Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-40870) ON A CREDIT

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-40870) ON A CREDIT IN THE AMOUNT OF SDR 17.7 MILLION (US$ 27 MILLION EQUIVALENT) TO THE REPUBLIC OF ALBANIA Report No: ICR2269 IN SUPPORT OF THE SECOND PHASE OF THE US$1,000 MILLION ENERGY COMMUNITY OF SOUTH EAST EUROPE (APL) PROGRAM Sustainable Development Department South East Europe Country Unit Europe and Central Asia Region December 21, 2012

2 CURRENCY EQUIVALENTS (Exchange Rate Effective November 5, 2012) Currency Unit = Lek 1.00 = US$ US$ 1.00 = 109 Lek FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AMM Albania Market Model IDA International Development Association APL Adaptable Program Loan IFRS International Financial Reporting Standards BER Bid Evaluation Report ISR Implementation Supervision Report CAPEX Capital Expenditure KESH Albanian Power Corporation CPS Country Partnership Strategy KfW Kreditanstalt fur Wiederaufbau DO Development Objective kv Kilovolt DCA Development Credit Agreement MDG-F Millennium Development Goals Achievement Fund, United Nations DSO Distribution System Operator METE Ministry of Economy, Trade and Energy EA Environmental Assessment NPV Net Present Value EBRD European Bank for Reconstruction and Development O&M EIRR Economic Internal Rate of Return OST Operation and Maintenance Albanian Transmission System Operator ECSEE Energy Community of South East Europe PA Project Agreement EIB European Investment Bank PCB Polychlorinated Biphenyls EMP Environmental Management Plan PDO Project development Objective EnC Energy Community PIU Project Implementation Unit ENTSO-E European Network of Transmission Power Sector Generation and PSGRP System Operators for Electricity Restructuring Project ERE Electricity Regulator Authority PSR Project Supervision Report EU European Union PSRRP Power Sector Rehabilitation and Restructuring Project FIRR Financial Internal Rate of Return QAG Quality Assurance Group FM Financial Management SDR Special Drawing Right FX Foreign Exchange SEE Southeast Europe GWh Gigawatt Hour TSO Transmission System Operator HV High Voltage Vice President: Acting Country Director: Sector Manager: Project Team Leader: ICR Team Leader: Philippe H. Le Houerou Gerard A. Byam Ranjit Lamech Salvador Rivera Yadviga Semikolenova

3 ALBANIA ENERGY COMMUNITY OF SOUTH EAST EUROPE (ECSEE) PROJECT APL2 Contents Data Sheet A. Basic Information... i B. Key Dates... i C. Ratings Summary... i D. Sector and Theme Codes... ii E. Bank Staff... ii F. Results Framework Analysis... ii G. Ratings of Project Performance in ISRs... v H. Restructuring (if any)... v I. Disbursement Profile... vi 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... 43

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5 A. Basic Information Country: Albania Project Name: Energy Community of South East Europe (ECSEE) Project APL2 (Albania) Project ID: P L/C/TF Number(s): IDA ICR Date: 12/21/2012 ICR Type: Core ICR Lending Instrument: APL Borrower: ALBANIA Original Total Commitment: XDR 17.70M Disbursed Amount: XDR 14.32M Revised Amount: XDR 17.70M Environmental Category: B Implementing Agencies: Albanian Transmission System Operator (OST) Cofinanciers and Other External Partners: European Bank for Reconstruction and Development (EBRD) B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 12/20/2004 Effectiveness: 12/21/ /21/2005 Appraisal: 02/22/2005 Restructuring(s): 04/17/ /22/2010 Approval: 06/28/2005 Mid-term Review: 07/28/ /23/2008 Closing: 07/31/ /30/2012 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Moderate Moderately Satisfactory Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory Quality of Supervision: Moderately Satisfactory Implementing Agency/Agencies: Moderately Satisfactory Overall Bank Overall Borrower Moderately Satisfactory Performance: Performance: Moderately Satisfactory i

6 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No Yes Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): Satisfactory None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Power Theme Code (as % of total Bank financing) Regional integration Regulation and competition policy E. Bank Staff Positions At ICR At Approval Vice President: Philippe H. Le Houerou Shigeo Katsu Country Director: Gerard A. Byam Orsalia Kalantzopoulos Sector Manager: Ranjit J. Lamech Peter D. Thomson Project Team Leader: Arturo S. Rivera Iftikhar Khalil ICR Team Leader: Yadviga Viktorivna Semikolenova ICR Primary Author: Yadviga Viktorivna Semikolenova F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The project would provide investment support and technical assistance for Albania. The objective of the investment is to extend the lifetime and improve the quality, reliability, safety and efficiency of the bulk power transmission system by replacing ageing existing facilities with new ones. The technical assistance would serve to facilitate project implementation, strengthen the Transmission System Operator, and improve both the tariff structure and the procurement procedures applicable to electricity imports. Revised Project Development Objectives (as approved by original approving authority) N/a ii

7 (a) PDO Indicator(s) Indicator Indicator 1 : Value quantitative or Qualitative) Original Target Values (from Baseline Value approval documents) ECSEE APL: Regional market liberalization Negligible Regional electricity market is functioning iii Formally Revised Target Values Actual Value Achieved at Completion or Target Years Partially achieved. ECSEE treaty is binding. The Power law was amended; as a result, Albania now has 7 eligible customers with annual consumption of 684 GWh in 2011 Date achieved 06/01/ /31/ /14/2012 Comments (incl. % achievement) The amended Albanian Power Sector Law qualifies as eligible all customers that: (1) are directly connected to the transmission system; and/ or (2) consume more than 50 GWh annually Indicator 2 : Capacity to transmit electricity is maintained at or above base levels Value quantitative or Qualitative) 6000 GWh Equal to or greater than baseline Achieved. The transmission system has delivered 6276 GWh and 684 GWh respectively to the distribution network and to HV customers, in 2011 Date achieved 12/31/ /31/ /14/ % achieved. The Project improved the availability of 3 main substations and Comments increased the system reliability and transfer capacity. Besides the yearly increase (incl. % of transmission volumes, the transmission losses and the number of outages were achievement) reduced. Transmission System Operator (TSO) functioning improved based on Indicator 3 : implementation of recommendations from technical assistance. Value quantitative or Qualitative) TSO established with limited operational capability Final recommendations from technical assistance submitted and decisions have been taken to implement them Partially achieved. The final recommendations were submitted. Recommendations have been partially implemented Date achieved 07/14/ /31/ /14/2012 Comments (incl. % achievement) Organizational structure, processes and human resources plan were adopted, as recommended. Market operation division remains weak. TSO needs to improve financial separation between the divisions and enhance its capacity to

8 Indicator 4 : Value quantitative or Qualitative) operate/monitor the market Procurement procedures for import of electricity improved Final recommendations of technical Existing procurement assistance procedures are submitted and cumbersome and result in decisions taken to delays and non-compliant implement them bids by appropriate changes in the relevant legislation iv Achieved. Procurement of electricity amendments were passed Date achieved 06/01/ /31/ /29/2008 Comments (incl. % achievement) 100% achieved. Consultants prepared a report on procurement in Government presented to Council of Ministers relevant amendments, which were passed in February, 2008 Indicator 5 : Increased availability of rehabilitated substations Value quantitative or Qualitative) 85.42% 98% Achieved. 98.5% Date achieved 11/22/ /29/ /14/2012 Comments (incl. % achievement) 100% achieved. 98.5% substations availability was achieved because during forced outages due to construction, the N-1 criterion for power transmission was respected; as a result, energy delivery to distribution system was not interrupted Indicator 6 : Reduced number of energy outages in the rehabilitated substations Value quantitative or Qualitative) 50 outages/ year 20 outages/ year Achieved. 20 outages/ year Date achieved 11/22/ /29/ /14/2012 Comments 100% achieved. There were 102 outages in 2011 because of forced outages due (incl. % to construction achievement) (b) Intermediate Outcome Indicator(s) Indicator Original Target Values (from Baseline Value approval documents) Progress in rehabilitation of substations Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : Value (quantitative 0% 100% 100% or Qualitative) Date achieved 06/01/ /31/ /14/2012 Comments 100% achieved. 100% of rehabilitation works in 3 substations is finalized. The (incl. % Completion Certificate was issued on June 14, 2012 achievement) Indicator 2 : Progress in technical assistance

9 Value (quantitative or Qualitative) 0% 100% 100% Date achieved 06/01/ /31/ /30/2008 Comments (incl. % achievement) 100% achieved. The technical assistance work envisioned in 3 contracts: (1) TSO strengthening, (2) Electricity tariff study and (3) Improving procurement procedures for electricity imports. All of the contracts were completed G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 12/07/2005 Satisfactory Satisfactory /01/2006 Satisfactory Satisfactory /21/2007 Moderately Satisfactory Moderately Satisfactory /30/2008 Moderately Moderately Unsatisfactory Unsatisfactory /29/2009 Moderately Satisfactory Moderately Satisfactory /24/2010 Moderately Moderately Unsatisfactory Unsatisfactory /30/2011 Moderately Satisfactory Moderately Satisfactory /20/2012 Satisfactory Satisfactory /26/2012 Satisfactory Satisfactory H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO IP Amount Disbursed at Restructuring in USD millions 04/17/2009 N MU MU /22/2010 MU MU 6.75 Reason for Restructuring & Key Changes Made Extension of the Closing Date to January 31, 2011 (i) Amendments to the Legal Agreements (DCA and PA) to reflect the unbundling of the power sector and substitution of implementing entity; (ii) extension of the Closing Date to June 30, 2012; and (iii) revision of the intermediate performance indicators v

10 I. Disbursement Profile vi

11 1. Project Context, Development Objectives and Design Albania is part of the Southeast Europe (SEE) group of countries, together with Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, FYR Macedonia, Montenegro, Romania and Serbia. Prior to 1991, Albania was far less developed economically than any country in the region, and was the poorest country in Europe. The fall of the Communist regime in 1990 inaugurated an era of economic reforms, providing a context in which the private sector could develop freely. In the late 1990s, the collapse of several pyramid schemes brought the country to the point of economic collapse, and civil unrest ensued. Economic recovery followed, and growth has been sustained since Until 2009, the average growth was around 6 percent per year, one of the highest in Europe. Significantly, increases in GDP led to Albania graduating from IDA in Despite this, in 2011 Albania s per capita income of US$4,027 lags behind the average of US$6,759 per capita for the SEE countries. 1.1 Context at Appraisal Overall ECSEE APL Program: Under coordination of the European Commission, the SEE countries decided to create a regional energy market with the longer-term objective of integrating it into the European Union s (EU s) internal energy market. This initiative is known as the Energy Community of South East Europe (ECSEE), or just the Energy Community (EnC). ECSEE has been an integral element of the efforts of the Regional Members and the European Commission for all states in SEE to have access to stable and continuous energy supply which has been, and still is, regarded as essential for economic development and social stability. The creation of an area without internal frontiers for energy would contribute to economic and social progress and a high level of employment, as well as balanced and sustainable development. The key objectives of ECSEE are to create a stable regulatory and market framework in order to: (i) attract investment in power generation and energy networks in order to ensure stable and continuous energy supply; (ii) create a regional energy market allowing for cross-border energy trade and interconnection to the EU market; (iii) enhance security of energy supply; and (iv) improve the environmental situation in relation with energy production and supply in the region. A Memorandum of Understanding was signed to that effect in December 2003, in Athens (the Athens Memorandum) and a legally binding Treaty (the Athens Treaty) was signed in October The Treaty entered into force on July 1, 2006, and became fully operational in 2007, when the EnC Secretariat was set up. The main provisions of the Treaty include, inter alia, the transposition into national legislation and implementation of EU Directives and Regulations in power, natural gas, energy efficiency, environment, and renewable energy, along with applying the main principles of EU competition policy. It soon became obvious that major financial resources were needed to finance the investments necessary to enhance energy trade within the EnC and indeed to give life to the concept of the ECSEE as a whole. For that reason the Bank decided in January 2005, to provide regional investment support through the Adaptable Program Loan (APL) 1

12 instrument. Since then, the ECSEE APL facility has become a key component of the Bank s working partnership with the European Commission. The APL was intended to provide Bank support in a flexible manner and to operate both horizontally (on a regional basis to support the ECSEE member countries), as well as vertically (each country could in principle receive more than one APL over the program period). Countries become eligible for an APL once they meet ECSEE s basic entry conditions as defined under the Athens Memorandum/Treaty 1 and remain substantively in compliance with the letter and spirit thereof. Albania Power Sector: At the beginning of Albania s transition in the early 1990s, the country was virtually 100 percent electrified and was a net electricity exporter, with exports of around 20 percent of the domestic generation in 1991 and However, while the three hydropower plants of the Drin River cascade, which produce over 90 percent of the country s electricity, were in reasonably good condition, the one significant thermal power plant, Fier, was in a poor state of repair. The transmission and distribution systems were badly run down because of previous neglect of maintenance and outdated equipment and there were frequent power outages due to overloading of facilities. Electricity demand within Albania fell initially to 79 percent of the 1989 level by 1992 because of declines in industrial production. Thereafter it rose by about 10 percent per year to 5,870 GWh in After 2001, Albanian electricity demand continued growing at about 2 percent per year and reached 6,230 GWh in By 1998, Albania had become a net electricity importer. By the second half of 2000, a serious electricity shortage had set in, partly as a result of a fall in hydroelectric production caused by reduced river flows. The country was unable to get all the electricity it needed primarily because of transmission and financial constraints. The result was large load shedding, which had serious adverse macroeconomic and social effects: industries cut production; businesses had to purchase and use costly back-up diesel generators; households had to suffer without electricity for many hours each day. Since the beginning of 2001, the Albanian Power Corporation (KESH) started implementing actions to reduce illegal electricity consumption and improve collections. As a result of these measures, collected revenue increased from 8.7 billion Lek in 2000 to 26.9 billion Lek in Although total electricity losses remained high, they were reduced from 46 percent in 2000 to 42 percent in 2002 and 40 percent in Load shedding decreased from 524 GWh in 2001 to 358 GWh in In addition, the average tariff level had been regularly increased. Albania also initiated power sector restructuring. A new Law on Regulation of the Electricity Sector was enacted in May 2003, which provided for strengthening of the Electricity Regulatory Authority, ERE, and the full unbundling of the electricity sector. In June 2003, a National Energy Strategy was adopted based on the recommendations of the Energy Sector Study conducted by the World Bank. In July 2004, transmission was separated from KESH, and the transmission system operator, OST 2, was registered as a 1 The ECSEE APL requirements are that an electricity sector regulator and a transmission system operator have been established and are operational 2 OST: Albanian Transmission System Operator (Operatori Sistemit Transmetimit) 2

13 joint-stock company, with KESH as a holding company. In August 2004, all nonhousehold customers were granted the right to become eligible consumers and choose their own suppliers. As a result of the sector reforms introduced, Albania complied with the ECSEE basic entry conditions and hence was eligible to use the ECSEE APL facility. The main justification for the Albania ECSSE APL 2 Project was threefold. First, Albania had by far the most unfavorable electricity supply imbalance among the ECSEE member countries and thus was expected to benefit the most from the creation of an integrated, well-functioning regional electricity market. Second, the poor state of the transmission and distribution system was slowing down Albania s integration into the regional electricity market: infrastructure had been run down, overloaded and thus unreliable. Given the situation in the sector at the time, private investments were not forthcoming. Third, the Bank had been playing the major role in the Albanian power sector since it began lending to Albania in 1992, both in supporting sector reforms and financing investments. The Power Sector Rehabilitation and Restructuring Project (PSRRP), which was ongoing at the time, provided financing for transmission and distribution system rehabilitation and strengthening in the regions of Durres, Elbasan and Kucova. The Power Sector Generation and Restructuring Project (PSGRP) had been financing the Vlore combined-cycle power plant, with co-financing from EBRD and EIB. Both PSRRP and PSGRP projects also supported implementation of the Energy Strategy through separate reform-related components. 1.2 Original Project Development Objectives (PDO) and Key Indicators ECSEE APL Program Objective: The objective of the ECSEE APL is the development of a functioning regional electricity market in SEE and its integration into the internal electricity market of the EU, through the implementation of priority investments supporting electricity market and power system operations in electricity generation, transmission and distribution and technical assistance for institutional/systems development and project preparation and implementation. The key indicator is liberalization of electricity markets in SEE in accordance with the Athens Treaty and creation of a functional regional electricity market. ECSEE APL2-Albania Project DO: The Project provided investment support and technical assistance for Albania. The objective of the investment was to extend the lifetime and improve the quality, reliability, safety and efficiency of the bulk power transmission system by replacing ageing existing facilities with new ones. The technical assistance would serve to facilitate project implementation, strengthen the Transmission System Operator (TSO), and improve both tariff structure and procurement procedures applicable to electricity imports. The key indicators were: (i) improved reliability of Albania power transmission network (i.e., improved capacity to transmit electricity); (ii) more effective functioning of the TSO (i.e., improved capacity due to implementation of recommendations from technical assistance); and (iii) removed impediments to the effective operation of the electricity market (i.e., improved procurement procedures for import of electricity). 3

14 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification After the second Project restructuring in November 2012, two additional key results indicators were added (increased availability of rehabilitated substations; and reduced number of energy outages in the rehabilitated substations) in order to enable better monitoring of progress towards achievement of the PDO. 1.4 Main Beneficiaries All electricity consumers in Albania were the main beneficiaries of the ECSEE APL. Successful integration of Albania into a functioning regional electricity market would address the serious electricity crisis that had been putting Albania s economic growth at risk. All electricity consumers in Albania were also the main beneficiaries of the Project. Rehabilitation of the bulk power transmission system was expected to improve the reliability and quality of electricity supply. Improved procurement procedures for importing electricity were expected to decrease delays in entering into contracts, thus improving security of supply. The TSO was expected to benefit from the Project as well. With implementation of Technical Assistance, the TSO was to develop and implement a new organizational structure, financial and accounting systems and business and managerial processes. 1.5 Original Components Eligible ECSEE APL Program Components: The Bank s March 2004 framework paper concluded that significant investments in power generation, transmission and distribution, and technical assistance were required for a well-functioning power market. Priority investments and technical assistance would be financed under the ECSEE APL program so that the ECSEE Regional Members could effectively participate in the regional electricity market. ECSEE APL2-Albania Project: The Project consisted of: 1. Investment Component: replacement of high-voltage equipment in the transmission substations at Burreli, Elbasan 1, Elbasan 2, Fier, Fierza, and Tirana 1, and replacement of control and protection equipment in the transmission substations at Burreli, Elbasan 2, Fier, Fierza, Komani and Vau Dejes. 2. Technical Assistance Component: (i) procurement activities and supervision of project implementation; (ii) strengthening of TSO (preparation of business plan, putting in place new financial and accounting systems; developing managerial and business processes; creating an open balance sheet; estimation of transmission tariff based on approved methodology); (iii) an electricity tariff study; and (iv) improving procurement procedures for electricity imports. Successful implementation of the investment component was expected to improve reliability and stability of the Albanian power transmission system. Implementation of the technical assistance component was aimed at strengthening TSO s capacity as a system and market operator. Successful completion of both components was expected to contribute to Albania s effective participation in the functional regional electricity market. 4

15 Out of the investment component, the Bank financed replacement of high-voltage equipment in Elbasan 1, Fier and Tirana 1 substations as well as control and protection equipment in Fier 3 ; Burreli, Elbasan 2, and Fierza were parallel-financed by European Bank for Reconstruction and Development (EBRD). The Bank financed the technical assistance component in full. As IDA and EBRD financed procurement packages for separate substations, there were no cross-effectiveness conditions. 1.6 Revised Components N/a 1.7 Other significant changes The effectiveness deadline was extended once, from October 21, 2005, to December 30, The delay in declaring the IDA Credit effectiveness was due to 2005 Parliamentary elections: it took longer than expected to form the new government after the elections. The Project was restructured twice. The first restructuring extended the Project s closing date from the original closing date of July 31, 2009, to January 31, The second Project restructuring amended the Project Legal Agreements to reflect the unbundling of the power sector (TSO substituted KESH as the implementing agency); extended the Project closing date to June 30, 2012; and added two additional key results indicators. Both times the closing dates were extended due to slow progress in implementation of the investment component of the Project. By the Project closing date, about 20 percent of the Project funds remained undisbursed due to (i) FX fluctuations over the last 4 years of the Project life; (ii) equipment price fluctuations; and (ii) termination by TSO of a contract for project implementation support (part of the technical assistance component). The undisbursed balance of US$ 5,148,376 was cancelled on November 15, Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry The Project was prepared in close consultation with the Government and other donors active in the sector. The most important consideration was the urgent need to improve Albania s energy reliability and security. The selection of an APL as the instrument allowed addressing reliability and security issues in a way that was consistent across the region. Horizontally, the APL allowed the Bank to address energy policy, EU accession and Albanian transmission network issues using the same coordinated approach applied in other SEE countries; it also allowed matching Bank s commitments to the region to the pace with which Albania was ready to move towards regional market integration. Regular monitoring and regional benchmarking taking place in the ECSEE process were expected to provide higher publicity and awareness, peer support and peer pressure incentives for Albania to improve its performance so as to avoid falling behind other ECSEE members. Vertically, the APL allowed the Bank to leverage its investments to improve reliability of the Albanian transmission system with advancing policy reforms in the energy sector. 3 Control and protection equipment in Elbasan 1 and Tirana 1 substations had been installed by EIB before the Project. 5

16 Since the investment needs to improve the reliability of the Albania transmission system were very large, several investments that could qualify under the ECSEE APL program criteria were considered: a new power dispatching system; new cross-border transmission lines; investments in expanding transmission network to meet growing demand; and rehabilitation of existing substations. The first two options were rejected because they were being prepared with financing by Italy and KfW. The third investment option was considered to have lower priority in terms of avoiding outages. Rehabilitation of substations was required immediately to address system availability issues. Evaluation by independent consultants identified the priority substations to be included in the Project. Elbasan 1, Fier and Tirana 1 covered about 70 percent of electricity transmission in Albania and had been in dire need of urgent rehabilitation. The Project was to complement the existing TSO program to replace old transformers at these substations. The Project was designed taking into account the lessons learned from operation of other regional electricity markets, as well as previous interventions in the country. A key lesson learned from other markets (e.g., NordPool) was that the progressive integration of energy markets and the implementation of common security of supply policies required close attention to be paid to the operation of subsidiary electricity markets which are best administered by TSOs. Hence, capacity building of the TSO was essential in facilitating the effective integration of Albania into the ECSEE. Experience from previous lending to the Albanian power sector showed that: (i) implementation of the investments by KESH had been satisfactory; and (ii) prior to 2001, KESH and the Government had not made much progress towards implementing previously approved sector reforms. After 2001, with coordinated support by the donor community, KESH and the Government started improving sector performance. These lessons justified selection of the APL as an instrument. Along with financing physical investments, the Project was designed to include the ECSEE-agreed benchmarks and facilitate Albania s sector reform actions. The environmental and social aspects were carefully examined. The overall ECSEE APL impact was expected to be positive since the common objective of the Athens Memorandum parties was to stimulate economic growth and investment in SEE. ECSEE accelerates the introduction of EU-compatible environmental legislation and standards in the SEE region. The Project was also expected to have no adverse social or environmental impacts. No land acquisition or resettlement was required. The investment component of the Project consisted entirely of replacing existing equipment. Hence, the Project triggered only OP/ BP 4.01 Environmental Assessment (EA). The major risks at preparation stage included: (i) ECSEE initiative risks (e.g., different pace of liberalization of the subsidiary markets might slow down SEE regional market integration); (ii) technical risks; (iii) implementation agency capacity risks; and (iv) sectoral risks due to ongoing unbundling. ECSEE initiative risks were minimized by adopting gradual approach to market opening and voluntary approach to trading. Technical risks were minimized by using proven technical designs and turnkey contracting approach. The rest of the risks were mitigated through technical assistance component that addressed implementation support and strengthening of TSO capacity. 6

17 2.2 Implementation ECSEE APL Program: In May 2006, Albania ratified the Athens Treaty making it legally binding. In 2007, distribution was separated from KESH, creating a new jointstock company, Distribution System Operator (DSO), owned by KESH. In June 2008, the ownership of both TSO and DSO was transferred to the Ministry of Economy, Trade and Energy (METE), completing the full unbundling of the sector in compliance with the Treaty. In March 2009, DSO was privatized. The Albanian Market Model (AMM) was approved by the Government in early In parallel, ERE prepared new regulations, licenses, tariff methodologies, as well as technical and commercial codes. As part of the DSO privatization process, the new Regulatory Statement was adopted for Under the adopted market structure, TSO was given a role of market operator. The Power Law was amended in January 2010, and again in January 2012; it allowed all electricity customers who are connected directly to the transmission system and/or consume more than 50 GWh/year to become eligible. The restrictions on allocation of interconnection capacity were formally removed. Auctions open to third parties have been being held since February However, the number of operations remains limited due to legislative gaps that hinder enforcement of contracts. Albania s legal framework still only partially complies with ECSEE obligations. Little progress was made with implementing the acquis on the security of electricity supply in line with the Athens Treaty and little progress was made on aligning the Power Sector Law with the acquis. Albania has not yet started aligning its legislation with the EU s third internal energy market package. The required transparency of the market remains problematic 4. ECSEE APL2-Albania Project: Implementation of the Project investment component financed by IDA went through two main stages: (i) procurement and mobilization of the supply and installation contractor between Project effectiveness (December 2005), bid award (December 2008), and final mobilization of the contractor (July 2010); and (ii) actual implementation of physical works under the component (October 2010-June 2012). The procurement of the supply and installation contractor took an unusually long time. The tender documents were issued in October 2006, but all the Bank s comments were addressed in the final Bid Evaluation Report (BER) in the fall of Such a long procurement process stemmed from constant disputes between KESH, TSO and the implementation support consultants, which led to confusion regarding the preparation of the BER. The process was complicated further by a complaint by one of the bidders and insufficient responses and follow-up by KESH. Additionally, procurement and contractor mobilization was slowed down by confusion of responsibilities under the Project. After TSO had been separated from KESH, there were significant delays in the division of assets and liabilities between the two entities. Hence, it was agreed during Project preparation that KESH, as the holding company of TSO, would become the implementing agency under the Project. Such a set-up eventually created ambiguity of responsibilities, disrupting implementation. After the sector was 4 Annual Report on the Implementation of the Aquis under the Treaty Establishing the Energy Community. Energy Community Secretariat, September

18 fully unbundled, KESH no longer had responsibilities for the Project, but TSO which had become responsible for the Project, had no legal relationship to the Project or the Bank. The complicated relationship between KESH, TSO and the Project significantly delayed signing and then effectiveness of the supply and installation contract. Procurement delays issues were addressed during the mid-term review in October 2008, which looked into the KESH/TSO dispute with the implementation consultants. Based on the review recommendations, the procurement process was finalized and the bid was awarded in December Because of the procurement delays, the Project closing date was extended to January 31, The issues of ambiguous implementation responsibilities under the Project were highlighted in the QAG Disbursement Review in November The review recommended Project restructuring to transfer implementation responsibilities to TSO, and potentially extending the Project closing date further. The restructuring mission took place in February It assessed TSO s financial viability, management and technical capacity for Project implementation and concluded that with appropriate technical assistance and regulatory oversight, TSO had the capacity to remain financially viable, meet its commitments under the loan and maintain adequate control and financial reporting procedures. Based on the mission recommendations, the Project restructuring action plan was agreed with TSO. The contractual arrangements under the Project were transferred from KESH to TSO, and the supply and installation contract became effective in July The formal Project restructuring was completed in November The Project closing date was extended again to June 30, After the Project had been restructured, implementation of the investment component financed by IDA proceeded smoothly and without any major delays. All the required works for all 3 substations were completed with high quality and the Operational Acceptance Certificate was issued on June 14, Implementation of the investment component, financed by EBRD, also experienced delays and has not been completed as of yet. Approval of EBRD Loan came in July 2006, instead of October 2005, as had been originally expected. EBRD s approval of the Project was subject to significant improvement of KESH s performance in the first quarter of 2006 and issuance of the necessary permits to build the Vlore Thermal Power Plant, which was co-financed by EBRD. Since approval, implementation of EBRDfinanced investments has been behind schedule, mainly due to unclear responsibilities of KESH and TSO under the Project. After numerous attempts to establish clear responsibilities and good working relationship between KESH and TSO, EBRD loan is being restructured to transfer implementation responsibilities from KESH to TSO. The EBRD-financed components are expected to be completed by June Since IDA and EBRD financed rehabilitation of different substations, implementation of the IDAfinanced investment component of the Project was not affected by the above. Technical Assistance component of the Project was implemented successfully and without any delays. Implementation support consultants were hired in January 2006, and supported the PIU through the procurement process. During the implementation of works, TSO, under the Bank supervision, showed a high capacity to supervise the Project and decided to terminate the implementation support contract. Recommendations to improve 8

19 procurement procedures for electricity imports were presented to the Government in 2007 and relevant amendments to the procedures were passed by the Parliament in February A detailed business plan was prepared for and adopted by TSO. A new organizational structure and human resources plan were recommended to TSO. Those recommendations have been partially adopted. The new organizational structure now includes, besides transmission network management and system operation divisions, market operation division. However, market operation division remains weak. TSO still needs to improve the financial separation between the divisions. New dedicated accounting software was introduced and TSO s financial audits are conducted based on International Financial Reporting Standards (IFRS). Tariff study was completed in 2007 and TSO has been using the materials from the study to support their tariff applications to ERE in 2007 and After the new Regulatory Statement was adopted, the Bank, with the support of the MDG-F-financed fee-for-service activity, developed an Albania power sector financial model, which has been used by TSO in its recent tariff applications, as well as to update their business plan. When it became apparent that about 20 percent of the Project would be undisbursed, the team decided not to restructure the Project again to introduce an additional component. Given difficulties in the Project implementation during previous five years, the team decided to concentrate on successful implementation of the investment. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Monitoring and Evaluation of the Project was adequately designed. The appropriate monitoring indicators were selected that were directly relevant to the achievement of the ECSEE APL objective and the ECSEE APL2-Albania PDO. ECSSE APL 2 objective was aligned with the obligations under the Athens Treaty. At the regional level, the Project benefited from the established mechanism for ECSEE coordination, monitoring and evaluation. ECSEE s Regulatory Secretariat has been providing regular monitoring reports of Albania performance against agreed ECSEE benchmarks. For ECSEE APL 2-Albania Project, the indicators were relevant, quantifiable and measurable. Monitoring was the responsibility of KESH and subsequently TSO. Implementation support consultants provided regular progress reports during the procurement process. These reports played an important role in finalizing the BER and contractor selection. Regular reports were received on the progress of the technical assistance component. After the implementation support contract was terminated, TSO became responsible for regular Project implementation reports. TSO provided reports on time and their quality met the Bank s requirements. TSO experienced difficulties with collecting and reporting data on additional key results indicators, introduced after the Project s second restructuring. The Bank team worked closely with TSO to improve their data collection capacity since these additional indicators were crucial in monitoring system reliability. From the Bank side, monitoring was carried out through the normal review procedures for procurement, regular supervision missions, the Financial Monitoring Reports, the independent annual financial audits of the Project, KESH and TSO statements. The 9

20 values of the indicators were integrated in Aide Memoires, Project Supervison Reports (PSRs) and ISRs. 2.4 Safeguard and Fiduciary Compliance Safeguards Environment: The Project triggered OP/ BP 4.01 Environmental Assessment (EA). The Project financed replacement of existing equipment in the existing locations. The EA was carried out and an Environmental Management Plan (EMP) was prepared for substations under rehabilitation to define procedures to mitigate local impacts of the Project. The mitigation measures included: avoidance of polychlorinated biphenyls (PCBs) in equipment purchased; ensuring that sewage water from substations was properly disposed of; appropriate movement of men, materials and equipment during construction/ erection (noise, dust); and minimizing noise and communication interferences during operation. Satisfactory consultations about and disclosure of EMP took place. The EMP was implemented in a timely manner and was closely monitored by TSO and the Bank supervision team. Conditions at all three substation sites greatly improved and are within environmental standards. TSO is still in the process of removing the remaining scrap material and replaced equipment from substations area. Social: Potential social impacts were examined during the design stage. The project did not require land acquisition or resettlement. The Bank-financed works were confined inside the walls of the substations. Fiduciary Procurement: Procurement was carried out consistent with Bank Guidelines and in accordance with the methods and thresholds specified in the DCA. Procurement activities for the technical assistance component were carried out on time and without issues. Procurement activities for investment component were carried out with the help of implementation consultants, who assisted with preparation of bidding documents. The bidding documents were issued in October 2006, followed by three addenda and the bid validity period extension. The bids were opened in February The BER was submitted, after some delay, to the Bank in June This initiated lengthy period of revisions, complicated by the lack of agreement between KESH, TSO and implementation consultants. As a result, three revised BERs were required before the final reward was agreed in November 2008, over two years after procurement of the supply and installation contract was initiated. Also, in the fall of 2006, a complaint was received by one of the bidders. It took KESH about a year to respond to the complaint, which further delayed the BER finalization. After the bid was awarded, no major issues were encountered relating to procurement. Financial Management: FM arrangements from a fiduciary perspective were implemented in an adequate manner and maintained throughout the life of the Project. PIU used a comprehensive set of accounting policies and internal control procedures in accordance with the Project financial management manual. The quarterly Project interim financial reports were submitted in a timely manner. KESH employed a financial specialist, who had the appropriate skills and abilities to manage the Project s financial management and disbursement issues. Consequently, this 10

21 specialist moved to TSO. After Project implementation responsibility was transferred, TSO agreed with the Bank on an action plan to improve its FM capacity and strengthen Project systems and controls. Following recommendations of the auditors and the Bank, TSO installed new accounting software. However, it was only used for accounting and consolidation of the Project transactions into financial reports of TSO. Project financial reports were still prepared in spreadsheets. The audits of the entity and Project financial statements were submitted on a regular basis, albeit with some delays in a few instances. Project financial statements consistently received unqualified opinion from the auditors. TSO received modified opinions on its consecutive IFRS financial statements due to noted deficiencies in financial reporting process and weak control environment. However, progress was noted in the 2011 IFRS financial statements, when the respective audit opinion was upgraded from disclaimer of opinion in 2010 to qualified opinion (except of) in Counterpart financing was satisfactory during the Project life. 2.5 Post-completion Operation/Next Phase For successful compliance with ECSEE conditions, Albania needs to continue energy sector and market reforms. Most of the necessary reforms are addressed in the current draft for a new Power Law, which has not been approved by the Government or submitted for public consultations. With the draft adopted, effective opening of the electricity market could finally commence in Albania. Hence, adoption of the new Power Law remains a priority for Albania. In an integrated regional electricity market, TSO would have to play a leading role as a subsidiary market operator. Despite improvements, TSO still lacks capacity to efficiently perform its responsibilities as a market operator and to monitor compliance with EU standards and the Athens Treaty. TSO needs further investment support in order to establish and run an efficient electricity market. In particular, TSO has to implement fully compliant rules for capacity allocation and power system balancing, with ERE overseeing the implementation. The requirements for transparency of information provided by TSO for access to the networks needs to be monitored and enforced by ERE. The rehabilitated substations do not require any particular measures other than standard maintenance. With appropriate regulatory oversight, TSO has capacity to operate and maintain the rehabilitated substation, thereby insuring their technical sustainability. TSO needs finish removing the remaining scrap material and replaced equipment from areas of rehabilitated substations. In order to further improve reliability, safety and efficiency of Albanian bulk power transmission system, additional investments are required in expanding the transmission network to meet growing local and regional demand. The system also needs to meet the ENTSO-E requirements for operational network security. TSO is currently implementing the SCADA System which is expected to be in full operation in May This project, and also others already implemented, will enable TSO to fulfill the requirements of ENTSO-E. Also, TSO plans important projects in order to meet local and regional demands. Those include an interconnection line Albania-Kosovo as well as a 110 kv circuit line South Albania. Implementation of both lines is expected to start in

22 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The PDO remains highly relevant today and is in line with the current 2010 Country Partnership Strategy (CPS) for FY11-FY14. The CPS cites infrastructure, and electricity supply, as one of the main obstacles encountered by businesses. The unreliability and poor quality of electricity supply has regularly been listed by Albanian firms of all sizes as one of their most critical constraints. In 2008, firms reported an average of 32 outages per month, necessitating widespread reliance on stand-by generators and inhibiting expenditures on sophisticated technical equipment which might be damaged by power fluctuations. A recent study 5 that assessed the Albanian power sector concluded that the security of the Albanian electricity supply would require maximizing transitions at the regional electricity market. For that, TSO would need to improve its capacity to allocate border transfer capacity, aiming to increase cross border trading and minimize interruptions to service caused by transmission facilities maintenance. The Project consequently addresses concerns which remain valid in 2012, as embedded in the PDO and the key indicators associated with regional integration, supply reliability and capacity of the TSO. Selection of an APL as an instrument allowed dealing with these issues through consistent and coordinated approach applied across the region. 3.2 Achievement of Project Development Objectives ECSEE APL Program: The sector reforms introduced during the life of the Project (electricity sector unbundling, privatization of the DSO, adopting and implementing the new Regulatory Statement, allowing for eligible customers, introducing third-party auctions) brought Albania closer to regional market integration. However, Albania s legal framework still falls behind the Athens Treaty obligations 6. Additional sector and market reforms are required to ensure sector viability and compliance with ECSEE requirements. ECSEE APL2-Albania Project: The main DO of the Project (to extend the lifetime and improve the reliability, quality, safety and efficiency of the bulk power transmission system) has been achieved. Transmission system capacity increased from 6,000 GWh at appraisal to over 6,200 GWh in The Project has significantly improved the availability of the rehabilitated substations: from 85.2 percent at the time of appraisal to 98.5 percent by the time of closing. Even with forced outages due to construction, the N- 1 criterion for power transmission 7 was respected and energy delivery to distribution system was not interrupted. The number of energy outages in rehabilitated substations reduced from 50 outages per year to 20 outages per year 8. Besides the increase of transmission volumes, the transmission losses decreased from 5.5 percent at the time of 5 A Stocktaking Assessment of the Albanian Power Market: Reform Progress and Market Monitoring Final Report, AF-Mercados EMI, prepared for MDG-F, United Nations, and the World Bank, April Annual Report on the Implementation of the Aquis under the Treaty Establishing the Energy Community. Energy Community Secretariat, September, The N-1 criterion expresses the ability of the transmission system to lose a linkage without causing an overload failure elsewhere. A power transmission system must be able to supply power reliably under all conditions of demand on the network. 8 The total number of outages in 2011 was 102 because of forced outages during construction. 12

23 appraisal to 2.3 percent in Even though electricity consumption reached a new historic high of 7,340 GWh in 2011, no load shedding was applied. TSO s financial audits are conducted based on IFRS. Albanian electricity sector financial model has been used by TSO to annually update its business plan and for tariff applications to ERE. 3.3 Efficiency ECSEE APL Program: The benefits from ECSEE electricity trade have been limited for Albania so far since the process of regional market integration has not been completed. The benefits are expected to be significant: it has been estimated that if SEE were to operate as a regionally integrated system dispatching on a least-cost basis, operating costs could be reduced by percent. ECSEE APL2-Albania Project: An ex-post cost-benefit analysis was carried out for the IDA-financed part of the investment component. The benefits of new investments include additional energy served due to better availability of substations and lower operation and maintenance (O&M) costs. For economic analysis, the additional energy served has been valued at the marginal cost of supply (i.e., the cost of imported electricity). Together with saved O&M costs, it comprises economic benefits of the completed investments. For financial analysis, the additional energy served has been valued at current approved transmission tariff. Together with saved O&M costs, it represents financial gains to the TSO due to the implemented investments. The economic internal rate of return (IERR) of the IDA-financed investment component is estimated to be 40 percent and the net present value (NPV) at a 10 percent discount rate is 46.7 million Euros (or 6.5 billion Lek). The financial internal rate of return (FIRR) of the implemented investments is 3 percent. The reason for low FIRR is by design and consistent with the current regulatory regime. The Government wishes to keep the retail tariffs as low as possible and does not necessarily require market-related returns on its equity; it prefers to finance transmission assets through borrowings. Accordingly, the transmission tariff is based on a return on its asset base (effectively project CAPEX) that is the weighted average between the Bank of Albania long-term treasury rate (~7 percent) and is the average borrowing rate (~2 percent). All of this is incorporated into published tariff methodology and quite normal for a wholly state-owned monopoly such as TSO. 3.4 Justification of Overall Outcome Rating Rating: Satisfactory The Project is considered to be satisfactory in terms of the overall outcome. APL as an instrument has proven to be successful. During the life of the Project, the Government implemented a number of sector and electricity market reforms, though further reforms are necessary to bring Albania s legal framework in compliance with ECSEE obligations. By the time the Project closed, both IDA-financed investments and technical assistance were completed; reliability of power transmission system and capacity of TSO improved, as reflected in the respective monitoring indicators. As discussed above, the PDO remains highly relevant to the current priorities of the Government and the Bank. 13

24 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development N/a (b) Institutional Change/Strengthening During Project implementation, TSO introduced changes to its business practices. They include: improved planning (TSO business plan is being updated annually); improved reporting (regular annual reports, combining financial, corporate and operation information, are published online, although only in Albanian); TSO submits regular tariffs filings to ERE, following the methodology outlined in the Regulator Statement; TSO s financial audits are conducted based on IFRS; capacity of the TSO to manage investment projects has increased. (c) Other Unintended Outcomes and Impacts (positive or negative) N/a 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops N/a 4. Assessment of Risk to Development Outcome Rating: Moderate The risk to the development outcome has been evaluated with respect to a number of criteria as summarized below: ECSEE initiative risks are assessed as moderate. Due to the outdated Power Law, Albania remains one of the ECSEE parties that is further away from compliance with the acquis. Postponing the approval of the new Power Law, which is now in draft with the Government, would hinder Albania s compliance with the ECSEE Treaty requirements further. Power system reliability risks are assessed as moderate. Without transmission system expansion to meet growing local and regional demand and compliance with the ENTSO-E requirements for operational network security, Albanian power system could not be properly integrated into the regional market. TSO capacity risks are assessed as moderate. Transparency and capacity of TSO to operate Albanian electricity market needs further strengthening. Without an efficient, transparent and capable TSO, Albania s effective participation in the regional market could be put at risk. Technical risks are assessed as low and manageable. The technologies introduced are well established; TSO has capacity to insure technical sustainability of rehabilitated substations. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory 14

25 The Bank selected a project that provided much-needed support to the sector and prepared it well. The selection of the APL instrument was appropriate. It allowed addressing reliability and security issues of the Albanian power system using consistent regional approach. Applicable safeguards were identified. The Project was linked to the continued effort to promote regional integration and improve Albanian energy sector performance. However, not all of the risks were properly mitigated at the design stage. Because of the ongoing sector unbundling at the time of appraisal, the Project should have specified conditions and milestones for transfer of responsibility for Project implementation to TSO. (b) Quality of Supervision Rating: Moderately Satisfactory The Bank followed closely Project execution and provided guidance in critical moments. Supervision of the Project was carried out on a regular basis, with numerous formal missions over the Project life, including a detailed mid-term review. The Bank team s recommendations during the mid-term review were instrumental in solving the procurement issues. Critical Project and sector-related issues were addressed via Aide Memoires. After Project implementation responsibility was transferred to TSO, the Bank team developed and agreed with TSO an action plan to improve its FM capacity and strengthen Project systems and controls. However, the team should have recognized the need and restructured the Project at an earlier stage of the implementation process. Also, it would have been of benefit had the team recognized during the time of the second restructuring that a part of the Project financing would not be used; that would have allowed utilizing IDA funds in full. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory Based on moderately satisfactory quality at entry and moderately satisfactory supervision, the overall Bank performance is rated moderately satisfactory. 5.2 Borrower Performance (a) Government Performance Rating: Moderately Satisfactory The Government supported the Project throughout its execution. It introduced a number of important sector and electricity market reforms in compliance with the Athens Treaty requirements. However, more sector and market reforms are needed for Albania to fulfill its obligations under the ECSEE initiative. Most of those are addressed in the current draft for a new Power Law, which has not been adopted yet. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory The financial and procurement functions were performed in a satisfactory manner by the PIU. The PIU provided quality technical management of Project implementation, which allowed them to terminate the implementation support contract. The PIU was prepared for missions and complied with requests for supplementary information. Field trips to observe implementation progress were efficiently organized. Missions received attention 15

26 of the top management. However, both KESH and TSO could have shown more determination in pursuing resolution of problems encountered during procurement stage. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory Based on moderately satisfactory rating of the Government and implementing agency performance, the overall Borrower performance is rated moderately satisfactory. 6. Lessons Learned Development of a functioning electricity market is a complex undertaking which requires coordinated actions from the Government, sector regulator and TSO. Strong commitment from the Government; competent and committed staff in the regulatory agency and transmission utility; consistent donor support with regular progress monitoring against agreed benchmarks, are essential in this process. Capacity building of a TSO is crucial in facilitating effective integration of a subsidiary market into a regional electricity market. TSOs should be able and properly equipped to operate internal electricity markets and monitor compliance of the system with regional market requirements. Choice of the APL instrument could be successful in addressing regional policy, country sector policy and infrastructure issues when physical investments are properly leveraged with appropriate policy actions and supported by complimentary activities. Successful achievement of the ECSEE APL 2-Albania PDO was facilitated by other operations: it benefited from ongoing dialogue as a part of other projects (PSRRP and PSGRP) and the MDG-F-financed fee-for-service activities. All the risks should be properly mitigated at design stage, including sector risks. Proper mitigation of sector risks, such as ongoing unbundling, could prevent unnecessary delays during the project implementation stage. Opportune restructuring of a project should be recognized through continuous tracing of project performance. The Project provided an example of how a simple restructuring made a difference in implementation and contributed to successful achievement of the PDO. The Project would have benefited had the restructuring taken place sooner, when issues of unclear responsibility under the Project had been identified. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies Borrower s comments on the draft ICR were received and were taken into account. (b) Cofinanciers The Bank concurs with EBRD s comments regarding Project delays due to disagreements between KESH, TSO and implementation consultants and unclear division of responsibilities under the Project between KESH and TSO. (c) Other partners and stakeholders N/a 16

27 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Components Actual/Latest Appraisal Estimate Estimate (USD (USD millions) millions) Percentage of Appraisal Investment Component % Technical Assistance Component % Total Baseline Cost % Physical Contingencies Price Contingencies Unallocated Total Project Costs % Front-end fee PPF Front-end fee IBRD Total Financing Required % (b) Financing Source of Funds Type of Cofinancing Appraisal Estimate (USD millions) Actual/Latest Estimate (USD millions) Percentage of Appraisal Borrower % European Bank for Reconstruction Loan and Development % International Development Association (IDA) IDA Credit % Total % 9 At the time of appraisal, EBRD committed Euro 16 million, or US$20 million, to the Project. At the time of the ICR preparation, EBRD s latest cost estimate remained Euro 16 million, or US$20.8 million at current exchange rate. 17

28 Annex 2. Outputs by Component The Project consisted of two components: 1. Investment component: a. Replacement of high-voltage equipment in six transmission substations; b. Installation of control and protection systems in six transmission substations. 2. Technical assistance component: a. Procurement activities and supervision of Project implementation; b. Strengthening of the TSO; c. An electricity tariff study; d. Improving procurement procedures for importing electricity. Table A2.1: Investment Component: Planned and Actually Installed High Voltage Equipment and Control and Protection Systems a. Transformer Bays Substations Funding kv Level Planned Installed Planned Installed Planned Installed Planned Installed Elbasan Fier IDA * 3 3 Tirana Burelli Elbasan 2 EBRD In Fierza 1 process TOTAL * At implementation stage, only 4 transformer bays were needed b. Line Bays Substations Funding kv Level Planned Installed Planned Installed Planned Installed Planned Installed Elbasan Fier IDA Tirana Burelli Elbasan 2 EBRD In Fierza 2 process TOTAL

29 c. Bus Coupler Bays kv Level Substations Funding Planned Installed Planned Installed Planned Installed Planned Installed Elbasan Fier IDA Tirana Burelli Elbasan 2 EBRD 1 1 Fierza TOTAL d. Bus Bar Measuring Bays and Control and Protection Systems Substations Elbasan 1 Funding kv Level Control and Funding Protection Planned Installed Planned Installed Planned Installed Installed by EIB before the Project Fier IDA IDA 1 1 Installed by EIB Tirana before the Project Burelli Elbasan In Fierza EBRD 1 process EBRD 1 In process 1 In process Komani 1 In process Vau Dejes TOTAL Table A2.2: Technical Assistance Component: Planned and Actually Completed Planned Technical Assistance (i) Support of procurement activities; (ii) Supervision of Project implementation TSO strengthening: (i) development of a business plan for TSO; (ii) development of a TSO organization structure; development Actually Completed Technical Assistance (i) Support of procurement activities completed; (ii) Implementation support contract terminated for implementation stage (i) business plan developed; Albanian electricity sector financial model developed (ii) Reports on TSO strengthening were prepared that included: suggested new Status of Recommendations Implementation (i) business plan adopted and being implemented; updated annually using the developed model (ii) TSO partially implemented the recommendations of the reports. 19

30 Planned Technical Assistance of business and managerial processes including procurement, billing and collection; preparation a human resources plan and Book of Ethics; development of a salary scale; creation of a Book of Rules; (iii) help to put in place new financial and accounting systems; creation of an opening balance sheet; (iv) estimation of a transmission tariff based on the approved methodology 3 Electricity tariff study Completed 4 Improving procurement procedures for importing electricity Actually Completed Technical Assistance organizational structure and processes (including new organization design, job descriptions, suggested new organization chart), Book of Ethics, new human resources plan (including selection guidelines, staff plan and performance management guidelines), suggested salary; (iii) new accounting software acquired and installed (iv) financial model developed that follows tariff calculation methodology outlined in the new Regulatory Statement Recommendations to improve procurement procedures for electricity imports were presented to the Government in 2007 Status of Recommendations Implementation Organizational structure, processes and human resources plan were adopted, as advised by the recommendations. The new organizational structure now includes, besides transmission network management and system operation divisions, a market operation division. The new structure now supports HR, Finance and Procurement departments. However, two additional departments were created that were not recommended: Investments and OST Security. Market operation division remains weak. Also, TSO still needs to improve financial separation between the divisions. (iii) TSO s financial audits are conducted based on IFRS; the new accounting software is only used for accounting and consolidation of the Project transactions into financial reports of TSO (iv) developed model is used by TSO for tariff applications to ERE TSO had used the materials from the study to support their tariff applications to ERE in 2007 and 2008, before the new Regulatory Statement was adopted Relevant amendments to the procedures were passed by the Parliament in February, 2008 ECSEE APL: Regional market liberalization Capacity to transmit electricity improved Tabl3 A2.3: Performance indicators Baseline Target Current Negligible 6,000 GWh Regional electricity market is functional Equal or greater than baseline ECSEE treaty is binding. The Power law was amended; as a result, Albania now has 7 eligible customers with annual consumption of 684 GWh in GWh to the distribution network; 684 GWh to HV customers Percent of Target Partially Achieved 116% 20

31 TSO functioning improved based on implementation of recommendations from technical assistance Existing procurement procedures are cumbersome and result in delays and non-compliant bids Increased availability of rehabilitated substations Reduced number of energy outages in the rehabilitated substations Baseline Target Current TSO established with limited operational capability Final recommendations of technical assistance submitted and decisions taken to implement them by appropriate changes in the relevant legislation Final recommendations from technical assistance submitted and decisions have been taken to implement them Consultants prepared a report of procurement in 2007 The final recommendations were submitted. Some of the recommendations are being implemented Government presented to Council of Ministers relevant amendments, which were passed in February, % 98% 98.5% 50 outages/ year 20 outages/ year 20 outages/ year Percent of Target Partially Achieved 100% 100% 100% 21

32 Annex 3. Economic and Financial Analysis The analysis below covers the IDA-financed investment component of the Project. Methodology. The economic analysis seeks to find the Net Present Value (NPV) and the Economic Internal Rate of Return (EIRR) of the three substations rehabilitation investments (in Elbasan 1, Fier and Tirana 1), with the following net costs and benefits: Costs: The investment costs of the IDA-financed investment component were 18 million Euros; expenditure began in Benefits: The benefits include the additional energy served and lower O&M costs because of the Project-financed investments. It is assumed that electricity demand would grow at about 2 percent per year; the new rehabilitated substations would be able to satisfy this growth in full. Without the Project, the availability of substations would be less: they would be able to satisfy only 1.8 percent of the growing demand. This availability of the non-rehabilitated substations would come at increasing costs of O&M. It is assumed that the O&M costs without the Project would grow 3 percent annually to provide appropriate availability of the substations with old equipment. The rehabilitated substations are expected to deliver full benefits in For economic analysis, the additional energy served is valued at the marginal cost of supply, which is the cost of imported electricity: in order to satisfy the demand in full, the distribution company would have to import. Together with saved O&M costs, it represents economic benefits of the Project. The current cost of imports to Albania is 60 Euros/ MWh, or 6 Eurocents/ kwh (8.4 Lek/ kwh). For financial analysis, the additional energy served is valued at current approved transmission tariff, 0.65 Lek/ kwh. Together with saved O&M costs, it represents financial gains to TSO due to the implemented investments. The costs and benefits of the IDA-financed investment component of the Project over a 25-year period in economic and financial terms are shown in Tables A3.1 and A3.2. Economic internal rate of return (EIRR): Under the assumptions above, the EIRR of the IDA-financed investment component is 40% and the NPV at 10% discount rate is 46.7 million Euros (or 6.5 billion Lek). Financial internal rate of return (FIRR): Under the assumptions above, the FIRR of the IDA-financed investment component is 3% and the NPV at 10% discount rate is -6.2 million Euros (or -0.8 billion Lek). The financial internal rate of return (FIRR) of the implemented investments is 3 percent and the NPV at 10 percent discount rate is -6.2 million Euros (or -0.8 billion Lek). The reason for low FIRR and negative NPV is by design and consistent with the current regulatory regime. The Government wishes to keep the retail tariffs as low as possible and does not necessarily require market related returns on its equity; it prefers to finance transmission assets through borrowings. Accordingly, the transmission tariff is based on a return on its asset base (effectively project CAPEX) that is the weighted average between the Bank of Albania long-term treasury rate of about 7%, and is the average borrowing rate of about 2%. All of this is included into to published tariff methodology and quite normal for a wholly owned state run monopoly such as TSO. 22

33 Cost Benefits a. Net O&M costs O&M costs, w/ the Project Table A3.1: Economic Cash Flow, Rehabilitation of Elbasan 1, Fier and Tirana 1 Substations Elbasan 1 ( ) ,214 2,895,212 1,376, , Fier ( ) ,376 4,465,745 1,348,502 1,154, Tirana 1 ( ) ,265 2,264,298 1,301, , Total investment costs ( ) 1,742,855 9,625,254 4,027,110 2,532,293 TOTAL COSTS (klek) * ,127 1,326, , , Elbasan 1( klek) 2,412 2,412 2,412 2,092 8,634 11,038 11,060 11,082 11,104 11,104 11,104 11,104 11,104 11,104 Fier( klek) 2,622 2,622 2,622 2,256 6,131 2,911 2,917 2,923 2,929 2,929 2,929 2,929 2,929 2,929 Tirana 1( klek) 3,417 3,417 3,417 1, O&M costs, w/o the Project Elbasan 1( klek) 2,412 2,412 2,412 2,092 8,634 8,893 9,160 9,435 9,718 10,009 10,310 15,594 16,062 16,544 Fier( klek) 2,622 2,622 2,622 2,256 6,131 6,315 6,504 6,700 6,901 7,108 7,321 11,073 11,406 11,748 Tirana 1( klek) 3,417 3,417 3,417 1, Net O&M costs (klek) ,329-1,774-2,234-2,738-3,256-12,382-13,190-14,023 b. Net Energy Served Total energy delivered to distribution (GWh) 5,617 5,186 5,758 6,061 6,059 6,276 6,415 6,556 6,700 6,847 6,998 9,490 9,699 9,913 Energy served w/ the Project Elbasan 1(GWh) Fier(GWh) ,020 1,020 1,057 1,078 1,099 1,121 1,144 1,167 1,539 1,570 1,602 Tirana 1(GWh) 2,746 2,535 2,815 2,962 2,962 3,068 3,129 3,192 3,256 3,321 3,387 4,470 4,559 4,650 Energy served w/o the Project Elbasan 1(GWh) Fier(GWh) ,020 1,020 1,038 1,057 1,076 1,096 1,115 1,135 1,457 1,484 1,510 Tirana 1(GWh) 2,746 2,535 2,815 2,962 2,962 3,015 3,070 3,125 3,181 3,238 3,297 4,232 4,308 4,386 Net energy served (GWh) Net energy served (klek) , , , ,087 1,027,781 1,128,852 3,725,785 4,059,496 4,403,770 TOTAL ECONOMIC BENEFITS (klek) , , , ,321 1,030,518 1,132,108 3,738,167 4,072,687 4,417,792 NET CASH FLOW (klek) ,127-1,326,071 92, , , ,321 1,030,518 1,132,108 3,738,167 4,072,687 4,417,792 NET CASH FLOW ( ) * ,742,855-9,625, ,305 2,781,943 5,967,326 6,643,304 7,343,013 8,066,895 26,636,507 29,020,141 31,479,209 IRR 40% NPV@10% (klek) 6,542,441 NPV@10% ( ) 46,438,658 * Exchange rate for 1: 123 Lek in 2006, 124 Lek in 2007, 123 Lek in 2008, 132 Lek in 2009, 138 Lek in 2010 and 140 Lek hereafter. 23

34 Table A3.1: Financial Cash Flow, Rehabilitation of Elbasan 1, Fier and Tirana 1 Substations Cost Elbasan 1 ( ) ,214 2,895,212 1,376, , Fier ( ) ,376 4,465,745 1,348,502 1,154, Tirana 1 ( ) ,265 2,264,298 1,301, , Total investment costs ( ) 1,742,855 9,625,254 4,027,110 2,532,293 TOTAL COSTS (klek) * ,127 1,326, , , Benefits a. Net O&M costs O&M costs, w/ the Project Elbasan 1( klek) 2,412 2,412 2,412 2,092 8,634 11,038 11,060 11,082 11,104 11,104 11,104 11,104 11,104 11,104 Fier( klek) 2,622 2,622 2,622 2,256 6,131 2,911 2,917 2,923 2,929 2,929 2,929 2,929 2,929 2,929 Tirana 1( klek) 3,417 3,417 3,417 1, O&M costs, w/o the Project Elbasan 1( klek) 2,412 2,412 2,412 2,092 8,634 8,893 9,160 9,435 9,718 10,009 10,310 15,594 16,062 16,544 Fier( klek) 2,622 2,622 2,622 2,256 6,131 6,315 6,504 6,700 6,901 7,108 7,321 11,073 11,406 11,748 Tirana 1( klek) 3,417 3,417 3,417 1, Net O&M costs (klek) ,329-1,774-2,234-2,738-3,256-12,382-13,190-14,023 b. Net Energy Served Total energy delivered to distribution 5,617 5,186 5,758 6,061 6,059 6,276 6,415 6,556 6,700 6,847 6,998 9,490 9,699 9,913 Energy served w/ the Project ( h) Elbasan 1(GWh) Fier(GWh) ,020 1,020 1,057 1,078 1,099 1,121 1,144 1,167 1,539 1,570 1,602 Tirana 1(GWh) 2,746 2,535 2,815 2,962 2,962 3,068 3,129 3,192 3,256 3,321 3,387 4,470 4,559 4,650 Energy served w/o the Project Elbasan 1(GWh) Fier(GWh) ,020 1,020 1,038 1,057 1,076 1,096 1,115 1,135 1,457 1,484 1,510 Tirana 1(GWh) 2,746 2,535 2,815 2,962 2,962 3,015 3,070 3,125 3,181 3,238 3,297 4,232 4,308 4,386 Net energy served (GWh) Net energy served (klek) ,791 57,608 64,666 71,971 79,531 87, , , ,768 TOTAL FINANCIAL BENEFITS (klek) ,688 58,937 66,440 74,205 82,268 90, , , ,790 NET CASH FLOW (klek) ,127-1,326, , ,445 66,440 74,205 82,268 90, , , ,790 NET CASH FLOW ( ) * ,742,855-9,625,254-3,658,806-2,112, , , , ,630 2,142,563 2,332,322 2,528,078 IRR 3% NPV@10% (klek) -837,932 NPV@10% ( ) -6,150,583 * Exchange rate for 1: 123 Lek in 2006, 124 Lek in 2007, 123 Lek in 2008, 132 Lek in 2009, 138 Lek in 2010 and 140 Lek hereafter. 24

35 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Lending Iftikhar Khalil Project Team Leader/Engineer ECSIE Kirsten Propst Counsel LEGEC Artan Guxho Operations Officer ECSIE Edward Daoud Senior Finance Officer LOAG1 Richard Hamilton Consultant Energy Economist ECSIE Kishore Nadkarni Financial Analyst ECSIE Olav Rex Christensen Sr. Financial Mgnt Specialist ECSPS Bernard Baratz Consultant ECSSD Angelica Fernandes Procurement Analyst ECSIE Yolanda Gedse Program Assistant ECSIE Supervision/ICR Bernard Baratz Consultant EASCS Olav Rex Christensen Senior Public Finance Speciali HDNED Gazmend Daci Energy Specialist ECSEG Angelica A. Fernandes Consultant ECSO2 Yolanda Litan Gedse Program Assistant ECSSD Elona Gjika Financial Management Specialis ECSOQ Artan Guxho Senior Infrastructure Speciali ECSS5 Richard E. Hamilton Consultant CEUIF Charles A. Husband Consultant ECSEG Ida N. Muhoho Sr Financial Mgnt. Specialist ECSO3 Kishore Nadkarni Consultant ECSEG Margaret Png Lead Counsel LEGEM Edon Vrenezi Operations Officer LCSDE Salvador Rivera Lead Energy Specialist ECSEG Yadviga Semikolenova Energy Economist ECSEG Responsibility/ Specialty 25

36 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY FY Total: Supervision/ICR FY FY FY FY FY FY FY FY FY13 Total:

37 Annex 5. Beneficiary Survey Results N/a 27

38 Annex 6. Stakeholder Workshop Report and Results N/a 28

39 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 7A. Summary of Borrower's ICR The full text of the Borrower s completion report is attached to the Project files. Below is the summary of the Borrower s assessment of the outcomes and lessons learned. Bulevardi. Gjergj Fishta Tirane, Shqipëri Tel Fax info@ost.al Document for The World Bank Report IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA ALB) ON A CREDIT IN THE AMOUNT OF SDR 17.7 MILLION (US$ 27 MILLION EQUIVALENT) TO ALBANIA FOR ENERGY COMMUNITY OF SOUTH EAST EUROPE (ECSEE) - APL2 November,

40 IMPLEMENTATION OF THE PROJECT 3.1 PART A- replacement of high voltage equipment, and control and protection systems in the substations; PART A-1:"The reconstruction of 220/110/35 kv substations Tirana 1, Fier and Elbasan-1" The contract consists in: - The replacement of old and depreciated primary equipment in three substations. - Transfer of 35kV system from the external to internal. - Creation of appropriate premises/work environments for safe operation and needed space for maneuver by building substations fences, earth and illumination networks, internal roads and refurbishment (whitewashing) of metallic constructions and existing portals. - Building new regional dispatching center at Fier substation, the renewal of monitoring control and protection relay system, as well as the renewal of existing concrete armed structures with new galvanized metallic structure. Scope of Supply 220/110/35 kv Fier Substation New control, protection and measuring system for all 220 kv bays, except otherwise specified elsewhere. New control protection and measuring system for all 110kV bays, except otherwise specified elsewhere. New distribution in metal-clad switchboard, control, protection and measuring system for all 35 kv feeders, Computerized substation control and automation system, All auxiliaries Services supplies, All Civil works (such as main control room, MV switchboards room, LV and DC switchboards room, battery room, Telecom room, cable rooms, cable trenches etc.) Civil works for installation of new marshalling kiosks (1 kiosk per bay) outside in the switchyard, cable ducts/trenches outside the building, between marshalling kiosks and cable entrance to the building, Installation of the control, protection and metering cubicles in main control room, New cabling to connect the new control & protection relay system as well as necessary interfaces to the existing Power Plant. Control concept for Fier. The levels of control shall be as follows: Substation control (all three voltage levels) from the operator s desk in main control room by means of HMI (Human Machine Interface) and computerized substation automation system. Bay control from respective control panels for the 220/110 kv feeders which shall be located in the substation control room, 30

41 Direct control (mechanical of electrical) of the 220/110 kv switching devices (circuit breaker, disconnect switches, earthing switches) at the primary equipment outside in the switchyard. Direct control from the LV compartment of the metal-clad switchgear 35 kv. The bay control units, the substation control unit and the numerical protection relays shall be interlinked with fiber-optics. 220/110/335/kV Tirana 1 and Elbasan 1 Substations New distribution in metal-clad switchboard, control, protection and measuring system for all 35 kv feeders Integration and interface of the new equipment in the existing Computerized substation control and automation system, All supplementary auxiliaries Services supplies, All Civil works ( such as MV switchboard room, LV and DC switchboard room, cable room, cable trenches etc.) to provide shelter for the 35 kv metal clad switchgear, Civil work for installation of new marshalling kiosk ( 1 kiosk per bay ) outside in the switchyard, cable ducts/trenches outside the control building,between marshalling kiosk and cable entrance to the control building as well as the 35 kv building, Installation of the control,protection and metering cubicles in the existing main control room, New cabling to connect the new control & protection relay system as well as necessary interfaces to the existing control, protection and monitoring system. Control concept for Tirana1 and Elbasan1. The control, measure, protection, and metering for Tirana1, and Elbasa1, are existing. The levels of control shall be as follows: Substation control (all three voltage levels) from the operator s desk in main control room by means of HMI (Human Machine Interface) and computerized substation automation system, Bay control from the respective control panels for the 220/110 kv feeders which shall be located in the substation control room, Direct control (mechanical or electrical) of the 220/ 110 kv switching devices( circuit breaker,disconnect switches, earthing switches) at the primary equipment outside in the switchyard, Direct control from LV compartment of the switchgear 35 kv, which shall be located in a separate building. The bay control units, the substation control unit and the numeric al protection relays shall be interlinked with fiber-optics. Issues: The procurement was carried out consistent with Bank Guidelines and in accordance with the methods and thresholds specified in the Development Credit Agreement (DCA), but it resulted with long delays due to protracted procurement disputes on the key Supply and Install contract for the investment component-rehabilitation of substations in extremely poor conditions. 31

42 The contract was finally signed with KESH in May 2009, however, the transfer of the contract to ATSO (the implementing agency after the unbundling) did not take place at that time due to: (i) the unbundling and privatization process which slowed down the needed due diligence of implementation and financial management capacity of ATSO; (ii) in the absence of this due diligence and transfer of contractual responsibilities to ATSO, ATSO could not mobilize or open the L/C with the contractor; and (iii) delays during the process of unbundling and privatization in the transfer of assets and liabilities among KESH, ATSO and Distribution System Operator, OSSH. Therefore, the project team conducted a due diligence of ATSO and, subsequently, reviewed and agreed to the reassignment of contractual responsibilities from KESH to ATSO in February With these actions taken, ATSO has managed to open the L/C (which is the instrument of payment of the contract), has updated the implementation schedule and mobilized the contractor, which has in turn led to progress in implementation and an increase in disbursement from of the Credit amount. Works recognized intensive performance/development from October 2010 to May With the termination of the works, we are satisfied to see that the three substations are new not only from technical but also from environmental point of view. To complete this project were needed more than 60 overnight shifts (taking additional measures) and over 250 outages of line tracks (bays), minimally one month, each. This was also dedicated to the fact that end-users (customers) were not left for a long time without power supply at any case. Safeguard Policies This project is utterly reconstruction, meaning that its implementation would be conducted at the presence of 220, 110 kv, 35 kv and 0.4 kv voltages without outage or cutting the supply to consumers. Because of that, since at its (project) outset, strict measures were taken for the application of rules for technical safety at work by appointing responsible persons (charged with the task) both from ATSO and the Contractor. Also special attention was dedicated to waste posts (this was done in cooperation with local authorities) observing applicable laws and WB requirements in effect, as respective measures were taken for the rehabilitation of facilities attacked. Environmental risk No environmental risk is seen as the whole project is developed under the strict supervision and monitoring control of ATSO experts who have not allowed violation of effective legislation and WB requirements in effect. 3.2 PART B: Technical Assistance Procurement activities and supervision of project implementation; The contract was signed on January 24, The objectives of the contract were as following: - To guarantee the perfect bid organization and optimal evaluation according relative standards - To negotiate and manage in the ATSO profitable way for the client the contracts - To conduct supervision of the works to assist project implementation guaranteeing the highest quality the lowest ATSO and shortest construction period 32

43 - Provision of training to PMU and ATSO. On April 21, 2009, the contract was amended because in order to reflect the changes that were made to first proposal, were all the lots I, II, III contractor s bid were scheduled to be floated at the same time, July 2006 and the evaluation of the bids would not exceed four weeks for all contract negotiations. Also the consultant claimed, that they provided additional services that were not included in the initial proposal, such as additional site visits of the substations of Lot I, followed be several meetings in KESH s offices to decide the work to be included in the Bid Documents for the contractors, as well as for more than 45 days for this bids evaluation. Despite the efforts put by ATSO and also KESH to get the best service from the consultant, the consortium didn t provide the service required by them. During the supervision, it was founded out that the designs and also the predictions were in many cases incorrect. Also the consultant was not present during the implementation of the contract; therefore, from ATSO there was a full commitment in order to supervise and to assure a successful project implementation Strengthening of the ATSO The contract was signed on January The technical assistance to strengthen ATSO will be financed from the IDA Credit for Energy Community of South East Europe APL2-Albania Project. The objective of this technical assistance was to strengthen the ATSO to enable the company to carry out its full responsibilities in accordance with the ongoing power sector reform program, the Transitional Market Model and Albania s commitments as a member of the Energy Community of South East Europe. Detailed Tasks (i) Assist the ATSO to identify and determine the value of assets based on the asset revaluation study prepared for KESH by Deloitte and American Appraisal; (ii) Assist in documentation and allocation of liabilities; (iii) Assist the ATSO to prepare a capital structure and pro-form financial statements (balance sheet, income statement and flow and funds statement) based on the revalued assets; (iv) Estimate a transmission tariff based on the methodology approved by ERE; (v) Propose an organization structure for the ATSO; (vi) Prepare a human resources plan; (vii) Prepare a Book of the Ethics; (viii) Propose a salary scale; (ix) Create a Book of Rules; (x) Help put in place new financial and accounting systems; (xi) Develop business processes including procurement, billing and collection; (xii) Provide assistance and training to the ATSO personnel in implementation of the business plan for the ATSO based on the recommendations contained in the reports of the above tasks and accepted by the KESH and ATSO. 4. PERFORMANCE INDICATORS AND PROJECT OUTCOMES The APL2 - Albania Project is completed. All the substations of transmission system are renovated with a new control and monitoring system. The objective of the project to extend the lifetime and improve the quality, reliability, safety and efficiency of the bulk 33

44 power transmission system by replacing ageing existing facilities with new ones, is fully achieved. The Albania Power Transmission operates now with greater reliability. The forced outages of the lines and autotransformers due to defects of the bays equipment (circuit breaker, disconnector, current transformer, voltage transformer, surge arrester, and protection equipment) are reduced significantly. In the table below are given statistic data for the forced outages of the lines and autotransformers of the transmission system, caused from the damages of bays equipment, for the years 2008, 2009, Outages due to bays equipment defects in years 2008,2009 and kv Lines annual average Name of the line Outage time Outage time Outage Time Outage time No. h No. h No. h No. h Line L V.Dejes-Koman Line L V.Dejes-Tirana Line L V.Dejes-Koplik Line L Tirana1-Elbasan Line L Elbasan1-Fier Line L.220-8/1 Elbasan1-Elbasan Line L.220-8/2 Elbasan1-Elbasan Line L.220-9/1 Fierze-Burrel Line L.220-9/2 Burrel-Elbasan Line L /1 Fierze-Titan Line L Fierze - Koman Line L Fierze-Prizren Line L /1 Koman-Kolacem-Tir Line L /1 Tir1-Tir2 (Rrashbull) Line L Fier-Babice TOTAL Autotransformers annual average Name of the Autotransformer Outage time Outage time Outage Time Outage time No. h No. h No. h No. h AT2 ne N/St. V.Deja AT2 - N/St. Tirana AT1 - N/St. Fier AT2 - N/St. Fier

45 TOTALE kv Lines annual average Name of the line Outage time Outage time Outage Time Outage time No. h No. h No. h No. h Line L V.Dejes-Shkoder Line L110-20/2 Burrel-Bulqize Line L Fierze-F.Arrez Line L Fierze-B.Curri Line L110-2/2 Tirana1-Kashar Line L110-2/3 Tirana1-Kashar Line L110-22/1 Tirane-F.Kruje Line L110-22/2 Tirana1-Traktora Line L110-16/ Elbasan1-Fiber Line L110-16/1 Elbasan1-Kombinat Line L Elbasan-Cerrik Line L110-4/3 Elbasan-Ibe Line L Fier-Vlore Line L110-10/1 Fier-Ballsh Line L110-21/2 Fier-Lushnje Line L Fier-Selenice TOTAL As it is presented in the table the average numbers of outages and the time have been: For the 400 and 220 kv Lines average 17 outages with total duration of time hours. For the Autotransformer average 4 outages with total duration of time 3.72 hours. For the 100 kv Lines average 16.3 outages with total duration of time hours. According to the statistic figures for 2012(until November 15, 2012), it results that the line and autotransformer outages of the transmission system, which are caused from the damages in the substations (bays and busbar), have been reduced significantly in number, and which is the most important, also in time duration. These data are introduced in the table below: 35

46 Outages in 2012 (until 15 November) due to bays equipment defects KV Lines Outages time Name of the line No. h Line L V.Dejes-Koplik Line L Elbasan1-Fier Line L.220-9/1 Fierze-Burrel Line L /2 Titan-Tirana Line L Fierze-Prizren Line L /1 Koman-Tirana Total kv Lines Autotransformer Outages time Name of the autotransformer No. h AT1+AT2 S/s. Fierze AT1 - S/s. Tirana AT3 - S/s. Fier 1 1 Total Autotransformer Line 110 kv Outages time Name of the line No. h Line L110-8 V.Dejes-Bushat Line L110-20/1 Ulez-Burrel 3 3 Line L110-20/2 Burrel-Bulqize Line L Fierze-F.Arrez Line L110-2/2-1 Tirana1-Kashar Line L110-2/3-1 Tirane-Kashar Line L110-9/1 Fier-Kucove Total 110 kv Lines As result of these reductions, the project itself, has given its effect on the reduction of the un-served electricity. The Technical Assistance in Strengthening of Albanian Transmission System Operator, have been very important for ATSO, particularly the assistance and training to the ATSO personnel in implementation of the business plan, estimation a transmission tariff based on the methodology approved by ERE, and the new organization structure and establishment of the Market Operator Directory. 36

47 The progress report on Albanian market reforms and their monitoring prepared by a consultant makes an evaluation of Albanian power sector, its current condition and gives respective recommendations on the prospect development with the intention to meet development priorities of this sector established in the Market Model. The viewpoint and consequently, the analysis and recommendations given in this report include all aspects and institutions that make up the Albanian market of electricity which monitor and regulate this market in order to fit the objectives and targets set in front of this sector. The Market Operator, as operating entity to meet ATSO functions and liabilities considers the analysis and the recommendations given in this report on the allocation of interconnection capacities and the implementation of a balancing market and the publication of market information as necessary. The Albanian market of electricity from January, this year recognized the reset of conditions to get the status of eligible client and because of that we have noticed an extension of active market participants in the market of power supply provided to these customers, thus an extension of electricity market transactions. As result of the above developments, there is an increasing number of electricity consumers which are free to choose their electricity supplier, and also now Albania operates in the regional power market in accordance with the ECSEE Treaty. 5. THE WORLD BANK PERFORMANCE WB has been periodically present with own experts inspecting the project by all indicators and making aware its own opinion on the project performance. Cooperation with the WB has been very fruitful and correct. WB has given it support and commitment, during all the phases and issues of the project, but we especially emphasize that WB and its specialist, have shown a great interest and support on the environment issues. We must also mention the very important assistance provided by World Bank referring to the terms of the facility management of the substations during the project implementation process, in order to help ATSO meeting the standards of environmental requirements. Furthermore, this assistance has served ATSO for the development of the Environmental Management System Manual of ATSO, and control of environmental management, which previously has not been performed by the ATSO. In May 2012, the three reconstructed substations were set into operation within the objectives of the project and without any serious technical problem. This shows the fruitful and excellent cooperation between ATSO and WB. 6. CONCLUSIONS The APL2 - Albania Project has fully contributed to the development of Albanian and regional market. All the substations of transmission system are rehabilitated with a new control and monitoring system and all the ageing existing primary equipment are replaced, extending the lifetime and improving the quality, reliability, safety and efficiency of the bulk power transmission system. Furthermore the new systems local control of the substations serve to the successful implementation of the project to a new system of control SCADA / EMS that is in the process of implementation. 37

48 Assistance provided through the project (Strengthening of ATSO) has served not only to a better organization of the structures of ATSO, but has been like a school for development of the business plan, evaluation of assets, the calculation of transmission tariff, etc. Regarding the assistance provided for the implementation of the project, we have to mention that it has been noted that in the stage of preparation of tender documents it has been a weak assistance and also it was completely absent during the implementation phase. Despite the problems that caused the lack of a consultant during the implementation phase, there was a great effort by the specialists of ATSO as well as by the experts of WB for this project, in order to assure a successful implementation of the project. As result of the above developments, now Albania operates in the regional power market in accordance with the ECSEE Treaty. Below, we present the pictures of the substations, which present their situation before the implementation of the project and after the implementation (the completed works). Tirana1 Substation BEFORE (RECONSTRUCTION) AFTER (RECONSTRUCTION) 38

49 Fier Substation BEFORE (RECONSTRUCTION) AFTER (RECONSTRUCTION) Elbasan1 Substation Before Reconstruction After Reconstruction 39