Peru - Electricity Privatization Adjustment Loan

 ICRR 10487 Report Number : ICRR10487 ICR Review Operations Evaluation Department 1. Project Data : OEDID : OEDID: L3810 Project ID : P008040 Project Name : Electricity Privatization Adjustment Loan Country : Peru Sector : Electric Power & Other Energy Adjustment L/C Number : Loan 3810-PE Partners involved : Prepared by : Alvaro J. Covarrubias, OEDST Reviewed by : Alain A. Barbu Group Manager : Gregory K. Ingram Date Posted : 08/18/1999 2. Project Objectives, Financing, Costs and Components : The Electricity Privatization Adjustment Loan (EPAL) for US$150.0 million was approved in FY95 and closed in FY99 after two one-year extensions. A total of US$100.0 million was disbursed in two tranches of US$ 50.0 million each, the first one when the loan was signed and became effective on November 22, 1994, and the second on November 21, 1995. The third tranche was canceled at loan closing . The EPAL was to support the Government ’s electricity privatization program and related legal /regulatory/institutional reforms with the twin objectives of promoting adequate and environmentally sustainable supplies, and enhancing economic efficiency through competition and private sector participation. By supporting privatization and regulatory reform in the electricity sector, the objectives were consistent with the Bank’s assistance strategy for Peru in infrastructure development, institutional building and macroeconomic sustainability. The program supported by the EPAL was broadly defined in a policy letter submitted by the Government. The program comprised four components : (a) maintaining a satisfactory macroeconomic program and financing plan; (b) implementing legal, regulatory and institutional reforms in the electricity sector; (c) implementing electricity pricing reform; and (d) privatizing the Government’s holdings in the sector. The Loan was to contribute to the achievement of the objectives by providing resources to easy the country ’s economic transition, assisting in the design of the reform through dialogue, and strengthening the Government ’s commitment to promoting reforms by providing incentives to meet the disbursement conditions . The conditions for the release of the three tranches of US$50.0 million each were: (a) for the first tranche: upon loan effectiveness, i .e. compliance with IMF three-year Extended Fund Facility and Bank adjustment lending as well as satisfactory progress in implementing the electricity sector reform set out in the Policy Letter; (b) for the second tranche: same conditions set out for the first tranche, plus setting of electricity tariffs at 100 percent of economic cost, plus privatization of Electrolima distribution in Lima and no less than 12 percent of assets in generation owned by Electrolima and Electroperú combined, plus maintenance of full autonomy of the Electricity Tariff Commission, plus issuing antitrust rules for electricity sector enterprises; and (c) for the third tranche: same conditions set out for the first tranche, plus maintenance of electricity tariffs at 100 percent of economic cost, plus privatization of at least 52 percent of generation assets of Electroper ú (it implicitly meant to privatize the 779 MW Mantaro-Restitución hydroelectric complex). The proceeds of the loan were allocated to finance 100 percent of the CIF value of general import not contained in a negative list. 3. Achievement of Relevant Objectives : Macroeconomic and electricity sector reforms were substantially achieved and the sector by and large is functioning well. On the macroeconomic front, the GDP annual growth rate averaged 7 percent in 1992-97. Inflation was down to 6.5 percent in 1997, investment rose from 18.6 percent to 24.7 percent in the period 1993-97, and the public deficit was reduced to zero (the ICR does not provide data for 1998 but indicates that macroeconomic performance would have been negatively affected by El Ni ño). On the electricity sector front, the reform, initiated in November 1992 by enacting the Law on Electric Service Concessions and related regulations, has been satisfactorily implemented. Antitrust legislation for the sector was enacted, the Electricity Tariff Commission and the Committee for the Economic Operation of the System are established and functioning, and the privatization of the sector is on-going. The legal/regulatory/ institutional framework introduced competition in power generation and regulation of prices for transmission services and for consumers demanding less than 1,000 kW. Electrolima and Electroperú were restructured and their activities divided in independent generation, transmission and distribution companies . About 48 percent (US$1,500 million) of the combined assets of these companies have been privatized and the balance is in the process of being privatized . Seven of the eight conditions for the release of the three tranches of the Loan were complied with. The non-compliance with the eighth condition (privatization of 52 percent of the majority interest of the Government in the assets of the generating utilities ) impeded the release of the third tranche in spite of two one-year extensions of the loan closing date . 4. Significant Achievements : In addition to the significant contribution of the Loan to the macroeconomic program and the successful implementation of the legal and regulatory framework for the electricity sector, it is worth mentioning some of its more important outcomes. Supply interruptions due to capacity shortages have ended, and anticipated private investment would ensure adequate future supply; service coverage (accompanied of better service quality ) has expanded from 53 percent in 1993 to nearly 70 percent in 1998; production efficiency has improved notably as shown by a decrease of the transmission and distribution losses from 21.8 percent in 1993 to 12.4 percent in 1998, and an increase in the customers /employee ratio from 316 to 520 over that period; the sector has shifted from draining the public treasury (a loss of US$300 million in 1990) to being a source of fiscal income (US$300 million in profits in 1998). Moreover, the culture of receiving subsidized electricity has been broken . 5. Significant Shortcomings : The most significant shortcoming of the program is the still pending privatization of the Mantaro -Restitución 779 MW hydroelectric complex. Operation of these hydroelectric plants has a large weigh in the interconnected generating system and can significantly influence the spot price of electricity . Consequently, Government ownership of these two hydroelectric plants may distort generation competition if their operation were done with other than technical or economic criteria. In this regard, the present majority vote of the Government in the Committee for Economic Operation of the Sector may alter the fairness and stability of the Committee ’s decisions. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : Public acceptance of a reform involving privatization of state -owned-utilities requires that Govermennt carry out studies of the effects of privatization and adequately disseminate the results so that the public is not misled . Also, when privatizing, it is important to have good coordination among the Government ’s units responsible for the process, and to move quickly by employing highly competent professionals, to avoid development of resistance . Moreover, electricity tariff increases should be made well before privatization commences : it will comfort private investors and ease public acceptance of privatization . 8. Audit Recommended? Yes No Why? The audit would look, inter alia, into : (a) the pending privatization of the US $1,000 million worth Mantaro-Restitución hydroelectric complex; (b) the effects of the possible lack of autonomy of the Electricity Tariff Commission caused by excessive Government ’s control; and (c) the fairness and stability of decisions being made by the Committee for the Economic Operation of the Electricity System . 9. Comments on Quality of ICR : The ICR is satisfactory overall . It presents a detailed description (at times repetitive) of the program implementation and results. It also provides good background information on the macroeconomic and electricity sector conditions that led to the EPAL. Although the ICR gives good recommendations on how to complete and maintain the electricity sector reform program it does not clarify whether the Government will act accordingly . It would be appropriate to issue errata in order to correct inaccuracies in Table 4 (Loan Disbursement), Table 8A (Program Cost), and Table 8B (Program Financing) as well as to input missing data in Table 13 (Bank Resources: Missions). The ICR includes the Aide-Mémoire of the ICR mission, the Borrower’s program completion report, and a map, but lacks the Borrowers’ future operational plan to maintain the achievements of the EPAL .