ICRR 12741 Report Number : ICRR12741 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 09/11/2007 PROJ ID : P056452 Appraisal Actual Project Name : Vn-Rural Energy US$M ): Project Costs (US$M): 201.5 203.47 Country : Vietnam Loan/ Loan /Credit (US$M): US$M ): 150.00 Sector Board : EMT Cofinancing (US$M ): US$M): 0.0 0.0 Sector (s): Power (100%) Theme (s): Regulation and competition policy (40% - P) Rural services and infrastructure (40% - P) Pollution management and environmental health (20% - S) L/C Number : C3358 Board Approval Date : 11/29/2000 Partners involved : Closing Date : 06/30/2004 12/31/2006 Evaluator : Panel Reviewer : Group Manager : Group : Alvaro J. Covarrubias Fernando Manibog Alain A. Barbu IEGSG 2. Project Objectives and Components: a. Objectives: The Project’s original development objectives (PDO) were to: (i) expand rural access to electricity to 671 communes in 32 provinces of Vietnam through grid extension, where economically justified, to improve welfare, enhance income earning capacity and help alleviate poverty; (ii) assess and develop appropriate institutional mechanisms for rural electrification in Vietnam that would facilitate: (a) a sustainable program of continued rural electrification; and (b) the long-term viability of the power sector; (iii) continued implementation of power sector reforms in accordance with the 1997 Policy Letter and Strategy; and (iv) promote local renewable energy in areas inaccessible to the national grid and also to supplement grid power supply. The key performance indicators were: (i) increase in the number of electrified rural households and communes; (ii) progress in the implementation of power sector reform; (iii) maintenance of financial soundness of Electricity of Vietnam (EVN) and its Power Companies (PCs); and (iv) progress in the introduction of policies and programs for renewable energy development. The project included financial performance indicators for EVN and PCs, plus a tariff increase to a specified value. As this value was calculated based on assumptions that failed to prove correct, the tariff indicator was later eliminated and replaced by standard financial performance indicators used in other Bank projects. The ICR does not indiciate if this change was formalized in an Amendment of the Credit Agreement. b.Were the project objectives/key associated outcome targets revised during implementation? No c. Components (or Key Conditions in the case of DPLs, as appropriate): The project was designed with four components – one for each of the three PCs with rural areas – and a fourth to ensure sustainability by providing technical assistance for capacity building, management arrangements and technical design: Component No. 1: Electrification of communes in PC1 area (northern region) to expand access to electricity to about 147,150 households (HH) in the northern areas of Vietnam in 347 communes in 13 provinces; Component No. 2: Electrification of communes in PC2 area (southern region) to expand access to electricity to 201,851 HH in 120 communes in the 10 provinces in the southern areas of Vietnam; Component No. 3: Electrification of communes in PC3 area (central region) to expand access to electricity to 204 communes in 9 provinces in the central region of Vietnam and connect 81,184 HH. Component No. 4: Technical assistance and capacity building for EVN and the PCs for institutional development. Revised components: There were no changes in the number or substance of components. Other significant changes: Yes. Change in Scope: More HH than originally planned were electrified reaching 976 communes in 35 provinces. Change in Schedule: Two additional phases ending June 2005 and December 2006 were added to accommodate the increase in project communes to be electrified. Change in Cost: The increase in the number of HH electrified did not increase the project cost because that investment was financed with funds available from savings in efficient procurement of goods through ICBs. d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: The project cost (US$194.12 million) was 3.0 % lower than the appraisal estimate (US$201.55 million) excluding taxes, duties and ICD. The funds were invested in material, equipment, and services for rural electrification of three areas: PC1 (US$87. 22 million) in the northern region, PC2 (US$52.11 million) in the southern region and PC3 (US$52.90 million) in the central region, plus technical assistance for capacity building of the government and regions (US$1.89 million). The Bank credit financed US$150.92 million equivalent to SDR99.9 million. Regional governments financed US$38.72 million (compare to US$40.7 million appraisal estimate). The Credit Agreement was declared effective in November 2000 or 6 months after Board approval. The credit closing date was extended twice for a total of 2.5 years to allow the financing of two additional phases of rural electrification and closed in December 2006 at which time SDR5.7 million was cancelled. 3. Relevance of Objectives & Design: The project development objectives were in line with the Bank’s Country Assistance Strategy at the time, which focused on poverty and social issues and lending for raising productivity through infrastructure and improving the quality of life of rural population. Project components for PCs were designed to specifically target poor communes in rural and distant areas, and taking into account the recommendations of the OED review "Rural Electrification: A Hard Look at Costs and Benefits" (May 1995). Communes were selected after verifying that grid extension was the least cost option and economically viable. Technical assistance was well designed to support the design of standard technical specifications for rural electrification, templates for economic and financial evaluation of project sub-components and formats for feasibility reports. 4. Achievement of Objectives (Efficacy): i) Expand rural access to electricity in 671 communes located in 32 provinces. Achievements : the actual electrification of 976 communes exceeded by 45% the level targeted at appraisal, including 278 of the poorest communes and more than 550,000 households in the most disadvantaged areas (41% higher than the appraisal target). The project contributed to the government's National Rural Electrification Program by providing access to electricity to 12 million of the 13 million rural households. As a result, 92.3 % of rural households are now experiencing a substantial positive impact on their living standards by having access to electricity. Rating: High (ii) Progress in the implementation of power sector reform. Achievements: (a) Decree 22 in 1999 allocated responsibility for Rural Electrification (The ICR does not indicate how the responsibilities were allocated to the institutions/companies existing in the power sector.); (b) Decree 45 in 2001 sets out the Government's strategy; (c) the Electricity Law of 2004 sets the framework for the power sector (including rural electrification) for the next 20 years; and (d) the road map for power sector reform, approved in 2006, sets milestones and timing for the transition to a power sector based on market principles. Rating: Substantial. (iii) Maintenance of financial soundness of EVN and the PCs. Achievements: EVN's financial performance has continued to be satisfactory based on the results of the 3 main financial indicators agreed with the Bank in 2004, replacing the electricity tariffs indicator. Since fiscal year 2004, the following results are indicated for EVN and the PCs: Debt Service Coverage Ratio has been 1.5 times or more; Self Financing Ratio was kept at 25% or better; and Debt to Equity Ratio has been kept at no more than 70:30. Rating: Substantial (iv) Promote the application of local renewable energy in areas inaccessible to the national grid and also to supplement grid power supply. Achievements: The project supported the Ministry of Industry in the preparation and adoption of the Renewable Energy Action Plan (REAP) which outlines a program for the connection of renewable energy to the electric grid and for non-grid supply of electricity in remote areas. A pilot scheme in Son La province and the preparation of standardized Power Purchase Agreements for renewable energy generators have been the first steps of the REAP, which will be continued with the System Efficiency Improvement and Renewable Energy Project (Credit 3680-VN) and the proposed grid-connected Renewable Energy Development Project. Rating: Substantial 5. Efficiency (not applicable to DPLs): The project's high economic benefits at closing were lower than the appraisal estimate. Although actual investment costs were lower than appraised, the lower ERR at closing is explained by rural consumption of electricity that was lower than appraised (non-household consumption was significantly overestimated at appraisal). The high costs of connections were also spread over several years (the appraisal assumed payment at the beginning of the project). Finally, actual willingness to pay of non-household consumers were lower than appraisal estimate. These factors also affected significantly the financial benefits (FRR of – 3%) because the actual cost of service was higher than the tariff set by the government for rural areas. ERR )/Financial Rate of Return (FRR) a. If available, enter the Economic Rate of Return (ERR) FRR ) at appraisal and the re -estimated value at evaluation : re- Rate Available? Point Value Coverage/Scope* Appraisal Yes 29% 100% ICR estimate Yes 21% 100% * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: Based on the achievements presented in Section 4 and the project's efficiency indicated in Section 5, the Project Outcome is rated as Satisfactory . a. Outcome Rating : Satisfactory 7. Rationale for Risk to Development Outcome Rating: The risk to development outcome is rated as Low to Negligible because: (1) upon completion, the electrification schemes have been transferred to the Provincial Power Services of EVN for decentralized operation and maintenance; (2) the local capacity of the Provincial Power Services for the operation of the rural networks in the communes under the responsibility of the PCs is well assured through technical training and technical and management manuals; (3) the satisfactory technical, commercial and financial capacity of EVN gives assurance that resources will be available to maintain and operate the rural networks in a safe and efficient way for their design lifetime; and (4) two RE follow up projects (The Second Rural Energy project, IDA 4000 VN already being implemented, and the proposed Third Rural Energy Project) are focused on the rehabilitation of rural networks and the improvement of their institutional and management arrangements. a. Risk to Development Outcome Rating : Negligible to Low 8. Assessment of Bank Performance: a. Ensuring Quality at Entry: The project responded to the CAS objectives and the Government's need to finance rural electrification. A PHRD grant was obtained for the Borrower to ensure adequate project preparation. Bank teams were fielded together with EVN staff to fully explain to stakeholders in the provinces the project design and their role in it, and to mobilize their interest and cooperation. A similar exercise was done by the project team at the provincial and district levels and at selected communes. This approach ensured commitment and adequate understanding of all stakeholders for smooth project implementation. In particular, the Bank assisted implementing agencies in the preparation of standard templates, and the definition of clear responsibilities for every concerned agency after an intensive consultation process.Rating: Satisfactory. The Task Team Leader (TTL) and most of the key task team members were based in the field and carried out close supervision of the project. This was complemented once a year with headquarter specialists during comprehensive supervision missions. Potential problems were promptly addressed and timely advice given to the implementing agencies. The Bank showed flexibility in resolving important issues raised during project implementation. Examples: (1) the Bank did not object to the request made by the Government that significant savings on procurement through ICBs be allocated to invest in more electrification of households. This also involved a change to the project schedule and an extension of the Credit closing date;(2) the Bank realized that it was more appropriate to waive the covenant on tariff setting, and replaced it with targets for standard financial indicators. (The ICR, however, does not indicate if all these changes required a formal amendment of the Credit Agreement.) The continued direct face-to-face contacts and discussions built the confidence of the implementing agencies and allowed the TTL to share successful implementation practices in a province with others facing implementation problems. c. Overall Bank Performance: Based on above ratings, Overall Bank Performance is rated Satisfactory . at -Entry :Satisfactory a. Ensuring Quality -at- b. Quality of Supervision :Satisfactory c. Overall Bank Performance :Satisfactory 9. Assessment of Borrower Performance: a. Government Performance: Rating : Satisfactory Project preparation was done by the Government in close cooperation with the Bank. The Government decision to decentralize the project to the local implementation agencies facilitated the process of preparation and implementation. A Government Steering Committee in each province supervised and guided project implementation. The local governments at the levels of province, districts and communes took the responsibility for paying compensation to owners of sites affected by the project and for clearance of sites. The provinces also assisted poor households in the payment for the low voltage drop lines to their houses. However, the approval and clearance of procurement documentation was slow, particularly in the review and clearance of payments by the financial controllers, caused by a lack of clear procedures. All the key conditions of the loan were fulfilled except the setting of a specific electricity tariff that would have impacted on the financial performance of EVN. However, IDA considered that the tariff would have been greater than reasonable given actual costs at the time, and waived this compliance by agreeing to gauge the finances of EVN based on the levels of standard financial indicators. After this agreement, financial performance of EVN was consistently satisfactory. b. Implementing Agency Performance: Rating: Highly Satisfactory The strong commitment of the regional PCs enabled the project’s PMUs to manage the execution of about 600 contracts for a large number of subprojects scattered in wide mountainous rural areas with difficult access. EVN displayed a good control of procurement, even in the period of strong fluctuation of prices, through competitive bidding that contributed to significant cost reductions and allowed the electrification of additional communes. There were delays and cost increases out of control of EVN most of them caused by low capacity and privatization actions of local contractors, and a surge in prices during the implementation of some contracts. c. Overall Borrower Performance: Based on above considerations, Borrower Performance is rated Satisfactory a. Government Performance :Satisfactory b. Implementing Agency Performance :Highly Satisfactory c. Overall Borrower Performance :Satisfactory 10. M&E Design, Implementation, & Utilization: (i) M&E Design: The Key Performance Indicators (KPIs) were well defined at appraisal under the logical framework approach and their target level or dates were appropriate. (ii) M&E Implementation: EVN set up adequate systems for collecting and compiling data on KPIs every 6 months. (iii) M&E Utilization: The KPIs were regularly monitored and progress evaluated by comparing them with targets. Similarly, the implementation of the environmental plan was regularly monitored and evaluated by social and environmental experts participating in Bank supervision missions. a. M&E Quality Rating : Substantial 11. Other Issues (Safeguards, Fiduciary, Unintended Positive and Negative Impacts): Environment. The project was included in the Environmental Category B because the rural electrification component of the project included land acquisition and rights-of-way for electric lines. The environmental management plan was prepared, duly assessed and successfully implemented in accordance with environmental procedures of the Bank. There was no resettlement of people and owners of households affected by the electric lines were adequately compensated by the local governments. Procurement. The project involved the procurement of goods and services for a large number of contracts. The competitive procurement procedures (ICBs and LCBs) using Bank procurement policies and guidelines were effectively managed and led to prices lower than estimated at appraisal. Disbursement. This was the main weakness of project implementation. A significant lag was observed between the work being done and the payment to contractors for completed works. Causes for delays were the low capacity of contractors to complete documents and drawings required for payment and to return unused equipment, all this compounded with a slow review of disbursement processes by government comptrollers. Unintended outcomes and impacts: Yes Two surveys carried out by the Institute of Sociology of the Vietnamese Academy of Sciences among beneficiaries conclude that the access to electricity by rural households, combined with access to other infrastructure services (roads, schools, clinics) have increased household income and alleviated the burden of housework on women and girls. It has also revealed a positive impact on: (1) the quality of education by bettering the conditions for study at home and for the preparation of lessons by teachers; (2) the access to information by increasing the time leisure at night for reading, watching TV and listening radio; and (3) personal security at night time. On institutional strengthening, the project created a model Service Agent where the Power Service of the PC signs contracts with local staff and trains them for performing procedures such as meter reading, bill collection, monitoring of right-of-way and minor repairs of in-house wiring. This model has cut operating costs by 50%. 12. 12. Ratings : ICR IEG Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Risk to Development Negligible to Low Negligible to Low Outcome : Bank Performance : Satisfactory Satisfactory Borrower Performance : Satisfactory Satisfactory Quality of ICR : Satisfactory NOTES: NOTES - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate . 13. Lessons: i) Long term vision. A clear roadmap aimed at achieving the final objective of the Borrower with Bank support should be developed. It should be the basis for designing specific interventions and facilitating their development. In this case, four major rural electrification projects were planned from the start to assist the Government of Vietnam to implement its Rural Electrification Program, addressing first the most urgent issues at the time, but not in the most difficult areas, and carefully preparing the institutional arrangements for the next set of interventions in more difficult areas. ii) Decentralize to the acceptable level. The decision to decentralize RE to the final implementing agencies proved to be efficient and effective in successfully implementing the project and exceeding the number of communes and households electrified. iii) Cost sharing. The development of RE is strengthened through the principle of cost sharing by the parties involved. It stimulates the mobilization of funds from several sources. Cost sharing arrangements need to be designed to ensure the ownership and dedication of related parties without surpassing their payment capacity. In this project, provincial authorities were able to provide financial support to the poorest households. iv) Stakeholders. Consulting with and obtaining strong commitments from local stakeholders are essential in projects involving a large number of parties. In this project, written commitments were obtained from rural residents, communes, districts and provinces and the layout of the electric lines were certified by those affected. v) Flexibility. Flexibility in implementation is essential -- both in term of physical scope and approval -- to allow for fast adjustment to unexpected conditions (in this case cost savings) that may contribute to an increase in the benefits of the project. vi) Project team. Projects with local implementing agencies and/or covering several local areas need a TTL and team based in the field. This allows effective coordination and interaction with the client and implementing agencies, close monitoring of project progress, and quick resolution of problems and delays arising in the project. 14. Assessment Recommended? Yes No Why? The project is replete with good lessons that an assessment could translate into good practices for rural electrification projects. The assessment can be realized jointly with the second and third rural electrification projects in Vietnam as soon as these projects had been completed. 15. Comments on Quality of ICR: The ICR complies with the Bank guidelines for preparation of ICRs. It presents a satisfactory account and evaluation of the project background, design, implementation and results. It also provides the reader with a concise description and evaluation of useful examples on project design, institutional set up, and procurement and implementation arrangements. Moreover, it includes a commendable ex-post economic and financial analysis of a rural electrification project. Based on theses findings, the ICR quality is rated Satisfactory. a.Quality of ICR Rating : Satisfactory