Argentina - Fourth Buenos Aires Power Project

Report No. 675b-AR Appraisal of the Fourth Buenos Aires Power Project Argentina SERVICIOS ELECTRICOS DEL GRAN BUENOS AIRES (SEGBA) September 7, 1976 Power and Telecommunications Division Latin America and the Caribbean Regional Office r c OPY FOR OFFICIAL USE ONLY Document of the World Bank 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 AND EQUIVALENT Currency Unit = Argentine Peso ($a) US$1 = $a 140.17 (Official Rate) US$1 $a 250.00 (Free Market Rate) $a 1 Million US$7,134 (Official Rate) $a 1 Million US$4,000 (Free Market Rate) ABBREVIATIONS AND ACRONYMS AC Alternating Current CADE Compafi!a Argentina de Electricidad AyEE Agua y Energia Electrica CEN Corporacion de Empresas Nacionales CIAE Compania Italo Argentina de Electricidad S.A. CNEA Comision Nacional de Energla At6mica CONCAP Comision Nacional de la Cuenca del Plata CTMSG Comision Tecnica Mixta de Salto Grande DEBA Direccion de Energla Electrica de la Provincia de Buenos Aires DUC Despacho Unificado de Carga EBY Entidad Binacional Yacyreta-Apipe EPEC Empresa Provincial de Energha de C6rdoba HIDRONOR Hidronor S. A. Hidroelectrica Norpatagonica, Sociedad An6nima SEGBA Servicios Electricos del Gran Buenos Aires, S.A. SOFRELEC Societe Francaise d'Etudes et de Realisations d'Equipements Electriques MEASURES AND EQUIVALENTS kW = Kilowatt MW M Megawatt (1,000 kW) kWh = kilowatt hour GWh - gigawatt hour (million kWh) kV = kilovolt (1,000 volts) kVA = kilovolt-Ampere MVA = Megavolt-ampere (1,000 kVA) km = kilometer (0.6214 mile) km = square kilometer (0.386 sq. mile) kcal = kilocalorie (3.968 BTU) SEGBA's FISCAL YEAR January 1 - December 31 1/ As of June 30, 1976  FOR OFFICIAL USE ONLY APPRAISAL OF THE FOURTH BUENOS AIRES POWER PROJECT SERVICIOS ELECTRICOS DEL GRAN BUENOS AIRES (SEGBA) ARGENTINA Table of Contents Page No. SUMMARY AND CONCLUSIONS i - ii 1. INTRODUCTION 1 2. THE POWER SECTOR 3 Energy Resources 3 Sector Organization 3 Power Market 4 Expansion Program 4 Future of the Sector 5 Tariffs and Asset Revaluation 5 Buenos Aires-Litoral Region 5 Greater Buenos Aires Subregion 6 Service to Low-Income Groups 6 3. THE BORROWER 8 Legislation 8 Organization and Management 8 Employment 9 Training 9 Accounting and Audit 9 Power Rates 10. Tariff Structure 10 4. THE PROJECT 12 Project Cost 12 Procurement and Disbursements 14 Engineering and Project Execution 15 Environment 15 5. JUSTIFICATION OF THE PROJECT Sector Objectives 16 Project Objectives 16 Load Forecast 16 High Tension System (500, 220 and 132 kV) 17 Distribution System (mid and low-tension) 17 Performance Indicators 17 Return on Investment 17 This document has a retrictod distribution cand may be used by recipients only in the performance| of their offcial duties. Its contents may not otherwise be dusclsed without World Dank authofiztion.  Table of Contents (Cont'd) Page No. 6. FINANCIAL ASPECTS 18 Past Record and Present Position 18 Financing Plan 19 Future Finances 21 7. AGREEMENTS REACHED AND RECOMMENDATIONS 22 This report was prepared by Messrs. C. Besse (Financial Analyst) and M. Linder (Engineer).  List of Annexes 1. The Energy Sector 2. The Power Sector 3. Greater Buenos Aires Subregion 4. Tariff Regulation and Structure 5. Project Implementation Schedule 6. Project Description 7. Justification of the Project 8. Actual and Forecast Income Statements 9. Actual and Forecast Balance Sheets 10. Debt Contracted as at December 31, 1975 11. Forecast Sources and Applications of Funds 12. Forecast Schedule of Loan Disbursements 13. Forecast Key Operational and Financial Indicators 14. Financial Ratios Maps Argentina - Regional Subdivision of the Power Sector (IBRD 11441R) SEGBA System - Transmission Lines and Substations (IBRD 11442R)   APPRAISAL OF THE FOURTH BUENOS AIRES POWER PROJECT SERVICIOS ELECTRICOS DEL GRAN BUENOS AIRES (SEGBA) ARGENTINA SUMMARY AND CONCLUSIONS i. This report covers the appraisal of a project forming part of the 1977-1981 expansion program of Servicios Electricos del Gran Buenos Aires (SEGBA), a corporation owned by the Argentine Government, which is the main distributor of electricity in the Greater Buenos Aires area. ii. This would be the Bank's fourth loan to SEGBA. The first three loans, which were made in 1962, 1968 and 1969 helped finance the expansion of generation, transmission and distribution facilities. The physical execution of these three projects has been satisfactory. Considerable progress was made toward one of the long-term objectives of Bank lending to SEGBA namely the building of SEGBA into a financially sound utility. However, this achievement was nullified by Government interference in 1964 and 1971. SEGBA's finances deteriorated dramatically as a result of it not being permitted to adjust its tariffs to keep pace with inflation and devaluation as provided by its Concession Agreement. However, as a result of monthly tariff increases which have been approved by the Government since April 1976, SEGBA is expected to comply with its concession and make a satisfactory contribution to the financing of its investment program in 1977 and thereafter. iii. The power sector, although essentially owned by the Government, has a fragmented organization. No reasonable national expansion program exists. As a result, a number of unjustified investment decisions for the sector have been taken in the past. The present Government, aware of this situation, intends to carry out a national sector organization study and prepare a national power expansion plan and to discuss their conclusions with the Bank. A rational development of the sector is of high priority to Argentina's industrial development. Industry is the largest consumer of electricity and its consumption has been growing rapidly. iv. The project consists of the main elements of SEGBA's 1977-1981 transmission and distribution program and two studies to be carried out by the Government. It is estimated to cost US$495.3 million (equivalent), with a foreign currency component of US$152.6 million, US$115 million of which would be financed out of the proposed loan. The Bank loan would be disbursed for equipment purchased during the period 1977-1980 and would cover 13.9% of SEGBA's financial requirements for this period. The balance of 1977-1980 requirements would be met by internal cash generation (51.3%), Government contributions (4.4%) and by foreign and local bank loans (30.4%). The project would allow SEGBA to provide the power infrastructure needed to support the continued growth of industrv in its service area, Argentina's largest market for electricity. v. Procurement procedures would be substantially similar to those established for the previous loan to SEGBA. Contracts for equipment and materials to be financed out of the Bank loan will be awarded after international  - ii - competitive bidding. Argentine manufacturers will be granted a margin of preference of 15% over the CIF price of the lowest qualified foreign biddc , or the applicable customs duty, whichever is lower. In addition,some of the equipment and materials needed by SEGBA may be procured locally without international competitive bidding and with financing from sources other than the Bank. Such procurement,-however, will be limited to (i) a maximum of one-third of SEGBA's needs for each category of equipment and materials, and to (ii) a maximum price of 38% above the CIF price of the successful foreign bidder for the same category of equipment and materials. Use of this arrangement is expected to continue to be limited (it only accounted for 5% of equipment procurement under the previous loan). vi. Since the new Government came into power in March 1976, it imme- diately took steps to improve the financial situation of the public service enterprises and a 10% monthly cumulative electricity tariff increase was introduced for SEGBA with an additional 20% increase on July 1, 1976. The Government intends to maintain this 10% monthly increase until December 1976 and thereafter grant tariff increases which will permit SEGBA to achieve the 8% rate of return stipulated in its Concession Agreement, which in turn will result in a substantial improvement in its finances and a satisfactory contribution to the investment program from net internal cash generation. The Government has also recently appointed competent new management for SEGBA, which is well qualified to implement the project. vii. With the assurances obtained during negotiations, listed in Section 7, the project would form a suitable basis for a Bank loan to SEGBA of US$115 million equivalent for a period of 15 years including a grace period of three years.  APPRAISAL OF THE FOURTH BUENOS AIRES POWER PROJECT SERVICIOS ELECTRICOS DEL GRAN BUENOS AIRES (SEGBA) ARGENTINA 1. INTRODUCTION 1.01 The Government of Argentina has requested the Bank to assist in the' financing of a project which is part of the 1977-1981 expansion program of Servicios Electricos del Gran Buenos Aires (SEGBA), a Government-owned corpora- tion which together with Companla Italo-Argentina de Electricidad, S.A. (CIAE), a corporation controlled by Swiss interests 1/, is responsible for supplying electricity in the Greater Buenos Aires area. 1.02 The project proposed for Bank financing comprises the main elements of SEGBA's ongoing transmission expansion program for the period 1977-1981, together with the entire distribution expansion program for the same period. These works will permit SEGBA to continue to provide the power distribution infrastructure required to support the continued growth of industry in its service area, which comprises Argentina's largest market for electricity. Also included in the project proposed for Bank financing are studies to be carried out by the Government with the assistance of consultants. The estimated cost of the project is US$495.3 million (equivalent), including a foreign component of US$152.6 million, part of which would be financed by the proposed loan of US$115.0 million. SEGBA hopes to arrange cofinancing from foreign sources for the balance of the foreign exchange requirements of the project. 1.03 The Bank has made four loans in the Argentine Power Sector: three to SEGBA and one to HIDRONOR, S.A. (Hidroelectrica Norpatag6nica Sociedad An6nima). The first loan to SEGBA (308-AR) for US$95.0 million was made in January 1962, to complete the Costanera thermal station and expand transmission and distribu- tion. The second loan (525-AR) for US$55.0 million was made six years later, in January 1968, to help finance further expansion of SEGBA's generation, transmis- sion and distribution facilities. A third loan (644-AR) for US$60.0 million was made in November 1969 to help finance SEGBA's 1970-72 expansion program. 1.04 The physical execution of the three SEGBA projects financed by the Bank was satisfactory. The third project was completed in-1973, with a delay of approximately one year. One of the major long-term objectives of these loans has been the building of SEBGA into an efficient and financially sound utility. Unfortunately success in this direction has been limited. SEGBA suffered a severe setback in 1964-1966 due to Government interference, which led to deteriora- tion in SEGBA's financial position and delayed its expansion. However, after a new management was appointed in mid-1966, significant progress was made in the organization, effectiveness and finances of SEGBA. 1/Conversations between the Government and CIAE are underway to explore She possibility of the acquisition by the Government of a controlling interest in CIAE.  -2- 1.05 History repeated itself in 1971 when the Government took over management of the company. SEGBA's finances deteriorated dramatically when it was not permitted to raise tariffs to keep pace with increased costs. This led to a sig- nificant slowdown in SEGBA's expansion program and a financial situation where it- could no longer cover annual interest payments out of income. However, it is expected that SEGBA's finances will improve following tariff increases authorized by the Government in 1976 (para. 2.14). The new management appointed in July 1976 is expected to bring SEGBA back to its previous efficiency of the period 1966-1971. 1.06 The loan to HIDRONOR (577-AR) for US$82 million was made in December 1968 to help finance a hydroelectric project about 1,100 km southwest of Buenos Aires, comprising the first stage of the El Chocon-Cerros Colorados works. In January 1973, an agreement amending the loan agreement expanded the project to include the second stage of the El Chocon-Cerros Colorados works. After initial problems with the turbines at El Chocon and the transmission line from El Chocon to Buenos Aires, the initial project can now be considered to be running satisfact- orily. The enlarged project is expected to be completed in 1977-1978. 1.07 HIDRONOR, SEGBA and other utilities making up the Argentine power sector have developed considerable expertise within their spheres of activity. However, organization, regulation and planning at the sector level need to be strengthened substantially. The current authorities have recognized this need and the proposed Bank loan would support the necessary studies. 1.08 A mission composed of Messrs. Alan A.M. Onslow and Renato E. Salazar visited Buenos Aires in September/October 1974 to appraise the project and SEGBA's expansion plans. A reappraisal mission composed of Messrs. Claude Besse and Manfredo Linder visited Buenos Aires in June/July 1976. This appraisal report is based on the findings of both Bank missions and on the information supplied by SEGBA.  -3- 2. THE POWER SECTOR 2.01 The fragmented organization of the Argentine power sector and the lack of effective arrangements for central regulation and planning, have resulted in a poorly conceived generation investment program. The present authorities have decided to carry out a power sector organization study and to develop a national power plan which will enable the country to make the most rational use of its energy resources. Together with improved pricing policies for power and fuel the implementation of the recommendations of these studies can be expected to lead to sound future development of the sector. Energy Resources 2.02 Argentina depends heavily on petroleum and natural gas which accounted for 85% of total primary energy consumption in 1975. The Govern- ment plans to reduce this proportion by expanding the production of nuclear energy, hydroelectricity and possibly coal. The electric power sector could make an important contribution to this objective, since the possibilities of substitution of petroleum in other major energy-consuming sectors are limited (electric energy accounted for 23% of total energy consumption in 1975). It will, however, be difficult to achieve improvements in the energy consumption structure without adequate planning of the expansion program for the whole energy sector and in particular of the power sector. 2.03 Argentina is well-endowed with indigenous energy resources (Annex 1), which are, however, relatively high-cost. The hydroelectric potential is sizeable but only some 4% of this resource has been developed. Projects totaling another 8% of the known potential are under construction. Coal could also become an important source of energy, especially for power generation, and the Government intends to decide shortly on the investment program necessary to increase produc- tion, which would permit switching some existing and future thermal plants from oil to coal. At present Argentina imports about 11% of its petroleum and 15% of its natural gas requirements, at a cost which is expected to reach US$450 million in 1976. The Government intends to try to make the country self-sufficient by intensifying the exploration and production of oil and natural gas through the award of exploration contracts to international firms. Sector Organization 2.04 The power sector is, in theory, regulated by the Secretarla de Energia, which is responsible for planning, granting concessions to public utilities and self-suppliers and approving tariffs. In practice, however, the Secretaria de Energia has lost much of its authority to other branches of Government and to the larger provincial utilities, with serious effects on the sector. The utilities subject to the Secretaria's effective control are CIAE, HIDRONOR, SEGBA and Agua y Energia Electrica (AyEE - the Federal water and power authority). However, as noted in Annex 2, some of their investments have been decided by other branches of Government without reference to the requirements for rational development of the power sector.  -4- 2.05 The Secretaria de Energia plays a marginal role in the decisions of the Comision de -. Cuenca del Plata, CONCAP, a body which coordinates Argentina's participation in international projects with Bolivia, Brazil, Uruguay and Paraguay. This commission is under the auspices of the Ministry of Foreign Affairs and, in consequence, its decisions have been taken chiefly on the basis of foreign policy conisiderations. At present, the principal sector activity of CONCAP is through its participation in Comision Tecnica Mixta del Salto Grande (CTMSG - the Uruguayan- Argentine binational authority in charge of building and operating the hydroelectric system of Salto Grande); and Entidad Binacional Yacyreta-Apipe (EBY - the Paraguayan- Argentine authority in charge of the planning, construction and operation of the future Yacyreta-Apipe hydroelectric project on the Parana river). 2.06 The Secretaria de Energia has no practical influence on the activities of the Comision Nacional de Energfa At6mica (CNEA - the national nuclear energy commission) which is in charge of building and operating nuclear power plants and reports directly to the President of Argentina. 2.07 The two major provincial electric companies controlled by the respective provincial Governments are Direcci6n de Energla Electrica de la Provincia de Buenos Aires (DEBA - serving a part of Buenos Aires province); and Empresa Provincial de Energia de C6rdoba (EPEC). The Secretarla de Energia has no formal influence or control over these and other smaller provincial utilities, e.g., it has no voice in their investment decisions nor does it approve their tariffs. Power Market 2.08 Argentina is a highly electrified country and at present 80% of the population have access to electricity. The per capita consumption is 991 kWh (1975). The Greater Buenos Aires region is 90% electrified with a per capita consumption of 1,170 kWh (1975). The main consumer categories are industrial and residential, accounting for 43% and 32% respectively of total consumption of public-service electricity. Industrial consumption is the fastest-growing category. Approximately 700,000 rural dwellings are without electric service, and a rural electrification plan is currently under execution (Annex 2). 2.09 In 1975, public service generation was 24,554 GWh compared with 16,800 GWh in 1970. Captive generation was 4,900 GWh, practically unchanged since 1970. Total installed capacity in Argentina in 1975 was 9,280 MW of which about 2,000 MW correspond to captive plant. 2.10 A proper long-term sales forecast for the power sector has yet to be prepared. However, it is clear that the projection adopted by the previous authorities (implying a growth of 11.5% p.a. for the period 1976-1986) was unrealistic. A reasonable forecast for demand growth in the central interconnected system of Argen- tina (Greater Buenos Aires, Litoral, Buenos Aires South,-Comahue and Cordoba) is a grow, of 0% for 1976, 5% for 1977 and 8% p.a. thereafter. A maximum growth alternative as suggested by the Secretaria de Energia would be 0% growth in 1976, 5% in 1977, 8% in 1978 and 10% p.a. thereafter. Expansion Program 2.11 The main items of the generation expansion program of Argentina which are under construction at the moment are shown in Annex 2. This investment  - 5 - program is a result of the fragmented decision-making which has characterized the power sector in the past and of the unrealistic sales forecast adopted by the previous authorities. It will result in substantial. surplus generating capacity until 1985, at considerable cost to the economy. 2.12 In view of this situation, the present authorities have reviewed all outstanding commitments for major generation and transmission projects to determine the possibility of delaying or cancelling them. A project in which HIDRONOR recently started construction (Alicura), will be deferred for the present. No new national projects will be started until the sector's priorities have been defined (para.2.13) International projects will be discussed with the Governments concerned in order to develop solutions compatible with the national interests of all countries involved. Future of the Sector 2.13 The present Government is fully aware of the need for improvement in the sector's structure and has,therefore,decided to carry out a national power sector organization study and to prepare a national power expansion plan based on the least-cost program for expanding generation and transmission, and agreed to discuss the conclusions of these studies with the Bank. To carry out the studies the Argentine authorities intend to retain individual international experts (to be financed under the proposed loan) to assist in certain specific aspects where national expertise is lacking. Furthermore, the Government has agreed not to approve any major new investment in generation and transmission until the national power expansion plan is prepared. Tariffs and Asset Revaluation 2.14 On taking office in March 1976, the present Government took immediate action to deal with the deteriorated finances of all public service enterprises and to bring user charges in line with costs. In this connection, SEGBA was authorized to raise its tariffs 10% monthly from April 1976 (a 20% additional increase was authorized in July) and the Government intends to continue this policy until becember 1976 when it is expected that SEGBA will obtain the 8% rate of return on net re- valued assets originally specified in its Concession Agreement. Similarly, AyEE was permitted to raise its tariffs in monthly increments of 15%. The Government also intends to raise the tariffs for bulk supply by HIDRONOR and CNEA's Atucha nuclear power plant to provide an 8% rate of return on investment by end 1977 (see Annex 8). In addition, the Government plans to increase prices for fuel used in electricity generation (at present only 25% of international levels), gradually, so that by end- 1978 they approximate 75-80% of international prices. 2.15 There is no consistent approach to revaluation of power sector assets and this may result in inconsistant pricing of electricity by different utilities, which may lead to a misallocation of resources. As part of the planned sector organization study,the Government intends to carry out a study to develop a uniform methodology for the periodic revaluation of the assets of all power utilities. Buenos Aires-Litoral Region 2.16 Argentina's principal power market is located in a region covering the city of Buenos Aires and parts of the Provinces of Buenos Aires, Entre Rlos and Santa Fe. This area,referred to as the Buenos Aires-Litoral region, includes 57% of the country's population and accounts for 70% of total electric power consumption.  -6- 2.17 The regionis served by AyEE, CIAE, DEBA, HIDRONOR and SEGBA. The main sources of generation are the AyEE thermal stations at Santa Fe, Rosario and San Nicolas, the SEGBA and CIAE thermal stations in Buenos Aires, CNEA's Atucha nuclear station, and HIDRONOR's El Chocon hydroelectric station. In 1979, the hydro power plant of Salto Grande operated by CTMSG will also start serving this region. 2.18 To ensure the most economical use of faci1ftties to meet load conditions, energy produced by these utilities is subject to a central dispatching system, Despacho Unificado de Carga (DUC), coordinated by AyEE. This is consistent with agreements included in the loan documents of previous Bank loans to the power sector, which provide for central control of the generating plants supplying the Greater Buenos Aires area. These agreements have been repeated in connection with the proposed loan. Greater Buenos Aires Subregion 2.19 Within the Buenos Aires-Litoral Region, the city of Buenos Aires and 31 surrounding municipalities of the province of Buenos Aires contain 70% of the population and account for 71% of the consumption of electric power. This power is distributed by SEGBA and CIAE, which in 1976 had an installed generating capacity of 2,971 MW, all thermal (see AnneK 3 for details). SEGBA is the principal supplier and its concession covers the whole subregion. CIAE's concession area (which over- laps with that of SEGBA) includes one third of the city of Buenos Aires and four of the remaining municipalities. In addition to their participation in the DUC system, SEGBA and CIAE have been coordinating their investment programs to avoid the duplica- tion of facilities which might otherwise result from their overlapping concession areas, in accordance with a provision of previous loan agreements which has been repeated under the proposed loan. 2.20 SEGBA and CIAE served 3.1 million consumers in 1975 (of which 2.7 million by SEGBA) and sold 10,300 GWh (of which 8,800 GWh by SEGBA). Captive plants in the subregion generated 1,400 GWh in 1975, which is relatively large. These plants were installed by many industrial and commercial consumers due to the power shortages of the 1950s and early 1960s, but as a result of SEGBA's ability to provide more reliable service their output has stagnated since 1970. Service to Low-Income Groups 2.21 The low-income population of the Greater Buenos Aires area has grown very rapidly due to immigration from rural areas and neighboring countries and large shanty towns have developed. These shanty towns have no urbanization infrastructure and many of these dwellings are connected to the nearest power line through illegal hook-ups which present serious problems of safety, in addition to financial losses to SEGBA. 2.22 SEGBA has estimated that about o50,000 persons live in 70,000 dwellings in 110 different shanty towns. SEGBA intends to reach agreements with the municipal- ities, where these shanty towns are located, on a plan which would consist of selling energy to the municipality in bulk for distribution within each shanty-town.  - 7 - 2.23 There are about 25,000 dwellings corresponding to new low-cost housing developments without legal electric service. SEGBA intends to connect these new consumers during the next three years with an investment of about US$6.0 million. This would form part of the project.  -8- 3. THE BORROWER Legislation 3.01 SEGBA, the proposed borrower is a corporation formed in 1958 to take over most of the assets and responsibilities of the Compai'ila Argentina de Electricidad (CADE). Its shares are wholly owned by the Argentine Government through the Corporacion de Empresas Nacionales (CEN), a holding company for most government-owned enterprises. Although this holding company has legal powers governing the general policies of its subsidiaries, the latter have retained their autonomy in carrying out their day-to-day business. The present Government is studying the future of CEN. One possible alternative would be to do away with it in order to streamline the relationship of public sector enterprises with the Government. 3.02 SEGBA's Concession Agreement (signed February 1, 1962 and approved by Decree No. 1247 of February 8, 1962) gives the company responsibility for electricity supply in the metropolitan Buenos Aires area on a non-exclusive basis (para. 2.19) and for an indefinite period. The Concession Agreement establishes in great detail the rights and obligations of SEGBA and the Government, including the basis for setting power rates (para. 3.12). 3.03 SEGBA's Bylaws, as approved in 1961 in connection with Loan 308-AR, were intended to ensure responsible management, efficiency and financial viability. Considerable progress towards these objectives took place in the period 1966-70. However, the political and economic conditions in the country during the following five years, led to Government interference in SEGBA's internal affairs, accompanied by considerable management instability. The Bylaws were amended in 1972 to reflect the Government's intention to exert a greater degree of control over the company. This action was reversed with the approval of new Bylaws in July 1976, which are basically the same as those of 1961 and are adequate. As under previous loans, it was agreed that any, substantial amendment of either the Bylaws or the Concession Agreement which shall adversely and substantially affect SEGBA's operations or its financial condition would constitute an event of default. Organization and Management 3.04 SEC-BA has a Board of Directors of eight members, appointed by the Government through CEN. The Board chooses two of its members to serve as President (Chairman of the Board) and Executive Vice President (General Manager). The Executive Vice President is responsible for day-to-day manage- ment. He is assisted by a committee of six department heads (Administration and Finance; Planning; Personnel; Procurement; Commercial; and Technical). 3.05 During the execution of SEGBA's Third Project, considerable improve- ments were introduced in the Commercial and Technical Departments. Customer service, meter reading, collections not handled by mail or through banks, construction of low voltage lines, installation of transformers and connection of new customers have been decentralized. This required a major reorganization and has resulted in greatly improved service and operation. A new system of reporting outages in the generation, transmission and distribution system is being implemented. This should be completed by 1978 and would permit management to monitor the quality of service provided by the utility.  -9- 3.06 There has been improvement, too, in SEGBA's Planning Department which is now self-sufficient and is not expected to require the services of outside consultants. The Personnel and Procurement Departments have an adequate organization and perform efficiently. In order to meet its financial goals, it is necessary that SEGBA improve its Administration and Finance Department, particularly in the area of financial plannina. There is also need to accelerate its accounting procedures and budget controls so that the monthly reports are available on time. The new management is aware of this situation and is studying different alternatives for achieving these goals. 3.07 The new Government appointed a new Board of Directors which took charge of SEGBA's management in July 1976. The current Executive Vice President is a capable engineer with more than 30 years' service with SEGBA and its predecessor utility. Before resigning in 1972, he held the post of technical manager. The newly appointed managers and assistant managers are experienced SEGBA staff members and constitute a competent team which is well qualified to implement the project. It had been agreed under previous loans that the Bank would be consulted prior to the appointment of a new Executive Vice President. This provision has proven to be of limited value and it was agreed to amend previous loan agreements to delete it. Employment 3.08 In previous appraisal reports it was indicated that SEGBA faced major problems due to employment levels far in excess of those usual for the sector. These resulted from the unusual strength of SEGBA's labor union. Though there was significant improvement in the period 1966-7l the situation worsened during recent years. The new economic authorities and the new management of SEGBA are fully aware of this problem and intend to reduce substantially the number of employees from the present figuLreof 26,300 to 22,800 in 1978. This means increasing the number of customers per employee from 102 in 1975 to 126 in 1978. This goal is reasonable and is among the performance indicators to be monitored during the execution of the project (para. 5.06). Training 3.09 SEGBA has a very comprehensive training program and maintains two centers to fulfill the majority of its training needs. Other specialized training is carried out at other local institutions (technical Universities, etc.) and for very specialized subjects (for graduate engineers) use is made of the training facilities of Electricite de France and of suppliers of sophisticated equipment. SEGBA intends to train 2,000 persons during the years 1977-1978 in subjects varying from low-tension networks maintenance to load dispatching. Accounting and Audit 3.10 SEGBA's accounting, internal audit and data processing are satis- factory. Nearly all commercial and accounting processes as well as personnel records, stores inventories and procurement are computerized. The monthly financial statements and the budgetary reports have been delayed in recent months. The necessary steps are being taken to speed up their preparation and ensure their timely availability.  - 10 3.11 Until 1973 SEGBA had its accounts audited annually by independent accountants acceptable to the Bank. In 1974 SEGBA was required to have its accounts audited by CEN and it cancelled its arrangements with its former auditors. CEN, which also audited SEGBA's 1975 accounts, cannot, as the utility's owner,be considered independent. For 1976 and future years, SEGBA agreed to employ independent auditors acceptable to the Bank, and to forward certified copies of the annual financial statements together with the .auditor's detailed reports to the Bank within four months of the end of each financial year. SEGBA has indicated that it intends to appoint as auditors a firm of public accountants. Power Rates 3.12 As explained in Annex 4, the Concession Agreement provides that SEGBA's rates should generate revenues sufficient to produce a return of 8% on its revalued rate base and contains detailed provisions on filing for tariff increases, recovery of shortfalls in earnings and interim rate increases. In 1969 SEGBA earned more than 8% and so, in accordance with the Concession Agreement, rates were reduced by 1.3% effective January 1, 1970, to compen- sate for the excess earnings. This was the last time that the Concession Agreement was observed. As noted in para 6.02, SEGBA has failed to earn its stipulated 8% return since 1970 and, although it submitted applications for rate adjustments the Government did not grant the full increases requested. The provisions which call for recovery of prior years' shortfalls and interim rate increases to offset rising costs, were not applied. 3.13 As noted in para. 2.14 the new Government has taken steps to improve SEGBA's financial situation by raising its tariffs. SEGBA agreed to request and the Government to grant tariff increases which will permit SEGBA to obtain in 1977 and thereafter the 8% rate of return as stipulated in the Concession Agreement. Tariff Structure 3.14 Details of SEGBA's tariff structure are shown in Annex 4. The tariff schedule for residential consumers is based on a low, "social" rate for small consumers (less than 60 kWh/month), with progressively higher charges to larger residential users. Tariffs for large industrial consumers include a charge related to maximum demand at the time of the system peak with reductions for accepting supply at higher voltages and for off-peak consumption. The latter are important factors in encouraging more economic patterns of consumption, and SEGBA should consider strengthening them. 3.15 SEGBA should also consider the possibility of introducing a more elaborate tariff structure for medium-sized commercial and industrial consumers with a maximum demand of less than 50 kW. Such consumers are presently included in a "general service" category which does not provide any incentive for high voltage supply or off-peak consumption. 3.16 The improvements suggested above should be introduced gradually, in connection with the annual rate adjustments. The Government and SEGBA  - 11 - have agreed to carry out a study of SEGBA's tariff structure with a view to identifying areas in which changes are required to induce improved patterns of consumption and to discuss its conclusions with the Bank.  - 12 - 4. TIIE PROJECT 4.01 The next step in the expansion of the generating capacity in the Buenos Aixes system is a 310 MW steam unit at SEGBA's Costanera station to be commissioned in 1980. A new 350 MW steam unit was commissioned in June 1976. No further expansien of generating capacity by SEGBA or CIAE is presently envisaged and the incremental requirements of the Greater Buenos Aires area will have to Le met by increased imports of energy from other utilities (see Annex 3). 4.02 To receive the imported power, interconnect local generating plants arid facilitate distribution, SEGBA has planned a ring around the periphery of the Greater Buenos Aires area,initially to operate at 220 kV (double-circuit) and to be transformed (as part of the project) to a single-circuit line at 500 kV. Another single-circuit line at 500 kV would also be added. This ring (map 11442R) will link the Costanera station, which in turn is interconnected with the other SEGBA and CIAE generating stations along the Rio de la Plata, with the Ezeiza and Rodriguez substations,which are receiving points for imported power. 4.03 This ring (500 kV and 220 kV) is planned to feed a number of 220 kV substations, which in turn feed the subtransmission network of 132 kV. This net- work (132 kV) feeds ,he mid-tension system (mainly 13.2 kV with some 33 kV and 27.5 kV subs:ations). The project includes expansion of ten 132 kV substations anid the construction of 21 new 132 kV substations. 4.04 The mid-tension system feeds the low tension network operating at 380/220 volts, 50 Hz. This network is under continuous expansion due to the increase of load in areas under service and to the extension of service to new areas (approximately 65,000 new connections per year). Project Cost 4.05 The project includes the main elements of the ongoing transmission expansion program for the period 1977-1981, to be commissioned before mid-1981 together with SEGBA's distribution expansion program for the same period and the studies to be carried out by the Government (para. 2.13). It is described in detail in Annex 6. The following are the estimated costs of the project:  - 13 - US$ x 103 $a x 10.6 Local Foreign Total Local Foreign Total A. Project Works Transmission Lines Equipment 6,402 12,870 19,272 1,600 3,218 4,818 Civil works and erection 25,-876 5,462 31,338 6,469 1,365 7,834 Engineering and Administration 17,714 - 17,714 4,429 - 4,429 Subtotal 49,992 18,332 68,324 12,498 4,583 17,081 Substations Equipment 8,273 44,678 52,951 2,068 11,170 13,238 Civil Works and Erection 37,489 7,679 45,168 9,373 1,920 11,293 Engineering and Administration 39,936 - 39,936 99,840 - 9,984 Other 523 - 523 131 - 131 Subtotal 86,221 52,357 138,578 21,556 13,090 34,646 Distribution Equipment 16,945 25,416 42,361 4,236 6,354 10,590 Civil works and Erection 62,785 12,860 75,645 15,696 3,215 18,911 Engineering and Administration 33,284 - 33,284 8,321 - 8,321 Subtotal 113,014 38,276 151,290 28,253 9,569 37,822 Communications and Load Dispatch Equipment 2,944 4,725 7,669 736 1,181 1,917 Civil works and Erection 1,584 324 1,908 396 81 477 Engineering and Administration 5,140 - 5,140 1,285 - 1,285 Subtotal 9,668 5,049 14,717 2,417 1,262 3,679 Total Base Cost 258,895 114,014 372,909 64,724 28,504 93,228 Physical Contin. 7,907 4,133 12,040 1,977 1,033 3,010 Price Contingency 75,773 34,032 109,805 18,943 8,508 27,451 Total 342,575 152,179 494,754 85,644 38,045 123,689 B. Consultants Base cost 80 370 450 20 93 113 Contingencies 10 40 50 3 10 12 Subtotal 90 410 500 23 103 126 Grand Total 342,665 152,589 495,254 85,667 38,148 123,815 4.06 These estimates were prepared by SEGBA and are based on prices corresponding to mid-1976 as quoted by different manufacturers. Physical contingencies were estimated at 2% for all project components, except