Colombia - Fourth Guadalupe Hydro Power Project

Docxmiit of The World Bank FOR OFIClIAL USE ONLY R.pwt No. 12023 PROJECT COMPLETION REPORT COLOMBIA GUADALUPE IV HYDRO POWER PROJECT (LOAN 1868-CO) JUNE 18, 1993 MICROGRAPHICS Report No: 1.2023 Type: PCR Trade, Finance, Industry and Energy Operations Division Country Department III Latin America and the Caribbean Regional Office This document has a restricted distribution and man be used by recipients oniv in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency unit Colombian Peso (Col$) US$1.00 - Col$ 42.06 (1979 appraisal assumption of average) US$1.00 - ColS 47.10 (1980 average) US$1.00 - Col$ 100.10 (1984 average) US$1.00 - ColS 299.28 (1988 average) US$1.00 = Col$ 433.92 (12/31/1989) us$1.00 - 100 USC WEIGHTS AND MEASURES mete. (m) 3.28 feet kilometer (km) 0.62 miles square kilometer (sq km) 0.39 square miles 1 Kilovolt (kV) = 1,000 volts (V) 1 kilowatt (kW) = 1,000 watts (W) 1 megawatt (MW) = 1,000 kilowatts 1 kilowatt-hour (kWh) = 1,00 watt-hours (Wh) 1 gigawatt-hour (GWh) 1,000 kilowatt-hours 1 megavolt-ampere (MVA) = 1,000,000 volt-amperes (VA) GLOSSARY OF ABBREVIATIONS AND ACRONYMS EPM - Empresas P6blicas de Medellin ISA - Interconexi6n Electrics S.A. EEEB - Empresa de Energia Electrica de Bogota CORELCA - Corporacion Electrica de la Costa Atlantica INCOMEX - Instituto Colombiano de Comercio Exterior JNT - Junta Nacional de Tarifas PCR - Project Completion Report LRAIC - Long Range Average Incremental Cost FISCAL YEAR Fiscal year = Calendar year  FOR OFFICIAL. USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A Office of Director-General Operations Evaluation June 18, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUB.'ECT: Performance Audit Report on Colombia GuadaluDe IV Hvdro Power Project (Loan 1868-CO) Attached is the report entitled "Project Completion Report on Colombia - Guadalupe IV Hydro Power project (Loan 1868-CO)" prepared by the Latin America and Caribbean Regional Office. Part II was provided by the Borrower. The Project Completion Repott provides an informative and comprehensive account of Project implementation and achievements. Overall physical completion was delayed by four years mainly due to bottlenecks in the procurement process managed by a government agency. Savings on one component were used to expand the project scope, but total cost was lower than estimated. The project fell short of the goal of raising tariffs to ensure financial soundness in the sector although the power utility of Medellin (the Borrower) was one of the better managed in Colombia. Overall, project performance is rated as satisfactory; sustainability as likely and institutional development as partial. No audit is plsnned. This documrnt has a restricted distribution and my be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  KO OFFXCIAL USE ONLY -gu GUADALUPE IV 8YDRO POWER PROJn C-T LOAN 1868-CO) PROJECT COMPLETION UPORT Table of Contents Preface ............................ ........................ . 1 Evaluation Suiary ...... .......... .... ................. . Li PART I. PROJECT REVIEW FRoM BAIK'S PERSPECTIVE ............ ... 1 Project Identity ............................ ........ 1 Project Background ................ ................. . 1 Project Objectives and Descriptin .. . . 2 Project Design and Organization ...................... 3 Project Implementation ............................. . 4 Project Results ..... 6 Project Slistainability . ... 9 Bank Porformance ..................................... 9 Borrower Performance ................... 10 Project Relationships . ... 11 Consulting Services ................ . . 11 Project Documentation and Data ....................... 11 PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE .. . 13 Project Objectives . 13 Project Implementation ............................... 14 Project Impect and Sustainability . . .6.... i Bank Performance . .................................... 16 EPM Porformance .......... .. . 17 Lessons Learned ...................................... 17 PART III. STATISTICAL INFORMATION ............................... 19 Related Bank Loans ................................... 19 Project Timetable . ................................... 21 Loan Disbursoments ................................... 22 Allocation of Loan Proceeds .......................... 23 Project Implemantation... . ...... . ....... .. . 24 Project Costs and Financing .......................... 26 Project Results . ........ . .... ........... . 28 Status of Covenants . . .............. . 31 Use of Bank Resources ...... ..... ..... . . 34 AMEX Financial Statements 1980-1989 ....................... 35 Performance and Financial Indicators 1980-1989 ....... 41 This document ha a retricted distribudon 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.  COLOMBIA GUADALUPE IV HYDRO POWER PROJECT (LOAN 1868-CO) PROJECT COMPLETION REPORT Preface This is the Project Completion Report (PCR) for the Guadalupe IV Hydro Power Project, for which Loan 1868-CO in the amount of US$125.0 million was approved on June 10th, 1980. The loan was closed on December 31 , 1988, three and a half years after the Appraisal estimate. Parts I and III of the PCR were prepared by the Trade, Finance, Industry and Energy Division, Country Department III of the Latin America and the Caribbean Regional Office and are based, inter ali, on the Staff Appraisal Report; the Loan and Guarantee Agreements; supervision reports; a final report prepared by Empresas PGblicas de Medellin (EPM); correspondence between the Bank and the Borrower; and internal Bank memoranda. Parts I and III of the PCR were sent to the Borrcwer for comments on January 24, 1992. Part II of the report reproduces the comments received from EPM.  - ii - ,COLOMBIA GUADALUPE IV HYDRO POWER PROJECT ILOAN 1868-0ao PROJECT COMPLETION REPORT Evaluation Summarv Proiect Objective. 1. The objectives of tho project weres (a) to assist MEpresas PGblicas do Mndellin (3PM) to meet the incremental power requirements in the expanding urban area of Medellin, to extend the supply system to the rural areas and to improve the reliability of supply in the existing network; (b) to assure the completion of ZPM's regional control center as pa.-t of the dispatch system of the integrated network; and (c) to raise EPM'* rates as necessary to insure sufficient internal cash generation for investnwant and introduce an adjustment in the rate structure to remove gradually the ox'.sting financial imbalances. lmzl-n nation ExDerience 2. The loan was approved by the Board in June, 1980 and was signed in December, 1980. This delay was caused by the necessary actions taken by the Borrower to obtain the governmental authorizations and approval of the loan. The Loan was declared effective in June, 1981, eight months later than expected at appraisal. This delay was caused by difficulties in obtaining complementary credits to finance those parts of the project not covered by the Bank loan (turbines and generators) and time required to complete the project engineering designs and infrastructure (access roads, bridges and working site installations) (para. 5.01). 3. The project was scheduled for completion by June 30th, 1985. The power plant component of the project was comvleted by August 1985, about ten months later than estimated in the appraisal. The original and added transmission, substation and distribution components of the project were completed with one to three years of delay. The control center component of the project was completed by March 1988, four years later than estimated in the appraisal. The main reasons for these delays were: (a) design changes made and geological conditions found in the civil works construction of the power plant; (b) changes in the initial description of the project and the scope of work in the transmission, substation and distribution components of the project; and (c) EPM's lack of experience in implementing a technologically complex project like the energy control centor. The final cost of the project was US$ 211.7 million, 7.3% below the estimated amount, even though important additions were made to the physical scope of the project (paras. 5.02 to 5.04). 4. The closing date of the project was extended twice. A first extension of three years, from June 30th, 1985 to June 30th, 1988, was approved in order to complete the project and as a response to the Borrower's good administrative, technical and financial management. The second extension, from June 30th to December 31st, 1988, was approved to allow the last disbursemonts from the loan to be carried out without problems (para. 5.05).  - iii - Prgoect Result. 5. The objectives of the Project were substantially met, even though the Project had major delays in its implameni:ation. The physical components of the Project were completed, with some changes in the scope of work of transmission lines, substations and the control center. The training objective of the Project was fully accomplished. In the important objective of attaining "sound sector financing through adequate tariff levels and economic rtructure of tariffs to promote rational energy use", the Project fell short of what was expected at appraisal, although some improvements were obtained during 1985- 1987 with the introduction of changes in tariff structure and levels. Low electricity tariffs and cross-subsidies have been, and continue to be, the moat critical factors in the weak financial position of the electric sub- sector in Colombia, although it should be mentioned that EPM is one of the best financially managed power utility companies in the country (paras. 6.J1 and 6.02). 6. Comparing between the appraisal foracast and actual financial statements and performance indicators for the period 1980-1989 shows that EPM's performance during that period was reasonably good, although in certain years and for some of the indicators the target values wera not met. The rate of return on revalued assets was lower than expected for years 1981-1984 (7.6% vs. 13% covenanted for 1982 was the worst result for the period), improving thereafter to values above those covenanted for years 1985 and 1986. In 1987 the rate of return continued increasing to a record level of 13.8%, above the target value of 122 for the Playas project. During years 1988 and 1989 the rate of return declined to values below 10%. The self-financing ratio declined from an initial value of 542 in 1980 to 22% in 1986 and recovered thereafter to a level of 47% in 1989. The debt-service coverage ratio fluctuated between 1.5 and 1.7 in years 1980-1983, declining considerably thereafter to values of 1.2 in 1986 and 0.9 in 1989. If this situationi continues EPM would be in a position of increasing difficulty to cover its debt service (para. 6.03). 7. The project had a fairly good institutional impact in EPM. This project was an additional step in the pattern followed on previous Bank loans, to reinforce the organization and financial independence of the different public services provided by EPM. The project made also an important contribution to enhance the technical, administrative and managerial skills of EPM's personnel, financing a comprehensive training program. The project will undoubtedly make a contribution to increase the standard of living of Colombian society through EPM's efficient public services (para. 6.10). Sustainabilitv 8. It is expected that the physical facilities and the institutional framework put in place by the project will continue to provide tangible benefits to EPM, and society in general, as the recipient of the expanded services. These benefits would increase if EPM could manage better its operational costs and limit its energy losses to more efficient levels. Maybe the most risky component to the sustainability of the project is the tariff policy. It is clear from the project results that electricity rates should be set to levels consonant with the income requirements of EPH. If tariff levels are not adequate the project benefits may not be sustained. On the other hand, if EPM applies consistently the new electricity tariff policy of the  - iv - goversment, it could reach a satisfactory rate level by 19O4-1995 (para. 7.01). lindings and Lessons Learned 9. Appraisal estimates of the implementation schedule for the main physical composnents of the project were too optimistic (particularly cosidering this wea a large hydroelectric power plant with technologically complex systems like the control center). 10. It is important to uncover, at the appraisal stage, potential problems in procurement related to conflicts with local legislation, like import permits and customs clearance. 11. The procurement cycle, particularly from proposai evaluation to contract effectiveness, should be shortened to avoid costly delays. Borrower internal procedures in this matter should be carefully evaluated during appraisal and corrections should be agreed upon before loan approval. In order to improve the procurement process, use of standard bidding documents should be a requiremexLt in future Bank operations in the power sector in Colombia. 12. A satisfactory level of electricity rates is crucial for the viability and sustainability of a power project and the financial soundness of a utility. A tariff policy covenant with the government should be a requirement and the Bank should enforce this covenant rigorously, This Loan and previous Bank operations in Colombia for the power sector have shown that the principal cause of the sector financial problems was electricity underpricing.  CQLOBA GUADALUPE IV HYDRO POWER PROJECT (LOAN 1868-CO) PROJECT COMPLETION REPORT PART I. PROJECT REVIEW FROM DANM'S PERSPECTI-7 1. Pro1ect Identity Project Name: Guadalupe IV Hydro Power Project Loan Number : 1868-CO RVP Unit : Latin America and the Caribbean Region, Country Department III Country : Colombia Sector : Power 2. Prolect Backzround 2.01 Sector development oblectives (at time of Project Appraisal). Electric power was the fastest-growing form of energy use in Colombia. Its share of total energy consumption had risen from 142 in 1960 to 23X in 1978. Since 1971, production of electricity had been growing at an annual rate of 9.7?, i.e., one and a half tiwes as fast as the growth rate of GDP. To catch up with rising power requirements, effective generating capacity was planned to be increased by 115%, or about 4,300 MW, by 1985. Of this total, about 3,200 MW were already under construction. In recognition of the power sector's important role in Colombia's development process, in mid-1970's the Government and the main power companies established a frameworK for orderly and efficient sector expansion, with ISA ( the national company) responsible for planning, building and owning all plants of national interest. In 1979, the shareholders of ISA expressed reservations about the concentration of almost 702 of planned expansion in generating facilities through 1985 in ISA and the associated loss of parity among themselves. These reservations gave rise to a proposal that the four plants in ISA's investment program be constructed, owned and operated by individual shareholders, The Empresas Pablicas de Medellin (EPM) was among them. 2.02 Policy Context Colombia is endowed with substantial primary energy resources (hydropower, natural gas, petroleum and coal). Since 1965, output of primary enxergy had lagged behind overall economic growth, mainly because of declining crude oil production. Projections of Colombia's energy balance indicated a rapidly growing deficit which was expected to reach significant proportions in the mid-1980's in the absence of an aggressive energy development program. The Government's objective was to overcome the energy deficit by developing domestic energy sources and promoting their rational use. Major projects were being executed and others prepared to expand hydroelectric power generations, and incentives were being given to private foreign companies for accelerated exploration and development of the country's petroleum, natural gas and coal potential.  2.03 Linkages between Project. Sector and Macro Policy Obiectives. The project objective to cover part of EPM's 1980-1984 electric power demand requirements by extending the hydro power generation, transmission and distribution systems, was in line with the sector and national policy objectives of serving the increase energy requirements of the country to foot.- economic growth, decrease the energy deficit and expand the use of indig3nous natural resources. 3. Proiect Obiectives and DescriDtion 3.01 Proiect Obiectives. The objectives of the project were to assist EPM to: (a) meet incremental power requirements in the rapidly expanding urban area of Medellin (330,000 consumers, including 60,000 new industrial, commercial and residential users); (b) expand the supply system to the rural areas to allow relatively inexpensive hydro-based electricity to replace costly and unreliable diesel plant generation; (c) improve reliability of supply in existing networks; (d) assure completion of its regional control center as part of the dispatch system in the integrated network; (e) develop the specialized technical expertise needed to cope with its increasingly complex responsibilities; and (f) continue support of the Government's objective of sound sector financing through adequate tariff levels and economic structure of tariffs to promote rational energy use. 3.02 Proiect Components. The project comprises: (a) Guadalupe IV Power Plant: 213 MW hydroelectric power plant, to be constructed on the Guadalupe River, would operate under a gross head of 417 m and generate an average of 1,077 GWh per annum. It would consist of a power tunnel (6.5 km), two surface penstocks, a surface power station with three vertical turbines and generators (3x71 MW) and a substation with two banks of 3 single-phase transformers of 59 MVA each; (b) Transmission and Sub-transmission: 10 km of single-circuit 44 kV lines, 30 km of single-circuit and 30 km of double-circuit 115 kV lines, and 93 km of double-circuit 230 kV lines; (c) Substations: expansion of 5-6 existing and construction of 4-5 new substations, together with about 420 MVA of transformer capacity; (d) Urban Power Distribution: renovation and expansion of EPM's urban distribution network, consisting of about 129 km of 13.2 kV overhead lines, 111 km of 13.2 kV underground cables, 2.2 km of 44 kV overhead cables, 111 km LV lines, 11 MVA in distribution transformers and miscellaneous specialized equipment; (e) Energy Dispatch Center: construction of a regional control center which, together with similar centers to be constructed by EEEB and CORELCA, would function as local satellites of ISA's national energy control center; (f) Training: specialized training program for EPM's professional staff consisting of about 8 scholarships each year during 1981-1984 plus special training for the staff of the power planning department.  - 3 4. Proiect Desuin &nd Oreanization 4.01 Prolect Oriain. In 1978-1979 EPM prepared, with the assistance of consultants, a power development program for 1980-1986 to meet its gross energy requirements expected to grow at 8.5S per year from 3,639 GWh in 1978 to 7,000 GWh in 1986. The main components of the program were: (a) ongoing works in generation (i.e. the almost completed Guatape It hydro plant - Loan 874-CO) and the Guadalupe IV and Las Playas hydroelectric power plants, for which construction has not yet started; (b) Ongoing works in transmission and distribution and a substantial retwork expansion plan (transmission, substations and distribution); and (c) studies of potential hydro developments in Antioquia, a high-voltage (230 kV) transmission network study and a training program. In coordination with ISA, the program contemplated also the construction of a regional control center to be part of the national energy dispatch center. 4.02 Proiect Preparation. The feasibility study of Guadalupe IV hydro power plant was developed by EPM with the assistance of consultants Consul- tores T6cnicos Ltda. and Mejia y Millan Ltda. (Colombia). The study was found to be generally acceptable, except that tunnel depth was not optimized at time of project appraisal. Because of the obvious benefits to the interconnected system of completing the Guadalupe IV power plant as soon as possible, it was agreed that EPH should: (a) locate the tunnel 50 m lower than design -an optimum condition- assuming a completely lined tunnel; (b) continue with exploratory drilling to complete the assessment of the geological conditions; and (c) prepare bid documents allowing adjustments in case changes were required. Cost estimates were sufficiently conservative to allow for some design changes during construction. 4.03 Under the Guatape II Loan EPM, with the assistance of consultants from Westinghouse, executed a study for the expansion of its sub-transmission and distribution systems. The results of this study were used by EPM to design the network included in its 1980-1986 expansion program. The design was tochnically simple and followed American standards, except for the underground portion of the network in the center of Medellin. Part of the transmission and distribution facilities included in the 1980-1986 program were to be financed by the proposed Bank