Argentina - Yacyreta Hydroelectric and Electric Power Sector Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15801 PERFORMANCE AUDIT REPORT ARGENTINA YACYRETA HYDROELECTRIC PROJECT (LOAN 1761-AR) ELECTRIC POWER SECTOR PROJECT (LOAN 2998-AR) June 28, 1996 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents 1.00 Peso = US$1.00 Acronyms and Abbreviations AyEE Agua y Energia Elctrica CAMMESA Compaihia de Administraci6n del Mercado El6ctrico Mayorista, S.A. CNEA Comisi6n Nacional de Energia At6mica CTMSG Comisi6n Tecnica Mixta Salto Grande EBY Entidad Binacional Yacyreta EGYEC Energy Department ENRE Ente Regulador ERR Economic Rate of Return GDP Gross Domestic Product IDB Inter-American Development Bank IDC Interest During Construction LRMC Long-Run Marginal Cost O&M Operation and Maintenance OED Operations Evaluations Department PAR Performance Audit Report PCR Project Completion Report PIR Public Investment Review SAR Staff Appraisal Report SE Secretaria de Energia SEGBA Servicios E16ctricos del Gran Buenos Aires, S.A. kV kilovolt kWh kilowatt hour MW Megawatt (thousand Watt) MWh Megawatt hour (thousand kWh) GWh Gigawattt hour (million kWh) TWh Terawatt hour (trillion kWh) Fiscal Year Government: January I -December 31 FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation June 28, 1996 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Argentina Yacyreti Hydroelectric Project (Loan 1761-AR) and Power Sector Project (Loan 2998-AR) Attached is the Performance Audit Report (PAR) on the Yacyretd Hydroelectric Project (Loan 1761-AR, approved in FY80) and the Electric Power Sector Project (Loan 2889-AR approved in FY89), prepared by the Operations Evaluation Department (OED). The loans for US$210 million and US$252 million, respectively, were fully disbursed and closed on June 30, 1988, and May 31, 1991, after an extension of their original closing dates of one year. The loans were made to the Government of Argentina and onlent to the beneficiary, Entidad Binacional Yacyretd (EBY), ajoint venture created under the Treaty of Yacyreti between Argentina and Paraguay. The cofinancier, the Inter-American Development Bank (IDB) contributed US$840 million. The objective of the Yacyreta Hydroelectric Project was primarily to add base load hydroelectric energy to Argentina's power supply and to improve navigation and fishing on the ParanA River as well as provide possible irrigation for two provinces in Argentina and Paraguay. The project comprised the construction of a 2,700 MW hydroelectric power plant, the relocation of existing transportation and sanitation works, and the resettlement of about 33,000 persons. It also included planning studies on power transmission systems and use of small hydroelectric plants for isolated areas. The objectives of the Power Sector Project were to: (i) confine power sector investment to least- cost solutions; (ii) rehabilitate the five state-owned utilities' finances; (iii) apply tariffs based on economic costs; (iv) strengthen the sector institutions; and (v) provide better environmental safeguards. The related loan was mainly to help finance the 1988-1989 time-slice of Argentina's sector investment program, specifically the Yacyreta Hydroelectric project, but its financial covenants applied to all five utilities owned by the government of Argentina. The physical objectives were not achieved within the original schedule and budget: the Yacyreta plant is scheduled for completion in 1998 with a nine-year delay at an estimated cost of US$8,220 million (59 percent cost overrun). As of December 1995, only 8 out of the planned 20 generating units were in commercial operation and were delivering only two thirds of its design capacity because Yacyreti's reservoir cannot yet be fully filled. Lack of local funding forced EBY to phase the resettlement over a longer period. The Audit rates the outcome of both projects as unsatisfactory. Given the much slower rate of demand growth and funding difficulties, project construction was stretched and cheaper generation This document has a restricted distribution and may be used by recipients only in the performance of their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization. alternatives have emerged. The recalculated economic rate of return of the YacyretA project, assuming its full completion in 1998, is 5.8 percent. The generation cost of YacyretA is estimated at US cents 9.7 per kWh, or more than three times the price currently being paid for base generation in the Argentinean electricity market. The Audit rates institutional development as moderate. The recommendations of the planning studies were implemented but the recommendations on sector organization were delayed. Thus, by 1989 the sector financial and operating performance was so poor that it triggered a swift sector reform and later a successful privatization drive of the State-owned power utilities with Bank support. The Audit rates the projects' sustainability as likely on the belief that YacyretA will be completed as planned, including resettlement, and adequate arrangements will be put in place for its operation and EBY's financial integrity. A protocol, now under consideration by the Congresses of Argentina and Paraguay, is expected to establish how the operation and maintenance of the scheme, its lifetime energy generation and the completion of its works, will be offered to the private sector. Bank performance is rated as unsatisfactory. The appraisal overlooked the downside risk of a slower demand growth, which proved to be of paramount importance. Later, opportunities to reassess the project were wasted in spite of the recommendations made by a good quality and timely Public Investment Review (PIR) in 1985. The Bank also accepted non-compliance with financial covenants. On the plus side, the Bank gave good advice, not always heeded by the Government and EBY, particularly on design and implementation of the project resettlement program. The Audit ratings are consistent with those in the PCR, but the findings are less favorable with respect to the project costs and benefits and to Bank performance. The Audit highlights three major lessons: (i) the Bank should be thorough in evaluating the borrower's demand forecast and investment planning decisions, and the financial and environmental risks of very large projects like Yacyreti; (ii) the Bank should be more agile in drawing the operational conclusions of reviews such as the PIR; and (iii) success in achieving sector financial objectives through institutional reforms is, at best, uncertain while unstable macroeconomic conditions last, but these conditions increase the need for such reforms. The Audit recommends that the Bank continue to monitor carefully the execution of Yacyreti, particularly its resettlement component, and prepare a thorough evaluation of its economic, social and environmental impact shortly after completing the project and closing the ongoing YacyretA II and SEGBA V loans. 1 FOR OFFICIAL USE ONLY Contents Preface.... ..................................................... 3 Basic Data Sheet................................................... 5 Evaluation Summary...............................................11 1. Background .................................................... 19 Introduction.................................................... 19 Country and Sector Context......................9....... .................19 2. The Projects and Their Objectives.. ........................................ 21 Objectives .......................................................... 21 Objectives of Subsequent Loans...........................................22 3. Implementation and Results ............................................ 23 Project Management...................................................23 Procurement........................................................23 Changes in Project Scope...............................................24 Physical Achievements.................................................24 Institutional Achievements..............................................25 PCR Conclusions..................................................... 26 4. Project Costs and Benefits.............................................. 27 Project Costs........................................................ 27 Project Benefits...................................................... 27 5. Issues in Project Economic Appraisal and Financial Management................ 31 Economic Appraisal and Reappraisals............................. ......... 31 Financial Management ........................................ ......... 33 6. Borrower and Bank Performance........................................37 Borrower Performance............... . ...................... ......... 37 Bank Performance .................................................... 38 This Report was prepared by Messrs. Covarrubias (Task Manager) and Guy J. Prdnoveau (Consultant) who audited the Projects in April 1995. Mrs. Lorna Sibblies, Mr. Charles Strout and Mrs. Patricia Bacarreza-Cosgrove provided administrative support. The report was issued by the Infrastructure and Energy Division (Yves Albouy, Chief) of the Operations Evaluation Department (Francisco Aguirre-Sacasa, Director). 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 wihout World Bank authorization. 2 7. Conclusions and Lessons Learned .......................... ................ 39 Conclus ions.................................................... 39 Lessons Learned .......................................... ....... 39 Recommendation .......................................... ....... 40 Annex A ........................................................41 Attachment 1: Progress Report on the Second Yacyreti Hydroelectric Project .............47 Attachment 2: Comments from the Borrower and the Beneficiary ................ 57 3 Preface This is a Performance Audit Report (PAR) of the Bank involvement with the Yacyreti Hydroelectric Project. It evaluates: (i) the Yacyreti Hydroelectric Project (Loan 1761-AR for US$210 million, approved in October 1979), and (ii) the Electric Power Sector Project (Loan 2998-AR for US$252 million, approved in October 1988), both fully disbursed. The cofinancier, the Inter-American Development Bank (IDB), has contributed US$840 million. The PAR was prepared by the Operations Evaluation Department (OED). It is based on the Staff Appraisal and President's Reports, sector and economic reports, special studies, Country Strategy Papers, the loan legal documents, the summary of the Board discussions, the project files, discussions with Bank staff, and the Project Completion Report (PCR) (Report No. 14056, March 14, 1995). An OED mission visited Argentina in April 1995 and discussed the effectiveness of the Bank's assistance with officials of the Government (Secretaria de Energia, SE) the Water and Power utility (Agua y Energia El6ctrica, AyEE), the regulatory agency (Ente Regulador, ENRE), the load dispatch entity (Compaffia de Administraci6n del Mercado El6ctrico Mayorista, Sociedad An6nima, CAMMESA) and the staff of Entidad Binacional Yacyreti (EBY). The PCR provided a detailed account of project experiences and a candid discussion of issues faced during project preparation and implementation. The PAR elaborates further on project cost, economic analysis and justification, project economic losses, financial management before and during implementation, and the privatization options sought by EBY. Copy of the draft PAR was sent to the SE, EBY, ENRE, and the IDB for comments. Comments received from SE, EBY, and ENRE have been taken into account and incorporated into the PAR as an Attachment. The IDB did not comment.  5 Basic Data Sheet Yacyretk Hydroelectric Project (Loan 1761-AR) Loan Position (Amounts in US$ million) As of September 30, 1995 Loan Original Disbursed Canceled Repaid Outstanding 1761-AR 210.0 210.0 0.0 210.0 0.0 Cumulative Estimated and Actual Disbursements IBRD Fiscal Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 Appraisal Estimates' 24.8 75.8 110.8 145.6 179.4 203.0 210.0 Actual Disbursements(USSM) 9.1 12.0 23.0 34.5 102.5 197.1 210.0 Actual as % of Estimate 0.0 0.0 8.2 8.2 12.8 17.0 48.8 93.8 100.0 Date of Final Disbursement: 8/4/88 a. In the SAR, the closing date was indicated as June 30 1986. However, in the Loan Agreement it was established as June 30, 1987 b. Delayed disbursements reflect most of the problems affecting the project (procurement, political, macroeconomics, financial, etc.). Project Dates Date Planned Date Revised Actual/Expected Identification 8/75 Preparation 12/77 - 4/78 Appraisal 7/78 Negotiations 3/5/79 5/79 Board Approval 4/24/79 10/16//79 Loan Signature 11/6/79 Loan Amendment 5/22/81a Loan Effectiveness 2/6/80 5/6/80b 11/18/82 11/6/80 2/6/81 5/6/81 Loan Amendment Effectiveness 11/18/86 Loan Closing 6/30/87 6/30/88 6/30/88 Expected Project Completion Date 1/85-12/89 2/93-9/96 c 9/94-6/98 d a. In order to change covenants by substituting tariff levels based on marginal cost b. Postponements of Effectiveness Date reflect poor financal performance of the sector. c. Installation of first and last units, revised by Loan 2998-AR. d. Completion dates were revised by Loan 3520-AR (Yacyreti Hydroelectric Project 11). 6 Staff Inputs (Staff-Weeks) Stage of Project Cycle and 75 77 78 79 80 81 82 83 84 85 86 87 88 89 92 93 FY Preparation 4.0 19.7 8.5 Appraisal 5.0 Negotiation 5.4 10.3 2.6 Supervision 12.5 3.6 15.3 30.7 1.0 21.9 30.1 20. 4.2 1.3 2 PCR 0.1 0.4 2.4 1.4 Sub-Total 4.0 19.7 18.9 10.3 15.1 3.6 15.3 30.7 1.0 21.9 30.1 20. 4.3 1.7 2.4 1.4 2 TOTAL: 200.6 Mission Data No. of Days in Specialization Stage of Project Cycle Date Persons Field Representeda Problemb I. Through Appraisal Reconnaissance 8/75 2 16 PE Preappraisal 4/77 1 26 PE Preappraisal 12/77 6 20 PE, C, LO, FA Preappraisal 12/77 1 1 E Preappraisal 4/78 1 8 E T Preappraisal 4/78 4 16 PE, FNA, PE, LO F, M Financial 7/78 1 11 PE F Appraisal 7/78-9/78 9 42 PE II. Appraisal through Board Approval Resettlement 12/78 3 13 RES Resettlement 2/79 2 6 UC Post Appraisal 4/79 1 1 PE T Post Appraisal 4/79 3 8 LO, C, PE F Post Appraisal 6/79 3 3 PE, E T III. Board Approval through Effectiveness Resettlement 10-11/79 2 14 S, C Resettlement 01-02/80 2 9 S, C 7 Mission Data (cont.) No. of Days in Specialization Stage of Project Cycle Date Persons Field Represented- Problemb IV. Supervision 4/80 1 8 C R 7/80 3 12 S, RES T, R 7/80 3 15 PE, FA F 2/81 1 7 PE F 7/81 1 7 PE, FAA F 11-12/81 1 20 LO F 8/82 1 12 LO F, M 02-03/83 2 10 LO F 2/83 1 5 PE F 5-6/83 4 14 PE, FNA, L F 8/83 1 1 RES 12/84 1 10 PE F 12/84 1 2 RES E 6/85 2 16 PE, FNA M,F 9/85 1 10 PE F 12/85 2 21 LO, FNA M 9/86 1 5 RES R 9/86 2 18 LO, FNA F 9/86 1 16 C M 2/87 1 5 C R 10/87 3 19 PE, FNA 11/87 1 5 PE a. PE - Power Engineer; FNA - Financial Analyst; LS - Legal Specialist; LO - Loan Officer; C - Consultant; S - Sociologist; RES - Resettlement and Environmental Specialist; E - Economist. b. F - Financial; M- Managerial; T - Technical; R - Resettlement; E - Environmental 8 Electric Power Sector Project (Loan 2998-AR) Loan Position (Amounts in US$ million) As of September 30, 1995 Loan Original Disbursed Canceled Repaid Outstanding 2998-AR 252.0 252.0 0.0 18.0 234.0 Cumulative Estimated and Actual Disbursements 1988 1989 1990 1991 Appraisal Estimate (US$M) 151.0 252.0 Actual (US$M) 99.7 184.2 249.2 252.0 Actual as % of Estimate 122.0 98.9 100 Date of Final Disbursement: 10/16/91 Project Dates Date Planned Date Revised Actual/Expected Identification Preparation 12/87 12/87 Appraisal 4/88 5/88 Negotiations 8/88 9/88 9/88 Board Approval 9/15/88 9/88 10/27/88 Loan Signature 11/18/88 11/18/88 Loan Amendment 3/23/90 Loan Effectiveness 11/88 12/6/88 12/6/88 Loan Closing 5/90 5/91 5/91 Expected Project Completion 2/93-9/96a 9/94-6/98b 9/94-6/98 a. Installation of first and last units. b. Completion dates for Yacyretd were revised by Loan 3520-AR (Yacyreti Hydroelectric Project II). Project completion is progressing on schedule. 9 Staff Inputs (Staff-Weeks) Stage of Project Cycle andFY 86 87 88 89 90 91 92 93 Preparation 2.6 9.5 49.8 Appraisal 13.8 32.8 Negotiation 6.4 Supervision 27.2 39.7 4.1 4.2 1.0 PCR .3 Sub-Total 2.6 9.5 63.6 66.4 39.7 4.1 4.2 1.3 TOTAL: 191.4 Mission Data No. of Days in Specialization Stage of Project Cycle Date Persons Field Represented, Problemb I. Through Appraisal Preparation 11/87 3 22 FNA, PE T Pre-appraisal 2/88 1 10 PE T Appraisal 5/88 3 18 FNA, PE T,F II. Appraisal through Board Approval Implementation 11/88 1 11 PE M IH. Supervision 12/88 2 15 FNA M, F Limited supervision 3/89 3 23 FNA, PE M,F 7/89 1 7 PE M 9/89 1 7 PE M 11/89 4 21 PE, FNA M C 8/90 1 5 PE M C 11/90 1 11 PE M C 2/91 2 22 PE, FNA F, R, E C 4/91 3 10 PE, FNA F C 6/91 2 4 FNA F C 7/91 2 29 PE, FNA F C 10/91 5 14 PE, FNA E, R C 12/91 3 11 E, R, PE, FNA E, R a. PE - Power Engineer; FNA - Financial Analyst; LS - Legal Specialist; LO - Loan Officer; C - Consultant; S - Sociologist; RES - Resettlement and Environmental Specialist; E - Economist. b. F - Financial; M- Managerial; T - Technical; R - Resettlement; E - Environmental c. Preparation mission for the Power Sector Project II and supervision for SEGBA V, but with an important element of supervision for this project. 10 Summary of Bank-Financed Power Projects in Argentina Loan Title Year of Amount (US$ Statsa Approval million) L 308-AR SEGBA I Power 1962 95.0 D L 525-AR SEGBA 11 Power 1968 55.0 D L 577-AR El Choc6n Hydro Plant 1968 82.0 D L 644-AR SEGBA III Power 1969 60.0 D Distribution L 1330-AR SEGBA IV Power 1976 115.0 D Distribution L 1761-AR YacyretA Hydroelectric 1979 210.00 D Power L 2751-AR Power Engineering 1986 14.0 D L 2854-AR SEGBA V Power 1987 276.0 U Distribution L 2998-AR Electric Power Sector 1988 252.0 D L 3520-AR Yacyreta Hydroelectric 1992 300.0 U2 Power II Total 1,459.0 a. D -Disbursed; Ul=US$69.77 million and U2=US$14.21 million were undisbursed as of 09/30/95 b. US$137.6 millions were allocated to YacyretA. 11 Evaluation Summary Introduction 1. Argentina and Paraguay signed the treaty of Yacyreti in December 1973 for the purpose of improving navigation and developing the hydroelectric potential of the Parank River at the rapids of Apipe. The treaty foresaw the creation and co-ownership of Entidad Binacional Yacyreti (EBY), including its statute, a description of the works to be carried out as well as understandings on setting future tariffs. In the period 1974-1978,1 an international consortium completed the final design for a hydroelectric power plant with a capacity of 2,700 MW with an estimated average annual generation of 17,500 GWh. 2. The two lending operations under audit (Loan 1761-AR for US$210 million approved in FY80 and Loan 2998-AR for US$252 million approved in FY89) were to help finance the hydroelectric plant; they were fully disbursed by June 1991. But because of a major procurement dispute that delayed project implementation by about three years and later extremely difficult economic conditions in Argentina, the Yacyreti hydroelectric plant (henceforth referred to as YacyretA) is not expected to be completed until 1998. 3. Completion of YacyretA requires substantial additional financing, part of which the Bank agreed to provide. The Bank thus approved additional financing for YacyretA in 1992 (Loan 3520-AR for US$300 million), and further agreed in 1994 that uncommitted funds in the SEGBA V Distribution Project (Loan 2854-AR for US$276 million approved in June 1987) be used for YacyretA. So far the Bank has committed a total of US$894.8 million to YacyretA. The Inter- American Development Bank (IDB) also supported the construction of Yacyreth and, up to 1994, 2 had committed a total of some US$839.6 million. The Audit does not cover the latter two lending operations, but refers to them when deemed necessary. Bank Assistance Strategy and the Electric Power Sector 4. At the time of appraisal of the first two projects in 1978 and 1988, Argentina had been engaged in an economic stabilization program, which was extended under various names through the 1980s and early 1990s. The Bank supported the Government efforts to improve resource allocation, reduce the fiscal deficit and stabilize the economy. 5. In the electric power sector, the Bank aimed at helping Government to reduce sector fragmentation, and improve the operating and financial performance of the five major State- owned power utilities (hence National Utilities) in order to reduce their burden on the Government budget. The Bank was also associated with the Government planning process for power system expansion. 1. Yacyreti Hydroelectric Project, SAR of September 21, 1979, (paras. 4.01 through 4.03). 2. PCR of November 8, 1994, Evaluation Summary (para. 3). 12 The Projects and their Objectives 6. The purpose of the Yacyreld Hydroelectric Project was to provide base-load hydroelectric energy for Argentina. The project comprised the construction of a 2,700 MW hydroelectric power scheme (dam, power house, spillways and associated structures), the relocation of infrastructure works such as railways, ports, highways, sanitation works, etc., and the resettlement of about 33,000 persons. The project also included studies for the future high- voltage transmission line and for the possibility of using micro and/or small hydroelectric power stations to provide energy to isolated regions. 7. The primary purpose of the Electric Power Sector Project was to provide supplemental financing for the Yacyreti hydroelectric project. The project also included technical assistance for the institutional strengthening of the Argentinian Secretariat of Energy including consultancy and office and telecommunication equipment. 8. The extent to which EBY could borrow from the so-called Electric Funds was crucial for the financing of Yacyreti. The various Electric Funds receive various percentages of the proceeds from a 5 percent surcharge on sales of electricity and a 5-10 percent tax on natural gas and petroleum products production. Since the National Utilities had first claim on the Electric Funds, the better the financial performance of these utilities, the less they would draw from the Electric Funds, and more would be available for YacyretA. The past performances of those utilities raised enough concern that covenants calling for tariff adjustments to yield certain returns on fixed operating assets were introduced in the loans for YacyretA. Implementation 9. While the Yacyreti loan had been signed in November 1979 and bids had been received in 1980, a dispute on the procurement of the major civil works began in late 1980 over the intention of Argentina to award the contract to the bidder of the second lowest evaluated bid. The IDB supported Argentina's decision while, because of its guidelines, the Bank did not. Meanwhile, the date for the effectiveness of the Bank loan kept being postponed. In 1983, the two lowest bidders formed a joint venture which accepted the contract value of the lowest evaluated bid. Argentina's decision to award the contract for this joint venture was accepted by the Bank, and a contract for the civil works was signed in October 1983 (para. 3.4). 10. Two substantive changes to the project scope were made: the first one to decrease and the second one to postpone investments. In 1986, it was decided to limit to 20 the number of power generating units-the space originally reserved for adding 10 more units intended for peaking capacity was eliminated. Since YacyretA is essentially a run-of-river plant, its electricity generating capacity was not affected by this change, but it cut US$175 million from the project cost (para. 3.5). Furthermore, in the early 1990s, lack of financing led to the phasing of population resettlement, infrastructure and land acquisition over a longer period. This postponed US$547 million of the resettlement and environmental program (para. 3.6). The reservoir will thus be operated at a significantly lower level as long as those works are not completed, which will result in a substantially lower output from YacyretA. 11. The Audit forecasted a project cost of US$8,220 million, 59 percent more than the appraisal estimate (para. 4.1). Engineering costs are four fold and administration costs seven fold the appraisal estimates. Alone, they represents about 27 percent of the project cost 13 (para. 4.2). In constant dollars, the cost overrun reflecting physical contingencies only is projected at 20.8 percent (para. 4.3). 12. The cost and benefits assessment made by the audit in 1995 may still be optimistic. Recent developments indicate that major problems continue to plague the project at this late stage. They may still adversely affect the cost and date at which the project will generate its full benefits. Families have recently moved into the project area and EBY is facing financial difficulties to complete the works. In May 1996, the Government of Argentina decided to discontinue the transfer of funds to EBY. Instead, it authorized EBY to borrow about US$90 million from commercial banks to meet its financial needs (mainly for resettlement works at level 76 in.) until private participation in Yacyreti is achieved, hopefully by the end of 1996 (Attachment 1). Projects Results 13. Physical Components. The civil works contractors have done a good job under difficult conditions, and construction so far is of good quality. A panel of experts visited the site and reported regularly on their findings. No extraordinary situation was brought to light as a result of their work (para. 3.2). Two of the 20 generating units entered into commercial operation in 1994, two more were operating in April 1995 and four more were commissioned by the end of 1995. The reservoir is currently operated at the 76 m. level and, as a result, each generating unit is producing at only about two-thirds of its design capacity (para. 3.8). 14. The resettlement of the population has been delayed along with overall project implementation because of lack of local funding created by a difficult macroeconomic situation. As often happens in long gestation projects, the estimated number of people to be relocated in 1995 has increased to 50,000 from 33,000 at the time of appraisal in 1978 (para. 3.7). 15. Institutional Aspects. The assistance of the Bank through the electric power sector consisted, inter alia, in helping to strengthen existing sector entities. It addressed investment planning and the problem of poor sector coordination mainly by attempting to expand the planning authority of the Secretariat of Energy to the entire sector, to develop its capability and establish it as the ultimate tariff setting authority. Likewise, it supported measures to improve the operating and financial performance of the power companies and tried to enhance their chances of success through covenanted understandings with the Government (para. 3.10). 16. The studies to design the national transmission system and review the use of small hydroelectric power plants were carried out. A 500 kV alternating current system was selected; also, for the supply of electric service, an expanded national power grid comprising large plants was judged to be a better alternative than scattered small hydroelectric plants (para. 3.9). 17. A study financed under a prior Bank Loan to strengthen the Secretariat of Energy was not implemented. Likewise, the diagnostic of the sector coordination problems introduced under the first loan and expanded under the second loan was completed but its recommendations were not implemented (para. 3.11). 18. In spite of the sustained efforts of the Bank to help Argentina improve the performance of the sector, little occurred. Just before privatization started in the early 1990's, after a new 14 Government came to power in 1989 (the Menem Government), the sector was still fragmented and its financial and operating performance was still unacceptable (para. 3.12). Economic Analysis 19. About the time of appraisal of the first project, the Government had been concerned with the magnitude of the oil and gas import bill, and while hoping to increase domestic production, had adopted a policy to increase the proportion of hydroelectric and nuclear capacity in the short- and medium-term and to focus on nuclear power once new hydro sites would be exhausted. In the opinion of the Audit, this policy largely influenced the selection of Yacyreti. 20. The SAR's statement that Yacyreti was the least-cost alternative may have been a reasonable conclusion at the time; but it should have clarified several assumptions, e.g., the rehabilitation of existing plants was not enough to cope with projected demand growth, and understandably in 1978 the alternative of conventional gas turbines was considered more reliable than the combined-cycle gas technology. However, three years later, before the major civil works of the project had started, the original demand growth had been shown to be very optimistic, and the existence of large gas reserves had been confirmed. The combined-cycle gas alternative looked better technically and economically in the face of uncertain demand since it could be implemented in small increments closely matched to demand. Yet the Bank continued to support Yacyreti (para. 5.3). 21. By 1982, the actual demand for electricity was already lagging 25 percent behind the original forecast, and there was no sign of a swift demand recovery. There was no longer the same urgency to build YacyretA. Thus, Argentina and the Bank had the opportunity to look at alternatives to Yacyreti even before the start of the major civil works. A cable dated December 1982 was received from Argentina stating that a comparison between Yacyreti and conventional gas turbine plants showed that YacyretA was still the least-cost solution. The Bank acknowledged receipt of Argentina's message, and the multi-billion dollar project was given the green light. Afterwards, implementation was regularly held up by the difficulty EBY had in securing financing (para. 5.6). 22. By 1985, the combined-cycle technology had been used in several developing countries, though the performance of this technology was not as good then as it is now. At that time, a Public Investment Review made a good diagnosis of the flaws in demand forecast and planning practices. It recommended that any new commitment should be postponed pending reassessment of the demand targets and of the role that natural gas could play in the power expansion strategy. But the additional analyses that it recommended to explore were carried out too late and not thoroughly enough. Time passed, and the project went ahead albeit on a more stretched out schedule than originally planned (paras. 5.7-8). 23. Later economic analyses of the project took place with each additional financing provided by the Bank in 1988 and 1992. Each time, the decreasing investment cost needed to complete YacyretA made it a part of the least-cost development program. As late as 1987, this reasoning was not entirely convincing because the analysis excluded some possible alternatives (para. 5.9). 24. The Audit re-calculated a project economic rate of return of 5.8 percent, which is close to the 5.5 percent calculated in the PCR but well below the 14 percent estimated at appraisal. If 15 postponement or partial implementation of resettlement forces the reservoir to be operated at levels below its design value, the economic rate of return can be as low as 4.8 percent (para. 4.4). 25. The Audit roughly estimated the economic loss of the project based on the difference between the incremental cost of power from Yacyreti (9.7 cents/kWh) and the long-run cost of generation (4.0 cents/kWh in 1994 growing later): Yacyretd amounts to a loss ofclose to US$8 billion in present value (almost US$1.0 billion/year around the year 2000). The loss would be even greater (US$11 billion) if Yacyreti were not completed to meet its design parameters, or if a more realistic opportunity cost of twelve percent is assumed for public sector expenditures rather than the standard ten percent (para. 4.5). Financial Management 26. EBY had been created with negligible equity in relation to overall estimated project costs and total financing requirements, 99 percent of which were to be provided by borrowing. Among other things, it was expected to obtain some US$2.6 billion from the Electrical Funds, whose available resources would depend on superb performance of the long deficient National Utilities since their financing needs had prior claim on these Funds. It was also expected to borrow some US$1.8 billion from foreign and local banks in a period of persistently high inflation and predictable disintermediation of the local banks, and of rapidly decreasing foreign reserves and equally predictable balance of payments difficulties. In this case, because of the failure of the economic situation to improve, the commitment of would-be financiers faded, and much of the financing expected from private sources was replaced by additional financing from the Bank and IDB (paras. 5.13-15). 27. In sum, the conditions prevailing in the period preceding the YacyretA Loan offered little prospect for optimism. Given the economic performance of the 1970s, the sector's past poor financial performance, and the fact that it becomes virtually impossible to withdraw support for a unitary scheme such as Yacyreti once it has reached a certain stage, the financing scheme was unrealistic (paras. 5.17 and 5.20). However, contrary to the Borrower's view (Attachment 2), it appears that under the conditions established in the Treaty - in particular, the sale of Yacyret's output at the adjustable price of 3.0 USO/kWh - EBY would be able to meet its long- term financial commitments once YacyretA is completed as envisaged. Borrower Performance 28. For most of the implementation of the Yacyreti project, financial covenants were not met, even though on a number of occasions they were modified and their terms were postponed. Another persistent problem was the lack of timely sector financial data. In addition, a diagnostic study of the electric power sector and the State-owned utilities, although completed, was not implemented (para. 6.2). 29. EBY's performance was mixed during project implementation. It was proactive during project preparation and in securing financing from the Bank and the IDB, but ineffective in project management during the early 1980s. Managers appointed for political reasons, lack of competent staff, chronic lack of financing and the Falklands war were factors which contributed to project delay and very high engineering and administrative costs. However, since the late 16 1980s, project management improved and had acceptable engineering consultant support. Performance of the Argentinean Government was also uneven: it was not able to implement the measures intended to improve the sector, but carried out the studies which helped to initiate the sector reforms leading, afterwards, to the privatization of the Government-owned utilities (para. 6.5). 30. All things considered, the Audit rates the performance of EBY and the Argentinean Government as unsatisfactory with regard to the loans 1761-AR and 2998-AR. Bank Performance 31. The Bank's performance varied considerably during the implementation of the two projects under audit. The economic analysis at appraisal was of acceptable quality. But, given the size of the project and the changing economic and technological conditions making loan cancellation and a gas-based alternative more attractive, it should have been redone thoroughly in the early 80's, before procurement started and as late as 1988. That was not always the case, and besides the Bank did not act decisively when confronted with the facts. The Public Investment Review (PIR) carried out in 1985 had a good quality analysis, but the follow-up study of its possible cancellation was not carried out until it was too late: sunk costs provided a justification to grant two more loans (the Power Sector loan and the YacyretA II loan). In addition, the Bank accepted repeated violations of major covenants and continued to associate with totally unsatisfactory sector financial and operating performance (para. 6.7). 32. The above dwarfs the Bank's good performance in other respects. It provided substantive support and, in many instances, unheeded advice to Government and EBY. When it became clear that population resettlement could develop into real problem areas, the Bank fielded frequent specialized missions. As serious concerns still remained, in 1990 the Bank retained consultants whose report formed the basis for the Resettlement and Environment Plan included in a subsequent YacyretA II loan. The support and assistance of the Bank in this area appears to have been considerable although not always heeded by EBY and the Government. (para. 6.8). 33. All things considered, the Audit rates Bank performance as unsatisfactory. Conclusions 34. The Yacyreti hydroelectric scheme partly financed by Loan 1761-AR and 2998-AR is planned to be completed only in 1998, some nine years later than originally envisaged. Most of the slippage in project implementation may be attributed to the difficult economic conditions which prevailed in Argentina throughout the 1980s and the early 1990s. The plant's output cost per kWh at completion will be more than three times the competitive price for EBY's output even though, in constant dollars, cost overruns at 20 percent are not excessive for a project of that complexity. The ensuing economic and financial losses are huge. Based on the foregoing, the Audit concludes that YacyretA was not a least-cost solution to expanded power supply and its relevance to the country's priorities was negligible (para. 7.1). 35. In several occasions the Bank had a good case for stopping the project before the major civil works were too advanced. The Public Investment Review carried out in May 1985, which 17 was of good quality and the complementary analyses that should have followed immediately, provide perhaps the best cases of missed opportunities (para. 7.3). 36. Project Ratings. The Audit concurs with the PCR in rating the project outcomes as unsatisfactory, and their institutional development as moderate (para. 7.4). 37. Sustainability. The Audit rates the YacyretA project sustainability as likely on the belief that YacyretA will be completed to meet its design parameters (including resettlement) and adequate arrangements will be put into place for its operation and EBY's financial integrity. A Protocol, now under consideration by the Congresses of Argentina and Paraguay, is expected to establish how the operation and maintenance of the scheme, its lifetime energy generation and completion of its works, will be offered to private agents. This rating is consistent with that in the PCR (para. 7.4). Lessons Learned 38. The PAR agrees with the PCR that an entity's capacity to carry out a large resettlement program must be built from the outset. It also agrees that economic analysis of a project must take into account the prevailing economic and financial conditions of the country, something that did not always occur here. However, the Audit does not subscribe to the view that the Bank had to support YacyretA in any event as if cancellation of civil works once started was inconceivable. 39. The PAR offers the following lessons: * The Bank should be very thorough in its evaluation of the borrower's demand forecasting and investment planning decisions and the downside risks of large unitary infrastructure projects like YacyretA; * Public Investment Reviews should and can be used effectively for portfolio management purposes. For this to happen, they must not only be of good quality but also be rapidly followed by the most urgent actions which emerge from them; * The financing of a project the magnitude of YacyretA should not rely for a large part on assumed future improvements in the financial results of notoriously poor performing sector entities; * Covenanted actions are a precarious way to ensure the viability of a financing plan in light of the Bank's willingness to "accommodate" non-compliance and the added difficulty of stopping a large unitary project once it has reached a certain stage of implementation. Also, amending financial covenants when the causes of their non- compliance are still prevailing, is often useless; and * Success in achieving sector financial objectives through institutional reforms is, at best, uncertain while unstable macroeconomic conditions last, but these conditions increase the need for such reforms. 18 Recommendation 40. The Bank should continue to monitor carefully the execution of the YacyretA project, particularly its resettlement component, and prepare a thorough evaluation of the economic, social and environmental impact shortly after project completion. 19 1. Background Introduction 1.1 Argentina and Paraguay signed the treaty of YacyretA in December 1973 for the purpose of developing the hydroelectric potential and improving navigation of the Parani River at the rapids of Apipe. The treaty foresaw the creation and co-ownership of Entidad Binacional Yacyreta (EBY), including its statute, a description of the works to be carried out as well as understandings on setting future tariffs. In the period 1974-1978,3 an international consortium completed the final design for a hydroelectric power plant with a capacity of 2,700 MW with an estimated average annual generation of 17,500 GWh. 1.2 The two lending operations under audit (Loan 1761-AR for US$210 million approved in FY80 and Loan 2998-AR for US$252 million approved in FY89) were fully disbursed by August 1988 and October 1991 respectively. But the YacyretA hydroelectric plant they helped to finance is not expected to be completed until 1998. The Bank approved additional financing for Yacyreti in 1992 (Loan 3520-AR for US$300 million), and further agreed in 1994 that uncommitted funds in the SEGBA V Distribution Project (Loan 2854-AR for US$276 million approved in June 1987) be used for Yacyreti. So far, the Bank has committed a total of US$894.8 million to YacyretA. IDB also supported the construction of YacyretA and, up to 1994, had committed a total of some US$839.6 million.4 The Audit does not cover the latter two lending operations, but refers to them when deemed necessary. Country and Sector Context 1.3 In 1979, at the time the Bank appraised the Yacyreti Hydroelectric Project, Argentina had been engaged in an economic stabilization program and appeared to be coming out of a recession, but had made little progress on price stabilization. The annual rate of inflation was over 150 percent. The Bank's overall assistance strategy was to finance projects to help reform Argentina's economic structure and make it more competitive, strengthen key public institutions, 6 support rational sector policies, and address some social problems. Projects in support of Government efforts would be mainly in the transport, energy and social sectors.7 1.4 In 1988 when the Bank appraised the Electric Power Sector Project, the economy was still in trouble. The project was "part of the Bank's global effort to help the Government achieve a better allocation of its scarce funds. Improving sector resource allocation would ... help the 3. Yacyreti Hydroelectric Project, SAR of September 21, 1979, (paras. 4.01 through 4.03). 4. PCR of November 8, 1994, Evaluation Summary (para. 3). 5. YacyretA Hydroelectric Project, Memorandum of the President of September 25, 1979 (paras. II and 13). 6. Yacyreti Hydroelectric Project, Memorandum of the President of September 25, 1979 (para. 23). 7. YacyretA Hydroelectric Project, Memorandum of the President of September 25, 1979 (para 25). 20 Government to rationalize power investments ... and speed (up) the recuperation of the power utilities". 1.5 In 1978, the Government owned virtually all major generation and transmission facilities. But the sector was fragmented and lacked central coordination. The Secretariat of Energy controlled the Greater Buenos Aires Electric Company (SEGBA); the North Patagonia Power company (Hidronor); and The Water and Energy Company (AyEE); the Ministry of Foreign Affairs controlled the Binational Salto Grande Entity (CTMSG) and the Binational Yacyreta Entity (EBY); and the Presidency controlled the Nuclear Energy Commission 9 (CNEA). This fragmentation had resulted in a number of uncoordinated and sub-optimal investment decisions.10 1.6 By 1988, sector governance had not improved. "... the sector is diffused and its performance is uneven. Power companies' finances are poor. The sector is also (still) burdened by the costs of an investment program predicated on the past high demand expectations and ready access to financing. There is an expensive nuclear (and hydroelectric) power program, while the criteria used for sector planning have led to questionable facilities and inadequate transmission and distribution. Poor legislation and complex institutional arrangements compound the sector financial strains and the difficulties of the central government".1 The major stumbling blocks were seen to be the Government's limited capacity to plan and govern adequately sector operations, the unstable macroeconomic environment, and irregular commitments to undertake comprehensive improvements. The proposed loan was the outcome of a new dialogue which had "... produced agreement on a broader gauged (sector) approach than had existed previously."'2 1.7 Thus, until the privatization of the sector materialized in late 1992, fostered by the Menem Government elected in 1989, power sector governance and with it sector performance was largely unsatisfactory and unchanged from the late 1970s. 8. Electric Power Sector Project, Memorandum of the President of October 5, 1988. 9. YacyretA Hydroelectric Project, Memorandum of the President of September 25,1979 (para. 33). 10. Yacyreth Hydroelectric Project, Memorandum of the President of September 25, 1979 (para. 34). I1. Electric Power Sector Project, Memorandum of the President, October 5, 1988 (para. 5). 12. Electric Power Sector Project, Memorandum of the President of October 5, 1988 (para. 7). 21 2. The Projects and Their Objectives Objectives 2.1 Yacyretd Hydroelectric Pr o ect (October 1979). The main objective of the project was to provide base-load hydroelectric energy for Argentina's power sector. Other objectives were to improve navigation on the ParanA River by eliminating the rapids of Apipe and to provide possible irrigation for both Argentina and Paraguay in the provinces of Misiones and Corrientes and the Department of Itaipu, respectively, and to augment the fishery industry of the region. The project consisted of the construction of a hydroelectric power scheme (a dam and power house with 20 generating units of 135 MW each and space for adding 10 more units) and associated structures, the relocation of infrastructure works such as railways, ports, highways, sanitation works etc., a navigation lock, and the resettlement of about 33,000 persons. The project also included studies for the future high-voltage transmission line and for the possibilit of using micro and/or small hydroelectric power stations to provide energy to isolated regions. 2.2 The implementation of YacretA depended on EBY's ability to borrow some US$2.6 billion from the "Electrical Funds" in the period up to 1990. Since the needs of the five State-owned utilities'7 had first claim on the Funds' resources, the better the financial performance of these utilities, the less they would draw from the Electric Funds and the more that would be available for YacyretA. The past performance of the utilities raised enough concerns that covenants calling for tariff adjustments to yield certain returns on rate base were introduced in the first loan for YacyretA. 2.3 Amendment to Loan and Project Agreements (October 1986). As the sector financial performance had not improved since before appraisal, this agreement was necessary for the Bank to overcome the non-compliance overhang which had plagued Bank-Argentina relations, held up disbursements, and would preclude approval of the next loan already under preparation. This was accomplished by obtaining fresh undertakings from the Government and by the Bank agreeing to substantial postponement of the dates for reaching the target 8 percent return on revalued rate base.'8 Additionally, in answer to Argentina's request, the Bank agreed to recast loan repayments so as to give greater weight to later maturities, thus reducing the amount EBY would have to borrow to service its debt. 2.4 Electric Power Sector Project (October 1988). The objectives of this project were to: (a) confine the expansion program to least-cost solutions; (b) rehabilitate the finances of the State- owned utilities; (c) apply tariffs based on economic costs; (d) improve efficiency; (e) strengthen the institutional structure of the sector; and (f) establish greater environmental safeguards. The 13. Yacyreti Hydroelectric Project, SAR of September 21, 1979 (para. 4.04). 14. Yacyreti Hydroelectric Project, SAR of September 21, 1979 (para. 4.06). 15. The Electrical Funds provided grants and loans for the development of State-owned power Companies, the "National Utilities". The Funds obtained their resources from an array of taxes on hydrocarbons and surcharges on the sale of electricity. 16. Yacyreti Hydroelectric Project, SAR of September 21, 1979 (Annex D, Attach. 6-3) 17. These National Utilities are SEGBA, AyEE, Hidronor, CNEA, and C MSG. 18. Yacyreti Hydroelectric Project, Amending Agreement of October 31, 1986 (Section 5.05). 22 related loan was to help finance the 1988-89 time-slice of the sector investment program, specifically the Yacyrett hydroelectric project. The project also included technical assistance for the institutional strengthening of the Argentinean Secretariat of Energy, including consultancy and office and telecommunication equipment. 2.5 In summary, the two projects under the audit comprised the construction of the hydroelectric structures, relocation of local infrastructure, population resettlement, and studies. In addition, the legal agreements included a number of conditions, especially with regards to the financial performance of the five National Utilities. A high voltage transmission system was to be constructed and financed separately by AyEE. Objectives of Subsequent Loans 2.6 Yacyretd Hydroelectric Project II (August 1992). The purpose of this project was to provide supplemental financing for Yacyreti. The project also included the installation of a 500 kV transmission system, which heretofore had been considered the responsibility of AyEE, and a study to assess the possibility of opening up EBY's capital to private participation. 2.7 Loan Assumption Agreement (August 1994). Following the privatization of SEGBA in 1992, Argentina assumed all the rights and obligations of SEGBA under Loan 2854-AR for US$276 millions (approved in June 1987) intended to help improve SEGBA's system efficiency. Uncommitted proceeds of US$137.6 million from this loan will help finance Yacyreti. At the same time, the Bank agreed to recast the loan repayments starting in September 1994, placing lower weight on early maturities, thus reducing the amount EBY would have to borrow to service its debt. 23 3. Implementation and Results 3.1 Implementation was repeatedly and seriously affected by weak project management and procurement disputes early on, country conditions, non-compliance with covenants, and not least by the difficulty of obtaining financing. This is discussed in the PCR, as well as in the comments provided by the Borrower. The following highlights the major achievements and issues as perceived by the Audit.19 Project Management 3.2 In the early implementation period, the competence level of EBY's management was inadequate. Its performance suffered most in the relocation of affected people and industries. Eventually, with the appointment of a new management team, performance improved. Yet the management structure seems unduly heavy because the Treaty prescribes that positions occupied by nationals of one country would have a counterpart from the other country. 3.3 The civil works contractors have done a good job under difficult conditions and so far construction is of good quality. In view of the size of the dam, a panel of experts was hired in 1983, some three years after bid invitation but before the start of the major civil works, to visit sites and report regularly on their findings. No extraordinary situation was brought to light in the course of their work. However, the Borrower indicates that, as of May 1996, there were still about US$700 million worth of compensation claims made by contractors that remained unsettled (Attachment 2). Procurement 3.4 According to the PCR, after the YacyretA loan had been signed in November 1979 and bids had been received, a dispute on the procurement of the major civil works began in late 1980 over the intention of Argentina to award the contract to the bidder of the second lowest evaluated bid. The IDB supported Argentina's decision while, because of its guidelines, the Bank did not. Meanwhile, the date for the effectiveness of the Bank loan kept being postponed. In 1983, the two lowest bidders formed a joint venture which accepted the contract value of the lowest evaluated bid. Argentina's decision to award the contract for this joint venture was accepted by the Bank, and a contract for the civil works was signed in October 1983.20 The rest of the procurement has not presented any major problem until today, although it was chronically delayed due to the difficulty to arrange financing.21 The Audit accepts the PCR findings on procurement but notes that the files on this topic contain the relevant legal information but lack details about the decision-making process. 19. PCR of November 8, 1994, Part II, Project Reviewed from the Borrowers Perspective (page 39). 20. PCR of November 8, 1994 (paras. 4.9 and 4.10). 21. PCR of November 8, 1994 (para. 4.5). 24 Changes in Project Scope 3.5 In 1986, it was decided to limit to 20 the number of power generating units -the space originally reserved for adding 10 more units intended for peaking capacity was eliminated. Since YacyretA is essentially a run-of-river plant, its electricity generating capacity was not affected by this change. Thus, by modifying the design of part of the dam, the power house, the spillways, the navigation lock, the fish ladder, and other civil works -about US$ 175 million- were cut from the project cost. 3.6 Second, in the early 1990s, when it was decided to temporarily operate the reservoir at an elevation of 76 m. instead of 83 in., " ... to allow postponement of substantial investments for resettlement, infrastructure, environmental mitigation, and land acquisition, and therefore facilitate the building of a feasible financial plan for commissioning the Yacyreti plant at an early date".22 This postponed, beyond 1995, an investment of about US$547 million for the resettlement and environmental program. Physical Achievements 3.7 The resettlement of the population and industry located in the project area between an elevation of 76 m. and 83 m. has been delayed along with overall project implementation. As often happens in long gestation projects, and even more so with substantial time overruns, the total estimated number of people to be relocated in 1995 had increased to 50,000 from 33,000 at 23 the time of the original appraisal in 1978. Due mostly to financial constraints created by a difficult macroeconomic situation, a two-stage construction approach was introduced in 1992 to phase over a longer period most of the relocation and resettlement, including industry located in Paraguayan territory.24 As of April 1995, plans called for population and industry relocation up to level 78 in. by 1997 and level 83 in. by 1998, although the timing for the latter will depend, in turn, on the timing and nature of private sector participation under consideration by the two Governments. While postponing the relocation of most of the affected population does not increase their current exposure to floods, it does prolong that exposure since water levels higher 25 than 76 in. have been known to occur during severe flooding conditions. A progress report prepared by the Region in April 1996 informed the Board that little progress has been achieved by EBY in implementing the resettlement program (Attachment 1). 3.8 Two of the 20 generating units of YacyretA entered into commercial operation in 1994, and two more were operating in April 1995. Four more units went into service by the end of 1995. Completion currently planned by 1998, some nine years later than foreseen at the time of appraisal, is uncertain because it depends on timely availability of financing. In this regard, it will take some time before the ongoing negotiations between Paraguay and Argentina reach an agreement on some participation of the private sector. Moreover, its full potential will only be reached if the implementation of the Resettlement and Environmental Program permits the 26 raising of the reservoir level in stages from 76 m. and 78 in. to its ultimate level of 83 m. Since 22. YacyretA Hydroelectric Project II, Memorandum of the President of August 31,1992 (para. 6). 23. YacyretA Hydroelectric Project I, SAR of August 31, 1992 (Annex 2.2, para. 12). 24. Yacyretf Hydroelectric Project II, SAR of August 31, 1992 (Annex 2.2, para. 6). 25. Yacyreti Hydroelectric Project II, SAR of August 31, 1992 (para. 2.37). 26. YacyretA Hydroelectric Project II, SAR of August 31, 1992 (paras. 2.10 and 2.11) 25 the design water head of YacyretA is 21 meters and operating it at level 76 m. gives a head of only 14 meters, the electricity to be produced by 20 generating units amounts to 11,880 GWh or about two third of its design output (18,763 GWh). The electricity production would increase by 14 percent at level 78 m. and by 50 percent if its design level could be attained. Institutional Achievements 3.9 The studies to design the national transmission system and review the use of small hydroelectric power plants were carried out. A 500 kV alternating current system was selected. Also, for the supply of electric service, an expanded national power grid comprising large plants was judged to be a better alternative than scattered small hydroelectric plants. 3.10 In line with its then existing policy27 for lending to electric power sector, the assistance of the Bank in the electric power sector consisted, inter alia, in helping to strengthen existing entities; it addressed the problem of sector fragmentation mainly by attempting to expand the planning authority of the Secretariat of Energy to the entire sector to develop its capability and establish it as the ultimate tariff setting authority. Likewise, it supported measures to improve the operating and financial performance of the operating companies and tried to enhance their chances of success through covenanted understandings with the Government. However, until the country began to implement radical macroeconomic reforms and decided to rapidly privatize the sector in the early 1990s, the Bank never advocated measures to expose the sector to the disciplines of the market except, of course, for project contract awards.28 3.11 Based on studies financed by a prior Bank loan,29 the Secretariat of Energy had submitted for Government approval a plan to empower the Secretariat with centralized sector planning, sector finances and the setting of tariffs.30 Whatever the reasons, the status of the Secretariat continued unchanged. In 1986, a diagnostic study of the organization and operational efficiency of the electric power sector and the National Utilities was added to the original loan 31 for YacyretA. It appears that nothing happened as evidenced by the reintroduction of the study in the next Bank loan in 1988.32 Again, while the study was eventually completed, it was not implemented. The PCR, however, reports that the information provided by the study was used in the early 1990s in connection with the privatization of the sector.33 3.12 In spite of the sustained efforts of the Bank to help Argentina improve the performance of the sector, little occurred. Just before privatization started, the sector was still fragmented and its financial and operating performance was still unacceptable. 27. Bank Operations Manual Statement (OMS) 3.72, issued in 1978. 28. In January 1993, the Bank introduced its new policy for lending to the electric power sector. This policy emphasizes market exposure and participation of the private sector. 29. Loan 1330-AR to SEGBA. 30. Yacyreth Hydroelectric Project, Memorandum of the President of September 25, 1979 (para. 34). 31. Yacyreti Hydroelectric Project, Amending Agreement of October 31, 1986 (Section 4.09). 32. Electric Power Sector Project, Loan Agreement of November 18, 1988 (Section 3.04). 33. PCR of November 8, 1994 (Table 12). 26 PCR Conclusions 3.13 The Audit concurs with the PCR conclusions that neither Loan 1761-AR (Yacyreti Project) nor Loan 2998-AR (Power Sector Project) were the most appropriate instruments to improve power sector policy and carry out institutional reforms by supporting the multi-year lumpy civil works of YacyretA. On the one hand, the YacyretA loan had too ambitious objectives given the difficult country conditions after the late 1970s. On the other hand, the power sector loan conditionality was likely to fail because non-compliance would have led to undesirable interruption of disbursements for the project. The alternative of using a pure sector approach to improve the sector would have equally failed because the Government had neither the political will nor the strength to carry out changes.34 3.14 The PCR, nonetheless, considers that Bank support to YacyretA was justified in the light of the foreseeable benefits of the added electric power to Argentina and Paraguay, and the opportunities opened to the Bank for participating in Argentina's sweeping public sector changes, including the power sector. The Audit disagrees with this view. The project costs greatly exceed its benefits; hence, it was not only an ineffective vehicle for policy dialogue but also an expensive one for the country. The Audit further argues that the project could have been stopped before it was too late. It, therefore, focuses on project costs and benefits, its successive economic reassessments, the institutional achievements of the projects, the financial management before and during Yacyreti's implementation, and the prospect for privatization under the options sought by EBY. 34. The Memorandum of the President writes the following about the situation that prevailed in 1992 when YacyretA Hydroelectric Project II was approved (Loan 3520-AR): "For some time (over 15 years) the authorities have tried to rationalize sector finances in order to improve the situation. However, these and other potentially corrective measures have been repeatedly frustrated, mainly by Argentina's prolonged macroeconomic instability and recurrent political uncertainties. Other contributing factors have been the blurred sector responsibilities and inadequate Government command over the utilities. "Argentina's power sector (had) long burdened the economy, ... contributing to the persistent structural fiscal deficit that substantially caused the country's prolonged economic instability. The utilities commanded sizable public financial resources. Their investments (claimed) a major share of external debt, (generated) inadequate sector savings, (and had) high operating costs and generally low efficiency. These problems had been exacerbated by an inappropriate investment strategy." The Bank felt that its continued association with the Yacyreti scheme "would be crucial for overcoming the past stop-go pattern of project execution ... An appropriate financing plan and the acquisition of new commercial credits for the remaining electrical equipment would be unlikely without the Bank's involvement and supervision In addition, the large debt overhang, EBY's lack of earnings capacity until 1994 and the absence of alternative medium-term financing made financial support from the Bank and IDB essential". 27 4. Project Costs and Benefits Project Costs 4.1 The PCR indicates a total project cost of US$5,556 million, in current dollars, excluding interest during construction-estimated in 1993. The Audit found a higher construction cost of US$5,729 million, excluding US$2,491 million in interest during construction (estimate made in March 1995, also in current dollars). US$4,421 million were spent through 1994 and the balance of US$1,308 million would be spent over the period 1995-1998 to complete the project (Table 4.1). As pointed out in para. 3.5, a decrease in cost of about US$175 million was achieved by modifying the project design in 1986. With this adjustment, the projected cost overrun amounts to 62.2 percent. If interests during construction are included as part of the cost, the financial cost overrun is 58.8 percent. A project implementation time nearly nine years longer than the original estimate -causing price and physical contingencies greater than the appraisal estimate- explains the cost overruns recalculated by the Audit. 4.2 Worthy of note is the very high cost of project engineering and administration which amounts to 26.5 percent of the latest direct cost estimate. Engineering cost more than four fold the US$132.5 million estimated at appraisal, and administration more than seven fold the US$90 million appraisal estimate. 4.3 As shown in Table 4.2 of the PCR, when the cost stream is converted to 1977 dollars, the project cost overrun, due to physical contingencies only, is 19.2 percent. This is close to the 20.8 percent calculated by the Audit and fairly reasonable for a project of the magnitude of YacyretA built over more than 15 years.35 Project Benefits 4.4 Project Economic Rate of Return (ERR). The Audit recalculated a project ERR of 5.8 percent, using the same assumptions as the PCR, e.g., Long Run Marginal Cost (LRMC) equal to 4.0 0/kWh but updated figures for investment and operation and maintenance costs and electricity production. The result is very close to the 5.5 percent reported in the PCR. If the benefits of Yacyreth are valued at the selling tariff of 3.0 0/kWh established in the Treaty instead of the LRMC, the resulting ERR is 4.5 percent (see Annex). The Audit also concluded that the ERR decreases to 5.7 percent and 4.8 percent if resettlement is partial or not done at all. This is because the decrease in project cost is not big enough to compensate for the decrease in the project benefits from the dam operated at lower than design levels (see Table 4.2 below). Since the ERR is significantly lower than the 10-12 percent opportunity cost of capital, Yacyreti represents a large economic loss for Argentina (para. 4.5).36 35. The PCR also shows that, in constant dollars, the financial requirements -including the amortization of loans which takes place during the construction period-have increased by 8.2. percent. It is the Audit's view that this calculation double counts each dollar when it was expensed and when It was repaid. 36. The Audit reviewed the rate of return calculated by the Energy and Transportation Secretariat (SE) In Attachment 2. It cannot be compared with the Audit's ERR because the SE used financial costs and not economic costs. 28 Table 4.1: YacyretA Hydroelectric: Estimated Project Cost (Current USS million) SAR ------------ AUDIT-------- Estimate Until 1994 1995-98 TOTAL Preliminary works 103.3 337.5 0.0 337.5 Camp (*) ------ 257.0 0.0 257.0 Main civil works 1,074.50 1,439.9 117.5 1,557.4 Other costs (*) ------ 26.6 25.8 52.4 Construction equipment (*)------ 256.0 0.0 256.0 Generation equipment 245.2 437.5 201.4 638.9 Arroyos protection works (*)------ 17.3 144.4 161.7 Electro-mechanical equipment 156.3 324.7 159.5 484.2 Navigation lock 130.2 (**) (**) (**) Land 66.4 78.3 178.2 256.5 Relocation/Resettlement (economic) 172.7 47.5 129.8 177.3 Relocation/Resettlement (improvements) 189.3 88.3 148.1 236.4 Environment (*)------ 22.3 90.4 112.7 Sub-Total 2,137.9 3,332.9 1,195.1 4,528.0 Engineering and Supervision 132.5 509.7 37.0 546.7 Administration 90.0 578.2 76.1 654.3 Sub-Total 222.5 1087.9 113.1 1,201.0 Total Direct Cost 2360.4 4,420.8 1,308.2 5,729.0 Physical Contingencies 296.9 Price Contingencies 1,049.0 SAR Estimated Cost 3,706.3 Reduction in Scope (175.0) --- Project Cost Less Scope Reduction 3,531.3 Interest During Construction (IDC) 1,646.2 2,491.0 Estimated Total Cost of 5,177.5 8.220.0 Construction Cost Overrun (with IDC) 58.8 % (*) These Items were not included or not explicitly valued in the SAR. (**) Included in electro-mechanical equipment Table 4.2: Yacyreti Hydroelectric Project - Economic Rate of Return (ERR) Operating Mode: ERR Level 83 m. and complete resettlement by 1998: 5.8% Level 76 m. through 1997 and level 78m thereafter with partial resettlement: 5.7 % Level 76 m. throughout the life of the project and no additional resettlement: 4.8 % 29 4.5 Economic loss of the project. Assuming that the dam will be operated at its design level (83 m.), project costs estimated in March 1995, benefits at completion, and 10 percent discount rate, the Audit calculated the project's average incremental cost of about US09.7 per kWh (the PCR calculated a slightly lower value of about 9.5 O/kWh37), or about 3.3 times the competitive selling price applied to EBY in 1994. The Audit roughly estimated the economic loss of the project as the net present value of the difference between the cost of power from Yacyreti and its value to the power system, that is the LRMC of generation: the economic loss is close to US$8 billion in present value (almost US$1.0 billion/year around the year 2000). This loss is considerable, a bit smaller (about US$7 billion) if the LRMC doubles over the life of the project, and bigger (about US$11 billion) if Yacyreti is not completed to meet its design parameters, or if the opportunity cost of capital is 12 percent, a more realistic figure for Argentina than the standard 10 percent. The argument that it provided jobs does not appear a very compelling one either: assuming that the construction of the plant provided 60,000 man-year of work, this job creation amounts to US$133,000 per man-year. 37. PCR of November 8, 1994 (Table 9). 38. Yacyreti Hydroelectric Project 11, SAR of August 31, 1992 (Annex 2.6, Attach. 2).  31 5. Issues in Project Economic Appraisal and Financial Management Economic Appraisal and Reappraisals 5.1 In 1977, the total installed capacity of the public sector amounted to 7,423 MW, of which 51 percent consisted of oil-fired steam turbines, 26 percent of hydroelectric generation, 18 percent of gas-fired turbines, and 5 percent of nuclear generation. The Government was concerned with the magnitude of the oil and gas import bill, and while hoping to increase domestic production, adopted a policy which would increase the proportion of hydroelectric and nuclear power capacity in the short and medium-term and to focus on nuclear power once new hydro sites would be exhausted.39 5.2 Appraisal Analysis. The appraisal of Yacyreti took place in July/August 1978. The terms of reference do not mention the need to establish/confirm that the YacyretU hydroelectric scheme was part of the least-cost development program of Argentina. The subject is not discussed in either the Back-to-Office Report nor the Issues Paper. 5.3 The SAR is quick to highlight the quality of the planning model used,40 but the Audit is less sanguine about this (see para. 5.7). The SAR concludes that Yacyreti was ranked first in the sequencing of future projects using a 12 percent discount rate. It may have been a reasonable conclusion at the time, but the justification of some assumptions should have been made clear. For instance, why was the rehabilitation of existing plants not a top choice? The utilization factor of about 735 MW of poor efficiency steam plants was only 19 percent in 1978, and that of 1,486 MW of average efficiency steam plants only about 60 percent. Why was the only gas turbine alternative considered of such small size (30 MW units) and operated with fuel at a time when there were indications of promising natural gas reserves in the country? Why was the combined-cycle gas turbine technology or other hydro power not considered as alternatives? There were good answers to these questions, e.g., plant rehabilitation would not provide enough additional capacity and Argentina had a bad experience with combined cycle technology. Corpus, a hydroelectric plant in the Parani river on the Argentina-Paraguay border could not be commissioned before 1989. All these answers were plausible, but they were all vulnerable to one single assumption: if demand growth was sufficiently slow, some of these alternatives would be available in a timely manner and turn out to be cheaper than YacyretA. 5.4 Imprudently, the appraisal considered a load growth of less than 8.4 percent per year as unrealistic on the grounds that demand had grown at that rate in the period 1962-1974. 4 As indicated in the SAR, a drop in demand growth from 9 to 8 percent would displace YacyretA from 1985 to 1986 in the priority ordering of the least-cost solution. This was a clear indication of the high sensitivity of Yacyretf to load growth because of its high prospective share in the base load structure of power supply. In reality, YacyretA could have been postponed until 1992, 39. Yacyreti Hydroelectric Project, Memorandum of the President of September 25,1979 (para. 32). 40. YacyretA Hydroelectric Project, SAR of September 21, 1979 (para. 7.02). 41. YacyretA Hydroelectric Project, SAR of September 21, 1979 (para. 7.09 (vi)). 32 the year in which the total electricity actually consumed reached the 55,000 GWh forecast for 1985 at project appraisal. 5.5 Post-Appraisal Developments. At the time of negotiations, Paraguay42 raised the question of the extent of the flooding of its territory and requested a study to substantially reduce the proposed area to be inundated. Realignment of the dam would reduce the flooded area by some 204 kM2, add one year to project time schedule, and some US$320 million in additional cost, including contingencies. Argentina did not agree with Paraguay, and was then reported to be looking at alternatives, including an increase in the installed capacity of Alicura from 750 MW to 1,000 MW, and to install a 200 MW combined-cycle gas thermal plant.4 The latter could have been a better alternative than Yacyreti because it would not only cost less per kWh but also would provide the highly desirable flexibility of being able to add capacity more in line with demand growth. In the event, Argentina and Paraguay resolved the impasse by agreeing to annual compensations to Paraguay for the flooded territory: Argentina's declared pro- hydroelectric development policy prevailed. 5.6 After the Bank loan was approved, project execution was delayed for over three years because of procurement disputes and delayed effectiveness. By 1982, the demand for electricity was already lagging 25 percent behind the original forecast and there was no sign pointing to a swift demand recovery. There was no longer the same urgency to build YacyretA. Furthermore, a statement to the press by the Minister of Public Works on November 29, 1982, indicated that Argentina's gas reserves were very large.45 Thus, Argentina and the Bank had the opportunity to look at alternatives to YacyretA even before the start of the major civil works. The decision to go ahead with Yacyreti was made on the basis of a December 1982 cable from Argentina stating that a comparison between Yacyreti and a conventional gas turbine plant showed that YacyretA was still the least-cost solution. 5.7 The 1985 Public Investment Review (PIR). However sophisticated the planning tools available in Argentina at the time of appraisal, the process had strong weaknesses as revealed by the PIR carried out by the Bank in May 1985. First, the PIR found that the load forecast techniques relied too much on econometric models which extrapolated the past without taking sufficient account of competing fuels such as natural gas, the already high level of electricity consumption by households and the elasticity of industrial demand to GDP. Second, the investment planning process was encumbered and distorted by politically motivated interference; for instance, a nuclear power plant was built and with it a large 850 MW pumped storage plant, which was never justified on economic grounds because peaking capacity or energy from gas-fired plants and conventional hydro was much cheaper. Third, the planning models were biased in favor of plants on the ParanA river which generate most from February to May although hydropower is more valuable in winter from June to September. 5.8 The PIR analyses were sound. As a result, it revised the load forecast for 1995 downwards by an amount which is equivalent to YacyretA's output. The PIR's mission Back-to- Office Report mentioned the "freezing" of the project construction as an option to explore taking 42. Bank internal memorandum dated May 9, 1979. 43. Bank internal memorandum dated May 31, 1979. 44. Bank internal memorandum dated June 25, 1979. 45. Press clippings attached to Bank internal memorandum dated December 14, 1982. 33 into account the cancellation costs. It recommended that "any new commitment should be postponed pending a reassessment of the demand targets and of the role that natural gas can play in the expansion strategy". The final PIR report came in late November 1986 (18 months after the mission) without such analyses and only recommended to postpone the commissioning of the first unit of YacyretA from 1992 to 1994. Precious time and momentum for a reassessment had been lost; more would be still lost. Over that time the amount of sunk cost kept increasing in the YacyretA project thus decreasing the net benefits of project cancellation and the chances that the project would be stopped. 5.9 Later analyses of the economic worth of the project took place prior to the approval of additional financing by the Bank in 1988 and 1992. In 1991, the accumulated sunk cost clearly ensured that YacyretA formed part of the least-cost development program, but in 1988, that claim made in the appraisal of the Power Sector Project was not entirely convincing even though, by then 46 percent of the total cost had been "sunk". In 1988, the appraisal compared the completion of YacyretA with the alternative of installing 3,000 MW in gas-fired power plants plus 270 MW in gas turbines power units. With a 20 percent cost overrun-not an unreasonable expectation for this kind of project, and one that should have weighed heavily as a downside risk in the analysis-YacyretA was more expensive than the thermal alternative for discount rates of 15 percent and above. This equalizing discount rate would have been much lower and less than Argentina's high opportunity cost of capital if the appraisal had used an alternative of combined cycle plants and a better methodology to account for the superiority of that alternative in providing firm energy over the winter months (June through September). The combined-cycle technology had been adopted successfully in a few countries at similar or earlier stages of development, e.g., in 1983 for Taiwan and Thailand and in 1984 for Mexico; though the performance of this technology was not as good then as it is now, its advantages in this case may have been enough to offset the cost of canceling Yacyreti as late as 1987. 5.10 In 1988, the Bank-financed Power Sector project finally included a more thorough study of power generation options," including a combined-cycle gas generation alternative. As pointed out in the PCR, the study was carried out but even at this date without effect, although in the 1990s combined-cycle gas plants were finally recognized as viable alternatives by Argentina.47 Financial Management 5.11 In the 1970s, sector finances had deteriorated due to inadequate tariffs and a drop in productivity. Investment financing had had to rely largely on contributions from the Electrical Funds, local and foreign borrowing, and Government contributions. The Electrical Funds, in turn, depended on the performance of the National Utilities which had prior claim on the resources of the same. 5.12 By 1990, the poor financial performance of the sector was substantially unchanged. In this connection, Bank files show that until 1986, the Bank appears to have looked exclusively to tariff adjustments to improve the financial performance of the sector. As mentioned earlier, a diagnostic study of the organization and operational efficiency of the sector introduced in the 46. Loan 2998-AR, Section 3.10; SAR, par. 2.16 and Annex 2.3.3. 47. Internal Bank memorandum dated March 9, 1990 (par. 7.4). 34 Amending Agreement was not done, and although it was carried out under Loan 2998-AR, it was not implemented. 5.13 For its part, EBY had been created with negligible equity in relation to overall estimated project costs and total financing requirements. Furthermore, while it could borrow from the Electrical Funds once the needs of the National Utilities had been satisfied, unlike the five National Utilities, it could not receive contributions from its parent organizations, i.e., the two sponsoring governments. EBY had to borrow to launch the project, to construct its infrastructure, and to service its debt until enough power generating units would be installed to produce the required internal cash generation (Table 5.1). Table 5.1: Yacyretfi Financing Plan (Million US$) 1978-1985 1986-1990 Amount Percent Amount Percent SOURCES: Gross Cash Generation 16 0.5 1868 47.7 Borrowing from: Electrical Funds 1298 41.5 1313 33.6 Local and Foreign Banks 1770 56.6 723 18.5 Total Borrowing 3068 98.1 2036 52.0 Equity, etc. 42 1.3 8 0.2 Total Sources 3126 100.0 3912 100.0 APPLICATIONS: Debt Service 627 20.1 2630 67.2 Working Capital 77 2.5 -2 -0.1 Investments 2422 77.5 1284 32.8 Total Applications 3126 100.0 3912 100.0 5.14 The original financing plan for YacyretA was unrealistic not only for its inadequate capital. It also included borrowing of almost US$2.6 billion from the Electrical Funds. Such amount could only have become available through superb performance of the National Utilities, a heroic assumption in light of the sector's experience. In the event, the financial performance of the five National Utilities did not improve during the period of implementation of the two projects under audit. Indeed, their inability to meet the financial objectives underpinning a large segment of the financing scheme led to the Amending Agreement of October 1986, an act which in itself was contrary to the financial interest of the sector and EBY. 5.15 The financing plan also assumed that EBY could borrow some US$1.8 billion from foreign and local banks in a period of persistently high inflation and predictable disintermediation of the local banks, and of rapidly decreasing foreign reserves and equally 48. Yacyret Hydroelectric Project, SAR of September 21,1979 (Annex D, Attachment 6.3). 35 predictable balance of payments difficulties. In fact, because of the failure of the economic situation to improve, the commitment of would-be providers of funds faded, and much of the financing expected from private sources was replaced by additional financing from the Bank and IDB. 5.16 The financing scheme prepared on the occasion of the 1992 Bank loan for YacyretA49still showed a financing gap (non-committed financing) of over US$600 million-after allowing for the transfer from the SEGBA loan-i.e., 23 percent of total requirements estimated at US$2.59 billion in the period 1992-1995. 5.17 In sum, the conditions prevailing in the period preceding the Yacyreti Loan offered little prospect for optimism. Throughout the implementation of the two projects under audit, sector finances remained unsatisfactory. Given the economic performance of the 1970s, the sector's past poor financial performance, and the fact that it becomes virtually impossible to withdraw support for a unitary scheme such as Yacyreti once it has reached a certain stage, the original financing plan for Yacyreti was unrealistic. 5.18 EBY's financial projections show that under the conditions established in the Yacyreti Treaty its external debt would be repaid by year 2034 but it all depends on the output pricing 50 agreements. Also, EBY's financial statements are still "under a cloud" and, unless the Treaty is amended, the external auditors may be expected to heavily qualify if not entirely withhold their opinion on EBY's future financial statements. Witness the Treaty's definition of the cost of service, which inter alia includes a 12 percent return on capital, the repayment of loan principal, and the carrying forward of prior years' profit or loss. This is compounded by the fact that the definition for establishing the amount of the compensation to be paid to each country for inundated territories lends itself to different interpretations. Thus EBY's latest financial projections offer two alternatives. In 1999, for instance, when the design level should be reached, compensation could amount to either US$65.9 million or US$94.6 million. 5.19 Privatization of Yacyretd. As of early 1995, the project was again faced with a financing shortfall of some US$400 million, and Argentina was inclined to operate the Yacyreti scheme at the 76 m. level while seeking to privatize EBY's operations. Based on a study financed by the Bank, in March 1995 Argentina was discussing with Paraguay several alternatives of private participation in Yacyreti. A definite decision on this was expected to be made shortly after the May 1995 presidential election in Argentina. The Borrower indicates that in November 23, 1995 both Governments signed a Protocol in which the mechanism and structure of private participation was agreed upon as follows: (i) a private agent to operate, maintain and manage the contracts for completion of YacyretU; and (ii) the sale of 30 years of power generation by Yacyreti to a private agent who should also finance its completion (Attachment 2, para. 6). By May 1996, the Protocol was being analyzed by both Congresses for its final approval and ratification.51 49. YacyretA Hydroelectric Project 11, SAR of August 31, 1992 (Annex 2.4, Attachment 2). 50. The Borrower indicates that EBY would not be able to repay its debt with Argentina over the 60 year life of Yacyreti (Attachment 2). However, the assumptions made by the Borrower do not reflect fully the conditions established in the Yacyreti Treaty. In particular, it assumed a constant price for base generation over the life of Yacyreti ( the Treaty stipulates a price of 3.0 UScent/kWh to be adjusted over time.). 51. "Protocolo para la participaci6n del Sector Privado en las Obras y Servicios a cargo de la Entidad Binacional Yacyreti" 36 37 6. Borrower and Bank Performance Borrower Performance 6.1 Compliance with Covenants. The status of compliance is well documented in the PCR. In addition to the financial covenants discussed below, non-compliance affected most importantly a diagnostic study of the electric power sector and the National Utilities which although completed was not implemented.52 6.2 For most of the implementation of the Yacyreti project, financial covenants were not met, even thoufh on a number of occasions they were modified, in 1981 " to allow for loan effectiveness", and in 1986, their terms were postponed in the Amending Agreement. Whereas the original YacyretA loan agreement had called for Hidronor, CNEA and CTMSG to obtain 8 percent return on rate base starting in 1979, AyEE in 1981, and SEGBA in 1982, 5 targets which had never been met-the Amending Agreement called for Hidronor to get 8 percent return by 1992, CNEA by 1987, AyEE by 1994 and SEGBA by 1992."s As to CTMSG, the rate of return was abandoned in favor of a break-even target, i.e., to generate enough cash to "cover, as a minimum, operational expenses, and pay all debt on a timely basis".56 Whatever comfort the elimination of the non-compliance overhang may have provided to the Bank and the Borrower in 1986, in particular in removing an obvious obstacle to further lending, such action was counter productive since it undermined the basis for a good portion of project financing. 6.3 In Loan 2998-AR, the financial discipline was changed from rates of return on investment which had never been met to some operating ratio, which did not improve matters. In fact the Bank eventually agreed to postpone the 1988 targets to 1989 and then to 1990. This experience confirms the lesson that changing covenants is no substitute for performance and does not absolve the authorities from having to adjust tariffs. Finally, and no doubt because the country had started to privatize the sector, Loan 3520-AR approved in 1992 contains no covenant concerning the financial performance of the sector. 6.4 Another persistent problem was the lack of timely sector financial data. As explained in a Bank telex to Argentina: "... our analysis forjustifying the loan amendments, unfortunately, was complicated by lack of adequate financial statements for the sector."57 On that occasion, the Bank's decision to amend the loan, in particular to postpone targeted ratios and recast loan repayments was based on inadequate data. However, it is doubtful that more accurate data would have made much difference given the Bank commitment to support the project until completion. 6.5 Under Loan 1761-AR, EBY had a mixed performance. It was proactive in project preparation, particularly in arriving at a project design which satisfied the requirements of Argentina and Paraguay and in securing financing from the Bank and IDB. It was not effective in managing project implementation during the early 1980s because management positions were 52. Loan 2998-AR, Section 3.04 (d). 53. BTO of June 17, 1987 (para. 22). 54. Loan Agreement (Loan 1761-AR) of November 6, 1979, Section 5.05. 55. Amending Agreement to Loan and Project Agreements (Loan 1761-AR) of October 31, 1986, paragraph 10, Section 5.05. 56. Amending Agreement to Loan and Project Agreements (Loan 1761-AR) of October 31, 1986, paragraph 11, Section 5.06. 57. Bank telex of October 10, 1986. 38 filled for political reasons, staff lacked technical competence, and the South Atlantic war diverted the attention of the Argentinean government. Since the late 1980s, EBY's management performance improved, but it continued to be impaired by the chronic lack of counterpart funds and the heavy bi-national organization imposed by the Yacyreti Treaty. The above factors played a role in the significant time overruns and high engineering and management costs which materialized even though EBY management had acceptable engineering support. 6.6 Under Loan 2998-AR, the Argentinean Government was ineffective in carrying out the measures intended to improve the sector. All things considered, the Audit rates the performance of EBY and the Argentinean Government as unsatisfactory, with regard to loans 1761-AR and 2998-AR. Bank Performance 6.7 The Bank's performance is rated as overall unsatisfactory. The appraisal did not see the flaws in the load forecast used to justify the project and failed to carry out a risk analysis for significant downwards deviations from this forecast. Before the start of the major civil works, it had become known that building Yacyreti was no longer urgent because projected demand was growing well below the forecast, and large gas reserves had been confirmed. By 1985, the Public Investment Review had come up with a reassessment of good quality. It came close to suggesting that this project be frozen and replaced in due course by gas-based generation. But the additional analysis that it recommended to explore loan cancellation came too late in 1988 and were not thorough enough. Whatever the motives which induced the Bank to be so uncritically supportive of YacyretA, the result is hugely detrimental to Argentina, both in economic and financial terms. In addition, the Bank accepted repeated non-compliance with major covenants and continued to associate with unsatisfactory sector financial and operating performance. 6.8 The above dwarfs good performance in other respects. The Bank provided substantive support and in many instances unheeded advice to the Government and EBY. The Bank was particularly flexible in enforcing its procurement guidelines by agreeing to the award of major civil works contract worth US$1,600 million to the joint venture formed by the lowest two evaluated bidders, after the public opening of bids and after a lapse of almost three years from opening bids. Population resettlement and environmental issues presented early implementation problems. When it became clear that these could develop into real problem areas, the Bank began to field frequent specialized missions. As serious concerns still remained, in 1990 the Bank retained consultants to review the situation. Their report formed the basis for the Resettlement and Environment Plan covenanted under Loan 3520-AR.58 By 1992, the resettlement schedule was temporarily altered, as already explained. The support and assistance of the Bank in this area appears to have been considerable although not always heeded by EBY and the government. 58. PCR of November 8, 1994 (paragraphs 4.25 through 4.31). YacyretA Hydroelectric Project II, Loan Agreement 3520-AR (Section 3.08). 39 7. Conclusions and Lessons Learned Conclusions 7.1 The Yacyreta hydroelectric scheme partly financed by Loan 1761-AR and 2998-AR is planned to be completed only in 1998, some nine years later than originally envisaged. Most of the slippage may be attributed to the difficult economic conditions which prevailed in Argentina throughout the 1980s and the early 1990s. The project's average incremental cost per kWh at completion has been estimated to be more than three times the current tariff for EBY's output which is largely imposed by competition. The ensuing economic and financial losses are huge (para. 4.5). The Audit concludes that the project was not the least-cost solution to expand power supply and its relevance to the country's priorities was negligible. 7.2 The cost and benefits assessment made by the audit in 1995 may still be optimistic. Recent developments indicate that major problems continue to plague the project at this late stage. They may still adversely affect the cost and date at which the project will generate its full benefits. Families have recently moved into the project area and EBY is facing financial difficulties to complete the works. In May 1996, the Government of Argentina decided to discontinue the transfer of funds to EBY. Instead, it authorized EBY to borrow about US$90 million from commercial banks to meet its financial needs (mainly for resettlement works at level 76 m.) until private participation in Yacyreti is achieved, hopefully by the end of 1996 (Attachment 1). 7.3 Although the Public Investment Review was a good instrument to dialogue with the Government, it did not translate into the forceful actions of portfolio management which were needed-in this case further analysis might have led to cancellation of the loan in or before 1986. Instead, the Bank procrastinated the needed analysis and decisions and ended up using the argument of sunk cost to justify YacyretS and further Bank financing for the project in 1988 and again in 1992. 7.4 Project Ratings. The Audit rates the outcome of the projects as unsatisfactory, their sustainability as likely and their institutional development as modest. These ratings are consistent with those of the PCR. The Audit rates the Yacyret project sustainability as likely on the belief that: (i) Yacyretd will be completed to meet its design parameters (including resettlement); and (ii) it will be operated and maintained by private agents as planned on a commercial basis that will remain largely unaffected by the difficulties of financing the project completion and servicing the debt.59 Lessons Learned 7.5 The PAR agrees with the PCR that an entity's capacity to carry out a large resettlement program must be built from the outset. It also agrees that economic analysis must take into account the prevailing economic and financial conditions, something that did not always occur here. However, it disagrees that the Bank had to support YacyretA, and maintains that the Bank 59. EBY's Financial Projections, March 1995. 40 should have withdrawn its support early in the project cycle, before the major civil works started and when demand growth rate declined, or later, following the 1985 PIR exercise. 7.6 The PAR offers the following lessons: * The Bank should be very thorough in its evaluation of the borrower's demand forecasting and investment planning decisions and the downside risks of large unitary infrastructure projects like YacyretA; * Public Investment Reviews should and can be used effectively for portfolio management purposes. For this to happen, they must not only be of good quality but also be rapidly followed by the most urgent actions which emerge from them; * The financing of a project the magnitude of Yacyreti should not rely for a large part on assumed future improvements in the financial results of notoriously poor performing sector entities; * Covenanted actions are a precarious way to ensure the viability of a financing plan in light of the Bank's willingness to "accommodate" non-compliance and the added difficulty of stopping a large unitary project once it has reached a certain stage of implementation. Also, amending financial covenants when the causes of non- compliance are still prevailing, is often useless; and * Success in achieving sector financial objectives through institutional reforms is, at best, uncertain while unstable macroeconomic conditions last, but these conditions increase the need for such reforms. Recommendation 7.7 The Bank should continue to monitor carefully the execution of the YacyretA project, particularly its resettlement component, and prepare a thorough evaluation of the economic, social and environmental impact shortly after project completion. 41 Annex A Yacyretd Hydroelectric Project ERR Calculation (Level 83) Year Investment, 1994 O&M 1994 S Sales. GWh Price 1994 S* Cost, 1994 5, mil. Revenue, 1994 S Net Benefit, S mil. mil. mil. 1994 S, mil. 1975 44.1 44.1 -44.1 1976 29.1 29.1 -29.1 1977 30.8 30.8 -30.8 1978 90.2 90.2 -90.2 1979 277 277 -277 1980 606.8 606.8 -606.8 1981 425.6 425.6 -425.6 1982 138.6 138.6 -138.6 1983 122.7 122.7 -122.7 1984 322 322 -322 1985 262.8 262.8 -262.8 1986 374 374 -374 1987 400.2 400.2 -400.2 1988 516.3 516.3 -516.3 1989 434.4 434.4 -434.4 1990 347 347 -347 1991 252.2 252.2 -252.2 1992 147.2 147.2 -147.2 1993 448.2 448.2 -448.2 1994 437.3 11.4 550 40 448.7 22 -426.7 1995 350.5 11.4 3054 40 361.9 122.16 -239.74 1996 374.5 21.1 5903 40 395.6 236.12 -159.48 1997 292.1 25.1 8968 40 317.2 358.72 41.52 1998 291.7 28.2 13801 40 319.9 552.04 232.14 1999 35.8 18763 40 35.8 750.52 714.72 2000 37.3 18763 40 37.3 750.52 713.22 2001 38.8 18763 40 38.8 750.52 711.72 2002 38.8 18763 40 38.8 750.52 711.72 2003 38.8 18763 40 38.8 750.52 711.72 2004 38.8 18763 40 38.8 750.52 711.72 2005 38.8 18763 40 38.8 750.52 711.72 2006 38.8 18763 40 38.8 750.52 711.72 2007 38.8 18763 40 38.8 750.52 711.72 2008 38.8 18763 40 38.8 750.52 711.72 2009 38.8 18763 40 38.8 750.52 711.72 2010 38.8 18763 40 38.8 750.52 711.72 2011 38.8 18763 40 38.8 750.52 711.72 2012 38.8 18763 40 38.8 750.52 711.72 4 38 1 4 3 7 2047 38.8 18763 40 38.8 750.52 711.72 2048 38.8 18763 40 38.8 750.52 711.72 ERR 5.76% 1994 NPV with 10% discount rate: 13061 307 137665 13368 5507 AIC(1994 US cent/kWh): 9.71 1994 NPV with 12% discount rate: 15203 247 109073 15449 4363 AIC(1994 US cents/kWh): 14.16 *Long-mn marginal cost, ($/MWh). Annex A 42 YacyretA Hydroelectric Project ERR Calculation (Level 83) Year Investment, 1994 O&M, 1994 S Sales, GWh Price 1994 S* Cost. 1994 S, mil. Revenue. 1994 S Net Benefit. S mil. mil. mil. 1994 S, mil. 1975 44.1 44.1 -44.1 1976 29.1 29.1 -29.1 1977 30.8 30.8 -30.8 1978 90.2 90.2 -90.2 1979 277 277 -277 1980 606.8 608.8 -606.8 1981 425.6 425.6 -425.6 1982 138.6 138.6 -138.6 1983 122.7 122.7 -122.7 1984 322 322 -322 1985 262.8 262.8 -262.8 1986 374 374 -374 1987 400.2 400.2 -400.2 1988 516.3 516.3 -516.3 1989 434.4 434.4 -434.4 1990 347 347 -347 1991 252.2 252.2 -252.2 1992 147.2 147.2 -147.2 1993 448.2 448.2 -448.2 1994 437.3 11.4 550 30 448.7 16.5 -432.2 1995 350.5 11.4 3054 30 361.9 91.62 -270.28 1996 374.5 21.1 5903 30 395.6 177.09 -218.51 1997 292.1 25.1 8968 30 317.2 269.04 -48.16 1998 291.7 28.2 13801 30 319.9 414.03 94.13 1999 35.8 18763 30 35.8 562.89 527.09 2000 37.3 18763 30 37.3 562.89 525.59 2001 38.8 18763 30 38.8 562.89 524.09 2002 38.8 18763 30 38.8 562.89 524.09 2003 38.8 18763 30 38.8 562.89 524.09 2004 38.8 18763 30 38.8 562.89 524.09 2005 38.8 18763 30 38.8 562.89 524.09 2006 38.8 18763 30 38.8 562.89 524.09 2007 38.8 18763 30 38.8 562.89 524.09 4 4 4 1 4 4 2047 38.8 18783 30 38.8 562.89 524.09 2048 38.8 18763 30 38.8 562.89 524.09 ERR 4.53% 1994 NPV with 10% discount rate: 13061 307 137665 13368 4130 AIC(1994 US centhAkM): 9.71 1994 NPV with 12% discount rate: 15203 247 109073 15449 3272 AIC(1994 US cents/kWVh): 14.16 *Selling Price to AyEE, ($/MWh). 43 Annex A Yacyretf Hydroelectric Project ERR Calculation (Level 76) Year Investment. O&M 1994 S Sales, GWh Price 1994 S* Cost, 1994 S. Revenue, 1994 S Net Benefit. 1994 S mi. mi. mil. mil. 1994 S, mil. 1975 44.1 44.1 -44.1 1976 29.1 29.1 -29.1 1977 30.8 30.8 -30.8 1978 90.2 90.2 -90.2 1979 277 277 -277 1980 606.8 606.8 -606.8 1981 425.6 425.6 -425.6 1982 138.6 138.6 -138.6 1983 122.7 122.7 -122.7 1984 322 322 -322 1985 262.8 262.8 -262.8 1986 374 374 -374 1987 400.2 400.2 -400.2 1988 516.3 516.3 -516.3 1989 434.4 434.4 -434.4 1990 347 347 -347 1991 252.2 252.2 -252.2 1992 147.2 147.2 -147.2 1993 448.2 448.2 -448.2 1994 437.3 11.4 550 40 448.7 22 -426.7 1995 350.5 11.4 3054 40 361.9 122.16 -239.74 1996 201.5 21.1 5903 40 222.6 236.12 13.52 1997 117.7 25.1 8968 40 142.8 358.72 215.92 1998 118.8 28.2 13801 40 147 552.04 405.04 1999 35.8 13801 40 35.8 552.04 516.24 2000 37.3 13801 40 37.3 552.04 514.74 2001 38.8 13801 40 38.8 552.04 513.24 2002 38.8 13801 40 38.8 552.04 513.24 2003 38.8 13801 40 38.8 552.04 513.24 2004 38.8 13801 40 38.8 552.04 513.24 2005 38.8 13801 40 38.8 552.04 513.24 2006 38.8 13801 40 38.8 552.04 513.24 2007 38.8 13801 40 38.8 552.04 513.24 2008 38.8 13801 40 38.8 552.04 513.24 2009 38.8 13801 40 38.8 552.04 513.24 2010 38.8 13801 40 38.8 552.04 513.24 2011 38.8 13801 40 38.8 552.04 513.24 8 1 1 4 3 5 51 2047 38.8 13801 40 38.8 552.04 513.24 2048 38.8 13801 40 38.8 552.04 513.24 ERR 4.76% 1994 NPV with 10% discount rate: 12705 307 107117 13011 4285 AIC(1994 US cents/kWh): 12.15 1994 NPV with 12% discount rate: 14870 247 85691 15117 3428 AIC(1994 US cents/kWh): 17.64 *Long-run marginal cost, (S/MWh). Annex A 44 Yacyretf Hydroelectric Project ERR Calculation (Level 76) Year Investment, O&A, 1994 S Sales, GWh Price 1994 $ Cost, 1994$, Revenue, 1994 Net Benefit, 1994 $ mil. mi. mil. S mil. 1994 $, mil. 1975 44.1 44.1 -44.1 1976 29.1 29.1 -29.1 1977 30.8 30.8 -30.8 1978 90.2 90.2 -90.2 1979 277 277 -277 1980 606.8 606.8 -606.8 1981 425.6 425.6 -425.6 1982 138.6 138.6 -138.6 1983 122.7 122.7 -122.7 1984 322 322 -322 1985 262.8 262.8 -262.8 1986 374 374 -374 1987 400.2 400.2 -400.2 1988 516.3 516.3 -516.3 1989 434.4 434.4 -434.4 1990 347 347 -347 1991 252.2 252.2 -252.2 1992 147.2 147.2 -147.2 1993 448.2 448.2 -448.2 1994 437.3 11.4 550 30 448.7 16.5 -432.2 1995 350.5 11.4 3054 30 361.9 91.62 -270.28 1996 201.5 21.1 5903 30 222.6 177.09 -45.51 1997 117.7 25.1 8968 30 142.8 269.04 126.24 1998 118.8 28.2 13801 30 147 414.03 267.03 1999 35.8 13801 30 35.8 414.03 378.23 2000 37.3 13801 30 37.3 414.03 376.73 2001 38.8 13801 30 38.8 414.03 375.23 2002 38.8 13801 30 38.8 414.03 375.23 2003 38.8 13801 30 38.8 414.03 375.23 2004 38.8 13801 30 38.8 414.03 375.23 2005 38.8 13801 30 38.8 414.03 375.23 2006 38.8 13801 30 38.8 414.03 375.23 1 1 13801 38.8 414 375.23 2047 38.8 13801 30 38.8 414.03 375.23 2048 38.8 13801 30 38.8 414.03 375.23 ERR 3.57% 1994 NPV with 10% discount rate: 12705 307 107117 13011 3214 AIC(1994 US cents/kWh): 12.15 1994 NPV with 12% discount rate: 14870 247 85691 15117 2571 AJC(1994 US centalkMh): 17.64 *Selling price to AyEE, (S/MWh). 45 Annex A Yacyreti Hydroelectric Project ERR Calculation (Level 78) Year Investment, O&AM 1994 5 Sates. GWh Price 1994 S* Cost, 1994 S, Revenue, 1994 S Net Benefit, 1994 $, mil 1994 $ mil. mil. mil. mil. 1975 44.1 44.1 -44.1 1976 29.1 29.1 -29.1 1977 30.8 30.8 -30.8 1978 90.2 90.2 -90.2 1979 277 277 -277 1980 606.8 606.8 -606.8 1981 425.6 425.6 -425.6 1982 138.6 138.6 -138.6 1983 122.7 122.7 -122.7 1984 322 322 -322 1985 262.8 262.8 -262.8 1986 374 374 -374 1987 400.2 400.2 -400.2 1988 516.3 516.3 -516.3 1989 434.4 434.4 -434.4 1990 347 347 -347 1991 252.2 252.2 -252.2 1992 147.2 147.2 -147.2 1993 448.2 448.2 -448.2 1994 437.3 11.4 550 40 448.7 22 -426.7 1995 350.5 11.4 3054 40 361.9 122.16 -239.74 1996 201.5 21.1 5903 40 222.6 236.12 13.52 1997 117.7 25.1 8968 40 142.8 358.72 215.92 1998 118.8 28.2 13801 40 147 552.04 405.04 1999 173 35.8 13801 40 208.8 552.04 343.24 2000 174.4 37.3 15455 40 211.7 618.2 406.5 2001 173 38.8 17109 40 211.8 684.36 472.56 2002 38.8 18763 40 38.8 750.52 711.72 2003 38.8 18763 40 38.8 750.52 711.72 2004 38.8 18763 40 38.8 750.52 711.72 2005 38.8 18763 40 38.8 750.52 711.72 2006 38.8 18763 40 38.8 750.52 711.72 2007 38.8 18763 40 38.8 750.52 711.72 2008 38.8 18763 40 38.8 750.52 711.72 2009 38.8 18763 40 38.8 750.52 711.72 2010 38.8 18763 40 38.8 750.52 711.72 2011 38.8 18763 40 38.8 750.52 711.72 2012 38.8 18763 40 38.8 750.52 711.72 2013 38.8 18763 40 38.8 750.52 711.72 2014 38.8 18763 40 38.8 750.52 711.72 2015 38.8 18763 40 38.8 750.52 711.72 2016 38.8 18763 40 38.8 750.52 711.72 2017 38.8 18763 40 38.8 750.52 711.72 2018 38.8 18763 40 38.8 750.52 711.72 47 1764 38. 4 . 7 2047 38.8 18763 40 38.8 750.52 711.72 2048 38.8 18763 40 38.8 750.52 711.72 ERR 5.67% 1994 NPV with 10% discount rate: 12972 307 132395 13279 5296 AIC(1994 US cents/kWh): 10.03 1994 NPV with 12% discount rate: 15107 247 104394 15354 4176 AIC(1994 US cents/kWh): 14.71 *Long-run marginal cost, ($/MWh). Annex A 46 Yacyretfi Hydroelectric Project ERR Calculation (Level 78) Year Investment O&M, 1994$ Sales GWh Price 1994 $* Cost, 1994 $. Revenue, Net Benefit, 1994 $. mil 19945 mil. mil. mil. 1994S mil. 1975 44.1 44.1 -44.1 1976 29.1 29.1 -29.1 1977 30.8 30.8 -30.8 1978 90.2 90.2 -90.2 1979 277 277 -277 1980 606.8 606.8 -606.8 1981 425.6 425.6 -425.6 1982 138.6 138.6 -138.6 1983 122.7 122.7 -122.7 1984 322 322 -322 1985 262.8 262.8 -262.8 1986 374 374 -374 1987 400.2 400.2 -400.2 1988 516.3 516.3 -516.3 1989 434.4 434.4 -434.4 1990 347 347 -347 1991 252.2 252.2 -252.2 1992 147.2 147.2 -147.2 1993 448.2 448.2 -448.2 1994 437.3 11.4 550 30 448.7 16.5 -432.2 1995 350.5 11.4 3054 30 361.9 91.62 -270.28 1996 201.5 21.1 5903 30 222.6 177.09 -45.51 1997 117.7 25.1 8968 30 142.8 269.04 126.24 1998 118.8 28.2 13801 30 147 414.03 267.03 1999 173 35.8 13801 30 208.8 414.03 205.23 2000 174.4 37.3 15455 30 211.7 463.65 251.95 2001 173 38.8 17109 30 211.8 513.27 301.47 2002 38.8 18763 30 38.8 562.89 524.09 2003 38.8 18763 30 38.8 562.89 524.09 2004 38.8 18763 30 38.8 562.89 524.09 2005 38.8 18763 30 38.8 562.89 524.09 2006 38.8 18763 30 38.8 562.89 524.09 2007 38.8 18763 30 38.8 562.89 524.09 2008 38.8 18763 30 38.8 562.89 524.09 2009 38.8 18763 30 38.8 562.89 524.09 47 8 17 37 58 54 2047 38.8 18763 30 38.8 562.89 524.09 2048 38.8 18763 30 38.8 562.89 524.09 ERR 4.45% 1994 NPV with 10% discount rate: 12972 307 132395 13279 3972 AIC(1994 US cents/kWh): 10.03 1994 NPV with 12% discount rate: 15107 247 104394 15354 3132 AIC(1994 US cents/kWh): 14.71 *Selling price to AyEE ($IMWh). 47 Attachment I InternatLionai 3ank for Reconstruction and Deveiolornent FOR OFFICIAL USE ONLY SecM96-404 FROM: Vice President and Secretary April 17,19% Argentina: Second Yacvret;i Hvdroelectric Project (Loan 3320-AR' Progress Report Attached for information is a Progress Report on the Second Yacvretd Hydroelectric Project. Questions on this report should be referred to Mr. Jadrijevic (X38703). Distribution: Executive Directors and Alternates President's Executive Committee Senior Management. Bank, IFC and MIGA This document has a resancted distributon and may be used by recipients only in the performsac of their olicial duties. Its contents may not otherwise be disclosed without Word Bank auLhorisation. Attachrent 1 48 ARGENTINA: SECOND YACYRETA HYDROELECTRIC PROJECT LOAN 3520-AR PROGRESS REPORT BACKGROUND 1. On September 29, 1992, the Board of Executive Directors approved a US$300 million loan to help complete the Yacvreta Hydroelectric Project. During that meeting, Management agreed to provide the Board with annual reports on the progress of implementation of the project. The first was issued on July 14, 1993 (Sec M93-735). A follow-up was contained in the Memorandum of the President on the proposed reallocation of funds of the SEGBA V Project (Loan 2854-AR), dated May 10, 1994 (R94-81). The most recent report to the Board was issued on September 14, 1994 The present report is a further update on the status of the project, with a special focus on the commissioning of the generating units, implementation measures for raising the reservoir lev#-l, and related resettlement and environmental measures. SUMMARY 2. The main civil works and supply and installation of electro-mechanical equipment is progressing satisfactorily as planned. The 500kV transmission system associated with the Yacyreta project is progressing well, with some of the facilities in operation and others under construction and/or planned for expansion to reinforce the 500kV grid (para. 15). The implementation of the Resettlement (PARR) and Environmental Management (PMMA) programs, however, has been delayed because of administrative bottlenecks and budgetary constraints. Reservoir rise above the current level (76m) depends upon completion of pre-defined portions of these programs. which are now delayed by about 18 months. Both the Argentine and Paraguayan Governments and the Entidad Binacional Yacyreta (EBY) have agreed that there will be no further increase in the reservoir elevation until the satisfactory completion of the required environmental and resettlement works. According to the current implementation schedule, it is expected that reservoir elevation to levels 78m and 83m (final) would occur by mid-1997 and end 1999, respectively. Bank supervision of the project, particularly the PARR and PMMA components, continues to be intensive and well coordinated with the Inter-American Development Bank (IDB) 3. Owing to reduced Argentine Government contribution to the project's 1995 budget, EBY's financial situation has deteriorated. By end 1995, the accumulated outstanding debt approached USS40 million, of which about USS25 million was owed to the main contractor--ERIDAY. As a result of the Argentine Government decision not to finance its contribution to the 1996 project budget, in view of the agreement with the Paraguayan Government to complete remaining project works through a privatization scheme (now estimated to be completed by December 1996, see para. 22), EBY's sole 49 Attachment I source of funds will be electricity sales durinu 1996 This will not be sufficient to meet the financial requirements for the continuation of the resettlement. environmental, and infrastructure works. and to pay outstanding debt to contractors, until privatization is completed. To cope with the financial requirements for 1996, EBY intends to borrow funds guaranteed with future sales of electricity. The Argentine Government confirmed to the Bank its intention to meet outstanding debts with contractors and suppliers before signing of the contract with a private concessionaire. Contractor claims, to be handled by the Argentine Government, will be settled separately in accordance with the settlement of dispute clauses provided in the existing contract. 4. The Government's financial strategy to complete the project through the privatization scheme is satisfactory, provided the financial requirements for 1996 are satisfactorily met, and EBY takes the required measures (paras. 17 and 18) to complete the main civil works and continue with the environmental and resettlement activities.I A Bank mission, scheduled for May 1996 will review with the Argentine authorities plans to ensure adequate project funding until privatization has been completed. If proposed project financing arrangements are deemed inadequate, Bank management would consider application of remedies provided in the loan agreement. Such remedies would also be considered in the event that the Argentine Government does not complete the pending resettlement activities related to elevation 76m (para. 6), and EBY does not strengthen its department responsible for the implementation of the PARR and PMMA programs (para. 18). MAIN CIVIL WORKS 5. Civil works are 96 percent complete. while the supply and installation of electromechanical equipment has reached 68 percent completion. Progress on both components is well coordinated. With the commissioning of the seventh generating unit ahead of schedule on November 22, 1995, progress in the installation of the first ten and the second ten generating units is 89 percent and 42 percent respectively The last (20th) unit is expected to be commissioned by mid-1998, on schedule. Preliminary works for protection of the Aguapey Valley, which will prevent inundation of some 30,000 ha in Paraguay, are proceeding satisfactorily. The following civil works remain to be completed: (i) protection of the Aguapey and Tacuary streams (diversion channel and dam); (ii) water flow control of the Afia Cua spillway; and (iii) coastal treatment for a small portion of the Apipe Grande island. Engineering design is underway for the above works, to be completed befoFe the scheduled reservoir rise to its final 83m level. During their last meeting in November 1995, the International Panel of Engineering Experts confirmed the safety of the major project structures. The additional investment in resettlement. environment protection and infrastructure relocaton required to allow operation at final reservoir elevation (83m) is about USS600 million. It has a pay back penod between 2 to 3 years. based on incremental revenues from additional electncity sales. Attachment 1 50 RESETTLEMENT 6. Results for Level 76m. Socioeconomic outcomes of the relocation of the population affected by level 76m are mostiv satisfactory. Compensation, land replacement. housing restitution. basic services. and socioeconomic stabilization and adaptation for more than 1,300 families relocated under the Yacyreta II loan have resulted in a perceptible improvement in living standards, especially for urban groups. In rural areas, more than 3,400 hectares have been acquired and made available for agricultural purposes. Livestock, inputs, and agricultural machinery have been delivered and economic recovery programs are under implementation. Recovery programs for the oleros (brick and tile makers dependent on river-edge clay deposits) are progressing well. The Bank has recently received and is reviewing a program to complete the remaining resettlement activities related to elevation 76m and expects to reach an agreement on this program with EBY during the forthcoming May mission. Bank management would consider application of remedies provided in the loan agreement, if the Argentine Government does not complete the pending resettlement works according to a timetable to be agreed during the forthcoming May mission. While all settled population have occupancy pernits for tne new plots. the upgrading of the permits to full titles is proceeding slowly because of delays in approval of site plans by local authorities. The Bank is discussing options with the relevant local Government authorities to expedite the issuance of tittles. 7. Planning for Level 78m. Implementation of activities for level 78m is proceeding slowly, mainly due to administrative shortcomings and budgetary restrictions. With the exception of housing designs and social support programs, the resettlement actions necessary for level 78m have not yet been initiated. The housing program (2,000 houses) to be financed with IDB resources is now on the critical path for raising the reservoir level to 78m. For the next phase of resettlement, there is a need for some adjustments in the alternatives offered to the rural and peri-urban affected population (e.g. size of new plot to be compatible with the family capacity to develop agricultural activities) in order to make the resettlement process more cost-effective. 8. Additional Families. Governments on both sides have failed to take timely and effective actions to prevent people from moving into the affected area. As a result, additional families (who moved into the area to be flooded after the EBY 1990-91 census and are not included in EBY's agreed resettlement program) must be relocated by the respective Governments. Progress on effective solutions for the relocation of these families is uneven. The Government of Paraguay has taken responsibility for relocating additional families affected by elevations 76m and 78m. Land in the Itapazo area has been acquired for this purpose. Provision of water and electricity services is advancing, although very slowly. Meanwhile, in Encarnacion, some of the displaced additional families are living in shelters under precarious conditions. On the Argentine side, there has been no official commitment by the government to take responsibility for either the relocation of the additional families already displaced by elevation 76m, or for those that will be displaced by further elevation of the reservoir. The Government of Misiones Province has failed to provide agreed assistance to the additional families already relocated 51 Attachment 1 by EBY To remedy this oroblem. EBY began implementing in January 1996 a technical assistance program for this group of additional families According to the loan agreement the Government of Argentina is responsible for resettling all its population affected by the project. The Bank has informed the Government of Argentina of its contractual obligation to the additional families. and in the event that no firm commitment to meet these obligations is obtained by the forthcoming May supervision mission, the Bank will consider application of remedies provided in the loan agreement. 9. Monitoring and Evaluation. An interdisciplinary team from the University of Misiones is monitoring the implementation of the PARR in Argentina. Quarterly reports have been produced and reviewed by the Bank. In Paraguay, monitoring of the PARR has been delayed due to the weak institutional capacity of the team hired from the University of Asuncion. A new contract with a local university has been signed. so monitoring will be normalized during the first semester of 1996. The Bank-financed international independent evaluation of the PARR is proceeding well, with the first report issued in December 1995. This report provides a positive assessment of the resettlement actions taken to date by EBY ENVIRONMENTAL MANAGEMENT 10. Compensatory Protected Areas. Five compensatory protected areas (Yacyreti island in Paraguay; and Santa Maria, Ibera, Apipe Grande island, and Campo San Juan in Argentina) have been legally established under the Yacyreta project. These reserves encompass about 125,000 ha of wetlands, native grasslands, and forests which are ecologically very similar to the areas flooded by the reservoir. Several additional areas in Paranuav are under consideration for the Yacyreti Protected Areas System (SAPY) On-the-ground manacement has been initiated in the Yacvreta island and Santa Maria reserves, which now have physical demarcation and full-time guards. Investments to manage several other protected areas have been delayed by the lack of counterpart funds (paras. 16-17), however, these other reserves do not face human encroachment or other imminent threats. The recurrent costs of managing the SAPY reserves (as well as other recurrent environmental mitigation costs) will be funded through a special allocation from power sale revenues, this requirement will be made explicit in the privatization bidding documents (para. 22). 11. Reservoir Water Quafity. Ongoing water quality monitoring programs in the reservoir and in upstream and downstream sections of the Parana River have provided useful information on the benefits of mitigation actions prior to flooding. Important parameters such as dissolved oxygen have shown no deterioration due to decomposition of flooded vegetation and soils. Biomass removal in critical areas (according to non water- quality criteria such as reservoir access. navigation, and aquatic weed control) has preven- ted the appearance of any major water quality trouble spots in the reservoir area. Vegeta- tion clearance for level 76m has been completed at more than 95% of planned estimates. Critical areas for biomass removal prior to reservoir filling to levels 78m and 83m have already been identified, and work programs will be adjusted to expected filling dates. Attachment 1 52 Vegetation clearance for levels 78m and 83m will concentrate on bays near urban and peri- urban areas. and dam water reiease rules under environmental restrictions are being analyzed as part of a short-term research effort which includes water quality modeling. 12. Fish Management. Monitoring of fish populations and movements is mostly proceeding as planned. The two fish elevators already installed (two more are planned) continue to function properly; fish survival within the elevators exceeds 99 percent. The best available scientific estimates indicate that about 7 oercent of the fish seeking to move upriver past the dam succeed in finding the elevators and using Lnem; the other fi-h remain in the river below the dam. While the elevators cannot help restore natural (pre-dam) fish migration patterns, they are nonetheless useful for ensuring that the Yacyreti reservoir has a genetically diverse breeding stock of native fish. Gas supersaturation (related to spillway design) has greatly diminished, visible fish kills below the dam (such as occurred twice during initial reservoir filling) are no longer taking place. To minimize the supersaturation problem, EBY is (i) carefully monitoring dissolved gas levels, (ii) adjusting operation of the main spillway, and (iii) incorporating design changes into the Afta Cui spillway. A potentially more important source of fish mortality at this time is large-scale. illegal commercial fishing in Paraguayan waters immediately below the dam (where migratory species are highly concentrated). Although EBY has no legal mandate to regulate fishing below the dam and the Paraguayan authorities have been slow to respond, a possible solution is the proposed declaration by EBY of a l km security zone below the dam. Intended to protect the dam from the remote risks of sabotage or terrorism, the security zone would also prevent access to most fishing boats. 13. Afia Cua Branch. In the absence of appropriate mitigation measures, the Afta Cui Branch of the Parana River (22 km long and 2 km wide) would be virtually dry for about 9 months of each year after the installation of Turbine No. 14 (scheduled for April 1997) To prevent potentially serious environmental problems (fish mortality, loss of adjacent wetlands and forests, and adverse public health, economic, and aesthetic impacts), three small dams are planned to maintain adequate water levels in the Ada Cua Branch. Construction of these three dams requires about 10 months and an investment of about USS7 million. To avoid delays related to contracting, the Bank has agreed that EBY issue a "work order" to the existing civil works contractor to construct these three dams. Until these small dams are built, EBY has agreed to release a minimum flow of 1,500 m'/sec throughout the year, to ensure adequate water levels in the Ala Cua Branch. 14. Treatment of River Banks and Urban Sanitation Works. Environmental mitigation works required for reservoir operation at level 78m mostly remain to be initiated. On the critical path for raising the reservoir are the river-bank treatment works needed for the cities of Posadas and Encarnacion. The restitution of urban infrastructure and services (water mains, electrical and telephone lines. urban roads, traffic patterns, coastal protection, etc.) is part of the scope of work of the engineering consultant yet to be contracted. There will be a need to revise the target dates for raising the reservoir to levels 78m and 83m, depending on. inter alia, when the technical design of these works is initiated. The bidding process for the construction of principal sanitation works (main collectors, pumping stations and wastewater treatment plants) for both 53 Attachment 1 Posadas and Encarnacion is nearly completed. Sanitation infrastructure for these cities is a necessary condition for raising the reservoir level above 78m. TRANSMISSION SYSTEM 15. The 500kV transmission system associated with the Yacvreta plant is being built in Argentina. as the totality of the energy generated by the plant is intended to be supplied to the Argentine market. Operation of existing transmission facilities and construction of new ones are progressing well. With regard to: (i) the first 500kV transmission line (T) commissioned last year, a possible capacity reduction due to abnormal conditions on other TLs in the system will be eliminated by control and relaving equipment, currently under installation; (ii) the second 500kV 71, the construction under the responsibility of a private concessionaire, is proceeding on schedule for completion In September 1996; (iii) the 500kporuon between the Colonia Elia and General Rodrigue: substanons, the construction has been authorized by the Argentine Secretariat of Energy in time for operation before September 1997 as required by progressive installation of the generating units: and (iv) the third 500k V 71 between the Rincon and Salto Grande substations, the bidding process for the construction should start immediately, so that commissioning of this TL is ensured for April 1998. The Argentine Secretariat of Energy and Transport is finalizing the bidding documents. FINANCING 16. Because of the Argentine Goverment's decision to totally cut its contribution to the project budget for 1996, and to complete remaining project works through a privatization scheme (para. 22), EBY's sole source of funds will be sales of electricity until privatization. This will not be sufficient to cover the EBY's 1996 financial needs. The Bank has conveyed to the Government its concern about the lack of adequate funds. 17. Based on the assumption that the privatization will be implemented by December 1996, the project financial requirements for 1996 could be met, provided EBY borrows about USS90 million, guaranteed with future sales of electricity. Under this proposal, EBY would: (i) complete the main civil works and pending actions related to elevation 76m; (ii) continue with the works required under the resettlement and environmental programs; and (iii) pay outstanding debt to contractors, suppliers and consultants. 18. The Argentine Government informed the December 1995 Bank mission that it supports this proposal. provided the privatization protocol, signed with the Paraguayan Government, is approved by both Congresses, and EBY puts in place an organizational structure to ensure that the complementary works (resettlement. environmental protection and infrastructure relocation) are carried out as planned. This would require: (i) appointing consultants for engineering and supervision of complementary works by July 1996; (ii) initiating the construction of pending Attachment 1 54 complementary works in August 1996. and (iii) starting the construction of the diversion channel and dam for the protection of the Aguapey and Tacuary streams (partially funded by 1DB) in the fourth quarter of 1996 The forthcoming May Bank mission will stress to the Government of Argentina the need to strengthen EBY's capacity to implement the complementary works (which will remain under EBY's responsibility even after privatization) and the need to implement the above three activities as scheduled, independently of privatization. 19. The Argentine Government also informed the December 1995 Bank mission that any outstanding debt to contractors will be paid before the signing of the concession contracts. Contractor claims, to be handled by the Argentine Government, will be settled separately in accordance with the settlement of dispute clauses provided in the existing contract. The forthcoming May Bank mission expects to reach an agreement on a financial plan to maintain adequate project funding until privatization has been completed. Bank management will consider application of remedies provided in the loan agreement if project financing arrangements until privatization are not considered adequate and EBY does not strengthen its department responsible for the implementation of the PARR and PMMA progress. INSTITUTIONAL ASPECTS 20. EBY Management. EBY's management capabilities have deteriorated significantly following the change of administration in September 1994, particularly regarding resettlement and environment. EBY's decision-making structure (involving approvals of even minor contracts by officials based in Buenos Aires and Asunci6n, far from the project area) continues to result in long delays in implementing environmental and resettlement measures, even when counterpart funding is not a constraint. This, together with the financial restrictions due to a substantial reduction of Argentine Government contributions during 1995, virtually put the implementation of complemen- tary works on hold for the last year. The Governmenr's confirmation, last December, of Mr. Herminio Sbarra as the Executive Director (after five months on duty as interim Executive Director) is seen as a crucial step for continuing with an adequate implemen- tation of the project. The restructuring of the department in charge of the execution of the resettlement and environmental protection works, needed to ensure adequate implementation of these works; and the streamlining of EBY's administrative procedures, needed to speed-up the process for procurement of goods and services, are high priorities in the new management's agenda. 21. Bank Supervision. During the last year, quarterly supervision missions were carried out, closely coordinated with IDB's staff in Argentina and Headquarters. In addition, the full-time supervising consultant on the site, reporting monthly to headquar- ters, has helped the Bank to anticipate and follow up on project issues. Notably, EBY's management and staff and Government officials have welcomed frequent Bank missions as a source of technical guidance. 55 Attachment 1 22. Privatization Plans. Following completion of a privatization study by . international financial advisors (funded by the Bank), the sponsoring Governments and EBY agreed with the Bank in early 1995 to proceed with the proposed privatization of EBY as anticipated in the loan agreement. On November 22, 1995, the Governments of Argentina and Paraguay signed a Protocol. providing a basic scheme for the contracting of private ooerators. under a 30-year concession arrangement, for the operation and maintenance or tne Yacvreta Dlant and for the marketing of energy. it is expected that the ?rotocol submitted to the two national Congresses will be approved by them before July 1996. Plans are to complete the procurement process and contracting of the private concessionaire by December 1996, which appears reasonable in the light of earlier Argentine experience in privatization of large infrastructure facilities. Bidding documents are being prepared by the Argentine Secretariat of Energy and Transport, with support provided by the SEGBA V Loan (2854-AR), in cooperation with the Paraguayan Ministry of Public Works and Communication and will be submitted to the Bank for comments by mid-June 1996. The Bank will carry out a review of the bidding documents, to ensure: (i) adequate funding for completion of the main civil works; (ii) adequate funding of the itemized investment and recurrent costs of all necessary environmental mitigation and resettlement activities; (iii) EBY's responsibility in executing such activities in accordance with the PARR and PMMA programs agreed with the Bank; (iv) adequate environmental rules for dam and spillway operation; and (v) that further raising of the reservoir be subject to compliance with the agreements between EBY and the two Governments and the Bank. relative to the execution of the PARR and PMMA programs. ADDITIONAL INFORMATION 23. Additional information will be circulated to the Board summarizing the findings of the May supervision mission. shortly after its return.  57 Attachment 2 COMMENTS FROM TIE ENERGY AND TRANSPORTATION SECRETARIAT (Translation of Spanish original) Ministry of Economy and Public Works and Services Energy and Transportation Secretariat Buenos Aires, June 3, 1996 Memorandum 00281 RE: Yacyreti Hydroelectric Project and Electric Power Sector Project (Loans 1761-AR and 2998-AR) Performance Audit Report Mr. Yves Albouy Chief, Infrastructure and Division Energy Operations Evaluation Department Dear Mr. Albouy: I am pleased to attach herewith the comments and observations made by the Energy and Transportation Secretariat on the World Bank's draft Performance Audit Report on the YacyretA Project. Please accept my best regards, Ing. Carlos M. Bastos Secretary of Energy and Transportation Attachment 2 58 Date: May 31, 1996 Comments from the Energy and Transportation Secretariat on the World Bank's Draft Performance Audit Report on the YacyretA Project. Comments on the following specific points: 1. Throughout project implementation, the report suggests the possibility that both the Bank and the Argentinean Government could have been in a position to decide on a possible suspension or cancellation of the works given the Project's lack of financial feasibility (Chapter 5). It is important to make a distinction between different periods. The 1978 appraisal, the cable from Argentina to the Bank in 1982, the results of the 1985 PIR report, and the 1987 assessments cannot be related to the additional financing decisions of 1992 and 1994. This is so given the advanced stage of the physical works at that time and because the remaining marginal investment to commission the first turbines at Level 76 justified such financing, a different story from previous periods. The same report indicates in paragraph 5.9 that "...In 1991, the accumulated sunk cost clearly ensured that Yacyretd formed part of the least-cost development program, ..." We believe it is important to note this difference when judgment is passed on the decisions made later regarding the continuity and viability of the project. 2. The Report outlines certain erroneous concepts, especially with respect to privatization, to the repayment capability of EBY's debt and as to the internal rate of return of the project. Following is an analysis of each of these issues. a. Due to the lack of updated information in the report with respect to the progress in the negotiations between Paraguay and Argentina on privatization matters, which materialized with the execution of the "Protocol for Private Sector Involvement in the Works and Services under the responsibility of Entidad Binacional Yacyret" on November 23, 1995, hereinafter the "Protocol", it is erroneously assumed in both the Executive Summary and in the conclusions that "It is expected that the foreseeable sale of Yacyretd's output to a private investor will yield enough cash to payoff EBY's foreign exchange debt. " This is incorrect and we believe it needs to be clarified. EBY's total debt as of 6/30/95, as reported by the Entity, amounted to US$7,568.9 million, and it is broken down as follows: 59 Attachment 2 EBY's Financial Debt (as of 6/30/95) (in US$ million) 1. Banks and Foreign Suppliers 94.4 2. Local Banks 66.2 3. Export Agencies 548.1 4. IDB 656.3 Subtotal 1,365.1 5. Government of Argentina 6,203.9 a. IBRD Loans 591.2 b. Electric Funds 2,115.1 c. Treasury Secretariat 2,785.6 d. Energy Secretariat 27.0 e. Brady Plan and others 685.2 TOTAL 7,568.9 It is unclear what is defined as EBY's "foreign" debt in the Report, nor what is the rationale of the statement made by the Audit in the sense that cash collection derived from privatization would be earmarked to pay off the debt. In the Protocol signed by Paraguay and Argentina, it is established that the investor will have to make an Initial Payment to Argentina, which acts as awarding variable and it is also stated that Argentina will assume the debt service of all those EBY liabilities listed in Table 2, Annex II of the Protocol. However, there is no direct correlation between the amount of the Initial Payment and that of EBY's "foreign" debt. b. In the Report's conclusions (paragraph 7.3) it is also pointed out that "Without privatization, the debt of EBY to Argentina would be paid off around the year 2036" citing as the source for this calculation EBY's financial projections of March 1995. We understand that this statement, made as a conclusion and without providing any additional information on energy price assumptions and project costs under which these projections have been calculated, constitute at the very least a debatable statement. Should it be inferred that the Audit validates these EBY projections? Upon review of the financial-economic evaluation made by the Audit in the Report, differences were detected with EBY's March 1995 projections. Does the Audit's financial projections reach the same conclusions as EBY's on the time it will take to repay the debt to Argentina? Attachment 2 60 These questions are raised because in the economic-financial calculations made by the Energy and Transportation Secretariat (in Spanish SEyT), it is found that at projected energy prices of 30 mills/kWh, EBY's debt with Argentina cannot be repaid during the lifetime of the project (60 years). It should be noted that the scenario in which SEyT is projecting EBY's financial surpluses is rather optimistic, above all when considering net energy prices of 30 mills/kWh and when assuming that the supplementary works would be completed in time and within budget to reach the final level. Current wholesale electrical market prices in Argentina are being set at the YacyretA node at around 25-26 mills/kWh and medium-term projections do not foresee any price increase, in some cases even forecasting lower values (22 mills/kWh) taking into account the additional supply of Argentina's thermal capacity of almost 1000 MW which is currently being installed in the Buenos Aires area. c. Following the same line of financial analysis, the Executive Summary of the Report states, for instance, that the project would reach an internal rate of return of 5.8%. We believe that there is an incompatibility in this calculation between the approach used to evaluate the loans objectives and the way costs and benefits are computed in order to obtain an indicator on the profitability of the undertaking. Throughout the Report the Audit evaluates the Bank's decisions as lender and those of Argentina as Borrower for the execution of the project. Argentina in turn on lends the Bank's funds to EBY and becomes an EBY lender. At the same time, Argentina is a partner on an equal share basis with Paraguay in EBY. If the idea is to evaluate Argentina's performance in the project, its double role as partner and lender to EBY needs to be understood. Thus, the net project benefits for Argentina should be measured by the funds received by Argentina as a result of debt service for the loans made to EBY plus the net profits derived from the project's operation, after payment of the financial commitments to lenders. In this sense, we see that in measuring the project's net benefits (and thus in the calculation of the net internal rate of return) as stated in the Report, the following main questions remain: i. We do not know the criteria used to valuate historical and remaining investments. Even though the Report indicates that total investments, including interests during construction, are estimated at US$8.22 billion (Table 4.1), the total amount of the investments shown in the Annex (Level 83) differs by more than US$1.2 billion with the this figure. ii. The main evaluation is made on the basis of an energy sale price of 40 mills/kWh, which does not reflect current conditions nor price projections expected in the Argentine market. iii. Main cost components such as transmission fees and compensation to the High Parties are not included. It should be remembered that from Argentina's point of view, the compensations and profits to be paid to Paraguay constitute an economic cost. 61 Attachment 2 iv. It is implicitly assumed that the capital invested has been financed with own resources, as no financial cost whatsoever is included in the project. Interest on EBY's debt, both with multilateral organizations, suppliers, export agencies and banks, as well as with the Government of Argentina as a lender, have not been calculated as project costs. SEyT has made its own calculations on the project's economic return and the same show a negative return when such factors as the interest to be paid on the debt, the transmission costs and the compensations and profits to be paid to Paraguay in accordance with the covenants of the Treaty and in its Official Notes, are added. These financial calculations are shown in the two attached tables. 3. Paragraph 3.3 (Project Management) the report indicates that during the course of the civil works contractors' "... no extraordinary situation was brought to light. " We believe that the Report cannot ignore that there were and still are numerous Pending Contractual Matters (in Spanish, ACP), Formal Claims and lawsuits by the main contractor which claims compensation for economic losses estimated by it of over US$700 million, which is equivalent to almost 50% of its original budget. 4. The decision of the Argentinean Government in the early 1990s to postpone the investment in Supplementary Works by US$547 million and to operate the dam at an elevation of 76 m., is a clear indication of an adjustment as a result of the project's financial situation. This constitutes a clear difference from the mistakes made in the past due to lack of financial planning, as indicated by the Audit Report (paras. 25, 5.14, 5.15 and 5.16), the Government of Argentina has presently decided not to transfer its own resources to continue the project to its final level, as it doubts the economic feasibility of the remaining marginal investment given the current management situation at EBY. In fact, the Report indicates (para. 11) that "...engineering costs are four fold and administration costs seven fold the appraisal estimates. " This situation could repeat itself or even become worse in case the supplementary works are carried out, thus, the Government of Argentina is giving priority to the option derived from the involvement of private capital to complete the project to the designed 83 level. 5. It is not clear how project overruns were calculated (paragraph 11), estimated at 59% at nominal value and 20.8% in constant dollars. 6. On the other hand, para. 5.19 of the Report, erroneously states the approach to privatization of the dam. To that effect, the Governments of Argentina and Paraguay have already agreed on the mechanism and on the structure to call on the private sector through the execution of the "Protocol for Private Sector Involvement in the Works and Services under the responsibility of Entidad Binacional YacyretA" dated November 23, 1995. This Protocol is currently under analysis of both national Congresses for its legislative approval and subsequent ratification. Attachment 2 62 On the one hand, the Protocol provides for the contracting of a private company to undertake the plant's operation and maintenance, including contract administration of Main Works and Creek Protection. On the other hand, there is a block energy sale and purchase operation for a period of thirty years to a marketing company, which will provide the remaining funds to complete the works. 7. Finally, we feel it is important that the Audit clarifies its statement in para. 29 on its evaluation of the performance of the Government of Argentina. As stated, it is impossible to establish whether this paragraph refers to the performance of the Government of Argentina as to one loan in particular, to a specific period of time, or to the entire Government performance in almost 20 years of project execution. ENTIDAD BINACIONAL YACYRETA CASH FLOW (in I IS$ niiolio s) Price: 30 mlls/kWh LEVEL 76, WITH OFFICIAL NOTE' 92 -'OWS LEVEL 76 ourceand Uses 11996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 LEVEL 76 Without Priv. 2 Income from energy sale 205.1 283 3 330 5 336 5 336 5 336 5 336.5 336 5 336 5 336 5 336 5 Loans to be disbursed 98.6 289 12 00 00 00 00 00 00 00 00 Total sources 303.7 312.2 331.7 336.5 336.5 336.5 336.5 336.5 336.5 336 5 336.5 Ies 480 540 540 540 540 540 540 540 5.1 0 54 0 54 0 Transmission fee 359 518 51.1 575 57.5 515 575 575 515 575 503 CompensationtoParaguay 120 165 193 196 196 196 196 196 196 164 764 Compensation to Argentina 00 00 00 00 00 00 00 00 00 2313 238 Investments Main Works 1603 685 236 00 00 00 00 00 00 0 00 Debt Services to Third Parties 2923 304 7 3145 2993 256 1 2435 2231 1085 153 1 121 7 91 9 Total uses 568.4 501.4 468.4 430.4 387.2 3746 354.2 2996 284.2 339 3 296 3 Net Results EBY (264.7) (189.2) (136.7 (93.0) (50.7) (38.1) (17.7) 36.9 52.3 (28) 402 Argentinian Flows: 0.0 00 00 00 0.0 0.0 00 00 00 238 238 + Comp. Argentina - Provincial Royalties 12.3 17.0 19.8 20.2 20.2 20 2 20.2 202 202 20 2 20 2 = Surplusl(Deficit) (277.0) (206.2 (156.5) (114.1) (70.9) (58.3) (37.9) 16.7 32.1 0 7 43.8 Debt Stock Argentina 5,9770 6,3440 6,6875 7,012.2 7,3158 7,627 5 7,938.3 8.214 4 8,4948 8,824 5 9,1289 Debt So Det 160.7 1870 2106 2326 253.4 212.9 2928 3126 3304 3483 3691 a Interest+onnDebt 5,700.0 6,137 7 6,531 0 6.898.1 1,244.8 7.5692 7,900.4 8.231.1 4 b27 0 8,0252 9.112 1 9.4980 Principal + Interest to be financed Surplus NPV 0.0 00 00 00 0.0 00 00 16.7 321 07 438 Suru N 565.5 at 10% 388.3 at 12%274.9 rr dg sandUses 007 2008 209 1¯2011 _202 2013 2014 2015 2016 2017 2018 2019 2020 LVL76 Without PrIv.2 Incorne from energy sale 336.5 3365 3365 3365 336.5 336 5 3365 336 5 3365 336 5 336 5 336 5 336 5 336 5 Lons be disbursed 0.0 00 00 0.0 00 00 00 00 00 00 00 00 00 00 Total sources 336.5 336.5 336 5 336.5 336.5 336.5 336.5 336 5 336 5 336 5 336 5 336 5 336 5 336 5 km Operaional costs 540 540 540 54 0 54 0 540 54 0 10 !,1 0 !.10 !l 0 .1 0 51 0 510 Transmission fec 286 286 286 00 00 00 00 00 00 0<0 n 0) 0 11 0 10 Compensation to Paraguay 76.4 764 764 764 164 164 /64 /64 164 /61 164 6 .5 136 r 136 / Compensation lo Argenina 238 238 238 238 238 238 238 238 23 8 2 8 2 8 31 1 46 1 46 1 invesunensMainWorks 00 00 00 00 00 00 00 0) ø<4 00 u Olk 0l (1 0 DebtServiccstoThirdPartes 851 546 267 133 30 29 25 20 20 20 20 20 19 19 Total uss 267.8 237.3 2095 167.6 157.2 157.1 156.6 1562 1562 1'>62 1561 1839 2393 2393 Nel Results EBY 68.7 99.2 1270 169.0 179.3 119.4 1790 1003 1803 I8 3 180 4 1!2 6 91 2 972 , Argenlinian Flows: +Com.Argenina 238 238 238 23.8 238 238 238 238 ý38 - Provincial Royalties 20.2 202 202 202 20.2 202 202 202 202 2D.) 202 20 2 20 2 20 2 Surplus/(Deficii) 72.2 102.8 130.6 172.6 182.9 183.0 183.4 1839 1839 1839 1839 1639 123 7 123 7 DebtSlockArgentina 9.4258 9.7116 9.9886 10,2420 10.5027 10.7196 11.0/26 11.382<9 11.1111 12.00l 1249ts 12 13 11 !, 1168 1381M83 -Pr on Ier 3886 4076 4259 443.6 4599 4765 4941 5127 5325 5!34 5156' 5991 6252 6553 Principal + Interest tobe financed 5.7000 9.8144 10.1192 10.414 5 10.6856 10.9626 11.2561 11.566/ 11 856 12 2.14 2 1 l1 I i I OW, 3 i i 4014) 13 94 2 0 14 4/36 SurplusNPV 122 1028 1306 1/26 1829 1830 183.1 lillu9 14VIq leu SA ., l-A 9 1 3 1i31 at 10% 565.5 at 12% 388.3 at 14% _ 274.9 Funding SoWces and Uses 2021 20 2023 2024 2025 2020 - 2027 2028 2020 203D 2031 2032 2033 2034 2D3 2038 2037 2036 2030 LEVEL 76 Without Prtv. 2 Income from energy sale 3365 3365 3365 336 5 6 5 3365 3365 3365 336 3 5 s 365 336 5 3365 3365 336 5 36 36 5 3365 3365 Loanstobedisbursed 00 00 00 0o o 00 00 00 00 0 00 00 00 00 00 00 00 00 00 ToS 3386 3385 3385 34 5 338 3385 3313 5 3385 s6 335 338 5 336 3385 58 5 336 5 33A5 33815 3" 5 3365 less 54 0 54 0 540 54 0 s4 540 54 o 0 540 540 540 a 4 540 540 54 0 54 0 a 40 540 0 Operational costs 00 00 00 00 00 00 00 00 00 0 0o 00 00 00 G 00 00 o 00 Transimiso on Pru 1387 1387 1387 136 1387 764 764 764 764 764 764 764 764 764 764 764 764 764 764 Compensation to Argenaum 467 487 48 7 46 7 46 7 238 23 a 238 238 238 238 238 238 238 238 238 238 238 23 a 00 00 00 00 00 00 00 00 00 InvestmentsMainWorks 00 0 00 Co 00 00 00 00 00 00 00 00 0 00 00 00 00 00 00 DebtServicestoTturdParties 1 19 1o 1s 00 00 00 00 00 0o 00 00 00 00 00 00 0 0o 00 Toal uses 259 3 2303 2392 2302 2374 1542 164 2 1542 1542 154 2 154 2 142 1542 1642 1542 1542 1542 104 2 15.42 Net Results EBY 972 972 973 073 O1 1823 1813 1823 1823 162 12 3 1823 1823 1823 1823 182 5 123 1823 1823 ArgentineanFlows: 467 461 467 407 467 236 2J8 236 236 8 z3E 236 236 /36 23B 23e 238 236 23e + Comp. Argentina - Provincial RoyakiCs 202 202 202 202 202 202 202 202 202 202 20 2 202 202 202 202 202 202 102 2. 2 Surplus/(Deficit) 1237 1237 123 8 s3a 1265 1516 185 . 15 9 1850 1859 1856 1859 185 1856 18s0 1859 1850 18s i 1859 DebtStockArgentina 143499 149133 155105 161435 168126 174618 181539 186875 196652 2048' 213bi 1 222894 232712 243119 254150 2658443 278237 291376 307E-O2 iluterestonDebt 6872 7210 7568 7948 8350 8780 9195 9636 10102 10597 11121 11677 12266 12890 13552 14254 14997 15786 16b21 Principl+ Interest to be fnanc 57000 150370 15634 2 162673 16 938 3 176477 183398 190734 198511 206754 21549 1 224753 23457 1 24.4978 256009 267702 28 006 6 293235 30716 1 32 192 3 SurplusNPV 1237 1237 1238 1238 1256 1859 1859 1869 1859 1859 1859 1859 1859 1859 18569 1859 109 1859 1856 atl10% so55 at 12% 7740 at 14% r (D1 rt rt Funding SourcesandUses 2040 204i 2042 1 2043 2044 2045 2040 2047 2048 2049 2050 2051 2052 20U 2054 2066 ' LEVEI. 76 Without Priv. 2 (D I rt jilin)Cne frol energy SAle 336 5 336 5 316 S 3 65 336 5 3365 3 16 5 3365 l 336 5 T16 5 3365 3365 336 5 336 5 336 5 LOans to be disbursed 00 00 0 . 00 001 00 00 00 0 0 00 00 00 00 00 00 00 Totl sources 3365 336 5 336 5 336 5 336 5 3365 336 5 336 5 336 5 336 5 336 5 3365 3365 336 5 336 5 336 5 les Opealionatcosts 54u 4 0 40 540 54 54' 54 0 54 0 4 0 54 0 A 540 4 0 54 54 0 54 0 Transmission fee 00 00 0 0 00 00 00 00 00 0 0 00 00 00 00 00 00 0 0 Compensalion to Paraguay 164 76 4 164 16 4 76 4 164 764 164 16 4 164 76 4 16 4 76 4 16 4 76 4 164 Coripeisaitin to Argenina 23 8 238 23 8 23 8 23 8 238 23 8 23 A 238 238 23 8 23 8 23 8 238 23 8 23 8 00 00 00 00 00 00 00 0O (i0 00 00 00 00 00 00 00 invc%iments Main Wwks 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 00 DebtServicestclT1irdPanies 00 00 00 0 00 00 00 00 00 00 00 00 00 00 00 00 Total uses 154 2 154 2 154 2 154 2 154 2 154 2 154 2 154 2 154 2 154 2 154 2 154 2 154 2 154 2 154 2 154 2 Net Results EBY 182 3 182 3 182 3 182 3 182 3 182 3 182 3 182 3 182 3 182 3 182 3 182 3 182 3 182 3 182 3 182 3 Argentinean Flows: + Comp.Argenfina 238 238 i373 23f 23h 238 238 238 27 238 238 238 23 8 238 238 238 -ProvincLalRoyalues 202 202 202 202 202 202 202 202 2o2 202 4 202 202 202 202 202 202 = Surplus/l(ericil) 1859 1859 1859 1859 1859 1859 1859 1859 185 9 18 9 1859 1859 1859 185 9 1859 1859 Debi Stock Argentina 32 0064 33 571 2 35 229 9 36988 1 38 851 8 40827 3 42 921 3 45 141 0 1/ 493 8 49987 9 52 631 5 55 433 8 58 401 3 61 552 9 64 890 5 68 428 3 Interest on Debt 1 750 7 1 844 6 1 944 1 20496 2 161 4 2.2799 2 4056 2 5388 2 6799 28296 2 988 2 3 1563 3 334 3 523 5 3 723 7 39360 Principal + Interest to be financed 5 7000 33 757 1 35 415 8 37 174 ) 39 037 7 41 013 2 43 107 2 45 3269 47 679 / rO 1738 >2 817 4 55619 7 58 590 2 61 738 8 5076 4 68614 2 72 364 3 Surplus NPV 1859 1859 1851) 1859 1859 1659 185 9 1[57 9 859 1659 1859 1859 185 11 1859 1859 185 9 at 10% 5655 at 12% 3883 a114% 274 9 67 Attachment Yacvretsi Hydroelectric Project: ERR Calculation (Level 76) Period Year Investments Operatonal Transmission Interest Interest Cornpens. Total Sales Price Total Net E xpenses Costs Ext. on Debt. . to Costs Incoe Project Debt Gov. Arg. Paraguay Profis S96 -as as% -15s6 IWs9 -ISs6 -sW 9a "I9 : uT"Whm 96 s59 -,5s6 1 1975 46 3 46 3 0 0 46 3) 2 1976 i0 6 30 6 0 0 30.6) 3 1977 32 3 32 3 0 0 32.3) 4 1978 A4 7 944 7 0 0 94.7) 5 1979 95.0 295.0 0 0 1295.0) 6 1980 1530 4530 0 0 453.0) 7 1981 -990 099 00 299.0) 8 1982 --93 0 293 0 0 0 2493.0) 9 1983 '70 0 170 0 0.0 170 0) 10 1984 -96.0 296.0 0 0 296.0) 11 1985 A00 0 300 0 0.0 300.0) 12 1986 167 0 467 0 0 0 467 0) 13 i987 508 0 508 0 0 0 508.0) 14 1988 '80 0 780 0 0 0 700 15 1989 632.0 632.0 0 0 532.0) 16 1990 )70 0 970 0 0 0 -970.0) 17 1991 ,33.0 633.0 0 0 .633.0) 18 1992 416 0 416 0 0 0 416.0) 19 1993 -32.0 632.0 0 0 1632.0) 20 1994 900 0 35 0 1 0 836.0 550 30 16 5 819.5) 21 1995 ;;57 0 40 0 5 8 702.8 3313 30 99.4 603.4) 22 1996 145 5 48 0 35 9 131 5 160 7 I 12 0 533 6 6838 30 205.1 '328.5) 23 .997 75 6 54 0 57 8 130 4 1837 0 16 5 521.3 9443 30 283.3 23M.0) 24 1998 50.5 54 0 57 1 105 6 210 6 19 3 497 0 11016 30 330.5 166.5) 25 1999 19 1 54 0 57 5 )4 9 232 6 19 6 -/7 8 11217 30 336.5 141 2) 26 11000 54 0 57 5 51 9 5 )3.4 19 6 166 4 11217 30 336.5 Q29.9) 27 2001 54 0 57 5 7 9 272 9 i9 6 472 0 11217 30 336.5 135.5) 28 2002 54 0 57 5 55 0 292.8 !9 6 4 78 9 !1217 30 336.5 142 4) 29 2003 54 0 57 5 45 0 112.6 i9 6 488 8 11217 30 336.5 152.3) 30 2004 54 0 57 5 35 6 1 330 4 19 6 497 1 11217 30 336 5 160.6) 31 2005 54 0 57 5 26 7 ! 38.3 1 6 4 562.9 11217 30 336.5 226.4) 32 2006 54 0 50.3 182 I 369.1 76 4 568.0 11217 30 336.5 -231.5) 33 2007 54 0 28.6 1181I 388.6 76 4 559.4 11217 30 336.5 222.9) 34 2008 54 0 28 6 6 2 I 407 6 1 76 4 572.8 11217 30 336 5 236.2) 35 2009 54 0 28.6 2.7 425.9 6 4 587.6 11217 30 336.5 251.1) 36 2010 54 0 0.91 443 6 i 76 4 574 9 11217 30 336.5 1238.4) 37 2011 54 0 0 4 459 9 76.4 590.7 11217 30 336.5 254.1) 38 2012 54 0 0.3 47651I 76 4 607.2 11217 30 336.5 270.7) 39 2013 54 0 0 2 4194 1 1 76.4 624.7 11217 30 336.5 28-2 40 2014 54 0 021 512.7 76 4 643 3 11217 30 336.5 306.8) 41 2015 54.0 021I 532 5 76 4 663.1 11217 30 336.5 1326.5) 42 2016 54 0 021I 553.4! 76.4 684.0 11217 30 336.5 .347.4) 43 2017 54 0 0.1 I 575.61 76.4 706.1 11217 30 336.5 369.6) 44 2018 54 0 0 1 1 599.1 96.5 749.7 11217 30 336.5 -413.2) 45 2019 5.40 0 1 1 625.2 136.7 816.0 11217 30 336.5 479.5) 46 2020 54 0 0 1 I 65531I 136.7 846.1 11217 30 336.5 SO09.51 47 2021 54 0 0 1 1 687.2 i 136.7 877.9 11217 30 336.5 541.4) 48 2022 54 0 0 1 1 721 01 I 36.7 911.7 11217 30 336.5 575.2) 49 2023 54 0 0 0 '56 8!I 136.7 947 5 11217 30 336.5 611.01 50 2024 54 0 0.01 794 8 1 136.7 985 5 11217 30 336.5 649.0) 51 2025 54 0 83501I 136 7 ! 025.7 11217 30 336.5 i;89.2) 52 2026 54 0 8780O 76 4 1 008 4 11217 30 336.5 671.9) 53 2027 5>4 0 91951I 76 4 049 9 11217 30 336.5 713.4) 54 2028 54 O 963.6 76 4 0940 !?1217 30 336.5 '57 4) 55 2029 54 O 1.010 2 76 4 1 140 6 11217 30 336.5 804.1 56 2030 54 0 1.059 7 76 4 1 190.1 11217 30 336.5 853.6) 57 2031 54 0 1.112 1 76 4 1 242.5 11217 30 336.5 906.0) 58 2032 5.40 1,167.7 76.4 1 298.1 11217 30 336.5 961.6) 59 2033 54 0 1 226.6 76.4 1 357.0 11217 30 336.5 t 1.020.5) 60 2034 54 0 11.2B9.0 16.4 1.419.4 11217 30 336.5 (1.082.9) 61 2035 54 0 1.355 2 i 76 4 1,485.6 11217 30 336.5 ( 1. 149. 11 62 2036 54.0 1.425.4 I 76 4 1.555.8 11217 30 336.5 <1219.3) 63 2037 54.0 1.499.7 1 76 4 1.630.1 11217 30 336.5 (1.293.6) 64 2038 54.0 1.578.61I 76.4 1.7090 11217 30 336.5 (1.372.4) 65 2039 5.4.0 1.662.1 1 76 4 1.792.5 11217 30 336.5 01.456.0) 66 2040 54.0 1,750.71I 76.4 i,881.1 1217 30 336.5 (:1.544.6) 67 2041 54 0 1.844 61 76 4 1 975.0 111217 30 336.5 (1.638.5) 68 2042 54.0 1.944.1 I 76 4 2,074.5 11217 30 336.5 (1.738.0) 69 2043 54.0 2.D49.6 1 76.4 2.180.0 11217 30 336.5 (1.843.5) 70 2044 54.0 2.161.4 1 76.4 2.291.8 11217 30 336.5 (1.95.3) 71 2045 54 0 2.279.9 I 76.4 2.410.3 11217 30 336.5 (2.073.81 72 2046 54 0 2.405.6 1 76.4 2.536.0 11217 30 336.5 (2.199.51 73 2047 54.0 12.538.8 I 76.4 2.669.2 11217 30 336.5 (2.332.7) 74 204 5.4.0 2.679.91 76.4 2.810.3 11217 30 336.5 i.2,473.8) 9,095.6 2.931.0 TtRI Åttachment 268 Yacyretá Hydroeiectric Project: ERR CaIculation (Level 83) Penod Year Invesanems Operauonal Transmission Interest Interesi Compens. Totaj Sales Pnce Total Net Expenses Costs Ext. on Debt :o Costs Income Project Debe Gv. Arg Paraguay Profits 10 -9 197 3 96 ,1SM ,'s - 96 -,59% ,a%6 ;.n ;,uwnæ ,9 s -1s9 ' 1 1975 163 463 00 463) 2 1976 20.6 306 30 306) 3 1977 323 7 2 3 9 0 32.3) 4 1979 947 94. 10 94 7) 5 1979 295.0 9950 00 2950) 6 1 981 2530 4530 00 -53.0) 7 1981 299.0 2990 00 299 0 8 1982 293.0 93 0 00 293.0) 9 1983 170.0 170 0 00 170.0) 10 1984 296.0 2960 00 296.0) 12 19865 300.0 3000 00 300.0) 12 1986 4670 4670 00 4670) 13 1987 080 5080 00 508 0) 14 1989 80.0 .80 0 00 780.0) 15 1969 32.0 6320 00 632.0) 16 1990 970.0 970.0 00 970.0) 17 1991 633. 0 633.0) 18 1992 4160 4160 00 416.0) 19 1993 632.0 63. 032.0) 20 1994 300.0 35.0 0 836.0 550 30 16.5 '819.51 21 1995 65 0 40.0 58 702.8 3313 30 99.4 603.41) 22 1996 3110 580 35.9 1640 161.2 120 732.0 6838 30 205.1 526.9) 23 1997 253.1 540 65.8 16691 1988 16.5 755.1 9443 30 283.3 471.81 4 1996 .99.2 540 65.1 145 8 235 9 242 724.1 13809 30 414.3 309.81 1999 540 655 242 2706 25.0 5493 '4306 30 :292 120.1) 7 00 340 65.5 '189, , '93.5 - 59 567 8 20497 30 6149 47 1 27 001 540 655 100 2 306 2 35.9 561 7 20497 30 6149 53.2 28 2002 540 65.5 32.5 3192 359 557.1 20497 30 6149 57 8 29 2003 540 65.5 694 331 a 359 5565 20497 30 614.9 584 30 2004 540 65.5 574. 339.9 359 552.7 20497 30 6149 62.2 31 2005 540 65.5 457 347 6 1348 6475 20497 30 6149 32.6) 32 2006 540 58.3 34.2 360.0 1348 641.2 20497 30 614 9 26.3) 33 2007 54.0 36.6 24.7 370.6 1348 520.7 20497 30 6149 ,5.8) 34 2008 54.0 36.6 15.8 380.0 1348 6212 20497 30 6149 6.3) 35 2009 54.0 36.6 8.8 388.2 1348 622.3 20497 30 614.9 (74) 36 2010 54.0 8.0 4 1 l 395.1 134.8 595.9 20497 30 614.9 19.0 37 2011 54.0 8.0 2.8 1 397.4 1348 597.1 20497 30 614.9 178 39 2012 54.0 2.0 l 399.3 1348 590.1 20497 30 614.9 24.8 39 2013 540 1 21 400.7 1348 590 7 20497 30 614 9 24.2 40 014 540 02 i 402.2: 134.8 591 2 20497 30 614 9 23.7 41 2015 54.0 021 403.4. 134.8 592.3 20497 30 614.9 22.6 42 2016 540 0.2 1 404.3 ! 134.8 5933 20497 30 614 9 21.6 43 2017 540 0.1 405.4 i 134.8 5943 20497 30 6149 20.6 44 2019 54.0 011 406.4' 154.9 615.5 20497 30 6149 (0.6) 45 2019 54.0 0.1 -409.4' 195.1 658.6 20497 30 614.9 (43.7) 46 2020 540 0 11 416.1 l 1951 665.3 20497 30 614.9 (50.4) 47 2021 54.0 0 1 i 423.2 195.1 672.4 20497 30 614.9 ý57.5) 48 2022 540 0.1 i 4308 195.1 679 9 20497 30 6149 65.0) 49 023 b4 0 0' 438.8 195 1 6879 20497 30 6149 '73.01 50 2024 940 '30 4473 .95 1 696.4 20497 30 6149 '81.5) 1 202 5 40 4563 95.1 705.4 20497 30 6149 90.5) 202 54.0 465 7 34 8 654 5 20497 30 6149 '39.61 53 2027 540 470 3 1348 659.1 20497 30 614.9 (44 21 54 2026 540 4751 134.8 663.9 20497 30 6149 49.0) 55 2029 540 4803 1348 669.1 20497 30 614.9 (54.2) 56 2030 54.0 485.7 134 8 6745 20497 30 614.9 (59.6) 57 2031 540 491.5 1348 6603 20497 30 614.9 '65.4) 58 2032 54.0 497.7 134 8 686.5 20497 30 614.9 (71.6) 59 2033 540 504.2 1348 693.0 20497 30 614.9 (78.1) 60 2034 54.0 511.1 134.8 699.9 20497 30 614.9 (85.0) 61 2035 54.0 518.41 134.8 707.2 20497 30 6149 (92.3) 62 2036 54.0 526.1 134.8 714.9 20497 30 614.9 (100.0) 63 2037 54.0 534.3 1348 723-1 20497 30 614.9 108.2 64 2038 54.0 543.0 1348 731.8 20497 30 614.9 (116.9) 65 2039 540 552.31 134.8 741.1 20497 30 614.9 (126.2) 66 2040 540 562.1 134.8 750.9 20497 30 614.9 (135.9) 67 2041 540 572.4 1348 761.2 20497 30 614.9 (148.3) 69 2042 54.0 583.4 1348 7722 20497 30 614.9 (157.3) 69 2043 540 595.1 1348 783.9 20497 30 614.9 (169.0) 70 2044 54.0 607 4 1348 7962 20497 30 614.9 <181.3) 71 2045 540 620.5 1348 8093 20497 30 6149 1194.4) 72 2047 54.0 634.41 134.8 823.2 20497 30 614.9 (208.3) 73 2047 540 649.1 1348 837.9 20497 30 614.9 (223.0) 74 2048 5.4.0 664.7 134.8 853.5 20497 30 614.9 (238.6) 9.58.3 2.931.0 Notas: inversione Inciuve costo total de financaamento (hasta 19 TIR ERR 69 Attachment 2 COMMENTS FROM THE ENTE NACIONAL REGULADOR DE LA ELECTRICIDAD (ENRE) (Translation from Spanish original) Buenos Aires, May 24, 1996 Mr. Yves Albouy Chief Infrastructure and Energy Division Operations Evaluation Department World Bank 1818 H Street, N.W. Washington, D.C. 20433 - U.S.A. Dear Mr. Albouy: Re: Yacyreta Hydroelectric Project (Loan 1761-AR) Electric Power Sector Project (Loan 2998-AR) Performance Audit Report The Ente Nacional Regulador de la Electricidad (ENRE) began its operations in April 1993. following the basic principles that led to the sector's reform. It is responsible for maintaining the balance among the different stakeholders in the wholesale electrical market, intervening and solving their conflicts, ensuring transparency of information, and monitoring the monopolies granted under concession. First, let me state that ENRE is not in a position to comment on the figures presented by the World Bank's Operations Evaluation Department, because ENRE has not performed any feasibility studies, economic-financial analyses, or any other type of research related to the YacyretA Project. Second, keeping in mind the date of ENRE's creation and considering that the Ente Binacional Yacyreti is a stakeholder in the market, all we can say is that the project is partially operational, with a hydraulic generation of 3,788.5 GWh during the period January-December 1995 over a Attachment 2 70 total hydraulic generation for the same period of 24,448.4 GWh, thus maintaining a 15.5% share of the country's generation. As to the Audit findings, ENRE agrees with the evaluation made by your Department and with the lessons learned from Yacyret's history. However, ENRE must maintain first and foremost a prospective view of this Project because. while it is true that it is possible to learn from the past, we cannot act upon it. It is known that, given the extent of the current development of the YacyretA Project, the Bank cannot, at this stage, stop its support of the same. With this in mind, we can only focus on how to proceed with EBY's completion. In this sense, we firmly believe that thanks to Argentina's success in its privatization and stabilization processes, the Yacyretd Project will be completed in accordance with all its design parameters and that its operation will make possible its completion and its debt service. Finally, we are certain that your Department will be able to evaluate YacyretA satisfactorily as the World Bank continues its monitoring of the project until its completion. Please be assured that I remain, Sincerely yours, Carlos A. Mattausch President Ente Nacional Regulador de la Electricidad 71 Attachment 2 COMMENTS FROM ENTIDAD BINACIONAL YACIRETA (EBY) (Translation from Spanish original) Entidad Binacional Yaciretti Letter DF No. 31120 Buenos Aires, May 23, 1996 Mr. Yves Albouy Chief, Infrastructure and Energy Division Operations Evaluation Department The World Bank Washington, D.C. Dear Mr. Albouy: Re: Yacyreta Hydroelectric Project (Loan 1761-AR) Electric Power Sector Project (Loan 2998-AR) Performance Audit Report I acknowledge receipt of the Spanish version of the above indicated Performance Audit Report. The comments I have on the report are of a formal nature and do not refer to the conclusions reached by the Bank's experts. Loan 1761-AR. The year 1976 was omitted from the table on Staff Inputs (Staff-Weeks), during which apparently no work was carried out. If this is the case, I suggest that this year be included in the Project Cycle phase with the corresponding zero value. Loan 2998-AR. The Staff Inputs table shows 6.4 staff weeks for the Negotiations stage in the year 1989. If the Board approved the Loan on 10/27/88 and the same was signed on 11/18/88, we assume that negotiations ended at that time and that supervision ensued. Likewise, it should be noted that the loan was for US$252 million, of which US$2 million were disbursed to the Energy Secretariat and US$250 million to the Yacireta Project. The amounts committed by the Bank are as follows: Loan 1761-AR: US$210 million (redeemed loan) Loan 2998-AR: US$250 million Loan 3520-AR: US$299 million Attachment 2 72 Anmendment to Loan Agreement - Loan 2854-AR: US$137.6 million plus the proportional part from interest payments resulting from the use of the proceeds from the category corresponding to EBY. The current total committed amount is US$896.6. Sincerely yours, Ing. Regina 0. Muz Coordinator, International Organizations  IMAGING Report No: 15801 Type: PPAR