Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 16145-PH

IMPLEMENTATION COMPLETION REPORT

PHILIPPINES

MANILA POWER DISTRIBUTION PROJECT(Loan 3084-PH)

NOVEMBER 22, 1996

Infrastructure Operations DivisionCountry Department IEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EOUIVALENTS(As of December, 1988)

Currency Unit = Philippines Peso (P)P1.00= 100 Centavos (ctv.)

US$1.00 = P 21.4P1000=US$46.73

(As of June, 1996)US$1.0= P 26.2P1000=US$ 38,2

WEIGHTS AND MEASURES

kV= kilovolt (1,000 volts)MW= Megawatt (1000 kW)

kWh= Kilowatt hour (1,000 watt-hours)Gwh= Gigawatt hours (one million kWh)

REPUBLIC OF THE PHILIPPINESFISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMSDBP = Development Bank of the PhilippinesDOE = Department of EnergyERR = Economic Rate of ReturnICC - Investment Coordinating CommitteeICR= Implementation Completion ReportingIPPs = Independent power producersKfW = Kreditanstalt fur WiederaufbauMERALCO = Manila Electnrc CompanyNEDA = National Economic Development AuthorityNPC = National Power CorporationOECF = Overseas Economic Cooperation Fund

Acting Vice President Hope, Nicholas C.Director Khalilzadeh-Shirazi. JavadActing Division Chief Farhandi, MohammadTIask Manager Irving, John

FOR OFFICIAL USE ONLY

Table of Contents

PREFACE .......................................... :.iEVALUATION SUMMARY. ii

PART I PROJECT IMPLEMENTATION ASSESSMENTA. STATEMENT/EVALUATION OF OBJECTIVES .IB. ACHIEVEMENT OF OBJECTIVES ... 3C. MAJOR FACTORS AFFECTING THE PROJECT .4D. PROJECT SUSTAINABILITY .... 5E. BANK PERFORMANCE .5F. BORROWER PERFORMANCE .6G. ASSESSMENT OF OUTCOE .7H. FUTURE OPERATION .7I. KEY LESSONS LEARNED .8

PART II STATISTICAL ANNEXESANNEX A: STATISTICAL TABLES . . . 9

TABLE 1: SUMMARY OF ASSESSMENT ............................................. 9TABLE 2: RELATED BANK LOANS .............................................. 10TABLE 3: PROJECT TIMETABLE .............................................. 1 TABLE 4: CREDIT DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL .. 1................ I TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION ............................................. 12TABLE 6: KEY INDICATORS FOR PROJECT OPERATION (A TO E) ............................................ 1 6TABLE 7: STuDiES INCLUDED IN PROJECT ............................................. 20

TABLE 8A: PROJECT COSTS .. 21TABLE 8B: PROJECT FINANCNG .. 21TABLE 9: ECONOMIC COSTS AND BENEFrrS ....................................... 22TABLE 10: STATuS OF LEGAL COVENANTS ................. .. .................... 23TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS ................................... 24TABLE 12: BANK RESOURCES: STAFF INPUTS . ........................................ 24TABLE 13: BANKRESOURCES: MISSIONS ........................................ 25

APPENDIXES:

A. FOLLOW-UP LETrER TO ICR MISSION .26B. BORROWER CONTRIBUTION TO THE ICR .27C. BORROWER COMMENTS TO THE ICR .34D. MAP(IBRD21390) .38

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.

IMPLEMENTATION COMPLETION REPORTPHILIPPINES

MANILA POWER DISTRIBUTION PROJECT

Preface

This is the Implementation Completion Report (ICR) for the Manila Power DistributionProject in the Republic of the Philippines, for which Loan 3084-PH in the amount of US$65.5 millionequivalent was approved on June 8, 1989 and made effective on November 17, 1989.

Loan 3084-PH closed on June 30, 1996 compared with the original closing date of June 30,1995. Final disbursement is expected to take place by December 30, 1996, at which time a balance ofUS$ 5.673,769.92 will be canceled.

The ICR was prepared by Ephrem Asebe, Consultant, EA1IN, under the supervision of JohnIrving, Senior Power Engineer, Infrastructure Operations Division of the East Asia & Pacific Region,Country Department I. It was reviewed by Mr. J. Shivakumar, Chief, Infrastructure OperationsDivision, and Mr. Walter Schwermer, Project Adviser. The borrower provided its comments that areincluded as appendices to the ICR.

Preparation of this ICR began during the Bank's supervision mnission in February 1996 followedby an ICR mission in October, 1996. It is based on material in the project file. The Borrowercontributed to the preparation of the ICR by preparing its own evaluation of the project's executionand commenting on the draft ICR.

iiMANILA POWER DISTRIBUTION PROJECT

(Loan No. 3084-PH)

PHILIPPINES

Evaluation Summary

Background & Project Objectives:

i. Manila Electric Company (MERALCO) is the major private distribution firm which serves MetroManila and the surrounding area. Much of the present project was initially appraised in August 1987 as acomponent of the Bacon-Manito Geothermal Power Project. However, the loan negotiations weredelayed until an arrangement for channeling the proceeds of the Bank loan to MERALCO was workedout. With the successful restructuring of the Development Bank of the Philippines (DBP), the project wasre-appraised and a financing mechanism agreed whereby DBP would borrow from the Bank and relend thefunds to MERALCO to finance a component of its five year program (1989-93).

ii. The objectives of the project were to improve MERALCO's subtransmission and distributionsystems, facilitate better communications between substations, and revitalize the organization'smaintenance. In so doing, the project was expected to enable the company to meet increasing loaddemands in the coming years, reduce losses and ensure more effective distribution of electricity within itsfranchise area and support improvement of MERALCO's technical and commercial operations.

iii. The main components of the project were: a) construction and upgrading of the subtransmnissionlines, and addition of substation capacity; b) construction and upgrading of distribution systems; c)improvement and expansion of the radio-multiplex facilities for system monitoring and control; d)provision of equipment and vehicles to improve maintenance; and e) action programs designed to reducesystem losses, enhance system reliability and improve management of accounts receivable and payable.

iv. The project objectives as defined in the SAR were clear. They were important for the overallachievement of the Government's energy sector strategy plan. The design of the project was appropriatewith clearly set targets to be achieved. The main anticipated challenges: a) occasional liquidity constraintswhich are normal to public utility companies; b) procurement delays; and c) delays in acquisition of right ofways were not foreseen to be beyond the capability of the organization. However, the real challenge camefrom another source, delays in decisions being taken by MERALCO on the appropriate primarydistribution system voltage level.

Implementation Experience and Results.

v. The project appears to have made a greater contribution to the overall fulfillment of the energysector strategy objectives than to the specific project targets of the Manila Power Distribution Project.With respect to the former, the project was successful in advancing the overarching objectives of theenergy sector i.e., implementing a least-cost energy sector strategy; achieving a break-through in privatesector participation in the Philippines' energy sector; mobilizing adequate financial resources; implementing

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regionalization, decentralization and separation of generation, transrmission, distribution activities intoseparate companies or profit centers.

vi. More specifically, the project's most significant achievement is the demonstration of a key tenet ofthe Bank's Country Assistance Strategy: providing assistance to enable the private sector increase itsinvolvement in the development of a key infrastructure sector without further resort to official assistance.In the case of MERALCO, which was precluded from borrowing from the market since 1986, the merefact that the Bank was willing to participate in such an arrangement in 1987 opened the door for moredevelopment funding from KfW, OECF between 1988 and 1990, as well as funding from [FC in 1988.MERALCO resumed borrowing from the market in 1990, and since then it has made a highly successfulpublic offering of its common stock with 65 percent being traded internationally and 35 percentdomestically. Its stock price has doubled compared to initial offerings and has remained at about that level.Today, MERALCO no longer needs official development finance. It now meets its financial needs fromthe international commercial markets.

vii. With respect to the specific objectives of the Bank financed component of the five-yeardevelopment program, an initial significant system loss reduction, from 22 percent to 14.8 percent, wasachieved during the preparation phase of the project. By the end of 1995, subsequent improvement in lossreduction reached 13.0 percent. The technical loss portion alone has declined from 11 percent in 1986 to8.6 percent in 1995. Further loss reduction is expected when the additional investments in the distributionsystem are in full service. Reliability of the system was also much improved. The system interruptionfrequency rate which rose from 48.8 in 1985 to 278.8 in 1993, during the period of energy brownout, hasdeclined back to 48.8 in 1995. Better coordination and control between substations were realized. Theorganization's maintenance was revitalized. Some improvement in the management of accounts receivableand payable have been achieved. Overall, the re-estimated ERR for the 1998- 1993 program was 59percent compared to the 32 percent estimated at appraisal.

viii. However, project completion was delayed relative to the original schedule. The most significantdelay resulted from management's desire to have a second opinion on the appropriate long-termdistribution system voltage level, causing the completion dates of various subprojects to slide from theoriginal schedule. As the Bank assumed that the decision on system design standard had been made byMERALCO, the implementation schedule in the appraisal report did not reflect the time needed to reach aconsensus on that standard. Also, the 1991-93 brownouts in NPC power generation were a majordistraction for MERALCO's management. Other contributing factors to the delays include MERALCO'slack of experience with the Bank's procurement guidelines and the major expansion and reorganization ofthe company since 1988; and further, the company has also reported that it encountered problems insecuring available land for substations and right of ways during implementation.

ix. The Bank's role in project identification was highly satisfactory. It was carried out on the basis ofthe Energy Sector Study (Report 7269-PH), over an extended period in the context of the Philippineeconomic recovery. The Bank's assistance to the borrower in the preparation phase was satisfactory.How-ever, while Bank support for preparation with respect to financial and procurement matters wasstrong, initial support for the engineering aspect of the work was weak. The Bank only learned in early1992 that a firm decision on the distribution system design standard had not been made; this was well into

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the implementation phase of the project. This issue had been left hanging mainly because of lack ofcontinuity of supervising engineers. Thus, although the Bank team did not foresee the consequence of thedelay in the system design decision, in other respects, both appraisal and supervision were satisfactory.

x. The Borrower's preparation and implementation of the project can also be considered to have beensatisfactory. As noted above (para. viii), delayed choices in primary distribution system affected allsubsequent phases of the implementation work: preparation of detail design, specifications and evaluationsof bids, etc. Early in the project preparation phase, administrative, legal and technical measures weretaken to reduce the system losses from 22 percent to 14.8 percent within eighteen months. Systemreliability also significantly improved over the course of the project implementation. MERALCO hasproved that it has mastered the bid evaluation process in the course of implementation as evidenced fromthe Bank's note of appreciation for the high quality of its bid evaluation.

ix. The benefits of the project are likely to be sustained. In fact, the fill benefits will be realized whenthe ongoing subtransmission and substation are put into service by 1998. The official develop-ment financeMERALCO secured has opened up opportunities for the company to access loans from domestic andinternational sources, which further enhance the sustainability of the project benefits.

xii. Overall, the project outcome is satisfactory. The recalculated ERR of 59 percent forNIERALCO's 1989-93 program is high despite some lag in putting into service some of the Bank-financedsubprojects at the closing of the loan. Implementation is progressing, and the project will achieve well-integrated transmission and distribution systems which are likely to result in further reductions in systemlosses, higher system reliability of supply to existing customers, provision of additional distribution capacityto satisfy demand, and overall operational efficiency.

Summary of Findings, Future Operations, and Lessons Learned

xiii. The most important finding of the implementation experience is that the Bank should develop akeen sense of understanding of the concerns of the private sector to be able to help its development. Muchof the delays could have been foreseen and a realistic implementation plan prepared if the Bank haddetected the delays in the company's decisions on the design standards either during preparation or atappraisal.

xiv. MERALCO's main indicators of the success of its future operations remain the same as its currentones: minimization of system losses, achieving high level of system reliability, and more efficientmanagement of its accounts receivable and payable.

xv. In designing future Bank projects with on-lending to private borrowers, the Bank may needto study the behavior of the private sector's decision making process towards official development finance.A proper understanding of the private sector may be vital, to find out the level of private sectorcommitment and how it is expressed. For example, in MERALCO's case, the time lost in seekingInvestment Coordinating Committee (ICC) and National Economic Development Authority (NEDA)approval could have been read as a signal that MERALCO was not as prepared as it should have been toimplement the project as anticipated at appraisal.

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xvi. The critical issue facing the distribution utilities is to become sufficiently credit-worthy tosecure loans and equity capital on their own in the capital market. As in the case of MERALCO,available official development finance can help them begin that process. The problem is one of devisinglegally appropriate transitional financing mechanisms for channeling development finance. To theextent that some of the remaining 145 distribution companies in the Philippines, representing some 40percent of the distribution capacity, become credible borrowers through consolidation program, DBPcould serve as a channel for development finance to recast their operations and finances to be able tomeet their future development finance from the market.

MANILA POWER DISTRIBUTION PROJECT(Loan No. 3084-PH)

PHILIPPINES

PART I: IMPLEMENTATION ASSESSMENT

A. STATEMENT/EVALUATION OF OBJECTIVES

1. Background. The Philippines' electric power industry is now divided into three segments: a)generation, b) transmission, and c) distribution. While National Power Corporation ( NPC) wasdominant in generation, it is likely to reduce its role in the future as Independent Power Producers'(IPPs) take over new generation. NPC is expected to be responsible for transmission through anumber of grids that serve virtually the entire country except for remote rural areas and small outlyingislands. MERALCO is the major private distribution firm which serves Metro Manila and itssurroundings, and accounts for about 70% of NPC's sales in Luzon and about 59% of NPC's salesNation-wide. Today, MIERALCO is the biggest of 146 electricity distribution companies in thePhilippines and rates as the fourth largest industry in terms of gross revenue in the country.

2. The Manila Power Distribution Project loan was the third in a series of Bank Group-financedprojects to MERALCO, the first two of which were made by the International Finance Corporation(EFC). IFC's first loan to MERALCO was for US$12.0 million equivalent in 1967. The second wasfor US$32 million equivalent in 1988 intended to finance a time slice of MERALCO's investmentprogram between 1989 and 1991. Much of what is Manila Power Distribution Project was initiallyappraised in August 1987 as a component of the Bacon-Manito Geothermal Power Project (Loan2969-0-PH and 2969-1-PH). However, the MERALCO's component of the Project was droppedfrom the loan because, under the Foreign Borrowing Act of the Philippines, the government isprecluded from guaranteeing directly the indebtedness of private institutions. The loan was delayeduntil an arrangement for channeling the proceeds of the Bank loan to MERALCO, acceptable to theGovernment, MERALCO, and the Bank, was worked out.

3. With the successful restructuring of Development Bank of the Philippines (DBP) andsubsequent designation of DBP as the nation's wholesale bank, the parties agreed that DBP was in aposition to serve as a conduit for official foreign loans to private sector companies, with a waver of thesingle borrower lirnit by the Monetary Board. Accordingly, the project was reappraised under the newcondition whereby, DBP would borrow from the World Bank and relent the funds to MERALCO tofinance its five year development program (1989-93) under terms that include a twenty year maturityand a five year grace period, and a fixed spread not to exceed 3.65% over the Bank's interest rates.

4. Project Objectives. As stated in the Bank Staff Appraisal Report, the objectives of ManilaPower Distribution Project were to: improve MERALCO's subtransmission and distribution systems,facilitate better communications between substations, and revitalize the organization's maintenancecapabilities. In so doing, the project would enable the company to meet increasing load demands in thecoming years, reduce losses, and ensure more efficient distribution of electricity within its franchise

2area. The proposed project would also support improvement of NERALCO's technical andcommercial operations.

5. Project Components. The main components of the Project were: a) construction andupgrading of the subtransmission lines, and addition of substation capacity; b) construction andupgrading of distribution systems; c) improvement and expansion of the radio-multiplex facilities forsystem monitoring and control; and d) provision of equipment and vehicles to improve maintenance.In addition, the project incorporated action programs for reducing system losses and, improving systemreliability, accounts receivable and payable

6. Evaluation of Objectives. The project objectives, as defined in the SAR, were clear.Identified project components were clearly tied with each of the project objectives. The expectedbenefits from achievement of the objectives had measurable qualitative and quantitative targets. Forexample, system losses were targeted to be reduced to 9 percent by 1993 from 22 percent in 1987,which was on the high side. The capacity to meet increasing load demand was also quantitativelydefined. System reliability was to improve through relieving line over-loading, reinforcing existinglines, improving operational flexibility and providing alternative sources of power and capacity forgrowth.

7. The project objectives were also important for the overall achievement of the Government'senergy sector strategy, which the Bank supported through a number of generation and transmissionprojects. At the time, the overarching concerns of the Bank were mobilizing sufficient resourcesthrough private participation to remove the energy constraints on the growth of the Philippines'economy. The Bank sought to revitalize economic growth, improve the efficiency of the publiccorporations and accelerate privatization in the energy sector. MERALCO's investment in distributionsystem was designed to supplement the government least-cost strategy in transmission, generationprojects, and sector coordination. The government was persuaded to guarantee the loan to supportsubstransmission and distribution system extensions and improvements to help ensure that MERALCOmaintained investment at the appropriate level. The channeling of the loan through DBP was also animportant objective of the Bank, as it would enhance DBP's role as a new wholesale bank for theprivate sector.

8. The project was well designed with clearly set targets to be achieved. First, the load forecastfor Luzon and for MERALCO were assessed. Second, estimated system loss reductions weretargeted. Third, the expected operational and commercial targets were forecasted. Accordingly, retailpower tariffs in the Manila area were indexed with NPC tariffs, and the exchange rate to provideMERALCO a rate of return higher than 8% based on agreed levels of losses, expected to decline overthe subsequent five years. Finally, these targets were to be made part of the loan covenants and subjectto regular review of Bank supervision.

9. The project was neither complex nor demanding for the implementing agency. There were fewspecial institutional changes foreseen which the beneficiary had to undertake as part of Bankconditionality i.e. reduction of system losses, improving reliability and efficiency of management ofaccounts receivable and payable. The main anticipated challenges: a) occasional liquidity constraints

normal to public utility companies, b) procurement delays, and c) delays in acquisition of right ofways, were foreseen to be not beyond the capability of the organization. However, the real challengecame from another source; delays in the decision being taken on the appropriate long-term primarydistribution system voltage level.

B. Achievement of Project Objectives

10. Overall, the project appears to have yielded a greater contribution to the fulfillment of theenergy sector strategy objectives than to the specific project targets. With respect to the former, theproject was successful in advancing the overarching objectives of the energy sector. i.e., implementinga least-cost energy sector strategy. This was achieved through: major investments in generation andtransmission (Bacon-Manito and the Energy Sector Loans, see table 2 Related Bank Loans) withappropriate complementary investment; achieving a break through in the private sector participation inthe Philippines energy sector; mobilizing adequate financial resources for financing of the private sectorincluding developing DBP as a wholesale Bank; and moving towards decentralization and separation ofgeneration, transmission, distribution activities, into separate companies or profit centers.

11. More specificaUly, the most significant achievement of the project is the demonstration of a keytenet of the Bank's Country Assistance Strategy: providing assistance to enable the private sectorincrease its involvement in the development of a key infrastructure sector without further resort toofficial assistance. In the case of MERALCO, which was precluded from borrowing from the capitalmarket since 1986, the mere fact that the Bank was willing to participate in such an arrangement in1987 opened the door for more development funding from KfW, OECF between 1988 to 1990, as wellas funding from IFC in 1988. MERALCO resumed borroving from the market in 1990, and sincethen it has made a highly successful public offering of its common stock with 65 percent being tradedinternationally and 35 percent domestically. Its stock price has doubled compared to initial offeringsand has remained at about that level. The financial restructuring of MERALCO resulted in raising ofnew equity capital and retained earnings. Today, MERALCO no longer needs official developmentfinance. The Bank's inter-mediation has helped catalyze MERALCO's access into internationalmarkets for financing its investments.

12. With respect to the non-financial objectives of the project, an initial significant reduction, from22 percent to 14.8 percent, was achieved during the preparation phase of the project. By year-end1995, subsequent improvement in loss reduction reached 13.0 percent. The technical loss portionalone has declined from 11 percent in 1986 to 8.6 percent in 1995. Further loss reduction is expectedwhen the additional investments in the distribution system are in full service. Reliability of the systemwas also much improved. System interruption frequency rate which was 48.8 in 1985 rose to 278.8 in1993 during the period of energy brownout but has declined back to 48.8 in 1995. Better coordinationand control between substations were realized with the implementation of the telecommunicationcomponent of the project. The provision of equipment and vehicles helped revitalize the organization'smaintenance capabilities. Some improvement in the management of accounts receivable and payablehas been achieved.

413. The re-estimated econornic rate of return for the project is 59 percent, significantly higher thanthe SAR estimate of 32 percent not withstanding the delays in the implementation of some of thesubproject components.

C. Major Factors Affecting the Project

14. There were several internal and external factors which contributed to the delays inimplementation. The most important factor affecting the timely realization of the project's objectives,was the delay experienced in making the decisions on the appropriate long-term system voltage level ofthe primary distribution system of MERALCO. Progress from design to the procurement phase wasrather slow as the company management tried to search for a design standard to optimize itsdistribution system operation. MERALCO was initially enthusiastic to get a Bank loan to finance theproject. Preparation of designs of the project did not, however, progress after the Bank and thegovemment agreed to drop the project after failing to find an appropnrate mechanism to channel theloan. The false start created skepticism that the project would come through. When a financingmechanism was finally found with DBP serving as a conduit for channeling the Bank loan toMERALCO, MERALCO was still skeptical that the project would get the loan. As a result,MIERALCO did not follow through nor made the critical system choice decisions to get ICC andNEDA clearance.

15. On the other hand, the Bank being at the early stage of its dealings with the private sector,appeared not to have understood correctly the significance of the delays MERALCO was experiencingin getting clearance from ICC and NEDA. In retrospect, the lack of clearance by ICC and NEDAshould have served as a signal that MERALCO's management was not committed to the project's timetable. In fact, MNERALCO's management was awaiting the results of the Voltage System Study to geta second opinion on the choice of primary distribution system, six months after the project had beendeclared effective. MERALCO's management was also uncertain about the progress on the generationand transmission expansion being executed by NPC.

16. MERALCO's lack of experience with the Bank's procurement procedures also led to somedelays at different stages of the process (e.g. preparation of specifications, bid opening, contractsignature). The fact that since 1988, MERALCO has been undergoing major reorganization andexpansion, including operationalization of the three regions, introduction of total quality managementand re-engineering, had detracted management's attention from the project. The company has alsoreported that it encountered problems in securing available land for substations and right of waysduring project implementation. The Govemment's reluctance to approve necessary tariff increases toosoon after the 1989 December Coup d'etat, also caused MERALCO to fail to comply the 8% rate ofreturn on its re-valued assets requiring Bank's agreement to waive the 8% rate of return covenant for1990.

5D. Project Sustainability

17. The project is likely to sustain the benefits generated by its components. In fact, the full benefitof the project will be realized when most of the ongoing subtransmission and substation works arecompleted and put into service by 1998. The official development finance MIERALCO secured hasopened up opportunities for the company to get access to loans from domestic and internationalsources. Despite the limit on the level of its borrowings because of country risks, MERALCO is left ina better position to mobilize resources than it was before the loan. MERALCO has also substantiallyimproved its maintenance capabilities. For example, when Typhoon Katring hit its franchise area onOctober 21, 1994, causing a total system blackout, MERALCO was able to restore service in 79% ofits 529 circuits within 24 hours and in 97% in six days.

E. Bank Performance

18. Identification. Project identification was highly satisfactory being carried out over anextended period in the context of the Philippine economic recovery. The Energy Sector Study (ReportNo. 7269-PH) provided the framework for the identification of MERALCO's five year (1989-93)investment program. Optimization of the company's five year program was conceived within the long-term development framework of the Philippines energy sector. The integration of MERALCO'sprimary distribution system with NPC's transmission was a significant step in the optimization of theoverall power system efficiency.

19. Preparation. Bank assistance to the borrower in the preparation phase can be consideredsatisfactory. During the preparation phase, the Bank focused on assisting the Government to establishan acceptable financing mechanism for channeling official development finance to the private sector,and at the same time finding a less complicated and inexpensive syndication scheme for MERALCO.The Bank's financial analyst played a prominent role in finalizing the financial aspects of the loan.Although the Bank's preference was a direct loan to MERALCO, the Govemrnment was not preparedto guarantee direct loans to private companies. In the end, the Bank and the Govemment agreed tochannel the loan through DBP, and avoided the syndication scheme through a waver of singleborrower limit. Unfortunately, MERALCO did not continue making progress in the critical designphase of the work, after the project was dropped from the Bacon-Manito Project, while the Bankassumed that the design was progressing well. This misreading of the company's readiness forimplementation had unintended consequences on the Bank's design of loan conditionality,implementation schedule, and resource allocation for supervision.

20. Appraisal. The Bank's performance in the project appraisal phase can be consideredsatisfactory. To be sure, the financial packaging and lending instruments were adequate andappropriate. MERALCO's operational problems of system losses, system reliability and efficiency inthe management of accounts receivable and payable were diagnosed early when the project was firstappraised as part of the Bacon Manito project. Remedial measures required to reduce system losseswere undertaken before project appraisal. A significant reduction of system losses from 22 percent to14.8 percent was attained between August 1987 and December 1987. Measures were being

6undertaken to improve perfornance of system reliability, accounts receivable and payable. Bank staff,being in the early phase of lending to the private sector, appeared to have overestimated MERALCO'sreadiness with the design of the distribution system, its technical capacity to deal rapidly with thechanging conditions of demand growth, and its technical capacity to adopt the specification tocoordinate its subtransmission plans into the new generation and transmission capacities of NPC.Moreover, because of this misperception by Bank staff during the appraisal phase of the project,MERALCO's problem of implementation was wrongly identified to be a procurement problem, when,all along, it was lack of progress in the design phase.

21. Supervision. Overall, Bank supervision was satisfactory. The first supervision mission wasundertaken between November 19 and December 12, 1990. Earlier, in March 1990, the reportingsystem to be used was agreed upon. Subsequent supervision visits were of limited scope and focusedon the procurement and financial aspect of implementation. Since at appraisal the Bank saw notechnical risks in the implementation of the project, both the transmission and distribution componentswere considered to be within the technical and managerial capabilities of MERALCO. As a result,while enough attention was paid to the supervision of the procurement and financial aspects of projectimplementation, supervision of the engineering aspect was negligible. The Bank only learned in early1992 that a firm decision on the distribution system design standard had not been made; this was wellinto the implementation phase of the project. This issue had been left hanging mainly because of thelack of continuity of supervising engineers. In retrospect, this was unfortunate. The Bank should havecarefully scrutinized the design and implementation of the technical aspects of the project, just as itwould supervise a public enterprise. A more careful follow up of the engineering phase would havehelped to uncover the reason behind the lack of progress in project implementation.

F. The Borrower Performance

22. Preparation. The Borrower's preparation of the project can be considered satisfactory. Asnoted above, the delay in selecting a primary distribution system affected all subsequent phases of theimplementation works including preparations of detail design specifications and evaluations of bids.Because of the uncertainties over the availability of Bank loan, MERALCO had not made enoughprogress in performing appropriate design studies. Consequently, these delays had cascading effects oncompletion dates of the sub-components of the project.

23. Implementation/Operation. The Borrower's implementation of the project has beensatisfactory. Early in the project preparation phase, administrative, legal and technical measures weretaken to reduce the system losses from 22 percent to 14.8 percent within eighteen months, althoughsubsequent improvements were marginal. System reliability also significantly improved over the courseof project implementation. initially, MERALCO had its attention deflected from implementation dueto the critical supply situation when NPC was experiencing brownouts. The construction of the threebulk delivery 230 kV- I 15 kV substations namely Calauan, Sta. Rosa and Duhat were delayed; butthese are expected to be completed by December 1996. Six other substations are expected tocommence in 1997. With respect to the transmission line projects, the Balintawak leg of Marikina-Novaliches-Balintawak line and Gardner-Pamplona line were completed after delays of two years and

7one year respectively. Dolores-Marikina 115 kV line is expected to be completed in June 1996. Other115 kV line subprojects delayed included: Sta. Rosa-Balibago line expected to be in service inDecember 1996, Gardner-MCCRRPI in September 1996, and Araneta-Sta. Mesa in October 1988.

24. Under the project, MERALCO has demonstrated increasing intuitional capacity in managingprocurement, accounting and other project activities. In particular, its demonstrated capability withBank bid evaluation process was exemplary. This was evident from a letter the Bank wroteappreciating the high quality of its bid evaluation performnance, and requesting MERALCO if it wouldobject to the Bank sharing MERALCO's high quality works with the Bank's clients as a model forgood practice. Moreover, by diligently practicing ICB, MERALCO was able to get savings of morethan 10 % in the prices of goods procured under the loan. Also when the borrower, the DevelopmentBank of the Philippines, was delinquent with regard to reporting of its June 30, 1990 audited annualaccounts and the reporting of activities in Special Account established for the project, MERALCOassumed the responsibility for the Special Account successfully.

G. Assessment of Outcome

25. Taking into account the earlier delays, overall, the project outcome can be consideredsatisfactory. The recalculated ERR of 59 percent is high although some of the subprojects of the five-year program financed under the loan are still ongoing at the closing of the loan. Implementation isprogressing, and it appears likely that the project will achieve a well integrated transmission anddistribution system which is more reliable and with reduction of system losses, increased systemreliability and operational efficiency.

H. Future Operation

26. MERALCO's main indicators of success of its future operations remain the same as its currentones, minimization of system losses, achieving high level of system reliability, and more efficientmanagement of its accounts receivable and payable. MERALCO, as a private public company, is keenon sustaining higher than the 8 percent rate of return on re-valued assets. With respect to the timingfor OED evaluation of the project, early 1999 may be appropriate. This will be the most probable dateto find out if the full targets for the system losses and efficiency of services are attained.

I. Key Lessons Learned

27. NMERALCO's experience has two significant lessons for designing and implementation offuture projects in the infrastructure sector:

(i) In designing future Bank projects with on-lending to private borrowers, theBank may need to study the private sector's decision making process towards

8

official development finance. A proper understanding of the private sector tofind out the level of commitment and how it is expressed may be vital. Forexample, in MERALCO's case the time lost in seeking ICC's and NEDA'sapproval could have been read as a signal that MERALCO was not as preparedas it should have been to implement the project as anticipated at appraisal.

(ii) The critical issue facing the distribution utilities is to become sufficientlycredit-worthy to secure loans and equity capital on their own in the capitalmarket. As in the case of NERALCO, available official development financecan help them begin that process. The problem is one of devising legallyappropriate transitional financing mechanism for channeling the developmentfinance. To the extent that some of the remaining 145 distribution companies inthe Philippines, representing some 40 percent of the distribution capacity,become credible borrowers through a consolidation program, DBP could serveas a channel for development finance to recast their operations and finances to beable to meet their future development finance from the market.

9 Anncx A

IMPLEMENTATION COMPLETION REl'ORT

i'lllLIPi'lIN'ES

.MIERALCO POWER DISTRIBUTION COMPANY

I'ART II: STATISTICAL ANNEXES

ANNEX A: STATISTICAL TA1LES

(Loan 3084-1I11)

Tahilc 1: Siimmary of,Assesimcit

A. AVchievrmcnt folltirc ctiv SunbstnlniAl Pairfi;il NcyliONbc !

Macroeconomic policies a ooSector policies o o oFinancial objectives 00 °

lnstitutional dcveiopmcnt 0 E ElPhysical objectives 0 0 ° Poverty rcduction E E ElGendcr conccrns a o oOther social objectives o El ElEnvironmental objectives 0 E ElPublic sector managcmcnt 0 0 0El

I'rivate sector development El E ElEcunomic benetiLs 17E E o

11. Ir~rr r 'licct Snin:mhiIity Ii.kchl Unlikch. LInccrt;min

V/) (1) (1)

C. lnnlrk l'crtormimanre IfjJlj

Satikfactorx ,Cnlisfactanv Dcfiocicnt

II! (1) (/)ldcntitication El ElPrcparation assistancc l E lAppraisal o 5 Supervision El 0

D. Ihm%rnmur 1'crforfnnli tlinly

SalifiHtaory Safisfcrtry Dfici

(I) (1) 0

Prcparation 0 , 5

Implementation E ,0 0

Covenant compliance El 0

Opcration l 5 El

10

Table 2: Related Bank Loans

Loan/credit title Purpose Year of StatusapprovalI

Preceaing operations

Loan 2201-PH & 2202-PH Promote private oil companies in petroleum 1982 ClosedPetroleum Exploration Promotion exploration and strengtren the explorationproject capabilities of Bureau of Energy and PNOC

Loan 2203-PH Geothermal Improve national strategy for geothermal 1982 ClosedExploration Project exploration, government geothermal development

policy and institutions: facilitate private involvementin geothermal exploration etc.

Loan 2969-PH Support the least cost source incremental capacity 1988 ClosedBacon-Manito Geothermal Power for Luzon grid: and strengthen institutionalProject capabilities and financial viability

Following operations

Loan 3163-PH Orient the development strategy of the energy 1990 ClosedEnergy Sector Project sector-National Power Corporation component

Loan 3164-PH Orient the development strategy of the energy 1990 ClosedEnergy Sector Project sector-Philippines National Oil Corporation

component

Loan 3165-PH Orient the development strategy ot the energy 1990 ClosedEnergy Sector Project sector-Government component (DOE, ERB. EMB.

NEA)

JEXIM NPC-JEXIM component of First phase of a least-cost energy sector 1992 ActiveLoan 3163-PH development program

Loan 3439-PH Rural Electrification Enhance National Electrification Administration's 1992 ActiveRevitalization Project effectiveness. REC's Investment Program for

1992-95

L3626-PH NPC-Power Alleviate power shortage in Luzon 1993 ActiveTransmission & RehabilitationProject

Loan 3700-PH, Loan 3702-PH Develop geothermal resources for power 1994 ActiveNPC-Leyte-Cebu Geothermal generation, strengthen institutions and their financialProject viability.

Loan 3746-PH/Loan 3747-PH NPC- Develop geothermal resources for power 1994 ActiveLeyte-Luzon Geothermal Project generation, strengthen institutions and their financial

viability

Loan 3997-PH Power Support the Government's plan to restructure the 1996 ActiveTransmission & Rehabilitation National Power Corporation and power sector

,, privatization

I I

Table 3: Project Timetable

Steps in project cycle Date planned Date actual/latest estimate

Identification/preparation/appraisal N/A August 1987

Reappraisal October 1988 October 1988

Reappraisal November 1988 October 1988

Negotiations March 1989 November 1989

Board presentation May/June 1989 June 8, 1989

Signing N/A August 2, 1989

Effectiveness N/A November 17, 1989

Project completion N/A October 1996

Loan closing (Loan 3084-PH)) June 30, 1995 June 30, 1996

Table 4: Loan Disbursements: Cumulative Estimated and Actual(USS million)

Bank FY FY90 FY91 FY92 FY93 FY94 FY95 FY96

Appraisal estimate 0.5 6.4 19.2 36.2 50.2 65.5

Actual 0.5 5.6 7.9 30.0 43.4 56.0 59.1

Actual as % of estimate 100 87.5 41.1 82.9 86.4 85.5 90.2

Date of final disbursement N/A ( up to Oct. 31, 1996)

12

Table 5: Key Indicators for Project Implementationa) 115 KV Subtransmisslon

Key dates - SIS Key Dates - Lines

Project Component Appraisal Actual Delays (months) Appraisal Actual Delays(months)

BALINTAWAK LEG OF 1 6/89 10/90 9 6/89 6/89 -

MARIKINA - NOVALICHES - 2 9/89 8/91 23 3/90 6/90 3

BALINTAWAK LINE 3 4/90 9/92 17 12/90 3/91 3

Associated substation: Balinlawak 4 12/90 12/92 24 2/91 12/92 10

DOLORES - MARIKINA LINE' 1 1/92 2/92 (1) 2/92 6/89 (32)

2 4/92 5192 1 5/92 6/90 (24)

Associated substations: 3 11192 4/93 5 4/93 3/91 (24)

Dolores. Marikina 4 10/93 6/98 56 10193 5/96 31

ARANETA - STA. MESA LINE 1 1/91 7/96 66 2/92 2/92 (-)

2 4/91 12/96 68 5/92 5/92 (-)

Associated substations: 3 11/91 5/97 66 4/93 4193 (-)

Araneta. Sta. Mesa 4 6/92 9/98 75 10/98 10/98 (-)

GARDEN - MCCRRPI LINE.- 1 2/90 3/92 25 2/90 6/89 (8)

2 5/90 4/93 36 5/90 6/90 1

Associated Substations: 3 12/90 4/94 41 4/91 3/91 (1)

Gardner, MCCRRPI 4 12191 11/97 72 12/91 9/96 57

GARDNER - PAMPLONA LINE 1 1/92 N/A N/A N/A 6/89 N/A

2 4/92 NA NA NA 6/90 N/A

3 11192 N/A NIA N/A 3/91 N/A

4 12192 N/A NIA N/A 5/94 N/A

STA. ROSA -BALIBAGO LINE.-- 1 1/92 NIA N/A 2/92 6/89 (20)

2 4/92 11/91 NA 5/92 6/90 (23)

Associated substations: 3 11/92 8/92 N/A 4193 3/91 (25)

Sta. Rosa, Balibago 4 6/93 7/96 N/A 6/93 5/96 35

KEY DATES: 1. BID INVITATION; 2. CONTRACT AWARD: 3. PROCUREMENT COMPLETION; 4. IN SERVICE

NOTES: Replaces the former NGC - PARANG LINESubstation project is now covered by NPC's KfW ProjectGARDNER - MCCRRP1 LINE is part of GARDNER - KAMAGONG LINE

*--- Replaces the former BINAN - BALIBAGO LINE

(x) Indicates project activities completed ahead of time.(-) Indicates project activites which complete on time

1 3

Table 5: Key Indicators for Project Implementationb) Substation Component

Key Dates - S/S Key Dates - LinesProject Component Appraisal Actual Delays Appraisal Actual Delays

(months)6) (months)6)1. MCCRRPI SUBSTATION 1 6/89 3/92 33 6/89 12/93 54

2 9/89 4/93 43 9/89 9/94 60Associated lines 3 8/90 4/94 44 4/90 4/95 60(115KV.&34.5KV) 4 12/90 11/97 83 12190 11/97 83

2. CALAUAN SUBSTATION 1 6/89 10/90 16 6/89 12/93 542 9/89 8/91 23 9/89 9/94 60

Associated lines 3 8/90 11/92 27 4/90 4/95 60(230KV & 115KV) 4 12/90 7/96 67 12/90 7/96 67

3. TAYABAS SUBSTATION') 1 6/89 See Footnote 1 6/89 See Footnote 12 9/89 9/89

Associated lines 3 8/90 4/90(230 KV 6 34.5 KV) 4 12/90 12/90

4. DUHAT SUBSTATION2" 1 2/90 10/90 8 6/89 6/89 H2 5/90 8/91 15 9/89 6/90 9

Associated Lines 3 4/91 3/93 23 12/90 3/91 3(230KV. 115 KV. 34.5 KV. 13.8KV) 4 12/91 10/96 70 12/91 10/98 58

5. PARANG SUBSTATION 1 2V91 DEFERRED 1/91 DEFERRED2 5/91 See Footnote 3) 4/91 See Footnote 3)

Associated lines 3 4/92 11/91(115KV&34.5KV) 4 10/92 10/92

6. ARANETA SUBSTATION'' 1 2/90 See Footnote 3) 1/91 See Footnote 3)2 5/90 4/91

Associated lines 3 4/91 11/91(34.5 KV) 4 5/92 5/92

7. S. M. SUBSTATION 1 6/89 3/92 33 6/89 12193 562 9/89 4/93 43 7/89 9/94 62

Associated lines 3 8/90 4/94 42 4/90 8/95 84(115KV&34.5KV) 4 11/90 11/95 60 11/90 11/95 60

8. BALINTAWAK SWITCHYARDS 1 2/90 10/90 8 2/90 6/89 (8)2 5/90 8/91 15 5/90 6/90 1

Associated lines 3 4/91 9/92 17 12190 3/91 3(230 KV& 115KV) 4 10/91 12/92 14 11/91 12/92 13

9. SAN MIGUEL SUBSTATION 1 6/90 10/90 4 2/90 N/A2 11/90 9/91 10 5/90 N/A

Associated lines 3 4/91 8/92 16 12/90 12/91 12(69 KV & 13.8 KV) 4 11/91 12192 13 11/91 12/92 13

10. LOS BANOS SUBSTATION 1 2/90 10/90 8 1/91 12/93 352 5/90 9/91 16 4/91 9/94 41

Associated lines 3 4/91 12/94 42 11/91 8/95 45(115KV &813.8KV) 4 2/92 12/96 58 2/92 12/96 58

I .1

Continued)Key Dates - S/S Key Dates - Lines

Project Component Key Appraisal Actual Delays Appraisal Actual Delays

Dates (months) 6) (months) 6)

11. SANTA CRUZ SUBSTATION 1 2/91 10/90 (4) 6/89 N/A N/A2 5/91 9/91 4 9/89 N/A N/A

Associated lines 3 4/92 8/92 4 12/90 12/91 12

(69 KV & 13.8 KV) 4 4193 12192 8 12/91 12/91 (-)

12. AYALA -ALABANG 1 2/90 12195 70 1/91 12/93 35

SUBSTATION 2 5/90 N/A N/A 4/91 9/94 41

Associated lines 3 4/91 N/A N/A 11/91 8/95 45

(I15KV&34.5KV) 4 8/91 11/97 75 10/92 11/97 61

13 URDANETA SUBSTATION 4) 1 2/91 3/92 5 1/91 12/93 342 5/91 4/93 27 4/91 9/94 41

Associaled lines 3 4/92 4/94 32 11/91 8/95 45

(115KV & 34.5 KV) 4 12/92 8/97 48 3/92 8/97 63

14. BF- PARANAGUE SUBSTATION 1 2/91 7/92 46 6/89 12/93 522 5/91 8/93 42 7/89 9/94 62

Associated lines 3 4/92 12/94 44 4/90 8/95 64

(115KV & 34.5KV) 4 8/93 8/97 64 11/90 12/96 73

15. KAYBIGA SUBSTATION 1 2/90 12/93 46 2/90 12/93 462 5/90 11/93 42 5/90 9/94 52

Associated lines 3 4/91 12/94 44 12/90 8/95 56

(115KV & 34.5KV) 4 4/92 8/97 64 11/91 8/97 69

16. STA MARIA SUBSTATION 5) 1 N/A N/A N/A NiA 6/89 N/A2 N/A 11/91 N/A N/A 6/90 N/A

Associated lines 3 N/A 8/92 N/A N/A 3/91 N/A

(t 15 KV & 34.5 KV) 4 N/A 2/95 N/A N/A 3/95 N/A

17. STA. ROSA SUBSTATION I N/A N/A N/A N/A 6/89 N/A2 N/A 11/91 N/A N/A 6/90 N/A

Associated lines 3 N/A 8/92 N/A N/A 3/91 N/A

(I15 KV & 34.5 KV) 4 N/A 7/96 N/A NIA 5/96 NIA

18. 230KV 1 N/A 12/93 N/A N/A 6/89 N/A2 N/A 7/95 N/A N/A 6/90 N/A3 N/A 2/96 N/A N/A 3/96 N/A4 N/A 11/96 N/A N/A 11/96 N/A

19. UPGRADING OF DISTRIBUTION 1 N/A 11/91 N/A 6/90 1/91 7

SYSTEM 2 N/A 1/92 N/A 11/90 2/93 133 N/A 11/92 N/A 12/92 10/93 10

4 N/A N/A N/A N/A N/A N/A

'5

(contlinued)Project Component Key Appraisal Actual Delays

Dales (Months)6)

20. RADIO MULTIPLEX 1 7/89 6/89 (1)2 8/89 2/90 63 5/90 9/91 164 12/90 N/A N/A

21. MAINTENANCE 1 6/89 7/89 1EQUIPMENT

2 11/89 6/90 73 4/91 12/91 84 1/92 N/A

22. MAINTENANCE 1 8/89 1/93 29VEHICLES

2 10/89 8/94 583 6/91 9/95 454 9/91 11/96 63

23. PT. TO PT. RADIO 1 9/92 9/92 (-)MULTIPLEX(ADDOL) 2 3/93 3/93 (H)(230 kV pROT) 3 9/95 9/95 (H)

4 3/96 3/96 (-)

KEY DATES: 1. BID INVITATION; 2. CONTRACT AWARD: 3. PROCUREMENT COMPLETION: 4. IN SERVICE

FOOTNOTES:1). Tayabas 230 KV - 34.5 KV project scheme revised due to NPC's Pagbilao Power Plant Project. A 115 KV - 34.5 KV

distribution substation under Meralco funding replaces this project.2). Formerly Guiginto Substation. Due to difficulty in procuring substation land sites Guiginlo Substation 230 - 115 - 34 5

schems was splitted into a 230 - 115 KV scheme at Duhat Substation and a 115 KV - 34.5 KV scheme at Sta. Mariaon different but adjacent land sites.

3). Substation project now covered by NPC's KFW project.4). Renamed Urdanela in lieu of Legaspi to conform to name of area where donated land by Ayala Group of Companies is

situated.5). See Note 2.

6) (x) Indicates project activities completed ahead of time in months(-) Indicates project activites which complete on time

I6

Table 6: Key Performance Indicators for Project OperationTable 6a: Financial Performance

(Apprais al)

Financial Year Ending 31- Dec. 1988 1989 1990 1991 1992 1993 1994 Sept. 1995

Energy Sales (Gwh) 10,313 11.504 12.360 13.310 14,340 15,420 16,530 17.690

Average Revenue (Ctvs./KWh) 160 163 166 173 180 1B7 190 193

Capital Expenditures (P million) 747 1.335 2.254 2,138 1.954 1.930 1.992 2,341

Operating Revenue (p million) 16,459 18.779 20.542 23,020 25,812 28,835 31,407 34,142

Operating Income (P million) 985 1.100 1.322 1,853 2.020 2,642 2,824 2,997

Rate Base (P million) 12,209 14.136 16.731 19,434 22,112 24,744 27,365 30,115

Total Assets (P million) 14,843 16.632 19,339 21,670 24,178 27,460 31,480 36,026

Relained Earnings (P million) 2,426 3.243 4.353 6,070 8,145 11,102 14,463 18,202

Financial Ratio:Current Ratio 0.96 1.13 0.96 1 21 142 2.09 2.69 3.20

Debt/Total Capital:W/Reval. Surplus (%) 30 26 23 22 19 17 14 12

W/o Reval Surplus (%) 46 38 34 32 27 24 19 15

Quick Ratio 0.87 1 01 0.85 1 06 1 24 1 85 2 43 2.94

Net Profi Margin (%) 4 4 5 7 7 9 9 9

Interest Coverage 1.58 1 60 2.05 2.82 3.90 7.62 11 40 17 65

Return on Rate Base(%) 9.83 7.78 9.43 10.83 1001 11.19 1065 10 16

Debt Service Coverage 2.31 1 32 1.37 1.65 2 72 3 47 6 46 8 46

Self Financing Ratio (%) 157 1 0 32 87 131 170 166

Operating Expense Ratio (%) 92 92 92 89 87 85 85 85

Accounts. Receivable * months 1.64 1 55 1 54 1 48 1.43 1.38 1 35 1 32

Accounts. Payable - months 0 80 0.71 0.74 0.72 0.69 0.68 0.66 0.65

17

Table 6b Financial Performance(Actual)

Financial Year Ending 31- Dec. 1988 1989 1990 1991 1992 1993 1994 Sept. 1995

Energy Sales (Gwh) 10,323 11.054 11,565 11,931 12,281 12,251 14,555 11,902

Average Revenue (Ctvs./KWh) 159 153 184 234 256 275 300 296

Capital Expenditures (P million) 822 1,157 1,843 2,974 3,615 3,800 5,314 3,241

Operating Revenue (p million) 16,459 16,965 21,403 28,004 31,482 33,842 43,884 35,493

Operating Income (P million) 985 977 890 1,892 1.796 1,543 3,367 3,210

Rate Base (P million) 12,581 13,409 15,993 19,412 22,373 25,228 31,243 37,824

Total Assets (P million) 14,838 17,215 21,345 26,859 30,200 37,360 42,238 49,343

Retained Earnings (P million) 2,426 3,269 3,973 5,781 7,708 8,938 9,531 10,805

Financial Ratio:Current Ratio 0.96 0.98 1.18 1.23 1.36 1.37 1.71 1 68

Debt/Total Capital:W/Reval. Surplus 1.0 0.88 0.84 0.65 0.57 0.66 0.68 0.64

W/o Reval. Surplus (%) 2.0 1.66 1.61 1.12 0.89 1.02 1.00 0.98 -

Quick Ratio 0.87 0.89 1.02 1.07 1.06 1.16 1.48 1.51

Net Profit Margin (%) 4.2 3.1 2.3 5 5 5.9 4.8 7.6 9.4

Interest Coverage 2.13 1.53 1.66 2.76 3 49 3.8 9.09 9.2

Return on Rate Base (%) 7.8 7.3 5.6 9.7 8.0 6.1 11.4 10.4

Debt Service Coverage 0.94 0.91 1.33 1.88 1.83 1.92 3.54 3.1

Self Financing Ratio (%) -23 22 16 43 29 26 58 0.62

Operating Expense Ratio (%) 92 93 94 90 92 93 87 0.85

Accounts. Receivable - months 0.6 1.2 1.0 0.6 0.8 1.3 1.1 0.9

Accounts. Payable - months 0.8 0.9 1.1 0.9 0.9 1.0 0.9 0.9

1995 figures - As of September 30,1 995,only

18

Table 6c: Load ForecastJActual for the MERALCO Franchise Area (1998 - 2009)(Number of Customers (000))

Residentlal Commercial Industrial Other Total

Year Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual

1987 N/A 1.529 1 59 4 3 1,695

1988 1,611 1,584 166 169 4 4 3 3 1,785 1,760

1989 1.692 . 1,651 171 181 4 4 4 3 1,871 1,839

1990 1,773 1,729 176 185 5 10 4 3 1,958 1,927

1991 1,855 1,819 183 193 5 11 4 3 2,046 2,026

1992 1,938 1,936 190 201 5 11 4 3 2,137 2,151

1993 2,019 2,073 196 209 5 11 4 4 2,226 2,297

1994 2,100 2,234 202 227 5 12 5 4 2,312 2,477

1995 2,180 2,399 207 238 6 13 5 4 2,398 2,654

1996 2,546 245 13 4 2,808

1997 2,692 252 13 4 2,961

1998 2.748 260 14 4 3,026

1999 2.803 268 14 4 3.089

2000 2.858 277 15 4 3.154

2001 2.911 286 16 4 3,217

2002 2.964 296 17 5 3,282

2003 3,016 306 17 5 3,344

2004 3,067 316 18 5 3.406

2005 3,116 328 19 5 3.468

2006 3,165 339 20 5 3,529

2007 3.212 352 22 5 3.591

2008 3.258 365 23 5 3,651

2009 3,303 379 24 5 3.7 1I

19

Table Bd: Load Forecast/Actual for the MERALCO Franchise Area (1996 - 2009)(Mwh Sales)

Residential Commercial Industrial Others TotalYear Appl Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual1987 3,045 2,932 2.769 83 8.8291988 3.282 3.327 3.398 3,357 3,305 3,553 87 86 10,072 10.3231989 3,533 . 3415 3,816 3.659 3,762 3.882 90 88 11,202 11,044

1990 3.789 3.593 4.187 3,813 4.162 4,069 95 90 12.233 11,5651991 4.076 3,754 4.591 3.751 4,602 4,335 100 92 13,369 11,9321992 4,376 3,941 4.978 3.816 5,027 4.430 104 92 14,486 12,279

1993 4,697 4,029 5.401 3,782 5.497 4,333 109 107 15,704 12,2511994 5,028 4,652 5,848 4.747 5,977 5,048 114 I 107 16,970 14,5541995 5,370 5,158 6.326 5.139 6,478 5,449 118 110 18,293 15,856

1996 5,721 5,425 5,873 112 17,1311997 6,389 5,830 6,363 114 18,6961998 6.992 6,387 6,976 116 20,471

1999 7,616 6,977 7,683 11B 22,3942000 8,146 7,561 8,527 121 24,3552001 8,712 8,203 9,451 123 26,489

2002 9.315 8,908 10,465 125 28,8132003 9,959 9,682 11,575 127 31,3432004 10,645 10,531 12,794 129 34,099

2005 11,377 11,463 14,129 131 37,1002006 12,155 12,483 15,593 133 40,3642007 12,985 13,604 17,197 135 43,921

2008 13,868 14,829 18,956 137 47,7902009 14,806 16,174 20.883 138 52,001

20

Table 6e: Load ForecastUActual for MERALCO Franchise Area (1987-2009)

Year Net System Input (Mwh) Peak Load (MW) Load Factor (%) System Loss (%) System Loss

I I I " R Technical (%)Appraisa Actual Appraisal Actual Appraisa Actual Appraisal Actual Appr Actual

I I aisal1987 11,367 1,923 67.5 20.8 10.91988 12,186 12,445 2,094 2.072 664 686 17.0 16,3 11 9.91989 13,001 13.024 2.249 2.225 66 0 66 8 13.5 14 7 10 5 9.5

1990 13.954 13,722 2.428 2.159 65.6 72.6 12.0 15.4 10 9.11991 14.909 14,004 2.606 2,350 65.3 68.0 10,0 14.5 9.5 9 21992 15,975 14,479 2,772 2,386 65.8 69.1 9 0 14.9 9 9 1

1993 17.318 14,570 2.995 2,398 66 0 69.4 9.0 15 5 9 8.91994 18,712 17,134 3.207 2,695 66.6 72.6 9 0 14 8 9 8.81995 20,169 18,351 3,442 2.910 66.9 72 0 9,0 13,0 9 8 6

1996 19,599 3,145 70 9 12 3 8 41997 21,150 3,440 70.2 11 3 8 31998 22.898 3,775 69 2 10 3 8 2

1999 24.828 4,142 584 9 5 a I2000 27,000 4.543 67 7 9.5 8 02001 29.366 4,981 67,3 9 5 8 0

C)2002 31,943 5,460 66 8 9 5 8 02003 34,749 5,983 66.3 9 5 8 02004 37,804 6.555 65.7 9 5 8 0

2005 41.130 7,180 65.4 9 5 802006 44,750 7,863 65.0 9 5 8 02007 48.693 8,609 64.6 9 5 8 0

2008 52.983 9,424 64.0 9.5 8 02009 57.652 10,314 63.8 9.5 8 0

Table 7: Studies Included In Project

Purpose as defined

Study/technical at appraisallredefined Status Impact of studysislance

The proceed of ihe loan of USS 65.5 was for goods and works. There was no funds allocated under the loan for technical assislance or sludies.

2

Table 8: ProJect Cost Estimate and Financing(US S million)

Ratio Original Project Cost Estimate 1 Actual/Latest Estimate for 6130/96Item actual/appralsal Local Foreign Total Local Foreign TotalSubtransmission Lines and Substations 1.66 34.3 33.4 67.7 60 7 51.4' 112 1

Upgrading of Distribution System 066 15 1 9.7 24.8 9.1 7.3 164

Radio - Multiplex Facilities 3.24 0 9 2.0 2 9 4.4 5.0 9 4

Maintenance Equipment and Vehicles 1.28 1.4 4.7 6.1 2 0 5 8 7.8

Total Base Cost 1.44 51.7 49.8 101.5 76.2 69.5 145.7

Physical Contingencies 5 2 5 0 10 2 7.7 0 2 7 9Price Contingencies 4 1 4.2 8.3 6.0 0 2 6 2

Total Project Cost 1.33 61.0 59.0 1 20.0 89.9 69.9 159.8

Interest During Construction 3 5 6 5 10 0 0.0 0 0 0 0

Total Financing Required 1.23 64.5 65.5 130.0 89.9 69.9 159 8

IBRD 1.00 6.5 59.0 65.5 0.0 65.5 65.5MERALCO 1.46 58.0 6.5 64.5 89.9 4.4' 94.3

Table 9: Economic Costs and Benefits(Million Pesos, price)

Investment 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Foreign Exchange 344 287 460 1,174 1,960 1,884 2,004 1,118 2.063 2,355 1,903Local Materials/Services 218 502 784 998 1,012 1.211 1.332 1,562 1,198 1,415 437Labor 92 128 203 353 483 503 543 437 529 613 380Total Investment 654 917 1,447 2.525 3,455 3,598 3,879 3,117 3.790 4,383 2,720

Operating Cost 1,519 1,725 2,183 2.617 2,728 2,749 3.350 3,543 3,723 3,908 4,200Purchase for NPC (MWh) 12,445 13,024 13,722 14,004 14,479 14,500 17,134 18,351 19,599 21,150 22,898Marginal Cost (P million) 12,614 13,015 16.643 20,845 24,164 26,367 32,388 35,315 39,194 44.233 49.638

Total Cost 14,787 15,657 20,273 25,987 30,347 32,714 39,617 41975

Incremental Sales (P million) 1,357 721 521 367 347 (28) 2,303 1,301 1,276 1,565 1,775Residential 3,327 3,415 3,593 3.754 3,941 4,029 4,652 5,158 5,721 6,389 6,992Commercial 3.357 3,659 3,813 3,751 3.816 3,782 4,747 5,138 5,425 5,830 6,387Industrial 3,553 3,882 4,069 4,335 4,430 4,333 5,048 5.449 5,873 6,363 6,976Other 86 88 90 92 92 107 107 110 112 114 116

Total 10,323 11,044 11.565 11,932 12,279 12,251 14,554 15,855 17,131 18,696 20,471

Incremental Sales (P million) 1,609 489 4,428 6.617 3,452 2,354 9,929 3,413 5.782 7,493 8,154Residential 4,428 5,040 6,867 9,054 10,434 11,340 14,447 15,639 18,023 21,052 23,880Commercial 5,866 5.823 7,096 9,080 10,026 10,740 14,661 15,824 17,359 19,509 22,154Industrial 6,054 5,958 7,262 9,680 10.783 11,499 14.374 15,419 17,269 19.569 22,236Other 56 72 96 124 147 165 191 204 . 217 231 245

Total 16,404 16.893 21.321 27,938 31,390 33,744 43,673 47,086 52.868 60.361 68,515Appraisal Actual

Economic Rate of Return Economic Rate of ReturnResults IRR NPV (million Pesos) IRR NPV (million Pesos)

t%) 10% 13% 15% (%) 10% 13% 15%Base Case 32 8.603 6,045 4.762 46.12 21,588 14,849 11,663LRMC + 10% 22 4,277 2,591 1,755 2662 10,434 6,474 4,639Sales minus 10% 18 2,808 1,420 737 20 39 6,408 3,467 2,129LRMC + 10% & Sales 5 -11,518 -2.033 -2.270 1.12 (4.716) (4,909) (4,895)minus 0%

23

Table 10: Status of Legal CovenantsOriginal Revised

Covenant Present Fulfillment Fulfillment

Agreement Section type status Date Date Description of Covenant Comments

LA 4.01 b (ii) 1 C 6 months DBP shall furnish to the Bank certified copies Monitored under Loan-after the end of audited financial statements not later than 3287-PH (LA4.02)of fiscal year six months after the end of the fiscal year

LA 4.02 a (II) I C 6 months DBP shall furnish to the Bank not later than Became MERALCO'safter the end six months after end of fiscal year an Audit of Obligation and wasof the fiscal all records regarding withdrawals from the loan complied withyear. account made on the basis of Statement of

Expenditures

LA 6.01 a 10 C Conditionof 11/17/89 Execute subsidiary Loan Agreement betweenloan Borrower and MERALCOeffectiveness

La 6.02 b 10 C Condition of 11/17189 Issuance of Policy Statement of the Borrowerloaneffectiveness

PA 2.06 5 C June 15, MERALCO shall by June 15,1989, appoint a1989 Project Manager with qualifications and

experience acceptable to the Bank.

PA 3.03 5 C - Maintain adequate insurance

PA3.05 2,10 C - MERALCO shall implement Action Plan in Incorporated in ERB tarifforder to: (a) reduce system losses: (b) obligationmaintain receivable existing or improved levels;and (c) remain Current in meetingMERALCO's obligations towards suppliersand creditors.

PA 3.06 11 C Annual Starting Dec. By December 31 of each year MERALCO A more detailed investmen12/31/89 shall review with DBP and the Bank program program review was made

investment program for the succeeding five in 1994 for possibleyears adopt recommendations made DBP and guarantee operationthe Bank.

PA 4 01 b 1 C Annual MERALCO shall furnish the Bank auditedfinancial statements not later than six monthsafter the end of fiscal year

PA 4.02 2 C 12/31/89 MERALCO shall earn, for each of its fiscal MERALCO had a ROR ofyear ending on December 31, 1989, an annual 8% or more for 1991,return of not less than 8% of the average 1992, 1994 and 1995. Thecurrent net value of MERALCO's fixed assets ROR for 1995 is estimatein operation. upto Sept. 1995.

PA 4.03 2 C - MERALCO shall not incur additional debt Starting 1991 the debtunless its net revenues are sufficient to yield a service coverage ratio hasdebt service coverage ratio of 1.0 in 1990-91, been over 1.3. The 1995and 1.3 thereafter. was 0.91.

C = Covenant complied with 6 = Environmental covenantsCD = Complied with after delay 7= Involuntary resettlementCP = Complied with partially 8 = Indigenous peopleNC = Not complied with 9 = Monitoring, review, and reportingCovenant type: 10 = Project implementation not covered by categories 1-91. Account/Audits 11 = Sectoral or cross-sectoral budgetary or other resource2 = Financial performance/revenue generation from beneficiaries 12 = Sectoral or cross-sectoral policy/regulatory/institutional3 = flow and utilization of project funds action4 = Counterpart funding 13. = other5 = Management aspects of project or executing agency

24

Table II: Compliance with Operation Manual Statements

Statement number and title Description and comment on lack of compliance

None No significant lack of compliance withapplicable Bank manual statements observed

Table 12: Bank Resources: Staff Inputs

Stages of Staffweek Amount

project cycle Actual US$('ooo)

Through Appraisal 28.4 70.6

Appraisal-effectiveness 0.0 0.0

Supervision 43.9 121.9

Completion 6.0 11.3

TOTAUplanned/ 78.3 213.8

25

Table 13: Bank Resources: Missions

Specialized Performance ratingStages of Month/ Number of SW in staff skills Implement. Developt. Types ofproject cycle Year 1persons\1 I field: represented status impact problems

Through Reappraisal Nov.lDec 4 0.0 FA (2) - -

1988 PEEE

Supervision I Mar 1990 2 1.6 FA 1 1 Progress on procurement had been slow thanPE expected. Mainly due to MERALCO's lack of

familiarity with Bank's ICB

Supervison 11 Aug. 1990 1 0.0 FA NR NR Potential problem with compliance of B% rate(Limited mission) of return covenant for 1990.

Supervision III Nov./DEC 2 0.3 FA 1 1 MERALCO seeking a waver from its 8% rate o1990 PE return covenant for 1990 because of Gov.

reluctance to grant needed rate increasesearlier in 1990. Rate increases were granted inAugust 1990 and became effective in Nov.1990

Supervision IV Aug. 1991 2 0.0 FA 1 1 MERALCO's progress in executingPE procurement rather slow especially, with bid

evaluation, contract signature andeffectiveness. DBP has not yet submitted itsaudited annual accounts nor the audit of thespecial account.

Supervision V Sept. 1992 2 0.0 FA 1 1 Slow progress in procurement andPE disbursement

Supervision VI May 1993 4 2.6 FA 1 1 Mission's findings regarding disbursementPE delays include (i)design caused 9-12 monthsEE delays in procurement; the practice of

PE (Consult.) disbursement upon full delivery.

Supervision Vll Aug. 1994 1 0.0 PE S S Procurement progressing well.

Supervision Vil Dec. 1995 1 0.0 PE S S Construction is expected to be two yearsbehind

Completion Oct. 1996 1 0.0 EEc S S Recalculate ERR

EE - Energy Economist; Eec- Eng. Economist; ES - Energy Specialist; FA - Financial Analyst; PE - Power Engineer: PS -Petroleum Specialist. 1 = problem free; S= satisfactory

THE Electric WORLD BANK GROUP Page 26Headquarters: Washington, D.C. 20433 U.S.A. Appendix A

Tel. No. (202) 477-1234 a Fax (202) 477-6391 * Telex No. RCA 248423FACSIMILE COVER SHEET AND MESSAGE

DATE: October 25, 1996 NO. OF PAGES: I MESSAGE NO.:

(including cover sheet)TO: Mr. Mv.B. Gonzaga FAX NO.: (632) 631-5677

Title: Sr. Asst. Vice President & Head, Project Management OfficeOrganization: Manila Electric CompanyCity/Country: {Metro Manila, Philippines}

SUBJECT: Manila Power Distribution Proiect (Loan No. 3084-PH) ICR Mission

Thank you for the hospitality and cooperation to the Implementing Completion ReportingMission consistinig of Ephrem Asebe whicli visited MERALCO on October 16, 1996 in accordance withthe terms of reference dated August 23, 1996.

We have included your revised contribution in the ICR for Manila Power DistributionProject (loan 3084-PH).

We are glad that during the October ICR mission we were able to review together the Bankdraft ICR and MERALCO's contribution to the ICR. From the comments, we noted that we are inbroad agreements on all the major issues raised in the draft ICR. We have reached understanding on anumber of salient points on Implementation Experience & Results, Summary of Findings, FutureOperations and Key Lessons Learned which are reflected in the [CR. In particular, an understandingwas reached on the underlyiig assumptions and data used for the recalculation of thc Economic Ratc ofReturin. As a result, both party arc now satisfied on the overall implementation results and agree thatthe overall rating of the project to be "satisfactory".

With regard to the appropriate mechianism of channeling future developmiient finance fromthe Bank to MERALCO or the other utilities, you can rest assured that the Bank will consider allappropriate mechanisms as the situation ariscs, including Philippines Government Guarantee Agency.It is our hope that not only MERALCO but also DPB has bencfitcd from the implementation cxperienceof the project.

Thank you once again for your cooperation. Copies of the ICR will be sent to you as soon asthey are printed, whicih will be early in 1997.

Sincerely yours,

John Irving

Senior Power Engincer

Infrastructure Operations Division

Country Department I, East Asia and Pacific Region,

Transmission authorized by:

If you experience any problem in receiving this transmission, inform the sender at the telephone or fax no. listed above.

27

M ERALCO Appendix B: Borrower Contribution to the ICR

'Ut U . 3 . ! 99C

Mr. J. ShivakumarChief,Infrastructure Operaticns Divisicn.DepailuiaeiL 1. EazL Aisiki aiu rPacitfI tmcgitl

I'he World bank1818 H St.. N.W.Washington. D.C. 20433 U.S.A.

Re: Manila Power Distribution Proiect (Loan No. 3084-PH)Imriementation Completion Report fICR)

Dear Mr. Shivakumar,

We arc olcased to submnit our Implementation Completion Report (ICR) in

fufil-mcnt cf the Ican re,uircL-cnts as cc'erecd unde-r the M2ani!.2 Fover D;tribution.Project (Loan No. 308-4-PH). Atso we submit herewith the 'Key indicators for project

implementation anci operacion which will heip the Bank in its ou-n assessment of the

abovemcntioned projec.

We hope that cur r^r: *- .n a.--'- !ock fyvard to the. Sanlks

comnlnwlts. We wi;; lbe giad t., fiiake furtlhet ciavifl-a-iors te6arding uur re,povt slhouldthe Bank find it necessarv.

Best Reegards.

M. E3. GonzaeaSenior Assistant Vice PresidentProjcct M,4ajnagcmcnt Olric

cc: WBIADBPMT File

AN's'cLr4 CD D a:S v ci

A1Mq C3 V T IN' I W1 4

1d-V~O £ C 3 1 NS O1 0 M 1JCDN QN I I V --I m QiI Q0D

NOIJN~~43flcJV4T SB/AOŽZIUOg

29

A ) STATEMENT AND E_ALU,,TION CF PROJ'CT ItZECT IVES:

The specific cojcjectves of t;,a p.sjct are to:

a) Inmprove .1E'ALCC's su.,a,sr;ssc. and distribution systems.

F) Facilitate better com......unicati,on between substations.

c) Rev,tal1ze thE OrganZtiZAtsons ma tnaenancec apabili,tieS.

Th,ese Objectives when real4,zed is expected to cont ribute largely to theimprovemenrt of electri,c service in its franchise area. T will enable I4ERALCOto meet increasing load demands 4in the combs,4, years, reduce .ts System, losses,ensure effective distribution of electricity within the 'ranchise area andsupport improvement of M1ERAL.C 's technica' and commercial operations.

The project is essentially miade up of four (') components namely:

a) Construction anud upgrading of subtransmission lines, and addition ofsubstaation capacity.

b) Construction and upgr,air. of distributi4on systems.

c) Improvement and expansion ofl the radio-multiplex facilities for systemmonitoring and control.

d) Provisicn of equipme,,t an,d veh,cles to, mprove maintenance.

The project has for its centerpiece, the Major Project Procurementrac'aga which is essent ially a Substa,,a anou co.-Preherns,ve procurementpac'^age of -major electrical and mech,anical equipment, and material resourcesneeded for the elactric cap.tal projects proposed over the next five years,which, covers the cited four project components. The implementaticn phase aspla,nne utilizev MEP.AlCO's Sn-hou_Se capauility for Cngineering, Planning,Project ,'anage.ment and C ov s t ion augm,,ented by accredeudl privateContr ac tr Os uld erus .

The project objective of im,prsv,,n c ERALCRL's cu"transzmiss on and4s.tribution ysytem wh,ich const.tutes 655% of the foreign portion coss' of the

project and it s local counterpart to be 77% of the local cost is assessed ashaving been fully achieved. Th,e procurement pack'age as implemented assured the0vilaibility of the reuired m,ajor equipment and materials for the specificlined-up subtransmission and substation projects. Also, it provides therequired spare trans,,iS3- 1, and diistribution line materials and equipmentneeded to c;arry ou.t MERALCO's operation and m ainaenance activities.Construction of the 11 kY subtrans,mission line projects andu 15 k'V'substations proceeded and carriled out as scheduled although some changes weremade in. the original line up.

Wlithl the a_Cqusi.con an , r - lorsS.v sf the Sc, .adio Microwave System,the c ommumcaLt,io;a; linz, f ^. < en t ral stations, - repeater stations and 2$outstatirns has been estabished thuS making ffective USE of the new sCAti;system for eaffect .ie system, csont ro and o operatio, n. The resultinS

r I a WI, C-_a p-ans-.., o:t CS.iS i O J-2stm also tooks care of

30

the increase2 c--u'' nicatlon traff4c broug about L, i, a d b o,^customers and expansion of francnise area. Tnassess ts rproject, the objective has been fully achieved.

I'tLI L 'L s c3 a laW4 It; .c cuerate, co.nstruct and n114I-,.a 1 ai,, t s hugItransmission and distribution network has received a tremendous boost with .heacUisutis ,, c, special construci,ion and mai,ntenance equi ,pment, andconsiderable spares o, important lir,e equip,i,men procured under funding fromthe loan. Included in these purchIases are a cerrick Trucks, :" Heavy BasketTrucks, 7 M'ledium Saset. Trucks, 'l Cranes, Il W.1recker, 1 lot of assorted spareparts and an ampple supply c, di's.r-.t.vn .ra.s.crm.rs, capac,.trs,switchgears, and circuit breakers 4,ntende%d as spares and major equipimen. sto kresources to support MERLCO's operation, .maintenance and c onstruct on.activities. Procurement- resulted in reinforcing MERALCO's limited fleet ofspecial construction and maintenance equipment and provided the optimum. storesinventory. These observations lead to the conclusion that the aforementionedobjectives Ihave been achieved successfully.

The resulting improvement in MERALCO's subtransmission and distributionsystem, communication system, and mainte.nance capabl'ities as derived fromthese World Bank Projects and from the balance of the overall electric capitalproject played a vital role and impact .n achieving the company goalsspecifically in system loss reduction, system, reliability, and improvedoperations.

From these observations and the very satisfactory results of theEconomic Internal Rate of Return and Financial Internal rate of Return, theProject is rated highly successful.

B) ACHIEVEMIENT CF PROJECT OBJECTIVES

Originally, the Manila Power Distributicn Project was mo..de a componentPart Co NiPVC-PINOC's Bacon ,ar.ito Geothermal Power Project. It was howeveroropped frc,-,-, t,,e 15aco,. ,'a..to Ik act.e rmal P ower Project when the arranaen .clanneling the proceeds of Bank loan to ME"R`, r0 Wh'cIh -,s uac table tv theGovern.men,t, "ERALCO a e an) could not Fe established. Later, DBP afterits restructuring and designation as the tNation's principal wholesale bank,established Itself as a conduit for official foreign loans to private sectorcc..panies which paveA the way for the reappraisal of the project by the ','orlduBank i.n 18uO. The project was approved and the loan arrangement was signed onAugust 2, 1982. The project was expected to be completed by December 31, 1994.Original closing date was set on June "V, 199I. As disbursements wereprojected to incur beyond the original loan closing date, an extension hasbeen granted by the vank for the loan to close by June ^0, 199c.

In the course of project implementation, EERALCCO relied heavily on lts

em-placed L c rprI p a r9aOz a Uns s u_ 3 .h as Planning, Engineer e ,

Purchasing, Construction, Cperation and Project Management Teams. With the.Major Procure2ment Package already established and dovetailed to specificelectric capital p-rojects that were l,ned up to meet project objectives,Project ..plemaentation went on. However, aid project i.mplementation suffereddelays, parti.cularly in the procurement and the design phases. The o1-going

-~~~~ - 1...-J ,.L-~~~~~~~~f 4- -- -- c...mpany reorganization couple', w... c _o... s upgrad. I,4 i.s e,.iCandu design standards slowed, down the preparation of specifications, evaluation

3'

v. kI ds , anU4dAaI ze,eS dAas ns t,h>.us r e s L; ,, t . ;Om Pe t II2Ulon dates 0-cvarious pr;jects to slide ,ro,, their o, I;nl' soCnedule.

Cons.ruction of the thlree bul'K delivery 2,30% kV\ _ 115 kV suLs.a I s,Inamely Calauan, Sta. Rosa and Cuhat are in progress and is expected to becom.pleted in July 199}, Nove-mber 1995, and DCecem.,ber 1,995 respectively. O0therprojects considered on lo0Ing are Los Banos and B. F. Parariaque Substationswhich are expected tL bDe cvompleted in Dece,mber 1995. Delayed auUstaticn,projects include Urrdaneta (formerly LegasPi then Ayala Center), MtCCRRPIfc rmeAr I -yala Alabang), and K\ayiga whose comvpletion are estim.ated to occurin August 1997, Nlovemb er 1997 and AuguSt 1997, respectively.

With regards to the construction of major subtrans,,is3 ion li,ne projects,the Balintawak leg of Marikina-Nosvaliches-Balintawak line and Gardner-Pamplonaline were completed, incurring delays of two year and one year, respectively.Dolores-Marikina 115 kV line is ongoing and expected to be completed in June1996. Other 115 kV line projects being delayed are: Sta. Rcsa-Balitago linewhich is expected in Dece-mber 1996; Gardner-'lCCRRPI which is expected inceptember 1996; and ^ranata-Sta. Mesa 115 kV line which is expected in October199°3.

C) MAJOR FACTORS AFFECTING THE PROJECT:

I) PRE-IMPLEMErNTATIONl PHASE

a) Project feasibility, appraisals and approval have long gestationperiods. Process took approximate'y two (2) years frcmT project identificationto loan signing.

'b) Long approval of project was experienced due to delayed forvmulationof guidelines by the government. for private firms av'ai'in o, . OA funds.

I T I T PLrCENlC TI' P T A C '0I P L'" *)-14 EN T Av, T I r,o

a)hanges -.r, project seh,e, (as yictated b; load growth a,, sys em,requirement), point of. delivery and NPC system requirements were mainlyresponsible for the c.hranges in equipment requiremment, an,d project line up 'orsubstation and subtran,smssio..ir.nes.

b) Staff appointed for project irmplement,ation has no involvemrent in thepreparalion or appraisal c the project.

c) Failure of the Supplier to co-.,.ply with certain provisions of thecontract (complete shipping documments, complete approval drawings, SCSrequirements, et .c.

d) Complex anu cumnbersoime procureme.nt procedures.

e) Very lean Project Manageent taf f.

f) Lon^. evalua.npear4cs.

g) Delayed engi neer ng designs.

32

,) Dif iculty i. proCu rem r '_nag c t1iation oS sb- statio sites and Right-

is Li in I.'.; ...- .u i.. ^ .v. .I r7 ' i.,. tr%r ' =, I ,, _8lC

J) Contract am,ensdm,,,,t,s

COn sidering , .that the project co,ns, t'ucs an pn.2 ra parv of 'iERALCR's.t i,ze T Invesme,nt rsF-ogram , the overalI benefli.S derived from the latter

reflects the przjecat benefits, as we21. cignifinfcant improve,ment in, system,in-errut-c.- frequency rate . )FP' whtch is a s systeam rcliabilit;was achieved. wit t.he rising t ren d o '' in I^53 ts 2° 7' in 1^3 reversedow uG 46.32 ,n y995. _ Istam. loss ipr,,rve,,en' wa-- rI I3tere. 'rsmm a high of

AGr,. Jow,, 'r,, 41 0Qs ir, r 1>c, 0. cn v> n 1^95

eUSc AT

UIAnyLT

ry

The Project sustainability is by no doubt assured as F£ER^LCO proceedswith the i4,mplemnentation of i ts planned projects in the coming years, theexpected benr,,.s of whic-h. are ademe d to r^ I 'I y t Ih , sa , .tainingS us ainabilit;y h owever is anchored on the continuing reali:tion of . scopanyprogram..s whicb directly support the project objectives being m,entioned.

E) BA^fK PERFORYiA."CE

The 0.anL-'--in anAgn t. i m_emen_t_to 4 . the Project Was

v;e. satisfaztcr, M. AL CC ' . 3 f'or c ntraCI am.erarde.a , -;. ensio, ofloan, closing, za;_s-- a '----- i r~c.v ,,v 'uJi, ssues an,i p-u'---,,dates and. 3s u as a n -P3rCI I ~ IW Cau3_

ban, Policies and guide ines were treated with appreciable degree oflil and d * * *s . _. ..iza

rm -DvR I cR ricrronmA,-,,c

The Per fo,rman c a z:f ERArL in gene1ral terAts a: the aOrraver/Execut in

Agen- can be rated as satisfocta ry. z1ERALCO was nct able to ensure timnelyacquis4,tiQ,, e.. Su^-;atior land s4ites, R10; and A^P Lermits c the *substatlon

ar u'a,,iis nAn I4 - A_ - -asi -ea -Z *,L cs,-r_i. a

system voltage affezted the succeeding proces c4. implementatiorn notablyHre<aratior, cZ detailed de;i,-,n mAn . .4, -- ions ar.A evalua,tion f bu Widls , t

effect of wh4c!-4 z-s-aJi,,- -. natur a targat completBi-; datae for somes-;vJets s.id4. V o t@.

prz:urem^ent r I ,, ... : t. h-se I t 4 U. _ z-=- d u e -l3 theoan I s rereme.. E t o z:r -.;?a^~we~..e a n T.: ,r.a:-. t asi. a :4Y

tY:s Hrs-ess v-~: ~._s -- . e 4.;, :ne bid: to MER s Purch. si-- u:;iVelines

orJ A.'* re, ,, - .

;D

C) t ASSESSMENT CF nUT COME

f te r a O~i ass a ,.,e- .ertc I ',a rroj a^ and z . v 4. n due av cne rs '1a c ievem,nts an. g a r, im,ade in the aprEparat 1on i, 1eiment ':t .on, an,d operation,J,asn-, a n ,4 I e Ud) -av y f v':e - su r c,- ac:ts ,' I"e ao _ c., a QanU ri 'atedsatis,ai.vr; . r; e d- -a ye , s - a -'- -__u ee: tE-.'O be ocmpleted ,rn du time and heralco has tih expetations that the Proi-jct

ij 4, v es wi " t aachiave' a_ Planned.

34

Appendix C: Borrower Comments on ICR

MANILA ELECTRIC CUivl?AIN YOrtsas Avenue, 1054 Pasiz Cit. Philippines

Fax No. (632;) 631-5677-X

FACSLNIILE TR_-k_NSXITTTAL FORNI

DATE September 6, 1996, No. of Pages: 16TO .- NIr. John Lrvin,

Title Senior Power EnPneerOr-ganization : Infrastructure Operatlons Division. Dept. 1.

East Asia and Pacific Regpon, IRD, World Bank,Washington D. C., U. S. .k

Fax No. (202) 477-2743

FROM : Mr. MI. B. Gonza2aTitle Head. Project Managcment OfficeOrganization : Manila Electric CompanvFax No. : (632) 631-5677

SUBJECT Manila Power Distribution Project (Loan No. 3084-PH)Implementation Completion Report

Messaue:

We are submiitunz herewith a recalculated Economic Rate of Return with the updated Table 9-Economic Cost and Benefit. As suggested in your message of July I . 1996. the sources of data of Table9. the underlvLnu assumptions as well as penod of anaiysis used in recalculating the Economic Rate otReturn is stated. with supporting- tables as annexes I up to 9.

As to the "Highly Successful rating of the proiect. we would like to cite the following reasonswhich led us to wive this rating in the over-all assessment of the Project.

1) Wc considered that a 1.49.o svstcm loss reduction from 1989 to 1995 (14.7%° to 13.3%) issubstantial when related to net system energy input. As svstem's loss decline. operazinicost is reduced resuJLing in increased benefits coming from improved operations. UtilityEconomics projects a continuing svstem loss improvement which we believe issustainable as the rest of the delaved World Bank- subprojects are commissioned andMieralco continues to develop in the coming years its eiectnic sVstem.

35

Table 5 Kev Indicators for Project Implementation indicates a completion rate of 53.3%(8 out of 15') for substation project and 50%,o (3 out of 6) for subtransmission lineprojects. \W`ith substantial departure from their original timetable of completion for mostsubprojects, the delav cannot serve as justification for giving a "Highly Successful"rating to the Overall Project. We believe however that due credit should be given to theaccomplishments made on other subprojects such as the Upgrading of DistributionSvstem. Radio Multiplex. Procurement of Maintenance Vehicles and Equipment, Pointto Point Radio Mlultiplex and 230L' Protection equipment where considerable successin the project cycle (identification to implementation) was achieved. We also thoughtthat the collective progress and success we have made in resolving difficult ROWproblems and land-site acquisition for the delaved substation and subtransmissionprojects should be highly regarded and credited as it serves to place the vital substationand subtransmission line projects on track and provide firmed up completion targetdates.

On the other hand, upon further consideration of other facts surrounding the Project particularlythe effects of a svstem voltage stud' and selection which delayed project implementation processes suchas detailed design and specificationr evaluation of bids and the cascading effects on target completiontargets, we accede and conciude that a -satisfactoryW rating of the outcome is just fitting.

To set the records properly we are attaching herewith revised pages 33 and 34 of our ICR portionwith the proper rectification of the affected sections.

We hope that you would understand our position. whereby assessment of the World Bank Projecttookl into consideration not onlv the Substation and Subtransmission subprojects but the whole ProjectPackage which revolves around a Substantial Procurement Package, to support and complement other\leralco Projects such as the upgrading of Distnbution. Operational Maintenance and CommunicationEquipment. which constitutes an integral part of Meralco's investment prozram, and to which we believewe achieve a creditable success wvith iLs overall implementation.

Kindlv convey further comments regarding this report.

Best Reiards.

Al GnzagaSenior Asst. Vice PresidentProject Management Office

LNV'

36

MANIA ELECTRIC MPANY -COOrtigas Avenue, 1054 Pasig City, Philippines

Fax No. (632) 631-5677

PFACSIMILE TRAN8MITTAL FORM

DATE : NovemberI 1. 1996 No. of Pages: 2TO Mr. John Irving

Title : Senior Power EngineerOrganization Infiastructure Operations Division, Dept I.

East Asia and Pacific Region, IBRD, World Bank,Washington D. C., U. S. A.

Fax No. : (2021 477-2743

FROM : Mr. MA B. Gonzaga|Tite . Head, Project Mianagement OfficeOrganization : Manila Electric CompanyFax No. : (632) 631-5677

SUaJECT : Manila Power Distribution Project (Loan No. 3084-PH)'' -.Implementation Completion Report

GcntL-men: - .e-

We ar glad to leamn during the visit of Mr. Ephrem Asebe on Octobier, 1996 thatthe bank bas finally received and i5. satsfied with the results of our recalculiiion of theProject)s ERR together with its supporting documents that was sent by fax oniter 6,1996 and by DHL on Sept rnber 20, 1996. -7 v...

-_Wfth these results, the final value of the ERR and other interrelatedfgures bereflected in the ICR for the BankWs finalization. We have reviewed the draft ICR.upon receiptand discussed salient points with Mr. Amebe particularly on ImpIementationeicnce &Results, Summary of Findings, Futurr Operations and Key L,ssons Learned. In general, weam of the opinion that the ICR is aLccurato and candid on its presentation azIstatementsin identfing the problemes and factors affecting the project, in aseain the Bank'sperfoirn1an1ce and that of the Borrower's as well. We also mentioned to Mr Asebe ourobServations listed hereunder which we feel the BarLk should know and evaluate if worthdocumenting

37

L PeHf-nMce of DBP accait bank. - It was observed that DBP as our conduit bankhas a very lean staff with only om personnel assigned to handle ODA loans from vanousorganizations. Ae such, MERALCO's disbursement and contract monitoring encounteredsome setbacks which rendered delays in the preparation of progress reports for submissionto the World Rank Starting the third quarter of 1995, acquisition of disbursemcnt anddrawdown data from DBP exceeds 30 days after the end of each quarter, thus defeating ourearlier commitment to the World Bank of submitting the required Quarterly ProgrssReports within one month at most after the end of each quarter. Meralco apy-ears to bebeter off in terms of communication and reptng with the World Bank without anyconduit bank and only a Philippmne government arantee agency acting on its behalf - aset up similar to the loan arranement tenM and the Asian DevelopmentBank (ADB).

A - -:

EL Xinernstianal Competttvo ldindg (lCV). - By pracucing ICB, Meralco was able toavail of lawer oompetitive prices without sacrificing the quality of goods in most of theMeralco packages. Huge savings in the prices of goods (minimum of 10 percent) have beennoticed in companson with our tied loan from other institution and even with Meralco's in-house procurement.

4.

It'. an opportune time to convey Meraco Management's sincere appre za±tion andsaafaction to the World Bank in providing the official Development Asaistance toMeralco's Manila Power Distributicon Projcct, and the whole support extended by its staffduring the entire phase of the project, without which gains and project experiences couldnot have been attained. The World Bank finan-ial asaistance was made available at thetime when Meralco needed it moor to put up the electic infrastrucrure facilities now foundvital and essential in meetng the increased power demand brought about by the rapidindustrializaion and the country's economic recovery.

The ICR will sere as a ready reference for other utilities in developing countriesdesiring to undertake similar kind of project and to which we would gladly share with themour valuable experience derived from our transaction with your bank.

Again, we thank you for your full support and we look forward to reciving a finalcopy of the ICR.

Best Regards,

Senior A8at. Vice PresidentProject Managemnent Office

MAP SECTION

A *r l B IBRD 2i320~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~BR 19A 12'1rB

LUZON SINGLE LINE SYSTEM MERALCO 1 1 5 kV SYSTEMPHILIPPINES

.~ 2MANILA POWER DISTRIBUTION PROJECTSUBTRANSMISSION LINES AND SUBSTATIONS

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