Peru - Second Power Engineering Project

Document of The World Bank FOR OMCLAL USE ONLY Repwt No. 11497 PROJECT COMPLETION NOTE PERU POWER ENGINEERING II PROJECT (LOAN 2603-PE) DECEMBER 28, 1992 Energy and Industry Operations Division Country Department I Latin America and 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.   FOR OFFICIAL USE ONL THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation December 28, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Note on Peru Power Enxineering II Project (Loan 2603-PE) Attached is a copy of the report entitled "Project Completion Note on Peru - Power Engineering II Project (Loan 2603-PE)" prepared by the Latin America and Caribbean Regional Office in lieu of a Project Completion Report, as the loan, though approved by the Board in 1986, was never signed. In November 1986, the Borrower and the Bank agreed that the operation be withdrawn. 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.   PROJECT COMPLETION NOTE PERU POWER ENGINEERING II PROJECT (Loan 2603-PE) 1. This Note is in lieu of a Project Completion Report for the Power Engineering II Project (Loan 2603-PE; US$ 13.5 million; 1985), and is based on a desk review of project files and related documents and reports. This Loan was never signed, and was withdrawn in November 1986. Background 2. The Electricity Law of 1982 transferred most operating responsibility to regional companies and left ELECTROPERU in charge of sector planning, implementation of major generation works and operation of the national transmission system. This process of transferral (regionalizing sector operations and responsibilities) received significant political support during the period of project preparation (the Bank identified the project during supervision of the Project Engineering Project, Loan 2018-PE and the Sixth Power Project, Loan 2179-PE, in October 1984). It also exposed the weakness of ELECTROPERU's management and the urgent need of the regional companies for technical assistance and training. To address these needs and to support the process of regionalization, on July 2, 1985, the Bank approved Loan 2603-PE, to Empresa Electricidad del Peru S.A. (ELECTROPERU), with the guarantee of the Republic of Peru. However, as the project was not a priority of the new Government that took office on July 28, 1985, the Borrower and the Bank agreed to the withdrawal of the Loan in November 1986. Proiect Concept 3. The proposed project was part of a larger effort on the part of the Bank to continue the dialogue with a country whose economy was floundering. The risk associated with lending to a country making only irregular debt service payments to foreign creditors was not addressed in the President's Report. However, given its stake in the country and the sector, and given the benefits expected from maintaining a dialogue, the strategy of the Bank -- using small projects as interim measures -- seemed reasonable. Also, Bank management believed that the benefits of having a project ready for the next Administration outweighed the risks of project rejection after its election. Prolect Objectives 4. The main objectives of the project were to support the process of regionalization and improve the efficiency of the sector, by: (a) strengthening the management and organization of the sector and making it more responsive to local needs;  (b) addressing the utilities' most pressing problems, including distribution losses, frequent outages, and inadequate billing and collection procedures; and (c) improving sector finances, based on recommendation of studies to be undertaken. Project Description 5. At appraisal, the project cost was estimated at US$ 24.8 million, in December 1984 prices. The Bank was to cover foreign costs, US$ 13.5 million. There were four major components: (a) studies 36.3% of total cost); (b) maintenance equipment (14.6%); (c) communication and computing equipment, and system components and parts (18.2%); and (d) laboratory equipment (7.7%). The balance (23.2%) of the project costs consisted of physical and price contingencies. 6. The studies were to: (i) recommend improvements in the administrative systems, commercial operations, and distribution planning of the regional companies; (ii) identify causes of high transmission and distribution losses, inadequate safety standards and poor system reliability; (iii) develop performance indicators and performance targets; (iv) review the tariff structure, and recommend changes; and (v) bring regional generation projects to the feasibility level. 7. The project was to be implemented by the regional utilities, under the supervision of ELECTROPERU's managerial coordinating unit. As the Borrower, ELECTROPERU, the holding company of the regional power utilities, was to on-lend the proceeds of the Loan, on the same terms and conditions as the Bank Loan, to the participating regional companies: Electro-Sur-Oeste, Electro-Norte, Electro-Sur-Medio, Hidrandina, and Electro-Sur. To implement their respective projects, the regional companies were expected to select jointly a single consultant to carry out the studies related to transmission and distribution system rehabilitation and expansion. The regional companies were also to establish a group to coordinate procurement. Rational for Loan Cancellation 8. Shortly after Loan approval, there was a change in Administration. The new Government decided to review all commitments of the previous Government, thereby deferring Loan signing. By 1986, the deteriorating creditworthiness of Peru became an issue, making the Bank reluctant to sign the Loan. 9. Believing that the 1986 economic boom was unsustainable, The Bank had fundamental reservations about Government economic policy. Moreover, in May 1986, the Bank had suspended disbursements on the Sixth Power Project  (Loan 2179-PE) because of non-compliance with financial conditions. Given this situation and the apparent lack of interest on the part of the Government in implementing the project, the Bank decided it was no longer appropriate to keep open the option of signing the Loan. In November 1986 a mission communicated the Bank's concerns about the Loan to the Borrower and the Government. On November 25, 1986 the Government confirmed, via telex, its agreement to withdraw the Loan. Lessons Learned 10. During project preparation, the Bank had met with enthusiasm from the newly established regional companies, which would have benefitted from the management and technical assistance under the project. It also received the full support of the Government, which was interested in improving sector efficiency. Bank management decided to take the risk of proceeding with the project, despite upcoming elections. The new Government, with the backing of the newly appointed management of ELECTROPERU, did not support the decentralization of the sector, and showed little interest in strengthening the regional companies. Although the project was well-thought out and timely, it had clearly lost its priority with the new Government, and was dropped after loan withdrawal. 11. The main lesson learned from the preparation and appraisal of this project is the importance of more careful assessment of the risks associated with preparing a project at the end of an Administration, due to the inability to ensure continued political support (the Bank should have been particularly cautious because of the broad policy changes expected from the likely winner). The Bank might have waited for the regionalization reforms to be consolidated by the next administration, before embarking on an ambitious engineering and technical assistance loan in the sector.