Documant of

The World Bank

FOR OMCIAL USE ONLY

Rqmwt No. 14056

PROJECT COMPLETION REPORT

ARGENTINA

YACYRETA HYDROELECTRIC PROJECT

AND

ELECTRIC POWER SECTOR PROJECT(LOANS 1761-AR AND 2998-AR)

MARCH 14, 1995

Infrastructure Operations DivisionDepartment ILatin America and the Caribbean Regional Office

This document has a restricted distribution and mav be used bv recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Currency Equivalents1 US$ = 1 Peso

Fiscal Year

January 1 - December 31

Weights and Measures

kW = KilowattMW = Megawatt (1,000 kW)GW = Gigawatt (1,000 MW)kWh = Kilowatt hourMWh = Megawatt hour (1,000 kWh)MVA = Megavolt-ampere (1,000 kVA)km = Kilometer (0.6214 mile)km2 = Square kilometer (0.386 sq. mile)m 3 = Cubic meterhm3 = Cubic hectometer (106m3)kcal = Kilocalorie (3.968 BTU)TOE = Tons of oil equivalentMTOE = Million TOE

Abbreviations and Acronyms

AYCA Auditores y Consultores AsociadosAyEE Agua y Energia Electrica S.E. (federally owned,

nationwide electric utility and irrigation agency)CNEA Comisi6n Nacional de Energia At6mica (National

Nuclear Energy Comrnission)CTMSG Comisi6n Tecnica Mixta de Salto Grande

(Argentine/Uruguayan Commission in charge of theSalto Grande hydroelectric plant)

DUC (DC) Despacho Unificado de Carga (Dispatch Center)EBY Entidad Binacional Yacyretd (Argentine-Paraguayan

entity in charge of the Yacyreta project)FRP Financial Rehabilitation PlanHIDRONOR Hidroel&ctrica Norpatag6nica S.A. (federally owned,

electricity generation and transmission utility)REMP Resettlement & Environment Management ProgramSIN (NIS) Sistema Interconectado Nacional (National

Interconnected System)SE Secretaria de Energia Electrica (Secretariat of

Electrical Energy, under the Ministry of Economy'SEGBA Servicios Electricos del Gran Buenos Aires, S.A.

(federally owned electric utility, serving the BuenosAires metropolitan area)

FOR OFFICIAL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Director-GeneralOperations Evaluation March 14, 1995

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on ArgentinaYacyreta Hydroelectric Project (Loan 1761-AR) andElectric Power Sector Proiect (Loan 2998-AR)

Attached is the Project Completion Report on Argentina - Yacyreta HydroelectricProject (Loan 1761-AR) and the Electric Power Sector Project (Loan 2998-AR) prepared by theLatin America and the Caribbean Regional Office. The loans provided a total of US$462 million(Loans 2854-AR and 3520-AR, expected to be fully disbursed by 1998, will additionally fundUS$437 million). The PCR is an interim report on the development and construction of theYacyretd hydroelectric project. The Borrower provided Part II of the report. It highlightsshortcomings in Bank supervision.

The loans were made to the Government of Argentina and on-lent to the Beneficiary,Entidad Binacional Yacyreta (EBY), a joint-venture created under the Treaty of Yacyreta betweenArgentina and Paraguay. The principal objectives of the projects were to provide additional lowcost energy, to improve sector finances and to finance studies in support of sector restructuring.

Construction of the Yacyreta hydroelectric plant started in 1977/78 but due tofinancial, economic and political difficulties, the plant is now only partially completed (two units outof 20 having been commissioned in 1994), and is expected to be fully completed with a nine-yeartime overrun in 1998. Lack of timely local and foreign financing other than from the Bank and theInter-American Development Bank was the main reason for the delay in dam works. It also delayedthe implementation of resettlement, the staging of which now delays reservoir impoundment andachievement of full output. On the basis of an estimated project cost in real terms about 8.2 percentabove the original estimate, the recalculated ERR is 5.5 percent compared with 14 percent atappraisal.

The outcome of the two projects is rated as unsatisfactory because of the partialsuccess of their physical components, high unit cost of the output compared to alternatives, andfailure to improve power sector finances. The technical assistance component of the Electric PowerSector Loan had a modest institutional development impact by contributing to the success of thepower sector reform which took place after mid-1991. Based on the current projections, thesustainability of the projects is iikely, provided that the Government continues to lend to EBY tohelp service its debt until the late 1990s.

The PCR includes a satisfactory account of the two projects' implementation and results. Anaudit is planned as part of a country assistance review.

Attachment

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

FOR OFFICIAL USE ONLYTABLE OF CONTENTS

PREFACE ................................... ii

EVALUATION SUMMARY . ........................... iiiProject Description . ............................. iiiProject Implementation . ........................... iiiProject Results ................................ ivSector Results ............................... vProject Sustainability ............................ viBank Performance ............................. viEBY Performance ............................ viiConsultant and Contractor Performance ...... .......... viiLessons Learned ............................ viii

PART I. PROJECT REVIEW FROM THE BANK'SPERSPECTIVE .............................. 1Project Identity ............................... 1Background ................................. 1Project Objectives and Description ................... 4Design and Implementation ........................ 15Project Results ............................... 27Project Sustainability ............................ 29Bank Performance ............................. 31Borrower/Beneficiary Performance ...... ............ 33Consultant and Contractor Performance ................ 35Lessons Learned .............................. 36

PART II. PROJECT REVIEWED FROM THE BORROWER'SPERSPECTIVE .............................. 39

PART III. STATISTICAL INFORMATION ................. 44Table 1: Related Bank Loans ...................... 44Table 2: Project Timetable ........................ 45Table 3: GDP Levels & Public Service Consumption: Actual

and Forecast ............................ 46Table 4: Appraisal Forecasts: Cost and Financing Plan ... ... 47Table 5: Estimated and Actual Schedule of Disbursements ..... 48Table 6: Sector Sources and Applications of Funds ... ...... 49Table 7: Status of Legal Covenants ................... 50Table 8: Economic Impact ........................ 57Table 9: Yacyreta's Economic Generation Cost .... ........ 58Table 10: Use of Bank Resources .................... 59Table 11: Mission Data .......................... 60Table 12: Project Studies ......................... 63

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

a

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PREFACE

The Project Completion Report (PCR) is an interim report on thedevelopment and construction of the Yacyreta Hydroelectric Power Project,which the Bank helped to finance with a project investment loan of US$210million (1761-AR, 1979), a sector investment loan of US$252 million (2998-AR, 1988), and a second project investment loan of US$300 million (3520-AR,1992). Loan 1761-AR was fully disbursed and closed on June 30, 1988, oneyear late. Loan 2998-AR was fully disbursed and closed on June 30, 1991, alsoone year late. Loan 3520-AR is under disbursement with an expected closingdate of December 31, 1998.

Yacyreta is a very large, complex, long-term project, and in the interim,a report was needed to fulfill the twin goals of (i) meeting the PCR requirementsof the two completed loans (1761-AR and 2998-AR) and (ii) providing apreliminary review of the main implementation issues while it is still possibleto receive meaningful comments from some of those who participated in theproject. To meet these goals, this PCR departs at times from the standard PCRformat and elaborates on the history of the project as well as several of the moreimportant issues.

It has been 15 years since approval of Loan 1761-AR. Since then, theproject has experienced significant time delays and moderate investment costoverruns. During the past two years, however, the project has regainedmomentum, has been properly managed and is on schedule to be completed in1998. The first unit came on line in September 1994. Once the Yacyretaproject is completed, a comprehensive Project Completion Report will be issued.

The PCR was prepared by the Infrastructure Operations Division of LatinAmerica and the Caribbean Region's Country Department I and is based interalia on loan documents, appraisal reports, supervision reports, correspondence,and interviews with Bank staff.

A draft of this PCR (Parts I and III) was sent to the Borrower forcomments. Comments were received in September 1994 and have been includedas Part II of this report.

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EVALUATION SUMMARY

Project Description and Objectives

1. Description. The Yacyreta Hydroelectric Power Project (3,100 MW),which is being constructed by the Entidad Binacional Yacyretd (EBY) on theParana River, is a joint venture of Argentina and Paraguay. The projectcomprises 70 km of earth dams, a power house, reservoir, navigation lock, fishpassage facilities, irrigation intakes, and ancillary/relocation works (para. 3.5).The expected completion date is June 1998, nearly eight years behind theoriginal schedule. As financier, Argentina bears the total responsibility forEBY.

2. Objectives. The present I-PCR covers two completed Loans: 1761-ARand 2998-AR. The project objectives for Loan 1761 (Yacyreta HydroelectricProject) were to: (a) provide additional, least-cost, base-load hydroelectricenergy; (b) improve navigation; (c) facilitate future irrigation projects; and(d) augment the fishing industry. The sector objectives were to promoteimproved long-range planning for generation/transmission and to rationalize thelevel and structure of power tariffs (para. 3.4). The project objectives for Loan2998 (Electric Power Sector Project) were to (a) irnprove resource allocationwithin the sector through optimization of its expansion program; (b) implementa Financial Rehabilitation Plan (FRP) in connection with the national powerutilities; (c) improve efficiency of the power utilities; (d) promote rational useof electricity through a tariff system based on economic costs; (e) strengthen thestructure of the sector, so as to bring about better coordination, planning andregulation; and (f) establish policies and procedures for environmental protectionand social aspects in power projects.

Project Implementation

3. Bank Lending. Since the original appraisal (1978), the Bank and theInter-American Development Bank (IDB) have collaborated in financing theproject with loans totalling US$1,734 million. The Bank has fully disbursedLoans 1761-AR and 2998-AR, amounting to US$458.2 million. Loan 3520-AR(US$300 million, 1992, out of which US$299 million are intended for EBY) isbeing disbursed, and discussions with the Government have led to an agreementto reassign US$137.6 million from Loan 2854-AR (SEGBA V) to further helpproject completion, thus increasing the Bank's total financing to US$894.8million. IDB lending in support of the project amounts to US$839.6 million(para. 2.7).

4. Tinetable, Cost, and Financing Plan. Total project completion delaysare estimated to reach nearly eight years when compared to the original plan.Delayed completion reflected the impact of late loan effectiveness (1982), athree-year Bank-EBY procurement dispute (1980-1983), the South Atlantic War(1982), chronic financing problems after 1983, and the uneven quality of EBY's

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management, which was especially weak in 1989-1991 (para. 4.5). The delayswere further aggravated by other important events during this period. Therewas severe macroeconomic mismanagement which produced recurrent bouts ofhyperinflation and an extended recession, compounded by the Latin Americanexternal debt crisis. Simultaneously, there were profound, protracted politicalshocks which eventually paralyzed the state. These forces ultimately ledArgentina to abandon many historic policies and customs, causing prolongeduncertainty and policy vacuums. All these events adversely affected Yacyreta'sprogress (para. 2.1).

5. Associated with delayed completion were higher project costs and largerfinancial requirements (paras 4.1-4.3). Stated in 1977 price levels, there wasa 17% increase in project (investment) cost from the first appraisal (US$2,637million) to the most recent one (US$3,082 million). This increase is explainedbasically by the higher engineering and administrative expenses (due to thenearly eight-year delay in project completion) and the Aguapey Valley protectionscheme which was not included in the initial project cost estimates. Financialrequirements, expressed in current amounts, increased considerably, as wouldbe expected due to inflation and extended project execution; they are nowestimated at US$9,350 million or 35% higher than originally estimated.However, when referred to a common price level these requirements show anincrease of some 8%. Along with the projected investment costs, theseadditional financial requirements as well as shortfalls from suppliers' credits andEBY's internally generated resources are being met by higher Governrentcontributions (US$2.1 billion including variation of working capital) andIBRD/IDB loans (US$1.1 billion).'

Project Results

6. The project was originally justified as the least-cost expansion programon the assumption of market growth of 8.0%-9.9% during the 1980s, followingaverage 7.9% annual increases during the previous 15 years. However, theactual annual growth rate during the 1980s was only slightly over 2%. Had thissharp turndown in demand been foreseeable during the 1979 project appraisal,YacyretA would possibly have been replaced by smaller sized projects. With theadvantage of hindsight, it can be argued that the delays in Yacyreta'scommissioning, combined with the advent of combined-cycle technology, andthe improving prospects of exploiting Argentina's ample natural gas reserveswould call YacyretA's selection into further question. Notwithstanding theseproblems, Yacyreta was still within the least-cost generation program when theBank systematically reassessed the feasibility of completing the project during1985-1988 and again in 1991-1992. These analyses considered: (a) priorinvestments as sunk costs; and (b) the financial consequences of earlytermination of contracts. It is also important to note that given the current

1. These resources do not include the increase in the last IDB loan amount or the Bank's SEGBA V loanreasignmnent of funds. which were decided after Loan 3520-AR appraisal. These would have increasedboth banks' participation by US$1,316 million above the Loan 1761-AR appraisal commnitments.

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balance of energy demand and supply, and its estimated evolution during thenext five years, it is expected that all energy produced by Yacyreta will beabsorbed by the market.

7. Internal Rate of Return. Presently, the economic generation cost ofYacyreta, referring all investment costs (actually incurred and estimated for thenext four years) to the 1994 price level and considering an opportunity cost ofcapital (OCC) of 10%, is USC9.5/kWh (Part III, Table 9). This comparesunfavorably with the prevailing marginal cost in Argentina (about USC4.0/kWh)which is the basis for setting prices in the spot market.2 For such a tariff levelof US C4. 0/kWh, the project's historical IRR is 5.5%, which is much lower thanthe originally expected IRR of 14%. According to the 1992 agreement betweenArgentina and Paraguay, Yacyreta's tariff at year-end 1994 will beUS¢3.3/kWh. Such a generation cost would correspond to a 4.5% OCC. Thehigh IRRs computed in the appraisals of Loans 2998-AR (1988, IRR= 19 %) and3520-AR (1992, IRR=24%) would have corresponded to low economicgeneration costs, and are basically due to the consideration of sunk costs.Indeed, generation costs computed for the updated investment series wouldconfirm this. For instance, 10% OCC would yield values of USC3.0/kWh andUSC1.4/kWh for cutting points in 1988 and 1992 (i.e., sunk costs until 1987,and 1991 respectively), while a more stringent 12% OCC would raise theformer value to a still reasonable cost of USC3.8/kWh (paras. 5.1-5.2).

Sector Results

8. Sector Financial Performance. Sector finances deteriorated between1979 and 1991 (paras. 4.6-4.8). Much of this was caused by deficientGovernment financial management, beginning with the misguided use ofArgentina's state enterprises for mobilizing overall balance of payments support.Their subsequent high level of indebtedness weakened the utilities' finances, asdid the Government's consistently belated adjustment of electricity tariffs tocover the higher costs of fuel, personnel and interest charges under the recurrentinflation.

9. Sector Organization. Although the Bank-supported activities wereunsuccessful in improving sector financial performance, this shortfall wasmitigated by the project's contribution to the power sector restructuring with amajor divestiture of state-owned utilities, one of the key components ofArgentina's now highly-regarded public sector reforms. Specifically, thetechnical assistance component of Loan 2998-AR provided the diagnostic studyand part of the preparatory work for these considerable changes (para. 5.7).

2. As a comparison, Puerto and Costanem, recently privatized thermal gcnemdtg utdlities in the BuenosAires area, have eight-year supply contracts with the distribution utilities at the current price ofUSc4.2/kWh.

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Project Sustainability

10. There are strong grounds for sustaining the favorable improvements inrecent years in project performance , and for considering that Yacyreta willcontinue to hold these improvements in place for completion of the project andlong-term operation of the plant.

11. Implementation process and completion of the project. The prospectsfor sustainability in implementing the project are favorable. Still to besuccessfully completed are: (a) the main civil works and installation of thegeneration equipment; (b) the transmission system; and (c) the reservoiroperation at the ultimate design level (83 m) for full generation. Completion ofthe first two areas will likely occur on schedule since the works to be completedhave been progressing well. While the complexity of the resettlement operationsentails some risk in meeting the June 1998 target for raising the reservoir toelevation 83 m, their likely completion in a reasonable time frame should notaffect the grounds for project sustainability.

12. Long-term operation of the fully completed project. The projectshould be sustainable, given the sound financial condition expected for EBY.The revenues resulting from the generation of electricity would guarantee thegeneration of positive cash flows and repayment of all debt before completionof the project's first 15 years of full operation. Given the current balance ofenergy demand and supply, and its estimated evolution during the next fiveyears, it is expected that all energy produced by Yacyreta will be absorbed bythe market. Prospects for sustainability of the project after completion wouldbe enhanced by the envisaged private sector participation in Yacyreta. Finally,the full generation of Yacyreta should not be affected by sedimentation in thereservoir since sedimentation studies and strategy control are being developedwith Bank financing.

Bank Performance

13. Risk Assessment. During appraisal of Loan 1761-AR, the Bank foresawthe likelihood of project delays and cost overruns because of possible difficultiesin mobilizing sufficient financial resources, which it correctly viewed as themajor project risk. Similarly, it anticipated that problems could ensue fromEBY's internal management strains, especially in dealing with procurement andenvironmental concerns. It failed, however, to secure adequate safeguards todeal with these. In Loan 2998-AR, the Bank designed a sector financialrehabilitation plan to be monitored by only two simple indicators, under theexpectation that a well-managed sector would also facilitate the channelling ofadequate funding to complete the project. It failed, however, to securesafeguards for protecting the project from reduction in Government contributions(paras. 3.21 & 3.32).

14. Resettlement/Environment. Had current Bank policies and staffexpertise existed at appraisal, many of the subsequent problems in design and

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delay would possibly have been avoided. By the time Loan 2998-AR wasdeveloped, a time-bound Action Plan was agreed upon for implementation of theMaster Plan (covering inter alia resettlement and the environment) and madepart of the legal documents. Nevertheless, these measures did not properlyexamine important resettlement issues related to the provision of replacementhousing for affected rural and urban populations, e.g., housing cost, mortgagepayment affordability, and diversified housing solutions, including constructionby those resettled. During project execution, these matters were addressed byspecialists hired by the Bank. However, as the resettlement component was thenvirtually at a standstill, the correction of these problems was deferred until Loan3520-AR provided for the resolution of all issues concerning the resettlementand environmental protection components through the Resettlement andEnvironment Management Program (REMP) (paras. 4.25-4.31).

EBY Performance

15. Project Management. EBY's top management was replaced many times(para. 8.2). In some cases, the new managers did not have the requisiteexperience, having been appointed for political reasons. Initially, managementand staffing of EBY were weak. It improved during the middle 1980s and thenbecame less viable toward the end of the decade. Reductions of personnel inthe 1990s eventually led to a reasonable number of staff. However,inappropriate voluntary separation incentives resulted in the loss of key people.

16. Resettlement/Environment. Under Loans 1761-AR and 2998-AR, EBYconsidered the resettlement and environmental protection works as secondary tothe construction of the civil works. Within EBY's management, there was noprofessional with requisite skills, experience or interest to oversee theresettlement and environmental protection. This, fortunately, did not prove tobe a major obstacle to getting results in environmental protection measures.However, this is probably because a Bank expert reviewed policy and designdecisions during the preparation of Loan 2998-AR. Similarly, EBY'sweaknesses in resettlement performance were somewhat mitigated over time byits accommodation to greater provincial and municipal involvement than itpermitted earlier. But in retrospect, EBY should have: (a) acquired land andthe related titles more speedily; (b) adopted housing design and standards withmanageable construction costs; and (c) taken full responsibility for affectedresidents' facilities which were lost, displaced or destroyed (paras. 8.4-8.5).

17. Procurement. EBY failed to present the Bank with a compelling casefor awarding the main civil works contract to the second lowest evaluatedbidder. EBY and the Government took a hard line on the matter which resultedin an impasse that lasted three years (para. 8.1).

Consultant and Contractor Performance

18. Engineering Consultants. For feasibility studies and design, as well assupervision of contractors, the consultants' performance was satisfactory. For

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instance, river diversion was carefully planned and smoothly executed. Theconsultants' reversal of opinion on the award of the civil works contract led toa protracted procurement dispute between the Bank and EBY. Theirperformance in the preparation and evaluation of the many bidding documentsand proposals for electro-mechanical equipment was less satisfactory in therecent past. The consultants provided environmental expertise whichrecommended a solution to the problems of fish migration, the feasibility ofwhich remains to be proven. They were not involved in the detailed planningand design work for resettlement; however, their proposed concept forresettlement housing during the early feasibility study phase would only havebeen appropriate for major urban settings (paras. 9.1-9.4).

19. Boards of Experts. In 1983, a board of four consultants of internationalreputation was appointed, at the Bank's urging, to review engineering aspectsof design and construction. These consultants meet regularly and have providedvaluable advice (para. 9.5). Subsequently, a panel for dealing with Resettlementand Environmental matters was formally instituted and met much less frequentlyas progress on those areas was much slower and more erratic. During 1990,an interdisciplinary group of experts, directly employed by the Bank, reviewedthe social and environmental aspects of the project and produced detailedrecommendations for addressing the most pressing issues. Their work wasinstrumental for setting the comprehensive Resettlement and EnvironmentalManagement Programs agreed to during Loan 3520-AR's appraisal.

20. Contractor. The civil works contractor has performed well thus far.Since 1984, the contractor has maintained a presence at the site in spite of thefinancial difficulties of the Argentine Government, which have resulted in EBYarrears exceeding a year or more in its payments to the contractor (para. 9.6).

Lessons Learned

21. Resettlement/Environment. Two lessons emerge: the first is that theBank must make every effort to ensure that the project entity has a proper senseof "ownership" of the resettlement/environment effort. 'lb achieve such a senseof "ownership", it is important that at the policy-making level, the managementof the project include individuals properly qualified to help formulate andimplement such an effort. A second lesson is that the local and provincialgovernments of the affected people should be included in the identification,planning and implementation of the selected programs (paras. 10.1-10.2).

22. Risk Assessment. During the original appraisal, the Bank correctlyidentified as a major risk the delays to project execution due to lack offinancing. Having identified variations in economic and financial conditions assources of uncertainty and risk, the Bank tested the economic justification of theproject by varying its costs and those of other generation options, but did nottest the economic soundness of the project in a manner which was consistentwith the perception of risk. Clearly, a lesson to be learned is that the economicanalysis of a project should be expanded to include a variation of economic and

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financial scenarios, the breadth of which is consistent with the perception of risk(including a critical evaluation of the credit standing and financing capacity ofthe borrower, paras. 10.3-10.4). Correspondingly, the project agreementsshould include workable safeguards to address the perceived financial risks andthus minimize them.

23. Continued Project Support in Deteriorating Circumstances. TheGovernment's persistent failures to keep Yacyreta on track and to resolve thesector problems raise questions as to whether the Bank's continued support ofthe project was justified. This continuity was initially based on the view thatYacyreta, being the largest public investmnent activity, was the best vehicle forseeking to influence Government public finance and state enterprise reforms.In addition, the extended project support reflected the continuing belief thatYacyreta's completion (in place of other power sector alternatives) was not onlythe least-cost solution, but also had a scale comnensurate with Argentina's long-term economic needs. Other factors included the difficulties of applying "stop-and-go" tactics on large, unitary civil works, EBY's heavy dependence on theBank for the project's survival, and Argentina's subsequent emergency-type aidrequests for its ultimately successful public sector reforms.

24. At the same time, while reluctant to abandon Yacyreta, the Banktoughened its position several times to stimulate better Governmentperformance. It initially deferred the effectiveness of Loan 1761 until receiptof pledges of stricter sector financial management. Later, it delayed theprocessing of new loans for the sector, which it conditioned on major policyactions, and repeatedly pressed the economic team for stronger Governmentbacking. Unfortunately, however, these measures netted only limited returns.On reflection, therefore, the principal conclusions are that:

(a) Support of a multi-year, lumpy civil works project was anineffectual tool for advancing sector policy and institutionalreforms, particularly because of country conditions after the late1970s. This approach proved to be unduly ambitious, althoughit may have appeared to be necessary under the circumstances.

(b) On the other hand, a sector loan (such as 2998-AR) whichincludes financing of a specific project may defeat the latterpurpose as non-compliance with agreed sector conditionalitieslikely results in interruption of disbursements for the project.Under both approaches, the project experience demonstrated thatit was unfeasible to obtain the needed sector reforms while theGovernment had neither the political will nor strength to carrythem out. A pure sector approach would have also failed underthe circumstances.

(c) However, the Bank's continued support of YacyretA must alsobe seen in light of the foreseeable benefits of added power andenergy, in addition to the opportunities it afforded for

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participating in recent sweeping public sector changes. Had theBank abandoned the project, it would have been in a weakerposition to actively influence such sector reform.

25. Agenda for a future evaluation. The assumptions considered in thesection for Project Sustainability should be revisited, giving special attention tothe REMP component and the operation of the reservoir at the ultimate designlevel (83 m). The evaluation of the REMP program should be quantitative, interms of the compensatory areas assigned, water quality measurements, and thenumber of people resettled; and qualitative, in terms of the quality in theimplementation and the effectiveness of the program. For these evaluations, theproject's independent monitoring program would be a good source ofinformation. Another issue of importance is the recalculation of the rate ofreturn of the project and the comparison with the value calculated in the Loan3520-AR (Yacyreta II) and the estimations made in the present report with andwithout sunk costs.

PART I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

1. Project Identity

Names: Yacyreta Hydroelectric Project andElectric Power Sector Project

Loan Numbers: 1761-AR, 2998-ARLoan Amounts: US$210 million and US$252 million, respectivelyRVP Unit: Latin America and the Caribbean RegionCountries: Argentina and ParaguaySector: EnergySub-sector: Electric Power

1.1 The Yacyreta hydroelectric project (3,100 MW), which is beingconstructed by the Entidad Binacional Yacyretd (EBY) on the Parana River, isa joint venture of Argentina and Paraguay. As financier, Argentina bears thetotal responsibility for EBY.

2. Background

2.1 Pblitical and Economic Context. Between 1975 and 1991, Argentineofficials, together with staff of the Bank and the Inter-American DevelopmentBank (IDB), prepared and partially executed the Yacyreta project.Collaboration with IDB, which was preparing its own loan to support Yacyreta,was close. A joint IDB/IBRD mission appraised the project in July 1978 (PartIII, Table 2). To evaluate the performance of institutions and personnelinvolved in the project, it is important to understand the turbulent context inwhich the project was planned and partially executed. Military governmentsruled Argentina in the 1970s when this project was planned, but in the 1980s,during project execution, they gave way to civilian, constitutional regimes3

following what was a watershed political event for Argentina: the SouthAtlantic War (1982). In addition, there was severe macroeconomicmismanagement which produced recurrent bouts of hyperinflation and anextended recession, compounded by the severe Latin America-wide external debtcrisis. Simultaneously, there were profound, protracted political shocks whicheventually paralyzed the state. These forces ultimately led Argentina to abandonmany historic policies and customs, causing prolonged uncertainty and policyvacuums. All these adversely affected Yacyreta's progress.

2.2 Prior to 1982 government policies comprised, inter-alia, centralizedplanning and industrial and energy independence with related barriers to trade.Between 1984 and about 1990, the central Government, reflecting the divisionsin Argentina, was weak and lacked the institutional mechanisms and capacity to

3. During the planning and execution of the project, there were four military governmens - those ofGenerals Videla (1976-1981), Viola (1981-1982), and Bignone (1983) - and two eleced administrations -those of Presidens Alfonsin (1983-1989) and Menem (1989 to the present).

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formulate and implement policy on a consistent basis. Reduced institutionalcapacity extended to the power sector, the organization of which was fragmented(para. 2.11). Many power utilities have suffered from political interference,over-staffing, poor maintenance, and financial difficulties. In circumstances ofpolitical ferment and economic stagnation, there were many changes withrespect to project leadership, ministers responsible for oversight, andGovernment financing for and commitment to the project.

2.3 During the past two decades, Argentina, a rich country, has beenstruggling to reverse a slow decline from the ranks of the most prosperousnations. Recent Bank reports make the point that prior to 1989, reliance on thestatist growth strategy led to: chronic deficits in public finance; excessivegovernment borrowing; virtual withdrawal of foreign lenders from the Argentinemarket; high rates of inflation and devaluation; balance-of-payment crises;declining savings, investment, and productivity; worsening poverty; and a longperiod of stagnation (1976-1989).'

2.4 Between 1984 and 1989, the Administrations of Presidents Alfonsin andMenem introduced various stabilization programs to control inflation based on,inter alia, price controls, tight monetary policy, and progressive devaluations(such as the Plan Austral, 1985) or new tax measures, sporadic improvementin the pricing of services offered by public enterprises, and some adjustment inprovincial public sector finances (such as the Plan Primavera, 1988). Once itbecame evident to the public that these plans had not fundamentally changed thestructure and behavior of public finance and that the Government was unableeffectively to redress the structural deficit of the public sector, inflationaiyexpectations re-emerged, the exchange rate-domestic inflation cycle took itscourse, and political support for the programs collapsed. In 1990, the MenemAdministration attempted to address the underlying sources of public sectordeficits through fundamental economic reform with measures which included thesale and privatization of several major state enterprises. These reforms haveachieved major success in controlling inflation, and continue to enjoy publicsupport.

2.5 Also growing under the administrations of Presidents Alfonsin andMenem was the importance of provincial governments as political entities. Withrespect to the allocation of the limited financial resources of the centralGovernment, the provincial governments used their influence to advance theclaims of local projects. Not surprisingly, the constituency favoring Yacyreta,a bi-national project, was less numerous (and therefore less influential) than themass of constituencies favoring local projects; and in the competition forfunding by the central Government, Yacyreta tended to lag.

4. Y.brId Bank (WB): Reorn and Recommendation of the President of the Intemnational Bank forReconstrucdion and Development lo the Executive Director on a Proposed Financial Sector AdiustmentLoan in an Amount Euuivalent to USS400 million to the Artentine Ranublic (Repot No. P-5862.R)January 25, 1993, p. 1. pam. 2; Armentina: Public Finance Review-Frm Insolvency to Gowth (ReportNo. 10827AR). February 11, 1993, pp. 1-3, pams. 1-5; Amgentina: Reforms for Price Stability andGrowth (Report No. 7994-AR), Febmuary 11, 1993, pp. i-iv, parms. 1-10.

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2.6 Bank Lending to Argentina. Besides political and economicdevelopments, the project was also affected by Bank lending policy towardArgentina. Given the depressed level of economic activity during the 1980s, itbecane progressively clear from successive failed stabilization programs thatonly deep structural, fiscal and institutional reforms could restore conditions fororderly development activity. Absent these conditions, the continuing project-specific lending practices offered almost no prospects for altering the poorfinancial performance of the power utilities or removing the impedimnents toimplementing Yacyreta. Thus, towards the end of the 1980s, Bank assistanceto Argentina stressed intensive adjustment lending, directed at correcting theeconomic policy framework. Lending to parastatals virtually ended. Sincethen, there has been a resumption of traditional investment lending forinfrastructure combined with adjustment lending as needed.

2.7 Bank Lending for Power. The Bank has made ten loans totallingUS$1.459 billion (Part III, Table 1) to support the Argentine power sector.Five loans (US$601 million) helped finance expansion of the Federally-ownedsystem serving metropolitan Buenos Aires (Servicios Electricos del Gran BuenosAires-SEGBA4). Loan 577-AR (US$82 million, 1968) helped finance the ElChoc6n hydroelectric plant. Project performance audits have concluded that,while the physical objectives of the first five projects were largely met, theirfinancial objectives were not. Loan 2751-AR (US$14 million, 1986) helpedfinance a technical assistance project. The Yacyreta project has been supportedby Loans 1761-AR, 2998-AR, and 3520-AR (totalling US$720 million, of whichUS$757.2 million was for Yacyreti). Loans 1761-AR and 3520-AR are projectinvestment loans; 2998-AR is a sector investment loan. Following theprivatization of SEGBA, discussions with the Government led to an agreementto reassign US$137.6 million of the fifth loan to SEGBA (2854-AR, US$276million, 1987) to further assist with the completion of Yacyreta. IDB lendingin support of the project amounts to US$839.6 million.

2.8 Energy Resources, Market and Organization. The energy resourcesof Argentina are diverse and abundant. Potential gas, oil, and coal reserves areestimated at 982 MTOE (million tons of oil equivalent). Hydropower potentialis estimated at 44,000 MW or 2200 MTOE over 50 years.

2.9 Argentina has traditionally enjoyed reliable electricity service. In 1977,when the project was being planned, total public consumption amounted to22,547 GWh, having grown since 1962 at an average annual rate of 7.9%.5In 1979, when Loan 1761-AR was approved, Argentina enjoyed a high degreeof electrification: about 80% of the population had access to electricity and percapita consumption amounted to about 1050 kWh, one of the highest in LatinAmerica. At that timne, Argentina's electric power needs were expected to growat rates of between 8% and 9.9% p.a. during the 1980s.6 Consumption slowed

5. Idem., Staff ADrmisal Report: Arentina-tPraauav: Yacvmti Hydroelectric Prtect (Report No. 2342-AR), dagd Sepember 21, 1979, p. 3, pam 1.14. -remafter referred to as SAR. Yfcvreti 1.

6. Ibid., p. 45, pam. 7.12.

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after 1980, reflecting the difficult economic situation of the country: it averaged2.2% p.a. from 1980 to 1985 and 2.1% p.a. from 1985 to 1990. Toward theend of the decade, there were energy curtailments due to a severe drought andthe low availability of thermal generation. In 1991, when Loan 2998-AR wasfully disbursed, ninety percent of the population had access to service, totalpublic consumption amounted to 38,754 GWh, and per capita consumptionamounted to about 1290 kWh.

2.10 Until 1991, electric power was provided by three national utilities,' anational nuclear agency (CNEA-Comisi6n Nacional de Energia At6mica), abinational entity similar to EBY (CTMSG-Comisi6n Tecnica Mixta del SaltoGrande), 19 provincial utilities, and several cooperatives. Located in Rosario,the national Dispatch Center (DC) was responsible for the economic use ofgeneration facilities on a nationwide basis; it was basically staffed by AyEEpersonnel. Starting in 1992, the Government launched a complete revampingof the power sector, with divestiture of most of its assets for generation,transmission and distribution. It basically kept only CNEA, CTMSG and EBY.

2.11 From 1978 to 1991, the Secretariat of Energy (SE), either as part of theMinistry of Economy or the Ministry of Public Works and Services, was incharge of defining energy sector policies, including energy planning, thegranting of concessions, management of the energy funds (to which the proceedsof energy taxes were transferred). The SE regulated the national power utilitiesand approved their tariffs; the tariffs of the nuclear agency were fixed underagreement with the SE to make them compatible with those of HIDRONOR, anational power utility. SE did not regulate other sector entities and was notroutinely concerned with their operations. CNEA reported to the President ofthe Republic, while CTMSG and EBY reported to the Ministry of ForeignAffairs, and the provincial utilities reported to their owners. As already stated(para. 2.2), with respect to the power sector, the central Government operatedwith reduced institutional capacity to formulate and implement policy.

3. Project Objectives and Description

Loan 1761-AR (US$210 million, October 1979)

3.1 Executing Agency. EBY was created under the YacyretA Treatybetween Argentina and Paraguay, signed on December 3, 1973. EBY wasformally established on September 6, 1974, with US$100 million in capital. Itis under the direction of a Board of Directors and is managed by an ExecutiveCommittee. EBY has the technical, financial, legal, and administrative

7. The national utilities include SEGBA (pam. 2.02); Agua y FEnergia Elictca (AyEE), responsible forgeneration and transmission nationwide, plus distribution in four provinces; Hidroelectrica Norparagdnica(HIDRONOR), responsible for development of the hydro resources of the North Patagonia region. TheComisi6n Nacional de Fnergia At6mica (CNEA) is responsible for all nuclear activities, including thedesign, construction, and operation of nuclear power plants. The Cormision T&cnica Mixta del SaltoGrande (CTMSG) is the binational (Argentina/Uruguay) agency which owns and operates the SaltoGrande hydro plant (1890 MW).

responsibility to study, direct and execute the project, and to operate thefacilities after completion.

3.2 Consultants and Planning. In 1971, the Government hired aninternational consortium of consultants to carry out a feasibility study. Thisstudy was completed in December 1973, and its conclusions provided the basisfor the preparation of the Treaty of Yacyret§. A further step was taken in 1974when EBY re-hired the consortium to prepare the basic design for the project,the bidding documents for the main civil works and the electro-mechanicalequipment, and the engineering and design of works related to the relocationprogram. EBY decided to continue with the services of the same consultant forthe preparation of construction design and for technical supervision duringexecution of the project.

3.3 Given the exceptional size of the project in physical and financial terms,the Bank requested the hiring of a panel of well-known international experts indifferent disciplines (geology, hydraulics, etc.) to review the concept of the damand related structures, to review the adequacy of their design, and to conductperiodic reviews of the dam and structures during construction. EBY agreed tothis request and later hired the panel in late 1983.

3.4 Objectives. The main objectives of Yacyret§ were to provide additionalleast-cost, base-load hydroelectric energy of up to 17,500 GWh annually. Theproject was also meant to improve navigation by eliminating the rapids ofApipe, facilitate future irrigation projects in Argentina and Paraguay, andaugment the regional fishery industry. In addition to supporting the project,Bank involvement would help to promote sector-wide policy measures, includinglong-range planning for generation and transmission, and to rationalize tarifflevels and structures.

3.5 Description. Located on the ParanA River, 80 km downstream from thetowns of Posadas (Argentina) and Encarnaci6n (Paraguay), the projectcomprises:

(a) approximately 70 km of earth dam with uniform elevation abovesea-level of 86 m and a maximum height of 33 m, and the SanMartin dike, creating a reservoir with total storage capacity ofabout 21,000 hm3;

(b) two spillways with a total discharge capacity of 95,000 m3/sec;

(c) a conventional, covered power house with 20 Kaplan turbines of135 MW each and 20 generators of 150 MVA each,8

transformers, associated equipment and intake structures for 10additional units;

8. Updated figures are 155 MW for the turbine and 172.5 MVA for the generator. Also, average plantproduction according to later studies is now estimated at 19,200 GWh per year.

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(d) fish passage facilities; a navigation lock with a maximum 3 mdraft; and irrigation intakes;

(e) ancillary works, including housing for personnel during and afterconstruction, about 90 km of access roads, relocatedinfrastructure, and a bridge (1,500 m) over the Ana Cua river;and

(f) resettlement of about 33,000 persons, as the result of the creationof the main reservoir.'

3.6 In addition, the project description included two studies to be carried outby the SE for the design of the future national transmission system10 and theuse of small hydroelectric power plants in isolated regions.

3.7 Justification. The project was justified on conventional, least-costprinciples. The sector expansion program "that includes Yacyreta entering in1985 is less costly than that excluding it for discount rates up to at least20%."" Also, Yacyreta "forms part of the least-cost solution for meetingArgentina's electric power needs from 1985 onwards. This is true for differentaverage demand growth rates varying from 8% to 9.9% p.a."12 Theseelectricity growth rates corresponded to an "annual growth of the economy ofabout 3.8% to 5.5%." 13 Expecting that a new package of policies (monetary,fiscal, price, trade, etc.) would stimulate growth, efficiency and reorganizationof industry, the Bank assessed the prospects of the Argentine economy to be

9. Updated figures are 50,400 persons for resettlement.

10. The construction of the Argentine high-voltage transmission system, related to the Yacyreta project, is the

responsibility of the Government through AyEE. Although the system does not form a part of the project

and would not be financed by the Bank, it was analyzed at appraisal and its costs were estimated at about

US$512 million for the purpose of the project's economic analysis. The Government covenanted to

prepare a financial plan for its construction within 12 months after the signing of the Loan Agreement andconstruct the system when and as needed for the transmnission of the power generated by the project

(Section 5.02 of the Loan Agreement).

11. WB: SAR. Yacvretr 1, p. 43, para. 7.08 (i). In the preface of the SAR, issued in September 1979, it is

explained that because "of delays in the prequalification process of the main civil works contractors (six

months) and in the resolution of complex issues on dam alignment and financial compensation betweenthe Governments of Argentina and Paraguay (another six months), the bidding procedures are nowexpected to start in November 1979 instead of November 1978, as envisaged during appraisal and as a

result the commissioning of the first units of the Yacyreta hydroelectric project will be delayed by about

12 months.' The body of the SAR report reflects the work done during appraisal (July-September 1978)

and indicates commissioning of Yacyreti's first unit in 1985. In terms of actual project scheduling underLoan 1761 -AR, in this PCR, however, the one-year delay mentioned in the preface is to be considered.Therefore, 1986 to 1990 is the period planned for commissioning of the Yacyreti units under Loan 1761-

AR.

12. Ibid., p. 45, parm. 7.12.

13. Idem. Report and Recommendation of the President of the Ilternational Bank for Reconstruction and

Develooment to the Executive Directors on a Proposed Loan to the Amentine Renublic for the YacvretiHydroelectric Proicct (Report No. P-2625-AR), dated September 25, 1979, p. 25, pam. 80.

favorable in 1980 and thereafter;'4 and therefore, accepted as reasonable theelectricity growth projections, which were in line with historical growth rates.The return on investment was estimated at 14%. Sensitivity analyses showedthat a 10% increase in cost or a 10% reduction of benefits would reduce thereturn by about 1 %. Part III, Table 3 compares actual and forecast electricityconsumption during the 1980s.

3.8 Moreover, when Loan 1761-AR was processed, the Government wasconcerned that Argentina's principal source of energy was petroleum, althoughits proven oil reserves accounted for only 10% of energy resources. Theauthorities were also quite mindful that US$500 million yearly had to be spentin 1976-77 for importing oil and gas. There was thus considerable momentumfor developing hydroelectric resources, which were then calculated to have hadonly about 4% of their potential exploited. These sentiments were furtherenhanced by the second oil crisis in 1979 as acceptable justification foradvancing this project.

3.9 Supplementing the economic justification were considerations ofstatecraft. In Argentina there was the perception that Brazil had gainedconsiderable influence in Paraguay by reaching agreement with that country toconstruct the Itaipu hydroelectric project (located upstream on the ParanaRiver). Not to be surpassed in regional influence was an important, ifunacknowledged, factor motivating Argentina to proceed with Yacyreta duringthe decade of the 1980s.

3.10 Timetable. Under Loan 1761-AR, the timetable called for bid award forthe gates by June 1980 and for the main civil works, turbines and generators byOctober 1980. It was expected that all other contracts would be placed in1981-1982. As for construction activity, it was also expected that mobilizationwould occur in November 1980, and the project would be carried out in threephases over the next ten years:

(a) Phase I (47 months): completion of preparatory works andnavigation lock, and completion of first stage construction of thespillways, powerhouse, side embankments and main dam;

(b) Phase 11 (10 months): building of coffer dam and completion ofriver diversion; and

(c) Phase III (63 months), completion of main dam, spillways, andpowerhouse, and filling of reservoir and erection of 20 units(commencing in 1986 and ending in 1990). Initial generationwas expected in the first half of 1986.

3.11 Sector Financing Plan. Yacyreta was part of a larger investmentprogram of the sector (defined as AyEE, SEGBA, HIDRONOR, CNEA,CIMSG, and EBY). Because YacyretA would account for a large share of the

14. Ibid., p. 6, pam. 17.

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program (22%), the Bank reviewed and accepted at appraisal a sector financingplan for the period 1978-1985, which relied heavily on the successful outcomeof future actions, i.e., the implementation of tariff increases and the signing ofloan contracts.

3.12 Stated in 1977 prices, total sector requirements amounted to US$11.9billion. This would be covered by: net internal cash generation, US$2.8 billion;energy funds, US$4.5 billion; borrowings, US$4.1 billion; other, US$0.5billion. Of key importance were assumptions about future levels of tariffs,resources from energy funds, and borrowing (mostly foreign). The energyfunds derived their resources from taxes on petroleum products and surchargeson electricity sales.

3.13 Concerning tariff levels, the Government covenanted to raise tariffssufficiently for the national utilities to earn target rates of return on properlyrevalued rate bases (para. 4.7).

3.14 Concerning the electricity funds: "The share of... surcharges onelectricity sales in Energy Funds resources is estimated at 36% for 1978 and isexpected to increase progressively to 46% by 1985."'5 This expectation wasnot reinforced by a covenant. The Bank accepted the Government's decision "toassign to Yacyreta all resources still available from the Electrical Funds aftercommitments with other recipients had been met."'6

3.15 Of total borrowings (US$4.1 billion), future borrowings were expectedto amount to about US$3.6 billion, of which US$2.1 billion appear to be relatedto Yacyreta and the balance (US$1.5 billion) to other projects. It was reportedthe non-Yacyreta borrowings would be covered manageably with medium-termexternal funds"7 . The Bank conditioned effectiveness to the submission ofevidence that EBY had contracted sufficient borrowing from other sources tocover the funding gap on the project in 1980-1981 (US$0.6 billion). Eventually,the gap turned out to be much greater and it caused delays.

3.16 Project Financing Plan. As shown in Table 3.1, at appraisal theexpected investment cost of the project for the period 1978-90, includingphysical and price contingencies, amounted to US$3,706 million. If capitalizedfinance charges for the period were included (US$2,557 million in currentprices), project cost would increase to US$6,263 million. Total financingrequirements, including amortization and working capital, would amount toUS$7,038 million in current prices. Prior to 1978, some US$44 million (incurrent prices) had been invested in the project preparation.

15. Ibid., p. 36, para. 6.10.

16. Ibid., p. 37, para. 6.11.

17. Ibid., p. 36, para. 6.07.

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Table 3.1: EBY Financing Plan 1978-1990, Loan 1761-AR(In millions of current US$)

Requirements Sources

Investment 3,706.3 a/ IBRD/IDB 418.2

Debt Service 3.256.7 Suppliers' Credits 829.5

Interest 1,646.2 Commercial Banks 1,245.2

Amortization 1,610.5 Foreign 945.2

Working Capital 74.7 Local 300.0

Gov. Loans (Energy Funds) 2,610.4 a/

Equity Contribution 50.0

Int. Cash Generation 1,884.4

7,037.7 7,037.7

a! Does not include US$44 million relative to the period 1975-1977.

3.17 The financing of the investment cost (US$3,706 million) would becovered by the Bank, the IDB, suppliers, and part of the borrowings fromforeign commercial banks (US$271 million) for the foreign component(US$1,519 million), and by the Government (US$1,213 million) and commercialbanks (US$974 million) for the local component (US$2,187 million). Internallygenerated funds, complemented by Government channelling of energy funds(US$1,372 million) would cover debt service, which was predominantly inforeign currency (about 80%). Funding for working capital would be providedby the energy funds.

3.18 In retrospect, the EBY financing plan was optimistic about the futureinterest of foreign lenders in Argentina and the self-financing capacity of thesector. For example, except for loans (US$433.2 million) from the Bank, theIDB, and a foreign Bank, commercial-bank financing (US$1,230.3 million) hadyet to be contracted, although EBY had obtained "Letters of Intent" from exportagencies and suppliers' credits providing for financing amounting to US$829.5million. Funding from sector sources (US$4,494.7 million) and a capitalcontribution (US$50 million) depended on future actions by the Government.In other words, as was later demonstrated, there was considerable uncertaintyattached to this financing plan.

3.19 Procurement and Disbursement. The Bank-financed portion of theproject, i.e., the civil works contract, would be awarded through ICB underprocedures in agreement with Bank guidelines for procurement. The bulk ofthe civil works construction equipment would be financed by export credits.Bidders would quote unit prices, excluding the cost of major constructionequipment so financed. Bids would be evaluated on a cash basis, by adding thetwo items mentioned. It was expected that the proposed loan would cover civilworks (US$176.0 million), engineering consultant services (US$32.2 million),

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and studies (US$1.7 million). Disbursement arrangements were to be asfollows:

(a) foreign costs during the period 1979-1985, consisting of civilworks, at 38% and engineering consultant services at 50%; and

(b) power sector studies to be carried out by the SE at 50%.

3.20 Resettlement and Environment. The Bank devoted major resources tohelping EBY find solutions to the problems of resettlement and environment.Staff of the Bank and the IDB persuaded EBY to:

(a) establish a properly staffed resettlement unit;(b) prepare a skeleton resettlement program and timetable;(c) take steps to acquire land for resettlement; and(d) establish an office of property assessment.

To address concerns with respect to fish migration, the construction of fishpassage facilities was planned. Liquid waste resulting from population growthand industrial development would be handled by future treatment plants; variouscontrol measures would discourage water hyacinths and ferns. The project alsoincluded relocation and improvement of railroads, power distribution, sewerage,roads and an airport.

3.21 Risk. Due to the advanced stage of studies and designs and thecompetence of the consultants, no special physical risks were expected. Themajor risk was identified as financial. "If the economic situation of Argentinawere to deteriorate and the authorities were unable to increase tariffs as needed.. and/or [EBY were] unable to obtain the foreign loans as assumed, the projectmight be delayed and, as a result, have important cost-overruns and . . . enterinto difficulties in its execution. " " Other sources of risk were identified asprocurement and the relocation/resettlement program.

Loan 2998-AR (US$250 million; October 1988)

3.22 In the ten years following the first appraisal of Yacyreta (1978), theproject, due to a variety of factors, progressed at a rate far slower than expectedat the first appraisal. Country and sector conditions became uncertain due topolitical upheaval, a stagnant economy, low growth of electricity demand (2%p.a.), and deteriorating sector finances (i.e., low tariffs, delayed paymentsamong utilities, and the extra burden of foreign-currency debt service due todevaluation)."9 As the proceeds of 1761-AR were disbursed, it became clearthat additional financing from the World Bank and the IDB was required.However, given these uncertainties, the processing of additional financing wasdelayed until 1988, when the Bank adopted a sectoral approach-that is, while

18. Ibfd., p. 24, pam. 4.34.

19. Idem., Staff Anraisaal Renort: Artentina-Elctric Power Sector Proiect (Report No. 7450-AR), datedOctober 5. 1988, p. 10, pan. 2.24. Hereafter, referred to as SAR. Electric Power Sector.

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all but a small portion of the proceeds would finance the project, the majorcovenants would address important sectoral issues-finances, organization, andthe level and structure of tariffs. Central to this sector investment operation wasagreement with the Government on sector-wide financial rehabilitation measures,targets and dates.

3.23 Objectives. Loan 2998-AR (US$250 million)20 supported a projectdefined as the sector investment program for the years 1988 and 1989, plus theinstitutional strengthening of the SE.21 However, the loan proceeds, except forUS$2.0 million, benefitted only the Yacyreta project. This operation wassupposed to achieve the following sector objectives of the Government:

(a) improving resource allocation within the sector throughoptimization of its expansion program;

(b) implementing a Financial Rehabilitation Plan (FRP) in connectionwith the national power utilities;

(c) improving efficiency of the power utilities;(d) promoting rational use of electricity through a tariff system based

on economic costs;(e) strengthening the structure of the sector, so as to bring about

better coordination, planning and regulation; and(f) establishing policies and procedures for environmental protection

and the treatment of social concerns in power projects.

The Bank fully supported these objectives with its lending strategy.

3.24 The Financial Rehabilitation Plan applied to the SE-regulated group ofnational utilities (AyEE, SEGBA and HIDRONOR), constituting 60% of sectoroperations. It was supposed to support the government strategy for stabilizingand revitalizing the economy, and was based on:

(a) increasing average tariffs per kWh22 some 30% over four years,from an annual average level of USC4.3 (in January 1988 prices)in 1987 to USC4.6 in 1988, US¢5.1 in 1989, US¢5.3 in 1990,and USC5.6 in 1991;

20. A parallel IDB loan of US$250 million was to finance 50% of the civil works and engineering contracts.

21. Sector Invesltent Progamm. This component was the 1988-1989 "time slice" of the investmentprograms of AyEE, SEGBA. HIDRONOR and EBY, defined on the basis of the sector expansion planfor the period 1988-1995. This prgram, which adheted to least-cost principles, included only highpriority works: ongoiig generation and transmission works; generation and transmission works to beinitiated by AyEE: distribution works; and studies for futume works.

Ilnitutional Strengthening of the SE. This component consisted of: 240 staff months of specializedconsulWan1s; up to US$1.0 million equivalent of compuers, and office equipment; database andcommunication link equipment between the SE and the main energy sector institutions; and miscellaneousequipment. UNDP would help with administrative support for the project.

22. Since the sales of the group included both final consumers and distribution utilities, this average tariff wasbasically a measure of the revenues, rather than the tariff level for a certain voltage or class of custDmer.Detailed financirg studies were being financed by Loan 2751-AR.

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(b) an investment program for each utility in line with a least-costexpansion plan agreed upon with the Bank;

(c) the implementation of sound practices of power utility financialmanagement with respect to collection and payment practices;

(d) Government contributions to be used for debt service payments;and

(e) borrowings committed to ongoing projects.

The FRP would be monitored through agreed upon levels for the ratio of cashoperating expenses divided by revenues, and internal fund generation divided byinvestment expenditures.

3.25 Sector Financing Plan. Stated in 1988 prices, the sector financing plan(national utilities plus EBY) for the period 1988-1995 provided for the coverageof investments (US$7.9 billion) and working capital (US$0.3 billion) by netconsumer-based funding (US$3.5 billion), Government contributions (US$1.2billion), and borrowing (US$3.5 billion). The Bank felt that the plan possesseda high degree of certainty because of commitments made by the Governmentduring negotiations for tariff increases and the assumption of debt-servicepayments. This financing plan, like the one developed in connection with Loan1761-AR (paras. 3.11-3.15), reflected optimism about the interest of foreignlenders in Argentina and the interest of the Government in restoring the self-financing capacity of the sector. As was later demonstrated, events confoundedexpectations with respect to restoring the self-financing capacity of the sector.

3.26 Project Financing Plan. Taking account of delays since 1979 and theexpected construction schedule, initial generation at Yacyreta was postponedfrom 1986 to 1992 and the completion date, from 1990 to 1996. Cost estimatesand financing plans were adjusted for the revised implementation schedule.

3.27 In 1988, as shown in Table 3.2 below, the revised project investmentcost, stated in current prices, was US$4,591 millioif3, including physical andprice contingencies. The Bank and IDB (US$1,278 million), suppliers andexport credit agencies (US$695 million) and foreign banks (US$796 million)would cover the foreign cost (US$2,769 million); the Government, through theenergy funds and other loans, would cover the local cost (US$1,822 million).If capitalized interest charges were included (US$2,395 million in currentprices, of which US$80 million would be financed by IBRD and IDB), theproject cost would increase to US$6,986 million. Total financing requirements,including amortization, would amount to nearly US$8.2 billion24 , to bebasically covered by Government (41.4%), internal cash generation (20.6%),IBRD/IDB (16%), commercial banks (13.4%) and suppliers and export agencies(8.5%).

23. WB: SAR. Electric Power SectDr, p. 19 & 20, para. 3.09 and p.1, Annex 2.6.5

24. If charging of working capitl1 (-US$245 million) is not considemed in the financirn requimments, thesewould increase to US$8.4 billion (see Thble 4.1).

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Table 3.2: EBY Financing Plan, 1975-1996, Loan 2998-AR(in millions of current US$)

Actual Existing & FutureFinancing Proposed Financing Sub-Total1975-1987 F linancig 1990-1996 1988-1996 Total

1988-89Toa

Total Requirements 2,606.2 1,322.1 4.241.3 5.563.4 8,169.6

Investrnent 2,052.1 988.1 1,551.0 2,539.1 4,591.2

Debt Service 855.4 362.8 2,606.0 2,968.8 3.824.2

Interest 564.3 215.6 1,647.1 1,862.7 2,395.1

Amortization 291.1 147.2 958.9 1,106.1 1,429.1

Change in Working Capital -301.3 -28.8 84.3 55.50 -245.8

Total Sources 2.606.2 1,322.1 4.241.3 5563.4 8,169.6

IBRD/IDB 406.6 511.9 400.0 911.9 1,318.5

Suppliers 162.2 141.7 390.6 532.3 694.5

Comm. Banks 758.1 105.8 232.9 338.7 1,096.8

Equity Contrib. 56.7 20.0 20.0 40.0 96.7

Elect.Funds 903.8 272.3 516.1 788.4 1,692.2

Other Govt. Loans 318.8 270.4 1,002.8 1,273.2 1,592.0

Int. Cash Gen. - - 1,678.9 1,678.9 1,678.9

3.28 The SAR, Electric Power Sector, discussed the level of commitment ofthe sources included in the financing plan for the period from 1988 to 1996.'-For total requirements of US$5,563 million, 48% were considered committed,including Government loans for covering debt service, two IBRD/IDB loansunder appraisal amounting to US$500 million and nearly all suppliers and exportagency credits (some US$520 million). This plan was basically contingent uponGovernment contributions deriving from energy funds (some US$790 million)and future IBRD/IDB loans amounting to US$400 million. The plan also reliedupon internal cash generation close to US$1.7 billion, to be used in investment(some US$200 million) and debt service in the outer four years of the period.It was thus essential for the continuation of the investments during the first twoyears of the period that Government secure some US$290 million, expected tocome basically from the energy funds (some US$270 million), in addition to theapproval of the IBRD/IDB loans under appraisal.

3.29 Economic Justification. In 1988, completing Yacyreta was justified onthe grounds that it was least-cost as compared with a gas-fired steam alternative

25. WB: SAR. Electric Power SecDr, p.22, para.3.14 and Annex 2.6.5.2.

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for meeting a market growing at 6% p. a. for the years from 1987 to 2000 forall discount rates lower than 18%. Expected GDP growth rates were 3.5% for1989 and 4. % p.a. thereafter.26 The costs of YacyretA included the costs of:

(a) completing the project;(b) constructing related transmission facilities; and(c) the foregone benefits in the event of abandonment.

Costs incurred prior to 1988 were obviously considered as sunk costs andtherefore were not included in the analysis.

3.30 Procurement and Disbursement. Loan proceeds would be applied tofinance contracts for Yacyreta procured under Loan 1761-AR (civil works:US$182.4 million; and engineering consultants, US$27.0 million); interest onLoans 1761-AR and 2998-AR (US$18.2 million and US$22.4 million,respectively); and the SE Technical Assistance (TA) Program (US$2.0 million).The civil works and engineering contracts had been awarded under Bankguidelines for procurement and for the use of consultants, respectively.Procurement for the TA Program, computers, software and office technologyequipment would be carried out through limited international bidding.

3.31 Disbursement arrangements (timing and percentages) under Loan 2998-AR differed greatly from those under 1761-AR (para. 3.19). The proposed loanwas expected to be disbursed over a period of two years (1988 and 1989); andits proceeds would cover:

(a) 50% of expenditures on the major civil works contract and theengineering contract in 1988-1989;

(b) interest and other charges on Loans 1761-AR and 2998-AR; and(c) 100% of expenditures under the SE technical assistance (TA)

program.

The proposed IDB parallel loan (US$250 million) would finance 50% ofexpenditures on the main civil works and engineering contracts.

3.32 Risk. The SAR discussed the financial risk facing the sector investmentprogram, not just Yacyreta. The major risk was identified as the pace ofimplementation of the FRP (Financial Rehabilitation Plan). "Considerable effortwill be needed to ensure that electricity prices reflect inflationary changes sothat planned cost recovery targets are met, as well as that other supportingfinancial measures are taken in time to avert deterioration in sector finances."2 7

26. Ibid., p. 6, para. 2.12.

27. Ibid., p. 29. pra. 3.34.

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4. Design and Implementation

4.1 Project Costs and EBY Financing Plan. It is important for comparisonpurposes to bring into the picture the more recent work done for the appraisalof Loan 3520-AR, which was reviewed for this I-PCR. A meaningfulquantitative comparison of financial plans and project investment costs whichspan long periods of time and have been produced in widely separated years,requires that they be brought to a common price-level basis. For the purposesof this I-PCR, it appears that the use of the index of unit value of manufacturedexports (MUV) as a deflator is adequate and also convenient, given itssimplicity and availability. There are also two baseline data sets usuallyavailable, one in current prices and one in constant prices. The series in currentprices (for yearly investments and the associated project financial plans) wasgiven preference in this analysis because it included more documentedinformation for the three loans. The deflation of current series by MUV,however, leads to the constant-price series, which is different from the baselineused in the appraisals since it cannot be expected that the ex-ante pricecontingencies would be matched by the ex-post MUVs. Lump-sums for projectcosts in constant prices have also been used to compare the different appraisalestimates. The differences resulting from the two approaches do not change thebasic conclusions.

4.2 Table 4.1 presents the financing plans for the three loans in currentprices for the sake of reference, while Table 4.2 facilitates a broad comparisonof the project costs and finances from the first to the last Bank loan, bypresenting figures deflated to 1977 prices. While financing requirements haveincreased by one third in current prices (some US$2.3 billion) to nearly US$9.4billion, they actually experienced an increase of only 8% in constant prices. Itis worth noting that from the inception of the project, it was considered thatsome of the interest charges would be deferred beyond project completion. Infact, this deferred interest amounts to about one-and-a-half times the interest tobe paid during project construction. Although most of the deferred interestshown under Loan 3520-AR has in fact been waived by the ArgentineGovernment (as part of the negotiations leading to the Yacyreta Treatyamendment in 1992), it has been kept in Table 4.2 for the purpose of a moreconsistent analysis. Financing plans also included loan amortization due to thelong project construction time (not even considering delays). If deferred interestwere included, total project financing requirements would today reach someUS$11.5 billion in current prices, an increase of 11% in constant prices withrespect to the first appraisal estimate.

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Table 4.1: Evolution of EBY Financing Plans(in millions of current US$)

Original Revised Updated(1761-AR) (2998-AR) (3520-AR)

1. Requirements a/ 7.007.0 8.415.4 9.349.6

Project Expenditures 3,750.2 b/ 4,591.2 5,555.5

Debt Service 3,256.7 3,824.2 3,794.1

Interest 1,646.2 2,395.1 2,490.5

Amortization 1,610.5 1,429.1 1,303.6

2. Sources 7.007.0 8.415.4 9.349.6

Equity Contribution 50.0 96.7 96.7

Net Internal Cash Gen. 1,884.3 1,678.9 1,390.8

Borrowing 5,147.4 6.394.0 7.335.2

IBRD/IDB 418.2 1,318.5 1,547.1

Suppliers 829.5 694.5 982.3

Com. Banks 1,245.3 1,096.8 661.8

Gov. Loans/Energy Funds 2,654.4 3,284.2 4,144.0

Chng. Working Capital (74.7) 245.8 526.9

a/ Sizable negalive amounts would show as working capital variations for Loans 2998-AR and 3520-AR, if includedunder the heading of requirements, thus artificially reducing the amount of financial requirements. For the sake ofuniformity of presentation and given its smaller absolute value in Loan 1761-AR appraisal, as compared to the twoother loans, in Section 4 working capital changes are included under the heading of financing sources.

b/ Includes expenditures prior to 1978.

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Table 4.2: EBY - Comparison of Flnancial Requirements under Loans1761-AR and 3520-AR

1761-AR 3520-AR

Current 1977 Current 1977 % inorear 3520-Prices Prices Prices Prices (1977 Prices)

Investment 3,750.3 2,636.9 5,555.5 3,081.9 16.9

Major Civil Works 1,905.2 1,449.5 2,477.3 1,516.9 4.7

Arroyos Protec. Works -- -- 118.2 68.0 New

Electromech. equip. 726.8 422.8 1,089.9 429.4 1.6

Indem.,Land & L.rights 114.3 64.8 271.5 126.3 94.9

Reloc.,Ress. & Envir. 590.3 423.5 505.3 235.0 (44.5)

Engin. & Administ. 413.8 276.4 1,093.3 706.3 155.6

Interest Paid 1,646.2 1,026.3 2,490.5 1,285.7 25.3

Sub total 5,3965 3,663.20 8,046.0 4,367.6 19.2

Amortization 1,610.6 922.1 1,303.6 591.2 (35.9)

Total Requirements 7,007.1 4,585.2 9,349.3 4,958.8 8.2

Borrowings 5,147.4 3,596.7 7,335.6 3,957.4 10.0

Government Loan 2,654.5 1,830.5 4,144.0 2,221.3 21.3

IBRD-IDB 418.2 298.7 1,546.1 829.2 177.6

Suppliers & others 2,074.7 1,467.5 1,645.5 907.0 (38.2)

Own Resources 1,884.3 1,014.3 1,390.9 579.8 (42.8)

Equity Contribution 50.0 37.2 96.0 74.9 101.5

Variation of Capital (74.7) (63.0) 526.0 346.7 (650.4)

Total Financing 7,007.1 4,585.2 9,349.3 4,958.8 8.2

Interest deferred 2,557.8 1,516.7 2,111.8 1,822.2 20.1

Total Investment plus Interest 7,954.3 5,179.9 10,157.5 6,189.8 19.5paid & deferred

Total Investment plus interest 9,564.9 6,102.0 11,461.0 6,781.1 11.1paid & deferred plusamortization paid

4.3 Investment costs have increased 17% in constant prices from the first tothe last appraisal.2" Physical contingencies used in Loan 1761-AR appraisalamounted to 12.6%, which could be considered a reasonable value were it not

28. If compared on the basis of the lump-sum cost figures available in the appmisals, which differ from thefigures presented in Tkble 4.2 for the reasons given in parm. 4. 1, the cost incrse would be slighdyhigher: 19%. The correspondirg figures in lIble 4.2 would be US$2,524 million (Ln.1761-AR) andUS$3,002 million (Ln. 3520-AR). Additionally, Ln. 2998-AR appraisal would show a cost increase of6 % with respect to Ln. 1761-AR, on the basis of lump-sum cost figures, referred to 1977 price level.

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for the hard-to-predict delays of the project. Under loan 3520-AR, given thehighly advanced stage of execution and with nearly all electro-mechanicalequipment contracted, physical contingencies amounted to 3.9% of theremaining investment.29 Engineering and administration expenses, which havealso accumulated during the years of project delay, and the Aguapey Valleyprotection scheme, which was not considered in the initial project cost estimates,help explain the cost increases.

4.4 Disbursement. Table 5, Part III compares actual and forecastcumulative disbursement for Loans 1761-AR and 2998-AR. There was anapproximate four year delay in the initial period of disbursement of loan 1761-AR, basically due to a procurement dispute on the civil works between the Bankand EBY (para. 4.6). By the end of FY 1986 (the project closing date set in theappraisal), about half of the loan had been disbursed; a year later the loan hadbeen nearly fully disbursed. The disbursement of Loan 2998-AR was ahead ofestimates in the appraisal during the first two years of the loan execution, butwas completed as scheduled. The extension of the closing date facilitated thefull use by the Secretariat of Energy of the US$2 million assigned to thetechnical component.

4.5 Completion Dates and Sources of Delay. Phase I was completed in1988, almost four years late; Phase II was completed in 1989, incurring noadditional delay with respect to the previous phase; and Phase III is expected tobe completed in June 1998, seven and a half years late. At 2998-AR appraisal,Phase III was estimated to last two more years than considered during Loan1761-AR appraisal. The sources of delay included:

(a) late loan effectiveness (November 1982 vs. July 1981) due topoor sectoral financial performance (paras. 4.6-4.8);

(b) the South Atlantic War (June 1982) and the political andeconomic convulsions which overwhelmed the country (paras.2.1-2.4). (From the Argentine point of view, these eventsreduced the project to an issue of secondary importance until1984);

(c) a protracted (three years) Bank-EBY dispute regarding award ofthe main civil works contract. The contract was not signed untilOctober 1983 (paras. 4.9-4. 10);

(d) after 1983, chronic financing problems (para. 4.14) due tobudgetary restraints experienced by the central Government, avery cautious approach on the part of foreign lenders to theArgentine market, and low sector tariffs and generalized liquidityproblems (paras. 4.17-4.21); and

(e) leadership at EBY of variable quality, especially in the period1989-1991 (para. 4.16) compounded by a lack of Government

29. In constnt prices, the rcmainiiE investment meptesented about one-thixi of the total investment fromproject inception to completion.

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commitment towards the Project, which was reflected in reducedfinancial support for investment; and

(f) a substantial increase in the number of people to be relocated dueto migration to the areas to be flooded attracted by the possibilityof obtaining compensation packages (para. 5.3).

4.6 Delayed Effectiveness and Financial Performance. At appraisal ofYacyreta (1978), weak finances were a central issue adversely affecting thesector. The Bank attempted to address this issue through covenants providingfor rising levels of revenue for major national power companies-that is, theGovernment committed itself to raise tariffs progressively until the powercompanies earned a rate of return of eight percent (8%) on annually revaluednet fixed assets. Depending on the company, the target dates for earning 8%ranged from 1979 to 1982.

4.7 During the eighteen months following Board approval (October 16,1979), the financial performance of the national power utilities-indeed, thesector as a whole-deteriorated. The Govermnent had not raised tariffssufficiently to offset the high rates of inflation, thereby preventing the nationalutilities from earning the covenanted rate of return. The fact of poor financialperformance placed the Bank in an awkward position: either declare the loanto be effective and then immediately take action (waiver or suspension) due tonon-compliance; or cancel the loan. The Bank chose to be forebearing due tocountry and project considerations3 0, and, as a first step, obtained (in 1980)Government agreement to amend the loan documents prior to effectiveness inorder to explicitly accept the principles of:

(a) basing tariffs on average long-run marginal costs;(b) accruing to the power sector total customer payments; and(c) allocating sector revenues to ensure that individual power

companies had satisfactory finances.

4.8 In November 1982, the Bank, after stipulating two new revenuecovenants, declared the loan agreement to be effective. The first covenant hadtwo parts:

(a) a general commitment from the Government to follow a rate-setting policy, which would reflect average long-run marginalcosts for the systems of SEGBA and AyEE; and

(b) a one-time tariff adjustment (6.3 % above the levels prevailing asof April 30, 1981) to permit accomplishment of this policy. Thisincrease would be maintained in real terms through an indexationscheme to reflect changes in costs.

30. WB: Back-l-Office (BTO) Remor, datd August 5, 1990: "... The consequences of .. [cancellation]ame, serious and obvious ... for Argentina .... the pmject, and ... mieations between the Bank andArgentina ... '

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The second covenant provided that the tariffs of SEGBA and AyEE wouldinclude amounts previously collected as taxes for provincial governments.Tariffs of the other companies would continue to be set to earn an 8% rate ofreturn on revalued net fixed assets. In so doing, the Bank made a concessionto assist Argentina.3'

4.9 After the declaration of effectiveness, procurement problems caused theproject to languish. While the pre-qualification exercise for the civil workscontract proceeded well-five contractors were pre-qualified on the basis of thereport made by the consultants-thereafter, the Bank and the Government/EBYdisputed the award of the civil works contract. The dispute began in late 1980when EBY convinced the consultants to change their stance and support theaward of the contract to a bidder (Bidder A for the purpose of this discussion)who was not the lowest evaluated bidder in the Bank's view, on the basis thatbidder B's bid (lowest evaluated bidder in the Bank's view) was unresponsiveon some aspects of the bidding documents and its knowledge of the local scenewas virtually nil. The Bank disagreed, and so advised EBY, at the same timeoffering it the opportunity of re-bidding the works.32 In the meantime BiddersA and B got together and proposed a joint venture which was accepted by EBYand in turn by the Bank with the provision that the award be made at the priceof Bidder B the lowest evaluated bidder. EBY signed a contract with the jointventure in October 1983, three years after the bids were received.

4.10 Unusual circumstances caused the extraordinary length of this delay.Because of the atypical reversal of the engineering consultants' awardrecommendation, the large amounts involved in the pending contract, and theconsiderable attention attached to the project, the Bank convened a special panelto investigate the circumstances. This group, chaired by an independentprocurement expert, held hearings over a considerable period of time. Amongothers, it examined intensively the weights that EBY had applied in evaluatingBidder B's proposal, which served as the basis for preventing this firm of beingranked first. Moreover, the fact that the two bidders were internationallyknown consortia with considerable competitive proficiency exacerbated theprocess. So too did the disruption in Argentina midway through this process.The South Atlantic hostilities and the attendant political instability that ended themilitary regime caused substantial delays in arriving at a solution with theArgentine authorities, which incidentally also needed to be agreed to by theGovermnent of Paraguay and the IDB.

4. 11 EBY's contract award recommendations for electro-mechanical andhydro-mechanical equipment, cranes, gates, stoplogs, navigator lock equipmentand plant sub-station equipment, although not financed by the Bank loan, were

31. Idem., Memorandum to Executive Directors from the President, dated June 22, 1981 (R81-183), p. 3,para. 6: "...1 am satisfied that the amendments will ensure the financial viability of individual powercompanies and a sound financirg plan for the Yacyreta project ... [and] that the financial situation ofArgentina's electricity sector has improved sufficiendy to declare the YacyretA loan effective....

32. Letter of March 3, 1982 from LACVP to EBY.

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reviewed and found acceptable by the Bank. For the last 10 of the 20 maingenerators, agreement in principle has been reached with the supplier, but theterms and conditions of the credit were fully negotiated only in 1993. Theconstruction of the transmission system to connect Yacyreta to the Argentinegrid, which was not EBY's responsibility, was followed up by the Bank initiallywith AyEE and, upon privatization of the national utilities, directly with the SE.Construction and operation of the first phase of the system was entrusted to aprivate concessionaire and its implementation is on schedule.

4.12 The contract for engineering services was awarded in accordance withBank guidelines for the use of consultants.

4.13 Project Reassessment. In 1984, EBY and the Government, afterevaluating possible options regarding the project, including cessation of works,decided to continue with the project because it was still considered to be theminimum cost solution for system expansion. Moving at a slow pace, work onthe project actually commenced in the first quarter of 1984.

4.14 Financing Problems. For the period 1984-1991, in addition to politicalchange, economic stagnation, and inflation, chronic project financing problemsdelayed the project. Foreign lenders took a cautious attitude toward Argentina;the Government experienced extreme budgetary stress, and sector financialperformance deteriorated (paras. 4.17-4.21). Due to excessively long periodsof non-payment, the contractor threatened to suspend construction several timesbut in fact proceeded with the major civil works, albeit at a slower pace thanwould have prevailed if lack of financing had not been a problem.

4.15 Design Changes and Reprogramming. In January 1986, EBY adopteddesign changes which produced an estimated savings of US$175 million. Thechanges were: deletion of some provisions for future expansion (US$50 million),replacement of fish stairs by fish-lifting machinery (US$25 million), andchanges in housing standards and investments in camps and land acquisition(US$100 million). By mid-1986, EBY, under new and qualified management,negotiated with the contractor a rescheduling of works consistent with the designchanges. Later, there were changes with respect to the design of protectionworks, but these were not major. One important change with respect to Loan1761-AR appraisal was the extension of the Phase III implementation period(para. 3.10). Loan 2998-AR appraisal considered that some two more yearswould be required for completion of Phase III. Such a pace was deemed morecompatible with EBY's managerial and financial possibilities. By April 1988,execution of the main civil works was 40% completed. In late 1990, as a wayto overcome financial difficulties, a phased approach was devised for filling thereservoir: by beginning initial generating operations with a reservoir levellowered to 76 m rather than at 83 m 33, as planned, it would be possible todefer construction of major resettlement and relocation works. Later, after thelevels of revenue and net internal cash generation of Yacyreta were sufficient

33. Refers to the Posadas/Encamaci6narea.

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to construct these works, the reservoir level would be progressively raised to 83m. By March 1992, about 80% of the main civil works were completed.During preparation of Loan 3520-AR, detailed analysis of the relocation costsat incremental reservoir levels and reduced-model turbine testing allowed thecompletion of a three-stage plan for reservoir filling. There were no delayscaused by technical problems.

4.16 EBY Management. Since 1978, there have been several projectmanagers at EBY, especially for the top position appointed by the ArgentineGovernment (Executive Director). The Paraguayans have treated the nextmanagement position, assigned to them by the Treaty (Director, and the othermember of the Executive Committee, with the Executive Director) moreseriously: only four appointments to date (one forced by death of theincumbent), all capable engineers. Because political considerations played amajor part in their selection, some managers did not possess the necessaryqualifications. In the mid 1980s, qualified management prevailed; in the late1980s, however, the quality of management proved to be sub-standard.

4.17 Loan 1761-AR: Amended Revenue Covenants & FinancialPerformance. During the years 1982-1985, "the Government made numeroustariff increases which were substantially eroded by increasingly acute inflation.Consequently, tariff levels proved insufficient to produce positive rates ofreturn."34 In circumstances of high inflation and political uncertainty, thefinancial performance of the national utilities and the sector as a wholedeteriorated severely. "3 Due to inadequate tariff levels, the nationalcompanies, as a group, generated negative operating income;36 the same wastrue with respect to the sector. Between 1982 and 1985, annual sector ratios ofdebt service coverage were 0.36, 0.18, 0.48 and negative; and each of theannual contribution-to-expansion ratios was negative (Part III, Table 6). "3

4.18 Not only were tariff levels inadequate, but financial discipline wasdeteriorating on a sector-wide basis. Customers did not pay the powercompanies on a timely basis, nor did the power companies pay each other ontimne. Furthermore, the power companies, being strapped for cash, wereholding back a portion of the energy taxes which they were supposed to transfer

34. Idem., Memorandum to the Executive Directors fmm the President (SecM86-967), dated August 15,1986, p. 1, para. 5.

35. Idem., SuDervision Reort (SR), dated June 28, 1983, Annex 8. p. 1, pam. 1; Bank letter,dated October 2. 1984.

36. For the years 1982-1985, HIDRONOR genemted rmtes of retum below I %; and SEGBA and AyEEgenetated negative net opemting income. CNEA and CTMSG did not prvide comprehensive financialinibrnation on their opertions; they report to, respectively, the Presidency and the Ministry of ForeignAffairs.

37. For the longer period 1978-1985, sted in consbnt 1977 prices, total sector requirements (US$5.0billion) were almost 58 % less than expected (US$11.9 billion). Net secaDral funding amounted to onlyUS$366 million, almost 95 % less than expected (USS7.1 billion); borrowing amounted to US$3.5 billion,almost 15% less than expected; and all other sources amounted to US$1.1 billion, 98% above forecastlevels.

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to the SE.38 Poor payment discipline was becoming a sector-wide financingbottleneck.39

4.19 In such circumstances, the Bank faced the options of suspendingdisbursements, granting a waiver of the revenue covenants, or renegotiating thecovenants. Given its agreement on the least-cost nature of Yacyreta and takinga sympathetic attitude toward the newly elected civilian administration ofPresident Alfonsin,40 the Bank undertook discussions with the Government in1985-86 to redefine "...a more appropriate [financial] strategy for thesector."4 ' These in turn led to another re-evaluation of the project and anaffirmation of the decision to proceed with the project on the basis that it wasthe least-cost solution at discount rates of up to 30% for an expected marketgrowth of 5.0% - 5.8% (1985-2000).42 Negotiations for an AmendingAgreement were completed in March 1986; the Amending Agreement wassigned on October 31, 1986 and became effective on November 18, 1986. Theamended financial covenants provided:

(a) programs to reduce losses and improve collections of receivablesand energy taxes;

(b) measures to raise and maintain power tariffs and other energyprices to reflect economic costs; and

(c) action programs to achieve (a) and (b).

The Government was covenanted also to review sector finances annually withthe Bank and revise them as required.

4.20 The action program required the submission of satisfactory programs forloss reduction and improved collections by October 31, 1986. For tariffs, theaction program consisted of short-term tariff increases for the individualcompanies, followed by dated target rates of return to be met over theintermediate term. For example, with respect to SEGBA, the Governmentwould:

(a) increase tariffs by up to 12% in five steps by April 1, 1987 overthe levels prevailing as of January 1, 1986; and

38. In Argentina, in addition to internal funds genertion and borrwings, the power secior was principallyfinanced by taxes on the sale of electricity and other forms of energy, which were returned to the secloras equity contributions to help finance investment. In 1985, it was estinated that tr nsfers by the powercompanies of such taxes to the SE, which adminisreed various Energy Funds, were only 50% of theirnominal level due to late pyments by customers to the power companies and only partial payment ofsuch tax receipa by the power companies to the SE.

39. WB: B, dated December 16, 1985, Form 590, Section 1I, pam. 3.

40. Ibid.

41. Idem., Memorardum to the Executive Directors frm the President (SecM86-967), dated August 15,1986, p. 2, pam 5.

42. For the longer period ..... Idem. Pmiect Brief, Yacyreti 11 daed Nov. 14, 1986, p.7, pam 3.04

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(b) take all measures required to provide rates of return rising from0.5% in 1986 to 8% in 1992.

In the case of AyEE, the rate-of-return approach was substantially deferred.AyEE's financial performance was to be measured by gradually improvingoperating ratios for the years 1986-1990; thereafter, it would be measured bya rate of return rising from 1 % in 1991 to 4% in 1994. There would also bea study of the long-run marginal costs of supply (completion date: March 31,1987). The study would serve as a future reference point for the level andstructure of tariffs. By not applying available remedies, in response to poorfinancial performance and by agreeing to a relaxation of financial targets, theBank made another concession to Argentina.

4.21 Because the Government, under the conditions of high inflation, chosenot to raise tariffs as expected, the performance of the national power utilitiesunder the amended covenants in 1986-1987 was abysmal. In fact, actual ratesof return were well below those which had been covenanted: HIDRONOR,1986, 1.5% vs. 3.0%; 1987, 0.1% vs. 4.0%; SEGBA, 1986, -4.7% vs. 0.5%;1987, -13.7% vs. 2.0%. On the positive side, the actual annual cash operatingratios of AyEE (cash operating expenses as percentage of revenues) were belowthose which had been covenanted: 1986, 87% vs. 100%; and 1987, 92% vs.93%. The rate of return for the sector as a whole was -2.1% in 1986 and -4.5% in 1987. The SE did not provide comprehensive financial data on CNEAand CTMSG.

4.22 Loan 2998-AR: Revenue Covenants and Financial Performance. Inconnection with Loan 2998-AR, the Bank abandoned efforts to monitor CNEAand CTMSG, adopted a semi-sectoral approach (i.e., focusing on the combinedoperations of SEGBA, HIDRONOR and AyEE), and substituted combined targetannual cash operating ratios for target rates of return. Under the new financialcovenants, the Government was to cause the national utilities to maintainconsolidated cash operating ratios in the years 1988, 1989, and 1990 of nothigher than, respectively, 91%, 81%, and 79% and a contribution ratio ofinternally generated funds to investment of not less than 30%. Again, theGovernment did not comply with the new financial covenants. The actualoperating ratios were, respectively, 111%, 122%, and 109%. In 1991 and1992, the ratios were 121% and 118%. The contribution ratios were negative.Clearly, the Bank, taking into consideration the economic and political

circumstances of Argentina, continued to accommodate the Borrower.

4.23 During the past two decades, due to inadequate tariff levels, the sectorhas had to rely almost exclusively on external sources to finance expansion. Inthe 1970s, internal funding covered about 10% of sector investment needs; bythe late 1980s, this ratio was -7%. In the 1970s, the sector relied on externalcredit; in the 1980s, due to declining credit worthiness, the goverrnmentcontributions had to cover the financing gap. Substantial decreases in workingcapital basically resulted from short-term borrowing necessary to keep the sectoroperational.

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4.24 Compliance. Table 7, Part III, summarizes the compliance withcovenants of Loans 1761-AR and 2998-AR. In addition to already discussedrevenue covenants, there was no compliance with some covenanted technical andinstitutional targets either. The study on the Sector Expansion Plan (section3.04 of Loan 2998-AR) was found unsatisfactory by the Bank. By includingnew nuclear plants and not considering development of combined-cycle thermalplants, the Government departed from the least-cost principle. The SE hadconsidered that the gas reserves should be used for applications other thanmassive power development. The latter would, in fact, displace most of thehydro projects into the remote future. The SE also had reservations onconcentrating the bulk of the country's future generation on a technology whichit maintained had not been proven to their satisfaction. Since there was noimminent decision for starting the construction of new plants, the Bank kept agood dialogue on the unresolved issues with the SE, whose planning unit haddeveloped satisfactory computerized planning tools. Later on, the SE reachedagreement with the Bank on two proposed new projects: a small hydroelectricproject (Pichi-Picun-Leufu, 250 MW) which is currently under construction, anda 300 MW gas-fired thermal project, whose only (high-cost) bid received led tono-adjudication with the Bank's support. In fact, the Bank's agreement to apossible thermal plant addition had been conditioned to the offer of prices andtechnical/operating conditions which would justify an earlier commissioning ofsuch a plant with respect to its schedule in the expansion plan previouslydiscussed with the Bank. Recommendations of the tariff study, which wasreincorporated in Loan 2998-AR and then rescheduled, were not implementedas proposed. However, they provided a solid basis for the tariff changesimplemented in the second half of 1991 and early 1992, before the privatizationof the power sector took place.

4.25 Resettlement and Environment. During preparation of the Loan 1761-AR, the Bank accepted resettlement and environmental proposals developed bythe engineering consultant which were in some cases flawed. Since Bankpreparation/appraisal missions did not include resettlement and environmentalspecialists, the flaws were not detected in many cases. For example, a fishpassage facility was based upon the consultants' knowledge and experience withfish migrations on the Columbia River in North America, where, upon reachingupstream areas, the fish die immediately after spawning. In the case of theParana River, however, fish tend to return to the sea and, therefore, it wouldbe desirable that facilities permit passage downstream as well. This aspect wasnot considered. The magnitude of the problem cannot be assessed until fishbehavior in the reservoir is studied.

4.26 Due to delays in project execution, implementation of the environmentaland resettlement programs did not materialize under Loan 1761-AR. Duringpreparation of 2998-AR, the Bank provided an expert to assist EBY inreformulating the environmental program. EBY and the Bank then agreed ona series of environmental/resettlement actions. At this point the environmentalprogram was considerably strengthened. It was recognized that the projectwould result in: flooding the habitat of several rare animal species; increasing

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the risk of vector-borne disease such as malaria; trapping liquid wastedischarges near urban areas; and inundating potentially important archeologicalsites. The SAR, Electric Power Sector, Annex 3.1.4., described the proposedmeasures for protection of water quality, aquatic fauna, animal rescue, reservoirclearing and protection of public health.

4.27 In contrast, resettlement planning under Loan 2998-AR did not improvedramatically. While it was recognized that new surveys were required duringimplementation, little attention was given to resettlement policies that laterproved to be unworkable. For example, arrangements for the affected ruralpopulation were not specified in the loan documents. EBY asserted that wherenecessary the rural population could simply move their homes up the slope ofthe reservoir. This proved not to be the case. Also, inappropriate resettlementarrangements were not examined. For example, the replacement houses wereextremely expensive (about US$ 28,000 per unit) and did not meet the needs forlow cost and low maintenance as required by low-income people.

4.28 Notwithstanding these shortcomings, the Master Plan provided theimpetus for strengthening the planning and implementation capacity of EBY.EBY created a properly-staffed Department of Resettlement and Environment(DRE) to implement the Master Plan.

4.29 Due to budgetary constraints, little progress was made in theimplementation of environmental measures such as the sanitation work for thecity of Posadas. The Master Plan for the city of Encarnaci6n did not reach thedetailed design stage as was envisioned.43 The Bank noted deterioration ofrelations between EBY and municipal governments due to the disparity inprogress between the civil works and the environmental protection works.

4.30 Actual implementation of resettlement operations commenced in 1987(planning for this segment of the operation began in 1984). The internationalbridge, linking Posadas and Encarnaci6n, required the resettlement of 1,700families (about 9,000 people) on the Argentina side, and was completed in 1989.Although it was not part of the financing, the Bank was concerned that theresettlement program was not going well. Consultants skilled in urban planningand sociology were retained by the Bank to strengthen supervision during 1990with the objective of drawing lessons from the bridge resettlement experienceand improving resettlement planning for the expected reservoir inundation."The resettled families expressed satisfaction with the quality of housing, butdissatisfaction with their inability to pay their subsidized mortgages (whichrequire payment of only 35 % of the housing cost), the legal fees to obtain titles

43. idem, SR, daWd Octuber 30, 1989.

44. Brombeig, P., 1990. 'Plan de Acci6n v Pmarania de Medio Ambient. Relocalizaciones v DesarmiloSocial - Centml Yawcvei' (Cuatmo 'Tbmos); Scombant. M., 1990. 'Erndicaci6n v Relocalizaciones deVwviendts: Cental Yacveti: Infone Parcial' Scombatti, M., 1990. 'Missto de Asistencia Tbcnica namRevisao do Piano de Remandiamenb de Povulacao c Medio Ambienle - Cental Yacvreta: InformeFinal."

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to new property, and maintenance costs. These problems were particularlyacute for the very poor. Based on these results, EBY proposed revisions to theresettlement plan.45

4.31 During 1990, the Bank also retained consultants to review majorenvironmental aspects of the project, which were consolidated in an Action Planalso covering Resettlement and Social Development.46 It is important to notethat this work was the basis for a detailed Resettlement and Environmental Plan,subsequently covenanted under Loan 3520-AR.

5. Project Results

5.1 Market Developments, Internal Rate of Return and Least-CostExpansion Plan. In connection with Loan 1761-AR, the Bank accepted the SEforecast of market growth, which eventually proved unfounded, for instead ofthe expected growth rate of 8.0%-9.9% p.a. during the 1980s, the actual growthrate was 2.1 % (Part III, Table 3). If, at appraisal (1978), sector authoritieshad been able to foresee the low level of market growth which latermaterialized, YacyretA would possibly have been replaced by smaller-sizedprojects. With the advantage of hindsight, it can be argued that the delays inYacyreta's commissioning, combined with the advent of combined cycletechnology, and the increased availability of natural gas, would furtherdepreciate Yacyreta's selection as part of a least-cost generation expansion plan.For the ten years beginning with the late 1980s, the annual growth rate forecastin connection with Loan 2998-AR was about 6.1% p.a. This growth rate maymaterialize, but the starting level for 1988 sales was lower than expected,reflecting the impact of prior events in a stagnant economy, combined withhyperinflation, major political upheaval, and ineffective monetary and fiscalpolicies. Given, however, further delays in Yacyreta's completion and therecent recovery of the Argentine economy, Yacyreta's power production will befully absorbed by the market as it becomes available.

5.2 Due to the unusually long investment period (24 years) and costoverruns, the internal rate of return, based on actual and forecast data, isestimated at about 5.5%, well below the estimated IRR in the first appraisal,14%, and the reference opportunity cost of capital (OCC), 12% (Part III, Tables8 and 9). This is based on a tariff of USC4.0/kWh at the 1994 price level,which is the prevailing average short and long-term marginal cost inArgentina.47 Conversely, an OCC at the reasonable level of 10% would yieldan economic cost of generation as high as USC9.5/kWh. The tariff for

45. Entidad Binacional Yacyreti Deparnmento de Relocalizaciones y Medio Ambient. 1991. 'Infonme alBanco Mundial Sobre Plan de Relocalizaciones".

46. Op cit., Brombe,g. 1990.

47. USc4.4/kWh at the supply point to distributDrs; transmission costs for Yacyreta make up for thedifference. In 1992, Puerto and Costanera, two thermal generation utilities in the Buenos Aires area,signed eight-year supply contracts with the distribution utilities, EDENOR and EDESUR, which arecurmndy at USC4.2/kWh.

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Yacyreta's sales according to the 1992 Treaty amendment will be US¢3.3/kWhat year's end. At this tariff, the IRR would be 4.5% (Part III, Table 9). Thehigh IRR's which resulted in the two last loan appraisals (18.6% in 1988 and24.1 % in 1992), was because sunk costs were (correctly) considered and can begauged by the corresponding economic generation costs (tariffs): the higher theIRR, the lower the generating cost. Using the updated cost stream and forOCCs in the range 10-12%, the generating costs would be USC1.4-1.6/kWh andUSC3.0-3.8 for sunk costs until 1991 and 1987 respectively. Even for the caseof sunk costs until 1987, these generation costs still compare favorably with themarginal costs. The Loan 1761-AR appraisal indicated an IRR of 14%predicated on a tariff of USC1.6/kWh at the December 1977 price level. It isironic that this tariff inflated to December 1994 would equal the actual tariffagreed by both countries for the beginning of operations, on the basis ofcompletely different considerations, the most important being the desire of theArgentine Government to have a tariff below the expected price in their spot-market that could still enable EBY to pay its debt during the first twenty yearsor so of the project operation.

5.3 Resettlement and Environment. The agreed Master Plan under Loan2998-AR was perceived as the most constructive approach for assisting EBY indealing with the potentially negative social and environmental consequences ofthe dam and reservoir. However, at appraisal many important decisions werestill awaiting completion of planning studies. This was especially true of theresettlement operations, which were not adequately encompassed in a detailedresettlement plan. A new census of the inundation area was conducted in1989-1990, which indicated that about half of the original families had left thearea on their own, but an even greater number had moved into the area themajority of whom lacked title to the lands and structures they occupied.Because of the delay in project execution and the phased approach to reservoirfilling (para. 4.15) sufficient time became available to eventually devise awell-formulated resettlement plan in the subsequent loan, in accordance with themore stringent Bank policies at that time.

5.4 Bank supervision missions in 1989 also included a visit by a specialistin indigenous development to the resettlement area set aside for them. It wasreported that the Mbya (who had left Yacyreta Island in 1987 on account of thedam and later returned to a 370ha preserve set aside for them at the Bank'surging) expressed satisfaction with the area, and, in particular, the fact that forthe first time in memory they have legal title to lands upon which theydepend. 4 8

5.5 Environmental protection works also lagged considerably behind. Thedetailed design work for drinking water and sewerage systems for Posadas andEncarnaci6n did not take place, nor did the coastal protection design workconsidered by local governments to be essential to the viability of the two citieswhen the future reservoir is filled at maximum elevation. Protected flora and

48. WB:B'IO Report, dated March 17, 1989.

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fauna reserves were not created beyond a small 100 ha plot suitable forreplicating only a fraction of affected habitats. Had the power plant beencompleted on time, it is likely that outstanding issues would have had to beconfronted and resolved. Instead, the continuing delays in civil worksconstruction and change in the filling of the reservoir as originally plannedremoved much of the urgency to collect missing data, conduct critical designstudies and take important decisions needed to advance with the environmentalprotection program. As in the case of the resettlement program, theenvironmental protection program was rescheduled and detailed under Loan3520-AR in order to match the updated power plant completion schedule and thephased reservoir filling; this was done meeting all the objectives of the originalMaster Plan.

5.6 Sector Financial Rehabilitation. The Government, overwhelmed by theproblems of hyperinflation, did not comply with the revenue covenants of Loan2998-AR. The sector feature of this operation was no more successful inrestoring sector financing than the financial covenants of Loan 1761-AR.

5.7 Sector Restructuring. Loan 2998-AR's technical assistance componentpermitted strengthening of the SE from 1989 to 1991, through financing of shortand long-term consultants. This not only facilitated the performance of someregular responsibilities of the SE, but also the carrying out of studies anddiscussions aimed at the survey of existing legislation and key organizationalaspects, to be followed by proposals for sector restructuring. The sweepingdecisions taken from mid-1991 that transformed the sector in a dramatic wayduring the following two years, were nurtured by the above-mentioned effortsmade under the auspices of Loan 2998-AR.

Project Sustainability.

6.1 Yacyreta's sustainability can be assessed in two stages: (a)Implementation process and completion of the project; and (b) Long-termoperation of the fully completed project.

6.2 Implementation process and completion of the project. The prospectsfor sustainability in implementing the project are favorable. Three main areasneed to be successfully completed: (a) main civil works and installation of thegeneration equipment; (b) transmission system; and (c) reservoir operation atthe ultimate design level (83 m) for full generation.

6.3 Completion of the first two areas should likely take place on schedulesince the works to be completed have been progressing well. The main civilworks and electromechanical supply and assembly are proceeding withoutproblems, and the concession of the transmission system is also proceedingwith the first phase of the system constructed ahead of schedule. 49

49. Yacyreta initiated electricity generation on September 1, 1994.

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6.4 Operation of the reservoir at full height is a key factor for the projectfinances since the average generation increases from 11,880 GWh to 18,770 peryear, when the reservoir rises from 78m to 83m. Such rise requires completionof the Resettlement and Environmental Management Program (REMP)established under Loan 3520-AR. Despite its satisfactory execution so far, thecomplexity of the REMP, especially of the resettlement operations, could readilycause some slippage in the June 1998 target for raising the reservoir from 78mto 83m. Also important under the environmental protection program are theworks for coastal treatment and the improvement of the sewerage systems inPosadas and Encarnaci6n. Slippages reasonably limited to one to two yearsshould not affect the financial grounds for project sustainability.

6.5 The two national Governments and local authorities have demonstrateda serious commitment to effectively implementing the REMP. Additionalconfidence is provided by new funding for the completion of the program:US$63.7 million, out of US$137.6 million reassigned from Loan 2854-AR(SEGBA V), and US$98.8 million, out of a US$130 million IDB loan. Also,a Loan 3520-AR Agreement provision for an Environmental Trust Fund, to beformed with revenues from Yacyreta's electricity sales, enhances the financingof the REMP activities.

6.6 Long-term operation of the fully completed project. The projectshould be sustainable, given the sound financial condition expected for EBY.The revenues resulting from electricity sales would guarantee the generation ofpositive cash flows and repayment of all debt by the year 2011.5° In fact,given the current balance of energy demand and supply, and its estimatedevolution during the next five years, all energy produced by Yacyreta isexpected to be absorbed by the market. Additionally, the tariff level requiredfor financial self-sufficiency, including escalation adjustments, was agreed byArgentina and Paraguay in 1992.

6.7 Prospects for project sustainability after completion would be enhancedby private sector participation in Yacyreti. Options are now being consideredby EBY and the two Governments.5 1

6.8 Finally, the full generation of Yacyreta should not be affected bysedimentation in the reservoir. In this connection, sedimentation studies andformulation of control strategies are being developed by EBY with Bank'sfinancing.

50. WB: Staff ADDraisal Report: YacvretA Hydroelectric Proiect II (Report No. 10696-AR), dated August 31, 1992, Annex 2.6. This date could extend due to delays in the REMPcompletion.

51. The firm Morgan Grenfell presented a study regarding private capital participationin EBY in December 1993.

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7. Bank PerformanceAppraisal

7.1 At the appraisal of Loan 1761, the Bank foresaw the likelihood of projectdelays and cost overruns because of possible difficulties in mobilizing sufficientfinancial resources, which it correctly viewed as the major project risk.Similarly, it anticipated that problems would ensue from EBY's internalmanagement strains, especially in dealing with procurement and environmentalconcerns. It failed, however, to secure adequate safeguards to deal with these.In addition, concerning environmental problems encountered in projectexecution, many of these would have been avoided had current World Bankpolicies and staff expertise existed at appraisal. This is demonstrated by the factthat, by the time Loan 2998 was developed, a time-bound Action Plan wasagreed for implementation of the Master Plan and made part of the legaldocuments. It should be noted nonetheless that these measures did not properlyexamine important resettlement/relocation policies related to the provision ofreplacement housing for affected rural and urban populations.

7.2 The project was the first attempt by the Bank to address the moreimportant sector issues: fragmented organization, weak financial situation of theimplementing agencies, and wrong investment decisions. In retrospect, Loans1761-AR and 2998-AR may not have been an appropriate channel to introducereforms in these areas, as they went beyond the scope of the project. First, asthe project is a bi-national undertaking, the enforcement of Bank covenantsentailed undertakings and compliance by two different countries. Second, Loan1761-AR did not take into adequate account the fragility of the ArgentineGovernment's sector decision-making processes, which bore the weight ofconditionality. (This was, however, partly remedied by the new approach takenunder the second loan (2998-AR) which had a strong sectoral focus, underliningorganizational and institutional issues.)

7.3 Concerning assumptions, Bank staff never conceived that circumstancessurrounding the project might change as drastically as they did. Of criticalimportance were the forecasts of annual growth rates in the 1980's for theeconomy (3%-5%) and for electricity demand (8.0%-9.9%). These forecastswere central to the justification of Yacyreta as part of a least-cost generationexpansion sequence; they were central to the success of the original financingplans for the sector and the project. If, at appraisal (1978), sector authoritieshad been able to foresee political, macroeconomic, and market events as theylater materialized, they would not have justified the project on the grounds thatit was part of a least-cost generation expansion sequence for the 1980s (para5.1). Moreover, the absence of such a justification would have contributed toa sense of skepticism about arranging a credible financing plan.

7.4 For Loan 2998-AR, the Bank accepted a forecast of annual growth forelectricity of 6%, partly based on the strong historic consumption levels.Events have not yet confirmed this forecast, even though recent high growth

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rates are tending to offset the smaller market increases in the period of hyper-inflation and initial macro-economic stabilization. Under Loan 3520-AR, theBank has confirmed the previous basic projection (high projection at 6.6% andlow projection at 5.4%). The Bank has frequently taken its decisions favoringa more optimistic forecast rather than a pessimistic one, which is understandablewithin reasonable limits, given that the cost of rationing is one order ofmagnitude higher than the cost of oversupply. However acceptable in Loan2998-AR, the forecast in Loan 1761-AR proved to be a bad judgment, given theuneven performance of the economy in the mid-1970s and the high level ofelectrification in Argentina (80%).

Implementation

7.5 Suspension of Disbursements. Due to country and projectconsiderations, the Bank did not threaten to suspend disbursements under eitherloan in response to non-compliance by the Government with prevailing revenuecovenants. The Bank's forbearance did not result, however, in improvedcompliance with the financial covenants of the loan agreements. Loan 2998-ARhad, however, a built-in mechanism which limited disbursements to US$170million (57% of the Loan) unless the Bank was satisfied with the execution ofthe FRP. The Bank in fact used this mechanism to obtain tariff increases andenforce generation expansion decisions under least-cost principles.

7.6 Progress Reports. These are submitted by the Beneficiary semiannuallyfor the hydro-electric plant and quarterly for the resettlement and environmentalprogram. During critical phases of the construction or program, the Bankshould also receive key information much more frequently (perhaps monthly)and in a simplified format (e.g. a short fax with major problems andaccomplishments). Such a scheme was successfully implemented in Loan 3520-AR.

7.7 Financing by Others. Inadequate financing by export credits, foreigncommercial banks, and suppliers' credits has hindered progress and increaseduncertainty. Files reveal that eight months after the award of the main civilworks contract, valued at US$1.5 billion, the Bank asked EBY about the detailsof the 62% foreign exchange cost financing, not covered by the Bank and IDBloans. This seems to be a risky fashion to enter into a major internationalundertaking. The files contain repeated warnings that "other financing" has notbeen secured, but the Bank failed to take decisive action.

7.8 Consultant and Contractor. As pointed out in paragraphs 9.1 and 9.5,the consultants and the contractor are conglomerations of 12 and 32 firms,representing four and five nationalities, respectively. Although supervisionreports do not reveal any inefficiencies created by the unusually large numberof firms involved-thanks to the strong leadership provided by the two leadfirms in each case-the Bank should not as a rule accept such a largefragmentation of the work unless the lesser firms function strictly assubcontractors to the lead firms. The desire of the Argentine and Paraguayan

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Governments to use the opportunity of high-level international work to improvethe quality and credentials of local firms was the reason behind the initiallylarge number of participants. As work progressed and financial difficultiesarose, many smaller firms sold their participation to the leading firms.

7.9 Resettlement and Environment. In connection with Loan 1761-AR,Bank performance was hindered by the lack of properly trained staff inresettlement and environment protection, but it improved significantly betweenthe first and second loans for the project in the latter area. With regard to Loan2998-AR, Bank preparation, appraisal and supervision missions includedenvironmental experts. A time-bound Action Plan was agreed forimplementation of the Master Plan and made part of the legal documents for thesecond loan. The environmental components of the plan addressed all majorenvironmental impact issues with suitably designed mitigation and protectionmeasures. No need for major changes in the agreed Action Plan wasencountered during supervision.

7.10 Regarding resettlement, however, Bank performance did not significantlyimprove between the first and second loans. Although there was a basicresettlement plan at the time of appraisal of the second loan, the Bank did notanalyze it critically enough in the light of major social concerns or Bankpolicies. Suitable resettlement expertise was not utilized to assist the borrowerto design and plan the execution of the operation, in the same level of detail andquality as other components of the project. Instead, the Bank and the borroweragreed in the first loan that the resettlement plan would be completed one yearlater, at a point in time when the Bank's leverage would be considerablyreduced. One result was that design flaws in the resettlement plan for the firstloan persisted during preparation and appraisal of the second loan. The Bankemployed qualified resettlement experts only when difficulties were encounteredin completing the detailed resettlement planning work. The experts failed tomake the necessary design corrections in the resettlement plan because theresettlement operation was already launched at the time the experts were broughtin, and policy changes necessary to achieve success could not be made. Withthe benefit of hindsight, the Bank should have prevailed on EBY to: (a) acquireland and the related titles more speedily; (b) adopt housing design and standardswith manageable construction costs; and (c) take full responsibility for affectedresidents' facilities that were lost, displaced or destroyed.

8. Borrower/Beneficiary Performance

8.1 Procurement. Initially, the consultant recommended one contractoras the lowest evaluated bidder; EBY sent the bid evaluation to the Bank,favoring award to another contractor (paras. 4.9 and 4.10). The Bank's ownevaluation concurred with the consultant's initial recommendation and thiscreated an impasse that lasted for almost three years, with the Bank finallyagreeing to award the contract to a joint venture of the two lowest evaluatedbidders.

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8.2 EBY's Project Management. EBY top management was replaced manytimes. In some cases, the new managers did not have the required experience,having been appointed for political reasons. Initially, management and staffingof EBY were weak. There was a lack of technical competence anddecision-making was very slow. The Bank expressed doubts about thecapability of the staff to carry out such a large project. The staff grew almostuncontrollably and, as a result, many had very little to do.

8.3 In 1985, the Government appointed new management with instructionsto carry out an in-depth review of the project, seeking its optimization. Theproject design was changed, contracts were renegotiated with contractors,engineers and suppliers and the schedule was modified to adapt to EBY's morecompatible management and financial capacities, which in turn fit well the new,updated demand projections. As a result, some important reductions in costswere achieved.

8.4 During the first and second loan periods EBY defined the resettlementand environmental protection works as ancillary to the construction of the civilworks. This reflects most clearly the absence of qualified and experiencedmanagers in EBY to administer the design and implementation of resettlementand environmental protection programs. Within EBY's management, there wasno professional with proper qualifications and experience in resettlement andenvironmental protection during the first and second loan periods. While alarge department to implement these programs was created, policy decisionswere taken at the managerial level without benefit of professional advice andguidance. Resettlement, in particular, was seen by top management simply asa housing construction endeavor. Although the technical staff appointed to theDepartment of Resettlement and Environment were well qualified professionals,they were powerless to influence policy decisions made by management.

8.5 This did not prove to be a major obstacle to get results in the case ofenvironmental protection probably because the policy and design decisions werereviewed during preparation and appraisal of the second loan by a Bank expertin the subject, and also because major implementation of the program was nottaken up by EBY (and, in fact, not strictly required) in light of the slowprogress of the project. EBY weakness in resettlement performance, however,was not corrected by the Bank and the absence of influential resettlementexpertise in EBY resulted in failure to correct past errors. Professionalqualification and experience present in EBY were located too low in thehierarchy to influence the outcome.

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9. Consultant and Contractor Performance

Engineering Consultants

9.1 From pre-feasibility to design, preparation of bidding documents,supervision of contractors, etc., the consultants' performance has been ingeneral acceptable. They have provided and fielded some very qualified staff,and throughout the development of the project the consultants had control of alltechnical aspects of the work related to the safety of construction andappropriateness of temporary and permanent structures. The river diversion wascarefully planned and supervised; it resulted in a smooth and highly successfuloperation. They have in general maintained a satisfying working relationshipwith the client and the contractors. The consulting entity is a joint venture of12 firms representing four nationalities. Ordinarily, such a large number offirms would lead to an unacceptable fragmentation of the work; however, asupervision report of the Bank states that, due to the strong leadership providedby the two principal firms, this does not appear to have affected the consultants'performance.

9.2 With respect to the award of the main civil works contract (paras. 4.9and 4.10), the consultants permitted EBY to change their recommendation toaward the contract to a contractor who was not the lowest evaluated bidder. Thiscomplicated the award problem further, but, in the final analysis,it is doubtful that the consultants' change of stance affected the outcome.

9.3 Preparation of bidding documents and recommendations for awards forequipment have been well accepted by the client. More recently the handlingof the SF6 substation equipment and the computerized supervisory controlsystem has not been consistent with the previous client satisfaction. It seemedthat the consultant delayed the strengthening of its electro-mechanical area,which should have occurred before assembly of this equipment gainedmomentum. Given the history of stop-and-go of the project, perhaps theconsultant wanted to have higher assurance that finally there would be nosetbacks in the decision to proceed at full steam, before bringing qualifiedpeople to the project site.

9.4 The consulting entity provided some environmental expertise duringproject planning and design activities, particularly as regards the problem ofmigratory fish passage facilities. Unfortunately, it failed to base planning anddesign recommendations on empirical knowledge of the behavior of the fishspecies nor their habitat requirements. Instead, a design was imported fromanother country and recommended to the borrower. The results are stilluncertain, because there were subsequent design improvements (para. 4.25) andthe fish passages are not yet in full operation. What is clear is thatenvironmental design decisions such as this one were recommended withoutadequate primary data to ensure technically satisfactory performance. Theconsulting entity was not involved in the detailed planning and design work for

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resettlement. However, its concept for resettlement housing in the feasibilityphase of the project would only have been appropriate for major urban settings.

9.5 Board of Experts. In April 1983, a board of four consultants ofinternational renown on engineering aspects was appointed at the Bank's urging.Later, a panel of social and environmental experts was also appointed. Theseconsultants meet regularly and have provided valuable input to the project.

9.6 Contractor. The civil works contractor has performed well, so far.During the ten years since 1984, the contractor has maintained a presence at thesite in spite of the financial difficulties of the Government, which have resultedin EBY's going into arrears of up to a year or more in its payments to thecontractor. Currently, the percentage of completion of works is estimated at90%. No delays or major inconveniences resulting from the contractor'sperformance have been reported to date, even though the contractor is aconglomeration of 32 firms representing five nationalities.

10. Lessons Learned

i0. 1 Resettlement and Environment. One lesson concerns "ownership" ofthe resettlement and environment components. Throughout implementation, ithas been apparent that progress made was in large part due to the urging of theBank. Where the Bank failed to detect significant problems, the managementof EBY was ill-equipped to identify and solve them on its own. In future theBank should seek the appointment, at the policy making level of the projectentity, of a person(s) suitably qualified in resettlement and environmentalproblems.

10.2 In an effort to resolve resettlement and environmental problems, theBank and EBY cooperated from the outset in staffing EBY with suitablyqualified and experienced professionals to design and implement the relevantprograms. No effort was initially made to include the local and provincialgovernments of the affected people and localities in the identification, planningand implementation of the selected programs. (This was corrected in Loan 3520-AR.) Efforts should be made to continue strengthening the capacity of localgovernments to monitor compliance with environmental requirements andmanage any required operations once construction is completed.

10.3 Risk Assessment. During the original appraisal, the Bank correctlyidentified as a major risk the delays to project execution due to lack offinancing-the result of a possible deterioration of the economic situation ofArgentina, low tariffs, and a low level of foreign lending (para. 3.21). Havingidentified variations in economic and financial conditions as sources ofuncertainty and risk, the Bank tested the economic justification of the project byvarying its costs and those of other generation options, but did not test theeconomic soundness of the project in a manner which was consistent with theperception of risk. Sensitivity analysis on the rate of return varied costs orbenefits by 10% but this was really a test of the adequacy of consumer charges

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rather than a test of the economic soundness of the project (para. 3.7). Projectplanners did not anticipate the deterioration of the economy, of the powermarket, and of the financial position and capacity of Argentina; nor did theyanticipate that important implementation delays would materialize. In short,their assessment of the impact of varying conditions on the economic soundnessof a project of this size was incomplete.

10.4 Clearly, a lesson to be learned is that the economic analysis of a projectshould be expanded to include a variation of economic and financial scenarios,the breadth of which is consistent with the perception of risk (including a criticalevaluation of the credit standing and financing capacity of the borrower). Theleast-cost exercise should be broadened to include an appropriate variation ofload patterns, financial flows, and project costs, leading to the identification ofsolutions which apply under multiple scenarios. Project planners can not foreseethe full spectrum of events affecting the economic soundness of a project, butthey can broaden their analysis to reflect that fact of uncertainty.Correspondingly, the project agreements should include workable safeguards toaddress the perceived financial risks and thus minimize them.

10.5 Continued Project Support in Deteriorating Circumstances. TheGovernment's persistent failures to keep Yacyreta on track and to resolve thesector problems raise questions as to whether the Bank's continued support ofthe project was justified. This continuity was based initially on the view thatYacyreta, being the largest public investment activity, was the best vehicle forseeking to influence Government public finance and state enterprise reforms.In addition, the extended project support reflected the continuing belief thatYacyreta's completion (in place of other power sector alternatives) was not onlythe least-cost solution, but also had a scale commensurate with Argentina's long-term economic needs. Other factors included the difficulties of applying "stop-and-go" tactics on large, unitary civil works, EBY's heavy dependence on theBank for the project's survival, and the Argentina's subsequent emergency-typeaid requests for its ultimately successful public sector reforms.

10.6 At the same time, while reluctant to abandon Yacyreta, the Banktoughened its position several times to stimulate better Governmentperformance. It initially deferred the effectiveness of Loan 1761 until receiptof pledges of stricter sector financial management. Later, it delayed theprocessing of new loans for the sector, which it conditioned on major policyactions, and repeatedly pressed the economic team for stronger Governmentbacking. Unfortunately however, these measures netted only limited returns.On reflection, therefore, the principal conclusions are that:

(a) Support of a multi-year, lumpy civil works project was anineffectual tool for advancing sector policy and institutionalreforms, particularly because of country conditions after the late1970s. This approach proved to be unduly ambitious, eventhough it may have appeared to be necessary under thecircumstances.

- 38 -

(b) On the other hand, a sector loan (such as 2998-AR) whichincludes financing of a specific project may defeat the latterpurpose as non-compliance with agreed sector conditionalitieslikely results in interruption of disbursements for the project.Under both approaches, the project experience demonstrated thatit was infeasible to obtain the needed sector reforms while theGovernment had neither the political will nor the strength tocarry them out. A pure sector approach would have equally failedunder the circumstances.

(c) However the Bank's continued support of Yacyreta must also beseen in the light of the foreseeable benefits of added power andenergy, in addition to the opportunities it afforded forparticipating in the recent sweeping public sector changes. Hadthe Bank abandoned the project, it would have been in a weakerposition to actively influence such a sector reform.

10.7 Agenda for a future evaluation. The assumptions considered in thesection for Project Sustainability should be revisited, giving special attention tothe REMP component and the operation of the reservoir at the ultimate designlevel (83 m). In general terms, the evaluation of the REMP program should bequantitative, in terms of the compensatory areas assigned, water qualitymeasurements, and the number of people resettled; and qualitative, in terms ofthe quality in the implementation and the effectiveness of the program. A futureevaluation should verify whether there were a reduced number of environmentalmitigation issues to be considered when raising the reservoir level from 76 to78 m, as was foreseen in the REMP. The resettlement issues, also consideredin the program, should be reviewed in terms of effectiveness of the results, inparticular the participation of the community in the program and theimprovement in the living conditions of the people resettled. For theseevaluations, the project's independent monitoring program would be a goodsource of information.

10.8 Another issue of importance is the recalculation of the rate of return ofthe project and the comparison with the value calculated in the Loan 3520-AR(Yacyreta II) and the estimations made in the present report with and withoutsunk costs.

- 39 -

PART II. PROJECT REVIEWED FROM THE BORROWER'SPERSPECTIVE

The following is a translation of a fax from EBY sent June 29, 1994. Theconfirmation from the Secretariat of Energy, representing the Borrower, wassent September 8, 1994. The originals are available in the project file.

The Entidad Binacional Yacyreta (EBY) and the Secretariat of Energy(SE), as beneficiaries of the loan, prepared Part II of the Interim ProjectCompletion Report, based on information available in both entities.

EBY and SE also reviewed Part I and the Statistical Annex of this reportthat was sent to EBY and SE for comments. Several comments were madebased on the Aides-Memoire from the Bank's previous missions.

LOAN 1761-AR

The central objective of this loan was the financing of the YacyretaProject, which had three components:

(a) construction of the main work;(b) relocation of infrastructure works; and(c) resettlement.

The expected completion date was December 31, 1990.

Substantial delays occurred beginning at the initial stages. The signatureof the loan was on September 21, 1982. The effectiveness date was November18, 1982 and disbursements between November 18, 1982 and December 31,1985 amounted to only US$35.5 million of US$210 million.52

The disbursements advanced on a more regular basis after end-1986,when the loan agreement was renegotiated. During renegotiation, a review ofthe original amortization plan took place, and the closing date was extended toJune 30, 1988.

Even thought there were implementation delays, the objectives ofcomponent (a) were achieved. However, this was not true for components (b)and (c), given the erratic performance of EBY and the lack of strict supervisionfrom the Bank's side. The project thus lost credibility, which still remains aproblem for EBY.

In this loan, as well as loan 2998-AR, the components of Resettlementand Environment were considered secondary to the construction of the maincivil works.

52. These dats were corrected by the Bank since they were inaccumate in the Borrower's fax.

- 40 -

The electro-mechanical supply was delayed due to difficulties inobtaining the necessary funding from the Export Agencies. The civil works forinfrastructure and the resettlement program also caused a delay in the envisagedprogram due to the financing difficulties of the project. Since the civil workswere delayed, there was no clear work program for environmental and socialprograms.

The advance of the project normalized as EBY began to comply withproject covenants-after rescheduling of the civil works. The loan was thenrenegotiated and disbursements reactivated. The need for financing and thefunds available increased proportionally.

In 1988, the World Bank authorized a new loan for the YacyretiHydroelectric Project, after analyzing the financing structure and participationof the funds involved in financing.

LOAN 2998-AR

As per request of the Argentine Government, in 1988 the World Bankauthorized a new loan of US$252 million to finance three components:

(a) Financing program of Yacyreta for civil works and engineering;(b) Technical Assistance for the institutional strengthening of SE; and(c) Interest due on loans 1761-AR and 2998-AR.

Given that the loan was for the financing of investments and financialexpenses of the Yacyreta Project, a detailed analysis of investments, expensesand the financing plan was prepared for the whole construction period. Themain objective was to determine the differences between the planned andexecuted program.

Despite the profound economic and political crisis that the Republic ofArgentina went through, the project substantially advanced during the period1989-91, particularly in the main civil works, given the financial support of theWorld Bank and the IDB. However, in the manufacturing of the electro-mechanical equipment and in the areas of resettlement and environment, theprogram fell behind schedule due to difficulties with the disbursements ofexternal credits and the lack of counterpart funds from Argentina.

A. Year 1989

Main Civil Works

Among the achievements was the deviation and closing of the main armof the Parana River, which started on April 26, 1989 and was completed onJune 8, 1989. The closing impedes the navigation in the Parana river up to thenavigation floodgate.

- 41 -

However, no major improvement occurred for equipment andconstruction plants for the civil works.

Electro-mechanical Contracts

The development continued with some complications due to difficultieswith disbursements from export agencies of supplier countries, includingArgentina. This situation led to legal claims and delays from contractors.

Resettlement and Environment

Important delays occurred in the studies and development of projects andcivil works, again caused by lack of financial resources.

B. Year 1990

Important delays occurred in 1990 due to economic difficulties in thecountry as well as institutional changes in EBY.

The delays and contractual problems resulting from lack of financingwhich prompted the execution of a new study for reprogramming the civilworks, the electro-mechanical contracts, and the resettlement and environmentalprograms. The former program dated from 1985.

Also during this year, the study and implementation of the administrativereorganization of EBY began, and the disbursements of IDB Loan 585-OC/RGstarted and Loan 2998-AR from the World Bank continued.

Negotiations with the EXIMBANK also began, with the intention ofproducing an amendment to the current contract so as to disburse the funds ona regular basis, in particular for the provision of turbines.

Main Civil Works

The development of the works continued on all fronts, since this wasleast affected by lack of funds.

Resettlement and Enviromment

Given the financial constraints and the priority to assist the main work,programmed goals were not met. Nevertheless, the construction of resettlementhousing and service networks in the areas of Posadas and Encarnaci6ncontinued. The evaluation and programming for the Master Plan forEnvironmental Management also continued.

- 42 -

Administrative Reorganization

The reorganization of EBY took place for the purpose of reducingexpenses and optimizing the personnel complement. This process included avoluntary retirement plan, sale of real estate and vehicles, and reduction ofservices.

EBY initiated a feasibility study for the concessioning of services suchas telecommunications, water supply, sewage, electricity, and public relations.This process reduced by 60 people the number of personnel in theAdministrative Department of Yacyreti.

C Year 1991

During this year, changes in the Yacyreta took place in order toreactivate the project according to the new economic plan of the Governmentestablished in March 1991. The application of new policies allowed room torenegotiate undisbursed loans and the soliciting of new lines of credit, especiallyfrom the World Bank and the IDB.

The main objectives were to set firm dates for initiating power generationin 1994, to establish a policy for resettlement and environment, and toreorganize the participation of the private sector in the project.

To achieve these objectives, the collaboration of the Governments ofArgentina and Paraguay was necessary, which materialized with the signatureof diplomatic notes (Treaty Amendment) on January 1992.

It was possible to define a generation program starting at a reduced levelof 76 m, and a new schedule for the project, synchronizing the program forresettlement and environment with the main civil works.

Additionally, the tariff for electric generation was negotiated, making itcompatible with the financing needs of the project and the actual situation of theelectricity market in Argentina and Paraguay.

Main Civil Works

The Main Contractor presented the reprogramming of the works andmore favorable costing.

Electro-mechanical Contracts

The design, manufacturing, and assembling also progressed withfinancial difficulties, and the contracts were reprogrammed according to the newschedule for works.

- 43 -

The legal claims and delays of the contractors continued due to the lackof efficiency in the credit lines of EXIMBANK (USA), EDC (Canada), and theregulations of OPRAC (Argentina).

Resettlement and Enviromment

The financing restrictions obstructed the achievement of the programmedobjectives. However, the construction of the housing and service network forPosadas and Encarnaci6n continued. Some tasks in the environmental field, andthe civil works that accompanied the Main Work also continued, and a definitiveplan to synchronize them with the Main Works began.

Administrative Reorganization

The process of reorganization of EBY continued in an effort to reduceexpenses and use personnel more efficiently.

-44 -

PART m. STATISTICAL INFORMATION

Table 1: Related Bank Loans

Year of AmountLoan Title Approval (in US$ million) Status a/

L 308-AR SEGBA I Power 1962 95.0 D

L 525-AR SEGBA 1I Power 1968 55.0 D

L 577-AR El Choc6n Hydro Plant 1968 82.0 D

L 644-AR SEGBA 11 Power 1969 60.0 DDistribution

L 1330-AR SEGBA IV Power 1976 115.0 DDistribution

L 1761-AR YACYRETA Hydroelectric 1979 210.0 DPower

L 2751-AR Power Engineering 1986 14.0 D

L 2854-AR SEGBA V Power 1987 276.0 UDistribution

L 2998-AR Electric Power Sector 1988 252.0 D

L 3520-AR YACYRETA Hydroelectric 1992 300.0 UPower II

TOTAL 1,459.0

a] D: Disbursed: U: Under disbursemnent

- 45 -

Iable 2: Project Timetable

Loan 1761-ARTitle Date Planned Date Revised Date Actual/Expected

Identification August 1975

Preparation December 1977-April 1978

Appraisal Mission July 24, 1978

Negotiations March 5, 1979 May 4, 1979

Board Approval April 24, 1979 October 16, 1979

Loan Signature September 21, 1982

Loan Amendment June 22, 1981 _/October 31, 1986November 25, 1986

Loan Effectiveness February 6, 1980 May 6, 1980 b/ November 18, 1982November 6, 1980February 6, 1981May 6, 1981

Loan Amendment November 18, 1986Effectiveness

Loan Closing June 30, 1987 June 30, 1988 June 30, 1988

Expected Project December 1986 c/ dlCompletion to December 1990

l,oan 2998-AR

Title Date Planned Date Revised Date Actual/Expected

Preparation December 1987 December 1987

Appraisal Mission April 1988 May 1988

Negotiations August 1988 September 1988 September 1988

Board Approval September 15, 1988 September 1988 October 27, 1988

Loan Signature November 18, 1988 November 18, 1988

Loan Amendment March 23, 1990

Loan Effectiveness November 1988 December 6, 1988 December 6, 1988

Loan Closing June 1990 June 1991 June 1991

Expected Project February 1993 c/ to d/Completion September 1996

a/ In order to declare covenants by substituting tariff levels based on marginal Cost.

b/ Pbstponemenzs of Effectiveness Date relflect poor financial performance of the sector.c/ Installation of the first unit.d/ The current dates expected for project comnpletion are September 1994 (first unit) to June 1998 (last unit), as established

under loan 3520-AR (ayreta 11). Project Conpletion is progressing under schedule.

Source: Project Files

lible 3: GDP Levels & Public Service Consumption: Actual and Forecast

Real GDP a/ % Cong Over Actual b/ % Chlng Fore1ARt % Chhng Act. ChFg over % Chg Act. over

(19K ~~~~~~~E) ~~(1761-AR) % Cling over (Mar gh4ubn) (GWh) Prior Year (GWh) over Prior Year over Fomast) Prior year Forecast

1980 10,331 -- 29,453 -- 32,491 -- -9.4

1981 9,738 -5.7 29,117 -1.1 35,287 8.6 -17.5

1982 9,431 -3.1 29,666 1.9 39,142 10.9 -24.2

1983 9,783 3.7 31,546 6.3 42,185 7.8 -25.2

1984 9,962 1.8 33,093 4.9 45,480 7.8 -27.2

1985 9,303 -6.6 32,841 -1.4 49,275 8.3 -33.8

1986 9,984 7.3 35,640 9.2 53,364 8.3 -33.2

1987 10,242 2.6 38,396 7.7 57,795 8.3 -33.6 38,396

1988 10,049 -1.9 38,391 -0.0 62,589 8.3 -38.7 41,058 6.9 -6.5

1989 9,424 -6.2 36,160 -5.8 67,783 8.3 -46.7 43,813 6.7 -17.5

1990 9,430 0.1 36,397 0.7 73,409 8.3 -50.4 46,484 6.1 -21.7

1991 10,270 8.9 38,754 6.5 79,500 8.3 -51.3 49,552 6.6 -21.8

Growth Rates1980-1985 -2.07 2.10 8.66 NA

1985-1990 0.27 2.19 8.25 NA

1980-1990 -0.91 2.14 8.50 NA

a/ Sourne: Series maintained by WB based on data provided by CenLral Bank (I Peso= 10.000 Australes).

_/ Sourme: Staff Appis5al Report. Yyrehd 11, (Report No. 1096-AR). dated August 31. 1992. Anris 1.3, Atachnenr 1.

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Table 4: Appraisal Fbrecasts: Cost and Financing Plan(in current US$ millions)

1761-AR 2998-AR 3520-AR(1978) ./ (1988) (1992)

A. Project Cost 1978-1989 19754996 1975-198Direct Construction Costs 1,903.10 2,284.2 2,595.5

Preliminary works 116.2 336.0 337.4Operators' village -- 256.0 256.5

Civil works 1,786.9 1,445.2 1,619.5Arroyos protection works -- -- 118.2

Construction equipment -- 247.4 263.9

Generation & Electro-mechanical 726.8 770.4 1,089.9equipment

Generation equipment -- 510.0 583.6

Electro-mechanical equipment -- 260.4 506.3

Compensations, Land & Land rights 114.3 137.8 271.5Relocation, Resettlement & Environment 590.3 339.5 505.3Engineering and Administration 371.8 1,059.3 1,093.3

Total Project Cost 3,706.3 4,591.2 5,555.5

B. EBY Cash Financing Requirements 7,037.7 8,169.6 8,822.7Project Cost 3,706.3 4,591.2 5,555.5Interest (IDC & int. exp.) 1,646.2 2,395.1 2,490.5Amortization 1,610.5 1,429.1 1,303.6Net Clhng., working capital 74.7 -245.8 -526.9

C Sources of Financing 7,037.7 8,169.6 8,822.7Net Internal Cash Generation 1,884.3 1,678.9 1,390.8Equity Contributions 50.0 96.7 96.7Local Borrowings 2,910.4 3,468.7 4,225.8

Government/Energy Funds 2,610.4 3,284.2 4,144.0Banks 300.0 184.5 81.8

Development Banks 418.2 1,318.5 1,547.1IBRD 1761-AR 208.2 208.5 208.5IDB 346/OC-RG 210.0 210.0 210.0IBRD 2998-AR -- 250.0 250.0

IDB 355 & 583/OC-RG -- 250.0 499.6

IBRD 3520-AR - - 299.0

Future IBRD/IDB (potential loans) -- 400.0 80.0

Credits: Suppliers & Export 829.5 693.5 982.3Foreign Loans and others 945.3 913.3 S83.0

a/ Ibis Appmisal Repon does not include the invement made durin the perid 1975-77. which amounted to USS 44 million in aen prices. (US$42 milliob in Er4gin.and Admin.. and US$2 million in Preliminary ,rku. The o amount of US$44 million wu financed with GovArnm Loans).

Source: Staff Appraisal Reports.

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Table 5: Estimated and Actual Schedule of DisbursementsCumulative Disbursements

(in millions of US$)

Loan 1761-ARIBRD Fiscal Year 1980 1981 1982 1983 1984 198S 1986 1987 1988

Appraisal Estimates a/ 24.8 75.8 110.8 145.6 179.4 203.0 210.0

Actual Disbursements b/ 9.1 12.0 23.0 34.5 102.5 197.1 210.0

Actual as % of 0.0 0.0 8.2 8.2 12.8 17.0 48.8 93.8 100.0Estimated

a/ In the SAR. the closing date was indicated as June 30. 1986. However, in the Loan Agreement it was established as June 30. 1987.b/ Delayed disbuwsementa reflect most of the problems affecting the project (procurement. political. macroeconomic, financial, etc).

Loan 2998-ARBRDF 1 scal Year 1988 1989 1990 1991

Appraisal Estimates 151.0 252.0

Actual Disbursements 99.7 184.2 249.2 252.0Actual as % of Estimated 122.0 98.9 100.0

Table 6: Sector Sources and Applications of FundsLOAN 1761-AR

(Stated in constant 1977 US$ millions)

Funds 1978 1979 1980 1981 1982 1983 1984 1985 Actual % of Forecast % of Actual

Summary Total Summary Total as a % of

1918-85 1978-85 Forecast

Sources

Internal Funding 172 79 129 235 113 78 131 -32 906 18.0 6,477 54.4 -86.0

Less: Debt Service 202 143 195 543 315 431 274 428 2,532 50.4 3,733 31.4 -32.2

Net Internal Funding -30 -64 -66 -309 -202 -353 -144 -460 -1,626 -32.4 2,744 23.1 -159.3

Customer Contributions 199 293 377 332 188 161 160 283 1,992 39.7 4,449 37.4 -55.2

Net Sectoral Funds 169 229 311 24 -14 -192 17 -177 366 7.3 7,193 60.4 -94.9

Other Contributions 36 33 51 51 83 397 196 279 1,125 22.4 568 4.8 98.0

Borrowing & Other 700 403 560 609 402 265 213 381 3,533 70.3 4,140 34.8 -14.7

Total Sources 905 665 922 683 470 470 426 482 5,024 100.0 11,901 100.0 -57.8

Applications

Investments - 861 705 973 730 521 551 434 560 5,336 106.2 11,071 93.0 -51.8

Net Chng., WC 1/ 44 -40 -51 -47 -51 -81 -8 -78 -312 -6.2 830 7.0 -137.6

Total AppLcations 905 665 922 683 470 470 426 482 5,024 100.0 11,901 100.0 57.8

1. NatO: V- Wwking Cisal

- 50 -

Table 7: Status of Legal Covenants

Loan 1761-ARDocumnent Section SubJect Deadline Compliance

Loan Agreement/Amendment Agreement

LA 2.02 Government to open and maintain a special n/a yesaccount

LA 3.01(a) Government to re-lend to EBY under a n/a yesSubsidiary Loan Agreement (SLA)

3.01(b) No amendment to SLA without Bank n/a yesagreement

AA 3.01(c) Government to provide to EBY (i) at least During the no$2,765,000,000 or assistance to carry out Parts periodA, B and C a/ of the Project; (ii) such amounts 1979-1991as shall be required by EBY

LA 3.02(a) Permit EBY to obtain $300 mill. from foreign n/a yessources

3.02(b) Allow EBY use foreign funds in Australes n/a yes

LA 4.01 Secretaria de Energia to carry out studies to n/a yesdesign the future national transmission systemand on the use of small hydroelectric powerplants in isolated regions

LA 4.02 SE to employ consultants for 4.01 n/a yes

LA 4.03 SE to use funds for assigned purposes n/a yes

LA 4.04 Government to (i) maintain records of the n/a yesStudies; (ii) furnish to the Bank informationconcerning Studies

LA 4.05(a) Information on financial and general operation April, 30 yesof power sector, SEGBA, AyEE and each yearHIDRONOR starting on

1980

LA 4.05 Replaced by section 5.01 LA 2998-AR n/a n/a(b,c,d)

AA 4.06(a) Action programs (i) reducing the National October yesUtilities' b/ energy losses; (ii) improving 31, 1986collection of the Electric Funds surcharges

AA 4.06(b) Carry out such action programs n/a no

AA 4.07(a) Prepare tariff study March 31, yes1987

AA 4.07(b) Furnish results to Bank n/a yes

AA 4.07(c) Include results in projections n/a yes

AA 4.08 SE to appoint professional for financial October yesprojections 31, 1986

AA 4.09 SE to carry out a diagnostic study of the March 31, yesElectric Power Sector and the National Utilities 1987

LA 5.01 Prohibition of preferred liens n/a yes

LA 5.02 Borrower to prepare a financial plan for One year yestransmission system related to Part A, build it, after theprovide funds date of the

LA

- 51 -

Loan 1761-ARDocument Secidon Subject Deadline Compliance

LA 5.03(a) Government to carry out the construction of its n/a yesinter-regional HV transmission system

5.03(b) Government to establish and maintain December yestransmission charges 31, 1979

AA 5.04 Revaluation of fixed assets Not later yesthan June30, 1987and each

yearthereafter

AA 5.05 Rate of return and operating indices for n/a noSEGBA, HIDRONOR, AyE, CNEA

AA 5.06 Enable National Utilities to increase their n/a noelectricity rates

AA 5.07 Enable National Utilities to levy surcharge May 31, yesinstead of provincial taxes 1987

AA 5.08(a) Enable National Utilities to convert their short n/a yesterm debt into long term debt

AA 5.08(b) Cause National Utilities to prepare plans to October yesachieve the short term debt limit 31, 1986

AA 5.09 Government to support SEGBA and AyE to n/a yes(a,b) obtain investment financing

5.09(c) Assign funds to CNEA only after needs of n/a yesNational Utilities are covered

AA 5.10(a) Exchange views with the Bank on the n/a yesBorrower's power sector

5.10(b) Report on the legal and procedural details of October yesthe transfer of AyE's assets to the Provincial 31, 1986Utilities

LA 5.11(a) (i) Audit of the Special Account; (ii) Furnish (i) Each yescertified copy of such audit fiscal year

(ii) April30 of each

year

5.11(b) Maintain separate records and accounts of the n/a yesstatements of expenditure and include them inthe annual audit

Project Agreement

PA 2.01 EBY to carry out Parts A, B and C of the n/a yesProject

PA 2.02(a) Employment of consultants to carry out Part A n/a yes

2.02(b) Employment of experts to ensure safety of the n/a yesdam

PA 2.04 Carry out Parts B and C of the Project in n/a yesaccordance with programs satisfactDry to theBank

PA 2.05(a) Furnish documentation for Parts A, B and C of n/a yesthe Project

- 52 -

Loan 1761-AR

Document Section Subject Deadline Compliance

2.05(b) (i) Maintain records and procedures to record (iii) at yesthe progress of the Project; (ii) enable Bank's regularrepresentatives to visit the facilities; (iii) intervalsfurnish information concerning Parts A, B andC of the Project

2.05(c) Furnish reports about each Part of the Project After yescompletion

of eachPart of the

Project

2.05(d) Examination by Bank's representatives n/a yes

PA 2.06 Exchange views with the Bank with regard to n/a yesthe progress of Parts A, B and C

PA 2.07 Respect for ecological and environmental n/a yesfactors

PA 2.08 Acquisition of land n/a yes

PA 2.09 Performance of obligation under Subsidiary n/a yesLoan Agreement

PA 3.01 Maintenance of rights and concessions n/a yes

PA 3.02 (a) Maintenance of plants and property; (b) (b) yesinspections periodicall

yPA 3.03 Not sell or transfer properties or assets n/a yes

PA 3.04 Performance in accordance with appropriate n/a yespractices

PA 3.05(a) Insurance n/a yes

3.05(b) (i) Advise by insurance experts; (ii) furnish to (i) yesthe Bank recommendations by such experts November

30, 1979

PA 4.01 Appropriate Accounting Practices n/a yes

PA/AA 4.02 (a) Auditing of Accounting; (b) Furnish (a) April yesAuditing of Financial Statements; (d) furnish 30 eachevidence of the employment of auditors year; (b)

October 30each year

PA/AA 4.03(a) Evaluation of accounting procedures in audit n/a yesreport for fiscal year 1980

4.03(b) Furnish evidence of an adequate accounting December yessystem 31, 1986

PA 4.04(a) (i) Report on long-term debt; (ii) exchange (i) October yesviews with the Bank 31 each

year

4.04(b) Limits on contracting of short-term debt n/a yes

- 53 -

Loan 1761-ARDocument Section Subject Deadline Compliance

PA 4.04(c) Furnish a report on short-term debt October yes31, 1986

Owners Agreement

OA 6 Cause EBY to furnish to the Bank a program 6 months yeson the rate system before the

date onwhich the

powerplant is

scheduledto start tooperate

OA 8(a) Exchange views with the Bank with regard to n/a yesthe progress of Parts A, B and C and theperformance of obligations under LA and PA

8(b) Inform the Bank of any condition which affects n/a yesthe progress of the Project

a/ Prt A: 1. Construction of the dam; 2. Spillways; 3. Ptower house; 4. Fish passage facilitates; 5. Navigation lock; 6. Irrigation intakes; 7. Dikes; 8. Housing.Part B: Relocation of infrastructure works.Part C: Resettlement on both river banks as a result of the creation of a main reservoir.

bh 'National Utilities' means SEGEA, AyEE, HIDRONOR, YACYRETA, CNEA and CTMSG referred to collectively or to some of them.

- 54 -

Table 7: Status of Legal Covenants (continued)

Loan 2998-ARSection Subject Deadline Compliance

Loan Agreement

2.02(b) Government to open and maintain a special n/a yesaccount

3.01 Government to carry out Parts A.4 and B a/, and n/a noto cause AyE and HIDRONOR to carry out PartA.2, and AyE and SEGBA to carry out Part A.3with efficiency and to provide funds

3.02(a) Borrower to on-lend funds to EBY under a n/a yesSubsidiary Loan Agreement

3.02(b) Subsidiary Loan Agreement n/a yes

3.04 Government to: (a)f(b) complete and furnish to the (a) March 31, yes (a), (b)Bank a diagnostic study on Electric Power Sector 1989 & (c)and National Utilities; (c) prepare plans or no (d)programs taking into account the study and Bank'scomments; (d) implement such plans or programs

3.05 Government to complete: (a) an update of the (a) April 30, yesSector Expansion Plan and of the financing 1989 and byschemes for major projects included in the Sector each April 30Expansion Plan; (b) furnish a copy to the Bank thereafter

3.06 Government to implement the results of tariff n/a nostudy being carried out under Yacyreta LoanAgreement

3.07 Government to pay overdue balances on their December 1, noaccounts to National Utilities 1989

3.08 Government to provide to the Bank a plan for May 31, 1989 nocompleting the financing of the YacyretA Project;and such plan to be reviewed annually

3.09(a) CNEA's tariff to DUC not higher than bulk tariff n/a yesof utilities

3.09(b) Limitation of Electric/energy funds to CNEA n/a yes

3.10 Government to carry out a study on power April 30, 1989 yesgeneration options to be used in updating of SectorExpansion Plan

4.01(a) Maintenance by Borrower of adequate records of n/a yesoperations related to the project

4.01(b) Borrower is to (i) have the records referred in (a), (i) Within four yesincluding the Special Account, audited; (ii) furnish months of theBank with reports of said audits end of each

fiscal year

4.01(c) Borrower to (i) maintain adequate records (ii) until at least yesregarding withdrawals from Loan Account; (ii) one year afterretain these records evidencing such expenditures; the bank has(iv) ensure that records are included in the annual received theaudit audit report for

the fiscal year

4.02(a) Government to cause to National Utilities to n/a nomaintain for 1988, 1989, 1990 a ratio of totalconsolidated operating expenses/operating revenuesnot higher than 91%, 81% and 79% respectively

- 55 -

Loan 2998-AR

Section Subject Deadline Compliance

4.02(b) Government to review whether the National By May 31, yesUtilities would meet the requirements set forth in 1989 and by(a) May 31

thereafter

4.03(a/b) Prepare consolidated forecasts for SEGBA, AyE By May 31, yesand HIDRONOR, for each year beginning in 1989 and by1988, indicating projected ratio of funds from May 31internal sources to annual capital expenditures thereafter

4.04(a) Government to take or cause NU to comply with Annually nothe financial indicators agreed between the revision ofBorrower and the Bank indicators

5.01 Government and Bank to carry out an annual May 31,1989 yesreview of (i) perfbrmance of the Borrower's and by each Mayelectric power sector; (ii) the update of the Sector thereafterExpansion Plan; (iii) the update of the plan forcompleting the financing of YACYRETA asprovided in 3.08

5.02 Limitation of new generation/transmission project n/a yes

5.03 SE to issue regulations on new sector projects n/a yesconcerning environment and resettlement

6.01 Send to the bank a report on the operational safety May 31, 1989of nuclear power plants

Project Agreement

2.01 EBY to carry out Part A.1 of the Project in n/a yesaccordance with the Implementation Program setforth in Schedule 2

2.02 Procurement according to Schedule I yes

2.03 EBY to comply with Sections 9.04, 9.05, 9.06, n/a yes9.08 and 9.09 of General Conditions

2.04 EBY to performance under Subsidiary Loan n/a yesAgreement

2.05 (a) EBY to exchange views with the Bank with n/a yesregard to the progress of YACYRETA; (b) toinform of any condition which interferes with theProject

2.06 (a) EBY to ensure that Project execution is carried n/a yesout with due regard to ecological andenvironmental factors; (b) to acquire land and landrights as necessary; (c) to carry outecological/resettlement Plan of Action (Schedule 3)

2.07 EBY to maintain experts and dam safety reviews Program to besubmitted to theBank not later

than January 1,1990

2.08(a) EBY to furnish documents on request to the Bank n/a yes

2.08(b) EBY (i) to maintain adequate records on Project (iii) at regular yesprogress; (ii) to allow visits and inspections; (iii) intervalsto furnish cost/expenditure information

- 56 -

Loan 2998-AR

Setion: Subxjet V Deadline Compliance

2.08(c) EBY to prepare and furnish Project Completion After completion noReport of the Project

2.08(d) Allow inspections to all sites n/a yes

3.01 EBY to maintain concessions and franchises n/a yes

3.02 EBY (a) to maintain plants and equipment and (b) Periodically yesmake repairs; (b) to have dam inspected

3.03 No unauthorized sale of assets, properties n/a yes

3.04 EBY to performance in accordance with n/a yesappropriate business, financial and public utilitypractices

3.05 EBY to maintain appropriate insurance n/a yes

4.01(a) EBY to maintain adequate accounting records n/a yes

4.01(b) EBY to (i) have its accounts audited; (ii) furnish (i) Each fiscal yesaudit reports to the Bank; (iii) furnish other yearrelevant financial information; (iv) furnish to the (ii) Within 4bank evidence of having employed auditors months of thereferred to in (b) (i) end of the fiscal

year(iv) October 31

each year

4.02(a) (i) EBY to furnish a report on the long-term debt; October 31 each(ii) exchange views with the Bank year

4.02(b) Short-term debt limitation yes

Second Owners Agreement

6 Cause EBY to furnish to the Bank a program for 6 months beforeputting into effect the rate system provided for in the date onthe Treaty which the power

plant isscheduled to

start to operate

8(a) Exchange views with the Bank with regard to theprogress of the Project and the performance ofobligations under LA and PA

8(b) Inform the Bank of any condition which affects theprogress of the Project

htd A: lnvetment PrgraPdt B: Instiutaonal Sureugthig

- 57 -

Table 8: Economic ImpactEconomic Internal Rate of Return

ActalLoan Appraisal Estimate (at flnal Development)

1761-AR 14.0

2998-AR 18.6 a/ 5.5% c/

3520-AR 24.1 bl

Considering as sunk costs the expenditures before 1988. which amount to 42% of toal project costs.Considering as sunk costs the expenditures befcre 1992. which amount to 59% of total project costs.Considerirg investments as they actually occurred until 1993 and as planned from 1994 to 1998.

- 58 -

Table 9: Yacyreti's Economic Generation Cost

Investment USS mition O & M Ibtal Cost GenerationYear Current prices 1994 prices 1994 Prices 1994 Prices (GWh)

1975 18.0 44.1 44.1

1976 12.0 29.1 29.1

1977 14.0 30.8 30.8

1978 50.0 95.7 95.7

1979 167.0 282.1 282.1

1980 393.0 604.9 604.9

1981 277.0 425.1 425.1

1982 89.0 138.6 138.6

1983 76.0 121.1 121.1

1984 199.0 324.1 324.1

1985 162.0 261.8 261.8

1986 272.0 372.8 372.8

1987 320.0 399.1 399.1

1988 443.0 515.4 515.4

1989 369.0 432.2 432.2

1990 313.0 346.7 346.7

1991 233.0 252.4 252.4

1992 378.3 393.1 393.1

1993 392.7 406.0 406.0

1994 383.1 383.1 3.0 386.1 305.01995 207.8 202.0 6.0 208.0 2,934.01996 268.1 252.8 7.0 259.8 8,481.01997 325.4 298.7 8.0 306.7 11,471.01998 192.9 172.5 9.0 181.5 16,021.0

1999-2025 9.0 9.0 19,206.0

NPV 10% OCC 2,134.8 22,402.9

12% OCC 1,766.6 12,956.0

Economic Without Sunk Sunk Cost Sunk Cost tillGeneration Cost Cost till 1987 1991

(US$/MWh)10% OCC 95.3 30.4 14.1

12% OCC 136.4 38.3 16.9

4.5% OCC 33.0

5.5% OCC 40.0

Sources: Loan 3520-AR Files. 0 & M cost is based on 'Evaluation of options fbr the Private Sector Participation in EBY', FinalReport Nov. 1993, by Morgan Grenfell & Co. LTD, LE Energy and Coopers & Lybrand.

59 -

lible 10: Use of Bank ResourcesStaff Inputs (in staff weeks)

Loan 1761-ARStage of 75 77 78 79 80 81 82 83 84 85 86 87 88 89 92 93

Project Cycleand FY

Preparation 4.0 19.7 8.5

Appraisal 50

Negotiation 5.4 10.3 2.6

Supervision 12.5 3.6 15.3 30.7 1.0 21.9 30.1 20.2 4.2 1.3

Project -- -- -- -- 0.1 0.4 2.4 1.4Completion

TYOTAL 4.0 19.7 18.9 10.3 15.1 3.6 15.3 30.7 1.0 21.9 30.1 20.2 4.3 1.7 2.4 1.4

TIOTAL Staff Weeks: 200.6

Loan 2998-ARStage of Project 1986 1987 1988 1989 1990 1991 1992 1993Cycle and FY

Preparation 2.6 9.5 49.8

Appraisal 13.8 32.8

Negotiations 6.4

Supervision 27.2 39.7 4.1 4.2 1.0

Project Completion 0.3

TOTAL 2.6 9.5 63.6 66.4 39.7 4.1 4.2 1.3

TOTAL Staff Weeks: 191.4

Sources: World Bank MIS and Project Files

-60 -

Table 11: Mission Data

Loan 1761-ARStage of Project Number Days in Specialization

Cycle Date o Persont Fbild Represented a/ Problem:bJ

I. Through Appraisal

Reconnaissance 08175 2 16 PE

Preappraisal 04/77 1 26 PE

Preappraisal 12/77 6 20 PE, C, LO, FA

Preappraisal 12/77 1 1 E

Preappraisal 04/78 1 8 E T

Preappraisal 04/78 4 16 PE, FNA, PE, LO F, M

Financial 07/78 1 11 PE F

Appraisal 07-08- 9 42 PE09/78

11. Appraisal through Board Approval

Resettlement 12/78 3 13 RES

Resettlement 02/79 2 6 UC,

Post Appraisal 04/79 1 1 PE T

Post Appraisal 04/79 3 8 LO, C, PE F

Post Appraisal 06/79 3 3 PE, E T

m. Board Approval through Effectiveness

Resettlement 10-11/79 2 14 S, C

Resettlement 01-02/80 2 9 S, C

IV. Supervision

04/80 1 8C R

07/80 3 12 S, RES T, R

07/80 3 15 PE, FA F

02/81 1 7PE F

07/81 1 5RES E

11-12/81 1 20 LO F

08/82 1 12 LO F, M

02-03/83 2 10 LO F

02/83 1 5 PE F

05-06/83 4 14 PE, FNA, L F

08/83 1 1RES

12/84 1 10 PE F

12/84 1 2RES E

06/85 2 16 PE, FNA M, F

09/85 1 10 PE F

12/85 2 21 LO, FNA M

- 61 -

Loan 1761-AR

Stage of Project Number Days in SpecializationCycle Date of Persons Field Represented at Problem b/

09/86 1 5 RES R

09/86 2 18 LO, FNA F

09/86 1 16 C M

02/87 1 5 C R

10/87 3 19 PE, FNA

11/87 1 5 PE

PE - Pbwer Engineer; FNA - Financial Analyst; LS - Legal Specialist; LO - Loan Officer; C - Consultant; S - Sociologist; RES - Resettlement andEnvironmental Specialist; E - Economist.

b/ F- Financial; M- Manrgriai; T= Technical; R= Resettlemrent; E= Evimrunental.

- 62 -

Table 11: Mission Data (continued)

Loan 2998-ARStage of Project Number of Days in Specialization

Cycle Date Persons Field Represented a/ Problem bI

I. Through Appraisal

Preparation 11/87 3 22 FNA, PE T

Pre-appraisal 02/88 1 10 PE T

Appraisal 05/88 3 18 FNA, PE T, F

II. Appraisal through Board Approval

Implementation 11/88 1 11 PE M

HI. Supervision

12/88 2 15 FNA M, F

Limited Supervision 03/89 3 23 FNA, PE M, F

07/89 1 7 PE M

09/89 1 7 PE M

11/89 4 21 PE,FNA M

C/ 04/90 3 18 PE,FNA M,R,E

C/ 08/90 1 5 PE M

C/ 11/90 1 11 PE M

C/ 02/91 2 22 PE,FNA F,R,E

C/ 04/91 3 10 PE,FNA F

c/ 06/91 2 4 FNA F

C/ 07/91 2 29 PE,FNA F

C/ 10/91 5 14 PE,FNA E,R

12/91 3 11 E,R,PE,FNA E,Rc/

a/ PE -vwer Engineer; FNA - Financial Analyst; LS - Legal Specialist; LO - Loan Officer; C - Consultant; S - Sociologist; RES - Reseulenent andEnvironmental Specialist; E - Economist.

b/ F= Financial; M= Managerial; T= Tedchical; R= Resetlexment; E= Enviromnental.

c/ Preparation mission for the Power Sector Project II and supervision for SEGRA V, but with an important eleenent of supervision for this project.

- 63 -

able 12: Project Studies

Purpose as defined at appiul Status Impact of study

L. Loan 1761-AR "

(Studies inder the responsibility of the SE)

Transmission Development of the high voltage (above Completed 500 kV system defined by the study is220 kV) transmission system in Argentina. being implemented.

Generation Determine the possibility of using micro Completed Preference has been given to bigger plantsand/or small hydroelectric power stations to and expansion of the high voltage networkprovide electric energy to isolated regions. to integrate isolated areas.

Tariff Study on the long-run marginal costs of Completed This study was expanded under Loanelectric services in Argentina. 2751-AR. It served as the basis for

restructuring the tariff system in 1991 andlater in 1992 provided the background forthe organization of the spot market pricingby the use of a marginal cost formulation.

Sector Diagnostic of the organization and Completed This study was expanded under LoanOrganization operational efficiency of the Argentina's 2998-AR.and Electric Power Sector and the NationalOperation Utilities.

H. Loan 2998-AR "'

(Studies under the responsibility of the SE)

Nuclear Assessment of the operating safety of the Completed Assessment was positive and no majorPlant nuclear plants in Argentina. modifications were necessary in theOperations operational procedures.

Sector Study on the organization and operational Completed While it was not implemented during theOrganization efficiency of the Argentina's Electric Power Loan 2998-AR, it served as a basis for theand Sector and the National Utilities. restructuring that took place in the sectorOperation from 1992 on.

Regulations Regulations in connection with new power Completed Regulations were issued by thefor new sector projects concerning protection of the Government and facilitated acceptance ofpower sector environment and mitigation of the economic REMP under Yacyreta II Project by theprojects and social effects of involuntary Argentine Government.

resettlement.

Power For the generation of the National Completed Assessment of the thermal plant conditionsGeneration Interconnected System (NIS): was key for defining the strategy for theirOptions a) define operating conditions of the privatization, which was very successful.

existing thermal plants and recommend SE accepted the use of gas-fueled CC inrehabilitation plants; their generation planning with well definedb) recommend the future role of gas-fueled values for economic cost of gas. PrivateCombined Cycle (CC) thermal plants; generation, recently added or contemplatedc) recommend a set of values for the in the near future, is CC burning gas.economic cost of gas.

53. SAR. Yacvreta 1, p.17 para. 4.06 and Loan Agreement sections 4.01, 4.07 & 4.09.

54. SAR. Electric Power Sector Proiect, p. 30 & 31, and Annex 2.3.3, p.1; and LoanAgreement sections 3.04 & 3.10.