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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY EMERGENCY OPERATION PROJECT PAPER ON A PROPOSED LOAN IN THE AMOUNT OF US$12.94 MILLION TO THE NATIONAL POWER CORPORATION Report No: PH WITH THE GUARANTEE OF THE REPUBLIC OF THE PHILIPPINES Transport, Energy and Mining Sector Unit Sustainable Development Department East Asia and Pacific Region FOR A BICOL POWER RESTORATION PROJECT January 11,2008 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective July 3 1, 2007) CurrencyUnit = US$ US$1 = PHP FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ABC ACSR BPRP CAS CNC COA DOE Dos DPL ECC EL4 ERC ERS EPIRA ERS GOCC GWh IBRD ICB Approved Budget for the Contract Aluminum conductor steel reinforced Bicol Power Restoration Project Country Assistance Strategy Certificate on Non-Coverage Commission on Audit Department of Energy Development Objectives Development Policy Lending Environmental Compliance Certificate Environmental Impact Assessment Energy Regulatory Commission Emergency Restoration Structures Electric Power Industry Reform Act Emergency Response Systems Government-Owned and Controlled Corporation Gigawatt-hour International Bank for Reconstruction and Development International Competitive Bidding ICC IEC kv km LARP MCM MW NCB NCIP NEDA NPC PAGASA PBD PIP PSALM ROW PHRD TransCo Investment Coordination Committee Information, Education, and Communication Kilovolt Kilometer Land Acquisition and Resettlement Plan Thousand Circular Mils (wire Gauge) Megawatt National Competitive Bidding National Commission on Indigenous People National Economic Development Agency National Power Corporation The Philippine Atmospheric, Geophysical, and Astronomical Services Administration Philippine Bidding Document Philippine Peso Power Sector Assets and Liabilities Management Right of Way Policy and Human Resources Development National Transmission Corporation Vice President: Country Director: Sector Manager: Task Team Leader: James Adams Bert Hofman Junhui Wu Salvador Rivera

3 FOR OFFICIAL USE ONLY PHILIPPINES BICOL POWER RESTORATION PROJECT A. B. C. D. E. F. G. Contents Introduction... 1 Emergency Challenge: Country Context, Recovery Strategy, and Rationale for Proposed Bank Emergency Project... 1 Bank Response: The Project... 4 Appraisal of Project Activities... 7 Implementation Arrangements, Cost, and Financing Plan Project Risks and Mitigating Measures Terms and Conditions for Project Financing Annexes Annex 1: Annex 2: Annex 3 : Annex 4: Annex 5: Annex 6: Annex 7: Annex 8: Annex 9: Detailed Description of Project Components Results Monitoring Framework for BPFP Summary of Estimated Project Costs Financial Management Assessment and Project Disbursement Arrangements Procurement Arrangements Implementation and Monitoring Arrangements Project Preparation and Appraisal Team Members Environmental and Social Safeguards Evaluation Economic Analysis Annex 1 0: National Transmission Corporation (TransCo) Annex 11 : Documents in the Project File Annex 12: Statement of Loans and Credits Annex 13: Country at a Glance Annex 14: Maximum Wind Speed of Typhoons in Southern Philippines Annex 15: IBRD Map No This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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5 EMERGENCY OPERATION PROJECT PAPER DATA SHEET THE PHILIPPINES BICOL POWER RESTORATION PROJECT (BPRP) EAST ASIA AND PACIFIC REGION Date: January 11,2008 Country Director: Bert Hofinan Sector Manager: Junhui Wu Lending instrument: Emergency operation Type of Operation: Proposed terms: VSL Expected effectiveness date: February 26,2008 Borrower: National Power Corporation Team Leader: Salvador Rivera Sectors: General Energy Themes: Natural Disaster Management Environmental screening category: B 1 Financing type: Loan [ X 3 Credit [ 3 IDAGrant [ 3 Other [ 3 Project ID: P I Total Amount: US$12.94 million Expected implementation period: Six months Expectedhevised closing date: July 30,2008 Responsible agency: National Transmission Comoration (TransCo) Source Borrower Total IBRD Trust Funds Others Local Foreign Total Total FY Total IBRD Does the emergency operation require any exceptions from Bank policies? Have these been approved by Bank management? Increase on retroactive financing limit from 40 to 80 percent of loan amount to cover disbursements pre-funded by TransCo (see paragraph 39). Yes [ x ] Yes [ x] Are there any critical risks rated substantial or high? What safeguard policies are triggered, if any? Environmental Assessment (OPBP 4.01); Indigenous Peoples (OD 4.20); and Involuntary Resettlement (OP/BP 4.12) I No Yes

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7 A. INTRODUCTION 1. This Project Paper seeks the approval of the Executive Directors to provide a loan in the amount of US$12.94 million to the National Power Corporation (NPC) for the Bicol Power Restoration Project (BPRP). This loan will allow the Bicol region, which has the highest incidence of typhoons in the country, to regain the level of power supply it had available before the devastating typhoons of The project consists of investments to repair severely damaged sections of the transmission system. Given the emergency nature of the project, approximately 80 percent of the total loan amount (US$10.3 million) will be financed, retroactively for replacement of towers and associated materials in the 230 kv transmission system, which sustained most of the damage from the typhoons. Further, to accelerate construction work and prepare for next typhoon season, the Bank reviewed and provided its concurrence with the bidding documents and bid evaluation reports for the three main supply and installation contracts during January to April 2007, with construction works starting in May Partnership arrangements: Not applicable. B. EMERGENCY CHALLENGE: COUNTRY CONTEXT, RECOVERY STRATEGY, AND RATIONALE FOR THE PROPOSED BANK EMERGENCY PROJECT 1. COUNTRY AND SECTOR CONTEXT 2. The Philippines, with a population of about 82 million, is highly prone to typhoons, which have become more severe in recent years. The Bicol region, with a population of over 5 million, is one of 17 regions in the Philippines. The region is located in the Southern part of Luzon Island, the most economically important island of the country. Two super-typhoons, defined as typhoons with wind speeds greater than 200 kmkr, hit the Bicol region in the last quarter of Typhoon Milenyo struck in September 2006 followed in November by Typhoon Reming, which had unprecedented wind gusts exceeding 230 km/hr. The typhoons toppled or otherwise damaged 118 transmission towers supporting 230 kv transmission lines in the South Luzon transmission system. The combined damage from both typhoons resulted in a two-day blackout in the South Luzon area and an ongoing power deficit in the Bicol region. During the first half of 2007, seven 500 kv towers, weakened during the typhoons of 2006, collapsed and three additional 500 kv towers collapsed in July Although the blackout resulting from the typhoons was not large on a countrywide basisy2 it had a considerable adverse economic impact on the Bicol region. As Figure 2 shows, most of the 230 kv transmission system serving the Bicol region was out of commission in November 2006, with unsupplied energy during the blackout amounting to over 200 GWh. A deficit of 50 GWh, or about a quarter of the Bicol region s power consumption, remained un-served due to incomplete restoration of the region s power sub-transmission and distribution capacity. The loss of supply would have been worse had the National Transmission Corporation (TransCo) not responded within two days typhoons to restore the vital 230 kv transmission interconnections at Based on the System Operator s estimation of unsupplied energy. The power system of the Philippines has a total installed capacity MW 15,600 with annual electricity generation of about 56,5 10 GWh.

8 Naga and Labo, using temporary Emergency Restoration Systems (ERS). The availability of these structures also made it possible to stabilize supply and provide power to the Northern part of Luzon Island, including the capital city of Manila. The economic cost of the blackout and continued power deficit - excluding revenue losses to TransCo and the electricity cooperatives - has been in excess of US$250 million, or more than 10 times the cost of the system restoration and strengthening investments that the proposed project supports. Figure 1: Illustration of Damaged Sections of the Transmission SOUTH LUZON TRANSMSSSSON SYSTEM 4. The transmission system remains vulnerable. The ERS currently in place are only temporary solutions and are not designed to withstand the high wind speeds of typhoons. Furthermore, the company has a limited number of these structures, some of which it had to transfer to the Bicol region from other regions. Complete restoration of service will require, in addition to the restoration of transmission towers, the repair of damaged 69 kv sub-transmission lines as well as medium-voltage distribution lines owned by various electricity cooperatives. TransCo anticipates the completion of repairs in both the transmission and distribution systems by early The project takes place in the context of a power sector with an evolving institutional structure. Prior to 2001, the power sector in the Philippines consisted of one vertically- integrated public power utility, the National Power Corporation. In 2001, the Electric Power Industry Reform Act (EPIRA) and related Implementing Rules and Regulations (IRR) resulted in the unbundling of NPC s operations into three separate business units: generation, transmission, and distribution. 6. At the same time, EPIRA established the Power Sector Assets and Liabilities Management (PSALM) Corporation to take ownership of the assets and liabilities of the National Power Corporation (NPC) entities. Furthermore, TransCo (wholly owned by PSALM) was created to assume the transmission function of NPC. Although TransCo currently operates as 2

9 separate business, it has not yet taken ownership of the transmission assets, which is expected to take place in late Consequently, NPC is the borrower for the BPRP and TransCo the implementing agency. PSALM will assume the loan in the future, once the transfer of transmission assets to TransCo has been completed. 2. RECOVERY STRATEGY 7. Firstly, the BPRP is integral part of a recovery strategy that focuses not only on repair of the damage to the TransCo system but also on critical reinforcement of transmission infrastructure in the Bicol region and other typhoon-prone areas in the transmission system, combined with emergency measures to reduce power outages in the event of further damage from the current or 2008 typhoon season. On February 7,2007, TransCo notified the Philippines Energy Regulatory Commission (ERC) of its intention to apply the Force Majeure provisions in the ERC s transmission wheeling rules.3 These rules allow TransCo to obtain funds needed to fully restore the capacity of its damaged transmission lines (see Figure 1). TransCo supported its application to ERC with certification from the Department of Science and Technology (January 9,2007) that unusually strong typhoons had caused the damage. Subsequently, both the National Economic Development Agency (NEDA) and the Environmental Management Bureau (EMB) supported TransCo s application in March 2007, on an exceptional basis, so they could to seek borrowing for the proposed project. 8. The second part of the strategy, reinforcement of the transmission system and enhanced emergency preparedness, stems from a study by TransCo, completed in February 2007, which established that the Southern Luzon-Visayas corridor has experienced an increased incidence of super typhoons. Annex 14 illustrates the cycle of high wind speeds in the main typhoon-prone zones of interest to the project. TransCo has reviewed its design standards for the wind resistance of its transmission towers and lines compared to standards in Japan and other countries also prone to super-typhoons. The study found that many transmission lines, built between 1960 and 1980, had much lower design standards, capable of withstanding wind speeds of only km/hr, significantly below the wind speeds of the recent super-typhoons. Based on this review, TransCo has adopted a standard of 270 km/hr in Zone I for the Bicol-Visayas corridor and 240 km/hr for other typhoon-prone areas. 9. As a result of its study, TransCo recommended an overall tower-strengthening program, particularly in the country s critical high-wind zones. The Government has agreed to the need for a strengthening program and improved capability to respond to emergencies in the transmission system. Annex 10 outlines the Terms of Reference for consulting services to provide TransCo with a comprehensive investment plan to ensure the company is better prepared to deal with typhoons in future. 3. RATIONALE FOR BANK INVOLVEMENT 10. The project meets the eligibility criteria for a rapid response of the Bank to loan requests for the financing of investments necessary to repair actual or imminent damage resulting from Under ERC Rule 20G, Section 3, a notice of Force Majeure 10.2 should be issued in accordance with Section 10.2 Article 10 to ensure expenditures are allowable under the Transmission Wheeling Rate Guidelines. 3

10 natural or man-made disasters. Bank s dialogue during project preparation focused TransCo s attention on the need to have minimum preparedness components as well, which will be financed by NPC (borrower) and implemented by TransCo (implementing agency). The Bank has a long history of assisting the Government in power sector development. This assistance includes support of the sector s restructuring and privatization program and of efforts to promote increased access to electricity for rural communities in isolated areas. Furthermore, the Bank is actively involved in dialogue on power sector reform4 including the preservation of the transmission system s assets during the transition period prior to planned operation by a private concession. In this period of institutional changes, TransCo is constrained in its ability to raise funds for any new investments. C. BANK RESPONSE: THE PROJECT 1. BRIEF DESCRIPTION OF BANK S STRATEGY OF EMERGENCY SUPPORT 1 1. The Bank s strategy for emergency support is to support financing of critical assets of investments in the power transmission system serving the Bicol region, thus assisting in the removal of infrastructure constraints to the region s economic development. The strategy also includes continued dialogue on defining the investments required to strengthen the transmission and sub-transmission systems of the Bicol region and other typhoon-prone areas, and related financing. In this context, the Bank initially offered its support for the project immediately after the emergency to discuss key investments required to restore full power transmission capacity to the Bicol region. In May 2007, the Bank firmed up processing arrangements. In parallel, the Bank participated in the procurement review process to facilitate the work program. Due to the emergency nature of the project and consistent with OPBP 8.00, which provides for increased flexibility on the use of simplified procurement methods, the Bank agreed to the adoption of the National Competitive Bidding (NCB) procedures of the Philippines instead of International Competitive Bidding (ICB) procedures. The Government awarded the contracts for the restoration work on April 14, Following on the Government s official approval authorizing TransCo to apply for IBRD funding, appraisal work took place on July 10-23, PROJECT DEVELOPMENT OBJECTIVES 12. The project s development objective is to support the stabilization of power supply in the Bicol region by replacing or repairing critical electricity transmission infrastructure damaged by typhoons in SUMMARY OF PROJECT COMPONENTS 13. The Bank financed project is part of a US$21.6 million program with two sub-project components: (i) restoration; and (ii) initial preparedness. Part I contains four packages (Packages A, B, C, and D) of investments in equipment and their installation to repair typhoon damage to The Bank also has supported the power sector through a Policy and Human Resources Development (PHRD) grant for technical assistance to move forward energy market reforms and participation in related workshops with the Asian Development Bank (ADB) and Japan Bank for International Cooperation (JBIC). Furthermore, the Bank s DPL-1 (Development Policy Lending), approved in December 2006, contains triggers for actions in the power sector associated with DPL-2. 4

11 the 230 kv and 500 kv transmission systems, serving the Bicol region. Part I1 consists of investments in equipment and consultant services to reinforce the transmission system in order to reduce potential damage and related power system disruption from future typhoons. It also covers the costs of Rights-of-way (ROW) and resettlement. Part I. Restoration of the Bicol Transmission System Table 1: Project Packages in Part I (Restoration) Package Estimated Section of the Transmission System Supported and key No. of cost Characteristics Towers (US% million) A 230- kv line from Naga to Lab B 230- kv line from Tiwi Plant C to Naga C Three 230 kv lines: (1) From Tiwi Plant A to Daraga: (2) From Naga to Daraga (3) From Bacman to Daraga. D The 500 kv System Total This first part, the Bank s financed project, consists of three packages (Packages A, By and C) that cover the five sections of the Bicol area s 230 kv transmission system severely damaged immediately following the typhoons in The fourth package, to be financed by the Government (Package D), covers seven additional towers for the 500 kv system to replace those towers that collapsed several months after the typhoon due to the weakened structural integrity as a result of typhoon damage. Table 1 summarizes the project s components by package, consisting of transmission line towers and related materials, and by section of the transmission system that components will help to restore, shown on the map in Figure 1. Part 11. Strengthening of the TransCo System Against Future Typhoons 15. This part consists of four packages, to be financed by the Government. Two packages (Package El and E2) cover the additional ERS required to rapidly restore power in the event of future damage to transmission towers and the development of an investment plan for reinforcing the transmission system against typhoon damage. The two other packages, Package F and G, cover the costs of ROW and resettlement, respectively. Table 2 summarizes the components in these packages. 16. In addition to the above components, TransCo requested that ICC/NEDA consider allowing TransCo to include, in the proposed project, a shunt reactor (180 MVar), at an estimated cost of US$7.2 million, in order to stabilize power in the Northern part of the Luzon transmission line. During the typhoons of 2006, the System operator had to de-energize one circuit of the entire stretch of the 500 kv transmission line due to the voltage build-up in the Northern portion of the line resulting from damaged Southern portions. Had a shunt reactor been in place in the Northern portion of the line, it would have helped to compensate for the higher voltage build-up, making it unnecessary to de-energize the line and thereby increasing the 5

12 availability and reliability of power in the Bicol region. This investment will be considered in the future. Table 2: Project Packages in Part I1 costs Package Description (US% million) El Supply of 11 additional sets of ERS to replace existing stocks borrowed from 1.70 E2 other TransCo stores, thereby enhancing the system s preparedness for restoring power in the event of fhture damage to transmission towers. Provision of consulting services to assist with planning the investments required for a comprehensive transmission upgrading pr~gram.~ TransCo has submitted draft terms of reference (Annex 10) to ICC/NEDA for final approval F ROW 0.68 G Resettlement 0.18 Total ELIGIBILITY FOR PROCESSING UNDER op/bp 8.00 The project meets the principal criteria and guiding principles for emergency operations, as specified in OP8.00 concerning:...the application of rapid response instruments to address major adverse economic and/or social impacts resulting from an actual or imminent natural or man made crisis of disaster. The Bank s Rapid Response Committee chaired by the Managing Director was informed of the emergency nature of the project on August 9, CONSISTENCY WITH COUNTRY STRATEGY 18. The project supports the Bank s strategy for assisting countries in recovering from the adverse economic and social impacts of natural or man-made disasters. It also will help to remove infrastructure barriers to achieving the objectives of economic growth and social inclusion outlined in the current Country Assistance Strategy (CAS). Furthermore, by financing investments that will help to preserve the assets of the transmission system, the project indirectly will support one of the three main platforms for achieving the CAS objective, a strategy to promote private sector investment. 6. EXPECTED OUTCOMES 19. The main project outcome will be the restored capability of the transmission system to meet the normal load in the Bicol area. The project will retroactively finance ongoing investments that already have reduced the supply gap as well as additional investments leading to full restoration. Figure 2 provides an overview of the progressive restoration of the 230 kv transmission system, moving from the complete shutdown of the system in November 2006 to full capacity to meet the normal load by March The restoration of the additional 500 kv towers will require more time but should be complete by April 2008, prior to the start of the 2008 typhoon season. Another expected outcome is the reduced vulnerability of the transmission The proposed upgrading program is unlikely to take place before 2008, subject to ERC approval. By that time, the government expects the private concessionaire to be in place. 6

13 ~ system to disruption from typhoons due to strengthened infrastructure combined with an enhanced capability for emergency response to damaged transmission towers. 20. Key Outputs. The key output leading to the above outcomes is the fast, successful completion of the procurement program for 118 transmission towers to help restore the transmission system serving the Bicol area to full operation by March Monitoring and evaluation. Annex 2 provides a full description of the project s monitoring and evaluation framework. The main indicators of project outcome are as follows: e e Re-establishment of the remaining 50 GWh of unsupplied energy in the transmission system for the Bicol region by the end of March 2008; and Improved power system reliability in the Bicol region, evidenced by a decrease in equivalent Power System Minutes lost in Luzon during I- - -.:- - -.I j I I L I j,! 1! I I I I Nov Dec Jan Feb Mar Apr May Jun Jul Aug Srp Oct Nov Dec 2006 I bwnd Total Maximum SS Capacity Total Subtransmission Capabllty - * -I Total Load Sewed 1 j Jan I 2008 I I D. APPRAISAL OF PROJECT ACTIVITIES 22. The appraisal activities applicable to the project are (i) a review of lessons learned from past projects and their incorporation in project design; (ii) an economic analysis of the financed investments; (iii) an assessment of the institutional capability of TransCo to manage the project; and (iv) an evaluation of environmental and social safeguards. Lessons Learned From Past Projects 7

14 23. Delays in procurement. The most recent Implementation Completion Reports (ICRs) for Bank-financed power transmission projects during the 199Os, managed by NPC, have noted protracted delays in procurement. Given the emergency nature of the project and the fact that the procurement already has taken place for many of the components, the risk of protracted delays in procurement is low. 24. Deficiencies in resettlement. ICRs for past power projects have rated resettlement as highly unsatisfactory. Due to past deficiencies in resettlement, the project s appraisal has given considerable attention to evaluating related policies and procedures in place. To ensure the project s compliance with Bank safeguard policies, the supervision team will conduct quarterly monitoring activities and facilitate discussions to resolve any potential issues adversely affecting the project s Land Acquisition and Resettlement Plan (LARP). Furthermore, TransCo s Corporate Social Responsibility and Environmental Stewardship Program includes a regularly updated reforestation plan to ensure the restoration and maintenance of any vegetation that TransCo s projects may affect. 25. NPC and Sector Finances. In the past, NPC has experienced liquidity problems attributable to its under-capitalization and inadequate tariff adjustments. The Government recognizes that heavy reliance on foreign debt financing is unsustainable in the long run. As a compelling response to contain NPC s deficit and minimize the related fiscal costs, the EPIRA of 2001 provides the framework for restructuring the overall power sector, recapitalization of NPC, unbundling and privatization of NPC generation and transmission operations. In particular, the EPIRA introduced the following new sources of fimds: (i) universal charge (UC) to cover stranded contract cost and stranded NPC debt,6 respectively; (ii) privatization proceeds; and (iii) assumption by the Government of up to PHP 200 billion of NPC s financial obligations. 26. The past 12 months have seen a concerted effort by the Government to restore and sustain the financial viability of Consolidated PSALM, including: (i) continued improvements in operational efficiency and in prioritization of pre-privatization capital expenditures by NPC and TransCo; (ii) steps towards the engagement of a Trading Advisor and appointment of IPP Administrators; (iii) mitigation of risks perceived by investors to achieve successful privatization and use of the resulting privatization proceeds to reduce borrowings. The privatization of assets has taken further momentum with the sale of the MW 600 Masinloc coal-fired power plant, and government plans to complete privatization of 50 percent of NPC s generation assets by early 2008; and (iv) moving towards improved liability management, including refinancing debt on more favorable terms and hedging of currency and fuel price exposure, as appropriate. Given the emergency nature of the operation, its quick disbursement nature and ongoing sector reform leading to stabilization of the sector s finances, no financial covenants - except those related to proper financial management - have been introduced in this project. According to EPIRA, (a) stranded contract cost is defined as the excess of the contracted cost of electricity under eligible IPP contracts of NPC over the actual selling price of the contracted energy output of such contracts in the market. Such contracts shall have been approved by the ERE3 as of December 3 1,2000; and (b) stranded debt refers to any unpaid financial obligations of NPC which have not been liquidated by the proceeds from the sales and privatization of NPC assets. 8

15 Economic Analysis 27. The project s appraisal used a cost-benefit analysis (see Annex 9) for evaluating the economic viability of the investments that the project will finance and has estimated an internal economic rate-of-return (IERR) amounting to 39 percent. Key assumptions in the analysis, which Annex 9 describes in detail, include: (i) a one percent probability, in any given year, over a 20- year period, that a typhoon of the same severity as the typhoons of 2006 will strike the Bicol area and cause similar damage; (ii) economic benefits valued at the cost of unsupplied energy in the Bicol area (US$5 million equivalent per GWh); and (iii) equipment designed to remain structurally sound for 20 years. The economic costs included in the analysis consist of the capital costs of the equipment financed by the project plus the costs of ROW and resettlement, along with price contingencies in the event of typhoon damage during the project s implementation period. Institutional Capability 28. Implementation of this project involves coordination among NPC, PSALM, and TransCo. NPC will be borrower for the project. PSALM created as part of EPIRA to take ownership of all NPC generation assets, liabilities, IPP contracts, real estate and other disposable assets, will take on NPC s borrower obligations once the transfer of debt and assets is completed as part of the ongoing privatization and reform process. TransCo, created under EPIRA to assume NPC s transmission functions, will implement the project. 29. When the transfer of debt and assets to PSALM is completed by the Government, then the Loan Agreement between IBRD and NPC may be amended to change the borrower from NPC to PSALM and corresponding amendments and consents will be obtained from the Government and from TransCo. This was discussed and recorded in the minutes of negotiations. 30. Currently, NPC s audited financial statements cover the operations of TransCo, the project s implementing agency because the transfer of assets to TransCo has not yet taken place. NPC currently receives all revenues that TransCo collects from transmission service and, in turn, provides TransCo with the funds it needs for operations. The appraisal s financial management review has found that TransCo financial management meets the minimum requirements of the Bank, satisfying OP/BP10.02 (see Annex 4). In addition, TransCo has experience implementing Bank-financed projects. The past project most relevant to BPRP took place in 1995, for which the Bank-financed restoration work on the 500 kv Naga-Tayabas transmission line damaged by civil unrest. TransCo s performance in managing this project was satisfactory. Environmental and Social Safeguards 3 1. The Bank s appraisal reviewed environmental standards and the Environmental Impact and Management Plan (EIMP) for the project, as well as TransCo s capability to implement the EIMP. TransCo s procedures for conducting an environmental impact assessment (EIA) and securing an Environmental Compliance Certificate (ECC)/Certificate of Non-Coverage (CNC) meet the Bank s minimum requirements specified under OP on Environmental Assessment. The EIMP adequately provides for the mitigation of significant impacts that the project may 9

16 generate.7 TransCo has an Environmental Management Department with a qualified staff of environmental and social development specialists in its central and field offices. The company also has IS certification and has adopted its own Corporate Social Responsibility and Environmental Stewardship Program. 32. In terms of social impact, the project will result in direct and indirect benefits to millions of residents of the Bicol region, it involves the involuntary resettlement of a relatively small number of people. The benefits of the project include improved safety of transmission lines and both greater reliability and efficiency of power supply. The project may displace 82 structures, including 47 households, in the process of reconstructing the damaged parts of the transmission system. A review done during project preparation with the National Commission on Indigenous People (NCIP), Albay Provincial Officer, provided an indicative list of project affected persons, their properties and their location together with the type of land documents covering these properties. The review showed that none of the Tiwi Barangays with ancestral domains (ADS) (Joroam, Misibis, Taabong, and Maayong) are affected by the restoration project. A similar review for Buhi Barangays with ADS (Sta Cruz, Ipil, Kaulam, and Iraya) also showed the same results. It was agreed that in case any indigenous population were affected the Bank s IP policy would be complied with, particularly in the area of consultation and compensation. 33. The Land Acquisition and Resettlement Plan (LAW), which TransCo has prepared, is consistent with Bank standards on compensation. Because of the project s emergency nature, it is exempt from the requirement to obtain the Free and Prior Informed Consent of the Indigenous Peoples. However, following good practice, TransCo has applied, and was granted on September 4,2007, for a certification from the NCIP confirming that the Free and Prior Informed Consent (FPIC) is not required for this emergency project. E. IMPLEMENTATION ARRANGEMENTS, COST, AND FINANCING PLAN Institutional Arrangements 34. Because the transfer of transmission assets to TransCo is still in progress, the Bank has agreed with PSALM to make the loan to NPC with arrangements for NPC to make available all the funds to TransCo under a separate subsidiary agreement, with the same terms and conditions. The Bank will also have a project agreement with TransCo. Annex 6 provides the summary findings of the appraisal s assessment of the project management capability of TransCo. 35. NPC. The Borrower, NPC, is a government-owned and controlled corporation created under Republic Act No NPC s audited financial statements still include the operations of TransCo. NPC deposits the funds it collects from TransCo into an account established for the funding of TransCo s operations. The President of the Philippines appoints the members of the NPC s Board with the Secretary of the Department of Energy as Chairman and the President of NPC as Vice Chairman. When the transfer of debt and assets to PSALM is completed by the The implementation of the mitigation measures requires the establishment and maintenance of buffer zones to ensure that residents in the affected areas remain outside electromagnetic fields generated by the transmission lines. In addition, the appraisal has determined that the biodiversity offsets to replace the natural environment displaced require strengthening. 10

17 Government, then the Loan Agreement between IBRD and NPC may be amended to change the borrower from NPC to PSALM. 36. TransCo. The Implementing Agency for the project, TransCo, is a government- owned and controlled corporation, created in 2000, under Republic Act No. 9136, to acquire all the transmission assets of NPC. The transfer of these assets will take place once all institutional creditors of NPC have given their consent to the transfer, a process in progress. Although TransCo s financial statements are still consolidated with those of NPC, TransCo has its own financial management system and organization. NPC will enter into a Memorandum of Agreement with TransCo, for the project s implementation. TransCo will be responsible for the preparation and submission to the Bank of the (a) quarterly Interim Financial Reports of the project 45 days after the end of each calendar quarter; and (b) annual audited project financial statements no later than six months after the end of each fiscal year. The Internal Audit Unit of TransCo shall conduct a review of the project every calendar semester during the project implementation and a copy of the report submitted to the Bank 30 days after each calendar semester. Project Costs Table 3: Project Cost Summary (In US$ million) PackageIComponent Foreign Local Total Part 1 : Restoration of the Bicol Transmission System (Transmission Towers and Materials) Package A: Naga-Lobo Transmission Line Package B: Tiwi Plant C-Naga 230 kv Transmission Line Package C: Three 230 kv Transmission Lines Tiwi Plant A to Daraga Naga to Daraga Daraga to Bacman Package D: A Seven 500 kv Towers 1.oo Subtotal Part I Part 2: System Strengthening and Improved Emergency Preparedness Package El : Emergency Restoration Structures (ERS) Package E2: Consulting Services Package F: Right of Way Costs Package G: Relocation Costs Subtotal Part II 1.55 I Total Base Costs Contingencies (10%) Subtotal Project Costs Part 2 RVAT (12 YO) Part 2 Import Duties TOTAL PROJECT COSTS

18 37. Total project costs, including both Government and Bank financing, amount to about US$21.61 million (see Table 3). These costs are based on actual contract prices, including taxes, together with provision for contingencies that might arise if a second typhoon hits the construction area. The costs of restoration of the transmission system due to typhoon damage amount to US$15.38 million, or about 68 percent of total project costs. The costs of investments in system strengthening and improved emergency preparedness amount to about US$3.05 million. In addition to the estimated base cost of about US$18.46 million, the total cost includes contingencies, taxes, and duties of about US$3.15 million. Project Financing Plan 38. Table 4 summarizes the project s financing plan. The Bank will finance US$12.94 million, or about 60 percent of the total project cost, and TransCo will finance the remaining (US$8.67 million) on its own. Provision has been made for a 10 percent contingency to ensure that there should be some funds available in case of further emergencies or cost overrun. Table 4: Bicol Power Restoration Project Financing Plan (US$ million) Foreign Local Cost Total cost Bank Loan (Part I A,B,C including taxes and 10% contingencies) TRANSCO Own Financing (Part ID&II, ROW, and Relocation) Total Financing Project Loan Disbursements 39. Disbursement schedule. As indicated in Table 5 below, project disbursements are expected to be completed in about a year from contract signature. Given the critical needs of the project to immediately mobilize loan proceeds for restoration activities currently underway, an increase in the retroactive financing limit from 40 percent, as per guidelines under emergency operations, to 80 percent has been approved by senior management as per OP 8.00 to support TransCo with its rapid response efforts. Based on the disbursement schedule and expected effectiveness date, the Government confirmed this request during negotiations. Table 5: Expected Disbursements of Bank Loan by Quarter (In US$ million) FY08 Q3 FY08 44 (Jan-March 2007) (April-June 2008) Disbursements Cumulative Loan percentage Procurement arrangements. The project is under implementation, using accelerated procurement procedures, in order to minimize delays. TransCo submitted tender documents for 12

19 the supply and installation of replacement towers under three contract packages on January 29, At the same time, TransCo issued the documents to nine international firms. A prebidding conference took place on February 19,2007, and six bidders responded by March 8, 2007, closing date of the tenders. Kalpaturu Power Transmission Company of India submitted the lowest responsive evaluated bid, complying with all bidding requirements, and received the contract award for all three packages. The signed contracts became effective in April During concurrent consultations, the Bank, as noted earlier, agreed to approve the use of Philippines NCB procedures, as modified to include provisions for installation works. The Bank also agreed to the imposition of the Approved Budget for the Contract as a ceiling on bid prices under these tenders, after TransCo demonstrated its compliance with the conditions set by the Bank for accepting this measure. After receiving satisfactory responses to its questions about the results of the bid evaluations and the recommendations of awards, the Bank issued its concurrence with the award on May 25,2007. These three contracts are subject to retroactive financing. 42. Project implementation and Bank supervision. Overall, the implementation of project components in Part I will take less than a year. The supervision and monitoring of the project s implementation will begin two weeks after loan signing. The Bank team visited the construction site in July 2007, and reviewed construction progress with TransCo staff in October, Project supervision will require about 10 staff weeks and, to the extent possible, Bank staff based in the Manila office will conduct the supervision, particularly for the fiduciary and safeguard aspects of the project. 43. Closing date. The project s tentative closing date is July 30,2008. The restoration of the 118 towers in the 230 kv transmission system should be complete by early

20 F. PROJECT RISKS AND MITIGATING MEASURES Ris Wrating Institutional (L) The key outputs may not be completed on time. External - Additional typhoons (S) Since the repair work financed by the proposed project will take place during the next typhoon season, there may well be more damage before the contracts are complete. Financial (M) Additional typhoons may disrupt the repair work and result in higher costs for completion. Internal controls Perception of corruption in the country is high. External auditors reported certain non-compliance with internal controls in its audit of the financial statements Accounting External auditors reported certain issues on accounting policies Mitigating Measure Given that construction already has begun and will be well advanced by the time of loan approval, it is unlikely that there will be any institutional risks that will affect the progress of the works. TransCo already has demonstrated its ability to respond swiftly to restore power on a temporary, emergency basis using ERS. The company is studying further additional strengthening measures required to prevent or minimize future damage in critical wind zones. The project s cost estimates include contingencies amounting to an additional 10 percent of project costs. The internal audit unit of TransCo shall cover the project in its scope of work and shall furnish the Bank with a copy of its report. The three contract packages under Part I of the project were already subjected to prior-review by the Bank. The project is considered as a separate work order and therefore separate financial reports can be generated G. TERMS AND CONDITIONS FOR PROJECT FINANCING 44. The loan would be of 18 years maturity with a five-year grace period. The Borrower has selected the variable-spread loan (VSL) option in which the spread over LIBOR is reset every semester. The loan will have the following terms: 0 A front-end fee equal to 25 basis point (0.25 percent) of the loan amount payable by the Borrower. 0 0 Interest payable by the Borrower for each interest period at a rate equal to LIBOR for the loan currency plus the variable spread, subject to any waiver of a portion of such interest as the Bank may determine from time to time. Payment dates of April 15 and October 15 in each year. 14

21 Overview Annex 1: Detailed Description of Project Components Philippines: Bicol Power Restoration Project 1. The Bank financed project is part of a US$21.6 million program with two sub-project components: (i) restoration; and (ii) initial preparedness. Part I contains four packages (Packages A, By Cy and D) of investments in equipment and their installation to repair typhoon damage to the 230 kv and 500 kv transmission systems, serving the Bicol region. Part I1 consists of investments in equipment (ERSs) and consultant services to reinforce the transmission system in order to reduce potential damage and related power system disruption from future typhoons. It also covers the costs of Rights of Way (ROW) and resettlement. 2. The Bank s project supports financing for investments necessary for the restoration of five sections of the 230 kv transmission system under Part I (Packages A to C). TransCo will use its own funds to finance restoration work for the 500 kv system under Part I (Package D) and the investments for the strengthening of the transmission system under Part I1 (Packages El and E2). Part I. Restoration of Power Transmission Capacity in the Bicol Area 3. This part consists of three packages (Packages A, B, and C), to be financed by the Bank s project, covering five sections of the Bicol area s transmission system damaged immediately following the typhoons in After competitive bidding TransCo has awarded the contract to Kalpataru of India, which began the restoration work in May 2007 and expects to complete the work by March The Bank will provide retroactive financing for this work. In addition, Part I includes a fourth package (Package D), to be financed by the Government, to restore towers weakened during the 2006 typhoon season, which ultimately collapsed in May The packages consist of the following items: e e e e Package A. Supply and installation of 56 steel transmission towers and line materials for typhoon-damaged portions of the double-circuit, Naga-Lab0 230 kv 795mm ACSR transmission line (estimated cost: US$5.49 million). Package B. Supply and installation of 32 steel transmission towers and line materials for typhoon-damaged portions of the double-circuit Tiwi Plant C-Naga 230 kv 2-795mm ACSR transmission line (estimated cost: US$4.48 million). Package C. Supply and installation of 30 steel transmission towers and line materials for typhoon-damaged portions of the double circuit 230 kv ACSR transmission lines in three sections of the transmission system: (a) Tiwi Plant A-Daraga (1-795mm); (b) Naga- Daraga (1-795mm); and Bacman-Daraga (2-795mm) (estimated cost: US$3.48 million). Package D. Supply and installation of additional materials for restoring seven 500 kv towers (estimated cost: US$1.94 million). 15

22 Part 11: Strengthening of the Transmission System 4. This part, to be financed by the Government, consists of two packages (Package El and E2) covering additional ERS required for emergency use and development of an investment plan for reinforcing the transmission system against future typhoon damage. e e e Package El. Supply of 11 additional sets of ERS structures to replace existing stocks borrowed from other TransCo stores. These structures need to be compatible with the proprietary ERS materials in stock at TransCo. Given the proprietary nature or the equipment, TransCo will procure this equipment through direct contracting, which the TransCo Board already has approved (estimated cost: US$1.7 million). Package E2. Consulting services to assist with planning investments for comprehensive transmission upgrading program.8 Draft Terms of Reference (TOR) have been submitted to TransCo s Corplan group for final approval (estimated cost: US$0.50 million). Package F. Right-of-way (estimated cost: US$0.68 million). Package G. Resettlement of displaced households (estimated cost: US$O. 18 million). The proposed upgrading program is unlikely to be implemented before 2008, subject to ERC approval and after the time when the Concessionaire is expected to be in place. 16

23 Annex 2: Results Monitoring Framework for BPRP Philippines: Bicol Power Restoration Project Pr men The project s development objective is to support the stabilization of power supply in the Bicol region by replacing or repairing critical electricity transmission infrastructure damaged by typhoons in Inte Part I - Transmission System Stabilization The transmission system with the capability to deliver an additional 50 GWh of electricity. outputs Part I - Transmission System Restoration Procurement of kv towers and related materials. ors Re-establishment of remaining 50 GWh unsupplied energy in the Bicol region by February Improved power system reliability in Bicol, evidenced by a reduction in minutes lost to 10 minutes. Indicators About 1 18 new 230 kv towers in place by March 2008 Accelerated contracting for 230-kV towers, with tendering started in April 2007 Use of Project Outcome Information Input to the Implementation Completion Report Use of Intermediate Outcome Monitoring Assessment of progress in meeting the final project outcome Use of Output Monitoring Assessment of progress toward meeting intermediate outcome. Arrangements for Results Monitoring Data Collection and Reporting Project Outcome Target Values Responsibility Bas e 1 in e Frequency Data Collection Indicators (accumulative) for Data and Reports Instruments Collection Accelerated 3 months 3 Quarterly TransCo PMG PMG contracting (to place contract) 6 months 6 Reports TransCo and Public (to complete works) 0 fatalities 0 Quarterly TransCo PMG PMG Safety Maximum Demand 232MW 251 MW Monthly Reports System Operator PMG Bicol (DOE estimate) System Interruption Severity Index Annually System Operator PMG Note: 1/ Definitions for Performance Indicators and Targets based on ERC Publication: Regulatory Reset for National Transmission Company for Final Determination ERC Case No RC June 13, 2006, Chapter 8 Performance Based Regulation, Section 8.5 and / System Interruption Severity Index (SISI) is defined by the Energy Regulatory commission as the total delivery point unserved energy (in MWW60) divided by System Peak load (see ERC Case IRC June 2006 Regulatory Reset for TransCo Final Determination Section 8.6 ERC Analysis and Decision. 17

24 Annex 3: Summary of Estimated Project Costs Philippines: Bicol Power Restoration Project: Contract Costs Table 3.1: Project Cost Summary (In US$ million) PackageIComponent Foreign Local Total Part 1 : Restoration of the Bicol Transmission System (Transmission Towers and Materials) Package A: Naga-Lobo Transmission Line Package B: Tiwi Plant C-Naga 230 kv Transmission Line Package C: Three 230 kv Transmission Lines Tiwi Plant A to Daraga Naga to Daraga Daraga to Bacman Package D: A Seven 500 kv Towers 1.oo Subtotal Part I Part 2: System Strengthening and Improved Emergency Preparedness Package El : Emergency Restoration Structures (ERS) Package E2: Consulting Services Package F: Right-of-way Costs Package G: Relocation Costs Subtotal Part II I. 55 I Total Base Costs Contingencies (10%) Subtotal Project Costs Part 2 RVAT (12 %) Part 2 Import Duties TOTAL PROJECT COSTS Table 3.2: Bicol Power Restoration Project Financing Plan (In US$ million) Foreign cost Local Cost Total Bank Loan (Part I A,B,C including taxes and 10% contingencies) TRANSCO Own Financing (Part IDMI, ROW, and Relocation) Total Financing Table 3.3: Expected Disbursements of Bank Loan by Quarter (In US$ million) FY08 Q3 FY08 44 (Jan-March 2008) (April-June 2008) Disbursements Cumulative Loan uercentage

25 Scope of the Assessment Annex 4: Financial Management Assessment and Project Disbursement Arrangements Philippines: Bicol Power Restoration Project 1. A Financial Management Assessment Review of the National Power Corporation (NPC), and National Transmission Corporation (TransCo), was undertaken with the objective of ensuring that an adequate financial management system is in place. The assessment covered (i) the 2004 to 2006 audited financial statements of the Borrower; (ii) the organizational structure of the Borrower and the Implementing Agency, specifically the finance and internal audit; (iii) the accounting and procedures manual; and (iv) the discussion of the financial management and disbursement arrangements of the project. Overall, the assessment has found that the financial management of the project meets the minimum requirements of the Bank. Profile of the Borrower and Implementing Agency 2. The Borrower under this loan is the National Power Corporation (NPC), a governmentowned and controlled corporation (GOCC) created under Republic Act (RA) No The Implementing Agency for the project is TransCo, a GOCC created in 2000 under RA No to acquire all the transmission assets of NPC. To date, however, the transfer of such transmission assets has not been finalized. Thus, and since TransCo does not have full ownership of the assets currently used, its financial statements are still consolidated with NPC s. However, TransCo has its own financial management system and organization. NPC has entered into a Memorandum of Agreement with TransCo, whereas TransCo shall implement the project. TransCo, as the implementing agency, entered into contracts with the contractors and has obtained the proceeds from NPC to pay the contractors. The proposed Bank loan to NPC, with the consent of the Bank, maybe transferred to Power Sector Assets and Liabilities Management (PSALM) Corporation, a GOCC created under Republic Act No to own the NPC s generation assets, liabilities, real estate, and all other disposable assets. Transfer of all these assets and liabilities to PSALM and TransCo is subject to the conditions precedent which to date have not been fully completed. Experience of TransCo with Bank-Financed Projects 3. The Bank has had considerable experience in supervising TransCo s implementation programs under a number of projects implemented during the 1990s. The most recent relevant project was implemented in 1995, in which the Bank financed restoration work on the 500 kv Naga-Tayabas transmission line that had been damaged due to civil unrest. The work was done expeditiously and completed satisfactorily within a contract period of about 18 months. 4. TransCo has a very experienced project management team established under a separate Vice President. This arrangement has in part been supported by earlier Bank operations (Leyte Geothermal Project), through which several key staff were provided training in Project Under Bank OPpBP10.02 and Guidelines on Financial Management Aspects of Emergency Operations Processed Under OPIBP

26 Management and achieved certified Project Manager status after a three-month course in the United States. On the financial management side, TransCo and NPC have a well-defined organizational structure and accounting and procedures manual. TransCo has a complete set manual of policies and procedures covering all stages of the transaction as well as recording and reporting. It has already obtained an I S0 9001:2000 certification. The key officers and staff of NPC and TransCo finance and internal audit have more than 15 years of work experience and either have a masters degree and/or are certified public accountants. TransCo s financial management system is computerized and is capable of generating the project financial statements. Internal Auditing at TransCo 5. TransCo has an internal audit department with 13 staff who are graduates in accounting (and also certified public accountants) and engineering and with an average experience of over 14 years in internal audit. The internal audit department reports directly to the Board of TransCo. It was agreed that TransCo management will authorize the internal audit unit to include the project in its scope of work. The scope of work of the internal audit unit will include the review of the adequacy of supports of selected payments to contractors, test inspection of the delivered materials and equipment purchased under the project and the physical controls over these assets, and also the physical inspection of the construction in progress. There will be an internal audit review for the project, every calendar semester during the project implementation, with a copy of its report submitted to the Bank 30 days after the end of each calendar semester. Report of the Commission on Audit (COA) 6. The Commission on Audit (COA) rendered a qualified opinion on the 2006,2005, and 2004 financial statements of NPC. The following issues were the subject of the audit qualification in 2006: (a) accounts with abnormal balances and unidentified items amounting to PHP billion and PHP 3.00 billion, respectively; (b) cost of completed projects were still included in the construction in progress account amounting to PHP billion; (c) deficiencies in the Asset Trust Account of PHP billion due to errors or omissions of details pertaining to Independent Power Producer plant accounts and residual assets of PHP 1.42 billion remained unadjusted in the generation company accounts; and (d) Philippine Accounting Standards No. 16 on property, plant, and equipment was not fully adopted by NPC with expenses of PHP billion as of December 31, 2006, for terminated power plant projects recognized as asset instead of expense. 7. NPC/TransCo, in coordination with COA, have been addressing these issues. As of August 3 1,2007, the percentage of adjustments to the above mentioned issues reported by NPC and TransCo as a result of their efforts to resolve the COA issues mentioned above were as follows: (a) accounts with abnormal balances and unidentified items (90 percent solved); (b) cost of completed projects still in CIP ( 38 percent and another 63 percent adjusted by early 2008); (c) deficiencies in the Asset Trust Account ( 93.4 percent solved); (d) residual assets of power producer plant accounts ( 59 percent solved); and (e) accounting treatment for expenses incurred for the terminated power plant projects, 33 percent and the balance will be adjusted after the ongoing validation work is completed. Most of the remaining unadjusted balances relate to transactions prior to the reorganization of NPC in In order to complete any remaining 20

27 internal control weaknesses, NPC management will work with TransCo through a task force using current internal staff, which will be dedicated to work on the verification, reconciliation and recording of the adjustments. These issues though are not expected to be present in the processing, recording and reporting of the project transactions. The project will only be operating in one location and involved a few contracts only. Furthermore, all contracts are on supply and install arrangement such that the risk of losses to materials and monitoring of the inventory supplies while under construction and implementation still rests with the contractors. 8. Solution of these outstanding balances will need to take place prior to the Bank appraisal of the next potential project with TransCo. In that context, and as stated before, the Bank is planning to support such a concession with a Partial Risk Guarantee, which is planned to be appraised sometimes around June Overall Financial Management Risk Assessment 9. The appraisal considers the financial management risk low (see Table 4.1). Country Issues 10. The only relevant country issue is the perceived high corruption in the country. This can be controlled under this project because there are only a few contracts involved and the project is confined to only one location. Furthermore, the internal audit (by TransCo) is required to include this Project in its scope of work. Table 4.1: Risk Assessment and Mitigation Measures Country level M Perception of corruption is high, but this is mitigated N by the proposed involvement of the internal audit. Furthermore, prior review of contracts by the Bank procurement specialist was already conducted for the three packages. Entity level M Project level L Overall inherent risk M Control Risks Budget L Accounting L The project will be accounted as a separate work order and therefore separate financial reports can be generated. There are only a few contracts and transactions under this project. N Internal controls M The internal audit unit shall cover the project in its scope of work and shall furnish the Bank with a copy of its report. Fundsflow L Financial reporting L Auditing L Overall control risks L H - High S - Substantial M - Moderate L - Low N 21

28 Financial Management Arrangements for the Project 11. Budgeting. This is an emergency project, and therefore was given exceptional approval by all government agencies. Estimates of the cost of restoration were done by qualified technical staff in TransCo and were the basis for the procurement activities. The relevant government agencies reacted quickly to TransCo request for early action to restore the damaged transmission line structures. On February 7,2007, TransCo notified the Energy Regulatory Commission (ERC) of its intention to apply the Force Majeure provisions in the ERC rules that are supported by documentation from the Department of Science and Technology as to the extent of the damage. Both the Environment Management Bureau (March 15,2007) and the National Economic Development Agency (March 19,2007) quickly approved the extent of the proposed restoration project on an exceptional basis. 12. Accounting. The processing, recording, and reporting of project transactions has been mainstreamed. TransCo has adequate financial management manual from purchasing to asset management, recording, and reporting. The officers and staff involved in the accounting function for the project are all experienced in project accounting and have adequate qualifications. The officers and staff are mostly accounting graduates and certified public accountants andor with a masters degree in finance or business management. The general accounting system of TransCo is computerized using Oracle. A job order number is created for each project order and all costs incurred are recorded based on the job order number. A project monitoring system i s in place to monitor the actual costs against budget and contracted amounts. The proposed project also has its own job order number - facilitating generation of project financial reports. 13. Internal control and auditing. TransCo s internal controls and procedures have been adopted for this project and the internal audit unit covers the project in its scope of work. It is expected that the internal audits will take place each calendar semester during the project implementation, with a copy of the reports submitted to the Bank 30 days after the end of each calendar semester. Based on the review of the finance procedure manual and the process flow charts, the system of internal controls was found to be adequate. There is also adequate segregation of incompatible functions and independent management controls - such as the preparation of bank reconciliation statements, physical count of fixed assets and inventories and reconciliation of the same with the accounting records, and reconciliation of subsidiary ledgers with the general ledgers, etc. 14. TransCo has an internal audit department, which reports directly to the Board, with 14 staff who are graduates of accounting (all are also certified public accountants) and a mechanical engineer. The internal audit head is a lawyer and has a master s degree in business administration. On average, the audit staff have 14 years of internal audit experience. Funds Flow and Disbursement Arrangement 15. The loan in the amount of US$12.94 million will finance civil works and goods at 100 percent of the eligible expenditures. Direct payment method shall be applied under the project, except for the retroactive financing which will be through reimbursement supported by full documentation. The retroactive financing of expenditures will amount to 80 percent of the 22

29 loan amount, which the Bank will disburse on a reimbursement basis. Disbursements under the project shall comply with the Bank policies and procedures on disbursements and financial management as reflected in the Bank s Disbursement Handbook. 16. Retroactive financing will be provided under the project for up to US$10.35 million of the Bank loan to reimburse for eligible expenditures for project activities paid not more than 12 months prior to the expected date of signing of the legal agreements. Table 4.2: Loan Allocation and Financing Percentage Amount of the Loan Percentage of Expenditures Category Allocated to be Financed (In US$) (Inclusive of taxes) a. Goods and works Part 1 (a) of the Project Part 1 (b) of the Project Part 1 (c) of the Project 4,759,363 3,973,666 2,994, % of foreign expenditures and 66% of local expenditures for goods and works b. Unallocated 1,212,727 c. Front-end Fee 0 Total 12,940,000 Financial Reporting 17. The financial reports required under the project are as follows: (i) annual audited financial statements of NPC and TransCo, should TransCo be eventually privatized during the project implementation, together with the auditor s comments and observations or management letter; and (ii) annual project financial statements (balance sheet and statement of sources and uses of funds) together with the auditor s comments and observations or management letter. These two financial reports shall be submitted to the Bank no later than six months after the end of each fiscal year. In addition, un-audited interim financial reports of the project will consist of: (i) a balance sheet and statement of receipts and disbursements showing data for the quarter and cumulative from project start with comparison against plan per Emergency Project Paper (EPP); (ii) physical progress status report; and (iii) explanation of significant variances noted between financial and physical accomplishment and actual against plan. These reports shall be submitted to the Bank no later than 45 days after the end of each calendar quarter. External Auditing 18. The Commission on Audit, the supreme audit institution, shall be the auditor of this project and will conduct the audit on the same terms as other Bank-financed projects. The project audited financial statement shall consist of the balance sheet and the statement of sources and uses of funds. 23

30 Financial Covenants e e e The project shall maintain an adequate financial management system that shall record the project transactions in accordance with generally accepted accounting principles. The audit submissions shall include the financial statements described in Table 4.2. Un-audited interim financial reports for the project consisting of (i) statement of receipts and disbursement for the quarter and cumulative from project start with comparison against plan per PAD; (ii) physical progress status report; and (iii) explanation of any significant variation. These reports shall be submitted to the Bank no later than 45 days after the end of each calendar quarter. Table 4.2: Required Financial Statements Type of Financial Audit Opinion Description Deadline Statements Coverage 1. Project Composed of: No later than six months To cover the whole Financial 1. Project balance sheet after the end of each project Statements 2. Project sources and used finds fiscal year 3. Notes to the Financial Statements 2. Audit Detailed audit findings and No later than six months Management recommendations after the end of each Letter fiscal year 3. Entity financial Composed of: No later than six months statements of NPC (with TransCo 1. Balance Sheet 2. Income Statement after the end of each fiscal year consolidated) 3. Cash flows statement 4. Notes to the Financial Statements Supervision Plan 19. The FM supervision of the project shall be conducted two weeks after the loan signing. The review shall include a combination of any of the following: (i) review of the FM system through inspection of selected payments under the project; (ii) site visit and inspection of fixed assets purchased under the project; (iii) the management of the DA; and (iv) review of the project financial reports. This will take around five days per visit considering the project location. 24

31 Overview Annex 5: Procurement Arrangements Philippines: Bicol Power Restoration Project 1. The procurement for the proposed Project would be carried out in accordance with the World Bank s Guidelines: Procurement under IBRD Loans and IDA Credits dated on May 2004, revised on October 2006, and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated on May 2004, revised on October 2006; and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. Since the Project is in response to an emergency situation, OP/BP8.00 applies, which allows for flexible and simplified procurement approaches. Goods and Works 2. The procurement of goods, and incidental works and installation, procured and financed under this project include three (3) contract packages for the supply, delivery, and installation of transmission steel towers and line materials. These are: 0 Package A: Supply and Installation of 56 transmission steel towers and line materials for typhoon damaged portions of the double circuit Naga-Lab0 230 kv 795mm ACSR transmission line. Contract cost: US$5.7 lmillion; 0 0 Package B: Supply and Installation of 32 transmission steel towers and line materials for typhoon damaged portions of the double circuit Tiwi Plant C-Naga 230 kv 2-795mm ACSR transmission line. Contract cost: US$4.63million; and Package C: Supply and Installation of 30 transmission steel towers and line materials for typhoon damaged portions of the double circuit 230 kv ACSR transmission lines from: (i) Tiwi Plant A-Daraga (1-795mm); (ii) Naga-Daraga (1-795mm); and (iii) Bacman- Daraga (2-795mm). Contract cost: US$3.64million. 3. Given the emergency nature of the project, the procurement for the contracts took place through NCB procedures using the Philippine Bidding Document (PBD) for procurement of goods, as harmonized with the Bank (see box below for details of NCB provisions). Under normal conditions, ICB procedures would have been followed due to the amounts of the contracts, but the Bank has agreed to raise the NCB threshold for goods to provide for increased flexibility on the use of simplified procurement methods (Op/BP 8.00). The Bank has also agreed to the imposition of the Approved Budget for the Contract as a ceiling on bid prices after TransCo demonstrated its compliance with three of the four conditions set by the Bank (i-e., Conditions 2 to 4 in the box below) in Due to the technical impossibility of uploading the complete set of bid documents, the Bank agreed to allow Condition 1 on a highly exceptional basis and without setting any precedent for future transactions. 25

32 Provisions for National Competitive Bidding (NCB) and Application of the Approved Budget for the Contract (ABC) A B National ComDetitive Bidding accedtable to the Bank (Reauirements in addition to Philiuuines Bidding Documents. PBD): Eligibility screening shall not be applied. However, bids that do not contain any of the following documents will not pass the documentary compliance check: (a) evidence of the required financial, technical or production capability; (b) audited financial statements; (c) credit line, or cash deposit certificate; (d) bid security; and (e) authority of the bid signatory. In the case of prequalification, if any bidder is denied access to the bidding process for reasons unrelated to its financial and technical qualifications to perform the contract, prior concurrence of the Bank shall be sought. A ceiling may be applied to bid prices, with prior concurrence of the Bank in advance of bidding. However, the Approved Budget Estimate may be disclosed in the advertisement or in the bidding documents. Domestic or regional preferences will not be applied in the evaluation of bids, and other preferences in effect in the Philippines will not be used except with the prior concurrence of the Bank. Suppliers and contractors will not be required to purchase only local goods or supplies or materials. In case of contracts for prior review, modifications exceeding 15 percent of contract amount and material changes in the conditions during implementation require prior Bank concurrence. Foreign suppliers and contractors shall be allowed to participate, if interested, without first being required to associate with, or enter into joint venture with, local f ms. Moreover, foreign bidders shall be allowed to bid, even without registration, licensing, and other government authorizations, leaving these requirements for after award and before signing of contract. For works contract, the experience qualification requirement shall be (a) at least one previous contract at 80 percent of the estimated cost of the contract being procured; and (b) an annual turnover from all works averaged over the last three years equal to 100 percent of the estimated cost of the contract being procured. Conditions for the Amlication of the ABC (ADDroved Budget for the Contract) as Contract Ceiling under Bank Loan Financing. Bidding Documents are obtainable free of charge on a freely accessible website. If payment of Bidding Documents is required by law, payment could be made upon the submission of Bids. Failure to pay for the Bidding Documents prior or upon submission of the Bids should not lead to the automatic rejection of the Bids. The implementing agency has procedures in place to ensure that the ABC is based on the Engineer s Estimate and that the Estimate reflects the quality, supervision and risk factors associated with the type of job proposed. The implementing agency has trained cost estimators on estimating prices and analyzing Bid variances. The implementing agency has established a system to monitor and report Bid prices relative to the ABC and Engineer s Estimate. 26

33 Retroactive Financing 4. The loan will finance, retroactively, up to US$10.35 million of eligible expenditures for project activities paid 12 months before loan signature, or 80 percent of the total loan amount. The goods, including installation, to be eligible for retroactive financing shall be contracted following the agreed procedures adopted for the project. Right-of-way and Relocation Costs 5. The project will acquire land and pay for it in accordance with the relevant Resettlement Action Plan satisfactory to the Bank. Related expenditures will be financed at 100 percent by the Government of the Philippines (GOP). Implementation Capability of TransCo 6. The overall implementation of the project, including procurement, is the responsibility of the National Transmission Corporation (TransCo). As stated before, the Bank has agreed with PSALM to make the loan to NPC with arrangements to transfer all the funds to TransCo under a separate subsidiary agreement. The Bank has had considerable experience in supervising TransCo s project implementation programs under a number of projects implemented during the 1990s through early 2000s. These include the Leyte-Cebu Geothermal Project, Leyte-Luzon Geothermal Project, and the Transmission Grid Reinforcement Project. TransCo staff, which used to be with NPC and involved in these projects, are still with TransCo to this present date. TransCo has a qualified Project Management Team, which was supported in part by earlier Bank operations, wherein several key staff were provided training in project management and achieved certified Project Manager status in the United States after a three-month course by the Project Management Institute. They also have proven international qualifications and experience in Bank-financed procurement. 7. The Procurement Specialist made an assessment, during the months of April to May 2007, of the capacity of the implementing agency to undertake procurement activities for the project, it also visited the project site in July The assessment reviewed the organizational structure for implementing the project and the interaction among the project s staff responsible for procurement. The assessment showed that TransCo has established units (fully staffed Bids and Awards Committee, including a Technical Working Group) and procedures to undertake procurement, including systems and database to monitor and report on bid prices relative to the approved budget for the contract and the engineer s estimate. The assessment also took into consideration the findings of the Bank s Country Procurement Assessment Report (CPAR) for the Philippines. 8. Appropriate training has been provided to TransCo in relation to the new procurement law (RA 91 84), and its implementing rules and regulations, and in the use of Philippine Bidding Documents for procurement following national competitive bidding (NCB) procedures. Based on the overall assessment of TransCo s capability, the appraisal has rated the overall procurement risk for the project as low. Procurement Plan 9. The Recipient, prior to appraisal, developed a procurement plan for project implementation that provides the basis for the procurement methods. This plan has been agreed 27

34 between the Recipient and the Project Team and is summarized below (see Table 5.1). The Plan is available at TransCo. It will also be available in the project s file and on the Bank s external website. Ref. No. Package A Package B Table 5.1: List of Goods Contract Packages Procured Under the Project Contract Cost Procurement Domestic Review Date of Bid Comments (Description) (US%m) Method p-q Preference by Bank Opening Naga - Lab0 Transmission Line Project 5.7 NCB Prior 03/08/2007 On-going Tiwi Plant C - Naga Transmission Line Project 4.6 NCB Prior 03/08/2007 On-going Tiwi Plant A - Daraga, Package Naga - Daraga and 3.6 NCB Prior 03/08/2007 On-going Bacman - Daraga Transmission Line Project A. FREQUENCY OF PROCUREMENT SUPERVISION 10. Procurement supervision will be part of the overall supervision efforts for this Project. In addition to the prior reviews carried out from World Bank offices, the capacity assessment of TransCo has recommended one procurement supervision mission immediately after project signature to visit the field and implementing agency s office. 28

35 , - / i! 11!

36 Annex 7: Project Preparation and Appraisal Team Members Philippines: Bicol Power Restoration Project Name Title Unit Salvador Rivera Task Team Leader, Senior Energy Specialist EASTE Victor Dato Infrastructure Specialist EASTE John Irving Consultant (Bank Retiree Power Engineer) EASTE Edward Daoud Sr Finance Officer LOAFC Ferdinand Vinuya Economist EASTE Jose F. Molina Sr. Financial Officer BDM Rene SD Manuel Procurement Specialist EAPCO Preselyn Abella Financial Management Specialist EAPCO Maya Gabriela Villaluz Operations Officer (Environment) EASRE V. Florian Lazaro Operations Officer (Social Development) EASSO Christopher De Serio Sr. Program Assistant EASTE Galina Menchikova Program Assistant EASTE Gia Mendoza Program Assistant EACPF Demilour Ignacio Reyes Team Assistant EACPF 30

37 Annex 8: Environmental and Social Safeguards Evaluation Objectives and Findings of Field Visits Philippines: Bicol Power Restoration Project 1. Being the only power Transmission Company in the country, TransCo s mandate is to provide transmission of reliable and affordable electricity and thereby help improve the economic status and quality of life of the people. The Emergency Loan Project will allow Bicol, a poverty-stricken region that has the highest incidence of typhoons in the country, to regain its continuous supply of electricity. 2. Field visits to the transmission towers and their surrounding areas in Albay and the Camarines Sur have been conducted to determine the extent of damage caused by the super typhoons Reming and Milenyo. The typhoons not only toppled towers, but also devastated agricultural lands and a significant number of infrastructures. For several months now, emergency response systems (ERS) were set up by TransCo to deliver a steady power supply to the Bicol Region. Still, the region continues to suffer regular power outages due to the greatly reduced capacity of the towers to transmit electricity. Given their transitory use, the ERS (made up of simple steel towers) are not designed to withstand the powerful winds and torrential rains that inundate the region each typhoon season. The felled towers and cables have rendered some lands and passageways inaccessible to the residents. Nature has taken its time to re-establish itself in the immediate vicinity of the towers and the hanging cables. While the plans are to build the new towers following the same alignment, there is a need to restore the affected areas to their natural state. It was also noted that sections of the felled towers and cables have been ransacked and pilfered. Security measures should also be put in place to safeguard the existing materials that could be re-used as well as ensure that the new towers and cables are not vandalized or torn apart by unscrupulous individuals. Environmental Capability of TransCo 3. TransCo has an Environmental Management Department led by a highly qualified Division Manager, with a staff complement of environmental and social development specialists in its central and field offices. It is an I S certified company and has adopted in January 5, 2004, its own Corporate Social Responsibility and Environmental Stewardship Program and has an environmental management system in place. Prescribed in its Project Management Procedural manual effective December 18,2006, under the section on Project development procedures, is a detailed procedural flow chart on the conduct of the Environmental Impact Assessment (EIA) and securing the Environmental Compliance Certificate (ECC)/Certificate of Non-coverage (CNC). This process is in accordance with the national rules and regulations prescribing the requirements for the conduct of an EIA study and securing the appropriate environmental certificate. This process meets the Bank s minimum requirements specified under OP 4.01 on Environmental Assessment. 4. For the Bicol and Quezon Power Restoration Project, an Environmental Impact and Management Plan, which includes a reforestation plan, has been prepared. An inventory of the vegetation to be affected is being finalized as part of the EMP. The management plan has adequately provided for the mitigation of the significant impacts that may be generated by the 31

38 project. However, implementation of the mitigating measures - such as the setting up and maintaining of the buffer zones for the right of way - needs to be done judiciously to ensure that the residents are outside the electric and magnetic fields generated by the transmission lines. The buffer zones also need to be secured to deter trespassing and pilferage. Another measure that needs to be strengthened is the establishment of biodiversity offsets to replace the natural environment (including the natural vegetation that serves as habitat for the endemic flora and fauna) that is displaced or modified in the areas traversed by the transmission lines as well as diverting the flight paths of migrating birds that abound in the primary and secondary impact areas. 5. For the project, the Contractor s Contract and Terms of Reference also includes the responsibility to implement the EMP and secure all the necessary permits required by the regulatory agencies. Social Impact Assessment 6. Expected benefits. The Bicol Restoration Project is expected to provide direct and indirect benefits to millions of households not only in the Bicol region but also those served by the Luzon Grid. When completed, the restored transmission system is expected to improve safety, reliability, and efficiency of the power system, resulting in stable transmission of energy to customers in Bicol primarily, but also Luzon especially during the occurrence of super typhoons already reported as probable this year. 7. Limited involuntary resettlement. The proposed project is assessed as having some impact from involuntary resettlement. Eighty two structures (47 houses and 35 other structures) and their 47 owners have been identified within the Right-of-way (ROW) of the felled towers and will have to be completely or partially displaced during reconstruction. The reconstruction of the transmission system may cause some inconvenience and may require minor cutting and/or trimming of the trees, that are beyond three-meter high, owned by local residents. In the consultation done by the task team, the residents generally expressed support for the project. Further, local residents shared that many of them have received a one-time tower occupancy fee during construction of the towers. 8. The Bank has reviewed the BPRP Land Acquisition and Resettlement Plan (LAW) and it has been found generally compliant to the objectives and principles of OP The TransCo Social Engineering and Right-of-way Management staff are skilled and have experience in implementing this sort of project, having done similar activities in previous Bank and other assisted projects. As an improvement, they now have an informal mechanism that addresses the issue of imperfect land documentation, mostly held by poor farmers, which previously led to noddelayed payment of compensation. The cost of this activity is part of the Approved 2007 Budgets of the Social Engineering and Right-of- Way Management Divisions. 9. A review done during project preparation with the National Commission on Indigenous People (NCIP), Albay Provincial Officer, provided an indicative list of project affected persons, their properties and their location together with the type of land documents covering these properties. The review showed that none of the Tiwi Barangays with ancestral domains (Joroam, 32

39 Misibis, Taabong, and Maayong) are affected by the restoration project. A similar review for Buhi Barangays with Ads (Sta Cmz, Ipil, Kaulam, and Iraya) also showed the same results. It has been agreed that in case any indigenous population is affected the Bank s IP policy will be complied with, particularly in the area of consultation and compensation. Due to the emergency nature of the Project, the NCIP Officer in the area revealed that the Free and Prior Informed ConsentKertificate Precondition (FPICKP) requirement is not applicable to the BPRP. For good practice, TransCo applied, and was granted on September 4,2007, for a certification from the National Commission on Indigenous People (NCIP) confirming that the Free and Prior Informed Consent (FPIC) is not required for this emergency project. In the course of project implementation, public consultations shall still be done with project affected persons, especially to get their agreement on the LAW and seek their cooperation on the security of the towers. On compensation (if needed), it was also agreed that the LARP guidelines will be applied. 10. Special concerns of women. To better understand the concerns of women regarding the project, an all-woman consultation was held during project preparation in Zone 1, Barangay Sagurong in Pili, Camarines Sur. Their houses are within the Right-of-way of the transmission lines and are identified for resettlement. Though they are aware of the promise of resettlement assistance and compensation, they appeal that they be allowed to continue occupancy in their present location under the transmission cables claiming that the danger of continued occupancy is distant and the need to rebuild their houses is too difficult. It is suggested that TransCo implements Information, Education and Communication (IEC) on the dangers of living under the grid. It is further suggested that a Community Based Program for the security of tower be developed and implemented by TransCo. 33

40 Background Annex 9: Economic Analysis Philippines: Bicol Power Restoration Project 1, The Bicol region, one of 17 regions in the Philippines, has a population of about 5 million. In 2005, the region accounted for about 3 percent (US$2 billion) of the Philippines Gross Domestic Product (GDP). The services sector accounts for the major share of economic activity in the region, about 55 percent of the total, with industry s contribution about 25 percent of GDP and that of agriculture close to 20 percent. The normal load in the Bicol system is about 164 MW. Frequency of Severe Typhoons 2. The Philippine Atmospheric, Geophysical, and Astronomical Services Administration (PAGASA) reports that in the past 50 years about 11 destructive typhoons have struck the Bicol region. The Philippines averages around 20 typhoons a year. Therefore, a destructive typhoon passing through the Bicol region is probable every five years. This probability of destruction poses a serious risk not only to the to the transmission lines that supply the Bicol region in Southern Luzon but also the Northern Luzon area, because damage to the Southern portion of the transmission system can disrupt the Northern portion due to the build up of reactive power. Furthermore, the electricity grid that supplies the Bicol region also forms a part of the main 230 kv grid, feeding the main load center in Manila, and any interruption of this supply could seriously hinder the economy. Basis for Economic Analysis 3. The main reason for the urgency in restoring power transmission capacity is to minimize the economic cost of unsupplied energy and replace temporary, emergency structures - incapable of withstanding high wind speeds - with permanent structures more resistant to typhoon damage, in order to prevent further loss of supply that could result from future typhoons. The total unsupplied energy during the two-day interruption in Luzon in 2006 amounted to 200 GWh. Although some restoration of the system has taken place, unsupplied energy still amounts to about 50 GWh, or about a quarter of electricity consumption in the Bicol region (see Figure 9.1 below). 4. The economic analysis rests on four key assumptions. The first is the probability that a severe typhoon will hit the Bicol region in the future and result in destruction similar to what took place in The available data from PAGASA show a probability of 1 percent that, in any given year, a typhoon striking the Bicol region may cause similar damage to the transmission system and result in a two-day blackout of service at the level of 200 GWh, with a continued deficit of 50 GWh assumed to last for a period of two days. The second assumption is the economic cost of supply at about US$5 million per GWh, which does not take into account any lost revenues to TransCo. The third assumption is that the transmission towers financed by the project will remain structurally sound for 20 years. The fourth assumption is that total project costs will amount to about US$25 million, including all project components, right-of-way and relocation costs, and contingencies. 34

41 5. The assumptions for benefits are on the conservative side for two reasons. First, they only reflect the observable loss of economic benefits resulting from unsupplied energy and do not account for the loss of unobserved benefits such as the loss of consumer surplus due to suppressed demand. Second, the amount of electricity unsupplied may be on the low side given that major service interruptions could last more than a couple of days. Assessment of Economic Benefits 6. Based on the above assumptions, the assessment results in an internal economic rate-ofreturn (IERR )of 50 percent for the base case of a one percent annual probability, over a 20-year period, that a destructive typhoon will hit the Bicol area again. Also, the assessment conducted a sensitivity analysis considering higher and lower probabilities of a destructive typhoon as well as 50 percent reduction in the assumed economic cost of supply per GWh. Alternative probabilities of 0.5 percent and 1.5 percent and consideration of 50 percent lower economic cost of supply resulted in EIRRs of between 12 percent and 80 percent, respectively. In all cases, the IERRs are robust, and are substantially higher than the cost of capital in the Philippines, where the average lending rate is at 7 percent. Table 9.1 summarizes the calculations of the EIRRs by probability scenarios for destructive typhoons. Table 9.1: Summary Calculations of the EIRRs for the Project Year Capital Costs Net Benefits Scenario 1 (Prob =1?40) Scenario 2 (Prob =0.5%) Scenario 3 (Prob=1.5%) Low Base Low Base Low Base EIRR (Yo) 26% 53% 12% 26% 40% 80% Note: Estimated costs and benefits are expressed in US$ million

42 ~ ~ ~ j ~ ~ 2 2OO.O i -.. )I... I. I.... I I. I.. i. ; ~srgd piqec~ Cmplebn I L.,- --.,- -- -, *-- -..I i I I. I j! j 1 I j j! j I.. I. -=:J...! I I I I I I I I I I I Nov Dee Jan Feb Mar Apr May Juri Jul Aug Sep Oct Nov Oec 2006 I I Leaend: Total Maximum S/S Capaclty - Total Subtrrrrmission Capability Total Load Sewed Jan I

43 Annex 10: National Transmission Corporation (TransCo) Philippines: Bicol Power Restoration Project Terms of Reference for Consulting Services Transmission Tower Reinforcement Program The National Transmission Corporation (TransCo) is responsible for the operation of over 20,000 km of the Philippines national grid extending throughout the main populated areas of the Philippines archipelago. In particular the load centers of Luzon, Visayas and Mindanao are served by TransCo s 500/230/69 kv transmission networks that run through rugged coastal and mountainous terrain exposed to varying degrees of adverse weather systems. The Luzon and Visayas system are interconnected by an undersea and overhead HVDC system. Two super-typhoons - Milenyo and Reming - hit the Bicol area of South West Luzon in September and November 2006 causing serious damage to the local community and its infrastructure. The most recent typhoon ( Reming ) hit the country with unprecedented wind gusts - exceeding 230 km/hr - knocking out 1 18 transmission towers supporting five transmission lines interconnecting critical 230kV substations the Naga, Labo, Tiwi, Daraga, and Bacman. A study by TransCo, completed in February 2007, has established that the Southern Luzon- Visayas typhoon corridor is apparently subjected to an increased incidence of super-typhoons (e.g., wind speeds above 2OOMhr). Accordingly, TransCo is concerned about the capacity of the transmission system to withstand the increasing number of future super-typhoons as well as its own capability to minimize the economic impact of the significant amounts of un-served energy that are a consequence of the system blackouts. Many of TransCo s transmission lines were built in the 1960s and are not capable of handling the high wind speeds of the super typhoons that were experienced recently in Bicol. In some cases, the strength of the towers has been compromised by the theft of vital parts leaving them particularly vulnerable to damage. As a result, the TransCo is considering undertaking a comprehensive tower strengthening program, particularly in country s critical high wind zones. TransCo has applied to the World Bank for financing to restore the damaged Bicol lines, and expects these to be restored to service (under emergency contracting and financing procedures) by March It is proposed that the Bank loan will also finance the recruitment of consultants to assist TransCo s Systems and Reliability Group (S&RG) to perform a comprehensive risk assessment of the exposure of the transmission network to extreme weather related events, IO During the 1990s TransCo reviewed its design standards for transmission line wind speed resistance to be consistent with standards adopted in Taiwan and Japan. It adopted wind speeds for Zone I(270 km/h) which would apply to the Bicol-Visayas corridor and Zone I1 for all other areas (240Mhr) where typhoons are not expected to be so severe. This compares with the design standards from of kdhr and used on the damaged lines. 37

44 identify those sections of transmission lines that are so exposed and recommend an investment program'' and an implementation plan to perform the necessary reinforcement measures. Scope of Services The consultants will be required assist the R&SG unit in preparing a plan culminating in a report and recommendation to management on how best to proceed. The work will include but not necessarily be limited to the following components: Assess the frequency and magnitude of recent typhoons, the damage done and the economic consequences of power system disruptions to verify the seriousness of the situation and whether it appears to be influenced by global climatic changes; Commence a survey of transmission lines initially in all Zone 1 Areas to identify the scope of work that needs to be done to minimize the damage caused by the increasing incidence of super typhoons; Identify methods of strengthening existing towers at lowest cost and recommend ways in which towers can be tested in situ to ensure they meet minimum standards; Review tower design standards, taking into account the local environmental issues (including considerations such as theft of parts), and indicate, for planning purposes, the cost difference (in percentage terms) between new transmission lines designed to withstand winds of 270,240, 185, and 165 Whr; Prepare a matrix of frequency and severity of risks and the economic consequence of unsupplied energy, to establish trade-off between the economic costs and benefits of new investments; Review power system protection and voltage compensation facilities and determine what additional investments in plant and equipment needed to improve power system security and stability during severe storm events; Perform an operational safety assessment to ensure that TransCo has adequate provision for ensuring public and employee safety during extreme weather events; Review TransCo's contingency plans for responding to typhoon events, including the appropriateness and adequacy of the use of its Emergency Restoration Structures (ERS) to minimize the time taken to restore supplies; Prepare indicative cost estimates for a national transmission reinforcement plan, including the prioritization the implementation of works in areas exposed to worsening typhoon events; and Recommend a suitable form of procurement and contracting arrangements to enable the work to be done on a continuous basis, as inspection proceeds, by a trusted group of contractors over an extended period of time. '' The Government is planning to recruit a private Concessionaire to manage the operations of TransCo, probably by the end of Until the Concessionaire is appointed, TransCo has limited ability to embark on major new investments. 38

45 Annex 11: Documents in the Project File Philippines: Bicol Power Restoration Project 0 Techno-Economic and Financial Evaluation of the Bicol Power Restoration Project, TransCo Luzon Division Project Planning and Development Department, February Regulatory Reset for the National Transmission Corporation (TransCo) for , Final Determination ERC Case No RCY June 13, 2006, Transmission Development Plan National Transmission Company (TransCo) - df 39

46 Annex 12: Statement of Loans and Credits Philippines: Bicol Power Restoration Project Original Amount in US$ Millions Difference between expected and actual disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P Support for Tax administration Reform PO PH-Nat'l Prog Supt for ENV & NRMP 5 5 PO Mindanao Rural Dev. Project - Phase PO PH-NP Support for Basic Ed PO PH-NP Support for HNP PO PH-SUPPORT FOR STRATEGIC PO LOCAL DEV & INV PH-CF-Northwind Bangui Bay Project 1.45 PO PH-MANILA SEWERAGE PO PH-2ND WOMEN'S HEALTH & SAFE MOTHERHOOD PO PH LAND ADMINISTRATION AND PO MANAGEMENT I1 PH-GEF-Rural Power Project PO PH: Diversified Farm Income & Mk PO Devt PH LAGUNA DE BAY PO INSTITUTIONAL STRENGTHE PH-GEF-Electric Cooprtv System Loss PO Redu JUDICIAL REFORM SUPPORT PO PROJECT PH-Rural Power Project PO PH KALAHI-CIDSS PROJECT PO PH Second Agrarian Reform Communities Dev PO PH - ARh4M Social Fund PO PH-LGU URBAN WATER APL PO PH-GEF-MMURTRP-Bicycle Nwk PO PH-MMURTRIP PO PH-LGU FINANCE & DEV Total: 1,

47 PHILIPPINES STATEMENT OF IFC s Held and Disbursed Portfolio In Millions of US Dollars Com m itted IFC IFC Disbursed FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic 200 I AEI APW Trade Alaska Milk Asian Hospital Bahay Financial Balikatan HF Banco de Oro Cepalco Drysdale Food Eastwood Eastwood Filinvest Filinvest Lan... Globe Telecom H&Q PV I11 H&QPV-I H&QPV-I1 Holcim Phil LARES MFI MEP MNTC MWC MWC Mariwasa Mindanao Power Mirant Pagbilao PEDF PLGIC Pilipinas Shell PlantersBank Pryce Gases STRADCOM SVI Sua1 Power Walden Mgmt SO oo oo SO Walden Ventures Total portfolio:

48 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic PEDF 2002 Eastwood Total pending commitment: 42

49 ~ T Annex 13: Country at a Glance Philippines: Bicol Power Restoration Project POVERTY and SOCIAL Philippines 2006 Population, m&pr (mi/ions) 84.6 GNIpercapita(Af/asmethod, US) 1420 GNI (Atlasmethod, US b//ions) M). 1 Average annual growth, Population (?4 Labor force (v Most recent estimate (latest year available, ) Poverty (Y6fppMon kfownafiondpverty/im) Man population (Yif tofa/pp/ation) LifeqxAancyat birth ().ears) Infant mrtality(jxrlggo/ivebifihs) Childmalnutrition (%ofch/&n&e$ Access to animprovedwtersource~6ffopulation) Literacy (%of pp/afion sg? E+ Gross ptimaryenrollment (%ofschoo/+ppp/afion) Male Female East Lowr- Asia & middle- Pacific income , t6 70 2,276 2,037 4, a9 70 W 114 Ievelopment diamond* TJI Gross Er ptiw wta enrollment 1 Access to improvedwtersource KEY ECONOMIC RATIOS and LONG-TERM TRENDS GDP (US Mons) Gross mal formatiorjgdp mrts of goods and setvi&gdp GrossdomesticsavirgdGDP Gross national savillgs/gdp D W Economic ratios* I Tracle c u m account balance/gdp Interest paywlts/gdp Total debtlgdp Total debt sefvice'eqmrts Present value of WGDP Present valueof Weqmrts m (av- mudpclth) GDP GDP percapita Eprts of goods and setvices STRUCTURE of the ECONOMY 43

50 ~ ~ ~ ~~~~ ~~~ (%of GDP) ~gnculture Industry M anufactunng services h Growth of capltal and GDP (Oh) Household final consumption expenditure General gov't final consumption expenditure 80 ns Imports of goods andservices GCF -GDP (average annualgmwth) Agriculture Industry M anufactunng Services ZOO Growth of exports and imports (%) 2o 5 Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services Exports -0-lmPOrtS I Note 2006 data are preliminary estimates This tablewas producedfrom thedevelopment Economics LDB database 'Thediamonds showfourkeyindicators in thecountry(in bold)compared withits income-groupaverage If dataaremissing thediamondwll be incomplete Philippines PRICES and GOVERNMENT FINANCE Domestic prices (%change) Consumer prices implicit GDP deflator inflation (Oh) I Government GDP, includes current grants) Current revenue Current budget balance Overall SurDluS/defiCit TRADE (US% rndlions) Totalexports (fob) ElectronicslTelecom Garments Manufactures Total imports (cif) Food Fuel and energy Capital goods Export price index (2000=00) import pnce index(2000=00) Terms of trade ( ) , ,672 5, , , ,008 0,472 ZOO5 40,263 28,476 2,309 36,945 48, ,281 8, , ,626 41,081 53,lO ,121 9,078 Export and Import levels (US$ mill.) 80 T 40,000 20,000 I Exports mlrrporls I 44

51 BALANCE of PAYMENTS (US$ millions) Eq~orts of goods and services Imports of goods and services Resource balance , , , , ,m ,561 59,185-7,624 Current account balance to GDP (%) 5- Net income Net current transfers -1, Current account balance 954 Financing items (net) Changes in net reserves 288-1,242 3, , n39i ) , ,769 lo Memo: Reserves including gold (US$ millions) Conversion rate (DEC, IocaIVUSS) 2, TI , EXTERNAL DEBT and RESOURCE FLOWS 1986 /US$ millions) Total debt outstanding and disbursed IBRD 3,017 IDA ,001 4, ,527 2, , of 2005 debt (US$ mill.] A:2,885 Totaldebt service IBRD IDA 2, , , Composition of net resource flows Official grants 401 Officiai creditors 86 Private creditors 295 Foreigndirect investment (net inflows) 727 Portfolio equity(net inflows) , ,1)1 u World Bank program Commitments Disbursements Pnncipal repayments Net flows Interest payments Net transfers ) a l A. IBRD E- Bilderal B-IDA D-Othsrmritila(eral F-Private C-IMF G- Shofl-ten Note This tablewas producedfrom thedevelopment Economics LDB database 9/28/07 45

52 - I I I m E3 I=j I 46