Document of The World Bank FOR OFFICIAL USE ONLY Report No: 25944 IMPLEMENTATION COMPLETION REPORT (CPL-37370) ON A LOAN IN THE AMOUNT OF US$ 26.4 MILLION TO THE REPUBLIC OF LITHUANIA FOR POWER REHABILITATION PROJECT JUNE 17, 2003 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective February 11, 2003) Currency Unit = Litas (LTL) 1 LTL = US$ 0.31 US$ 1 = LTL 3.23 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS CBEM Common Baltic Electricity Market CHP Combined Power and Heat Plant EPC Energy Prices Commission ERR Economic Rate of Return FSU Former Soviet Union INPP Ignalina Nuclear Power Plant LE Lietuvos Energija (Joint Stock Power Company, LPC) LPC Lithuanian Power Company OPGW Optic Power Ground Wire QAG Quality Assurance Group SAL Structural Adjustment Loan SBA Stand-by Arrangements SDH Synchronous Digital Hierarchy Vice President: Johannes F. Linn Country Director: Roger W. Grawe Sector Manager: Henk Busz Task Team Leader: Gary Stuggins LITHUANIA POWER REHABILITATION PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 11 6. Sustainability 13 7. Bank and Borrower Performance 14 8. Lessons Learned 15 9. Partner Comments 17 10. Additional Information 18 Annex 1. Key Performance Indicators/Log Frame Matrix 19 Annex 2. Project Costs and Financing 21 Annex 3. Economic Costs and Benefits 23 Annex 4. Bank Inputs 26 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 28 Annex 6. Ratings of Bank and Borrower Performance 29 Annex 7. List of Supporting Documents 30 Annex 8. Borrower's Contribution to the ICR 31 Annex 9. Summary Financial Statements of LPC, 1994-2001 35 Project ID: P008537 Project Name: POWER REHAB Team Leader: Gary Stuggins TL Unit: EWDEN ICR Type: Core ICR Report Date: June 17, 2003 1. Project Data Name: POWER REHAB L/C/TF Number: CPL-37370 Country/Department: LITHUANIA Region: Europe and Central Asia Region Sector/subsector: Power (98%); Central government administration (2%) Theme: Infrastructure services for private sector development (P); Regulation and competition policy (S) KEY DATES Original Revised/Actual PCD: 01/15/1993 Effective: 06/25/1994 11/21/1995 Appraisal: 01/24/1994 MTR: 05/10/1999 Approval: 05/24/1994 Closing: 06/30/1999 07/01/2002 Borrower/Implementing Agency: GOVERNMENT OF LITHUANIA/Lietuvos Energija Other Partners: STAFF Current At Appraisal Vice President: Johannes F. Linn Wilfried P. Thalwitz Country Director: Roger W. Grawe Basil G. Kavalsky Sector Manager: Henk Busz Dominique Lallement Team Leader at ICR: Gary Stuggins Achilles Adamantiades ICR Primary Author(s): Gary Stuggins 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome:S Sustainability:HL Institutional Development Impact:H Bank Performance:S Borrower Performance:S QAG (if available) ICR Quality at Entry: S S Project at Risk at Any Time: Yes 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: Background At the time of appraisal of the project, Lithuania was three years into a program or political, social and economic reform following the restoration of national independence in 1990. Substantial progress had been made in transition to a market economy, most notably in the areas of price reform, privatization, trade reform and social safety net design. The decline in real GDP which followed Lithuania's separation from the Soviet Union was being arrested, and by the end of 1994 the economy was growing. The hyper-inflationary rise in prices was starting to abate. A new national currency had been introduced and was pegged to the U.S. dollar by means of a currency board arrangement. The Government had made constructive use of standby agreements with the IMF and a Rehabilitation Loan from the World Bank. However, as in other transition economies, the exposure of the various sectors of the economy to market conditions was painful, and the progress of reform was hindered by the weakness of the banking sector, the limited application of effective accounting standards and bankruptcy/liquidation provisions, the persistence of significant inter-enterprise arrears, and the widespread use of subsidies to protect the population from the short-term effects of transition. As in other former Soviet Union (FSU) economies, the Lithuanian energy sector was both economically highly significant and politically very visible. Lithuania has no significant indigenous supplies of primary energy and was at the time almost wholly dependent on Russia for supplies of oil and gas. The ending of cheap supplies of primary energy at a time of stagnant or falling personal incomes placed predictable strains on the enterprises in the sector, on domestic and industrial consumers, and, particularly, on the State budget. The difficulties of consumers were increased by Lithuania's historically high energy intensity and by the fact that there were few incentives for energy efficiency and conservation. The electricity sub-sector was also distinguished by the lopsided structure of the supply/demand equation. The restoration of independence found Lithuania in possession of two very large generating assets--the 1800 MW thermal power station at Elektrenai, commissioned in the 1960s, and the 2600 MW nuclear power station at Ignalina, whose two units were commissioned during the 1980s. Both of these were constructed to serve the electricity needs, not of Lithuania, but of the north-west region of the USSR, and either was capable of serving Lithuania's entire electricity needs virtually unaided. Indeed, even since 1990 Lithuania had continued to be a major source of power for neighboring countries, particularly Belarus, Russia and Latvia. Given the relative cost structures, Ignalina Nuclear Power Plant (INPP) had been the base load plant at all times that it had been available, contributing about 80% of total electricity output, with supplies also being provided by the CHP plants at Vilnius, Kaunas and Mazeikiai. Elektrenai has served primarily as reserve capacity. The international community, represented by the G7 Nuclear Safety Account administered by the European Bank for Reconstruction and Development (EBRD), had focused for some years on finding modalities which would allow all reactors of the RBMK type (as in Chernobyl) to be closed down safely. INPP has two such reactors, and agreement was reached with the Government of Lithuania that the older of these would be decommissioned by 1998. It was in the light of this expectation that Lithuania's future generating needs were assessed in 1994. The other critical factor in the electricity sector was the need to adapt institutional structures to the requirements of a modern market economy. All the country's electricity generation, transmission and distribution assets belonged to the Lithuanian Power Company, except for Ignalina Nuclear Power Plant - 2 - which was and remains a separately-held State company. During project implementation, Lithuania's objective of membership of the European Union became an important objective. Physical rehabilitation, therefore, would need to be paralleled by the unbundling and reform of what was, at the time of appraisal, a vertically- and horizontally-integrated, State-owned monopoly. Thus, considerable legal and regulatory changes were required to permit the development of an efficient and competitive electricity sector. The project concept, therefore, was based on the need to update thermal capacity and to put in place the improvements in dispatch, transmission, communications and institutions which would allow the electricity industry to function in the emerging market environment. Objectives of the Project i. Improve the operating safety, efficiency, reliability, and environmental performance of the electricity generating system, thus reducing the amount of imported fuel needed for its operation; ii. Improve the safety, reliability and flexibility of the electricity transmission system, thus reducing power disruptions and facilitating economic load management; and iii. Support the restructuring and commercialization of LPC (at the time of loan effectiveness, the corporate entity was Lietuvos Valstybines Energetikos Sistemos, or Lithuanian State Power System (LSPS). It was renamed Lietuvos Energija or Lithuanian Power Company (LPC) in 1995. In this report the abbreviation LPC is used throughout, except when use of the legally exact name is necessary for clarity in explaining changes in corporate structure.) The project objectives were clear and fully consistent with both the Bank's country assistance strategy and its 1994 Energy Sector Review (11867-LT). They were important for the electricity sector, representing an appropriate response to the critical priorities and changing situation in the sector, in particular the phased shutdown of Ignalina NPP which was expected to cause a significant change in the structure of generating capacities from 1998 onwards. Furthermore, the modernization of dispatch and transmission in parallel with the restructuring of the power sector would be important elements in the development of national and regional power markets. 3.2 Revised Objective: The objectives of the project were not formally revised during its lifetime. The deferral, subsequent to appraisal, of the Ignalina closure program was not judged to be a reason for revising project targets. However, the reallocation of those portions of the loan originally intended to fund the Mazeikiai rehabilitation and the upgrading of the Dispatch Center permitted an increased focus on the upgrading of the communication and control systems to get the full benefit of the enhanced Dispatch Center. 3.3 Original Components: The Project included three components to be implemented under the direction of LSPS: i. Rehabilitation of two thermal plants: unit 6 at the Elektrenai Thermal Power Station and two units (2X80 MW) at the Mazeikiai combined-heat-and-power (CHP) station. It was intended that these measures should increase the operational efficiency, reliability, safety and environmental performance of these plants. The scale of the benefits expected from the rehabilitation was predicated on the eventual closure of the Ignalina nuclear power plant and the consequent need for additional thermal units in the system. The main packages for Elektrenai included: (a) control system modernization of Unit 6 (300 MW); (b) installation of low NOx burners for boilers 6A & 6B; and (c) installation of motor operated control valves for steam and water pipes. Broadly similar investments were planned for Mazeikiai. Technical assistance for the design and - 3 - commissioning of these installations, as well as on site training, were also foreseen. ii. Upgrading of the electricity system, including upgrading of the dispatch center in Vilnius, system communications and control equipment, and replacement equipment at high-voltage transmission substations. It was expected that the upgrading of the dispatch center would improve operational functionality by applying a state-of-the-art Supervisory Control and Data System (SCADA) with modern hardware and advanced software. Upgrading of the communication system subcomponent with the removal of existing limitations was essential for the real-time control and operation of the power system. The main packages in the communications subcomponent included installation of: (a) integrated voice/data wide area network; (b) microwave links (digital radio relay equipment); (c) optic power ground wire (OPGW) type optical cables on various 330-110 kV overhead electric lines with eventual ring of optical cables; (d) synchronous digital hierarchy (SDH) equipment and network. The transmission subcomponent focused on the Kaunas 330/110/10 kV substation and included installation of: (a) 125 MVA power autotransformers - 2 units; (b) switchgear equipment with relevant current, voltage transformers and surge arresters; (c) protection relays and control equipment. These transmission upgradings were well justified since replacement of existing old equipment was mandatory if service disruptions were to be avoided. Technical assistance for the design, commissioning and training for these installations was also necessary. iii. Restructuring of LPC and other technical assistance for consultants' services to perform technical studies, project engineering, and management. This component provided consulting services to LPC to assist in its transition from a centrally controlled entity in a command economy towards greater market orientation. The restructuring would include the transfer of the district heating utilities to municipal ownership, the improvement of accounting and management information systems and the phased implementation of the Government's Energy Sector Action Plan. Assistance would also be provided in the development of the regulatory framework, in an Electricity System Communications Strategy Study, and in project management and implementation. 3.4 Revised Components: The first amendment to the loan agreement (1997) was necessitated by a recognition that sales of heat by Mazeikiai Elektrenai to the neighboring oil refinery were, and were likely to continue to be, at such a low level compared to the level projected at appraisal that the economic justification for investment there had been undercut. This part of the loan was therefore cancelled, and efforts in the generation area focused exclusively on Elektrenai. Furthermore, in the same year, and following an abortive tendering exercise, LPC decided to finance the Vilnius Dispatch Center component from its own resources. The funds originally provided for these two components were reallocated, firstly to a major expansion of the communication and control system component, and secondly to an increase in the transmission system element involving accelerated reconstruction of 110kV and 330kV substations. 3.5 Quality at Entry: At the time of appraisal, the Bank did not carry out prior QAG assessments of projects. However, Bank management judged that the project objectives were consistent with the Bank's strategy in Lithuania in 1994, as well as with the Government's priorities at that time, and that project design took appropriate account of these and of lessons learned from other projects in the sector and region. - 4 - To a considerable extent the investments were predicated on an early shutdown of the INPP units--an Agreement with the Nuclear Safety Account (NSA) administered by the European Bank for Reconstruction and Development (EBRD) envisaged the retirement of Unit 1 as early as 1998. In the event it was agreed during Lithuania's entry negotiations with the European Union that the closure date should be deferred by approximately seven years. However, while this arguably rendered the Elektrenai rehabilitation premature, the project as a whole was well founded and appropriate to its time. Perhaps most importantly, the rehabilitation model developed at Elektrenai and the experience of implementing it will be invaluable when the time comes to rehabilitate the other units. The project was given a satisfactory rating based on the results. The project was designed to help stabilize the reliability of power supply and move the company in the direction of commercial viability. Both of these targets have been achieved, with the commercialization aspects exceeding the original expectation. The proposed technical assistance was an important component in supporting both the company and the Government to achieve commercialization of the sector, enabling Lithuania to meet EU Directives early in its EU Accession process. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The overall outcome of the project is rated as satisfactory. All foreseen objectives and development outcomes were fully achieved, though with some changes and delays. Generally, the project components brought the desired benefits and these will become more apparent in the coming years as the radical restructuring and unbundling of LPC carried out in 2001-2002 transforms the sector. The new communications system enables the company to provide essential information for the operation of the Lithuanian electricity market and for the eventual Baltic common electricity market. The project will contribute to the future interconnection of the electricity system with Western European networks. At the same time the legal basis and regulatory framework of the power sector have been brought into line with European Union requirements. Finally, the financial condition of the Lithuanian power system and of its various entities has improved significantly. The detailed results are outlined below. i. Improve the operating safety, efficiency, reliability, and environmental performance of the electricity generating system, thus reducing the amount of imported fuel needed for its operation: rehabilitation of the Elektrenai thermal power plant contributed to the improvement of operating safety, efficiency, reliability, and the environmental performance of the electricity generating system. Although control system modernization for unit 6 was the main investment (US$5.1 million from total investment of US$8.16 million), the main benefits achieved so far were due to the installation of low NOx burners. However, as one unit of Ignalina NPP will be shut down in 2005, additional thermal power units will then be needed in the system. The control system modernization for unit 6 is envisaged by LPC as a pilot project to be replicated for the remaining generating units at Elektrenai. ii. Improve the safety, reliability and flexibility of the electricity transmission system, thus reducing power disruptions and facilitating economic load management: the upgrading of the electricity system had a beneficial impact on the electricity sector by improving the safety, reliability and flexibility of the electricity transmission system, thus reducing power disruptions and facilitating progress in creating a competitive electricity market. The improvement in communication systems comprised the installation of a new ring of reliable and high-capacity optical cables using 330-110 kV electricity transmission towers. This allowed LPC to connect all major system components in an integrated information medium and also to provide additional data transmission services. Before the project, the power transmission and distribution equipment was - 5 - near the end of its life. The replacement of equipment at high-voltage transmission substations was very beneficial in terms of enhanced reliability and helped reduce losses. The duration of maintenance outages for switchgear has been substantially reduced. Before the project, circuit breakers were shut down for maintenance for two weeks after every three years' operation, and for four weeks after every six years. This has now been reduced to one day per annum. Voltage fluctuations in the transmission system have been stabilized considerably. iii. Support the restructuring and commercialization of LPC: the electricity business of LPC has been unbundled and five new State-owned joint stock companies have been established: l AB "Lietuvos Energija" (AB=Akcinč Bendrovč, Joint Stock Company) which owns the transmission network and dispatching facilities as well as the hydropower plant at Kaunas and the hydro pumped storage plant at Kruonis; l AB "Lietuvos Elektrine" which owns the thermal power station at Elektrenai; l AB "Mazeikiu Elektrine" which owns the CHP station at Mazeikiai; l AB "Rytu ST" which is responsible for electricity distribution in the eastern portion of Lithuania; and l AB "Vakaru ST" which distributes electricity in western Lithuania. The great majority of the shares in all five companies remain in State ownership (85.7% of the shares of LPCE were in State ownership prior to the reorganization of the company on 1 January 2002, while 10.9% were held by E.ON Energie AG, 0.1% by Municipalities, and the balance of 3.3% by miscellaneous private shareholders. These proportions have been maintained in the new companies.) However, the privatization program for the two distribution companies and for AB Mazeikiu Elektrine is to be developed in the first quarter of 2003 and these companies are expected to be privatized by the end of 2003 (privatization of the distribution companies was intended to occur in 2002, but has been delayed (November 2002)). The eventual sale of AB Lietuvos Elektrine is also envisaged. AB Lietuvos Energija (LPC), as the national grid operator, will be retained in State ownership. All of the non-core activities of the former company have been sold or liquidated or are on the list of entities for privatization (except for Kauno Energetikos Remontas, which will remain in the ownership of Lietuvos Energija until 2005). The six district heating networks owned by LE were transferred to municipal ownership in 1997, and negotiations for the sale of the CHP generating station in Kaunas are ongoing. Private expertise has been introduced into the management of the district heating businesses in Vilnius, Kaunas and other cities through concession and leasing arrangements. LPC has, particularly since 1996, made vigorous efforts to improve its management structures and processes. These have included the establishment of commercial operational norms throughout the organization and the establishment of new functions--for example, an active international treasury capability. Such developments have, in recent years, been supported by the Government's implementation of improved structures of governance, including the appointment of outside directors with relevant expertise. Following repeated urging by Bank missions, the Government initiated a series of changes to the management board, supervisory board and shareholders' assembly arrangements at the end of 1997. While these changes were initially negative in their impact, an effective non-executive Board has been in place since early 2000, peopled by outsiders with backgrounds in finance, law and other relevant fields, and chaired by the Director of the Lithuanian Energy Institute. This Board has been prepared to stand up to political pressure and has given an important focus and consistency to reform efforts ever since. - 6 - Another crucial development was the restructuring in 1997 o f the State Commission for Pricing of Energy Resources and Energy Activity Control (commonly known as the Energy Prices Commission, or EPC) on the basis of enhanced independence and resourcing. This change facilitated a progressive move towards economic pricing of all energy products. The steady adherence to sound economic principles maintained by the EPC and its Chairman has provided an essential policy underpinning to unbundling and restructuring. Further evidence of Government commitment to reform was provided by the decisive moves it made to deal with the problem of non-payment or slow payment of the energy debts of budgetary entities. Taken together, these improvements have provided a solid basis for operating companies in the sector to develop strong management and financial structures, and will enhance the privatization revenues accruing to the Government. The restructuring and commercialization of Lithuania's electricity sector, as described above, have taken place at a pace and with a determination which have fully met, and in some respects even exceeded, the Bank's expectations. The initiatives described have been facilitated by parallel moves in the areas of regulation and market development. A new Electricity Law came into force in July 2001, and a new Energy Law in July 2002. The power market in Lithuania is being opened in stages with regulated transmission prices and provisions for the licensing of operators: in the first stage of market opening, customers purchasing more than 20 GWh per annum have been free since 1 April 2002 to contract directly with suppliers for power. There are now 11 independent suppliers of electricity and for 2003, there will be 25 eligible consumers, accounting for approximately 26% of the electricity market. At the same time, Lithuania is an active player in moves to establish a Common Baltic Electricity Market (CBEM) together with Latvia and Estonia. Furthermore, the very real transformation which has occurred in the regulation, governance and management of the power sector has enabled the Government to terminate all production subsidies in the sector, with the consequent removal of what had been a continuing budgetary overhang. In financial terms, the improvement in the financial status of the power sector has been striking. In 1994, the company's auditors estimated that LPC incurred a net loss (calculated in accordance with International Accounting Standards) of LTL 513 million on sales of LTL1,500 million. The outturn for 2001 (the last year for which LPC's financial statements represent an integrated picture of the industry) the company earned a net profit of LTL 180 million on revenues of LTL 1,664 million. While the separation in 1997 of the heavily loss-making district heating business was a factor in the turnaround, evaluation of the company's recent financial statements reveals a stable organization with satisfactory financial ratios and the potential, through continuing attention to cost control and operational improvement, to be solidly profitable into the future. The financial performance of LPC in recent years has been such that in May 2002 it was able to prepay $8 million of the World Bank Power Rehabilitation Loan. The cost of debt has dropped from 450 basis points over LIBOR in 1999 to roughly 75 basis points today with a much-improved repayment profile. At the beginning of the project the Government subsidized fuel import prices. Now LPC is able to prepay debt, and the government is expecting to receive dividends from 2002. (Annex 9 contains summarized financial statements for 1994 to 2001.) The story of financial improvement was not without interruptions: in 1999 a combination of inadequate tariffs, non-performing sales to Belarus, and an expensive debt profile led to heavy losses in LPC and provoked the Bank to suggest suspension of the loan unless a satisfactory recovery plan were put - 7 - in place: this was done, with positive results in 2000 and subsequently. 4.2 Outputs by components: The Project outputs were generally in line with the plan, with three exceptions: l The Mazeikiai CHP subcomponent of Component (i) (power plant rehabilitation) was cancelled as a consequence of the diminishing role of this plant in the power system; l Component (ii) (transmission system enhancement) was restructured as a result of LPC's decision to carry out the upgrading of the dispatch center in parallel with the Bank project by using its own resources. In consequence, the dispatch center sub-component was removed from Component (ii) of the Bank loan; l Following a reallocation of the loan proceeds, Component (ii) was refocused to allow for an increased investment in the modernization of the communications system. i. Rehabilitation of two thermal plants: unit 6 at the Elektrenai Thermal Power Station and two units (2X80 MW) at the Mazeikiai combined-heat-and-power (CHP) station: the modernization of the supervisory control for Unit 6 at the Elektrenai thermal station together with installation of low NOx burners was satisfactory. The control system was modernized using modern data collection hardware and software which allows real time monitoring and operation of power Unit 6. There is a joint control room for Units 5 and 6, which makes it easy to compare the operation of the 40-year-old control system for Unit 5 with the new one for Unit 6. New low NOx burners have modern fire protection systems, which is integrated with the modern control system of Unit 6. Tests have confirmed 50% reductions in emissions (mg/Nm3) for the new burners compared with burners of the old type (from 850 to 425 mg/Nm3 for heavy fuel oil and from700 to 330 mg/Nm3 for natural gas). Since rehabilitation, emissions at Unit 6 have been within allowable limits. Unfortunately, because of the substantial electricity generation overcapacity in Lithuania, the Elektrenai power plant operates for very short periods of time. Since the new control system was installed in July 2001 Unit 6 has been in operation for only 292 hours in 2001 and 71 hours in 2002 (load factor 0.03). Staff have therefore had very limited possibilities to gain operational experience with this system. It is expected that this situation will change after closure of Ignalina NPP starts in 2005. The cancellation of the Mazeikiai Power Plant upgrade has been fortunate. As the sector has been unbundled it has become increasingly apparent that this is a stranded asset. The government will address this issue as part of the privatization program. ii. Upgrading of the electricity system, including upgrading of the dispatch center in Vilnius, system communications and control equipment, and replacement equipment at high-voltage transmission substations: the upgrading of the system communications equipment, and the replacement of equipment at high-voltage transmission substations was satisfactory. The old analogue type data equipment was replaced by modern open structure digital hardware and software, substantially contributing to very accurate and reliable real time monitoring and management of the power system, including the newly emerging electricity market. The new ring of optical cables is linked with neighboring states, an essential for the development of the Baltic electricity market. The data transmission system is integrated with the upgraded Vilnius dispatch center control equipment (information complex XA-21 of GE Harris Company). The upgrading of the dispatch and control systems is estimated to result in an annual saving of US$530,000 in staff and travel costs. The installation of optical cables using of optic power ground wire (OPGW) technology has also facilitated the rehabilitation of HV transmission lines at the same time. The replacement of 330 kV power transformers and switchgear equipment at Kaunas substation has had a very positive impact, as this equipment was nearing the end of its life. In addition, new digital protection relays with self-test features were installed at key points of the substation, which - 8 - reduced the fault rate and response time. Generally, the reliability of Kaunas substation has increased markedly, while maintenance costs have decreased. LPC has also been able to lease some of the bandwith in its fiber optic network to telecommunications companies. iii. Restructuring of LPC and other technical assistance for consultants' services to perform technical studies, project engineering, and management: Under the project, consultants were hired for several tasks. l LPC Restructuring and Management Consultancy: In early 1995, following international restricted tendering procedures, Price Waterhouse Ireland, in association with ESB International, were appointed to provide Restructuring and Management Consultancy advice, financed by the EU-PHARE program. The consultants' Interim Report, presented in October 1995, proposed radical restructuring of LPC and substantial internal management improvements. This was accepted by the Government, but initially resisted by the company. Following extensive discussions involving the Government, the World Bank, the European Commission and the local PHARE office, LPC management and the consultants, the Final Report was submitted to the Commission in September 1996. The restructuring program set out in the Report provided a road map for much of the reform of the electricity sector which followed. l In the meantime, following the acceptance by the Government of the Interim Report and the appointment of a new General Director, the company established a number of Working Groups, coordinated by a consultant hired by the World Bank to oversee the implementation of the Price Waterhouse report and financed by the Irish Consultancy Trust Fund at the World Bank. The Working Groups analyzed and recommended on key issues of reorganization and management improvement, including how best to set up Business Units, as a precursor of unbundling, the improvement of management information systems, the development of corporate planning, the disposal of non-core activities, and the development of a power market. l USAID provided funding for Regulatory Framework Assistance, under which Bechtel consultants worked within the Energy Prices Commission in the development of methodologies, coordinating this work within a Baltic framework. l An Electricity System Communications Strategy Study was carried out by LPC's own experts. l Project Management and Implementation Assistance was provided by various contractors, including Preussen Elektra in respect of the thermal power plant at Elektrenai and Electrotek Concept Inc. for the dispatch center, and Pauwels for the Kaunas transformer element. A consultant hired under the project was attached to TENA, the procurement subsidiary of LPC, and provided procurement assistance in 1996/97. l Training was arranged by LPC itself for every component of the project. In most cases, this included secondment of staff to overseas utilities for on-job learning purposes. 4.3 Net Present Value/Economic rate of return: At appraisal, the economic rate of return (ERR) for the whole project (including environmental benefits and associated investment costs) was calculated to be 21.1%. The ERR on the Thermal Power Plant Rehabilitation element was calculated at 16.3% and that on the Electricity Dispatch System Upgrade 34.5%. The current recalculations of project ERRs are 32% for the Elektrenai thermal power plant rehabilitation without taking account of the costs and benefits of the environmental investments, and 26% when these are included. The higher ERR for Elektrenai (compared to the estimate made at appraisal) reflects the - 9 - significantly lower cost of the investments in burner and control systems--$8.2 million (excluding related consultancy assistance, which amounted to about $0.5 million) against $13.2 million estimated at appraisal. The life extension benefit estimated at appraisal (which remains unaltered) is by far the largest source of economic benefit from this component. No recalculation of the economic rate of return from the dispatch and transmission system upgrade was possible. However, in addition to the benefits foreseen at the time of appraisal, LPC has been able to earn extra revenue from the system by leasing capacity on its optical fiber network to telecommunications operators. 4.4 Financial rate of return: A financial rate of return for the project was not calculated at the time of appraisal. At the time the project was appraised (1994), financial rates of return were usually not calculated for power projects. Consistent with this approach, the project was assessed from the technical and economic standpoints. The financial aspects were dealt with by projecting the future financial performance of LPC and by including legal covenants designed to ensure that the company's financial performance would be satisfactory. 4.5 Institutional development impact: In 1994, Lithuania was in the early stages of its transition from Soviet times, and the State's ability to face and deal with the challenges posed by an uneconomic energy sector was a key test of the strength of the re-established democracy. LPC, at the time of appraisal, was not only the dominant entity in the Lithuanian energy sector, but also the largest State-owned asset and employer. In the event, the Government of Lithuania met the challenge. This is the more praiseworthy for the fact that there have been several changes of government in the intervening eight years, involving significant differences of social and economic ideology. The outcome of the efforts made by government, regulators, LPC management, the World Bank and other international agencies--namely, the reform and restructuring of a key economic sector--demonstrated to Lithuanians, and to the citizens of other transition economies, that the results merited the effort, that reform need not mean the destruction or demeaning of the achievements of the past, and that substantial economic and political gains could be made through consistency of policy. While this may have been the most important institutional development impact of the Power Rehabilitation Project, at enterprise level the project drove major improvements in the management of LPC--in project management, in procurement, in capital expenditure planning, and, particularly, in financial management. The company moved to full implementation of International Accounting Standards, created separate revenue, cost and profit centers to support unbundled accounting, and established a Treasury Management capability which has enabled it to operate effectively in capital markets, with consequent savings in financial costs. Additionally, the corporate governance aspect of LPC's operations was boosted when the Government decided in 2000 to expand its Management Board to include outside directors with appropriate knowledge and experience of law, finance, and energy. Covenant Compliance: The Loan Agreement, Subsidiary Loan Agreement and Project Agreement required that the borrower and LPC meet target values in relation to certain financial ratios and other indicators. The table below sets out actual performance for 2001 in relation to the target values. - 10 - Table 1: Covenants Indicator Target value 1 Actual value 2001 Collection period for domestic electricity bills 45 552 (days' sales) Debt service coverage ratio 1.5 2.0 Average domestic electricity tariff (net) Lc. 11.5/kWh 3 Lc. 18.6/kWh 1According to the projections prepared at time of appraisal, the loan would have been fully disbursed in 1999. In the Table, the target values shown are those for 1999, or for the latest year specified (but see Note 7). 2The value for 2001 is not directly comparable with the target value, because of different calculation methods. The collection for 2001 is accounts receivable, which includes a 30 day period for the customer to make their payments. It is assumed that the target was designed as arrears and hence the intention of the collection target was met. 3The Loan Agreement specifies the setting of an average domestic tariff of 11.5 Lithuanian cents per kWh as a condition of effectiveness. Adjusting for changes in the Consumer Price Index between 1994 and 2001 yields a target value for 2001 of 20.3 Lc./kWh. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Over the 1994-2001 period, the population of Lithuania declined by nearly 5%, to just under 3.5 millions. Real GDP rose by an average of 3.7% p.a. and stood at 13.4 billion euro in 2001. Economic growth has been fairly consistent, except in 1999, when output was seriously affected by the economic crisis in Russia. Table 1 below illustrates the trend in final energy consumption over the period. The only sector to register growth is transport. It seems reasonable to attribute a major part of the decline in household consumption to improved energy economy, whereas the declines in the productive sectors are likely also to reflect changes in scale and structure. Overall, the energy intensity of the Lithuanian economy, which the World Bank measured as being quite high in the early nineteen-nineties, fell from 210 toe per million LTL in 1994 to 136 toe per million LTL of GDP in 2001 (at constant 1995 prices). Table 2: Final Energy Consumption 1994 million toe 2001 million toe Industry 1101 815 Transport 999 1279 Agriculture 248 104 Households 1814 1410 Commerce and public services 744 484 Total final energy consumption 4906 4092 A major factor in the electricity sector continued to be export demand, based on the productive potential of Ignalina. In 1994, Lithuania had net electricity imports of 1,000 GWh (imports which Lithuania was compelled to accept from Russia in lieu of transit fees due on power wheeled to Kaliningrad), while there have been substantial net exports in every other year, peaking at over 6,000 GWh in 1998. The development of electricity supply and demand is shown in Table 2 below. The growth in household and commercial/public service demand has been quite striking. At the time of project appraisal, the Bank's base case scenario was for GDP growth to average 5.6% p.a. between 1994 and 2001 and for final - 11 - electricity demand in 2001 to be approximately 7.85 TWh. Calculating as far as possible on the same basis, the actual outturn for 2001 was 9.03 TWh, which, combined with substantially slower GDP growth than forecast in 1994, reflects a slower reform process, and a continuing higher electricity intensity, than in the base case (the figure of 9.03 TWh is reconcilable with the amount of 6.4 TWh shown in the table by adding to the latter 50% of the "system own use" consumption and 80% of the network losses estimated for 2001, in accordance with the Bank's 1994 methodology (Lithuania: Energy Sector Review, Report No. 11867-LT)). Table 3: Electricity Balance 1994 GWh 2001 GWh Generation: Ignalina 7706 11362 Thermal and CHP 1597 2674 Hydro 718 701 Total 10021 14737 Net imports/exports 1099 -3964 Losses, own use etc. 4608 4326 Net domestic supply 6512 6447 Industry 2795 2347 Transport 102 91 Agriculture 574 197 Households 1541 1817 Commerce and public services 1500 1995 Total final consumption 6512 6447 The load factor in Ignalina recovered from its very low level (47%) in 1994 to consistent levels of 70% to 80% in the following years. However, it fell to 58% in 1999 and to 50% the following year, recovering somewhat to 67% in 2001. Apart from 1998, when exports peaked, Elektrenai's load factor has consistently been in the range 9% to 14%. This has prevented the realization of the output levels projected for Unit 6. 5.2 Factors generally subject to government control: The policies adopted and actions taken by the Government of Lithuania were generally positive in their effects on the project's outcome. The government has been responsive to the changing international environment, particularly the new responsibilities which it assumed consequent on Lithuania's application for membership of the European Union. It has been ready to interact with and listen to the World Bank and other international agencies. In general, it has created an environment in which the reform process has been less of an uphill struggle than it might otherwise have been, and indeed has been in so many other countries. The steady commitment to an independent price regulator, often at times when the political pressures to compromise such independence must have been hard to resist, has been at the heart of reform in the energy sector. The implementation of radical solutions to the overdue energy receivables problem and the separation of district heating from LPC (with consequent severe tariff increases for some communities) also required strong political will. After some false starts, a Board has been installed in LPC which gives a fair degree of protection to the organization from possible governmental interference in operational matters. (A notable issue which emerged during the supervision phase of the project was the direction by the Minister of Economy in 1998 and 1999 that power should be sold to Belarus even though LPC's prospects of receiving timely, or indeed any, payment were slim: it is unlikely that such a situation could be repeated - 12 - under the governance structures now in place.) On the other hand, it appears that key appointments to the most senior management positions in the company are still made by the Minister rather than the Board. Also, the enactment of the new energy and electricity legislation was hampered and delayed by administrative and political problems, although it is now satisfactorily in place. (Despite these difficulties, however, the power market has reached a more developed state than in some neighboring countries.) 5.3 Factors generally subject to implementing agency control: LPC implemented the project through its Procurement Department together with the company's technical and financial staff, including local specialists at project sites in Elektrenai and Kaunas. In order to ensure that the project would be carried out with due diligence and efficiency and in accordance with best engineering practices, foreign consultants were appointed including a procurement adviser. The main factor within the control of LPC that contributed to implementation delays was LPC's limited implementation capacity, especially at the initial project phase, and frequent turnover of higher management staff. Despite delays, LPC ultimately successfully managed the project to completion, including the own restructuring and unbundling of its own operations. LPC turned certain opportunities to its advantage, for example improving dispatch center facilities using its own resources, and rehabilitating HV electricity lines during the installation of optical cables on ground wires (OPGW technology). It also proactively sought to work with the Ministry of Economy and the Energy Prices Commission to develop economic tariffs. After initial reluctance, LPC recognized the need to reform its operational and management structures. It appropriately redesigned the company's organizational structure in the context of unbundling, and it achieved improvements in all key organizational, operational and financial areas. The company also respected environmental issues in the implementation of the Project, especially in relation to Elektrenai thermal power plant. Evidence of the improvement in operational performance is provided by the reduction in distribution losses from 19% in 1993 to 13.5% in 2001. In the same period, transmission losses were reduced from 4% to 2.7% (losses split between transmission and distribution at 330 kV). 5.4 Costs and financing: The total project costs amounted to $32.5 million, compared to the appraisal estimate for baseline costs of $32.90 million. The details of costs and financing are given in Annex 2. The main differences between the appraisal estimates and the outcome centered on the reduction of the power rehabilitation element arising out of the decision not to proceed with the upgrade at Mazeikiai power plant, thus reducing this component from $16.78 million to $9.50 million. The transmission and electricity system upgrade component was increased from $5.02 million at appraisal to $22.50 million. Technical assistance was less than envisaged at appraisal. The overall financing required, at $32.50 million, was slightly less than the appraisal estimate of $32.90 million. Disbursements from the World Bank loan totaled $26.4 million, leaving a balance of $6.1 million which was covered from LPC's resources. 6. Sustainability 6.1 Rationale for sustainability rating: Looking towards the future, the project is clearly sustainable. There is a firm date for the closure of at least one of the Ignalina units: this will increase the potential demand for the output of the rehabilitated Elektrenai unit. The development of the power market (Baltic as well as Lithuanian) will also provide further underpinning of the investments in transmission and in communications and control. The independence of the regulator and the transformed cost/revenue balance of LPC--now guided by well-structured governance arrangements--will substantially support the continued financial strength of the borrower. The factors which drained that company's vitality in the past--below cost tariffs, the district heating millstone, forced sales of power to Belarus, unprofitable non-core subsidiaries--have been removed. Further comfort that the reform process is irreversible is provided by the undertakings entered into by the government in its dealings with the World Bank and the International Monetary Fund during - 13 - SAL and Stand-by Arrangement (SBA) negotiations. There are uncertainties, of course. Prime among these is the future of Ignalina--any decision to defer closure would have serious consequences for other units in the industry. Also, the independence of the LPC Board may need to be underpinned by legislation in order to reduce the temptation to future governments to become involved in commercial issues. 6.2 Transition arrangement to regular operations: Even though generation, transmission and distribution operations have been separated, LPC retains almost all of the assets acquired under the Project as it continues to be responsible for transmission & load dispatch as well as for hydropower plant operations. Of the entities benefiting from the loan, only Elektrenai thermal power plant became a separate company. LPC and Lietuvos Elektrine (Elektrenai) have already commissioned the new facilities, which are fully deployed in day-to-day operations (within the limits imposed by the electricity overcapacity problem, referred to above) and regular operations are being carried out now. Additionally, in order to expand the coverage of the power system improvements, similar investments are being made according to appropriate development plans up to 2006 for: i) transmission grid development; ii) dispatch center and communications system development; iii) modernization of Kaunas hydropower plant and Kruonis hydro pumped storage plant and iv) development of electricity metering and accounting between the transmission and distribution networks. These plans were developed by LPC specialists taking into account the results of consultancy studies carried out by international experts and experience from visits to western companies. Sustainable improvements, in relation to the establishment of the electricity market in January 2002, transmission system operator performance for national balancing services, private capital flows to the sector and financial performance of the sector, etc., can be expected. 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank's performance in appraising and negotiating the loan was satisfactory. The Bank team provided strong support both to the government's energy policies and to Bank/IMF programs in Lithuania. Appropriate flexibility was shown in adapting the loan to the evolving needs of the electricity sector. 7.2 Supervision: The supervision of the project was satisfactory. Supervision missions were conducted on a regular basis with competent staff who established productive relationships with LPC's project and general management and with Government representatives. However, the company had some difficulty complying with the financial covenants contained in the Loan Agreement, Project Agreement and Subsidiary Loan Agreement. Specifically, in several years net revenues were not adequate to provide the covenanted 1.5 times cover of prospective debt repayments and the covenanted collection period for domestic electricity bills was not met. In addition, in several years tariffs were not adequate to cover all costs. The Bank, the Borrower and LPC engaged on these issues on several occasions. However, on such occasions the Bank concluded that the general direction of financial progress was positive, and thus did not object to financing operations proposed by LPC. There were three amendments to the project, reflecting primarily reallocations of funds between the various components. In early 2000, following a significant deterioration in LPC's financial performance in 1999, the Bank suggested that the loan be suspended unless a satisfactory financial recovery plan was implemented. LPC proposed the following set of actions: (a) a 20% price increase; (b) the cessation of electricity sales to Belarus because of non-payment problems; and (c) the restructuring of LPC's debt. These actions were successfully implemented resulting in a considerable turnaround in LPC's financial status. - 14 - 7.3 Overall Bank performance: Overall the Bank's performance is rated as satisfactory. A notable feature of the project was the close coordination which was maintained between the Bank's team on the project and other ongoing Bank operations in Lithuania, particularly the first and second Structural Adjustment Loans (SAL I and SAL II), as well as the IMF. The conditionalities for both SAL operations included several clauses which reinforced the Bank's covenants and conditionalities in the Power Rehabilitation Project. Conversely, the Bank's work to assist in the full implementation of the PRP materially assisted in the achievement of SAL objectives--for example, the ending of producer subsidies in the energy sector, and the control of inter-enterprise arrears. Borrower 7.4 Preparation: The project was prepared by LPC at a time of intense international interest in the future of the Lithuanian electricity sector, driven by safety concerns about Ignalina. There had been a succession of strategy studies, including the Bank's 1994 Energy Sector Review and an Energy Strategy Study performed by a consortium of European contractors under financing by the EU-PHARE program. In parallel, the US grant agencies USAID and USTDA provided technical assistance for feasibility studies of thermal plant rehabilitation and electricity system upgrading, and it was these which provided the basis for the preparation of the Power Rehabilitation Project. Preparation was satisfactory and provided a strong basis for appraisal of the project and subsequent implementation. 7.5 Government implementation performance: Government performance, both at the level of financial management through the Ministry of Finance and (as already noted) at the level of institutional and policy development at the level of the Ministry of Energy (later the Ministry of Economy), was generally satisfactory. Strong and positive relationships were established, which allowed implementation to proceed smoothly, and which furthermore materially assisted the dialogues underlying the first and second SAL efforts. 7.6 Implementing Agency: Implementation performance by LPC was excellent. Adequate full-time local staff were selected to cover the procurement, technical and financial areas of the project. Co-ordination of project activities and the procurement of goods, works and services for the project proceeded smoothly. Experienced technical consultants were retained to assist with implementation, and a full-time procurement advisor was appointed. The management structure of LPC evolved during the years of implementation: noteworthy was the development of a treasury function which facilitated much-improved management of the company's debt and cash resources. 7.7 Overall Borrower performance: Overall borrower performance is rated satisfactory. 8. Lessons Learned The Bank's experience in Lithuania since 1994 suggests a number of lessons which may be relevant to the energy sector reform process in other states. l Given strong Government support, enabling good regulation and governance, and payment discipline on the part of budget entities, it is possible for a publicly-owned utility to be successful, well-run and financially robust, and to be a positive player in market reform, while remaining under state control; l Structural adjustment operations and project operations, if co-coordinated, are mutually - 15 - supportive; l Reform policies should initially emphasize restructuring rather than privatization. Excessive concentration on privatization as an objective can have negative effects on the reform process, particularly in the early stages: in the case of Lithuania, given the variety of governments which held power, too much emphasis on privatization could have been counter-productive, whereas the benefits of institutional reform, restructuring, unbundling and corporatization could be readily demonstrated and were acceptable to the key players; l Achieving improved governance of utilities smoothes the institutional reform process. Good utility governance rests on the clear definition and separation of four pillars: policy, ownership, management and regulation. The Board forms the bridge between the second and third of these, and a Board of individuals chosen for their individual merits, clearly briefed on the shareholders' objectives and working free of ministerial interference can help management to optimize operational performance; Most important of all, an independent, well-resourced regulator put in place at an early stage of the reform process can be a firm bulwark against back-sliding. - 16 - 9. Partner Comments (a) Borrower/implementing agency: - 17 - (b) Cofinanciers: There were no co-financiers in the project, other than LPC itself. (c) Other partners (NGOs/private sector): There were no other partners. 10. Additional Information For additional details see Annex 8 and Annex 9. - 18 - Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate (i) Availability of the electricity system The power system has remained at a level of The availability of the power system is in line reliability above that envisaged at the time of with Western European standards. This appraisal as the Ignalina Nuclear Plant outcome has been highly successful. remains fully operational (at the time of appraisal an agreement had been reached with EBRD to close Unit 1 by 6.30.98). (ii) Restructuring and commercialization of LPC has been unbundled into five separate The Government has surpassed all of our LPC legal entities, consistent with the EU Directive expectations regarding sector restructuring. 96/92 on establishing electricity markets. The sector has been vertically unbundled in a The accounts have been separated, manner consistent with the EU Directive. management and staff assigned and an Horizontal unbundling has taken place to application for unbundled tariffs has been foster competition. The Government has issued. taken the final step of legal unbundling, going beyond the current EU requirements. (iii) Authority and independence of the The regulator has been established and is The regulator in Lithuania has been of the Energy Pricing Committee successfully undertaking its duties. Its more successful instances of regulatory independence appears to be satisfactory. reform in our client countries. The independence and operating rules and pricing criteria are clear and consistently adhered to. Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate A. Technical Indicators: The Elektrenai unit improvement has been Elektrenai 300 MW Thermal Power Plant - completed and is fully successful. Improvement in plant operating efficiency; The upgrading of the Mazeikiai power plant improvement in plant reliability; reduction in was, fortunately, dropped. As this unit is now NOx and particulate emissions; safety perceived as a potentially stranded asset, it improvements. has been helpful that the Bank loan did not Mazeikiai 160 MW CHP Plant: improvement add to this burden. in plant operating efficiency; improvement in plant reliability; reduction in NOx and particulate emissions. Electricity dispatch and transmission system upgrade: loading of power plants; loss reduction; reliability; management information. B. Environmental indicators: This was reviewed by Bank environmental Completion and implementation of asbestos staff and was found to be fully satisfactory. management plan. Completion of PCB survey and, if needed, implementation of management plan. Completion and implementation of oil spill prevention and management plan. Completion and implementation of the environmental monitoring system. C. Financial and economic indicators: The Government and LPC made a Improvement in liquidity and working capital considerable turnaround in the financial (current ration in excess of 1.6 and quick health of the sector in 2000 by increasing the ratio not less than 0.8). electricity price, restructuring debt (replacing Compliance with covenants (debt service short-term debt with longer-term debt that ration not lower than 1.5, electricity better matched the life of the assets) and receivables not greater than 45 days, and cut-off supply to non-payers (Belarus in heat receivables not greater than 70 days).. particular). As a result, debt service is about Profitability (net income before tax 2.0, enabling LPC to prepay its debt, further consistently positive). improving its balance sheet. Fixed assets and depreciation (progress in Although the liquidity targets have not been bringing fixed asset values and depreciation met, LPC has managed its liquidity well and - 19 - charges closer to realistic values as is able to pay its creditors on time (or early in measured by international industrial averages the case of some of its debt obligations). for the subsector). The EIRR for the project remains Recalculation of the Economic Internal Rate satisfactory. of Return. D. Institutional restructuring indicators: Institutional restructuring has been Commercial operation of LSPS. successfully completed well beyond the Improvement in the articles and operation of original expectations of the project. the Regulatory Agency. Progress in power sector restructuring. 1End of project - 20 - Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component US$ million US$ million 1. Power rehabilitation 16.78 9.50 56.6 2. Transmission and electricity system upgrade 5.02 22.50 448.2 3. Technical assistance 1.68 0.50 29.8 Total Baseline Cost 23.48 32.50 Physical Contingencies 2.26 Price Contingencies 3.39 Total Project Costs 29.13 32.50 Interest during construction 3.77 Total Financing Required 32.90 32.50 Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB NCB 2 N.B.F. Total Cost Other 1. Works 0.00 0.00 0.00 2.10 2.10 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 21.20 0.00 3.50 0.00 24.70 (21.20) (0.00) (3.50) (0.00) (24.70) 3. Services 0.00 0.00 1.70 0.60 2.30 (0.00) (0.00) (1.70) (0.00) (1.70) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 21.20 0.00 5.20 2.70 29.10 (21.20) (0.00) (5.20) (0.00) (26.40) Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB NCB 2 N.B.F. Total Cost Other 1. Works 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 27.01 0.00 0.00 0.00 27.01 (25.64) (0.00) (0.00) (0.00) (25.64) 3. Services 0.00 0.00 0.79 0.00 0.79 (0.00) (0.00) (0.55) (0.00) (0.55) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 - 21 - (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 27.01 0.00 0.79 0.00 27.80 (25.64) (0.00) (0.55) (0.00) (26.19) 1/Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2/Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. - 22 - Annex 3. Economic Costs and Benefits Lithuania: Power Rehabilitation Project Demand Projections and Capacity of Power Plants Key assumptions Domestic Demand growth rate post 2001 3 % Exports p.a. post 2004 (TWh) 1.7 System losses 10% Own Use 10% Hydro storage use p.a. (TWh) 0.5 Actual demand 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Electricity Demand and Generation Domestic Demand TWh 12.68 9.72 7.45 7.12 6.79 7.04 7.30 7.60 7.25 6.91 7.24 7.46 Exports TWh 12.75 5.30 2.89 0.00 2.89 5.24 3.76 6.47 3.30 1.48 4.16 6.80 Total Net Demand TWh 25.43 15.02 10.34 7.12 9.68 12.28 11.06 14.07 10.55 8.39 11.40 14.26 System Losses (%) % 5.83 9.15 13.81 18.47 14.82 11.06 10.96 8.78 9.85 11.52 9.86 0.10 System Losses TWh 1.71 1.69 1.91 1.98 2.01 1.78 1.58 1.52 1.33 1.28 1.42 1.58 Less: Loss Red. From invest (2.5% of thermal) TWh -0.03 -0.08 Net System Losses TWh 1.71 1.69 1.91 1.98 2.01 1.78 1.58 1.52 1.33 1.28 1.45 1.66 Own use (%) % 7.53 9.48 11.42 15.11 13.79 12.62 12.28 9.99 12.00 12.96 10.76 0.10 Own use TWh 2.21 1.75 1.58 1.62 1.87 2.03 1.77 1.73 1.62 1.44 1.55 1.58 Electricity Production TWh 29.35 18.46 13.83 10.72 13.56 16.09 14.41 17.32 13.50 11.11 14.40 17.51 Hydro Storage Use TWh 0.00 0.24 0.28 0.39 0.54 0.77 0.67 0.68 0.64 0.45 0.55 0.50 Total Electricity Production TWh 29.35 18.70 14.11 11.11 14.10 16.86 15.08 18.00 14.14 11.56 14.95 18.01 Average Demand, MW MW 3350 2129 1611 1268 1610 1919 1721 2055 1614 1316 1707 2056 Peak Demand, MW MW 3131 2777 2165 2117 1965 1984 2051 2077 1918 1779 1916 2419 Capacity for Peak +20% reserves, MW MW 3757 3332 2598 2540 2358 2381 2461 2492 2302 2135 2299 2902 Available Capacity with Ignalina, MW MW 5209 5589 5589 5779 5779 5789 5791 5791 6001 6001 6004 6004 Available Capacity without Ignalina, MW MW 2609 2989 2989 3179 3179 3189 3191 3191 3401 3401 3404 3404 Existing Available Capacity (reflecting down- time for rehabilitation) Ignalina #1 (Nuclear) MW 1300 1300 1300 1300 1300 1300 1300 1300 1300 1300 1300 1300 Ignalina #2 (Nuclear) MW 1300 1300 1300 1300 1300 1300 1300 1300 1300 1300 1300 1300 Elektrenai 1-8 TPP MW 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 Vilnius 1 & 2 CHP MW 364 364 364 364 364 364 364 364 364 364 364 364 Mazeikiai 1 & 2 CHP MW 99 99 99 99 99 99 99 99 99 99 99 99 Kaunas 1 & 2 CHP MW 178 178 178 178 178 178 178 178 178 178 178 178 Klaipeda CHP MW 11 11 11 11 11 11 11 11 11 11 11 11 Panevezys CHP MW 0 0 0 0 0 0 0 0 0 0 1 1 Kaunas Hydro MW 101 101 101 101 101 101 101 101 101 101 101 101 Kruonis (Pumped Storage--Peaking) MW 0 380 380 570 570 570 570 570 760 760 760 760 Small Hydro MW 5 5 5 5 5 5 7 7 15 15 15 15 Independent Producers MW 51 51 51 51 51 61 61 61 73 73 75 75 Excess (Deficit) Capacity MW 1452 2257 2991 3239 3421 3408 3330 3299 3699 3866 3705 3102 Excess (Deficit) Capacity without Ignalina MW -1148 -343 391 639 821 808 730 699 1099 1266 1105 502 Estimated demand 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 7.70 7.93 8.18 8.43 8.70 8.96 9.24 9.53 9.82 10.13 10.44 10.77 11.10 5.70 5.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.70 1.53 1.15 13.40 13.63 9.88 10.13 10.40 10.66 10.94 11.23 11.52 11.83 12.14 12.30 12.25 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 1.49 1.51 1.10 1.13 1.16 1.18 1.22 1.25 1.28 1.31 1.35 1.37 1.36 -0.07 -0.07 -0.18 -0.18 -0.18 -0.19 -0.19 -0.27 -0.34 -0.35 -0.36 -0.37 -0.37 1.56 1.59 1.27 1.31 1.34 1.37 1.41 1.52 1.63 1.67 1.71 1.73 1.73 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 Own use TWh 1.49 1.51 1.10 1.13 1.16 1.18 1.22 1.25 1.28 1.31 1.35 1.37 1.36 Electricity Production TWh 16.45 16.74 12.25 12.57 12.89 13.22 13.57 13.99 14.43 14.81 15.20 15.40 15.34 Hydro Storage Use TWh 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 Total Electricity Production TWh 16.95 17.24 12.75 13.07 13.39 13.72 14.07 14.49 14.93 15.31 15.70 15.90 15.84 Average Demand, MW MW 1934 1963 1456 1492 1529 1562 1606 1654 1704 1743 1793 1815 1808 Peak Demand, MW MW 2358 2373 1744 1741 1777 1837 1886 1973 2033 2060 2128 2157 2143 Capacity for Peak +20% reserves, MW MW 2830 2848 2093 2089 2132 2204 2263 2368 2440 2472 2554 2588 2572 Available Capacity with Ignalina, MW MW 6004 6004 4704 4704 4704 4704 4704 4054 3404 3404 3404 3404 3404 Available Capacity without Ignalina, MW MW 3404 3404 3404 3404 3404 3404 3404 3404 3404 3404 3404 3404 3404 Existing Available Capacity (reflecting down-time for rehabilitation) Ignalina #1 (Nuclear) MW 1300 1300 0 0 0 0 0 0 0 0 0 0 0 Ignalina #2 (Nuclear) MW 1300 1300 1300 1300 1300 1300 1300 650 0 0 0 0 0 Elektrenai 1-8 TPP MW 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 1800 Vilnius 1 & 2 CHP MW 364 364 364 364 364 364 364 364 364 364 364 364 364 Mazeikiai 1 & 2 CHP MW 99 99 99 99 99 99 99 99 99 99 99 99 99 Kaunas 1 & 2 CHP MW 178 178 178 178 178 178 178 178 178 178 178 178 178 Klaipeda CHP MW 11 11 11 11 11 11 11 11 11 11 11 11 11 Panevezys CHP MW 1 1 1 1 1 1 1 1 1 1 1 1 1 Kaunas Hydro MW 101 101 101 101 101 101 101 101 101 101 101 101 101 Kruonis (Pumped Storage--Peaking) MW 760 760 760 760 760 760 760 760 760 760 760 760 760 Small Hydro MW 15 15 15 15 15 15 15 15 15 15 15 15 15 Independent Producers MW 75 75 75 75 75 75 75 75 75 75 75 75 75 Excess (Deficit) Capacity MW 3174 3156 2611 2615 2572 2500 2441 1686 964 932 850 816 832 Excess (Deficit) Capacity without Ignalina MW 574 556 1311 1315 1272 1200 1141 1036 964 932 850 816 832 - 23 - Merit Order Loading of Power Plants Actual 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Generation for Domestic Demand TWh 15.15 11.95 9.77 9.51 9.33 9.48 9.45 9.68 9.12 8.65 9.15 9.52 Generation to meet total demand TWh 29.35 18.70 14.11 11.11 14.10 16.86 15.08 18.00 14.14 11.56 14.92 17.93 Minimum Thermal Generation (160MW) TWh 1.30 1.80 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 Energy Dispatch Projections (based on order of merit loading) Ignalina #1 (Max. 70% CF) TWh 8.50 7.32 6.13 3.86 5.91 6.97 6.01 6.78 4.93 4.21 5.68 6.93 Ignalina #2 (Max. 70% CF) TWh 8.50 7.32 6.13 3.86 5.91 6.97 6.01 6.78 4.93 4.21 5.68 6.93 Kaunas Hydro (36% CF) TWh 0.33 0.30 0.38 0.44 0.36 0.32 0.28 0.39 0.39 0.31 0.28 0.34 Kruonis Pumped Storage (5-17% CF) TWh 0.00 0.16 0.19 0.27 0.38 0.55 0.47 0.48 0.45 0.30 0.38 0.46 Klaipeda CHP (33-70% CF) TWh 0.05 0.03 0.01 0.03 0.03 0.03 0.02 0.03 0.03 0.04 0.03 0.04 Mazeikiai 1 & 2 CHP (45-60% CF) TWh 0.61 0.41 0.48 0.45 0.47 0.46 0.44 0.43 0.37 0.30 0.33 0.40 Vilnius 1 & 2 (5-35% CF) TWh 1.74 0.74 0.16 0.21 0.22 0.47 0.65 0.71 0.82 0.91 0.96 1.17 Vilnius HPP (35% CF)--small hydro and IPPs TWh 0.12 0.07 0.03 0.03 0.05 0.06 0.07 0.08 0.08 0.13 0.11 0.13 Kaunas 1, 2 CHP (0-35% CF) TWh 0.77 0.52 0.02 0.10 0.01 0.16 0.20 0.24 0.42 0.30 0.44 0.54 Elektrenai 1-8 TPP (3-75% CF) TWh 8.75 1.82 0.58 0.77 0.55 0.79 0.69 1.70 1.09 0.71 0.82 1.00 Total Dispatch TWh 29.37 18.69 14.11 10.01 13.89 16.78 14.84 17.61 13.51 11.42 14.71 17.93 Total Thermal Generation TWh 11.87 3.49 1.24 1.53 1.25 1.88 1.98 3.08 2.70 2.22 2.55 3.11 Electricity supplied by Elektrenai Unit 6 (after rehabilitation) Capacity needed to meet demand MW 1404 96 Supply from Unit 6 (300 MW)--max. 50% of TWh 1.31 0.29 0.01 0.02 0.00 0.03 0.02 0.49 0.00 0.02 0.29 0.50 total Elektrenai Supply Estimated 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Generation for Domestic Demand TWh 9.63 9.90 9.61 9.90 10.20 10.51 10.82 11.15 11.49 11.84 12.20 12.54 12.87 13.21 Generation to meet total demand TWh 16.87 17.16 12.58 12.89 13.21 13.53 13.87 14.22 14.59 14.96 15.34 15.53 15.47 15.42 Minimum Thermal Generation (160MW) TWh 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 1.40 Energy Dispatch Projections (based on order of merit loading) Ignalina #1 (Max. 70% CF) TWh 6.52 6.63 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Ignalina #2 (Max. 70% CF) TWh 6.52 6.63 4.86 4.98 5.10 5.23 5.36 2.75 0.00 0.00 0.00 0.00 0.00 0.00 Kaunas Hydro (36% CF) TWh 0.32 0.33 0.24 0.25 0.25 0.26 0.26 0.27 0.28 0.28 0.29 0.30 0.29 0.29 Kruonis Pumped Storage (5-17% CF) TWh 0.44 0.44 0.32 0.33 0.34 0.35 0.36 0.37 0.38 0.39 0.40 0.40 0.40 0.40 Klaipeda CHP (33-70% CF) TWh 0.03 0.04 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 Mazeikiai 1 & 2 CHP (45-60% CF) TWh 0.38 0.39 0.28 0.29 0.30 0.30 0.31 0.32 0.33 0.34 0.34 0.35 0.35 0.35 Vilnius 1 & 2 (5-35% CF) TWh 1.10 1.12 0.82 0.84 0.86 0.88 0.91 0.93 1.79 2.02 2.26 2.39 2.39 2.39 Vilnius HPP (35% CF)--small hydro and IPPsTWh 0.13 0.13 0.09 0.10 0.10 0.10 0.10 0.11 0.11 0.11 0.11 0.12 0.12 0.12 Kaunas 1, 2 CHP (0-35% CF) TWh 0.50 0.51 0.38 0.39 0.39 0.40 0.42 0.43 0.88 0.99 1.10 1.17 1.17 1.17 Elektrenai 1-8 TPP (3-75% CF) TWh 0.94 0.96 5.56 5.69 5.84 5.98 6.13 9.03 10.80 10.80 10.80 10.80 10.80 10.80 Total Dispatch TWh 16.87 17.16 12.58 12.89 13.21 13.53 13.87 14.22 14.59 14.96 15.34 15.53 15.47 15.42 Total Thermal Generation TWh 2.92 2.98 7.04 7.21 7.39 7.57 7.76 10.70 13.79 14.14 14.51 14.71 14.71 14.71 Electricity supplied by Elektrenai Unit 6 (after rehabilitation) Capacity needed to meet demand MW Supply from Unit 6 (300 MW)--max. 50% TWh 0.47 0.48 1.97 1.97 1.97 1.97 1.97 1.97 1.97 1.97 1.97 1.97 1.97 1.97 of total Elektrenai Supply - 24 - Project Economic Analysis Base Benefits Value Fuel Cost Savings $/MWh 0.35 Non-fuel operating cost savings $/MWh 0.10 Total base beneifts $/MWh 0.45 Other benefits NOx emission reductions $/MWh 0.13 Particulate reduction $/MWh 0.01 Total other benefits $/MWh 0.14 Heat efficiency improvement, BTU/kWh 1998 1999 2000 2001 2002 2003 2004 2005 2006 Supply from rehabilitated unit Capacity factor % 3% 19% 18% 18% 75% 75% Production GWh 87 500 470 478 1971 1971 Base incremental benefits 000$ 39 225 212 215 887 887 Other incremental benefits 000$ 13 72 68 69 284 284 Total benefits 000$ 52 297 279 284 1171 1171 Base costs--excluding environmental 000$ 42 1,874 2,549 1,020 Costs--environmental 000$ 556 1,871 250 Total incremental costs 000$ 598 3,744 2,799 1,020 - - - - - A. Net base (costs) benefits 000$ (42) (1,874) (2,549) (980) 225 212 215 887 887 B. Net total (costs) benefits 000$ (598) (3,744) (2,799) (968) 297 279 284 1,171 1,171 ERR, Case A 32% ERR, Case B 26% NPV, Case A 15,536 NPV, Case B 14,416 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Supply from rehabilitated unit Capacity factor % 75% 75% 75% 75% 75% 75% 75% 75% 75% 75% Production GWh 1971 1971 1971 1971 1971 1971 1971 1971 1971 1971 Base incremental benefits 000$ 887 887 887 887 887 887 887 887 887 887 Other incremental benefits 000$ 284 284 284 284 284 284 284 284 284 284 Total benefits 000$ 1171 1171 1171 1171 1171 1171 1171 1171 1171 1171 Base costs--excluding environmental 000$ -300000 300000 Costs--environmental 000$ Total incremental costs 000$ - - - - - - (300,000) - - 300,000 A. Net base (costs) benefits 000$ 887 887 887 887 887 887 300,887 887 887 (299,113) B. Net total (costs) benefits 000$ 1,171 1,171 1,171 1,171 1,171 1,171 301,171 1,171 1,171 (298,829) ERR, Case A -1% ERR, Case B -1% NPV, Case A 43,734 NPV, Case B 45,478 - 25 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 06/19/1992 3 TASK MANAGER; ENERGY SPECIALIST; CONSULTANT 03/24/1993 3 TASK MANAGER; ENERGY SPECIALIST; CONSULTANT 07/03/1993 3 TASK MANAGER; ENERGY SPECIALIST; CONSULTANT 10/01/1993 8 TASK MANAGER; FINANCIAL SPECIALIST (2); ENVIRONMENTAL SPEC.; OPERATIONS ASSISTANT; ENERGY SPECIALIST (2); CONSULTANT Appraisal/Negotiation 03/03/1994 7 TASK MANAGER; FINANCIAL SPECIALIST (2); ENVIRONMENTAL SPEC. (1); OPERATIONS ASSISTANT (1); ENERGY SPECIALIST (2) Supervision 06/15/1995 4 OPERATIONS ASSISTANT (1); U S ENERGY SPECIALIST (2); FINANCIAL SPECIALIST (1) 12/13/1995 7 FINANCIAL SPECIALIST (2); S S DIVISION CHIEF (1); ENVIRONMENTAL SPEC. (1); OPERATIONS ASSISTANT (1); ENERGY SPECIALIST (2) 03/29/1996 4 ENERGY SPECIALIST (2); S S ENVIRONMENTAL SPEC. (1); OPERATIONS ASSISTANT (1) 07/19/1996 3 FINANCIAL ANALYST (1); U U OPERATION ASSISTANT (1); TASK MANAGER (1) 02/07/1997 3 OPERATION ASSISTANT (1); U U TASK MANAGER (1); FINANCIAL CONSULTANT (1) 05/07/1997 5 DIVISION CHIEF (1); S S OPERATION ASSISTANT (1); TASK MANAGER (1); FINANCIAL CONSULTANT (2) - 26 - 12/12/1997 4 TASK MANAGER (1); S S ENGINEERING CONSULTANT (1); FINANCIAL CONSULTANT (1); OPERATIONS ASSISTANT (1) 09/25/1998 4 TASK MANAGER (1); S S ENGINEERING CONSULTANT (1); OPERATIONS ASSISTANT (1); FINANCIAL ANALYST (1) 05/21/1999 3 ECONOMIST (1); FINANCIAL S HS ANALYST (1); RESIDENT REP. (1) 02/09/2000 3 ECONOMIST (1); FINANCIAL S HS ANALYST (1); RES REP (1) 04/13/2001 2 ECONOMICS/TECHNICAL (1); S HS FINANCE (1) 04/13/2001 2 TEAM LEADER (1); S HS FINANCIAL ANALYST (1) 04/26/2002 2 TEAM LEADER (1); S HS FINANCIAL MANAGEMENT (1) ICR (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 294,366.88 Appraisal/Negotiation Supervision 493,902.26 ICR Total 788,269.14 - 27 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA - 28 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU 6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU - 29 - Annex 7. List of Supporting Documents 1. Lithuania Power Rehabilitation Project - Completion Report, by Lietuvos Energija AB. November 5, 2002. 2. Letter from Ms. Kamarauskiene, Director of the State Debt Management Department, Ministry of Finance, Republic of Lithuania, dated April 30, 2003. - 30 - Additional Annex 8. Borrower's Contribution to the ICR LITHUANIA POWER REHABILITATION PROJECT LOAN NUMBER 3737 LT COMPLETION REPORT VILNIUS 2002 1. Basic Loan information The Loan Agreement between the Republic of Lithuania and International Bank for Reconstruction and Development for USD 26.4 million was signed on the 27th January 1995, and became effective on the 21st November 1995. The first General Procurement Notice was published in Development Business in November 1993, updated in February 1995 and the last updating was made in January 1998. The first Amendment to the project scope was based on The World Bank Review Mission December 1-12, 1997 that approved the reallocation of loan funds and the project scope was revised as follows: Part A, (Rehabilitation) was decreased to focus it exclusively on Elektrenai Unit 6 and the rehabilitation of the Mazeikiai CHP was cancelled. Part B1, (Upgrading the Dispatch Centre in Vilnius) will be financed by other lender. Part B2, (Upgrading of the communication and control equipment) increased in communication system strengthening to accommodate the full capabilities of the enhanced Dispatch Centre. Part B3, (Replacement of equipment at high voltage transmission substations) increased in transmission system rehabilitation to accelerate reconstruction of 110kV and 330kV substations. The project, as revised, was expected to complete by December 31, 2000, i.e. two years behind the original schedule and the updated General Procurement Notice was published in January 1998. The second Amendment to the loan Agreement was based on The World Bank Review Mission June 21-25, 1998 that approved the reallocation of loan funds considering the actual contract amounts and updated project implementation dates. No changes in the project scope were introduced. The third Amendment to the loan Agreement has been approved by The World Bank Review Mission September 21-25, 1998 updating the loan funds taking into consideration the actual contract amounts and the project implementation dates. Considering the actual procurement finished up to date, the sufficient savings of the loan funds was foreseen. As a result of the World Bank Mission discussions with JSC "Lietuvos Energija" two new projects were included to part 4 (Transmission and Substations Rehabilitation), namely: 4d 110kV Equipment 4e Control and Relay Protection The Loan closing date: The Loan closing date indicated in Section 2.03 of the Loan Agreement by the World Bank's notice dated 12 February 1999 was extended from 30 June 1999 to 31 December 2000. By a further notice, dated December 27, 2001 to Ministry of Finance Republic of Lithuania, the Loan - 31 - termination date was extended to 30 June 2002. Reallocation of the Loan Categories: In order to maximise the achievement of Project objectives, the reallocation of the amounts under the Loan Categories have been recorded and signed on 1st August 2001. These amounts were reallocated in light of the Ministry of Finance request. 2. Project Implementation 2.1. Execution management In accordance with the provisions stated in the Loan Agreement Article III - Execution of the Project adequate full time local staff was selected to cover procurement, technical and financial areas of the project. These persons had to co-ordinate, manage, monitor and evaluate all Project implementation aspects, including the procurement of goods, works and services for the project. In order to cause the Project to be carried out with due diligence and efficiency in accordance with engineering and business standards and practices, the technical consultants were appointed. PreussenElektra was engaged for preparation of three Technical Specifications for Lithuanian Power Plant and later implementation of the projects and Electrotek Concepts for preparation and implementation of Dispatch Centres project. Further, for the local staff assistance through the execution of the Project, an expatriate procurement adviser was engaged. 2.2. Procurement Information Procurement of goods, works and services, including consultants' services, required for the Project and financed out of the proceeds of the Loan were carried out in accordance with the requirements of Section 2.02 of the Project Agreement. It should be underlined that Guidelines for Procurement under IBRD Loans and IDA Credits were followed without any deviation during the Project Implementation process. In accordance with provisions of Schedule 1 of the Project Agreement, a Procurement Plan was prepared. All components indicated in this plan and procurement procedures applied for these components were reviewed and approved by the Bank. The adjustments to the plan with the Bank's concurrence have been continued as needed throughout the duration of the project. Several revisions of the Procurement Plant were experienced. The overall Procurement Activities included thirteen (13) Open Single Stage Tenders, two (2) Open Two Stage Tenders, one (1) tender for consultants selection and two (2) single source consultants selection procedures. All procurement procedures were carried out and successfully completed mainly by the end of the year 2001. 2.3. Contracting On completion of competitive procedures, the evaluation of all tenders received was followed. All tenders were compared on the basis of the evaluation criteria listed in the tender documents. The tender evaluation process up to the award of the contract was confidential and a close collaboration with the evaluation committees was established. This in fact helped to complete the evaluation process and submit to the Bank a report containing the results without any delay. The Bank reviewed all findings and recommendations and confirmations were obtained as needed. Further, the signing of 18 contracts took place. - 32 - 3. Financial Information Close relations with the Ministry of Finance were established in compliance with the Loan Agreement. This successful co-operation resulted in correct reallocations of funds available and ensured timed extensions of the loan, quarterly reports and disbursements for the suppliers. The first disbursement out of the Loan was made in July 1996 and the last disbursement was made in June 2002. All disbursements procedures were completed within 71-month period. No serious deviations or delays in payment procedures were experienced. In compliance with the requirements of Section 3.01 of the Loan Agreement, the Borrower's attention in respect of project's completion was directed at the solutions, which resulted promptly installation of almost all components procured. 4. Co-operation and reporting Good co-operation with the End-Users resulted successful Project Implementation process. All requirements re necessary equipment, any technical details and other relevant information was closely discussed and agreed. This in fact helped to procure components in a best efficient way. A good collaboration with all consultants involved and with the IBRD ensured efficient monitoring on Project Implementation and resulted possibilities to avoid problems in advance. 5. Brief information on Borrower's status The Government policy has initiated the restructuring of energy sector and attracting private investments. The law on the reorganisation of the JSC "Lietuvos Energija" and transfer of District Heating and its management to municipalities was approved. This law defined the decentralisation of district heating by means of separating district heating from JSC "LE" and establishing a new special purpose JSC and transferring their property and share capital held by the state to municipalities. Starting from 1997 the core activities of the company involve only electricity energy. The separation of the JSC "Lietuvos Energija" into electricity production, transmission and distribution components were the next step initiated by the Government and implemented since year 2002. The existing JSC "Lietuvos Energija" management structure is attached. 6. Achievement of the Loan Objectives The purpose of the Project was to improve the operating efficiency of the electricity system, improve the safety, reliability and flexibility of the electricity system and provide support for the restructuring and commercialisation of JSC "Lietuvos Energija". These objectives remained unchanged during the project implementation period and were completely achieved. The Project consisted of the following parts: Part A: Rehabilitation. Part B Upgrading of the Electricity System. Part C Technical Assistance. - 33 - The equipment procured and the services provided were fully consistent with the international standards. Yours sincerely, Rymantas Juozaitis General Director of SC "Lietuvos Energija" Report prepared by: Linus Lukosevicius, JSC "Lietuvos Energija" Procurement Specialist and Aldona Sasnauskiene, JSC "Lietuvos Energija" Procurement department - 34 - Additional Annex 9. Summary financial statements of LPC, 1994-2001 INCOME STATEMENT 1994 1995 1996 1997 1998 1999 2000 2001 Revenues Electricity-Domestic n.a. n.a. 1,128 1,141 1,190 1,131 1,289 1,358 Export n.a. n.a. 362 298 539 272 102 215 Total Electricity 718 1,220 1,490 1,439 1,729 1,403 1,391 1,573 Heat 543 - - - - - - - Other 239 62 78 119 185 140 107 91 Total Revenues 1,500 1,282 1,568 1,558 1,914 1,543 1,498 1,664 Operating Costs Electricity 810 Heat 980 - - - - - - - Other 272 Total Operating Costs 2,062 1,047 1,521 1,329 1,842 1,587 1,318 1,472 Operating profit (loss) Electricity (92) - - - - - - - Heat (437) - - - - - - - Other (33) - - - - - - - Total Operating Profit (Loss) (562) 235 47 229 72 (44) 180 192 Subsidies Received 86 95 819 132 284 (9) - - Other Income and Expenses (37) (545) (508) (295) (198) (64) (68) (12) Net Profit (Loss) (513) (215) 358 66 158 (117) 112 180 BALANCE SHEET 1994 1995 1996 1997 1998 1999 2000 2001 Fixed Assets 2,002 2,975 3,061 2,007 2,172 2,193 2,153 2,172 Current Assets 480 728 1,409 507 884 608 532 598 TOTAL ASSETS 2,482 3,703 4,470 2,514 3,056 2,801 2,685 2,770 Shareholders' Equity 1,445 2,105 2,477 1,601 1,759 1,593 1,713 1,842 Long-term debt and other long-term liabilities 512 700 754 572 311 341 406 414 Current Liabilities 525 898 1,239 341 986 867 566 514 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2,482 3,703 4,470 2,514 3,056 2,801 2,685 2,770 Notes: (i) comparisons over the years 1994 to 1997 are complicated by the fact that over that period the company was withdrawing from the district heating business. For the years 1995-97 the losses on this business are included under "Other Income and Expenses". (ii) large subsidy payments received by the company in the years 1996-98 related to district heating losses in the years up to 1997. - 35 - - 36 -