Document of The WorldBank FOR OMCIAL USIE ONLY Report No. 13624 PROJECT COMPLETION REPORT CHILE PEHUENCHE HYDROELECTRIC PROJECT (LOAN 2832-CH) OCTOBER 24, 1994 Infrastructure and Energy Operations Division Country Department IV Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank autborization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OMCIAL USIE ONLY
Report No. 13624
PROJECT COMPLETION REPORT
CHILE
PEHUENCHE HYDROELECTRIC PROJECT(LOAN 2832-CH)
OCTOBER 24, 1994
Infrastructure and Energy Operations DivisionCountry Department IVLatin America and the Caribbean Regional Office
This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank autborization.
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Fiscal Year
January 1 - December 31
Currency Equivalents
Currency Unit Peso (CH$)US$1.00 CH$ 204.73 (12/31/1986)US$1.00 CH$ 419.33 (11/30/1993)
BICE Banco Industrial y de Comercio Exterior S.A.CHILECTRA Empresa Chilena de Electricidad S.A.CHILGENER Chilectra Generacion S.A.CHILMETRO Distribuidora Chilectra Metropolitana S.A.CHILQUINTA Distribuidora Chilectra Quinta Region S.A.CNE Comision Nacional de EnergiaCONAF Corporacion Nacional ForestalCORFO Corporacion de Fomento de la ProduccionENDESA Empresa Nacional de Electricidad S.A.Pehuenche Empresa Electrica Pehuenche S.A.GDP Gross Domestic ProductGoCh Government of ChileINGENDESA Empresa de Ingenieria INGENDESA S.A.SAR Staff Appraisal ReportSEC Superintendencia de Electricidad y CombustiblesSIC Sistema Interconectado CentralSING Sistema Interconectado del Norte Grande
FOR OFFICIAL USE ONLYTHE WORLD BANK
Washington, D.C. 20433U.S.A.
Office of Director-GeneralOperations Evaluation
October 24, 1994
MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT
SUBJECT: Project Completion Report on ChilePehuenche Hydroelectric Proiect (Loan 2832-CH)
Attached is the Project Completion Report on Chile - Pehuenche Hydroelectric Project(Loan 2832-CH), prepared by the Latin America and the Caribbean Region. The Borrower contributedPart 11 of the PCR.
The project objectives were to cover the increasing power demand in Santiago and CentralChile, to provide sufficient knowledge in the operation of hydroplants, to protect two species of birdsendangered by the project, to increase public awareness of environmental issues, and to fill informationgaps about the power sector.
The objectives were successfully met by building a 500 MW hydroelectric plant and itstransmission system, training the staff of Empresa Electrica Pehuenche S. A., Pehuenche, owner of thehydroelectric plant, implementing an environmental program, and carrying out power sector studies.
The plant was commissioned in September 1991, 17 months ahead of the original schedule, butthe power sector studies and the implementation of an expanded environmental program were completedin April 1994. The project cost was US$395 million. The 51% cost savings -esulted from highlycompetitive bidding for the supply of the civil works and electromechanical equipment, and reducedprice escalation and interest during construction due to the short construction time. The Bank loan ofUS$95.0 million was reduced to US$40.6 million and fully disbursed by the original closing date.
Pehuenche was established for the sole purpose of constructing and operating the Pehuenchehydroelectric plant. Corporacion de Fomento de la Produccion (CORFO) -- the Governmentdevelopment agency -- with 70% of the shares, was to remain as the main shareholder until the planthad operated successfully for a few years. However, the Government accelerated the privatization whilePehuenche was under construction. The privatization of Pehuenche does not seem to have had anyinfluence on the project.
The outcome of the project is rated as highly satisfactory while its institutional developmentimpact was modest. Since Pehuenche is fully committed to the project, has met all loan covenants, andis enjoying a healthy financial position, the project sustainability is rated as likely.
The PCR provides a satisfactory and concise account on the project implementation and results.The project may be audited together with the Alto Jahuel - Polpaico Transmission Project (Loan 2833-CH) to extract lessons on the privatization process and its consequences for the future operation of thesector.
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.
PROJECT COMPLETION REPORT FOR OFFICIAL USE ONLY
CHILE
PEHUENCHE HYDROELECTRIC PROJECTLOAN 2832-CH
Table of ContentsPage No.
PREFACE . ...................................... i
EVALUATION SUMMARY ............................ ii
PART I - PROJECT REVIEW FROM BANK'S PERSPECTIVE ... .. 1
PART II - PROJECT REVIEW FROM BORROW"ER'S ANDEXECUTING AGENCY'S PERSPECTIVE ....... 13
PART m - STATISTICAL INFORMATION ................. 15
1. Bank Lending for Other Power Projects in Chile ... ...... 162. Project Timetable ............................ 173. Forecast and Actual Disbursements of Loan Proceeds ... ... 184. Project Implementation Schedule and Procurement Method . . 195. Project Scope .......... .................... 206. Project Cost and Financing ...................... 217. Capacity and Energy Balance for the SIC .... ......... 228. Financial Statements of E.E. Pehuenche S.A ............ 249. Performance and Monitoring Indicators of E.E. Pehuenche S.A. 2710. Status of Covenants ........................... 2811. Use of Bank Resources ................... . 30
MAPIBRD 20371
This document has a restricted distribution and may be used by recipients only in the peforman of theirI official duties. Its contents may not otherwise be disclosed without World Bank authorizadon. l
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PROJECT COMPLETION REPORT
CHILE
PEHUENCHE HYDROELECTRIC PROJECTLOAN 2832-CH
PREFACE
This is the Project Completion Report (PCR) for the PehuencheHydroelectric Project in Chile, for which Loan 2832-CH in the amount ofUS$95.0 million was approved on June 9, 1987. The loan was reduced invarious steps by US$54.4 million to US$40.6 million of which US$40.4million has been disbursed. The loan will be closed as scheduled on June 30,1994, and the balance (at present estimated to be US$0.09 million) will becanceled.
This PCR was prepared by the Infrastructure and Energy OperationsDivision of the Latin America and Caribbean Country Department IV(Preface, Evaluation Summary, Parts I and III). It was sent to the Borrower,Corporacion de Fomento de la Produccion (CORFO), and the ExecutingAgency, Empresa Electrica Pehuenche S.A. (Pehuenche). Their commentshave been incorporated into the PCR as Part II.
This PCR is based, inter alia, on the Staff Appraisal Report (SAR),the Loan and Project Agreements as amended, progress, project conclusionand annual reports by the Borrower and the Executing Agency, audit reportsby the external auditors, supervision reports by the Bank, correspondencebetween the Bank, the Borrower and the Executing Agency, and internalBank documents.
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PROJECT COMPLETION REPORT
CHILE
PEHUENCHE HYDROELECTRIC PROJECTLOAN 2832-CH
EVALUATION SUMMARY
Project Objectives and Description
1. The Pehuenche Hydroelectric Project was an integral part of theBank's strategy for Chile at the time of appraisal and approval whoseobjectives were (a) increasing the efficiency in the delivery of public servicesand (b) strengthening the implementation of a financial policy based on longrun marginal cost of system expansion at least cost. As in the previous sixpower projects, this project aimed at providing low cost and reliableelectrical energy for the production of goods and services as well as finalconsumption with minimum negative impact on the environment. For thatpurpose, the project comprised: (a) the construction of a 500 MWhydropower station and the corresponding transmission system to the CentralInterconnected System (SIC); (b) training for Pehuenche staff; (c) a nationalenvironment program; and (d) Power sector studies.
Project Implementation
2. The loan was approved on June 9, 1987, signed on December 16,1987, and declared effective on February 3, 1988. Initiation of the projecthad already begun at appraisal. It proceeded swiftly. The first generatingunit of the main component, the hydropower station, became operational inMay 1991, and the second in September 1991, an average of 17 monthsahead of schedule. The direct environmental components of the hydropowerstation were implemented in parallel with the civil works. Training forPehuenche staff was advanced due to the speedy implementation. A secondphase was added to the original national environment program executed byOctober 1992, and will end in April 1994. The last component, the powersector studies, took 16 months longer than estimated, and the last study wascompleted in October 1989.
3. Actual project net cost at current prices amounted to US$347 millionas compared to US$651 million in the SAR, a decrease of 47%. It wascaused mainly by a low in the business cycle of the construction industry atthe time of bidding, renegotiation with the consultant for a lower fee, theshorter execution time, and a very conservative cost estimate. Financinglower costs than planned obviously did not present a problem. Whileamounts from all sources were reduced, the overall ratio between debt (72%)
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and equity (28%) financing was changed in favor of more debt. The Bankloan was reduced from US$95.0 million to US$40.6 million, and the mode oftransfer of funds for US$25.0 million changed from capital contribution toonlending.
Project Results
4. Average peak demand growth in the five year period 1987-92 for theSIC reached 6.7%, well above the forecast of 4.3% in the SAR, due to amore rapid development of the economy. In combination with the positiveoutlook for the Chilean economy, the increase in generation capacityprovided by the Pehuenche hydroelectric power station was thereforejustified.
5. Project implementation coincided with the restructuring of the Chileanpower sector and its subsequent privatization. CORFO, a state developmentbank, originally owned 61% of the shares of Pehuenche, and planned to sellit to the private sector after operating it for a couple of years. The legaldocuments were worded to permit the later change of ownership. However,during project execution CORFO decided to advance the privatizationprocess, and in 1989 put up the shares for sale, advised by the Chileaninvestment bank Banco Industrial y de Comercio Exterior (BICE). Despitean extensive promotion campaign abroad, only local investors bid for thecompany, with Empresa Nacional de Electricidad S.A. (ENDESA) presentingthe highest offer. It became the new majority owner in 1990. The Loan andProject Agreements were amended to reflect the new legal set-up.
Project Sustainability
6. Given Pehuenche's excellent record during construction, the benefitsof the installations are expected to be sustained throughout their service life.Experience with operation thus far has been above average, with only minorrepairs required during the warranty period.
Lessons Learned
7. On balance, the Pehuenche Hydroelectric Project should be judgedhighly successful based on its technical, financial, and institutional results.
8. The project confirms the importance of advanced preparation andgood management in implementation. The macroeconomic and sectorenvironment supported the execution of the project, as the economy wasdeveloping rapidly, tariff policy was already sound at appraisal, and therestructuring and privatization, which occurred simultaneously with projectexecution, provided the executing agency with a strong financial backing.Failures in the process of privatization - as is the case in Chile with regardto the structure of the power sector - will be almost impossible to correctafter the transfer of ownership. Covenants have to be worded sufficiently
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detailed, otherwise monitoring of compliance is not feasible. As sector andmacroeconomic conditions change, conditionality and other projectramifications of Bank loans have to be kept under constant review andadjusted if need arises.
PROJECT COMPLETION REPORT
CHILE
PEHUENCHE HYDROELECTRIC PROJECTLOAN 2832-CH
PART I - PROJECT REVIEW FROM BANK'S PERSPECTIVE
1. Project Identity
Project Name: Pehuenche Hydroelectric ProjectLoan Number: 2832-CHLoan Amount: US$40.6 million (reduced from original amount
of US$95.0 million)RVP Unit: Latin America and Caribbean Regional OfficeCountry: ChileSector : EnergySub-Sector: Power
2. Background
2.1 The Energy Sector. The country's hydro potential of which onlyabout 20% have been developed so far is its most economic and abundantenergy resource, followed by coal and petroleum. Chile's primary energydemand (326,000 barrels of oil equivalent per day) and overall energyintensity (0.79 kgoe/US$GDP) are low compared to other countries in theregion, especially considering the importance of energy intensive consumerslike mines and smelters for the economy. In the 12 years, between 1979 and1990, when Gross Domestic Product (GDP) growth averaged 3.7% p.a.,primary energy demand increased only slightly higher at 3.9% p.a.However, in the same period, power consumption grew at 4.8% p.a.,resulting in an elasticity of power-demand-to-GDP of 1.3. Thus, energyintensity in the economy expanded by only 0.2% p.a., whereas for powerintensity the growth rate was 1.1% p.a.
2.2 Power Sector Objectives. The Pehuenche Hydroelectric Project, aswith the previous power projects, was aimed at promoting social andeconomic development by providing low cost and reliable electrical energyfor the production of goods and services as well as final consumption, withminimum negative impact on the environment.
2.3 Pbwer Sector Strategy. The project was an integral part of theBank's strategy for Chile to increase efficiency in the delivery of publicservices and to strengthen the implementation of a financial policy based onthe long-run marginal cost of system expansion at least cost.
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2.4 Bank Sector Lending. At the time of project approval, the Bank hadfinanced six power projects in Chile between 1948 and 1976 for a loan totalof US$144 million, mostly for power generation.
2.5 Pbwer Demand and Supply. Due to the rapidly expanding economy,with a GDP growth rate averaging 7. 1 % in the last 5 years, power demandgrew by 6.6% p. a. Currently peak demand is forecast to increase by 5.7%p. a., in accordance with a 5 % growth rate of the economy. To satisfy theseadditional power requirements, efficiency gains on the supply and demandside should be implemented first, as long as their cost are below those ofsystem expansion, and because of their additional environmental benefits.Any remaining gap has to be covered by added capacity. While theproduction, transmission, and distribution systems have reached a highdegree of efficiency, a considerable potential for additional efficiency gainsremains on the end-user side. However, even if all remaining savingspotential is realized, additional capacity will be necessary. As thehydropower plants close to the population centers have already beenconstructed, capacity additions have to be built by exploiting the potentialfarther south in the country. This in turn requires increased investment intransmission lines and substations to transport the electricity to the centers ofconsumption. The incremental demand also creates a need for reenforcingthe existing transmission systems within and around the centers ofconsumption, and for expanding the distribution systems.
2.6 Power Sector Organization. In the early eighties, the Governmentof Chile (GoCh) started the modernization of the power sector by devising anew tariff based on long run marginal cost. Two regulators, the NationalEnergy Commission (CNE), and the Superintendency for Power and Fuel(SEC) were created. While they initially performed well, their more recentachievements are perceived as rather limited. The tariff system has generallyworked satisfactorily, but some alterations are being prepared to facilitatesales by cogenerators and make the system more transparent. Onedisadvantage is its lack of incentives for end-user energy conservation. TheGuarantee Agreement for the Pehuenche loan included a provision to regulatethe existing electricity law in areas of concessions and electric services.However, as the scope and content of these regulations were not specified,adequate control of compliance was not feasible.
2.7 As a next step, the structure of the sector was changed. In the SIC,where about 95% of total electricity is consumed, the two biggest companiesENDESA and Empresa Chilena de Electricidad S.A. (CHILECTRA), whichas vertically integrated entities performed the functions of generation,transmission, and distribution, were limited to generation and transmission.ENDESA's shareholdings in distribution companies were terminated, and twodistribution companies for Santiago (Distribuidora Chilectra MetropolitanaS.A., CHILMETRO) and the Fifth Region (Distribuidora Chilectra QuintaRegion S.A., CHILQUINTA) formed. To make the package more interestingfor later sale, no separate transmission company was established, despite the
recognized disadvantages for market structure. Also, by not depositing thewater rights for future projects in an entity different from ENDESA, itsdominance in expansion programs for hydropower was safeguarded. In thesecond most important part, the Great Northern Interconnected System(SING), the separation of the functions of generation and transmission isunderway, and is already completed for distribution.
2.8 After the restructuring in the SIC was completed, the GoCh startedwith the privatization of the state-owned companies. CORFO, a state owneddevelopment bank which acted as the holding company for the government inthe power sector, was entrusted with the sale. Four big companies weresuccessfully sold to the public, consisting of local and foreign financialinstitutions, local private companies inside and outside the sector, and privateinvestors some of them company employees. Only Colbun, a 490 MWhydroproject, still remains publicly owned. In the SING, public ownershipof generation and transmission still prevails, but its majority is beingreduced. By not separating generation from transmission and permittingcross holdings, the privatization of the power sector failed to create a marketstructure composed of a great number of economically and financiallyindependent producers and distributors.
2.9 Once privatized, the entities undertook their own restructuring byestablishing new companies to perform certain functions that were previouslydone inside, by outsourcing other functions, by strengthening the financingdepartment, and by reducing staffing in other parts of the company. Theyalso started to look outside to acquire ownership of companies already in thesector or recently created to implement new projects.
3. Project Objectives and Description
3.1 Project Objectives. The objective of the physical components of theproject was to cover the increasing power demand by the load centers inSantiago and central Chile. The training component aimed at providingsufficient knowledge for Pehuenche's staff in operation of hydroplants. Thenational environment program's objective was to protect two endangeredspecies and increase public awareness of environmental issues. The powersector studies were targeted at filling some information gaps in the design,execution and operation of power systems.
3.2 Project Description. The project included four components:(a) Construction of the Pehuenche hydroelectric power plant:
(i) Small diversion dam at the Maule River;(ii) 90 m high earth dam at the Melado River for daily
storage with useful volume of 6.5 million m3;(iii) Two tunnels with a total length of 13.3 km;(iv) Underground powerhouse with two 250 MW turbines
and two 13.8/230 kV transformers with 290 MVAcapacity each;
(v) Annual average generation of 2,765 GWh; and(vi) 220kV double circuit transmission line of 25 km length
between substation Pehuenche and the substation Ancoafor the SIC at Colbun.
(b) A training program for around 31 of Pehuenche's professionalsfor a total of 116 staff-months, in the following fields:
(i) Overall control and administration of construction; and(ii) Operation of hydroplants.
(c) A national environment program consisting of:(i) Two programs to protect two endangered species;(ii) Post-graduate studies in environmental fields for four
professionals; and(iii) Seminars to increase public awareness of environmental
matters related to the above.(d) Power sector studies regarding three special areas of interest:
(i) Protection of the environment and resettlement issuesrelated to the execution of power projects;
(ii) Handbook for basic design for small and medium sizehydroelectric projects; and
(iii) Reduction of illicit use of electricity.
4. Project Design
4.1 Conceptual Framework. Although the economy started to growmore rapidly in the mid 1980s, the timing of the project was still based onthe past modest growth rates experienced by the economy. When afterproject approval Pehuenche became convinced that the acceleration of thegrowth rate of the national economy was sustainable, it decided to speed upthe execution of the project.
4.2 Project Preparation. Feasibility studies and engineering designs forthe power plant were available. Project implementation had already startedat anpraisal. Training requirements to be provided by paid courses abroadan(' fhrough the hydropower department of ENDESA in Chile wererestiictively defined. Little preparation was needed for the environment andpower sector studies components as only terms of reference had to bedrafted.
5. Project Implementation
5.1 Changes in Project Scope. The hydropower station was executedalmost exactly as designed. The entire analysis of the appraisal was based ona useful storage volume of 33.0 million m3. The apparent increase in usefulstorage volume of the reservoir from 6.5 million m3 to 33.0 million m3 is dueto a mistake in the SAR and not a change in design. The 5% increase ofannual generation under average hydrological conditions to 2,905 GWh hasbeen achieved through widening the design diameter of the adduction tunnelby 6.6%. The length of the transmission line was reduced by 10% to 22 km
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due to a more direct alignment. The amount of training was increased butpart of it was provided by suppliers within their contracts instead of beingpaid separately. The two subcomponents for protection of an endangeredtree and parrot within the national environment program were extended toincrease the chances of succeeding. The scope of the power sector studieswas implemented as planned.
5.2 Project Implementation Schedule and Procurement. At appraisal(November 1986), implementation of the physical components of thehydropower station was already underway since June 1986, and estimated totake six and a half years for completion (December 1992). Actually, due totight project management, proper incentives for suppliers and contractors incase of early commissioning, and favorable weather conditions, Pehuenchemanaged to have the first generation unit producing energy in May 1991 andthe second in September 1991, an average of 17 months ahead of schedule.The only activity that took longer than planned was the installation of theremote control system which was commissioned in December 1992 instead ofMarch 1992. However, this did not prevent the plant from being welloperated, albeit on a manual basis. The three lots (two for civil works - theintake Maule and the tunnel Maule - and one for goods -telecommunications and remote control equipment) financed by the IBRDloan were procured through ICB. As planned from the beginning, theengineering services were provided by ENDESA, first by its own engineeringdepartment and later by its affiliate Empresa de Ingenieria INGENDESAS.A. (INGENDESA), and were therefore not eligible for Bank financing.Due to the more rapid advance in implementation, training at Pehuenche alsohad to be completed earlier, in March 1991 instead of March 1992.
5.3 No resettlement issues were involved in the implementation of theproject, as the area was unpopulated. The environmental impact was alsolimited, as the reservoir area is small (400 ha), and the climatemediterranean. Pehuenche went to great lengths to mitigate the negativeimpact of the project on the endangered parrot (Chilean Conure, CyanaliseusPatagonus Byroni) whose three breeding sites on the river banks of theMelado were permanently inundated after filling. Pehuenche hiredCorporacion Nacional Forestal (CONAF) to execute an artificial breedingprogram outside the area. It was successful in bringing up young parrots. Itofficially ended on January 31, 1994. However, its medium-term impact isnot clear as it was not possible to establish if the birds once in freedom werecapable of surviving on their own. Overall, the number of parrots in thearea declined markedly during construction, but started to recover once thedisturbances caused by the civil works abated. Pehuenche also contractedCONAF to do research into the growing conditions of an endangered pine,the Belloto del Sur (Beilschmiedia Berteroana), and to plant these trees in thearea. From the 27,000 seedlings that CONAF brought up, some 3,000 ascompared to the initially programmed 10,000 pine saplings were planted inthe project area. To monitor the quality of the water in the reservoir,
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Pehuenche has entered into a contractual agreement with the University ofTalca whose first report is expected to be finalized soon.
5.4 The original national environment program - whose original durationof only 18 months had been greatly underestimated in the SAR - wascompleted by October 1992. A second phase was added which will end inApril 1994. The last component, the power sector studies, took 16 monthslonger than estimated, and the last study was completed in October 1989.Further details on the power sector studies are contained in the PCR datedMarch 3, 1992 for the Public Sector Management Project (Loan 2504-CH)which was used to partially finance them.
5.5 Project Cost. At appraisal, the total project was estimated to costUS$799.3 million, of which US$454.2 or 57% in foreign exchange. 99.75%of the investment cost corresponded to the hydroelectric power station(US$1035/kW in constant 12/1986 prices), while 0.04% had been allocatedto the training component, 0.12% to the national environment program, and0.09% to the power sector studies. The actual investment cost for the scopeof the total project at current prices including financial cost amounted toUS$395.0 million (-51%) of which US$281.7 million or 71% in foreignexchange. The final cost in constant 12/1986 prices for the hydroelectricpower station alone was only US$577/kW (-44%). This impressive costreduction was caused mainly by: (a) intense competition in the internationalconstruction sector due to recession that lowered costs of civil works by anaverage of 43% compared to the estimates; (b) a renegotiation with theconsultant ENDESA that resulted in reduced compensation; (c) the shorterconstruction time which required less price escalation (-62%) and financialexpenses (-65%). Further, the SAR cost estimate for the power plant wasrather conservative. The separately computed cost for the component"training" were in-line with the estimates, while CORFO spent 23% less forthe "national environment program," and the "power sector studies" cost25% more.
5.6 Project Financing. Actual financing of the hydropower plant turnedout quite different from the assumptions in the SAR. Originally, 38% of theinvestment cost were supposed to be financed by equity and 62% by debt.Of the borrowing, 52 percentage points were to be provided by multilateralbanks (US$319 million from the IDB and US$95 million from the IBRD), 13percentage points from a local bond issue, and 8 percentage points fromsupplier credits. After loan approval by the Bank's Board, an untied loanfrom the Japanese Eximbank - part of a bilateral financial cooperationagreement between the Republic of Chile and Japan - was signed, whichmade the planned supplier credits and local bond issue unnecessary. When itbecame clear that the capital investment costs and financing requirementswould be about US$404 million less than estimated, the shareholders reducedtheir planned equity contributions, and Pehuenche requested all lenders toreduce their loan amounts. In the end, equity contributions financed 28%,multilateral bank loans contributed 49% (US$164 million from the IDB and
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US$40 million from the IBRD), and the Japanese Eximbank loan 23 % of thefinancial resources needed. Within the shareholders, as a consequence of theprivatization (para. 6.4), the composition between CORFO, ENDESA andCHILGENER also changed, with ENDESA becoming the main shareholder.Financing of the training component was done entirely with Pehuenche's ownfunds. The following table compares the forecast and actual financing:
5.7 The financing of the national environment program executed byCORFO was shared between the Bank and CORFO at the 2:1 ratio as agreedin the loan agreement from the beginning. 60% of the power sector studieswere financed by the Bank, 40% by the Borrower, again in-line with theoriginal loan agreement.
5.8 US$94.6 million of loan 2832-CH had been allocated for thehydropower station and Pehuenche's training program, to be transferred fromCORFO to Pehuenche as equity contributions, while US$0.4 millionremained with CORFO to finance part of the national environment program.Loan disbursements started rapidly. When CORFO decided to sell its sharesof Pehuenche, it also had no more interest in making equity contributions.As a consequence, it stopped requesting disbursements from the loan ofwhich US$15.6 million had been disbursed at the time. After protractednegotiations complicated by change of government, CORFO and Pehuenche,with the Bank's prior consent, agreed to use part of the balance of the loan asa subloan of US$25.0 million. An amendment to the Loan Agreement wassigned on October 8, 1991. At the same time, together with previouscancellations, the loan amount of the IBRD loan was reduced to US$41.0million. Since then, it has been reduced further to US$40.6 million of which
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US$40.4 million has been disbursed. The balance at the loan closing on June30, 1994 (at present estimated to be US$0.09 million) will be canceled.Allocation of loan proceeds was slightly altered in favor of goods to adjustfor contractual arrangements.
6. Project Results
6.1 Project Objectives. The original project of a 500 MW hydroelectricpower station was implemented in concept and detail as planned at appraisal.By coming on line earlier than programmed and at significantly lower cost, itfulfilled its purpose as part of the least cost expansion program for the SIC.Therefore, not only was the original objective in terms of added capacityachieved, but it was done ahead of time and more cost effective. The SICwas therefore earlier able to meet increased demand at more favorablegeneration costs. The sooner than originally anticipated commissioning waseven more beneficial given the four-year draught that affected the country atthe time, and the delay in bringing another hydroplant (Alfalfal, 140 MW) onstream. The measures to protect the endangered parrot so far have showninconclusive results, but might still improve. The remaining environmentalobjectives attached to the hydropower station were achieved.
6.2 The objectives of the national environment program although vaguelydefined and much more modest than its name implied were accomplished.Both of CORFO's subprograms for the protection of the parrot, and theresearch and planting of "Belloto del Sur" trees were not only executedduring the time period provided in the SAR but extended to increase thechances for improved results. The subprogram for scholarships abroad inenvironmental studies concluded with all four students obtaining masterdegrees. Also, three seminars were held to increase the public's awarenessof environmental matters in general and of the endangered parrot inparticular, and to facilitate the dissemination of the experiences gained duringthe artificial breeding period.
6.3 Nhuenche's Institutional Performance. In 1986, E.E. PehuencheS.A. was established with the sole purpose of constructing and operating thePehuenche hydroelectric power project. With 70% of the shares, CORFOwas the main shareholder, followed by ENDESA (20%) and CHILGENER(10%). Pehuenche managed to attract qualified staff from other powercompanies and the private sector. It has remained a lean company with littleoverhead which from the beginning distinguished itself by placing equalemphasis both on the engineering aspects of the project and on its financialdevelopment.
6.4 Initially, the GoCh planned to privatize Pehuenche after the plant hadbeen successfully operated for a couple of years. Adequate provisions wereincluded in the legal agreements. However, once the then GoCh realized thatit had to relinquish power earlier than planned, it decided to sell Pehuenchewhile the plant was still under construction. CORFO hired the Chilean
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investment bank BICE, which is affiliated with the Rothschild group inLondon, as advisor for the sale. Although it led an extensive promotioncampaign abroad, only Chilean companies actually bid. ENDESA which bythen was already privately owned presented the highest offer and on January18, 1990 became the new majority owner; at year-end 1992, its participationreached 92.5%. In addition, the employees represented by InversionesTricahue S.A. could also buy shares and exercised that right to the extentthat at December 31, 1992 they owned 4.3% of the capital. The balance isowned by foreign investment funds and local pension funds. The Bank,which had given its prior consent to the sale during construction, CORFO,and Pehuenche amended the legal agreements on January 2, 1990 to reflectthe new set-up.
6.5 Privatization did not change to a great extent the way Pehuencheworks. To begin with, management remained the same. ENDESA allowedPehuenche a high degree of autonomy, managing it mainly by results. ForPehuenche it meant enjoying the backing of a financially strong institution.From a company with the purpose of building and operating a single powerproject, Pehuenche has since evolved into building a second hydroelectricpower station, the run-of-the-river 85 MW Currillinque plant upstream fromPehuenche in the same river basin. It is nearing completion. At present,further expansion plans include Loma Alta, a third small hydrostation of 38MW capacity between Pehuenche and Currillinque, and eventually somecombined cycle gas power stations once the natural gas from Argentinabecomes available.
6.6 Pehuenche's Financial Performance. When comparing the financialforecast in the SAR with their actual value it is important to note that after1991 these numbers refer to two somehow different organizations, since thebasic assumption of the SAR was that Pehuenche would remain a one projectcompany, yet i. is already executing a second one. Because Pehuenche ismore than 50% owned by ENDESA, Pehuenche's financial statements arealso fully consolidated with the parent company. ENDESA's finances arecommented in the PCR on the Alto Jahuel - Polpaico Transmission Project,Loan 2833-CH, dated December 17, 1993.
6.7 During the two years of 1991 and 1992, while the Pehuenchehydroelectric plant was already operating, average rates remained well belowthose forecast because the earlier commissioning of Pehuenche with its lowoperating costs prompted a reduction in the rates as they are based onmarginal cost. As the system moves towards a higher capacity utilization inthe coming years, these rates will increase. Although sales started earlier,sales revenues for the same reason also were depressed. Operating ratios(1992:51%) are 25% higher than forecast. As capital investment cost for theproject had been much lower than forecast, the lower rates did not affect therate of return calculations as negatively as one might expect. Actually, theaverage financial rate of return on assets in operation for the two years 1991and 1992 reached 6.9% p.a., whereas the return on equity at 17 % p.a.
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amounted to more than twice that value, demonstrating a successfulmanagement of financial resources and assets. In the same period, 27% ofthe total capital investment program of US$45 million was financed with ownresources. 114% of the debt service of 1993 was covered by the grossinternal funding of 1992, thereby staying above the financial covenant of theProject Agreement requiring 110%. Pehuenche also stayed within the debt-equity-ratio of 67/33 as stipulated by the Project Agreement.
6.8 Economic Reassessment. At appraisal, Bank staff and Chilean powerauthorities expected the project to contribute to the economic growth of thearea (mostly to industrial growth) and to the improvement of the population'sstandard of living. To reach these objectives and to provide for expectedload growth, the Project was designed as part of a least-costgeneration/transmission program.
6.9 During the period up to 1990, the actual level of peak demand in theSIC (2,326 MW) remained very close to the forecast. In 1991, because of adrought, it was below SAR estimates, only to exceed them by circa 8% at2,778 MW in 1992. Overall, growth of peak demand averaged 6.7% p.a.compared to 4.3% p.a. anticipated in the SAR. Development of energygeneration was similar to peak demand (11,866 GWh in 1987, 16,302 GWhin 1992 or 6.6% p.a.). The increase in generation capacity by the projecttherefore seems justified.
6.10 The current forecast for peak demand of 4,316 MW in 2000 is basedon a 5.7% growth rate, in ac^ordance with a 5% growth rate of theeconomy. In view of the strong growth of the Chilean economy in the lastthree years (which was inconceivable in the mid-1980s at the time ofappraisal), the current forecast appears rather conservative. Only ifconsiderable efficiency increases in production and end-use are realizedand/or economic growth rates are substantially reduced, will peak demandexpand at this rate.
6.11 The project was part of the least cost expansion program for thepower sector. Therefore, an isolated economic evaluation of the project wasnot made, as it was not meaningful to allocate benefits to the variouscomponents of the whole program. Instead, the internal rate of return for theoverall 1986-95 investment program for the SIC was calculated at 11.2%,based on data provided by CNE, which in turn drew on information madeavailable from the state-owned power companies. Since privatization, CNEno longer obtains this type of data. It is therefore not possible to recalculatethe actual rate of return of the investment program. This would not onlyrequire data on past performance of the many companies involved in the SIC,but also knowledge of their future plans, which as private companies theyhave little interest in providing. However, the information given in previousparagraphs on demand development, investment cost, and time ofcommissioning, demonstrates that actual developments exceeded those of theappraisal forecast. It thus seems safe to assume that the cost effectiveness
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was actually better than estimated in the SAR, and possibly the internal rateof return as well.
7. Project Sustainability
7.1 Benefits of the installations are expected to be sustained throughouttheir service life given Pehuenche's excellent technical record. Experiencewith the equipment has been above average. The only problems detectedwere two cases of minor damage to the turbine blades in June 1991 and April1992 which were repaired by the supplier as they occurred within thewarranty period. The loss of revenue was covered by Pehuenche'sinsurance. Further, the dam has already withstood a 1000-year-flood.
8. Bank Performance
8.1 Only 63 staff-days were spent in the field for project preparation andappraisal, and 31 staff-days for supervision. This low level of staff inputrepresents the economies of scale made possible through the managing of twopower projects that advanced basically at the same speed (the other being theAlto Jahuel-Polpaico Transmission Project), the advanced level of projectpreparation, the rapid pace of implementation of the project, and thecompetence of the executing agency. In retrospect, staff was tooconservative in assessing the investment cost of the project. Financialcovenants were also not tailored sufficiently to Pehuenche's future characteras a private company. A dividend cap related to actual cash generationshould have been covenanted. The continuation of the support of theRepublic of Chile for the project in the case of privatization should have beenstipulated in the Guarantee Agreement. The covenant on regulation to theelectricity law was too vaguely worded to allow adequate control ofcompliance. During implementation, Bank staff showed flexibility when theGoCh decided to privatize Pehuenche during construction rather than after acouple of years of operation as initially planned. Supervision was adequatewith no delays in project execution attributable to slow response by the Bank.
9. Borrower and Executive Agency Performance
9.1 The performance of Pehuenche in managing the project was highlysatisfactory, and was given high marks by Bank staff. Pehuenche is a leancompany with competence in planning, executing and operating hydroelectricpower plants, as reflected in its active participation in the preparation of theproject, its attention to detail during supervision, the exacting standards it setfor its contractors, and its periodic reports on project implementation.Pehuenche's transformation from a publicly to a privately owned corporationprimarily affected its relationship with the public sector, but has in no waycaused a lowering of technical standards. CORFO provided the requiredsupport for the transfer of funds and executed the National EnvironmentProgram satisfactorily.
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10. Bank-Borrower and Executive Agency Relationship
10.1 The relationship between Pehuenche and the Bank was a close onecharacterized by considerable continuity in the staff and managers workingon the project both in Chile and in the Bank (with the exception of changesbrought about by the Bank's reorganization in 1987). Perhaps the only areain which the Bank could not exercise a positive influence on the course ofevents was the restructuring of the power sector prior to privatization, aswell as the modalities of the sale of the public power companies in generaland Pehuenche in particular. Given the small amount of the NationalEnvironment Program, contacts with CORFO were more limited.
11. Consulting Services
11.1 Pehuenche preferred to use first ENDESAs engineering department,than after privatization its affiliate INGENDESA as consultants instead ofhiring outside consultants through Bank-approved procedures. Overall, thein-house consultants performed well. Engineering costs as a percentage ofproject costs (14%) were relatively high.
12. Project Documentation and Data
12.1 Project documentation and data included the SAR, the legaldocuments, the progress and final reports by the Borrower and executingagency, supervision reports by the Bank, correspondence, financialstatements, annual and audit reports. The SAR and legal documents wereadequately prepared and generally comprehensive and did provide a usefulframework of reference during project implementation. Semi-annual progressreports were prepared regularly informing on project implementation, and thefinancial situation of the executing agency. Audit reports werecomprehensive and generally submitted on time; all reports were unqualified.The final project report was helpful in preparing this report. Bank recordswere well kept, and information retrieval was easy.
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PART II - PROJECT REVIEW FROM BORROWER'S ANDEXECUTIVE AGENCY'S PERSPECTIVE
From the Borrower's Perspective (Translation)
In accordance with the request in your letter of January 21, 1994 Iwish to inform you that in our character as debtor to the World Bank, wemake the following comments related to the partial financing of thePehuenche Hydroelectric Project.
The participation of CORFO was and is as debtor to the Bank,having to fulfill administrative procedures of periodic projectinformation, as requested by the Bank; in addition, therequirements for information and documentation forreimbursement requests were complied with, and informationon the status of these funds in the Special Account at theCentral Bank was provided with the support of the ContraloriaGeneral de la Republica.
Regarding the financial aspects of the loan for the financing ofthis project, we consider the interest rate applied high; as anexample, we indicate that at present the rate to be paid is7.25% p.a., whereas LIBOR stands at 4.125% p.a.
In general, we consider the relationship for this credit betweenCORFO and the Bank as normal for this type of creditoperations.
On the other hand, it would be convenient that in futureprojects which the Bank finances, special programs such as theenvironmental ones be incorporated directly into the projectand not charged to CORFO as intermediary.
From the Executive Agency's Perspective (Translation)
We wish to confirm that the statistical information and on Projectexecution, the annual financial statements representing the 1987-1992 period,and the financial projections of Empresa E1lctrica Pehuenche S.A., havebeen prepared according to the World Bank's methodology for analysis, andthey correspond to the available information at the time of its preparation andthe best estimates the Company could make on that basis and in the contextof the stated methodology.
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Furthermore, the information and analysis contained in Part I of thisProject Completion Report, have been prepared by the World Bank based onbackground and information provided by Pehuenche S.A.
During the development of the Pehuenche project and the process ofnegotiations, validation and disbursement of the World Bank credit, the Bankstaff made important contributions at each stage of the Project.Communication of the company with the different Bank representatives wasdirect and expeditious, thus facilitating each one of the needed steps.
The relationship with the World Bank, both from a technical as wellas administrative point of view, has been a pleasant experience for EmpresaEl6ctrica Pehuenche S.A.
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PART III - STATISTICAL INFORMATION
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Table_1: Bank Lending for Other Power Proiects in Chile
Loan Amount ApprovalProject Name Number US$ million Year Status
Power and Irrigation 0005-0 13.50 1948 Fully repaid
ENDESA Expansion 0153-0 15.00 1956 Fully repaid
Rapel and Huasco 0244-0 32.50 1959 Fully repaid
Interim Power Program 0402-0 4.40 1965 Fully repaid
Fifth Power 0479-1 60.00 1966 Fully disbursed B-loan
Fifth Power 0479-2 6.41 1974 Fully disbursed B-loan
Sixth Power 1351-0 12.00 1976 Fully disbursed B-loan
Professional training programPlanned - - 03/1992 OtherActual - - 12/1991 Other
Natonal environment program - CORFOPlanned 01/1987 05/1987 06/1988 OtherActual 1987 - 04/1994 Other
Power sector studies - CORFO/CNEPlanned 01/1987 05/1987 06/1988 OtherActual 1987 - 10/1989 Other
IMPLEMENT
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Table 5: Proiect Scope
SAR Scope Actual Scope
Pehuenche Hydroelectric Power Plant Pehuenche Hydroelectric Power Plant- Small diversion dam at the Maule River - Small diversion dam at the Maule River- 90 m high earth dam at Melado River for daily - 90 m high earth dam at Melado River for daily
storage with useful volume of 6.5 million m3 storage with useful volume of 33.0 million m3- 2 tunnels with a total length of 13.3 km - 2 tunnels with a total length of 13.3 km- Underground powerhouse with two 250 MW turbines - Underground powerhouse with two 250 MW turbines
and two 13.8/230 kV transformers with 290 MVA capacity and two 13.8/230 kV transformers with 290 MVA capacity- Annual average generabon 2.765 GWh - Annual average generation 2,905 GWh- 220 kV double circuit transmission line of 25 km - 220 kV double circuit transmission line of 22 km
length between substation Pehuenche and length between substation Pehuenche andthe substation Ancoa for the SIC at Colbun the substation Ancoa for the SIC at Colbun
Training compone,t for Pehuenche staff Training component for Pehuenche staff- 36 staff months for 11 higher level staff - 504 staff months for 18 higher level staff- 80 staff months for 20 plant operators - 414 staff months for 23 plant operators
Nabonal environment program - CORFO National environment program - CORFO- Protecbon of two endangered species - Protecton of two endangered species- Post-graduate studies in environmental fields for - Post-graduate studies in environmental fields for
four professionals four professionals- Seminars to increase public awareness of - Seminars to increase public awareness of
environmental matters related to the above environmental matters related to the above
Power Sector Studies - CORFO/CNE Power Sector Studies - CORFO/CNE- Protecton of the environment and resettlement issues - Protection of the environment and resettlement issues
related to the executon of power projects related to the executon of power projects- Handbook for basic design for small and medium size - Handbook for basic design for small and medium size
hydroelectric projects hydroelectric projects- Reduction of illicit use of electricity - Reduction of illicit use of electricity
SCOPE
- 21 -Table 6 Prolect Cost and Financing
- USS million -
Project Cost SAR Estimate Actual Change_ Local Foreign j Total Local Foreign Total %
12. Total Project Cost 2 534507 4s4.231 799.30 113.30 39
Project Financing SAR Estimate Actual Change__________________________________________ Local Foreign I Total Local Foreign Total %IBRD Loan 2832-CH i il i
1) Originally CORFO had transferred USO 15 6 mil on ol IBRD loan 2832-CH to Pehu:nche es equitycontribution. andUSD 25 0 million at; subloan When CORFO sold Peh,,enche to ENDESA, its equity oartic cation became part ot ENDESA's holdings.
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?.blO 3: 0.0. P.- ob - .AVA - 0 0.0# of Food.
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loor .. di.q D.o-b.. 31 1931193
BAR AC SA AT gm. ACT SAM ACT Zam MT OARt ACT Pr..ft ForooKat
Agreement Section Status Original Revised Descriptior of Covenant ConventsDate Date
Loan 2.03 NYD 6/30/94 Closing Date No extensionrequired
3.01 OK Borrower's comfitment to theobjectives of the Projectand to carry it out with duediligence and efficiency.
3.02 OK Procurement of goods and ALL procurement isworks by Bank's Guidelin2s. completed.
3.04 CORFO to implement aNational EnvironmentProtection Program.
3.05 OK 12/31/88 07/30/89 CORFO/CNE shall develop Studies areguidelines and methods for completed andenvironmental and reports were sentresettlement studies and to the Bank.carry out study on illicituse of electricity.
3.06 OK 12/31/88 09/15/89 CORFO/CNE shall prepare a Handbook washandbook for execution of issued.basic design forhydroprojects up to 50MW.
4.01 OK June 30 of CORFO to furnish to the Bankeach year. audit report on audited
financial statementsincluding Statements ofExpenditures and SpecialAccount.
4.02 The Borrower to refrain from Not meaningful.reducing Pehuenche's equitycapital.
4.03 OK CORFO not to dispose of CORFO sold itsshares in equity capital of shares in equityPehuenche S.A. without prior capital ofconsent of the Bank. Pehuenche with
Bank's noobjection.
Project 2.02 OK Pehuenche to maintain Board The Board ofof consultants for verifying consultants hasappropriateness of design regularly visitedand construction of dam and the site.related infrastructureworks.
2.04 OK Pehuenche to cause dam andrelated structures to beperiodically inspected.
2.05 OK Pehuenche to concludecontract with CORFO aboutavailability of proceeds ofthe loan.
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Page 2 of 2
2.06 OK Pehuenche to submit reportsto the Bank.
2.07 OK Pehuenche to implement Underenvironmental program. implementation
2.08 OK Nov. 30 each Pehuenche to furnish to the With delay.year. Bank a plan for financing
the project in the followingyear.
3.01 OK Pehuenche to carry out itsoperations and conduct itsaffairs with soundadministrative, financialand public utilitiespractices.
3.02 OK Pehuenche to operate andmaintain its plants,machinery, equipment andother property in accordancewith sound engineering,financial, and publicutility practices.
3.03 OK Pehuenche to maintaininsurance of installations.
4.01 OK April 30 Pehuenche to furnish to the With delay.each year. Bank audit report on audited
financial statementsincluding Special Account.
4.02 OK Pehuenche to maintain ratio Ratio was 56/44 atof debt to equity not 12/31/92greater than 67/33.
4.03 OK Pehuenche not to incur any Debt servicenew debt 12 months after coverage for 1992operation starts, unless was 1.1.debt service coverage is atleast 1.1.
4.04 OK Pehuenche shall not acquireits own shares of stock.
Guarantee 2.02 OK Republic of Chile to provide No financingnecessary funds should funds problems.of CORFO and Pehuenche beinadequate to meetexpenditures for project.
3.01 OK Republic of Chile to Studies compLeted.cooperate in studies onenvironment, resettlementand electricity theft.
3.02 OK 12/31/88 12/31/89 Republic of Chile to Regulating Decreeregulate Decreto con Fuerza published inde Ley No. 1, dated Sept. 02/1990.13, 1982 regardingconcessions and electricservices.
KEY:OK = Covenant complied with. ACT = Needs use of formal remedies to bring about compliance.
RVS = Needs to be revised. NYD = Not yet due.SOON = Compliance expected in reasonably short time.
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Page 1 of 2
Table 11: Use of Bank Resources: Staff Weeks
BoardAppraisal Approval
Through Through Board ThroughFY Appraisal Approval Effectiveness Supervision
