Guatemala - Aguacapa Power Project

Report No. 1361b-GU FILE COPY Appraisal of Aguacapa Power Project Instituto Nacional de Electrificacion (INDE) Guatemala May 4, 1977 Energy Division Latin America and the Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank 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.  CURRENCY EQUIVALENTS Currency Unit = Quetzal (Q) Q 1.00 = 100 centavos = US$1.00 ACRONYMS CABEI = Central American Bank for Economic Integration CEL = Comisio'n Ejecutiva Hidroelectrica del R;o Lempa (El Salvador) EEG = Empresa Electrica de Guatemala, S.A. FIV = Fondo de Inversiones de Venezuela INDE = Instituto Nacional de Electrificaci6n IDB = Inter-American Development Bank UNITS AND MEASURES kW = kilowatt MW = megawatt = 1,000 kw kWh = kilowatt hour GWh = gigawatt hour = 1,000,000 kWh kV = kilo volt-ampere MVA = mega volt-ampere m = meter = 3.28 feet km = kilometer = 0.621 mile kcal = kilocalories = 1,000 calories FISCAL YEAR INDE's fiscal year ends December 31  FOR OFFICIAL USE ONLY APPRAISAL OF AGUACAPA POWER PROJECT INSTITUTO NACIONAL DE ELECTRIFICACION (INDE) GUATEMALA Table of Contents Page No. Summary and Conclusions i-iii 1. Introduction ............. . .................................. 1 2. The Power Sector ..... ........ ................ ... .............. 2 Energy Consumption and Resources .... .................. 2 Power Sector ..... . ........ . ........................... 3 Sector Review ....................... 4 Organization and Management . .......................... 4 System Expansion and Plannning ....................... 4 Service Extensions ..... ............. ..... . . .... .............. . 5 Existing Tariffs and Finances ......................... 5 Sector Development ..... ........... ..................... 5 Future Sector Organization ............................ 6 Future Expansion ...................................... 6 Future Tariff Structure ..... ................. 7 3. The Borrower ............................................... 7 Organization and Management .................. 8 Audit ................................................. 9 Performance Indicators ................................. 9 4. The Project ................................................ 10 The Program ........................................... 10 Project Costs ......................................... 12 Engineering and Project Execution ..................... 13 Procurement and Disbursement .......................... 13 Environment ........................................... 14 Project Risk .......................................... 14 5. Justification of the Project ............. .. ................ 15 Objectives ............................................ 15 Load Forecast ......................................... 16 Least-Cost Solution ................................... 16 Return on Investment .................................. 17 This report was prepared by Messrs. C.F. Mena and J. Acevedo-Navas. This document has a mtricted 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.  Table of Contents (Cont'd) Page No. 6. Finances .................. ................................. 18 Background ............................................ 18 Past Earnings and Financial Position ................ .. 18 Financing Plans ....................................... 19 Future Earnings and Financial Position .... ............ 21 7. Agreements to be Reached and Recommendations ............... 24  List of Annexes 1. Energy Consumption 2. Power Sector Installed Capacity 3. Terms of Reference of the Sector Organization Commission 4. Schedule for INDE's Organization Strengthening and Studies 5. Power Market 6. INDE and EEG Tariffs 7. Sector Energy Requirements 8. Project Description and Costs 9. Chixoy Hydroelectric Project 10. Project Implementation Schedule 11. Estimated Loan Disbursement Schedule 12. Performance Indicators 13. Economic Justification 14. Finances 15. INDE's Organization Chart Map IBRD 12449   APPRAISAL OF AGUACAPA POWER PROJECT INSTITUTO NACIONAL DE ELECTRIFICACION (INDE) GUATEMALA Summary and Conclusions i. This report covers the appraisal of the Aguacapa hydroelectric project (90 MW), for which Instituto Nacional de Electrificacion (INDE) has requested financial assistance. ii. The proposed loan would be the third by the Bank to INDE, a govern- ment-owned autonomous institution founded in 1959, and responsible for bulk electricity supply and retail distribution outside the concession area (Guatemala City) of Empresa Electrica de Guatemala S.A. (EEG). The projects financed by the two previous loans to INDE have been successfully completed. However, the project performance audit on these two loans concluded that the two most serious problems of the sector--the poor financial performance of INDE and the lack of development of Guatemala's hydroelectric resources--had not been resolved. The major objective of the Bank's proposed renewed in- volvement in the Guatemalan power sector is to assist in addressing these problems. iii. INDE and EEG (founded in 1922) are the main utilities in the power sector. The dichotomy between these entities resulting from their different operating styles and outlooks constitutes a constraint in the performance and development of the sector. Aware of the sector organization's shortcomings, Government established a special commission in January 1976 to study the problem and to propose actions to improve sector organization, strengthen INDE, and formulate a national electricity tariff policy. The commission presented its report (which recommends that a single entity, INDE, be res- ponsible for the public electricity service in Guatemala) to Government in September 1976. Government has not acted on the commission's recommendations. However, it has stated its intention to develop an improved organization structure for the sector. Its decisions would be communicated to the Bank by June 1977. The proposed Loan Agreement contains provisions to ensure that there will be adequate consultations between the Government and the Bank prior to the implementation of any major decisions affecting INDE's organization. iv. By mid-1979, demand for power in Guatemala is expected to be equal to the available firm capacity. In order to maintain adequate service re- liabilty, additional capacity would need to be operational by that date. The Aguacapa project would provide the additional capacity required and make possible a substantial reduction in thermal generation thus reducing the country's dependence on imported fuel. This project is one of the two hydro- electric plants included in INDE's least-cost expansion program (1976-1982); the other is the Chixoy plant (300 MW), expected to be in operation by 1982, and for which the Inter-American Development Bank (IDB) made loans totalling US$105 million in 1975.  - ii - v. The return on investment of the project is estimated at 14.9%. This rate of return indicates that electricity prices will, on average, be higher than incremental system costs, suggesting that wasteful use of electricity will be avoided. vi. INDE's organization has not been structured to function effec- tively. New management is aware of the organization's shortcomings, and has agreed to implement improvements in the areas of administration, finance, personnel and planning during project execution. This program should result in improvement of INDE's effectiveness. vii. The proposed US$55 million loan would cover 92.5% of the project's foreign costs (excluding interest during construction) and contains a compo- nent to cover management consultants' services to assist INDE. The remainder of the foreign currency requirements would be financed by CABEI (US$4.5 million). Local currency requirements (US$40.5 million) would be financed by a loan from the Venezuelan Investment Fund (US$30 million), CABEI (US$4.3 million), and net internal cash generation (US$6.2 million). The loan would allow the Bank to participate in the financing of this critically needed project and, equally important, assist Government in the implementation of improvements in the power sector. viii. Procurement of equipment, materials and construction services that would be financed by the Bank is being completed through international compe- titive bidding (ICB) in accordance with guidelines for procurement under Bank loans. INDE's award recommendations on three of the four contracts involved have been reviewed and the Bank has concurred with INDE's recommendations. Award of the largest contract (civil works) was complicated by INDE's proposed partial award, in accordance with the respective bidding documents, to the two contractors who presented bids for the complete works. INDE, with the Bank's concurrance, decided to issue invitations for new tenders on these works. The new bids are expected to be received in Mlarch 1977. Electrowatt (Switzerland), INDE's consultant for the project, has prepared all bidding documents, per- formed bid evaluations and would be responsible for project supervision. INDE has issued letters of intent to the successful bidders. Formal contracts are expected to be signed after the approval of the proposed loan. No retro- active financing would be required. ix. The power sector's financial performance was satisfactory through 1973 but deteriorated thereafter as substantial increases in fuel costs were not fully offset by tariff increases. The situation improved in 1976 and is expected to improve further as a result of a tariff increase in 1976 and an additional increase agreed for 1977. With the agreed increased revenues, the sector would be in a position to finance a satisfactory proportion (15%) of the very large investment program which it is undertaking to reduce the country's dependence on imported fuel. After the two major components of this program (para. iv) are complete, the sector would be in a very strong financial position. x. Although, as noted above, the financial performance of the power sector was satisfactory through 1973 and is expected to improve in 1976-77, INDE's own finances have been weak. This weakness was attributable in the  - iii - past to its failure to charge adequate bulk supply tariffs to EEG, which distributes over three-quarters of INDE's generation. The financing plan reflects the agreement that INDE's tariffs to EEG would be adjusted annually to transfer to INDE any funds generated by EEG in excess of its own require- ments. With the agreed bulk and retail tariff arrangements and Government equity contributions aggregating US$44.6 million in the years 1977-79, INDE should experience no difficulty in implementing the proposed project. xi. The project provides a suitable basis for a Bank loan to INDE of US$55 million with a term of 17 years, including 3-1/2 years of grace.   - 1 - APPRAISAL OF AGUACAPA POWER PROJECT INSTITUTO NACIONAL DE ELECTRIFICACION (INDE) GUATEIALA 1. Introduction 1.01 Instituto Nacional de Electrificacion (INDE), supported by Govern- ment, has requested financial assistance from the Bank to build the Aguacapa hydroelectric project. INDE, a government-owned autonomous institution re- sponsible for bulk electricity supply and retail distribution outside the concession area (Guatemala City) of Empresa Electrica de Guatemala S.A. (EEG), has received two Bank loans totalling US$22 million. I/ The projects financed with these loans were successfully executed and the facilities in- volved are in operation. A project performance audit on these two loans has been distributed to the Executive Directors. 2/ It concluded that the Bank played an important role in the expansion of Guatemala's power supply and in helping to establish INDE as the major institution in the power sector. Nevertheless, the two most serious problems of the sector--the poor financial performance of INDE and the lack of development of Guatemala's hydroelectric resources -- were not resolved. The major objective of the Bank's proposed renewed involvement in the Guatemalan power sector is to assist the Government in addressing these problems. 1.02 The project consists of the critically needed Aguacapa hydroelec- tric plant (90 MW) to reliably meet demand by 1979 while allowing substantial reduction in thermal generation, thus reducing the country's dependence on imported fuel. A reliable supply of electricity is essential to Guatemala's economic growth and industrial development. The project, estimated to cost US$100 million (with a foreign exchange component of US$59.5 million), will facilitate achievement of these goals through the economic utilization of the country's indigenous resources. 1.03 The proposed loan of US$55 million would cover 92.5% of the proj- ect's foreign cost; would contain a component (US$0.25 million) to finance management consultants services for the institutional strengthening of INDE; and would supplement loans from the Venezuelan Investment Fund (FIV) and the Central American Bank for Economic Integration (CABEI) expected to total US$38.8 million. As noted above, the main objective of the project is to 1/ Loan 487-GU of 3/10/67 (US$15 million) for the construction of Jurun Marinala hydroelectric plant (60 MW) and corresponding transmission, Escuintla gas turbine-generator plant (15 14W) and Puerto Matias diesel plant (5 MW). Loan 545-GU of 6/28/68 (US$7 million) for construction of Escuintla generating station (33 MW-steam). 2/ Project Performance Audit Report on Guatemala First and Second Power Projects (Loans 487-GU and 545-GU)--Sec M75-99 of February 14, 1975.  - 2 - provide urgently needed additional generating capacity and maintain adequate service reliability. The proposed loan would allow the Bank, in addition to contributing to the project's execution, an equally important participation in assisting Government to carry out sector reforms, expected to consider- ably improve electric service throughout Guatemala by the time the project is completed. Government is considering a new sector organization which is expected to strengthen the role of INDE. Implementation of the financial policies underlying the agreements relating to the proposed loan would make a major contribution to INDE's finances. 1.04 This report is based on INDE's study of its expansion program (1976-82); on a feasibility study of the Aguacapa project, completed by Electro- watt (Switzerland) in June 1976; on the findings of an appraisal mission composed of Messrs. Carlos F. Mlena and Billy Martin, which visited Guatemala in February and April of 1976, and on discussions between INDE and Bank staff in lWashington (September 1976). 2. The Power Sector Energy Consumption and Resources 2.01 Gross energy consumption in Guatemala, although accelerating sub- stantially in recent years (from an average growth rate of 3.9% p.a. in the 1960's to 5.9% p.a. in 1970-73, see Annex 1) is still at a low level by Cen- tral American standards. It amounted to 1,967 M.T.o.e. 1/ (0.34 T.o.e. per capita) in 1973, which is about two-fifths the highest national consumption level in the area (0.82 T.o.e. per capita in Panama) and well below the re- gional average (0.44 T.o.e. per capita). This reflects the fact that about 40% of the population has yet to be integrated into the modern sector of the economy. While commercial energy (petroleum derivatives and hydroelectric- ity) has been growing in importance, a high proportion of total consumption (46% in 1973) was derived from traditional energy sources (wood and bagasse). Total gross consumption of electric energy generated by public utilities and self producers is estimated at 1,140 GWh (about 181 kWh per capita) in 1975. 2.02 Thus far Guatemala has had to import all of its petroleum fuels. However, spurred on by major oil discoveries in southern Mexico and the en- ergy crisis, exploration for oil and gas by private oil companies was inten- sified and commercial finds have been recently reported. On the other hand, Guatemala has a large, technically exploitable hydroelectric potential which has recently been calculated at 4,300 MW. This contrasts sharply with 121 MW (2.5% of the potential) in installed hydroelectric capacity. Moreover, being 1/ T.o.e.: tons of oil equivalent, approximately 107 kcal. M.T.o.e. = 1000 T.o.e.  - 3 - a country with geological characteristics similar to El Salvador's and Nicaragua's -- where geothermal potential is being successfully defined -- Guatemala should also have an exploitable geothermal potential. 2.03 Gross consumption of electric energy generated by public utilities increased from 541 GWh in 1970 to 958 GWh in 1975, representing an average growth rate of 11.5% p.a. The main factor contributing to this relatively high growth rate has been the substantial development of the industrial sector which in 1975 accounted for 45% of the total power consump- tion, while residential consumption amounted to 27% and commercial consumption to 15%. The remainder was absorbed by the government sector. The relative market share of the industrial sector is expected to continue to grow during the project period, as shown below for sales in the central interconnected system, which represents 85% of the total market: Actual _ Forecast 1974 1975 1980 GWh % GWh % GWh % Industrial 307 45 337 45 528 47 Residential 190 28 202 27 303 27 Commercial 102 15 112 15 169 15 Municipal 71 10 75 10 101 9 Governmental 21 2 22 3 23 2 691 100 748 100 1124~ To0 Power Sector 2.04 The power sector consists of INDE, EEG, numerous (though consider- ably smaller) private and municipal utilities and self-producers. Some of the smaller utilities have their own generating capacity and are not intercon- nected with INDE or EEG systems; the remainder purchase bulk energy from INDE or EEG. EEG was established in 1922 by foreign investors to serve the coun- try's most lucrative market, Guatemala City and its environs. INDE was cre- ated in 1959 by the Government to serve the rest of the country and to assume responsibility for expansion of power generation. 2.05 The relative shares in total public service generation and sales to consumers in 1975 were as follows: Retail Generation Sales INDE 68% 10% EEG 30% 76% Others 2% 14%  - 4 - Present total generating capacity amounts to 326 MW. Of this, 207 MWJ (64%) are in the interconnected system located in the southern half of the country; 16 MW (5%) correspond to isolated INDE, privately and municipally-owned util- ities; and 100 MIW (31%) belong to miscellaneous self-producers. Sector Review 2.06 A Bank mission visited Guatemala in August 1975 to review the power sector. The mission's findings were discussed with the Guatemalan authorities in MIarch and July 1976, and have provided the basic orientation for the pro- posed loan. The mission's analysis of the main factors which have limited the power sector's contribution to the country's economy is summarized below. Organization and Management 2.07 The sector has been marked by conflict between INDE and EEG, both in operating style and outlook. EEG has been relatively well managed. However, despite the acquisition of 93% ownership by Government in 1972, it continues to view its functions rather narrowly. INDE has been less well managed, financially weak and, in particular, has not until recently discharged its responsibility for expanding power generation in an effective manner. The project performance audit of the first two Bank loans to INDE noted that the organization of the sector was the most important problem facing Government in the sector. System Expansion and Planning 2.08 After an early exercise (consisting of the preparation of a hydro- electric resource survey and master plan for the power sector in 1960-62, with financing from the UN Special Fund and for which the Bank acted as Executing Agency) there was no sound follow-up or long-term planning for the expansion of the system. INDE, which is responsible for generation expansion, failed to discharge this function effectively, particularly in project prepar- ation. As pointed out in the project performance audit of the first two Bank loans, the development of the country's abundant hydroelectric resources fell behind the pace recommended in the master plan. Only 40% of additions in generating capacity since 1962 have been hydroelectric, compared with a recommended 95% in the power study referred to above. The high thermal com- ponent rendered the power sector finances particularly vulnerable to the world-wide readjustment of fuel prices which began in 1973. 2.09 Aware of the sector's shortcomings, Government and INDE created a Mlaster Plan Group to fill the gaps in sector planning. With the help of con- sultants, under the auspices of the Technical Cooperation Agreement between the Governments of Guatemala and the German Federal Republic, the Group has issued its report. 1/ The report identifies 121 exploitable hydroelectric 1/ "Plan M4aestro de Electrificacion Nacional, 1977-2000," dated May 1976.  projects with an estimated aggregate firm capacity of about 4,300 141W. After a detailed investigation of these projects, 20 hydro aiid 8 thermal projects have been selected to meet the anticipated load growth through the year 2000. Service Extensions 2.10 Sales of electricity to final consumers totalled 850 GW4h, or 135 kllh per capita in 1975 (Annex 5). In addition to being low by Central Ameri- can standards, this per capita consumption masks an extremely uneven regional distribution of the electricity load. Consumption per capita in Guatemala City and environs amounted to 456 kWh, which is about 14 times the consump- tion per capita of 33 kWh in the rest of the country. Of about 6.3 million inhabitants in 1975 only about 20% received electrical service. This figure is among the lowest in Latin America. The Government is aware that electricity must be made available to a greater proportion of the population and, through INDE, it has initiated a series of rural electrification programs to meet this objective. Existing Tariffs and Finances 2.11 EEG's concession agreement gives it the power to set tariffs within ample limits and INDE's charter gives it full discretion in this area. In practice, however, tariff increases have been subject to Government approval. Tariffs of the two utilities (Annex 6) have been developed independently, without adopting a common focus. EEG's tariffs were reviewed and updated in 1975 with the help of consultants, but this was done from the perspective of EEG as a distribution utility, planning only a few years ahead and not con- cerned with overall sector policies. Except for the application of a fuel adjustment clause, INDE's retail tariff level and structure have not been changed since 1967. IIIDE's tariff to EEG is fixed annually through negotia- tions between the parties. 2.12 In the past, tariffs have not been set at levels sufficient to provide an adequate contribution to sector expansion. Increases in consumer charges in the last two years have not been sufficient to offset increasing operating costs. Consequently, the financial position of the sector has been weak. This situation can only be improved by increasing sector reve- nues. However, because of the bulky nature of the investment program ahead, and since consumer charges are already relatively high (US$0.052/kWh) it would not be reasonable to raise the substantial funds required solely through tariffs; a blend of tariff increases, borrowings and government contributions would be more appropriate. Sector Development 2.13 To resolve the problems described above Government should decide on the main outline of future sector organization, particularly in view of the expiration of EEG's concession in Mlay, 1977. Government should develop also a sound policy on tariffs. Finally, it should implement the measures required for the institutional strengthening of IlIDE, while the utility carries out the needed expansion of its facilities.  2.14 The proposed loan for the Aguacapa project would allow the Bank to contribute more effectively than in the past towards the strengthening of the sector and the development of Guatemala's natural resources. The Bank has also been asked to participate in the financing of a second major hydroelec- tric project, Chixoy, which was appraised in March 1977. Future Sector Organization 2.15 With the objective of strengthening the sector, Government cre- ated a special commission on sector reorganization in January 1976 to study alternatives for the future organization of the sector and to develop rec- ommendations for action by the Cabinet-level National Economic Commission. The special commission's terms of reference (Annex 3) also required it to propose broad policies in the areas of tariffs and the strengthening of INDE. The comimission submitted a report to the National Economic Commission in late September 1976. With regard to sector reorganization the report recommends principally that only one entity be responsible for public elec- tricity service, and that INDE absorb EEG's operations as well as those of all other private and municipal electric utilities. Government has yet to react to this recommendation, but has stated its intentions to reorganize the sector to develop an improved institutional structure covering generation, transmission, and distribution. It would communicate its decision on this matter to the Bank by June 30, 1977, and complete sector reorganization by December 31, 1979. ITIDE agreed not to create or acquire any company if such action would adversely affect its financial condition or the efficiency of its management and personnel; and that any change in INDE's charter, or the passage of a resolution for the dissolution of INDE, without the agreement of the Bank, would be an event of default under the proposed Loan Agreement. These provisions ensure that there will be adequate consultation between Government and the Bank prior to the implementation of any major deci- sion under the proposed reorganization which might affect INDE. Future Expansion 2.16 The sector expansion program is described in paragraph 4.01 and the major installations involved appear on the map. In addition to conven- tional thermal and hydro plants, INDE has commenced exploratory drillings for the development of geothermal resources. Favorable preliminary results in the IIoyuta field (see map) have led INDE to plan a 30 M11W plant for com- mercial operation by year-end 1981. 2.17 INDE is now preparing a national rural electrification program which should give a better idea of the Government/INDE targets regarding access to supply and of their financing/subsidization implications. Upon completion of the program (planned for mid-1977), INDE expects to obtain financial assistance from IDB for this rural electrification program.  2.18 Discussions have been proceeding for the past two years between representatives of INDE and the Comision Ejecutiva Hidroelectrica del Rio Lempa (CEL) of El Salvador concerning a transmission line to tie their electric systems by year-end 1979. Consultants for a feasibility study were selected in late 1976. The proposed transmission line could be the initial step leading to the effective integration of both systems, as it is likely that the line will prove to be of benefit to both countries. If this expectation is confirmed, and an agreement is reached between El Salvador and Guatemala, the line could be in operation by year-end 1979. Initially, energy is expected to flow from El Salvador to Guatemala, because El Salvador would have available spare capacity to sell outside its market. After 1983, when the Chixoy project is expected to be in operation, the reverse could take place. Both INDE's and CEL's finances should benefit significantly from the proposed interconnection. Consequently, the Bank should provide the assis- tance that may be required by both countries to reach this goal. CABEI is expected to finance the line. 2.19 In addition to the study mentioned above, the United Nations Eco- nomic Commission for Latin America is conducting a study on the long-range possibilities for interconnection among the Central American countries. INDE and CEL are cooperating in this study; its first stage was recently completed and is currently under review. The study includes an assessment of the long-term costs and benefits of various interconnection possibilities which could provide a basis for regional sector planning and integrated elec- tric system operation. Future Tariff Structure 2.20 The special commission on sector reorganization proposed the unifi- cation of electricity tariffs. A comprehensive tariff study should be carried out to recommend new tariff levels and structures for all final consumltrs, conciliating as best as possible the various objectives. The timing of the various steps required to carry out such a study and for Government and INDE to develop a position on its recommendations, as agreed, is shown in Annex 4. The Bank obtained from Government and INDE assurance on the timely execution of the tariff study. Prior to this study, however, the Government and INDE agreed to interim increases in the present tariff levels which are discussed in detail in Section 6. 3. The Borrower 3.01 The borrower will be INDE, which is entrusted with the development of the nation's bulk supply system and distribution of electricity outside the concession area (Guatemala City and environs) of EEG.  -8- Organization and blanagement 3.02 INDE's organization (Annex 15), which has not changed significantly since the second project was appraised in 1968, needs improvement. INDE's management is aware of the organization's shortcomings, but pending sector reorganization had only carried out relatively minor reforms, particularly in construction management, where improvement has been noticeable through the creation of major project construction teams. Government agreed to support, and INDE to carry out, a program that would result in the necessary general institutional strengthening and improvement of the utility (Annex 4). Some improvements would be initiated immediately; others after sector reorganization begins (June 1977). The immediate measures to be carried out by June 30, 1977 are: the hiring of an experienced financial analyst for the financial analysis unit of the planning group, and an experienced personnel manager to prepare a personnel upgrading program; and the simplification of procedures relating to the handling of correspondence, aimed at providing a practical and effective system. 3.03 Government recognizes that major reforms in INDE's organization should be carried out as soon as possible, even if these may require some adjustments after the final sector arrangement is defined. The principal areas, in order of importance, requiring improvements are listed below, with a brief description of the measures to be implemented: (a) Personnel. INDE is short of specialized and experienced professionals, particularly at mid-management (department head) levels. The number of operation employees (1560 in 1975) is high in terms of customers served. Intensive construction activity on force account has caused the util- ity to increase its unskilled staff substantially; the number of construction workers rose from 800 in 1975 to 3580 by mid-1976. INDE agreed that by June 30, 1978 it would put into effect a program to upgrade the quality of its staff (through training, hiring and reduction programs). Construction forces will be substantially reduced when civil contractors mobilize for the Aguacapa and Chixoy project works, early in 1977. Nevertheless, by year-end 1978, INDE would phase out completely construction on force account of major works; (b) Planning. Since inception, INDE has relied almost exclusively on the use of outside planning consultants. It agreed to strengthen gradually this function, but its planning group is not adequately organized or staffed to readily achieve this objective. Therefore, INDE agreed to reorganize its plan- ning group by June 30, 1978 into a department, incorporating in it the technical team trained by the master plan group. The head of the new deparetment would report to the general manager;  - 9 - (c) Financial Staff. This group performs essentially account- ing functions. It is overstaffed. Mechanization of routine accounting is still rudimentary. Financial planning is inadequate and efficiency is generally low. Although tardy, its operating and financial reports are, nevertheless, complete. INDE agreed to reorganize the financial group by June 30, 1978, into a department headed by an experienced financial manager who would implement a program for effective financial planning and improvement of the accounting function. The head of this new department would report directly to the general manager; and (d) Working Conditions. Main offices are excessively over- crowded, in part as a result of overstaffing, but mainly because these facilities have not been planned for the use being given (INDE rents all its office space, which is dispersed in several commercial buildings in the city). These conditions do not stimulate good performance and rental expenses are high. INDE agreed to finalize planning of its own main office building by June 30, 1978. 3.04 To assist INDE in carrying out the improvements listed above, an amount in the proposed loan has been allocated to finance consultant ser- vices that would be required, particularly for the personnel upgrading pro- gram (para 3.03(a)) and the reorganization of the financial group (para. 3.03(c)). Audit 3.05 INDE's financial statements are audited by a local auditing firm (Lizarralde y Ayestas Asociados) whose work has been satisfactory. INDE agreed to continue appointing independent auditors satisfactory to the Bank and to send to the Bank the audited financial statements together with the auditor's report within four months from the end of each fiscal year. Performance Indicators 3.06 Annex 12 shows a representative selection of indicators of INDE's operating and financial performance (other than those covered by proposed covenants) through the year following project completion. Performance as measured by these indicators would be monitored during project execution.  - 10 - 4. The Project The Program 4.01 INDE's expansion program during the period 1976-1979 consists of the following works: (a) Generation: - Escuintla gas turbine generators - 2 x 25 MW (1976) 1/ - Escuintla I gas - 33 MW (1976) - Escuintla II gas - 53 MW (1977) - Palin II hydro plant - 5 MW (1978) - Aguacapa hydro plant - 90 MW (1979) - Moyuta geothermal plan - 30 MW (1981) 2/ - Chixoy hydro plant - 300 MD; (1982) - Improvements on small hydro plants (b) Transmission: Lines: - Escuintla - Guatemala Sur, 43 km, 1st circuit, 230 kV (1978) - Guatemala Sur - Guatemala Norte, 30 km, 1st circuit, 230 kV (1979) - Aguacapa - Escuintla, 23 km; 1 circuit, 230 kV (1979) - Guatemala - El Salvador, 105 km, I circuit, 230 kV (1980) 2/ - 300 km, 1 circuit, 69 kV Substations: - Escuintla expansion, 100 MVA, 230/138 kV (1977) - Guatemala Sur, 150 MVA, 230/69 kV (1979) - Guatemala Norte, 150 MVA, 230/69 kV (1980) (c) Distribution - Ongoing low-voltage system expansion (d) Rural Electrification - Ongoing program (1978) - El Peten, Atlantic, and Southwestern regional programs (1982) (e) Studies: - Future generating and transmission facilities 1/ Parentheses indicate expected commissioning dates. 2/ Subject to confirmation of its economic merits. Feasibility reports expected by year-end 1977.  - 11 - (f) Building - New headquarters for INDE's central offices in Guatemala City (1979). 4.02 These works call for an investment of US$364.1 million during the disbursement period of the proposed Bank loan (1977-1979), as follows: