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R E S T R I C T E D Report No. TO-306a Public Disclosure Authorized This reportwas preparedfor use within the Bank. It maynot be published nor mayit be quotedas representingthe Bank'sviews. The Bankaccepts no responsibilityfor the accuracyor completenessof the contentsof the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized BUENOS AIRES POWER PROJECT SEGBA ARGENTINA Public Disclosure Authorized January 10, 1962 Public Disclosure Authorized Department of Technical Operations BUENOSAIRES POWERPROJECT TABLE OF CONTENTS Page Nq. Summary I. INTRODUCTION 1 II. BACKGROUND 2 III. THE PINEDO PLAN 4 IV. THE BORROWER 5 The By-Laws 5 The Concession 6 Organizationand Managenjnt 7 V. POWER MARKET 8 VI. THE PROJECT 10 GBA Station 10 132 kv Interconnection 13 Distribution System Expansion 15 VII. FINANCIAL ASPECTS 18 Present Financial Position 18 SEGBA 19 Fourteen Partidos 20 GEA Station and 132 kv Interconnection 20 Consolidated Capitalization of SEGBA 21 ConsolidatedAssets 22 Tariffs 22 FinancingPlan 24 EstimatedFuture Earnings 27 Debt LimitationCovenant 27 'uditing Procedures 28 VIII. CONCLUSIONSAND RECOMvENDATIONS 28 LIST OF ANSTNEXES ANNEX 1 - Long Term Load DevelopmentChart ANNEX 2 - Plant Capabilitiesand Peak Loads, MW ANNEX 3 - Cost Estimates 1962-1964,132 kv Interconnection ANNEX 4 - Total SEGBA Program 1962-1964,Summary of Estimated Costs ANNEX 5 - SEGBA - Balance Sheets 1961-1967 ANNEX6 - SEGBA - Estimated Income Statements 1961-1967 ANNiEX7 - Sources and Applicationsof Funds 1962-1967 ANNEX g - Compania Italo-Argentina de Electricidad - CIAE Map BUENOSAIRES POIWERPROJECT SEGBA S u m m a r y The Government of Argentina has proposed that the Bank make a loan to assist in the execution of a program intended to eliminate the power shortage in the Buenos Aires Metropolitan area and to reorganize the electric power supply industry in the area as a necessary condition to efficient expansion of service in the future. ii. The reorganized SEGBA, which would be the Borrower, is to be given ownership and responsibility for AyEE's generation, interconnection and distribution facilities in Buenos Ainres. Tnis will result in a con- solidated program for SEGBAwhich, for the period of 1962-1964, includes the completion or addition of about 800 MWof generating facilities, a 132 kv system in the metropolitan area and a substantial expansion of distribution facilities. The program, which is estimated to cost a total of US&p292million equivalent, represents the minimum necessary to eliminate, by 1965, the bulk of the power shortage. iii. After the reorganization SEGBAwill be a stock corporation: initially, all shares will be owned by the Government but would be sold gradually to the public as conditions of the Argentine financial market permit. A satisfactory plan has been worked out to ensure that SEGBAwill have a competent management group operating with the necessary autonomy. iv. The plan for financing the 1962-1964 program, after taking into account US$76 million equivalent (26%) representing the total of new borrowings already contracted and US$109 million equivalent (37%) repre- senting net internally generatec funds, leaves a gap of US$107 million equivalent. This is to be met by the sale of US$12 million equivalent (4%) of new common shares of SEGBA in 1963-1964, and by a proposed loan of US$95 million equivalent (33%) from the Bank. The financial position of SEGBA, which is analyzed in detail in the report for the six years 1962 to 1967, should be sound throughout the period. v. The project is considered suitable for the proposed US$95 mil- lion loan, with a term of 25 years and with amortization starting in March 1965. BUENOS AIRES POWER PROTEECT SEGBA I. INTRODUCTION 1. The Governmentof Argentina has proposed that the Bank make a sub- stantial loan to assist in implementinga program to consolidateelectric utility services in the Buenos Aires Metropolitanarea (GreaterBuenos Aires) and to eliminate a long standing shortage of power in the area. 2. The elimination of the shortage depends largely on completing as quickly as possible a 600 MWinstallation, the "Gran Buenos Aires" (GBA) Station, which has been under constructionsince 1958 by the Governmient's Water and Power Agency, Agua y Energia Electrica (AyEE). Due to physical, organizationaland financial difficulties,the constructionof the station is now two years behind schedule and AyEE is unable to obtain the funds in local currency needed to complete the installation. 3. The proposed consolidationof services would be achieved by trans- ferring to a reorganizedSEGBA (ServiciosElectricos Gran Buenos Aires, at present the largest among the electricitysupply organizationsin Buenos Aires) the responsibilityfor completingthe constructionand undertaking the combined operation of the GBA Station, of the 132 kv interconnectionin the metropolitanarea as well as of the necessary expansion of the consoli- dated distributionsystem. These measures should bring to an end as quickly as possible the power shortage in the area and provide a sound basis for the efficient provisionof electric utility service in the future. 4. The organizationaland financial features of the consolidation plan have been the object of long consultationsbetween the Governmentand the Bank. A firm plan of action has now been formulatedand is appraised in this report. After consideringall reasonablecontributions which could be obtained in Argentina to meet the financial requirementsof the plan, there remains a gap of $95 million which the Governmentrequests be the amount consideredby the Bank for a loan. The Government proposes that the loan be made to the new SEGBA and that the utilization of its proceeds be authorized in the followingmanner: (i) The equivalentof US$60 million to obtain local currency exclusivelyfor the completionof the GBA Station and of the 132 kv ring, and (ii) US$35 million against imported equipmentand services mainly for the expansion of the distributionsystem and interest during construction. II. BACK(GROUND 5. Electricitysupply by privately-ownedutility companiesin Buenos Aires was establishedat the beginning of the century. These companies were owned and controlledby foreign interest and operated under long term concessionsgranted by the city of Buenos Aires and later by the city and/or the province of Buenos Aires when servicewas extended beyond the borders of the Federal District. 6. In the period between the two world wars, and after some trans- fers of ownership following the first world war, electric utility service in the Greater Buenos Aires area was shared by two companies: CADE (CompaniaArgentina de Electricidad)a fully-ownedsubsidiary of SOFINA, and CIAE (CompaniaItalo Argentina de Electricidad)which was and is con- trolled by Swiss financial interests but whose shares have also been quoted on the Zurich and Buenos Aires stock exchanges. These two companies, like their predecessors,ran an efficient and profitable operationand es- tablishedand maintained a traditionof reliable service. Ample capacity reserves were maintained at all times and generally the management and operation of the companiesreflected the conservativeelectric utility approach of western European companies before the second world war. Under these conditions the developmentof the Buenos Aires power system during the 30 year period to 1940 progressed steadilywith an average annual rate of increase in demand between 7 and 8%. 7. With the advent of the Peron regime and the emergence of national- istic trends in Government policies the foreign-ownedpower companiesbegan having difficulties. In the early 1950's they were refused permission further to expand their facilities. Shortly thereafter they were prevented from applying the rate adjustment clauses which were included in their con- cessions. This was accompaniedby increasinglyfrequent expropriationsof foreign-ownedpower facilities,mostly in the interior of Argentina, and by the mid-1950's a strong movement was apparent to nationalizethe power industry by expropriatingthe foreign-ownedcompanies and/or revoking their long term concessions. This situation continuedafter the fall of the Feron Goverinmentand by 1958, foreign owned power undertakingsin the interior had been formally taken over, mostly by AyEE, but in some in- stances (notably Cordoba) by the ProvincialGovernments. Most of these had been owned by American and Foreign Power Company and negotiationsfor compensationwere successfullycompleted in 1960. The remainder had been owned by CADE or CIAE and settlementstherefor were included in agreements reached between the Governmentand the owners in 1958 and 1961, respectively. 8. In Buenos Aires, CADEts and CIAE's concessionswere cancelledin mid-1957. The brunt of politicalattacks was borne by CADE. By late 1958 a settlementwas reached between the Government and SOFINA under which AyEE took over CADE's distributionsystem in fourteen municipalitiesto the north-west of the Federal District (FourteenPartidos). The revalued assets remaining in CADE, whose name was changed to SEGBA, consisting of the generating facilitiesand of the distributionsystem in the Federal District and in the fourteen municipalitiesto the southeast,were to be bought by the Governmentin equal installmentsduring the ensuing ten years. - 3 - The contract provided, inter alia, that equity capital would earn 8%. Management was vested in a Board with representationboth of the Government and of SOFINA, with executivemanagement remaining SOFINA's responsibility at