Document of The World Bank FOR OFFICIAL USE ONLY Report No: 29341 IMPLEMENTATION COMPLETION REPORT (SCL-42740 PPFB-P3230) ON A LOAN IN THE AMOUNT OF US$12.7 MILLION TO THE REPUBLIC OF PANAMA FOR A UTILITIES RESTRUCTURING TECHNICAL ASSISTANCE PROJECT August 3, 2004 Finance, Private Sector and Infrastructure Department Country Management Unit for Central America Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective December 1997) Currency Unit = Panamanian Balboas (B/) B/1 = US$ 1.00 US$ 1.00 = B/1 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ANAM National Environmental Authority CAS Country Assistance Strategy (of the Bank) CLICAC Commission for Competition and Consumer Affairs CND National Dispatch Center COPE Energy Policy Commission (in the Ministry of Finance) CPE Energy Policy Commission ERSP Public Services Regulatory Agency ETESA Electricity Transmission Company FIS Social Investment Fund IDAAN National Institute for Water and Sanitation (Govt. Water/Sewerage Co.) IDB Inter-American Development Bank IFC International Finance Corporation INRENARE National Institute of Natural and Renewable Resources IRHE Institute for Hydraulic Resources and Electrification (Govt. Power Co.) MINSA Ministry of Health MIPPE Ministry of Planning and Economic Policy UTPP Technical Unit for Public Policy OER Office of Rural Electrification PAD Project Appraisal Document (of the Bank) PSR Project Supervision Report (of the Bank) RE Rural Electrification TA Technical Assistance UNDP United Nations Development Program UTPP Technical Unit for Public Policy (in the Ministry of Finance) Vice President: David de Ferranti Country Director Jane Armitage Sector Manager Susan Goldmark Task Team Leader/Task Manager: Paulo Correa PANAMA PA UTILITIES RESTRUC TA CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 4 5. Major Factors Affecting Implementation and Outcome 14 6. Sustainability 15 7. Bank and Borrower Performance 16 8. Lessons Learned 18 9. Partner Comments 19 10. Additional Information 22 Annex 1. Key Performance Indicators/Log Frame Matrix 23 Annex 2. Project Costs and Financing 25 Annex 3. Economic Costs and Benefits 27 Annex 4. Bank Inputs 28 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 30 Annex 6. Ratings of Bank and Borrower Performance 31 Annex 7. List of Supporting Documents 32 Project ID: P051124 Project Name: PA UTILITIES RESTRUC TA Team Leader: Paulo Guilherme Correa TL Unit: LCSFR ICR Type: Core ICR Report Date: September 20, 2004 1. Project Data Name: PA UTILITIES RESTRUC TA L/C/TF Number: SCL-42740; PPFB-P3230 Country/Department: PANAMA Region: Latin America and the Caribbean Region Sector/subsector: Central government administration (99%); Power (1%) Theme: State enterprise/bank restructuring and privatization (P); Regulation and competition policy (P); Infrastructure services for private sector development (S); Legal institutions for a market economy (S); Environmental policies and institutions (S) KEY DATES Original Revised/Actual PCD: 10/26/1997 Effective: 04/01/1998 05/08/1998 Appraisal: 11/29/1997 MTR: 07/05/2000 07/05/2000 Approval: 01/20/1998 Closing: 06/30/2001 01/31/2004 Borrower/Implementing Agency: REPUBLIC OF PANAMA/MIPPE/UTPP Other Partners: STAFF Current At Appraisal Vice President: David de Ferranti Shahid Javed Burki Country Director: Jane Armitage Donna Dowsett-Coirolo Sector Manager: Susan G. Goldmark Sri-Ram Aiyer Team Leader at ICR: Paulo Correa Jonathan D. Halpern ICR Primary Author: Steve Ettinger; Eduardo Zolezzi 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The development objective of the Utilities Restructuring Technical Assistance Project was to enhance the efficiency, improve the quality and expand coverage of infrastructure services by providing an enabling environment to mobilize private sector expertise and capital within an appropriate policy and regulatory framework. The key performance indicators were: (a) timely issuance of regulatory directives; (b) favorable assessment from the financial community and potential operators on entities to be privatized; and (c) adequate performance by key sector institutions in their policy, planning and regulatory roles. This approach was consistent with that used by the Bank in a number of earlier utilities sector reform projects, especially in Latin America. The sector focus was on electricity, water/sanitation and telecommunications. This project did not initiate the reform process, but rather provided support for its implementation. Transportation, was not included because major restructuring of this public utility sector (toll roads, railway concession) had already been completed, with Bank and IFC support. The project was amended in 2000 to reflect decreased support to privatization in the water and sanitation sectors, and increased demand for access to infrastructure by rural communities (with the loan financing part of the costs of rural electrification pilot projects). Relevance ­ The project was highly relevant to the country's development needs because, as shown by recent economic research, inadequate infrastructure has hampered economic growth in Latin America and the Caribbean (LAC). Panama is no exception. An improved sewerage system would also improve health and the environment. Earlier efforts to address infrastructure bottlenecks and inefficiencies by improving performance of the parastatals had had only limited success. At the time of project design, the Panamanian Government was committed to the reforms and had already passed key enabling legislation in the electricity (Law No. 6 of 1997), telecommunications (Law No. 43 of 1995) and water and sanitation (Decree Law No 2 of 1997) sectors, established the regulator for public services (Law No. 26 of 1996) and privatized the telecom company. As recent experience in LAC countries has shown, privatization by itself and the enactment of corresponding (broad) sector laws are not sufficient to induce efficient provision of infrastructure services. Good performance by utilities depends upon the enactment and enforcement of regulation and norms, and enforcement of concession contracts over time, which in turn requires a well-equipped regulator. A well-equipped regulator needs not only legal means (usually provided by sector law) but also well-trained professionals and access to modern regulatory instruments (such as regulatory accounting methods). The project was aimed at providing some of these needed resources. 3.2 Revised Objective: The objectives were not revised. 3.3 Original Components: The project consisted of four components - one for each of the three sectors and a multi-sector element. The bulk of the cost was for consultancy services, with smaller amounts for training and equipment. The project definition included a number of elements that were funded by a loan from - 2 - the Inter-American Development Bank (IDB) and that related to the Bank-funded portions. However, the Bank was not closely involved in the IDB-funded activities. Table 1 - Bank Loan Expenditures by Project Component, Expected and Actual (US$ million) Component Appraisal Estimate Actual % of Appraisal 1. Electricity 3.93 2.90 73.79 2. Water/sanitation 2.91 1.60 54.98 3. Telecommunication 2.64 3.40 128.79 4. Multi-sector 3.22 3.80 118.01 12.70 11.70 92.13 (a) The electricity component was intended to support restructuring and preparation for sale of the Government-owned Institute for Hydraulic Resources and Electrification (IRHE), which was the vertically integrated sector monopoly. In addition, it included the development of regulations by the Public Sector Regulatory Entity (ERSP), establishment of the Energy Policy Commission (CPE) and the Office of Rural Electrification (OER), and formulation of key policies and programs under their jurisdiction. The IDB funded the planning, transmission development, and upgrading of systems operations capabilities (b) The water/sanitation component included planning for the 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). In addition, the much larger IDB-funded portion covered the restructuring of IDAAN prior to privatization, development of the regulations, and watershed planning. (c) The telecommunications component included establishing a radio spectrum management system and developing the telecom regulatory capacity of ERSP. (d) The multi-sector component included public and consumer information, investment promotion, environmental measures (audits, review of guidelines, and oversight capacity building) and project management. 3.4 Revised Components: In the last quarter of 2000, pursuant to a request from the Vice-Minister of Economy and Finance (October 25, 2000) and based on a midterm review mission to Panama (July 4-13, 2000), the water/sanitation component was reduced sharply from 23 percent of the appraisal estimate to approximately 17 percent, with the remaining funds being used to improve MINSA's capacity to carry out its core mandate of water quality surveillance. Approximately US$ 1.875 million were re-allocated to pilot projects and technical assistance to rural electrification. The rural electrification strategy was a key element of the energy restructuring and privatization programs. The Bank had appraised and found satisfactory the policies and procedures undertaken by the Office of Rural Electrification (OER) in the context of another loan (the FIS project, 4191-PAN). The Bank also considered that the pace of rural electrification was slow due to the scarcity of funding. On the other hand, progress had been quite limited in the water and sanitation sector. Most importantly, the new government (elected in 1999) made a policy decision not to proceed with the concessioning of IDAAN. Since Bank support was directed at the restructuring of - 3 - IDAAN and the performance of key sector institutions had been weak (MINSA and Dirección Nacional de Águas y Alcantarillados of ERSP), the component was downsized in favor of the above described priorities. The support to finance rural electrification pilot projects was not foreseen at the time the loan was signed and, as a result, the Loan Agreement had to be amended. 3.5 Quality at Entry: Quality at entry is considered satisfactory. The Project was consistent with the Bank's Country Assistance Strategy (CAS) and was substantially relevant to the country's development needs, as noted in Section 3.1. It built upon reforms that had been ongoing in Panama since 1995, especially the new legal and regulatory framework, and the establishment of ERSP as the regulatory agency. The project did not address generic issues related to the functioning of the public sector, especially bureaucratic and procedural rigidities related to procurement, hiring and budgeting, but instead tried to strengthen management, technical and administrative staff, and the functioning of the ERSP. Project preparation and design took an integrated approach to reform of these sectors, covering policy, regulation and privatization. The project design was consistent with that in other countries in the region and elsewhere undergoing similar reforms. The electricity sector was restructured by breaking up the public sector monopoly -- the Institute for Hydraulic Resources and Electrification (IRHE) both horizontally and vertically, and selling four generation and three distribution companies, while retaining transmission as a public corporation. This was a reasonable approach: some countries have privatized transmission as well, but then faced difficulties in designing the right incentives for new transmission investments. The reform of the electricity sector in Central America gained from previous experiences in other LAC countries. The reforms in Chile, Argentina, Peru, Colombia and Bolivia were implemented between 1990 and 1994. In general, the models chosen followed more market-oriented approaches. As a result of considerable project preparation, there was significant progress even prior to Project start-up, and effectiveness came comparatively soon (4.5 months after Board presentation). The original closing date, 41 months after Board presentation, was very optimistic from the start, given the history of such TA projects (with several implementing agencies and a multitude of sub-components) and, in particular, given the expected change in Administration during the second year of implementation. Eventually, the closing date was extended by 31 months. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: Standard procedure would lead to the evaluation of the achievement of project objectives according to the key performance indicators presented in the PAD. The proposed indicators are however subjective (as for example the "timely issuance of regulatory directives") and difficult to measure indicators ( "adequate performance by key sector institutions in their policy, planning and regulatory roles") and biased toward certain social groups ("favorable assessment from the - 4 - financial community and potential operators on entities to be privatized"). More importantly, they are indirect indicators for the enhancement of the efficiency, improvement of quality and expansion of coverage of infrastructure services through adequate private investments, the final goal of this operation. Instead applying the standard procedure, the evaluation will be based on objective, unbiased and direct measures for efficiency (productivity), quality and coverage of infrastructure services. Based on these criteria, the overall development objective of the Project was satisfactory, as Panama enhanced efficiency of provision, improved quality and expanded coverage of electricity and telecommunication services after the implementation of reforms supported by the loan. The water and sanitation reform program was not implemented by the government and this project development objective was not achieved, something predicted since the 2000 project amendment. The rural electrification sub-component was not originally part of the development objectives in the Loan Agreement. This is not to say that if we use the proposed indicators the conclusion would change. In fact, the Ente Regulador de los Servicios Públicos (ERSP) has satisfactorily issued regulatory directives that were key for the evolution of the reforms, such as (i) preparation of regulations for sector liberalization, technical norms and regulations, and (ii) purchase and installation of a modern radio spectrum management and monitoring system. Also, 51 percent of Instituto de Recursos Hidráulicos y Electrificación (IRHE) were sold for US$ 300 million indicating the assets were satisfactorily evaluated by the financial community. Finally, the performance of sector institutions may be rated from partial satisfactory (policy bodies for the electricity) to satisfactory (ERSP). The remainder of this section provides some quantitative evidence supporting the conclusion that Panama enhanced efficiency of provision, improved quality and expanded coverage in the telecommunications and electricity sectors. Some qualitative evidence about the progress in the overall "policy and regulatory framework" enabling these achievements is also included. The information below compares the performance (efficiency, quality and coverage) of the telecommunications and electricity sectors in Panama, Guatemala, El Salvador and Nicaragua, considered to be the "best approximation available" of a control group for Panama. The graphs present the evolution of the selected indicators five years before and after the changes in ownership of the company. We define the last year when each firm was owned by the government as the "year equals zero", standardized each indicator to level equals to 100 that year and built the series using the weighted average (by number of connections) of the change of the indicator across the firms. The graphs contrast the weighted average of Panamanian firms with the same averages for the three comparator countries. Data come from "The impact of Privatizations on Firms in the Infrastructure Sector in Latin American Countries". Andres, L; Foster, V. and Guasch, L. The World Bank 2004. In the electricity sector, coverage increased six percent after privatization, showing a positive impact. The average rate of change in coverage also changed positively, as shown by the difference in the slope of both trends (dotted lines). This increase is nevertheless lower than comparator countries which is ­ at least in part ­ explained by the fact that Panama had much higher coverage ratios at the time privatization occurred. In fact, at the time privatization occurred in each of these countries, 81 percent of the Panamanian population had access to - 5 - electricity in comparison with 55 percent in Nicaragua, 65 percent in El Salvador, and 57 percent in Guatemala. Panama experienced the best enhancement in labor productivity and loss reductions among the four countries. Also, the average rate of improvement in labor productivity and distribution losses in Panama was much higher after privatization, as shown by the difference in the slope of the trend curves in each of the corresponding graphs (dotted lines). In the telecommunications sector, there was an increase of fixed line coverage although lower in Panama than in the other countries. Like the electricity sector, this was ­ in part -- a result of higher coverage ratios at the time of privatization. While Panama's coverage was 13 percent, Nicaragua's, El Salvador's, and Guatemala's coverage ratios were 3 percent, 6 percent, and 4 percent respectively. Average rates of improvement, as shown by the trend lines (dotted lines), are better after privatization for both coverage and labor productivity. The rate of improvement in digitalization seems to have worsened after privatization (flatter trend line) but this is due to the fact that Panama reached a digitalization level of 100 percent of the network in 1998 (one year after privatization). In addition, much of the population had been shifting to mobile telecom services from fixed-line services: there were 419,000 fixed lines and only 86,000 mobile phones in 1998, compared to 380,000 fixed lines and 834,000 mobile phones in 2003. Electricity - Distribution Electricity - Distribution Coverage: Residential Connnection per 100 HHs Labor Productivity: Connections per employee 130 300 120 250 110 200 100 150 90 100 80 50 -5 0 5 -5 0 5 t t Panama SV+GT+NI Trend before Trend after Panama SV+GT+NI Trend before Trend after Electricity - Distribution Fixed Telecommunications Distributional Losses Coverage 110 300 100 250 200 90 150 80 100 70 50 -5 0 5 -5 0 5 t t Panama SV+GT+NI Trend before Trend after Panama SV+GT+NI Trend before Trend after - 6 - Fixed Telecommunications Fixed Telecommunications Labor Productivity: Total Connections per Employee % of the network digitalized 600 140 400 120 100 200 80 0 60 -5 0 5 -5 0 5 t t Panama SV+GT+NI Trend before Trend after Panama SV+GT+NI Trend before Trend after The performance described above is closely related to a regulatory/policy framework with well defined rules governing private returns prior to privatization; an established independent regulator and the separation of policy-making and regulatory functions as well as their allocation to different bodies. This reflected for example the existence of the ERSP (the regulator), the Oficina de Eletrificación Rural (OER -- responsible for the government's rural electrification strategy) and the Comisión de Política Energética (COPE -- responsible for energy policy as a whole) ruling the electricity sector. Even considering that the performance of each of these institutions was significantly different, as discussed in further detail in the next sections, the clear definition of the attributions of each institution and the allocation of these attributions to different bodies is an important achievement because it discourages regulatory opportunism, rent-seeking and illegitimate contract renegotiations, contributing to a more stable regulatory regime. At present, ERSP has about 140 permanent employees and 30 contract employees. Most higher level staff come to ERSP with many years of professional experience in their respective sectors. About 20 percent of them have graduate degrees. Most of the technical staff have an engineering or legal background, as is common in the initial years of regulatory agencies in developing countries. Yet, ERSP could benefit from an improvement in its staff mix towards an increase in the share of economists. Training -- including that supported by this loan -- has been a very important component of the ERSP's strategy to build capacity and bring technical reputation to the institution: the amount of training (internal and external seminars and field visits) received between December 2000 and May 2001, for example, was equivalent to 2,868 hours (corresponding to at least 20 hours per staff), a remarkable achievement. ERSP salaries are higher than most government entities even though for highly specialized staff in the electricity and telecommunications sectors, salaries may be not competitive with those paid by the private sector. ERSP, however, has also been able to attract former employees of the regulated companies, compensating for the relative high turn-over of its staff (again a common event in the region). ERSP has managed to issue timely key directives, as for example, reviewing the norms setting transmission and distribution tariffs in the electricity sector during 2001. In 1999, it also established the appropriate norms enabling competition in the mobile phone market between a verticalized fixed-phone incumbent and a de-verticalized provider of mobile phone services, another remarkable achievement strictly related to the increase in access to mobile services described above. Overall, ERSP is better organized, better staffed, better funded, better trained and, until recently, better led than the regulatory agencies in El Salvador, Guatemala, Honduras and the Dominican Republic. It survived the 1999/2000 events essentially unaffected. The loan - 7 - particularly contributed to smoothing this transition by intensifying the dialogue and the provision of information to the new administration. 4.2 Outputs by components: a) Electricity Sector: This component is rated as satisfactory, given the successful overall transformation of the sector, despite some problems. The loan supported the preparation for privatization of IRHE and the development of key complementary regulation and norms. The regulatory system is well-structured, if rather sophisticated for such a small country. In the regional context, and compared with the other three Central America countries that implemented electricity sector reform, Panama's electricity sector is functioning reasonably well, with a capable and respected regulatory institution. After some necessary adjustments, service standard improvement targets are being progressively met. Investments in generation, transmission and distribution have been adequate to meet the country's needs for at least the near future. The distributors and some of the generators consider Panama to have been a better investment than most other countries in the region. The loan also provided technical assistance for the formulation of energy policy (COPE) and the rural electrification program (OER), although the impact of these initiatives has been less compelling due to the government's lower interest in implementing the Project's recommendations. When petroleum prices began to rise in 2003, the Government started to pressure ERSP to keep consumer prices low (a large portion of generation in Panama comes from thermal plants that use petroleum fuels). This has constrained ERSP to interpret the pricing rules for payments to generators (which are passed on to consumers by the distributors) in ways that minimize those prices increases, a controversial decision. While some such controversies are normal, especially in a newly reformed system, and while it is difficult to judge the merit of each of these complaints, it does appear that the Government is not prepared to accept price increases in utility services (public opinion is opposed to such increases). For the last 18 months the government has opted to provide direct subsidies to the sector in lieu of allowing the application of automatic tariff adjustment formulas included in the tariff regime. The option taken by the Government of Panama -- although disputable in terms of priorities for budget allocation -- showed some respect for the existing contracts, a remarkable feature in a region with a poor history of contract renegotiation. The short-term risks for the electricity sector are not significant but, in the longer term, the discouraging of private investment could lead to shortages and/or more Government intervention in the sector, especially as investment requirements for the next ten years are estimated to exceed US$1 billion. (i) Develop framework for privatization of IRHE: this was highly satisfactory, as IRHE was privatized (51 percent sold) in a way that was widely accepted as fair and transparent. IRHE was divided into eight different companies. The government sold 51 percent of the shares of the distribution companies and of one thermal generating company as well as 49 percent of the three hydro generation companies, two of which merged later. It retained 100 percent of the shares of the transmission companies. The prices paid (a total of some US$300 million each for generation and distribution) were relatively high and considerably above the set minimums, indicating positive investor sentiment. The loan helped to prepare some of these transactions. - 8 - (ii) Increase market competition: this element was satisfactory, even though actual competition has been limited to date and is likely to remain so in a system as small as Panama's. The generation subsector attracted additional private investment in connection with and soon after privatization. As the initial contracts expire, distributors are seeking to increase competition in generation by offering long-term contracts that could attract new investors in generation. Furthermore, the transmission network is adequate. There are no major bottlenecks that limit competition. Potential interconnections with both Colombia and Central America (the SIEPAC project is already under construction but the financial feasibility of interconnection is still uncertain) could increase competition over the longer term. In addition, ERSP has done a satisfactory job favoring competition and at the same time preventing abuse of dominance by incumbent firms. Distributors have not faced much competition from generators, as only six large clients, representing less than one percent of total demand, have chosen to purchase power directly, bypassing the distributor. Introducing competition in distribution is nevertheless a challenge elsewhere and its impact on the end consumer is very limited. Yardstick competition provides a better alternative in this case. (iii) Strengthen policy and regulatory oversight capabilities: this is rated highly satisfactory. The regulator (ERSP) is functioning reasonably well in the power sector and has carried out its heavy workload satisfactorily. The project as highly satisfactory in terms of providing necessary and very relevant training to ERSP staff dealing with the electricity sector. However, it has been hampered in developing its capabilities by civil service regulations and the Civil Service Commission in ways that limit its flexibility and ability to acquire the necessary high-level staff who can deal adequately with the large international companies being regulated. Yet, experts in the power sector interviewed for this ICR consider ERSP one of the best equipped regulatory agencies in the region in terms of human and material resources. (iv) Refocus the rural electrification (RE) program: this is rated unsatisfactory, mainly because of institutional problems with the OER, politization of the program and serious payment problems to contractors due to lack of counterpart funds. This component was added through an amendment to the loan at mid-term review. At first, the Government RE policies and its investment design that would support local industry worked well and achieved important economies of scale from combined bidding for multiple sites. In fact, a satisfactory policy/institutional performance was one important reason to increase the amount of resources allocated to this component, as discussed before. After the mid-term review, the Bank agreed to finance RE investments, and the procurement started out well. However, the problems started when the Government transferred OER to the Social Investment Fund (FIS) in the Office of the President, with the stated goal of better integrating rural electrification with agricultural and other rural investments. Individual Congressmen were given the right to allocate additional resources to provide the counterpart funding in their own districts, and given a major say in the choice of investments. Thus, what had originally been an economic/technical concept -- allocating rural electrification resources where they could earn a return -- became a politicized program. Furthermore, FIS lacked both the expertise and the interest to implement rural electrification effectively. Later, the Government abolished this approach, before almost no counterpart funding was actually provided (but after all of the procurement had been carried out), because of conflict between the executive and legislative branches. As a result, even though the contractors carried - 9 - out all of the work, they did not get paid. Despite these problems, the project financed a total of 64 individual grid extensions in an equal number of localities. The project covered all regions of Panama. Twenty-three grid extensions in the west; twenty-seven in the center; and fourteen in the east (where the Darien region is located.) This component has contributed in part to the increase of the electrification index of the country in recent years (at mid term review this index was about 67.5% and at the end of 2002 it was 75.5%.) The Government is preparing and evaluating enacting a new rural electrification law, to deal with increasing cost to electrify localities with low demand and more difficult to reach. While this RE subcomponent is rated as unsatisfactory, it does not affect the overall rating of the electricity component to a great extent because project funds were properly allocated, and procurement, contracting and works execution were completed. b) Water/Sanitation Sector: This component is rated as unsatisfactory, because the privatization (by concession) of IDAAN was blocked for political reasons. Because of widespread public opposition to water privatization (stemming from a belief that water was too essential to life to be in private hands), all of the leading candidates in the 1999 election ran on a platform of keeping IDAAN in the public sector and maintaining low water tariffs. When privatization was stopped, all of the concomitant reforms were blocked as well, including giving ERSP full regulatory authority in the water sector and developing policy capacity in MINSA. The result was that IDAAN has remained a largely unregulated monopoly. As a result, after a year of dialogue and negotiations, the government and the Bank agreed to reduce the size and coverage of the component, restricting it to those activities which still made sense to do with an "unreformed" sector - namely the rural water supply/sanitation program and the water quality/health monitoring. The IDB froze its operations in the sector, and eventually cancelled US$49 million out of two loans (a US$25 million tranche from an adjustment loan, and US$24 million of investment in the sector). A new law (end-2001) restructured the IDAAN Board to include private sector representation. In addition, the Government made available to IDAAN investment funds stemming from the privatization of the electricity and telecom sectors. However, the basic financial problem of IDAAN has not been resolved, because it is prevented from increasing its rates to cover its costs. Furthermore, because the low price per unit consumed is combined with a high connection fee, the tariff is regressive. (i) Develop framework for privatization of IDAAN: this is rated unsatisfactory, since although considerable work was done in designing a good framework, the Government decided not to implement it. The process had reached the point where six consortia were pre-qualified to participate in the bidding, but, in February 1999, in the face of the opposition from the public and the leading presidential candidates, the outgoing administration decided to suspend privatization pending the results of the election. The decree law to establish the new legal and institutional framework had been issued in January 1997, and key directives related to standards, tariffs, subsidies etc. had subsequently been prepared, but were never issued. (ii) Expand drainage and sanitation services: this is rated unsatisfactory, as IDAAN has lacked the resources to make the necessary investments. This was a component that was to be financed by the IDB, which had financed a master plan to clean up the Bay of Panama. - 10 - Apparently, however, the planning is still moving forward, and financing for the clean-up is being sought. (iii) Strengthen policy and oversight functions: this is rated unsatisfactory, as MINSA never developed adequate policies and oversight capability in the water sector. Such a lack of capacity in the responsible ministry is not uncommon when the utility remains in government hands. A number of policy studies were prepared under the Project, but MINSA was unable to assess them, much less begin implementation. Some progress has been made in strengthening MINSA's capacity to carry out its responsibilities to ensure that the quality of drinking water that the Panamanian population consumes is adequate. For example, the project complemented the Government of Panama's efforts to increase the capacity of Laboratorio Gorgas, MINSA is main laboratory for the analysis of drinking water. While the Government funded badly needed renovations to the building and is financing the construction of a new wing, the Project financed the acquisition of some modern analytical equipment. Also, the Project funded the design of a monitoring system of drinking water quality in the rural areas, for which MINSA has direct responsibility. The implementation of this system is pending. The project also financed a similar study, the "Design of a Monitoring System for the Quality of Drinking Water in the Urban Centres of Panama", for the benefit of ERSP, an institution that currently has the responsibility of ensuring that the quality of drinking water delivered in the cities of Panama is adequate. The proposed monitoring system is still to be implemented. (iv) Develop rural water supply/sanitation program: this is rated as satisfactory (marginally) as MINSA basically invested in small town rural systems, showing a reasonable capacity of focusing prioritization, even though the overall execution of the component was rather uneven. (c) Telecommunications Sector: This component is rated as highly satisfactory, because the Telecommunications Sector in Panama had very strong growth during the Project period, reaching near 400,000 fixed and 800,000 mobile lines, as Figure 1 shows. This impressive performance is the result of a clear regulatory framework, open competition policy and a functioning regulator that operators trust. Our Project has contributed to these results. The telecom staff is considered the strongest part of ERSP. They have managed well the opening up of the sector. As a result, service has been expanding to meet demand, at stable to falling prices. In particular, after the Cable & Wireless 5-year exclusivity period came to an end at the start of 2003, fixed service prices for calls to the US plummeted from US$1.00 to US$0.15 per minute, and long distance calls within Panama dropped from US$0.15 to $0.10 per minute. More recently, the Government has removed the US$1.00 per call tax on international calls; this has enabled the development of "call centers" with some 5,000 total direct employees. The prices of mobile phone calls reduced roughly on average 30 percent in late 2003, in part due to a cost study financed by the project. This is a good example of the importance of the provision of appropriate regulatory tools: the study generated information on comparative costs of mobile phone calls enabling the regulator to better negotiate with the incumbent firms. There has been some conflict between the new entrants and Cable & Wireless regarding interconnection ­ as is typical in such - 11 - situations, with "heavy-handed" regulation needed to offset the incentives for Cable & Wireless to delay interconnection as much as possible. Finally, no executive agency has been given responsibility for telecom policy, leaving this de facto in ERSP, which tends to blur the boundary between policy and regulation. One policy issue that needs to be addressed is the support for rural telecom, because Cable & Wireless's obligations to provide the (unprofitable) service terminated with its exclusivity period. (i) Develop the radio spectrum management system: this is rated highly satisfactory, because the system was installed, tested and commissioned, and is fully operational. It allows the regulator to issue new licenses, solve interference claims and stop illegal use of the spectrum, thereby ensuring investors of a clean and reliable use of their radio frequency licenses. This was the single largest use of Bank funds (US$3 million) in the project. (ii) Develop monitoring systems and procedures for the granting of new licenses and concessions: this is rated highly satisfactory, as ERSP has developed the necessary systems and procedures for overseeing auctions, monitoring compliance and has granted numerous licenses. It has granted 25 concessions to four companies for local, long distance, international, public telephone and leased lines services, in preparation for the expiration of Cable and Wireless' legal monopoly (January 2003). It also awarded access codes to facilitate competition. The ERSP has significantly improved its capacity to manage dispute resolution among operators. (iii) Train ERSP staff: this is rated highly satisfactory, as the ERSP telecom unit is now staffed by a cadre of young, well-trained engineers, economists and lawyers. It passed a major test by handling the opening up of the sector relatively well, including the issuance of some 120 new licenses to 58 different companies (in local, domestic long distance, international, public phones and rental of voice circuits). This is generally considered to be the best-staffed part of ERSP. d) Multi-sectoral: This component is rated as satisfactory, because the environmental audits and the public opinion surveys have been carried out, and the environmental liabilities assigned appropriately. (i) Gauge public opinion through surveys: this is rated satisfactory, because the surveys have been carried out as results have been reasonably disseminated. One of the early surveys was designed to provide information on how to structure the IDAAN privatization process. More recent surveys, on the public perception of the reforms and privatization, have shown large and growing dissatisfaction. In particular, the failure of the power tariffs to fall is perceived by the public at large as a failure of the restructuring, even though it was due to rising international oil prices. As the Bank has increasingly recognized, this is a general sentiment regarding infrastructure reforms carried out in the 1990s in Central America and in other countries in the region. (ii) Complete environmental audits and standards/guidelines: this is rated as satisfactory, because consultants carried out the environmental audits and the identification of responsibility for environmental liabilities, prior to the privatization of IRHE. The concession agreements incorporated the corrective measures required. With ANAM as the implementing agency, the - 12 - project also financed the preparation of guidelines for monitoring emissions (noise, gas, liquid and solid), from power plants as well as acquired field equipment that would enable the ANAM staff to carry out such monitoring. Environmental audits were also carried out for IDAAN, but their recommendations about the allocation of liabilities became moot when privatization was cancelled. Initially, this work was coordinated by ERSP, but subsequently the new National Environmental Authority (ANAM) took over responsibility for environmental monitoring of these sectors, and issued the necessary standards and guidelines for the electrical power sector. However, ANAM has been rather slow to develop into an effective organization. It was reorganized twice during its first two years, and suffered from a lack of clarity about its role in the water/sanitation sector, vis-à-vis both MINSA and ERSP. With MICI as the lead agency, the project financed a study that proposed an accreditation system for analytical laboratories of Panama. Such a system would ensure the reliability of the analytical results that serve as the basis for assessing the quality of drinking, surface and ground waters in the country. This often overlooked element is essential not only for public health reasons, but also to ensure that the establishment of investment priorities in the water sector is based on correct information, a basic element in ensuring their effectiveness. This is a complex project with successes (satisfactory and highly satisfactory ratings) in most of the components and some unsatisfactory performance in others. In this context, a natural issue would be to discuss the criteria to be used for aggregating each individual rating in one final score for the whole project.. Note, however that the overall evaluation of the project was based on the direct indicators provided in section 4.1. As such, the final rating of the project does not result from any weighted sum of sub-components ratings. The advantage here is that the final rating of the project does not depend on any arbitrary weights imposed to each sub-component. Still, by discussing each sub-component in its own specificity, this ICR offers a deeper assessment their achievements and helps to build the bridge between those outputs and the final outcomes described in section 3.1. 4.3 Net Present Value/Economic rate of return: Not applicable 4.4 Financial rate of return: Not applicable 4.5 Institutional development impact: The Project's institutional development impact was substantial overall, with the development of ERSP and National Dispatch Center (CND) quite successful. The Energy Policy Commission (COPE) was only a partial success, and OER and MINSA (as regards water/sanitation) were basically unsuccessful. Below is a description of each of the institutions created or strengthened in connection with the Project. (i) The development of the Regulatory Entity for the Public Sectors (ERSP) is one of the - 13 - Project's signal achievements. ERSP survived a difficult transition to the new Administration in 1999, exacerbated by criticism for not preventing price increases. It successfully resisted efforts to make the Directors' terms coincident with the political cycle. It is generally viewed as stable, competent and objective. It created a Market Vigilance Group of three international experts to monitor the performance of the wholesale power market and of the National Dispatch Center (CND), and takes their confidential reports seriously. Difficulties in hiring, because of civil service salary and procedural restrictions, have kept ERSP from developing a sufficient corps of high-level staff who can deal well with the large private sector firms it regulates. Furthermore, its work in the power sector is complicated by the sophisticated and complex power regulatory system. Experts consider the ERSP in a much better position than its counterparts in El Salvador and Guatemala, in terms of human, technical and material resources, as well as in terms of its reputation (political resources). In the water/sewerage sector, ERSP has had only a limited role and capability. However, the legal instruments have been in place to expand this, and in 2003 ERSP began monitoring water quality. These achievements of the ERSP, most of which are supported by the loan, are key steps towards a stable environment conducive to better performance and increased private participation in the provision of infrastructure services in Panama. (ii) COPE was created under the Ministry of Finance and has functioned as a study and planning unit. Its Executive Director was appointed in 1999, but the institution has remained relatively small, undermining its role as a policy advisor unit. Given the new design of the electricity industry in Panama, COPE is an essential institution, as international best practice recommends allocating policy-making and regulatory functions to different institutions. COPE's longer-term status, however, is not secure: its staffing as well as special studies have been financed by the Bank loan and bilateral donor funds. Part of the problem is that the Ministry of Finance is not an ideal home for such a unit, but in the absence of any Ministry of Energy, there is no obvious alternative. (iii) The National Dispatch Center (CND) and its Operations Committee have operated under the administrative aegis of the transmission company, ETESA. While there has been some dissatisfaction about their being under ETESA, and full independence would be a better long-term arrangement, they are generally considered to operate in a transparent and collaborative manner. It also has a well-respected technical reputation. (iv) The Office of Rural Electrification (OER) has lost most of its trained staff, and has been hampered by a lack of management continuity, particularly since its transfer to the Social Investment Fund (FIS). This raises serious questions about the Government's ability to implement its rural electrification strategy of extending service to the rural population not currently connected. (v) The Ministry of Health (MINSA) was the counterpart agency for the water and sanitation studies, but lacked the capacity to assess them and implement their recommendations. It appears not to have given water and sanitation policy a high priority, and has instead left this mainly in the hands of IDAAN (which as an operating company is not in the best position to be setting policy). - 14 - 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: The most important development affecting the project was the failure of the incumbent administration to gain public support for the reform agenda. This was expressed most clearly by the popular rejection of a second term for the incumbent president and his replacement by a candidate that opposed the reforms. Diminishing public support for the reforms slowed project implementation, bringing it to a virtual halt in the water sector. The electricity and telecom components were much less affected because sector reforms progressed faster and had already been implemented at that time. A second important external factor was the increase in international oil prices, which has led to an increase in the price of electricity under the tariff formula. This price increase had two particularly unfortunate effects. First, it undercut popular support for the reforms. Second, it eventually led the Government to pressure ERSP for a freeze in electricity prices, thereby undermining the regulatory system. 5.2 Factors generally subject to government control: The transfer of responsibility for rural electrification to the FIS has slowed and politicized the program. The decision by the incoming Administration in 1999 to honor its campaign promises to freeze water prices and stop giving control of the water/sewerage utility IDAAN to the private sector by concession undermined the water/sewerage component of the project. 5.3 Factors generally subject to implementing agency control: The loan performed remarkably well, due to high efficiency and standards of professionals within the Technical Unit for Public Policy (UTPP). The delay in disbursement of funds that motivated the last extension of the loan (June 2003 to January 2004) and than the four months grace period (February-May 2004)2 were motivated by delays at OER and the Government's fund counterparts. 5.4 Costs and financing: Total Project costs over the implementation period were US$ 11.7 million or 92.3 percent of estimates at Board presentation of the loan (US$ 12.70 million). As shown in Table 2, cumulative Project loan disbursements lagged appraisal estimates. This is because the estimates did not take adequately into account the usual delays in project start-up and during governmental transitions. In addition, when the IDAAN privatization was blocked, some of the funds were reallocated to new activities, and the main one of these, rural electrification, then ran into its own difficulties. - 15 - Table 2 ­ Cumulative Bank Loan Disbursements Fiscal Year Appraisal Actual Actual/ Estimates (US$MM) Appraisal (US$MM) 1998 1.73 1.40 81% 1999 6.83 3.01 44% 2000 10.57 5.81 55% 2001 12.70 6.54 51% 2002 12.70 8.57 67% 2003 12.70 9.93 78% 2004 12.70 11.72 92% 6. Sustainability 6.1 Rationale for sustainability rating: Overall sustainability is assessed as likely. The telecom sector has been performing well and has fully opened up to competition in January 2003. As such, the sector performance is not subject to political controversies and we see as negligible the likelihood that the reforms will be reversed. In electricity, there is adequate power supply, quality has improved and coverage is large. Thus, in the foreseeable future there is a low probability that the reforms in this sector will be rolled back. The regulatory system is, for the most part, functioning well, and survived its first governmental transition. Foreign investors generally consider Panama to be one of their better investments in the Central American region. ERSP has also expressed its interest in proceeding with the implementation of the monitoring system for drinking water quality in the urban centers. Recent elections brought the pro-reform administration back to the Government. Together with the chance to learn from previous experience, this change in the political cycle increases the likelihood of sustainability of the results achieved by the Project. For example, Congress did not ratify one of the three recent appointments to the ERSP board. The new government, coming in September is willing to appoint another person to overcome the impasse. The biggest problem in the long term is the generally negative public perception of privatization in these sectors, and of the regulatory system. In this respect, Panama is similar to many other countries in Latin America. There is a growing consensus that the benefits of the reforms were oversold, leading to a negative reaction when the benefits turned out to be less than anticipated, especially in terms of tariffs (electricity prices have risen moderately but telecommunication prices have dropped significantly). 6.2 Transition arrangement to regular operations: Because this is a technical assistance project that financed a wide variety of consultancies, studies and training, this heading does not really apply to most of the project. However, there is one - 16 - issue worth noting. With the closing of the Bank loan, COPE is losing an important source of funding. Funds are being sought from the IDB and it is unclear whether the government will provide adequate budgetary resources to support COPE 7. Bank and Borrower Performance Bank 7.1 Lending: Bank performance on lending was satisfactory. The Bank had been involved at the sector strategy level, using the Economic Recovery Loan, but then agreed that the IDB would assist with the drafting of the legislation. However, it did permit a senior Bank staff member from Panama to consult for the government for a year. He played a key role in designing the ERSP. The PAD is clear and covers the issues and risks adequately. It does not discuss the generic problems affecting government agencies in Panama, as the Economic Recovery Loans were supposed to address these issues. 7.2 Supervision: Bank performance on supervision was satisfactory. The Bank made effective use of senior specialists and showed good flexibility in adjusting the project to the changing situation in Panama. Working relationships with the Panamanian officials were good and the Project Supervision Reports (PSRs) were generally clear and frank. There was also high continuity, with just two changes of task managers (the second task manager continued to work on supervising this project as a consultant after retirement.) Until the July 2000 mid term review, Bank missions visited the project on average every five months. After that, the frequency of missions dropped in half, to once every ten months. This was justified because most of the difficult issues had already been addressed. Nevertheless, issues related to the rural electrification component seem to have received insufficient attention: although the Bank was creative and flexible in terms of initially trying to get the rural electrification component investments financed out of a different Bank project with the FIS and later amending the loan agreement of the current project, it was late to recognize the difficulties in obtaining counterpart funding for this component. One area in which the Bank could have done better is collaboration with IDB, which has focused more on avoiding duplication of efforts and ensuring consistency among the different initiatives sponsored by them. To reduce transaction costs, the project design favored a specific division of labor: the Bank took the lead on telecommunications and electricity and the IDB on water. 7.3 Overall Bank performance: Overall Bank performance was satisfactory. Borrower 7.4 Preparation: Borrower performance in preparation was highly satisfactory. The administration at the time was deeply committed to the reforms. It had already carried out the main legal and regulatory changes in two out of three sectors to be included in the loan with a reasonable amount of public consultation and consensus building initiatives. Not surprisingly, Panama has been more - 17 - successful than most countries in obtaining support from the labor unions. The telecommunication privatizations previous to the loan were considered transparent. The timing and sequencing of reforms also appeared to have been acceptable, with the sector laws and the existence of the regulator and of main regulation being put in place in the appropriate timing. 7.5 Government implementation performance: The government's performance in implementing the project was satisfactory (partially). The previous administration's performance (1998-1999) was satisfactory as it was effective in implementing project's recommendations and components but the administration that took office in mid-1999 did not share its predecessor's commitments to reforms and therefore was less effective in project implementation. Some observers may argue that the new government tried to undermine the autonomy of the regulator to fix tariffs in the power sector when the country faced an external shock due to the increase in oil prices but the debate between regulators and executive bodies over tariffs has been a widespread event in LAC region after external shocks, as for example in the case of the peso-crisis in Argentina or the 1999 exchange rate devaluation in Brazil. Given the novelty of the market and institutional environment, the concern with the impact of price increase on consumer welfare and political support may be seen as legitimate and, in it self, should not be taken against the government. It may also be argued that stopping the privatization of IDAAN the government negatively affected the loan and more importantly the performance of the sector. This may also not be the case: economic research has shown that, in some cases, the change in ownership is less important than the development of an appropriate incentive-compatible regulatory environment. In the water sector, however, it failed to implement the technical recommendations prepared by the project, as previously discussed. Also, due to fiscal constraints and rigid budgetary rules, it may have failed sometimes to provide full counterpart funding on time, resulting in delays mainly in the implementation of the rural electrification component. However, the overall loan's disbursement was not seriously affected, as 92% of the resources were effectively used. In practice, therefore, the government never affected significantly the flow of resources to the project. 7.6 Implementing Agency: UTTP's performance as implementing agency was highly satisfactory. UTTP was selected as the coordinating agency because it had already been established as the implementing arm of the Ministry of Finance for the infrastructure sector reforms and it had been used in both the Economic Recovery Loan and the IDB-financed Basic Infrastructure Sector Reform Program. After some start-up difficulties with the Project, UTTP performed remarkably well. It learned the Bank's procurement and financial reporting regulations and procedures, and implemented them accordingly, in coordination with the UNDP (the disbursement agent). It maintained continuity at technical level and developed good linkages with the other relevant Government agencies. 7.7 Overall Borrower performance: Overall Borrower performance was satisfactory. 8. Lessons Learned a. The water and sanitation sector was more difficult to privatize and introduce market-oriented reforms because people consider the provision of water at low (or even negligible) prices to be a basic right. The failure of this component in the Panama project reflects - 18 - the experience in the Latin American countries. Accordingly, greater attention needs to be paid to the social and political acceptability of these measures, and to building support for them. Also the privatization of IDAAN was not an end in itself but a means to achieve greater efficiency and improve quality of the service. The decision not to privatize is the exercising of a legitimate policy option regarding ownership. The causes of poorer outcome in the water and sanitation sector were not due to ownership but the fact that the government did not really follow through with adequate legislation to ensure that IDAAN could operate as an efficient commercial enterprise, once the decision to keep IDAAN a state-owned enterprise was taken. The Bank's support could have been more effective in the water and sanitation sector if it had helped Panama to provide such legislation and regulatory environment (e.g. for the development of yardstick competition). b. The establishment of a credible, stable and efficient regulatory system is a long-term activity that will have its ups and downs as any process of institution building. In Latin America, one cannot expect the degree of independence that is normal in the US or in the UK ­ which have quite different institutional endowments ­ to be created by the stroke of a pen (or the enactment of legislation). The Bank (and the IDB) was probably too optimistic in assuming that it would be possible to isolate the ERSP from the normal, traditional interference in its affairs by other government institutions. This optimism was based on the provisions of the law establishing the regulatory entity which provides for financial and administrative autonomy. More emphasis should be placed on obtaining government commitment towards the autonomy of entities such as ERSP and other regulatory bodies (e.g. the banking regulator and the antitrust agency). It is important to ensure that reforming countries get the appropriate support to capacity and reputational building activities as well as to obtain increased access to regulatory tools (information included), well-trained and stable staff, appropriate decision-making rules and processes; transparency and accountability mechanisms. These are necessary conditions for better decision-making by the regulator and thereby better performance of private utilities, enhancing the reputation of the new institutions and the increasing the acceptance of the reforms. c. Another relevant lesson is that the importance of policy-making in the context of market-oriented reforms have been underemphasized. This affects the several aspects of the performance of the privatized sectors ­ for example in terms of the use of social tariffs; or in terms of defining the appropriate policy for rural electrification ­ which in turns undermine the acceptance of market-reforms. The situation reflects a bias towards producer gains (increase in labor productivity) to the detriment of consumers (price reductions) and, more broadly, and emphasis on static efficiency gains to the detriment of dynamic efficiency (investments) and equity (access to the poor) issues. From the point of view of the project, this bias helps to explain the underperformance of the rural electrification component as well as the relatively lower performance of COPE. d. A positive lesson is related to the importance of competition. The main source of price reductions in telecommunications was probably related to a more competitive environment - either because technological conditions were more favorable than in other industries or because monopoly rights assigned through concessions did not last as long. On the other hand, one of the reasons for having so few large customers and therefore lower competition in the electricity market, as discussed before in this report, is the absence of pure energy traders. This is a major - 19 - shortcoming of the sector legislation: most "large" customers are in reality quite small and lack the necessary expertise to negotiate directly with generators, while generators are not interested in venturing into the retail business, particularly since they can either sell their whole output to the distributors or they can export part of their output to Central American countries. The importance of competition has been underemphasized by the Bank and future TA in regulation must pay more attention to its potential benefits as well as to needed institutional reforms . e. Finally, multi-sector TA projects are expensive and almost always take longer to implement than anticipated. In particular, allowances need to be made for: (i) the project unit becoming familiar with Bank procedures; (ii) the heavy workload of implementing many small components (about 40 in this project); and (iii) prolonged transitions between administrations. 9. Partner Comments (a) Borrower/implementing agency: With the support of the World Bank, the Government of Panama decided to carry out substantial reforms on its national infrastructure sector, including energy, telecommunications, and water and sanitation. The main goals concerned the enhancement of overall quality and efficiency of the services convened, the increase of public access to them, and the promotion of private investments in infrastructure. These activities were managed by Unidad Técnica de Políticas Públicas (UTPP) based at the Ministry of Economy and Finance. The Bank approved a loan of US$ 12.7 million, which became effective on February 1998. The target of this amount was to support the Government of Panama's proposed reforms at the end of the 1990s. They included: a) Enhancement of service quality and increased investment in future expansions b) Promote private investment while incorporating infrastructure services into the private sector c) Increase efficiency and tariffs revision d) Market reorganization to boost competition e) Definition of stable and clear regulatory framework f) Establishment of institutional framework in which the public sector would coordinate and formulate adequate policies (with an autonomous entity, the ERSP, exercising regulatory functions) while the private sector would provide financing and the actual services g) Creation of an autonomous regulatory entity, the ERSP Energy The reform in this sector aimed at the enhancement of quality and efficiency in the service provided through the private sector's participation. Therefore, the country had to create the conditions that would guarantee that private investments would be sufficient to meet the necessary supply of energy to an increasing local demand, and to develop institutions that - 20 - would regulate the sector. In 1999, the consulting company Leme Cemig was hired to define how to strengthen the Oficina de Electrificación Rural (OER) and create a national policy for rural electrification. Besides, the company Synex Ingenieros Consultores Limitada was hired to prepare a methodology to assess the economic value of the expansion of energy distribution by OER ( "Elaboración de la Metodología para la Determinación del Valor Económico de la Expansión de Proyectos de Líneas de Distribución"). The individual consultant Fernando Lecaros was hired to analyze the tariff regime, studying current and future demand as well as marginal costs and, moreover, develop an "Estrategia y Plan de Fortalecimiento Institucional para la COPE"). Additional assessments strengthening the Comisión de Política Energética (COPE) and its activities include: (i) "Estudio de Usos y Eficiencia Energética", which concerned a diagnosis and strategy of promoting energy efficiency in the country, by FIDE (ii) "Estudio Suministro Futuro de Electricidad", which included a strategy for future expansion of electricity generation, by SCN-LAVALIN International Inc. The project resulted in a strengthened COPE (under the Ministry of Economy and Finance), which effectively operates and monitors the energy sector, and in an organized and stronger OER. According to the institutions that were supported by the loan, the assessments described above assisted OER, ERSP, COPE and ETESA to work efficiently under the new legal framework. Nevertheless, there are issues in this sector whose resolution is still pending such as: (i) lack of competition by generators and big consumers, (ii) difficulties to transfer the real cost of energy to the final consumers, and (iii) high energy losses. Telecommunications The reform of the telecommunications sector aimed at the enhancement of quality and efficiency of the services provided through the participation of the private sector, increasing access to telecommunication services, private financing of investments, and development of the regulatory framework. Nonetheless, some steps have not yet been completed: (i) the creation of Oficina de Políticas de Telecomunicaciones is still being considered, (ii) data on rural access to telecommunication services is not updated, and (iii) due to the high rates for cellular phone calls, mechanisms to reduce their impact on the user could be created (e.g., charge for seconds instead of the full minute). Water and Sanitation Originally, the restructuring of the water and sanitation sector was supposed to expand sanitation services, efficiency and quality of the water supply and sewage. These goals were to be met with the participation of the private sector, the establishment of regulations for the sector, and through capacity building within the Ministry of Health to perform its duties related to sanitation. - 21 - The reform did not flow as expected. Initially, the loan supported a technical assistance portion to prepare the process of concessions. However, after the government, due to popular demand, decided to reconsider the participation of the private sector in this area, the project provided technical assistance to the Ministry of Health through the creation of a department to formulate policy initiatives in the sector. . The Dirección del Subsector de Agua Potable y Alcantarillado Sanitario (DISAPAS) received the consulting from TDS Consulting, which designed the vigilance system for potable water in rural areas. Although the participation of the private sector in the sector did not take place as initially planned, the loan provided important assistance, specially on labor training and on studies oriented to strengthen the Instituto de Acuerdos y Acantarillados Nacionales (IDAAN) to make it capable to negotiate future concessions and to the accounting of its assets. There are several issues pending on this sector such as: (i) restructuring of the Instituto de Acuerdos y Acantarillados Nacionales (IDAAN), (ii) development of a plan to expand sanitation services to rural areas, (iii) revision of tariffs for water, and (iv) a definition of methodology for application of required subsidies. Some of these issues, however, are at present being addressed through projects that are financed, or to be financed, by other international financial institutions. Multi Sectorial The consultancy firm Hagler Bailly was hired to support the Ente Regulador de los Servicios Publicos (ERSP) to apply legal and technical tools, identify critical issues, define responsibilities of ERSP, and define human resources requirements. The Ente Regulador de los Servicios Públicos (ERSP) received assistance in diverse activities. Hagler and Bailly was hired to train staff working in different sectors. The Dirección de Agua was beneficiary of the consulting by TDS Consulting, which designed the vigilance system for potable water in urban areas. The Dirección de Telecomunicaciones hired Tadiran Electronic System to design, provide and install a radio electric spectrum monitoring system. This system allows a single spot in Panama City to monitor the use of radio electric frequencies by telecommunications, radio and television companies throughout the country. In addition, some consultants were applied on regulation of telecommunication, especially on pre-subscription and access codes, as well as interconnections. Moreover, a videoconference system was acquired and installed. In addition, the equipment acquired for monitoring the radio electric spectrum was fundamental for the Dirección de Telecomunicaciones to supervise and monitor private sector activities on this sector. The Autoridad Nacional del Ambiente (ANAM) received technical assistance on the following activities: (i) the development of a baseline definition for environmental impacts as well as the creation of environmental technical rules and procedures to supervise the impact of actions of the private sector to the environment, (ii) interpretation and evaluation of environmental audits by the consultant Ernesto Triana, (iii) the development of environmental guidelines for the prevention of water contamination by the consulting company CINSET, (iv) institutional strengthening of both ANAM and ERSP by the - 22 - consulting firm Consorcio Tractebel/SAG, and (v) preparation of guidelines for preventing contaminations by the energy sector, managed by consulting company Consorcio Caura/Ecoambiente. The main achievements were the labor training of ERSP's and ANAM's staffs, the provision of equipments for the control of contamination in the electric sector, and the design and installation of a supervision system for environmental control. (b) Cofinanciers: N/A (c) Other partners (NGOs/private sector): N/A 10. Additional Information - 23 - Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Timely issuance of regulatory directives N/A Was done satisfactorily for electricity and telecommunications. For Water/Sanitation, they were prepared but never issued. Favorable assessment from financial N/A Electricity generation and distribution community and potential operators on entities companies were sold for a total of US$600 to be privatized million, reflecting a very favorable assessment. Adequate performance by key sectorial N/A Policy and planning functions in Government institutions in their policy, planning and are generally weak. Regulatory function is regulatory roles performed well by ERSP. Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate 1.Electricity Sector: develop framework for 1. Framework for privatization developed and privatization of IRHE, increased competition privatization implemented, competition in the for or in the market, strengthen policy and market still limited but regulatory oversight capabilities, refocus rural progressing.Regulatory capacities relatively electrification program well developed. Policy definition and implementation capacities still limited. 1.1 Formulate key policies/programs in 1.1 Panama still have a limited capacity to energy sector (renewables, nat.gas dev., develop and implement energy policies; OER energy conservation, rural elec.) now has moderate capacity to plan offgrid electrification. 1.2 Prepare regulations governing all 1.2 ERSP is relatively well stablished and economic aspects of service provision has issued the most important regulations for the functioning of the sector 1.3 Define new industry structure, grid code 1.3 Implemented to a large extent but few and commercial arrangements definitions still pending. ERSP is fairly capable of performing the task. 1.4 Define bid parameters and prepare 1.4 Sale of electricity company implemented documentation for sale of electricity companies 1.5 Key staff of COPE and ERSP have 1.5 Training and support were adequately received adequate training and support provided to ERSP and COPE 2. Water/Sanitation Sector: Develop 2. 2000 Project Amendment reduced the framework for privatization of IDAAN, scope of work to strengthen policy and expansion of drainage and sanitation oversight functions and develop rural water services, strengthen policy and oversight and sanitation program. government showed functions, develop rural water few capacity to implement policy supply/sanitation program recommendations 2.1 Define key risk allocation parameters for 2.1 Preliminary studies done sale/concession of new water companies 2.2 restructure IDAAN and prepare entities 2.2 Not implemented. for privatization 2.3 Preparation of appropriate tariff, water 2.3 Quality studies prepared, reflecting the and wastewater quality and service standards structure of project after amendment regulations 2.4 Key staff of MINSA and ERSP have 2.4 Training implemented to the extent received adequate training and support needed after amendment 2.5 Develop key policies and programs for 2.5 Training and consultancy provided . water sector (subsidies, standards, rural service delivery) - 24 - 3. Telecommunications sector: Develop 3. Capacity fully developed and licenses capacity of regulator to manage radio granted frequencies in a manner which promotes competition 3.1 Develop radio spectrum management 3.1 Basically accomplished system 3.2 Develop monitoring systems and 3.2 Basically accomplished elaborate procedures for license award, oversight, and dispute resolution 3.3 ERSP staff have received adequate 3.3 Adequate training provided training and support 4. Multisectoral: Foster consensus for 4. Project management capabilities privatization, define environmental liabilities of strengthen at UTPP. Environmental liabilities existing installations to be privatized, build defined. Capacity for environmental oversight capacity for environmental oversight, still limited strengthen project management capabilities 4.1 Issuance of guidelines/benchmarks for 4.1 Opinion surveys implemented and water/electricity conservation preliminary studies for water and electricity 4.2 public support gauged through opinion conservation executed. surveys 4.3 environmental audits completed and 4.3 Environmental audits carried out by environmental standards and guidelines consultants. The concession agreements prepared incorporated the corrective measures as 4.4 Planned (PIP) versus actual project required performance indicators 1End of project - 25 - Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component US$ million US$ million Electricity Sector 10.12 9.20 90.1 Water Sector 24.84 8.40 0 Telecommunications Sector 3.00 7.80 130 Multisectoral Activities 3.65 4.30 117.8 Total Baseline Cost 41.61 29.70 Total Project Costs 41.61 29.70 Interest during construction 0.11 Front-end fee 2.08 Total Financing Required 43.80 29.70 Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB NCB 2 N.B.F. Total Cost Other 1. Works 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 3.17 0.37 0.00 0.00 3.54 (3.05) (0.33) (0.00) (0.00) (3.38) 3. Services 0.00 0.00 16.47 0.00 16.47 Training (0.00) (0.00) (6.06) (0.00) (6.06) 4. Project management 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Worker's severance 0.00 0.00 0.00 0.00 0.00 payments (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 3.17 0.37 16.47 0.00 20.01 (3.05) (0.33) (6.06) (0.00) (9.44) 1/Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2/Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. Project Financing by Component (in US$ million equivalent) Percentage of Appraisal Component Appraisal Estimate Actual/Latest Estimate Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF. - 26 - Electricity 3.70 3.10 3.20 2.90 3.10 3.20 78.4 100.0 100.0 Water/Sanitation 2.70 10.30 11.80 1.60 0.30 6.50 59.3 2.9 55.1 Telecommunications 2.50 0.50 0.00 3.40 0.50 3.90 136.0 100.0 0.0 Multisectoral 3.00 0.50 0.00 3.80 0.50 0.00 126.7 100.0 0.0 - 27 - Annex 3. Economic Costs and Benefits N/A - 28 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 04/09/1997 2 TEAM LEADER (1) S S WATER/ENVIRONMENT (1) S S 09/29/1997 5 TEAM LEADER (1); S S WATER/ENVIRONMENT (1); ENERGY SECTOR (1); ECONOMIST (1); CONSULTANT (1) Appraisal/Negotiation 12/1/1997 7 TEAM LEADER (1); S S WATER/ENVIRONMENT (1); TELECOM SPEC (1); LAWYER (1); PROJ. MONITORING (1) ENERGY SECTOR (1); PROJ. MONITORING (1) Supervision 03/07/1998 4 TEAM LEADER (1); S S WATER/ENVIRONMENT (1); ENERGY SECTOR (1); ENVIRONMENT/ECONO MIST (1) 06/12/1998 3 TEAM LEADER/ELEC. SECT S S (1); ENVIR/WATER SECT. (1); WATER/PROJ. MONITORING (1) 10/16/1998 4 MISSION LEADER (1); S S WATER SECTOR (1); INSTITUTIONAL DEVELOP (2) 10/29/1999 3 SR. ECONOMIST (1); S S CONSULTANT (2) 03/31/2000 2 LANGUAGE PROGRAM ASSIS S S (1); SR. ECONOMIST (1) 07/13/2000 7 TEAM LEADER (1); WATER S S SPEC. (2); TELECOM (1); PROJECT MANAGEMENT (1); CONSULTANT (1); POWER SECTOR/REGULATIO (1) 12/10/2000 2 ENERGY SPEC. (1); S S CONSULTANT (1) 04/25/2001 1 CONSULTANT (1) S S 06/22/2001 5 TASK MANAGER (1); LEAD S S ECONOMIST (1); SR. REGULATORY ECONOM. (1); - 29 - SR. ENV. SPECIALIST (1); SR. TELECOMS SPECIAL. (1) 04/05/2002 3 TTL, SENIOR POWER ENG. S S (1); TELECOM SPECIALIST (1); ENVIRON. SPECIALIST (1) 2/18/2003 3 SR. POWER ENG. (1); S S TELECOM SPECIALIST (1); ENVIRON. SPECIALIST (1) 3/17/2003 2 TASK MANAGER (1); SR. S S POWER ENG. (1) 11/10/2003 3 SR. POWER ENG. (1); S S TELECOM SPECIALIST (1); ENVIRON. SPECIALIST (1) S S ICR (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 31.4 110.2 Appraisal/Negotiation 11.3 62.6 Supervision 99.9 461.3 ICR 5.6 53.4 Total 148.2 687.5 US$(000) include labor and travel expenses - 30 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA - 31 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU 6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU - 32 - Annex 7. List of Supporting Documents Andres, L; Foster. V and Luis Guasch, The impact of Privatizations on Firms in the Infrastructure Sector in Latin American Countries. The World Bank 2004. Asociación de Ingeniería y Sanidad Ambiental, Informe Final sobre Fortalecimiento Institucional para el Sector Agua Potable y Saneamiento del Ministerio de Salud de Panama. Madrid, 1999. Ayuda Memoria: Proyecto de Reestructuración de los Servicio Públicos Misión de Supervisión. June 19-22. 2001. Calderon, Cesar and Luis Servén, The Effects of Infrastructure Development on Growth and Income Distribution. Washington, DC: The World Bank, Draft dated July 22, 2004. Easterly, Wm and Luis Servén (eds.), The Limits of Stabilization: Infrastructure, Public Deficits and Growth in Latin America. Washington, DC: The World Bank. Guasch, J. Luis, Granting and Renegotiating Infrastructure Concessions: Doing it Right. Washington, DC: The World Bank Institute. Hagler Bailly, SA, Contrato de Concesión de Generación Hidráulica. Panama, August, 1998. Hagler Bailly, SA, Contrato de Concesión de Transmisión. Panama, July, 1998. Hagler Bailly, SA, Estudio Fortalecimiento Institucional y Capacitación del Ente Regulador de los Servicios Públicos de la Republica de Panama. October 1999. Hagler Bailly, SA. Licencia de Generación Térmica. Panama, August, 1998. Loan Agreement, Loan Number 4274-PAN Utilities Restructuring Technical Assistance Project, March 3, 1998. COPE, MEF. Plan de Trabajo Estratégico (2000-2002). Panama, June, 2000. UTPP, MEF. Programa de Reforma de los Sectores de Infraestructura Básica: July, 2000. Viceministerio de Economía, MEF. Informe de Avance del Proyecto de Reforma de los Sectores de Infraestructura Básica. Panama. July-December, 2001 OED Power Point Presentation: Improving ICR Quality: Latin American and Caribbean Region, March 16, 2004 PA Consulting Group, Ente Regulador de los Servicios Públicos de Panama--Fortalecimiento Institucional y Capacitación del ERSPL: Segundo Informe de Progreso del Plan de Capacitación. Buenos Aires, May, 2001 - 33 - - 34 -