IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-48680) ON A LOAN IN THE AMOUNT OF US$200 MILLION UKRAINE FOR THE POWER TRANSMISSION PROJECT

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1 Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-48680) Report No: ICR Public Disclosure Authorized ON A LOAN IN THE AMOUNT OF US$200 MILLION TO UKRAINE FOR THE POWER TRANSMISSION PROJECT IN SUPPORT OF THE ENERGY SECTOR REFORM AND DEVELOPMENT PROGRAM December 21, 2016 Public Disclosure Authorized Public Disclosure Authorized Energy and Extractives Global Practice Europe and Central Asia Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective December 21, 2016) Currency Unit = Ukraine Hryvnia (UAH) UAH 1.00 = US$0.038 US$1 = UAH FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS CAS CESRD CF CTF CO2 CPS EBRD EC ECT EIRR EMP EPCU EU FIRR GDP GHG GWh HPP HRP HV IFI KfW KP MIS MoECI MW NERC NEURC NOx NPV PIU PSP SIL Country Assistance Strategy Commission for Energy Sector Reform and Development Carbon Financing Clean Technology Fund Carbon Dioxide Country Partnership Strategy European Bank for Reconstruction and Development European Commission Energy Community Treaty Economic Internal Rate of Return Environmental Management Plan Energy Program Coordination Unit European Union Financial Internal Rate of Return Gross Domestic Product Greenhouse Gas Gigawatt-hour Hydropower Plant Hydropower Rehabilitation Project High Voltage International Financial Institution Bank for Reconstruction (Germany) Kyoto Protocol Management Information System Ministry of Energy and Coal Industry Megawatt National Electricity Regulatory Commission National Electricity and Utilities Regulatory Commission Nitrogen Oxide Net Present Value Project Implementation Unit Pumped-Storage Plant Specific Investment Loan

3 TSO UE UHE WEM WTO Transmission System Operator UkrEnergo UkrHydroEnergo Wholesale Electricity Market World Trade Organization Senior Global Practice Director: Practice Manager: Project Team Leader: ICR Team Leader: ICR Author Riccardo Puliti Ranjit Lamech Dmytro Glazkov Dmytro Glazkov Alexey Morozov

4 UKRAINE POWER TRANSMISSION PROJECT IN SUPPORT OF THE ENERGY SECTOR REFORM AND DEVELOPMENT PROGRAM CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Annex 9. List of Supporting Documents MAP

5 A. Basic Information Country: Ukraine Project Name: Power Transmission Project in Support of the Energy Sector Reform & Development Program Project ID: P L/C/TF Number(s): IBRD ICR Date: 2/12/2016 ICR Type: Core ICR Lending Instrument: Specific Investment Loan Borrower: UKRAINE Original Total Commitment: US$ million Disbursed Amount: US$ million Revised Amount: Environmental Category: B US$ million Implementing Agencies: National Power Company UkrEnergo Cofinanciers and Other External Partners: Not applicable B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 01/19/2006 Effectiveness: 12/05/ /05/2008 Appraisal: 03/20/2007 Restructuring(s): 10/15/ /09/ /17/ /09/ /07/2015 Approval: 08/02/2007 Mid-term Review: 04/03/ /03/2013 Closing: 06/30/ /30/2016 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Satisfactory Moderate Satisfactory Moderately Satisfactory i

6 C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Quality at Entry: Moderately Satisfactory Government: Unsatisfactory Implementing Quality of Supervision: Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Performance any) Potential Problem Project at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No Yes Moderately Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Transmission and Distribution of Electricity Theme Code (as % of total Bank financing) Infrastructure services for private sector development Regional integration E. Bank Staff Positions At ICR At Approval Vice President: Cyril Muller Shigeo Katsu Country Director: Satu Kristiina Kahkonen Paul G. Bermingham Practice Manager/Manager: Ranjit J. Lamech Peter D. Thomson Project Team Leader: Dmytro Glazkov Dejan Ostojic ICR Team Leader: ICR Primary Author: F. Results Framework Analysis Dmytro Glazkov Alexey Morozov Project Development Objectives (from Project Appraisal Document) ii

7 The main objective of the Power Transmission Project is to improve the security, reliability, and quality of power supply through the rehabilitation of transmission substations and the strengthening of the power transmission network. The project will also aim to improve institutional capacity and technical capabilities of transmission system operator, UkrEnergo (UE), so that it can assure secure and reliable operation of the high voltage power grid and, therefore, facilitate unimpeded operation and opening up of the electricity market. Revised Project Development Objectives (as approved by original approving authority) n.a. (a) PDO Indicator(s) Indicator Indicator 1: Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Support market reforms in the energy sector through legal, institutional, regulatory, and technical, regulatory and technical harmonization with the EU internal energy market Value 0% power market opening 10% in 2009 (trial operation); 20% in 2010; 30% in 2011 Model of bilateral agreements with a balancing market operational Dropped Date achieved 12/29/ /29/ /17/ /09/2015 The indicator was dropped. Originally, the market opening indicator was monitored as a percentage of market opening based on the draft legislation, but in 2012, the draft law Comments was significantly modified and no longer included the percentage of market opening, allowing full market opening upon signing of the law. Support sustainable economic development by improving security, reliability, Indicator 2: efficiency, and quality of energy supply through investments (rehabilitation and strengthening of transmission network) Estimated energy not served (ENS) Value due to transmission system failures: GWh; transmission losses: 3.4%; voltage quality: voltage outside accepted range (+/ 5% of the nominal voltage) in several substations ENS reduced by at least 35 GWh/year; transmission losses reduced to less than 2.5%; voltage within acceptable range in all substations included in the project. ENS reduced by at least 35 GWh/year; transmission losses reduced by 14 MW; Target achieved voltage within acceptable range in all substations included in the project. Date achieved 12/29/ /29/ /17/ /30/2016 iii

8 Comments (incl. % achievement) Indicator 3: Value (Quantitative or Qualitative), MW Target fully achieved Implementation of the Wholesale Electricity Market (WEM) concept Power market rules Market rules are WEM concept and Grid Code Development of market developed, new adopted in 2002 developed in 2008; rules, regulatory, and legal Electricity Market but not trial operation in framework of new energy Law pending implemented 2009; regular market model approval in the operation in 2010 parliament Date achieved 12/29/ /29/ /09/ /30/2016 Target partially achieved. During the last years of the project implementation period, the Government of Ukraine (GoU) made an ambitious effort to go beyond original target of bringing legislation in accordance with the requirements of the 2nd European Comments Union (EU) energy package and in cooperation with the energy community, has (including % released the next reiteration of the Electricity Market Law which conforms with the achievement) requirements of the 3rd EU energy package. The law was approved by the Ukrainian parliament in the first reading (out of three formally required for the law to be considered passed) in September Indicator 4: Transmission lines constructed or rehabilitated under the project Value (Kilometers) n.a Date achieved 12/29/ /05/ /30/2016 Comments (incl. % achievement) Indicator 5: Value (percentage) Target fully achieved. For consistency with the core sector indicators, the indicator was moved from intermediary to project development objective (PDO) level in Electricity losses per year in the project area Date achieved 12/29/ /05/ /09/ /30/2016 Target was added in Target overachieved. Original indicator planned electricity losses per year in the project area of 4 energy systems, and by 2014, after rehabilitation of 220 kv, 330 kv, and 750 kv substation, the UE technical team confirmed that this indicator was fully met by reaching 1.67 percentage losses. In 2014, due to loss of Comments access to the Crimean Grid, parts of the Lugansk and Donetsk regions, and difficulties (including % with assessing the losses in the Dnieper Energy system (some of the sites are located in achievement) the zone of conflict), the precise measurement of losses in all 4 grids is impossible. The UE, therefore, only managed to measure losses in 2 grids fully and confirm that by the closing date, the Dniprovska energy system and South-western energy system fully complied with the target. Indicator 6: Total net injected generation Value (MWh) 138, , n.a. 139, Date achieved 12/29/ /05/2012 n.a. 06/30/2016 iv

9 Comments (incl. % achievement) Target added in Target partially met. Area of Crimea and territories not controlled by Ukraine are not included in the calculation. Drop in total net injected generation attributed to inability to measure net injected in 2 regions Donetsk and Lugansk where conflict affected the consumption and transmission of net injected generation into the grid. Electricity losses per year in the project area - Technical Indicator 7: Value (Percentage) n.a Date achieved 12/29/ /05/2012 n.a. 06/30/2016 Comments (including % Target met. achievement) (b) Intermediate Outcome Indicator(s) Indicator Indicator 1: Value (Quantitative or Qualitative), MW Baseline Value Original Target Values (from approval documents) Rehabilitation of transmission substations Obsolete substation equipment By 2010, rehabilitation is completed in 50% of substations (5); By 2011 rehabilitation is completed in 100% of substations (10). Formally Revised Target Values Replacement of 11 power breakers at 750 kv s/s; completion of reconstruction of kv and 330 kv s/s; completion of installation of relay protection systems and automation systems at 750 kv s/s Actual Value Achieved at Completion or Target Years 12 out of 15 contracts completed; other 3 partially completed, but due to force majeure were not completed. Date achieved 12/29/ /29/ /09/ /30/2016 Comments (including % achievement) Target partially met. Works on upgrading and installation of equipment in all areas except for the parts of Eastern Ukraine and Crimea, not controlled by Ukraine, have been completed. Indicator 2: Number of outages at rehabilitated substations Value (Quantitative or Qualitative) Pivdenna - 29; Pershotravneva - 28; Dniprodzerzhinska - 29; Chaikine - 22; Azovska - 8 Pivdenna - 0; Pershotravneva - 13; Dniprodzerzhinska - 0; Chaikine - n.a.; Azovska - 6 Pivdenna - 0; Pershotravneva - 12; Dniprodzerzhinska - 0; Chaikine - n.a.; Azovska - 4 Date achieved 09/05/ /09/ /09/ /30/2016 Target added in Target partially achieved; however, it became impossible to Comments (including % achievement) measure the number of outages at the substations located in the Eastern Ukraine and Crimea areas which fell out of control of the Ukrainian central government during the events in At one substation in the Dniprovska energy system (Pershotravneva SS), the contractor ceased all works due to bankruptcy. v

10 Indicator 3: Value (Quantitative or Qualitative) Strengthening of transmission network Expansion of bar substation and construction of Dnister-Bar pumped-storage Operation of 330 kv Inadequate plant (PSP) 73 km transmission transmission line transmission line line to Dniester and capacity completed by 330 kv Bar s/s 10/31/2009; improved voltage quality by 12/31/2009 Operation of 330 kv 73 km transmission line to Dniester and 330 kv Bar s/s Date achieved 12/29/ /29/ /09/ /30/2016 Comments (including % Target achieved. The transmission line and 330 kv Bar s/s were completed in achievement) Indicator 4: Stabilization of the Crimea electric power grid 330 kv substation upgrade by Completion of modernization of Simferopol s/s is not completed due to force majeure in the project 10/31/2009; 330 kv 330kV S/S; area. Another contract Value Low reliability and transmission line completion of for upgrade of (Quantitative or quality of power upgrade by modernization of substation control Qualitative) supply 12/31/2009; control systems at 220 systems at 330 kv and reduced ENS by 12/31/2010 and 330 kv substations. 220 kv in Crimea was fully completed in Date achieved 12/29/ /29/ /05/ /30/2016 Comments (including % achievement) Indicator 5: Value (Quantitative or Qualitative) The indicator is focused on Crimea, which is currently not under control of Ukraine. Target partially met. Ukraine has lost control over Crimea in 2014 and was not able to reinstate access to the power grid in the peninsula. For this reason, while most of the activities were completed by 2014, it became impossible to continue rehabilitation works on the substation in Simferopol. Management Information System None Design of Management Information System (MIS) in 2008; implementation in 2009; operation in 2010 Finalization of technical assistance in capacity building in procurement and project management and for annual auditing of project and company accounts Has been moved to the Second Power Transmission Project Date achieved 12/29/ /29/ /09/ /30/2016 Target partially met. The consultancy services for the MIS defining the terms for the Comments MIS package were provided, as well as capacity building and project management (including % assistance. The MIS contract was moved to the Second Power Transmission Project to achievement) allow for tendering of more sophisticated package and longer implementation period. vi

11 Indicator 6: Value (Quantitative or Qualitative) Under the Second Power Transmission Project, the tender package has been finalized in early Implementation of Grid Code Finalization and Developed in 2008; approval of the Grid Grid code is finalized, Not established adopted in 2009; Code by the respective but not approved applied in 2010 authority Date achieved 12/29/ /29/ /09/ /30/2016 Target partially met. Grid code was finalized by the National Electricity and Utilities Comments (incl. % achievement) Regulatory Commission (NEURC); however, since this is a piece of secondary legislation, its effectiveness is dependent on the signing of the Electricity Market Law, which was approved in the first reading (out of three readings necessary for the law to be considered approved) by the Ukrainian parliament in September G. Ratings of Project Performance in ISRs No. Date ISR Actual Disbursements DO IP Archived (US$, millions) 1 06/26/2008 Satisfactory Moderately Unsatisfactory /23/2009 Satisfactory Moderately Satisfactory /27/2010 Moderately Unsatisfactory Moderately Unsatisfactory /21/2010 Moderately Unsatisfactory Moderately Unsatisfactory /28/2010 Moderately Unsatisfactory Moderately Unsatisfactory /15/2011 Moderately Satisfactory Moderately Satisfactory /11/2012 Moderately Satisfactory Moderately Satisfactory /26/2012 Moderately Satisfactory Satisfactory /19/2012 Moderately Satisfactory Satisfactory /19/2013 Moderately Satisfactory Satisfactory /26/2013 Moderately Satisfactory Moderately Satisfactory /22/2014 Moderately Satisfactory Moderately Satisfactory /07/2015 Moderately Satisfactory Moderately Satisfactory /22/2015 Moderately Satisfactory Moderately Satisfactory /01/2015 Moderately Satisfactory Moderately Satisfactory /29/2016 Moderately Satisfactory Moderately Satisfactory H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO Amount Disbursed at Restructuring in US$, millions 10/15/2011 No MS MS 13.9 IP Reason for Restructuring & Key Changes Made Financing of the Asset Revaluation Study was added to the project description in both the Loan Agreement and the Project Agreement and the date by which this study was to be completed was vii

12 05/9/2012 No MS S /17/2014 No MS MS /09/2015 No MS MS /07/2015 No MS MS extended from June 30, 2009 to June 30, 2012 Extension of the closing date to December 31, 2014; the date by which the midterm review shall be carried out is amended from March 31, 2010 to December 31, 2012; the date by which UE shall carry out a reevaluation of its assets is amended to December 31, 2012; amendments are made to the Results Framework to reflect changes in the values of the performance indicators. Extension of the closing date from December 31, 2014 to December 31, 2015, and revision of end target dates of the Results Framework. Revisions to the Results Framework, two result indicators are dropped; financial covenant - current ratio is replaced with self-financing ratio. Extension of the closing date from December 31, 2015 to June 30, The end target dates and disbursement estimates have been revised to align them with the revised closing date. I. Disbursement Profile viii

13 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. After a decade of economic decline, which halved the country s economic output and raised the poverty rate to almost a third of the population, by 2005, Ukraine s gross domestic product had rebounded by over 50 percent, and the poverty rates had fallen from 31 percent in 2001 to an estimated 8 percent in The economic growth in Ukraine at the time of the project appraisal has been a mixture of revival of old activities and the emergence of new activities, both supported by access to inexpensive energy, supplied from aging, inefficient, and often environmentally polluting sources through extensive electricity and gas and oil networks inherited from the former Soviet Union. The increase in the price of imported natural gas underscored the challenges faced by Ukraine in ensuring the sustainability of the economic growth, and the consolidation of market reforms was critical to the country s aspirations of membership in the World Trade Organization and the European Union (EU). Sector Background 2. Developments in the energy sector closely mirrored the aforementioned changes in the economy. After a sharp decline in the 1990s, the consumption of electricity was growing at an average rate of 1.5 percent per year during the five years preceding project approval and in 2006, reached about two-thirds of the consumption level of While significant spare capacities, freed by declining demand, enabled unconstrained energy supplies in the 1990s, albeit of low quality and poor reliability, the economic revival exposed a significant loss of available capacity and deterioration of energy infrastructure. The sector faced serious challenges in maintaining security, reliability, and quality of energy supply because of (a) the lack of investments and deferred maintenance in aging infrastructure; (b) poor financial standing of energy enterprises; and (c) delays in sector reforms. These problems threaten the sustainability of economic growth, reducing the competitiveness of the country s products and services, degrading the environment, and increasing the cost of social services. 3. The Ukrainian transmission system faced significant challenges similar to the ones confronting the energy sector in general. The construction of the 750 kv network, a backbone of the national transmission system started in the 1970s, and by 2005, more than one-third of the equipment at the 750 kv substations had exceeded their lifetime of 25 years. In addition, around 2005, more than two-thirds of the 220 kv and 330 kv transmission facilities, forming about 75 percent of all assets operated by UkrEnergo (UE), had exceeded their lifetime. The decline in reliability of substation equipment and the increase of its maintenance and repair costs were accelerated by delays in maintenance and investments because of lack of funding. The Energy Not Served (ENS) to consumers because of failures in the power transmission system operated by UE reached about 1 TWh in 2005, that is, about 0.7 percent of the net electricity consumption in Ukraine. Despite significant surplus in installed generating capacity, several regions of Ukraine experienced difficulties in covering their peak load because of inadequate power transmission capacity. One of the weakest points in the power grid was the connection between the mainland and the Crimean peninsula. The Crimea Electric Power Grid did not have adequate generating capacity to meet its fast growing demand and since 2004, it experienced a number of blackouts and brownouts because of the overloading of transmission lines supplying electricity from the 1

14 mainland power grid. 4. By 2005, Ukraine had made considerable progress in energy sector reform, which started in 1994 with the restructuring and corporatization of the oil, gas, and power subsectors. As a result of its reform effort, Ukraine unbundled its power industry and introduced elements of competition to the wholesale electricity market (WEM). Despite these positive measures and the evidence of structural transformation taking hold, Ukraine still faced significant reform and development challenges in the energy sector. To address these challenges, the Ministry of Fuel and Energy (later the Ministry of Energy and Coal Industry) developed an Action Plan for Energy Sector Reform and Development which was based on a Conceptual Plan for harmonization of Ukraine s energy sector with the EU internal energy market. 1.2 Rationale for World Bank Involvement 5. The World Bank has supported Ukraine in its efforts to reform and restructure its energy sector through policy dialogue, technical assistance, and financing of adjustment and investment projects since the early 1990s. The World Bank prepared several energy sector policy notes, which reviewed the results of the first decade of transition and mapped a way forward for a more strategic sectorwide approach. 6. In 2006, the Government requested the World Bank s support for the implementation of its multiphase long-term Energy Sector Reform and Development Program (Energy Program), particularly through investment lending. Such support was provided by the World Bank with a series of Specific Investment Loans (SILs) which were focused on priority investments with a strong ownership on the Government s part and a clear commitment to technical and governance excellence on part of the implementing agency. The first SIL supported the Hydropower Rehabilitation Project (HRP) and was approved by the Board in June The Action Plan for Energy Program, adopted by the Cabinet of Ministers on June 13, 2007, formed a strong basis for World Bank support. Key measures included further price adjustment and strengthening of collection discipline; passing a law to strengthen the independence of National Electricity Regulatory Commission (NERC) (later, National Electricity and Utilities Regulatory Commission [NEURC]); privatization of power distribution companies; further development of the domestic WEM and creating the conditions to allow Ukraine to be integrated into the European energy market; improving corporate governance in energy companies; developing a domestic natural gas market; modernizing the domestic gas distribution system; and creating conditions for increasing domestic production of natural gas. This was an extraordinarily ambitious agenda to be implemented over the medium term ( ). 1.3 Original Project Development Objectives (PDO) and Key Indicators (as approved) 8. The original PDO of the Power Transmission Project was to improve the security, reliability, efficiency, and quality of power supply through the rehabilitation of transmission substations and the strengthening of the power transmission network. The project was also aimed at improving institutional capacity and technical capabilities of the transmission system operator (TSO), UE, so that it can assure secure and reliable operation of the high voltage power grid and, therefore, facilitate unimpeded operation and opening up of the electricity market. 2

15 9. The Loan Agreement did not distinguish the project objective from the program objective and included the following wording of the PDO: (a) to improve the security, reliability, efficiency, and quality of power supply through the rehabilitation of transmission substations and the strengthening of the power transmission network and (b) to improve the institutional capacity and technical capabilities of the Project Implementing Entity to ensure a secure and reliable operation of the high voltage power grid and facilitate the unimpeded operation and opening up of the electricity market. Key Outcome Indicators of the Project at Approval 10. The project included the following outcomes: Reduced maintenance and repair costs by US$0.8 million per year; Reduced ENS by 35 GWh per year; Reduced transmission losses and peak load capacity requirements by 14 MW; and Reduced average voltage drop to less than 5 percent of the nominal voltage at 330 kv and 220 kv substations included in the project. 1.4 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification 11. No revision of the PDO was made during the life of the project. Most of the PDO indicators were amended to reflect more precisely the changes in the approach of the Government of Ukraine (GoU) to the energy reform. The indicator tracking support of market reforms in the energy sector was dropped because of the change in the Government s approach to pace of the sector reform the draft Electricity Market Law suggested full market opening after the signing and tracking the progress of the electricity market opening in percentages became irrelevant. Another energy reform related target was adjusted to reflect the preparation of the new Electricity Market Law by the Ministry of Energy and Coal Industry (MoECI), which encompassed provisions of the 3rd EU energy package. The target tracking electricity losses was adjusted to reflect the events in the eastern parts of Ukraine and Crimea, affecting the implementation of the project. 12. Several PDO indicators were adjusted during the project implementation period. 1.5 Main Beneficiaries 13. At the appraisal, it was anticipated that project benefits will directly accrue to electricity consumers. They were to receive more reliable electricity supply made possible by the reduction of periodic supply interruptions in the power transmission system operated by UE. UE is a direct beneficiary of the project through institutional strengthening and rehabilitation investments. At the central level, the MoECI and the NERC were also to benefit from the project by improving accountability and efficiency in the Ukrainian energy sector. 1.6 Original Components (as approved) 3

16 14. The original project was approved by the Board on August 2, 2007, and became effective on December 5, The project consisted of five components. 15. Component A: Rehabilitation of Transmission Substations (US$157.8 million). Replacement of outdated high voltage equipment and installation of modern protective relaying and substation automation systems in (a) three 330 kv substations in the Dnieper electric power grid; (b) one 330 kv and one 220 kv substation in the Donbas electric power grid; and (c) five 750 kv substations. 16. Component B: Strengthening of Transmission Network (US$47.0 million). Expansion of the existing 330 kv Bar substation and construction of the 77 km long 330 kv transmission line to connect the Bar substation with the Dniester Hydropower Pumped-Storage Plant (PSP) which was under construction. 17. Component C: Stabilization of the Crimea Electric Power Grid (US$23.2 million). Upgrading of the existing 220 kv Simferopol-Sebastopol transmission line and associated substations to the 330 kv voltage level and upgrading of the substation control systems at the 330 kv and 220 kv substations in the Crimea electric power grid. 18. Component D: UE Institutional Development (US$8.7 million). Establishment of a corporate-wide Management Information System (MIS) in UE. This component also included provision of technical assistance to UE in (a) capacity building in procurement and project management; (b) designing and implementing corporate-wide MIS; and (c) annual auditing of project and company accounts. 19. Component E: Implementation of the Grid Code (US$1.3 million). Provision of technical assistance to UE in implementing the Grid Code and related regulations and norms of the WEM. 1.7 Revised Subcomponents 20. The original project components were not revised during the project implementation period; however, a few changes were made at the subcomponent level. Those changes are summarized in the following paragraphs (other components and subcomponents were left intact). 21. Component A: Rehabilitation of Transmission Substations. Because of significant savings, UE suggested adding additional packages to the Procurement Plan, which was approved by the World Bank. As a result, the number of 750 kv substations, rehabilitated under Component A, was increased from five to seven. 22. Component C: Stabilization of the Crimea Electric Power Grid. Because of slow progress with the effectiveness of the project during the first year after its approval, decision was made to finance upgrading of the 220 kv Simferopol-Sevastopol line using UE s own funds. The loan proceeds, initially set for upgrade, were used to finance rehabilitation of the Simferopol substation. The changes were approved by the World Bank. 23. Component D: UE Institutional Development. An asset revaluation study was included in Component D and implementation of the MIS activity was moved to the Second Power 4

17 Transmission Project. 24. Component E: Implementation of the Grid Code. In 2012, the World Bank agreed to exclude the Implementation of the Grid Code package from the Procurement Plan for Component E. 1.8 Other significant changes 25. Project restructurings. The project has gone through five restructurings, including three extensions of the closing date. Approved on October 15, 2011, the first project restructuring included provisions enabling financing of the asset revaluation study and extension of the study s completion date. During a second restructuring, approved on May 10, 2012, the first extension of the project s closing date from June 30, 2012 to December 31, 2014 took place. The said restructuring also extended the completion dates of several activities and included amendments of target values of performance indicators. 26. In 2014, the loss of control over substations in the eastern part of Ukraine and in Crimea by Ukraine, significantly affected the performance of several contracts and another restructuring became necessary. On December 18, 2014, the closing date was extended for a second time from December 31, 2014 to December 31, 2015, and since the total number of years for which the project had to be extended was to exceed two years, the extension was executed with the Regional Vice President s approval. The end targets were amended accordingly. At the time of the restructuring, the situation in the eastern part of the country and in Crimea was still developing, and hence, decision was made to not amend PDO indicators. 27. By the third quarter of 2015, the project s objectives related to energy reform and the opening of the electricity market became obsolete because the Government decided to take on a more ambitious energy sector reform. In addition, UE could not comply with the financial covenant in the Loan Agreement and, therefore, the current ratio was replaced with the selffinancing ratio. The fourth restructuring enabling those amendments was approved on September 1, Last restructuring took place on December 8, 2015, and involved six months extension of the closing date from December 31, 2015 to June 30, The restructuring was necessary for the finalization of several contracts, the performance of which was delayed because of the economic and political turbulence in Ukraine. In addition, a need to finalize performance of several new contracts, which were signed during 2015 with the purpose of using the savings, accumulated because of a depreciation of the Ukrainian national currency. The end target dates and disbursement estimates were amended accordingly. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 29. Soundness of the background analysis. The project preparation was initiated in early 2006 in response to the Government s request for a Development Policy Loan and lending to support the Government s investment programs in the energy sector. The project was approved on August 2, 2007, and became effective on December 5,

18 30. The project was built on the World Bank s extensive experience in the energy sector, including power transmission in the Commonwealth of Independent States and the EU member countries. In addition, during appraisal, extensive experience of the World Bank with the energy reform in Ukraine was studied thoroughly and lessons from the previous projects in the region were used, especially from an earlier Electricity Market Development Project (FY97), Hydropower Rehabilitation and System Control Project and Kazakhstan: Electricity Transmission Rehabilitation Project. The project s main focus was on achieving tangible results in the form of upgrading the Ukrainian power transmission network with additional components supporting the energy sector reform. World Bank-funded projects in Ukraine faced difficulties in achieving their objectives and scored low on sustainability when they included World Bank-driven components, largely because of the Government s inability and/or lack of willingness to support difficult reform components with uncertain outcomes. This is why the project was closely aligned with the Government s national energy sector investment and development program, and in addition, it complemented a WEM reform (via Component E) supported by the HRP, implemented in parallel. The chosen approach proved reasonable because project activities related to the upgrade of the transmission network were facing less challenges than components supporting the energy sector reform. Despite optimistic expectations prevailing at the time of the appraisal, the economic situation in Ukraine, has deteriorated gradually over the years that followed the effectiveness date and worsened dramatically after an unrest in Eastern Ukraine and the unfolding situation around Crimea factors which could not have been foreseen at the time of appraisal. This significantly affected the ability of the Ukrainian Government to support the project, especially the extensive energy sector reforms. 31. Considering a number of difficulties with the previous projects, it was critical to have an implementing entity with advanced technical skills, strong project ownership, and commitment to results. By the time of appraisal, UE had demonstrated that it had such ownership and commitment under the prior power operation. To better ensure that UE is able to carry out the substantially larger investment program under the proposed operation, the project was structured so as to ensure that proper project management arrangements were in place on time and supported by consultants and technical assistance. 32. Assessment of project design. The PDO was broad and included together with the outputs, the program-level outcomes, for which the project could only be partly held accountable, given the fact that the project was the one, among others, supporting an energy program carried out in Ukraine at the time. In addition, the project did not include PDO-level indicators, directly measuring improvements in security, reliability, efficiency, and quality of power supply. The existing project indicators at appraisal only partly allowed to capture the project benefits and achievement of the PDO and for this reason, some of the indicators required subsequent fine-tuning during the implementation, while a few were added as the project picked up pace. The objective of improving security, reliability, efficiency, and quality of power supply was supported with the investments in rehabilitation of transmission substations and strengthening of transmission network. The results indicators allowed for adequate measuring of the progress of the project. Achievement of the objectives was measured by the volume of ENS, reduction of transmission losses, volume of voltage, and number of power outages at the rehabilitated substations. The objective of improving the institutional capacity and technical capabilities of the project implementing entity was supported by investments in the institutional development of UE, implementation of the Grid Code and related regulations, and the provisions of the electricity 6

19 market legislation. The project included several indicators to keep track of the progress of the related activities, such as implementation of the WEM concept and the implementation of the Grid Code. Initially, the progress of the energy sector reform was measured by the percentage of power market opening; however, during the project s implementation period the indicator was dropped to better align with the concepts envisaged in the later versions of the Electricity Market Law, which required full market opening upon signing. The project s geographical scope supported the its high level ambitions, covering the whole territory of Ukraine with particular attention to the rehabilitation of the Crimean Peninsula grid. 33. Adequacy of the Government commitment. The Government s commitment at entry appeared solid and support to the project s objectives at all levels was visible. The project backed the Government s objectives in the energy sector, expressed in its Energy Strategy 2030 and program for upgrade of energy infrastructure. The Government backed the project with institutional and cofinancing support, including a commitment to strengthen the independence of the NERC. 34. Following a review of the World Bank s projects in Ukraine, the Independent Evaluation Group, in its country assistance evaluation ( ) underlined the importance of having a reform-oriented Government not only during project preparation but also during the entire project cycle. Unfortunately, this was not always the case during the project s lifetime. During the first months after the World Bank s approval, the project faced delays in effectiveness. It was not until a year and a half after signing that the Loan Agreement received the necessary governmental approvals and was ratified by the parliament. Since the project s effectiveness, the Ukrainian Government was replaced six times, with the minister of the MoECI being replaced even more frequently. Such frequent changes in the Government significantly hampered the pace of the project and led to delays with the implementation of the Energy Reform Program. Even when they were in place, the ministries officials were at times slow in the coordination of work between the Government s units and were not always successful in upholding the leadership, consistency, and continuity of sector reform. 35. Assessment of the project risks and mitigation measures. Most of the risks identified at the appraisal stage materialized during implementation. The risk of vanishing political commitment has been visible not only early in the project but also during the whole implementation period. Though technical assistance in the energy reform was one of the components of the HRP, implemented in parallel, this only partly helped to advance the energy reform. 36. The financial viability of the main energy enterprise implementing the project, UE, despite visible improvements in the early years of the project, started to deteriorate after the project passed half of its implementation period because of insufficient local financing, lack of decision by regulator on tariffs, and mounting problems in the Ukrainian economy. Problems with the local financing, identified among the risks at the appraisal stage, significantly affected the implementation pace of the project, causing delays and ultimately led to several extensions of the closing date. This risk was wrongly identified as Moderate at appraisal; however, as it will be demonstrated in the following paragraphs, the reasons for the deteriorating financial standing of UE were mostly outside of the company s control and were because of an overall decline of the Ukrainian economy. 7

20 37. At the same time, a few risks, identified as Substantial or Moderate, did not materialize over the life of the project: no monopoly abuses or misuse of funds were discovered at the implementation stage. There were also no complaints from the civil society regarding the Bar- Dniester transmission line associated with the Dniester Hydro Complex and PSP Implementation 38. Factors contributing to successful implementation: Close alignment between the objectives of the project and the Government s commitments in the energy sector. High level of cooperation between the Project Implementation Units (PIUs) and the World Bank s team, which helped address the issues arising during the implementation phase properly and on time. Significant attention paid to the increase of UE s institutional capacity over the project s lifetime, the PIU s team has substantially improved its ability to manage a number of procurement packages and to handle World Bank-financed projects in terms of procurement, financial management (FM), and fiduciary aspects, thus creating a solid basis for the follow-up project the Second Power Transmission Project. Ability of UE to quickly absorb savings accrued at the end of the project and prepare and implement a number of additional bidding packages, including a contract with the project management company, which helped prepare the basis for the follow-up, the Second Power Transmission Project. 39. Factors negatively affecting implementation: Delay with the ratification of the Loan Agreement in the Ukrainian parliament and hence, delay in the project s effectiveness (the Loan Agreement was ratified on October 29, 2008, and the project became effective in December 2008, that is, more than a year after it was approved by the World Bank s Board of Directors in August 2007). Low initial contract management capacity of the consultant, which led to problems with timely preparation of the procurement packages during the first years of the project s implementation. Additional delays in rehabilitation of several substations caused by the system restrictions imposed by the TSO, which did not approve switching off the substations for rehabilitation purposes because of a need to respond to peak loads, which lasted for several months. Lack of stability and predictability in the Ukrainian political and economic environment. Frequent changes in the Government and in the line ministry, coupled 8

21 with the rapidly contracting Ukrainian economy, led to an overall delay in obtaining necessary approvals and affected timely performance of the obligations by the borrower and UE. Loss of control over Crimea and civil unrest in Eastern Ukraine affected implementation of several contracts, making them impossible to complete because of lack of access to the equipment and substations located in the areas outside of the GoU control. 40. Implementation arrangements. The implementation arrangements were well designed and were based on the experiences and lessons learned from previous World Bank projects in the energy sector in Ukraine. Implementation of the Power Transmission Project was the responsibility of the national energy company UE a fully state-owned company, established in Before the Power Transmission Project, the company had experience in implementing World Bankfunded projects by participating in the Hydropower Rehabilitation and System Control Project. A comprehensive coordination and implementation mechanism was established for implementation of the Energy Program. A focal point of the program coordination and implementation mechanism was the Commission for Energy Sector Reform and Development which was established in August The commission was responsible for reviewing and proposing to the Cabinet of Ministers strategic decisions related to energy sector reform and development, including changes in the legal and regulatory framework and priority investments to be supported by the World Bank. In the process of preparation of those proposals, the commission was responsible for reviewing and approving the Action Plan for the implementation of the Energy Program. The commission was also responsible for the oversight of the program, including overall monitoring of investment projects and technical assistance included in the Energy Program. The commission was supported by the Energy Program Coordination Unit (EPCU). The EPCU, headed by the Deputy Minister of the Ministry of Fuel and Energy acted as the Commission Secretariat and was responsible for (a) preparing and updating a Conceptual Plan for Legal and Technical Harmonization of the Ukrainian energy market with the EU internal energy market and (b) developing a program of priority investments and technical assistance in the energy sector. The EPCU also established program communication and documentation procedures, managed technical consultants hired to assist in program and project preparation, and assisted other implementing entities in meeting program requirements, including fiduciary requirements agreed with the World Bank. Unfortunately, as it will be explored in more detail in the section on Borrower s performance, during the project implementation, there were several instances when the EPCU could not perform its functions because of changes at the ministerial level which negatively affected implementation of the project. Progress of Implementation 41. The project achieved most of its targets, however, through certain adjustment of indicators and five restructurings, including three extensions of the closing date. Overall, during its lifetime, the project faced a number of challenges which significantly delayed its timely completion. A brief overview of the project s main challenges and milestones is presented in the following paragraphs. 42. Bidding and contract management. The project started with significant delays no supply or installation contracts were signed until the end of September 2010 as a result of UE 9

22 struggling with the low capacity to handle preparation of the bidding packages. The situation worsened when selection and hiring of the project management and procurement firm took significantly more time than expected, which resulted in additional delays with the bid preparation. Two other unexpected factors contributed to delays: (a) a large number of bids submitted to UE upon opening of the bidding process for the key contracts and (b) submitted bids indicated costs, which were about twice lower than the original cost estimates (high voltage circuit breakers for 750 kv substations - bid for US$17 million compared to the initial estimate of US$35 million, the final estimate was US$14.6 million) and the power transmission line Bar-Dniester (bid for US$10 million to US$12 million compared to initial estimate of US$29.6 million, the final estimate was US$14.6 million). In addition, a number of contracts for delivery of auxiliary equipment were added to the original set of contracts and as a result, the total number of packages has increased to 15, making contract management activities extremely difficult for the project implementing entity of the UE staff. While it may seem logical that UE could have benefited from hiring a project management consultant, responsible for preparation of tendering packages at the project preparation stage, hiring the consultant before effectiveness of the Loan Agreement was impossible because of lack of funds. During the project implementation phase, the project management consultant was hired; however, the consultant could not satisfy UE s requirements because of delays in preparation of the packages and overuse of funds. Three years after the contract was signed, the project management consultant requested a fee increase in the amount of 156 percent. The UE did not consider such an increase reasonable and therefore, the contract with the project management consultant was not extended and ceased in During , UE was severely constrained in hiring experienced professionals who could assist with project management. The UE s PIU was small and had a statutory ban on hiring, which affected all Governmental institutions at that time and prevented the expansion of the PIU, as the World Bank requested. Lack of internal capacity to supervise and monitor transactions, coupled with the difficulties in finding a new project management consultant, led to difficulties with contract management for the rest of the project s lifetime. 43. In December 2010, three key contracts were signed and disbursements began in However, because of bidding-related delays and a need to have at least three summer seasons for installation works for technical reasons, UE had requested the extension of the closing date for two and a half years until December 31, 2014, which was approved by the World Bank. Over , other major contracts were signed, the implementation gradually picked up pace, and disbursement rate began to grow. By the end of 2012, the first two major contracts were completed. 44. Midterm review. At the midterm review, carried out in March 2013, it was estimated that all contracts would be completed before the revised closing date of December 31, 2014, except for the MIS contract. The World Bank agreed to move this contract to the Second Power Transmission Project as it become evident that because of the complexity, it would take at least one year for the tendering of the MIS and at least three years for its implementation. After the supervision mission in September 2013, the World Bank recommended that UE pay special attention to the implementation pace of several packages, but no significant concerns regarding timely completion of contracts were voiced. 45. Disbursement of funds. The World Bank s financing was provided to UE by the Ministry of Finance through the state budget on a recurring basis according to annual budget allocations (quotas) which by 2013 started to get utilized well in advance before the end of the fiscal year. 10

23 Getting permission to increase the budget allocations during the fiscal year had consistently been taking several months, during which the subcontractors were not paid and the whole investment program was left frozen. By mid-march 2014, when budget disbursements were unlocked, three contracts were fully completed, and there was still an expectation to complete the implementation of all contracts by December 31, 2014, though timely implementation of six contracts was considered under significant risk. At the time of the project closing, the problem still persists and affects timely implementation of other projects in Ukraine. However, over several years, preceding the Closing Date, UE and the Ministry of Finance cooperated more actively to solve the issues of underfinancing in advance. 46. Force majeure. During 2014, several dramatic events occurred in Ukraine, which affected the project, namely (a) the Maidan revolution and subsequent changes in the Government; (b) loss of control over Crimea by Ukraine; and (c) conflict in Eastern Ukraine. The events had a significant direct impact on the execution of several contracts and some of them were cancelled because of force majeure. In particular, one of the Donbas Power Grid contracts which was to be performed in the zone of conflict could not be physically completed because of security considerations. In Crimea, the modernization of the 330 kv Simferopol substation had to be stopped because of lack of access to the site. Despite the fact that several other contracts were implemented on sites located outside of the conflict-affected areas in Eastern Ukraine, those contracts were still affected by this crisis TSO had to maintain operation of the Ukrainian Power System and during several months it did not allow UE to disconnect substations from the power grid, which was necessary for installation of the new equipment. Worsening economic conditions in Ukraine had their effect too one of the contractors became bankrupt and all works at the substation of Dniprovska Energy System were stopped. Considering these facts, the decision was taken to extend the project s closing date to allow for timely completion of the delayed contracts. 47. Loan savings. During 2014, savings in the amount of US$20 million in loan proceeds accumulated because of the depreciation of the Ukrainian hryvnia and partial cancellation of contracts (because of force majeure). UE s proposal for utilization of those proceeds was approved by the World Bank and as a result, UE was to procure two new contracts for the supply of goods. During 2015, the economic situation in Ukraine worsened and because of the high risk of noncompletion of five original and two new contracts by the closing date, UE requested a final extension of the closing date until June 30, 2016, which was approved by the World Bank. 48. Energy program. The project supported the Energy Sector Reform by pursuing two objectives: (a) opening of the power market and (b) implementation of the WEM concept. Achievement of both goals was supported by the HRP, which started before the Power Transmission Project and was implemented in parallel with it. The HRP had a wider scope and more ambitious energy reform agenda and the Power Transmission Project supported parts of the reform that were not covered by the HRP. Both projects energy reform related components faced similar challenges, namely lack of continuing Government ownership and inconsistency in the Government s approach to the energy reform agenda. 49. On a project design level, however, only one out of five components was directly related to the energy reform. During the March 2011 supervision mission, the NEURC and UE indicated that the Grid Code was in the final stages of preparation and was expected to be approved by the NEURC as soon as the Electricity Market Law is signed by the President. The Law was approved 11

24 in 2013 but almost immediately after that the Government started working on a new Electricity Market Law compliant with the 3rd EU Energy Package. A new Electricity Market Law was approved in the first reading in the Ukrainian parliament in September 2016; however, by the project closing date, neither the law nor the Grid Code had been effective. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 50. M&E design. The monitoring indicators selected at the project appraisal were relevant to the achievement of the PDOs. In particular, the indicators have addressed the progress of both the investment lending and the energy reform components of the project. Improvements in security of power supply are measured directly by the volume of reduction in ENS, improvements in reliability, by reduction of transmission losses. Improvements in the quality of power supply are measured by number of outages at each of the rehabilitated substations. The project did not have direct indicators to measure the level of institutional development and technical capabilities of the project implementing entity. However, since those objectives were intermediary to assure secure and reliable operation of the high voltage power grid and to facilitate unimpeded operation and opening up of the electricity market, the overall success of the project was measured by success in ensuring an unimpeded operation of the transmission network, for which the indicators were available. Opening of the electricity market was initially measured by the percentage indicator, but it was later replaced by a number of indicators demonstrating the degree of electricity market liberalization, including an indicator on approval of the Grid Code. The Grid Code was supposed to follow signing of the Electricity Market Law, thus demonstrating the level of openness of the Ukrainian electricity market. During the project s implementation period a number of indicators were adjusted to reflect changes in the project s priorities and in the project s closing date. 51. M&E implementation. Data were collected through the lifetime of the project via submissions from the project implementation entity and implementing agencies. The quality and timeliness of the data collection and reporting by the project implementing entity and the implementing agencies had been improving throughout the project s lifetime, while quality and reliability of reporting had to be reinforced by consultants and external auditors. 52. Internal monitoring needed significant improvement as well, which was acknowledged by the borrower at the preparation stage and was addressed by one of the project s components. Because of inadequate internal capacity for contract management and problems with installation of the much needed MIS, the M&E implementation process could be regarded as somewhat challenging. 53. M&E utilization. The set of intermediate indicators was instrumental in timely reaction to the project s changing conditions. The performance indicators were designed to ensure adequate monitoring and reporting of the project implementation progress and were utilized efficiently. Information regarding the procurement and execution of contracts was used to follow the progress of the project and to address the implementation issues as they arose. 2.4 Safeguard and Fiduciary Compliance 54. Safeguard compliance. The project was rated Satisfactory from the safeguards compliance point of view. The project triggered OP/BP 4.01 (Environmental Assessment) and 12

25 OP/BP 4.12 (Involuntary Resettlement) due to land acquisition for the foundations of transmission towers along the Bar-Dniester transmission line. The first review of the borrower s compliance with the safeguards policies was carried out in May 2013 and though full compliance with OP/BP 4.01 was confirmed, the quality of reporting on the compliance with OP/BP 4.12 required additional attention. The Resettlement Action Plan was not prepared before land acquisition, and the land acquisition process for the project was implemented in accordance with the domestic legislation. According to the borrower, the provisions of the Land Acquisition Resettlement Framework were fully complied with during the process of the land acquisition and were fully reflected in the Land Acquisition Report. The quality of the Land Acquisition Report, however, was found unacceptable to the World Bank during the World Bank s mission in May To assist the client with the preparation of the detailed Land Acquisition Report, a local consultant was hired by the World Bank who worked under the supervision of the World Bank s social development specialist. By March 2014, a report that was of the quality acceptable to the World Bank was produced and the relevant personnel in the PIU received an orientation with regard to the provisions of OP/BP The project had several positive environmental and social impacts. Residents along the project impact area of transmission line 330 kv Dniester - Bar were consulted and interviewed during project preparation through a social assessment to identify social issues relevant to the project objectives and execution of Component B. Their concerns were properly addressed both at the preparation and implementation stages. The project helped put in order the title deeds of the landowners, which were not documented properly since the beginning of the 1990s. The project also helped develop land evaluation mechanisms. A labor safety system at all UE s/s was in place: staff received regular instructions and there were no emergency situations during the project s implementation period. Installation of modern switches reduced exposure of personnel to electromagnetic fields. 56. With regard to the environmental management issues, the project did not have any negative impact on the air quality, soil, groundwater, flora, or fauna and resulted in lower noise from operating switches and decrease in using oil lubricants because of decommissioning of compressors at two substations. Recultivation of all the s/s sites was finished on time. 57. Financial management. The project used the FM institutional arrangements already existing with the borrower and UE. During the implementation period, additional FM reporting software was procured and finalized in UE s FM procedures had been reviewed periodically as part the supervision of all ongoing World Bank-financed transmission operations. The World Bank considered the project s FM arrangements Moderately Satisfactory in 2009 and then Satisfactory during the subsequent years ( ). The borrower s FM team was adequately staffed and accounting and reporting systems were in place as well as the internal control systems and auditing arrangements. Interim financial reports (including the latest as of June 30, 2016) have been received within required timelines and reviewed and assessed as acceptable to the World Bank. The rating was downgraded in October 2013 to Moderately Satisfactory and it remained at this level until project closure. The key reasons for the Moderately Satisfactory rating in these years were as follows: (a) irregular Statement of Expenditure reporting, resulting in the inactivity of the special account for several months; (b) delays with the submission of the revised Project Operation Manual; (c) delays in submission of the audit reports (except for the timely submission of the 2015 audit reports in 2016); (d) the accounting system still to be put in active use, and needed 13

26 fine tuning to allow automated generation of reports; and (e) periodic delays in sufficient allocation of funds in the state budget (otherwise, the FM and disbursement arrangements were generally in place and were functioning relatively well). At the time of the Implementation and Completion Results Report (ICR), all payments were made and the project audit was in progress. 58. Procurement. During the first years of the project s lifetime, UE experienced problems with the project management consultant (mentioned earlier in the ICR) which led to delays in the organization of bidding procedures and subsequent delays with the signing of contracts. As a result, the project s procurement had been continuously rated Moderately Satisfactory for a number of years. To assist UE with tackling procurement issues, a procurement capacity assessment was carried out by the World Bank s team in UE in February 2011 and a plan to mitigate the procurement risks and strengthen implementation capacity was agreed with the company. During the following months, intensive training was conducted to help the PIU of UE improve its capacity in procurement under World Bank guidelines. This led to visible improvements in the PIU s ability to handle multiple contract packages, and since 2012, the project s procurement rating was upgraded to Satisfactory and remained the same until the project s closing. 59. All contracts were subject to prior review by the World Bank. Frequent implementation reviews were carried out by the World Bank project team that included technical staff, FM specialists, and procurement accredited staff. 2.5 Post-completion Operation/Next Phase 60. The MoECI and UE have demonstrated commitment to sustain achievements of the Power Transmission Project with regard to improvement of security, reliability, efficiency, and quality of power supply and strengthening the power transmission network as well as to the improving the institutional capacity of the TSO. To expand the activities of the Power Transmission Project and to build on its lessons and achievements, the Government requested the World Bank to consider a follow-up project the Second Power Transmission Project, which was approved by the Board in 2015 and became effective on June 9, The objective of the Second Power Transmission Project is to improve the reliability of power transmission system and support implementation of the WEM in Ukraine. The Electricity Market Reform is under way. In September 2016, the new Electricity Market Law was approved in the first reading in the Ukrainian parliament and is expected to be approved by the parliament in all three readings in Assessment of Outcomes 3.1 Relevance of Objectives Rating: High 61. The PDO was relevant to the conditions in Ukraine at the time of appraisal and remains relevant and consistent with the current development priorities and conditions. The team is rating relevance of the project objectives as high, based on the following: (a) alignment of the project s objectives with the GoU s and UE s plans for rehabilitation of aging high voltage transmission lines and substations and with the World Bank's Country Partnership Strategies FY08 FY11 and FY12 FY16 and (b) strengthening of the effective partnership between the Government and 14

27 development partners (European Bank for Reconstruction and Development [EBRD]/EIB/German Bank for Reconstruction [Kreditanstalt für Wiederaufbau]/United States Agency for International Development and others) in the energy sector. In particular, the high relevance of the PDO is demonstrated by its full alignment with the Country Partnership Strategy for Ukraine for fiscal years The PDO is specifically aligned with Pillar 4 Improving public services and public finances, Result Area 1 Improved governance of public finances, and Outcome 4 Improved governance in the energy sector and Pillar 2 Improving policy effectiveness and economic competitiveness: support to building relations with businesses, Result Area 5 Improving infrastructure for business activities, and specifically, Outcome 15 Improved performance of power sector. The high relevance is also demonstrated by the PDO of the Second Power Transmission Project partly following the activities of the current project, namely the activity of improving the reliability of the power transmission system and supporting implementation of the WEM in Ukraine Relevance of Design and Implementation Rating: Substantial 62. The project s components were adequately designed to achieve the PDO. Components A, B, and C contributed directly to improving security, efficiency, and quality of power supply. Component D contributed to the improvement of institutional capacity and technical capabilities of UE, thus also affecting the objective of improving security, efficiency, and quality of power supply. Component E supported the objective of facilitating unimpeded operation and opening up of the electricity market by providing the borrower with the technical assistance for implementation of the Grid Code and relevant power market legislation. Component E, though formulated somewhat narrowly, included under its umbrella a set of activities that were carried out to provide legislative support to the electricity market opening. 63. Initially, the PDO and corresponding PDO-level indicators were not well aligned, and it took several years before new indicators clarifying the PDO were added to the Results Framework In particular, indicators accounting for construction of the transmission line, electricity losses, and total net injected regulation were added in This allowed the project to account for measurable results and to better reflect the nature of activities carried out under the project. An indicator measuring the extent of the electricity market opening was dropped due to changes in the energy reform agenda and in the Ukrainian political landscape. 64. The relevance of the design and implementation is Substantial. The Results Framework was revised several times and after restructurings it became better aligned with project activities and the PDO. During the project implementation, several changes were introduced to the subcomponents in response to changes in the Ukrainian economic and political landscape (described above) without amending legal agreements. During the last years of the project s lifetime, the only major change was made to Component D, where the subcomponent implementation of the MIS system was transferred to the Second Power Transmission Project; other changes in indicators were introduced to accommodate the closing date extensions. Overall, lack of substantial changes in the components during the project s lifetime can be regarded as a well-prepared alignment between the components and the project s objectives. 15

28 3.3 Achievement of Project Development Objectives Rating: Substantial 65. The objectives under the project were in most part achieved. 66. The objective of improving security, reliability, and quality of energy supply was achieved through the rehabilitation of transmission substations and strengthening of the power transmission network. The achievement of this objective is rated Substantial. The project helped eliminate critical bottlenecks in the transmission network and improved sustainability of the energy system. By the closing date, most of the projected outcomes and PDO indicators were achieved, namely key high voltage substations in four power regions of Ukraine were rehabilitated; the new 72.9 km Bar-Dniester transmission line, designed with better reliability to withstand increases in power output, was built and is operating; ENS was reduced by at least 35 GWh/year; transmission losses were reduced by 14 MW, and the voltage drop was reduced to less than 5 percent of the nominal voltage at the 330 kv and 220 kv substations included in the project; electricity losses per year in the project area were decreased to numbers which were even less than the target value of 1.7 percent; maintenance and repair costs were reduced by US$0.8 million per year; total net injected generation in the project area increased to more than the target of MWh; and the number of outages at rehabilitated substations were reduced to the projected levels. 67. As a result of the activities, supported by the project, as well as of subsequent improvements in security, reliability, and quality of the Ukraine Unified Power System, the system is now ready to operate under the requirements of the European Network of Transmission System Operators for Electricity (ENTSO-e). The Government is integrating the Ukraine Unified Power System with ENTSO-e, with the goal of further assuring uninterrupted, secure, and reliable electricity supply to domestic clients. 68. The objective of improving the institutional capacity and technical capabilities of UE was partially achieved through improving of UE capacity in FM and procurement, which led to increase of the efficiency of UE internal procedures and in the upgrade of the respective World Bank s ratings for FM and procurement. In addition, the project resulted in UE acquiring new modern software and hardware, which was installed and is currently in operation. Installation of the MIS in UE was not completed, however the MIS contract was transferred to the follow-up 16

29 project, the Second Power Transmission Project. The achievement of this objective is rated Substantial. 69. The achievement of the objective facilitating unimpeded operation and opening up of the electricity market is rated Substantial. The objective was achieved through financial and technical assistance to UE and the GoU in preparation of the regulations and provisions of the WEM and in shifting from the single buyer model to a new model of the electricity market based on bilateral contract market, balancing mechanism, and day-ahead and intra-day markets. In 2013, the Law On Operating Principles of the Electricity Market of Ukraine was signed, which provided the foundation for the electricity market opening and was compliant with the EU 2nd Energy Package. After it became effective, the market rules were developed and the Grid Code was finalized. In 2015, the Government embarked on bringing National Electricity Legal Framework in compliance with the EU 3rd Energy Package and after months of consultations, in September 2016, the new Law On Operating Principles of the Electricity Market of Ukraine was approved in the first reading in the Ukrainian parliament (three readings are required for the law to be considered approved). The Grid Code and the market rules will enter into force once Law No becomes effective. The full opening of the electricity market was not expected by the closing date, and the progress made by the GoU and other stakeholders toward this goal is visible and significant. 70. Based on the above, the achievement of the PDO is rated Substantial. All of the project s objectives were interdependent and contributed to the achievement of each other to a certain extent. However, based on the relative weight of inputs and the impact that the objectives outputs were expected to have on the functioning of the transmission network and operation of the electricity market, it is the achievement of the first goal that is considered crucial for the overall success of the project. Project Key Indicators Power market opening Support sustainable economic development by improving security, reliability, efficiency, and quality of energy supply through investments (rehabilitation and strengthening of transmission network) Implementation of the WEM concept Table 1. Status of achievement of Project Key Indicators at the time of the ICR Baseline Target Status at ICR 0% power market opening Estimated ENS due to transmission system failures: GWh; transmission losses: 3.4% voltage quality: voltage outside acceptable range (+/ 5% of the nominal voltage) in several substations WEM concept adopted in 2002 but not implemented; Draft law on Operational Principles of Ukraine's Power Market Model of bilateral agreements with a balancing market operational ENS reduced by at least 35 GWh/year; transmission losses reduced by 14 MW; voltage within acceptable range in all substations included in the project; number of outages at rehabilitated substations reduced Development of market rules, regulatory, and legal framework of new energy market model Dropped in 2012 the full market opening was expected upon approval of the Electricity Market Law. Achieved Target partially achieved; Market rules are developed; New Electricity Market Law pending approval in the parliament. 17

30 Project Key Indicators Transmission lines constructed or rehabilitated under the project (kilometers) Electricity losses per year in the project area (percentage) Total net injected generation (MWh) Electricity losses per year in the project area - technical Baseline Target Status at ICR Achieved Target overachieved , , Target partially achieved 139, without Crimea ES Target achieved 3.4 Efficiency Rating: Modest 71. The overall efficiency of the project is rated as Modest. Actual project costs in U.S. dollar terms at project completion were around the same as estimated at appraisal. The implementation period was significantly longer (nine years) as compared to the appraisal estimate of six years. The net economic benefits during the implementation period were lower than projected at appraisal and the associated indicators of economic viability were lower than the estimates at appraisal. 72. Project cost and implementation schedule. At the appraisal of the project, the total project cost was estimated at about US$238 million. The project was to be implemented over a six-year implementation period (2007 to 2012) with a completion date of December 31, The actual implementation period was significantly longer (nine years) with project completion in June Actual project costs at completion are estimated at about US$234 million, nearly the same as the projected cost of US$238 million. However, this includes the effects of the major devaluations of the UAH since 2009 as a result of which the exchange rate progressively changed from UAH 8 per US$ to UAH 25 per US$. This mitigated (in U.S. dollar terms) the effects of some significant increases that occurred in local currency denominated costs during the period. 73. Economic viability. Indicators for economic viability as estimated at project appraisal and reestimated at project completion are given in table 2. Details of the underlying economic analysis are provided in annex 3. Table 2. Economic Viability Estimates Indicator Appraisal Estimates Post-Completion Estimates EIRR ENPV EIRR ENPV Economic viability 18.2% US$122.9 million 14.0% US$42.8 million at 10% discount rate US$129.7 million at 6% discount rate Note: EIRR = Economic Internal Rate of Return; ENPV = Economic Net Present Value. 74. The post-completion EIRR is estimated at 14.0 percent. It is lower than that estimated at appraisal (18.2 percent) but nevertheless is substantially higher than the discount rates of 10 18

31 percent used at appraisal and of 6 percent that is applicable under the current guidelines in the World Bank for economic analysis of investment projects. In addition to the slower realization of project benefits because of the slower and longer implementation period, the post-completion estimated EIRR has also been constrained by the adverse impacts of the conflict situation that prevailed in Ukraine during 2014 to 2016, which resulted in a loss of transmission assets in Crimea and the economic slowdown in Ukraine which resulted in a decline in UE s power transmission volumes. The post-completion ENPV is estimated at US$42.8 million at a discount rate of 10 percent (as at appraisal) and US$129.7 million at a discount rate of 6 percent (under the currently applicable World Bank guidelines). 3.5 Justification of Overall Outcome Rating Rating: Moderately Satisfactory 75. The overall outcome of the project is rated as Moderately Satisfactory. The PDO was and continues to be highly relevant to the objectives of the GoU and to the priorities of the Ukraine Country Partnership Strategy. Three out of four PDO-level indicators have been achieved, most of the project s components have been fully implemented to date, and majority of intermediary indicators were met with some targets being exceeded and the rest being not met because of force majeure. The project has improved security, reliability, and quality of power supply through the rehabilitation of transmission substations and the strengthening of the power transmission network. Institutional capacity and technical capabilities of UE have also been significantly improved. 3.6 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 76. The project had only an indirect effect on poverty, gender, and social development. The project did not specifically focus on immediate impact on those areas and therefore, the exact link between the project s outcomes and such impacts could not be measured. (b) Institutional Change/Strengthening 77. UE s institutional development was one of the project s components. The World Bank has assisted UE in developing its FM, procurement, and reporting arrangements which helped improve the reporting discipline and is expected to have a positive effect on the implementation of the follow-up project, the Second Power Transmission Project. UE has been demonstrating persistent commitment to apply modern power electricity market practices and support to the GoU in development of the Grid Code and electricity market reform legislation. 78. The project contributed to creating a legal framework for a liberalized electricity market. One of the components included providing technical assistance to the GoU in implementing the Grid Code, related regulations, and norms of the WEM. Despite the fact that this component and the corresponding indicator on the implementation of the WEM concept had not been fully achieved, the project resulted in assisting the GoU in preparation of two versions of the Electricity Market Law and corresponding secondary legislation. In 2013, the parliament voted on and the President signed an Electricity Market Law, compliant with the EU 2nd Energy Package. Then, its implementation gradually started. In 2015, the Government encouraged by the EU and the energy Community Secretariat and several international financial institutions (IFIs) started working on 19

32 the new Electricity Market Law compliant with the EU 3rd Energy Package. The new law was approved in the first reading in the Ukrainian parliament in September 2016 and once signed, it will become a solid foundation for a new Ukrainian liberalized electricity market. In addition to this tangible result, the project also assisted the GoU in finalization of the market rules and other essential documents needed for operation of the new WEM, based on the new Electricity Market Law, including balancing market rules and rules of day-ahead and intra-day markets. Even with partially achieved targets, the component will significantly raise the capacity of the GoU to implement the electricity market reform. (c) Other Unintended Outcomes and Impacts (positive or negative) 79. The project did not have any unintended negative impacts. There were several positive outcomes. In particular, the project has attracted the attention of several development institutions which took an active part in financing of certain parts of the transmission rehabilitation plan that were not covered by the World Bank s financing, such as rehabilitation of several additional substations and assistance in construction of transmission lines with the overall purpose of strengthening the transmission grid. Such cooperation with the EBRD, EIB, and the German Bank for Reconstruction (Kreditanstalt für Wiederaufbau) helped better address UE s immediate needs and improved UE s capacity to simultaneously handle activities involving international assistance, originating from several sources. 3.7 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable. 4. Assessment of Risk to Development Outcome Rating: Moderate 80. Based on the above, the overall risk to the sustainability of the project benefits is assessed as Moderate. Technical, social, stakeholder, environmental, and institutional risks are negligible; however, several risks to the achievement of the development objectives persist. Financial capacity of UE and its ability to continue its investment program with limited resources is a matter of concern. The Ukrainian economy continues to rely heavily on international commodity markets, which are subject to large demand and price swings. Times of weak economic performance create political pressure to minimize price increases on essential services, which may make it difficult for UE to obtain timely tariff increase approvals from the regulator (NEURC). The outlook for tariff increases is, however, promising, as Ukraine embarked on tariff reforms and tries to bring tariffs to cost recovery level by Another significant risk to the ability of UE to sustain the benefits of the project is a restriction imposed by the Ukrainian legislation in the form of an annual cap for IFI financing which state-owned companies are eligible to receive during a fiscal year. According to this rule, state-owned companies are allowed to receive only certain amount of funds from the IFIs, which are allocated within a quota. For a number of years, such quota has been lower than the amounts UE actually needed. The budget reallocation process required for an extension of the quota involves both the MoECI and the MoF and both Ministries are cooperating to ensure there are no disbursement delays in future. 81. The possibility of escalation of conflict in the eastern part of Ukraine poses another 20

33 significant risk to the ability of the Government and UE to continue this ambitious program. By the time of the project closing, sporadic fights were still taking place in the conflict zone. During the implementation phase, because of the active fighting and the damage to some parts of the transmission system, some of the substations had to be kept operational to support the functioning of the system. Hence, while geographically the fighting may only touch a marginal part of the transmission system, continuing operation in the zone of conflict at some point may lead to technical difficulties in timely rehabilitation of the transmission system components as well as, on a more general level, to a change in the Government s budgetary priorities which may ultimately deprive UE of the expected financial support. 82. The ability to continue investing further in power transmission facilities is also closely related to the Government s commitment to the energy reform. The months following the project s closing date will be crucial for the future of the energy reform in Ukraine and will define the ability of UE to continue its investment program. The Electricity Market Law, defining the organizational framework of the new electricity market, was approved in the Ukrainian parliament in the first reading in September 2016, sending a positive signal to the international community and proving strengthened commitment from the Government to the electricity market reform. 83. The project has, and will continue, allowing UE to provide more reliable electricity supply to Ukrainian customers and satisfy a substantial part of demand growth. The importance of the rehabilitation of the transmission assets, institutional development of UE, and continuing energy reform is reflected in the Second Power Transmission Project which was approved by the World Bank in The Second Power Transmission Project is pursuing the objective of improving the reliability of the power transmission system and supporting implementation of the WEM in Ukraine. It is financed by the IBRD (US$ million) and by the CTF (US$ million) and will support rehabilitation of transmission substations, electricity market enhancement, and institutional strengthening of the MoECI. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory 84. The project was built upon the lessons learned in the Electricity Market Development Project and the Hydropower Rehabilitation and System Control Project and aimed to continue the rehabilitation activities started by the World Bank s previous engagements in the Ukrainian energy sector. The project s design incorporated many lessons learned and had an adequate set of indicators and monitoring mechanisms to allow for proper implementation. The project was consistent with the Government s development and the World Bank s sector priorities as well as with the Country Assistance Strategy. Safeguards and fiduciary mitigation measures were properly designed and consistent with the World Bank s fiduciary role. Risks were assessed, and in overall, were mitigated properly through covenants in the Loan Agreement. Provisions were made for monitoring and evaluation both during and after implementation. The scope of the project was strategically relevant. 21

34 85. There were, however, shortcomings the PDO was broad and somewhat overly ambitious considering the projected outputs, scope, and the duration of the project. Initially, the PDO was only partly supported by the indicators, for which the project could be reasonably held accountable. It took several years before some new indicators were introduced to reflect the scope of the project and its activities better. The project could also have benefited from early arrangements enabling the implementing agency to develop capacity to handle multiple complex bidding packages. (b) Quality of Supervision Rating: Satisfactory 86. Throughout the project s lifetime, the team was primarily based in Kiev, which substantially contributed to maintaining a constructive relationship with the client, timely identification, and resolution of risks to the achievement of relevant development objectives. Supervision missions were fielded on a regular schedule, with some of the missions having multiple agenda and being assisted by supervision missions from other projects implemented in the Ukrainian energy sector. Because the Ukrainian counterparts (the MoECI, Ukrainian project implementing entities) were facing similar issues across the board, such joint missions allowed for a necessary synergy and improved the ability to target those issues with more sophisticated approaches. A major part of project s achievements in quality of supervision was due to the consistency and continuity of the project s team: the TTL and economist/financial analyst/procurement specialist have been with the project since the Board presentation and for the most of the project s lifetime. The project engineer stayed with the team from the supervision stage until finalization of most of the key procurement activities. As a result, a pattern of mutual respect and understanding was developed between the World Bank and the client, which helped in overcoming difficulties that arose from time to time during implementation. An effective training program on World Bank procedures, together with the willingness of the PIU staff to learn, also contributed to effective implementation. 87. Because initial progress was slow, the midterm review was held in 2013, two years after the initially scheduled date, and produced recommendations which helped speed up the implementation progress. Overall, implementation delays were identified on time throughout the project s term. They were properly monitored and efforts to assist UE and the MoECI in speeding up the implementation progress were successful. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory 88. Given these factors, the World Bank s performance is rated as Moderately Satisfactory. 5.2 Borrower Performance (a) Government Performance Rating: Moderately Unsatisfactory 89. During the project s lifetime, the Government has been in working contact with the World Bank s team and generally, has been responsive to the World Bank s concerns, although the Government s commitment was not stable over the implementation period. The MoECI experienced frequent changes of management and could not maintain an uninterrupted level of 22

35 responsiveness to UE financial and organizational constraints. The World Bank s team, as well as UE, have observed several challenges when working with the Government; in particular, the Government delayed approval of tariffs for UE and processing of project titles/project passports and disbursements was slow. This, eventually was one of the contributing factors to numerous closing date extensions. 90. The Government was not able to maintain the acceptable pace of the energy reform. Implementation of the WEM concept was delayed several times because of the overall delays with the approval of the Electricity Market Law, problems with the political commitment, and coordination between stakeholders. Despite the fact that the Electricity Market Law, prepared with the help of the donors, was approved in 2014, it has been implemented only partly and the Government took a decision to replace it with the new Electricity Market Law, the draft of which was submitted to the parliament in the beginning of The work on a new Electricity Market Law was launched to make it compliant with the requirements of the 3rd EU Energy Package along the lines of the EU-Ukraine Association Agreement. The progress of the reform, therefore, has been very slow throughout the implementation period both with regard to the development of the required market rules and with regard to regulations and institutional reorganization of stakeholders, which has been a condition of meeting the milestones under the concept. The progress of implementation of the concept was also affected by poor coordination between various Governmental and market participants. While the Government established the coordination center in the beginning of 2014 to oversee and coordinate the electricity market opening, the center has never had a single meeting nor has it ever exercised its duties. Furthermore, a Government work plan with detailed measures, schedule, and required resources for electricity market implementation did not exist and therefore, the Government toolkit for ensuring the full market opening by July 2017 was limited. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory 91. Several implementing agencies were involved in the project. Performance of the Governmental agencies is described above and this part will describe performance of UE, which had been implementing the investment part of the project. Its performance is rated Moderately Satisfactory. During its initial years, the project was experiencing significant procurement and installation delays due to difficulties with hiring and then, working with a project management consultant and low contract management capacity of UE. As a result, even by the new midterm review date which was postponed for two years, the disbursement rate was minimal and signing of contracts was only starting to happen. The delays were further complicated by the seasonal nature of works and difficulties or total lack of access to the equipment at certain sites because of events beyond UE s control. 92. After the launch of the bidding process and after overcoming several difficulties, UE demonstrated increased commitment and ownership of the project. Repeated failures to inform the World Bank about delays in implementation with regard to several contracts led to an intensified closer supervision of the World Bank over the implementation process, including introduction of more frequent reporting obligations. Introduction of the MIS could have helped UE in addressing a set of organizational issues, but the company failed to procure and execute the respective contract by the closing date, and the contract was transferred to the Second Power Transmission Project. 23

36 However, despite facing a number of difficulties, the company has put in a lot of visible effort to ensure that actions within the scope of its capacity and authority were undertaken to enable timely project completion, including provision of adequate management and staffing, which ultimately helped achieve respective targets. 93. In addition, during the last year of the project implementation, UE managed to utilize savings accrued due to devaluation of the hryvnia, by efficiently preparing, bidding, and implementing contracts for purchase of additional equipment within a very short period. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 94. Based on the ratings of the Government and the implementing agency's performance and on the partially successful outcomes of the project, the borrower's performance is rated as Moderately Satisfactory 6. Lessons Learned 95. Project Design When combining an ambitious sector reform program with significant investment lending in a country with a low track record of sector reforms, there is a risk of a project restructuring and revision of the PDO indicators, when the level of the Government commitment decreases. It is advisable, therefore, either to address two major sets of goals (policy and investment related) in separate projects or to lower expectations of the policy reforms and address only a certain number of sector targets that are reasonably achievable, considering the scope and duration of the project. During the preparation of the Second Power Transmission Project, this was taken into account and the energy reform component targets were less ambitious than in the Power Transmission Project, and the share of the component in the overall mix of planned project activities became more modest. Energy reform activities are now primarily financed by separate technical assistance projects implemented in Ukraine. Sufficient flexibility in the project design. Even if the implementing entity has a strong management capacity and there is a well-supported expectation that the project will be implemented according to the schedule, experience shows that in the case of a client country with a sophisticated political environment, the project design framework, as reflected in legal documents, needs to be flexible enough to allow for introduction of minor changes on the go, without resorting to restructuring. 96. Project Preparation Special attention should be paid to selection of the procurement/project management consultant. Unless the project implementing entity has a proven track record of managing projects of comparable scale and scope, it is crucial to arrange for an experienced project management consultant at the earliest stage of the project. One of the solutions could be having an engineering, procurement, and construction contract 24

37 signed with the experienced project s engineer at the early stage of the project s implementation. This could help create and maintain a one-window project coordination and management center that is financially responsible for most of the technological implementation delays. In case the option to arrange for the project management consultant is selected, it might be practical to hire a company that is not directly affiliated with any of the energy companies. Though it may seem logical to hire a project management consultant with direct experience in the management of the activities of the parent company, the practice demonstrates that, in most cases, staff of such companies are less result oriented than staff of professional energy project management consultants and are less involved in day-to-day work. Project readiness is critical to avoid implementation delays. It has been observed in the current project and a few other projects implemented in Ukraine that activities that could be identified in advance should have their feasibility studies completed and wherever possible, design preparation should be under way by the time the project goes to the Board for approval. In particular, preparation of the bidding documentation should be carried at the earliest. Having a bidding package ready by the time of effectiveness, with the prospect of determining the winner of a tender within the first few months of the project s effectiveness, would significantly enhance the pace of the project. Given the experience of slow implementation of the portfolio in Ukraine because of overall cumbersome administrative procedures, political, and economic uncertainties, teams, therefore, need to aim at ensuring a high level of project readiness at appraisal. To respond to the challenges above, in the final years of the project implementation, UE obtained an approval from the World Bank to use the funds saved due to the devaluation of the hryvnia to hire the project management consultant for preparation of bidding packages for the first stages of the Second Power Transmission Project the experience proved to be successful. 97. Project Implementation Strong commitment from implementing agencies is crucial for implementing energy projects, especially in Ukraine where implementation of World Bank projects has been slow at times. The experience of UE, implementing the Power Transmission Project, and of UkrHydroEnergo, implementing the HRP in parallel, demonstrated that strong drive and determination of the participating state-owned companies (implementing agencies) are crucial for the achievement of the PDO. The project demonstrated the importance of establishing a close relationship between the World Bank and the client, since from the preparation stage to the closing date, the World Bank s team was based in Ukraine and was able to closely monitor the implementing agency s compliance with the covenants and its progress toward 25

38 achieving the project s goals. This fostered mutual trust and enhanced smooth resolution of issues as they arose. On-the-job training is crucial in improving the implementing agency s capacity to manage World Bank procurement contracts and FM issues. The World Bank worked closely with UE to assist in handling procurement and FM, which resulted in the upgrade of the project s ratings in procurement and FM to Satisfactory and maintaining those ratings until the closing date. The support has also created a solid foundation for the implementation of the follow-up project, the Second Power Transmission Project. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 98. The borrower had no specific comments. The overall assessment and rating on the performance of the project was found acceptable. A summary of the borrower's ICR is presented in annex 7. (b) Cofinanciers Not applicable. (c) Other partners and stakeholders Not applicable. 26

39 Annex 1. Project Costs and Financing (a) Project Cost by Component (in US$, millions equivalent) Component Appraisal Estimate Value (US$, millions) Actual Value (US$, millions) Percentage of Appraisal A: Rehabilitation of Transmission Substations B: Strengthening of Transmission Network C: Stabilization of the Crimea Electric Power Grid D: Institutional Development of UE E: Implementation of the Grid Code Total (b) Financing Source of Funds Type of Cofinancing Appraisal Estimate (US$, millions) Actual/Latest Estimate (US$, millions) Percentage of Appraisal Borrower International Bank for Reconstruction and Development

40 Annex 2. Outputs by Component Component A: Rehabilitation of Transmission Substations Description: Replacement of outdated high voltage equipment and installation of modern protective relaying and substation automation systems in (a) three 330 kv SS in the Dnieper electric power grid; (b) one 330 kv and one 220 kv substation in the Donbas electric power grid; and (c) five 750 kv substations. Outputs at the Closing: Rehabilitation of SS in the Dnieper Power Grid: Pivdenna 330 kv - completed Dniprodzerzhinska 330 kv - completed Pershotravneva 330 kv - terminated Rehabilitation of SS in the Donbas Power Grid: Azovska 220 kv - completed Chaikine 330 kv - terminated Vinnitskaya 750 kv SS - completed Outages at SS: Pivdenna - 0; Pershotravneva - 13; Dniprodzerzhinska - 0; and Azovska - 6 as planned High Voltage Circuit Breakers for 750 kv SS Out of 44 high voltage circuit breakers for 750 kv SS - 42 were installed, but the last 2 circuit breakers could not be installed because the 750 kv SS Donbasskaya is located close to the fighting zone near Lugansk. The installation was suspended due to force majeure and security regime limitations. Additional High Voltage Circuit Breakers for 750 kv SS 100% of goods supplied and 93% installed. All 86 high voltage circuit breakers were delivered. Out of them, 82 were installed by UE, but the last four circuit breakers could not be installed in 2015 at the 750 kv SS Donbasskaya because of the close location to the fighting zone and security limitations. Protective Relaying and Automation for 750 kv SS 100% of goods delivered and 99% installed. Under this contract some protective relaying and automation is to be installed at the 750 kv SS Donbasskaya, which is located near Lugansk close to the fighting zone. Hence, it was considered to be under force majeure and installation was suspended. Because the fighting stopped, the contractor completed work, and all acts of completion were signed as of June 30, Component B: Strengthening of Transmission Network Target: Expansion of the existing 330 kv Bar SS and construction of the 77 km long 330 kv transmission line to connect the Bar SS with the Dniester Hydropower PSP which was under construction. Outputs at the Closing: Construction of the 330 kv Bar-Dniester transmission line was completed at the end of April The transmission line is in operation. Component C: Stabilization of the Crimea Electric Power Grid Target: Upgrading of the existing 220 kv Simferopol-Sebastopol transmission line and associated SS to the 330 kv voltage level and upgrading of the SS control systems at the 330 kv and 220 kv SS in the Crimea electric power grid. Outputs at the Closing: Modernization of the 330 kv Simferopol (Crimea) SS - terminated. Other contract on upgrading SS controls in the Crimea was fully completed in Component D: Institutional Development 28

41 Description: Establishment of a corporate-wide MIS in UE. This component also included provision of technical assistance to UE in (a) capacity building in procurement and project management; (b) designing and implementing corporate-wide MIS; and (c) annual auditing of project and company accounts. Outputs at the Closing: Creating a UE corporate MIS - moved to the Second Power Transmission Project. Audits of project and company accounts were conducted. Component E: Implementation of the Grid Code Description: Provision of technical assistance to UE in implementing the Grid Code and related regulations and norms of the WEM. Outputs at the Closing: Between 2008 and 2011, the concept of WEM, Grid Code, and other codes were finalized. The NEURC approval expected after the Grid Code was revised according to the approved Electricity Market Law (which is also under revision per requirements of Energy Community Secretariat to align this law to the requirements of the 3rd EU Energy Package). The updated Electricity Market Law was submitted to the parliament and was approved in the first reading in September Note: SS = Substation. 29

42 Annex 3. Economic and Financial Analysis Project Economic and Financial Analysis at Appraisal 1. Economic analysis. The economic evaluation of the project was carried out by a comparison of the with project and without project scenarios. The economic investment cost included physical contingencies but did not include price contingencies, taxes, and duties. The project economic benefits were assessed under four categories: (i) Reduction in costs of maintenance and repairs because of the rehabilitation, modernization, and upgrading of facilities under the project were valued at US$0.8 million per year. (ii) Reduction in ENS because of the reductions in power system breakdowns and interruptions resulting from the project investments; this was estimated at 33 GWh per year, valued at a rate of US$1 per kwh, yielding economic benefits of US$33 million per year. (iii) Reduction in transmission losses because of the improved quality of transmission facilities; these were estimated at 14.4 MW of peak-load power production, valued at US$156 per kw peak, yielding economic benefits of US$2.25 million per year.. (iv) Savings in electricity supply costs because of the more economical dispatch from generating plants after the commissioning of the first unit of the Dniester PSP and implementation of the WEM reforms; a share of the projected savings was attributed to the effect of the project investments; these were valued at US$7 million per year. 2. Based on these reductions and savings, at appraisal, three indicators of economic efficiency were estimated: the EIRR, the ENPV, and the economic benefits/costs ratio. 3. The project-level indicators are given in table 3.1. Discounted Investment Cost (US$, millions) Table 3.1. Economic Indicators at Appraisal Discounted Project Benefits (US$, millions) EIRR (%) ENPV (US$, millions) Benefits/Costs Ratio Note: The discount rate used at appraisal was 10 percent. 4. Financial analysis. Detailed analysis was carried out only at the entity level. 5. Project-level analysis. No project-specific financial analysis was carried out at appraisal. The Project Appraisal Document noted that power transmission was a regulated activity in Ukraine under which UE s annual financial plans were reviewed by the regulatory authorities who approved UE s annual tariffs based on estimates of the annual financial needs for operations, debt service, and approved levels of contributions to investment financing. Under this system, UE realized annual profits from its operations, which also permitted it to realize a significant return on equity. 30

43 6. Entity-level financial analysis. This included an assessment of the historical financial situation and projections for a 20-year period. Based on the assessment, it was determined that the key financial performance indicators that should be adopted in project implementation should be (a) annual current ratio (current assets/current liabilities) of not less than 1.2 and (b) annual debt service coverage (net cash from operations divided by the sum of interest and loan repayments) of not less than 1.5. These were formulated as financial covenants under the Project Agreement with UE. Post-Completion Economic and Financial Analysis 7. To enable comparability with the estimated results at appraisal, the post-completion economic and financial analyses have been carried out utilizing, to the extent possible, a similar approach to that used at appraisal, based on a comparison of with project and without project scenarios. 8. Economic analysis. The actual investment costs have been adjusted by excluding taxes and duties. To enable comparison of the results with the estimates at appraisal, all costs and benefits have been made in U.S. dollar terms in 2007prices of. The main assumptions in the analysis are given in the following paragraphs. 9. Investment costs. UE estimates that the actual total project costs (in current U.S. dollar terms) were US$234 million with a disbursement period of nine years (from 2007 to 2015). 10. Reduction in costs of maintenance and repairs. UE has estimated that annual operations and maintenance expenses for the rehabilitated substations and power lines have been reduced from US$3.77 million before 2012 to US$1.37 million in 2015, implying an annual cost savings of US$2.40 million per year. 11. Reduction in ENS. The baseline volume of ENS was GWh. Based on figures supplied by UE, the average ENS during the period 2012 to 2015 was 124 GWh, resulting in an average reduction in ENS of 36 GWh. This has been assumed to further increase to 40 GWh by 2017 with further improvements in operating efficiency in the rehabilitated substations. The value of ENS is retained at US$1 per kwh as at appraisal. This yields economic benefits of US$36 40 million per year. 12. Reduction in transmission losses. UE estimates that transmission losses have been reduced from 1.98 percent of total volume in 2005 to 1.64 percent in The annual reductions in transmission losses have been valued at the corresponding annual average transmission tariffs for UE. 13. Fuel savings through improved economic dispatch. These have not been estimated because of lack of the relevant data. To that extent, this results in an underestimation of the postcompletion EIRR and ENPV, which must be regarded as conservative estimates of these indicators. 14. Discount rate for the ENPV. At appraisal, the discount rate used was 10 percent. For the post-completion reestimation, the discount rate is assumed at 6 percent (the upper end of the range suggested in the World Bank s recent Guidelines on Use of Discount Rates in Investment Projects). 31

44 15. Based on the foregoing, the reestimated EIRR and ENPV are presented in table 3.2. Table 3.2. Post-Completion Economic Efficiency Indicators Appraisal Estimates ICR Estimates EIRR (%) ENPV (US$, millions) EIRR (%) ENPV (US$, millions) (at 10% discount rate) (at 6% discount rate) 16. Conclusion. The post-completion EIRR is estimated at about 14.0 percent (compared to 18.2 percent at appraisal). The ENPV is estimated at US$42.8 million at a discount rate of 10 percent (as at appraisal) and US$129.7 million at a discount rate of 6 percent (under currently applicable World Bank guidelines) as compared to US$122.9 million at appraisal (based on a discount rate of 10 percent). While it is lower than the EIRR estimated at appraisal, the postcompletion EIRR of 14.0 percent nevertheless is substantially higher than the discount rates of 10 percent used at appraisal and the 6 percent currently recommended for use in the World Bank s investment projects. The post-completion EIRR of 14.0 percent should be regarded as a conservative estimate as it has not been possible to include some benefits (for example, fuel savings in power generation due to improved transmission services) because of lack of relevant data. 17. Financial analysis. For the reasons explained in the previous section on economic and financial analysis at appraisal, indicators of the project s financial viability were not estimated at appraisal. For the same reasons, they have not been estimated at project completion. 18. Ukrenergo s financial performance. UE s tariffs are regulated and approved annually by the NERC and are essentially set on a cost-plus basis to enable UE to cover its (a) operating expenses, (b) debt service, and (c) own internal funding contributions to annual investments. Key indicators of UkrHydroEnergo s financial performance are given in table 3.3. Table 3.3. Key Indicators of UE s Financial Performance Indicator Unit Transmission volume TWh Average tariff kop/kwh Operating revenues UAH million 3,489 3,385 3,152 5,500 Net profits after tax UAH million Current assets UAH million ,597 Current liabilities UAH million 1, ,010 1,529 Debt service UAH million Annual capital expenditure UAH million 1,836 1,721 2,246 3,476 Financial ratios Net profit after tax/operating revenues Percentage Current ratio Ratio Debt service coverage ratio Ratio Self-financing ratio Ratio 80% 55% 24% 77% 32

45 Definitions: Current ratio = Current assets divided by current liabilities Debt service coverage = Net cash from operations divided by debt service (interest plus loan repayments) Self-financing ratio = Net cash from operations after debt service divided by three year (past, current and following) average of annual capital expenditures 19. As seen in table 3.3, UE realized a net profit after tax with the exception of 2014 when it reported a major loss of UAH 2,298 million. The loss arose because of the provisions that UE was required to make for the foreign exchange-related losses arising from the major devaluations of the hryvnia which resulted in substantial increases in the hryvnia equivalent values of UE s foreign borrowings and the debt service thereon. UE also had to make further provisions in 2015 which resulted in a lowering of its net profit as compared to the earlier years before Compliance with financial covenants. Under the Project Agreement, UE had undertaken to carry out a revaluation study of its fixed assets by June 30, 2009; maintain annually a current ratio of not less than 1.2; and maintain annually a debt service coverage ratio of not less than Revaluation of fixed assets. UE, with the assistance of consultants, carried out the study for the revaluation of assets. The study was completed in However, the results and recommendations of the study were not implemented pending a decision by the Government to adopt a sectorwide policy within the electricity sector with regard to utilizing revalued assets as a basis for tariff-setting and taxation. 22. Debt service coverage ratio. UE was in compliance with this covenant during the implementation period with the exception of 2014 and In 2014, UE had to make very large provisions for foreign exchange-related losses arising from the major devaluations of the hryvnia which resulted in large increases in the hryvniaequivalent of its foreign exchange borrowings and the debt service thereon. In 2015, the ratio was 1.3, lower than the covenanted ratio of Current ratio. Up to 2007, UE was able to comply with the covenant. At the time, UE s current assets included a large amount of receivables from the national energy market company Energorynok, which enabled it to have a higher current ratio. However, because of changes in the national accounting system, UE was required to adjust the level of its current assets by transferring the substantially overdue receivables to non-current receivables. This very significantly affected the current ratio situation and resulted in UE s current ratio being substantially less (ranging from 0.4 to 1.0) than the covenanted level of 1.2. To address the situation, UE agreed with the World Bank project supervision team to prepare and implement an action plan aimed at restoring the current ratio to meet the covenanted level. Despite some improvements, UE was not able to consistently meet the covenanted level. On review, it was found that UE was having difficulty in 33

46 meeting the ratio which is calculated based on the situation at the end of each year. Under the prevailing system, Energorynok makes payments on a monthly basis to UE. However, UE s current payables mount up at year-end because of the practice of suppliers to invoice toward the end of the year. This results in a temporary mismatch between the funds available to UE and the payments to be made at the time. UE is able to meet the payments with some delay following the end of the year but this is not reflected in the current ratio as estimated at the end of the year. In view of this, the World Bank agreed in 2015 to replace the current ratio covenant with another covenant (the self-financing ratio). UE has been successfully meeting the self-financing ratio covenant. 34

47 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team Members Names Title Unit Lending Irina Babich Senior Financial Management Specialist GGO21 Bernard Baratz Consultant GEEDR Dmytro Glazkov Senior Energy Specialist GEE03 Daria Goldstein Lead Counsel LEGCF Ivanna Knyazevich Program Assistant ECCUA Dmytro Kryshchenko Investment Officer CNGF8 Dejan R. Ostojic Lead Specialist GEE02 Norval Stanley Peabody Consultant GEEDR Rozena Serrano Program Assistant GEE03 Anna L Wielogorska Lead Procurement Specialist GGO08 Supervision/ICR Irina Babich Senior Financial Management Specialist GGO21 Angelica A. Fernandes Procurement Analyst ECSO2 - HIS Oleksandr Filonenko E T Consultant ECSEG - HIS Dmytro Glazkov Senior Energy Specialist GEE03 Sergio Augusto Gonzalez Coltrinari Senior Energy Specialist GEE04 Sara Gonzalez Flavell Special Assistant IEGDG Oksana Kovalenko Consultant GENDR Knut J. Leipold Lead Procurement Specialist GGO03 Peggy Janice Masterson Operations Officer ECSEG - HIS Kishore Laxmikant Nadkarni Consultant GCCCF Julia Samoslied Team Assistant ECCUA Rozena Serrano Program Assistant GEE03 Anna L Wielogorska Lead Procurement Specialist GGO08 Responsibility/ Specialty (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle US$, thousands (including No. of staff weeks travel and consultant costs) Lending FY FY Total: Supervision/ICR FY FY FY FY FY FY FY FY FY FY Total: ,

48 Annex 5. Beneficiary Survey Results Not applicable. 36

49 Annex 6. Stakeholder Workshop Report and Results Not applicable. 37

50 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR 1. Project Description 1. Power Transmission Project was the second investment project that was implemented within the framework of the Energy Program. The key policy and institutional elements of the Energy Program were defined and established by the GoU in partnership with the World Bank and in close cooperation with the European Commission and other donors. 2. At the level of Cabinet of Ministers, the program coordination was performed by the Commission for Energy Sector Reform and Development. The Commission was supported by the EPCU which was established in the Ministry of Fuel and Energy in The implementation of all components (Parts A, B, C, D and E) of the Power Transmission Project was the responsibility of the National Energy Company UrkEnergo (the Loan Beneficiary). The Power Transmission Project comprised five components: 3. Project Component A: Rehabilitation of Transmission Substations. This component included replacement of outdated high voltage equipment and installation of modern protective relaying and substation automation systems in (i) three 330 kv substations in the annexation; (ii) one 330 kv and one 220 kv substation in the Donbas regional power grid; and (iii) five 750 kv substations. 4. Project Component B: Strengthening of transmission network. The expansion of the existing 330 kv substation in Bar and construction of the 330 kv Bar-Dniester PSP line was included in this component of the Power Transmission Project. 5. Project Component C: Stabilization of the Crimea Electric Power Grid. This component included upgrading of the existing 220 kv Simferopol Sebastopol transmission line and associated substations to the 330 kv voltage level, and upgrading of control systems at 330 kv and 220 kv substations in the Crimea power transmission system.. 6. Project Component D: Institutional development of UE. This component was designed to initiate the establishment of a corporate-wide MIS, including FM system (FMS) in UE. Therefore, this component included support for the articulation and adoption of a new vision for UE s corporate structure which was expected to be compatible with the organization of TSOs in the EU Internal Energy Market. 7. Project Component E: Implementation of the Grid Code. This component of the Power Transmission Project included technical assistance to UE in implementing the Grid Code, which was developed by NERC and UE. Changes and Revised Components 8. Component A: Due to significant savings of loan funds UE has agreed with the World Bank to include the Additional Package UE/003A Additional High Voltage Circuit Breakers for 750 kv Substations, as a result the number of 750 kv sudstations to be reconstructed within the scope of Component A had increased from 5 to 7. 38

51 9. Component C: Stabilization of the Crimea Electric Power Grid. Because of a long term process of the entry into force of the Loan Agreement between Ukraine and IBRD (over 1 year) and with the aim to step up activities for upgrading of the existing 220 kv Simferopol Sebastopol transmission line to the 330 kv voltage level, the headquaters of MoECI and UE in coordination with the World Bank made a decision to change the funding source for specified object to the Company's own funds, also it was determined efficient to use the IBRD loan funds to finance the reconstruction of the "Simferopol" Substation as the substation connected to the above mentioned transmission line. 10. Component D: UE Institutional development. According to the Amending Letter, dated , carrying out of Asset Revaluation Study was inserted in the scope of the Component D. In accordance with the findings of World Bank implementation support mission to Ukraine from September 16-25, 2013, it was proposed by the Bank to move the tendering and implementation of Package UE/009 The Management Information System (MIS) to the Second Power Transmission Project, as the total duration of the work on this Package was 36 months and thus exceeded the effective at the time of the decision timeframe of Power Transmission Project (December 31st, 2014). These agreements are reflected in the Aide Memoire of the World Bank Project Component E: Implementation of the Grid Code. In accordance with the findings of World Bank implementation support mission to Ukraine from April 23 April 30, 2012 for the Power Transmission Project, it was agreed to exclude the Package Implementation of Grid Code from the Procurement Plan, as reflected in the Aide Memoire of the World Bank. 2. Project Development Objectives and Key Indicators 12. Reform and sustainable development of the energy sector is one of the highest priorities in restoring Ukraine s macroeconomic fundamentals, improving the investment climate and integrating the county into the global economy. 13. The main objective of the Power Transmission Project is to improve the security, reliability, efficiency and quality of power supply through the rehabilitation of transmission substations and the strengthening of the power transmission network. The project will also aim to improve institutional capacity and technical capabilities of TSO, UE, so that it can assure secure and reliable operation of the high voltage power grid, and, therefore, facilitate unimpeded operation and opening up of the electricity market. 14. The main results of the project are: Elimination of critical "bottlenecks" in the transmission electrical networks; Improving the sustainability of the energy system; Improving the structure of capacity and load scheduling to manage the power grid; 39

52 Development of market mechanisms to attract and return on investment in the electric power transmission networks and their reduction through optimal allocation; Pricing signals creation (motives) for modernization of generation equipment, improve the generation structure towards increasing its mobility, efficiency and compliance with environmental requirements. Approaching the technical requirements to ensure European energy system -ENTSO- E. 15. Key project performance indicators (in comparison to parameters in the year 2005): Reduced maintenance and repair costs by US$0.8 million per year; Reduced ENS by 35 GWh per year; Reduced transmission losses and peak load capacity requirements by 14 MW; and Reduce the average voltage drop to less than 5% of the nominal voltage at 330 kv and 220 kv substations included in the project. 3. Project Cost 16. Total investment costs amounted to US$ million, representing 98.56% of the investment planned for the Project appraisal estimate. The amount of external funding is 80.01% of the total investment. Table 3.4. Project Cost by Component (in US$, millions equivalent) Component Appraisal Estimate Value (US$, millions) Actual Value (US$, millions) Percentage of Appraisal A: Rehabilitation of Transmission Substations 158,00 187,76 84,15% B: Strengthening of transmission network 47,00 31,47 149,36% C: Stabilization of the Crimea Electric Power Grid 23,00 9,46 243,21% D: Institutional development of UE 9,00 5,87 153,24% E: Implementation of the Grid Code 1,00 0,00 0,00% Total 238,00 234,56 101,47% Component of the Project A: Rehabilitation of Transmission Substations B: Strengthening of transmission network Table 3.5. Funding from the Components of the Project Funding from the IBRD as of 30/06/2016 (paid to contractors), US$, millions Funding from NPC NEK UE, US$, millions plan fact plan fact The share of external financing,% 124,00 143,03 34,00 44,74 80,05% 47,00 29,52 0,00 1,94 13,42% 40

53 C: Stabilization of the Crimea Electric Power Grid 19,00 9,26 4,00 0,20 4,03% D: Institutional development of UE 9,00 5,87 0,00 0,00 2,50% E: Implementation of the Grid Code 1,00 0 0,00 0,00 0,00% Total 200,00 187,68 38,00 46,88 4. Factors Affecting Implementation and Outcomes Factors outside the control of government or implementing agency 17. The main factors outside the control of the Government, and "UE" and had impact on the project were the ratification procedure in Verkhovna Rada of Ukraine (Parliament), which require a lot of time, global economic trends, force majeure. Under such circumstances, a closer supervision by the Bank and the hard work of local contractors allowed to mitigate the impact of negative factors on the project and do all the physical work within a busy schedule. 18. Force Majeure: The political crisis, a change of power in Ukraine, the annexation of the territory of Ukraine (Crimea), the armed conflict in part of Donetsk and Lugansk regions and conducting Anti-terrorist operation (ATO). Factors generally subject to government control 19. The important role of the MoECI of Ukraine in the implementation of the action plan to implement the Programme of the Cabinet of Ministers of Ukraine and the Strategy for Sustainable Development "Ukraine-2020". Factors generally subject to implementing agency control 20. The beneficiary requires very good technical skills, strong project ownership and commitment to results, proper project management arrangements were in place in a timely manner and supported by consultants and technical assistance, as necessary during the realization of the Power transmission Project. 21. Project Design was guided by in-depth analysis of options. Lessons learned and reflected in the project design. UE already had experience in implementing the Bank funded project as it participated in the Hydropower Rehabilitation and System Control Project (Loan 3865). 22. Careful Attention to Project Management was key in successful implementation of the project. 23. The proposed project was implemented by the employees of UE. Formally, UE assigned responsible employees to deal with project FM issues (including disbursement and reporting), and all accounting, budgeting and reporting for UE s needs to be managed within the existing financial system. The UE s FM structure and FM staff are qualified for the project implementation. Additional training on project FM and disbursement arrangements was provided under the project. 5. Risks and risks mitigation measures 41

54 24. The Assessment of Risks identified and addressed the major risks likely to be faced and outlined a mitigation strategy for each. The overall FM risk for the project was moderate. To mitigate this risk UE has implemented an integrated accounting and reporting software; and UE has established processes for executing operations and recording transactions, as well as a system of functioning internal controls. Furthermore, UE has established and will maintain an adequately staffed PIU which includes FM specialists with experience in implementing IFI-financed projects, since the Power Transmission Project is the second project financed by the Bank in UE and the company is currently implementing investment projects financed by the IFI (in particular, the EBRD and the EIB). 25. The following measures are incorporated in the project design to minimize the risk of misuse of funds: controls over payments; independent Verification of the Quantity and Quality of Works by International Supervision; disbursement mechanism; prior Review of Procurement; Annual Financial Audit; Forensic Audit; supervision by the World Bank. 6. Safeguard and Fiduciary Compliance 26. The project was in strict compliance with the GoU and World Bank regulations, policies and procedures for environmental assessment (EA). Under Ukrainian legislation the project was not included in the List of Activity Categories and Installations which are environmentally unsafe or hazardous. In accordance with World Bank environmental safeguard policies (OP/BP/GP 4.01 Environmental Assessment) the project had been assigned a Category B rating. 27. UE prepared: (i) generalized Environmental Management Plan (EMP) for rehabilitation of high voltage transmission substations; (ii) generalized EMP for rehabilitation of transmission lines; and (iii) corridor specific environmental assessment (EA)/EMP for the new transmission line Bar Dniester PSP (component B). The complete EMP documents and the specific EA for the corridor Bar Dniester PSP transmission line were reviewed and accepted by the Bank, and they are included in the project file. 28. OP 4.12 is triggered because UE will acquire approximately 1.5 ha of land for 280 transmission towers and a small parcel to extend the 330 kv Bar substation to implement the project. It will also execute servitude contracts to protect the right of way and safety zone. The servitude contracts will not affect existing agricultural practices, but will limit future changes in land use to ensure the integrity of the right of way and safety zone. 29. UE prepared a Land Acquisition Policy Framework which was reviewed and accepted by the Bank, which will guide the land acquisition process and indicates reporting requirements to ensure compliance with OP Lending under the Energy Program was through IBRD SILs to Ukraine and Bank s standard fiduciary requirements will apply. Procurement will be in accordance with the Bank Guidelines for Procurement and Bank Guidelines for the Use of Consulting Services. 31. The FM assessment of the proposed Power Transmission Project covered UE which is the project implementing agency. The existing FM system of UE will be used for this project. The project will rely on the company s FM staff and use of the company s accounting and reporting system. 42

55 32. The FM arrangements in UE were assessed and found satisfactory to the Bank. UE completed draft project financial management manual and nominated FM staff responsible for the project implementation before the loan negotiations. The overall FM risk for the project is moderate 33. The Country Financial Accountability Assessment (CFAA) for Ukraine confirms that improvement is required in the management of public expenditures, especially for the strengthening of internal and external audits. The CFAA also identified a lack of adequate control over state owned enterprises, but appropriate steps have been taken recently to improve the control over these enterprises. 34. There is no outstanding audit issue on the existing project being implemented by UE. The annual audited financial statements, which will include entity financial statements for UE, will be provided to the Bank within six months of the end of each fiscal year and also at the closing of the project. The project will produce a full set of consolidated Financial Monitoring Reports (FMRs) every three months throughout the life of the project. 35. The project continued to have acceptable FM arrangements in place and there are no major issues impacting performance and fiduciary risk. The project is in compliance with financial reporting requirements. 7. Implementation 36. The Loan Agreement and Project Agreement for the Ukraine Power Transmission Project (Loan No. 4868) of US$200 million were signed on November 9, On October 29, 2008 the Verkhovna Rada (Parliament) of Ukraine adopted the Law "On Ratification of the Loan Agreement (Power Transmission Project) between Ukraine and the International Bank for Reconstruction and Development and Letters amending the financial terms of the Loan Agreement (Power Transmission Project) between Ukraine and the International Bank for Reconstruction and Development. 37. The Project was being implemented by State Enterprise National Power Company - UE and was comprised of five components: Component A: Rehabilitation of transmission substations; Component B: Strengthening of transmission network; Component C: Stabilization of the Crimea Electric Power Grid; Component D: UE Institutional development; and Component E: Implementation of the Grid Code. 38. After a delay in project start-up, implementation progress has gained momentum over 2011 and 2012 and most of the contracts for project activities have been signed and were under implementation. 39. The energy sector reform process has progressed at a slower pace than anticipated during project preparation. The reforms anticipated during the project preparation were in progress: (i) the WEM Law (Law on the Foundation of the Electricity Market Functioning) was under review by relevant ministries and authorities and was expected to be approved and ratified in Parliament later in 2012; (ii) development of new power market rules will commence as soon as the WEM Law is ratified and signed; (iii) opening of the power market will take place in stages after the 43

56 WEM law has been approved; and (iii) the Grid Code will be also finalized after approval of the WEM law. 40. UE is adequately and proficiently staffed and continues to perform satisfactorily with a view to ensuring adherence to agreed timetables. 41. The PIU at UE was adequately staffed and was working hard to comply with the agreed implementation schedule. 42. The Closing Date was extended by two and a half years from June 30, 2012 until December 31, This was the first extension, and it was being proposed because completion of the remaining works will require 3 further construction seasons i.e. the summer months of 2012, 2013 and 2014 because of system constraints. 43. Project implementation had experienced significant delays mainly due to the general situation in Ukraine, including annexation of Crimea, unrest in the Easter part of the country and change of Government, which lead to slowdown in supply of equipment and installation works. As of October 2014 most of the planned contracts were under implementation with a total value of about US$180 million (equal to 90% of the loan amount) and three contracts fully completed. Out of nine major Supply and Installation and Goods contracts, only three had been fully completed. Timely completion of the six other contracts under implementation by December 31, 2014 was not possible due to the general situation in Ukraine, including occurrence of force majeure Donbas power grid area. Two of the remaining contracts were in the eastern regions of the country where fighting had broken out in mid-april, namely: Subcontracts UE/002/1 and UE/002/2, and the site for Contract UE/007 is located on Crimea. The contract on the Rehabilitation of Substations in the Donbas Power Grid Chaikine (UE/002/2) was temporarily suspended due to force majeure. A solution was negotiated between the contractor and UE. The contract on Modernization of 330kv Simferopol Substation in Crimea (UE/007) was terminated due to the annexation of Crimea. The contractor was paid for the goods already supplied. Disbursements in October 2015 reached US$150 million and were expected to reach about US$160 million (about 80 % of the loan amount) by the end of December Due to the general situation in Ukraine and occurrence of force majeure Donbas power grid area, timely completion of the six Supply and Installation and Goods contracts by December 31, 2014 was not possible and if not implemented PDOs will not be achieved. 45. Works under all existing contracts were planned to be completed before the Loan Closing date. But contractors have raised a number of issues related to the extension of deadline for supply of equipment and implementatoion of works based on the contracts until end of 2015 based on the following considerations: Appearance of for force majeure, confirmed by respective sertificate of Ukrainian Chamber of Commerce (UCC), linked to destabilizing events in Autonomous Republic of Crimea and easternt regions of Ukraine, where objects of the reconstruction are located; 44

57 Regime limitations of Unified Energy System of Ukraine (UES), which have appeared because of the demages to the transmission lines and equipment caused by illegal military formations in eastern regions of Ukraine. 46. In early September UE initiated the second extension of the Project for a total of 12 months from December 31, 2014 to December 31, 2015 (with total extension reaching 42 month). The Bank management had approved in principle the extension. 47. In October 2014, the World Bank, MoECI, Ministry of Finance, SC NEK UE teams agreed that in order to achive Project goals, which are outlined in Loan Agreement, such as - improve the security, reliability, efficiency and quality of power supply through the rehabilitation of transmission substations, and the strengthening of the power transmission network, there was a need to move closing date of the Project by 1 year. 48. Based on above, changes to the Loan agreement were made, closing date was revised from 31 December 2014 to 31 December In 2015, the general situation in Ukraine related to project implementation continued to be difficult. 50. Major setback on Power Transmission Project implementation encountered, due to the following reasons: (i) force majeur events affected four contracts (in Crimea and Eastern regions of the country where contractors did not have access to substations to complete planned works); (ii) devaluation of the Ukrainian currency contributed to the contractor s bankruptcy of another contract; and (iii) power security limitations affected five contracts as the dispatcher center could not take substations out of service for rehabilitation, in particular during the winter when they are used at peak capacity. 51. Based on above UE, MoECI and MoF requested to consider an additional six month extension of the Loan Closing Date and agreed to provide to the Bank a detailed implementation plan for the remaining seven contracts for periodic monitoring to ensure that targets are met and project is closed by June 30, 2016, if extension is granted. 52. As of June 30, contracts were signed at approximately US$195.8, 18 contracts of which were fully completed and fully utilized, all acts of completion were signed, the two contracts are terminated for reasons of force majeure and one contract is terminated due to the contractor s failure to fulfil its obligations under the contract.as of May, 2016, given the progress in installation of equipment procured from the savings under the Project, and commitment of UE to expedite the remaining installations within the next month; progress on consultancy work completing FS and Tender Documents for Second Power Transmission Project; progress in procurement of external auditors; continued Government push with WEM Reforms, the Bank recommended to keep the overall Implementation Progress rating to Moderately Satisfactory. 8. Assessment of Outcomes 53. Three out of four PDO level indicators have been achieved or exceeded, confirming the benefits of improving security, reliability, efficiency and quality of energy supply through investments (rehabilitation and strengthening of transmission network). 45

58 54. The indicator on the Implementation of the WEM concept has not been fully achieved. In 2013 Parliament voted and President signed a new Electricity Market Law, compliant with the EU 2nd Energy Package and its implementation gradually started. In 2015 Government pushed by the EU together with the Energy Community Secretariat and IFIs started working on new Electricity Market Law compliant with the EU 3rd Energy Package, drafted WEM Reform implementation Plan and submitted the draft law to the Parliament, which is expected to vote on the Law in June Even before the new Electricity Market Law is approved, GoU with support of World Bank has finalized Market Rules, and other essential documents, needed for operation of the new WEM, based on the New Electricity Market Law, including Balancing Market Rules, Rules of Day Ahead and Intra-Day markets and is currently working on other elements of the new market model. 55. The following three indicators were achieved fully: (a) ENS reduced by at least 35 GWh/year ( ,99 GWh; ,86 GWh; ,25GWh); Transmission losses reduced by 14 MW; Voltage within acceptable range per rehabilitated substations included in the project; (b) Transmission Line Dniester Bar 72.9 km constructed; (c) Electricity losses per year in project area decreased to less than target value of 1.7% with total net injected generation in project area increasing to more than target of MWh in 2014 (last year when Crimea and 3 other Energy Systems were measured together). Results per Component Component A: Rehabilitation of Transmission Substations Current (2016) Rehabilitation of Substations in the Dnieper Power Grid: Pivdenna 330 kv - completed Dniprodzerzhinska 330 kv - completed Pershotravneva 330 kv - terminated Rehabilitation of Substations in the Donbas Power Grid: Azovska 220 kv - completed Chaikine 330 kv - terminated Vinnitskaya 750 kv Substations - completed Outages at SS Pivdenna - 0; Pershotravneva - 13; Dniprodzerzhinska - 0; and Azovska - 6 as planned. High Voltage Circuit Breakers for 750 kv Substations - Out of total 44 high voltage circuit breakers for 750 kv SS all 44 were installed, but the last two circuit breakers could not be installed due to the fact that 750 kv SS Donbasskaya is located close to the fighting zone near Lugansk, so installation was suspended due to force majeure and security regime limitations Target Replacement of power transformers and reactors in the Dnieper and Donbas regional power grids, and reactors in 750 kv substations; Replacement of high voltage circuit breakers, disconnect switches, surge arresters, measuring transformers, protective relaying, substation control and auxiliary systems in the Dnieper and Donbas regional power grids. Replacement of high voltage circuit breakers, protective relaying and control systems in 750 kv substations. 46

59 Additional High Voltage Circuit Breakers for 750 kv Substations - 100% of goods supplied and 93% installed. All 86 high voltage circuit breakers were delivered. Out of them 82 were installed by UE, but the last four circuit breakers could not be installed in 2015 at 750 kv substations Donbasskaya because of close location to fighting zone and security limitations. Protective Relaying and Automation for 750 kv Substations - 100% of goods delivered and 99% installed. Since under this contract some protective relaying and automation is to be installed at 750 kv SS Donbasskaya, which is located near Lugansk in close proximity to the fighting zone and hence was considered to be under force majeure, installation was suspended. Since fighting stopped, contractor completed work, and all acts of completion were signed as of June 30, Component B: Strengthening of Transmission Network Current (2016) Construction of the 330 kv Bar-Dniester transmission line By end of April 2013 contract was fully completed and was commissioned. Target Operation of 330 kv 73 km TL to Dniester and 330 kv Bar s/s Component C: Stabilization of the Crimea electric power grid Current (2016) Target Modernization of 330 kv Simferopol (Crimea) substation - terminated. Upgrading of 220 kv transmission line Other contract on Upgrading substation controls in the Crimea was fully Simferopol - Sevastopol and related completed in substations up to 330 kv voltage level and modernization of control systems at substations of 330 kv and 220 kv Crimean backbone system Component D: Management Information System Current (2016) Target Creating a UE Corporate MIS - moved to the Second Power Transmissio Establishment of a corporate-wide Project MIS. This component also includes Audits of project and company accounts were made. provision of technical assistance to UE in (i) capacity building in procurement and project management; (ii) designing and implementing corporate-wide MIS; (iii) annual auditing of project and company accounts; (iv) carrying out of Asset Revaluation Study of SE NPC UE Component E: Implementation of Grid Code Current (2016) The NEURC received assistance as part of Component E of the project where consultant worked from 2008 to 2011 and finalized Concept of WEM, Grid Code and other Codes. Target Finalization and approval of the Grid Code by the Respective Authority 47

60 NEURC approval expected after the Grid Code is revised according to th approved WEM Law (which is also under revision per requirements of Energy Community Secretariat to align this law to requirements of 3rd EU Energy Package). Updated WEM law was submitted to Parliament and was passed in the first reading in September Post-completion Operation/Next Phase 56. Due to the completion of the Component A - Rehabilitation of Transmission Substations (completion of reconstruction of 4 Substations 220 kv and 330 kv; completion of installation of relay protection systems and automation systems at 750 kv Substations, replacement of 11 power breakers at 750 kv Substtions, completion of reconstruction of 4 Substations 220 kv and 330 kv) UE reduces its maintenance and repair cots and decreases number and duration of power outages in the transmission system. 57. After the successful completion of the work provided by Component B (expansion of the Bar substation and construction of the transmission line Bar Dniester PSP) UE uses the power system ancillary services provided by the first Dniester PSP unit and reduces losses in the power transmission system. 58. UE continues cooperation with the Bank in the implementation of the Second Power Transmission Project. The Component D (Management Information System) of Power Transmission Project had been moved to the Second Power. 59. The objective of the Second Power Transmission Project in Ukraine is to improve the reliability of the power transmission system and support the implementation of the WEM in Ukraine. 60. On October 24, 2013, the Ukrainian Parliament approved the law On Operating Principles of the Electricity Market of Ukraine, which replaced the single-buyer WEM with a bilateral contracting market and a balancing mechanism. The law was signed by the President on November 26, 2013, and became effective on January 1, Ukraine has three years to prepare for the complete launch of the WEM, starting from July 1, 2017, including implementation of the following elements: (i) a bilateral contract market; (ii) a day-ahead (spot) market; (iii) a balancing market; (iv) a market of ancillary services; and (v) a retail electricity market, as prescribed in the law. 61. Ukraine officially became a member of the Energy Community Treaty (ECT) in September 2010 with the signing of the protocol that defined the implementation schedule of the acquis communautaire. ECT s goals are to promote energy security, stability, development, and solidarity by integrating the energy market, mutual relations, and harmonization of rules, regulations, and policies with those adopted in the EU, as well as coordination of energy policies. The final purpose of ECT membership is to synchronize the operation of Ukraine s Unified Power System (UPS) with EU power systems. Being part of ECT has a number of requirements, including adaptation of Ukraine s legislation to EU Directives, unbundling of energy assets, and provision of third-party access to the network. Energy sector reforms are identified as a priority objective by MoECI. 48

61 62. Over the longer term, the sustainability of the proposed power transmission project will depend on: Preserving the financial viability of UE through timely adjustment of tariffs in accordance with the pre-agreed schedule. Careful management of the company s power transmission assets and their adequate operation and maintenance. Continued growth in both the domestic power market and the international electricity trade. 10. Assessment of Bank and Borrower Performance Bank Performance 63. The Bank performance in assisting the borrower with project preparation covered the design and all major relevant aspects: technical, financial, economic, commercial, and institutional (including procurement and FM, environmental, sociological, and consistency with the Bank's safeguard policies. 64. Continuity from identification through appraisal was good. Important project benefits were outlined and the goal of achieving and preserving them served as a key incentive for the implementing agencies and the Government to pursue project sustainability. The loan amount was commensurate with the project scope. The performance indicators were designed to ensure adequate monitoring and reporting of project implementation progress. 65. The project was supervised on a regular basis throughout the entire implementation period, supported by the country office in Kyiv. 66. In lending activities, comprehensive teams were fielded with many members maintained throughout supervision. Supervision missions included the required expertise and local staff who continuously monitored project activities. 67. The Bank Team acted professionally and carefully, helping to lead the project in difficult conditions, a change in leadership of the state, the economic crisis (bankruptcy of contractor case) by force majeure (annexation of part ot the territory of Ukraine - Crimea, ATO in the part of Donetsk and Lugansk regions), gave advice to the implementing agency and agreed adequate follow-up actions. 68. Bank staff emonstrated flexibility in suggesting or approving needed modifications or restructuring; and working relationship of the Bank, borrower, implementing agency, cofinanciers and other partners. 69. The Bank's performance during supervision was satisfactory in terms of (i) ensuring regularity of supervision missions and adequate skill-mix of Bank staff; (ii) providing timely responses to project issues and involving management when called for by the complexity of the 49

62 project matters; (iii) actively involving the field office in maintaining close working contacts with the local project counterparts; (iv) applying realistic project performance ratings. 70. The Bank developed a very good working relationship with the management and staff of the implementing agencies during supervision missions, site visits, and regular follow-up communications. 71. Taking into account the ratings given to the Bank s lending and supervision performance, the Bank's overall performance was satisfactory. Borrower Performance 72. The Borrower's performance during project preparation is assessed as satisfactory. The Borrower demonstrated a high level of commitment and responsibility during project preparation since the Government assigned high priority to improving electricity supply as a main prerequisite for modemizing the country's industry. 73. In the process of project preparation a thorough analysis of the industry was conducted, all major aspects particularly relevant to the project, such as technical, financial, economic, commercial, institutional, environmental and sociological factors, including stakeholder commitment were take in account. Government Implementation Performance. 74. The Government's effort to enhance economic growth and continue energy reforms within a broad program to improve institutions and govemance in the economy, with support from the Bank provided a framework which facilitated moderately satisfactory completion of the project works. Implementing Agency. 75. Implementation of the project was in compliance with acceptable FM arrangements, there were no serious problems in the implementation and fiduciary risks. The project was implemented in compliance with the financial reporting. All scheduled reports and documents have been prepared and submitted by UE. Interim financial reports have been received in a timely, considered and assessed as acceptable for the Bank. 76. Procurement for the Project was completed and the last contracts were signed in June and October All current contracts completed by 30 June 2016., and the remaining payments for goods and works to loan closing date will be paid within the grace period. 77. Implementation of Power Transmission Project started with delays in the preparation of the first package of bidding documents. Preparation of tender documents is one of the tasks of the Consultant. In accordance with the conditions of the Loan Agreement between Ukraine and the World Bank (signed on , ratified by the Parliament on , effective since ) the Consultant services were to be financed from the World Bank loan funds, that is the Consultant could not start bidding documents preparation before the entry of the Agreement into force. 50

63 78. Development of bidding documents by the Consultant (MVV Decon, Germany) was carried out with substantial delays (in particular, the development of the bidding documents for the package Construction of transmission line 330 kv Dniester HPPS - Bar lasted about 8 months and about 2.5 months were needed to complete the documents in accordance with the Bank comments). 79. After agreeing on all contentious issues with the Bank's assistance, the procurement process continued at a normal pace tenders procedures were conducted and all necessary contracts were concluded. 80. The main problems were due to the following: (i) force majeure affected the implementation of the two contracts (in the Crimea and eastern regions of the country where contractors had access to the substation to complete the planned work); (ii) the devaluation of the Ukrainian currency led to the bankruptcy of the contractor for one contract (330 kv SS Pershotravneva ), and (iii) restrictions on energy safety affected the implementation of the three contracts since dispatching center could not take off from work substation for its rehabilitation, particularly in the winter time when it is used maximum power. 81. Events in the year 2014 had a significant adverse impact on UE s financial performance. These include the impacts on UE and the overall Ukrainian economy following from (i) the conflict in the Eastern region and situation around Crimea and (ii) the major devaluation of the Ukrainian currency (the exchange rate changed from UAH 8 per US$1 at the beginning of 2014 to about UAH 15.7 per US$1 at the end of 2014). These factors resulted in lower transmission volumes, lower revenues, and substantial provisioning for foreign exchange losses and impairment of UE s assets in the Crimean region. In the year 2015, UE s financial performance improved very significantly as compared to For the year 2016, NERC has approved further increases in UE s tariffs. 82. But due to the professional and prudent actions UE team members at all levels, their technical knowledge and engineering literacy, with direct and consistent Bank involvement in resolving the issues, the necessary measures were taken for the successful implementation of the project. 83. Despite the delay in the implementation of the project, the complex situation and the presence of force majeure circumstances, three out of four PDO level indicators have been achieved or exceeded, confirming the benefits of improving security, reliability, efficiency and quality of energy supply through investments (rehabilitation and strengthening of transmission network). 84. At the Project level, UE has shown: (i) its determination to improve the security, reliability, efficiency, and quality of power supply by rehabilitating transmission SSs and strengthening the power transmission network; and (ii) its interest and willingness to apply modern efficient technologie. 85. Given the assessments of the Borrower in the preparation and implementation of the project, both the Government and Implementing agency, the overall rating is "Moderately Satisfactory". 11. Lessons Learned and Conclusions 51

64 86. The following are the key lessons to be taken away from the Power Transmission Project: 87. Assessment of the Government's long term commitment and ability to carry out reforms is a key aspect of analyzing overall project sustainability. It is important to have a reform-oriented government not only during project preparation, but throughout the entire project cycle as well. The experience in Ukraine has shown that a reversal of the initially progressive course of economic reforns has adversely affected the implementation of the Bank's investment project 88. Ensuring the enabling environment for a large scope investment operation is a critical success factor for the operation: The experience in Ukraine has shown that initial government commitment to provide such an environment through comprehensive reforms requires sustained support from the IFIs. 89. The Project confirmed the efficiency of EPC contracts for the rehabilitation of transmission substations and the strengthening of the power transmission network, improval of institutional capacity and technical capabilities of TSO. It also validated the usefulness of engaging a procurement and project management consultant to support the implementing agency, especially with respect to dealing with the complexities of IFI bidding procedures. 90. The clear long-term objective and the programmatic design of the Bank support mitigated the risk of policy reversal by agreeing up-front with the Government on an Action Plan for the energy sector reform, aligning the program milestones with the policy lending (Development Policy Loan program), and sequencing the Bank financial support to the energy sector through a series of SILs without back-loading policy conditionality to investment lending. 91. Another factor for the success is that the beneficiary possessed very good technical skills, strong project ownership and commitment to results. 92. The Project demonstrated the value of a close relationship between the Bank and the Implementing Agency, which fostered mutual trust and understanding and allowed the smooth resolution of problems as they arose. 93. Very good technical skills, strong project ownership and commitment to results on the side of the project beneficiaries have been critical success factors. Such ownership and commitment have partially mitigated the adverse impacts of the financial crisis, the initial lack of experience with the Bank's project cycle, and have provided the Bank with grounds for extending the closing date to ensure successful project completion. 94. The benefits from the project are sustainable in view of the improvements in the power system's efficiency, stability and safety, the system's enhanced possibility for interconnections with the neighboring systems, achieved in the context of macro-economic improvements, coupled with positive trends in the overall business environment, sector privatization, improving cash collections, commitment to further sector reforms with active support from IFIs. 95. UE will continue the work to (i) ensure proper financing of their operations; (ii) integrate completely the project equipment in their systems; (iii) draft internal regulations for equipment operations and maintenance and train relevant staff accordingly; (iv) ensure arrangements with 52

65 suppliers for proper servicing of the project equipment beyond the contract guarantee period, and (v) monitor key physical and financial performance indicators. 96. UE will also pursue improvements in their FM and accounting practices based on the auditors' recommendations received during project implementation. Both companies will continue training staff to improve preparation of their consolidated financial statements based on National Accounting Standards (NAS) format, will work on introducing proper registry and software systems along with streamlining their tax records and tax payments forecasts. 97. UE has estimated that the project impact on the entire power system will be visible in about 5-10 years in view of the large size of the system and the additional time needed to integrate the project equipment into overall system operations. 98. Strong commitment from energy companies, NEURC, and the GoU is critical for implementing energy projects. Ownership by the Borrower is important during Project implementation, especially in Ukraine where implementation of energy projects has been slow. 99. The consequent Second Power Transmission Project in Support of the Energy Sector Reform & Development Programthe aims to improve the reliability of the power transmission system and support implementation of the WEM in Ukraine. 53

66 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Not applicable 54

67 Annex 9. List of Supporting Documents Ukraine World Bank Country Partnership Strategies FY08 FY11 and FY12 FY16 Project Appraisal Document on a Proposed Loan in the Amount of US$200 million to Ukraine for the Power Transmission Project in Support of the Energy Sector Reform and Development Program, June 27, 2007/Report No: UA Loan Agreement with amendments, dated November 9, 2007 Project Agreement with amendments, dated November 9, 2007 Aide Memoires and Management Letters Restructuring Papers Implementation Status and Results Reports Implementation Completion and Results Report Guidelines, OPCS, August 2006, last updated July 22, 2014 Guidelines for Reviewing World Bank Implementation Completion and Results Reports Manual for Evaluators, Independent Evaluation Group, last updated November 12,

68 PROJECT MAP (cleared on 12/08/2016) 56