PUBLIC SIMULTANEOUS DISCLOSURE DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK ECUADOR NATIONAL TRANSMISSION SYSTEM STRENGTHENING PROGRAM (EC-L1117) LOAN PROPOSAL This document was prepared by the project team consisting of Jesús Tejeda (ENE/CEC), Project Team Leader; Arnaldo Vieira de Carvalho (INE/ENE), Project Team Co-leader; Carlos Hinestrosa (INE/ENE); Carlos J. Echevarría (ENE/CPE); Paola Méndez (INE/ENE); Juan Carlos Páez (INE/ESG); Rafael Poveda (CAN/CEC); Gumersindo Velázquez (FMP/CEC); Patricio Crausaz (FMP/CEC); Mónica Lugo (LEG/SGO); under the supervision of Alejandro Melandri, Interim Chief of the Energy Division (INE/ENE) and Morgan Doyle, Representative in Ecuador (CAN/CEC). This document is being released to the public and distributed to the Bank s Board of Executive Directors simultaneously. This document has not been approved by the Board. Should the board approve the document with amendments, a revised version will be made available to the public, thus superseding and replacing the original version.
CONTENTS PROJECT SUMMARY I. DESCRIPTION AND RESULTS MONITORING... 1 A. Background, current situation, and proposal... 1 B. Objectives, components, and costs... 9 C. Results Matrix... 10 II. FINANCING STRUCTURE AND MAIN RISKS... 11 A. Financing instruments... 11 B. Environmental and social safeguard risks and associated mitigation measures... 12 C. Fiduciary risk... 13 D. Execution risks... 13 E. Other special considerations and risks... 13 III. SUMMARY OF IMPLEMENTATION MEASURES... 14 A. Execution arrangements and period... 14 B. Summary of arrangements for results monitoring and evaluation... 15
- ii - ANNEXES Annex I Annex II Annex III Summary Development Effectiveness Matrix (DEM) Results Matrix Fiduciary Agreements and Requirements ELECTRONIC LINKS REQUIRED 1. Annual work plan (AWP) http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38270585 2. Monitoring and Evaluation Plan (M&E) http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38270583 3. Complete Procurement Plan http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38270596 4. Environmental and Social Management Report http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38228050 OPTIONAL 5. Technical and environmental studies and specifications for electric works http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38581748 http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38666685 6. Technical, economic, and financial evaluation http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38270587 7. Projected cash flow for the program http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38270590 8. Midterm evaluation of loan 2457/OC-EC http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38270594 9. Program rationale under the Public Utilities Policy (document GN-2716-4) http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38567771 10. Piura Peru-Ecuador Extra High Voltage International Interconnection Agreement http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38280643 11. Terms of reference for the final evaluation of the program http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38326626 12. Paul L. Joskow, Patterns of Transmission Investment http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38274468 13. Master Plan for Electrification of Ecuador 2013-2022. CONELEC http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=38272441 14. Plan Nacional del Buen Vivir 2013-2017 http://www.senplades.gob.ec/
- iii - ABBREVIATIONS AWP Annual work plan CEA Andean Electric Corridor CELEC EP Corporación Eléctrica del Ecuador [Ecuador Power Corporation] CENACE National Energy Control Center CONELEC National Electricity Board EIA Environmental impact assessment EIRR Economic internal rate of return ESMP Environmental and Social Management Plan GDP Gross domestic product IIS Integrated information system km Kilometers kv Kilovolts LOEP Ley Orgánica de Empresas Públicas [Organic Law on Public Enterprises] LPG Liquefied petroleum gas LRSE Law on the Power Sector Regime MC-09 Mandato Constituyente [Constituent Assembly Legislative Decree] 09 MC-15 Mandato Constituyente [Constituent Assembly Legislative Decree] 15 of 2008 MEER Ministry of Electricity and Renewable Energy MEM Wholesale Electricity Market MF Ministry of Finance MVA Megavolt-ampere MVAR Megavolt-ampere reactive MW Megawatts MWh Megawatt hour NPV Net present value PDU Power distribution utilities PET Transmission Expansion Plan PME Master Plan for Electrification of Ecuador 2013-2022 PMU Program Management Unit PNBV Programa Nacional del Buen Vivir [ Good Life National Program] SINEA Andean Electric Interconnection System SNI National Interconnected System SNT National Electric Transmission System System 500 500 kv Transmission System
PROJECT SUMMARY ECUADOR NATIONAL TRANSMISSION SYSTEM STRENGTHENING PROGRAM (EC-L1117) Financial Terms and Conditions Borrower: Republic of Ecuador Flexible Financing Facility* Amortization period: 25 years Executing agency: Corporación Eléctrica del Ecuador (CELEC EP) Weighted Average Life: 15.25 years** Disbursement period: 5 years Source Amount (US$) Grace period: 13 years** IDB - Ordinary Capital 150,000,000 Inspection and supervision fee: *** Local contribution 19,500,000 Interest rate: LIBOR-based Total 169,500,000 Credit fee: *** Currency: U.S. dollars charged to the Ordinary Capital Program at a Glance Program objective and description: To help improve the operating conditions of the National Transmission System (SNT) and ensure the supply of high-quality energy to consumption centers, nationally and regionally. The specific objectives are: (i) to strengthen the 230 kv and 138 kv systems of the SNT; (ii) to increase the reliability of the SNT; and (iii) to contribute to regional Extra High Voltage energy integration, as part of the Andean Electric Corridor Special contractual conditions precedent to the first disbursement: (i) signing and entry into effect of a subsidiary agreement between the Ministry of Finance and the executing agency establishing the obligation to use the funds in accordance with the terms and purposes agreed in the loan contract (paragraph 3.1); (ii) the executing agency s establishment of the Program Management Unit (PMU), comprising a general coordinator, a procurement specialist, a financial specialist, an environmental specialist, an electrical engineer, and a computer engineer, as agreed with the IDB (paragraph 3.1); (iii) establishment by the executing agency of a short list for hiring an external firm to audit the program s financial statements and preparation of the corresponding terms of reference, approved by the IDB (paragraph 3.1); and (iv) presentation of an updated version of the program operating manual, duly approved by CELEC EP, and its entry into effect with the IDB s no objection (paragraph 3.5). Special contractual conditions for execution: Before starting the works covered in component I, the executing agency will present, to the Bank s satisfaction, evidence of: (i) the permits and licenses required under Ecuadorian law for constructing the projects under the program (paragraph 3.6); (ii) the Environmental Impact Assessment (EIA) and the Environmental and Social Management Plan (ESMP), together with the budget for their execution (paragraph 2.4); (iii) the corresponding environmental license (paragraph 2.4); (iv) the resolution reserving rights-of-way for the new transmission lines (paragraph 2.4); (v) legal ownership of the land where the substations will be located (paragraph 2.4); (vi) inclusion of the required environmental technical specifications and the ESMP in the contracts for construction and supervision of the planned works (paragraph 2.4); and (vii) evidence that at least one public consultation has been held for each project, including: (a) project description; (b) description of probable impacts; (c) description of measures for mitigating the impacts identified (ESMP); (d) description of the system for receiving and processing complaints and claims; and (e) arrangements for receiving suggestions concerning the proposed project or its ESMP (paragraph 2.4). Retroactive financing and recognition of expenditures: The Bank may provide retroactive financing, charged to the loan proceeds, and recognize expenditures, charged to the local contribution, up to an amount equivalent to 20% of the loan or the local contribution, respectively, for eligible expenditures incurred prior to the loan approval date related to preinvestment studies for the program, provided that such expenditures meet requirements substantially similar to those established in the loan contract (paragraph 3.2). Exceptions to Bank policies: None Project qualifies as: SEQ [ ] PTI [ ] Sector [ ] Geographic [ ] Headcount [ ] * ** ** Under the Flexible Financing Facility (FN-655-1), the borrower has the option of requesting changes to the amortization schedule and currency and interest rate conversions. When considering such requests, the Bank will take operational and risk management considerations into account. The original weighted average life of the loan and the grace period may be shorter, depending on the effective signature date of the loan contract. The credit fee and inspection and supervision fee will be established periodically by the Board of Executive Directors as part of its review of the Bank s lending charges, in accordance with the applicable policies.
I. DESCRIPTION AND RESULTS MONITORING A. Background, current situation, and proposal 1.1 Background. Ecuador is pursuing a development model, the guidelines of which were set forth in the 2008 Constitution and reflected in the Plan Nacional del Buen Vivir 2013-2017 [ Good Life National Plan 2013-2017] (PNBV). That model calls for strengthening the role of the State as a driver of the economy and as a provider of public goods and services, in particular infrastructure, health, and education. 1.2 With the reforms introduced by the government, the Republic of Ecuador recorded average annual growth rates of 4.6% between 2008 and 2012, and the nonoil economy 1 averaged rates of 4.8%. This growth reduced the poverty level from 29.5% in 2011 to 23.7% in 2013. Over that same time the Gini index, which measures degrees of inequality, declined from 0.497 to 0.463. During the first quarter of 2013, the Central Bank reported GDP growth of close to 3.5%. In this context, investments in the energy sector are defined in accordance with the guidelines in the PNBV and the Master Plan for Electrification 2013-2022 (PME), aimed at achieving efficient, sustainable, and sovereign development. 1.3 Planning for the sector as laid out in the PME is based on the projection of demand for electric power. That planning considers not only population and consumption growth trends but also the projected new power demands resulting from mining projects, the Pacific Refinery, the National Efficient Cooking Program, the Petroamazonas Project for Optimizing Power Generation and Energy Efficiency, the national program for changing the country s energy matrix, electrically powered public transit (the Quito Metro and the Cuenca Tranvía), and the initiative for regional energy integration. The PME calls for developing the system to ensure that sufficient energy reserves are available to satisfy national demand, to optimize operating costs through international connections, and to guarantee Ecuador s capacity to contribute to the regional power market. To achieve these goals, the PME cites as critical elements reliability, quality, and security in the generation, transmission, and distribution of electric power. 1.4 The PME projects the demand for electricity using a base scenario that correlates macroeconomic, 2 demographic as well as energy and customer variables to determine the expected trend of demand to the year 2022. As a result, it estimates average annual growth of 5% between 2012 and 2022, reaching 26,542 gigawatthours at the end of that period. This corresponds to a maximum generating capacity of 4,723 megawatts (MW) for meeting demand in 2022. A more optimistic scenario, which assumes full development of the strategic projects planned for 1 2 Nonoil GDP represents approximately 87% of total GDP. The PME makes reference to a decline in the growth rate of the national economy, which affects the industrial, residential, and commercial demand projections in which GDP was used as an explanatory variable. As a result, average growth is estimated at 3.7% (2012-2022), below the historic average growth rate of 4.7% (2000-2012).
- 2 - coming years (paragraph 1.3), implies growth exceeding 8%, equivalent to 6,864 MW at the end of that same period. 1.5 Electric power infrastructure. In 2013, Ecuador s power system had an installed generating capacity of 4,543 MW, of which hydroelectric generation accounted for 2,255 MW and thermal generation for 2,287 MW. There are new hydropower projects now under construction, for an additional capacity of 4,165 MW. Eight of those projects, equivalent to 2,362 MW, are regarded by the government as flagship projects. The flagship hydropower projects located in the Amazon basin and on the Pacific coast are expected to come on stream beginning in 2014. 3 1.6 At the present time, the National Electric Transmission System (SNT) has 1,841 km of 230 kv 4 transmission lines and 1,718 km of 138 kv lines. 5 The transmission lines are arranged in a 230 kv trunk ring with double circuit lines interconnecting 10 substations and linking the Paute hydroelectric plant, the country s largest generating plant, with the two most important consumption centers of Guayaquil and Quito, as well as the rest of the country. The SNT also has 138 kv radial transmission lines fed from the trunk ring to link power generation centers with consumption centers. To meet the additional energy requirements of the power distribution utilities (PDU), there are approximately 115 km of circuits operating at 69 kv. 6 As part of the existing transmission infrastructure, the country has international connection lines, and these helped to alleviate the country s power crisis during 2009. In 2003, 212 km of 230 kv transmission lines came on-stream with Colombia, and in 2008 construction of a second line of the same caliber enabled the transfer of up to 500 MW. In 2004 the interconnection with Peru came online, with construction of 107 km of 230 kv transmission lines. This circuit allows the noncontinuous transfer of up to 100 MW between the two countries. 1.7 Legal framework for the power sector. Legislation governing the power sector in Ecuador is based on the 2008 Constitution, the Constituent Mandate 15 (MC-15), the Law on the Power Sector Regime (LRSE 7 ) as amended (Law 2006-55), the Organic Law on Public Enterprises (LOEP) of 2009, 8 and Executive Decree 220 of 2010, creating the Empresa Pública Estratégica Corporación Eléctrica del Ecuador [Ecuador Power Corporation] (CELEC EP). The LRSE establishes the regulatory framework for the power sector and creates the Electric Transmission Company, 3 4 5 6 7 8 The amounts of public and private investment needed to carry out the generation expansion plan are US$6,011,662 and US$1,071,837, respectively. Master Plan for Electrification 2013-2022. 1,285 km of double circuit and 556 km of single circuit. 625 km of double circuit and 1,093 km of single circuit. The Galapagos Islands are operated as an isolated system of the National Interconnected System. The LRSE and MC-15 set the rules for the sector. Other related provisions include Resolution 173, in which the Ministry of Environment grants CONELEC accreditation as the responsible environmental authority; and CONELEC regulation 003/06, specifying those power transmission lines that require environmental impact assessments. The LRSE sets objectives for power generation, transmission and distribution. The LOEP regulates aspects concerning the establishment and management of public enterprises, including the strategic sectors.
- 3 - Transelectric S.A. Transelectric S.A. began operations in 1999 with the disappearance of the Ecuadorian Electrification Institute (INECEL). In 2009, the generating companies of Ecuador and Transelectric were merged, and in 2010 CELEC EP was officially created. Transelectric became a business unit of CELEC EP, called CELEC EP-Transelectric (hereinafter Transelectric). 1.8 Institutional framework of the power sector. The agency responsible for power sector policy is the Ministry of Electricity and Renewable Energy (MEER). The National Electricity Board (CONELEC) is responsible for regulation and control of the power supply and planning for the sector, subject to the National Development Plan and the policies of the MEER. The transmission function is concentrated in Transelectric, with the basic objective of transporting electric power and ensuring free access to the transmission networks for agents in the Wholesale Electricity Market (MEM). 9 Distribution and marketing of electric power is handled through 10 majority publicly-owned PDUs. 10,11 Technical and financial transactions on the MEM are administered by the National Energy Control Center (CENACE). 1.9 MC-15 requires CONELEC to establish a single rate 12 which the PDUs must apply for each type of consumer. The transmission rate approved in 2008 13 takes into account the costs of operation and maintenance, service quality and social and environmental management as approved by CONELEC, recognizing that the planned investment amounts are covered as established in MC-15. 14 This rate 15 is applied to distributors and large-scale consumers in recognition of the use of the transmission lines, transformer substations, and other elements that comprise the SNT. All the PDUs are covered by trust funds administered by specialized institutions in the local banking system: Banco de Guayaquil and Banco del Pichincha, privately owned, and the publicly owned Banco del Pacífico. The revenues of each of the PDUs, including the offset for the reduced power rate ( tarifa dignidad ) from the government, go into the respective trust funds to guarantee the payments associated with the provision of service, in the order of 9 10 11 12 13 14 15 The MEM consists of generators, distributors, and large-scale consumers. Responsibility for providing generation, transmission, and distribution services as well as the marketing, import, and export of electric power lies with the CELEC EP and other firms authorized by law to perform such functions. The Corporación Nacional de Electricidad (CNEL) has 10 business units and distributes power to 1.3 million customers (36% of the customer market in Ecuador). Other utility firms, serving 1.7 million customers (46% of the customer market), are Empresa Eléctrica de Quito S.A., Unidad Eléctrica de Guayaquil, Empresa Eléctrica Regional Centro Sur C.A., Empresa Eléctrica Azogues S.A., and Empresa Eléctrica Riobamba S.A. According MC-15, the single rate that the PDUs must apply reflects operating and maintenance costs. Pursuant to CONELEC Resolution 0107/08 of 12 August 2008. As of 2008, under MC-15 the government reserves the right to administer, regulate, control, and manage the sector and provides that investments in generation, transmission, and distribution are to be financed from the general government budget, eliminating the investment component from the power rate. The transmission rate applicable in 2013 is US$1.77 per kw month of maximum demand (CONELEC, Resolution 008/2013).
- 4 - priority established by the MEER: (i) international interconnections; (ii) generators using renewable energies under CONELEC regulation 004/11; (iii) generation exceeding 50 MW; (iv) payment to the PDUs for operation and maintenance; and (v) transmission service, etc. 1.10 Knowledge of the sector. As part of the strategy for addressing the challenges facing the SNT (paragraph 1.3), the government is financing the Transmission Expansion Plan (PET). The Support for the Transmission Program (loan 2457/OC-EC), financed by the IDB in the amount of US$64.7 million, is part of the PET investment plan being executed by CELEC EP through Transelectric. Loan 2457/OC-EC began execution in 2011, and its objectives include improving electricity service conditions, minimizing the risks of interruptions in electricity supply in the different areas of the National Interconnected System (SNI), and improving the capacity for managing the transmission service of CELEC EP and Transelectric. As of the first quarter of 2014, loan 2457/OC-EC had been 91% disbursed, with 100% of the resources committed, and a level of execution of close to 65% 16 for the agreed activities. The last disbursement is planned for February 2015. 1.11 The results achieved with the PET investments in recent years include: (i) construction of 146 km of 230 kv transmission lines and 143 km of 138 kv transmission lines; (ii) the rehabilitation, expansion, and construction of nine substations; and (iii) the increase in the reserve capacity by 1,104 MVA to satisfy new demand of 60,105 MWh per month. These works have helped reduce loadability in the Loja substation and the Cuenca-Loja Cumbaratza transmission line, bringing them within the parameters established by CONELEC regulation 004/02. 17 On this basis, the SNT has an additional reserve capacity to meet demand in the provinces of Loja and Zamora Chinchipe. The works at the Esmeraldas and Quinindé substations will boost their reserve capacity, ensuring that demand can be met in accordance with current regulations. 18 The investments made under loan 2457/OC-EC in the country s northern zone will improve efficiency in the transport of high energy flows as a result of the requirements of the zone itself and of the 138 kv corridor under conditions of maximum power transfer from Colombia, when the Agoyán and Pucará power plants are offline. This will increase the levels of reliability of the northern zone of the national grid, the Quito PDU, and the power exchanges with the Colombian system. The Inga substation will provide a new feed point from the SNT to the Quito PDU, allowing it to meet the needs of the new Quito airport and the northeastern zone of the province of Pichincha, as well as to connect the Coca Codo Sinclair 19 and Quijos power plants to the SNI. 16 17 18 19 Component I, for expansion of the transmission network, has a level of execution of 65.7%. Reactive Power Transactions in the MEM, which establishes the permitted SNT bus voltage variation limits in the 138 kv lines at 0.93 p.u. and 1.05 p.u. Idem. http://www.ccs.gob.ec/.
- 5-1.12 Loan 2457/OC-EC is financing training for members of the 13 business units of CELEC EP in project management, the procurement of an integrated information system (IIS), 20 and implementation of the Enterprise Resource Planning (ERP) system. The Ecuadorian government has also used fiscal resources to promote the adoption of better organizational practices in CELEC EP. During 2013, with the agreement of the Strategic Sectors Coordinating Ministry (MICSE) and the MEER, the international consulting firm of Pricewaterhouse Coopers AG Ltda. (PWC) was hired to conduct a study on a comprehensive upgrade of the management and operations model and improvement of the efficiency of power sector firms in Ecuador. As a result of phase 1 of that study, completed in October 2013, a number of organizational and technological projects have been undertaken with a view to improving corporate management and enhancing the efficiency of the power sector. The report on the financial audits of loan 2457/OC-EC, conducted by Deloitte & Touche S.A., indicates satisfactory financial execution by CELEC EP. 21 1.13 Current situation. The growth in demand for electric power in Ecuador has outstripped supply, leading to an annual deficit that is estimated at more than 100 MW. In 2012, annual energy demand was 6.1% greater than in 2011. Current reserve margins are high, but they are not available on a permanent basis because of the great variation in hydrology between the rainy and dry seasons, fuel storage capacity, and the periodic maintenance requirements of the power plants. The PME s high-growth scenario for power demand estimates that additional generating capacity of approximately 232 MW will be needed on average each year in order to meet demand to the year 2022, together with a robust, reliable transmission system, with expanded capacity to take up the energy from the generating projects now under construction. The main weaknesses that the SNT faces are closely linked to the country s energy security and the system s operating security 22 : (i) flexibility for operating efficiently at times of minimum demand in the binational interconnections; (ii) boosting capacity in substations that have been operating for more than 30 years, thus making it possible to meet demand from the PDUs; (iii) the need to expand the 138 kv sub-transmission system to alleviate saturation at high consumption points; (iv) low capacity of 230 kv transmission for serving distribution points; (v) saturation of feeders through rising demand, which entails building new power delivery points from the SNT in order to improve the quality of service and offer sufficient capacity; (vi) increasing the 500 kv transformer capacity so that energy from the new generating projects can be transferred with lower electricity losses. 20 21 22 The IIS has been used to acquire 770 additional light IFS licenses for use of Corporate Phase II, Maintenance Modules and Projects; 330 full IFS licenses for use of the IFS phase II system. Loan 2457/OC-EC Report, DOCNUM=38274571. The regulations Dispatch and Operation Procedures (006/00), Reactive Power Transactions in the MEM (004/02), and Quality of Power Transport and Connection Service in the SNI (003/08) establish the quality, security, and reliability parameters that must be observed by the transmitter and all other MEM agents.
- 6-1.14 In response to these requirements, the government has several hydroelectric projects under construction (paragraph 1.5), of which around 2,362 MW will come on stream gradually beginning in 2014. Under loan 2457/OC-EC, CELEC EP is undertaking additional works in the SNT, including 230 kv, 138 kv, and 69 kv transmission lines as well as modernization and renovation of substations and subtransmission lines more than 30 years old (paragraph 1.10). Currently, construction is under way on approximately 600 km of Ecuador s first 500 kv extra high voltage (EHV) transmission system (System 500) needed to bring the energy from the Coca Codo Sinclair hydroelectric plant into the SNT, which will connect the Inga substation in Quito with the Chorrillo substation in Guayaquil. 23 1.15 System 500 is a key part of the government strategy for meeting the increased demand for electric power, and will make it possible to proceed with development of the Andean Electric Corridor (CEA) as part of the Andean Electric Interconnection System (SINEA 24 ), which is planned as an EHV system. The SINEA initiative had its origins in the Galapagos Declaration signed by the governments of Bolivia, Chile, Colombia, Ecuador, and Peru on 2 April 2011 at a meeting in Galapagos, Ecuador. During that meeting, ministers and senior officials of the power sector agreed on the importance of the benefits that would flow from electrical interconnection in the region, as a fundamental step for the economic integration and development of participating countries. 1.16 Proposal. According to the PME, construction of the PET will require approximately US$95 million a year, without considering the budget for the projects in execution since 2012. In order to comply with the provisions of Constituent Mandate 09 (MC-09) and MC-15, and taking into account the experience and outcomes achieved through loan 2457/OC-EC, the government considers it appropriate to continue with the same financing scheme, through the National Transmission System Strengthening Program (the program), with a view to meeting the financing needs described in the PME and the specifications of the SNT. 25 This will make it possible to connect the planned new loads (paragraph 1.3) and to structure a robust system for incorporating System 500, which is seen as the backbone of the CEA. In this way, the program will ensure an adequate supply of electricity to meet the demand that will be generated by the initiative to migrate from liquefied petroleum gas (LPG) to electricity for residential customers, and it will facilitate progress with the binational project to build the first EHV segment between Ecuador and Peru, pursuant to recent progress made in the negotiations included under the Piura Agreement. 26 23 24 25 26 System 500 will cut across a large portion of the country and will come online in two stages, in 2015 and 2016. The IDB is supporting the SINEA initiative through regional technical-cooperation project RG-T2056. The reliability of the transmission system plays a key role in the investment decision, above and beyond the standard economic criteria.. Paul L. Jaskow, Patterns of Transmission Investment. MIT. IDBDOCS- #38274468-Joskow Transmission Investment. Piura Agreement 2013 - construction of the 500 kv Peru-Ecuador EHV line.
- 7-1.17 The country s strategy. Ecuador has a power sector strategy defined by the guiding documents, the PNBV 2013-2017 and the PME. In line with the Bank s Public Utilities Policy (document GN-2716-6), the sector is consistent 27 with the core principles of supporting basic needs, transparency, financial sustainability, and adequate institutional organization, in that it has clearly defined the following: (i) separation of the roles of the MEER, as the policy body, the CONELEC, as the regulatory body, and the transmission and distribution companies; (ii) the structure of the sector, which allows private sector participation in generation 28 and distribution; and (iii) reform of the state-owned companies to improve their management and sustainability based on rates that cover operation and maintenance, and on government contributions that will guarantee expansion of the sector. The program to expand and improve the SNT is also aligned with the objectives of the Bank s Public Utilities Policy for promoting universal and sustainable access for electricity service through power rates, and improving the public utility companies ability to provide efficient service. 1.18 Alignment with the IDB strategy with Ecuador. The Country Strategy Update with Ecuador 2012-2017 (document GN-2680-2) considers that Bank engagement in the sector will support the country in its effort to create a sustainable energy strategy, one that will facilitate an adequate supply of energy, help to diversify the country s generating capacity, improve the system s reliability, promote energy efficiency, and expand coverage of electricity service. More specifically, the program will support achievement of the objectives in the country strategy by promoting: (i) energy diversification through greater delivery of energy from renewable sources; (ii) energy efficiency in the transmission stage, contributing to improving the reliability of service; and (iii) reduction of electricity losses. 29 The program is also aligned with the priority areas of the Bank s Infrastructure Strategy: Sustainable Infrastructure for Competitiveness and Inclusive Growth (document GN-2710-5), in that it will: (i) promote access to infrastructure services through the financing of works in the SNT that will ensure the interconnection of power from strategic projects (paragraph 1.3); and (ii) improve quality of life by providing a robust power system that, over the medium term, will see LPG replaced by electricity for residential customers. 1.19 The IDB is currently supporting the Ecuadorian power sector through the following operations: Support for the Transmission Program (loan 2457/OC-EC), Modernization of Pumping Stations on the Emerald-Quito Multiproduct Pipeline (loan 2472/OC-EC), and the Electrification Program for Rural and Marginal Urban 27 28 29 Rationale for the program under the Public Utilities Policy, document GN-2716-4, DOCNUM=38567771. Private participation is allowed when public enterprises do not have the capacity to meet demand or when necessary and appropriate for serving the public, community, or general interest. In this case, CONELEC Regulation 002/11 requires power generation with nonconventional renewable energies. Electricity losses are currently running at 12.7%. They are expected to fall to 7.5% by 2022 (PME 2013-2022).
- 8 - Areas (loan 2608/OC-EC), which now have disbursement levels 30 of 91%, 98%, and 98%, respectively. In addition, at the end of 2013, the second stage of the Electrification Program for Rural and Marginal Urban Areas (loan 3087/OC-EC) was approved. Overall, these operations, pursued in the context of the strategic programs for the sector Electrification Plan for Rural and Marginal Urban Areas (FERUM), Plan for Reducing Electricity Losses (PlanRep) and Plan for Improving the Distribution Network (PMD) have contributed to: (i) expanding the distribution network to provide greater electricity coverage (95.4%); (ii) reducing total electricity losses by approximately 25% on average nationwide, to 12.74% over the last five years; and (iii) improving the system s technical service quality indices (AIFI from 17.88 to 14.11 and AIDI from 19.55 to 15.11 31 ) over the last two years. The sound execution performance of IDB-supported operations in the sector has provided some lessons that could be considered good practices, such as: (i) preparing projects and their execution instruments in close collaboration with the executing agencies, from the design stage onward; (ii) selecting projects for financing that are prioritized in sector policy documents; (iii) continuous technical and management strengthening of executing agencies as part of government objectives; and (iv) continuous interaction between the IDB team and the project management units, to facilitate understanding of the IDB s procurement and monitoring procedures. 1.20 The Bank is also supporting the sector in initiatives relating to energy diversification, through the use of nonconventional renewable energies, energy efficiency, regional power integration, reduction of electricity losses in distribution, operation of smart networks, and sustainable electrification in isolated rural areas, through a number of technical cooperation projects: ATN/MC-11398-EC, GRT/FM-1384-EC, ATN/OC-13089-EC, ATN/ME-13933-EC, ATN/OC-13350-RG, 32 and ATN/KK-14170-EC. 33 1.21 Consistency with the Ninth General Capital Increase (GCI-9). This operation is aligned with the priorities for the lending program established in the GCI-9 (document AB-2764): (i) lending to small and vulnerable countries; (ii) lending to support climate change initiatives, renewable energy and environmental sustainability; and (iii) lending to support regional cooperation and integration by strengthening the transmission system with Colombia, improving the reliability of the transmission system as a transition to System 500, and supporting the design of the EHV power interconnection with Peru. The expected outcomes of the program will contribute to the following outputs in the GCI-9 results framework: (i) kilometers of new transmission lines installed or upgraded; (ii) number of cross- 30 31 32 33 Disbursement status as of December 2013. AIFI: Average Interruption Frequency Index (per nominal installed kva); AIDI: Average Interruption Duration Index (per nominal installed kva). Support for Andean Electrical Interconnection Studies. Analysis and recommendations for the successful implementation of the Smart Grid Program in Ecuador. Pending IDB approval.
- 9 - border or transnational projects supported; and (iii) contribution to regional development goals relating to stabilization of CO 2 emissions through adequate transfer and dispatch of energy from renewable sources. B. Objectives, components, and costs 1.22 The general objective of the program is to help improve the operating conditions of the SNT and ensure the supply of high-quality energy to consumption centers, nationally and regionally. The specific objectives are: (i) to strengthen the 230 kv and 138 kv systems of the SNT; (ii) to increase the reliability ratings of the SNT; and (iii) to contribute to regional EHV energy integration, as part of the CEA. The program includes two components: 1.23 Component I. Expansion and strengthening to improve transmission capacity and quality of the SNT (US$162 million). This component accounts for 96.6% of program resources, and includes preinvestment studies and the construction of four new transmission systems, as well as the expansion of two existing systems: (i) Santo Domingo-Esmeraldas transmission system, with 163 km of transmission lines (230-kV), and substations of 230/138 kv; (ii) Tabacundo transmission system with 25 km of transmission lines (230-kV and 138-kV) and 230/138-kV and 230/69-kV substations; (iii) Durán transmission system with 10 km of transmission lines (230-kV) and a 230/69-kV substation; (iv) Concordia-Pedernales transmission system with 95 km of transmission lines (230-kV) and two substations of 138/69 kv; (v) transmission system for the expansion of substations: 138/69 kv and the increase of capacitive power by 30-MVAR; and (vi) transmission system for improving the Esclusas substations with capacitors of 2x60 MVAR. These works are part of the PET in the Northern, Tabacundo, and Riombamba; the Southern zone, Yanacocha; the Southwestern zone, Durán, as well as the interconnection of the Santo Domingo-Esmeraldas and Pedernales-La Concordia segment. These works will boost hydroelectric generation in the provinces of Santo Domingo, Esmeraldas, and Guayas while reducing generation needs at the Esmeraldas and Trinitaria thermal power plants, meeting the growing needs of the southern and northern regional PDUs, strengthening the interconnection with Colombia through the Tabacundo substation, relieving congestion on the Milagro- Dos Cerritos-Pascuales 230-kV power corridor, and improving the voltage profiles and power supply capacity of the SNT bus bars in the province of Manabí. 1.24 Component II. Final design for development of the EHV Electrical Interconnection Infrastructure with Peru (US$5.6 million). With reference to the electrical integration infrastructure planning study 34 financed under the SINEA, entry into service of a 500 kv transmission line between Ecuador and Peru will produce a significant coupling of marginal costs in the two countries. The study shows that the benefits derived from the time this line enters into service will average US$94.0 million annually over the period 2017-2020, US$165.0 million 34 Study financed through technical cooperation project RG-T2056. Planning Report. AF-Mercados, SIGLA, August 2013.
- 10 - annually between 2021, and 2025, and up to US$172.0 million annually from 2026 to 2030. The total approximate cost of this interconnection would be US$210 million, and with a rate of return of 12% and 30 years of useful life, its annual cost would be around US$26 million. Comparing this value with the total savings to be obtained, the interconnection clearly makes economic sense. On the basis of these results, 3.3% of program resources will be used in this component to finance final designs and development of environmental specifications for the EHV system, including: 35 geographic location of the project, topography, soil mechanics, layout of roads and existing infrastructure, design criteria, configuration of the proposed system, costs, climate, access areas, applicable standards and regulations, equipment specifications, works, time schedule, and telecommunication and control systems. 1.25 Cost and financing. The estimated cost of the program is US$169.5 million, of which US$150 million will be financed by the IDB and US$19.5 million recognized as the local counterpart contribution (see Table 1). COMPONENTS Table 1. Program costs (US$ thousands) FINANCING IDB COUNTERPART * TOTAL Component I. Expansion and strengthening to improve transmission capacity and quality of the SNT 145,000 17,400 162,400 Santo Domingo-Esmeraldas transmission system 58,035 6,964 64,999 Tabacundo transmission system 29,286 3,514 32,800 Durán transmission system 12,388 1,486 13,874 Concordia-Pedernales 138/69 kv, 66 MVA transmission system 25,782 3,094 28,876 Expansion projects 19,509 2,342 21,851 Component II. Final design for development of the EHV electrical interconnection infrastructure with Peru 5,000 600 5,600 Program administration 0.0 1,500 1,500 Program monitoring and supervision 0.0 150 150 Program management unit (PMU) 0.0 600 600 Midterm and final program evaluations 0.0 100 100 External audits 0.0 150 150 Contingencies 0.0 500 500 TOTAL 150,000 19,500 169,500 * Amount to be contributed by CELEC EP C. Results Matrix 1.26 The program has a results matrix showing outcome indicators and targets associated with its objectives and components. The indicators selected for the 35 The specific scope will be defined in the terms of reference for the final designs to be prepared.
- 11 - overall outcomes are: (i) reserve transmission capacity (MVA) for meeting demand in the SNI; (ii) average maximum loadability in transmission lines and substations; and (iii) incremental demand met from new installations associated with the program (MWh per month). In addition, the thermal generation displaced will be measured as will the reduction in electricity losses. The results and targets have been formulated and projected for five years (2014-2019) (see Annex II, Results Matrix). 36 A. Financing instruments II. FINANCING STRUCTURE AND MAIN RISKS 2.1 The program will be financed as a specific investment loan. The funds will be disbursed over a period of five years, starting on the loan contract s effective date: Table 2. Disbursement schedule (US$ millions) Source Year 1 Year 2 Year3 Year 4 Year 5 Total IDB 10.8 43.2 39.7 29.5 26.8 150 Counterpart 1.38 5.52 5.0 3.8 3.8 19.5 Cumulative 12.3 48.7 44.7 33.3 30.5 169.5 2.2 Economic and financial analysis. The economic evaluation of component I identified the type of impact on electricity service of the various works included in the component, grouping them into 10 projects. The economic rate of return was calculated for each of the proposed projects. Starting with a technical analysis of demand, load flow, and simulations of load dispatch in the national grid, projections were obtained as needed to estimate the annual costs and benefits associated with each project over the period 2014-2023. The results for recent years were extrapolated over the remaining useful life of the assets, estimated at 40 years. The economic return was evaluated at market prices and at efficiency prices, using shadow price relationships. The economic evaluation of the program at efficiency prices indicates an economic internal rate of return (EIRR) of 28.1% and a net present value (NPV) of net benefits to the country, discounted at 12%, of US$194.1 million. The sensitivity analysis shows that, under adverse changes on the order of 15% in the main parameters used in the evaluation, the program s EIRR is still above 12%. The evaluation of the program s financial impact took into account additional revenues from transporting greater amounts of electricity and replacing thermal generation, resulting in an IRR of 15.3% and an NPV of US$29.9 million. The analysis for component II yields an NPV of US$428 million, a cost recovery period of three years, and an IRR of 34%. 36 The indicators, their baselines, and target values have been analyzed and agreed with CELEC EP. These indicators will be used for monitoring and evaluation of the program, with the support of Transelectric.
- 12 - B. Environmental and social safeguard risks and associated mitigation measures 2.3 The program will have positive impacts by improving the reliability and quality of the country s electricity supply, reducing losses, and transferring the greater volume of energy generated. Any potential adverse social and environmental impact would arise primarily during the construction phase 37 for the new substations and transmission lines, and to a lesser extent during operation. 38 There is not expected to be any involuntary resettlement or economic displacement of people. The impacts will be moderate and easy to handle through standard procedures. 39 Consistent with the Bank s Environment and Safeguards Compliance Policy (Operational Policy OP-703), the program was classified as a category B operation. Because of its characteristics, the program is also subject to Operational Policies OP-704 scenario I and OP-765, 40 and these have been considered in the Environmental and Social Management Plan (ESMP). 2.4 With respect to the social and environmental risks, in addition to observing the operating conditions established for this purpose, the executing agency will present to the Bank s satisfaction, before beginning construction on any of the works: (i) the Environmental Impact Assessment and the ESMP, together with the budget for their execution; (ii) the corresponding environmental license; (iii) the resolution reserving rights-of-way for the new transmission lines; (iv) evidence of legal ownership of the land where the substations are to be located; (v) inclusion of the required environmental technical specifications and the ESMP in the contracts for construction and supervision of the planned works; and (vi) evidence that at least one public consultation has been held for each project, including: (a) project description; (b) description of probable impacts; (c) description of measures for mitigating the identified impacts (ESMP); (d) description of the system for receiving and processing complaints and claims; and (e) arrangements for receiving suggestions concerning the proposed project or its ESMP. The Bank will supervise the environmental and social aspects of the works financed on a semiannual basis, including visits at the beginning of the works and upon their acceptance. 37 38 39 40 These include: (i) the impact on air quality through the uncontrolled emission of particulate matter into the atmosphere as a result of construction work on the transmission lines and substations; (ii) noise generated in the vicinity of works through the operation of construction machinery and equipment and the installation of towers, in particular; (iii) generation of liquid, solid, and gaseous wastes; and (iv) increased risk of accidents due to the presence of machinery, faulty disposal of debris or materials, or lack of work signage. These include: (i) changes in land use along the route of the transmission lines and at substation sites; (ii) depreciated economic value of adjacent properties due to restricted use for other activities; (iii) nonionizing radiation emissions in the direct zones of influence of the power transmission networks; and (iv) generation of common and hazardous wastes through maintenance work, especially on the transformers. The Environmental and Social Management Report (IDBDOCS 38228050) presents an analysis of the main potential impacts, as well as the measures for mitigating them. Operational Policy OP-704, Disaster Risk Management Policy; Operational Policy OP-765, Indigenous Peoples Policy.
- 13 - C. Fiduciary risk 2.5 The evaluation of the fiduciary capacity of CELEC EP and its Transelectric business unit showed that the executing agency has sufficient capacity to carry out the planning, financial management, and procurement activities for the program. No significant fiduciary risks were identified. D. Execution risks 2.6 Program management risks. Risks identified relate to events that could cause delays during execution: (i) timely transfer of program funds from the Ministry of Finance (MF) to the executing agency; (ii) changes in the PMU and its full-time dedication to the program; and (iii) the capacity to prepare bidding processes for complex works. To mitigate these risks, as a condition precedent to the first disbursement, a suitable mechanism will be agreed for transferring program funds from the MF to the executing agency s consolidated account and for ensuring that those funds are used in accordance with the terms and purposes established in the loan contract. Furthermore, in setting up the PMU, the executing agency will confirm full-time dedication of the team assigned to program execution and the profile of the team will be agreed upon in order to mitigate risks in the preparation of complex bidding processes. 2.7 Procurement risks. The potential risks lie in the capacity of executing agency personnel to follow IDB procurement policies properly. Although good procurement practices were evident during implementation of loan 2457/OC-EC, potential personnel turnover within the organization may pose the need for further training. To mitigate this risk, every effort will be made to retain the PMU personnel who have been successfully executing loan 2457/OC-EC, or to select new personnel in accordance with the profile of each position, as well as to provide ongoing training to the PMU on Bank procurement policies. 2.8 Political risk. This risk relates to the possibility of changes in the decision to pursue regional electrical integration. The integration initiative is spelled out in the PME, which places special emphasis on the electrical interconnection with Peru. This risk is not expected to affect component II of the program. Moreover, the inclusion of support for designing the EHV interconnection infrastructure with Peru will facilitate monitoring of the bilateral negotiations and the final agreements for the future construction of the EHV line with Peru. E. Other special considerations and risks 2.9 Technical and economic viability. 41 The technical viability of these projects is ensured by the preparation of designs and the construction approval process. The designs of program projects are prepared in accordance with current technical, regulatory, social, and environmental specifications in the sector. This process will help to mitigate risks associated with social objections in the areas of influence of 41 Technical, economic, and financial evaluation, DOCNUM=38270587.
- 14 - the projects to be financed. Development of these projects is an integral part of the PET, and their priority is described in the PME. During project selection, a rigorous analysis of their economic viability was performed to determine their sustainability, along with a sensitivity analysis of the results to changes in investment costs, operating and maintenance costs, the cost of electric power, the average rate to the end consumer, the price-elasticity of demand, the benefits arising from greater reliability, savings in terms of electricity losses, and savings in generation costs; that analysis demonstrated the robustness of the estimated economic and financial viability of the program. 2.10 CELEC EP has already requested the budgetary item for executing the PET, which includes this program. Asset replacement and operations and maintenance will be financed through power rates approved by CONELEC for regulated transmission services, and this will ensure the program s sustainability. The expected economic and financial benefits from the projects relate primarily to: (i) the reduction in thermal generation using high-cost liquid fuels; (ii) the reduction in technical losses in the national grid; (iii) the satisfaction of demand that is unmet or anticipated through natural growth; and (iv) improvements in the quality and reliability of the power supply. III. SUMMARY OF IMPLEMENTATION MEASURES A. Execution arrangements and period 3.1 The program s planned execution period is five years. The executing agency is CELEC EP, through the Transelectric business unit. Execution of the following activities will be part of the special contractual conditions precedent to the first disbursement: 42 (i) signing and entry into effect of a subsidiary agreement between the Finance Ministry and the executing agency establishing the obligation to use the funds in accordance with the terms and purposes agreed in the loan contract; (ii) the executing agency s establishment of the PMU, devoted to the program s execution and comprising a general coordinator, a procurement specialist, a financial specialist, an environmental specialist, an electrical engineer, and a computer engineer, as agreed with the IDB; and (iii) establishment by the executing agency of a short list for hiring an external firm to audit the program s financial statements and preparation of the corresponding terms of reference, approved by the IDB. 3.2 Procurement plan. The IDB team and the executing agency have agreed on a procurement plan for the first 12 months of execution. The executing agency will update the plan annually with the planned annual monitoring reports and before the 42 The Program will be executed on the basis of the documents included in the Initial Report according to the General Conditions 4.01(d) of the loan contract. The program management unit (PMU) will review and update these documents in accordance with the General Conditions and submit them to the IDB for its no objection.
- 15 - end of each calendar year or whenever there are substantial changes covering the remaining months of the program execution period. 3.3 Retroactive financing and recognition of expenditures. The Bank may provide retroactive financing, charged to the loan proceeds, and recognize expenditures, charged to the local contribution, up to an amount equivalent to 20% of the loan or the local contribution, respectively, for eligible expenditures incurred prior to the loan approval date related to preinvestment studies for the program, provided that such expenditures meet requirements substantially similar to those established in the loan contract. 43 3.4 Disbursements and advances of funds. The loan will be disbursed in the form of advances of funds in accordance with the program s estimated liquidity needs based on the annual work plan and the procurement plan. Cash needs will be programmed with a moving 12-month horizon, and advances will cover the needs of five months of execution. 3.5 Audits. External audit services for the program will be provided by a firm of external auditors acceptable to the IDB, which will be contracted on the basis of terms of reference agreed with the executing agency. The cost of external audits will be covered by the local counterpart resources. 3.6 Project Operating Manual. The program s procedures have been clearly spelled out in the Project Operating Manual for loan 2457/OC-EC. They include a full system for monitoring and evaluating actions and outcomes, both for the CELEC EP itself and for the external auditors. Presentation of an updated version of the manual, duly approved by CELEC EP, and its entry into effect with the IDB s no objection, will be a special contractual condition precedent to the first disbursement. 3.7 Special execution conditions. Before starting the works under component I, the executing agency will present, to the Bank s satisfaction, evidence that it has the permits and licenses required by Ecuadorian law for construction of the projects under the program, and that it is in compliance with the environmental conditions described above (paragraph 2.4). B. Summary of arrangements for results monitoring and evaluation 3.8 Monitoring arrangements. The IDB will conduct semiannual technical visits to the executing agency to review progress under the program and to make any adjustments needed in its execution. Fiduciary oversight visits will be take place once a year. External audits of program accounts and operations are planned to validate the use of the loan proceeds and the internal operating processes and controls followed within the executing agency. 43 Such expenditures must have been incurred beginning 7 March 2014.
- 16-3.9 Program evaluation arrangements. Evaluation of the program is reflected in the Monitoring and Evaluation Plan 44 and will include a midterm and a final evaluation, financed with the counterpart funds. The midterm evaluation will be contracted by the executing agency within two months after 50% of the IDB loan proceeds have been committed. The final evaluation will be contracted by the executing agency within two months after 95% of the Bank s loan proceeds have been disbursed. 45 The semiannual and annual progress reports will be submitted by the executing agency as described in the Program Monitoring and Evaluation document. The IDB team will conduct semiannual visits to the works sites and will maintain ongoing collaboration through the Energy Division (INE/INE) and the Country Office in Ecuador (CAN/CEC). 44 45 Monitoring and Evaluation Plan (M&E), DOCNUM=38270583. As part of the final evaluation of the program, and in order to assess its impacts, an ex post cost-benefit evaluation will be performed to verify the assumptions and determine the impacts of the operation.
Annex I - EC-L1117 Page 1 of 1 Development Effectiveness Matrix I. Strategic Alignment 1. IDB Strategic Development Objectives Lending Program Summary Aligned (i) Lending to small and vulnerable countries; (ii) Lending to support climate change initiatives, renewable energy and environmental sustainability and (iii) Lending to support regional cooperation and integration. Regional Development Goals Bank Output Contribution (as defined in Results Framework of IDB-9) (i) Km of electricity transmission and distribution lines installed or upgraded (ii) Number of cross border and transnational projects supported. 2. Country Strategy Development Objectives Country Strategy Results Matrix Country Program Results Matrix GN-2680 GN-2756 Aligned Create a long-term energy strategy that promotes a sustainable energy framework, facilitates adequate energy supply, and improves access to electric power. The operation is included in the 2014 Country Program Document. Relevance of this project to country development challenges (If not aligned to country strategy or country program) II. Development Outcomes - Evaluability Evaluable Weight Maximum Score 8.8 10 3. Evidence-based Assessment & Solution 10.0 33.33% 10 3.1 Program Diagnosis 3.0 3.2 Proposed Interventions or Solutions 4.0 3.3 Results Matrix Quality 3.0 4. Ex ante Economic Analysis 10.0 33.33% 10 4.1 The program has an ERR/NPV, a Cost-Effectiveness Analysis or a General Economic Analysis 4.2 Identified and Quantified Benefits 1.5 4.3 Identified and Quantified Costs 1.5 4.4 Reasonable Assumptions 1.5 4.5 Sensitivity Analysis 1.5 5. Monitoring and Evaluation 6.4 33.33% 10 5.1 Monitoring Mechanisms 2.5 5.2 Evaluation Plan 3.9 III. Risks & Mitigation Monitoring Matrix Overall risks rate = magnitude of risks*likelihood Identified risks have been rated for magnitude and likelihood Mitigation measures have been identified for major risks Mitigation measures have indicators for tracking their implementation Environmental & social risk classification IV. IDB s Role - Additionality The project relies on the use of country systems Fiduciary (VPC/PDP Criteria) 4.0 Yes Low Yes Yes Yes B Financial Managemente: i) Budget; ii) Treasury; iii) External control. Procurement: i) Information System Non-Fiduciary The IDB s involvement promotes improvements of the intended beneficiaries and/or public sector entity in the following dimensions: Gender Equality Labor Environment Additional (to project preparation) technical assistance was provided to the public sector entity prior to approval to increase the likelihood of success of the project Yes The Government of Ecuador received technical assistance to improve its capacitites to design and evaluate photovoltaic systems (EC-T1235). In addition, a TC (EC-T1280) is expected to support the current operation. The ex-post impact evaluation of the project will produce evidence to close knowledge gaps in the sector that were identified in the project document and/or in the evaluation plan The Ecuadorian Electrification Master Plan is based on the need to ensure satisfaction of the projected energy demand considering the energy reserves and the need for cost optimization. In order to achieve this goal, it is critical to have a reliable system with quality and safety in the generation, transmission and distribution services. The POD explains in detail the structure of the system including a description of the National Transmission System and the challenges and progress in its operational management. The challenges ahead are also presented in a context in which the demand has outgrown planned supply requiring not only greater generation capacity but also a more robust, reliable transmission system with higher capacity. The proposed project is clearly articulated with this detailed analysis of the energy situation, and proposes funding for two components: (i) Expansion and strengthening to improve the capacity and transmission quality of the National Transmission System (96% of resources) and (ii) Final designs for the development of the Infrastructure for Electrical High Voltage Interconnection with Peru. As a result of this diagnosis, the intervention that is proposed has a clear vertical logic and its final impacts are associated with the project's contribution to mitigating climate change and improving the efficiency of the transmission system as a whole. These impacts will be achieved by increasing the reserve capacity of the system in the transmission lines and substations to be funded, the level of "chargeability" in transmission lines and the incremental demand to be satisfied with the additional Power Substations. The distributed package contains a full economic analysis which in the base case scenario results in a 28.1% Economic Internal Rate of Return and US$194.1 million in Net Present Value. Simulations show that, under unfavorable variations of the order of 15% in the main parameters involved in the assessment, the Internal Rate of Return is always above 12% The Monitoring and Evaluation Plan proposes a reflexive socioeconomic analysis and an ex post Cost Benefit evaluation.
Annex II Page 1 of 4 RESULTS FRAMEWORK MATRIX OF INDICATORS Objectives To help improve the operating conditions of the National Transmission System (SNT) and ensure the supply of high-quality energy to consumption centers, nationally and regionally. The specific objectives are: (i) to reinforce the 230 kv and 138 kv systems of the SNT; (ii) to increase the reliability of the SNT; and (iii) to contribute to regional Extra High Voltage energy integration, as part of the Andean Electric Corridor. Output indicator Baseline (2013) Year 1 Year 2 Year 3 Year 4 Year 5 Final target Means of verification Component I Expansion and strengthening to improve the transmission capacity and quality of the SNT 1.1 Santo Domingo-Esmeraldas transmission system completed (US$000) 1.1.1 163 km of 230 kv transmission lines completed (US$000) 1.1.2 Expansion Esmeraldas 230/138 kv substation completed (US$000) 1.1.3 Modernization 138 and 69 kv substation completed (US$000) 1.2 Tabacundo transmission system completed (US$000) 1.2.1 25 km of 230 and 138 kv transmission lines completed (US$000) 1.2.2 Construction 230/138 kv substation completed (US$000) 1.3 Durán transmission system completed (US$000) 1.3.1 10 km of 230 kv transmission lines completed (US$000) 0.0 5,850 23,399 12,998 12,998 9,705 64,993 Project progress report 0.0 4,298 17,190 9,550 9,550 7,162 47,750 Project progress report 0.0 1,328 5,313 2,951 2,951 2,213 14,756 Project progress report 0.0 224 896 497 497 373 2,487 Project progress report 0.0 2,951 11,807 6,559 6,559 4,919 32,795 Project progress report 0.0 1,122 4,489 2,494 2,494 1,870 12,470 Project progress report 0.0 1,829 7,318 4,065 4,065 3,049 20,328 Project progress report 0.0 1,249 4,994 2,774 2,774 2,080 13,874 Project progress report 0.0 263 1,052 584 584 438 2,921 Project progress report
Annex II Page 2 of 4 Output indicator Baseline (2013) Year 1 Year 2 Year 3 Year 4 Year 5 Final target Means of verification 1.3.2 Construction 230/69 kv substation completed (US$000) 1.4 La Concordia-Pedernales transmission system completed (US$000) 1.4.1 95 km of 138 kv transmission lines completed (US$000) 1.4.2 Construction 138/69 kv substation completed (US$000) 1.4.3 138 kv substation sectioning completed (US$000) 1.5 Expansion transmission system completed (US$000) 1.5.1-Expansion of Yanacocha 138/69 kv substation completed (US$000) 1.5.2 Expansion of Riobamba 230/69 kv substation completed (US$000) 1.5.3 San Gregorio 30 MVAR substation capacitors completed (US$000) 1.5.4 Expansion of San Gregorio 230/69 kv substation completed (US$000) 1.5.5 Expansion of El Inga 230/138 kv substation completed (US$000) 1.5.6 Quality improvement Esclusas substation, 2x60 MVAR, completed (US$000) 0.0 986 3,942 2,190 2,190 1,642 10,950 Project progress report 0.0 0.0 0.0 12,512 5,775 10,585 28,875 Project progress report 0.0 0.0 0.0 8,022 3,702 6,787 18,511 Project progress report 0.0 0.0 0.0 2,860 1,320 2,420 6,600 Project progress report 0.0 0.0 0.0 1,629 752 1,378 3,759 Project progress report 0.0 1,726 6,902 5,409 4,960 2,840 21,837 Project progress report 0.0 390 1,561 1,064 1,064 354 4,435 Project progress report 0.0 377 1,506 837 837 627 4,184 Project progress report 0.0 82 329 224 224 74 933 Project progress report 0.0 527 2,108 1,437 1,437 479 5,988 Project progress report 0.0 350 1,398 777 777 582 3,884 Project progress report 0.0 0.0 0.0 1,070 621 724 2,415 Project progress report
Annex II Page 3 of 4 Output indicator Baseline (2013) Year 1 Year 2 Year 3 Year 4 Year 5 Final target Means of verification Component 2 Final design studies for the EHV Electrical Interconnection with Peru Infrastructure design for the 500 kv interconnection line with Peru, completed (US$000) Environmental and social studies of the 500 kv interconnection line with Peru completed (US$000). 0.0 200 800 1,000 1,000 0.0 3,000 Project progress report 0.0 100 400 500 1,000 0.0 2,000 Project progress report Outcome indicators Baseline (2013) Year 6 Means of verification Observations Component I Expansion and strengthening to improve the transmission capacity and quality of the SNT Increased reserve capacity in the transmission lines of projects financed in order to meet power demand in the areas of influence (MVA) Average maximum loadability level 1 in the transmission lines financed (MVA) Increased reserve capacity in the substations of projects financed in order to meet power demand in the areas of influence (MVA) Incremental demand satisfied through the substations financed (MW) 0.0 970 Final project evaluation 0.0 775.96 Final project evaluation 400 1,936.70 Final project evaluation Baseline and target validated by TRANSELECTRIC (100% of thermal limit) Final target in light of current CONELEC regulations (80% of thermal limit) Baseline and target validated by TRANSELECTRIC (90% of installed capacity) 0.0 395 Final project evaluation Baseline and target validated by TRANSELECTRIC Component 2 Final design studies for the EHV Electrical Interconnection with Peru Government decision to finance construction of the 500-kV line for the EHV interconnection with Peru (official notice published). 0.0 1 Government notice CELEC EP through its business unit TRANSELECTRIC will be responsible for building the 500-kV line with Peru. 1 Load capacity of the transmission lines and substations.
Annex II Page 4 of 4 Impact indicators Baseline (2013) Final target Year 5 Means of verification Climate change mitigation Reduced thermal generation (MW) 0.0 130 Final project evaluation CO 2 avoided through the program (Tons of CO 2 eq./year) 0.0 Tbc Transmission efficiency Savings from improved capacity and quality of electricity transmission in the SNT 2 (US$/day) 0.0 26,145 Final project evaluation Average level of electricity losses in the SNT (%) 3.32 2.34 3 2 3 Evaluates the cost of not supplying incremental demand at cost of ENS= US$1,533/MWh. Based on the impact of the 230 kv Santo Domingo-Esmeraldas transmission system.
Annex III Page 1 of 8 FIDUCIARY AGREEMENTS AND REQUIREMENTS Project number: Name: Executing agency: Prepared by: EC-L1117 National Transmission System Strengthening Program Corporación Eléctrica del Ecuador (CELEC EP) Patricio Crausaz and Gumersindo Velásquez (FMP/CEC) I. EXECUTIVE SUMMARY 1.1 The executing agency for this program will be the public enterprise CELEC EP, through its business unit Transelectric. CELEC EP will be responsible for the tendering, contracting, and technical and fiduciary management of the goods, works, and nonconsulting services, as well as the consulting services to be financed by the loan. The executing agency has the capacity and the means to carry out its responsibilities under the program, and the overall fiduciary risk is assessed as low. The proposed supervision plan is consistent with that assessment. II. FIDUCIARY CONTEXT OF THE COUNTRY 2.1 The National Public Procurement System (SNCP) was created by law in August 2008, and applies to all entities of the public sector, including public enterprises. Article 34 of the Organic Law on Public Enterprises (LOEP) provides that all contracting by public enterprises for the procurement of works, goods, and services, including consulting services, will be subject to the National Development Plan, with due regard to the national and corporate budgets, and must be substantiated in a strategic plan and an annual procurement plan. 2.2 The National Public Finance System (SINFIP), under the stewardship of the Ministry of Finance (MF), contains all the standards, policies, instruments, processes, activities, records, and operations that Ecuador s public sector entities and agencies and the public financial system are to use in programming and managing public revenues, expenditures, and financing. The LOEP (general provision 5) provides that public enterprises are not required to keep their accounts in accordance with the government s accounting standards, nor are they obliged to manage their financial resources through the Single Treasury Account or through e-sigef. Public enterprises may apply generally accepted accounting principles and international accounting standards for producing all the financial information needed to measure their management performance, both administrative and financial. Public enterprises are required to report their
Annex III Page 2 of 8 financial management outcomes to the MF in the formats determined by the Ministry. III. FIDUCIARY CONTEXT OF THE EXECUTING AGENCY 3.1 The new program will be executed by CELEC EP, through its business unit Transelectric. CELEC EP will be responsible for all aspects of the project cycle and for management of the IDB loan proceeds and the local contribution, and will periodically report the results of the program to the MF and the Bank. The executing agency s fiduciary capacity has been evaluated as satisfactory, and it has the human and technical resources and the information systems needed to execute the program properly and to manage its finances and procurement. 3.2 The executing agency will rely on the same Program Management Unit (PMU) that is currently managing program EC-L1070, Support for the Transmission Program, financed under loan 2457/OC-EC. This PMU will consist of a general coordinator, a financial specialist, a procurement specialist, an environmental specialist, an electrical engineer, and a computer engineer, who will be dedicated full-time to these activities. The executing agency will maintain this structure in order to ensure efficient execution of the new program. 3.3 The PMU will rely on the relevant offices of CELEC EP to carry out its tasks. Transelectric has a document, Organizational Structure and Functions, which systematizes the principal activities that the various offices must perform and focuses staff efforts on fulfilling the mission and vision established by the strategic plan 2013-2017, which covers the projects to be financed by this operation. IV. FIDUCIARY RISK EVALUATION AND MITIGATING MEASURES 4.1 On the basis of available information regarding the executing agency s experience with management of project 2457/OC-EC financed by the IDB, as well as the institutional capacity assessment of the Transelectric business unit of CELEC EP, the fiduciary risk, in both its financial and procurement aspects, was deemed to be low. No fiduciary risks were identified that would merit specific mitigation measures. However, it is recommended that CELEC EP maintain and strengthen the Management Unit devoted exclusively to execution of the program. V. CONSIDERATIONS FOR THE SPECIAL CONDITIONS OF THE CONTRACT 5.1 Present evidence of the approval and entry into force of the updated Program Operating Manual for project 2457/OC-EC, adapted to the new program. 5.2 Confirmation that the PMU will be devoted full-time to the program and will comprise a general coordinator, a procurement specialist, a financial specialist, an environmental specialist, an electrical engineer, and a computer engineer.
Annex III Page 3 of 8 5.3 Agreement between the executing agency and the Bank on the firms eligible to conduct the program audit and the content of the corresponding terms of reference. VI. AGREEMENTS AND REQUIREMENTS FOR PROCUREMENT EXECUTION A. Procurement execution 6.1 The initial procurement plan agreed between the executing agency and the Bank will establish the procurement operations initially included in the program, which will be carried out in accordance with the tendering methods and thresholds established therein. 6.2 The program calls for the procurement of works, goods, and nonconsulting, as well as consulting services under the framework established in documents GN-2349-9 and GN-2350-9, respectively. Use of the Procurement Plan Execution System (SEPA) is recommended for planning and monitoring program procurement. Procurement of works, goods, and nonconsulting services 6.3 The threshold for the use of international competitive bidding 1 (ICB) will be made available to CELEC EP at the website http://www.iadb.org/procurement. Below this threshold, the selection method will be determined on the basis of the complexity and characteristics of the procurement, which will be reflected in the procurement plan approved by the Bank. 6.4 Contracts for goods, works, and nonconsulting services arising under the program and subject to ICB will be executed using the standard bidding documents (SBDs) issued by the Bank. Requests for proposals subject to national competitive bidding (NCB) and shopping (S) will be executed using national bidding and shopping documents agreed upon with the Bank. 6.5 In addition, in ICB processes, reducing to four weeks the period established by the policies for the submission of bids for works, goods, and nonconsulting services applicable in the case of noncomplex procurement will be accepted, and the period established by local regulations will be accepted for NCB. Contracting of consulting services 6.6 Any of the methods described in the policy on consultants may be used for the selection and contracting of consulting services (document GN-2350-9), provided that the method has been identified for the respective procurement in the procurement plan approved by the Bank. The threshold for preparation of a short 1 Currently the ICB threshold is for amounts of US$3 million or more for works; and US$250,000 or more for goods and nonconsulting services.
Annex III Page 4 of 8 list of international consultants 2 www.iadb.org/procurement. will be made available to the program at 6.7 Consulting services contracts under the program will be executed using the request for proposals issued by the Bank. For consulting services with an estimated budget of up to US$200,000, the executing agency will promote the use of the selection method based on the consultants qualifications, as provided in paragraph 3.7 of the policies. B. Table of threshold amounts (US$) Works Goods Consulting services ICB NCB Shopping ICB NCB Shopping 3,000,000 < 3,000,000 250,000 < 250,000 250,000 < 250,000 50,000 International publicity Shortlist 100% national < 50,000 > 200,000 < 200,000 6.8 For contracting of simple works and off-the-shelf goods, the shopping method may be used up to the ICB thresholds. The executing agency must justify the use of this procedure and submit it for approval in the procurement plan. 2 When contracting consulting firms, the threshold is for amounts of US$200,000 or more; for lesser amounts, the short list may comprise entirely national consulting firms.
Annex III Page 5 of 8 C. Main procurement items Activity Works Santo Domingo Esmeraldas 230-kV transmission line, double circuit, 1200 ACAR, 163-km. Esmeraldas 230/138 kv, 167 MVA substation; modernization 138 & 69 kv. Expansion Santo Domingo 230 kv substation, expansion of 2 line bays 230 & 138 kv transmission line segments, 25 km, connection Tabacundo substation Tabacundo substation 230/138 kv 167 MVA & 230/69 kv 100 MVA. El Inga substation expansion, 230/138 kv, second three-phase autotransformer 300 MVA Riobamba substation expansion, second transformer 230/69 kv, 100 MVA Transmission line connection Durán substation, 230 kv, double circuit, 2 x 750 ACAR, 10 km Type of bidding Estimated date Estimated amount (US$000) ICB January 2015 42,636 ICB January 2015 13,177 NCB January 2015 2,223 ICB January 2015 11,135 ICB January 2015 18,150 ICB January 2015 3,469 ICB January 2015 3,738 NCB January 2015 2,610 Durán substation, 230/69 kv, 225 MVA ICB January 2015 9,778 San Gregorio substation expansion 230/69 kv 167 MVA ICB January 2015 5,349 Yanacocha substation expansion to 138/69 kv 67 MVA ICB October 2015 3,960 La Concordia-Pedernales 138 kv transmission line, double circuit, 750 ACAR, 95 km ICB October 2015 16,530 Pedernales substation 138/69 kv, 66 MVA ICB October 2015 5,895 La Concordia substation 138 kv, sectioning ICB October 2015 3,357 Goods Esclusas substation, installation capacitor banks 2 x 60 MVAR ICB October 2015 2,159 Consulting Services Studies and final designs and EIA for the Chorrillos-Frontera Sur transmission line & Frontera Sur 500kV substation QCBS February 2015 5,000 D. Procurement supervision 6.9 All ICB processes for goods and works, selection of consulting services with an estimated amount above US$200,000, and single-source selection will be subject to ex ante review by the Bank.
Annex III Page 6 of 8 6.10 The Bank will conduct ex post review visits at least once every 12 months. Ex post review reports will include at least one physical inspection visit, as appropriate. It should be noted that no less than 10% of the contracts reviewed will be physically inspected during the program. 6.11 Advance procurement/retroactive financing and recognition of expenditures: The Bank may provide retroactive financing, charged to the loan proceeds, and recognize expenditures, charged to the local contribution, up to an amount equivalent to 20% of the loan or the local contribution, respectively, for eligible expenditures incurred prior to the loan approval date related to preinvestment studies for the program, provided that such expenditures meet requirements substantially similar to those established in the loan contract. 3 Ex post review thresholds (US$) Works Goods Consulting services Individual consultants Single-source selection < 3,000,000 < 250,000 < 200,000 < 50,000 All Note: The threshold amounts established for ex post review are based on the fiduciary execution capacity of the executing agency and may be modified by the Bank in the corresponding procurement plan, as greater institutional capacity and experience are acquired. In addition, the first three contracts for amounts below the ICB threshold will be reviewed on an ex ante basis. E. Records and files 6.12 The executing agency will create a specific programming and budgetary structure for identifying the program in its financial management system; it will maintain updated records, and keep its files properly organized so they can be periodically reviewed by the Bank. The file containing the documentation for program procurement and contracting will be in a single folder that is readily distinguishable from the processes financed with local contribution resources or nonprogram resources, and must be available at all times for auditing purposes. VII. FINANCIAL MANAGEMENT AGREEMENTS AND REQUIREMENTS A. Programming and budget 7.1 Programming and budgeting of the program will be done in accordance with national legislation and the in-house procedures of CELEC EP-Transelectric. The executing agency has already developed its 2014 AWP and has a multiyear work plan 2013-2017, and these include the projects that make up this program. The executing agency budget also incorporates the disbursements anticipated from IDB loan 2457/OC-EC. 3 Such expenditures must have been incurred beginning 7 March 2014.
Annex III Page 7 of 8 B. Accounting and information systems 7.2 The program s accounting will be based on Ecuadorian accounting standards for public enterprises, using the IFS information system of CELEC EP. C. Disbursements and cash flow 7.3 The Bank will disburse the loan using the advance of funds modality. The monetary value of each advance will be based on the estimated cash flow necessary for executing planned program activities for periods of six months (two advances per year). Cash flow programming must be consistent with the annual work plan and the procurement plan approved by the Bank, and must span a moving horizon of 12 months. Drawings will be deposited to the designated account opened by CELEC EP in the Central Bank of Ecuador for this purpose. Both the MEER and the executing agency undertake to use these resources exclusively to pay for transactions relating to program activities. D. Internal control and internal audit 7.4 The internal audit unit of CELEC EP, which was established in September 2013, will include specific control activities for the program in its annual work plan. This unit will be strengthened in 2014 with the addition of five new members. In performing its work, this unit applies the Government Audit Manual, Government Audit Standards, and Technical Standards for Internal Control. E. External control and reports 7.5 External control of the program will be performed by an external auditing firm acceptable to the Bank. This firm will be contracted using local counterpart funds through a competitive process based on terms of reference agreed upon between CELEC EP-Transelectric and the IDB. The annual report on the audited financial statements and the report on the integrated ex post review of procurement and disbursements will be delivered to the IDB no later than 120 days after the close of the corresponding fiscal year.
Annex III Page 8 of 8 F. Fiduciary supervision plan Supervision activity Operational Financial Nature and scope Review of progress report Review of portfolio with executing agency Update of cash flow programming and disbursements Inspection visits Every six months Supervision plan Frequency In accordance with MF requirements Every six months, or with each request for advance when program circumstances so require. Annual Bank Fiduciary and sector team Fiduciary and sector team Fiduciary and sector specialist Fiduciary specialist Responsible party MF Third party CELEC EP Consultant Financial audit and ex post review Annual Fiduciary specialists Executing agency / external auditor Procurement Compliance Ex ante review of procurement processes Update of procurement plans Fulfillment of conditions precedent Budgetary allocation Delivery of audited financial statements During program execution Annual JEP/executing agency JEP/executing agency Executing agency Executing agency Once; Q2 2014 Fiduciary team Consultant Annual, in January of each year Annual Fiduciary specialist Fiduciary specialist Executing agency Executing agency / auditor G. Execution arrangements 7.6 The borrower and the Bank have agreed that CELEC EP, through its business unit Transelectric, will serve as executing agency for the program and will have general responsibility for fiduciary reporting and for overall management of the program. 7.7 The Program Operating Manual for program EC-L1070 will be updated and supplemented for application in this program, and it will establish in detail the requirements for this program s overall management.
DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK PROPOSED RESOLUTION DE- / Ecuador. Loan /OC-EC to the Republic of Ecuador National Transmission System Strengthening Program RESOLVES: The Board of Executive Directors That the President of the Bank, or such representative as he shall designate, is authorized, in the name and on behalf of the Bank, to enter into such contract or contracts as may be necessary with the Republic of Ecuador, as Borrower, for the purpose of granting it a financing to cooperate in the execution of a national transmission system strengthening program. Such financing will be for an amount of up to US$150,000,000 from the Ordinary Capital resources of the Bank, and will be subject to the Financial Terms and Conditions and the Special Contractual Conditions of the Project Summary of the Loan Proposal. (Adopted on 201_) LEG/SGO/CAN/IDBODOCS#38348296-14 EC-L1117