r.cis r 1 c22994 WORLD BANK OPERATIONS EVALUATION DEPARTMENT SPRING 1999 NUMBER 1 9 2 Reformning Bolivia's Power Sector W5T T HEN THE WORLD BANK APPROVED FUNDING FOR Bolivia's Power Rehabilitation Project in 1987, the v V expected outcome was confined to improvements in the operation of the state-owned power company, ENDE (Einpresa Naciozal de Electricidad S.A.). But a recent OED evaluation has found that the operational relationship developed by the project also assured Bank participation in a radical reform of Bolivia's power sector-a privatization scheme that resulted in a more efficient sector. The project objectives of rehabilitating the dropped its resistance to change, however, agency's facilities, improving its financial clearing the way for the reform that fol- and administrative efficiency, and develop- lowed. The seeds of that reform had been ing a master plan for expanding power planted at a 1991 meeting in Cocoyoc, through 2010 had been largely achieved by Mexico, of Latin American ministers in 1992. In the two remaining years of project charge of electric power. The conference, implementation, the election of a reform- jointly organized by the Bank and minded government provided the Bank with OLADE (the Latin American Energy an opportunity for a broader sectoral dia- Organization), discussed principles for logue with the government, which eventu- power sector reform. Timely, strong tech- ally contributed to sweeping reform. nical support by the Bank continued for the next few years and culminated in a Pushing for Reform May 1993 seminar in Bolivia on power The Bank had first urged Bolivia to priva- sector reform, which was attended by tize its power sector in 1989, but with high government officials and the execu- limited success. The government at the tives of all the Bolivian power companies. time resisted the reform because the sec- Throughout this Deriod, the supervision tor, in its view, was already running effi- missions for the Power Rehabilitation ciently. It was indeed more efficient than Project Lused their leverage to broaden the the power sectors of its neighboring coun- project's objectives in support of the tries. Bolivia never experienced the power government's reform efforts. shortages and blackouts that prompted . privatization elsewhere in Latin America Before the Reform (most notably in Argentina and Peru). The Until 1994, policies for the power sector government that came into power in 1993 in Bolivia were established in the Codigo 2 World Bank Operations Evaluation Department de Electricidad (Electricity Code), issued by Supreme expected to be liquidated within about two years as its Decree in 1968 and subsequently amended. Energy poli- remaining installations-serving Sucre, Potosi, Tarija, cies were the responsibility of the Ministry of Energy Cobija, and other rural electrification systems-are and Hydrocarbons. Sector regulation was also the gradually privatized. ministry's responsibility through the Direcci6n Nacional The privatization of the state-owned power compa- de Electricidad (DINE). Several generating companies nies used a scheme of capitalization that was unique to served the country. ENDE was in charge of generation Bolivia. Under the scheme, private investors bought 50 and transmission. COBEE, a private, U.S.-owned com- percent of the shares in the newly created public enter- pany, had responsibility for generation and distribution prises. Workers and employees bought about 2 percent in the area of La Paz and Oruro. Two privately owned of the shares. The remaining shares were used to estab- rural electric cooperatives controlled distribution in lish two funds that paid pensions to citizens over 65 Santa Cruz and Sucre. Two subsidiaries of ENDE were years of age. This mechanism also included a contract in charge of distribution in Cochabamba and Potosi. that permitted private investors to gain management Several issues hindered development of the sector. control of the company and allowed the capital gener- The institutional setup and regulatory regime did not ated by the sale, most of it from foreign sources, to provide the incentives that generation and distribution remain with the privatized companies, obligated for companies needed to improve efficiency, to charge effi- investment in new business projects. cient prices reflective of marginal costs, or to foster com- The restructuring of the sector also created a new, petitive behavior and private sector participation. The and stronger, institutional environment. The Superinten- granting and renewal of licenses was not transparent. dency of Electricity, an autonomous agency with an There was an inherent conflict in ENDE's role as de independent budget, is in charge of supervising compli- facto regulator (owing to weak capacity in the DINE), ance with sector regulation and of approving tariffs. The system planner, and dominant producer. Tariff approval General Superintendent supervises the efficiency of all at the municipal level had politicized the process, lead- regulated sectors, including the power sector, and hears ing to tariff distortions between consumers and regions. appeals on cases not satisfactorily resolved by the Super- Although ENDE had been generally effective in operat- intendent of Electricity. A National Committee for Load ing a generation and transmission system with reason- Dispatch (Comite Nacional de Despacho de Carga), able reliability, the efficiency of the system had shown with a total of five representatives of the generating, some signs of weakening in the early 1990s (with losses transmission, and distribution companies; of the unregu- as high as 16.6 percent in 1990, compared with 11.6 lated consumers; and of the Superintendency of Electric- percent in 1986). ity, is in charge of medium-term planning (four years) and of weekly and daily dispatch of generation. Dis- Keys to Success patch is based on marginal cost principles. The national The key to a successful reform of the sector lay in the committee is also in charge of proposing the nodal prices legal and regulatory framework that was put in place in for generation to the Superintendent of Electricity every 1994. The Capitalization Law (March 21, 1994) autho- six months. rized private capital investments in state-owned enter- The new institutional structure has effectively decen- prises. The law creating the Sectoral Regulatory System tralized control of the sector, and the new regulatory (October 28, 1994) established individual superintenden- regime has established an independent, privatized power cies for the power, telecommunications, hydrocarbon, industry. Although the new system has been in place transport, and water sectors. The Electricity Law only a short time, observers both inside and outside (December 21, 1994) detailed the operation of the power Bolivia believe the power sector reform has been a sector. Other sectoral regulatory systems were also cre- success. ated to regulate the financial sectors and sectors cover- ing forestry, agricultural lands, and renewable resources. Winners and Losers The new sectoral structure unbundled ENDE's assets The power sector reform had five winners: into three generation companies that were sold to private investors: Corani, Valle Hermoso, and Guaracachi. a The Bolivian economy gained new foreign capital. Pri- COBEE's assets were also unbundled into separate gen- vate investors paid approximately US$1,600 million to eration and distribution companies and sold to private gain control of all capitalized public companies. bidders. ENDE also created a transmission company * The Bolivian treasury saw fiscal revenues from the that it then privatized. The distribution subsidiaries of power sector (sales and profit taxes) increase by 247 ENDE and COBEE were also fully privatized. ENDE is percent in three years (from US$17 million in 1994 to Pr6cis 3 0Precis OED PARTNERSHIPS AND KNOWLEDGE GROUP Editor-in-Chief: Elizabeth Campbell-Page approximately US$42 million in 1997). In addition, Series Editor: Caroline McEuen the service of ENDE's debt of approximately US$61 Graphic Design: Kathy Strauss, Lunn Lestina million, guaranteed by the government, was trans- Assistant: Juicy Qureishi-Huq ferred to the private companies. * Private investors obtained annual rates of return of up to PRECIS ORDER FORM 14 percent and saw the price of their shares increase sig- nificantly. For example, the small amount of Corani * Pr&is are available at no charge by contacting the OED shares traded in the Bolivian stock market increased Help Desk: tel: 1-202/458-4497, or fax the form from $blOO per share in 1994 (just after privatization) to below to: 1-202/522-3125. You can also e-mail your $b215 per share in 1998. The price of COBEE's shares request to: OED Help Desk@worldbank.org. increased from US$25 in 1994 to US$43 in 1996. * Mail this form to: * The elderly of Bolivia now receive a small annual Precis-OEDPK, World Bank pension from funds created by the privatization. In 1818 H St. 1997, each elderly citizen received US$248. Washington, D.C. 20433, USA * Electricity customers have not seen rate increases attn: Editor-in-Chief (except for inflation and fuel price adjustments) and now have direct access to the power companies Quantity Title Precis # through newly created consumer offices to resolve grievances. Quality of service is expected to improve considerably when the new quality of service regula- tion is fully implemented in the next three years. * Please add my name to the Precis mailing list. C1 The main losers so far are the rural areas. The situa- Name_ tion in these areas was not measurably improved by the reform, and rural residents continue to depend on the Address central and local governments for electric service. Pri- vate companies currently appear reluctant to extend ser- Gty State vice to areas that are not economically attractive, unless Postal Code Country government is willing to provide some sort of subsidy. Telephone Lessons This project clearly shows that to attract private capital, * For large orders, please contact the World Bank InfoShop the size of the sector or the relative development of the at tel: 1-202/458-5454, fax: 1-202/522-1500, or through e- country is less important than having in place a clear mail at books@worldbank.org. regulatory system, strong and autonomous institutions to * This and other OED publications are on the Internet, at enforce it, and the will of the government to respect its http://www.worldbank.org/html/oed. commitments. In addition, it demonstrates that power sector reform should include approaches specifically tai- *To order our books, please contact: lored to serve people in suburban and rural areas who The World Bank Fulfillment Center do not have electricity. Leaving this duty to the central P0 Box 960 and local governments may be inadequate if correspond- Herndon,VA20172-0960,USA Tel: 1-703/661-1580 ing, sustainable funding arrangements are not put in Fax: 1-703/661-150 place. Fax: 1-703/661-1501 Internet: http://www.wvorldbank.org From the World Bank homepage, select publications. e-mail: books@worldbank.org DISCLAIMER: OED Precis are produced by the World Bank Operations Evaluation Department, Partnerships and Knowledge Group (OEDPK), Outreach and Dissemination 0 Unit. The views in this paper are those of the Operations Evaluation staff and editors and should not be attributed to ,________________ zthe World Bank, its affiliated organizations, or its Executive * Based on the 1998 OED evaluation work (kjMdI Directors. of Alain Barbu and Luis Luzuriaga. OED Publications Some Recent Titles Recent OED Pr6cis 191 Results-Based Management and the Bank 190 Transport in Indonesia 1 89 Health Care in Brazit: Addressing Complexity 188 Health Care in Mali: Building on Community Involvement [87 Health Care in India: Learning from Experience 186 Global Health: Meeting the Challenge [85 Aid Coordination and Post-Conflict Reconstruction: The West Bank and Gaza Experience 184 Land Administration and Rural Development: Two Cases from Thailand 183 Monitoring and Evaluation Capacity Development in Africa 182 Sub-Saharan Africa: Lessons from Four Sectors 181 Grassroots Pastoral Organizations in Mauritania [80 Capacity Building in the Agricultural Sector in Africa 179 Yemen: Forging a New Consensus (available in Arabic) 178 Municipal Development Projects: Building Institutions and Financing Local Development 177 Nongovernmental Organizations in World Bank-Supported Projects 176 Meeting the Health Care Challenge in Zimbabwe 175 Development Effectiveness, 1998: Opportunities in a Volatile Environment 174 Disaster Assistance [73 Support for Smaller Enterprises 172 PCR: El Salvador 171 PCR: Uganda 170 PCR: Bosnia & Herzegovinia 169 Post-Conflict Reconstruction (PCR) 168 India's Dairy Revolution 167 Philippines: From Crisis to Opportunity Precis aussi disponible en franFais @ http://www.worldbank.org/html/oed Precis en espafiol tambien dispoinible L http://www.worldbank.org/htmi/ocd OED Study Series 1998 Annual Review of Development Effectiveness Developing Towns and Cities: Lessons from Brazil and the Philippines Evaluation and Development: The Institutional Dimension (Transaction Publishers) Financial Sector Reform: A Review of V"orld Bank Assistance india: The Dairy Revolution Nongovernmental Organizations in World Bank-Supported Projects Ihe World Bank's Experience with Post-Conflict Reconstruction OED Mutilingual Series Assessing Development Effectiveness: Evaluation in the World Bank and the International Finance Corporation Appreciation de l'efficacite du developpement: L'evaluation a la Ban que mlondiale et a la Societe financitire internationale Determinar la eficacia de las actividades de desarrollo: La evaluacio en el Banco Mundial y la Corporacionn Finaniera Internacional Cdte d'Ivoire Revue de l'aide de la Banque mondiale am pays Philippines: From Crisis to Opportunity Filipinas: Crisis y oportunnidades Rebuilding the Mozambique Economy: Assessment of a Development Partnership Reconstruir a Economiiia de Moianbique