Honduras - El Cajon Power Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7901 PROJECT PERFORMANCE AUDIT REPORT HONDURAS EL CAJON POWER PROJECT (LOAN 1805-HO AND CREDIT 989-HO) JUNE 30, 1989 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Leapiras 2 = US Dollar 1 Lps. 2 - US$1 GLOSSARY OF ABBREVIATIONS 0 ENEE Empresa Nacional de Energia Electrica (National Electric Energy Company) ENALUF Empresa Nacional de Luz y Fuerza (National Light Company) OED Operations Evaluation Department PPAM Project Performance Audit Memorandum PCR Project Completion Report GOVERNMENT OF HONDURAS FISCAL YEAR January 1 - December 31 THE WOWLD IANK nO * AL USE ONLY Washngon. DC. 20413 U.S A. 01ce of OUNeCAeM June 30, 1989 NMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Honduras El Calon Power Proiprt (Loan 1805-HO and Credit 989-HO) Attached, for information, is a copy of a report entitled 'Project Performance Audit Report on Honduras - El Cajon Power Project (Loan 1805-HO and Credit 989-HO)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. It contents may not otherwise be disclosed without World Bank authoriation. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT HONDURAS EL CAJON POWER PROJECT (LOAN 1805-HO and CREDIT 989-HO) Table of Contents Page No. PREFACE ............................................................ ..... i BASIC DATj. SHEET .................................................... ii EVALUATION SUMMARY .................................................. iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND ........................................1...... 1 A. Earliest History ....... .................................... . 1 B. Mounting the Operation ...................................... 1 C. Dissident Voices .................................... 2 II. THE ECONOMIC ANALYSIS ................................... 3 A. The Technique .......... ..................................... . 3 B. Limitations of the Technique ................................ 5 III. THE IMPACT OF EL CAJON ..................................... 6 A. ENEE's Situation Today ................................. 6 B. The Bank Proposes Action ............................... 8 VI. CONCLUSIONS ................................................ 9 A. Overall Assessment ......................................... . 9 B. Lessons to be Learned ....................................... 9 ANNEXES 1. Motor-Columbus Economic Analysis........................ 11 2. ENEE's Condensed Operating Statements .................. 13 3. Extracts from President's Report on Proposed US$50 Million Structural Adjustment Loan ............ 15 ATTACHMENTS 1. Comments from the Borrower ...................................... 17 2. Comments from the Co-financier ................................... 23 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. Table of Contents (Cont'd) Pane No. PROJECT COMPLETION REPORT I. INTRODUCTION ............................................... 33 II. PROJECT PREPARATION, APPRAISAL AND NEGOTIATIONS ........... 35 III. PROJECT IMPLEHENTATION ..................................... 39 IV. PROJECT JUSTIFICATION ...................................... 43 V. FINANCIAL PERFORMANCE ...................................... 45 VI. INSTITUTIONAL PERFORMANCE .................................. 47 VII. LESSONS TO BE LEARNED ...................................... 49 PCR ANNEXES 1.1 Sumary of Bank Lending to the Sector ...................... 51 2.1 Compliance with Loan, Credit and Guarantee Conditions ...... 52 3.1 Actual and Forecast Construction Initiation and Completion Dates ...................................... 53 3.2 Major Project Modifications ................................ 54 3.3 Forecast and Actual Costs and Sources of Financing ......... 55 3.4 Actual and Forecast Schedule of Disbursements .............. 61 4.1 Actual and Forecast Energy and Demand Requirements (1980-1990) ........................................... 62 4.2 Forecast (Appraisal Report) Return on Investments .......... 63 4.3 Actual (Borrower's Final Report) Return on Investments ..... 64 5.1 Actual Operating Data ...................................... 65 5.2 ENEE's Performance and Financial Indicators ................ 66 5.3 Comparison of ENEE's Rates ......................-.......... 67 5.4 Actual and Forecast Income Statements, 1980-1987 ........... 68 5.5 Actual and Forecast Balance Sheets, 1980-1987 .............. 69 5.6 Actual and Forecast Sources and Applications of Funds, 1980-1987 ............................................. 70 5.7 ENEE's Long-Term Debt ...................................... 71 5.8 Accounts Receivable, 1982-1986 ............................. 73 i PROJECT PERFORMANCE AUDIT REPORT HONDURAS EL CAJON POWER PROJECT (LOAN 7.905-HO and CREDIT 989-HO) PREFACE 1. ThiE report is an audit of the performances of Empresa Nacional de Energia Electrica (ENEE) and the Bank in carrying out El Cajon Hydroelectric Project, for which Loan 1805-HO of US$105 million and Credit 989-HO of US$2n million were approved on March 11, 1980. The principal issue is the Project's size vis-a-vis both the market for power, and the capability of ENEE and of the economy to comfortrbly absorb so large an investment. 2. The PPAR consists of a Project Performance Audit. Memorandum (PPAM) prepared by the Operations Evaluation Department (OED), aid a Project Comple- tion Report (PCR) prepared by the Latin America and the Caribbean Regional Office. In carrying out its audit, OED has reviewed (i) the PCR, (ii) the Bank's files and certain Prcject Documents from the archives, (iii) the Staff Appraisal and President's Reports together with the Loan and Credit Agree- ments, (iv) the minutes of the Meeting of the Executive Directors during which the operation was approved; and interviewed (i) staff of the Bank involved in the Project, (ii) the Consultant who assisted in the preparation of the PCR, and (iii) staff of the Inter-American Development Bank whc were associated with El Cajon. Finally, OED's audit has benefitted ftom an analysis of ENEE's recent financial performance, carried out in early 1988 in connection with the work of a Bank economic mission in Honduras, and the analysis of Honduras prepared by the Bank in connection with a proposed Structural Adjustment Loan. 3. The PCK faithfully reflects the history of the conception and execution of the Project, and presents accurately the current position of ENEE. The findings of the PCR as set forth in its "Section VII. Lessons to be Learned" are appropriate, and OEn accepts them, while expressing some views of its own in the PPAM. These views form the greatest part of the PPAM and do not cover issues addressed in the PCR, because OED believes they are already well-presented and carefully analyzed. 4. Following standard OED procedures, copies of the draft PPAR were sent to the Government, the Borrower, and the cofinancing agencies. The comments received from ENEE and tae IDB are reproduced as Attachments to the PPAR and have been incorporated in the report as appropriate. PROJECT PERFORMANCE AUDIT REPORT HONDURAS EL CAJON POWER PROJECT (LOAN 1805-HO and CREDIT 989-HO) BASIC DATA SadEET KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Costs (US$ million) 582.7 618.0 Loan Amount (US$ million) 105.0 105.0 Credit Amount (US$ million) 20.0 20.0 Date Physical Components Completed 8/86 10/85 Economic Rate of Return 9.9z 4.6Z Institutional Performance Improving Unchanged CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS 1980 1981 1982 1983 1984 1985 1986 1987 Appraisal Est. (US$ mil.) 5.3 14,7 27.7 43.9 70.3 102.4 125.0 125.0 Actual (US$ mil.) - 22.9 33.6 61.4 91.5 116.4 124.5 125.0 Actual as Z of Appraisal (Z) - 156 121 140 130 114 100 100 Date of Final Disbursement: 2/28/87 PROJECT DATES Original Plan Actual First Mention in Files 1/ 03/74 Negotiations 06/79 06/79 Board Approval 03/80 03/11/80 Signing (Loan/Credit Agreements Dates) 03/80 03/27/80 Effectiveness 09/25/80 09/25/87 Closing Date 02/28/87 02/28/87 1/ C. 1965. Files are silent prior to 1974. m. Z m Z ZE 1.2 . 110 i 9 . Z .a..0 Pe-..,i.. 1.1 4.0 12.4 7.1 s.s so.4 1o.4 sS - - - - - - - - as.1 A..,.m..l - - - - - - - 44.3 a.8 - - - - .. - - 47.8 e..as .. - - - - - - - 3.8 as.8 - - - - - - 18.4 S...v.s.l.. - - - - - - - - 4.8 8.o 1n.8 n1.0 14.8 13. 7.8 7.0 es.0 T.l.i 1.1 4.0 =.4 7.1 8.8 24.4 W. 6 M8.4 41.8 1.0 12.8 11.0 14.8 3.e 7.8 7.0 =ss.4 MISSION DATA Date No. of Specializations Performance Typ--s of (MO./Yr.) Persons Represented Rating Problem Identification 02/75 n.a. n.a n.a n.c Preparation 06/78 n.a n.a n.a n.a Appraisal 11/78-10/79 3 EGR, FNA Supervision 1 09/81 n.a (No Report) 1 n.a II 01/82 1 EGR 2 M III 09/82 2 EGR, FNA 2 F, m IV 07/83 2 " 2 F V 03/84 2 • " 2 n.a VI 11/84 2 2 F VII 07/85 2 1 1 n.a VIII 09185 3 " 1 n.a IX 06/86 2 2 n.a X 05/87 2 f 2 n.a OTHER PROJECT DATA Borrower: (Credit 989-HO) (Loan 1805-HO) Government of Honduras ENEE EZecuting Agency: ENEE ENEE Iv PROJECT PERFORMANCE AUDIT REPORT HONDURAS EL CAJON POWER PROJECT (LOAN 1805-HO and CREDIT 989-HO) EVALUATION SUMMARY Introduction 1. El Cajon Power Project, the object of the Bank's eighth operation 1/ to finance programs and facilities of Empresa Nacional de Energia Electrica (ENEE) in Honduras, was completed in November 1985, some twelve months ahead of schedule. At the time, El Cajon was the largest hydroelectric installation in Central America, and its 292 MW capability was greater than the require- ments of all Honduras when it entered into service. During the construction period, and stbsequent operation of El Cajon, ENEE was engaged in other system expansion activities as well, some financed by the Bank. The Project has been operating for several years, but ENEE now has capacity far in excess of its requirements -- more than twice -- because the market for electricity failed to grow as forecast. Owing to a number of factors, the principal ones being the failure of sales to materialize and the burden of servicing the large foreign debts incurred to construct El Cajon, ENEE's finances are in very bad shape. Objectives 2. The objective of constructing El Cajon was to provide, at the least cost, generating capability adequate to serve the then growing demand in Honduras. On the other hand, as has been generally true of Bank lending to electric power agencies, a number of improvements in ENEE's planning, opera- tion, and overall management were also sought. They are presented and dis- cussed in the PCR, and sunmarized in its Annex 2.1. Implementation Experience 3. Section III of the PCR deals with implementation in detail. ENEE and its contractors and consultants executed the Project well, and in a timely manner. It was completed one year early, at a cost of about 6Z more than estimated, when financing cha'ges are taken into account. The Bank's super- vision activities were particLlarly well conceived, coordinated, and executed. 1/ A Bank loan of US$105 million equivalent, and an IDA Credit of US$20 million equivalent. Hereafter in this Report, references to the Bank should be understood to include IDA. v In this respect, the Project is a textbook example of what the Bank and its borrowers should seek to achieve. Results 4. The Project has been operating Osuccessfully,' insofar as it alone is concerned. However, it was conceived as only one element -- albeit a large one -- in a mixed hydro-thermal system. ENE's total system demand and sales in 1987 have been less than the capability of Zl Cajon alone, and ENEE's thermal plants are not being operated (PCR, para. 1.3.1). This situation has prevailed for several years. The institutional improvements sought, (para. 2), have been achieved to a limited extent. 2/ 5. Financial results, on the other hand, have been very poor. Sales have not materialized, all thermal plants are idle, and debt service costs go inexorably on. ENEE is in & crisis. A critical examinatien of ENEE's finan- ces, apart from the PCR exercise, was carried out in early 1988 in ronnection with a Bank Economic Mission to Honduras. 3/ This confirmed ENEE's perilous situation, and the Mission proposed draconian measures to set ENEE's house in order, most of which are mentioned in Section III of this Memorandum, in connection with a Structural Adjustment Loan to Honduras. This Loan was approved on September 15, 1988, and an Electric Power Sector Adjustment Loan for the principal benefit of ENEE in FY90 is now under active consideration. Findings and Lessons 6. One may wonder why the enterprise, having executed a project ahead of schedule, at a cost only some 62 above the estimate, should be so badly off. We know that sales and revenues failed to live up to expectations, and a large increase in requirements to service foreign debts took place. The Bank, however, has witnessed such factors at play in other settings, without such calamitous results. The sheer size of El Cajon appears to be the overriding cause for these unhappy circumstances. 4/ The PCR and Da,ris' paper relate in a comprehensive manner the background and evolution of ENEE's affairs and current problems. The Region is formulating measures to assist ENEE to recover, based in part upon the analysis in the Davis paper (cf para. 13 et 2/ See Borrower's comment (Attachment 1. point 3). 3/ John Davis. Consultant: Honduras - Economic Mission - Power Sector - Financial Review. March 7, 1988. 4/ See Borrower's comments (Attachment 1, point 4), and IDB's observations (Attachment 2, B(i)). vi seq). The immediate and most respone-e measure is the US$50 million Struc- tural Adjustment Loan. 5/ 7. Meanwhile, the focus of this ex-post audit should be on identifying the sources of the problem. OED agrees with the major cot lusion of the Region's PCR, viz the method employed to assess the economic justification of 31 Cajon leaves much to be desired (paras. 2.2.5 and 7.1.1 of the PCR). This method simply did not captire the effects of all the risks inherent in under- taking 1 Cajon. 6/ These risks include those associated witt comitment to an inflexible investment program of very large scale vis-a-vis the resources of the enterprise and societyl the risks inherent in accepting exposure to exchange fluctuations by borrowing very large sums abroad; and the risk of the market's failure to develop. Finally, the technique makes the heroic assump- tion that money is available in whatever amounts one would like. i.e., the cost of capital is invariant with the amount of capital involved. But no analytic technique can replace judgement. The lesson is: "Be wary where the results of complex studies seem to fly in the face of common sense., El Cajon, as feared by many ex-ante, is, indeed, ex-post too big. The Borrower disagrees with this conclusion. 7/ However, OED is convinced that the project was too large even if the demand projections had proven correct, because of the other risks that should have been perceived ex ante. 5/ President's Report, Report No. P-4874-HO, August 25, 1988. 6/ See Borrower's comments (Attachment 1, point 5 and 6). 7/ See Borrower's comments (Attachment 1, point 7). PROJECT PERFORMANCE AUDIT MEMORANDUM HONDURAS EL CAJON POWER PROJECT (LOAN 1805-HO and CREDIT 969-HO) 1. BACKGROUND A. Earliest History 1. As the PCR notes (para. 2.1.1', El Cajon was identified in the 1960s. Although the Bank's chronological files on the Project begin only in 1974, active and retired staff recollect proposals to consider the Project in the late 1960s. The Project as outlined seemed prima facie overwhelmingly large for Honduras, but was believed ta be eventually suitable to the region as markets in neighboring countries developed, provided that internetional sales could be achieved. The Bank's advice at that time was to interconnect the system of Honduras (ENEE) with that of Nicaragua, Empresa Nacional de Luz y Fuerza (ENALUF). This was subsequently done at 230 Kv, and the facilities involved (financed in part by Loan 841-HO of 1972) remain the basis for across-the-border sales today. A survey of Honduran hydraulic resources carried out by HARZA (USA) c. 1967 had identified El Cajon, and much later, c. 1976, studies of proposed system operation by EBASCO (USA) demonstrated its economic feasibility. Meanwhile, Motor Columbus (Switzerland) was doing engineering feasibility analyses in the mid and late 1970s. Motor Columbus became the principal engineer for project design, procurement coordination, and construction supervision. With all these basic investigations in hand, the Bank began actively to consider processing an operation to finance the Project. B. Mounting the Operation 2. Clearly preoccupied by the size of El Cajon -- in terms of electric power markets and in terms of large capital requirements in a small economy-- the Bank engaged a consultant experienced in addressing just such issues, Arnold Harberger (USA). The consensus of his and the engineering studies was that, although the risks inherent in undertaking so large a project were substantial, the rewards of success would be great and, "on balance," it should be built. The Bank maintained a prudently skeptical, but nevertheless encouraging, attitude, and proceeded to advocate development of electricity sales to neighboring countries. At the same time, recognizing the tenuous nature of the Project's economic justification, the Bank investigated the possibilities of invoking benefits attributable to flood control,1/ and irrigation enhancement. Simultaneously, the Bank mounted a strenuous effort 1/ The Borrower points out that, since completion, flood control benefits were substantial (see Attachment 1, point 8). 2 to arrange financing on concessional terms.2/ Finally, the Bank assiduously pursued many other aspects of the Project during project processing and execution, viz: (i) geology, through its own consultant, and through specialists retained by Motor Columbus; (ii) cost, through Jacobs Associates (USA). a firm well-skilled in preparing cost estimates for general contractors; (iii) ecological concerns, through specialized Bank staff and consultants; (iv) resettlement of people living in the reservoir area; (v) construction advice, through the constitution of a special Board of Experts which regularly reviewed design and construction; and (vi) finally, cost control, through creation of a separate task force to review and advise on contractor claims. The Bank's performance was exemplary, insofar as a critical examination of all these aspects of El Cajon was possible. Th4 being the case, what went wrong? OED has the uncomfortable feeling that the Bank accepted as oracular the outcome of the complex "economic analysiss because this exercise yielded an answer which was agreeable to the project's advocates. Other alternatives should have been considered, and the techniques of the economic analysis itself should have been questioned. The Bank was dealing with a proposal to double ENEE's assets by financing a facility whose capability was some 7Z greater than all ENEE's sales in the year following initial operations.3/ (Indeed, ENEE's system capability including the existing inetallation was 594 MW, vis-a-vis a demand of 234 MW.) One wonders if, economic analysis notwithstanding, the Bank should not have felt greater discomfort, intuitively. C. Dissident Voices 3. The Bank's files contain two unsolicited screeds by Honduran en- gineers 4/ who were adamantly opposed to El Cajon, on grounds of its high 2/ With considerable success: 77Z of the cost of the project as completed was financed by foreign borrowings, including concessional-term operations by IDA, IDB (Fund for Special Operat.ons), Japan, the Central American Bank for Economic Integration, and OPEC. 3/ See Borrower's comments (Attachment 1, point 9). 4/ F. L. Paret, 1974, and Francisco Garcia G., 1979. Garcia appears to have written to both the President of IDB and the Bank's Regional Vice Presi- dent. Parts are these obliquys are quite poetic. 3 cost, potential for endangering the downstream population in the event of a failure of the dam, and above all, diverting scarce resources from other development needs. Such complaints are not unusual, and the Bank's refusal to be drawn into a debate was the correct stance. Nevertheless, attention was drawn to the early review of Honduran hydroelectric potentials, which iden- tified El Cajon. The criticism that this review was superficial and covered only the portion of the country for which topographical maps were then avail- able, may not have been without merit. 5! Although it is difficult to recon- struct che ambiente which prevailed at the time El Cajon was being advanced as the next logical and economically attractive investment in power-generating facilities, it does seem clear two major factors were present: first, an understandable concern in Honduras with the cost of, and security aspects of, relying upon foreign oil for electric power production, at a time when oil prices were high, and supplies uncertain; and, second, no other program for electricity production had been studied in depth and brought to a state of readiness. OED is well aware that the Bank has confronted similar situations many times. Nevertheless, it is desirable to have alternatives to consider, and analytic techniques exist for taking into account the risks associated with reliance upon foreign fuel. In any event, only two major alternative power system development modes were subsequently studied: one based upon El Cajon, the other based upon conventional steam-electric plant supplemented by diesels and gas turbines. (Other major hydroelectric schemes were not con- sidered, although two smaller hydroelectric plants were included in the studies: Remolino and Naranjito. They complement rather than offer alterna- tives to El Cajon, and have not yet been constructed.) Annex 1 is some extracts from the Motor-Columbus feasibility report's economic analysis, which deals with these alternatives.6/ II. THE ECONOMIC ANALYSIS A. The Technique 4. The Bank's economic analysis leading to the justification of El Cajon employed the "classic" technique of calculating and comparing costs of alternatives. Because of the difficulty (or impossibility) of imputing a 5/ Lamentably, the Bank's current files cannot produce the reports of these hydraulic resource surveys. 6/ See also Borrower's comments (Attachment 1, point 10). 4 value to electricity, 7/ the costs of different programs of power system investments and costs of operation to meet a perceived demand for service are compared. The "least cost' alternative is then held to be the desirable solution. Typically, a fairly long-range forecast of power market require- ments is made, estimating both peak demands, and energy requirements. The cost of expanding and operating a power system to meet this forecast witiL the proposed project -- El Cajon, in this case -- is compared to the costs of the apparent best alternative. The familiar example is a comparison, on the one hand, of a system with a large, lumpy capital-intensive hydroelectric scheme built early, sizeable enough to meet requirements for some time at low operat- ing costs, with, on the other hand, a system with time-phased thermal plants with lower initial capital requirements spread out over years but with high associated operating costs (attributable largely to fuel). By discounting the streams of costs of each alternative, one can compare their present values ar.d opt for the alternative with the lower present value of all costs at a given rate of discount. The question of the value of electricity is thus side- stepped. Presumably one should do the discounting at the opportunity cost of capital. To avoid controversy about this parameter, analysts -- the Bank included -- use test rates of discount to determine at what rate the present values of the cost streams are made equal. Provided the derived "equalizing discount rate' is felt to be higher than the opportunity cost of capital, even though the latter may not be specifically articulated, the lumpy, capital- intensive alternative is accepted as the more economical. Some writers8/ equate this equalizing discount rate to an "internal -ate of return.' OED would prefer to think of it as the "threshold of indifference" between the two choices, given unlimited amounts of capital. (But in the real world capital is not available in unlimited amounts: its scarcity value is probably a function of the amount requireC.) 5. In any event, this is what was done in analyzing El Cajon. The basic discount rate derived was 11.5Z, without regard to any possible benefits other than those from meeting the forecast market for electricity, i.e., taking no credit for flood control or irrigation. This rate was considered high enough to justify the investment. It is important to recognize that the analysis did not rely upon any electricity sales to other countries, although subsequently markets in Costa Rica, Panama, and Nicaragua have been exploited. A large number of "sensitivity" studies were made, in which the precise timing of El Cajon and its costs were varied, and flood control and irrigation benefits were considered. Recognizing the impact of the activity of building El Cajon in a society with substantial unemployment, the Bank shadow-priced 7/ Much has been written upon this question, including a lot by the Bank. It continues to be an awkward issue with no completely happy resolution. 8/ H. G. Van der Tak among them, in the Bank's first "Occasional Paper.' 5 labor in one of these exercises. All resulted in discount rates deemed accep- table, varying from 7.91 to 22.51. 9/ 10/ B. Limitations of the Technique 11/ 6. First of all, the use of any analytic technique to examine a non- tradable assumes a priori that the product must be produced, that the demand must be met. This reasoning applied to electric power assumes that its production is essential to development, and that the cost of shortages is greater than the cost to provide an abundant supply. This is, of course, a view not easily supported by quantitative analysis. The Bank has pioneered in attempting to develop methods to capture all the benefits and costs to society of investments in electric power, but such techniques are not yet accepted and in general use. Meanwhile, reliance is placed upon exercises such as des- cribed above in Section A. The discount rate derived in these exercises would have validity only if all the underlying assumptions prove to be correct, and if they remain correct over the term of the study, typically 50 years in the case of hydroelectric schemes. Unforeseen increases in project costs; changes in the prices of alternative fuels; and, failure of the market to develop as forecast are all events which can render invalid the results of the "economic analysis." Finally, the analytic technique clearly does not capture the risks of rigidity 1n commitment to a large, lumpy inflexible investment program vs. a phased series of smaller, much less capital-intensive thermal installations, and it does not take into account explicitly the unpleasant fact that the opportunity cost of capital is a function of the amount of capital involved. Put mure bluntly, it fails to distinguish between mistakes of $1 million, and mistakes of $1 billion. 7. Even optimistic analysts recognize the lack of robustness of this long-range discounted cash-flow technique, and use sensitivity analyses to test it. This was done in the studies of El Cajon, and resulted in the range given in para. 5 above. Unfortunately, in the case of El r.ajon, the sensitivity of the result to failure of the market to develop was not es- timated. This wAs a lapse not easily rationalized today. Testing the sen- sitivity of results to market development is a standard sine qua non in electric power analysis. It seems simply to have been overlooked. 12/ 13/ 9/ Staff Appraisal Report, Annex 6. 10/ See also IDB's comments, Attachment 2, B (iii). 11/ See also PCR Section IV, "Project Justification." 12/ Based largely upon studies in which the sensitivity of project justifica- tion to market development was specifically examined, the Bank declined to associate itself with very large hydroelectric schemes in Ivory Coast and Turkey. 6 8. Another risk appears not to have been perceived: the risk of serious loss in value of the borrower's currency in terms of its obligation to service debts denominated in foreign exchange.14/ The PCR properly hints that it would be appropriate to try to take into account this risk; but even had devaluation of the Lempira been forecast in 1980, it is questionable that analysts would have been willing to predict losses as large as those which have taken place.151 OED believes that testing analyses for the effect of such risks was not an element of Bank techniques at the time 31 Cajon was being considered. Having said this, it is then reasonable to ask again whether reliance should be placed on an analytic technique used to examine justification. Indeed, the experience of El Cajon raises the unpleasant question of whether or not the analytic technique wa6 substituted for judge- ment. Curiously, there seems to have been no discussion of these issues by the Bank's watchdog group, Central Projects Staff, or by anyone on the Loan Committee. III. THE IMPACT OF EL CAJON A. ENEE's Situation Today 9. ENEE's finances are in disarray, due to a number of factors, includ- ing inter alia: 13/ Operations insists that the SAR includes an analysis of sensitivity of the proposed solution to lower market growth. Indeed, Table 6.3 shows the changes in the equalizing dircount rate in function of variations in revenues. But OED did not find a statement relating a reduction in growth by X percentage points to a reduction in the equalizing discount rate by Y percentage points, which might have been especially telling. 14/ See also Borrower's comments (Attachment 1, point 11) which, however, refers to a far earlier stage of project preparation. 15/ Page 5, part. 8 and page 8, para. 13. The foreign exchange risk was assessed at appraisal. As noted by ENEE in para. 6 of its reply telex, at the request of the Bank a consultant was engated to advise on this issue and he actively participated with Bank staff and ENEE in the discussions on the financing arrangements for the project. The Bank was also very aware of the macroeconomic impact of the project (see SAR, page 35, para. 5.15) and sought to put together a financing package with a large concessionary component. 7 (i) the commitment of so large an amount of resources to building El Cajon; , (ii) the failure of the electric power market to develop as forecast; and (Mii) the deterioration in the value of the Lempira vis-a-vis foreign currencies other than the US$ owed by ENEE from borrowings to finance E1 Cajon (as ENEE was still able to get US$ at the 1 for 2 rate prevailing at appraisal). It would be imprudent to attribute all of ZNEE's troubles to the construction of E1 Cajon, but the project certainly contributed in a major if unquantifi- able way to the present situation. A summary of ENEE's recent position is in Annex 2. 10. When placed in service, El Cajon doubled ENEE's assets. Sales in the period 1980-1987 were 212 less than forecast (i.e., 2,000 million kwh) and revenues were 181 less than forecast (L.300 million) in spite of tariff increases of 50Z since beginning construction in 1980. Because the Bank (and other lenders) denominated ENEE's obligation by the Obasket of currencies* method, the enterprise suffered an exchange loss of US$191 million, adding to its debt and increasing debt service. 16/ ENEE's debt service the year after completing El Cajon absorbed 712 of all internal cash generation, and in 1987 was 18% greater than all internal cash generation. To add insult to injury, many customers are not paying ENEE for even the lower-than-forecast sales, so that revenues do not reflect cash income; accounts receivable now equal 180 days sales.17/ ENEE is borrowing to defray operating expenses, is not fully servicing its debt, and was about US$100 million in arrears on this account alone at the close of 1987.18/ 11. In a nutshell, ENEE is an enterprise with the equivalent of about US$1 billior invested, in debt more than US$800 million, producing a net income in 1987 of US$150,000. At the same time, the problems of ENEE are of course visited upon the national economy. The indebtedness attributable to El 16/ The Bank Loan of US$105 milllon represented an obligation of US$154 million in January 1988, after repayment of US$7.5 million. 17/ See Borrower's comments (Attachment 1, point 12). 18/ See also IDB's comments (Attachment 2, B (ii)). 8 Cajon is about 202 of all Honduras' foreign debt, another way of saying that El Cajon is just too big. 191 20/ B. The Bank Proposes Action 12. In recognition that ENEE and Honduras did not get into their present bind by themselves, the Bank has taken measures to assist in setting things right. At the time of this Audit, the Bank was preparing to make a Structural Adjustment Loan (SAL) of US$50 million equivalent, and was marshalling another US$50 million from co-financiers.21/ Furthermore, the Bank contemplates making future SALs in appropriate amounts as the need is determined, and as the country's performance warrants, including the US$50 million Electric Power Sector Adjustment Loan in FY90. Meanwhile, a program of measures to improv ENEE's finances has been proposed to the Government. Among the measures recommended are: (i) ENEE should reduce losses; (ii) ENEE should freeze its employment; (iii) ENEE should disconnect customers egregiously in arrears; Government should reimburse ENEE in instances where it wishes to see service continued; (iv) ENEE should make no capital expenditures outside its approved program, e.g., no investments in rural electrification at Government's behest; (v) Government should assume foreign exchange losses suffered by ENEE; and (vi) Government and ENEE should cooperate to reduce receivables over five years. These and other readjustments will be incorporated into the SAL now being processed. 19/ El Cajon debt US$475 million, Honduras US$2,412 million. Sources: PCR, Annex 3.3, page 2; President's Report No. P-4874-HO, Annex I. ENEE's aggregate debt iq 342 of Honduras' foreign debt. 20/ See also Borrower's comments (Attachment 1, point 14). 21/ President's Report No. P-4874-HO, August 25, 1988. Several relevant paragraphs are extracted and presented as Annex 3 to this PPAM. The Loan was approved on September 15, 1988. 9 IV. CONCLUSIONS A. Overall Assessment 13. The Bank was well aware of the risk Honduras ran in constructing a very large project in a very small economy. The attention of everyone in- volved was focussed on this risk, and Bank staff prudently delayed executicn of the Project several years while the market grew. The political and econo- mic events, including civil unrest and insurgency in Honduras' neighbors, which led to the failure of the market to develop were unforeseen and un- foreseeable, but they had a devastating impact on ENEE's sales and revenues.22/ During the construction and first two years of operation of El Cajon, revenues fell far short of expectations. In a system whose operating ratio is as high as ENEE's -- around 652 -- the impact of this shortfall is exaggerated. The PCR notes in para. 4.3.2 that this effect is '... one of the main reasons for ENEE's present financial difficulties ..." Perhaps legiti- mate concerns with all the other aspects of this operation -- cost, ecology, resettlement, etc. -- deflected attention from the sensitivity of El Cajon's economic justification to development of the market. On the other hand, the possibility of difficulties arising from exchange losses was not considered at all. B. Lessons to be Learned 14. It is easy to criticize ex-post facto. It is difficult to make such criticism useful, and OED is well aware it played no role in reaching the difficult decisions leading to construction of El Cajon. With the benefit of hindsight, it would seem that the Bank placed too -uch reliance upon the results of the economic justification exercise. The project was large vis-a- vis the market it was to serve. It was costly vis-a-vis the country's resour- ces. Its undertaking exposed the enterprise and the country to large exchange loss risks. Its utilization depended upon rapid growth of a small market. Commitment to its construction cost ENEE the loss of flexibility to adjust to any failures of the underlying assumptions to materialize, as it would have been able to, had it been pursuing a program of sequential installation of smaller thermal plants. The risks materialized, and proved to be large. The benefits were ephemeral. No one saw fit to question whether other alterna- tives should have been considered, or whether the sensitivity of the Project's 22/ Recall that the Bank's analyses did not rely -tpon export sales. In fact, exports did take place. Lamentably, they * are part of ENEE's unpaid accounts receivable. 10 justification to the market should have been tested,23/ or whether exchange risks should be taken into account. 15. What does one take away as a lesson? Hore is a Project justified by traditional analytic techniques, completed ahead of schedule at not much over cost, to serve a market that did not fully materialize, at a time when the then major international reserve currency wau losing value rapidly. The more poetic among us characterize the results as *catastrophic.* The more thought- ful propose that in future the risks of exchange rate variation be taken into account. The PCR hints at this in paras. 2.2.5 and 7.1.1, and indeed this is the view of some of today's Bank analysts. 16. The records and recollections are clear: the Bank was preoccupied by El Cajon's size, and yet it nevertheless relied upon a flawed analytic technique whose guidance was contrary to intuition, common sense, and ex- perience. It seems clear in retrospect that reliance was placed on a mecha- nistic calculation, rather than upon judgement. 23/ Motor Columbus, however, did calculate the effect of delaying the con- struction of El Cajon. This is tantamount to assuming lower growth of market requirements. Deferral improves the economic attractiveness of El Cajon. See Annex 1. 11 ANNEX 1 Page 1 of 2 MOTOR-COLUMBUS ECONOMIC ANALYSIS Motor-Columbus (M-C) delivered an 'Updating of Feasibility Study, Vol. 1, Final Report' in December 1977. This work reviewed, inter alia, the earlier EBASCO and M-C studies, including Project Economics, in Section 7. Some tin alternative development schemes were analyzed, including an all-thermal program; six programs based upon El Cajon alone; and three where other hydro plants 1/ were built as well as El Cajon. The principal variable was the on- stream date for El Cajon. The three key alternatives were: LA Naranjito in 1982, El Cajon in 1987, Remolino in 1991, and thermal thereafter; 4A Thermal, El Cajon 1967, Remolino 1991, thermal thereafter; 4B El Cajon 1983, Remolino 1991, thermal afterwards; 7A All thermal. M-C goes on to say, page 1-10, "1.10 Comparison of Alternative Neglecting sales to neighboring countries, and on the basis of 1977 prices, the equalizing discount rates of the hydroelectric develop ment programs when compared to the all thermal program, 7A, are the following: Alternative Equalizing Discount Rate, I 1A 11.6 4A 13.8 4B 12.8 M-C goes on to recommend 4B, employing somewhat tortured logic, viz: 'All these equalizing discount rates are above the opportunity cost of money in Honduras, which is estimated to be around 11, and consequently, any of the three is economically justifiable. Further- more, when sales to neighboring countries are introduced, at a rate ofLps. 0.05 per kwh, the equalizing discount rate shifts for 3/ Remolino, Naranjito. These two plants have not been constructed. 12 ANNEX 1 Page 2 of 2 4 to 13.61 since this alternative with El Cajon commissioned in 1983 shows energy surpluses in the period 1984-1988. '41 has a lower present worth of costs than 4A up to a discount rate of 13.OZ. Considering the above mentioned opportunity cost of capital in Honduras of approximately 112, 4B may be regarded as the optimum solution for the ENEE power system development.0 These studies show clearly there would have been an advantage to delaying El Cajon from 1983 to 1987, i.e., the rate went from 12.82 to 13.8Z. This seems to be as close as any analyst came to testing sensitivity of the decision to market development. The decision to construct El Cajon as soon as possible had to ignore this study. M-C itself, in this same report notes: "... The reports submitted by EBASCO show that if Honduras is analyzed as an isolated system,the next major hydro addition should be El Cajon built in one stage, and with an arch dam approximately 200 meters high. On the basis of the ENEE load alone, however, it appears to be slightly better to postpone El Cajon until 1987.0 "Slightly better" apparently means 1.0 percentage point out of 12.8, or 8Z. 13 ANNEX 2 Page 1 of 2 ENEE's CONDENSED OPERATING STATEMENTS Sales and Income 1986 1987 Millions of kwh Generation and Purchase 1,454 1,778 Sales: Domestic 1,058 1,145 International 158 322 Total 1,216 1,467 Millions of Lempiras Operating Revenues 211.4 226.9 Operating Expenses 137.5 141.8 Operating Income 73.9 85.1 Other Income (Net) ( 7.3) ( 4.6) Total 66.6 89.7 Financial Charges (106.8) (90.0) Net Income (Loss) (40.2) (0.3) Operating Ratio 64 62 Return on Net Fixed Assets 3-1/2Z 42 KEY BALANCE SHEET ITEMS (Millions of Lempiras, Dec. 31, 1987) Net Assets 2,346 Accounts Receivable - Domestic Day's Sales Residential 23.0 116 Commercial 9.9 76 Industrial 43.9 243 Official Autonomous Entities 18.8 928 Municipalities 7.4 873 Total 103.0 14 AMEX 2 Page 2 of 2 Long-Term Debt Foreign - Non-refinanceable (2) ENEE Loans 595 Government for NEE 420 1,015 61 Other Foreign KNEE Loans 267 Government for ENEE 243 510 31 Total 1,525 92 Domestic To Government 65 To Central Bank 10 To Commercial Banks 23 Bonds 28 126 8 Total 1,651 100 Equivalant US$ Million 825 15 ANNEX 3 Page 1 of 1 PROPOSED US$50 MILLION STRUCTURAL AA.JUSTMENT LOAN Extracts from President's Report Report No. P-4874-HO August 25, 1988 Extract ls Part II - The Government's Adiustment Program 29. A case of special concern is that of the power company. ENEE. With the commissioning of El Cajon Hydroelectric Project (partially financed under Loan 1805-HO and Credit 989-HO) in 1985, Honduras entered into a period of excess generation capacity, which is expected to continue at least until 1993. The expected benefits from the construction of El Cajon have not yet been realized. With low revenues, ENEE's cash flow has been insufficient to meet its financial obligations. In particular, the financial requirements derived from the construction of El Cajon and from the recent weakening of the US dollar (691 of ENEE's external debt is denominated in currencies other than the US dellar) have forced the company to incur arrears with some of its lenders. (They may reach $100 million by the end of 1988.) 30. The Goi rnment has requested the Bank's assistance to define a program of reform and financial restructuring for ENEE to restore the enter- prise's so,vency and eliminate the burden it has imposed on public finances. The program is currently under preparation and is expected to be initiated during 1989. The Bank plans to support implementation of the program through an adjustment operation for ENEE (see para. 79, below). Extract 2: Part IV - Bank Operations Strateg7 79. To achieve and sustain the increases in public savings necessary for medium-term stability and growth, strong actions are needed in the management of the public enterprise sector. The Government plans to undertake a major overhaul of the management of the public enterprises, with a view to increase their operational and financial efficiency as well as the discipline governing their financial relationship with the Central Government. The Bank could support this effort through a public enterprise loan, focused on 10-15 of the largest enterprises. The severe adverse impact that the deficits of ENEE, the electric power company, have had on the Central Government's fiscal accounts in recent years warrant special attention to this enterprise. A separate operation will therefore be proposed to address ENEE's problems. The programs designed as the basis for these loans would be carefully linked with the objectives and constraints imposed by SAL I and II, to assure consistency with the macroeconomic adjustment process. 17 ATTACHMNT 1 Page 1 of 6 COMMENTS FROM THE BORROWER (TRANSLATION) 1128 ENEE HO Tegucigalpa, Honduras Telex 440098 December 20, 1988 Mr. Alexander Novicki Operations Evaluation Department World Bark Subject: El Cajon Hydroelectric Project Loan 1805-HO and Credit 989-HO Project Performance Audit Report Following are my comments on the above-referenced project: 1. Para. 1 (Introduction) states that project capability was greater than the requirements of all Honduras when it entered into service. All hydro projects have a capability greater than the demand for the year in which they enter into service. The question is how much greater that capability should be. The ideal is that project capability is utilized as rapidly as possible, but this means additional investors, and a categorical determination cannot therefore be made without knowing exactly what that "greater capacity" is. 2. Para. 2 of the Summary states that the objective of providing energy at the least cost was not achieved. Thus far, the analysis does not show that there was any cheaper alternative. 3. Para. 4 (Results) states that the thermal plants are not being operated. The truth is that theae plants were designed to operate after the commissioning of the El Cajon project, along with the joint execution with the World Bank of what was known as the interim generating project that sought to cover the demand caused by the delayed entry into service of El Cajon. 4. Para. 6 (Findings and Lessons) gives what "could" have been the main cause of ENEE's financial situation, i.e. the size of the project, although para. 1 (Introduction) is more informative when it states that the principal factors were the failure of sales to materialize and the burden cf servicing the large foreign debts. 5. Para. 7 states that Lhe method employed to assess the economic justification of El Cajon leaves much to be desired, although the documentation does not indicate any other possible method then that known at this time. We are still unaware that any other methodology has been developed and know of only minor refinements to the original one. 18 ATTACHMENT 1 Page 2 of 6 6. That same paragraph also mentions the risks inherent in accepting exposure to exchange fluctuations. In this specific regard, ENEE contracted an expert in the field, a former World Bank staff member, Mr. Klaus Huber, and the consensuc was precisely to run the exchange risk. What would be the correct decision now? 7. That paragraph also states that the [findings of the] complex studies conflicted with common sense. If the market analyses had been right, such a statement would not have been appropriate because all studies showed that the approach and size were appropriate, just as the market would hi.ve been adequate had the national economy not deteriorated. The factor of the national economy was not and is not a function of ENEE's analyses, but rather the aspects coveree by macroeconomic analyses conducted by international agencies and specialized institutions in the country, [the findings of] which were corroborated by Arthur Harberger, a consultant. 8. Section B (Execution of the Operation) mentions the possibility of evoking benefits attributable to flood control and irrigation enhancement. This aspect was not analyzed ex post, but all hydroelectric cords indicate that the project avoided at least two major floods (1986-1988) in Sula Valley, which meant major benefits. 9. Section B (Mounting the Operation) states that production was 7% greater than all ENEE's sales in thi year following initial operations, although average growth was precisely about that figure, which shows that in two. years project capacity will be fully utilized. The question again is whether under those conditions the project was oversized for the needs of the country. 10. Section C (Dissident Voices) states the usual criticisms, but they could at no time be substantiated, i.e. as for any underdeveloped country all possible hydroelectric alternatives were not known, at the time all possible hydroelectrir alternatives were considered, and the study on the Naranjito hydroelectric project was even stepped up. 11. Para. 7 in Section B (Limitations of the Technique) states that no analysis was made of the electricity market or its sensitivity. This is not true, as this was included in the EBASCO "Systems Optimization Study," Vol. IV, p. 33, Section 4 entitled "Sensitivity to Change in the Load Forecast Period." 12. Regarding para. 8 in that section, the decision was taken with the assistance of the experts. 13. Para. 10 of Section A (ENEE's Situation Today) of Section III (The Impact of El Cajon) states that "to add insult to injury, customers are not paying ENEE." It should be added that "some" [of those customers] are state-owned enterprises. 14. Para. 11 of that same section states that "the indebtedness attributed to El Cajon is about 20% of all Honduras' foreign debt, another way of saying that El Cajon is just too big." This statement is very 19 ATTACHMNT 1 Page 3 of 6 simplistic, because when the analyses were made, the situation was difficult. It could be said instead that "the national economy simply did not grow as expected." Yours truly, Mauricio Mossi Sorto Director, Project Planning and Monitoring 20 ATTACHENT 1 Page 4 of 6 1128 ENEE HO TEGUCIGALPA> HONDURAS TELEX 440098 DICIEMBRE 20y 1983 SR.ALEXANDER NOWICKI DEPARTAMENTO DE EVALUACION DE PROYECTOS BANCO MUNDIAL REF: PROYECTO HIDROELECTRICC EL CAJON PRESTAMO 1805-HO Y CREDirO 999-HO INFORMACION DE EVALUACION EX-POST DEL PROYECTO A CONTINUACION MIS COMENTART=S SORRE EL PROYECTO DE REFERENCIA: 1.-EL NUMERAL 1 DE LA INTRODUCCION SE REFIERE A QUE EL PROYECTO ERA MAYOR QUE LAS NECESIDADES DFL PAIS CUANDO SE PUSO EN SERVICIO. TODOS LOS PROYECTOS HIDROELECTRICOS At MCMENTO DE ENTRAR EN OPERACION SON MAYORES QUE LA DEMANDA DE ESE MISMO ANO. LA PREGUN'A ES: CUANTO MAYOR DEBE SER ESE TAMANO? LO IDEAL ES nUE SE CONSUMA EL PROYECTO LO MAS RAPIDO POSIBLI, PERO ESTO OPLISA A INVERSTONE;, ADICIONALES, POR LO TANTO NO SE PUEDE SER DETERMINANTE SINn SE TIENE LA MEDIDA DE CUANTO ES ''ESE MAYOR 7AMANO''. 2.-EN EL PUNTO 2 DEL RESUMEN SE EXPRESA QUE EL OBiJEIVO DE SUMINIS-- TRAR ENERGIA A MINIMO COSTO NO SE LOGRO. A LA FECHA Y EN EL EXAMEN NO SE DEMUSTRA QUE HUBIESE OTRA ALTERNATIVA MAS BARATA QUE LA SELECCIONADA. 3.-EN EL PUNTO 4 DE RESULTADOS SE MENCIONA QUE LAS PLANTAS TERMICAS NO HAN FUNCIONADO. LA VERDAD ES QUE ESTAS PLANTAS FUERON CONCEBIDASS PARA FUNCIONAR ANTES DE LA PUESTA EN OPERACION DEL PROYECTO EL CAJON, HABIENDOSE EJECUTADO CONJUNTAMENTE CON BANCO MUNDIAL LO QUE SE CONOCIO COMO EL PROYECTO INTERINO DF GENFRACION QUE TRATABA DE CUBRIR LA DEMANDA OCASIONADO POR EL ATRASO DE LA PUESTA EN OPERACION DEL PROYECTO EL CAJON. 4.- EN EL PUNTO 6 HALLAZGOS Y EXPERIENCIS SE EXPRESA LO QUE ''PODRIA ' SER LACAUSA PRINCIPAL DE LA SITUACION FINANCIERA DE LA ENEE AL TAMANO DEL PROYECTOm SIN EMBARGO EN EL PUNTO 1 DE LA INTRODUCCION SE ACLARAN MEJOR DICHOS CONCEPTOS CUANDO SE AFIRMA QUE LOS PRINCIPALES FACTORES SON LA NO MATERIALIZACION DE LAS VENTAS Y EL PESO DE LAS GRANDES DEUDAS EN DIVISAS. 21 ATTACHMENT 1 Page 5 of 6 5.-EN EL PUNTO 7 DE LA INTRODUCCION SE MENCIONA QUE LA JUSTIFICACION ECONOMICA DEJA MUCHO QUE DESEAR# SIN EMBARGO EN EL DOCUMENTOS NO SE ENCUENTRA NINGUN OTRO METODO QUE SE CONOCIERA EN ESA EPOCA PARA SER APLICADO. NI AUN AHORA TENEMOS CONOCIMIENTO QUE SE HAYA DESARROLLADO OTRA METODOLOGIA, SINO UNICAMENTE PEQUENOS REFINAMIENTOS SOBRE LA MISMA BASE. 6.-EN ESE MISMO PUNTO SE MENCIONA LO REFERENTE A LOÉ RIESGOS QUE SE ACEPTARON AL EXPONERSE A LAS FLUCTUACIONES DE LOS TIPOS DE CAMBIO. LA ENEE PARA ESE ASPECTO ESPECIFICO CONTRATO UN EXPERTO EN LA MATERIA EXFUNCIONARIO DEL BANCO MUNDIAL SR. KLAUS HUBER, Y EL CONSENSO FUE PRECISAMENTE ARRIESGAR EL RIESGO CAMBIARIO. CUAL SERIA LA DECISION CORRECTA EN ESTA FECHA?. 7.- EN ESE MISMO PUNTO SE MENCIONA QUE LOS ESTUDIOS COMPLEJOS ESTABAN ENR CONTRADICCION CON EL SENTIDO COMUN. SI LOS ANALISIS DE MERCADO HUBIESEN SIDO ACERTADOS TAL FRASE NO SERIA CORRECTA PORQUE 'TODOS LOS ESTUDIOS DEMOSTRARON QUE LA SOLUCION. Y EL TAMANO ERA ADECUADO, COMO ADECUADO HUBIERA SIDO ESE MERCADO SI LA ECONOMICA NACIONAL NO HUBIESE DECLINADO. EL FACTOR DE LA ECONOMICA NACIONAL NO ERA NI ES FUNCION DE LOS ANALISIS DE LA ENEE, SINO MAS BIEN LOS PUN*TOS A CONTESTARSE POR ANALISIS MACROECONOMICOS EFECTUADOS POR ORGANISMOS INTERNACIO- NALES E INSTITUCIONES ESPECIALIZADAS DEL PAIS QUE FUERON CORROBORADAS PRO EL EXPERTO SR. ARTHUR HARBERGER. 8.-EN EL PUNTO B)EJECUCION DE LA OPERACION SE MENCIONA LA POSIBILIDAD DE INVOCAR BENEFICIOS ATRIBUIBLES AL CONTROL DE LAS INUNDACIONES, Y AL AFIANZAMIENTO DE LA IRRIGACION. ESTE ASPECTO NO HA SIDO ANALIZADO EX-POST, SIN EMBARGO TODOS LOS REGISTROS HIDROELECTRICOS INDICAN QUE EL PROYECTO HA EVITADO POR LO MENOS DOS GRANDE INUN- DACIGNES(ANOS 1986-1988), EN EL VALLE DE SULA, DANDO BENEFICIOS DE GRAN MAGNITUD. 9.-EN LA PAGINA 4 PUNTO B) SE MENCIONA EFECTIVAMENTE QUE LA PRODUCCION ERA 7 PORCIENTO MAS ALTA QUE TODAS LAS VENTAS DE LA ENEE EN EL ANO SIGUIENTE, SIN EMBARGO EL CRECIMIENTO MEDIO ERA PRECISAMENTE ALREDEDOR DE ESA TASA, LO QUE INDICA QUE EN DOS ANOS EL PROYECTO ESTARIA TOTALMENTE OCUPADO. NUEVAMENTE LA PREGUNTA ES* SI BAJO ESAS CONDICIONES EL PROYECTO ERA MUY GRANDE PARA LAS NECESIDADES DEL'PAIS.? 10.-EN EL PUNTO C) POSTURAS DISIDENTES SE MENCIONA LAS CRITICAS USUALES, PERO QUE NUNCA FUDIERON SUSTENTARSE, TALES COMO: QUE NO SE TENIAN COMO TODO PAIS SUBDESARROLADO CONOCIDAS TODAS LAS ALTERNATIVA HIDROELECTRICAS POSIBLES. EN ESE MOMENTO SE CONSIDERARON TODAS LAS ALTERNATIVAS HIDROELECTRICA POSIBLES, E INCLUSIVE SE ACELERO EL ESTUDIO DEL PROYECTO HIDROELECTRICO NARANJITO. 22 ATTACME=T 1 Page 6-of 6 11.-EN EL PUNTO B-7 SE DICE QUE NO SE HICIERON ANALISIS Y SENSITI- VIDAD DE MERCADO ELECTRICO. LO ACEVERADO NO ES CIERTO, YA QUE ESTA SE INCLUYO EN EL ESTUDIO REALIZADO POR EBASCO DEMONIDADO SYSTESS OPTIMIZATION STUDY VOLUME IV PAGINA 33 PUNTO 4 DENOMINADO: ''SENSITIVITY TO CHANGE IN THE LOAD FORECAST''. 12.-EN EL PUNTO 8 -8 LA DECISION FUE TOMADA CON LA ASISTENCIA DE EXPERTOS EN LA MATERIA. 13.-EN EL PUNTO III-A-10 SE MENCIONA QUE PARA AGRAVAR AUN MAS LAS rOSAS LOS CLIENTES NO LE PAGAN A LA ENEE, HABRIA QUE AGREGAR QUE SON ''ALGUNAS'' EMPRESAS QUE PERTENECEN AL GOBIERNO DE HONDURAS. 14.-EN EL PUNTO 11 DE ESTE MISMO CAPITULO SE MENCIONA QUE EL CAJON REPRESENTA EL 20 PORCIENTO TOTAL DE LA DEUDA EXTERNA# LO CUAL ES OTRA FORMA DE DECIR QUE EL CAJON ES DEMASIADO GRANDE. ESTA APRECIACION ES MUY SIMPLISTA, PORQUE CUANDO SE HICIERON LOS ANALISIS NO ERA ESA LA SITUACION PORQUE PODRIA DECIRSE ''QUE SIMPLEMENTE LA ECONOMIA NACIONAL NO CRECIO COMO SE ESPERABA''. ATENTAMENTE, MAURICIO MOSSI SORTO DIRECTOR DE PLANIFICACION Y CONTROL DE PROYECTOS. 23 ATTACHMENT 2 Page 1 of 8 BANCO INTERAMERICANO DE DESARROLLO INTER-AMERICAN DEVELOPMENT BANK BANCO INTERAMERICANO DE DESENVOLVIMENTO BANQUE INTERAMERICAINE DE DEVELOPPEMENT WASHINGTON. DC 20577 CABLE INTAMBANC COMMENTS FROM THE CO-FINANCIER April 5, 1989 Mr. Alexander Novicki, Chief Policy-Bazed Lending Industry, Public Utilities and Urban Sectors Division Operations Evaluation Department World Bank, Washington DC. Dear Sir: Re: Honduras - El Caj6n Power Project (Loan 1805-HO and Credit 989-HO) Draft Project Performance Audit Report We have carefully reviewed the draft version of the Project Performance Audit Report of El Caj6n project in Honduras at the request of the IDB's President. Expost evaluation is a valuable tool for the continuous development and improvem.nt of project appraisal techniques. In this context the expost evaluation of El Caj6n seems most appropriate, particularly in light of numerous unforseen developments since the appraisal time, which have led to reduced benefits of the project on its first years of operation. We believe, however, that the analysis undertaken in the draft PPAR presents some weaknesses which could have distorted the study's findings, and consequently invalidate some of its conclusions. We present our detailed comments and observations in the annexed document, hoping they would be useful in the preparation of the final report. We are open to any questions or clarifications that may arise. Sincerely yours, / Chief, Energy Divisio Annex 24 ATTAC T 2 Page 2 of 8 Annex Comments of Draft Project Performance Audit Report (dated February 15, 1989) Loan 1805-HO and Credit 989-HO A. Main Conclusions 1. Although it is clear that benefits from the project have failed to materialize in the expected way, we believe that the estimates of the rate of return of the project presented as annexes to the PPAR underestimate the actual figures as seen today. There are inconsistencies between the appraisal and project completion data. In addition, the PPAR presents some methodological shortcomings and questionable assumptions about El Caj6n's future energy contribution to the national power system. Though initial economic Lenefits of the project fall short from appraisal projections, such benefits seem significantly higher than the draft PPAR estimates: indeed, ex-post analysis based on reconciled data would yield results more favorable to the project. 2. One of the main objectives of El Caj6n was the substitution of hyro-generation for chermal-generation, reflecting the high crude price forecast at the time. This original objective is overlooked by the PPAR, which highlights the excess thermal capacity of the present system as one of the major flaws of El Caj6n. 3. The draft report largely attributes the tight financial condition of ENEE to the implementation of El Caj6n, failing to account for the costs of operating and expanding the system --based on thermal units-- had El Caj6n project not been implemented; i.e. the PPAR does not accurately estimate the incremental impact of the project on ENEE's finances. 4. The draft report states that the original appraisal: (i) used methodologies not conducive to sound decision making; (ii) ignored substantial risks inherent to the project; (iii) relied on economic analysis which was counterintuitive, non-sensical and in conflict with past experience. These assertions seem questionable because El Caj6n's original appraisal included: (i) an analysis of generation options for the system and a benefit cost analysis; (ii) sensitivity analysis including lower growth scenarios for the domestic power demand; (iii) an analysis of the impact of a sizeable investment in a relatively small economy; and (iv) sensitivity on exchange rate fluctuations. These analyses, largely built on "common sense" perceptions about risks and economic growth, supported the implemention of the project on the basis that expected benefits overcame the risks involved. 5. It is our opinion that, although at the time of decision making the costs of making a mistake were recognizably high, the probability assigned by experts to substantially lower oil prices and power demand growth, or to drastic depreciation of the USA dollar was very low; 25 ATTACMENT 2 Page 3 of 8 hence, even a common sense based decision would not have been different than the one actually made about the project. We strongly agree with the draft report on its appreciation of the value of common sense and experience in a decision making process; however, we see them as complementary and intrinsic ingredients of rigorous technical analysis, not as substitutes for it. Additionally, though we recognize the need to strenghthen the use of models which specifically deal with decision making under uncertainty, it is important to remember that risk modeling has developed rapidly during the last decade mostly as a response to the hig' volatility of the world economies a.d of commodity prices during the 80's. Risk and sensitivity analysis beyond those performed during the appraisal of El Caj6n did not seem appropriate nor desirable in the context of the stable world economic environment of the 70's. 6. The PPAR analysis seems biased by results o2 El Caj6n's three first operational years. Projecting future performance largely based on such short experience (i.e. three out of forty operational years) at a time of major international and local economic uncertainties, seems more questionable that the basis for the projections made in the appraisal of El Caj6n. B. Specific Comments 1. The principal issues raised in the Project Performance Audit Report (PPAR), the Project Performance Audit Memorandum (PPAM), and the Project Completion Report (PCR) prepared by the World Bank in February 1989 were: (i) The size of the project vis-a-vis the market for power as the main cause for its failure to produce the expected economic benefits. (ii) The size of the project as measured against the capability of ENEE and the Honduran economy to service the debt incurred in project construction. (iii) The quality, of the economic analysis and the reliance of decision making on such analysis. (i) Size of the Project Vis-A-Vis the Market for Power 1. The Project Completion Report and the Draft Project Performance Audit Report alluded to the fact that the development of the domestic and external markets for the project output has been frustrated by political and macro-economic factors beyond the control of ENEE. There is general consensus on this view. The impact of a sluggish electricity market has been compounded by some large customer's delinquency in payment electricity consumed. This occurrence has adversely affected the availability of local and foreign funds for the expansion of the distribution network a critical factor in the development of the domestic electricity market. Only 31% of the population of Honduras have access to electricity. The PCR noted that investment in distribution is needed to expand the 26 ATTACHMENT 2 Page Z of V electricity market and characterized postponed distribution projects as "high" return distribution. 2. The PPAR, PPAM and PCR's conclusions on ex-post economic viability of the project depend heavily on the reductions observed between electricity sales originally projected for the period 1979 to 1990 and the actual or estimated electricity sales for the same period. Annex 4.2 gives the original cost-benefit analysis sumary and Annex 4.3 depicts what is described as the "actual" situation. Essentially Annex 4.2 has been modified and presented as Annex 4.3 to show the effect on El Caj6n project of actual investment costs and "actual"electricity sales. It is assumed that these Annexes were reviewed and compared, especially Annexes 4.2 and 4.3 during the course of the project performance audit. However, there are several issues represented in these Annexes which should be examined and clarified before the issuance of a Final Report. 3. Annex 4.1 gives the actual and estimated (1986 to 1990) electricity sales in the interconnected isolated systems. The original Project Appraisal Report projected an annual average increase in electricity sales of approximately 9.8% between 1980 and 1990. Actual and estimated electricity sales data reve.1 a lower annual rate of growth of approximately 6.3%. It should be noted that actual electricity sales increased or was projected to increase every year from 1980 to 1990 except in 1986 when sales were also identical to the previous year's. 4. Reduction in actual electricity sales led PPAM to conclude that the project's capability was greater than the requirements of all Honduras when it entered into service and that ENEE now has capacity far in excess of its requirements. This statement forgets that one of the main objectives of the project was to substitute thermal energy production, estimated at 859 Gwh/year. The following table shows the project's utilization during the first years of operating in this context. Year Sales Generation 1 Other Hydro-Plants El Caj6n 1986 1031.9 1258 720 538 1987 1167.5 1423 720 703 1988 1243.8 1516 720 796 1/ Assuming 18% losses Therefore, after three years of operation, the project is producing 93% of that objective and 60% of its mean final capacity. 5. On the basis of the implicit annual growth rate of 6.3% contained in the PCR "forecast", and on the assumption of 18% system losses, the gross generation requirements of the interconnected system would exceed the country's hydro-electric capacity by the year 1992. The total output of El Caj6n would be demanded from 1992 ouwards even in the event of electricity sales stagnation at the 1992 level. The lower growth rate in the increase of sales would lead to the postponement or cancellation 27 ATTACHMENT 2 Page 5 of 8 of other generating capacity expansion projects but not inevitably to the continued underutilization of El Caj6n. Continued excess hydro-capacity and energy would only exist if sales remained constant at the estimated 1990 level 1/. With any positive growth in electricity demand and sales, the displaced thermal units would be pressed into service after 1992 while new sources of electricity generation would be investigated. 6. The unfavorable change in El Caj6n's economic viability results almost exclusively from the projected decline in sales (The period of actual estimated sales 1985 to 1988 is considered too short for a meaningful evaluation of prospects) Nevertheless, no explanation is given for the new demand forecast embedded in the PPAM. The impression conveyed is that the unfavorable economic conditions would prevail indefinitely. If this possibility is conceded, the anticipated 32% decrease in the demand growth does not preclude full utilization of the total output of El Caj6n and the consequent reduction in the value of incremental sales attributable to the project is questionable. 7. The Project's Cost-Benefit summary contained in Annex 4.3 presents several issues which should be resolved in the Final Report because much of the evidence for the PPAR conclusions on the Project's economic viability's shown in this Annex. 8. A primary issue is the determination of the base year for the ex-post evaluation. It is assumed that Annex 4.2 was compared to Annex 4.3 during the course of the Project Performance Audit. Apparently, Annex 4.2 was extracted from the original Project Appraisal Report and the base year is presumably 1978. According to Annex 4.2, the project capital cost was Lps 706 million. According to Annex 4.3, however, the actual total capital cost for El Caj6n hydrr,-electric plant (without transmission lines) would have amounted to Lps. 1238 million. This would mean a "cost-overrun" of approximately 75%! The PPAR stated that the project was completed with an excess cost of 6% (PPAR Section 3-page iv. "Implementation Experience"). There is an unexplened discrepancy between the data and conclusions. 9. The question of which is the base year for the Annexes arises again when the benefits are compared. Benefits from flood control, shadow pricing of labor, fuel savings and staff reduction in existing thermal plants are almost identical in the two Annexes. The cost-benefit tables (Annexes 4.2 and 4.3) indicate that all of El Caj6n energy is viewed as incremental energy. Therefore, another important issue is how this energy was valued in the Annexes. Apparently, the measure chosen was 1/ The PPAR stated that Thermal plants have not operation since the entry-into-service of El Caj6n without mentioning the beneficial environmental impact of operating an all-hydro-system. 28 ATTACHMENT 2 Page 6 of 8 the average price of electricity. 2/ Going back to the question of the base year for cost-benefit calculations if the actual costs were expressed in 1988 Lempiras then, correspondirgly the benefits should share the same base. 10. However, it does not appear that the project's benefits were estimated in 1988 Lempiras because the Lempira cost per Kwh as shown in Annex 4.3 is Lps 0.083, if losses were not taken into account, and Lps 0.104 if 2U% system losses were factored into the calculations. Both estimates are well below the 1986 average price of electricity of Lps 0.17 mentioned in section 1.3.3 page 23 of the PPAM. 11. If actual project costs were given in 1988 monies, then the value of the benefits should be treated in a similar fashion. The results of the eost-benefit analysis would be much different. For example, the internal rate of El Caj6n when only incremental sales are measured as benefits would be 8%. On a similar basis the internal rate of return in the original evaluation was 9.9%. When all benefits are taken into account the internal rate of return would be 12.5%. When the benefits are restricted to incremental sales and fuel savings the internal rate of return would approximate 11%. 12. The PPAR placed considerable emphasis on benefits from "Incremental Sales" of electricity attributable to the project. The value of actual incremental sales in Annex 4.3 is much lower than that forecasted in the Appraisal Report Annex 4.2. This variation apparently represents the 32% decline in demand growth which is expected to occur between 1988 and 1990. From Annex 4.3, incremental sales are projected to remain stable at 32% below the forecasted level even though significant investments in distribution are planned for the period, 1989-1992 and 2011 to 2017. Additionally, benefits from savings in operation and maintenance cost of thermal plants (including fuel savings) and flood control represent the liberation of real resources available to the economy with the project in service and should not be relegated to incidental benefits status. (ii) Ability of ENEE and the Honduran Economy to service the Debt incurred in Project Construction 1. As noted in the PPAR and the PCR, ENEE and the World Bank engaged the Services of consultants of solid international reputation to investigate this issue. After exhaustive analysis and discussion the decision was taken to proceed with the project. 2. The question as to whether the "right" decision was taken in the circumstances is obviously still being debated. Another relevant question was whether every effort was made to conduct a comprehensive analysis of the issues on the basis of the best information and 2/ This is a purely financial measure which does not reflect the consumers willingness to pay for new electricity and thus may understate the economic benefits obtained from project operation. 29 ATTACMIENT 2 Page 7 of 8 methodologies available. Thn PPAR and PCR are relatively silent on this matter. It could be argued, perhaps persuasively, that given the important external influences affecting ENEE e.g. load growth, cost and availability of external financa, availability and cost of fuels and the rate-making and setting mechanisms that the analytical tools could have been more conducive to multi-objective decision making under uncertainty. However, such an approach is only now emerging as a regular feature of corporate planning in utilities in some developed countries. How should the choice be made between a scenario of an appreciating US dollar and a depreciating US dollar? In which circumstances would "large" hydro-plants be built! 3. Given the nature of the world energy situation and futures outlined by many energy specialists and the forecasts for the behavior of crude oil prices prevalent at the time it is doubtful whether many analysts would have assigned a high probability to a sharp decline in the real price of petroleum as was experienced in recent years. Similarly, reputable economists and experts would not have been willing to assign a high probability to the existence and persistence of the unfavorable trade and budgetary conditions which have affected the external value of the United States dollar. 4. It is suggested in the PPAR and PPAM that El Caj6n caused much of the utility's financial problems and these could have been avoided with an alternative expansion scheme consisting of thermal plants. The performance audit did not develop this alternative expansion plan and estimate an annual cost for capital investment, fuel and operation and maintenance. Such a plan would allow the comparison ENEE's external obligations with and without El Cajdn and the extent of El Caj6n's incremental contribution to ENNE's current financial state could be determined more accurately. (iii) Nature of the Economic Analysis 1. The Project Performance Audit Report and Memorandum stated, among other things, that the economic analysis did not evaluate the effects of market variations on the project. As was pointed out in ENEE's comments on t'e PPAR and PPAM, sensitivity tests were performed by project consultants to guage the impact of changes in projected electricity demand on project viability. The IDB in its analysis of the project in 1983 for the purpose of ascertaining the need for additional finance, (PR-1316 A November 8, 1983) did state that "the project is most sensitive to changes in electricity sales". (Section 8.77 (e) page 104). 2. The PPAR described the "economic analysis" as essentially an exercise aimed at obtaining an equalizing discount rate between two different cost streams representing different generating capacity investment options. However, the PPAR and attachments (PPAR and PCR) include Annexes which showed clearly that the economic analysis was a two-Ctage process in which the least-cost expansion plan was developed and then the cost and benefits of the proximate capacity expansion project were identified, measured and valued on an annual basis. 30 ATTACHMT 2 Page 8 of 8 3. The ex-post evaluation does not present a clear methodology for assessing project's performance. The ex-post evaluation includes ex-aute aspects e.g. incremental energy sales to the year 2028 without any independent electricity demand forecast. Characterization of the economic analysis of as "complex mmbo-jumbo" used by decision makers as a substitute to comon-sense seems unguaranted, as we believe that sound analytical techniques and common-ense and experience are all basic ingredients of economic decision making. HP/VB/eo/jm 002JM/JOSE10 4-5-89 PROJECT COMPLETION REPORT HONDURAS EL CAJON POWER PROJECT (LOAN 1805-HO AND CREDIT 989-HO) Infrastructure and Energy Division Country Department II Latin America and the Caribbean Regional Office 33 HONDURAS PROJECT COMPLETION REPORT EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) EL CAJON POWER PROJECT (Loan 1805-HO and Credit 989-HO) I. INTRODUCTION 1.1 Bank Lending to the Sector 1.1.1 Since 1959, the Bank has made eight loans and three credits amounting to US$235.6 million equivalent to the power sector of Honduras (see Annex 1.1). The first four loans and two credits helped to finance the first four projects: Interim Power, Canaveral Hydroelectric, Rio Lindo Hydroelectric and Fourth Power (Transmission/Distribution), which were completed successfully with some delays and cost overruns. The fifth and sixth loans helped to finance the interconnection with Nicaragua and Rio Lindo 40 MW Extension, respectively, which were completed successfully at or slightly below estimated cost but with some delay in completion. The seventh loan helped to finance the Nispero Project needed to meet the Honduran electric power demands during the time El Cajon Project was under construction. Nispero was completed with a delay of about 18 months in July 1982 and a cost overrun of about 29.3Z. The eighth loan and the IDA credit, 1805-HO and 989-HO (USS105.0 million and US$20.0 million), helped to finance El Cajon Project (292 MW) which is the largest hydroelectiic project in Central America. 1.2 The Borrower and Sector Organization 1.2.1 ENEE is an autonomous public utility owned by the Republic of Honduras. ENEE has a monopoly over power generation, transmission and distribution. It is also responsible for the design of Electricity rates, and for system planning. There is no external regulating body. ENEE's Board is composed of representatives of various Ministries (Finance, Public Works, National Resources, and Planning), the President of the Central Bank, and a representative of the private sector. The Board sets policy and appoints a General Manager, who is assisted by four Deputy Managers. After informal discussions with the highest levels of political leadership, ENEE sets its tariff levels. Over the years, ENEE has implemented recommendations from consultants to improve its organization and operation but still faces major management problems and overall efficiency is poor. The covenant in Section 4.03d of the Loan Agreement to implement the recommendations of an Organization and Management Study not later than March 31, 1981, had still not been met by 1987. The Bank had approved a postponement of complete implementation of these recommendations until project completion. ENEE has advised the Bank that it shares the conclusions of the study which was completed by an American consulting firm which call for setting up independent administration and financial management areas. This has not yet been done. Instead a new accounting and financial division has been created under the administrative manager. 34 1.2.2 Special organization arrangements for the execution of the project were agreed at appraisal. These arrangements called for intensive participation of the consultants in all aspects of project administration and supervision, assisted by Honduran staff which were thus provided on-the-job training. A project manager, directly under ENEE's General Manager and satisfactory to the Bank, was appointed and maintained through the project execution. All changes that took place were made after consultation with the Bank. These arrangements proved extremely effective as reflected in the completion ahead of schedule of the project, and the low cost overruns despite important physical contingencies. 1.3 ENEE's Installations and Market 1.3.1 After the operation of all four units (4X73 MW) of El Cajon Hydroelectric Power Plant, ENEE's available installed generation capacity reached 549 MW in 1986, of which 536 MW (982) were in the interconnected system and 13 MW were in isolated systems, with a ratio of 20/80 between thermal and hydropower. As the peak load (234 MW) remained below the capacity of the hydropower plants, ENEE was operating therwal generation plants in the interconnected system only on a stand-by basis. 1.3.2 At year end, 1986, there were 228,600 connections, of which 206,700 (902) were residential. An average of 311 of the population of Honduras was connected to ENEE's system. This represents a Lore modest growth than envisaged at appraisal, at which time it had been forecasted that by 1986 235,500 customers would be connected. The main reason for the shortfall was ENEE's deteriorated financial condition. 1.3.3 In 1986 the average electricity price for the interconnected systems was about US-cents equivalent 8.5/kWh. Sales to neighboring countries were 158.4 GWh, of which 72.3 GWh to Costa Rica, 16.5 GWh to Panama and 69.6 GWh to Nicaragua. The rates applicable for these sales (average US-cents 3.6/kwh) were determined by the generation cost of the most efficiert thermal unit in the recipient countries and therefore could not be influenced by ENEE. 1.4 Investment Plans 1.4.1 ENEE's future investments are expected to be concentrated in distribution and transmission facilities. A Distribution Project (which had been scheduled as IBRD's Ninth Power Project), is in ths preparation stage for financing from IDB (Total cost: US$45.0 million). 1.4.2 ENEE has already contracted the feasibility studies of NaranjitL Hydropower Project and is receiving proposals for the feasibility studies and engineering design of Remolino and Zico II Hydropower Projects, also for IDB financing. 1.4.3 Due to ENEE's financial problems there is a risk that high return investments in distribution may have to be postponed and that replacement of equipment and maintenance may suffer, building problems for the years ahead. Hence, solution of ENEE's financial problems should be assigned a high priority. 35 II. PROJECT PREPARATION, APPRAISAL AND NEGOTIATIONS 2.1 Proiect Origin and Preparation 2.1.1 El Cajon was originally identified in the 1967 hydropower survey of Honduras, prepared by the an American consultant firm. A first project feasibility study was completed by a Swiss consultant in 1973 and updated in December 1977. Between 1973 and 1977, the Bank held of on its approval of the project, as it considered that it vas too large for the needs of the Honduran market. Prior to neg-tiatiens, the Bank required an updated cost estimate developed following a methodology similar to what would be used by a contractor in preparing its bid. For this work an American consultant was engaged; revised and updated cost estimates and construction schedules were completed in April 1978. Engineering design and bid documents were issued by the Swiss consultant after review with the principal financing agencies and ENEE's Independent Board of Consultants. 2.1.2 Because of its large size compared to Honduras' home market, the Bank always considered El Cajon to be a project of regional interest. The most obvious market in the region would be Nicaragua, as it had a limited number of potential hydro sites, a limited availability of other indigenous energy resources and its power system was already interconnected with ENEE's system. The feasibility of interchanges with Costa Rica, via the Nicaraguan system as well as sales to isolated areas in Guatemala was also foreseen. This issue led to a dialogue on the timing of the project and the type of cuntractual arrangements for sale of electricity to Nicaragua that took over four years. 2.1.3 The economic justification of El Cajon was analyzed in a study, carried out by an American consultant under terms of reference agreed with the Bank and with IDB. The study included an economic evaluation of the least-cost expansion alternatives for the Honduras independent system and for the Honduras/Nicaragua interconnected system. The final reports were completed in February 1978, updated during October 1978 and a supplementary report was issued in November 1978. The results confirmed previous findings for the isolated Honduras market and concluded that for a 122 discount rate, the optimal commissioning date for the first 73 MW El Cajon unit would be about June 1985 and for the fourth 73 MW El Cajon unit it would be about June 1986. 2.1.4 For the Honduran/Nicaraguan combined market, the EBASCO report showed that fully coordinated interconnection of the power systems of ENEE and Empresa Nacional de Luz y Energia (ENALUF) the Nicaraguan power monopoly, now named Instituto Nacional de Energia (INE), would be beneficial to both parties and recommended its implementation. 2.1.5 The consultant's study showed that El Cajon could not be completed before September 1985. Preliminary calculations on this basis showed about 10.5% for the rate of return for the isolated ENEE development,l and about 12.5? if El Cajon excess generation was sold to ENALUF and minimum flood 1/ This figure excludes benefits stemming from flood control. Labor costs were computed at market prices. 36 control benefits were considered. It must be remembered that rate of return calculations on power projects measure benefits using electricity sales as a proxy for benefits, hence if rates are aligned with long run marginal costs (the case of Honduras) the rates of return are normally expected to be comparable to the opportunity cost of capital. 2.1.6 The project also contributed to: (a) the control of floods in the Sula Valley;2 (b) regmlate the flow of the Humuya River downstream of the dam, thus enabling future irrigation projects there; and (c) strengthen ENEE's organization and management by on-the-job training of its staff as counterparts to the professional staff provided by the consultants for the Project. 2.2 Project Definition and Cost 2.2.1 El Cajon would produce 1,051 GWh of firm energy in a dry year and 1,348 GWH in an average year. The project was executed as described in the SAR except as noted in paragraphs 3.1.3 and 3.1.4, and consisted of the following components: (a) A concrete arch dam, involving 1.48 million cubic meters of concrete work with a maximum height of 225 m and a crest length of 382 m, located on the Humuya River, near the confluence with the Sulaco River, w1th 3 bottom outlets, each with a capacity of 630 ms/s and a crest spillway of 2,700 m3/s and a reservoir having a surface area of 94 km2 and a maximum storage of 5,650 million m3 of which about 74Z would be live volume; (b) An intake structure and two inclined pressure shafts to convey the water to an underground powerhouse with four 73 MW Francis turb'nes, gener&tor units and auxiliary equipment and thence through four 75 m long tailrace tunnels to the outlets; and (c) Ancillary works including about 60 km of access roads, a switching substation, a diversion tunnel and overtoppable upstream end downstream coffer dams. 2.2.2 El Cajon Hydroplant is connected by two 230 kV lines each to the El Progreso substation in the San Pedro Sula area and to the Suyapa substation in the Tegucicalpa area. The transmission facilities needed to connect El Cajon Power Plant to the national system were not defined before Board approval of the loan/credit. It was decided that other financing would be sought for the transmission network and such financing was to be secured by mid-1982. In fact, financing was secured in 1985 from agencies other than the Bank and the related transmission works were not incorporated into the IBRD/IDA/IDB project. 2.2.4 The proposed dam and hydroplant were expected to cost US$493.2 million (foreign cost: US$356.6 million) before IDC. The prcosed transmission system was expected to cost US$42.5 million (foreign cost: US$42.5 million), before IDC. Proposed sources of financing included: the loan and credit from the Bank and IDA totaling US$125.0 million, an IDB loan of US$95.0 million plus a supplemental IDB loan of approximately US$95.0 million (of which US$5.0 m.llion was unutilized) including some US$86.0 2/ These floods are caused mainly by the overflows of the Chamelion and Ulna Rivers which flow downstream of El Cajon. 37 million in Funds for Special Operation, and the balance from suppliers. bilateral agencies, commercial banks, the Honduran Government and ENEE. 2.2.5 Of the total amount of external financing obtained, US$103.0 million equivalent, or 212 of the total IBRD/IDA/IDB project (before IDC). were on concessionary terms, and it was considered that this would result in a debt service profile that would be manageable from a macroeconomic point of view. The assessment of the macroeconomic implications focussed particularly on this aspect, given the vulnerability of Honduras foreign exchange earnings to weather and world price fluctuations for its main export products. The appraisal did not envisage, (it would have been unrealistic to expect it to). the disruption in the political situation in Central America and the debt crisis, with the subsequent interruption of voluntary lending to the region. We are left to wonder, however, whether a more thorough assessment of the macroeconomic implications of undertaking the project under alternative scenarios would not only have been warranted but, conceivably, have led to a different decision. 2.3 Project Preparation and Appraisal 2.3.1 In addition to defining the cost and components of the proposed Project, lengthy Bank preparation and appraisal work focused on such issues as the identification of Project size and investment, the items suitable for Bank financing and suitable for parallel financing, the economic justification of the Project,3 the effect of geological risks, staging and materials to be used on the cost of the dam, resettlement, and the environmental and archaelogical impact (the area to be flooded was thought to have Mayan ruins) aspects of the Project. Collaboration with the Inter- American Development Bank (IDB) was close, and appraisal was carried out jointly. The loans of both agencies carry similar conditions. During preparation extensive attention was assigned to geological risks; a comprehensive drilling program was carried out and a seismic measurement program was also instituted. 2.3.2 In connection with the identification of items suitable for Bank financing and in line with its Project objectives, the Bank's funding of US$125.0 million would finance (a) part of the foreign cost component (42?, up to US$25.0 million) of the underground civil works and powerhouse construction, excluding cement supply; (b) part of the foreign cost component (36Z, up to US$43.5 million) of the arch dam and related works, excluding cement supply; (c) cement supply for the underground powerhouse and dam construction, US$20.0 million; (d) consulting sdrvices of ENEE's Independent Board of Consultants, engineering management advisor and a financial advisor (US$1.0 million) and (e) an amount of US$35.5 nadllion to cover an unallocated category and interest and other charges on the Bank funds accrued on or before December 31, 1985. It was expected that the equipment financed under parallel financing arrangements would be subject to ICB among suppliers willing to provide financing. 2.3.3 The dam site is located about 3 km downstream of the confluence of the Humuya and Sulaco Rivers in Central Honduras in a gorge formed in limestone (middle cretaceous) covered by volcanic rock (andesites) of probably tertiary age. The massive limestone outcroppings at the site were 3/ The Bank's CPP of 1977 recommended additional studies to consider these issues, which were carried out as outlined in paras. 2.1.1 to 2.1.5. 38 caused by five vertical or sub vertical systems. Karats in the limestone are in the form of cracks or irregular shaped cavities, most of them filled with clay. At the damaite, the rock permeability is related to fractures and karat. An area of high permeability reaches to a point below the bottom of the powerhouse cavern. To waterproof the dam abutment and cavern areas, an extensive grouting system was designed in addition to sealing karstic cracks with concrete. The drainage curtain system was examined extensively by specialized consultants and accepted by the Bank. Seismic risks were also extensively studied and conservatively taken into account in the design of the concrete arch structure, to be constructed to its maximum height at this stage. An alternative rockfill dam, staged or built initially to its maximum height was proven uneconomic by the consultants. 2.3.4 Feasibility studies included an outline and cost estimate of the necessary land purchase, resettlement, conservation, reservoir cleaning, health control, protection and management of the watershed, fauna and archeological treasures. While the consultant's report was being reviewed by ENEE and the Instituto Nacional Agrario (INA), the Bank had arranged with the Pan American Health Organization for the services of a resettlement consultant to assist in the design of a satisfactory resettlement plan with acceptable employment options for those affected by the flooding of the reservoir. The loan agreement included detailed provisions regarding the environmental and resettlement programs and a condition for Board Presentation was the setting up of a coordinating group, chaired by ENEE, of all agencies involved in these issues. 2.4 Negotiations, Board Approval, Loan Signing and Effectiveness 2.4.1 At the Bank's insistence and initiative, fiscal reforms and ceilings on public investments and current expenditures to accomodate the large project investment and ensure the local counterpart were the subject of protracted negotiations which delayed Board presentation. ENEE ultimately complied with conditions of Board presentation including a proposed program and timetable for tariff structure revisions based on long-term marginal cost criteria and its implementation, a proposed program for the ecological, environmental and resettlement measures to be taken and implementation of changes in the compensations scheme for certain personnel categories. The ENEE authorized representatives signed the Loan (1805-HO) Agreement with the Bank and the Credit (989-HO) Agreement with IDA on March 27, 1980. The agreements provide for a loan of US$105 million (term: 14 years, including 6-year grace period; interest rate, 8.25Z, commitment fee of 3/4 of 12, effectiveness of the loan agreement commenced from October 10, 1980) and for a credit of US$20.0 million (term: 40 years including 10-year grace period; principal repayment only; service charge 3/4 of 12 effectiveness of the credit agreement commenced frcm October 10, 1980). 2.5 Major Covenants of the Loan and Guarantee Agreements 2-5.1 Annex 2.1. sets forth the major covenants of the Loan and Guarantee Agreements. Except for slow action in carrying out the resettlement plan, in implementing the Organization and Management study, in implementing tariffs based on marginal cost principles, and in meeting financial performance indices, the compliance of ENEE and the Government was satisfactory. 39 III. PROJECT IMPLEMENTATION 3.1 Construction Schedules, Chanzes and Supervision 3.1.1 Physical work on the Project was measured from schedules prepared at the beginning of 1981 by the main consultant. Excavations of the tunnels, the powerhouse and the river diversion works commenced in the first month of 1981. The civil works on the powerhouse and substations cofferdam began in September 1981. Concreting of dam began in March 1982. Transmission line preliminary work began in September 1983. Completion of the works, measured as the date the last (fourth) unit went into commercial operation was recorded at October 6, 1985, one year ahead of schedule. The actual and forecast construction, initiation and completion dates are shown in Annex 3.1. 3.1.2 The project has three major parts; the powerhouse, dam and the transmission system. Concerning the powerhouse, a total of 92 change orders were executed by the contractor, that resulted in an increase of almost US$10.0 million in the contract which was originally estimated at US$66.0 million. Major increases (see Annex 3.2) were caused by a change in the location of the intake tunnel from that originally envisaged because of bad geological conditions encountered; the access tunnel needed a larger drainage system than anticipated, and the volume of auxiliary equipment required had been underestimated. 3.1.3 Unfavorable geological conditions at the Aam site made it necessary to change its originally selected location. This late design change incorporated another major change to substantially expand a redesigned grouting scheme to reduce the risk of uncontrollable seepage under the dam foundation in the deep karstic system present in that area. The new design also required the construction of galleries below the foot of the dam, which were not foreseen in the original design. These and other changes resulted in a net increase of approximately US$39.0 million (14%) estimated by the consultant for the dam civil work contract. 3.1.4 Construction of the transmission lines, not included in tLe IBRD/IDA/IDB Project, had an initial delay in placing the related tower order because of delays in securing financing. As a consequence the towers were delivered late. Route changes were also required resulting from ENEE's inability to purchase land and rights-of-way as originally planned. The delays caused claims by the contractor for the extended period and the added volume of work caused by the consequent increased length of the lines. Despite this, by mid-1985 transmission line works from El Cajon to El Progreso (40 kilometers at 230 kV) had been completed. 3.1.5 A high percentage increase (1601) was recorded over the appraisal estimate for the "Engineering and Administration' category. The increase was due to extra work requested by the main consultant for the responsibility of construction management; creation of the Project Supervision Unit and its operating costs; expansion of the consultant's services to cover bid document preparation and procurement; preparation of final report, and was built" drawings and model tests by the consultant; and the extended period of time (1 ycar) that the Project Supervision Unit was kept active after project completion. Also, at the advice of the Bank, an individual consultant was engaged to assist ENEE to handle claims from the contractors. 40 3.1.6 Bank missions supervised the Project at least annually from 1981 through 1987. The latest Supervision Report (6/16/87) indicates that all physical work on the Project can be considered completed. although certain repairs and restorations were still being made. ENEE created a Panel on Project Safety at the time of plant operation and retained for this purpose the services of well-known experts for a five year period. ENEE has also contracted the same project consultant to provide a continuing evaluation of the dam behavior until at least 1992; this consultant will make the continuing evaluation of the measurements and report on the safety of the Project, including monitoring of the dam, grout curtain, bathymetric surveys and ecology. ENEE is sending the Bank copies of all reports the consultant issues on the above mentioned matters. 3.2 Detailed Proiect Cost and Financing 3.2.1 In 1987, actual cost of the dam and powerhouse amounted to US$543.4 million (before IDC), 10.2% more than the appraisal forecast. The cost of the transmission component amounted to US$64.1 million (before IDC), 50.8z more than the original forecast provided by the consultant (see Annex 3.3). Since one of the main concerns during project preparation had related to the financing scheme, Board presentation only took place once most of the financing had been secured and bids for civil works had been received and the Bank was satisfied that they were in line with the appra al estimates. 3.2.2 A summary of the Project costs, financing requirements, and the financing provided is shown in the following table and is detailed in Annex 3.3, page 2: -----4JSS (Millions)--- Variation from Actual Appraisal Dam and Hydroplant Local Foreign Total Cost before IOC 268.1 885.8 548.4 10.2 IDC 11.9 62.7 74.6 (29.0) Financing Requirements 226.6 898.0 618.0 6.1 EXTERNAL SOURCES IBRD 1365-HO -- 106.6 106.0 IDA 989-HO -- 20.6 26.0 IDB 85.6 99.5 1865. Japan 2.6 31.2 88.2 CABEI 26.9 1.7 86.6 OPEC Sp. Fund -- 8.6 6.5 CDC -- 11.7 11.7 UBS (Supervision) -- 9.8 9.8 BOA -- 2.0 2.0 EXIMBANK -- 9.6 9.6 UBS (Mixto) -- 3.2 3.2 UBS (Cred Fin) -- 8.9 8.6 Swiss Govt. -- 7.8 7.8 Gereen Govt. -- 6.4 6.4 KFN -- 4.9 4.9 ASTALDI -- 6. 5,6 F1ret Interstate 6.2 6.6 1.2 BOA (Germany) 8.8 8.1 6.9 UBS (CELCA) 8.1 8.8 6.9 Subtotal External 0II 871.2 474.2 INTERNAL SOURCES Honduras Govt. 60.2 1.0 81.2 ENEE 86.8 26.6 62.8 Subtotal Internal 117.6 2F6. T48. TOTAL SOURCES 220.0 898.0 616.6 MA3=U =8=_3 8=8M 41 3.2.3 A total of 29 financing contracts were signed during the implementation period with sixteen international finuncial agencies covering 772 of the materials, equipment and works, engineering and administrative costs for the project. The Government of Honduras and ENEE provided the funding for the remaining 232. A table showing the comparison of the financing scheme estimated with that actually obtained is shown as follows: Appraisal (2) Actual (2) Joint Financing (IBRD/ IDA/IDB/CABEI/CDC) 52.0 55.0 Parallel Financing 23.0 22.0 Government/ENEE Financing 25.0 23.0 100.0 100.0 3.2.4 The official rate of exchange of US$1.00 = L 2.00 has been used in all cost and financing tables. 3.3 Procurement 3.3.1 All construction items of the Bank Project, except for access road to site, were packaged and procured under ICB or rules acceptable to the Bank. The bid package, contractors, original estimates and final costs are shown below: In US$ millions1/ Bid Original Final Percentage (Z) Package Description Contractor Estimate2/ Cost Final over Original Cost 1 Power house 3/ CONINCA 58.9 112.9 91.6 2 Arch Dam 3/ - CELCA 176.1 327.2 85.9 3 Hydraulic Structures IHI 14.3 11.8 (7.4) 4 Turbines & Accesories VEVEY 12.2 12.5 2.5 5 Generators & Accesories AEG 15.6 10.3 (34.0) 6 Electrical Equipment BBC 3.6 5.4 50.0 1/ Before IDC. 2/ ?epared by the project consultant upon completion of bidding documents. 3/ Cement for the civil works contracts was bid separately under ICB rules :o permit international competition including Honduran suppliers. ?.3.2 Notwithstanding the volume of bids and the consequent work involved in arranging the packages for international bidding with committed financing, the procurement proceeded on schedule. 42 3.4 Allocation of Loau Proceeds and Timing of Disbursint 3.4.1 As the Bank had followed the progress of the project and had played an important coordinating role to ensure financing, the contracts for the major civil works items were let very early in the execution period, resulting in higher disbursements than anticipated made in the early years and reflecting the Leduction of the period of construction by one year (see Annex 3.4). 3.5 Environmental Impact of the Project 3.5.1 The Bank in its Loan Agreement 1805-HO requested, as part of the Project, the execution of a program to adequately compensate and when necessary, resettle the residents of the area to be affected by the execution of the Project and of a program for the protection of the watershed, fauna and archaeological treasures in the area of the Project and a preventive health control program in the area of the pro'act. It also required ENEE to furnish to the Bank a detailed program of the land to be flooded, including an inventory of such land and a timetable for its acquisition. Further, the Bank required ENEE to take the measures necessary to coordinate the activities of all Government agencies responsible for the environmental aspects of th- Project, to ensure that the Project would be carried out with due regard to ecological, health and environmental factors. ENEE covenanted to present before effectiveness of the loan a detailed program to the Bank, including its costs and a timetable for its execution providing for: a) Adequate compensation and, if necessary, resettlement of the residents in the area to be flooded or other areas affected by the project execution, including measures to maintain or enhance their standard of living; b) reservoir clearing and protection of the watershed fauna and archaeological treasures; c) preventive health control measures; and d) the commitment to put into effect such program according to a timetable satisfactory to the Bank. 3.5.2 An expert from PAHO was engaged by the Bank as consultant to assist ENEE and the other Honduran Government agencies involved in the preparation of the required programs and timetables. TheRe were reviewed prior to loan effectiveness and found satisfactory. 3.5.3 The expert, later associated with the Department of Anthropology at the University of Pittsburgh, continued as consultant to the Bank on resettlement and environmental aspects of the Project. His final report of June 1987 indicates that the programs as originally envisaged were carried out satisfactorily but at a slower rate than the timetables established in 1980. Inter-institutional collaboration between ENEE and Corporacion Hondurefta de Desarrollo Forestal (COHDEFOR) for the environmental development of the Project area and basin is now better than it ever has been. An Ecology Division, formed after the liquidation of El Cajon Project executing unit still employs a number of experienced promoters and rural extension agents from the earlier resettlement program. Strict control of human and anthropogenic activity in the basin is being monitored to prevent imigrant 43 settlement or infiltration across the vast unpatrolled perimeter of the basin. 3.5.4 Some important recommendations of the Consultant, which are still pending implementation, are the following: a) An 2Autonomous Authority for the Integrated Regulation and Management of El Cajon Basin (AREC)l should be established, separate from ENEE but coordinated with COHDEFOR, as an equal but independent part within the Government; and b) A 'Plan for the Integrated Regulation and Management of El Cajon Basin* should be prepared. The Consultant recommended that a foreign group of experts be formed to work with Honduran counterparts in the completion of this task. IV. PROJECT JUSTIFICATION 4.1. Actual and Forecast Data on Justification of the Project 4.1.1 Annex 4.1 compares the market and actual and forecast energy ai.d demand balances for the ENEE system. Annexes 4.2 and 4.3 compare the actual and forecast data used in setting forth the riturn on the system investments including El Cajon. Comments on these annexes are presented in the subsequent paragraphs. 4.2 Project and Loan/Credit Objectives 4.2.1 The main objectives of El Cajon Project were: to provide the least cost solution to meeting demand growth plus sales to neighboring countries; strengthen national and regional electric power planning; and, permit a training effort of ENEE's counterpart personnel through association with the consultants during the design and supervision stages. On an ex-post basis it is questionable whether the project provided the most economic solution. In addition to the obvious reason,--i.e. the fall in the price of oil--,4 the contraction in internal demand due to deteriorated political and macroeconomic conditions, and the inability to place surplus energy in Nicaragua or Costa Rica due mainly to political factors--there is an additional factor, which at appraisal did not receive the kind of attention that now, with hindsight, would seem to have been warranted. That is the risk of devaluation of the dollar (to which the Lempira is tied) vis-a-vis the basket of currencies used to finance the project. As noted in para. 5.2.4, foreign exchange losses accumulated until 1987, amounted to US$191 4/ Appraisal estimates prepared in 1979 considered as fuel costs US$13.55/bbl for Bunker C residual and US$24.22/bb1 for diesel oil, increasing annually in real terms at OX and 21 in sensitivity analyses. Based on trends in oil prices at the time (US$18.6/bbl in 1979, US$30.5/bbl ii 1980) which were higher than appraisal estimates and the Bank projections made after the price hike, El Cajon Project appeared to be a sure winner. 44 million. The project cost represented about 192 of Honduras GDP,5 the proposed indebtedness represented an addition of almost 5026 to Honduras foreign debt, the increase in lenerating capacity was 115Z.7 In this context the conventional least cost analysis seems a particularly poorly suited decision-making instrument, and a technique which attempted--however poorly--to factor in risks and uncertainties to the final decision should have been employed. The Bank however should be credited for having engaged an external consultant, vith worldwide reputation in the field of project analysis, to review the justification of the project and for an intensive macroeconomic policy dialogue and conditionality, linked to the project, to avoid disruptive effects on the economy (para. 2.4.1). 4.3 Market Growth, 1975-1986 4.3.1 The market growth anticipated at the time of appraisal in the years of early El Cajon operation did not develop. In addition, the expected volume of sales of surplus energy from El Cajon to neighboring countries (Nicaragua, Guatemala and Costa Rica) did not take place due to decreased electricity demands in those countries caused in large part by drastically changed political and economic conditions. A comparison of energy sales (net of exports) as envisaged at the time of the appraisal and as now foreseen by the Borrower is summarized from Annpx 4.1 and shown below: Percent Difference: -----------Sales (GWh)---------------- Final Report from Appraisal Report Borrowers Final Report Appraisal Report 1986 1,485.3 1,059.3 (28.7) 1q87 1,627.3 1,180.3 (22.7) 1988 1,783.8 1,257.5 (29.5) 1989 1,951.5 1,342.2 (31.2) 1990 2,134.9 1,434.3 (32.8) 4.3.2 Demand for electricity in the first five years after El Cajon (1986-1990) was lower, or is expected to be lower, by an average of 29Z when compared to the appraisal estimates for each corresponding year in the period. The decrease in demand from that forecast resulted or will resa]t in a substantial decrease in revenues from those estimated at appraisal and used in the original proje:t justification, and is one of the main reasons for ENEE's present financial difficulties. 4.4 Least-Cost Justification and Internal Rate of Return (IRR) 4.4.1 At the time of appraisal, some 20 alternative generation installation sequences were analyzed to find the optimum hydro-thermal 5/ Estimated cost, before IDC of US$493.2 million; GDP of 1980, Lempiras 5,075 million. 6/ Estimeted El Cajon debt, US$384.2 millions; Honduras foreign debt of 1980, US$746 million. 7/ El Cajon added 292 MW to Honduran power system, which had an installed capacity of 254 MW prior to El Cajon operation. 45 generation mix to serve the market as then envisaged. In addition to El Cajon (at various dam heights, with and without staged construction), the sequences included the installation of other technically feasible hydroelectric projects in accordance with their realistic construction schedules. The alternative based on El Cajon completion in mid-1980's war found to be the least costly of all. At fuel prices then prevailing, the second best alternative consisted exclusively of installation of thermal plants in the 1978-1988 decade. 4.4.2 The Appraisal Report included an economic cost-benefit analysis of El Cajon Project which showed a return on investment (IRR) of 12%. The benefits considered were: revenue from incremental sales in Honduras, flood control, cost reduction due to shadow pricing of labor, fuel cost reduction in existing thermal plants and staff cost reduction in existing thermal plants. The Borrower's Final Report included the updated version of the economic cost-benefit analysis using the actual investments and benefits based on the latest market forecasts, tariffs and hydroplant operating curves. Using the latest estimates, the Project showed a return on investment of 7.17?. 4.4.3 A summary of the comparisci of the IRR's computed from the economic analysis shown in Annexes 4.2 and 4.3 is given below: ----------Percent IRR--------- Borrowers Appraisal Final IRR Report Report All benefits included 12.00 7.17 Only benefits from incremental electricity sales included 9.90 4.64 4.4.4 The lower rate of return reflects primarily the shortfall in incremental sales and to lesser degree, the increases in investment costs. V. FINANCIfL PERFORMANCE 5.1 Actual and Forecast Operating Comparison 5.1.1 Annex 5.1 shows the development of ENEE's operating and consumption data frzm 1980 to 1986. Peak-load demand was lower than expected during the period. After commissioning El Cajon Hydroplant in November 1985, actual peak-load demand reached 220 MW in 1985 and 234 MW in 1986, well below the appraisal estimate (-21% in 1985 and -24Z in 1986). Sales increased at an average 9.3? per year, lower than the 11.3? forecasted at appraisal, due to lower than expected sales to neighboring countries as a result of changes in political and economic growth conditions. In particular, industrial customers reduced their demand. This has made ENEE unable to earn the benefits expected from the construction of El Cajon. ENEE has not found a market for its surplus capacity, which has placed ENEE in a very weak financial situation. 46 5.2 Actual and Forecast Financial Comparisor 5.2.1 Annexes 5.2 to 5.6 compare actual and forecast data for key financial indicators, rates, income statements, funds statements and balance sheets during the period 1980-1987. 5.2.2 ENEE's finances deteriorated gradually in the period 1980-1985 and sharply deteriorated in 1986 and 1987. The inability of ENEE to find a market for its excess hydro-capacity has resulted in insufficient financial resources to meet heavy debt service payments. Additionally, the balance-of- payments and financial problems of the Government and the inability to increase tariffs as forecasted, have caused a liquidity problem to ENEE. 5.2.3 Although the average rate of return on net fixed assets in operation (8.92) was very close to the 92 covenanted during the period 1980-1985, it deteriorated significantly in 1986 and 1987 (4.1? and 5.OZ respectively), and internal revenues were inadequate to meet cash requirements. Other 'actors also contributed to the deterioration of ENEE's finances, such as the accelerated construction of El Cajon Project (which was nine months ahead of schedule), El Cajon cost overrun (10% higher than appraisal estimates) and the execution of transmissions lines nct originally considered in the investment program. ENEE contribution to investment was US$84 million, or 25% lower than expected at appraisal for the period 1980-1985, but in 1986 and 1987 internal sources were insufficient to fully meet debt service payments. The Government contribution amounted to US$153 million and was 45% higher than expected at appraisal for he total period 1980-1987. This contribution was funded through transfer of US$90 million from an IDB loan to cover the financial gap of El Cajon Project (Annex 3.5). 5.2.4 After commissioning El Cajon Project in 1985, ENEE's cash flow deteriorated further because of the heavy debt service arising from the construction of the project, compounded by the devaluation of the dollar against other currencies. About 69% of ENEE's foreign debt is denominated in currencies other than the US dollar (Annex 5.7) of which 382 is due to the Bank group. This high proportion of the foreign debt in non-dollar currencies, has caused large exchange losses (US$191 million), far worse than any possible project cost overrun, and ENEE has been forced to go in arrears with some of its lenders. 5.2.5 Liquidity problems were also caused by ENEE's inability to collect payments from Government entities. In 1983, the Government established that accounts payable for water, electricity and telephone services were considered contributions from the public utilities to the Government. This decree is still in force. ENEE has had difficulties to collect payments from the Nicaraguan power company, which owes about US$9 million. In all categories of national consumers, with the exception of the commercial group, ENEE's collection performance has been unsatisfactory, mainly since 1983. By December 1987, accounts receivable amounted to US$58 million or six months of billing, of which US$22 million (eight months of billing) correspond to industrial consumers, and US$13 million correspond to autonomous entities and municipalities, with a collection period of around 30 months. The shortfall in cash revenues caused by this situation led to the delay of some payments to contractors and forced ENEE into local short-term borrowings with a financing cost of about 202, thus further compounding ENEE's financial problems. 47 5.2.6 Since the end of 1984, ENE's tariffs have remained unchangeu well below the appraisal forecasts. Up to 1984, electricity tariffs increased in line with the appraisal estimates and reached about US-cents 8.5/kWh, but in 1987, the average tariff decreased to approximately US-cents 7.5jkWh, as compared to US-cents 10/kWh eutimated at appraisal. Though the data available is poor, it would seem that on the average, current tariffs are at about the level which covers long-run marginal cost, but they are insufficient to fund ENEE's financial requirements. This poses a conflict between economic considerations, which would favor promoting electricity demand to absorb excess generation capacity (though growth in demand will require additional investments in distribution), and financial criteria which would require significant tariff increases. 5.2.7 Other aspects that contributed, though to a lesser degree, to the financial deterioration of ENEE are the high system losses and increase in the number of employees (para. 6.1.1). During project implementation, system losses were between 32 to 7Z higher than the appraisal estimate (152 forecasted for the period), which are mainly attributed to non-technical (i.e. theft) losses. In spite of action taken by the ENEE Commercial Division to reduce non-technical losses, they remain over 25Z of gross generation; the proposed IDB loan includes actions to reduce ENEE's energy losses. 5.2.8 The issues of ENEE's financial situation and efficiency are being reviewed by the Bank in the context of the preparation of an adjustment loan. During that review, the impact of the devaluation of the US dollar on Honduras' debt service should be analyzed and hedging options should be considered in order to lessen the risks of further debt increases caused by exchange rate changes in the future. 5.2.9 In summary, the financial results have been influenced adversely by several factors, four of which are of particular importance, as follows: (1) The projected demand did not develop as forecast. (2) The revaluation of the yen and major European currencies resulted in a significant increase in ENEE's debt service burden. (3) The Goverment decreed that the electricity sales to the public sector would not be paid, thus eliminating an important source of income. (4) Accounts receivable mounted due to the deterioration of macroeconomic conditions and liquidity problems faced by major industrial consumers. In addition, receivables from sales to Nicaragua accumulated. VI. INSTITUTIONAL PERFORMANCE 6.1 Performance of Bank and ENEE Staff 6.1.1 Over the last few years, ENEE has become seriously overstaffed; at the end of 1987 total staff numbered 3,307 compared with 2,769 forecast for 48 1987 during the appraisal of El Cajon. Present staff includes 1,045 (322) temporary personnel, a large number of which could claim permanent status; the temporary staff for construction could be reduced now that El Cajon Project has been completed. 6.1.2 The collaboration of Bank and ENEE staff was professional and satisfactory. ENEE enjoyed the benefits of good top management during the preparation and implementation of the Project. Top maragement turnover has increased in the past few years. 6.1.3 Bank supervision efforts were adequate, and particular attention seems to have been placed on the environmental and resettlement aspects, which the Bank brought to the attention of ENEE on repeated occasions. The Bank, however, failed to respond forcefully to the financial deterioration that took place after 1985. 6.2 Performance of Consultants 6.2.1 ENEE engaged consultants, firms and individuals, throughout the preparation, design, contracting and construction stages. A listing of all the firms and individuals is shown in Anrex 6.1. 6.2.2 The principal consultant used a special Panel of Experts to guide the firm during the design and construction stage of the Project. An independent Board of Consultants, answering directly to ENEE was engaged as a Bank requirement to follow the project progress from the design through the construction and for a period thereafter during its initial commercial operation. The consulting firms and individuals were supported by ENEE units (in some cases, reinforced by other individual consultants) to ensure that all stages were covered by competent engineers and professionals and that ENEE would receive the maximum possible "on-the-job" technical assistance during the development of the largest hydroelectric project in Central America. 6.2.3 Given the size of the project and the technical capacity of ENEE, the consultant coverage was adequate. Performance of the consultants was satisfactory. Relations with ENEE were good. 6.3 Performance of Contractors and Suppliers 6.3.1 Progress in construction and performance by the civil works contractors and sub-contractors was very satisfactory. Contractor personnel, cont.truction equipment aTtd the financial resources available to the contractors were all decisive factors in completing the works early and with a low overall percentage of liquidated damages. 6.3.2 Relations between the contractors and ENEE was satisfactory primarily due to the active role of ENEE's Project Unit and the Consultant's role in the supervision in all phases of the execution. 49 VII. LESSONS TO BE LEARNED 7.1 Project Justification 7.1.1 On an ex-post basis, it is questionable whether the project provided the most cconomic solution for meeting the lower demand that developed. The assessment of the macroeconomic consequences took into account that a large portion of the financing was obtained on concessionary terms, which made the debt service profile manageable under what then seemed reasonable macroeconomic consumptions. The appraisal did not envisage, (and it would have been unrealistic to expect it to), the disruption in the political situation in Central America and the debt crisis, with the subsequent interruption of voluntary lending to the region. Perhaps a more thorough assessment of the macroeconomic implications of undertaking such a large project under alternative scenarios might have led to a different decision. 7.2 Project Investment and Financing 7.2.1 The evaluation of the proposed El Cajon Project failed to consider th? risk to the Borrower inherent to the financing under a basket of hard currencies. This applies with particular severity to the case when a small, resource limited country, located in the area of influence of the US dollar, undertakes a very large project with a high proportion of financing in hard currencies.8 The Bank should develop methodologies to consider these risks, and should promote hedging or insurance instruments to assist its Forrowers. 7.3 Resettlement and Environmental Aspects 7.3.1 With qualifications, the program established for resettlement, protection of the watershed and preventive health control could be considered a success, to a large degree because of the close supervision given by the Bank during its implementation. However, there are still some outstanding issues (mainly the implementation of a river basin protection program to prevent soil erosion and consequent sedimentation, reducing the live volume of the reservoir). The Bank loan did not provide financing for the resettlement program, which may have contributed to a slower than desireable pace of execution for this component. The Bank should keep open the dialogue on this issue to ensure that positive results are maintained. 7.4 Organizational Arrangements 7.4.1 The project included many arrangements which produced very satisfactory results and should be considered in similar situations: for example che decision not to take the loan to the Board until bids for civil works had been received (to ensure that the financing secured was adequate), also the arrangements for project execution by an ad-hoc organization with significant inputs from consultants (to compensate for limited local experience with large projects and, at the same time, provide on-the-job training to local staff) proved useful. The final arrangements for all risk 8/ As an example, the outstanding balance on the US$105 million (equivalent) Bank group loans, after repayment of US$7.5 million, amounted at recember 31, 1987 to US$154 million. 50 comprehensive insurance (which became a condition of Loan 1805-HO), necessary for a project of this size, were developed with assistance from consultants and are believed to have resulted in savings over the ad-hoc approach frequently encountered in large projects. The recommendation to engage a seasoned external consultant to advise ENEE on the handling of claims submitted by the contractors, led to expeditious settlement and--it is generally believed--valuable savings. 51 ANNEX 1.1 HONDURAS EMPRESA MACIONAL DE ENERGIA ELECTRICA (ENE) EL CAJON POWER PROJECT (Loan 1805-HO and Credit 989-HO) Suary of Bank Lending to the Sector Loan/Credit Loan or Date Amount Name Credit (in US$ Number millions) 226-HO 1959 1.45 Interim Power 261-HO 1960 8.80 Canaveral Hydroelectric (30 MW) 541-HO 1968 7.50/ Rio Lindo Hydroelectric (46 MW) 116-HO 4.00 692-HO/ 1970 5.50/ Fourth Power 201-H01/ 5.50 (Transmission/Distribution) 841-HO 1972 12.30 Fifth Power (Interconnection with Nicaragua) 1081-HO 1975 35.00 Sixth Power (Rio Lindo Extension- 40 MW) 1629-HO 1978 30.50 Nispero Hydroelectric (22.5 MW, plus 30 MW of diesel plant) 1805-HO/ 1980 105.00/ El Cajon Hydroelectric 989-H01/ 20.00 (292 MW) 235.55 1/ IDA Credit 52 ANNEX 2.1 HONDURAS PROJECT COPLETION REPORT EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) EL CAJON POWER PROJECT (Loan 160540 and Credit 909-O) Compliance with Loan. Credit and Guarantee Conditions Legal* Document Section Covenants Descriptlun Compliance Remarks LA 8.01 PE Establishment and operation Yes of project unit LA 3.02 PE Engagement of consultants Yes for project LA 3.64 PE Reporting requirement Yes ENEE's reports were timely and complete LA 8.65 PE Acquisition of land rights Yes LA 3.68 PE Environmental aspects Partially GA 3.64 LA 3.07 S Engage consultants for Yes generation expansion program LA 3.16 S Engage consultants for Yes national electrification master plan LA 8.11 PE Construction of transmission Yes facilities. LA 4.08 M Carry out and implement Partially Management Study LA 4.06 M Salary structure Yes LA 4.07(b) PE Insurance arrangement for Yes project LA 4.6 M Implement changes in commercial Yes functions LA 4.09 M Program for dam inspection Yes LA 5.02 F Presentation of audited Yes financial statements LA 5.04 F Retain earnings Yes LA 5.05 F Limit on new debts if debt No service ratio is l*e than 1.4 LA 6.68 F Revalue assets Yes Consultation has been informal Achieve rate of return of 9% No Rate of return for 1986 was 4.1% and 5% in 1987 LA 5.67 F Major projects clause Yes DCA 3.02 F Government to onlend proceeds No for IDA credit to ENEE GA 2.02(b) F Government to make equity No (Please see Annex 3.3, (c) contributions for 3110.7 Page 2 of 6) million and loans for 820.5 million to ENEE GA 2.02(e) F Local lines of credit Yes GA 3.03 PE Compensate and resettle Partially residents of areas to be flooded a Codes: F = Financial M = Management, operations PE = Project execution S = Studies DCA = Development Credit Agreement GA = Guarantee Agreement LA = Loan Agreement 53 ANNEX 3.1 HONDURAS PROJECT COMPLETION REPORT EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) EL CAJON POWER PROJECT (Loan 1805-HO and Credit 989-HO) Actual and Forecast Construction Initiation and Completion Dates Actual Proarammedl/ Initiation Completion Completion 1. Excavation Tunnel and Powerhouse 1/1/81 8/6/82 5/30/82 2. Excavatuib Oressyre Intake Conduit B 9/1/81 7/6/82 5/16/82 3. Excavation Pressure Intake Conduit A 9/15/81 4/5/82 2/12/83 4. Distribution A & B 9/1/82 8/6/84 7/16/84 5. Civil Works - Power House 9/1/82 8/6/84 7/16/84 6. Civil Works - El Cajon Substation 9/15/82 12/6/84 12/6/83 7. River Diversion 1/1/81 3/31/82 1/15/82 8. Cofferdams 9/15/81 7/31/81 7/24/82 9. Dam Concrete Elevation 170 m 3/1/82 2/6/84 1/27/84 10. Close Tunnel - Initiate Filling Reservoir 3/1/84 6/15/84 6/15/84 11. Intake B 9/1/81 6/23/84 8/4/84 12. Intake A 2/1/82 5/28/84 8/4/84 13. Intake C & D 9/1/81 6/15/84 8/4/84 14. Spillway 2/1/82 6/15/84 2/27/85 15. Dam Concrete Elevation 301 m 3/1/83 3/16/85 2/28/85 16. Complete Dam and Remaining Civil Works 3/16/85 7/16/85 7/16/85 17. Grout Curtain 1/16/81 1/15/85 12/29/84 18. Operation - Unit 1 1/2/84 3/6/85 3/6/85 2/ 19. Operation - Unit 2 4/1/84 4/6/85 4/6/85 2/ 20. Operation - Unit 3 7/1/84 7/6/85 7/6/85 2/ 21. Operation - Unit 4 10/1/84 10/6/85 10/6/85 2/ 22. Transmission Line I 9/1/83 6/20/85 12/15/84 23. Transmission Line II 9/1/83 1/16/85 5/15/85 24. Transmission Line III 9/1/83 6/20/85 4/15/85 1/ Program prepared by Motor Columbus and approved by the Board of Consultants. 2/ Shows one year advance from original appraisal estimate. 54 ANNEX 3.2 HONDURAS PROJECT COMPLETION REPORT EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) EL CAJON POWER PROJECT (Loan 1805-HO and Credit 989-HO) Maior Proiect Modifications 1. Power House 1.1 A total of 92 change orders were executed by the contractor, Consorcio Internacional "El Cajon" (CONINCA), that resulted in an increase of almost US$10.0 million in the contract which was originally estimated at US$66.0 million. 1.2 Major increases resulted from the necessity of changing the location of the intake conduit because of geological conditions encountered; the access tunnel needed a larger drainage system than anticipated, and the volume of auxiliary equipment required had been grossly underestimated. 2. Dam 2.1 Dam relocation, involving the horizontal and vertical axes of the structure had to be made during the final design period because of encountering some unfavorable geological conditions at the sites selected. This and other chang-s resulted in a net increase of approximately US$39.0 million over the US$288.2 million estimated for the civil works contract by the consultant. 2.2 Other major changes included the necessity to substantially expand the grouting design to 180 m below the dam foundation to reduce the risk of seepage in the deep karstic zone. The new design also required the construction of galleries below the foot of the dam, which were not foreseen in the original project design. The total cost increase of the grout curtain at June 30, 1987 amounted to over US$6.23 million. 55 ANNEX 3.3 Page 1 of 6 HONDURAS EMPRESA NACIONAL DE ENERCIA ELECTRICA (ENES) EL CAJON POWER PROJECT LOAN 1805-HO AND CREDIT 989-O Forecast and Actual Cost and Sources of Financing (in millions of current US$) A. IBRD/IDAflDB Project Cost -----US I (millIons) ---- Dem and Hydroplant Agreleal Actuall/ X Difference Costs Local Foreign Total Eoca rFeign Total From Appraisal Land, roads, relocations 1.6 2.2 12.8 10.2 6.4 15.6 21.8 Underground power- house 15.8 43.1 58.9 34.0 70.8 112.8 91.5 Arch dam and works 47.0 129.1 176.1 136.2 196.9 327.1 85.8 Steel hydraulic structures 0.4 18.9 14.8 0.1 11.7 11.8 (21.2) Turbines and accessories - 12.2 12.2 0.2 12.3 12.5 2.5 Generators and accessories - 15.6 15.6 - 10.8 16.3 (84.0) Power station equipment 6.1 3.5 3.6 - 5.4 6.4 568. Engineering and Administration 7.6 11.4 18.4 27.4 20.5 47.9 166.3 Base Cost 36.9 231.9 311.9 28.1 335.3 543.4 Contingencies: Physical 10.3 28.7 89.0 - - - Price 36.4 165.9 142.8 - - - Project Cost Subtotal 1IT" 18" w 493.2 Ti. 33533 TI7 10.2 Interest During Construction - 89.5 89.5 11.9 62.7 74.6 (20.0) Hydroplant Financing Requirements 127.6 455.1 5602.7 226.6 398.9 618.6 6.1 / The actual figures are not strictly comparable to the appraisal estimates, as the latter included indirect foreign exchange costs in the foreign cost totals. It was not possible to accurately distinguish between actual indirect foreign exchange costs and other local costs with the Information available. 56 ANNEX 3.3 Page 2 of 6 B. Financing of IBRDIDA/IDB Project -------------- US $ (millions)--------------- Hydroplant Appraisal Actual Financing Plan Local Foreign Total Local Foreign Total Bank loan (1805-HO) - 105.0 105.0 - 105.0 105.0 IDA credit (989-HO) - 20.0 20.0 - 20.0 20.0 IDB - 95.0 95.0 85.5 99.5 185.03/ Japan - 33.0 33.0 2.0 31.2 33.2 CABEI - 30.6 30.6 1.7 28.9 30.6 OPEC Special Fund - 7.5 7.5 - 8.5 8.5 CDC - 10.0 10.0 - 11.7 11.7 Suppliers Credits1/ - 68.1 68.1 - 32.7 32.7 Other Commercial Banks2/ - 15.0 15.0 13.8 33.9 47.7 ENEE's Internal Cash Gen. 64.8 - 64.8 36.8 25.5 62.3 Government Capital Contribution 42.3 70.9 113.2 80.2 1.0 81.2 Government Loan to ENEE 20.5 - 20.5 - -- Total Hydroplant Financing 127.6 455.1 582.7 220.0 398.0 618.0 1/ Supplier Credits from: UBS, Eximbank, Swiss Government, German Government, KFW, Astaldi. 2/ Other Commercial Banks included: UBS, Bank of America, First Interstate 3/ Includes US$90 million loan by IDB to GOH and transferred to ENEE as indirect Government contribution. ANNEX 3.3 Page 3 of 6 C. Costs in CIDA/FINEXPRO/VIF Project (Relatei Transmission) -------------US $ (millions) ------------ Transmission Original 1/ Actual 1/ 2 Difference Costs Local Foreign Total Local Foreign Total From Original Land, right of way 0.6 - 0.6 - Transmission Lines 31.1 9.7 30.4 40.1 28.9 Substations 11.4 0.1 13.6 13.7 20.2 Receiving System Improvements - 0.7 7.2 7.9 - Engineering and Admin. - 0.3 1.5 1.8 Interest During (included in items) Construction Transmission Financing Requirements 42.5 11.4 54.4 65.8 54.6 1/ From Borrower's Final Report 58 ANNEX 3.3 Page 4 of 6 D. Financina of CIDAIFINEXPROVIF Project (Related Transmission) -------------- US $ (millions)------------ Transmission Orizinal Actual Financing Plan Local Foreign Total Local Foreian Total CIDA - 13.6 13.6 FINEXPRO - 18.2 18.2 VIP 9.3 2.5 11.8 OPEC - 6.9 6.9 Suppliers Credits (Detailed financing - 10.1 10.1 Other Commercial plan not included in Banks the Appraisal Report - 1.0 1.0 or the Borrower's ENEE, Government Final Report) Equity and Loans ____ 2.1 2,1 4.2 Total Transmission Financing 74.31/ 11.4 54.4 65.8 I/ A global amount of US $74.3 million was estimated in the Appraisal Report as the investment required for 230 kV transmission lines from El Cajon to the El Progreso substation in its San Pedro Sula area and to the Suyapa substation in the Tegucigalpa area. No detail was given in the Appraisal Report because the associated transmission system was still under study as part of the Central American interconnection, which was being debated among the regional countries. The Borrower used the Jacobs Associates estimate, prepared about the time of the appraisal, as the original baseline estimate, although it was apparent that is was incomplete. 59 ANNx 3.3 Page 5 of 6 E. Financing by Item of Cost - Local Cost Component (US$ million equivalent) Project Category Actual IDI CABEI DECF Supplier. FIV Governi En Local and of Cost Contract Honduras Hydroplant 1. Land, Roads, Resettlemont 10.2 1.8 8.4 2. Underground Power House 84.0 1.7 82.3 9.9 3. Arch Deo 136.2 35.1 2.0 13.8 35.3 9.0 4. Hydraulic Stool Structure 9.1 0.1 5. Turbine and Accessories 0.2 6.2 6. Generators and Accessories 9.0 9.0 7. Miacellaneous 0.0 0.9 8. Eng. a Admin. 27.4 9.4 27.9 28.1 86.5 1.7 2.0 13.8 0.9 69.4 35.7 Transelssion 9. Land, Right of Way 9.6 6.8 16. Transmieson Lines 9.6 9.8 0.8 11. Substations 0.1 6.1 12. Eng. and Admin. 9.3 6.8 10.6 0.6 0.6 0.0 0.0 9.8 0.6 1.3 1/ It should be noted that there is a slight variation between these figures and the ones shown by the Borrower in the Final Report. Source: Supervision Report 6/15/87. F. Financing by Item of Cost - Foreign Cost Component (US$ million equivalent) Project Category Actual IBRD/ IDB CADEI DECF OPEC CDC Eximbank UBS and KfW and Suppliers Bank of CIDA FDEO FIV Covers. BE Foreign IDA and Japan Swis Cerman and America ef Cost Contract Contract Covern Covern Contract Japan Handuras todroalat 1. Land, Roads, Resettlement 5.4 5.4 2. Underground Power Houee 78.8 37.2 28.9 11.7 11.1 1.0 3. Arch Dam 190.0 68.3 71.9 31.1 8.5 4. Fwdraulic Steel Structure 11.7 9.6 2.1 5. Turbine and Accessories 12.3 12.3 6. Cenerators and Acce**ories 10.3 10.3 7 Hiscellaneous 5.4 5.4 8. Eng. A Admin. 20.5 1.5 7.7 9.3 0.0 2.0 335.3 107.0 79.6 20.9 31.1 8.5 11.7 9.6 17.7 10.3 25.0 2.1 0.0 0.0 0.0 1.0 2.0 Transmiasion 9. Land, Right of Way 0.0 10. Transmission Linas 30.4 6.9 2.9 0.3 18.2 2.4 11. Substations 13.6 13.6 12. Eng. and Admin. 1.5 0.7 0.6 Total Costs 1/ 45.5 0.0 0.0 0.0 0.0 6.9 0.0 0.0 0.0 0.0 3.6 0.0 13.6 18.2 2.4 0.0 0.8 03 1/ These figures vary slightly from those shown by the Borrower in the Final Report. Source: Supervision Report - June 15, 1987. 61 ANNEX 3.4 HONDURAS DPRESA MACIONAL DE ENERGIA ELECTRICA (E)EE BL CAJON POWUR PROJECT (1805-HO AND 989-HO) Actual and Forecast Schedule of Disbursements (in millions of US$) IBRD Fiscal Actual Disbursements Year and Actual Appraisal as a Pe:centage of Semester IBRD IDA IBRD IDA Appraisal Estimate 1980 6/30/80 - - - !.3 0.0 1981 12/31/40 0.3 16.7 0.4 8.3 195.4 6/30/81 2.9 20.0 0.8 13 9 155.8 1982 12/31/81 7.8 20.0 1.2 19.5 134.3 6/30/82 13.6 20.0 7.7 20.0 121.3 1983 12/31/82 24.2 20.0 14.2 20.0 129.2 6/30/83 41.4 20.0 23.9 20.0 139.9 1984 12/31/83 57.0 20.0 33.7 20.0 143.4 6/30/84 71.5 20.0 50.3 20.0 130.2 1985 12/31/84 90.2 20.0 67.0 20.0 126.7 6/30/85 96.4 20.0 82.4 20.0 113.7 1986 12/31/85 101.7 20.0 97.8 20.0 103.3 6/30/86 104.5 20.0 105.0 20.0 99.6 1987 12/31/86 104.7 20.0 105.0 20.0 99.8 6/30/87 105.0 20.0 105.0 20.0 100.0 Closing Date 2/28187 212817 2/28/87 2/28/87 HONDURAS PROJECT COMPLETION REPORT EHPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) EL CAJON POWER PROJECT (Loan 1805-HO and Credit 989-80) Actual and Forecast Energy and Demand Requirements (1980-1990) ACTUAL Energy Sales (Wh) p/ Energy Generation (GWh) Interomected System Meximum Colocident Year Interconnected Isolated Total Interconnected Isolated Total Demand (M) Act. 1980 740.8 18.8 759.4 876.6 22.6 899.1 155.3 Act. 181 808.7 19.7 823.4 966.8 23.6 978.9 170.6 Act. 1962 825.6 21.0 846.8 1,018.5 26.6 1,037.1 132.1 Act. 183 896.0 22.3 920.3 1,098.4 26.7 1,126.1 198.0 Act. 1984 960.4 22.9 973.3 1,154.5 27.5 1,182.0 210.5 Act. II9 1,088.6 28.2 1,064.8 1,839.6 81.4 1,870.9 220.0 Est. 1986 1,081.9 27.4 1,059.8 1,426.8 32.8 1,459.6 284.0 Est. 1967 1,187.5 12.8 1,180.8 / 2,086.7 15.4 2,102.1 250.7 Est. 198 1,248.8 13.7 1,257.6 2,086.7 16.4 2,108.1 265.4 Est. 1989 1,827.5 14.7 1,342.2 2,088.7 17.8 2,104.8 232.2 Est. 1990 1,419.6 15.7 1,434.8 2,086.7 16.8 2,106.5 800.1 APPRAISAL FORECAST Energy Sales (Wh) / Energy Generation (CWh) Interconnected System Maximum Colncident Year Interconnected Isolated Total Interconnected / Isolated d/ Total Demand MW Act. 180 750.4 26.7 777.1 856.7 88.8 690.0 156.0 Act. 1981 8568.4 i/ 15.6 / 871.9 978.1 */ 19.5 / 997.6 177.0 Act. 1962 960.7 17.6 978.8 1,098.4 22.0 1,120.0 199.0 Act. 198 1,000.8 19.6 1,100.8 1,238.9 24.6 1,281.7 225.0 Act. 1984 1,206.0 22.1 1,227.1 1,381.6 27.6 1,409.2 261.0 Act. 1985 1,832.9 24.6 1,857.7 1,581.2 31.0 1,682.2 279.0 Est. 1986 1,475.4 !/ 9.9 / 1,486.8 1,696.8 / 12.4 / 1,710.7 809.0 Est. 187 1,616.8 11.0 1,627.8 1,661.7 13.8 1,676.5 889.0 Est. 188 1,771.0 12.3 1,763.8 2,042.7 15.4 2,057.9 871.0 Est. 1989 1,988.0 13.5 1,961.6 2,237.9 16.9 2,254.8 407.0 Est. 1990 2,120.1 14.8 2,134.9 2,450.0 18.5 2,468.6 445.0 a/ From 1987 onwards hydro energy available for sales outside Honduras under average hydrological conditions. / Sales to neighboring countries not included. c/ Losses and station use assumed at 15 for 1979-1996. / Losses and station use assumed at 20X for 1978-1996. Auan Valley assumed connected to Interconnected System. Interconnection of about 17.4 GWh assumed from isolated ENEE Systems. HONDURAS PROJECT COMPLETION REPORT EMPRESA NACIONAL DE ENERIA ELECTRICA (ENEE) EL CAJON POWER PROJECT (Loen 18fS-0 and Credit 989-HO) Forocast (Appraisal Report) Return of Invet4ente Sei. --> cl C2 C3 C4 cs C# C7 ca al 02 as4 os Total Total Rveue Flood Coat Reduction Fuel Cesi t~ff ca 6 oma BMeeii Year cwhpaiq pTcita Capitat 0 a m Iner*matal Control du* to Retducioan adtoion str~ Sal. in Bnffit Shadow Pricing in Enie6ing in Ea6i&ing Hondura Baneft of Labor TNeral Plan Therml Plent* M. - 1 1979 9,35 0 0 0 0 9,3M 0 0 0 201 - 9,07F 19s0 am,54 1 6,554 1,97 1911 89,912 6,M2 95,474 2,114 - 1912 95,922 28,172 124.094 3,728 -10.371 1963 131,062 46.9x6 177,978 5,3=9 194 176,9M2 11,00 188.0~2 > 5.41 1915 119,218 1,269 2,060 1,46' 12i,266 2,750 ,. 14,826 1,90 -16,82 1966 26.716 2,195 506 7,125 1,267 34.747 4.92 16.50 17,900 1.042 79,9~6 *77,791 19a7 0 2,22$ 1,~6I 8.260 2.673 9,335 6,005 32,674 260 .117,36 1960 847 9,106 4,069 9,6U5 7,751 50,820 290 +18,670 19 0 1,56 10,019 5.60 10,019 9,36 70.192 300 56,291 127,2 1990 11,022 7.257 11.022 11 040 91,315 330 30,40« +119,6 1991 12,12 9,059 12.123 12,642 114,492 364 0 ,106,771 1992 0 11,34~ 0 15,12 139,862 0 +142,184 1996 159,152 + 161,904 2011 7,56 7,525 226 +156.62 M12 6.M O,260 248 ø15w,892 2018 9,10 9,10 278 15.8 214 10.019 10.019 800 215 11.022 11.022 30 .161 2016 12, 12 12,123 364 .166 2017 0 0 0161,914 2016 2019 2021 5,562 5,562 167 +186, 2CR2 29,172 29,172 645 +14, 22 46,916 41,916 1.407 +116.415 2004 11,060 11,050 332 *181,S6 202 2,00 2.050 62 .1...916 2026 50 506 15 +161,43 2027 1,055 1.055 32 +160,901 2026 -112.900 -85,700 - -24,970 -223, 650 0 *.+3,674 Rat# of Raturn - ih aii benafitg includ.d - 129 - With following excludød: 66 of ga - 11 (bag* ca~ 2) 1006 of 63 - 10.43 32. 93, 04, 85 - 9.9% (hase cas. 2) -―塗―、―争 E”ヤXヨNNy り9 65 ANNEX 5.1 HONDLIRAS PROJECT COMPLETION REPORT EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) EL CAJON POWER PROJECT (Loan IM-NO and Crodit 909-HO) Actual Ope stina D&U - 19W i"i Im 19013 1984 1995 low 1967 OPERATING DATA Peak DammenJ (Rd) 155.6 170.6 102.1 103.0 210.3 220.0 234.0 250.7 Generation capacity (available) (MW) 207.6 207.8 230.3 230.3 260.3 546.6 549.8 549.8 Energy generated in own plants (not? (010h) 880.9 968.0 1,022.3 976.4 1,010.4 1,364.6 1."9.8 2,102.1 Energy acquired from neighb. countri am (Wh) Optimization interchange Energy purchased :ith contract (firm) 141.8 135.5 3.3 0.0 0.0 Energy purchased ;thout contract (eacon) 18.2 10.9 14.8 6.9 36.1 3.0 9.8 0.0 Subtotal 18.2 10.9 14.8 148.7 171.6 6.3 9.9 0.0 Total energy available (Oldh) 699.1 978.9 1.03-.1 1,125.1 1.192.0 1,370.9 1,469.6 2,102.1 L oss as (OWh) 130.7 137.9 181.7 203.2 203.2 171.9 241.9 671.8 Total energy supplied (Odh) 7". 4 641.0 856.4 921.9 976.8 1,199.0 1,217.7 1.430.3 To.oth:%CA-countriaa pt; st;ninterch "":t (firm) sold ; ..h contra 0.0 0.0 0.0 0.0 0.0 127.0 158.4 Energy sold without contract (**con) 8.9 17.7 8.6 1.6 5.5 7.2 0.0 250.0 Subtotal 1/ 8.9 17.7 8.6 1.6 5.5 134.2 158 .4 2SO.0 To EWE'* system Int*rconn:c.ted system 740.8 803.6 825.6 P98.0 950.4 1,038.6 1,031.9 1,167.5 Iso , ated y tem. 18.7 19.7 21.0 22.3 22.9 26.2 27.4 12.8 Subtotal 796.5 823.3 846.6 920.3 973.3 1,064.8 1,059.3 1,180.3 Total 768.4 841.0 M .4 921.9 978.8 1,199.0 1,217.7 1,430.3 SALES IN ENEEIS SYSTEM (Wh) Imterconnected System R.side t;al 202. 229.5 252.7 269.7 27S.2 315.2 324.4 322.8 Comm :rci:: 115.7 121.7 129.8 135.3 148.7 17 9 191.6 199.7 I du tri Low Voltage 32.4 160.4 148. 1 157.8 163.7 1682:6 142. 7 193.4 indlu:tri: Medium Volt:06 98 .3 96.2 82.9 86.0 91.6 93.3 83.1 117.0 Ind u tri High Voltag 143.2 140.8 165.0 190.4 200.4 146.5 161.1 214.4 G *rnmsnt and Municipalities 30.2 34.6 26.3 35.3 39.4 74.6 93.4 73.6 Pub , ic lighting 18.1 19.8 le.i 22.7 26.4 215.5 24.8 36.6 own use 0.7 0.7 0.7 0.8 0.8 M.S. 0.8 n.s. Subtotal 740.6 903.7 825.6 998.0 950.4 1,0U.6 1,031.9 1,167.6 Isolated $yet*.* Residential 9.3 10.1 11.7 11.9 12.7 15.1 IS.6 7.4 Commercial 1.4 1.6 1.8 1.8 2.2 1.3 1.7 0.6 Industrial Low Voltage 3.0 3.9 4.1 4.4 3.9 3.4 3.3 1.7 Industrial High Voltage 2.1 0.6 0.0 0.0 0.0 0.0 0.0 0.0 Government and Mut,icipalities 1.7 1.9 2.3 2.4 2.6 4.9 5.0 2.4 Public lighting 1.3 1.6 1.1 1.8 1.5 1.5 1.8 0.7 subtotal is's 19.7 21.0 22.3 22.9 26.2 27.4 12.8 Total Residential 211.3 239.6 264.4 281.6 290.9 330.3 as-.O 340.2 com,werciel 117.1 123.3 131.6 137.1 150.9 180.2 193.3 200.3 Industrial Low Vo Its 0 135.4 164.3 152.2 162.2 169.6 166.0 146.0 195.1 Industrial M*,,, um Vo?taoe 94.3 96.2 02.9 84 .0 91.8 93.3 83.5 117.0 Industrial High Volts?* 143.3 141.4 165.0 190.4 200.4 186.5 181.1 214.4 Government and Mun;cips ities 31.9 36.3 30.6 37.7 41.0 79.5 U .4 76.0 P.61;c lighting 19.4 21.4 19.2 24.5 27.9 27.0 26.6 37.3 Own Use 0.7 0.7 0.7 0.8 0.8 n.s. 0.8 n.a. Total 759.4 023.4 646.6 920.3 973.3 1,064.6 1,059.3 1,180.3 l/ From 1987 onwards hydroenergy available for sales outside Honduras under average hydrological conditions. HONDURAS PROJECT ZFE T ON REPORT EMPRESA NAffWL DCA EN EL CAJON PUR PROJECT (Loan M O an Crod i 99-HO) ENEE's Performance and Financial Indicators IMg IM Ig= n M WlMM MAraie I Acual Arosl Actual Aprai.al Astal Mrainl Actual arismal Acual Asarsima sa ea L sal 1. NMW PETRATION Total Population with access to eletricity (5) 25 25 27 27 29 27 31 s0 84 2 M6 21 8 Number of new villages served 5 a 5 3 6 72 3 a 5 a 9 4 Number of customers added during year 11,500 15,092 12.600 17,048 13.400 12.505 15.300 16,250 19,000 9.948 16.060 21,71 8.400 16,060 Number of customers at year end 139,966 137.669 182.566 154,937 1685.96 167.442 161.266 189,463 201,06 199.411 217.516 2S0,7 11S,51S Ma" Annual icrease in retail energy sales (1) 14.3 9.6 13.1 11.7 13.6 3.3 13.7 7.6 12.5 7.4 12.5 9.4 11.0 1.6 Annuel increee in bulk energy eales (5) 2/ 16.5 12.6 11.7 14.1 7.8 0.0 7.8 6.2 7.0 8.4 7.0 2.240 7.0 2.0 2. EEEICIENI Number of employs** 2.271 2.485 2,322 2,723 2.364 2.613 2,419 2.681 2,802 2,657 2,810 2,66 2.081 3.111 Total customere per employee 85 89 aB 94 91 78 67 78 73 64 61 i 78 8. FINMCIAL IMDICATORtS Unit rate (W-Cents/kwh) 5.4 6.4 6.0 6.8 6.9 7.5 7.5 8.3 8.7 8.9 9.0 6.7 9.6 8.5 Rate of return on not plant in operation (1) 9.1 10.5 9.1 9.2 9.1 6.4 9.0 7.9 9.0 9. 6.9 6.8 9.0 4.1 Operating ratio (5) 61 57 66 65 65 72 66 67 GO 62 so 44 80 o EE contribution (5) 14 20 14 16 17 9.5 1 9 14 4 16 11 6 (1) Government and 91EE contribution (5) 26 33 26 34 33 27 29 20 29 24 as AM W (18) Government equity contribution for El Cajdn Project (million USS) 9.0 10.5 13.2 18.8 18.0 17.2 20.0 17.2 24.0 55.4 28.5 32.8 0 9.0 Debt service coverage ratio 1.4 2.3 1.3 2.3 1.3 1.9 1.0 1.1 1.1 1.2 1.0 1.3 1.8 0.0 Debt-equity ratio 51/49 45/5 53/47 46/54 53/47 47/53 54/46 50/50 53/47 57/43 51/49 50/50 48/82 65/45 Collection period (days) 55 68 54 6 54 80 54 100 54 147 SO 100 54 Collection period for public sector receivab les (days) 90 192 90 342 90 380 90 395 90 539 90 641 90 90 Current ratio 1.6 0.7 1.6 0.7 1.5 0.6 1.7 0.5 1.4 0.4 1.0 0.7 2.1 0.8 Depreciation as a proportion of average gross utility plant in operation (1) 3.4 2.9 3.6 2.9 3.5 2.9 3.5 2.9 3.2 3.1 3.3 1.6 8.5 2.3 s/ From 1985 onwards defined as sales to neighboring countries. I I HONDURAS PROJECT 5WEPTION REPORT EMPRESA NACIWNL DE ENERCIA ELECTRICA-CENEEI EL CAJON POWER PROJECT (Loan 18-H0 and-Credit 909-M) Comparison of ENEE's Rates 1984 1986 Change 5 1988 Change 5 Actual Actual Aetual 1 ENEE - System 1.1 Interconnected System 1.1.1 Tariff Income Lempira million 149.7 177.1 18.8 187.6 5.9 GWh Sales 95.9 1,038.6 6.7 1,081.9 -0.6 Average Rate US-Cents/kWh 7.83 8.36 8.9 9.09 6.6 1.1.2 Petroleum Adjustment Clause Lempira million 16.7 10.9 -84.7 - -100.0 GWh Sales 955.9 1,036.6 6.7 - -100.0 Average Rate US-Cents/kW 0.87 0.62 -39.9 - -100.0 1.1..3 Subtotal Lempira million 166.4 168.0 13.0 187.6 -0.2 MWh Sales 956.9 1,038.6 6.7 1,031.9 -0.6 Average Rate US-Cents/kWh 8.70 9.05 4.0 9.09 0.4 1.2 Isolated Systems 1.2.1 Tariff Income Lempirs million 8.2 9.4 14.6 9.0 -4.3 GWh Sales 22.9 26.2 14.4 27.4 4.6 Average Rate US-Cents/kWh 17.90 17.94 0.2 18.42 -3.4 1.8 Subtotal ENEE-System Lempira million 174.6 197.4 18.1 196.6 -0.4 0Wh Sales 978.8 1,064.8 8.8 1,069.3 -0.6 Average Rate US-Cents/kWh 8.92 9.27 8.9 9.28 0.1 2 Sales to Neighboring Countries Lempira million 0.2 10.2 6,000.0 11.3 10.8 GWh Sales 2.3 134.2 5,784.0 158.4 18.0 Average Rate US-Cents/kWh 4.36 3.80 -12.6 3.57 -6.1 8 Total Lempira million 174.8 207.6 18.8 207.9 0.1 0Wh Sales 981.1 1,199.0 22.2 1,217.7 1.6 Average Rate US-Cents/kWh 8.91 8.66 -2.8 6.54 -1.4 HONDURAS PROJECT ZÖW=PETYON REPORT EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) EL CAJON POWER PRORE C oan 180-O and-H) Actual and Forecast Incomm Statemnts (1980-1987) (in Millions of current Lempirag unle otherwise noted) Sales (ik 768.4 777.1 840.4 871.9 850.4 978.3 919.6 1,100.6 978.8 1.227.1 1,199.0 1,387.7 1 217.7 1.488.8 1.467.0 1 67.8 Uni% r~. (L.pa/kUh) 0.125 0.120 0.138 0.138 0.149 0.150 0.166 0.166 0.176 0.174 0. 174 0.178 6.170 0.192 0.15 6.20 Salez Reveus 98.7 93.3 113.8 120.3 126.5 146.7 152.6 162.7 174.6 213.5 209.4 243.0 206.6 28. 227.9 ~. DicligaS29.0 26.7 33.3 80.5 41.1 36.6 41.7 43.8 45.0 50.3 48.0 6.4 68.8 82.6 76.0 75.0 Fucl a Eney Purch 13.7 11.6 21.1 26.0 26.6 31.0 35.3 43.8 34.4 60.7 14.8 6.6 4.6 10.8 7.5 12.9 Dereciation §JL UJ JLE 22 22I 2LZ 2L9 2L2 2L" i4. ÅM 2L2 ELR Zmå .i ZuA Total Operat Coat 57.8 57.3 73.4 79.3 90.4 95.8 103.0 120.8 106.4 145.5 93.0 167.0 126.4 143.2 143.3 16.2 Hel lne f r= useratione 43.3 38.6 43.7 41.7 38.5 51.7 50.1 62.7 66.6 68.8 116.8 6.J 96.2 141.4 95.2 16.J Int'essts * Chares 22.1 26.3 37.3 36.6 42.1 46.B 48.1 58.4 59.8 72.5 87.2 84.9 106.8 89.8 85.4 88.2 Lass Inberest Ouring C6 Coe6rcon (7.5) (10.9) (22.5) (16.7) (20.6) (22.3) (25.7) (31.3) (31.2) (47 60 (53 (0.2) (0.4) (01) (3.0)1 Other Ines (Ne) - - - -- -- _å _---1 (.2 .- ._.L -- _Lk -- Interwst Expense 14.6 16.1 4.0 19.9 21.5 24.5 16 5 27.1 20.4 25.4 28.0 31.6 99.2 6.4 79.3 6.4 Net Income efter Inters 26.7 20.5 26.9 21.8 17.0 27.2 33.6 35.6 46.2 43.4 94.0 45.0 (27.6) W.0 5.9 88.2 Adjus~ment for Mon~ rary Fluctuation (1.2) _.. _Q. _L5 _-_- _--_ . _.--_ . _-- Net Inacoe 27.5 20.5 29.0 21.8 17.5 27.2 33.6 35.6 46.2 43.4 94.0 45.0 (27.6) 82.0 5.9 83.2 Rate lae 404.3 459.6 57.8 637.6 696.6 675.8 763.6 1,403.2 860.8 2.118.4 1.578.4 2 112.0 2.264.2 Rata of Return 10.5 9.1 9.2 9.1 6.4 9-1 7.9 9.0 9.9 9.0 6.3 8.9 4.1 8.9 4.0 7.4 PROJECT COMLETION REPURT BPRESA NACIONAL DE EQERIA ELECTRICA (ENE EL CAJON POWER PROJECT (Loan 1805-HO and Credit 989-HO) Actual and Forecast Balance She*t* (190-1987) (in Millions of current Leapiras unless otherwise noted) j Year ending December 31 1980 1981 1982 1983 1984 1965 1968 .187 Appraisal Appraisal Appraisal Appraisal Appraisal Appraisal Appraisal Appraisal Astalt foresen Actual Ea a Actua Foreces Actual Eonen Actual Eneas Actual farea Atual F&*ms Astual oreast Fixed Assets Cross Plant in Service 592.4 582. 6 696.1 687.7 840.6 876.1 977 6 1,036 8 977.6 1.114.1 2,421.0 1,850.1 2,491.2 2.696.2 2,541.0 2.98.4 Accumulated Depreciation l iL.! 1911 193, 219. .235 2W, .2.. (20.3 (9.11 (312.01 (4L.1 (394 (4",0) f316 (0J1 Net Plan in Service 437.3 424.8 507.0 494.5 621.1 641.1 697.3 752.1 697.3 775.0 2,109.0 946.5 2,121.0 2.198.2 2,102.4 2.830.1 Work in Progress 2Z1! 2Q1. 40 422 .4 526. 1f1 746.1 1J218 1J2. 40- 1,24 4l. M.4 3U 1j4 Net Fixed Assets 709.0 696.7 937.5 923.7 1,192.5 1,169.7 1,916.0 1,498.2 1,916.0 1,697.3 2,149.6 2.23.9 2,171.2 2.824.0 2,185.0 2,451.5 Current Assets Cash 5.5 7.8 6.4 9.4 7.2 11.0 13.6 16.1 13.6 11.1 27.0 31.4 11.0 60.6 31.9 93.4 Accounts Receivable (net) 19.8 14.4 26.9 18.2 27.7 22.1 59.5 27.5 59.5 32.2 91.2 88.0 49.8 42.8 90.0 49.4 4 Materials and Supplies 24.8 16.7 35.9 20.0 28.8 20.7 43.6 23.4 43.8 25.4 42.4 25.3 40.8 27.2 82.8 29.0 * Other -- --= -- .-- -- . .40 --Z.- O . Total Current Assets 50.1 40.9 69.2 47.6 63.9 53.8 117.3 67.0 117.3 68.7 161.4 93.8 102.2 130.6 174.6 171.8 Other Aseets (incl. deferred J 2L 1. 14. 1. .7 .7 .7 L...2LI . -.ZL . 4.6 ...M Changes) TOTAL 798.6 738.7 1,032.7 972.6 1,270.7 1.225.0 2,051.0 1,566.9 2,051.0 1 967.9 2,337.1 2,334.4 2,43.4 9,468.0 2,764.2 226.3 LIAILITIM Me NE WORTH Nat Worth Capital 8.7 43.8 78.1 70.6 112.4 106.9 257.9 147.3 257.9 195.5 324.4 248.7 342.4 249.0 348.3 249.0 Accumulated Surplus 145.8 131.8 174.6 150.6 192.3 180.8 272.0 216.4 272.0 259.9 086.1 005.1 292.0 867.0 82.8 470.8 Asset Revaluation Reserve 217, ZU 2L. 21LI 313. 2.. 46.9 344J 341. "2. 33 174 .8 4.2 387.7 7.2 Total Net Worth 402.0 048.9 515.0 440.7 617.8 559.5 876.I, 706.4 876.6 897.6 1,053.9 1,111.2 1,006.0 1,160.2 1,066.6 1,48.8 LiabiIities Long-Ters Debt (net) 300.9 347.4 415.9 484.9 504.0 611.2 873.1 794.9 873.1 994.1 1,045.6 1,101.2 1,154.8 1,079.4 1,66.6 1,002.8 Short-Term Debt 29.8 15.7 20.4 16.2 44.J 18.8 111.5 23.0 111.5 29.4 184.0 38.2 230.0 66.2 -- 87.0 Accounts Payable and Accruals A5l 2L. 79, .6 _g1. 35, 109.6 .7 1.6 46, __MA __AU go, .2. -Jai ..=Z P Total Liabilities 39L1 X92 0g SIB, .162.9 665.4 1,1742 S.L 2.1174 14070 18 LZZU 1A45. L,1V 124 1-L. TOTAL 798.6 738.7 1,033.5 972.6 1,270.7 1,224.9 2,051.0 1,567.0 2,rS1.0 1,967.9 2,307.3 2,334.0 2.483.0 ,457.8 2,764.2 2,62.8 & Figures my not add up due to rounding off. POJE1 COMFLETION REPORT EMBA WCIOML DE RMtIA ETRICA (EEM EL CAJON POW1t PROJELT (Loan 1805-HQ and Credit 989-M) Actual and Forecast Sources and Applications of Funds (1980-19871 (in Millions of current Leampiras unless otherwise noted)* Year endina December 31 1980 1981 192 1983 1984 1985 1911 197 Appraisal Appraisal ApprailI Appraisal Appraisal Appraisal Appraisal Appraisal Aca fanast Actual Frasant Astua Fesasat Asta E ast Aa Fecastal Actuat Eacast Astua Foentl am s stli Earcsm 50LtCE OF PLJHD6 Internal Cash Generatign i ALA A1.2 lIk 23 ILA A9 Si2 1". 10EJ 112 I&lM 1A.2 81 AU 2lu Nt Income from Operations 43.3 36.6 48.7 41.7 38.5 51.7 56.0 62.7 74.7 68.8 123.0 77.0 01.2 141.4 91.2 166.6 Depreciation and Retirement* 16.1 18.8 19.5 22.8 24.4 28.2 26.0 33.2 29.1 34.5 30.2 40.9 57.0 70.2 9.0 75.4 Leas: Debt MerVice 26Z ELI S 11 H.1 MU HL2 M'L2 ALI 9l 1U &2 ZAu 1M14 I"2.I 1MA 15.o Amertization 12.6 15.9 13.3 16.1 25.5 18.8 33.8 23.1 73.3 29.5 88.0 43.1 65.0 71.2 89.2 71.2 Interest Epense 13.1 16.1 14.6 20.0 20.6 24 5 22.4 27.1 11.9 25.4 29.2 31.9 106.4 69.4 85.2 0a.6 Net Internal Cash Generation 33.7 23.6 35.3 28.4 18.8 36.6 25.8 45.7 18.6 48.4 36.0 42.0 (98.4) 00.6 (3.4) 88.0 Governmnt Contribution 2L.g 11 MA ZLI HA MA ILA "A.2 111.2 SIM" !&J "L.2 M".0 ALA .LL._ ..L Rural Electrification - 18.0 1.9 12.8 - 0.4 - 0.3 0.4 0.3 0.0 0.2 -- 0.2 0.9 0.2 El Cajonoe 21.0 0.4 37.5 26.4 34.3 36.0 .1.3 40.0 110.8 48.0 65.8 50.0 18.0 -- -- -- g2rwim Atta 12. 143.1 1Ja.J 141.1 147. 231.4 211U 33LJ 23.2 2m 2MJ ZA. AZJ ..IOU Z.Z Total Sources 18.8 168.3 217.8 209.5 198.2 220.7 291.5 297.0 461.3 331.9 331.0 285.0 68.6 18.4 96.9 181.4 ..... - - - -- - mmemssme- - APPLICATIMI OF ftN3S Conetruction Expenditures (including IDC) 159.4 163.7 216.6 206.5 227.1 218.9 329.1 288.8 421.1 386.1 249.4 287.1 03.4 99.0 8.2 71.6 Studies -- -- 1.8 -- 2.1 -- -- -- Working Capital Increaee JZA .2M A21 -2-2 11.91 ..LI 1 -1 LI AL -M MA £ 1 fLk .L.2 LLK W M.M TOTAL APPLICATIONS 186.8 16.3 217.8 209.5 198.2 220.7 291.8 291.9 454.6 338.9 317.6 264.7 79.6 90.2 70.0 71.6 Annual furplue -- 5.1 6.7 -- 13.4 2D.3 -- 19.0 10.9 59. or (Deficit) (0.31 -- -- (5.1) -- . - (16.0) -- -- -- a Balance at Beginning 7.2 11.0 6.9 16.1 13.6 11.0 27.0 81.4 11.0 60.4 Balance at End 6.9 16.1 13.6 11.0 27.0 31.4 11.0 00.4 31.9 120.2 e/ Figures my not add up due to rounding off. e!i Includes loans transferred by the Government as contributions. M 0 ANNEX 5.7 71 Page 1 of 2 HONDURAS PROJECT COMPLETION REPORT EMPRESA NACIONAL DE ENERGIA ELECTRICA (ENEE) EL CAJON POWER PROJECT (Loan 1805-HO and Credit 989-HO) ENN's Loni-Term Debt (As of December 31, 1987) Lps - million Z A. Foreign Debt1 1,533 92 1. Non-Refinanceable 1.022 61 - Loan contracted by ENEE 570 - Loans contracted by Government for ENEE 452 2. Other Foreing Debt 511 - Loans contracted by ENEE 268 31 - Loans contracted by Government 243 B. Local Debt 136 8 to Government 65 to Central Bank 10 to Commercial Banks 22 Bonds 28 Pension Fund 11 C. Detail of ENEE's foreing debt by currencies Currency Lps millioi _Z US$ 480.3 31 Japan Yen 331.0 22 Swiss Franc 290.2 19 German Mark 214.7 14 French Franc 63.6 4 Dutch Florin 56.5 4 Sterling 37.0 2 Canadian $ 28.0 2 Venezuelan Bolivar 18.7 1 Belgian Franc 4.6] Spanish Peseta 3.3] Saudi Ryal 2.9] 1 Austrian Schilling 1.5] Italian Lira 0.7] Brazil Cruzado negl.] Total Debt 1,533.0 100 ANNEX 5.7 72 Page 2 of 2 D. ENEE's foreign debt due to World Bank Group. Lps million IBRD 529.0 IDA 52.0 581.0 1/ Includes arrears: principal Lps 126 million and interest Lps 71 million, of which Lps 8.9 million and Lps 14.7 million respectively correspond to arrears due to the Bank group. HONDURAS PROJECT COMPLETION REPORT EMPRESA NACIONAL DE ENERIA ELECTRICA (ENEE) EL CAJON POWER PROJECT (Loan 1806-MO and Credit 989-~0) Accounta Receivable. 1982-1986 (in Thousanda of current LepItras) 1982 1983 1984 1966 196 Outstand- Co =0ction Outstand- ColIlction butstand- Colection Outetand- Col,ec6"1e Owteland- CeIIection ing Balance Poriod ing Balanes Period ing Salance Period ing Salanco Perio lag Balance PeP_la (La x 103) (Month*) (ex 103) (Month*) (La x 103) (Montho) (Le x 103) (~ethse) (La x 10Ø) (W~,g,) Govern~et Ceitrai Covernment 3,169 7.6 9,029 18.2 16,906 27.7 24,400 84.9 - Musicipalities 937 3.8 890 3.4 1 372 7.3 2 767 13.7 2 018 3.9 Sub-Total Government 4,9 ~8. 13. 18,277 -l" Ti£, 1fE ,. Government Entities SMAA 941 18.5 1,792 28.4 2,878 31.5 Hondutel 1.264 19.9 1,739 22.9 1 724 18.6 Sub-Total Gov Entities 2,196 19.i 3,631 26.4 4~ Enterprises Controlled by ,overnent < ~NAEACI 266 12.9 438 20.0 -- -- 14,204 50.4 17,615 50.8 Ceentos de Honduras 3,774 36.7 7,177 25.9 11,386 28.1 1,259 -- -- - Tetile Rio Lindo 669 4.2 1,662 9.9 2,151 12.7 ACERNOSA and Others Lf -f __. 289' _20 Sub-Total Enterprise* Control led by Gov 4,599 18.8 10,908 29.7 '-4,828 18.3 17,515 S0.J Total Governmnt and Related 10,890 24,358 16.7 37,706 18.0 60,097 32.2 19,52 34.0 Other Custo~ers 17.027 1.7 18,226 1.9 24.339 2.0 34948 2. 4*. -WA Sub-Tota1 27,917 2.6 42,684 3.3 62,044 19.9 856,Mi 4.9 9,490 5.0 Foroen Power Companies b/ 10,890 18.0 14,569 18.0 inackvo Accounte 5 436 7 164 8 410 -- 9 349 - 2 0 - T~lI Acc. Receiv. (Gross) ,N 4.9 IMm 6.1 , TE Less Reserve for Bad oebta (7.680) (9.128) (10,860) (12,907) - (28.4) -~, Total Acc. Receiv. (Net) 25,773 40,810 59,694 91,172 5.8 62,229 S.9 N/ No rogla»r «nI to ACEIeSA in these yera, transferrod to inactivo accoun. in 196. þf Forgigh par coøpa enis: Outstading Collection Outstanding Collection Batlance Pa1l acP (Lo . 103) (Month) (t 103) (Moths) E- Nicar*gua 10,375 12.09 12,440 15.0 ICE - Costa Ric* 15 1.0 -- -- I - PNE -na~ -- 2,158 5.0