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Implementation Completion Report (ICR) Review - Power Transmission


  
1. Project Data:   
ES Date Posted:
04/01/2005   
PROJ ID:
P008604
Appraisal
Actual
Project Name:
Power Transmission
Project Costs(US $M)
 255.7  368.5
Country:
Poland
Loan/Credit (US $M)
 160  108.5
Sector, Major Sect.:
Power,
Energy and mining
Cofinancing (US $M)
   
L/C Number:
L3959      
   
Board Approval (FY)
  96
Partners involved
 
Closing Date
12/31/2001 06/30/2004
         
Prepared by: Reviewed by: Group Manager: Group:  
Richard Berney
Fernando Manibog Alain A. Barbu OEDSG

2. Project Objectives and Components:

a. Objectives
1. Improve reliability of high voltage grid through rehabilitation and reinforcement;

2. Enhance security of power supply by interconnecting with the Western European grid;
3. Enhance energy conservation through reducing transmission losses and improving network operating performance by improving dispatching;
4. Reduce environmental pollution;
5. Enhance institutional capacity of the Polish Power Grid Company (PSE).

b. Components
1. Ostrow Transmission Development
2. Substation Modernization Program
3. 220 kV line Modernization Program
4. Technical Assistance

c. Comments on Project Cost, Financing and Dates
The scope of the project increased substantially during project implementation, all within the agreed component description. The Polish Power Grid Company found itself with greater internal funds than has been estimated at appraisal and therefore decided to assume a larger proportion of total project cost. Also, it did not capitalize IDC in the loan as was originally expected. As a result, total project cost increased by 44 percent, but Bank funding decreased from $160 million to $105.5 million.


3. Achievement of Relevant Objectives:

1. Improved reliability: [partially achieved]
  • The overall upgrading and modernization of major portions of the grid is likely to improve reliability. However, the ICR provides no quantitative information on this matter, listing instead the project inputs used to generate better reliability, including replacement of transformers, replacement of electromechanical relays with computerized protective relays, and replacement of circuit breakers, surge arresters and other equipment. (The region commented that the fact that the Polish Power System was able to be connected to the Western European UCPTE Grid Systems is in itself a recognition and confirmation by UCPTE of the improved reliability of the Polish power system).
  • The ICR reports a significant improvement in the level of forced outages, but provides no figures. The borrowers report, on the other hand, reports an 8% increase in the average number of emergencies between 1993-95 and 2001-04 (from 15.9 to 17.2), and an average increase of 3% in the shutdown index for EHV (extra high voltage) transformers (from .447 to .460) over the same period. It also reports that loss factors in the 220 kV network improved marginally (by less than 1%), but losses for the 400 kV network increased by about 25% (from 0.8% to 1.01%). On the positive side, the average number of emergency line shut down for all 220 kV and above lines decreased from 17.7 per 100 km in 1995, to only 12.0 per 100 km in 2003. With no other information to go by, OED can rate this component as Marginally Satisfactory, at best.
2. Enhanced security of power supply: [achieved]
  • The interconnections with the European power grid were completed, which automatically enhanced power security. This was a major benefit.
3. Enhanced energy conservation: [partially achieved]
  • While the introduction of the SCADA system was important for an increase in efficiency, not much efficiency appears to have been gained, especially since the investment needed to transition from 220 kV to 400 kV has yet to be completed. (the region commented that in addition to improved efficiency in the transmission system through loss reduction, the reinforcement of the transmission systems and the resulting increase in power transfer, etc. have led to a better dispatching of the power generation and therefore improvement in the overall efficiency of energy supply, which also resulted in improved environmental emissions- however no quantification has been provided).
4 . Reduced environmental pollution: [partially achieved]
  • There were no quantitative targets for this objective. Although it is understood that environmental pollution (SO2, NOx and CO2) is reduced to the extent that system-wide losses are reduced, gains from fuel switching and improvements in generation cannot be attribut`able to the project. There does, however, appear to be some environmental pollution gains from the introduction of oil retention facilities during power transformer replacement. Oil retention facilities were included in the redesign of all transformer substations upgraded by PSE. During project implementation, 17 220/110-kV transformers were replaced, 5 of these financed by the Bank. The transformer replacement program and provision of new oil retention facilities have virtually eliminated the risk of explosive failures together with all the related environmental and safety implications. The project was also able to support the introduction of the environmental fees and fines as part of the variable costs of energy generation, thereby introducing some elements of green dispatching.
5. Enhanced PSE institutional capacity: [achieved]
  • PSE has gained significant experience and expertise in implementing, construction, commissioning, operating and maintaining transmission lines.
  • The new fiber optic telecommunications system has greatly enhanced the ability of PSE to coordinate this widespread transmission system.
  • Financial management, controls and accounting have been greatly improved, at Bank insistence, after a serious scandal in 2001.
  • Sector work associated with project preparation led to the creation of a Least-Cost Generation Program, a tariff study, and a masterplan for power sector telecommunications. These activities have enhanced PSE’s institutional capacity for supporting a power expansion program based on independent power producers (IPPs). It is envisaged that these IPPs could invest several billion dollars in the coming years. However, there is, as yet no evidence presented in the ICR that these proposals will come to fruition.

4. Significant Outcomes/Impacts:

The interconnection with the European grid allowed Poland to export large quantities of power at advantageous prices. These extra funds were used for investment, without the necessity of using more of its borrowing capacity.
  • The grid system, which was in danger of failing in many places, and did indeed experience one catastrophic failure during the period of project implementation, has been strengthened and made more secure.
  • PSE has greatly improved its cost accounting and financial management system, which should greatly reduce the risks of corruption and fraud.
  • The fiber optic communications system greatly increased efficiency of operation. It also is providing a backbone for the updating of Poland’s telecommunications industry. The system’s excess capacity is now being used for communication connections for Poland’s banking network, and other all-Polish companies, and in the future it is likely to be used for other commercial applications, including cable TV, data communication systems, and tele-internet connections.
  • The outsourcing of engineering services facilitated the privatization of Energoproject, the country’s major electrical engineering company.

  • 5. Significant Shortcomings (include non-compliance with safeguard features):

    There was a major grid failure in the eastern section of the grid. Key transformers in this section were found to be operating well beyond their useful economic life, with failure rates of some ten times higher than the benchmark rates. However, because the needs were far in excess of resources under the loan, it was decided to focus on the western section of the grid, which would be interconnected with the European grid. The beginning replacement program for transformers in the eastern portion of the grid was included in the project. The program is expected to be completed by 2009.
  • It took major crises in the financial system (the discovery of a large unaccounted for loss in 2001) before corrective action was taken. While this issue might have been identified in earlier audit reports, the Bank supervision team took full advantage of the crisis to get PSE to agree to major reforms in its accounting and reporting system, which have significantly improved the enterprise's financial accountability.
  • No quantitative outcome indicators were established for the project at inception and none were added during midterm review (2001).
  • The Bank declared misprocurement on three contracts because PSE was unwilling to follow Bank guidelines. However, it should be noted that they did go with the lowest bidder, and did make sure that the bidder corrected all of his omissions during final negotiations.
  • PSE was not able to comply with the covenant to prepare a comprehensive program for rehabilitation of the 110 kV network, primarily because of lack of cooperation between PSE and the distribution companies, may of whom had been privatized.
  • 6. Ratings:ICROED ReviewReason for Disagreement/Comments
    Outcome:
    SatisfactoryModerately Satisfactory[The ICR's four point rating does not allow a Moderately Satisfactory rating]. The information provided in the ICR (which lacks quantification of important benefits and achievements) is insufficient to justify a fully satisfactory rating. For lack of quantitative information, some objectives can only be considered to have been partially achieved - see section 3.
    Institutional Dev.:
    SubstantialSubstantial
    Sustainability:
    Highly LikelyHighly Likely
    Bank Performance:
    SatisfactorySatisfactory
    Borrower Perf.:
    SatisfactorySatisfactory
    Quality of ICR:
    Satisfactory

    7. Lessons of Broad Applicablity:

    If the Bank is to be a “knowledge Bank”, it needs to improve its ability to provide up-to-date information about the costs of the types of equipment that are used in infrastructure projects such as this one.
    • Strong project management is particularly important when a project has a large number of interrelated subprojects.
    • The Bank needs to make sure that the state-owned infrastructure companies are audited by an internationally acceptable of auditors firm early in the project cycle, and preferably as a condition of disbursement, and that these audits pay particular attention to financial controls.
    • A strong Bank stand on issues of potential corruption can pay high dividends in terms of improvements of institutional financial management.

    8. Audit Recommended?  No

              Why?  

    9. Comments on Quality of ICR:

    The ICR is satisfactory on balance. It presented a reasonable picture of the progress of the project, although in a somewhat disjointed manner. It also discusses candidly the most important project failures. However, it also has a number of shortcomings:
  • The ICR mostly measured the project outcome by the project inputs, and did little to present actual outcomes (or even outputs). In fact, the Borrower’s contribution had more relevant outcomes data than did the Region’s ICR. At a minimum, the ICR could have abstracted the relevant data from the Borrower’s contribution and put it a reader-friendly form.
  • The ICR could have highlighted better the project’s lack of quantitative indicators, which made it impossible for the ICR to present any quantitative analysis for the major indicators (improvement in reliability, enhanced security of power supply and improving the network’s operational performance), even though this data is available from the borrower’s contribution. (the Region commented that the borrower's data did not provide details on the causes, the duration or the circumstances of the falure/forced outages; since no meaningful quantification could be made, the ICR team decided to omit the data.)
  • It should have included the basic assumptions for the ERR calculation.
  • The ICR explains that project was prepared within the framework of the continuing policy dialogue on energy sector restructuring and, in particular, achieving further improvement in energy pricing policies and achieving a sound regulatory framework. However, the ICR should have provided more information about the results in these critical institutional areas. For instance, it does state that cash flow analysis was based on an assumption of zero price increases, but then does not follow-up with information about what actually happened to the tariff structure.
  • It is not clear why the substitution of own funds for Bank loan funds should be considered as a negative factor for the implementing agency (this might even suggest that the implementing agency was being extremely efficient).
  • The table on Bank inputs starts with supervision and does not include any for information on preappraisal, or appraisal and negotiations resources.
  • Finally, the amount of the loan on the title page should refer to the original loan amount ($160 million), not the final amount borrowed ($108.5 million).

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