Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 4376b-PAN

STAFF APPRAISAL REPORT

PANAMA

SIXTH POWER PROJECT

May 20, 1983

Projects DepartmentLatin America and the Caribbean Regional Office

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

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Currency Equivalents

Currency Unit = Balboa (B)US$1.00 = B 1.00 = 100 cts.

Units and Measures

km = kilometermile 1.609 kmkW kilowattIW Megawatt = 1,000 kWkWh kilowatt hourGWh Gigawatt hour = 1 million kWhkV kilovoltkVA kilovolt amperekVAr kilovolt ampere reactiveMVA Megavolt ampere = 1,000 kVATcal Teracalory = 1 x 109 Kilocalories

Glossary of Abbreviations

CODEMIN = Corporacion Minera de Cerro ColoradoCONADE = Comision Nacional de EnergiaIBRD = International Bank for Reconstruction and DevelopmentIDB = Inter-American Development BankIRHE = Instituto de Recursos Hidraulicos y ElectrificacionICE = Instituto Costarricense de ElectricidadUNDP = United Nations Development ProgrammeUSAID = US Agency for International Development

Panamanian Fiscal Year = Calendar Year

PANAMA FOR OFFICIAL USE ONLY

SIXTH POWER PROJECT

TABLE OF CONTEN'TS

Page No.

1. THE SECTOR ................ .......................... 1

Energy Resources ... . to .................. *..... ......***. 1

Energy Demand and Supply .. ....... ............ S. ...... . . . 2Energy Planning .................................. ...... to 2Bank Participation in the Power Sector ................ 3Power Sector Organization and Regulation .............. 3Power Tariffs ................................ 4Existing Facilities to ...................... .............. . 5Electricity Consumption and Access to Service ......... 6Rural Electrification ......... ... ... .................. 6

Sector Development t . ............................... . 6

2. THE BORROWER ............................... *.... .*.. 7Background ..................................... ...... 7Organization and Administration ...... ................. 7F,mployment .............................................. 8Accounting and Auditing ................................ 8Billing and Collection ................................ 8Performance Indicators and Reporting ......... ......... 9Insurance ............................ 0.................. 9

3. THE MARKET ........................... ................. 9Historical Market .................... ................ 9

The Forecast ............................................. 9

The Energy and Capacity Balances ...................... 10

4. THE PROGRAM AND THE PROJECT . .................. . . . . .. . 10Background ............................................ 10The Program ............................. ................ 11

-.Generation ... * ....................... 11Transmission ............... . 11Sub-transmission, Distribution and Other Projects ... 12

The Proj ect . .......... . 12

_ Project Cost and Financing ........................... 13Implementation .............. ....... 15Procurement ......... . 15Disbursement .... 16Environment .......... ..... 16Project Risks ....... 16proj ect File ...................... 16

This report is based on the findings of an appraisal mission which visitedPanama in October/November 1982. The mission comprised Messrs. L. H.Luzuriaga (Power Engineer) and J. L. Vietti (Financial Analyst).

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

TABLE OF CONTENTS (Continued)Page No.

5. FINANCES ....... ....................................... 17Summary o. .......... ... ................................ 17Past Performance and Present Position .................. 17

Financial Structure * ...... *...............o....... .. . ... .......... . 18

Investment and Financing Plan ......................... 19Future Finances ........... * .* * * ** * * * **........*....... 20

6. ECONOMIC ANALYSIS .......... . . . . ............... o......*.**.*....... * 21Least-Cost Solution . .. ..... * .. *.... *..o *******.......... * *o **...... 21

Return on Investment .... ... ................ .. .. .... 21

7. AGREEMENTS REACHED AND RECOMMENDATION ................. 22Condition of Effectiveness ... o............**........... 23Recommendation ....... *..* * ...... * *........... * * * 23

ANNEXES

1.1 Bank Participation in the Power Sector .... os...o ...... 241.2 Electricity Rates as of November 1, 1982 ... ........... 251.3 Electricity Charges for Some Typical Consumptions ... 261.4 Existing and Future Power Projects ........ ............. 27

2.1 Organization Chart ....... .. ........... ............ 282.2 Main Performance Indicators .... .... .... ................... 29

3.1 Actual and Forecast Sales and Gross GenerationRequirements - GWh . ..... ......... ... .. ............ 30

3.2 Energy Balance for IRHE's System - GWh .................. 313.3 Capacity Balance for IRHE's System - MW ........... ..... 323.4 Forecast of Net Generation for IRHE's Power Plants

- GWh ............... o............... 33

3.5 Firm Energy Forecast ...... .. ........ ........ .......... . 343.6 Demand Forecast ............ .................... . .. 35

4.1 Investment Program for Period 1983-87 ..... ............. 36

4.2 Project Cost and Implementation . ...................... 374.3 Proposed Bid and Execution Schedule .. .............. ... 38

4.4 Loan Disbursement Schedule ... ......................... 394.5 Project File .......... ........... . ..... . 40

5.1 Financial Indicators ... ......... .. .......... 415.2 Actual and Forecast Income Statement 1981-87 . .425.3 Actual and Forecast Sources and Applications of Funds

1981-87 o ............................. o ...... o .... oo.o...... o.. 435.4 Actual and Forecast Balance Sheets 1981-87 ....... o..o. 445.5 Loans Disbursement Statement ............ 45

5.6 Forecast Interest Charges to 1983-87 ...........o...... 465.7 Forecast Debt Amortization Statement 1983-87 ....... o... 47

6.1 Financial Rate of Return for 1982-87 Program .......... 48

MAP

Instituto de Recursos Hidraulicos y Electrificacion (IRHE)- IBRD 16835

PANAMA

SIXTH POWER PROJECT

1. THE SECTOR

Energy Resources

1.01 The main source of indigeneous commercial energy identified so farin Panama is hydro energy. Instituto de Recursos Hidraulicos yElectrificacion (IRHE) has investigated about 30 sites with a potential ofabout 1,900 MW and an average generation of about 10,000 GWh per year (para.4.02). A pre-feasibility study prepared by IRHE with United NationsDevelopment Programme (UNDP) financing and the assistance of the consultantC. T. Main (USA) shows that in the Changuinola and Teribe river basins thereare eleven feasible sites for power generation with a total capacity of about1,500 MW, and an estimated annual generation of about 8,700 GWh. Also withUNDP funds, the same consultant prepared the feasibility study for theChanguinola II site, which would have a total capacity of 300 MW. TheInter-American Development Bank (IDB) is considering to finance the initialactivities for this project, including the preparation of the finalengineering design and bidding documents by 1985, as well as the constructionof the access roads. Additionally, the consulting firm ACRES (Canada)completed the feasibility study for the Tabasara hydro-project (220 MW, 1,000GWh/year). Finally, under a Swedish Government grant, consultants arepreparing the feasibility study for the Esti project which would include theinstallation of 120 MW and 500 GWh/year downstream of the existing LaEstrella and Fortuna projects.

1.02 Panama's geothermal resources would permit the installation ofabout 400 MW, according to the results of preliminary investigations preparedby Corporacion Minera de Cerro Colorado (CODEMIN), a Government-owned miningcompany, and by IRHE, from 1971 to present, with UNDP and OLADE financing.Most of the geothermal sites are located in the Chiriqui province, in theareas of Anton, Calobre, Colorado and the Baru volcano. IRHE will contractconsultants to be financed by the Bank (para. 1.07) for the execution ofgeothermal surveys in the most promising sites; the studies would becompleted in 1984.

1.03 Preliminary investigations executed by the Government show noindication of petroleum resources. However, there appear to be potentialcoal deposits in the provinces of Colon and Chiriqui, although no studieshave been made to determine coal characteristics and reserves. As part of aBank financed Energy Assistance Project (Loan 1954-PAN), there are studiesunderway to determine the exploitable petroleum and coal resources of thecountry (para. 1.07). Completion of the studies is scheduled for 1984.

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1.04 With USAID financing, IRHE is preparing preliminary studies for theinstallation of 25 mini-hydro plants, which would have a total capacity ofabout 1,000 kW. In the past, IRHE installed four plants of this kind (total600 kW). Even though mini-hydros are not attractive in Panama because oftheir high investment cost and low efficiency, sometimes they represent theonly feasible alternative to supply electricity to small communities. IRHEis conducting experiments to utilize other renewable sources of energy suchas biomass, biogas, solar energy and firewood, although these sources are notexpected to contribute significantly to the country's energy supply in theforeseeable future.

Energy Demand and Supply

1.05 Panama depends heavily on imported petroleum to meet its energyrequirements. Petroleum accounts for about 60% of Panama's total primaryenergy supply. In 1981, petroleum imports amounted to 10.7 million barrelsat a cost of approximately US$361 million, or about 20% of all Panama'simports that year. Petroleum is refined locally at Las Minas refinery, whichhas a capacity of 100,000 bbl/day. Currently, about 56% of the importedpetroleum is re-exported mainly as diesel and fuel oil. Government policiesadopted in 1979 and an intense public campaign to conserve energy helped tocurb the use of petroleum products, resulting in a net decrease of 20% in itsuse in the period 1979-81.. Retail fuel prices to consumers in October 1982were as follows: Gasoline regular: B 2.18/gal; premium: B 2.32/gal;Diesel-oil: B 1.40/gal.

1.06 As a consequence of Government policies, hydro energy has increasedits share in the country's total energy supply from 2% in 1977 to 10% in1981. In the same period, mainly because of the substitution of hydro forthermal generation, the supply share of petroleum products for electricgeneration decreased from 24% to 13% of gross energy supply. The followingtable shows the country's gross energy consumption by supply sources for theperiod 1977-81:

Gross Primary Energy Consumption by Sources (Tcal)

Source 1977 % 1979 % 1981 %

Petroleum products 7,050 47 7,687 48 6,727 47Petroleum forelectric generation 3,695 24 3,084 20 1,922 13

Hydroelectricity a/ 337 2 800 5 1,432 10Wood products 3,053 20 3,167 20 3,186 22Baggasse 1,020 7 1,183 7 1,100 8

Total 15,155 100 15,921 100 14,367 100a/ 1 Tcal = 1.163 Gwh

Energy Planning

1.07 Comision Nacional de Energia (CONADE), created in 1980 as anadvising body to the President of the Republic, is in charge of investigatingand planning all matters related to energy supply and consumption in Panama.It is headed by IRHE's Director General and operates with personnel of IRHE'sPlanning Directorate. CONADE's Executive Board includes its Director, itsTechnical Secretariat (IREE's staff) and delegates representing the President

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of the Republic, the Minister of Planning and Economic Policy, the Ministerof Commerce and Industry and the Association of Panamanian Engineers. Atpresent, CONADE and the Ministry of Commerce and Industry are the executingagencies for Loan 1954-PAN for US$6.5 million to the Government, coveringthe following areas: (a) planning and organization of the energy sector;(b) energy auditing and conservation; (c) cost analysis of energyconservation and substitution; (d) investigation of petroleum, coal andgeothermal resources in the country; and (e) training and other studies.

Bank Participation in the Power Sector

1.08 Since 1962 the Bank has made five loans to IRHE totallingUS$172.3 million (Annex 1.1). The first four loans have helped to financehydroelectric and thermal expansion (533 MW) and associated transmission, andthe fifth loan is financing subtransmission and distribution across thecountry. Bank participation has contributed to improve sector organizationand planning and has facilitated the inflow of foreign commercial financingto the sector. Bank lending has assisted IRHE and the Government in theirefforts to implement tariff policies aiming at maintaining electricity pricesin line with long-run marginal costs and at providing appropriate generationof funds to meet the sector investment requirements. The continued Bankpresence in the sector would be crucial to consolidate the sector'sorganization and self-financing, and to attain, where justified, theGovernment's goal of substitution of hydro for thermal generation ofelectricity.

1.09 As detailed in the corresponding Project Completion and Auditreports, the first three Power Projects financed under Loans 322-PAN (1962),661-PAN (1970) and 948-PAN (1973) were successfully completed although withsome delays and cost overruns. In the execution of the Fourth Power Projectpartly financed under Loan 1470-PAN, the construction of the Fortunahydroelectric plant encountered unexpected poor geological conditions whichwill result in a delay of about 16 months and a cost overrun of about 73%.The distribution project (Fifth Power Project), financed under Loan 1778-PAN,is progressing satisfactorily, although with an expected cost overrun ofabout 29% due mainly to higher than originally estimated local costincreases.

1.10 The proposed US$32.1 million loan would be the sixth one to IRHE,and would help finance a second stage of the rehabilitation and expansion ofdistribution systems started under the Fifth Power Project.

Power Sector Organization and Regulation

1.11 IRHE, the autonomous Government agency created in 1961, is the soleentity responsible for public service electricity supply in Panama, exceptfor the supply of the Canal and adjacent areas (para. 1.13). IRHE acquiredthe Compania Panamena de Fuerza y Luz (FyL) in 1972, the Empresas Electricasde Chiriqui in 1973, the Hidroelectrica de El Valle in 1976, and two smallpower utilities in 1978: La Chorrera, formerly a privately owned company inWest Panama Province (about 3 MW), and Bocas del Toro, a municipal company(less than 1 MW).

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1.12 IRHE's Board of Directors is in charge of power sector policies(para. 2.02). There is no separate regulatory body for the sector.Electricity tariffs have to be approved by the Cabinet on the recommendationof IRHE's Board and the Finance Commission 1/. IRHE's annual budget issubject to approval by the Finance Commission. The covenant under Loan1778-PAN which provides that it would be an event of default to make anychange in the electricity legislation affecting materially and adversely theoperations or financial condition of IRHE or the carrying out of the project,has been maintained under the proposed loan.

1.13 The Canal facilities and adjacent areas are supplied by the PanamaCanal Commission which has an installed capacity of 176 MW. The systems ofthe Canal Commission and IRHE are interconnected and exchange of power andenergy between the two companies is determined for economic and technicalreasons on a day-to-day basis; there is no formal power exchange contract.In 1982 the Commission purchased from IRHE 16 GWh. Most of the residentialservice to the Ancon and Cristobal areas is now provided by IRHE at standardtariffs.

1.14 IRHE and the Instituto Costarricense de Electricidad (ICE), signedearly in 1982 a system interconnection agreement setting forth the basis forenergy exchange and pricing, and for the programming and financing of therelated facilities. The interconnection, scheduled for 1984, would benefitboth countries, permitting the exchange of up to 150 MW in emergencies andsecondary hydroelectric energy to replace thermal generation in Panama.

Power Tariffs

1.15 Government legislation enacted in 1958 allows IRHE to earn amaximum rate of return of 8.75% on a rate base equal to net revalued assetsin operation plus a working capital allowance of three months revenues. Acovenant under Loan 1778-PAN establishes that IRHE's tariffs will be set toallow 8.75% as a rate of return, starting in 1980. Actual figures were 8% in1980, 9.25% in 1981, and 7.4% in 1982. This covenant has been retained underthe proposed loan. Fixed assets, including major works under construction,will continue to be revalued yearly in accordance with a method satisfactoryto the Bank 2/.

1/ Chaired by the Vice President of the Republic and composed of the Ministerof Planning and Economic Policy, the Minister of Finance and Treasury, theController General of the Republic and the General Manager of BancoNacional de Panama.

2/ The methodology agreed with the Bank provides for revaluation of assets(including major works during construction) according to specified indicesfor international inflation (Handy-Whitman indices) and local inflation(composite index of IRHE's labor and materials costs).

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1.16 IRHE applies a unified tariff structure to all its customersthroughout the country (Annex 1.2). It has been designed to discourageexcessive electricity consumption by residential customers with consumptionover 400 kWh/month (Annex 1.3). Present tariff structure provides for a fuelsurcharge clause designed to pass fuel price increases on to consumersautomatically.

1.17 As agreed under the terms of Loan 1470-PAN, IRHE, with theassistance of SOFRELEC (France), prepared a tariff structure study based onmarginal costs of electricity (9 US/Kwh at consumer's level) Some of therecommendations of the study have been implemented, i.e. a special tariff wascreated for larger industrial customers. The study is being updated by IRHEto determine the impact of the delay and overcost of the Fortuna project, notknown when the study was first prepared. The existing covenant under Loan1778-PAN, which establishes that no power will be sold to bulk customers atrates lower than the long run marginal cost, has been maintained under theproposed loan.

Existing Facilities

1.18 IRHE's total installed capacity by the end of 1982 was 516 MW ofwhich 49% was hydroelectric capacity. The following table summarizes theexisting capacity in Panama by type of installation and ownership (see Annex1.4 for details):

Installed Capacity in Panama - January 1983

Hydro Thermal Total

MW % MW % MW %

IRHE 252 49 264 51 516 100Self producers - - 55 100 55 100Panama Canal Commission 47 27 129 73 176 100

Total 299 40 448 60 747 100

1.19 By the end of 1982 the transmission system consisted of about765 km of 220 kV and 115 kV lines interconnecting the regional systems andthe main power plants to the grid. The same year distribution systemstotalled about 4,500 km of 34.5 kV and lower voltage lines. Total capacityin transformers by the end of 1982 was about 1,080 MVA at 220 kV and 115 kV,and 890 MVA at 34.5 kV and lower voltages.

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Electricity Consumption and Access to Service

1.20 Per capita consumption of electricity in Panama was 687 kWh in1977, 753 kWh in 1979 and 801 kWh in 1981 3/. In 1981, 80% of the urbanpopulation and 39% of the rural population, or 57% of the total population,had access to electricity. IRHE's goal is to increase those figures to 85%,43% and 62% respectively by 1986. This reflects the Government's awarenessof the need to provide adequate public services to support the serviceoriented economy of the country.

Rural Electrification

1.21 IRHE, with the assistance of the consultant ESIN (Argentina),and IDB financing, prepared a five year rural electrification program. Thefirst stage of this program will be executed in the period 1983-85, at atotal cost of US$23.0 million, of which IDB will finance US$13.3 million.The project includes 1,400 km of lines at 34.5 kV, and will serve 12,500 newrural customers.

Sector Development

1.22 The main objectives of IRHE's expansion program are:

(a) to meet electricity demand at least cost;

(b) to integrate the small isolated systems into the regional systems;

(c) to interconnect the regional systems through a high-voltagenational grid; and

(d) to develop the country's hydro resources to meet the increase indemand and to substitute high cost thermal generation.

1.23 IRHE's technical staff has acquired considerable experience in thedesign, construction and supervision of power projects, some of which, likethe Fortuna hydro project, have presented difficult technical and financialproblems. Such experience has been complemented with formal training in andoutside the country and on the job training provided by consultants. As aresult IRHE's staff is technically prepared to meet most of the futureproject requirements. However, consultants' services will still be requiredfor the design of large power plants, complex transmission systems andsubstations and other highly specialized technical projects. The Bank'spresence in the power sector has been a decisive factor to encourage andsupport IRHE's staff training in particular and institution building ingeneral.

1.24 IRHE is experiencing short-term financial constraints mostlyrelated to the Fortuna project cost overrun (para. 5.03). No major financial

3/ Per capita electricity consumption and access to electricity in 1980 forsome South American countries are respectively: Argentina 1,464 kWh and80%; Brazil 1,120 kWh and 57%; Colombia 783 kWh and 62%; Ecuador 393 kWhand 43%; Peru 564 kWh and 36%.and Uruguay 1,209 kWh and 82% (Source:IBRD, Power Sector Data Sheets for 1980).

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constraints are anticipated for the long term, i.e. for the period 1983-88,provided that financing to complete Fortuna is secured, and provided thatIRHE will continue obtaining the required 8.75% rate of return.

2. THE BORROWER

Background

2.01 The proposed borrower, IRHE, is an autonomous agency of thePanamanian Government, created in 1961 for the purpose of planning,constructing and operating, under exclusive basis, all power generationr'equired by the country. Since IRHE's creation, the Government has purchasedthe assets of other private utilities vesting them in IREE. Today theinstitution i!::, the sole utility providing electrical energy to the entirecountry, with the e-xeption of the area served by the Panama Canal Commission(para. 1.13).

Organization and Administration

2.02 IRHE is reputed to have the best organization and staff amongpublic institutions in the country. IRHE is directed by a seven member Boardof Directors and a Director General. The Chairman is the Minister ofPlanning and Economic Policy; other members are the Ministers of Agricultureand of Commerce and Industry, and the representatives of the Association ofIndustrialists, of the Banking Association, of the Society of Engineers andArchitects, and of IRHE's Labor Union. This Board composition has generallyproven to be satisfactory. IRHE's annual operating and investment budgetmust be approved by the Government's Finance Commission (para. 1.12).

2.03 Administration is entrusted to the Director General, the DeputyDirector General and the Technical Director. The first two are appointed bythe President of the Republic, and the Technical Director by the DirectorGeneral.

2.04 IRHE's current organization (Annex 2.1) includes seven Directoratesof which three are for operations (Finances, Operations, and Engineering andConstruction) and four for support functions (Planning, InstitutionalOrganization, Computer Services, and Purchasing and Warehouses). It wasimplemented as a result of an organizational and training program executed byIRHE with the assistance of the consultant Gilbert and Associates, USA, withBank financing (Loan 1470-PAN). It is adequate for today's operation,although some structural changes would be required in the near future tofacilitate delegation of authority and decision making as the system grows.IRHE's management is addressing this problem.

2.05 Bank financing of organizational studies, training and consultant'sservices, especially under the Fourth and Fifth Power Projects, has permittedTRHE to achieve important goals such as: improvement of its organizationalstructure, staff training at all levels, implementation of computer facil-ities for billing, accounting and technical applications; implementation offinancial and load forecasting models; improving purchasing procedures andmanagement of warehouses; and improving coverage of risk insurance policies.

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Employment

2.06 IRHE's total staff in December 1982, was 5,415 including permanentand temporary employees, of which approximately 71% operate and administerthe power system across the country; the rest are in charge of theengineering and construction activities for new projects and offer generalsupport to IRHE's staff. IRHE has 370 professionals with a Universitydegree, of which 267 are engineers. In the period 1979-81, the growth ofpersonnel has been higher than agreed with the Bank in the context of Loans1470-PAN and 1778-PAN. At present IRHE has productivity indicators lowerthan the average for similar utilities 4t. IRHE's management is consciousof the problem, and took some important decisions on this issue: (i) freezingof personnel hiring in 1982; (ii) decreasing IRHE's construction force by notreplacing construction personnel leaving the company; and (iii) establishingthat hiring of new personnel will be done only when justified and authorizedthrough the annual operating budgets. Although these are positive steps tocurb the problem, in view of the high incidence of personnel costs in IRHE'spower rates, during negotiations of the proposed loan IRHE agreed to limitits personnel growth as established under agreed performance indicators(para. 2.10).

Accounting and Auditing

2.07 IRHE has substantially improved its accounting procedures in thelast few years. As a result, monthly financial statements are now issuedwithin 30 days of their respective closing dates. IRHE's assets have beenrevalued yearly since 1976 by a local independent consultant acceptable tothe Bank, under a methodology agreed with the Bank (para. 1.15).

2.08 Since IRHE is a Government autonomous agency, its accounts areaudited annually by the office of the Controller General of the Republic.TRHE's annual external audit, required under previous Bank loans, has beenperformed satisfactorily by Arthur Andersen and Co. since 1975. Under theterms of the proposed loan, IRHE agreed to continue to engage qualifiedexternal auditors to review its accounts yearly and to send to the Bankaudited financial statements, including the Auditor's recommendations, withinfour months of the end of each fiscal year.

Billing and Collection

2.09 Within the context of the Fourth Power Project (Loan 1470-PAN),IRHE, with the assistance of Gilbert and Associates (USA), established amodern data processing system for customer billing and accounting. Monthlybills are distributed by carriers and by mail, and within 20 days of receiptcustomers should pay their bills at IRHE's offices or banks located through-out the country. As of December 31, 1982, total accounts receivable were 18%(about 67 days of billing) of total annual sales, which is higher than the 60days agreed under previous loans, largely due to high arrears of publicentities. However, the problem is not serious since past experience showsthat the Government has always paid its arrears, often in lump sums.

4/ In 1982, one of the productivity indicators, the number of customersserved per employee, was 47 in Panama, as compared to 75 and 95 for thepower sectors of Costa Rica and Ecuador respectively.

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Nevertheless, the relevant covenant under existing loan agreements whichlimits accounts receivable to 60 days of billing has been retained under theproposed loan.

Performance Indicators and Reporting

2.10 IRHE agreed to comply with and to inform the Bank quarterly on theperformance indicators shown in Annex 2.2 which have been discussed with IRHEand define targets for improving its operating efficiency. IRHE also agreedto inform the Bank whenever noncompliances with such targets are expected tooccur. As in past loans, IRHE agreed to prepare and send to the Bankperiodic progress reports and such other reports as the Bank may reasonablyrequest, including a project completion report.

Insurance

2.11 IRHE carries acceptable insurance against risks arising from civilliability, motor vehicle claims, fire, lightning, explosion, flood, accidentclaims, and income loss due to equipment failure for specified plants,warehouses and buildings. As a result of a rationalization of its practices,IRHE now contracts its insurance policies with three companies through abroker.

3. THE MARKET

Historical Market

3.01 IRHE's service area extends throughout the country and includesrural areas and isolated villages. As provided in the Torrijos-Carter CanalTreaty signed in 1977, IRHE is gradually assuming the service to residentialcustomers of the former Canal Zone. However, electricity supply for theCanal operations and its military installations will continue to be providedby the Canal Commission. At present, IRHE serves 57% of Panama's population,equivalent to 1.1 million inhabitants. In the period 1970-80, in the areasnow served by IRHE, electricity consumption grew at an annual average of8.8%. However, there has recently been a trend towards slower growth (i.e.7.2% in 1977-82, and 6.9% in 1980-82) as a result of generation restrictionsin 1977 and 1978, a public campaign since 1979 directed by the Government tosave energy, and lately the economic recession.

The Forecast

3.02 IRHE has improved its load forecast models with the assistance ofconsultants financed by the Bank. The most adequate model for Panama'sconditions appears to be one that considers both econometric and macroeco-nomic inputs related to historical and projected data for consumption andeconomic growth. Energy sales for the period 1982-90 are expected to grow at6.75% per annum, which is lower than the 7.5% forecast for the same periodduring the appraisal of the Fifth Power Project (Loan 1778-PAN). The

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decrease reflects a slower economic growth for the country. 5/ Statisticaldata and forecast of energy sales in Panama by consumption categories areshown in detail in Annex 3.1 and summarized in the following table, whichshows that patterns of electricity consumption are not expected to changesubstantially in the future.

Electricity Consumption in Panama

1977 1982 1987Type of user GWh % GWh % GWh

Residential 403 34 497 30 633 27Commercial 397 33 526 31 725 31Industrial 128 11 205 12 305 13Public Lighting 23 2 35 2 49 2Government 196 17 320 19 472 20Other a/ 35 3 89 6 151 7

Total 1,182 100 1,672 100 2,335 100

a/ Includes bulk sales and IRHE's own consumption.

3.03 The number of IRHE's customers grew from 210,000 in 1978 to254,000 in 1982, and IRHE expects to serve 314,000 customers in 1987, a netincrease of 60,000. The proposed project would finance the distributionexpansion required to supply these new customers.

The Energy and Capacity Balances

3.04 The forecast energy and capacity balances are shown in Annexes 3.2and 3.3, and graphically in Annexes 3.5 and 3.6. The forecast net generationof IRHE's power plants (Annex 3.4) shows that thermal generation will begreatly reduced after Fortuna becomes operational in 1984 (para 4.03).

4. THE PROGRAM AND THE PROJECT

Background

4.01 Up to 1976 Panama relied almost exclusively on thermal generationto supply electric energy and, as a consequence, it depended heavily on fuelimports. After the commissioning of the 150 MW Bayano hydroelectric plant in1976 and the 90 MW La Estrella-Los Valles hydro plant in 1979, IRHEconsiderably reduced its thermal generation from 94% in 1975 to 41% in 1982.In 1985, after the new Fortuna project is in service, almost all electricityrequirements will be met by hydroelectric plants.

5/ Constant GDP growth in real terms for Panama is now forecasted at 2%average per year for 1983-85, as compared to approximately 5% forecastedpreviously.

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The Program

4.02 IRHE's generation expansion program aims toward three importantgoals: (i) the substitution of hydro for thermal generation from a present41% of thermal generation to nearly zero after the commissioning of Fortunain 1984; (ii) the installation of least cost capacity additions to supplydemand growth; and (iii) the improvement of system reliability to secure aloss of load probability of two days per year as a maximum. The presentgeneration expansion program for the period 1982-93 is based on a Master Planfor 1982-2003, originally prepared by IRHE with the assistance of C. T. Main(USA). The plan is periodically updated by IRHE's Planning Directorate. Inits latest revision, a total of eight alternative plans were considered,combining in various arrangements the following projects: Fortuna II(raising of the dam); Bayano 3 hydro (75 MW);- Changuinola I, II, III and IVhydro (300 MW, 306 MW, 102 MW and 146 MW, respectively); Teribe I, II and IIIhydro (237 MW, 76 MW and 124 MW); geothermal plant (110 MW); coal fired plant(225 MW) and gas turbines (75 MW).

4.03 The least-cost expansion plan adopted by IRHE includes onlyhydroelectric projects, except for a gas turbine plant (1982) constructed tocompensate for the delay of Fortuna. The existing thermal plants will bekept operative as cold stand-by during average hydrological years, and willoperate to meet energy deficiencies during dry years and during a period of 4years prior to the operation of the new Changuinola hydroplant in 1992. 6'The program includes the following projects for the period 1982-93:

Generation

(a) Installation in Panama City of a 2 x 18 MW gas turbine plant (completedin 1982).

(b) Completion of the 300 MW Fortuna I hydroelectric project in October1,984.

(c) Completion in 1987 of Fortuna II (raising of the dam to provideadditional firm energy).

(d) Installation of the third 75 MW generating unit at the Bayanohydroelectric plant in 1990.

(e) Construction of the 300 MW Changuinola I hydro project for operation in1992.

Transmission

(f) Completion of the 220 kV lines Fortuna-David in 1983.

(g) Interconnection with Costa Rica at 220 kV in 1984 (para. 1.14).

6/ IRHE is considering a rehabilitation program to improve the efficiency ofexisting thermal plants as suggested recently by an UNDP sponsored energymission (para. 4.13).

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(h) Construction of a high voltage tranmission system 7/ to connect theChanguinola Project to the Panama metropolitan area.

Sub-transmission, Distribution and Other Projects

(i) Completion in 1983 of the sub-transmission and distribution projectsincluded in the Fifth Power Project (Loan 1778-PAN).

(j) Execution of the proposed Sixth Power Project which would include mostlydistribution in the period 1983-86.

(k) Other routine expansion projects covering substations, sub-transmissionand distribution for the rest of the period up to 1993.

(1) Execution of the the first stage of the rural electrification program,to be financed by IDB (1983-85), covering 1,400 km of primary voltagelines (34.5 kV) to serve 12,500 new rural customers.

(m) General plant and miscellaneous investments.

4.04 The cost of the 1983-87 slice of the above construction program incurrent prices, including interest during construction, is estimated at aboutUS$692 million, of which 41% would be local costs and 59% foreign costs(Annex 4.1).

The Project

4.05 The Fifth Power Project now being executed (Loan 1778-PAN) includeda much needed rehabilitation and expansion of IRHE's sub-transmission anddistribution facilities across the country for the period 1980-83. Some ofthe distribution networks under rehabilitation were over thirty years old,obsolete and operated overloaded and with high losses. They were acquiredfrom privately-owned utilities as part of a Government policy to entrust toIRHE the responsibility of the power business in the entire nation (para.1.11). The project is progressing satisfactorily, although with a delay ofthree months and a cost overrun in the local cost component due to higherlabor costs than anticipated at the time of appraisal (para 1.09).

4.06 The proposed Sixth Power Project is a part of IRHE's least costexpansion plan. It has been included by the Government in the list of highpriority projects since its execution is essential to permit the expansion ofthe power sector as planned by the Government. The project represents asecond stage of the program initiated under the Fifth Power Project, andconsists of the rehabilitation and expansion of IRHE's sub-transmission anddistribution systems for the period 1984-86. The various components of theproject would provide the means of energy distribution to meet the projectedload growth; part of the people who are

7/ The rated voltage has not yet been decided, but will be in the range offrom 345 to 500 kV.

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today without electric service, as well as large housing projects beingdeveloped by the Institute of Social Security and the Ministry of Housing,would be supplied with electricity. The rehabilitation of obsolete systemsand the addition of distribution transformers and capacitors would reducelosses and improve the quality of service to residential, commercial andindustrial consumers. However, overall improvement to energy losses will bemoderate in view of the expected increase in transmission losses when theFortuna project is connected at the extreme of a long transmission line in1984. Power would be supplied for the operation of the new pipeline betweenPuerto Armuelles on the Pacific Ocean and Bocas del Toro on the Atlantic, nowdepending on captive diesel power plants. Postponement of the project wouldcause economic problems to the industrial sector because of lack of electricservice, and to IRHE a loss of revenues, because of market growth limitationsand an increase in power losses, due to circuit overloads, with itsconsequent economic losses and degradation of quality of service.

4.07 Design alternatives are sometimes limited because the proposedproject includes improvements to and expansion of existing systems.Least-cost solutions were investigated for the main components such asextension of existing substations and installation of new ones; routing oftransmission lines; location, dimensioning and type (aerial vs. underground)of primary and secondary feeders; and location and dimensioning ofdistribution transformers and capacitors.

4.08 The project, described in detail in Annex 4.2, consists of thefollowing components:

(a) sub-transmission: (i) installation of 65 km of 115 kV aeriallines, 7 km of 115 kV underground feeders and 19 km of 34.5 kVlines; and (ii) installation of 121 MVA of substation capacity at115 kV and 34.5 kV;

(b) distribution (13.2 kV and lower voltages): installation of(i) about 1,700 km of primary and secondary circuits; (ii) 40 km of13.2 kV underground circuits; (iii) 3,200 distribu-ion trans-formers, with a total capacity of 150,000 kVA; (iv) 9,000 streetlamps; and (v) 32,000 meters;

(c) metering equipment: installation in 35 substations of meteringequipment to be used for detailed load forecasting and energylosses study (para. 4.13); and

(d) consulting services: design of a 115 kV underground feeder andpreparation of an energy losses study, requiring a total of 10man-months.

Project Cost and Financing

4.09 The cost estimates for the proposed project which were prepared byIRHE, based on actual costs of the Fifth Power Project, are reasonable. Inparticular, costs were analyzed in depth to take into account recentexperience (para. 4.05). Base costs are expressed in January 1983 prices.Local and foreign costs at the end of each year were obtained using thefollowing inflation indices:

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1983 1984 1985 1986

Local Cost (%) 7.5 7.5 7.5 6.0Foreign Cost (%) 8.0 7.5 7.0 6.0

The cost of IRHE's engineering and administration is estimated at 10% oftotal base cost, in line with experience in recent similar projects. Thecost of the foreign consulting services (total 10 man-months) is estimated atUS$15,000 per man-month including travel, living and miscellaneous expenses.Physical contingencies are estimated at 10% of base cost for thesub-transmission and distribution sub-projects. Detailed project costs areshown in Annex 4.2, and are summarized in the following table:

Estimated Cost(In Million US$)

Local Foreign Total1. Sub-transmission (115 kV and 34.5 kV)

1.1 Transmission lines 4.2 4.1 8.31.2 Substations 1.4 4.7 6.1

2. Distribution (13.2 kV and lower)

2.1 Specific projects 2.5 1.6 4.12.2 Distribution expansion 7.6 12.8 20.4

3. Engineering and Administration

3.1 Consulting services for undergrounddesign and system losses study 0.4 0.3 0.7

3.2 IRHE's engineering and administration 3.9 - 3.9

Total Base Cost 20.0 23.5 43.5

4. Contingencies

4.1 Physical contingencies 1.6 2.3 3.94.2 Price contingencies 5.8 6.2 12.0

5. Total Project Cost 27.4 32.0 59.4

4.10 The proposed US$32.1 million Bank loan which would finance theforeign cost of the project and the front-end fee, would be made at standardBank terms with a 15 year maturity, including a 3 year grace period. Forfinancial forecast purposes, an interest rate of 10.97% p.a. was assumed.The local cost of the project, US$27.4 million or 46% of the project cost,

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would be financed by IRHE's internal cash generation. No Governmentfinancing is required for the proposed project, but during negotiations ofthe proposed loan the Government should agree to provide any additional fundsthat may be necessary to carry out the project.

Implementation

4,11 The design of the project will be carried out by IRHE's engineerswho have acquired enough experience during previous projects executed withthe assistance of consultants. The exception would be the design of the115 kV, 7 km San Francisco-Monte Oscuro underground feeder, for which fourman-months of specialized consulting services are required. For the energylosses study (para. 4.13) IRHE will also require specialized consultant'sservices estimated at six man-months. IRHE expects to contract theseservices from one of its present consultants.

4.12 Construction and insta'llation of the physical components of theproject will be executed in the same manner as for the Fifth Power Project,as this method has proved to be successful: IRHE will carry out theinstallation of all routine distribution expansion and in general allsub-projects that require service disconnection or energized line work. Allother projects will be contracted. As a result of the implementationapproach agreed for the execution of the Fifth Power Project, IRHE has now atotal of 54 well equipped and experienced construction crews, which couldimplement the proposed project without difficulty within the estimatedconstruction schedule.

4.13 In the past few years IRHE's energy losses have increased, the mainreasons being: (i) increase of the length of transmission lines; (ii) distri-bution system overloads; and (iii) increase in illegal use of electricity.In order to find solutions to decrease these losses, a diagnostic study wasprepared in January 1983 under a UNDP funded program for which the Bank wasthe executing agency, which also included a review on efficiency improvementsto existing thermal plants, A second phase for the energy loss study will becontinued by a team of IRHEE's engineers (40 man-months) assisted by a consul-tant (para. 4.11). The proposed loan would finance the consulting servicesfor this study as well as the cost of fixed and portable metering equipmentrequired to determine loading of substation transformers, feeders, distribu-tion transformers, etc. The gathering of demand information through theseinstruments is fundamental for an efficient design and operation of distribu-tion systems,

Procurement

4.14 All the equipment, materials and civil works not carried outby IRHE will be procured through international competitive bidding, inaccordance with Bank guidelines, Following successful purchasing policiesestablished for the Fifth Power Project, IRHE would do all purchases in asmall number of bulk contracts (Annex 4.3). IRHE will not requestpreferences for local suppliers because the equipment and materials requiredfor the project are not produced locally.

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Disbursement

4.15 Disbursements from the loan account will be fully documented andwould be made for 100% of the foreign expenditures for equipment, materials,civil works and consulting services. The estimated disbursement schedule(Annex 4.4) is based on detailed construction programs prepared by IRHE whichenvisions final equipment delivery by July 1986 (Annex 4.3) and projectcompletion by December 1986. This disbursement schedule reflectspeculiarities in the implementation of distribution projects and isconsidered reasonable. Bank's standard profiles were not used mainlybecause, particularly for Panama, they are based on experience mostly withhydrolectric and thermal projects. The closing date for the proposed loanwould be June 1987 to allow IRHE enough time to pay funds retained tosuppliers.

Environment

4.17 Following IRHE's usual practice, the proposed project will becarried out with due regard to environmental protection. None of the sub-projects or the routine distribution expansion included in the project isexpected to involve any risk to the environment. Rehabilitation and expan-sion of existing facilities in most cases will not involve new right-of-ways. In the case of new lines and substations, the corresponding routes andlocations have been selected to minimize new right-of-ways involvingclearance.

Project Risks

4.18 The execution of the project does not involve risks other thanthose normally associated with the construction of sub-transmission anddistribution works. IRHE carries out its construction works safely and has alow record of accidents. All the rehabilitation works of existinginstallations in congested urban areas, and the expansion which would requireline disconnections or energized line work, will be executed by IRHE. Somerehabilitation of existing distribution and sub-transmission works will becarried out by contractors under IRHE's supervision to ensure duecoordination with local authorities. Construction schedules for thesubprojects are based on average completion times for similar installationsand consequently no major delays are expected in the execution of theproject.

Project File

4.19 Reference is made to Annex 4.5 for the contents of the projectfile.

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5. FINANCES

Summary

5.01 Since 1977 IRHE has kept a sustained improving trend in itsfinancial performance and its present financial situation appears to beadequate. The difficulties which arose in late 1982 as a consequence of thecost increase of the Fortuna project and the failure of the previouslyarranged financing have been recently overcome by preliminary agreements on asupplementary financing package. IRHE's 1983-87 fund requirement amounts toMUS$774.7 of which MUS$59.3 or 7.7% of the total correspond to the proposedVI project (Annex 5.3). The net internal cash generation would financeMUS$383.5 or 45.5% of the total requirements; capital contributions from theGovernment and consumers would fund MUS$17.5 or 2.3% of the total, and theremaining 48.2% would be covered by loans amounting to MUS$373.7. Thisfinancing plan is reasonable, assuming that the present adequate tarifflevels are maintained as well as the interest shown by external lenders. Theresulting financial situation is expected to continue its improving trendduring the forecast period.

Past Performance and Present Position

5.02 Since 1977 IRHE has kept a sustained improving trend in itsfinancial performance and, having overcome by early 1983 some uncertaintieson the financing of its construction program (mainly the Fortuna project),its present financial situation appears to be adequate. IRHE's financialperformance deteriorated substantially during the period 1974-76, mainly dueto low tariff levels and insufficient Government capital contributions. In1977, in connection with the Fourth Power Project (Loan 1470-PAN), IRHE andthe Government agreed with the Bank on a program for financial recoverycalling, inter alia, for: (i) tariff increases allowing IRHE to reach ratesof return of 7% in 1977, 8% in 1978 and 8.75% in 1979 and thereafter, whichwere then covenanted; (ii) Government equity contributions totalling US$49.5million over the 1977-81 period; and (iii) settlement of overdue accounts bythe Government and its agencies. These financial agreements were furtherratified in 1979 in line with the Fifth Power Project (Loan 1778-PAN). IRHEand the Government have been substantially in compliance with the aboveundertakings; IRHE's actual rates of return have consistently increased from6.9% in 1977 to 9.2% in 1981 due to an adequate tariff policy, which has keptpace with inflation and fuel prices. However, the return in 1982 fell to7.4% due to lower sales resulting from the generally stagnant economicsituation of the country, and the unusually dry season which demanded higherthermal generation than forecast. Nevertheless, it is expected that IRHEwill be able to meet the covenant rates of return in 1983 and thereafter.Self-financing, debt service coverage and other financing ratios have alsoranged close to Fifth Power Project estimates.

5.03 The difficulties which arose in late 1982 as a consequence of thecost increase of the Fortuna project and the failure of the previouslyarranged financing have been recently overcome by preliminary agreements on asupplementary financing package with various agencies including the Bank, theIDB, and commercial banks as well as bilateral Government aid agreements.Because of unforeseen geological conditions encountered in the execution of

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the underground works of the Fortuna project, resulting in a cost increase ofMUS$241.4 (including interest during construction), IRHE had to devise anemergency financial plan which included the Venezuelan and Mexican InvestmentFund committed in the San Jose Agreement of April 1980. The unexpectedfinancial difficulties of these countries in mid-1982 made this courseimpossible, and IRHE had to explore other avenues including the Bank, IDB,Italian Cooperation Agencies and commercial banks. Finally, in March 1983,preliminary agreements on a supplementary financing package were set asfollows: the Bank, MUS$31.3; IDB, ordinary funds, MUS$60.0 and commercialbanks syndication, MUS$30.0; Venezuelan Investment Fund, MUS$12.3; suppliers'credit, MUS$0.2; Italian Government Export Credit Insurance Agency, MUS$25.0;and other commercial banks, MUS$46.7; the remaining balance is to be fundedby the Government, MUS$10.4 and IRHE's internal cash generation. The projectis progressing markedly on the updated schedule and is expected to becommissioned by mid-1984, about a year and a half behind the originalschedule.

5.04 In order to partially offset the gaps resulting from the lack oflong term financing for domestic components of its investment program and toavoid further delays in the construction schedule of the Fortuna project, in1980-82 IRHE resorted to excessive short and medium term financing, which hasbeen available in Panama, exceeding the limit covenanted under Bank loans.However, IRHE is making some efforts to reduce such high level of short termdebt (from MUS$58.3 in 1981 to MUS$55.8 in 1982) and has prepared a plan(para. 5.07 and Annex 5.3, footnote g/) for reducing its short term debtposition to a more manageable level.

Financial Structure

5.05 As of December 31, 1982, IRHE capitalization was (Annex 5.4):

Equity MUS$ %Capital 113.7Grants 7.5Retained Earnings 205.9Revaluation Reserve 313.2

640.3 56Long Term Debt 363.7 31Current Liabilities 122.8 11Other Liabilities 26.9 2

Total 1,153.7 100

5.06 As of December 31, 1982, IRHE's principal creditor was the Bank;the debt balance under its first five loans amounted to MUS$96.2 (26.5% oftotal long term debt); the second largest creditor is IDB with MUS$96 (26.4%)followed by Libra Bank, MUS$91.1 (25.1%), the. Government (by transference ofa loan from Dillon Read Overseas) MUS$39.2 (10.8%) and suppliers andcommercial banks (Annex 5.6).

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Investment and Financing Plan

5.07 IRHE's 1983-87 investment program, including its own constructionprogram (para. 4.04 and Annex 4.1), interest during construction, require-ments for working capital and other applications, amounts to MUS$774.7 ofwhich MUS$59.3 or 7.7% correspond to the proposed VI project. The ongoingworks are comprised of: (a) the final stage of the construction of theFortuna project, partially financed by Loan 1470-PAN, amounts to MUS$170.6 or22%; and(b) other ongoing works such as V Project, partially financed by Loan1778-PAN and a Rural Electrification Project, amount to MUS$127.6 or 16.5%.Other future construction, which includes the raising of the Fortuna dam, theChanguinola project and the interconnection with Costa Rica, amounts toMUS$245.7 or 31.7%. The interest during construction of these projects isestimated at MUS$88.4 or 11.4%. The increase in working capital requirementsamount to MUS$27.3 or 3.5%, and other applications to MUS$55.8 or 7.2% whichrepresents repayment of short term loans. The investment program and finan-cing plan are summarized on the next page and shown in detail in Annex 5.3.

5.08 IRHE's net internal cash generation would finance MUS$383.5 or49.5% of the total requirements of the 1983-87 program; capital contributionsfrom the Government for the Changuinola project and from consumers for urbanand rural distributions projects would fund MUS$17.5 or 2.3% of the total;the remaining 48.2% would be covered by loans amounting to MUS$373.7. Ofthis figure MUS$23.3 comes from undisbursed proceeds of existing loansincluding MUS$11.1 from Loan 1778-PAN. Fortuna package would financeMUS$198.8 or 25.7% of the total, including: (a) undisbursed proceeds ofexisting loans, MUS$35.2 as follows: (i) Loan 1470-PAN: MUS$9.9; (ii) IDBordinary funds loan: MUS$14.0; and (iii) suppliers credit: MUS$11.3; and (b)the following future loans amounting to MUS$163.3 and for which preliminaryagreements have been set: (i) a proposed supplementary financing Bank loan:MUS$31.3; (ii) an IDB - ordinary funds - supplementary financing loan ofMUS$60.0; (iii) an IDB - commercial banks syndication - supplementaryfinancing loan, MUS$30.0; (iv) a loan from the Italian Government ExportCredit Insurance Agency: MUS$25.0; (v) a commercial loan from an Italianbank, MUS$5.0; and (vi) a Venezuelan Investment Fund loan, MUS$12.3. The VIProject would require the proposed loan of MUS$32.1. Finally, other futureloans amounting to MUS$119.6 would be required for the rest of the program1983-87; (a) MUS$63.7 from suppliers; (b) MUS$51.4 from internationalfinancing institutions; and (c) MUS$4.5 from local banking institutions.

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Proposed Financing Plan 1983-87

MUS$ %

Requirements of FundsConstruction Program:

Ongoing Works 127.6 16.5Ongoing Fortuna 170.6 22.0Proposed VI Project 59.3 7.7Other Future 245.7 31.7

Sub-total 603.2 77.9Interest during Construction 88.4 11.4

Total 691.6 89.3Increase in Working Capital 27.3 3.5Other Applications 55.8 7.2

774.7 100.0

Sources of FundsGross Internal Generation 861.0Less: Debt Service (excluding Interest

during Construction) 477.5Net Internal Cash Generation 383.5 49.5Capital Contributions 17.5 2.3Borrowings;

Existing 23.3 3.0Fortuna Package 198.8 25.7Proposed IBRD Loan 32.1 4.1Other Future 119.5 15.4

Total 373.7 48.2774.7 100.0

5.09 IRHE's proposed financing plan for 1983-87 is reasonable. Assumingthe present adequate tariff levels are maintained in line with rate of returncovenants agreed with the Bank in Loan 1470-PAN, it would be expected thatIRHE would be able to obtain the financing estimated above (para. 5.08) inview of its present financial position, its tariff policy, as well asGovernment support and the interest shown by commercial lenders in projectssupported by both the Bank and IDB. As an indication of availability ofadequate financing, preliminary agreements have recently been set for asupplementary financing package for the completion of the Fortuna project(para. 5.03). The effectiveness of the proposed loan will be conditional upon

the effectiveness of the Bank's suDDlementarv loan to finance the Fortunaproject (para. 7.03).

Future Finances

5.10 Present financial projections are based on: (a) updated assump-tions for inflation; (b) an energy balance assuming full commissioning of theFortuna hydroplant in the second semester of 1984; and (c) a tariff policy

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aiming at achieving the 8.75% rate of return computed on a rate basecalculated using fully revalued fixed assets in operation and 1/4 of totalannual sales as a proxy of a working capital allocation.

5.11 IRHE's financial situation is expected to continue its improvingtrend during the forecast period. The debt service coverage on an annualbasis would not descend under 1.7, which is satisfactory; and the debt/equityratios (45/54 in 1982) are forecast to remain at safe levels during theperiod (27/73 in 1987) despite the borrowings required for construction ofongoing and future projects.

5.12 The following package of financial convenants, which were agreedupon by IRHE under the Fortuna and Fifth Power Project loans, will berepeated for the proposed loan (Sections refer to Loan Agreement of Loan1778-PAN): (a) adequacy of accounting practices and annual revaluation offixed assets (Section 5.01); (b) auditing by independent auditors acceptableto the Bank (Section 5.02); (c) liens limitations (Section 5.03); (d) shortterm debt limitation (Section 5.04(a)); (e) long term debt limitation(Section 5.04(b)); (f) price of bulk sales (Section 5.05); (g) accountsreceivable targets (Section 5.06); and (h) rate of return (Section 5.07).

6. ECONOMIC ANALYSIS

Least-Cost Solution

6.01 The sub-transmission and distribution program, of which the projectis a part, was designed by IRHE on the basis of a load forecast for theperiod 1982-1993. Since the objective of the program is to provide electricservice to new customers and to improve or replace existing facilities,alternatives are limited. IRHE has made economic comparisons, where appli-cable, to select the least-cost solution, i.e., conductor size selection, useof capacitors, routing of transmission lines, location of new substations,etc., using a discount rate of 11%. Sub-transmission and distributionvoltage levels have been standardized by IRHE: 115 kV for express feeders tolarge substations; 34.5 kV for rural distribution and smaller towns, and 13.2kV and 4.2 kV for urban distribution. The rehabilitation or replacement ofexisting installations was included in the program only for components whichcould not continue operating without excessive maintenance cost and losses.Spare capacity at substations is normally provided to maintain about 25% overthe substation peak demand.

Return on Investment

6.02 The proposed distribution project is an integral part of IRHE'sinvestment program; its economic feasibility cannot be judged on astand-alone basis as the project is not justified by itself, but rather inthe context of generation and distribution of electric energy. Consequently,an economic evaluation for the proposed project was not done. Instead, theinternal financial return for IRHE's overall investment program for the slice

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1983-87 was computed as the discount rate equalizing the present value of thestream of costs and benefits associated with it (Annex 6.1). The cost streamcomprises the capital costs of the development program and the incrementaloperation and maintenance costs related to the incremental sales associatedwith the program. Incremental fuel costs with respect to 1983 result innegative values, which are equivalent to fuel savings due to thermalgeneration substitution realized with the operation of the Fortuna project.Investment costs incurred prior to 1983 for ongoing projects, except forFortuna, were considered as sunk costs. As a proxy for benefits, therevenues derived from incremental sales at the average rate prevailing inDecember 1982 (12.0 US¢/kWh) were used. No economic evaluation was madeutilizing shadow prices or to reflect other benefits to society and theeconomy of the country, such as those derived from effects of fuel savings onPanama's external trade balance, improvement of quality of service tocustomers, connection of large housing developments for lower incomefamilies, and connection of new industries.

6.03 The internal financial return is 13.4%, which compares favorablywith the opportunity cost of capital for Panama estimated to be 11%.A sensitivity analysis was made to estimate the impact of major uncertaintiesaffecting the economic comparison for the following cases:

(a) Should the capital investment and operation and maintenance costs(except fuel) be increased by 20%, the rate of return would bereduced to 11.6%.

(b) Should the price of oil be decreased by 20% from the US$33 perbarrel assumed in the study, with the consequent decrease of fuelsavings due to Fortuna, the rate of return would be decreased to11.8%.

(c) Should costs be increased by 20% as in case (a) and benefits (bothfuel savings and revenue from incremental sales) be decreased by10%, the rate of return would be decreased to 10%.

6.04 If sunk costs incurred for the Fortuna project prior to 1983 areexcluded in the analysis (US$242.7 million), the rate of return for theprogram would be 27%, which also compares favorably with the opportunity costof capital in Panama. A sensitivity analysis for the same conditionsdescribed in paragraph 6.03 resulted in the following rates: for case (a),rate of return reduced to 20.9%; for case (b), to 23.0%; and for case (c), to17.8%.

AGREEMENTS REACHED AND RECOMMENDATION

7.01 IRHE agreed on efficiency performance indicators which would bequarterly reported to the Bank (para. 2.10).

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7.02 The following main provisions of Loan Agreement 1778-PAN have beenrepeated:

(a) execution of the project (Article III);

(b) management and operation of the Borrower Sections 4.01, 4.02, 4.03and 4.04 (Clause 4.04 (b) updated for consistency with expansionprogram 1982-87 in SAR para. 4.03);

(c) adequacy of accounting practices and annual revaluation of fixedassets (Section 5.01) (para. 5.12);

(d) auditing by independent auditors acceptable to the Bank (Section5.02) (paras. 2.08 and 5.12);

(e) liens limitations (Section 5.03) (para. 5.12);

(f) short term debt limitation (Section 5.04 (a)) (para. 5.12);

(g) long term debt limitation (Section 5.04 (b)) (para. 5.12);

(h) price of bulk sales (Section 5.05) (para. 5.12);

(i) accounts receivable targets (Section 5.06) (paras. 2.09 and 5.12);and

(j) rate of return (Section 5.07) (para. 5.12).

Condition of Effectiveness

7.03 The effectiveness of the Bank's supplementary loan for the Fortunaproject (para. 5.09) is a condition of effectiveness for the proposed loan.

Recommendation

7.04 With the above assurances, the proposed project would be suitablefor a Bank loan of MUS$32.1 equivalent, to be made to IRBE with the guaranteeof the Government of Panama. The loan would have a repayment period of 17years, including 3 years of grace.

May 20, 1983

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ANNEX 1. 1

PANAMA

SIXTH POWER PROJECT

Bank Participation in the Power Sector

Loan and Year Purpose Amount (US$ millions)

322-PAN, 1962 Loan to IRHE for the(First Power Project) financing of a Rural

Electrification Program 4.0

661-PAN, 1970 Loan to IRHE to finance(Second Power Project) the Bayano hydroelectric

project (150 MW), expansionof Las Minas steam plant(40 MW), related transmis-sion, small diesel plantsfor rural areas and distri-bution systems 42.0

948-PAN, 1973 Loan to IRHE to finance the(Third Power Project) San Francisco diesel plant

(25 MW), new transmissionlines and substations, aload dispatch center, expan-sion of the distributionsystems, training and insti-tutional improvement 30.0

1470-PAN, 1977 Loan to IRHE to finance the(Fourth Power Project) Fortuna hydroelectric project

(300 MW) and related trans-mission lines and substations,training and institutionalimprovements 42.0

Additional loan to IRHE tofinance part of the additionalcosts related to the Fortunahydroelectric project 31.3

1778-PAN Loan to IRHE to rehabilitate(Fifth Power Project) and expand the distribution

systems across the country 23.0

Total 172.3

May 13, 1983

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ANNEX 1.2PANAMA

SIXTH POWER PROJECT

Electricity Rates as of November 1, 1982(in balboas)

1. Residential Customers (Tariff 11-P)

First 10 kWh B 1.70 minimum chargeNext 40 kWh 1 13.6 per kWhNext 50 kWh ¢ 10.7 per kWhNext 300 kWh ¢ 9.9 per kWhNext 600 kWh ¢ 11.1 per kWhExcess over 1,000 kWh ¢ 13.2 per kwh

2. General Use Customers with 5 kW Load or less (Tariff 21)

First 10 kWh B 1.70 minimum chargeNext 90 kWh ¢ 14.2 per kWhNext 125 kWh ¢ 12.1 per kWhExcess over 225 kWh ¢ 10.3 per kWh

3. General Use Customers with 6 to 29 kW Contract Demand (Tariff 26)

First 15 hours of billing demand a/ 4 22.0 per kWhNext 30 hours of billing demand ¢ 13.9 per kWhNext 55 hours of billing demand 4 9.3 per kWhExcess over 1UO hours of billing demand ¢ 9.2 per kWh

Minimum charge: B 3.30 per kW demand but no less than B 19.80 permonth.

4. Industrial (30 to 299 kW) and Commerciai (over 30 kW) Customers withContract Demand (Tariff 31)

Demand charge B 5.20 per RN of demand b/First 25 hours of billing demand ¢ 10.3 per kWhNext 375 hours of billing demand ¢ 7.2 per kWhExcess over 400 hours of billing demand 4 7.9 per kWh

Minimum charge: demand charge, but not less than B 156.00 per month.

5. Industrial Customers with More than 300 kW Contract Demand (Tariff 3b)

Demand Charge B 4.90 per kW of demand b/Energy Charge ¢ 6.9 per kWh

6. Public Lighting (Tariff 65) c/

Mercury lamps 400 W B 10.01 per month125 W 4.43 per month

Fluorescent and 115 W 4.30 per monthincandescent lamps 25 W 1.80 per month

High-pressure sodium 1,000 W 23.97 per monthlamps 100 W 5.09 per month

Charge per pole installed especially for public lighting: B 3.45 permonth.

Note: All six categories above are subject to a fuel surcharge clause,to allow for recovery of fuel price increases.

a! Billing demand is defined as the maximum demand over the last 12-monthperiod including the month of billing, or as the contracted demand.

b/ Maximum demand is the maximum demand registered over the last 12 months,including the month of billing, or the contract demand for demandsnot measured.

c/ Only ranges are shown.

February 28, 1983

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ANNEX 1.3

PANAMA

SIXTH POWER PROJECT

Electricity Charges for Some Typical Consumptions

Charges a/(in cents of Balboa

per kWh)

Residential 30 kWh/month 14.73Residential 100 kWh/month 12.49Residential 400 kWh/month 10.55Residential 1,500 kWh/month 11.65Commercial 25 kWh/month 15.32Commercial 100 kWh/month 14.48Commercial 400 kWh/month 11.91

Small Industry 2,000 kWh/month 10.48(8 kW demand; 35% load factor)

Medium Industry 20,000 kWh/month 8.50(45 kW demand; 60% load factor)

Large Industry 100,000 kWh/month 8.49(195 kW demand; 70% loadfactor)

a/ Excludes fuel surcharge clause (average fuel clause in September 1982 was¢ 1.57 per kWh).

February 28, 1983

- 27 -

ANNEX 1.4PANANA

SIXTH POWER PROJECT

Existing and Future Power Projects(As of January 1983)

TotalInstalled Effective Firm PlantCapacity Capacity Generation Factor

Names of Project Type Year MW MW a/ GWh X Comments

1. Existing Projects

a. IRHELas Minas Steam 1969/74 3 x 37.5 134.0 942 80 Good condition

Steam 1964 1 x 22.0

San Francisco Steam 1955 1 x 11.0 47.0 246 60 33 MW to beDiesel 1964 1 x 12.0 retired by 1989Diesel 1976 4 x 7.0

Avenida Sur Steam 1958 1 x 8.0 5.0 28 64 Retired in 1985

Diesel Provinces Diesel 1961/75 23 units (35.0) 35.0 200 65 Good condition

Gas Turbines Panama Gas Turb. 1982 2 x 18 36.0 94 30 Good condition

Yeguada Hydro 1967 2 x 3.5 7.0 35 57 Good condition

Bayano Hlydro 1976 2 x 75 150.0 630 48 Good condition

Estrella-Los Valles Hydra 1978 2 x 21.5 90.0 509 65 Good conditionhydro 1979 2 x 23.5

Mini-hydros Hydro 1980/82 2 plants (0.6) 0.6 2 35 Isolated system

Chiriqui Hydros Hydro 5 units (4.0) 4.0 21 60 Good condition

Sub-total IRHE 516.1 508.6 2,707 (61)

b. Comision del CanalMiraflores Steam 2 units 55.5 389 80

Diesel 3 units 40.0 106 30

Mount Hope Diesel I x 20 20.0 53 30

Madden Gatun Hydro 9 units 46.5 122 30

Sub-total ComisionCanal 176.0 162.0 670 (47)

c. Self-ProducersChiriqui Land, Sugar Diesel and Several unitsMills, various owners Steam 55.0 30.0 78 30

d. Total Existing 747.1 700.6 3,455 (57)

2. Future ProjectsFortuna I Hydro 1984 3 x 100 300.0 1,384 53 Under

constructionFortuna II Hydro 1987 - - 100 - Firm energy onlyBayano 3 Hydro 1990 1 x 75 75.0 28 -Changuinola I Hydra 1991 3 x 100 300.0 1,804 69

Sub-total FutureProjects 675.0 675.0 3,316

a/ Plant capacity considered for load-dispatch purposes.

February 28, 1983

PANAMASIXTH POWER PROJECT

Organization Chart

Uoard ofDirectors

Audit from General AssistentsIGovernment'sh CONADEMangerOf fice

Controller l a

DeputyGeneral Industrial

Manager Security

I SysteI l Adviser Director TeConuol l

Finance Institutional Planning Operations Engineerin and Computer Purehasingand

D irector Organirctior Director _ Director ed Netr Srnsl _are I

Financial { Public Planning Trsmission Ds ion SystemsPlanining Rilations Office Mranagerio Masinae Development Purchasing

General Project Vehicle Fleet Construction Technical oSecretary Studies Maintenance Manager Support Warehouses,

OrgpnizatiTriffandDistribution endAccouting Organl2tion Sn Maiketing o Production Trai'fjc

2 Staff Ut and ing flegional PlydrometereologyRelations Coordination Managers and River Basins

|Administrative |t

1 Services | Note: Units are not necessarily shown in hierarchical order.

r Personnel oMaveamerent

Novemtber 1982 World Bank-24406

PANAMA

SIXTH POWER PROJECT

Main Performance Indicators

-----Actual-- --------- Future--------1981 1982 1983 1984 1985 1986 1987

1. Market IndicatorsNumber of Customers (1,000) 244 254 265 276 289 301 314

Total Sales (GWh) 1,554 1,672 1,813 1,931 2,062 2,194 2,335

Installed Capacity (MW) 533 531 509 800 800 800 793

Maximum Demand (MW) 322 336 364 387 413 440 468

2. Efficiency IndicatorsTotal Number of Employees a/ 5,405 5,415 5,415 5,520 5,636 5,745 5,860

Customers/Total Employees 45 47 49 50 51 52 53

MWh Sold/Total Employees 288 309 335 350 366 382 398

kWh Sold/Customer 6,369 6,583 6,842 6,996 7,135 7,289 7,436

Losses % b/ 16.5 14.5 13.5 13.5 13.4 13.4 13.4

3. Financial IndicatorsDebt/Equity Ratio 46/54 44/56 44/56 43/57 37/63 32/68 27/73

Debt Service Coverate Ratio 1.6 1.3 1.2 1.3 1.6 1.6 1.7

Accounts Receivable (days) 88 67 60 60 60 60 60

Self-financing Ratio (%) 24 26 30 33 60 61 72

Rate of Return (%) 9.25 7.40 8.75 8.75 8.75 8.75 8.75

Average US4/kWh c/ 10.9 11.6 12.4 11.7 12.7 13.2 13.4

a/ Includes permanent and temporary employees, but not the hydrology observers, employed as of December 31

of each year.b/ Losses as compared to gross energy generation.c/ Includes fuel clause adjustment.

May 18, 1983

PANAMA

SIXTH POWER PROJECT

Actual and Forecast Sales and Gross Generation Requirements - GWh

1981 1982 1983 1984 1985 1986 1987 1988 1989a/

1. Sales to CustomersResidential 475 497 521 546 574 603 633 665 699Commercial 498 526 562 600 639 680 725 772 822Industrial 188 204 221 240 260 282 306 331 359Government d/ 287 320 339 367 400 434 471 512 556Street Lighting 33 35 37 40 43 46 49 53 56

Sub-total 1,481 1,582 1,680 1,793 1,916 2,045 2,184 2,333 2,492

2. Block SalesICE (Costa Rica) 2 2 2 2 2 2 2 2 2Chiriqui Land Co. 16 22 35 47 64 65 65 65 65Impregilo b/ 21 18 18 9 - - - -Petroterminal - 20 52 52 52 52 52 52 52Canal Commission 23 16 12 12 12 12 12 12 12

Sub-total 62 78 119 122 130 131 131 131 131 0

3. IRHE's Use c/ 11 12 14 15 16 18 20 21 23

4. Total Sales 1,554 1,672 1,813 1,930 2,062 2,194 2,335 2,485 2,646

5. System LossesEnergy Losses 306 284 282 301 319 339 360 384 409In Percentage of Sales (%) 19.7 17.0 15.6 15.6 15.5 15.4 15.4 15.5 15.5In Percentage of GrossGeneration (%) 16.5 14.5 13.5 13.5 13.4 13.4 13.4 13.4 13.4

6. Required Gross Generation 1,860 1,956 2,095 2,231 2,381 2,533 2,695 2,869 3,055

a/ Actual data.b/ Sales to the contractor Impregilo for use in the construction activities to the Fortuna Project.c/ For accounting purposes IRHE's energy use is shown as sales.d/ Includes public service users such as the Port Authority, international airport, water treatment plants, etc.

May 13, 1983

PANAMA

SIXTH POWER PROJECT

Energy Balance for IRHE's System - GWh

1981 a/ 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

'I. Required Gross Generation 1,860 1,956 2,095 2,231 2,381 2,533 2,695 2,869 3,055 3,254 3,467 3,694 3,937

2. Available Generation

2.1 ThermalBahia Las Minas 943 943 943 943 943 943 943 943 943 943 943 943 943San Francisco 246 246 246 246 246 246 179 b/ 179 147 b/ 147 147 147 147Avenida Sur 28 28 28 28 -b/ - - - - - - - -Diesel Central Prov. 71 71 71 71 71 71 71 71 71 71 71 71 71Diesel West Panama 34 34 34 34 34 34 34 34 34 34 34 34 34Diesel Chiriqui 95 95 95 95 95 95 95 95 95 95 95 95 95Gas Turbine - 95 95 95 95 95 95 95 95 95 95 95

Sub-total 1,417 1,512 1,512 1,512 1,484 1,484 1,417 1,417 1,385 1,385 1,385 1,385 1,385

2.2 Hydro (Average Hydrology)Yeguada 35 35 35 35 35 35 35 35 35 35 35 35 35Chiriqui Hydro 21 21 21 21 21 21 21 21 21 21 21 21 21Bayano 631 631 631 631 631 631 631 631 631 658 f/ 658 658 658Estrella-Los Valles 509 509 509 509 509 509 509 509 509 509 509 509 509Fortuna - - - 690 1,385 1,385 1,483 c/ 1,483 1,483 1,483 1,483 1,483 1,483Changuinola I - - - - - - - - - - 1,804 1,804

Sub-total Hydro (Average) d/ 1,196 1,196 1,196 1,886 2,581 2,581 2,679 2,679 2,679 2,706 2,706 4,510 4,510

Sub-total Hydro (Firm) e/ 913 913 913 1,360 1,807 1,807 2,328 2,328 2,328 2,328 3,808 3,808 3,808

2.3 Total Available GenerationAverage d/ 2,613 2,708 2,708 3,398 4,065 4,065 4,096 4,096 4,064 4,091 4,090 5,895 5,895Firm e/ 2,330 2,425 2,425 2,872 3,291 3,291 3,745 3,745 3,713 3,713 3,713 5,193 5,193

Gross Generation Required 1,860 1,956 2,095 2,231 2,381 2,533 2,695 2,869 3,055 3,254 3,467 3,694 3,937

3. Firm ReserveReserve in GWh 470 469 330 641 910 758 1,050 876 658 459 246 1,499 1,256Reserve in % of Demand 25 24 16 29 38 30 39 31 22 14 7 41 32

a/ Actual data.b/ Retirement of old units.c/ Raise of Fortuna Dam.d/ Hydro energy for average hydrological year (9 out of 10 years).e/ Hydro energy determined for combined operation of the hydro plants in a dry year (I out of 10 years).f/ Installation of a new 75 MW unit at Bayano.

February 18, 1983

PANAMA

SIXTH POWER PROJECT

Capacity Balance for IRHE's System - MW

1981 a/ 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

1. System RequireemntsRequired Gross Generation (GWh) 1,860 1,956 2,095 2,231 2,381 2,533 2,695 2,869 3,055 3,254 3,467 3,694 3,937

Load Factor (%) 66 66 66 66 66 66 66 66 66 66 66 66 66

Maximum Demand 323 336 364 387 413 440 468 498 530 565 602 641 683

2. Available Capacity

2.1 ThermalBahia Las Minas 135 135 135 135 135 135 135 135 135 135 135 135 135

San Francisco 47 47 47 47 47 47 36 b/ 36 24 b/ 24 24 24 24

Avenida Sur 5 5 5 5 - b/ - - - - - - - -

Diesel Central Prov. 12 12 12 12 12 12 12 12 12 12 12 12 12

Diesel West Panama 6 6 6 6 6 6 6 6 6 6 6 6 6

Diesel Chiriqui 17 17 17 17 17 17 17 17 17 17 17 17 17

Gas Turbine - 36 36 36 36 36 36 36 36 36 36 36 36

Sub-total 222 258 258 258 253 253 2422 230 230 230

2.2 Hydro (Average Hydrology)Yeguada 7 7 7 7 7 7 7 7 7 7 7 7 7

Chiriqui Hydro 4 4 4 4 4 4 4 4 4 4 4 4 4

Bayano 150 150 150 150 150 150 150 150 150 225 225 225 225

Estrella-Los Valles 90 90 90 90 90 90 90 90 90 90 90 90 90

Fortuna - - - 255 255 255 300 c/ 300 300 300 300 300 300

Changuinola I - - - - - - - - - - 300 300

Sub-total Hydro (Average) d/ 251 251 251 506 506 506 551 51 551 626 626 926 926

Sub-total Hydro (Firm) e/ 177 177 177 356 356 356 419 419 419 489 489 739 739

2.3 Total Available CapacityAverage d/ 473 509 509 764 759 759 793 793 781 856 856 1,156 1,156

Firm e/ 399 435 614 609 609 661 661 661 649 719 719 969 969

Maximum Demand 323 336 364 387 413 440 468 498 530 565 602 641 683

3. Firm ReserveReserve in GWh 76 99 71 227 196 169 193 163 119 154 117 328 286

Reserve in x of Demand 24 29 20 59 47 38 41 33 22 27 19 51 42

a/ Actual data./ Retirement of old units.

c/ Raise of Fortuna Dam.d/ Hydro energy for average hydrological year (9 out of 10 years).

e/ Hydro energy determined for combined operation of the hydro plants in a dry year (1 out of 10 years).

February 18, 1983

PANAMA

SIXTH POWER PROJECT

Forecast of Net Generation for IRHE's Power Plants - GWh

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

1. Required Gross Generation 1,956 2,095 2,231 2,381 2,533 2,695 2,869 3,055 3,254 3,467 3,694 3,937

2. Generation

2.1 Thermal GenerationBahia Las Minas 783 950 409 - 28 - 16 285 426 725

San Francisco 20 88 49 - 74 25 47 -

Avenida Sur - - - - - - - - - - - -

Diesel Central Prov. 1 1 10 - - - - - - - -

Diesel West Panama I - 4 - - - - - - - -

Diesel Chiriqui - - 9 - - - - - - - -

Gas Turbine - - 8 - - - - - - - - -

Sub-total 805 1,039 489 - 28 - 90 310 473 7--

2.2 Hydroelectric a/Yeguada 36 33 38 38 38 38 38 38 38 38 38 38

Chiriqui Hydro 19 18 21 21 21 21 21 21 21 21 21 21

Bayano 578 525 448 375 465 646 586 593 600 561 610 645

Estrella-Los Valles 518 479 547 547 547 547 547 547 547 547 547 547

Fortuna - - 688 1,400 1,434 1,443 1,587 1,546 1,575 1,575 713 956

ChanguinolaI - - - - - - - - - - 1,765 1,730

Sub-total 1,151 1,055 1,742 2,381 2,505 2,695 2,779 2,745 2,781 2,742 3,694 3 937

3. Total Generation 1,956 2,094 2,231 2,381 2,533 2,695 2,869 3,055 3,254 3,467 3,694 3,937

a/ Forecast based on average hydrological year (9 out of 10 years).

February 18, 1983

PANAMASIXTH POWER PROJECT

Firm Energy Forecast

0

GWH Z

9000 _

m 8408

8000

7000;- 3

6000 1 1900

z.February, 1883 0EARS W

zLU5000 cc

…- D

4000

10…

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002Lfl

February. 1983 YEARISWorld Bank-24406

: o 8 ~~8 ° ° g 8 o

CDco t 2X18MW GAS TURB.

_ - - _ FORT. I (JUN. 84)

CD~~~~~~~~~~C

0, >- \ _ FORT. II JAN. 87)

CD tOIt CHANGUINOLAI>, m>

A~~~~~~~~~~~~~~~~- t O>

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CD )m

Oo = = = = t a ~~~~~TERIBE I

o; . a \ ~~~~~~~TABASARA

o - - -

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- -_ __

9 ' s XANW~~~~~~~~~~~C

01 C

PANAMA

SIXTH POWER PROJECT

Investment Program for Period 1983-87(hillions of uss, Current Prices)

1981 1982 1983 1984 1985 1986 1987 1983-87Local Foreign Local Foreign Local Foreign Local Foreign Local Foreign Local Foreign Total

1. Ongoing WorksTTITPo2werP roject 1.8 1.9 0.2 - - - - 0.2 - 0.2

V Power Project 0.4 14.9 12.4 4.5 2.7 - - - - _ _ _ 15.1 4.5 19.6

Rural Electrification 2.0 0.4 0.8 0.6 5.3 7.6 3.3 4.7 - - - - 9.4 12.9 22.3

Other Works a/ 16.7 9.4 9.3 3.3 6.2 1.2 11.7 2.0 15.1 9.0 16.7 10.9 59.0 26.4 85.4

Gas Turbine Panama - 8.6 - 0.1 - - - - - - - - - 0.1 0.1

Sub-total 20.9 35.2 22.7 8.5 14.2 8.8 15.0 6.7 15.1 9.0 16.7 10.9 83.7 4 9 176

Fortuna (IV Power Project) 46.4 105.8 44.7 46.9 39.1 39.9 _ _ _ _ _ _ 83.8 86.8 170.6

Total Ongoing Works 67.3 141.0 67.4 55.4 53.3 48.7 15.0 6.7 15.1 9.0 16.7 10.9 167.5 130.7 298.2

2. Future WorksProposed Distribution(VI Power Project) - - 0.7 - 6.7 8.7 11.7 13.7 8.2 9.6 - - 27.3 32.0 59.3

Fortuna II (Raising the dam) - - - - 0.6 0.4 8.3 16.7 11.2 23.2 4.6 9.9 24.7 50.2 74.9

Changuinola Hydro Project:- Engineering studies and

access roads 0.9 2.2 - - 4.8 4.0 7.3 10.6 4.7 7.7 0.3 0.4 17.1 22.7 39.8

- Project Execution - - - - - - - - 12.5 14.6 22.5 62.0 35.0 76.6 111.6

115 kV Line Fortuna-Bocas - - - - - - 0.2 - 2.8 2.0 3.7 3.7 6.7 5.7 12.4

Interconection with Costa Rica - 1.2 0.6 0.9 3.6 1.9 _ - - _ - - 4.2 2.8 7.0

Total Future Works 0.9 3.4 1.3 0.9 15.7 15.0 27.5 41.0 39.4 57.1 31.1 76.0 115.0 190.0 305.0

3. Total Investment by Currency - - 68.7 56.3 69.0 63.7 42.5 47.7 54.5 66.1 47.8 86.9 282.5 320.7 603.2

Total by Year 68.2 144.4 125.0 132.7 90.2 120.6 134.7

4. Interest during Construction - - - 30.6 - 26.0 - 6.9 - 11.3 - 13.6 - 88.4 88.4282E5 409.1 6917.

a/ Other works include: substations and distribution expansion not included in the VI Power Project, generalplant investment, isolated systems, etc.

May 13, 1983

- 3 7 -

PANAMA ANNEX 41.2

SIXTH POWER PROJECT

Project Cost ond impleentation

ExecutionArea Type of Voltage Length Cost in US$ x 1,000 Bid To be

ProJect Nuns (Grenia) a/ Project kV or Capacity Local Foreign Total Invitation Completion Cooatre-ted by

1. SUBTRANISMISSION

1.1 Traxamission Lines km`SanFrancisclo-Konte Oscero b/ Metro Nee 115 77U 1,882 1,585 3,467 7/84 11/86 Co-tratorLlano Sanchet-S-ntiago Co-l-Ver New 115 35.0 1,019 1,088 2,107 6/84 12/86 CnetractcrProgreeo-Charco Anal Chiriqui Nex 115 30.0 1,322 1,435 2,757 7/84 12/86 Contractor

1.2 Substations MVAHots Oncuro Metro Net- 115/13.2 4cr 262 1,048 1,310 7/84 12/86 Co-trsctorSan Freotinco (Brexknr) Metro Ilev Li - 70 189 259 7/84 11/86 IBESantiago 115 kV Cool-Ver New 115/34.5 25.0 284 723 1,007 7/84 12/86 ContractorSantixgo 34.5 kV Cool-VFr Enters. 34.5/4.2 9.4 58 221 279 7/84 11/86 IRHEDivixa Col-Ver Enters. 34.5/13.2 4.7 19 89 108 9/84 11/86 IRBHELi..n Sarcho. (Broeker) CorEl-Vr Ne. 115 - 96 217 313 9/84 11/86 IRHELas Tablax Herr-LS ixtens. 34.5/13.2 4.7 36 150 186 9/84 11/86 1R1ELa Acren Herr-LS Extexs. 34.5/4.2 4.7 37 149 186 9/84 11/86 IRHELox SBrtos Herr-LS Extens. 34.5/4.2 4.7 48 199 247 9/84 11/86 IHREMonagrtllo Herr-LS Extens. 34.5/4.2 1.7 22 87 109 9/83 11/84 IRHECharce A-l Chiriqei NBe 115/4.2 25.0 319 1,143 1,462 7/84 12/86 ContractorPrFgre.e (Breakre.) Chiriqei NBe 115 - 148 436 584 9/84 11/86 Contract

Seb-total Subtrans=ixsion 3362 7759 14,381

2. DISTRIBUTION

2.1 Soecific Projects kcePoeders tonic Onrero s/s b/ Metre New 13.2 1k0 384 274 658 7/84 7/86 IRHEFeedero Cerro Vlenit n/n Metro ERtens. 13.2 1.0 922 487 1,409 1/83 2/85 IRHE/ContractorFeeders Avenuid cr b/ Hetro Cemntes. 13.2 2.0 853 302 1,155 7/84 11/86 IRHE/C=t-racrorIprte-enerts La Chorrera Pax Drt Imprev. 13.2 25.0 48 86 134 1/83 12/84 IRHEOyster Conversion Santiago Conl-Vr Coornrx. 4.2 1.0 6 6 12 1/83 12/84 IBHEFeeders for Lax Tablas, La

Arena, Lox Santon andMrnagrilllo /s Herr-LS Enters. 13.2 axd 4.2 4.0 14 24 38 1/84 1/86 IRE8

Dlvid Sonord rtage Chiriqoi Convers. 13.2 33.0 79 75 154 2/83 2/85 IRHEFeeder C inncpt_on-Connti di

FPedra Chiriqei Icpror. 34.5 19.0 114 106 220 1/84 2/86 IRHEMetering Equipmert focr

33 S/n Across Ceoury CountrF lee - - 108 190 298 1/83 1/85 IRHE

2.2 Distributior ExparsioFourine Disributiion 8ysten

Expansioc in the Coentry Cr.ntry Extrna. 13.2 end loer - 5,831 10,903 16,734 - - IBEEInprnvomonts tr ExsitingDitrtibetion Sytstem Country Icpro-. 13.2 and loser - 1,764 1,910 3,674 - - IRHE

8eb-toral yistribution 10,123 14,363 24,486

3. ENGINEERING AND ADMINISTRATION

3.1 Consulting Sercicex - - - - 40 60 100 - - Cocsuliact

3.2 Bytne Lassos lStdy ardarnitoriog Eqeipmeni - - - - 312 286 598 - - IRHE/Consultant

3.3 IRHE0 s Engineering and Ade. - - - - 3,007 - 3,887 - - IBOESeb-tetal Engineering and Ode. 4,2lW 39 4,585

Total lane Cent (Jannary 1983Pri.ns) - - - - 19,984 23,468 43,452 - -

4. CONTINGENCIES

4.1 Phynial Contingency - - - - 1,574 2,312 3,886 - -

4.2 Price Contingency c/ - - - - 3 842 6 220 02 062Sub-total Contingnenies 77f 416 M g2159

5. TOTAL CURRENT PRICE - _ _ _ 27,400 32,000 59.400

6. INTERESTS DU1ING CONSTRUCTION d/ - - - - - 4,300 4,300

7. TOTAL FUNDING REQUIRED - - _ - 27,400 36,300 63,700

a/ Motr-: Panama Metrrpolitan area; Conl-VFr: Greoria Cocle-Verag.a.; Chiriqui: Ge-e.nia Chiriqui;Herr-LS: Gereonia Herrers-Los Banto; Pan Orr: Gerencia Paea Oceidente.

b/ Undergronnd installations.c/ Indices for price escalation:

1983 1984 1985 1986

tonal Costs: 7.5 7.5 7.5 6.0Foreign Costs: 8.0 7.5 7.0 6.0

d/ Includes fronit-ed fee.

May 18, 1983

PANAMA

SIXTH POWER PROJECT

Proposed Bid and Execution Schedule

Foreign Cost Bid Contract Material InstalledBid Number and Description US$ x 1,000 a/ Invitation Signed Delivery Completion By Comments

Bid No. 1: Routine DistributionDistribution transformers, poles, conductors,meters, switching equipment and hardware.13.2 kV primary voltage 2,500 1/83 1/84 7/84 8/84 IRHE Supply only

Bid No. 2: Substation EquipmentPower transformers for all substations,and equipment for Llano Sanchez and SanFrancisco (115 kV) and 34.5 kV substations 2,052 4/84 3/85 3/86 8/86 IRHE Supply only

Bid No. 3: Substation EquipmentCivil works, miscellaneous equipment anderection of Santiago, Charco Azul, Progresoand Monte Oscuro s/s 3,063 8/84 7/85 7/86 12/86 Contractor Supply and erection

Bid No. 4: Transmission LinesOverhead and underground 115 kV lines 4,517 8/84 7/85 7/86 12/86 Contractor Supply and erection

Bid No. 5: Distribution SystemsSpecific projects, routine distribution,substation metering and load recordingequipment 4,538 4/83 3/84 9/84 12/84 IRHE Supply only

Bid No. 6: Routine Distribution b/ 8,998 10/83 9/84 3/85 2/86 IRHE Supply only

a/ Base cost without physical and price contingency. zb/ The Sixth Power Project covers routine distribution materials up to February 1986.

February 18, 1983

- 39 -

ANNEX 4.4

PANAMA

SIXTH POWER PROJECT

Loan Disbursement Schedule(In Current Millions US$)

Semester's CumulativeIBRD Fiscal Year Disbursement Disbursementand Semester Amount % Amount %

FY84December 1983June 1984 1.5 4.7 1.5 4.7

FY85December 1984 7.8 24.3 9.3 29.0June 1985 7.0 21.8 16.3 50.8

FY86December 1985 6.7 20.9 23.0 71.7June 1986 6.0 18.7 29.0 90.3

FY87December 1986 3.1 9.7 32.1 a/ 100.0

AssumptionsLoan Signing: July 1983Effective Date: September 1983Closing Date: June 1987

a/ Includes front-end fee.

March 18, 1983

- 40 -

ANNEX 4.5

PANAMA

SIXTH POWER PROJECT

Project File

CONADE: Balance Energetico Nacional 1970-80.CONADE: Balance Energetico Nacional, Resumen EjecutivoIRHE: Plan de Expansion 1982-2003 para el Sistema de Generacion de Panama.IRHE: Plan Maestro para la Expansion y Mejoras del Sistema de Distribucion,

Periodo 1983-86.IRHE: Estimaciones de las Ventas de Energia 1982-93.IRHE: Projecciones Financieras 1980-87.IRHE: Estructura Tarifaria de Aplicacion Uniforme Nacional (Enero 1982).IRHE: Normas de Distribucion.IRHE: Analisis sobre el Coeficiente de Elasticidad del Consumo Especifico

de Energia Electrica.IRHE: Quarterly Progress Reports, June 30, 1982. Loans 1470-PAN and

1778-PAN.IRHE: Informe de Labores 1982.IRHE: Disenos y Metodos de Construccion de la Casa de Maquinas del Proyecto

Fortuna (incluyendo estudios geologicos).IRHE: Audited Financial Statement for 1981.IRHE: Selected working papers, tables, drawings, maps, etc.

March 18, 1983

- 41 -

PANAMA ANNEX 5.1

SIXTH POWER PROJECT

Financial Indicators

Actual Forecast1981 1982 f/ 1983 1984 1985 1986 1987

Rate Base: (MUS$)Average Net FixedAssets 566.2 627.2 680.7 900.5 1,471.8 1,587.5 1,723.7Three Months Revenues 41.3 48.3 56.2 56.7 65.8 72.1 78.1Total Rate Base 607.5 675.5 736.9 957.2 1,537.6 1,659.6 1,801.8

Operating Income (MUS$) 56.2 54.8 63.7 83.8 134.5 145.2 157.7

Rate of Return (%) 9.25 8.11 g/ 8.65 8.75 8.75 8.75 8.75

Debt Service Coverage: (Times)Standard a/ 1.9 2.1 2.0 1.8 1.7 1.7 1.9As Agreed in Loan1778-PAN b/ 1.6 1.3 1.2 1.3 1.6 1.6 1.7

Debt/Equity Ratio c/ 46/54 44/56 44/56 43/57 37/63 32/68 27/73

Self-FinancingRatio (%) d/ 24 26 30 33 60 61 72

Operating Ratio (%) e/ 66 72 72 63 49 49 49

Annual Revaluation (%) 9.0 8.5 7.5 7.5 7.5 7.5 7.5

Accounts Receivable (days) 77 67 60 60 60 60 60

a/ Gross Internal Generation divided by Debt Service, defined as amortization plusinterest charged to income.

b/ Gross Internal Generation less subsidy (see footnote i of Annex 5.2) dividedby Debt Service, defined as amortization plus total interest paid.

c/ Total debt (long term, current and other liabilities)/total equity.d/ Net internal generation as a percentage of total applications.e/ Total operating costs as a percentage of total revenues.T/ Based on preliminary estimates.g/ IRHE has recently informed the Bank that the Rate of Return for 1982 is 7.4%

rather than 8.11% shown here (para. 5.03).

May 13, 1983

- 42 -

PANhNA ANNEX 5.2

SIXTH POWER PROJECT

Actual and Forecast Income Statement 1981-87(Millions of US$)

Actual Forecast1981 1982 1/ 1983 1984 1985 1986 1987

Sales in GWh a/Total 1,518 1,672 1,813 1,931 2,062 2,194 2,335

Revenues per kWh Sold(USt/kWh) b/Basic - 10.28 10.23 11.74 12.78 13.15 13.38Oil Surcharge - 1.28 2.19 - - - -

Total 10.89 11.56 12.42 11.74 12.78 13.15 13.38

Operating RevenuesTotal 166.0 193.3 225.0 226.8 263.4 288.4 312.4

Operating Expenses c/Operation d/ 12.8 11.6 10.8 14.2 15.8 17.0 18.5Maintenance 7.2 7.5 6.3 7.0 7.9 8.5 9.1Salaries e/ 28.7 31.0 37.8 40.9 44.1 47.7 51.4Fuel f/ 36.6 59.0 73.5 39.3 2.4 5.0 3.4Hydrometeorology g/ 1.1 1.1 1.3 1.3 1.3 1.3 1.3Depreciation h/ 23.4 28.3 31.6 40.3 57.4 63.7 71.0

Total 109.8 138-.5 161.3 143.0 128.9 143.2 154.7

Operating Income 56.2 54.8 63.7 83.8 134.5 145.2 157.7

Other Income (Net) iJ 2.2 5.7 7.2 3.8 0.3 0.5 0.3

Income Before Interest 58.4 60.5 70.9 87.6 134.8 145.7 158.0

Interest Charged toIncome j/ 28.1 25.6 26.8 39.2 59.2 55.2 49.5

Net Income k/ 30.3 34.9 44.1 48.4 75.6 90.5 108.5- - -- -

a! For forecast of net sales of energy to customers see para. 3.02.*F/ Tariffs have been forecast in line with the 8.75Z rate of return covenant agreed under Loan

1470-PAN which would be repeated in the proposed loan.c/ Except where noted otherwise, the operating costs have been estimated based on the historic

trend in real terms and then escalated; operating costs of the Fortuna hydroplant and the SanFrancisco gas turbines were estimated separately and then added to each cost item. The 1983estimate is based on the approved budget.

d/ Includes energy purchases from PanCanal; forecast purchases are negligible.e/ 35Z of general administrative expenses have been deducted from charges to operations and

therefore capitalized to the relevant investment programs.f/ Based on fuel consumption projected by IRHE's load dispatch program. Forecast unit prices (1982

averages in US$ per barrel: Bunker 33 - and Diesel 57) have been escalated 7.5% per annum forthe 1983-1985 period and 6Z thereafter.

g/ Cost of hydrometeorological observation activities borne by IRHE.h/ Based on straight-line method; weighted average depreciation rates have been forecast at 3.1%

for 1983-1984 and 2.3% for 1985 and thereafter.i/ Includes the Government oil subsidy, 9.75% on IRHE's fuel bills.J/ See forecast interest charges in Annex 5.6.k/ Net earnings are fully retained as IRHE pays no dividends.1/ Preliminary; not yet audited.

March 18, 1983

- 43 -

PANAMA ANNEX 5.3

SIXTH POWER PROJECT

Actual and Forecast Sources and Applications of Funds 1981-87(Millions of US o)

Actual Forecast Totals1981 1982 h/ 1983 1984 1985 1986 1987 T3-87

Sources

Internal Cash GenerationNet Income before Interest 58.4 60.5 70.9 87.6 134.8 145.7 158.0 597.0Depreciation 23.4 28.3 31.6 40.3 57.4 63.7 71.0 264.0Gross Internal Generation 81.8 88.8 102.5 127.9 192.2 209,4 229.0 861.0

'Debt ServiceAmortization a/ 15.8 17.7 23.8 30.5 55.7 66.8 70.8 247.6Interest Charged to Income b/ 28.1 25.6 26.8 39.2 59.2 55.2 49.5 229.9

Total 43.9 43.3 50.6 69.7 114.9 122.0 120.3 477.5

Net Internal Generation 37.9 45.5 51.9 58.2 77.3 87.4 108.7 383.5

Capital ContributionsCentral Government and

Others 7.6 5.0 - 0.4 0.8 7.8 8.5 17.5

Borrowings c/Existing 18.3 34.0 9.0 10.3 4.0 - - -Fortuna Package 55.5 92.8 109.3 89.5 - - - -

IBRD - Proposed VI Project - - - 9.2 13.7 9.1 - 32.0Other Future - - 1.0 9.5 32.6 43.3 33.2 -

Sub-total 73.8 126.8 119.3 118.5 50.3 55 :32E 373.7Short Term 36.5 - - - - - - _

Total 110.3 126.8 119.3 118.5 50.3 52.4 33.2 373.7

Total Sources 155.8 177.3 171.2 177.1 128.4 147.6 150.4 774.7

Applications

Construction Program 21Ogig Works

Ongoing Woras d 20.9 35.2 31.2 23.0 21.7 24.1 27.6 127.6Ongoing Fortuna 46.4 105.8 91.6 79.0 - - - 170.6Proposed DistributionVI Project - - 0.7 15.4 25.4 17.8 - 59.3

Other Future 0.9 3.4 1.5 15.3 43.1 78.7 107.1 245.7Sub-total 68.2 144.4 125.0 132.7 50. 120.6 134.7 603.2

Interest During ConstructionActually Paid e/ 10.8 20.6 30.6 26.0 6.9 11.3 13.6 88.4

Total 79.0 165.0 155.6 158.7 97.1 131.9 18.3 691.6

Working Capital Increase_(Dc -rease) 7f 7.3 4.0 4.6 0.8 12.5 1.7 3.5 23.1

Other Applications g/ 69.2 8.3 10.8 17.7 18.7 8.6 - 55.8

Total Applications 155.5 177.3 171.0 177.2 128.3 142.2 151.8 770.5

Surplus (deficit) of Funds 0.3 0.0 0.2 (0.1) 0.1 5.4 (1.4) 4.2Accumulated 0.8 0.8 1.0 0.9 1.0 6.4 5.0 5.0

a/ See forecast debt amortization statement in Annex 5.7.5/ See forecast interest charges in Annex 5.6.c/ See forecast loans disbursement statement in

Annex 5.5.df See construction program in Annex 4.1.e/ See forecast interest charges in Annex 5.6. Represents interest charged to construction actually paid which

partially compensates the 9% cost of capital imputed by IRHE to its works in progress.f/ Working capital has been defined as the sum of current assets (other than cash) less current liabilities

(exclusive of short-term loans and the current portion of the long-term debt). For projections assumptionssee Annex 5.4 footnotes b/, c/, d/ and ea.

g/ Includes cancellation of short-term loans.h/ Preliminary; not yet audited.

March 18, 1983

4 bb -

PANAMA ANNEX 5.4

SIXTH POWER PROJECT

Actual and Forecast Balance Sheets 1981-87(Millions of US$)

Actual Forecast1981 1982 f/ 1983 1984 1985 1986 1987

Fixed AssetsGross Fixed Assets inService a/ 827.0 928.2 1,035.6 1,487.4 2,015.9 2,221.8 2,504.0Accummulated Depreciation a/ 225.7 274.2 328.2 393.6 481.1 581.5 696.9Net Fixed Assets inService 601.3 654.0 707.4 1,093.8 1,534.8 1,640.3 1,807.1Works in Progress a! 192.6 396.7 555.9 364.4 73.8 161.3 204.0

Total Fixed Assets 793.9 1,050.7 1,263.3 1,458.2 1,608.6 1,801.6 2,011. 1

Current AssetsCash and Equivalent 0.8 0.8 0.9 1.0 1.1 6.4 5.0Accounts Receivable bI 35.1 35.5 37.0 37.3 43.3 47.4 51.4Inventories (includingFuel) c/ 15.3 16.1 17.7 17.4 17.1 18.6 19.8Other Current d/ 8.1 8.1 8.1 8.1 8.1 8.1 8.1

Total Current Assets 59.3 60.5 63.7 63.8 69.6 80.5 84.3

Deferred Assets d/ 39.6 42.5 42.5 42.5 42.5 42.5 42.5Total Assets 892.8 1,153.7 1,3 1,564.5 1,720.7 T, 2,137.9

EquityCapital 113.7 113.7 113.7 113.7 113.7 113.7 113.7Retained Earnings 171.0 205.9 250.0 298.4 374.0 464.5 573.0Grants 2.5 7.5 7.5 7.9 8.7 16.5 25.0

Revaluation Reserve a/ 192.2 313.2 401.7 478.3 589.1 713.9 846.1Total Equity 479.4 640.3 7729 89.3 18.5 T108. 157

Long Term DebtTotal 278.6 387.6 483.0 571.1 565.6 551.2 513.6Less: Current Portion 16.6 23.9 30.5 55.7 66.8 70.8 85.7

Total Long Term Debt 262.0 363.7 452.5 515.4 498.8 480.4 427.9

Current LiabilitiesShort Term Loans 58.3 55.8 45.0 27.4 8.6 -Suppliers and Contractors e/ 49.6 43.1 41.7 40.8 34.1 37.9 39.6Current Portion of LongTerm Debt 16.6 23.9 30.5 55.7 66.8 70.8 85.7

Total CurrentLiabilities 124.5 122.8 117.2 123.9 109.5 108.7 125.3

Contingent an6. OtherLiabilities d/ 26.9 26.9 26.9 26.9 26.9 26.9 26.9

Total Equity andLiabilities 892.0 1,153.7 1,369.5 1,564.5 1,720.7 1,924.6 2,137.9

a/ IRHE revalues its fixed assets in operation and major works in progress in accordance withexisting agreements with the Bank.

b/ Forecast as an annual percentage of total sales representing days of financing: 1982: 67 (real)and 1983 and thereafter: 60.

c/ Materials inventory has been forecast assuming constant the, level of 1982 in real terms; fuelinventory maintaining 15 days reserve.

d/ Miscellaneous current assets, deferred assets and contingent and other liabilities have beenforecast constant.

ea Accounts payable have been forecast as follows: fuel: 30 days; other supplies: 60 days; andcontractors: 45 days.

f/ Preliminary; not yet audited.

March 5, 1983

_ /45 _

PANAMA ANNEX 5.5

SIXTH POWER PROJECT

Loans Disbursement Statement

(Millions of US$)

1981 1982 1983 1984 1985 1986 1987

ExistingSan Miguelito 0.6 - - - - - -IBRD V Project 5.7 6.0 8.4 2.7 - - -

IDB Rural Electrif. - 1.1 0.6 7.6 4.0 - -

Libra 1981 (partial) 12.0 - - - - - -

Libra 1982 (partial) - 18.3 - - - - -

Exim Bank/DKB - 8.6 - - - - -

18.3 34.0 9.0 1 0.340 - -

Fortuna PackageIBRD 1470-PAN 9.5 15.9 9.3 0.6IDB 71C-17VF 15.2 33.7 14.0 -Shandinavinska 2.8 1.4 4.8 6.5Libra 1981 (partial) 28.0 - - -

Libra 1982 (partial) - 41.7 - - - - -

IBRD - Supplementary - - 16.0 15.3 - - -

IDB - Supplementary - - 22.9 37.1 - - -

IDB - Cofinancing - - 10.0 20.0 - - -

Italian Export Credit - - 20.0 5.0 - - -

Italian Commercial - - - 5.0 - - -

Venezuelan Investment Fund - - 12.3 - - - -

55.5 92.8 109.3 89.5 - - -

IBRD - Proposed VI Project 9,3 13.7 9.1

Other FutureFortuna Dam RaisingPackage - - - 0.9 21.3 29.2 12.3

X Changuinola 1st Stage - - - 5.1 11.3 10.1 0.4Changuinola 2nd Stage - - - - - 4.0 20.5

Interconnection Costa Rica - - 1.0 3.5 - - -- - 1.0 9.5 32.6 43.3 33.2

7T 12 119.3 1 50.3 52.4 33

March 18, 1983

- 46 -

PANAMA ANNEX 5.6

SIXTH POWER PROJECT

Forecast Interest Charges to 1983-87(Millions of US$)

1983 1984 1985 1986 1987 4

ExistingThe Equitable Life Ass. Soc. - - - - -

Caja Seguro Social - Chiriqui - - - - -

Fondo Preinversion No. 41 - - - - -

Banco Union 0.1 0.1 - - -

Skandinaviska No. 2137 MUS$2.2 0.2 0.2 0.1 - -

IDB 71C-17VF-PN 5.2 5.6 5.5 5.2 4.9IDB FOE 0.1 0.1 0.2 0.2 0.2IDB OC - 0.1 0.1 0.2 0.2IBRD 322-PAN 0.1 0.1 - - -IBRD 661-PAN 2.3 2.2 2.0 1.9 1.7IBRD 948-PAN 1.8 1.6 1.6 1.4 1.3IBRD 1470-PAN 2.6 2.8 2.5 2.3 2.0IBRD 1778-PAN 1.3 1.7 1.7 1.5 1.4GIE-SVECA MUS$11.5 0.6 0.5 0.4 0.3 0.2Societe Generale Banque 0.8 0.5 0.3 0.2 -Skandinaviska No. 1342 3.4 2.9 2.3 1.8 1.3Skandinaviska No. 2019 MUS$19.6 0.9 1.2 1.3 1.1 0.9Skandinaviska No. 2690 0.3 0.2 0.2 0.2 0.1Plan de Pensiones CSS 0.1 0.1 - - -Banco Central de Venezuela 0.1 0.1 0.1 - -Banco N. de D. U. San Miguelito 0.1 0.1 0.1 0.1 0.1Amex Bank MUS$8 0.5 0.2 - - -Libra Int. Bank 1981/MUS$40 6.5 6.3 5.9 4.7 3.5Libra Int. Bank 1982/MUS$60 8.7 8.7 7.8 6.6 5.5Fondo Proinversion No. 62 - - - -F.I.V. 08-60 0.5 0.4 0.3 0.3 0.2Banco Nacional Abengoa 0.1 0.1 0.1 - -Banco Nac. Panama (Dillon/Ind. Japan) 6.5 5.8 4.9 4.3 3.6San Francisco Turbines Package (DKB) 0.7 0.7 0.8 0.7 0.7

Sub-total 43.5 42.3 38.2 33.0 27.8

Proposed IBRD Loan - 0.8 2.0 3.3 3.8

FutureIBRD Fortuna Supplementary Package 1.2 2.8 3.7 3.5 3.2IDB Ordinary Funds 2.0 5.1 7.0 6.6 6.1IDB Cofinancing 1.0 2.8 4.0 3.4 2.6Italian Government Exp. Co. 1.4 2.7 2.9 2.6 2.3Italian Commercial - 0.2 0.3 0.3 0.3Venezuelan Investment Fund 0.7 1.3 1.3 1.3 1.1Suppliers Dam Raising Package - 0.8 2.1 5.0 7.2Development Agency No. 1 Changuinola - 0.6 1.5 2.6 3.1Development Agency No. 2 Changuinola - - - 3.8 5.3Interconnection Costa Rica 0.1 0.4 0.6 0.5 0.3

Sub-total 6.4 16.7 23.4 29.6 31.5

Short Term Loans 7.4 5.4 2.5 0.6 -

Total Interest Charges 57.4 65.2 66.1 66.5 63.1

Interest Charged to Income 26.8 39.2 59.2 55.2 49.5

Interest Charged to Construction 30.6 26.0 6.9 11.3 13.6

March 18, 1983

- 47 -

PANAMA ANNEX 5.7

SIXTH POWER PROJECT

Forecast Debt Amortization Statement 1983-87(Millions of US$)

1983 1984 1985 1986 1987

ExistingThe Equitable Life Ass. Soc. 0.2 - - - -

Caja Seguro Social - Chiriqui - - -

Fondo Preinversion No. 41 - - -

Banco Union 0.3 0.3 0.2 -Skandinaviska No. 2137 MUS$2.2 0.6 0.6 0.6 0.3 -IDB 71C-17VF-PN - 1.8 3.7 3.7 3.7IDB FOE _ _ _ _IDB OC - - - - -IBRD 322-PAN 0.3 0.3 0.3 0.3 0.3IBRD 661-PAN 1.7 1.8 2.0 2.1 2.3IBRD 948-PAN 1.4 1.5 1.6 1.8 1.9IBRD 1470-PAN 3.1 3.1 3.1 3.1 3.1IBRD 1778-PAN - 1.8 1.8 1.8 1.8GIE-SVECA MUS$11.5 1.2 1.2 1.2 1.2 1.1Societe Generale Banque 1.3 1.3 1.3 1.3 -Skandinaviska No. 1342 6.0 6.0 6.0 6.0 6.0Skandinaviska No. 2019 MUS$19.6 1.0 2.0 2.0 2.0 1.9Skandinaviska No. 2690 0.5 0.5 0.5 0.5 0.5Plan de Pensiones CSS 0.7 0.5 0.5 0.9 -Banco Central de Venezuela 0.3 0.3 0.3 0.3 0.3Banco N. de D. U. San Miguelito - - - - -

Amex Bank MUS$8 1.5 1.5 - - -Libra Int. Bank 1981/MUS$40 - - 7.5 7.5 7.5Libra Int. Bank 1982/MUS$60 - - 8.6 8.6 8.6

Fondo Proinversion No. 62 0.1 0.1 0.1 - -F.I.V. 08-60 1.0 1.0 1.0 1.0 1.0Banco Nacional Abengoa 0.3 0.3 0.3 0.5 -Banco Nac. Panama (Dillon/Ind. Japan) 2.3 4.5 4.5 4.5 4.5San Francisco Turbines Package (DKB) - - 0.2 0.7 0.7

Sub-total 23.8 30.5 47.3 48.1 45.2

Proposed IBRD Loan - - - - 2.4

Other FutureTIRD Fortuna Supplementary Package - - 1.0 2.1 2.1IDB Ordinary Funds - - 2.3 4.6 4.6IDB Cofinancing - - 3.0 6.0 6.0

Italian Government Exp. Co. - - 1.5 3.1 3.1Italian Commercial - - - - 0.3Venezuelan Investment Fund - - - 1.8 1.8Suppliers Dam Raising Package - - - - 3.3Development Agency No. 1 Changuinola - - - - 0.9

Development Agency No. 2 Changuinola - - 0.6 1.1 1.1Interconnection Costa Rica - - - -

Sub-total - - 8.4 18.7 23.2

Total 26.8 75.

March 18, 1983

- 48 -

PANAMA ANNEX 6.1

SIXTH POWER PROJECT

Financial Rate of Return for the 1983-87 Program(In Millions US$, 1982 Constant Prices)

Costs BenefitsIncrease Average

Capital O&M Fuel in Sales Rate b/ RevenueYear Investment Costs a/ Costs a/ Total GWh US¢/kWh from Sales a/

1978 29.0 c/ - - 29.0 - - -1979 27.5c/ - - 27.5 - - -

1980 44.5c/ - - 44.5 - - -1981 50.1 c/ - - 50.1 - - -1982 105.8 c/ - - 105.8 - - -1983 116.2 - - 116.2 - - -1984 114.1 6.8 -37.0 83.9 117.0 12.0 14.01985 73.1 21.1 -71.4 22.8 249.0 12.0 29.91986 91.7 24.4 -69.4 46.7 381.0 12.0 45.71987 97.0 27.1 -70.1 54.0 522.0 12.0 62.61988-2018 - 29.2 -64.4 -35.2 672.0 12.0 80.6

Financial Rate of Return %Without WithFortuna Fortuna

Case Sunk Costs Sunk Costs

1. Base Case 27.0 13.42. Capital investment and O&M costs increased

by 20% 20.9 11.63. Fuel costs decreased by 20% 23.0 11.84. Capital investments and O&M costs increased

by 20%; fuel costs and revenues from salesdecreased by 10% 17.8 10.0

5. Fuel costs and revenues from sales decreasedby 10% 19.5 10.9

a/ Incremental fuel costs with respect to 1983 operation. Negative costs areequivalent to fuel savings due to thermal generation substitution realized with theoperation of the Fortuna project from 1984 onward.

b/ Average rate prevailing in December 1982.c/ Sunk costs for Fortuna equal to US$242.7 million (current prices) as of

December 1982.

April 25, 1983

IBRD 16835* So 77- 78' JANDiAHY T4a-

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* a-: ,, < PANAMA

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.OSTA RaCe 5A CaIOMETERS S 22 40 60 80 IOU

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