Honduras - Nispero Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5420 PROJECT COMPLETION REPORT ilONDl)lRAS NISPERO POWER PROJEC T (LOAN 1629-HO) Janinrv 29, 1985 i.nt in Aznerica and the C.aribbhan Rezional Office This document has a restric ed 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.  FOR OMCIAL USE ONLY PROJECT COMPLETION REPORT HONDURAS EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) NISPERO POWER PROJECT (LOAN 1629-HO) Table of Contents Page No Preface ... i Basic Data Sheet .......... . ..... ii Highlights ..................................... ,v I. Background ............... 1 1.1 Bank Lending to Sector . ....... ................ 1 1.2 Electric Power Sector Organization ............................ . 1 1.3 Investm-. Plans .............................. 1 II. Project Preparation and Appraisal ....................... ...... .. 2 2.1 Origin and Preparation of the Nispero Power Project . .. 2 2.2 Negotiati-ons, Board Presentation, and Effectiveness.. 4 2.3 Major Covenants of the Loan and Guarantee Agreements ............4 II. Project Implementation and Cost.. ......... 5 3.1 Timetable. 5 3.2 Increases in Amounts of Materials Used and Excavation at Nispero 6 3.3 The Energy Sector Organization Study ........................... 7 3.4 The Distribution Component and the Lack of CABEI Financing. 7 3.5 Project Costs. 8 3.6 Other Studies...... 10 3.7 Operation of the Nispero Power Plant and the Diesel Units at Puerto Cortes .11 IV. Project Justification .11 4.1 Load Growth . . . 11 4.2 Least-cost Solution . . . 11 4.3 Rate of Return on Investment . . . 11 V. Financial Performance .............................,,,l11 5.1 Actual and Appraisal Forecast Financial 1ata, 1979-1982 .11 5.2 Actual and Appraisal Forecast Financial Performance, 1979-1982..12 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.  VI. Institutional Performance .. ....................... ..... s ... .. . 14 6.1 ENEE's Non-Financial Indicators of Performance .............14 6.2 Performance of Bank and ENEE Staff ..........................*15 6.3 Performance of Consultant Staff and Suppliers ...................15 VII. Lessons to be Learned ............................................... 15 7.1 Improved Project Preparation ...................... 15 7.2 Improved Project Supervision .......................... .... .....15 Annexes 1.1 Summary of Bank Lending to the Sector ......................... ..... 16 2.1 Major Covenants of Loan and Guarantee Agreements ............. .... . 17 3.1 Actual and Forecast Project Timetable of Implementation ............ 18 3.2 Actual and Forecast Project Costs and Sources of Financing ......... 19 3.3 Price Deflator Indices for Costs of Nispero Power Project .......... 20 3.4 Actual and Forecast Annual Disbursements . . . 21 3.5 Expected Final, Revised, and Forecast Loan Allocation for Loan 1629-HO ............................................ .... 22 4.1 Actual and Forecast Energy Requirements ......................... . .. 23 4.2 Actual Internal Rate of Return on Nispero Power Project ............ 25 5.1 Actual and Forecast Key Indicators of Financial Performance, 1979-1982 ........................................................... 26 5.2 Actual and Forecast Income Statements, 1979-1982 . . ................. 28 5.3 Actual and Forecast Sources and Applications of Funds, 1979-1982 ......................................................... 29 5.4 Actual and Forecast Balance Sheets, 1979-1982 ...................... 31 6.1 Actual ard Forecast Non-financial Indicators of Performance, 1979-1982 ......................................................... 32  (i) HONDURAS NISPERO POWER PROJECT (LOAN 1629-HO) PREFACE The project consisted of the Nispero hydorelectric plant (22.5 NW), diesel units at Puerto Cortes (4x7.5 MW) and associated double-circuit transmission lines (at 69 kV; 4 km) to a neighboring substation, consultant services (engineering, management and organization, and various studies), and a distribution expansion program. To support this Project, the Bank made loan 1629-HO (US$30.5 million) in November 1978 to the national power company, Empresa Nacional de Energia Electrica (ENEE). Loan 1629-HO was the seventh of eight Bank loans and two Bank credits which benefitted the power sector in Honduras. The Central American Bank for Economic Integration (CABEI) also supported the Project with a small loan (US$0.6 million) to cover some engineering costs. Contrary to expectations, CABEI did not provide a loan (US$2.9 million) to help to finance the distribution component of the Project. The Bank Loan Agreement became effective in April 1979; the final closing date was June 1984, twenty-one months after the original closing date. The delay was primarily due to late completion of the Nispero hydro plant because of the difficult geology at the plant site. Another factor contributing to delayed project completion was ENEE's slow action in signing a contract for a hydro-inventory study. The Latin American and Caribbean Region/Energy 1 prepared the Project Completion Report (PCR), based on the Appraisal and President's reports, supervision and consultant's reports, other documents in the Bank's files, an incomplete final project report prepared by ENEE, and conversations with ENEE and Bank staff. The PCR sets forth the main points with respect to the preparation, appraisal, and implementation of the Bank-financed portion of the Project, which was completed successfully, notwithstanding certain delays. With respect to the distribution component, it is difficult to make comparisons between actually completed and expected distribution works for the period 1980-1981. In accordance with the revised procedures for project performance ar'dit reporting, this PCR was read by the Operations Evaluation Department (OED) but the Project was not audited by OED staff. Following normal procedures, OED sent a copy of the draft report to the Government, ENEE, and CABEI for comments. lowever, no comments were received from them.  (ii, PROJECT COMPLETION REPORT BASIC DATA SHEET HONDURAS EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) NISPERO POWER PROJECT (1629-HO) KEY PROJECT DATA Appraisal Actual Total Project Cost (excluding interest during construction) (US$ million equivalent) 52.99 65.13 1/ Cost Overrun () - 22.9 1/ Loan Amount (US$ millions) 30.50 30.50 (including allocation for finance charge) Disbursed (as of 06/30/84) 30.50 30.432/ Outstanding 29.48 22.4 3, Date Physical Components Completed 12/80 9/82 Time Overrun: Mlonths and Percentage - 18 mos; 100%4/ Internal Rate of Return (%) 9.0 4.6 5/ Financial Performance Required Exceeded covenanted to earn rate of return 8% annually6/ except in 1982. Institutional Performance Improving Improving, except for delayed imple- mentation of recom- mendations for up- grading inventory- management and fin- ancial functions. 1/ Not a fully meaningful comparison because actual data do not include costs of distribution component. Actual and forecast costs of components defined at appraisal and subsequently completed were respectively, US$65.1 million and US$49.7 million (para. 3.5.2). 2/ ENEE did not expect to complete disbursement before September 30, 1984. 3/ Exchange adjustment: (US$6.94) million. 4/ Time overrun was primarily due to difficult geological conditions at Nispero (para. 3.2.1). 5/ The actual internal rate of return was lower than expected due to cost increase at Nispero (para.4.3.1). 6/ See para. 2.3.2.  (iii) MISSION DATA Type of Mission Month/ No. of No. of Staff Date of Year Weeks Persons Weeks Reports Preparation 10/77 1.5 1 1.5 11/08177 Pre-appraisal 12/77 0.5 2 1 01/03/78 Appraisal 02/78 2 2 4 10/17/78 6.5 Supervision I 7/80 1 2 2 08/05/80 Supervision II 8-9/81 1.5 2 3 09/29/81 Supervision III 1/82 1 1 1 02/08/82 Supervision IV 8/82 1.5 2 3 09/29/82 9 7/ OTHER PROJECT DATA Item Original Revision Actual First mentioned in Project files - - 05/05/77 ENEE loan application - - 03/78 8/ Negotiations - - 07/31-08/03/78 Board Approval Date - - 11/04/78 Loan Agreement Date - - 12/15/78 Effectiveness Date 03/15/79 04/16179 04/16/79 Closing Date 09/30/82 06/30/83 06/30/84 Borrower ENEE - ENEE Executing Agencv ENEE - ENEE Fiscal Year of Calendar - Calendar Borrower Year Year Follow-on Project Cajon - Cajon 7/ During the years 1980-1982 supervision missions used about 40% of their field time to supervise the Cajon Project (1805-HO). During 1979, while Rank staff were appraising the Cajon Project, an unspecified (small) amount of field time was used to supervise the Nispero Project. 8/ Date of receipt of memorandum prepared by ENEE on interim generation project.  (iv) COUNTRY EXCHANGE RATE Name of Currency Lempira (Lps.) Exchange Rate At appraisal USS1.00-Lps 2.00 d ~~Intervening-year average US$1.00umLps 2.00 Completion Date US$1.00-1.ps 2.00  (v) HONDURAS NISPERO POWER PROJECT LOAN 1629-HO HIGHLIGHTS Loan 1629-HO (US$30.5 million) helped to finance construction of the Nispero hydroelectric plant (22.5 MW) and the Puerto Cortes diesel plant (4 x 7.5 MW), various consultant services, and training. Credits from suppliers (US$7.5 million) helped to finance the diesel units at Puerto Cortes; and the Central American Bank for Economic Integration (CABEI) provided a small loan (US$0.6 million) to help cover the costs of engineering services. Because the Project helped to meet forecast demand increases, its achievements can be rated an overall success. Because of difficult geological conditions at the Nispero plant (para. 3.2.1), completion of this Project, however, required more time and financing requirements than expected. The time overrun amounted to eighteen months and the cost overrun amounted to US$15.4 million on project components forecast at appraisal and actually completed. That is, excluding the distribution component, the actu'al and forecast costs of the Nispero hydro plant, the Puerto Cortes diesel plant, studies, and training were, respectively, US$65.1 million and US$49.7 million (para. 3.5.2). Contrary to expectations, CABEI did not provide expected financing of US$2.9 million for the 1980-1981 distribution component of the Project (para. 3.4.1). Through self-imposed time constraints, Bank staff omitted proper supervision of the distribution component; and ENEE did not provide information in the project progress reports on works which the Bank was not financing. Because of these factors, it is not possible to compare actually completed and forecast distribution works. However, as the actual and forecast increases of electricity sales and numbers of customers in 1980-1981 were close, much of ENEE's actual distribution investment probably corresponded to what was expected at appraisal (paras. 3.4.1 - 3). Between 1979 and 1981, ENEE's financial performance was satisfactory as measured by levels of sales and the return on net fixed assets, debt-service coverage ratio, operating ratio, and contribution to expansion; hut in 1982 ENEE's performace suffered some deterioration. In 1983, ENEE's rate of return recovered almost to the level stipulated by the revenue covenant (9%). The Bank was generally satisfied with ENEE's tariff levels and financial performance (para. 5.2.3) during implementation of the Project. As expected at appraisal, the institutional performance of ENEE improved slowly. ENEE has delayed implementation of consultant recommendations for reorganizing and upgrading inventory-management and financial functions (para. 6.2.2) because of budget and staffing problems.  HONDURAS EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) NISPERO POWER PROJECT (LOAN 1629-H0) I. BACKGROUND 1.1 Bank Lending to the Sector 1.1.1 Since 1959, the Bank has made eight loans and three credits amounting to US$235.6 million equivalent to the power sector of Honduras (Annex 1.1). The seventh loan, 1629-1O, helped to finance the Nispero Power Project, which is the subject of this report. Six previous loans and two credits helped to finance the first six projects which were completed successfully with some delays and cost overruns. The eighth loan and the third credit, 1805-HO and 989-RO (1980: US$105.0 million and US$20.0 million) are helping to finance the Cajon project (292 MW), which is the largest hydroelectric 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 is the only power company in the country. No other entity takes part in new service extensions, planning for the sector, or regulation of the sector. ENEE's Board 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. 1.3 Investment Plans 1.3.1 The Cajon project and related transmission facilities are expected to absorb the bulk of ENEE's financial resources through 1985. The current tariff levels of ENEE are not generating adequate resources to cover fully the financial needs of the company in 1984 or to permit ENEE to earn its covenanted rate of return. As a partial remedy, the Bank is urging tariff increases. Because the Government is also having fiscal problems, the balance of ENEE's financial gap would have to be provided by new borrowings; and ENEE is experiencing difficulties in obtaining access to new borrowings. Financing constraints have required ENEE to defer portions of its ongoing expansion program for transmission and distribution works.  -2- 11. PROJECT l'REPARATION AND APPRA1iAL 2.1 Oriigin and Preparation of the Nispero Power Project 2.1.1 Preparation for Lhe Nispero power project began in 1977, taking into account the findings ot a system-optimization study (financed by the lnterAmerican Development Bank -- IDB) which developed a least-cost sequence of generationi additions. The study showed that, based on a comparison of three large hydro projects (Cajon, Pemolino, and Naranjito) and ian all-thermaII a ltertiaive , th- CajonI project (para. 1.1.1) would bt the mist economic major gent ratILI iaddittoin, with initial operation sicheduled for either 1983 or 1985. T'[hv earlier diite of initial ope r;ationi would depend on the results ot nejeotiLt lItns tr the sale of C;ajon power and energy to NicaragI.UaI. I[h' study :11lso shoWLd th.at t ollowing completuion in 1978 of tlh.' extension of the Rio I.inmdo Ivyro plant, ENEE would need about 51) MW of additional genlerating varpacity to mnet mexpected load growth during the pertod 1980-1983. This 50 lMW imicrvmnent cattiv to be knowII as Elke "-lniterim Generationl lPlan'. and cons [sted ti; Lht- NI:;pe rt) liyvro projecLt (Initially vesLinkittd alt 15 MW) locatted oni Ll I'm 1'.1 K. I;tv.'r mIl (it diesel ini its IoC-i ted miciar l'ue rto CorLes (5 x 6t,i MW). 2.1.2 tLi MN.rch I'i; r N!.1.eq it -ted Hank tinancin gi ir tilhe prL)posd Nisper-o powe.-r ro. w-v siidfI ii .a mimtinorandum oln thle proposed "ItiLterimit Gene r;.t i on I6'rug r .IimIr .4 Iii a ; -.msuitaLnt to prepare a I ill I teas ii I I tv studv. Tlhe co,n-iiIt.:;! mmod-i ii tile project toi include ''2.5 MW ol hvdro CapaCity and 4 I'.- MW .i dit se 1 c:pac;ity. The consul tant prepamred a teasi hi I tv ;-ttIIdy -;I i Lit- !;Cr i bd t lyV the complex gCOlogy obt Lhe NispIero Site, irut iIj :.li t-rc Ii r. i I '.-;atures as steeply Jdiplping beds. local tight loldildng anid . x! i e . I, , t i:nd, , ;itiui<, and fractrurimi. * !hm' studv stated that rlm t-s t!m!'-- I ' I -:.hr . ugh red mudstonte. Shale. and linivstonv ;aui that vo;ll:.'r.Lm:. .: - .muit , s':titl voids. amid cavi Lies e-isted in the v i- i :: : * .:!'"-' . .. 4 .-.1m";e- ' t he-s yi'lgl I.m*l ledititotS, tihl' ;.lr : -; 1.'! .1 .-- '.s.-.T;m.'.' puvs i cl1 clt ig c I ci; I or tlh .i ivi 1 w. rl:. (I,.. I I-|t: -.: ; .: i I - -I-. It iuelk' i t s wiucl. c xh ..iI-t i I IIt-d - 1-t fn:l.-;. . ' ; .. -; -; - sI .nint . Iinr i mm prm'je T Ilm. It'rln'It;mt j0int- It imt.mI ,:*z4 - .- . i .: -; ', ::- ..*.* 'mlI !4' he wL) rr-- t hall eXps-ft- .Id . I '1pr.t i ; .: - :: - .t i rb -.ntl c;1. t C pxC:t 1: *.: i 1I.t1 aww(;.si: l * : : ; :. I!