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Implementation Completion Report (ICR) Review - North-south Electricity Transmission Project


  
1. Project Data:   
ICR Review Date Posted:
11/04/2013   
Country:
Kazakhstan
PROJ ID:
P095155
Appraisal
Actual
Project Name:
North-south Electricity Transmission Project
Project Costs(US $M)
 160.6  142.3
L/C Number:
L4805
Loan/Credit (US $M)
  100.0  98.1
Sector Board:
Energy and Mining
Cofinancing (US $M)
 56.5  42.1
Cofinanciers:
Development Bank of Kazakhstan (DBK) , EBRD
Board Approval Date
  10/27/2005
 
 
Closing Date
12/31/2009 11/30/2011
Sector(s):
Power (100%)
Theme(s):
Infrastructure services for private sector development (40% - P) Regional integration (20% - S) Other financial and private sector development (20% - S) Regulation and competition policy (20% - S)
         
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Ramachandra Jammi
Roy Gilbert Soniya Carvalho IEGPS1

2. Project Objectives and Components:

a. Objectives:
The Project Appraisal Document (B.2, Technical Annex 3 and Page 6) and the Loan Agreement (page 15), state the project objective as to "Ensure that business enterprises and households in southern Kazakhstan have access to reliable, cost effective and high quality supply of electricity; and support regional integration with respect to optimizing the use of energy resources through international electricity trade..

b. Were the project objectives/key associated outcome targets revised during implementation?
No

c. Components:
Original Components:

Component A. Construction of 500 kV Overhead Single Circuit Transmission Line. (Planned: US$113.8 million; Actual: US$84.5 million). Expanding the existing 500 kV Sub-Stations (SS) at Agadyr by six bays to accommodate the new 500 kV link with the Ekibastuz and YukGRES sub-stations. Three new shunt reactors would be installed with two shunt control reactors connected to the busbar and the third shunt reactor connected to the Agadyr-YukGRES line. Installation of shunt reactors was intended to improve the stability of the power grid and regulate voltage conditions of the transmission system.
Component B. Extension/Modernization of 1,150/500 kV Ekibastuz Air-Insulated Substation
(Planned: US$13.2 million; Actual: US$10.5 million). Expanding the existing 1,150/500 kV sub-station at Ekibastuz by three bays and installing shunt reactors to accommodate the new 500 kV link with Agadyr sub-station. Installation of shunt reactors was expected to improve the stability of the power grid and regulate voltage conditions of the transmission system.
Component C. Extension/Modernization of 500 kV Agadyr Air-Insulated Substation. (Planned: US$32.7M; Actual: US$32.65M). Expanding the existing 500 kV sub-station at Agadyr by six bays to accommodate the new 500 kV link with the Ekibastuz and YukGRES sub-stations. Three new shunt reactors would be installed with two shunt control reactors connected to the busbar and the third shunt reactor connected to the Agadyr-YukGRES line. The work would include installation of SF6 circuit breakers, disconnect switches, current and voltage transformers shunt reactors, and sub-station automation and protective relaying as well as PLC. Installation of shunt reactors was intended to improve the stability of the power grid and regulate voltage conditions of the transmission system.
Component D. Technical Assistance. (Planned: US$0.90M; Actual: US$0.59M). Consulting services for (i) procurement and project management for the construction of the 500 kV OHL between Ekibastuz and Agadyr (estimated cost US$0.5 million financed by the Bank) and (ii) further reforms of the transmission sector (estimated at US$0.4 million), including transmission pricing (zonal tariffs) and establishment of a real time balancing market.
Component E. (revised component/added during implementation): Modernization of Sub-Stations
(US$13.99 million). Modernize 27 high voltage sub-stations which were originally included in the Rehabilitation Project, which experienced a financing gap due to the large depreciation of the US$ against the Euro; and (ii) reduction of the IBRD loan-financed portion of the existing Component A “Construction of Transmission Line Agadyr-Ekibastuz” by the same amount.

Project Restructuring - Component E: In January 2009, following a request from the borrower, the North-South Transmission Project was restructured to add Component E as described above. This revision was consistent with the original project objectives that did not require any changes. Under the restructuring, an unfinished portion of the earlier Electricity Transmission Rehabilitation Project (Loan No. 4526- KZ) was transferred to the North-South Transmission Project for full completion. The two Bank-financed transmission projects were closely connected, with the same outcome of improved reliability and quality of electricity supply to businesses and households.

d. Comments on Project Cost, Financing, Borrower Contribution, and Dates
Project Costs and Financing: Actual project costs at US$142.3 million were 11.4% less than the planned US$160.6 million. This was due to KEGOC (Kazakhstan Electricity Grid Operating Company) using its own funds to finance the VAT (value-added tax) component (US$10.7 million); and from the cancellation of US$1.9 million through savings from the IBRD loan. The winning bid for the North-South Transmission Line was US$5.7 million lower than the original cost estimate and these savings were used to partly finance the new Component E. Planned EBRD co-financing of US$13.1 million was not used. The actual Borrower contribution was US$2.3 million, about half of the planned US$4.3 million.

Dates: The closing date was extended by 23 months to November 30, 2011 so that the remaining 27 sub-stations under the new Component E (added in January 2009, or 11 months before the original closing date) could be completed and commissioned.


3. Relevance of Objectives & Design:

a. Relevance of Objectives:
Improvements in infrastructure including the power sector were priorities in the Bank’s Country Partnership Strategies (CPS) for FY05-11 and FY12-17. Relieving the infrastructure constraints to growth including the power sector was a key component of the FY05-11 CPS. The CPS FY12-17 spells out the country development goal of developing infrastructure connectivity to reduce economic distance and the outcome of improving energy transmission to poor areas. Although the Government has reduced its sovereign guaranteed borrowings in recent years, it continues to provide sovereign guarantees for KEGOC’s program of transmission system expansion and upgrading, thereby demonstrating the strategic importance that it assigns to these initiatives. This project was also consonant with the Government's development strategy for its national power grid for 2007-2015. The strategy includes a list of seven projects aimed at reconstruction, reinforcement and modernization of the national power grid, which links not only regions within the country, but also aims at strengthening the energy interconnections with the neighboring Central Asian countries.

Overall, the relevance of the project objectives was high.

b. Relevance of Design:
The results chain was clear and logical. The project outputs - a 500 kV Overhead Single Circuit Transmission Line; extension/modernization of several substations; and capacity-building through technical assistance – would provide households and businesses in southern Kazakhstan directly with greater access to reliable, cost effective and high quality supply of electricity, while also supporting regional integration and international electricity trade. By helping develop a “Balancing Market” for electricity (an economic mechanism by which Brokers buy and sell the final increments of power needed to achieve balance in the current timeslot) the project would support regional integration for optimizing the use of energy resources through international electricity trade.

Overall, the relevance of the design is rated high.


4. Achievement of Objectives (Efficacy) :

Objective 1: Ensure that business enterprises and households in southern Kazakhstan have access to reliable, cost effective and high quality supply of electricity. Rated Substantial.


The project increased the volume of electricity transfer and reduced the number of major outages (an outage is a short- or long-term loss of the electric power to an area; however neither the PAD nor the ICR specify what is meant by a ‘major’ outage). The project increased the maximum transmission capacity to southern Kazakhstan through the North-South connector from 650MW to 1350MW as targeted. The volume of electricity transfer from generating plants in northern Kazakhstan to markets in southern Kazakhstan through the North/South interconnector was increased from 3.9 Twh (terawatt-hours) to 7.5 Twh, also as targeted. The frequency of major outages was reduced from 13 to 6, exceeding the target of 8. Transmission losses on the North-South connector were reduced from 8.8% to 7.6% but were yet to meet the target of 6.5% As mentioned in the section on M&E below, the project could have tracked the number of households and businesses that experienced more reliable electricity service as a result of the improvements from the project.

Regarding quality of electricity supply, the ICR notes that there are no longer any quality of service issues with fluctuations of voltage and frequency at the high voltage level.

The results framework did not include a specific outcome indicator for cost-effectiveness. However the ICR reports that the expansion of the N/S transmission line allows more effective use of low-cost generating plants in northern Kazakhstan, though a measure of increase effectiveness is not been provided in the ICR. The ICR also notes that cost-effectiveness of electricity supply has improved through reduced frequency of outages and reduction in losses.

Objective 2: Support regional integration with respect to optimizing the use of energy resources through international electricity trade. Rated Substantial.

The Project has provided substantial additional regional electricity transfer capacity of 700MW to support electricity trade among, Kazakhstan, other Central Asian countries, and Russia. The Balancing Market introduced by the project has been operating in trial mode since January 2008. However the current load-following generation capacity is insufficient to launch the Balancing Market at this time. The Project has provided non-discriminatory third party access to the transmission grid. The new tariff methodology is also consistent with the Guarantee Agreement by not including in the tariff structure a distortionary geographic (distance-based) component between sellers and buyers of electricity.


5. Efficiency:

The Bank-financed investment represented one segment of a three-phase overall transmission line project, However, the economic and financial analysis at appraisal examined the viability of this investment in the context of the of the entire North-South transmission line. The same approach was adopted for the ex-post evaluation. The primary economic benefits of the project accrued through the availability of additional low-cost power to customers in southern Kazakhstan. The other economic benefit of the project is the value of avoided transmission losses in the overall KEGOC transmission system. The project costs were the capital cost of the project, annual operating and maintenance costs, including wages, materials and property taxes, periodic major maintenance of lines and substations and the cost of technical losses on incremental volumes transmitted on the new line. At completion the ERR is estimated at 15.5%, compared to 21.4% at appraisal.

The project disbursement was delayed by three quarters of a year from the planned start of the first quarter of 2007. However, the project components A-D were completed earlier than planned and with substantial cost savings. The overall delay of 23 months in project completion was mainly due to the extra time needed to complete the tasks under the new Component E that was added to this project 11 months before its original completion date. Component E was transferred and largely funded from a parallel project (Electricity Transmission Rehabilitation Project: Loan No. 4526- KZ), and supplemented by savings from Components A-D.

Efficiency is rated substantial.

a. If available, enter the Economic Rate of Return (ERR)/Financial Rate of Return at appraisal and the re-estimated value at evaluation:


Rate Available?
Point Value
Coverage/Scope*
Appraisal:
Yes
21.4%
100%
ICR estimate:
Yes
15.5%
100%

* Refers to percent of total project cost for which ERR/FRR was calculated

6. Outcome:

Relevance of objectives is high in terms of southern Kazakhstan’s electricity needs, alignment with Bank strategy, and country priorities. With a clear results framework, relevance of project design is rated high. The achievement of the first objective is rated substantial for meeting the outcome targets of volume of electricity transfer, but with some shortcomings in meeting the target for transmission losses. The second objective is rated substantial because although the pilot mechanism and regulatory framework for the Balancing Market is in place, its actual operation cannot be demonstrated until sufficient surplus power becomes tradable on it. Efficiency is rated substantial given the positive flow of net benefits demonstrated by the ERR at project completion, though somewhat lower than the appraisal estimate; completion of project activities at a lower cost than planned; completing the original components of the project on time; while taking into account the delayed start of project disbursements. Overall outcome is rated Satisfactory.

a. Outcome Rating: Satisfactory

7. Rationale for Risk to Development Outcome Rating:

According to the ICR, Kazakhstan’s electricity sector has well-established technology, staff skills and capacity, and local availability of equipment. The sector regulator has consistently allowed tariff increases to cover KEGOC’s full operating costs. As a result, the company’s overall financial position is currently sound. Governance risks are moderate. KEGOC has a strong and capable management team, which has enjoyed the support of the government agencies, and has experienced little political interference to date. The technical assistance for the Balancing Market is likely to be fully utilized only when sufficient electric power becomes available for trading.

a. Risk to Development Outcome Rating: Moderate

8. Assessment of Bank Performance:

a. Quality at entry:
Project design was based on sound technical, economic and financial analysis by a Bank team with the necessary skills including specialists in electricity markets, engineering, procurement, environment and financial management. The project used tested technologies, and drew upon lessons from the earlier Kazakhstan Transmission Rehabilitation Project (Loan IBRD-45260) and other similar projects in the Europe and Central Asia Region. The Bank team recommended measures to supplement and enhance the capacity of the implementing agency by hiring a project management consultant with international experience and improving implementation of environmental safeguards.

Quality-at-Entry Rating: Satisfactory

b. Quality of supervision:
Supervision missions were carried out regularly and frequently (two per year). Adherence to the project’s Environmental Management Plan was monitored regularly by the Bank’s environmental specialist, and fiduciary management was monitored by the Bank’s financial management and procurement specialists. A good working relationship was maintained with KEGOC, the government, and government and the co-financiers.

Quality of Supervision Rating: Satisfactory

Overall Bank Performance Rating: Satisfactory

9. Assessment of Borrower Performance:

a. Government Performance:
The government – the owner of KEGOC - fulfilled the project-specific covenants of its Guarantee Agreement, namely to (a) ensure that KEGOC’s tariffs are maintained at levels sufficient to fully cover the company’s cash flow requirements; (b) approve by the first quarter of 2006 the implementation of a transmission tariff-setting methodology based on the concept of zonal tariffs. Other covenants relating to establishing a real-time balancing market to be operated by KEGOC based on transparent market rules by December 31, 2007; and cause KEGOC to ensure the implementation of open third party access to the North-South transmission line were also implemented, though the Balancing market was still operating in a trial mode at project completion as explained under objective 3 in Section 4 on Efficacy.

Government Performance Rating: Satisfactory

b. Implementing Agency Performance:
The implementing agency KEGOC successfully utilized technical experience gained under the earlier Electricity Transmission Rehabilitation Project (Loan No. 4526- KZ) to implement the current project. KEGOC provided a team of highly qualified personnel specializing in technical, commercial and financial management under its project management unit. The implementing agency consistently complied with the covenants in the Loan Agreement, including the submission of quarterly financial reports and annual financial audits, as well as with the financial covenants. In September 2007, KEGOC provided a comprehensive Mid-Term Review, which was reviewed by the Bank team and found to be satisfactory.

Implementing Agency Performance Rating: Satisfactory

Overall Borrower Performance Rating: Satisfactory

10. M&E Design, Implementation, & Utilization:

a. M&E Design:
The outcome and intermediate indicators developed for the project as detailed in section 4 on efficacy were adequate to measure progress towards achieving the project development objectives. KEGOC was responsible for and involved in the design of the M&E framework. The project could have provided a clearer picture of improved reliability of power supply by tracking the number of households and businesses that experienced more improved electricity service as a result of the project.

b. M&E Implementation:
KEGOC regularly collected appropriate data on the outcome and intermediate indicators and ensured information quality using data from KEGOC’s own reliable annual operating statistics and dispatch center reports. KEGOC prepared comprehensive, accurate and transparent annual reports.

a. M&E Utilization:
KEGOC’s Project Management Department regularly collected the appropriate data on the outcome and intermediate indicators and ensured information quality, using data from KEGOC’s annual operating statistics and Dispatch Center reports. The Project Management Department provided Financial Monitoring Reports within 45 days of the end of each quarter. KEGOC prepared comprehensive, accurate and transparent Annual Reports, which were used for management decision making, and enhanced KEGOC’s reputation as a reliable and financially stable partner, enabling the company to raise substantial financial resources from international financial institutions. M&E indicators have been adopted for regular use by KEGOC, and, according to the ICR, it is likely that data will continue to be collected in the future.

M&E Quality Rating: Substantial

11. Other Issues:

a. Safeguards:
The project was classified as Category ‘B’ under the Bank’s environmental and social safeguards policies. Environment Assessment was the sole policy that was invoked. KEGOC prepared an Environmental Management Plan for each transmission line segment and implemented an effective environmental monitoring system for the required mitigation actions at each stage of the project. The ICR states that the Bank’s team regularly monitored the conduct of the Environmental Management Plan and confirmed that KEGOC carried it out in a satisfactory manner. The ICR also states that KEGOC fully complied with the Bank’s environmental safeguard requirements as well as Kazakhstan’s environmental protection regulations. No social safeguard policies were invoked.

b. Fiduciary Compliance:
KEGOC complied with the Bank’s fiduciary policies and financial management (FM) requirements and complied with the financial covenants of the Loan Agreement. Audits of financial statements were unqualified. Procurement under the project was implemented in accordance with the Bank’s Guidelines as well as the provisions stipulated in the Loan Agreement.

c. Unintended Impacts (positive or negative):

d. Other:



12. Ratings:

ICR
IEG Review
Reason for Disagreement/Comments
Outcome:
Satisfactory
Satisfactory
 
Risk to Development Outcome:
Moderate
Moderate
 
Bank Performance:
Satisfactory
Satisfactory
 
Borrower Performance:
Satisfactory
Satisfactory
 
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.
- The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate.

13. Lessons:
Even in situations where technical and management capacity of implementing agencies is apparently strong, the quality at entry process should ensure that all institutional aspects are adequately covered. In this project, capacity of the implementing agency was supplemented by a project management consultant with international experience, including the implementation of environmental safeguards.
  • Technical assistance should be timed to be utilized and mainstreamed in a timely manner so that the gains are maximized and retained. In this project the Balancing Market can become fully functional only after sufficient electric power becomes available for trading.

The following lessons are adapted from those in the ICR.
  • Continuity in the composition of a Bank project team is an important factor in the smooth implementation of a complex project, allowing for a stable working relationship with the Borrower and implementing agency.
  • .Where multiple co-financiers/donors are involved, coordination between them and with the Bank is crucial for the timely implementation of a project

14. Assessment Recommended?

Yes
Why?
This project is a good example of a well designed and implemented electricity transmission project. This project could form one of a cluster of similar projects to draw collective lessons for other countries or regions.

15. Comments on Quality of ICR:

The ICR is concise, clearly written, analytical, and assesses the project’s performance in an objective manner. The ICR discussion pays adequate attention to the project outcomes, alongside the discussion of outputs and intermediate outcomes. It could have drawn more compelling lessons from the project experience.

a. Quality of ICR Rating: Satisfactory

(ICRR-Rev6INV-Jun-2011)
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