Nicaragua - Eighth Power and Earthquake Reconstruction Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5144 PROJECT PEIRFORMANCE AUDIT REPORT NICARAGUA: EIGHTH POWER AND EARTHQUAKE RECONSTRUCTION (PART C) PROJECTS (LOAN 840-NI AND CrEDIT 389-NI) June 19, 1984 Operations Evaluation Department This document has a restricted distributim and may be used by recipients enly in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank autherlation. IFOR OFFCIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT NICARAGUA: EIGHTH POWER AND EARTHQUAKE RECONSTRUCTION (PART C) PROJECTS (LOAN 840-NI AND CREDIT 389-NI) TABLE OF CONTENTS Page No. Preface .......................................................... i Basic Data Sheets ................................................. iii Highlights ........................**........................ v PROJECT PERFORMANCE AUDIT MEMORANDUM - I. PROJECT SUMMARY ........................... 1 II. SUPPLEMENTARY COMMENTS ........ ... ........... 5 III. CONCLUSIONS ............. .oo ......... ....... 9 ANNEX 1, PPA1 - Alternative Power Expansion Program and the Sensi- tivity of Rates of Return to Changes in Fuel Cost 11 APPENDIX A Comments Received from the Borrower ................... 12 PROJECT COMPLETION REPORT I. Background ..................................... 17 II. Project Preparation and Appraisal . . .............. 18 III. Implementation and Costs of the Projects 22 IV. Project Justification .................... ........... 28 V. Financial Performance........ ................... .. 30 VI. Institutional Performance .... ................ 35 VII. Lessons to be Learned .......................... 35 Annexes: 1. Summary of Bank Lending for Power .......... 37 2a. Major Covenants of the Loan, Joint Financing, and Guarantee Agreements for the Eighth Power Project 38 2b. Major Covenants of the Credit and Project Agreement for Part C of the Earthquake Reconstruction Project 40 3. Actual and Forecast Project Timetable for the Eighth Power Project .................... 41 4. Price Deflator Index for Costs of Eighth Power Project 42 5. Appraisal and Actual Cost of Eighth Power Project and Sources of Financing ........................ 43 6. Appraisal and Actual Cost of Eighth Power Project o........ 44 7. Actual and Forecast Loan Allocation for Loan 840-NI ...... 45 8. Actual and Forecast Loan Allocation for Credit 389-NI .46 9. Actual and Forecast Schedule of Loan Disbursements for Loan 840-NI ............... .... 47 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. TABLE OF CONTENTS (Continued) Page No. 10. Actual and Forecast Schedule of Loan Disbursements for Credit 389-NI ...................................... 48 11. Actual and Forecast Sales, Purchases, and Generation by Type of Plant ...................................... 49 12. Actual Internal Rate of Return (IRR) ..................... 50 13. Actual and Forecast Key Financial Ratios, 1972-78 ........ 51 14. Actual and Forecast Income Statements, 1972-78 ........... 52 15. Actual and Forecast Sources and Applications of Funds 1972-78 .................................o.-.... 53 16. Actual and Forecast Balance Sheets, 1972-78 .............. 54 PROJECT PERFORMANCE AUDIT REPORT NICARAGUA.: EIGHT POWER AND EARTHQUAKE RECONSTRUCTION (PART C) PROJECTS (LOAN 840-NI AND CREDIT 389-NI) PREFACE This report presents the results of a performance audit of the Eighth Power and Earthquake Reconstruction (Part C) Projects in Nicaragua for which the Bank Group provided a loan of US$24.0 million (840-NI) in 1972 and a credit of US$5.0 million (389-NI) in 1973. Of the loan amount, US$23.9 million was disbursed by March 31, 1980 and the balance cancelled. The credit was fully disbursed by September 30, 1979. The steam plant, with two units of 53-MW each, which greatly increased the national generation capaci- ty, constituted the main component of the eighth power project. The project also included: a 230 kV -transmission line which interconnected the Nicaragua-Ronduran systems; other transmission lines and substations for expanding the domestic distribution networks; and the services of management consultants for reviewing INE's 1/ management system. Further, following the 1972 earthquake, the IDA credit (389-NI) financed a "shopping list of distribution materials for rehabilitating the INE system, and the Corporation's 1973-74 work-program. Project objectives included the least-cost supply of electricity to both2l Nicaragua and Honduras through the expansion of an interconnected system, and the development of Nicaragua's institutions. The report consists of a Project Performance Audit Memorandum (PPAR) prepared by the Operations Evaluation Department (OED), and a Project Completion Report (PCR) prepared by the Latin America and the Caribbean Region' s Energy 1 Division. The PCR is comprehensive and has referred to INE's management as a problem area. The audit, which is OED's first report on the power sector in Nicaragua, has commented on the risks of transnational projects requiring for their success special institutional, pricing and financial arrangements. It has also emphasized the need for developing a flexible power expansion program. 4 1/ Before the civil strife, which ended in 1979, Instituto Nicaraguense de Energia (IVE) was called Empresa Nacional de Luz y Fuerza (ENALUF). In this report, the national power corporation, which is the borrower, is referred to as INE or the Corporation. 2/ Appraisal Report No. PU-92a, Annex 6, para. 14. The PCR is based on information obtained from INE, Bank records and files. Further, Bank staff associated with the project have been inter- viewed. In conducting the audit, OED has depended on similar sources3/ and on recent supervision reports prepared by the Region on the Ninth Power Project (Loan 1402-NI). Following standard OED procedures, a copy of the draft report was sent to the Government and the Borrower. INE's comments are reproduced in Appendix A. They are reflected in the report with footnotes referring to the Borrower's position. 3/ Including the Appraisal Reports No. PU-928-NI dated June 2, 1972 and No. 1342-NI dated April 20, 1973; the President's Reports No. P-1087-NI of June 12, 1972, and No. P-1237-NI dated April 23, 1973 and the Loan and Guarantee Agreements dated June 28, 1972 and June 6, 1973; corre- spondence vith the borrower; internal Bank memoranda on project issues contained in Bank files; and the minutes of the Board Meeting at which the projects were approved. -11-;-\-i-&!’」i-／『「「「！-―『；/&;----;-&--&;;--.../, & & . .& & ！떼 & 뱁 & · & & ■ . . . · & . r,.1. ■ 」 . L ．「．, & … & & , . · . ㅑ· . . · . PROJECr PERPOW00 AM= Z"ZC DMAJ NICARAM: IMITUTO NICARACCOM DR ZMMXA (Xn) AIR RECONSTERMIM FAWZCT. Part C (CREDIT 389-NX) MY PRWZCr DATA /s. Total Project Cost Appraisal Actual (excluding fl charges) --- r.7' 6.7(m timsted) CM uMlon equivalent) Overrun (2) - Credit Amount 5.0 5.0 (including fluan charges) (US$ mil1ion equivalent) Disbursed 5.0 5.0 Anwalled. - - Repaid to 02/26/82 No" Date Physical Components Completed 2974 1974(matimated) Proportion of Use Overrun (Z) - CUMULATIVE ZSTDUM AND ACMAL DISBUISMEM (M million) 1973 1974 1975 1976 1977 1978 2979 (1) Appraisal 3.5 3.0 5.0 5.0 5.0 5.0 5.0 (11) Actual 0.2 2.8 3.1 4.4 4.4 4.5 5.0 (U) as Z of (L) 56 62 as as 90 100 HISSIM DATA no. of No- of Staff Date of Type of Mission Konth/Tear Week Persons Weeks Report Consultation and Reconnaissance 01/73 1/2 1 1/2 01/10173 01/11173 Appraisal 01/73 1/2 1 1/2 01/25/73 Supervision 1 10/73 1-1/2 2 3 10/29/73 Supervision 11 /b 10/74 2 1 2 11/05/74. 01/10/75 SupervIsioninth 02/75 1-1/2 2 3 03/24/75,- 8 OTHER. PROJECr DATA Item Original Rev1slon Actual First Hention 111 pass - 12/27/72 Credit Application - 01/25173 Negotiation - - 04/17-20/73 Board Approval 05/08/73 - 05/00173 Credit Agreement Date - - 06/06173 Effectiveness - - 08/07/73 ClosLing Date 12/31/76 06/30/79 09/30/79 Borrower - Covezzment Executing Agency - INK Fiscal Year of Executing Agency - Calendar Year Ponow-on Project - Ninth Power Project COUNTRY EICHANCE RATE Name of Currency Cordoba ExchmW Rate At appraisal US$1.00 - Cs 7.00 Intervening year average USSL.00 - C$ 7.00 Completion Date US$1.00 - CS 7.00 /a SAR Included no estimate of internal economic return of project, financial performance, or institutional performance. A Supervision missions were also supervising Eighth Power Project (840-NI). NIGARAGUA: EIGHTH POWER AND EARTHQUAKE RECONSTRUCTION (PART C) PROJECTS (LOAN 840-NI AND CREDIT 389-NI) HIGHLIGHTS The eighth power project in Nicaragua was transuational in scope. It was financed by INE, the Bank, the Central American Bank for Economic Integration (CABEI), and other aid agencies. Based on the expectation of high rates of demand growth in both Honduras and Nicaragua, and of the con- struction of the Cajon project by 1978, the loan financed two 53-MW steam units, a 230 kV transmission line to the Nicaragua-Honduran border (70 km.), a transmission ring around Managua, other transmission lines and substations for the domestic market, and the services of a management consultant. A corresponding project in Honduras provided complementary interconnection facilities. Although the transmission line to the Honduran border was built, the transnational trade in electrical energy did not develop as envisaged in the appraisal report, since the electricity demand in Honduras did not develop as expected. The project illustrates "the risks of justifying a major project component on the carrying out in another country of a second project, for which not even a feasibility study exists" (PCR, para. 7.1.1). However, the transmission line is now being used by Honduras to purchase energy from Costa Rica. INE considers the ensuing benefits to be satisfactory (Appendix A, para. 2). The PCR draws a number of lessons from project experience. On the institution-building issue it states that when an agency is apathetic to improving its operational efficiency, the Bank should exercise extra care in "making new loans until there is a more receptive attitude on the part of the borrower's management" (PCR, para. 7.2.1). On design and supervision, it recommends that when the two functions are undertaken by the same consultant, the Bank should consider a covenant requiring design review by another experienced consultant (PCR, para. 6.3.1). And on procurement it counsels that for the projects of the size of the steam plant "borrowers should seek international competitive bidding for the project components, as there are normally substantial savings." In the present case, however, INE's inability to manage the project, (PCR, para. 3.6.1), could have outweighed any possible savings in cost. Project. implementation suffered from: the consequences of the 1972 earthquake (PPAM, para. 8); delays in the interconnection agreement between Nicaragua and Honduras, the contract being a condition of loan effectiveness; delays in procurement and equipment deliveries; and difficulty in arranging loans to finance the cost-overruns on the project. The loan was closed in mid-1979, 27 months behind schedule and the credit in September 1979, some 33 months behind schedule. - vi - Several project modifications added to the cost (PPAM, para. 6). Further, because of worldwide inflation, implementation delays resulted In additional financial cost. In terms of constant prices, however, the origi- nal project turned out to be less expensive than shown in the appraisal raport (PCR, para. 3.4.3). According to the PCR, the project's economic rate of return is about 7% (PPAM, para. 9). Despite maintenance problems the two steam generators are being intensively utilized. The audit distinguishes between transnational schemes which aim at supplying least-cost power to two or more nations and those which attempt to promote international trade In electrical energy. It is the opinion of the audit that the success of the first group of transnational schemes depends on binding international agreements concerning: supranational authorities to co-ordinate the management of investment and operation of the interconnected system; equitable distribution of project risks among participating nations; and the price of electricity (energy and maximum demand). Should these conditions be unobtainable, the Bank must refrain from encouraging any single nation to bear a disproportionate share of the burden (PPAM, para. 29). In the present case the burden consists of the cost of excess generation capacity, of the underutilized transmission line, and the loss of opportunity to re-evaluate parts of the project in light of new developments, e.g. rapidly escalating fuel costs. In 'addition, the audit has emphasized the importance of a flexible power expansion program which should be, as far as possible, least-cost ex post as well as ex ante. The suitable management of power demand, which needs to be treated with caution, is one way of achieving this objective (PPAM, para. 22). Finally, considering major changes that have occurred In the energy sector and the economy, partly because of the 1979 civil strife, the prin- cipal sector issues need to be reassessed (PPAM, para. 30). PROJECT PERFORMANCE AUDIT HEMORANDUM NICARAGUA: EIGHTH POWER AND EARTHQUAKE RECONSTRUCTION (PART C) PROJECTS (LOAN 840-NI AND CREDIT 389-NI) I. PROJECT SUMMARY 1. The eighth power project, which was transnational in scope, has been financed by INE, the Bank, the Central American Bank for Economic Integration (CABEI) and other aid agencies. The project was part of a least-cost development sequence which included the construction of the Cajon hydropower scheme in Honduras by 1978, thus permitting the two nations to benefit from the low-cost hydropower. Considering the small size of the Honduran power market and the difficulty of exporting electrical energy from Honduras to El Salvador, Costa Rica and Guatemala, the Bank persuaded INE to study the advantages to Nicaragua of a Nicaragua-Honduran interconnection, involving a joint, interim, and least-cost generation and transmission pro- gram, including the electricity output from the Cajon hydropower project (PCR, para. 2.1.2). 2. As-originally defined, the eighth power project comprised two 50-MW thermal units; a 230 kV transmission line to the Nicaragua-Honduran border (70 km); a transmission ring around Managua; other transmission lines and substations for the domestic market; and management consultant services. The project objectives were to supply energy to the Nicaraguan consumers and to Honduras during the period 1974-78 at a cost lower than that from other sources of supply. 3. The Loan (840-NI) for US$24.0 million was approved in June 1972. Then, following the 1972 earthquake, which damaged INE's distribution net- works and headquarters building and caused the relocation of a large number of its customers, the Association approved, in May 1973, a US$5.0 million credit for the rehabilitation of existing installations, the extension of a distribution system to the provisional housinp area established near Managua, and the financing of the 1973-74 INE work-program. 4. - The loan was closed in mid-1979, 27 months behind schedule, and the credit in September 1979, some 33 months behind schedule. The residual loan balance amounting to $69,941 was cancelled on November 18, 1980. Because of implementation delays and the civil strife, the Bank postponed the closing date of the loan four times and that of the credit, two times. 5. Altogether, US$53.7 million were spent on the project, including $7.1 million for additional works. Thus the original project would have re- quired $46.7 million which was 35% more expensive than the appraisal estimate of $34.6 million. In terms of constant prices, the original project turned out to be less expensive than shown in the appraisal report; the actual cost of the project being $26.7 million, or 19.9% below the $33.4 million appraisal estimate net of price contingencies (PCR, para. 3.4.3). -2- 6. The following changes in project scope accounted for about 60% of the additional cost: (a) the increase in plant capacity from two 50-NW to two 53-NW units; (b) the construction of a worker's village (12,000 a2 building); an access road (8 km) to the thermal plant, and a transmission link between the thermal plant and the 69 kV line for the utilization of plant capacity before completion of the much delayed 230 W lines; and (c) the right-of-way, which escalated in cos* following the earthquake. There was, however, a reduction of work on the Managua transmission ring, reflecting the impact of the earthquake on the load growth pattern. 7. Factors which contributed to implementation delays were: (a) delays in the effectiveness of Bank-CABEI loan agreement, while waiting for processing by KfW of the project and of the CABEI loan application; (b) changes in bid specifications, because of the request of local contractors to subdivide civil works, and the KfW request to revise specifications; (c) a one-year delay in signing a design and supervision contract for the transmission line, the disbursement on this component being conditional on an interconnection agreement between Honduras and Nicaragua; and (d) strikes in Italy, slowing delivery to subcontractors. 8. As a result of worldwide inflation and additions to project scope, the cost of the project exceeded sources of finance identified at appraisal. Although the Bank refused to finance cost overruns, it helped the Corporation to secure a loan of $16.1 million in 1976 from the Venezuelan Investment Fund. 9. The completion report estimates the project's internal rate of return at 7.2% (Annex 12). This result is based on a realistic fuel cost estimate although it also assumes considerable improvement in plant utilize- tion from 169 GWh in 1981 to an average of 332 GWh 41uring 1982 - 2001 peri- od. The latter utilization rate requires well-maintained thermal plants, as well as a stable economy. Further, the rate of return is an under-estimate since it excludes the non-quantifiable consumers surplus, which could be sizeable. - 3 - 10. According to the appraisal report (para. 5.01, and Annex 5) INE's sales to local consumers were projected to increase by 13% a year during the 1971-76 period. Actual sales came close to these projectlqns; they grew at a 12% annual rate (PCR, Annex 11). The appraisal report also shows expected sales of 1:0 GWh of electrical energy to Honduras in 1975, rising to 260 GWh in 1977. However, after the completion of the Cajon project in 1978, Nicaragua was to switch from selling electricity to buying it ftum Honduras: 100 GWh in 1978, reaching a peak of 740 GWh in 1979, but falling to 70 GWh in 1985. These expectations about bilateral trades in electrical energy were not realized. 11. Because of the shortfall of international sales, the PCR considers the construction of the transmission line to the Honduran border to have been premature (PCR, para. 4.1.2). At appraisal the joint development program was found to be the least-cost in satisfying the expected load growth, at dis- count rates of up to 20%,1/ because of the assumed coordination of power expansion programs between Nicaragua and Honduras. The Cajon project in Honduras, which was expected to be operational in 1978, is rescheduled for completion in March 1985. Honduras will probably have surplus power of 300 GWh a year up to 1990 (PCR, para. 4.1.2). However, Nicaragua-Honduras interconnection is now being used by Honduras to purchase energy from Costa Rica. INE considers the ensuing benefits to be satisfactory 2/. 12. Because of the 1972 earthquake, the rapid escalation of fuel costs (1973), delayed tariff adjustments, recession, drought and civil strife, INE's financial rates of return fell below the covenanted rate of 9%. The earthquake affected sales and earnings during the 1973-1974 period. But owing to tariff increases of 1974-75, the Corporation's financial performance improved temporarily; the rate of return falling again to about 3.3% in 1977. The low rate was cuased by delays in the completion of thermal plants and severe drought which limited the electricity output from hydro plants. Chiefly because of improved hydrological conditions, the rate of return increased to 7.2% in 1978, but sagged in the aftermath of strikes, riots, and civil strife during 1979-80 (PCR, para. 5.3.2). 13. While increasing its electricity rates in January 1981, INE also introduced significant changes in the tariff structure. Although the system still needs to conform to the long-run marginal cost of electricity supply, which has been under study for some time, the 1981 measures have simplified the system and made it more equitable than the one previously in force. Moreover, according to the latest supervision report (December 23, 1982) the Corporation's collection efforts were impressive in 1981 and 1982. In sup- porting these efforts the Government has agreed to make advance monthly pay- ments for its electricity consumption, and to reduce the municipalities' indebtedness to the Corporation. Another favorable development is INE's actions to reduce the number of its redundant workers. Although the 1/ Appraisal Report No. PU-92a, page 10, paragraph 5.04. 2/ For INE's comments see Appendix A, para. 2. -4- Corporation's labor force increased by over 20Z in 1981, the Government and the Corporation became concerned about the trend and an 8% staff reduction was effected during the first ten months of 1982. These improvements and the lower than expected capital spending in recent years have strengthened IE's finances; the rate of return being 13.0% in 1981 and an estimated 11.2% in 1982. 14. Before the civil strife, INE was governed by its Constituent Law, as amended in April 1968 and November 1974. The 1974 amendment reflected the organizational recommendations of the consulting firm, prepared under InKEs eighth project. 15. The Corporation's top management had been strongly centralized, causing many difficulties. The top management dominated the Board. It did not delegate authority to staff and failed to coordinate responsibilities within INK. For example, the groups responsible for engineering planning, economic forecasting, and budget preparation used, concurrently, conflicting load forecasts. 16. The need for management reforms had become urgent given INE's expanded responsibility which resulted from the 1972 earthquake and the energy crisis. The recommendation of the management consultant did not improve the efficiency of top management. According to these recommendations the Executive President, while holding the position of the Chairman of the Board, was to continue to function as the Chief Operating Officer of the Corporation (PCR, para. 3.5.2). However, Eank staff were unsuccessful in their efforts to gain recognition of the need to improve efficiencyl/ (PCR, para. 3.5.3). 17. INE complained about the plant's poor design and deficient project supervision. The Bank staff have concurred with this assessment (PCR, para. 3.8.1). Problem areas included: the siltation of the cooling-water intake, the high operating cost of desalting plant, and serious water leakage from the roof of the thermal plant station. Moreover, although the machine shop and the warehouse facilities were built for direct loading and unloading of trucks, the low height of the entrance prevented trucks from having access to the area. According to INE, the civil works of the thermal plants were over-dimensioned. During design and construction of the project, INE's construction and engineering departments displayed serious weaknesses (PCR, para.- 6.2.1). 31 To relieve the Executive President of a part of his administrative burdens, INE appointed a General Coordinator, agreed to give him terms of reference acceptable to the Bank and to provide the Bank a reasonable opportunity to comment on any new appointee to that position. Assisted by the General Coordinator, INE's top executives were expected to attend better to policy formulation, interdepartmental coordination, training of staff, and development of team work. The General Coordinator resigned in 1978. But because of significant organizational changes in INE since the civil strife, the. Bank did not insist on a replacement. For INE's comments see Appendix A, paras. 3, 4, 5, 9(a), 9(b) and 9(c). - 5- 18. As for the earthquake reconstruction credit, the Bank staff con- sider that INE successfully executed emergency repair works and resumed service to the earthquake affected areas. The credit was intended to finance a shopping list" of distribution materials, which were to be used flexibly. INE repaired the Managua plant expeditiously but was slow in purchasing dis- tribution equipment. Although less than 1OZ of the $5.0 million IDA funds remained undisbursed or uncommitted by the end of 1974, disbursements dragged on for several years (PCR, para. 3.2.1). Moreover, INE did not maintain a job-order accounting system in 1973 and 1974, or a record of local expendi- tures. The final cost of the earthquake rehabilitation project (Part C) is, therefore, indeterminable. II. SUPPLEMENTARY COMMENTS 19. Through its nine loans to Nicaragua, the Bank has contributed to the financing of most of INE's generating capacities and transmission facilities 4/. Despite some delays and cost overruns, the first six projects have been completed successfully. This is also true of the seventh project, a 50 MW hydropower station, which was commissioned in 1972 although it encountered severe unforeseen hydrological problems. Thermal plants constructed under the eighth power project began to be used in December 1976 and April 1977, but they have experienced continuing technical difficulties, their operation and maintenance being very poor. The proceeds of the earthquake credit were used to rehabilitate the damaged power facilities and to construct the distribution network for serving the relocated population and commerce. Loan disbursements on the ninth power project, which is a transmission/distribution project, were completed in August 1983. 20. According to the appraisal report the consultants studied alterna- tive generation schemes for each system and selected least-cost programs for the two countries' expected load growth. These programs were the least-cost for each separate system. The eighth power project could also have supplied least-cost power to the combined Nicaragua-Honduran market if both nations had developed and operated a well-coordinated system. The advantages of a unified grid over separate systems include: a smaller reserve requirement, and a cheaper power because of the economy of scale and the more efficient use of the two nations' combined energy resources. The key to securing these advantages is a coordinated programming approach which would be, at the same time, flexible. The two ensuing paragraphs review such a programming approach in relation to Nicaragua's electricity needs and supply options and the contribution of the transuational component in making the program more flexible. 21. The appraisal report emphasizes the difficulties and uncertainties of projecting long-term load growth for the individual and combined systems. The eighth power project extrapolated the growth in electricity demand on the 4/ Appendix A, para. 8(b). -6- basis of the 19 65-70 trends5/. A more rigorous demand analysis could not be attempted probably because of the unavailability of data. Even if an in- depth analysis would have been undertaken, the results could not reflect the impact of earthquakes, civil strifes or energy crisis on load growth. There- fore, in a sector where the project lead time is long an uncertain demand forecast requires that the long-term load growth be treated with considerable skepticism. This suggests that several least-cost solutions might exist, one for each demand scenario. The power expansion programs have, therefore, to recognize the advantages of an adjustable program. Transnational schemes provide an opportunity for introducing some degree of flexibility. Thus in constructing a 230 kV transmission line to the border area, Honduras attempted to secure supply flexibility by retaining the option of purchasing INE energy until such time when the Cajon project would provide it with high returns6/. A related question is whether the Nicaraguan commitment under the eighth power project was flexible enough to allow adjustment to unforeseen developments. 22. This issue is particularly important since Nicaragua's least-cost scheme seems to have been highly sensitive to changes in fuel price assump- tions, a price which quadrupled after October 1973. PPAM, Annex 1 illus- trates this case. During appraisal, the consultants had compared two alter- native programs for Nicaragua: a mixed hydro-steam development, and an all-steam development. The latter, which included two 50-MW units to be installed in 1975 and 1977, was determined to be a more economic solution up to 17Z rate of discount (SAR, Annex 6, para. 7). As illustrated in the PPAM Annex 1, the 17% equalizing discount rate, favoring the all-steam solution, seems highly sensitive to a quadrupling of fuel costs. When the fuel price increases the mixed hydro-steam option gains a considerable edge over the all-steam alternative. For planning purposes, therefore, the issue I. whether the expansion programs could adjust and remain as far as possible least-cost, em-post. To achieve this objective, the demand for electricity should not be treated as given. It could be managed through long-run mar- ginal cost (LMC) pricing and in other ways. 23. The Energy Projects Division of the Latin American and Caribbean Regional Office (LCPE1) did not agree that the Eighth Power Project in Nicaragua was a good example of the case for flexible implementation of power expansion programs. Their views and those of the audit are set out herein and through paragraph 27. LCPEl pointed out that, from the point of view of the Nicaraguan Government and of the management of the power utility, flexi- bility (under conditions of uncertainty) would have involved more risks than advantages. For example, if, on January 1, 1974, the Government and INE had taken the decision to cancel one of the two 53-MW thermal units and to substitute a 40-MW hydro plant because of the prospect of rising fuel costs and lagging sales growth - and there was considerable uncertainty about the duration of these negative conditions - such a decision would have involved long delays in the execution of the changed generation program. Completion 5/ Appraisal Report No. PU-92a, Annex 6, para. 1. 6/ Appraisal Report No. PU-92a, para. 5.06. -7- of the remaining 53-MW thermal unit would have led to a delay of between one and two years past the actual completion date (December 1976) of the first 53-HW unit because of the time required to adjust financial and contractual arrangements; and given the low state of project preparation for the 40-MW hydro plant at the moment of decision (January 1, 1974), it would have taken until 1980 or 1982 to complete the 40-MW hydro plant. These delays would have led to power shortages lasting as long as five years, which would have required power rationing or extraordinary tariff increases to curtail demand, causing heavy economic costs in the form of lost employment, production, and income. Given the prospect of these risks, it seems unrealistic to LCPE1 that any Government or power utility management under the conditions of un- certainty as existed in early 1974 would have -taken the decision to substi- tute the 40-MW hydro plant for a 53-1W thermal unit. 24. In contrast, this audit has maintained that if the two options presented by the consultants, namely: (a) a mixed hydro-thermal variant, and (b) an all-thermal alternative, were true substitutes at the time of appraisal (the year 1972) then, they both would be ready for implementation, catering to an assumed growth in the power market. Conceptually, the reversal of the sequence of hydro-thermal mix in alternative (a) should have improved the supply availability in that option rather than limiting it. If (a) and (b) were both in a similar state of readiness in 1972 (a) could have substituted for (b) in reverse order after the year 1973 - i.e., a thermal plant followed by a hydro station - without much harmful impact on the economy. The implication of LCPE1's rejoinder is that either (a) and (b) were not true substitutes, or that they were no longer so in the year 1974. 25. The first argument is untenable because it undermines the very justification of the project. Implicitly such an argument admits that alter- native (a) was inadequately prepared at the time of appraisal. The issue of "whether the power expansion program could adjust and remain as far as possible least-cost ex post- would revolve, in that event, around the inade- quacy of project preparation rather than on the inflexibility of demand fore- casts. 26. The second argument disregards the uncertainty surrounding the demand for electricity which was under severe pressure after 1973 owing to a fourfold increase in petroleum cost, and world recession that ensued partly because of the energy crisis. Also the 1972 earthquake aggravated the situa- tion by adversely affecting the demand. Post-1973 uncertainty about the power market is true of most developing nations; it is not confined to Nicaragua. Hence the reduction in optimum demand for power supply as compared with the SAR projection provided sufficient room for a shift from (b) to (a). 27. Further, skeptics might have questioned the irreversibility of fuel cost increase in 1974. However, warning signs about the crisis were present even before 1973; they were reflected in the decline in the rate of growth of oil reserves at prevailing prices. 28. Additional flexibility could have been secured from the transna- tional component of the eighth power project. Both Nicaragua and Honduras - 8 - invested in 230-kV transmission lines to their border areas. But despite World Bank efforts, Honduras did not commit itself to the purchase or the sale of a significant amount of electrical energy, nor from Nicaragua's standpoint to the timely development of the Cajon project. In contrast, Nicaragua committed itself, under the eighth power loan, to the construction of a 230-kV transmission line to the border area and also of about 100 le base-load thermal capacity to cater for an uncertain growth in its power market. 29. While exploring the policy and institutional basis for the promur- tion of transnational scheme and the equitable sharing of project risks among participating nations, the PPAN considers the following arrangementa may be useful for transnational schemes: (a) the establishment of a supranational authority for ensuring the efficient operation of a unified system, even though nations pursue divergent political interests; (b) a fair interconnection agreement among participants based on their long-run marginal cost of electricity supply, the international fuel cost, and an equitable sharing of the project's economic rent between the producing and consuming nations7/; and (c) the joint financing arrangement among participating cou=- tries by, for example, having the supranational authority assume management, implementation, financial, and operation- al responsibilities. 30. As regards institutional and sector developments, INE took over, immediately after the 1979 civil strife, the thirteen private power com- panies, the five rural electric cooperatives, and the three municipal distribution agencies. Already, the Corporation had been planning to work on an ambitious fuel substitution/conversion program for reducing the country's dependence on oil imports through the development of local geothermal and hydropower resources. These programs had to be postponed because of the strain on INE's administrative and financial resources caused by many developments, including: the nationalization of distribution systems, which were badly maintained or damaged during the civil strife; the difficulty of assimilating the staff of the nationalized agencies; and the worsening collection performance 8/. Owing to salary cut-backs many experienced staff left the Corporation. Despite the sagging electricity sales during 1979-81, 7/ The World Bank conditioned disbursements for the interconnection grid to the signing of a satisfactory interconnection agreement. At appraisal, Bank staff expected that tariffs would incorporate the marginal cost concept; but power companies established tariffs based on considerations which the Bank accepted (PCR, paras. 3.3.4 and 3.3.5). 8/ For INE's comments see Appendix A, paras. 8(c) and 8(d). -9- the nation's socio-economic hardships impelled the Corporation to absorb a large number of unskilled labor force. The shortages of foreign exchange and spare parts further exacerbated the management problems calling for a fresh assessment of INE's capacity, role and growth prospects. Although the Corporation's performance has improved in the past two years, the main power sector issues deserve a close scrutiny. III. CONCLUSIONS 31. After the civil strife, INE has become the main agency which manages Nicaragua's energy sector, including the generation, transmission and distribution of electrical energy. The Corporation plans to reduce the coun- try's dependence on oil imports through the development of local sources of energy, mainly geothermal and hydropower. 32. Although INE continues to have operational and management prob- lems, serious efforts are now being made to address these issues. Since 1979, despite low sales, INE staff expanded. Concurrently, many experienced personnel left the agency. The Corporation's finances were precarious, its thermal plants badly maintained, which affected system reliability. The main distribution networks still require substantial renovations. Recent reports suggest that efforts are underway to reduce excessive staff, Improve opera- tion and maintenance of the thermal plants, collect unpaid bills and train plant operators. Further, INE's finances for 1981 and 1982 have been satis- factory (PPAM, para. 13). 33. Despite design and maintenance problems, the two 53-1KW steam generators, constructed under the eighth power project, are being intensively utilized. They represent about 40% of the country's installed capacity or 60% of the thermal installed capacity. The earthquake rehabilitation scheme has also repaired the damage an' provided service to the relocated popula- tion. 34. As for the Bank, it has greatly contributed to the development of the electricity supply industry in NTicaragua. Also, as an international agency, the Bank has-been expected to assist Nicaragua and Honduras in the development of least-cost transnational power projects. In retrospect, the Bank can best serve by insisting on policy and institutional developments before proceeding with such schemes (PPAM, para. 29). 35. Future power expansion programs which would be least-cost ex ante should be made flexible so as to provide, as far as possible, least-cost sup- plies ex post. One way of achieving this goal is to treat the electricity demand with caution and consider it manageable through price policy and by other means (PPAM, para. 22). 36. For ensuring the success of that group of transnational projects which attempt at supplying least-cost power to two or more nations and go - 10 - beyond the promotion of international trade in electrical energy and for dis- tributing equitably the benefit of such schemes, the following arrangements deserve consideration: (a) the establishment of appropriate supranational institutions to ensure the efficient operation of the system even though trading partners pursue divergent political objectives; (b) an interconnection agreement that helps to promote the economic interest of participants; and (c) an equitable sharing of project risks. 37. If these conditions are unobtainable the Bank should refrain from encouraging any single nation to bear a disproportionate share of the risk of that group of transnational schemes which aim at supplying least-cost power to two or more nations. 38. Finally, because of major changes in the economy and the electri- city supply industry the main sector issues need to be reassessed (PPAM, para. 30). PPAM, AMER 1 PROTECT PERFOCANMCB AUDIT REPORT MICARASUA: BIGHI POWER AM EARTHQUAE RZCDNUUCTIWN (PART C) POJECS (LOAN a40-NI AND CREDIT 369-Nm) ALTzaTI Eam EAno PRocnWa AnD THE SENSrTIVI or IER /b To CeAsesS is rU. COST (In million 1972 M) AM I - ruel Cost ($2/bbl) 3armE 1, AITERATIVE , A.r-STEA DEP T MXD RIDRD-STEAM DBVEWMBT The Stem Component The Rydro Component D0& 061. O aH Net Benefit Capital Fuel A Fuel Total Capital & fuel Total Capital & Fuel Total Grand of Alternative IE Cost Cost Cost Cost Cost Cost Cost Cost Cost Coat Total I over Alt. II 172 7.80 7.80 6.00 6.00 4.00 4.00 10.00 2.20 1.88 10.30 10.30 7.00 7.00 7.00 7.00 14.00 3.70 2.70 9.30 0.30 0.76 10.06 2.55 0.76 3.31 7.50 7.50 10.81 (-) 0.75 (-) 0.47 2.20 0.50 0.96 3.16 0.96 0.96 4.00 4.00 4.96 (-) 1.80 (-) 0.96 S 1.50 0.77 1.70 3.20 1.23 1.23 0.30 0.30 1.53 (-) 1.67 (-) 0.76 1.23 2.16 2.16 1.38 1.38 0.30 0.30 1.68 (-) 0.48 (-) 0.L9 1.40 2.33 2.33 1.36 1.36 0.30 0.30 1.65 (-) 0.65 (-) 0.22 1.83 2.76 2.76 1.38 1.38 0.30 0.30 1.68 (-) 1.05 (-) 0.31 . . . . . . . 0.30 1.83 2.76 2.76 1.38 1.38 0.30 0.30 1.68 (-) 1.05 (-) 0.02 00 ---4*RIO II FUEL COST ESCALATION (S 8/bbl) nimaVE i, ALTERNaTI II, ALL-STEAK DEPARTM HrXED EnDRO-STEAM DEVELOPHENT Net Benefit Fuel Other Fuel Other of Alternative Cost Costs as Cost Costs as II over Alter- IER Increase in Scenario I Total Increase in Scenario I Total native I 30Z 7.80 7.80 10.00 10.00 (-) 2.20 (-) 1.69 10.30 10.30 14.00 14.00 () 3.70 (-) 2.19 0.90 10.06 10.96 0.90 10.81 11.71 0.75 0.34 1.50 3.16 4.66 1.50 4.96 6.46 1.80 0.63 2.31 3.20 5.51 2.31 1.53 3.84 1.67 0.45 3.69 2.16 5.85 2.76 1.68 4.44 1.41 0.29 4.20 2.33 6.53 2.76 1.68 4.44 2.09 0.33 5.49 2.76 8.25 2.76 1.6 4.44 3.81 0.47 5.49 2.76 8.25 2.76 1.6B 4.44 3.81 0.00 (+) 0.10 Scenario I Is intended to correspond as closely as possible to the consultant's version (SAR, Annex 6, para. 7). both yieldimg a 17% IER2. This Annex reverses, bowever, the hydro-steam order. The capital cost of the all-steam option is from the PCR, Anna 12. The fuel cost estimate ia derived from the additional load growth projected in the SAR - 90 CM in 1975 risng to 550 Cub in 1980, the load zequiring in 1980 a 60Z plant factor. The stem plant's beat rate is calculated at 10,000 Btu/EMh and the bunker fuel's beat rate at 6 an BWdbbl. The 0 N M cost Is assumed to be 3% of fixed investment for thermal plants and 1.3% of fixed investment for the hydro station. Internal Economic Rate of Return (IERR) Translation - 12 - APPENDIX A Page 1 of 5 COMMENTS 7ROM THE BORROWER INSTITUTO NICARAGUENSE DE ENERGIA DS 466/84 Mr. Shiv S. Kapur Managua, May 9, 1984 Director, OED World Bank Washington, DC Re: World Bank - Project Performance Audit Report - Eighth Power Project (IBRD Loan 840 NI) and Part C of the Earthquake Reconstruction Project (Credit 389 NI). Comments by Instituto Nicaraguense de Energia. Dear Mr. Kapur: We have read with interest the above-mentioned report, transmitted with your letter of March 13, 1984. We attach hereto our comments, clarifications, and objections concerning various points of the Report, for inclusion in the final version. We should be grateful if you would let us have the Final Report for our information and other purposes. Very truly yours /s/ Emilio Rappaccioli B. Minister-Director INE APPENDIX A -13 - Page 2 of 5 Comments by INE on the performance audit report on the Eighth Power Project (IBRD Loan 840 NI) and Part C of the Earthquake Reconstruction Project (Credit 389 NI) Broadly speaking, we agree with the World Bank's Report on the Eighth Project and Part C of the Earthquake Reconstruction Project. We give below a few explanatory comments that should be added: 1. Nicaragua Plant 1.1 Consulting services for the Nicaragua plant The consulting services 1/ were deficient, which later affected the operation of the Nicaragua plant and led to high operating and maintenance costs. The consulting fim 1,/ was hired by direct negotiation, with no preselection or international bidding. 1.2 Low reliability of the Nicaragua plant The low reliability of the Nicaragua plant was caused by flaws in plant design and inadequate supervision during construction. The errors on the part of the former Empresa Nacional de Luz y Fuerza (ENALUF) originated in the choice of people whose appointment was in the interests of the institution's current top management. We would mention the efforts made by INE since July 19, 1979 to correct the flaws in the design and construction of the Nicaragua plant, which have considerably enhanced the reliability of operation. 2. Nicaragua-Honduras Interconnection The Nicaragua-Honduras Interconnection was initially used to exchange energy in times of emergency, the Caj6n Project having been postponed by ENEE since the projected demand in Honduras was too optimistic, being way above the actual figures. However, we would point out that the Nicaragua-Honduras Interconnection is now being used by Honduras to purchase energy from Costa Rica. Thus, although the volumes of energy transferred have not been as projected in the original program, the interconnection with Honduras has been satisfactory, since both countries have benefited for the above-mentioned reasons. 3. Management consultants The Management Consultants carried out a very superficial study of the organization and management systems of the former ENALUF. Any of the Consultant's recommendations that contradicted current management interests were not implemented. 1/ The name of the firm was removed to avoid legal complications. APPENDIX A -14 - Page 3 of 5 4. In our opinion, the idea of appointing a General Coordinator, as put forward by the Bank, was intended to strengthen the administrative side of the institution. This objective was not achieved, since the Coordinator always acted under the influence of the Executive President and top management, besides lacking the training and administrative experience to perform his duties. 5. Participation by INE's technical personnel With respect to the performance of INE's Construction and Engineering Departments, we feel that the Construction Department was politicized at the whim of current top-level management, while on the Engineering side the qualified personnel were given little authority to act. The World Bank mentions the resultant serious weaknesses (section 6.2.1), but does not point up the causes of these shortcomings, which were mentioned earlier in this Report. 6. Bank Performance Despite the fact that the Bank put pressure on management to steer the project along the path to successful completion, it allowed the consulting firm to be hired without bid proceedings or any type of competition, which had an adverse impact on the project. Furthermore, the Bank accepted a single alternative for the Nicaragua plant, namely the construction of a 40-MW hydro plant, and did not require the analysis of any other combined hydro-thermal alternatives. This has imposed restrictions on Nicaragua at least until 1986, since it means the country's natural resources cannot be properly exploited. It should be pointed out and acknowledged that analysis and approval of financing for the Eighth Project were handled by the Bank very smoothly, considering the scope and complexity of the project. 7. Financial performance With regard specifically to the financial aspects we find the Report reasonable, except for the 1972/78 balance sheets, which include under long-term debt the current portion that will be amortized in the later years, and under short-term debt only those payments to contractors or suppliers made directly by the Bank. Among the ratios included by the Bank this affects the Long-Term Debt/Capital ratio. According to the Bank, the 1976 ratio is 56.6%. Our calculations give 56.4%, but this difference is immaterial, and we therefore accept the Bank's figures. You also give the ratio of self-financing of expansion (section V. 5.2.1) as 24%, whereas 32% is the correct figure, based on Net Internal Generation of Funds, C$195,323,000; Additions to Fixed Assets, APPEDIX A Page 4 of 5 C$602,776,000. The same correction should be made in section V. 5.3.3, which states that self-financing in 1977 and 1978 was 12.2%. This should be 15% based on Net Internal Generation of Funds, C$41,516,000; Additions to Fixed Assets, C$278,503,000. 8. Additional Comments: (a) Most of the categorical statements contained in the Report are not made with reference to any specific time frame. Many of the statements are valid for one year or a few years, but not for the entire period of the Report. (b) The Bank has contributed to the financing of most of INE's generation and transmission facilities, but not all. (c) Since July 19, 1979 a number of officials have left INE because of salary considerations while others have been fired for lack of professional integrity in the performance of their administrative duties. (d) In paragraph 30 of the PPAM, we disagree when the Bank says that the fuel substitution and conversion programs for reducing the country's dependence on oil imports through the development of local geothermal and hydropower resources had to be postponed because of the strain on INE's administrative and financial resources caused by the nationalization of distribution systems, which were badly maintained or damaged during the War of National Liberation which ended on July 19, 1979. INE admits that some financial resources were channeled into distribution, but this did not result in postponement of the programs for expansion of the generation and transmission systems. Those programs were put off for other reasons. Ce) The Eighth Energy Project has achieved its principal objectives, namely: - increased generating capacity - interconnection of the Honduran and Nicaraguan systems - -- increased reliability of the 138-KV Transmission System, principally in the Managua ring - development of the Northeast: S6baco,' Esteli, Yalaguina. In addition, the entry into operation of the project reduced energy rationing at the beginnIng of 1977. 9. Summary The Eighth Energy Project has been subjected to an infinite number of occurrences and factors that need to be kept in mind, including: APPENDIX A -16 - Page 5 of 5 (a) The tremendous influence of bad government policy on the internal functioning of the institution. (b) Administrative corruption at top management levels and excessively centralized decision-making. (c) Failure by top management to give adequate authority to qualified technical staff. (d) External factors over which the institution had no control, in particular: - the earthquake of December 23, 1972 - the economic recession - suspension of commercial and industrial activities in early 1978 - the insurrection of September 1978 - the final insurrection in 1979. May 1984. - 17 - PROJECT COMPLETION REPORT NICARAGUA: EIGHTH POWER AND EARTHQUAKE RECONSTRUCTION (PART C) PROJECTS (LOAN 840-NI AND CREDIT 389-NI) I. BACKGROUND 1.1 Bank lending to the Sector 1.1.1 Since 1953, the Bank has made nine loans and part of a credit amounting to US$93.3 million equivalent to the power sector in Nicaragua (Annex 1). The eighth loan, 840-NI (1972; US$24.0 million equivalent), and part of the credit, 389-NI (1973; US$5.0 million), helped to. finance, respectively, the Eighth Power Project.and Part C of the Earthquake Reconstruction Project, which are the subjects of this report. The seven previous loans helped to finance the first seven projects which have been completed successfully, although with some delays and cost overruns. The ninth loan, 1402-NI (1977: US$22.0 million), is helping to finance the Ninth Power Project (primarily transmission and distribution works). This Project is expected to be completed in 1983, three years behind schedule (primarily due to the civil war). The Ninth Power Project is expected to cost about US$18.6 million (or almost 58%) more than expected at appraisal. 1.2 Sector Organization 1.2.1 Since the end of the civil war (1979), the power sector has been re-organized. All municipal power companies and the rural electric cooperatives have been merged Into INE, which now regulates the sector and is responsible for energy planning for the country. As well as carrying out its basic role of supplying electricity to the public, INE also absorbed two small companies in the oil sector. In connection with a proposed Tenth Power Project, Bank staff Intend to assess whether the present organization of the sector is satisfactory. 1.3 INE's Immediate Problems 1.3.1 INE has management problems. Between 1979 and 1982, the number of staff increased significantly despite low sales; and some senior professional staff have taken positions outside INE because of a wage freeze. In 1982, INE started to take measures to address these prbblems and the results have been encouraging. The financial position of INE has been and continues to be precarious due to lack of access to international financial markets and limited borrowing opportunities within Nicaragua. The thermal generating plants which account for about sixty-six percent of istalled capacity have a low reliability due to multiple maintenance problems. In addition, the distribution networks in Nanagua and other major cities require substantial renovation. - 18 - 1.4 Investment Plans 1.4.1 Based on a Master Plan financed by Loan 1402-NI, INE has a sbort-tern development program calling for development of the geothermal fleld at Homotombo, hydro sites, and bydro plant studies. The possible tenth power project would finance the detailed design and bidding docutAents for the Wojolka hydro project. II. PROJECT PREPARATION AND APPRAISAL 2.1 Origin and Preparation of the Eighth Power Project 2.1.1 While supervising construction of the Seventh Power Project (Loan 543-NI), Bank staff learned of INE's interest in constructing a 40 MW bydro station as their next generation project. In June 1970, a foreign consulting firm provided the economic justification for the proposed hydro project. 1 The following anth, a second foreign consulting firm recommended that th national power company of Honduras (Empresa Nacional de Energia Electrica - ENEE) construct the Cajon hydro project (6 x 83 MV). For reasons set forth below, this recommendation completely transformed the subsequent dialogue between the Bank and INE as to the content of the future Eighth Power Project in Nicaragua. 2.1.2 Based on preliminary hydrological/geological investigations, the initial cost estimate for the Cajon power project was US$85 million, i.e., US$170 per kW with an energy cost of 6 US aills per kWh. These were very low costs for Central America. However, given the small size of the Honduran system (1970 sales: 227.8 GRh), near-term construction oF the project depended upon locating a market outside Honduras which could absorb the excess energy of Cajon. As there were various obstacles (political, tariff, or market) to interconnecting the Honduran system with the.-systems of El Salvador, Costa Rica, and Guatemala, the Bank undertook two project identification missions (September and December 1970) to persuade IRE to investigate the advantages of interconnecting with ENEE - that is, planning and Implementing a joint, interim least-cost generation and interconnection program until completion of the Cajon project (expected in 1977-78). During the second mission, ENEE and INE agrged to engage jointly a foreign consulting firm to make a feasibility study on the interconnection. 2; It was recognized that additional hydrological/geological studies wouldbe required before a full feasibility study of the Cajon project could be completed (by the end of 1972). 2.1.3 In March 1971, a pre-appraisal mission reviewed the terms of reference for the interconnection feasibility study; and in August, a second pre-appraisal mission reviewed the results of the study with representatives 1/ The justification was based on a comparison of the present values of two investment sequences: a 40 MW hydro plant followed by a 60 MW thermal plant as compared with the reverse sequence. The hydro-thermal sequence had a slightly lower present value and appealed to the management of IE because it deferred increasing use of imported fuel. 2/ The same firm which prepared the economic justification for the proposed new hydro station, using the cost data for the Cajon project prepared by the second consulting firm. - 19 - of IE and ENEK. The consultants first studied alternative generation programs for each system for the period 1972-85 and selected the most economic one for each system. Then a program taking account of the proposed interconnection was compared with the combination of the two separate programs.. The consultant defined the following as the least-cost joint, interim generation and transmission (interconnection) program: Generation: INE: 60 MW steam unit at Lake Managua in 1975 60 MW steam unit at Lake Managua in 1977 ENEE: 40 MW steam unit at La Ceiba in 1974 6 x 83 HW hydro units at El Cajon in 1978 (the latter expected to cost about US$85 million) Transmission (Interconnection): IVE & ENEE: 230 kV line (single-circuit) linking leon in Nicaragua to Tegucigalpa in Honduras. Initial operation would be 138 kV until commissioning of the Cajon hydro plant (1978). 2.1.4 In October 1971, appraisal missions simultaneously visited Nicaragua and Honduras. On their return, in order to minimize the capital outlays of both companies, they substantially modified the above generation program as follows: INE: 50 MW steam unit at Puerto Tiscuco in 1975 50 MW steam unit at Puerto Tiscuco in 1976 ENEE: 24 MW diesel units at La Ceiba in 1974 4 x 75 MW hydro units at El Cajon in 1978 (the latter re-estimated to cost about US$88 million). The Government refers to the steam plant at Puerto Tiscuco as the Nicaragua Plant. 2.1.5 The appraisal mission to INE also defined transmission elements of the proposed Project in addition to the interconnection transmission line, identified deficiencies in INE's organizational structure and operating practices, and undertook a search for additional sources of project financing. The search eventually resulted in a satisfactory joint financing agreement with the Central American Bank for Economic Integration (CABEI). 2.1.6 A second appraisal mission (February 1972) resolved discrepancies with respect to information received on expected investment expenditures and cash flows. The proposed project was expected to: (i) enable INE to meet its own load growth and to supply ENEE between 1974 and 1978 with lower-cost energy than ENEE could supply itself; and - 20 - (11) enable ENEE to advance construction- of the Cajon project, the completion of which (1978) would permit both companies to benefit from low-cost hydro power through fuel savings resulting from the stand-by status of thermal units. 2.2 Negotiations and Effectiveness, Eighth Power Project 2.2.1 No major issues delayed negotiations. The Bank agreed to include personnel housing and related facilities adjacent to the Nicaragua plant as part of the Project which the Bank loan would partially finance. These facilities were expected to be small. The proposed loan of US$24.0 million also included cost overrun financing (US$1.5 million) to complete the Seventh Power Project (543-NI). 2.2.2 No major issues delayed presentation of the proposed loan to the Executive Directors. Believing that IME and ENBE were on the verge of signing an interconnection contract, Bank management relaxed their earlier condition of board presentation - the signing of an interconnection contract; but management did condition disbursements pertaining to the interconnection transmission line to the signing of a satisfactory interconnection contract. In June 1972, the Executive Directors approved a loan of US$24.0 million in support of the Project (term: 24 years, including 5 year grace; interest rate: 7-1/4Z). The corresponding CABEI loan was for US$6.1 million (term: .24 years, including a grace period of 4-1/2 years; interest rate: 8%). Effectiveness of the Bank loan agreement depended on effectiveness of the CABEI loan agreement which in turn depended on the signing of a loan agreement between CABEI and Kreditanstalt fuer Wiederaufban (KfW), the German aid agency (which had committed itself to supply CABEI with US$3.6 zillion for on-lending to IE). To finance engineering studies in connection with preparation of the Project, CABEI had made an earlier loan to IE for US$637,000. The Bank agreed to INE's request for authorization to obtain this small loan. 2.2.3 Effectiveness of the Bank loan was delayed until March 30, 1973 because of slow action by KfW in examining the proposed Project and in processing the CABEI loan application. This delay adversely affected construction progress of the Nicaragua plant. 2.3 Origin and Preparation of the Earthquake Reconstruction Project 2.3.1 On December 23, 1972, an earthquake leveled Managua, killing thousands of people (perhaps as many as 16,000.) and causing about US$300 million in property damage. The earthquake did not undermine the justification for the Eighth Power Project. The earthquake inflicted substantial damage to INE's distribution network and rendered unusable its headquarters building. The immediate financing effect was a cash-flow deficit resulting from the temporary loss of 38,000 subscribers (almost 20% of the total) and the equivalent of about one month's revenues. The Bank promptly dispatched (January 1973) a consultation and reconnaissance mission, which recommended that the International Development Association (IDA) include US$5.0 million in the Earthquake Reconstruction Credit to help lower DIE's expected financing gap in 1973. These monies would finance the repair of existing installations, extensions of the distribution system, and other construction (communication equipment, spare parts, buildings, and vehicles). - 21 - 2.3.2 No major obstacles delayed credit negotiations, approval, or signing of the Credit Agreement. The Credit Agreement became effective August 7, 1973. 2.4 INE's 1972-1976 Expansion Program 2.4.1 At appraisal of the Eighth Power Project, INE's expansion program for 1972-76 consisted of: (i) completion of the Seventh Power Project (Loan 543-NI); (ii) expansion of the distribution network; (iii) a program of village electrification; (iv) studies for future geothermal and hydro plants; and (v) the Eighth Power Project. 2.4.2 As defined in the Joint Financing Agreement with CABEI, the Eighth Power Project consisted of: (i) the Nicaragua plant at Puerto Tiscuco (about 2x50 M), fuel unloading and storage facilities, substation,- personnel housing and associated facilities; (ii) a single-circuit transmission line (about 105 km) at 230 kV between Puerto Tiscuco, Leon, and Tiscapa (south of Managua); 230/138 kV subszations at Leon and Tiscapa (including a small load dispatch center); communications, metering and control equipment at the substations at Puerto Tiscuco, Leon, and Tiscapa; (iii) a single-circuit transmissica line (about 70 km) at 230 kV between the Leon substation and the Nicaragua-Honduras border; (iv) the Managua transmission ring at 138 kV (about 75 km), plus a 138 kV substation at Los Brasiles and addition of switching bays to the existing 138 kV substations at the Managua steam electric plant and at Masaya; and * (v) a single-circuit transmission line at 138 kV between Sebaco and Yalaguina (about 90 km). 2.4.3 Part C of the Earthquake Reconstruction Credit provided for the following: (i) emergency repair and rehabilitation of the Managua steam electric plant, substations, distribution equipment, and =aterial and equipment for about 15,000 consumer connections; (ii) extension of the distribution system to provide electric service to provisional housing near Managua; (iii) additions to substations in various locations (Managua, Masaya, Jinotepe, and Chichigalpa); - 22 - (iv) the annual work program for 1973-74 (distribution equipment, office and warehouse facilities, vehicles, communications equipment, and spare parts). 2.5 Major Covenants of the Loan, Joint Financing, and Guarantee Agreements for the Eighth Power Project; and Major Covenants of the Credit and Project Agreements for Part C of the Earthquake Reconstruction Credit. 2.5.1 Annexes 2a and 2b set forth the major covenants of the above agreements. As set forth in greater detail in Chapters III and V, compliance by IRE and the Government with respect to operations and financial covenants was less than satisfactory. III. IMPLEMENTATION AND COSTS OF THE PROJECTS 3.1 Changes to the Eighth Power Project 3.1.1 With Bank approval, INE increased the generating capacity of the Nicaragua plant to 2 x 53 MW; and reduced the works of the Managua ring to the following: (i) construction of a 230/138 kV substation at Los Brasiles redesigned to act as the new terminal point for the Leon-Managua 230 kV transmission line (instead of terminating at Tiscapa as expected). The Los Brasiles substation was also redesigned to include added distribution capacity; (ii) construction of about 11 lan of 138 kV transmission line between the substations at Los Brasiles and the Managua thermal plant, where substation facilities were also expanded. - The transmission works of the Managua ring were substantially redesigned and transferred to the Ninth Power Project (1402-NI) reflecting the impact of the earthquakes on load growth patterns. 3.1.2 Subsequent to appraisal, INE made additions to the scope of the Project, the costs of which were not included in the appraisal cost estimates. Bank staff did not learn of these additions, which are set forth below, until TIM request? cost overrUn finncing for the Project in 1974-5: (i) a workers' village constituting about 12,000 m2 of construction plus infrastructure (water, sewage, electricity, paved roads, athletic facilities, etc.). At appraial, INE expected to construct only some 15 structures (1,800 i2); but following the earthquake, INE substantially expanded these facilities due to the lack of housing in the Managua area and the Government's decision to decentralize residential living patterns; and (ii) construction of: (a) an access road (8 km) to the Nicaragua thermal plant; (b) a short link between the Nicaragua plant and the existing 69 kV system (prior to comletion of the 230 kV - 23 - transmission line); and (c) purchases of rights-of-way. Following the earthquake and the relocation of substantial numbers of the population in outlying areas of Managua, costs of rights-of-way escalated substantially. 3.2 Part C of the Earthquake Reconstruction Project 3.2.1 Bank staff did not require the preparation of project progress reports by INE. -Further, as INE did not have a job-order accounting system in 1973 and 1974, INE did not make the effort to record the local cost component for items purchased under the Credit. Because of these factors, it is not possible to identify the final cost of this component of the Earthquake Reconstruction Project. This unusual situation reflected the nature and origins of the power component of the Project - that is, in response to the earthquake emergency, the appraisal mission identified financing needs for a "shopping list" of distribution materials which INE was expected to use flexibly to meet changing needs. The imperatives were to restore and extend power to a sorely distressed and dislocated population. INE returned to service quickly the Managua thermal plant but moved more slowly in purchasing distribution equipment. By December 31, 1974, of the original $5.0 million of IDA financing, less than US$0.4 million remained undisbursed or uncommitted; but as discussed later, disbursements dragged for many years. Bank staff did not supervise the implementation of repairs to distribution extensions after 1975. Bank staff considered that INE . successfully executed emergency repair operation and provided service to people displaced by the earthquake. 3.3 Timetable for the Eighth Power Project 3.3.1 Annex 3 shows that the Nicaragua plant commenced operations in December 1976 and was completed in September 1977, about twenty-one months later than expected at appraisal; and there were substantial delays (up to nineteen months) in completing the transmission-distribution portion of the Project. 3.3.2 In addition to the delay in effectiveness of the Bank and CABEI loan agreements (para. 2.2.3), factors adversely affecting the construction timetable of the Nicaragua plant included: (1) postponement of bid due date and change of bid specifications because of the request by local contractors to subdivide the civil works contract (which request was consildered impractical) and because of the request by KfW to review and revise bidding specifications. The bid due date was postponed from November 1972 to March 15, 1973. INE signed the construction contract on September 6, 1973; the civil works sub-contractor began mobilization at the job site in October; (ii) strikes in Italy, which delayed delivery of major equipment to sub-contractors; and (iii) funding shortages, which delayed the work of the contractor. These shortages were nor solved until the Venezuelan Investment Fund (VP) made a cost overrun loan of US$16.1 million to INE in 1976. Bank staff successfully assisted INE in the preparation of its loan application submitted to the VIF. -24- 3.3.3 Because disbursements .of the 230 kV transmission line were conditioned to the signing of an interconnection contract, which was delayed for one year (para. 3.3.4), -there was a corresponding delay in the signing of a contract for the design and construction supervision of the line. The interconnection transmission line was actually completed in September 1976, about 19 months later than expected. The delayed completion date also reflected the financial problems of INE and problems in obtaining rights-of-way. 3.3.4 The delay in signing the interconnection contract had its origins in a dispute over Interconnection tariff levels. During appraisal, an individual consultant outlined a tariff concept based on an equal sharing of the present value of savings resulting from the interconnection of the two systems and the near-term construction of the Cajon project. Since this concept would have awarded substantially more revenues to ENEE than to INE (because the savings to INE would have been greater than the savings to ENEE), INE objected and the negotiations stalemated. At about the same time, following the earthquake, INE began a re-assessment of its energy and power needs; and ENEE found that its negotiations had stalemated with two principal fruit companies for the supply of electricity for their irrigation loads. When further investigations revealed that the Cajon project would cost about US$150 million (rather than US$85 million, as originally estimated), ENEE decided to postpone construction of the Cajon hydro plant. 3.3.5 In these circumstances, both parties were willing to enter into a non-obligatory agreement for exchanges of emergency and short-term surplus power. After requiring both parties to provide a demonstration that the interconnection would lead to a lesser cost joint development sequence (as compared with independent development), the Bank accepted the agreement as fulfilling the conditions for disbursements on the transmission component of the Project. Bank staff anticipated a delay of up to five years in the start of the Cajon project -- it turned out to be eight years -- but felt that the agreement was a first step which would generate confidence between the two companies and would lead to a contract providing for the exchange of firm energy and power in the future. 3.3.6 Lack of funds delayed completion of all the other transmission and distribution elements of the Project. The transmission line at 138 kV between Yalaguina and Sebaco was completed about four months late (June 1975). The 230 kV transmission line connecting the Nicaragua plant to the 138 kV Managua ring was completed about thirteen months late (March 1977); and the reduced works of the Managua ring were substantially completed about seventeen months late (May 1977). Bank staff were critical of INE's slow action in arranging for financing, especially the delays in raising tariffs in 1974. 3.3.7 Construction of the 230 kV transmission line*was delayed while the engineering consultants investigated the operation of the system at a lower voltage level (138 kV). The routing of the 230 kV line was affected by questions about plans for the Managua ring (para. 3.1.1). Because of delays in completing the 230 kV line to Managua, the initial output from the Nicaragua plant was brought to Managua via temporary use of existing 69 kV facilities (para. 3.1.2). - 25 - 3.4 Project Costs 3.4.1 Annex 4 shows the price deflators employed to deflate the current cost of the Project to constant 1972 prices. Annex 5 shows the cost of the project (including changes described paras. 3.1.1 - .2) and sources of financing in current prices. Annex 6 shows the cost of the Project in constant 1972 prices. 3.4.2 The table below summarizes data on Project costs shown in Annex 5 and 6. In current prices, the actual cost of the Project was US$53.7 million, Including US$7.1 aillion for the expansion in the scope of the Project. Without the expansion, the actual cost of the original Project (including the reduced Managua ring) in current prices was US$46.7 million as compared with the appraisal estimate of US$34.6 million - an increase of 35%. 3.4.3 In constant prices, the actual cost of the original Project (including the reduced Managua ring) was US$26.7 million, 19.9% less than the appraisal estimate. The reduction in constant prices was centered in the electro-mechanical equipment of the steam plant. In constant prices, the costs of the 230 kV and 138 kV transmission lines and substations were, respectively, only 6.7% and 13.8% over the appraisal estimates. INE capitalized US$4.3 million of administrative costs, which was 77.9% higher than the amount expected at appraisal (US$2.4 million). -In constant prices, actual engineering and administrative costs amounted to 16. 1% of the actual cost of the original Project as compared with the appraisal estimate of 7%. 3.4.4 The earthquake, inflation in fuel and other operating costs, inadequate tariff Increases - these factors adversely affected INE's internal cash generation available for investment. Worldwide inflation plus increases in the scope of the Project caused the cost of the Project to exceed sources of financing identified at appraisal. While the Bank would not agree to INE's request to provide cost overrun financing, the Bank assisted INE in obtairing a cost overrun loan from the Venezuelan Investment Fund (VIF) in 1976 for US$16.1 million. 3.4.5 The following institutions provided financing for the Project: (in US$ millions) Actual Forecast IBRD 20.3 20.4 CABEI 6.5 6.2 VIP 15.9 - iE 11.0 8.0 53.7 34.6 -26- Appraisal'and Actual Cost* of Eighth Power Project (in millions of US) -Appraisal Forecast- "'uas tocal Foreign Local Forein 2 Dif erence Currency Currency Total Currency Corrency Total from Appraisal 1. Direct Cost, original poet11 21 Plant& Nicaragua 7,225 15,780 23,005 3,429 11,185 14,614 (36.5) 230 kV-$ 138 k Trans- mission Systems 1,880 5,870 7,750 1,780 5.890 7,670 (1.0) Eng.neering & Administration 490 1,930 2,420 2,251 2,055 4,306 77.9 Management Consultants 50 150 200 - 134 134 (33.0) Sub-total Direct Cost 1/ 2/ 9,645 23,730 33,375 7,460 19,264 26,724 (19.9) Price CDntingenCy, Original Project 355 930 1,285 N,866 14,098 19,964 1453.6 Total Cost, Original Project (in current prices) 10,000 24,660 34,660 13,326 33,362 46,688 34.7 II. Direct Cost, Expansion of of Project 1/ 2/ Rights of Way, Access Roads - - - 731 - 731 - Operators' Village - - - 3,600 - 3,600 - 69 kV Transmission Line - - - 59 - 59 - Sub-total Direct Cost - - - 4,390 - 4,390 - Price Contingency, Expansion of Scope of Project - - 2,666 - 2,666 - Total Cost, Expansion of Scope of Project (in current prices) - - - 7,056 - 7.056 - III. Direct Cost of Project (Sub- totals I & n1) 1/ 2/ 9,645 23,730 33,375 11,550 19,264 31,114 (6.8) Price Contingency 355 930 1,285 8,532 14,098 22.630 1661.1 Total Cost of Project, Appraisal & Actual (in current prices) 10,000 24,660 34,660 20,382 33,362 53,744 55.1 * Actual cost data includes expenditures of about US$0.455 million (in current prices) incurred durimg years 1979 and 1980. After 1978 there was only one disbursement from Loan 840-NI: $11,119 in 1980 for engineering in connection with Planta Nicaragua. 11 In constant 1972 prices. Appraisal data reflects pro-rata distribution of physical contingencies. 1 Actual data adjusted with indexes set forth in Annex 4. Details on actual cost data in constrant and current prices set forth in Annexes Sand 6. - 27 - 3.5 Management and Organization 3.5.1 The appraisal mission noted deficiencies in INE's operating practices and organizational structure (para. 2.1.5). The major organizational deficiency originated in the Constituent Law, which designated the Chairman of the Board of Directors as Executive President, thereby providing no clear division of responsibilities between the Board and management. This criticism reflected the mission's dissatisfaction with the performance of the Executive President, a political appointee, whose position was beyond challenge because of his political and family alliances. 3.5.2 To correct this situation as well as other operating deficiencies of the company (such as job descriptions, computer needs, and proposals for improving the financial administration of the company), the appraisal mission persuaded INE to accept a management and organization study funded with proceeds from loan 840-NI. Acting under terms of reference agreed with INE and the Bank, a consulting firm recommended: (i) the elimination of the position of General Manager; (ii) the enumeration of the policy-making responsibilities of the Board; and (iii) the identification of the Executive President as the chief operating officer of the company. The consultant made no recommendation requiring the Executive President to vacate the position of chairman. The same individual continued to occupy both positions . As this arrangement was not unusual for many power sector organizations, Bank staff had no grounds to object to these recommendations which the Government incorporated into the Constituent Law in November 1974. 3.5.3 During supervision missions, Bank staff continued to be dissatisfied with the performance of the Executive President. This individual dominated the Board, did not delegate decision-making within INE, often did not act quickly on matters requiring immediate attention, and did not bother Lo coordinate adequately the activities of the various departments. As a result, INE operated at less than the efficiency which its personnel vere capable of achieving. In the case of the Nicaragua plant, the Executive President did not seek the participation of the Generation Department during the design and construction phase. This led to flaws in the design of the fuel-heating system which the Generation Department rectified after taking responsibility for plant operation. Another example of failure to coordinate was the simultaneous use of different lad forecasts by the groups responsible for engineering planning, economic forecasting, and budget preparation. In the course of helping INE to prepare the loan application submitted to FIV (para. 3.3.2), Bank staff discovered data inconsistencies which resulted from poor coordination among INE's departments. The efforts of Bank staff to reconcile these inconsistencies 'and to gain recognition on the part of the Executive President of the need to improve efficiency led to a deterioration of relations between the Bank and borrower. 3.6 Procurement 3.6.1 No major disputes slowed the procurement process. At INE's request, the Nicaragua plant was built on a turn-key contract. The Bank recommends that for projects of the size of the steam plant borrowers should seek international competitive bidding for the major project components, as -28 - there are normally substantial cost savings. IE, however, had very little confidence in its ability to manage the Project. The assessment appears to have been well founded. 3.7 Allocation and Closing Dates 3.7.1 Annexes 7 and 8 compare actual and forecast loan allocation by categories for, respectively, Loan 840-NI and Credit 389-NI. Annex 9 shows that actual disbursements for Loan 840-NI substantially lagged expected disbursements In the early stages of the project because of delays in carrying out the project (para.3.3.2). Annex 10 shows that actual disbursements for Credit 389-NI lagged expected levels after INE had carried out those repairs which it considered of highest priority (para. 3.2.1). Because of project delays and the civil war, the Bank postponed the closing date for Loan 840-NI four times (from March 31, 1977 to December 31, 1978 to June 30, 1979 to March 31, 1980); and postponed the closing date for Credit 389-NI twice (from December 31, 1976 to June 30, 1979). 3.8 Operation of the Project 3.8.1 INE has made complaints, which Bank staff share, about the poor design and deficient project supervision of the Nicaragua plant on the part of the consulting firm. The most serious problems have been the siltation of the cooling-water in-take and the high cost of operating the desalting plant which still causes severe operating problems. INE has complained that the civil works of the plant have been over-dimensioned. Other design problems extended to the machine shop and warehouse, which was built to permit the direct loading and unloading of trucks within the building. This objective was defeated because the height of the entrance was constructed too low to permit a truck to enter the building. The roof of the Nicaragua plant developed serious water leaks, problems which resulted from poor construction and supervision. Extensive repairs were made during 1980 to solve this problem. IV. PROJECT JUSTIFICATION 4.1 Least-cost Solution 4.1.1 The major elements of the Project are the Nicaragua steam plant (2X53 MW) and the 230 kV transmission line interconnecting the electrical systems of Honduras and Nicaragua.. The appraisal report justified the Project on the grounds that, based on the expected completion of the Cajon project in 1978 (paras. 2.1.3 - .4), the interconnected development of both systems was the least-cost solution to meet expected load growths for discount rates upto 20%. According to the appraisal report, this conclusion still held, even if there were a delay of several years in completing the Cajon project because: (i) an economic comparison of a thermal plant (2X60 MW) and a hydro-thermal equivalent favored the all thermal sequence in Nicaragua for discount rates up to 17%; and - 29 - (ii) by linking the two systems, the interconnection transmission line would enable INE and ENEE to defer or to avoid substantial investment which would otherwise be required if the two system carried out independent development programs. 4.1.2 The steam plant and the transmission works linking it with Managua and Leon remain the least-cost solution for meeting the load growth in Nicaragua. As discussed below, actual and expected sales in Nicaragua were fairly close during the period of expected project execution (1972-1976). However, substantial sales to Honduras have not materialized primarily (but not solely) because of lower-than-expected load growth. Following completion of the Cajon project, which is expected in mid 1985, Honduras may have surplus energy amounting to 300 GWh annually for five years. Bank staff accepted the risk of under-utilizatlon of the interconnection trasmission line when they did not object to the non-binding tariff agreement (para. 3.3.4). Construction of the interconnection transmission line appears to have been premature. 4.2 Sales Growth in Nicaragua and Honduras 4.2.1 At appraisal, INE's domestic sales were expected to grow at a rate of about 11.8% annually during the period 1972-1976. The actual growth rate was 9.9% annually, which was reasonably close to the appraisal forecast after one makes an allowance for the impact of the earthquake of 1972 (para. 2.3.1), escalating tariffs due to the fuel crisis of 1973, and world-wide recession during 1974-1975. In 1976, the level of actual sales (798 GVh) was only about 4% below the level of forecast sales (830 GWh). Because of reduced hydro generation due to drought In 1977 and because of delays in completing the Nicaragua plant, INE had to introduce rationing with the result that actual sales (880 GWh) were about 4% below the forecast level (910 GWh). In 1978, the actual level of sales (886 GWh) was 13% below the forecast level (1,020 GWh) and in 1979, the actual level of sales (727 GWh) was 34% below the expected level (1,094 GWh). These declines reflected the impact of strikes and the civil war. Subsequent to 1979, sales have increased and are currently at the pre-civil-war level. 4.2.2 At appraisal, ENEE's sales in 1976 were expected to amount to 645 GWh. The actual figure was 469 GWh. *The shortfall in sales reflected the combined effect of: (I) failure to reach agreement to supply electricity for the irrigation load of two principal fruit companies; (ii) eccaomic stagnation due in part to the lingering impact of the war with El Salvador; and (iii) damage to agricultural districts causdd by Hurricane Fiff (1974). To meet its lower load growth following its decision to postpone the start of construction for the Cajon project (para. 3.3.4), ENEE expanded the Rio Lindo bydro plant (Loan 1081-HO), built a diesel plant at Puerto Cortes (Loan 1629-HO), and constructed the nearly completed Nisperd bydro plant (Loan 1629-HO). Construction of the Cajon plant began in 1980. 4.3 Internal Economic Return on the Project 4.3.1 The appraisal report included an estimated rate of return (15%) based on the expected benefits and costs (investment and operating) associated with the Project. This calculation contrasts with current Bank practice, which bases the rate of return on expected benefits and costs of an entire investment program. The appraisal estimated rate of return reflected - 30 - operating benefits and costs based on the following rates of utilization of the steam plant: (1) heavy utilization (up to 650 GWh in 1977) during the period 1974-1977 due to substantial sales to Honduras (260 GWh in 1977); (ii) declining utilization (as low as 200 GWh in 1979) during the years 1978-1979 because of substantial electricity purchases from Honduras (up to 740 GWh); (iii) rising utilization (up to about 350 GWh) during the period 1980-1982 as purchases from Honduras declined (580 GWh in 1982); and (iv) utilization declining in a straight line from about 350 GWh to zero by the year 2001, as INE brought new generating facilities on line. Corresponding with expected utilization of the steam plant after 1982, sales revenues and fuel costs were expected to decline in linear fashion to zero by the year 2001; and other operating costs were expected to decline by about two thirds by the year 2001. 4.3.2 On the basis of the actual data for sales revenues, operating costs and investment expenditures associated with the Project for the years 1972-1981 and on the basis of a high level of utilization of the power plant (expected sales of 332 GWh annually) during the period 1982-2001, the internal rate of return on the project is expected to be about 7.2% (Annex 12). This rate of return relfects the effect of, primarily, higher-than-expected operating and fuel costs, especially in the period 1977-1981, and bigher-than-expected plant utilization in the period 1982-2001. This higher-than-expected plant utilization is based on uncertainties about INE's future generation expansion plans. If, however, the utilization of the plant were to decline by about 'one third during the period 1982-2001, the internal rate of return would drop to about 4.7%. V. FINANCIAL PERFORMANCE 5.1 Actual and Appraisal Forecast Financial Data, 1972-1978 5.1.1 Annexes 13 to 16 compare actual and appraisal forecast key financial ratios, income statements, funds statements, and balance sheets for 1972-1976, the period covered in the financial forecasts for the Eighth Power Project; and they compare actual and forecast data for the years 1977 and 1978, when the last elements of the project were completed. Forecast data for 1977 and 1978 were taken from the Staff Appraisal Report for the Ninth Power Project. 5.2 Actual and Appraisal Forecast FiAancial Performance, 1972-1976 5.2.1 During the forecast period of project construction, the financial performance of INE was below that which was expected at appraisal. INE's actual summary ratios of financial performance for 1972-1976 were: debt-service coverage, 1.6 times; self financing, 24%; 1/ and average rate of return on historically valued assets, 10.3%. In 1973 and 1974, due to the effects of the earthquake, rising fuel costs, and delayed tariff increases, plus recession (para. 4.2.1)--a of which adversely Affected sales and earnings-the financial performance of INE was poor; but as a result of tariff action in late 1974 and 1975, together with an expansion of the economy, the financial performance of INE improved in 1975 and 1976. 5.2.2 The appraisal forecast for financial performance for 1972-1976 was based on the following expectations: 1/ See INE's comments, Appendix A, para. 7. - 31 - (i) domestic sales rising 15% annually for the period 1972-1974 and 10% thereafter. Net sales to Honduras would amount to 110 GWh in 1975 and 180 GWh in 1976; (ii) stable tariff levels but declining average revenue (domestic) per kWh sold due to a large increase of sales to industrial customers (45% of sales In 1975 as compared with 41% In 1970). Domestic average revenue per kWh sold was expected to decline from C$ 0.209 to C$ 0.196; and (iii) stable fuel prices but declining average fuel costs per kWh of thermal generation due to the greater efficiency and the slightly lower fuel costs of the new steam plant. Average fuel costs were expected to decline from C$ 0.053 in 1974 to CS 0.044 in 1976. INE's summary ratios of expected financial performance for 1972-1976 were: debt-service coverage, 1.9 times; self-financing, 37%, and rate of return, 9.6%. 5.2.3 As shown in the table below, which compares for the period 1972-1976 actual and forecast summary data for sales, operating results, and sources and applications of funds, the expectations of the financial forecast were contradicted by events. Net sales to Honduras did not materialize; and domestic sales grew more slowly than expected (para. 4.2.1). Tariff levels in real terms were not stable: they declined 21% in 1973 as compared with the actual level In 1972 and then increased in 1974 and 1975 (Annex 13) following execution of a tariff and asset-revaluation study. The study ultimately led, at the urging of Bank staff, to implementation of a non-automatic fuel adjustment clause (in late 1974), a general tariff increase (in 1975), a revaluation of assets as of December 31, 1974 and an improvement in INE's rate of return in 1975 and 1976 - respectively, 8.4% and 8.9% on revalued assets (or 14.82 and 17.0% on historically valued assets). The actual summary revenue per kWh sold (CS 0.199) was 5.3% abo7e the appraisal forecast level (CS 0.189). 5.2.4 The most important factor adversely affecting INE's financial performance was the increase in the cost of fuel. The appraisal forecast was based on a stable per-gallon cost of-C$ 0.54 (USO.77. for Bunker C fuel. By 1976, the cost (in constant 1972 prices) had risen to about C$ 1.162 (US$O.166)-an increase (net) of almost 116%. P-r T-e period as a whole, the actual average fuel cost per kWh of thermal generation was CS 0.082 (US$0.0118) was compared with the appraisal forecast of C$ 0 .048 (US$0.0069)-an increase of 70.1%. 5.2.5 Because of lower-than-expected summary sales (3,197 GWh vs. 3,740 GWh) and revenues (CS 636 million vs CS 717 million) -in 1972-1976, and be- cause of higher-than-expected cash operational expenses (C$ 374 million vs. C$ 357 million), INE's actual gross internal cash generation (C$262 million) was 26% below the appraisal forecast level (C$ 360 million). After deductions for debt service and net changes in non-cash working capital, actual net Internal cash generation (C$ 120 million) was 34% below the appraisal forecast level (CS 180 million). DIE financed the shortfall of internal cash generation (C$60 million) and the increase in financial requirements (C$14 million) with a corresponding increase in long-term borrowing and funding from other sources. -32- 5.3 Actual and Forecast Financial Performance, 1977-1978 5.3.1 During 1977 MK earned a return of about 3.3Z on net average assets revalued. Operating results were adversely affected by the delay in completing the Nicaragua Plant and severe drought, which led to rationing, lower-than-expected sales and revenues, net energy purchases from Honduras, and bigber-than-expected fuel usage and costs (Annex 14). INE introduced a series of tariff increases at the urging of Bank staff, which raised the level of average revenue per kWh sold about 14Z over the level of 1976. ACTUAL AND FORECAST SUMEARY SALES, OPERATIN ESDLTS* AwD SoURCES AND APpLICATIONS OF FUNDS, 1972 - 1976 (in thousands of CS in February 1972 prices) Percent Dif- Percent Appraisal Percent farence from Actual of TDtal Forecast of Total Forecast Summary Sales and Operating Results Sales (in GWh) 3,197 - 3,740 - (14.5) Average revenue per klh sold (in centavos) 19.9 - - 18.9 - 5.3 operating revenues 635,633 100.0 717,200 100 11.5 Operating expenses (excluding depreciation) 373,779 58.8 . 356,900 49.8 4.7 Fuel 173,179 27.3 120,170 16.8 44.1 other (including non-operating expenses) 200,600 31.5 236,730 33.0 (15.3) -et operating income (before depreciation) 261,854 41.2 360,300 50.2 (26.2) Summary Sources Uses of Funds cross internal cash generation 261,854 52.2 360,300 73.9 (26.2) Iess: debt service (excluding interest during construction 167,646 33.4) 192,727 39.5 (13.0) Net internal cash generation 94,207 18.8 167,573 34.4 (43.8) Add (subtract): net charge in non-cash working capital, contributions, and customer deposits 25,632 5.1 12,600 2.6 103.4 Net internal cash generation available . for construction - 119,839 23.9 180,173 36.9 (33.5) Long term debt, contractor, liabilities, - and government advances 397,577 79.2 307,590 63.1 .29.3 Add (subtract): loss reserves, including earthquake loss (15,282) (3.1) - - - Total sources 502,134 100.0 487,763 100.0 29.5 Applications Construction 397,737 79.2. 389,182 79.8 2.2 Other (loans to cooperatives. prepaid expenses, cash) 104,397 20.8 98,581 20.2 5.9 Total applications 502,134 100.0 487,763 100.0 29.5 - 33 - Faced with lower-than-expected fiternal cash generation, an unexpected shortfall in Government contributions and involuntary investment in accounts receivable due from the Government, INE lowered its investment expenditures by more than half of the level expected at appraisal of the Ninth Power Project. 5.3.2 During 1978, IN's operating performance Improved, as measured by its rate of return, 7.2%, primarily because of improved hydrological conditions. In other respects, its financial position deteriorated because of the disruptive effects of strikes, riots, and civil war. Actual sales (886 GWh) were 13% below the appraisal forecast and involuntary investment in accounts receivable grew. INE again lowered its investment expenditures by more than half of the level expected at appraisal of the Ninth Power Project. 5.3.3 The summary table below compares actual and forecast data during the period 1977-1978 for sales, operating results, and sources and applications of funds. INE's expected summary financial ratios were: rate of return, 8.6%; debt-service coverage, 2.0 times; and self-financing, 20.6%. The actual ratios were, respectively, 5.3%, 1.4 times, and 12.2%. 1/ 5.4- Bank Enforcement of Financial Covenants 5.4.1 As a result of the earthquake (1972) and the dramatic increase of fuel costs (1973), INE's actual rates of return in 1973' and 1974 (about 4% and 5%, respectively) fell seriously short of its covenanted rate of return .(9%). As a result of drought (1977) and the initial disturbances of the civil war (1978), INE again experienced rate-of-return shortfalls-about 3% and 7%, respectively, in 1977 and 1978. 5.4.2 The Bank did not threaten to suspend disbursements in 1973 and 1974 because INE needed time to recover from the physical and financial damage of the earthquake and the fuel-cost increase. In 1977 and 1978, the Bank again did not threaten to suspend disbursements because INE was faced with the reality of a drought and the initial disturbances of the civil war. 1/ See INE's comments, Appendix A, para. 7. -34- ACTMAL AND FORECAST SUMKARY SALES. OPERATING RESULTS, AND SOURCES AMD APPLICATIONS OF PIUDS, 1977 - 1978 (in thousands of current CS) Percent Dif- Percent Appraisal Percent ference from Actual of Total Forecast of Total Forecast Summary Sales and Operating Results Sales (In GCh) 1,713 - 1,875 - (8.6) Average revenues 43.4 - 39.3 10.4 Operating revenues 743,234 100.0 737,600 100.0 1.0 Operating expenses (excluding depreciation) 514,882 69.3 400,800 54.3 28.5 Fuel 337,247 45.4 259,900 35.2 29.8 Other (including non-operating income) 177,635 23.9 140,900 19.1 26.1 Net operating income (before depreciation) 228,352 30.7 336,800 45.7 (32.2) Summary Sources and Applications of Funds Sources Gross internal cash generation 228,352 67.0 336,800 42.2 (32.2) Less: debt service (excluding interest during construction 166,123 (48.7) 171,800 (21.6) (3.3) Net internal cash generation 62,229 18.3 165,400 20.6 (62.3) Add (subtract): net charge in non-cash working capital, contributions, and customer deposits (20,713) (6.1) 400 - 5,078.3 Net internal cash generation available for construction 41,516 12.2 164,400 20.6 (74.8) Long tern debt, contractor, liabilities, and government advances 299,498 87.8 632,100 79.4 (52.6) Total sources 341,014 100.0 796,700 100.01 (57..) Applications Construction 279,182 81.9 797,700 100.1 (65.0) Other (loans to cooperatives, prepaid expenses, cash) 61,832 18.1 (1.000) (0.1) 6,283.2 Total Applications - 341,014 100.0 796,700 100.0 (57.2) 35- VI. INSTITUTIONAL PERFORNCE 6.1 INE-Bank relations 6.1.1 Bank-borrower relations deteriorated during the course of Project execution. The Executive President did not share the interest of Bank staff in improving efficiency, especially as it related to his office. Bank staff were correct in identifying centralized decision-making as a major management weakness; but they were in no position to affect matters. Their efforts to seek corrective action (para.3.5.2) led to ill-feeling and unproductive confrontations. 6.2 Performance of INE Staff 6.2.1 IME staff at the operational level performed their duties well, especially with respect to the restoration of service following the earthquake and the civil war (para.3.2.1). Bank staff felt that during design and construction of the Project, INE's construction and engineering departments exhibited serious weakness. 6.3 Performance of Bank Staff 6.3.1 Bank staff successfully assisted INE in obtaining cost overrun financing for the Project (para. 3.3.2). Bank staff did not request information which would have led to an improved design for the cooling-water in-take. This was not a failing, however, since the Bank did not maintain a specialist to review design problems at this level of detail. However, when design and supervision are performed by the same consultant, the Bank should weigh the advantages of a covenant requiring the review of the general concept by an experienced, individual consultant. 6.4 Performance of Consultant Staff (Power Plant 6.4.1 INE complained about poor supervision and design deficiencies at the Nicaragua plant (cooling-water in-take, over-dimensioning of civil works, etc.-para. 3.8.1). The Bank shares these complaints. VII. LESSONS"TO BE LEARNED 7.1 Project Justification 7.1.1 As the interconnection transmission line appears to have been constructed prematurely (para. 4.1.1), this Project illustrates the risks of justifying a major project component on the carrying out in another country of a second project, for which not even a feasibility study exists. The interconnection transmission line was built on the exectation that ENEE would build the Cajon project before it had been demonstrated that Cajon was the least-cost next step. Actual events contradicted these developments, leaving the interconnection transmission line under-utilized. - 36 - 7.2 Bank-Borrower Relations 7.2.1 This project illustrates that, with respect to institution-building objectives, when faced with a lack of shared interest in improving efficiency (para. 3.5.3), the Bank should be very cautious in making new loans until there is a more receptive attitude on the part of the borrower's management. For example, In connection with processing the loan for the ninth power project (1402-NI), IHE accepted reluctantly a covenant requiring the hiring of an expert who would, acting as an advisor to the Executive President, implement improvement programs agreed with the Bank. Obtaining INE's agreement delayed loan processing by six nonths. The expert achieved very limited results before leaving as a result of the civil war. ANn I MICAPACUA ulWSTITUTO WICARACMUVSE DE ""EaCIA (T.)* ZICHTH PORER AND AUTM AT? 99CONSTRUCTTOW PROJRarS (LOAN 340-U! AND CPfDIT 3X9-WI) SUMWART 0? SANK LENPTWC TOW VOW" Loan 82 9f4153 0.45 Governmentito InK I Managua Diesels 3 VW diesel electric generator Len 121 71535 7.10 INE/INE II Thermal Power 30 MU steam plant: 69kV (180 ka) and 13.2 kV (91 ka) - * transmission lines and sub-stations. Loan 122 7/8/55 0.40 Inst.rom.saclLocal III Power Distri- Distribution in 14 distributing button towns companies Loan 154 11115156 1.60 INEfl IV *Thermsal Power Supplemental loarto comlete wrofect financed by 121-P7 Loan 259 6122/60 12.50 INRIME V Rio Tuma 2ydro 50 PM xydro slant: (M1anta Centro 138 kv transmission America) lines (120 k) and sub-stations. Loan 470 10/15/66 5.00 INE/IME VI Sixth Power 15 M gas turbine unit: 138 kv trans- niesion lines (-100 ka) and sub-stations expansion'of 13.2 kv distribution sys- tem and construction of headquarters building Loan 543 6121/68 15.25 INEKINE VII Sewenth Power £0 MU steam unit Santa Barbara addition to Wanagus ydro (P1anta Power Plant:50 MW cral. Somoza Zydroplant (Santa Carcia) Barbara) on Viejo river; 138 kV (124 k) - transmission lines and substations. Loan 840 6/28/72 24.00 INE/INE VII Eighth Power 2 X 50 NW steam plant (Pto.Somosa at Tiscuco; 230 kv Stea and (165 ka) and 138 kv transmission (165 ka) transmission lines inter- lines and sub-stations connecting tbe management studies power systems of and ouppleantary a Nicaragua and financing for VII Honduras) Project. Credit 389 6/6/73 5.00 Government/INK Eartheake Re- Repair and rehabili- Part C construction tation of etisting installation in tanagua area (Dower plant. sub-station and distribution system); extension of distribution net- work; and 1973-74 normal work vrogras Loan 1402 4122/77 22.00 INEINE Ninth Power 230 k (145 ka) and transmission 138 k (31 k) trans- lines inter- mission lines plus TOTAL 2 Lsas connecting the other sub-station TOTA Crs 93.30 power systems works 1 credit Nicaragua and Costa Rica plus other transni- sasion/distri- bution works) *predecessor to INK was Empress Wacional de a y Fomrsa (ElALIV), which was established in 1954. FKALWF became INE in 1979 (following the establishment of the revolutionary government). All references to INK should be understood as EMALU -38- ANNEX ?A Page 1 of 2 pages NICARAGUA INSTITUTO NICARAGUENSE DE ENERGIA (INE) EIGTH PMER AND EARTRQUAKE RECONSTRUCTION (PART C) PROJECTS (LOAN 840-NI AND CREDIT 389-N1) Major Covenants of the Loan, Joint Financing,& Guarantee Agreements for the Eighth Power Project 1. Performance of the INE under the following major covenants relating -to the Eighth Power Project was generally satisfactory. (i) Section 3.04 of the Loan Agreement 4equired INE to obtain prior Bank agreement for long-term borrowing when net revenues were less than 1.5 times future debt service; (ii) Section 3.05 of the Loan Agreement eduired IKE to maintain the amount of receivables in arrears below 110% of the total average monthly billing corresponding to the inmedia- tely preceeding 90 days. Since 1978, INE has not complied with this covenant; (iii) Section 3.05 of the Joint Financing Agreement required INE to procure Bank-financed goods required for the Project on the basis of international competitive bidding, except as the Bank otherwise agreed (Joint Financing Agreement - JEA - Section 3.05); (iv) Section 3.06 of the Joint Financing Agreement required INE - to furnish plans, specifications, contracts, etc., and any modifications as the Bank requested (JPA, Section 3.06); and (v) Section 5.02 of the Joint Financing Agreement required INE to furnish the Bank with financial statements prepared by an independent, outside auditor; however, INE often missed the deadline (April 30) for submitting this report to the Bank. (vi) Section 5.04 of the Joint Financing Agreement required INE to complete a rate study by June 1974. 2. Performance of INE under the following major covenants has not been satisfactory: ANNEX 2 A Page 2 of 2 pages (vii) Sections 4.01 (a) and (b) of the Joint Financing Agreement required INE to conduct its operations in accordance witb sound administrative, financial, and engineering uractices and to operate and maintain its plant in accordance with sound engineering and public utility practices. 3. The performance of INE and the Government was not satis- factory with respect to tariff levels in 1973 and 1974. Section 3.03 of the Guarantee Agreement required the Government to adjust tariffs sufficiently for INE to earn nine percent (9%) annually on average net fixed assets. In 1973 and 1974, INE earned returns of 4.4% and 5.9% on average net fixed .-assets historically valued; and in 1975 and 1976, INE earned returns of, respectively, 8.4% and 8.9% on net average fixed assets revalued annually. INE again failed to earn it covenanted rate of return in 1977 and 1978 because of droought and civil war; however, when INE's financial diffi- culties began to emerge in 1977, the Government moved more promptly to raise tariffs than it did following the fuel-cost increase of 1973. -40- AM 2B NICARAGUA INSTITUTO NICARAGUENSE DE ENERGIA (INE) EIGHTH POWER AND EARTHQUAKE RECONSTRUCTION (PART C) PROJECTS (LOAN 840-NI AND CREDIT 389-NI) Major Covenants of the Credit and Project Agree- ments for Part C of the Earthquake Reconstruction Projects 1. The Project Agreement for Part C of the Earthquake Reconstruction Project contained covenants on procurement (Section 2.03), project documen- tation (2.05), and sound public utility practices (administrative, financial and engineering) (3.01b8c). INE's performance under these covenants was as described for the corresponding covenants of the loan and Joint Financing Agreements for the Eighth Power Project (Annex 3A). 2. The Credit Agreement (Section 3.01) obligated the Government to cause INE to perform all the obligations set forth' in the Project Agreement. The Government did not require INE to operate in accordance with sound public utility practices (administrative, financial, and engineering). - 41 - ANE 3 NICARAGUA INSTITUTO NICARAGUENSE DE ENERGIA (INE) EIGHTH POWER AND EARTHQUAKE RECONSTRUCTION PROJECTS (LOAN 840-NI AND CREDIT 389-NI) Actual and Forecast Project Timetable for the Eighth Power Project Forecast* Actual Difference Comple- No. of Comple- No.of No. of Percent Start tion months Start tion Months Months. difference from expec- ted 1. Nicaragua Plant 6/73 12/75 30 8/73 9/111/ 49 19 63.3% 2. 230 kV trans- mission system: 1) Interconnection line (Leon to the border, 70 km) 2/75 2/75 12 2/75 9/76 19 7 58.3 2) Puerto Tiscuco- Leon-Managua (95 km)21 6/74 2/76 20 9/75 3/77 18 (2) (10.0) 3. 138 kV trans- mission system 1) Sebaco-Yalaguina (91 km)3/ 12/73 2/75 14 2/74 6/75 16 2 14.3 2) Managua Ring (60 km)4/ 5/74 12/75 19 5/76 5/77 12 (7) (36.9) 4. Management and organization study 12/72 - 5/ - 7/73 6/74 10 N.A. N.A. */ Taken from progress reports, as the appraisal report contained no project timetable. 1/ The first unit cosmenced operations in December 1976; the second, April 1977. 1/ Including an expansion of the existing 138 kV substation near Leon. 3f Including the addition of a switching bay at the 138 kV substation at Sebaco and construction of substations at Esteli and Yalaguina (at 138/69/24.9 kV). 4/ As appraised, this component included (in addition to the transmission line): construction of a 230/138 kV substation at Tiscapa (including a load dispatch center), a 138 kv substation at Los Braziles, and switching bay additions to the existing 138 kV.substations at the Managua steam electric Plant. This component of the project was substantially redesigned to respond to population dislocations caused by the earthquake (December 1972) and because of the transfer of certain works to the Ninth Power Project. Under the Eighth Project as revised, the works of the Managua ring consisted of construction of: (i) a 230/138 kV substation at Los Braziles, the new terminal point of the Leon-Managua 230 kV transmission line; (ii) and about 11 km of 138 kV transmission line between the substations at Los Brasiles and the Managua steam electric plant, where substation facilities were also expanded. The balance of the works of the Managua ring were redesigned and transferred to the Ninth Power Project. 5/ No completion date indicated in either appraisal report or Joint financing Agreement for Eighth Power Project (dated June 28, 1972, Section 3.03(a)). -42 - ANNEX 4 NICARAGUA INSTITUTO NICARAGUENSE DE ENERGIA (INE) EIGHT POWER AND EARTMQUAKE RECONSTRUCTION PROJECTS (LOAN 840-NI AND CREDIT 389-NI) Price Deflator Index for Costs of Eighth Power Project General Price Index Deflator 3/ (Annual Average) 1/2/ (Annual Average) 1972 122.1 1.014 1973 144.2 1.198 1974 178.0 1.478 1975 182.1 1.513 1976 201.4 1.673 1977 229.7 1.908 1978 236.8 1.967 1979 285.3 2.370 1980 385.2 41 3.199 1/ Source: Central Bank of Nicaragua, Indicadores Econ6micos, December 1979, p. 20. 2/ 100 - 1958. 31 100 = February 1972. 41 Reflects Bank estimate of about 35% inflation in 1980. International Price Index Deflator (Annual Average) 1/2/ (Annual Average) 3/ 1972 51.05 1.042 1973 58.65 1.197 1974 71.45 * 1.458 1975 84.80 1.731 1976 91.30 1.863 1977 96.05 1.960 1978 109.15 2.228 1979 126.90 2.590 1980 143.45 2.928 1/ Source: International Bank for Reconstruction and Development, "Commodity Price Forecasts - Updating", June 22, 1981, Table 7, p. 6. 2/ 100 = 1977 31 100 = February 1972 - 43 - EiM= P0M AND EMPa~UA!E AMrZTECrZN PIUJECTS Ala 840-nt AN æ r 389-I) ~a~P ad cctual Cog or P~ o fa •roc. Pore.n Local PGrtdm = ufffferne Currenc Ow~n Total Cua~nc Ca~rn T~ta from Agrasel' 1. Project Cost (Original Project) 1. Planta Nicaragua Civil ork & 2.190 940 3,130 3,554 2,475 6,029 iler plat 1,960 6.300 8,260 762 8,325 9,087 Tutbo & ntion Plant 460 3,850 4,310 300 5,661 5,961 Electric ~1ast 720 1,980 2,700 196 2,664 2,860 o..ral plant 1.360 1.690 3.050 713 689 1.402 Subtotal 6,690 14,760 21,450 S,S 914 25,339 mgieering and MAiniatration 210 1,500 1.710 2,769 1 440 4.209 Subtotal 6,900 16,60 23,160 8,294 9,54E Cæbting~ncies (MP ical and Price> 800 1500 2.300 Total plant 7,700 17,760 25,460 8.294 21,254 29,548 16.1 2. 230 kv Traueeisaion Sstem Line. 440 1,740 2,180 666 3,542 4,208 Sub~tation 690 2 140 2830 -1.337 4.317 5.654 Subtotal 1,130 -3,88 5,020 2,003 7,859 9,862 -giering and A~- atom,n 1n0 . 350 460 1,121 472 1.593 Subtotal ~M- , 4,2Y30 5,470 3,124 8,331 1.455 Contingecie ~tryaical and Price) 160 570 730 - - Total 230kvTraumi - Syetem 1,400 4,800 6,200 3,124 8.331 11,455 84.7 3. 138 kV Trana-ioeiam Systen ~inea 370 1.060 1,430 475 2,004 2.479 Substations 240 550 790 651 1.337 1 988 Subtotal --m II Znff 1,.26 3.341 Engineering and Adniatration 170 B 250 782 232 3,014 Subtotal 780 1,690 2,470 10 3,57 5,481 Cotingencie «: ry~ical and Price) 70 260 330 .- .-- Total I38kTransmiionSystem 850 1,950 2,800 i,908 3.573 5,481 95.8 4. mnaement Consultants 50 150 200 - 204 204 2.0 5. Total Ccmt (Original Project) 10,000 24,660 34,660 13,326 33.362 46,688 34.7 II. ~Epanaion to scope of Projeet 6. Operators' Village - - - 5,798 - 5,798 7. Rightv of Way and Accese nad - - - 1,157 - 1,257 8. 69 ikv Transission Tie 101 101 9. Total Coat of Erpenaion - - - 7,056 - 7,056 III. Project Cot Original Plu Tncreases) 10,000 24,660 34.660 20,382 33,362 53,744 55.1 Tv. Proiect ~inancing (Original Proiect) låE 8,o0 - 8,000 5~,24 1,151 6,395 nIT - - - 6,082 7,362 13,444 CAEI 359-P0 2,000 3,600 5,600 2,000 3,883 5,883 351-io - 660 660 - 637 637 iD - 20.400 20.400 - 20.330 20.330 Total (Orig~na Project) 20,000 24,660 34,660 13,326 33,363 46,689 34.7 V. Additiona to Scope of the Proect 3iE - - - 4,559 . - 4,559 IT _ - _ _- 2.497 - 2.497 Total (additins) - - 7,056 - 7,056 - iv. Total Prolect Pinncing (Original plus Increaea) 10,000 24,660 34,660 20,382 33,363 53,745 55.1 * Atual cot data inc~-e axpondfuet~ of abot US$0.455 million incurred during the yars 1979 nd 1980 (les. t2e 22 of total co~t of Project after 1978). ere w~ only ane diebur~am.ne frm L,~n 840-NI: $21,149 in 1980 for ane«~eari=g a-ricea redered in conec- ti~n with Piana NicarWg0a. AMM 6 -44 - I16 IRSTITUTO WICARACUMSE 1 MIERGIA (iRE mr1 PounE a~ n qUMn M=MUCo=snWIOEN ECTS (LOM 840-1 AND CMDTT 389-NI) Appraisal and Actual Cost* of Eighth Power Project (In millions of US$) Appraisal Forecast Actual Local Foreign Local Foreign % Difference . Project Cost (Oriinal Projet) rency Total Currency Currency Total from Appraisal 1. Plants NicaraRua 112/ 7.435 17 280 24,715 4.556 12,921 17.377 (29.7) Civil works 2.365 1,005 3,370 2,224 1,380 3,604 6.9 Boiler plant 2,17 6,735 8,852 494 4,707 5,201 (41.2) Turbo generation plant 497 4,116 4,613 180 3,201 3,381 (26.7) Electric equipment 778 2,117 2,895 124 1,519 1,643 (43.2) Ceneral equipment 1,468 1,807 3,275 407 376 785 (76.0) Engineering and administration 210 1,500 1,710 1,127 1,636 2,763 61.6 Price Contingency 265 480 745 3.738 8 12.171 1533.7 Subtotal, Planta Nicaragua (in current prices) 7.700 17,760 26,460 8.294 21,254 29,548 16.1 2. 230 kV line 1/2 1.330 4.498 5828 1.900 6.7 Lines 475 1,860 2,335 474 1,823 2,297 (1.6) Substationa 745 2,288 3,033 764 2.215 2,979 (1.8) Engineering and administration 110 350 460 662 281 943 105.0 Price Contingency 70 302 372 1.224 4.032 5,236 1307.5 Subtotal, 230 kY line (in current prices) 1.400 48 6.200 3.124 8.331 11.455 84.8 3. 138 Wd Line 1/2/ 830 1Q0 2.632 1.004 1-990 -2.94 13.9 Line 400 1,134 1,534 223 1,071 1,294 (15.6) Substations 260 588 848 319 781 1,100 29.7 Engineering and administration 170 80 250 462 138 600 140.0 Price Contingency 20 148 168 904 1583 2.487 1380.4 Subtotal, 138 kV Line (in current prices) 850 1.950 2.800 1.908 3 5.481 95.8 4. Management Consultants 50 150 200 - 134 134 (34.0) Price contingency - - - - 70 70 - Subtotal, Management Consultants (in current prices) 50 150 200 - 204 204 2.0 5. Total Cost, Original Project (Items 1 to 4)(In current prices) 0 24.660 34,660 13.326 33436 4.688 34.7 II. Expansion of Scope of Project 1/2/ - - - 4.390 4.390 - 6. Operators' Village (including engineering apd administration) - - - 3,600 - 3,600 - 7. Rights-of-Way and Access Road - - - 731 - 731 - 8. 69 kV Line - - - 59 - 59 - 9. Price Contingency (for items 6-8) - - - 2.666 - 2.666- 10. Total Cost. Expansion of Scope of Project (iteme 6-9)(in current prices) - - MEs5 III. Total Cost of Project (items 7 and 10) 260 34.660 20,382 3 53.7" 55.1 * Actual cost data includes expenditures of about VS$0.455 million (in current prices) Incurred during the years 1979 and 1980 (or less than 12 of the cost of the Project in current prices). After 1978, there was only one disbursement from Loan 840-NT: $11,149 In 198D for engineering services rendered in counection with Plants Nicaragua. 1 Tz constant 1972 prices. Appraisal data reflects pro-rata distribution of physical contingencles. 2f Actual cost data adjusted with indees set forth in Annex 4. Details on actual cost data in current prices set forth in Annex 5. -45- ANNEX 7 NICARAGUA INSTITUTO NICARAGUENSE DE ENERGIA (INE) EIGHTH POWER AND EARTHQUAKE RECONSTRUCTION PROJECTS (LOAN 840-NI AND CREDIT 389-NI Actual and Forecast Loan Allocation for Loan 840-NI Forecast Revised Revised Actual Category (6128/72) (5/17/76) (10/4/78) (3/31/80)2I 1. Civil works of the Nicaragua Thermal Plant (previously referred to as the Tiscuco Thermal Plant 0.800 0.850 0.918 0.909 2. Electrical and mechanical works of the Nicaragua Plant, plus materials and associated services 11.750 13.150 11.616 11.558 3(a) Equipment, materials, and associated services for the 230 kV transmission system (including the interconnection with Honduras) 3.310 3.340 2.996 2.996 3(b) Equipment, materials and associated services for the 138 kV trans- mission system (the Managua ring and the Sebaco-Yalaguena trans- =ission works) 1.370 1.800 3.355 3.412 4. Consultants services for above categories plus nanagement and organization study 1.210 1.260 1.515 1.456 5. Interest during construction 2,100 2,100 2,100 2,100 6. Civil works at Santa Barbara plant 1,500 1,500 1,500 1,500 7. Unallocated 1.960 13.931 1/ 24,000 24,000 24,000 23,931 1/ I/ About US$0.069 of Loan 840-NI was cancelled. 2/ Shows disbursements as of final disbursement, July 17, 1980 46 -AffEi=8 NICrAm - IMSTITUTO NICARAGESE Dr EMRGIA (DE) EIGTr PMER AD lARTHUAKE RECM STRUCTION (PAWT C) PROJECTS (Loan 840-NI and Credit 389-"I. Actual and Forecast Loan Allocations for Credit 389-NI (in millions of US$) and Category Forecast Actal 2 (06.06.73) (04.25.80)- 6. Civil works (for repair 0.370 0.336 of da~age anagua thermal plant and indoor substation) 7. Equipment and waterials 4.230 4.664 (for repair of damaged distribution system, plus extensions of distribution system and annual work program). 12. Unallocated 0.400 - Total 5.000 5.000 1/ February 2, 1978. 2/ Date of last disbursement. ANNEX 9 --47- NICARAGUA INsTITuTo NICARAGUENSE DE ENERGIA (INE) EIGHT POWR AND EARTHQUAKE RECONSTRUCTION (PART C) PROJECTS (LOANS 840-NI AND CREDIT 389-NI Actual and Forecast Schedule of Loan Disbursements for Loan 840-NI (in millions of US$) Actual Cuamula- tive Disburse- aent as a per- cent (Z) of IBRD Fiscal Year Forecast Dis- and Quarter Actual Forecast bursement 1972/1973 December 31, 1972 - 3.3 0 June 30, 1973 0.3 5.8 5.2 1973/1974 December 31, 1973 2.8 9.0 31.1 June 30, 1974 4.2 14.0 30.0 1974/1975 December 31, 1974 5.6 18.2 30.8 June 30, 1975 7.3 21.0 34.8 1975/1976 December 31, 1975 13.4 22.5 59.6 June 30, 1976 18.1 22.7 79.7 1976/1977 December 31, 1976 20.2 . 23.2 87.1 June 30, 1977 20.9 24.0 87.1 1977/1978 December 31, 1977 21.8 24.9 90.8 June 30, 1978 23.0 24.0 95.8 1978/1979 December 30, 1978 23.3 24.0 97.1 June 30, 1979 23.7 24.0 98.8 1979/1980 December 30, 1979 23.7 24.0 98.8 June 30, 1980 23.9 1/ 24.0 99.6 1/ The equivalent of US$69,941.29 of Loan 840-NI was cancelled. -48- ANNEX 10 NICARAGUA INSTITUTO NICARAGUENSE DE ENERGIA (INE) EIGHT POWER AND EARTRQUAKE RECONSTRUCTION (PART C) PROJECTS (LOANS 840-NI AND CREDIT 389-NI Actual and Forecast Schedule of Loan Disbursements for Credit 389-NI (in millions of US$) Actual Cummula- tive Disburse- ment as a per- cent (Z) of IBRD Fiscal Year Forecast Dis- and Quarter Actual Forecast bursement December 31, 1973 0.2 3.5 December 21, 1974 2.8 5.0 56.0 December 31, 1975 3.1 5.0 62.0 December 31, 1976 4.4 5.0 88.0 December 31, 1977 4.4 5.0 88.0 December 31, 1978 4.5 5.0 90.0 December 31, 1979 5.0 5.0 100.0 a* -49- ARll NICARAGDL INSTITOTO NICARAGUENSE DE ENERCIA (INE EIGHH POWER AND EARHQUAEE RECONSTRUCTION PROJECTS (OAN 841-MI AND CREDIT 1389-M1 Actual and Forecast Sales, Purchases from Honduras, and Generation by Type of Plant Summary Summary Sales Sales 1972 1973 1974 1975 1976 1972-76 1977 1978 1977-78 Actual and Forecast Sale. In Nicaragua (in cuh) Actual 552 625 645 687 798 3,197 837 886 1,713 Forecast 530 600 685 750 830 3,395 910 1/ 1.020 1/ 1,930 Z Difference from Forecast 4.2 (14.2) (5.8) (8.4) (3.9) (5.8) (9.2) (13.1) (11.2) Actual and Forecast Sales to (Purchases from) Honduras (In CWh) Actual Sales - - - - 3 3 10 8 18 Less: Purchases - - - - (10) (10) (18) - (8) (26) Net Sales (Purchases) - - - - (7) (7) (8) - (8) Forecast Net Sales - - - 110 180 290 260 - 260 % Difference from Forecast - - - (100.0) (103.9) (102.4) (103.1) - (103.1 Actual and Forecast Generation By Type of Plant (in GUh) Actual Generation: Hydro 285 294 352 355 380 1,666 121 176 297 Stems 337 275 397 452 541 2,r-2 899 876 1,775 Diesel 14 17 10 10 1 52 6 1 7 Gas Turbine 10 25 4 4 20 63 41 12 53 Purchases from Honduras (net) - - - - 7 7 8 - 8 Gross Generation 640 611 763 821 949 3,790 1.075 1,065 2,140 Forecast Generation . Rydro 295 380 380 380 380 1,815 380 380 760 Stem 315 318 415 620 790 2,458 970 700 1,670 Diesel 5 2 - - - 7 - - - Gas Turbine 10 5 10 10 10 45 10 20 30 Net Purchases (Sales) from Honduras - - - (110) (180) (290) (260) 100 (160) Gross Generation 625 705 805 900 1,000 4,035 1,100 1,200 2.300 Z Difference from Forecast 3.4 (13.3) (5.2) (8.7) (5.1) (6.1) (2.3) (11.3) (7.0) Taken from Staff Appraisal Report (SAR) for the Eighth Power Project. Forecast sales data for 1977 and 1978 differs from that shown in subsequent financial annexes, wh ich show forecast data for 1977 and 1978 taken from the SAR for Ninth Power Project in Nicaragua. NICARAGUA ANNEX 12 INSTITUTO NICARAGUENSE DE ENERGIA (INE) EIGHTH POWER AND EARTHQUAKE RECONSTRUCTION PROJECTS Actual Internal Rate of Return ([RR)1' (in millions of C$,'in constant 1972-prices) Incremental Incremental Revenue Per Incremental Incremental Incremental Sales kWh Sold Incremental Capital Operating Net Year (in GWh) (in C$) Revenues Costs Costs Benefits 1972 - - - 4.3 - (4.3) 1973 - - - 17.4 - (17.4) 1974 - - - 29.8 - (29.8) 1975 - - - 39.3 - (39.3) 1976 - - - 57.1 - (57.1) 1977 351.9 0.216 76.2 57.8 53.9 (35.5) 1978 452.5 0.230 104.2 10.7 59.3 (34.2) 1979 248.5 0.243 60.3 0.9 39.2 20.2 1980 208.4 0.234 48.7 0.4 31.6 16.7 1981 169.2 0.290 49.2 - 40.6 8.6 1982-2001 332.1 0.291 96.5 - 79.2 17.3 Internal Rate of Return: 7.2% 1/ Appraisal Report for Eighth Power Project (dated June 2, 1972; PU92a) included a description (but not a mathematical demonstration) of the IRR for the Project. - 51- AWE 13 NICARAGUA INSTITUTO NICARACUENSE DE ENERCIA (INE). EIGMTB POUER AND EARTBQUAKE RECONSTRUCrIO PRWJECTS (LDAN 841-WI AND CREDT 389-nT) Actual and Forecast Key Financial Patios, 1972-1978 Sumary Summary Summary Financial Financial Financial Ratio Ratio Ratio 1972 1973 1974 1975 1976 1972-1976 1977 1978 1977-2978 1972-1970 1. Return on aTage net fixed assets (M) Actual 9.4 4.4 5.9 14.8 17.0 10.3* 3.32 7.22/ 5.31 - Forecast 9.7 9.6 10.2 9.6 9.0 9.6* .SI J.77 8.6*/ --7Z2x 2. Operating ratio (M Actual 62.8 76.0 79.0 62.1 62.5 66.8 82.3 68.2 74.7 74.7 Forecast 61.8 59.5 61.7 64.2 63.9 62.4 69.1 64.1 66.5 66.5 3. Debt servje coverage ratio (times)- Actual 1.7 1.0 0.9 2.0 2.2 1.6 1.2 1.5 1.4 1.5 Forecast 1.6 1.7 2.0 1.9 2.1 1.9 2.0 1.9 2.0 1.9 4. Contributio,to investment ratio (z%q' Actual 54 18 9 47 42 28 26 10 15 24 Forecast 26 27 29 51 105 40 24 18 21 28 5. Debt total capital ratio Actual 49.8 55.1 62.5 58.3 57.4 - 56.6* 46.6212/ 446.ZI.I 45*2JJW - 2 Forecast 52.0 52.3 54.1 51.2 49.1 51.7* 42.721 45.8Z/ 45*2/J! .. 1 6. Sct customer r9qeivables ratio (days)w Actual 50 52 57 56 55 54* 76 76 76* 60* Forecast 61 59 57 53 50 56* 48 49 48* 54* 7. Average revenue per kWh sold (in constant Feb. '72 centavos) Actual 20.0 15.9 17.0 23.5 21.6 19.9 21.6 23.0 22.4 20.8 Forecast 20.9 20.5 20.1 18.3 17.6 18.9 20.9 19.7 19.0 19.0 * Annual average Net operating income/average net operating assets (historically valued during 1972-1976; revalued annually thereafter. Operating expenses/operating revenues. Gross internal cash generation/debt service. Net internal cash generation available for construction/ (construction expenses - netsalvage + loans to rural cooperatives). This ratio differs from that shown in Chapter 5, which measures INE's self-financing capacity. 5 Long-term debt (including current maturities) + (long-term debt + equity). The forecasted long-ters debt includes contractor debt. which is shown as a current l1abilty in actual balance sbeets ( Annez ). When contractor debt Is included in long-term debt, the ratio for the actual figures are: 1972 1973 1974 1975 1976 L9m2-a975 Actual 50.5 55.7 63.1 59.5 58.9 58.2 Accounts receivable/revenues x 365 days. Ratio not comparable with that of 1976 (and before) because of annual revaluation of operating assets. Based on estimated data for revalued assets in 1976. Ratio reflects annual revaluation of assets and corresponding revaluation of equity accounts. - 52 - NICARAGUA INSTITUTO NICARACUENSE DE E EIGHTH POWER AM EARTHQUAKE RECONSTRUCTON PROJEC Actual and Forecast Income State (in thousands of Cordobas. cr- 1 9 7 2 1 9 7 3 1 9 7 4 1 9 7 5 1 9 7 6 Year Ending December 31 Actual Forecast Actual Forecast Actual Forecast Actual Forecast Accual - Sales of Electricity (in GWh)V 552 541 515 609 645 695 687 872 798 Average Revenue per kWh (in centavos) 20.3 20.9 19.0 20.5 25.1 20.1 35.6 18.3 36.1 Operating Revenues: From sales In Nicaragua 112.238 113,100 97,669 124.900 161,656 139,700 244,661 151,200 288.269 From sales to Honduras - - - - - - - 8,700 - Subtotal 112,238 113,100 97.669 124.900 161.656 139.700 264.661 159.900 288.249 Operating Expenses: Fuel 17,100 16,970 19.100 16.130 55,300 22.560 71,300 29.620 93.386 Ceneral & administrative 22,991 12,270 16,746 13.570 24.772 15,190 28,436 16,280 32.294 Other operating 14.986 25.220 22.548 27,900 29,744 31,200 32.852 35,850 34,299 Depreciation 15.382 15,383 15,814 16.655 17.968 17224 19.461 2a,837 20.111 Subtotal 70.459 69.843 74.208 74,255 127,784 86,174 152,069 102,587 180.090 Net Operating Income 41.779 43,257 23,461 50.645 33,872 53,526 92.612 57.313 108,159 Other Income (Expense), Net (5.261) (1.290) (4,92 470 (3.277 1,310 (994) 2,130 (1,622) Exchange Losses (3,519) (2,300) -~ (1.600) - (1.600) - (1,700) - Net income before interest charges 32,999 39,667 18.537 49.515 30,595 53,236 91,618 57,743 106.537 Total Interest Charge 16,000 19.340 20,654 22,830 31,575 27,230 38,114 30.290 39.606 Less: interest charged to construction 743 4.360 2.185 6,523 3.566 11.699 5,488 14.373 10.109 Interest Expense 15,257 14,980 18.469 16,307 28,009 15.531 32,626 15.917 29,497 Ner Income 17,742 24,687 68 33,208 2,586 37.705 58.992 41,826 77.040 If Except for forecast daa for years 1972-1976 (stated in conscart prices as of February 1972). Forecast data for 1977 and 1973 I- for the Ninth Power Project in Nicaragua (1402-NI). 21 During years 1973-1977, INE did not expense exchange losses. / Forecasted "Other Operating" expenses In 1977 Includes Purchased Power from Costa Rica and Honduras. 4/ On annually revalued assets, estimated depreciation expense world amounr to about CS49.759. - 52 - -AMA ANNEX 14 TSE DE ENERGIA (INE) -1 PROJECTS (LON 841-NI AND CREDIT 389-NI) me Statements. 1972-;978 as, current priceser') Summary Sumary Income Statements Z Differ- Income Statements Z Diff- - 1 9 7 6 1972-1976 ence from 1 9 7 7 1 9 7 8 1977-1978 ence f Actual Forecast Actual Forecast Forecast Actual Forecast Actual Forecast Actual Forecast Foreci-i 798 1,023 3,197 3,740 14.5 827 878 886 997 1,713 1,875 (8.6) 36.1 17.6 28.3 9.2 47.4 41.3 39.9 45.3 38.8 43.4 39.3 10.4 288,249 165,400 904,473 694.300 30.3 341,637 350.900 401,597 382,100 743,234 733.000 1.4 - 14,200 - 22,900 _ - - - 4.600 - 4,600 - 288.249 179,600 904.473 717.200 26.1 341.637 350.900 401,597 386.700 743,234 737,600 1.0 93.386 34,890 256,186 120,170 113.2 185,895 127,200 151,352 132,700 337,247 259.900 29.8 32.294 17,500 125,239 74.810 67.4 35,616 29.100 37.511 30,600 73,127 59.700 22.5 34,299 37.,850 134,429 158,020 14.9 32.853 43,90031 54.259 35,300 87,112 79,200 10.0 20,111 24.532 88,736 94.631 6.2 26.835 42.100 30,7081 49.400 57.543 91.500 (37.1) 180.090 114,772 604.590 447.631 35.1 281,199 242,300 273,830 248.000 555.029 490,300 13.2 108.159 64.828 299,883 '29.569 11.3 60,438 108,600 127.767 138,700 188,205 247.300 (23.9) (1,622) 2,080 (16,078) 4,700 (442.1) (6,152) (1,200) (11,077) (800) (17.229) (2.000) 761.5 - (1,400) (3,519)' (8,600) 59.1 - - 5,761 - 5,761 - - 106,537 65,508 280.286 265,669 5.5 54,286 107,400 110.929 137.900 165,215 245,300 (32.7) 39,606 30,650 145,949 130,340 12.0 45,516 58,500 63,274 76,200 108,790 134,700 (19.2) 10.109 2,678 22.091 39.633 44.3 6,626 21.700 9.034 26.900 15.660 48.600 (67.8) 29,497 27,972 123,858 90,707 36.5 38.890 36,OO 54,240 49.300 93,130 86,100 8.2 77,040 37.536 156,428 174.962 10.6 15.396 70,600 56,689 88.600 72,085 159,200 (54.7) 1978 is taken from the staff appraisal report - 53 - NICARAGUA INSTITUTO NICARAGUENSE DE EN EIG1TH POWER AND EARTBQUAKE RECONSTRUCTION PROJECT- Actual and Forecast Sources and Applicat (In thousands of C$, current 1972 1973 1974 1975 1976 SOURCES Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Fc -- Cross internal cash generation 51,900 55.050 34.351 66,170 48,563 70.460 111.079 78,580* 126.648 Net income before interest 36T518- 39,667 18.537 49,515 30.595 53.236 91,618 57,743 106,537 Depreciation 15.382 15.383 15,814 16.655 17.968 17.224 19.461 20,837 20,111 Less: Debt service 29.842 33.900 34.509 39.797 57.276 35.751 54.935 41,097 57.454 Amortization 14.585 18.920 16,040 23.490 29.267 20,220 22,309 25,180 27.957 Interest expense 15.257 14.980 IB,469 16.307 28.009 15,531 32.626 15,917 29,497 Net internal cash generation 22.058 21,150 158 26.373 8,713 34.709 56.144 37.483 69,194 Add (subtract): 10.006 2,200 14.171 2,400 5.090 2.500 21,086 2.700 10.981 Change in non-cash working capital 8.155 1.300 7,180 1.300 15,180 1.400 11.225 1,400 19,491 Contribution in aid of construction 3.104 2,000 4.503 2,100 4.901 2,200 5.356 2,300 4.259 Customer deposits 1.253 1,500 2.488 1,600 5,189 1.700 4.505 1,800 4,251 Net internal cash generation available for construction 32.064 23.350 14.013 28.773 13.803 37.209 77,230 40,183 58.213 Long-term borrowing 32,327 76.670 77.164 72,350 180.609 97,130 70.530 34,740 133.286 Contractor liabilities 4.167 - 1,987 - 4.843 - 14,441 - 12,214 Advances from the Government 8.964 8,000 952 4,000 5.919 2.000 29,234 - 9,167 Add (subtract): 7.527 - B.885 - 587 - 70 - - Reserve for property loss 10.011 - - - - - - - - Extraordinary earthquake loss 17.538 - 8,885 - 587 - 70 - - TOTAL SOURCES 61,661 108,020- 81.257 105,123 176,981 136.339 191.365 74,923 212.880 APPLICATIONS Construction expenditures (including interest during construction) .8,063 57.598 72,108 86,923 134,210 117,669 163,709 78.693 149,085 Less: net salvage 9.965 -- 1,217 - 3,777 - 11.333 - 11.000 Loans to rural cooperatives 21,582 32.690 7,877 18.410 29,836 9,800 13,306 - 492 Prepaid expenses 637 11,422 2,218 1,840 16,046 5.890 20,682 15,120 63.474 Cash 1.34" 6.310 271 2,050 666 2,980 5,001 11,350 10,829 61.661 108.020 81.257 105.123 176.981 136,339 191.365 74,923 212.880 Except for forecast data (1972-1976), which is expressed in constant prices as of 2172- Forecast data for 1977 and 1978 are taken from the staff appraisal report for the Ninth Power Project in Nicaragua (Loan 1402-NI). Differs from actual net income before interest in 1972 and 1978 (Annex ) due to elimination of accounting entry for exchange losses (respectively C$3.519 and C$5.761) as a charge against income. AANE 15 DE ENEGIA (IKE) ROJECTS (LOAN 841-NI AND CREDIT 389-NI) plications of Funds 1972-1978 -urrent prices-J) Summary of Sources and Applications of Funds Summary Statement 1 9 7 6 1972-1976 % Difference 1 9 7 7 1 9 7 8 1977-1978 % Difference 1I Forecast Actual Forecast from Forecast Actual Forecast Actual Forecast Actual Forecast from Forer- -8 90,040 372,541 360,300 3.4 80,956 149,500 147 398 187,300 228,352 336.800 (32.2) -7 65.508 283,805 265,669 6.8 54.287 107,400 t69' 137.900 170,977 245.300 (30.3) 1 24,532 88,736 94,631 6.2 26,667 42.100 30,708 49,400 57.375 91.500 (37.3) 4 42,182 234,016 192,727 21.4 67.821 73.400 98,302 98.400 166,123 171,800 (3.3) --7 14,210 110,158 102,020 8.0 28,931 36.600 44,062 49,100 72.993 85,700 (14.8) 7 27,972 123,858 90.707 36.5 38.890 36.800 54.240 49,300 93.130 86.LO 8.2 4 47.858 138,525 167.573 17.3 13.133 76.100 49,096 88,900 62,229 165,000 (62.3) 1 .2,800 29,192 12,600 131.7 10,305 1.600 (31,018) (2.000) (20,713) (400) 5078.3 1 1.500 8,111 6,900 17.6 533 (12.100) (35.456) (17.300) (34.923) (29.400) 18.8 ---9 2.400 22.123 11,000 101.1 3.471 9.200 3,956 10.300 7.427 19.500 (61.9) --1 1,900 15,180 8,500 78.6 6,301 4,500 482 5,000 6,783 9,500 (28.6) -3 50,658 167,717 180,173 6.9 23,438 77,700 18.078 86.900 41,516 164.600 (74.8) --6 12,700 493,916 293,590 68.2 162,086 242,900 110,978 367,500 273,064 610.400 (55.3) 4 - 25.344 - - (22.581) (44.200) 6.931 - (15,650) (44,200) (64.6) 7 - 54.236 14,000 287.4 2.100 47.000 39.984 18,900 42,084 65.900 (36.1) - - 17.069 - - - - - - - - - - - 10,011 - ---- ---- - - 27,080 - - - - - - - -- 0 63.358 724,144 487,763 48.5 165,043 323,400 175.971 473.300 341,014 796.700 (7.2) ;5 48.299 567,175 389,182 45.7 128,793 320.200 208.376 477.500 337,169 797,700 (42.3) 0 - 37,292 - - 40.25? - (17,730) - (57,987) - - 492 - 73,093 60,900 20.0 10 - (489) - (479) - - 4 2,879 103,057 6.911 1391.2 69,028 -- (1,623) - 67,405 - - 9 12,180 18,111 30,770 41.1 7,469 3,200 (12,563) (4,200) (5,094) (1,000) (409.4) .0 63.353 724,144 487,763 48.5 165.043 323,400 175,971 473.300 341,014 796,700 JI.2) taken -54- NICARAGUA INSTITUTO NICARAGUM )EIDENERG- EIGHTH PDWERiAND EARTHQUAKE-RECONSTRUCTION PRDJECTS ( Actual anhd Forecast-Balance Sheets; (In thousands of C$, in current I 1 9 7 2 1 9 7 3 1 9 7 4 1 9 7 ASSETS Actual Forecast- Actual Forecast Actual Forecast Actual Plant in operation 626,631 630,476 660,400 641,716 744,074 656,416 7787,340 Less: accumulated depreciation 99,667 101,206 115,033 117,861 131,778 135,085 150,955 Net plant in operation 526,964 529,270 545,367 523,855 612,296 521,331 636,385 Work in progress 26,859 22,180 75,888 94,171 133,375 200,352 235,094 Total net fixed assets 553,823 551,450 621,255 618,026 745,671 721,683 871,479 Investment in cooperatives 117,979 129,087 125,856 147,497 155,692 157,297 168,998 Current Assets: Cash 3,195 8,161 3,466 6,111 4,132 - 9,091 9,133 Accounts receivable 15,360 19,017 13,835 20,317 25,212 21,717 37,558 Materials & supplies 19,281 24,679 25,299 27,147 45,577 29,862 41,296 Subtotal 37,836 51,857 42,600 53,575 74,921 60,670 87,987 Other assets (studies, prepay- ments, & capitalized foreign exchange losses) 5,016 15,801 7,235 17,641 23,281 23,531 43,963 TOTAL ASSETS 714,654 748,195 796,946 836,739 999,565 963,181 1,172,428 CAPITAL AND LIABILITIES Equity Capital 62,790 62,790 62,790 62,790 62,790 62,790 111,107 Surplus & reserves 212,225 238,881 212,225 272,089 212,846 309,794 277,715 Subtotal 275,015 301,671 275,083 334,879 278,637 372,584 388,822 Earthquake reserves 12,185 - 3,300 -- 2,713 - - Contributions and advances 41,714 39,647 47,169 45,747 57,021 49,947 43,060 Long-term debt (including current maturities) 326,4791 369,184 399,959 418,022 563,253 498,936 604,369 Current liabilities: Customer deposits 11,267 14,020 13,755 15,620 18,944 17,320 23,448 Accounts payable 30,764 19,013 41,161 16,206 55,393 15,607 72.894 Accumulated interest 4,787 4,108 6,063 5,684 8,306 8,177 10,095 Other -- 202 - 206 - 210 -- Contractor's debt 12,443 - 10,456 - 15,299 - 29,740 59,261 37,343 71,435 37,716 97,942 41,314 136,177 ier - 350 - 375 - 400 - -AL CAPITAL AND LIABILITIES 714,654 748,195 796,946 836,739 999,566 963,181 1,172,428 3- ii Except for forecast data for years 1972-1976. Forecast data for years 1977 and 1978 are taken from the - staff appraisal report for the Ninth Power Projecf (Loan 1402-NI). ANNEX 16 IERIA: (INB) rS (LOAN 841-NI AND CREDIT 389-NI) lets, 1972-1978 --t prices&) 1 9 7 5 1 9 7 6 1 9 7 7 1 9 7 8 Forecast Actual Forecast Actual Forecast Actual Forecast 0 829,684 806,621 945,753 1,126,388 1,855,600 1,235,418 2,168,600 5 155,922 170,770 180,454 197,437 383,900 230,199 464,000 5 673,762 635,851 765,299 928,951 1,471,700 1,005,219 1,704,600 -4 87,979 348,376 20,410 117,145 424,600 328,033 737,500 '9 761,741 984,227 785,709 1,046,096 1,896,300 1,333,252 2,442,100 --8 157,297 169,490 157,297 169,500 169,000 169,010 169,000 3 20,441 19,962 32,621 27.431 9.000 14,868 4,800 -.8 23,117 43,716 24,617 70,963 45,700 83,615 52,000 '-6 30,046 47,689 31,709 86,077 45,000 106,330 56,000 73,604 111,367 88,947 184,471 99,700 204,813 112,800 3 8,411 107,437 11,290 213,122 44,000 91,862 44,000 B 1,001,053 1,372,521 1,043,243 1,613,189 2,209,000 1,798,937 2,767,900 "'7 62,790 120,273 62,790 122,373 507,300 162,358 595,900 :5 351,620 354.756 389,156 367,385 694,900 424,073 841,800 2 414,410 475.029 451,946 489,758 1,202,200 586,431 1,437,700 D 52,247 47,319 54,647 50,790 - 44,196 - 9 490,494 704,471 488,987 877,052 894,400 992,425 1,212,800 B 19,120 27,699 21,020 34,000 32,400 34,482 37,400 4 14,259 67,069 15.359 132,965 112,361 5 9,861 8,979 10,595 9,251 80,000 27,286 80,000 212 - 214 - 1,756 70 - 41,954 - 19.373 - - - 43,452 145,701 47,188 195,589 112,400 175,885 117,400 450 - 475 - - - - 8 1,001,053 1,372,520 1,043,243 1,613,189 2,209,200 1,798,937 2,767,900 a -