Argentina - Fourth Buenos Aires Power Project

Docmetof The World Bank FOR OFFICIAL USE ONLY Report No. 6098 PROJECT COMPLETION REPORT ARGENTINA SERVICIOS ELECTRICOS DEL GRAN BUENOS AIRES (SEGRA) FOURTH POWER PROJECT (SEGBA IV) (LOAN 1330-AR) March 14, 1986 Latin America and the Caribbean Regional Office  FORORFFCAL US ONLY T*HE WOltLO BANK Washington. D.C. 20433 U.S.A. Office af Owrtw-CeAwai Opwatmns EV4WAtKa" March 14, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report: Argentina - Servicios Electricos del Gran Buenos Aires (SEGBA) Fourth Power Project (SEGBA IV) (Loan 1330-AR) Attached, for information, is a copy of a report entitled "Project Completion Report: Argentina - Servicios Electricos del Gran Buenos Aires (SEGBA) Fourth Power Project (SEGBA IV) (Loan 1330-AR)" prepared by the Latin America and the Caribbean Regional Office. Under the modified system for project performance auditing, further evaluation of this project by the Operations Evaluation Department has not been made. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be diclosed without World Bank authorization.  FOR OFFICIL USE ONLY ARGENTIN PROJECT COMPLETIZON REPORT SERVICIOS DEL GRAN BUENOS AIRES (SEGRA) FOURTH POWER PROJECT (SEGBA IV) (LOAN 1330-AR) TABLE OF CONTENTS Page Basic Data Sheet................................................ (it - v) L i g h l i g h t s ~~~~~~~~~~~~~(vi) CHAPTER i: iNTRODUCTION ............I........... . 1 1.1 Bank Lending to the Sec t o r 1 1.2 Sector Orai i. .a t i o n 1 CHAPTER II: PROJECT PREPARATION AND APPRAISAL.....RAISAL....... 2 2.1 Project Preparation and-Definition...................... 2 CHAPTER III: PROJECT IMPLEMENTATION AND COSTS S TS............... 4 3.1 Implementation of the Project, Changes, Delays...ays..... 4 3.2 Implementation of Studiest u d i es....e0....... 600000000.00 5 3.3 Project Costss.... S CHAPTER IV: OPERATING PERFORMANCE ........................7...., 7 4.1 Demand 7 4.2 Losses ......... . 7 4.3 Operating Costs 7 CHAPTER V: FINANCIAL PERFORMANCE ............*600.......600000 , 9 5.1 Actual and Appraisal Forecast Financial Data t a*#**,**.... 9 5.2 Tariffs Increases and Compliance with Revenue Covenants.. 9 5.3 Government Contribution and Debt-service Coverage ......6 10 5.4 Short-term Debt..... 0 11 5.5 Accounts Receivable .... *.600 9 6,66609 69006,960666006e6 11 Th docunt has a rticted distribution nd may be sed by eciients only in the perforace of dr oMkiSduties. Its contents may not otberwbe be diclosed whout Word Bank autliotion.  Page CHAPTER VI: INSTITUTIONAL PERFORMANCES........................ 12 6.1 The Borrower.... 12 602 The Government........................................ 12 6.3 The Bn ....., .................... 12 CHAPTER VII: PROJECT JUSTIFICATION.....*........ 14 7.1 Appraisal Justification ..... 0 @014 702 SEGBA Load Growth ............o.......... 14 7.3 Internal Rate of Return (IRR)........................... 14 CHAPTER VIII: LESSONS TO BE LEARNED ..................O...... ... 15 8.1 Successful Projecto........... **e........... 000000000og 15 8.2 Sector Financing..............ooo..e 15 ANNEXES Annex 1 Summary of Bank Lending to the Sectort..or......o. 16 Annex 2 Original, Reappraised and Actual Project Scope... 17-18 Annex 3 Forecast and Actual Project Target and Completion. Rattes.... ........... 000000@@000.60.0....... 00006 19-20 Annex 4 Schedule of Disbursements.*o...e...e0*.e......e. 21 Annex 5 Project Cost Summary.m..................0.....0.0. 22 Annex 6 Power and Energy Balance of SEGBA Systemtem......o 23 Annex 7 Performance and Financial Indicators.......... 0.. 24 Annex 8 Comparison Between Forecast and Actual Income Statement .o..00.... ' 0000000004*000000**00*0*00 25 Annex 9 Comparison Between Forecast and Actual Funds Statemento.......ooooo....o............o.o...oo...o..o......26 Annex 10 Comparison Between Forecast and Actual Balance Sheetse.......... @0000600oe 00o.o.0.o.......o...... 27 Annex 11 Internal Rate of Return Based on Actual Cost Date. 28 Annex 12 Price and Exchange Rate Indicators.........P.... 29 APPENDIX I- Comments from the Borrower .............. ....... 30  PROJECT COMPLETION REPORT ARGENTINA SERVICIOS DEL GRAN BUENOS AIRES (SEGBA) FOURTH POWER PROJECT (LOAN 1330-AR) Preface This is the Project Completion Report (PCR) for Loan 1330-AR (US$115 million) which was approved in September 1976. The Loan Agreement became effective in January 1977. The final closing date (December 1983) of the Loan Agreement was two years after the original closing date (December 1981). SEGBA IV was completed about four and one-half years late due to reduced investment expenditures required to take account of couaterpart financing problems and lower-than-expected load growth. In accordance with the revised procedures for project performance audit reporting, this PCR was read by the Operations Evaluation Department (OED) but the project was not audited by OED staff. Following standard procedures, OED sent copies of the draft PCR to the Government, the Borrower and Executing Agency. The comments received from the Secretary of Planning, expressing concurrence with the findings of the completion report, are attached.  - ii - PROECT COlPIfON REPORT BASIC DATA SHEr SRVICCIOS W COOS DL GR(A iUENOS AIUES (SEGA FOURTffl PO PRWECr (LUkN-1330 AR) (SEGBA I) KE PROJECt DATA Item Apprsal A or Fcpectatioa Oirrent lDstixate Total Project Cost (excluding fingnce charges) - in US$ mfli.oa equivalent 495.3 (i) at official exchange rates; Z overrun in brackets 691.4 (39.6) (1i) at PE I/ exchane rates; 2 overrun in bra&kets 626.2 (26.5) loan Ammt - US$ mlflion 115.0 115.0 Disbursed 115.0 115.0 Cancelled none none Repaid to December 31, 1984 52.69 52.69 Outstanding December 31, 1984 62.31 62.31 Date Physical Coaponents Coumleted 6/30/81 12/31/85 2/ Time Overnm - X None 100 Rate of Return on Project - 2 21 5.2 3t Financial Performnce Required to Never earned earn 81 more than annually as 3.52, except stipulated in in 1978 when the concession reached 7.22 agreement Returns ere negative in 1976, 1979. and 1982-1984 Institutional Performacne good good 1/ PTE: Paridad Teorica de Equilibtio: "Purchasing Power Parity Exchange Rate". See Annex 11. 2/ Delayed project completion reflected the effects of redkced market growth and problems of local-currency funding. 3/ Iower-than-expected return reflects effect of actual project costs, actual tariff levels, and actual operating costs. If annual operating costs had amounted to only 3.52 of project costs, as e3pected at appraisal, the rate of return on the Project would have approximated 17.02.  - iii - MISSION DATA Type of Day/Mo/Yr No. of No. of Staff Date of Mission (Return) Days Persons Weeks Reports Appraisal 21 2 6.0 - Reappraisal 7/24/76 35 2 10.0 9/7/76 56 ~~~~~16.0 Total Supervision 1 4/22/77 8 1 1.2 5/5/77 Concurrent with Economic Mission II 13/11777 9 1 1.3 11/7/77 III 5/1/78 10 2 2.8 5/25/78 IV 12/12/78 3 1 0.4 3/12/79 V 3/22/79 7 1 1.0 4/27/79 VI 2/14/80 14 1 2.0 3/04/80 VII 3/5/81 4 1 0.6 3/18/81 VIII 6/9/83 3 2 0.9 6/24/83 XI 8/6/84 13 1 1.8 8/27/84 Total 71 12.0 3/ Abbreviations and Acronyms AyEE = Agua y Energia Electrica CIAE u Compania Italo-Argentina de Electricidad S.A. CNEA - Comision Nacional de Energia Atomica CTMSG a Comision Tecnica Mixta de Salto Grande DUC - Despacho Unificado de Carga EBY - Entidad Binacional Yacyreta HIDRONOR - Hidroelectrica Norpatagonica S.A. 3/ Above data does not indicate substantial supervision of SEGBA and the Project carried out in connection with preparation, appraisal, and supervision of the Yacreta hydroelectric Project (Loan 1761-AR) (para. 6.3.3).  - iv - OTHER PROJECT DATA Item Original Actual or Plan Estimate First Mention in Files or Timetable - 3/-/71 Government 's Application - 2/-/72 Negotiations - following Appraisal - 4/28-5/5/75 - following Reappraisal - 8/16 - 8/20/76 Board Approval - 9/21/76 Loan Agreement Date - 1/1/76 Effectiveness Date 1/31/77 1/10177 Closing Date 12/31/81 12/31/83 Last Disbursement Date 12/31/80 9/19/84 ;-rrower Servicios Electricos del Gran Buenos Aires (SEGBA) Executing Agency Servicios Electricos del Gran Buenos Aires (SEGBA) Fiscal Year Borrower January 1 - December 31 Follow-on Project Name Yacyreta Hydroelectric Project Loan/Credit Number 1761-AR Amount (US$ million) 210.0 Loan/Credit Agreement Date 11/6/79  COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Peso Argentino ($a) V Hicgange Rates in $a/Us$ Official PTE 2/ (for financial transactions) - Yearly Avg. End of Year Yearly Avg. End of Year Appraisal Year (1975) 0.00151 0.00292 1976 0.0258 0.0277 0.0163 0.0238 1977 0.0419 0.0599 0.0386 0.0560 1978 0.0812 0.1007 0.0901 0.1272 1979 0.1340 0.1662 0.2019 0.2551 1980 0.1852 0.1996 0.3i20 0.3571 1981 0.5969 1.0600 0.5978 0.9388 1982 2.6867 4.8570 2.03084 3,7029 1983 11.1900 23.2710 9.2615 18.8132 1984 (March) 30.86 28.54 11 $a is currency designation since June 1983. 2/ Purchasing Power Parity Exchange Rate"  - vi - PROJECT COMPLETION REPORT ARGENTINA SERVICIOS DEL GRAN BUENOS AIRES (SEGBA) FOURTH POWER PROJECT (SEGBA IV) (LOAN 1330-AR) Higlights Loan 1330-AR (US$115 million) helped to finance expansion of transmission and distributiou lines, substations, and studies of Servicios Electricos del Gran Buenos Aires (SEGBA). With the agreement of the Bank, SEGBA changed the scope of the Project (SEGBA IV) somewhat to adjust to changes in market requirements (Section 3.1). Because of lower-than-expected demand (Section 4.1), and also because of the poor financial situation of SEGRA (Section 5.2), the Project suffered a completion delay of four and one-half years. Nevertheless, the project was successful in meeting its normal technical and physical objectives of providing facilities to meet the growing electricity demand of the greater Buenos Aires area. As a result of the Government's failure to implement adequate tariff inereases, SEGBA did not comply with its financial covenants; and its financial performance was poor during 1976-1983. To obtain compliance and to restore the finances of SEGBA and the sector,-the Bank engaged the Government in dialogue to identify constructive solutions, including the f%.rmulation of new covenants. In 1979, the original revenue covenant of the SEGBA IV Loan Agreement was superceded by the revenue covenant for the Yacyreta Loan Agreement. Immediately after approval (October 1979) of the new Loan Agreement, the Government informed the Bank that, as part of its anti-inflation effort, the Government would not introduce the newly covenanted tariff increases. In response to non-compliance, the Bank deferred effectiveness of the Tacyreta Loan Agreement, but continued 4isbursements from Loan 1330-ARL The Bank again engaged the Government in dialogue, including warnings about the need for tariff increases. In June 1981, the Bank and the Government agreed to an amendment of the revenue covenant of the Yacyreta Loan Agreement, after which the Bank declared the Loan Agreement to be effective. In 1982-1983, a sequence of adverse events (economic and political) overwhelmed the efforts of the Government to restore sector finances with the result that SEGBA earned negative rates of return. As the Bank took into consideration these adverse economic and political events and as the Bank accorded a high priority to the settlement of a complex procurement dispute, the resolution of which was considered sufficiently serious to appear to jeopar- dize the Bank's continued iarticipation in the Yacyreta project, the Bank continued to defer taking nece3sary actions to enforce compliance. The actual internal rate of return was 5.2%, as compared with the appraisal estimate of 21% (Section 7.3). As 'expected at appraisal, the institutional performance of SEGBA was good (Section 6.1).  PROJECT COMPLETION REPORT ARGENTINA SERVICIOS DEL GRAN BUENOS AIRES (SEGBA) FOURTH POWER PROJEaCT (tGBA IV) (LOAN 1330-AR) I. INTRODUCTION 1.1 Bank Lending to the Sector 1.1.1 Since 1962, the Bank has made six loans amounting to US$617 million to the Argentine Power Sector (Annex 1). The Bank made its first loan in 1962 to SEGBA to help finance the Costanera thermal power plant and transmission and distribution systems serving the metropolitan area of Buenos Aires (308-AR; US$95 milliou). In 1968-1969, the Bank made two additional loans to SEGBA to help to finance the expansion of thermal generation as well as the transmission and distribution system (525-AR for US$55 million and 644-AR for US$60 million); and one to Hidroelectrica Norpatagonica S.A. (HIDRONOR) for the construction of the 1200 MW El Chocon hydroelectric power plant (577-AR for US$82 million). Subsequent to a pause of eight years, the Bank resumed lending in 1976 with T,oan 1330-AR for SEGBA's fourth power project, which is the subject of this report. The Bank is currently supporting the construction of the binational (Argentina-Paraguay) Yacyreta hydroelectric power plant (Loan 1761-AR; US$210 million). 1.1.2 The projects of SEGBA helped to extend power supply to industry which is heavily concentrated in the greater Buenos Aires area. In addition to the normal technical and physical objectives of helping to meet electricity demand (especially industrial demand), the objectives sought by the Bank included sector institutional development and policy reforms through improvements of the sector organization and management and through improvements of the electricity tariff structures. 1.2 Sector Organization 1.2.1 The power sector, mostly owned by the Provincial and National Governments, has a fragmented organization; and no centralized planning body enforces least-cost investment decisions on a sector-wide basis. Currently, the Ministry of Public Works and Services, through the Secretariat of Energy, controls SEGBA, HIDRONOR, and Agua y Energia Electrica (AyEE). The Secretariat also represents Argentina in the two binational entities, Entidad Binacional Yacyreta (EBY) with Paraguay and Comision Tecnica Mixta de Salto Grande (CTMSG) with Uruguay. The Comision Nacional de Energia Atomica (CNEA) reports to the President of Argentina. 1.2.2 As a corporation owned by the Argentine Government, SEGBA is the only distributor of electricity in the greater Buenos Aires area. In November 1980, the Government purchased and transferred to SEGBA all the assets of Compania Italo-Argentina de Electricidad, S.A. (CIAE) a pri7ate company operating in Buenos Aires (with a concession area formerly overlapping that of SEGBA). Bank staff considered the acquisition of CIAE by SEGBA to be technically justified (to eliminate overlapsing of the two systems), and to require no prior consultation with the Bank.  -2- II. PROJECT PREPARATION AND APPRAISAL 2.1 Project PreRaration and Definition 2.1.1 During the execution of SEGBA's third power project (Loau 644-AR), Bank staff identified a transmission and distribution project requiring a loan of US$40 million to be included in the lending program for FY 1973. The proposed project would be SEGBA's fourth power project (SEGBA IV). To define the propnsed project, preparation and preappraisal missions visited Argentina i.n November 1973, March 1974, and July 1974. The first of two appraisal missions visited Argentina in September 1974. 2.1.2 The key issues raised in the first appraisal related to SEGBA's financial condition. Under the three earlier loan agreements, SEGBA had failed to comply with financial covenants because of delayed tariff increases and an undervalued rate base. To address these problems, in the course of negotiations (April/May 1975) for a proposed loan of US$115 million, representatives of the Bank, SEGBA, and the Government reached agreement on the following issues: (i) tariff increases for reaching and maintaining a.. 8X rate of return on net assets, with automatic adjustments to reflect changes in costs and currency devaluations; (ii) revaluation of SEGBA's assets; and (iii) attaining at least a minimum debt service coverage of 1.1 times for the years 1975, 1976 and 1977. 2.1.3 Because of adverse developments affecting the Argentine economy, Bank staff deferred presenting the negotiated loan to the Board in 1975, as originally expected. On August 4, 1975, the Bank informed the new Minister of Economy that major new Bank commitments to Argentina would be contingent upon economic performance. Before proceeding further with the proposed loan, the Bank informed SEGBA that the Bank would: (i) carry out a fresh review of: general economic and financial * conditions; prospects for management of external debt and balance of payments; and associated Government policies; and (ii) appraise for a second time the Project within tne context of SEGBA's expected investment and financial programs. 2.1.4 After a change of government administration (March 24, 1976), the introduction of drastic measures to strengthen the country's foreign exchange position, and the successful negotiation of a stand-by credit with the International Monetary Fund (IMF), a second appraisal mission visited SBGBA in June/July 1976. Annex 2 sets forth the definition of the Project (including studies) as agreed finally with SEGBA (para. 2.1.5). By  3- subsequently processing the loan rapidly, the Bank provided timely assistance to Argentina In connection with the efforts of the Government to obtain financial assistance from other sources. This timely assistance was made possible by simplifying procedures and by the efforts of Bank staff. 2.1.5 Based on the documents negotiated in April/May 1975 (the date of the first negotiations) representatives of the Bank, the Government and SEGBA successfully completed new negotiations for a loan amounting to US$115.0 million between August 16 and 20, 1976. Board presentation occurred on September 21, 1976 and loan signing occurred on November 1, 1976. The term of the Loan Agreement for Loan 1330-AR was 15 years, including three years of grace; the rate of interest was 8.9% p.a. The Loan Agreement became effective on November 1, 1976.  -4- III. PROJECT IMPLEMENTATION AND COSTS 3.1 Implementation of the Project, Changes, Delays 3.1.1 Details of mDdifications of physical Project components (lines, substations, distribution facilities) are shown in Annex 3. Originally planned and actual Project scope and completion dates are indicated with reasons for specific deletions, additions and other changes. This information reflects SEGBA's latest estimates for the components yet to be completed, as SEGBA does not expect to complete the physical components until the end of 1985. 3. .2 By mid-February 1977 the Government began to carry out the national power expansion study and the Bank began to review the bidding documents for goods. However, SEGBA reported that the main works of the !roject would suffer delays due to: (a) late passage of the Law No. 21.522 which established incentives for local industries and special regulations for foreign bidders under Bank financed procurement; (b) late approval of the national budget which assigned treasury contributions to SEGBA; (c) lack of tariff increases as covenanted under the loan; and (d) labor problems which SEGBA faced in the first quarter of 1977. Due to the above factors, SEGBA adjusted its 1977 construction program to available resources. This adjustment was considered acceptable by the Bank. 3.1.3 Slowdown in load growth, late approvals of national budgets and inadequate tariff increases frequently delayed Project execution throughout the construction period; and led to annual adjustments of the priorities of the program. The revisions to the Project were based on results of periodically repeated system expansion studies which provided the justification for the deletions, lpostponements, or advancements of lines and substations shown in Annex 2. SEGBA informed the Bank of the changes through its comprehensive quarterly construction reports and during Bank supervision missions. Bank staff found the proposed changes to the Project to be reasonable and appropriate to the circumstances. 3.1.4 Because of funding problems due to inadequate tariff levels, SEGBA had to cut its total investment program for 1977 and 1978. The situation improved temporarily during 1973 but deteriorated again from 1980 onward. The supervision mission of February 1980 predicted that Project implementation would have further delays if the Government continued its policy of increasing tariffs at a rate lower than the inflation rate. The March 1981 mission concluded that the major project components would not be completed before mid-1983 due to the further tightening of SEGBA's financial  situation. As a result of the delays described above, the Bank agreed to extend the loan closing date from December 31, 1981 to December 31, 1983. Annex 4 compares actual and forecast schedules of disbursements. 3.1.6 In general, the performance of most of SEGBA's construction contractors was satisfactory. However, the civil works contractor of an important 500 kV substation defaulted and went bankrupt. Four new contractors were engaged to complete the works, with SEGBA's own staff carrying out the erection of the electromechanical equipment. SEGBA also dismissed the contractor for the 220 kV Matheu-Empalme Tigre l$ne due to his noncompliance with his contract. 3.1.7 By mid 1984 about 93% of the physical Project had been completed. The last tenders for equipment and materials financed by the loan were awarded during the second half of 1983. After the loan closing date, December 3 ,1983, disbursements for some final payments continued until June 30, 1984. The slow rate for completing the remaining percentage of the Project resulted from the lack of local funds for civil works and the slow pace of erection carried out by local contractors or under force account. Completion of the Abasto 500/220 kV substation will be delayed to the end of 1985. However, late completion of this substation is not critical because of the slow load growth in the southern SEGBA service area and the delay of the completion of the line from the Alicura hydroelectric plant. 3.2 Implementation of Studies 3.2.1 The national power expansion program and the sector organization study financed with the proceeds of Loan 1330-AR were carried out by the Secretariat of Energy. Bank staff were satisfied with the performance of consultants who carried out these studies. The studies were comprehensive and well made. 3.2.2 The recommendations of the sector organization study were well implemented by the Government, which took the following important steps: (i) concentration of the planning and funding of the major generation and bulk transmission works in the hands of the Secretariat of Energy; and (ii) transfer of the subtransmission and distribution networks of AyEE to provincial distribution entities, leaving AyEE the responsibility - together with HIDRONOR - of building and operating generation and transmission works of national importance. 3.3 Project Costs 3.3.1 As set forth in Annex 5, the final Project cost, in current prices and at the official exchange rates and excluding financial charges, amounted to US$691.5 million, of which US$181.9 million were foreiga costs. This is 39.6% and 19.2%, respectively, above the appraisal estimates.  -6- 3.3.2 Based on peso amounts converted into US dollar equivalents, the above project cost, US$691.5 million, reflects the distortions of the official exchange rate, which for several years failed to reflect the proper relationship between external and domestic rates of inflation. To remedy the shortcomings of the official exchange rate relative to its purchasing power parity, a private Argentine firm (Techint) developed a purchasing power parity rate of exchange (PTE) which reflects a theoretical balance between the external and domestic rates of inflation (see Annex 12, footnote d). Based on the PTE, the project cost, in current prices, amounted to US$627.3 million, of which US$171.2 million were foreign costs, or 26.7% and 12.3%, respectively, above appraisal estimates. In constant prices, the project cost amounted to US$396.7 million, as compared with the appraisal cost estimate of US$384.9 million. This calculation shows an increase of 4.3% for local, 0.3% for foreign and 3.1% for total cost over appraisal estimates. However, due to the changes to the scope of the project, very limited conclusions may be extracted from these figures,  -7- IV. OPERATING PERFORMANCE 4.1 Demand 4.1.1 Due to the economic situation of Argentina during 1976-1983, the demand for electricity grew significantly less than the appraisal forecast, as shown in Annex 6. This slowdown in overall load growth required some changes in the Project as mentioned in para. 3.1.3. The forecast sales growth was 7.4% per year, but actual sales growth was 5.7X per year. However, this "growth" includes the incorporation into the company's operations of the CIAE in 1980, which represented about 15X of SEGBA's sales. 4.2 Losses 4.2.1 The energy losses were higher than those forecasted in the appraisal, thereby producing a slower than forecasted increase of revenue. As shown in Annex 7, the energy losses remained around 162 of total sales until 1981; the appraisal was based on losses reducing from 162 in 1975 to 14.3% in 1981. From 1981, actual losses grew rapidly to about 22.52. The increase is not in technical losses but in "unaccounted for energy" with most of the increase due to fraudulent use. Early in 1984, SEGBA's management set up a "Comision Contra Fraude' which is trying-out several approaches to combat fraud. Initial results observed for May 1984, while modest, show that SEGBA may be on the right track. If results continue to be encouraging, other power systems may be able to learn from SEGBA's experience. 4.3 Operating Costs 4.3.1 SEGBA made a significant effort to increase productivity by confronting the strong labor union and seeking to eliminate featherbedding. The number of employees declined from 24815 in 1976 to 20130 in 1983 (considering the 2937 employees of CIAE incorporated in 1980) (See Annex 7). This reduction mainly affected operational personnel (22X reduction) and administrative personnel (25% reduction). The results of this personnel reduction program were better than appraisal expectations. However, this effort had only a small effect on SEGBA's financial situation. 4.3.2 Nevertheless, SEGBA's operating costs per kWh sold (excluding depreciation) increased 47% in constant 1976 prices from about UScents 3.00 in 1976 to UScents 4.4 in 1983 (see table below), mainly due to the increase of cost of purchased power.  -8- 1976 1977 1978 1979 1980 1981 1982 1983 (in millions of US$ stated in constant 1976 prices) Salaries 118 105 101 109 118 147 118 122 Fuel 42 63 84 76 55 84 80 101 Purchased Power 59 81 63 63 63 67 143at 197a1 Taxes 13 17 38 55 46 55 50 55 Other Expenses 34 34 29 29 59 50 59 63 Total Operating__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Costs 266 300 315 332 341 403 450 538 GWh 8917 9350 9684 10299 10805 11818 11543 12249 Unit Cost USc/kWh 3.0 3.2 3.3 3.2 3.2 3.4 3.9 4.4 a/ Reflects availability and purchase of lower-cost hydro power outside of the SEGBA system.  -9- V. FINANCIAL PERFORMANCE 5.1 Actual and Appraisal Forecast Financial Data 5.1.1 Annexes 8, 9, and 10 compare actual and appraisal forecast financial data for the years 1976-1983. The appraisal figures were presented in millions of current US dollars; the actual figures were converted Into current US dollars using a purchasing power parity rate of exchange (PTE) (para. 3.3.2). The PTE was felt to provide a more meaningful comparison than the official exchange rate, which for several years lagged significantly behind internal inflation and then was drastically devalued (Annex 11). 5.1.2 SEGBA's financial performance was poor due to inadequate tariff increases. Its financial problems were further complicated by disproportionate resort to short-term debt and high levels of overdue accounts receivable. The following paragraphs discuss these factors. 5.2 Tariff Increases and Compliance with Revenue Covenants 5.2.1 During the period 1976-1983, the Government, by not authorizing adequate power tariff increases, did not comply with the revenue covenants of the SEGBA IV Guarantee Agreement and with subsequent and superceding revenue covenants agreed with the Bank in connection with the Yacyreta hydroelectric project (Loan 1761-AR). As a result of non-compliance on the part of the Government, SEGBA did not comply with its corresponding covenants; and its financial performance was poor: the rate of return (ROR) of SEGBA was negative in 1976, 1979, 1982, 1983, and 1984; and SEGBA never did earn the ROR covenanted in the SEGBA IV Loan Agreement -- 8%. 5.2.2 Rather than apply harsh remedies to enforce compliance, the Bank tried to be accommodating by engaging the Government in dialogue with respect to the formulation of constructive measures which would promote adequate tariff levels for the sector and SEGBA. This approach reflected an understanding attitude toward the succession of economic and political problems which buffeted the Government during the period 1976-1983. From 1979 onward, it also reflected the Bank's involvement with the Yacyreta hydroelectric project. 5.2,3 Within a few months of effectiveness of the SEGBA IV Loan Agreement (January 10, 1977) and throughout 1977, the Government and the management of the Bank discussed, in order to help the Government's anti-inflationary measures, a relaxation of the requirements for power sector tariff increases. By October 1977, an agreement was reached on a new timetable and mechanisms (e.g., revaluation of assets) for tariff adjustment and recovery of sector revenue shortfalls. The seriousness of the Government's commitment to this agreement was highlighted by the implementation of a nominal tariff increase of 59% at the end of December 1977. Nevertheless, SEGBA's ROR in 1978 was only 7.2%, not the covenanted return of 8%. 5.2.4 In 1979, in connection with the Yacyreta hydroelectric project, the Bank attempted, inter alia, to strengthen sector finances in general and  - 10 - those of SEGBA in parriaular. The revenue covenant of the Yacyreta Loan Agreement superceded chat of the SEGBA IV Loan Agreement; and committed the Government to increase by January 1, 1980, the level of SEGBA tariffs in real terms to the level prevailing as of January 1, 1979, to maintain that approximate level until December 1981, and to set tariff levels thereafter at levels sufficient to earn 8% annually on revalued assets. 5.2.5 Shortly after Bank approval (October 16, 1979) of the Yacyreta Loan Agreement, the Government informed the Bank that, as part of its anti-inflation effort, there would not be tariff increases sufficient to com- ply with the new revenue covenants. In response to non-compliance, the Bank postponed effectiveness of the Yacyreta Loan Agreement but continued to disburse the proceeds of Loan 1330-AR. During the next two years, the Bank engaged the Government in dialogue concerning constructive measures, coupled with strong warnings as to the willingness of the Bank to continue its participation in the sector and the need to raise tariff levels. 5.2.5 This approach remained in effect during 1980 and early 1981 while the Government took corrective action in the form of tariff increases, tax modifications, and debt restructuring to benefit the power sector. Based on these measures, and in response to the request of the Government, the Bank agreed (June 1981) to amend the Yacyreta revenue covenants. Under the amended covenant, the Government agreed to raise tariffs by 6.3% in real terms no later than December 31, 1981 over the level prevailing on April 30, 1981 and to maintain them thereafter at that level in real terms. Further, the Government agreed to (and later implemented) electricity rates for SEGBA reflecting average long run marginal costs of electricity supply. In consequence of the amended revenue covenant, the Bank declared the Yacyreta Loan Agreement to be effective. 5.2.6 This serious effort of the Bank and the Government to restore sector finances (and those of SEGBA) was later overwhelmed by a succession of adverse political and economic events. In consequence of these events, subsequent compliance by the Government with the amended revenue covenant was unsatisfactory, as SEXiBA earned negative rates of return in 1982, 1983, and 1984. The Bank contiiiued to defer taking nece*sary actions to enforce compliance, giving priority to the settlement of a ccmplex procurement dispute, the resolution of which was considered sufficiently serious to appear to jeopardize the Bank's continued participation in the Yacyreta project. 5.3 Government Contribution and Debt-service_-erae 5.3.1 Under the Guarantee Agreement, the Government agreed to provide SEGBA with US$50.3 million in 1976 and US$36b.5 million in 1977 to offset the total shortfall in earnings with respect to its covenanted 8% ROR. This covenant supplemented existing obligations under the concession agreementl/. 1/ The concession agreement requires the government to pay the ROR make-up (Defecto de beneticio) which is the difference between actual earnings and the earnings required to obtain 8% of IROR,  - 11 - Actual contributions fell short of those amounts (US$11 million in 1976 and US$31 milion in 1977). During the period between 1978 and 1981, the Government complicated the financial problems of SEGBA by ceasing to make further contributions and by imposing special taxes on SEGBA. These taxes increased three times in real terms during 1977-1983 (using the Argentine consumer price index as deflator). The Government's contribution was reestablished in 1982 to cover SEGBA's operational deficit. 5.3.2 In a side letter to Loan 1330-AR, the Government agreed to the recovery of SEGBA's past earnings shortfalls (with respect to the Concession Agreement between 1977 and 1979) but this recovery was never carried out. In 1982, the Government paid SEGBA the accumulated ROR make-up for the first time since 1970. The whole amount was used to pay part of the short-term loans accumulated during the period. 5.4 Short-term Debt - 5.4.1 The deterioration of tariff and revenue levels produced a negative self-financing ratie during all the period except in 1978. The difficulty of financing its investment program forced SEGBA to make a disproportionate use of local short-term loans. The composition of debt during the period is shown below. 1976 1979 1981 1982 1983 (in millions of current US$) Total long-term debt (including current portion) 374 291 795 834 774 Short-term debt 34 136 477 670 250 Short-term debt as percentage of total long-term debt (%X 9 47 60 80 32 5.5 Accounts Receivable 5.5.1 As a consequence of the economic deterioration, the level of accounts receivable increased sharply from 76 days in 1980 to 215 days in 1982 and 197 days in 1983, mainly due to arrears from the Government agencies. The appraisal considered a value of 76 days as satisfactory.  - 12 - VI. INSTITUTIONAL PERFORMANCES 6.1 The Borrower 6.1.1 At the beginning of the period 1976-1983, SEGBA succeeded in improving overall efficiency by reducing unnecessary staff, overtime, and general expenses, and by increasing reliability through improved maintenance of thermal generation equipment. 6.1.2 SEGBA did not successfully influence Government budgetary and tariff decisions, which were mainly responsible for the delay in P-roject completion (about 4-1/2 years). However, the distribution componenl' was completed in 1982 with a delay of only one year (para. 3.1.1). The installations, equipment and construction were of a high quality and constituted a credit to the engineering and design capability of SEGBA technical staff. SEGBA's execution was more than satisfactory under adverse circumstances not of its own making. 6.2 The Government 6.2.1 While there were serious efforts to restore sector finances in 1978 and 1981, the fact remains that the Government missed the opportunity to authorize tariff increases sufficient for SEGBA to earn the 8% rate of return stipulated in the Concession Agreement. In 1982 and 1983, there were no such opportunities, as political and economic events ovrwhelmed the Government. During this period, the execution of SEGBA IV was, along with virtually every other project, severly affected by Government policy reversals and "on-again, off-again' indecision as to the relative importance of fiscal austerity and realistic pricing. No Argentine Government in these years succeeded in maintaining sound public sector pricing policy in the context of a declining economy and rising inflationo 6.3 The Bank 6.3.1 The Bank appraised the project as a repeater' operation with a sophisticated borrower. The Bank relied heavily on the analyses and judgements of the borrower concerning its requirements, in view of the large number and diversity of components making up the project and the satisfactory experience with the borrower's previous projects. Indications are that all components eventually installed were needed and applied correctly. 6.3.2 The Bank showed appropriate flexibility in agreeing to the changes in physical component, scope, and timetables for installation dictated by the changing pattern of load development and the financial constraints of the  - 13 - chauging pattern of load develoiment and the financial constraints of the borrower. Supervision of the administration of the many hundreds of procurement items (not unusual for distribution projects) and the resolution of the few procurement issues were carried out successfully. Spot visits were made to project sites during supervision missions as inspection of items actually procured and installed would have been impractical given their large number and geographic dispersal. 6.3.3 The Bank's supervision of the studies by the Secretariat of Energy allowed the Bank to maintain a dialogue on the content and findings of the studies for power sector organization and national expansion program. In the .later years of the implementation of the Project, this and SEGBA's su- pervision were carried out in connection with, or part of, the preparation, appraisal and supervision of the Yacyreta hydroelectric project (Loan 1761-AR). 6.3.4 In 1981, as part of making Loan 1761-AR effective, the Bank reached agreements with the Government on the general policy for the development cf the power sector. Whereas rational measures were taken to improve sector organization by separating the responsibility for distribution from bulk generation and transmission entities, the Government did not comply with the aspects on sector finances of these agreements. 6.3.4 The financial deterioration of SEGBA was the subject of intensive efforts and examination by Bank staff. 6.3.5 The Bank was flexible with regard to the problems of SEGBA's financial performance, although without ultimate success. The Bank agreed to several changes in the financial covenants (related to tariff increases), waived compliance on several occasions, and allowed SEGBA to borrow from commercial banks as required. It is an open question whether the Bank could have achieved more than it attempted with respect to the financial situation of SEGBA, given the macroeconomic policies of the Government. However, before 1982, by engaging the Government in dialogue rather than taking harsh measures to enforce the financial covenants, when there was clear indication that the financial situation of the Borrower was deteriorating, the_Bank may have lost credibility as to the importance it attached to this under- standing. On sector grounds, it would now appear that a stronger Bank stance would have been warranted. After 1982, economic and political events overwhelmed the Government and Bank efforts to restore sector finances.  -14- VII. PROJECT JUSTIFICATIO'N 7.1 Appraisal Justification 7.1.1 The appraisal report justified the undertaking of the Project because it would: (i) provide SEGBA with uransmission and diEtribution facilities to use its share of remote hydropower (El Chocon, Planicie. Banderita and Salto Grande) and the output of the nuclear power pla its. Energy from these sources would allow SEGBA to meet increasing demand for power as a result of-the expected revitalization of indu trial activities (para.1.1.2). While most of industrial demand lagged expectations, the distribution facilities under the project allowed connection of at least the number of customers estimated at appraisal. (ii) support the Bank's objective of improving sector organization, planning, financing and operations (para. 1.1.2), to attain maximum economy and efficiency in the power sector. This support was provided through power sector organization study and by tailoring the national power expansion to the least cost expansion plan. Except in the area of sector finances (para. 5.2.1 and 5.3.1), the above objec- tives have been achieved, albeit with a substantial time overrun.(para. 3.1.4). 7.2 SEGBA Load Growth 7.2.1 The main objective to be achieved by the physical project components was- to provide the transmission and distribution facilities needed to supply the growing load in SEGBA's concession area. Sales to the industrial sector were lower on average than forecast, the actual level of energy losses was not reduced and, overall, the load grew slower than predicted. However, the project components were added in a flexible and timely fashion by adjusting the construction timetable to the changing demand growth. 7.3 Internal Rate of Return (IRR) 7.3.1 The appralsal report indicated an IRR of 21Z on project investment. Based on actual cost data for the Project, the IRR is estimated at 5.2% (Annex 12). This value is based on actual results so far achieved but with adjusted attributable fuel operating and maintenance costs and revenues to reflect approximately economic values. An adjustment of fuel costs to international prices was made because SEGBA obtains fuel at heavily subsidized prices.  - 15 - VIII. LESSONS TO BE LEARNED 8.1 Successful Project 8.1.1 The proceeds of tne loan were usefully invested and the physical objectives reached, even though none of the financial objectives were accomplished and SEGBA's financial position has seriously deteriorated over the last few years As a result of timely changes to the Project in response to changing system requirements, SEGBA completed the project reasonably within the original cost estimates. 8.2 Sector Financing 8.2.1 In the future, the sector's financial condition and outlook will need to be followed closely and the agreements under the Yacyreta Loan modified in line with the changes in sector expansion plans and the financial conditions in the country. The Bank should take a hard look at its approach to conditionality, and it would be proper to consider lowering the financial targets but taking a stricter stance regarding compliance with the agreements thereby reached. June 26, 1985  -16- AMIM FUm PMw?M - MW 130-hA Sizyw of Bwk Luaiiw to t1e Sombr Anb0 Date hwNa A. AAjvQIsb=W lam 308-a Ji. 1962 95 SE - 1st a Ale Pbwer 525-AR Jan 1968 55 MM - 2I 1th Aire Pmr 577-A Oct. 1968 82 n - EL Qxar P r 644-hA Nv. 1969 60 SMA- 3rd 1 Alrz Pcwr 1330-R Sep. 1976 115 SES - 4th u Atr's Por Sub-totea 407 B. 1X.sbauz la 1761-AR Sep. 1979 210 EBY- Yacy!reta liyodre*ic 1~YTL 617 Di :2 26, 1985  - 17 - ARM4K 2 Page I of 2 ARGN W=SFRTD MMECRIa) IEL MM BUMW AME (SEG&) FOH P FROWr= - ION 133D-AR M0Iial, 8Re ai an Actual Project Scope Original Reapraised Actual Project 1/ Profect 2/ Etoect Trazdssion Unes (ki) 50D kV - sigle circuit - n - 121 58 - cmversion fru 22D kV - 120 62 220 kV -double ciradt - overhead 134.5 127 130.9 - sixrle circit - oveha - - 47 - undergrond cable - 12 23 132 kV - double circiit - overhead 145 74 66.8 - sie cirdt - oveemi 13 12 71.2 -unde rgr d cable 60 25.6 36.4 Sibstations, with witc*gears 50/220 kV (MVA) 80D 3,200 3,200 220/132 kV (MVA) 1,800 2,100 2,100 132kV/MV (MVA) 1,90 1,880 1,960 Reactors (MVAR) 100 600 424 Distribution 13.2 kV - overhead lines (km) 1,900 1,330 ) - undergrrnd cables (lan) 1,700 1,330 ) 2,239 380/22D V distributin lines (km) 6,78D 4,743 ) 380 V unerd K:able (n) 950 837 )6,462 13.2/0.38 kV dietributim transformers (MVA) 1,365 800 - 999 Service conrctions (thOUSA-d) 170 180 254  - 18 - ANNU 2 Page 2 of 2 MPters (thousand) 315 300 287 Public 1ightIig fixtures (thousai) yes 21 2.2 ontrol uipment Yes YS yes Studies National por orgardzatimx tD yes yes National pr epansion progm (1east cost) to yes yes I/ Suree: Appraisal Report No. 6756-AR of ty 29, 1975. Z' Sace: Appraisal Report No. 675b-AR of Septebr 7, 1976.  -19 - ANNEX 3 Page 1 of 2 setic7ne3 eLW"clN ML tam now 5m (tSA) r -ll, I J 0 1 tfaoe,t Om 1ct000 Ni9ol* t ONt *l4 cmi.tt" bros _ _4 i^ or.oot .~- - -. . 4*. *o Lt.,? '011..? (0 - S ~ ~tS _ne C*Oo oto 0e Lowofet t Cos 5let l * tc ___fs_ _ I. ?ooowegtoa we odsbttrimdt.o Ctrert* AMt t. - 1 ra17 of 0 et 2 *0 e etivalt P1.14s-3.tdsOf to ckV 4* * 040sc 41*0 11/*01 62 04." v/47 I3t ;M "a to-thiat0e to Os-IC 41/3 6*)1 S* 04105 A'*3 172'(PI 1i11*41) *ovis 7ns 1054lt0* 40b4t,7*1 0 t,i) SC 1*0 0' 0tlet.6 tre *0.0e'c _ c00 l "r. of Ito kV7 4 hkIr otreuto tsm."Aose to W. ILV s11 Ool-s 311 :l __ tr aetfm to $11 v _ *Issobgetp70 04 7* oc4 7103 *17. - - - - - 1rssI.,o e tose 50034 0 pu OoOg.9Od1qss *7 04-40 4/74 4/79 - 4ql*7 outa140 4007070 0c 0110 bltotal (a t0 SC I . '2 tt