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Implementation Completion Report (ICR) Review - Podhale Geothermal District Heating And Environment Project


  
1. Project Data:   
ICR Review Date Posted:
01/10/2006   
PROJ ID:
P037339
Appraisal
Actual
Project Name:
Podhale Geothermal District Heating And Environment Project
Project Costs(US $M)
 69.6  37.0
Country:
Poland
Loan/Credit (US $M)
 38.2+5.4 GEF Grant  14.5+3.4 GEF Grant
Sector, Major Sect.:
District heating and energy efficiency services,
Energy and mining
Cofinancing (US $M)
 26.0  19.1
L/C Number:
L7015      
   
Board Approval (FY)
  00
Partners involved
EU, Denmark, USAID 
Closing Date
12/31/2004 12/31/2004
         
Evaluator: Panel Reviewer: Division Manager: Division:  
Peter W. Whitford
Fernando Manibog Alain A. Barbu IEGSG

2. Project Objectives and Components:

a. Objectives
Project Development Objective: to reduce air pollution from local coal-fired space-heating boilers through increased utilization of clean energy resources such as geothermal heat and natural gas in the Podhale region of Southern Poland.

Global Objective: to reduce CO2 emissions in order to help Poland meet its international obligations under the United Nations Framework on Climate Change.

These objectives were not revised in the course of project implementation (but are reworded in the ICR - without substantial change).

b. Components (or Key Conditions in the case of Adjustment Loans):
A. Production and Transmission of Heat - geothermal base load plant; expansion/ construction of two gas-fired peak load plants; hot water and gas pipelines; pumping stations; and, land acquisition.
B. Heat Distribution Network Development - two district heat networks; five partial networks; and, network connections.
C. Heat Exchangers, Meters and Connections to End Users
D. Facilities, Tools and Vehicles for Implementing Company
E. Project Management Support - including technical assistance
F. Monitoring and Evaluation

The project description was not formally revised, despite a considerable reduction in project scope.

c. Comments on Project Cost, Financing, Borrower Contribution, and Dates
The appraisal cost estimates were reasonable, but the 4-1/2 year implementation period proved to be too short. A request from the Borrower/ Recipient for a 12 month extension of the closing date for the GEF Grant - but not the Bank Loan - was evidently not accepted by the Bank but this issue is not discussed in the ICR (the Region has subsequently advised that this decision was taken because the Recipient was unable to obtain commitments to connect from two additional towns). The financing plan was complex, with five external sources (including grants and loans and varying procurement requirements) and at least three local sources, and, in retrospect, did not allow sufficient flexibility to account for events like procurement delays and lags between investments and revenues. Conversion of debt into equity by the National Fund for Environmental Protection and Water Management, the principal shareholder in the Borrower/ Recipient company PEC/GP, was necessary to avert bankruptcy of the latter.


3. Relevance of Objectives & Design:

The project's development objective was highly relevant to national development objectives (including pollution reduction, public health, tourism promotion and EU accession) and to the 1997 CAS, which gave priority to achieving environmental sustainability. The global objective was highly relevant to the UN Framework on Climate Change and the Kyoto Protocol, by reducing carbon emissions at low cost. In addition, the project was expected to have a strong demonstration effect, as geothermal heat is not yet widely developed worldwide.

The project financed was essentially the completion of an investment plan begun in 1995 with local funding and which may not have been sufficiently updated, especially on the marketing side. The planned investments were logical but depended critically on a commitment from the second major town, Nowy Targ, which in the event could not be finalized because of a pricing dispute and a new elected town administration. With hindsight, more effort may have been needed at appraisal to get a commitment from Nowy Targ which would have been binding on any subsequent administration, failing which a smaller project could have been designed or possibly an APL approach followed.

4. Achievement of Objectives (Efficacy) :

A commendable and possibly replicable feature of the ICR (in Annex 3) is a kind of "development diamond" for achievement of project objectives - with two axes for local and global environmental benefits (efficacy) and two for economic and financial rates of return (efficiency). As a result of the project, the local environmental objectives were fully met in Zakopane, following the introduction of geothermal heat and, by this measure, the outcome was Satisfactory. However, truncation of the project meant that these benefits could not be fully achieved in Nowy Targ and the smaller towns. Achievement of the global objective - reduction in CO2 emissions - was only 22% of appraisal projections, though this could rise to 31% if some presently foreseen investments are made; still an Unsatisfactory result. There is evidence that the project is having a useful demonstration effect both inside and beyond Poland.

5. Efficiency:

The ICR includes a detailed and thorough re-evaluation of the project's economic and financial rates of return, which compare to the appraisal estimates as follows:

Appraisal Estimate
ICR Estimate (Case 1*)
ICR Estimate (Case 2**)
Econ. Rate of Return***
26.6%
9.3%
8.6%
Financial Rate of Return
(before taxes)
14.0%
-4.0%
1.9%
Financial rate of Return
(after taxes)
11.5%
-5.5%
0.0%
* No further investments. ** Including foreseen investments with local funds. *** Including local (health) and global (carbon) environmental benefits but not possible ecological and tourism benefits.

Given that capital costs were 60% of appraisal estimates (and operating costs a disturbing 85%) while benefits to date are only 22 - 31% of expected values, it is logical that both the economic and financial rates of return are significantly reduced. Nevertheless, the economic results might be considered Moderately Satisfactory. The financial results are clearly Unsatisfactory, even with additional investments, showing the need for continued subsidies and/or debt equity conversions.

A measure of efficiency with respect to global objectives is the unit abatement cost of avoided carbon emissions, which is the primary justification for GEF support. This was estimated at appraisal at $3.16/tonne, while the actual is $3.90 to $5.45, depending on the future development scenario. While higher than expected, these figures compare favorably with benchmarks used in the Prototype Carbon Fund and the EU trading system - a Moderately Satisfactory result.
6. M&E Design, Implementation, & Utilization:

The thorough analysis of the ICR was made possible by a well-designed and implemented project M&E system. An initial weakness - that the M&E agency had not been selected by the time of Board presentation - was overcome and reporting appears to have been regular and comprehensive, although the Borrower comments (in Annex 8) that the monitoring results were used more by the Bank than the project management, which may explain why the project had so many implementation issues. Annex 1 of the ICR sets out a clear comparison between appraisal projections and actual results with respect to the performance indicators, which were well chosen. This is rare in this reviewer's experience and represents Best Practice.
7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative):

Safeguards
As is often the case for environmental projects, Section E.5 of the PAD focuses more on the expected environmental benefits of the (Category B) project, rather than its potential negative impacts. Nevertheless, a detailed and very satisfactory Environmental Management Plan (EMP) (including a monitoring plan, institutional strengthening, equipment and costs) was prepared by a local consultant at the time of appraisal, as well as a Land Acquisition Plan (not available for review). Both plans were mandated for use under the project in the legal documents. PSRs report the status of Environmental Assessment as HS and the other safeguard policies as NA or NR throughout the implementation period but without further explanation. The ICR makes no mention at all of the implementation experience of the EMP and land acquisition plans, including the reasoning behind the HS ratings, and whether any unforeseen environmental or social issues were encountered, though the Region has subsequently advised that the EMP was "well observed" and that there were "practically no issues" with respect to land acquisition.

Fiduciary
Project appraisal identified certain weaknesses in the Borrower/ Recipient's financial management, including the lack of an operating manual, inadequate software and insufficient staff. A condition of Board presentation was that "[minimum] financial systems and controls shall be in place", in accordance with a dated FMS Action Plan in Annex 6 of the PAD. A covenant required the use of a "professional database". Procurement provisions were unexceptional. Financial specialists were included in only two supervision missions. Reporting on these issues in the ICR is sketchy, reflecting the lack of a sub-heading for this subject. Mention is made of: procurement delays due partly to the diverse procurement rules of the various co-financiers; procurement of three gas engines outside the project scope and later found to be uneconomic (though not cited as misprocurement); financial controls that were "not fully adequate"; accounting problems (not specified) pointed out by the auditors; and, the following Borrower comments: ineffective organization and inappropriate management system; the controlling system has not worked well; PEC/GP did not apply any penalties for [contractor] delays; accounting irregularities (booking the cost of fuel into investments, decreasing depreciation allowances and keeping worthless assets on the books); the lack of reliable financial and management information (including, reports "prepared improperly"; and, use of PEC/GP funds to build an "Aqua Park" (later transferred to another body). Unfortunately, the ICR does not evaluate the significance of these problems and what, if any, actions the Bank took with regard to them. We are told that the Management Board was replaced in 2003 but the reasons are not given in the ICR (the Region has since advised that the reason was a lack of trust between company management and the major shareholder).

8. Ratings:
ICR
ICR Review
Reason for Disagreement/Comments
Outcome: 
UnsatisfactoryModerately UnsatisfactoryAs noted in Sections 3 and 4 above, outcomes were mixed - very positive on local air pollution and demonstration effects, marginally so on economic rate of return and unit abatement costs, and negative on total reduction in carbon emissions and financial rates of return. Given that local investments now planned may be able to turn this around somewhat, this review finds that the evidence supports a rating of Moderately Unsatisfactory [a rating which does not exist under the ICR's current 4-point scale].
Institutional Dev.: 
SubstantialModestDespite good technical work, PEC/GP's financial management was weak until its management was replaced in 2003. While it is undoubtedly better now, more time is needed to see if the project has strengthened it sufficiently for its current and future responsibilities.
Sustainability: 
LikelyLikelyFor the reasons advanced in Section 6.1 of the ICR, strong government commitment is likely to ensure that the benefits of the project are maintained, despite any remaining weaknesses in PEC/GP.
Bank Perf.: 
SatisfactoryUnsatisfactoryThe ICR notes a number of deficiencies in Bank performance, especially in underestimating risks at appraisal, and concludes with a Marginally Satisfactory rating in Section 7.1, translated to Satisfactory on page 2. This review finds this rating overly generous, considering the unwarranted DO ratings of Satisfactory and Highly Satisfactory given to the project prior to late-2003 and the Bank's apparent reluctance to use its remedies given chronic noncompliance on the financial performance covenants. On the other hand, supervision teams took effective action to fix many problems.
Borrower Perf.: 
SatisfactoryUnsatisfactoryThe ICR notes a number of deficiencies in Borrower and Guarantor performance, including ham-handed tax policies, ineffective project management until late-2003, and lack of support from a key municipality, and concluded with a "marginally satisfactory" rating in Section 7.2, translated to S on page 2. . This review views these Borrower and Guarantor shortfalls as leading directly to the limited success of the project and therefore warranting an overall rating of Unsatisfactory.
Quality of ICR: 
Satisfactory

NOTES:
- When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006.
- ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness.

9. Lessons:

It would be difficult to add much to the 27 project-specific lessons set out in Section 8 of the ICR. Some general principles of wider application might be:


1. While geothermal heat projects may appear relatively straightforward, this may not be the case in practice. They need a robust business plan, an implementing agency with construction experience and financial know-how and sufficient working capital to provide a cushion against unforeseen events.
2. While geothermal projects may be competitive with fossil fuels when global benefits are monetized, they will not be financially viable unless grants are provided (from GEF or elsewhere) to cover incremental global costs.
3. Governments should not undercut their renewable energy policies with royalties and other taxes.


10. Assessment Recommended?  Yes

          Why?  The main value of an assessment would be to deepen and disseminate the lessons learned for the benefit of other candidate projects in this new area of lending.

11. Comments on Quality of ICR:

With its thorough analysis and clear-sighted views on project weaknesses and Bank and Borrower performance shortfalls, the ICR is close to Exemplary. However, the absence of any discussion on safeguard outcomes and of an evaluative summary on fiduciary issues precludes that rating. Among the best features of the ICR were: the "development diamond" for outcomes (see 4. above); the rigorous approach to economic and financial rates of return; Annex 1, showing actual outcomes against appraisal projections; extensive use of Section 10 on areas of concern to the GEF; and the detailed lessons learned. However, institutional issues were treated more superficially. There also appears to be an inherent discrepancy between the Unsatisfactory outcome rating and the Satisfactory Bank and Borrower performance ratings (given the limited role of factors outside project control) - see Section 8.

(ES-Rev4B-Dec/05)
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