Honduras - El Cajon Power Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. 2388a-HO STAFF APPRAISAL REPORT HONDURAS EL CAJON POWER PROJECT February 21, 1980 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Lempira (L) L 1 - 100 centavos L 1 - US$0.50 L 1,000,000 - US$500,000 1 centavo - USi0.5 US$1 - L 2 USi1 - 2 centavos US mill 1 0.2 centavos British Pound Sterling Y - Japanese Yen UNITS AND MEASURES kW - kilowatt MW - megawatt = 1,000 kW kWh-' - kilowatt-hour GWh - gigawatt-hour = 1,000,000 kWh kVi - kilovolt kVA - kilovolt-ampere MVA - megavolt-ampere m - meter = 3.28 ft km - kilometer = 0.621 mi km2 _ square kilometer = 0.386 sq mi m3 - cubic meter = 35.3 cu ft TPE - tons of oil equivalent ACRONYMS AND ABBREVIATIONS Beck - R.W. Beck and Associates CABEI - Central American Bank for Economic Integration CDC - Commonwealth Development Corporation (UK) CIDA - Canadian International Development Agency COHDEFOR - Corporaci6n Hondurefia de Desarrollo Forestal CONSUPLANE - Consejo Superior de Planificacion Economica EBASCO - EBASCO Services Incorporated ECLA - Economic Comission for Latin America ENEE - Empresa Nacional de Energi'a Electrica IDB - Inter-American Development Bank INE - Instituto Nacional de Energ'a (formerly ENALUF) of Nicaragua INPOP - Instituto Nacional de Formacion Profesional, of Honduras MC - Motor Columbus MbNENCO - Montreal Engineering Company OCEF _ Overseas Economic Cooperation Fund (Japan) OPEC - Organization of Petroleum Exporting Countries SANAA - Servicio Aut6nomo Nacional de Acueductos y Alcantarillados SOFRELEC - Societe' Fragaise d'Etudes et de Realisations d'Equipements Electriques UNDP - United Nations Development Programme USAID - United States Agency for International Development FISCAL YEAR ENEE's fiscal year ends December 31  FOR OFFICIAL USE ONLY HONDURAS STAFF APPRAISAL REPORT ON EL CAJON POWER PROJECT EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) TABLE OF CONTENTS Page No. 1. THE SECTOR .................................. l.....1 Energy Use and Resources # .............. ............ 1 Energy Sector Organization ..... .................. 3 Development of the Electricity Sector ........... . 3 Bank Group Participation in the Power Sector ..... 4 Electricity Consumption and Access to Service .... 5 National Electrification ......................... 6 Tariff Levels and Structure ..................... 7 Constraints on Sector Development ................ 7 2. THE BORROWER ............ ...........*.* *... 9 Legal Structure ....................................... 9 Organization and Management ............ 9 Staffing . .................. . ................. * * . 10 Training ..................................................... lO Management Systems .. ............ ....... ............ . 11 Accounting and Audit .... *..*......... ......... 12 Commercial Functions ......... .. . *. . . . .......... ........ . 12 Insurance ........ 6...... ............ ................... 13 3. THE MARKET AND MEANS TO MEET IT ..... ................. . 14 Market History and Characteristics .............. . 14 Existing Supply Facilities ....................... 15 Forecast of Requirements .......... .. ............. 16 Program to Serve Forecasted Market ....... ........ 16 4. PROGRAM AND PROJECT ................................... 18 Background and Objectives ........................ 18 Generation ....................................... 18 Transmission and Distribution .................... 19 The Project ................ ..... . .. 19 This report is based on the findings of an appraisal mission which visited Honduras during October/November 1978. The mission comprised Messrs. Helmut Wieseman, Ricardo Halperin and Ralph Bloor (Consultant). It was updated in October 1979 by Messrs. Ricardo Halperin, Nigel Green and Robert Goodland. This document has a rotricted 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 (Continued) Page No. Project Cost ..................................... 20 Project Engineering and Execution .21 Procurement ..................................... 22 Disbursements .24 Coordination with Co-lenders and Project Supervision ............................ 26 Ecological, Environmental and Resettlement Aspects .27 Project Risks and Uncertainties .27 5. FINANCE .............. 29 Introduction .29 Earnings History .29 Financial History ............................... 30 Investment and Financing Plan .................... 31 Future Finances . ................................. 36 Performance Indicators .38 6. ECONOMIC ANALYSIS .38 Least-Cost Solution .38 Return on Investment ............................. 40 7. SUMMARY OF PROPOSED AGREEMENTS AND RECOMMENDATIONS .... 41  TABLE OF CONTENTS (Continued) Page No. LIST OF ANNEXES Annex 1 - Tariffs and Generation Table 1-1 - Monthly Electricity Tariffs of the Interconnected System ........ .. ............... 44 Table 1-2 - Monthly Electricity Tariffs of the Isolated Systems ............. .. ............... 45 Table 1-3 - ENEE's Electricity Generation ................ ... 46 Annex 2 - Organization Figure 2-1 - ENEE's Organization Chart .... .................. 47 Figure 2-2 - El Cajon Power Project Organization Chart ...... 48 Annex 3 - Market Table 3-1 - ENEE - Sales Growth by Geographic Areas ......... 49 Table 3-2 - ENEE - Electricity Consumption and Number of Customers in the Interconnected System ........ 50 Table 3-3 - ENEE - Total Sales Statistics 1973-1978 ......... 51 Table 3-4 - ENEE - Comparison of Load Forecasts EBASCO, MONENCO, Appraisal ................... . 52 Table 3-5 - ENEE - Forecast of Peak Demand and Energy Requirements, 1976-1995 ........... .......... 53 Table 3-6 - Peak Load-Capacity Balance - ENEE Interconnected System, 1979-1992 ............................ 54 Table 3-7 - Energy Balance of Generating Plants (Interconnected System) 1979-1992 ............ 55 Annex 4 - Project Description and Schedules Attachment 4-1 - Description of Project and Major Works .... 56 Table 4-1 - Program for Procurement (Bidding, Award, Deliveries) ..... ................................. 64 Figure 4-1 - El Cajon - Proposed Construction Schedule ..... 65  TABLE OF CONTENTS (Continued) Page No. LIST OF ANNEXES (Continued) Annex 5 - Finance Table 5-1 - Financial History: Income Statements, 1973-1978 ................................. .. 66 Table 5-2 - Financial History: Balance Sheets, 1973-1978 67 Table 5-3 - Financial Projections: Income Statements, 1979-1988 .............................. ..... 68 Table 5-4 - Financial Projections: Balance Sheets, 1979-1988 ................................... 69 Table 5-5 - Sources and Applications of Funds, 1979-1988 70 Table 5-6 - ENEE - Construction Program, 1979-1988 ...... 71 Table 5-7 - Schedule of Existing and Proposed Long-Term Debt 72 Table 5-8 - Forecast Long-Term Loan Disbursement Statement, 1979-1988 ........................ 73 Table 5-9 - Forecast Long-Term Debt Amortization Statement, 1979-1988 ........................ 74 Table 5-10 - Forecast Interest Charged to Income, 1979-1988 75 Table 5-11 - Forecast Interest Charged to Assets, 1979-1988 76 Table 5-12 - Financial Indicators, 1978-1988 .... ......... 77 Table 5-13 - El Cajon Project: Financing Sources ........ 78 Table 5-14 - Performance Indicators, 1979-1988 .... ....... 79 Annex 6 - Economic Analysis Table 6-1 - Independent System Optimization Study ....... 80 Table 6-2 - Sensitivity of Equalizing Discount Rate to Changes in Costs and Benefits .... ........... 81 Table 6-3 - Sensitivity of Rate of Return on Investment Program Until 1991 .......................... 82 Table 6-4 - El Cajon Project: Cost and Benefit Streams . 83 Table 6-5 - Return on Investment ........................ 84 Table 6-6 - Assumptions for Economic Comparisons ........ 85 Figure 6-1 - Difference in Present Worth of Annual Costs for 50 Years Period ......................... 87 Annex 7 - Selected Documents and Data Available in the Project File 88 MAP - IBRD 3745 R5 .............................................. 90  HONDURAS STAFF APPRAISAL REPORT ON EL CAJON POWER PROJECT EMPRESA NACIONAL DE ENERGIA ELECTRIC (ENEE) 1. THE SECTOR Energy Use and Resources 1.01 In 1976, Honduras per capita energy consumption ranked second lowest among the six nations of the Central American isthmus (Panama ranked highest, with a consumption of 914 kg of petroleum equivalent per capita, compared to Honduras' 354). The country uses four primary energy resources. petroleum, hydro power, wood/charcoal and bagasse. The Economic Commission for Latin America (ECLA) estimates that gross energy consumption in 1976 amounted to about 1,115,000 tons of petroleum equivalent (TPE) of which 44% was provided by petroleum products, 13% by hydroelectric power stations, and the balance from non-commercial sources. All liquid fuel requirements are currently met by imports of reconstituted crude, refined in the Texaco refinery at Puerto Cortes. The role of hydro power has grown rapidly since 1970 and will expand further with the recently completed Rio Lindo power plant extension, the Nispero Power Project and the proposed El Cajon hydro power project. However, Honduras will still continue to be heavily dependent on fuel imports. The table below shows the historic change in consumption patterns, including the substantial relative increase in hydro power use. Gross Energy Consumption Percent of Total Non-Commercial Primary Energy-TPE (thousands) Commercial Wood Total Imported Local Total Petroleum Hydro Charcoal /a Bagasse 1950 290 34 256 100 12 .. 77 11 1955 382 97 285 100 26 .. 65 9 1960 512 186 326 100 36 1 56 7 1965 632 229 403 100 37 5 52 6 1970 895 390 505 100 44 7 43 6 1975 1,068 457 611 100 43 13 39 5 1976 1,115 489 626 100 44 13 38 5 /a Although the percentage has decreased, quantity has almost doubled from 1950 to 1976. Less than 1%. Source: ECLA.  1.02 The consumption pattern of the main forms of commercial energy-- hydro electricity, fuel oil, diesel oil, gasoline, kerosene and liquefied petroleum gas (LPG)--is shown below: Commercial Energy Consumption--(TPE, thousands) or % All Petro- % of Total Total Hydro leum Products Gaso- Kero- Bunker TPE % of Total TPE (thousands) % line sene Diesel C LPG Losses 1950 35 3 34 97 51 6 40 - - - 1955 99 2 97 98 35 3 36 23 - 1 1960 191 3 186 97 20 6 32 38 .. 1 1965 263 13 229 87 19 6 35 26 1970 455 14 390 86 18 8 38 17 .. 5 /a 1975 593 23 457 77 15 7 32 16 1 6 /a 1976 630 22 489 78 15 7 31 19 1 5 /a /a Includes use by Texaco refinery, installed in 1968. Less than 1%. Source: ECLA. 1.03 Domestic energy resources are not fully known. Government and private efforts are focussing on exploring for coal in central and western Honduras and for petroleum and gas offshore in the Caribbean. However, exploration so far has not identified deposits on a scale that could ensure their commercial development. Other alternative sources of energy are also being studied. Areas which appear to have potential for geothermal devel- opment are being evaluated. The country's forests may represent an addi- tional energy resource to be more fully tapped. The Corporacion Hondurena de Desarrollo Forestal (COHDEFOR) has proposed to use for fuel the wood waste produced by the country's sawmills. A recent study by independent consultants (Chas. T. Main, U.S.A.) suggests that modern methods of pelletizing wood waste would make steam power plants economically feasible. The 1982-1985 generation addition study, currently under way (para. 4.04), is to consider this alternative. 1.04 Honduras' most abundant and known energy resource is hydraulic power, which is believed to have a potential of 4,000 MW and an annual production capacity of about 35,000 GlWh (present annual needs are about 600 GWh). This theoretical potential was calculated on the basis of total runoff at average total head to a sea level reference. About one third of this potential has already been inventoried, and sites aggregating about 2,000 GWh annual pro- duction have been studied at feasibility level, including the proposed El Cajon (about 1,350 GWh per year) Project on the Humuya river. The proposed Borrower, Empresa liacional de Energia Electrica (ENEE), plans to update shortly the existing inventory and to prepare a prefeasibility study of the most promising site 1/ for potential development after completion of El Cajon. 1/ Currently assumed to be the Piedras Amarillas site on the Patuca river.  - 3 - Both studies will be financed by Loan 1629-HO (Nispero Power Project). ENEE is also studying possible small hydroelectric projects to expand the options available for future supply of isolated areas. Energy Sector Organization 1.05 The Consejo Superior de Planificacion Economica (CONSUPLANE) 1/ lays down the broad objectives of national energy development for the National Development Plan. The Government agencies active in the sector are the Ministry of Natural Resources (fuel resources and refinery supervision), Ministry of Economy (petroleum distribution and pricing), Ministry of Public Works and Communications (transport companies), Corporacion Hondurena de Desarrollo Forestal--COHDEFOR (wood/charcoal producers), and ENEE (electricity supply). However, there is no central entity in Honduras to plan energy policy, and adequate statistics on energy use by sectors of the economy are not available. Also, Government staff responsible for the energy sector need training. 1.06 To handle these problems, in March 1979 the Government created an advisory body to the Executive Power, which has now recommended the creation of a Ministry of Energy or a National Energy Commission, as well as further institutional measures to strengthen the sector. An agreement has also been reached with UNDP to carry out a sector review and provide training of sector officials as part of UNDP's Central American Energy Program. The review would study Honduras' prospective energy demand and supply patterns, as well as alternative sources of energy. Particular emphasis would also be placed on the design and implementation of an energy information system which should greatly enhance the ability of the Government to develop policies for the sector. Development of the Electricity Sector 1.07 Prior to the creation of ENEE in 1957, supply of electricity in Honduras was provided by isolated private and municipal systems relying chiefly on diesel generation. Tegucigalpa was served by Empresa de Agua y Luz, a government company San Pedro Sula--by the Public Utility Honduras Corporation, a company with foreign capital participation, Puerto Cortes, La Lima and Tela--by Tela Railroad Co. (a subsidiary of United Brands); and La Ceiba--by Standard Fruit Co. Other towns had mainly municipal or simply no electricity service. 1.08 At present all major cities and towns are served by ENEE through the national Interconnected System, which uses hydroelectric generation mainly. With the electric energy sector of Honduras being entirely the responsibility of ENEE, no other entity takes part in new service extensions or regulation of the sector. ENEE's role has been achieved through gradual acquisition of the municipal and private companies. Only a few small installations remain to be absorbed in the near future. 1.09 The planning of the electricity sector of Honduras is the respon- sibility of ENEE and in particular of its Planning Division, which draws up 1/ Economic Planning Council.  - 4 - the detailed investment programs. The planning and technical studies for these programs are contracted with specialized consulting firms. Currently, the quality of planning appears adequate. Bank Group Participation in the Power Sector 1.10 The Bank Group has made seven loans and two credits to the electric power sector, totalling US$110.5 million and providing a substantial part of ENEE's financing requirements. The last three projects are currently in execution. The last loan (1629-HO)--US$30.5 million--for the Nispero Power Project, consisting of 52.5 MW generating plant, distribution expansion, studies, and training, was declared effective on April 12, 1979. The major equipment components have already been ordered and bidding for the other components and other project execution is in progress. A small delay (about 4 months) in project completion is currently expected. 1.11 The Sixth Loan (1081-HO)--US$35 million--of January 27, 1975, financed the 46 MW extension of the Rio Lindo hydroelectric plant, distri- bution system improvements, rural electrification, studies, and training. The Sixth Power Project is about 90% completed and the Rio Lindo plant ex- tension was placed in full operation in March 1978, about four months ahead of appraisal schedule. With the completion of the Rio Lindo plant extension the main objective of the Sixth Power Project has been met. The CABEI-financed distribution works have been delayed about two years, now to be completed, with a larger scope, during 1981. The Bank-financed part of the project, as originally defined, did cost less than estimated at appraisal because of lower steel prices for the long penstock/pipeline and lower price escalation than assumed. The Bank has agreed that the saved funds be used by ENEE to finance the extension of 35 kV lines (additional to those already included in that project) to serve areas without electricity west of the Interconnected System. These lines will also connect the Nispero hydro-electric plant and the area of Santa Rosa de Copan with several villages to ENEE's system. CABEI's part of the Sixth Power Project has also been amended, to provide for increased ENEE's transmission system needs through 1981. With these additions, a larger Sixth Power Project would be completed by 1981, two years later than estimated at appraisal. 1.12 Over 90% of the Fifth Power Project (Loan 841-HO of June 28, 1972-- US$12.3 million--providing funds for 26 MW of diesels, an interconnection line to Nicaragua, a load dispatch system, studies and training) has been successfully completed. ENEE was unable to agree with Instituto Nacional de Energia (INE) of Nicaragua to jointly contract consulting services to design the load dispatch and communications systems. ENEE has contracted independently for such services for an expanded load dispatch and communication component to provide for its system control needs through the 1980s, including those of the proposed El Cajon Project. For the expansion, the Organization of Petroleum Exporting Countries (OPEC) Special Fund is providing US$1.7 million. The 138 kV lines for the supply of the Aguan Valley (originally included in the Fifth Power Project) have been deleted, since USAID is now financing a compre- hensive rural electrification project for the Valley (para. 1.25). The modified Fifth Power Project is now expected to be completed in mid-1981.  1.13 The four earlier projects--with loans/credits totalling US$32.7 million--have been successfully completed. Together they provided for (a) 94 MW thermal and hydro power generation additions, including the first two stages of the Lake Yojoa-Rio Lindo hydroelectric development (30 MW at Canaveral and 46 MW at Rio Lindo); (b) transmission expansion (particularly under the Fourth Power Project); and (c) distribution expansions. The Project Performance Audit Reports for ENEE's Third and Fourth Power Projects (Sec. M75-411 of May 30, 1975 and Sec. M78-489 of June 5, 1978, respectively) indicate that both projects were implemented without noteworthy problems and that the purposes of both projects were fully achieved. The major lesson derived from these projects is that ENEE's load forecasting required improve- ment. This problem and minor weaknesses mentioned in the Reports (ENEE's need to continue training programs, improve administrative efficiency, and reduce accounts receivable) have been addressed in the Nispero Power Project. 1.14 Further participation by the Bank Group in helping the Honduran energy sector development would be aimed at: (a) reducing the dependence of the econoray on imported fuel through construction of projects using indigenous energy resources; (b) improving the organization and planning capability in the energy and power sectors; (c) further strengthening the efficiency of ENEE and assisting in the expansion of its system; (d) improving inter- sectoral planning capacity so that ENEE investments in power would relate more than presently to projects in other sectors (water management, agriculture, industry); and (e) promoting integration of the Central American power systems. 1.15 Cooperating with the Bank in the development of the Honduran power sector are other lenders and technical assistance agencies: USAID is lending for rural electrification; CABEI--for distribution; IDB, several bilateral aid agencies, and CABEI are expected to cofinance the El Cajon hydro power project; and the Canadian International Development Agency (CIDA) is inter- ested in financing the future transmission additions to connect El Cajon to ENEE's system. klso, ECLA is preparing an interconnection study of the Central American isthmus with the assistance of consultants (Montreal Engineering Co.--MIONENCO--of Canada). As a complement to the El Cajon Project, IDB is considering to extend a separate Technical Cooperation Loan for a study on the comprehensive development of the Humuya and Sulaco river basins, part of whose hydraulic resources will be regulated by tne El Cajon dam. The specific objectives and the scope of the work would be determined by a short-term consultant specializing in this type of study, who would prepare the terms of reference. Electricity Consumption and Access to Service 1.16 Between 1967 and 1977 ENEE generation grew at an average annual .rate of 15.1%, while CDP grew 4.0%. The resulting annual growth rates for generation per unit of GDP and generation per capita were 10.6% and 12%, respectively. Annual net generation per capita (about 178 kWh in 1976) remained low compared with other Central American countries: Costa Rica (762 kWh), Nicaragua (385 kWh), El Salvador (262 kWh), and Guatemala (162 kWh). About 70% of ENEE's load is industrial-commercial which con- tributes to the high annual system load factor of about 65%.  - 6 - 1.17 Access to electricity is available only to about 22% of the total population, living mainly in urban centers in the more densely populated part of the country. This is about double the access of 11% during 1968. Overall, ENEE is supplying electricity to about 600,000 people (about 75% of the inhabitants of the areas served). Only 5 out of 26 towns supplied have a higher percentage of population served: San Pedro Sula (96%), Puerto Cortes (85%), Santa Barbara (83%), La Ceiba (77%), and Tegucipalga (76%). Even though most of the population lives in small population centers in remote areas, and a large effort will be needed to provide them with electricity in the future, ENEE expects to make electricity available to about 37% of the total population by 1986. By 1983 alone, the number of costumers is expected to increase to about 181,000 as a result of the distribution facilities and rural extensions being built and those included in the Nispero Project. 1.18 To increase the number of electricity users, ENEE has the following policy: (a) A low monthly minimum bill of US$1.25 has been established, which gives the customers the right to use up to 20 kWh. I/ This price makes electricity competitive with other sources of lighting available to the smallest customers. (b) A connection policy is being applied under which new customers will not be charged a connection fee whenever the cost of connection is less than US$150. When this amount is exceeded the customer may amortize, without interest, the excess over a 24-month period. (c) Based on the policy described in (b), new population centers which request a connection are not charged if the cost of the connection averages less than US$150 per customer connected. Otherwise, the excess may be amortized over a 24-month period. National Electrification 1.19 ENEE concentrated during its initial years on serving the major urban centers, thus obtaining a sound financial position. In 1971, a rural electrification program was drawn up, based on a review of 23 potential market areas. Six priority markets 2/ close to the Interconnected System were selected for development. With Bank Group financing, ENEE has built about 270 km of 35 kV rural lines and related distribution facilities in these areas. ENEE is now undertaking the electrification of the Aguan Valley, where the Government is implementing an extensive program for the development of the area. In addition to agro-industry and sawmills, the Aguan Valley Rural Electrification Project will benefit 25,000 low-income families. About 610 km primary 35 kV and 550 km of secondary distribution lines, 200 km of 138 kV transmission lines, five 138/35 kV substations totalling about 26 MVA, and 20,000 meters will be installed with the help of a US$10 million USAID loan and ENEE/Government counterpart funds of US$5.6 million. 1/ About 20% of ENEE's customers fall into this category. 2/ La Paz, Valle, Francisco Miorazan and Choluteca; Choluteca and El Paraiso; Cortes and Yoro; Atlantida; Yoro and Colon; and Comayagua and La Paz.  - 7 - 1.20 Undertakings in connection with the Nispero Power Project will extend ENEE's Interconnected System into western rural areas now partly supplied by isolated systems (with the largest at Santa Rosa de Copan). Extension of the interconnection to these areas will bring service to about 17 villages over some 132 km of 35 kV lines and supply about 5,500 households initially (about 25,000 mostly low-income people). Loan 1629-HO for the Nispero Power Project provides funds for preparing a new National Electri- fication Plan for the mid- and long-term (para. 4.05). Tariff Levels and Structure 1.21 By law ENEE has the right to set its own tariffs. At the end of 1974, R.W. Beck & Associates (USA) completed a tariff study based on accounting costs. This study recommended substantial increases in the tariffs for various service categories (particularly the large consumers, at that time with fixed- price contracts) and a general increase in basic tariffs levels, averaging 25%. It also recommended the application of a fuel-cost adjustment clause designed to compensate for changes in the cost of fuel. As a condition for Loan 1081-HO, the proposed increase was put into effect in February 1975. The fuel adjustment clause was implemented in 1977 when fuel costs increased notably in the operating cost mix. Since then ENEE has increased its tariffs twice, in June 1978 by 10% and in MIay 1979, by 12%. Present tariffs are shown in Annex 1, Tables 1-1 and 1-2. Average revenues and rates of return over the past ten years are discussed in para 5.04. In US cents per kWh sold, the average revenues were 3.72 in 1973 and 4.93 in 1978. Most of ENEE's 1979 tariffs fell within Central American averages. However, for large industrial consumers above 100,000 kWh monthly (corresponding to 195 kW demand at a load factor above 70%), ENEE's tariffs were about the lowest in the region; commer- cial tariffs were also low. 1.22 In 1978, ENEE engaged Societe Francaise d'Etudes et de Realisation d'Equipements Electriques (SOFRELEC--France) for a study of ENEE's power tariff structure based on long-term marginal cost criteria. This study, already completed, was financed by Loan 1081-HO. The study confirms that the present tariff structure favors large industrial consumers. Based on it, ENEE has prepared a satisfactory program for tariff structure revision and has already placed orders for the metering equipment required. Constraints on Sector Development 1.23 The major constraints at the energy sector level are the lack of sector information, coordination and expertise in policymaking. The UNDP- sponsored exercise would help find solutions to alleviate the country's dependence on imported fuel (which will continue to remain high to the mid- 1980s) through increased exploration of energy resources. 1.24 Within the power sector, ENEE will have to continue its efforts to increase and strengthen the staff in order to undertake its very large expansion program. The Organization and Management Study (para. 2.04), and the training combined with the reinforcement of ENEE management (paras. 2.02, 2.10 and 4.08) provided through the proposed Project, would assist these efforts.  1.25 The large financial requirements of the El Cajon Project and possible future large hydro power projects which would follow it immediately, could place a heavy financial burden both on ENEE and the economy. Should the financial requirements of such projects increase substantially above those now projected, shortage of funds would slow the implementation of a National Electrification Program. Over the longer term, financial requirements might be reduced through greater reliance on regional interconnection of the national power systems of the region. The ECLA interconnection study (para. 1.15) is proceeding well after initial delays resulting from the need to arrange financing. It is expected to be completed in early 1980; its results should provide a framework for planning future generation expansion in the six countries covered, over the next five years. 1.26 The remoteness and dispersion of rural population centers, com- bined with their rather low level of productive activity and income, will continue to handicap the extension of electricity service to them because they have limited prospects of becoming economically viable.  - 9 - 2. THE BORROWER Legal Structure 2.01 The borrower of the Bank loan 1/ would be the Empresa Nacional de Energia Electrica (ENEE), an autonomous public utility owned by the Govern- ment of Honduras. ENEE was created in 1957 as a result of the merger of Empresa de Agua y Luz de Tegucigalpa, then an agency of the Ministry of Development, and several utilities which operated isolated systems. Water supply, for which ENEE was originally also responsible, was transferred to a newly created autonomous institution, Servicio Autonomo Nacional de Acueductos y Alcantarillados (SANAA), in 1961. 2.02 During project appraisal, agreement was reached on the need to expand ENEE's Board membership, incorporating the President of the Central Bank and the linister of Finance both of whom have had, and will continue to have, direct participation in the financing arrangements for the project. The amending decree (April 1979) provides that, in addition to the two officials mentioned above, the Board shall be composed by the Ministers of Communications and Public Works, of Natural Resources, and of Planning and by a representative from the private sector. This change should speed up the decision making and government clearance processes, improving ENEE's efficiency. Organization and Mlanagement 2.03 ENEE's management is entrusted to a General Manager assisted by four Deputy Managers, respectively responsible for (a) Administration/ Finance, (b) Operation, (c) Engineering, and (d) Construction and Special Projects. There is also an Economic Planning and Project Analysis Division which provides staff function support to the General Manager. The current organization chart is shown in Annex 2, Figure 2-1. 2.04 Further strengthening of ENEE's and middle upper management is, however, required, particularly for building the El Cajon Power Project. ENEE has engaged Arthur D. Little (USA) to carry out an Organization and Management Study with financing from Loan 1629-HO. The study is now underway. The consultants first partial report, covering the organizational arrangements for the Project, has been reviewed by the Bank. Its recommendations on the subject are reflected in the organizational arrangements made. 2.05 Special organizational arrangements are being made by ENEE for the Project (Annex 2, Figure 2-2), since neither ENEE nor its staff have had experience in the construction of hydroelectric projects the size of El Cajon. A Project Unit having an appropriate mix of expatriate and local staff has been set up under a Director reporting directly to ENEE's General MIanager. In view of ENEE's limited experience with very large civil 1/ The Borrower for the IDA credit would be the Government which would onlend the proceeds to ENEE.  - 10 - works, the Project organization also includes an Engineering Mlanagement (Technical) and a Financial Advisor to the Project Director, in addition to the engineering consultants' and the engineering consulting board (paras. 4.14-4.16). Both advisors have already been appointed and will participate in bid evaluation and contract negotiations. Agreement has also been reached with ENEE on: (a) the timetable for organizing the Project Unit and engaging other key personnel for Project execution 1/, and (b) maintenance, during Project execution, of an adequate Project Unit whose key staff would be satisfactory to the Bank. Staffing 2.06 As of October 1978, ENEE had 1,543 employees in operations, with a ratio of 1 employee per 71 customers served. ENEE has been able to steadily improve this ratio despite substantial increases in its service area (in 1973 it had 1 employee per 54 customers served). Of ENEE's staff about 4% are professionals, 7% technicians, 21% non-professional administrative employees and 43% are skilled and 24% unskilled laborers. The Organization and Management Study will examine in depth staffing requirements, particularly at top and middle management levels especially with a view to ENEE's projected rapid growth rates. 2.07 ENEE has followed the policy of maintaining competitive salaries for higher level staff. General salaries are negotiated with a strong company union; the present labor qontract expires at the end of 1980, it provides for annual wage increases averaging about 7.5% per year 2/. To ensure that ENEE will pay salaries sufficient to attract suitably qualified personnel (especially taking into account the limited breadth of the local market) ENEE agreed with the Bank to request its external auditors (Price, W4aterhouse & Co.) to update a salary study taking into account the special needs of the El Cajon project. 3/ The results of this update generally confirm that professional salary levels are adequate and agreement was reached on further compensation policy measures for certain personnel categories, as recommended by the study. Training 2.08 ENEE has given considerable attention to training its staff. It has sent approximately 100 technical and administrative staff abroad for this purpose and has also received technical assistance from utilities in Europe, the Republic of China, and North and South America. The foreign cost of the 1/ Engagement of a financial administrator for the project has been made a condition of loan effectiveness. 2/ In October 1979, the union requested an additional wage increase of 30% to cover recent cost of living increases. After intensive bargaining, the union settled for an increase averaging about 12%, effective January 1, 1980. 3/ In March 1977, ENEE's external auditors submitted a salary evaluation study for ENEE's management and professional staff. In general, ENEE's salaries were then found to be in line with the market.  - 11 - programs was and is mainly financed by Loans 841-110, 1081-Ho and 1629-HO. To establish further training needs, a survey of ENEE's occupational structure and a proposed training program were completed in November 1977 by the Instituto Nacional de Formacion Profesional (INFOP) with assistance from the International Labor Organization. The survey included a job evaluation in all ENEE depart- ments and identified areas where training is required. ENEE is implementing INFOP's recommendations by setting up a training center in Tegucigalpa and organizing two programs with financial assistance from the above loans, to train staff to serve as assistant electricians and to provide literacy training for all ENEE employees who have not completed primary school. 2.09 Several institutions are assisting ENEE's training efforts. ENEE places middle level technical and office staff in special training courses offered by INFOP. ENEE's staff receives training in design and construction of transmission lines, maintenance and operation of hydroelectric power plants and geotechnical and hydrological techniques at the United States Bureau of Reclamation. Comision Federal de Electricidad (Mexico) trains ENEE's staff in operations and maintenance techniques, especially hot line maintenance of transmission and distribution lines and safety procedures. The Taiwan Power Company has sent a group of specialists to Honduras to train ENEE staff in the following areas: (a) small hydroelectric and multipurpose projects; (b) power system planning; (c) power system operation; and (d) diesel, gas turbine and hydroelectric power plant maintenance. 2.10 W4hile the Project does not include special funds for a training component, substantial training benefits will result to ENEE during Project execution. The Project engineering consultants, Motor Columbus (MIC), would establish a training program for ENEE's counterpart professionals, in the main engineers, as assistants to the consultants' specialized professional field staff (para. 4.16). ENEE engineers would also assist MC, at its head- quarters in Switzerland, in the preparation of construction drawings and detailed engineering for El Cajon. Other training by the consultants will focus on construction supervision of civil works and erection of equipment, instrumentation systems for the dam and the underground powerhouse, and factory inspections during fabrication of goods for the Project. Management Systems 2.11 ENEE's management systems are reasonably satisfactory; and manage- ment consultants have been engaged, with Bank financing under prior loans, to improve them. In 1974, R.W. Beck and Associates (Beck-USA) was engaged to develop computer systems for billing, payroll, inventories and general accounting purposes and, as of 1977, the whole accounting process has been computerized. Presently, ENEE prepares monthly income and budget control reports and is developing methods to improve data quality and speed of pre- paration. ENEE also operates a computer model for financial planning, pre- pared for them by 'IC.  - 12 - 2.12 Since 1976, ENEE, based on Beck's recommendations, has been intro- ducing a Management by Objectives system, but has met with difficulties in achieving a higher degree of delegation of responsibilities. This is one of the issues which the Organization and Management Study (para. 2.04) is addressing. ENEE has agreed to exchange views with the Bank on the recommenda- tions of the study and its proposals for putting them into effect by October 30, 1980 (December 31, 1979 under Loan 1629-HO), to introduce such changes in these proposals as the Bank may reasonably request, and to implement them starting not later than March 31, 1981. Accounting and Audit 2.13 ENEE's accounts are kept in accordance with generally accepted accounting principles. The accounting code is based on the United States Federal Power Commission Uniform System of Accounts. Internal control is carried out by an internal audit unit which reports directly to the Board of Directors and also provides services to the General Manager. Previously, the scope of the work of this unit had been limited. ENEE's external auditors have recently prepared an internal auditing manual, and ENEE has been engaging the staff required to enable the internal audit unit to perform effectively its functions as specified in the manual. The internal audit unit is now fully operational. 2.14 ENEE's external auditors (Price, Waterhouse, and Co.) work has been satisfactory. ENEE has agreed to continue presenting financial statements, audited by independent auditors acceptable to the Bank, within four months after the end of each fiscal year. During negotiations, agreement was reached on the scope of additional information to be included in the audited financial statements 1/, as well as on changes on the presently agreed method of asset revaluation (para. 5.05). 2.15 The Comptroller General of the Government of Honduras carries out an additional audit of ENEE's operations, which includes an annual management review. Commercial Functions 2.16 ENEE is currently engaged in improving the management of its com- mercial functions. Based on the recommendations of a recent study by Beck, ENEE has created a commercial division under the Deputy Manager for Administration/Finance and appointed the Division Chief. The Bank and ENEE have agreed on a program for the full implementation of the consultants recommendations and on the timetable for the program. 2.17 Despite the shortcomings stemming from the previous lack of central- ized control of its commercial functions, ENEE's billing and collection expe- rience has been generally satisfactory. Bills for electricity are distributed 1/ Such information has already been submitted for FY 1978.  - 13 - monthly and must be paid within 15 days. Payment may be made at ENEE's offices, which are somewhat lacking in adequate facilities, or through banks. As of December 31, 1978, gross accounts recei.vable from electricity consumers represented about 65 days of sales. ENEE maintains a reserve for bad debt losses which it increases annually by 1% of the total billings to the private sector. The reserve is judged to be adequate. 2.18 Implementing a provision of the Guarantee Agreement for Loan 1081-HO, ENEE signed an agreement with SANAA for the payment of SANAA's overdue accounts. This agreement is being complied with satisfactorily. ENEE's collection experience with governmental and other public sector agencies is generally satisfactory, although in the past problems have arisen with collections from municipalities. To allow ENEE's collection experience to be monitored during project execution, the average collection period for public sector receivables has been included in the project performance indicators. Insurance 2.19 ENEE has insured its fixed assets against various risks. It does not engage, however, in any form of risk analysis nor is it presently admin- istratively staffed to do it. Present insurance coverages represent about 11% of the revalued cost of fixed assets, and seem insufficient vis-a-vis normal figures ranging between 25% and 40%. Consequently, ENEE agreed (under Loan 1629-HO) to engage consultants to review its policy on insurance and to imple- ment, after discussion with the Bank, the resulting recommendations. Their report is now expected by April 1980. It has been agreed, therefore, to change the date for implementation of the agreed recommendations from Septem- ber 30, 1979 to September 30, 1980. 2.20 Given its presently limited expertise in the field of risk manage- ment, ENEE has engaged a specialized insurance consultant (Sedgwick, Forbes, Inc., UK) to determine the most suitable insurance coverage for the Project during and after construction. Sedgwick Forbes has provided advice on the handling of responsibility and insurance matters in the contract signed with the project consultants, as well as on the tender documents.  - 14 - 3. THE MARKET AND MEANS TO MEET IT Market History and Characteristics 3.01 The Honduran economy expanded by an average of about 4% annually in real terms during 1963 to 1973, followed by no growth in 1974-1975 because of the damage from hurricane Fifi to agricultural production capacity and a drought in mid-1975. The economy rebounded sharply in 1976-1978, when the annual GDP growth rate was about 7.4%. During these periods, ENEE elec- tricity sales grew at average annual rates of 23% in 1963-1973, 15% in 1974- 1975, and 14.6% in 1976-1978. Annual electricity sales growth by major ser- vice area during 1965-1977 is shown in Table 3-1. 1/ The trend of sales for the Interconnected System by major consumer category is given in Table 3-2. 2/ 3.02 The table below summarizes the history of annual generation, demands, load factors and coincidence factors. Recently, the annual load factor has varied from 61.7% in 1972 to 67.4% in 1974 when it was exceptionally high because the annual maximum demand was depressed as a consequence of hurricane Fifi. System losses (in transmission and distribution) ranged from 11.0% to 15.5% during 1967-1977; they were about 14.3% in recent years. ENEE-Interconnected System History of Maximum Demand, Load Factor and Coincidence Factor Total Generated Maximum Demand in MW Annual Load Coincidence Year (GWh) Noncoincident Coincident Factor in % /a Factor in % /b 1967 153.0 29.98 29.8 58.6 99.4 1968 185.8 37.67 38.0 55.8 n.a. 1969 218.6 41.32 39.4 63.3 95.4 1970 242.7 46.42 47.3 58.6 n.a. 1971 272.7 54.51 50.3 61.9 92.3 1972 309.9 63.04 57.4 61.7 91.0 1973 360.8 67.05 64.0 64.4 95.4 1974 433.7 76.65 74.8 67.4 97.6 1975 483.6 88.33 83.7 66.0 94.8 1976 540.2 100.00 94.8 65.1 94.8 1977 623.9 112.24 106.4 66.0 94.8 1978 692.1 131.00 123.5 64.6 94.3 /a Annual average demand/coincident maximum demand. lb Coincident maximum demand/noncoincident maximum demand. Source: ENEE. 1/ Table and Figure references in this section refer to Annex 3. 2/ Detailed information on consumer composition, electricity sold (in kWh and Lempiras), and average revenue by consumer category is shown in Table 3.3.  - 15 - Existing Supply Facilities 3.03 In addition to about 191 MW in 2 hydro, 3 diesel and 2 gas turbine power plants in its Interconnected System, ENEE has approximately 10 MW installed in isolated diesel stations. ENEE's generating plant is summarily described below, indicating that 61% represents hydroelectric, 25%--diesel, and 14%--gas turbine power plants. ENEE Generating Plant Nominal No. Unit Total Annual Energy Installation of Size Capacity Firm Average Date Units MW MW GWh GWh Hydroelectric 122 594 /f 656 Canaveral 1963 2 15 30 151 If 166 Rio Lindo 1970 (Nos. 1&2) 2 20 46 /d 284 Tf 294 1878 (Nos. 3&4) 2 20 46 /d 159 If 196 Diesel-Heavy Fuel /a La Ceiba 1974 4 6.65 26.6 186 186 Diesel-Light Diesel Oil /b 14 62 62 Santa Fe 1969 4 2 10 44 44 San Lorenzo 1970 2 2 4 18 18 Gas Turbine /c 28 73 73 La Puerta 1970 1 15 15 39 39 Miraflores 1972 1 13 13 34 34 Total Interconnected System 190.6 915 977 Isolated Diesel Stations 10.0 /e /a Energy at a plant factor of 80%. lb Energy at a plant factor of 50%. /c Energy at a plant factor of 30%. Td Available capacity 15% higher than nominal capacity. /e Approximate capacity. /f Primary energy. The two hydro power plants are downstream from Lake Yojoa which provides annual storage. The Interconnected System has 564 km of 138 kV and 200 km of 69 kV lines. The 138 kV system is arranged in a ring (Rio Lindo, La Puerta, Bermejo and El Progreso substations) to which the two lines to Tela/La Ceiba and to Canaveral/Siguatepeque/Comayagua/Tegucigalpa area/Pavana/Nicaragua are radially connected (see Map). The line linking ENEE to the Nicaraguan power system has been built for future 230 kV operation. There are 10 major trans- mission substations with a total installed capacity of about 562 MVA, 221 MVA to transform to subtransmission level (at 69 kV and 34.5 kV) and 202 MVA to distribution level (34.5, 13.8, 4.16, 2.4 kV).  - 16 - Forecast of Requirements 3.04 The outlook for Honduran economic growth is favorable for the mid- and long-term. Basic agricultural and related production capabilities are expanding rapidly and export volumes have been increasing significantly. Honduras has a relatively low foreign debt ratio compared with other Latin American countries. Continuing inflows of development capital are expected to assist in the financing of investment requirements. A relatively high level of economic growth is expected during 1978-1983. For 1979-1983, it is presently estimated that the average annual growth rate of real GDP may be about 5%, which would be above the 1960-1965 average of 4.3% 3.05 Based on recent market studies, generation requirements in the Interconnected system are expected to grow at a rate of 11.7% per annum during 1979-1988. The load forecast used for the appraisal of this Project was prepared by EBASCO in mid-1976, in connection with a System Optimization Study (para 6.01). The forecast was revised and updated in July 1978 by Montreal Engineering Co. (MONENCO) in connection with the ECLA regional study; both forecasts are reasonable for the mid- and long-term. The MONENCO forecast is marginally lower as the comparison in Table 3-4 shows. But, as both fore- casts assume a relatively higher growth in the initial years than recent experience would lead to conclude, the appraisal is based on a more gradual growth until 1985. 1/ The sales forecast, as adjusted by the appraisal mission, is shown in Table 3-4. Program to Serve Forecasted Market 3.06 ENEE's total power and energy requirements to 1995 are shown in Table 3-5. The earliest feasible date to meet the requirements in the Interconnected System from the proposed El Cajon Power Project would be in 1986. To avoid rationing of electricity, ENEE has programmed the addition of 30 MIW of diesels in 1982 and of 22.5 MW in 1983; this is essentially based on the study by EBASCO. However, a more detailed feasibility study should establish if such additions represent the least cost solution (para. 4.04). 1/ EBASCO's and MONENCO's forecasts included the analysis of economic and social factors which can be expected to influence the country's long-term electricity requirements. The factors included historical rates of economic growth and plans for future development and general economic outlook for Honduras and its industries. In particular EBASCO's sales forecast attempted to take into account (a) the price elasticity of demand of electricity, (b), the possible application of incremental (marginal) rates, and (c) the impact of irrigation loads. EBASCO analyzed in detail ENEE's sales records for 1966 through early 1976, together with economic and demographic data, and held discussions with knowledgeable government and industry officials, other economic and business information sources and major ENEE customers. In addition, correlations between the growth of the economy and ENEE's energy sales were developed by EBASCO and MONENCO and econometric forecasts were made, based on assumed future economic growth rates.  - 17 - 3.07 A balance of peak load and annual average load (energy) vs. supply for the period 1979-1988 is shown in Tables 3-6 and 3-7, indicating acceptable reserve margins through 1989, when ENEE's next major project would have to be commissioned (unless arrangements can be made for import- ing electricity from other Central American countries). The annual supply available from El Cajon was estimated by MC on the basis of a three-year period for filling the reservoir. 3.08 The basic forecasts in this report do not assume any so-es of surplus power to other Central American countries. As shown in Table 3.7, by 1986 internal market needs will (under average hydrological conditions) practically absorb all hydro generation capacity. Because of its large size compared to Honduras' home market, the Government has always considered El Cajon to be a project of regional interest. Negotiations have therefore been conducted with both Guatemala and Nicaragua with a view to selling any possible surpluses available during the first years of the Project's operation. A third possibility for placing surplus power would be sales to Costa Rica through Nicaragua. 1/ However, the most obvious market would be Nicaragua which is already intercon- nected with ENEE's system. Discussions had been underway between ENEE and INE (formerly ENALUF) for some time. The recent civil war and major political changes in Nicaragua, however, have delayed the decisions at the highest levels of government required to arrive at concrete arrangements. 3.09 The most promising market for sales to Guatemala would be in that country's Atlantic system, which is presently isolated from the main intercon- nected system and which relies entirely on thermal power. In 1977, the Government of Guatemala indicated preliminary interest in the possibility of interconnection between the Guatemalan interconnected system and Honduras. However, purchases from El Cajon would require substantial transmission investments and supply from the main Guatemalan system might be more economical. The Guatemalan utility, Instituto Nacional de Electrification, INDE, agreed under Loan 1605-GU (Chixoy Project) to carry out a study of the transmission requirements for connecting the Atlantic system to its main interconnected system. This study could provide a useful basis for a decision by the Guatemalan Government regarding possible purchases from Honduras. 3.10 In view of the above discussion, there would be substantial advan- tages to neighboring countries from purchasing any hydroelectric energy produced in ENEE's system in excess of Honduras' own requirements. The main uncertainty associated with such exports relates to the future course of events in Nicaragua, which will affect the growth of the power market in that country and its willingness to cooperate in transfers with Honduras and between Costa Rica and Honduras. As noted in Chapter 6, export sales are not necessary to justify the construction of El Cajon. They could, however, be financially significant if the internal market fails to expand at the forecasted rates. 1/ The economic feasibility of an interconnection between Costa Rica and Nicaragua has been established, and financing for the project has been secured.  - 18 - 4. PROGRAM AND PROJECT Background and Objectives 4.01 ENEE's construction program for generation plant additions through 1985 is appropriate to meet the demand for electricity in Honduras which is expected to continue to rise rapidly. The curtailment of electricity supply which would result if El Cajon and the other facilities of the program were not built on time would be costly to the economy, it would set back industrial growth and delay extension of public electricity service to new areas as well as connection of low income consumers within the existing system. 4.02 The program is summarized below and detailed in Annex 5, Table 5-6. El Cajon accounts for over two thirds of total expenditures planned through 1985. The program's cost was estimated by ENEE, its consultants and the appraisal mission on the basis of generally prevailing prices during the third quarter of 1979, and takes account of revised Project cost estimates as of the same date. Program and project financing are discussed in paras. 5.10-5.16. 4.03 The proposed El Cajon project, discussed in detail in Attachment 4-1, 1/ and summarized in para. 4.07, was prepared over the past decade by ENEE and its consultants. El Cajon was originally identified in a 1967 hydro power survey of Honduras. A Project feasibility study was completed by Motor Columbus (MC) in 1973, and updated in December 1977. In addition, EBASCO carried out studies (financed by a Technical Cooperation Loan from IDB) of the Project's size and timing in connection with a system optimization review. The reports and documents for the above studies supplied the basis for a field appraisal of the Project by a mission in October/November 1978. 2/ Generation 4.04 All of the future increases in the demand of the Honduran Inter- connected System for electric energy are expected to be met by ENEE. It currently has an installed generating capacity of about 200 MW, with an annual production of 915 GWh of firm energy (977 GWh of average year energy), sufficient to provide supply through 1979 and, with the addition of the 30 MW Puerto Cortes diesels in 1980 and the 22.5 MW Nispero hydro power plant in 1981, through 1982. To study El Cajon's timing and possible joint development of the Honduran and Nicaraguan power sectors and define the projects that should be programmed to enter service in the period 1983 to 1988, ENEE, with financial assistance from IDB, engaged the consulting firm of EBASCO Service, Inc., New York (EBASCO). For ENEE's independent development, EBASCO's study shows that the addition of medium speed diesels for the period after 1982 and before commissioning the proposed El Cajon hydroelectric plant in 1985/1987, is the optimum development alternative. The study also shows that for the combined ENEE (Honduras)/INE (formerly ENALUF, Nicaragua) systems, the earliest possible construction of 1/ Attachment, Table and other references in this section refer to Annex 4 unless noted otherwise. 2/ A post appraisal mission took place in October 1979.  - 19 - El Cajon would have been justified since sales of Honduran surplus electric energy to Nicaragua, using the existing ENEE/INE interconnection line, would have offset the economic costs of advancing El Cajon to the earliest possible date. In any case, prior to completion of El Cajon ENEE would have to install about 52.5 MW of generating capacity to provide for the growth in demand during 1982 to 1985. The present program is based on installation of additional diesel units. The precise nature and timing of the capacity to be installed would be determined on the basis of a feasibility study for the generation development program for the 1982-1985 period to be completed by external consultants (Chas. T. Main), and submitted to the Bank by July 31, 1980. ENEE and the Government' are expected to discuss the results of this study with the Bank under the arrangements covering major investments described in para. 5.21. From 1986 until about 1989 the output of El Cajon (292 MW, and about 1,348 GWh annually) would provide an ample supply of electricity for Honduras. Transmission and Distribution 4.05 ENEE's program to expand its transmission and distribution system in the period to 1984 includes the 138 kV line from La Ceiba to the Aguan Valley with the associated stepdown substations and 35 kV distribution and subtransmission lines, 69 kV lines to connect the Puerto Cortes diesel plant and 35 kV lines to the west of the Mochito mine to connect the Nispero and Santa Rosa de Copan areas to the main inter-connected system, stepdown sub- stations at El Progreso, Canaveral, Pavana, Suyapa, San Lorenzo, Choluteca, Villanueva, Tegucigalpa area, and La Ceiba, with related reinforcements of the distribution systems, and normal expansion of distribution systems in areas served. ENEE has agreed to revise this program in light of the recommendations which would result from the National Electrification Masterplan updating study which it will prepare under the Nispero Power Project. This study would also verify the best and most economical bulk transmission system for the delivery of El Cajon output to the load centers and confirm its final cost. For the purposes of this appraisal El Cajon has been assumed to be connected by two 230 kV lines each to the El Progreso substation in the San Pedro Sula area and to the Suyapa substation in the Tegucigalpa area. ENEE and the Government did agree that the transmission facilities required for the Project will be constructed and completed by August 31, 1985. The Canadian Government has expressed its interest in principle in financing the lines. The Project 4.06 The proposed Project, described in greater detail in Attachment 4-1, consists of the El Cajon 292 MW hydro power plant on the Humuya river, near the confluence with the Sulaco river, and related consulting and other services as described below. El Cajon would produce 1,051 GWh of firm energy in a dry year and 1,348 GWh in an average year.  - 20 - 4.07 The El Cajon Power Project will consist essentially of the fol- lowing components. A concrete arch dam with a maximum height of 225 m and a crest length of 382 m. The dam will include 3 bottom outlets, each with a capacity of 630 m3/s and a crest spillway for 2,700 m3/s. An intake struc- ture and two inclined pressure shafts convey the water to an underground powerhouse with four 73-MW Francis turbine and generator units and auxil- iary equipment and thence through four 75 m long tailrace tunnels to the outlets. Ancilliary works include about 60 km of access roads, a switching substation, a diversion tunnel, and overtoppable upstream and downstream cofferdams. A reservoir will be created having a surface of 94 km2 and a maximum storage of 5.65 x 109 m3, of which about 74% would be live volume. 4.08 The main objectives of the Project are to: (a) increase the gener- rating capacity of ENEE to meet the demand for electricity projected for the period beyond 1986 and reduce, in its early years, fuel consumption in thermal generating plants; (b) contribute to the control of floods in the Sula Valley; 1/ (c) regulate the flow of the Humuya river downstream of the dam, thus enabling future irrigation projects there; and (d) strengthen ENEE's organization and management by on-the-job training of its staff as counterparts to the profes- sional staff to be provided by the consultants for the Project. Project Cost 4.09 The cost of the Project 2/--excluding interest during construction and other financial charges--is estimated (based on third quarter 1979 prices) at the equivalent of US$493.2 million including provisions for physical contingencies and for price escalation. A summary, by major categories, is shown below. 10 Lempiras Equivalent 10 US$ Local Foreign Total Local Foreign Total Land, roads, relocations, etc. 21.22 4.44 25.66 10.61 2.22 12.83 Underground powerhouse and works 31.68 86.04 117.72 15.84 43.02 58.86 Arch dam and related works 93.94 258.22 352.16 46.97 129.11 176.08 Steel hydraulic structures 0.66 27.86 28.52 0.33 13.93 14.26 Turbines and accessories --- 24.48 24.48 --- 12.24 12.24 Generators and accessories --- 31.16 31.16 --- 15.58 15.58 Miscellaneous power station equipment 0.20 7.00 7.20 0.10 3.50 3.60 Engineering and administration 14.02 22.80 36.82 7.01 11.40 18.41 Total Direct Costs 161.72 462.00 623.72 80.86 231.00 311.86 Contingencies: Physical 20.70 57.26 77.96 10.35 28.63 38.98 Price 72.72 211.98 284.70 36.36 105.99 142.35 Total 255.14 731.24 986.38 127.57 365.62 493.19 1/ These floods are mainly caused by the overflows of the Chamelecon and Ulua rivers which flow downstream of El Cajon. 2/ Excluding about US$4.8 million already disbursed prior to 1979 on studies, consulting services, site preparation, and miscellaneous expenses.  - 21 - 4.10 These estimates are reasonable. They are based on an analysis by Jacobs Associates Construction Engineers (USA) of the civil works 1/ costs and construction program provided in the bid level designs of MC for El Cajon and have also been reviewed by Mr. Ralph Bloor, an engineering consultant engaged by the Bank. MC had obtained suppliers' pro forma quotes for the steel hydraulic structures, and the turbines and generators with accessories. Except for the erection of electromechanical equipment, labor--together with the purchase of land--was considered to be a local cost, as was 24% of the diesel fuel and gasoline cost (which would be purchased from local distributors). The estimates do not include taxes or customs duties, as ENEE is exempt from such payments. 4.11 Provisions for physical contingencies, in view of the advanced status of engineering for the Project are about 15% for major civil works and 5% for the provision of equipment, engineering during construction, and other items. Price contingencies were calculated using annual inflation rates of 12% in 1980, 10% in 1981 and 1982, and 8% in 1983 and 1984 and thereafter 7%. 4.12 The cost of project engineering, supervision of construction and administration has been estimated for expatriate staff on the basis of the bid submitted to ENEE by MC and of an estimate of the costs of the services of the Consulting Board (para. 4.15) and of the Technical Advisor. For local staff the cost was estimated in detail using adjusted local rates. The work force required to complete the Project engineering and administration has been calculated to aggregate 1,455 expatriate and 9,240 local staffmonths. The average foreign consultant base line cost (excluding travel and subsistence) is US$8,500/staffmonth. Project Engineering and Execution 4.13 ENEE will retain MC for further consulting services to maintain continuity in Project engineering. A new contract, has been signed for Project procurement, final engineering and design, administration and super- vision of construction and testing. 4.14 An independent Consulting Board 2/ with suitably qualified members reports to ENEE's General Manager and meets periodically to review progress and major project issues. The Board's services and those of the Engineering Management (Technical) Advisor and the Financial Advisor (para. 2.05) would be financed by the proposed loan/credit. 4.15 As described in para. 2.05, ENEE is establishing a Project Execution Unit. At its headquarters in Tegucigalpa, ENEE will take all major decisions and coordinate the activities of all groups, including those related to environment and resettlement and of the Consulting Board and the various administrative offices giving support to the Project. At its headquarters in Baden, Switzerland, MC, as consultants, will prepare the detailed final design 1/ Bids for the civil works were opened on October 31, 1979. The lower bids are in line with Jacobs' estimates. Bid award is scheduled for March 1980. 2/ Consisting of Messrs. A. Merritt (engineering geologist), J. Amorocho (hydrologist), J. Raphael (arch dam expert), and A.A. Mathews (construction management expert).  - 22 - under its own project director who will coordinate all field and headquarter activities of the consultant teams, technical departments and its own special board of consultants. At the Project site, an MC team with ENEE counterpart staff will be responsible for the supervision and construction of the Project under the consultant's resident chief engineer. He will coordinate four specialized subgroups, for civil works, electromechanical equipment, planning and coordination, and administration of site activities. ENEE agreed to retain satisfactory consultants (including an independent Board of Consultants) during Project execution and to consult with the Bank before making any substantial changes in these arrangements. 4.16 The El Cajon project studies and designs, prepared by MC under a project preparation loan from CABEI, provide a realistic basis for estimating technical characteristics, Project timetables and detailed costs. The Project construction schedule (Figure 4-1) prepared by Jacobs Associates is reason- able and takes into account the need for detailed design and engineering, coordinated administrative and construction procedures and engagement of a limited number of contractors and suppliers of goods and services. It should be noted that the designer of the Project (MC) has estimated, and continues to believe in the validity of, a somewhat shorter construction schedule (5.6 years vs. 6.3 years used for the appraisal). Bid documents are expected to be issued and major contracts awarded as shown in Table 4-1. Final con- struction designs will be prepared during the course of the Project for delivery to the contractors, manufactures and suppliers as needed. Using critical path analysis methods, it is estimated that the last El Cajon unit will be placed in operation in August 1986. To meet the completion date, the contract for the civil works for the dam (the major critical item) should be awarded in March 1980. The Bank's comments on the draft bid documents for the underground powerhouse (Lot No. 1) and dam (Lot No. 2) were taken into account by ENEE. MC has also submitted draft bidding documents for the steel hydraulic structures, turbines, generators, switchgear, transformers, high voltage cables, high voltage switchyard, auxiliary services, local control equipment, and telecommunication equipment. These items (except for switchyard equipment) will be financed and bid as shown in the next paragraph. Procurement 4.17 The cost estimate is based on what Jacobs Associates considers to be an optimum procurement packaging. This includes erection of the steel hydraulic structures (which are expected to be financed by suppliers' credits) and all other electromechanical equipment and transport of the turbines and generators in Honduras by the general contractor of the civil works for the dam (which is Bid Lot No. 2). All construction items of the Project--except for land, access road to the site, environment and resettlement--would be packaged and procured under competitive bidding as follows:  - 23 - No. of Proposed Bid Type of Item Lot /a Financing Procurement Arrangements Underground power station I Joint /b Prequalification /e ICB /f Arch dam, spillways, etc. 2 Joint /c Prequalification /e ICB If Steel hydraulic structures 3 Parallel /d Competitive bidding / - Turbines and governors 4 Parallel Id Competitive bidding /g Generators, etc. 5 Parallel Id Competitive bidding /g Generator switchgear 6 Parallel /d Competitive bidding /g Auxiliary services equipment 10 Parallel Id Competitive bidding /g Local control equipment 11 Parallel /d Competitive bidding /g Local telecommunication equipment 12 Parallel /d Competitive bidding /g /a Bid Lots No. 7, 8, 9 and 13 for connection of El Cajon power plant to ENEE's Interconnected System, including transmission lines, are part of a later ENEE project. /b IBRD/IDA, CABEI, GDC, Honduran Government. /c IBRD/IDA, IDB, Japanese Government, OPEC, Honduran Government. /d One or several suppliers. /e The Bank has already agreed with the prequalification of 15 acceptable consortia or firms from countries eligible to the Bank and IDB for Bid Lot No. 1 and with 13 for Bid Lot No. 2 of which 8 have qualified for both lots. /f International Competitive Bidding (ICB) consistent with Bank Group Guide- lines. /g Competitive bidding among suppliers willing to provide financing. Lots No. 1 and 2 were bid simultaneously in order to attract a large number of proposals from the prequalified international contractors and to obtain lowest possible combined bids for the large civil works package. The prequalified firms are acceptable to the Bank and to IDB. The civil works for Lots No. 1 and 2 represent critical path items and amount to about 85% of physical project costs. The balance represents the purchase of the hydraulic structures and electromechanical equipment (to be financed by suppliers). Honduras is presently not a member of the Central American Common Market; therefore, regional preferences will not apply. None of the goods included in the Bid lots (No.1 to 6 and 10 to 12), included in the Project except for cement (para. 4.18) are expected to be available from Honduran manufacturers. A 15% domestic preference margin would be applied to the cost of cement delivered to the Project site based on cif-Honduras port or ex-factory of the local cement plant. 4.18 The bidding documents for the civil works provide special arrange- ments for the purchase of cement, of which approximately 430,000 tons 1/ are needed: 1/ Of this amount, it is expected that about 85% would have to be delivered in 1984/85.  - 24 - (a) The civil works contractor for Bid Lot No. 2 is required to place annual contracts for cement supplies as needed; these annual contracts are to be subject to international competitive bidding consistent with World Bank guidelines for procurement, and subject to Bank review before award. (b) Payments for cement supplies would be made against documentary evidence. (c) The civil works contractor would remain responsible for logistics and quality control of cement supplies. These provisions should ensure reasonable competition for cement supply. They also relieve the contractor from the uncertainty which might otherwise prevail with respect to future cement supplies in Honduras. At present, there is only one local supplier of cement, who does not have sufficient capacity to cover these requirements in addition to the expected growth in demand by other users. A new cement plant is expected to begin production in 1982, which should allow local producers to supply the Project's needs. Under these arrangements, local industry would be able to participate in the bidding. Disbursements 4.19 The proposed disbursement percentages from the Bank Group loan/ credit accounts reflect the Bank/IDA 1/ share of the joint or parallel finan- cing 2/ of the bid lots (para. 4.17) as shown below: 1/ IDA funds would be disbursed first up to the amount shown. 2/ The percentages shown have been agreed with the co-lenders and with ENEE and the Government.  - 25 - Amount in Equivalent Thousand US$ Category Bank IDA Total (a) 42% of the foreign cost of the civil works contract (Bid Lot No. 1) for the underground works and powerhouse, excluding cement supply 20,500 4,500 25,000 (b) 36% of the foreign cost of the civil works contract (Bid Lot No. 2) for the arch dam and related works, excluding cement supply 30,000 13,500 43,500 (c) 75% of total expenditures, representing the foreign cost, of the cement supply (para. 4.18) 20,000 - 20,000 (d) 100% of total expenditure for consulting services by ENEE's Consulting Board and the Engineering Management (Technical) Advisor 500 500 1,000 (e) Interest and other charges on the Bank loan accrued to December 31, 1985 18,000 - 18,000 (f) Unallocated 16,000 1,500 17,500 Total 105,000 20,000 125,000 Retroactive financing of US$250,000 is recommended for the services, from November 15, 1978, of the Consulting Board (about US$200,000) and of the Technical and Financial Advisors (about US$50,000). 4.20 The following table shows estimated loan/credit disbursements, assuming loan effectiveness to be May 1, 1980.  - 26 - In US$ millions IBRD During Cumulative at Fiscal Year Semester End of Semester and Semester Bank IDA Bank IDA 1980 first -- -- -- -- second -- 5.3 -- 5.3 1981 first 0.4 3.0 0.4 8.3 second 0.4 5.6 0.8 13.9 1982 first 0.4 5.6 1.2 19.5 second 6.5 0.5 7.7 20.0 1983 first 6.5 -- 14.2 20.0 second 9.7 -- 23.9 20.0 1984 first 9.8 -- 33.7 20.0 second 16.6 -- 50.3 20.0 1985 first 16.7 -- 67.0 20.0 second 15.4 -- 82.4 20.0 1986 first 15.4 -- 97.8 20.0 second 7.2 -- 105.0 20.0 The closing date for the proposed loan would be February 28, 1987, shortly after the estimated completion of the Project (August 1986). Coordination with Co-lenders and Project Supervision 4.21 Since a meeting of the Bank, IDB, CABEI, the Government and ENEE in Miami in 1975, a staff of these entities and of ENEE's consulting firms and experts have worked closely on the coordination of all aspects of the prepar- ation and evaluation of the Project, laying a basis for continued coordination of activities to implement the Project. Agreements for coordination and supervision procedures have been reached, establishing the sharing of infor- mation and services of such specialists as may be attached to the offices of IDB and CABEI in Honduras from time to time. 4.22 The Bank, IDB and CABEI would have joint responsibility for Project Supervision. IDB plans to employ a qualified construction engineer in its Tegucigalpa office for following the Project closely and CABEI also intends to supervise the Project intensively. Bank supervision missions, therefore, would coordinate their work closely with the Honduran offices of IDB and CABEI especially in those matters involving cofinancing which will affect the administration of the loans.  - 27 - Ecological, Environmental and Resettlement Aspects 4.23 MC's feasibility studies include a satisfactory review of the environmental aspects of the Project and the cost estimates provide for the necessary programs. In May 1978, the Government made an Interagency Group 1/ responsible for implementing the consultant's recommendations. The General Manager of ENEE is the chairman of this Group and ENEE is coordinating the Group's activities. ENEE is currently expediting the work of the Group in the drawing up of satisfactory programs and timetables for the various activ- ities recommended. A detailed program, satisfactory to the Bank, has been agreed as a condition of loan effectiveness. The detailed program should cover: (a) the inventory of land to be flooded; (b) its acquisition; (c) resettlement and compensation of the approximately 2,000 families affected by the Project, including provision of means to maintain or enhance their standard of living; (d) reservoir clearing and protection of the watershed, fauna and archaeological treasures; and (e) a preventive health control program. The Bank has requested for its review and comments a copy of the report ENEE's consultants will prepare for IDB precedent to IDB's first disbursements of its loans. This report will evaluate the actions of the agencies in the execution of the programs and recommend further actions and passage of legislation needed to acquire land rights for the reservoir. The Instituto Nacional Agrario (INA) has prepared a census of the area to establish the precise number of people living in the El Cajon basin (estimated to be about 5,000 families) and the Bank has arranged with the Pan American Health Organization for the services of a resettlement consultant to help ENEE and INA in the final planning, to achieve a satisfactory resettlement with acceptable employment options for those affected by the flooding of the reservoir. Project Risks and Uncertainties 4.24 While ENEE has executed its recent projects satisfactorily, and the bulk of the last one (Rio Lindo expansion--Loan 1081-HO) very success- fully, a number of special measures (institutional, technical and financial) will be required for the successful execution of the large and complex El Cajon Project. Specific provisions have been taken to allow ENEE to cope with project risks, in such areas as cost estimates, financing, management, physical uncertainties, environment and resettlement. The economic risk of project slippage would be small (para. 6.03) because El Cajon completion any time during 1985 to 1987 would always result in the least-cost development; however, the financial impact could be substantial. 1/ The Group includes: Direccion General de Obras Civiles; Direccion General de Salud Publica; Direccion General de Recursos Naturales; Instituto Nacional Agrario; Corporacion Hondurena de Desarrollo Forestal; Instituto Hondureno de Antropologia e Historia; ENEE; and Oficina de Catastro Nacional--a total of 8 entities.  - 28 - 4.25 The Project is located on a geologically unfavorable site composed of karstic limestone. The designers and the independent board of consultants are fully aware of the problem and have designed the structures accordingly. The cost estimate for the civil structures and foundation works (which account for two thirds of the total cost) includes provision for uncertainties to the extent of 15% over the base cost. Earthquake hazards are receiving careful study by up-to-date methods under review by the board of independent consul- tants. The resulting dam is likely to be as safe as modern knowledge can achieve. ENEE agreed to submit to the Bank detailed inspection programs covering the dam and other Project works six months prior to their entering critical construction phases as determined by ENEE's Consulting Board and, by December 31,' 1983, for subsequent maintenance phase during Project operation. 4.26 The Project could be delayed if environmental activities do not proceed within the time allocated. There is a large number of agencies that must cooperate if progress is to be smooth, and the lenders will need to supervise their coordination.  - 29 - 5. FINANCE Introduction 5.01 Since the start of its operations, in 1957, ENEE has increased its electricity sales and expanded its generation, transmission, and distribution facilities at a rapid pace (para. 3.01-.02). The average annual growth rates over the past ten years were 12% for electricity sales and 14% for generating capacity. This expansion required a substantial investment effort, averaging about US$19 million per year 1/, which ENEE was able to manage while maintain- ing a satisfactory financial structure. 5.02 During the 1979-1986 period, ENEE's financial management will be brought to test, as financing requirements will amount to about US$865 million (of which about two thirds caused by the El Cajon project). The current financial projections (Tables 5-3 to 5-11) 2/ show that an increase to 9% from the 8% rate of return covenanted under Loan 1629-HO will be needed, in order to maintain a reasonable contribution to investment and a balanced financial structure through the Project construction period (para. 5.17). At negotiations, ENEE and the Government agreed to this increase. This will require periodic tariff increases, starting in 1980 3/. Furthermore, substantial government funding will be required. During negotiations, the Government agreed to make equity contributions totalling the equivalent of US$113.2 million, 4/ in accordance with a time schedule which will be reviewed periodically and, also, to make loans to ENEE for about US$20.5 million. Under this scheme, ENEE's debt equity ratio (which was about 49:51 in 1978) would rise to 54:46 in 1984; it would fall thereafter. This is acceptable. 5.03 Tables 5-1 through 5-5 show ENEE's historic and forecasted financial statements. The former have been recast to incorporate the principle of annual asset revaluation (to which ENEE has agreed under Loan 1629-HO) and the latter also include revaluation of work in progress for the El Cajon Power Project (para. 5.05). Earnings History 5.04 Until the 1973 increase in world petroleum prices, ENEE's tariffs --which were among the highest in Central America--enabled it to obtain a high rate of return, in excess of the 10% covenanted under the Fifth and Sixth Power Projects. ENEE's financial performance deteriorated after 1973 as its dependence on petroleum fuels increased during the construction period of the Rio Lindo hydro power plant expansion. Tariff actions taken over the period 1/ In mid-1978 constant dollars. 2/ Table and other references in this chapter are to Annex 5 unless other- wise noted. 3/ ENEE's Board has already approved the 12% average increase required for 1980, which will become effective in March. 4/ Of which US$2.5 million were already provided during 1979.  - 30 - (a 25% increase in 1975, implementation of a fuel adjustment clause in early 1977, a 10% average tariff increase in mid-1978 and a further 12% increase in May 1979) and the entry into operation of the Rio Lindo expansion allowed ENEE to gradually offset the effects of the petroleum price increase. For 1979 its rate of return on annually revalued assets is forecasted at 8%, as convenanted under Loan 1629-HO. ENEE's tariffs and rate of return have evolved as follows: Average Revenue Rate of Return (%) per kWh sold On unrevalued On annually Year (centavo) assets revalued assets a! 1969 7.2 16.0 n.a. 1970 7.3 16.1 n.a. 1971 7.5 10.9 n.a. 1972 7.5 9.9 n.a. 1973 7.3 10.3 9.4 1974 7.2 10.9 4.7 1975 9.0 9.4 6.2 1976 9.1 11.8 5.8 1977 9.8 12.9 5.8 1978 9.9 14.5 7.4 b/ a/ Bank estimates. b/ See Table 5-1, footnote (j). 5.05 For the Sixth Power Project, ENEE agreed to revalue its fixed assets on the basis of a study prepared by independent consultants. It did so in 1975 (as of December 31, 1973) but did not, nor was it under the Loan Agreement specifically required to, make any revaluations subsequently. For the Nispero Power Project, ENEE agreed to the principle of annual asset revaluation, and to incorporate the results of revaluation into its accounting records, starting with the 1978 financial statements; this provision is being repeated under the proposed loan. At negotiations, ENEE also agreed to annual revaluation of work in progress, for projects which warrant it because of their magnitude and extended construction time, such as El Cajon. Financial History 5.06 Adjusted for the effects of inflation, ENEE's assets have approxi- mately tripled over the past ten years, to US$275 million equivalent today, while the debt equity ratio has improved slightly (from 51:49 to 48:52). Government equity contributions in the period were small, so that this development basically reflects ENEE's capacity to meet a substantial part of its investment needs through internal cash generation. It also reflects, however, the fact that ENEE has carried a large amount of debt denominated in US dollars, or in currencies pegged to the US dollar and, consequently, losses due to foreign exchange fluctuations have been small relative to the increase in the fixed asset values produced by revaluation.  - 29 - 5. FINANCE Introduction 5.01 Since the start of its operations, in 1957, ENEE has increased its electricity sales and expanded its generation, transmission, and distribution facilities at a rapid pace (para. 3.01-.02). The average annual growth rates over the past ten years were 12% for electricity sales and 14% for generating capacity. This expansion required a substantial investment effort, averaging about US$19 million per year 1/, which ENEE was able to manage while maintain- ing a satisfactory financial structure. 5.02 During the 1979-1986 period, ENEE's financial management will be brought to test, as financing requirements will amount to about US$865 million (of which about two thirds caused by the El Cajon project). The current financial projections (Tables 5-3 to 5-11) 2/ show that an increase to 9% from the 8% rate of return covenanted under Loan 1629-HO will be needed, in order to maintain a reasonable contribution to investment and a balanced financial structure through the Project construction period (para. 5.17). At negotiations, ENEE and the Government agreed to this increase. This will require periodic tariff increases, starting in 1980 3/. Furthermore, substantial government funding will be required. During negotiations, the Government agreed to make equity contributions totalling the equivalent of US$113.2 million, 4/ in accordance with a time schedule which will be reviewed periodically and, also, to make loans to ENEE for about US$20.5 million. Under this scheme, ENEE's debt equity ratio (which was about 49:51 in 1978) would rise to 54:46 in 1984; it would fall thereafter. This is acceptable. 5.03 Tables 5-1 through 5-5 show ENEE's historic and forecasted financial statements. The former have been recast to incorporate the principle of annual asset revaluation (to which ENEE has agreed under Loan 1629-HO) and the latter also include revaluation of work in progress for the El Cajon Power Project (para. 5.05). Earnings History 5.04 Until the 1973 increase in world petroleum prices, ENEE's tariffs --which were among the highest in Central America--enabled it to obtain a high rate of return, in excess of the 10% covenanted under the Fifth and Sixth Power Projects. ENEE's financial performance deteriorated after 1973 as its dependence on petroleum fuels increased during the construction period of the Rio Lindo hydro power plant expansion. Tariff actions taken over the period 1/ In mid-1978 constant dollars. 2/ Table and other references in this chapter are to Annex 5 unless other- wise noted. 3/ ENEE's Board has already approved the 12% average increase required for 1980, which will become effective in March. 4/ Of which US$2.5 million were already provided during 1979.  - 30 - (a 25% increase in 1975, implementation of a fuel adjustment clause in early 1977, a 10% average tariff increase in mid-1978 and a further 12% increase in May 1979) and the entry into operation of the Rio Lindo expansion allowed ENEE to gradually offset the effects of the petroleum price increase. For 1979 its rate of return on annually revalued assets is forecasted at 8%, as convenanted under Loan 1629-HO. ENEE's tariffs and rate of return have evolved as follows: Average Revenue Rate of Return (%) per kWh sold On unrevalued On annually Year (centavo) assets revalued assets a/ 1969 7.2 16.0 n.a. 1970 7.3 16.1 n.a. 1971 7.5 10.9 n.a. 1972 7.5 9.9 n.a. 1973 7.3 10.3 9.4 1974 7.2 10.9 4.7 1975 9.0 9.4 6.2 1976 9.1 11.8 5.8 1977 9.8 12.9 5.8 1978 9.9 14.5 7.4 b/ a/ Bank estimates. b/ See Table 5-1, footnote (j). 5.05 For the Sixth Power Project, ENEE agreed to revalue its fixed assets on the basis of a study prepared by independent consultants. It did so in 1975 (as of December 31, 1973) but did not, nor was it under the Loan Agreement specifically required to, make any revaluations subsequently. For the Nispero Power Project, ENEE agreed to the principle of annual asset revaluation, and to incorporate the results of revaluation into its accounting records, starting with the 1978 financial statements; this provision is being repeated under the proposed loan. At negotiations, ENEE also agreed to annual revaluation of work in progress, for projects which warrant it because of their magnitude and extended construction time, such as El Cajon. Financial History 5.06 Adjusted for the effects of inflation, ENEE's assets have approxi- mately tripled over the past ten years, to US$275 million equivalent today, while the debt equity ratio has improved slightly (from 51:49 to 48:52). Government equity contributions in the period were small, so that this development basically reflects ENEE's capacity to meet a substantial part of its investment needs through internal cash generation. It also reflects, however, the fact that ENEE has carried a large amount of debt denominated in US dollars, or in currencies pegged to the US dollar and, consequently, losses due to foreign exchange fluctuations have been small relative to the increase in the fixed asset values produced by revaluation.  - 31 - 5.07 As of December 31, 1978 ENEE's long term debt was to the following institutions: Amount (US$ millions) % World Bank/IDA 79.6 79 CABEI 9.4 9 Central Bank of Honduras 8.5 8 Other 4.0 4 101.5 100 5.08 ENEE has, from time to time, received financial assistance from the Central Bank of Honduras, at market rates of interest. For the recently approved Nispero Power Project the Central Bank agreed to provide up to US$4.4 million bridge financing to avoid Project delays until the Bank loan became effective. Similar arrangements have been agreed for the El Cajon construction period; these involve opening a stand-by revolving line of credit for an initial amount of US$5.0 million; this amount to be revised from time to time based on ENEE's cash budget. The present forecasts indicate that ENEE is likely to require this facility during 1980-1986. ENEE has also agreed to submit annual cash budgets to the Bank. 5.09 ENEE has tended to operate with a small, and on occasions negative, working capital. Over the past few years this has become more noticeable, as the company has been able to progressively reduce its collection periods. Thus, ENEE has little financial margin to face unforeseen circumstances (such as major foreign exchange fluctuations affecting its debt service payments). The standy-by credit arrangements discussed in para. 5.08 should provide ENEE with an additional margin of safety while allowing it to maintain fairly low liquidity levels. To enable ENEE to use its funds in an efficient manner, at negotiations the Government agreed to authorize ENEE to make short term placements of funds, at rates of interest in line with its own cost of funds. Investment and Financing Plan 5.10 During the El Cajon construction period (1979-1986), f) nancing requirements for the Project are estimated at US$582.7 million.- Other construction and working capital requirements result in total financial needs of US$865.5 million. The investment and financing plan (detailed in Table 5-5) is summarized as follows: 1/ Not including about US$4.8 million estimated to have been incurred prior to 1979.  - 32 - Investment and Financing 1979-1986 millions Lempiras Equivalent US$ Percentages Financing Requirements Construction program (including interest during construction - IDC) _67_0.0 835.0 96 Existing Bank Projects: Fifth Power Project 6.8 3.4 -- Sixth Power Project 7.1 3.5 -- Nispero Power Project 100.3 50.2 6 El Cajon Power Project 1,165.4 582.7 67 Other projects /a 390.4 195.2 23 Increase in working capital 61.1 30.5 4 Total Requirements 1,731.1 865.5 100 Sources of Funds Gross internal cash generation 774.3 387.2 Less: Debt service (excluding IDC) 450.0 225.0 Net internal cash generation 324.3 162.1 19 Equity contributions 234.0 117.0 14 Borrowings 1,172.8 586.4 67 Existing loans 114.7 57.4 Loans proposed for the Project IBRD/IDA 250.0 125.0 IDB /b 190.0 95.0 CABEI 61.2 30.6 OECF (Japan) 66.0 33.0 CDC (UK) 20.0 10.0 OPEC 15.0 7.5 Honduran Government 41.0 20.5 Suppliers 136.2 68.1 Commercial Banks 30.0 15.0 Future Loans 248.7 124.3 Total Sources 1,731.1 865.5 100 /a Includes El Cajon transmission lines and substations (US$74.3 million), interim thermal generation investments (US$40.6 million), Aguan Valley Electrification Program (US$23.4 million), start of the next major generation project in 1986 (US$4.0 million), as well as transmission and distribution expansion. /b Includes US$77.0 million from the Fund for Special Operations (FSO) and US$18.0 million from a Complementary Line obtained by IDB from private financing sources.  - 33 - 5.11 The Bank has worked closely with ENEE in developing a suitable project financing scheme. Approximately 95% of the foreign exchange cost of the civil works component of the project has been, or will be, firmed up before the proposed loan and credit are declared effective (para. 5.16). The project financing scheme stands as follows (see Table 5-13): (a) Local costs (amounting to US$127.6 million), foreign exchange costs corresponding to interest during construction not financed by the lendors 1/ (amounting to US$68.6 million), and miscellaneous foreign exchange costs (amounting to US$2.3 million) would be financed from internally generated funds and from Government equity contributions and loans (para. 5.14). (b) All other foreign exchange costs would be financed through borrow- ings according to the following breakdown: Amount (US$ million) World Bank Group 125.0 Interamerican Development Bank FSO 77.0 Complementary line 18.0 Central American Bank for Economic Integration 30.6 Overseas Economic Cooperation Fund (Japan) 33.0 Organization of Petroleum Exporting Countries 7.5 Commonwealth Development Corporaton (UK) 10.0 Suppliers 68.1 Commercial Banks 15.0 384.2 5.12 The status of the financing arrangements listed above is as follows: (a) The IDB loans have been approved by IDB's Board; effectiveness is expected in parallel with the Bank loan and IDA credit; (b) The CABEI loan has been declared elligible by CABEI's Board; (c) The Japanese Government has officially notified the Honduran Government its decision to extend an untied loan equivalent to Y 7.8 billion; 2/ 1/ The financial projections assume financing of interest during construc- tion on the Bank loan (para. 5.17) and, partially, on supplier credits. ENEE has already obtained letters of intent from several possible supplier countries confirming their willingness to finance interest during construction. 2/ At early February 1980 exchange rates, this would be equivalent to about US$32.5 million.  - 34 - (d) A loan agreement for US$3.5 million equivalent has already been signed with OPEC, an increase in amount up to US$8.5 million is presently under consideration; (e) C.D.C. is presently appraising the project, its management has indicated willingness to consider financing up to the equivalent of L 5 million 1/; (f) ENEE has received letters of intent, or other written expressions of interest from most of the major equipment supplying countries for the financing of turbines, generators and hydraulic steel structures. Several of the offers involve financing on semi- concessionary terms" 2/; (g) Swiss commercial banks have indicated their willingness to finance the Motor Columbus contract for engineering services. 5.13 The terms assumed, for financial projection purposes, for the above mentioned loans are the following: Commitment Interest Grace Amortization Fee Rate Period Period (%) (%) (number of years) IDB (FSO) /a /c 0.5 1.0 10 40 1DB (Complementary Line) /b /c 0.5 9.5 4 8 CABEI 0.75 8.75 5 15 OCEF (Japan) -- 2.0 10 40 OPEC -- 0.75 7 22 CDC 0.5 9.0 7 20 Suppliers -- 8.0 4 10 Commercial Banks 0.5 11.0 4 8 /a Also carries a 1% "flat" supervision fee. After the grace period, IDB's loan (which would be to the Government, and onlent to ENEE) would carry an interest rate of 2%. IDB requires, and ENEE and the Government have agreed, that ENEE's debt service on the loan be calculated as for IDB's ordinary loans (which bear interest at 7.5% and mature in 25 years), the differential between this amount and the debt service to the country is to be deposited in a fund and applied to the financing of social projects. /b Also carries a 0.5% "flat" fee. /c These loans have already been approved by IDB's Board. For the proposed Bank loan which would have a maturity of 20 years including a six year grace period (para. 5.17), an interest rate of 8% per year and a commitment fee of 0.75% were assumed for projection purposes. The IDA credit was assumed to be onlent to ENEE on the same terms as the Bank loan. 1/ At early February 1980 exchange rates, this would be equivalent to about US$11.5 million. 2/ Financing terms will be taken into account on supplier-financed equipment for bid evaluation.  - 35 - 5.14 Due to the very significant magnitude of its investment program, of which a substantial part is caused by the El Cajon project, ENEE will require the Government's financial assistance. At negotiations ENEE and the Government agreed that, in order to insure a balanced financial struc- ture, most of the required funds would be provided in the form of equity contributions. The total amount required is estimated at US$133.7 million. Of these, US$113.2 million 1/ would be Government equity contributions and US$20.5 million in loans 2/ to be repaid after project completion. At nego- tiations the Government agreed to provide its equity contributions per the following calendar (to be periodically revised in consultation with the Bank): 1979 US$2.5 million, 1980 US$9.0 million, 1981 US$13.2 million, 1982 US$18.0 million, 1983 US$20.0 million, 1984 US$24.0 million, and 1985 US$26.5 million. 5.15 To ensure the viability of the proposed financing scheme, Bank economic missions frequently visited Honduras during the past year to assess the country's ability to meet the projected debt service (including a reason- able allowance for cost overruns), and the Government's proposals to raise the funds required for its proposed equity contributions. The Bank also looked into the public sector investment program as a whole and overall Project macroeconomic effects. As a result of these analyses, in February 1980 a mission discussed tightening expenditure controls and further fiscal measures with the Government, which declared its intention to mobilize the additional domestic resources needed to finance prudently its ambitious devel- opment program. The Government implemented a US$40 million tax package in December 1979 and is prepared to raise power tariffs, reduce current expen- diture growth and, if necessary, introduce further reforms to the tax system. The Government is also expected to follow prudent credit policies to av 1ioa excessive pressures on the balance of payments and on prices. Further-ore, a three-year EFF arrangement negotiated in 1979 provides IMF resources in support of sound overall economic and financial policies during the implementation of the public investment program. The Government has also requested the Bank's collaboration in conducting annual revicss of the investment program and its financing because of tne large size of the program, the political uncertainties prevailing in the region, and past volatility of Honduras' export receipts due to hurricanes or price fluctua- tions in external markets. 5.16 To ensure the firmness of the financing plan, at negotiations ENEE and the Government agreed to the following conditions of effectiveness on the proposed loan and credit: 1/ Of this amount US$2.5 million were already paid in during 1979. Of the balance, the Government expects to finance US$55 million from two long term loans from the Venezuelan Investment Fund, of US$45 million and US$10 million respectively. 2/ At negotiations, the Government also agreed to request an additional US$6 million loan from the VIF which, if obtained, would be onlent to ENEE to reduce commercial bank and supplier credit financing require- ments.  - 36 - (a) all conditions of eligibility for disbursement on the IDB loans should have been fulfilled (except for effectiveness of the Bank loan and IDA credit); (b) CABEI's proposed loan shall have been approved; (c) the VIF first loan to the Government shall have been approved; and (d) satisfactory progress shall have been made on other financing arrangements. 5.17 Standard Bank lending terms for Honduras are 20 year amortization and five year grace. For the project an exception would be justified in view of the long (6-1/3) years construction period, during which ENEE will face a significant financial strain. Thus, a grace period of six years is recommended for the Bank loan. In view of the magnitude of ENEE's investment program, financing of interest during construction until December 31, 1985 (by which time the first El Cajon unit is expected to enter into commercial operation) is, too, recommended. Future Finances 5.18 The financial projections are based on the assumption that ENEE's tariffs will be adjusted to achieve a 9% return on average net revalued assets in operation (subject to the revaluation provisions specified in para. 5.05). 1/ Such return would result in tariff levels in line with marginal cost of supply, and would enable ENEE to make a 19% contribution to its 1979-1985 investment program which is reasonable in view of the magnitude of the works involved. Accordingly, ENEE has agreed to amend the existing covenant which provides for an 8% return. ENEE has also agreed to maintain the provisions of the previous Loan Agreement (1629-HO) which require it to review its revenue forecasts and submit to the Bank, before August 31 of each year, the results and measures to be taken to achieve the covenanted rate of return. Because of the lumpiness of the Project, it is estimated that, even with this rate of return, during the first years of El Cajon construction ENEE's financial structure would deteriorate somewhat and debt service coverage would fall; however, starting in 1986, when the Project is expected to come into operation, this trend would reverse and ENEE's financial position would improve substan- tially. 5.19 When El Cajon comes into operation, ENEE's rate base will increase sharply as the value of the assets incorporated would be about 1.6 times the value of net plant in operation at the end of the preceding year. Conse- quently, application of the 9% rate of return requirement would then lead to a very sharp tariff increase, which the financial projections and economic analysis show not to be required. Accordingly, during negotiations it was agreed that, if ENEE's financial situation is sound, for the first three years of operation of El Cajon the rate of return covenant would not be applied and, 1/ ENEE's Board has approved that, effective March 1, 1980, electricity rates be increased by about 12% to the level required to achieve this rate of return.  - 37 - instead, ENEE commits itself to maintain its average tariffs constant in real terms, at the level required to produce an annualized rate of return of 9% in the period preceeding the initial operation of El Cajon. 1/ 5.20 As under previous loans, ENEE has agreee to retain all earnings for investment in its facilities, and to obtain the Bank's concurrence before borrowing if its internal cash generation is less than 1.4 times its maximum future debt service requirement. 5.21 The major projects provisions of the Nispero Loan and Guarantee Agreeements (1629-HO) have been repeated. These provisions: (a) require ENEE to inform the Bank before making any capital expenditure which would increase ENEE's gross fixed assets in operation by more than 2%, and to furnish a report showing the economic justification and soundness of the proposed investment; and (b) commit the Government to ensuring that expansion of power facilities in Honduras is carried out in a coordinated manner in order to prevent waste, duplication and unnecessary investment, on the basis of economically justified programs and within the limits of ENEE's financial and managerial capacity. 5.22 The financial projections show that the debt/equity ratio would reach a maximum of 54:46 in 1983, which is considered acceptable in view of the lumpiness of the Project. Debt service coverage is forecasted to be tight through Project construction and would drop to a low of 1.0 in 1985 when Project related debt amortizations start to build up. However, this situation is forecasted to be transitory and the ratio is expected to rise to 1.3 in 1986 and to 1.6 in 1988. The short term financial position is also expected to be somewhat tight until about 1986, and ENEE will have to make use of the proposed line of credit (para. 5.08); the amounts envisaged (up to US$4 million) indicate that this should not pose any major problems. Forecasts for key financial indicators for the 1979-1988 period are shown in Table 5-12. 5.23 Undertaking a hydroelectric project of the size of El Cajon involves a substantial financial risk for Honduras. Such projects are subject to con- siderable uncertainties and the Government would have to mobilize any additional funds required by ENEE to meet cost overruns. As noted in para. 4.10, consider- able effort has been expended to ensure that the cost estimates for the Project are accurate. If, despite these precautions, cost overruns should develop, the most recent balance-of-payments forecasts show that additional commercial borrowing could be sustained without unduly impairing Honduras' creditworthi- ness and growth prospects. In the event that very large cost overruns were to be incurred, Honduras might have to request additional support from conces- sional sources in order to avoid debt servicing problems. Project slippage would also have a material impact on ENEE's financial projections; it would delay the substantial fuel economies expected from the Project and require offsetting tariff increases to meet the rate of return covenant. Slippage in the transmission works associated with the Project would have similar implications, and major fluctuations in exchange rates would lead to an increase in projected debt service requirements. 1/ This is expected to result in rates of return of 7.4% in 1987 and 8.6% in 1988. From 1989 on, the 9% rate of return would again become applicable.  - 38 - Performance Indicators 5.24 Selected indicators showing ENEE's expected achievements in the period 1979-1988 in the areas of increasing access to service, improving efficiency and maintaining an acceptable financial situation, are given in Table 5-14. They were agreed with ENEE during negotiations and will be incorporated in regular progress reports. 6. ECONOMIC ANALYSIS Least-Cost Solution 6.01 EBASCO's Optimization and Tariff Study has shown that the completion of the El Cajon Project as early as 1985--the earliest feasible year--would allow ENEE to meet, at least cost, the growing interconnected system demand for electric energy during the 1980s. The need for additional capacity in that decade and how it should be provided until 1985 was discussed in para- graphs 3.05-3.07. The expected growth during 1980-1983 would be met at least cost by the additton of 52.5 MW of the Nispero Project and during 1983-1985 by further thermal plant additions of 52.5 MW. 6.02 The EBASCO Study considered some 20 alternative generation installa- tion sequences to find the optimum hydro-thermal generation mix. In addition to El Cajon--at various dam heights, with and without staged construction-- these sequences included the installation of other hydroelectric projects in line with their feasible construction schedule. The alternative based on completion of El Cajon (with about 300 MW) in the mid-1980s was found to be less costly than all others. At fuel prices then prevailing, the second-best alternative consisted exclusively of installation of thermal plants in the 1978-1988 decade. 6.03 At the time of project appraisal, based on 1978 cost data, EBASCO also compared the all-thermal expansion with an installation sequence for El Cajon coming into operation in 1985, 1987 and 1989. For this comparison (summarized in Table 6-1 and Figure 6-1) 1/, expansion plans were modeled with the aim of minimizing the total costs of investment, operation (includ- ing fuel) and maintenance 2/. In these plans the hydroelectric energy was supplemented by oil-fired steam-electric, diesel and gas turbine units, assuming investment costs of US$680/kW and US$599/kW for the first and second steam electric unit, respectively; US$550/kW for diesels; and US$216/kW for gas turbines. The cost of fuel 3/ was assumed to be US$13.55/barrel for Bunker C and US$24.22/barrel for diesel oil. EBASCO's analysis shows that 1/ Table and Figure references in this section refer to Annex 6. 2/ EBASCO's computer programs calculated fuel costs on the basis of optimum hydro-thermal dispatch and maintenance schedules compatible with an acceptable loss-of-load probability of up to one day per year. 3/ Includes inland transport cost of about US$1.00/barrel.  - 39 - the total present value of the costs of power produced by existing and future plants is not very sensitive to the timing of El Cajon completion for dis- count rates approximating the estimated opportunity cost of capital in Honduras (about 10% in real terms): Present Value of Cost of Power at a 10% Discount Rate (as % of Minimum) Timing of Fuel Prices Assumed to Increase El Cajon Completion in Real Terms at Annual Rates of: 0% 2% 1985, 101 100 1987, 100 100 1989, vs 102 103 All Thermal 108 118 6.04 At appraisal, based on fuel prices then prevailing and a lower project cost estimate, the equalizing discount rate between the program which assumes completion of El Cajon in 1985 and the all-thermal program was estimated to be about 11.5% if fuel prices stayed constant and 14.1% if they escalated at 2% per annum in real terms (Table 6-2). Additional likely or potential benefits from an earlier completion of the Project were not considered in the EBASCO study such as (a) the reduction of flood damage in the Sula Valley by storing in the El Cajon reservoir the flood waters from the Sulaco and Humuya rivers; (b) sale of initial surplus hydroelectric energy to neighboring countries; (c) regulation of flow during dry seasons thus allowing improved river flow for Sula Valley irrigation; (d) transportation and tourism on the reservoir which would extend into presently inaccessible areas; and (e) the training and institution building aspects of the Project. These benefits, with the exception of (a) and (b), are not easily quantified. They would all, how- ever, enhance the attractiveness of the alternative which calls for the earliest possible commissioning of El Cajon, and, considering considering too the likelihood of fuel cost increases, EBASCO recommended this course of action to the Government. With the (a) and (b) benefits taken into account, the equalizing discount rate between the program which assumes completion of El Cajon in 1985 and the all thermal program would rise to about 14.3%. In November 1979, and in order to take account of design changes, world market conditions, revised project cost estimates, fuel prices and electricity sales revenue data, check calculations were made to verify the judgements reached during appraisal. These revealed that now the Project (with commissioning date shifted to 1986) is the preferred alternative up to a rate of discount of 19%. 6.05 The basic assumptions for the appraisal's economic analysis are stated in Table 6-6. The sensitivity of the equalizing discount rate to changes in the major elements of uncertainty affecting the investment choice is shown in Table 6-2 indicating that an increase in the construc- tion cost of El Cajon by 30% would reduce the equalizing discount rate between the proposed least-cost and the all-thermal program by 2.5 percen- tage points. In view of the advanced state of the detailed engineering  - 40 - of the Project the above shows a notable margin for the risk of project cost overruns. On the other hand, the equalizing discount rate could rise 2.5 percentage points if fuel costs were to increase 2% annually in real terms. As real fuel costs are expected to increase over the long term, the Project is strongly justified as the most economical alternative. The above sensitivity analysis consequently shows that the Project has been chosen on an economically sound basis. Return on Investment Program 6.06 The rate of return has been estimated as the discount rate which equates the net cost and benefit streams associated with the project over its useful life. As shown in Table 6-5, the costs include the investment and operating costs of El Cajon and the associated transmission and distribution investments required to deliver its output to consumers. The benefits were assumed to consist of the revenue produced by the sales increment and the reduction of fuel costs and other operating costs in the thermal generating plants existing by the time El Cajon comes into operation. The revenues were measured at the average 1986 tariffs used in the financial projections (deflated to 1979 price levels): L 0.116/kwh. 6.07 Based on November 1979 prices, the rate of return on investment- including estimated flood control benefits and with unskilled labor shadow priced-was estimated to be 13.5%. It should be noted that this figure still understates to some degree the economic rate of return because the revenues from the sales of electricity alone do not fully measure the social benefits of the Project to residential and public users or to the economy (by providing transportation and tourism on the reservoir, and improving river flow for irrigation) or the indirect benefits to the economy through the multiplier effect on industry and commerce, whose production and opportunities to create employment depend on readily available electricity supply, which the Project would amply supply for the 1986-1990 period.  - 41 - 7. SUMMARY OF PROPOSED AGREEMENTS AND RECOMMENDATIONS 7.01 During negotiations agreements were reached with the Government and with ENEE, as applicable, on the following principal points: (a) A program and timetable for tariff structure revision and implementa- tion (para.1.22). (b) Implementation of compensation scheme changes for certain personnel categories (para. 2.07). (c) Exchange views on the recommendations of the Organization and Management study by October 30, 1980. ENEE to implement the agreed proposals by March 31, 1981 (para. 2.12). (d) Scope of supplementary information to the audited financial state- ments to be provided with these (para. 2.14). (e) Engagement of insurance consultants for the project (para. 2.20). (f) Organization of the El Cajon project unit, consulting and advisory services required and timetable for staffing the project unit (paras. 4.05, 4.15, 4.16). (g) ENEE's transmission and distribution investment program will be revised in light of the recommendations which will result from the National Electification Master plan. The El Cajon transmission facilities will be completed by August 31, 1985 (para. 4.05). (h) Cement to be procured through placement of annual contracts, through ICB (para. 4.18). (i) Program for ecological, environmental and resettlement measures (para. 4.24). (j) ENEE will periodically furnish to the Bank detailed inspection programs for the dam and other project works (para. 4.25). (k) The Government will make equity contributions to ENEE totalling the equivalent of US$113.2 million over the 1979-1985 period, in accordance with a time schedule to be reviewed periodically. The Government will also make loans to ENEE for about US$20.5 million under terms and conditions to be agreed upon (para. 5.02). (1) ENEE will revalue work in progess for projects which warrant it because of their magnitude and extended construction time (para. 5.05). (m) Lrrangements with the Central Bank of Honduras for a revolving line of credit. ENEE will furnish to the Bank annual cash budgets (para. 5.08).  - 42 - (n) ENEE will be authorized to make short-term placements of funds at rates of interest in line with its own cost of funds (para. 5.09). (o) The Government will implement policy measures to deal with the macro-economic issues raised by the Project (para.5.15). (p) ENEE will adjust its tariffs for the sale of electricity to achieve a rate of return on revalued assests of 9% (para. 5.18). During the first three years of operation of El Cajon the Bank may agree not to apply the rate of return convenant provided however that tariffs are maintained at a constant level in real terms (para. 5.19). (q) Repetition of the covenants under previous loans to: (i) review ENEE's revenue forecasts and submit to the Bank measures proposed to achieve the agreed rate of return by August 31 of each year (para. 5.18); (ii) retain all ENEE's earnings for investment (para. 5.20); and (iii) obtain the Bank's concurrence before borrowing if ENEE's internal cash genration is less than 1.4 times the maximum future debt service requirement (para. 5.20). (r) Repetition of the provisions on major projects of the previous loan (para. 5.21) 7.02 Before declaring the loan effctive, the following conditions would have been met: (a) Engagement of a financial administrator for the project unit (para. 2.05). (b) Presentation of a detailed program regarding the handling of the environmental issues, satisfactory to the Bank, and of a copy of the report to be prepared by ENEE's consultants for IDB covering inter alia an evaluation of the environmental program, further actions required, and legislation needed to acquire land rights for the reservoir (para. 4.24). (c) All conditions of eligibility for disbursement on the IDB loans (except for the effectiveness of the proposed Bank loan and IDA credit) should have been fulfilled (para. 5.16). (d) Approval of CABEI's proposed loan (para. 5.16). (e) Approval of the Venezuelan Investment Fund first loan to the Government (para. 5.16). (f) Satisfactory progress shall have been made on other financing arrangements (para. 5.16).  - 43 - 7.03 Any change in sector legislation or in ENEE's bylaws which may adversely affect the utility's operations or its financial performance would be an event of default. 7.04 Retroactive financing for consulting services provided by ENEE's Consulting Board and by its Technical and Financial Advisors since November 15, 1978, in an amount not exceeding US$250,000 is recommended (para. 4.19). 7.05 With the above agreements, the Project constitutes a suitable basis for a Bank loan of US$105 million equivalent and an IDA credit of US$20 million equivalent. The loan would be repaid over a period of 20 years, including 6 years of grace.   -44- Table 1-1 ANNEX 1 Table i-i EMPRESA NACIONaAL DE ENERGIA ELECTRICA (ENEE) Monthly Elactricity Tariffs of the Intarconnectad System (i eEafect since Map 1979) Tariff Appli-ebility Eatr5 Minimum Change Pfwer Factor Billing Denard Primacy Service Discount TARIFF A RESIDENTIAL SERVICE Foe domestic use and for First 20 KWh or lEae - L 2.50 L 2.50 pn menth plfs Mater Reatal domestic sod cooTent.al use Seat 80 Rwh - L 0.165 per KWh wens -ommeraial c-oenm.cd baud 0ler 100 KWh - L 0.121 par EWh iE less than doneerio lbad Mnet- R-etal - L 0.50 TARIFF B GENERAL SERVICE Foe all ele-cticuenvica First 20 EWh or l-s - L 4.00 Single-phass - L 4.00 pen m-nth Thc c-stoar sha11 main- Nerxt 8 KWh - L 0.173 pen KWh Th-ee-phase - L 17.30 per month tai a poer factor of nor Neat 4,905 KWh - L 0.146 per KWh lees thAn 85%, legging. fear 5,000 KWh - L 0.100 pee KWh Macer Rentali: Single-phase - L 0.50 Three-phase - L 1.00 TARIfF C OPTIONAL GENERAL SERVICE Fee alectric emite sedan Demand Charga _ L 10.00 par KW The Decond Charga Con thc notLh iamb emothly -esaurad demand Th,c Billing Demand shall For oustooers taking sayic a fire c_neatr for o_e year of billing demand bht not lesa than L 2,500.0 will ha adjusted by i-ncesing ha the highest of: at the primary voltage on anne as determoied by ENEE Ene-gy Charga _ L 0.066 par KWh it 1% fec each 1A on ma- j_ whu -n and maintain means. portion thereof by which tha 1. The aeasunad demand fan foemees cad ali ether fani- eea_e Pow_ fanro at which the -onc, adjsssid fan lithea necssay for snie energy is sppli d aing smh poe lotion; on as ppro-ed by EDEE, erh moth is lestha 851 iaga 2. 81M 0f rh. highest bill. charge at tha aboe rare log Deand of the pe- will he redumed by SiC. _diag 11 n'cha; or TARIFF D TRANSMISSION SERVICE FPr electiec asiin thbraugh De..nd Change - L 9.15 pen KW The Deesnd Charge bet not leos Caih monthly measured demand The Billing Demnsd shall ba sabststinon directly connected of Billing De-nd thms 1 22,875 sill be sdjusted by intrees- the highest of: to trenesission oines of the Energy Chargs _ L 0.0563 KEWh ig it 1i. foe each 1% r system (an defined by REEE) IIjor portion thereof by Whinh 1. The measured demand for of not less than 2,000 hilowatts the eveefag power factor at the -onth, adjiuted fan of deancd. Requirs a firm which energy iE supplied d-nleg power f_ctor; or conreact of ntt leas than fioe such month is lees than 15%, 2. 851 of the highest Bill- yrars. lugging ing D-emnd of tha premed- in1 11 ...nths; or 3. TheC-ntrat Demand, if ..Y. TARIFF E AERICULTURAL PUMPING FPtservice - i agri-ult-ral Demnud Cheege -L 9.g6 pee KW The Demsnd Charga hot not banh monthly measured demand The Billieg Demand shall he pnmpng etprimary voltage, as of Billing Decond lees char L 2T,650 cil be adjosted byinmenasing the highe-t of: approved by ENEE, fee loads of Energy Charge - L 0.0634 KWh it l' foe ach IX or aion nut less than 2,500 kblowalts, portion thereof by which the 1. Thb meaeured demand foe onder fie contrcts of sat lest a_arage pecan faetor at Which tlhe month adjueted for than 5 peare fer ecemrtan minimum energp is supplied dueiag power factor; or kilwartt losd. soch month Es lest than 8% 2. The highest Billing lagging. a ofthe Pr dig li -ath ; oe 3. The Contrat Demad. Defin_tion ot Foal Cost Detarmination of Unit mf Churge for Credit) TARIFF F FUEL ADJUSTMENT ELAUSE Thin Pnel Adjustment Clause is FPel Cost shall mean the a-tu"l The Uein Chsrge (Sa Credit) applichble to aCurnent applicable to " 11 the above most of all fuel used in the monih shall be dectrmined (mt the nnarest 1/100 tppiffte nomted tbh abuve prad-ctian of el eargy by a t- ) by dividing the Fuel Cost for the sthand enth Unit Change foa Ceadit) to the thermal-electric generstieg pl nts presodine the urrenst month by the total kilowatt-hoUr total kilowatt-houe repree-tead of ENEE daring a stated peeled Ef sales feon ENEE eYeten for use within Handurns in -ch by the bill. tie. prce-ding .onth and usbtrEting the bEse fuel -ote th-ef-ee   -45- Table 1-2 EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) Monthly Electricity Tariffs of the Isolated Systems Tariff Applicability Rates A Residential and For domestic use and commercial use, when First 15 KWh (minimum) - 3.50 L Commercial commercial consumption do not exceed 2000 KWh Next 85 KWh - 0.18 L/KWh monthly Next 200 KWh - 0.16 L/KWh Next 200 KWh - 0.15 L/KWh Excess KWh over 500 KWh - 0.14 L/KWh B General For industrial use and commercial use when First 250 KWh (minimum) - 35.00 L monthly consumption exceed 2000 KWh. Next 750 KWh - 0.12 L/KWh The customer shall maintain a power factor Excess KWh over 10,000 - 0.10 L/KWh of not less than 85% lagging C Optional General For electric service under a firm contract Demand Charge: - 8.25 L/KWh of Billing Service for one year or more as determined by ENEE Demand Fnergy Charge: - 0.055 L/KWh Fuel Adjustment: Billings are adjusted to reflect changes in fuel prices applicable to each isolated system from their level in 1973. Sr H Source: ENEE r'j  -46- ANNEX 1 Table 1-3 Table 1-3 EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) ENEE's Electricity Generation ENEE Gener- Genera- GDP /a Gener- ation tion per Population (UIS$ ation /GDP /a capita Year (Thousands) million) (GWh) /b (kWh/US$) (kWh/person) 1967 2,335 609 153 0.251 66 1969 2,461 659 219 0.332 89 1971 2,593 722 273 0.378 105 1973 2,733 787 361 0.459 132 1975 2,881 792 484 0.611 168 1977 3,043 904 622 0.688 204 1979 3,207 1,026 794 0.774 248 1981 3,380 1,131 998 0.882 295 1983 3,563 n.a. 1,262 n.a. 354 1985 3,756 n.a. 1,562 n.a. 416 /a In 1967-1969 constant prices. /b Includes losses of 12 to 16% of generation. Source: IMF, IBRD, ENEE. EBASCO,_MONENCO. __j  -47- ANNEX 2 Figure 2-1 ENEE ORGANIZATION CHART P Board of a Directors C 1- ! ~~~~~Internal I Audit General Manager Panng and Public i El Cajon Projc Control Relations Legal Proiect 3 Economic Planning 3 Analysis and Control of Projects F~srvtices Engineering Operations and Special d General Services * Electrical 0 Center Regional * Construction e Accounting and Mechanical Division 0 Special Finance 0 Civil * North Regional Projects - Commercial Division * Personnel * Interconnected System World Bank -21020  ECOLOGIA E N EE GRUPOI NTERIONSTITUCIONAL r _ _ TECRCCA,CI O N oFe GRUPO CONSULTIVO COMINISTRC IONTRESTAL * r- -CCINENTC-OTsv| ASESOR TECNICO P NGA G AOEODEEINISTRACI-N OCCIOC *GES | t - ALTO NIVEL I L .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CONSEJO DE CONSULTORES E SPECIALES TRSCCResAvMNETAC-loNEC PPOYECTO I I DIRECTOR DEL PROYECTO I SISRICA j [ N HONDVIRAS TEGUCHOALPA _4 ----~ ~ ~ ~ ~~II 1- OT| _ DPTO DE INGENIEfllA OIO0ACLICA | I SEOORIEO - | | A DETDDEGETENIA P EAS1- I |N MCLCA iENe ReS OT N C OCLES | ACOS JECE TSET OEEG00EERSOENTEE CERA0 dOlt ES ESCIPON -ETET A E CON CC, FE II i 'rIEII I1 I INCENIERO OE AREA l INCERTERCO E AREA ENTEIS l T GEPTo DE NRC CITECTURA_ CENTEAL CENERAOPA _ | UFO MECAN co cASTOSS ISTRoREC-AUOS DFPTODOE T.ANSPORTES E I NIe RO DE 0 EE INCENIE D EuulpAMleNTo 0 _ l lE | INOENIeRTOFD AREA !Ne,Fb RAeurMeT CNPANTEONTNioEE S MFCANICO _ OEPTO nE INCENIETIA ACCONICA TT ATTEEIENCO DE LA CIMENTAC.0N1 | j ECTOITOCREN ShACIONES - OITCA2 p O % l l | [ INGcNGiRO ME TA I AS l | cloN/eNeRGlA/AouAsDl SAGUI S-| WbAOM - EEE CONCEEROI,*OEATREAOOE -0 DEPTO DE INCENIET ELTECTICA I ECTEU CTAROPSME L l-i ___EI A _L_T R _ _ RELACIONEN PURI,CAS I u, |C EOCIIPAC,EE.TO , I fNCAO CONTROL DE COLOAGIS/OTOGEF eL eITRSco 2 HDEPTO DE INGENIERIA ELECTRICA . | | PTD E INETALACIONEO I | | | l |~~~~~ TECNICAS AOOILFCTTCS | I s NE||_0 . . } | _ , ' fONIlEl~~~~~~~~~~~~~~~~~~~~~~~~~~~~DRAS E1l 1 ECONOM A COEPTD OE ECONOMIA ENERGE T ICA | ,CECC CCTT I TMCENEER C l|Cajon Hydroelec | -NTA- ... I nric Power Proj , CONTCEIIOCO CONTCOUOIO EN LA SE. -EL CONSTOU RI i I rganization I_