Colombia - Power Market Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 24991 IMPLEMENTATION COMPLETION REPORT (CPL-39540; SCL-3954A; SCL-3954B; SCL-39550) ONA LOAN IN THE AMOUNT OF US$ 249.3 MILLION TO THE GOVERNMENT OF COLOMBIA FOR A POWER MARKET DEVELOPMENT PROJECT OCTOBER 28, 2002 Finance, Private Sector and Infrastructure Department Mexico, Colombia, and Venezuela 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 (Exchange Rate Effective February 2002) Currency Unit = Colombian Peso Col$ Col$1.00 = US$ 0.00045 US$ 1.00 = Col$2,200 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ACIEM Asociaci6n Colombiana de Ingenieros Electricistas y Mecdnicos (Colombian Association of Electrical and Mechanical Engineers) ACODIS Asociacion Colombiana de Distribuidores (Colombian Association of Distribution Companies) ACOLGEN Asociaci6n Colombiana de Generadores (Colombian Association of Generating Companies) BOO Build, Own, Operate CAS Country Assistance Strategy CASEC Comite Ambiental del Sector Electrico Colombiano (Colombian Power Sector Environmental Committee) CIF Cost, Insurance, Freight CIER Comisi6n de Integraci6n Electrica Regional (Regional Power Integration Conmmission) CNE Comisi6n Nacional de Energia (National Energy Commission) CND Centro Nacional de Despacho (National Dispatch Center) COLGAS Compafiia Colombiana de Gas (Colombian Gas Company) CONPES Consejo Nacional de Politica Econ6mica y Social (National Economic and Social Policy Council) CORELCA Corporaci6n Electrica de la Costa Atlantica (Atlantic Coast Electricity Corporation) CREG Comisi6n de Regulaci6n de Energia y Gas (Energy and Gas Regulatory Commission) CVC Corporaci6n Aut6noma del Valle del Cauca (Valle del Cauca Autonomous Corporation) DANE Departamento Administrativo Nacional de Estadistica (National Statistics Department) DNP Departamento Nacional de Planeaci6n (National Planning Department) ECOGAS Empresa Colombiana de Gas (Gas Transmission Corporation) ECOPETROL Empresa Colombiana de Petr6leos (Colombian Petroleum Corporation) EEB Empresa de Energia de Bogota (Bogota Power Corporation) EEC European Economic Community EMCALI Empresas Municipales de Cali (Cali Municipal Services Corporation) EPM Empresas Publicas de Medellin (Medellin Municipal Services Corporation) ERR Economic Rate of Return ESMAP Energy Sector Management Assistance Program FEN Financiera Energetica Nacional (National Energy Finance Company) GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development ICEL Instituto Colombiano de Electrifcaci6n (Colombian Electrification Institute) ICR Implementation Completion Report IDB Inter-American Development Bank INEA Instituto Nacional de Energias Alternas (National Institute of Alternative Energy) IPP Independent Power Producer IRR Internal Rate of Return ISA Interconexion Elctrica S.A. "E.S.P. " (National Interconnection Company) ISAGEN Government-owned power production company LAC Liquidadory Adrninistrador de Cuentas (Account Settlement Organization) LPG Liquified Petroleum Gas MEM Mercado de Energia Mayorista (Wholesale Power Market)  MHCP Ministerio de Hacienda y Credito Ptublico (Ministry of Finance and Public Credit) MINERCOL Empresa Nacional Minera Ltda. (National Mining Corporation) MIS Management Information System MME Ministerio de Minas y Energia (Ministry of Mines and Energy) MTR Mid Term Review MUS$ Million US$ NPV Net Present Value OED Operations Evaluation Department, World Bank OLADE Organizaci6n Latinoamericana de Energia (Latin American Energy Organization) PMDP Power Market Development Project PPA Power Purchase Agreement PROMIGAS Promotora de la Incorporacion de Gasoductos de la Costa Atldntica (Atlantic Coast Gas Company) PSR Public Sector Reform Loan SAR Staff Appraisal Report SCI Sociedad Colombiana de Ingenieros (Colombian Association of Engineers) SIE Sistema de Informacion Energetica (Energy Information System) SSP Superintendencia de Servicios Publicos (Public Services Superintendence) TA Technical Assistance UNDP United Nations Development Programme UPME Unidad de Planeamiento Minero Energetica (Mining and Energy Planning Unit) USAID US Agency for International Development MEASUREMENT UNITS bbl Barrel kW Kilowatt (103 W) bpd Barrels per day J Joule BTU British Thermal Unit Liter cal Calorie MBTU Million BTU cf Cubic foot Mcf Million cubic feet cfd Cubic feet per day MW Megawatt (103 kW) gal US gallon TJ TeraJoule (1012 J) GWh Gigawatt-hour (106 kWh) TOE Ton of oil equivalent. kcf Thousand cubic feet Tcf Tera cubic feet (1012 cf) ENERGY CONVERSION FACTORS I TOE = 7.3 bbl I MTOE = 12.4 TWh (heat content equivalent) = 12,400 GWh 1 kcal = 3.968 BTU I cf of gas = 1000 BTU I kWh = 860 kcal m 3gas= 9000 kcal Vice President: David De Ferranti Country Manager/Director: Olivier Lafourcade Sector Manager/Director: Danny Leipziger Task Team Leader/Task Manager: Eduardo Zolezzi   COLOMBIA POWER MARKET DEVELOPMENT PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome 6 6. Sustainability 7 7. Bank and Borrower Performance 8 8. Lessons Learned 9 9. Partner Comments 10 10. Additional Information N.A Annex 1. Key Performance Indicators/Log Frame Matrix 11 Annex 2. Project Costs and Financing 12 Annex 3. Economic Costs and Benefits 14 Annex 4. Bank Inputs 15 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 17 Annex 6. Ratings of Bank and Borrower Performance 18 Annex 7. List of Supporting Documents 19 Annex 8. Borrower's Contribution 20 Map   Project ID: P006887 Project Name: POWER MARKET DEVELOPMENT & ENERGY (TA) Team Leader: Eduardo H. Zolezzi TL Unit: LCSFE ICR Type: Core ICR Report Date: November 21, 2002 1. Project Data Name: POWER MARKET DEVELOPMENT & ENERGY L/C/TFNumber: CPL-39540; (TA) SCL-3954A; SCL-3954B; SCL-39550 Country/Department: COLOMBIA Region: Latin America and Caribbean Region Sector/subsector: Power (100%) KEY DATES Original Revised/Actual PCD: 06/28/1994 Effective: 06/26/1996 06/26/1996 Appraisal: 01/04/1995 MTR: Approval: 11/16/1995 Closing: 12/31/2002 12/31/2002 Borrower/Implementing Agency: GOVT OF COLOMBIA/ISA Other Partners: STAFF Current At Appraisal Vice President: David de Ferranti Shahid Husain Country Manager: Olivier Lafourcade Yoshiaki Abe Sector Manager: Danny M. Leipziger Peter Ludwig Team Leader at ICR: Eduardo Zolezzi Jayme Porto Carreiro ICR Primary Author: Fernando Lecaros 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: HL Institutional Development Impact: H Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: HS HS Project at Risk-at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: 1.1 Background The objectives and design of the Power Market Development Project (PMDP) need to be assessed in light of developments which culminated with a radical reform of the energy sector and the power subsector in particular. The 1980s were characterized by periodical financial crises in the power subsector which led the Government to embark on a sweeping overhaul of its institutional structure. With Bank support through the Energy Sector Management Assitance Program (ESMAP), during 1991-92 the Government drafted supporting legislation (Electricity Law, Public Services Law) and organized an Energy and Gas Regulatory Commnission (CREG) for restructuring the power subsector. Government policy consisted of introducing competition by creating a bidding-based wholesale market for electricity and an open-access transmission network, disengaging itself from direct participation in electricity production and distribution through divestment of power plants and utilities, undertaking the development of new power stations with private sector participation, introducing regulation where market mechanisms could not be effective, and introducing pricing reforms to reflect costs. In the gas subsector, the Government aimed at developing the resource by promoting gas-based electricity generation in order to reduce the reliance on hydroelectricity, attracting private sector participation in building an infrastructure of gas pipelines, stimulating exploration, creating an efficient gas trading and transportation system with private sector participation, together with a market similar to that of the power sector. Although achieving these objectives presented considerable challenges given relatively little worldwide experience with bidding markets, by 1995 most of the required mechanisms and institutions had been set up: (a) the Electricity Law and the Public Services Law had been passed by Congress; (b) the Interconexi6n Electrica S.A. "E.S.P." (ISA) which prior to the reform operated the interconnection network and owned major power plants, had been separated into a transmission company (ISA) and a generation company (ISAGEN), thereby removing sources of conflicts of interest; (c) the wholesale power market ( Mercado de Energia Mayorista -MEM-) had been designed and organized, together with the settlement function (Liquidador ;y Administrador de Cuentas -LAC-); and (d) the dispatching procedures based on bids tendered by producers had been designed and set up within the existing dispatching facilities of ISA (Centro Nacional de Despacho -CND-). ISA was designated to manage the three functions (MEM, LAC and CND), in addition to its transmission network. However, the remuneration of all these activities is regulated and accounted for separately, with a view to eventually having them operate independently if required. Despite these major institutional advances, a number of weak points remained to be addressed: (a) dispatch and network monitoring were being executed with equipment and software dating back to the early 80s; (b) the settlement function required monitoring of energy supplied to unregulated users (initially limited to loads in excess of 2MW) as well as the skills to manage the contracts market between generators, distributors, and suppliers; and (c) the transmission network required reinforcements in order to avoid creating bottlenecks and constraints, thereby increasing prices. Lifting transmission network constraints was expected to be addressed through ISA's Third Transmission Plan which included new 500 kV links to the energy-poor southwest area of the country as well as a new link to the Atlantic Coast. The PMDP was conceived as a further complement to Bank support for sector reform which was initiated in 1991 with the ESMAP grant indicated above, and which continued with the Energy Sector Technical Assistance Loan (ESTAL) -Loan 38270-. The latter's objective consisted of providing support for CREG and the Ministry of Mines and Energy (MME) in the development of regulations and indicative planning functions. The PMDP can be seen as providing both required infrastructure support and assistance in the organization of the new dispatch and settlement centers. It was also the first major lending operation for the power subsector since 1987. -2-  1.2 Original Objectives: The project's objective was to support power sector reform by facilitating the operation of a competitive bulk supply market for electricity. Successful implementation of the project would remove barriers to competition among generators, pushing bulk electricity prices towards their economic costs. Specifically, the project would lift transmission constraints that hinder an open access to the grid and support ISA in its role as transmission network operator, system generation dispatcher and commercial transactions coordinator. 3.2 Revised Objective: The original objectives were not revised. 3.3 Original Components: The project was designed around three components: (a) Enhancing the facilities of the Energy Dispatch Center and creating a Financial Settlement Center in ISA in order to achieve a smooth operation of system dispatch under market conditions at the bulk supply level. This component would adapt ISA's existing facilities to the requirements of the new regulatory and commercial environment and would consist of: (a) expanding the Energy Dispatch Center's supervisory system, including new metering and telecommunications; (b) technological updating of the Dispatch Center's data processing equipment and software; and (c) putting in place a Financial Settlement Center for keeping track of energy transactions, payments to generators, invoicing of large consumers, and billing of transmission costs through network charges. (b) Expanding the interconnected transmission system through: (a) the reinforcement of transmission facilities between the main generation center of San Carlos and the Southwest region with a 380 km, 500 kV line and a 30 km, 230 kV line; (b) reinforcements in the Atlantic Coast and Northeastern regions which consist of 240 km of 230 kV lines, together with substation equipment; and (c) other transmission projects comprising line extensions and substation expansion. This component would eliminate transmission bottlenecks and would facilitate entry to the electricity market. Additionally, it would improve the economic performance of the system by reducing system losses, increasing system reliability, and lowering generation costs. (c) Provision of consulting services and training programs to assist ISA in the strengthening of its capabilities to assume its roles of: (i) transmission network operator; (ii) power dispatch coordinator; and (iii) bulk electricity transaction clearing house. These activities would be agreed upon between ISA and the Bank subject to an annual plan to be approved by the Bank. Assessment. The objective was appropriate, and it reflected priorities forfurthering energy sector reform: (O) by supporting ISA as the central operative institution under the new sector organization; and (ii) by seeking to achieve a minimum cost operation by lifting transmission constraints and allowing the competitive market to operate. It was consistent with the Bank's Country Assistance Strategy (CAS). The CAS was contained in the MOP of 19 November 1993 for a Secondary Education Project (Report P-6070-CO) at the time, which, while emphasizing policy reform, institutional development, as well as a shiftfrom resource transfers to technical assistance, also providedfor sector investment loans conditional on progress of sector reforms, which clearlyfitted the project's concept. Project components were well-conceived and realistic, and they reflected the project's objectives. - 3-  3.4 Revised Components: One of the proposed transmission links in the Atlantic Coast region (La Loma-Copey) was not built. It was associated with the La Loma power station whose construction was postponed. Due to tefrorist activity, ISA faced the problem of rebuilding transmission pylons, and an additional component to finance these needs was included in the project. The transmission pylon recovery component fitted well with the project's objective, as it removed a barrier to network flows, thereby promoting the wholesale market's operation. 3.5 Quality at Entry: In addition to assessing the relevance of the objectives and the project's design as reflected in its components, quality of preparation depends on an objective recognition of risks and the measures to mitigate them. The project was neither particularly complex nor risky. ISA had a background of successfil project implementation and its revenues as a regulated transmission company were -and continue to be- assured. Project components consisted of technically tested elements (hardware and software for the CND, transmission line and substation equipment for network reinforcement) whose associated risks could be minimized by the use of experienced consultants, as provided in the technical assistance component. The project's Internal Rate of Return (IRR) (27% in the base case) was tested against a number of unfavorable situations such as increases in investment costs, decreases in operating benefits and lower demand, which-yielded rates of return above the 12% benchmark. Environmental risks were identified during project preparation, and no major risks were expected to materialize. ISA conducted a Sector Environmental Assessment of the Colombian power sector which included the overall impact of new transmission lines included in its Third Plan. The project was classified in Environmental Category B. Assessment Quality at entry is rated as Highly Satisfactory (HS): objectives and components were congruent and realistic, project economics were thoroughly studied, and environmental contingencies were taken into account. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Operation of a competitive bulk supply market for electricity. The MEM has been operating since mid-1995. Since then, it has grown considerably and it has gained in complexity due to the increase in the number of participants. Initially, unregulated users who could access the market were limited to those with a demand in excess of 2MW which represented around 100 commercial borders in 1997; by 2001 the limit had been reduced gradually to 100 kW (or a consumption in excess of 55MWh/month) and over 3,000 commercial borders were being monitored. Removal of barriers to competition among generators/ pushing prices towards their economic costs. Prices in the MEM respond to a combination of signals, including expectations regarding critical factors, which include such hydrological phenomena as "El Nifio"- provoked droughts; a consequence of this is a high volatility of prices which may vary considerably from one day to another. However, in retrospect, prices appear to have reflected essentially short run marginal costs, with average values around 2-3USO/kWh. These are significantly below the long run marginal cost levels predicted by expansion models; the difference can be explained by the large reserve margin which the system has accumulated due to the stagnation of demand since 1996: peak demand in 2002 has reached values on the order of 7,500-8,000MW, while installed capacity is on the order of 13,000MW. The fact that prices in the MEM have reflected this situation of oversupply is evidence of strong competition between generators and, indirectly, of the market's success. -4-  Lifting of transmission constraints. The transmission investments in the project have increased the transfer capacity to the southwestern area of the country which is now supplied by a 500 kV link which was built as part of the project. Support of ISA as transmission network operator, system generation dispatcher and commercial transactions coordinator. ISA has successfully discharged itself of these functions which were initially entrusted to it; however, its main role remains that of transmission network operator, as the dispatching and commercial coordination roles are the responsibility of distinct entities, CND and MvEM, which could, if required, be separated from ISA. 4.2 Outputs by components: (a) Energy Dispatch Center/ Financial Settlement Center. The technically obsolete dispatch center was replaced with state of the art equipment and new software was developed and installed to conform to the new dispatch miles; the financial settlement center was put in place and equipped with hardware and software to handle the task of managing contracts and billing agents according to dispatch results. (b) Strengthening and expansion of the interconnected transmission system. The components envisaged in the Project were all put in place with the exception, as noted, of the La Loma-El Copey line (cancelled together with the La Loma power station with which it was associated). Lines commissioned through the project include a 378 kIn, 500 kV line (San Carlos-San Marcos), two 230 kV lines totaling 182 kln (Sochagota-Guatiguari and La Virginia-La Hermosa), and the expansion of 13 substations at 230 kV and 500 kV. (c) Provision of consulting services and training programs to assist ISA in its roles of transmission network operator, power dispatch coordinator, and bulk electricity transaction clearing house. ISA executed a training program to support its transmission network operation, dispatching, and settlement functions; these activities were coordinated with the Bank through an annual plan. ISA instituted a training and studies program which covered these areas in addition to instruction and education in power systems technology, telecommunications, management, finance, human resource development, information technology, and social and enviromnental management. (d) Transmission pylon recovery. ISA developed expertise to deal with the technical aspects of recovering damage from terrorist attacks and has consistently reduced the time and cost required to put lines back into service. As of early 2002, ISA had recovered over 500 pylons which had collapsed due to sabotage. Assessment. The project achieved its development objectives related to supporting power sector reforms which have progressed and deepened with competition, which is now reaching the level of smaller regulated users. 4.3 Net Present Value/Economic rate of return: The Staff Appraisal Report (SAR) esimated the economic rate of return (ERR) for ISA's overall expansion plan, which yielded an ERR of 27%. For the ICR, an ex-post ERR was estimated for the two main investment components in the project -the San Carlos-San Marcos 500 kV line and the Sochagota-Guatiguara 230 kV line-. They yielded Net Present Values (NPVs) (1996) of US$326 million and US$14.2 million, respectively, at a 12% discount rate. The corresponding ERRs were 39% for San Carlos-San Marcos and 17% for Sochagota-Guatiguari; the overall ERR when considering both lines was 34%. The benefit/cost (B/C) ratios were 3.0 and 1.3 for the two projects and 2.6 overall. All these values are indicative of highly worthwhile investments. 4.4 Financial rate of return: - 5-  The financial rate of return of transmission assets built prior to 2001 is regulated by CREG. The project's transmission components fall into this category; as part of ISA's overall assets, they earn a 9% real rate of return. This is slightly higher than the rate of return on revalued assets expected in the SAR (6-8%). It should be noted that transmission additions to the grid are now regulated through a competitive bidding procedure, which can yield higher or lower returns on assets. 4.5 Institutional development impact: The project addressed the key elements underlying the new market structure: (a) the dispatch center component which was essential to assuring an economic power system operation; (b) the financial settlement component which was necessary to ensure the credibility of the proposed market scheme and to achieve the cooperation of all agents taking part in it; (c) the transmission reinforcement component facilitated the creation of a "level playing field" which was essential for MEM to operate as a competitive market. MEM's subsequent success indicates a major contribution by the Project towards institutional consolidation. It should be stressed that supporting the wholesale market has resulted in a radical change of attitude regarding agents' behavior: by setting rules according to which production costs are revealed by the bidding process, remuneration of agents in the market has ceased to be subject to centrally-determined estimates (e.g. regarding costs) and is now a direct consequence of their own strategy and decisions. Assessment In this project, the measure of effective institutional development is given by the acceptance, by agents in the wholesale market, of rules and procedures adopted to put the dispatch and settlement-functions in place. The latter have operated to satisfaction since the inception of the wholesale market in 1995. Agents' complaints have been rare and have been dealt with at the operational level. The PMDP loan was instrumental in providing resources which allowed these institutions(CND, MEM, LAC) to build up their reputation and the impact is consequently rated as high. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: The major factors affecting the ultimate outcomes of the Government's strategy, and arguably outside its control, are the related phenomena of economic recession and terrorism. Economic recession has led to a stagnation of demand; terrorist activity has focused on felling transmission pylons. The latter's effect has been to create transmission constraints and to increase production costs due to the dispatch of out of merit plants. Paradoxically, the negative economic effects of terrorism have been attenuated by the economic recession: the terrorist attacks to the transmission system did not induce major blackouts due to the depressed power demand caused by the economic recession; if economic growth had not been stunted, country-wide blackouts would have resulted from terrorist acts on the power transmission system. Lately, terrorist activity has led CREG to have to regulate on matters which were originally conceived for very unlikely circumstances (such as network separation due to natural causes) and which have become a part of daily life. Originally, the costs of such events (due to out of merit dispatch) were passed on to consumers; however, this in effect created local monopolies, raising prices, and leading CREG to deviate from its market-based bidding approach and to impose price ceilings on such production. This has created doubts regarding the stability of regulatory rules and has led some agents to seek redress in Court. 5.2 Factors generally subject to government control: Despite an overall satisfactory operation of the wholesale market, the ultimate objective of a power system operated by private investors has proved elusive, and the privatization momentum has been lost in the last years. As of mid-2002, the main remaining Government interests in the sector include: ISA and its affiliate Transelca, ISAGEN, the former generation division of ISA, and fourteen distribution companies where the Government owns a controlling share. The privatization of these companies, including ISA, has not taken place. ISAGEN's sale, although it had been prepared for 1998/99, did not take place due to a number of -6-  legal issues concerning water rights, as well as a general slackening of interest on the part of investors due to Colombia's recession. The privatization of the distribution companies was postponed partly for the latter reason, as well as lack of political will on the Government's part; it was revived in March of 2002; it is an urgent measure given the need for investment in the companies, as well as the need for avoiding jeopardizing the wholesale market in the long term due to non-payment of supplies. As for ISA's privatization, rather than selling the company, the Government adopted a strategy of attracting local private investors; the "Acciones para Todos" (Shares for All) program designed by the Government and ISA management consists of the issuance of shares placed in the domestic capital market; this took place in two rounds which were both oversubscribed. Currently, 24% of the company is in the hands of local investors. Finally, the Government is responsible for overseeing sector performance through the Superintendence of Public Services, which has not performed adequately. Summarizing, although the specific project-related elements were adequately supported by Government, a broader point of view shows that Government-related actions during the last four years have slackened regarding the overall reform objectives. 5.3 Factors generally subject to implementing agency control: ISA diligently put in place the project's physical components, together with the hardware and software required for dispatch and account settlement. ISA, as manager of the wholesale market, was also active in ensuring its financial viability iby promoting measures (codified by CREG) to assure that market-related debts are under control. This has been largely successful. 5.4 Costs andfinancing: Total project costs amounted to US$427.8 million, compared to the appraisal estimate of US$410 million. The Bank financed US$249.3 million through its loan, which was fully disbursed; the Bank's financing amounted to 58% of project costs, including interest during construction of US$36.8 million. The balance was financed by ISA through its own resources. Cost increases with respect to appraisal estimates for the transmission components originated in design changes to take into account new regulatory criteria with respect to reliability, security and availability of the transmission network (which accounted for an increase of around US$50 million), as well as an increase of around US$30 million in transformation and compensation equipment in substations. The Bank's financing was reprogrammed by channeling US$26.5 million from the Energy Control Center and Technical Assistance components to the Transmission Expansion and Pylon Recovery components. 6. Sustainability 6.1 Rationaleforsustainability rating: The changes that have taken place in the energy sector, as indicated in the background section, revolutionized the trading mechanisms of electricity. In its current form, it would be practically impossible to conceive of retaining these trading mechanisms without those components (MEM, CND) supported by the Project. The interests involved include those of private power producers, suppliers and unregulated consumers. Disbanding these institutions would only be likely if the market itself were to disappear, an improbable event linked to radical political and constitutional changes which would reverse current economic thinking in order to revert to a "command and control" economy. Sustainability of the project's physical components is to be expected given ISA's permanence in the power subsector, its 30-year experience in operating transmission networks, and its guaranteed regulated resources. Significant destruction of project assets due to terrorism is also unlikely, although limited damage is expected to continue to occur until a ceasefire has been agreed. This is not expected to happen within the next four years. Assessment. The project's achievements have consolidated during thefirstyears of implementation. -7-  Barring highly unlikely extreme political shifts, the institutions associated with the wholesale market are highly likely to continue to operate. This supports a Highly Likely ratingfor project sustainability. 6.2 Transition arrangement to regular operations: The project's components have become operational upon commissioning and transition arrangements have not been necessary. 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank responded expeditiously to sector reform requirements which it had been supporting since 1988, (a) through an incisive Operations Evaluation Department (OED) review of Bank lending and sector performance which set the stage for the reforms; (b) through ESMAP support to prepare the ground for reforms and draft legislation; (c) through the Public Sector Reform loan which supported the preparation of final drafts of enabling legislation through 1994; and (d) through the Energy Sector Technical Assistance Loan. As noted in the quality at entry section, the project concept was appropriate, it responded to the 1993 CAS, and it took advantage of experience gained in the initial years of the reform process. Project preparation took place through eight missions between 1992 and 1994 which focused on identifying alternatives for encouraging private sector participation; this extended preparation period allowed the Bank to identify the project fully and carefully, which contributed to its success. Accordingly, lending performance of the Bank can be rated as Highly Satisfactory. 7.2 Supervision: The project responded to well-defined needs for achieving the development of a competitive power market. The Bank contributed to implementation through staff advice, and helped ISA in adapting its procurement procedures to Bank requirements. There was continuity of the Bank's team during lending as well as supervision, which helped to maintain a fluid and constructive dialog with the borrower. The overall satisfactory progress of the Project did not place an unusual burden on supervision, which benefited from ISA's expertise; the Bank responded to the sector's requirements by financing pylon repair as an additional component of the project. An official Mid-Term Review (MTR) was not recorded in the files; however, the MTR was scheduled for July, 1998, and an in-depth supervision mission was conducted in May, 1998 which effectively served as such. All supervision missions rated the project as either Highly Satisfactory (development objectives, counterpart funds, procurement) or Satisfactory (implementation progress, project management). Based on these considerations, supervision can be rated as Satisfactory. 7.3 Overall Bank performance: The Bank's role in strengthening the energy sector through reforms, private sector participation and the introduction of competition in an erstwhile totally command-controlled e.evironment can be considered as an unqualified success. Problems with regulation and the wholesale market remain; this is to be expected, particularly under the very trying circumstances of Colombia's current social unrest which has severely tested the new institutions put in place since the early and mid-90s. The project was instrumental in achieving the sector-level goals and the Bank's performance during both preparation and implementation provided the required backing, as well as the necessary feedback during the early years of the project, to ensure an economic use of its resources. Based on the project's success, overall Bank performance is rated as Satisfactory. Borrower 7.4 Preparation: Project preparation was actively supported by ISA by carefully defining the project and its components, -8-  and by assisting in preparing the required groundwork (demand forecasts, sector financial forecasts), and specifying the project which obtained clearance from CONPES (National Economic and Social Policy Council). The Borrower's ratingfor preparation is Highly Satisfactory based on its demonstrated ownership of the project and its foresight in setting up its management. 7.5 Government implementation performance: Responsibility for implementation was vested primarily in ISA, the Borrower and Implementing Agency. The Govermment supported the project through its commitment to overall sector reform, which included support for CREG and financial support for the wholesale market by backing and guaranteeing the debt of a number of Government-owned distribution companies. Based on the Government's active supportfor the project, Government implementation performance is rated as Satisfactory. 7.6 Implementing Agency: ISA put in place all required components on time and has been operating them to satisfaction. Within the limits imposed by sabotage to the network, ISA has been able to honor its commitments regarding supplying the different subsystems connected to the main grid. Overall, ISA established an excellent record of compliance with the target performance indicators. ISA has also confirmed an outstanding track record regarding environmental affairs, both by taking the lead in developing environmental standards and by complying with best practice in project implementation. On the other hand, with regard to the use of project funds, ISA abstained from making use of Bank financing for the Control Center and Transactions Settlement Center (Component A) and for the Technical Assistance component (Component C). This was due partly to the difficulty of complying with Bank procurement procedures in the case of the high-tech equipment associated with Component A. As for the Technical Assistance component, although the studies and training were executed, Bank funds were not used (despite Bank urging through its supervision missions); one reason was that Bank funds were limited to financing foreign consulting, whereas ISA's Technical Assistance needs were supplied mainly through local, low cost courses and consultancies. Based on its accomplishment ofproject objectives, implementing agency performance has been rated as Satisfactory. 7.7 Overall Borrower performance: The Government and ISA cooperated to implement the project according to plan. Project operational performance has been satisfactory insofar as the wholesale market is concerned; regarding the transmission component, within the constraints of sabotage actions, its operation has also been satisfactory. Overall borrower performance has been rated Satisfactory. 8. Lessons Learned Elements which contributed to the project's success include: Consistency of objectives with development needs. Embedding the project within a sequence of operations geared towards a common goal was a determining factor for project success. In this case, the groundwork established by ESMAP and the Public Sector Reform Loan supported the Project's objective, which was implemented largely in parallel with the Energy Sector TA loan. Preparation. A relatively large number of missions may be justified for preparing a project of this magnitude, in order to identify and target those elements of a reform process which require greatest support, and whose outcome can be expected to have the most impact in furthering the overall objectives of the process. -9-  Ownership. ISA's needs regarding its responsibilities in managing the wholesale market, together with its Third Transmission Plan had been carefully prepared beforehand and they were an integral component of the company's development The Bank's loan assisted ISA in executing the plan, but the primary initiative throughout implementation remained with the borrower/implementation agency. Flexibility. The project's broad objective of supporting the wholesale market allowed the inclusion of transmission pylon rehabilitation as a new project component. This flexibility provided needed support to ISA at a difficult moment when the rehabilitation of assets damaged by terrorist action was at a critical point. In regard to the project's shortcomings the lessons include: Risks. Although attacks to the transmission infrastructure did not acquire a high profile until around 1998-99, they had been going on sporadically since the mid 80s. This threat was not identified duning project preparation, and it has had a major disruptive effect on the transmission system. Recognizing the possibility of politically-induced terrorism on the infrastructure of projects to be financed by the Bank should be introduced into the appraisal process. Use of funds. Bank funds were not used at all for two of the project's three components. They accounted for less than 10% of the total initial budget. Components with highly specialized characteristics may not adapt easily to the Bank's procurement procedures and this should be recognized early on in the negotiation process to avoid budgeting items which will be financed through other sources. The use of funds for minor items such as technical assistance, which constitutes an important feature of Bank lending should be insisted upon. 9. Partner Comments (a) Borrower/implementing agency: The Bank was the sole sponsor of the PMDP loan. (b) Cofinanciers: (c) Other partners (NGOs/private sector): 10. Additional Information - 10-  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: Indlkcoirimatrx * Projectedin last PSR| ActuaULatest Estimate Welghted Average Frequency of lnterruption 0.73 0.24-0.44(1) '2.0 Weighted Average Length of interruptons 0.87 0.61-1.61(1) (hrs.) <1.0 Average Interruption Time (hrs.) <1.2 0.63 0.12-0.71(1) Reliability Index >98.8% 99.99% 99.99% Total Transmission Losses <2.5% 1.83% 1.71% Debt Seryloe Coverage >1.5 NA. 1.9 Cash Operating Ratio '23% NA. 20% Self-inancing Ratio >30% NA. 132% Accounts Receivable '60 days NA. 83 (l)The higher figure corresponds to the case in which terrorist-induced outages are factored in Output Indicators: Indlcator Matrtl Projected In lastP8R ActuaUlLatest Estimate Bulk Power Market pool created In 1998 120 entifles transacted In the pool Market operatng. Partidpant capacity limit reduced to 1 00kW. Over 3000 commercial borders monitored. Energy/Dispatch Center/ Finandal Project components completed In place and operating Settement Center In place Interconnected system expansion: 378km of 500kV lines, 182km of 230kV lines, Project components completed. In place and operating substaton equipment executed Consultng servlces/ training programs Executed. Training programs executed executed Completion of Environmental Assessment NA. Yes (EA) for each transmission line before inviting bids for construction. Preparation of an Environmental Project N.A. Yes (Environmental Guidelines for Implementation Manual for Transmission Transmission LUnes, subsequentty published Unes by the Ministry of the Environment) Execution of al actions determined in the NA. Yes Environmental Management Plan (EMP) Ratio of families NA. 100% relocated/displaced End of project  Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) .-- . IAppraisal .Actualllatest Percentage of Estimate, Estimate Appraisal '. Project-Cost.By Component US$ million :US$ million' PART A: Energy Control Center and Financial Settlement 20.50 14.50 71 Center PART B: Expansion of the Interconnected Transmission 269.60 358.50 133 System PART C: Technical Assistance to ISA 2.90 5.10 176 Part D: Transmission Pylon Recovery 8.40 Total Baseline Cost 293.00 386.50 Physical Contingencies 43.90 Price Contingencies 21.30 Total Project Costs 358.20 386.50 Interest during construction 51.80 41.30 80.00 Total Financing Required 410.00 427.80 Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) Expenditure bony. ICB ' .Pruniet Method N..F. Total C Cate~~~ory ICB ~NCB' . Other ~Cs 1. Works 31.00 0.00 0.00 12.50 43.50 (25.00) (0.00) (0.00) (0.00) (25.00) 2. Goods 129.00 0.00 12.30 50.00 191.30 (113.50) (0.00) (10.00) (0.00) (123.50) 3. Services 0.00 0.00 28.50 8.40 36.90 (0.00) (0.00) (5.00) (0.00) (5.00) 4. Equipment and 50.00 0.00 0.00 34.60 84.60 Installation (43.00) (0.00) (0.00) (0.00) (43.00) 5. Training course 0.00 0.00 1.90 0.00 1.90 (0.00) (0.00) (1.00) (0.00) (1.00) 6. Interest during 0.00 0.00 51.80 0.00 51.80 construction (0.00) (0.00) (51.80) (0.00) (51.80) Total 210.00 0.00 94.50 105.50 410.00 (181.50) (0.00) (67.80) (0.00) (249.30) -12 -  Project Costs by Procureme nt Arrangements (Actual/Latest Estimate) (US$ million equival nt) Procurement Method . K T C Expenditure Category ICB NCB Other-Total Cost 1. Works 78.50 6.50 4.30 0.00 89.30 (46.70) (0.00) (3.70) (0.00) (50.40) 2. Goods 207.70 0.70 4.30 0.00 212.70 (160.00) (0.00) (2.10) (0.00) (162.10) 3. Services 0.00 0.00 0.00 64.80 64.80 (0.00) (0.00) (0.00) (0.00) (0.00) 4. Equipment and 0.00 0.00 14.50 0.00 14.50 installation (0.00) (0.00) (0.00) (0.00) (0.00) 5. Training course 0.00 0.00 5.10 0.00 5.10 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Interest during 0.00 0.00 41.30 0.00 41.30 construction (0.00) (0.00) (36.80) (0.00) (36.80) Total 286.20 7.20 69.50 64.80 427.70 ____________ (206.70) (0.00) (42.60) (0.00) (249.30) 1 Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 1 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. Project Financing by Component (in USS million equivalent) Percentage or Appraisal Component ; Appraisal Esdmate Actual/Latest Esimate .__________________ .Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF. PART A: Energy Control 23.70 5.40 14.50 0.0 268.5 Center and Financial Settlement Center PART B: Expansion of the 222.80 153.90 243.40 156.30 109.2 101.6 Interconnected Transmission System PART C: Technical 2.80 1.40 5.10 0.0 364.3 Assistance to ISA Part D: Transmission 5.90 2.60 Pylon Recovery -13-  Annex 3. Economic Costs and Benefits A cost benefit analysis was performed for the two main elements financed in the transmission-expansion component of the project, the San Carlos-San Marcos 500kV transmission line, and the Sochagota-Guatiguara 230kV transmission line, together with the substation investments associated with them. The cost and benefit streams (in US$ million) associated with the projects are: San Carlos- San Marcos 500kV Transmission Costs and Benefits I US$ millions) Year Investment O&M Gross Benefit Net Cash Flow 1996 4.3 . (4.3) 1997 14.0 (14.0) 1998 43.8 (43.8) 1999 71.3 (71.3) 2000 54.2 3.75 88.2 30.2 2001 11.7 3.98 88.2 72.5 2002-2023 3.98 88.2 84.2 IRR % 39% '96 NPV * 12% 144 22 492 326 Sochagota Guatiguari Transmission Costs and Benefits (US$ nillions) Year Investment O&M Benefit Net Cash Flow 1996 1.72 (1.72) 1997 5.7 (5.7) 1998 26.6 (26.6) 1999 12.1 0.92 7.0 (6.0) 2000 0.14 0.93 9.34 8.27 2001-2023 0.93 9.34 8.41 IRR % 17% '96 NPV @i 12% 37 5.8 57 14.2 Total Project Transmission Costs and Benefits (US$ milli ns) l Year Investment O&M Benefit Net Cash Flow 1996 6.02 (6.02) 1997 19.7 (19.7) 1998 70.4 (70.4) 1999 83.4 0.92 7.0 (77.3) 2000 54.3 4.68 97.5 38.5 2001 11.7 4.91 97.5 80.9 2002-2023 4.91 97.5 92.6 IRR % 34% '96 NPV * 12% 181 27.8 549 340 - 14-  Annex 4. Bank Inputs ) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/ear Count Specialty Progress Objective Identification/Preparation 12/8 - 12/17/ 2 1 Energy Specialist, I Cofinance 1992 Specialist 10/29 - 11/13 / 3 1 Res. Rep., lEnergy Specialist, 1992 1 Financial Specialist, 1 Power Engineer 7/27 - 8/7 / 1992 4 1 Res. Rep., 1 Cofinance Specialist, 1 Power Engineer, 1 Energy Specialist 3/29 - 4/7 / 1993 1 1 Environmental Specialist (consultant) 5/17 - 6/2 / 1993 4 1 Cofinance Specialist, 1 Finance Specialist, 1 Power Engineer, 1 Energy Specialist 10/28 - 11/12 / 5 1 Energy Specialist, 1 Financial 1993 Specialist, 1 Economist, 2 Gas Specialists 1/24 - 2/3 / 1994 4 1 Energy Specialist, 1 Power Engineer, 1 Economist, lEnviromnental Specialist 4/4 - 4/15 / 1994 4 1 Energy Specialist, 1 Financial Specialist, 1 Economist, 1 Power Engineer Appraisal/Negotiation 1/4 - 1/20 / 1995 5 1 Energy Specialist, 1 Financial Specialist, 1 Economist, 1 Power Engineer, 1 Environmental Specialist Supervision 8/10 - 8/18 / 1996 3 1 Energy Specialist (TM1), 1 S HS Environ-mental Specialist, 1 Power Engineer 7/20 - 7/26 /1997 2 TM, Power Engineer S HS 5/18 - 5/29 /1998 2 TM, Power Engineer S HS 1/18 - 1/22 / 1999 2 TM, Power Engineer S HS 11/3 - 11/5 / 1999 2 TM, Power Engineer S HS 11/13 - 11/15/ 2 TM, Power Engineer S HS 2000 5/29- 5/30 / 2001 2 TM, Power Engineer S HS ICR 5/!4 - 5/17/2002 1 Consultant S HS - 15 -  (b) Staff: Stage of Project Cycle Actual/Latest Estimate -____________________ _ . .No. Staff weeks US$ ('000) Identification/Preparation 129.6 341.2 Appraisal/Negotiation 63.6 187.2 Supervision 101.6 305.9 ICR 4.0 11.0 Total 298.8 845.3 - 16-  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating 3Macro policies O H * SUOM O N O NA Sector Policies OH OSUOM ON O NA M Physical *H OSUOM O N O NA 3 Financial O H OSUOM O N * NA Z Institutional Development 0 H O SU O M 0 N 0 NA Z Environmental O H * SU O M O N O NA Social 3 Poverty Reduction O H OSUOM O N * NA Z Gender O H OSUOM ON * NA O Other (Please specify) O H OSUOM O N O NA Z Private sector development 0 H 0 SU O M 0 N 0 NA 3 Public sector management 0 H 0 SU O M 0 N 0 NA 0 Other (Please specify) O H OSUOM O N O NA -17-  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bankperformance Rating