Honduras - Fifth and Sixth Power Projects

Document of The World Bank FOR OFFICLAL USE ONLY Report No. 5060 PROJECT COMPLETION REPORT HONDUJEAS EMPRESA NACIOXAL DE ENERGIA ELECTRICA (ENEE) FIFIH AND SIXT POWER PROJECTS (LOAIiS 841-HO AND 1081-HO) April 24, 1984 Latin America and the Caribbean Regional Office This document hd a restictd distibudm and may be med by recipient auy in th perfoance of official duties lts content may not othewwse be disloewd withou World Bank authorizatIon.  FoR oFCIAL US. oNLy PROJECT COMPLETION REPORT RDNDURAS EKPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) FIFTH & SIXTH POWER PROJECTS (LOANS 841-HO & 1081-HO TABLE OF CONTENTS Page Preface ............................................. ..........i Basic Data Sheet ...................... EHiS.blithts ...... **........................................ viii PROJECT COMPLETION REPORT I. Bank Lending to the Sector ...... ....................... 1 II. Project Preparation and Appraisal ........ o .. ........... 2 III. Project Cost and Execution , ..... 7 IV. Project Justification ....... ......................... 12 V. Financial Performance .................................. 13 VI. Institutional Performance .... .......................... 16 VII. Lessons to be Learned .................................. 17 ANNEXES 1. Summnry of Bank Lending to the Sector .................. 18 2. Major Covenants of the Loan Agreements for the Fifth and Sixth Power Projects ..................... 19 3. Major Covenants of the Guarantee Agreements for the Fifth and Sixth Power Projects ..................... 20 4. Actual and Forecast Cost and Sources of Financing, Fifth Power Project ........... .. ............ 21 5. Actual and Forecast Cost Project Timetable for the Fifth Power Project ............. .. ............. 22 6. Actr'l and Forecast Schedule of Disbursements, Fifth Power Project ................... ................. 23 7. Actual, Revised, and Forecast Loan Allocation for Loan .................................... 24 This document has a estricted distibution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be discksed without World Bank authori2ation.  TABLE OF CONTENTS (continued) Page ANNEXES (continued) 8. Actual, Forecast, and Revised Maximum Demand, 1973-1980 ..................................... 25 9. Actual and Forecast Energy Supply, Losses and Sales, Fifth Power Project ..... ................... 26 10. Actual Interconnection Results ........................ 27 11. Actual and Forecast Cost and Sources of Financing, Sixth Power Project ........................ 28 12. Actual and Forecast Project Timetable for Sixth Power Project ................................... 30 13. Actual, Revised, and Appraisal Forecast Loan Allocation for Loan 1081-HO ..... ...................... 31 14. Actual and Forecast Schedule of Disbursements, Sixth Power Project ........ ........................... 32 15. Actual Operating Results of La Ceiba Diesels: Fifth Power Project ............. * ..................... 33 16. Actual and Forecast Sales by Geographic Region ........ 34 17. Price Deflator Indexes for Costs of Fifth and Sixth Power Projects ................................. 37 18. Internal Rate of Return for Investment Program of 1972-1978 ........ .......................... . 38 19. Actual and Forecast Key Financial Ratios, 1972-1979 ... 39 20. Actual and forecast Income Statements, 1972-79 ........ 40 21. Actual and Forecast Sources and Application of Funds, 1972-1979 ...................................... 43 22. Actual and Forecast Balance Sheets, 1972-1979 ......... 46 APPENDIX I: Borrower's Comments .. . . .. .. .................... 48 APPENDIX 11 Government's CommentEg..... x -** ....................... 51 APPEIDIX III CABEI's Comments ......................... 52  ci) PROJECT COMPLETION REPORT HONDURA,S EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) FIFTH & SIXTH POWER PROJECTS (LOANS 841-HO & 1081-HO) PREFACE The Fifth Power Project consisted of transmission facilities (at 230 kV) interconnecting the power systems of Honduras and Nicaragua, a variety of transmission and sub-transmission facilities (at 138 kV and 34.5 kV, respectively), diesel sets at La Ceiba (4 x 6 MW), studies and training. To support the Fifth Power Project, the Bank made Loan 841-HO (US$12.3 million) in June 1972 to Empresa Nacional de Energia Electrica (ENEE). This was the fifth of eight Bank loans benefitting the power sector in Honduras. Also supporting the Fifth Power Project was a loan (US$1.7 million) made in 1977 by the OPEC Fund for International Development. The Sixth Power Project consisted of the extension of the Rio Llndo hydroelectric plant, improvements of the rural transmission/distribution system, distribution materials to repair damage caused by Hurricane Fifi (1974), studies, and training. To help finance the Sixth Power Project, the Bank made Loan 1081-HO (US$35.0 million) in January 1975 to ENEE. The Central American Bank for Economic Integration (CABEI) also helped to finance the project with three loans amounting to US$10.1 million (primarily to finance the distribution component). The Loan Agreement for Loan 841-HO became effective in December 1972; the final closing date was December 1981, more than five years after the original closing date (June 1976). This delay was primarily due to the introduction of various changes (additions and deletions) to the Project. The Bank agreed to these changes, which led to the adoption of new completion dates. ENEE expects to complete the last new component of the Project, a load dispatch center, in 1985. The major original project components; the diesel sets and the interconnection transmission line, were completed in 1973 and 1975, respectively. The Loan Agreement for Loan 1081-1O became effective in April 1975; the final closing date was December 1981, tlhree years after the original closing date (December 1978). This delay, like the delay to the Fifth Power Project, was due to the introduction of various changes to the Project -- the addition of studies and a sub-transmission line. The Bank agreed to these, changes which led to the adoption of new completion dates. The original Project items were completed in 1978, close to the original completion date. The last of the new studies was completed in 1980; the sub-transmission line was completed in 1982.  (ii, The Latin American and Caribbean Region/Energy I prepared the Project Completion Report (PCR) based on the Appraisal and President's Reports, supervision and consultant's reports, other documents in the Bank's files, a final project report prepared by ENEE, and conversations with ENEE and Bank staff. The PCR sets forth main points with respect to the preparation, appraisal, and implementation of the Fifth and Sixth Power Projects, which were completed successfully, notwithstanding certain delays. In accordance with the revised procedures for project performance audit reporting, this PCR was read by the Operations Evaluation Department (OED) but the project was not audited by OED staff. Following normal procedures, OED sent a copy of the draft report to the Government, ENEE, CABEI, and OPEC for comments. Those comments which were received have been taken into account in finalizing the report and have been appended.  (ii) PROJECT COMPLETION REPORT BASIC DATA SHEET HONDURAS ENPRESA NACIONAL DE ENERGIA ELECTRI'CA (ENEE) Fifth Power Project (841-HO) KEY PROJECT DATA Appraisal Actual Total Project Cost 16.0 17.6 1/ (excluding finance charges) (US$ million equivalent) Cost Overrun (Z) 10.0 I/ Loan Amount 12.3 12.3 2/ (US$ million equivalent) Date Physical Components Completed 12/75 06/773/ Time Overrun (Z) 43 I/ Internal Rate of Return (Z) Not Computed 11.7% 4/ Financial Performance Expected to Sometimes earn covenanted earned less return, 10%. than 10%; but otherwise satisfactory. Institutional Performance Improving Improving 1/ Not a fully meaningful comparison because of changes to the Project (para.3.1.1). Actual and appraisal costs of components defined at appraisal and subsequently completed were very close, about US$13.9 million . ENEE completed the last of the original project components (new service extensions) in June, 1977, about 18 months late. This delay was primarily due to construction rescheduling required because of higher priority accorded repair of facilities damaged by Hurricane Fifi (September 1974). Additions to the Project, especially construction of a load dispatch center, extended completion to 1985. 2/ US$12,710.80 was cancelled from loan. 3/ Reflects completion of all components except central load dispatch facility (not part of original project definition), which is expected in 1985. 4/ Computed on basis of ENEE's investment program of 1972-1978.  (iv) MISSION DATA Month/ No. of No. of Staff Date of Type of Mission Year Weeks Persons Weeks Report Project Identification I 12/70 1 2 2 12/23/70; 02/09/71 Project Identification II 03/71 2 1 03/31/71 08/27/71 Pre-Appraisal 08/71 i 2 1 08/27/71 Appraisal 10/71 3 2 6 10/29/71; 06/02/72 10 Supervision I 06/73 1 1 1 07/09/73 Supervision II 12/73 1 1 1 02/22/74 Supervision III 10/74 1 1 1 10/31/74; 03/05/75 Supervision IV 2-3/75 1 2 2 05/08/75 Supervision V 7-8/76 1 2 2 08/11/76; 11/09/76 Supervision VI 10/77 1 1 1 11/08/77; 01/05/78 OTHER PROJECT DATA Item Original Revision Actual First Mention in Files 04/20/70 ENEE Loan Application -- 03/15/71 6/ Negotiations 04/17-21/72 Board Approval Date 06/27/72 Loan Agreement Date 06/28/72 Effectiveness Date 10/02/72 12/01/72 12/01/72 Closing Date 06/30/76 06/30/77; 12/31/81 06/30/78; 06/30/79; 12/31/81 Borrower ENEE ENEE Executing Agency ENEE ENiEE Fiscal Year of Borrower Calendar Year Calendar Year Follow-on Project Cajon Rio Lindo Expansion Rio Lindo (Sixth Power) Expansion 5/ Does not reflect about + staff week of field supervision carried out in connection with central dispatch facility. 6/ Date of meeting in Managua between representatives of ENEE, INE, Bank and consultants to review results of interconnection feasibility study. This meeting resulted in decision to proceed with Project. Bank files do not reflect receipt of a loan application.  (v) COUNTRY EXCHANGE RATE Name of Currency: Lempira Exchange Rate: At appraisal US$1.00 - L2.00 Intervening-year average US$1.00 - L2.00 Completion date US$1.00 - L2.00 - r  (vi) PROJECT COMPLETION REPORT BASIC DATA SHEET HONDURAS EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) Sixth Power Project (1081-HO) KEY PROJECT DATA Appraisal Actual Total Project Cost 55.7 46.9 1/ excluding finance charges) (USS million equivalent) Cost Overrun (Z) (15.8) 1/ Loan Amount 35.0 35.0 2/ (USS million equivalent) (including interest during construction) Date Physical Components Completed 12/78 06/82 / Time Overrun (X) 97.7 Internal Rate of Return (Z) 22.3% 11.7% 4| Financial Performance Expected to Sometimes earn covenanted earned less return, 10%. than 10%; but otherwise satisfactory. Institutional Performance Improving Improving 1/ Not comparable because of changes to project and omission by ENEE of cost data on distribution expansion partially financed by Central American Bank for Economic Integration (CABEI). Actual and appraisal costs of Rio Lindo expansion project were close: US$40.8 million vs. US$39.03 million. 2/ US$42,923.40 was cancelled from loan. 3/ Completion date of Mochito-Nispero sub-transmission line (at 35 kv), a new project component. Original project components were completed November 1978, about as scheduled. 4/ Computed on basis of ENEE's investment program for 1972-1978.  (vii) MISSION DATA Month/ No. of No. of Staff Date of Type of Mission Year Weeks Persons Weeks Reports Project Identification 07/73 1 4 07/09/73 Pre-Appraisal 12/73 1 G2/22/74 Appraisal 04/74 1i 2 3 05/07/74 Supervision I 2-3,175 1 2 2 03/05/75 Supervision II 7-8/76 1 2 2 08/11/76; 11/09/76 Supervision III 10/77 1 1 1 11/08/77; 2 08/11/76; 01/05/78 OTHER PROJECT DATA Item Original Revision Actual First Mention in Files -- 07/09/73 ENEE Loan Application -- 01/10/74 Negotiations 11/26-30/74 Board Approval Date -- 01/07/75 Loan Agreement Date 01/27/75 Effectiveness Date 04/30175 015/05/75 05/05/75 Closing Date 12/31/78 12/31/79; 12/31/81 12/31/81 Borrower ENEE ENEE Executing Agency ENEE ENEE Fiscal Year of Borrower Calendar Year Calendar Year Follow-on Project Cajon Nispero Nispero COUNTRY EXCHANGE RATE Name of Currency: Lempira Exchange Rate: At appraisal US$1.00 = L2.00 Intervening-year average US$1.00 = L2.00 Completion date US$1.00 = L2.00 5/ Does not reflect about one staff week of field supervision of Project carried out in course of appraising Nispero (1629-HO) and Cajon Projects (989/1805-HO).  (viii) PROJECT COMPLETION REPORT HONDURAS EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) FIFTH & SIXTH POWER PROJECTS (LOANS 841-HO & 1081-HO) HIGHLIGHTS Loan 841-HO (1972, US$12.3 million) helped to finance the Fifth Power Project which consisted of a transmission line (at 230 1(i) interconnecting the power systems of Honduras and Nicaragua, diesel sets (4 x 6 MW) at La Ceiba, transmission/distribution works, studies, and training. The OPEC Fund for International Development supported the Project with a loan of US$1.7 million in 1977. With Bank agreement, ENEE deleted certain transmission/sub- transmission works and added new components - studies and a load dispatch center. The new components led to added costs and revised completion dates. The final project cost was US$17.6 million as compared with the appraisal forecast of US$16.0 million. Because of changes to the Project, the only meaningful comparison is between the actual and forecast costs of items defined at appraisal and actually completed. These were close -- about US$13.9 million. The major original project items, the diesel sets and the transmission lines, were completed in 1973 and 1975 respectively. ENEE completed the last of the new studies in 1980; but does not expect to complete the load dispatch center until 1985 (PCR, paras. 3.1.1-6; paras. 3.3.1-3.3.4). ENEE carried out the Fifth Power Project successfully but the benefits of the interconnection transmission line in the form of energy transfers between Honduras and Nicaragua have been at a lower level than anticipated at appraisal due to disappointing market growth in both countries up to 1977, the civil war in Nicaragua (1978-1979), and the subsequent strains between both Governments. Even if underutilized, according to ENEE, the interconnection transmission line has provided benefits in the form of access to generating capacity in emergencies and improved continuity of service (PCR, paras. 3.2.5-6; Appendix I). Having decided to postpone construction of the Cajon hydroelectric project, ENEE identified the extension of the Rio Lindo hydro plant as its next addition to its generating capacity (PCR, para. 2.3.1-2). With Loan 1081-HO (1975: US$35.0 million), the Bank helped to finance not only the extension of the Rio Lindo plant but also improvements and extensions of the rural transmission/distribution system, training and studies. The Central American Bank for Economic Integration (CABEI) also supported the Project with three loans amounting to about US$10.1 millior.. With Bank agreement, ENEE added studies and a sub-transmission line to the Project. These additions led to extra costs and revised completion dates for the Project. The final cost of the Project was US$45.0 million as compared with the appraisal forecast of US$41.3 million. The final cost of items defined at appraisal and subsequently completed was US$ 41.8 million,  (ix) which was close to the appraisal forecast. The original Project components were completed close to the original completion date of December 1978. The new studies were completed by 1980; the new sub-transmission line was completed in 1982 (PCR, paras. 3.4.1-4). Because the Project helped to meet forecast demand increases which were reasonably close to actual increases, the achievements of the Project can be rated an overall success (PCR, paras. 4.2.1). Between 1972 and 1979, ENEE's financial performance was marginally satisfactory. While ENEE did not always earn the covenanted rate of return (10 Z), its summary contribution-to-expansion ratio (23.7%) was better than that which was expected at appraisal (13.6%). This improvement was due primarily to the postponement of investments expected at appraisal (primarily the Cajon Project) (PCR, para. 5.2.1). As expected at appraisal, the institutional performance of ENEE has improved. ENEE has enjoyed the benefits of high-caliber top management; but improvements in administrative efficiency have come slowly (PCR, para. 6.2.2).  PROJECT COMPLETION REPORT HONDURAS EMPRESA NACIONAL DE ENERGIA ELECTRICA (EDEE) FIFTH & S=TH POUER PROJECTS (LOANS 841-HO & 1081-HO) 1.1 Bank Lending to the Sector 1.1.1 Since 1959, the Bank has made seven loans and three credits amounting to US$235.6 million equivalent to the power sector of Honduras (Annex 1). The fifth and sixth loans, 841-HO and 1081-HO, helped to finance the Fifth and Sixth Power Projects, which are the subjects of this report. Four previous loans and two credits helped to finance the first four projects which were completed successfully with some delays and cost overruns. The seventh loan, 1629-HO (1978: US$30.5 million) helped to finance the Nispero Project, which was completed with a delay of about 18 months in July 1982 and a cost overrun of about 29.32. The eighth loan and the third credit, 1805-HO and 989-HO (1980:US$105.0 million and US$20.0 million), are helping to finance the Cajon project (292 Mg), which is the largest hydro electric project in Central America. 1.2 Electric Power Sector Organization 1.2.1 ENEE is an autonomous public utility owned by the Republic of Honduras. ENEE dominates the sector. No other entity takes part in new service extensions, planning for the sector, or regulation of the sector. ENEE's Board memsership is composed of representatives of various Ministries (Finance, Public Works, National Resources, and Planning), the President of the Central Bank, and a representative of the private sector. The Board sets policy and appoints a General Manager, who is assisted by four Deputy Managers and the Director of the Cajon Project Unit. After informal discussions with the highest levels of political leadership, ENEE sets its tariff levels. Because of budget and staff constraints, ENEE has delayed implementing a series of recommendations to improve its organizational structure. 1.3 Investment Plans 1.3.1 The Cajon project is expected to absorb the overwhelming bulk of ENEE's financial resources through 1985. ENEE, which is experiencing some stringency in generating adequate local-currency resources, expects to obtain additional financinv from the Inter-American Development Bank. The Government has difficult fiscal problems, which the Bank is addressing in connection with a proposed structural adjustment loan.  -2- II. PROJECT PREPARATION AND APPRAISAL 2.1 Origin and Preparaticn of the Fifth Power Project in Honduras 2.1.1 Preparation for the interconnection project began in July 1970 as the result of a consultant's identification of the Cajon site as the most promising for power development of three sites compared on the Humuya River in Honduras. 1/ Bank staff made - preliminary estimate of capacity, output, and cost at, respectively, 500 KW (later changed to about 300 NW), 1,300 GWh, and about US$85 million or US$170 per kW. These were very low cost estimates for Central America (see Appendix I for coments of ENEE on early studies of Cajon Project). 2.1.2 Despite the preliminary nature of the cost data - a full feasibility study was not expected until December 1972 - Bank staff began to investigate the rationale for constructing the Cajon project in the near term. Given the small size of the Honduran system (1970 sales: 228 GWh), near-term construction of the Cajon project depended upon interconnection with Nicaragua. 2/ To determine the benefits of interconnection and joint operation, Bank itaff suggested that ENEE and its Nicaraguan counterpart, Instituto Nicaraguense de Energia (INE),3/ hire another consultant to investigate the feasibility of interconnection and joint operation. 2.1.3 Using the preliminary cost estimates of the Cajon project, the consultant confirmed the feasibility of an interconnection project in the context of a joint development program which was least cost as compared with the two separate programs. The joint program included: Generation: INE: 60 NW steam unit at Lake Managua (to be operational in 1975); 60 MW steam unit at Lake Managua (to be operational in 1977); ENEE: 40 MW steam unit at La Ceiba (to be operational in 1974); 6 X 83 MW hydro electric plant at Cajon (to be operational in 1978) and; Transmission: INE and ENEE: 230 kV line (single-circuit) linking Lean in Nicaragua to Tegucigalpa in Honduras (to be operational in 1975). Initial voltage would be at 138 kV until commmissioning of the Cajon hydro plant (expected in 1978). 1/ This pre-feasibility study was financed from Bank loans/credits 541/116-HO and 682/201-HO. 2/ Various obstacles (political, tariff, geographic or market) stood in the way of interconnecting the Honduran system with the systems of El Salvador, Costa Rica, and Guatemala. 3/ Formerly known as Empresa Nacional de Luz y Fuerza (ENALUF).  -3- The Honduran portion of the interconnection transmission line would cover a distance of about 150 km. This line would replace a component of the Fourth Power Project (loan/credit 682/201-HO), a 69 kv transmission line which ENEE intended to construct between Tegucigalpa and the southern city of Choluteca (a distance of about 90 km); and would extend an additional 60 km to the border. The Nicaraguan portion of the interconnection line covered a distance of about 100 km -- from Leon to the border. 2.1.4 After a series of preparatory missions to INE and ENEE in 1970 and mid 1971, a pre-appraisal mission reviewed critically the economic justification for the interconnection in August. As a result of this review, the consultant amended his recommendation by modifying ENEE's generation program through the substitution of two diesel sets (10 EW each) for the 40 MW steam plant. 2.1.5 In October 1971, appraisal missions simultaneously visited Nicaragua and Honduras. On their return, in order to minimize capital outlays of both companies, the missions further modified the generation program as follows: I-NE: 2x50 MW steam unit at Puerto Tiscuco in 1975 (to be operational in 1975 and 1976); ENEE: 4,r6 14 diesel unitq at La Ceiba (to be operational by 1074): and 4x75 MW hydro units at the Cajon hydro plant (to be operational in 1978). It was expected that this combined expansion program (including the interconnection line) would permit: (i) INE, through construction of the steam plant, to meet its own load growth between 1974 and 1978 and that of ENEE with lower-cost thermal energy than ENEE could supply itself; (ii) ENEE to advance by several years the construction of the Cajon plant, with which ENEE would supply low-cost hydro energy to INE; and (iii) both companies to benefit from fuel savings resulting from the stand-by status of thermal units. The appraisal reports for the Fifth Power Project in Honduras and the Eighth Power Project in Nicaragua stated that, when compared to the least-cost program for separate development of each system, the combined INE-ENEE expansion program (including the interconnection transmission line, the various thermal plants, and the large Cajon hydro electric project) would be the least cost solution to the combined power development needs of the two utility companies for discount rates up to 20X. 2.1.6 A key element in the justification for the joint development program in general and the interconnection project in particular was the market forecasts for Honduras and Nicaragua. For ENEE, the dynamic element of its load forecast was the expected substitution of its energy (including energy to be purchased from INE) for that generated by the foreign fruit companies to supply their irrigation loads and the loads of the small cities of La Lima, Tela and La Ceiba. Sales to the fruit companies and the municipalities were expected to amount to about 23X of ENEE's entire load by 1977. During appraisal, representatives of the fruit companies confirmed their interest in purchasing firm power from ENEE, subject to agreement on tariff levels. ENEE planned to acquire the municipal systems.  -4- 2.1.7 Successful negotiations with the fruit company would be the basis for an interconnection contract with INE. If the negotiations with the fruit companies did not succeed or otherwise resulted in a substantial downward revision of the sales forecast, ENEE would not need to purchase energy on a firm basis from INE. Because of its importance to the interconnection project, the Bank conditioned presentation of the proposed loan to the signing of a satisfactory interconnection contract. 2.1.8 In addition to the load forecasts in Honduras and Nicaragua, another key element in the justification of the joint development program was the preliminary low-cost estimate of the Cajon project (US$88 million). During appraisal, Bank staff assessed as acceptable the risks to the interconnection project posed by a delay due to financing problems in the construction of the Cajon project. The appraisal report stated that in the event of a delay, the interconnection would still benefit ENEE and INE because it would provide a means for the interchange of emergency power and because the combined reserves of the two systems would be less than the independent systpms. During appraisal, Bank staff did not assess the risks to the interconnection project posed by an adverse development in negotiations with the fruit companies. 2.1.9 In addition to the interconnection transmission line and the diesel units at La Ceiba, the appraisal mission identified other elements of the Project: a transmission line from La Ceiba to the Aguan Valley (47 km at 138 kV) and related substations plus about 90 km of sub-transmission (34.5 kV) lines and substations in the Aguan Valley; sub-transmission lines and substations to serve new areas (about 150 km at 34.5 kV); consulting services to complete the Cajon feasibility study, to assess the Naranjito site on the Rio Jicatuyo, and to carry out a preliminary hydro survey in eastern Honduras (particularly the Rio Patuca); and training of ENEE staff. 2.1.10 The Fifth Power Project formed part of ENEE's expansion program for the period 1972-1978. The other elements of the program included: (i) completion of the first stage of the Rio Lindo Project (loan/credit 541/116-Ho) and the Fourth Power Project (loan/credit 682/201-HO); (ii) improvement and expansion of the distribution system; (iii) acquisition of existing systems owned by other companies and municipalities; and (iv) the Cajon Project (paras. 2.1.2-.3). 2.2 Negotiations, Board Presentation, Loan Signing and Effectiveness 2.2.1 No major problems delayed negotiations. The samP was true with respect to presentation of the proposed loan to the Executive Directors for reasons set forth below. 2.2.2 As the date of board presentation aproached (June 27, 1972), ENEE was conducting simultaneous negotiations with the fruit companies and INE. The two power companies assured the Bank that they had resolved all major problems, except for the amount of electricity which ENEE would purchase; and that following successful completion of negotiations with the fruit companies, they would sign an interconnection contract. Further, ENEE expressed its confidence in the ultimate success of its negotiations with the fruit companies; but declined to commit itself to the purchase of firm amounts of energy from INE without corresponding commitments from the fruit companies.  -5- 2.2.3 Believing that ENEE would ultimately negotiate satisfactory contracts with the fruit companies, Bank management relaxed the earlier condition of board presentation (the signing of a satisfactory interconnection contract) but did condition disbursements pertaining to the interconnection transmission line to the signing of a satisfactory interconnection contract. Corresponding covenants were introduced into the Loan Agreement for the Eighth Power Project in Nicaragua (SU0-NI). Disbursements for the transmission line to the Aguan Valley were conditioned to the presentation of a satisfactory economic justification. Following approval by the Executive Directors, representatives of ENEE and the Bank signed a loan agreement (June 28, 1972) providing US$12.3 million in support of the Fifth Power Project (term: 24 years, including four years of grace; interest rate: 7-1/4Z). Effectiveness of the loan agreement was delayed from October 2, 1972 to December 1, 1972 because the Honduran Congress was slow to ratify the loan documents. 2.3 Origin and Preparation of the Sixth Power Project in Honduras 2.3.1 By December 1972 - six months after the signing of the Fifth Power Loan Agreement (841-idO) - major expectations underlying the rationale for the joint development program had changed radically and adversely. For example, ENEE's consultant estimated the cost range for the Cajon project at US$150-230 million, thereby making the project only marginally economic when compared with the thermal alternative-a reasonable conclusion before the advent of the worldwide fuel crisis--and leading Bank staff to ask new questions about the economic justification of the project. Further, ENEE's negotiations with the fruit companies for the supply of their irrigation loads had nearly stalemated; and in Nicaragua, an earthquake leveled Managua, INE's major load center, killing thousands and disrupting the economy. 2.3.2 Accordingly, in these circumstances, both compa.ies were anxious to review their load forecasts; and neither was willing to sign an interconnection contract calling for the purchase and sale of large blocks of energy on a firm basis using an agreed tariff formula. Based on new information about the economic justification of the Cajon project, ENEE decided to postpone development until the 1980's. However, there was still a need for additional generating capacity. By June 1973, ENEE had identified the extension (2 X 20 NW) of the Rio Lindo plant 4' as the next addition to its generating capacity. This project would use river water to be diverted into Lake Yojoa and would be completed in 1978 - the original completion date for the Cajon project. This project would also t'e the third stage of development of the hydro-electric potential of Lake Yojoa. The Bank helped to finance the first two stages (Annex 1). ENEE has attributed the postponement of the Cajon project during 1973 and 1974 to the Bank's requests for additional technical and geologic studies. Bank records do not support the delaying role attributed by ENEE to these studies (Appendix I). 2.3.3 With Bank agreement, ENEE funded a feasibility study for the extension of the Rio Lindo plant with proceeds from Loan 841-HO. While this study was being carried out, representatives nf the Bank and the Inter-American Development Bank (IDB) discussed the latter's proposal to finance the proposed project with monies from its Fund for Special Operations (FSO). Because the Bank's procurement rules were less restrictive than those of the IDB and were therefore expected to generate some price competition advantageous to ENEE, the IDB did not press its offer to finance the project. ENEE informally informed the Bank of its preference for Bank financing. 4/ Financed from Bank loan/credit 541/116-HO.  -6- 2.3.4 Upon compleaion of the feasibility study (February-March 1973), a Bank mission appraised the project (April 1973). The Rio Lindo extension was based on the construction of four small dams to divert three rivers into Lake Yojoa, the construction of new pipeline and penstock, and the addition of new generation capacity (2 x 20 MW). The cost estimates of the Rio Lindo extension were based on the feasibility study, not on detailed engineering studies, as now required by the Bank. 2.3.5 In addition to the expansion of the Rio Lindo plant, the mission identified other elements of the Project: improvements and extension of the transmission/distribution system serving new rural customers for the period 1975-1978; materials and equipment to repair equipment damaged by Hurricane Fifi; training for top-level, supervisory, and technical personnel; and studies of a future hydro project (either Remolino or a site to be identified in the course of the hydro survey of eastern Honduras - para. 2.1.9), small hydro sites, administrative improvements, and tariffs based on the marginal cost of supply. The project would form part of ENEE's expansion program for 1974-1982, which was expected to consist of: completion of the Fourth and Fifth Power Projects (para. 2.1.10), normal distribution expansion, and -onstruction of the Cajon (300 MW) or Naranjito (70-100 MW) projects. 2.3.6 At about the time the Bank was appraising the Project, ENEE successfully arranged two loans from the Central American Bank for Economic Integration (CABEI) to finance the foreign cost of (i) the diversion dam on the Rio Lindo and (ii) some engineering (plus some local-currency costs). The two loans amounted to US$0.4 million and US$1.4 million, respectively. ENEE also arranged for a third CABEI loan (US$8.3 million) to help to finance its distribution expansion. The distribution expansion partially financed by the third CABEI loan was included in the definition of the Sixth Power Project. To ensure adequate local-cost financing for ENEE's expansion plan, the Bank conditioned Board presentation to the implementation of: (i} a revaluation of ENEE's rate base ; and (ii) a tariff increase and P fuel adjustment clause sufficient to provide ENEE with a 107 rate of return on revalued assets. 2.4 Negotiations, Board Presentation, Loan Signing, and Effectiveness of the Sixth Power Loan Agreement 2.4.1 No major problems delayed negotiations (November 2974) or Board presentation (January 1975). ENEE implemented measures which were a condition of Board presentation -- increasing tariffs by 25Z, instituting a fuel adjustment clause and revaluing assets. On January 28, 1975, Bank-and ENEE representatives signed a loan agreement (1081-HO), providing for a loan of US$35.0 million in support of the Sixth Power Project (term: 25 years, including 4-1/2 years grace; interest rate: 8X). Effectiveness of the loan agreement was delayed from April 30, 1975 to May 5, 1975, because of a political crisis which convulsed the Government. 2.5 Major Covenants of the Fifth and Sixth Power Loan and Guarantee Agreements 2.5.1 Annexes 2 and 3 set forth the major covenants of the Loan and Guarantee Agreements for the Fifth and Sixth Power Projects. Except for slow action in raising tariffs, the compliance of ENEE and the Government was satisfactory.  -7- III. PROJECT COST AND EXECUTION 3.1 Fifth Power Project: Changes, Costs, and Delays 3.1.1 Changes to the Fifth Power Project included: (i) the deletion of the Aguan Valley transmission line, which had an appraisal cost estimate of US$2.1 million; and (ii) the addition of three new studies and a central dispatch facility, which together had an actual cost of US$3.7 million. The Bank agreed to these changes, which led to additional costs and new completion dates, especially for the new project components. 3.1.2 The deletion of the Aguan Valley transmission line resulted from the unsuccesful ending of negotiations with one of the foreign fruit companies (para 2.3.1) to supply its irrigation load. The properties of this company suffered extensive hurricane damage (September 1974). Later, ENEE constructed this line - again with Bank agreement -- using funding provided by the US Agency for International Development (USAID) to meet the load of a number of new Government-sponsored projects (a saw mill. an agricultural. resettlement scheme, etc.). The deletion of this Project component led to a re-allocation of loan proceeds to help finance the cost of additional studies and part of the cost of the dispatch center. With Bank assistance, ENEE successfully arranged complementary financing with a loan from OPEC Fund for International Development (US$1.7 million) in .377, and, later, a suppliers credit (US$0.8 million). Bank and ENEE staff collaborated succesfully in finding solutions to the problems posed by the changee to the Project. 3.1.3 Including all changes, the final cost of the Project was about US$17.6 million (in current prices) as compared with the appraisal forecast of US$16.0 million. However, because of changes to the Project, the only meaningful comparison is between the actual and forecast costs of components defined at appraisal and subsequently completed - that is, the diesel sets, interconnection transmission line, new service extensions, studies, and training. The actual and appraisal costs of these components were very close, about US$13.9 million, indicating adequate prcvision for price and contingency allowances. Given that the actual and forecast costs of these components were close, this report does not include a calculation of the actual cost of the project in constant prices as of October 1971, the date of appraisal. This calculation would show a modest cost underrun. 3.1.4 There was some delay in completing the new service extensions because of the priority accorded the repair of facilities damaged by Hurricane Fifi (September 1974). There was also some delay in completing the interconnection transmission line (see below). Otherwise, ENEE succeeded in completing on schedule the components of the original Project (except, of course, the Aguan Valley transmission line, which was deleted - para 3.1.1). 3.1.5 Consultants completed the new studies during the period 1977-1980. ENEE expects to complete the central dispatch center in 1985 - about nine years after the original completion date of the Project: December 1975.  -8- 3.1.6 Eleven engineers received training abroad with financing from Loan 841-HO. Only US$50,000 was disbursed for training under this loan rather than US$400,000 as expected. With additional support from other Bank Loans (1081-HO and 1629-HO), ENEE financed the foreign-currency cost of part of its training program. ENEE has devoted considerable attention to training its staff. Between 1973 and 1980, about 100 technical and administrative staff received training outside of Honduras. 3.1.'T Annexes 4, 5, 6, and 7 compare actual and forecast data on, respectively, project cost, completion dates, cumulative disbursements, and allocation of loan proceeds for the Fifth Power Project. 3.2 Fifth Power Project: Interconnection Transmission Line 3.2.1 ENEE completed construction of the interconnection transmission line in December 1975, a year late. Late completion did not lead to rationing or otherwise adversely affect the ability of ENEE to meet its load, which in 1975 was 17.6% below the appraisal forecast for the Fifth Power Project. The interconnection transmission line was comm'ssioned in September 1976, following the late completion by the Nicaraguan power company of its complementary generation and transmission works. 3.2.2 The delay in completing the interconnection transmission line had its origins in the disagreement between ENEE and INE over a tariff-setting formula proposed by a consultant (see Appendix I for ENEE's comments on delays to interconnection). Also complicating matters was the reluctance of ENEE to sign an interconnection contract for the purchase and sale of firm power without a corresponding commitment from the foreign fruit companies (para 2.2.2-.3). After signing of the Loan Agreement, the negotiations with the fruit companies over tariff levels progressed very slowly. Because of the slow progress plus other problems (para 2.3.1), both companies abandoned the concept of a contract for the sale of firm energy in favor of a non-binding agreement for the exchange of emergency and short-term energy (May 1973). As ENEE maintained an optimistic outlook with respect to the final result of its negotiations with the fruit companies, the Bank accepted a revised load forecast reflecting this optimism (Annex 8 ). The revised load forecast was part of a new demonstration justifying the interconnection as part of a lesser-cost joint development sequence (as compared with independent development), not including near-term construction of the Cajon project. Based on this new justification, the Bank accepted the non-binding contract as fulfilling the conditions for disbursement (February 1974). However, because of the time required to fulfill this condition -- about one year more than expected -- there was a corresponding delay in contructing the interconnection transmission line. 3.2.3 ENEE took over the municipal systems of La Ceiba, Tela, and La Lima and negotiated successfully a contract to meet the irrigation load of one of the fruit companies based on the eventual retirement of its uneconomic diesels. Negotiations with the second fruit company did not result in a contract because of the decision of the fruit company to reduce its operations in the Aguan Valley following extensive property damage inflicted by Hurricane Fifi (September 1974). The hurricane could not have been foreseen during appraisal or later.  -9- 3.2.4 Having accepted the interconnection contract, 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. Baak staff accepted the extra (political) risks associated with constructing a transmission line between two sovereign countries. The market risks associated with negotiating contracts with the fruit companies appeared to be acceptable. In these circumstances, the decision to accept the contract and to proceed with construction of the transmission line was reasonable. 3.2.5 As measured by the actual amount of energy exchanged between the two companies (Annex 9), the utilization of the interconnection transmission line has been poor, far below expectations. During the period 1975-1977, ENEE sold IKE about 28.9 GWh; and INE sold ENEE about 13 GWh (Annex 10). At appraisal, INE expected to be a net exporter of energy (550 GWh) during this period. During the next three years, ENEE sold INE 31.2 GWh; and INE sold ENEE about 41.0 GWh. At appraisal, INE was expected to be a net importer of energy (1,515 GWh). For the period 1975-1977, the sales pattern reflected the delay in commissioning the interconnection transmission line (September 1976 as compared with December 1974) and market forces -- that is, the load (primarily irrigation) in Honduras had not grown as expected by 1977. Later, political factors adversely affected the utilization of the line: the civil war in Nicaragua and the subsequent strains between the governments of Nicaragua and Honduras. 3.2.6 The interconnection has led to close co-operation, if not close integration, of the londuran and Nicaraguan systems (see Appendix I for ENEE's comments on usefulness of interconnection). ENEE reported that neither system maintains spinning reserves; and that since the end of the civil war, the operation of the interconnection on the part of INE has been rather erratic. By providing access to generating capacity in emergencies and thereby improving the continuity of service, ENEE feels the interconnection has been useful. Nevertheless, as measured by energy exchanges, the interconnection remains an underutilized facility. 3.3 Fifth Power Project: Studies and Central Dispatch Facility 3.3.1 The three studies originally defined at appraisal (Naranjito, Cajon, and the eastern Honduras hydro survey) were completed on schedule but with a cost increase of about US$1.1 million (or 65%). A feasibility study showed that a hydro plant constructed at the Cajon site would be only marginally economic when compared with a thermal alternative. Based on additional economic studies of the Cajon project, ENEE decided to postpone construction (para 2.3.1) (see Appendix I for ENEE's comments on delays to Cajon project). Later, in December 1975, ENEE contracted additional studies of the Cajon project which helped provide justification for its subsequent development. 3.3.2 The Naranjito study showed that a hydro plant constructed at that location was technically feasible but not least cost as compared with a thermal alternative. The hydro survey of eastern Honduras identified three basins large enough to provide water for projects with installed capacity appropriate for londuras - the Patuca, the Seco, and the Aguan. In connection with the Nispero Project (Loan 1629-HO), ENEE is committed to carry out a feasibility study for a hydro plant located on the Patuca River.  - 10 - 3.3.3 The three new studies were: (i) a full feasibility study of the extension of the Rio Lindo plant. This study provided justification for the Sixth Power Project. It wa- later found that the geological investigations were limited, requiring substantial redesign of civil works. (ii) a tariff study based on conventional cost-of-service principles and the development of a fuel adjustment clause. In January 1975, ENEE raised tariffs 25Z and inaugurated the fuel adjustment. Implementation of these measures was a condition of presentation of the Sixth Power Loan. (iii) geothermal investigations of the Pavana and San Ignacio sites carried out by a firm which went bankrupt and later by personnel supplied by the United Nations. Budgeting constraints have led to postponement of further drilling required for the project. 3.3.4 The load dispatch facility was an expansion of the original concept of installing communications and control equipment at the Pavana and Suyapa substations. The facility was needed in connection with the expected growth of interchange operations with INE. Subsequently, there were various delays in completing the feasibility study. As interchange operations have been at a low level, ENEE has moved slowly to complete the facility (sometime in 1985). 3.4 Sixth Power Project: Changes, Costs, and Timetable 3.4.1 Additions to the Sixth Power Project included: (a) extension of 35 kV lines from Mochito to Nispero; and (b) consulting services for (i) a study of woodwaste use for electricity production; (ii) preparation of an inspection manual for hydraulic works; (iii) studies of geology, water management, cost and scheduling of Cajon project. The Bank agreed to these changes which led to new completion dates for the Project, revisions of the Project description in the Loan Agreement, and a new closing date for the Loan Agreement: December 31, 1981 vs. December 31, 1979. 3.4.2 Primarily because of limited geological investigations at the feasibility stage, substantial redesign of specific civil-works items (diversion structures at Rio Lindo, Varsovia, and Yure) was required duriug construction. Because of the design changes, ENEE and Bank staff were not fully satisfied with the performance of the consultant. Fortunately, due to off-setting cost increases and decreases, especially for the civil works and the penstock, the actual and forecast costs (in current prices) of the Rio Lindo extension were close: US$40.8 million vs. US$39.03 million (including the costs of extension works financed by CABEI). As ENEE has not provided annual expenditure data for the Project before 1977, this report does not include a schedule comparing the actual and forecast costs of the extension works in constant prices (which could be expected to show a modest cost underrun).  - ii - 3.4.3 Because of the addition of new items (para. 3.4.1) to the Project cost, it is not meaningful to compare the final cost (US$45.0 million) of all items financed by the Bank with that expected at appraisal (US$ 41.3 million). Excluding the addition of the new items, the final cost was about US$41.8 million, which was close to the appraisal forecast. Because of the difficulty of maintaining cost records on project components which were heterogeneous by their nature, ENEE supplied no cost data on the distribution-expansion and rural-electrification components, which CABEI and ENEE were expected to finance respectively. Bank staff made virtually no effort to supervise these components. 3.4.4 The original Project items were completed close to the original Project date of December 31, 1978. The sub-transmission line between Nispero and Mochito was completed in 1982. The additional studies on Cajon were completed in 1978; those on wood waste, in 1980. 3.4.5 Collaboration between Bank and ENEE staff during the implementation of this Project was close and cordial. ENEE's performance was professional and satisfactory. 3.4.6 Annexes 11, 12, 13, and 14 compare actual and forecast data on, respectively, Project cost, completion and implementation dates, allocation of loan proceeds, and cumulative disbursements. 3.5 Sixth Power Project: Studies and Training 3.5.1 The original studies of the Project - tariffs, budget control, small hydro sites, hydro power at Remolino and/or eastern Honduras - were carried out just about on schedule and close to the original cost forecast. The major hydro power studies led to justification of the Nispero project (Loan 1629-HO). The small hydro power studies have led to further consideration of several sites but not to construction planning in the near-term. Tariff consultants proposed a marginal-cost-based tariff structure in 1979, which the Bank and ENEE accepted. With some modifications, ENEE introduced corresponding changes in its tariff structure in 1980. Consultants recommended a series of budget-control procedures in 1978, which ENEE implemented after discussion with the Bank. Later, ENEE extended this contract to improve its commercial practices in order to reduce the overdue accounts receivable of private customers. The additional study of the Cajon project helped in preparation of that project. The use of wood waste for electricity generation has not led to near-term construction plans, as ENEE is still evaluating its generation needs and the availability of adequate wood waste supplies. ENEE and Bank staff were satisfied with the performance of the various consultants in connection with the above studies. 3.5.2 In connection with the study of small hydro sites, consultants provided a group of ENEE engineers with training in the areas of power system planning, system operation, and maintenance of diesel, gas turbine, and hydro power plants. During the period of project construction, ENEE established a training center near Tegucigalpa (La Leona); and continued to send engineers (about 15) outside Honduras for additional training.  - 12 - 3.6 Project Operations: Fifth and Sixth Power Projects 3.6.1 Except for the La Ceiba diesels, which have experienced operating problems due to the high vanadium content of bunker C fuel available in Honduras, the major generation and transmission works built under both projects have operated satisfactorily. Annex 15 sets forth operating data on the La Ceiba diesels. IV. PROJECT JUSTIFICATION 4.1 Fifth Power Project: Justification 4.1.1 The Fifth Power Project, especially the interconnection transmission line, was part of a least-cost joint development program (para.2.1.6) to meet the expected load growth in Honduras and Nicaragua for discount rates up to 20%. According to the appraisal report, even if the Cajon project were postponed for a few years, the interconnection transmission line would permit both companies to exchange emergency power and to combine their reserves. 4.1.2 Central to the justification of the joint development program were tne expected load growths in both countries and the cost estimates for the Cajon Project. These expectations were substantially reversed by subsequent events which could not have been foreseen. Because of the marginal economic justification of the Cajon Project in 1973, there was a lengthy deferral of construction of the Cajon project (paras 2.3.1 and 3.2.4) (see Appendix I for ENEE's comments on delay of Cajon Project). During the years 3972-1976, the original period of project execution, sales growth in Honduras and Nicaragua lagged expectations. For ENEE, the actual growth rate was 13.7% annually as compared with an expected growth rate of 20.8%. The most important factor adversely affecting growth was the shortfall of sales to the fruit companies (para 3.2.3). On a secondary level, other factors also adversely affected sales growth -- the economic stagnation due in part to the lingering impact of the 1969 war with El Salvador, a world-wide recession, and the damage to agricultural districts caused by Hurricane Fifi. The combination of these factors lessened ENEE's need to purchase energy from INE's new steam plant (2 x 50HW) at Puerto Tiscuco which was almost ready for commercial operations when the interconnection transmission line was commissioned in September 1976. 4.1.3 After commissioning, the transmission line linking Tegucigalpa and Choluteca provided substantial benefits by permitting a rapid increase of sales in the Choluteca area: between 1976 and 1979, sales in this area rose about-84X to almost 24 GWh (3% of ENEE's total sales). But due to a combination of market and political factors, there has been a substantial underutilization of that portion of the line connecting Choluteca with Leon in Nicaragua, notwithstanding some improvements in continuity of service (para 3.2.6). 4.1.4 The staff appraisal report included no calculation on the internal rate of return on the Project. Given the many changes to the Project (paras. 3.1.1-2.) and the substitution of the Rio Lindo expansion project for the Cajon project as ENEE's next generation addition following completion of the Fifth Power Project, this report includes a calculation of the internal rate of return on ENEE's investment program for the period 1972-1979 (see below).  -. - 13 - 4.2 Sixth Power Project: Justification 4.2.1 The appraisal report for the Sixth Power Project stated that the Rio Lindo extension was the least-cost method for meeting ENEE's expected load growth for discount rates up to about 20%. The internal return on the project was estimated at about 22.3%. 4.2.2 The appraisal report contains different sets of sales projections. Sales projections for the economic justification of the Project (Annex 16) indicate cumulative sales for the period 1974-1978 of 2,722.3 GWh; sales projection for the financial forecast reflect cumulative sales of 2,663.8 GWh. The difference in sales projections reflects a difference in the approach of power engineers and financial analysts. To be conservative, a power engineer must orient his power planning to meet a maximum expected load. In contrast, to be conservative, a financial analyst must orient his financial planning on a lower expected load. Actual cumulative 1974-1978 sales (2,502 GWh) were reasonably close to the sales forecast of the financial projections (a difference of 6.1%). Depressed economic conditions in 1974-1975 plus Hurricane Fif-i adversely affected ENEE's domestic sales levels until 1976, resulting in annual growth rates of only 9.9% as compared with the appraisal forecast of 12.2%. Thereafter, sales growth was strong -- about 13% annnually through 1979 (as compared with the appraisal forecast of about 10% annually). In connection with the Nispero power project (1629-HO), ENEE substantially improved its forecasting methodology: actual cumulative sales for the period 1978-1981 were less than 3% below the cumulative forecast level (2,946 GWh vs. 3,036 GWh). ENEE credited the irvroved forecasting to its staff, who had greater familiarity with Honduras than a foreign consultant (see Appendix I for ENEE's comments). 4.2.3 The appraisal report stated that the Rio Lindo extension was the least-cost alternative as compared with various alternative layouts of the diversion works; and the least-cost alternative as compared with medium-speed diesels providing the same generation. Because the actual and forecast costs of the Rio Lindo extension were close (para. 3.4.2), and given the large increase in real terms of the price of fuel, as compared with the appraisal estimate, the extension remains the least-cost alternative. 4.2.4 Annex 18 sets forth the internal rate of return on ENEE's investment program for the period 1972-1978. The return was about 11.7%, indicating that tariff levels in 1979 were about adequate. V. FINANCIAL PERFORMANCE 5.1 Actual and Appraisal Forecast Financial Data, 1972-1979 5.1.1 Annexes 19 to 22 compare actual and appraisal data for the years 1972 and 1979 in the areas of: key financial ratios, income statements, funds statements, and balance sheets. Forecast data for 1972 and 1973 were taken from the appraisal report for the Fifth Power Project; data for 1974-1979, the appraisal report for the Sixth Power Project.  - 14 - 5.2 Actual and Appraisal Forecast Financial Performance, 1972 - 1979 5.2.1 ENEE's financial performance was marginally satisfactory, if different from what was expected at appraisal. The rate of return results were significantly affected by the asset valuation criterion used. Before 1979, ENEE valued its assets at original cost revalued to 1973 prices. On this basis, its return on net average assets was close to 10% each year. On annually revalued assets, its annual average return was 6.4% (as compared with the convenanted return of 10%). Neverthless, these shortfalls in the rate of return did not adversely affect the progress of construction of either the Fifth or the Sixth Power Projects. Because of delayed tariff increases, there was some deterioration in summary ratios for debt-service coverage (1.5 times vs. 1.9 times), operations (60.5% vs. 47.8%), and working capital (1.1 vs. 1.5); but because of the deferral of the Cajon project,there was some improvement in summary ratios for contribution to investment (23.7Z vs. 13.6%) and debt-to-total capital (55/45 vs. 66/34). There was also some improvement in the receivables ratio (equivalent to 68 days of sales in 1979) but less than expected (equivalent to 52 days of sales in 1979). 5.2.2 Set forth below is a summary table comparing actual and forecast data stated in 1974 prices. Because of the deferral of the Cajon project, the actual and forecast financing plans are not comparable. However, actual and forecast summary sales and operating results are comparable. Because actual summary sales were 6.7% less than expected (paras. 4.1.2 and 4.2.2) and because ENEE was slow to increase tariffs, operating revenues (L 309.2 million) were 16.5% less than expected; and because operating expenses (L 134.0 million) were 6.6% greater than expected, operating income (L 175.2 million) was 28.4% less than expected. 5.2.3 Certain factors worked in ENEE's favor to keep operating costs close to the appraisal forecasts. For example, the actual summary fuel expense (L 36.5 million) exceeded the appraisal forecast by only 11.6% because of lower-than-expected sales and generation; and ENEE had success in the area of salary administration, even though the actual number of employees exceeded the appraisal estimates. At appraisal, ENEE's staff numbers were expected to rise 3.5% annually between 1974 and 1979, resulting in a customer/employee ratio of 84 by 1979. ENEE's numbers of employed staff actually rose at a rate of 4.5% annually, resulting in a customer/employee ratio of 71. ENEE compensated for these increases in staff by holding the line on salary increases. In 1974 prices, ENEE's wage bill, L 10.6 million, was actually lower than expected at appraisal, L 11.0 million. ENEE's customer/employee ratio is currently at an acceptable level (93). 5.3 Tariff Increases and ENEE's Compliance with Revenue Covenants 5.3.1 The dramatic increase of fuel costs (in 1973) required ENEE to take tariff action in order to avoid an undermining of its financial position. ENEE complied with the conditions of Board presentation for Loan 1081-HO - raising tariffs 25% and instituting a fuel adjustment clause (para 2.36), based on the findings of a tariff study (para. 3.3.3). Later, it revalued its operating assets to a 1973 price level. With some delay, ENEE implemented  -15- Actual and Forecast Sales of Operating Results and Sources and Uses of Funds 1972-1979 (in constant 19'4 prices. stated In mIllions of leaviras) Actual Z of Forecast 2 of Z Difference Sumarry Sales nod Operating Results Total Total from Forecast Sales (in C4h) 3777.3 - 4050.5 - (6.7) Average revenue per Nub sold 8.2 - 9.2 - (10.8) (centavos) Operating revenues 309.2 100.0 370.5 200.0 (16.5) Operating expense (cash) 134.0 43.3 125.7 33-9 6.6 Foel 3I M -mTi.w :Tw 1T8 Other 97.5 31.5 93.0 Z5.1 4.8 Net Operating Income efore Depreciation 175.2 56.7 244.8 66.1 (28.4) Summary Soaurces.of Funds Cross internal cash gencratlon l6 175.9 69.1 246.2 31.8 (28.6) Less: debt service 118.4 46.5 129.0 16.6 (8.2) get Internal cash generation 57.5 22.6 117.2 15.2 (50.9) Add (subtract): change in non-cash working capital (net) (4.6) (1.8) (10.4) (1.3) (55.8) Add: contribations & deposits 10.3 4.0 3.5 0.4 194.3 Net internal cash generatior avaLlable for construction and other needs 63.2 24.8 110.3 14.3 (42.7) Long-term debt 191.4 75.2 665.0 35.7 (71.2) Total Sources 254.6 100.0 775.3 100.0 (67.2) Summary Uses of Funds Construction 223.9 8'.9 769.5 99.3 (70.9) Studies 28.4 11.2 3.7 0.5 667.5 Change in cash 2.3 0.9 2.1 0.2 9.5 Total Uses 254.6 100.0 775.3 100.0 (67.2) 1/ Includes net income before de'reciation. other Income. plus miscellaneous other items.  - 16 - the fuel adjustment clause in 1977 when fuel costs rose notably in the operating cost mix. Since then, ENEE increased its tariffs by 10X in June 1978 and 12% in May 1979. In 1979, it implemented a procedure for the annual revaluation of assets. In 1980, ENEE again raised tariffs 12%. During the years 1972-1979, Bank staff were generally satisfied with ENEE's compliance with the revenue covenants of the Fifth and Sixth Power Loan Agreements. VI. INSTITUTIONAL PERFORMANCE 6.1 Collaboration of Bank and KNEE Staff 6.1.1 The collaboration of Bank and ENEE staff was cordial, professional, and satisfactory. Each group complemented the work of the other, especially in responding to the changing circumstances of the Fifth and Sixth Power Projects (paras 3.1.1). 5.2 Performance of ENEE Staff 6.2.1 ENEE's construction department showed deepening maturity in the conduct of its operations. ENEE enjoyed the benefits of high-caliber top management during the implementation of these projects. 6.2.2 Improvements in administrative efficiency have come slowly. ENEE brought its customer/employee ratio in line with appraisal forecasts for the Cajon project (para. 5.2.3); but internal reports have been delayed from time to time because of inadequate computer capacity. Inventories and accounts receivable have consistently exceeded appraisal forecasts. With the prompting of Bank staff, ENEE is planning to acquire additional computer capacity and has accepted consultant recommendations for re-organizing and up-grading the financial and administrative functions (especially inventory management). Because the Government has been a slow payer of its bills, significant progress in reducing overdue receivables would require Government co-operation in the formulation and enforcement of a payments plan as applied to itself and its entities. Government cooperation would also be required to speed up collections from certain corporations. ENEE has delayed implementing management improvements of the administrative and financial functions because of budgetary and staff constraints. If necessary, Bank staff should condition its next lending operation to the taking of appropriate remedial action by the Government (bills) and ENEE (administrative improvements). 6.3 Performance of Bank Staff 6.3.1 At appraisal of the Fifth Power Project, Bank staff did not assess the risks to the Project in the event of adverse market developments or increases ef the cost estimate for the Cajoa project (para 2.1.7). However, Bank staff showed excellent flexibility during supervision of the Project (para. 3.1.1). At appraisal of the Sixth Power Project, Bank staff accepted cost estimates for the pipeline and penstock which far exceeded the actual cost. Fortunately, this over-estimation offset an under-estimation of the  - 17 - cost of civil works (para. 3.4.2). Bank staff made virtually no effort to supervise the distribution portion of the Project, which was financed by CABEI (para. 2.3.4). The financial measures required in connection with Board presentation of the Sixth Power Loan helped ENEE to avoid financing shortfalls which could have delayed project execution (paras. 2.4.1 and 5.3.1). 6.4 Performance of Consultant Staff 6.4.1 With one exception, ENEE was satisfied with the performance of consultants in connection with studies carried out under the Fifth and Sixth Power Projects. ENEE was not satisfied with the geological investigations for the Rio Lindo expansion. Bank staff share this complaint. VII. LESSONS TO BE LEARNED 7.1 Project Justification: Fifth Power Project 7.1.1 This Project illustrates the risks of justifying a major project component on the basis of a second project, for which not even a feasibility study exists. The '.terconnection transmission line was built on the expectation that ENEE would build the Cajon project before it had been demonstrated that Cajon was the next least-cost generation addition. Actual events contradicted these developments. Later, the interconnection was justified as part of a lesser-cost joint development sequence which did not include construction of the Cajon project as ENEE's next least-cost generation addition (para. 3.2.2). Market and other factors have combined to cause the interconnection to be an underutilized, if useful, facility (para. 3.2.5). ENEE stated that feasibility study did not take into account such factors as emergency energy, system stability, reserve sbaring, and future interconnections in Central America (see Annendix I for ENE.E's comments). 7.2 Project Appraisal: Sixth Power Project 7.2.1 The differences between the actual and forecast costs of the Rio Lindo expansion (para. 3.4.2) confirm the wisdom of the Bank's delaying Board presentation of projects with a large civil-works component until the appraisal mission reviews detailed designs and corresponding cost estimates (para. 2.3.4).  - 18 - ANNEX 1 HONDURAS. EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) FIFTH AND SIXTH POWER PROJECTS (841-HO & 1081-HO) Summary of Bank Lending to the Sector Loan/Credit Number Date Amount Name (in US$ millions) 226-HO 1959 1.45 Interim Power 261-HO 1960 8.80 Cancveral Hydroelectric 541-HO/ 1968 7.50/ Rio Lindo Hydroelectric 116-HO 4.00 692-HO/ 1970 5.501 Fourth Power 201-HO 5.50 (Transmission/distribution) 841-HO 1972 12.30 Fifth Power ( Interconnection with Nicaragua) 1081-HO 1975 35.00 Sixth Power (Rio Lindo extension- 40 MW) 1629-HO 1978 30.50 Nispero Hydroelectric (22.5 MW) (plus 30 MW of diesel plant) 1805-HO! 1980 105.00/ Cajon Hydrolectric 989-H( 20.00 (292 MW) 235.55  - 19 - ANNEX 2 HONDURAS EMPRESA NACIONAL DE ENERGIA ELECTRIC (ENEE) FIFTH AND SIXTH POWER PROJECTS (LOANS 841-HO & 1081-HO) Major Covenants of the Loan Agreements for the Fifth & Sixth Power Projects 1. ENEE complied with the following major covenants in a generally satisfactory manner: Section 3.01: to execute the Projects efficiently; Section 3.02 & 3.03: to employ satisfactory design consultants and contractors. Section 3.04: to take out adequate insurance for goods financed out of proceeds of the Loans; Section 3.05: to provide such documentation related to the Project as the Bank may reasonably request; Section 3.07 (Sixth Power only): to carry out a satisfactory program of resettlement and/or compensation for those displaced by the Project. Section 4.01: to conduct its operations under competent mnagement and staff in accordance with sound engineering and public utility practices; Section 4.02: to take out insurance in accordance with appropriate public utility practices; Section 5.02: to provide the Bank with an audited financial statement not later than four months after the end of the preceeding calendar year; Sections 5.03 & 5.04: to earn 10X on net average assets valued in accordance with methods acceptable to the Bank. Sections 5.06 & 5.07: to seek Bank agreement to long-term borrowing unless ENEE meets a debt-service test of 1.4 times the maximum debt-service.  - 20 - ANNEX 3 HONDURAS EMPRESA NACIONAL DE ENERGIA ELECTRIC (ENEE) FIFTH AND SIXTH PGWER PROJECTS (LOANS 841-HO & 1081-HO) Major Covenants of the Guarantee Agreements for the Fifth & Sixth Power Projects 1. The Government complied satisfactorily with Section 3.02 of the Fifth Power Guarantee Agreement which required the Government (and its agencies) to take no action which might interfere with the sound and satsifactory operation of the interconnection transmission line in accordance with the terms of the Intercoanection Contract. 2. The Government complied satisfactorily, if with some delay, with Section 3.02 of the Sixth Power Guarantee Agreement which obligated the Government to enable the Borrower to comply with the corresponding revenue covenant of the Sixth Power Loan Agreement (Section 5.04). The Government was slow in complying with Section 3.04 which obligated the Government to pay (or cause to be paid) the debts of Servicio Antonomo Nacional de Acueductos y Alcantarillados (SANAA) rendered during 1974 not later than December 31, 1975, and all such future debts to ENEE owed by SANAA within two months after the date of billing.  -21- ASNU