Panama - Third Power Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 222a-PAN APPRAISAL OF THE THIRD POWER PROJECT INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION PANAMA November 9, 1973 Regional Projects Department Latin America and the Caribbean Regional Office This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY AND EQUIVALENT Currency Unit = Balboa (B) US$1.00 = Bl.00 = 100 centesimos U2NITS AND MEASURES kW = kilowatt NW- Megawatt = 1000 kW kWh = kilowatt hour GWh = Gigawatt hour - 1 million kWh kV = kilo volt kVA = kilo volt - ampere MVA Megavolt-ampere = 1000 kVA mile = 1.609 km square mile 2.590 km2 ACRONYMS FyL - Compania Panamena de Fuerza y Luz IRHE - Instituto de Recursos Hidraulicos y Electrificacion MAIN - Chas T. Main International Inc. PANCANAL - Panama Canal Company IRHE'S FISCAL YEAR January 1 - December 31  APPRAISAL OF THE THIRD POWER PROJECT INSTITUTO DE RECURSOS HIIJRAULICOS Y ELECTRIFICACICI PANAMA Table of Contents Page No. SUMMARY AND CONCIUSIONS i - ii 1. INTRODUCTION 1 2. THE POWER SECTOR 3 General 3 Sector Organization 3 Regulation 4 Sector Facilities 4 Extension of the Electricity Supply 4 Power Development Program 5 3. THE BORROWER 7 Legislation 7 Organization and Management 7 Tariffs 9 Insurance 9 Accounting and Audit 9 4. THF PROJECT 10 IRHE's Expansion Program 10 The Bank Project 12 Technical Training 13 Project Cost Estimate 13 Engineering and Construction 14 Procurement and Disbursement 15 Project Coordination 16 Environmental Aspects 16 5. PROJECT JUSTIFICATION 17 Least Cost Solution 17 aeturn on Project and Program Investment 19 6. FINANCIAL ASPECTS 21 Past Record and Present Position 21 Financing Plan 22 Financial Forecasts 24 7. AGREEMENTS REACHED AND RECOMWNDATICNS 25 This report was prepared by Messrs. Alan A.1-. Onslow and Helmut Wieseman.   LIST OF ANNEXES ANNEXES 1. Legislation 2. Interconnected System - Installed and Planned Generating Capacity 1972-82 3. Interconnected System - Power and Energy Balance 1972-82 4. IRHE's Organization Chart 5. Tariffs 6. Description of the Thi-rd Power Project 7. Estimated Schedule of Loan Disbursements 8. Load Forecasts 1972-82 9. Return on the Investment 10. Income Accounts 1969 - 1972 11. Balance Sheets 1969 - 1972 12. Estimated Sources and Applications of Funds 1973 - 1978 13. Estimated Income Accounts 1973 - 1978 14. Estimated Balance Sheets 1973 - 1978 15. Estimated Financial Ratios 1973 - 1978 Maps IBRD 10469 - Instituto de Recursos Hidraulicos y Electrificacion IBRD 10470 - Metropolitan Division - Instituto de Recursos Hidraulicos y Electrificacion   APPRAISAL OF THE THIRD POWER PROJECT INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION PANAMA SUMMARY AND CONCLUSIONS i. This report covers the appraisal of a project forming part of the 1973-77 expansion program of Instituto de Recursos Hidraulicos y Electrificacion (IRHE), an autonomous agency of the Panamanian Government, charged with coordinat- ing and expanding electrical power generation and distribution throughout the Republic. ii. This would be the Bank's third loan to IRHE. Loan 322-PAN, signed in 1962, was one of the Bank's first loans for rural electrification and assisted IRHE in financing its expansion program in the Central provinces, including the construction of a small hydroelectric plant at La Yeguada with an installed capacity of 6 MW. The second loan (661-PAN), signed in.1970, assisted IRHE in financing the foreign exchange for the first stage of the Bayano hydroelectric development (150 MW) and associated transmission line and substations; a 40 4W steam unit at Las Minas and transmission line; 6 MW of diesel in the rural areas; expansion of its distribution systems; and studies, training and management consultants' services. The bulk of the second project (Bayano) is about one year behind schedule and the total project likely to cost some 35% more than the original estimate of US$58 million. The cost and time overruns, which affect the two main components of the project - Bayano and Las Minas - are due to variations in foreign exchange rates since the appraisal in June 1969, to the poor quality of the preliminary engineering studies and field investigations made by IRHE's previous consultants, to difficulties in finding and quarrying suitable aggregates for Bayano's civil works, and to additional civil works at Las Minas, which were found to be necessary. Additional to the 35% cost overrun, the civil works contractor for Bayano has recently submitted claims amounting to about US$6 million due to basalt instead of limestone now being used as concrete aggregate. It is expected that the loan will be fully drawn down by the original closing date of April 30, 1976, even though Las Minas will not be in operation until September 1974 and Bayano in the first half of 1976. iii. In December 1970, under a UNDP grant, a contract was signed with Chas. T. Main International Inc. of USA, for which the Bank was the executing agency, to make a Hydropower Development and Feasibility Study for Panama covering the period 1971-85. This Master Plan was finalized in January 1973 and proposes a national power grid by 1982 based on a hydro-thermal generation installation program. The Project, which is now proposed for Bank financing will be carried out during 1974-76 and is estimated to cost a total of US$38.5 million equivalent. It forms part of IRHE's expansion program in accordance with the Master Plan. IRHE's total construction program during this period is estimated to cost US$110 million equivalent. It comprises ongoing works in the second Bank loan, the proposed Project, the initial stages of future generation expansion and associated works, and other expansion of IRHE's system. iv. The Project includes IRHE's 1974-76 transmission and distribution program and a system load dispatch center, as well as studies, engineering and technical training. Due to the delay of the Bayano hydroplant to the first half of 1976, 25 MW of generating plant needs to be added by Aprll975 to meet the projected capacity shortage in 1975-76 before Bayano is in operation. This 25 MW of generating  * ~~~- ii - capacity would also form part of the Project and would represent about 10% of its cost. The transmission would include the integration of isolated regional systems, which is less costly than continuing to operate the systems separately; this, in conjunction with the supply of additional load, following expansion of the distribution systems, would produce a return on program investment of at least 13%, if benefits are measured by incremental revenue attributable to the program and financial costs are adjusted for taxes, inflation, and internal transfers. v. The loan would finance the foreign exchange component of the project cost. International competitive bidding would be used to contract for other work than consultants' services and training. Except for the engagement of consultants for bid preparation for the 25 MW thermal generation and for the proposed 115 kV lines and substations - for which retroactive financing to March 31, 1973, to a maximum of US$300,000 is proposed - no contracts are expected to be awarded before the signing of the loan. Nevertheless, the proposed loan provides additional retroactive financing in an amount up to US$500,000, in case IRHE is in a position to place the order for the 25 MW of generating capacity prior to loan signing. vi. Following the "intervention" in June 1972 of Compania Panamena de Fuerza y Luz (FyL), a subsidiary of Boise Cascade (USA) which had the concessions for electricity, telephones and gas in the cities of Panama and Colon, the Government bought FyL's assets and liabilities, and, on August 1, 1972 handed them over to IRHE. It has been decided by the Government that these telephone activities will be transferred from IRHE by December 31, 1973, and that the gas activities will be phased out by June 1974, leaving IRHE responsible only for electric power. vii. With the acquisition of FyL's assets, IRHE is now the major electricity undertaking in the Republic, owning, except for captive industrial plant, over 90% of the country's installzd generating capacity. The transformation of IRHE from a small rural supplier into a national power company has naturally brought its problems in organization and management; particularly, there is a shortage of trained personnel in higher echelons. However, with the continued use of consultants and a good trahing program, it is considered that IRHE will overcome present difficulties and be able to execute its program satisfactorily. viii. IRHE's rapid and accelerated expansion has placed a heavy strain on its finances, with the result that its financing plan will have to rely heavily, during the years 1973-75, on Government contributions, which will be largely utilized in ongoing projects. After 1975 the Govermment hopes that IRHE will be able to raise some of the funds required for local expenditure by the issue of bonds locally. During the draw down period of the proposed Bank loan (1974-77), approximately 17% of the total cost of IRHE's expansion program would be financed from internal sources, 54% from overseas loans, 14% from Governnent contributions and 15% from local borrowings. ix. The Project is a suitable basis for a Bank loan to IRHE of US$30 million equivalent, for a period of about 20 years, including a grace period of about four years.  APPRAISAL OF THE THIRD POWER PROJECT INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION PANAMA 1. INTRODUCTION 1.01 The Government of Panama has requested the Bank to assist in the financing of a Project which is part of the 1973-77 expansion program of the Instituto de Recursos Hidraulicos y Electrificacion (IRHE), the autonomous agency responsible for the installation of all new electric generating capacity for public service and for most of the distribution system in the Republic. During the five-year period, IRHE expects to invest about US$169 million in this program. 1.02 The Project proposed for Bank financing comprises the addition of 25 Mw of thermal generating capacity to IRHE's system, about 364 km of trans- mission and subtransmission lines and related substations, distribution system expansion, a communication system, a system load dispatch center at Panama substation, studies, engineering and technical training. The estimated cost of the Project is US$38.5 million equivalent, including a foreign currency component of US$27.3 million, which, with part of the interest during con- struction of US$2.7 million, would be financed by the proposed loan of US$30 million equivalent. The 25 Mw of new generating capacity (at a cost of about US$3.3 million), together with 28 MW of diesel plant presently under con- struction and, with purchases from Panama Canal Company (PANCANAL), will provide for the system growth until the Bayano units come into operation in the first half of 1976. The remainder of the project provides almost exclu- sively for IRHE s transmission, distribution and other expansion requirements for the three years 1974-1976. 1.03 This would be the third Bank loan to IRHE. The first, Loan 322-PAN of US$4 million equivalent in 1962, was one of the Bank's first loans for rural electrification and assisted IRHE in financing the construction of the 6 MW yeguada hydroelectric project and associated facilities; the installation of 3 MW of diesel generation; and distribution rehabilitation - all of which is now in operation. The Second Loan, 661-PAN of US$42 million equivalent, signed March 16, 1970, is helping to finance the foreign exchange component of the:first stage of the Bayano hydroelectric development (150 MW) and asso- ciated transmission line and substations, steam unit No. 4 (U0 MW) at Bahia Las Minas on the Atlantic coast and transmission line to Panama City, 6 MW of diesel generating capacity in the rural areas, expansion of IRHE's distri- bution systems, and studies, training and management consultants' services. There have been significant cost overruns on this Project and the total cost is now estimated at US$78.6 million against US$58.2 million at the time of the appraisal. The increase of about 35% affects the two main items comprising the project - the Bayano hydroelectric scheme and Las Minas 40 MW steam unit.  -2- The increases in cost estimates are discussed in paragraph 4.03. The Govern- ment has guaranteed to provide or cause IRHE to be provided with any necessary funds to complete this Project. The first unit at Bayano is now expected to be in operation in the first half of 1976 (originally the first half of 1975) and Las Minas No. 4 in September 1974 (originally September 1973). However, it is still expected that the loan will be fully disbursed by the original closing date of April 30, 1976. 1.04> Now that it has taken over FyL 's responsibilities, IRHE is faced with additional organizational problems but proposes to continue to use the services of management consultants to help solve these probiems. The proposed loan would assist IRHE in the financing of such services. 1.05 In December 1970, under a UNDP grant, a contract was signed with Chas. T. Main International, Inc. of USA (MAIN) to make a Hydropower Develop- ment and Feasibility Study for Panama covering the period 1971-85, for which the Bank acted as Executing Agency. This study included a comprehensive survey of the power market in panama and provided the basis for IRHE's 1973 to 1982 expansion program. The Project, now proposed for Bank financing, is the initial phase of this program. As part of the study, MAIN finalized a "Master plan" in January 1973, which proposes a national poier grid by 1982 based on the installation of: (i) the first 75 MW steam unit at Las Minas in 1978, (ii) the Bayano hydro units Nos. 3 and 4 (150 mw) in 1979-80, (iii) the first stage (2 x 85 mM) of La Fortuna hydropower plant in the Chiriqui Province near the Costa Rica border in 1981, and (iv) a backbone 230 kV double-circuit transmission system interconnecting the country. The ",Master Plan' also provides for the addition of at least one 25 MW gas turbine in June 1974 to cover IRMH's generating capacity deficiencies prior to Bayano units Nos. 1 and 2 being commissioned. A companion UNDP study, also prepared by MAIN, provided the basis for the feasibility of a communication system and load dispatch center installation as part of the proposed project. 1.06 In January 1973, IRHE sent to the Bank a ten-year (1973 through 1982) forecast of its electric and telephone utility operating costs, revenues and construction requirements prepared by IRHE's consultants, Stone and Webster Management Consultants, Inc. (USA), and based, in part, on Chas. T. Main's Master plan dated November 1972. A mission composed of Messrs. Alan A. M. onslow and Helmut Wieseman visited panama in February/March 1973 to appraise the proJect and IRHE's power division. This appraisal report is based on the reports of Chas. T. Main and Stone and Webster, and on the findings of the Bank mission.  -3- 2. TIE POWER SECTOR General 2.01 Panama, with an area of about 7h,000 km2, has a population of 1.5 million (growing at 3.0% per annum), of which about one-half is rural. Most of the urban residents live in the cities of Panama or Colon. Panama now ranks fourth in Latin American nations in per capita income which is at the US$820 level. Since 1968, when the present Government took over, the country's economy has been growing at an average annual rate of about 8%. Present expectations are that the economy will continue its recent pace of expansion and the demand for electricity should therefore continue to grow near the rates experienced in the recent past. Sector Organization 2.02 The present sector organization, which originated as a number of small privately-owned power companies and generating plants, is being consolidated by IRHE, an autonomous state-owned government agency, original- ly created under Law No. 37 of January 31, 1961, and charged with coordinat- ing and expanding electrical power generation and distribution throughout the Republic. By 1973, following the acquisition of Compania Panamena de Fuerza y Luz (FyL) (paragraphs 2.03 and 3.03) IRHE owned about 90% of the country's installed generating capacity, except for captive industrial plant. 2.03 I3HE presently retails electricity in Panama province, in the Central provinces of Cocle, Herrera, Los Santos and Veraguas, and in the eastern provinces of Darien and San Blas, and will shortly supply at whole- sale to rvate compa,nies in the towns of Chorrera, Santiago;l and in the Chiriqui_ province. IRHE used to supply at wholesale the growth requirements of FyL, a subsidiary of the Boise Cascade Company (USA), in Panama City and Colon. On June 1, 1972 the Government "intervened" FyL and on August 1, 197S, IRHE acquired its assets and liabilities which include telephones and gas in addition to electricity. 2.04 An agreement of 1969 provides for power and energy sales from IRHE's Las Minas No. 2 unit to the Panama Canal Company (PANCANAL). Another agreement of 1970 between PANCLNAL and FyL provides for PANCANAL sales of power and energy to FyL, and for emergency assistance. IRHE and PANCANAL are re-negotiat- ing the latter contract and informally arranged for maximum mutual assistance on a "when available" basis. In order to relieve a projected capacity short- age in the IRHE system, MRHIK'sales obligation under the 1969 agreement for 30 MW and 210 GWh per year has been suspended for three years (from September 1, 1972). Presently, IRIE and PANCANAL interchange power and energy,as agreed on a day-to- day basis. PANCANAL has a generating capacity of about 160 MW (excluding 30 MW 1/ The Government has recently acquired the distribution company in Santiago (1 MW capacity) and turned it over to IRHE for operation; it is now negotiating the acquisition of %mpresas Electricas de Chiriqui. 2/ See Nap IBRD 10469.  -a - floating plant of the US Army) and had a peak demand bf about 120 MW in 1972; it has no present plane to add further generation capacity as its load is grow- ing at only 4.5% per annum. Regulati on 2.05 Until 1957, the power sector was operated exclusively by private entities under franchises and without any other Government regulation. In 1958, the National Commission for Electric Energy, Telephones and Gas was established to regulate those three industries. Later that year, Law No. 31 was passed establishing the standards for regulating the electric companies. However, the provisions of the law were not enforced until Cabinet Decree No. 6 was passed in January 1969 to reform the regulatory Commission. Certain amendments have since been made to the legislation, including one which subjected IRHF to regulation. On June 30, 1970, Law No. 214 was passed establishing standards for the regulation of telecommunications; no law has been passed establishing the standards for regulating the gas industry, nor is it the Government's present intention to pass any sucth law. 2.06 Law No. 31, as amended,(Annex 1) provides adequate regulation for the electric industry and effectively guarantees a minimum rate of return on net fixed assets in operation, plus working capital of three months' revenue; the minimum rate in the case of IRFM is 8-3/4L%. Since it is important that IIUfS should remain financially viable, assurances have been obtained during negotiations, as it was done for Loan 661-PAN, that the electricity legislation will not be amended so as to affect materially and adversely the management or operation of the Borrower. Sector Facilities 2.07 The public electric supply comprises four regional systems and about 50 small and isolated diesel installations. The regional systems are: (a) the Metropolitan System with a demand (December 1972) of about 140 MW atid a generating capacity of 176 MW; (b) the Wes-t Panama System with a demand of about 6 1W and installed capacity of 7.5 MW of diesel generators; (c) the Central Provinces system (which was the subject of the first Bank loan to IRH:E) with a demand of 11 MW and capacity of 20 MW; and (d) the Chliriqui Province System of the private Empresas Electricas de Chiriqui and the Chiriqui Land Company, with a combined load of 17 MW and capacity of 22 MW. The existing generating facilities of each of the four interconnected systems are shown in Annex 2 and on Map ITBRD 10469. Extension of the ElectricLty Supply 2.08 Over the 10 years 1962-1972, production of electricity in Panama (excluding PANCANAL) increased by 265%, from 281 to 1,025 GWh. Generating  -5- capacity, which totaled about 240 MW in 1972, has generally provided adequate supply except for recent rationing due to forced outages in IRHE's Metropolitan System (paragraph 5.02). 2.09 In 1970, Panama ranked sixth among Latin American republics, in terms of per capita generation of electricity for public service. Consump- tion of electricity by consumer category has evolved since 1962 as follows: Category of Consumer Retail Sales 1962 1967 1971 GWh~ __% GWh %_ GWh _ Residential 71.8 30.7 134.4 32.8 254.5 35.5 Commercial 89.2 38.1 153.1 37.4 255.5 35.7 Industrial 37.2 15.9 69.4 17.0 110.7 15.5 Government 35.8 15.3 52.3 12.8 95.5 13.3 234.0 100.0 409.2 100.0 716.2 100.0 2.10 The total number of customers in Panama increased by 70% to about 147,000 in the 10 years through 1972. Of the total, about 130,000 were residential customers, indicating that about 48% of the total population of Panama have electric service; however, in the Metropolitan Area it is estimated that about two-thirds of the population have supply. In its 1973-78 expansion program, IRHE hopes to increase its services so that about 80% of the total population and about 90% of the Metropolitan Area would have supply. Power Development Program 2.11 IRHE's 1973 to 1982 expansion program is based on the Master Plan (paragraph 1.05) which proposes the installation by 1981 of the first stage (170 MW) of the La Fortuna hydropower plant in the Chiriqui province near the Costa Rica border (see Map IBRD 10469). The Master Plan assumes a backbone 230 kV double circuit transmission system in operation by 1981, but without interconnection with Costa Rica's Instituto Costarricense de Electricidad (ICE) system. As La Fortuna is located about midway between San Jose in Costa Rica and Panama City (the two major potential markets for La Fortuna) the feasibility of such an interconnection should be studied. The Panamanian Government has indicated that it would initiate talks with Costa Rica at an early date with a view to joint planning studies for coordinated expansion of the ICE and IRHE systems on an interconnected basis. If the Costa Rican Government is interested in the proposal, such studies would be a necessary part of any Bank appraisal of the La Fortuna project. Paragraph 5.05 shows the planned generation additions 1974-84. 2.12 Expansion of the IRHE transmission system at 230 kV and 115 kV will generally be westward from Bayano permitting transfer of Bayano's hydropower and m4etropolitan Area thermal generation across the Panama Canal to the West Panama, Central and Chiriqui provinces. As transmission ties to Chorrera, Divisa, and later David are established, the presently isolated systems of IRHE in the area, and the private companies at Chorrera, Santiago and Chiriqui will become part of the national interconnected system and be incorporated into the economic dispatch and remote control from IRHE's new dispatch center.  As interconnecting ties are established, most local diesel generation in the provinces will be put on standby or relocated. Annexes 2 and 3 give the capacities and loads, respectively, of the interconnected system as it is extended year by year. IRHE's remote isolated systems are not expected to be joined to the national system, but their generating capacity will be increased mainly by the installation of small capacity diesel units released from other parts of the IRHE system. Additional details of the IRHE expansion program are given in Chapter 5.  - 7 - 3. THE BORROWER Legislation 3.01 The Borrower would be the Instituto de Recursos Hidraulicos y Electrificacion (IRHE), which is an autonomous agency of the Panamanian Government, charged with the task of developing the electric power resources in the country. 3.02 IRHE was created by Law No. 37 of 1961, which assigned to it the exclusive right to develop the hydro resources of the country, thereby restrict- ing the expansion of the private companies. In its early days IRHE was small, inexperienced and subject to considerable political interference, which led to mismanagement and an unfavorable financial position. During 1968-69 discussions were held between IRHE, the Government and the Bank to develop new legislation to improve IRHE's organization and management. Consequently, in July 1969, Law No. 235 was passed, which replaced Law No. 37, charging IRHE, inter alia, with the exclusive right to construct and operate all new sources of generation in the country. This new law gave IRHE a satisfactory basis on which tocperate as an autonomous agency. 3.03 In mid-1972 IRHE's role again changed significantly when the Govern- ment purchased the assets and liabilities of Compania Panamena de Fuerza y Luz (FyL), a subsidiary of Boise Cascade (USA) and vested them in IRHE. Formerly, FyL had concessions for the operation of electricity, telephones and gas services in the cities of Panama and Colon. The Government and the Bank have agreed that IRHE should be divested of the telephone and gas operations as soon as possible. The Government has decided to create a new autonomous agency to take over the telephone operations presently managed by IRHE by January 1, 1974. This timing is consiuered to be realistic and accordingly, it is a condition of effectiveness of the proposed loan that the assets, liabilities, rights and obligations relating to telephones presently vested in IRHE will be transferred from IRHE. 3.04 The Government has not yet clarified its thinking on the future of the gas activities, but it has decided to transfer the gas operations from IRHE no later than June 30, 1974, and, in a letter dated February 28, 1973, has given an assurance to the Bank to this effect. The gas operations are insig- nificant - the net fixed assets being less than US$100,000 as at