Argentina - Second Yacyreta Hydroelectric Project

Do cument of The World Bank FOR OFFICIAL USE ONLY . ej,t~. Nf i_. Li 23 7 AR. ',s:;;: ri ~YA(Y}~JTA ~D.IlL' r i - l : Y 2Ct! 4i , . Repwt No. P-5817-AR I4EORADUM AUD RE1CNENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION ANi) DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$300 MILTLION TO THE ARGENTINE REBMLIC FOR THE YACYRETA HYDROELECTRIC PROJECT II AUGUST 31, 1992 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 EQUSIVALES Currency = Peso (P) P1.00 * US$1.00 [exchange rate as of January 1, 1992 (fixed in March 1991)] MASMRES MNTOE :million tons of oil equivalent W: watt Wh : watt-hour V volt VA: volt ampere k : kilo : thousand (l03) M mega : million (106) G : giga : billion (109) T : tera : trillion (1012) AfRONYXS AyE Agua y Energia Electrica S. E. (federally-owned, nationwide electric utility and irrigation agency) CFE Consejo Federal de Electricidad (Federal Electricity Council) CNEA Comisi6n Nacional de Energia At6mica (National Nuclear Energy Commission) CTMSG Comisi6n Tecnica Mixta del Salto Grande (Argentine/Uruguayan commission in charge of the Salto Grande hydroelectric plant) DC Despacho Unificado de Carga (Dispatch Center) EBY Entidad Binacional Yacyret& (Argentine/Paraguayan entity in charge of the Yacyreta hydroelectric plant) HIDRONOR Hidroel6ctrica Norpatag6nica (federally owned, electricity generation and transmission utility) HE Ministerio de Economia y Obras y Servicios Pfblicos (Minristry of Economy and Public Works and Services) NIS National Interconnected System SE Secretaria de Energia Electrica (Secretariat of Electric Energy, under the ME) SEGBA Servicios El6ctricos del Gran Buenos Aires (federally owned, electric utility serving the Buenos Aires metropolitan area) UESTY Unidad de Ejecuci6n del Sistema de Transmisi6n de Yacyreta (Execution Unit for -:he YacyretA Transmission System, under the SE) UNDP United Nations Development Program FISCAL ER January 1 - December 31  FOR OmCIAL USE ONLY ARGENTINA YACYRhTfi HYDROjAECTIC PROJECT :I Loan and Proiect Summary The Argentine Republic Beneficiaries: Entidad 8inacional YacyretA (EBY) and the Executing Unit for the Yacyreta Transmission System (UESTY) Amount: US$300 million eqUivalent of which US$299 million for EBY and US$ 1 million for UESTY Terms: Repayment over 17 years, including four years of grace, with interest at the Bank's standard variable rate. Onllendinc Terms: The Borrower would retain US$1 million for the Secretaria de Energia Electrica and onlend the remaining US$299 million to EBY under the same terms and conditions. Financina Plan: Net Internal Funds US$ 94.8 million Government Loans 1604.6 million Proposed IBRD Loan 300.0 million Proposed IDB Loan 31.5 million Export/Supplier Credits 560.2 million US$ 2591.1 million Retroactive Financing: US$60 million would be made available for retroactive financing of expenditures due for payment after January 1, 1992, a date 10 months prior to expected loan signing. Bstimated Disbursement: Bank EX I 1 1 1997 Annual 196 68 31 4 1 Cumulative 196 264 295 299 300 Rate of Return: Economic Rate of Return: 17t Staff Awraisal ReDort: Report No. 10696-AR N4ans: IBRD Nos. 14128R and 21188R This document has a restricted distribution and may be used by recipients only in tse performance of their official duties Its contents may not otherwise be disclosed without World Bank authorization.  MD(ORANDUXM AND RECOENDATION OF T32 PRBSIDENT OF THE XTERNATIONAL EM1 FOR RECONSTRUCTION SD DEVELOPMNT TO THE EXCUTE DXRECTORS ON A PROPOSED LOAN OF US$300 NU.LION TO THE ARGENTINE REPUBLIC FOR THE YACYRtTi HMDROELECTRIC PROJCT I1 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Republic of Argentina fo. the equivalent of US$300 million to help finance the Yacyret& Hydroelectric Project II. The loan would be at the Bank's standard variable interest rate, with a maturity of 17 years, including 4 years of grace. The Borrower would transfer US$1 million for the Executing Unit for the Yacyreta Transmission System, under its Secretariat of Electric Energy, and onlend the remaining US$299 million to Entidad Binacional Yacyret& on the same terms and conditions. 2. Background. Argentina's power sector has long burdened the economy, particularly in contributing to the persistent structural fiscal deficit that substantially caused the country's prolonged economic instability. The utilities have commanded sizable public financial resources for many years. Their investments have comprised a major share of external debt. There have been inadequate sector savings, high operating costs and generally low efficiency. These problems have been exacerbated by an inappropriate investment strategy. 3. For some time the authorities have tried to rationalize sector finances in order to improve the situation. However, these and other potentially corrective measures have been repeatedly frustrated, mainly by Argentina's prolonged macroeconomic instability and recurrent political uncertainties. Other contributing factors have been the blurred sector responsibilities and inadequate Government command over the utilities. Consequently, the current economic team has undertaken a more sweeping reform: cutting back on public mnagement in favor of private operation under arm's length Government regulation. Privatization of Argentina's largest distribution company (SEGRA) is being carried out successfully by the administration. Additionally, preparation for privatization of the two other large naticaal utilities, AyE and HIDRONOR, ie progressing at a fast pace, meaning that the Government will renounce investment across the board in new generation and transmission facilities. In addition, it has set about expediting the completion of the YacyretS hydroelectric scheme. 4. The massive project launched in the late 1970s is now well advanced with about 80 percent of civil works completed, assembly of the first four turbines progressing well and favorable prospects for commissioning the first unit in September 1994. However, the unforeseen political (initially the South Atlantic war) and macroeconomic instability since project works began, discontinuity in Ministry of Economy oversight of the project and sector finances, recurrent difficulties with the contractors over payment arrears, inadequate management of the project and differences between the Argentine and Paraguayan owners have together led to extended delays, and form an enormous financing burden. Financial charges now require 42* of the 1992-1995 project expenses. Only relatively modest amounts are still needed for basic project investment costs (US$1.5 billion to have six units operational with adequate  -2- transmission compared to US$3.4 billion already invested, excluding financing charges). The Project had comparatively minor overruns during construction. On these grounds, the authorities have decided to press ahead with the project, so as to commission the first unit in September 1994 in order to ensure adequate supply in the mid 1990s hile seeking to contain further buildup of financing charges. In addit. the early generation of revenues from power sales from the first units woulix yield fiscal benefits. 5. Rationale for Bank Involvement. In addition to complementing the public sector reform centerpiece of IBRD lending in Argentina, the completion of Yacyret& is essential to Argentina's economic recovery and subsequent growth. A large amount of energy, equivalent co over 40% of present consumption, can bi made available within a short time. The first fourth of the total output 4ould be available in 3.5 years. The completion cost is equivalent to two- thirds of the long-term marginal cost, and would have an ERR of 17t. The Bank's presence in the proposed pro-ect would be crucial for overcoming the past "stop-go" pattern of project execution and achieving the 1994 commissioning goal. An appropriate financing plan and the acquisition of new commercial credits for the remaining electrical equipment are unlikely without the Bank's involvement and continuing supervision. That role is considered necessary moreover for effecting the plarned sector prIvatization and creating opportunities for additional private sector investment, including the Yacyrst6 transmission system. In addition, the large debt overhang, EBY's lack of earnings capaicity until 1994 and absence of alternative medium-term financing make financi.1 support from the Bank and IDB essential. The proposed loan is justified on the grounds that the project is still economically justified notwithstanding the higher costs; the project cannot be reduced to fit the available resources; and the Government alone cannot finance the additional costs, which are due to exceptional circumstances. 6. The Reduced Reservoir Level Schame. Given the serious difficulties in obtaining additional financing for the completion of Yacyreta as originally designed, the Governments of Argentina and Paraguay have agreed on a phased implementation as a prudent way to proceed. Technical studies have shown that the plant could operate with a head as low as two-thirds of the nominal head (reservoir at elevation 76 m). The cperation of the reservoir at a reduced level (between 76 and 78 meters) allows the postponement of a substantial amount of investment in resettlement, infrastructure, environmental mitigation, and land acquisition, and therefore facilitates the building of a feasible financial plan for the commissioning of the plant at an early date. Additionally, the income produced by sale of energy generated with the reservoir at a reduced level would help finance the deferred investment. The proposed project takes on this scheme of reduced operating level and defines a financially feasible and physically well-defined part of the original Yacyreta scheme whose implementation can be achieved in the minimum time (para. 8). 7. Proiect Obiectives. The proposed project would: (a) help provide efficient supply of energy in the mid-90s by ensuring early operation of Yacyreta; (b) bring about tighter environmental protection and appropriate handling of social aspects in Yacyret&; and (c) encourage private capital participation in EBY.  -3- S. Proiect Descriltion. The proposed project would consist of: (a) completion of Yacyreta's basic permanent structures; (b) installation of Yacyreta's first six units; (c) connection of Yacyreta to the national grid; (d) implementation of the resettlement and environmental management programs required for reservoir operation at elevation 78 m and assesswent of the impact of such operation and of the possible rise of the reservoir above 78m; and (e) assessment of the possible private capital participation in EBY. The proposed loan would finance civil works and related engineering for (a) and (b), and the technical assistance for (c), (d) and (e). The project is limited by the number of units (six) that can be transmitted through the 500 kV transmission line that will link the hydroplant to the interconnected system. The basic investments of the proposed project would be completed by September 1995. However, the technical assistance for the Resettlement and Environmental Management Programs (REMP) would extend beyond this date in order to facilitate a critical review of the reservoir operation at levels 76m and 78m and the implementation of required corrective measures. It would also support the possible raising of the reservoir to elevation 83m and an assessment of the reasonableness of such preparatory activities (para. 9). In its entirety therefore, the project would be completed by June 1998. 9. As noted above, the proposed project does not call for the completion of the full Yacyreta undertakings. The latter would mainly consist of the installation of units 7 to 20, bringing the installed capacity to 3,100 MW, carrying out an adequate REMP to permit ope;.tion of the reservoir at elevation 83m, and installation of the associated transmission system. In this connection, although IBRD financial participation is not committed to help ensure the accomplishment of these tasks, the Bank is concerned that they be achieved satisfactorily. It is particularly important that the resettlement and environmental mitigation measures needed to protect the affected population be executed prior to the reservoir rise, and in compliance with defined standards. Consequently, the Bank plans to monitor carefully EBY's performance in this area before the level is raised to 76m, and again to 78m. The mid-term review, to be carried out in the first semester of 199', would focus on these issues. EBY's record in meeting these requirements would also be considered in the determination of further raising the reservoir above 78m, for which the Bank's agreement would be necessary. Other significant considerations for raising the reservoir above 78m relate to: (a) firming up of the plant financing plan for works extending beyond those covered by the proposed project; (b) the mobilization of an estimated US$400 million in private investment for, and completion of contractual arrangements governing, the transmission system; and (c) locking up comparable private sector participation in the entity which will ultimately operate the Yacyret& hydroplant. 10. .Project Cost and Financing Plan. Given the unusually high debt service during the execution of the proposed project (1992-1995), the project cost and the financing plan explicitly include the amortization and interest due in that period. The total project cost is US$2.6 billion, out of which US$1.5 billion is for investment (58*) and the remaining US$1.1 billion is for debt service (42&). About 92* of the investment cost is for making the units operational (67W of which are foreign costs), the rest for the 270 km transmission system (out of which 49* are foreign costs). The Bank loan of  -4- US$300 million would finance about 20% of total project investment costs net of taxes and duties. Retroactive financing of up to $60 million would be granted for expenditures incurred after January 1, 1992. A breakdown of project costa and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement are shown in Schedule B. A timetable of key project processing events and tie Status of Bank Group operations in Argentina are given in Schedules C and D, respectively. Staff Appraisal Report No. 10696-AR is also being distributed. l. The 1992-1995 financing plan is predicated on: (i) Government contributions of US$503 million for investment; (ii) new US$241 million export and supplier credits; (iii) EBY's internally generated funds (US$95 million) based on an agreed tariff of USO3/kWh and operation of the reservoir at reduced level; and (iv) an IDB US$80 million loan of which US$30 million would be disbursed during the project period. Debt service of US$1.1 billion, consisting of US$442 million amortization, and US$658 million interest will be covered by Government loans. 12. This financing plan does not reflect additional assistance requested by the Government at negotiations. In this regard, the reallocation of US$100 million of the US$165 million outstanding balance of the SEGBA V Loan (Ln. 2854-AR) to support further the orderly completion of Yacyret& will be submitted to the Board in the near future for its consideration. US$40 million in reallocated funds would support early completion of th3 water supply and sewerage systems for the cities of Posadas and Encarnaci6n, coastal treatment for selected urban areas, and diverse infrastructure works in rural areas. While these works go beyond the REMP for operation of the reservoir to 78m, which was developed based on minimum investment criteria consistent with Bank standards, they are expected to have considerable social and environnental benefits. In addition, these works eventually would be required as part .:f the R8MP for operation of the reservoir beyond 78m, if so agreed (para.