FILE COPY RESTRICTEDReport No. PU-28a

This report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF THE SECOND POWER EXPANSION PROJECT

OF THE INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION

PANAMA

February 19, 1970

Public Utilities Projects Department

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CURRENCY EQUIVALENT

Currency Unit = Balboa (B)B 1.00 = 100 centesimos = US$1.00IRHE's financial year = Calendar year

UNITS OF MEASUREMENT

m = meter = 3.28 feetkm = kilometer = 0.621 milekm2 = square kilometer = 0.387 square milem3 = cubic meter = 35.31 cubic feetm3/sec = cubic meter per second = 35.31 cubic feet per secondkg = kilogram = 2.2 poundskg/cm 2 = kilogram per square centimeter = 14.22 pounds per square inchkW = kilowattMW = Megawatt = 1,000 kilowattskWh = kilowatt hourGWh Gigawatt hour= 1,000,000 kWhkV = kilo voltMVA = megavolt-ampereAnnual Load Factor = kWh generated in year

maximum demand in kW x 5760

ACRDNIMS

CPFL - Compania Panamena de Fuerza y LuzEPITSA - Estudios y Projectos Technicos Industriales, S. A.IRHE - Instituto de Recursos Hidraulicos y Electrificacion

P'ANAMA

APPRAISAL OF THF SECOND POWER EXPANSION PROJECT

OF THE INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION

Table of Contents

Page No.

SUMMARY ANI) CONCLUSIONS ..... ....................... i

1. INTRODUCTION ....................................... 1

2. THE ELECTRIC POWER INDUSTRY IN PANAMA. 2

Existing Facilities. 2Regulation and Tariffs. 4

3. THE PROJECT. 6

Description. 6Estimated Cost. 7Engineering. 8Construction. 9Procurement and D)isbursement. 9

4. JUSTIFICATION OF THE PROJECT .10

The Power Market .10Comparison of Alternatives .11

5. THE BORROWER .12

Legislation .12Organization and Management .12Accounting and Audit .13Past Operating Results and Financing .14Present Financial Position .14

6. FINANCING PLAN AND FINANCIAL PROSPECTS .16

Proposed Financing Plan .16Estimated Future Operating Results .18

7. AGREEMtENTS REACHED DURING NEGOTIATIONS .19

This report is based on feasibility studies carried out by IRHE'sconsultants, Estudios y Projectos Tecnicos Industriales, S.A., - EPTISA,(Spain), on information prepared by IRHE and Stone and Webster (U.S.),and on the findings of a Bank mission, consisting of Messrs. Onslow,Stahl and Hutchins, which visited Panama in July, 1969.

PANAMA

APPRAISAL OF THE SECOND POWER EXPANSION PROJECT OF THE

INiSTITUTO DL RECURSOS IIIDRAULICOS Y ELECTRIFICACION

LIST' OF ANNEXES

ANNEX

1. IRFIE, CPFL, EMPRESA HIDROLECTRICA CHORRERA, EMPRESA ELECTRICASANTIAGO ANT) CANAL ZONE - INSTALLED CAPACITY AND GENERATINGCAPABILITY

2. LEGISLATION

3. ESTIMTATED COST OF THE PROJECT

4. DEMANID ANI) CAPABILITY - METROPOLITAN AREA, CENTRAL PROVINCES,PANAMA WEST ANT) CANAL ZONE

5. SYSTEN CAPACITY AND DEMAND

6. DATA USETI IN THE ElCONOMIC EVALUATION

7. INCOME STATEMENTS - 1965-1968 AND ESTIMATED INCOME STATEMENTS -1969 -1976

f. BALANCE SlllEETS - 1965-1968

9. FSTIMATFED SOURCES AND APPLICATIONS OF FUNDS - 1969-1976

10. ESTIMATED FINANCIA. RATIOS - 1969-1976

11. F,STIMATEID BALANCE SHFETS - 1969-1976

MIAPS - 1. LOCATION OF BAYANO HYDROELECTRIC DEVELOPMENT

2. MEFTROPOLITAN AREA, CANAL ZONE, PANAMA WEST AND CENTRAL PROVINCES

PANAMA

APPRAISAL OF THE SECOND POWER EXPANSION PROJECT

OF THE INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION

SUMMARY AND CONCLUSIONS

i. This report covers the appraisal of the Second Power ExpansionProject of the Instituto de Recursos Hidraulicos y Electrificacion (IRHE),

the Government-owned power agency. It includes the construction of theBayano Hydroelectric Development on the Bayano River (ultimate capacity300 MW) with an initial installation of 2 - 75 MW units; a 40 MW steam unit

at Bahia Las Minas; 230 kV and 115 kV transmission lines; 6 MW of diesel

power; and expansion of distribution for the years 1970 through 1972.The Project also includes overseas training for the staff of the Borrowerand a study of the future electric power development in Panama. The cost

of the Project which will be completed in 1975, and which is part of aUS$94.4 million eight-year construction program (1969 through 1976), would

be US$58.3 million; the Project's foreign exchange cost, excluding interestduring construction, is estimated at US$42 million, which is the amount of

the proposed loan. The balance of the program and the provision of adequateworking capital would be financed by: US$5.5 million from suppliers' credits,which have already been arranged; US$6.9 million from IRHE's internal cash

generation; US$28.0 million from Government contributions and US$14.1 mil-lion from a future foreign loan.

ii. IRHE was established by Law 37 in 1961 to coordinate powerdevelopment in Panama. In 1962 it obtained a Bank loan (322-PAN) ofUS$ 4 million to construct the small La Yeguada hydroelectric plant(e MW) to serve the Central Provinces. The entity came under consider-able political pressure, which resulted in mismanagement and financialdifficulty. In addition, its operating costs were above original esti-mates and IRHE has been unable to fulfill the rate of return covenantin the Bank loan.

iii. It was not possible to obtain the necessary reforms in the legis-lation creating IRHE to put it on a satisfactory operating basis untilOctober 1968, when the present de facto government took control. In July1969 Decree No. 235 was passed to replace Law 37 and now provides a suit-

able basis upon which IRHE can develop. The decree incorporates the prin-

cipal recommendations of consultants (Stone and Webster, U.S.A.) who were

engaged by IRHE to study its organization and recommend changes. The mainprovisions of the decree put the management of IRHE in the hands of aDirector General, who is no longer subject to change when the President ofthe country changes, and ended the interference by the Board of Directorsof IRHE in day to day operations by limiting their role to policy matters.A number of lesser modifications to IRHE's organization and management have

been included to give it more autonomy and to isolate it as much as possible

from political interference. If Decree 235 is properly applied, IRHE should

henceforth be a sounder institution.

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iv. tUp to the present the major electric power center in Panama hasbeen in the metropolitan area of Panama City and Colon, which also containsthe Panama Canal. Public service in this area other than the Canal Zonehas been provided exclusively by Compania Panamena de Fuerza y Luz (CPFL),a private company which generates its own power and distributes it. TheCanal Zone has its own source of power. In 1969 IRHE completed the LasMinas No. 2 40 MW steam plant, which was constructed and financed byGruppo Industrie Elettro Meccaniche per Impianti all'Estero, S.p.A. (GIE)of Italy. This power is now being sold to the Panama Canal and to CPFLby IRHE on contract and signals the start of IRHE's entry into powergeneration on a significant scale.

V. In addition to the provisions noted in paragraph iii above,Decree 235 gives IRHE the exclusive right to construct and operate allnew sources of electric power generation in the countrv. The implementa-tion of the proposed Project would convert IRHE from a small rural orient-ed utility to th.e major electric power entity in Panama and relegate CPFLand the other smaller companies to the role of distributors who will pur-chase power in bulk from IRHE.

vi. In January 1969 the Government passed Decree No. 6 which reacti-vated the Regulatory Commission for the Electric, Gas and Telephone indus-try with specific instructions to enforce the standards established inElectricity Law No. 31 (1958) for regulating electric companies, which upto then had not been applied. While a properly conducted RegulatoryCommission is essential to the orderly control and development of theelectric power sector, there are aspects of the present decree which arestill unsatisfactory. The Government has agreed to modify the existinglegislation before the proposed loan is made effective, so that the Regu-latory Commission is an impartial Government Agency which will regulatethe electric and telephone industries impartially and in accordance withthe provisions of the pertinent laws. To this end, IRHE would not sit asa member of the Regulatory Commission, as now specified in Decree No. 6.A Law establishing standards for regulating the telephone industry, wouldbe prepared to supplement the Electric Law No. 31. The financial viabilityof CPFL, which provides service for electricity and telephones and will beIRHE's principal customer could be jeopardized if telephone services arenot regulated. In addition, the provisions of Electricity Law No. 31 willnot be made retroactive to a period prior to January 1, 1969.

vii. The financial viability of all entities in the electric powersector is essential for its proper development and this in turn will re-quire the prompt and impartial application of Electricity Law No. 31 andthe proposed Telephone Law. The Electricity Law provides the basis forsatisfactory rates of return of between 8-3/4% and 10-1/2%. Tariffs shouldbe adjusted promptly by the Regulatory Commission for IRHE, CPFL and allother electric power entities when required to allow the applicable rateof return. Satisfactory undertakings have been obtained during negotiationsfrom the Government and IRHE in regard to the above.

viii. IRHE will not start earning an 8-3/4% return on net fixedassets in operation until 1972, after the Las Minas No. 3 thermal plant

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(which is being financed by suppliers' credits), comes into operation.After that IRHE's financial position would further improve as the plantsunder the Project go into operation and produce revenues provided tariffsare adjusted when necessarv to permit IRHE to achieve an 8-3/4% rate ofreturn. Until the Project is completed, IRHE will depend heavily ongovernment capital contributions (US$ 28 million) and an annual govern-ment subsidy of US$ 1.2 million to provide funds for the local currencyexpenditures of the Project. Decree 235 stipulates the manner in whichthese payments from the government will be made. The Government's US$1.2 million annual subsidy is to be reduced after 1980 and ceases after1990, at which time IRHE should no longer require subsidies.

ix. The proposed combined thermal and hydroelectric Project iseconomically more advantageous than an all thermal development of thepower sector for discount rates of less than 16%.

X. IRHE has engaged consultants for the design and supervision ofconstruction of the Project, which will be built by contractors. Hence,no unusual difficulties are foreseen in the completion of the Projecteven though IRHE itself has not previotusly had experience with a projectof this magnitude. IRHE has also had the assistance of consultants inthe past for management and accounting matters and intends to continueusing consultants.

xi. The conditions which were largely responsible for IRHE's poorperformance and financial difficulties in the past would be corrected bythe changes in the legislation mentioned in paragraphs iii and vi. Thepresent loan would help to make IRHE a viable enterprise, provided thattariff adjustments are made henceforth for all power entities, includingIRHE and CPFL, promptly and completely when required.

xii. The proceeds of the loan would finance the foreign exchangecost of equipment and services and the foreign exchange component ofcivil works contracts. Contracts would be awarded on the basis of in-ternational competitive bidding. IRHE does not intend to ask for bidsuntil after the loan has been approved, and no contracts, other than toconsultants, have been awarded.

xiii. Satisfactory agreement having been reached regarding the pointssummarized in paragraphs 7.01 of this report, the proposed Project is suit-able for a Bank loan of US$ 42 million equivalent, for a term of 25 years,including a grace period of about 6 years. The Borrower would be IRHE andthe loan would be guaranteed by the Republic of Panama.

PANAMA

APPRAISAL OF THE SECOND POWER EXPANSION PROJECT

OF THE INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION

1. INTRODUCTION

1.01 This report covers the appraisal of the Second Power ExpansionProject of the Instituto de Recursos Hidraulicos y Electrificacion (IRHE).The Project includes the construction of the 300 MW Bayano HydroelectricDevelopment, with an initial installation of 2 - 75 MW; the installationof a 40 MW steam plant at Las Minas; the construction of transmission linesassociated with the power plants, distribution system expansion and con-sulting services.

1.02 IRHE's program for the period 1969 through 1976, in addition tothe Project, includes investment in one 40 MW steam unit now under con-struction, some small diesel and hydro units and initial investment inthe proposed next major hydroelectric development. With this program,IRHE will grow from a minor power enterprise engaged in rural electrification,with 56 MW of generating capacity in 1969, to Panama's principal wholesalerof power with 287 MW of installed capacity when the Project is completed in1975.

1.03 The total cost of IRIIE's program is about US$ 94.4 million. Theestimated cost of the Project is US$ 58.3 million. The Government ofPanama has asked the Bank for a loan to meet the foreign exchange costs ofthe Project, which are estimated at US$ 42 million (72% of the total esti-mated cost).

1.04 The Bayano Hydroelectric Development has been under investigationin Panama by various organizations since about 1957. In October 1966 IRHEappointed the Spanish firm of Estudios y Projectos Tecnicos IndustrialesS.A. (EPTISA) as consultants to design Bayano. Their report was completedin November 1968 and submitted to the Bank in March 1969. In April, IRHEsent to the Bank a seven year (1969 through 1975) forecast of its electricutility operating costs and revenues and its construction requirements,which it had prepared with the help of the U.S. Consultants, Stone andWebster. An appraisal mission consisting of Messrs. Alan A. M. Onslow,Ger J. P. Stahl and A. J. David Hutchins visited Panama in July. Thisreport is based on the studies carried out by EPTISA, on information pre-pared by IRHE and Stone and Webster, and on the findings of the Bank mission.

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2. THE ELECTRIC POWER INDUSTRY IN PANAMA

2.01 Panama's central position in the Western Hemisphere, at a point

where the distance between the Pacific and the Atlantic oceans is the

shortest, has been its most important source of prosperity. Constructionof a trans-isthmus railroad in 1855, the establishment of a U.S. adminis-

tered Canal Zone in 1904 and the opening of the Canal in 1914 laid thebasis for the development of a sophisticated service-centered and outward-oriented economy.

2.02. Panama has achieved a rapid economic growth in the pasttwo decades. Against a background of price stability, economic growthaccelerated from 5 percent a year during the 1950's to almost 8 percent

in 1960-68 (or 4.5 percent on a per capita basis), the highest rate ofany country in the hemisphere. Per capita income now exceeds US$ 500.As a center of employment and income, the Canal Zone (which has over50,000 residents, mostly U.S. citizens) has been the major factor ofPanama's economic growth. In the last decade, however, with the helpof large amounts of foreign capital the economy has become somewhat lessdependent on the Canal by developing into one of the most advanced com-mercial and banking centers in Latin America and by exporting bananas,refined oil and shrimp. The main areas of agricultural activity are theCentral Provinces and Chiriqui Province, situated in the western part ofthe country and connected to Panama City by the Interamerican Highway.Panama has no known fossil fuel deposits. There are a number of potentialhydroelectric sites which appear to be economic, especially in the westernprovinces.

2.03 Excluding the Canal Zone, the average annual per capita con-sumption of electricity in 1968 was approximately 340 kWh. In the deve-

loped power market areas, the growth of energy consumption over the pastten years has been rather uniform and steady, at a rate of about 11% perannum. Prospects are for continued economic expansion and parallelgrowth of energy consumption. The energy consumption is concentrated inthe Panama City and Colon metropolitan areas, which form the principal

power market and together account for approximately 85% of the nationalconsumption; Chiriqui Province in the west consumes about 9%, the CentralProvinces 4%, and isolated areas the remaining 2%. On average, about 35%of the gross consumption is residential, 35% commercial, 19% industrial,

and the remaining 11% for public services. Load factors are high, dueto intensive use of air-conditioning in the urban centers.

Existing Facilities

2.04 The public power sector of the Republic of Panama comprises threeregional systems plus about 50 small and isolated diesel power stations.As of mid-1969 the total installed capacity was 155 MW, of which abouttwo-thirds was owned and operated by private companies, the remainder byIRHE. (See Annex 1 for details of installed capacity.) The most importantand largest of the regional systems is the Metropolitan System, serving the

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metropolitan area of Panama City and Colon. The present demand of theMetropolitan System is about 96 MW, of which Cia Panamena de Fuerza y Luz(CPFL), a U.S. owned private company, supplies 88.5 MW and the remaining7.5 MW is supplied by IRHE. Next in importance is the Chiriqui Provincesystem in the west of the country with a demand of about 10 MW, suppliedby another private company, Empresas Hidroelectricas de Chiriqui. Thirdin size is the Central Provinces system with a demand of about 6 MW,supplied by IRIIE. The three systems are located along the InteramericanHighway, about 200 km apart. The 50 isolated diesel power stations aremostly owned and operated by IRHE.

2.05 The Canal Zone is supplied by the Panama Canal Company, a U.S.Government agency. Its present demand is about 100 MW. Until 1968 a 115kV tie line between the Canal Zone and the Metropolitan System servedprimarily for the exchange of emergency power. In 1969 the Panama CanalCompany entered into a 25-year contract with IRHE for the purchase of30 MW of steam power from Las Minas No. 2. Although the Zone is free toconstruct its own new generating plant, the Panama Canal Company has in-dicated that it is willing to increase its purchases of power from IRHEas soon as there is a dependable supply at a reasonable price.

2.06 IRHE was created on January 31, 1961 by Law No. 37 as an autono-mous state-owned Covernment agency for the main purpose of coordinatingand expanding electric power generation and distribution throughout theRepublic (see 5.01). Law No. 37 assigned to IRUE the exclusive rightto develop the hydro resources of the country, thereby restricting theexpansion of the private companies. The present Panamanian Government,on July 30, 1969, passed a decree (No. 235) which replaces Law No. 37.IRHE is now charged, inter alia, with the exclusive right to constructand operate all new sources of generation in the country, except forcertain transitory arrangements. IRHE's role as wholesaler to privateretailers is hereby established by law. This transition began earlierthis year when CPFL signed a contract with IRHE for 7.5 MW from the LasMinas No. 2 unit.

2.07 IRUE's entry into electric power generation started in 1962when the Bank made Loan 322-PAN to finance construction of La Yeguada6 MW hydroelectric plant in the Central Provinces and other diesel plantsand distribution system expansion. The construction of this plant wasabout 15 months behind schedule due to heavy rains in 1966 and laborproblems in 1967. It came into operation late in 1967.

2.08 In the early days IRHE was small, inexperienced and subject toconsiderable political interference, which led to mismanagement and an un-favorable financial position. During 1968-69 discussions were held betweenIRHE, the Panamanian Government and the Bank to develop new legislation toimprove IRHE's organization and management to overcome past defects. As aresult Decree Law 235 was passed which is discussed in detail in Annex 2and paragraph 5.01.

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Regulation and Tariffs

2.09 Until 1957, the power sector in Panama was operated exclusivelyby private entities under franchises and without any Government regulation.In 1958, the National Commission of Electrical Energy, Gas and Telephoneswas formed to regulate the electric, gas and telephone industries. Laterthat year Law No. 31 was passed establishing the standards for regulatingthe electric companies. However, the provisions of the law were not en-forced until Cabinet Decree No. 6 was passed in January 1969 to reactivatethe Regulatory Commission, with specific instructions to apply the provi-sions of Law 31.

2.10 The Regulatory Commission is essential to ensure the orderlydevelopment of the electric power sector composed of a number of privatelyowned entities and the major government-owned power entity. However, tobe effective it must be an autonomous government agency which can enforcethe provisions of the pertinent laws impartially for all entities, whetherowned by government or privately. Decree No. 6 names the Director Generalof IRHE as ex-officio Deputy Director of the Regulatory Commission and ex-empts IRHE from regulation. Thus only the private companies are regulatedand the impartiality of the Commission is jeopardized. Both the Governmentand the Bank consider Decree No. 6 unsatisfactory and the Government hasagreed to amend it before the proposed loan if; made effective, by removingIRHE's Director General from the Board of the Regulatory Commission andmaking IRHE also subject to regulation.

2.11 The Electricity Law (No. 31) generally provides adequate regula-tion for the electric industry and allows a satisfactory rate of return onnet fixed assets in operation plus working capital of between 8-3/4% and10-1/2%. Annex 2 gives further details on the provisions of the law. How-ever, there are two defects which should be corrected: (a) the law containsstandards for the electric industry only and should be accompanied bysimilar legislation to regulate the telephone industry; (b) the law permitsthe Regulatory Commission to apply its provisions retroactively to 1958 whenthe law was passed. The Government agrees, that these defects should becorrected and has undertaken to pass legislation to correct them before theproposed loan becomes effective.

2.12 IRHE has negotiated contracts for a minimum period of 25 yearswith its main customers, CPFL and the Panama Canal Company, for the saleof the whole of the output of the 40 MW Las Minas No. 2 unit. Basically,these contracts provide a revenue which is designed to cover all operatingand maintenance expenses, and debt service on Las Minas No. 2 unit and aportion of general and administration expenses. The revenue per kWh soldis approximately 9.5 mills, which should provide a rate of return on thisinvestment only, of upwards of 9.5%. No contracts have yet been signedwith CPFL or any other undertaking for the sale of power from Las Minasunits Nos. 3 and 4 or from the Bayano plant. While the sales contracts forthe output of the Las Minas No. 2 unit were satisfactory at the time theywere signed in 1968, they are not based upon the provisions of the elec-tricity law. As of January 1, 1972 IRHE will be regulated under the same

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legislation governing the other entities in the electric power sector andwould have its wholesale and retail tariffs set at a level which would allowit to earn the rate of return stipulated in Law 31, (IRHE's present capita-lization would permit it to earn 8-3/4%). This will ensure impartial andequitable treatment of all power entities, including IRHE, and provide thebase on which their financial viability can be assured. Additionally, oncethe Electricity legislation is amended the Government has agreed not tomaterially change any of the laws which would adversely affect the regulat-ion of the Power industry, without prior approval of the Bank.

2.13 In addition to its two main wholesale customers, IRHE plans tosell power wholesale in the Central Provinces for about 2.5¢ per kWh.Such sales will be relatively small, representing about 2% of total kWhsold. IRHE also has about 19,000 rural consumers, in some 49 differentlocations, of which approximately 3,000 are on an unmetered supply. Thetariffs for these 19,000 customers are high due to the high cost of dieselgeneration and bring in an average revenue of about 8f per kWh sold. Thepresent government realizes this is a high rate and has passed a decreeimposing a tax on electricity consumption in the cities which would bepassed to IRHE and used to subsidize rates in the rural areas. Since itwill need all the funds it can generate, IRHE agreed during negotiationsthat unless the 8-3/4% rate of return is achieved, it will not adjust tariffsto reduce its revenues from rural customers by an amount greater than anytax so collected, unless the Bank otherwise agrees.

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3. THE PROJECT

Descr4ption

3.01 The proposed Project comprises the major part of IRHE's 1969-1976investment program and consists of:

(a) The first stage of the Bayano hydroelectric developmentincluding one main dam, an auxiliarv dam, a powerhousewith 2 x 75 MW units, 80 km of 230 kV transmission lineto Panama City, and a receiving substation;

(b) A 40 MW steam unit (No. 4) to be installed at Las Minas oni theAtlantic coast;

(c) A 55 km 115 kV transmission line from Bahia Las Minas to PanamaCity;

(d) 6 MW of additional diesel capacity for the Central Provincesand the western part of Panama Province including 7.5 MVA ofsubstation facilities;

(e) Expansion of small isolated distribution systems including theaddition of small diesel units during 1970-1972;

(f) Studies for future electric power development; and

(g) Consulting services and overseas training for IRIIE's staff.

3.02 The Bayano hydroelectric development would be located 80 km eastof Panama City on the Bayano River, about 40 km from the present terminationof the Interamerican Highway (see map 2). The Bayano Dam (main dam) andthe Viejo Pedro Dam (auxiliary) would form a reservoir of about 300 km2 ,extending over largely unpopulated and jungle-covered areas, with a totalstorage of 3,900 million m3. The design head of the power plant is 50 m.The powerhouse would be constructed for the ultimate installation of four75 MW units, although only two units will be installed initially. Minimumgeneration based on the driest year of record would be 465 GWh. The plantis expected to be capable of generating an average of 560 GWh per year.

3.03 The main dam and spillway would be a concrete gravity structure,72 m high and 457 m long at the crest. A surface powerhouse at the dam'sright toe, with four penstocks, would cover about half the width of theriver bed. Vertical Francis turbine-generators would be connected to step-up transformers at the powerhouse and to a 230 kV switching station on theright bank. The Viejo Pedro Dam, filling a saddle about 10 km northeastof the main dam, would be a rockfill embankment 21 m high and 850 m long.Material for the Project's main civil works would be cement produced inPanama and sand, gravel, boulder and clay available in nearby riverdeposits.

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3.04 The power from the Bayano plant would be transmitted to PanamaCity by an 80 km 230 kV double circuit steel tower transmission line alonga route paralleling the Interamerican highway.

3.05 Reliable records of stream flow for the Bayano River are availa-ble for the past ten years, only. But flow and rainfall records of the past30 years exist for adjacent catchments. This combined information gives asatisfactory basis for the design of the Project. The storage capacity ofthe reservoir is 75% of the average annual river flow and provides morethan annual regulation. The spillway capacity of 4,300 m3/sec is adequate.

3.06 Geological investigations of the dam sites were based on the re-sults of preliminary geological studies in 1963 by Mr. Robert H. Stewart,Geological Advisor for the Canal Zone. Extensive further examinations werecarried out in 1967 by EPTISA in consultation with Sociedad de Reconocimien-tos Geofisicos of Spain. The design of the Project by EPTISA is based onthe data obtained from these geological investigations.

3.07 The major portion of the Bayano Valley is an undeveloped Indianreservation. Approximately 450 Indians occupying about 60 houses will haveto be resettled on the northeast bank of the lake. The Bayano Project costestimate includes the cost of compensation and relocation.

3.08 The 40 MW Las Minas No. 4 unit near Colon would be similar tounits Nos. 2 and 3 and would work under the same operating conditions i.e.,sea water cooling from Las Minas Bay, Bunker C fuel oil from the nearbyrefinery; boiler pressure and temperature would be 90 kg/cm2 and 5000C(1280/lb/sq in. 9320 F). A 55 km 115 kV double circuit transmission linewould be built to Panama City; its route would be near the existing line,along the trans-isthmus highway from Colon to Panama City. Four MW of theadditional diesel capacity, including step-up facilities, would be install-ed near Aguadulce in the Central Provinces and 2 MW of new diesel capacityin Panama West.

3.09 In order to ensure the future orderly development of the powersector IRHE will have to engage consultants to make a study of the alter-nate programs of system development to meet forecast demand and to recom-mend the optimum program to be followed after the completion of the Project,and satisfactory undertakings have been obtained from IRHE to this effect.

Estimated Cost

3.10 A detailed breakdown of the estimated cost of the Project isgiven in Annex 3. A summary of the estimated costs of the Project's mainfeatures (excluding interest during construction) is as follows:

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Millions of US$ or BLocal Foreign Total

1. Bayano Development(a) Civil works 7.5 12.6 20.1(b) Compensation to landowners .2 - .2(c) Electrical and mechanical works .5 10.1 10.6(d) 230 kV line and Panama City Substation .7 3.0 3.7(e) Engineering .9 2.1 3.0

Subtotal 9.8 27.8 37.6

2. Las Minas Unit No. 4 1.5 4.6 6.1

3. Las Minas-Panama City Transmission line .2 .7 .9

4. Diesel and substation, Central Provinces andPanama West .2 .7 .9

5. Engineering .2 .6 _ .8Subtotal 2.] 6.6 8.7

6. Distribution Expansion 1.6 2.4 4.0

7. Studies for future power development .1 .2 .3

8. Management Consultants and Training .3 .4 .7

9. Contingencies 1.1 2.2 3.3

10. Price escalation 1.3 2.4 3.7

Total Cost of the Project 16.3 42.0 58.3

3.11 The estimate for Bayano is based upon present construction costsin Panama adjusted for the size and location of the development. An allow-ance has been made for price increases during 1971-1974 at an averageannual rate of 3%, which is based on price experience during the 1960's,to take account of possible increases in local labor and imported machineryand equipment costs. An allowance for contingencies has been made at ratesof approximately 10% for civil works and 5% for machinery, which is adequatefor the type of facilities involved. Costs for Las Minas Unit No. 4 ($165per kW) and the costs for the 115 kV transmission line ($19,000 per km) fromLas Minas to Panama City and the diesel units are estimated on the basis ofsimilar recent construction in Panama. The above estimates do not includeduties on imported materials since IRHE is exempt from such duties.

Engineering

3.12 The Bayano scheme was first investigated in 1957. In 1963, acomplete feasibility study for the Panamanian Government, financed by AID,was made by the International Engineering Company. This studv was revisedby Harza Engineering in 1965. The following year the Government appointed

EPTISA as consultants for the design and supervision of construction ofBayano. A complete project design, including contract documents, was sub-mitted to the Government in late 1968. EPTISA's performance on the projectto date has been satisfactory and it should be competent to supervise theconstruction of the Bayano Project. IRHE is presently engaging consultingengineers for Las Minas No. 4 and the 115 kV Las Minas-Panama transmissionline. The design for the extension of the distribution and low voltagetransmission systems is being done by IRHE itself, which is acceptable.

IRIIE agreed during negotiations to continue to employ consultants acceptable

to the Bank for the Project.

Construction

3.13 Before work can commence at the Bayano site, it would be necessary

for the 40 km portion of the Interamerican Highway from the town of Chepo

to the dam site to be brought to a stage at which it could be used for the

transport of equipment and materials. The Government has agreed to expedite

this work and has submitted satisfactory evidence that the work will be

completed on time.

3.14 Construction of the Bayano development will require 4-1/2 to 5 years.

This estimate takes into account the major influence of weather conditions,

specially heavy rains, on the progress of civil works. Since work will not

be started before the second half of 1970, the completion date is set for

the first half of 1975.

Procurement and Disbursement

3.15 The equipment and civil works to be financed by the Bank loanwould be procured after international competitive bidding. IRHE does notintend to call for bids until the financing is assured. Disbursements fromthe proposed loan would be made only for the foreign exchange cost of equip-ment, materials, services and erection and civil works contracts. Expendi-ture prior to signing of the loan would not be eligible for reimbursement.Should it appear that the Project will be completed for less than estimated

costs, any undisbursed amount of the loan would be cancelled, unless the

need for additional related investment arises.

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4. JUSTIFICATION OF THE PROJI.CT

The Power Market

4.01 IRHE's principal power market is the Panama City-Colon Metropo-litan System where it sells power in bulk to CPFI, and the Panama CanalCompany. IRHE also furnishes retail supply in Panama West and the CentralProvinces. These latter areas will be interconnected by transmission linesto the Metropolitan System after the Bayano plant comes into service in1975.

4.02 IRHE's largest customer in 1975 will be CPFL. At that timeCPFL will be purchasing about 85% of IRHE's energv sales. The table belowshows the distribution of CPFL's sales in 1968 among its variotus categoriesof customers.

Sales in Percentage Average pricemillion of total per kWh sold

Category of kWh sales in US cents

Residential 134.1 34.7 4.32

Commercial 150.0 38.7 3.11

Industrial 59.9 15.5 2.42

Street Lighting 4.6 1.2 8.35

Municipal & Government 35.0 9.0 2.01

Miscellaneous 3.4 0.9 2.04

Total 387.0 100.0 3.41

4.03 During the past 19 years, CPFL's annual system sales growth hasvaried from 7% to 15%, with an overall average of 10%. During the pastthree years (1967-69) the average annual growth rate has increased to 14%.On the basis of CPFL's past experience and an assessment of future trends,the Metropolitan System is forecast by IRHE and the consultants to havean annual average growth in sales of 11.2% through 1976. This forecast isconservative in view of growth rates in power demand during recent yearsbut is close to the long term average experienced during the past 20 years.The proposed power expansion program is tailored to fit this projectedincrease in demand. The resulting power and energy demand is shown inAnnex 4. As will be seen from this Annex, the system would lack firm ca-pacity (i.e., sufficient available generating plant when one large unitis out of service for routine maintenance) from 1969 through 1974. Butthis situation would be manageable by utilizing the Canal Zone's plantsin emergencies. These plants would normally be on stand-by or used for

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peaking purposes only to obtain the lowest system generating cost. Annex5 shows the relationshlip between the maximum demand and installed plantcapacity for the Metropolitan System, the Central Provinces and PanamaWest through 1980.

Comarison of Alternatives

4.04 Alternative plant programs for meeting the forecast demand forthe Metropolitan System, with or without Bayano, have been investigatedwith the object of minimizing capital, fuel and operating costs for thesystem. There are no other known hydro resources of comparable magnitudeclose enough to the main load center which could be built before Bayano,hence the alternative to the expansion of the system by the proposed Bayanohvdro development would be thermal power.

4.05 IRHE's consultants, Stone and Webster and the Bank carried outcomparisons between hydro-thermal programs including Bayano, and all-thermaldevelopments, by discounting the cost streams over a period of 60 years.These analyses showed that the hydro-thermal development would be moreeconomic than the all-thermal program for discount rates of less than 16%,and that 75 MW was the most economic unit size. The computations demons-trated also that an increase of 10% in the capital costs of the Bayanodevelopment would reduce by about 2.5% the discount rate for which the twoprograms would be equal. The cost assumptions used in these comparisons areshown in Annex 6.

4.06 The addition of 6 MW of diesel generation to the Central Provincesand Panama West is the lowest cost solution at present load levels. In 1975when demand will have increased, IRHE intends to connect these areas to theMetropolitan System by transmission lines.

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5. THE BORROWER

Legis lation

5.01 As explained in paragraph 1.02, IRIIE is in the process of chang-ing from a small undertaking mainly concenied with rural electrification,into the authority responsible for the construction of all future generat-ing plants in the Republic of Panama. The Government originally createdIRHE as an autonomous state-owned agency by Law No. 37 of Januarv 31, 1961,but this law did not provide IRHE with the autonomy it required to manageitself and control its own budget. There was excessive political pressureexerted by the Government; the Director General was a Presidential appoin-tee and his term of office coincided with that of the President. The Boardof Directors had powers to interfere in the daily operations of the entityand did so. All expenditures were subject to the approval of the Comp-troller General of the Nation. As a result of the poor experience withLaw 37, IRHE commissioned its consultants, Stone and Webster, to reviewits management and organization and to recommend changes in Law 37 whichwould give IRHE the autonomy it would need to operate as an efficientelectric utility enterprise. The consultant's report and subsequentdiscussions between the Bank, IRHE and the Government, led to Decree 235being passed on July 30, 1969 to replace Law 37. The new decree (seeAnnex 2) provides a satisfactory basis upon which IRHE can operate as anautonomous entity.

Organization and Manaement

5.02 The present Director General is a capable and experienced engineerand suitable for his present appointment. He was formerly sub-DirectorGeneral and Chief of the Planning Department, and was appointed late in1968 following the military coup and the dismissal of the previous DirectorGeneral. Assurances have been received that the Government of Panama willconsult with the Bank prior to any new appointment to the position ofDirector General.

5.03 Due to lack of experienced personnel in Panama, and to pastmismanagement, IRHE is short of suitable staff in the higher echelons.In the lQwer levels, however, there has been over-staffing. It is dif-ficult to dismiss redundant staff, but IRHE intends to keep to a minimumthe hiring of new staff and to reassign existing staff as the organiza-tion expands. This approach is reasonable, and should result in excessstaff being usefully absorbed by the time the Project is completed.

5.04 IRHE has had a contract for management consultant services withStone and Webster since December 1965. This contract expires February 281970. Prior to 1968, IRHE appeared to resist advice and little progresswas made. Recently, there has been more cooperation with the consultants;however, further improvements in organization and management, particularlywith regard to planning system expansion and accounting, are necessary.The continued employment, at least during 1970-71, of management consul-tants is necessary and an agreed contract, which is acceptable to the Bank,has been drawn up between IRHE and Stone and Webster.

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5.05 Training in IRHE has been meager in the past. Training programs,acceptable to the Bank, should be established jointly by IR}IE and consul-tants during the construction period for the future successful operationof the Project. An amount has been included in the proposed loan forthis purpose. Suitable undertakings have been obtained to insure that IRHEwill utilize consultants for this purpose.

5.06 TRUE's past problems of management and staffing can be rectifiedby the measures suggested above. Meanwhile the execution of the Projectslhould not be affected by IRHE's present institutional weaknesses. TheBavano D)evelopment has been designed by consultants who will also beresponsible for supervising the construction. The steam plants will,as in the past, be built bv contractors and suppliers of equipment andIRHE will continue to design and construct the distribution facilities.It is IRHE's intention to invite international tenders for the constructionof the Project. Thus, no unusual problems in carrying out the Project areexpected since the consultants and contractors involved would be well ex-perienced in their tasks. The principal problem confronting IRHE in futurewill be in operating the plants and transmission and distribution systemsafter they go into service. There is adequate time for the consultantsand IRHE to establish the training programs needed to improve IRHE'soperational capabilities.

Accounting and Audit

5.07 The remodeling of IRHE's accounting system to conform with theU.S. Federal Power Commission's uniform system of accounts has been sub-stantially completed by Stone and Webster and has considerably improvedthe system. However, further work has to be done on the procedures andprogramming problems arising from the use of the computer, owned by theUniversity of Panama, on which IRHE hires time. The University changedfrom an IBM to an NCR computer in the fall of 1968, which caused addi-tional programming problems, delays and other difficulties with billingsand year-end accounting. The recently appointed chief of the accountsand supply department, an engineer by qualification and background,functions as Chief Financial Officer. In view of his comparatively limitedaccounting experience, IRHE has agreed to review, prior to December 31, 1970,its accounting service, in conjunction with its management consultants, itsexternal auditors and the Bank, and, unless the services are being carriedout in accordance with sound accounting methods and practices, to appointa qualified and experienced Chief Accountant acceptable to the Bank. IRHE'saccounts have been audited by Arauz, Hermida and Pazmino, a local firm ofaccountants associated with the New York firm of Deloitte, Plender, Haskinsand Sells. The auditors are acceptable to the Bank, and assurances havebeen received that IRHE will continue to employ independent auditorsacceptable to the Bank and will forward certified copies of the annualfinancial statements to the Bank within four months of the end of eachfinancial year, together with the auditors' detailed reports.

5.08 Insurance is carried against losses arising from civil liability,motor vehicle claims and fire (plants, stores and buildings). A contractfor insuring losses resulting from machinery breakdown, boiler explosion,

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fire, and subsequent loss of profits has recently been signed. Duringnegotiations assurances were received that IRHE will continue to maintaininsurance against such risks and in such amounts as shall be consistentwith sound public utilities and business practices.

Past Operating Results and Financing

5.09 Annex 7 shows income statements for the four years 1965 through1968. Prior to 1969, IRHE was a small poorly-run organization withoutsufficient sales or revenues to make it viable which operated at a loss in1965 through 1968, when a small Government subsidv is excluded. Since oneof the major objectives of the proposed loan is to help change this situa-tion, the poor performance outlined below should not serve as a basis forjudging future financial performance. Operating expenses, excluding de-preciation, absorbed 94-95% of revenue for the years 1965 through 1967.During 1968 gross operating revenues were about 2% less than those estimat-ed in 1961 at the time of the appraisal of La Yeguada, and operating costs,excluding depreciation, were about 90% greater than estimated. Net operat-ing income, which was positive only after including a small Governmentoperating subsidy, was, as a result, equivalent to less than 1% on net fixedassets in operation for 1968 and IRHE did not meet its commitment underloan 322-PAN to earn a return from January 1, 1968, of at least 7% onits net fixed assets in operation. IRHE will only start to earn a satis-factory rate of return in 1972 when its second 40 MW steam plant at LasMinas (No. 3 unit) comes into full operation. From then onwards, the fi-nancial situation of IRHE should show an improvement as it changes from arural power company to the main source of generation in the Republic.

5.10 IRHE has accordingly been unable to make more than a token contri-bution from internally generated funds to its capital expansion program, andits contribution will continue to be small for some time. Almost all localfunds for investment have come from Government contributions. The high debtservice resulting from the use of medium-term suppliers' credits reducedstill further the amount available for re-investment. During 1968 debtservice was covered only 1.2 times by net revenue, before depreciation.

5.11 Although the valuation of IRHE's assets is considered satisfactoryand its rates of depreciation adequate, as a matter of routine IRBE agreedduring negotiations to keep its assets properly valued and to maintainadequate rates of depreciation.

Present Financial Position

5.12 IRHE's recent balance sheets (Annex 8) reflect its poor operatingresults and show a deterioration in its financial position. This state ofaffairs has been aggravated by receivables for the supply of electricityincreasing over the years. IRHE is making a determined effort to collectthe arrears, some of which have been outstanding since 1961, and about$150,000 out of $231,000 which are over 91 days, are considered to beirrecoverable.

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5.13 IRHE's fixed assets, which have increased from B 5.1 million in1965 to B 16.5 million in 1968, have been increased by a loan from theIBRD, suppliers' credits and Government contributions. Internal cash gene-ration has been negligible. As of December 31, 1968, IRHE's equity ofB 8.8 million consisted of the original capital of B 1.1 million and Gov-ernment contributions of B 7.8 million less a cumulative deficit on in-come account of B 0.1 million. The suppliers' credits are from GruppoIndustrie Elettro Meccaniche per Impianti all'Estero, S.p,A. (GIE) whichsupplied the Las Minas Nos. 2 and 3 steam generating units of 40 MW. TheGIE credit for Unit No. 2 bears interest at 6% per annum and will be fullyamortized in October 1979. The 6% credit for $4,830,000 for Las MinasNo. 3 (40 MW) was signed in July 1969 and is to be fully amortized inJuly 1981. IRHE also has a small balance of bonded debt, issued in 1967and to be fully repaid in December 1972. As required by Loan 322!-PAN,IRHE has sought and obtained Bank approval for all these loans.

5.14 In order to assist putting IRHE on a firm financial footing, itwas agreed during negotiations that IRHE will, if necessary, be lermittedto use Government contributions as working capital and that the Governmentcontributions will be defined as equity, upon which no cash distributionswill be made by way of dividend payments or otherwise.

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6. FINANCING PLAN AND FINANCIAL PROSPECTS

Proposed financing_Plan

6.01 IRHE's future financing plan is similar in broad outline to thepast in its heavy reliance on debt financing and Government contributionsand only vinimal contributions from internal cash generation, given theexisting bigh debt service burden. However, the poor performance of thepast need not be repeated if the new and revised legislation in the elec-tric power sector is properly applied. The plan relies heavily on IRHEearning the permitted rate of return and on Government contributions.IRHE is unable in this period to generate sufficient funds of its own forits large expansion program. The forecast of sources and applications offunds 1969 through 1976 presented in Annex 9 reflect, in addition to theincome assumptions outlined in Annex 7, a Government commitment to make acapital contribution of not less than $20 million or more than $30 millionover the seven years 1970 through 1976. While this appears to be adequatein amount, the Government agreed during negotiations, to contribute, on termssatisfactory to the Bank, any sums over and above the US$30 million limitif needed to complete the Project.

6.02 The financing for the six years 1970 through 1975 can be summar-ized as follows:

1970-75Thousands Percentageof Bs & $s of Total

Financial Requirements

Construction expenditure

Proposed IBRD Project -Foreign currency 42,000 50.9Local currency 16,275 19.7

58,275 70.6

Other ExpenditureForeign currency 16,983 20.6Local currency 6,071 7.4

23,054 28.0

Increase in working capital 1,179 1.4

Total Requirements 82,508 100.0

Sources

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1970-75Thousands Percentageof Bs & $s of Total

Sources

Internal Cash Generation 25,985 31.5Less: Debt Service 23_368 28.3

2,617 3.2

Operating Subsidy 5,659 6.9Sale of assets 99 -

Borrowings:Proposed Bank Loan 42,000 50.9Existing Suppliers' Credits 4,830 5.9Future foreign loan 8,103 9.8

54,933 66.6

Government capital contribution 19,200 23.3

Total Sources 82 508 100.0

Most of the expenditure planned in these six years is for the proposedProject. The "other" expenditure of $23 million in the period consistsmainly of other generation facilities in the program, including Las MinasNo. 3, part of the third 75 MW unit for Bayano and part of the next gene-rating facility to be started after Bayano. IRHE expects this expenditurewill be financed to the extent of about 55% by suppliers' credits and otherforeign loans.

6.03 The net internal cash generation is low; it provides only about3% of IRHE's requirements. But such a low contribution is not surprisingconsidering that assets will be increasing over 5 times during the period.As noted earlier, one of the premises of IRHE's financing plan is thatCPFL, its principal customer, will be permitted under the Electricitylegislation to earn an 8-3/4% rate of return. To do this, CPFL may wellhave to increase its tariffs to the general public in Panama City and Colon.The Government has agreed to cause the Regulatory Commission to grant changesto the private companies and to IRHE promptly when required, to enable themall to earn thie return allowed by Decree Law No. 31 (8-3/4% on net fixedassets in operation and working capital of three month's gross revenue). Atthe same time the Bank agreed to include the Government operating subsidywhen calculating the rate of return for 1970 (Loan 322-PAN requires a rateof return on net fixed assets in operation of at least 7%). The subsidy willbe excluded in 1971. It would be unreasonable to expect the full returnof 8-3/4% before 1972 when Las Minas No. 3 will be in service. IRHE hasfurther agreed that until the 8-3/4% return is achieved, no tariffs wouldbe reduced without Bank approval.

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Estimated Future Operating Results

6.04 Annex 7 shows forecast income statements for the years 1969through 1976. This annex is based upon the following main assumptions:(i) IRHE's future tariffs will be set to allow it to earn 8-3/4% on netfixed assets and working capital from 1972 onward, as provided by Law 31,and (ii) the Government will pay IRHE the subsidy of US$ 100,000 per monthspecified in Decree Law No. 235, out of which IRHE will be required to payfor hydrological studies which it carries out for the Government.

6.05 In 1970 interest chargeable to operation would be covered only1.6 times by net operating income (without subsidy), but from 1971 through1976 the coverage is estimated to vary between 2.6 and 1.9 times, (Annex10). Compared with past results, this is satisfactory. The coverage oftotal debt service, however, is poor, mainly due to the heavy use ofsuppliers' credits by IRHE for past expansion. Debt service during thesix years 1970 through 1975 would be covered by internal cash generationbetween 1.0 and 1.3 times, excluding the Government subsidy, and between1.2 and 1.6 times, including the subsidy, after payment for hydrologicalstudies. But there is no alternative, since IRHE is a relatively newentity. During negotiations, IRHE agreed to a debt limitation testsimilar to that provided under Loan 322-PAN, which recuires future debtservice to be covered at least 1.4 times by current cash generation, toensure that IRHE does not borrow without Bank permission until it is amore financially mature undertaking.

6.06 Forecast Balance Sheets for the years 1969 through 1976 areshown in Annex 11. It is estimated that IRHE's total net fixed assetsin operation would increase from $17 million in 1969 to $91 million in1976. The balance sheets show a satisfactory position, with a debt/ecuity ratio of about 55/45. While it should be the ultimate aim ofIRHE to pay interest or dividends on Government contributions, the fi-nancing plan is too tight to allow for such payment in the foreseeablefuture, and assurances have been obtained that, unless otherwise agreedwith the Bank, no interest or dividends would be paid on the Governmentcapital contributions.

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7. AGREEMENTS REACHED DURING NEGOTIATIONS

7.01 During loan negotiations, agreement was reached on the following

principal points:

(a) from the Government that:

(i) It will amend the Electricity Legislation beforethe proposed loan is made effective (paragraph 2.11);

(ii) It will not make material changes to the ElectricityLegislation (after amendment), without prior approvalof the Bank (paragraph 2.12);

(iii) It will consult the Bank prior to making any change totihe post of Director General of IRHE (paragrah 5.02);

(iv) It will permit if necessary, its contributions to beused for Working Capital (paragraph 5.14), providefunds to complete the Project over and above its

commitment under Decree Law 235 should that benecessary (paragraph 6.01), and treat all contributionsas dividend and interest free capital (paragrapsh 5.14and 6.06);

(v) It will cause the Regulatory Commission to grant tariffchanges promptly when required to the private and publicelectric entities so as to enable them to earn the rateof return specified in Law 31 (paragraph 6.03);

(b) From IRHE that:

(i) It will employ consultants and auditorssatisfactory to the Bank (paragraphs 3.09,3.12, 5.05 and 5.07);

(ii) Continue to carry adequate insurance (paragraph5.08), and continue to value its assets on a properbasis and use adequate depreciation rates (paragraph5.11)

(iii) Not reduce tariffs unless the Bank agrees otherwise(paragraph 2.13 and 6.03);

(iv) Observe a debt limitation similar to that imposedbv Loan 322-PAN (paragraph 6.05).

February 19, 1970

PANAMA

INSTITUTC DE RECURSOS HIDRAULICOS Y ELECTRIFICACION

IRIE, CPFL, ENPRESA HIDROELFCTRICA, CHORRERA, FMPRESA ELECTRICA SANTIAGO AND CANAL 70NE

INSTALLED CAPACITY AND GENERATING CAPABILITY

1/ Year CapabilityINSTALLED CAPACITY Location7 Installed MW 1969 1970 1971 1972 1973 1974 1975 1976

Capability GWh Generated (net)IRHELas Minas No. 2, 1 x 40, steam MA 1969 40 143 262 262 260 260 260 260 260Las Minas No. 3, 1 x 40, steam MA 1971 40 66 260 260 260 260 260Las Minas No. 4, 1 x 40, steam MA 1973 40 100 260 260 260Bayano No. 1 and 2, 2 x 75, hydro MA 1975 150 280 560

La Yeguada No. 1/3 2 x 3, 1 x 1, hydro CP 1967/71 7 17_/ 34Central Provinces diesel (standby) CP 7 2/ 1Panama West diesel (standby) pW 3 1__/ 1

Total Capability 328 52 6 720 0 1,07

Compania Panamena de Fuerza y Lu7Ave. Sur 1 x 1.0 steam MA 1917 0.95 - - - - - -

. 3 x 2.5 " MA 1937 8.6 40 35 35 25 15 30 25 -II tI 1 x 7.5 MA 1958 7.0 50 50 50 35 30 50 45 49

San Francisco 2 x 6 MA 1949/53 12.4 75 75 75 60 60 60 60 65IT 1 x 11.5 T MA 1960 12.2 80 80 80 80 80 80 80 80

1 x 14 gas turbine MA 1964 12.8 30 30 30 25 25 30 30 30Colon steam MA 1931 5.25 10 5 5 - - - - -Las Minas 2 x 1 diesel MA - 1.8 - - - - - - - -

Las Minas No. 1 1 x 24 steam MA 1966 29.00 165 165 165 165 160 165 165 165Total Capability Uh.00 470 Z0- 77- 370 370- 7I M7 -Ey

Empresa Hidroelectrica Chorrera PW 2 52 5Empresa Electrica Santiago CF -E

Canal ZoneMadden 3 x 8 hydro MA 1934 22.5 185 185 185 185 185 185 185 185Gatun hydro MA - 2L 64 64 64 64 64 64 64 64Cocoli - Aguaclara 2 x 7 diesel MA - 14 5 5 5 5 5 5 5 5Miraflores 2 x 10 gas turbines MA 1963 20 55 55 55 55 55 55 55 55

It 1 x 25 steam MA 1966 25 185 185 180 180 180 180 180 180"(Army) 1 x 33 steam MA 1971 33 65 230 230 230 230 230

Army floating plants MA - 29.5 96 96 96 96 96 96 96 96Total Capability _160 590 __0 ___ 717 -i7 17 T1 TiT

1/ MA: Metropolitan Area; CP: Central Provinces; PW: Panama West

2/ After interconnection with Metropolitan System

January 1970

ANNEX 2Page 1 of 3 pages

LEGISLATION

A. DECREE LAW NO. 31 OF SEPTEMBER 27, 1958

Decree Law No. 31 lays down the standards for the control ofgeneration and distribution of electricity over 50 kilowatts in Panama,and requires undertakings engaged in the industry to obtain a concession.All future generation is to be undertaken by IRHE. A concessionaire whosecontract comprises distribution services, will be compelled to supplyannually up to 1.1 times the amount of power supplied the previous yearfor public service.

The National Commission of Electricity, Gas and Telephones hasthe right to determine the value of the assets within certain rules andwith certain rights of appeal. Concessionaires are entitled to a rate ofreturn on net fixed assets and working capital of three months' grossrevenue, varying with their capital structure and annual sales, as follows:

Percentage of capital Sales in kWhin bonds, preferred over 15,000,001 overstocks and loans 25,000,000 -25,000,000 15,000,001

15% or less 9-1/2% 10% 10-1/2%15.1% to 30% 9-1/4% 9-3/4% 10-1/4230.1% to 50% 9% 9-1/2% 10%over 50% 8-3/4% 9-1/4% 9-3/4%

Capital should not be more than 60% in bonds nor more than 62%among bonds, preferred stocks or loans. Depreciation is allowed as anexpense but rates are undetermined other than "not exceeding as a whole,that indicated by the normal operation of the industry of electricity forcompanies similar in size and type of generation."

The difference between the actual and permitted amounts of returnwill be registered in a stabilization account and carried forward. Thisprocedure effectively guarantees the return.

The law lays down the following timetable to be followed by con-cessionaires and the commission.

(a) Accounts and financial and technical data are to be furnishedby the concessionaire within 90 days of the end of the fis-cal year.

(b) The commission should, if necessary, contest such accountsand information within 120 days of presentation.

ANNEX 2Page 2 of 3 pages

(c) An adjustment in the price per kilowatt hour shall be deter-mined by the debit or credit in the stabilization accountand applied to sales from the first day of the third monthfollowing the end of each fiscal year.

(d) The commission must give its decision on a tariff revisionwithin 60 days (90 days if complex) of receipt of therequest. The decision can be appealed to the commissionfor reconsideration within 15 days of it being communicatedto the concessionaire and the appeal must be decided within30 days.

A concessionaire is required to invest in the enlargement ofhis services, increase the working capital or both, an amount equivalentto at least 25% of the net gains which are available to common stockholdersas dividend, plus the amount allocated during the last year to reserve fordepreciation, after making the necessary reimbursements for the amortiza-tion of bonds and other capitals.

B. DECREE LAW NO. 235 OF JULY 30, 1969

Decree Law No. 235 charges IRHE with planning, expanding, diver-sifying and rationalizing the generation, transmission and distributionof electric power throughout the Republic, with the exclusive competenceto construct and operate all new sources of generation, with certain tran-sitory exclusions. Functions relative to irrigation, flood control andmaintenance of river navigation, which were previously assigned the IRHEhave now been transferred to the Ministry of Agriculture, Trade andIndustry. IRHE is exempt from all taxation, other than Social Securitytaxes.

The law provides for a Board of Directors consisting of sevenmembers appointed by the President of the Republic with the approval ofthe National Assembly. Four members are ex-officio: the Director Generalof Planning and Administration of the Office of the President of theRepublic; one representative each from the Ministry of Agriculture andthe Ministry of Commerce; and an electrical engineer who is a member ofthe National Commission of Electric Energy, Gas and Telephones. Thesemembers hold office so long as they are employees or officials of therespective ministries or state agencies. The other three members areappointed for a period of seven years and are eligible for re-appointment,the terms are staggered so that not more than one of these three directorsretires at the same time. One represents the Banking Association; another,the Federation of Industrialists; and the third is a Civil Engineer, whomust be a member of the Panamanian Society of Engineers and Architects.The Comptroller General of the Republic, or his representative, may attendBoard meetings with the right to speak but not to vote. The Chairman andVice-Chairman are elected by the Board. The Board controls the broadpolicy of IRHE, and authorizes, inter alia, salary scales, expendituresover $25,000, and electricity tariffs.

ANNEX 2Page 3 of 3 pages

The Director General, who is the legal representative of IRHEand its Chief Executive Officer, is appointed by the President of theRepublic, subject to the approval of the National Assembly. His term ofoffice is for a period of six years, with eligibility for re-election.He may be dismissed from his post only by a court judgment because of anoffense or because of failure to comply with certain requirements speci-fied in the Decree, or he can be dismissed for manifest incapacity by theExecutive with full cabinet approval.

The Director General is responsible to the Board for the day today operation of IRHE under the broad policy of the Board. He has theright to attend Board meetings and to propose motions and to speak, butnot to vote. He appoints and dismisses subordinate personnel, submits forapproval budgets, investment plans, tariffs, etc., and authorizes expendi-ture of amounts of less than $25,000.

Decree Law No. 235 provides IRHE with the following financialcontribution from the Government:

(1) "A State subsidy of B 100,000 a month, which shall bedelivered to the Institute by the Office of the Comptroller-General of the Republic or the Ministry of Pinance and theTreasury, from funds of the National Treasury, within thefirst five days of each month. The necessary appropriationsto comply with this provision shall be included in allnational budgets with effect from the year 1970. This sub-sidy shall diminish by B 120,000 a year with effect from1980."

(2) "An additional capital in cash, contributed by the Nationfor purposes of investment, in accordance with the NationalElectrification Plan, of not less than B 20,000,000 ormore than B 30,000,000, which shall be delivered to theInstitute within the next seven years, in such annual con-tributions as shall be required for the National Electri-fication Plan."

ANNEX 3

PANAMA

INSTITITO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION

Estimated Cost of the Project

1970 price level US$000 or B 000

Local Foreign Total

Bayano Hydro Development

Comperisation to landowners 200 200Preliminary works 474 643 1,117River diversion 473 1,065 1,538Bayano dam 4,618 8,216 12,834Viejo Pedro dam 717 843 1,560

Power house and step up station (civil) 1,242 1,839 3,081T'urbines, generators, transformers 62 5,396 5,458Other mechanical equipment 410 4,009 4,419Other electrical equipment 36 673 709230 kV transmission line 379 1,282 1,661Panama Substation 308 1,669 1,977Engineering 890 2,120 3,010

Subtotal 9,809 27,755 37,564

Las Mirias No. 4 1,529 4,588 6,117Transmission line Las Minas-Panama City 234 701 935Diesel & substation, Central Provinces

and Panama West 187 748 935

Engineering 170 556 726

Subtotal 2,120 6,593 8,713

Distribution expansion 1,665 2,457 4,122Studies for further power development 52 200 252Management consultant and training 293 380 673Contingencies 1,040 2,195 3,235Price escalation 1,296 2,42O 3,716

Total Cost of the Project 16,275 42,ofO 58,275

Total- foreign exchange to be financed by Bank 42,000

February 1970

ANNEX 4

PANAMA

INSTITUI- DE RECURSOS HIDRAULIOOS Y ELECTRIFICACION

DEMAND AND CAPABILITY - METROPOLITAN AREA, CENTRAL PROVINCES, PANAMA WEST AND CANAL ZONE

Metropolitan Area, Central Provinces and 1969 1970 1971 1972 1973 1974 1975 1976Panama West

1) Power DemandCPFL MW 96 108 121 137 151 168 190 211Central Provinces incl. E.E Santiago / " 13 14.5Panama West incl. E.H. Chorrera.2/ " 4 4,5

Subtotal it 9 108 121 137 151 1 207 230IRHE to Canal " 0 3 0 0 30 0 30 30 30

Total " 12 1I1 1318 237 2

2) Power CapabilityCPF

71/ " 84 84 84 84 84 84 78 78E.H. Chorrera./ 2/ " 2 2

Subtotal l' 1 0 8 8 o 8IRHE1/ " 40 40 80 80 120 120 287 287

Total 3124

3) Surplus or (Deficit) " (2) (14) 13 (3) 23 6 130 107Surplus or (Deficit) with largest unit out" (42) (54) (27) (43) (17) (34) 55 32

4) Energy RequirementsCPFL GWh 500 560 620 700 780 870 970 1,070Central Provinces incl.E.E.Sant ggocv " 51 58Panama West incl. E.H. Chorrera- " 13 19

Subtotal " 50 70 720 70 0 780 770 1,036 1,137IRHE to Canal " 88 210 210 210 210 210 210 210

Total ' 770 *7 910 990 1, 080 1,244 1,357

5) EnerFr CapabilityCPFL-' " 450 440 440 390 370 415 405 389E.H. Chorrera 2/ 5 5

Subtotal " 450 m 90 3 394IRHE 1/ , 143 262 328 520 620 780 1,079 1,376

Total , 593 702 -76 910 990 1,195 1,489 1,770

6) Energy Reserve " 5 (68) (62) 0 0 115 245 413

Canal Zone

7) Power Demand MW 102 112 119 129 138 143 148 152Power purchase from IRHE " 30 30 30 30 30 30 30 30Own power generation " 72 82 89 99 108 113 118 122

8) Power Reservel/ " 63 53 79 69 60 55 5° 46Power Reserve firm " 38 28 46 36 27 22 17 13

9) Energy Requirernents GWn 655 713 768 839 899 937 972 1,000Energy purchase from IRHE " 88 210 210 210 210 210 210 210Own energy generation if 567 503 558 629 689 727 762 790

10) Energy Reservel/ GWh 23 87 92 186 126 88 53 25

IRHE Energy (KWH) Requirerents

11) Capability1/ GWh 143 262 328 520 620 780 1,079 1,37612) Requirements " 138 330 390 520 620 780 1,079 1,192

13) IRHE dispatchIRHE dispatch wholesale metrop.area 2/" 138 262 328 520 620 780 1,015 1,115IRHE dispatch wholesale Chorrera/Santiago- 16 24IRHE dispatch own retai2 " 48 53

14) IRHE Reserve " 5 (68) (62) 0 0 0 0 184

1/ Annex 12/ After interconnection with Metropolitan area

January 1970

ANNEX 5

PANAMA: INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACIONMETROPOLITAN SYSTEM, INTERCONECTED WITH CENTRAL PROVINCESAND PANAMA WEST (1975), SYSTEM CAPACITY AND DEMAND(MEGAWATTS)

400 I I I I , I 400

0

BAYANO NO I and 2 @75 MW(+ Panama West) m 367MW(+ Central Provinces) r

350 350I~~~VI~~~~~~~~~~

INSTALLED C PACITY I

300 . - 3001 292MW

FIRM CAPACITY

250 250

zPOWER DEMAND

o 4¢ 204MW

200 200

0

z r IS

150 -U - 150Z

3 n~~- 124 MW

z

I100 7- , , i_100ctj 84 MW__

rFUEFIZA Y LUZTotal Installed Capacity CANAL ZONE CONTRACT 30 mw

CENTRAL PROVINCES ANDPANAMA WEST CONNECTED 17 MW

50 50'65 '66 '67 '68 '69 '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80

< ACTUAL :* FORECAST -

IBRD - 4601 (4R)

ANNEX 6Page 1 of 2 pages

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION

DATA USED IN THE ECONOMIC EVALUATION

Capital Cost (excluding interest) 1000 US$

Bayano 4 x 75 MW 41,880

230 kV Line Bayano/Panama 1,920

Substation " 2,980

Thermal Plant 4 x 75 MW 39,180

230 kV Line Las Minas/Panama 1,340

Substation " 2,980

Fuel Cost

Steam plant and Gas turbines US$ 1.26/million/kcal (0.315/million/BTU)

Operation and Maintenance Cost per year (1975)

Bayano 150 MW 300 MW1000 US$

Dam/Powerhouse 480 560

Substatioii 140 160

line 80 80

Thermal Plant 800 1,600

Substation 140 150

Line 60 60

Assumed Life

Bayano 60 years

Thenral Plant 30 years

Average Generation of Bayano 560 GWH/yr

.AiAMA

IN3TITJTO DE HECURSOS HTIRAULICOS Y ELECTIRIFiACION

DATA USED TN THE EONCMTIC bVALUATIOh

1969 1970 1971 1972 1973 1377 1975 1976 1973 1983 2003 2004 2005 2006 2015 2029

System Maximum Demand (MW) 1.'6 138 151 167 181 (9' 237 260 286 - - - - - - -Required Generation (GWh) 600 770 830 910 990 1,080 1,244 1,357 - - _ _ _ _ _

Hydro PlanGenerating Capacity (MW)Existing System 84 124 124 164 164 207. 204 354 354 - _ _ _ _ _ _New thermal 40 - 4.0 - 40 - - - - - _ _ _New hydro _ - - - - 150 - 75 75

Total installed 124 124 167 164 204 204 354 354 429 -

Capital CostsHydro plant $(000) - 1,340 3,980 6,770 10,420 6,850 6,510 2,610 1,100 2,300Transmission $(000) - - - - 230 1,310 380 - - - _ _ _ _Substation $(000) _ 240 1,940 200 200 100 300

Total $(000) - 1,340 3,980 770 10,890 10,100 7,090 2,810 1,20 2,600

Operation & Naint. CostsPlant, Transmission,substation 1/ $(000) - - - - - - 650 700 700 750 800 800 800 800 800 800

Thermal PlanGenerating Capacity (NW)

txisting system 87 124 127 164 164 204 204 354 354 - - - - -

New thermal 40 - 40 _ 70 - 150 - 75 75

Total instaaled 124 127 167 167. 207 204 354 354 729 -

Capital CostsThermal Plant $(000) - - - - 3,600 7,140 9,540 41,300 7,400 7,200 3,600 7,140 9,540 4,300 7,400Transmission $(000) - - - 160 920 '60 - - - - -Substation $(000) _ - - - 240 1,940 200 200 100 300 - - -

Total $(°°°) - - - - 4,00C 10,000 l3,0oo 4,600 7,5.00 7,5CO 3,600 7,140 9,540 4,300 7,400

Operation & Maint. CostsPlant, Transmissionsubstation 1/ $(0005 - - - - - - 900 1,000 1,000 1,810 1,810 1,810 1,810 1,810 1,810 1,810

Fuel CostThermal Plan minus Credit X jfor Hydro Plan $(000) - - - - - - 1,lOC 2,300 2,000 2,190 2,190 2,190 2,190 2,190 2,190 2,190

I/Annex 6, Page 1

February 1970

PANAMA

INSTITUTO DE RECURSOS HIDRAULIOOS Y ELECTRIFICACION

INCOME STATEHEUNS 1965-1976

(THDUSANDS OF BALBDAS)

- - - - - - Actual - - - - - - - - - - - - - - - - - - - - - - - Estimated- - - - - - - - - - - - - - - - - TOTAL

Years Ended December 31 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1969-1976

Kwh Sales (millions)Retail 114.1 15.4 17.6 20.9 22.5 25.1 28.2 31.1 34.5 38,2 42.3 47.0 268.9

Wholesale - Panama Canal - - - - 88.0 210.0 210.0 210.0 210.0 210.0 210.0 210.0 1,558.0

- CPFL - - _ - 55.o 52.5 118.0 310.0 410.0 570.0 805.0 905.0 3,225.5

- Other - - 52 7.7 7.9 8.2 6.4 8.7 14.1 20.8 81.0

TOTAL SALES . - 77 - 170.7 295.3 9.3 662.9 82 1,07 1.

Average price per kwh (centeeimos)Retail 7.55 8.00 8.01 8.00 8.17 8.04 7.87 7.76 7.62 7.52 7.43 7.33 7.65

Wholesale - Panama Canal - - - - 1.07 0.94 0.95 0.95 0.95 0-95 0.95 0.95 o.96

- CPFL - - - _ 1.07 0.9L 1.O 1.09 1.05 1.04 1.10 1.22 1.11

- Other - - 2.48 2.49 2.49 2.50 2.51 2.51 2.32 2.23 2.40

TOTAL 7, z5 2 .05 1.59 _Ti3 1.4 3 -T33 1.33 1.3 4

Gross Operating RevenuesRetail 1,065 1,232 1,410 1,672 1,838 2,018 2,218 ,413 2,630 2,872 3,142 3,446 20,577

Wholesale - Panama Canal - - _ - 940 1,982 1,986 1,988 1,992 1,996 2,000 2,004 14,888

- CPFL - - - _ 587 495 1,289 3,390 4,323 5,952 8,883 11,012 35,931

- Other - - - - 129 192 197 205 211 218 327 463 1 942

TOTAL G1DSS OPERATIlW REVENUES 1,0065 1,232 1,6772 3 ,7 7,9 96 9,156 iI,09 14,352 16,925 7

Cost of OperationsOperation and maintenance 601 736 939 907 1,139 1,244 1,328 1,582 1,852 1,997 2,340 2,705 14,187

Fuel - Las Minas - - - - 537 987 1,233 1,956 2,332 2,934 2,934 2,242 15,155

Fuel and Electricity purchased-other areas 222 238 208 149 191 246 334 329 361 396 401 401 2,659

Administration and General Expenses 169 182 194 282 300 315 331 348 365 384 465 486 2,994

Depreciation 178 201 237 411 646 797 963 1,227 1,435 1,924 2,367 2,827 12 186

TOTAL OPERATING EXPENSES !T7g 1,357 i777 1,749 2,813 9 14,189 5,4 t , T ,7 t8t 17

NET OPERATING INCOME (105) (125) (168) ( 77) 681 1,098 1,501 2,554 2,811 3,1403 5,845 8,264 26,157

Government Subsidy 184 144 189 85 75 1,200 1,200 1,200 1,200 1,200 1,200 1,200 8,475

Less: Hydrological costs - - - - - (200) (220) (242) (266) (292) (321) (353) (1,894)

Other Income (net) 7 - ( 42) 16 10 10 10 10 10 10 10 10 80

NET INIOME BEFONRE INTEREST 86 19 ( 21) 24 766 2,108 2,491 3,522 3,755 4,321 6,734 9,121 32,V18

IrnterestInterest payable 108 159 198 257 477 901 1,614 2,416 3,253 4,018 4,366 4,610 21,655 -i0 i

Interest charged to capital 108 159 198 - - 194 837 1 446 1,962 2 564 1 812 934 9 749

Interest charged to operation - 2_7 _77 707 777 97d 1,291 23,676 1,96

NET REVENUE OR (LOSS) FOR TIE YEAR 86 21) (233) 289 1,401 1,714 2,552 2,464 2,867 4,180 5,445 20,912

February 16, 1970

ANNEX 7Page 2 of 2 pages

The forecasts in this Annex have been based on the followingassumptions:

(a) IRHE's retail sales will increase by 14% per annum for1969 and 1970 and 12% thereafter. The estimated sales tothe Panama Canal Company are in accordance with IRHE 'scontract to them for the sale of 30 MW of the output ofLas Minas No. 2. Through 1973 it is estimated that bothIRHE and CPFL will be generating to their maximum. There-after it is assumed that CPFL will not use any of its owngenerating capacity other than the 24 MW Las Minas No. 1steam unit, and will purchase the balance of its require-ments from IRHE;

(b) Tariffs for Las Minas No. 2 are in accordance with theexisting contract (see paragraph 2.12);

(c) Tariffs for Las Minas Nos. 3 and 4 and Bayano would beset as to enable IRHE to obtain, effective January 1,1972, the rate of return allowed in Decree Law No. 31,initially 8-3/4% on net fixed assets and working capital;and

(d) A Government subsidy of $100,000 per month granted byDecree Law No. 235, will commence in January 1970. IRHEwill be required to provide for future hydrologicalstudies out of the subsidy.

ANNEX 8

PANAMA

INSTTTUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION

BALANCE SHEETS 1965-1968

(Thousands of Balboas)

Years Ended December 31 1965 1966 1967 1968

ASSETS

Fixed AssetsGross plant in operation 3,155 4,901 10,389 10,673Less: Depreciation Reserve 589 833 1,152 1 635Net plant in operation 2,56 4,o68 9,237 9,036Work in Progress 2,572 3,462 1,443 7,419

TOTAL FIXED ASSETS 5,138 7,530 10,680 16,457

Studies, Planning, Deferred Expenditures, etc. 644 663 1,602 2,223

Current AssetsDebtors - Consumers 232 242 248 524

- Government - - - 481- Other 77 66 341 42

Less Reserve (68) (77) (87) (98)Net Debtors 241 231 02 9yBank Balances or (overdrafts) 299 528 646 (52)Inventories ard other current assets 494 500 566 665

TOTAL CURRENT ASSETS 1,034 1,259 1,714 1,562

TOTAL ASShES 6 816 __9 45 20,242

TLABILITIES

EquityCapital 1,135 1,135 1,135 1,135Government Grants & Contributions 2,688 L,04o 6,689 7,773Surplus or(Deficit) 126 145 124 (109)

TOTAL EQUITY 3,949 5,320 7,948 8,799

Long-term DebtIBRD - Loan 322-PAN 2,193 3,247 3,679 3,715Suppliers' Credits - - - 5,794Bonds - _ 492 561

TOTAL LONG TERM DEBT 2,193 3,247 4,171 10,070

Current LiabilitiesCurrent liabilities, including current portion of

Long Term Debt 674 885 1,877 1,373

TOTAL LIABILITIES 681652 13,996 20,242

January 1970

ANNEX 9

PANAMA

INSTITt1TO DE RECURSOS HDRAULIOS Y ELECTRIFICACION

EST1l(ATED SOURCES AND APPLICATIONS OF FUNDS 1969-1976

(Thousands of Balboas)

TOTAL1969 1970 1971 1972 1973 1974 1975 1976 1969-1976

Sources of FundsInternal Cash GenerationNet operating income 681 1,098 1,501 2,554 2,81] 3,A03 5,845 8,264 26,157Other income 1 10 10 10 10 10 10 10 e8Depreciation 646 797 963 1 227 1 435 1 924 2 367 2,827 12 186

TOTAL CASH GENERATION 1,337 1,905 20 47 t 9 W,9 5,337 5 l,222 1101Net Operating Subsidy 75 1,000 980 958 934 908 879 84765iSale of assets 51 90 8 1 - - - -847 6BorrowingsSuppliers' Credits Las Minas 2 and 3 641 4,350 480 - - - - - 5,471Proposed IBRD Loan - 2,504 8,501 11,039 9,523 8,250 2,183 - 42,000Future Foreign Loan - - - - 721 2,746 4,636 6,047 14,150

TOTAL BORROWINGS 641 6,854 8,981 11,039 10,244 10,996 6,819 6,047 61,621

Government ContributionsLas Minas 2 and 3 750 250 250 - - - - - 1,250Other 1,100 1,200 j.600 4,000 4,800 4,000 1,100 400 20,200

TOTAL GOVERNMENT OONTRIB1TTIONS 1,850 1,50 3,850 4,000 4 800 4,000 1.100 400 2l,450

TOTAL SOURCES 3.954 11,299 16,293 19,789 20,234 21,241 17,020 18,395 128.225

Applications of FundsConstruction Expenditures (excluding

Capitalized Interest)Proposed IBRD Project -Foreign Currency - 2,504 8,501 11,039 9,523 8,250 2,183 - 42,000

-Local Currency - 1,511 3,623 4,766 3,735 1,947 693 - 16,275Other Construction -Foreign Currency 240 4,716 972 141 1,516 3,827 5,811 7,269 24,492

-Local Currency 1,817 719 489 58 768 1,669 2,368 3,765 11,653

TOTAL CONSTRUCTION EXPENDITrURES 2,057 9,450 13,585 16,004 15,542 15,693 11,055 11,034 94,420

Debt ServiceInterest (including capitalized interest)IBRD Loan-322 PAN 209 203 196 188 180 172 164 154 1,466Proposed IBRD Loan - 236 1,002 1,693 2,288 2,803 2,940 2,888 13,850Suppliers' Credits 228 432 398 528 635 571 501 428 3,721Bonds 40 30 18 7 - - - - 95Future Foreign Loan - - - - 150 472 761 1,140 2,523

TOTAL INTEREST 477 901 1,614 2,416 3,253 4,018 4,366 4,610 21,655

AmortizationIBRD Loan - 322 PAN 120 125 130 140 150 155 165 175 1,160Proposed IBRD Loan - - - - - - - 1,048 1,040Suppliers' Credits 267 558 592 820 1,068 1,133 1,203 1,275 6,916Bonds 179 185 190 186 - - - - 740

TOTAL AI4ORTIZATION 566 868 912 1,146 1,218 1,288 1,368 2,498 9,864

TOTAL DEBT SERVICE 1,043 1,769 2,526 3,562 4,471 5,306 5,734 7,108 31,519

Increase in working capital 700 100 125 150 175 200 225 250 1,925

TOTAL APPLICATIONS 3,800 11,319 6236 19 17,014 18,392 127,84

Annual Surplus or (Deficiency) 154 (20) 57 73 46 42 6 3 361

Surplus or (Deficit) at thebeginning of the year (52) 102 82 139 212 258 300 3(0 (52)

Surplus at the end of the year 102 82 139 212 258 300 306 309 30y

February 16, 1970

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELBCTRIFICACION

ESTIMATED FINANCIAL RATIOS 1969-76

(Thousands of Balboas)

1969 1970 1971 1972 1973 1974 1975 1976

1. Debt/Equity Ratio 47/53 53/47 55/45 56/44 56/44 56/44 55/45 53/47

2. Interest CoverageNet operating income, excluding

subsidy 681 1,098 1,501 2,554 2,811 3,403 5,845 8,264

Interest charged to operation 477 707 777 970 1,291 1,454 2,554 3,676Times covered, excluding subsidy 1.4 1.6 1.9 2.6 2.2 2.3 2.3 2.2

3. Debt Service CoverageInternal Cash Generation(a) excluding subsidy 1,337 1,905 2,474 3,791 4,256 5,337 8,222 11,101(b) including subsidy 1,412 2,905 3,454 4,749 5,190 6,245 9,101 11,948

Debt service 1,043 1,769 2,526 3,562 4,471 5,306 5,734 7,108Times covered(a) excluding subsidy 1.3 1.1 1.0 1.1 1.0 1.0 1.4 1.6(b) including subsidy 1.4 1.6 1.4 1.3. 1.2 1.2 1.6 1.7

4. Return on investment

Average net fixed assets inoperation 14,433 18,151 21,444 27,192 29,835 36,139 63,21)4 90,217

Three Months' Gross Revenue - - - 1,999 2,289 2,759 3,588 14,231

TOTAL INVESTMENT 14,433 18,151 21:444 29191 32,124 38,898 66,802 94,448

Return-Percentage., excluding subsidy 4.7 6.1 7.0 8.75 8.75 8.75 8.75 8.75

February 16, 1970

PANAMA

INSTITUTO DE RECURSOS HIDRAULICOS Y ELECTRIFICACION

ESTIMATED BALANCE SHEETS 1969-1976

(Thousands of Balboas)

Years Ended December 31 1969 1970 1971 1972 1973 1974 1975 1976

ASSETS

Fixed AssetsGross plant in operation 19,571 21,989 30,776 32,731 42,503 44,891 100,256 104,775Less: Depreciation reserve 2,251 3,007 3,955 5,168 6,597 8,519 10,885 13,712

Net plant in operation 17,320 18,982 26,821 27,563 35,906 36,372 89,371 91,063

Work in progress 510 7,618 13,2-43 28,736 36,468 52,337 9,839 17,288

TOTAL FIXED ASSETS 17,830 26,600 40,064 56,299 72,374 88,709 99,210 108,351

Studies, Planning, Deferred Expenditure,etc. 2,210 2,197 2,184 2,171 2,165 2,163 2,162 2,162

Net Current Assets 741 777 725 876 1,027 1,189 290 380

TOTAL ASSETS 20,781 29,574 42,973 59,346 75,66 92,061 101.662 110,893

LIABIMTIES

EquitCapital 10,758 12,208 16,058 20,058 24,858 28,858 29,958 30,358Surplus 180 1,581 3,295 5,847 8,311 11,178 15,358 20,803

TOTAL EQUITY 10,938 13,789 19,353 25,9Q5 33,169 40,036 45,316 51,161

Long Term Debt (excluding current portion)IBRD - Loan 322 PAN 3,590 3,460 3,320 3,170 3,015 2,850 2,675 2,490

- Proposed Loan - 2,504 11,005 22,044 31,567 39,817 40,952 39,829Suppliers' Credits 5,877 9,635 9,295 8,227 7,094 5,891 4,616 3,263Bonds 376 186 - - - - -

Future foreign loan - - - 721 3,467 8,103 14,150

TOTAL LONG TERM DEBT 9,843 15,785 23,620 33,441 42,397 52,025 56,346 59,732

TOTAL LIABILITIES 20,781 59,346 75,56 92h061 101,662 110,893

February 16, 1970

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P A C I F I C O C E A N

NOVEMBER 1969 BR 25