Document of The World Bank FOR OFFICIAL USE ONLY F $ V Report No. 1848-PH PHILIPPINES STAFF APPRAISAL REPORT RURAL ELECTRIFICATION PROJECT March 13, 1978 Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients only in the performane2 of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY F $ V
Report No. 1848-PH
PHILIPPINES
STAFF APPRAISAL REPORT
RURAL ELECTRIFICATION PROJECT
March 13, 1978
Projects DepartmentEast Asia and Pacific Regional Office
This document has a restricted distribution and may be used by recipients only in the performane2 oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.
1 meter (m) = 100 centimeters (cm)1 hectare (ha) = 10,000 square meters (sq. m)
ABBREVIATIONS AND ACRONYMS
Coop - CooperativeDOE - Department of EnergyEDB - Energy Development BoardGNP - Gross National ProductIER - Internal Economic ReturnMECO - Manila Electric CompanyMM - Man-Month
NEA - National Electrification AdministrationNPC - National Power CorporationNRECA - National Rural Electric Cooperative AssociationPDC - Power Development Council
NEA's FISCAL YEAR
Until 1976: July 1 - June 301976 onward: January 1 - December 31
This document has a restricted distnbution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed withoul World Bank authorization.
1. NEA Organization Chart2. Assumptions in Financial Forecasts3. Statement of Policy4. Related Documents and Data Available in the Project File5. Map IBRD 13281
This report is based on information obtained by B. Abadian, J. Cavallottiand J. Sneddon during an appraisal mission to Manila in September/October1977.
PHILIPPINES
NATIONAL ELECTRIFICATION ADMINISTRATION
APPRAISAL OF THE RURAL ELECTRIFICATION PROJECT
1. THE POWER SECTOR
General
1.C1 The power sector in the Philippines has historically been poorlycoordinated and uneven in performance and institutional strength. In 1970,there were 336 private utilities and 122 public utilities, most of which werevery small and located in urban areas. Since then a number have been takenover by rural cooperatives and some have ceased operating. As of August 1977,about 85 utilities and 73 cooperatives were actually supplying consumers.The Manila Electric Company (MECO), responsible for generation and distributionin the greater Manila area, dominates the private sector, while the NationalPower Corporation (NPC) is the largest public utility. MECO accounted forabout 63%, and NPC 29%, of total electricity generated by utilities in 1976.Many of the smaller utilities have distributed power purchased from NPC and MECObut some have also generated their own power, accounting for the remaining 8%.Only about 26 of the 85 utilities sold more than 5 Gwh in 1976 and only about19 of the 39 generating plants owned were larger than 1 MW. Service by thesmall utilities (and some of the larger) has been substandard, costly, andconfined to the centers of urban areas; no attempt had been made to carry powerto villages. The absence of reliable power supplies has caused many industriesto resort to captive plants to meet their power needs.
1.02 Fragmented ownership of the generation and distribution facilitiesbecame an important obstacle to the coordinated development of the powersector. The Government, therefore, formed the National ElectrificationAdministration (NEA) in 1969 under Republic Act 6038 (revoked in 1973 andreplaced by Presidential Decree 269), which declared the national objectiveof total electrification on an area coverage I1 basis through electriccooperatives. Little progress was made until after the declaration ofmartial law in late 1972. The Government announced in Presidential DecreeNo. 40 that the total electrification of the country was a national policyobjective which should be achieved by establishing island grids, integratinggenerating systems and consolidating electric distribution franchise systems.NPC was made responsible for island grids, the development of all futuregeneration supplying the grids and ultimately, for owning and operating allgenerating facilities. MECO, now the largest generating as well as distribut-ing company, will eventualLy become only a distributing utility; negotiationsfor transferring the bulk of MECO's generating plants and transmission linesto Government are nearing conclusion.
1.03 The Department of Energy (DOE), created in 1977, is the policymakingbody for the power sector responsible for formulating policies and programs
/1 Area coverage means connecting every house or building providedthat the cost of doing so is reasonable in relation to overallsystem costs.
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on power development and coordinating the activities of all organizationsconnected with electric power, including approval of the power projectpipeline and the ratemaking policy. Responsibility for granting powerfranchises is also covered and assurances were obtained during negotiationsand incorporated into the Guarantee Agreement that licenses for power genera-tion and distribution will continue to be granted by NEA. The DOE coordinatespolicy for NEA, NPC, MECO and all other utilities. NPC and NEA both reportto it. The Department Secretary is the Chairman of the boards of directorsof both NEA and NPC to ensure coordination of the two corporations.
1.04 The intrasectoral responsibilities of NEA and NPC are clearlydefined. If properly implemented, the reorganization of the sector willlead to better coordination in power development. Progress is alreadyapparent. NEA's eEforts in setting up rural cooperatives have beenwelcomed in the provinces, and consumers have shown themselves willing topay the cost of power supplies whether at low or high tariff levels. NPChas committed itself to a massive generation and transmission developmentprogram, not only in Luzon, where its activities were concentrated in thepast, but also in Mindanao and the Visayas. NEA should have no difficultyin carrying out its share of the program but NPC's responsibilities havebeen greatly increased and it is reorganizing to meet these. Its mana-gerial, technical and financial ability to carry out its ambitious programhas yet to be proven.
The Bank's Role in the Sector
1.05 To date :he Bank has made seven loans to NPC, and IDA one creditto the Government, totaling US$218.3 million, to assist in the developmentof the Philippines' power sector. The first loan, for US$14.4 million,was made in 1957 to provide partial financing for the Binga hydroelectricproject. The most recent, signed in August 1977, made US$58 million availablefor expansion of the transmission system in Luzon, the first stage of acentral load dispatching system, and consultants' services. Although some ofthe projects financed either exceeded the original execution schedules orexperienced cost overruns, all of them are being operated satisfactorily.
1.06 The proposed loan of US$60.0 million would be the first from theBank to NEA for power expansion and would help finance the 1979-1980 portionof the rural electrification program; it would provide access to electricityservice for more than 5.3 million individuals in the countryside and help toincrease incomes arong the poorest population.
Main Characteristics of the Sector
1.07 Electricity generation in the Philippines grew at an annual rate of11.0% over the period 1970-1976, while GDP grew at a rate of 6.0% over thesame period. Per capita electricity generation is estimated at 323 kwh.Installed capacity at the end of 1976 was 3,542 MW including self-production;oil-fired thermal power plants accounted for 80% of total energy generation.
1.08 There are currently approximately 2.3 million subscribers for anestimated population of 43 million. The population serviced throughout thecountry rose from 27% in 1972 to 32% in 1976 as shown below:
Served by ElectricSystem 5,432 8,064 5,390 5,731 10,822 28 13,795 32
Not served 25,153 26,082 2,842 3,125 27,995 72 29,207 68Total ('0OOs) 30,585 34,146 8,232 8,856 38,817 100 43,002 100
There are marked contrasts in electricity consumption among the differentregiLons. The Luzon market accounts for 73% of all consumption. In its turn,the central area around Manila accounts for more than 80% of consumption onLuzon although less than 65% of the Luzon population lives in this region.
1.09 Public utility companies supply 79% of total electric power, therest being produced by self-production. Self-suppliers (mainly sugar mills,cement plants, and mining enterprises) own 20% of the country's installedcapacity. The following tab:Le shows installed capacity and power generatedin the Philippines in 1976.
INSTALLED CAPACITY AND POWER GENERATION IN PHILIPPINES IN 1976
Capacity GenerationHydro Thermal Total Hydro Thermal Total
----- MW ---------- GWh ----------
1. Public Service 644 2,178 2,822 2,818 8,243 11,061
Information about the generating capacities and energy production of NPCand MECO is readily available, but a complete analysis of past trends in thePhilippines power sector is hampered by a lack of data about the capacitiesand production of the Bnwl utilities and -rivp--- I'ed rlans r-^-ol_idated statistics of energy consumption for private utilities by class ofcustomer are not readily available except for MECO's customers. As theGovernment has just set up a Department of Energy on which the electricutilities will depend (para 1.03), it is expected that this basic informationwill be kept up to date in future to assure the best allocation of resourcesin the expansion of- the power sector.
Development Program
1.10 NEA aims to establish a cooperative in each province by the end of1977, complete the backbone or primary distribution system by 1980, provideelectricity to all barrios by 1984, and attain total electrification ofthe country by 1990. The following plan has been devised to achieve thosetargets:
No. of Barrios No. of NewYear to be Energized Connections
1.11 NPC is also embarking on a large program to provide the generatingplant and transmission lines required for the electrification of the countryas a whole, as well as meeting the increase in demand in areas which alreadyhave adequate service, such as the greater Manila area.
1.12 Significant changes are expected to take place in the sources ofelectric energy in the coming years. The relative importance of petroleumfor power generation would decline to be replaced by hydro, geothermal andnuclear as shown below:
1.13 The capital investment required for the proposed developmentprogram from 1977 through 1983 is estimated at US$7.3 billion (P 54.0 bil-lion) at current prices including finance charges and price escalation, asshown below:
The Government will have to provide a large part of the investmentrequired for the power expansion program in the coming years since existingconsumers are only able to contribute about 8% to the construction programeven though the rate of return may reach about 10% on revalued net fixedassets. This is acceptable due to the fact that the cost of residentialservice is at present as high as 5% of the disposable personal income andcurrent coop tariffs approximate the marginal cost of power.
2. THE BORROWER
Organization and Management
2.01 The Borrower would be NEA, a stock corporation fully owned by theGovernment with an authorized capital of two billion pesos, of whichP 618 million was paid up at end-1976. Corporate powers are vested in aBoard of Administrators of iEive members, including NEA's executive head, whois an ex-officio member. The Chairman and members are Presidential appointeesand serve for six-year terms. The General Manager of NPC is also a member ofthe Board.
2.02 NEA was originally created in 1969; its duties and responsibilitieswere redefined in Presidential Decree 269 of August 1973, which is currentlyNEA's charter. The main objective of NEA is the total electrification ofthe Philippines on an area coverage basis. NEA is empowered to make loansto public service entities with preference to cooperatives. NEA is alsoresponsible for licensing electric power franchises and assurances wereobtained and provisions included in the Guarantee Agreement that it willcontinue to do so under the new DOE. Since 1972, NEA has mainly grantedfranchises to rural electric cooperatives, 91 of which were in existence atmid-1977 with 73 supplying electricity and 18 with buildings, backbone linesand distribution systems under construction.
2.03 NEA has its head office in Manila. The current organizationchart is shown in Annex 1. Three Deputy Administrators are responsible foradministration and cooperative development, engineering and materials, and
finance and franchises. In addition, training, special studies and otherdivisions report directly to the Acting Administrator. NEA has met itsresponsibilities efficiently as evidenced by the success of the program; itis generally a well-operated and managed organization but the rapid acceler-ation of the electrification program has caused certain strains. Emphasishas been on initial organization of cooperatives and program implementationwith the day to day utility operations taking a secondary role.
2.04 Staff of NEA are closely involved in the formation and operationof the cooperatives. NEA has developed manuals which lay down standardoperating procedures to be followed by cooperatives. NEA audit, engineeringand other administration staff ensure that these procedures are followed.Standard operating practices are based on those of the National Rural ElectricCooperative Association of US, which originally provided consultants to NEAunder USAID auspices.
2.05 Ten year development and financial plans are compiled for coops inthe initial feasibility and architectural and engineering studies. Thesehave not been updated annually as the coop situation and projected loadgrowth has changed. Currently, five-year plans are only available for fivecoops. It was agreed during negotiations that NEA will form a planning unitthat inter-alia would prepare five year plans for all coops by end-1978 and10 year plans by end-1979; thereafter all would be updated annually.
Audit and Accounts
2.06 NEA's annual accounts were made up on a Government department basisuntil 1974, which precluded the preparation of income statements andbalance sheets. Since 1974, income statements and balance sheets have beenprepared in the conventional commercial form. Accounting is good and thestaff which includes a number of CPA's, are competent.
2.07 The audit of NEA's annual accounts is carried out by the Auditorof the Administration who is appointed by the Auditor-General, the ex-officioauditor. The Auditor of the Administration who serves full time in NEAheadquarters approves all checks prior to payment; the procedure used has ineffect, been a pre-audit rather than a post-audit analysis of the balancesheet. It was agreed during negotiations that the Government, with theassistance of the Bank, will undertake a review of the auditing proceduresfor NEA.
Consolidation and Coordination of Information
2.08 NEA obtains monthly reports on coop operations, construction andother aspects of coop activities. The available information has not beenconsolidated in the past and it was agreed during negotiations that aninformation section will be established in the planning unit to gather andconsolidate informal'ion and statistics relating to all coops.
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Cooperatives
2.09 Organization and Management. Cooperatives are organized withthe help of NEA at the request of district electrification committees whichare formed from local municipal councilors. A feasibility study is carriedout of the proposed cooperative area by NEA staff to ensure that the coop-erative would be financially viable. The cooperative is then registeredwith a board of directors each of whom represents one or more munici-palities /1 as required to limit the maximum number of board members toabout seven. The coops then conclude a loan agreement with NEA. Amanager, and architectural and engineering consultants are appointed onterms and conditions and with qualifications and experience satisfactoryto NEA.
2.10 Consultants. Local consulting firms plan and design the systemand buildings and supervise the construction of both. These firms havegained considerable experience in the design and construction of distributionsystems during the first five years of program implementation. The localfirms will continue to be supervised by NEA with the assistance of StanleyConsultants, Inc. of the U.S. (financed by USAID), whose present contractextends through 1980.
2.11 Reports and Progress Certificates. Cooperatives send reports toNEA on all aspects of operations:
(a) monthly operations;(b) annual budgets - capital and operating; and(c) construction progress and related certificates.
The construction progress certificates are required by NEA before fundsare released to the cooperative to make payments to the contractor.Certificates are issued by the A&E consultants and progress is often alsoverified by NEA staff.
2.12 Audit and Accounts. Coop accounting and management audits arecarried out by NEA staff to verify that accounts and books are properlymaintained and up to date. However, a final audit of the annual accounts isnot carried out and currently the annual income statements and balance sheetsof each coop have no audit certificate. Agreement was obtained duringnegotiations that the annual accounts of each coop be certified by auditorsacceptable to the Bank for the year ending December 31, 1978 and every yearthereafter.
2.13 Manpower and Training. NEA trains all the personnel required toman the coops, including managers, accountants, linemen, electricians, andplant operators. Courses and training tours have also been sponsored inthe US. By the end of 1976, a total of 516 courses had been held covering19,400 participants.
2.14 The Philippines is one of the most advanced developing countriesin the field of rural electrification. The RE program is working well and
/1 Approximately equivalent to a US county.
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is being pursued vigorously; consequently, other developing countries arestudying the program for possible use in promoting their own RE programs.During 1976, a conference-study tour on rural electrification was heldwith about 40 participants from 13 countries.
2.15 NEA and the cooperatives are well-manned with adequately trainedand qualified staff. The manpower needs of the RE program are met byrecruitment from the educated and skilled manpower available in thePhilippines, who are then given specific training in the standard proceduresand the functions in which they will be employed in NEA or the cooperatives.
2.16 Insurance. Individual coops have arranged some insurance coveragebut generally coops carry only motor vehicle insurance. NEA is in process ofestablishing a mutual insurance fund to provide adequate coverage for coopfacilities. It was agreed during negotiations that all coops would holdinsurance coverage satisfactory to the Bank.
2.17 Tariff Policy. General NEA policy is that each cooperative is anindividual entity which must be financially self-supporting, although subsidiesare provided in the form of tax exemption and low lending rates that do notexceed 3% p.a. Tariffs are fixed by the individual coop boards to meet thisobjective. In doing so, the coops endeavor to comply with targets laid down byNEA that tariffs should be fixed to cover cash operating expenses 1/ in the firstyear of operation and cash operating expenses plus 15%, 25%, 35% and 50% ofthe sixth year's debt service for the second through fifth years of operation,respectively, so that an aggregate of 125% of the sixth year's amortizationand interest is available to the coop at the beginning of that year.
2.18 Anomalies currently exist in the tariff levels among the cooperatives.Although these will be addressed during the tariff study to be carried outunder Loan 1460-PH (made in 1977 to NPC), two aspects were discussed duringappraisal. The first is the large variation in tariff levels among coops.Tariff levels currently range from P 0.15 (USJ2.0) to g 1.16 (USd15.6),depending on whether the power comes from cheap hydro sources in northernMindanao or from diesel generation for a small coop in South Leyte. Somecross funding from prosperous to less prosperous coops may be justified andcould be achieved by NEA having different terms of lending for the cooper-atives. The second aspect is that there is little or no subsidy for poorconsumers. Generally, coops have a flat rate per kWh whether or not coveredby the minimum charge. Under Loan 1460-PH, it was agreed that the Governmentwill consult with the Bank on its tariff policies when the ongoing tariffstudy is completed, which is expected at end-1978.
/1 Operating expenses excluding depreciation, interest and amortization.
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Load Promotion Programs
2.19 NEA promotes the use of electric power through the followingprograms:
(a) Illumination for Learning and Work;(b) Rural Water Service;(c) Fishermen's Assistance;(d) Small-Scale Industry; and(e) Irrigation.
2.20 The Illumination for Learning and Work project is a program formaking loans of a maximum of 1 50,000 (US$6,700) to RE coops willing toonlend to school boards for schoolhouse wiring. Close liaison is maintainedwith the Department of Education and Culture; evening classes are organizedfor adult education, vocational courses, social activities, and other instruc-tion using educational television. Nine hundred and four public schools with7,281 classrooms had been electrified by mid-1977. Thousands of adults andout-of-school youths have enrolled in various evening classes and for theformal five-year secondary and college courses offered in these schools.
2.21 The Rural Water Service Program began in 1976, the purpose beingthe formation of village water supply coops to construct facilities for apotable water supply comprising an electric pump, a small storage tank and acommunal .standpipe distribution system. Five associations had been formedby mid-1977 and six feasibility studies were under evaluation.
2.22 The Fishermen's Assistance Program provides loans to associationsfor the construction of ice plants, cold storage plants and markets. By mid-1977, NEA had lent F 4.8 million (US$140,000) to five fishermen's associations.
2.23 The Small-Scale Industry Program aims at fostering employmentin the provincial areas by using electric power. The Bank made a loanto NEA of US$ 2.3 million in 1975 to assist in financing machinery for thesecoops. Total loans of 1 3.35 million (US$447,000) had been committed to tencoops by NEA at mid-1977.
3. THE POWER MARKET
Historic Background
3.01 Electric power generated in the Philippines totalled 13,896 Gwh in1976: Luzon producing 73% (10,150 Gwh), the Visayas 13% (1,773 Gwh) andMindanao 14% (1,973 Gwh). A considerable amount of the electric powergenerated in the Visayas (74%) and Mindanao (27%) was produced by captiveindustrial plant.
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3.02 The Luzon interconnected system is the main electricity system inthe Philippines and comprises the generating and transmission facilitiesof the two largest- public utility companies operating in the region, namelyMECO, serving the Manila metropolitan area and adjacent zones, and NPC, whichsupplies the proviLncial districts of Luzon. Electric power consumption inthe area served by NPC-MECO grew at an average rate of 11.3% between 1960 and1975; over the same period, GNP rose at an average of 5.8% a year, while thepopulation growth rate was 3.1%. Growth in electric power consumption andGNP from 1960 to 1L975 was as follows:
Consumption Growth Rate GNP Growth RatePeriod % per year % per year
3.03 The drop in the growth rate in the last five-year period was aresult of a drastic fall in consumption in 1974 (-1%) by comparison with1973. The fall was due to severe restriction in consumption and an increasein tariffs applied in the Manila metropolitan area following the rise ininternational oil prices. Nevertheless, the Luzon market recovered quickly,the consumption growth rate reaching 12.2% in 1975 and 8% in 1976.
3.04 A summary of development in the integrated Luzon market is givenbelow:
3.05 The load factor in the Luzon integrated system is high owing tothe fact that industrial consumption predominates and that there have beencertain restrictions on peak-hour demand in recent years. MECO's losses intransmission and clistribution (9%), and NPC's in transmission (5.8%), arereasonable and have decreased as a whole from 14% in 1960 to 7% in 1976.Small producers in Luzon as well as in the Visayas and Mindanao generallyshow high losses ('over 20%).
3.06 Statistical data on development in electric power production andconsumption in the Visayas and Mindanao, is extremely sketchy and unreliable.Some data on energy production over the 1970-76 period are given below:
3.07 Demand forecasts in the Luzon grid prepared by NPC and MECOforesee a growth rate of 10.0% annually for the period 1977-81, whichseems reasonable. Provincial demand is estimated to rise 15% per year,while demand in the Manila metropolitan area is expected to grow at 7.8% ayear. Lahmeyer International, the German consulting firm now reviewingthe future generating expansion program for the Luzon mainland, has estimatedthe power demand growth rate at 11.5% through the 1977-85 period, which isconsidered optimistic. This forecast is based on a correlation betweeneconomic and population growth and the associated increase in power energy.Reasonable demand growth (Gwh) in the Luzon interconnected grid based on anannual growth rate of 10%, is shown in Table 3.1 and summarized below:
Sales Generation RequirementsMECO NPC Total MW Gwh
3.08 The existing generating capacity in Mindanao is approximately554 MW of which 201 MW is owned by NPC. Demand growth to be met by NPCis estimated at about 40% a year over the next five years. The forecastassumes that NPC would absorb the load of existing utilities and wouldconnect to its system some :industries with large power demands. Currentlydemand in the region is increasing so rapidly that a large diesel installa-tion has been committed to augment the existing hydroelectric generationand avoid possible power rationing.
3.09 Existing power supplies in the Visayas subgrids depend almostentirely on private utilities and captive industries (351 MW) which run90% of the installed capacity in the region. NPC has launched a majorgeneration development program, starting with diesel plants and proceeding tothermal, hydro and geothermal plants to meet th'e forecast growth in energydemand. The estimated demand in the areas presently served or to be served
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by NPC is forecast to increase from 52 Gwh in 1977 to 1812 Gwh in 1981. Theforecast assumes interconnection of networks on the individual islandsfollowed by interconnection of island grids to cover potential demand,especially from current captive plant and several private franchises withvery high generating costs. Details are given in Table 3.1.
The Rural Electric Cooperatives
3.10 Energy sales from cooperatives accounted for 370 Gwh in 1976with the following breakdown: 81% in Luzon, 8% in the Visayas and 11% inMindanao. Growth in sales by comparison with 1975 was 72%. Energy lossesaccounted for 22% of generation and the energy produced by the cooperativeswas 81 Gwh (17%) of their requirements of 478 Gwh. The high losses weremainly due to the fact that the old distribution networks acquired by thecooperatives are generally inadequate and overloaded. NEA has agreed toplan a program of rehabilitation of the old distribution networks toreduce losses to a 12% average by the end of 1982. The plan will be sentto the Bank for review by mid-1978.
3.11 Energy sales are forecast to increase from 460 Gwh in 1977 to1,430 Gwh in 1981. The mission based its estimates of growth in energy saleson the following assumptions: residential: 33 Kwh-month; commercial: 180Kwh-month; industrial: 10,800 Kwh-month and others: 2,000 Kwh-month. Thesefigures give a weighted monthly consumption per consumer of 55 Kwh-monthwhich is about the present average consumption per capita in the majority oftowns and villages currently served by the cooperatives. Historic andforecast energy sales (see Table 3.2) are summarized below:
3.12 Although the rural electric cooperatives maintain monthly statistics,NEA does not consolidate such data. Neither the cooperatives /1 nor NEA makeanalyses in the short or medium term of their power markets or of likely trendsin consumption by categories and number of consumers. As is recommended inpara 2.05, the planning unit would assist the cooperatives in preparing five-year plans and forecasts by the end of 1978 and 10-year plans by the end of1979; thereafter all the plans would be updated annually. All the informationon cooperative activities would also be centralized in the unit.
4.01 The Rural Electrification Program in the Philippines is designedto accomplish the Government's objective of bringing electric service to thewhole population by 1990. NEA, the national executing agency, has set late1980 as the deadline for achieving its short-term goal of completing thebackbone or primary distribution systems connecting all the municipalitieswithin the area of operation of each cooperative. Medium-term goals, to beachieved by 1984, call for the electrification of all barrios and for theconnection of approximately 4.3 million dwellings housing some 26 millionindividuals. To enable every Filipino to have the benefit of power serviceby 1990, the rural electric cooperatives would have to connect an average of600,000 households a year between 1985 and 1990.
4.02 The rural electrification program for 1978-80 prepared by NEAwith the assistance of Stanley Consultants, Inc. (USA) is shown in Table 4.1and summarized below:
RURAL ELECTRIFICATION PROGRAM (1978-1980)
To be energized Household Backbone system Lateral LinesYear Towns Barrios Connections (Kms) (Kms.)
4.03 Accomplishment of the targets set by NEA as a means of carryingout the Government's objectives will depend to a large extent on the Govern-ment's own capacity to make the necessary funds available on time to meetlocal costs and the availability of sufficient skilled manpower to implementsuch an ambitious program. According to NEA and its consultants, the countrydoes possess a large enough labor force with the skills and technical trainingneeded to accomplish the targets set. Government gave assurances that anygap in the funds required for the construction of the program scheduled for1978-1980 would be made available to NEA as required.
Generation and Transmission Facilities
4.04 The present generating capacity of the electricity cooperatives is49 MW. A further 69 MW in diesel units is in the process of installation tosupply power in some areas not currently serviced by NPC. As NPC extendsits service and the cooperative systems are connected to the NPC grid,
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smaller and less efficient plants will be removed and relocated on otherislands where generating capacity needs to be increased or in areaswithout electric power service.
4.05 By 1980, approximately 4,072 Km. of 69 Kv transmission lines areto be constructed. Since NEA's policy is not to duplicate the servicesprovided by NPC, the cooperatives would set up about 716 Km of transmissionlines in areas where NPC does not construct them.
Program Costs
4.06 The investment costs of the 1978-1980 rural electrificationprogram are estimated at the equivalent of US$228.9 million, with a foreignexchange component of US$112.9 million (49%). Details of the annual programof investments are given in Table 4.2.
4.07 Program cost estimates have been based on estimates for astandard project requiring 151 Km of primary distribution lines, 65 Km ofsecondary lines and 98 Km of service drops at a direct weighted cost ofUS$147 per consumer for the backbone system, US$126 per consumer on thelateral primary lines and US$66 per low voltage connection. These costsreflect September 1977 price levels. The standard project as described isthe average project individual cooperatives would execute in the variousregions of the country. Table 4.3 details costs of the standard project.
The Project
4.08 Scope. The proposed project would help finance the 1979-80 programof NEA, and comprises the construction of 230 individual subprojects of which94 would be new projects and 136 would be expansion of the present distribu-tion systems, including rehabilitation of some old distribution facilitiesacquired by the cooperatives from private franchise holders or frommunicipalities.
4.09 Objectives. One of the fundamental objectives of the proposedproject is improvement in the standard of living of the rural poor, whoconstitute the majority of the low-income population. Once a permanentand reliable electric power supply is available, NEA, in conjunction withthe cooperatives, would go on to organize: drinking-water supply projects,thus improving sanitation in the barrios; pump irrigation projects,opening the way for increased farm output; small-scale industry projects,generating new employment opportunities and reducing the rural exodus tourban centers; and projects to promote electricity consumption by usingelectric motors to power mills now operated by diesel equipment, which iscostlier to run and maintain. In addition, project construction work willprovide employment for approximately 12,000 individuals.
Description of the Project
4.10 The project includes the following items:
(a) 476 Km of 69 Kv transmission lines;
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(b) 20,334 Km of primary distribution lines at 13.2/7.6 KV;
(c) 8,743 Km of secondary distribution lines at 220V;
(d) electric motors, pumps and machinery for load promotion;
(e) headquarters facilities, including warehouses for cooperatives;and
(f) consultants' services.
4.11 The single-circuit 69 KV transmission lines would be mounted onwooden poles 45' to 75' long, with ACSR conductors and a steel shieldwire; 4-unit suspended insulator chains and average spans of 110 m. Theprimary distribution system would be mounted on wooden poles 35' to 55'long, using ACSR-type conductors sized to meet the anticipated loaddensity, and pin-type insulators. The average span of the lines would beapproximately 65 m. Approximately 70% of the low voltage distributionsystems would be mounted on the same poles used for the primary distribu-tion networks. Power transformer installations and distribution networkshave been designed with sufficient capacity to supply forecast loads forabout 10 years and also designed for a voltage drop of not more than 10%under full load conditions. The design of the backbone system to cover10 years' load growth to be constructed initially constitutes the least costsolution. With other alternatives (for example to build the backbone systemto cover 5 or 7 years' load growth) the incremental cost to replace theconductors for a larger size and the unavoidable shortages of energy in thesystem would be an uneconomic solution.
Location
4.12 The facilities making up the proposed project would be constructedirn various regions of the island of Luzon, the Visayas and Mindanao (see MapIBRD 13281). The rural areas in the various islands to be served have allbeen the subject of feasibility studies and they were selected on the basisof the following criteria:
(a) proper timing, to ensure that NPC and the cooperatives willhave completed the generating and transmission facilities bythe time the distribution networks are to be energized; and
(b) consideration of the need to provide service to areas where thelack or high cost of electricity has seriously constrainedeconomic development.
Project Cost
4.13 The estimated cost of the project is US$160.5 million, with a foreignexchange component of US$81.8 million, as shown in Table 4.2 and as summarizedbelow:
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In millions of US$ In millions of PLocal Foreign Total Local Foreign Total
The base costs were prepared by NEA and its consultants and reflect September1977 prices. Physical contingencies have been estimated at 5% for materialsand 8% for civil works. Price escalation has been calculated on the basis ofan assumed inflation rate of 7.5% from 1977 to 1979 and 7% thereafter forforeign costs and 8% for local costs.
Financing
4.14 A Bank loan of US$60.0 million is proposed, which would finance theforeign exchange costs as follows:
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Millions of US$
Hardware 7.6Insulators 1.6Conductors 16.7Transformers, etc. 14.8Meters 6.9Street Lights 1.2Miscellaneous (Radio Communication Equipment, Tools
and Billing Machines) 0.7Materials for Load Promotion 0.5
Total Equipment and Materials 50.0
Consultants 0.3Contingencies 9.7
Total 60.0
NEA expects to finance from other external sources the balance of US$21.8 mil-lion of the foreign exchange costs which will be needed in 1980 to completethe 1979-80 program. OECF is expected to finance NEA's program in theCagayan Valley and NEA has been discussing the possibility of additionalfinancing with other external sources. Local costs (US$78.7 million equiva-lent) would be financed by the Government through equity contributions toNEA. The Government gave assurances that any gap in the local or foreignfunds required for the 1978-80 program would be made available to NEAas required.
Engineering and Construction
4.15 The electric cooperatives will use the services of the followingfour local architecture and engineering (A&E) firms for engineering designand construction supervision of the physical facilities: Trans-Asia,Adrian Wilson Inc., DCCD Engineering Corp., and Engineering and DevelopmentCorporation of the Philippines. These firms have gained considerableexperience in the design and construction of distribution systems duringthe first five years of program implementation. The firms will be supervisedby NEA, with the assistance of Stanley Consultants Inc. of the United States.In addition, NEA would engage outside expertise for specialized tasks inmanagement and engineering to improve the administration of the projectduring construction as required.
4.[6 In general, the transmission lines and the backbone distributionsystem would be built by independent contractors. The lateral lines from thebackbone and the service drops to the consumer connections would be undertakenby the cooperatives on force account./l Each contractor would use one or twoteams of workers with an average of 100 men per subproject. Each cooperative
/1 The cooperatives obtain the rights-of-way of their lines free ofcharge.
- 18 -
would employ between 50 and 70 laborers. The construction period for eachsubproject would range between 4 and 11 months, depending on the scope of theworks; the average rate of progress would be 1.5 km a day for contractorsand 1 km a day for cooperatives on the backbone system. £onstrucL±oil of theproject would start: at the beginning of 1979 and would be completed in thelast quarter of 1981.
Procurement
4.17 Contracts for procurement of equipment and materials of morethan $50,000 to be financed by the proposed loan would be awarded on thebasis of international competitive bidding in accordance with the Bank'sguidelines for procurement. For purposes of bid comparison, a preferencelimited to 15% of the c.i.f. price of imported goods, or the customs duty,whichever is lower, will be extended to qualified local manufacturers.Contracts for materials and equipment of less than $50,000 up to an aggregatelimit of $350,000, and civil works contracts (which the Bank would notfinance) will be tendered on a competitive basis in accordance with NEA'snormal procedures, which are satisfactory to the Bank.
4.18 NEA will act as the procurement agent for all goods and relatedservices required Eor the project. NEA will allocate materials to thecooperatives on a cost plus handling and freight basis, but each cooperativewould be responsible for storing these materials in its warehouse. NEA plansto issue invitations to bid for the first materials and equipment contract($14,000,000) after the proposed loan has been approved by the Bank. Thefirst partial delivery is expected to arrive in the Philippines in November/December 1978. NEA and its consultants estimate that in order to avoidshortages of materials during the construction of backbone systems andrapidly increasing household connections, about US$10 million in stocks ofmaterials would be required.
Disbursements
4.19 Funds from the proposed loan would be disbursed against 100% ofthe c.i.f. cost of imported equipment and materials, 100% of the ex-factorycost of locally-procured equipment and materials, and 65% of foreign equipmentprocured locally, and 100% of the cost of services of consultants. Thefollowing table shows estimated loan disbursements.
- 19 -
IBRD fiscal year Disbursements duringand semester semester and cumulative
The closing date would be December 31, 1981, three months after the estimatedcompletion of the project, to allow for some unexpected delays.
4.20 As execution of the rural electrification program is a continuousprocess, any undisbursed amount from the proposed loan would be applied tocomponents of the program similar to those included in the project, followingconsultation with the Bank.
Environment
4.21 A team of specialists provided by the Government of the PhilippinesInter-Agency Committee onl Ecological Studies (ICES) is preparing an assessmentof possible adverse consequences for the environment arising out of the ruralelectrification program. This study is expected to be completed soon; noadverse impact on the project is expected. NEA will submit this study byJune 30, 1978 for review by the Bank and consideration would be given at thattime as to which of its recommendations, if any, should be incorporated inthe project.
Meter & Meter Loop Service drops _Foreign Local Total Materials & Labor (USS'
Service entrance cable 2.70 2170 K15 and connectors 4,19
Connectors 0.81 0>81 #6 duplex 8.51Ground rod clamp 0.54 0.54 K10 2,70Meter 8.90 8.90 Service entrance
Ground rod 4.73 4.73 and meter 24.82
Staples 0.81 081
Ground wire 0.54 0.54 Total 42.24
Total materials 15.52 3.51 21.03
Labor 3,79 3v/19
Total 15.52 7.30 24.82
Project Scope to Serve 4,894 Corisumers
56.0 kilometers of single phase 7.62 KV 18 kilometers of secondary on secondary poles29.4 kilometers of two-phase 7.62/13.2 KV 47 kilometers of underbuild secondary65.8 kilometers of three-phase 7.62/13.2 KV 97.9 kilometers of service drops
151.2 kilometers of primary distribution
November 1977
- 20 -
5. FINANCIAL ANALYSIS
NEA: Past Results and Financial Position:
5.01 NEA's annual accounts were compiled on a government departmentalstyle until 1973 which focused on the budget aspect of operations and didnot distinguish between capital and recurring expenditures. Following theincorporation of NEA as a government corporation, commercial accountscomprising income statements and balance sheets have been prepared since1974. Income statements and balance sheets for 1974-76 are shown in Table 5.1.
5.02 In the past, foreign funds have been received from USAID loans;Japanese reparations which Government has passed to NEA as equity; localfunds have also been provided by government as equity. A summary of NEA'sDecember 1976 balance sheet is as follows:
Millions ofAssets p US$ %
Fixed assetsEquipment and development 39.6 5.3 4.1Less: Depreciatioa and amortization 1.9 0.2 0.2
Short-term and other loans -Load promotion 17.1 2.3 2.3
761.4 102.9 100.0
An additional P 8.0 million (US$1.2 million) of amortization on loans wasoverdue for payment, mainly for loans to private and municipal utilitiesthat had stopped payment in anticipation of being taken over by a cooperative.Such loans are repaid to NEA from the compensation payable to the owners forthe assets on takeover. If the amount of the compensation does not cover theoutstanding loan, collateral assets do so.
5.05 Most of the new cooperatives are within the five-year grace periodof the loans made to them; a pattern of repayment performance has thereforenot yet emerged. While there is some variation in the performance of individualcooperatives, NEA has been successful in ensuring that the cooperatives followefficient operating procedures and has established reasonable standards forsetting tariffs. If some of the cooperatives have difficulty in servicingtheir loans, NEA has the authority and will consider steps to alleviate theposition of the financially weaker cooperatives. These steps include themerging of less viable cooperatives into larger cooperatives and some cross-subsidization to enable the smaller cooperatives to meet their financialobligations while keeping tariffs at reasonable levels. Both the Bank andNEA will closely monitor this aspect of the program.
5.06 A substantial portion of NEA's expenditures to date, although of arecurring nature, have long-term benefits. P 32.4 million (US$4.4) of suchexpenditures had been capitalized at end 1976 for write off over 40 years.In the circumstances the procedure is correct and acceptable to the Bank.
NEA - Future Position
5.07 NEA has performed services in the past which it has not charged tothe cooperatives; it proposes to charge for its services in the future.Operating expenses have been less than 92% of interest and other operatingrevenues in the past but are forecast not to exceed 90% through 1982 as NEAintends to take steps to increase interest rates and shorten repaymentperiods. The pattern of such lending will not emerge until follow-up loans
- 22 -
are made to individual coops at the higher interest rates that will be decildedfor each individual coop when the loans are made. Forecast Income and FundsFlow Statements and Balance Sheets are given in Table 5.2
Financing Plan
5.08 NEA's lending program is much greater than anything that hasbeen accomplished in the past, mainly due to the electrification programgearing up over the next few years. It will lend at least P 3,282 million(US$444 million) through 1982, about four times the accumulated loans at end1976; in addition about P 52 million (US$7 million) will be required to meetNEA's equipment and development expenditures making capital requirementsthrough 1982 an aggregate of 1 3,334 million (US$450 million). To financethis amount, about 59% would be borrowed abroad; government equity wouldprovide 37%; and internal cash generation would provide 6% as shown in thefinancing plan which follows:
FINANCING PLAN 1977-82
Aillions ofP US$ %
Internal cash generation 523 70 15.6Less: Debt service and working capital 336 45 10.0
Loans to be made andcapital investment 3,334 450 100.0
5.09 The proposed Bank loan of P 444 million (US$60 million) and thealready committed P 17 million (US$2 million) from Loan 1120-PH amounts toabout 14% of NEA's capital requirements and 23% of the foreign borrowingneeded through 1982; USAID has committed P 355 million (US$48 million), or18%; French suppliers credits of P 135 million (US$ 18 million) for dieselengines and transmission equipment will provide another 7%; OECF credits ofP 292 million (US$39 million) or 15% are expected to be available for expen-ditures in the Cagayan Valley; a further P 225 million (US$30 million), or
- 23 -
11%, may come from ADB; about FL 45 million (US$6 million), or 3%, is antici-pated from KFW; and P 457 million (US$62 million), or 23%, remains to bearranged. No difficulty is expected in doing so as NEA is already in contactwith other external sources, and the Bank may provide additional fundstowards the end of the five-year period. Government has provided local fundsas equity in the past and has guaranteed the program through 1980 (see para4.03), the period of the Bank-financed project.
NEA's Future Operating Results
5.10 NEA's future financial position is expected to remain sound; annualoperating expenses and interest are not expected to exceed 90% of revenues;debt service coverage on an annual basis is expected not to be below 1.5times (1978); the debt/equity ratio is expected to reach a maximum of53J47 in 1982; and the current ratio is not anticipated to fall below 7.0(1982). However, in order to help safeguard the financial situation, it wasagreed the Government would indemnify NEA for any additional costs forservicing the proposed loan arising from fluctuations in exchange rates.
Cooperatives: Past Results and Financial Position
5.11 Almost all the 73 operating cooperatives are still within the firstfive years of operation; some only began operating recently while othersbegan operation on various dates back to 1972. The degree of financialviability depends on the stage of development and the consequent householdincomes of each cooperative area. Each cooperative fixes its tariffs toproduce the revenues it requires (see para 2.17). The coops remain finan-cially viable because of this and because interest is financed during thefive-year grace period to keep tariffs down to acceptable levels.
5.12 In view of the short history of the cooperative system an analysisof past results would not, however, be indicative of future performance andthis will need to be carefu:Lly monitored.
Cooperatives - Future Position
5.13 Financial plans for five years are currently available for fivecoops only, again because of the concentration on establishing the programand the coops. A covenant is included in the proposed loan agreement thatfive-year plans will be available for all coops by end 1978 and ten-yearplans by end 1980 (see para 2.05). The five coops for which plans areavailable, however, are repcesentative of the whole: two very viable entitiesin well developed areas - Pampanga and Benguet; one coop of average viability- La Union; and two of poor viability - Ilocos Norte, which is connected tothe NPC grid and covers one of the least developed areas of Luzon, andCatanduanes, which obtains its power from its own diesel generation and islocated on a small island off Southern Luzon.
5.14 The forecasts which are discussed below, have been based on thephysical and financial plans prepared by the coops and reviewed by NEA.Figures are based on the individual towns and villages to be connectedthrough 1982 with forecast MW loads and Kwh sales expected for existing and
- 24 -
future residential, commercial, industrial and public lighting consumers.Capital and operating expenditures have been estimated to provide and operatethe re'5 plant and services for these consumers. The forecasts assume 7%p.a. inflation and net operating assets have been revalued on that basis.Detailed assumptions in the financial forecasts are given in Annex 2.
Pampanga Rural Electric Cooperative
5.15 Energy sales are expected to increase from 46 Gwh in 1977 to 187 Gwhin 1982, an average annual rate of growth of 33%; average tariffs, based on arate of return on net fixed assets in operation of 8% p.a., are expected toincrease from P 0.38 (USJ5.1) in 1977 to P 0.51 (USA6.9) in 1982 at currentprices and in real terms are expected to decrease to p 0.34 (USJ4.6) in 1982.Contributions to construction are forecast to average 25% over the fiveyears; the debt/equity ratio is expected to fall from 85/15 in 1977 to66/34 by 1982. Pampanga is financially viable by any standards and shouldcontinue to prosper.
Benguet Electric Cooperative
5.16 Benguet includes the city of Baguio in its franchise area and isalso a viable cooperative. Energy sales are expected to increase from 66 Gwhin 1977 to 87 Gwh in 1982; tariffs based on an 8% rate of return on revaluednet fixed assets in operation, are forecast to increase from P 0.33 (USd4.5)(USd6.6.) to P 0.48 in current prices which is equal to P 0.32 (USd4.3) the1977 average, in real terms. Contributions to construction are expected toaverage about 41%; debt/equity ratios are expected to fall from 71/29 in 1977to 48/52 in 1982; ard current ratios are forecast to be about 2.1 throughoutthe forecast period. Benguet like Pampanga is financially viable and boththese cooperatives should have no difficulty in supplying all power demandsat acceptable tarifE levels.
La Union Electric Cooperative
5.17 La Union coop's energy sales are forecast to increase from 16 Gwhin 1977 to 88 Gwh in 1982, an average annual growth rate of 42%; averagetariffs are expected to range from P 0.37 (USV5.0) in 1977 to P 0.50(USA6.8) in 1982 or about the same level as Pampanga and Benguet. Theresults for 1978 are based on NEA's requirement that coops should earn 50% ofthe debt service in the fifth year of operation - 1979 in La Union's case;results for the folLowing years are based on rates of return of about3%, 5%, 7%, and 8% on revalued net fixed assets in operation. Contributionsto construction on this basis increase to 46% annually by 1982; the debt/equity ratio falls to 61/39; but the current ratio falls to 0.9 as borrowingsof about P 7 million (US$ 1 million) over those currently programmed will beneeded to cover the funds required for La Union's development program.
- 25 -
Ilocos Norte Rural Electric Cooperative
5.18 Energy sales are expected to grow from 16.5 Gwh to 40.6 Gwh, 1977through 1982 or at an average annual growth rate of 19%. Tariffs required,based on rates of return of 3% rising to 8% on revalued net fixed assets inoperation are forecast to double at current prices, from P 0.42 (USd5.7) toP 0.84 (USil.4) or to P 0.56 (USd7.6) in real terms. Borrowings currentlyprogrammed would require to be increased by at least P 12 million(US$1.6 million) to cover the cash deficits in the funds flow. Ilocos NorteCoop because of being located in an underdeveloped area, would requireassistance in ways not currently programmed by NEA if the financial situationis to remain acceptable and average tariffs are to be kept down to reasonablelevels.
Catanduanes Electric Cooperative
5.19 Energy sales for this island coop are expected to increase from3.9 million Kwh in 1977 to 19 million Kwh in 1982; average tariffs based ongraduated rates of return to reach 8% are forecast to increase from P 0.96(USa 13.0) in 1977 to P 1.27 (US¢17.2) per Kwh in 1982 in current prices andto reduce to P 0.85 (USi11.4) in real terms. The current tariff is P 0.50(USi6.8) on average. The projected tariffs are increasingly high and someameliorating action is required to assist the consumers of Catanduanes Coop(See para 2.18).
General
5.20 The sample financial forecasts discussed reveal that some coopswill be able to yield acceptable rates of return. Other coops, however,will need special assistance to keep their tariffs down to acceptablelevels. This may be accomplished by shortening lending terms and increas-ing interest rates to prosperous coops and transferring the funds sogenerated within NEA to less prosperous coops by giving them soft termsfor borrowing. Some cases may require equity to be given as grants; andother coops may need to be merged with their more prosperous neighbors.
5.21 A definite policy cannot be evolved until five-year and preferablyten-year plans for all coops are available so that the overall position canbe consolidated for the country as a whole. Any decisions on adjustingtariffs to make average levels more equitable among coops will need to awaitthe outcome of the ongoing study of power sector tariffs financed under Loan1460-PH of 1977 to NPC. However, in order to safeguard NEA's position, toassure the continued financial viability of the rural electrification program,and that consumers pay for power at tariff rates that approach economic cost,it was agreed during negotiations that NEA would generally follow and causethe coops to follow the financial policies outlined in Annex 3. The issuanceof the policy statement by NEA is a condition of effectiveness of the pro-posed loan.
Table 5.1Page 1 of 2
PHILIPPINES
NATIONAL ELECTRIFICATION ADMINISTRATION
Income Statements: FY1974-76(Thousands of Pesos)
Year ended June 30., 1974Years ended December 31, 1975/76 1974 1975 1976
6.01 The load forecast prepared by the coops and NEA estimatedresidential, commercial, industrial and other power needs. Peak demandis expected to increase from , MW in 1978 to 2,469 MW by the year 2010, anaverage annual rate of about 20%; energy consumption is forecast to increasefrom 18 Gwh for 1978 to 9,870 Gwh by 2010, an average annual rate of about22%. Growth is rapid in the early years, then tapers off as all the latentdemands are satisfied. A profile of the area is given in Table 6.1.
Scope of Economic Analysis
6.02 For the purpose of the economic analysis, the eighty coops thatwill construct backbones, laterals and service drops over the next two yearswere selected as representative of the RE program as a whole. These coopsare expected to energize over one-third of the towns and villages in thePhilippines by the end of 1984.
Internal Economic Rate of Return
6.03 As a proxy for benefits, direct revenues attributable to theproject were calculated, based on the 1977 weighted average border prices perkWh paid by customers of existing cooperatives. The only indirect benefit tobe quantified was the savings that would be generated by replacing kerosenewith electricity. Since the net savings on kerosene captures only a part ofthe consumers' surplus, the benefits are considerably understated. Forecastdemand and energy consumption are shown in Table 6.2 and the 1976 sale priceby coops in Table 6.3.
6.04 Using NPC's marginal cost of power (see Table 6.4) and the incre-mental costs of investment and operation less taxes, all at 1977 borderprices, (Table 6.5) the IRR is about 22%; if demand drops by 10%, the IRRwould be 17%; if costs increase by 10%, it would be 18%.
6.05 The IRR given above is the minimum based on the benefits whichhave been quantified. Substantial additional benefits will be gained becausemost of the beneficiaries are among the lowest income groups in the country(55% are farmers and 80% live in rural areas). The coming of electricitywill mean less drudgery at home; longer working hours on farms when requiredduring peak planting and harvesting seasons; higher productivity in localindustries; increased use and improvement of schools; better water suppliesand health facilities; and a significant improvement in life style.
Table 6.1Page 1 of 3
PHILIPPINES
NATIONAL ELECTRIC ADMINISTRATION
Socio-Economic Profile of CORE area
1. No. of towns & villages 11,724
A. No. of towns 542(i) Large municipalities (average population 95,000) 36(ii) Medium municipalities (average population 36,000) 109(iii) Small municipalities (average population 15,000) 397
B. No. of villages 11,182
2. 1977 Population (million) 13.4
3. 1977 households (million) 2.2
4. 1977 labor force (million) 4.6engaged in:
(i) Agriculture 2.6(ii) Industry 0.4(iii) Other sectors 1.6
(i) Peak demand in eachkw unit of power kWh 2,224 2,269 2,250 2,245supply, (36.4%/cof 2.4, ii)
(ii) Investment cost( centavos/2.2i- 2.7,i) kWh 68.7 45.1 58.5 58.5
(iii) Current cost. "(2.6) 12.2 22.7 9.0 14.6
/a At 12% annual discount rate, at border prices.
/b Based on regional weights of 41.1% for Luzon, 31.2% for Visayas and 27.2% forMindanao.
/c 36.4% of tne present value of projected sales (1978-2010) by the80 co-ops in CORE area are for peak demand and 63.6% foroff peak demand.
Source: Information provided by NPC and NEA.
Table 6.5: INVESTMENT AND OPERATING COSTS OF THE 80 COOPS IN CORE
(in P million at 1977 prices)
Current Cost
Electrical No. of Cost of Customer acentg
Investment system assets customers Customer accntg purchased and O&M at
Year cost at end of ea. yr. ('000) & gen. admin. O&M power border prices Total
------------------------ At domestic prices ----------------------- ------ At border prices ---------
1978 292 292 93 4 6 8 8 16
1979 412 704 298 12 14 42 22 64
1980 260 964 522 21 19 98 34 132
1981 187 1,151 748 30 23 170 45 215
1982 187 1,337 974 39 27 232 56 288
1983 186 1,523 1,199 48 30 320 67 387
1984 187 1,710 1,425 57 34 423 78 501
1985 155 1,865 1,651 66 37 540 88 628
1986 154 2,019 1,876 75 40 641 98 739
1987 154 2,174 2,101 84 43 750 108 858
1988 154 2,328 2,326 93 47 884 119 1,003
1989 154 2,482 2,550 102 50 1,000 129 1,138
1990 154 2,635 2,774 III 53 1,142 139 1,281
1991 154 2,789 2,998 120 56 1,297 149 1,446
1992 154 2,943 3,223 129 59 1,436 160 1,596
1993 154 3,097 3,447 138 62 1,597 170 1,767
1994 147 3,244 3,661 146 65 1,766 170 1,936
1995 58 3,301 3,745 150 66 1,915 183 2,098
1996 56 3,358 3,827 154 67 2,015 187 2,202
1997 56 3,414 3,910 156 68 2,118 191 2,309
1998 59 3,473 3,996 160 69 2,228 195 2,423
1999 60 3,533 4,083 163 71 2,344 199 2,543
2000 74 3,606 4,164 iF' 72 2,462 203 2,665
2001 74 3,680 4,246 170 74 2,582 207 2,789
2002 76 3,756 4,329 173 75 2,710 211 2,921
2003 78 3,834 4,414 177 77 2,840 215 3,055
2004 83 3,918 4,501 180 78 2,949 220 3,169
2005 75 3,993 4,579 183 80 3,139 224 3,363
2006 77 4,070 4,660 186 81 3,291 228 3,519
2007 79 4,149 4,741 190 83 3,453 232 3,685
2008 78 4,227 4,824 193 85 3,626 236 3,362
2009 89 4,316 4,910 196 86 3,805 240 4,045
2010 79 4,396 4,987 199 88 3,966 244 4,210
Because of roundings figures may not add up.
- 27 -
7. SUMMARY OF AGREEMENTS
7.01 During negotiations agreement was reached on the following:
(a) NEA would continue to exercise franchising powers (para. 1.03).
(b) NEA would form a planning unit (para 2.05).
(c) Government with Bank assistance will review NEA's audit procedures(para. 2.07).
(d) An information section will be established in the plannng unit(para. 2.08).
(e) Annual income statements and balance sheets of each cooperativewould be certified by auditors acceptable to the Bank beginningwith the year ending December 31, 1978 (para 2.12).
(f) Cooperatives would hold insurance coverage satisfactory to the Bank(para 2.16).
(g) NEA will plan to reduce cooperatives' power losses to a 12% averageby the end of 1982 (para 3.10).
(h) NEA would follow and endeavor to cause cooperatives to follow thefinancial policies outlined in Annex 3 (para. 5.21).
NATIONAL ELECTRIFICATION ADMINISTRATIONORGANIZATION CHART - 1977
BOARD OF
|ADMIINISTRATORS BOR SEHT lA1
ADMINISTRATORS
;PECIA I I I.A . I A.GiE.M11NTOFF CE OF THE PROJECT LOCAL ASITAC ROGRAM CONTROL PULCRLATIONS SPECIAL STUDIES UALFE
CORP AUDITOR P~~ROCURFMENT TASK GROUP OEFICE TAFFTAINGOFC
FISHIRMEN'S F ~ ~~~~~~~~~~~~~~ELECTR IC MICRO HYDRO
ASST PROCRAM RN NG ~~~~~~~~~~~~OOF MUJTUAL LI ENERGlY
OF ICE ~~~~~~~~~PROTFCTION FUND RE SEARCH OFFIC
|DEP ADMINISTRATOR ||DFP ADMINISTRATOR ||DEP ADMINISTRATOF FOR ADM & COOP DEV FOR ENG'G & MATL'S ||FINANCE & FRANCHIS~ES||
DIRECTO RATE FOR DIRECTORATE FOH DIRFCTORATE FOR l l DIRECTORATE FOR DIRECTORATE FOR DIRLCTORATE FOR DIRECtORATE FORADMINISTRATION _COOP DEVELOPMENT _ ENGINEERING L EQPT & MATL'S FINANCE FREUANCISES OF DOOPCPOWFF'OSE
REGULATION OF COOP POWVF, USE
PERSONNEI COOP INFO FEASIBILITY RFCEIVING & LOANS SUPFR RATES AND FINANCE l
DIVISION DIVISION STUDIES DIV CONTROL DIV VISION DIV EVALUATION DIV DIVISION
D GEN SERVICES l j COOP ORG A j A &FE AND MATEL l | WAREHOUSE & I NANCIAL PLAONTROL l FRANCHISING NRAING & PROGl DIVISION l 1 DIVISION l 1 PROCUREMENT DIV l g SHIPPING DIV NN & CIVISONTROL DIVISION SUPPORT DIV
J CORPORATE l j TRAININ CONSTRUCI ION l | EXCESSPROPERTY BORROWERS PLANNING & JECT
LEGAL COUNSEL l 1 DIVISION DI1 [)lVISION 1 5DIVISION DVNRESEARCH DIV VOFVISIO
OPLERATiONS J i OPERONS NS l i DIVISION C < EMM ETATION
Wrdd Rk 1B12S
ANNEX 2Page 1 of 2
PHILIPPINES
NATIONAL ELECTRIFICATION ADMINISTRATION
Assumptions in Financial Forecasts, dated March 19 1978
A. NEA
1. Coops Interest: is assumed at 2.75% for existing loans and firstloans to coops and at 5% thereafter. Interest for diesel equipment from theFrench loan at the amount paid; coops receiving these loans will pay equiva-lent terms.
2. Other Revenue Items: are as estimated by NEA including procurementfees at 2% through 1978 and 3% thereafter.
3. Operations: costs of operations are as forecast by NEA on thebroad assumption that costs currently borne by NEA will be passed to coops.
4. Depreciation: depreciation for all equipment is on the straightline method at 10% for most of the equipment including transport and 6.75%for Other Property and Equipment. Development expenditure is being writtenoff over 40 years.
5. Debt Service: is based on the individual loans borrowed or assumedto be borrowed by NEA. Interest financed for coop loans is as estimated by NEA.Interest financed for loans borrowed is assumed for sources that usually financeinterest during grace.
6. Loans and Investments: are as estimated by NEA based on materialsand cash required by the coops to carry out the program.
7. Borrowings: are amounts estimated to be required for the foreigncosts of equipment and materials and interest financed during the graceperiods on certain loans.
8. Equity: is assumed at the amounts necessary to cover the financegap and provide adequate working cash.
9. Current Assets: receivables have been estimated in detail for eachitem making up the receivables. Inventories are as estimated by NEA asrequired to meet the program.
10. Current Liabilities: payables have been estimated at one month'soperating, one month's loan releases, and three month's interest.
ANNEX 2Page 2 of 2
B. Cooperatives
1. Energy sales for each cooperative have been forecast based on theplanned connections of towns, villages and consumers, and the estimated loadsand Kwh sales they will generate.
2. Revenues except for Pampanga and Benguet which are based on an 8%rate of return, are forecast at the levels necessary to cover cash operatingexpenses and cash operating expenses plus 15%, 25%, 35% and 50% of the sixthyear's debt service for the first five years of operation respectively, andto earn a rate of return of 8% in the tenth year of operation.
3. Operating Expenses
(a) Power Purchases have been taken at NPC's forecast price perKwh purchased.
(b) Operating Expenses have been predicted at 4% of gross plantfor operating and maintenance, P 40 (the 1977 average) per consumer escalatedat 7% p.a. for administration and 1% of revenue for bad debts.
(c) Depreciation has been taken at 3% p.a. of gross plant.
4. Interest and Amortization are based on currently agreed and assumedloans from NEA.
5. Construction Expenditure has been based on estimates of the costof installation of equipment, lines, and plant required for the villages,towns and consumers forecast for connection. Work-in-progress has beenestimated at 15% of construction expenditure 1977-79 and 10% thereafter.
6. Plant in Service has been revalued at 7% p.a.
7. Receivables were estimated at two month's revenue.
8. Payables have been forecast at one month's power or fuel purchase,one month's operating, 5% of construction and 25% of interest.
ANNEX 3Page 1 of 2
PHILIPPINES
NATIONAL ELECTRIFICATION ADMINISTRATION
Stet'ment of Policy
1. It is NEA's policy to conduct its operations, arrange to obtainloan and equity funds, and to lend or otherwise provide funds to borrowersunder circumstances reasonably designed to ensure that: (i~ adequate workingcapital and cash levels are maintained; (ii) operating expeases and interestpayable shall not exceed 90% of operating revenues; and (iii) cash generationincluding operating income, depreciation and loan repayments shall be at least1.2 times annual debt service. To that end, NEA will prepare and implementfinancial plans annually for the current and following nine years which areconsistent with the achievement of these objectives.
2. NEA recognizes that cooperatives should be expected to have earningssufficient to cover operating expenses, debt service and other needs such asmeeting part of the requirements for development from internally generatedfunds. In the interests of achieving appropriate allocation of Philippineresources for development, NEA intends to exert its best efforts to havecooperatives fix and charge tariffs to consumers at levels that will recoverthe economic costs of supplying power as soon as possible after commencingcommercial operations. Consistent with these criteria, NEA shall follow theguidelines set out in its Policy Bulletin 401-A which provides that cooperativesearn revenues sufficient to cover cash operating expenses for the first year ofoperations, and for the second through fifth years, to cover cash operatingexpenses and 15%, 25%, 35% and 50%, respectively, of the sixth year's debtservice on the initial loan Erom NEA to the cooperatives, which provides fundsfor the first stage in a cooperative's development, generally coveringpurchase of assets from existing utilities and/or the backbone distributionsystem, including a few initial laterals.
3. In deciding how much lending to provide for subsequent developmentof a cooperative and how much the cooperative should be expected to providefor this purpose from internally generated funds, and in determining theterms (interest rate, grace period on repayment, and repayment period) ofsuch financing, NEA will be guided by the principle that cooperatives shouldachieve as soon as possible after the fifth and not later than the tenth yearof commercial operation, an annual overall rate of return of 8% on revaluednet fixed assets in operation. It is currently NEA's policy to make initialloans to cooperatives on the following terms: (a) 30 years, including fiveyears of grace, with interest at 3% p.a., for those cooperatives connected tothe grid of the National Power Corporation (NPC); and (b) 35 years, includingfive years of grace, with interest at 2% p.a., for those that self-generate.However, it is NEA's policy to make second and subsequent loans to thecooperatives on terms with the period of repayment not greater than and theinterest rate not lower than: (a) 25 years, including five years of grace,
ANNEX 3Page 2 of 2
with interest at 3% p.a., for those connected to the NPC grid, and (b) 30years, including five years of grace, with interest at 2% p.a., for thosethat self-generate. NEA plans in the future to reduce repayment terms andincrease interest charges commensurate with NEA's cost of capital and withthe increasng capacity of the cooperatives to service debt on harder terms.
4. Studies will be undertaken of the financial circumstances ofcooperatives and the merits of merger, federation and varied lending terms aspossible means to avoid extremely large variations in electricity tariffs indifferent rural localities.
For the purposes of this Policy Statement:
(i) "debt service requirement" shall be the aggregate amount of amorti-zation (including sinking fund payments, if any), interest andother charges on debt;
(ii) "operating revenues" for NEA shall be gross operating revenue fromall sources; and operating expenses shall be all expenses chargeablein the annual income statement, excluding interest;
(iii) the annual rate of return shall be calculated by dividing thecooperative's net operating income for the Fiscal Year in questionby one-half of the sum of the current net value of the cooperative'sfixed assets in service at the beginning and at the end of thatFiscal Year, expressed as a percentage;
(iv) the term "net operating income" means gross revenues from allsources related to the cooperative's electricity operations lessall expenses of electricity operations, including administration,adequate maintenance and taxes or any payments in lieu of taxes,and provision for depreciation. Interest and other charges on debtare not considered to be operating expenses for the purposes ofdetermining said net operating income; and
(v) the term "current net value of the cooperative's fixed assets inservice" means the gross value of the cooperative's fixed assets inservice less the amount of accumulated depreciation and consumerscontributions, all valued annually in accordance with agreedindices or other means of valuation acceptable to the Bank.
ANNEX 4Page 1
PHILIPPINES
RURAL ELECTRIFICATION PROJECT
Related Documents and Data Available in the Project File
A. General reports and documents related to the sector and the Borrower
1. NEA Annual reports 1972-1976
2. Various NEA internal monthly reports
3. IBRD appraisal report 1552-PH. The Seventh Power Project, May 1977
4. Impact of Rural Electrification in the Moresco Area, 1975
5. An Evaluative Study of the Misamis Oriental Rural Electric ServiceCooperative, Inc. (MORESCO), March 1976
6. Load forecast for MECO from 1977-1982, October 4, 1977
7. Power expansion program for Luzon Grid, NPC, August 1977
B. General reports and documents related to the rural electrification program
1. Rural Electrification V, Project Paper, USAID, June 1977
2. Rural Electrification Loan, Capital Assistance Paper - USAID - February 1972
3. Notes of Rural Electrification Program 1978-1980, NEA, September 1977
4. Construction Administrative Procedures - NEA
5. Specifications and drawings for 7.62/13.2 KV Line Construction - NEA
6. Specifications and drawings for 34.5 KV and 69 KV Transmission LineConstruction - NEA
C. Appraisal Working Papers
1. Integrated Luzon Grid Hlistorical Data
2. Rural Electrification P'rogram, 1978-80
3. Schedule of Construction - 69 kV Transmission Lines
4. Details of Individual Subprojects
ANNEX 4Page 2
5. Financial Forecasts - Pampanga
6. "i - Benguet
7. if it - La Union
8. " - Ilocos Norte
9. " - Catanduanes
10. NEA Debt Schedules
11. A Profile of CORE Area
12. Comparative Costs of Kerosene Lamps and Electric Lights
13. Main Features of Farms in the Philippines
14. Power Demand in CORE Area
15. Power Supply Cost
16. Coops Estimated Cost of Power Distribution, 1976
17. Investment Schedule of 80 Coops in CORE Area
18. Alternative Methods of Estimating Current Cost
19. CORE's IRR
IBRD 13281tio- 12s' JANUARY i978
CLASSIFICATION OF ELECTRIC COOPERATIVES
BY GEOGRAPHICAL REGIONS PHILIPPINES
R-~G10fN I REG!ON Vii 20°
1L oCos Norte CENTRALVISAYAS National Electrification Administration (NEA)1. Aboco 42. Cebu I - Cebu II2. Abra ~~~~~~~Cebu III -Cebu IV 8RUA ELC IFATO POJ T3. Ilocos Sur 43. Negros Oriental I RURAL ElECTRIFICATION PROJECT4. Mt. Provinc *Negros BOrintl 115. La Union 44 Bohof I - Bohol ti6. Benguet4. 7. Pangasinan I 4 Siquior
Pangasinan It REGION VIII --- Provincll boundoriesCentral Pangasinan EASTERN VISAYAS Ro
R.EGtON 11 46. Northern Samrar egional boundariesCAGAYAN VALLEY 47. W Samar I
B. Batanes ~~W.Samar 11S. Satane5 48. E. Samar I
Cagayan i 49. Leyte I - Leyte IV IKalinga-Apayso Leyte III- Leyte IV -Aparr10. Kuig-pyoLeyte V - Leyte VI '
I. Isabela f I 50. Southern Leyte 5 I 9
1Z Ifugao REGION IX
14. Quirino WESTERN MINDANAO51. Zamboanga del Norte 2f 10 / - - 01o0 20o 300 400
CENTRAL LUZON Zamboanga del Sur 1I1(Kloner15. Nueva Ecija 1 53. Basilan Kiloeters1 Nueva Ecija 11 54. Sulu16. Tarlac 55. TaWi-Tavdvi 0 50 100 150 200 25017. Zambales R EG IONX19. Bulacan I NORTHERN MINDANAO ' 5- Miles
Bulacan It 56. SuriQas del Norte , J .J .20 Bataan 57. Camiguin , ' \ 14 i
S&. A=nndel Norte ~ N REGION IV 59. Muans OrientatalSOUTHERN TAGALOC Misamis Oriental 11
21 Quezon f 60. Misamis Ocidental IQu Oezon It Miamis Occidental 11 Vi.Ocezon II 63 Bukidnonl i 6 I1 OQuezon IIl Eukidnon 11
22. Rizaf bA4. Agusan del Sur \ IRizal II 6.Agusan del Norte7
23. Canie Agusandel Norte . t24. Laguna I REGION Xl- '>8 r I 21
Laguna 11 EASTERN MINDANAO )2225. Batangasl 20
Batangas 11 65. Surigao del Sur IT MXNILAc, "uezopn CtyBatangas Ill Saritao del Sur it ,
26 M =rindunque 67. Cot>ibato I27 MindoroOrientall Cotabato II 5 3
Mindoro Oriental 11 68. Davao Norte 2\ 28. Mindoro Occidental 69. Davao Oriental -> y 9--29. Romablan - Lubong 70. Davao del Sur . 3230. Palamn REGION XII 33
REGION V SOUTHERN MINDANAO E2 \ \ - ,BICOL 61 Lanao del Norte .. 37 \L
31. Camarines Norte 62 Lanao de Sur,432. Camarines Sur I 66 Maguindana- 2 - I--.
Camarines Sur II~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~nCamarines Sarl1 71. Sultan KudaratICamarinen Eur IVI 72. South Cotabato . 28
33. Catanduanes34. Albay .I29< '6-4635. Sornogan I /
eionsogan If . 3' , \k" / 47 1'36. M a sbate 4
REGION Vi ' 48WESTERN VISAYAS I V _
37. Aklan ."3 /
38. Capiz39. Anfique V * ( n40. IloilolI
lloito 1 1 \ *\< ) *391 40 -_ 49Iloilo IV
41. Negros Occidental I ' 'loilo ° l ' Negros Occidental It : 50Negros Occidental lil ' . ; -
0/ °Ce , V 6 - 'l
*lo- * -/ / /o . -w .S15 o
14 5T, 36/ .
-. ./1 ra~ 64
. : 45-2-~~~~~~~~~~~/1.\ (1- 44>
N~~~~~~~~~~~~~~~~~~~~~~~5 lfl J °t6 5
' Io
.... Zamboanga, .5. - g .' 66 .- / E4Va;~~~~~~ ~ ~ ~ ~~~ ~ ~ r 62- t / '-
L UZON I Xi
'PHiLfPPINES 0x' 1 ' :
, ~~~~~~VISA KA Sf5- J 2 n
VIET NAM _ -
MfiNDA NAG
BRUN El"- -
MALAYSIA 5I
of thmrodv-of ft rIVo- n Mih i is 800,c Akec d1ei-1om-naeih, o m-d Ikd thkoiolostt,o hlo m- do -t -plY. oil hk p-n f i Woildsk SnPml itS
I N D 0 N ES IA _ af i.h.e y mmrt on in pCi otot t 0ev po,y o' th^ doroame or 2... . > - -: - ~~~~~ ~~~~~~120' cpne,uhhnvvet 12,5 ,
