Sixteenth Power (Masinloc Thermal Power) Project (Loan 1042-PHI)

7/31/2019 Sixteenth Power (Masinloc Thermal Power) Project (Loan 1042-PHI)

1/51

ASIAN DEVELOPMENT BANK PPA: PHI 24212

PROJECT PERFORMANCE AUDIT REPORT

ON THE

SIXTEENTH POWER (MASINLOC THERMAL POWER) PROJECT(Loan 1042-PHI)

IN THE PHILIPPINES


2/51

CURRENCY EQUIVALENTSCurrency Unit Peso (P)

At Appraisal(as of October 1990)

At Project Completion(as of January 1999)

At Operations Evaluation(as of May 2002)

P1.00 = $0.0388 = $0.0250 = $0.0202$1.00 = P25.78 = P40.00 = P49.47

ABBREVIATIONS

ADB Asian Development BankCEMS continuous emissions monitoring systemDENR Department of Environment and Natural ResourcesECC environmental compliance certificateEIRR economic internal rate of returnESP electrostatic precipitatorEIS environmental impact studyFBC fluidized bed combustion

FIRR financial internal rate of returnIPP independent power producerLGU local government unitMCDO Municipal Cooperative Development OfficeMTPP Masinloc Thermal Power PlantNGO nongovernment organizationNOx nitrogen oxideNPC National Power CorporationOEM Operations Evaluation MissionO&M operation and maintenancePAF project-affected familyPCR project completion reportPMO project management officePPA power purchasing agreementPPAR project performance audit reportSED Social Engineering DepartmentSO2 sulfur dioxide

TA technical assistanceUF under frequencyWTP willingness-to-pay

NOTES

(i) The fiscal year (FY) of the Government ends on 31 December


3/51

WEIGHTS AND MEASURE

GWh (gigawatt-hour) 1,000,000 kWhHz (hertz) unit of frequency equal to per secondkm (kilometer) 1,000 meterskV (kilovolt) 1,000 voltskWh (kilowatt-hour) 1,000 watt-hoursm (meter) unit of length (metric)MVA (megavolt-ampere) 1,000,000 volt-amperesMW (megawatt) 1,000,000 wattsMWh (megawatt-hour) 1,000 kWh


4/51

CONTENTS

Page

BASIC DATA iiiEXECUTIVE SUMMARY ivMAP vii

I. BACKGROUND 1A. Rationale 1

B. Formulation 1C. Purpose and Outputs 2D. Cost, Financing, and Executing Arrangements 2E. Completion and Self-Evaluation 3F. Operations Evaluation 3

II. PLANNING AND IMPLEMENTATION PERFORMANCE 4A. Formulation and Design 4

B. Achievement of Outputs 5C. Cost and Scheduling 6D. Procurement and Construction 7E. Organization and Management 8

III. ACHIEVEMENT OF PROJECT PURPOSE 8A. Operational Performance 8B. Performance of the Operating Entity 9C. Financial and Economic Reevaluation 10

D. Sustainability 11

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS 11A. Socioeconomic Impact 11B. Environmental Impact 12C. Impacts on Institution and Policy 13

V. OVERALL ASSESSMENT 14

A. Relevance 14B. Efficacy 14C. Efficiency 14D. Sustainability 14E. Institutional Development and Other Impacts 15F. Overall Project Rating 15G Assessment of Asian Development Bank and Borrower Performance 15


5/51

ii

APPENDIXES

1. Project Cost and Financing Plan 192. Project Schedule 203. Generation Output Data for Masinloc Thermal Power Plant 214. Unit Outage/Availability for Masinloc Thermal Power Plant 235. Compliance with Major Loan Covenants 246. Reevaluation of Financial and Economic 25

Internal Rates of Return7. Resettlement and Social Impact Evaluation 318. Environmental Monitoring Results 39

9. Organization Chart: National Power Corporation 41


6/51

BASIC DATA

PROJECT PREPARATION/INSTITUTION BUILDING

TA No. Name Type Person-Months

Amount($)

ApprovalDate

1405 Environmental Management of Coal-Based Power Generation

ADTA 50 636,000 30 Oct 1990

KEY PROJECT DATA ($ million)As per ADB Loan

DocumentsActual

Total Project Cost 441.0 429.3Foreign Exchange Cost 350.0 393.5ADB Loan Amount/Utilization 200.0 196.8ADB Loan Amount/Cancellation 3.2Amount of Cofinancing 150.0 149.0

KEY DATES Expected ActualFact-Finding 1223 Mar 1990

Appraisal 30 May15 Jun 1990Loan Negotiations 18 Jul 1990 2526 Sep 1990Board Approval 15 Aug 1990 30 Oct 1990Loan Agreement 19 Apr 1991Loan Effectiveness 18 Jul 1991 23 Dec 1994First Disbursement 28 Dec 1994Project Completion 1 Oct 1994 18 Jun 1998Loan Closing 30 Jun 1995 7 Jan 1999Months (effectiveness to completion) 38 42

ECONOMIC AND FINANCIAL RATES OF RETURN (%) Appraisal PCR PPAREconomic Internal Rate of Return 14.5 28.8 29.7Financial Internal Rate of Return 14.9 17.2 21.4

BORROWER National Power Corporation

GUARANTOR Republic of the Philippines

EXECUTING AGENCY National Power Corporation

MISSION DATA No. of Missions No. of Person-DaysFact-Finding 1 58Appraisal 1 107Project Administration

Review 6 57Project Completion 1 6


7/51

EXECUTIVE SUMMARY

In 1987, the resumption of economic growth in the Philippines caused power shortagesin the main grids. In Luzon, such shortages reached severe levels in 1989 and the first half of1990. The Asian Development Bank's (ADB) operational strategy in the power sector in thePhilippines in the late 1980s focused on augmenting of power-generating capacity (includingrestoring the capacity of existing power stations) to meet the growing demand for power foreconomic development and to facilitate poverty reduction.

The Project aimed to increase the base-load generating capacity of the Luzon grid tomeet efficiently and economically the projected capacity and energy requirements, and to assist

the Government in its efforts to diversify the countrys energy sources and reduce oildependency. The Project was to cover Stage I of the Masinloc Thermal Power Scheme, andwas to include the boiler and turbo-generator for the first 300-megawatt unit and associated coaland ash handling equipment, harbor facilities for unloading seaborne coal, cooling water andfresh water systems, powerhouse, and stack common to both the first and second units (thesecond unit with identical design was financed under a separate ADB loan). The Project wasdesigned to use imported high-quality bituminous coal. A technical assistance grant wasattached to the Project to help improve capacity of the National Power Corporation (NPC), the

Executing Agency, in environmental monitoring and management.

On 30 October 1990, the ADB Board approved a loan of $200.0 million for the Project.The total project cost was estimated at $441.0 million equivalent, including $350.0 millionforeign exchange and $91.0 million local currency equivalent. The foreign exchange cost was tobe jointly financed by ADB ($200.0 million), Export-Import Bank of Japan ($120.0 million), andNPC ($30.0 million); while the local currency cost was to be financed by NPC ($61.0 millionequivalent) and Export-Import Bank of Japan ($30.0 million equivalent). Due to a series ofunforeseen events related to land acquisition, resettlement, and obtaining the environmental

compliance certificate (ECC), the ADB loan did not become effective until 23 December 1994.

The Operations Evaluation Mission (OEM), which held discussions in Manila and visitedMasinloc Thermal Power Plant (MTPP) during 2031 May 2002, confirmed that all projectcomponents were implemented as envisaged at appraisal. Although not a direct part of theProject, the originally planned 230-kilovolt transmission lines from MTPP to the Hermosasubstation in Bataan was rerouted to the Labrador substation in Pangasinan because of theeruption of Mt. Pinatubo in 1991. Despite the initial delay of about 3.5 years due to

environmental and social concerns, the execution of the Project under a turnkey contract wasefficient and within the budget and revised time schedule. Considering the initial delay, it is likelythat compared with multicontract packaging, the turnkey approach resulted in cost savings andreduced the construction period, perhaps by as much as a year. Generally, the OEM foundMTPPs design and equipment to be least-cost, in conformance with the environmentalstandards, and of high quality. The total project cost amounted to $429.3 million equivalent, 3%below the appraisal estimate However there was a cost overrun on foreign exchange costs


8/51

v

base load in the Luzon grid. During the initial operating period, their output suffered fromtransmission constraints and equipment outages. However, in 2001 and the first four months of

2002, the plant factor has exceeded 70% and availability 80% for both units, despite thegeneration capacity surplus in Luzon due to a large number of independent power producers(IPPs). This was attributable to MTPPs relatively low generation costs and the fact that, fromthe viewpoint of system stability, there are some problems in using the large 600 megawatt unitsat the IPP plant in Sual for meeting base load in the relatively small grid in Luzon. Overall,MTPP has been providing stable and economical power supply for Luzon, and has helpedimprove conditions for economic development and investments amid the current public debateon the role of IPPs in power supply in the Philippines.

Coal-fired power generation projects generally have major environmental impacts in theform of air emissions, discharge of cooling water and wastewater, and ash handling. Environmentprotection has been well incorporated in the design of the Project, including the exclusive use oflow-sulfur coal for control of sulfur dioxide emissions, combustion at minimal excess air to limitnitrogen oxides emissions, a stack height of 150 meters, electrostatic precipitators removingparticulate matter with an efficiency of 99.5%, limitations on the cooling water dischargetemperature, emission monitoring, reforestation, and various measures in coal handling to limitdust dispersion. The design conforms to the ECC granted by the Department of Environment and

Natural Resources (DENR). The ECC, several memorandums of agreement signed betweenNPC, the local government unit and DENR, and ADB loan covenants also require MTPPoperators to implement various forms of emission control and monitoring. The OEM confirmedthat NPC had established an environmental analysis laboratory and maintained a competent full-time environmental personnel. These personnel perform monitoring, maintain records of such,analyze samples, and interface with a multipartite committee consisting of NPC, the localgovernment unit, the Department of Energy, DENR, and nongovernment organizationrepresentatives who perform joint quarterly sampling exercises with MTPP. The monitoring resultsindicate that the environmental emissions and discharges are well within DENR standards.

The Project has had moderate socioeconomic impacts. During its implementation, NPCdeveloped and implemented a resettlement program for 198 project-affected families (PAFs)living at the project site, in collaboration with the municipality of Masinloc. The resettlementprogram consisted of three compensation options and two livelihood programs. In-depthinterviews carried out with 51 PAFs indicate that the resettlement program has largely achievedits main objective to relocate the PAFs within the boundaries of the project site after they hadbeen compensated. Although on the whole the resettlement program was fair and socially and

economically acceptable to PAFs, there are some problems and unresolved issues, including lackof drinking water on the resettlement sites, limited job opportunities and reduced income forsome PAFs, delayed transfer of land ownership to the PAFs, and disputes over compensationamounts. On the other hand, the Project has contributed significantly to the betterment ofconditions for economic development by providing reliable and economical power, which meetsthe demand not only of industrial and commercial customers in Metro Manila, but also anincreasing number of newly connected rural households in northern Luzon Over the years


9/51

vi

Despite the initial delay of about 3.5 years, the execution of the Project under a single turnkeycontract was efficient, and was within the budget and the revised time schedule. With the high

financial and economic internal rates of return of 21.4% and 29.7%, respectively(notwithstanding the major delay), the Project is efficient. MTPPs maintenance is generallysatisfactory. The Project has had moderate impacts on institutional development andenvironment, and is likely to be sustainable. Overall, the Project is rated successful.

Several key issues affect the performance of the Project and/or the sector in general,including the tedious procedures for procuring spare parts at NPC, its future privatization, and thecurrent debate over the role of IPPs. How these issues are resolved will have a significant impacton the Projects long-term operational performance and sustainability. The key lessons derived

from the Project include (i) avoiding front-end delays by gaining public acceptance, acquiringnecessary land and rights-of-way, and preparing a comprehensive resettlement program beforeloan approval; and (ii) using the turnkey approach to ensure smooth implementation of this type ofprojects.

A series of follow-up actions are recommended. ADB should continue to provideassistance in the power sector in the Philippines, particularly for sector restructuring anddevelopment of a competitive electricity market. Without further delay, the Government should

bring on track the much-anticipated privatization of NPC. It is also important that theGovernment approve a much-needed policy for involuntary resettlement. Several issues relatedto environmental monitoring and management, equipment operation, and timely procurement ofcoal and spare parts may potentially affect the long-term sustainability and performance ofMTPP. These issues should be handled with urgency and in a forward-looking manner. Inaddition, several outstanding issues regarding resettlement require immediate attention of andresolution by NPC: the ongoing lawsuit against it on compensation filed by a group of resettlers,providing PAFs with drinking water by constructing water lines, studying the feasibility ofproviding more assistance to the local economy by constructing a basic market in a nearby

area, and immediate transfer of land titles to the resettlers. These recommendations should beimplemented before NPCs privatization scheduled in the second half of 2003.


10/51

Mapvii


11/51

I. BACKGROUND

A. Rationale

1. As a result of high oil prices and the serious economic difficulties that the Philippinesexperienced, commercial energy consumption as well as gross domestic product stagnatedduring 19801986. In 1987, however, a trend of increasing energy consumption started, andcommercial energy consumption almost reached the 1979 peak of 12.4 million tons of oilequivalent. The share of oil in the commercial energy mix decreased from 94% in 1975 to 72%in 1989. The balance of the energy demand was met by hydropower, geothermal steam, andcoal. The main thrust of the Governments energy policy was to increase self-sufficiency and to

lessen the impact of external factors on the economy. Therefore, the sector strategy mostlyaimed at developing indigenous energy resources, diversifying energy sources, and reducingconsumption through energy conservation and demand management. In addition, theGovernment made serious efforts to foster private sector participation, particularly in powergeneration.

2. Resumption of economic growth from 1987 led to power shortages in the main grids. InLuzon, such shortages reached severe levels starting in 1989 due to a combination of factors

including the mothballing of a just completed nuclear power plant for safety reasons, droughtthat curtailed hydropower availability, and increased forced outages of the aging oil-firedgenerating facilities. Operational strategy of the Asian Development Bank (ADB) for thePhilippines at the time gave priority to supporting poverty reduction and employment generation,especially in rural areas, and addressing the severe regional income disparities. For the powersector, one of the main objectives was to augment power generating capacity (includingrestoring capacity of existing power stations) to meet the growing demand for power foreconomic development and to assist the Government in its efforts to diversify the countrysenergy sources and reduce oil dependency. The objectives also included enhancing operating

efficiency as well as the use of indigenous energy resources.

B. Formulation

3. The Project was formulated as ADBs sixteenth lending operation in the Philippine powersector. During fact-finding in March 1990, the scope of the Project as well as the implementationand financing arrangements were discussed with the Government and the National PowerCorporation (NPC), the principal power generation and transmission utility in the Philippines. It

was confirmed that the Government accorded high priority to the Project and it was suitable forADB financing. During appraisal in May/June 1990, detailed specifications of the Project wereworked out with the Government and NPC using existing data and studies, including a site-selection and feasibility study undertaken by NPC in 1989 for establishing a 2 x 300 megawatt(MW) coal-based thermal power plant in Luzon. The ADB loan for the first 300 MW unit and allauxiliary equipment was approved in October 1990.1 However, due to a series of unforeseenevents (para 8) the loan did not become effective until December 1994


12/51

2

C. Purpose and Outputs

4. The Project aimed to increase the base-load generating capacity of the Luzon grid tomeet efficiently and economically the projected power requirements, and to diversify thecountrys energy sources and reduce oil dependency. The Project was to cover Stage I of theMasinloc Thermal Power Plant (MTPP), and was to include the boiler and turbo-generator forthe first 300 MW unit and associated coal and ash handling equipment, harbor facilities forunloading seaborne coal, cooling water and freshwater systems, powerhouse, and stack, whichwere common to both units. The Project was designed to use imported high-quality bituminouscoal.2 The Projects output was to be brought into the Luzon grid through a 130-kilometer (km),230-kilovolt (kV), double-circuit transmission line from Masinloc to the Hermosa substation in

Bataan via Botolan. The transmission line, which was to be financed, along with the second 300MW unit under a separate ADB loan,3 was to be completed well before the first 300 MW unitwas commissioned.

5. A technical assistance (TA) grant4 was attached to the Project to help NPC in (i) establishinga baseline air quality monitoring program for the Project; (ii) assessing the impacts of the coolingwater discharge from the Project on coral reefs and fisheries in Oyon Bay; and (iii) examining thefeasibility of using fly ash for commercial applications; (iv) providing equipment, software, andtraining to upgrade the capabilities of NPCs environment management department; and (v)studying the feasibility of conversion to coal of oil-fired thermal power plants by using the fluidizedbed combustion (FBC) technology, which would offer significant environmental benefits and wouldalso be less sensitive to variations in coal quality.

D. Cost, Financing, and Executing Arrangements

6. Appendix 1 gives a cost breakdown by project component and the proposed financingplan. At appraisal, the total project cost was estimated at $441.0 million equivalent, including

$350.0 million foreign exchange cost and $91.0 million equivalent local currency cost. Theforeign exchange cost was to be jointly financed by ADB ($200.0 million), Export-Import Bank ofJapan ($120.0 million), and NPC ($30.0 million); while the local cost was to be financed by NPC($61.0 million equivalent) and Export-Import Bank of Japan ($30.0 million equivalent).

7. NPC was the Executing Agency for the Project. A project management office (PMO) wasto be established by NPC, and headed by a project director with appropriate qualifications andexperience. The core staff of PMO were to be supported by additional qualified staff includingproject accounting staff at the later stage of project implementation. Partly because of theconstraints on NPCs project implementation capacities, NPC decided to adopt the turnkeyapproach for the Project, as opposed to multicontract packaging.5


13/51

3

E. Completion and Self-Evaluation

8. The project completion report (PCR), circulated in October 1999, confirmed that theProject was mostly implemented as envisaged at appraisal, but with a major delay. The workunder the single turnkey contract included (i) design, manufacture, delivery, and installation ofboilers and electromechanical equipment including all associated auxiliary equipment andapparatus; (ii) basic and detailed design and delivery of related equipment, materials, andsupplies, and construction of the associated civil and architectural works such as port facilities,cooling water facilities, coal storage yard, ash disposal area, stack, foundations forequipment/plants, powerhouse, appurtenant buildings/structures, and other related works; and(iii) testing, commissioning, and trial operation of equipment and machinery to ascertain that

they were functioning in accordance with the contract provisions and guarantees. However,because of the eruption of Mt. Pinatubo in 1991, the proposed transmission line to the Hermosasubstation was rerouted to avoid areas affected by the eruption. This involved the constructionof a 230 kV transmission line from Masinloc to the Labrador substation in Pangasinan to linkwith a proposed 500 kV transmission line from Labrador to San Jose (see Map). Publicconcerns about the environmental impact of the Project led to major delays, and consequentdelays in the issuance of the environmental compliance certificate (ECC) by the Department ofEnvironment and Natural Resources (DENR). The matter was successfully resolved through

public hearings and intensive dialogue between the Government, NPC, ADB, and the mayor ofMasinloc and concerned citizens. Other factors also contributed to the delays includingimplementation of the environmental management and resettlement plans, land acquisition, andnegotiations about financial assistance to be advanced by NPC to the province of Zambales andthe municipality of Masinloc. As a result, loan effectiveness was delayed by 41 months andclosing date by 42 months.

9. Because of the extensive delays, the Project, which was commissioned in June 1998instead of the scheduled commissioning in September 1994, made no contribution to the

elimination of the severe power shortages, which peaked in 1992 and 1993. By 1998, the powersupply situation had substantially improved due to the large number of independent powerproducers (IPPs) operating in Luzon and the slowdown in demand growth as a result of theAsian financial crisis. Despite the setback, the financial internal rate of return (FIRR) andeconomic internal rate of return (EIRR) were recalculated in the PCR at about 17% and 29%,respectively, higher than the appraisal estimates of 15% and 14%. The improvements weremainly due to higher retail tariffs and customers willingness to pay. The execution of theassociated TA was also delayed for 2 years, but the TA was considered successful since it had

largely achieved its objectives. Overall, the Project was rated generally successful.

6

The PCRrecommended that NPC develop a more effective strategy for dealing with issues thatcontributed to implementation delays, such as land acquisition and involuntary resettlement; andthat ADB further its assistance to NPC to strengthen the institutional capability in managingsocial issues.

F Operations Evaluation


14/51

4

2002. In Manila and during the site visit, the OEM held discussions with NPC officials, Departmentof Energy (DOE), DENR, the province of Zambales and the municipality of Masinloc,representative of IPPs, Manila Electric Company (Meralco) as a representative of downstreamdistribution companies, and key industrial/commercial customers. Copies of the draft PPAR weresent to the Government, NPC, and the concerned ADB departments for review; all commentsreceived were considered in finalizing the PPAR.

II. PLANNING AND IMPLEMENTATION PERFORMANCE

A. Formulation and Design

11. The resurgence of growth in the demand for power starting in 1987 had severelystressed the limited and unreliable power generation capacities. As a result, increased forcedpower outages seriously constrained economic recovery. ADBs operational strategy for thepower subsector was to help augment generation capacities and, in so doing, remove thebottleneck and facilitate economic growth and poverty reduction. The Project was consideredconsistent with this strategy, despite questions raised at loan approval about the wisdom offinancing additional generation capacity instead of rehabilitating existing power plants orimproving the distribution network.

12. The feasibility study commissioned by NPC envisaged the use of imported coal (i.e.,Lymington coal from Australia) mixed with local coal (i.e., Semirara coal) on a 50:50 basis.However, it was decided during appraisal to use imported coal only, mainly for betteroperational efficiency and environmental benefits as imported coal had a more assured supply,higher heat value, and lower ash content than local coal (footnote 2). The coal specificationsand the coal-fired design have been appropriate.7 First, compared with natural gas and dieselthat would also have to be imported, coal is much cheaper and more abundantly available (fromAustralia, the Peoples Republic of China, and Indonesia). Therefore, importing coal represents

much less stress on the countrys balance-of-payment and enhances its energy security. Thisdoes not necessarily contradict ADBs operational strategy, which emphasized enhancement ofoperating efficiency as well as the use of indigenous energy resources, since the domestic coalsupply was not reliable and the very low quality of coal would have severely impaired theoperational efficiency of the units.8 Second, the main concern associated with coal-firedgeneration, i.e., environmental protection, has been well addressed into the design with state-of-the-art pollution control (para. 15).

13. As designed, MTPP consists of two generating units of 300 MW each, the first financedunder the Project, and the second under Loan 1398-PHI (footnote 3). The units are of identicaldesign and each is rated for 21 kV output and provided with a unit transformer of 21 kV-230 kV,353 megavolt-ampere (MVA). Station power is provided by 230 kV-7.2 kV, 27/45 MVAtransformers and unit auxiliary transformers of 21 kV-7.2 kV, 34 MVA rating. MTPPs coolingand steam cycle utilizes saltwater from the adjacent Oyon Bay for cooling (condensing) andtreated freshwater from an adjacent source (Lawis River) for steam makeup Cooling water is


15/51

5

from the heated discharge. The intake structure and the discharge canal are both adequate tosupport MTPPs rated output as is the treatment facility for the river water for steam makeup.

14. Coal is delivered to the plant site via ocean-going bulk ships. It is off-loaded to aconveyor system at an extended jetty with dual auger-type unloaders and conveyed to the coalstorage area. This area has a design capacity of 60 days of coal at maximum plant generation.The unloading facility is capable of unloading a typical shipment of about 70,000 tons in about5 days. A failure of one of the augers results in extended dockage time for the ship, but shouldnot result in a shortage of fuel for generation provided the typical inventories of 30-day supplyare maintained. Control and monitoring of the generation process are accomplished by a fullycomputerized control room with multiple monitors and servers. In the event that a unit monitor

fails, all control functions are moved to a backup station, which has fully multiple control andmonitoring capability. In the event of a total failure of the control room, control can bemaintained at the unit level for each generating unit and for the common facilities.

15. In general, environment protection has been well incorporated into the plant design,including the exclusive use of low-sulfur coal to control sulfur dioxide (SO2) emissions,combustion at minimal excess air to reduce nitrogen oxides (NOx) emissions, a stack height of150 m, electrostatic precipitators (ESPs) with an efficiency of 99.5%, limitations on cooling water

discharge temperatures, emission monitoring, reforestation, and various measures in coalhandling to limit dust dispersion. The design conforms to the ECC granted by DENR.

16. In addition to these pollution control measures, other environmental issues such asmonitoring and alternative design using new technologies such as FBC were addressed throughthe associated TA (para. 5). FBC, in particular, was viewed to have significant environmentalbenefits when combusting coal with low heat values and high ash content. However, since onlyimported high-quality coal would be used, FBC was deemed unnecessary for the Project since itwould increase costs for NPC without significant additional environmental benefits. In the event

that a decision is made in the future to switch to domestic coal, FBC would be a cost-effectivetechnology and should be considered.

17. Overall, the OEM regards the Project as a least-cost option to meet the growing energydemand at the time. Rehabilitation of the aging oil-fired facilities was not an economically viableoption. Other energy sources including nuclear, geothermal, and hydropower (the latter two havebeen explored and utilized by NPC to a major extent in other locations) were constrained byvarious factors including limited availability and low reliability, and political considerations. The

MTPP equipment was well designed. The layout of the facilities makes good use of the site andallows for efficient coal handling, ash handling and disposal, and maintenance of the majorequipment has been enhanced by attention to access requirements.

B. Achievement of Outputs

18 The OEM inspected the generation plant and associated facilities and confirmed that all


16/51

6

the Luzon grid via a gas-insulated switching station9 and a 230 kV double-circuit transmission lineof about 94 km.10 However, the entire transmission line between MTPP and the Labradorsubstation did not start operation until May 1999, about 5 months after the second unit wascommissioned. During this time, a temporary arrangement was made to evacuate the power byway of completing the first 5 km and tapping to the existing 230 kV Botolan-Labrador line at areduced capacity. This adversely affected MTPPs operational performance during the initialmonths (para. 27).11

19. Generally, the OEM found the quality of the equipment procured under the Project,construction, and civil works to be high to satisfactory. However, the site inspection and interviewswith key MTPP operation personnel revealed some implementation issues and disputes. First, the

four remote environmental monitors procured under the Project to be used for conductingcontinuous air quality monitoring around MTPP have all stopped functioning.12 Although thebreakdown occurred within the warranty period, the supplier was not able to fix the instruments.Second, both generation units experienced outages shortly after their commissioning (para. 26).Third, significant problems were encountered with the coal handling system, including the waterspray system and the bulldozer used for compaction (para. 37). Fourth, one of the two coal shipunloaders broke down at the time of the OEMs visit (para. 31). Fifth, the turnkey contractspecified that the under frequency (UF) relay tripping on the MTPP units should not be higher than58.2 hertz (Hz). The actual UF relay tripping was set at 58.0 Hz by the manufacturer, which metthe requirement of the contract. However, the Grid Code, which was promulgated in June 2001after the commissioning of MTPP, requires all generating units to remain in synchronism for atleast 5 seconds if the system frequency momentarily falls to 57.6 Hz, lower than the 58.0 Hz setfor the MTPP units.13 This deviation has caused serious problems in operation as the DOE hasrepeatedly requested MTPP to lower the frequency to 57.6 Hz to reduce the downtime for theLuzon grid. On the other hand, the manufacturer has warned that if MTPP lowers this frequencysetting and damages the turbines as a result, the damage would not be covered by themanufacturers warranty. On the whole, however, the facilities built under the Project have been

operating well, and MTPP has reached its design output (para. 27).

C. Cost and Scheduling

20. The PCR estimated that the actual total cost amounted to $429.3 million equivalent, 3%lower than the appraisal estimate of $441.0 equivalent. The ADB financing amounted to $196.8million, and the balance of $3.2 million was cancelled. The foreign exchange portion was $393.5million, 12% higher than the appraisal estimate of $350.0 million; and the local currency portionwas $35.8 million equivalent, 61% lower than the appraisal estimate of $91.0 million equivalent

9The OEM noted the adoption of a state-of-the-art gas insulated switching station. Though more expensive than theconventional open design, it can significantly reduce the maintenance required in view of the atmospheric coal dustand increase the systems reliability.

10Each circuit is designed with four conductors per phase; thus, either circuit can support the rated output of bothgenerating units


17/51

7

(Appendix 1). After extensive deliberations within NPCs financing department and severaldiscussions with the OEM, NPC confirmed that the PCR estimate accurately reflected the costs

to NPC.

14

Despite the total cost underrun, the actual project cost excluding interest chargesduring construction was higher than the appraisal estimate, indicating efficient project executionin terms of time requirements (despite the initial delays) but higher-than-estimated costs of theproject components.15 The latter was mainly attributable to the fact that the appraisal estimatewas prepared in 1990 while the turnkey contract was awarded in 1994; this rendered theappraisal estimate outdated given general cost increases in the meantime. Regarding theforeign exchange overrun, the civil works portion of the contract was awarded to a foreignsubcontractor.16 This had implications for the currency of payments. The total cost for all civilworks was $83 million, only slightly higher than the appraisal estimate of $81 million. However,

the foreign subcontractor demanded that all payments be made in foreign currency. While theforeign subcontractor paid local subcontractors in local currency, NPC was not aware of suchcosts. As a result, NPC reported zero for the actual local costs for civil works in Table A1.1.17

21. Appendix 2 gives the project schedule as appraised and as implemented. As noted inpara. 8, loan effectiveness was delayed for about 41 months due to difficulties encountered inissuance of the ECC, land acquisition, and implementation of the resettlement action plan.18Tendered as a turnkey contract through international competitive bidding procedures, the power

plant construction, once started, took 39 months, some 3 months shorter than anticipated.

D. Procurement and Construction

22. All ADB-financed civil works and equipment were procured in accordance with ADBsGuidelines for Procurement. Turnkey contracts are generally an industry standard forconstruction of coal-fired power plants. The use of a turnkey contract was anticipated atappraisal as the most expedient method to construct MTPP. However, there were initialconcerns that the turnkey method may result in higher construction costs than multicontract

packaging. Considering the ensuing start-up delays (which would have caused chain effects inincurring cost overruns), it is likely that the turnkey method resulted in cost savings andshortened the construction period, perhaps by as much as a year (compared with themulticontract alternative). Although such an alternativethree contractswas successfully

14The PCR for Loan 1398-PHI (footnote 3), which financed the construction of Unit 2 plus various transmission lines

and substations, suggested that there was an additional cost of about $91 million associated with Unit 1. However,with assistance from ADB staff and NPC, the OEM determined that the additional cost referred to the foreignexchange shortfall caused by the cost overrun in foreign exchange, even though the total cost of the Project waswithin the appraisal estimate. The foreign exchange shortfall was financed through an ADB-guaranteed bond issuearranged in conjunction with Loan 1398-PHI, and the balance of the Y12 billion bond proceeds was used to financeother components of Loan 1398-PHI.

15It appears that, in order to minimize interest payment, NPC had used part of the foreign currency financing(including the Japanese bond issue) for the subsequent Loan 1398-PHI (footnotes 3 and 14) to pay for ADBs


18/51

8

used by NPC to construct the coal-fired thermal power plant in Calaca, Batangas,19 the turnkeymethod, given the situation at Masinloc, appears to have been the most expedient and least-cost choice for constructing MTPP.

23. The performance of the turnkey contractor was generally satisfactory. The quality ofconstruction of the generation plant and associated facilities is excellent. However, in a fewnoncritical areas, inadequate coordination of subcontractor works resulted in poor integration ofsystems, such as the air conditioning ductwork for the environmental laboratory. Better planningand coordination by the turnkey contractor would have eliminated those few minor problems.

E. Organization and Management

24. NPC implemented the Project through its PMO that had only 10 staff members. Onhindsight, the turnkey approach significantly reduced the additional stress from the limitedcapacity of the PMO. However, the downside was that the PMO had to rely heavily on the inputsof the consultants for design, detailed engineering, preparation of bidding documents, andconstruction supervision for the turnkey contract.20 Close to $12 million, or almost 3% of thetotal project cost, was spent on consulting fees for this purpose (Appendix 1). In addition toPMO staff, NPC also dispatched a team of engineers to work with the project consultants andcontractors. Some of them later became key managerial personnel for the operation of MTPP.

25. Project implementation experienced a major start-up delay due to difficultiesencountered in acquisition of land and rights-of-way, and issuance of ECC (para. 21). This waspartly caused by the underestimation of such difficulties by NPC and inadequate projectpreparation, as NPC lacked experience in dealing with complex public acceptance andresettlement issues. At the time, ADB had yet to develop its policy on resettlement, 21 andpreparing a resettlement action plan was not yet practiced in the Philippines.

III. ACHIEVEMENT OF PROJECT PURPOSE

A. Operational Performance

26. The OEM regards MTPPs operation and maintenance to date as satisfactory. Theupkeep appears to be according to generally accepted utility practice. Nevertheless, there havebeen two significant failures of major equipment, one affecting each unit. In Unit 1 (the projectunit), seawater intruded into the steam flow in August 1999, and damaged the turbine. Theresult was a significant cost for repair and loss of production. Unit 2 suffered a stator fault inJanuary 2000 due to an apparent failure of the excitation protective relaying. This also resultedin a significant cost for repair and downtime of the unit with the corresponding loss ofproduction. Both incidents are currently the subject of discussion with the turnkey contractor andinsurance providers so as to resolve the causes, costs inflicted, and prevention of futureincidents. During the OEMs site visit, minor repair and cleaning were under way on theconveyor system which resulted in marked but localized spillage of coal A few key


19/51

9

operational that lengthened vessel turnaround times, and possibly resulted in demurragecharges.

27. Since their commissioning in June and December 1998, both units have been used forbase-load operation in the Luzon grid. During the initial months, however, the output was limitedby the transmission line constraints (para. 18). Coupled with the two unit failures, the plant factor22(Appendix 3) and availability23 (Appendix 4) were low. Since mid-2000, operational performancehas improved significantly. In 2001, MTPPs average plant factor was 70% (over 90% for somemonths), and availability of Unit 1 was 84%. In 2002 (through April), the plant factor was 75% andavailability of Unit 1 was 97%,24 despite the current generation capacity surplus in Luzon due to alarge number of IPPs. MTPPs high utilization has been attributable to its relatively low generation

costs and the fact that the two units of 600 MW each at an IPP plant in Sual, which wascommissioned in April 1999, are too large for base-load operation in the relatively small grid inLuzon with a total available capacity of 5,300 MW. MTPPs generation depends on an assuredsupply of coal of design quality and properties in a timely manner without significant delays in off-loading. The concerns on timely procurement of spare parts and repair apply equally to the coal-handling facilities. Overall, however, MTPP has been providing a stable and economical powersupply for Luzon, and has helped improve the conditions for economic development andinvestments amid the current public debate on the role of IPPs in the power supply in thePhilippines. The improved power supply has allowed a growing number of new connections inrural Luzon and has met the demand for power by major industrial and commercial customers, asindicated by interviews with key customer representatives including a small utility cooperative nearMTPP and several large industrial and commercial customers in energy-intensive industries.

B. Performance of the Operating Entity

28. As of January 2001, NPC had 26 power generation plants in Luzon with a totalinstalled capacity of 3,486 MW.25 Table 1 gives some key operational and financial indicators

for NPC. Generally, NPCs financial performance has been deteriorating, particularly after theAsian financial crisis in 1997. Despite the fact that the wholesale tariff was the second highestin the region, NPCs operating revenue in 2001 was only 6% higher than its operatingexpenditure. When interest payments and other charges were deducted, NPC incurred a netloss of about P10.4 billion. The return on rate base, or the rate of return on average net fixedassets as specified in the loan covenants, declined steadily from 8.2% in 1996 to 2.9% in2001, far below the covenanted level of 8% (Appendix 5). The debt-service coverage ratioexperienced a similar decline, from 1.6 in 1996 to 1.0 in 2001, below the covenanted level, set

at 1.0 for 1996 and 1997, and 1.3 from 1998 onward. NPCs compliance with the loancovenant on a self-financing ratio not less than 20% could not be independently confirmed bythe OEM because of lack of information. However, the PMO official interviewed indicated thatgenerally, 20% of total financing for NPCs capital expenditure was from NPCs internal cashgeneration while 80% was from external sources.


20/51

10

Table 1: NPC Financial Performance, 19962001

Indicator 1996 1997 1998 1999 2000 2001Sales (GWh) 33,381 36,442 37,321 36,987 37,320 39,948Sales Growth (%) 7.6 9.2 2.4 (0.9) 0.9 7.0Average Rate (P/kWh) 1.96 2.15 2.58 2.65 3.12 3.40Operating Revenue

(P million)63,635 77,144 86,611 89,686 100,119 115,698

Operating Expenditure(P million)

50,317 65,519 79,696 81,196 94,681 108,861

Rate Base (P million) 161,536 161,808 215,053 251,989 244,756 236,305RORB (%) 8.2 7.2 3.2 3.4 2.2 2.9Debt-Service

Coverage Ratio1.6 1.0 0.9 0.9 0.7 1.0

GWh = gigawatt-hour, kWh = kilowatt-hour, rate base = the average value of the net fixed assets inoperation at the beginning and the end of the year, RORB = return on rate base.Source: National Power Corporation.

29. Despite the good performance of MTPP, NPCs financial performance has not beensatisfactory. The poor performance is at least partly attributable to the fact that NPC signedapproximately 40 power purchasing agreements (PPAs) with IPPs across the Philippines at theheight of the power crisis in the early 1990s and thereafter. These take or pay contractsoblige NPC to pay a minimum capacity charge regardless of whether the capacity has beenused or not. This became a problem when the growth in NPCs energy sales slowed down inthe aftermath of the Asan financial crisis. During the period 1996-2001, NPCs operatingrevenue increased at an average annual rate of 12.7%, significantly below the average annual

growth rate of NPCs operating expenditure of 16.7%. Depending on the schedule and themanner in which the planned privatization will be carried out, the poor financial health of NPCmay have an adverse impact on the long-term performance of the Project (para. 33).

C. Financial and Economic Reevaluation

30. Appendix 6 contains the recalculated FIRR and EIRR for Units 1 and 2 combined.26 Allcosts and benefits are denominated in pesos in 2002 constant prices. As summarized in Table 2,the recalculated FIRR is 21.4%, higher than the appraisal and PCR estimates of 14.9% and

17.2%, respectively. The very high FIRR is due to the high utilization of the two units for meetingthe base load and the high tariffs. The recalculated EIRR is 29.7%, also higher than the appraisaland PCR estimates of 14.5% and 28.8%, respectively, mainly due to the higher averagewillingness-to-pay as estimated for Luzon by the OEM based on interviews with key customersand NPCs customer profile (e.g., type of customers and their capacity requirements).


21/51


22/51

12

reliable electricity. Over the years, NPC has also been supporting local community developmentby building schools and roads in northern Luzon.

35. Additional socioeconomic impacts of the Project were achieved during construction withthe resettlement of 198 project-affected families (PAFs), or about 1,000 affected persons, living atthe project site. Despite the fact that at the time ADB had yet to develop its own resettlementpolicy and preparing resettlement programs was not yet widely practiced in the Philippines (para.25), NPC developed and implemented a resettlement program in collaboration with themunicipality of Masinloc. The resettlement program had three objectives: (i) to relocate thefamilies within the boundaries of the project site after they had been compensated; (ii) to developa resettlement program that would be socially and economically acceptable to PAFs; and (iii) to

define the responsibilities of NPC offices and PAFs in planning, implementing, monitoring andevaluating of the resettlement program. The main features of the resettlement program were threecompensation options to PAFs: (i) a house and lot at the resettlement site, (ii) cash compensationfor a house and a lot at the resettlement site, and (iii) cash compensation for those who wouldrelocate outside the resettlement site. NPC also provided two livelihood programs, with oneadministered by the association of relocatees at the resettlement site, and the other managed bythe local government for the rest of the residents of Masinloc.

36. With assistance from NPCs community relations coordinator, the OEM carried out in-depth interviews with 51 PAFs. Detailed information and analysis are presented in Appendix 7.Generally, despite some outstanding issues, NPC has fully achieved the first objective of theresettlement program and substantially or partly achieved the two others. The livelihoodprogram managed by the local government has been well run and highly successful; the oneadministered by the association of relocatees has failed for various design and implementationreasons. Through the interviews, the OEM identified the main issues still to be resolved: (i) lackof drinkable water at the resettlement sites (e.g., high salinity of the water extracted from deepwells), (ii) lack of job opportunities and reduced income for some PAFs, (iii) delayed transfer of

land titles to PAFs, and (iv) disputes over compensation amounts.

B. Environmental Impact

37. Environmental protection has been well incorporated in the design of the Project(para. 15). First, MTPP meets the emission standards for SO2 by using low-sulfur coal, i.e., lessthan 1% sulfur on an as-received basis. Second, to limit emissions of NOx formed duringcombustion in the presence of excess air, MTPPs burners are designed to minimize suchexcess air. Third, fly ashthe major component of particulate matter, which is ejected in theexhaust of MTPPis abated by the use of ESPs. Each MTPP generating unit is equipped withtwo ESPs, which have 99.5% removal efficiency. Fourth, to abate pollution and noise, NPC hasembarked on a major effort to plant trees, which function as a buffer zone around the plant areaand absorb carbon dioxide generated by the burning of fossil fuels. To date, this effort hasresulted in the planting of over 44,400 trees of various kinds including mango, which now bearfruit Fifth MTPP emits cooling water discharge and runoff from the ash disposal pits The


23/51

13

ash has been disposed of by conversion to commercial use by a construction company that alsoprovides off-site transportation.27 Coal inventory is limited and the storage is compacted. Awater spray system is in place for dust control and temperature is monitored to preventspontaneous combustion in the coal storage. These features conform to the requirements of theECC and have contributed to the overall environmental compliance of MTPP. However, theOEM noted that the water spray system was temporarily out of service and the bulldozer usedfor compaction was subject to outages for lack of spare parts. The OEM also noted that theECC called for a physical windbreak around the coal storage areas. The tree planting effortsprovide a form of windbreak for MTPP; additional plants around the perimeter of the coalstorage yard itself would be more effective.

38. The ECC, several memorandums of agreement signed between NPC and the localgovernment unit (LGU) and DENR, and ADB loan covenants require various forms of emissioncontrol and monitoring by the plant operators. The Project addressed this issue by (i) providingstate-of-the-art environmental monitoring equipment; and (ii) the associated advisory TA, whichhelped NPC improve its environmental monitoring capacity. The OEM confirmed that NPC hadestablished an environmental analysis laboratory and maintained competent full-timeenvironmental personnel. These personnel perform monitoring, maintain records of such,analyze samples, and interface with a multipartite committee consisting of NPC, LGU, DOE,DENR, and nongovernment organization (NGO) representatives who perform joint quarterlysampling exercises with the MTPP Pollution Control Officer and staff.

39. Plant emissions at the stack are monitored by a state-of-the-art continuous emissionsmonitoring system (CEMS), which is maintained by the control software and data acquisitionsystem. CEMS measures SO2, NOx, and other data on an hourly basis. In addition, four remotemonitoring stations were established in nearby villages to provide continuous monitoring of theseemissions as they affect the surroundings of the MTPP site. Although equipped with continuousrecording monitors, these instruments failed (para. 19). The warranty considerations are being

discussed with the supplier. To provide the required quarterly monitoring for the multipartitecommittee, NPC staff are utilizing portable instruments at present. The results of the past fourquarterly inspections of ambient air and water quality as well as several snapshots of the printoutof the CEMS on stack emissions are shown in Appendix 8. The results indicate that MTPPsenvironmental impacts are well within the limits set by DENR.

C. Impacts on Institution and Policy

40. Appendix 9 shows NPCs organization chart. NPC has been divided into differentoperating entities, e.g., transmission companies (TRANSCOs) and generation companies(GENCOs).28 Such a structure is conducive to the planned privatization, which can take placeeither with a particular company or facility, or a group of companies. Although the Project did notcontribute to restructuring NPC directly, it was part of ADBs long-term assistance programconsisting of project loans, program loans, and TAs in support of sector restructuring.


24/51

14

ECC delayed the TA by about 2 years, the consultants report established a baseline air qualitymonitoring program that was the basis for the present monitoring program at MTPP andcontributed to the creation of the multipartite monitoring committee. The TA was instrumental in

convincing NGOs and others opposing the use of coal for power generation that MTPP could bedesigned and operated in an environmentally sustainable manner. The assessment of theeffects of the cooling water discharge into Oyon Bay showed that the effects would be negligibleand provided a basis for the eventual design of the discharge channel. The discharge channeldesign and orientation to the site have proved successful and performance has been asindicated by the assessment. The OEMs review of the activities, reporting, field measurementpractices, and the laboratory and portable equipment of the environmental personnel at MTPPindicated that the training under the TA was successful. Interviews with key NPC environmental

personnel indicated they were well satisfied with the training received. Overall, the TA isconsidered successful.

42. Another source of the Projects positive impacts on institutional development was thework with international consultants and contractors in preparing and implementing the Project.This work allowed NPC staff to gain substantial knowledge in designing and supervising coal-fired generation projects. The Project had no discernible policy impacts.

V. OVERALL ASSESSMENT

A. Relevance

43. The Project was highly relevant in that it aimed to address the countrys severe powershortages during the early 1990s, which hindered economic recovery. It was consistent withADBs operational strategy in the power sector at the time, which gave priority to augmentingpower generating capacity to facilitate economic growth and poverty reduction. The relevancehas been reduced somewhat due to (i) delay in implementation that prevented the Project from

contributing to alleviation of the power crisis, and (ii) the current lower demand for powerresulting from slower-than-expected economic growth and the surplus generation capacities dueto a large number of IPPs operating in Luzon. Overall the Project is as assessed as relevant.

B. Efficacy

44. Since their commissioning, the two 300 MW units at MTPP, including the Project-financed unit, have been used for the base-load operation in the Luzon grid. With its high plantfactor and availability, the Project has achieved its intended purpose of efficiently and

economically meeting the capacity and energy requirements in Luzon and, hence, is assessedas highly efficacious.

C. Efficiency

45 The Project provides least-cost generation of electricity Despite the initial delay of about


25/51

15

spare parts at NPC as a main factor impeding the operational sustainability of the Project, whichmay also be adversely affected by the poor financial performance of NPC. However, theplanned privatization of NPCs generation companies is expected to have positive impacts onMTPPs sustainability by streamlining procurement procedures and improving financialmanagement. Overall, the Project is likely to be sustainable.

E. Institutional Development and Other Impacts

47. The Project has had moderate but positive impacts on the institutional development ofNPC for project management and operations through work with the international consultantsand contractors. In addition, the associated TA enhanced NPCs in-house capacities in

environmental monitoring and management, as evidenced by the well-equipped and well-trainedenvironmental management department, and the conformity of MTPPs air and water emissionswith the Philippine national standards. By providing reliable and affordable electricity to facilitateeconomic growth, rural electrification and poverty reduction in Luzon, the socioeconomicimpacts of the Project have been mainly positive. After initial problems, the resettlement of 198households living at the project site was handled satisfactorily. The resettlement program hasbeen fair, comprehensive, and socially responsible, but there are still some problems in terms ofdrinking water, economic opportunities for PAFs, land ownership, and disputes overcompensation amounts that need to be addressed. Overall, the Project has had moderateenvironmental and socioeconomic impacts.

F. Overall Project Rating

48. Based on the preceding considerations, the Project is rated successful.29

G. Assessment of Asian Development Bank and Borrower Performance

49. ADB fielded eight missions during project preparation and implementation. However,given the geographic proximity of ADB and NPC, the number of missions did not reflect the fullscope of ADBs inputs to project preparation and implementation. Available records indicate thatADBs project and environment and social divisions, interacted intensively with NPC, LGUs, andNGOs, particularly in addressing issues related to land acquisition, resettlement andcompensation, and environmental impacts. Project design proved to be of high quality and therewas virtually no variation from the original design (except for the rerouting of the transmissionline). Overall, ADBs performance was satisfactory. The performance of NPC was generallysatisfactory as it promptly implemented the Project once the resettlement and environmentalissues were resolved. However, as the Project was the first time in NPCs projectimplementation history to involve designing and implementing a resettlement program, therewere deficiencies in the process (Appendix 7). Learning from the initial difficulties, NPCestablished a Social Engineering Department to specialize in rights-of-way issues andcommunity development.


26/51

16

VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS

A. Key Issues for the Future

1. Operational Sustainability

50. Although the Project is generally well operated and maintained, several factors mayaffect its operational sustainability. In addition to the slow and tedious procedures for procuringspare parts (para. 31), the manner by which the issue of proper setting and time delay of UFrelay tripping on the MTPP units is resolved will affect the sustainability of the Project (para. 19).A decision toward a lower UF relay tripping would risk significant equipment damage and

outage while keeping the status quo may result in more blackouts, which would not onlyadversely affect the revenue attributable to MTPP but also subject the wider economy to losses.This dilemma could be resolved by certain transmission improvements, but the possible additionof a 500 kV transmission loop south from MTPP to Hermosa substation is probably only on a10-year planning horizon. This aspect of the future operation of MTPP needs to be resolvedsoon and in the most cost-effective manner.

2. Future Privatization of the National Power Corporation

51. With ADBs support, NPC has embarked on a restructuring program under which itsgeneration and transmission companies will be privatized, wholly or partially. Most NPC officialsinterviewed expect the privatization to have positive impact on the operations and sustainabilityof MTPP as the flagship of NPCs generation assets, by introducing more commercial practicesand reducing political interference. However, the timetable has been postponed several timesand it is hoped that privatization will take place in the second half of 2003.

3. Controversy Around independent power producers and Power

Purchasing Agreements

52. The power sector in the Philippines is currently witnessing a public debate about the roleof IPPs and the high electricity tariffs partly caused by the PPAs that NPC signed with them.These PPAs are take or pay in nature, obligating NPC to purchase a minimum capacityinstalled, typically 80%, regardless of whether the electricity is used or not. There is increasingpublic pressure for NPC to lower its tariffs, which is likely to cause further deterioration of itsfinancial performance. On the other hand, MTPP is clearly a positive factor amid the controversyand has been playing a crucial role in providing economical and reliable power supply in Luzon.

B. Lessons Identified

1. Front-End Delays and Resettlement Program

53 The Project suffered from a major front-end delay of about 3 5 years It may be

17


27/51

17

project socioeconomic situation, and be fully communicated to all PAFs. This would facilitate itsacceptance by PAFs and allow a clear comparison of what was intended and what was actuallyachieved.

2. Turnkey Contract as a Key to Smooth Implementation

54. Despite the initial delays, project construction was relatively smooth and within therevised schedule. This was largely due to the adoption of a single turnkey contract for all projectcomponents. It is likely that the turnkey approach, compared with multicontract packaging,resulted in cost savings as well as a shortened construction period, perhaps by as much as ayear. A downside of the turnkey approach as used in this case was that all the payments were

made in foreign currency.

C. Follow-Up Actions

1. For Asian Development Bank

55. ADB has been providing major assistance to the power sector in the Philippines,particularly for sector restructuring and development of a competitive electricity market, asexemplified by the ongoing program loan.30 This assistance has been instrumental inovercoming the various physical, institutional, and political constraints to restructuring. ADBshould continue such assistance in the foreseeable future, although its focus and recipients maybe different after NPC has been privatized.

56. Two financial covenants of the Projectdebt-service ratio and rate of return on averagenet fixed assetshave not been complied with. However, after the privatization, NPC will ceaseto exist as an operating entity. Different covenants may be needed in ADBs future assistance toNPC-derived entities.31

2. For the Government

57. The much-anticipated privatization of NPC, which is scheduled to take place in the secondhalf of 2003, should be brought on track without further delay. The OEM feels that, althoughprivatization will not solve all the problems facing the power sector of the Philippines, such ashigh tariffs and low supply reliability, a well-crafted and transparent privatization program canremove much of the institutional and political barriers that currently hinder the development of acompetitive electricity market. Furthermore, it is important that the Government (i.e., Housing andUrban Development Council under the Office of the President) approve a policy on involuntaryresettlement at the earliest time possible to minimize costly project delays and ensure fair andsocially responsible compensation and livelihood programs for future would-be-affectedpersons.

3 For National Power Corporation

18


28/51

18

as soon as possible, to avoid further complications, it is essential that they be completed beforeNPCs privatization in the second half of 2003:

(i) The windbreak around the coal-storage yard should be installed to conform to theECC requirements.

(ii) The four dysfunctional remote monitoring stations, which were designed tomeasure ambient air pollutant concentrations, should be repaired.

(iii) The outstanding issues related to resettlement should be resolved by NPC,namely, the ongoing lawsuit against NPC on compensation, providing PAFs with

drinking water by constructing water lines, study of the feasibility of providingmore assistance to the local economy by constructing a basic market in a nearbyarea, and transfer of land titles to PAFs.

(iv) As timely procurement of spare parts is a crucial factor for MTPPs uninterruptedoperations, NPC should streamline its procurement procedures.

(v) To avoid possible equipment damage, NPC should operate MTPP with theexisting UF relay settings. Although this may reduce grid security, the risk is

small compared with the stability problem caused by the larger size of the Sualunits.

Appendix 1 19


29/51

Appendix 1 19

PROJECT COST AND FINANCING PLAN

Table A1.1: Cost Breakdown by Project Component($ million)

Appraisal Estimate ActualItem Foreign Local Total Foreign Local TotalA. Base Costs

1. Electromechanicala. Boiler and Auxiliaries 81.00 5.60 86.60 103.19 0.00 103.19b. Turbogenerator and Auxiliaries 69.00 1.90 70.90 115.06 0.00 115.06c. Coal-Handling System 43.00 1.50 44.50 33.65 0.00 33.65

2. Civil Worksa. Harbor 9.20 5.20 14.40 23.25 0.00 23.25

b. Cooling Water 5.00 8.80 13.80 13.46 0.00 13.46c. Powerhouse and Stack 8.30 4.00 12.30 18.09 0.00 18.09d. Others 12.50 28.00 40.50 38.22 0.00 38.22

3. Insurance and Transport 9.00 4.00 13.00 5.95 0.00 5.954. Social Costs

a. Land/Right-of-Way 0.00 3.00 3.00 0.00 11.62 11.62b. Relocation/Resettlement 0.00 0.00 0.00 0.00 3.06 3.06c. Financial Assistance 0.00 0.00 0.00 0.00 11.07 11.07

5. Consulting Services

a. Fuel Management 0.50 0.10 0.60 0.00 0.00 0.00b. Construction Supervision 6.50 0.90 7.40 10.47 1.50 11.97

6. Administrative/OperationalExpense

0.00 0.00 0.00 0.00 8.50 8.50

Subtotal (A) 244.00 63.00 307.00 361.34 35.75 397.09B. Contingencies 47.00 28.00 75.00 0.00 0.00 0.00C. Interest During Construction 59.00 0.00 59.00 32.18 0.00 32.18

Subtotal (B+C) 106.00 28.00 134.00 32.18 0.00 32.18

Total 350.00 91.00 441.00 393.52 35.75 429.27Source: Operations Evaluation Mission.

Table A1.2: Financing Plan($ million)

Appraisal Estimate ActualItem Foreign Local Total Foreign Local Total

Implementation CostsNPC 0.00 61.00 61.00 21.55 35.75 57.30ADB 171.00 0.00 171.00 190.82 0.00 190.82JEXIM 120.00 30.00 150.00 148.97 0.00 148.97

Subtotal 291.00 91.00 382.00 361.34 35.75 397.09IDC C t

20 Appendix 2


30/51

20 Appendix 2

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

Project Processing and Pre-Construction

A. Loan Signing

B. Loan Effectiveness

C. Land Acquisition

D. Environmental Compliance Certificate

Construction Stage

A. Generating Plant

1. Design/Manufacturing/Delivery

2. Civil Works

3. Electromechanical Erection

4. Test and Commissioning

Project Completion

Appraisal

Actual

1998

PROJECT SCHEDULE

1994 1995 1996 19971992 19931991

Loan Agreement required

that all needed land be

acquired before award of

the turnkey contract.

Land acquisition requirements

complied with on 23 Sep 1994.

Appendix 3 21


31/51

Appendix 3 21

GENERATION OUTPUT DATA FOR MASINLOC THERMAL POWER PLANT

Auxiliary Net PlantYear/ Gross Generation (MWh) Use

a Output Factor

b

Month Hours Unit 1 Unit 2 Plant (MWh) (MWh) (%) Remarks

1999

Jan 744 48,794 100,355 149,149 11,293 137,856 30.9 Output constrained by transmission limits

Feb 672 71,710 133,848 205,558 14,832 190,726 47.3 Output constrained by transmission limits

Mar 744 22,466 162,637 185,103 11,765 173,338 38.8 Output constrained by transmission limits

Apr 720 180,855 51,750 232,605 20,642 211,963 49.1 Output constrained by transmission limitsMay 744 195,535 73,040 268,575 21,681 246,894 55.3

Jun 720 71,590 197,762 269,352 20,432 248,920 57.6

Jul 744 0 177,215 177,215 12,864 164,351 36.8 Final Inspection-Unit 1

Aug 744 45,800 195,080 240,880 17,839 223,041 50.0 Unit 1 Failure/Repair

Sep 720 0 191,180 191,180 13,490 177,690 41.1 Unit 1 Repair

Oct 744 0 163,975 163,975 11,322 152,653 34.2 Unit 1 Repair

Nov 720 0 0 0 0 0 0.0 Unit 1 Repair/Unit 2 maintenance (annual)

Dec 744 10,109 0 10,109 1,825 8,284 1.9 Unit 1 Repair/Unit 2 maintenance (annual)

8,760 646,859 1,446,842 2,093,701 157,985 1,935,716 36.8

2000

Jan 744 167,224 0 167,224 13,667 153,557 34.4 Unit 2 Failure/Repairs

Feb 696 217,139 0 217,139 15,029 202,110 48.4 Unit 2 Failure/Repairs

Mar 744 205,438 0 205,438 13,707 191,731 43.0 Unit 2 Failure/Repairs

Apr 720 198,653 0 198,653 13,769 184,884 42.8 Unit 2 Failure/Repairs

May 744 65,228 0 65,228 5,640 59,588 13.3 Unit 2 Failure/Repairs

Jun 720 168,695 108,278 276,973 22,718 254,255 58.9Jul 744 144,879 190,554 335,433 24,849 310,584 69.6

Aug 744 172,277 217,211 389,488 27,755 361,733 81.0

Sep 720 169,552 217,974 387,526 27,393 360,133 83.4

Oct 744 144,461 195,054 339,515 25,244 314,271 70.4

Nov 720 0 180,459 180,459 13,713 166,746 38.6 Unit 1 Maintenance (annual)

Dec 744 107,655 207,961 315,616 21,654 293,962 65.9 Unit 1 Maintenance (annual)

8,784 1,761,201 1,317,491 3,078,692 225,138 2,853,554 54.1

MWh = megawatt-hour.a Based on actual figures until April 2001 and estimated at 7.1% of gross generation afterwards.b Based on net output at 230 kilovolt.Source: Masinloc Thermal Power Plant.

22 Appendix 3


32/51

pp

GENERATION OUTPUT DATA FOR MASINLOC THERMAL POWER PLANT (Contd.)

Auxiliary Net PlantYear/ Gross Generation (MWh) Use

a Output Factor

b

Month Hours Unit 1 Unit 2 Plant (MWh) (MWh) (%) Remarks

2001

Jan 744 195,446 176,368 371,814 26,251 345,563 77.4

Feb 672 184,903 207,826 392,729 26,968 365,761 90.7

Mar 744 193,637 194,548 388,185 25,766 362,419 81.2

Apr 720 213,160 208,855 422,015 28,069 393,946 91.2

May 744 211,212 211,796 423,008 30,034 392,974 88.0

Jun 720 222,208 141,831 364,039 25,847 338,192 78.3

Jul 744 165,431 69,165 234,596 16,656 217,940 48.8 Unit 2 Maintenance

Aug 744 111,565 212,013 323,578 22,974 300,604 67.3

Sep 720 75,576 218,964 294,540 20,912 273,628 63.3

Oct 744 108,126 187,240 295,366 20,971 274,395 61.5

Nov 720 80,777 195,813 276,590 19,638 256,952 59.5

Dec 744 0 186,833 186,833 13,265 173,568 38.9 Unit 1 Maintenance (annual)

8,760 1,762,041 2,211,252 3,973,293 277,351 3,695,942 70.3

2002

Jan 744 165,565 116,036 281,601 19,994 261,607 58.6

Feb 672 189,705 190,671 380,376 27,007 353,369 87.6

Mar 744 166,124 167,445 333,569 23,683 309,886 69.4

Apr 720 197,910 203,446 401,356 28,496 372,860 86.3

2,880 719,304 677,598 1,396,902 99,180 1,297,722 75.1

MWh = megawatt-hour.a Based on actual figures until April 2001 and estimated at 7.1% of gross generation afterwards.b Based on net output at 230 kilovolt.Source: Masinloc Thermal Power Plant.


33/51

UNIT OUTAGE/AVAILABILITY FOR MASINLOC THERMAL POWER PLANT

1999 2000 2001 2002

Unit 1 Unit 2 Unit 1 Unit 2 Unit 1 Unit 2 Unit 1 Unit 2

Outage Availability Outage Availability Outage Availability Outage Availability Outage Availability Outage Availability Outage Availability Outage Availability

Month Hoursa (h) (%) (h) (%) (h) (%) (h) (%) (h) (%) (h) (%) (h) (%) (h) (%)

Jan 744 495 34 234 69 114 85 744 0 0 100 67 91 78 90 251 66

Feb 672 365 46 161 76 0 100 672 0 61 91 0 100 0 100 0 100

Mar 744 590 21 73 90 0 100 696 6 0 100 0 100 2 100 0 100

Apr 720 0 100 473 34 53 93 720 0 0 100 34 95 0 100 0 100

May 744 24 97 303 59 403 46 744 0 0 100 0 100

Jun 720 501 30 0 100 0 100 258 64 0 100 255 65

Jul 744 744 0 27 96 63 92 0 100 35 95 425 43

Aug 744 554 26 19 98 0 100 0 100 0 100 0 100

Sep 720 720 0 50 93 0 100 0 100 230 68 0 100

Oct 744 744 0 141 81 65 91 19 97 0 100 52 93

Nov 720 720 0 720 0 720 0 32 96 290 60 15 98

Dec 744 602 19 744 0 304 59 0 100 744 0 0 100

Total 8,760 6,058 31 2,943 66 1,721 80 3,884 56 1,360 84 847 90 80 99 251 97

h = hours.a

Total number of hours for 1999 and 2001 was 8,760 as shown here, but was 8,784 for 2000. The additional February hours in 2000 were not considered in the calculation.

Source: Masinloc Thermal Power Plant.

24 Appendix 5


34/51

COMPLIANCE WITH MAJOR LOAN COVENANTS

Covenant Status

1. Provision of adequate local funds for the Project.Reference: LA 1042; Section 4.02 Complied with.

2. Submission of annual financial statements audited by auditorsacceptable to ADB, not later than 6 months after the end of eachfiscal year.Reference: LA 1042; Section 4.12

Complied with.

3. Self-financing ratio, on a 3-year moving average basis, of not lessthan 20%.Reference: LA 1042; Section 4.12

Detailed data unavailable, but complianceindicated.

4. Debt service ratio of at least 1.0 in 1996 and 1997 and 1.3 timesfrom 1998 onwards.Reference: LA 1042; Section 4.13

Not complied with. The ratio was 0.9, 0.7,and 1.0 for 1999, 2000, and 2001,respectively.

5. Rate of return on average net revalued fixed assets in operation ofat least 8%.Reference: LA 1042; Section 4.14

Not complied with. The rate was 3.4, 2.2,and 2.9 for 1999, 2000, and 2001,respectively.

6. Accounts receivable of no more than the equivalent of 3 monthssales.Reference: LA 1042; Section 4.15

Complied with.

7. Annual discussion with ADB of the results of tariff reviews and theproposed measures to maintain the tariffs at adequate levels.Reference: LA 1042; Schedule 6, para. 3 (b)

Complied with.

8. Annual submission of the National Power Corporation 3-yearbudget, together with the corresponding financial projections andpower expansion program.Reference: LA 1042; Schedule 6, para. 4

Complied with.

9. Revaluation of assets by independent appraiser as of 31 December1992 and every 4-years thereafter.

Reference: LA 1042; Schedule 6, para. 6

Not fully complied with. No independentappraisal undertaken in 2000, but waiver

requested from ADB.10. Development of computerized accounting system and audit to be

continued.Reference: LA 1042; Schedule 6, para. 7

Complied with.

11. Approval of the Project by the Environmental Management Bureauin the Department of Environment and Natural Resources, andimplementation, operation and maintenance of the Project in amanner minimizing environmental damage and consistent with thelaws and legal environmental requirements.Reference: LA 1042; Schedule 6, para. 10

Complied with.

12. All lands, properties, rights-of-way, easements, licenses, and otherrights or privileges that may be necessary to enable the carryingout of the Project to be acquired or made available in sufficient timeto avoid delay in the implementation of the Project.Reference: LA 1042; Schedule 6, para. 11

Not complied with. Protracted acquisitionof land and rights-of-way caused majorimplementation delays.

13 Sufficient and timely supply of required quality of coal is continuous Complied with

Appendix 6 25


35/51

REEVALUATION OF FINANCIAL AND ECONOMICINTERNAL RATES OF RETURN

A. General

1. The financial and economic reevaluation of the Project was carried out in terms of with-and without-project scenarios. All prices and costs were expressed in the second quarter 2002constant Philippine peso values. The costs and benefits incurred before 2002 were adjustedusing the Philippine consumer price index. The reevaluation was carried out for combined units1 and 2 of Masinloc Thermal Power Plant (MTPP) as they had identical design, werefunctionally inseparable and more or less commissioned at the same time, and shared allauxiliary components. A 30-year operating life was assumed for MTPP.

B. Financial Internal Rate of Return

2. Although the Project did not have transmission and distribution components, estimatingthe financial internal rate of return (FIRR) included an allocation of costs for the necessarytransmission facilities to deliver the generated energy to the wholesale level. For the capitalexpenditure for the two units and transmission lines, the estimates used in the projectcompletion report (PCR) for Loan 1398-PHI: Northern Luzon Transmission and Generation

Project were used. Specifically, the capital expenditures included (i) 100% of the costs of MTPPcompletion, (ii) 100% of the Masinloc to Labrador 230-kilovolt (kV) transmission line, (iii) 33% ofthe cost of the Labrador to San Jose 500 kV transmission line, and (iv) 33% of the cost of theassociated substations. Assumptions (iii) and (iv) were based on the fact that the substation andthe transmission lines were jointly used by MTPP and the Sual Plant. Interest paid duringconstruction was deducted from the calculation. Additional assumptions were made based oninformation obtained by the Operations Evaluation Mission (OEM): (i) average fuel costs ofP0.60/kilowatt-hour (kWh) of gross generation (estimated from current actual coal prices);

(ii) annual operation and maintenance (O&M) costs of P0.10/kWh of MTPP and 2% of theallocated capital costs of the transmission and substations; (iii) annual sales of 3,739 gigawatt-hours (GWh)1 to the Luzon grid based on a net generation of 3,915 GWh2 and transmissionlosses of 4.5%; and (iv) an average wholesale tariff of P2.34/kWh for 1998 and P2.89/kWh for1999 and subsequent years.3

3. Based on these assumptions, the recalculated FIRR is 21.4% (see Table A6.1),substantially above the weighted average cost of capital of 6.3% for the Project.4

26 Appendix 6


36/51

C. Economic Internal Rate of Return

4. To convert financial costs to economic costs, all taxes and duties were deducted.Nontradable costs of local goods and services, which were estimated as about 20% of totalfinancial costs, were converted to border prices using a 0.88 standard conversion factor. Inaddition to the transmission costs, as included in the financial reevaluation, the economicreevaluation also included the average distribution cost, estimated at P1.75/kWh, anddistribution losses estimated at 14%.

5. The economic benefits of the Project to society were attributed to two sources: (i) resourcesavings from replacing existing but more expensive generation option, namely, oil-basedgeneration units; and (ii) economic value of additional electricity sales. Although part of therationale for the Project was to replace the existing oil-based units in Luzon, its delayedcompletion has reduced the first category of benefits attributable to switching from oil to coal.Most of the oil-based units continued to operate till January 2000 when they weredecommissioned at the average age of about 30 years. Even without MTPP, those aging oil-based plants would have to be retired soon. Therefore, the substitution benefit is assumed to beminimal and all electricity generated and sold by MTPP is for additional uses, whose benefitmay be estimated using the average willingness-to-pay (WTP) approach.5

6. To estimate WTP, a linear demand function for electricity was assumed for all electricityconsumers in Luzon (Figure A6). The linear demand function assumes that there exists amaximum consumption level, qmax, when the price reaches zero (i.e., the demand is not infiniteat zero price). Likewise, there exists a maximum price, pmax, beyond which the consumption ofelectricity would be zero (i.e., all customers would switch to alternatives such as self-generation). The quantities of electricity generated and sold for the with- and without-projectscenarios are denoted by qw and qwo with their corresponding demand prices pw and pwo. Theeconomic benefit of the incremental quantity (q

wo q

w) is the area beneath the demand curve

between qwo and qw.

7. To determine the slope of the linear demand function, two points are needed. Thecurrent actual price and total electricity consumption in Luzon, i.e., with-project, were used asthe first point (qw, pw). Information provided by the National Power Corporation (NPC), ManilaElectric Company (Meralco), and representatives of smaller utility cooperatives in northernLuzon indicates that, in 2001, total actual sales of electricity in Luzon or qw was 24,073 GWh,while the weighted average actual retail price for Luzon or pw was P6.46/kWh.

6 To estimate the

second point (p2, q2), one needs to estimate the feasibility and costs of self-generation as analternative for customers with different capacity demands. Table A6.2 provides cost estimatesfor diesel generators of various capacities, which can meet most industrial and commercialcustomers demand. It indicates that the resulting cost is about P5/kWh for most generators.Considering the additional cost of land and other barriers to a consumer procuring and installinga generating system for internal use i e initial capital costs reluctance to enter into an

Appendix 6 27


37/51

indicated that they would be willing to stay with Meralco as long as the price is not more than15% higher than what they are paying now, averaged at P6.46/kWh.

Figure A6: Demand Curve for Electricity

8. The OEM believes that users with a combination of high load factor and whose overheadand production costs are electricity-intensive are more likely to start a self-generation to avoidincreasing costs from the utility supply. Examples are ice plants, refineries, and cementproducers. Many of these enterprises exhibit load factors of 50% and more. Assuming anincrease in price of about 15% or P1/kWh to P7.46/kWh, the OEM estimates that a totaldemand of 700 megawatts (MW) of load presently connected to the Luzon grid, which has atotal available capacity of 5,300 MW, is likely to induce a move to self-generation. This isequivalent to 3,066 GWh for the Luzon grid. Therefore, total electricity sale for Luzon or q2when the retail price p2 reaches P7.46/kWh is estimated as 24,073 3,066 = 21,007 GWh(about 13% reduction in electricity consumption).

9. Using the linear demand function defined by the above two points, it is possible to

determine the marginal demand price or marginal WTP given a level of electricity sale. For thewithout-project scenario, total electricity sale in Luzon qwo in 2001 would have been total actualelectricity sale minus electricity sale by MTPP for the year, or 24,073 GWh 3,177 GWh =20,896 GWh. The marginal demand price for the without-project scenario or p wo is calculated asP7.50/kWh. The average WTP for Luzon industrial, institutional, and residential customers isthus calculated as (pw + pwo)/2 or P6 98/kWh

7 On this basis the economic internal rate of return

qmax qqw

p

pmax

pw

0

pwop2

qwo q2

AverageWillingness-to-Pa


38/51

Appendix 6 29


39/51

Table A6.2: Unit Costs of Generation in the Philippines, 2002

P/$ = 50.00Item Type 1 Type 2 Type 2 Type 3 Type 4

Load Demand (kW) 1,000 1,000 1,000 5,000 10,000

Power Factor >0.90 >0.90 >0.90 >0.90 >0.90

Unit Configuration 2 x 500 2 x 500 2 x 500 5 x 1,000 5 x 2,000

$/kW Installed 225 225 225 150 125

Total $ 225,000 225,000 225,000 750,000 1,250,000

Total P 11,250,000 11,250,000 11,250,000 37,500,000 62,500,000

Load Factor 65% 60% 50% 50% 50%

Annual kWh 5,694,000 5,256,000 4,380,000 21,900,000 43,800,000

Fuel Usage (liter) 1,898,000 1,752,000 1,460,000 7,300,000 14,600,000

Fuel Cost/liter (P) 13 13 13 13 13

Fuel Cost (P) 24,863,800 22,951,200 19,126,000 95,630,000 191,260,000

Debt Service (P) over 10 yr 1,830,881 1,830,881 1,830,881 6,102,938 10,171,563

O&M (P) 1,000,000 1,000,000 1,000,000 5,000,000 10,000,000

Total Cost (Annual) 27,694,681 25,782,081 21,956,881 106,732,938 211,431,563

P/kWh 4.86 4.91 5.01 4.87 4.83

kW = kilowatt, kWh = kilowatt-hour, O&M = operation and maintenance, P = Philipinne peso.Assumptions:1. Generation is by diesel-driven generator.2. Diesel as fuel, fuel efficiency at 3.0 kWh/liter.3. "Slow-speed" units utilized for base load generation (typical rated rpm at 600, 1,200, 1,800).4. Power Factor < 0.90 corrected by capacitors.5. Installation considered as "temporary" due to 5-10 years expected high rates due to purchase power

adjustment.Notes:1. Above assumes no cost of land, no extraordinary maintenance, levelized fuel costs.2. Similar installations in the United States normally provide generation at $0.060.08/kWh.Source: Operations Evaluation Mission.

7/31/2019 Sixteen