Ecuador - INECEL Power Transmission Project

* DowmWat The World Bank FOR OMCUAL USE ONLY Report No. 6359 PROJECT COMPLETION MEMORANDUM ECUADOR INECEL POWEn' TRANSMISSION PROJECT (LOAN 2045) July 28, 1986 Latin America and the Caribbean Regional Office 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.  THE WORLD SANK POE OFCIL US ONY Washngton.D.C 20433 USA Qei af Oiwcw.G.'mI oprns.>w stvSufl July 289 1986 MEHORANDUM TO TOE EMECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Memorandum on Ecuador - INECEL Power Transmission ProJect (Loan 2045-EC) Attached, for information, is a copy of a report entitled 'Project Completion Memorandum ou Ecuador - NECEL Power Transmission Project (Loan 2045-EC)" prepared by the Latin America and thp Caribbean Regional Office. Further evaluation of this y oject by the Operations Evaluation Department has not been made. Attachment This document ha a mnscted disubution and may be usd by tocpients only in th pefonmnmu of their official duties. Its contents may not othewie be d _sloed without Wodd Bank authorition.  FOR OFFICIAL USE ONLY ECUADOR PROJECT COMPLETION MEMORANDUM INECEL POWER TRANSMISSION PROJECT LOAN 2045-EC TABLE OF CONTENTS Page No. Preface ................................ .......... ............. (i) Basic Data Sheet ......... ....... . .............. ............. ii Introduction .............. ........... Project Description..... ............. ............................ 1 Loan Processing, Negotiations, and Signing 1 Loan Effectiveness ............ 2 This documnt has a sticted ditibution md may be ued by npients only in the pfoanne of their officW duties. Its contents may not otherwis be disbed without Wofld Bank authbtion.  (M) ECUADOR PROJECT COMPLETION MEMORANDUM INECEL POWER TRANSMISSION PROJECT LOAN 2045-EC Preface 1. This is the Project Completion Memorandum for the INECEL Power Transmission Project, which the Bank supported with Loan 2045-EC (US$100 million). The borrower was Instituto Ecuatoriano de Electrificacion (INECEL); the guarantor was the Government. 2. The loan agreement terminated on July 21, 1983, twenty months after loan signing (December 4, 1981) at the requElt of the borrower and the guarantor. The loan agreement had never become effective due to non- compliance on the part of INECEL and the guarantor with respect to major financial covenants. In accordance withi the revised procedures for project performance audit reporting, this Project Completion Memorandum was read by the Opera- tions Evaluation Department (OED), but the project was not audited by OED staff. Following standard procedures, OED sent copies of the draft project completion memorandum to the Government and the Borrower for comments. However, no comments were received.  (ii) PROJECT COMPLETION MEMORANDUM BASIC DATA SHEET ECUADOR INSTITUTO ECUATORIANO DS ELJECTRIFICACION (INECEL) INECEL POWER TRANSMISSION PROJECT (LOAN 2045-EC) Key Proiect Data Forecast Actual Total Proiect Cost (excl. fin. charges) 144 Not Applicable (US$ million equivalent) (NA) as loan agree- ment terminated Cost Overrun (X) None NA Loan Amount (US$ million equivalent) 100 NA Date Ph1sical Comoonents Completed 2/84 NA Financial Performance Expected to earn INECEL never rate of return complied with rising from -1.72 earnings covenant in 1981 to 9.11 prior to termina- in 1985. of loan agree- ment (07.21.83) Institutional Performance Improving Poor  (Iii) MISSION DATA Month No. of No. of Staff Date of Type of Mission Year Weeks Persons Weeks Report Preparation I 10/79 1.5 2 3.0 11/20/79 Preparation 1I 03/80 1.5 2 3.0 04/14/80 Preparation III 05/80 0.5 1 0.5 06/06/80 Preappraisal 05-06/80 2 2 4.0 07/30/80 Appraisal 11/80 2 2 4.0 11119/80; 12/18/80; 06123/81 Total 14.5 Supervision I 10/81 0.5 1 0.5 11/29/81 (Pr) Supervision II 04/82 1.0 2 2.0 04/22182 (T,F) 01110179 Supervision III 02/83 1.0 2 2.0 04/04/83 (F) - -04/26183 Total 4.5 T: Technical supervision. Ft Financial supervision. Pr: Procurement supervision. COUNTRY EXCHANGE RATES Name of Currency - Sucre (SI.) Exchange Rate At Appraisal - US$1.00 s S/.25.00 Intervening-year Average - US$1.00 9 S/.36.75 Completion Date l/ - US$1.00 t S1.49.50 1! Termination Date (07.21.83)  ECUADOR INSTITUTO ECUATORIANO DE ELECTRIFICACION (INECEL) INECEL POWER TRANSMISSION PROJECT (2045-EC) Prolect Completion Memorandum Introduction This memorandum was prepared in lieu of a project completion report (PCR), as Loan 2045-EC (US$ 100 million) terminated on July 21, 1983, twenty months after loan signing (December 4, 1981) sinice it failed to become effective. The termination of the Loan Agreement took place at the request of the borrower (Instituto Ecuatoriano de Electrificacion - INECEL) and the guarantor (Government) due to non- compliance on the part of INECEL and the Government with respect to major financial covenants. No portion of the loan was ever disbursed. Project Description The project was part of a larger program to be executed by INECEL to meet energy and power capacity requirements for the period 1980-1985. The project consisted of: (i) constructing transmission lines (338 circuit km at 230 kV and 427 circuit km at 138 kV) and substations (with about 280 MVA of transformation capacity); and (ii) engaging consultants in connection with a training program, an institutional development program, and various engineering services. Each transmission line and its corresponding substation was the least-cost transmission alternative when compared with an equivalent thermo-electric power plant. The project was expected to cost US$144 millions with a foreign cost of US$86 millions. The proposed loan would cover the foreign cost of the project (US$86 millions) plus interest during construction. Loan Processing, Negotiations, and SiRning Bank preparation and appraisal missions visited Ecuador between October 1979 and November 1980 in connection with the above project. Bank staff paid particular attention to the problems of loan amount, co- financing and audit arrangments, power sector tariffs, distribution losses, asset revaluation, control over the investment program of INECEL subsidiaries, and retroactive financing. In order to provide for an appropriate level of resource generation on the part of INECEL, Bank staff agreed at the Decision Meeting (December 1, 1980) that the Bank, inter alia, would seek revrenue covenants specifying the following rates of return: 1981, 2%; 1982, 42, 1983, 8%; and 1984 and thereafter, 8.5?. Subsequently, it was decided that the loan agreement should include a covenant requiring INECEL and its subsidiaries  - 2- to increase their power tariffs by 3% per month until they had achieved the specified rates of return. No major problems delayed loan negotiations (June 15-19, 1981) or Board approval (July 21, 1981). Because of post- negotiation objections on the part of the Controlaria General to the auditing covenant of the loan agreement, the Bank, the Government, and INECEL had to delay tigning the loaln and guarantee agreements until December 4, 1981. Loan Effectiveness By the original deadline for effectiveness (March 4, 1982), INECEL had not fulfill d a special condiiion for eifectiveness (the selection of auditors) and was in non-compliance with res-ect to the covenant requiring monthly tariff increases of 3%. At that time, even though the actual level of monthly tariff increases was only 1.7%, there was substantial political pressure to discontinue the policy of monthly tariff increases. The Bank agreed to ercend the date of effectiveness by three months (to June 4, 1982); anet 'ispatched a supervision mission (March 17-24,1982) to monitor progress. In the subsequent months, notwithstanding continuing non- compliance with respect to the revenue covenants on the part of INECEL and the Government, the Bank twice more agreed to change the deadline for effectiveness: from June 4, 1982 to August 4, 1982 and t!"en to July 21, 1983. The later date was two years after loan approval. While INECEL eventually fulfilled all of the special and general conditions for effectiveness, it remained in non-compliance with respect to the revenue covenants of the loan agreement. Although there had been some small upward movement in tariffs in 1981 and early 1982, these were not sufficient to comply with the financial covenants of the loan agreement. INECEL did attempt to raise tariffs in the autumn of 1982 but this action was partially responsible for the dismissal of the general manager of INECEL and the impeachment by Congress of the Minister of Energy and Natural Resources, who had authorized these increases. As a result of inaction on tariffs, INECEL earned a negative rate of return in 1982 and during the first half of 1983 and was unable to cover even half of its debt service. Throughout this period, the Bank had, of course, urged the Government to implement tariff increases in accordance with the covenants of the loan documents. A supervision mission (February 1983) reported that there was substantial political resistance to further increases for power tariffs; and recommended that the Bank cancel the loan if the GovernzLent would not commit itself to carry out a program of tariff increases. Later (May 1983), a Bank mission composed of higher level staff confidentially offered the Government a compromise plan for tariff increases which would permit INECEL to earn a rate of return of 2% in 1984 and 8.5% in 1986. Under the financial covenants of the loan agreement, INECEL was obligated to earn a return of 8.5% in 1984 and each year thereafter. Under the compromise  - 3 - plan, the Bank offered the Government and INECEL a three-year period in which to raise tariffs sufficiently to comply with the original targets of the revenue covenants. Because of political considerations, the Government declined to accept this program. Preceding the dispatch of the mission, Bank staff had examined a Government offer to increase tariffs (an increase of 101 followed by monthly increases of 2X) and concluded that the Government offer would not have provided INECEL with a positive rate of return before 1986. Given that the financial rehabilitation of INECEL was a major Bank objective, this offer, in the opinion of the Bank, fell too far short of what was needed to be acceptable. In contrast, the Government believed th.t political resistance to the tariff Increases proposed by the Bank would be so strong that the political stability of the country would be at stake. In these circumstances, compromise was not possible. The Bank felt it could not accept the Government's offer which would not have provided INECEL with a positive rate of return until 1986 and the Governwbnt felt it could not aecept the Sank proposal which would have provide ECEL with rates of return rising from 21 to 8.52 in two years (betweer. ..84 and 1986). Because of these radically different views on tariff increases, the Government requested that the Bank terminate the Loan Agreement as of July 21, 1983; and the Bank agreed to this request. As a postscript, it should be noted that in May 1985 the Government introduced monthly tariff increases of 3%; and that these increases have not compromised the political stability of the country.