Argentina - Yacyreta Hydroelectric and Electric Power Sector Projects

Documant of The World Bank FOR OMCIAL USE ONLY Rqmwt No. 14056 PROJECT COMPLETION REPORT ARGENTINA YACYRETA HYDROELECTRIC PROJECT AND ELECTRIC POWER SECTOR PROJECT (LOANS 1761-AR AND 2998-AR) MARCH 14, 1995 Infrastructure Operations Division Department I Latin America and the Caribbean Regional Office This document has a restricted distribution and mav be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents 1 US$ = 1 Peso Fiscal Year January 1 - December 31 Weights and Measures kW = Kilowatt MW = Megawatt (1,000 kW) GW = Gigawatt (1,000 MW) kWh = Kilowatt hour MWh = Megawatt hour (1,000 kWh) MVA = Megavolt-ampere (1,000 kVA) km = Kilometer (0.6214 mile) km2 = Square kilometer (0.386 sq. mile) m 3 = Cubic meter hm3 = Cubic hectometer (106m3) kcal = Kilocalorie (3.968 BTU) TOE = Tons of oil equivalent MTOE = Million TOE Abbreviations and Acronyms AYCA Auditores y Consultores Asociados AyEE Agua y Energia Electrica S.E. (federally owned, nationwide electric utility and irrigation agency) CNEA Comisi6n Nacional de Energia At6mica (National Nuclear Energy Comrnission) CTMSG Comisi6n Tecnica Mixta de Salto Grande (Argentine/Uruguayan Commission in charge of the Salto Grande hydroelectric plant) DUC (DC) Despacho Unificado de Carga (Dispatch Center) EBY Entidad Binacional Yacyretd (Argentine-Paraguayan entity in charge of the Yacyreta project) FRP Financial Rehabilitation Plan HIDRONOR Hidroel&ctrica Norpatag6nica S.A. (federally owned, electricity generation and transmission utility) REMP Resettlement & Environment Management Program SIN (NIS) Sistema Interconectado Nacional (National Interconnected System) SE Secretaria de Energia Electrica (Secretariat of Electrical Energy, under the Ministry of Economy' SEGBA Servicios Electricos del Gran Buenos Aires, S.A. (federally owned electric utility, serving the Buenos Aires metropolitan area)  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation March 14, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Argentina Yacyreta Hydroelectric Project (Loan 1761-AR) and Electric Power Sector Proiect (Loan 2998-AR) Attached is the Project Completion Report on Argentina - Yacyreta Hydroelectric Project (Loan 1761-AR) and the Electric Power Sector Project (Loan 2998-AR) prepared by the Latin America and the Caribbean Regional Office. The loans provided a total of US$462 million (Loans 2854-AR and 3520-AR, expected to be fully disbursed by 1998, will additionally fund US$437 million). The PCR is an interim report on the development and construction of the Yacyretd hydroelectric project. The Borrower provided Part II of the report. It highlights shortcomings in Bank supervision. The loans were made to the Government of Argentina and on-lent to the Beneficiary, Entidad Binacional Yacyreta (EBY), a joint-venture created under the Treaty of Yacyreta between Argentina and Paraguay. The principal objectives of the projects were to provide additional low cost energy, to improve sector finances and to finance studies in support of sector restructuring. Construction of the Yacyreta hydroelectric plant started in 1977/78 but due to financial, economic and political difficulties, the plant is now only partially completed (two units out of 20 having been commissioned in 1994), and is expected to be fully completed with a nine-year time overrun in 1998. Lack of timely local and foreign financing other than from the Bank and the Inter-American Development Bank was the main reason for the delay in dam works. It also delayed the implementation of resettlement, the staging of which now delays reservoir impoundment and achievement of full output. On the basis of an estimated project cost in real terms about 8.2 percent above the original estimate, the recalculated ERR is 5.5 percent compared with 14 percent at appraisal. The outcome of the two projects is rated as unsatisfactory because of the partial success of their physical components, high unit cost of the output compared to alternatives, and failure to improve power sector finances. The technical assistance component of the Electric Power Sector Loan had a modest institutional development impact by contributing to the success of the power sector reform which took place after mid-1991. Based on the current projections, the sustainability of the projects is iikely, provided that the Government continues to lend to EBY to help service its debt until the late 1990s. The PCR includes a satisfactory account of the two projects' implementation and results. An audit is planned as part of a country assistance review. Attachment 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 ONLY TABLE OF CONTENTS PREFACE ................................... ii EVALUATION SUMMARY . ........................... iii Project Description . ............................. iii Project Implementation . ........................... iii Project Results ................................ iv Sector Results ............................... v Project Sustainability ............................ vi Bank Performance ............................. vi EBY Performance ............................ vii Consultant and Contractor Performance ...... .......... vii Lessons Learned ............................ viii PART I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .............................. 1 Project Identity ............................... 1 Background ................................. 1 Project Objectives and Description ................... 4 Design and Implementation ........................ 15 Project Results ............................... 27 Project Sustainability ............................ 29 Bank Performance ............................. 31 Borrower/Beneficiary Performance ...... ............ 33 Consultant and Contractor Performance ................ 35 Lessons Learned .............................. 36 PART II. PROJECT REVIEWED FROM THE BORROWER'S PERSPECTIVE .............................. 39 PART III. STATISTICAL INFORMATION ................. 44 Table 1: Related Bank Loans ...................... 44 Table 2: Project Timetable ........................ 45 Table 3: GDP Levels & Public Service Consumption: Actual and Forecast ............................ 46 Table 4: Appraisal Forecasts: Cost and Financing Plan ... ... 47 Table 5: Estimated and Actual Schedule of Disbursements ..... 48 Table 6: Sector Sources and Applications of Funds ... ...... 49 Table 7: Status of Legal Covenants ................... 50 Table 8: Economic Impact ........................ 57 Table 9: Yacyreta's Economic Generation Cost .... ........ 58 Table 10: Use of Bank Resources .................... 59 Table 11: Mission Data .......................... 60 Table 12: Project Studies ......................... 63 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.  a  - ii - PREFACE The Project Completion Report (PCR) is an interim report on the development and construction of the Yacyreta Hydroelectric Power Project, which the Bank helped to finance with a project investment loan of US$210 million (1761-AR, 1979), a sector investment loan of US$252 million (2998- AR, 1988), and a second project investment loan of US$300 million (3520-AR, 1992). Loan 1761-AR was fully disbursed and closed on June 30, 1988, one year late. Loan 2998-AR was fully disbursed and closed on June 30, 1991, also one year late. Loan 3520-AR is under disbursement with an expected closing date of December 31, 1998. Yacyreta is a very large, complex, long-term project, and in the interim, a report was needed to fulfill the twin goals of (i) meeting the PCR requirements of the two completed loans (1761-AR and 2998-AR) and (ii) providing a preliminary review of the main implementation issues while it is still possible to receive meaningful comments from some of those who participated in the project. To meet these goals, this PCR departs at times from the standard PCR format and elaborates on the history of the project as well as several of the more important issues. It has been 15 years since approval of Loan 1761-AR. Since then, the project has experienced significant time delays and moderate investment cost overruns. During the past two years, however, the project has regained momentum, has been properly managed and is on schedule to be completed in 1998. The first unit came on line in September 1994. Once the Yacyreta project is completed, a comprehensive Project Completion Report will be issued. The PCR was prepared by the Infrastructure Operations Division of Latin America and the Caribbean Region's Country Department I and is based inter alia on loan documents, appraisal reports, supervision reports, correspondence, and interviews with Bank staff. A draft of this PCR (Parts I and III) was sent to the Borrower for comments. Comments were received in September 1994 and have been included as Part II of this report.   - iii - EVALUATION SUMMARY Project Description and Objectives 1. Description. The Yacyreta Hydroelectric Power Project (3,100 MW), which is being constructed by the Entidad Binacional Yacyretd (EBY) on the Parana River, is a joint venture of Argentina and Paraguay. The project comprises 70 km of earth dams, a power house, reservoir, navigation lock, fish passage facilities, irrigation intakes, and ancillary/relocation works (para. 3.5). The expected completion date is June 1998, nearly eight years behind the original schedule. As financier, Argentina bears the total responsibility for EBY. 2. Objectives. The present I-PCR covers two completed Loans: 1761-AR and 2998-AR. The project objectives for Loan 1761 (Yacyreta Hydroelectric Project) were to: (a) provide additional, least-cost, base-load hydroelectric energy; (b) improve navigation; (c) facilitate future irrigation projects; and (d) augment the fishing industry. The sector objectives were to promote improved long-range planning for generation/transmission and to rationalize the level and structure of power tariffs (para. 3.4). The project objectives for Loan 2998 (Electric Power Sector Project) were to (a) irnprove resource allocation within the sector through optimization of its expansion program; (b) implement a Financial Rehabilitation Plan (FRP) in connection with the national power utilities; (c) improve efficiency of the power utilities; (d) promote rational use of electricity through a tariff system based on economic costs; (e) strengthen the structure of the sector, so as to bring about better coordination, planning and regulation; and (f) establish policies and procedures for environmental protection and social aspects in power projects. Project Implementation 3. Bank Lending. Since the original appraisal (1978), the Bank and the Inter-American Development Bank (IDB) have collaborated in financing the project with loans totalling US$1,734 million. The Bank has fully disbursed Loans 1761-AR and 2998-AR, amounting to US$458.2 million. Loan 3520-AR (US$300 million, 1992, out of which US$299 million are intended for EBY) is being disbursed, and discussions with the Government have led to an agreement to reassign US$137.6 million from Loan 2854-AR (SEGBA V) to further help project completion, thus increasing the Bank's total financing to US$894.8 million. IDB lending in support of the project amounts to US$839.6 million (para. 2.7). 4. Tinetable, Cost, and Financing Plan. Total project completion delays are estimated to reach nearly eight years when compared to the original plan. Delayed completion reflected the impact of late loan effectiveness (1982), a three-year Bank-EBY procurement dispute (1980-1983), the South Atlantic War (1982), chronic financing problems after 1983, and the uneven quality of EBY's  - iv - management, which was especially weak in 1989-1991 (para. 4.5). The delays were further aggravated by other important events during this period. There was severe macroeconomic mismanagement which produced recurrent bouts of hyperinflation and an extended recession, compounded by the Latin American external debt crisis. Simultaneously, there were profound, protracted political shocks which eventually paralyzed the state. These forces ultimately led Argentina to abandon many historic policies and customs, causing prolonged uncertainty and policy vacuums. All these events adversely affected Yacyreta's progress (para. 2.1). 5. Associated with delayed completion were higher project costs and larger financial requirements (paras 4.1-4.3). Stated in 1977 price levels, there was a 17% increase in project (investment) cost from the first appraisal (US$2,637 million) to the most recent one (US$3,082 million). This increase is explained basically by the higher engineering and administrative expenses (due to the nearly eight-year delay in project completion) and the Aguapey Valley protection scheme which was not included in the initial project cost estimates. Financial requirements, expressed in current amounts, increased considerably, as would be expected due to inflation and extended project execution; they are now estimated at US$9,350 million or 35% higher than originally estimated. However, when referred to a common price level these requirements show an increase of some 8%. Along with the projected investment costs, these additional financial requirements as well as shortfalls from suppliers' credits and EBY's internally generated resources are being met by higher Governrent contributions (US$2.1 billion including variation of working capital) and IBRD/IDB loans (US$1.1 billion).' Project Results 6. The project was originally justified as the least-cost expansion program on the assumption of market growth of 8.0%-9.9% during the 1980s, following average 7.9% annual increases during the previous 15 years. However, the actual annual growth rate during the 1980s was only slightly over 2%. Had this sharp turndown in demand been foreseeable during the 1979 project appraisal, YacyretA would possibly have been replaced by smaller sized projects. With the advantage of hindsight, it can be argued that the delays in Yacyreta's commissioning, combined with the advent of combined-cycle technology, and the improving prospects of exploiting Argentina's ample natural gas reserves would call YacyretA's selection into further question. Notwithstanding these problems, Yacyreta was still within the least-cost generation program when the Bank systematically reassessed the feasibility of completing the project during 1985-1988 and again in 1991-1992. These analyses considered: (a) prior investments as sunk costs; and (b) the financial consequences of early termination of contracts. It is also important to note that given the current 1. These resources do not include the increase in the last IDB loan amount or the Bank's SEGBA V loan reasignmnent of funds. which were decided after Loan 3520-AR appraisal. These would have increased both banks' participation by US$1,316 million above the Loan 1761-AR appraisal commnitments.  v - balance of energy demand and supply, and its estimated evolution during the next five years, it is expected that all energy produced by Yacyreta will be absorbed by the market. 7. Internal Rate of Return. Presently, the economic generation cost of Yacyreta, referring all investment costs (actually incurred and estimated for the next four years) to the 1994 price level and considering an opportunity cost of capital (OCC) of 10%, is USC9.5/kWh (Part III, Table 9). This compares unfavorably with the prevailing marginal cost in Argentina (about USC4.0/kWh) which is the basis for setting prices in the spot market.2 For such a tariff level of US C4. 0/kWh, the project's historical IRR is 5.5%, which is much lower than the originally expected IRR of 14%. According to the 1992 agreement between Argentina and Paraguay, Yacyreta's tariff at year-end 1994 will be US