Peru - Industrial Energy Conservation and Rationalization Project

Dcument of The World Bank FOR OMCLAL USE ONLY Repwt No. 11584 PROJECT COMPLETION NOTE PERU ENEGY CONSERVATION AND RATIONALIZATION PROJECT (LOAN 2538-PE) JANRY 26, 1993 b1ICROFICHE COPY Report No.:11584 PE Type: (PCR) Title: ENERGY CONSERVATIONt AND RETION. Author: BERNEY, R. Ext.:31710 Room:T 9102 Dept.:OEDD3 PROJECT COMPLETION NOTE Energy and Industry Operatioi Division Country Department I Latiu America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipiets only in the performance of their official duties Its contents may not otherwise be disclosed witbout World Bank authorization.  FOR OFFICI USE ONLY THE WORLD BANK Washgton, D.C 20433 USA Office of Director-General Operatins Zvaluatien January 26, 1993 MEMORANDUM TO THE EXECUTIVE 1)T-ECTORAND THE PRESIDENT SUBJECT: Project Completion Note on Peru Energy Conservttion and RationalizatK.an Proiect (Logan 2538-PE) Attached is a copy of the Note entitled "Project Completion Note on Peru - Energy Conservation and Rationalization Project (Loan 2538-PE)" prepared by the Latin Amer4ca and the Caribbean Regional Of fice in lieu of a Project Completion Report, as the loan, though approved by the Board in 1985, was never signed. In July 1988, the Borrower and the Bank agreed that the operation be withdrawn. Aunex I was contributed by the Borrower.. Here is a project where the concept and design were well developed and the country priority and country commitment were so high that the project was fully implemented even though Bank funding failed to materialize. Project financing was delayed first by a new Peruvian administration, which decided to review all of Bank landing before signing the Guarantee Agreement, and then by the Bank, when the creditworthiness of Peru came into question. The loan was eventually withdrawn by the request of the Borrower, and was implemented with internally generated funds, essen-:ially because the Government and the executing agency believed that the economic benefits from energy saving retrofitting measures would be significant. The new energy conservation institute, CENERGIA, is fully operational and is expanding its client base. CEHERGIA's long term fimnacial independence, as well as its effectiveness in promoting investments for energy saving will depend, in the longer term, on the continuation of the Government's present policy of increasing domestic energy prices to international parity levels. This issue should be an important element in the Bank's policy dialogue with the Government. Attacbment Thfs docLmmnt has a restricted distribution and maybe used bv recipients only in the perfann of f their otff cit duties. Its contents OY not otheriss ibe discosed wiStou W- d San authwrintien.  PCJECtc CC"PtYSlON NOTC FOR OMCAuL USE ONLY PRU Elino COSERVATION AID RATIONALIZATION PROJECT fLGAN 2538-Pg} 1. This Note is in lieu of a Project Completion Report for the Energy Conservation and Rationalization Project (Loan 2538-PE, US$4.0 millions 1985), and is bsed on a desk review of project files and related documents and reports. 2. On May 9, 1985, to support the above project, the Bank approved Loan 2538-PU, tc Petroleos del Peru (PETROPURU), with the guarantoe of the Republic of Peru. In 1982, the Bank had agreed to finance a study to improve the efficiency of oil refineries (Petroleum Refinery Engineering Project, Loan 2117-PE). The present project u6ught to provide technical assistance to carry out energy audits and to identify opportunities for energy conservation and rationalization in other industries. In July 1985, subsequent to Loan approval, there was a change in Administration, with the result that the new Government decided to review all commitments of the previous Government, thereby deferring loan signing. Because of legal and bureaucratic formalities, it was not nntil April 2, 1986 that the Government authorized its ambassador to the U.S.. to sign the Guarantee Agreement, by which time the creditwor oness of Peru had become an issue, making the Bank reluctant to sign the Loan. The Loan was w_hdrawn at tlhe request of the Borrower in July 1988. Even without Bank financing, the Government decided to implement the project Prelect Concoct 3. During the early 1980s, energy conservation and rationalization, especially in the industrial and mining sectors, became an important element of the national energy strategy for maintaining petroleum self-sufficiency and exports. Together with interfuel substitution, energy conservation could yield savings of 565,000 to 755,000 tons of oil equivalent per year 1J 4 To achieve petroleum energy savings, PETROPERU intended to establish a Center for Energy Conservation (CENERGIA), where staff of both public and private companies could receive appropriate training from specialists. It was believed that staff seconded to CENERGIA, after two years of on-the-job training as energy audit enginers working with foreign and local experts, would return to their firms as energy managers wLth sufficLent experience to implement and train others in energy conservation Measurs. Tho project would thus create an adequate pool of personnel in Peru to carry on the energy conservation work. Furthermore, by making CENERGIA an autonomous entity, Bank staff hoped to avoid the civil service complications of dealing with a government agency. O See President's Report 3955-PE, page 9-10 This document has a ret*ctd distfdbutdon and may be use by redpients only in fth petfonmw of their ofciaW dutW& Its contents MaY not otherie be disclosed without Wor1 Bank authoduion.  -2- S. Project preparation took about seven months. During this period, the Bank developed excellent workinq relationships with its counterparts. Prolect Obiectives 6. The main objective of the project was to assiat Peru to achieve petroleum savings. Another objective was to assist the industrial 6ector in Peru in reducing energy costs. These objectives would be achieved by: (a) establishing CENERGIA as an autonomous body to guide energy policy and define priorities for energy conservation and rationalization. Both private and public sector companies would participate in cEqERGhA; (b) conducting energy audits and promotional training, developing energy conservation legislation, and preparing manuals and handbooks on energy saving measures, plus a study on incentives for energy conservation; and, (c) expanding petroleum exports via conservation and inter-fuel substitution, which would have country economic benefits as well as financial benefits for the borrower, PETROPERU. Pro eat Descristion 7. At appraisal, the project cost was est_nated at USS 6,072,000, ln March 1985 prices. The Bank loan would cover foreign costs, US$ 4 million. The project, which would be organized and implemented through CENEROZA, had three major components: (a) hiring consultants and a technical adviser (32% of total cost); (b) organizing seminars and overseas training (5 5% of total cost); and (c) purchasing equipment and instrumentation (18.6% of total cost). The balance (43.9%) of the project costs consisted of office maintenance, physical and price contingencies, and working capital. 8 A foreidgn consulting firm was to organize CENERGIA as an autonomous entity to train local staff to carry out the functions of the Center. The initial team of ten professionals to work with the consulting firm were to be hired from PETROPERU, the Institute for Industrial Technology (ITINTEC), the National Association of Private Enterprises, public utilities, and private companies, through a system of secondment, on a rotational basis. Although CENFRGIA was to perform demonstration energy audits in the first year for less than the normal feo, thereafter it was to strive for full cost recovery. 9. CUNERGIA was to enter into a management contract with PETROPERU to minimize overheads and to give CENERGOA the benefit of PETROPERU's experience in energy conservition and rationalization. a Director General was to be appointed to serve as the main channel of communications between the CENZROZA 8oard and PETROPERU, as well as with the Government and the industrial sector. 10* Under the management contract with CENERGIA, PETROPERU was to establish a new Energy Conservation Department (BCD), which, under the direction of tho Center, was tos (L) provide training for engineers and energy coordinators in industries and universities interested in energy rationalization projects,  -3- monitor progress In energy conservation in Peru, and carry out publicity campaigns; (Ui) recommend energy-saving measures and Investment programs following an energy audit, provide the necessary technical assistance, and facilitate the provision of loans for such investments; (III) prepare manuals for energy rationalization in energy-intensive subsectors, and establish a computerized data bank on energy use; and, (lv) procure specialized equipment for laboratory and training. Rationale for Loan Cancellation 11. In 1986, about a year after loan approval, the Government was prepared to sign the Loan Agreement, but the Bank, which no longer considered Peru creditworthy, was reluctant to sign the Loan. The Bank believed that the 1986 economic boom was unsustainable, and had fundamental reservations about the Government's economic policy. However, the fragile Bank-Government relations at the time made it difficult for the Bank to withdraw the Loan, and it agreed to keep the loan open for eventual signature. 12. In February 1987, in view of the Government's expressed interest Ln the project, management decided to postpone the withdrawal decision until after economic discussions with the Government concerning the Country implementation Review. However there was concern that in light of the President's announcement to limit service of external debt to those institutions from which Peru received positive net transfers (Bank net transfers had become negative in late 1986), the Government appeared prepared to default on its World Bank debt. Although the Prime Minister, in a meneting with the President of the Bank on April 14, 1987, avoided any direct commitment regarding debt service, he tried to reassure the Bank of the Government's intention to preserve good relations with the Bank and receive the Bank's operational support and policy advice. By April 16, 1987, USS 18 million due the Bank was more than 60 days overdue. The Bank had sought to avoid disruption of disbursements to Peru. 13. In May 1987, Peru suspended debt service payments to the Bank, causing the Bank to suspend disbursements on all loans to Pru. However, the Bank took no action on this relatively small project which had been an element in maintaining good relations with the Government. Finally, on July 5, 1988, the Government notified the Bank of PETROPERU' intent not to proceed with signing of the Loan Agreement. Conclusion 14. Due to the prospects of energy savings, the project, even after loan withdrawal, continued to enjoy support among high level officials in the Government and private industry. Also the project was expected to make a significant contribution to institutLon-building and human capital development in the energy sector in Peru, and to serve as a model that could later be extended to other countries.  -4- 15. The main lessons learned from the preparation and appraisal of this project were the importance of (L) finding support at the highesr Government level to ensure the acceptance and success of a project; (Li) developing a close working relationship with industry, and ensuring its participation in the benefits of the project: (iii) charging fees for the services provided; and, (iv) setting up a supervisory institution, not part of the government, and, hence, able to avoid becoming submerged in the exigencies of bureaucracy. 16. To the credit of Bank staff who helped develop the concept and objectives of the project, the Center was established despite the fact that Bank funds were not forthcoming. The Bank had contributed to all major aspects of project preparation, by: (I) defining the structure and role of CUERGIA, and helping identify suitable staff; (Li) organizing training and promotional efforts; and (iII) developing suggestions for the appropriate regulatory framework. Today, elght years later, CUNZfGIA is a well-established and well- run insititution. CENZRGIA received support from UND?, which funded an international expert at the Center. Staff seconded from public enterprises, as forseen in the original design of the project, were to have been the only element of subsidy (See Annex I, Petroperu's Coment on the Project). CINERGIA has expanded Its client base; and industries remain interested in the services it provides, especially now that energy pricing is expected to approach international parity levels. 17. Although Loan 2538-PB was never s.gned, clearly the project was succezsful and achieved its objectives. Deterioiration in the economic situation after a brief boom in 1986, and eveLtual default by Peru on its payments to the Bank, led to loan withdrawal three years after Board approval. although the Bank normally is reluctant to hold a loan unsigned for more than a year after Board approval, the delicate political situation and the interest in avoiding further strain on the already difficult relations with Peru, perhaps justified keeping the loan open for signature for a long period after Board approval. However, with hindsight, one may question the Bank's optimism in keeping the loan open, after it had become evident that the Government was unlikely to become creditworthy.  -5- PETROLEOS DEL PERU 1 _4 Jun