Honduras - Morazan Dam Emergency Project

C-ICL .4 i ( / / /- Dousn of The World Bank FOR OMCIAL USE ONLY Reprt No P-5830-HO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATTONAL DEVELOPMENT ASSOCIATION ON A PROPOSED CREDIT OF SDR 8.83 MILLION (US$12.0 MILLION EQUIVALENT) TO THE REPUBLIC OF HONDURAS FOR THE MORAZAN DAM EMERGENCY PROJECT JULY 10, 1992 Ths document bas 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 Bak authorization.  CURRENCY EQUIVALENTS (as of July 10, 1992) Currency Unit - Lempira US$1.0 - L5.55 L 1.0 - US$0.18 SDR 1.0 - US$1.36 On June 18, 1992 the Central Bank introduced a freely floating exchange rate regime. FISCAL YEAR January 1 to December 31 MEASURES AND EQUIVALENTS kVA - Kilovolt Ampere kW - Kilowatt kWh - Kilowatt hour Glih (Gigawatt hour) - 1,000,000 kWh kV (Kilovolt) - 1,000 Volts MW - 1,000 kW ACRONYMS AND ABBREVIATIONS ENEE - National Power Company (Empresa Nacional de Energia El6ctrica) ESAP - Energy Sector Adjustment Program ESAC - Energy Sector Adjustment Credit GOH - Government of Honduras ICB - International Competitive Bidding IDA International Development Association IDB Interamerican Development Bank PSD - Panel for the Security of the Dam  FOR OFFICIL USE ONLY HONDURAS MORAZAN DAM EMERGENCY PROJECT Credit and Proisect Summary Borrower: Republic of Honduras Executing Agencv: Empresa Nacional de Energia El6ctrica (ENEE) Amount: SDR 8.83 million (US$12.0 million equivalent) Terms: 40 years, including 10 years of grace, with a service charge of 0.75Z per annum. Relendinz Terms: The Borrower would relend the credit of US$12 million equivalent to ENEE in US dollars with a term of 20 years, including 5 years of grace at an interest rate of 7.60% per annum. ENEE would bear the foreign exchange risk between the lempira and the US dollar. Financing Plan: Local Foreign Total --------- US$ million ------ IDA 4.3 7.7 12.0 IDB - 1.6 1.6 ENEE 3.8 - 3.8 Total 8.1 9.3 17.4 Economic Rate of Return: About 42% Staff Appraisal Report: No. 10754-HO dated July 10, 1992 Maps: IBRD 23948 IBRD 23947 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.  HEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL D m LOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC O HONDURAS FOR THE MORAZAN DAM EMERGENCY PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Republic of Honduras for SDR 8.83 million, the equivalent of US$12.0 million, on standara IDA terms with a maturity of 40 years to help finance the Morazin Dam Emergency Project. The proceeds of the credit would be relent to the National Power Company (Empresa Nacional de Energia El6ctrica - ENEE) for 20 years, including 5 years ef grace, with interest at 7.60 percent per annum. The Interamerican Development Bank (IDB) would be providing US$1.6 million of parallel financing to support the purchase and installation of equipment through amendment of an existing energy sector operation. 2. Background. Until recently, Honduras' energy sector faced a number of unresolved issues, including the lack of a comprehensive energy policy and strategy and a sound regulatory framework, d4istorted pricing policies for electricity and petroleum products, and a financially weak and inefficient national power company (ENEE) which placed a heavy burden on public finances and on the country's balance of paymeut.. These issues are now being addressed under the Government's Energy Sector Adjustment Program (ESAP), supported by an Energy Sector Adjustment Credit (ESAC) of SDR 37.95 million (US$50.6 million equivalent) which was approved by the Executive Directors in October 1991. The first ESAC tranche was released in December 1991. Progress under the ESAC has been satisfactory. The Government (GOH) has continued to implement the agreed tariff program and ENEE has satisfactorily complied with its obligations under the Contract Plan, particularly with respect to financial and staff reduction targets. Release of the second ESAC tranche is now expected for November, rather than August 1992 (as originally planned), due to delays in initiating key studies and technical assistance activities supported under the ESAC. Efforts are being made to accelerate these activities. Any possible future IDA assistance to the sector would be considered based on ESAC-supported studies, covering rural energy needs and greater involvement by the private sector. 3. One of the major causes of ENEE's difficult financial situation has been its heavy debt service for the El Caj6n Dam and Hydroelectric Power Plant (rensmed Francisco Morazin in March 1992) partially financed by the Bank through a US$105 million Bank loan (Ln. 1805-HO) and a US$20 million equivalent IDA credit (Cr. 989-HO) which were approved in March 1980. In 1991, the Moraz&n power plant generated 1,487 GWh, equivalent to 70Z of total electricity generation in Honduras. The cost of construction, including transmission lines and financing charges, amounted to US$785 million. 4. Construction of the Morazin Dam and underground power station was completed in 1985. The dam is a double-curvature, high (225m) concrete arch (among the ten highest in the world) and impounds a reservoir of 5.7 million cubic meters. The power station is located about 200 meters below the ground on the left abutment and contains four units, each generating 73 MW. The station is connected to the national grid by a double circuit transmission line at 230 kV: the Northern branch to El Progreso substation (40km) and the Southern branch to Tegucigalpa (140km) (see Map IBRD 23948).  - 2 - 5. The dam is located about 3 km downstream of the confluence of the Humuya and Sulaco rivers in a gorge of limestone formation covered by volcanic rock. The limestone outcroppings at the site have four main vertical faults running parallel to the river. Karst in the limestone occurs in the form of cracks and large cavities of irregular shape, most of them filled with clay. Rock permeability is related to fractures and karst. Originally, a conventional vertical grouting curtain was designed to waterproof the dam foundation. However, when excavation for the dam was compleced, based on a reexamination of the geological conditions, it was concluded that the original sealing curtain would not be appropriate. Instead, a relatively novel sealing scheme was designed combining shallow vertical and wide horizontal grouting zones forming a tub-shaped seal (Map 23947) at a small additional cost. 6. In 1986, two years after the filling of the reservoir, hydrostatic pressures at the dam foundation had increased abnormally (by about 20 meters), indicating breaches in the impermeabilized zone. Deep drain holes were drilled at the base of the dam and downstream of the originally treated grouting zone which relieved the pressures but resulting seepages containing clay remained excessive. The location of renewed higher pressures and evidence of clay in the discha!ges pointed to erosion of zones in several areas. A grouting program was carried out in 1987-1989 to seal the major leaks and control the erosion they were causing. Pressures and seepage were reduced to acceptable levels, but a side effect, noticed first in late 1989, was the increase in underground water seepage into the power plant from new channels. 7. A more extensive sealing program is now urgently needed to control pressure buildups and subsequent erosive flows in the left abutment, because these could eventually reduce the strength of the abutments and cause the dam to fail. Water seepage at the dam has increased dramatically over the last year and has reached a point where, if left untreated, it could result in serious damages to the dam's structure or even collapse. The proposed project will assist ENEE to carry out an emergency sealing program and to improve its monitoring of dam performance and emergency preparedness. The design of the sealing program was prepared by ENEE with the assistance of highly specialized international consultants. It was reviewed by the Panel for the Secsrity of the Dam (PSD), a group of international experts, which has been in place since the beginning of dam construction in 1980, and international consultants independently contracted by IDA. 8. Lessons Learned from Previous Bank/IDA Involvement. The Bank and IDA have had considerable involvement in the power sector in Honduras, with eight loans and four credits amounting to US$290.4 million equivalent. Except for the ESAC, all operations assisted in the financing of generation and dis- tribution projects which were completed successfully despite some delays and cost overruns. The main conclusions of the PCR and the PPAR (SecM89-930, dated July 13, 1989) were that the El Caj6n project had been well-prepared and designed, completed ahead of schedule and that it had satisfactorily addressed environmental issues. However, it was too large for its actual market, as expected demand growth largely failed to materialize. As a result, the project has strained the capability of ENEE and the Honduran economy to service debt, and thereby contributed to Honduras' balance of payments difficulties.  9. Rationale for IDA Involvement. The country assistance strategy for Honduras provides for IDA support for the GOH's macroeconomic and sectoral adjustment efforts through policy-based lending and selected investment projects, particularly those targeted at poverty alleviation and rehabilitation of critical infrastructure. Consistent with this strategy, the proposed project would assist in preventing a potential economic and environmental disaster and in ensuring the continued availability of the country's key source of electricity supply. Specifically, IDA involvement in the project is important to: (i) ensure that the engineering design and execution of the impermeabilization works are sound; (ii) provide for additional measures to improve dam safety and monitoring; and (iii) help ENEE establish the capacity to handle future similar situations if needed. IDA's financial support would permit ENEE to meet other critical and immediate investment needs while not undermining the utility's financial rehabilitation program. Among the original financiers of the dam, only IDA and the IDB have the necessary technical capacity to assist ENEE. 10. Proiect Obiectives. The project would: (i) maintain the structural integrity of the Moraz&n dam by controlling excessive seepage and hydrostatic pressures under the dam foundation; (ii) increase the reliability of the power plant's auxiliary system thereby minimizing the risk of interruption of the principal source of the country's electricity supply; and (iii) strengthen ENEE's emergency preparedness planning and its capacity to monitor dam perfor- mance and manage possible similar future seepage problems at the Morazin dam. 11. Proiect Description. The project (see Map 23947) consists of: (a) an underground investigation program with deep rock borings (about 46,000 linear meters) and corresponding instrumentation, followed by high pressure injection of sealants (about 14,000 metric tons) into the rock mass (84% of total project cost); (b) impermeabilization of the power plant sump, construction of additional drainage galleries (about 300m) to evacuate filtrations by gravity flow, lining of inspection gallery and plugging of the diversion tunnel (5.5Z); (c) purchase and installation of additional electrical and mechanical equipment to substantially increase service reliability of the auxiliary electrical system of the power plant (42); (d) purchase and installation of new and complementary instrumentation to monitor foundation pressures and water filtrations (2.5%); (e) about 32 man-months of consulting services (32) to: (i) supervise the impermeabilization works; (ii) carry out a structural and electro-mechanical safety review of the dam; and (iii) assist in the preparation of an emergency preparedness and evacuation plan; and (f) training of ENEE staff in underground investigations, pressure sealing of foundations, monitoring of hydrostatic foundation pressures and water leakages in high dams and electrical system stability, through visits to other plants and ongoing foundation sealing programs abroad (12). 12. The total project cost is estimated at US$17.4 million equivalent, with a ioreign exchange component of US$9.3 million equivalent (53%). The proposed Credit would finance 69% of total project cost. A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursement, and the disbursement schedule, are shown in Schedule B. A timetable of key project processing events and the status of  4 Bank Group operations in Honduras are given in Schedules C and D, respec- tively. To avoid any delays in correcting the water seepage which could cause dam failure, retroactive financing of up to US$600,000, equivalent to 5Z of Credit proceeds, is recommended for expenditures incurred since April 1, 1992. 13. Proiect Implementation. ENEE would be the executing agency for the project. ENEE's technical capacity is sound based on the experience gained by its engineering staff during the construction of the Morazfin dam and subsequent impermeabilization works. Its financial position has also been signific ntly strengthened as a result of the actions supported under the ESAC. The proposed project would be implemented through a single contract for civil works, awarded through ICB, and multiple cortracts for acquisition of special electrical and mechanical equipment, and motorized vehicles. Experienced ENEE engineers will supervise the works, assisted by a consulting engineering firm, highly qualified in this specialized rield of civil engincering. ENEE staff will also be assisted by the PSD which will carry out quarterly reviews of the progress of the works. As part of the decen- tralization efforts supported under the ESAC and to ensure effective dam management, the dam and plant will be constituted as a separate operating unit with iLdependent decision-making authority. 14. Proiect Sustainability. Upon completion of the project, all critical pressure areas and filtration currents will be monitored closely with additional new and existing instruments that have been thoroughly examined and calibrated. Instrument readings at all critical locations, now read individually, will be monitored at a central control board. Other actions supported under the project to enhance monitoring and improve dam performance comprise: (i) a safety review of the dam structure and electro-mechanical equipment and preparation of an action plan to implement the review's findings; (ii) annual reviews by the PSD; (iii) preparation by ENEE of an emergency preparedness and evacuation plan; and (iv) a training component to strengthen ENEE's staff skills in foundation exploration, pressure grouting, dam monitoring and electrical system stability. As a result, the risk of a similar problem arising and remaining undetected in the future will become very small and ENEE's ability to deal with any increase in water filtration will have been built up to a satisfactory level. 15. Actions Azreed. During negotiations agreements were reached with: (A) the GOH to ensure that sufficient funds are provided through ENEE as indicated in the project financing plan and as needed to complete the project; and (B) ENEE to: (a) contract consultants to complete a safety review of the dam's structure and electro-mechanical systems by December 31, 1992, and submit to IDA by January 31, 1993 a plan of action to correct the problems and deficiencies identified during the review; (b) complete execution of the first phase of the program to increase reliability of the auxiliary electrical system by December 31, 1992 and the entire program by March 31, 1993; (c) maintain trained and capable staff at the dam site to monitor dam performance and the results of the sealing works; (d) create a decentralized operating unit for the Moraz&n power plant by September 30, 1992; (e) contract for quarterly supervision visits by the PSD during project execution and annual visits thereafter, and submit to IDA the PSD's report within 30 days of the  - 5 - PSD's visit; (f) provide the GOH and IDA quarterly progress reports during the execution of the project; and (g) complete, and put in place, an emergency preparedness and evacuation plan to be submittsd to IDA by December 31, 1992. 16. Conditions of effectiveness would bet (i) signing of a subsidiary loan agreement between the Borrower and ENEE, satisfactory to IDA; and (ii) satisfactory amendment of the IDB energy sector hybrid loan agreement to provide IDB cofin#ncing funds. 17. Environmental Aspects. The proposed project is rated C and does not pose environmental problems. On the contrary, delay or failure to carry it out promptly and according to highest technical criteria would pose a major environmental risk, as the structural integrity of the dam could be placed in jeopardy. The threat of dam collapse, because of increasing seepage, would require rapid lowering of the re.ervoir, resulting in downstream flooding and would cause ar. increase in air polluting thermal generation to offset the drop in hydroelectric power generation. Actions to strengthen ENEE's environmental asseAsment capacity and establish clear safeguards for environmental protec- tion as part ef it's investment planning are being supported under the ESAC. 18. Proiect Benefits. The main project benefit would be to enhance the economic merits of the investment already made for the Moraz&n Dam and Hydroelectric Power Plant by ensuring the safety of the dam and the reliability of its auxiliaries, thereby extending its useful operating life. The economic rate of return of the project is estimated at 42%. 19. Risks. There is a remote risk that the present seepage problem may worsen before project works are initiated. This could require emergency lowering of the reservoir and could result in shut-down of the Moraz&n plant with adverse economic effects. Speedy project implementation would reduce this risk and IDA has been assisting ENEE to expedite the initiation of works. There is also a risk that other seepage sources could appear after the impermeabilization program has been completed. The exploratory drilling component of the project has been designed to reduce this risk. Finally, the impermeabilization cost could be greater than estimated. This is not perceived as a major risk. If it were to occur, ENEE would be able to provide the additional funds necessary to complete the program by deferring lower priority investments, and the IDB would be prepared to consider assisting ENEE with complementary financing. 20. Recommendations. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. July 10, 1992  - 6 - HIONDURAS Schedule A MORAZAN DAM EMERGENCY PROJECT Estimated Project Cost and Financing Plan LOCAL FOREIGN TOTAL SOURC | CIVILL W0O: S 621i 5343 1164 . WEi 1.1 General installations 41 809 850 1.2 Drainage works 51 23 74 1.3 Drilling for grouting & Instruments 2030 3772 5802 1.4 Grouting 3703 623 4326 1.5 Cleaning of galleries 108 28 136 1.6 Sealing of powerhouse sump bottom 50 - 50 1.7 Diversion tunnel plug 148 42 190 1.8 Lining of inspection gallery 105 15 120 1.9 Vertical shaft and drainage tunnnel 25 31 56 1.91 Installation of pumps 10 - 10 SzqulPE AND' vYICS .: 61.-. 1505 15 66 . - 2.1 Additional electrical system protection and independent power supply equipment 31 664 695 2.2 Examination of existing instruments 10 10 20 2.3 Supply of instruments - 230 230 2.4 Installation of instruments 20 60 80 2.5 Additional pumps and accessories - 315 315 2.6 Motor vehicles - 126 126 2.7 Communication equipment - 100 100 * SERVlGES AND SUPPLIES- - - t 402 - - 402 - . .v ENER:' 4 3.1 Electricity supply for pumping 320 - 320 3.2 Lighting 3 - 3 3.3 Drilling compressors 41 - 41 3.4 Grouting pumps 30 - 30 3.5 Ventilation 8 8 [: + C0 t NS XCES 10:. 1 .:521 -- 3 4.1 Engineering contract - 401 401 4.2 Dam safety panel and grouting consultants 10 120_ 130 '9 .St : a ' ' .' : . ' '.: 6934 7429 . 14363 . Physical contingencies 789 1461 2250 Price contingencies 394 413 807 9''"' 1 8117 OSO- T 814  7- Schedule B Page 1 of 2 HONDURAS MORAZAN DAM EMERGENCY PROJECT METHODS OF PROCUEMENT (US$ million) Qae _r _ _pniue ICe O a gEv m_ _ _ _ _ _ __ _ _ _ _ _ ___ _ _ _ _ Y A:01' 1. Civil works 14.66 14.66 l (11.41) (11.41) 2. Equipment and vehicles - _ 1.57 2/ 1.57 3. Services and supplies - 0.40 - 0.40 4. Consulting services - 0.53 _ 0.53 (0.53) 3/ (0.53) 5. Administration and supervision - 0.19 0.19 6. Training program - 0.06 4/ _ 0.06 (0.06) 11 Figures in parentheses are amounts financed by the proposed credit. 2/ IDB financed. To be procured in accordance with IDB guidelines. 3I Contracting of consultants in accordance with IDA guidelines. 4I Training courses and individual consultants to be contracted directly with institutions and individuals acceptable to IDA.  -8- Schedule B Page 2 of 2 HONDURAS MIORAZN DAMI EMERGENCY PRORCT DISBURSENIENTS (US$ million) CATEGORY AMOUTPERCENTAGE. 1. Civil Works 10.4 78% 2. Consultant Services 0.5 100% 3. Training 0.1 100% 4. Unallocated 1.0 TOTAL, 12.0 ESTIMATED:-IDA'DISBURSENS_______ IDA FiseaI Year. 1993 1;9: X9 Annual 6.0 1' 5.0 1.0 Cumulative 6.0 11.0 12.0 1/ Includes US$600,000 equivalent in retroactive financing for expenditures incurred since April 1, 1992.  -9- Schedule C Page 1 of 1 IIONDURAS MORAZAN DAM EMERGENCY PROJECT Timetable of Ke roLen Processiy1 Events (a) Time taken to prepare: 3 months (b) ?P=pared by: ENEE, with IDA assistance (c) First IDA mission: April 1992 (d) Appraisal mission departure: May 1992 (e) Negotiations: July 1992 (f) Planned date of Effectiveness: September 1992 (g) List of relevant PCRs and PPARs: Loan/Credit Number Project Name PPAR Ln. 1805-HO/Cr. 989-HO El Caj6n Power Projec, P 7901; July 1989  - 10 - Schedule D Page 1 of 2 HONDURAS MORAZAN DAM EMERGENCY PROJECT STATUS OF BANK GROUP OPERATIONS A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of March 31, 1992) Amount in US$ million (less cancellation) Credit/ Fiscal Loan No. Year Borrower Purpose Bank IDA Undisbursed 31 loans and 13 credits fully disbursed 519.81 105.00 Of which SECALs, SALs, and Program Loans a> Ln. 2990-HDS 1989 Honduras Structural Adjustment 50.00 Cr. 2208-HDS 1991 Honduras Structural Adjustment 20.00 Subtotal 50.00 20.00 La. 2421-HDS 1984 Honduras Water Supply 19.60 9.39 Lu. 2703-HDS 1986 Honduras Industrial Credit 37.40 4.28 Ln. 2804-HDS 1987 Honduras Primary Education 4.40 3.36 Ln. 2991-HDS 1989 Honduras Agricultural Credit 25.00 2.55 * Lu. 3257-HDS 1991 Honduras Structural Adjustment II 90.00 25.00 Cr. 2212-HDS 1991 Honduras Social Investment Fund 20.00 4.38 * Cr. 2306-HDS 1992 Honduras Energy Sctr Adj 50.60 31.34 * Cr. 2306-1-RDS 1992 Honduras Energy Sctr Adj 31.50 32.50** Total 696.21 207.10 112.80 Of which has been repaid 242.36 9.98 Total uow held by Bank and IDA 453.85 197.12 Amount Sold : 4.46 Of which has been repaid: 4.46 Total undisbursed 44.58 68.22 112.80 a> Approved after FY80. * SAL, SECAL, or Program Loan. ** Difference due to exchange rate fluctuation between SDR and US$.  - 11 - Schedule D Page 2 of 2 IIONDURAS MORAZAN DAM EMERGENCY PROJECT STATUS OF BANK GROUP OPERATIONS B. Sunmnarv of IFC Investments as of March 31, 1992 (US$ Millions) mnnsss wcnng"B"uX s uin= BWg=wssuannn*nssn.sc.gBznnnns=n="3B8 ss ===.=.==u===== Orisinal Approvals Held Held by Undisbursed FY by Partici- (including) App'd. Oblinor TYpe of Business Loan Equity Total IFC pants Participants 1964166 Imp. de Curtidos Centro-Americana, S.A. (ECCASA) Tannery 0.30 0.08 0.38 1969/70 Cia. Pino Celulosa de Centro-Am6rica (COPINO) Pulp and Paper 0.00 0.08 0.08 1978/91 Textiles Rio Lindo, Textiles and S.A. de C.V. Fibers 9.77 1.00 10.77 3.14 1986 Granjas Marinas Shrimp Pactory 0.00 0.58 0.58 0.58 Total Gross Commitments 10.07 1.73 11.80 Less Cancellations, Terminations, Repayment, and Sales 7.93 0.15 8.08 Total Commitments Now Held 2.14 1.58 3.72 3.72  Z661 3Nnr _) ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ . o. |z ".o.. " t2 -. rR L 0 ",n E wf t r t7X , SX *C- > (2 i.l