Docunent of

The World Bank

FOR OFFICLAL USE ONLY

Report No 21309-BO

IMPLEMENTATION COMPLETION REPORT

BOLIVIA

POWER SECTOR REFORM TECHNICAL ASSISTANCE PROJECT(Credit 2790 BO)

March 5, 2001

Bolivia, Ecuador and Peru Country UnitFinance, Private Sector & Infrastructure Sector DepartmentLatin America and Caribbean Region

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

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CURRENCY AND EXCHANGE RATE(As of December 31. 2000)

Currency Unit = Boliviano (Bs)US$1.00=Bs 6.38

FISCAL YEAR OF BORROWER

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ENDE Empresa Nacional de Electricidad S.A.(National Electricity Corporation)ENDE-T ENDE's Transmission UnitESMAP Energy Sector Management Assistance ProgramGOB Government of BoliviaICR Implementation Completion ReportIDA International Development AssociationIDB Inter-American Development BankMOC Ministry of CapitalizationMOED Ministry of Economic DevelopmentNGO Non-Governmental OrganizationNLDC National Load Dispatch CommitteeNSE National Secretariat of EnergyPPIAF Public-Private Infrastructure Advisory FacilityPPF Project Preparation FacilityPRONER National Rural Electrification ProgramSE Superintendency of ElectricitySETAR Servicios Electricos de Tarifa (Electricity Tariff Services)SIRESE System of Sectoral RegulationSOE State Owned EnterpriseTG Power Sector Reform and Capitalization Technical Group

Vice President: David De FerrantiCountry Manager Director: Isabel Guerrero

Sector Manager Director: Danny LeipzigerTask Manager: Chakib Khelil

FOR OFFICIAL USE ONLY

TABLE OF CONTENTS

Page No

PREFACE

EVALUATION SUMMARY

PART 1 - PROJECT IMPLEMENTATION ASSESSMENTA. Background ........................................ 1IB. Project Objectives and Components ........................................... 2C. Achievement of Objectives ........................................ 3D. Major Factors Affecting the Project ........................................ 6E. Project Sustainability ........................................ 7F. IDA Performance ......................................... 7G. Borrower Performance ......................................... 8H. Assessment of Outcome ......................................... 8I. Future Operation ........................................ 9J. Key Lessons Learned ......................................... 9PART II- STATISTICAL TABLESTable 1: Summary of Assessments ......................................... 11Table 2: Related IDA Loans/Credits ........................................ 12Table 3: Project Timetable ........................................ 12Table 4: Cumulative Estimated and Actual Credit Disbursements ........................................ 13Table 5: Key Indicators for Project Implementation ........................................ 13Table 6: Key Indicators for Project Operation ........................................ 13Table 7: Studies Included in Project ........................................ ................... 14Table 8A: Project Costs ........................................ 19Table 8B: Project Financing ........................................ 20Table 9: Economic Costs and Benefits ........................................ 20Table 10: Compliance with Operational Manual Statements ........................................ 20Table 11: Status of Legal Covenants ........................................ 20Table 12: Use of IDA Resources: Staff Inputs ........................................ 22Table 13: Use of IDA Resources: Major Missions ........................................ 22

Annex A - Borrower's Contribution .......................... 3............... ... .... 23

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

IMPLEMENTATION COMPLETION REPORT

BOLIVIA

POWER SECTOR REFORM TECHNICAL ASSISTANCE PROJECT(Credit 2790 BO)

Preface

This is the Implementation Completion Report (ICR) for the Power 'Sector ReformTechnical Assistance Project in Bolivia, for which Credit 2790-BO in the amount ofSDR3.5 million (US$5.1 million equivalent) to the Government of Bolivia was approvedon November 30, 1995 and made effective on January 23, 1997.

The Credit closed on June 30, 1999 after one six-month extension. Finaldisbursement took place on January 19, 2000, at which time a balance of SDR1 81,487(US$231,136) yemained to be recovered from the project's Special Account.

After the departure of Chakib Khelil, the project's task manager, from the WorldBank in October 1999, a draft ICR was prepared by his team member, Hannachi Morsli(Principal Petroleum Engineer, COCPO) during May-August 2000. This draft wassubstantially rewritten by Stephen Ettinger (Consultant) during September-October 2000.It was reviewed by Susan Goldmark (Sector Manager, LCSFE), Andrea Silverman(Sector Leader, LCSFP), Tonci Bakovic (CPW) and Maria Victoria Lister, (Sr.Operations Officer, LCSFP). It was sent to the Government of Bolivia for comments inNovember 2000 which were received in late February 2001.

The ICR is based on material in the project file retrieved from the managementinformation system, and on discussions with and information provided by GOB and theimplementing agencies. The Borrower contributed to the preparation of the ICR bypreparing its own project evaluation (Annex A) and by commenting on the I'DA's draftICR.

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BOLIVIA

POWER SECTOR REFORM TECHNICAL ASSISTANCE PROJECT(Credit 2790 - BO)

EVALUATION SUMMARY

1. Background. In 1993, the Governnent of Bolivia (GOB) began the process ofrestructuring and privatizing the public utility sectors of electricity, hydrocarbons,telecommunications, water and transport. It established the independent System ofSectoral Regulation (SIRESE), covering the above five sectors, passed new laws for thosesectors (except for transport, where the law is under preparation), and privatized most ofthe main state-owned enterprises (SOEs). SIRESE is headed by a General Superintendent,and includes the power sector regulatory agency, the Superintendency of Electricity (SE).

2. The December 1994 Electricity Law called for the vertical separation of the sectorinto generation, transmnission and distribution companies. Generation would become acompetitive activity and the others would be regulated monopolies. The EmpresaNacional de Electricidad S.A. (ENDE), Bolivia's national power generation andtransmission company, was one of the first public enterprises to be restructured andlargely privatized. In 1995, its generation operations were split into three companies,which were then "capitalized." (In this Bolivian form of privatization, private firms obtain50% of a company's shares plus management control in exchange for investing new capitaldirectly into the cornpany. The remaining 50% of the shares -- except for a small portionpurchased at book value by employees -- is transferred from the state to the Bolivianpeople, and managed in trust by private pension funds). The largest electricity distributionSOE, Cochabamba's ELFEC (in which ENDE held a majority of shares), was alsoprivatized in 1995. To further consolidate these electricity sector reforms, GOB obtainedIDA support through the Power Sector Reform Technical Assistance Project (Credit2790-BO).

3. Project Objectives and Components. The project's listed objectives were toassist Bolivia's power sector in (a) fine-tuning the regulations under the Electricity Law,(b) carrying out key transition activities, and (c) completing the restructuring andprivatization of remaining government-owned assets, especially ENDE transmission(ENDE-T), the main isolated systems, and the distribution companies in the smaller cities.A fourth objective, although not specified as such in the documents, was to design asustainable system for rural electrification.

4. To achieve these objectives, the project provided resources to the Ministries ofCapitalization (MOC) and Economic Development (MOED) for: (a) strengthening theNational Secretariat of Energy (NSE) within MOED, and the Technical Group (TG)coordinating the project within MOC; (b) fine-tuning regulations under the ElectricityLaw; (c) carrying out pricing studies to determine the economic costs of generation,

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transmission and distribution, and updating the power tariff structure accordingly; (d)improving system dispatch by the National Load Dispatch Committee (NLDC); (e)mitigating environmental impacts; (f) developing a rural energy program, and (g)evaluating and implementing options for restructuring and privatizing ENDE-T, theisolated systems, and the smaller cities' distribution companies.

5. Evaluation of Objectives and Components. The project's objectives wereconsistent with the government's sector priorities and in line with the Bolivia CountryAssistance Strategy. The objectives were appropriately modest, because the central partof the reforms had already been carried out. The components lacked cohesiveness, as theycovered all the main matters which had not yet been adequately attended to, but werereasonable in scope and in line with the objectives.

6. Credit Amendment. The Credit was amended in July 1997, following thedissolution of MOC, to reflect the transfer of its activities to SE and NSE, an1d a six monthClosing Date extension (to December 30, 1999) was granted.

7. Achievement of Objectives. Credit effectiveness took fourteen moniths fromIDA Board approval, primarily because of delays in getting the credit approved by theBolivian Congress, due to the higher priority GOB was giving at the time to capitalizationof the hydrocarbons sector. The impact of this delay, however, was minimized by theProject Preparation Facility advance, which was granted soon after appraisal. There was asecond delay due to the change in administration. The new government that assumedoffice in August 1997 was initially skeptical about the reforms in general ancl SIRESE inparticular, but soon came to accept them. In spite of these delays, the project was by andlarge implemented on schedule.

8. Significant progress towards attaining the project's main objectives was achieved,but there still remains a substantial unfinished agenda in the sector. While theSuperintendency of Electricity (SE) has become a strong and capable institu'ion, the NSEis seriously under-staffed and under-funded. Some fine-tuning regulations were drafted bySE, but several still await NSE action. The tariff system was defined, but the 8-yearperiod for ending cross-subsidization of residential consumption only began in early 2000,so it remains to be seen whether its full implementation will be politically possible. Theelectricity dispatch system is operating satisfactorily, but some outstanding issues remain.An environmental assessment system has been established in the sector, butimplementation capacity is very limited. A national rural electrification program(PRONER) was designed, but the fiscal austerity measures of recent years havecontributed to staffing its implementation. ENDE-T was privatized successfully, althoughonly one bid was received (at the minimurn price). On the other hand, GOB has failed sofar to privatize the isolated systems and smaller distribution systems, due to [ocalopposition and the fact that the only bids received were far below the compEalies' bookvalues.

9. Major Factors Affecting the Project. When project preparation was initiated in1993, it was intended to support, in addition to the above components, the capitalization

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of ENDE's power generation units in the national interconnected system. But because ofslow project preparation, that component had to be carried out with support instead fromthe Regulatory Reform and Capitalization Technical Assistance Project (Credit 2647-BO),which was identified at the same time as this project, but prepared much faster. This, inturn, required reducing the scope of Cr. 2790, resulting in the smaller project being givenlower priority, thereby contributing to the delay in effectiveness of the Credit. Soon aftereffectiveness, members of the new administration publicly questioned the regulatoryframework, so implementation slowed down until the new administration decided to backthe new system. Strong local resistance has so far blocked privatization in the smallercities.

10. Project Sustainability. The project's achievements, which are part of a broaderreform program, are likely to be sustainable. The current administration, after questioningsome of the bases of the reform, publicly reaffirmed its commitment to preserving andcontinuing the process. The critical regulatory functions, including tariff regulation andenforcement of service quality, are now well accepted by the operators, and to a certainextent by the general public. Privatization has proven almost impossible to reverse inLatin America during the past decade. However, achieving the full potential projectbenefits may be hampered by (a) the lack of budget and staff in NSE to continueformulation and monitoring of sector policies, (b) potential popular resistance to increasesin residential tariffs (as has already been shown in the water sector), (c) general politicaland social strife in Bolivia, and (d) the ability of influential companies to obtain specialbenefits by by-passing SE and NSE. Thus, while a major reversal of the alreadyimplemented reforms is unlikely, further progress remains uncertain.

11. IDA Performance. Overall, IDA performance was marginally satisfactory.Project preparation was much too slow, as it took aimost four years from identification toBoard approval. The project documentation was not particularly lucid in explainring theobjectives, components and institutional arrangements, or how they fit together. Duringimplementation, IDA gave effective support to GOB. Project supervision was satisfactoryin quality but timesheet data indicate that it may have been rather limited in quantity,averaging only seven staff-weeks per year. However, a mitigating factor is that the projectwas able to benefit from regulatory and power sector specialists (including this project'stask managers) working on related adjustment and technical assistance projects as well asa large ESMAP grant program for this sector. Most supervision missions comprised onlyone person and no formal mid-term review was undertaken. The supervision reports wereoverly optimistic, and did not fully reflect the difficulties faced in privatizing the smallersystems, implementing PRONER, or strengthening the NSE.

12. Borrower Performance. GOB's overall performance was also marginallysatisfactory. It shares responsibility with IDA for the slowness of project preparation, andwas the main source of the subsequent delay in effectiveness. Inter-agency rivalries,especially between SE and NSE, impeded progress. On the positive side, starting evenbefore the Credit became effective, GOB initiated some of the necessary actions. Itappointed the regulator for the electricity sector, mobilized the consultants needed for theproject, privatized ENDE-T and issued revised regulations. After a period of uncertainty

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early in the new administration, the GOB performance again became satisfactory, exceptin terms of privatizing the smaller systems, implementing PRONER and strengthening theNSE.

13. Assessment of Outcome. The power sector divestitures and associated legal andregulatory improvements have by and large been successful, and the project contributed tothe latter stages of this process. In particular, new private sector investment has resulted inrapid growth of generation capacity, eliminating the risk of shortages, keeping pricesdown, and enabling expansion in under-served areas. The SE is operating well, theprocess of adjusting tariffs to match economic costs has begun, and the overall system isgenerally functioning smoothly. The main problem areas which have emerged are: (a)slow progress in implementing PRONER; (b) failure to privatize the systems in the smallercities; (c) the weakness of the NSE; (d) several technical disputes related primnarily to theorder of dispatch and the payments due to the generation companies; and (e) lack ofpopular understanding and support for the reforms. These problem areas inclicate thatmuch remains to be done. The project as a whole is rated 'marginally satisfactory.'

14. Future Operation. While a TA project does not have an "operational plan" perse, the power sector reform process is continuing, with IDA support under t.he ongoingRegulatory Reform and Privatization Technical Assistance Project and the relatedRegulatory Reform Sector Adjustment Credit. An Environmental Management Learningand Innovation Credit, due to become effective in March 200 1, has been designed toenhance the capacity of the NSE to carry out its environmental responsibilities as well asinvolve local communities and non governmental agencies in environmental monitoring. Inaddition, IDA is beginning to prepare a project that would promote rural electrificationand communications infrastructure and the application of modern information andcommunications technologies to a wide range of poverty alleviation efforts. (i.e. distancelearning, telemedicine, agricultural information systems, e-commerce for smallerenterprises, etc.)

15. Key Lessons Learned. The lessons learned include: (a) a well-defined legal andregulatory framework, and transparency throughout the reform process, are prerequisitesfor successful privatization; (b) in smaller cities, privatization is likely to be harder toaccomplish than in major centers; (c) policy design and implementation are best carriedout by a strong local core of permanent government professionals with a dependableadministrative budget; (d) reform of the power sector is a long-term process that requirescontinuous adjustments; (e) when project implementation spans a change inadministration, allowance should be made for at least several months' delay while the newadministration reviews the situation and determines its approach; (f) when preparation of aloan or credit is delayed, it is important to have access to other resources, such as a PPFor a related loan or credit, so that the processing delay does not lead to delay on theground; and (g) with the shift to E-mail, assembling all the necessary documents for anICR is becoming harder.

I

BOLIVIA

POWER SECTOR REFORM TECHNICAL ASSISTANCE PIROJECT(Credit 2790 - BO)

Part I - PROJECT IMPLEMENTATION ASSESSMENiT

A. Background

1. Overall Reform Program. In the mid-1980s, Bolivia initiated a successful economicstabilization program which controlled inflation and promoted economic growth. By the early1990s, the foundations of a stable economy had been established and political consensus grew on theneed for reforms to improve efficiency in key sectors of the economy and lessen the government'sfinancial burden. Starting in 1993, GOB began restructuring and privatizing the public utility sectorsof electricity, hydrocarbons, telecommunications, water and transport. It established the independentSystem of Sectoral Regulation (SIRESE), covering the above five sectors, passed new laws for thosesectors (except for transport, where the law is under preparation), and privatized the main state-owned enterprises (SOEs). SIRESE is headed by a General Superintendency, with appellate as wellas general supervisory responsibilities, and includes five independent regulatory agencies, one ofwhich is the Superintendency of Electricity (SE). While SE has regulatory authority, the normativerole (establishing policies and issuing regulations) lies with the National Secretariat of Energy (NSE).The privatization was carried out successfully, transparently and quite rapidly through internationalbidding, which brought significant investments (about US$4 billion, exceeding 60 percent of GDP) intelecommunications, hydrocarbons, electricity, railways, airlines, airports and water. The processgenerated a great deal of interest from international investors in Bolivia's economy, particularly theenergy sector. At the same time, however, many issues in these sectors have nol: been resolved, andpopular support for the reforms and privatization remains thin.

2. Power Sector Restructuring. The December 1994 Electricity Law cafled for the verticalseparation of the sector into generation, transrnission and distribution companies . Generation wouldbecome a competitive activity while the others would be regulated monopolies. The EmpresaNacional de Electricidad S.A. (ENDE), Bolivia's national power generation and transmissioncompany, was one of the first public enterprises to be reformed. Although ENDE, was consideredthe best major SOE in Bolivia, it was restructured and privatized as a means of (a) attractinginvestment, since ENDE lacked the funds itself to expand, and its traditional financiers (the IDA andIDB) were no longer willing to keep investing in SOEs, (b) introducing competition in generation,and (c) improving operational efficiency. In 1995, its generation operations werz split into threecompanies, which were then "capitalized." (In this Bolivian form of privatizationi, private firmsobtain 50% of a company's shares plus management control in exchange for investing new capitaldirectly into the company. The remaining 50% of the shares -- except for a small portion purchasedat book value by employees -- is transferred from the state to the Bolivian people, and managed intrust by private pension funds). The largest distribution SOE, Cochabamba's ELFEC (in whichENDE held a majority of shares), was also privatized in 1995.

3. Remaining Agenda. However, much remained to be done to complete the reform andprivatization of the power sector. The tariff system needed to be overhauled to match the new

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sectoral structure. In the interconnected system, which supplied over 90% of the power, GOBwanted to privatize ENDE transmission (ENDE-T), and needed to ensure that the dispatch systemwas appropriate for competitive generation. In the smaller cities, both those within theinterconnected system (Potosi and Sucre) and those with their own isolated systems (Tarija, Cobijaand Trinidad), the reforms had hardly begun. And in the rural areas, where access to electricity wasonly about 14%, GOB wanted to design an efficient and sustainable system for expansion. GOB alsoneeded to strengthen both the regulatory capacity of the SE and the policy-making activitiesentrusted to NSE, within the Ministry of Economic Development (MOED). To help implementthese follow-up reforms, GOB obtained IDA support through this Power Sector Reform TechnicalAssistance Project (Credit 2790-BO).

B. Project Objectives and Components

4. Objectives. The project's listed objectives were to assist Bolivia's power sector in (a) fine-tuning the regulations under the Electricity Law, (b) carrying out key transition activities, and (c)completing the restructuring and privatization of remaining government-owned assets, especiallyENDE-T, the main isolated systems, and the distribution companies in the smaller cities. A fourthobjective, although not specified as such in the documents, was to design a rural energy strategy.The presentation in the project documents was not particularly lucid, as objective (b) above isexceptionally broad, and objectives (a) and (c) are really subsumed under it.

5. Components. To achieve its objectives, the project provided resources for:

(a) institutional strengthening of (i) the Technical Group (TG), within the Ministry ofCapitalization (MOC), to enable it to coordinate implementation of the project and (ii) theNational Secretariat of Energy (NSE), within the Ministry of Economic Development's(MOED), to enable it to further develop the power sector policy objectives, promote anew direct private investment environment; plan for an adequate energy balance (supplyand demand), establish guidelines for mitigation of social and environmental impacts, anddevelop a rural energy strategy;

(b) fine-tuning the regulations under the Electricity Law;

(c) pricing studies to determine the economic costs of generation and distribution and updatethe power tariff structure accordingly;

(d) system dispatch improvements including (i) studies to upgrade regional load dispatch andtransmission systems, (ii) establishment of the organization of the National Load DispatchCommittee (NLDC), including operational and administrative regulations, staffing,training, and budget and, (iii) specification of the equipment needed for metering andcommunications systems;

(e) mitigating environmental impacts by (i) identifying possible environmental and socialissues associated with ENDE-T privatization; (ii) updating the environmental legalframework; and (iii) implementing the environmental assessment mitigation measures;

(f) rural electrification option studies to design a strategy, including pilot investments, forefficient and sustainable energy development and supply to rural areas;

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(g) financial, technical and legal audits and restructuring option studies to: (i) complete theunbundling of ENDE-T, (ii) corporatize the isolated systems and smaller distributionentities; and (iii) privatize the above units.

6. Evaluation of Objectives and Components. The project's objectives were: (a) relevant tothe government's own sector priorities of providing economic and reliable service to the greatestnumber of consumers, with the minimum government intervention, and due regard to theenvironment; and (b) consistent with IDA's Bolivia country assistance strategy, which viewed the: (i)need for effective economic reforms and the restructuring of the SOEs to involve private sectorparticipation, in particular, as essential to greater economic development; and (ii) power supply as aservice best delivered by competitive markets. The objectives were appropriately modest, becausethe central part of the reforms had already been carried out. Design of the ruralL energy programshould have been specified as a separate objective, as it was not covered by the listed ones. This toowas a worthwhile and feasible objective.

7. The components lacked cohesiveness, as they covered all the main matters which had not yetbeen adequately attended to, but were reasonable in scope and in line with the objectives. They weremodeled after those of preceding projects in Bolivia and in the region, and emphasized the transitionperiod requirements in order to maintain the momentum of the reform process. The time-frame wassomewhat optimistic, given the forthcoming change of administration (as the President of Boliviacannot run for immediate re-election), but reflected the desire to move ahead as rapidly as possible.

8. Credit Amendment. The Credit was amended in July 1997 (just before the newadministration took power) following the dissolution of MOC, which was formed specifically for theprivatization through capitalization of the six major SOEs (electricity, telecommunications, mining,hydrocarbons, railway and airline), and was therefore dismantled at the end of the capitalizationprocess. Under the amendments, the project's implementation responsibilities Ihat were under MOC,consisting largely of the restructuring and privatization strategy studies, were transferred to SE, anda limited number of activities that were under MOC were transferred to NSE. In addition, theCredit's Closing Date was extended by six months, from December 31, 1998 to June 30, 1999, at therequest of SE, in order for it to review and implement the action plan originally agreed with MOC.Finally, the amendment provided the opportunity for some fine-tuning text adjustments to enhancethe focus of the technical assistance components in light of the project implementation progress.

C. Achievement of Objectives

Project Implementation.

9. The project was identified in 1993, but due to slow processing, it was not appraised untilJune 1995. Because project preparation took so long, another project, the Regulatory Reform andCapitalization Technical Assistance Project, Credit 2647-BO, which was prepared faster, had to beused to finance the restructuring and capitalization of ENDE's generation facilities in theinterconnected system. The IDA Board approved the power reform project on November 30, 1995,but Credit effectiveness was delayed until January 23, 1997, after the Bolivian Congress hadapproved the credit. The main reason for this delay was that the relevant GOB officials werefocussing instead on the privatization of the hydrocarbons sector, and this relatively small credit(which had been cut in half from the originally-anticipated US$10 million) did not have high priority,

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especially since the main actions for sector reform and privatization had already been taken.However, the impact of this delay was minimized by a Project Preparation Facility (PPF) advance,which was approved soon after appraisal. Implementation was then satisfactory until the dissolutionof MOC in July 1997, followed the next month by the inauguration of the new administration.Because the winning coalition had campaigned against both capitalization and the regulatory system,they needed several months not only to become familiar with the project, but also to decide toproceed with all of its components. In spite of these delays, the project was by and largeimplemented on schedule, with only a six-month extension of the closing date necessary.

10. Of the US$5.1 million credit, US$4.9 million was disbursed. The largest amount, US$1.5million, was spent on studies, with slightly over half of this related to tariffs. Other studies coveredtechnical standards, dispatch arrangements, adherence of the capitalized generation companies totheir investment commitments, the information systems of the companies, limitations on crossownership (between generation, transmission and distribution companies), and the strengthening ofthe SE (see Table 7 for details). The second largest amount, US$1.2 million, went for consultants onthe restructuring and privatization of ENDE-T. A further US$0.9 million was spent for the design ofthe rural electrification program. About US$0.3 million went for institutional costs of the TG,US$0.1 million for environmental assessments, and US$0.9 million for refinancing the PPF (seeTables 8A and 8B).

Project Achievements.

11. Overall. Becaus-, the project financed a potpourri of activities across the sector, it is difficultto separate fully the project's contribution from the overall progress of the power sector. In general,the sector is performing satisfactorily, and the project made a limited but positive contribution tothis. However, in each of the main areas in which the project was active, there were failures as wellas successes. Thus, while significant progress was made towards the project's main objectives, thereremains a substantial udinished agenda in the sector.

12. Institutional. SE's operations and performance standards have been significantly enhanced.SE's "code of conduct" and staffing benchmarks have been strengthened using international bestpractices and guidelines, promoting responsibility and accountability. The project helped the SE todevelop its information and communications systems, and its method of dealing with consumercomplaints. But while the SE has become a strong and capable institution, with independent funding(from a service charge of 1% on electricity revenues), the project failed to meet its objective ofstrengthening NSE, which is now seriously under-staffed and under-funded. Although there wereconsultants under the project at NSE working on particular tasks, no overall strategy for institutionalstrengthening was provided, and little capacity was left after the consultants finished. Thus the NSEhas been slow at making progress in key areas for which it has responsibility, such as implementationof the rural energy strategy, fine-tuning of the regulations, and enforcement of environmentalstandards. The imbalance of capability between SE and NSE is also unhealthy, because by giving SE(by default) too much power, it can set the stage for clashes later on.

13. Privatization. ENDE-T, which is the backbone of the country's power sector with some1,818 km. of high voltage power transmission lines, became a separate transmission company andwas then successfully privatized through a competitive bidding process on July 17, 1997. Althoughsix firms had been prequalified, eventually only one, Uni6n Fenosa Desarrollo y Acci6n Exterior S.A.of Spain, bid, and its offer was the US$40 million minimum (and substantially below the US$54

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million book value). Apparently, other potential bidders were discouraged by the stated skepticismof the incoming administration (which had been elected in June 1997) about the regulatory system,and by its stated intention to review all privatizations undertaken by the outgoing administration.Still, the process was carried out transparently and efficiently.

14. Privatization was attempted in April 1997 for the largest isolated system, SETAR in Tarija,which includes generation, transmission and distribution, and for the distribution company SEPSA inPotosi (part of the integrated system). In the case of SETAR, the only bid received, from UnionFenosa, was for US$7 million, far below the book value of US$28 million. Similarly, UnionFenosa's US$1.5 million bid for SEPSA was well below its US$5 million book value. (No minimumprices had been set in these bids, because of uncertainty about the market values.) There had alreadybeen strong political opposition to these privatizations from the employees' unions and local politicalleaders. The low prices offered, and the absence of competition, greatly strengthened the argumentsof those opposed to the sales, leading GOB to cancel both privatizations. GOB chose not to useproject funds for the restructuring and privatization efforts of these companies. Privatization of thesmaller isolated system in Trinidad has been held up pending a decision on whether to connect it tothe national grid. ENDE remains the majority shareholder in these enterprises. I[n the Sucredistribution company, CESSA, ENDE is a minority shareholder (most shares are: owned byconsumers, as this was formerly a cooperative), and GOB is still considering howv to proceed,especially given the opposition of the municipality (another minority shareholder) to privatization.

15. Tariffs. Eight individual studies financed under the project contributed to calculation of thegeneration, transmission and distribution elements of the tariff, and resultant fine-tuning of therelevant regulations. Average retail tariffs have not changed much in real terms since the reformsbegan, and are still at reasonable levels, while the wholesale tariff structure has been adjusted toincrease efficiency and reflect the break-up of ENDE. However, there remain two major problemswith the tariff system. The first is the substantial cross-subsidization of residential consumption,mainly from industrial users. This has the effect of harming Bolivia's industrial c.ompetitiveness,while at the same time subsidizing well-off consumers. The 8-year period for gradually ending thiscross-subsidization only began earlier this year, so it remains to be seen whether full implementationwill be possible politically. As residential tariffs rise, it may be desirable to introduce a life-line tarifffor poorer consumers. Second, the regulated price for generation, which the distributors can passthrough to the consumers, has consistently and increasingly been below the spot price at which thegenerators sell to the distributors. For three years, while the difference was not too great, consumerswere charged a "factor z" (for which there appears to be no provision in the Electricity Law) tooffset this, but this ended in early 2000. Since then the distributors have been losing money. Aneffort to resolve this is underway.

16. Dispatch. The project had a small but positive impact on the electricity dispatch system,which was already in operation and generally working well. The diagnostic finaniced by the loanhelped the NLDC to optimize the functioning of its load dispatch center. The curTent system iscentered on an economic order of discharge, based on marginal costs, intended to maximizeefficiency in production. Most elements of marginal cost are monitored to ensure that this efficiencyobjective is achieved. However, one major exception is the price of the fuel (mostly natural gas),because fuel contracts are considered confidential (and, in some cases, the generators are linked tothe hydrocarbons producers). Generators have been known to quote unrealistic fuel prices so as toobtain a more desirable position in the order of dispatch.

6

17. Environment. An environmental assessment system has been established in the sector, butimplementation capacity remains limited. NSE's environmental responsibilities, including fieldmonitoring and clearance of impact assessments and mitigation action plans, have not been properlyperformed due to the shortage and turnover of adequately trained technical specialists. The problemis exacerbated by the environmental standards, which are based on those of North America andEurope, and often extremely difficult to comply within the context of Bolivia. In addition torequiring substantial quantitative improvements in certain parameters, environmental regulationsrequire significant monitoring, reporting and planning activities, which are seldom carried out due tothe lack of qualified personnel and resources. The project did not adequately address these issues.

18. Rural Electrification. A national rural electrification program, known as PRONER, wasdesigned under the project, with the objective of doubling the rural availability of power from 14% to28% over about five years, at a cost of about US$ 100 million. Design of PRONER was a majorachievement, and the manuals produced are being disseminated in other countries as well, asexamples of best practice. PRONER has three components: (a) grid extensions, by local distributioncompanies; (b) low-density off-grid areas, where commercial firms might be interested in providingphotovoltaic units; and (c) higher-density off-grid areas, where NGOs would take the lead in settingup small isolated systems (using mini-hydro or small thermal generation, for example). The projectwas supplemented by resources from the ESMAP program which has continued after credit closing.The basic approaches are to maximize use of the private sector and to minimize subsidization,through competition whenever feasible. Subsidies would be limited to investment costs, with theprivate firms expected to cover at least all operating costs. Although PRONER was very welldesigned, little progress to date towards its implementation has occurred for two basic reasons. First,unlike some other countries, Bolivia has not assigned significant resources, either from the sector orfrom general revenue, to rural electrification. And second, rural electrification is the responsibility oflocal governments (originally at the department level, but now primarily at the municipal level),which have not always felt compelled to follow PRONER guidelines, especially when bilateraldonors or commercial interests were pressing in other directions. Nevertheless, there has beensteady expansion of rural electrification coverage (by about 1% of the rural population per annum),primarily with external financing, although often with greater subsidies, less consistency and a lowerassurance of sustainability that would be the case with PRONER.

19. Regulatory Fine-Tuning. Several project studies led to the preparation by both NSE andSE of draft regulatory changes, but a number of these have been held up because of rivalry anddisagreement between the two agencies. A supreme decree was issued to correct the calculation ofthe transmission tariffs. However, draft regulations dealing with matters such as integratedinformation systems, distribution service quality in rural areas, and relations between consumers andutilities, including the handling of consumer claims and complaints, are still pending, as is fine-tuningof the operation of the wholesale (spot) market.

D. Major Factors Affecting the Project

20. Slow Project Preparation. A slower project preparation than anticipated during projectidentification resulted in a reduction of the project's scope. The restructuring and privatization ofENDE's generation facilities within the national interconnected systern, initially earnarked for thisproject, had to be transferred to the Regulatory Reform and Capitalization Technical AssistanceProject, Credit 2647-BO. This required reduction in the project's scope, further slowing down

7

project preparation while reducing the project's importance in the eyes of GOB, which in turn led tothe delay in credit effectiveness.

21. New Administration's Approach to Reform. Soon after credit effectiveness, members ofthe incoming administration publicly questioned both the independent regulatory system (SIRESE)and the privatizations. Fortunately, after a few months in office the new administration concludedthat the privatization process had been proper, and also that SIRESE should remain in effect.However, tensions have remained between GOB and SIRESE. There was some justifiable concernin the new administration that too much of MOC's sector reform activities under the project had beentransferred to SE, whose role should normally be only to monitor and enforce, rather than makepolicy. In addition, the administration has taken certain steps towards reducing the financialindependence of SIRESE, such as by applying GOB salary scales to SIRESE, and requiring fundspaid by the utilities for the operating costs of their respective superintendencies to pass through theGOB Treasury.

22. Poor Inter-Agency Coordination. Lack of coordination among the various central andlocal government agencies adversely affected the project in several ways. First, some of the initialdelays were exacerbated by disputes between MOC and MOED. Second, in the new administration,conflicts between NSE and SE were a continuing problem during project impleinentation. However,relations have improved since the issuance of a ministerial resolution requiring consultation amongNSE, SE and other interested parties prior to the promulgation of new regulatic,ns. And third,strong local resistance by local governments has so far blocked privatizations in the smaller cities.

E. Project Sustainability

23. The project's achievements, which are part of a broader reform prograrrm, are likely to besustainable. The current administration, after questioning some of the bases of ilhe reform, publiclyreaffirmed its commitment to preserving and continuing the process. The fact that the reforms'survived this critical review ended up improving the prospects for long-term sustainability, especiallyas all of the major political parties have now endorsed the reforms. The critical regulatory functions,including tariff setting and enforcement of service quality, are now well accepted by the operators,and to a certain extent by the general public. SIRESE's sustainability is also increased by its financialindependence. Privatization has proven almost impossible to reverse in Latin America during thepast decade, and there appears to be no major threat in this direction, especially given the legal,economic and international implications of any such effort.

24. However, there are three areas of concern. First, any new electricity system needscontinuous monitoring and adjustment, particularly in traditionally weak areas such as ruralelectrification and environmental protection. However, due to the lack of budget and permanentqualified staff, NSE has weak capacity which is delaying implementation of some of the projectconsultants' recommendations. Second, the approach of gradual increases in residential tariffs overeight years may eventually encounter popular resistance; the potential for utility price increases totrigger widespread disturbances has already been shown in the water sector in ('ochabamnba. This isthus linked to the third problem area: the political and social strife currently prevalent in Bolivia.And finally, influential companies have been able to use the political system at tines to circumventthe responsible agencies (NSE and SE) and obtain supreme decrees giving thenm special rights orbenefits. Thus, while a major reversal of the already-implemented reforms is urdikely, furtherprogress remains uncertain.

8

F. IDA Performance

25. Overall, IDA performance was marginally satisfactory. Project preparation was much tooslow, which resulted in the project's scope having to be scaled down prior to negotiations. It appearsthat the task manager spent much of this time reviewing policy recommendations by numerousstudies carried out under earlier and ongoing IDA-financed projects, rather than in moving aheadwith project processing. The project documentation was not particularly lucid in explaining theobjectives, the components, the institutional arrangements, or how everything fit together.Inadequate attention was paid to building capacity in NSE, including for environmental reviews.

26. Once project implementation started, IDA provided effective support to the project units.After the task manager was changed at GOB's request, the collaborative working relationshipimproved. When the new administration questioned central aspects of the project, IDA played animportant role in convincing it of the importance of maintaining the reforms and completing theproject. Project supervision was satisfactory in quality but timesheet data indicate that it may havebeen rather limited in quantity, averaging only seven staff-weeks per year. However, a mitigatingfactor is that the project was able to benefit from regulatory and power sector specialists (includingthis project's task managers) working on related adjustment and technical assistance projects as wellas a large ESMAP grant program for this sector. Supervision missions were frequent enough butconsisted usually of only one person, spending less than a week on the project, and seldom travellingoutside of La Paz and Cochabamba. No formal mid-term review took place. Thus, while there wasgood dialogue on the implementation of the project, in general, it appears from reports that lessstrategic discussions abc ut the overall development of the sector occurred. In addition, thesupervision reports were overly optimistic, and did not fully reflect the difficulties faced in privatizingthe smaller systems, implementing PRONER, or strengthening the NSE. Because of theseshortcomings, management was not alerted to the continuing problems in the sector, and hence wasnot in a position to engrge in a serious dialogue with GOB on the sector.

G. Borrower Performance

27. GOB's overall performance was also marginally satisfactory. It shares responsibility withIDA for the slowness of project preparation. The interest shown in the project during identificationsoon dissipated, especially after the project was reduced in size. As a result, project negotiationswere carried out two years after identification, and the Credit became effective 14 months after IDABoard approval. On the positive side, starting even before the Credit became effective, GOBinitiated some of the necessary actions, using funds from the PPF. It appointed the regulator for theelectricity sector, mobilized the consultants needed for the project, restructured and privatizedENDE-T and issued revised regulations. After a period of uncertainty early in the newadministration, the GOB performance became again satisfactory in terms of implementing theproject. It handed a large number of consultant contracts and managed IDA' s procurement,disbursement and accounting requirements well.

28. The lack of adequate budget has made it difficult for NSE to hire and retain qualified staff forsector policy formulation, regulatory fine-tuning, implementation of PRONER, and carrying out itsenviromnental responsibilities. Inadequate coordination between the project agencies, particularlyNSE and SE, persisted throughout project implementation, though relations have since improved.

9

H. Assessment of Outcome

29. The power-sector divestitures and associated legal and regulatory improvements have by andlarge been successful, and the project contributed to the latter stages of this process. In particular,new private-sector investment has resulted in rapid growth of generation capacily, eliminating therisk of shortages, keeping prices down, and enabling service expansion in under- served areas. TheSE is operating well, is adequately financed from automatic payments charged to operators, and hasgained credibility. The process of adjusting retail tariffs to match economic costs has begun, and thefirst small increases in residential prices have been accepted. The dispatch system, including the spotprices on which almost all generation transactions are based, is generally functioning smoothly. Themain problem areas which have emerged are: (a) slow progress in implementing a rational ruralelectrification system, to serve the 45% of Bolivia's population without access to electricity; (b)failure, due to political resistance and the economic unattractiveness of the companies, to privatizethe systems in the smaller cities; (c) the weakness of the NSE, which has responsibility for sectorpolicy, regulatory changes, environmental assessments and rural electrification; (d) several technicaldisputes related primarily to the order of dispatch and the payments due to the generation companies;and (e) lack of popular understanding and support for the reforms. These problem areas indicate thatthe project has been only partially successful in meeting its objectives, and there is still much to bedone. The project as a whole is rated 'marginally satisfactory.'

1. Future Operations

30. While a TA project does not have an "operational plan" per se, the power sector reformprocess is continuing, with IDA support under the ongoing Regulatory Reform and Privatization TAProject and the related Regulatory Reform Sector Adjustment Credit. An EnvironmentalManagement Learning and Innovation Credit, due to become effective in March 2001, has beendesigned to enhance the capacity of the NSE to carry out its environmental responsibilities as well asinvolve local communities and non governmental agencies in environmental moritoring. In addition,IDA is beginning to prepare a project that would promote rural electrification anid communicationsinfrastructure and the application of modern information and communications technologies to a widerange of poverty alleviation efforts. (i.e. distance learning, telemedicine, agricultural informationsystems, e-commerce for smaller enterprises, etc.) A Public-Private Infrastructure Advisory Facility(PPIAF) study is assessing the remaining reform needs of the sector. Sector regulations willcontinue to need to be refined as experience is acquired under the competitive system. GOB iscontinuing its efforts to implement the PRONER rural electrification program, and is seekingsolutions to the problems of the power companies in the smaller cities, as the failure of the initialprivatization efforts has left those companies in legal and financial limbo.

J. Key Lessons Learned

31. The project implementation review identified a number of lessons learned, of which the mostimportant are:

(a) a well-defined legal and regulatory framework, and transparency throughout the reformprocess, are prerequisites for successful privatization, and for maintaining the credibilityof the approach through changes in government administration;

10

(b) in smaller cities, privatization is likely to be harder to accomplish than in major centers,both because of strong local pride and interests that resist the sale, and because of lowerattractiveness to foreign bidders;

(c) policy design and implementation are best carried out by a strong local core of permanentgovernment professionals with a dependable administrative budget. Especially whennegotiating with highly-paid private-sector managers, it is important that the governmentteam be well-qualified. Budgets that depend excessively on external project financing arevulnerable when those projects end, especially when the financing of consultants wasreally a back-door way of giving direct recurrent budgetary support. In this regard, SE,having an independent budget, was able to train and retain staff that made it a strong focalpoint during project implementation, while NSE, because of lack of budget, was unable toperform as consistently or effectively;

(d) reform of the power sector is a long-term process that requires continuous adjustments;even with sound sectoral and regulatory laws, as is the case in Bolivia, there can betension between the executive power and the regulatory agencies, and conflicts with theprivate utilities. Regulatory systems will have to be continuously adapted based on boththe lessons of experience and technological progress.

(e) whenever project implementation spans a change in administration, allowance should bemade for at least several months' delay while the new administration reviews the situationand determines its approach. This delay is normally longer and more problematical whenthere is a change in ruling political parties, as the previous opposition is likely to havebeen critical of the outgoing administration's policies;

(f) when preparation of a loan or credit is delayed, it is important to have access to otherresources, such as a PPF or a related loan or credit, so that the processing delay does notlead to delays on the ground; and

(g) with the shift to E-mail and the division of responsibility between IDA headquarters andresident missions, assembling all the necessary documents for an ICR is becoming harder.Neither resident mission nor regional files (in the IRIS system) tend to be comprehensive,and unless the task manager has kept a good set of personal hard-copy files, it isbecoming increasingly difficult to follow the paper trail. Since both task managersinvolved in this project from conception to end had left the World Bank prior to draftingthis ICR, it was a challenge to reconstruct the project's history.

11

IMPLEMENTATION COMPLETION REPORT

BOLIVIA

POWER SECTOR REFORM TECHNICAL ASSISTANCE PROJECT(Credit 2790 - BO)

Part II - Statistical Tables

A. Achievements of Objectives Substantial Partial Negligible NotApplicable

Macroeconomic Policies O3 13Sector Policies 1 13 0 ]Financial Objectives E ] 13Institutional Development 03 3 0 1Physical Objectives O L 03Poverty Reduction 13 [ 03Gender Concerns 1 O [1 12Other Social Objectives 13 131 0Public Sector Management 0 0 213Private Sector Development F1 3 01°Environmental Objectives 0 [] [l3

B. Project Sustainabilitv Likely Unlikelv Uncertain

El 1 03

C. Bank Performance Highly Marginally DeficientSatisfactory

Satisfactory

Identification 13 1Appraisal 1 03Supervision 1 13

D. Overall BorrowerPerformance

Preparation 1 -13Implementation 13 13Covenant Compliance 13 13Operation M1 13

E. Assessment of Outcome Hihly Marginally Marginallv HihlvSatisfactory Satisfactorv Unsatisfactory Unsatisfactory

C1 13 10

Source: Bank staff estimates.

12

Year ofLoan/Credit Title Purpose Approval Status

Preceding OperationsPower Sector Power Sector Rehabilitation 1988 ClosedSAC Structural Adjustment Credit 1992 ClosedRegulatory Reform & Capitalization Technical Assistance 1994 ClosedSAC Structural Adjustment Credit 1995 ClosedHydrocarbon Sector Reform & Cap. Technical Assistance 1995 Closed

Following Operations:Regulatory Reform & Privatization Technical Assistance 1998 OngoingRegulatory Reform Sector Adjustment Credit 1998 OngoingHydrocarbon Environment Mgmt. LIL 2000 PendingDecentralized Energy, Information and Investment Credit PreparationCommunications Technology for RuralTransformation

Steps in Project Cycle Date Planned Actual Date

Identification July 1993

Appraisal May 26, 1995

Negotiations October 1995 October 25, 1995

Board Presentation November 1995 November 30, 1995

Signing March 28, 1996

Effectiveness June 1996 January 23, 1997

Project completion June 30, 1998 June 30, 1999

Loan closing December 31, 1998 June 30, 1999

Source: Project files and SAP

13

* hble4 t$_|Eto:(~$S mlfieu)illl

FY FY FY FY FY1996 1997 1998 1999 2000

AppraisalEstimate 2.8 4.7 5.1 5.1 5.1

Actual ---- 1.8 2.6 3.9 4.9

Actual as % 0% 38% 51% 77% 96%of estimate

Date of Final Disbursement: 19 January 2000Source: Project Appraisal and Borrower

t*=e 5: Key APOW for Pr_ject_ .48*WWt0Key Implementation Estimated Actual

IndicatorsAchievement of DO HS SImplementation Progress S SCounterpart Funds HS HSProject Management HS HSProcurement HS HSEnvironment HS SFinancial NR NROther Legal Covenants S SMonitoring & Evaluation S SResettlement N/A N/AEnvironmental Plan N/A N/AWID Impact N/A N/ASource: Project Appraisal and Borrower

TatjIe -6:r 9_ _I. Key project operations Key Indicators

Investment Operation N/A

Sector Policy & Institutional Development Supreme Decrees No. 25283, Jan.30, 1999, No. 25563,Oct.29, 1999 and No.25592, Nov. 19, 1999 were issuedfine-tuning sector regulations and 4 more decrees wereunder preparation by the Credit Closing Date.

Source: Project Files

14

i 'J, ,/Et,0 f,r,0^7771

(SEPTEMBER 1997 TO JUNE 1999)

Total Cost of Studies -- US$1.53 million

PART A

Technical Group and Regulatory Framework

TITLE COST OBJECTIVE RESULT1 Analysis, 32 172.- Definition, analysis and design of Contributed to develop a strategic

Development the Integrated Information plan for the Integratedand Design of System (IIS) in observance of the Information System of the SE.the Integrated SE functions. Included theInformation analysis of the existing processesSystem of the and information systems, and the

SE determination of additional ones

that will be required for____________ _subsequent development.

2 Training and 5 540.- Training of the SE personal in the Helped through training toTechnical use of the Ultimus Web Suite improve the knowledge andAssistance in Software. management of the Ultimus WebUltimus Web Suite Software by the SE staff..Suite Software

PART B. 1

Tariff Adjustment Program

TITLE COST OBJECTIVE RESULT1 Determination 338 743.- To develop the methodology and The methodology and procedures

of procedures to determine the were subsequently approved byMethodologies electricity distribution tariffs, the SE.for Electricity within the framework establishedDistribution by the Electricity Law; and to All the distribution companies ofTariffs Calculus calculate referential economic the NIS are applying the

prices for the main distribution methodology in to calculate theirsystems of the national tariff structures and proposeinterconnected system (NIS). them to the SE for its approval.

2 Regulation of the 21 714.- To determine the procedure for Contributed to determining theCapital Cost and calcula-ting the rate of return on rate of return on equity, which isStructure equity, that will be used for the a main input that the NIS

determination of the allowable distribution companies are takingprofit and consequently used in in account in order to determinethe base-tariff calculus. To their tariff structures.establish the regulation of thefinancial cost that will be Helped the SE to approve arecognized as part of the methodology for the treatment ofdistribution companies' financial cost as part of theexploitation costs (as indicated in determination of the distributionarticle 54 of the Electricity Law). tariffs.

3 Preparation of 20 400.- To produce the final version of Supported the SE in developing athe Regulation the Regulation on Power Supply final version of the Regulationfor Power Project, through a systematic Project on Electricity Supply,Supply Project process beginning with the which rules the relations between

analysis and revision of the initial consumers and distributionI version of the project. companies. The regulation project

15

was presented by the SE to theVMEH and currently is being

_____________________________ review by thai: entity.4 Regulationfor 24 902.- To establish within the Contributed to determine a

Demarcation of framework of the Electricity Law methodology 1:hat the SE appliedthe Concession and its regulations, the to determine the geographicAreas observations and methodologies areas of the concessions of the

required to facilitate the distribution cDmpanies of thedemarcation of the concession NIS.areas, through a respective

___________ x _regulation.

5 Analysis and 44 451.- To analyze the dispositions in the Contributed to realizeApplication of Electricity Law and its modifications to the RegulationTransmission regulations related to on Tariff and Prices, related toRegulations transmission, to revise the earlier transmission tolls, that solved the

interpretations and applications, more controversial problemsand to propose the steps required between SE and the companies.to obtain proper interpretation These modifications wereand applications in accordance approved by t:he Governmentwith the Electricity Law, verifying through a supreme decree andits consistency with the principle are now being applied.of economic efficiency.

6 Evaluation of 41 463.- To give the SE a professional and Contributed tc improve thethe National qualified opinion about the supervision cf the NLDC by theLoad Dispatch organization and operations of SE.Center (NLDC) the NLDC in accordance with thePerformance Electricity Law and regulations.

7 Analysis and 37 431.- To analyze the dispositions of the Supported the SE in theApplication of Electricity Law and its preparation cf a new regulation toTransport regulations related to the determine the electricityPricing determination of the electricity transport prices for GeneratorsRegulations on transport prices for Generators and Non Regalated ConsumersDistribution and Non-Regulated Consumers that are located in facilitiesFacilities located in facilities owned by owned by Distribution

Distribution Companies, and to Companies. The SE presentedpropose the steps required in this draft regulation to the VMEHorder to obtain proper for its consideration.interpretation and applications inaccordance with the ElectricityLaw, verifying its consistencywith the principle of economic

___________ efficiency.__

2. PART B.2

Wholesale Power Market

TITLE COST OBJECTIVE RESULT1 Evaluation of the 28 900.- To revise the procedures about Enabled the NLDC members to

proceduresfor technical and commercial determine that the procedurethe Transmission aspects of the transmission established in the Electricity LawTolls Allocation in tolls allocation methodology in and its regulations createthe Bolivian the NIS, and also to make inconsistencies. TheWholesale Power recommendations about how to recommendatons of the study wereMarket handle any future adopted in order to be tested

modifications that may become against the results of thenecessary. application of the regulations in

I force. This comparison showed the

16

need for a specialized study thatwill propose a fundamental change

_________ in the regulation.2 Models for 188 571.- To develop, install, and test the Contributed to improve the

Simulation and functioning of computational optimization of operation of theOptimization of the models for simulation and NIS, in order to determine theOperation of the optimization of operation of the generation and transmissionBolivian NIS in the short and medium prices. These models were firstInterconnected term, under the established used to determine the prices for theSystem operational and tariff period April - October 2000. All the

regulations. companies of the BolivianWholesale Power Market have acopy of the models, so as to ensuretransparency of the pricecalculation and determination.

3 Preparation of the 48 514.- To prepare the TOR for Served to elaborate the terms ofTermns of specialized consultant services reference for this Study; theReferencefor the to study the requirements of consultant firm that was theNIS Reliability the Electricity Law and its counterpart demonstrated itsand Associated regulations related to Bolivian quality and reliability.Costs Study Wholesale Power Market

operation.4 NIS Reliability 131 223.- To carry out the NIS Reliability Helped the SE and the NLDC to

and Associated and Associated Costs Study in approve the minimum performanceCosts Study order to observe the levels that the generators and

requirements of the Electricity transmitter must maintain in theLaw and its regulations related operation of the power system.to Bolivian Wholesale PowerMarket operation.

5 Functional and 87 010.- To study the functions and Helped the NLDC develop a planEquipment attributes of the Operative Unit that contains the requiredDiagnostic of the of the NLDC in accordance with measures to optimize theNLDC the Electricity Law. functioning of the Load Dispatch

To make a complete diagnostic Center in accordance with theof what is required by the Electricity Law.NLDC in order to develop itssupervision and coordinationfunctions, such as the SCADAsystem in its control functionand data collection, and theEMS functions for the statusestimation, node factors,

________________ demand projections, etc.6 Evaluation of the 70 511.- To evaluate the general Helped the SE present to the VMEH

Functioning of the performance of the Wholesale a package of necessaryBolivian Power Market since its adjustments and additions to theWholesale Power beginning in May 1996, regulations on prices, tariffs andMarket verifying the observance of the operation of the wholesale power

Electricity Law and its market.regulations, and the principlesof economic efficiency, takingin account the most significantaspects, and to proposemodifications to improve its

_____________ ________ functioning in the future.

17

_ TITLE COST OBJECTIVE RESULT7 Evaluation of the 6 857.- To evaluate and to propose Helped the SE to adjust the

Functioning of the modifications or new procedures structure and procedures ofClaims and for the consumer claims and the system. The majorComplaints Unit of complaints system of the SE modifications are in a draftthe SE and the distribution companies. supreme decree that is under

consideration in the VMEH,and woukl be approved at thesame timt as the Regulation

________________ ________ on Power Supply.8 Audit of the 91 428.- To establish the procedures that Supported the SE in verifying

Observance of the will permit the SE to observe the the observance of the legalDivision and dispositions established in dispositions by theLimitation of article 15 of the Electricity Law generation, transmission andOwnership by the and in the respective supreme distribution companies of theElectric Companies decree. NIS. Article 15 is consideredof the NIS. the essence of the new

electric power structure.9 Evaluation of the 30 000.- To give the SE a qualified and Assisted the SE to confirm

Investment professional opinion about the the fulfillment of theCommitments in the fulfillment of these investment investmrent commitment inEmpresa Electrica commitments the Empr-sa Electrica ValleValle Hermoso S.A. Hermoso S.A. capitalizationCapitalization contract.Contract

1 Evaluation of the 45 000.- To give the SE a qualified and Assisted t:o the SE to confirm0 Inuestment professional opinion about the the fulfillment of the

Commitments in the fulfillment of the investment investment commitmentEmpresa Electnica commitment established in the established in the EmpresaCorani S.A. and Empresa E1lctrica Corani S.A. Electrica Corani S.A. andEmpresa Eectrica and Empresa Electrica Empresa ElectricaGuaracachi S.A. Guaracachi S.A. capitalization Guaracachi S.A.Capitalization contracts. capitalization contracts.Contracts

1 Evaluation and 123 428.- To realize a systematic audit of Helped the SE to instruct the1 Diagnostic of the the effectiveness and reliability main distribution companies

Distribution of the data processing related to of the NI'; (ELECTROPAZ,Companies' the commercial and technical CRE and ELFEC) to adjustInformation Systems areas of the distribution their information systems, by

companies, in accordance with applying the correctivethe requirements to control the measures that will solve theestablished parameters in the failures detected by theregulation on Distribution study._ Quality Control.

1 Analysis and 73 265.- To make a detailed analysis of Assisted the SE to respond to2 Reuiew of the investment commitments the request of COBEE to

Investments, Costs and maintenance, operational sharply increase its electricityand an administrative costs of tariffs. As a result of theTariff Revision COBEE, for 1997 and 1998, and study, SEi ratified the tariffsRequest of the forecasted for 1999 to 2001, as that were already in force.Compailia Boliviana part of the regular tariff reviewde Energia El&ctricaprcsfo198

_ S.A. (COBEE). process for 1998.1 Preparation of the 39 500.- To develop a short- (1 year) and Helped the SE to implement a3 Communication and medium-term (4 years), plan that will improve the

Information Strategic Communication and Information regulated consumers'Plan of the SE Strategic Plan for the SE. knowledge of their rights and

obligations, as well as of the__________________ __________ ______________________________ regulatory system .

18

% ½ % & _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _X_ _ _ _ _ $

Appraisal Estimate ActualLocal Foreign Total Local Foreign

Project Components Costs Costs US$MM Costs Costs Total

A. TG & REGULATORY FRAMEWORK 0.52 0.07 0.59 0.14 0.88 1.031. Reform and Capitalization Technical Group -TG 0.42 0.01 0.43 0.14 0.23 0.382. Fine-tuningRegulationstoElectricityLaw 0.10 0.06 0.16 0.00 0.65 0.65

B. TRANSITION REOUIREMENTS 0.42 1.79 2.21 0.64 2.10 2.741. Tariff adjustment program 0.06 0.34 0.40 0.19 0.27 0.462. Wholesale power market 0.05 0.47 0.52 0.44 0.50 0.943. Environment Phase 1: Generation (Done) 0.01 0.04 0.05 0.01 0.04 0.05

Environment Phase 2: EIA rest of sector 0.02 0.09 0.11 0.00 0.05 0.054. Strengthen the NSE policy promotion 0.18 0.52 0.70 0.00 0.37 0.375. Rural Energy Development 0.10 0.33 0.43 0.00 0.87 0.87

C. UNBUNDLING AND RESTRUCTURING 0.23 0.32 0.55 0.00 1.22 1.221. Isolated Systems 0.16 0.11 0.272. ENDE - Transmission 0.07 0.21 0.28 0.00 1.22 1.22

D. CAPITALIZATION AND PRIVATIZATION 0.21 0.75 0.961. Isolated Systems 0.11 0.32 0.432. ENDE Transmissions 0.10 0.43 0.53

Base Cost 1.38 2.93 4.31 0.78 4.20 4.98Physical contingencies 0.04 0.15 0.19Price contingencies 0.18 0.16 0.34Local Taxes (IVA - 15.5%) 0.74 0.74

Total proiect cost 2.34 3.24 5.58 0.78 4.20 4.98

OtherRefinancing of PPF 900-00-BO 0.40 1.02 1.42 0.47 0.95 1.42

Grand Total 2.74 4.26 7.00 1.25 5.15 6.40

Source: Project Appraisal and Borrower

19

.____________ _ .Table 8bo ?-loj;t_ _ _ _ _ _ _

Appraisal Estimate ActualLocal Foreign Local F7oreign

Source of Financing Costs Costs Total Costs Costs Total

GOB 1.90 0.00 1.90 1.25 0.28 1.53

IDA 0.84 4.26 5.10 0.00 4.87 4.87

Total 2.74 4.26 7.00 1.25 5.15 6.40

Source: SAR and Borrower Finance Department

Production: Not Applicable Econoniic Rate of Return: Not Applicable

Major Costs: (in US$M)

Legal and Regulatory 1.03Reform Transition Requirements 2.74Unbundling and Restructuring 1.22Refinancing PPF 1.42 _-

Total: 6.40

Source: Project Files

Statement number and title l Describe and comment oni lack of compliance

Complied with all relevant Operational StatementsSource: Project Files

20

RevisedAgreement - Section Type Status Date date Description of CovenantDevelopment CreditAereement

DCA 2.02 05 C Procurement to be made in accordance with the Credit Agreement's Schedule

DCA 3.01 05 C The Ministry of Capitalization (MOC) will carry out project components Al,A2, B 1, B2, C and D, with administrative, technical auditing andenvironmental due diligence.

DCA 3.01 05 C The Ministry of Economic Development (MOED) will carry out projectcomponents: B3, B4 and B5 with administrative, technical, auditing andenvironmental due diligence.

DCA 3.01(d) 05 C The Borrower will maintain and staff implementation units (the GT for theMOC and the UEP for the MOED) satisfactory to IDA, and consult anychanges with IDA.

DCA 3.01(e) 05 C Project will be carried out in accordance with Monitoring targets.

DCA 3.01 (f) 05 C To phase tariff studies under B2 to allow timely availability of requiredmetering equipment.

DCA 3.01(g) 05 C Within 30 days of Credit effectiveness Borrower is to establish a ProjectAdvisory Committee.

DCA 3.04 05 C Borrower will not invite bid for ENDE-T unless assessment indicatessuitability of regulations on power market operation and environmentalassessment of ENDE-T.

DCA 4.01 01 C Deliver to IDA satisfactory audited statements of project and Special Accountsaudited by external auditors satisfactory to IDA.

21

RevisedAgreement - Section Type Status Date date Description of CovenantDevelopment CreditAgreement

DCA 5.01 12 C Remedies pursuant to Section 6.02 of General Conditions will apply in eventthat Electricity Law or Privatization Law or SIRESE Law shall have beenrevoked, abrogated or amended or not enforced, IF, such event in IDA'sopinion would have adverse effect on Project.

Covenant types: Present status:

I = Accounts/Audits 8 = Indigenous People C = covenant complied with2 = Financial performance/revenue 9 = Monitoring, review, and reporting CD = complied with after delay

generation from beneficiaries 10 = Project implementation not CP = complied with partially3 = Flow and utilization of project covered by categories 1-9 NC not complied with

funds 11 = Sectoral or cross-sectoral4 = Counterpart funding budgetary or other resource5 = Management aspects of the allocation

project or executing agency 12 = Sectoral or cross-sectoral policy/6 = Environmental covenants regulatory/institutional action7 = Involuntary resettlement 13 = other

22

Stage of Planned Revised ActualProject Cycle Weeks US$ Weeks US$ Weeks US$

Through appraisalBoard-effectiveness 89.3 288.4

Supervision 63.9 242.3Completion 11.1 56.3

Total 164.3 587.0Source: FACT and SAP

AA;-0$;0ab- Th U^&0fU)A Arn4psT M4or Projtlt Mi0si.i:s

Performance RatingStage of Month/ Number of Days in Specialized Staff Implementation Development

Project Cycle Year Persons Field Skills Represented Status Impact

ThroughAppraisal 10/95 4 PR, FA, PE

Supervision 02/96 3 PE, EN S HS07/96 3 PE, FA S HS02/97 1 6 FA S HS07/97 1 FA HS HS07/98 1 4 PE S HS09/98 1 4 PE S HS12/98 1 PE S HS02/99 1 PE S HS

Source: PSRs (SAP)

Special Staff Skills:TM - Task Manager EC - Economist PE - Petroleum EngineerG - Geologist EN - Environment Specialist FA - Financial AnalystPR - Procurement Specialist PC - Process Engineer

23ANNEX A

IMPLEMENTATION COMPLETION REPORT

BOLIVIA

POWER SECTOR REFORMTECHNICAL ASSISTANCE PROJECT

(Credit 2790 BO)

Annex A

BORROWER'S CONTRIBUTION

Introduction

Since 1985, the Bolivian State implanted the denominated New Economic Politics, through aseries of measures that allowed to the Bolivian economy to be unwrapped in an atmosphere ofmacroeconomic stability, besides taking out to the country of a hyperinflaciorLary and negativegrowth period. One of the fundamnental measures was to promote the intervention of themarket mechanisms in the economy and to reduce the distortions produced by the interventionof the State. Between the end of the 80 and principles of the 90, the achieved stability allowedBolivia to grow, and to begin to design development strategies that will allow to growth theGDP in order to diminishing the degrees of poverty.

In this sense the Bolivian State began a deep process of structural reforms in according withthe world environment of liberalization of the economy in which the core is thecompetitiveness. The structural reform had as one of its fimdamental purposes to redefine thefunctions that the State as such should have in order to face the future challenges.

In this context, the central objective was to establish that the State centered its efforts andresources in: a) gestate political of development of long term; b) to norm and regulate theinvolved economic activities; in order to be excluded of the activity of provid&ng those servicesthat can be supplied by the private initiative.

Consequently it was then indispensable: a) to create the necessary incentives so that the privateinitiative participated actively in the provision of those services; b) to establish mechanismsthat guarantee the continuity and appropriate levels of quality of supplying the services; and c)to institutionalize the normative and regulatory capability of the State in such way that theoperation of the economic sectors will achieve the economic efficiency.

Project Objectives

The objective of the Project was to assist to the Republic of Bolivia in: a) to implement thereform specified by the laws of Capitalization, Electricity, Privatization and the SIRESE,including the adjustment of their regulations; b) to carry out key activities that will assure thesustainability in the long term, of those reforms; c) to complete the restructuring of the assetsof the electric sector and corporatize the smallest companies in the isolated systems; d) tocomplete the process of privatization of the assets of the electric sector owned by the State;and e) to evaluate the impact of the reform of the sector in the competitiveniess, and practical

24ANNEX A

commercial and investment in the electric market.

Consistent with the objectives of the Project, this was divided in the following parts: a)Operation of the Technical Group (A. 1) and strengthening of the system regulator (A.2); b)Requirements of Transition, where they highlighted the studies for determination of prices(B. 1) and the operation of the wholesale power market (B.2), besides an evaluation ofenvironmental impact (B.3), the strengthening of the then National Secretary of Energy (B.4)actually the Viceministry of Energy and Hydrocarbons (VMEH), and the treatment of the ruralareas (B.5); c) Restructuring of the electricity companies that still are owned by the State orsome organisms of the same one; d) Capitalization and privatization.

In a first stage of execution of the Project, until the emission of the first amendment, twoentities beneficiaries and execution units existed, the MOC to which were assigned the partsA.1, B.1, B.2, C and D, while for the VMEH were granted the parts A.2, B.3, B.4 and B.5.This initial assignment agreed fully with the institutional objectives of each one of thebeneficiaries, taking in account the process of reform of the State.

Conformed and established the SE in the firsts months of 1996, and the disappearance of theMOC, a new assignment of beneficiaries and executioners determined an adjustment to theresponsibilities of each entity. This new assigmnent understood the fact that to a year ofadministration of the SE, there was evident the necessity of its institutional strengthening, aswell as that the privatization functions and energy policy making should be centered in theVMEH. In this context the new assignment of execution of the parts of the Project,determined that the VMEH executed the parts A.2, B.3, B.4, B.5, C and D, while to the SEthey were only assigned the parts A. 1, B. I and B.2.

Additionally, as the capitalization and privatization processes of the main electric companieshad finished in 1995, and that the Law of Electricity and their regulation was effective from1996, it was evident the necessity to evaluate the impact of the reform. As a consequence inthe amendment of July of 1997, was included inside the part B.2 the corresponding objectiveand the reassignment of the respective funds.

Project Implementation

The Project was approved by IDA's Board on 30 November 1995 and made effective morethan a year later, on 23 January 1997. However, there was no signiificant implementationdelay, because the Project was: (i) supported by a Project Preparation Facility (PPF) advance,which was approved in June 1995, allowing the Project to start at that date; and (ii) acontinuation of a sectoral reform program initiated a few years earlier with IDA's supportthrough the Regulatory Reform and Capitalization TA Project (Cr. 2647-BO/ July 94 toDecember 98).

The Project's components were implemented satisfactorily, except for the restructuring,commercialization and privatization of the isolated systems (about 10% of the country's powersystem), which required more time than anticipated.

25ANNEX A

The implementation responsibility of the Project's components related to sector developmentpolicy, including the new regulatory standards, environmental assessment and mnitigation rules,institutional strengthening and promotion of rural electrification was assumed by VMEH withthe assistance of individual consultants. In addition, VMEH developed operational standardsfor the National Interconnected Grid System and operational guidelines Sfor the IsolatedSystems.

The implementation responsibility of the Project's components related to electricity pricing,system dispatch, restructuring of government-owned power sector assets, and capitalizing andor privatizing the restructured assets, was assumed by the TG under MOC until July 1997, andsince then, under SE. The TG, has become involved in policy making, including: (a)completion of capitalization of three generating companies (Empresa Electrica Guaracachi,Empresa Electrica Corani and Empresa Electrica Valle Hermoso); and (b) privatization of (i)the country's largest transmission company (ENDE-T); (ii) one distribution company(Empresa de Luz y Fuerza Electrica de Cochabamba); and (iii) the two largest isolatedsystems, which include generation and distribution, (Servicios Electricos SETAR, Tarija andSEPSA Potosi), these privatizations at the present were not concluded. The restructuring andprivatization of the smaller isolated systems required more time than anticipated and thepreparation for their privatization is still under way.

Achievement of Objectives

The key objectives of the Project were achieved in order to assist the Borrower in: (i) establisha new regulatory framework that corresponds with the principles of the major State reforms;(ii) create and establish the regulatory authority, the SE as an autonomous and independententity, that will guarantee the correct application of the dispositions of the Electricity Law; (iii)put in effect a new structure of the power sector through a capitalization and privatizationprogram that promoted the participation of the private investment, in order to guarantee thepower supply in the long term; (iv) develop pricing methodologies, procedures for grantingconcession and licenses, standards for the power supply that were implemented through keytransition schemes and activities that permit the long term sustainability of the reform results;(v) evaluate the power sector performance as effect of the new regulations application andrefine them in order to enhance competition in generation, promote efficiency in the naturalmonopolies and protect the consumer. These objectives were achieved, attaining the results ofdifferent processes and studies that were developed by consultants, also firms and individuals,foreign and locals, which were financed under the Project categories.

The performance of VMEH, as on of the major sector policy makers for the government, hasbeen significant improved. During the course of the Project, VEMH's units were able torefine a sound legal, institutional and regulatory framework, fostering efficient sector policies,attracting private sector participation and strengthening their efficiency. Sector environmentalassessments have been incorporated as a basis in all sector related action plans.

26ANNEX A

A number of key transition activities to ensure the long-term sustainability of the reforms werecompleted. Consumers and users can now participate directly in the regulatory process ofpublic utilities services. The sector is no longer subject to political interference and the powercompanies are only obliged to comply with the regulatory framework and performanceindicators. The first Indicative Investment Plan to guide private and public investment for thesector was published in 1999. The procedures for updating and issuing the plan annually werefinalized. A comprehensive sector information system and full sector statistics and businessopportunities were developed and now published yearly since 1998.

With the privatization of ENDE-T (1,818 km of transmission system) the nationalinterconnected system, consisting of more than 90% of Bolivia's power generation,transmission and distribution, is now privately owned and operates on market principles. Thesector is divided into three distinct activities, generation, transmission and distribution,substantially improving the operational performance and reducing commercial and technicallosses. The restructuring and commercialization program for the smaller utilities of theIsolated Systems (representing less than 10% of the country's power sector) has been underactive implementation with the objective of privatization by the end of 2001.

An energy strategy for private development of sustainable rural electrification, includingpolicy, regulations and a program (National Rural Electrification Program/ PRONER), hasbeen developed and approved by the government. PRONER's objectives are to increase thecoverage of rural electrification from 14% now to 28% by 2002, supplying some 110,000households. Several model projects have been designed for electricity demand-led and notpolicy-pushed, including renewable (photovoltaic solar, wind and mini-hydro) and are nowbeing promoted to private sector development with the assistance of UNDP, GermanGovernment Aid Agency and a local investment bank (Corporation Andina de Fomento). IFCparticipation is also being sought by VEMB.

On the regulatory side, the Project provided a fundamental contribution to the consolidation ofthe legal and regulatory framework of the power sector. The operations of SE, thegovernment's policy implementing agency or the independent regulator, have beenstrengthened and its performance standards significantly improved. The appointment of theSuperintendent of Electricity was confirmed in October 1998. The reforms mandated by theCapitalization, Power Sector, Privatization and the SIRESE Laws were further consolidated.Regulations related to (i) retail and wholesale pricing of electricity; and, (ii) open-accessoperation of the National Grid (spot market) were refined and issued during the course ofProject implementation.

Major Factors Affecting the Project

The factors that affected positively the Project's implementation are the following:

- Political support from high levels of GOB, to the power sector reform program,especially since the elaboration of the Electricity Law until the privatization of TDES.A. passing through the capitalization process.

- One team4 with highly qualified members, dedicated full time to the power reform andconsequently to the Project's implementation.

27ANNEX A

- Processes of capitalization and privatization, executed with transparency, permitted tomaintain the private interest in the power sector reform program and in. the adjustmentsrequired to the legal framework, as result of the operation of the powe:r marketincluding the VMEH, SE and NLDC.

- Remarkable ENDE's administration and operation, before the implemerntation of thecapitalization and privatization processes.

- Relatively well organized power sector, was essential in order to focus the activities inthe application of the procedures of the Electricity Law and its regulations, thatpermitted to obtain a consistent feedback for the adjustments needed to the powersector functioning through the Project's implementation.

- Specialized and individual consultants rather than firm consultants produced betterresults, because perrnitted that the coordination between the Project's executions unitsand the consultants was narrow and consistent.

In the other side, among the factors that attempted against the Project's implementation mustbe mentioned the following:

- Slow Project preparation, reduced the Project's scope, because the capitalizationprocess must be faced with resources transferred from other IDA credits, that alsoproduced a long delay in the Credit 2790-BO effectiveness.

- Complex concept of capitalization, not well understood by public opinion was a hardfactor to confront, that takes to much time and resources that finally were no sufficientin order to maintain the public opinion well informed.

- Hard opposition and conflicting attitude of the unions of the smaller companies,especially of SETAR and SEPSA.

- New administration's approach to the reform, affected in the delay of the Project'simplementation, because the incoming administration must be convinced about thepower sector reform.

Project Sustainability

In 1993, the past government initiated major state reforms following the new economicprinciples established since 1986. These reforms were based on concepts of sustainabledevelopment, national income redistribution and administrative decentralization, and requireredefining the role of the state in the main economic sectors. In that way the power sectorreform was implemented in parallel with others that correspond to telecommunications,hydrocarbon, mining, railway, and aviation sectors. Those sector reforms were implemented inan integrated way and with strong relations with other kind of reforms like pension fundsreform. Then in a general concept these relations between sector reforms guarantee theirsustainability, because any interest in modify the results of the power reformi must take carethat would affect seriously the other economic sectors.

28ANNEX A

The new regulatory authority of the power sector, through the results of the studies financedwith the project, has proposed to the government adjustments and modifications to theregulations, in effect since July 1995, that after their promulgation improved the performanceof the power sector. Also to put in effect the prices and tariffs according with the principlesand methodologies established in the Electricity Law, required transitional schemes that willavoid social impacts, those transitional schemes were developed and established, and willpermit that in eight years the actual distortions must be surpassed. These are samples that howin a specific concept, the results of the Project are sustainable, because the studies developedin the Project have provided to the regulatory authority and power executive with thenecessary mechanisms to evaluate permanently the power sector and most of all theapplications of the Electricity Law and the related legal framework.

The Project's legal and regulatory framework achievements are likely to be sustainable. Theconsolidation of the reforms was carried out with the aim of promoting efficiency andcompetition. The regulatory system has been operating to the satisfaction of all relevantparties, the consumers through an appeal process that has been functioning effectively, thepower companies by having a level playing field that foster competition under arms lengthregulations, and the government by having its sector policies enforced. SE has been able tohire and retain well-qualified staff, in addition to the well trained TG it inherited from MOC.The SIRESE Law provides for sustainable financial self-sufficiency of all superintendencies,including SE. In this regard, the Electricity Law provides up to 1% surcharge on all sales ofelectricity to cover the expenses of SE under yearly budgets. Over the years, the governmenthas also firmed up its commitment to the reforms and the independent regulatory system. Allof these achievements, which have been in the rnaking since the early 1990s, are not likely tobe reversed.

However, it is unlikely that the institutional development achieved during the course of theProject by the VMEH' s units will be sustained. Severe budget limitations (about 60%reduction of the previous year) are seriously constraining the VMEH activities. The Vice-Ministry is experiencing difficulties not only for hiring the skills it needs, but also for retainingthose formed under the Project. This situation could affect the Project's future operation,particularly the rural electrification for which the legal and regulatory framework still requirebroader development and further strengthening in order to attract private investment. Thecoordination between the policy makers and the regulators could also be affected.

IDA Performance

Since the beginning of the power sector reform in March 1993, IDA played a remarkable role,supporting through ESMAP and other grant funds the initial studies and high level assessmentsof foreign consultants needed by the power sector reform. Nevertheless most important was,the consistent, expertise, continuity and close collaboration provided by the supervision ofIDA. The IDA supports also mined to confer to the Bolivian capitalization and privatizationprogram a high level of credibility within the international power industry. During theimnplementation of the reforms IDA indorsed those actions that the Borrower's implemented inorder to apply the principles established in the Electricity and SIRESE laws, and were rejectedby some agents uncomfortable with the reform. Throughout the Project's cycle, fromappraisal to implementation supervision, the performance of IDA was highly satisfactory,including the difficult period of transition between the past and the actual Bolivia'sgovernment. One of the beneficiaries of the Project, the Superintendence of Electricity was

29ANNEX A

one of the entities that availed from the IDA performance, because improved its procedures inselecting and employing consultants.

Borrower Performance

In the evaluation of the Borrower's Performance is necessary to distinguish ilwo aspects; onerelated strictly to the preparation of the Project and the other that consist in the execution ofthe Project itself that corresponds with the achievements of its objectives.

About the first issue, there has been corresponsibility with IDA about the delay between theidentification and the effectiveness of the Project. Another delay that was important wasrelated with the effectiveness of the first Credit Agreement Amendment, it takes almost sixmonths since it was agreed. These delays affected directly to the execution of the Project, inorder to improve its performance. This was due principally to the change cf administration,and after that, the GOB assumed the measures needed to improve the Project implementation.One issue that must be mentioned was a lack of high coordination between the entitiesresponsible of the Project, the SE and the VMEH, nevertheless this problem was resolved asthe different studies were carrying out specially those related with adj ustments to theregulations of the Electricity Law. If the delays would not take so much time, the coordinationwould be highly improved.

They were several difficulties for the VMEH to implement satisfactorily the Project, theprincipal was related with the difficulty of this institution to retain qualified staff. The effects ofthat problem were observed in the lack of capability for sector policy formulation,implementation of PRONER and carrying out its power environmental responsibilities.

In relation with the second aspect, the GOB has achieved in general terms with the objectivesof the Project, taking in account the wide spectrum of matters involved in the Project'sobjectives, and was focused in the power sector institutional and legal frameworkconsolidation, trying to benefit from the initial momentum of the power sector reform relatedwith the capitalization and privatization processes. In that order the strengthen of the SEbeginning with the appointment of the Superintendent and with specific studies related withthe regulatory activities and the capacitating of its personal were essential to the consolidationof the regulatory entity. In the same trend the decision adopted by the GOB in order toestablish the NLDC was definitely essential to complete the structure of the power sector andto its functioning according with the provisions of the Electricity Law and its regulations, theadequate design of the studies needed to improve the NLDC performance was another issuethat was certainly done.

Assessment of Outcome

At the present the power sector has a new and more efficient structure that in the past, themain problems that it has before were solved, especially those related with the necessity toattract the private investrcnt in order to guarantee the sustainability, continuity and quality ofthe power supply. A new, consistent and well-conceived regulatory frmelTWork was put ineffect, that establish the adequate incentives and protections to the private investments. Anautonomous and independent regulatory agency capable of fulfill its functions established bythe Electricity Law, was implemented.

30ANNEX A

As result, the SE is obtaining a certain degree of credibility, and is improving through the yearsits efficiency and effective parameters. The process of adjusting retail tariff has begun after along, but necessary preparation of studies and coordination process with the distributioncompanies. The quality of the power supply has followed the stages established in theregulations in order to aim the final stage were the quality indicators will be enforced; toachieve this stage was necessary not only a high coordination between the SE and thedistribution companies, also these needed to implement adequate information systems capableto fufill the regulations requirements. Trough the consolidation of the NLDC, and theprovision of procedures to administrate the wholesale power market, its functioning is ingeneral terms smoothly.

Nevertheless, there were several problems that were identified before the power sector reformbegun and were not yet solved, even though these were not a primarily objective of theProject, they were not treated as the others mainly because: there were not prioritizedappropriately and consequently their approach to solve them was inadequate; also the financialresources and qualified staff were not sufficient. These problems area related with: a)implementing a rational rural electrification policy; b) privatize the small isolated systems; c)strengthen the actual VMEH in order to fulfill its responsibilities related with the power sectorpolicy, regulatory proposals, and environmental assessments; d) anti trust legal frame work;and e) insufficient diffusion to the consumers about: i) of how is structured the power supplyindustry; ii) their rights and obligations established in the Electricity Law; iii) the functions ofthe SE; and iv) the rights and obligations of the distribution companies. These problems doesnot means that the Project does not achieved its objectives, because these were not theprincipals and that yet there is much to be done.

Future Operation

In the future the GOB will be making efforts in order to solve the problems mentioned above,specially those related with the implementation of the PRONER, the privatization of the smallisolated systems, and with the anti trust legal framework.

As these activities must be aimed by the VMEH, is evident its strengthen, in that sense theGOB must find the necessary resources.

The SE also must improve the diffusion of information about the power sector in the followingareas: a) legal framework; b) statistics; c) structure; and d) the SIRESE and ODECO systems.