Uruguay - Fifth Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2022b-UR FEL CLPY STAFF APPRAISAL REPORT URUGUAY FIFTH POWER PROJECT November 26, 1979 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit = New Uruguayan Peso (NUr$) NUr$1 = 100 Centavos (ctv) NUr$7.7 (May 1979) = US$1 NUr$1,000 = US$130 (May 1979) WEIGHTS AND MEASURES 1 meter (m) = 3.281 feet (ft) 1 cubic meter (m3) = 35.315 cubic ft (ft3) - 264.2 gallons (gal) = 6.290 barrels (bbl) 1 kilogram (kg) 2.206 pounds (lb) 1 ton (t; metric; 1000 kg) = 1.100 short tons (sh. tons) 1 kilowatt (kW) = 1,000 Watts (103 W) 1 Megawatt (MW) = 1,000 kW (103 kW; 106 W) 1 kilowatt hour (kWh) = 1,000 Watt hours (103 Wh) = 830.3 kilocalories (kcal) 1 Gigawatt hour (GWh) = 1,000,000 kWh (106 kWh) 1 kilovolt (kV) = 1,000 Volts (103 V) I kilovolt ampere (kVA) = 1,000 Volt amperes 103 VA) 1 Megavolt ampere (MVA) = 1,000 kVA (106 VA) 1 kilocalorie (kcal) = 3.968 British thermal units (Btu) = 4,186.8 Joule (J) 1 Hertz = 1 cycle/second ... per... - ... =... ... per second; ... per = hour = ... /s; ..h ...per day; ... per year = ... /d; ... /a GLOSSARY OF ABBREVIATIONS ANCAP = Administracion Nacional de Combustibles, Alcohol y Portland ANTEL = Administracion Nacional de Telecomunicaciones COMIPAL = Comisi6n Mixta del Palmar CTM = Comision Tecnica Mixta del Salto Grande ELC = Electroconsult (Consultant, Italy) IDB = Inter-American Development Bank SEPLACODI = Secretaria de Planeamiento, Coordinaci6n y Difusi6n UTE = Administraci6n Nacional de Usinas y Trasmisiones Electricas  FOR OFFICIAL USE ONLY -i- URUGUAY Staff Appraisal Report Fifth Power Project TABLE OF CONTENTS Page No. 1. THE SECTOR 1 Energy Resources ...................1................... World Bank Participation in the Sector .. .............. 2 Sector Organization and Regulation ....... . ............. 4 The Role of the Sector in the Economy ............. 6 Supply and Demand of Electricity ................ 6 Power Sector Facilities and Service Levels ............ 7 Tariffs and Rates ...................... 8 Power Sector Development Program .............. ........ 9 2. THE BORROWER 12 Organization and Management ..... ...................... 12 Staffing .............................................. 13 Training .............................................. 14 Accounting ............................................ 14 Auditing ......... ...... 15 Insurance ............................................. 15 Dam Safety ............................................ 15 3. THE POWER MARKET 16 The Energy Market ....... ........... ................... 16 Power Market History ....... .......... ................. 16 Forecasts ...................... ....................... 18 Energy and Capacity Balance ....... ............ ........ 18 4. DEVELOPMENT PROGRAM AND PROJECT 20 Development Program ....... .......... .................. 20 Generation ............ 20 Transmission ..................... ..................... 21 Distribution ..................... ..................... 21 The Project ..................... ...................... 22 Project Cost ..................... ..................... 23 Project Execution .................. ................... 24 Procurement ..................... ...................... 24 Disbursements .................... ..................... 24 Environmental Aspects ...... .......... ................. 25 Project Risks .................... ..................... 25 This documfbt has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii-. TABLE OF CONTENTS (Continued) Page No. 5. FINANCIAL ANALYSIS 26 Earnings History ............................... 26 Tariff Regulations ..................... 26 Financial Position ...................... 27 Liquidity ........................... 27 Overdue Government Accounts ...................2......... 27 Financing Plan .............................. . .28 Forecast Financial Performance ......................... 30 Future Finances ........................ 31 Performance Indicators ................................,.32 6. ECONOMIC ANALYSIS 33 Network Evaluation ............................... 33 Comparison of Alternatives ............................. 33 Rate of Return on Investments . ......................... 34 7. SUMMARY OF PROPOSED AGREEMENTS AND RECOMMENDATIONS ..... 36 ANNEXES 1. Historic Power Data .................................... 39 2. UTE's Organizational Chart ............................. 41 3. Balances of Energy and Capacity ............ 42 4-1. Development Program Cost - Base Cost ................... 45 4-2. 1980-81 Project Costs .................................. 47 4-3. Loan Disbursements Schedule ............................ 48 4-4. Program Implementation Schedule: Key Dates ............ 49 5-1. Estimated Income Statements .................. .......... 51 5-2. Estimated Balance Sheets 1974-78 ............. .......... 52 5-2. Attachment - Tariff Regions 1970-79 ..... ............... 53 5-3. Schedule of Existing and Proposed Long-Term Debt ....... 54 5-4. Forecast Income Statements 1978-83 ..... ................ 55 5-4. Attachment - Salary and Personnel Forecast ............. 56 5-5. Forecast Sources and Applications of Funds 1979-83 ..... 57 5-5. Attachment - Forecast Debt Service Schedule .............. 58 5-6. Actual (1978)and Forecast Balance Sheets, 1979-1983* ... 59 5-6. Attachment - Attachment to Forecast Balance Sheets, 1979-1983 ............. ............................... 60 5-7. Financial Indicators ........ ........................... 61 5-8. Performance Indicators ....... .......................... 62 6-1. Comparison of Alternative Supply Development in the Interior ......... ............................. 63 6-2. Rate of Return Calculation ...... ..................... 64 6-2. Attachment - Rate of Return Calculations - Basic Assumptions ........ ............................ 65 7. Contents of Project File ....... ........................ 67 MAP Uruguay- Electric Power System Development ............. This report is based on the findings of an appraisal mission which visited Uruguay in October 1977. The mission comprised Messrs. R. Halperin and W. Kupper. This report has been up-dated on the basis of the findings of a mission in May 1979 by Messrs. R. Halperin, F. Ruberl and M. Agarwal.  URUGUAY STAFF APPRAISAL REPORT FIFTH POWER PROJECT I. THE SECTOR Energy Resources 1.01 Uruguay has no coal or geothermal resources, nor known reserves of oil or gas (exploratory works are being carried out in the Santa Lucia river basin). 1/ Its relatively few hydro power resources are, by and large, either already utilized or in the process of being developed. As to future indige- nous supplies, hope lies with uranium, solar energy and wind energy. Gas imports from Argentina are presently also being considered. A study of the possibility of a pipeline for this purpose, which would be financed by the River Plate Basin Development Fund, is under preparation. The government has expressed interest in Bank financing of the pipeline. At present, Uruguay imports about 14 million bbls of petroleum per year, which absorbs about 30% of all merchandise export earnings. Petroleum is refined locally by a govern- ment entity: Administracion Nacional de Combustibles, Alcohol y Portland (ANCAP). 1.02 Demand for oil products in Uruguay has been relatively steady and is close to the 1970 level, whereas electricity use is growing at 5% annually and is now substantially above the South American per capita average, as can be expected in view of Uruguay's per capita income and urbanization. Oil products meet over eighty percent of the 2.0 million tons primary energy demand, and hydroelectricity the major part of the remainder. 1.03 By decree 655 (August 1975), the Government determined to develop to the fullest extent possible the country's hydro resources, thus reducing the reliance on imported fuel. To this end, Uruguay is investing heavily in the development of its hydroelectric capacity. Salto Grande (1,890 MW), a binational project executed by the Comision Tecnica Mixta del Salto Grande (CTM), located on the Uruguay River, which will serve Argentina and Uruguay, started generation in 1979; the first 2 units (270 MW) will supply power to Uruguay. Palmar (300 MW), located on the Rio Negro and executed by the Comision Mixta del Palmar (COMIPAL), is presently scheduled to start generation by 1982. These two projects will more than triple the 1977 hydro capacity of 236 MW to 806 MW by 1982, and should meet expected demand growth as well as allow a significant reduction in fuel requirements.2/ 1.04 Given the slow growth in energy demand, a low per capita usage overall and negligible domestic resources, there seemed to be no urgent need for energy planning prior to 1974. Then the serious impact of the oil price increases led to the establishment of a Direccion Nacional de Energia in a remodelled Ministry of Industry and Energy, but the Direccion has been kept extremely small and no major changes were made in the organization of the 1/ There are oil shale reserves in N.E. Uruguay which are being evaluated by ANCAP with the assistance of the Institute of Geology and Petrobras, but extraction would be costly. 2/ Recently the government also signed an agreement with Brazil for two small hydroelectric and irrigation projects in the N.E.  - 2 - energy sector. Though still understaffed and limited by the low salaries it can offer (a common problem in Uruguay's public sector), and consequently, constrained in the tasks it may be expected to undertake, the Direccion is the logical locus for energy planning. Even though comprehensive energy planning has not yet been attempted, Uruguay does have a national electrical energy plan, spanning the period 1975-83. This plan, which was approved by decree in August 1975, was developed by the Government (with the assistance of an external consultant financed by UNDP, Mr. C. Robertson Lavalle). 1.05 The proposed loan would include funds (US$0.6 million) for an overall energy study which would result in a master energy plan and define the measures to be taken to foster fuel economizationi. These funds would be relent to the Direccion (under terms and conditions similar to those of the proposed loan and acceptable to the Bank) which would be responsible for this part of the Project. In order to allow the Direccion sufficient timle for preparation of this complex study, and reach final agreement with the Bank on the terms of reference and organization for it, during negotiations agreement was reached that consultants to assist the Direccion should be engaged not later than June 30, 1980 under terms and conditions acceptable to the Bank. The study would be completed by December 31, 1981. World Bank Participation in the Sector 1.06 Through the former Administracion Nacional de las Usinas Electricas y Telefonos del Estado (now: Administracion Nacional de las Usinas y Tras- misiones Electricas; UTE) the Bank has made four loans to the sector, in 1950 (Loan 30-UR), in 1955 (Loan 132-UR), in 1956 (Loan 152-UR), and in 1970 (Loan 712-UR), aggregating US$82 million. 1.07 The first three loans were made at a time when UTE was fairly well managed and in a reasonably strong financial situation. Subsequently, the enterprise's staff and finances, as well as the physical adequacy of its installations, deteriorated markedly. This deterioration was attributable to poor management as well as to interference and control of UTE's operations by various Government departments. As a result, UTE's performance declined, rate levels became inadequate, and experienced staff abandoned the company because of low salaries and lack of other incentives. In 1970, an external consultant, Mr. R. Salazar (General Manager of the Empresa Nacional de Electricidad S.A., of Chile), was made available by the Bank and made a set of recommendations which were substantially accepted by UTE and by the Government. On this basis, the Bank agreed to appraise the fourth power project. 1.08 The fourth power project consisted of a 100 MW steam unit (later increased to 125 MW at UTE's request) at UTE's Battle y Ordonez plant in Montevideo, rehabilitation of the utility's distribution network, reorganiza- tion of its financial functions and preparation of a sector expansion program. The Project Performance Audit Report for the Fourth Power Project (SecM78-867 of November 29, 1978) indicates that progress towards meeting the institutional objectives the Bauk hi;& Then making the loan was slow and generally disappoint- ing. It also makes the point that UTE did not comply with some of the loan covenants. With the exception of the installation of 65% of low voltage overhead conductors and 42% of electric meters (not financed by the loan) for  -3 - the rehabilitation of the distribution network, the project has been completed. Its most important physical component (the steam unit, accounting for about 65% of the original project cost estimate) was commissioned 18 months behind schedule, with a cost overrun of 141%. The overrun and delays are attrLbut- able to: increased unit size, sharp increases in world prices for equipment subsequent to appraisal, a longer than expected construction period, labor problems in Italy which slowed down the manufacture of the equipment and delays in procurement because of cumbersome legal procedures within Uruguay. While performance on the execution of the physical components of the fourth project was poor, the most disappointing aspect of the project was the failure of UTE and the Government to take action to arrest UTE's managerial and financial deterioration. The project's implementation coincided with a period of severe social conflict and general economic dislocation, from which the country only started recovering after 1975. The Government was reluctant to attempt to strengthen UTE, and when it decided to undertake Palmar, it set up COMIPAL as a special purpose authority to carry out the project. 1.09 To provide a focus for discussion of further Bank support of the power sector, in mid 1976 a consultant (Mr. R. V. Sear) carried out a review. His report 1/ recommended a program of measures to strengthen the power sector and improve UTE's performance: (a) Provision to UTE's Board of Directors of clearly defined duties and responsibilities for policy making. (b) Definition of the management responsibility of the Chief Executive Officer. (c) Authorization of tariff adjustments to achieve a satisfac- tory rate of return. (d) Authorization of competitive salary levels. (e) Preparation of an Electricity Law and associated regulations and statutes for UTE. (f) Effective separation of UTE and ANTEL. 2/ (g) Settlement of debts between public entities, UTE, and the Government. (h) Creation of a credit line for UTE. (i) Completion of contractual arrangements for interconnection with Argentina. 1/ IBRD - Uruguay Power Sector Memorandum, Report No. 1287-UR, Dec. 21, 1976. 2/ The new telecommunication administration (2.01).  - 4 - The Uruguayan Government indicated its acceptance of this program and initi- ated action on the first five items listed above. On thaLt assurance, the Bank and the Inter-American Development Bank (IDB) decided to proceed with a power transmission and distribution project. UT'E's transmission and dis- tribution programs were evaluated in a study 1/ carried out by external consul- tants (Electroconsult - ELC - of Italy) under terms of refeZrence previously discussed with the Bank and with IDB, and acceptable to both institutions. The Bank sent a mission to appraise the 1978-81 distribution program in October 1977 and the IDB appraised the transmission program shortly thereafter. 1.10 In view of the lessons learned under LoaLn 712-]UR, the Bank and IDB conducted an intensive dialogue with the Government and UTE on the measures required to improve the latter's performance. Subsequent to appraisal, it proved impossible to reach agreement with the Uruguayan authorities on the scope of the changes needed in UTE's management structure. It was agreed instead to resume the discussion once the management studLy included in the project (2.02) is completed. The Bank project would be limited to the first two years of UTE's distribution program. Subject to UTE's performance in implementing the first portion of the program, the Bank agreed to consider financing the latter portion through a subsequent loan. Further delays occurred, however, because of UTE's slowness in issuing calls for the various consulting services required for the project and the dif'f'iculty in reaching agreement with the Government on the text of the regulations to the Electricity Law. These matters were finally resolved in April 1979 and. the project was reappraised in the following month.2/ Sector Organization and Regulation 1.11 Most of Uruguay's energy sector, in line with Goovlernment policy generally, is state controlled. Apart from the Ministry of' Industry and Energy, the most important bodies are ANCAP, the power companies (1.12), some private companies involved in oil exploration and distribution, and a private gas company. The government-owned bodies dominate the se!ctor. The Government also intends to establish an energy advisory body drawn frcm the Ministry of Industry, ANCAP, and UTE. Uruguay's electric power policy is determined by the Executive Power which also supervises the sector through the Ministry of Industry and Energy. Electricity rates dire approved by Pre-sidential decree, and the Ministry of Industry and Energy, the Ministry of' Economy and Finances, and the Secretariat of Planning, Coordination and Information (SEPLACODI) intervene in their determination, with primary decision-making powers vested in the latter. UTE is organized as an autonomous public entity (its Board of Directors is appointed by the Executive Power) but: in effect Government agencies' general prerogatives impose legal and administrative constraints on its everyday operations. UTE's budget is approvecl by SEPI'L!CODI and this budget places a legal ceiling on investments and expenditures. The government auditing agency (the Tribunal de Cuentas) is responsible fcr ensuring that UTE complies with budget and other legislation. 1/ Plan Nacional de Energia Electrica: Proyectos de Trarsmision y Distribucion a realizarse entre 1978 y 1981 -- Electroconsult, Milano, Italia, Agosto 1977. 2/ IDB reappraised its project in September 1979.  - 5 - 1.12 In addition to UTE, which is responsible for power generation, transmission and distribution throughout the country, Uruguay's power sector includes CTM and COMIPAL. CTM was created in 1946, and is an international organization governed by a Board composed by four Argentine and four Uruguayan members, all appointed by the respective Governments. CTM is constructing, and will operate Salto Grande. COMIPAL was created in 1973 to build the Palmar hydro plant; it is governed by a Board with representatives from the three armed forces, from the Ministry of Industry and Energy, from the Ministry of Economy and Finance and from SEPLACODI. 1.13 Until 1977, Uruguay did not have an electricity law. As a result, several aspects pertaining to the organization and regulation of the sector were not defined, which caused uncertainty and inefficiency. In September 1977, after more than a year of study and negotiation, an electricity law was passed which has the following features: (a) It covers all activities in the sector. (b) It establishes the Executive Power's policy, regulatory and control functions over the sector. (c) It defines UTE's primary role in the sector, but allows the presence of other local utilities. (d) It creates a National Load Dispatch center, to be operated by UTE. (e) It defines UTE's responsibilities vis-a-vis the municipal- ities and private consumers. 1.14 The regulations to the law were approved in June 1979, and cover such matters as: concession regime, arrangements between UTE and munici- palities for assignment of regulatory and supervisory functions, reimburse- ment procedures for customer contributions and, most importantly, the tariff regime. The Bank was given the opportunity to express its opinion on the various drafts of the law and of its regulations, and its major comments were taken into account in the version finally approved. 1.15 This new legal framework represents a positive step forward, and evidences the Government's commitment to improve sector performance. UTE's leading role in the sector is maintained in the law, which grants it the right of first refusal for any electricity expansions proposed. Any new electric companies to be formed under the new law will therefore be small local enter- prises, serving areas which UTE cannot supply economically. 1.16 To accommodate to these legal changes, UTE's by-laws are also being modified (2.02/03). It is expected that these changes will permit a more efficient and dynamic administration. Thus, the basic conditions will be set for an improvement in UTE's operations. As noted in Chapter 2, however, very serious management problems remain and important actions are required for a meaningful improvement in UTE's performance. Solutions to these problems would be identified by the management study included in the proposed project (2.02). This study is one of the most important aspects of the Project and  -6 - UTE has already engaged consultants to carry it out (ICSA'- Spain). Imple- mentation of solutions, however, will require sustained efforts on the part of the Government and UTE over at least the next five years. Should such efforts be forthcoming, they would justify continued support for UTE from the international lending organizations. The Role of the Sector in the Economy 1.17 The energy sector has played a key role in Uruguay's economy, as evidenced by the following: (a) In the recent past investments in generating capacity did not keep up with the pace of growth of demand. This re- quired constraining demand through rationing, with conse- quent negative effects on output and on welfare. (b) The 1973 oil price rise had a momentous effect. In 1974, the value of petroleum imports rose by over US$100 million (within total imports of less than US$300million) and this created a very serious balance of payments problem. To meet it, gasoline prices were raised more than required to cover input cost and fuel oil prices to UTE to about international levels (US$378/t for residual oil or US$10.50/bbl in early 1978). Electricity rates, however, were not raised commensurately. 1.18 Since 1971, investment in the sector has increased markedly, largely due to the Salto Grande and Palmar hydroelectric projects. However, invest- ments in transmission and distribution have lagged. The proposed 1980-83 investment program would raise the investments to adequate levels in order to expand transmission and distribution facilities commensurately with the increase in power requirements and generating capabilities of Salto Grande and Palmar. Supply and Demand of Electricity 1.19 The table below shows how supply and demand for electric energy have developed in this decade (Annex 3-1). Generation (GWh) Actual Required Total Supply Supply Hydro Thermal /a Generation Losses /b (GWh) (GWh) 1970 1,242 918 2,160 433 1,727 1,727 1971 1,470 853 2,323 442 1,881 1,881 1972 995 1,345 2,340 547 1,793 1,878 /c 1973 1,556 902 2,458 652 1,806 1,806 1974 1,366 931 2,297 5C0O 1,797 1,874 /c 1975 1,133 1,263 2,396 456 1,940 1,945 Ic 1976 1,222 1,366 2,588 525 2,063 2,063 1977 1,567 1,189 2,756 568 2,188 2,188 1978 1,630 1,329 2,959 554 2,405 2,405 /a Includes Diesel generation in isolated areas and imports. /b Includes consumption in UTE's plant. /c In years in which rationing occurred required supply was estimated indirectly on the basis of its correlation with GDP.  -7- The sales growth rate was very low through 1974 reflecting the political and economic difficulties encountered during the period. For the period 1971-78 it averaged 4.1%. Power Sector Facilities and Service Levels 1.20 Under normal hydrological conditions, about half of UTE generation is thermal. The generating plant at the end of 1977 had the following features (Annex I): Capacity Commissioning (MW) date Hydro Gabriel Terra 128 1945-48 Baygorria 108 1960 Thermal Batlle (Montevideo) Units 1/2 20 1931 Units 3/4 100 1954-56 Unit 5 88 1970 Unit 6 125 1975 Gasturbines (Montevideo) Unit 1 20 1965 Unit 2 10 1969 Diesels (Isolated), 48 Power Stations 60 1949-76 Total 659 The Rio Negro flow is highly variable, e.g., 48 km in 1914 but only 1.8 dm in 1917; from September 1942 tVrough July 1946 flow totalled only 10.8 km and within this period 0.24 km only was registered from December 1944 through July 1945. Thus, relatively high thermal reserves are required to meet occa- sional long dry periods. 1.21 Until the commissioning of the Bank financed 125 MW thermal unit in mid 1975, UTE was not always able to meet the demand for electricity and, consequently, had to ration supply. In May 1979 UTE again experienced supply difficulties in Montevideo as a result of a transmission cable failure and of problems this failure sgbsequently caused to the Battle fifth unit, which re- quired its overhaul, together with low rainfall which reduced hydro generation. Supply was restricted in various ways: lowering of voltage and frequency, limiting the use of electricity for heating purposes, prohibiting use of general and commercial lighting, changes of work hours for offices, rotating programs for interrupting supply to defined areas, etc. UTE has a well defined standby program (which is instituted through Government decrees and instructions) to mitigate the effect of dry periods. The Salto Grande and Palmar additions  -8- would suffice to adequately meet demand growth and provide a reasonable reserve capacity in the early eighties. However, because of the unstable nature of the Rio Negro and Rio Uruguay's hydrology, it is necessary to determine whether additional thermal back-up may be required, as early as 1984 (1.30). 1.22 About 95% of UTE's generation is in the interconnected system; the remainder is generated by isolated diesel power stations. Transmission lines are at 110 and 150 kV, and this duality is creating some standardiza- tion problems. The development program envisages to convert all circuits in the East to 150 kV, while in the West only a single 110 kV line would continue operation with limited expansion (using equipment liberated in the East). Distribution is generally of the European type (3 phase, 50 Hz), at intermediate voltages of 60 kV, 30 kV and 6 kV, and low voltage at 3 x 220 V. Here, some of the main problems faced are the following: network obsolescenu-'o low reserves and inadequate service in many substations and inadequate reli- ability of service (particularly to such important consumers as the principal airport and key industries) and high losses. Existing L.V. lines are at 3 x 220 V (without neutral), resulting in high losses and limited capacity; expansion and renewals (whenever possible) would be at 380/220 V-4 wire. 1.23 Access to electric service in Uruguay is, on the whole, quite good. About 664,000 homes are connected to UTE, and the electrification index 1/ is about 0.80 (over 0.95 in Montevideo and 0.65 in the rest of the country). At present, only one town with more than 1,000 inhabitants, 20 population centers with between 500 and 1,000 inhabitants and about 100 with between 200 and 500 inhabitants lack electricity. Thus, the main objective to be pursued by UTE is not primarily accelerating access to service but, rather, renovating its obsolete installations to improve the quality of its service as well as to integrate hitherto independent systems to the interconnected network to save fuel and create a basis for further expansion. This is the main technical problem to which the project is addressed. Tariffs and Rates 1.24 UTE tariff structure is simple and has not been basically revised since loan 712-UR was made in 1970. The rates do not del)e"tld either on the season, the day of the week or the time of the day and are applicable through- out the country irrespective of voltage level, distance or type of generation. For domestic, industrial and commercial tariffs they comprise a monthly demand block charge (tied to the kWh blocks) increasing with increased usage; the kWh charge is in blocks, increasing with the next higher block for domestic purposes, declining for normal industry and constant for process industry and commerce. For traction, pumping and public services (schools, printing, radio, theaters) only a kWh charge applies. 1/ Households served by UTE divided by total households.  1.25 Rate adjustments have tended to lag behind yearly inflation (5.02); for 1972-78, the developments were the following: --- Average Rates --- ctvs/kWh at current ctvs/kWh in US mills Year prices /a at 1978 prices b/ per kWh 1972 1.53 34.06 28.54 1973 3.24 34.60 38.57 1974 5.64 32.70 47.15 1975 9.86 23.16 43.63 1976 15.33 34.24 45.90 1977 23.59 35.04 50.41 1978 30.76 30.76 50.76 /a Slight differences compared with the income statements are due to different allocations of fixed charges and claim fees. Rates shown are price to consumer, inclusive of energy tax (10%). In 1979 rates were increased by 17.5% on May 1 and by 34% on August 1. /b Inflated by the wholesale price index. Throughout the period, rates did not reflect the increased cost of supply, taking into account the considerable international price increases for equipment since 1972 and the 1973 oil price rise. 1.26 UTE's tariff structure does not give an adequate message to the consumers, it has caused a proliferation of electric room and water heating which under adverse circumstances may represent some 25-30% (150 MW in 1977) of peak demand (523 MW). In order to lay a basis for future improvements, UTE has agreed to carry out a study of its tariff structure based on the marginal cost of supply, with the assistance of consultants engaged under terms and conditions acceptable to the Bank. The development study (1.31) to be undertaken under the present project, should provide an adequate data base for the tariff study. At negotiations UTE agreed to implement, per an agreed timetable, a load measurement program to serve as an additional data input to the tariff study. The tariff study should be completed by June 30, 1981 and in consultation with the Bank, its recommendations put into effect by June 30, 1982. Power Sector Development Program 1.27 The program for generating facilities envisages that the first 135 MW Salto Grande unit for Uruguay would be commissioned in 1979 1/ and the second in early 1980. CTM will also construct the following transmission works, which will become part of the Uruguayan interconnected system, owned and operated by UTE (see Map): 1/ As of October 1979 one unit had been placed in operation, and the second one was scheduled towards year-end.  - 10- (a) 500 kV transmission single circuit lines with al total length of 440 km (one line Javier-Palmar; two lines Palmar-Montevideo). (b) Substations at Palmar and Montevideo (2). The line Salto Grande-Javier would be owned and operated by CTM as well as the substations at Salto Grande and Javier (which will be the interconnecting points with Argentina). The first 100 MW Palmar Unit would enter service in 1982. Due to interconnection of the major part of presently isolated systems, diesel capacity would decrease from 60 MW at present to about 25 MW in 1983. In order to transmit and distribute the power generated by Salto Grande and Palmar, UTE plans to undertake the investment program described in 4.01-4.07. 1.28 The Salto Grande works are being financed by IDB, suppliers, and by the Governments of Argentina and Uruguay. The Palmar Project is being financed by Banco do Brasil, a syndicate managed by Banque de l'Union Europeene, Banque de l'Indochine et de Suez and Banque Francaise du Commerce Exterieur and by the Government, which, for this purpose, has floated a US$100 million bond issue through a syndicate led by Citicorp Internationial. The Government's contribution to both Salto Grande and Palmar is also der:Lved from the National Energy Fund which obtains its revenues from a 10% tax on electricity sales and from participation on the petroleum products tax (with rates up to 102% on gasoline prices). At negotiations, the Government agreed to furnish to the Bank, by December 31, 1979, a satisfactory program for meeting power sector financing requirements through 1983. The program would consider the possibility of raising charges to final consumers, through increases in the energy tax, which could be used to finance the completion of Palmar. The Government also agreed to examine the costs and financing schemes of the projects being executed outside UTE and to furnish to the Bank a report by December 31, 1979. 1.29 The generation program, as shown in the balances of energies and capacities (Annex 1), is summarized as follows: Installed Generating Capacity 1976 1980 1983 Type MW % MW % MW % Hydro 236 36 396 48 806 68 Steam 333 50 333 41 333 28 Gas turbines 30 5 30 4 30 2 Diesel (Isolated) 60 9 60 7 25 2 659 100 819 100 1,L94 100 1.30 The change in composition of the capacity is striking, hydro plants would increase from the present 36% of the total to 68% by 1983, steam plant decreasing from 50% to 28% during the same period. It is expected, however, in view of the erratic hydrology of the Rio Negro (on which all of UTE's hydro stations including Palmar are located) and of the Rio Uruguay (Salto Grande), that further thermal plant may be required in 1985. Undeveloped hydro poten- tials in Uruguay are small (restricted to the Rio Negro and its tributaries, not exceeding 150-200 MW) and after completion of Salto Grande and Palmar, UTE's investments in generating plant would mainly be thermal.  - 11- 1.31 Under the arrangements with Argentina for the construction of Salto Grande (1.03), the Uruguayan Government has the right to gradually exercise the option to acquire additional units, reaching, by 1995, 50% of total capacity. 1/ Because in any case further thermal plant will be required in Uruguay to meet dry water year conditions (although the timing is still to be ascertained), the alternatives in generating facilities comprise acquisition of further units at Salto Grande (which could be deferred by 1 or 2 years), imports from Argentina, installation of additional gas turbines and an addi- tional steam plant. A study of the least-cost power sector development program, through the year 2000, resulting in the optimum timing of additional thermal plant, will be undertaken. UTE has already engaged consultants-- (Lahmeyer, -Germany-) under terms of reference acceptable to the Bank, and has agreed to cause the study to be completed by September 30, 1980. 1/ Total cost of the Salto Grande project is presently estimated at US$1,243 million. Annual debt service and O&M costs for the 14 units will be close to US$100 million per year, and will be distributed between Argentina and Uruguay in proportion to the number of units operated for each country.  - 12- 2. THE BORROWER Organization and Management 2.01 The Borrower of the proposed loan would be Administracion Nacional de Usinas y Trasmisiones Electricas (UTE), a quasi autonolmoujs entity of the Uruguayan Government. UTE was founded in 1912 (under the name Administracion General de las Usinas del Estado) and assigned the responsibility for public power supply. In 1931, the telephone service was added to its activities. In 1974, the Government established a new telecommunications administration, Administracion Nacional de Telecommunicaciones (ANTEL), lwhich took over UTE's telecommunications operations. At present UTE and ANTEL are in the process of separating. A complete schedule for the further steps required to finalize this separation and commercial arrangements to be entered into were agreed on during negotiations. 2.02 Due to its legal structure as an autonomous entity, UTE's bylaws (Carta Organica) have to approved by law and its regulations (reglamentacion) by Presidential decree. Both are being amended to conform to the new Electricity Law (1.13) and allow a more flexible and efficient administration. 1/ Under the projected new legal structure, UTE would continue to be governed by a full-time 3-member Board of Directors; UTE's President, however, will act as Chief Executive Officer. The bylaws, as amended in agreement with the Bank, would establish a distinction between matters of policy (including organizational set-up, issue of internal regulations, approval of annual budget and develop- ment program) which would be referred to the Board, and major operational decisions, which would be the responsibility of the President. It is expected that the President will continue to be a political appointee but the bylaws would provide for a General Manager who would be an experienced executive, to whom the everyday running of operations would be delegated. However, such a division of responsibilities can only emerge over time, since UTE does not presently have staff qualified to make it function effectively. 2/ To help UTE achieve this objective, the proposed loan would finance the consultant services for a management study; this study would cover all aspects of UTE's organiza- tion, policies and procedures and the implementation of all agreed actions to be taken. UTE has already engaged these consultants. The study should be completed by September 30, 1980, at which time it would be submitted to the Benk for discussion, together with a program to implement the recommendations with the consultants' assistance. Prompt action on the mleasures agreed upon would be a prerequisite for further Bank financing, in the sector. 2.03 Enactment of bylaws, and of regulations to the bylaws, acceptable to the Bank would be a condition of effectiveness. 2.04 UTE's organization chart is shown in Annex 2. Until the recent creation of a Planning Unit, UTE's organization lacked provision for overall planning and budgeting. Each technical department has its own planning, design and cost estimating group. For budgeting purposes, the finance 1/ The draft bylaws are currently being considered by the Consejo de Estado. 2/ The problem is complicated by the assignment of military "interventores" to run certain UTE departments, who operate outside the regular organi- zational structure.  - 13- division collects the individual informations and consolidates them. Project consultants, under terms of reference satisfactory to the Bank, have already been engaged (Electroconsult, Italy). Their services comprise the necessary manpower for organizing and staffing, together with available UTE staff a special Project Unit within UTE (responsible for both the IDB and Bank projects) which shall coordinate and assist in matters of preparation and issuance of bids documents, evaluation of bids and making recommendations for the awards, and shall be responsible for the preparation of execution schedules and super- vision of construction and for the reporting thereon. This unit will consti- tute the basis of a central Planning and Supervision Department, responsible for all works to be executed by UTE. Staffing 2.05 UTE presently employs about 9,700 people (including 70% of the 550 employees of the services still common for UTE and ANTEL) representing 1 employee per 81 consumers (about 790,000, of which 48% in the interior). This is high and it appears that considerable improvement in the efficient use of manpower could be made. Two aspects, however, have to be taken into account in evaluating the above monitoring indicator: (a) due to lack of contractors and technically adequate local workshops, UTE itself executes most of its works, thus increasing the need for artisans considerably (for instance, at least some 200 people are employed for manufacturing replace- ment parts alone); (b) the systems in the interior are wide apart and have to be largely self supporting in all respects. A tentative estimate indi- cates that the number of consumers in Montevideo may be a more reasonable 150 per employee (although allocation of personnel serving both Montevideo and the Interior is rather subjective). However, there are areas, particularly in UTE's administrative organization, which are evidently overstaffed and the management study would suggest ways to make better use of manpower. 2.06 As of December 1978 UTE had 160 professionals on its payroll (i.e. 1.6% of its total number of employees including 11 working in supporting serv- ices common to both UTE and ANTEL). About 100 professionals are graduate engineers, about one third of which are young professionals; technical expertise in the entity, therefore, constitutes presently only 0.7% of the work force. 2.07 Over more than a decade Uruguay has been experiencing a brain-drain, due to low salaries and limited opportunities offered to its generally well qualified professionals. This has been even more true in the public sector. In UTE's case, the problem was compounded by CTM and COMIPAL's competition for qualified manpower. While the output of the universities practically dropped to zero during several years of unrest, both CTM and COMIPAL have been able to pay substantially higher salaries than UTE, thus drawing away many of its more capable professionals. 2.08 Over the past two years UTE has taken some steps to modify this situation. Salaries of key personnel have been increased, in some cases by as much as 100% (over and above cost of living increases, periodically granted to all public sector employees), and there is a commitment, supported by the Government, to continue in this direction. UTE and the Government have agreed too that the external auditors prepare a salary study to be submitted to the Bank by June 30, 1980, to be followed by a program for the implementation of its recommendations. This commitment is reflected in the loan documents, which require UTE to start implementation of the agreed proposals by January 1, 1981.  - 14- 2.09 Despite the progress discussed above, UTEI still faces a serious staffing problem. The management study (2.02) would evaluate UTE's staffing needs at all management and professional levels, outline the policies necessary to recruit and train the personnel required, and develop an adequate remunera- tion scheme. At negotiations, UTE agreed that, until the study is completed, it will proceed with a recruitment plan, which sets the following targets: October 1, 1979 - April 1, 1980 - October 1, 1980 - March 31, 1980 September 30, 1980 March 31, 1981 Engineers Electrical 18 11 7 Civil 5 1 - Accountants - 2 1 Other professionals 8 6 4 31 20 12 Training 2.10 Training at higher levels is totally absient in 1JTE (which is not surprising given the shortage of staff at these levels). The training pro- gram for lower echelons, which appears reasonably adequate, comprises courses for basic electricity theory and practices (duration 120 hours), welding (70 h), basic industrial electronics (120 h), interior wirin,g practices (180 h), interior wiring execution (120 h), general administration (40 h), supervi- sion practices (30 h), metering equipment and mounting (210 h), and overhead line construction (190 h). The total number of people that received training during 1978 was 364 (representing a total of 47,100 staff-hours). UTE has agreed to engage a suitably qualified training expert acceptable to the Bank, and on terms and conditions acceptable to the Bank by April 30, 1980. This expert, recommended by a vocational training mission in late 1977, would be financed by the recently approved vocational training loan (1594-UR). He should evaluate UTE's present training program and develop a comprehensive training program for UTE (including, if necessary, scholarships abroad). UTE has agreed to discuss with the Bank the program and its proposals for implementation by November 30, 1980. Accounting 2.11 UTE's management problems affected its financial administration and performance as well as the timing and quality of its financial statements. In early 1977, a new computer system was installed and this allowed the revi- sion of the accounting code, as well as the gradual development of improved information subsystems. These tasks were accomplished with the assistance of consultants (Arthur Young & Co.) under Loan 712-UR. The updating of UTE's information system has not yet been completed; the next stages would include the preparation of quarterly income statements and the processing of cost information by responsibility centers. During negotiations, it was agreed that the external auditors should assist UTE in these areas (2.13).  - 15- Auditing 2.12 UTE's accounts are supposed to be audited by a specialized govern- ment agency, the Tribunal de Cuentas de la Nacion. Because such audit does not meet the requirements of the Bank, under the fourth power project loan agreement, UTE agreed to engage independent auditors satisfactory to the Bank, which provision should be repeated for the proposed loan. Due to the reorganization of its accounts and delays experienced in producing the accounting statements, UTE has until now not been able to fulfill this obliga- tion. The lack of an appropriate external audit has significantly affected the reliability and comparability of UTE's financial statements, to the point that at present these are by and large ignored by both management and Government for decision making. Because this situation must be remedied, at negotiations UTE agreed to engage external auditors, under terms of reference (see also 2.13) earlier agreed with the Bank, prior to loan effectiveness. 1/ Initially, the auditors should review the 1978 and 1979 financial statements, and submit a report with their conclusions and recommendations. As from FY 1980, audited financial statements should be submitted within five months of year end. 2.13 For similar reasons to those discussed above, the internal auditing unit recently created by UTE should be organized and staffed at the earliest. In order to avoid duplication, the external auditors would assist UTE with this task. It has been agreed that the external auditors will submit a program, which by December 31, 1980, UTE would transmit to the Bank together with its own proposals, for the timely preparation of quarterly income statements and cost data by responsibility centers, to monitor performance and provide adequate management information, as well as for the organization and staffing of the internal auditing unit discussed above. Insurance 2.14 UTE's assets have not been adequately insured, despite standard Bank requirements to that effect in the 712-UR loan agreement. UTE has now agreed to obtain adequate external insurance for major risks and to self-insure against risks which are amenable to such treatment starting on January 1, 1980. UTE and the Government have also agreed with the Bank on the details of a self insurance fund (premiums for which would be charged to operating expenses) and the Govern- ment has also agreed to guarantee any losses not covered by insurance or self- insurance. Dam Safety 2.15 The Bank loan 152-UR financed the Baygorria hydro project, which has been in operation satisfactorily since 1960. No requirements for monitor- ing of dams have been included in previous loans to UTE, but the company regularly inspected all facilities. Recently, UTE has signed a contract with SOFRELEC (France) for a study of its present practices and recommendations for modernizing them. The standard undertaking for monitoring the soundness of dams is included in the loan agreement for the proposed project. 1/ UTE's Board has already awarded the contract to Price Waterhouse, however due to administrative approval requirements, signature may be delayed until January 1980.  - lb - 3. THE POWER MARKET The Energy Market 3.01 Supply data is available for the main commercial sources of energy over many years but little is known on the demand for energy. The most notable development in the petroleum sector has been a decline in gasoline use after prices were raised substantially in the wake of the 1973-74 petroleum price increase. This decline appears to have been partly offset by increased diesel fuel consumption. In the electricity subsector an analysis is available between domestic, commercial and industrial sales but no such breakdown is available for oil products. Neither is there any analysis of energy used for trans- port, process loads, heating, cooking and lighting, nor a sectorial analysis of industrial use. This lack of data restricts demand forecasts to projections of trends and aggregate GDP relationships, and provides no firm basis for planning. 3.02 The supply of energy has been as follows (in thousands of cubic meters): Average Annual Oil Products 1960 1965 1970 1975 1976 1977 Increase t%) Gasoline 339 371 345 280 263 271 -1 Kerosene 231 214 220 198 205 176 -2 Gas Oil 228 326 383 447 482 491 +5 Fuel Oil 378 414 430 452 470 467 +1 LPG 2 33 57 66 69 68 +23 Other 18 17 38 37 43 43 +5 1,196 1,375 1,473 1,480 1,532 L[,516 +1 Fuel Oil for Electricity 187 324 266 355 342 317 +3 Fuel Oil for the Refinery 34 66 95 88 95 __ 99 +6 1,417 1,765 1,834 1,923 1,969 1,932 +2 Annual Average Increase over Previous Data - +4% +1% +1% +2% -2% Power Market History 3.03 Statistics on the past evolution of the power market are not available because data on the energy generated by captive industrial plant are not collected regularly. The last census was made in 1968,  - 17 - when demand was suppressed and captive plant generated 62 GWh (compared with total sales to industry of 591 GWh and total sales to all consumers of 1513 GWh, i.e., auto production was 4% of total sales). Most captive plants have been installed to assure continuation of generation during years of restrictions, 6 since 1960 (3.04). 3.04 UTE's overall power data (Annex 1) since 1960 are summarized as follows: Average Growth (%) 1960 1970 1978 1960-70 190-78 Generation (GWh) /a 1,244 2,160 2,959 5.7 4.0 Maximum demand (MW) /b 250 402 548 4.9 3.9 Sales, total 1,017 1,727 2,405 5.4 4.2 Industrial (%) 47 32 37 Residential (Z) 39 48 44 Commercial (%) 8 16 15 Others (%) 6 4 - 4 Losses (%) /c 18 20 19 /a Including some imports, mainly fron Brazil. /b Interconnected system only. /c Including UTE consumption (82.5 GWh in 1978). The pattern of supply to the various consumer groups changed considerably over 1960-1978. The share of industry in the market decreased from 47% in 1960 to 37% in 1978 (the minimum share of 32% was reached in 1970). Residential supply increased from 39% in 1960 to 46% in 1965, remaining relatively level utnti, thne present. Except for industry, the growth rate for this decade decreased considerably compared with the sixties. The difference in the growth pattern of generation and sales compared with maximum demand appears to be due to rationing in 1965, 1968, 1970, 1972, 1974 and 1975 (two of which were also dry years--with less than 1,000 GWh hydro generation--of which there were four during 1960-76). 3.05 Losses remaiaed relatively constant throughout the period at some 19-20%. This is high but it is not known whether thefts are a substantive part of these losses; this appears unlikely in view of the fact that losses varied little from year to year (1972 and 1973 are the only exceptions). Technical inadequacies may be the main reasons: Montevideo's intermediate voltages are relatively low at 30 kV and 6 kV, many of the 30-kV and 6-kV underground cables are old and overloaded (forced outages in 30 kV cables is about 0.15/km.a and in 6 kV cables about 0.2/km.a, both about 2 times normal), while distribution is at 3 x 220 V, i.e. non-balanced 2-phase 220-V loads, cause heavier losses due to the lack of the neutral conductor which effecttvely adds up to 33% to the cross section of the phase conductors.  - 18 - Although renewals are envisioned, losses should not be expected to decline materially, particularly because renovations and a change to 380/220 V 4-wire system in Montevideo (which could reduce losses to a more reasonable level of some 15%) will take many years. To enable it to tackle this problem, at negotiations UTE agreed to present to the Bank by December 31, 1980 a report on the nature, size and occurrence of losses in tbhe system, and also terms of reference for a comprehensive study of losses, to develop recom- mendations for reduction of losses by means of a long-termt program of technical improvements. Forecasts 3.06 In view of the erratic development of sales and the importance of the effect of external circumstances of political, economical and technical (repeated restrictions) nature, historic power data are of little use for the preparation of forecasts unless a persistent low growth rate appears probable. ELC included GDP in their two forecasting models, either as a multiplier (exponential trend model) or as a separate term (adaptive model). Both models represent historic data well. For forecasting purposes a GDP growth in real terms of 3% was assumed which, though somewhat conservative 1/ is reasonable for the medium-term. The first model results in an average sales growth rate of 5.2%, the second gives 6.1%. Taking into account historic trends for the various consumer classes and regional differences, and adding several larger future connections (e.g. 2 cement factories and a steel product factory) further elaboration of the models indicate that the trend model is adequate to be used for overall forecasting and an average sales growth rate of 5.8% was assumed for the period through 1983. Energy and Capacity Balance 3.07 ELC's forecasts, 2/ which appear reasonable, are shown in Annex 1 (Energy and Capacity Balance) together with generation capabilities and plant capacities. The information is summarized as follows: 1/ The Bank expects that GDP could achieve a 4.5% growth rate during the coming years - Economic Memorandum on Uruguay (Report No. 2241-UR, December 1978). 2/ Updated in May 1979.  - 19 - Average 1978 1980 1983 Growth Actual --Forecast-- % Total Sales (GWh) 2,405 2,692 3,187 5.8 Of which: Residential (%) 44 44 41 Industrial (%) 37 38 41 Commercial (%) 15 15 15 Others (%) 4 3 3 Losses, % of Generation 19 19 18 Required Generation (GWh) 2,959 3,311 3,888 5.5 Of which: Hydro (%) 55 58 78 Thermal (%) 44 41 22 Imports (%) 1 1 - Demand Interconnected system (MW) 548 617 758 7.1 Available capacity (MW) Hydro (MW) 236 396 806 Thermal (MW) 363 363 373 Number of consumers (thousands) 790 812 870 3.08 The above table shows that by 1983 sales to industry would be about equal to domestic sales. UTE has signed an interconnection contract with Agua y Energia Electrica of Argentina, which would provide some 60 MW in additional reserve capacity. This contract provides for the construction of a 37 km long 150-kV line between Paysandu in Uruguay and Concepcion del Uruguay in Argentina, crossing the Uruguay River. Contracts have already been awarded and the line is expected to be operational towards the end of 1979.  - 20 - 4. DEVELOPMENT PROGRAM AND PROJECT Development Program 4.01 UTE's development program for 1980-83 is estimated to cost about US$324 million equivalent, including physical and price contingencies but excluding interest during construction. It is designed to meet the fore- cast load and demand increases and is based on the technical recommenda- tions of ELC (1.09). Details of the program are shown in Annex 4-1 which is summarized here as follows (in US$ million): Local Foreign Total -----------MUS$-------- Generation 11.1 25.2 36.3 11 Transmission 35.0 67.6 102.6 32 Distribution 80.1 78.3 158.4 49 Other 13.6 12.5 26.1 8 139.9 183.6 323.5 100 4.02 The bulk of the program is in Transmission and Distribution. This arises from the conditions currently obtaining in Uruguay, where two large hydro projects and related bulk transmission are nearing completion under the responsibility of special-purpose authorities (1.27). These investments, which are not included in UTE's program, will provide additional generating capacity for the next few years, and the expansion of the transmission and distribution systems is needed to make efficient use of this power, in addition to the need for rehabilitation and up-grading of existing systems (1.22). Generation 4.03 Generation investment consists mainly of some buildings and fuel tanks for thermal stations, spares for thermal and hydro stations, and repairs and replacements. It does not include possible expenditures for a future thermal plant which may be needed for firming up hydropower at times of water shortage, a matter which will have to await the outcome of the 1980-2000 development planning report (1.31) for which consultants are about to be engaged. To include any estimates for such thermal plant in the 1978-83 development program would be premature since various alternatives, such as possibility of new hydro storage sites (currently under investigation) and availability of capacity from Salto Grande, on the Rio Uruguay that has a hydrology different from the Rio Negro on which the other hydro stations are located, have yet to be evaluated.  - 21 - Transmission 4.04 Transmission investment is mainly for construction of 150 kV trans- mission lines and related substations. The major portion of this work consists of the following: (a) 200 km line from G. Terra via Tacuarembo to Rivera (this line is currently under construction, for completion in 1981); (b) 200 km line from G. Terra via Valentines to Treinta Y Tres; (c) 230 km line from Salto Grande via Arapey and Bella Union to Artigas; and (d) Load Dispatch Center (bids have been invited on the basis of specifications prepared with the assistance of consultants engaged in consultation with the Bank). IDB is considering financing a significant part of the transmission works, in- cluding the load dispatch center, and has been cooperating closely with the Bank in project preparation and appraisal. 1/ IDB appraised the transmission project shortly after the Bank's initial appraisal of the proposed Fifth Project, and had held the project in abeyance pending resolution of the issues discussed in 1.10. IDB reappraised the project in September 1979. Because the Fifth Project's distribution facilities are complementary to those provided under the IDB project, signature of the IDB loan has been agreed as a condition of effectiveness of the proposed Bank loan. Distribution 4.05 The distribution investment program provides for expansion and re- habilitation of existing distribution systems that are mainly underground in Montevideo, and overhead in the interior. Existing voltage levels of 60, 30, 15 and 6 kV are adequate since load densities are not very high, and urban development is modest. In Montevideo, about 60 km of 30 kV and 150 km of 6-kV and 150 km of low tension (L.T.) underground cables will be needed, in addition to transformers and substations and overhead line materials. The main technical objective is to rehabilitate the aging system to a 4-wire 220/380 V system, which will reduce losses and increase capacity (1.22). 4.06 For distribution work in the interior, there will be a need for 800 km of 60 and 30-kV overhead lines, 500 km of 15 and 6 kV lines, 300 km of L.T. lines, and 70 kmn of underground cables, in addition to transformers and substations and various other equipment. The primary technical objective is the replacement of about two-thirds of the existing isolated diesel capacity by linking local systems with the interconnected system. 1/ The IDB loan amount is presently scheduled at US$24 million. The financial projections assume a loan of US$31.5 million and the Government has informed the Bank that this shortfall will be financed through foreign commercial bank loans to the Central Bank, to be onlent to UTE under terms substantially similar to those of the proposed IDB loan.  - 22 - 4.07 The development program also provides for consultants' services which are considered necessary to overcome UTE's institutional and organiza- tional shortcomings and lack of expert staff. The Project 4.08 The proposed Fifth Project would consist in the distribution devel- opment program for the years 1980-81. It is expected that a Sixth Power Project, similar to the Fifth Project, would cover investments in 1982-83, subject to satisfactory performance up to that time. The proposed IDB trans- mission project would overlap in time with both IBRD projects. The proposed Fifth Project would include: (a) Montevideo Distribution. Renovation and expansion of the distribution networks in Montevideo, including approximately the following principal quantities: (i) 36 km of 30-kV underground cables; 87 km of 6-kV underground cables; and 87 km of L.T. underground cables. (ii) 4 new substations and 2 extensions, with a transformer capacity of about 80 MVA at 30/6 kV. (iii) 50 km of bare conductor; 700 km of insulated conductor; and 200 transformer stations with a capacity of about 50 MVA. (b) Interior Distribution. Renovation and expansion of the distribution networks, mainly in Treinta y Tres, Valentines, Tacuarembo, Rivera, Rocha, and Chuy, including approximately the following principal quantities: (i) 230 km of 60-kV overhead lines; 230 km of 30-kV overhead lines; 290 km of 15 and 6-kV overhead lines; 170 km of L.T. overhead lines; and 40 km of 30, 15 and 6-kV underground cables. (ii) 5 substations at 60/15/6 kV with about 34 MVA transforming capacity; and 12 substations at 30/15 and 30/6 kV with about 62 MVA transformer capacity. (iii) 230 transformer stations with a capacity of about 25 MVA. (iv) 10 MVA of capacitors for 6 kV. (c) Consultants' Services. The services of consultants for: (i) the organization, direction and staffing of the Project Unit, and for assistance with project planning, design, and implementation;  - 23 - (ii) a study of UTE's generation development program for the years 1980 to 2000; (iii) a tariff study based on marginal cost criteria; (iv) a management study; (v) studies of UTE's internal auditing, financial reporting, cost accounting, and management information systems, and of its staff compensation structure and policies; and (vi) the overall energy sector study (1.05). Project Cost 4.09 The Project costs are estimated to be as follows: in NUr$ millions in US$ millions Local Foreign Total Local Foreign Total 1. Montevideo Distribution 46.8 70.8 117.6 6.0 9.2 15.2 2. Interior Distribution 131.0 60.1 191.1 17.0 7.8 24.8 3. Consultants 16.8 26.2 43.0 2.2 3.4 5.6 4. Base Cost (1 + 2 + 3) 194.6 157.1 351.7 25.2 20.4 45.6 5. Physical Contingencies (10% of 1 x 2) 17.7 13.1 30.8 2.3 1.7 4.0 6. Price Contingencies 155.4 137.3 292.7 0.9 1.9 2.8 7. Totals 367.7 307.5 675.2 28.5 24.0 52.5 4.10 The above estimates were made by ELC on the basis of the designs and costs _n their August 1977 report (1.09), which they updated to May 1979. Local costs include an element of indirect foreign costs, since UTE's records do not provide an adequate basis for estimating such costs. The estimates include physical contingencies of 10% for the distribution works which is considered adequate. Price contingencies for local costs are based on rates of 45% for 1980 and 40% for 1981. For foreign costs, a rate of 6% p.a. has been assumed. Average exchange rates of NUr$11 and NUr$14.85 per US dollar for 1980 and 1981 respectively were used for conversion purposes. The cost estimates exclude import duties and taxes, for which UTE is to be exempted. The average base cost of consultant services (excluding travel and subsistence) is esti- mated at US$7,000 per staff-month.  - 24 - Project Execution 4.11 The Project consists mainly of a large number of small works carried out by UTE's Montevideo and Interior Distribution Departments, with procure- ment through UTE's Procurement Division. UTE has recently set up a planning unit to implement detailed engineering and timely procurement. To strengthen this unit, improve coordination and expedite project execution, Project Consultants (Electroconsult, Italy) have been engaged to provide together with UTE the necessary manpower for a Project Unit (2.04). This unit will work within the framework of UTE's existing organization, providing the required technical and project management input to ensure that the various stages of the design, procurement and construction are executed in a timely and orderly manner, and ensuring coordination with the closely interrelated IDB project and other ongoing works. A program implementation schedule is shown in Annex 4-4 which would be used to monitor progress. Project completion is expected by December 1981. 4.12 In the area of Montevideo, construction would be largely by UTE's workforce, with the assistance of suppliers and civil works contractors for underground cables and substations. For the interior some difficulties may arise because of lack of contractors for this type of work and some unwilling- ness of UTE's artisans to work outside Montevideo. This may cause implemen- tation delays, and during negotiations it was agreed that, in such instance, the use of contractors from adjacent countries could be a solution. Procurement 4.13 Procurement of goods and services to be financed from the proposed loan, except for those of consultants, would be through international competitive bidding in accordance with the Bank's Guidelines for Procurement. Goods and services to be financed by UTE would be procured through UTE's normal procedures, which require competitive bidding or negotiated contracts in special instances. Due to the small size of the local market and unfavorable tax treatment, locally procured equipment may be up to 40% more expensive than equivalent imported equipment. However, the increase in total project cost resulting from such local bidding is not expected to exceed 10%, as local manufacturers are only capable of supplying a small portion of project requirements. The loan agreement provides that similar items should be grouped together to the satisfaction of the Bank, with a view to creating reasonably large and attractive packages likely to ensure wide international competition. Disbursements 4.14 The proceeds of the proposed loan would be disbursed for (a) 100% of foreign expenditures for materials and equipment, including auxiliary services; and (b) 90% of total expenditures for consultant services. 4.15 Retroactive financing is recommended for consultant services not exceeding US$900,000 subsequent to June 1, 1979, in order to ensure a prompt start on project execution. The loan disbursement schedule is shown in Annex 4-3 and the closing date will be June 30, 1982, in order to allow for repayment of retention moneys and some unforeseen delays.  - 25 - Environmental Aspects 4.16 No problems in this respect are expected. The facilities to be constructed are of standard execution for which the necessary easements are provided. They would be largely underground and in substation buildings in Montevideo, and of the standard overhead and above ground type in the interior. Project Risks 4.17 The Project is mainly subject to risks associated with UTE's and the country's institutional and managerial shortcomings. Delays may arise from lack of qualified staff, and from difficulties in integrating the Project Consultant's staff into the UTE organization. A determined effort is needed to get procurement activities moving as early as possible, and the presence of the Project Consultants will be beneficial in overcoming UTE's bureau- cratic inertia, provided they receive sufficient support from the utility's management. 4.18 Procurement procedures in Uruguay have, in the past, tended to take a long time. To reduce the danger of delays in project execution which this may cause, during negotiations the government agreed to pass a decree exempting procurement for the Bank and IDB projects from normal administrative procedures, which would otherwise require approval by various ministries in a sequential order. During negotiations it was agreed that enactment of the decree would be a condition of loan effectiveness.  - 26 - 5. FINANCIAL ANALYSIS Earnings History 5.01 UTE's earnings record has improved over the recent past (Annex 5-1). While until 1976 the rate of return was below the 8% level covenanted under Loan 712-UR, it exceeded it in 1977 and 1978. This improvement in earnings was chiefly the product of very favorable hydrological conditions in 1977 and 1978. UTE's earnings have not generated adequate resources to finance power sector investments. This has not had a serious impact to date as a result of the Government's decision to implement through other entities its main invest- ments in the electric sector (the hydroelectric projects of Salto Grande and Palmar). However, investment in transmission and distribution continued to be under UTE, and in these two areas, as well as in maintenance, financial tightness was felt severely. 5.02 In 1972-1978, the government did not increase electricity tariffs to levels required on financial and economic grounds because it feared that higher tariffs would aggravate inflation. Timely measures with respect to tariffs are required to preclude waste (i.e., supply of electricity to the consumer below economic cost) and financial difficulties for UTE. Given that power generation is about 50% from thermal sources, it would indeed be uneconomic that Uruguay should keep its rates low when fuel imports have such significant macroeconomic effects. Tariff Regulations 5.03 The recently enacted Electricity Law (1.13) provides that electricity rates shall be set so as to maintain the quality of service and finance invest- ment requirements to meet market growth. The regulations to the law institute a tariff regime which supersedes the one instituted by decree 143/70 (see Attachment to Annex 5-2). The basic principles of the previous regulations have been retained. UTE's tariffs will be set on the basis of a target rate of return on a rate base consisting of average revalued net fixed assets in oper- ation and a provision for working capital. The main changes from the previous regulations are as follows: (a) The annual rate of return shall be not less than 6% (the previous minimum was 8%) nor more than 10%, averaging 8% in the period 1975-1983, and the Executive Power shall annually determine the rate of return expected for the next year and fix tariffs accordingly; (b) UTE may request tariff adjustments: (i) within the first four months of each year (to reflect hydrological conditions), (ii) every three months to take into account cost changes adding up to 5% or more, 1/ (iii) at any moment when cost changes since the last rate increase add to 10% or more; 1/ and 1/ These provisiorLs were incorporated through a subsequent decree issued in August 1979.  - 27 - (c) Provision is made for a more comprehensive asset revaluation scheme than the one presently in use, 1/ which--before being instituted--must be proposed by UTE for approval by the Executivt Power. At negotiations, UTE agreed to submit, on a mandatory basis, tariff increase requests if any of the conditions listed in (b)(ii) and (b)(iii) occurs, and the government agreed to act expeditiously on such requests. 5.04 At negotiations, UTE agreed to require its external auditors to submit a report with their recommendations on the new asset revaluation scheme not later than December 31, 1980; to exchange views with the Bank on the report and its recommendations; and to put into effect such proposals as shall have been approved by the Bank. This timing would enable the Bank to discuss the new scheme with the Government prior to the appraisal of the proposed Sixth Power Project. Financial Position 5.05 UTE has a strong financial structure. Its debt/equity ratio as of December 1978 was 20:80 (Annex 5-7) and this is probably overstated, since inventories are carried at their historic cost (and not all items have been adequately inventoried), work in progress is shown at cost, and foreign infla- tion is not yet taken into account for fixed asset revaluation purposes. Thus UTE has the capacity to carry considerable additional debt, provided its revenues are allowed to increase so as to meet the additional debt service. Liquidity 5.06 In the past UTE's liquidity has fluctuated from very poor to fairly good. At present, with investment being kept low, UTE has no liquidity problem. UTE regulates its liquidity through its payments to ANCAP and to the Government (Treasury, pension funds), falling back on these when its own financial situation tightens, an event often associated with difficulties in collecting its accounts receivables from the Government and its agencies. UTE's short-term debt to ANCAP has on occasion been excessive. During negotiations, agreement was reached that debts to the public .;ector, in- cluding ANCAP, should be settled on a timely basis. Overdue Government Accounts 5.07 Overdue Government accounts have been a perennial problem for UTE, associated with its de facto dependence from the Central Governmenit. Loari 712-UR included a covenant requiring collection of overdue receivables from the public sector (as well as timely payment of UTE's debts to it) but this was never fulfilled. As of December 31, 1978, accounts due from the pkublAt sector were estimated to amount to the equivalent of US$20.0 million which, had rates remained invariant through time, would represent about 15 months of sales (at prevailing inflation rates, however, it is probably closer ;:o about 20 months of sales). 1/ At present, fixed assets are revalued by the arithmetic average of the annual cost of living index and rate of exchange increases (Annex 5-2, Attachment).  - 28 -- 5.08 To deal with this problem, the Government established a compensating mechanism for "old" debt in early 1978 and made budgetary allocations for power purchases in such a manner that they may not be diverted from the intended purpose. These measures have proved insufficient, as overdue accounts have kept on mounting. In view of the above, the loan documents contain provisions to ensure timely payment of future electricity bills, and agreement has been reached on the manner and timetable in which debtS outstanding as of December 31, 1978 shall be settled. In this respect, the Government has agreed that by June 30, 1980 it will settle any public sector overdue accounts yet outstanding. 1/ UTE has agreed to take adequate measures to collect accounts receivable from public sector agencies within 75 days of billing and the Government has agreed to make direct payment to UTE of bills not paid by its respective agencies, other Government enterprises or municipalities, within the same period. To monitor compliance, UTE has agreed to submit quarterly reports on sales and receivables to the public sector. Miring negotiations, it was agreed that prior to loan effectiveness, the Bank will receive evidence that the above commitments are being fulfilled. Financing Plan 5.09 The financing plan on the next page was prepared on the basis of the information available during appraisal and updated in May 1979. It is expected that during the disbursement period of the proposed loan, the financing for UTE's investments will come substantially (42%) from internal cash generation, complemented by the proposed Bank and IDB/Central Bank loans (26%) and by suppliers credits and future commercial bank loans (32%). 5.10 The proposed Bank fifth power loan of US$24 million would be made to UTE for a term of 15 years including 3 years of grace, 2/' at the current Bank interest rate, assumed for the purpose of financial projections to be 8%. The loan would be guaranteed by the Republic of Uruguay. Of the proceeds of the loan, US$0.6 million would be relent to the Direccion de Energia, for purposes of the energy sector study (1.05). It has been assumed that these funds will be onlent on the same terms as the loan to UTE. The loaEn documents provide for the onlending arrangements, which should be satisfactory to the Bank. 5.11 The proposed IDB project has already been appraised, and loan approval is expected before December 31, 1979. The financiLal projections assume a loan amount of US$31.5 million equivalent (see 4.04), f-or a term of 20 years, in- cluding a 3.5 years grace period, which is currently assumed to bear an interest rate of 7.5% per year. 1/ Information submitted to the Bank shows that, through the first semester of 1979, reasonable progress towards achieving the above target had been achieved. 2/ These are the standard terms for Uruguay.  - 29 - UTE'S FINANCING PLAN (US$ millions) 1980-1981 1980-1983 Amount % Amount % Requirements for Funds Investments in: Generation 18.0 10 36.3 10 Transmission 64.2 36 102.6 28 Distribution 64.9 37 158.4 43 Other 1/ 12.7 7 24.4 7 Working capital 2/ 18.0 10 44.1 12 Total requirements 177.8 100 365.8 100 Sources of Funds Net operating income 59.8 34 195.7 54 Other income (net) 17.9 10 38.0 10 Depreciation and amortization 39.6 22 107.1 29 Total gross cash generation 117.3 66 340.8 93 Less: Debt service 43.3 24 192.8 53 Net internal generation 74.0 42 148.0 40 Borrowings IBRD proposed Fifth Power Loan 24.0 13 24.0 7 IDB/Central Bank proposed loans 22.8 13 31.5 9 IBRD future Sixth Power Loan - - 22.1 6 Suppliers 48.0 27 127.2 35 Commercial banks' future loans 9.0 5 13.0 3 Total borrowings 103.8 58 217.8 60 Total sources 177.8 100 365.8 100 1/ Differs slightly from figure in 4.01 because part of UTE administration of investment program is expensed for purposes of financial projections. 2/ Net of reduction of public sector accounts as of December 31, 1978 expected to be outstanding as of December 31, 1979 (US$12.2 million).  - 30 - 5.12 The financial projections also assume a future IBRD loan, on the same conditions as the Fifth Power loan, to finance the foreign costs of UTE's 1982-83 distribution investment program (1.10). Forecast Financial Performance 5.13 During negotiations, UTE and the Government agreed that UTE's electricity rates will be adjusted periodically, to achieve an annual rate of return of not less than 7.5% averaged over two year periods, to take account of impact of variable hydrology on fuel costs. 1/ 5.14 The new regulations to the electricity law provide a satisfactory legal framework for the achievement of the rate of return targets proposed (5.03). The main issue, however, is not the legal framework but the Govern- ment's willingness to take tariff actions when required. Due to recent inter- national fuel price increases, not yet fully reflected in the price paid by UTE for its fuel purchases to ANCAP, to the need for further salary increases to maintain the progress achieved in improving salary structures (2.08), and to the persistence of inflation, significant tariff actions will be required during project execution. The initial test of this intention will be Govern- meent action on UTE's tariff application for 1980, which is due by January 1980 under the regulations . During negotiations the Government agreed to approve, by January 15, 1980, a tariff increase program designed to ensure that a rate of return of 7.5% will be achieved. 5.15 The financial projections (Annexes 5-4 and 5-5') indicate that tariffs as shown below will be required to ensure the viability of IJTE's investment program. Average Tariffs and Rates of Return Required Tariffs - In current In constant Rate of Year US$ mills/kWh US$ mills/kWh Return (%) 1979 53.7 53.7 7.5 1980 60.5 56.5 7.5 1981 67.7 59.1 7.5 1982 72.6 59.3 7.5 1983 79.0 60.2 7.5 /a Exclusive of connection fees and of tax oIn electricity sales (for which UTE acts as a mere collecting agent). 1/ Provided, however, that the rate of return in any one year cannot fall below 6%.  - 31 - Future Finances 5.16 With the rate actions discussed above and the Government repaying its arrears and paying its electricity bills on time, UTE's 1980-81 financial situatton should be comfortable. In 1980 and 1982, UTE's financial structure wil change significantly with the incorporation to its assets of the Salto Grande 500 kV transmission works and of the Palmar hydro project respectively (Annex 5-6). It has been agreed that the debt stevice on these two projects will also be transferred to UTE, while the equity contributions made by the Government will be considered as a Government contribution to UTE's capital. 1/ 5.17 With the transfers, combined with the proposed investment plan and its financing, UTE's debt-equity ratio is expected to rise to 47:53 by 1982 which is still satisfactory, and should provide adequate margin for additional borrowings. The debt service coverage ratio will be comfortable during project execution but will fall to its lowest level (about 1.2) in 1983 when UTE will be servicing the entire Palmar debt, which is tight. To ensure adequate review of future borrowings the present covenant of Loan 712-UR, which requires UTE to seek the agreement of the Bank before incurring any additional long-term debt which would lower the coverage of the maximum future debt service below 1.5, has been repeated for the proposed loan. 5.19 In 1978 the Government imposed a contribution of NUr$6.0 million on UTE. The financing plan does not provide for any further contributions and UTE and the Government have agreed that all UTE's earnings shall be retained until project completion. 5.20 UTE's current position should remain comfortable as receivables from Government are paid. The acid test (the ratio of cash plus short-term receivables to current liabtlities) is expected to reach 0.70 in 1983 which, though below its presently high level, is still satisfactory. By 1983, the average collection period is also expected to have fallen to about two months from its 4.5 months present level, due to the improvement in Govern- ment payments. 5.21 In order to avoid a recurrence of UTE's past severe liquidity problems, the Government has agreed to a,-,st UTE in obtaining, as and when required, short-term credits from the Government-owned banks for not less than US$1.5 million. UTE should be able to maintain adequate liquidity at all times and, to monitor its behavior, the acid test ratio has been included in the performance indicators. 1/ Since Palmar is not expected to be fully operational until late 1982, it was also agreed that the Government will bear 50% of the debt service burden in that year (see Annex 5-5).  - 32 - Performance Indicators 5.22 Over the project implementation period UTE is expected to improve its performance in several areas (see Annex 5-8), the most important of which are: (a) The ratio of customers to employees is expected to improve despite the heavy investment effort and the larger share of sales in the interior; (b) The relative number of professionals within the work force and their average salary are expected to improve; (c) The investment program would result in a gradual reduction in the number of forced outages; (d) System losses would reduce gradually; (e) UTE's penetration in the interior would increase; (f) Rates would increase in real terms, and the rate of return would remain satisfactory; (g) The collection period for public sector receivables would gradually fall to a normal level; and (h) Satisfactory liquidity would be maintained. The forecast indicators shown in Annex 5-8 refer to the above and would be used as a basis for monitoring performance during project execution.  - 33 - 6. ECONOMIC ANALYSES Network Evaluation 6.01 The design of UTE's network is technically simple and follows European standards instituted many years ago: the system is of the radial levels type (except for the higher voltages in Montevideo; though even there most rings are not closed); down to the 15 kV and 6 kV level cables, lines and busbars are re- lay protected, below this level protection generally consists of fuses (fused isolators are used for protection of the distribution transformers and outgoing radial lines and cables), except for important industrial connections. Except in urban centers (Montevideo) the systems have overhead lines and open-air substations for higher voltage levels, and brick or concrete buildings for the distribution substations (where the intermediate to low voltage transformers, switching and protection equipment, and L.V. boards are located). The 150 kV and 115 kV lines have towers, all intermediate voltage lines concrete poles and L.V. lines either wood or concrete poles. The planned expansion would follow the same standards and thus its capital cost is considered to be at a minimum. On the other hand, in view of the considereable use of fused pro- tections, the quality of service is less than would have been obtained with the most modern (and more expensive) equipment and systems that allow automatic restoration of service. The standards applied are commensurate with the historic and forecast conditions of Uruguay's economy, where least direct cost considerations are of prime importance and increase in reliability of the service of secondary importance. The expansion of the distribution networks at 220/380 V (4-wire) rather than 3 x 220 V (3-wire), however, will ensure less voltage distortions and a reduction in losses, thus raising the quality of service. The replacement of old and worn-out equipment and cables in Montevideo, together with the removal of overloads in various sections, will provide an acceptable level of security of supply (in the long term the objective is to cut the relative number of forced outages in half). Comparison of Alternatives 6.02 In designing the transmission (150 kV) and subtransmission facilities (the latter being part of the Project), a least-cost comparison has been made to justify the replacement of localized diesel-electric supply by supply from the interconnected system. The low voltage distribution networks are considered to be common to either system of supply and its costs, therefore, should not be included in the comparison. The consultants have grouped the various diesel stations in such a way so as to assure technically adequate supply from the grid at reasonable cost, thus defining a number of areas to be included in the comparison. These areas (8), subsequently were assumed to develop (during a period of 20 years) with or without the benefit of supply from the grid (in the "without" case additional diesels would have to be installed to meet requirements).  - 34 - 6.03 The discount rate up to which the present value of all costs related to supply from the interconnected system, would be lower than the present value of all cost of isolated (diesel) supply, is about 18% (Annex 6-1). Under reason- able assumptions for various adverse conditions materializing simulataneously (i.e., neglecting simultaneous occurrence of favorable conditions, in view of the rather high equalizing discount rate), the equalizing discount rate would range from 10%-18% with an average of 14%, i.e., even under adverse conditions the equalizing discount rate exceeds the opportunity cost of capital by a comfortable margin. Supply from the interconnected system is therefore econo- mically justified. Rate of Return on Investments 6.04 Because of the nature of the Project it is not possible to separate the costs and benefits that it generates from those of the other components of UTE's overall development program. The rate of return of the entire program was therefore calculated (Annex 6-2). The cost streams include the capital cost of UTE's development program, project administration costs, and associated operating costs (fuel, operation and maintenance, and administration and commercial). The benefit streams associated with the program comprise sales revenues (inclusive of the tax on energy sales) and connection fees derived from new customers and revenues from incremental sales to existing customers (3.06) and the estimated market value of diesel units to be sold after interconnecting isolated systems (6.03). 6.05 Since, even after Palmar and Salto Grande enter into operation, a proportion of UTE's generation is expected to be from thermal sources (1.30) incremental operating costs have been estimated from the expected incremental fuel requirements 1/ associated with the program, as well as operation, main- tenance, administrative and commercial expenses. 6.06 The rate of return calculations are based on international fuel prices. Local currency costs and benefits have been adjusted through shadow pricing (by a factor of 0.8), following standard Bank practice for Uruguay. All other values considered are based on market prices. Based on the above assumptions, the rate of return on the 1980-1983 program would be about 7%. Details of the calculations are shown in Annex 6-2. The results of sensitivity analyses are shown below: 1/ Net of fuel savings arising from greater hydro generation caused by the scheduled replacement of some hydro equipment which is evidencing reliability problems (4.03), reduced system losses (3.05), and displace- ment of diesel generation due to interconnection (4.06).  - 35 - Rate of Return (%) Without shadow pricing of foreign exchange 11 With investment life reduced from 25 to 20 years 6 With investment costs increased by 10% 6 With fuel expenditures increased by 10% 5 With a 5% rate increase effective January 1, 1984 8 6.07 The results shown do not take into account productivity and welfare gains resulting from outage reduction, nor other factors affecting consumer surplus. Taken in isolation, however, they suggest that the tariff levels which may be adequate to meet UTE's financial requirements may be insufficient to cover marginal costs. For this reason, UTE has agreed to carry out a tariff structure study to determine the appropriate level of charges to different classes of consumers (para. 1.26).  - 36 - 7. SUMMARY OF PROPOSED AGREEMENTS AND RECOMMENDATIONS 7.01 During negotiations agreements were reached with the Government and with UTE, as applicable, on the following principal points: (a) The Direccion Nacional de Energia will, not later thaa Jtin-~ 30, 1980, engage consultants to prepare an energy study. The study would be completed by December 31, 1981. It would be financed, through the proposed loan, by US$0.6 million relent to the Direccion under terms and conditions similar to those of the proposed loan, and acceptable to the Bank (para. 1.05). (b) UTE will carry out a load measurement program, according to an agreed timetable, and will engage external consultants to prepare a tariff study, under terms of reference acceptable to the Bank. The study is to be completed by June 30, 1981 and, in consulta- tion with the Bank, its recommendations put into effect by June 30, 1982 (para. 1.26). (c) By December 31, 1979 the Government will furnish to the Bank a satisfactory program for meeting power sector financing require- ments through 1983, and a report on the costs and financing schemes of power projects being carried out outside UTE (para. 1.28). (d) The power sector development program study is to be completed by June 30, 1980 (para. 1.31). (e) A complete schedule for the separation of UTE and ANTEL (and for finalizing commercial arrangements on the services respectively provided) (para. 2.01). (f) The management study is to be completed by September 30, 1980, at which time it would be submitted to the Bank for discussion. Implementation to be completed with the assistance of the consultants (para. 2.02). (g) Role of the project unit with regard to the IBRD and IDB projects (para. 2.04). (h) UTE's external auditors will prepare a salary study, which will be submitted to the Bank by June 30, 1980. UTE will submit, for Bank review, a program for the implementation of the study's recom- mendations, which is to start by January 1, 1981 (para. 2.08). (i) UTE's recruitment program for engineers and other professionals (para. 2.09).  - 37 - (j) Engagement of a training expert (to be financed under loan 1594-UR) by April 30, 1980. Presentation to the Bank of a training program by November 30, 1980 (para. 2.10). (k) UTE's external auditors will: (i) review the 1978 and 1979 financial statements, and UTE will furnish to the Bank their report (para. 2.12), (ii) assist UTE in the updating of its information systems (including preparation of quarterly income statements and processing of cost information by responsibility centers) (para. 2.11), (iii) assist UTE on the organization and staffing of its internal auditing unit (para. 2.13), and (iv) prepare a report on a new asset revaluation scheme - which is to adequately take into account external inflation -, said report to be submitted to the Bank by UTE, together with its own proposals, by December 31, 1980 (para. 5.04). (1) Starting on January 1, 1980, UTE will externally insure its major assets against agreed risks, and will set up a self insurance provision for other risks. The Government will guarantee any losses not covered by the above (para. 2.14). (m) The standard undertaking for monitoring the soundness of dams (para. 2.15). (n) UTE will be exempted from import duties on imports for the project (para. 4.10). (o) Use of contractors from neighboring countries, if required (para. 4.12). Grouping of similar items to ensure economic procurement (para. 4.13). (p) UTE's debts to the public sector, including ANCAP, will be settled on a timely basis (para. 5.06). (q) By June 30, 1980 all overdue public sector debts to UTE will have been settled. As from January 1, 1980 all electricity bills to public sector agencies will be settled within 75 days. UTE will submit to the Bank quarterly reports on its sales to and receivables from the public sector (para. 5.08). (r) UTE's annual rate of return will be not less than 7.5%, averaged over two year periods. In any one year it will not be less than 6%, (para. 5.13). By January 15, 1980 the Government will approve a tariff increase program designed to achieve a 7.5% rate of return in 1980 (para. 5.14).  - 38 - (s) Upon their completion, the Salto Grande non common works and the Palmar hydroproject will be transferred to UTE. The debt service on these projects will also be transferred to UTE. The equity contributions made by the Government will be considered a Government contribution to UTE's capital (para. 5.16). (t) UTE will consult the Bank prior to incurring any long term debt if its debt service coverage ratio is lower than 1.5 (para. 5.17). (u) All UTE's earnings will be retained until project completion (para. 5.19). (v) The Government will assist UTE in obtaining, as and when required, short term credit from the Government owned Banks for not less than US$1.5 million (para. 5.20). 7.2 Before declaring the loan effective, the following conditions would have been met. (a) UTE's bylaws and their regulations should have been enacted. They should be acceptable to the Bank (para. 2.03). (b) The external auditors should have been engaged (para. 2.12). (c) The IDB loan should have been signed (para. 4.04). (d) Enactment of a decree providing all Government required authoriza- tions for procurement for the project and for the IDB project (paras. 4.18). (e) Evidence should have been provided the Government is making adequate progress towards fulfilling its commitments regarding payment of electricity bills (para. 5.08). 7.03 Any change in sector legislation or in UTE's byLaws or its regulations which may adversely affect the utility's operations or its financial performance would be an event of default. 7.04 Retroactive financing for consulting services as from June 1, 1979, in an amount not exceeding US$0.9 million is recommended (para. 4.14). 7.05 With the above assurances, the project would constitute a suitable basis for a Bank loan of US$24 million. The loan would be repaid over a period of 15 years, including three years of grace.  URUGUAY - FIFTH POWER PROJECT Historic Power Data (Generation) ---------------------------Interconnected System----------------------------- -----------Interior----------- --------Total UTE-------- Demand hidro Thermal Total Annual Annual Load Thermal Tal Total Annual Hidro_ Thermal Total Growth Maximum Growth Factor (Diesel) Imports ot Generation Growth Rate Year GWh % GWh % % MW GWh GWh G GWh 1945 355 75 355 1950 616 11,7 119 9,7 616 11,7 1955 1.022 10,7 209 11,9 1.022 10,7 1960 675 54,3 484 38,9 1.159 93,2 4,0 250 3,6 -- 85 85 6,8 1.244 4,0 1961 1.047 73,8 280 19,7 1.327 93,5 14,5 278 11,2 55 92 92 6,5 1.419 14,1 1962 829 53,3 624 40,0 1.453 93,3 9,5 300 7,9 55 105 105 6,7 1.559 9,9 1963 1.102 69,9 371 23,5 1.473 93,4 1,4 306 2,0 55 105 105 6,6 1.578 1,2 1964 1.267 73,7 345 20,1 1.612 93,8 9,4 340 11,1 54 107 107 6,2 1.719 8,4 1 1965 * 611 37,0 924 56,2 1.535 93,2 -4,8 299 -12,1 59 111 0,1 111 6,8 1.646 -4,2 w 1966 1.399 76,3 321 17,5 1.720 93,8 12,1 343 14,7 57 114 -0,4 114 6,2 1.834 11,4 1967 1.319 69,3 463 24,3 1.782 93,6 3,6 365 6,4 56 122 -0,5 122 6,4 1.904 3,8 1968 * 1.150 61,0 610 32,3 1.760 93,3 -1,2 330 -9,6 61 123 3 126 6,7 1.886 2,8 1969 1.068 52,1 844 41,2 1.912 93,3 8,6 383 16,1 57 113 24 137 6,7 2.049 8,6 1970 * 1.242 57,5 770 35,6 2.012 93,1 5,2 402 5,0 57 120 28 148 6,9 2.160 5,4 1971 1.470 63,3 690 29,7 2.160 93,0 7,4 444 10,4 55 129 34 163 7,0 2.323 7,5 1972 * 995 42,5 1.177 50,3 2.172 92,8 0,6 450 1,4 55 135 33 168 7,2 2.340 0,7 1973 1.557 63,3 766 31,2 2.323 94,5 7,0 447 -0,7 59 108 27 135 5,5 2,438 5,0 1974 * 1.366 59,5 815 35,5 2.182 95,0 -6,1 425 -4,9 59 96 19 115 5,0 2.297 -6,6 1975 * 1.132 47,3 1.143 47,7 2.275 95,0 4,3 414 -2,6 63 98 23 121 5,0 2.396 4,3 1976 1.221 47,2 1.235 47,7 2.456 94,9 8,0 470 13,5 59 106 25 131 5,1 2.588 8,0 1977 1.567 59,3 1.075 40,7 2.642 94,9 7,6 523 11,3 58 114 28 142 5,1 2.784 7,6 1978 1.630 58,1 1.176 41,9 2.806 94,8 6,2 548 4,8 58 124 29 153 7,7 2.959 6,3 As erage annual grcwz.! rate, '960-77 (%) 5.1 5.5 JQ z -YCa-fs Gu- ..Up,.?y rc-jt:'cUticns. 0 i i97"  URUGUAY - FIFTH POWER PROJECT Historic Power Data (Sales) Industrial Domestic Commercial Street Lighting Total Monte Inte Monte Inte Monte Inte Monte Inte Annual video rior Total video rior Total video rior Total video rior Total Traction Sales Growth Losses Year GWh GWh h I GWh GWh GWhF-T- GWh GWh 1GWh i GWh GWh TGWh V GWh % GWh % G T 1945 1950 1955 1960 341 140 481 47,3 292 104 396 38,9 60 20 80 7.9 19 7 26 2.6 34 3.3 1.017 227 18 1961 360 155 515 44.7 349 127 476 41.3 73 23 96 8.3 24 8 32 2.8 34 3.0 1.153 13.4 266 19 1962 347 158 505 39.8 436 156 592 46.6 82 25 107 8.4 25 9 34 2.7 32 2.5 1.270 10.1 289 19 1963 345 151 496 38.7 448 163 611 47.7 84 25 109 8.5 26 10 36 2.8 29 2.3 1.281 0.9 297 19 1964 379 172 551 39.7 481 172 653 47.1 90 27 117 8.4 27 10 37 2.7 29 2.1 1.387 8.3 332 19 1 1965 * 357 182 539 40.3 446 172 618 46.2 91 31 122 9.1 24 10 34 2.6 24 1.8 1.337 -3.6 * 309 19 4- 1966 384 195 579 40.2 475 190 665 46.2 103 33 136 9.4 29 11 40 2.8 21 1.5 1.441 7.8 393 21 1967 388 194 582 38.3 529 200 729 48.0 112 31 143 9.4 29 11 40 2.6 26 1.7 1.520 5.5 384 20 1968 * 390 201 591 39.1 515 206 721 47.7 104 37 141 9.3 28 12 40 2.7 20 1.3 1.513 -0.5 * 373 20 1969 384 219 603 37.3 549 231 780 48.2 131 44 175 10.8 30 13 43 2.7 17 1.1 1.618 8.9 401 20 1970 * 340 211 551 31.9 569 265 834 48.3 201 80 281 16.3 29 13 42 2.4 19 1.1 1.727 6.7 * 433 20 1971 369 231 600 31.9 638 268 906 48.2 227 78 305 16.2 30 16 46 2.4 24 1.3 1.881 8.9 442 19 1972 * 358 219 577 32.7 574 278 852 48.3 191 85 276 15.7 18 18 36 2.0 22 1.3 1.763 -6.3 * 577 25 1973 348 233 581 32.2 572 298 870 48.2 194 85 279 15.5 34 20 54 3.0 22 1.2 1.806 2.4 652 27 1974 * 374 274 648 36.1 556 273 829 46.1 179 73 252 14.0 29 16 45 2.5 23 1.3 1.797 -0.5 * 500 22 1975 * 417 304 721 37.2 574 295 869 44.8 198 78 276 14.2 36 21 57 2.9 17 0.9 1.940 8.0 * 456 19 1976 430 334 764 37.0 599 327 926 44.9 211 86 297 14.4 38 24 62 3.0 14 0.7 2.063 6.5 525 20 1977 473 301 774 35.4 644 356 1000 45.7 233 102 335 15.3 39 24 63 2.9 16 0.7 2.188 6.1 596 21 1978 535 362 897 37.3 686 383 1069 44.5 . 245 112 357 14.8 38 27 65 2.7 17 0.7 2.405 9.9 554 19 Average annual growth rate (.) 3.5 5.7 8.7 5.9 4.9 * Years of supply restrictions. May 1979  ANNEX 2 -41- URUGUAY - FIFTH POWER PROJECT UTE ORGANIZATION sOARD OF DIRECTORS P SELEICES EXECUTIVE SECRETARY RELATIONS ~~~PRESIDENT CO R IN G LEGAL -1 NOTARY CONTACT C UITH | INTERNAL TECH L __ 2 AUDI ADVISOR | |ORGANIZATIONAL GEEA PLANNING I PROJECT I 1 UNIT l l l l | | | GENERAT~~~~~~~ ~~IO N | I OPERTION I SEVCE FINAC PROCUREMENT _--ID DISTRIBUTION| OPERATIONS _ _ _ _ _ ~~~~~~~~~~TRANSMISS _ |PERSONNEL | -|MAINTENANCE | |ACCOUNTING | -|C.C B.ljTEMLt 'IE -|CONSTRUCTION | | BDE OA | HYDRO | INTERIOR L TRASPOR | 4COMMERCIAL| . TASI.. -|CNSTRUCTION WVorlcl Bank 20673  -42- ANtW,X 3 Page I of 3 URUGUAY - FIFTH POWER PROJECT Balances of Energy and Capacity Historic Forecast 1975 1976 1977 1978 1979 1980 1981 1982 1983 -__________--------------Balance of Energy------- INTERCONNECTED SYSTEM Sales GWh Residential " 916 869 940 1,005 1,056 1,106 1,152 1,221 1,299 Commercial " 256 275 310 330 350 372 391 423 465 Industrial " 698 739 750 869 927 992 1,072 1,184 1,297 Traction 17 14 16 17 14 14 14 14 14 Street Lighting - 53 58 59 61 70 73 76 85 92 Total ' 1,840 1,955 2,075 2,282 2,417 2,557 2,705 2,927 3,167 Losses " 435 501 568 525 555 587 594 643 697 Generation Required GWh 2,275 2,456 T,643 2,807 2,972 3,144 3,299 3,570 3,864 Supplied by Exist. Hydro GWh 1,132 1,222 1,568 1,630 1,100 1,061 900 820 924 Palmar - - - - - - - 610 880 Salto Grande - _ - _ 170 889 1212 1,225 1230 Sub-Total Hydro " 1,132 1,222 1,568 1,630 1,270 1,950 2,112 2,655 3,034 Batlle y Ordones " 1,092 1,233 1,073 1,165 1,682 1,184 1,177 915 830 Gas Turbines 51 1 2 11 20 10 10 - - Sub-Total Thermal " 1,143 1,234 1,075 1,176 1,702 1,194 1,187 915 830 Imports (Argentina) GWh - - - - - Load Factor % 62.8 59.3 57.7 58.5 58.0 58.2 58.2 58.2 58.2 Maximum Demand MW 414 470 523 548 585 617 647 700 758 Dry Year Capabilities (1 in 5) GWh Hydro 950 1,750 1,915 2,600 2,600 Batlle y Ordones ,, 1,900 1,900 1,900 1,900 1,900 Gas Turbines 50 50 50 50 50 Total GWh 2,900 3,700 3,865 4,550 4,550 ISOLATED SYSTEMS Sales GWh Residential 53 57 60 64 67 71 75 45 11 Commercial 20 22 25 27 27 28 29 18 4 Industrial " 23 25 25 28 29 31 33 20 4 Street Lighting 4 4 4 4 4 5 6 3 1 Total 100 108 114 123 127 135 143 86 20 Losses " 21 23 28 29 31 32 33 20 4 Generation Required GWh 121 131 142 152 158 167 176 106 24 Supplied by Diesels GWh 98 106 114 124 129 138 147 94 12 Imports (Brazil) 11 23 Z5 28 29 29 29 29 12 12 Estimated Coincident Demand MW 30 31 33 34 36 38 40 30 12 1/ Interconnection used for emergencies.  43 - ANNEX 3 Page 2 of 3 Historic Forecast 1975 1976 1977 1978 1979 1980 1981 1982 1983 SUMMARY AND TOTALS Sales GWh Residential 869 976 1,000 1,069 1,123 1,177 1,227 1,266 1,310 Commercial " 276 297 335 357 377 400 420 441 469 Industrial " 721 764 774 897 956 1,023 1,105 1,204 1,301 Traction " 17 14 16 17 14 14 14 14 14 Street Lighting 57 62 63 65 74 78 82 88 93 Total 1,940 2,063 2,188 2,405 2,544 2,692 2,848 3,013 3,187 Losses 456 524 596 554 586 619 627 663 701 Required Generation GWh 2,396 2,587 2,784 2,959 3,130 3,311 3,475 3,676 3,888 Supplied by Hydro GWh 1,132 1,222 1,567 1,630 1,270 1,950 2,112 2,655 3,034 Thermal " 1,241 1,340 1,189 1,300 1,831 1,332 1,334 1,009 842 Imports " 23 25 28 29 29 29 29 12 12 Coincident Demand MW 444 501 556 582 621 655 687 730 770 - ____-------------------Balance of Capacities----------------------- INTERCONNECTED SYSTEM Maximum Demand MW 414 470 523 548 585 617 647 700 758 Installed Capacities G. Terra (1945-1948) MW 128 128 128 128 128 128 128 128 128 Baygorria (1960) 108 108 108 108 108 108 108 108 [08 Palmar - - - - - - - 100 300 Salto Grande - - - - 45 160 270 270 270 Sub-Total H'ydro 236 236 236 236 281 396 506 606 806 Batlle y Ordones #1, 2 (1931) 20 20 20 20 20 - - - - #3, 4 (1954-1956) " 100 100 100 100 100 100 100 100 [00 #5 (1970) 88 88 88 88 88 88 88 88 88 #6 (1975) 125 125 125 125 125 125 125 125 125 Gas Turbines (1965-1969) 30 30 30 30 30 30 30 30 30 Sub-Total Thermal 363 363 363 363 363 343 343 343 343 Total Installed Capacities MW 599 599 599 599 644 739 849 949 1,149 Capacity Margin MW 185 129 76 51 59 122 202 343 391 I of Demand 45 27 15 9 10 20 31 49 52 Required Thermal Capacity-/ MW 254 318 379 408 450 350 350 400 410 Surplus (Deficit) " 109 45 (16) (45) (87) (7) (7) (57) (67) 1/ Two criteria (select highest): Up to 1979: 1.15 [Max. Demand - Minimum Hydro Capacity (202)] + 0.05 Minimum Hydro Capacity (SOFRELEC Study). 1980 onward: 1,136 R; R = Thermal Back-up (Respaldo), factor resulting from simulation study (ELC/UTE) assuming 12% of capacity not available.  44- ANNEX 3 Page 3 of 3 Historic Forecast 1975 1976 1977 1978 1979 1980 1981 1982 1983 ISOLATED SYSTEMS Coincident Demand MW 30 31 33 14 36 38 40 30 12 Installed Capacity Diesels MW 55 60 60 60 6() 60 60 60 25 Imports 7 7 7 7 7 7 7 3 3 Total MW 62 67 67 67 67 67 63 28 Capacity Margin MW 32 36 34 33 3]L 29 27 33 16 % of Demand 107 116 103 97 36 76 68 110 133