Argentina - Fifth SEGBA Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6758-AR STAFF APPRAISAL REPORT ARGENTINA SEGBA V PROJECT June 3, 1987 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 witbou. World Bank authorizaon.  CURRENCY EQUIVALENT Currency Unit Austral (A.) 1US$ 1.26 A.1 Weihts and Measures GW = Gigawatt (1,000 MW) GWh = Gigawatt-hour kV = kilovolt (1,000 V) KVA - kilovolt-ampere kW = kilowatt kWh = kilowatt-hour GWh = Gigawatt-hour tWh = Terawatt-hour MBTU = Million of BTU (British Thermal Unit) MVA = Megavolt-ampere MW = Megawatt (1,000 kW) MWh M Megawatt hour TOE = Tons oil equivalent "M" preceding any unit indicates thousands "'MM" preceding any unit indicates millionLs Glossary of Abbreviations AyE = Agua y Energia Electrica Sociedad del Estado CNEA - Oomision Nacional de Energia Atomica CTMSG = Comision Tecnica Mixta de Salto Grande DEP = Directorio de Empresas Pu'blicas DUC = Despacho Unificado de Carga EBY = Entidad Binacional Yacyreta HIDRONOR - Hidroelectrica Norpatagonica, Sociedad Anonima MOSP = Ministerio de Obras y Servicios Publicos NCD = Non-Corporate Debt p.a. = per annum SEGBA = Servicios Electricos del Gran Buenos Aires NIS = National Interconnected System VAT = Value added tax Fiscal Year January 1 - December 31 1, As of December 31, 1986  FOR OFFICIAL USE ONLY ARGENTINA SEGBA V PROJECT STAFF APPRAISAL REPORT Table of C.)ntents Paxe No. I. LOAN AND PROJECT SUMMARY *******9 1................. 1 II. THE SECTOR .......................................3...... Energy Resources and Consumption ........................ 3 Electricity Consumption 4 Energy and Power Sector Organization ..... 4 Power Sector Government Objectives and Policies ......... 5 Main Power Facilities and Expansion Plans .............. 7 Power Sector Finances ..... 8 Past Experience in the Sector ........................... 11 III. THE PROJECT ..................... .12 The Setting ............................................. 12 Project Origin and Objectives 13 Project Description 13 Project Cost ...........15 Project Financing .....16 Project Implemen'.ation and Monitoring ........17 Procurement 19 Disbursements ...**.....* .....................*.. . 20 Project Executing Agency 21 - SEGBA's institutional profile 21 - Billing and collection 23 - Auditing and reporting 23 - SEGBA's Investment Program 23 This report is based on the findings of an Appraisal Mission consisting of Messrs. Hernan Garcia (Power Engineer) and Jorge Gorrio (Financial Analyst) who visited Argentina in January- . February 1987. This document has a restricted distribution and may be used by recipients only in the performance of their offcil duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Table of Contants (continued) - SEGBA's Finances ......... ......................... 23 - Past Performance 23 - Expected Performance 24 - SEGBA Tariffs . ..................... . . . ....... . 28 - Economic Justification ........................... 29 - Least-Cost Solution .....................o.......... 29 - Return on Investments 29 Environmental Aspects 3. ... 30 Project Risks ......o .............. .......... o........... 30 IV. AGREEMENTS REACHED AND RECOMMENDATIONS ............30 List of Annexes 2.1 Energy Sector Organization Chart 2.2 Sector and SEGBA's Expansion Programs Attachment 1: Summary of National Energy Denand Projections Attachment 2: Table 1 - National Interconnected System. Power Balance Table 2 -SEGBA - Energy Balance and Power Demand Attachment 3: SEGBA's Expansion Plan 2.3 rable 1: Projected Consolidated Funds Flow of AyE, SEGBA, and HIDRONOR Table 2: Forecast Energy Funds - Sources and .pplications Table 3: AyE's 1987-1995 Financial Projections Table 4: SEGBA's 1987-1995 Financial Projections Table 5: HIDRONOR's 1987-1995 Financial Projections 3.1 Project Description 3.2 Project Execution Schedule 3.3 Schedule of Procurement 3.4 Estuimated Disbursement Schedule 3.5 SEGBA's Institutional Assessment Attachment l SEGBA's Organization Chart 3.6 Action Plan for Efficiency Improvement 3.7 Financial Analysis of SEGBA Attachment 1: Historic and Projected Income and Funds Flow Statements Attachment 2: Historic and Projected Balance Sheets Attachmant 3: Historic and Projected Performance Indicators Attachment 4: Existing Debt as of December 31, 1985 3.8 SEGBA's Rate Base and Tariffs Attacbment ls Revenue effects of elliminating the discounts to tariff Tl consumers.  iii - Table of Contents (continued) 3.9 Project Economic Evaluation Attachment 1: Basis for the Economic Evaluation of the Project Attachment 2: Economic Evaluation - Case 1 Attachment 3: Economic Evaluation - Case 2 4.0 List of Selected Documents and Data Available in the Project File Map IBRD 20403  ARGEINA SEGBA V PROJECT STAFF APPRAISAL REPORT PART I - LOAN AND PROJECT SUMMARY Borrower: Servicios Electricos del Gran Buenos Aires (SEGBA). Guarantors The Republic of Argentina. Amounts US$276.0 million equivalent. Termst Repayment in 15 years including three years of grace, with interest at the Ba'.k's standard variable rate. Project Objectivess (a) to reduce distribution losses and to improve SEGBA's operational efficiency, (b) to ensure adequate energy supply in the Buenos Aires area for economic growth requirements, and (c) support rehabilitation of SEGBA's finances. Prolect Descriptions The proposed project would consist of: Part As a program for improving the efficiency of SEGBA, including a loss reduction program; Part B: rehabilitation and expansion of SEGBA's distribution network through financing of part of SEGBA's 1988-1992 least-cost investment program; and Part C: support for SEGBA's training program. Prolect Benefits: The project would benefit about 3.7 million consumers now living in the borrower's concession area through the improvement of the reliability of electricity services and 400,000 new consumers that are expected to be connected in the period 1988-1992. The project is also expected to ensure that energy is used efficiently and losses reduced and to reduce SEGBA's reliance on budget support. Riskst The project presents no special technical risks. To minimize the financial risk, actions would be taken by the Government to ensure adequate flow of funds for SEGBA through a combination of tariff actions and Government contributions.  '~ 2 - Estimated Prolect Costs: Local ForeA Total -------- (US$ Million)------- Part A Loss reduction program 14.5 1.0 15.5 2.1 Computer facilities and management information system 2.0 1.5 3.5 0.5 Studies 0.2 0.5 0.7 0.1 Subtotal Part A 16.7 3.2 19.7 2.6 Part B Transmission and subtransmission 86.8 39.1 125.9 16.7 Distribution works 269.4 125.3 394.7 52.4 Communications tolecontrol and general plant 62.4 26.8 89.2 11.9 Subtotal Part B 418.6 191.2 609.8 81.0 Part C Training 5.0 3.0 8.0 1.1 Subtotal Part C 5.20 3.0 8.0 1.1 Total Base Line Cost 440.3 197.2 637.5 84.7 Physical Contingencies 35.3 '5.6 50.9 6.8 Price Contingencies 15.7 48.5 _64.2 8.6 TOTAL PROJECT COST 491.3 261.3 752.6 100.0 Interest on Bank Loan during grace period - 25.6 25.6 Total financing required 491.3 286.9 778.2 Financing Plant IBRD loan 0.0 276.0 276.0 35.5 SEGBA internal cash generation 161.7 0.0 161.7 20.8 Government contributions 125.0 0.0 125.0 16.1 Borrowing from commercial banks 179.6 10.9 190.5 24.5 Consumer-contributions 25.0 0.0 25.0 3.2 Total 491.3 286.9 778.2 100.0 Estimated Disbursements: Bank FY 1988 1989 1990 1991 1992 1993 1994 Annual 27.0 24.1 49.4 48.3 43.7 42.2 41.3 Cumulative 27.0 51.5 100.5 148.8 192.5 234.7 276.0 Rate of Return: Economic rate of return 15.42  - 3 - PART II - THE SECTOR Enorgy Resources and Consun_tion 2.01 Argentina's energy resources are diverse and abundant. Proven and potential &as reserves are estimated at 880 million tons of oil equivalent (HMTOE), and proven and potential oil reserves at 560 !MMTOE. Potential coal reserves are also large, estimated at 220 MMTOE, but the low quality of deposits, as well as their distance from consumption centers, make their commercial exploitation doubtful. Uranium proven reserves are estimated at 400 MKTOE - or the consumption of about 8,000 MW of nuclear installed capacity for 30 years. Hydro power potential is estimated at 44,000 MW, equivalent to about 44 NMTOE p.a. - or 2,200 MMTOE over 50 years. 2.02 The country's energy consumption in 1985 is estimated at 33.0 MMTOE, resulting in a per capita consumption of 1.2 tons of oil equivalent (TOE) p.a., compared with the Latin American average of 1.0 TOE p.a. The country can be considered energy self-sufficient, although it Imports gas from Bolivia under a 1972 contract--which is scheduled to expire in 1992. 2.03 The pattern of energy consumption has changed significantly lately. As proven gas reserves have increased and gas fields have developed, gas has substituted for oil in industry and electricity L teration. This trend is expected to continue beyond 1990, with increased use of natural gas in industr7 and households. In anticipation, the Government is preparing to expand the capacity of its Northern and Center-West gas pipelines, and recently contracted works for expansion of the Neuquen-Bahia Blanca-Buenos Aires pipeline. Substitution of oil would also continue with the commissioning of large hydro projects currently under construction. 2.04 Argentina's energy policies have not fostered efficient use of the country"s energy resources. Distorted pricing policies are believed to be the main problem since, for long periods of time, the Government allowed prices of oil derivatives and electricity to decrease in real terms. The structure of electricity tariffs has not promoted conservation (par&. 2.25). 2.05 The Government recently completed an energy plan whose main objectives are: (a) to increase t:Le contribution of gas and hydro resources to the country's energy supply; (b) to increase oil exploration efforts in order to improve the reserve-production ratio, and (c) to correct pricing distortions and foster conservation and substitution. Specifically the country is expected to maintain its energy independence through the year 2000 by increasing the shares of gas and hydroelectricity in the country's energy balance (gas: from 25% in 1985 to 36% in 2000; hydro: from 11% in 1983 to 15% in 2000), reducing oil's share from 47% to 37%. The energy plan has been a valuable planning tool but requires review to ensure cost- effective and balanced use of resources subsequent to 1994. (para. 2.16).  -4- Electricity Consumition 2.06 The degree of electrification in Argentina Is high compared to oth'ar Latin American countries. About 79% of Argentina's inhabitants have access to electricity. Almost all the urban centers and about 502 of the rural population have electricity service. Electricity per capita consumption was about 1,160 kWh in 1986 (compared with 1,100 kWh per year for Brazil and 270 kWh per year for Bolivia). Total consumption from public service utilities increased at a rate of 7.82 p.a. in the period 1970-1980. It slowed after 1980, reflecting the difficult economic situation, reaching 3X in the period 1980-1984 and decreasing by 1X in 1985. Consumption growth recovered in 1986, however, at a high rate (8.52) and a 52 increase is expected for 1987. In 1986 industrial consumption aczounted for 48% of consumption and residential and commercial for 40%. Energy and Power Sector Oritanization 2.07 Annex 2.1 shows the organization of the energy and the power sectors. The Energy Secretariat (SE) of the Ministry of Public Works egnd Services is in charge of defining sector policies. SE is responsible for (a) overall energy planning, (b) concessions for exploration and exploitation for petroleum and gas and for electricity (c) pricing policies, and (d) policies for energy conservation and diversification. As part of its drive to improve public sector management, in 1986 the Government set up a holding company, "Directorio de Empresas Publicas' (DEP) which reports to the President and is expected to play a supervisory role in the energy as well as other sectors. The DEP is scheduled to negotiate medium-term performance contracts with sector institutions to improve efficiency and privatize some of their operations. Also, under the renegotiated covenants of the Yacyreta Loan (para. 2.27) the Government and the Bank have agreed on the need to re-examine the legal and institutional issues involved in the sector organization. This will be done through the execution of a study which would provide recommendations regarding improvements needed to increaee the sector coordination and efficiency and regulate relations between the national utilities and between the Government and the provincial utilities. DEP would supervise the execution of the sector organizational study and would implement its recommendations. 2.08 The country's national power utilities and their role in the power sector are listed belows AMua y EnerRia Electrica (AyF). A Government-owned utility in charge of nationwide generation, transmission and bulk supply. It has responsibilities in integrated basin development, irrigation, flood control, drainage and reclamation. Servicios Electricos del Gran Buenos Aires (SEGBA). A Government- owned utility in charge of generation, subtransmission, and distribution in the Greater Buenos Aires area. Hidroelectrica Norpatagonica (HIDRONOR). A Government-owned utility responsible for developing the hydro resources of the North Patagonia region.  - In additions the Government participates in two binational agencies with the neighboring countries, Uruguay and Paraguay. These are, respectively: Comision Tecnica Mixta del Salto Grande (CTMSG). The agency in charge of the 1,620 MW hydro project of Salto Grande, in operation since 1980. Entidad Binacional Yacvreta (EBY). The agency in charge of the construction (and eventually of the operation) of the Yacyreta hydro project. Finally, the Government has established thes Comision Naeional de Enertia Atomica (CNEA), an agency in charge of developing nuclear energy, which constructs and operates power plants and is in charge of other nuclear applications. Electricity services in the provinces are the responsibility of provincial utilities although AyE distributes electricity in a few provinces. 2.09 SE has direct control of the three national utilities: AyE, SEGBA, and HIDRONOR. EBY reports directly to the Ministry of Public Works and Services. CTMSG reports to the Ministry of Foreign Affairs. :NEA reports directly to the Presidency. A national dispatch center (DUC), operated by AyE, is in charge of coordinating the operations of the larger electricity producers (AyE, SEGBA, CNEA, CTMSG and HIDRONOR) to ensure economic use of generation facilities. 2 10 The provinces' constitutional autonomy enables them to grant concessions for electricity services. They may also set financial rules and tariffs for the operation of the facilities without the obligation to maintain specific standards of service or providing data to the Federal Government. The study on the sector organization agreed upon under the revised covenants of loan 1761-AR (para. 2.07) as well as that to be carried out under the Power Engineering Project (para 2.13) are expected to provide the basis for improving coordination between the Government's sector authorities and the provincial utilities. Power Sector Government Objectives and Policies 2.11 The Government is seeking to improve resource allocation within the sector through optimization of the sector's expansion programs and improved coordination of operations. To achieve this, the Government has decided thatt (a) planning for new investments ir. generation and transmission will be centralized at the SE. SE is respon;ible for preparing generation expansion plans, and is coordinating and supervising transmission planning; (b) the implementation of future generation and transmission projects will be the responsibility of the national utilities. Provincial  - 6 - utilities which have initiated construction of generation works would complete them, but would not start new ones; and (c) the operations and the expansion of distribution services in the greater Buenos Aires area will be the responsibility of SEGBA and in the rest of the country, of the corresponding provincial utilities. 2.12 The Government is also taking steps to restore the financial soundness of the sector and improve the efficiency of national and provincial utilities by: (a) improving the self-financing capabilities and rates of return of the ma4or power companies (para. 2.27); (b) carrying out a study on the organization and efficiency of the sector and of the national utilities (para. 2.07); (c) implementing an action program simed at reducing electricity losses of the national power companies to normal levels; and (d) set electricity tari!fs on economic basis for which a tariff study is being prepared (para. 2.25). Being the largest utility, SEGBA's deficiencies would be addressed on a priority basis. 2.13 In September 1986 the Bank approved a US$14 million loan for a Power Engineering Project in support of the above Government's goals (Loan 2751-AR). The project will assist in improving the efficiency of Argentina's regional power distribution systems, notably by strengthening coordination between the national and provincial utilities and the efficiency of the latter companies. These effnrts include the setting of: (a) countrywide regulations, designed to provide even coverage and quality of service; (b) improved planning methods and tools, to optimize allocation of resources; and (c) standardization, system coordination and integration, to promote efficiency in the utilities' operations. Main Power Facilities and Expansion Plans 2.14 In 1986, the installed capacity of the National Interconnected System (NIS), which covers about 852 of the nation's electricity public services, was 9,770 MW, of which 3,780 MW (39%) was hydro, 5,050 MW (56X) conventional thermal and 940 MW (5%) nuclear. 2.15 The generation projects now under construction are expected to be completed at various times through the end of 1994 and would provide additional sources of power and energy supply to the NIS during this period. They originated from expansion programs prepared in the 19709 on  - 7 - the b&sis of optimistic national power demand projections, which assumed 8.62 p.a. growth rates in consumption between 1979 and 1990. Actual growth between 1979 and 1985 turned out to be much lower (para. 2.06). The energy plan (para. 2.05) forecast 5.82 p.a. growth between 1987 and 1994 and 6.32 p.s. between 1994 and 2000. 2.16 Schedules for completion of projects under execut!.on ani plans for constructing plants to be commissioned beyond 1994 are based on the above growth assumptions, which appear on the high side mainly because of the high growth in industrial consuTption (7Z) assumed for the industrial sector which already has a rather large share of electricity - intensive induRtries. In addition, the parameters ssumed for the optimization studies undervalue the potential use of gas for power generation. For these reasons and although ongoing generation works represent the least cost solution for exparding the generation capacity of the NIS, the Bank has reservations regarding the non-committed generation expansion included in the energy plan beyond 1994. The Governmont has agreed to exchange views regarding these concerns and will carry out additional sensitivity analyses under assumptions agreed with the Bank. 2.17 A 500 kV National Interconnected System (NIS) links the major consumption areas with the production centers and is used for the transfer of large bloclks of energy. A network of 230-XV lines completes the grid and permits energy transfers between load centers. Studies related to expansions between 1988 and 2000 are currently being prepared under the Yacyreta Hydroelectric Project (Loan 1761-AR). These studies are progressing satisfactorily and are expected to be completed by end-1987. 2.18 Distribution expansion planning is under the responsibility of each distribution utility. More advanced utilities, like SEGBA, serving the largest consumption centers generally have qualified staff and are able to meet their planning responsibilities. The smaller utilities are less developed and generally need to improve their planning capabilities. Also, there are differences in planning and design aud in equipment standards among utilities which do not permit adequate nationwide integration and coordination of operations. This problem is being addressed through Loan 2751-AR (parae 2.13). 2.19 Investments in distribution expansion have been neglected during the last few years because of the difficult financial situation of the sector and the need to secure financing of large hydroprojects under construction. Also in 1979 the Government decided to transfer the responsibility of providing distribution services to the less developed provinces from AyE to the concerned provinces, which then created a number of distribution utilities with very little experience. This has resulted in deterioration of distribution networks, poor customer services and a decrease of service reliability and there has been a substantial increase in technical losses and energy theft. Power Sector Finances 2.20 The financial arrangements that govern Argentina's power sector are complex. A substantial part of the revenues of each sector utility is  - 8 - paid to the Federal government in the form of value added tax (VAT) and to earmarked Electri-cal Funds in the form of surcharges. A variable (depending on need) portion of the VAT and all the surcharges return to the sector as government equity contributions. There Is also a tax on the sale of petroleum products, part of the proceeds of which flows to the sector, via the Electrical Funds, to help fund its investment requirements. 2.21 In addition to the above VAT and surcharges the final user pays provincial and municipal taxes which vary substantially around the country. For example, while the average net tariff received in Buenos Aires by SEGBA is currently about 332 below its estimated average long run marginal cost (LRMC), the average tariff charged to consumers, including about 441 of surcharges and taxes is equivalent to about 96% of average LRMC. In other provinces, the taxes and surcharges paid by final consumers are even greater. These wide ranging differences between federal and provincial fiscal requirements funded by taxes and surcharges on utilities' rates together with insufficient revenues to cover the cost of supply of the utilities constitute a national pricing issue which the Bank plans to address in the context of its future power lending operatiori. 2.22 Over the past several years the sector has had to bear the impact of changing economic policies and the burden of an investment program designed at a time when demand growth expectations were higher and external financing had been assumed to be more easily available. During 1976-1982 the sector incurred a high level of external indebtedness, to a large degree prompted by the government, which In such manner was financing a substantial part of its overall needs. The very substantial devaluation of the peso that fo lowed placed a very heavy debt service burden on the sector and caused a major deterioration in its financial structure which has since been corrected by the refinancing of the sector's debt. However, the decline in the value of the US dollar since 1986 is again causing liquidity problems because of its effect on the sector's investment and debt service programs which have components based on European and Japanese currencies. 2.23 In addition to the above, during 1981-1983 Agua y Energia transferred without charge to the provinces its distribution facilities, thus having to meet its debt service with a lower revenue generating capacity. 2.24 The above economic difficulties also resulted in a deterioration of financial discipline between publ'c sector entities, Arrears for the purchase of electricity by Federal, Provincial and Municipal agencies and by autonomous agencies mounted. By June 30, 1986 overdue public sector accounts equivalent to 180 days of sales amounted to about US$180 million. (para. 3.27) 2.25 Tariff structures, except to a certain extent for SEGBA (Annex 3.8), have not been designed on the basis of economic criteria. While the national average level of tariffs including taxes and surcharges is in line with the estimated national average economic cost, some consumers pay prices considerably higher or lower than their corresponding estimated economic costs. This has been caused in part by the difficulties associated with the management of utility prices in a high inflation  - 9 - environment and also by the autonomy of provincial utilities to set their own rates. The existing differences between the rates paid by the final consumer and the costs of supply are the subject of the tariff study, covenanted under loan 1761-AR. The execution of this study, which is expected to be carried out between July 1987 and December 1988, will be supervised by the Bank. 2.26 Argentina's recent economic difficulties may have been a contributing factor to the increase in electricity theft (para. 2.19) which accounts to a sizet.Jle degree for the increase in distribution losses that has been taking place since 1981. The financial problems of the power sector itself, however, were also an important contributing factor as they resulted in a curtailment of investments in distribution and in network maintenance. 2.27 In March 1986, the Government prepared a program to address the various problems faced by the sector and the covenants under loan 1761-AR were amended to reflect the agreements then reached. The key aspects of the agreements are; (a) commitment to increase tbe internal cash generation of the sector; (b) agreement on a prudent mix of self financing and external borrowings; (c) revised financing plan for Yacyreta; and (d) y2arly financial review and agreement on financial targets for the national utilities i'r the following year. The introduction in September 1986 of a wage and price freeze to break rekindled inflationary expectations did not allow for the real increases in electricity rates that were expected to take place by April 1987. In compensation the Government has returned to the sector a larger proportion of taxes collected from it than anticipated before the application of the above measures. 2.28 Based on the policies outlined above financial projections were prepared for the utilities controlled by the Energy Secretariat (AyE, SEGBA and HIDRONOR, which account for about 60X of sector operations). They are shown in Annex 2.3. A summary financing plan for this group is shown below.  - 10 - FINANCING PLAN FOR AYE, 8EGBA AND HIDRONOR (1987-1992) Amount % ($ millions) Financial Requirements Investment Program (excludes Yacyreta) 3752 95 Working capital 204 5 Total Requirements 3956 100 Financial Sources Gross internal cash generation: Retained by the utilities 2299 58 Redistributed by the Government al 1166 30 Total gross cash generation 3465 88 Government contributions: b/ 2614 66 Total non-borrowed funding 6079 154 Less: Debt service Interest (2170) (55) Amortization C/ (1553) (39) Total debt service (3723) (94) Net non borrowed funding 2356 60 Plus: Gross Borrowings 1600 40 Total Sources 3956 100 a/ Part of the revenues of every utility is paid to "Electrical Funds' administered by the Government, which redistributes these funds between the utilities on the basis of financial need. b/ Taxes paid by the sector are over twice the expected amount of Government contributions. These contributions are funded by part of the VAT and by taxee on fuels (including fuel purchased by the power utilities), earmarked by law to go to the energy sector (40%) and to the transport sector (60X). cl Excludes rescheduled amounts. 2.29 The above plan is based on a set of assumptions which take into account the requirements of the national utilities investment program together with current limitations imposed by the stabilization program on rate increases and on availability of Electrical Funds, the limits on possible Government contributions and the limits on domestic and external borrowings. This financing strategy as covenanted under Loan 1761-AR will be reviewed by the Government and the Bank in August 1987 (pars. 2.27(#e)). At that time the relatively low projected level of net borrowings by the national utilities ($48 million, against an investment program of $3752 million) would be analyzed in the context of Argentina's overall fin.incing strategies. While from a sectoral perspective the projected low reliance on net external borrowings would place the power sector in a more  - 11 - comfortable financial situation in the future, the viability of increasing the bulk rates for the sale of electricity at the pace now expected from Agua y Energia (132 in real terms per year in 1987, 1988 and 1990) and from Hidronor (152, 182, 102 in real terms per year in 1987, 1988, 1989 and 1990), which sell to the provinciai. and municipal distribution companies, needs to be analyzed further. The review would also look into the amounts of Government contributions which the national utilities are now expecting to receive, as it might be desirable to assign some of these funds to help finance Yacyreta. 2.30 During the period of project execution, the Governments of Argentina and Paraguay will also be constructing Yacyreta, a binational l ydroelectric project which the Bank is helping to finance under loan 1761- AR (para. 2.32). The financing plan to cover the US$5 billion (in current US$ equivalent) required to complete the project by 1997 has a gap of US$2 billion. Both the Bank and IDB are currently considering supplementary financing of up to US$900 million ($450 million each) to help fund this project and it is expected that the Argentine Government will be able to obtain the remaining US$1.1 billion without straining the finances of the sector, given Argentina's improved access to international financial markets, At the forthcoming review of sector finances, the funding scheme for Yacyreta would be reviewed. Past Experience In the Sector 2.31 Since 1962, the Bank has made a total of seven loans to Argentina's power sector; four of which were to SEGBA, to help finance an oil-fired thermal generat!on plant, and transmission, subtransmission, and distribution expansions; one to HIDRONOR for the construction of the 1,200 MW E1 Chocon hydroelectric power plant; and two to the Government, the first one to help finance the Yacyreta hydro project and recently, one for a power engineering project. Project performance audit reports have concluded that, while the physical objectives of the first five projects were largely met, the financial objectives were not. The latest of these reports, on SEGBA IV (Loan 1330-AR approved in September 1976 and completed in June 1981), indicates that the project was successful in meeting its technical and physical objectives of providing facilities to meet the growing electricity demand of the Greater Buenos Aires area, and that SEGBA succeeded in improving its overall efficiency during the execution period of the project. It reduced unnecessary staff, overtime and general expenses and increased reliability of the system through improved maintenance. However, because of lower-than-expected demand and also because of the poor financial situation of SEGBA, the project suffered a completion delay of 4.5 years and a 402 increase in total costs. Moreover, Government's failure to implement adequate tariff increases prevented SEGBA from complying with its financial covenants except for a short time, and its financial performance was poor. 2.32 Execution of the Yacyreta project suffered implementation problems due to the country's economic difficulties. Additionally, the project was delayed by differences with the Bank over procurement issues, which were resolved only shortly before the present Goverrment took power. It is now  - 12 - scheduled to be coAmpleted by 1997, about eight years behind tnxe original schedule. The execution of the project improved substantially after a new management reduced costs, rescheduled works on a basis of reduced demand projections, and renegotiated contracts with the civil works constructor and consultants. On this basis the Government and the Bank renegotiated the loan covenants (para. 2.27) and the Government has requested a supplementary loan to help conclude the hydroplant on the revised schedule. 2.33 Execution of the Power Engineering Project (Loan 2751-AR) is progressing satisfactorily even though it is not effective yet (it is expected to be signed soon). SEGBA has taken a leading role in the organization of the Executing Unit, which will be in charge of carrying out the studies, and tl; retaining of consultants is well advanced. PART III - THE PROJECT The Setting 3.01 Sixty per cent of the country's population and even a larger share of the country's public service electricity market is located in the 'Buenos Aires/Litoral region (city of Buenos Aires and part of the Buenos Aires, Entre Rios and Santa Fe provinces) which is the most Important consumption center of the NIS. SEGBA, the main regional producer-supplier of electricity, has a concession area which covers 552 of the population of the region and 612 of the power demand, serving about 3.7 million consumers (1986). 3.02 Between 1982 and 1986 SEGBA faced a period of severe scarcity of funds for expanding its distribution networks due to: (i) negligible internal cash generation and (ii) insufficient government contributions. Budgets for investments in distribution were substantially cut by the Government in relation to levels requested by SEGBA in the period 1982- 1986. As a result, total investments (expressed in constant 1986 money) in distribution were on average US$46.5 million per year, a low level as can be noted when compared with the US$72.0 million invested in 1981, a year in which investments were not cut. In addition to the above, SEGBA took over in 1980 a large and very deteriorated network formerly operated by ITALO, a privately-owned company, in downtown Buenos Aires. Because funds allocated in SEGBA's budget to reinforcement aid extension of distribution networks were inadequate to meet investment requirements, most of SEGBA's distribution installations have sharply deteriorated while reliability of service has decreased and delays in supplying requests for connections have increased. Finally, energy losses which were in a 13-15% range until 1981, began to mount. They were 162 in 1981, 17% in 1983, 182 in 1984 and reached an unprecedented 212 in 1985 and 1986. These high levels of losses result from a combination of abnormally high technical losses due to the deteriorated status of the networks and energy theft. 3.03 A large population, estimated at about 400,000 (mainly imigrants from economically depressed provinces) live in about 100,000 dwellings in shantytowns in the outlying Buenos Aires area without eleactricity service,  - 13 - although most of these dwellings are illegally connected to SEGBA's networks. Additionally, about 50,000 low-income consumers connected to SEGBA's networks have not been provided with electricity meters. Thus, about 150,000 consumers (or 152 of the current total number of consumers representing a population estimated at 600,000) do not pay at all or pay only a nominal rate for the electricity they use. This has contributed to increase non-technical losses and to worsen SEGBA's finances (para. 3.23). Project Origin and Objectives 3.04. The proposed project was identified during supervision of the Fourth SEGBA Project (loan 1330-AR), implemented in the period 1977-1983. A first version of the project was submitted to the Bank by end 1984. In view of the financial difficulties faced by the sector, project processing was held in abeyance until renegotiation of the financial covenants of loan 1761-AR was completed, in March 1986. After a viable scheme for the sector's financial rehabilitation was devised the Government completed project preparation at end 1986 with Bank assistance. The project was appraised in January-February 1987. Negotiations were held in Washington on May 13 through 19, 1987. The Argentine Delegation was headed by Mr. Jorge Olmedo, Undersecretary of Energy. 3.05 The proposed project fits within the Bank's support of the Argentine Government efforts to improve the public sector's efficiency. The project would address the problem of SEGBA's growing distribution losses and would provide for actions to improve SEGBA's organization, management and operations based on the results of an organizational study (para. 3.18). The main physical objectives of the project would be to rehabilitate and expand the distribution networks in the Greater Buenos Aires area in order to reduce technical losses and improve the reliability of electricity supply, while electricity theft would be rediced through the implementation of a loss reduction program. The financing of equipment for load control and communications would result in improving SEGBA's operations and maintenance. The training component complements SEGBA's 1988-1992 Master Training Program which is sound--and is available in the project file--but for which SEGBA has found difficulties in obtaining the foreign exchange required to train staff abroad (see Annex 3.5, para. 19). These objectives are in line with national and sectoral policies. Project Description 3.06 The proposed project consists of part of the 1988-1992 time slice of SEGBA's expansion program, which was reviewed by the Bank and considered sound. (The total 1987-1994 expansion program of SEGBA is presented in Annex 2.2, Attachment 3.) The project components are detailed in Annex 3.1 and summarized below:  - 14 - Part A. Efficiency and Operations Improvement (a) Implementation of a loss reduction program including: (i) a survey and a study to assess the problem's magnitude and characteristics, (iU) establishment of legal instruments to eliminate theft, (iiI) a public relations and advertising campaign, (iv) design and implementation of a computer-based distribution circuit analysis program and a data base to identify and control distribution system losses; and (v) improvement o! metering, operative, billing and collection practices and operative procedures for theft control. (b) Improvement of SEGBA's computing facilities and implementation of a Management Information System, and (c) Carrying out of final design for the rehabilitation of SEGBA's thermal plants. Part B - Rehabilitation and expansion of SEGBA's networks (a) Transmission and subtransmission workas (i) construction of new, and expansion of existing high voltage substations for about 800 MVA of 500/220 kv transformers and about 1200 MVA of 220/132 kv transformers, (ii) construction of about 50 circuit-Km of 220 kv transmission lines and about 20 circuit-Km of 220 cables; (iii) construction of about 25 new medium voltage 132 kv subtransmission substations with a total of about 2,200 MVA installed capacity and (iv) construction o-f about 120 circuit-Km of subtransmission 132 kv lines and cables. (b) Distribution works: (i) construction of about 2,100 circuit-Km of 33 and 13.2 kv medium voltage lines, (ii) construction of about 3,500 transformer centers with a total of about 1,200 MVA installed capacity, (1ii) construction of about 9,000 circuit km of 380/220 V low tension lines,  - 15 - (iv) installation and/or renovation of about 490,000 connections to consumers, and (v) installation of about 380,000 electricity meters. (c) Communications. Include the purchae and installation of tele- measurement and control equipment, protection and telecommunication equipment such as microwave links, telephones, telex and radio. (d) General plant. Include the purchase and installation of equipments for laboratories and utility vehicles for network maintenance. Part C - Training Support through financing of the foreign exchange component of SEGBA's training program Including fellowships and on-the-job training abroad as well as teaching materials. Project Cost 3.07 The total cost of the proposed projeet, including physical and price contingencies but excluding interest during construction, is estimated at US$752.6 million of which about US$261.3 million is the foreign component. The project baseline cost is expressed in December 1986 prices. It was prepared by SEGBA's staff on the basis of unit prices available in its data bank, built up during implmentation of loan 1333-AR and updated with information obtained from recently completed works. Costs estimates were reviewed by the Bank and found reasonable. The physical contingencies are estimated at 8% which is reasonable for distribution projects. Estimate of price contingencies are based on a set of escalation factors assumed for the sector financial analysis and agreed upon by the Bank with the borrower and IDB - the other main sector financier. These escalation factors applied over the base line cost plus physical contingencies are: (i) for the foreign costst 7.61 for 1987, 6.31 for 1988, 5.0X for 1989, 3.81 for 1990 and 42 p.a. for 1991 through 1994; and (ii) for the local costs expressed in dollar terms: nil for 1987 through 1990 and 41 p.a. from 1991 through 1994. Details of the project cost estimate are available in the Project File and a summary is shown belows  - 16 - Suvinarl of Project Cost -------US$Million------- Local Foreign Currenc Currency Total % Part A Loss reduction program 14.5 1.0 15.5 2.1 Computer facilities and management information system 2.0 1.5 3.5 0.5 Studies '0.2 0.5 0.7 0.1 Subtotal Part A 16.7 3.0 19.7 2.6 Part B Transmission and subtransmission works 86.8 39.1 125.9 16.7 Distribution works 269.4 125.3 394.7 52.4 Communications, telecontrol and general plant 62.4 26.8 89.2 11.9 Subtotal Part B 418.6 191.2 609.8 81.0 Part C Training .0 -3.0 8.0 1.1 Subtotal Part C 5.0 3.0 8.0 1.1 Total Base Line Cost 440.3 197.2 637.5 84.7 Physical Contingencies 35.3 15.6 50.9 6.8 Price Contingencies 15.7 48.5 64.2 _8.5 TOTAL PROJECT COST 491.3 261.3 752.6 100.0 Project Financing 3.08 The proposed US$276 million Bank loan would finance up to US$250.0 million of the foreign exchange project cost which is equivalent to about 35% of the total project cost or 96S of its foreign exchange cost. To ease the commercial financing requirements during the initial period of project execution the proposed loan includes US$26.0 million to finance interest due on the Bank loan during the grace period. The remaining foreign exchange cost (US$11.3 million) as well as local funds required to finance the balance of project costs are expected to be financed with Government's and customers' contributions and SEGBA's internal cash generation together with commerieal bank borrowings. The proposed financing plan of the project is summarized belows  - 17 - Summary of Protect Financing Local Foreign Currency Currency Total X ---------US$ Million-------- Financing requirements Total project costs 491.3 261.3 752.6 96.7 Interest on Bank loan a/ 0.0 25.6 25.6 3.3 Total 491.3 286.9 778.2 100.0 Financing sources Bank loan 0.0 276.0 276.0 35.5 SEGBA's internal cash generation 161.7 0.0 161.7 20.8 Government's contributions 125.0 0.0 125.0 16.0 Borrowings from commercial banks 179.6 10.9 190.3 24.5 Consumer contributions 25.0 0.0 25.0 3.2 Total 491.3 286.9 778.2 100.0 a/ During grace period; includes commitment fees. Proiect Imolementation and Monitoring 3.09 A feasibility study of the project was prepared by SEGBA's technical staff, reviewed by the Bank and found satisfactory. SEGBA's engineering department has prepared final design for works to be implemented under the project and technical specifications for the acquisition of materials and equipment, and for the carrying out of construction works for works to be constructed during the first year of the project execution, as is normal practice for this type of project. Because SEGBA's technical staff is very competent and have benefited from the experience of executing similar works under loan 1330-AR, it is expected that final design and procurement documents will be prepared in an adequate and timely manner as the project's execution progresses. 3.10 Construction works with an estimated total cost of about US$304.2 million would be carried out under SEGBA's established practices. SEGBA intends to call for prequalification of construction firms for the execution ofs (i) a few construction packages of civil works and erection and installation of equipments for high voltage lines and substations; and (ii) a largo number of small contracts for the construction of low voltage networks (see para. 3.14 for discussion on reserved procurement). Execution of all contracts would be supervised by SEGBA's Construction Department. Installation of equipment in existing facilities as well as connection to clients would be done by force account as is normal utility practice. With the above arrangements, it is expected that the project would be adequately completed as was the SEGBA IV project (Loan 1330-AR). 3.11 The proposed project is expected to be implemented in seven years based on past experience with similar projects as reflected by the relevant Bank standard profiles. Bowever, it is possible that if the project is  _ 18 - implemented efficiently the Implementation period could be reduced to five years as Is reflected In the proposed execution schedule prepared by SEGBA, detailed in Annex 3.2. This would result in project costs being reduced by about 72, or from US$752.6 million to US$692.4 million. As the flow of benefits would begin earlier, the project financial rate of return would Increase from 15.4 to 16.2 per cent. The project would be implemented as follows: Regarding the efficiency and operations improvement program, the agreed execution schedule of the studies and actions as appropriate are reflected in an action plan attached as Annex 3.6; design and implementation of subprograms would be completed within two years from the effectiveness date. The rehabilitation and expansion of SEGBA's networks would be implemented during the whole execution period in accordance with demand growth. The training component, which supports SEGBA's training program by financing its foreign exchange cost, would be implemented in accordance with a satisfactory master plan available in the project file. During negotiations agreement was also reached that: (i) project execution will be monitored against target dates included in the project implementation schedule (Annex 3.2) and (ii) SEGBA would submit quarterly progress reports in a format satisfactory to the Bank. Procurement 3.12 The following table summarizes the procurement arrangements for implementing the project. US81 MILLION ------------ PROCUREMEWT METHOD-Total ICP -----Othor Methodu-------------- Cost LCB RP FA LIS Other Pert A