ASIAN DEVELOPMENT BANK PPA: LAO 22065

Transcription

1 ASIAN DEVELOPMENT BANK PPA: LAO PROJECT PERFORMANCE AUDIT REPORT ON THE NAM NGUM-LUANG PRABANG POWER TRANSMISSION PROJECT (Loans 928-LAO[SF]/1308-LAO[SF]) IN THE LAO PEOPLE S DEMOCRATIC REPUBLIC June 2002

2 CURRENCY EQUIVALENTS Currency Unit kip (KN) At Appraisal At Reappraisal At Project Completion At Operations Evaluation (July 1989) (March 1994) (August 1998) (November 2001) KN1.00 = $ $ $ $ $1.00 = KN400 KN720 KN3,562 KN9,485 ABBREVIATIONS ADB Asian Development Bank ADF Asian Development Fund EA Executing Agency EdL Electricité du Laos EIRR economic internal rate of return FIRR financial internal rate of return IDA International Development Association Lao PDR Lao People s Democratic Republic OEM Operations Evaluation Mission PCR project completion report PPAR project performance audit report SDC Swiss Development Corporation TA technical assistance TOR terms of reference WEIGHTS AND MEASURES GWh (gigawatt-hour) 1,000 megawatt-hours kv (kilovolt) 1,000 volts kva (kilovolt-ampere) 1,000 volt-amperes km kilometer kwh (kilowatt-hour) unit of electrical energy MVA megavolt-ampere MW (megawatt) 1,000,000 watts MWh (megawatt-hour) 1,000 kilowatt-hours V volt NOTES (i) (ii) The fiscal year (FY) of the Government ends on 30 September. In this report, $ refers to US dollars. Operations Evaluation Department, PE-593

3 CONTENTS Page BASIC DATA EXECUTIVE SUMMARY MAP iii iv vi I. BACKGROUND 1 A. Rationale 1 B. Formulation 1 C. Purpose and Outputs 2 D. Cost, Financing, and Executing Arrangements 2 E. Completion and Self-Evaluation 3 F. Operations Evaluation 3 II. PLANNING AND IMPLEMENTATION PERFORMANCE 4 A. Formulation and Design 4 B. Achievement of Outputs 4 C. Cost and Scheduling 5 D. Procurement and Construction 6 E. Organization and Management 6 III. ACHIEVEMENT OF PROJECT PURPOSE 7 A. Operational Performance 7 B. Performance of the Operating Entity 8 C. Financial and Economic Reevaluation 9 D. Sustainability 10 IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS 11 A. Socioeconomic Impact 11 B. Environmental Impact 12 C. Impact on Institutions and Policy 13 V. OVERALL ASSESSMENT 14 A. Relevance 14 B. Efficacy 15 C. Efficiency 15 D. Sustainability 15 E. Institutional Development and Other Impacts 16 F. Overall Project Rating 16 G. Assessment of ADB and Borrower Performance 16

4 ii VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS 16 A. Key Issues for the Future 16 B. Lessons Identified 17 C. Follow-Up Actions 17 APPENDIXES 1. Goals, Targets, Inputs, and Results Project Costs Appraisal, Reappraisal, and Actual Implementation Schedules Summary of Contract Awards Technical Report Summary Electricité du Laos Performance Indicators Financial and Economic Reevaluation 32

5 BASIC DATA Nam Ngum-Luang Prabang Power Transmission Project Project Preparation/Institution Building TA No. TA Name Type Person- Months Amount ($) Approval Date LAO Xieng Khouang and Sayaburi PPTA 5 85,000 3 Jan 1989 Power Transmission Study 1081-LAO Nam Ngum Hydropower Station ADTA ,000 3 Jan 1989 Operational Improvement Study 1082-LAO 2 Institutional Improvement to EdL Luang Prabang ADTA ,000 3 Jan 1989 Key Project Data ($ million) As per ADB Loan Documents Appraisal Reappraisal Actual Total Project Cost Foreign Exchange Cost Local Currency Cost ADB Loan Amount/Utilization Cofinancing Key Dates Loan 928-LAO(SF) Loan 1308-LAO(SF) Expected Actual Expected Actual Fact-Finding May 1988 Appraisal 4 26 Jul 4 Aug Feb 5 Mar 1994 Loan Negotiations Oct Oct Jun 15 Jul 1994 Board Approval Nov Dec Aug 1994 Loan Agreement 21 Feb Sep 1994 Loan Effectiveness 22 May Jul Dec Jan 1995 First Disbursement 23 Nov May 1995 Project Completion 31 Jul 1992 Dec Jun 1997 Jul 1998 Loan Closing 31 Jan May Dec Aug 1998 Months (effectiveness to completion) Internal Rates of Return Appraisal Reappraisal PCR PPAR Economic Internal Rate of Return (%) Financial Internal Rate of Return (%) Borrower Executing Agency Lao People s Democratic Republic Electricité du Laos Mission Data No. of Missions No. of Person-Days Fact-Finding 1 7 Appraisal 1 40 Reappraisal (Supplementary Loan) 1 6 Project Review Project Completion 1 30 Operations Evaluation ADB = Asian Development Bank, ADTA = advisory technical assistance, EdL = Electricité du Laos, OEM = Operations Evaluation Mission, PCR = project completion report, PPAR = project performance audit report, PPTA = project preparatory technical assistance, TA = technical assistance. 1 The TAs were subject to ADB Board approval of Loan 928-LAO(SF), and approved as grants by the ADB President on 3 January Subsequently cancelled. 3 The increase resulted from the dollar s depreciation against the special drawing rights. 4 In this report, appraisal for Loan 1308-LAO(SF) is referred to as reappraisal. 5 An alternative financial internal rate of return of 8.1% was calculated assuming electricity transmitted to the Project did not represent generation that would otherwise have been exported. 6 Missions were fielded to review the progress of projects under several loans. Person-days shown are actual days spent on the Project. 7 The OEM comprised Timothy Hutton (Senior Evaluation Specialist/Mission Leader) and William Michael Lewis (Staff Consultant). The OEM visited the Lao PDR during November 2001.

6 EXECUTIVE SUMMARY The Nam Ngum-Luang Prabang Power Transmission Project aimed to extend the transmission of electricity from Nam Ngum Hydropower Station to Luang Prabang Province and to expand and improve the distribution of electricity in Luang Prabang and Vang Vieng. The project rationale to meet the suppressed demand for electricity, promote economic development, reduce dependence on fuel imports to achieve foreign exchange savings, and strengthen the operating performance of Nam Ngum Hydropower Station and Electricité du Laos (EdL), proved highly relevant. The outputs under Loan 928-LAO(SF) included (i) construction of a 115-kilovolt (kv) single circuit power transmission line, 208 kilometers (km) long, from Nam Ngum Hydropower Station through Vang Vieng to Luang Prabang; (ii) construction of substation facilities at Vang Vieng and Luang Prabang; and (iii) provision of equipment and tools for improving the reliability of the Luang Prabang city power distribution system. The additional outputs under Supplementary Loan 1308-LAO(SF) included (i) upgrading the 6.6 kv distribution network at Luang Prabang to 22 kv, and (ii) energizing the overhead lightning shield wire to 25 kv to electrify about 35 villages along the transmission line route. Technical assistance (TA) attached to the Project aimed to (i) determine the viability of extending the supply of electricity to the neighboring provinces of Xieng Khouang and Sayaburi; (ii) determine, through a water management study of Nam Ngum Hydropower Station, how to maximize the operating performance and revenues from electricity exports to Thailand; and (iii) improve the institutional organization, management, and financial systems of EdL in anticipation of merging Luang Prabang s electricity operations with EdL. The decision to electrify villages along the transmission route, which expanded the original scope, enabled the Project to achieve a fuller development impact. Formulation and design of the Project were based on least-cost considerations. Appraisal was completed in August 1988, and the Asian Development Bank (ADB) Loan 928-LAO(SF) for $11.0 million, in support of a total project cost of $12.7 million, was approved on 6 December During implementation and following detailed design, the need became apparent for supplementary financing to meet changes in technical specifications and scope because of difficult topographic and geological conditions. At the same time, it was realized that it was politically unwise and socially imprudent for the Project s transmission line to cross land owned by villagers without supplying them with electricity. A decision was made, therefore, to electrify villages along the transmission route using a method that avoided the need for additional investment in conventional distribution equipment. The method involved energizing the lightning shield wire of the transmission line. The need for supplementary financing necessitated a reappraisal in March The total project cost was reestimated at $20.5 million. To help meet the $7.8 million cost overrun, Loan 1308-LAO(SF) was approved on 30 August 1994 for $4.0 million. The actual project cost was $20.3 million. The project configuration was appropriate for achieving its purpose. However, changes necessary after detailed design were more than anticipated at appraisal, and resulted in delays and the need for supplementary financing. Implementation was also impaired by difficult terrain and insurgency threats to construction. Despite these initial deficiencies, project outputs and operational targets as measured against appraisal and reappraisal expectations were all achieved or even exceeded. The quality of construction and installation was of a high order. Operating performance has been highly satisfactory, and EdL s financial performance has been sound. Maintenance of the transmission line, towers, substation structures, and distribution equipment is adequate. The reestimated financial internal rate of return of 3.6%, and economic

7 v internal rate of return of 14.3%, which take into account system losses and the need for periodic maintenance, confirm the viability, efficiency, and sustainability of project operation. In addition, the Project shares with other infrastructure projects in its area of influence a positive impact on economic growth, employment opportunities, income, and household savings. At Luang Prabang and Vang Vieng, electricity attracted commercial enterprises for a host of activities that were not previously in existence, including the production of drinking water, metal ware, plastic ware and textile, and craft manufacture. In Vang Vieng, employment opportunities were expanded and average incomes are nearly six times (after adjustment for inflation) their level before 1996 when electricity was introduced. The 10,700 new connections in Luang Prabang exceeded forecasts, as did the 57 villages with an estimated 5,200 households electrified from the shield wire. Without the Project, power generation sources at Luang Prabang and Vang Vieng would have been insufficient to serve the growth in tourism, and the income benefits from employment and business opportunities would not have been as large. Without energizing the lightning shield wire, village households would have been denied access to electricity as well as the opportunity to halve their average monthly expenditure on lighting and improve their quality of life. Implementation provided valuable experience for the future design and scheduling of transmission projects to adjoining provinces across similar mountainous areas. Two of the attached TAs led to recommendations that were taken up. TA 1080-LAO prepared a transmission project for expanding electricity supply to two additional northern provinces, Xieng Khouang and Sayaburi. TA 1081-LAO led to better managing water spillage at Nam Ngum Hydropower Station and introducing export peak and nonpeak tariff pricing, which resulted in higher export revenues. The integration of Luang Prabang s operations with EdL was based on the recommendations made under TA financed by the World Bank for integrating the electricity operations of the southern provinces with EdL. Results obviated the need for TA 1082-LAO, which at the request of EdL, was cancelled. Based on the positive outcomes relating to the satisfactory construction, operation, and comprehensive achievement of its purpose as reflected in ADB s evaluation criteria, the Project is rated successful (bordering on highly successful). The two completed TAs are rated highly successful. The key lessons learned from the Project are (i) cost estimates that are dependent on detailed engineering design after loan approval should be prepared with a wider contingency margin to avoid the possible need for supplementary financing and delays; (ii) transmission projects that involve the carriage of electricity across populated rural areas should also plan to provide for the distribution of electricity to such areas so as to minimize objections and enhance the socioeconomic impact; (iii) more rigorous checks are needed at commissioning to avoid the possibility of faulty equipment leading to the impairment of technical operating performance; and (iv) the introduction of monthly adjustments is a suitable mechanism for increasing electricity tariffs to acceptable and viable levels without causing undue consumer resistance. Based on these lessons, some specific follow-up actions are recommended.

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9 I. BACKGROUND A. Rationale 1. In 1988, the Lao People s Democratic Republic (Lao PDR) economy was largely subsistence oriented, lacking in infrastructure, and without sufficient people with training to facilitate development. The Project was part of the Government s broad strategy for development, which gave priority to the development of electricity infrastructure so as to increase foreign exchange earnings and develop private sector activity. The decision to prioritize the transmission of electricity from Nam Ngum to Luang Prabang was based on the need to avert isolation of the northern provinces where the demand for electricity was severely suppressed, and the need for complementary infrastructure support to other development efforts. 1,2 Technical assistance (TA) attached to the Project aimed at (i) enhancing generation and management capacity at Nam Ngum Hydropower Station, (ii) evaluating technical options for further expanding the availability of electricity in the north, and (iii) strengthening the institutional capacity of Electricité du Laos (EdL), into which the electricity operations in Luang Prabang were to be integrated. 2. During implementation of the Project, it was realized that it was politically unwise and socially imprudent for the Project s transmission line to cross land owned by villagers without supplying them with electricity. 3 The subsequent decision to electrify 35 villages along the transmission route expanded the original project scope and enabled the Project to achieve a fuller development impact. B. Formulation 3. The original basis for the Project was a feasibility study prepared by Swedish consultants for the Mekong Secretariat to the United Nations Development Programme. A copy of the feasibility study report was forwarded to the Asian Development Bank (ADB) in January 1988 for consideration of project funding. 4 ADB considered the Project to have merit. Factfinding was completed in May 1988, and appraisal ended in August The feasibility cost estimates were adjusted at appraisal to take account of increased costs and provision for a smaller size substation transformer. Provision was also made for the transmission route to be modified, if found necessary during implementation. The ADB loan of $11.0 million equivalent was approved on 6 December The Borrower was the Lao PDR, with proceeds of the loan to be relent to EdL. TA in support of the Project was approved on 3 January The Project was consistent with the Lao PDR Government s Second Five-Year Plan ( ), and closely fitted the strategy of the Asian Development Bank (ADB) to (i) achieve a better integration of the economy to stimulate production and trade, (ii) increase foreign exchange earnings (or reduce foreign exchange outflows), and (iii) provide institution building and human resources development. 2 One of these other development efforts included ADB s loan support for the reconstruction of 230 kilometers of national road between Vang Vieng and Luang Prabang, namely Loan 1009-LAO(SF): Fourth Road Improvement Project, for $39 million, approved on 21 December Electrification was necessary to avert the potential destruction and stealing of transmission lines and tower structures. 4 A complete version of this report, released in December 1987, could not be located. However, numerous excerpts, references, and discussions of the report were available for review. 5 Loan 928-LAO(SF): Nam Ngum-Luang Prabang Power Transmission Project. 6 TA 1080-LAO: Xieng Khouang and Sayaburi Power Transmission Study, for $85,000; TA 1081-LAO: Nam Ngum Hydropower Station Operational Improvement Study, for $192,000; and TA 1082-LAO: Institutional Improvement to EdL Luang Prabang, for $198,000.

10 2 4. The need for supplementary financing of cost overruns necessitated reappraisal in February/March ADB s supplementary loan of $4.0 million equivalent was approved on 30 August 1994, 7 together with approval for retroactive financing. C. Purpose and Outputs 5. The project purpose was to extend the transmission of electricity generated from Nam Ngum Hydropower Station in Vientiane Province to Luang Prabang Province, and thereby promote economic development and save foreign exchange spent on imported fuel used for lighting and diesel power. The attached TA aimed to (i) determine the viability of extending the supply of electricity to the neighboring provinces of Xieng Khouang and Sayaburi; (ii) determine, through a water management study of Nam Ngum Hydropower Station, how to maximize the operating performance and revenues from electricity sales to Thailand; and (iii) improve the institutional organization, management, and financial systems of EdL in anticipation of merging Luang Prabang s electricity operations with those of EdL. 6. The project outputs under Loan 928-LAO(SF) included (see Map) (i) construction of a 115-kilovolt (kv) single circuit power transmission line 208 kilometers (km) long from Nam Ngum Hydropower Station, through Thalat and Vang Vieng to Luang Prabang; (ii) construction of substation facilities at Vang Vieng and Luang Prabang; and (iii) provision of equipment and tools for the Luang Prabang city power distribution system. The additional project outputs under Supplementary Loan 1308-LAO(SF) included (i) upgrading the 6.6 kv distribution network at Luang Prabang to 22 kv, and (ii) energizing the overhead shield wire to 25 kv with distribution at 230/400 volts to electrify about 35 villages along the transmission line route. 8 Further details of the outputs and expected impacts are provided in Appendix 1. D. Cost, Financing, and Executing Arrangements 7. The estimated total project cost at appraisal was $12.7 million equivalent, with a foreign exchange cost of $11.0 million. ADB s loan of $11.0 million was to be used to finance the entire foreign exchange cost, including $0.8 million for consulting services. 9 The local currency cost of $1.7 million equivalent was to be funded by the Government/EdL. At reappraisal, the total project cost was reestimated at $20.5 million, with a foreign exchange cost of $17.0 million (Appendix 2). ADB s supplementary loan was to be used to finance $4.0 million equivalent of the $7.8 million increase in the project cost. The remaining additional cost was to be funded by the Swiss Development Corporation (SDC) for $2.0 million, and the Government/EdL for $1.8 million equivalent. Funding from SDC for consulting services to the Project was approved under TA 1301-LAO in two tranches The two ADB loans were drawn from the Asian Development Fund (ADF) to the Lao PDR under ADB s standard ADF terms, and relent from the Borrower as subsidiary loans to EdL with provision for interest equal to ADB s ordinary capital resources and a repayment period of 7 Loan 1308-LAO(SF): Nam Ngum-Luang Prabang Power Transmission Project (Supplementary). 8 The shield wire system is a single-wire, earth-return, single-phase circuit that costs less than one third of the conventional three-phase distribution system. It added less than 7% to the total project cost, and rendered the cost of electricity affordable to villages connected under the Project. 9 Although ADB s loan included provision to meet the full foreign exchange cost of consulting services, it was acknowledged in the appraisal report that the Government of Switzerland, represented by the Swiss Development Corporation, had agreed in principle to meet the cost of consulting services. 10 TA 1301-LAO: Nam Ngum-Luang Prabang Power Transmission (Part C), for $960,000, approved on 30 March 1990; and TA 1301-LAO: Nam Ngum-Luang Prabang Power Transmission (Part C) (Supplementary), for $1.034 million, approved on 14 October 1992.

11 3 20 years (including a grace period of 4 years). EdL assumed the foreign exchange risk, and was the appointed Executing Agency (EA) with responsibility for physical implementation of the Project, assisted by consultants. E. Completion and Self-Evaluation 9. ADB s project completion review mission inspected the Project in August 1999 and rated it partly successful. 11 The mission s project completion report (PCR) was circulated to the ADB Board in December All project components were reported implemented as conceived, except for the need for supplementary financing and the implementation delay. Less than full compliance with loan covenants was reported with regard to EdL s reporting requirements, as well as financial covenants relating to accounts receivable, debt service, and internal fund generation. Initiatives for implementing recommended accounting reforms were found only partly complied with. The financial internal rate of return (FIRR) was recalculated at -8.0% and the economic internal rate of return (EIRR) at 1.8%, below the appraisal estimates of -1.1% and 12.4%, and the reappraisal estimates of 3.5% and 9.2%. Both TA 1080-LAO and TA 1081-LAO were considered generally successful in meeting their purpose. TA 1082-LAO for strengthening the institutional capacity of EdL s operations on the integration of Luang Prabang operations was cancelled after it was considered by EdL to duplicate the provision of consulting services for merging the electricity operations of the southern provinces Lessons learned included the need to (i) take more explicit account of topographic and geological factors when preparing cost estimates, and (ii) finalize cofinancing at an earlier stage to prevent unnecessary implementation delays. Recommendations provided for (i) EdL to separate cost records of operation and maintenance expenditures, (ii) ADB to reiterate the continued relevance of loan covenants and need for their compliance, (iii) EdL to restructure the tariff system so as to reflect the impact on financial expenditures from depreciation of the kip, and (iv) ADB to closely monitor EdL s financial performance. 11. The PCR s assessment reliably evaluated the Project s implementation, but also reflected the negative impacts of the Asian financial crisis in FY1998, the last year for which financial results were available to the project completion review mission. The broader socioeconomic and development impacts of the Project were not assessed. F. Operations Evaluation 12. This project performance audit report (PPAR) reflects the findings of an ADB Operations Evaluation Mission (OEM) that visited the project area in November The PPAR is based on a review of the PCR, appraisal report, material in ADB files, and 3 years of additional actual operational data; EdL s responses to the OEM s questionnaire; and follow-up discussions with ADB staff, EdL s senior officials, representatives of other government agencies, and meetings with electricity consumers at Luang Prabang, Vang Vieng, and two villages supplied from the shield wire. Special attention is given to assessing the appropriateness of the feasibility study, the achievement of purpose, developments induced by the Project, sufficiency of technical design for meeting load expansion requirements, financial operating performance of EdL, and adequacy of EdL measures for reducing system losses. Also addressed are development and TA impacts on operating performance. Copies of the draft PPAR were provided to the 11 Under the previous three-category rating system (generally successful, partly successful, and unsuccessful). 12 Funded by the International Development Association (IDA) under Credit 1826.

12 4 Government, EdL, and ADB staff concerned for review, and their comments were considered in finalizing the PPAR. II. PLANNING AND IMPLEMENTATION PERFORMANCE A. Formulation and Design 13. Formulation of the Project was influenced by (i) the need for additional power in the northern provinces; (ii) ADB s assistance strategy for promoting and sustaining economic growth, saving foreign exchange, and improving operational and institutional capacity (footnote 1); and (iii) the feasibility study results, including least-cost considerations. The feasibility study (para. 3) drew on the design specifications and cost estimates specific to another project. ADB s review at appraisal accepted almost entirely the design formulation, and adjusted the cost estimates upward by about one third. Final specification requirements and costings were made subject to detailed design during implementation. The changes necessary after detailed design were more than anticipated at appraisal, and resulted in delays and the need for supplementary financing. 13 Notwithstanding weaknesses in the feasibility study estimates, the overall approach to planning and design was satisfactory The bid openings in March 1991 revealed funding deficits for the transmission lines of $1.9 million, or 44% of the appraisal estimate, and for the distribution component of $0.9 million, or 82%. Additional cost overruns resulted from variation orders after detailed design, as well as delayed completion of civil works. The physical contingency provision in the appraisal estimate was only 5%. Given the nature of the terrain over which the transmission line was to be constructed and, therefore, potential for variation in technical specifications following detailed design, a much higher physical contingency would have been appropriate. 15 B. Achievement of Outputs 15. The actual outputs achieved or exceeded what was envisaged at appraisal and reappraisal (Table 1). The transmission conductor size was increased for strengthening purposes, and to cope with the additional loading and future transmission needs to adjoining northern provinces. Upgrading of the 6.6 kv distribution system at Luang Prabang to 22 kv allowed more consumers to be connected. The number of villages electrified under the shield wire scheme was also much higher than targeted and enhanced the overall development impact of the Project. 13 Adjustments were made in anticipation of the added construction difficulties associated with the terrain. However, the additional cost and time requirement was not fully appreciated. The construction workers and project team were often subject to insurgent action, which added further to the project cost and construction delay. 14 The approach of making the feasibility study formulations subject to detailed design during implementation is common for projects where design follows conventional practice, and inputs, including pricing, are considered reasonably reliable. 15 The possibility of variable ground and soil conditions and the need for irregular tower constructions to cover chasms, steep inclines, and uncharted waterways should have been anticipated.

13 5 Table 1: Achievement of Outputs Item Envisaged Actual At Appraisal Transmission Line 208 km of 99 mm kv ACSR 212 km of 115 mm kv ACSR Substation Facilities 115/22 kv Luang Prabang 115/22 kv Vang Vieng 115/22 kv Luang Prabang 115/22 kv Vang Vieng Distribution Equipment a Value of $1.1 million Value of $2.0 million b Other Four utility vehicles Project office facilities Four utility vehicles Project office facilities Added at Reappraisal Energizing of Shield Wire (SW) 25 kv 25 kv 22/25 kv step-up transformers 22/25kV step-up transformers Electrification of Villages (no.) Distribution Upgrading 6.6 kv to 22kV at Luang Prabang 6.6 kv to 22 kv at Luang Prabang ACSR = aluminum conductor steel reinforced, km = kilometer, kv = kilovolt, mm 2 = square millimeter. a Switchgear accessories, line connectors, insulators, lightning arrestors, transformer accessories, jointing drilling and cutting equipment, testing, and protection equipment. b Including the provision of two 320-kilowatt diesel generators. C. Cost and Scheduling 16. The actual project cost, including interest during construction, was $20.3 million, 1% below the reappraised estimate of $20.5 million. Financing was provided by ADB ($15.6 million), 16 SDC ($2.0 million), and the Government/EdL ($2.7 million). Table 2 summarizes the estimated and actual project costs. The difference between the appraisal and reappraisal estimates largely resulted from the variation orders on the specification of equipment and scope of the Project after detailed design. 17 The ADB loans financed 77% of the total project cost and 89% of the foreign exchange cost. SDC financed the balance of the foreign exchange cost as a grant. An undisbursed balance of $0.18 million equivalent from the ADB loans was cancelled. Further details of estimated and actual costs are shown in Appendix 2. Table 2: Summary of Estimated and Actual Project Costs ($ million) Item Appraisal Reappraisal Actual Foreign exchange cost Local currency cost Total The Project was judged complete in July 1998, 13 months later than envisaged at reappraisal. The components of the original scope were deemed complete in December 1994 or 16 The increase from $15.0 million was attributable to a depreciation of the dollar vis-à-vis special drawing rights. 17 Variation orders on the appraised project scope were linked to an increase in the length of transmission line, the increase in conductor size for additional power transfer and strength for longer span lengths between towers, the need for larger insulators, the need for stronger tower and foundation structures, the decision to upgrade the 6.6 kv distribution network at Luang Prabang to 22 kv, the addition of two 320-kilowatt diesel generators at Luang Prabang to reduce the shortage of power during construction, and the need to energize the overhead lightning shield wire in order to provide electricity to villagers along the transmission route.

14 6 29 months later than scheduled at appraisal. There were four extensions to the closing date for the ADB loans, from 31 January 1993 to 15 August Implementation was slowed by the delay in fielding consultants, difficulties with completing the transmission line survey, unanticipated difficulties caused by the difficult terrain that meant some tower structures had to be strengthened and required a longer time for erection, limited transport access into and across the transmission route, security problems and the need for military protection, and weather constraints that prevented rapid construction during the rainy season. A comparison of the actual implementation schedule with the appraisal/reappraisal schedule is shown in Appendix 3. D. Procurement and Construction 18. Procurement was to be undertaken in accordance with ADB s Guidelines for Procurement. Two turnkey contracts were to be awarded under international competitive bidding procedures on the basis of supply, delivery, installation, and commissioning for the transmission line, and for terminal and substation facilities. The distribution equipment was to be contracted on the basis of supply and delivery only. For Loan 1308-LAO(SF), the proposed contract arrangements at appraisal were reconfirmed and extended to cover the expansion in project scope. The turnkey contracts were awarded under international competitive bidding. Details of contract awards are provided in Appendix EdL reported that the international and domestic contractors and suppliers for the Project performed satisfactorily. 18 All equipment inspected at the sites visited by the OEM was functioning satisfactorily with no significant defects, except for the metering equipment at substations (para. 28 and Appendix 5). E. Organization and Management 20. Organization and management were consistent with agreed arrangements at appraisal and generally satisfactory, except for the need to extend the implementation period. Implementation was satisfactory with respect to the awarding of procurement and construction contracts, and management by EdL. The recruitment of consultants was initiated in February 1989, but their appointment was not made until January The consultants assisted EdL throughout project implementation, providing detailed design, bidding documents, bid evaluations, and construction supervision. Engineering and progress reports were submitted promptly, and supervisory responsibilities over contractor activities and advisory assistance to EdL were discharged effectively. Because of the change in project scope following reappraisal and implementation delays, it was necessary to extend the consultants period of assignment under several amendments until project completion. EdL considered the performance of the consultants and their contribution to institutional strengthening through improving technical efficiencies and employee implementation training appropriate and helpful ADB provided adequate monitoring during implementation with 10 review missions, and 1 project completion review mission. Coordination and progress meetings were held during 18 Some difficulties associated with the inexperience of the contractor for the substation component were reported, but with close supervision, were satisfactorily overcome. 19 ADB file records confirm the delay in appointment was attributable to time taken in finalizing funding from SDC to meet the cost of consulting services (para. 7, footnote 9). While the reason for the delay is clearly evident, the OEM notes that the financing of consulting services was not contingent at appraisal or loan approval on SDC support. 20 Some dissatisfaction was found with the first appointed team leader.

15 7 review missions with the Ministry of Foreign Affairs, EdL, and consultants to solve problems and minimize delays. 22. ADB s loan and project agreements included covenants relevant to strengthening EdL s accountability and operating performance. These included requirements for (i) ensuring that the Project was managed by a project group, headed by a full-time project manager reporting to the manager of EdL; (ii) equalizing the tariff structures for Luang Prabang and Vientiane by 31 March 1989; (iii) assuming total control of Luang Prabang s operations by 31 December 1991; (iv) implementing reforms of accounting and financial systems recommended by the International Development Association (IDA) consultants (para. 52); (v) maintaining a debt service ratio of not less than 1.1, and a self-financing ratio of not less than 22%; (vi) carrying out an action plan to reduce EdL system losses; and (vii) submitting quarterly progress reports on execution of the Project. At project completion, all covenants had been complied with, except those relating to financial performance and reducing system losses (para. 48). Special measures relating to the adjustment of tariffs adopted since project completion helped restore compliance with ADB s financial covenants (para. 33). III. ACHIEVEMENT OF PROJECT PURPOSE A. Operational Performance 23. Operational performance is measured in terms of the Project s achievements relative to expectations at appraisal and reappraisal to (i) help meet the projected demand for power between FY1992 and FY2000, (ii) improve distribution voltage levels and system reliability in Luang Prabang, (iii) expand distribution at Luang Prabang, and (iv) expand distribution under the shield wire. The adequacy of maintenance is also reviewed. Technical issues relating to the performance of project components are discussed in Appendix 5 and indicators of EdL s technical and financial performance are summarized in Appendix At appraisal, demand in the Luang Prabang City had been suppressed at around 4.5 gigawatt-hours (GWh) for 5 years. 21 With commissioning of the Project, electricity consumption was expected to grow at about 17% per year for 5 years to 11 GWh, and thereafter grow at a reduced rate of 8% per year. After energizing the substation at Luang Prabang in December 1994, actual sales grew at 30.8% per annum for 5 years to 17.8 GWh. Electricity supplied to Vang Vieng also exceeded the district s projected usage of about 8.5 GWh, and in FY2000 had reached 15.3 GWh. 25. Rehabilitation and upgrading of Luang Prabang s city network helped offset overloading in low voltage distribution. Rehabilitation under the original project scope saw distribution losses fall from 35.5% in FY1987 to 20.5% in FY1994. Distribution losses continued to fall after FY1994, and in FY2001 were around 12%. 26. Upgrading of the 6.6 kv network in Luang Prabang to 22 kv voltage enhanced EdL s capacity to expand its low voltage network, and increase the number of consumer connections. By FY2001, the total number of connections in Luang Prabang had increased to 13,994 from 3,250 at appraisal, or about one third more than was projected. 27. The Project was expected, under the shield wire component, to electrify 35 villages and around 3,800 households. Actual electrification included 42 villages in Luang Prabang, 21 Generation was supplied from the 1.0-megawatt (MW) Nam Dong Hydropower Station, and a 0.3 MW diesel plant.

16 8 7 villages in Vang Vieng, and 8 villages along the transmission route between Luang Prabang and Vang Vieng. All up, an estimated 5,200 households were connected to electricity. 28. Maintenance was not addressed at appraisal. General maintenance, including checks at substations and transmission towers, is, however, undertaken. The transmission towers are well maintained, but regular clearance of potential hazard trees located near the transmission line is not done on a routine basis and is the cause of excessive outages. The OEM discussed the need for quarterly inspections of the line and EdL is developing such as part of its preventive maintenance program. The structures at substations and distribution equipment are in good order, but failings in metering equipment have remained largely unchecked and have impaired EdL s capacity to optimally manage its network. Discussions with EdL engineers confirmed their knowledge of transformer maintenance and gas circuit-breaker handling requirements, but operational constraints were precluding the substations at Luang Prabang and Vang Vieng from shutting down the transformers for periodic oil changes, checks of windings, and system tuning. 22 A. Performance of the Operating Entity 29. At appraisal, the financial operating performance of EdL over the period FY1983 FY1986 was very strong. Financial remittances to Government in the form of taxes and dividends had been a substantial proportion (71% in FY1984 and 61% in FY1985) of EdL s operating revenue. High export revenues to Thailand, low debt service, and low capital expenditures had been a feature of EdL s strong financial performance. In FY1987, drought conditions caused a 35% overall reduction in power generation, which in turn reduced export revenues. Despite total revenue falling by 43%, and profit before tax falling from 44.5% of equity to 17.8%, the financial performance indicators remained sound. With normal rainfall, they were expected to return to their long-term trend. The appraisal projections, up to FY1993, took into account the timing of integration of the Luang Prabang and southern provinces electricity operations with EdL. Actual power generation levels had been restored in FY1990 to predrought levels, and at reappraisal in 1994 when financial statements up to FY1992 were available, it could be seen that the overall financial performance of EdL had recovered in line with appraisal projections. 30. The main indicators of EdL s financial performance are summarized in Table 3 (for details see Appendix 6). EdL s financial statements prepared at appraisal for FY1988 FY1993 and the original project scope, projected in dollar terms (i) a total investment of $189.8 million, (ii) an increase in operating revenue by 12.8% a year, (iii) the average return on equity falling from 20.5% to 14.3%, 23 and (iv) a debt service ratio ranging from 1.8 to 4.3. Actual investment expenditure was $104.1 million, or 55% of that planned. Actual real operating revenue increased at 9.0% per annum, 24 and the return on equity fell to 7.3% in FY1993. EdL s debt service ratio varied between 1.6 and 2.9, well above the covenanted level of at least 1.1. Although some weakening in the financial performance had occurred, the overall financial strength of EdL was still satisfactory, despite the delays in implementation and commissioning of the Project. 22 The transformers will continue to operate as designed only if periodic outages are taken for oil changes and system tuning. 23 Profit before tax divided by equity calculated over the 3-year averages to 1987 and Compared with 18.5% per annum in current prices.

17 9 Table 3: Financial Performance of Electricité du Laos Fiscal Year Ending Current Ratio a Debt Service Ratio b Self-Financing Ratio (%) c Operating Expenditure/Revenue (%) Return on Operating Revenue (%) d (5.0) Return on Equity (%) (3.1) Equity to Total Assets (%) Average Revenue Tariff (KN/kWh) Average Exchange Rate (KN per $1.00) ,635 4,274 7,600 7,986 kwh = kilowatt-hour. a Current assets to current liabilities. b Profit before depreciation, interest, and tax less dividends, all divided by interest plus loan repayments. c Net sum of funds from internal resources (return plus depreciation less dividends) divided by average capital expenditure. d Profit before tax divided by operating revenue. 31. Over the longer period from FY1987 to FY2000, EdL s performance in terms of operating revenue and return on equity continued to be satisfactory, except in FY1998 when depreciation and interest costs from capital expenditure accelerated faster than revenues. 25 Gross operating profit, before depreciation and interest, increased from KN5.7 billion to a record KN142.4 billion, due largely to the significance of export sales in dollars and a large depreciation of the kip. 26 ADB s financial covenants to ensure a debt service ratio of at least 1.1 times and a selffinancing ratio of at least 0.22, were complied with in every year except FY1997 and FY1998 (self-financing ratio), and FY1998 (debt-service ratio). By FY2000, the returns on operating revenue and equity were high again. 32. Adjustments in EdL tariffs resulted in their average annual increase of 23% between FY1987 and FY2000, compared with an average inflation rate of 28% per annum 27 and an average annual increase of 30% in the unit operating cost, excluding depreciation and interest. 33. Subsequent to the Asian financial crisis, which resulted in a large depreciation of the kip, an innovative, and so far successful, scheme for adjusting domestic tariffs was introduced in January The scheme increases the tariffs by 3.5% per month, and to date has met little resistance from consumers. 28 The scheme was reviewed in 2002, and from May 2002, domestic tariffs are to be increased at 2.3% per month for a further 36-month period. C. Financial and Economic Reevaluation 34. The appraisal estimates of the FIRR and EIRR were calculated taking into account the effect of diverting generation to the Project that would otherwise be sold for export. Electricity sales in Luang Prabang and Vang Vieng were forecast based on the potential number of new consumer applications likely to be received, and EdL s capacity to implement connections. The 25 This was accentuated by the impact of the Asian financial crisis, which after July 1997 caused a large depreciation of the kip. The large increase in revenues and operating profit in FY1999 reflects the cumulative impact of local tariff adjustments and increase in kip export revenues arising from depreciation of the kip. 26 Exports, as a proportion of total energy sales by value, are some 60 70%. 27 As measured by the consumer price index for Vientiane. 28 For some consumer categories, the increase was limited to 3.0% per month.

18 10 economic viability of the Project was shown to be sensitive to a 10% capital cost overrun, a 10% less than forecast load demand, and a 1-year delay in implementation, which operating together would reduce the EIRR estimate to below 10%. Because the Project was to be implemented using proven technology and implementation methods, no major implementation risks were anticipated. The EIRR and FIRR appraisal estimates are compared in Table 4 with the reestimates at reappraisal, the PCR, and this PPAR. Table 4: FIRR and EIRR Estimates (%) Item Appraisal Reappraisal PCR PPAR FIRR a EIRR EIRR = economic internal rate of return, FIRR = financial internal rate of return, PCR = project completion report, PPAR = project performance audit report. a An alternative FIRR of 8.1% was calculated at appraisal on the assumption that electricity transmitted to the Project did not represent generation that would otherwise be exported. The reappraisal, PCR, and PPAR reestimates were calculated on the assumption that such electricity would have been exported without the Project. 35. The reappraisal, PCR, and PPAR reestimates followed the general approach adopted at appraisal, but took into account the actual investment costs, commissioning date for operations, and unit operating costs up to the time of calculation. Differences between the estimates are largely accounted for by the higher actual investment costs and higher electricity demand than projected earlier. The significant differences between the PCR and PPAR estimates reflect a much stronger demand after FY1998, and in the case of the FIRR a nominal increase in the domestic tariff of over 120% and a 2.9 times rise in export revenues due to depreciation of the kip. The resulting EIRR and FIRR reconfirm the economic and financial viability of the Project. The estimates are considered reasonably robust as they are calculated 7 years after commissioning of the transmission line, and assume future growth in demand at less than the historical trend. Appendix 7 provides details of the methodology and assumptions underlying the FIRR and EIRR calculations, and results of a sensitivity analysis. D. Sustainability 36. The sustainability of the transmission and distribution components depends on generation sufficiency, optimal load management, maintenance, and EdL s investment capacity. Present power requirements of the project areas amount to less than 3% of Nam Ngum Hydropower Station s average generation of 1,100 GWh. Export sales account for more than 85% of Nam Ngum s generation, and represent a large buffer reserve. Generation sufficiency has also been enhanced with hydropower augmentation from Nam Leuk Overloading in Luang Prabang as a cause for outages will not be a concern for several years. At Vang Vieng, the power factor at peak loads has reached 82% and is a signal for a larger transformer. EdL is currently addressing the need for capacitors on the 22 kv distribution circuits to counter reactive power loads and contain technical losses. The shield wire circuits 29 Nam Leuk Hydropower Station was commissioned in February 2000 with a capacity of 60 MW. A 115 kv transmission line connects the Nam Leuk and Nam Ngum hydropower stations.

19 11 suffer from a high incidence of outages caused by their susceptibility to lightning strikes. Voltage is also variable due to the higher than expected ground resistance and varying ground moisture. Improvements to the reliability of the shield wire circuits are ongoing and continue to be addressed by EdL. The shield wire system is considered sustainable at the limits of the supplying transformers. 38. Maintenance requirements are being met, except for periodic maintenance on substation transformers, which is not being carried out because of the need to avoid power supply interruptions. The spare and smaller transformer in Vang Vieng is not in standby condition, which means that, in the absence of periodic maintenance, the probability of transformer failure is increasing. If transformer failure should occur at Luang Prabang, restoration of power could take several weeks. 30 Increased attention to the clearance of hazard trees along the transmission line will reduce the incidence of outages and enhance operational efficiency (para. 66). 39. EdL s investment capacity to meet expansion, upgrading, and maintenance requirements looks reasonably assured. The high proportion of power sold for export in foreign exchange is planned to continue. The measures in 1999 to increase local tariffs restored the financial viability of EdL s operations, and extension of the adjustment mechanism for a further 3 years (para. 33) is likely to ensure that real tariffs are preserved. Aid agency support for further improving EdL s operational and administrative efficiencies contributes to sustained operations. IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS A. Socioeconomic Impact 40. The Project helped support the Government s policies for economic and social development. Although socioeconomic benefits from the Project were not explicitly addressed at appraisal, 31 substantial benefits were implied for those households and businesses expected to switch to electricity. 41. Economic development of Vang Vieng and Luang Prabang was rapid after the Project. Not all development, however, can be attributed to the increased availability of electricity. Paralleling the Project s implementation, the road between Vang Vieng and Luang Prabang was reconstructed and sealed, allowing year-round access and regular transport services. 32 At the same time, improved security and communications made conditions more conducive for commercial development. In December 1995, Luang Prabang was declared a world heritage site, which provided an unanticipated spur to tourism. Vang Vieng has also benefited as a tourist destination. 42. In Vang Vieng district, the impact of introducing electricity was monitored. 33 Between 1996 and 2001, 22 villages were electrified through the 22 kv distribution system, and 7 villages 30 The substation at Luang Prabang is operated with only one transformer. There are no readily available transformers in the event of failure. The matter has been brought to the attention of EdL. 31 The main benefits of the Project were identified in the form of resource cost savings through the replacement of kerosene used for lighting, and oil used for diesel power generation. 32 Reconstruction, which was completed in 1996, has enabled the road to be used by vehicles in all weather, and reduced the average travel time for a truck from 2 days during the dry season, and 3 5 days during the wet season, to 6 7 hours. 33 By the Vang Vieng District Office.

20 12 under the shield wire system. Before electrification, gross output was growing at an average of 4% per annum. Production was not developed and industries and services were observed to be inferior without electricity. After electrification, gross output grew at an average of 7% per year, and production activities changed dramatically. New commercial enterprises in Vang Vieng include 2 irrigation centers, 3 enterprises for the production of drinking water, 10 ice-making plants, 14 furniture factories, and 111 rice mills. Electricity has also been increasingly used for raising livestock, poultry feed, and handicraft manufacturing. The number of registered tourist rooms increased from 15 to 448. Attracted to the increased economic activity, the official population of Vang Vieng district increased from 40,934 persons to 43,130 persons, and average nominal incomes per year increased from about KN0.2 million per person to about KN2.5 million per person or between 1996 and In real terms, the increase was 5.7 times. 43. Comparable records for the growth and development of Luang Prabang are not available. 34 Development appears, nevertheless, to have followed a similar pattern, though deeper and more significant. Tourist facilities are bigger and more developed. Industrial and commercial development has brought about electricity requirements for board laminations, metal furnaces, engineering, and hotels. Motor vehicle service stations and manufacturers of textiles, metal ware, and plastic ware are in far greater evidence, as are businesses for the sale of building materials and household wares that require heavy electrical machinery. Before the Project, these activities were nonexistent or very limited. 44. The OEM visited two villages electrified under the Project to observe and discuss the ensuing socioeconomic benefits. Lighting was the most significant benefit because it enabled more activities in the evening, and permitted the use of appliances such as a refrigerator for keeping medicines, and television. Trip systems prevented the use of electricity for commercial purposes, namely, ice making, small machinery pumps, and auto services, but while the need for electricity capable of serving such higher loads was recognized, consumers viewed the availability of electricity for household appliances as having greater importance and providing a substantial cost saving. Households were reported to be paying on average KN7,000 per month for electricity, compared with the alternative cost of using kerosene for lighting of approximately KN15,000 per month. 45. The Project was gender neutral with no stated objective to assist women during or after implementation. The benefits from electricity accrue largely in the form of opportunity labor savings, enhanced social interaction, and broadened work and other activity options. B. Environmental Impact 46. ADB s loan covenants required EdL to adhere to ADB s Environmental Guidelines for Selected Industrial and Power Development Projects. The Project had no significant adverse impact on the environment. Because the feasibility study did not include a physical survey of the proposed transmission route, potential problems of the transmission lines and tower structures were assessed from geographic maps and aerial photographs. No special problems were expected. During the OEM s visit to selected project sites, no adverse environmental impacts were observed. The transmission line was for the most part above minimum height clearances and built over clear areas. Ongoing clearance of foliage along the transmission route is a maintenance task. Even so, because the transmission route traverses steep hillsides and mountainous country, the transmission line remains prone in places to ground slippage and 34 Statistics for the development of Luang Prabang, including gross output figures, were not available through the National Statistical Office.

21 13 falling trees from high ridge levels. The substations are fenced off, and noise from transformers is not audible outside the substation fence boundaries. Personnel safety measures against accidental high-voltage electrocution were incorporated into the substation and transmission line designs. C. Impact on Institutions and Policy 47. Support for institutional strengthening was addressed through loan covenants (para. 22), and the attached TAs (footnote 6). The financial covenants aimed at enhancing the financial viability of EdL to make it self-sustaining. The financial targets for debt service ratio and selffinancing ratio provided signals for adjusting tariffs where noncompliance with these ratios was imminent. Actual tariff adjustments were sufficient (para. 32), despite extreme inflationary pressures following the Asian financial crisis, and growing system losses associated with expanding EdL s distribution network. 48. EdL, with the support of the Government, was required under a loan covenant to produce an action plan for reducing its system losses. The implications of this covenant and how EdL s success at reducing system losses should be measured were not made clear. No specific targets were set. At appraisal, the proportion of generation for export ensured that overall system losses were low. However, the integration of the southern provinces and Luang Prabang s distribution operations into EdL during project implementation meant that overall system losses would increase. 35 Technical improvements made under the Project to Luang Prabang s distribution system reflect efforts by EdL to ensure that system losses were less than they would otherwise have been. Under the Project, Luang Prabang distribution losses fell from 35% at appraisal to 21% in FY1994, and currently are around 12%. EdL made similar efforts to reduce distribution losses in the southern provinces. Distribution losses in Vang Vieng were around 6% in FY2001, well below those in nonproject areas. 49. Consultant guidance for dealing with quality control, processing design approvals, contractor problems, and testing equipment provided EdL with valuable experience for improving its implementation efficiency. 50. The prime task of the attached TA 1080-LAO was to study the feasibility of extending the supply of electricity from Nam Ngum Hydropower Station to Xieng Khouang and Sayaburi provinces, taking into account the alternative options for supply. The TA report was finalized in October 1991 and concluded that the most effective means of supply for both provinces was a 115 kv transmission line, originating as a tap from the Nam Ngum-Luang Prabang transmission line. The report s recommendations were accepted as the basis for subsequent project(s), but with Nam Leuk Hydropower Station substituted for Nam Ngum (footnote 29) for the extension of transmission to Xieng Khouang. 36 Taking into account the relevance, timeliness, quality of analysis, and impact on design for expanded transmission to Xieng Khouang and Sayaburi provinces, TA 1080-LAO is rated highly successful. 51. The attached TA 1081-LAO aimed at improving the water management and operations of Nam Ngum Hydropower Station to maximize the generation of electricity and the value of exports to the Electricity Generating Authority of Thailand. This was to be achieved by way of a 35 Export sales carry a system loss of less than 2%. At appraisal, EdL s overall system losses were around 7%, and distribution losses were in the order of 25%. The connection of the distribution networks in Luang Prabang and southern provinces would increase the overall system losses. 36 The transmission extensions to Xieng Khouang and Sayaburi are financed under the ongoing Loan 1558-LAO: Power Transmission and Distribution Project, for $30.0 million, approved on 30 September 1997.

22 14 study of the water flows and demand factors affecting the optimal operation of Nam Ngum Hydropower Station. The TA report, which was completed in 1990, concluded that (i) the annual spill could be limited to 4% of total water discharged, (ii) that a three-peak daily operation with differing tariffs was feasible and would increase the value of electricity exports to Thailand by about 15%, and (iii) that operating the turbines above their rated capacity with water inflow augmentation from either Nam Song or Nam Leuk was a preferred alternative to adding a 40 MW generator unit. The study recommendations led to better management of the station, and acceptance of a two-tier export tariff. Taking into account the overall effectiveness of the study, TA 1081-LAO is judged highly successful as well. 52. TA 1082-LAO aimed at facilitating the integration of Luang Prabang operations with EdL. The general aim was to consolidate the operating results of Luang Prabang and synchronize organization, procedures, and accounting systems. To this end, the tasks of the TA consultants were to propose changes consistent with the recommendations made and implemented under the TA financed by IDA for integrating the electricity operations of the southern provinces with EdL. The success of IDA s TA, which was conducted mainly in 1989, was considered a sufficient basis for EdL to integrate Luang Prabang s operations, and at the request of EdL, ADB s TA 1082-LAO was cancelled. 53. IDA s terms of reference (TOR) were comprehensive with a general aim to strengthen the financial and accounting systems, and training for such but did not include provision for the computerization of the financial, accounting, and management information systems. The OEM reviewed and compared the TOR for TA 1082-LAO with the IDA TOR and held discussions with EdL to determine the extent to which the aims of TA 1082-LAO had been successfully achieved under IDA s TOR. Because there followed, after TA implementation, considerable additional donor assistance with the same general aims, it was not possible for the OEM to reliably assess achievements in this direction attributable to IDA s TA. What can be concluded is that historical problems identified at appraisal regarding weaknesses in accounting practices, the need for more timely preparation of accounts and lack of qualified staff remain, and the need for strengthening EdL s accounting systems continue. The nature of capacity building and training appears too short term, and not an adequate replacement for graduates trained for a longer period in accounting and information technology. The timely provision of system hardware and software is also necessary for the effective strengthening of accounting and management information systems. A. Relevance V. OVERALL ASSESSMENT 54. The Project s rationale to extend the availability of electricity generated from existing hydropower resources at Nam Ngum to Luang Prabang in the north of the country was consistent with the Government s Second Five-Year Plan ( ) for development of power infrastructure in the Lao PDR, as well as with ADB s country assistance strategy to achieve better integration of the economy and to stimulate production and trade. Significant in the Government s decision for selecting the Project were parallel efforts for building an allweather national highway linking Luang Prabang and Vientiane and for improving communications and security between the provinces. Without the Project, generation sources in Luang Prabang would have been insufficient to meet load requirements of the province. Without electrification of the lightning shield wire, village households would have been denied access to electricity and the cost savings of switching from kerosene. The unanticipated growth in tourism would not have been served, and the income benefits from employment and business

23 15 opportunities would not have accrued. Generation from Nam Ngum Hydropower Station would not have benefited from the recommendations for better managing water spillage and for introducing export peak and nonpeak tariff pricing to increase export revenues. The Project s transmission component has become a vital link in the national grid for further promoting economic development. In consideration of these factors, the project rationale, purpose, and outputs were highly relevant. B. Efficacy 55. The overall project design, with expanded scope, was sound. There were weaknesses in the feasibility study and in estimating project costs, which caused delays during implementation and required supplementary financing. Construction of the transmission line over mountainous jungle country that was largely inaccessible by road proved a considerable physical and engineering accomplishment. Distribution networks were effectively expanded. The quality of construction and installation of equipment was of a high order. Project operating performance has been highly satisfactory. EdL s financial performance has been sound, and ADB s financial covenants that aimed at ensuring a timely adjustment of tariffs have been met. The attached TAs for studying the feasibility of alternative options for expanding transmission to the adjoining northern provinces of Xieng Khouang and Sayaburi, and for optimizing generation and export revenues from Nam Ngum Hydropower Station led to recommendations that formed the basis for further transmission expansion and improved operational performance at Nam Ngum. The merger and consolidation of EdL Luang Prabang s operations was achieved. Overall, the Project, in achieving its stated purpose and targets, is assessed efficacious. C. Efficiency 56. Operational efficiency has been satisfactory. Maintenance of the Project s transmission line, towers, substation structures, and distribution equipment is sound, but could be improved with more attention both to clearing hazardous trees along the transmission line to reduce outages, and to carrying out periodic maintenance. The reestimated FIRR and EIRR of 3.6% and 14.3% confirm the viability and efficiency of project operations. On balance, the Project s implementation and performance are rated efficient. D. Sustainability 57. The sustainability of project benefits depends largely on generation sufficiency, optimal system management, maintenance, and EdL s continuing investment capacity. Generation sufficiency is assured with ample back-up capacity available from the Nam Ngum and Nam Leuk hydropower stations. System management is conducted satisfactorily and additional attention is being paid to maintenance and upgrading requirements. There is need for a back-up 115 kv transformer at Luang Prabang to avoid the potential economic cost of a breakdown to the existing single transformer. The quality of civil works at towers, grid stations, power equipment, and cabling is sound, and should outlast the end of the projected life in The financial viability of the Project was substantially strengthened by the Government s decision in January 1999 to introduce a monthly tariff adjustment of 3.5%. Financial performance is dependent on sustaining the net average real tariff, containing system losses, and improving administrative efficiencies. The extension of the adjustment mechanism for domestic tariffs for a further 36-month period from May 2002 at 2.3% per month will help ensure financial viability of the Project. Assuming the continued sufficiency of financial and management support to meet operational and maintenance requirements, the project benefits are judged likely sustainable.

24 16 E. Institutional Development and Other Impacts 58. Project support for institutional strengthening was achieved and the attached TAs led to recommendations that were taken up. The Project shares with other infrastructure projects a very positive impact on economic growth. There is visible evidence of the socioeconomic benefits accruing to rural villages electrified under the Project. At Luang Prabang and Vang Vieng, electricity has attracted commercial enterprises for a host of activities that were not previously in existence. In Vang Vieng, where statistics have been compiled, employment opportunities were expanded and average real incomes increased substantially. The 10,700 new connections in Luang Prabang exceeded project forecasts, as did the 57 villages connected from the shield wire. Average village household expenditures on lighting were halved. Overall, institutional, economic, and other impacts of the Project are judged substantial. F. Overall Project Rating 59. The Project was appropriate for achieving its purpose, and proved a pioneering success. Difficult terrain, insurgency threats to construction, and the need for supplementary financing impaired implementation, but did not prevent the overall achievement of project purpose. Based on the positive outcomes, the Project is rated successful, bordering on highly successful. 37 This upgrading of the PCR assessment of partly successful is attributable to the strengthened financial performance of EdL and operating performance of the Project since its completion in 1998, and because of the broader focus of evaluation, which gives more emphasis to the achievement of project purpose and of socioeconomic and development impacts. G. Assessment of ADB and Borrower Performance 60. ADB s overall performance is assessed satisfactory. The technical feasibility of the Project was reviewed, and project design was consistent with least-cost development considerations. Procurement and contracting were carried out in accordance with competitive bidding procedures and with appropriate supervision. Monitoring through review missions was adequate. Detracting from ADB s performance was (i) an error of judgment made at appraisal pertaining to project costs and insufficient allowance for physical contingency to meet project scope variations following detailed design, which were significant factors in the need for supplementary financing; and (ii) lapses in ADB s administration of the Project associated with changes in personnel, which meant outstanding matters were not always attended to in a timely fashion, and caused unnecessary administrative delay. 61. The Borrower s performance is assessed fully satisfactory. The Borrower adequately managed project implementation, including recruitment of military personnel for the protection of survey and construction teams. The Borrower was responsive to ADB s monitoring, and showed a strong commitment to working to schedule and ensuring sustainability. VI. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS A. Key Issues for the Future 62. No specific issues are singled out that are not captured as a lesson or follow-up action. 37 Under the current four-category rating system (highly successful, successful, partly successful, and unsuccessful).

25 17 B. Lessons Identified 63. The key lessons learned from the Project are (i) transmission projects that involve the carriage of electricity across populated rural areas should also plan to provide for the distribution of electricity to such areas so as to minimize objections and enhance the socioeconomic impact (para. 2); (ii) feasibility estimates that are dependent on detailed engineering after loan approval should include a wider contingency margin to avoid the possible need for supplementary financing and delays (para. 14); (iii) more rigorous checks are needed at commissioning to avoid the possibility of faulty equipment leading to the impairment of technical operating performance (paras. 19 and 28); and (iv) the introduction of monthly adjustments is a suitable mechanism for increasing tariffs to acceptable and viable levels without causing undue consumer resistance which can arise with one-off major adjustments (paras. 33, 39, and 47). A basic premise at formulation that project design called for conventional engineering systems and methods of construction proved faulty, and impaired the efficacy of implementation with regard to scheduling and the availability of funding (paras. 13 and 14). Non-uniform design considerations, including provision for variable tower heights, tower spans, and tower support structures, are lessons of experience now being applied to transmission projects for adjoining provinces with similar mountainous topography. C. Follow-Up Actions 64. ADB should take into account the lessons learned and, where project appraisal is based on a feasibility study specific to other projects, should closely review the potential for design variation and adopt higher contingency provisions. 65. The Government, before including a shield wire system in the scope of future projects, should undertake a comparative cost analysis of the shield wire system versus the conventional system, taking into account restrictions on consumer usage in the former and the need to replace it to allow increased loadings. 66. By September 2002, EdL should address substation metering problems; leaks in transformers; the need for an oil containment system; and the urgent need for a back-up 115 kv transformer at Luang Prabang (so as to avoid the potential economic cost of a break down to the existing single transformer). It should also reduce outages caused by falling trees across the transmission line.

26 GOALS, TARGETS, INPUTS, AND RESULTS a Goals Targets Expected Outcomes and Impacts Actual Outcomes and Impacts Sector/Area Reduce dependence on fuel imports to achieve foreign exchange savings Export surplus power to earn additional foreign exchange Increase the supply of electricity for the development of industry and improvement of living standards Promote development of food and agro-based industries Southern provinces of Savannakhet, Champassak, Saravane, and northern provinces of Luang Prabang, Sayaburi, and Xieng Khouang Construction of 45-megawatt (MW) hydropower station at Xeset plus transmission line to Thailand Rehabilitation of units 3 and 4 at Nam Ngum Hydropower Station Rehabilitation of Seleban Hydropower Station Rehabilitation and upgrading of distribution networks in Savannakhet, Champassak, and Saravane provinces Progressive expansion of electricity generation and transmission from hydropower resources Expanded electricity distribution to meet household and industry needs Fuel savings on kerosene and diesel oil from household and industrial consumers connecting to the national network Not enumerated Increased generation of 60 MW from Nam Leuk in year 2000 enhanced capacity to export Expanded industrial and commercial development Increased and more diversified income opportunities Increased commercial and industrial developments Not enumerated Increased income opportunities For Project Under Appraisal Extend the availability of electricity generated from hydropower sources to Luang Prabang Construct 115-kilovolt (kv) single circuit transmission line from Nam Ngum Hydropower Station to Luang Prabang Install 115 kv terminal facility at Nam Ngum and Thalat Install 115/22 kv substation facilities at Luang Prabang and Vang Vieng Increase electricity consumption in Luang Prabang City to 11 gigawatt-hours (GWh) by 1997 at an average increase of 17% per annum; load growth after 1997 of 8% Increase electricity consumption in Vang Vieng to 8.5 GWh per annum Actual increase Luang Prabang by GWh by GWh Vang Vieng by GWh by GWh Actual growth Luang Prabang 30.8% per year Vang Vieng 21.8% per year a Although some similarity in format exists, this comparison is not intended to represent a project framework. A project framework was not prepared for this Project at appraisal or reappraisal.

27 Goals Targets Expected Outcomes and Impacts Actual Outcomes and Impacts Improve the reliability of power distribution in Luang Prabang City Promote economic development Save foreign exchange on imported fuel used for lighting and motive power Improve operating performance of Electricité du Laos (EdL) Supply power equipment and tools to improve reliability b Improved voltage reliability and reduced outages in Luang Prabang Meet planned industry power needs at Luang Prabang and Vang Vieng Expand distribution and increase connections to households Optimize generation output from Nam Ngum Hydropower Station Enhance foreign earning capacity from sales to Thailand Higher production levels and faster growth Offsetting demand for kerosene and diesel oil imports Not enumerated Not enumerated Voltage output to households/ commercial consumers regularized at 220 V ± 5% Outages substantially reduced but still too high In Vang Vieng, growth in output increased on average from 4% to 7% per annum Fuel savings kerosene 0.42 liter/kwh diesel oil 0.35 liter/kwh Sustained output of 140 kwh from Nam Ngum Peak pricing on sales to Thailand enhanced revenues For Project Under Reappraisal (same primary goals as for appraisal, plus the following) Electrify lightning shield wire on Nam Ngum-Luang Prabang transmission line Extend electricity from the shield wire to consumers at 35 villages along the Luang Prabang-Vang Vieng Electricity for 3,835 village households from the electrification of shield Upgrade the primary voltage distribution at Luang Prabang transmission route Upgrade Luang Prabang distribution voltage from 6.6 kv to 22 kv wire Increased capacity to expand number of consumer connections Electricity extended to 57 villages and estimated 5,200 village households Additional connections at Luang Prabang had increased by 10,700 to the end of 2001 Project Inputs Procurement Route survey Detailed design Civil works (transmission and substations) Supervision Project costs (at reappraisal) $20.5 million Project financing plan ADB $15.0 million SDC: $2.0 million Government/EdL: $3.5 million Original project completion by 31 Jul 1992 Expanded project completion by 30 Jun 1997 Original project deemed complete 30 Dec 1994 Final project complete 31 Jul 1998 Project costs $20.3 million Project financing ADB: $15.6 million SDC: $2.0 million Government/EdL: $2.7 million ADB = Asian Development Bank, kwh = kilowatt-hour, SDC = Swiss Development Corporation, V = volt. b Including switchgear, lightning arrestors, connectors, installations, cable jointing equipment, communication equipment, protection equipment, testers, and line equipment tools.

28 Goals Targets Expected Outcomes and Impacts Actual Outcomes and Impacts Technical assistance (TA) for (i) TA 1080-LAO: Xieng Khouang and Sayaburi Power Transmission Study; (ii) TA 1081-LAO: Nam Ngum Hydropower Station Operational Improvement Study; and (iii) TA 1082-LAO: Institutional Improvement to EdL Luang Prabang Provide about 25 person-months of TA Attached TA financing $375, person-months of TA Attached TA financing $168,000 TA 1082-LAO cancelled c c Due to a duplication of consulting services provided under International Development Association Credit 1826 for the integration of the electricity operations of the southern provinces with EdL. Results were considered a sufficient basis for EdL to integrate Luang Prabang operations.

29 PROJECT COSTS Table A2.1: Actual versus Appraisal Costs ($ million) Appraisal Reappraisal Actual Item Foreign Local Total Foreign Local Total Foreign Local Exchange Currency Cost Exchange Currency Cost Exchange Currency Component Transmission Substation facilities Distribution Shield wire electrification Consulting services LCDC Contingencies Total Funding Source ADB SDC Government/EdL Total ADB TA Grant a,b TA 1080-LAO ($'000) TA 1081-LAO ($'000) TA 1082-LAO ($'000) a cancelled c Total Cost ADB = Asian Development Bank, EdL = Electricité du Laos, LCDC = loan charges during construction, SDC = Swiss Development Corporation, TA = technical assistance. a Loan-attached TA support. Amounts exclude value of local support for consultant offices; managerial, technical, and secretarial services; and local transport. These are variously estimated between 5% and 8% of ADB's grant. b In addition, the following standalone TA grants were approved and implemented: TA 1301-LAO: Nam Ngum-Luang Prabang Power Transmission, for $960,000, approved on 30 March 1990, and $1,034 million (supplementary), approved on 14 October The grants reflect funding commitments to the Project from SDC to meet the cost of consulting services. c This TA was cancelled due to a duplication of consulting services provided under International Development Association Credit 1826, which were considered a sufficient basis for EdL to integrate Luang Prabang operations. Sources: ADB and EdL documents and Operations Evaluation Mission estimates. Appendix 2 21

30 22 Appendix 2 Table A2.2: ADB Project Loan Disbursements a ($) Year Loan 928-LAO(SF) Loan 1308-LAO(SF) , ,993 1,534 2,225,704 9,330, , , ,222 1,719,507 Total 11,746,741 3,839,850 ADB = Asian Development Bank. a The higher total value disbursed than was approved was possible as a result of the dollar's subsequent depreciation against the value of ADB's loan units or special drawing rights.

31 APPRAISAL, REAPPRAISAL, AND ACTUAL IMPLEMENTATION SCHEDULES Item Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 A. Feasibility Study Review B. Loan Processing Loan 928-LAO(SF) Loan 1308-LAO(SF) C. Detailed Engineering D. Procurement, Installation, and Construction (Transmission and Distribution) Transmission and substations complete Distribution upgrading complete E. Shield Wire Procurement, Construction, and Connection F. Testing and Commissioning Expected testing and commissioning at appraisal Expected testing and commissioning at reappraisal EdL = Electricité du Laos. At appraisal/reappraisal. Actual. Sources: EdL and consultant reports. Appendix 3 23

32 24 Appendix 4 SUMMARY OF CONTRACT AWARDS Description Currency Contract Amount ( 000) Under Loan 928-LAO(SF) Turnkey Contract for Transmission Line FF 9,309.9 $ 6,081.4 Turnkey Contract for Termination and Substation Facilities $ 3,891.5 Diesel Generators and Spare Parts $ Under Loan 1308-LAO(SF) Turnkey Contract for Transmission Line FF $ Turnkey Contract for Termination and Substation Facilities $ Substation Transformers and Line Materials $ 1,833.5 Electrical Equipment $ 85.3 Prestressed Concrete Poles $ KN 254,971.1 Tools and Vehicles $ FF = French francs, KN = kip. Source: Asian Development Bank disbursement records.

33 Appendix 5 25 TECHNICAL REPORT SUMMARY A. Background 1. The project design at appraisal included (i) a 115 kilovolt (kv) single circuit transmission line of 208 kilometers (km) from Thalat through Vang Vieng to Luang Prabang; (ii) terminal facilities at Thalat and Luang Prabang; (iii) 115/22 kv substations at Luang Prabang and Vang Vieng, with additional 6.6 kv facilities at Luang Prabang to interconnect with the existing distribution system; and (iv) distribution equipment and tools to improve the Luang Prabang distribution system. The substations were to be equipped with a 15-megavolt-ampere (MVA) transformer at Luang Prabang and 7.5 MVA at Vang Vieng for the kv system. Engineering consulting services for detailed design and implementation assistance as well as project vehicles and office equipment were also included. 2. At reappraisal, and after detailed design, the Project was expanded to include a total 212 km of transmission line, an insulated shield wire energized at 25 kv to provide single phase 230/400 volts (V) to consumers 1 along the transmission line right of way. Also included were 22 kv and 25 kv single-phase transformation equipment at Luang Prabang and Vang Vieng substations, and cable and equipment needed to upgrade Luang Prabang s 6.6 kv distribution system to 22 kv. The transformer capacities for the kv system were rerated to 12.5 MVA at Luang Prabang and 5.0 MVA at Vang Vieng. A spare transformer of 5.0 MVA was added and sited at Vang Vieng. It was envisaged that the spare could be utilized at Luang Prabang, provided that suitable transport was available. The conductor size for the transmission line was increased from 99 square millimeter (mm 2 ) to 115 mm 2 in order to provide greater power transfer capability and lower energy losses. Two diesel generators were also included to reduce the electric supply shortage at Luang Prabang during construction of the Project. B. Transmission and Substation Component 3. As constructed, the 115 kv transmission line is sustainable, assuming normal maintenance is maintained, to a point in time at which the peak power delivered reaches approximately 27 MVA. 2 At a peak of about 27 MVA, voltage regulation of the line will cause the receiving voltage at Luang Prabang to fall below the recommended 90% of nominal voltage. 4. Observed maintenance of the transmission structures indicated that, with the exception of clearing potential danger trees (trees located near the line which would strike the conductors should they fall), the line is being well maintained. The concrete foundations of the steel lattice towers exhibit little sign of deterioration. The bolt connections appear to be of proper tightening, no damaged insulators were observed, and security measures have been made to restrict unauthorized climbing of the towers Many of the towers are located where they are subject to severe water and soil runoff during heavy rains. Electricité du Laos (EdL) personnel are aware of the need to periodically 1 For about 35 villages along and near Lao Route 13, which runs parallel to the transmission line. 2 Various combinations of line loading from Thalat to Vang Vieng and then from Vang Vieng to Luang Prabang affect the loading level of the transmission line and voltage limits at both substations. Load flow studies of various combinations of load, reactive compensation (capacitors) size and placement, and distribution voltage response at no load and full load are necessary to determine the power transfer limits of this line. 3 Access by the general population has been restricted by the use of barriers and barbed wire in addition to warning signs.

34 26 Appendix 5 inspect these foundations for ground stability. Run-off diversion structures have been placed at vulnerable tower locations. 6. The Operations Evaluation Mission (OEM) discussed the need for quarterly inspection of the line and periodic checking of connections with EdL personnel. EdL is developing this as part of its preventive maintenance programs. 7. Capacitors are needed on the 22 kv feeders at Luang Prabang and Vang Vieng substations. The addition of capacitors to the 22 kv distribution circuits in the Luang Prabang and Vang Vieng service areas will increase the generation that can be transmitted. 8. The substation structures are of galvanized steel with overhead string bus arrangements for aluminum conductor steel reinforced (ACSR). The structures at the substations are well maintained and sustainable for at least the typical years service with normal maintenance. This maintenance consists mainly of periodic touch-up and bolt connection checks. There is sufficient room for distribution circuit expansion as well as sufficient room for additional transformers. The control buildings at both substations were of very good construction and well maintained. 9. The 22 kv distribution equipment at the distribution substations 4 consist of 22 kv circuit breakers rated 3,000 amperes and associated disconnect switches and metering. The circuit breakers are designed for utilizing sulfur hexafluoride (SF 6 ) gas. The equipment is sustainable for long-term usage with periodic maintenance and regular attention for ensuring that the SF 6 pressure is maintained. The distribution equipment appears to be properly maintained, and discussions with EdL personnel confirmed their knowledge of SF 6 handling procedures. 10. The main power transformers at the distribution substations are rated 115 kv 22 kv, 10,500 kilovolt-amperes (kva), and are load-tap changing (LTC) equipped. The present transformer at Vang Vieng is a replacement of the project-supplied unit that failed. Vang Vieng has a spare 5,000 kva transformer while Luang Prabang has no spare. Both transformers are adequate for present loadings. However, their prime function is sustainable only if periodic outages are taken to meet maintenance requirements. Even with this provision, the use of a single transformer compromises the sustainability of the substations, as a failure of the main transformer will cause the stations to be out of service during replacement. The single transformer at Luang Prabang is of more concern as the delivery of a replacement unit would entail a long delivery time. The spare transformer at Vang Vieng is not maintained in an energized mode, that is, it is not in a hot standby condition. Its readiness for use in the case of a main transformer breakdown is, therefore, questionable. C. Substation Metering 11. The metering of Vang Vieng to Luang Prabang power and energy flows is unreliable. Readings maintained by EdL personnel, based upon the two substation s kwh and kw metering, routinely show that more power arrives at Luang Prabang than is sent from Vang Vieng, or show a very small loss in the order of less than 1%. The metering of the 22 kv circuits at Vang Vieng is also faulty. In consequence, effective management is hampered and would be considerably enhanced with reliable metering of the 115 kv and 22 kv circuits. 4 Luang Prabang and Vang Vieng substations receive power at 115 kv and distribute at 22 kv. A 25 kv circuit from each substation supplies the insulated shield wire distribution along the route of the transmission line. The terminal connecting facilities at Thalat constructed by the Project do not include distribution.

35 Appendix The problem with the 115 kv metering may be simply that power levels are low compared to the ratio of the installed current transformer. Another reason may be that the current transformer tap does not match that of the connected meter. This problem was evident at commissioning of the substations. 13. The metering of the 22 kv distribution circuits at Luang Prabang appears reliable. The basis for early reported criticism appears to be the reduction in system losses that coincided with the commissioning of the substation. Current improvements are due to the conversion of the system to 22 kv from 6.6 kv, improved connection and configuration of the distribution system, and increase in conductor size. The OEM s reported data of the Luang Prabang system are reliable and consistent with operational performance. 14. Proper maintenance of transformers requires periodic tap changer oil changes and deenergized tests of the transformer windings. These cannot be performed at Luang Prabang without reducing the service area supply to that from the small hydropower station located at Nam Dong and the project-supplied diesel generation. During oil changes, electricity supply at Luang Prabang would be reduced to about 1.5 MVA. 5 At Vang Vieng, the spare transformer could be utilized during maintenance outages. 15. To ensure continued electricity supply, a spare of comparable rating with the present main transformer should be provided at Luang Prabang and installed in a hot standby configuration. The existing spare at Vang Vieng should be kept energized with periodic oil analysis performed to ensure that it is available in standby readiness. D. Distribution Component 16. The distribution system in the Luang Prabang service area was enhanced by the Project. As a result of converting the existing 6.6 kv system to 22 kv, the Luang Prabang 22 kv and associated 230/400 V connection system is sustainable for the next 3 5 years, so long as customer and load density is maintained and distribution system maintenance is provided. 17. A caveat to the above conclusion is that a small (5 6%) phase unbalance was observed in the three-phases of the 22 kv circuits. It could not be determined if this was universally true for the system on a continuous basis. Proper balancing of the single-phase loads among the three phases must be maintained to avoid conductor overloads and increased losses. 18. Observations of the Luang Prabang distribution indicate that it is well maintained and transformer loading is within accepted limits for proper operation. However, the service areas in the market area of the city are of smaller conductor size, and the connection practices are not as good as those of the outer areas. If the load in the inner city areas continues to grow at recent levels, conductor augmentation will soon be required The dedicated 22 kv feeders to the cement production facilities at Vang Vieng are sustainable. There is a need for capacitive compensation on these feeders as they were 5 Transformer failure at Luang Prabang would reduce electricity supply to about 1.5 MVA. 6 A loading analysis of the distribution circuits should be made periodically to determine the need for additional circuit installation and re-conductoring with larger diameter wire, and to determine transformer loading and phase balance.

36 28 Appendix 5 observed to be operating with an apparent power factor of about 82% during the time of the OEM s visit. 20. In the service areas of both substations, it was noted that the metering of most nonindustrial consumers is in need of upgrade and standardization. A multitude of manufacturers meters of widely varying age were noted. This is especially evident in the market district of Luang Prabang. The evident age and lack of tamper protection for the majority of the revenue metering observed can be assumed with a high degree of certainty to be contributing to avoidable losses of both a technical (underregistration) and a nontechnical nature. A program of meter replacement is recommended to ensure that metering is not a source of significant technical and revenue losses. All nonmetering should be eliminated. E. Shield Wire Distribution Component 21. The shield wire was insulated and energized from both substations at 25 kv as a single wire, ground return, single-phase circuit. At various towers along the route, service drops were constructed to serve 25 kv 230 V transformers. 22. As a single-wire earth return configuration, the shield wire system is limited to singlephase service, and the total amount of service is limited by fusing each consumer meter. This limits the total load on the three shield wire circuits 7 to the capacity of the supplying 22 kv 25 kv transformers. 23. The shield wire circuits suffer from high rates of outage due to their susceptibility to lightning and the voltage regulation is poor due to higher than expected ground resistance. In addition, the ground resistance varies greatly depending upon wet/dry conditions and the prevalence of rock. Regardless of these drawbacks, the system is sustainable at the capacity limits of the supplying transformers. EdL has made considerable improvements in the reliability of the shield wire systems in recent years and customer satisfaction is considerable. However, extensions of the system should not be considered without a clear showing that a 22 kv or 34.5 kv three-phase system replacement, enabling larger motors such as irrigation pumps and electricity to be consumed for commercial and airconditioning purposes, is not superior in terms of economic return. 8 7 One circuit to the south of Luang Prabang and two circuits, one each to the north and south of Vang Vieng. 8 A 34.5 kv distribution system is a standard distribution design with cost effective components available from a wide number of suppliers.

37 Table A5.1: Transmission and Distribution Line Length with Project Transmission line (km) Distribution (km) Year Thalat- Salaphokhone- Vang Vieng Luang Prabang Salaphokhone Luang Prabang Shield Wire 22 kv 0.4 kv Shield Wire 22 kv 0.4 kv km = kilometer, kv = kilovolt. Source: Electricité du Laos. Table A5.2: Transmission and Distribution from Load Centers (MWh) Thalat Vang Vieng Luang Prabang Year Sent Received Distributed Received Distributed Generated by Nam Dong Diesel , ,657 1,992 3, ,028 5,643 5,619 6, , ,558 8,267 4,791 8, , ,630 10,264 1,105 8,940 11, , ,509 12,773 2,265 11,005 13, , ,966 11,538 2,379 3,683 16, , ,892 15,825 1,567 15,952 19, ,658 MWh = megawatt-hour. Source: Electricité du Laos. Table A5.3: System Losses, (%) Year EdL Luang Prabang Vang Vieng a EdL = Electricité du Laos. a Increase due to shield wire and distribution connections. Sources: Electricité du Laos and Operations Evaluation Mission estimates.

38 Fiscal Year Ending ELECTRICITÉ DU LAOS PERFORMANCE INDICATORS Table A6.1: Financial Performance Indicators a Exchange Rate (KN per $1.00) ,635 4,274 7,600 7,986 Gross Revenue (KN million) 8,246 6,627 11,006 15,377 15,807 18,461 21,479 27,586 29,496 42,408 58,298 95, , ,744 Total Operating Revenue (KN million) 7,579 6,080 10,821 14,988 15,037 17,658 20,997 27,048 28,803 37,098 48,563 76, , ,566 Gross Operating Profit (KN million) 5,697 4,635 9,328 10,444 11,848 13,499 13,672 15,813 14,635 21,379 26,771 36, , , Appendix 6 Cost of Power Purchases (KN million) ,638 2,769 12,345 19,264 36,613 Operation and Maintenance (KN million) 1,720 1, ,645 2,343 2,740 3,584 4,986 5,128 Salaries and Allowances (KN million) ,370 1,518 1,561 2,472 3,829 6,742 9,712 13,324 Administration (KN million) 453 2,038 3,631 5,413 6,212 8,434 15,529 Depreciation (KN million) 1,454 2,319 3,675 2,874 3,580 3,323 5,100 5,378 5,072 6,207 6,899 8,374 9,033 19,593 Interest (KN million) 919 1,066 1,474 2,491 1,339 4,038 4,018 3,814 4,809 6,432 13,116 36,493 99,437 90,683 Profit Before Tax (KN million) b 3,324 1,250 4,179 5,079 6,929 6,138 4,554 6,888 7,004 9,089 7,424 (3,841) 80,872 c 75,864 Taxes (KN million) 1, ,743 3,441 4,591 4,123 3,976 3,103 3,171 3,210 2,604 3,552 33,964 35,962 Profit After Tax (KN million) 1, ,638 2,338 2, ,785 3,833 5,879 4,820 (7,393) 46,908 39,902 Dividend Provision (KN million) ,382 1,131 1, Total Equity (KN million) 29,040 32,876 50,392 56,731 58,529 58,602 62,700 66,406 74,128 81, , , , ,503 Net Fixed Assets (KN million) 32,641 36,544 53,383 75, , , , , , , , , , ,525 Current Assets (KN million) 9,951 11,401 12,661 12,641 13,475 12,803 15,453 16,783 18,888 30,506 44,253 69, , ,890 Total Assets (KN million) 39,156 50,270 90, , , , , , , , ,422 1,138,029 2,362,929 1,195,778 Current Liabilities (KN million) 3,434 4,377 9,039 4,796 7,031 8,104 11,535 16,344 14,584 17,806 45, , , ,043 Long-Term Liabilities (KN million) 10,116 13,018 32,023 50,098 61,909 64,830 61,106 61,286 97, , , ,673 1,805, ,872 Operating Expenditure/Operating Revenue (%) Profit Before Tax/Equity (%) (3.1) Profit BeforeTax/Total Operating Revenues (%) (5.0) Long-Term Liabilities/Equity (%) , Equity/Total Assets (%) Current Assets/Current Liabilities (ratio) Current Liabilities/Total Liabilities (%) Long-Term Liabilities/Total Assets (%) Debt Service Ratio d Self-Financing Ratio (%) e = not separately accounted for, KN = kip. a Estimates released in October b After depreciation and interest. c Increase reflects, in the main, the impact of merging province operations, and an expansion in export sales after commissioning Nam Leuk Hydropower Station. d Profit before depreciation, interest, and tax less dividends, all divided by interest plus loan repayments. e Net funds from internal sources (return plus depreciation less dividends) divided by the average capital expenditure calculated over 3 years for the current fiscal year, previous fiscal year, and next fiscal year. Sources: Electricité du Laos and Operations Evaluation Mission estimates.

39 Table A6.2: Operating Performance Indicators Fiscal Year Ending Gross Energy Generation (GWh) a ,256 1,162 1,335 1,320 1,090 1, ,741 Energy Losses (%) Total Energy Sales (GWh) ,109 1,013 1,172 1, ,164 1,503 Export Sales (GWh) Local Sales (GWh) Total Energy Sales (KN million) Export Sales (KN million) Local Sales (KN million) Capital Investment (KN million) 3,951 22,068 15,300 21,022 13,481 11,791 7,615 11,790 43,813 46,223 77, , , ,832 Total Connections ('000) Export Sales/Total Sales (%) By GWh By KN GWh = gigawatt-hour, KN = kip. a Also includes imported generation and purchases from independent power producers. Sources: Electricité du Laos and Operations Evaluation Mission estimates. Appendix 6 31

40 32 Appendix 7 FINANCIAL AND ECONOMIC REEVALUATION A. Background 1. Before the Project, the Government sought to harness its electric hydro resources from Nam Ngum reservoir to supply Vientiane City. Transmission from Nam Ngum Hydropower Station was over a line length of some 100 kilometers (km). Agreement was reached with the Government of Thailand to transfer all excess generation to Thailand by extending the transmission line from Vientiane across the Mekong River to substations at Phone Tong and Thanaleng, a distance of approximately 15 km. In 1971, the generation capacity at Nam Ngum Hydropower Station was expanded from 30 megawatts (MW) to its current rated capacity of 150 MW. All excess generation was exported to Thailand on a nonfirm basis and with recognition that future export sales to Thailand would reduce as domestic demand for electric power increased in the Lao People s Democratic Republic (Lao PDR). B. Methodology at Appraisal 2. The approach at appraisal was to separately consider the consumption of electricity at Luang Prabang and Vang Vieng, variously supplied from Nam Dong Hydropower Station and diesel power generators, and to consider the likely development that would take place with additional generation introduced by the Project. In Luang Prabang, it was projected that about 4,500 households without electricity would switch to electricity over 3 years and that a proposed workshop with an excess of about 1.5 MW installed electricity equipment would immediately connect. With commissioning of the Project, electricity consumption was expected to grow from a level of 4.5 gigawatt-hours (GWh) at 17% per year for 5 years to 11 GWh and thereafter at a reduced rate of 8% per year. In Vang Vieng, an immediate load requirement of 1.5 GWh and 7.0 GWh for a cement factory was foreseen. Load demand was projected to grow at 8% per year. On these projections, the Project s maximum load requirement would utilize less than 2% of the total generation from Nam Ngum Hydropower Station The economic internal rate of return (EIRR) calculation evaluated the benefits of the Project by applying the expected incremental increases in load demand for each of Luang Prabang and Vang Vieng to computational formulas for measuring the sum of resource cost savings, net tariff, and consumer surplus. The financial internal rate of return (FIRR) was estimated similarly to the EIRR approach, but excluded resource cost savings and consumer surplus benefits. The EIRR so obtained at appraisal was 12.4%. The reappraisal estimate was calculated on the same basis at 9.2% after taking into account the additional project costs and expected increase in load sales from the shield wire. The FIRR evaluation provided two estimates: (i) which viewed sales to the Project as forgone sales to Thailand; this approach resulted in an FIRR = -1.1%; and (ii) which valued sales to the Project excluding the value of forgone sales to Thailand. This approach resulted in an FIRR = 8.0%. C. Approach and Methodology of the Project Performance Audit Report 4. From both an economic and financial perspective, the cost of generation and transmission for export is the same as the cost of generation and transmission for domestic 1 Between 1983 and 1987 (inclusive), the annual variation in generated output from Nam Ngum averaged 9.5%. This included an extreme drought year, which resulted in a 35% fall in generation. Without this drought year, the annual variation averaged 3.2%.

41 Appendix 7 33 distribution, that is, the cost of generation and transmission to the substation before distribution. 2 After transmission for export from the terminal station, there is no further development gain to the Lao PDR. After transmission for domestic distribution to the substations at Vang Vieng and Luang Prabang, the net economic gain to society is the net sum of private and social benefits arising from the sale of electricity to the country s consumers. The net financial gain is similarly calculated, but evaluated at market prices and excluding social benefits. D. Specific Assumptions 5. The EIRR and FIRR estimates revalue investment costs at 2001 prices using the World Bank s manufacturer s unit value index to revalue foreign expenditures, and the Lao PDR s gross domestic price deflator to revalue local currency expenditures. Table A7.1 summarizes specific parameter values used in the computations. Other specific assumptions used to calculate the FIRR/EIRR reestimates are as follows. (i) (ii) (iii) (iv) (v) (vi) The economic life of the project assets is assumed at 20 years. Projections are from 2002 to All costs and benefits are valued in constant 2001 prices. Electricity sales are calculated as total consumer sales for Luang Prabang and Vang Vieng. These include consumer sales under the shield wire scheme for both centers. Without project sales at Luang Prabang are based on firm generating capacity at Nam Dong Hydropower Station of 1.0 MW, plus power generation available from a 0.3 MW diesel generator. Without project sales at Vang Vieng are based on the level of self-generation for the Vang Vieng cement factory at appraisal. Economic and financial tariffs for consumers are a weighted composite of the tariffs for consumer categories. The economic tariff at the substations for Luang Prabang and Vang Vieng is a weighted average of the financial tariff at which electricity is sold for export less 20%. The economic tariff for consumers is a weighted composite of the financial local tariff less 5%. The percentage deduction represents the incidence of taxes on tariff revenues. 3 In the without project case (Table A7.1), the economic tariff is a weighted composite price of alternative energy used for lighting and diesel power generation. Economic and financial costs for generation and transmission for export are assumed equal to the economic and financial costs for generation plus transmission to the Project. 2 Ignoring differences in fixed capital costs associated with differences in transmission line length. 3 Estimating the net benefit (economic and financial), sales to consumers after distribution from the substations at Luang Prabang and Vang Vieng is equivalent in effect to reducing the benefits by the forgone export revenues.

42 34 Appendix 7 Table A7.1: Parameter Values Used in EIRR/FIRR Computations (financial nominal values) Year Power Sales (GWh) Economic (KN/kWh) Financial (KN/kWh) S w S w/o PE PAE CE a PE CE a CE b Actual , , Projected , , , , Projected , to to , , EIRR = economic internal rate of return, FIRR = financial internal rate of return, CE = operating cost of electricity, GWh = gigawatt-hour, KN = kip, kwh = kilowatt-hour, PAE = price of alternative energy (kerosene and diesel), PE = price of electricity, S w = power sales with the Project, S w/o = power sales without the Project. a At distribution. b At generation. (vii) Financial capital costs reflect actual costs incurred and revalued in constant 2001 prices. Economic capital costs are obtained after applying an adjustment factor of 0.9. (viii) The FIRR assumes a residual value based on a 20-year economic life of the project assets. The residual value is calculated at 10% per annum depreciation on the nominal capital cost. E. Sensitivity Analysis 6. Table A7.2 shows the base case results for the EIRR and FIRR reestimates and sensitivity to changes in assumption and projections.

43 Appendix 7 35 Table A7.2: EIRR/FIRR Sensitivity Item EIRR FIRR A. Base Case Incremental (%) B. With the Following Changes (%) A decrease in the connections from 8% per year to 6% per year after 2001 A 10% decrease in the real value of local tariffs after 2001 A 10% increase in the real operating cost of electricity after EIRR = economic internal rate of return, FIRR = financial internal rate of return.

44 Year Table A7.3: Project Economic and Financial Internal Rates of Return (KN million at 2001 prices) Total Incremental Project Additional Incremental Incremental Economic Consumer Savings Total Financial Electricity Electricity Sales Investment Distribution Operating Economic For New From Induced Net Economic Investment Sales (GWh) (GWh) Cost a Investment b Cost Revenues Connections c Consumption d Benefits Cost Financial Operating Surplus Total Net Financial Benefits (284) 315 (315) ,042 (2,042) 2,269 (2,269) ,324 (1,324) 1,471 (1,471) ,979 (20,979) 23,310 (23,310) ,853 12,256 (53,109) 59,009 (59,009) ,256 10,577 (45,832) 50,925 (50,925) , (25,595) 29, (28,576) , , (7,374) 10,273 1,098 (9,175) , , ,340 6,356 1,291 (5,066) , , (13,137) 18,916 1,265 (17,651) ,503 2,916 10, , ,821 3, ,424 4,060 27,592 2,878 31, ,618 3, ,751 8,650 34,765 3,706 42, ,122 8, ,281 12,234 32, , ,431 13, ,820 13,774 36,430 1,222 45, ,727 14, ,407 15,454 40,873 1,333 51, ,141 16, ,049 17,286 45,719 1,454 57, ,683 17, ,994 19,988 52,866 2,144 67, ,365 19, ,512 21,467 56,777 1,174 71, ,201 21, ,345 23,848 63,074 1,889 79, ,205 23, ,254 26,446 69,946 2,062 88, ,391 25, ,246 29,282 77,446 2,250 97, ,778 27, ,329 32,377 85,633 2, , ,382 30, ,758 36,459 96,428 3, ,514 (64,965) 34,226 99,191 e 36 Appendix 7 EIRR = 14.3% FIRR = 3.6% EIRR = economic internal rate of return, FIRR= financial internal rate of return, GWh = gigawatt-hour, KN = kip. a Total capital investment, shown in economic values, includes provision for periodic maintenance on substation transformers, and upgrading the Luang Prabang distribution (see para. 6 to convert economic values to financial). b Investment not financed under the Project for expansion of the distribution network. c New connections to consumers who, without the Project, used electricity from diesel power generators and others who used kerosene for lighting purposes. d Representing additional consumption of electricity induced as a result of the cheaper price of electricity relative to other energy alternatives. e Includes financial residual for value of investments in 2012.