Peru - Energy and Mining Technical Assistance Project (EMTAL)

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 19029 IMPLEMENTATION COMPLETION REPORT PERU ENERGY AND MINING TECHNICAL ASSISTANCE PROJECT (EMTAL) (LOAN 3610 - PE) March 11, 1999 Finance, Private Sector and Infrastructure Sector Unit Bolivia, Paraguay and Peru Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS January 15, 1999 Currency Unit = Nuevo Sol (SI.) US$1=S/3.27 S/ 1=US$0.31 ABBREVIATIONS AND ACRONYMS CIDA Canadian International Development Agency COES Committee for Economic (Electricity) System Operation CONERG National Energy Council CTE Electricity Tariff Commission DGAA General Environmental Affairs Directorate DGE General Electricity Directorate DGH General Hydrocarbons Directorate DGM General Mining Directorate ICR Implementation Completion Report IDB Inter-American Development Bank IM International Monetary Fund MEF Ministry of Economy and Finance MEM Ministry of Energy and Mines OS1NERG Control and Supervision Agency for Energy SICN Interconnected Central-Northern Electricity System SOEs State-owned Enterprises UINDP United Nations Development Program FISCAL YEAR January 1- December 31 Vice-President: Shahid Javed Burki Country Director: Isabel Guerrero Sector Director: Danny Leipziger Task Manager: Joerg Uwe Richter  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. PREFACE ......................................................1 EVALUATION SUMMARY ...........................................2........ 2 PART I: PROJECT IMPLEMENTATION ASSESSMENT Background ............................................. ...... 7 Project Objectives and Scope ................... .......................... 8 Achievement of Project Objectives ............................................ ...... 8 Implementation Record and Major Factors Affecting the Project .......... ..... 12 Project Costs and Financing ................................................... . 13 Project Risk Evaluation .............................................. ..... . 13 Project Sustainability ................................................... . 13 Bank Performance ............................................. 14 Borrower/ Implementing Agency Performance ............................... .....15 Assessment of Project Outcome ............................................. .....16 Future Operations ................................... .....16 Project Operational Plan ....................................16 Key Lessons Learned ................................. ....17 PART II: STATISTICAL TABLES Table 1: Summary of Assessments .......................................... .... 18 Table 2: Related Bank Loans - Preceding Loans . ............... ....19 Table 3: Project Timetable ....................... ............................ .... 19 Table 4: Loan Disbursements: Cumulative, Estimated, and Actual . ... 19 Table 5: Key Indicators for Project Implementation . .20 Table 6: Key Indicators for Project Operation . . 20 Table 7: Studies Included in the Project ...................................... .... 21 Table 8A: Project Costs ........................... ................... --22 Table 8B: Project Financing ................................................... ... 22 Table 9: Economic Costs and Benefits ....................................... .... 23 Table 10: Status of Legal Covenants .......................................... ... 23 Table 11: Compliance with Operational Manual Statements . . 25 Table 12: Bank Resources: Staff Inputs ...................................... .... 25 Table 13: Bank Resources: Missions . .26 APPENDICES A. Summary of Loan Objectives and Achievements ........................ ....27 B. ICR Mission Aide-Memoire .................................................... 28 C. Project Review from Borrower's Perspective .............................. .... 32 D. Proposed Operational Plan .................................................. .. 37 Map IBRD No. 26572R - Peru General Country Map 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.  IMPLEMENTATION COMPLETION REPORT PERU ENERGY AND MINING TECHNICAL ASSISTANCE LOAN (EMTAL) (LOAN No. 3610-PE) PREFACE This Implementation Completion Report (ICR) deals with the Energy and Mining Technical Assistance Loan (EMTAL) to Peru, for which Loan 3610-PE in the amount of US$11.8 million was approved on June 1, 1993 and made effective on December 2, 1993. Following two extensions (December 31, 1997 for six months and June 30, 1998 for three months), the Loan was closed on September 30, 1998. It was 91% disbursed. The last disbursement took place on December 22, 1998, at which time a balance of US$1. lmn was cancelled. Cofinancing was provided through PHRD Grant No. TF 022474. The ICR was prepared by Messrs. Joerg-Uwe Richter of the Finance, Private Sector, and Infrastructure Department of the Latin America and Caribbean Regional Office (LCSFP) and Fernando Lecaros (Consultant). The Report was reviewed by Mmes/Messrs. Susan G. Goldmark, Maria-Victoria Lister (LCSFP), Chakib Khelil (EMTOG) and Leopoldo Maraboli (EMTIM). The Report is based, inter alia, on the Memorandum of the President; reports of the Borrower's Project Coordinating Unit; supervision mission reports; correspondence between the Bank and the Borrower's implementing agency; Bank internal memoranda; Borrower's progress reports; and discussions between the Borrower and Bank staff. Preparation of the ICR began during the Bank's project completion mission during January 12-22, 1999. The Borrower contributed to this ICR by preparing an evaluation of the Project's implementation and results (Appendix C) and by commenting on the Bank's draft ICR. The Resident Office of the United Nations Development Program, which was in charge of the financial administration of the Loan, is in agreement with the conclusions and recommendations of this Report.  2 PERU ENERGY AND MINING TECHNICAL ASSISTANCE LOAN (EMTAL) (LOAN No. 3610-PE) EVALUATION SUMMARY Background 1. Upon assuming office in 1990, the Fujimori Government faced a social and economic crisis of huge dimensions. Two-thirds of external debt was in arrears and Peru was in default to the IMF, World Bank, and Inter-American Development Bank (IDB). State-owned enterprises (SOEs) had become increasingly inefficient, loss- making, and politicized, and government controls kept their prices at uneconomic levels. Their inability to invest in infrastructure was a serious obstacle to economic development. The Government launched comprehensive stabilization measures, followed by a liberalization and structural reform program which was based on policies and legal/regulatory/institutional reforms aimed at arms-length regulation, demonopolization and competition, and maximum feasible private participation. New laws and regulations were enacted; autonomous regulatory entities were created; and new tariff systems to cover economic costs were introduced, complemented by initiatives to create and modernize antitrust and labor legislation. The Government expanded this program to include privatization of most SOEs, recognizing that Peru lacked the means to bring the enterprises up to required standards. 2. The Bank, IMF, and IDB developed a joint strategy to enable Peru to clear arrears and regain access to international capital markets. The Bank approved five adjustment loans during 1992-94. The Privatization Adjustment Loan (PAL) and Electricity Privatization Adjustment Loan (EPAL) were conditioned on ambitious sector reforms, with privatization of SOEs a central element. Project Objectives and Scope 3. The Energy and Mining Technical Assistance Loan (EMTAL) was aimed at supporting and reinforcing the Government's reform and privatization objectives in the sectors. This was to be achieved through assisting the (a) implementation of the relevant sector strategies and policies, (b) completion of the legal/regulatory reforms including environmental regulation, and (c) institution building at the Ministry of Energy and Mines (MEM; the beneficiary of the Loan) and the associated entities to regulate and monitor the sector enterprises. These aims were consistent with requirements for sustainable sector development and had strong government support. The Project incorporated components (a) for overall energy, to prepare an integrated sector strategy and support MEM' s National Energy Council CONERG; (b) for electricity, to complete the regulatory framework and apply reforms at the enterprise level, design an energy management system for the North-Central Interconnected System (SICN), strengthen MEM's General Electricity Directorate (DGE) and the Electricity Tariff Commission (CTE), and apply the new tariff system; (c) for hydrocarbons, to complete the legal! regulatory framework, strengthen MEM's General Hydrocarbons Directorate (DGH) and promote exploration and field development through establishing PeruPetro and a modern data bank; (d) for mining, to develop and implement a promotion program, create an information system at MEM's General Mining Directorate (DGM), develop and implement a new cadastral/concession system, and reform procedures to process mining concessions;  3 and (e) for environmental management, to formulate and implement policies, strengthen MEM's General Environmental Affairs Directorate (DGAA), prepare environmental mitigation measures in the energy and mining sectors, and carry out sectoral assessment studies. Achievement of Objectives 4. The Project's overall objectives were achieved including (a) Demonopolization and privatization of SOEs: The bulk of electricity generation and distribution now is carried out by private companies; PeruPetro is actively promoting, negotiating, and awarding exploration and development licenses; PetroPeru no longer has quasi-monopoly status; large-scale mining activities have largely been privatized, and mining expansion now is private-enterprise driven; (b) Regulatory reform, including environmental regulation: The concept of autonomous regulatory entities and regulated operators has been accepted by the Government and the general public; the Electricity Tariff Commission (CTE) - charged with regulating electricity prices - and OSINERG - monitored by the Ministry of Economy and Finance (MEF) and charged with enforcing compliance by enterprises with operative rules - adequately meet their responsibilities; (c) Strengthening of MEM and of related institutions to regulate and monitor sector enterprises: The Directorates have been reorganized and been assigned clearly defined normative functions; information systems have been modernized and allow ready access to data required for discharging their functions; and fees collected from sector enterprises ensure more adequate revenues for MIEM. 5. Among the Project's individual components, the energy strategy evaluation was not completed, mainly due to lack of consensus on a methodology consistent with the sector's market-based paradigm. For electricity, the legal/regulatory and institutional framework was strengthened, strategies to implement reforms were designed, an efficient corporate structure at the enterprise level was created, and guidelines for contracts were developed. For hydrocarbons, regulations attendant to the Basic Hydrocarbons Law were prepared, PeruPetro was created and a data bank established, and DGH was strengthened to carry out its normative functions. For mining, an investment promotion program was prepared and implemented, a comprehensive information system and a Public Mining Registry were established, problems faced by small-scale and artisanal mines were analyzed, and the backlog of mining requests was considerably reduced. For environmental management, policy formulation and implementation were improved, guidelines and norms were prepared and disseminated, permissible emission levels were determined, regional environmental assessments were initiated, and DGAA was considerably strengthened so that its activities now are considered exemplary for the public administration at large. Contamination levels in mining were reduced, and the larger enterprises committed themselves to large-scale investment in pollution abatement. Implementation Record and Major Factors Affecting the Project 6. Implementation was facilitated by strong government commitment and effective implementing agencies, delays in project initiation notwithstanding. The  4 November 1995 mid-term review concluded that the Project was progressing well and was being executed within budget, but there were. concerns about the lack of improvement in MEM's staff capabilities and the use of consultants to carry out staff functions. As follow-up to the review, the role of the Project Coordinating Unit was enhanced and increased emphasis was given to small-scale and subsistence artisanal mining, resulting in budgetary shifts in favor of these components. By the envisaged loan closing date of December 31, 1997, the project components subject to specific targets (e.g., regulations which need to be issued within a certain period after enactment of the underlying law) were completed but regional environmental assessments of mining activities experienced delays which necessitated two closing date extensions of the Loan to September 30, 1998. Project Costs and Financing 7. By loan closure, project expenditure totaled US$15.1mn and loan disbursements, US$10.7mn, both equivalent to 91% of budget. Two PHRD grants for energy and for mining-related environmental activities totaling approximately US$4mn equivalent were fully disbursed. The breakdown between foreign and local costs reflects the type of currency disbursed but not necessarily the source of goods and services, as many contracts for local personnel were denominated and paid in foreign currency. Project Risk Evaluation 8. At appraisal, risks were assumed to be related to congressional and popular support, the public administration's implementation capacity, and physical security in the country. Unlike the two former risks, weaknesses at the public administration were not resolved and were not sufficiently taken into account when the project timetable was established. In particular, mining and environmental components required a considerable build-up of expertise as well as extensions of their implementation schedule. Project Sustainability 9. Project achievements are likely to be sustainable as the Government is committed to maintaining the key enabling conditions. These comprise: in electricity, ensure CTE's full autonomy and provide DGE with competent staff, in hydrocarbons, strengthen DGH's regulatory functions in downstream activities including for natural gas; in mining, strengthen the focus on artisanal mining and on social-environmental issues, further improve the legal/regulatory/institutional framework and fiscal regime to ensure international competitiveness, and avoid a new buildup of unprocessed petitions; and in environment, prepare and implement pilot projects to apply the results from past activities. In all areas, preserving adequate financial resources will be essential to sustainability. Bank Performance 10. The Bank responded expeditiously to sector requirements as the Project was initiated at a critical moment of the reform effort. The Project was based on a comprehensive analysis of the rehabilitation and reform requirements in energy and  5 mining, and its concept was appropriate. Staff contributions to project preparation and implementation were fully recognized by the Government. However, supervision which was intensive at project initiation subsequently slackened, coinciding with frequent changes in task managership in the wake of internal Bank reorganizations. Borrower/ Implementing Agency Performance 11. After initial delays, the Borrower implemented the Project largely on time and on budget. The Coordinating Unit provided effective support to MEM's Directorates in charge of the Project's individual sector components. Annual implementation plans were drawn up and were adjusted semi-annually. MEM' s Directorates were instrumental in implementing the Government's sector strategies, through measures that often were far-reaching and difficult. UNDP's Lima Office played an important role in administering project funding, which provided transparency and avoided possible implementation delays due to temporary lack of counterpart funds. Loan disbursements until FY96 run ahead of schedule but afterwards fell behind schedule when difficult and untried tasks had to be tackled. Assessment of Project Outcome 12. The outcome is rated "Satisfactory" for preparation, appraisal, and implementation, both for Bank and Borrower. The major project objectives were achieved and overall progress was smooth. The Project's success was acknowledged by the Government, in particular the Ministry of Economy and Finance. Future Operations 13. A CIDA grant for technical assistance in mining and environmental matters will address some of the needs for follow-up to EMTAL. The Bank is supporting the preparation of a rural electrification strategy, as a basis for possible future lending. No other Bank operations are currently implemented or planned. Project Operational Plan 14. MEM is in the process of preparing an operational plan, which would include the principal activities to maintain and complement EMTAL's achievements, i.e.: completion of regulations for electricity, hydrocarbons including natural gas, and mining, especially for health and safety; continued institutional strengthening at MEM, OSINERG, and PeruPetro; demonstration projects for environmental rehabilitation; and dissemination of environmentally sustainable operational practices to small-scale and artisanal miners. Key Lessons Learned 15. For technical assistance aimed at sector reforms to succeed, (a) strong government support and consistency of project objectives with overall development requirements are critical; (b) continuity of project direction and management needs to be ensured; (c), project coordination and implementation units need to be carefully staffed, with emphasis on sectoral experience and networking skills; (d) favorable macroeconomic conditions are important; and (e) the use of UNDP or other local offices as disbursement agent helps to avoid bureaucratic delays in making project funds available. On the other hand, EMTAL's shortcomings emphasize the need to  6 (a) avoid or at least limit the multiplicity of objectives and activities, design the project concept as firmly as feasible at appraisal, and ensure that loan covenants are enforceable; (b) make appropriate arrangements for enhanced monitoring of complex projects, including adequate resources for supervision; and (c) restrict labor-intensive and less effective types of contracting (e.g., use of individual consultants).  7 IMPLEMENTATION COMPLETION REPORT I:? PERU ENERGY AND MINING TECHNICAL ASSISTANCE LOAN (EMTAL) (LOAN No. 3610-PE) PART I: PROJECT IMPLEMENTATION ASSESSMENT Background 1. On assuming office in 1990, the Fujimori Government faced a social and economic crisis of enormous proportions. Per-capita income had declined to the levels of the early 1960s; 75% of the labor force in Lima was unemployed or underemployed; real wages had fallen by 60% over five years; and inflation had reached 36,000% on an annualized rate. Two-thirds of the external debt totaling US$22bn was in arrears. Peru was in default to the International Monetary Fund (IMF), the World Bank, and the Inter-American Development Bank (IDB). State- owned enterprises (SOEs) were a major contributing factor to the economic decline, as they had become increasingly inefficient and politicized, hampered by government controls which kept prices of their outputs at unrealistically low levels. As a group, SOEs by 1990 were losing US$2.5mn/year, much of which had to be covered by the Budget. Their inability to invest in basic infrastructure was a serious obstacle to economic development. 2. The Government launched strong and comprehensive stabilization measures to reverse the country's decline, which comprised fiscal, monetary, and exchange rate policies and which dramatically lowered inflation. In parallel, a liberalization and structural reform program was introduced, initially emphasizing trade liberalization and financial sector reform but quickly spreading to sector reforms in energy and infrastructure, industry and mining, agriculture, and social services. This effort was based on new policies and legal/regulatory/institutional reforms to promote competition and facilitate private investment. 3 . Subsequently, the Government expanded the reform program to include the privatization of most SOEs, to be completed by 1995, recognizing that Peru lacked the means to make the necessary investments to bring SOEs up to required standards. The "Law for Promotion of Private Investment in State Enterprises" (Legislative Decree 674 of September 1991) established the necessary framework, by creating the Minister-level Committee for Private Sector Investment (COPRI) as privatization agency, to be complemented by Special Privatization Committees (CEPRIs) in charge of individual sectors and/or enterprises to be privatized. In parallel, the Government undertook major legal/regulatory/institutional reforms of the sectors dominated by SOEs, aimed at deregulation or arms-length regulation, demonopolization and competition, and maximum feasible participation by private enterprise. New laws and attendant regulations were enacted for telecommunications, electricity, hydrocarbons, and mining; autonomous regulatory entities were created; and new tariff systems ensuring coverage of economic costs were introduced. The sector reforms were complemented by economy-wide initiatives to create and modernize antitrust and labor legislation. 4. In support of the Government's reform agenda, the Bank, 1MF, and IDB developed a joint strategy to enable Peru to clear its arrears with them and to regain  8 access to international capital markets. The Bank during 1992-94 approved five adjustment loans, two of which were disbursed in single tranches in March 1993. The Privatization Adjustment Loan (PAL) and Electricity Privatization Adjustment Loan (EPAL) were conditioned on ambitious sector reforms, with privatization of SOEs a central element. The Energy and Mining Technical Assistance Loan (EMTAL), whose beneficiary was the Ministry of Energy and Mines (MEM), was designed to reinforce the sector reform measures pursued through PAL and EPAL. Project Objectives and Scope 5. The project funded through EMTAL was aimed to support the Government's reform and privatization objectives in energy and mining, through assisting the Government in the (a) implementation of sector strategies and policies, especially demonopolization and privatization of SOEs; (b) completion of legal/regulatory reforms in the energy and mining sectors, including environmental regulation; and (c) institution building at MEM and the autonomous entities to regulate and monitor sector operations. These objectives were consistent with requirements for sustainable development of the sectors. They were strongly supported by the Government and thus, were considered attainable within the Project's envisaged implementation period (1993-97). 6. The Project consisted of the following components: (a) Overall energy sector: (i) preparation of an integrated sector strategy, and (ii) strengthening of MEM's National Energy Council (CONERG); (b) Electricity: (i) completion of the regulatory framework and application of reforms at the enterprise level; (ii) design of an energy management system for the North-Central Interconnected System (SICN); (iii) strengthening of MEM's General Electricity Directorate (DGE); and (iv) strengthening of the Electricity Tariff Commission (CTE) and application of the new tariff system; (c) Hydrocarbons: (i) completion of the regulatory framework; (ii) strengthening of MEM's General Hydrocarbons Directorate (DGH); and (iii) promotion of exploration and field development, through establishing PeruPetro as decentralized public entity and creating a modern data bank within PeruPetro; (d) Mining: (i) development and implementation of a promotion program; (ii) creation of a modern information system at MEM's General Mining Directorate (DGM); (iii) implementation of a new cadastral/ concession system through the Public Mining Registry; and (iv) reform of procedures to process mining concessions; and (e) Environmental management: (i) policy formulation and implementation; (ii) strengthening of MEM's General Environmental Affairs Directorate (DGAA); (iii) environmental mitigation in the energy and mining sectors; and (iv) sectoral assessment studies. Achievement of Project Objectives 7. The multiplicity of project objectives and the large number of institutions involved in execution made the Project a complex undertaking to coordinate. The  9 clarity of objectives differed among project components, which would eventually be reflected in different degrees of achieving the corresponding objectives. 8. Overall Objectives. These were achieved, as evidenced by: (a) Demonopolization and privatization of SOEs: * Electricity sector development now is driven by private investors and operators: twenty private companies are generating electricity for public supply, and most consumers are supplied by private distributors; * PeruPetro was created as the Government's promoting and negotiating entity in the hydrocarbons sector;