Mexico - Transmission and Distribution Project

 Transmission and distribution project Report No: ; Type: Report/Evaluation Memorandum ; Country: Mexico; Region: Latin America And Caribbean; Sector: Distribution & Transmission; Major Sector: Electric Power & Other Energy; ProjectID: P007662 Mexico: Transmission and Distribution Project (Loan 3189-ME) The implementation Completion Report (ICR) on the Mexico Transmission and Distribution Project (Loan 3189-ME, approved in FY90) prepared by the Latin America and the Caribbean Regional Office, including the Borrower's contribution, was reviewed by the Operations Evaluation Department (OED). The loan for an amount of US$450 million was approved in April 1990 and closed in December 1994, one year behind schedule; the loan was fully disbursed. The project was cofinanced with the Inter-American Development Bank (IDB). The project was the second in the sector following the resumption of Bank involvement in power lending in 1989 after a 17-year hiatus. Its primary objectives were to: (i) improve the availability and reliability of thermal plants operated by the Federal Electricity Commission (CFE), Mexico's principal state-owned utility; (ii) expand CFE's transmission and distribution capacity in order to meet demand while improving service quality and reliability; (iii) strengthen CFE's environmental monitoring capabilities; (iv) correct tariff distortions in order to improve end-use efficiency and strengthen sector finances; and (v) further CFE's managerial autonomy and operating efficiency. The project was defined as a two-year(1991-92) time slice of CFE's investment program, within which four special programs (in transmission, distribution, thermal plant rehabilitation and environmental studies) were to be financed by the Bank loan. The loan also provided, inter alia, for: (i) average tariffs to be increased by 30 percent in real terms; and (ii) CFE's rate of return on revalued assets to be raised from 4 percent to 7 percent, both within four years. The project achieved most of its physical objectives, but over a four (instead of two)-year period, mainly due to budgetary constraints imposed by the Government and a lowerthan-forecast (by 40 percent) demand growth. The environmental studies were carried out and CFE implemented their recommendations by setting up an emission monitoring network and replacing combustion and fuel handling equipment in several plants. CFE was able to meet most of the operational performance targets provided under the project. However, financial objectives were not met as the initial gains (in terms of real tariff increases and improved profitability) made in 1991 and 1992 were all but offset in subsequent years--with CFE's rate of return on assets down to 4 percent in 1994--as a result of the Government wavering tariff policy in a difficult political and macroeconomic environment; and CFE's financial autonomy remains severely restricted. Broad sector institutional reform--including the possible unbundling and partial privatization of CFE--is currently being studied by the Government. On balance, the outcome of the project is rated as marginally satisfactory and its institutional development as moderate (respectively satisfactory and substantial in the ICR), given the above shortcomings on the policy and institutional fronts. Project sustainability is rated as uncertain (instead of likely in the ICR) in light of the recent erosion of tariffs (in real terms) and of current uncertainties regarding future tariff policy. Bank performance is assessed as satisfactory (as in the ICR). A key lesson of this project is that the introduction of Bank-required ICB procedures in this critical sector can lead to immediate and broad benefits to the economy; in this case, these included lower prices and better quality of equipment acquired by CFE, and enhanced efficiency and productivity of domestic producers of such equipment. The ICR is thorough and informative and is thus assessed as satisfactory. No audit is planned.