ICRR 11957 Report Number : ICRR11957 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 11/15/2004 PROJ ID : P051124 Appraisal Actual Project Name : Panama Utilities Project Costs 43.80 29.70 Restructuring Technical US$M ) (US$M) Assistance Project Country : Panama Loan /Credit (US$M) Loan/ US$M ) 12.70 11.70 Sector (s): Board: PSD - Central Cofinancing 15.96 13.60 government administration US$M ) (US$M) (99%), Power (1%) L/C Number : L4274 Board Approval 98 FY) (FY) Partners involved : Inter American Closing Date 06/30/2001 01/31/2004 Development Bank (IDB) Prepared by : Reviewed by : Group Manager : Group : Peter Nigel Freeman John R. Heath Alain A. Barbu OEDSG 2. Project Objectives and Components a. Objectives To enhance the efficiency, improve the quality and expand the coverage of infrastructure services by providing an enabling environment to mobilize private sector expertise and capital within an appropriate policy and regulatory framework. Specifically (as detailed in the PAD), the project will provide technical assistance to : i) Restructure and prepare for privatization entities in the electricity and water /sanitation sectors; ii) Develop regulations required for implementing already enacted reform legislation; and, iii) Strengthen key public institutions in their newly defined policy, planning, and regulatory roles in the electricity, water and sanitation, and telecommunication sectors . b. Components i) Electricity. Support for the restructuring and preparation for sale of the Institute for Hydraulic Resources and Electrification (IRHE). Development of regulations by the Public Sector Regulatory Entity (ERSP), establishment of the Energy Policy Commission (CPE) and the Office of Rural Electrification (OER) as well as assistance with key policies and programs under their jurisdiction . The IDB funded the planning, transmission development and upgrading of systems operations capabilities . (Planned US$10.0 million, 24.2% project cost; actual US$9.2 million, 31.0% expended amount). ii) Water & Sanitation . Privatization of the National Institute for Water and Sanitation (IDAAN), developing policies for rural areas and strengthening capacity for regulation at ERSP and policy -making at the Ministry of Health (MINSA). IDB funded the restructuring of IDAAN prior to privatization as well as the development of regulations and watershed planning. (Planned US$24.8 million, 60.0%; actual US$8.4 million, 28.3%). iii) Telecommunications. Establishment of a radio spectrum management system and developing the telecom regulatory capacity of ERSP. (Planned US$3.0 million, 7.3%; actual US$7.8 million, 26.3%). iv) Multi-sector. Public and consumer information, investment promotion, environmental measures and project management. (Planned 3.5 million, 8.5%; actual US$4.3 million, 14.4%). c. Comments on Project Cost, Financing and Dates A new government (elected in 1999) decided not to proceed with the concessioning of IDAAN . This led to the downscaling of certain components . Some surplus funds were re-allocated to rural electrification . Following a request from the Vice-Minister of Economy and Financing in 2000 the water/sanitation component was also reduced and funds diverted to improve MINSA's water quality surveillance capability . These changes, supported by the mid -term review, necessitated an amendment to the loan agreement, but the overall development objective remained unchanged. The original closing date, given the experience of similar technical assistance initiatives in the region, was unrealistic and delayed further by the change in government leading to project restructuring, culminating in an extension of closure by 31 months. 3. Achievement of Relevant Objectives: The somewhat generalized overall objective was supported by key performance indicators in the PAD that are somewhat subjective. However, the PAD does give three sub objectives and they were achieved as follows : i) Restructure and prepare for privatization entities in the electricity and water /sanitation sectors.Objective partially achieved. Electricity fully achieved, but water /sanitation did not proceed due to a change in government policy . ii) Develop regulations required for implementing already enacted reform legislation . Substantially achieved. iii) Strengthen key public institutions ... Partially achieved. Substantial progress with energy and telecommunications, but water/sanitation lacked the resources because of the failure to go ahead with privatization . Expressed by component: Electricity. Substantially achieved, especially in terms of coverage and quality of infrastructure services . Enabling environment improved and appropriate, exceptions being the handling of rural electrification and government interventions in pricing. Telecommunications. Fully achieved. Coverage and quality of infrastructure services greatly improved, costs cut to the consumer and appropriate privatized environment created . Water and sanitation. Not achieved. Government remains in control, but lacks the capacity and resources to expand the sector. Multi sector .Achieved. Environmental audits and public opinion surveys successfully carried out . 4. Significant Outcomes/Impacts: In the electricity sector coverage has increased by six per cent after privatization . The average rate of improvement in labor productivity and distribution loss reduction is better than for comparable countries in the region. Service standard improvement targets are being met . Telecom fixed line coverage and labor productivity have also improved. Call costs have fallen. Improvements in coverage for both sectors are, however, less than for some other central American countries, but this is because coverage in Panama is already higher than these comparator countries. Overall the impact in Panama is positive . ERSP (the regulator) is better organized, funded and trained than before the project . It has satisfactorily prepared the necessary regulations required by the project for the electricity and telecom sectors . IRHE was privatized in a fair and transparent way . Competition has increased, especially in the generation subsector . The multi sector environmental audits and public opinion surveys were carried out successfully . 5. Significant Shortcomings (including non-compliance with safeguard policies): The water and sanitation program was not implemented by the government and this part of the development objective was not achieved . Expansion of drainage and sanitation services has been unsatisfactory because IDAAN lacked the resources to make the necessary investments . The government has pressurized ESRP to keep consumer prices low and has opted to provide direct subsidies in lieu of allowing the application of automatic tariff adjustment formulae . The rural electrification program has not performed satisfactorily due to institutional problems in OER, politicization of the program and serious contractor payment problems . After the OER was transferred to the Social Investment Fund by government, it lost most of its trained staff and lacked management continuity . This raises serious concerns about the government's ability to implement its rural electrification strategy . MINSA did not have the capacity to develop adequate policies and oversight capability in the water and sanitation sector. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Moderately Satisfactory (The ICR's 4-point scale does not allow for a Moderately Satisfactory rating ). The water and sanitation program has not been implemented and government has insufficient capacity to develop adequate policies and expand the sector . The rural electrification program is unsatisfactory . Also, the government has unduly interfered in electricity pricing. Institutional Dev .: Substantial Modest While the development of ERSP was significant, the other institutional initiatives were less successful. The ICR itself states that the National Dispatch Center was quite successful , the Energy Policy Commission was only a partial success and OER and MINSA were basically unsuccessful. Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory NOTE: NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. 7. Lessons of Broad Applicability: Because many people consider water to be a basic right there is often resistance to privatization and the introduction of market-oriented reforms. In such circumstances much greater attention needs to be paid to the social and political acceptability of such measures and a program to build support (backed by the government ) becomes a prerequisite. More emphasis needs to be placed on the rationale for the autonomy of regulatory bodies, charged with establishing privatized entities, to minimize direct government intervention . In telecommunications a competitive environment is often enhanced by favorable technological conditions and where monopoly rights assigned through concessions are for relatively short periods . In the energy sector the absence of pure energy traders can be a major shortcoming because small customers generally lack the expertise to negotiate directly with the power generators . The Bank could therefore pay more attention in the design of future utility restructuring technical assistance projects to increasing the potential benefits of greater competition. 8. Assessment Recommended? Yes No 9. Comments on Quality of ICR: Satisfactory overall. An effort was made to use comparative quantitative indicators with other central American countries in the absence of measurable indicators in the project . However, the ICR is thin on the role and views of the partner (Inter American Development Bank). Figures in some tables in the ICR do not agree; eg those shown in Annex 2 differ (though not substantially) from Table 1, page 3.