Peru - Energy and Mining Technical Assistance Loan (EMTAL) Project

Docawit of The World Bank FOR OMCUL USE ONLY 4,;W~. ut. N. F'-- t; '-t l . TvpI- ( Fi Y:ti~~vt P: PKSY A ND N iN IN O 'ECT~N t2A: AS A*th. l R t X > , i . ( . ;; r P. NoI P-6039-PE '>! :;"s;.i; 1'-,,n: +r-I ' I D~-S.t . .JU ' MORAND)UN A1ND RECONNATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPtMET TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AMOUNT EQUIVAL1NT TO US$11.8 MILLION TO THE REPU3BLIC OF PERU FOR AN ENERGY AND MINIG TECHNICAL ASSISTANCE LOAN (EI) MAY 12, 1993 This document has a restricted distribution and may be sed by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS (as of March 11, 1993) Currency Unit = Sol US$1.00= 1.77 1 Sol = US$.5650 FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS AMDEP - Asociaci6n Multidisciplinaria de Investigacidn en Poblaci6n CAP - Andean Development Fund (Corporaci6n Andina de Fomento) CTE - Electricity Tariff Commission (Comisi6n de Tarifas Electricas) COES - Comit6 de Operaci6n Econ6mica del Sistema Interconectado CONERO - Nationa Energy Council (Consejo Nacional de Energfa) COPRI - Commission for Promotion of Private Investment (Comisi6n de Promocion de la Inversi6n Pnvada) DGE - General Electricity Directorate D1GH - General Hydrocarbons Directorate DGM - General Mining Directorate DGAA - General Directorabt on Environmental Matters (Direcci6n General de Asuntos Ambientales) DIGESA - Direcci6n General de Salud Ambiental Electrolima - Lima Electricity Company Electroperu - Peru Electricity Conpany (Empresa de Blectricidad del Peru) EMS - Energy Management System EMTAL - Energy and Mining Technical Asistance Loan INMADI - Investigacidn Medio Ambiente Inutria INAPMAS - Instituto Nacional de Protecci6n del Medio Ambientb INGEMMET Instituto Geol6gico Minero y Metaldrgico IB L- Limited Intemational Bidding MEM - Ministry of Energy and Mines NBF - Non-Bank Finance NGO - Non-Govemmental Organization ONERN - National Evaluation Office of Natural Resources (Oficina Naciona de Evaluaci6n de Recursos Naturales) PAHO - Pan American Health Organization SAL - Structural Adjustment Loan SCADA - Supervisory Control and Data Acquisition SICN - Central-Northern Interconnected System SOE - State-owned Enterpaise TOR - Terms of Reference UNDP - United Nations Development Program VME - Viceministry of Energy VMM - Viceministry of Mining  FOR OFFICIAL USE ONLY ENYM AND MNG TFCWAL ASSISTANCE LOAN ETL Laan and uWect U== Republic of Peru Executitir Age: MMistry of Energy and Mines (MM Boneffcades: MEM and its centralized and autonomos agencies AmQImt: US$11.8 milion equivalent MmrXs: Repayment in 20 yeas, including five years of grace, at the standard variable interest rate. Proj gWect vre: To assist the Government of Peru in the insttutional development of the Ministry of Energy and Mines (MEM) and its related entitias in order to ensure their adequate contribution to economic stabilization and structural reform in the energy and mining sectors, in particular to the privaizaion effort. DeItdfl: The project consists of: (a) (i consltancy (firms and individuals) for carrying out studies which would provide recommendations for MEM's institonal development and fli) implementation of the recommendations of these studies; (b) traiing progam for MEM and other relevant staff, in Peru and abroad; and (c) compute software and hardware, particularly to provide adequate stadstical information to the market and to help MEM to develop its policies. These services would assist MEM in: (i) completing the process of lega and regulatory reforms for the energy and mining sectors; (ii) strengthening its organizational unks and procedures; (iii) increasing the professional capabilities of its staff, and (iv) developing specific guidelines for environmental protection in energy and mining projects. fstimated Project Cost: C=onwonets LalFe (1) Overall Energy 0.16 0.74 0.90 (2) Eleetricity 0.77 2.00 2.77 (3) Hydrocarbons 0.42 3.63 4.05 (4) Mining 1.90 1.90 3.80 (5) Environment 055 2 6320 Subtotal 3.80 10.92 14.72 Physical Contingencies 0.19 0.55 0.74 Price Contingencies 0.38 1.09 1.47 Project Coordinating Unit 0.02 0.22 0.24 UNDP Administrative Fee 0M 0303 0.36 Total L44 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.  Proosd Financing Plan (in USS million): IBRD 11.8 Goverment 2.7 Japanese Grants .0 Estimate Disbursemept Banlc PY: 4l9S1612 Annual: 2.3 3.3 3.1 3.1 Cumulative: 2.3 5.6 8.7 11.8 Economic Rate of Retun: Not Applicable hEnmronmental tCJassificatio: C  MEMORANDUM AND RECOMDUMATION OF THE PRESIDENT OF TIRE INTERNATIONAL BANK FOR RECONSTRUCTION AM DEVELOPNT TOT EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PERU MRI AN MD= AN CRM wMICUA S ME.PR 1. I submit the following memon and ommendation on a proposed loan to the Republic of Peru, for the equivalent of US$11.8 million, to help finnce an energy and mining techWcal assce project. Ihe loan would be repaid over 20 yers, including 5 years of grace, at the Bank's standard variable rate. 2. Bacund On taking office in August 1990, President Fujimori's Government aumched a major stabilization and struwtal reform progam. It expanded its reform program In mid- 1991 to include privatization, with the objective of privatzing all state-owned enterprises (SOBs) before Its term expires in mid-1995. Ihe privadzation program is supervised by an intr-ministria commission (COPRI), reporting direcy to the President of the Republic. The privaizaton process has already strut in the hydrocarbons sector with the sale of Solgas and 74 of Petropr's 82 service stadons and in the mining sector with the sae of Hierroperu nd holdin Mineroperu (Minera Condestable, Quellaveco, and Mipeco USA). Preparatory studies for privatzation are being caied out for the other hydrocarons, power and minig companies. 3. The Government is also enacaing new policy, legal and regulatory measures to promote compeition and to facilite prvate investment. Recent economy-wide meastues include new anti-ust and labor legslation. Comprehensive new legislation has been passed for electricity and mining, and is being prepared for hydrocarbons. The policy reform and privatzation effots, however, require for their completion and success the strengthening of Government insittons which are responsible to: (1) monitor the implementation of the new policies; (iU) complement the sector legal framework with the corresponding reguations and guidelines; (iii) absorb the strategy and regulatory fimctiom which were previously vested in the SOEs now being privatized; (Iv) protect against monopolistic conditions; and (v) ensure evironmental protection. 4. Cau= Assistanc Sg. In March 1993, Peru successuly completed a debt workout program and cleared its arrears with the Bank and the IMP. The Govemt also agreed wit e d PW on a three-year stabiization program and finacing plan to be supported by an Extended Fund Facility. The Bnks counry assistance strategy for Peru was discussed and approved by the Board on Aprfl 20, 1993, together with ihe $250 million Privadzatlon Adjustment Loan. Under the assistnc strategy, lending iS forecast at $500 milliou annually from FY94-96, auming mainte of a satisfatory macroeconomic program and finmcing plan The assistance strategy has four main objectives: (a) to susti stabilization and consolidate stuctural reforms; (b) to fter prvate sector developmet and public sector reform; (c) to alleviate poverty and promote human resource development; and (d) to rehabiltate key irstucure and reform related policies. Strengthening istituional capacity is fundmental to all four strategic objectives. 5. The project will assist the Government in Implementing new institutional and regulry hfrmework for the electricity, hydrocarbons, and mning sectors, thereby faciitaing prIva hation and prWate investment in these key sects. It will also help develop new envimel policies/guidelines and strengthen enviromenal monitoring and enforcement capacity In these sectors.  * 2 - 6. ihnnerEn and Mining Sectors. The energy and miring sectors play a key role in Peru's economy: they contribute an estimated 11 % of GDP, 53% of exports, and 35-40 % of fiscal revenues. Sector enterprises constitute over 70% of Government holdings (in book value). Both sectors took a serious down-tn during the second half of the 1980s, triggered by the decline in the overall economy, which they in turn aggravated. The root causes of the decline of energy- and mining-related activites were (i) institutional and policy inadequacies, especially regarding energy prices which weakened the enterprises so that these were unable to carry out maintenance, let alone expand their productive capacities; (ii) wide-spread government ownership and control in both sectors: and (iii) operational inefficiencies at the enterprises. The Government recognizes that the rehabilitation and growth of the overall economy hinges on profound reforms and strengthening of the energy and miulng sectors. The Government, with the assistance of the Bank and well-qualifieu advisors, has established long-range policies for the energy and mining sectors (Annex 2), to: (i) modernize and strengthen the legal/regulatory and institutional frameworks; (ii) maximize the play of market forces; (iii) establist a pricing system which reflects economic costs; (iv) privatize SOEs and promote private investment in -aew facilities; and (v) reform the corporate structure of SOEs while tbey are not yet privatized. 7. Responsibility for overall energy strategy and policy advise is vested in the National Energy Council (Consejo Nacional de Energfa, CONERG). This institution is weak and requires substanti strengthening to carry out its functions. The institutional framework for the electric esbor~ has been defined in a decree law on electricity concessions enacted in November 1992. It establishes the following principles: (a) generation is deregulated and sudoject to market forces through competition; (b) transmission provides open access to suppliers and purchasers under a common carrier system with an adequately rgulated toll scheme and node prices; (c) distribution as a natural monopoly is fully regulated in regard to rights and duties of the market participants; and (d) prices are liberalized at the generation stage and regulated at the transmission and distnrbution stages. 8. The Government policy for hrocabons establishes that (a) all prices be deregulated, competition established where contestable markets exist, and natural monopolies be made subject to arms-length regulation; (b) the development and operation of the sector be undertaken by the private sector; (c) efficient operations and optimal contribution of the sector to public revenues be achieved through appropriate pricing (including taxation, linkage to international markets, and domestic competition) and a clear policy of contractual arrangements with the private sector concerning exploration/development, rather than through government ownership. 9. In the case of ming, the Government policy establishes: (a) an enabling legal framework conducive to private investment; (b) the strengthening of sector institutions with well- defined mandates to effectively administer and monitor compliance with established regulations (including environmental); and (c) promotion of private investment through the provision of basic geological data and other services. 10. ionale for Bank I'Mmer. The Bank's strategy in Peru is to support strategies, policies, and investments that encourage the resumption of economic growth and social development in a context of structural change and environmental sustainability. The emphasis is on efficient resource allocation, increased effectiveness in the public sector, and the appropriate targeting and delivery of support systems to the poor. Ihe energy and mining sectors are key to this strategy: electricity and hydrocarbons are essential to any productive activity in the economy, whereas mining as principal export sector has to generate the foreign exchange needed for economic growth. Both sectors are at a crossoads where pervasive state intervention and government ownership are being replaced by greater compettion and private participation. However, a strategy aimed at decentralization and privatization requires a strong and effective regulatory and monitoring system,  -3 - which has yet to be put into place. Ihis entails the preparation of regulations, administrative guidelines, and tehical nonr.. In support of legislation euacted or to be enacted. It also entails the strenghening of government and other public insitions that are responsible for implementing the Govement's new energy and mining policies. In support of this process, the Bank can bring to bear its knowledge of Peru's energy and mining sectors gained through previous loans and sector studies, its experience with sector reforms in comparable countries, and its recent involvement in several other operations, Including for privatization, which seek to reform Peru's economic policies. 11. Since May 1991, the Bank has been working closely with the Government to help prepare and implement an economy-wide privatization program and related secoral policy/legal reforms. For this proposa!, substantial technical assistance is being supplied, financed by the UNDP, by two Japanese grants of US$2.2 million and US$0.8 million for mining and energy respectively, by the US$30 million Privatzation TA loan, and by this proposed EMTAL. Under the SAL, the Bank has agreed with the Government on sectoral development policies and strategies which will be supported kiW ia by: (a) the US$250 million Privaization Adjustment Loan and (b) a proposed FY94 Electricity Privatization Adjustment Loan. 12. I esons LeaMrd from Past Bank Projects. lhe design of this EMTAL reflects lessons learned from the Bank's internaional experience in sector reform and in institutional development under a recently liberalized and privatized setting, and experience in Peru prior to the mid-1980s under technical assistance opetions for public sector management and investment for energy and mining projects. Key lessons include the need to: (a) ensure the continuity of *he reform program, during and after the execution of the TA operaton; (b) ensure consistency and coordination between the reform/privazaton and the Institutional development process; (c) limit the scope and size of the TA loan to keep it focussed and manageable; and (d) have well-defined loan administration and financing arrangements in place up-front. 13. ect ObjeAives. In view of the requirements for sector reform, the project aims at assisting the Government in: (a) implementing sector strategies and policies, especially demonopolization and privatizaton of state-owned enterprises; (b) completing the legal and regulatory reform of the energy and mining sectors, including environmental regulation; and (c) strengthening the capabilities of MEM and the related instiutions, especiall!' the autonomous regulatory entities, to regulate and monitor the operations of the enterprises in the sector. Ihe project thus would enable MEM and its agencies to contribute adequately to the Governmentes privaization, deregulation, and sector development efforts. 14. The specific outcome/implemenation indicators linked to each of the major project objectives, are as folows: (a) for implementation of energy sector strategies and policies-the progress in demonopolization and privatzation of statowned enterprises; (b) for legal and regulaory reform-he submission to Congress of the relevant laws and the issunce of the relevan regulations; and (c) for institutional strengthening-the capability of MEM to recruit qualified staff and to adeqty perform all tasks, including those currently carried out by consultants. Over the longer term, key sectoral performance indicators would be monitored, including adequacy of supplies, evironmenta sustainability of operations, and revenues, costs, and staffing of the entprises. 15. Projec Do ci. The project consists of the following components (see Annex 1 for the detailed project description and summary TORs): (a) OverallEnergy: X() evaluation and development of an integrated Energy Sector Strate; and OiI) institutional strengthening of CONERG.  -4 - (b) Electig: (i) comletion of the reglatory framework and reform implemenion at sector udlities; (ii) design of an energy managem system for the Central-Northem System; (iii) Istitutonal strenghing of the General Electrieitty Directorate (DGE); (iV) institutional strengthenring of the Electicity Tariff Commission (CTE); and (v) tariff Implementation. (c) Hyfltcadaoot : (i) completion of the legal and regulatory framework; (i) institutional strengthening of the General Hydrocarbons Directorate (DIGH); and (iii) petroleum exploration and exploitation promotion through the design and development of a data bank and establishment of Peru-Petrol, S.A., us the entity in charge of these functions. (d) M:Ig (i) execution of a mining promotion progrrm under the Vice-Ministry of Miig; (ii) creion of the Mining Information System under the General Miming Directorate (DGM); and (iii) development of a cadastral/concession system through the formation of the Mining Registry and procedures to process mining concessions. (e) Emionment: (i) policy fomlation and implementaion; (Hi) institutional strengthening of the General Directorate on Environmental Matters (Direccion General de Asuntos AmbientrAes, DGAA); vii) environmental management and mitigation of energy and mining projects; and (v) sectoral asessment studies. 16. Proiect Cost and Pa ing. The total estimated cost of the project (Schedule A) is US$17.5 million, of which US$2.2 million are physical and price contingencies, US$0.2 million is the expense of the project coordinating unit and US$0.4 million UNDP's adminison fee. ITe foreign exchange component of the project is estimated at US$13.1 million. The Bank, through this loan, will finance US$11.8 million, the Japanese Grant Facilities for Energy and Mining/Environment will finanoe US$0.8 million and US$2.2 million, respectively, while the local contribution will be US$2.7 million, primarily consisting of counterpart staff and office support. The local share of the finacing will come from budgetary resources of MEM and selfgenerated fur4s of its agencies. Asuaces have been obtained from the Government that the fumds required to cover the local coributio will be made available to MEM. ITe fiancing plan is set out in Schedule A. All contracts will be individually and sepaatey financed by the funding institutions, rather than cost- hared, for administrative simplicity. 17. Proect Ipementon. he project will be managed by MEM. The Minstry will be assisted by a Project Coodination Unit, to be financed under the Project, comprised of a principal coordinatr and one sectoral coordinator each for the electricity, hydrocarbons, mining, and envionment-related componenis of the project. The principal coordinator has already been appointed by the Ministry. The relevant sectoral coordinators of the Unit would initially be employed full-ime, but they would be gradually replaced by MEM higher-level staff as project implementation advances. n addition, he project includes the financing of a limited number of short-term specialists o advise the Govenm In institutional and policy reform andlor participate in sector policy evaluations. All reports and re n ons ofthe consultants engaged to assist in the execution of the project will be submitted to the Bank for its review and comments. Ihe total involvement of individual national speciaists will be less than ten person-years. 18. Each MEM organizational unit or autonomous agency will have primary responsibility for preparing terms of reference and short lists, and selecdng consultants, subject to approval by the Project Coordination Unit and Bank no-objection. All conslta financed by the Bank will be selected and hired in accordace with the Bank's Guidelines for Use of Consultants. For consulting  -5-- contracts fanced by other sources under the project, the Bank wll review the tems of reference. Draft opeatonal guidelines for the TA program, settng out the procedures and responsibilities, are In Annex 4. 19. The Government has proposed, and the Bank lac agreed, to use UNDP as the adinisrte agency t ad the contcs and payment under a management arrangement satisfactory to the Bank. Its management fee of US$0.4 million will be financed from the proceeds of the loan. UNDP will disburse directly to consultan and will mainain supporting documenton on file for review by Bank supenrision missions. 20. 1niromn AMeX. lhe Project belongs to Eavironmental Cagory C and has no adverse enviiromea impacts. It will Include Sector Enviromental Assessments and the deveopment of sectoral eironmea guidelines for energy and mining projects and, as such, will support the Government's environmental ste. 21. Erng=m Objecve Catey. The Project belongs to the category of Public and Private Sector Development. 22. . Methods for prouremen and disbursemens are shown in Schedule B. Procrement of goods to be ficed wivth proceeds from the loan would foUlow procedures in accordance with Bank Guidelnes fo procurement. Couting services totaling about US$10 million for the cont of fim to carry out secoral, institudonal ad management studies under the varous components of the project, and of individual consultants for the strengthening of MEM and the operaions of the Project Co nating Unit, would be in accordace with Bank Guidelines for the use of consultants. Procurement of computng, communications, and ancillary equipment for the mpleentaion of the energy management system, hydrocarbons data bank, mining information system, and the general strengthening of MEM units, for an esmated amount of about US$1.1 million would be procured through Limited Intrnonal Bidding (lU) because of the specialized nate of such equipment. An estated US$0.3 million of the loan proceeds would be used for the reimbursement of training expenses such as tuition fees and travel expenses for courses and seminans in accorjance with a plan to be previously approved by the Bank, and for fees of Wdividual consultants acceptable to the Bank. UNDP's administrative expenses (US$0.4 million) would be paid with proceeds from the loan directly to UNDP. Prior review of documenion and procuement decisions wil be required for all procurement including the proposed UNDP management service agreeme. 23. Dibumen MEM will request disbursements and submit these requests through the Project Coordinating Unit to UNDP for processing. UNDP will disburse payments out of its own resources directly to consultants. The applicator for withdrawal requests submitted by the Borrower of eligible expenditures made under the Bank Loan to UNDP will be in amounts of about US$500,000. For all contracts requiring Bank's prior review, UNDP will submit full documentation. Since the project is largely composed of short-term technical assistance, disbursements would be made over a four-year period, which is shortar than the average disburement profile for technical assistance projects in the Latn America and the Caribbean Region. Retroactive financing not to exceed US$1.1 million (i.e., about 10% of the loan amount) would be applied to finance eligible expenditures made after December 31, 1992. The closing date of the proposed Loan would be December 31, 1997. 24. Accunts ad Audi. UNDP will maintain separate accounts for receipt of project finds and payments for all project activities. UNDP accounts and statements of expenditures, both of the Coordinating Unit and of UNDP, would be audited each year by auditors acceptable to the Bank  -6- in accordance with the Bank's Auditing Guidelines. The audited reports would be submitted to the Bank not later than four monuis after the close of its fiscal year. 25. s AgMd. During negotiations, agreement was obtaned on: (a) the TA to be financed under the Loan, and the financing plan (Schedule A); (b) a project description and an action plan on all project components, including a cooperation agreement between the rGAA and a specialized agenq for the purpose of carying out the Eavironmcntal Protection Plan (Annex 1); (c) operational guidelines for loan administration and cansultant hiring, conracting and supervision (Annex 4); (d) model procurement documents and UNDP/Government project documents (Annex 5); the latter will provide the basis for UNDP to administer contracts and disbursements under the loan; (e) TORs for consulting assistance to prepare/implement the project cotaponents; (t) submission of an annual forecast of the sources and uses of funds, and a semi-annual report on the results of the program; (g) a semi-annual review of the implementation timetable; (h) a mid term review to realign project resources to the evolving needs of . nrogram; (I) submission of all renorts and recommendations of the consultants engaged to assist in tht execution of the Project; 0) submission of an annual exteral audit report of the project accounts. 26. Conditions of effectiveness will be (a) the issuance of operational guidelines, as agreed between the Bank and the Government, to MEM's organizational units and autonomous agencies, and (b) the signature of a project administration agreement, satisfactory to the Bank, between UNDP and the Governmezit. 27. Conditions of disbursement for consultants' services in each of the areas of electricity, hydrocarbns, mining and environment, will be the appointment of the project unit's relevant specialist. 28. Benefits. Te proposed loan would assist the Government in the implementation of legal/regulatory reforms and the strengthening of public institutions, which would improve efficiency and attract private Investors to the energy and mining sectors. Economic pricing of electricity and petroleum products would eliminate the financial burden that these sectors pose to the Government by allowing these sectors to fund their own investment needs, and would reduce energy waste and pollution. Sector efficiency woud be further enhanced through increased private participation, and scaling-down of government intervention which would be limited to market-based regulation. Environmental monitoring and management of energy-related and mining operations would be much improved. 29. Rigka. Because of its nature, the project poses no significant tedhnical risks. However, the implenentation of the broad range of institutional and policy reforms that It is designed to support greatly depends on congressional and popular support, the availability of competent technical staff in the public administration, and the outcome of the ongoing efforts to reestablish physical securt in the country. First, opponents of the Govermnent's reform and privatization policies are likely to be critical of the policy goals of the operation. 'Te new Congress may insist on reconsidering the mining and electricity laws enacted by the Government as decree laws, and its consideration of the draft hydrocarbons law may entail a delay in enacting this law. Second, the Government lacks experienced staff to regulate public utilities and the regulatory framework is still in an inception stage. hwus, the sustainability of the institutional strengthening program will depend to a great extent on overall civil service reform, especially as it relates to salary levels. Third, the ability to attract well qualified consultants, and the future participation of private investors in the energy and mining sectors would be affected if teorist activities do not abate.  -7 - 30. These risks will be mitigated substantially through training (fiunded by the loan) and a public information camaign that the Government is undertaldng. By and large, the risks outside the control of Governent are expected to be offset by the significant potential benefits of the reform process, which is adready under way. To avert political risk, the Govement moving as quickly as possible to make the reform process irreversible. It will also launch a public reladons campaign on the advantages of te refonr, and continue to advance with Its regulatory reform and privtizatio process to give positive signs to national and intenaional investors. 7Te Government Is aware of the need to include, within its overall institudonal strengthening, civil service regulations which allow the hiring of well-experienced and qualified personnel, and it intends to take the necessary steps into this direction. Government performance under the economic stabilization and adjustment program has been excellent, reflecting a strong commitment to its goais. 31. RoeMdadon. I am satsfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve U. Lewis T. Preston President Attachments Washington, D.C. May 12, 1993  | S"8= i 081 W lEoi