Hydroelectric Development Project Report No: ; Type: Report/Evaluation Memorandum ; Country: Mexico; Region: Latin America And Caribbean; Sector: Hydro; Major Sector: Electric Power & Other Energy; ProjectID: P007609 The Mexico Hydroelectric Development Project, supported by Loan 3083-ME of USS460 million equivalent and excess funds of US$125 million from Loan 3189-ME, was approved in FY89, an closed on schedule on December 31, 1996. The implementation Completion Report (ICR) was prepared by the Latin American and Caribbean Regional Office, and includes an evaluation report on the project provided by Comision Federal de Electricidad (CFE), the project's implementing agency. The main objectives of the project were to assist the sector by: (a) promoting the efficient use of electricity through realistic pricing, energy conservation and improved sector operations; (b) diversifying sources of power generation; (c) strengthening CFE's financial position, (d) making electricity available to more consumers; and (e) improving CFE's abilities to deal with the social and environmental aspects of hydroelectric projects. The project included construction of: (i) the 960 MW Aguamilpa hydroelectric dam and associated works, including 255 km of transmission line; and (ii) the 280 MW Zimapan hydroelectric dam and associated facilities, including a 20 km long tunnel and 150 km of transmission line. Institutional strengthening components included preparation of policy statements and field manual to help CFE execute the social and environmental aspects of hydropower schemes. The project also funded studies of conservation, energy efficiency and cogeneration programs to improve CFE's power system, management and tariffs. The objectives of the project were partially realized. Completion of the two dams resulted in a 16% increase in hydroelectric generation capacity over that existing in 1988. However, the overall project cost at completion was 47.5% above the appraisal estimate, with the Zimapan component suffering a cost overrun of 98%, in part due to changes in design the design was not completed until after appraisal of the project. The number of customers increased from 15.5 to 20.1 million between 1989 and 1995. In the same period, performance and efficiency indicators for CFE, such as thermal plant availability factors, and the ratio of employees to electricity sales or consumers, also improved significantly. However, overall power system losses increased from 14% to 15.9% and CFE's losses also increased from 11 to 12%. CFE's finances were adversely affected by the decrease in the tariff from US$0.06 to US$0.04 per kWh between 1993 and 1996, due to: (a) the Government's decision to decrease industrial tariffs in 1993, and (b) devaluation of the peso by over 50% in 1994 without an appropriate rate increase to compensate the devaluation. Artificially low electricity tariffs remain a major disincentive for private cogeneration so that technical assistance to explore opportunities for cogeneration has had little success. A program to resettle 412 mestizo families was implemented unsatisfactorily: a large number of the families who had received financial compensation spent their money on consumption and were left without sustainable sources of livelihood or land. The project failed to establish compensatory protected areas ecologically similar to the flooded areas, although three protected parcels with a total area of 1,120 ha. smaller than the flooded areas in the Zimapan component, were to be set aside for this purpose. The Operations Evaluation Department (OED) rates the overall outcome of the project as marginally satisfactory (satisfactory in the ICR.), because of the partial realization of overall objectives, particularly financial and environmental objectives, as well as serious cost overruns on one of the dams. OED agrees with the ICR in rating project's sustainability as likely and institutional development as substantial. OED rates the Bank's performance as unsatisfactory (satisfactory in the ICR), as there were serious deficiencies in the preparation and appraisal of the project. The bid documents did not provide adequate provision for work variations despite: (i) revised designs that had been recommended by a panel of international experts not being finalized before the bids were issued, and (ii) relative inexperience of the borrower with carrying out hydro projects using outside contracting resources. As a result, implementation of the project was adversely affected and costs increased sharply. The environmental and mitigation strategies on the two hydro components were developed as the' project was implemented, without the benefit of design and preparation before appraisal. The key lesson is that the design and engineering of hydroelectric projects, bid packages, environmental mitigation and resettlement programs should be completed before appraisal or Board approval of the project. The ICR is satisfactory, and contains extensive data and information on implementation of this project. However, the economic reevaluation of the project is incomplete. An audit is planned.