Argentina - Fifth SEGBA Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4577-AR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN WITH THE GUARANTEE OF THE REPUBLIC OF ARGENTINA IN AN AMOUNT EQUIVALENT TO US$276.0 MILLION TO THE SERVICIOS ELECTRICOS DEL GRAN BUENOS AIRES (SEGBA) FOR THE SEGBA V POWER DISTRIBUTION PROJECT June 3, 1.987 This document bas a testricted distribution and may be used by recipients only in the performance of their ofiial duties. Its eontents may not otherwise be disclosed without World Bank authorization.  FOR OMCIAL USE ONLY ARGENTINA SEGBA V PROJECT LOAN AND PROJECT SUMMARY Borrowers Servicios Electricos del Gran Buenos Aires (SEGBA) Guarantor: The Government of Argentina Amount: US$276.0 million equivalent Terms: Repayment in 15 years including three years of grace with interest at the Bank standard variable rate. USS million Financing Plan: Local Resources 311.7 IBRD Loan 276.0 Borrowings from commercial banks 190.5 Total 778.2 Economic Rate of Return: 15.4% for SEGBA's 1988-1994 time slice investment program Staff Appraisal Report: Report No. 6758-AR 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.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SERVICIOS ELECTRICOS DEL GRAN BUENOS AIRES (SEGBA) FOR A POWER DISTRIBUTION PROJECT The following report and recommendation on a proposed loan to Servicios Electricos del Gran Buenos Aires (SEGBA) for an amount of US$276.0 million equivalent is submitted for approval. The proposed loan would have terms of 15 years, including three years of grace, at the standard variable interest rate and would be guaranteed by the Republic of Argentina. The loan would assist SEGBA in financing rehabilitation and expansion of its distribution networks. * 2. Background. The Government of Argentina is making efforts to improve resource allocation in the energy sector. Tn the oil and gas sector measures have been taken to encourage private investments. In the electricity sector, the Bank and the Government have agreed on a program to: (a) optimize sector investments; (b) improve sector finances; (c) improve sector organization and regulation; and (d) improve operations of and coordination among the national utilities. The first step was taken by the reformulation of the covenants of Loan 1761-AR (Yacyreta project) which now provide for rehabilitation of sector finances through a program of efficiency improvements and tariff increases, annual financial targets, complemented by studies on sector organization. Next was the agreement on the Power Engineering project which provides inter alia recommendations for improving sector regulation and coordination in distribution and transmission. As part of the Bank's energy sector assistance program in Argentina, the proposed project alms at enhanced operating efficiency and financial performance of SEGBA, the largest power company Ln Argentina, responsible for distribution services in the capital region, covering about 35% of national power demand. 3. Prolect Obiectives. The main objectives are (a) to reduce mounting distribution losseq and to improve SEGBA's operational efficiency; (b) to ensure adequate and reliable energy supply in the Buenos Aires area for economic growth requirements; and (c) to support rehabilitation of SEGBA's finances. The proposed project would provide stability to SEGBA's investment program and correct imbalances in the overall power sector expansion program. It would enable SEGBA to rehabilitate and expand the distribution networks and reduce the high energy losses in the Greater Buenos Aires area (by one-third in 1990). It would improve SEGBA's financial situation by expanding its liquidity and by correcting the main distortion in its tariff structure and increasing average tariff levels. Consumer tariffs are already close to average long-run marginal costs. However, 44% of SEGBA's revenues are passed to the Government as taxes, which accounts for its low rates of return in relation to tariff levels. These transfers also enable SEGBA to make significant contributions to financing of generation investments.  -2- 4. Proiect Description: Project components would include (a) implementation of a loss reduction program; (b) transmission, subtransmission and distribution works in SEGBA's 1988-1992 expansion program as well as acquisition of equipment for SEGBA's load control and general plant, and (c) support to SEGBA's training program. 5. The total financing required for the proposed project is estimated at US$778.2 million equivalent, with a foreign exchange component of US$286.9 million (372). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank group operations in Argentina are given in Schedules C and D respectively. A map showing the location of the project is also attached. The Staff Appraisal Report No. 6758-AR dated May 22, 1987 is also being distributed separately. 6. Rationale for IBRD involvement: The project is a key element of the Bank's general policy of supporting the Government's efforts to Improve operating performance and investment planning in the power sector. It would contribute to improving the management of SEGBA and its existing infrastructure while constituting a prototype for planned future efforts to enhance other provincial power companies' capacity to plan and carry out distribution investments. The project would: (a) support efficiency improvements in SEGBA's service and delivery standards, metering, billing, collections, staff utilization, financial planning and maragement information systems, and (b) improve its self-financing and progressively eliminate its reliance on Government budget support. 7. A. Actions Areed by the Goverment and SEGBA (a) The Government would allow SEGBA to achieve the following minimum rates of return targets on revalued assets including the amounts received from the Electrical Funds as part of the .evenues: -5.5% in 1987, -3 in 1988, -1% in 1989, 22 in 1990, 42 in 1991 and in 1992, and 5% in 1993 and thereafter; (b) The Government would (i) allow SEGBA to increase its average yearly rate in real terms as follows: in 1987, by the amount required to recover its December 1986 value; in 1988 and thereafter by such amounts required to achieve the covenanted rates of return; (ii) allow SEGBA, as part of the required rate increases to eliminate the discounts applied to small consumers; and (iii) by December 31, 1987 present to the Bank a satisfactory plan of tariff increases for 1988 including the plan of action to eliminate the discounts to small consumers; and by December 31 of every year thereafter prepare a plan of tariff increases for the following year satisfactory to the Bank; (c) The Government would provide SEGBA with the following equity contribution in USS million: 98 in 1987 and 175 during 1988-1990, distributed in annual amounts satisfactory to the Bank. Also, not later than December 31, 1987, the Government would compensate  - 3 - SEGBA, either through cash refunds or by offsetting payment obligations of SEGBA, for fuel taxes paid in excess during the period 1982-1984. (d) The Government would cause SEGBA to obtain through borrowings or otherwise, in addition to the proposed Bank loan, in US$ million, at least: 108 in 1987 and 139.3 during 1988-1990 in yearly amounts satisfactory to the Bank; (e) The Government would pay or cause to pay to SEGBA the overdue arrears of the federal agencies as of April 30, 1987 within 18 months beginning on October 1, 1987, and by December 31, 1987, 152 of the arrears would have been paid; and pay or cause to pay on time the current billings of these entities issued after January 1, 1988 within 60 days of billing date; (f) The Government would make its best efforts to ensure that the overdue amounts owed by the provincial and municipal entities as of April 30, 1987 are paid within 18 months beginning on December 31, 1987, and also thereafter that these entities pay their current consumption within 60 days from billing date; (g) The Government by December 31, 1987 would prepare an action plan satisfactory to the Bank indicating all administrative and monitoring action required to supervise compliance with the agreements under (f) above; (h) SEGBA would carry out, by December 31, 1987 a study satisfactory to the Bank on monthly billing and after taking into account any Bank comments would promptly implement its recommendations by July 1, 1988; (i) The following covenants of loan 1330-AR and 1761-AR would be repeated: (i) SEGBA would seek the Bank's consent before incurring any new debt if its individual debt service coverage test becomes lower than 1.3; (ii) The Government would monitor monthly the adequacy of SEGBA's tariff levels in relation to costs through the composite index agreed under loan 1761-AR and report to the Bank semi- annually the findings of this monitoring including proposed remedial action, if any, to fully comply with the covenanted targets; (iii) SEGBA would contract independent auditors acceptable to the Bank to audit SEGBA's yearly financial statements; (iv) SEGBA would revalue its assets every year; (j) SEGBA would operate with a Current Ratio equal or greater to 1.0 with an accounts receivable ratio not greater than the following  equivalent days of sales: 55 in 1987, 50 in 1988-89, and 45 thereafter; and with a short term debt to total debt ratio of 0.2 or lower; (k) Every year SEGBA would review with the Bank its investment and financing plan for the coming year. At that review the Bank would monitor SEGBA's past and expected compliance with covenanted financial targets on the basis of five-year financial projections prepared in a format satisfactory to the Bank; (1) SEGBA would carry out a comprehensive action plan to improve its operational and financial efficiency; and (m) By December 31, 1987, the Government would carry out, under terms of reference and assisted by consultaats satisfactory to the Bank, a diagnostic study of SEGBA's organization and operational efficiency. B. For Loan Effectiveness: As conditions for effectiveness, the Government would have provided SEGBA with at least US$65 million of the equity contributions to be provided for the year 1987 ia accordance with (c) above. 8. Justification. The project would improve the reliability of electricity supply for some 12 million present consumers and 1.7 million new users, expand its availability and reduce power losses. It would improve SEGBA's management, operations and maintenance, and support its institutional recLperation. 9. Risks. There is no special implementation risk related to the project. The risks involve the weak financial situation of the sector. These have been minimized through a financial program based on a combination of tariff actions and Government's contribution. 10. Recommendation. I am satisfied that the proposed loan would comply with the articles of agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. June 3, 1987  - 5 - SCHEDULE A Estimated Costs:j/1 Local Foreign Total X --- (US$ Million)------ Part A Loss reduction program 14.5 1.0 15.5 2.1 Computer facilities and management information system 2.0 1.5 3.5 0.5 Studies 0.2 0.5 0.7 0.1 Subtotal Part A 16.7 3.2 19.7 2.6 Part B Transmission and subtransmission 86.8 39.1 125.9 16.7 Distribution works 269.4 125.3 394.7 52.4 Communications telecontrol and general plant 62.4 26.8 89.2 11.9 Subtotal Part B 418.6 191.2 609.8 81.0 Part C Training 5.0 3.0 8.0 1.1 Subtotal Part C 5.0 3.0 8.0 1.1 Total Base Line Cost 440.3 197.2 637.5 84.7 Physical Contingencies 35.3 15.6 50.9 6.8 Price Contingencies 15.7 48.5 64.2 8.6 Total Project Cost 491.3 261.3 752.6 100.0 Interest on Bank Loan during grace period - 25.6 25.6 Total financing recuired 491.3 286.9 778.2 * Financing Plan: IBRD loan 0.1 276.0 276.0 35.5 SEGBA internal cash generation 161.7 0.0 161.7 20.8 Government contributions 125.0 0.0 125.0 16.1 Borrowing from commercial banks 179.6 10.9 190.5 24.5 Consumer-contributions 25.0 0.0 25.0 3.2 Total 491.3 286.9 778.2 100.0 L Excluding taxes and duties.  -6G - (SCHEDULE B Page I of 2 Procurement: usf mILLION ------------ PROCUREMENT METHOD ------------------ Total IcB ----------------Other Methods ---------- Cost LCB RP FA LU8 Other Part A EquTpment and Uaterials 1.6 8.e 0.0 0.0 0.0 0.0 10.1 (1.5) (1.5) Consultant Services 8.1 8.1 (1.6) (1.5) Other Services 4.4 4.4 Part 8 t Equipment and Materials 244.0 111.4 356.4 (244.0) (244.0) Civil Works 224.2 20.0 60.0 304.2 Engineering and Administration 0.0 0.0 0.0 66.8 0.0 6.0 60.8 Part C Tr=atnng equipment 0.0 0.0 0.0 0.0 l.O 8.0 1.0 (1.0) (1. 0) Other Service. 0.0 0.0 0.0 e.0 0.0 8.6 -8. Total 245. 6 348.8 20 1 21.7 7 2.6 (245.5) (-) (-) (-) (1.0) (3.5) (250.0) NOTES: From the US$276.0 million Bank loan a total of US$260.0 million would be allocated for procurement of goods and services; tho remaining US$26.0 would finance interest during the project oxecution. Figures in paronthesis show the allocation. from the proceeds of the loan ICB: International Competitive Bidding LC8: Local Competitive Bidding RP: Reserved Procurement FA: Force account (to be supplied through the borrower's manpower and/or resources) LIB: Ltmited international bidding Other: Consultant services to be procured through Bank guidelines when financed with proceeds from the Bank loan; other services such as scholarships and training related expenses.  - 7 - SCHEDULE B Page 2 of 2 Disbursements Amount Category US$ million Percentage a) Equipment and materials 220.5 1002 of foreign ex- for parts A, B and C of the expenditures and project. 100% of ex-factory of locally produced goods. b) Consultants services for 1.5 100% of foreign ex- parts A and C of the penditures. project. c) Expenses for part C of the 2.0 100% of foreign ex- project. penditures. d) Interest during the grace 26.0 100% period in the Bank loan. e) Unallocated 26.0 Total 276.0 Estimated Bank Disbursements: Bank Fiscal Year 1988 1989 1990 1991 1992 1993 1994 -US$ Millions ------------------- Annual 27.0 24.1 49.4 43.3 43.7 42.2 41.3 Cumulative 27.0 51.5 100.5 148.8 192.5 234.7 276.0  SCHEDULE C TIMETABLE OF KEY PROJFr.T PROCESSING EVENTS (a) Time taken to prepare : Seven months (b) Prepared by : SEGBA and individual consultants (c) First Bank mission s May 1986 (d) Appraisal mission departure : January 26, 1987 (e) Negotiations : May 1987 (f) Planned date of effectiveness : November 1987 (g) List of relevant PCRs and PPARs s Loan 577-AR - PCR No. N.A.; PPAR No. 1353 /a Loan 644-AR - PCR No. N.A.; PPAR No. 1055 Loan 1330-AR - PCR No. N.A.; PPAR No. 6098 /a PPAR includes PCR.  SCHEDULE D Page 1 of 2 THE STATUS OF BANK GROUP OPERATIONS A. STATEMENT OF BANK LOANS AND IDA CREDITS a/ (As of March 31, 1987) ARGENTINA Amount less Undis- Loan No. Year Borrower Purpose Cancellations bursed (US$ million) Fully disbursed loans (14) 786.0 1384 1977 Argentina Highways 104.7 0.0 1521 1978 Argentina Grain Storage 87.0 37.4 1761 1979 Argentina Yacyreta Power 210.0 64.6 1905 1980 Argentina Vocational * Training 0.9 0.02 S-020 1980 Argentina Coal Exploration 10.0 0.5 2031 1981 Banco Nacional Oil and Gas de Desarrollo Credit 100.0 74.3 1981 Yacimientos Petroliferos Refinery Fiscales Conversion 200.0 5.3 2063 1981 Banco Nacional Industrial de Desarrollo Credit II 100.0 71.7 2296 !.983 Argentina Highway 100.0 52.2 2592 1985 Yacimientos Gas Utilization 180.0 169.3 Petroliferos and Technical Fiscales Assistance 2032-1 1986 Yacimientos Refinery Petroliferos Conversion 116.0 74.6 Fiscal-.. 2641 1986 Argentina Water Supply 60.0 60.0 2675 1986 Argentina Agricultural 350.0 176.8 Sector Loan 2712 1986 Argentina Public Sector 18.5 13.6 Management 27511/ 1986 Argentina Power 14.0 14.0 Engineering TOTAL 2,437.1 Of which has been repaid 597.3 1,839.8 Amount Sold 12.8 Of which has been repaid 12.8 Total now held by Bank 1,827.0 Total undisbursed 814.3 11 These loans are not yet efiective. 2I Cancelled a! The status of the projects listed in Part A is described in a separate report on all Bank/IDA financial projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31.  SCHEDULE D Page 2 of 2 B. STATEMENT OF IFC INVESTMENTS (As of March 31, 1987) ARGENTINA Fiscal Amount in US$ million Year Obligor Type of Business Loans Equity 1960 Acindar Industria Steel Products 3.7 - 3.7 Argentina de Aceros, S.A. 1960 Papelera Rio Parana, S.A. Pulp and Paper 3.0 - 3.0 Engranajes, S.A.I.C. 1961 Fabrica Argentina de Automotive 1.5 - 1.5 1962 PASA, Petroquimica Petrochemicals 3.0 - 3.0 Argentina, S.A.I.C. 1965/ 72 Celulosa Argentina, S.A. Pulp and Paper 12.5 - 12.5 19691 75 Dalmine Siderca, S.A. Steel Products 17.0 - 17.0 1969 Editorial Codex, S.A. Printing and 5.0 2.0 7.0 Publishing 19711 73 Calera Avellaneda, S.A. Cement 5.5 - 5.5 1977/ 84 Alpargatas S.A.I.C. Textiles & Fibres 28.4 2.0 30.4 1977 Soyex S.A. Soybean Processing 25.0 - 25.0 Plant 1978 Massuh, S.A. Pulp and Paper 13.5 2.3 15.8 1978/ Juan Minstti, S.A. Cement and 83.0 - 83.0 81/82 Construction materials 1978/ Ipako-Industrias Chemicals and 18.3 2.0 20.3 79/82 Petroquimicas Petrochemicals 87 Argentinas S.A. 1979/ Alpesca S.A. Fisheries 5.2 1.6 6.8 83/84 1984/ 86 Petroquimica Cuyo SAIC Chemicals and 41.8 4.0 45.8 Petrochemicals 1986 Inversiones Industriales Money and - 1.3 1.3 S.A. and Roberts Capital Markets Participaciones, S.A. 1986 Atanor S.A.M. Chemicals and 7.0 1.0 8.0 Petrochemicals 1986 BRSA Money and Capital 10.0 - 10.0 Market 1987 Hidra Oil Chemicals and 80.0 - 80.0 Petrochemicals Total Gross Commitments 363.4 16.2 379.6 Less Cancellations, Terminations Repayments and Sales 196.8 2.0 198.8 Total Commitments Now Held by IFC 166.6 14.2 180.8 Total Undisbursed 116.0 5.0 121.0  132kv I> - - SEGBS CONCESSION AREA I ' ' {(Grand Buenas Aires) SGM'S CAammdm Aw.a MATHEU X2 D Z 220/132 _ ' 500/22~ ~~00/220\ |. \\ &ms t\ iN.~~~~~~~~~~~~~~~~~~201 34\= '5W '34- \XNjOI47N-60 :'t),.s, $W,7FERfNAfAOS Numbered Substarkmns ag^<)tirspSXti^? \ \ ? g,rhX ,^^\RiJ