Mexico - Fourth Power Sector Program Project

RETURN TO REPORTS DESK RE S t-R ICT ED WITHIN RLE COPY Report No. PU-94a ONE WEEK This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF FOURTH POWER SECTOR PROGRAM (1972 - 1974) MEXICO May 30, 1972 Public Utilities Projects Department  CURRENCY EQUIVALENTS Currency Unit = Mexican Peso (Mex$) = 100 Centavos US$1 = Mex$12.50 Mex$1 = US$0.08 Mex$1 million = US$80,000 WEIGHTS AND MEASURES kW = Kilowatt MW = Megawatt = 1,000 kW kWh = Kilowatt Hour GWh Gigawatt Hour = 1,000,000 kWh kV = Kilo Volt kVA = Kilo Volt-Ampere MVA Megavolt-Ampere m = Meter = 3.281 feet Ian Kilometer = 0.6214 mile Hz = Hertz = 1 cycle per second FISCAL YEAR CFEts Fiscal Year = Calendar Year ABBREVIATIONS AND ACRONYMS C FE = Comieiion Federal de Electricidad Centro = Compania de Luz y Fuerza del Centro, S.A. IEMSA = Industrial Electrica Mexicana, S.A. Mexlight The Mexican Light and Power Company, Limited NAFIN Nacional Financiera, S.A. PEMEX = Petroleos Mexicanos, S.A.  APPRAISAL OF FOURTH PWER SECTOR PROGRAM (1972 - 1974) MEXICO Table of Contents Page No. SUMMARY AND CONCLUSIONS ......................... . i - ii 1. INTRODUICTION ....................................... 2. TI'HE SECTOR . ................................................. 3 3. THE BORRCWER ........... .................................... 5 Comision Federal de Electricidad .. ....................... 5 Compania de Luz y Fuerza del Centro, S.A. (Centro) .... ...... 5 Integration of CFE and Centro ............. .................. 5 Organization and Management ................................. 6 Training .. .. 7 Load and Energy Forecasting ... ..... .... .. ....... ... ........ . 7 Investment Planning ........ ........................... 7 Auditors ............ ..09......... ...... ............................. 8 4. THE SECTOR PROGRAM .....A14.......... o ......o.............. 9 TRhe Project ............ ... ...0........ ........................ 9 Frequency Unification o ............................. 9 Nuclear Plant ............ ........ .. .......... . . . ..... 10 High Voltage Interconnections .............. ........... 11 Village Electrification .............. *...................................... 11 Cost Estimates ...... ......0...... *O.... ..............-.............. 11 Amount of the Loan .......................................... 13 Procurement and Disbursement ............................... 13 Design and Supervision ...................................... 15 5. JUSTIFICATION OF THE PROGRAM . ........... .. ................... 16 Forecast of Demand .......................................... 16 Least Cost Alternatives .................. ...... .o. ...... . 17 Ecoior,:ic Returr.r . .... . ..... . ...... - ..... 17 6. FNI'ANCES .......................... o 18 Financial Performance . .......... .. ........... 18 Financial Position . ....................... 18 Tariffs ........ ......o..... 20 Financing Plan ........ .................. 21 Financial Forecast ....... 44...... ... .... 400..... 23 7. AGREEENTS RUACHED AND RECOMMENDATION .................. 24 This report was prepared by Messrs. R. Ribi, E. Wessels and R. du Mee.   LIST OF ANNEXES 1. Previous Bank Loans to the Mexican Power Sector 2. Growth of Installed Capacity and Output of the Power Sector 3. Sales to Consumers 4. Sales and Revenues by Categories of Consumers 5. Construction Program - List of Major Facilities 6. Frequency Unification 7. Village Electrification 8- Estimated Cost of Construction and Forecast of Expenditures 9. Estimated Demand and Capacity 10. Actual and Projected Growth Rates of Maximum Gross Demand 11. Financing of the 1972/1974 Construction Program 12. Estimated Schedule of Disbursements 13. Internal Economic Return Calculations 114. Power Sector Balance Sheets (1969 - 1976) 15. Power Sector Income Statements (1969 - 1976) 16. Power Sector Forecast Sources and Applications of Funds (1972 - 1976) 17. Notes on Financial Statements   MEXICO APPRAISAL OF FOURTH POWER SECTOR PROGRAM (1972-1974) SUMMARY AND C(NCLUSICNS i. This report covers an appraisal of the power sector's continuing investment program and the financial position during 1972-1976 of Comision Federal de Electricidad (CFE) and Compania de Luz y Fuerza del Centro, S.A. (Centro), the two main entities that comprise Mexico's public power sector. A Bank loan of US$125 million is proposed to help finance the foreign exchange cost of generation, transmission, and distribution facilities needed to meet Mexico's increasing power demand. In recent years aggregate peak load has been growing at a rate of over 12% per year; it reached 5,720 M' in 1970. ii. The Bank has made ten loans for power in Mexico for a total of US$580 million. The proposed loan would be the fourth to the power sector as a whole. The previous sector loans (436-ME, 544-ME, and 659-ME) were made in 1965, 1968 and 1970 for US$110 million, 90 million and 125 million, respectively. As of April 30, 1972, US$27.5 million remained to be disbursed from the latest loan. This amount is expected to be fully disbursed during the second half of 1972. The Bank's experience with the sector has generally been satisfactory, although parts of previous programs have suffered sub- stantial delays or have not been executed (e.g., frequency unification). iii. The Borrower would be CFE which is responsible for the planning and the finances of the sector. As for the previous loans to the sector, Nacional Financiera, S.A. (NAFIN) would be the co-borrower. Under a subsidiary agree- ment, CFE would make funds available to Centro for expenditures eligible for Bank financing. iv. The merger of Centro into CFE would be the final step in the con- solidation cf the Mexican power sector. The liquidation of Mexlight, the holding company which owns Centro and which itself is owned by CFE, is expected to be completed by the end of 1972. The full institutional integration of Centro into CFE is underway; however, progress is modest because of the reluctance of Centro's labor union, which has long enjoyed higher wages and more benefits than CFE's unions, to give up its vantage position. v. The Bank project is the 1972-1974 slice of the investment program. Total cost of the project is estimated at US$1,368 million; Bank financing for these expenditures is assumed to amount to US$172 million or 12% of total expenditures (US$47 million from Loans 544-ME and 659-ME, and US$125 million from the proposed loan ). The balance of the project would be financed as follows: US$68 million by loans made jointly with past Bank loans; US$50 million by loans to be made by foreign export financing institutions parallel to the proposed loan; US$69 million by foreign suppliers; US$282 million by local suppliers and financial institutions; US$404 million by foreign financial institutions and through bond issues w(including US$208 million expected to be rolled over); and, US$323 million by net internal cash generation and contri- butions by the Government, the States and the consumers.  -ii - vi. During 1972 the Government and CFE expects to work out an agreement on parallel financing with the main potential supplier countries. These countries will be asked to finance 100% of the foreign exchange component of selected large equipment contracts won by their nationals on the basis of bidding restricted to these countries. vii. Items to be financed by the proposed Bank loan would be procured on the basis of international competitive bidding with a maximum preference margin of 15% for Mexican manufacturers. The following would be eligible for financing: (i) 50% of payments still to be made for contracts placed before January 1, 1972 under Joint financing agreements, (ii) 100% of the cif cost of contracts won by local and foreign firms for items not covered by joint or parallel loans, and (iii) the foreign exchange component of civil works contracts. Orders for about 27% of the investment program would be restricted to local bidding, and financed by the sector. viii. Although the sector has earned returns in excess of the 8% minimum agreed with the Bank under previous loans, it finds itself in a difficult financial position because of high debt service charges resulting from excessive reliance on high-cost, short-term credit. The Government has agreed it would allow the sector to generate (a) at least 18% of investment in 1973 and 25% in following years from its net internal resources, and (b) a rate of return on net fixed assets of at least 8%. In order to comply with these requirements the sector has applied for a 22.5% tariff increase in one step. An increase of at least 17.5% before the end of 1972 is a condition of effectiveness of the proposed loan. If only this minimum is implemented it might have to be followed by a further increase in 1974. ix. The power sector has not met its obligations in past agreements on the con- version of its 50 cycle Central system to 60 cycles. However, in July 1971 the President of the Republic signed a decree ordering the sector to carry out frequency unification. A second decree defining the financing of the operation and creating the organization which will implement the changeover of customers' installations was signed in May 1972. This will allow the sector to begin the actual changeover by the beginning of 1973, and to complete it by 1977. X. On the basis of the agreements reached, the project is suitable for a Bank loan of UIS25 million for a term of 20 years, including a 5-year grace period.  APPRAISAL OF FOURTH POWER SECTOR PROGRAM (1972 - 1974) MEXICO 1. INTRODUCTION 1.01 The Government of Mexico has asked the Bank for a loan to help finance the Mexican power sector's continuing investment program. Comision Federal de Electricidad (CFE) would be the borrower and--as with previous Bank loans to CFE--Nacional Financiera, S.A. (NAFIN), the Government develop- ment bank, would be co-borrower. A loan of US$125 million is proposed. A portion of the loan would be relent to CFE's subsidiary, Compania de Luz y Fuerza del Centro, S.A. (Centro), through an arrangement satisfactory to the Bank. 1.02 The Bank has made ten power loans in Mexico for a total sum of US$579.8 million. Of this amount, US$475.7 million or 82% has been lent to CFE and US$1041. million or 18% either to Centro or the Mexican Light and Power Company, Ltd. (Mexlight). Annex 1 lists the amounts, dates and beneficiaries of these loans. Over the past twenty years, the Bank has helped to finance the bulk of the sector's new generating capacity, as well as large amounts of transmission and distribution. The Bank's experience with the sector has generally been satisfactory, although parts of previous programs have suffered substantial delays or have not been executed (e.g., frequency unification, discussed in paragraphs 4.02 and 4.03). 1.03 The loan now proposed would be the fourth in a series of power sector program loans for Mexico. The third power sector loan (Loan 659-ME) of US$125 million is not yet fully disbursed and the closing date of June 30, 1972, will undoubtedly have to be extended by several months. On April 30, 1972, US$27$5 million of the loan remained, and this amount is not expected to be drawn down until late this year. Disbursement of Loan 659-ME has been slow mainly because the Government insisted on protecting Mexican industry by restricting the tendering for many items of equipment to Mexican firms, thus orecluding the financing of these contracts by the Bank loan. Loan 659-ME was planned to cover 25% of the sector's capital expenditure during a two-year period; actually it will cover about 17% during a two and a half year period. 1.04 Funds from the proposed loan will be required by the second half of 1972. Expenditure on generation, transmission, and distribution during mid 1972 - end of 1974, the expected period of disbursement of the loan, will amount to some US$1,150 million, of which the proposed loan would cover about 11%. In connection with the three previous loans, the Bank, Mexico and major equipment supplying countries had arranged "joint" financing. These arrange- ments provided that equipment orders of at least US$200,000 procured under international competitive bidding and awarded to a supplier of a country participating in such an arrangement, would be financed jointly by that  -2- country and the Bank. The latest arrangement provided for 50/50 joint financing by the Bank and ten supplying countries. Because of the need for participation by all major equipment-supplying countries in Joint financing arrangements and the decision of the United States not to do so in the future, no joint financing is expected for contracts let after January 1, 1972, the cutoff for orders to be financed under the present joint financing arrangement. However, it is expected that contracts already awarded, and for which payments are due after this date, would continue to be financed jointly - the Bank share being provided first from the undisbursed amount of Loan 659-ME and then from the proposed loan. 1.05 In order to continue the mobilization of foreign finance in connection with Bank lending for the Mexican power sector, specific large equipment contracts to be let after January 1, 1972 would be financed under a "parallel" financing scheme. This arrangement would call for the export credit agencies of the participating countries to finance the full foreign exchange component of contracts won by their nationals. Participation in the bidding for this equipment would be restricted to firms from countries which make a prior commitment to provide finance. 1.06 This report is the result of an appraisal mission to Mexico during the second half of November 1971, carried out by Messrs. R. A. Ribi, E. C. Wessela and J. A. Martinez, and an updating mission by MessrE. Wessels and R. du Mee in January 1972 to review the latest financial information.  - 3 - 2. THE SECTOR 2.01 During the first half of this century, an increasing number of scattered enterprises provided the public power supply in Mexico. Until 1939, when the Mexican Government created CFE, all of these utilities were privately-owned, and generally provided reasonably good service. However, during the fifties the private utilities restricted their new investment in anticipation of the nationalization of the sector. Consequently, in many systems the quality of the service declined until, in 1960, the Government, after acquiring a majority of shares of the private power companies, nationalized the sector. This measure opened the way for a progressive merger of the smaller companies into the two main entities which, from then on, formed the power sector, CFE and Centre. At present, Centl'o is a sub- sidiary of CFE (see paragraph 3.04). In parallel with these mergers, which improved the operational efficiency of the sector, a large program of inter- connections between formerly isolated systems was carried out,which also helped improve the general quality of service. During the sixties, annual energy production grew at increasing rates averaging over 10%, with a maximum of 15% in 1969. In this same period, the sector purchased more and more electrical equipment from the fast growing local industry. 2.02 By early 1971, public power supply reached 96% of the urban population of 30 million and 37% of the rural population of 21 million-- urban population being defined as the population of centers of more than 2,500 inhabitants. At the same time Mexico's installed generating capacity was 7,297 MW. Of this total, 1,206 MW was captive industrial plant. The remaining 6,091 MW served the ten major systems and the various isolated centers of the power sector; CFE owned 5,41 MW, Centro 667 MW and several small utilities operated a total of 10 MW of plant. Annex 2 gives details of growth of capacity and output in the past. 2.03 Centro sells energy to consumers in and around Mexico City; all of its sales are retail. It generates with its own plant, but also purchases in bulk from CFE about 2/3 of the energy it sends out; in 1970, the purchases amounted to 6,400 GWh. Centro's network, and those of CFE's generating plants which supply it, operate at 50 Hz; all other public supply is at 60 Hz. CFE generates and distributes energy to consumers in virtually all the rest of Mexico. 2.04 The joint installed capacity of CFE and Centro at the beginning of 1971 was 6,081 MW and consisted of: Hydro-electric plant 3,194 MW Steam-turbine plant 2,307 MW Gas-turbine plant 339 MW Diesel plant 241 MW  - 4 - Transmission lines, at the same date, consisted of: 400 kV 2,008 km 220 kV 2,368 km 161 kV 1,258 km 150 kV 375 km 138 kV 286 km 110 kV 7,312 km 2.05 In 1970, sales of energy were 12.9% higher than in 1969; this compares with the average rate of increaae over the period 1965-1970 of 12.3% per year. Principal figures for 1970 were: Energy generated (gross) 26,239 aWh Energy sent out (net, including 110 5Wh imported from the U.S.) 25,410 awh Energy sold 21,828 GWh Station losses 3.3% (of gross) Transmission and disbribution losses 14.1% (of net) Losses were reasonable; the tranamission and distribution losses of 14% compare with 15.2% and 9% respectively for regional systems in Argentina and the U.S.. Past sales to consuers and forecast sales are given in Annex 3; Annex 4 lists sales and revenues by categories of consumers. 2.06 The sector's plant is generally in good working condition. However, maximum demand has been growing rapidly (the average load growth for 1967-1970 was 12.8% per year) and there have been delays in commission- ing important new generating facilities and in the start of frequency unification In 1971 power shortages occurred in three large systems and, since the delays will not be made up before 1973 at best, such short- ages are likely to recur in 1972. As a result, maintenance in these systems will undoubtedly continue to be less thorough than desirable-for the next year or so. While the delay of frequency unification has been due to slow Government action in establishing the legal basis for the change- over (paragraph 4.03), the delays in plant coimiasioning are sainly due to poor performance in procurement and to low estimates of construction times.  - 5 - 3. THE BORROWER Comision Federal de Electricidad (CFE) 3.01 CFE, the borrower, was founded in 1937 as a branch of the Mexican Government. In 1949, it became an autonomous public enterprise. It is controlled by a Board of Directors consisting of (a) the Secretary of Commerce and Industry; (b) the Under-Secretary of Finance; (c) the Director General of Petroleos Mexicanos (PEMEX); and (d) the Director General of NAFIN. The Board of Directors appoints the Director General (who is the chief executive) and the Sub-Director General. 3.02 CFE is divided administratively into 14 divisions and geographically into ten regions. At present, it has about 22,000 employees and supplies 3.7 million customers. Thus CFE has about 1 employee for 170 customers, which is a reasonable ratio for its market characteristics. 3.03 The Government exempts CFE from most taxes, and also refunds 87% of the import duties paid by CFE. Compania de Luz y Fuerza del Centro, S.A. (Centro) 3.0h Centro is owned by the Mexican Light and Power Company, Ltd. (Mexlight), which was founded as a Canadian corporation in 1902. CFE now owns about 93% of Mexlight's total share capital and hence controls Centro. Three members of CFE's Board, namely, the Secretary of Commerce and Industry, the Under-Secretary of Finance, and the Director General of NAFIN, are also on the Board of Centro. 3.05 Centro has about 14,500 employees and serves about 1.5 million customers. Thus Centro employs about one person for every 105 customers, which is rather a poor ratio, given the high density character of its market. This is mainly because Centro's trade union insists that Centro's personnel be used instead of contractors for practically all of its construction work. The manage- ment disagrees with the union on this point, but, in the short run, is unlikely to be able to modify the current practice. Integration of CFE and Centro 3.06 Although the power sector was nationalized in 1960, institutional integration has been slow, primarily because of opposition from the trade unions. It was only in 1967 that the 19 subsidiaries of CFE were merged with CFE, after the two unions representing the personnei of CFE and the subsidiaries had agreed to the gradual introduction of identical conditions of contract.  - 6 - 3.07 During 1968 CFE acquired a majority of the shares of Mexlight. In 1969 management of the sector's debt and funds was centralized with CFE, and Centro's union pledged its support for integration of the sector. Presently, CFE's Director General, Sub-Director General, and the heads of its Controller's and Legal departments hold corresponding positions in Centro; CFE coordinates system planning and procurement; a unified system of accounts is being established; and Mexlight's Toronto office has been closed. Integration of the sector will be complete when Mexlight is liquidated and Centro becomes a division of CFE. By the end of 1972, the first of these objectives should have been achieved and all of Centro's shares transferred to CFE. Several recent changes in Centro's top echelons are further steps towards the second objective. However, full institutional integration cannot take place until Centro's union, which has long enjoyed higher wages and more benefits than CFE's unions, accepts job changes such as abolishing the post of Centro's Director General and replacing the position of Sub-Director General with a divisional manager's post under CFE's Manager of Operations. Organization and Management 3.08 CFE's Director General is usually replaced every aix years, when a new Government takes office. The last change occurred in December 1970, and was followed by an unusually large number of new managerial appointments, which have probably improved CFE's administration. But they have not as yet resolved CFE's problems of internal coordination. While CFE's operating divisions and Centro's departments are each reasonably well managed, the organization of CFE ' head office in Mexico City has not kept pace with its rapid growth of responsi- bilities. There is little cooperation between departments, and control and budgetary information are inadequate. 3.09 Between 1966 and 1970, CFE's data processing section completed a system of computer programs called SAI--Sistema de Administracion de Inversiones-- to improve management's control of the program of construction by providing data on the status and the program of procurement and construction, and on expendi- tures for and costs of investment. However, SAI has not yet been implemented, mainly due to lack of cooperation between the departments concerned and because the system is rather sophisticated for a first step in computerized investment control. CFE's data processing section is also preparing a budget control system narrowly related to SAI but essentially providing data on the cash flow into, within and out of the sector and emphasizing the comparison between allocated funds for given items and time periods (for which SAI would produce the basic data) and actual expenditures for these items and periods. The imple- mentation of SAI (or a similar system) and of computerized budget control appears to be the only way to provide the sector management in the next few years with the tools required to control and adequately coordinate the sector's various activities and the parts of its organization responsible for these activities. CFE plans to consult Electricite de France and SOFRELEC (France) in order to obtain an outside judgment on the sector's short and long term needs for investment and budget control systems. During negotiations CFE agreed to prepare by late 1972 a timetable for the implementation of such systems.  -7- Training 3.10 The quality of training of lower and medium echelon personnel appears satisfactory. At the higher echelons substantial improvement is needed, in particular, the training of specialized personnel for the operation of generating plants (including plant managers) and the grooming of future division and depart- ment managers. CFE planned to start in 1972 a program of improved training of plant personnel including the use of a plant simulator. Bank supervision missions would periodically assess the results of this program and would also review the steps taken by the present managers to train successors. Load and Energy Forecasting 3.11 CFE's forecasts of peak power demand (MW) and energy requirements (GWh) are generally satisfactory, though the methods used need further improve- ment. CFE prepares the projections annually, system by system (Annexes 9 & 10). In some systems only global extrapolations are made. In others, large industrial loads are separated; then the other categories are extrapolated, and existing and projected industrial loads are added to the extrapolation of the other categories. In still other systems CFE prepares global extrapolations for the various subsystems and aggregates them taking into account diversity factors derived from experience. During negotiations CFE agreed to improve further its forecasting methods in connection with the implementation of long term planning for its generation and transmission systems (paragraph 3.12). It would, in particular, use more aggregations of demand extrapolations for areas and/or consumer categories; as a further step, it would carry out--at least for the largest systems--market studies relating the future demand to the expected demographic and economic development. The Bank would continue to review the forecasts from time to time. Investnent Planning 3.12 CFE's planning department works with a rolling 10-year investment program; the first five years of which are projected item by item, and the last five years in less detail. The program is revised at least once a year. CFE's consultants, SOFRELEC, reviewed and approved the main points of the September 1971 revision of the 1972-1981 program, on which this appraisal is based. CFE is also continuously improving the computer programs it uses to establish the 10-year plan. However, the time has come when CFE should also begin to plan for a longer period. CFE acknowledges the need for long term planning and has agreed to study and implement a system for the long term planning (horizon at least 20 years) of the sector's generation and transmission facilities. This work would be carried out in the period 1972-1974 by CFE's planning department assisted by the French consultants, SOFRELEC, on the basis of terms of reference to be discussed with the Bank. These terms of reference should ensure that the planniitg is coordinated with the work of a study group formed by the Government early in 1971 to formulate short term and long term national policies for all energy usage. CFE expects to let the contract to SOFRELEC during the third quarter of 1972. 3.13 Development of distribution networks is planned in a generally satisfactory way by CFE's Operations Department and Centrots Planning Section. However, since the planning of large urban distribution networks (Guadalajara, Monterrey, etc.) is at a rather short term, CFE, during loan negotiations, agreed to extend the planning horizon for these large networks from the present two or three years to at least five years.  -8- Auditors 3.14 The Secretaria del Patrimonio Nacional is the supervisory agency for Government-owned enterprises and appoints independent accountants to audit the financial statements of CFE and Centro. The firm of Manuel Resa which is qualified and follows generally accepted accounting standards audited both undertakings in 1969 and 1970, and will continue the audit of Centro's books for 1971. A new firm, Suarez del Real y Valle Orozco, has been appointed to audit CFE's accounts from 1971. The credentials of CFE's new auditors are acceptable, although the firm does not have experience with a public utility of CFE's size and complexity. Two meetings with the partner responsible for CFE's audit indicated a willingness to comply with the Bank's requirements, and the firm has agreed to prepare consolidated financial statements for the sector.  - 9 - 4. THE SECTOR PROGRAM The Project 4.01 The Bank project is the sector's continuing investment program. The purposes of the program are to enable the sector to meet the expected growth in demand, and to maintain an adequate standard of servide. The project includes facilities under construction by January 1, 1972 or to be started prior to the end of 1974 and comprises: (a) 3,015 MW of hydro plant, (b) 3,900 MW of steam-turbine plant, (c) 670 MW of nuclear plant, (d) 500 MW of gas-turbine plant, (e) 150 NW of geothermal plant, (f) 15 WN of diesel plant, (g) 3,000 kim of 400 kV transmission lines, (h) 2,900 km of 220 kV transmission lines, (i) 5,600 km of 69-161 kV transmission lines, (J) 17,000 MVA of main substations, (k) 300 MVA of small substations, (1) the expansion of distribution networks and village electrification, costing annually about US$120 million, and (m) the first phase of frequency unification costing about US$3 million annually. Annex 5 is a list of the major facilities included in the project. Frequency Unif icat io 4e02 Of the sector's total installed capacity of 6,091 MW in 1971, 2,380 MW in the Central system operated at 50 Hz and 3,711 MI at 60 Hz. The Mexican Government has decided that the national frequency would be 60 Hz and the power sector is planning the conversion to 60 Hz of the above 50 Hz generating plant in the Central system, plus the conversion or replacement of frequency-sensitive equipment which consumers in the area now have in use. CFE, assisted by its consultants, Bechtel (U.S.), now estimates the cost of conversion to be about  - 10 - Mex$1,600 million (US$128 million). The estimate appears reasonable; it is based on the actual costs of a similar operation in Caracas (Venezuela), which was completed in 1970. As compared to the development of independent 50 and 60 Hz systems, frequency unification and the subsequent development of a single 60 Hz system in southern Mexico is still the least cost solution for discount rates up to at least 12%. l.03 Although the three previous loans had covenants specifying time- tables for the first phase of frequency unification, the actual changeover has not yet started. Several master plans were prepared, each of which, in turn, became obsolete when the Government did not take the steps necessary to implement them. In August 1971, the President signed a decree directing that the work should be done. A second decree, creating the entity which would convert customers' installations, and stipulating the respective costs to be borne by the Government, CFE, and the consumers, was signed by the President in May 1972. On the basis of these two decrees, frequency unifi- cation is finally expected to go ahead. Actual conversion is to start in January 1973 and to be completed in 1977. During negotiations, agreement was reached on a timetable for implementing the first stage of frequency unification consisting of the changeover by September 1974 of frequency sensitive equipment corresponding to a maximum non-coincidental demand of about 600 MW. Nuclear Plant 4.04 In 1968-1969, CFE assisted by NUS Corporation (U.S.) prequalified eight firms, which were asked to submit bids for the nuclear steam supply system, including fuel, for a 670 MW power station to be installed near Veracruz. As an alternative, the bidders could offer a "package" including the turbo- generator and further equipment of their choice, up to a complete installation. Seven firms submitted bids, which CFE opened in January 1970. CFE, together with the U.S. consultants, Burns & Roe, evaluated the bids which showed, in particular, that the nuclear plant was economically justified and therefore had a place in CFE's 10-year program. However, as a result of improper bidding procedures by some bidders, no contract was awarded. Late in 1971, bidders were asked to update their proposals; one other manufacturer was also permitted to submit a proposal. CFE opened the new bids in March 1972, and plans to award the contract during the second half of 1972, and to commission the plant in 1977. 4.05 Based on the 1970 offers, CFE has estimated the cost of the plant at US$130 million or US$195 per kW excluding engineering, overheads, and interest during construction, which is about 20% below the estimated cost of similar plants presently under construction in other countries. This estimate might have to be revised when the new offers are analyzed. However, the possible changes are not likely to affect substantially the forecast total annual investments of the sector in the period 1972-1974. 4.06 Since the manufacturers of nuclear equipment are ready to offer financing with terms of at least 15 years and at reasonable interest rates, the nuclear steam supply system (or the "package") would be financed through supplier credits. If CFE decides to procure the turbogenerator separately, it would ask for its inclusion in that part of the program to be financed by parallel loans (see paragraph 6.17). The rest of the conventional equipment might be included in a future Bank loan.  - 11 - High Voltage Interconnections 4.07 The Puebla-Veracruz system (Map 1) is presently interconnected with the Michoacan-Chapala-Guanajuato system through a 220 kV link to constitute the Southern Interconnected system. In the North, the Falcon- Monterrey, the Torreon-Chihuahua, and the Durango systems (see Map 2) are now interconnected through 220 kV lines. In connection with the installation of the nuclear plant near Veracruz and of two 900 MW conventional thermal plants in the areas of Tampico on the east coast and Mazatlan on the west coast, CFE is planning successively to interconnect the Northern system with the Sonora-Sinaloa system at 220 kV and then this enlarged Northern system with the Southern system at 400 kV, both in the east and the west. Thus, by about 1977 (when the frequency changeover in the Central system should be completed), Mexico's main systems except for those of Tijuana-Mexicali and Yucatan will be interconnected; this will undoubtedly result in more economical operation, in particular from the use of larger, relatively less expensive generating units. Village Electrification 4.08 Early in 1971, when public power supply reached about 7.8 million people in rural areas (i.e., about 37% of the rural population), the President announced that during his 6-year term, CFE would bring electricity to about 5.3 million more people in 9,000 small towns and villages. Thus, by 1976, about 13.1 million people, or nearly 55% of the rural population, would have electricity. This program would require an investment of about Mex$350 million (US$28 million) per year--less than 7% of the sector's annual investment (Annex 7). Budget constraints caused CFE and the Secretaria de la Presidencia subsequently to reduce the corresponding amounts in the sector program to Mex$250 million (US$20 million) for 1972, and to Mex$150 million (US$12 million) per year from 1973 onward. However, pressure from other sectors of the Govern- ment and from the States, which finance 33% of the program, may well induce CFE to carry out more of the program than it presently plans. To provide for this contingency, the estimates in this report include an annual allocation to village electrification of Mex$350 million. Cost Estimates 4.09 The sector's estinated construction expenditures for the 5-year period 1972-1976 are set out in Annex 8. Summarized belowi is the cost of the program for 1972 through 197h: In million Mex$ In million US$ % of Local Foreign Total Local Foreign Total Total Centro: Generation, trans- mission & 325 605 930 26 49 75 5 substations Distribution 800 430 1,230 64 34 98 7  - 12 - In million N.s$ In minlion US$ % of CFE: Local Foreign Total Lo