document of the inter-american development bank

PUBLIC

SIMULTANEOUS DISCLOSURE

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

ECUADOR

NATIONAL TRANSMISSION SYSTEM STRENGTHENING PROGRAM

(EC-L1117)

LOAN PROPOSAL

This document was prepared by the project team consisting of Jesús Tejeda (ENE/CEC),

Project Team Leader; Arnaldo Vieira de Carvalho (INE/ENE), Project Team Co-leader;

Carlos Hinestrosa (INE/ENE); Carlos J. Echevarría (ENE/CPE); Paola Méndez (INE/ENE);

Juan Carlos Páez (INE/ESG); Rafael Poveda (CAN/CEC); Gumersindo Velázquez

(FMP/CEC); Patricio Crausaz (FMP/CEC); Mónica Lugo (LEG/SGO); under the supervision

of Alejandro Melandri, Interim Chief of the Energy Division (INE/ENE) and Morgan Doyle,

Representative in Ecuador (CAN/CEC).

This document is being released to the public and distributed to the Bank’s Board of Executive Directors

simultaneously. This document has not been approved by the Board. Should the board approve the

document with amendments, a revised version will be made available to the public, thus superseding and

replacing the original version.

CONTENTS

PROJECT SUMMARY

I. DESCRIPTION AND RESULTS MONITORING ........................................................................ 1

A. Background, current situation, and proposal ........................................................... 1 B. Objectives, components, and costs .......................................................................... 9 C. Results Matrix ........................................................................................................ 10

II. FINANCING STRUCTURE AND MAIN RISKS ....................................................................... 11

A. Financing instruments ............................................................................................ 11 B. Environmental and social safeguard risks and associated mitigation measures ... 12

C. Fiduciary risk ......................................................................................................... 13 D. Execution risks ....................................................................................................... 13

E. Other special considerations and risks ................................................................... 13

III. SUMMARY OF IMPLEMENTATION MEASURES ................................................................... 14

A. Execution arrangements and period ....................................................................... 14

B. Summary of arrangements for results monitoring and evaluation ........................ 15

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ANNEXES

Annex I Summary Development Effectiveness Matrix (DEM)

Annex II Results Matrix

Annex III Fiduciary Agreements and Requirements

ELECTRONIC LINKS

REQUIRED

1. Annual work plan (AWP) http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=38270585

2. Monitoring and Evaluation Plan (M&E)

http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=38270583

3. Complete Procurement Plan


4. Environmental and Social Management Report


OPTIONAL

5. Technical and environmental studies and specifications for electric works



6. Technical, economic, and financial evaluation


7. Projected cash flow for the program


8. Midterm evaluation of loan 2457/OC-EC


9. Program rationale under the Public Utilities Policy (document GN-2716-4)


10. Piura Peru-Ecuador Extra High Voltage International Interconnection Agreement


11. Terms of reference for the final evaluation of the program


12. Paul L. Joskow, Patterns of Transmission Investment


13. Master Plan for Electrification of Ecuador 2013-2022. CONELEC


14. Plan Nacional del Buen Vivir 2013-2017

http://www.senplades.gob.ec/

pcdocs://IDBDOCS/38270585/R


pcdocs://IDBDOCS/38270596/1












http://www.senplades.gob.ec/

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ABBREVIATIONS

AWP Annual work plan

CEA Andean Electric Corridor

CELEC EP Corporación Eléctrica del Ecuador [Ecuador Power Corporation]

CENACE National Energy Control Center

CONELEC National Electricity Board

EIA Environmental impact assessment

EIRR Economic internal rate of return

ESMP Environmental and Social Management Plan

GDP Gross domestic product

IIS Integrated information system

km Kilometers

kV Kilovolts

LOEP Ley Orgánica de Empresas Públicas [Organic Law on Public Enterprises]

LPG Liquefied petroleum gas

LRSE Law on the Power Sector Regime

MC-09 Mandato Constituyente [Constituent Assembly Legislative Decree] 09

MC-15 Mandato Constituyente [Constituent Assembly Legislative Decree] 15 of

2008

MEER Ministry of Electricity and Renewable Energy

MEM Wholesale Electricity Market

MF Ministry of Finance

MVA Megavolt-ampere

MVAR Megavolt-ampere reactive

MW Megawatts

MWh Megawatt hour

NPV Net present value

PDU Power distribution utilities

PET Transmission Expansion Plan

PME Master Plan for Electrification of Ecuador 2013-2022

PMU Program Management Unit

PNBV Programa Nacional del Buen Vivir [“Good Life” National Program]

SINEA Andean Electric Interconnection System

SNI National Interconnected System

SNT National Electric Transmission System

System 500 500 kV Transmission System

PROJECT SUMMARY

ECUADOR

NATIONAL TRANSMISSION SYSTEM STRENGTHENING PROGRAM

(EC-L1117)

Financial Terms and Conditions

Borrower: Republic of Ecuador Flexible Financing Facility*

Amortization period: 25 years

Executing agency: Corporación Eléctrica del Ecuador (CELEC EP) Weighted Average Life: 15.25 years**

Disbursement period: 5 years

Source Amount (US$) Grace period: 13 years**

IDB - Ordinary Capital 150,000,000 Inspection and supervision fee: ***

Local contribution 19,500,000 Interest rate: LIBOR-based

Total 169,500,000 Credit fee: ***

Currency: U.S. dollars charged to

the Ordinary Capital

Program at a Glance

Program objective and description: To help improve the operating conditions of the National Transmission System (SNT) and ensure the

supply of high-quality energy to consumption centers, nationally and regionally. The specific objectives are: (i) to strengthen the 230 kV

and 138 kV systems of the SNT; (ii) to increase the reliability of the SNT; and (iii) to contribute to regional Extra High Voltage energy

integration, as part of the Andean Electric Corridor

Special contractual conditions precedent to the first disbursement: (i) signing and entry into effect of a subsidiary agreement between

the Ministry of Finance and the executing agency establishing the obligation to use the funds in accordance with the terms and purposes

agreed in the loan contract (paragraph 3.1); (ii) the executing agency’s establishment of the Program Management Unit (PMU), comprising

a general coordinator, a procurement specialist, a financial specialist, an environmental specialist, an electrical engineer, and a computer

engineer, as agreed with the IDB (paragraph 3.1); (iii) establishment by the executing agency of a short list for hiring an external firm to

audit the program’s financial statements and preparation of the corresponding terms of reference, approved by the IDB (paragraph 3.1); and

(iv) presentation of an updated version of the program operating manual, duly approved by CELEC EP, and its entry into effect with the

IDB’s no objection (paragraph 3.5).

Special contractual conditions for execution: Before starting the works covered in component I, the executing agency will present, to the

Bank’s satisfaction, evidence of: (i) the permits and licenses required under Ecuadorian law for constructing the projects under the program

(paragraph 3.6); (ii) the Environmental Impact Assessment (EIA) and the Environmental and Social Management Plan (ESMP), together

with the budget for their execution (paragraph 2.4); (iii) the corresponding environmental license (paragraph 2.4); (iv) the resolution

reserving rights-of-way for the new transmission lines (paragraph 2.4); (v) legal ownership of the land where the substations will be located

(paragraph 2.4); (vi) inclusion of the required environmental technical specifications and the ESMP in the contracts for construction and

supervision of the planned works (paragraph 2.4); and (vii) evidence that at least one public consultation has been held for each project,

including: (a) project description; (b) description of probable impacts; (c) description of measures for mitigating the impacts identified

(ESMP); (d) description of the system for receiving and processing complaints and claims; and (e) arrangements for receiving suggestions

concerning the proposed project or its ESMP (paragraph 2.4).

Retroactive financing and recognition of expenditures: The Bank may provide retroactive financing, charged to the loan proceeds, and

recognize expenditures, charged to the local contribution, up to an amount equivalent to 20% of the loan or the local contribution,

respectively, for eligible expenditures incurred prior to the loan approval date related to preinvestment studies for the program, provided

that such expenditures meet requirements substantially similar to those established in the loan contract (paragraph 3.2).

Exceptions to Bank policies: None

Project qualifies as: SEQ [ ] PTI [ ] Sector [ ] Geographic [ ] Headcount [ ]

* Under the Flexible Financing Facility (FN-655-1), the borrower has the option of requesting changes to the amortization schedule and currency and

interest rate conversions. When considering such requests, the Bank will take operational and risk management considerations into account. ** The original weighted average life of the loan and the grace period may be shorter, depending on the effective signature date of the loan contract. ** The credit fee and inspection and supervision fee will be established periodically by the Board of Executive Directors as part of its review of the Bank’s

lending charges, in accordance with the applicable policies.

I. DESCRIPTION AND RESULTS MONITORING

A. Background, current situation, and proposal

1.1 Background. Ecuador is pursuing a development model, the guidelines of which

were set forth in the 2008 Constitution and reflected in the Plan Nacional del Buen

Vivir 2013-2017 [“Good Life” National Plan 2013-2017] (PNBV). That model

calls for strengthening the role of the State as a driver of the economy and as a

provider of public goods and services, in particular infrastructure, health, and

education.

1.2 With the reforms introduced by the government, the Republic of Ecuador recorded

average annual growth rates of 4.6% between 2008 and 2012, and the nonoil

economy1 averaged rates of 4.8%. This growth reduced the poverty level from

29.5% in 2011 to 23.7% in 2013. Over that same time the Gini index, which

measures degrees of inequality, declined from 0.497 to 0.463. During the first

quarter of 2013, the Central Bank reported GDP growth of close to 3.5%. In this

context, investments in the energy sector are defined in accordance with the

guidelines in the PNBV and the Master Plan for Electrification 2013-2022 (PME),

aimed at achieving efficient, sustainable, and sovereign development.

1.3 Planning for the sector as laid out in the PME is based on the projection of demand

for electric power. That planning considers not only population and consumption

growth trends but also the projected new power demands resulting from mining

projects, the Pacific Refinery, the National Efficient Cooking Program, the

Petroamazonas Project for Optimizing Power Generation and Energy Efficiency,

the national program for changing the country’s energy matrix, electrically powered

public transit (the Quito Metro and the Cuenca Tranvía), and the initiative for

regional energy integration. The PME calls for developing the system to ensure that

sufficient energy reserves are available to satisfy national demand, to optimize

operating costs through international connections, and to guarantee Ecuador’s

capacity to contribute to the regional power market. To achieve these goals, the

PME cites as critical elements reliability, quality, and security in the generation,

transmission, and distribution of electric power.

1.4 The PME projects the demand for electricity using a base scenario that correlates

macroeconomic,2 demographic as well as energy and customer variables to

determine the expected trend of demand to the year 2022. As a result, it estimates

average annual growth of 5% between 2012 and 2022, reaching 26,542 gigawatt-

hours at the end of that period. This corresponds to a maximum generating capacity

of 4,723 megawatts (MW) for meeting demand in 2022. A more optimistic

scenario, which assumes full development of the strategic projects planned for

1 Nonoil GDP represents approximately 87% of total GDP.

2 The PME makes reference to a decline in the growth rate of the national economy, which affects the

industrial, residential, and commercial demand projections in which GDP was used as an explanatory

variable. As a result, average growth is estimated at 3.7% (2012-2022), below the historic average growth

rate of 4.7% (2000-2012).

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coming years (paragraph 1.3), implies growth exceeding 8%, equivalent to

6,864 MW at the end of that same period.

1.5 Electric power infrastructure. In 2013, Ecuador’s power system had an installed

generating capacity of 4,543 MW, of which hydroelectric generation accounted for

2,255 MW and thermal generation for 2,287 MW. There are new hydropower

projects now under construction, for an additional capacity of 4,165 MW. Eight of

those projects, equivalent to 2,362 MW, are regarded by the government as flagship

projects. The flagship hydropower projects located in the Amazon basin and on the

Pacific coast are expected to come on stream beginning in 2014.3

1.6 At the present time, the National Electric Transmission System (SNT) has 1,841 km

of 230 kV4 transmission lines and 1,718 km of 138 kV lines.

5 The transmission

lines are arranged in a 230 kV trunk ring with double circuit lines interconnecting

10 substations and linking the Paute hydroelectric plant, the country’s largest

generating plant, with the two most important consumption centers of Guayaquil

and Quito, as well as the rest of the country. The SNT also has 138 kV radial

transmission lines fed from the trunk ring to link power generation centers with

consumption centers. To meet the additional energy requirements of the power

distribution utilities (PDU), there are approximately 115 km of circuits operating at

69 kV.6 As part of the existing transmission infrastructure, the country has

international connection lines, and these helped to alleviate the country’s power

crisis during 2009. In 2003, 212 km of 230 kV transmission lines came on-stream

with Colombia, and in 2008 construction of a second line of the same caliber

enabled the transfer of up to 500 MW. In 2004 the interconnection with Peru came

online, with construction of 107 km of 230 kV transmission lines. This circuit

allows the noncontinuous transfer of up to 100 MW between the two countries.

1.7 Legal framework for the power sector. Legislation governing the power sector in

Ecuador is based on the 2008 Constitution, the “Constituent Mandate 15” (MC-15),

the Law on the Power Sector Regime (LRSE7) as amended (Law 2006-55), the

Organic Law on Public Enterprises (LOEP) of 2009,8 and Executive Decree 220 of

2010, creating the Empresa Pública Estratégica Corporación Eléctrica del Ecuador

[Ecuador Power Corporation] (CELEC EP). The LRSE establishes the regulatory

framework for the power sector and creates the Electric Transmission Company,

3 The amounts of public and private investment needed to carry out the generation expansion plan are

US$6,011,662 and US$1,071,837, respectively. Master Plan for Electrification 2013-2022. 4 1,285 km of double circuit and 556 km of single circuit.

5 625 km of double circuit and 1,093 km of single circuit.

6 The Galapagos Islands are operated as an isolated system of the National Interconnected System.

7 The LRSE and MC-15 set the rules for the sector. Other related provisions include Resolution 173, in which

the Ministry of Environment grants CONELEC accreditation as the responsible environmental authority;

and CONELEC regulation 003/06, specifying those power transmission lines that require environmental

impact assessments. 8 The LRSE sets objectives for power generation, transmission and distribution. The LOEP regulates aspects

concerning the establishment and management of public enterprises, including the strategic sectors.

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Transelectric S.A. Transelectric S.A. began operations in 1999 with the

disappearance of the Ecuadorian Electrification Institute (INECEL). In 2009, the

generating companies of Ecuador and Transelectric were merged, and in 2010

CELEC EP was officially created. Transelectric became a business unit of CELEC

EP, called CELEC EP-Transelectric (hereinafter Transelectric).

1.8 Institutional framework of the power sector. The agency responsible for power

sector policy is the Ministry of Electricity and Renewable Energy (MEER). The

National Electricity Board (CONELEC) is responsible for regulation and control of

the power supply and planning for the sector, subject to the National Development

Plan and the policies of the MEER. The transmission function is concentrated in

Transelectric, with the basic objective of transporting electric power and ensuring

free access to the transmission networks for agents in the Wholesale Electricity

Market (MEM).9 Distribution and marketing of electric power is handled through

10 majority publicly-owned PDUs.10,11

Technical and financial transactions on the

MEM are administered by the National Energy Control Center (CENACE).

1.9 MC-15 requires CONELEC to establish a single rate12

which the PDUs must apply

for each type of consumer. The transmission rate approved in 200813

takes into

account the costs of operation and maintenance, service quality and social and

environmental management as approved by CONELEC, recognizing that the

planned investment amounts are covered as established in MC-15.14

This rate15

is

applied to distributors and large-scale consumers in recognition of the use of the

transmission lines, transformer substations, and other elements that comprise the

SNT. All the PDUs are covered by trust funds administered by specialized

institutions in the local banking system: Banco de Guayaquil and Banco del

Pichincha, privately owned, and the publicly owned Banco del Pacífico. The

revenues of each of the PDUs, including the offset for the reduced power rate

(“tarifa dignidad”) from the government, go into the respective trust funds to

guarantee the payments associated with the provision of service, in the order of

9 The MEM consists of generators, distributors, and large-scale consumers.

10 Responsibility for providing generation, transmission, and distribution services as well as the marketing,

import, and export of electric power lies with the CELEC EP and other firms authorized by law to perform

such functions. 11

The Corporación Nacional de Electricidad (CNEL) has 10 business units and distributes power to

1.3 million customers (36% of the customer market in Ecuador). Other utility firms, serving 1.7 million

customers (46% of the customer market), are Empresa Eléctrica de Quito S.A., Unidad Eléctrica de

Guayaquil, Empresa Eléctrica Regional Centro Sur C.A., Empresa Eléctrica Azogues S.A., and Empresa

Eléctrica Riobamba S.A. 12

According MC-15, the single rate that the PDUs must apply reflects operating and maintenance costs. 13

Pursuant to CONELEC Resolution 0107/08 of 12 August 2008. 14

As of 2008, under MC-15 the government reserves the right to administer, regulate, control, and manage the

sector and provides that investments in generation, transmission, and distribution are to be financed from

the general government budget, eliminating the investment component from the power rate. 15

The transmission rate applicable in 2013 is US$1.77 per kW month of maximum demand (CONELEC,

Resolution 008/2013).

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priority established by the MEER: (i) international interconnections; (ii) generators

using renewable energies under CONELEC regulation 004/11; (iii) generation

exceeding 50 MW; (iv) payment to the PDUs for operation and maintenance; and

(v) transmission service, etc.

1.10 Knowledge of the sector. As part of the strategy for addressing the challenges

facing the SNT (paragraph 1.3), the government is financing the Transmission

Expansion Plan (PET). The Support for the Transmission Program (loan

2457/OC-EC), financed by the IDB in the amount of US$64.7 million, is part of the

PET investment plan being executed by CELEC EP through Transelectric. Loan

2457/OC-EC began execution in 2011, and its objectives include improving

electricity service conditions, minimizing the risks of interruptions in electricity

supply in the different areas of the National Interconnected System (SNI), and

improving the capacity for managing the transmission service of CELEC EP and

Transelectric. As of the first quarter of 2014, loan 2457/OC-EC had been 91%

disbursed, with 100% of the resources committed, and a level of execution of close

to 65%16

for the agreed activities. The last disbursement is planned for February

2015.

1.11 The results achieved with the PET investments in recent years include:

(i) construction of 146 km of 230 kV transmission lines and 143 km of 138 kV

transmission lines; (ii) the rehabilitation, expansion, and construction of nine

substations; and (iii) the increase in the reserve capacity by 1,104 MVA to satisfy

new demand of 60,105 MWh per month. These works have helped reduce

loadability in the Loja substation and the Cuenca-Loja Cumbaratza transmission

line, bringing them within the parameters established by CONELEC regulation

004/02.17

On this basis, the SNT has an additional reserve capacity to meet demand

in the provinces of Loja and Zamora Chinchipe. The works at the Esmeraldas and

Quinindé substations will boost their reserve capacity, ensuring that demand can be

met in accordance with current regulations.18

The investments made under loan

2457/OC-EC in the country’s northern zone will improve efficiency in the transport

of high energy flows as a result of the requirements of the zone itself and of the

138 kV corridor under conditions of maximum power transfer from Colombia,

when the Agoyán and Pucará power plants are offline. This will increase the levels

of reliability of the northern zone of the national grid, the Quito PDU, and the

power exchanges with the Colombian system. The Inga substation will provide a

new feed point from the SNT to the Quito PDU, allowing it to meet the needs of the

new Quito airport and the northeastern zone of the province of Pichincha, as well as

to connect the Coca Codo Sinclair19

and Quijos power plants to the SNI.

16

Component I, for expansion of the transmission network, has a level of execution of 65.7%. 17

Reactive Power Transactions in the MEM, which establishes the permitted SNT bus voltage variation limits

in the 138 kV lines at 0.93 p.u. and 1.05 p.u. 18

Idem. 19

http://www.ccs.gob.ec/.

http://www.ccs.gob.ec/

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1.12 Loan 2457/OC-EC is financing training for members of the 13 business units of

CELEC EP in project management, the procurement of an integrated information

system (IIS),20

and implementation of the Enterprise Resource Planning (ERP)

system. The Ecuadorian government has also used fiscal resources to promote the

adoption of better organizational practices in CELEC EP. During 2013, with the

agreement of the Strategic Sectors Coordinating Ministry (MICSE) and the MEER,

the international consulting firm of Pricewaterhouse Coopers AG Ltda. (PWC) was

hired to conduct a study on a comprehensive upgrade of the management and

operations model and improvement of the efficiency of power sector firms in

Ecuador. As a result of phase 1 of that study, completed in October 2013, a number

of organizational and technological projects have been undertaken with a view to

improving corporate management and enhancing the efficiency of the power sector.

The report on the financial audits of loan 2457/OC-EC, conducted by Deloitte &

Touche S.A., indicates satisfactory financial execution by CELEC EP.21

1.13 Current situation. The growth in demand for electric power in Ecuador has

outstripped supply, leading to an annual deficit that is estimated at more than

100 MW. In 2012, annual energy demand was 6.1% greater than in 2011. Current

reserve margins are high, but they are not available on a permanent basis because of

the great variation in hydrology between the rainy and dry seasons, fuel storage

capacity, and the periodic maintenance requirements of the power plants. The

PME’s high-growth scenario for power demand estimates that additional generating

capacity of approximately 232 MW will be needed on average each year in order to

meet demand to the year 2022, together with a robust, reliable transmission system,

with expanded capacity to take up the energy from the generating projects now

under construction. The main weaknesses that the SNT faces are closely linked to

the country’s energy security and the system’s operating security22

: (i) flexibility

for operating efficiently at times of minimum demand in the binational

interconnections; (ii) boosting capacity in substations that have been operating for

more than 30 years, thus making it possible to meet demand from the PDUs;

(iii) the need to expand the 138 kV sub-transmission system to alleviate saturation

at high consumption points; (iv) low capacity of 230 kV transmission for serving

distribution points; (v) saturation of feeders through rising demand, which entails

building new power delivery points from the SNT in order to improve the quality of

service and offer sufficient capacity; (vi) increasing the 500 kV transformer

capacity so that energy from the new generating projects can be transferred with

lower electricity losses.

20

The IIS has been used to acquire 770 additional light IFS licenses for use of Corporate Phase II,

Maintenance Modules and Projects; 330 full IFS licenses for use of the IFS phase II system. 21

Loan 2457/OC-EC Report, DOCNUM=38274571. 22

The regulations—Dispatch and Operation Procedures (006/00), Reactive Power Transactions in the MEM

(004/02), and Quality of Power Transport and Connection Service in the SNI (003/08)—establish the

quality, security, and reliability parameters that must be observed by the transmitter and all other MEM

agents.


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1.14 In response to these requirements, the government has several hydroelectric

projects under construction (paragraph 1.5), of which around 2,362 MW will come

on stream gradually beginning in 2014. Under loan 2457/OC-EC, CELEC EP is

undertaking additional works in the SNT, including 230 kV, 138 kV, and 69 kV

transmission lines as well as modernization and renovation of substations and sub-

transmission lines more than 30 years old (paragraph 1.10). Currently, construction

is under way on approximately 600 km of Ecuador’s first 500 kV extra high voltage

(EHV) transmission system (System 500) needed to bring the energy from the Coca

Codo Sinclair hydroelectric plant into the SNT, which will connect the Inga

substation in Quito with the Chorrillo substation in Guayaquil.23

1.15 System 500 is a key part of the government strategy for meeting the increased

demand for electric power, and will make it possible to proceed with development

of the Andean Electric Corridor (CEA) as part of the Andean Electric

Interconnection System (SINEA24

), which is planned as an EHV system. The

SINEA initiative had its origins in the Galapagos Declaration signed by the

governments of Bolivia, Chile, Colombia, Ecuador, and Peru on 2 April 2011 at a

meeting in Galapagos, Ecuador. During that meeting, ministers and senior officials

of the power sector agreed on the importance of the benefits that would flow from

electrical interconnection in the region, as a fundamental step for the economic

integration and development of participating countries.

1.16 Proposal. According to the PME, construction of the PET will require

approximately US$95 million a year, without considering the budget for the

projects in execution since 2012. In order to comply with the provisions of

Constituent Mandate 09 (MC-09) and MC-15, and taking into account the

experience and outcomes achieved through loan 2457/OC-EC, the government

considers it appropriate to continue with the same financing scheme, through the

National Transmission System Strengthening Program (the program), with a view

to meeting the financing needs described in the PME and the specifications of the

SNT.25

This will make it possible to connect the planned new loads (paragraph 1.3)

and to structure a robust system for incorporating System 500, which is seen as the

backbone of the CEA. In this way, the program will ensure an adequate supply of

electricity to meet the demand that will be generated by the initiative to migrate

from liquefied petroleum gas (LPG) to electricity for residential customers, and it

will facilitate progress with the binational project to build the first EHV segment

between Ecuador and Peru, pursuant to recent progress made in the negotiations

included under the Piura Agreement.26

23

System 500 will cut across a large portion of the country and will come online in two stages, in 2015 and

2016. 24

The IDB is supporting the SINEA initiative through regional technical-cooperation project RG-T2056. 25

The reliability of the transmission system plays a key role in the investment decision, above and beyond the

standard economic criteria.. Paul L. Jaskow, Patterns of Transmission Investment. MIT. IDBDOCS-

#38274468-Joskow Transmission Investment. 26

Piura Agreement 2013 - construction of the 500 kV Peru-Ecuador EHV line.

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1.17 The country’s strategy. Ecuador has a power sector strategy defined by the

guiding documents, the PNBV 2013-2017 and the PME. In line with the Bank’s

Public Utilities Policy (document GN-2716-6), the sector is consistent27 with the

core principles of supporting basic needs, transparency, financial sustainability, and

adequate institutional organization, in that it has clearly defined the following:

(i) separation of the roles of the MEER, as the policy body, the CONELEC, as the

regulatory body, and the transmission and distribution companies; (ii) the structure

of the sector, which allows private sector participation in generation28

and

distribution; and (iii) reform of the state-owned companies to improve their

management and sustainability based on rates that cover operation and

maintenance, and on government contributions that will guarantee expansion of the

sector. The program to expand and improve the SNT is also aligned with the

objectives of the Bank’s Public Utilities Policy for promoting universal and

sustainable access for electricity service through power rates, and improving the

public utility companies’ ability to provide efficient service.

1.18 Alignment with the IDB strategy with Ecuador. The Country Strategy Update

with Ecuador 2012-2017 (document GN-2680-2) considers that Bank engagement

in the sector will support the country in its effort to create a sustainable energy

strategy, one that will facilitate an adequate supply of energy, help to diversify the

country’s generating capacity, improve the system’s reliability, promote energy

efficiency, and expand coverage of electricity service. More specifically, the

program will support achievement of the objectives in the country strategy by

promoting: (i) energy diversification through greater delivery of energy from

renewable sources; (ii) energy efficiency in the transmission stage, contributing to

improving the reliability of service; and (iii) reduction of electricity losses.29

The

program is also aligned with the priority areas of the Bank’s Infrastructure Strategy:

Sustainable Infrastructure for Competitiveness and Inclusive Growth (document

GN-2710-5), in that it will: (i) promote access to infrastructure services through the

financing of works in the SNT that will ensure the interconnection of power from

strategic projects (paragraph 1.3); and (ii) improve quality of life by providing a

robust power system that, over the medium term, will see LPG replaced by

electricity for residential customers.

1.19 The IDB is currently supporting the Ecuadorian power sector through the following

operations: Support for the Transmission Program (loan 2457/OC-EC),

Modernization of Pumping Stations on the Emerald-Quito Multiproduct Pipeline

(loan 2472/OC-EC), and the Electrification Program for Rural and Marginal Urban

27

Rationale for the program under the Public Utilities Policy, document GN-2716-4, DOCNUM=38567771.

28 Private participation is allowed when public enterprises do not have the capacity to meet demand or when

necessary and appropriate for serving the public, community, or general interest. In this case, CONELEC

Regulation 002/11 requires power generation with nonconventional renewable energies. 29

Electricity losses are currently running at 12.7%. They are expected to fall to 7.5% by 2022 (PME 2013-

2022).


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Areas (loan 2608/OC-EC), which now have disbursement levels30

of 91%, 98%,

and 98%, respectively. In addition, at the end of 2013, the second stage of the

Electrification Program for Rural and Marginal Urban Areas (loan 3087/OC-EC)

was approved. Overall, these operations, pursued in the context of the strategic

programs for the sector—Electrification Plan for Rural and Marginal Urban Areas

(FERUM), Plan for Reducing Electricity Losses (PlanRep) and Plan for Improving

the Distribution Network (PMD)—have contributed to: (i) expanding the

distribution network to provide greater electricity coverage (95.4%); (ii) reducing

total electricity losses by approximately 25% on average nationwide, to 12.74%

over the last five years; and (iii) improving the system’s technical service quality

indices (AIFI from 17.88 to 14.11 and AIDI from 19.55 to 15.1131

) over the last

two years. The sound execution performance of IDB-supported operations in the

sector has provided some lessons that could be considered good practices, such as:

(i) preparing projects and their execution instruments in close collaboration with the

executing agencies, from the design stage onward; (ii) selecting projects for

financing that are prioritized in sector policy documents; (iii) continuous technical

and management strengthening of executing agencies as part of government

objectives; and (iv) continuous interaction between the IDB team and the project

management units, to facilitate understanding of the IDB’s procurement and

monitoring procedures.

1.20 The Bank is also supporting the sector in initiatives relating to energy

diversification, through the use of nonconventional renewable energies,

energy efficiency, regional power integration, reduction of electricity losses in

distribution, operation of “smart networks,” and sustainable electrification

in isolated rural areas, through a number of technical cooperation

projects: ATN/MC-11398-EC, GRT/FM-1384-EC, ATN/OC-13089-EC,

ATN/ME-13933-EC, ATN/OC-13350-RG,32

and ATN/KK-14170-EC.33

1.21 Consistency with the Ninth General Capital Increase (GCI-9). This operation is

aligned with the priorities for the lending program established in the GCI-9

(document AB-2764): (i) lending to small and vulnerable countries; (ii) lending to

support climate change initiatives, renewable energy and environmental

sustainability; and (iii) lending to support regional cooperation and integration by

strengthening the transmission system with Colombia, improving the reliability of

the transmission system as a transition to System 500, and supporting the design of

the EHV power interconnection with Peru. The expected outcomes of the program

will contribute to the following outputs in the GCI-9 results framework:

(i) kilometers of new transmission lines installed or upgraded; (ii) number of cross-

30

Disbursement status as of December 2013. 31

AIFI: Average Interruption Frequency Index (per nominal installed kVA); AIDI: Average Interruption

Duration Index (per nominal installed kVA). 32

Support for Andean Electrical Interconnection Studies. 33

Analysis and recommendations for the successful implementation of the Smart Grid Program in Ecuador.

Pending IDB approval.

- 9 -

border or transnational projects supported; and (iii) contribution to regional

development goals relating to stabilization of CO2 emissions through adequate

transfer and dispatch of energy from renewable sources.

B. Objectives, components, and costs

1.22 The general objective of the program is to help improve the operating conditions of

the SNT and ensure the supply of high-quality energy to consumption centers,

nationally and regionally. The specific objectives are: (i) to strengthen the 230 kV

and 138 kV systems of the SNT; (ii) to increase the reliability ratings of the SNT;

and (iii) to contribute to regional EHV energy integration, as part of the CEA. The

program includes two components:

1.23 Component I. Expansion and strengthening to improve transmission capacity

and quality of the SNT (US$162 million). This component accounts for 96.6% of

program resources, and includes preinvestment studies and the construction of four

new transmission systems, as well as the expansion of two existing systems:

(i) Santo Domingo-Esmeraldas transmission system, with 163 km of transmission

lines (230-kV), and substations of 230/138 kV; (ii) Tabacundo transmission system

with 25 km of transmission lines (230-kV and 138-kV) and 230/138-kV and

230/69-kV substations; (iii) Durán transmission system with 10 km of transmission

lines (230-kV) and a 230/69-kV substation; (iv) Concordia-Pedernales transmission

system with 95 km of transmission lines (230-kV) and two substations of

138/69 kV; (v) transmission system for the expansion of substations: 138/69 kV

and the increase of capacitive power by 30-MVAR; and (vi) transmission system

for improving the Esclusas substations with capacitors of 2x60 MVAR. These

works are part of the PET in the Northern, Tabacundo, and Riombamba; the

Southern zone, Yanacocha; the Southwestern zone, Durán, as well as the

interconnection of the Santo Domingo-Esmeraldas and Pedernales-La Concordia

segment. These works will boost hydroelectric generation in the provinces of Santo

Domingo, Esmeraldas, and Guayas while reducing generation needs at the

Esmeraldas and Trinitaria thermal power plants, meeting the growing needs of the

southern and northern regional PDUs, strengthening the interconnection with

Colombia through the Tabacundo substation, relieving congestion on the Milagro-

Dos Cerritos-Pascuales 230-kV power corridor, and improving the voltage profiles

and power supply capacity of the SNT bus bars in the province of Manabí.

1.24 Component II. Final design for development of the EHV Electrical

Interconnection Infrastructure with Peru (US$5.6 million). With reference to

the electrical integration infrastructure planning study34

financed under the SINEA,

entry into service of a 500 kV transmission line between Ecuador and Peru will

produce a significant “coupling” of marginal costs in the two countries. The study

shows that the benefits derived from the time this line enters into service will

average US$94.0 million annually over the period 2017-2020, US$165.0 million

34

Study financed through technical cooperation project RG-T2056. Planning Report. AF-Mercados, SIGLA,

August 2013.

- 10 -

annually between 2021, and 2025, and up to US$172.0 million annually from 2026

to 2030. The total approximate cost of this interconnection would be

US$210 million, and with a rate of return of 12% and 30 years of useful life, its

annual cost would be around US$26 million. Comparing this value with the total

savings to be obtained, the interconnection clearly makes economic sense. On the

basis of these results, 3.3% of program resources will be used in this component to

finance final designs and development of environmental specifications for the EHV

system, including:35

geographic location of the project, topography, soil mechanics,

layout of roads and existing infrastructure, design criteria, configuration of the

proposed system, costs, climate, access areas, applicable standards and regulations,

equipment specifications, works, time schedule, and telecommunication and control

systems.

1.25 Cost and financing. The estimated cost of the program is US$169.5 million, of

which US$150 million will be financed by the IDB and US$19.5 million

recognized as the local counterpart contribution (see Table 1).

Table 1. Program costs (US$ thousands)

COMPONENTS FINANCING

TOTAL IDB COUNTERPART

*

Component I. Expansion and strengthening to improve

transmission capacity and quality of the SNT 145,000 17,400 162,400

Santo Domingo-Esmeraldas transmission system 58,035 6,964 64,999

Tabacundo transmission system 29,286 3,514 32,800

Durán transmission system 12,388 1,486 13,874

Concordia-Pedernales 138/69 kV, 66 MVA transmission system 25,782 3,094 28,876

Expansion projects 19,509 2,342 21,851

Component II. Final design for development of the EHV

electrical interconnection infrastructure with Peru 5,000 600 5,600

Program administration 0.0 1,500 1,500

Program monitoring and supervision 0.0 150 150

Program management unit (PMU) 0.0 600 600

Midterm and final program evaluations 0.0 100 100

External audits 0.0 150 150

Contingencies 0.0 500 500

TOTAL 150,000 19,500 169,500 * Amount to be contributed by CELEC EP

C. Results Matrix

1.26 The program has a results matrix showing outcome indicators and targets

associated with its objectives and components. The indicators selected for the

35

The specific scope will be defined in the terms of reference for the final designs to be prepared.

- 11 -

overall outcomes are: (i) reserve transmission capacity (MVA) for meeting demand

in the SNI; (ii) average maximum loadability in transmission lines and substations;

and (iii) incremental demand met from new installations associated with the

program (MWh per month). In addition, the thermal generation displaced will be

measured as will the reduction in electricity losses. The results and targets have

been formulated and projected for five years (2014-2019) (see Annex II, Results

Matrix).36

II. FINANCING STRUCTURE AND MAIN RISKS

A. Financing instruments

2.1 The program will be financed as a specific investment loan. The funds will be

disbursed over a period of five years, starting on the loan contract’s effective date:

Table 2. Disbursement schedule (US$ millions)

Source Year 1 Year 2 Year3 Year 4 Year 5 Total

IDB 10.8 43.2 39.7 29.5 26.8 150

Counterpart 1.38 5.52 5.0 3.8 3.8 19.5

Cumulative 12.3 48.7 44.7 33.3 30.5 169.5

2.2 Economic and financial analysis. The economic evaluation of component I

identified the type of impact on electricity service of the various works included in

the component, grouping them into 10 projects. The economic rate of return was

calculated for each of the proposed projects. Starting with a technical analysis of

demand, load flow, and simulations of load dispatch in the national grid, projections

were obtained as needed to estimate the annual costs and benefits associated with

each project over the period 2014-2023. The results for recent years were

extrapolated over the remaining useful life of the assets, estimated at 40 years. The

economic return was evaluated at market prices and at efficiency prices, using

shadow price relationships. The economic evaluation of the program at efficiency

prices indicates an economic internal rate of return (EIRR) of 28.1% and a net

present value (NPV) of net benefits to the country, discounted at 12%, of

US$194.1 million. The sensitivity analysis shows that, under adverse changes on

the order of 15% in the main parameters used in the evaluation, the program’s

EIRR is still above 12%. The evaluation of the program’s financial impact took into

account additional revenues from transporting greater amounts of electricity and

replacing thermal generation, resulting in an IRR of 15.3% and an NPV of

US$29.9 million. The analysis for component II yields an NPV of US$428 million,

a cost recovery period of three years, and an IRR of 34%.

36

The indicators, their baselines, and target values have been analyzed and agreed with CELEC EP. These

indicators will be used for monitoring and evaluation of the program, with the support of Transelectric.

- 12 -

B. Environmental and social safeguard risks and associated mitigation

measures

2.3 The program will have positive impacts by improving the reliability and quality of

the country’s electricity supply, reducing losses, and transferring the greater volume

of energy generated. Any potential adverse social and environmental impact would

arise primarily during the construction phase37

for the new substations and

transmission lines, and to a lesser extent during operation.38

There is not expected

to be any involuntary resettlement or economic displacement of people. The

impacts will be moderate and easy to handle through standard procedures.39

Consistent with the Bank’s Environment and Safeguards Compliance Policy

(Operational Policy OP-703), the program was classified as a category “B”

operation. Because of its characteristics, the program is also subject to Operational

Policies OP-704 scenario I and OP-765,40

and these have been considered in the

Environmental and Social Management Plan (ESMP).

2.4 With respect to the social and environmental risks, in addition to observing the

operating conditions established for this purpose, the executing agency will present

to the Bank’s satisfaction, before beginning construction on any of the works:

(i) the Environmental Impact Assessment and the ESMP, together with the budget

for their execution; (ii) the corresponding environmental license; (iii) the resolution

reserving rights-of-way for the new transmission lines; (iv) evidence of legal

ownership of the land where the substations are to be located; (v) inclusion of the

required environmental technical specifications and the ESMP in the contracts for

construction and supervision of the planned works; and (vi) evidence that at least

one public consultation has been held for each project, including: (a) project

description; (b) description of probable impacts; (c) description of measures for

mitigating the identified impacts (ESMP); (d) description of the system for

receiving and processing complaints and claims; and (e) arrangements for receiving

suggestions concerning the proposed project or its ESMP. The Bank will supervise

the environmental and social aspects of the works financed on a semiannual basis,

including visits at the beginning of the works and upon their acceptance.

37

These include: (i) the impact on air quality through the uncontrolled emission of particulate matter into the

atmosphere as a result of construction work on the transmission lines and substations; (ii) noise generated in

the vicinity of works through the operation of construction machinery and equipment and the installation of

towers, in particular; (iii) generation of liquid, solid, and gaseous wastes; and (iv) increased risk of accidents

due to the presence of machinery, faulty disposal of debris or materials, or lack of work signage. 38

These include: (i) changes in land use along the route of the transmission lines and at substation sites;

(ii) depreciated economic value of adjacent properties due to restricted use for other activities; (iii) non-

ionizing radiation emissions in the direct zones of influence of the power transmission networks; and

(iv) generation of common and hazardous wastes through maintenance work, especially on the

transformers. 39

The Environmental and Social Management Report (IDBDOCS 38228050) presents an analysis of the main

potential impacts, as well as the measures for mitigating them. 40

Operational Policy OP-704, Disaster Risk Management Policy; Operational Policy OP-765, Indigenous

Peoples Policy.

- 13 -

C. Fiduciary risk

2.5 The evaluation of the fiduciary capacity of CELEC EP and its Transelectric

business unit showed that the executing agency has sufficient capacity to carry out

the planning, financial management, and procurement activities for the program. No

significant fiduciary risks were identified.

D. Execution risks

2.6 Program management risks. Risks identified relate to events that could cause

delays during execution: (i) timely transfer of program funds from the Ministry of

Finance (MF) to the executing agency; (ii) changes in the PMU and its full-time

dedication to the program; and (iii) the capacity to prepare bidding processes for

complex works. To mitigate these risks, as a condition precedent to the first

disbursement, a suitable mechanism will be agreed for transferring program funds

from the MF to the executing agency’s consolidated account and for ensuring that

those funds are used in accordance with the terms and purposes established in the

loan contract. Furthermore, in setting up the PMU, the executing agency will

confirm full-time dedication of the team assigned to program execution and the

profile of the team will be agreed upon in order to mitigate risks in the preparation

of complex bidding processes.

2.7 Procurement risks. The potential risks lie in the capacity of executing agency

personnel to follow IDB procurement policies properly. Although good

procurement practices were evident during implementation of loan 2457/OC-EC,

potential personnel turnover within the organization may pose the need for further

training. To mitigate this risk, every effort will be made to retain the PMU

personnel who have been successfully executing loan 2457/OC-EC, or to select

new personnel in accordance with the profile of each position, as well as to provide

ongoing training to the PMU on Bank procurement policies.

2.8 Political risk. This risk relates to the possibility of changes in the decision to

pursue regional electrical integration. The integration initiative is spelled out in the

PME, which places special emphasis on the electrical interconnection with Peru.

This risk is not expected to affect component II of the program. Moreover, the

inclusion of support for designing the EHV interconnection infrastructure with Peru

will facilitate monitoring of the bilateral negotiations and the final agreements for

the future construction of the EHV line with Peru.

E. Other special considerations and risks

2.9 Technical and economic viability.41

The technical viability of these projects is

ensured by the preparation of designs and the construction approval process. The

designs of program projects are prepared in accordance with current technical,

regulatory, social, and environmental specifications in the sector. This process will

help to mitigate risks associated with social objections in the areas of influence of

41

Technical, economic, and financial evaluation, DOCNUM=38270587.


- 14 -

the projects to be financed. Development of these projects is an integral part of the

PET, and their priority is described in the PME. During project selection, a rigorous

analysis of their economic viability was performed to determine their sustainability,

along with a sensitivity analysis of the results to changes in investment costs,

operating and maintenance costs, the cost of electric power, the average rate to the

end consumer, the price-elasticity of demand, the benefits arising from greater

reliability, savings in terms of electricity losses, and savings in generation costs;

that analysis demonstrated the robustness of the estimated economic and financial

viability of the program.

2.10 CELEC EP has already requested the budgetary item for executing the PET, which

includes this program. Asset replacement and operations and maintenance will be

financed through power rates approved by CONELEC for regulated transmission

services, and this will ensure the program’s sustainability. The expected economic

and financial benefits from the projects relate primarily to: (i) the reduction in

thermal generation using high-cost liquid fuels; (ii) the reduction in technical losses

in the national grid; (iii) the satisfaction of demand that is unmet or anticipated

through natural growth; and (iv) improvements in the quality and reliability of the

power supply.

III. SUMMARY OF IMPLEMENTATION MEASURES

A. Execution arrangements and period

3.1 The program’s planned execution period is five years. The executing agency is

CELEC EP, through the Transelectric business unit. Execution of the following

activities will be part of the special contractual conditions precedent to the first

disbursement:42

(i) signing and entry into effect of a subsidiary agreement

between the Finance Ministry and the executing agency establishing the

obligation to use the funds in accordance with the terms and purposes agreed

in the loan contract; (ii) the executing agency’s establishment of the PMU,

devoted to the program’s execution and comprising a general coordinator, a

procurement specialist, a financial specialist, an environmental specialist, an

electrical engineer, and a computer engineer, as agreed with the IDB; and

(iii) establishment by the executing agency of a short list for hiring an external

firm to audit the program’s financial statements and preparation of the

corresponding terms of reference, approved by the IDB.

3.2 Procurement plan. The IDB team and the executing agency have agreed on a

procurement plan for the first 12 months of execution. The executing agency will

update the plan annually with the planned annual monitoring reports and before the

42

The Program will be executed on the basis of the documents included in the Initial Report according to the

General Conditions 4.01(d) of the loan contract. The program management unit (PMU) will review and

update these documents in accordance with the General Conditions and submit them to the IDB for its no

objection.

- 15 -

end of each calendar year or whenever there are substantial changes covering the

remaining months of the program execution period.

3.3 Retroactive financing and recognition of expenditures. The Bank may provide

retroactive financing, charged to the loan proceeds, and recognize expenditures,

charged to the local contribution, up to an amount equivalent to 20% of the loan or

the local contribution, respectively, for eligible expenditures incurred prior to the

loan approval date related to preinvestment studies for the program, provided that

such expenditures meet requirements substantially similar to those established in

the loan contract.43

3.4 Disbursements and advances of funds. The loan will be disbursed in the form of

advances of funds in accordance with the program’s estimated liquidity needs based

on the annual work plan and the procurement plan. Cash needs will be programmed

with a moving 12-month horizon, and advances will cover the needs of five months

of execution.

3.5 Audits. External audit services for the program will be provided by a firm of

external auditors acceptable to the IDB, which will be contracted on the basis of

terms of reference agreed with the executing agency. The cost of external audits

will be covered by the local counterpart resources.

3.6 Project Operating Manual. The program’s procedures have been clearly spelled

out in the Project Operating Manual for loan 2457/OC-EC. They include a full

system for monitoring and evaluating actions and outcomes, both for the CELEC

EP itself and for the external auditors. Presentation of an updated version of the

manual, duly approved by CELEC EP, and its entry into effect with the IDB’s

no objection, will be a special contractual condition precedent to the first

disbursement.

3.7 Special execution conditions. Before starting the works under component I, the

executing agency will present, to the Bank’s satisfaction, evidence that it has the

permits and licenses required by Ecuadorian law for construction of the projects

under the program, and that it is in compliance with the environmental conditions

described above (paragraph 2.4).

B. Summary of arrangements for results monitoring and evaluation

3.8 Monitoring arrangements. The IDB will conduct semiannual technical visits to

the executing agency to review progress under the program and to make any

adjustments needed in its execution. Fiduciary oversight visits will be take place

once a year. External audits of program accounts and operations are planned to

validate the use of the loan proceeds and the internal operating processes and

controls followed within the executing agency.

43

Such expenditures must have been incurred beginning 7 March 2014.

- 16 -

3.9 Program evaluation arrangements. Evaluation of the program is reflected in the

Monitoring and Evaluation Plan44

and will include a midterm and a final

evaluation, financed with the counterpart funds. The midterm evaluation will be

contracted by the executing agency within two months after 50% of the IDB loan

proceeds have been committed. The final evaluation will be contracted by the

executing agency within two months after 95% of the Bank’s loan proceeds have

been disbursed.45

The semiannual and annual progress reports will be submitted by

the executing agency as described in the Program Monitoring and Evaluation

document. The IDB team will conduct semiannual visits to the works sites and will

maintain ongoing collaboration through the Energy Division (INE/INE) and the

Country Office in Ecuador (CAN/CEC).

44

Monitoring and Evaluation Plan (M&E), DOCNUM=38270583. 45

As part of the final evaluation of the program, and in order to assess its impacts, an ex post cost-benefit

evaluation will be performed to verify the assumptions and determine the impacts of the operation.


Annex I - EC-L1117

Page 1 of 1

1. IDB Strategic Development Objectives

Lending Program

Regional Development Goals

Bank Output Contribution (as defined in Results Framework of IDB-9)

2. Country Strategy Development Objectives

Country Strategy Results Matrix GN-2680

Country Program Results Matrix GN-2756

Relevance of this project to country development challenges (If not aligned to country

strategy or country program)

II. Development Outcomes - Evaluability Evaluable Weight Maximum Score

8.8 10

3. Evidence-based Assessment & Solution 10.0 33.33% 10

3.1 Program Diagnosis 3.0

3.2 Proposed Interventions or Solutions 4.0

3.3 Results Matrix Quality 3.0

4. Ex ante Economic Analysis 10.0 33.33% 10

4.1 The program has an ERR/NPV, a Cost-Effectiveness Analysis or a General Economic

Analysis4.0

4.2 Identified and Quantified Benefits 1.5

4.3 Identified and Quantified Costs 1.5

4.4 Reasonable Assumptions 1.5

4.5 Sensitivity Analysis 1.5

5. Monitoring and Evaluation 6.4 33.33% 10

5.1 Monitoring Mechanisms 2.5

5.2 Evaluation Plan 3.9

Overall risks rate = magnitude of risks*likelihood

Identified risks have been rated for magnitude and likelihood

Mitigation measures have been identified for major risks

Mitigation measures have indicators for tracking their implementation

Environmental & social risk classification

The project relies on the use of country systems

Fiduciary (VPC/PDP Criteria) Yes

Non-Fiduciary

The IDB’s involvement promotes improvements of the intended beneficiaries and/or public

sector entity in the following dimensions:

Gender Equality

Labor

Environment

Additional (to project preparation) technical assistance was provided to the public sector

entity prior to approval to increase the likelihood of success of the projectYes

The ex-post impact evaluation of the project will produce evidence to close knowledge gaps in

the sector that were identified in the project document and/or in the evaluation plan

Financial Managemente: i) Budget; ii) Treasury; iii) External

control.

Procurement: i) Information System

The Ecuadorian Electrification Master Plan is based on the need to ensure satisfaction of the projected energy demand considering the energy reserves and the need for cost optimization. In order

to achieve this goal, it is critical to have a reliable system with quality and safety in the generation, transmission and distribution services. The POD explains in detail the structure of the system

including a description of the National Transmission System and the challenges and progress in its operational management. The challenges ahead are also presented in a context in which the

demand has outgrown planned supply requiring not only greater generation capacity but also a more robust, reliable transmission system with higher capacity.

The proposed project is clearly articulated with this detailed analysis of the energy situation, and proposes funding for two components: (i) Expansion and strengthening to improve the capacity and

transmission quality of the National Transmission System (96% of resources) and (ii) Final designs for the development of the Infrastructure for Electrical High Voltage Interconnection with Peru.

As a result of this diagnosis, the intervention that is proposed has a clear vertical logic and its final impacts are associated with the project's contribution to mitigating climate change and improving

the efficiency of the transmission system as a whole. These impacts will be achieved by increasing the reserve capacity of the system in the transmission lines and substations to be funded, the level

of "chargeability" in transmission lines and the incremental demand to be satisfied with the additional Power Substations.

The distributed package contains a full economic analysis which in the base case scenario results in a 28.1% Economic Internal Rate of Return and US$194.1 million in Net Present Value. Simulations

show that, under unfavorable variations of the order of 15% in the main parameters involved in the assessment, the Internal Rate of Return is always above 12%

The Monitoring and Evaluation Plan proposes a reflexive socioeconomic analysis and an ex post Cost Benefit evaluation.

The Government of Ecuador received technical assistance to

improve its capacitites to design and evaluate photovoltaic

systems (EC-T1235). In addition, a TC (EC-T1280) is expected to

support the current operation.

Low

Yes

III. Risks & Mitigation Monitoring Matrix

IV. IDB´s Role - Additionality

Yes

Yes

B

(i) Km of electricity transmission and distribution lines installed or upgraded (ii) Number of cross

border and transnational projects supported.

Aligned

Create a long-term energy strategy that promotes a sustainable

energy framework, facilitates adequate energy supply, and

improves access to electric power.

The operation is included in the 2014 Country Program

Document.

Development Effectiveness Matrix

Summary

Aligned

(i) Lending to small and vulnerable countries; (ii) Lending to support climate change initiatives,

renewable energy and environmental sustainability and (iii) Lending to support regional

cooperation and integration.

I. Strategic Alignment

Annex II

Page 1 of 4

RESULTS FRAMEWORK

MATRIX OF INDICATORS

Output indicator Baseline

(2013) Year 1 Year 2 Year 3 Year 4 Year 5

Final

target Means of verification

Component I – Expansion and strengthening to improve the transmission capacity and quality of the SNT

1.1 Santo Domingo-Esmeraldas

transmission system completed

(US$000)

0.0 5,850 23,399 12,998 12,998 9,705 64,993 Project progress report

1.1.1 163 km of 230 kV

transmission lines completed

(US$000)


1.1.2 Expansion Esmeraldas

230/138 kV substation completed

(US$000)


1.1.3 Modernization 138 and 69 kV

substation completed (US$000) 0.0 224 896 497 497 373 2,487 Project progress report

1.2 Tabacundo transmission

system completed (US$000) 0.0 2,951 11,807 6,559 6,559 4,919 32,795 Project progress report

1.2.1 25 km of 230 and 138 kV

transmission lines completed

(US$000)


1.2.2 Construction 230/138 kV

substation completed (US$000) 0.0 1,829 7,318 4,065 4,065 3,049 20,328 Project progress report

1.3 Durán transmission system

completed (US$000) 0.0 1,249 4,994 2,774 2,774 2,080 13,874 Project progress report

1.3.1 10 km of 230 kV transmission

lines completed (US$000) 0.0 263 1,052 584 584 438 2,921 Project progress report

Objectives

To help improve the operating conditions of the National Transmission System (SNT) and ensure the supply of high-quality energy to

consumption centers, nationally and regionally. The specific objectives are: (i) to reinforce the 230 kV and 138 kV systems of the

SNT; (ii) to increase the reliability of the SNT; and (iii) to contribute to regional Extra High Voltage energy integration, as part of the

Andean Electric Corridor.

Annex II

Page 2 of 4



Final



substation completed (US$000) 0.0 986 3,942 2,190 2,190 1,642 10,950 Project progress report

1.4 La Concordia-Pedernales

transmission system completed

(US$000)

0.0 0.0 0.0 12,512 5,775 10,585 28,875 Project progress report

1.4.1 95 km of 138 kV transmission

lines completed (US$000) 0.0 0.0 0.0 8,022 3,702 6,787 18,511 Project progress report


substation completed (US$000) 0.0 0.0 0.0 2,860 1,320 2,420 6,600 Project progress report

1.4.3 138 kV substation sectioning

completed (US$000) 0.0 0.0 0.0 1,629 752 1,378 3,759 Project progress report

1.5 Expansion transmission

system completed (US$000) 0.0 1,726 6,902 5,409 4,960 2,840 21,837 Project progress report

1.5.1-Expansion of Yanacocha


(US$000)

0.0 390 1,561 1,064 1,064 354 4,435 Project progress report

1.5.2 Expansion of Riobamba


(US$000)

0.0 377 1,506 837 837 627 4,184 Project progress report

1.5.3 San Gregorio 30 MVAR

substation capacitors completed

(US$000)

0.0 82 329 224 224 74 933 Project progress report

1.5.4 Expansion of San Gregorio


(US$000)

0.0 527 2,108 1,437 1,437 479 5,988 Project progress report

1.5.5 Expansion of El Inga


(US$000)

0.0 350 1,398 777 777 582 3,884 Project progress report

1.5.6 Quality improvement

Esclusas substation, 2x60 MVAR,

completed (US$000)

0.0 0.0 0.0 1,070 621 724 2,415 Project progress report

Annex II

Page 3 of 4



Final


Component 2 – Final design studies for the EHV Electrical Interconnection with Peru

Infrastructure design for the

500 kV interconnection line with

Peru, completed (US$000)

0.0 200 800 1,000 1,000 0.0 3,000 Project progress report

Environmental and social studies

of the 500 kV interconnection line

with Peru completed (US$000).

0.0 100 400 500 1,000 0.0 2,000 Project progress report

1 Load capacity of the transmission lines and substations.

Outcome indicators Baseline

(2013) Year 6 Means of verification Observations

Component I – Expansion and strengthening to improve the transmission capacity and quality of the SNT

Increased reserve capacity in the transmission

lines of projects financed in order to meet

power demand in the areas of influence (MVA)

0.0 970 Final project evaluation Baseline and target validated by TRANSELECTRIC

(100% of thermal limit)

Average maximum loadability level1 in the

transmission lines financed (MVA) 0.0 ≤ 775.96 Final project evaluation

Final target in light of current CONELEC regulations

(80% of thermal limit)

Increased reserve capacity in the substations of

projects financed in order to meet power

demand in the areas of influence (MVA)

400 1,936.70 Final project evaluation Baseline and target validated by TRANSELECTRIC

(90% of installed capacity)

Incremental demand satisfied through the

substations financed (MW) 0.0 395 Final project evaluation Baseline and target validated by TRANSELECTRIC

Component 2 – Final design studies for the EHV Electrical Interconnection with Peru

Government decision to finance construction of

the 500-kV line for the EHV interconnection

with Peru (official notice published).

0.0 1 Government notice

CELEC EP through its business unit

TRANSELECTRIC will be responsible for building

the 500-kV line with Peru.

Annex II

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2 Evaluates the cost of not supplying incremental demand at cost of ENS= US$1,533/MWh.

3 Based on the impact of the 230 kV Santo Domingo-Esmeraldas transmission system.

Impact indicators Baseline

(2013)

Final target

Year 5 Means of verification

Climate change mitigation

Reduced thermal generation (MW) 0.0 130 Final project evaluation

CO2 avoided through the program (Tons of CO2 eq./year) 0.0 Tbc

Transmission efficiency

Savings from improved capacity and quality of electricity transmission in the

SNT2 (US$/day)

0.0 26,145 Final project evaluation

Average level of electricity losses in the SNT (%) 3.32 2.343

Annex III

Page 1 of 8

FIDUCIARY AGREEMENTS AND REQUIREMENTS

Project number: EC-L1117

Name: National Transmission System Strengthening Program

Executing agency: Corporación Eléctrica del Ecuador (CELEC EP)

Prepared by: Patricio Crausaz and Gumersindo Velásquez (FMP/CEC)

I. EXECUTIVE SUMMARY

1.1 The executing agency for this program will be the public enterprise CELEC EP,

through its business unit Transelectric. CELEC EP will be responsible for the

tendering, contracting, and technical and fiduciary management of the goods,

works, and nonconsulting services, as well as the consulting services to be

financed by the loan. The executing agency has the capacity and the means to

carry out its responsibilities under the program, and the overall fiduciary risk is

assessed as low. The proposed supervision plan is consistent with that assessment.

II. FIDUCIARY CONTEXT OF THE COUNTRY

2.1 The National Public Procurement System (SNCP) was created by law in August

2008, and applies to all entities of the public sector, including public enterprises.

Article 34 of the Organic Law on Public Enterprises (LOEP) provides that all

contracting by public enterprises for the procurement of works, goods, and

services, including consulting services, will be subject to the National

Development Plan, with due regard to the national and corporate budgets, and

must be substantiated in a strategic plan and an annual procurement plan.

2.2 The National Public Finance System (SINFIP), under the stewardship of the

Ministry of Finance (MF), contains all the standards, policies, instruments,

processes, activities, records, and operations that Ecuador’s public sector entities

and agencies and the public financial system are to use in programming and

managing public revenues, expenditures, and financing. The LOEP (general

provision 5) provides that public enterprises are not required to keep their

accounts in accordance with the government’s accounting standards, nor are they

obliged to manage their financial resources through the Single Treasury Account

or through e-SIGEF. Public enterprises may apply generally accepted accounting

principles and international accounting standards for producing all the financial

information needed to measure their management performance, both

administrative and financial. Public enterprises are required to report their

Annex III

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financial management outcomes to the MF in the formats determined by the

Ministry.

III. FIDUCIARY CONTEXT OF THE EXECUTING AGENCY

3.1 The new program will be executed by CELEC EP, through its business unit

Transelectric. CELEC EP will be responsible for all aspects of the project cycle

and for management of the IDB loan proceeds and the local contribution, and will

periodically report the results of the program to the MF and the Bank. The

executing agency’s fiduciary capacity has been evaluated as satisfactory, and it

has the human and technical resources and the information systems needed to

execute the program properly and to manage its finances and procurement.

3.2 The executing agency will rely on the same Program Management Unit (PMU)

that is currently managing program EC-L1070, Support for the Transmission

Program, financed under loan 2457/OC-EC. This PMU will consist of a general

coordinator, a financial specialist, a procurement specialist, an environmental

specialist, an electrical engineer, and a computer engineer, who will be dedicated

full-time to these activities. The executing agency will maintain this structure in

order to ensure efficient execution of the new program.

3.3 The PMU will rely on the relevant offices of CELEC EP to carry out its tasks.

Transelectric has a document, “Organizational Structure and Functions,” which

systematizes the principal activities that the various offices must perform and

focuses staff efforts on fulfilling the mission and vision established by the

strategic plan 2013-2017, which covers the projects to be financed by this

operation.

IV. FIDUCIARY RISK EVALUATION AND MITIGATING MEASURES

4.1 On the basis of available information regarding the executing agency’s experience

with management of project 2457/OC-EC financed by the IDB, as well as the

institutional capacity assessment of the Transelectric business unit of CELEC EP,

the fiduciary risk, in both its financial and procurement aspects, was deemed to be

low. No fiduciary risks were identified that would merit specific mitigation

measures. However, it is recommended that CELEC EP maintain and strengthen

the Management Unit devoted exclusively to execution of the program.

V. CONSIDERATIONS FOR THE SPECIAL CONDITIONS OF THE CONTRACT

5.1 Present evidence of the approval and entry into force of the updated Program

Operating Manual for project 2457/OC-EC, adapted to the new program.

5.2 Confirmation that the PMU will be devoted full-time to the program and will

comprise a general coordinator, a procurement specialist, a financial specialist, an

environmental specialist, an electrical engineer, and a computer engineer.

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5.3 Agreement between the executing agency and the Bank on the firms eligible to

conduct the program audit and the content of the corresponding terms of

reference.

VI. AGREEMENTS AND REQUIREMENTS FOR PROCUREMENT EXECUTION

A. Procurement execution

6.1 The initial procurement plan agreed between the executing agency and the Bank

will establish the procurement operations initially included in the program, which

will be carried out in accordance with the tendering methods and thresholds

established therein.

6.2 The program calls for the procurement of works, goods, and nonconsulting, as

well as consulting services under the framework established in documents

GN-2349-9 and GN-2350-9, respectively. Use of the Procurement Plan Execution

System (SEPA) is recommended for planning and monitoring program

procurement.

Procurement of works, goods, and nonconsulting services

6.3 The threshold for the use of international competitive bidding1 (ICB) will be made

available to CELEC EP at the website http://www.iadb.org/procurement. Below

this threshold, the selection method will be determined on the basis of the

complexity and characteristics of the procurement, which will be reflected in the

procurement plan approved by the Bank.

6.4 Contracts for goods, works, and nonconsulting services arising under the program

and subject to ICB will be executed using the standard bidding documents (SBDs)

issued by the Bank. Requests for proposals subject to national competitive

bidding (NCB) and shopping (S) will be executed using national bidding and

shopping documents agreed upon with the Bank.

6.5 In addition, in ICB processes, reducing to four weeks the period established by

the policies for the submission of bids for works, goods, and nonconsulting

services applicable in the case of noncomplex procurement will be accepted, and

the period established by local regulations will be accepted for NCB.

Contracting of consulting services

6.6 Any of the methods described in the policy on consultants may be used for the

selection and contracting of consulting services (document GN-2350-9), provided

that the method has been identified for the respective procurement in the

procurement plan approved by the Bank. The threshold for preparation of a short

1 Currently the ICB threshold is for amounts of US$3 million or more for works; and US$250,000 or more

for goods and nonconsulting services.

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list of international consultants2 will be made available to the program at

www.iadb.org/procurement.

6.7 Consulting services contracts under the program will be executed using the

request for proposals issued by the Bank. For consulting services with an

estimated budget of up to US$200,000, the executing agency will promote the use

of the selection method based on the consultants’ qualifications, as provided in

paragraph 3.7 of the policies.

B. Table of threshold amounts (US$)

Works Goods Consulting services

ICB NCB Shopping ICB NCB Shopping International

publicity

Shortlist

100%

national

≥ 3,000,000 < 3,000,000

≥ 250,000 < 250,000 ≥ 250,000

< 250,000

≥ 50,000 < 50,000 > 200,000 < 200,000

6.8 For contracting of simple works and off-the-shelf goods, the shopping method

may be used up to the ICB thresholds. The executing agency must justify the use

of this procedure and submit it for approval in the procurement plan.

2 When contracting consulting firms, the threshold is for amounts of US$200,000 or more; for lesser

amounts, the short list may comprise entirely national consulting firms.

http://www.iadb.org/procurement

Annex III

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C. Main procurement items

Activity Type of

bidding Estimated date

Estimated

amount

(US$000)

Works

Santo Domingo – Esmeraldas 230-kV transmission line,

double circuit, 1200 ACAR, 163-km. ICB January 2015 42,636

Esmeraldas 230/138 kV, 167 MVA substation; modernization

138 & 69 kV. ICB January 2015 13,177

Expansion Santo Domingo 230 kV substation, expansion of

2 line bays NCB January 2015 2,223

230 & 138 kV transmission line segments, 25 km, connection

Tabacundo substation ICB January 2015 11,135

Tabacundo substation 230/138 kV 167 MVA & 230/69 kV

100 MVA. ICB January 2015 18,150

El Inga substation expansion, 230/138 kV, second three-phase

autotransformer 300 MVA ICB January 2015 3,469

Riobamba substation expansion, second transformer

230/69 kV, 100 MVA ICB January 2015 3,738

Transmission line connection Durán substation, 230 kV,

double circuit, 2 x 750 ACAR, 10 km NCB January 2015 2,610

Durán substation, 230/69 kV, 225 MVA ICB January 2015 9,778

San Gregorio substation expansion 230/69 kV 167 MVA ICB January 2015 5,349

Yanacocha substation expansion to 138/69 kV 67 MVA ICB October 2015 3,960

La Concordia-Pedernales 138 kV transmission line, double

circuit, 750 ACAR, 95 km ICB October 2015 16,530

Pedernales substation 138/69 kV, 66 MVA ICB October 2015 5,895

La Concordia substation 138 kV, sectioning ICB October 2015 3,357

Goods

Esclusas substation, installation capacitor banks 2 x 60 MVAR ICB October 2015 2,159

Consulting Services

Studies and final designs and EIA for the Chorrillos-Frontera

Sur transmission line & Frontera Sur 500kV substation QCBS February 2015 5,000

D. Procurement supervision

6.9 All ICB processes for goods and works, selection of consulting services with an

estimated amount above US$200,000, and single-source selection will be subject

to ex ante review by the Bank.

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6.10 The Bank will conduct ex post review visits at least once every 12 months.

Ex post review reports will include at least one physical inspection visit, as

appropriate. It should be noted that no less than 10% of the contracts reviewed

will be physically inspected during the program.

6.11 Advance procurement/retroactive financing and recognition of expenditures: The

Bank may provide retroactive financing, charged to the loan proceeds, and

recognize expenditures, charged to the local contribution, up to an amount

equivalent to 20% of the loan or the local contribution, respectively, for eligible

expenditures incurred prior to the loan approval date related to preinvestment

studies for the program, provided that such expenditures meet requirements

substantially similar to those established in the loan contract.3

Ex post review thresholds (US$)

Works Goods Consulting services Individual

consultants

Single-source

selection

< 3,000,000 < 250,000 < 200,000 < 50,000 All

Note: The threshold amounts established for ex post review are based on the fiduciary execution capacity of the

executing agency and may be modified by the Bank in the corresponding procurement plan, as greater institutional

capacity and experience are acquired. In addition, the first three contracts for amounts below the ICB threshold will

be reviewed on an ex ante basis.

E. Records and files

6.12 The executing agency will create a specific programming and budgetary structure

for identifying the program in its financial management system; it will maintain

updated records, and keep its files properly organized so they can be periodically

reviewed by the Bank. The file containing the documentation for program

procurement and contracting will be in a single folder that is readily

distinguishable from the processes financed with local contribution resources or

nonprogram resources, and must be available at all times for auditing purposes.

VII. FINANCIAL MANAGEMENT AGREEMENTS AND REQUIREMENTS

A. Programming and budget

7.1 Programming and budgeting of the program will be done in accordance with

national legislation and the in-house procedures of CELEC EP-Transelectric. The

executing agency has already developed its 2014 AWP and has a multiyear work

plan 2013-2017, and these include the projects that make up this program. The

executing agency budget also incorporates the disbursements anticipated from

IDB loan 2457/OC-EC.

3 Such expenditures must have been incurred beginning 7 March 2014.

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B. Accounting and information systems

7.2 The program’s accounting will be based on Ecuadorian accounting standards for

public enterprises, using the IFS information system of CELEC EP.

C. Disbursements and cash flow

7.3 The Bank will disburse the loan using the advance of funds modality. The

monetary value of each advance will be based on the estimated cash flow

necessary for executing planned program activities for periods of six months (two

advances per year). Cash flow programming must be consistent with the annual

work plan and the procurement plan approved by the Bank, and must span a

moving horizon of 12 months. Drawings will be deposited to the designated

account opened by CELEC EP in the Central Bank of Ecuador for this purpose.

Both the MEER and the executing agency undertake to use these resources

exclusively to pay for transactions relating to program activities.

D. Internal control and internal audit

7.4 The internal audit unit of CELEC EP, which was established in September 2013,

will include specific control activities for the program in its annual work plan.

This unit will be strengthened in 2014 with the addition of five new members. In

performing its work, this unit applies the Government Audit Manual, Government

Audit Standards, and Technical Standards for Internal Control.

E. External control and reports

7.5 External control of the program will be performed by an external auditing firm

acceptable to the Bank. This firm will be contracted using local counterpart funds

through a competitive process based on terms of reference agreed upon between

CELEC EP-Transelectric and the IDB. The annual report on the audited financial

statements and the report on the integrated ex post review of procurement and

disbursements will be delivered to the IDB no later than 120 days after the close

of the corresponding fiscal year.

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F. Fiduciary supervision plan

Supervision

activity

Supervision plan

Nature and scope Frequency Responsible party

Bank Third party

Operational

Review of progress

report Every six months

Fiduciary and

sector team

Review of portfolio

with executing agency

In accordance with MF

requirements

Fiduciary and

sector team MF

Financial

Update of cash flow

programming and

disbursements

Every six months, or with

each request for advance

when program circumstances

so require.

Fiduciary and

sector specialist CELEC EP

Inspection visits Annual Fiduciary

specialist Consultant

Financial audit and

ex post review Annual

Fiduciary

specialists

Executing agency /

external auditor

Procurement

Ex ante review of

procurement processes During program execution

JEP/executing

agency Executing agency

Update of procurement

plans Annual

JEP/executing

agency Executing agency

Compliance

Fulfillment of

conditions precedent Once; Q2 2014 Fiduciary team Consultant

Budgetary allocation Annual, in January of each

year

Fiduciary

specialist Executing agency

Delivery of audited

financial statements Annual

Fiduciary

specialist

Executing agency /

auditor

G. Execution arrangements

7.6 The borrower and the Bank have agreed that CELEC EP, through its business unit

Transelectric, will serve as executing agency for the program and will have

general responsibility for fiduciary reporting and for overall management of the

program.

7.7 The Program Operating Manual for program EC-L1070 will be updated and

supplemented for application in this program, and it will establish in detail the

requirements for this program’s overall management.

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

PROPOSED RESOLUTION DE-___/__

Ecuador. Loan ____/OC-EC to the Republic of Ecuador National Transmission System Strengthening Program

The Board of Executive Directors RESOLVES:

That the President of the Bank, or such representative as he shall designate, is authorized, in the name and on behalf of the Bank, to enter into such contract or contracts as may be necessary with the Republic of Ecuador, as Borrower, for the purpose of granting it a financing to cooperate in the execution of a national transmission system strengthening program. Such financing will be for an amount of up to US$150,000,000 from the Ordinary Capital resources of the Bank, and will be subject to the Financial Terms and Conditions and the Special Contractual Conditions of the Project Summary of the Loan Proposal.

(Adopted on __ ______ 201_)

LEG/SGO/CAN/IDBODOCS#38348296-14 EC-L1117

document of the inter-american development bank

Documents