Peru - Electricity Privatization Adjustment Loan Project (EPAL)

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 19441 IMPLEMENTATION COMPLETION REPORT PERU ELECTRICITY PRIVATIZATION ADJUSTMENT LOAN (EPAL) (LOAN 3810 - PE) June 15, 1999 Finance, Private Sector and Infrastructure Sector Unit Bolivia, Paraguay and Peru Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS June 15, 1999 Currency Unit = Nuevo Sol (S/.) US$l=S/3.34 S/i=US$0.30 FISCAL YEAR January 1- December 31 ABBREVIATIONS AND ACRONYMS CEPRI Special Privatization Committee COES Committee for Economic (Electricity) System Operation COPRI Committee for Private Sector Investment CTE Electricity Tariff Commission EDEGEL Lima Electricity Generation Enterprise EGASA Arequipa Electricity Generation Enterprise ETECEN Transmission Enterprise for the Central-Northern Interconnected System ICR Implementation Completion Report IDB Inter-American Development Bank IMF International Monetary Fund INDECOPOI Government Competition and Consumer Protection Agency MEF Ministry of Economy and Finance MEM Ministry of Energy and Mines OSINERG Supervisory Agency for Investments in Energy SICN Interconnected Central-Northern Electricity System SOEs State-owned Enterprises Vice-President: Shahid Javed Burki Country Director: Isabel Guerrero Sector Director: Danny Leipziger Task Manager: Joerg Uwe Richter  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. PREFACE ........................................................................................ EVALUATION SUMMARY ................................................ 11 PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Background .............................................; .....I B. Project Objectives and Design ............................................ 3 C. Achievement of Objectives ............................................ 5 D. Major Factors Affecting the Project ........................ .. 10 E. Project Sustainability ..........................1 F. Bank Performance .......................... 12 G. Borrower Performance .......................... 13 H. Assessment of Outcome ............................. ..... 14 I. Operational Plan ......................................... 15 J. Key Lessons Learned ......................................... 17 PART II: STATISTICAL TABLES Table 1: Summary of Assessments ......................................... .....19 Table 2: Related Bank Loans - Preceding Loans . .......................... ..... 20 Table 3: Project Timetable ............................. ..... 21 Table 4: Loan Disbursements - Tranche Releases . ................................ 21 Table 5: Key Indicators for Project Implementation . ............................. 22 Table 6: Key Indicators for Project Operation ................. . ........... ..... 22 Table 7: Studies Included in the Project ....................... ..... 23 Table 8A: Project Costs ................................ .....23 Table 8B: Project Financing ............................. .....23 Table 9: Economic Costs and Benefits ............................. 23 Table 10: Status of Legal Covenants ......................... ..... 24 Table 11: Compliance with Operational Manual Statements . . 25 Table 12: Bank Resources: Staff Inputs ...................................... ..... 26 Table 13: Bank Resources: Missions ............................... 27 APPENDICES A. Summary of Loan Objectives and Achievements ........................ .... 28 B. ICR Mission Aide-Memoire .......................................... 29 C. Project Review from Borrower's Perspective .................................. 35 D. Proposed Operational Plan .......................................... 45 Map IBRD No.30256- Peru Electricity Sector Map 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.  IMPLEMENTATION COMPLETION REPORT PERU ELECTRICITY PRIVATIZATION ADJUSTMENT LOAN (LOAN No. 3810-PE) PREFACE This Implementation Completion Report (ICR) deals with the Electricity Privatization Adjustment Loan (EPAL) for Peru, in the amount of US$150.0 million, which was approved and made effective on November 22, 1994. Following two extensions on December 31, 1996 and December 31, 1997 for twelve months each, the Loan was closed on December 31, 1998. Two out of three tranches arnounting to 66.7% of the full loan amount were disbursed. The last disbursement took place on November 21, 1995. The ICR was prepared by Messrs. Joerg-Uwe Richter of the Finance, Private Sector, and Infrastructure Department of the Latin America and Caribbean Office (LCSFP) and Stephen Ettinger (Consultant). The Report was reviewed by Mines. Susan G. Goldmark, Maria-Victoria Lister, and Noriko Iwase (LCC6C). The Report is based, inter alia, on the Memorandum of the President; reports by the Borrower's Project Coordination Unit; supervision reports; correspondence between the Bank and the Borrower's implementing agency; Bank internal memoranda; Borrower's progress reports; and discussions between the Borrower and Bank staff. Preparation of the [CR began during the Bank's project completion mission during March 1-12, 1999. The Borrower contributed to this ICR by preparing an evaluation of the Project's implementation and results (Appendix C) and by commenting on the Bank's draft ICR.  ii PERU ELECTRICITY PRIVATIZATION ADJUSTMENT LOAN (LOAN No. 3810-PE) EVALUATION SUMMARY 1. Introduction. This Implementation Completion Report (ICR) deals with the Electricity Privatization Adjustment Loan (EPAL) of US$150mn equivalent. The Loan, approved and signed on November 22, 1994, was the last of five adjustment loans made to assist Peru to overcome its economic crisis and restructure its economy. The first US$50mn tranche was disbursed immediately after loan signing, and the second tranche one year later, but the final tranche was cancelled when the loan was closed on December 31, 1998, two years after the original closing date. 2. Background. Upon assuming office in 1990, the Fujimori Government faced a social and economic crisis of huge dimensions. One contributing factor was the poor perforrnance of the state-owned enterprises (SOEs), which had become inefficient and politicized, faced low and controlled prices, were losing about $2.5bn/year, and lacked resources for essential investments. Electricity was by far the largest segment of the SOEs, representing 40% of the $7.5bn in SOE assets (at book value). The sector was dominated by ElectroPeru (the nationwide generation and transmission company) and ElectroLima (the generation, transmission, and distribution company for the greater Lima area), along with nine smaller regional companies. 3. As part of the overall restructuring program and in preparation for privatization, the Government carried out major reforms in the electricity sector during 1992-94. ElectroLima was segmented into one generation and two distribution companies, while ElectroLima's and ElectroPeru's transmission assets were combined into a new company, ETECEN. The 1992 Law on Electricity Concessions and the 1993 regulations under it provided the basis for a new system of competitive generation, common-carrier transmission, and regulated-monopoly distribution to small consumers, with larger consumers (over 1,000 kW) able to purchase directly from generators in a free market. The Electricity Tariff Commission (CTE), that traditionally had been subject to political pressure, was given regulatory autonomy, and tariffs were to be set based on economic costs. 4. Project Objectives and Scope. The Project was to support the Government's electricity privatization program and related legal/regulatory/institutional reforms, with the twin objectives of (a) promoting adequate and environmentally sustainable electricity supplies and (b) enhancing economic efficiency through competition and private sector participation. The objectives were to be achieved through both sector reform (economic pricing and a sound legal/regulatory/institutional system) and privatization. Maintenance of a satisfactory macroeconomic policy framework and financing plan was a condition for effectiveness and for each tranche release, as was  satisfactory progress in implementing the agreed sector reform program. For the second and third tranches, maintenance of full autonomy for CTE and setting/keeping tariffs at full economic cost were required. The second tranche also required the publication of antitrust rules for the sector and of model concession contracts for transmission and distribution, assuring third-party access and use. These objectives were appropriate and in full accord with the Government's program. 5. The privatization requirements were, for the second tranche, offer for sale of a majority interest in (a) metropolitan Lima distribution, and (b) ElectroLima's and part of ElectroPeru's generation assets with combined value of at least 12% of total sector assets. For the third tranche, offer for sale of a majority interest had to cover generating units with assets of at least 52% of total assets to be privatized. This implied that the 1,008MW (installed capacity) Mantaro hydro generation scheme, the largest on the system, had to be included. In addition, to attain critical mass of private participation, actual sale was required of at least 25% of total assets to be privatized. While these objectives were appropriate, the privatization of the regional utilities should have been included in the conditionality, given their importance for a comprehensive sectoral development focus, especially the social need to improve electricity supplies to consumers outside Lima. 6. Achievement of Objectives. The Government met all macroeconomic and sectoral reform conditions, and the sector by and large is functioning well. Foreign investors view Peru as having one of the more receptive Latin American electricity sectors in which to invest. CTE remains autonomous, although there are indications that the Government may still be trying to influence it. Tariffs have been kept at what is calculated as 100% of economic cost. But because of the definition of the incremental generating unit - based on natural gas from Camisea whose timing is uncertain -, marginal costs as basis for tariff setting have declined. Also, distribution firms challenged ir court some of CTE's rulings. The legal/regulatory/institutional framework establishes competition between generators de jure, but there are questions about how much competition exists de facto. The Govermnent has been changing the allocation of firm capacity payments between thermal and hydro generators, initially to favor the former (so as to induce immediate investments with short gestation periods) and now to favor the latter (so as to give improved signals for future hydro investments) which raises questions of both fairness and future stability of operating conditions overall. These issues appear to result primarily from the newness and complexity of the legal/regulatory and pricing regimes. The authorities recognize these issues, but fixing them is not easy, especially when it involves changing the rules of the game under which private firms operate, as well as the culture of governance. 7. ElectroLima's generation and distribution and most of ElectroPeru's generation plants excluding Mantaro were offered for sale (which fulfilled the second tranche conditions) and were privatized. To date, 48% of sector assets has been sold, far more than 25% required as a third tranche condition. Sales revenues have totalled about $1.5bn. Privatizations were carried out transparently, and there were winning bidders  iv of high repute from Chile, Argentina, Spain, the U.S., Canada, and Peru itself. But the Government has not offered the Mantaro hydro complex for sale and, therefore, was not able to meet the third tranche condition of offering for sale generation facilifies with a combined value of 52% of the sector assets to be privatized. (This was considered important by the Government and the Bank as sector-wide efficiency improvements through enhanced private participation were deemed not to be fully attainable if the largest generating scheme on the system were to remain in public ownership.) The Loan's closing date was extended for two years in expectation of progress on Mantaro, but without success. The Government provided a variety of reasons which changed over the lifetime of the Loan, i.e., uncertainties about the condition of the Mantaro water injection tunnel; Mantaro's dominant market position; weaknesses in the regulatory/pricing system; efficiency improvements at Mantaro achieved under public enterprise management, obviating privatization for efficiency reasons; inability to use the sales revenues immediately due to IMF-imposed restrictions; and political resistance to privatizing a major asset in the public domain. 8. Sustainability. One reason why privatization is such a critical reform element is that it is difficult to reverse for a variety of legal, economic, political, and practical reasons. Furthermore, the overall economic success of the current Government makes any general assault on Peru's economic reforms unlikely. The fact that privatizations were on the whole successful, in terms of prices received, the high quality of the firms attracted, and the transparency of the process, should further ensure that they will not be reversed. Nevertheless, popular support for privatization has dropped steadily, and there is sentiment in favor of re-nationalizing the electricity and telecommunications sectors.' The reasons - perceived or real - are: (a) reduction in employment in the companies being privatized; (b) increases in utility tariffs in the move to economic pricing which accompanied the privatizations; (c) dominance in the electricity sector of companies from Chile and Spain, with whom Peru has had a contentious relationship; and (d) poor public communications efforts by these companies (although this is improving). There is also a lack of public understanding of and hence confidence in the regulatory system. Declining popular support has made privatization a convenient target for the Government's opponents. At the same time, the Government has failed to counter these criticisms with a communications effort in support of privatization, and has even issued statements questioning whether key remaining SOEs, such as Mantaro, should be privatized. Nevertheless, the privatization program is slowly moving ahead. The Government also continues to invite private participation in the sector by granting concessions for the construction and operation of new transmission lines. 9. Bank Performance. The Bank did a creditable job in project design, especially at the identification stage when it advised key officials and financed the preparation of the legal/regulatory and pricing systems. The Bank's insistence on the According to the May 1999 results of a permanent survey undertaken by the socio-economic research institute APOYO, in Lima the support for privatization has declined to less than 30% from 65% in mid- 1992, and 72% of Lima residents would like to see their electricity and telecommunications utilities re- nationalized.  v privatization of Mantaro as a third tranche condition was appropriate, given the scheme's importance for sector reform and efficiency improvement and for setting the investment climate throughout the economy. The decision to twice extend the loan closing date was reasonable, as this preserved an incentive for the Government to privatize Mantaro and allowed the dialogue to continue. When it became clear in late 1998 that no progress toward privatization had been made and was not likely in near future, the decision to close the Loan was also appropriate. But there are a number of areas in which the Bank could have done better: (a) the President's Report was not sufficiently explicit about the complexity of the Mantaro issue and its centrality for third tranche disbursement; (b) the project timetable and closing date were too optimistic; (c) the privatization conditionality excluded the regional companies; and (d) due to financial and human resource constraints, the Bank in later years did not systematically monitor sectoral performance indicators, and did not sufficiciently involve sector specialists in project supervision (even though the 1998 QAG review considered project supervision to be satisfactory). In particular, project implementation would have benefitted from a fuller analysis of the complexities surrounding the privatization of Mantaro. 10. Government Performance. The Government successfully met seven of eight second and third tranche disbursement conditions. It established a modern legal/ regulatory/institutional framework and tariff system for the electricity sector, and has continued to improve that system, although a number of issues remain. In privatization, the Government initially moved quickly, overcame considerable difficulties in privatizing all of ElectroLima and a large part of ElectroPeru, and undertook the privatizations transparently and efficiently. But progress slowed down considerably after 1995. Regarding Mantaro, it would have been preferable if the Government had delivered a clearer message about the obstacles to privatization, so that there could have been a more productive dialogue with the Bank. In addition, the Government did not follow up on its November 1997 agreement with the Bank to hold a workshop on the alternatives for private participation in Mantaro. 11. Assessment of Project Outcome. The outcome of the Project is satisfactory, the cancellation of the third EPAL tranche notwithstanding. The sector has made substantial progress during the project implementation period, meeting, in large part, the underlying objectives: (a) supply interruptions due to shortage of capacity have ended, and anticipated investments will ensure adequate supply in coming years; (b) service has expanded rapidly, especially to poorer consumers, increasing coverage during 1993-98 from 53% to nearly 70% of the population; (c) over the same period, production efficiency has improved, indicated by an increase in the customers/ employee ratio of 316 to 520 and a decline in transmission and distribution losses from 21.8% to 12.4%; (d) over the 1990-98 period, the sector has shifted from a US$302mn loss to an operating profit of US$3 18mn, and hence from being a drain on the public treasury to a source of fiscal income; and (e) the culture of receiving highly subsidized energy has been broken.  vi 12. Future Operation. Although $1.5bn has already been obtained from electricity privatizations to date (not counting investment commitments), an even larger amount is still government-owned, comprising the largest share of the remaining privatization agenda. Given the need for the overall economy to attract external financing, the privatization of Mantaro is particularly important because it would: (a) show the Government's commitment to the separation between entrepreneurship and the Government's regulatory and enforcement role, and its own confidence in the legal/regulatory system it has established; (b) ensure that the Government cannot be accused of making policy decisions which favor the enterprises it owns; (c) leave major future investments for Mantaro up to a private company that has the resources and can be expected to invest them efficiently; (d) support the development of a spot market; and (e) provide greater fiscal resources in the near term, when they are needed urgently. 13. On sectoral policies, the Government needs to: (a) maintain CTE's autonomy, and gain greater appreciation of the meaning and benefits of that autonomy; (b) strengthen the judicial system to deal with disputes in the sector; (c) monitor the performance of the free market, among others through improved information on contracts, and propose remedies if there appears to be inadequate competition; and (d) protect ("grandfather") existing investments in the sector against sudden changes in operational norms and conditions. 14. Key Lessons Learned. The Government should be aware that: (i) a complete reform of the electricity sector is a long-term proposition, calling for a firm focus on fundamental requirements rather than short-term expediency; (ii) at the same time, a flexible legal/regulatory framework is needed, so that modifications can be made based on experience; (iii) the Government needs to retain high-quality staff familiar with the private sector and as competent as the private-sector staff with whom they deal, to avoid regulatory capture; (iv) maintaining the autonomy of regulatory agencies is a constant struggle that requires not only adequate laws but also continuing political support, growing understanding of the nature of regulation, and adequate financing; (v) when privatizing, it is important to move quickly, because resistance always develops; (vi) close coordination between the key agencies is required for successful reform and privatization; (vii) tariff increases should be made before privatization commences, so that the public does not confound the two; and (viii) the effects of privatization need to be properly evaluated and communicated to the public. The Bank, when supporting sectoral reform, should (i) include all major parts of the sector(s); (ii) devote adequate resources to supervision; and (iii) when a major roadblock is encountered, devote resources to understanding the source of the problem and, on that basis, having a dialogue with the Government on the issue, rather than mainly focussing on legal and administrative aspects of project implementation. Combining adjustment lending with technical assistance provides an effective way of ensuring that the Government has the funds with which to carry out the necessary preparations in support of reforms.  PERU ELECTRICITY PRIVATIZATION ADJUSTMENT LOAN (EPAL) (LOAN No. 3810-PE) PART I. PROJECT IMPLEMENTATION ASSESSMENT A. BACKGROUND 1. Economic Crisis. When President Fujimori assumed office in August 1990, Peru was in deep crisis. The economy was in shambles, a cholera epidemic was threatening, and terrorist movements were expanding their grip from rural areas to Lima. Peru had accumulated an external debt of US$22bn, two-thirds of which w_s n arrears, and was in default to the IMF, the World Bank, and IDB. Inflation had reached an annualized rate of 36,000%. Per capita income had dropped to the leve.' 3- thirty years earlier, 75% of the labor force in Lima was unemployed or underem2.1l - O and real wages had fallen by 60% over five years. 2. Impact of State-owned Enterprises (SOEs). One of the contributing factors to the economic decline was the poor performance of the SOEs. These were largely the product of nationalizations of foreign-owned finns by Peru's military regimes during the 1 960s and 1 970s, dominating the banking, telecommunications, water, electricity, hydrocarbons, mining, and steel sectors. They had become increasingly inefficient and politicized, and were hampered by government interference and low, controlled prices. By 1990, they were losing about $2.5bn/year, much of which had to be covered by the government budget. Their inability to modernize and expand basic infrastructure, especially telecommunications and electricity, were constraining development in the rest of the economy. 3. Electricity Sector. Electricity was by far the largest segment of the SOEs, representing 40% of their $7.5bn assets at book value. The sector consisted of (a) ElectroPeru, the nationwide generation and transmission company, which sold entirely in bulk to distributors; (b) ElectroLima, the second largest generation and transmission company and largest distribution company, serving the greater Lima area; and (c) nine smaller regional utilities whose ownership was a mixture of ElectroPeru and local governments. The combination of state ownership and economic crisis had seriously weakened this sector. Sales during 1980-92 had grown by only 2.7% p.a. because of increasing losses (from 13% to 22% of gross generation) and inability to make adequate new investments. The financial condition of the enterprises deteriorated even more, as average tariffs fell to 18% of economic cost in 1989. There were frequent  2 blackouts, brownouts, and rationing, and concern that once the economy recovered, electricity shortages would become much more pronounced because of the long lead time on increasing electricity generation. 4. Economic Reforms. President Fujimori was not elected on an economic reform program, but once in office he took strong and comprehensive measures to reverse the country's slide. A series of stabilization measures in the areas of taxation, public expenditures, and interest and exchange rate policies lowered inflation dramatically. For the longer term, structural reforms were introduced which initially emphased trade liberalization and financial sector reform but quickly spread to specific sectoral changes in energy, industry, agriculture, infrastructure, and social services. 5. Motivation for Privatization. Within its first year in office, the Government had grown convinced of the need to launch a comprehensive privatization program. Central to this was the recognition that Peru lacked the resources to make necessary investments in the SOEs, especially in energy and telecommunications where massive expenditure would be needed to attain regional standards. While many key officials supported privatization on grounds related to the proper roles of the public and private sectors, others endorsed it on more limited pragmatic grounds. But in initial phases, this distinction was not important operationally. Peru was in crisis, radical measures were needed, and all major elements of Government were in favor of privatization. 6. Launching the Privatization Program. Legislative Decree 674, the "Law for Promotion of Private Investment in State Enterprises," of September 1991, established the legal and institutional framework for privatization. The Minister-level Committee for Private Sector Investment (COPRI) was created as privatization agency, with a Secretariat headed by an Executive Secretary in charge of day-to-day management. COPRI then established a series of Special Privatization Committees (CEPRIs), in charge of individual enterprises or sectors being privatized. For the electricity sector, CEPRIs were established for ElectroPeru and ElectroLima, respectively. (The more politically complex privatization of the regional companies was left for later). 7. Reform of the Electricity Sector. As part of the overall reform program, and in preparation for privatization, the Government in 1992-94 carried out major reforms of the electricity sector. On the institutional side, ElectroLima was segmented into one generation company and two distribution companies, while its and ElectroPeru's transmission assets were combined into a new company, ETECEN, covering the central-northern interconnected system (SICN). The establishment of a separate transmission company, operating as a common carrier, was recognized as essential for permitting competition in generation. A new 1992 Law on Electricity Concessions, and the 1993 regulations under it, provided the basis for a new system of competitive generation, common-carrier transmission, and regulated-monopoly distribution to small consumers, with larger consumers (above 1,000 kW) able to purchase directly from generators in a non-regulated free market. The Electricity Tariff Commission (CTE), which traditionally had been subject to strong government interference, was  3 given regulatory autonomy, and tariffs were to be set based on economic costs. Overall, the reform of the sector was modelled on Chile's, which at that time had been the most successful and thoroughgoing in Latin America. 8. Bank Adjustment Lending. Meanwhile, the Bank, IMF, and IDB developed a joint strategy to enable Peru to clear its arrears with them and obtain new funds to support the ambitious reform agenda. The Bank, for its part, approved in I992-93 four adjustment loans prior to EPAL. The US$300mn Trade Policy Reform Loan and US$450mn Structural Adjustment Loan were disbursed in a single tranche in March 1993, in conjunction with the arrears clearance. The first disbursement of the Financial Sector Adjustment Loan (FSAL) was made then as well. The US$250mn Privatization Adjustment Loan (PAL) was the fourth of these adjustment loans. FSAL, PAL, and EPAL were conditioned on an ambitious action program to be taken in their respective sectors, with privatization of SOEs a central element in all three operations. The US$30mn Privatization Technical Assistance Loan (PTAL) was designed to support PAL, and the US$11.8mn Energy and Mining Technical Assistance Loan (EMTAL) to support EPAL and the mining and hydrocarbons components of PAL. (It was considered to be more efficient to extend all relevant technical assistance to the Ministry of Energy and Mines through a single project). B. PROJECT OBJECTIVES AND DESIGN 9. Objectives. EPAL was aimed at supporting the Government's electricity privatization program and related legalVregulatory/institutional reforms, with the twin objectives of (a) promoting adequate and environmentally sustainable supplies and (b) enhancing economic efficiency through competition and private sector participation. The US$150mn loan, approved and made effective on November 22, 1994, was to be disbursed in three equal tranches. A separate loan for the electricity sector was considered justified because electricity represented a large proportion of the SOEs, and was in such dire straits. These objectives were to be achieved through both sector reform (economic pricing and modernization of the legal/regulatory/institutional framework) and privatization. EPAL was to contribute to this endeavor by (a) providing resources to ease the country's economic transition, (b) assisting the design of the reforms through dialogue, and (c) strengthening the Government's commitment to promoting reforms, by providing incentives to meet the disbursement conditions. 10. Sector Reform Design and Conditionality. Maintainance of a satisfactory macroeconomic policy framework and financing plan and satisfactory progress in implementing the agreed electricity sector reform program were conditions for loan effectiveness and for each tranche disbursement. In addition, for the second and third tranches, maintenance of full autonomy for the Electricity Tariff Commission and setting/ keeping tariffs at full economic cost were required. The second tranche also required publication of antitrust rules for the sector and model concession contracts for transmission and distribution, assuring third-party access and use. These specific  4 requirements were limited in scope because the major reforms were already well underway. The objectives were appropriate and in full accord with the Government's program. The requirement to set and maintain tariffs at economic cost was easy to meet, because by that time, the most highly subsidized tariffs (for residential consumers outside of Lima who used no more than 150 kWh/month) had already reached 88% of economic cost, and tariffs on average covered 98.6% of economic cost. 11. Privatization Design and Conditionality. The privatization requirements for the second tranche were offer for sale of a majority interest in (a) ElectroLima's metropolitan distribution assets, and (b) ElectroLima's and ElectroPeru's generation assets, with combined value of at least 12% of total sector assets to be privatized. For the third tranche, as a demonstration of seriousness of the Government's commitment, the offer for sale of a majority interest had to cover generating units with assets of at least 52% of total sector assets to be privatized, including the Mantaro scheme. In addition, in order to attain critical mass of private participation, actual sale of at least 25% of total assets to be privatized was required. 12. The privatization objectives were modeled after those of the preceding PAL, which required actual sales by the third tranche, as well as a larger offer for sale. However, two points should be noted. First, the transmission system and regional utilities were excluded from the Project, because, according to the President's Report, they were "expected to be privatized in a second round," which was "expected to get underway in 1995, starting with those in regions where support for privatization is strong." The Government and the Bank considered that with full privatization of ElectroLima and ElectroPeru, private ownership in the sector would be firmly established. The exclusion of transmission was reasonable, as the potential stranglehold position of a private monopoly, and the difficulty in determining prices adequate to induce a private company to optimize investment in new lines, would make this the most difficult part of the electricity system to privatize. However, in regard to the regional utilities, the argument is not compelling for leaving out an important part of the system, especially as 1995 was not so distant for a loan approved in November 1994. Its effect was to limit the Bank's sectoral dialogue and forego a tranche-disbursement incentive to move quickly with the privatization of the regional utilities.2 There was concern that the regional utilities could not be privatized on the projected - excessively optimistic - schedule, which anticipated fast privatization of ElectroPeru and full disbursements before the end of FY96. 13. A more complicated issue, technically and politically, which was implied but not elaborated on in the President's Report, was related to the dominance of the Mantaro hydro generation scheme, whose assets totaled 39% of total sector assets to be privatized. Offer for sale of this plant was required for third tranche disbursement. This was considered important by the Government and the Bank as sector-wide 2 Privatization of these utilities did not begin until 1997 and has yet to be completed.  5 efficiency imnprovements through enhanced private participation were deemed not to be attainable if the largest generating scheme on the system were to remain in public ownership. Mantaro thus became the principal issue of project implementation. While the requirement for privatization of Mantaro was appropriate, given its centrality in Peru's electricity system and its importance for demonstrating the Government's commitment to private investment, the Bank should have realized earlier its complexity, elaborated on the risks involved, adjusted the timetable accordingly, and involved senior management more in this issue. 14. Cost and Implementation Schedule. The Loan was for US$150mn, with three tranches of US$50mn each. The first two US$50mn tranches were projected to be disbursed in FY95, i.e. within eight months after loan approval, and the third tranche, in FY96. The closing date was set at December 31, 1996. This tight schedule was agreed with Government officials who wished to use it as a lever to accelerate the privatization process, and their optimism was due in large part to the impressive progress Peru had already made in overall reform and privatization in the other sectors. Nevertheless, the Bank should have appreciated how difficult the Mantaro privatization was likely to be and should have analyzed more fully the complexities surrounding this issue, in the interest of a more realistic project implementation schedule. C. ACHIEVEMENT OF OBJECTIVES Macroeconomic Reform 15. While the macroeconomic adjustment and reform program and Bank financing for it were conceived in a period of significant fiscal and external deficits, Peru has since adhered to this program, with excellent results. GDP growth averaged 7% p.a. in 1992-97, the highest rate in Latin America, and inflation by 1997 was down to 6.5%, the lowest rate in the past quarter century. Investment during 1993-97 rose from 18.6% of GDP to 24.7%, the second highest ratio in Latin America. The public sector deficit was reduced to zero, even excluding privatization revenues, and net international reserves passed US$10bn. 1998 was a difficult year because of the El Niflo climatic phenomenon and the loss of investor confidence in developing countries in general. But Peru continues to meet the targets under its third consecutive three- year Extended Fund Facility with the IMF. Electricity Sector Reform 16. All sector reform conditions were complied with, and the sector by and large is functioning well. However, a number of issues remain to be addressed, which result primarily from the novelty and complexity of the legal/regulatory/institutional framework and pricing regime. The authorities recognize these issues, but fixing them is not easy, especially when it involves changing fundamental rules of the game under  6 which private firms operate, or changing the modus operandi of the Government at large. 17. Autonomy of the Electricity Tariff Commission (CTE). 3 While CTE remains an autonomous agency, the concept of autonomy is not yet fully understood and appreciated, even within some public institutions. Regulators must balance the protection of consumers with incentives to investors and operators and thus, steer a difficult course between regulatory capture by the sector enterprises and retrogression to being a tool of short-run government policy. There are recent indications that Peru's course may be tending toward the latter, such as: (a) Tighter budgetary control by MEF over CTE and OSINERG (the agency for the entire energy sector, established in 1997, to enforce faithful application by the enterprises of sector laws and regulations, including CTE-set electricity prices). CTE is not being allowed to spend all of the funds obtained from its 0.26% levy on energy sales, and is subject to MEF's review of salary scales and hiring of consultants. There is nothing inherently wrong with CTE being subject to such oversight, provided it is not used to influence CTE's decisions (of which, to date, there is no evidence); (b) Recent legislation which made CTE's Board entirely government- nominated (previously, three of the five board members were to represent the Government). In fact, all incumbents were retained. (In many countries, the regulatory bodies are entirely government-nominated, but the change indicates the Government's inclination toward tightening control); and (c) Government's stated concerns about keeping down electricity prices to consumers, which the private sector interprets as an attempt to put pressure on CTE. The Government seems not yet to fully appreciate the benefits of not being responsible for utility price movements. 18. Economic Tariffs. CTE has retained tariffs at what it calculates as 100% of economic cost, in accordance with sector laws and regulations. Some generating companies have shown concern that because of CTE's definition of the incremental unit - i.e., based on natural gas from Camisea, which is beset with uncertainties - the resulting marginal cost as basis for tariff setting are significantly below their short-run marginal cost. Also, distribution companies complained that CTE did not properly estimate replacement costs in calculating economic cost, and initiated legal proceedings against CTE. But all parties seem to agree that the law courts lack the technical expertise to handle such cases effectively. 3 Subsequent to the ICR mission, CTE was transformed into the Energy Tariff Comnmission, with responsibility to regulate pipeline tariffs and prices of natural gas, -in addition to electricity tariffs. (Law No. 27116 of May 17, 1999.)  7 19. Anti-Trust Legislation. Peru in 1997 instituted special anti-trust legislation for the electricity sector, which aims to (a) prevent vertical integration, by not pernitting generators to buy distributors, and vice versa; (b) maximize competition in generation, by not letting any company with more than 15% of total generation capacity buy any other generating company without special approval from the Government's competition agency INDECOPI; and (c) impose a 5% limit on vertical integration. There was concern that an intensifying alliance between ENERSIS of Chile and ENDESA of Spain, both of which are major investors in Peru's electricity sector, would violate at least the spirit of those restrictions, without being covered by Peruvian legislation.4 20. Third-Party Access to transmission and distribution networks was recognized as essential if there was to be competition among generators. While this was achieved de jure, there has not always been sufficient competition de facto. On the free market, the largest electricity users (e.g., mining companies) have been able to get competitive bids from generators. But this has often not been the case for smaller electricity users, especially those within existing distribution grids, who have invariably remained with their current distributors (upon whom, in any case, they remain dependent for distribution connections and hence for uninterrupted service). Such users may lack both knowledge and market power to obtain fair deals, and reportedly many were induced to sign long-term contracts at high prices. (This is less the case with newer contracts, as consumers have been learning to call for competitive bids). Free market prices have generally been above regulated prices, which is not what one would expect in a fully competitive market. The Bank recommends that INDECOPI interview a sample of electricity users to learn of their experience, to determine whether there have been abuses and, if so, to propose remedies. 21. Other Legal/Regulatory/Tariff Concerns. There have been issues in several other areas as well, which have not yet been resolved: (a) The initial tariff structure, through the way its payments for firm capacity were calculated, was modified in 1994 so as to increase the incentive to invest in thermal as opposed to hydro generation, as the cheapest and fastest way of meeting the capacity shortage. But demand did not grow as fast as anticipated in 1997-98, due to the economnic slowdown, and there is now an excess of thermal capacity. The capacity charge has been modified to give hydro plants a larger share of capacity payments. This probably is economically correct, by providing the signals for new least-cost investment, but the change is bound to have an adverse impact on firms that under the old rules had invested substantially in thermal capacity. Also, some companies are concerned that this could be the start of a trend in government-enterprise relationships resulting in sudden modifications of other operational norms and conditions. While the need to give the correct signals for new investment is 4 This occurrence also stalled government initiatives toward privatization of Mantaro.  8 appreciated, consideration should be given to clearly and meaningfully "grandfather" past investments, so that the Government cannot be accused of "bait and switch". (b) The decision referred to in (a) above, was made by the Committee for Economic (Electricity) System Operation (COES), on the basis of majority vote among its nine members.5 COES is a body with a technical mandate, but its recent voting record has raised questions about both fairness and stability of the outcomes, which are essential issues for investors. In addition, as some of its decisions can affect distributors and free-market users as well, a mechanism for the latters' involvement in COES where relevant should be found. (c) Distribution companies are required to conclude multi-year contracts with generators for the full estimated demand of the regulated market, but generators are under no such obligation. As free market prices generally have exceeded those in the regulated market, distribution companies have at times had difficulty meeting their legal requirement. Until recently, the Government had to use its ownership of Mantaro to help to meet that requirement, which is obviously not how the system is supposed to work. Recent changes in capacity payments to generators have added an incentive to sign such long-term contracts, but a more comprehensive examination of contracting requirements is desirable. Privatization 22. ElectroLima Distribution. The first electricity sector privatizations were the two Lima distribution companies in July 1994, both carved out of ElectroLima. A sound decision was made to divide the Lima market in two, so that there could be benchmark competition. 23. ElectroLima Generation. The sale of ElectroLima's generation capacity - consolidated into a new company, EDEGEL - was completed in October 1995, which fulfilled the second tranche conditionality. The main issue was whether to sell the generating plants separately or as one unit. While the Bank tried to make the case that selling them separately would increase competion, the opposite arguments prevailed, i.e., (i) the main hydro plants were on the same river, so coordination of the water flow would be easier within a single company; (ii) the relatively small and old thermal plants would not be attractive by themselves, but could be used by the owner of the hydro plants to balance production; and (iii) selling the facilities together would attract a strong company, which could then compete effectively against Mantaro and 5 The eight major generating companies and the transmission company are members of COES. The recent key decision affecting the division of revenue from capacity payments between thermal and hydro generators was made by a five-four vote (the three state-owned enterprises voted en block with the majority). Two weeks later there was another vote on which one of the private generators switched sides.  9 other large generators. In a case like this, there is no clear right or wrong, and thus no grounds to criticize the final decision. 24. ElectroPeru Generation (excluding Mantaro). Privatization of the smaller ElectroPeru facilities took much longer than expected and was not concluded until end- 1997. This did not affect tranche disbursements (and hence the Bank had no leverage) because it was neither necessary nor sufficient for the third tranche. 25. Mantaro. To meet the third tranche condition, it was necessary to privatize Mantaro. This process was started and stopped at various times, and government plans conveyed to the Bank as basis for closing-date extensions were not implemented. In recent years, this became a major issue between the Bank and Peru. While it is not known exactly on what grounds decisions at the highest levels were made at various points not to privatize Mantaro, the following arguments against privatization were put forward: (a) It would be problematical to sell Mantaro before the technical uncertainties about the condition of its water injection tunnel were resolved. This was an important issue during the early phase of EPAL. But after ElectroPeru was not able to examine the tunnel, despite obtaining expert international consultancy, it was no longer raised as a major impediment. In fact, as ElectroPeru has not been able to resolve this issue after many years, it would seem best to let new owners decide how they wish to handle it. (b) Mantaro plays a central role in the electricity system, so whoever buys it would be in a strong market position. But Mantaro's relative importance is declining as other companies develop new generating capacity, and Mantaro will soon not be much larger than EDEGEL, once the latter completes its ongoing expansion program. The transmission line being built to connect the central and southern systems will further increase competition for Mantaro. The risk of cartelization can be protected against through INDECOPI and other legal/regulatory mechanisms, and by ensuring, in accordance with Peru's electricity antitrust legislation, that the purchasers of Mantaro are not linked to any of the larger existing generating companies in Peru. (c) The regulatory/pricing system has not worked optimally, and private investors have allegedly engaged in abusive practices, so the Government has had to use its ownership of Mantaro to offset these distortions (e.g., by selling more electricity on long-term contracts to distributors; maximizing production so as to keep down the spot price; using its vote on COES to affect key decisions). However, recent legal/regulatory/ changes, such as the anti-trust law for electricity and incentives to sign long-term contracts, have eliminated the need for the Government to use Mantaro in this way.  10 (d) Mantaro is now run efficiently and produces high operating profits (in the order of US$80mn equivalent in 1998) so the Government would gain little financially by privatizing it. However, there still appears to be room for improving operational efficiency and, more importantly, there could be substantial efficiency gains in future investments, such as a second tunnel, without the need for Government funds as this would be carried out by private investors. (e) The Government can now use all of Mantaro's profits in the year in which they are earned, but, under IMF guidelines, would not be able to quickly use all of the privatization revenue as some of this revenue would have to be set aside for external debt repayments. Thus, the Government would not be able to spend all of the one-time sales revenue as if it were recurrent income. But the Government would still be able to spend more of it in the first year than that year's profits from Mantaro, and the unspent portion would reduce the public debt and improve Peru's creditworthiness. (f) It is politically difficult to privatize Mantaro, because (i) it stands as the monumental legacy of public sector investment to Peru, (ii) it might be bought by foreign (especially Chilean or Spanish) investors, who already have a strong hold on Peru's utilities, and (iii) public support for privatization in general is at an all-time low. Notwithstanding these issues, it is worth noting that (i) certain forms of privatizing operations raise fewer political objections (e.g., selling a minority share but with operational control; long-term concessions); (ii) the political objections might be diminished if the Government made a concerted effort to explain to the population the benefits which privatization has produced in Peru; and (iii) by applying existing laws, companies which already have a significant share in the Peruvian electricity market would be barred from purchasing Mantaro. D. MAJOR FACTORS AFFECTING THE PROJECT 26. The slow-down of the overall privatization process was the main reason for the slower than anticipated privatization in electricity. This program got off to a rapid start largely because Congress had given the executive branch the power to undertake individual sales without referring back to Congress. When a new Congress was elected in 1993, the pro-Government majority strongly supported privatization. Sales revenues were relatively limited in 1992-93, as smaller, more easily saleable companies were disposed of first to get the program off to a solid start, while the process took longer for the larger SOEs. The US$2bn sale of the telephone company in 1994 boosted the total, as did the $0.5bn sale of ElectroLima's distribution assets. In the run-up to the 1995 presidential elections, privatization was slowed down for political reasons. The program picked up after the elections, but growing political  11 criticism of it has since slowed down the pace of progress even more. The impact of these developments can be seen in the following table: ,a,,00Year ValuetSS0 , W of Pivtitin 1992 209 1993 344 1994 3,233 1995 1,225 1996 2,669 1997 684 1998 3006 Although, to some extent, the reduced transactions since 1997 reflect the reduced number and value of companies left to be sold, there is still about $2bn of government holdings in the electricity sector alone, of which Mantaro is estimated to account for nearly one-half. E. PROJECT SUSTAINABILITY 27. Difficulty in Reversing Privatizations. One reason that privatization is such a critical element of economic reform is that it is difficult to reverse, for a variety of legal, economic, political, and practical reasons. Although Latin America suffered waves of nationalizations during earlier decades, repetition of this in the current global context is hardly imaginable, where country after country is following the same general route of economic liberalization. Furthermore, the overall economic success of the current Government, in contrast with the disastrous results of its predecessors, makes any general assault on Peru's economic reforms unlikely. The fact that privatizations in Peru were on the whole successful, in terms of prices and investment commitments received, high-quality firms attracted, and the absence of even a hint of scandal, should further ensure the sustainability of this program. Finally, the "Citizens' Participation" program, under which some 40,000 lower-income citizens have bought shares in some privatized companies on soft credit terms, makes reversal even more unlikely. 28. Growing Public Opposition. Nevertheless, there is cause for concern, because of the increasingly negative public perception in Peru of privatization. According to a permanent survey undertaken by the socio-economic research institute APOYO, public support in Lima (the only location surveyed) has dropped from about 65% in mid-1992 to below 30% in May 1999. Even more disturbing is a poll that showed that 72% of Lima residents would like to see their electricity and telecommunications utilities re- nationalized. The main reasons given to explain these results are (i) reduction in employment (estimated at 94,000) in the privatized companies; (ii) increases in public 6 Estimated.  12 utility tariffs in the move to economic pricing which preceded the privatizations, (iii) dominance in the electricity sector of companies from Chile and Spain, with whom Peru has long had a contentious relationship; and (iv) poor public relations efforts of these companies. This is accompanied by a lack of public understanding of and hence confidence in the regulatory systems for electricity and telecommunications. Declining popular support has made privatizations a convenient target for the Government's opponents. There has been some improvement during the last year, in the wake of major public relations campaigns by the Lima distribution companies. 29. Government Attitude. At the same time, the Government has failed to counter these criticisms with a communication effort in support of privatization, and has even issued statements questioning whether key remaining SOEs, such as Mantaro, should be privatized. Its weakening support for privatization appears to reflect not only shifting public sentiment but also (a) the departure from Government of key decision makers who were the most active proponents of privatization, (b) the end of a sense of crisis which had made even radical and unpopular economic reforms palatable, and (c) the absence of clear short-term linkages between privatization and the Government's top priority of poverty reduction, given restrictions under the IMF program on the Government's ability to spend privatization revenues. Nevertheless, the privatization program continues to move ahead slowly. The Government continues to invite private participation in electricity and has offered concessions for construction and operation of new transmission lines, particularly the link betwen the central-northern and southern networks. Also, the COPRI Board appointed in January 1999 may be more proactive than its predecessor in promoting private participation in the electricity sector. F. BANK PERFORMANCE 30. The Bank did a creditable job in project design and supervision. Its contribution was particularly useful at the project identification stage, when it advised key officials on the overall design of the legal/regulatory/institutional framework and pricing system, and financed consultants who did much of the detailed work. The Bank was correct to insist on the privatization of Mantaro as a third tranche condition, given the importance of the scheme for sector reform and efficiency improvement, and the need to attract external financing to the overall economy. The decision to twice extend the closing date appears reasonable, as this kept some incentive to privatize Mantaro (although rather little, considering that Mantaro is worth about 20 times the size of the cancelled tranche) and allowed some dialogue to continue. When it became clear in late 1998 that no progress toward privatization had been made and was not likely to be made in near future, the decision to close EPAL was also appropriate. 31. But there are a number of areas in which the Bank's performance could have been better:  13 (a) The President's Report was not explicit enough about the complexity of the Mantaro issue, and did not mention this as a specific project risk. Bank management did not give the matter the needed attention, or raise it at an earlier stage with senior government officials. (b) Project timetable and closing date were too optimistic, even considering that this timetable was part of a strategy agreed with the Government so as to accelerate privatization. The Bank should have recognized at an earlier stage the legal, political, economic, and technical complexities of privatizing Mantaro. (c) The privatization conditions essentially were related to ElectroLima and Mantaro only, which kept the Bank from being involved in other privatizations, especially the regional distribution and generation companies (which were omitted primarily because they were considered relatively unimportant compared to ElectroLima's and ElectroPeru's core holdings, and did not fit into the tight privatization schedule). This limited the effectiveness of the dialogue on sector reform and privatization, as well as on addressing the social needs of expanding electricity supplies to populations outside Lima. (d) Because of financial and human resource constraints, the Bank in later years did not systematically monitor sectoral performance. This weakened its ability to demonstrate the benefits from privatization, and to strengthen its arguments in favor of privatizing Mantaro. (e) The Bank in later years did not devote sufficient resources to involving sector specialists in project supervision.' Coupled with the Government's shifting position on Mantaro, this resulted in an inadequate dialogue on this important issue, and coupled with (c) and (d) above, in reduced dialogue on other key issues as well. The Bank decided not to undertake a mid-term review even though this would have been very useful in this regard. Although the Bank continued to impress upon the Government the need to proceed with the Mantaro privatization, it did not early enough and fully appreciate the reasons for the Government's reluctance to take this important decision. G. BORROWER PERFORMANCE 32. The Government successfully met seven of the eight second- and third-tranche disbursement conditions, i.e., maintenance of the appropriate macroeconomic policy framework and corresponding financing plan; tariffs covering economic costs; 7 This notwithstanding, the August 1999 QAG project review considered the supervision of EPAL to be satisfactory.  14 autonomy of CTE; model concession contracts ensuring third-party access to transmission and distribution networks; sectoral anti-trust rules; offer for sale of both Lima distribution companies and of generation companies corresponding to at least 12% of selected sectoral assets; and actual sale of at least 25% of selected sectoral assets. The Government established a modem legal/regulatory/institutional framework and tariff system for the sector, with competent regulatory institutions, and has continued to improve on that system, although a number of issues remain (paras. 17-21). 33. Privatization. The Government initially moved quickly and overcame considerable obstacles in privatizing all of ElectroLima and a large part of ElectroPeru, carrying out the process transparently and efficiently. The decision to establish several large companies by selling ElectroLima's and ElectroPeru's generation assets (except Mantaro) en bloc appears reasonable, as this created strong companies able to compete with Mantaro and (potentially) generation based on natural gas from Camisea. But progress slowed down considerably after 1995 as the sense of economic urgency diminished, key proponents of privatization left the Government, and political opposition developed. However, the process never stopped completely and there are indications that the new COPRI leadership may revitalize it. Regarding Mantaro, it would have been preferable if the Government had communicated more clearly to the Bank the reasons that impeded privatization, so that there could have been a more productive dialogue, and perhaps a resolution of the dispute (through one side convincing the other, or through a compromise solution). Also, the Government did not follow up on its November 1997 agreement with the Bank to hold a workshop on the alternatives for private participation in Mantaro. 34. Coordination among the key Borrower agencies was excellent at first but slackened in later stages, which blurred responsibility within Government for matters pertaining to EPAL. MEF, MEM, and COPRI had difficulty reaching agreement on Mantaro and differed on other issues as well, exacerbated by the shift in responsibility from MEM to MEF for budget oversight on ElectroPeru (Mantaro) and CTE. H. ASSESSMENT OF OUTCOME 35. Achievements. Overall, the Project's outcome is assessed as satisfactory. The electricity sector has made substantial progress during the period of EPAL, largely meeting the underlying objectives: (a) Supply interruptions due to capacity shortages have ended, and anticipated investments will ensure adequate supply in coming years. (b) Service coverage has expanded rapidly (especially to the poorer strata of the population) from 53% in 1993 to nearly 70% in 1998, and service quality has improved.  15 (c) Production efficiency has improved substantially, with reduction in transmission and distribution losses in 1993-98 from 21.8% to 12.4% and improvement in the customers/employee ratio from 316 to 520 over the same period. (d) The sector has shifted from being a major drain on the public treasury (incurring a US$0.3bn loss in 1990) to a source of fiscal income, generating US$0.3bn of operating profits in 1998. (e) The culture of expecting to receive highly subsidized electricity has been broken. 36. These benefits are the direct result of the sectoral reforms and privatizations. Economic prices provide adequate income to the sector, giving it the resources to invest and freeing it from dependence upon the national budget. The legal/regulatory framework provides reasonable stability and predictability of prices and service standards, enabling private enterprise to invest with confidence. The pricing structure provides incentives to smooth out demand across the day, permitting more efficient capacity utilization. The private firms operate more efficiently than their govemnment-owned predecessors, trying to gain and retain customers through attractive prices and service. I. OPERATIONAL PLAN 37. Remaining Privatization Agenda. Electricity was the largest component of the SOE sector by far, and its privatization has proven to be particularly complicated. Although about US$1.5bn has been obtained to date from electricity privatizations to date (not counting investment commitments), an even larger share remains in government ownership and comprises the largest portion of Peru's remaining privatization agenda. For electricity, this agenda is as follows: (a) Mantaro, for which a CEPRI is being reestablished. Privatization of Mantaro is important, as it would (i) show the Government's commitment to the separation between entrepreneurship and the Government's normative/ regulatory role, and its confidence in the legal/regulatory/institutional system it itself has established; (ii) ensure that the Government cannot be accused of making policy decisions in favor the enterprises it owns; (iii) leave any future investment (e.g., construction of a second tunnel) up to a private company that has the resources and can be expected to invest efficiently; and (iv) provide greater fiscal resources and external fmancing to the overall economy, which are urgently needed in the near term. The Government is considering a more complicated option of transferring control of Mantaro, by setting up and then selling a new company that would own not the physical  16 assets but only the right to operate and receive the income from them. Prima facie, this option does not appear to be advisable as it would complicate sector management, have less appeal to potential purchasers, and not resolve any issues relating to the IMF expenditure restrictions. (b) Regional generating companies, i.e., Empresa de Generaci6n Electrica Machu Picchu and EGASA, for whom the process has been slow and politically complicated. The construction of the Mantaro-Socobaya transmission line, linking the central and southern systems, should make it easier to privatize these companies: once they are part of the larger grid, there should no longer be concerns about their regional quasi-monopoly position. (c) Regional distribution companies, which are slowly being privatized under "Promoci6n Empresarial," requiring at least 60% Peruvian ownership and providing cheap (LIBOR plus 2%), long-term (12 years) loans for up to 90% of the purchase price. While the rationale for requiring Peruvian control is understood, it does go against the grain of overall privatization policy, tends to exclude the most efficient potential operators, and results in relatively few qualified bidders. In addition, the use of subsidized credit makes bid prices somewhat artificial, and with 90% financing, there is a risk of moral hazard and later default. (d) The Government's remaining minority position in most privatized firms (only its minority participation in Luz de Sur, one of the Lima distribution companies, has been sold). Plans for selling its remaining shares in other companies have been postponed due to the depressed state of the Lima stock exchange, limited international receptivity to Latin American shares at present, and reluctance of Peruvians to buy because those who earlier bought shares of Luz de Sur and Telefonica de Peru have seen the prices of these companies' shares plummet. Nevertheless, the Government is looking for an opportune time to resume the process, with a limited offering of other electricity companies' shares. (e) the generation assets of the state-owned mining company CENTROMIN, whose privatization is complicated both by that company's need for the funds it generates so as to pay for environmental clean-ups, and by the ongoing construction of the Juncan hydro plant (as it is considered difficult to privatize a major project still under construction). 38. Remaining Reform Agenda. With the transition phase of electricity sector reform nearly completed, the Government has shown willingness to adjust the legal/ regulatory/institutional framework for the sector in response to new developments and lessons learned, which is necessary given the sector's complexity and the paucity of proven models. Now that the private sector has made and continues to make large  17 investments, it is also necessary that the rules not be changed in ways which would undermine private sector confidence. This requires that the Government: (a) maintain the autonomy of CTE and OS1NERG, and gain greater appreciation of the meaning and benefits of that autonomy; (b) strengthen the way the judicial system deals with inevitable disputes in the sector; (c) monitor the performance of the free market among others through improved information on contracts, and propose remedies if there appears to be inadequate competition; (d) support the development of a spot market; (e) protect ("grandfather") existing investments against sudden changes in norms and conditions affecting sector operations; (f) move from COES (probably to CTE) the authority to make policy (as opposed to technical) decisions affecting the division of revenue among its members, and broaden the representation in COES by including distribution companies; and (g) reexamine the obligation for distribution companies to sign multi-year supply contracts with generators. 39. Communications. As the Government has not yet mounted serious efforts to communicate to the population the benefits of the privatization program, a number of actions appear necessary. Results of analyses on the effects of privatization (which have all come to positive conclusions) should be disseminated, seminars organized, and academic institutions encouraged to undertake case studies. Some of COPRI's income from electricity privatizations could be allocated for this purpose. J. KEY LESSONS LEARNED 40. The Project conveys the following lessons: For the Government: (a) A complete reform of the electricity sector is a long-term proposition, calling for a firm focus on fundamental requirements instead of short-term expediency. At the same time, a flexible legal/regulatory/institutional framework is needed so that modifications can be made based on experience, preferably by means of regulations, so as to minimize the need to go back to  18 Congress each time. Amending the laws and regulations is often harder than enacting them initially, because it affects the interests of private firms which have made decisions based on the existing rules of the game. The amendment process is easier when there is an adequate level of trust between public and private institutions, which is not yet the case in Peru's electricity sector. (b) As private enterprise enters and develops, the Government needs to retain high-quality staff familiar with private enterprise and as competent as the private sector staff with whom they deal, so as to avoid regulatory capture. (c) Maintaining the autonomy of regulatory agencies is a constant struggle that requires not only adequate laws and regulations but also continuing political support, growing understanding of the nature of regulation, and adequate financing. (d) When privatizing, it is important to move quickly, because resistance always develops, even when privatizations have been transparent and generally successful as in Peru. Competent personnel, with incentives to sell as fast as possible, is required for this. (e) Close coordination between the key agencies (in this case MEF, MEM, and COPRI) is required for successful privatization and reform. In Peru, this was excellent at first, but weakened in later phases of the process. (f) Tariff increases should be made well before privatization commences, so that the public does not confound the two. (g) The Government needs to carry out studies of the effects of privatization and adequately communicate the results, so that the public is not misled (e.g., into thinking that there has been a net job loss due to privatization). For the World Bank: (h) When making sectoral reform loans, the Bank should (i) include all major components of the sector, (ii) give supervision appropriate priority, and (iii) when major obstacles are encountered, devote resources to understanding the source of the problem and, on that basis, conduct a dialogue on the issue, rather than mainly focussing on disbursement conditions, closing date extensions, and other legal and administrative aspects of project implementation. (i) Combining adjustrnent lending with technical assistance provides an effective way of ensuring that the Government has the funds with which to carry out the necessary preparations for reforms.  19 Part II Statistical Tables Table 1: Summary of Assessments A. Achievement of Project Objectives Assesment Categories Substantial Partial Negligible Not Applicable Macroeconomic policies X Sector Policies X Financial objectives X Institutional development X Physical objectives X Poverty reduction X Gender issues X Other social objectives . X Environmental objectives X Public sector management X Private sector management X Other _________ X B. Project Sustainability Likely _ Uncertain Unlikely x C . Bank Performance Stage of Project Cycle Highly Satisfactory Satisfactory Unsatisfactory Identification X Preparation X Appraisal X Supervision X D. Borrower Performance Stage of Project Cycle Highly Satisfactory Satisfactory Unsatisfactory Preparation X Implementation X Covenant Compliance . X E. Assessment of Outcome Highly Satisfactory Satisfactory Unsatisfactory x  20 Table 2: Related Bank LoanslPreceding Loans Loan title Purpose Year of approval Amount Status (US$ Million) SAL - 34520, 3452S Support Government's medium- 1992 300 Closed term program of macroeconomic stabilization and broad-based structural reforms. Privatization TA - Assist Govemment in preparation 1992 30 Closed 3540A. 3540S, 35400 and implementation of its privatization program and related sectoral, policy, legal and regulatory reforms. Prvatization Adj. - Support Government's 1993 250 Closed 3595A, 3595S, 35950 privatization program and related sectoral policy, legal and regulatory reforms. Promote competition and private investment, and improve economic efficiency and fiscal performance. Energy/Mining TA - Assist Government in institutional 1993 11.8 Closed 3610A, 3610S, 36100 development of the Ministry of Energy and Mines (MEM)._  21 Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual Identification Apr-92 Preparation -- 12 months Appraisal Aug-93 Aug-93 ........................ ...........................I...................................... ...................... ...................................................... ......................... ....................................... Negotiations Jul-94 Jul-94 .. ......... ........................................ ........I........ ........................................ ...............I............................ ............. .. .................. ........................................................... Letter of Development Policy Aug-94 Aug-94 ............. .................................................................................................... ............................. .............................. . ... .....a........................ . ..... Board Presentation Nov-94 Nov-94 .Signing Nov-94 Nov-94 .... ........................I............... ... ..................................,........ ...................................... .............. .......... ............ Effectiveness Dec-94 Nov-94 First Tranche Release 12/31/94 11/22/94 ................................................. ........................................................... .... .. ...................... ..................................... .... ............. .......... ................................. ....... Second Tranche Release 6/30/95 11/21/95 Third Tranche Release 6/30/96 Project Corpletion 6i30/96 12131198 .......................... .............................. .................,,, ....... ., ..,........... , ,..................................................... Loan Closing 12/31/96 12/31/98 Table 4: Loan Disbursements -Tranche Releases (US$ millions) Estimated Actual Date Amount Date Amount Actual as % of Estimate First Tranche 12/31/94 50.0 11/22/94 50.0 100.0 Second Tranche 6/30/95 50.0 11/21/95 50.0 100.0 ........................ ............ .......... ......................... - - - - - - - - - - - - - - - - - - - Third Tranche 6/30/96 50.0 -- 100.0 Total 150.0 100.0 66.71% Undisbursed -- 50.0 33.31%  22 Table 5: Key Indicators for Project Implementation - A Tranche Releases Conditions Estimated Completion Actual Completion Maintenance of a macroeconomic policy framework and a financing Ongoing. Ongoing - plan consistent with the objectives of the overall structural reform complied with. program supported by the Bank. Satisfactory progress in implementing the electricity sector reform Ongoing. Ongoing - program as set out in the Policy Letter. complied with. Setting of all electricity tariffs at 100% of their economic costs. By second tranche release. October 95. Maintenance of all electricity tariffs at 100% of their economic By third tranche release. Ongoing - costs. complied with. Maintenance of full autonomy of Electricity Tariff Commission. Ongoing. Ongoing - complied with. Official publication of antitrust rules for electricity sector enterprises. By second tranche release. October 95. Offer for sale of a majority interest in: (a) each of Electrolima By second tranche release. (a) July 94; (b) distribution utilities for metropolitan Lima, and (b) the generating October 95. utilities whose combined assets represent not less than 12 percent of total assets to be privatized in the electricity sector. Offer for sale a majority interest in the generating utilities whose By third tranche release. Not complied assets represent at least 52 percent of total assets to be privatized with. in the electricity sector. Actual sale of a majority interest in the utilities whose combined By third tranche release. End-1997. assets represent at least 25 percent of total assets to be privatized in the electricity sector. Table 5: Key Indicators for Project Implementation-B Key implementation indicators Starti g Date Completion Date Estimated Actual Estimated Actual Progress in demonopolization and N.D" 1994 N.D. Ongoing privatization of state-owned enterprises Submission to Congress of relevant N.D. 1992 N.D. 1996 laws and issuance of relevant regulations Capability of MEM to recruit qualified N.D. 1996 N.D. Ongoing staff and perform all tasks adequately Monitoring of enterprise performance 1994 1995 1995 1996 indicators Table 6: Key Indicators for Project Operation [NOT APPLICABLE] 8 N.D.=Not Defined  23 Table 7: Studies Included in the Project Study Purpose as defined at| Status Impact of study ___ ___ appraisal/redefined No studies were included in this Project. Table 8A: Project Costs Appraisal Actual/Latest Estimate Estimate (US$ million) (US$ million) First Tranche 50.0 50.0 ............ .......... .... ........... .............. ............................................................ . ............. ............. .............. .. Second Tranche 50.0 50.0 ............................................................................. . ..................... . ................................. ... ........ ............... . ................ . ..... Third Tranche 50.0 50.0 TOTAL 150.0 150.0 Table 8B: Project Financing Source Appraisal Actual/Latest Estimate (US$ million) (US$ million) IBRD 150.0 150.0 TOTAL 150.0 150.0 Table 9: Economic Costs and Benefits [NOT APPLICABLE]  24 Table 10: Status of Legal Convenants Agreement/ Covenant Present status Original Revised Covenant description Comments Section type fulfillment fulfillment date date LAW2.03 Other Complied with 12/31196 12/31/98 Closing date Closing date was extended twice, each time by one year (i.e. to December 31, 1997 and December 31, 1998) LA/3.01 (a) Management Complied with Borrower and Bank aspects shall exchange views on the progress achieved in carrying out the program. LA/3.01 (b) Monitoring & Complied with Borrower to fumish to reporting Bank a progress report on carrying out the ________ __ _____ ___ ____ ___ __ _ Program. LA/302 Management Complied with Procurement of goods aspects in accordance with ___________ __________________ Bank guidelines. LAW3.03(a) Financial Complied with Borrower to maintain performance financial records of the project in accordance with sound and consistently maintained accounting practices. LAW3.03(b) Financial Complied with Borrower to have Received in March performance project accounts 1996. In the following, audited by independent summary accounts auditors acceptable to only were submitted, the Bank, and to due to absence of fumish its audited disbursements. report to the Bank not later than six months after the end of each fiscal year or six months after last withdrawal from loan account. LA/3.03(c) Financial Complied with Borrower to (i) maintain Received in March performance and retain audited 1996. In the following, records of the loan summary accounts account, (ii) enabbe the only were submitted, Bank's representatives due to absence of to examine such disbursements. records, and (iii) include such records and accounts in the audits. LA/5.01 Implementati Complied with Ongoing Borrower to maintain Complied with, as on macro-economic policy confirmed in frame- work and successive IMF financing plan reviews. consistent with the objectives of the Structural Reform Program. LAW4A(1), 4B(1) Implementati Complied with Ongoing Maintenance of full Complied with, on autonomy of the although budgetary Electricity Tariff autonomy was .____________ __________ _________ Commission. restricted in Dec. 1997.  25 LAW4A(2) Implementati Complied wth Second a) Provision to the Complied with in on Tranche Bank of concession October 95 Release contracts for transmission and distribution b) Publication of anti-trust .__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ rules LAW4A(2), 4A(3) Implementati Complied with Second Setting of all electricity Attained in Oct. 1995. on Tranche tariffs at 100% of Release economic cost. LAW4A(4) Implementati Complied with Second Offering for sale of a Attained a) July 1994 on Tranche majority interest in a) and b) October 1995. Release the two Lima distribution utilities, and b) generating utilities whose combined assets represent at least 12% of total privatmation assets. LAI4B(3) Implementati Not complied with Third Offering for sale of a Not complied wih. The on Tranche majority interest in Mantaro hydropower Release generating utilities plant was not offered whose assets for sale, nor did the represent at least 52% Govemment prepare of total privatization proposals for assets. concessions. LW4B(4) Implementati Complied with Third Actual sale of a Achieved by end-1 997 on Tranche majority interest in with the sale of Release utilities whose ElectroPeru's combined assets generation plants. represent at least 25% of total privatization _ assets. I Table 11: Compliance with Operational Manual Statements (NOT APPLICABLE]  26 Table 12: Bank Resources: Staff Inputs Estimated Actual Stage of Project Cycle Staff US$ Staff US$ Weeks Weeks Preparation to Appraisal INA NIA 129.67 286,617 Appraisal NIA N/A 33.69 99,476 Negotiations through Board Approval N/A N/A 33.51 101,507 Supervision N/A /IIA 22.77 73,134 Completion NVA N/A 8647 25,284 TOTAL 228.11 586,018  27 Table 13: Bank Resources: Missions Stage of project cycle Monthtyear Number of Days in Performance Types of problems persons field rating Implementation Development status objectives Through appraisal Appraisal through Agreement on schedule for tariff Board approval increases Supervision Feb-95 1 S S In view of the Presidential elections and the conflict with Ecuador, Govemment has postponed until after the elections (a) increase of electricity tariffs to 100% of economic costs and (b) offer for sale of assets in electricity generation equivalent to at least 12% of total privatizable assets in the sector. Dec-95 1 S S implementation delays, particulariy in connection to the offer for sale of Mantaro, the system's largest generation ............................... ............. ... .... ..... ..I. .......................... ,-schem e Dec-96 1 S S Due to privatization delays, closing date needed to be extended to December 97. _ _ _ .............~~~~............. ..... ........... .............................................. May-97 - 1 7 S S Privatization of Mantaro- Restitucion generation scheme has been repeatedly postponed. The Bank has impressed upon the Govemment the need to reemphasize privatization of Mantaro-Restitucion, under conditions acceptable to the Bank, in order to meet the third tranche release condition by the extended closing date of ===_........................ .......... December 31 I1997. Nov-97 1 8 S S The Government is unlikely to meet the Mantaro-related conditionality within the specified period and requested a second one-year extension, until December 31, 1998. Completion S S Dissatisfaction of private companies with application of legal/regulatory framework. Reluctance of Government to I__________________. _ _ _ revive privatization process.  28 Appendix A SUMMARY OF LOAN OBJECTIVES AND ACUTEVEMEENTS Loan Objectives Loan Achievement by Loan Closing I Conditionality Maintenance of a macroeconomic Schedule Complied with. Peru observed the policy framework and financing 1, 4(a) commitments under Extemal Fund Facilities plan consistent with the objectives concluded with IMF of the structural reform program Satisfactory progress in Schedule Complied with implementing the electricity 1, 4(a) reform program set out in the policy letter Maintenance of full autonomy of Schedule Maintained in regard to operational matters; the Electricity Tariff Commission 4, A, 1; B, CTE budget is subject to Finance Ministry I __approval Provision to Bank of final model Schedule Submitted to Bank in October 1995 concession contracts for electricity 4, A, 2 transmission and distribution, assuring third-party access and use of these systems and publication of antitrust rules for electricity enterprises . Setting of all tariffs at 100% of Schedule Attained October 1995 economic cost 4, A,3; B,2 Offering for sale of a majority Schedule Attained October 1995 interest in: (a) each of the two 4, A, 4 distribution utilities for metropolitan Lima; and (b) the generating utilities whose combined assets represent not less than 12% of the total privatization assets Offering for sale of a majority Schedule Not complied with, due to failure to include interest in the generating utilities 4, B, 3 Mantaro in the groups of state enterprises whose assets represent at least 52% offered for privatization of the total privatization assets Actual sale to the private sector of Schedule Attained October 1997 (with privatization of a majority interest in the utilities 4, B, 4 Egenor) whose combined assets represent at least 25% of the total privatization assets  29 APPENDIX B PERU Electricity Privatization Adjustment Loan No. 3810-PE Final Supervision and ICR Preparation Mission, March 2-9, 1999 Aide Memoire 1. Introduction. This aide memoire summarizes the main findings of our visit to Peru from March 2-9, 1999, and the next steps needed to produce the Implementation Completion Report (ICR). It represents only the personal and preliminary views of the mission, and has not yet been reviewed by the Bank. We met with (a) the Ministries of Economy & Finance and Mines & Energy, (b) the 2 Lima distribution companies and 4 largest generation companies, (c) the Electricity Tariff Commission, OSINERG and COES, (d) COPRI and relevant CEPRIs, (e) APOYO, and (e former officials who played key roles earlier in the project. We wish to thank all these people for the time they gave us and the frankness with which they discussed the EPAL and the power sector. 2. The EPAL. The loan, approved in November 1994, was for $150 million, to be disbursed in three equal tranches. The loan objectives were both the refonn of the sector (through economic pricing and a sound legal, regulatory and institutional system) and its privatization. EPAL was to contribute to this by (a) providing resources to ease the country's economic transition, (b) assisting the design of the reforms through dialogue, and (c) strengthening the hand of those in Peru promoting the reforms, by providing incentives to meet the disbursement conditions. EPAL was one of a series of related loans: in particular, the Privatization Adjustment Loan (PAL) supported overall privatization, while the Energy and Mining Technical Assistance Loan (EMTAL) financed consultants who did studies needed for the electricity-sector reforms. The first $50 million from the EPAL was disbursed at loan effectiveness in December 1994, and the second in November 1995, after the relevant conditions had been met. The third tranche, which required, inter alia, the privatization of the Mantaro-Restitucion hydroelectric complex, was ultimately cancelled at the end of 1998, after two extensions of the original December 31, 1996 closing date. Government had been very reluctant to have the tranche cancelled, as that broke its perfect record with respect to tranches from both World Bank and Inter-American Bank adjustment loans. 3. Achievements. Overall, it is clear that the electric power sector has made enormous progress during the period of the EPAL, meeting, in large part, the underlying objectives. a) Supply interruptions due to shortage of capacity have ended, and anticipated investments will ensure adequate supply in coming years. b) Service has expanded rapidly (especially to the poorer sections of the population), and service quality has improved. c) Production efficiency has improved substantially, with both technical and non- technical losses cut sharply, and output/worker and capacity utilization increased. d) The sector has shifted from being a major drain on the public treasury to a source of fiscal income. e) The culture of getting free or highly-subsidized energy has been broken. 4. These benefits are the direct result of the sectoral reforms and privatizations. Economic prices provide adequate income to the sector, giving it the resources to invest and freeing it from dependence upon the national budget. The regulatory system provides reasonable stability and predictability of prices and service standards, enabling 1  30 the private sector to invest with confidence. The pricing structure provides incentives that smooth out demand across the day, permitting higher capacity utilization. The private sector firms operate more efficiently than their predecessors, and, where there is competition, try to attract and retain customers through better prices and service.- 5. Remainins Sector-Reform Issues. Although the sector is functioning well bv and large, there remain a number of issues to be addressed, which result primarily from the newness and complexity of the legal, regulatory and pricing regimes. The Perumian authorities recognize these issues, but fixing them is not easy, especially when it involves changing any rules of the game under which private firms operate. a) The initial tariff structure, through the way its payments for capacity were calculated, appears to have given too much incentive to invest in thermal as opposed to hydro generation - and, indeed Peru now has an excess of thermal capacity. The tariffs are in the process of being corrected, but the change underway will have an adverse impact on firms which made huge investment decisions under the old rules, partcularly on those firms which are entirely dependent on thermal generation. While we appreciate the need to give the correct signals for new investments, consideration should be given to "grandfathering" past investments, so that the Government cannot be accused of "bait and switch". b) Important decisions about the system operation and remuneration to generators, such as the one discussed under (a) above, are made by the Committee for the Economic Operation of the System (COES), on the basis of majority vote among the (currently nine) members (the transmission company and the eight major generating companies). The recent key vote affecting the division of revenue from capacity payments between thermal and hydro generators was made by a 5-4 vote (with the 3 state-owned enterprises voting en bloc with the majority). Such votes raise questions about both the fairness and the stability of the outcomes, both essential issues for investors. In addition, as some COES decisions can affect distributors and free-market users as well, some mechanism for their involvement where relevant should be found. c) Regulatory autonomy is not yet well understood and appreciated, even within the Government. Regulators must steer a difficult course between "regulatory capture' by the industry, and retrogression to being a tool of short-run government policy. Peru's course is tending more toward the latter, due to (i) tighter MEF budgetary control over the Electricity Tariff Commission and OSINERG, (ii) the Board of the Tariff Commission now being entirely Government nominated (previously, 3 of the 5 mernbers were to represent the Government), and (iii) Government's stated concerns abouE keeping down electricity prices to consumers. Government needs to learn to appreciate the benefits of not being responsible for utility price movements, and should allow the regulatory agencies to pay salaries that can attract and retain qualified personnel. d) Distribution companies are required to sign multi-year contracts with generators for the full estimated demand of the regulated market, but generators are under no such obligation. As prices in the free market have generally exceeded those in the reeulated market, distribution companies have at times had difficulty meeting that legal requirement. Until recently, Government had to use its ownership of Mantaro to help meet that requirement - but this is obviously not how the system is supposed to work. Recent changes in payments to generators for capacity have added an incentive to sign such long-term contracts, and this will surely help, but a more comprehensive examination of contracting requirements may be desirable. 2  31 e) On the free market, the largest firms (such as mining companies) have been able to get competitive bids from generators, but this has often not been the case for smaller users, especially those within existing distribution grids, who have invariably remained with the distributors (upon whom, in any case, they would remain dependent for distribution lines and hence for uninterrupted service). Such users may lack both the knowledge and market power to obtain fair deals, and reputedly many were induced to sign very-long-term contracts at high prices. Free market prices have generally been above regulated prices, which is not what one would expect in a fully-competitive market. We did not have the time to meet with a sample of users to learn of their experience and views, but we recommend that this be done to determine whether there have been abuses and, if so, to propose remedies. 6. Remainin2 Privatization A2enda. Electric power was by far the largest component of the state-owned-enterprise sector, and its privatization has proven to be complicated. Although about $1.5 billion has already been obtained from the privatizations to date (not counting investment commitments), an even larger amount is still in Government hands, and comprises the largest portion of the remaining national privatization agenda. As in other sectors, the electricity-privatization program started quickly (with Electrolima distribution and then its generation) but slowed down. The privatizations under the EPAL were done transparently and efficiently, and the decisions to establish a pair of large companies by selling Electrolima's and Electroperu's generation (excluding Mantaro) en bloc appear reasonable, as this created two strong companies which should be able to compete with Mantaro and (potentially) whomever generates with gas from Camisea. Besides Mantaro, Government's remaining minority position in most privatized firms, and the former CENTROMIN generation (where privatization is complicated both by CENTROMIN's need for the funds it generates so as to pay for environmental clean-ups, and by the ongoing construction of the Juncan hydro plant), the remaining privatization agenda is as follows: a) Regional generating companies EGASA and Machu Picchu, for whom the process has been very slow and politically complicated. The construction of the Mantaro- Socobaya transmission line, linking the central and southern systems, should make it easier to privatize them, as once they are part of the larger grid, there should no longer be concerns about their regional quasi-monopoly position. b) Regional distribution companies, which are slowly being privatized, under "Promocion Entrepreneurial," requiring at least 60% Peru-vian ownership and providing cheap (LEBOR plus 2%), long-term (12 years) credit for up to 90% of the purchase price. We understand the rationale for requiring Peruvian control, but this does go against the grain of overall privatization policy in Peru, tends to exclude the most efficient potential operators, and results in relatively-few qualified bidders. In addition, the use of subsidized credit makes bid prices somewhat artificial, and with 90% financing, there is a risk of moral hazard and later default. 7. Privatization of Mantaro-Restitucion. This was, of course, a key issue during EPAL implementation, and the area in which no resolution was reached. While we cannot know exactly on what grounds decisions at various points not to privatize Mantaro were made, we have heard the following arguments against privatization: a) Mantaro plays such a central role in the power system, that whoever buys it would be in too strong a market position, and perhaps even able to organize a cartel;  32 b) The regulatory/pricing system has not been optimal, and private investors in the sector have allegedly engaged in abusive practices, so Governnent has had to use its ownership of Mantaro to offset these distortions (as by selling more on long-term contracts to distributors, maximizing production so as to keep down the spot price, and using its vote on COES to affect key decisions; c) Mantaro is now run efficiently, and produces high annual earnings, so there is little to be gained by privatizing it; d) It would be problematical to sell Mantaro before the uncertainties about the condition of its tunnel are resolved; and e) It is politically difficult to sell Mantaro, because (i) it stands as President Belaunde's monumental legacy to Peru, (ii) it might be bought by Chilean or Spanish investors, who already have a strong hold on Peru's public utilities, and (iii) public support for privatization in general is at an all-time low. 8. On these points, our response is as follows: Re (a), the relative importance of Mantaro keeps dropping as new capacity is brought on line, and the company will soon not be much larger than EDEGEL. The transmission line being built between the central and southern systems will further increase competition for Mantaro. The risk of cartelization can be protected against through INDECOPI and other legaVregulatory mechanisms, and by ensuring that the purchasers of Mantaro are not linked to any of the larger existing generators in Peru.. Re (b), recent and ongoing legal/regulatory/pricing changes (the anti-monopoly law for electricity, incentives for signing long-term contracts) have virtually eliminated the need for Government to use Mantaro in this way. Re (c), there still appears to be some room for improving efficiency in operations but, much more importantly, there could be substantial efficiency gains in future investments, and without the need for Government funds. Re (d), as Electroperu has not been able to resolve this issue after many years, it would seem best to let new owners decide how they wish to handle it. Re (e), while we are not competent to address all the political issues, we would note that (i) certain forms of privatizing operation of companies (e.g. selling a minority share but with operational control) raise fewer political objections, (ii) that the political objections might be diminished if Government made a concerted effort to explain the benefits which privatization has produced in Peru, and (iii) companies which already have a significant share in the Peruvian power market would be barred by existing laws from purchasing Mantaro. 9. The arguments in favor of privatizing Mantaro are that it would: a) show Government's commitment to the separation between entrepreneurship and the Government's normative/regulatory role, and its confidence in the legal/regulatory system it has established; . b) ensure that Government cannot be accused of making policy decisions so as to favor the enterprises it owns; c) leave the construction of any second tunnel up to a private company that has the resources and can be expected to invest efficiently; and d) provide fiscal resources in the near term, when they are needed urgently as a result of El Nino and the economic slowdown. 4  33 10. Government Performance. Government successfully met 7 of the 8 second and third tranche disbursement conditions (economic tariffs; autonomy of the Electricity Tariff Commission; model concession contracts with third party access to transmission and distribution networks; sectoral anti-trust rules; offer for sale of both Lima distribution companies and of generation companies with at least 12% of selected sectoral assets; and actual sale of at least 25% of selected sectoral assets). It established a modern legalregulatory/tariff system for the electric power sector, with competent regulatory institutions, and has continued to make improvements on that system, although a number of issues remain, as noted in para. 5 above. 11. In privatization, it moved quickly initially, overcame considerable difficulties in privatizing all of Electrolima and a large part of Electroperu, and did the privatizations properly. But progress on privatization slowed down considerably, as the sense of economic urgency diminished, key people left, and political opposition developed. Fortunately, the process never stopped completely, and there are indications that the new COPRI leadership may revitalize it. Regarding Mantaro, it would have been preferable if Government had been franker with the Bank about the issues impeding privatization, so that there could have been a more productive dialogue, and perhaps a resolution of the dispute (through one side convincing the other, or a compromise solution). In addition, the Government did not follow up on its agreement with the Bank to hold a workshop on the alternatives for private participation in Mantaro. 12. World Bank Performance. The Bank did a creditable job in designing and supervising the project. It was particularly useful at the project-identification stage, when it advised key officials on the overall design of the legaVregulatory/pricing system, and financed consultants who did much of the detailed work. The decisions to twice extend the closing date appear reasonable, as they kept some incentive to privatize Mantaro (although rather little, considering that Mantaro is worth about 20 times the size of the cancelled tranche) and allowed some dialogue to continue. When it became clear last December that no progress towards privatization had been made, the decision to close the loan was also proper. 13. But there are a number of areas in which the Bank could have done better. a) The President's Report was not very transparent about the complexity of the Mantaro issue, and did not mention this as a specific project risk. As a result, Bank management did not give the matter the attention it deserved, or raise it at an early stage with senior Peruvian officials. b) The project timetable and closing date were far too optimistic, even bearing in mind that this timetable was part of a strategy agreed with Govertunent so as to accelerate privatization. The Bank should have recognized the legal, political, economic and technical complexity of privatizing Electroperu/Mantaro. c) The privatization conditions essentially related only to Electrolima and Mantaro, which kept the Bank from being involved in other major privatizations, such as the rest of Electroperu generation and the regional distribution and generation companies (which were omitted primarily because they did not fit into the overly-optimistic timetable). d) The Bank did not systematically monitor sectoral performance indicators. e) The Bank did not devote sufficient resources to supervising the project, especially in the later years. Coupled with the Government's lack of frankness about Mantaro, this 5  34 resulted in only a minimal dialogue on this important issue, and coupled with c) and d) above, in inadequate dialogue on other key issues. A mid-term review would have been very useful in this regard. 14. Lessons Learned. a) A complete reform of the electricity sector is not a one-shot operation. Flexibility is needed in the laws, so that modifications can be made based on experience, preferably by means of regulations (to minimize the need to go back to Congress each time). Amending the laws and regulations is often harder than enacting them initially, because it affects the interests of private firms which have made investment decisions based on the existing "rules of the game." The amendment process is much easier when there is an adequate level of trust between the public and private sectors (which is not yet the case in the electric power sector in Peru). b) As the private sector enters, Government needs to retain high-quality staff familiar with the private sector and as competent as the private-sector staff with whom they deal. c) Maintaining the autonomy of regulatory agencies is a constant struggle that requires not only adequate laws but also continuing political support and adequate financing. d) When privatizing, it is important to move quickly, because resistance always develops, even when the privatizations have been transparent and generally sucoessful, as in Peru. Adequate personnel, with incentives to sell as fast as possible, are required for this. e) Close coordination between the key agencies (in this case MEF, MEM and COPRI) is required for successful privatization and reform - in Peru this was excellent at first, but lacking in the later phases of electricity privatization. f) Tariff revisions should be made well before privatization commences, so that the public does not confound the two. g) Government needs to carry out studies of the effects of privatization, and publicize the results, so that the public is not misled (e.g. into thinking that there has been a net job loss due to privatization). h) The World Bank, when making sectoral reform loans, should (i) include all major parts of the sector, (ii) devote adequate resources to supervision, and (iii) when a major roadblock is encountered, devote resources to understanding the source of the problem and, on that basis, having a dialogue on the issue, rather than focussing almost exclusively on the legal aspects (closing date extensions and disbursement conditions). 14. Next Steps. In accordance with World Bank procedures, the Implementation Completion Report (ICR) needs to be presented to its Executive Directors within six nonths after loan closing, i.e. by June 30, 1999. To meet this schedule, we would greatly appreciate it if Government could send us a draft of its contribution to the ICR, for comment, by April 15. We appreciate the commitment of the Ministry of Economy and Finance to preparing this report. We will then endeavor to send our draft ICR to Government, for comment, by April 30, and would hope to receive Government's comments on it by May 15. Joerg-Uwe Richter Stephen J. Ettinger Lima, March 9, 1999 6  35 Appendix c PROJECT REVIEW FROM BORROWER' S PERSPECTIVE ELECTRICITY PRIVATIZATION ADJUSTMENT LOAN (LOAN 3810-PE) Inforn,e de Cierre de Proyceto Prestamo en Agoyo al Desarrollo del Sector Electrico tEec'(tricitv Privatization Adjustm l 'f Luan - EPAL) Resumen Ejecutivo El progr-.ma de reformas cstablecido por el 1'r6stamo en Apoyo al Desarrollo del Sector El1.cerico - Electricity Privutization Adjustment Loan (EPAL) acordado con el Banco ; iundial el 22 de noviemnhre de 1994, ha acomppanado a las otras reformas estructurales y de sanas politic.ts macroccon6micas implantadas por el Gobierno Pcruano Los cor:eonontes del referido prestnino han contribuido a alcanzar un mejor funcionai.iiento del sector electrico nmedianto la total reformulaci6n del marco regulatorio que regia en el sector cl6ctrico, el pleno establecimiento del nAevo marco regulatorio con un 6nfasis central en la plena aplicacion del nuevo s .stema tarifario ;-ae permiti6 a la postre una exitosa reestructuraci6n y privatizaci6n de las emprcsas electricas de propiedad del Estado. Introduc gi6n El Prestarlno en Apoyo al Desturuolo del Sector El6ctrico - Electricity Priuatization Adjustmeazt Loan (EPAL)- fue concebido para apoyar al Gobierno del Peru6 en la realizac-,5n de un ambicioso progrtirna de reestructuracion del sector electrico que ha perniitido contribuir a un mejor funcionamiento de la economfa en di':ho sector, uediante la participaci6n de la inversi6n privada y generando ingentes recursos para el Tesoro Puiblico. El EPAi. fue aprobado por .I Gobierno peruano mnediante Decreto Supremo No.146-94 EF publicado el 22 cle noviembre de 1994 y fue suscrito el 22 de noviembre de 1994. Situaci6n Previa del sector electrico En 1992 quo se inicia la reforma del sector el6ctrico peruano, el coeficiente de electrificacion a nivel nacional a 199() alcanzaba a un 43%, y se agravaba en algunas zonas donde dificilmcnte alcanzaba cl 5%, el consumo per-cdpita anual de ener.ia era de 350 kwh aptoximadamente y la potencia instalada era apenas  Emisor: 051 A 36 05/17/99 6:36PM Tra tuz Pagina 3 qi,SCA DR~ MINIS[ERIO DE ECONOMIA Y FINANZAS de 0. 19 kW por habitante. Estos valomes nos ubicaban en el grupo de los paises de menor dc sarrollo en Latinoam&rica, regi6n reconocida como en via de desarrollo. En genercal. la calidad del servicio se habfa deteriorado, principalmente por el manejo no tecnico de las tarits 0el6ctricas que no permitieron cubrir adecuadamente los costos de operaci6n y mantenimiento y, que Ilevaron a efecruar severos racionamientos en 1990. La falta de una adecuada selecci6in v administraci6n de proyectos de inversi6n, trajo conmc consecuencia que en el leru, a pesar de su gran potencial y favorables condiciones para su desarrollo, se hayan construido centrales hidroelectricas mayore: con costos que supera uon a los 4000 US$ por kW instalado, iajo condicioi z.s de financiamient.o integral por parto de contratiuas y SLiniinistradores, sumamente gravos<as. La invern .jn privada en el sect.ur electrico fue priicticamente nula, con I u ixnica excepci6I: de aquella, que con car.cter forzoso, se imponia a los nuevos usuarios para la c. nstrucci6n de los sistemas cle distribuci6n y que se capitalizaba en las empresas a favor del Estado, sin reconocerle ningtin derecho por esta inversi6n. El sector cmpresarial a cargto del Estado, no alcanz6 niveles de eficiencia principalmnente por las politicas de corte populista, que permitieron la ingerencia politica en la direcci6n de las empresas y la sobredotaci6n de personal. Los resultados de esa gesti6n so traducen en un indicador de productividad de 124 clientes por trabajador para el sector en 1990, perdidas econ6micas acumuladas de US$ 3,000 millones y una deuda externa acumulada de US$ 3,500 millones. ObjetivoQs del Prestamo El prograrna de reformas que e lBanco ha apoyado con este pr6stamo incluy6 cuatro con-poner.tes principales: a) Mantenimiento de un programna macrocconomico v un Rlan financiero satisfactorioa pagra el Banco gue parnmitan apo-var el orograma cle privatizaci6n. D)esde la suscripci6n del prestamo en noviembre de 1994 y su cancelaci6n en diciembrc de 1998, el Banco Mundial ha realizado un soguirniento de la politica &PAT. -Pnf, 2,' d. - P gZde 10  Emisor: 051 1 37 05/17/99 ff:i(rM 114 A ragina 4/11 0%.%SCA OP4 MINISTERIO DE ECONOMIA Y FINANLAS macrocconomica del Peru y Lin plan de financianijento consistente con los objetivos del programa de reforimas. Las Misiones del Fondo MIonotLrio Internacional han rcalizado un seguimiento continuo de la politica macroecon6inica. Entre los principales objetivos y logros macroecon6micos planteados y alcanzados respocto de aquellos trazados segun la u1tima Pre-publicaci6n de la Carta de Intenci6n presentada al FMI en mayo de 1997, encontramos los siguientes: L Crecir:iiento del PBI real dc 7,4%'Y en 1997, lo cual supera el crecimiento proyec tado de 5%. j Reduc:i6n del nivel de inflaci6n: en 1996 la tasa de inflaci6n fue de 11,8% y en 19)7 se redujo a 6,5%., con lo cual se cumnple ampliamente la meta propucsta en la mencionada carta (se esperaba quo la inflaci6n se ubicase entre -- 10%). o Se log--6 una reducci6n del deficit de cuenta corriente de 5,9% del PBI en 1996 a 5,2%, en 1997 (se incluy6 que fuera inenor al 5,5%). w Las R servas Intermacionales Netas del Banco Central de Reserva Ilegaron a nivelo, de US$ 10,3 billones lo cual oquivale a 15 moses de importaciones de bienes y servicios no financicros (nientras que en 1996 equivalia a 12 meses), 6 vec:'. la base monetaria y el 80X% de la liquidez total del sistema bancario. _ La tasa de inversi6n ascielnde a 25% del PBI y la tasa de ahorro nacional a 20% dol PBI. De la misma nmanera aimbas tasas superan lo proyectado. i Por otro lado, el deficit del sector puiblico, antes de ingresos de privatizacion, se redujo a 0% en 1997, logrdndose de esta manera un equilibrio fiscal. b) Reformas del marco legal. regulatorio e illstitucional La Ley de Concesiones Elctricas, promulgada en noviembre de 1992, y sus normas reglamentarias, contenidas en legislaci6n secundaria, establecen las condiciones sobre las cuales se dcsarrollan las actividades del sector electrico. Las caracteristicas principales son: por un lado, definici6n del rol del Estado como normativo y regulador, de acuerdo a lo establecido en la Constitucion Politica del Pais; y por otro quo hls actividades de generaci6n, de transmisi6n y de distribuci6n de electricidad se efectuan independientemente, mediante contratos de concesi6n a plazo indeterminado y s6lo terminan por renuncia o caducidad debido a incumplimiento de las condiciones del contrato. I'AL -Inf-nn, de Cierre PZg 3 de 10  Emlsor: 051 1 38 05/17/99 6:37PM ira nuz Pagina 5i ,*XCA bQ -MINISTER10 DE ECONOMIA Y FINANZAS Los usuarios con consumos superiorcs a 1000 kW quedan desregulados, en consecucxicia pueden contratar libroniente al distribuidor o a cualquier proiductor clel sistenia, sin mayor restricci6n lue lia capacidad fisica dc los sistemas. La regulaci6n tarifaria la ejerce la Cnomisi6n de Tarifas Electricas, organismo t6cnico con autonomfa funcional y administrativa, bajo un sistema de precios basado en los valores del inercado librt en generaci6n y de costos estandares en distribuci6n (VAD). La fiscalizaci6n de la calidad del stervicio se encuei-tra a cargo del Organismo Supervisor de la Inversi6n en Energia - OSINERG con los lineamientos establer;dos en la norma de Calidad del Servicio. c)i Sisterma de precios de la electricidad Otro aspc ;-to remarcable es que la experiencia en ol pais de los uiltimos anios, en un ambi:!nta totalmente rcgulado, con exclusividad en la prestaci6n por empresas estatales, con un manejo tarifario no t6cnico, ha dejado una scrie de distorsior es y prejuicios en los agenies econ6micos. El equilibrar un niercado con oferta restringida y demanda creciente a precios artificialmente mantenidos llevaron al racionamiento del servicio, haciendo que los usuarios domesticos derrocharan un bien escaso y la industria no dispusiera de este insumo vital, que origin6 una negativa realimentaci6n en desmedro de la producci6n. Los resultados de la desregulaci6n eni el sector electrico son que a partir del mes de mayo de 1993 la fijaci6n tarifaria se rige por mocanismos econ6micos y ]os usuarios con demanda superior a 1000 kW, tienen la posibilidad de negociar sus precios libremente y se han eliminado los subsidios cruzados entre sectores de consumo. Los indicadores que revelan una tendencia de eficiencia son que en el aino 1990 un consumo per-cdpita de onergia a usuario domdstico de 143 kWh-mes, en tanto que dicha cifra para el presente afno alcanza un significativo valor inferior a 100 kWh-rnes. Igualmente el factor de carga que en aquel ano alcanzaba apenas un nivel del 65%, a la fecha tiene un significativo valor cercano al 74%. Los niveles de competencia a nivel del mercado libre no han alcanzado todavfa los mejores resultados, y en algunos casos han causado C<iertos desajustes debido BI'AL -1M.onn . de Cierre PI 4 de- IO  Emisor: 051 1 39 05/17/99 6:38PM Tra 502 Pagina 6/11 ,'OgUCA AN Aw MINISTERIO DE ECONOMiA Y FINANZAS fundamentalmente al desfase entre la privalizaci6n de las empresas de distribuci6n en Lima y las empresas de generacion. 1n cuantc al comportamiento de los precios de 1a electricidad en los ultimos anos, los datos relevantes son, que cl precio para usuarios dom6sticos ha sufrido un incremnelno real de 200% entiv los alios 1990 y 1994, en tanto que para el sector industrial se redujo en 9%. El programa de implementacion tarifitria para los usuarios domesticos ha sido un tema particularmente dificil de afr ontar, y que se alcanz6 en 1994 previo a la privatizaci6n, hecho sin precedentes en America Latina o en otros sectores como telecomunicaciones, en el cunt se ensay6 un programa de rebalanceo de mayor alcance. d) Pri atizaci6n de las er_oresas celetricas En cumpIimiento a lo establecidol en la Ley de Concesiones Electricas, las empresas efectuaron un proceso de reestructuraci6n destinado a dividir las actividad. s de generaci6n, de transmisi6n y de distribuci6n en empresas independientes. El proces: de privatizaci6n de las cimpresas de electricidad se enmarc6 dentro de lo establecido en la Ley de Prornoci6n de la Inversi6n Privada, que sefiala que la Conisi6n de Promoci6n a la Invcrsion Privada - COPRI es la encargada de Ilevar adelante tal proceso mediante Jos respectivos Comites Especiales. Para efectuar el proceso de privatizaci6n del sector eldetrico se conformaron tres Comites Especiales CEPRI's. El CEPRI de Electrolima, erncargado de la privatizaci6n de las unidades empresariales derivadas de Electrolima, el CEPRI de ElectroperCt encargado de la privatizaci6n de las unidades derivadas de ELECTROPERtI y El CEPRI de Empresas Regionales encargada de la privatizaci6n de las empresas regionales de distribuci6n y generaci6n. La estrategia bAsica del procoso fue la de generar un ambiente real competitivo en la actividad de generacion, miontras que en la distribuci6n se busc6 que en el proceso no se lograra una intogracifn horizontal, ni siquiera en la ciudad de Lima, donde se dividi6 la emprosa en dos unidades. El'-l ^.1_ . -m-Aex . l Cierre ' -" -Piig, S de 10  Emlsor: 051 1 * 40 05/17190 6:39PM Tra 502 Pagina 7/11 MINISTERIO DE ECONOMIA Y FINANZAS En las primoras-privatizaciones so I)usc6 transferir el control de la unidad empresarial a un operador estrategico que asumicra la propiedad de un paquete accionario que le diera el control real de la stociodad nmediante un proceso de licita.ci6n ptiblica internacional. Una vez concretada la transferencia al inversionista cstrategico, se procedia a transferir un paquete de hasta el 10% de acciones a los trabajadores de la emipresa, que en ei caso de las primeras privatizaciones fueron operaciones que involueraron montos importantes en beneficio de los accionistas trabajadores. La privatizaci6n de una empresa concluia el dia quo el Estado colocara, mediante los mecanismos de participacion ciurladana, el paquete remanente de la emnpresa privatizaaa. Bajo es-os criterios se llevo adelante la privatizaci6n de las unidades ernpres&aiales derivadas de Electrolima S.A. (Edelnor, Luz del Sur, Edegal, EDE ChaBcay . EDE Cafiete) asi corno algunas do IAs derivadas de Electroperd S.A. (Etevensa, Egenor y Empresa EI6ectrica de Piura) efectuadas entre 1994 y 1996. Leccioes aprendidas Sobre la reforma del sector: Un aspecto que se puede seiialar. comIo principal lecci6n aprendida en la reforma, es que la regulaci6n que se plantcu no debe responder en ningin caso a las condiciones coyunturales o de corto plazo. A manera de ilustraci6n se puedo scialar como casos tipicos de este tipo de decisiones las siguientes: la conformaci6n del organimo . regulador y la remuneraci6n de la potencia. En el primer caso se incluy6 en cl Couojo Dirwctivo de la Comisidn de Tarifas Eldctricas la participaci6n de repressatant.s de las empresas a fin de darle estabilidad y hacerla atractiva hacia lo. invorsionistas, deformando de esta manera un rol que plenamente le correspondo al Estado. En el caso de la potencia firme. igualmento se estructur6 una regulaci6n que privilegi:aba la generaci6n t6rmica, debido a que en el momento de la reforma el FTZ I. _I nf te rIs 0 de 10  Emisor: 051 1 41 05/17/99 6:39PM Tra 502 Pagina a/11 MINISTEROE EcOMIA Y FIZAS pais afrontaba un scrio racionamituntoi y los proyectos t6rmicos eran los de mas pronta e-jecuci6n. Otro de los objetivos de la rcfoiria es privilegiur la libre competencia, que el usuario final pueda contar con el scrvicio en forms suficiente, oportuna y con una calidad adecuada, a un precio de eticiencia, sostenible on ol largo plazo. En cste entendido, la conmpetencia deberia permitir a los ofertantes del servicio los ingresos suficientes para el retorno de sus inversiones, cubriendo adecuadamente los costos de prestar y ampliar el servicio. IUno de Is* aspectos quo privilegia el modelo, cs cl levantamiento de las barreras de acceso al mercado en las distintas actLividades, como son el uso de los sistemas de transri-si6n para atenci6n de clientes. En el ca ;o de la generacion, el principio de la competitividad es de crucial importax, ;.a, por ser la base de la fijaci6n de precios. los que han de formarse por la conc ;- *ancia de varios ofertantes, compitiendo por clientes que per mitirdn la formaci6i. de precios econ6micos, que se toman como base para la fijaci6n de los precios 'vgulados. Uno de lo.s retos de la reformu es que en el nuevo entorno, se lleven a ca.bo las nuevas invorsiones que permitan cl crecimiento de la oferta, para atender la creciente demanda, situaci6n que se ha alcanzado con la privatizacionss, las concesiones y los proyectos rcalizados por iniciativa propia. En el proceso actual, se reconoce quo la nueva inversi6n, principalmente de fuente extraWera, es necosaria pars lograr estc cometido, por lo qe el mantener un marco regulatorio eatable y coherente debe ser una tarera permanente, evitando caer en las tentaciones regulatorias de corto plazo y efctistas. Los resultados alcanados son bastanto alentadores, a nivel de generaci6n mediante inversi6n privada so ha logrado una reserva del 50% de la demanda total del sistema. Las inversiones en distribuci6n han contribuido a mejorar el coeficiente de electrificer.i6n. del paus, an efecto, Linia Metropolitana tiene ahora un nivel del 100% y a nivel nacional sc ha alcanzado un valor cercano al 70 %, correspondiendo a IaB empresas de Lirna wa 6% de este crecimiento. iSAL a1znrn,, d. O,iare. PAS 7 dn 10  Emisor: 051 1 42 05/17/99 6:40PM Tra 502 Pagina 9/11 MINISTERIO DE ECONOMIA Y FINANZAS Sobre el Acuerdo de Prestamo: Un aspecto remarcable del presente prestanio de ajuste fue que el plazo de ejecuci6n fue excesivamente opLimista para alcanzar las condicionalidades que en el se acordaron, no habi6ndose tomado en cuenta debidamente el entorno politico que se iba a presentar en el ano 1995 con las elecciones presidenciales quo tuvicron un serio impacto en le proceso de privatizaciones. En esto sentido, ha quedado en evidencia la necesidad de que el Banco trabaje, en lo sucesivo, en el disefio de planes mas acordes con las realidades de cada pais. Sobre el lesempento del Banco: El Gobicvno del Peru, a pcsar quc cl prdstasio no lleg& a ejecutarse en su totalidad, considera que el EPAL ha alcanzado satisfactoriamente los objetivos esperado ,. El equiypo de trabajo del Batnco asignado para este prestarr.o se involucr6 profundainente en el proceso do la reforma aportando sus experiencias a lo largo de todo E i proceso. Menci6n especial merecen las discusiones referidas al marco regulat :. io asi como al proceso de ajuste tarifario. Otro aspecto que demand6 especial atenci6n por parte del Banco fue el dessrrollo de los lineamientos y reglamcntaci6n de las pr*icticas que limitan o restringen la libre con'petencia, en el que se cont6 con el aporte de especialistas en el tema y permitieron crear consciencia. Una gran ventaja en el prestamo EPAL fue la continuidad de la(s) personas a cargo que permiti6 aplicar flexibilidad necesaria en el cumplimiento de metas. El Prestamo de Asistencia Tecnica de Privatizaci6n (Privatiz2tion Technical Assistance Loan - PTAL) tambi4n ayud6 a cumplir las metas del pr4stamo no s6lo en el MEM, sino tambi6n en COPRI y los CEPRIs, se tuvo asesoria t6cnica y continuidad en el campo de acci6n del pr6stamo. Sobrc el desempefio del Beneficiario del Prdstam<a: Tanto el Banco como el Gobierno del Perd trazaron metas muy optimistas al momento de la suscripci6n del pr6stamo, hecho que gener6 presiones por ambas partes para llegar a cumplirlas. Algunas de estas metas no se concretaron en su EPAL -tnIr,,r-, dci Cierre pAg 8 de 10  Emisor: 051 1 43 05/17/99 6:41PM Tra 502 Pagtna lO/l ,3O IL MINISlERIO DE ECONOMIA Y HNANZAS oportunidad, dando lugar a que se solicitaran varias pr6rrogas a la fecha de cierre pactada inicialmente. Asimismo, el tema vinculado con la privatizaci6n de la Central Hidroelectrica de Mantaro determin6 que no se efectuara el dltimo desemboLso. Durante todo el proceso se busc6 comsolidar la reforma de este importante sector. Sisn embargo, algunos aspectos relativos a deeisionies de politica impidieron cumplir cabalmente con tal cometido. No obsLante, confianios quo en los pr6ximos afios una vez que la experiencia haga evidentc que los paradigmas del contexto el6ctrico de los anios 70 han perdido vigencia y que se defina que el Estado s6lo debe centrar sus esfuerzos en la regulaci6n, dicha roformia concluirx auspiciosaraente. Agenda pendiente en la reformla: Los tern is pendientes de resolver cn cl marco regulatorio se centran basicamcnte en los sivazientos puntos. 3 Mejorar la competitividad a nivel de la generaci6n que perni ta una adecuada incorporaci6n de nuevas fuentes de energia como el gas natural y que redunde an mejores precios para los consumidores. - Solucionar el conflicto de la remuneraci6n de la potencia, que no se ha resuelto con la modificacion do la Ley. * Revisar profurndamente Ia norma de prevenci6n de monopolios a fin de evitar que siga siendo una barrera de ingreso a nuevas inversiones. * Revisar la norma do calidacd do servicio, ya que los niveles de e2dgencia de la norma tienden a oncarecer el servicio, y toda esa exigencia se traducira en mayores tarifas en peijuicio de los usuarios. Privatizaci6n de Mantaro: Al principio, la condicion de imiayor trascendencia en el prestamo EPAL era la privatizaci6n de la C.H. Mantaro. Las fechns establecidas en los cronogramas resultaron muy optimistas. De la manera en la que se ha desarrollado la privatizaci6n del sector el6ctrico, la privatizaci6n del complejo Mantaro ya no tiene la trascendencia econ6mica que tenia en el momento de la suscripci6n dol pr6stamo. Su participaci6n relativa es cada vez menor, al igual quo su valor de rmercado por la entrada en servicio de nuevas plantas hidraulicas y de gas natural que sera aun mas notoria con el rPAL -I,f,rrn de Cierre Pig $1 dr 10  Lmisor: Ut1 1 44 05/17/99 6:41PM Tra 502 Pag1na 11 MINISTERIO DE ECONOMIA Y FINANZAS ingreso del gas de Camisea. Sin embargo desde el punto de vista conceptual de la reforma, cs conveniente conclui' con dicho proceso. Duraci6n del prestamo: El prcstamo suscrito el 22 de noviombre dc 1994 tonia como fecha inicial de cierre el 31 de diciembre de 1996. Hubo una serie de sucesivas pr6rrogas hasta que se corr6 definitivamente cl 31 de diciembre de 1998. El periodo indicado en el Convenio de Prestamo de dos arios de duraci6n result6 insuficiente para las reforimas quo so adoptaron. 5Si'AI. -Ijrutle de Cierre P*g In d.> ia  45 APPENDIX D PROPOSED OPERATIONAL PLAN The government is in the process of preparing an operational plan aimed at maintaining EPAL's achievements.  *812' ~~~~~7'8 74 072 ELECTRICITY SYSTEM GENERATION AND TRANSMISSION/C0L0MBIA INSTALLATIONS ECUADOR c_ ~ ~ ~ ~ ~ ~ ~ ~ ~ - 1 TUMBES / // M.K-j~~~~~~ NeareDE A.-s "' ofot \, (Ree L.WE I L 1"'_ ci > SeThoro 2 -~~ ~~ a * O XxBA'U",o TRANSMISSION LINES: 67 220 kV - ~'k N "'- N - - ----- 138 kV LA/V44$9~EQ 7Co'eoa ~CHACAPOYAS ATi ~ OO `7 00t dePI-j.~O* 33-60 kV CHICL4Y0rat12 '~ Chor SAN t GOOMIOPe~MtkCI~ e aAAJA8AX3 SUBSTATIONS Pot'roi'g~~j~~ C b.ek MAHN YDRO STATIONS N' ~~~~~~~~~~~, A ~~~~~~~~~~THERMAL STATIONS 5"' 'lf P,4 Aeyosat1B R A Z I L AN HCA' ~~i-hq ~HUANUCO A UAAI ' _fHUANU9O Pooee_ 'iSrto4,~ "ASCO P. 6' "'- \ gh..oCERRO DE 0 reroaoogF< *E PoroAhoU&E, PB121-0 H-or Yoy '- Sg