El Salvador - Ahuachapan Expansion Project

Document of The World Bank FOR OMCAuL USE ONLY Report No- 5399 PROJECT COMPLETION REPaRT EL SALVADOR COMISION EJECUTIVA HIDROELECTRICA DEL RIO LEMPA (CEL) SEVENTH POWER PROJECT LOANS 1288-ES/1289-TES December 28, 1984 Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the perferance of their official duties. Its contents my not otherwise be disclosed without World Bank aihorrzation.  CURREvCY EQUIVALENTS Currency Unit Colon (C) C1.00 100 ceatavos US$0.40 US$1.00 - C2.50 1/ ACRONYMS CONAPE Comislon Nacional de Petroleo IDB = Inter-American Development Bank OLADE = Organizacion Latinoamericana de Energia SNI National Interconnected System UNDP United Nations Development Program AMBBPLMIATIONS, UNITS AND MEASURES kcal kilocalorie (1,000 calories = 1.163 kWh) Tcal teracalorie (109 kcal) kW kilowatt MW = megawatt (1,000 kW) kWh = kilowatt hour CWh = gigawatt hour (1,000,000 kWh) kV = kilovolt (1,000 volts) MVA megavolt-ampere (1,000 kVA) kM2 = kilometer (0.6214 mile) km = square kilometer (0.386 sq. mi) TOE = ton of oil equivalent (107 kcal) BARREL = 42 gallons oil GALLON = 3.785 liters FISCAL YEAR CEL fiscal year ends December 31 1/ Commercial exchange rate as of December 31, 1981, which was used to compute currency equivalents in this report.  EL SALVADOR FOR OFFICIAL USE ONLY COMISION EJECUTIVA HIDROELECTRICA DEL RIO LEMPA (CEL) SEVEETH POTJEPR PROJECT (LOANS 1288-ES/1289-TES) Table of Contents Page No. PREFACE ..................................................... BASIC DATA SHEET ......................................... ii HIGHLIGHTS - ................ ........ v I. BACKGROUND.. 1 1.1 Sector Organization 1 1.2 Bank Lending to CEL 1 II. PROJECT PREPARATION AND APPRAISAL ........................... 1 _ 2.1 Project Origin, Appraisal and Negotiations .........1 2.2 CEL's Major Sector Development Activities 1976-1982 2 2.3 Project Description. 3 2.4 Major Covenants in the Loan and Guarantee Agreement 3 III. PROJECT IMPLEMENTATION AND COST. 4 3.1 Loan Effectiveness and the Award of Consultant Contracts. 4 3.2 Timetable of Project Implementation ...................... 4 3.3 Performance of Consultants, Contractors, Suppliers and Staff of the Borrower and the Bank ..................... 6 3.4 Project Costs .......................................... 7 3.5 Disbursements and Allocations .......................... 8 IV. PROJECT'S OPERATING PERFORMANCE AND JUSTIFICATION .... ....... 8 4.1 Operating Performance .................................. 8 4.2 Project Justification .................................. 9 V. FINANCIAL PERFORMANCE .11 5.1 CEL's Financial Performance and Rate of Return .11 5.2 Revaluation of Fixed Assets in Operation .11 5.3 Tariff Increases .11 5.4 Short-term Borrowings .12 VI. INSTITUTIONAL PERFORMANCE .................................. 13 6.1 The Borrower ................---..-..--.. 13 6.2 The Bank .................................-.--... 14 VII. LESSONS TO BE LEARNED 14 7.1 Cost Overruns .......................................... 14 7.2 Delays .......... ....................................... 14 7.3 Handling of Geothermal Waste Water ..................... 14 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.  Page No. ANNEXES: 1 CEL's Installed Capacity and Related Bank Financing ...... 15 2 Najor Covenants of the Loan Agreements .................. 16 3 Actual and Appraisal Estimated Target Dates for Project Implementation ..- 17 4 Total Actual and Appraisal Estimated Project Cost ........ 18- 5 Actual and Appraisal Cost for the Power Generating Component of the Project ..-..... ................ ...... 19 6 Price Deflator Index for Project Costs .................. 20 7 Actual and Forecast Disbursements ....................... 21 8 Original, Revised and Final Loan Allocations ............ 22 9 Actual and Forecast Generation and Sales Data, 1976-1981 23 10 CEL's Actual and Forecasted Energy Generation by Type of Plant ................................... 24 11 Economic Analysis: Overall Return to Economy .... ........ 25 12 Economic Analysis: Return to CEL ....................... 26 13 Actual and Appraisal Financial Ratios 1976-1981 .... ...... 27 14 Actual and Appraisal Income Statements 1976-1981 .... ..... 28 15 Actual and Appraisal Funds Statements 1976-1981 .......... 29 16 Actual and Appraisal Balance Sheets 1976-1981 .... ........ 30 APPENDIX - Coruqents frovi CEL and Staff Observations 31  PROJECT COMPLETION REPORT EL SALVADOR COMISION EJECUTIVA HIDROELECTRICA DEL RIO LEMPA (CEL) SEVENTH POWER PROJECT (LOANS 1288-ES/1289-TES) PREFACE This is a completion report of the Seventh Power Project in El Salvador (Loans 1288-ES and 1284-ES) for which the Bank provided two loans amounting to $39 million. The project was approved in 1976 and the loans were fully disbursed in October 1981. The project included generation, transmission, communicationus, geothermal site investigation, and technical assistance components. Despite cix:il strifes the executing agency, CEL 1/, completed the project's major parts with delays of only six months. The Project Completion Report (PCR) was prepared by the Latin America and Caribbean Region's Energy 1 Division, based on the Appraisal Report, the President Report, the Loan Agreement, Supervision Mission Reports, correspondence with the borrower and internal Bank memoranda on project and sector issues. In accordance with the revised procedures for project performance audit reporting, this Project Completion Report was read by the Operations Evaluation Department but the project was not audited by OED staff. Following normal procedures, OED sent a copy of the draft report to the Government and CEL. Comments received from CEL and Staff Observations on CEL's comments have been reproduced as an Appendix to the report. 1/ Comision Ejecutiva Hidroelectrica del Rio Lempa (CEL)  - ii - PROJECT COMPIETION REPORT, BASIC DATA SHEET EL SALVADOR COMISION EJ?'f' YA HIDROELECTRICA DEL RIO LEMPA (CEL) SEVENTH POWER PROJECT (LOANS 1288-ES/1289-TES) KEY PROJECT DATA I t e m Appraisal Actual Total Project Cost and Sources of Financing (US$ millions equivalent): IBRD (Loan 1288-ES) 30.0 30.0 IBRD (Loan 1289-TES) 9.0 9.0 CEL and domestic loans 4.8 25.2 43.8 64.2 Overrun (percentage) - 47 Loan Amount (US$ millions equivalent): Disbursed ) 39.0 39.0 Cancelled 1/ )- - Repaid: Loan 1288-ES ) 12/31/83 1.8 1.8 Loan 1289-TES ) 0.3 0.3 Outstanding: Loan 1288-ES ) 28.2 28.2 (Repayment) Loan 1289-TES ) 8.7 8.7 Date Physical Component Completed: Generation 6/80 12/80 2/ Transmission & Substation 4/80 6/82 Communication & Control System 6/80 3/81 Studies 4/79 7/81 Proportion Completed by Appraisal Completion Date (Z) Generation 100 90 Transmission and Substation 100 55 Communication & Control System 100 85 Studies 100 80 Proportion of Time Overrun from Appraisal Completion Date (%): Generation 16 Transmission and Substation 57 Communication & Control System 21 Studies 80 1/ The remaining portion of US$1,315.93 was cancelled. 2/ Commissioning of the third unit was in 1/81.  I t e m Appraisal Actual Incremental Financial Rate of Return Z (Project) 14.9 13.9 Financial Performance (CEL) Expected to earn 2.9 - 1981 at least 8% rate 6.1 - 1980 of return annually 7.7 - 1979 9.8 - 1978 15.7 - 1977 13.5 - 1976 Institutional Performance Good Good under circumstances OTHER PROJECT DATA I t e m Original Plan Revision Actual First mention in files - - 03/31/75 CEL's application - - 10/17/75 Board approval - - 06/17/76 Loan agreement date - - 07/28/76 Effective date 10/28/76 - 10/28/76 Closing date 12/31/80 6/30/81 6/30/81 Borrower CEL - CEL Executing agency CEL CEL Fiscal year of borrower Calendar year - Calendar year  - iv - MISSION DATA No. of No. of Staff Date of Type of Item Month/year Weeks Persons Weeks Report Reports Appraisal 11/75 2 3 6 01/01/76 Draft Appraisal Report Supervision 12/76 1-1/2 2 3 03/01/77 Combined/Full - - 11/77 1 2 2 12/07/77 Combined/Full 05/78 1 1 1 06/20/78 Memorandum - 07/78 1 2 2 08/14/78 Technical 05/79 1 2 2 07/05/79 Financial 06/81 1 2 2 06/26/81 In Washington 10/81 1 2 2 11/20/81 Full Super- vision 10-1/2 22 Note: No technical field supervision was carried out during the period from July 1978 to October 1981 because of guerilla activities at the project sites. COUNTRY EXCHANGE RATES Name of currency - Colon (C) Year Exchange Rate - Appraisal year average 1976 US$1 = Colones 2.50 - Intervening years average 1977-1980 US$1 Colones 2.50 - Completion year average 1981 US$1 = Colones 2.50  PROJECT COMPLETION REPORT EL SALVADOR, COMISION EJECUTIVA HIDROELECTRICA DEL RIO LEMPA (CEL) SEVENTH POWER PROJECT (LOAN4S 1288-ES/l289-TES) HIGHLIGHTS El Salvador has two known indigenous energy resources of moderate size: the Lempa River and the geothermal fields. CEL1/ has striven to exploit them and eliminate the power sector's reliance on hydrocarbon fuels. The project (Loans 1288-ES and 1289-TES) had many parts: (a) generation, (b) transmission, (c) communication, (d) geothermal site investigation, and (e) technical assistance. The principal component of the project was a 30-37.5 MW generator, the third unit in the area, for utilizing Ahuachapan's geothermal steam. The transmission and communication component, accounting for one-fourth of project cost, was aimed at supporting the further expansion of the distribution network and improving system coordination. Geothermal site investigation and the related feasibility studies focused primarily on fields other than AhuachtTyan. In addition, consultants were to be retained to study an LRMC-based / tariff system, and undertake detailed engineering and construction supervision of the first three components of the project. CEL is managed and organized well. Despite the civil strife, the agency provided acceptable power supply with system losses of only 14%. Mbreover, CEL completed the project's najor components with delays of six months (PCR, para. 3.2.2). The geothermal investigation, which changed in scope, lagged 27 months behind schedule (PCR, para. 3.2.6). The tariff study contract, signed 18 months late, was completed 44 months behind schedule. The result of the study has had no effect on the electricity rates or CEL's finances. Cost overruns on the generation and most transmission components were not appreciable. In contrast, the geothermal studies and exploration drilling of geothermal fields have cost much more than the SAR 3/ estimate. So did the equipment of the communication and control systems (PCR, para. 3.4.2). CEL seems to have been satisfied with the work of consultants (PCR, para. 3.1.1). But the PCR has expressed reservations: -CEL did not always receive adequate support from consultants which -may have contributed to the delays in some project components". The tariff study was also deficient, in certain aspects". 1/ Comision Ejecutiva Hidroelectrica del Rio Lempa (CEL), which is the bulk supplier of electricity and provides retail distribution in rural areas not served by other utilities. 2/ Long-run marginal cost. 3/ Staff Appraisal Report (SAR)  - vi - The performance of contractors and consultants was generally satisfactory (PCR, para. 3.3.2). Further, because of unsafe conditions in project areas, the Bank staff was rnable to undertake field supervision missions "at intervals as required" (PCR, para. 3.3.3). Adverse economic and political developments have undermined CEL's power market. Concurrent with the 1979 coup, production decreased in all major sectors: manufacturing, 29%; agriculture, 14%; construction, 35%; and commerce, 24%. In contrast, CEL's sales in 1981 were at the 1978 level, but still 21% below the SAR forecast (PCR, Annex 9). The borrower has failed to meet the financial covenants. CEL's rate of return on non-revalued assets decreased from 15.7% in 1977 to 2.9% in 1981. The net cash generation was negative, whereas SAR expected a 37% contribution to financing investment, after meeting debt service requirements (FCR, para. 5.3.1). The ensuing lessons emerge from the project experience: - Geothermal exploration should constitute a separate project, since it is risky, complex, and not a minor item (PCR, para. 7.1.1); - Engineering support in planning and design, including the preparation of tender document, was probably necessary and could have helped minimize implementation delays (PCR, para. 7.2.1); and - Underground waste disposal was successful and should be considered in other geothermal projects (PCR, para. 7.3.1).  PROJECT COMPLETION REPORT EL SALVADOR COMISION EJECUTIVA HIDROELECTRICA DEL RIO LEMPA (CEL) SEVENTH POWER PROJECT (LOANS 1288-ES/1289-TES) I. BACKGROUND 1.1 Sector Organization The Comision Hidroelectrica Ejecutiva del Rio Lempa (CFL) is a government-owned autonomous institution responsible for bulk electricity supply throughout E1 Salvador and for retail distribution in rural areas not served by other distributors. CEL'S Board of Directors is composed of representatives of Government ministries, private banks and industrial and agricultural associations. The Board sets policy and appoints an Executive Director, who is responsible for all management functions. CEL sells bulk supplies of electricity to seven private distribution companies. Tne Minister of Fconomy approves CFL's requests for tariff adjustments. 1.2 Rank Lending to CFL Annex 1 shows that the IBRI and the International Development Association (IDA) have provided CEL with financing amounting to US$97.1 million in the form of one credit and seven loans (including a third window loan to the Government for on-lending to CEL). The first five loans (US$52.1 million) helped to finance utilization of the resources of the: (i) Lempa River and its tributaries and (ii) geothULmal field at Ahuachapan. The credit (US$5.6 million) helped to finance construction of a gas turbine plant at Soyapango. All of the works financed by the first five loans were completed and are in normal operation. The sixth (889-ES) and seventh loans, (1288-ES and 1289-TES)1/ helped to finance the first and the third unit of the geothermal Ahuachapan Project which was completed in January 1981. The seventh loan is the subject of this report. II. PROJECT PRFPARATION AN' APPRAISAL 2.1 Project nrigin, Appraisal and Negotiations 2.1.1 First investigations and studies related to the geothermal development at Ahuachapan and Lempa were initiated by CEL in 1965 with technical assistance from TtNTP. A consultant prepared a feasibility study for the Ahuachapan geothermal plant with three units totalling 100 MW capacity. The first 30 MW unit was financed by the Bank and was commissioned in 1975. The second 30 MW unit was financed by a supplier and was commissioned in 1976. 2.1.2 CFL requested IBRD financing for the third geothermal unit at Ahuachapan in October 17, 1975. In January 1976 CEL also requested financing for transmission lines and substations as well as communication and load dispatch facilities including consulting services. Geothermal studies and investigations at Berlin, Chinameca and San Vicente as well as studies on tariffs for electricity were also included in this seventh power project. 1/ IBRT made Loan 1289-TES (iSS9.0 million) to the Government from its third window facility for on-lending to CEL.  -2- 2.1.3 An IBRD appraisal mission (November 1975) determined that the third geothermal unit and the expansion of the transmission/substation facilities were the least cost solution for meeting the expected average growth (10.5% per annum) in electric energy consumption up to 1982. In addition to the project cost and economic justification, IBRD staff devoted particular attention during appraisal to the assessment of the geothermal resources, and proposed that the loan finance geological exploration and geothermal studies. 2.1.4 The definition of the transmission/substation and communication components of the project was based on consultants studies, on discussions between CEL and Bank representatives in San Salvador and Washington and on the findings of the IBRn' appraisal mission. Details on CEL's development program 1976-1982 are set forth in para. 2.2. 2.1.5 To ensure a satisfactory operation of the Ahuachapan plant with regard to the disposal of its contaminated geothermal waste water which constituted a hazard to the environment, the Bank required CEL to proceed with the construction of a separate discharge channel for conducting the geothermal waste water into the Pacific Ocean instead of discharging it into the Paz River. This undertaking had been already agreed between CEL and IBRI during the appraisal of the sixth power project in 1972 and was again made a condition in the loan agreement of the seventh power project. The construction of the discharge channel was completed in October 1978. This channel, although part of the previous sixth power project, was not financed by the Bank. The PCR for the sixth power project dated June 25, 1979 deals with this channel in more detail. 2.1.6 No major problems delayed loan processing. Negotiations took place in May 1976; the Board of Directors approved the loan on June 17, 1976 and representatives of the Bank, CEL and the Government signed the loan documents on July 28, 1976. The Loan Agreement became effective on October 28, 1976 the original terminal date for effectiveness. 2.2 CEL's Major Sector Development Activities in 1976-1982 2.2.1 The following works were undertaken by CEL simultaneously with the implementation of the Seventh Power Project which is described in paragraph 2.3.1 below: (a) Sixth power project (Loan 889-TFS): - Cerron Grande 135 MW hydro power plant completed in August 1977 (with IDB co-financing); - Ahuachapan, canal for geothermal waste water, completed in October 1978. (the canal was not financed by IBPP); - 115 kV transmission lines of about 76 km; and - studies and training program. (b) Ahuachapan, 30 1W geothermal unit No.2 financed by Mitsubishi and completed in 1976. (c) San Lorenzo, 180 MW hydropower project financed by IDE (completion scheduled for 1986/87.  (d) Electrical Interconnection with Guatemala financed by CABEI (project preparation started in 1978, commissicning scheduled for 1984). 2.3 Project Pescription 2.3.1 The appraisal report defined the project as consisting of: (a) Generation The third unit at Ahuachapan geothermal station with an estimated capacity between 30 and 37.5 MW with the provision that the final capacity would be determined after evaluation of the results of studies and investigation of the geothermal fields in Ahuachapan. (b) Transmission and Subtransmission (i) Construction of about 39 circuit-km of new 115 kV transmission lines and about 20 circuit-km of the 46 kV subtransmission lines; (ii) Conversion of about 83 circuit-km of existing 69 kV transmission lines ro 115 kV; and (iii) Construction and/or improvement of 10 substations, including the addition of about 150 MVA in new transformer capacity to the system. (c) Improvement and additions co CEL's commurication and control system. (d) Geothermal site irvestigations (drillings) of geothermal fields in Ahuachapan, Berlin, Chinameca and Sani Vicente. (e) Consulting services Cabout 500 staff-months) for: (i) tariff studies based on marginal cost pricing; (ii) feasibility studies for geothermal power development in Berlin, Chinameca and San Vicente; and (iii) detailed engineering and construction supervision pertaining to the geothermal unit, the transmission lines, the substations and the communication and control system expansion. 2.4 Major Covenants in the Loan and Guarantee Agreements 2.4.1 Annex 2 describes the major covenants of the Loan and Cuarantee Agreements and their compliance by the Government and CFL.  III. PROJFCT IMPLEMENTATION AIqP COST 3.1 Loan Effectiveness and the Award of Consultant Contracts 3.1_1 The Loan Agreement became effective on October 28, 1976, as scheduled. CFL created a satisfactory Planning and Engineering Department which was fully staffed in Pecember 1978, CEL continued with the services of the same two consulting firms which had assisted in the SIi-h Power Project. 3.1.2 The services of the first consultant cons sted of the detailed design and construction supervision for the third geothermal unit at Ahuachapan as well as of the preparation of feasibility studies for geothermal power development including supervision of site investigations in geothermal fields at Ahuachapan, Berlin, Chinameca and San Vicente. Due to the early engagement of the first consultant (the contract was signed on September 9, 1976 as scheduled) CEL was able to procure the major generating equipment practically without delay and at the estimated purchase price. 3.1.3 CEL awarded to the second consultant a contract for consulting services related to transmission lines and substations as well as to communication and control facilities on August 25, 1976 as scheduled. The preparation of tender documents for some of the equipment and materials for the transmission lines and substations suffered delays which consequently delayed the implementation of these project components. Procurement and implementation of the extension of the communication system was advanced by about 5 months. The preparation of the tender documents for the control system was delayed by about 7 months, and this delay in turn caused a delay in the implementation of about 9 months. 3.1.4 The preparation of the terms of reference for the tariff study was delayed by about 8 months. Ten more months were spent in carrying out the bidding procedure, evaluation of bids and contract negotiations. The contract for the tariff study was finally signed on January 24, 1979 about 18 months later than scheduled. 3.2 Timetable of Project Implementation 3.2.1 Annex 3 sets forth original and actual key dates concerning implementation of the Project. There was a promising start in 1976 with the preparation of detailed design and contract documents for the third geothermal unit (35 MW), the main project component; but from 1977 onwards there -zas a slow down in the progress of engineering works for the other project components. The main reason for the slow progress was the politica'l and economic crisis which erupted in El Salvador and which created serious problems and affected negatively CEL's ability to finance local expenditures from its own revenues. 3.2.2 In spite of extremely difficult conditions in the country (guerilla actions against electrical installations, labor unrest, curfews and blocking of roads), CEL was able to complete most of the major project  -5- components such as the Ahuachapan geothermal plant, one transmission line and the communication system with delays of only about 6 months. The following paragraphs set forth details on the completion dates and operation of the various project components. 3.2.3 Geothermal Unit No.3 at Ahuachapan. The 35 MW geothermal (third) unit has operated successfully (after trial runs in December 1980) since commissioning in January 1981 (six months later than scheduled) with average plant factor of 0.70 which is a good performance, considering that the plant, which has a total installed capacity of 95 MW, was initially limited to about 87 MW due to lack of sufficient geothermal steam. After completion of the geothermal investigations including drilling of seven additional boreholes and connection of the wells to the plant in Pecember 1982, the plant entered into normal operation. 3.2.4 Transmission Lines and Substations. The transmission lines were completed with delays varying between 4 and 23 months and substations 26 to 50 months as compared with the appraisal schedule. The slowdown was mainly caused by delays in the preparation of tender documents, design changes and adjustments to actual load growth and by delays of construction due to unsafe conditions in sove areas of the country. -rhese postponements did not cause major problems to power supply because of the reduced demand. 3.2.5 Communication and Control Systems. The communication system expansion (microwave equipment) was installed and commissioned in January 1979, 4 months ahead of schedule. The installation and tests for the supervisory control system suffered a delay of 9 months because the supplier refused to send technicians to El Salvador due to the security conditions in the country. CFL's technicians were able to complete the installation of this control system by themselves. 3.2.6 Geothermal Studies. The geothermal investigation program at Berlin, San Vicente and Chinameca was delayed by about 27 months mainly due to an increased scope of work. The original program envisaged only 4 (1200 m deep) boreholes, but it turned out that 10 bore holes, drilled to a much greater depth (average depth about 2000 m), were actually required to complete the feasibility study. This work was mainly concentrated in the Berlin field. The drilling works at San Vincente (one bore hole) and Chinameca (two bore holes) fields were suspended in late 1979 because of unsafe conditions due to guerilla actions in that area. The results obtained from 3 out of 7 bore holes at the Berlin field were encouraging and showed, according to the feasibility report, a geothermal reservoir of sufficient capacity to feed a unit of about 50 MW for at least 20 years. 3.2.7 The Ahuachapan geothermal reservoir was considered at appraisal to have sufficient capacity to feed a plant of about 95 MW. The first 30 MW unit was installed in 1975 and the second 30 MW unit in 1976. After more than two years of operation with two 30 MW units, an unexpected decrease in  -6- the geothermal steam was observed. Five (5) new bore holes were drilled in 1979 in order to previde the steam also needed for the third (35 MW) unit, which was installed in late 1980. After commissioning of the third unit, a maximum production test was carried out in March 1981 which showed a maximum plant output of 87 MNW when 95 MW were actually installed. Two additions; bore holes were drilled to ensure full rated output. These bore holes including connection of the wells to the plant -were successfully corApleted in Pecember 1982. 3.2.8 Tariff Study. The contract with the consultant was signed on January 24, 1979 about 18 months later than scheduled (see paragraph 3.1.4). The first draft of the study was completed in mid 1980 but not accepted by CEL because of a disagreement between CEL and the consultant about the opportunity cost of capital. After prolonged discussions, the consultant agreed to make additional calculations using a 10% opportunity cost of capital instead of 7.5%. The revised study was finally completed in August 1981 about 44 months later than the appraisal estimate. The recommendations of this study have not been implemented because of Government refusal to -prove further (see para. 5.3) tariff increases. In 1981 the project was practically completed. 3.3 Performance of Consultants, Contractors, Suppliers and Staff of the Borrower and the Bank 3.3.1 CEL expressed no dissatisfaction with the various consultants. It seems however, that CEL did not always receive sufficient engineering support from consultants during preparation of design and contract documents for most of the equipment other than the turbo generator. This lack of sufficient support may have contributed to the delays in some project components. It appears also, that the physical volume of works and especiallv the exploratory geothermal drillings as well as the cost of some of the equipment were underestimated by the consultants. CEL feels that this was ui:derstandable, taking into consideration the complexity of new technologies and the risks involved in the exploration and operation of geothermal fields. Neither CEL nor the Bank were satisfied with certain aspects of the tariff study (para. 3.2.8). 3.3.2 The performance of contractors and suppliers was generally satisfactory, with an exception that one company failed to deliver the electrical (medi-um and low voltage) equipment as scheduled which has caused a delay of 15 months and additional costs of more than Colons 1.0 million. 3.3.3 The Borrower's staff performed well under the circumstances. CEL expressed satisfaction with the performance of the Bank staff. It should be noted that Bank staff was not able to carry out field supervision missions (especially technical supervisions) at intervals as required because of unsafe conditions in project areas due to guerilla actions.  -7- 3.4 Project Costs 3.4.1 Annex 4 compares the actual and appraisal estimate of the project cost and financing. The costs of the project are summarized below: S unary of Appraisal and Actual Cost (in US$ millioxs) Apprisal Estimate Actual 0,st Bbse Ptysic. Price Ibtal Base Other TDtal piff. Item O,st Cxitin. CxMtin. Cbst Cost Expen. Cost 1, ird geotheanml unit 20.60 2.10 4.92 27.62 22.62 1.S3 24.15 (14.2) Transmission 2.20 0.25 0.54 2.99 2.98 0.07 3.05 2 Substation 2.50 0.25 0.62 3.37 4.18 0.10 4.28 27 Comnidcation and Control 1.90 0.50 0.50 2.86 8.24 0.53 8.77 207 Geotherml studies 2.60 0.60 0.60 3.82 19.64 0.2D 19.84 419 wRsultant services 2.30 0.30 0.30 3.14 4.14 - 4.14 32 Total project cost 32.10 4.00 7.70 43-RO 61.80 2.43 64.23 47 interest during Construction - - - 6.40 - - 8.52 33 Total 32.10 4.00 7.70 50.20 61.80 2.43 72.75 45 1J COsts for admrinistration, land, etc. 3.4.2 As can be seen in Annex 5, the actual cost (LTSS29.96 million) of the third geothermal unit, including costs of engineering, administration, drillings and associated works at Ahuachapan was close to that estimated at appraisal (US$29.92 million). The actual and forecast unit costs were close: USS856/kW vs. USS855/K.- The costs of transmission lines, actual and forecast, were close: UTS$3.05 as compared with US$2.99 million (para. 3.4.1). The costs for all other project components increased substantially (see Annex 4). The highest cost increases were observed for the geothermal studies and exploration drillings of geothermal fields as well as for the equipments of the communication and control systems. 3.4.3 The factors contributing to the higher-than-expected costs can be summarized as follows:  (3) Increases in the physical volume of works especially for geothermal drillings. In view of the risks involved in drilling and the incomplete knowledge of the Berlin field and considering the complexity of new technologies, physical contingencies for this component should have been higher. (ii) Changes in the scope of were for the Communications and Load Control Systems. (iii) Increases of the costs for civil and erection works especially for substations and for the Load Dispatch Center, including a building which had not been considered at the time of appraisal. (iv) The political situation in El Salvador which caused uncertainty to foreign suppliers and resulted in higher prices to offset risks and delays in the execution of works. This contributed to higher costs for equipments and erection works as well as to a larger amount of interest during construction. (v) Increases of the staff-months for consulting services related especially to the geothermal studies. 3.4.3 Sources of financing for the project were as follows: -- ----in US$ millions)- Appraisal Actual Increases (Z) IBRD 39.00 39.00 - CEL and other local sources 1/ 11.20 33.75 201 Total 50.20 72.75 45 I/ Internal cash generation and Government Loans 3.5 Disbursements and Allocations 3.5.1 About 76% of the loan had been disbursed by December 31, 1980, the original loan closing date. In view of cost changes and disbursement delays, the Bank agreed to two re-allocations of loan proceeds and one postponement of the loan closing date (from December 3, 1980 to June 30, 1981). Annexes 7 and 8 show actual and forecast disbursements and allocations. IV. PROJECT'S OPERATING PERFORMANCE AND JUSTIFICATION 4.1 operating Performance 4.1.1 The main objective of the Seventh Power Project was to provide additional generation and transmission facilities to CEL's power system and thus enable this utility to meet future demands for electricity in El  -9-. Salvador without a reduction in the quality of service. Annex 9 shows that for the sector, actual generation grew about as fast as expected between 1976 and 1979; but thereafter actual generation declined on a year-to-year basis through 1981. CEL's pattern of actual generation and sales paralleled that of the sector. This reduced load growth, which ref ected the unsettled domestic conditions, postponed meeting the load-growth objectives until 1Q86/87 and caused the third unit to be used to replace the existing oil-fired plants, rather than to meet additional demand. Since commissioning of this third unit in January 1981, CEL was able to reduce almost to zero its dependence on imported fuel for electricity generation. The existing oil-fired plants are being used as standby plants for emergencies only. 4.1.2 Commercial operations of the third geothermal unit at Ahuachapan (35 MW) commenced in January 1981. The plant has operated satisfactorily with a plant factor of 0.70 and to date no major problems have been encountered in the equipment. The temporary decrease in geothermal steam (see paragraph 3.2.7), which caused a capacity reduction of about 8.5% during 1981 and 1982, did not affect CEL's ability to meet its supply commitments because of reduced electricity demand. Annex 10 shows details on CEL's actual and forecast energy generation in comparison with the appraisal estimate as well as the fuel savings due to the operation of the third geothermal 'mit at Ahuachapan. 4.2 Project Justification 4.2.1 The appraisal report provided an economic analysis showing that the Seventh Power Project represented the least-cost solution for meeting El Salvador's incremental requirements beginning in 1982 (when additional capacity would be needed) for all discounts rates lower than 23%. At the time of appraisal there were neither fa ilities nor plans for importing electricity from neighboring countries which were also short in energy. Five generation programs for meeting the energy requirements under different assumptions were considered in the appraisal report, comparing different sequential implementations of the third geothermal unit at Ahuachapan with a corresponding conventional oil-fired steam power plant,which was the only practical alternative. The appraisal report concluded that the proposed in-service date June 30, 1980 for the third geothermal unit was the optimum. For this case, the return on investment of the Seventh Power Project (not including the costs for geothermal studies other than Ahuachapan but, including additional investments for distribution facilities), was estimated at 14.1%, based on 1975 retail tariff levels. At appraisal, there was no consideration of other geothermal and hydro alternatives because: (i) investigation of other geothermal fields had not advanced sufficiently to warrant consideration; and  -10- (ii) the development of lower-cost hydro sites on the Lempa River (downstream of Cerron Grande) was contingent on improved stream-flow regulation to be provided by the Cerron Grande Dam, at that time under construction. These sites could not be in service by the required date. 4.2.2 The project's actual rate of return compared with the appraisal estimate is shown below: Appraisal Actual Mi) Overall return to economy based on a retail sale price for electricity 14.1 11.1 (ii) Return to CEL based on a bulk sale price for electricity 14.9 13.9 4.2.3 Adversely affecting the actual returns were CaL's reduced load growth (para. 4.1.1) and, to a lesser extent, the cost overruns of the Project (para. 3.4.2). Because of the reduced load growth, the benefits of the Project have been limited to fuel saving, as the third geothermal unit has been mainly used for replacing oil-fired plants (until 1986187) instead of meeting increased energy demand (Annex 10). The estimated return of the Project to the economy (11.1%) is underestimated to the extent that incremental benefits (sales) associated with distribution investment were not taken into account. UTndoubtedly there were incremental sales associated with the expansion of the distribution system; but it was not possible to measure them during a period of system-wide sales declines. This factor makes the return of 11.1% a very conservative estimate of the return of the Project to the economy. 4.2.4 It should be noted that the average fuel cost of thermal generation using Bunker "C" in El Salvador (0.0635 US$/kWh in 1981)2/ was higher than the average sale prices for electricity3!. Fuel savings during the years 1981 to 1986 were not sufficient to offset the impact an the rate of return caused by cost overruns. The economic analysis with the rates of return to the overall economy (retail sale prices measuring benefits) and to CEL (bulk sale prices measurtng benefits) is shown in Annexes 11 and 12 respectively. 4.2.5 The investment costs considered in the economic analysis are the direct costs of the entire Seventh Power Project less the costs for 2/ Assum