Argentina - Buenos Aires Power Project

R E S T R I C T E D Report No. TO-306a This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT BUENOS AIRES POWER PROJECT SEGBA ARGENTINA January 10, 1962 Department of Technical Operations  BUENOS AIRES POWER PROJECT TABLE OF CONTENTS Page Nq. Summary I. INTRODUCTION 1 II. BACKGROUND 2 III. THE PINEDO PLAN 4 IV. THE BORROWER 5 The By-Laws 5 The Concession 6 Organization and Managenjnt 7 V. POWER MARKET 8 VI. THE PROJECT 10 GBA Station 10 132 kv Interconnection 13 Distribution System Expansion 15 VII. FINANCIAL ASPECTS 18 Present Financial Position 18 SEGBA 19 Fourteen Partidos 20 GEA Station and 132 kv Interconnection 20 Consolidated Capitalization of SEGBA 21 Consolidated Assets 22 Tariffs 22 Financing Plan 24 Estimated Future Earnings 27 Debt Limitation Covenant 27 'uditing Procedures 28 VIII. CONCLUSIONS AND RECOMvENDATIONS 28  LIST OF ANSTNEXES ANNEX 1 - Long Term Load Development Chart ANNEX 2 - Plant Capabilities and Peak Loads, MW ANNEX 3 - Cost Estimates 1962-1964, 132 kv Interconnection ANNEX 4 - Total SEGBA Program 1962-1964, Summary of Estimated Costs ANNEX 5 - SEGBA - Balance Sheets 1961-1967 ANNEX 6 - SEGBA - Estimated Income Statements 1961-1967 ANNiEX 7 - Sources and Applications of Funds 1962-1967 ANNEX g - Compania Italo-Argentina de Electricidad - CIAE Map  BUENOS AIRES POIWER PROJECT SEGBA S u m m a r y The Government of Argentina has proposed that the Bank make a loan to assist in the execution of a program intended to eliminate the power shortage in the Buenos Aires Metropolitan area and to reorganize the electric power supply industry in the area as a necessary condition to efficient expansion of service in the future. ii. The reorganized SEGBA, which would be the Borrower, is to be given ownership and responsibility for AyEE's generation, interconnection and distribution facilities in Buenos Ainres. Tnis will result in a con- solidated program for SEGBA which, for the period of 1962-1964, includes the completion or addition of about 800 MW of generating facilities, a 132 kv system in the metropolitan area and a substantial expansion of distribution facilities. The program, which is estimated to cost a total of US&p292 million equivalent, represents the minimum necessary to eliminate, by 1965, the bulk of the power shortage. iii. After the reorganization SEGBA will be a stock corporation: initially, all shares will be owned by the Government but would be sold gradually to the public as conditions of the Argentine financial market permit. A satisfactory plan has been worked out to ensure that SEGBA will have a competent management group operating with the necessary autonomy. iv. The plan for financing the 1962-1964 program, after taking into account US$76 million equivalent (26%) representing the total of new borrowings already contracted and US$109 million equivalent (37%) repre- senting net internally generatec funds, leaves a gap of US$107 million equivalent. This is to be met by the sale of US$12 million equivalent (4%) of new common shares of SEGBA in 1963-1964, and by a proposed loan of US$95 million equivalent (33%) from the Bank. The financial position of SEGBA, which is analyzed in detail in the report for the six years 1962 to 1967, should be sound throughout the period. v. The project is considered suitable for the proposed US$95 mil- lion loan, with a term of 25 years and with amortization starting in March 1965.  BUENOS AIRES POWER PROTEECT SEGBA I. INTRODUCTION 1. The Government of Argentina has proposed that the Bank make a sub- stantial loan to assist in implementing a program to consolidate electric utility services in the Buenos Aires Metropolitan area (Greater Buenos Aires) and to eliminate a long standing shortage of power in the area. 2. The elimination of the shortage depends largely on completing as quickly as possible a 600 MW installation, the "Gran Buenos Aires" (GBA) Station, which has been under construction since 1958 by the Governmient's Water and Power Agency, Agua y Energia Electrica (AyEE). Due to physical, organizational and financial difficulties, the construction of the station is now two years behind schedule and AyEE is unable to obtain the funds in local currency needed to complete the installation. 3. The proposed consolidation of services would be achieved by trans- ferring to a reorganized SEGBA (Servicios Electricos Gran Buenos Aires, at present the largest among the electricity supply organizations in Buenos Aires) the responsibility for completing the construction and undertaking the combined operation of the GBA Station, of the 132 kv interconnection in the metropolitan area as well as of the necessary expansion of the consoli- dated distribution system. These measures should bring to an end as quickly as possible the power shortage in the area and provide a sound basis for the efficient provision of electric utility service in the future. 4. The organizational and financial features of the consolidation plan have been the object of long consultations between the Government and the Bank. A firm plan of action has now been formulated and is appraised in this report. After considering all reasonable contributions which could be obtained in Argentina to meet the financial requirements of the plan, there remains a gap of $95 million which the Government requests be the amount considered by the Bank for a loan. The Government proposes that the loan be made to the new SEGBA and that the utilization of its proceeds be authorized in the following manner: (i) The equivalent of US$60 million to obtain local currency exclusively for the completion of the GBA Station and of the 132 kv ring, and (ii) US$35 million against imported equipment and services mainly for the expansion of the distribution system and interest during construction.  II. BACK(GROUND 5. Electricity supply by privately-owned utility companies in Buenos Aires was established at the beginning of the century. These companies were owned and controlled by foreign interest and operated under long term concessions granted by the city of Buenos Aires and later by the city and/or the province of Buenos Aires when service was extended beyond the borders of the Federal District. 6. In the period between the two world wars, and after some trans- fers of ownership following the first world war, electric utility service in the Greater Buenos Aires area was shared by two companies: CADE (Compania Argentina de Electricidad) a fully-owned subsidiary of SOFINA, and CIAE (Compania Italo Argentina de Electricidad) which was and is con- trolled by Swiss financial interests but whose shares have also been quoted on the Zurich and Buenos Aires stock exchanges. These two companies, like their predecessors, ran an efficient and profitable operation and es- tablished and maintained a tradition of reliable service. Ample capacity reserves were maintained at all times and generally the management and operation of the companies reflected the conservative electric utility approach of western European companies before the second world war. Under these conditions the development of the Buenos Aires power system during the 30 year period to 1940 progressed steadily with an average annual rate of increase in demand between 7 and 8%. 7. With the advent of the Peron regime and the emergence of national- istic trends in Government policies the foreign-owned power companies began having difficulties. In the early 1950's they were refused permission further to expand their facilities. Shortly thereafter they were prevented from applying the rate adjustment clauses which were included in their con- cessions. This was accompanied by increasingly frequent expropriations of foreign-owned power facilities, mostly in the interior of Argentina, and by the mid-1950's a strong movement was apparent to nationalize the power industry by expropriating the foreign-owned companies and/or revoking their long term concessions. This situation continued after the fall of the Feron Goverinment and by 1958, foreign owned power undertakings in the interior had been formally taken over, mostly by AyEE, but in some in- stances (notably Cordoba) by the Provincial Governments. Most of these had been owned by American and Foreign Power Company and negotiations for compensation were successfully completed in 1960. The remainder had been owned by CADE or CIAE and settlements therefor were included in agreements reached between the Government and the owners in 1958 and 1961, respectively. 8. In Buenos Aires, CADEts and CIAE's concessions were cancelled in mid-1957. The brunt of political attacks was borne by CADE. By late 1958 a settlement was reached between the Government and SOFINA under which AyEE took over CADE's distribution system in fourteen municipalities to the north-west of the Federal District (Fourteen Partidos). The revalued assets remaining in CADE, whose name was changed to SEGBA, consisting of the generating facilities and of the distribution system in the Federal District and in the fourteen municipalities to the southeast, were to be bought by the Government in equal installments during the ensuing ten years.  - 3 - The contract provided, inter alia, that equity capital would earn 8%. Management was vested in a Board with representation both of the Government and of SOFINA, with executive management remaining SOFINA's responsibility at least until the Government achieved majority ownership. 9. The settlement with CIAE was concluded by mid-1961 and the con- tract then signed provides for an indefinite concession period, but with an option for the Government to buy the Company's facilities after 1966 with three years notice. 10. As for the power supply situation in Buenos Aires, the power shortage which had begun in the early 1950's, partly alleviated by the in- stallation of captive plant by consumers, grew more serious and by 1956 the companies had difficulty meeting demand of connected consumers. Con- nections to new consumers were practically discontinued and restrictions on the use of power were imposed which are still in effect. The con- troversies about CADE and CIAE and the cancellation of their concessions prevented the adoption of the logical solution to the power shortage - the installation of new units at their respective plants in Puerto Nuevo and Nuevo Puerto (both in Buenos Aires port) - which would have made available suitable new capacity in the shortest time and at the smallest cost. In- stead, AyEE initiated plans for building a new 600 IW steam power station on a site to be reclaimed from the Rio de la Plata in the port area. Con- tracts were awarded in April 1958 to a partnership of British co!