Peru - Power Engineering Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13572 PROJECT COMPLETION REPORT PERU EMPRESA PUBLICA DE ELECTRICIDAD DEL PERU, SA (ELECTROPERU) POWER ENGINEERING PROJECT (LOAN 2018-PE) SEPTEMBER 29, 1994 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents mav not otherwise be disclosed without World Bank authorization.  UNITS AND MEASURES Kw - kilowatt MW - megawatt - 1,000 kW GW - gigawatt - 1,000,000 kW kWh - kilowatt hour GWh - gigawatt hours - 1,000,000 kWh ABBREVIATIONS AND ACRONYMS BD - Bidding Documents CENTROMIN * Compania Minera del Centro del Peru COFIDE * Corporacion Financiera de Desarrollo DGE , Direccion General de Elctricidad ELECTROLIMA - Electricidad de Lima (Empresa Electricas Asociadas) ELECTROPERU - Electricidad del Peru FD - Final Design FS - Feasibility Study HIDRANDINA - Energia Hidroelectrica Andina MME . Ministry of Mines and Energy PR - President's Report PS . Prefeasibility Study FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation September 29, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Peru Power Engineering Proiect (Loan 2018-PE) Attached is the "Project Completion Report on Peru - Power Engineering Project (Loan 2018-PE)" prepared by the Latin America and the Caribbean Regional Office. The Borrower contributed Part II of the PCR. The first project objective to accelerate the studies of twelve hydroelectric projects and one thermal power plant was partially met. Electroperu, the Borrower and principal beneficiary, took an unduly long time in selecting consultants (following its own procedures) and initiating the studies, which required a three-year extension of the loan closing date. Several studies were incomplete and lacking financing when in May 1987 the debt service moratorium by the Peruvian Administration caused suspension of disbursement on all Bank loans. The other beneficiaries, Electrolima, Hidrandina, and Centromin were effective in selecting consultants (following the Bank guidelines) and in completing their studies on time in 1984. The second objective of strengthening master planning for the sector and transferring planning capability from the Ministry of Mines and Energy to Electroperu was successfully met. Until recently, Electroperu has been updating a master plan for power sector development. The project cost was only US$27.8 million or 69% of the original cost estimate, and US$6 million was canceled from the US$25 million Bank loan. The outcome of the project is rated as marginally satisfactory and its institutional development impact as substantial. The sustainability of the project's benefits is rated as likely, particularly because the reform initiated in 1992 is now nearly complete and the ongoing privatization of the power sector is likely to remove the uncertainty about the good use that can be made of the results of the studies financed by this loan. The PCR presents a satisfactory account of project development. No audit is planned. Robert Picciotto by H. Eberhard Kopp Attachment This document has a restricted distribution and may be used by recipients only in the performance of their officiaL duties. Its contents may not otherwise be disclosed without World Bank authorization.   FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT PERU EMPRESA PUBLICA DE ELECTRICIDAD, S.A. (ELECTROPERU) POWER ENGINEERING PROJECT LOAN 2018-PE TABLE OF CONTENTS PREFACE (i) EVALUATION SUMMARY .(i) PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .1 1. Project Identity .1 2. Sector Background .1.. . . . . . . . . . . . . . . . . . . . . . Economic, Political & Sector Overview .1 Resources and Organizaton, 1981 ... . . . . . . . . . . . . . 2 Bank Power Lending .... . . . . . . . . . . . . . . . . . . . 3 3. Preparation. 3 Sector Planning. 3 Relending Arrangments .... . . . . . . . . . . . . . . . . . 3 Timetable .... . . . . . . . . . . . . . . . . . . . . . . . 3 Project Objectives and Description. 4 Consultants .... . . . . . . . . . . . . . . . . . . . . . . 5 Completion Date and Cost. 6 Financial Issues. 6 4. Implementation. 6 Completion Date. 6 Actual and Expected Costs ... . . . . . . . . . . . . . . . . 7 Implementing Agencies ..... . . . . . . . . . . . . . . . . . 7 Implementation by ELECTROPERU ................. 7 Findings of the Studies. 9 Part A -- ELECTROPERU ................ 9 Part B -- ELECTROLIMA ................ 12 Part C --HIDRANDINA ................. 12 Part D --CENTROMIN ................. 12 Part Z: ELECTROPERU Planning Unit .12 Performance of Consultants ... . . . . . . . . . . . . . . . . 12 Timing and Allocation of Loan Proceeds .12 5. Project Results .13 Studies .13 Planning Unit .13 6. Institutional Performance .14 Borrower .... . . . . . . . . . . . . . . . . . . . . . . . . 14 Other Beneficiaries .... . . . . . . . . . . . . . . . . . . 14 Bank .... . . . . . . . . . . . . . . . . . . . . . . . . . . 14 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.I  Table of Contents (Continued) 7. Lessons to be Learned . . . . . . . . . . . . . . . . . 14 PART II. PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE . . . . . . . . . 16 PART III. STATISTICAL INFORMATION Table 1: Related Bank Lending . . . . . . . . . . . . . . . . . . . 17 Table 2: Project Timetable . . . . . . . . . . . . . . . . . . . . . 19 Table 3: Cumulative Loan Disbursements . . . . . . . . . . . . . . . 19 Table 4: Project Implementation ... . . . . ... . . . . . . . . 20 Table 5: Actual & Forecast Project Cost & Financing . . . . . . . . 21 Table 6: Project Results . . . . . . . . . . . . . . . . . . . . . . 22 Table 7: Status of Loan Covenants . . . . . . . . . . . . . . . . . 22 Table 8: Use of Bank Resources . . . . . . . . . . . . . . . . . . . 23 Table 9: Supervision Missions . . . . . . . . . . . . . . . . . . . 23  i PROJECT COMPLETION REPORT PERU EMPRESA PUBLICA DE ELECTRICIDAD, S.A. (ELECTROPERU) POWER ENGINEERING PROJECT LOAN 2018-PE PREFACE This is the Project Completion Report (PCR) for the Power Engineer- ing Project in Peru, for which Loan 2018-PE in the amount of US$25.0 million, was approved on June 23, 1981. The borrower and primary beneficiary was Electricidad del Peru, S.A. (ELECTROPERU), the national power company responsible for sector planning and construction/operation of the national transmission system and large generating works. Empresa Electricidad de Lima, SA (ELECTROLIMA), Energia Hidroelectrica Andina, SA (HIDRANDINA), and Empresa Minera del Centro (CENTROMIN) were the other beneficiaries. The loan was intended to help finance: (i) preinvestment studies at the pre-feasibility and feasibility stages for generation and transmission works, plus final design and bidding documents, as required; and (ii) the equipment and training for a planning unit at ELETROPERU. During the course of the 1980s, Peru's relations with the international financial community deteriorated. In 1987, relations between the Government and the Bank ruptured. Beset with economic and political problems, the administration of President Alan Garcia extended its debt- service moratorium to include international financial/development institutions, including the World Bank. Given this development, the Bank suspended disbursements on all loans to Peru on May 5, 1987 and did not extend the closing date of Loan 2018-PE past its revised deadline of June 30, 1987. The last disbursement was made on July 7, 1987 and about US$5.96 million was canceled. Thereafter, relations continued to worsen. In these circumstances, contact between Bank and sector personnel lapsed until 1992 when, as a result of improved Bank-Government relations, contact between Bank staff and sector personnel was resumed. The improved relations reflected the efforts of the administration of President Alberto Fujimori to reform the economy and to normalize relations with external creditors. The Bank supported these efforts. Starting in 1992, the Energy and Industry Operations Division of Country Department I of the Latin America and Caribbean Regional OffIce pre- pared Parts I and- III of the PCR. The PCR is based, inter alia, on Bank sources: the President's Report; the Loan, Guarantee and Project Agreements; and supervision reports. ELETROPERU provided general information on the project and relevant details for some studies as requested by the Bank, but due to changes in personnel since 1987 was not able to prepare a final project report. The Borrower provided comments and correction to a draft of Parts I and III. These comments were incorporated into the PCR as Part II.  ii PROJECT COMPLETION REPORT PERU EMPRESA PUBLICA DE ELECTRICIDAD DEL PERU, SA (ELECTROPERU) POWER ENGINEERING PROJECT LOAN 2018-PE EVALUATION SUMMARY DEscription. Loan 2018-PE (US$25.0 million; 1981) helped to finance & project consisting of: (i) an emergency program of pre-investment studies of the options--generation and transmission--for meeting expected demand growth in the mid- to late-1980s; and (ii) a technical assistance (TA) program to enhance the planning capabilities of the principal national power company, Empresa Publica de Electricidad del Peru, SA (ELECTROPERU). Identified in late 1980 in connection with a preliminary Master Plan financed under Loan 1215-PE (US$36.0 million; 1976), the options included twelve hydroelectric projects, a transmission line, and a thermal plant. The feasibility of a proposed power/irrigation project was also to be reviewed. The studies were to be at the pr--feasibility and feasibility levels, plus final designs and bidding documents, as required (para. 3.05). The TA program included training and equipment (para. 3.06). Objectivo. The first objective of the project was to accelerate studies of hydroelectric projects and thereby minimize the need for new thermal generation capacity (para. 3.04). It was expected that the power utilities would base their generation expansion plans on the findings of these studies. The second objective was to continue Bank efforts to strengthen the planning institutions and capabilities by providing ELECTROPERU with the equipment, staff, and training to carry out sector-wide planning responsibilities (para. 3.06). Borrowers and Beneficiaries. The borrower and major beneficiary wae ELECTROPERU. The other beneficiaries, to which ELECTROPERU relent some of the proceeds of Loan 2018-PE, were Empresa Electricidad de Lima, SA (ELECTROLINA), Empr-sa Minera del Centro del Peru, SA (CENTROMIN), and Energia Hidroelectrica Andina, SA (HIDRANDINA) (para. 3.02). All are state-owned. Each company was responsible for preparing its own studies. Consultant. Consultants were contracted either to assist company staffs in their efforts to prepare studies or to prepare the studies directly. Consultants were also contracted to train the planning staff of ELECTROPERU. At appraisal, the Bank found acceptable local procedures for selecting consultants (paras. 3.08-3.10). Relying on such procedures, ELECTROPERU, contrary to the recommendation of Bank staff, pre-qualified about 100 consultants as a first stop to preparing short lists of qualified consultants for contracts covering two packages of studies. This took about 15 months to complete (from late 1981  iii through most of 1982). It took another 24 months (until the end of 1984), for ELECTROPERU to conclude the process of evaluating consultant proposals and of negotiating contracts. This process involved consultant challenges to the findings of selection committee, suspicion by ELECTROPERU's Board of Directors about the integrity of the selection process, a call for the resubmission of proposals, and a dispute between the Bank and ELECTROPERU on the mechanics of negotiation. Work under these contracts began in 1985. The original project completion and loan closing dates were, respectively, December 31, 1984 and June 30, 1985 (paras. 3.10, 4.01, and 4.04-4.10). In contrast, the consultant selection process at ELECTROLIMA, HIDRANDINA, and CENTROMIN went smoothly. The other beneficiaries followed the Bank's consultant selection procedures, thereby promptly contracting suitable consultants who carried out the studies on time (para. 4.03). Timetable. The forecast completion date for the project was December 31, 1984. Work actually stopped in 1987 as a result of the decision (May 7, 1987) of the Bank to suspend, for country reasons, disbursements on all loans to Peru. The Bank then decided not to extend the revised closing date of Loan 2018- PE beyond June 30, 1987. Small amounts of work on four studies remained to be completed. ELECTROPERU secured only enough financing from the Corporacion Financiera de Desarrollo (COFIDE) to meet outstanding payments due consultants. Later, ELECTROPERU completed work on two studies. Work on two additional studies ELECTROPERU has not been completed (para. 4.01). Contributing to the slow project execution by ELECTROPERU were, first, consultant selection problems, and, second, local currency financial constraints. There also were technical/ operational problems (paras. 4.03-4.10). Actual & Expected Cost. The records of ELECTROPERU and the Bank indicate that expenditures on the project amounted to about USS24.4 million. This figure does not include the local currency costs for the studies contracted by ELECTROLIMA, CENTROMIN, and HIDRANDINA, as records were not kept. On the assumption that the actual local currency costs incurred by ELECTROLIMA, CENTROMIN, and HIDRANDINA equalled the "base" costs estimated at appraisal, the cost of the project rises to about USS27.8 million as compared to about USS32.9 million forecast at appraisal. Actual costs for the individual studies were generally in line with appraisal forecasts (para. 4.02). Results Studies. ELECTROLIMA, CENTROMIN, and HIDRANDINA completed the feasibility studies, final design, and bidding documents on four hydroprojects as expected in 1982-1984 (Matucana, Yuracmayo, Yuncan, and Mayush--paras. 4.13- 4.15). After deleting studies of two projects (a thermal generating plant and a transmission line), ELECTROPERU eventually completed all but two: Platanal and Molloco (para. 4.12). Only one project has been initiated as a result of the studles: Yuracmayo--a reservoir dam under construction by ELECTROLIMA on the Rimac River  iv (para. 5.01). The low level of study usage reflects the fact that both before and after 1987, the power companies, due to low levels of tariffs and internal cash generation, had severely curtailed investment expenditure. Underlying the financing problems were a deteriorating macro-economic situation and the political complexities of near civil war. It is uncertain what will happen to these studies, given the discovery of major new natural gas reserves and the emerging changes to the structure and organization of the sector (para. 5.02). Having benefitted from Bank financing (Loan 2179-PE: Sixth Power Project), ELECTROLIMA started construction of Yuracmayo in 1984. However, construction languished following the Bank's suspension of disbursements on all loans to Peru in May 1987. In 1992, ELECTROLIMA restarted the Yuracmayo dam. When completed, the dam will create a reservoir, the waters of which will be used for dry-season energy generation and as drinking water in metropolitan Lima. The currently expected completion date is 1994 (para. 4.13). TA Program. This component achieved its objective of improving the planning capabilities of ELECTROPERU. The Planning Unit was established, organized, and equipped; it continues to update the Master Plan for the electricity sector. The training aspect of the loan had a smaller-than-expected impact due to the large turnover of staff (para. 5.03). Sustainabilitv. Because the Master Plan, which the Planning Unit at ELECTROPERU annually updates, provides the proper reference point for discussion about expanding the system, the benefits from this part of the TA program continue (para. 5.04). As for the studies, only one project--Yuracmayo-- has materialized (para. 4.13). If *ustainability is measured by the use of the studies for the construction of works, one must, as of today, make a negative judgement about the sustainability of the benefits of the studies. However, given the possibility of improved economic and political circumstances during the 1990. and the expansion of the system, this judgement may yet be reversed (para. 5.03). Beneficiary Performance. The studies under the responsibility of ELECTROPERU suffered substantial delay because of inefficient consultant selection procedures which were clearly within its control. These studies later were delayed due to the financing problems of ELECTROPERU--a sector-wide problem which was the responsibility of the administrations of Presidents Belaunde and Garcia (para. 6.01). The performance of the other beneficiaries was satisfactory (para. 6.03). Bank Performance. At appraisal, the Bank accepted consultant selection procedures which later proved to be a source of delay. It seems apparent that the Bank staff did not understand the potential for delay inherent in the procedures. However, acceptance was fully consistent with the spirit of then current Bank-approved consultant selection guidelines, which laid primary responsibility for selection and supervision of consultants on borrowers and beneficiaries (paras. 3.08-3.10; and para. 6.04). During supervision, the Bank, having agreed that local procedures would prevail, was not in a position to take  v measures sufficient to overcome delays on the part of ELECTROPERU. All things considered, the Bank did what it could to promote execution of the studies (para. 6.05). Lessons Learned. The major sources of delay during implementation were reliance on local consultant selection procedures at ELECTROPERU and local currency constraints. If current Bank guidelines had prevailed at appraisal-- they require borrowers and beneficiaries to modify their selection procedures if they Bank deems modification to be appropriate--Bank staff would probably have required elimination of those parts of the local selection procedures which caused delay. There are two lessons to be learned: First, at appraisal, local consultant selection procedures should be carefully examined, especially with respect to their operation and impact under actual circumstances. This examination should give an indication of the efficiency of the borrower in this activity. Second, the Bank should make every effort to ensure acceptance and use of its consultant selection procedures by the borrower/beneficiary (para. 7.01).   PROJECT COMPLETION REPORT PERU EMPRESA PUBLICA DE ELECTRICIDAD DEL PERU, SA (ELECTROPERU) POWER ENGINEERING PROJECT LOAN 2018-PE PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1. Proiect Identity Project Name : Power Engineering Project Borrower : Empresa Publica de Electricidad del Peru, SA (ELECTRO- PERU) Beneficiaries: t ELECTROPERU, Empresa Electricidad de Lima (ELECTROLINA), Empresa Minera del Centro del Peru, SA (CENTROMIN), Energia Hidroelectrica Andina, SA (HIDRANDINA) Loan Number : Loan 2018-PE Loan Amount : US$25.0 million (amount cancelled: US$5.96 million) Loan Dates : Approval: June 23, 1981; Effectiveness: February 25, 1982; Closing: June 30, 1987 (two years late); Last Disbursement: July 7, 1987 RVP Unit s Latin America and the Caribbean Regional Office Country : Peru Sector : Electric Power 2. Backaround Economic, Political & Sector Overview 2.01 Between 1980 and 1987, Peruvian power officials, together with the staff of the World Bank, prepared and executed the studies and technical assistance program which comprised the project. To evaluate their performance, it is important to understand the context of turbulent economic, political, and sector conditions. 2.02 The 1980. were a lost decade for Peru. The administrations of Presidents Belaunde and Garcia relied on an inconsistent, interventionist policy mix--stimulating consumption expenditure and reducing investment expenditure--which eventually caused the economy to collapse in recession, soaring inflation, rising budgetary deficits, and suspension of foreign debt- service payments,- Complicating the economic problems was a crisis of confidence in the organs of government due to civil disturbance and the drug trade. 2.03 The 1980s were also hard on the power sector, as the administrations treated the sector more as a strategic agent for implementing public policy--distributing subsidies or controlling inflation--than as a business enterprise. Such treatment resulted in progressive regulatory/ institutional weaknesses, deficient management and operations, inadequate tariff levels, financial crisis and severely restricted investment expenditure. On May 7, 1987, the Bank, for country reasons, suspended disbursements on all loans to Peru, including Loan 2018-PE, the closing date of which was not extended beyond the revised deadline of June 30, 1987. The result of such suspension and closing  2 was that work stopped before completion of small parts of five studies, three of which ELECTROPERU later completed. Resources and Organization, 1981 2.04 In 1981, when Loan 2018-PE was approved, economically exploitable hydro resources totalled about 60,000 MW, of which only 1,654 MW were being used. Hydropower and forest resources were the most significant potential sources of primary energy. Natural gas reserves were estimated to be small: one to two trillion cubic feet. 2.05 Public power companies supplied about 70% of the total electric energy requirement; captive plants serving industrial and mining installations supplied the remainder. The two most important sector operating entities were Empresa Publica de Electricidad del Peru, SA (ELECTROPERU) and Empresa Electricidad de Lima (ELECTROLIMA). The principal power grid was the central-north interconnected system. 2.06 The Electricity Law of 1972 made the state the principal authority in the power sector. Under the law, the Ministry of Mines and Energy (MME) "...was given responsibility for.. .policy formulation, for the authorization of investments, and for regulation and tariff setting."1 MME had responsibility for coordinating all energy planning activities and for setting prices in the energy sector. With respect to the power sector, the Directorate of Electricity (DGE) within MME carried out the regulatory and other functions. Major investment decisions were taken at higher levels of Government. Operational responsibility was divided among various public enterprises under MME's aegis. ELECTROPERU, the national power company, was charged with developing power generation projects--planning, engineering, constructing and operating all new generating facilities larger than 10 MW--plus development and construction of the national transmission network. Further, it was legally responsible for the master planning function which was being exercised by DGE. ELECTROLIMA served the market of metropolitan Lima; the national oil company was responsible for producing and distributing petroleum products. 2.07 The Bank judged DGE to be a weak entity due to excessive turnover of high-level personnel--the result of low salaries. An example of weakness was the delay attending the execution of a preliminary Master Plan which the Bank helped finance (Loan 1215-PE: Fifth Power Project). "The power sector master plan...was not completed until late 1980, in part because of DGE's lack of technical and administrative capacity, and is only now being adopted by MME and the principal--utility companies". Inadequate salary levels had also negatively affected the performance of ELECTROPERU. 3 World Bank CWB): Report and Recomnendation of the President of the International Bank for Reconstruction and Devetornent to the Executive Directors on a Prooosed Loan to the Envresa de Electricidad deL Peru, S.A. with the Guarantees of the Republic of Peru for a Power Engineering rroiect (Report No. P-3075-PE), dated June 1, 1981, p. 11, pra. 46. Hereafter, referred to as PR. I , p. 11, para. 47. Also, WB: *Issues-Decision HemorandrvA, dated February 9, 1981, Anmex 1, p. 5. para. 11. I , p. 12, para. 48.  3 2.08 During the 1970s, MME received considerable technical assistance with respect to energy planning: an energy balance study (UNDP, 1976), an assessment of hydro resources (US Government, 1979), a hydro survey (German Government, 1979), and a preliminary Master Plan (1980) which the Bank reviewed and helped finance (para. 2.07). Based on a market study (also financed by Loan 1215-PE: Fifth Power Project) which showed demand growing at 8% per year. through 1990, MME concluded, in consultation with the Bank, that the speedy preparation of pre-investment studies for hydro (and other) projects was a priority task if the power sector were to construct the facilities needed to meet expected demand growth at the end of the decade. 2.09 Bank Power Lendina. The Bank has made eight loans, amounting to US$222.2 million, for power development in Peru (Part III, Table 1). Project execution under the first four loans was satisfactory, but disbursements of the fifth loan initially progressed at a slower rate than expected due to a sharp reduction in demand growth in the late 1970s. However, by 1980 demand picked up and the project was completed in 1982. In November 1986, the Bank withdrew Loan 2603-PE (Power Engineering II) after determining that the Government, which had not signed the loan agreement in the sixteen months following approval, was not very interested in the corresponding technical assistance project. In May 1987, the Bank suspended disbursements on all loans to Peru and later closed Loans 2018-PE (Power Engineering Project) and 2179-PE (Sixth Power Project) before completion of the corresponding projects. 3. Preparation 3.01 Sector Planning. In 1980, MME/DGE was carrying out the power-sector master planning function which was legally the responsibility of ELECTROPERU. In connection with the slow preparation of a master plan financed by Loan 1215-PE (Fifth Power Project), MME/DGE had demonstrated a lack of administrative capacity. The Bank and the Government agreed that the preparation of an adequate inventory of pre-investment studies and the proper discharge of the master planning function required the transfer of such activities away from MME/DGE--that is, the operating companies, including ELECTROPERU, should undertake the preparation of pre-investment studies (para. 3.04) and ELECTROPERU should assume the master-planning function (para. 3.06). This concept was central to the project. The problem of low salaries at ELECTROPERU, it was expected, would be addressed by new legislation providing public enterprises with sufficient autonomy to resolve staffing and managerial problems. 3.02 Relendina Arrangements. The borrower was to be ELECTROPERU, which would use -US$18.5 million of the loan proceeds and would relend the remaining proceeds on the same terms and conditions as the Bank loan to ELECTROLIMA ((USS 0.9 million), Empresa Minera del Centro del Peru, SA (CENTROMIN -- US$3.0 million), and Energia Hidroelectrica Andina, SA (HIDRANDINA -- US$2.6 million). The latter three companies entered into Project Agreements with the Bank, and signed subsidiary loan contracts with ELECTROPERU. 3.03 Timetable. Project preparation proceeded quickly. The Bank and the Government began discussing the project in early 1980 and appraisal took place in December 1980. Negotiations took place in May 1981; approval and loan signing occurred on June 23, 1981 and August 19, 1981, respectively; and the loan became effective on February 25, 1982 (Part III, Table 2).  4 Proiect Obiectives and Descrivtion 3.04 First Obiective. Given the lengthy time required to plan and implement hydroelectric projects, the first objective of the loan was to accelerate the preparation of pre-investment studies at the pre-feasibility and feasibility levels for twelve hydroelectric projects and one thermal project with an aggregate generating capacity of about 1,100 MW of generating capacity. The project would also provide for final designs and bidding documents, as required. It was expected that the studies would establish the basis for generation expansion with minimum reliance on thermal capacity. 3.05 To meet the above objective, local power authorities, in consultation with Bank staff, selected the following projects for study--projects first identified in the 1980 Master Plan (para. 2.08): Part A: ELECTROPERU (1) final design and bidding documents (FD/BD) for El Chorro (150 MW); (2) feasibility studies (FS) for: (a) Quishuarani (30 MW); (b) Molloco (340 KW); (c) Platanal (80 MW); (d) reservoir dams (for water storage capacity)4 on the Rio Santa (upstream from Canon del Pato hydroplant) and the Rio Chili (upstream from Charcani hydro plant); (d) a fossil fuel-fired generating station of up to 200 MW serving Lima in 1986 or 1987; (e) a transmission line for northern Peru; and (3) prefeasibility study (PS) for: Rio Huaura (339 MW); and (4) review of the existing PS of the Olmos power and irrigation project. Part B: ELECTROLIMA (1) FS and BD for: (a) a reservoir dam, serving the Matucana hydroelectric plant; and (b) a reservoir dam at Yuracmayo on the Rio Rimac (upstream from the Matucana plant). Part C: HIDRANDINA (1) FS and BD for: (a) a dam for water storage and regulation on the Rio Paticilca (upstream from the Cahua hydroplant); and (b) a hydroplant called Cahua II or Mayush (40 MW); and Part D: CENTRONIN (1) FD/BD for: Yuncan (120 MW). Nine of the hydroelectric project studies (about 800 MW) would serve the central- north syotem; two others, Molloco and the Rio Chili reinforcement (about 300 MW), would serve the southwest; and, one, Quishuarani (about 30 MW) was located in the Reservoir dans were to provide the meas for additional water storage and energy, but they were not to provide facilities for additionat generation capacity.  5 southeast. Each study was to be executed by the company which was later expected to construct the correBponding project. 3.06 Second Obiective. The second objective of the loan was to continue efforts, begun under Loan 1215-PE, to strengthen master planning for the sector by financing the purchase of equipment and training for a planning unit at ELECTROPERU--Part E of the Project. Dated covenants in the Guarantee and Loan Agreements provided for, respectively, the transfer of MME's planning staff, equipment and materials to ELECTROPERU and the corresponding establishment of the master planning unit within the organizational structure of ELECTROPERU. Consultants 3.07 ole. Consultants were to be retained either to assist the staffs of the respective companies in the preparation of the studies or to carry out the studies directly. Consultants were also to be retained to organize and advise the new planning group in ELECTROPERU (para. 3.08). 3.08 Selection and Negotiations. Selection of consultants was to be in accordance with Peruvian procedures. The ER provided no details on local procedures beyond stating that they required ". a competition on the substantive aspects of the consultants' proposals... " and that "...the procedures were acceptable to the Bank" 5. Given Bank acceptance of local procedures, the Loan Agreement did not include a schedule setting forth consultant selection procedures and did not refer to then current Bank guidelines 6 3.09 The decision to accept local procedures proved to be important in a negative sense. Such procedures, which involved a lengthy pre- qualification exercise, became, in the case of ELECTROPERU, a major source of delay in the selection/negotiation process. An additional source of delay was the exercise by the Board of Directors of ELECTROPERU of the right to review the recommendations of the consultant selection committee (para. 4.01). 3.10 Bank staff devoted at least some time to examining local consultant selection procedures, but it appears that staff did not fully under- stand the potential for delay inherent in those procedures. Supporting this judgement are: (i) the absence of reference to consultant selection procedures UB: P, p. 18, para. 73. When the project was appraised (December 1980), the Bank relled on consultant selection procedures set forth in "Uses of Conwultants by the World Bank and Its Borrowers" (dated April 1974) and recommended their use by borrowers. The Iank mode It plain that Its generaL ruLe was to Leave to its borrowers the responsibility for selecting and supervising consultants and that it encouraged, but did not require, the borrower to adopt its (the Bank's) procedures ("Uses", pares. 1.21 and 1.22). In August 1981, the Bank issued "Guidelines: Use of Consultants by World Bank Borrowers" which repeated, in essence, the consultant selection process outlined in the predecessor patphLet. However, the new "Guidelines" reflected a major difference: prior to the Invitation of proposals, the Sank required the beneficiary to: (1) submit for Bank review its consultant selection procedure; and (0i) modify that procedure in those cases that the Bank deemed appropriate ("Guidelines", pars. 2.21). From a legal point of view, the Bank is the final interpreter of the "Guidelines"; and current practice does not include a pre-qualification process as a first step to preparing a short list.  6 in the 'Issues-Decision Memorandum' 7; and (ii) the expected signing dates of consultant contracts--all but one contract was expected to be signed between June 1981 and March 1982. 8 3.11 The other beneficiaries did not carry out a pre- qualification exercise. Instead, they followed Bank procedures; and their studies were completed more or less on time (para. 4.03). 3.10 Completion Date and Cost. Following contract signing (June 1981-March 1982), the project timetable called for completion of all but one study between September 1981 and December 1982. All work was expected to be finished by June 30, 1984, and the Loan Agreement set the project completion date as December 31, 1984. The expected cost, including contingencies, was US$40.7 million, of which US$25.0 million (61%) represented foreign currency costs. The proceeds of the Bank loan would cover the foreign currency cost; the beneficiaries would cover the local-currency costs (US$15.7 million). of the total cost: (i) studies of the hydroprojects would account for 79%; (ii) feasibility study of the thermal plant, including preparation of bidding documents, would account for 14%; (iii) the transmission-line study would account for 5% of project cost; and (iv) the setting up and equipping of the planning group in ELECTROPERU would account for 2%. The total cost of the pre-investment studies financed under the project were expected to be less than 2% of the estimated cost of the related investment projects. 3.11 Financial Issues. Although the financial performance of the sector was poor at loan signing, Bank staff believed a power engineering loan was not the appropriate instrument to seek agreement on satisfactory financial goals in the sector. The PR mentions that the Government was likely to seek Bank financing for some of the major hydroelectric projects prepared under the pre- investment studies of the present loan, at which time the Bank would then have the opportunity to review the sector finances. 4. Implementation 4.01 Completion Date. The original project completion and loan closing dates--respectively, December 31, 1984 and June 30, 1985--were pushed back to May 7, 1987 and June 30, 1987 (Part III, Table 2). In early 1987, Bank staff recommended extending the loan closing date to June 30, 1988 in order to finish those studies which were not quite completed, but as has already been stated (para. 2.03), the Bank, for country reasons, suspended disbursements on all loans to Peru on May 7, 1987 and did not extend the closing date of the loan past it. revised deadline of June 30, 1987.9 Part III, Table 3 compares actual and forecast cumulative disbursements of Loan 2018-PE. Since work on the studies stopped as a result of the suspension (Part III, Table 4), it is convenient to date project completion as May 7, 1987. At that time, work on five studies 7 InternaL lank Memo, dated February 9, 1981. W: PR Amex V p. 36. In 1988, the Bank cLosed the last loan supporting the power sector in Peru: 2179-PE (US$81.2 miltion, 1982).  7 remained to be completed. Later, three studies were completed: designs for Quitaracsa, Canon del Pato expansion and Huaura. Studies of the Platanal hydroproject and Molloco scheme never progressed beyond the pre-feasibility level. 4. 02 Actual and Expected Costs. The actual project cost amounts to about US$24.4 million. This figure, however, is not comparable with the appraisal forecast (US$40.7 million) because not all of the contemplated studies were completed or carried out and because there iu only partial data for local costs (Part III, Table 5). Efforts to obtain such data have proved unsuccessful. If one adjusts the appraisal forecast to exclude those studies which were not carried out and if one assumes that the missing actual local-cost data are no higher than that forecast for the base cost, then the forecast and actual costs are, respectively, US$32.9 million and US$27.8 million. 4.03 Implementing Agencies. ELECTROLIMA, HIDRANDINA, and CENTROMIN completed the consultant selection process promptly because they elected to follow Bank procedures--that is, rather than pre-qualifying as a first step to preparing a short list, they relied on their experience, plus consultation with the Bank, to prepare a short list. The studies under their supervision progressed satisfactorily--that is, they were completed in 1982 and 1984. There were no substantial cost overruns, with the exception of the studies carried out by ELECTROLIMA, whose costs were higher than estimated due to design work which was more extensive than expected. Implementation by ELECTROPERU 4.04 Overview. Speedy consultant selection and study execution did not prevail at ELECTROPERU. During the three years following loan effectiveness (February 25, 1982), the pace of execution of the different studies varied, but most studies were behind schedule. In October 1982, Bank staff reported that contracts had been let for three studies. The Olmos study was underway; but the Rio Santa and El Chorro studies, which had been contracted in March 1982 to a single consultant, languished until 1983 for lack of adequate counterpart funding.10 4.05 Contracts for the remaining five hydro studies were not migned until late 1984 due to, first, a lengthy exercise to pre-qualify consultants; second, multiple disputes and challenges by the consultants concerning the ranking of study proposals; third, intervention by the Board of Directors of ELECTROPERU in the selection procedure; and, fourth, a disagreement between the Board and the Bank over a proposed change with respect to the mechanics of negotiations. 4.06 Once the remaining contracts were signed, the consultants began their work in 1985, but an acute shortfall of counterpart financing caused progress to move at a slower pace than would have been the case if ELECTROPERU had not experienced financial stringency. 'o Now to Files, dated October 4, 1982.  8 4.07 Pre-cualification. The first problem appeared in late 1981 and occupied most of 1982. Due to a lack of business, there was substantial competition among the consultants to win contracts: about one hundred (100) firms, some quite unqualified, expressed interest in preBenting proposals. In some instances, local political officials placed pressure on ELECTROPERU for special consideration of favored firms. To achieve transparency in the consultant selection process, ELECTROPERU decided to pre-qualify the consultants. The Bank informed ELECTROPERU that Bank rules did not require such a procedure, advised against its use, and recommended preparation of a short-list for a single contract covering all studies not already contracted (para. 4.04) based on management's (ELECTROPERU's) knowledge of the technical qualifications of interested firms ll Ignoring this advice, management proceeded with the pro- qualification exercise which took some fifteen months to complete (December 1982). Thereafter, ELECTROPERU proposed--and the Bank accepted--(a) a short list of consultants for a two-study package--Huaura (PS) and Platanal (FS); (b) a short list of consultants for a three-study package--Molloco (FS), Chili (FS), and Quishuarani (FS/BD); (c) terms of reference for each study package; (d) guidelines for the preparation and evaluation of the study proposals; and (e) rules on the mechanics of negotiation. Under these rules, the proposals would be ranked on the basis of merit, and negotiations for each Dackaae would be carried out sequentially on the basis of rank. ELECTROPERU then invited the short-listed consultants to furnish proposals for each study package, having provided them with terms of reference, guidelines, and rules. 4.08 Consultant Disputes and Board Review. Lengthening the evaluation process for both study packages were disputes and challenges to the ranking of proposals by various consultants. These delays were compounded and extended as a result of review and intervention in the selection process by ELECTROPERU's Board of Directors. These disputes and interventions continued from 1983 into 1984. ELECTROPERU signed a contract with a single consultant for the three-study package on November 23, 1984 and a separate contract for Platanal (FS) and Huaura (PS) with another consultant on December 27, 1984. 4.09 Bank files provide a comprehensive picture of the delays attending the selection of consultants for the two-study package--Huaura (PS) and Platanal (FS). In early 1983, a committee composed of top ELECTROPERU staff received, evaluated and ranked study proposals provided by the short-listed consultants. At the end of May 1983, ELECTROPERU's Board of Directors set aside the first evaluation of proposals on the grounds that two of the proposals did not comply with legal requirements and called for fresh proposals from the same consultants. There were complaints to the Bank on the part of consultants about the action of the Board. According to the general manager, the real reason was suspicion about the integrity of the evaluation process. Given such suspicion, the Bank did not object. 2 In connection with the second evaluation, ELECTROPERU established a procedure to review each proposal's compliance with legal requirements before evaluation and expanded the evaluating commission from five to nine members. By December 1983, the evaluation commission had completed " WB: Letter to ELECTROPERU, dated August 12, 1981; telex, dated October 6, 1981; teLex, dated Janury 5, 1982; and letter, dated March 26, 1982. '2 Internal Bank Memo, dated March 1, 1984.  9 its work, the results of which the Board sent to the Bank for review. The Bank found satisfactory the evaluation procedure and its results. 4.10 Bank-Board Disagreement. In January 1984 the Board proposed to set aside the second evaluation on minor technical grounds and to change the mechanics of negotiation: substituting separate and sequential negotiations for each study with the two leading consultants in place of sequential negotiations for the two-study package with the consultants ranked by order of merit of their respective proposals. The Bank insisted (March 1984) that ELECTROPERU adhere to the original rules.13 Eventually, the Bank agreed to the proposal of ELECTROPERU as a result of the first-ranked consultant's indication of disinterest in the Platanal study.14 4.11 Financing Problems. By the end of 1984, ELECTROPERU had signed contracts for all studies; by early 1985, the consultants had begun their work, but thereafter it moved slowly due to counterpart funding problems. Although the loan had no financial covenants, the financial performance of ELECTROPERU during the 1980s was poor. The Government, for political reasons, actually lowered tariffs in real terms. For example, the December 1986 nominal rate level was only 6% higher than in December 1985, although cumulative inflation for the year was 62%. Findincs of the Studies 4.12 Part A. The following summarizes the findings of the studies carried out by ELECTROPERU: i. Rio Santa and El Chorro: In March 1982, ELECTROPERU contracted a consultant to carry out a study of the Rio Santa watershed and the El Chorro hydroplant to be completed in 1984-1985. The study was to consist of: (i) an inventory of the resources of the watershed; (ii) pre-feasibility studies of the system Canon del Pato- Quitaracsa-El Chorro; (iii-iv) completion of the feasibility study and design of the El Chorro hydroplant; and (v) feasibility study of the Quitaracsa poundage and expansion of the Canon del Pato hydro- plant.15 Due to a local currency *hortfall, work did not start until early 1983. Following discovery of a geologically active fault (Pashma) crossing the headrace tunnel of El Chorro, the consultants urged the study of alternative conceptual designs, and in 1985 ELECTROPERU agreed to a reformulation of the terms of reference and related work plan, i.e., work would be carried out in three stages. Before-completion (September 1984) of the inventory and assessment of the Rio Santa watershed (first stage), the consultants began work (April 1984) on the second stage--that is, alternatives to El Chorro (PF), expansion of the Canon del Pato hydroplant (FS), and the Quitaracsa reservoir (FS). Draft versions of the corresponding Bank telex to ELECTROPERU, dated March 13, 1984. " Letter of ELECTROPERU to the Bank, dated Septemtber 11, 1984. Contents of Letter s4upLamentad by interview with Bank staff. 1 Part 11 includes detaiLs on the five-stage study of the Rio Santa watershed.  10 reports were circulated in April 1986 and were complete (or nearly so) when work on the project stopped. In January 1987, the consultants began work on the third stage: definitive studies at the design level of the Quitaracsa reservoir and the Canon del Pato hydroplant. These studies were not complete when the Bank suspended disbursements (May 7, 1987). Expenditure for these studies and designs was USS7.9 million. Sources of financing were: World Bank, US$5.0 million of foreign-currency costs; Corporacion Financera de Desarrollo (COFIDE), US$0.9 million of foreign-currency cost; and ELECTROPERU, US$2.0 million of local-currency costs. Following the suspension and closing of Loan 2018-PE, ELECTROPERU was periodically able to finance additional work on the definitive studies of the Quitaracsa reservoir and the Canon del Pato hydroplant and reports having finished them (Part II). ii. Huaura River: Consultants commenced this pro-feasibility study in May 1985. There was a five-month delay in 1986 due to contractual problems with the subcontractors for the topographic survey. The study was completed in late December 1987, twenty-one months behind the contractual completion date (March 4, 1986) and almost three years behind the appraisal estimate (December 1984). The principal reason for late completion after contract signing was a counterpart funding deficit in 1985 which delayed basic geological investigations. The pre-feasibility studies, which were generally of good quality, identified five good sites totalling some 530 MW of installed capacity and about 2,000 GWh/year. The cost of the studies was just under US$1.2 million; the sources of financing were: World Bank, US$0.9 million of foreign-currency costs; and ELECTROPERU, US$0.3 million of local-currency costs. The consultant recommended that a feasibility-level study be carried out at the site of Chevez Izquierda.16 ELECTROPERU is still seeking funding for such a study. iii. Platanal Hvdro-Dlant: Consultants commenced this study (FS) in February 1985. After work began, a budgetary shortfall in 1985 delayed the start of geological investigations and was primarily responsible for late completion. The completion date for the interim feasibility study was March 1987, six and one-half months after the contractual completion date. According to this report, the Platanal plant would have an installed capacity of 140 MW and primary energy would be around 787 GWh/year. Costs of theme studies amounted to US$2.0 million; sources of financing were: the World Bank, US$1.4 million; -and ELECTROPERU, US$0.6 million. The consultant recommended the preparation of a final feasibility study; ELECTROPERU is seeking financing. iv. Chili River. molloco and Ouishuarani Hydro-olants: Consultants began work on these studies (FS) in March 1985. Technical/operational problems related to geological investigations were the primary source of delay after work began. The Chili River According to ELECTROPERU, the irstaLled capacity and average anual generation of the hydro-pLant at Chevez lzquierda would be, respectively, 150 NW and 915 GIA (see Part 11).  11 regulation study included construction of reservoirs, increased intake capacity and diversion schemes and transfer of water from other basins through pumping. A draft of the final report was delivered to ELECTROPERU in March 1987. The Molloco scheme considered the use of a 2,000 meter head. Due to topography and access conditions, the upper section in all alternative schemes had to be designed with a head of 1,400 meters and the lower section with a head of about 700 meters. The pre-feasibility study was scheduled for delivery in April 1987. The study of the Quishuarani hydro site considered a two-stage development: (1) first stage: installed capacity of 90 MW producing average annual generation of 458 GWh; and (2) second stage: 135 MW installed capacity producing average annual generation of 619 GWh. The hydro project would provide electricity to the south and south- east region and also benefit the agricultural activities through increased flood control and regulation in the Vilcanota valley. The consultant recommended the preparation of final feasibility studies; ELECTROPERU is seeking financing. This study was completed in March 1987. The cost of these studies was US$7.3 million; sources of financing were: the World Bank, US$5.7 million; and ELECTROPERU, US$1.6 million. V. Olmos Evaluation: Having reviewed the feasibility study of the Olmos multi-purpose scheme (power and irrigation components), the consultant concluded that, while technically feasible, the scheme had a very low global internal rate of return. The evaluation was completed in May 1983, eleven months late. Disbursements from Loan 2018-PE for this study amounted to just under US$0.2 million. ELECTROPERU provided no data on the local-currency costs of this study. vi. Thermal Plant: The development plan issued in October, 1983 indicated that the decline in demand growth meant that the quick construction of a thermal plant had lost priority, and could be replaced by a hydro-plant. However, the project was kept on a stand- by basis in case lack of financing for a hydro-plant would require a last-minute thermal solution. The option of using natural gas of the Zorritos area (northern Peru) was considered and discarded due to uncertainties with regard to the amount of gas and the cost of further exploration. Therefore, ELECTROPERU did not use any of tho funds allocated for study of a thermal option. vii. - Transmission Line (Truiillo-Piural: Having obtained the financing for the line from Spain, the Government considered the study of its economic feasibility as not needed.17 The study of the transmission line was dropped from the project, but the Bank did not cancel funds allocated for the study to allow reallocation in case other studies experienced a shortage of counterpart funds or cost overruns. e . ! ps " 'SL.prvigion Rsor?, dated Januar 1,1981, AYY~X7-2, p. 1, prr 2.  12 4.13 Part B: ELECTROLIMA. Studies of the Matucana hydroplant and the reservoir dam at Yuracmayo were satisfactorily completed in 1982, and final design and bidding documents for Yuracmayo were completed in November 1984. Partial financing for constructing the Yuracmayo reservoir dam was included in Loan 2179-PE (1982; US$81.2 million). The contract was divided into two lots and a local contractor started construction of Lot I in January 1984. The pre- selection process for contracting Lot II was completed in December 1986; construction was supposed to start in September 1987 and be completed in March 1990. However, financial difficulties required ELECTROLIMA to defer further construction until 1992. The expected completion date is 1994. Disbursements from Loan 2018-PE for Part B amounted to about US$1.3 million; but there are no actual data on local-currency costs. 4.14 PART C: HIDRANDINA. The feasibility study of the Mayush hydroplant was satisfactorily completed in January, 1984. A pre-feasibility study for the Tumac hydro-plant carried out in conjunction with the Mayush study confirmed that the best utilization of the waters of the Rapay River is through a low diversion into the Pativilca River, despite the additional construction it would involve. Final design and bidding documents were completed in early 1985, and a summary of the final design study was issued in January 1986. Disbursements for Part C amounted to just over US$2.0 million. There are no actual data on local-currency costs. 4.15 PART D: CENTROMIN. This component, which included the final design and bidding documents for CENTROMIN's 120 KW Yuncan project, was completed satisfactorily in June 1982. Disbursements for Part D amounted to just under US$2.5 million. There are no data on local-currency costs. 4.16 PART E: ELECTROPERU Plannino Unit. Part E included additional equipment, training and an advisor to assist in the establishment and operation of a master planning unit (paras 2.07-.08 and 3.04). Procurement of material and equipment was through international shopping. At the time of loan closing, disbursements from Loan 2018-PE amounted to just under US$0.02 million; and ELECTROPERU had not procured all items considered necessary. The now unit hired an advisor/consultant for four months, approved and financed by the Bank, to help improve ELECTROPERU's planning methodology, and to organize the updating of the Master Plan. Despite the loss of its more experienced staff due to low salaries, the Planning Unit successfully completed its tasks, and, at the time of loan closing, was working on updating the Master Plan for that year. In fact, ELECTROPERU has continued to update the Master Plan every year. 4.17 -Performance of Consultants. All consultants performed satisfactorily, with important participation of local consultants under joint venture arrangements. The consultants working for ELECTROLIMA on the Yuracmayo dam revised their report and bidding documents to achieve the standard. the Bank expects of international consultants. The Board of Independent Consultants made useful recommendations for designing the safety aspects of the dam. 4.18 Timing and Allocation of Loan Proceeds. Due to delayed project execution, disbursements from Loan 2019-PE, which amounted to USS19.04 million, were delayed (Part III, Table 3). The Bank cancelled the undisbursed balance of US$5.96 million. An amendment to Schedule 1 of the Loan Agreement,  13 reallocated USS 800,000 from Category 6 (Unallocated) to Category 3 (Part B: ELECTROLIMA), to pay for the consultants. Actual and forecast allocation of disbursements by category were: Category Actual Forecast Difference (in US$ millions) 1. Parts A & E (consultant services) 13.24 13.70 -2.6 2. Part E (goods & services) 0.02 0.30 -93.3 3. Part B (consultant services) 1.28 0.70 82.9 4. Part C (consultant services) 2.00 2.00 0.0 S. Part D (consultant services) 2.50 2.50 0.0 6. Unallocated 0.00 5.80 NA Total 19.04 25.00 -23.8 5. Prolect Results 5.01 Studies. Except for the final phases of two studies-- Platanal and Molloco--the objective of preparing pre-investment studies war accomplished (if not on an accelerated basis--para. 3.04). The larger, if un- stated, objective of adding generating and/or water storage capacity based on the findings of these studies has not yet materialized, except for the reservoir dam at Yuracmayo, which is under construction (para. 4.13). Since 1987, regulatory, financial, political and other problems materialized, severely limiting sector investment expenditures and deferring the construction of new generating capacity (para. 2.03). At appraisal, no indicators were established to measure the project (Part III, Table 6). 5.02 It is uncertain what will happen to those hydroprojects, the studies of which were completed and which are ready to be executed. The MMZ continues to be responsible for overall energy sector planning under the Law of Concessions and must review the studies in the light of new energy options. That is, MHE will have to undertake comparative studies to determine (i) whether electricity generation should be based on natural gas or conventional thermal and hydro sources; and (ii) the benefits and risks of developing each project. The natural gas option, especially after the discovery of large reserves at Camisea has led to public debate about suggestions to build a gas pipeline along the coast. While the MME remains responsible for planning, it is not clear what the results of such review will be, which entity will be in a position to implement the findings of the studies following their review, or when, if ever, these studies will lead to the construction of new hydro generating or water storage capacity. 5.03 If the *ustainability of the benefits of these studies is measured by their use for the construction of works, one must, as of today, make a negative judgement about the *ustainability of benefits. However, given the possibility of improved economic and political circumstances during the 1990. and the expansion of the power system, this judgement may yet be reversed. 5.04 Plannina Unit. There was more success in achieving the second objective, the establiahment of the ELECTROPERU Planning Unit. it continues to update annually the Master Plan for the sub-sector and prepare demand forecasts and generation expansion development plans (para. 4.16). Hence the benefits from this part of the TA program continue.  14 6. Institutional Performance 6.01 Borrower. Because of its inefficient consultant selection procedures and financing problems (paras. 4.04-4.11), ELECTROPERU substantially delayed the contracting and execution of the studies under its responsibility. The Board of Directors could have taken corrective action to speed the consultant selection process; the Government was responsible for the deteriorating finances of ELECTROPERU. ELECTROPERU complied with the major covenants of the Loan Agreement (Part III, Table 7). 6.02 In the process of becoming the sector holding company, ELECTROPERU implemented improvements in some technological, administrative and financial areas, although managerial problems persisted. The work of the Planning Unit was considered a success. 6.03 Other Beneficiaries. The satisfactory performance of ELECTROLIMA, HIDRANDINA, and CENTROMIN justified the decision to make them responsible for the execution of their project studies. 6.04 Bank. At appraisal, the Bank correctly combined financing of pre-investment studies to meet the immediate needs of the sector with assistance to improve the technical, institutional and planning capacity of the sector. The Bank examined and accepted the local consultant selection procedures, which later proved to be a source of delay. It seems apparent that Bank staff did not understand the potential for delay inherent in the local procedures. However, acceptance was fully consistent with the spirit of the then current Bank-approved consultant selection procedures. These laid primary responsibility for selecting and supervising consultants on borrowers and beneficiaries (paras. 3.08-3.10). 6.05 During supervision, the Bank, having agreed that local consultant selection procedures would prevail, was not in a position to take measures sufficient to overcome the selection delays at ELECTROPERU. Once the contracts were signed, except for delays due to funding problems in 1985, the consultants proceeded with their work in satisfactory fashion. All things considered, the Bank did what it could to promote the execution of the studies. 6.06 Despite its increasing concern with the deteriorating financial situation of the sector (low tariffs and low rates of return), the Bank made a substantial offort to sustain project momentum and maintain a constructive relationship with ELECTROPERU. In support of the Second Power Engineering Project, the Bank signed another technical assistance loan (2603-PE; 1985) to support the process of regionalization, to improve the management of ELECTROPERU and to improve the sector efficiency. Bank efforts to integrate and coordinate all aspects of concern to the power sector, including organizational, managerial, technical and planning aspects, had some beneficial impact on the sector. An example of such a beneficial impact is the Planning Unit in ELECTROPERU. 7. Lessons Learned 7.01 The major sources of delays during implementation were consultant selection procedures at ELECTROPERU and local currency constraints. Current Bank guidelines require the beneficiary, prior to inviting proposals from  15 consultants, to submit for Bank review its consultant selection procedures and to modify those procedures when the Bank considers modification to be appropriate. This is a useful change from the less stringent approach prevailing at appraisal (December 1980). If the current guidelines had been operational at appraisal, Bank staff would probably have required elimination of those parts of the local selection procedures which caused delay. There are two lessons to be learned: The first is that is that at appraisal local consultant selection procedures should be very carefully examined, especially with respect to their operation and impact under actual circumstances. This examination should give some clue to the efficiency of the borrower in this activity. The second is that the Bank should make every effort to ensure acceptance and use of its consultant selection procedures by the borrower or beneficiary.  16 PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE ELECTROPERU commented as follows on the draft PCR. The PCR " ...describes in detail ...what happened when the loan was used and during the carrying out of the various studies . However, it is necessary to clarify some aspects [of . ..the suspension of certain feasibility studies... [and] ...of the [consulting] contract... [which ...initially contemplated a five- stage study of the Rio Santa watershed, [including]: (i) a development study of the ...watershed (i.e., an inventory of possible sites); (ii) a pre-feasibility study of the Canon del Pato-Quitaracsa-El Chorro system; (iii & iv) feasibility study and final design of El Chorro hydro-plant; and (v) feasibility studies of the Quitarasca reservoir and expanding the hydro-plant at Canon del Pato." During implementation of the second stage, following the dincovery of an active geological fault (Pashma), "... it was recommended that the planned design of the hydro-plant at El Chorro be modified and that the stages of the study be reformulated. In due course, this led to the abandonment of pre-feasibility and feasibility studies initially contemplated under the Bank loan." =...ELZCTROPERU ...completed with its own resources..." studies of the Quitarasca reservoir and expanding the hydro-plant at Canon del Pato. 'The final versions of the studies.. indicated the following characteristics... of the power plants at the sites examined: Installed Average Annual Ails Ca2acitv IMWI Generation (GWhi Chevez Izquierda 150 915 Platanal 140 787 Quishuarani First Stage 90 458 Second Stage 135 619 Molloco First Stage -- 200 991 Second Stage 110 545" The final coment of ELECTROPERU was that under new Law of Electrical Concessions, "...the work of planning is the responsibility of the Ministry of Energy and Mines."  17 PART III STATISTICAL INFORMATION 1. Related Bank Loans Amount Year of Loan No. Purpose (in USS Approval Status millions) 260-PE Construction of the Huinco 24.0 1960 Completed Hydrostation with two units of 60 MW each 365-PE Expansion of Huinco station 15.0 1963 Completed to expand capacity to 240MW. 465-PE Expansion of Transmission and 10.0 1966 Completed Distribution System. 511-PE Construction of Matucana 17.5 1967 Completed (hydro). 1215-PE ELECTROLIMA's 1975-1978 36.0 1976 Completed transmission and distribution expansion program, plus technical assistance. 2018-PE Studies at feasibility and 25.0 1981 Completed pre-feasibility level, plus final design & bidding documents, as required for hydro projects (12), a thermal generating plant, and a transmission line. ELECTROPERU, ELECTROLIMA, BIDRANDINA, and CENTROMIN were responsible for carrying out studies of projects which they later expected to execute. Project also included technical assistance to reinforce planning capacity of ELECTROPERU.  18 Amount Year of Loan No. Purpose (in USS Approval Status millions) 2179-PE ELECTROLIMA's 1982-1986 81.2 1982 Completed1 distribution program, plus construction of Yuracmayo dam, expansion of Huinco plant, the Mantaro Transfer Scheme and engineering studies for Mayush project. 2603-PE Studies to improve 13.5 1985 Withdrawn2 organization of regional power companies; acquisition of laboratory and computational equipment. (Technical Assistance). Total 222.23 Parts of the project financed by Loan 2179-PE were never carried out due to Lack of financing--that is, the Bank, for country reasons, suspended disbursement on aLL of its loans to Peru in May 1987. Maintwnnce of this suspension underlay the Bank's decision not to extend the closing date for the Loan beyond its deadline of Jure 30, 1988. 2 FoLLowing approval of Loan 2603-PE (July 2, 1985), the newly leLcted Administration of Presidmnt Alan Garcia, judging the project to be of Low priority, did not sign the loan agreement. Sixten months Later, in circumtances of declining Bank-country relations, the Bank withdrew the Loan with the approval of the Goverrnent (November 25, 1986). The Bank is considering an Electricity Privatization Adjustment Loan for USs150.0 million.  19 2. Project Timetable -----------------------------------------------------------__--------------- Item Date Date Planned Actual --------------------------------------------------------------__------------- Appraisal 12/80 Loan Negotiations (end) 05/14/81 Board Approval 06/23/81 06/23/81 Loan Signature 08/19/81 Loan Effectiveness 11/19/81 02/25/82 Loan Closing 06/30/85 06/30/87 Last Disbursement 07/07/87 Project Completion 12/31/84 05/07/871 This date corresponds with the Bank's suspension of disbursements on Loan 2018-PE. Soue dditionaL consulting work was carried out after cLosing of the Bank loan. As recentLy as 1992, studies were completed with respect to final designs for exparnding the Canon del Pato hydroplant and the Quitaracca reservoir. 3. Cumulative Loan Disburoements (USS million) ---------------------------------------------------------------__------------_ Bank FY 1982 1983 1984 1985 1986 1987/88 ----------------------------------------------------------------__-----------__ Appraisal I/ 9.4 20.6 24.1 25.0 25.0 25.0 Actual 2/ -- 3.4 6.0 9.8 14.7 19.04 Actual as % of -- 16.5 24.9 39.2 58.8 76.2 Estimated 1/ President's Report 2/ USS 5,959,749 was cancelled.  20 4. Project Implementation Completion dates for Studies -