Ethiopia - Northern Ethiopia Power Transmission Project

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AFRICAN DEVELOPMENT BANK AFRICAN DEVELOPMENT FUND

ETHIOPIA

NORTHERN ETHIOPIA POWER TRANSMISSION PROJECT

PROJECT COMPLETION REPORT

COUNTRY DEPARTMENT OCDEEAST REGION FEBRUARY 2000

TABLE OF CONTENTSPage

EQUIVALENTS AND ABBREVIATIONS iLIST OF ANNEXES iiEXECUTIVE SUMMARY iii-vBASIC PROJECT DATA vi-viiiMPDE MATRIX ix-xi

1. INTRODUCTION 1

2. PROJECT OBJECTIVES AND FORMULATION 1

2.1 Sector Goal 12.2 Project Objectives 12.3 Project Formulation 22.4 Preparation, Appraisal, Negotiation and Approval 22.5 Project Description 2

3. PROJECT EXECUTION 3

3.1 Effectiveness and Start-up 33.2 Modifications 33.3 Implementation Schedule 43.4 Reporting 53.5 Procurement 53.6 Financing Sources & Disbursements 5

3.6.1 Project Costs 53.6.2 Source of Financing 53.6.3 Project Disbursements 6

3.7 Performance of the Contractors, Suppliers and Consultant 6

4. PROJECT PERFORMANCE AND RESULT 6

4.1 Overall Assessment 64.2 Operating Results 64.3 Management and Organisational Effectiveness 74.4 Project Management Unit 74.5 Staff Recruitment, Training and Development 74.6 Past Financial Performance 84.7 Tariffs, Billing and Collection 84.8 Fulfilment of Loan Conditions 94.9 Financial Viability 94.10 Economic Viability 10

TABLE OF CONTENTS (contd)

Page

5. ENVIRONMENTAL AND SOCIAL SUSTAINABILITY 10

6. PROJECT SUSTAINABILITY 11

7. PERFORMANCE OF THE BANK AND THE BORROWER, 12

7.1 Performance of the Bank/Fund 127.2 Performance of the Borrower 127.3 Performance of the Executing Agency 13

8. OVERALL PERFORMANCE RATING 13

9. CONCLUSIONS, LESSONS LEARNT AND RECOMMENDTIONS 13

9.1 Conclusions 139.2 Lessons Learnt 149.3 Recommendations 15

___________________________________________________________________________

This report was prepared following a Project Completion Mission by Mr. Babu Ram(Principal Power Engineer) and Mr. Hussein Yusuf Iman (Principal Financial Analyst) toEthiopia during October 1-15, 1999. Any enquiry relating to this report may be referred toeither the authors or Messers: G.Mbesherubusa, Manager OCDE.4 (Extension 4131) andA.D. Mtegha, Director, OCDE (Extension 4056).

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EQUIVALENTS AND ABBREVIATIONSCurrency Equivalents

PCR Appraisal

1 UA = US$ 1.38072 1.472841 UA = Birr 11.0760 7.155851 US$ = UA 0.72426 0.755351 US$ = Birr 8.00005.000001 Birr = UA 0.0.0929 0.13975

WEIGHTS AND MEASURES

1 Km = Kiliometer = 1000 meters1 kV = Kilovolt = 1000 volts1 KVA = Kilowatt = 1000 watts1 KVA = Kilovolt ampere = 1000 volt ampere1 MW = Megawatt = 1000 KW1 GW = Gigawatt = 1000 MW1 MVA = Megavolt = 1000 kVA1 KWh = Kilowatt hour = 1000 watt hour1 MWh = Megawatt hour = 1000 kWh

FISCAL YEARJuly 8th July 7th

ABBREVIATIONS

ADB = African Development BankADF = African Development FundNEPTP= Northern Ethiopia Power Transmission ProjectEELPA = Ethiopian Electric Light & Power AuthorityEEPCO = Ethiopian Electric Power CorporationERESA = Ethiopian Airlines EnterpriseEIRR = Economic Internal Rate of ReturnFIRR = Financial Internal Rate of ReturnGOE = Government of EthiopiaICS = Interconnected SystemSCS = Self Contained SystemMEDAC = Ministry of Economic Development and Co-operationLRMCS = Long Run Marginal Cost of SupplyUA = Unit of AccountIDA = International Development AssociationSMI = Small & Medium IndustriesQPR = Quarterly Progress Report

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LIST OF ANNEXES

AnnexNo. No. Pages

1. Map of Ethiopia 1

2. Actual Implementation Schedule 2

3. Past Financial Performance 2

4. Financial Projections 2

5. Categories of Expenditure 1

6. Projected and Actual Funds Disbursed by Source of Finance 1

7. Performance of contracts and consultant 5

8. EEPCO PMU Chart 1

9. Loan Conditions 2

10. Assumptions for Recalculation of FIRR and EIRR 3

11. Calculation of Financial and Economic Rate of Return 2

12. Overall Performance Rating 4

13. Matrix of Recommendation 5

14. Sources of Information 1

15. Borrower's PCR

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ETHIOPIANORTHERN ETHIOPIA POWER TRANSMISSION PROJECT

EXECUTIVE SUMMARY

1. The Northern Ethiopia Power Project (NEPTP) was conceived by the TransitionGovernment of Ethiopia (GOE) in March 1992 in order to supply cheap and reliablehydroelectric power to the Northern Region (Project Area). Within three years of itscompletion and commissioning, the project would i) cater to an industrial demand of 40 MWand ii) supply electricity to 30,000 new residential consumers.

2. The design of the project was reviewed and optimised by the consultant, and thebidding documents for procurement of the goods were prepared on the basis of the reviseddesign. The revised design has certainly enhanced the technical soundness and sustainabilityof the project. It has also led to an appreciable cost reduction.

3. The Project Components given in the Appraisal Report are the construction of 230kV,132kV, 66kV transmission lines, 15kV distribution line, distribution networks, substationsfor the 230, 132, and 66kV lines, logistics and consultancy services. The Bank approved thechanged scope of works, revision of goods and services, and allocated UA 10.25 Million tothe distribution component because the executing agency maintained that the originalallocation of UA 2.29 million was inadequate.

4. The project was commissioned on June 6, 1998 and the completion was 28 month latebehind the scheduled date given in the appraisal (end of December 1995). The project hasregistered a time overrun of 183%. The major causes of delay were (a) ineffectiveness of theloan, (b) delayed selection of consultant, (c) inefficient evaluation of bids and submission ofrecommendations to the Bank and (d) the late completion of the contracts.

5. The quality of the commissioned project is generally acceptable.

6. The cost of the completed project is UA 70.26 Million (FE UA 46.65 Million andLocal Costs UA 23.61 Million), which is 97.74 % of the appraisal estimates. The project wascompleted within the cost approved by the Bank and therefore did not register any cost over-runs.

7. The beneficiary and the executing agency of the project was the Ethiopian ElectricLight and Power Authority (EELPA); re-established since June 1997 as the Ethiopian ElectricPower Corporation (EEPCO) with the purpose of engaging in the business of producing,transmitting, distributing and selling electricity. The re-structuring enabled EEPCO to operateas an autonomous commercial organisation with the ability to design its own tariffs,organisational structure, personnel management, finances and procurements.

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8. The NEPTP project has been completed with 85% (17 towns out of twenty) of theproject towns connected to the grid. The three towns still awaiting access to electricity areAdi Shohu, Adi Godum, and Bizet, which should be connected to the grid by June 2000. Nosignificant technical risk was anticipated at Appraisal. The implementation of the project, ingeneral, followed the guidelines given in the Appraisal.

9. The executing agency complied with sixty percent (six out ten) of the loan conditions.However, four significant financial covenants relating to re-valuation of fixed assets,reduction of the high level of receivables, reduction of arrears owed to EEPCO, andimplementation of tariff based on 5% minimum rate of return on re-valued assets, have notbeen complied fully and require to be fulfilled.

10. The overall financial performance and capital structure is solid and shows positivetrend. The financial performance of EEPCO for (1993-1998) has improved as measured by a)return of fixed assets, b) net profit margin, c) operating ratios, and d) liquidity ratios. The rateof return on fixed assets improved from a negative of 4% to a positive of 12% in 1998. Forthe same period, net profit margin improved from a negative 39% to positive 49%. EEPCO'sdebt to equity ratio averaged 56.3% indicating the institution is conservatively capitalised.This improved financial performance has enabled the corporation to meet its operationalcosts, service its debt, and finance part of its capital expenditure. Further, improvement infinancial performance is expected provided that it complements its cost reduction efforts witha gradual tariff increase, customer service improvement and increased sale of electricity.

11. The recalculated financial rate of return of the project is 11.42% as compared to theforecasted FIRR of 11.5% at appraisal. The recalculated FIRR of 11.42% comparesfavourably with the estimated rate of return of 11.5% at appraisal and is well above the 10%average cost of capital required by EEPCO for new projects. The revised Economic InternalRate of return (EIRR) of the project is 17.75%. This is well above the long-term lending rate,in Ethiopia, estimated at 11%.

12. The Projects overall negative impact on the environment was negligible. To thecontrary, it had a significant positive impact on the environment. This was a result ofutilisation of cheap and renewable hydroelectricity, which displaced the use of imported oilused for running diesel generators and traditional cooking firewood. The industrial activity inthe Northern Region has increased and has created new opportunities for employment andgrowth and has, therefore, improved the income and quality of life in the project area.

13. The continued sustainability of the project will depend on EEPCOs ability to i)reduce costs and increase tariffs, ii) maintain effectiveness in carrying out its operations, iii)pay its debt, and iv) finance part of its expansion program.

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Issues that require to be addressed

1. EEPCO needs to be m

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