PHILIPPINES Electric Cooperative System Loss Reduction Project Implementation Review Mission—September 18-30, 2010 Draft Aide Memoire 1. This aide memoire summarizes the findings of a World Bank mission1 which visited the Philippines from September 18-30, 2010 to review progress of the Electric Cooperative Loss Reduction Project (ECSLRP). The mission discussed project developments with officials from DOE and LGUGC and met other stakeholders in the rural electrification sector including the Energy Regulatory Commission (ERC). We would like to thank DOE, LGUGC and other agencies for the many courtesies extended to the mission. 2. LGUGC has booked the first three guarantees, there is a robust set of deals that are at an advanced stage of development, and a pipeline of new prospects that are lining up for support. This represents a complete turnaround of the project after the NEA-LGUGC Co-Financing Agreement signing in 2009. This is a testament to the efforts of DOE, LGUGC, NEA, ERC, and the electric cooperatives (ECs) in working collaboratively to realize the potential of the guarantee approach. A summary of the status of the portfolio and pipeline follows here: EC PHP Loan EC-PCG Exposure EC-PCG (Million) 80% of Amount USD Leverage Booked? Principal Interest* Total (@P45:$1) Ratio MORESCO I 115.00 92.00 1.61 93.61 2.08 Y PANELCO 113.00 90.40 1.58 91.98 2.04 Y SOCOTECO I 102.00 81.60 1.43 83.03 1.85 Y BOHECO I 108.40 86.72 1.52 88.24 1.96 N SURNECO 100.00 80.00 1.40 81.40 1.81 N Sub-Total 538.40 430.72 7.54 438.26 9.74 3.25 Processing Stage BUSECO 140.00 112.00 1.96 113.96 2.53 Due Diligence On-going FIBECO 140.00 112.00 1.96 113.96 2.53 Due Diligence On-going LANECO 100.00 80.00 1.40 81.40 1.81 Due Diligence On-going SOCOTECO II 100.00 80.00 1.40 81.40 1.81 Due Diligence On-going PALECO 135.00 108.00 1.89 109.89 2.44 ERC Capex submission in February 2011 Sub-Total 615.00 492.00 8.61 500.61 11.12 3.71 GRAND TOTAL 1,153.40 922.72 16.15 938.87 20.86 6.95 * 80% of 3 months interest computed at 7% 3. The above table reflects the 10 deals completed or at an advanced stage of development. If all result in guarantees being booked, about 70% of the capacity of the $10-million Guarantee Reserve Account will have been utilized to support over 1-billion pesos in lending (and total investment, including equity, of about 1.25-billion pesos). Meanwhile, another dozen electric cooperatives are being considered for entry into the pipeline, so there is a chance that the entire Guarantee Reserve Account could be committed by end-2011. On the basis of this progress the team will recommend to Bank management that the project rating is changed to satisfactory status. The change will be confirmed in the management letter to be sent following the mission. 4. With nearly $6-million in guarantees booked, the project has exceeded the threshold at which release of the second GEF tranche of $5-million for the guarantee fund can be requested. The Bank team has provided its “no objection� to the DOE request for disbursement of the balance of the guarantee 1 The mission was comprised of Alan Townsend (Task Team Leader, Senior Energy Specialist), Victor Dato (Infrastructure Specialist), Beatriz Arizu (Senior Energy Specialist), Samuel Haile Selassie (Sr. Procurement Specialist), Maya Gabriela Q. Villaluz (Senior Operations Officer), Victoria Florian S. Lazaro (Operations Officer), Aisha de Guzman (Financial Management Specialist), and Gia Mendoza (Program Assistant) reserve account allocation. Once this tranche is transferred, the guarantee fund will be capitalized to its design level, and most of the GEF grant for the project as a whole will have been disbursed. 5. There remain substantial technical assistance funds remaining in the grants to LGUGC and DOE for program management, studies, training, and other purposes. The agencies are planning to accelerate expenditures especially to: 1) respond to market demand for provision of new guarantees, which generates expenses related to due diligence and deal processing; and 2) initiate technical assistance work aimed at developed a credit risk rating system covering all electric cooperatives. 6. The proposed work to develop a credit risk rating system for the ECs is timely, and complementary to emerging concepts to develop such a system with the active participation of NEA. Given the level of funding within the DOE component of the ECSLRP, the approach that is agreed is to initiate credit risk rating work with development of the methodology and credit review process within the current project. In parallel with this work, project preparation funds from the Clean Technology Fund will be requested in support of development of the Philippines Renewable Energy Development (PhRED) project, which is proposed as a combined CTF/IBRD project with DBP as implementing agency. Since the major borrower market for PhRED is likely to be the ECs, the preparation funds will be in part used for doing the first round of ratings for as many ECs as possible (with the goal of doing all 119 under the to-be-developed methodology). 7. It is agreed that governance factors will be especially important as part of the credit risk rating system to be developed, with ECs being able to effectively increase their ratings by meeting key governance criteria. 8. The World Bank raised the issue that LGUGC’s appointment as manager of the guarantee fund will expire in the foreseeable future. Given the traction that the project has, and the complementarity of the guarantee fund with the proposed new project, it would be advisable for Government to consider re- appointment of LGUGC for a term that would parallel the planned duration of the PhRED project. This would enable a suite of financing options to be available to ECs who approach lenders for financing support for network expansion and energy efficiency investments. 9. The DOE has raised the concern on the closure of the program on Investment Management Contract (IMC) arrangement. The IMC is also eligible to avail of the PCG fund as stipulated in the Project Appraisal Document, however, it was decided to stop proceeding with the program due to the problems encountered in the pilot ECs (Camarines Sur IV Electric Cooperative Inc., Pampanga III Electric Cooperative Inc.). It was agreed to seek the direction of the Secretary on this matter in accordance to any new policy to strengthen the ECs to make them competitive under a deregulated electric power industry. 10. The mission noted the steps underway to form the Project Monitoring Board (PMB) composed of DOE, NEA, LGUGC, concerned EC and the lending bank, that will monitor progress of the participating ECs in implementing their investment plans effectively. Each of the PCG accounts will have their respective PMB as stipulated in the Guarantee Agreement between the EC and LGUGC. 11. Procurement – the team agreed that the Bank’s procurement specialist would conduct procurement post-review in October, and use the opportunity to also provide advice, as necessary, on procurements under preparation. 12. Environmental and Social Aspects – During the course of due diligence on electric cooperative loan requests, LGUGC and its consultants verify compliance of the EC’s proposed project with national rules and the standards agreed as part of the grant agreement between the Bank and the Government. It was agreed that the environmental and social specialists of the Bank will, at an appropriate time after project implementation has started with selected cooperatives, follow up with one or more site visits, and that the procedures followed in reviewing environmental and social compliance will be reviewed with LGUGC and its consultants. This is to ensure, that as a growing pipeline of loan requests is being appraised, LGUGC’s expanded team of consultants is sensitive to the importance of compliance in these areas. 13. Financial Management– The financial management rating of the DOE (TF 053360) and LGUGC (TF 053361) on the whole is considered satisfactory. a) Status of disbursements for the grant: TF053360 - As of September 30, 2010, the cumulative disbursement for the grant totaled US$5.33 million, representing 48% of the total grant amount of US$11.12 million. The grant closing date is December 31, 2011. TF053361 - As of September 30, 2010, the cumulative disbursement for the grant totaled US$395,562, representing 45% of the total grant amount of US$877,000. The grant closing date is December 31, 2011. b) Compliance with loan covenants: TF053360: i. Financial Monitoring Reports (FMRs) – The first quarter FMR for 2010 was received only on June 17, 2010. The Bank is still to receive the FMR for the second quarter which is already past the due date. ii. An audited financial statement – The audited financial statements for 2009 is still to be received by the Bank and is already past the due date. TF053361: i. Financial Monitoring Reports (FMRs) – The FMRs for 2010 for the first 2 quarters were received by the Bank before the due date. The reports were reviewed and clarifications/replies on Bank’s comments were found to be acceptable. Audited financial statements – The audited financial statements for 2009 were ii. submitted on May 31, 2010 and the external auditors issued an unqualified opinion thereon. In addition, the audited financial statements of Escrow Fund Trust Accounts T-12684 and T-12685 of LGUGC for the year ended December 31, 2009 were received by the Bank on July 7, 2010. The external auditors issued an unqualified opinion on both financial statements. c) Management of the guarantee fund under TF53360  As project manager of the guarantee operation of TF53360, LGUGC is required to have the Guarantee Funds under the trusteeship of Philippine National Bank (the escrow agent) audited. The guarantee funds consist of Guarantee Reserve Account and the Interest Income Account. LGUGC submitted the 2009 audited financial statements of the guarantee funds on July 7, 2010 and the external auditors issued unqualified opinion thereon. As of December 31, 2009, Guarantee Fund’s audited total balance amounted to $6.521 million consisting of $5.296 million under the Guarantee Reserve Account and $1.226 million under the Interest Income Account. 14. The mission noted with appreciation the contributions of the departing program manager, Ms. Mary Grace Guzman, who left the project as of September 15 to pursue other professional opportunities.