Colombia - Bogota Second Power Distribution Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14627 IMPI.EMENTATION COMPLETION REPORT' COLOMBIA BOGOTA POWER DISTRIBUTION II PROJECT (LOAN 2634-CO) JUNE 19, 1995 Infrastructure and Operations Division Department III Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents maw not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Colombian Peso (Col.$) US$1.00 Col.$101.19 (mid-1984) US$1.00 Col.$502.2 (1990 average) US$1.00 Col.$863.7 (1993 average) UNITS AND MEASURES meter (m) 3.28 feet kilometer (km) 0.62 miles square km (sqkm) 0.39 square miles ABBREVIATIONS AND ACRONYMS CONPES = Consejo Nacional de Politica Econ6inica y Social (National Council of Economics and Social Policies) CORELCA = Corporacion E1lctrica de la Costa Atlantica (Electric Corporation of la Costa Atlantica) EEB = Empresa de Energia de Bogota (Energy Company of Bogota) EPM = Empresas Publicas de Medellin (Public Company of Medellin) CRE = Energy Regulatory Commission CVC = Corporaci6n Aut6noma Regional del Valle del Rio Cauca (Regional Corporation of Valle del Rio Cauca) DNP = Departamento Nacional de Planeaci6n (National Department Planning) FEN = Financiera Energetica Nacional (National Financing Energy Corporation) ICEL = Instituto Colombiano de Energia Electrica (Colombian Institute of Electric Energy) ISA = Interconexi6n El6ctrica S.A. (Electric Interconection S.A.) IADB = Inter-American Development Bank MME = Ministry of Mines and Energy MOF = Ministry of Finance JNT = Junta Nacional de Tarifas (National Tariff Comission) FISCAL YEAR January 1" to December 3 15  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT BOGOTA POWER DISTRIBUTION H PROJECT (LOAN 2634-CO) Table of Contents PREFACE ........................................................i EVALUATION SUMMARY ......................................................... ii PART I. PROJECT IMPLEMENTATION ASSESSMENT .............................................1 Background .. . ......................................................1 Project Objectives and Description .........................................................2 Achievement of Objectives .........................................................3 Implementation Record and Major Factors Affecting Implementation . ......................... 6 Project Sustainability .........................................................8 Bank Performance .........................................................8 Borrower Performance ........................................................9 Assessment of Outcome ........................................................ 10 Key Lessons Learned ........................................................ 10 PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ........................ 11 A. Executive Summary 1......................................................... 1 PART III. STATISTICAL ANNEXES ........................................................ 15 Table 1: Summary of Assessment ......................................................... 15 Table 2: Related Bank Loans ......................................................... 16 Table 3: Project Timetable ......................................................... 16 Table 4: Loan Disbursements: Cumulative Estimated and Actual .................................. 17 Table 5: Key Indicators for Project Implementation ..................................................... 17 Table 6: Key Indicators for Project Operation ........................................................ 18 Table 7: Studies Included in Project ........................................................ 18 Table 8A: Comparative Poject Costs ............................................ 19 Table 8B: Project Financing .................................................. 19 Table 9: Economic Costs and Benefits ......................... ............................... 20 Table 10: Status of Legal Covenants ....................... .. ............................... 21 Table 1 1: Bank Resources; Staff Inputs ......................................... 23 Table 12: Bank Resources; Missions ......................... ................................ 23 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. l   IMPLEMENTATION COMPLETION REPORT COLOMBIA BOGOTA POWER DISTRIBUTION II PROJECT (LOAN 2634-CO) PREFACE The Implementation Completion Report (ICR) for the Bogota Power Distribution II Project in Colombia was prepared by Alfonso Posada (Consultant) and Jayme Porto Carreiro (LA3IN), and reviewed by Peter Ludwig (Division Chief, Infrastructure Operations) and Robert Crown, Project Adviser. The Infrastructure Operations Division, Country Department EI, Latin America and the Caribbean Regional Office, prepared the ICR based, among other sources, on the Issues/Decisions Paper, the Staff Appraisal Report, the Loan and Guarantee Agreements, project files, and interviews with Borrower's Staff in Bogota. Preparation of the ICR was begun during the Bank's final supervision/completion mission in August 1994, during which a field review of all the physical facilities included in the Project's scope was carried out. The Borrower's contribution to the ICR is reflected in the Borroweres own evaluation of the project's implementation and results, which is included as Part II of the report.   - ii - EVALUATION SUMMARY The Bogota Power Distribution II Project was financed through a loan to Empresa de Energia de Bogota (EEB) which amounted to US$171 million; it was approved in November, 1985 and made effective in September, 1987. The closing date was December, 1993, a year later than originally planned. US$56.7 million of the loan proceeds were canceled. The balance of the loan was fully disbursed; the last disbursement took place in January, 1994. Background. (i) The electricity industry provides service to around 5.2 million users; energy consumption in 1993 amounted to 36.7TWh which were generated with an installed capacity of 9660MW. The borrower, EEB, is the largest municipal utility in the country; it operates as a vertically integrated corporation with an installed capacity of 2300MW; it provides electricity service in the metropolitan region of Bogota (pop. 6.5 million) and smaller adjacent communities. It currently serves 1.1 million customers with a peak demand of 1800MW. (ii) Until recently, the sector was characterized by powerful vertically-integrated monopolies together with a large number of government-controlled distribution companies. It experienced major difficulties during the 1980s: it underwent a lengthy period of financial crisis due to overbuilding of generating facilities and low tariff levels, followed in the early 90s by an unprecedented drought which caused country-wide rationing. These crises provided the impetus for embarking on radical institutional reforms. (iii) The sector was reorganized, with Bank support, during the 1991-94 period. The process incorporated efficiency, accountability and financial responsibility incentives into sector corporations and was complemented with tariff increases together with a financial restructuring whereby the Government injected massive resources into the sector to set it on a sound financial footing. The results of these efforts were asserted with the approval of a Public Services Law and an Electricity Law which emphasize the introduction of competitive incentives and provide for the regulation of non- competitive supplies. (iv) The sector's restructuring has been successful: an Energy Regulatory Commission has been operating since 1993, a competitive market for bulk supplies is being set up, the major generation and transmission enterprise (ISA) has been split up into a generation company and a transmission/dispatch corporation, and private generators are supplying part of the system's needs. Project Objectives and Description. (v) The project was conceived for the purpose of supporting EEB in order to expand the distribution of electricity in the Bogota area, extend electricity service to low-income areas of the city, reduce energy losses and theft, and improve the effectiveness and efficiency of EEB's operations.  - iii - (vi) The project consisted of a physical component and an institutional component. The physical component included 230/115kV substation equipment and lines, primary and secondary distribution equipment together with new lines, line improvements and street lighting extensions, the installation of 300,000 meters and operations and maintenance equipment. The institutional component included studies for controlling energy losses, reducing theft and improving distribution reliability and planning, technical assistance for training EEB staff, and the implementation of a loss reduction program. Achievement of Objectives. (vii) Reevaluating the objectives in hindsight, it becomes apparent that the physical components, which consisted of standard distribution investments, could reasonably be implemented. In contrast, the institutional components, including loss reduction targets and financial goals, appear to be unrealistic given the overall organization of the power sector at the time, and EEB in particular which lacked autonomy vis a vis municipal authorities, was subject to political meddling from the City Council and faced no accountability constraints. (viii) The physical objectives of the project were met with the exception of primary distribution lines and secondary distribution line improvements. The 230kV and 115kV components, although delayed, will be completed by December, 1996. The extension of service to low income customers and the public lighting goals were achieved and benefited an estimated 650,000 people. (ix) Loss reduction objectives were not achieved at all: the level of losses in 1993 was only marginally lower to that of 1987 (22% vs. 24%). Covenanted financial goals did not materialize either: the rate of return for the enterprise decreased instead of reaching the 12% target; the self financing ratio was only achieved twice during the seven-year execution period and accounts receivable (as a percentage of sales) increased to 43% instead of decreasing to 17%. (x) A rough ex-post rate of return calculation for EEB's investment program yields a value of 9%, significantly below the ex-ante rate, estimated at 12% in the SAR. The reason for the shortfall can be traced to the cost overruns of the Guavio generation plant, rather than to failures of the distribution project itself (SAR demand projections were remarkably accurate). However, the institution building components of the project, had they been implemented, should have helped EEB to overcome many of its management weaknesses which ultimately led to an unsatisfactory performance. Implementation Record and Major Factors Affecting Implementation. (xi) The major factors which affected implementation were (a) unrealistic objectives in regard to the institutional components of the project; (b) procurement delays; (c) a weakly staffed Project Management Unit; and (d) a lack of stable management policies in EEB. (xii) Procurement delays originated due to lengthy Government approval procedures and conflicts between Bank procedures and those required by the Bogota municipality. Misprocurements caused the cancellation of US$1.69 million of the loan proceeds. The Project Management Unit, which according to Bank experience is a critical component in the implementation process, lacked authority to coordinate the activities of different EEB groups involved in the project. Throughout project  - iv - implementation the Bank lacked an effective counterpart within EEB to account for the project's performance due to frequent staff turnover and the instability of the borrower's top management. (xiii) The monitoring indicators of the project were uniformly unsatisfactory throughout its execution; additionally, EEB did not comply with numerous covenanted conditions. The decision to partially cancel the loan was taken in 1992 when 78% of the project had been completed and when it became evident that EEB's record would not improve. The loss reduction components were kept as a means of alleviating the power rationing which was taking place and which would last until 1993. Disbursements continued through 1993 and reached 88% of their scheduled amount. Project Sustainability. (xiv) The physical investments of the project are likely to be operated and maintained successfully. The sustainability of components such as the loss reduction program, which require strong management support, appears to be unlikely until institutional reform of EEB (following the directives contained in the Public Services Law) is implemented. Bank Performance. (xv) During appraisal and negotiation, the Bank overestimated EEB's capability of implementing institutional reforms. It failed to recognize the procurement issue which would have required agreement with the Government and the Municipality reaffirming the precedence of Bank procedures to be applied to projects financed by the Bank and it did not exert sufficient pressure on EEB to overcome the weakness of the Implementation Unit. (xvi) The Bank's supervision reports reflect a continued preoccupation with EEB's institutional strengthening which ultimately helped to recognize the need for the overall power sector reorganization which proved successful. The Bank's support contributed to its success and continued help is being provided at present through the Energy Sector Technical Assistance Loan. Regarding implementation obstacles, the Bank has commissioned a Country Procurement Assessment Report for Colombia that will serve as a guide for future operations. Borrower Performance. (xvii) EEB's overall performance was unsatisfactory: it failed to find constructive solutions to procurement impediments and higher management did not respond to the project's problems. Strong management support was lacking in critical areas such as the loss reduction component. This is reflected in the low rating given the project in all of the supervision missions. On the financial front EEB's situation was hampered by the Guavio project's major problems as well as unrealistic pricing policies which were beyond its control. The blame for the latter lies squarely on the Government's macroeconomic policies which it pursued to the detriment of the power sector in general throughout the 80s; much-needed pricing reforms only materialized in 1991-92 as part of the power sector restructuring program.  v - Assessment of Outcome. (xviii) Despite implementation delays, those physical elements of the project which were undertaken were put in place and are operating to satisfaction. The institution building component of the project was not successful and the loss reduction programs were ineffective. The physical component accounted for 96% of investment, and therefore the final assessment would show that the project was economical even under the assumption that all of the project's institutional component had been wasted. Key Lessons Learned. (xix) Experience gained from the Bogota distribution project applicable to future operations includes: * the need to undertake a realistic appraisal of the underlying institutional framework of the sector and the Borrower, and to include institution-building components in a project only if there is a commitment and a policy to implement required reforms; * the requisite to carry out and to monitor the project by putting in place a Project Implementation Unit with sufficient authority and autonomy to solve execution obstacles; and * the requirement to assess procurement procedures and to obtain explicit agreement with the Borrower and/or the Government concerning (a) following Bank contracting guidelines and (b) waiving procedures that may delay implementation.  IMPLEMENTATION COMPLETION REPORT COLOMBIA BOGOTA POWER DISTRIBUTION II PROJECT LOAN 2634-CO PART L PROJECT IMPLEMENTATION ASSESSMENT The Bogota Power Distribution II Project in Colombia was financed through Loan 2634- CO in the amount of US$171 million which was approved on November 26, 1985 and made effective on September 30, 1987. The Borrower was the Empresa de Energia de Bogota (EEB), formerly Empresa de Energia Electrica de Bogota (EEEB). The closing date was December 31, 1993, one year later than originally foreseen. US$56.7 million of the loan proceeds were canceled. The balance of the loan has been fully disbursed. The last disbursement was made on January 10, 1994. Background 1. Between 1970 and 1994, the Bank supported the development of Colombia's power sector with 15 loans for over US$1.9 billion'. The fourteenth Bank loan to the power sector since 1970 went to EEB and helped finance the Bogota Power Distribution II Project. It was the seventh loan to EEB since 19602. 2. Until the early 90s the power subsector was nominally under the supervision of the Ministry of Mines and Energy (MME). However, in practice it operated with little control regarding its investment plans which were prepared by ISA, a generation and transmission enterprise owned by the two principal municipal utilities and a number of Government-affiliated companies. 3. The power subsector experienced major problems during the last decade. In the 80s it became the source of considerable financial difficulties due to overbuilding of generation plants which confronted the Government with major macroeconomic problems. Paradoxically, because of the hydro predominance in the system, it became increasingly vulnerable to weather changes and faced a supply crisis due to an unprecedented drought in the early 90s, which aggravated sectorial problems caused by inadequate planning, low efficiency, and poor maintenance. These crises provided the impetus for embarking on radical institutional reforms. 4. A number of the problems that the sector faces have institutional origins. In the 60s and 70s the state increasingly became the major owner in energy enterprises, with a consequent 'The Inter-Ameican Development Bank (IDB) contributed a sinilar amount in 22 loans. 2Before 1985 the Bank had made 6 loans, totalling USS613.2 million, to EEB for electric power generation, transmission and distribution (225-CO in 1960, 313-CO in 1962, 537-CO in 1968, 1628-CO in 1978,1807-CO in 1980 and2008-CO in 1981).  - 2 - slackening of efficiency incentives and the virtual disappearance of accountability. The symptoms of serious problems in the energy sector became alarming in the mid-80s with the power sector's financial crisis; it then became evident that energy policy should be given a cohesive nature in order to address the issues of excessive investment in electricity generation and the underdevelopment of the gas subsector. In 1990 an OED study3, developed during a two year period with the participation of Colombian experts, identified many of the weaknesses of the power subsector and recommended its restructuring through the introduction of adequate regulation and private sector participation. 5. Since 1991 the Bank has supported the reshaping of the power sector in order to introduce market forces by promoting competition and private sector participation. This process culminated in 1994 with the approval of the Public Services Law and the Electricity Law whose implementation is expected to remedy many of the sector's weaknesses. 6. The Borrower. EEB is a municipal utility attached to the Bogota Municipality since 1951. It operates as a vertically integrated corporation, with an installed generating capacity of 2300MW; its service area encompasses the metropolitan area of Bogota (population 6.5 million) as well as a number of smaller towns in adjacent regions. It currently serves 1.1 million customers with a peak demand of 1800MW. 7. When the project was appraised, EEB had an installed capacity of 1288MW, 700,000 customers and a peak demand of 1000MW. The SAR forecast a peak demand of 1466MW in 1990; actual demand was slightly higher (1496MW); energy demand was forecast to grow at an average 5.4 percent per annum, and in fact it increased by an average 5.7 percent. In any case, the SAR projections were very accurate. 8. EEB's management is appointed by the mayor of Bogota whose tenure lasts three years; the company has experienced a high turnaround of upper management (three CEOs during the last three years). It has been widely accepted that the company has suffered from outside intervention by the City Council. It currently has around 4100 employees. Project Objectives and Description 9. The objectives of the project consisted of expanding the distribution of electricity in the Bogota metropolitan area, extending electricity service to low-income areas of the city, reducing technical energy losses and energy theft, and improving the effectiveness and efficiency of EEB's operations. 10. The Project consisted of: (i) Subtransmission: Installation of 1100 MVA of substation capacity at 230/115 kV and around 10 km of 230 kV lines and 75 km of 115 kV lines; 3OED, Colombia-The Power Sector and the World Bank. 1970-1987, Report No. 8893 (June 28, 1990).  (ii) Distribution: * Installation of 350 MVA of distribution substation capacity at 115/11.4 kV, 115/34.5 kV and 230/11.4 kV; * Installation of 750 km and improvement of 1600 km of primary distribution lines at 11.4 kV and 34.5 kV; * Installation of 650 km and improvement of 900 km of secondary circuits; * Installation of 10 MVA of voltage regulators and 60 MVAR of capacitors; * Installation of 300,000 meters; and * Installation of street lighting. (iii) Operation and Maintenance: Acquisition of equipment for hot line maintenance of substations and lines, and low, medium and high voltage testing equipment; (iv) Studies: (a) an evaluation of types and locations of illegal customers; (b) studies on: reliability of EEB's distribution system, planning and operation of EEB's subtransmission system, and systematization of energy losses control; (v) Training and Technical Assistance: Provision of technical assistance and training for EEB's staff to improve their management, strategic planning and technical skills; and (vi) An Energy Loss Reduction Program. 11. The estimated project cost at appraisal was US$348.6 million before interest during construction (IDC); including IDC, the expected cost increased to US$389.6 million. The project was expected to be executed over a period of 5.5 years. The programmed completion date was June 30, 1991. The Bank's U$171 million loan was designed to cover 90% of foreign currency costs, including US$41 million of IDC. Achievement of Objectives 12. Re-evaluating the project's objectives in hindsight, it becomes apparent that the physical objectives could reasonably be met given (a) that they are standard elements of distribution systems with no technological risk and (b) that they could be executed through experienced contractors with little risk of delays. By contrast, the institutional objectives appear to be unrealistic given the overall organization of the power subsector in general and of EEB in particular: the enterprise did not operate as a business, there were no accountability constraints, negligible financial autonomy (EEB's budget is subject to approval by the City Council which thereby exerts a stranglehold on the enterprise) and there was little management control due to frequent changes at the executive level (EEB had eight general managers between 1985 and  - 4 - 1994). Furthermore, EEB's management focus was overwhelmed by the construction of the 1OOOMW Guavio hydroelectric project which had created major financial difficulties by incurring over US$1 billion in cost overruns due to delays and physical contingencies. Under these conditions, which were evident at the time of appraisal, the achievement of institutional goals appears unrealistic; furthermore, the strains in management would subsequently imperil the achievement of the physical objectives of the project. 13. The SAR's proposed targets for loss reduction were also overly optimistic, particularly given the level of losses - 23 percent in 1983 -. It appears unreasonable to expect that by 1990 losses could be reduced to 13 percent in a city as large as Bogota with numerous slums. Theft control in particular requires a firm management approach in order to confront social unrest and political pressures associated with the required actions. Under the circumstances, EEB's weak management could not be expected to accomplish this goal. According to EEB this unrealistic target was proposed by the Bank and accepted with reluctance by the Colombian negotiating team. 14. Pliysical Objectives. Early in 1989 it became apparent that the physical objectives of the Project could not be achieved within the agreed time-frame, because of delays in the contracting processes due mainly to the lengthy and cumbersome contract-processing procedures to which EEB is subject by Colombia's and Bogota's legislation, as well as the difficulties in making them compatible with the Bank's procurement guidelines. The project's achievements are summarized in the following table: Comparison of Planned and Achieved Physical Objectives Planned Installed (a) Subtransmission 230/1 15kV substations 1 100MVA 930MVA 230kV, 115kV Lines 85km 23km (b) Primary Distribution 115/11.4kV substations 350MVA 438MVA New lines 750km 485km Line improvements 1600km 304km (c) Secondary Distribution New lines 650km 630km Line improvements 900km 416km 15. The project's 230kV components, albeit delayed, will be completed with Borrower's resources, together with the 115kV components. The latest project completion date is December 1996, although 88% of the project was completed as of December, 1994. The delays forced a re- evaluation of the project's physical objectives and total investment in the project was reduced from US$389.6 million at appraisal to US$220.4 million when it became evident that the implementation milestones would not be achieved.  16. Extension of Service to Low Income Customers: in this area the project fully achieved its social objective. Practically all extensions of primary and secondary distribution done with project funds are in the low-income city sections of Bogota. Altogether the socially worthwhile aim of supplying reliable electric service to the poorest areas of the city has been successfully attained through the Project. An estimated 650,000 low income people benefited from the project. The public lighting objectives were achieved: main thoroughfares were illuminated, and the programmed replacement of incandescent bulbs by mercury vapor ones was executed; lighting controls were installed thereby reducing losses. 17. Loss Reduction Objectives. The objectives regarding loss reduction were not achieved. On one hand, they appear to be unrealistic and, on the other, loss indicators which were on the order of 24% in 1987, were only reduced to 22% in 1993 (they were down to 18% in 1992 due principally to the energy rationing that took place and cut off supplies to mainly residential sectors where a large portion of the commercial losses is concentrated). In December 1991 EEB entered into a performance contract with Financiera Energetica Nacional (FEN), which among other indentures required EEB to reduce energy losses to percentages which are higher than those stipulated in the Bank's Loan Agreement. All the same, EEB has not been able to meet these new targets; EEB performance in this regard is summarized in the following table: Percentage of Energy Losses 1987 1988 1989 1990 1991 1992 1993 According to: Loan Agreement 21.0 18.0 16.0 14.0 13.0 13.0 13.0 Contract with FEN 19.3 18.0 Actually Achieved 24.6 24.8 22.4 22.9 20.1 18.5 22.0 18. Not much confidence can be placed on the achieved figures since a large part of consumption is not metered and computed on the basis of connected loads which are seldom verified. In other words, actual losses could be lower than stated above if legally connected but unmetered consumers consume more energy than EEB's estimates. 19. Institutional Objectives. Regarding the institutional objectives of the project, their unrealistic scope given the situation of EEB led to a foreseeable failure regarding their achievement. It should be noted that there have been some improvements in management quality -albeit unrelated to the project- associated with the independence of the Board of Directors (following directives contained in the 1991 Constitution) whose members are no longer subject to the direct influence of the City Council. However, the enterprise continues to lack autonomy vis a vis municipal politics and will therefore continue to depend on the quality of short-lived staff appointments rather than on its strength as a business enterprise. This situation is expected to change with the implementation of the Public Services Law which requires greater autonomy for enterprises engaged in providing energy, water, telephone and natural gas services.  - 6 - 20. Covenanted Financial Objectives. These were not achieved either, and have tended to worsen during the last three years: EEB's Comparative Financial and Operational Performance 1987 1988 1989 1990 1991 1992 1993 Rate of Retum (/o): As per Loan Agreement 12.0 12.0 12.0 12.0 12.0 12.0 12.0 Actually Achieved 10.5 8.1 8.6 12.0 6.6 6.0 7.7 Self-Financing Ratio (