoid Right-of-Way problems. The Dingle–Panit-an-Sta. Barbara 138 KV DC/ST Transmission Line was divided into three (3) schedules (Schedules I, II & III). These were completed on April 22, 2002, April 4, 2002 and December 6, 2001, respectively. However, there is still one (1) tower left unerected for Schedule II due to unstable soil condition at the tower site.

The Bacolod – Cadiz 138 KV SC/ST Transmission Line was divided into two (2) schedules, (Schedules IV and V). Schedule V was completed on November 20, 2001. On the other hand, Schedule IV was further delayed due to Right-of-Way problems. At the moment, there are still six (6) remaining towers unerected under expropriation. The Writs of Possession are still pending in court.

The Cadiz Substation is expected to be completed in March 2004. The three (3) substation expansion projects consisting of the Sta. Barbara Substation Expansion, Dingle Substation Expansion and Panit-an Substation Expansion are yet to be implemented.

• Cebu Grid Reinforcement Project Based on this schedule, the entire Naga-Sigpit-Talavera 138 KV SC/ST was energized in January 2001. This actually consisted of 2 contracts. The Naga-Sigpit (Schedule I) portion was targeted for completion in August 1998 but because of Right-of-Way problem this was energized only in November 1998. In addition, a geo-technical problem occurred along this line and within the area where a steel tower was originally located. A remedial/restoration work, involving the erection/installation of two (2) sets steel towers, are being considered for implementation by early next year. The Sigpit-Talavera portion (Schedule II) was scheduled for completion in May 1998. However, a land acquisition problem involving one (1) tower site surfaced during the course of construction that led to the temporary suspension of the work. This long overdue problem was resolved when the judicial court issued its decision in May 2000 in favor of TRANSCO, that enabled the eventual completion/energization of this portion in January 2001.

Over the years, the proposed site of the new 100-MVA substation has been varying in and out of Cebu City due to Right-of-Way and project cost considerations. Accordingly, after a review of three (3) possible locations, the site has finally been established in Quiot (Pardo), back within Cebu City. In May, 2001,TransCo Management finally firmed up the final site at Quiot (Pardo). However, it was only in December, 2002 that TransCo was able to acquire the substation site only in December 2002. Construction is targeted to start in January 2004 and completion is targeted in November 2004.

Implementation of the Naga-Sigpit-Talavera Substation Expansion Project had to be deferred following the privatization of the Naga Power Plant Complex, the mothballing of a diesel plant,

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Cebu Diesel Power Plant II, and the deferment of the construction of the corresponding Naga-Banilad Transmission Line Project until 2005. It was in July 2003 that TRANSCO Management felt the need to implement the expansion/upgrading of the Sigpit Substation, which during power shortage could be an alternate source of power for Metro Cebu and outlaying municipalities that would come from Mirant Philippines (formerly Toledo Power). Preparation of plans and specifications and other tender documents for bidding of this project is on-going for its target start of construction in July 2004 and completion by October 2004.

Institutional Support and Project ManagementMIS LAN/WAN Backbone Project - The LAN/WAN Backbone project Stage-1 was completed in 1996 at a contract cost of $3.15M. NPC’s final acceptance to the contractor was issued in May 1997. Each of the 12 NPC sites (Home office Complex, regional centers, power plants of the Metro Manila Regional center and the Maintenance Engineering Center) covered in this project is now operational on LAN mode and is interconnected with each other on WAN mode.

The PMS/CMMS -The PMS/CMMS was completed/installed using ADB fund. The installation was confined to the power plant sites. The need for CMMS/PMS Extension Project was also identified and this involves installation of the systems at additional sites, particularly at the transmission operation offices (area offices) in Luzon, Visayas and Mindanao.

PROMOD IV - This covers the supply PROMOD IV (Production Modeling) and Hydro Optimization Module to upgrade NPC’s present costing & outage scheduling program. Delivery/installation of the module is already completed. The contract amount was US$150,000.

Y2K remediation Project This project was completed successfully. A total of P115 Million was spent for the replacement of Y2K non-compliant equipment, which was purchased thru various Purchase Requisitions/Purchase Orders.

RAP Monitoring A memorandum of Agreement (MOA) between NPC and COA was signed on Nov 6, 1997 for the latter to monitor the implementation of RAP for the TGRP, specifically for the Northwestern Luzon 500KV T/L Project and Negros IV-Panay IV 138 KV TL project. While TransCo has exerted all efforts in its own authority to expedite the completion of compensation, there are still remaining issues, which are basically not within the control of TransCo, most notably the inability of the affected landowners to produce the required documents. Nevertheless, even beyond loan closing, Transco is still committed to address/settle all remaining issues, whether COA’s Monitoring services will be continued or not.

Environmental Safeguards Environmental assessments (EA) are done for the components of TGRP in the form of Initial Environmental Examinations (IEEs). IEE reports are the basis of DENR for the issuance of Environmental Compliance Certificates (ECCs) or Certificates of Non-Coverage (CNC). Of the TGRP components, only the NCC building in Diliman, the Negros IV T/L Project and the Panay IV T/L Project have been validated/monitored by EMD-TransCo for ECC/CNC compliance. ECC compliance/monitoring/validation of Northwestern Luzon T/L Project have been conducted in January 2004. Inputs from respective Engineering Construction site managers on the status of compliance with the ECC/CNC conditions supplement the ECC Compliance Reports retrieved from records turned over from NPC to TransCo.

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Thus, only Labrador new EHV S/S, San Manuel new EHV S/S and San Jose new GIS S/S components and the Masinloc-Labrador 230 kV T/L Project have no ECC Compliance Status Report. All TGRP components with ECC Compliance Monitoring Reports have satisfactorily complied with majority of the ECC conditions (e.g. Panay IV have complied 13 out of 18 conditions, Negros IV have complied 2 out of 3 CNC conditions, etc.).

Financial/Sectoral Objectives:

The implementation of the privatization process had encountered difficulties and delays, and the earlier expectation for NPC to contain its increasing deficits did not materialize. During appraisal, the corresponding law for reforming/restructuring the power industry was targeted to be in place by Dec 1996 but actually happened only in June 2002.

There was a long-standing liquidity problem of the NPC which is mainly attributable to its under-capitalization and inadequate tariff adjustments. Financial losses have likewise continued to increase. Important milestones have been achieved to initiate the privatization process, and the TransCo formally stared operating independently of NPC on March 1, 2003 following a mass employee oathtaking. However, the recent failed bid of TransCo and failure of Congress to pass the Franchise Bill and the poor investment climate both globally and in the country, and in power sector in particular, are some concerns to address before the project sectoral objectives can be achieved fully.

The original closing date was Dec. 31, 2000. The loan was extended twice, representing a total of 3 year extension, with a revised final closing date of Dec 31, 2003. The extensions were needed generally to accommodate the disbursements for the NCC Project. Approximately US$80 Million was cancelled before the loan closing date. Around US$11 Million more remains unutilized after the loan closing. Details of project achievements are as follows:

C. MAJOR FACTORS AFFECTING THE PROJECT

The passage of the Omnibus Power Industry Code bill - as expected in 1996 was delayed mainly due to prolonged debates, particularly in Congress. It was even withdrawn in 2000 and subsequently replaced by Electric Power Industry Reform Act (EPIRA) which was passed only in 2001. The progress of privatization/restructuring was also hindered by the Asian financial crisis in 1997 and the political upheavals in the Philippines over the last few years.

The recession in the late 1990s had a severe impact on NPC’s finances and the lack of local funds was a severe constraint on the implementation of the TGRP. It is also relevant to appreciate that since 1997 NPC has suffered from three changes of President and lost many of its key management personnel. Taken together, this has been a difficult period for the remaining staff implementing the project and are a major factor in the long delays that were experienced in implementing key components.

As in the past, the Right-of-Way/resettlement problems greatly affected the timetable of project implementation. The relative success of the project is marred by the slow settlement of claims for compensation, the causes of which are not altogether within the control of either NPC or TransCo. While most of the physical components have already been completed, outstanding compensation related to land acquisition have continued to encounter delays under TGRP, as well as for two projects already long closed, namely Leyte-Luzon and Leyte-Cebu Geothermal projects.

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Northwestern Luzon (NWL) EHV T/L & S/S ProjectRight-of-Way problem was single most serious delaying factor of the project. Right-of-Way problems persisted throughout the project, even up to the time of final inspection, when final tree clearing was being prevented by landowners. Despite Right-of-Way consents for construction of the transmission lines having ostensibly been procured prior to the construction stage, there were objections by landowners and tenants at all stages of the construction. Most of these disputes was only resolved through expropriation, a very time-consuming legal process. The following is a list of common Right-of-Way related problems affecting not only the NWL Project and other components of the TGRP, but most of projects of TransCo, in general:

1. Ownership dispute, where it is unclear with whom NPC have to negotiate.2. Overlapping lot/property boundaries, conflicting claims 3. Landowners/tenant bad relationship and dispute on sharing the compensation4. Opportunist property owners , taking advantage of the situation to make more money5. Difficulty in locating property owners who may already be residing abroad6. Hard-to-deal rich and influential owners of properties7. Bad experiences of project affected persons on ROW claims in previous projects8. Protracted processing of payment (This was alleviated to some extent by contractor’s preparedness to make cash advances to landowners, pending the arrival of definitive payments from NPC).9. Resistance/opposition of NGO’s, some local LGUs and affected populace on the project10. Unavailable/lack of cadastral/parcellary maps and proofs of ownership11. Tax arrears 12. Properties under mortgage13. Erroneous Technical Description of property14. Lost Original Certificate of Title (owner’s Title or Registration of Deed’s copy)15. Properties covered by Land Reform Program under court litigation16. Squatter problems17. Too much regulations which are sometimes conflicting with each other. 18. Low valuations of affected lands and crops/plants/trees19. Delayed issuances of Provincial Appraisal Committee (PAC) / City Appraisal Committee (CAC) resolution for valuations of affected lands and crops/plants/trees20. Delayed issuance of requested ROW documents as TCT’s (Transfer Certificate Title), TD’s (Tax declarations) CLOA, etc. by concerned government agencies.

Other problems are material/design related, which include (a) poor galvanizing and contamination of structural steel, (b) conductor contamination and damage. Poor storage conditions at stockyard was also noted. Some safety issues were also raised. From the start of the construction, and despite repeated urging from NPC and the consultant, the turnkey contractor paid little attention in promoting safety measures at the site. Site workers rarely wore hard hats and safety shoes. Even supervisors failed to set a good example.

Luzon Substation Reinforcement ProjectsIt took five (5) years from issuance of bid documents to completion of delivery of materials (transformers and power circuit breakers) because of various issues and concerns. Thus, the need to install all the delivered equipment at their originally planned sites has already changed. Due to urgency, reinforcements have already been undertaken using other funds or available equipment. In some areas, load demand has not increased substantially as envisaged during appraisal.

There are two procurement packages, transformers (Sched I) and circuit breakers (Sched II). The bids

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for both schedules were submitted and opened on April 20, 1999. For Schedule I, evaluation was delayed and was completed by the Technical Working Group (TWG) only on June 13, 2000 because (a) the evaluation of the prequalification and bids coincided with other projects like the Ilijan Natural Gas Project which prevented most of the technical members of the Technical Working Group from devoting full time to the evaluation of this project and (b) clarification and verification of the documents submitted by the bidders with independent verification yielded positive action only in May 2000. A Notice of Reinvitation was eventually issued on Jan 5, 2001 and the bid opening was conducted on January 19, 2001. For Schedule II, the release of the evaluation report was held due to the above issues on Schedule I. Apparently, there was no point securing approval of just half of the package, which, although separated into 2 supply contracts, is always considered as one.

The Visayas Grid Reinforcement Projects The local cost of the project increased substantially due to difficulties in finalizing substation sites and due to the lack of local funds. Materials (substation components, conductors, tower parts etc) were in fact procured and delivered in 2000 but were stored for nearly three years waiting for funds and ROW arrangement to be finalized. As a consequence of the delays, the local contractors were able to claim significant amount for the cost overruns and ROW compensation increased 400%. Installation work for the Negros-Panay IV components is still under construction using local funds about three years behind schedule.

• Negros IV-Panay IV Project It took three (3) years from issuance of bid documents to the delivery the materials for this project.

The implementation of the Bacolod – Cadiz 138 KV SC/ST TL Project had been affected by the re-routing of its portion traversing the area being proposed for the construction of an airport of international standard in Silay City. However, the major problems that delayed much its completion were the perennial Right-of-Way problems. Of the two (2) schedules of the Bacolod – Cadiz 138 KV SC/ST TL, the Bacolod- Cadiz “1”, Schedule IV had been greatly affected by the ROW problems. Although, there were also a number of ROW problems that had been encountered in Bacolod – Cadiz “2”, Schedule V but they were manageable that they did not affect much its completion as per contract schedule.

There were also Right-of-Way problems encountered during the construction of the Dingle – Panit-an – Sta. Barbara 138 KV DC/ST TL. However, these were immediately addressed to, minimizing delay of this portion of the project. Other problems that were encountered include the reclassification of some tower foundation types to suit actual field condition.

• Cebu Grid Reinforcement ProjectsAs early as contract tendering to opening of bids, the project was already delayed due to several postponement of bidding dates brought about by some changes in the specifications introduced by NPC, incorporation of additional provisions to contract specifications as required by the World Bank, example of which is the provision of the automatic price adjustment, and due to clamor or request from bidders coursed through World Bank for its postponements.

During construction, various problems were again encountered further delaying the project. Foremost among them is the ROW problem, which has tremendous impact in the overall performance of the project and had resulted to other problems, such as rerouting of the transmission line, variation orders, financial difficulties on the part of the contractor, etc. The

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necessary changes in the original plans to suit actual field conditions, the corresponding variation orders and the delayed resolution of the ROW problems due to landowners’ refusal to cooperate with NPC affected the contractor’s financial capacity and their already depleted resources. Problems like shortage of skilled workers and stringing equipment, unusually heavy rainfalls had also caused delays.

RAP Monitoring The Third Party Monitoring Group (COA), alarmed the Bank by way of reporting in its March 1999 Report to the Bank that ”the prices of affected lands are unacceptable to most of the landowners and prices of land are already higher, thus could no longer buy replacement thereof”. The Memorandum of Agreement between COA and NPC did not specify the duration of monitoring activities. The Monitoring report did not address/proved recommendation for improving NPC’s implementation of resettlement and ROW policies. Sometimes recommendations are not within the policy of NPC on resettlement/nor provided in the RAP. There was no specific department in NPC that was tasked to monitor the implementation of the RAP. The adoption of the Integrated Table of Organization by Project Management Engineering Services has provided full authority to the Project Manager in terms of Pre-construction, (i.e. survey, resettlement, ROW) and construction implementation. This arrangement has left little room /authority to Social Engineering Department to monitor the Resettlement Plan implementation. Recently, however, the management has defined the responsibilities of each group. The third party monitoring group did not comply with some of the conditions in the Terms of Reference, such as the conduct of “Periodic Workshop with regional managers, to inform them about the findings”

Environmental Safeguards The ECC/CNC condition that is commonly not complied with is the condition on notifying DENR of the change of ownership of these TGRP components. These TGRP components were originally under the ownership of NPC and should be turned over by NPC to TransCo. However, up to now, the deed of transfer between NPC and TransCo has not been fulfilled yet. Therefore, TransCo have not informed DENR yet of the change in ownership. These TGRP components are still legally owned by NPC.

D. PROJECT SUSTAINABILITY

To support the sustainability of the project, and the power sector, for that matter, legislative passage of the Franchise Bill would be needed in order to attract qualified investors and obtain full value for the privatization of TransCo. In addition, NPC/PSALM has to be allowed to set tariffs that allow for adequate full recovery and a reasonable return on investment.

With regards to the remaining compensation for resettlement, Transco should sustain its efforts to fully resolve all pending compensation and seek resolution to all land acquisition, even without the Bank’s supervision and the independent monitoring group, like COA. This is in fact, the commitment of TransCo, not only for TGRP but all of its project, in general.

Northwestern Luzon (NWL) EHV T/L & S/S Project Through this project, the generated output of various power plants in North Luzon is now being transmitted to the heaviest load center, Metro Manila. This project has been able to reinforce the Luzon grid as a whole, and has contributed much to the grid’s stability and reliability. The technical performance of the Luzon transmission system since commissioning of the 500 KV transmission lines constructed under the Project is reported to be highly satisfactory. Not only does the 500 KV line

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facilitate dispatch of power from the least cost power generation plants in the north but also the line provides generally improves power system stability during normal operations. However, on the northern 500 kV line the San Jose substation experienced two incidents in 2000 that caused blackouts in parts of the Luzon grid. Two of the three shunt reactors failed first in April 2000 and again in October 2000. Both shunt reactors have been sent to France to be repaired by the contractor.

Currently, only one of the two 500 kV transmission line circuits between San Manuel and San Jose is being operated using the spare shunt reactor. The other 500 kV line is being operated without the shunt reactor under special operational procedures. Therefore, notwithstanding the substation failure, the transmission of the output of the Masinloc and Sual power plants has not been affected. As the reasons for the failure have not been clearly identified, the operation of the one remaining 500 kV circuit is at high risk. The substation managers and operators have not received the comprehensive technical training required to ensure smooth operations and maintenance (O&M) of these highly computerized modern substations. NPC has prepared a contingency plan if the spare shunt reactor fails, and this entails operating both circuits of the 500 kV transmission line between Labrador and San Jose at 230 kV by bypassing the GIS substation.

National Control Center (NCC) Project Transnational arrangements for the NLDC component are in place although it is too early to measure the effectiveness of the organization in terms of improving the efficiency of the power market and the reliability of the transmission system. During the next few months this will become the System Operator and will be responsible for providing the necessary market information to WESM. This will require (a) the completion of the installation of commercial metering; (a) the completion of the installation of RTU facilities mainly in Luzon and Mindanao as a matter of priority over the next two years.

Visayas Grid Reinforcement Projects Since the Visayas line is not yet complete it is too early to report on its capability to improve power system operations in the Cebu and Panay regions. It is noted however that the Panay region is suffering poor voltage regulation conditions, and unless NPC completes it plans to build new generation in the area consumers may be prone to brownouts later in 2004.

Although the components under the Negros IV/Panay IV Project have not yet been fully completed, we can foresee its great importance to the area. They are being envisioned to provide continuous and reliable power supply using an environmentally friendly source of energy in the said area. They can trigger in increasing the energy transfer in the area, hence, calls for additional power capacity.

Under Cebu Grid Reinforcement, The completion and energization of the Naga-Sigpit-Talavera Transmission Line does not only serve to reinforce, but as replacement to the already retired/de-activated Naga-Sigpit-Talavera “Woodpole” Overhead Line. It now assures Metro Cebu and outlaying municipalities with reliable alternate/back-up power supply coming from Mirant Philippines (formerly Toledo Power) Generating Units during power shortage/failures caused by breakdown of major generating units and line trippings. With this existing transmission line and the scheduled construction and completion of Quiot (Pardo) 100-MVA Substation and the Sigpit Substation Expansion next year, Metro Cebu and its outlaying municipalities will be assured of sufficient and reliable power, which is a vital element in sustaining economic growth and development. Once fully realized, the Cebu Grid Reinforcement Projects will relieve the high concentration of power at Banilad Substation, thereby, improving the voltage profile of customer's power system.

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E. BANK’S PERFORMANCE

For Northwestern Luzon Grid Extension Project, the bank’s performance is deemed satisfactory, since there were no restrictions imposed as to the management, implementation, monitoring, and construction supervision by the Borrower and the Project Consultant unto the project. However, for the Visayas Grid Reinforcement Projects, it was observed that the Bank Staff conducted only very limited visits to the project site, during project construction.

During its supervision, the Bank showed assertiveness for the Borrower’s compliance to Resettlement/ROW requirements. But through this, the Borrower was able to improve its existing system, particularly, in streamlining compensation procedures, and the Borrower was also able to enhance its reporting system, coming up with a comprehensive status report of ROW compensation periodically.

The Bank also showed decisiveness and frankness in issuing objections to requests/proposals made by the Borrower, particularly for the NCC Project and the WESM Project. But evidently, the supervision team exerted its best efforts, in justifying to Bank’s higher management, to grant Borrower’s requests/proposals.

A frequent change in task managers and team members was also noted. Four (4) task managers have already been assigned during the project implementation (1996 to 2003). Nevertheless, this did not pose a major problem in terms of continuity and effectiveness of the supervision efforts.

In summary, the Bank’s supervision of the procurement and implementation activities was generally satisfactory. The Bank usually replied promptly to the Borrower’s correspondences. Latest communication system, particularly the email has been fully harnessed by the Bank to relay its comments, findings and recommendation for immediate action by the Borrower. Both HQ and Resident Mission Office gave full support to addressing concerns of the Borrower.

F. BORROWER’S PERFORMANCE

The Northwestern Luzon 500KV T/L Project was implemented in accordance with the Project Management Plan (Integrated Project Management Plan) that was approved by NPC on December 1996. It is based on Project Consultant’s established standard procedures for Project Management Plan, suitably modified to reflect actual project conditions and arrangement, as well as requirements of NPC. The project covers a period of eighteen (18) months in accordance to the Original Implementation Schedule, but was delayed due to ROW issues. During project implementation, NPC encountered difficulties in solving the perennial Right-of-Way problems such as ownership disputes; landowner’s refusal of access to their property. These resulted to filing of expropriation cases. But despite the delay in project completion, the Borrower was rated satisfactorily, as to project performance since the completed line is already transmitting bulk power to load centers, Metro Manila and Northern Luzon.

For the big turnkey project of Northwestern Luzon 500KV T/L, the procurement (from issuance of bid to contract signing) took only 11 months on the average. This is probably one of reasons for the huge loan disbursements in 1997, exceeding the same year’s target by 300% ($15M target vs $62M actual disbursement), as established during appraisal. It goes without saying that submission of Bid Evaluation Reports to Bank was relatively faster during the earlier years of the loan implementation.

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Under the NCC Project, a total of ten (10) contracts, with a total of about $55M were successfully implemented. However, seven (7) contracts with a total of about $30M, were not pursued under the loan, due to various reasons (e.g. failure of biddings, limited time to implement project within loan closing date, protracted delay in the submission to the Bank of the bid evaluation results, etc.).

During the project preparations for the Visayas Grid Reinforcement Projects, the Borrower failed to immediately comply with World Bank’s requirements on power rate structure for Visayas and Mindanao, resulting to the delay in the issuance of Loan disbursement clearance, and thus delaying the effectivity of the transmission line contracts under Leyte Geothermal Power Projects (LGPP). There were also changes in design and deviations from contract pay items to suit actual field conditions, which resulted to variation orders and the corresponding increase in project resources. During project implementation, NPC then encountered difficulties in solving the perennial right-of-way problems due to disagreement on the price of affected properties and the refusal of landowners to grant NPC entry to their properties, resulting to filing of expropriation cases and re-routing of transmission lines further delaying the project. These problems affected the physical and financial performance of the contractors of the project. In the overall, despite the delayed project completion due to aforesaid reasons, the borrower can still be rated a “satisfactory” performance since the completed transmission line now provides Metro Cebu and outlaying municipalities with reliable back-up power supplied by Mirant Philippines’ generating sets in Toledo City.

Towards the start of 1999, however, the procurement process tended to drag out. The main contracts of the NCC Project took 2 years on the average before being awarded/signed. Interestingly, the supply contracts under the Luzon Substation Reinforcement Project took 40 months before signing. This was of course, an isolated case which incurred problems not entirely within the control of the Borrower, itself. Thus, the Borrower’s performance was hampered by problems, e.g., compensation process, which are not entirely within its full control.

G. ASSESSMENT OF OUTCOME

The overall outcome is considered satisfactory in terms of achieving the physical objectives, considering that the components are mostly now completed. However, as earlier mentioned, Borrower had problems with financial and sectoral improvement objectives, which are, in the first place not within the control of the Borrower, itself.

In particular, the Northwestern Luzon 500 kV EHV Project has greatly contributed to the Luzon grid’s stability and reliability. Similarly, the Visayas Grid Reinforcement Projects has improved the reliability and stability of the Visayas grid. The NCC Project has also improved the coordination and reliability of the power system. The successful completion of the projects indicated the flexibility of both the Borrower and the Bank during difficult times.

H. FUTURE OPERATIONS

Since 1998, Transco has reported operational performance in terms of various internationally recognized indices. These include Power Quality indicators such as , Average Time Accuracy, Frequency Limit compliance and Voltage Limit compliance. The last figure indicating that there is a considerable incidence of voltage regulation that would concern most industrial consumers. Likewise data for transmission reliability indicates that for the period 1998-2002 the average number of outages and equivalent system minutes of outage is still quite poor by international standards:

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TransCo has already performed an analysis of the causes of unreliability and quantified the loss in sales which resulted from the various outages. Many of the problems relate to poor housekeeping and maintenance issues (tree clearing, maintenance planning, protection relays etc) which could be improved at relatively low cost.

Clearly there is scope for considerable improvements in TransCo system operational performance that should be addressed as a matter of priority. A plan to do should be drawn up and implemented in conjunction with the extensions TransCo is making to the network under the current Transmission Development Plan.

Northwestern Luzon Grid Extension component and associated projects - During the course of the project, it became apparent that a number of improvements could be made for future projects. Some are design and construction related, such as:

• Pinning of Bolts – this was a requirement of NPC but was not actually specified.

• Height of OPGW Joint Boxes – OPGW coils mounted on tower five (5) inches above ground level were tampered and/or stolen. As a result, joint boxes had to be elevated higher to avoid replacement of large quantities of OPGW.

• Counter-weights for Jumper Support Insulator String – should be installed for all to have a reliable line

• Jumper Insulators – Several jumpers were roughly shaped and aesthetically unpleasant. For future projects, it would be better if designers were required to minimize the number of spacers on jumpers.

• Turnbuckles – On the 230 kV overhead T/L turnbuckles were included in the tension insulator strings. It is not desirable for turnbuckles to be used at full line tension as the threads are likely to corrode in time, and be impossible to adjust, and even fail. Screwed rod should not be allowed to be in full tension also.

• Rock Wall / Grouted Riprap for Protection of Sloping Tower Site – Some tower sites were required to construct the Rock Wall/ Grouted Ripraps for slope protection, however, there are no price schedule for the said item. For future projects, slope protection should be included in the pay items.

National Load Dispatch Center (NLDC) or National Control Center (NCC) Project - Installation, test and commissioning activities would be continued. Entire project would be completed in December 2004. All materials/activities, eligible for funding under the loan have all been delivered/implemented. The remaining installation activities would be funded by TransCo’s own funds. In addition to the 10 contracts already implemented and funded by WB, there are three (3) equally important contracts (RTU Mindanao, RTU Luzon/Visayas and Revenue Meters) which were excluded for funding by the WB. Implementations of these contracts are nevertheless being pursued to enhance the efficiency of future operations. The 1st two (RTUs) are currently lined-up under Miyazawa funds. The 3rd is currently under bidding process and will be implemented using TransCo’s own funds.

Visayas Grid Reinforcement Projects

• Negros IV-Panay IV 138 KV T/L Project

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For Cadiz S/S, installation works are in full blast and target project completion is April 2004. For Dingle S/S, contract for installation targeted for award next quarter and target project completion is Jan 2005. For Panit-an S/S, invitation to prequalify for bid is ongoing and target project completion is May 2005. For Sta. Barbara S/S expansion, contractor has recently mobilized and target project completion is Sept 2004. For the T/L portion, the only remaining section is the Bacolod-Cadiz T/L (Schedule IV) and this is targeted for completion by 1st quarter of 2004.

• Cebu Grid 138 KV T/L Reinforcement ProjectWith the enactment of Republic Act 9136 or the Electric Power Industry Reform Act, TRANSCO - a spin-off corporation of the National Power Corporation - is mandated by law to pursue the transmission of electricity across the nation, undertaking activities, including but not limited to planning, construction and centralized operation and maintenance of transmission facilities, grid interconnection, dispatch system and operations, and securing ancillary services on behalf of all users of the transmission system. Thus, the Naga-Sigpit-Talavera Transmission Line is now handled by TRANSCO-Visayas, whose responsibility includes providing adequate staffing, training, management, operation and maintenance of the Cebu Grid. Pre-construction activities for Quiot Substation is underway and bidding for installation works would be continued next quarter. Target project completion is Feb 2005. For Sigpit Substation, management approval for the conduct of bidding for the installation works is expected to be secured next quarter. The Naga S/S expansion, will be covered by the Cebu-Negros-Panay Interconnection Project, targeted for completion in Dec 2005. For Talavera S/S, upgrading has been deferred due to low demand in the area.

Relocation Action Plan (RAP) Monitoring In the future, the selection of a third party monitoring group should be done thru a selection process. The group should not only cover monitoring of payments but should also include evaluation of the resettlement program. A documentation of resolved issues should also be prepared as future reference in the implementation of resettlement plan for new projects. Considering that there are still outstanding compensation, the Bank should understand that even after loan closing, TransCo is still committed to address/settle all remaining issues, whether a third party monitoring group‘s services are continued or not.

I. KEY LESSONS LEARNED

1. The Northwestern Luzon 500 kV T/L Project again proves the swiftness of implementing a project under a turnkey basis, compared to a split supply/erection contract. The commissioning of a turnkey project can be achieved in a period equivalent to a period within which a supply contract can be concluded. For instance it only took 3 years from issuance of bid documents to completion of this large project. In contrast, the Negros IV -Panay IV Luzon T/L Project took 3 years from issuance of bid documents to delivery of materials, alone. For Luzon S/S, it even took 5 years just to completely deliver the materials, and erection/installation is yet another tedious undertaking/awarding process in itself.

2. To avoid recurrence of the problems and delays during the implementation of the project, the following measures are recommended:• Bank shall be more clear and firm in its guidelines for the Borrower to follow• Bank should be flexible enough in dealing with the Borrower’s commitment most especially those involving power rates which have social, political and economic impact.• Thorough analysis/evaluation of the plans/ data during design to avoid variances from actual bid cost.

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• It should be a policy that no re-routing of transmission line be allowed to avoid delays /cost overruns.• The right-of-way should be substantially cleared /settled before the start of the construction. • Adopt more policies and guidelines that are fair to the corporation but acceptable to landowners. • Adequate and capable personnel to handle negotiations and expropriation cases;• There should be full support of other government agencies involved in the processing of ROW documents, including speedy court decisions. • To avoid traversing areas that are being proposed for other government projects, coordination should be made with local government unit and concerned agencies, especially with the ones that are involved in planning for future development in the area.• There should be available comprehensive parcellary plan of lots to be affected and their adjacent lots in order the less/ free Right-of-Way problematic route can be established.• To achieve complete monitoring and reporting of compliance to ECC/CNC conditionalities, the concerned Engineering Construction site managements should have complete compilation of documentary proof to substantiate compliance to the ECC/CNC conditions.• Compliance to ECC/CNC conditions should be monitored continuously even up to the operation stages of these TGRP components. In order to achieve this, there must be a proper turn-over of the environmental-related documents, which should include as minimum, the ECC/CNC, the IEE (EA document), the ECC Compliance Report and other documentary proofs of ECC/CNC compliance) from the Engineering Construction site management to Operation & Maintenance.

3. The employment of a third party for monitoring the implementation Relocation Action Plan (RAP), proved to be beneficial because of the following: • They served to post-evaluate the implementation of the relocation activities for the projects• It provided the opportunity to improve the policies and guidelines affecting the lives of PAPs • It serves as the venue whereby the affected persons/families redress their grievances• Issues/concerns could be addressed readily, minimizing possible delays in project implementation• It has established a comprehensive reporting system detailing cases with and without problems

4. In order to improve the ODA portfolio performance, proactive implementation of the following general measures, as recommended by oversight agencies, are necessary: • Close monitoring of procurement activities• Institutionalization of internal systems for tracking procurement activities• Strict adherence to timeliness• Delineation of clear lines of responsibilities for procurement• Immediately addressing systemic bottlenecks• Continuous study of ways to streamline procurement processes thru decentralization/delegation.

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