world bank document · document of the world bank report no. 17173-pan project appraisal document...

Document ofThe World Bank

Report No. 17173-PAN

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED LOAN

IN THE AMOUNT OF US$12.7 MILLION

TO THE

REPUBLIC OF PANAMA

FOR A

UTILITIES RESTRUCTURING

TECHNICAL ASSISTANCE PROJECT

December 19, 1997

Finance, Private Sector and Infrastructure SMUCountry Management Unit 2Latin America and the Caribbean Region

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CURRENCY EQUIVALENTS

Currency Unit = Panamanian Balboas (B/)US$1 00 = B/i (December 1997)

FISCAL YEAR OF BORROWERJanuary 1- December 31

ABBREVIA4TIONS AND ACRONYMS

CLICAC - Commission for Competition and Consumer AffairsComisi6n de Libre Competenciay Asuntos del Consumidor

CPE - Energy Policy ConmuissionComisi6n de Politica Energetica

ERSP - Public Services Regulatory AgencyEnte Regulador de Los Servicios Puiblicos

IDAAN - National Institute for Water and SanitationInstituto de Acueductos y Alcantarillados Nacionales

JNRENARE - National Institute of Natural and Renewable ResourcesInstituto Nacional de Recursos Naturales y Renovables

IRBHE - Institute for Hydraulic Resources and ElectrificationInstituto de Recursos Hidrduhcos y Electrificaci6n

MINSA - Ministry of HealthMinisterio de Salud

MNPPE - Ministry of Planning and Economnic PolicyMinisterio de Planificaci6n y Politica Econ6mica

UTPP - Technical Unit for Public PolicyUnidad Tecnica de Politicas Pzibhcas

Vice President: Shahid Javed BurkiCountry Director Donna Dowsett-CoiroloSector Director: Sri-Ram AiyerTask Team Leader: Jonathan Halpern

TABLE OF CONTENTSPae

Project Financing Data ............................ 1Block 1: Project Description ..........................,,2

1. Project Development Objectives ......................... 22. Project Components ......................... 23. Benefits ................................................................ 34. Institutional and Implementation Arrangements .............................................................. 3

Block 2: Project Rationale ............................................................. 45. CAS Objective Supported by the Project .............................................................. 46. Main Sector Issues and Government Strategy .............................................................. 47. Sector Issues to be Addressed by the Project and Strategic Choices ...........................................................78. Project Alternatives Considered and Reasons for Rejection .............................................................. 79. Major Related Projects Financed by the Bank and/or Other Development Agencies ..................................810. Lessons Learned and Reflected in the Project Design .............................................................. 811. Indications of Borrower Comr itment and Ownership .............................................................. 812. Value Added of Bank Support .............................................................. 9

Block 3: Summary Project Assessments .............................................................. 913. Economic Assessment .............................. 914. Financial Assessment ............................ 915. Technical Assessment ............................ 916. Institutional Assessment ............................. 917. Social Assessment ............................ 918. Enviromental Assessment ........................... 1019. Participatory Approach ........................... 1020. Sustainability ........................... 1021. Critical Risks. ........................... 1122. Possible Controversial Aspects ........................... 12

Block 4: Main Loan Conditions ........................... 1223. Effectiveness Conditions ........................... ,1224. Other ............................ 12

Block 5: Compliance with Bank Policies ........................... 12

List of AnnexesAnnex 1 - Design SummaryAnnex 2 - Detailed Project DescriptionArnex 3 - Estimated Project CostsAnnex 4 - Fiscal Impact CalculationsAnnex 5 - Financial SummaryAnnex 6 - Procurement and Disbursement ArrangementsAnnex 7 - Enviromnental FrameworkAnnex 8 - Project Processing Budget and ScheduleAnnex 9 - Documents in Project FileAnnex 10 - Statement of Loans and CreditsAnnex 11 - Panama at a Glance

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTINTERNATIONAL DEVELOPMENT ASSOCIATION

Latin America and the Caribbean Regional Office

PROJECT APPRAISAL DOCUMENT

PanamaUtilities Restructuring Technical Assistance Project

Date: December 19, 1997 [] Draft [x] FinalTask Manager: Jonathan Halpern Country Manager: Donna Dowsett-CoiroloProject ID: PA-51124 Sector: Privatization POC: PVLending Instrument: Technical Assistance Loan PTI: [] Yes [XI No

Project Financing Data [x] Loan [] Credit [] Guarantee [] Other [Specify]

For Loans/Credits/Others:

Amount (US$m/SDRm): 12,700,000Proposed Terms: [ Multicurrency [x] Single currency

Grace period (years): 5 [ Standard Variable [ Fixed [x] LIBOR-basedYears to maturity: 17Commitment fee: .75%

Financing plan (US$m):Source Local Foreign Total

Government 12.23 2.90 15.14IBRD 2.26 10.44 12.70IDB 3.17 12.79 15.96

Total 17.67 26.13 43.80

Borrower: Republic of PanamaResponsible agency(ies): Ministerio de Planificacion y Politica Econ6mica-Unidad T6cnica de Politicas PuiblicasEstimated disbursements (Bank FY/IJS$M): 1998 1999 2000 2001

Annual 6.59 22.80 8.11 6.30Cumulative 6.59 29.39 37.50 43.80

Expected effectiveness date: April 1, 1998 Closing date: June 30, 2001

Project Appraisal Document Page 2Cotuntry: Panama Project Title: Utilities Restructuring Technical Assistance Project

Block 1: Project Description

1. Project development objectives (see Annex 1 for key performance indicators):To enhance the efficiency of provision, improve the quality and expand coverage of infrastructure services by providing anenabling environment for mobilizing private sector expertise and capital on a competitive basis, within an appropriate policyand regulatory framework. Specifically, the project will provide technical assistance to:(i) restructure and prepare for privatization entities in the electricity and water/sanitation sectors;(ii) develop regulations required for implementing already enacted reform legislation; and,(iii) strengthen key public institutions in their newly defined policy, planning, and regulatory roles in the electricity, waterand sanitation, and telecommunications sectors.

2. F'roject components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):Component Category Indicative % of

Costs US$M Total(IBRD)

Electricity. Consulting services and training to: Policy/institution 10.12 24* restructure IRHE (funded by borrower); building (3.72)* prepare for privatization and sale facilitation;* develop required regulations;* support systems planning, development of the transmission network andupgrading of system operations capabilities (IDB funded);* establish the CPE and Oficina de ElectriJicaci6n Rural, includingformulation of key policy and development programs under their jurisdiction

Water and Sanitation. Consulting services, training, and equipment to: Policy/institution 24.84 60* undertake systems characterization and delineate new companies; building (2.75)* establish risk allocation parameters and concession frameworks;* restructure IDAAN - prepare entities for privatization and facilitate sale(IDB funded);* develop required regulations, including quality and service standards (IDBfunded);* develop oversight capabilities of the regulator;* prepare drainage and watershed master plans (IDB funded);* restructure MINSA and strengthen capacity to develop policies, monitorservice and water quality;* develop sustainable rural water supply and sanitation policies andprograms.

Telecommunications. Consulting services, training and equipment to: Policy/institution 3.0 7* establish a radio spectrum management system; building (2.5)* develop regulatory capacity to grant new licenses and concessions, overseeauctions, monitor compliance, and manage resolution of disputes betweenoperators.

Project Appraisal Document Page 3Country: Panama Project Title: Utilities Restructuring Technical Assistance Project

Multi-sectoral: Consulting services, equipment and training to: Policy/institution 3.65 9* promote consumer awareness and resource conservation; building (3.05)* carry-out public information and investment promotion dissemination;* conduct environmental audits of existing installations;* review and revise as necessary administrative framework governing water

use rnghts and environmental standards and guidelines;* strengthen capacity for oversight of compliance with environmental

standards;* technical assistance for additional privatization requirements and cross

sectoral issues;* project management (strengthen implementation unit, extemal audit). Project

managementTotal 41.61 100

Physical Contingency 0.11Price Contingency 2.08Total Project Cost 43.803. Benefits:Proper utilization of project outputs would result in the following principal benefits:(i) improve the operating efficiency and quality of electricity, water/sanitation, and telecommunications services; and(ii) mobilize private sector capital to fund expansion of service.Successful implementation will improve service quality for existing consumers, expand access for those currently withoutservices, and improve efficiency of basic economic and environmental services for the economy at large. While not a directbenefit of the restructuring program, the transfer of responsibility for service provision to the private sector is expected tocreate fiscal space in the general budget and as such will support the Govemment's public expenditure policy of directingmore budgetary resources to the social sectors.

4. Institutional and implementation arrangements:Implementation period: 1998-2001Executing agencies: MIPPE is responsible for assuring consistent implementation of the Government's reform program andachievement of the program's economic objectives. The Ministry has been charged with supervision of the reform processin the infrastructure sectors and will be the implementing agency for the project. Within MIPPE, the UTPP has directresponsibility for oversight and day to day execution of the restructuring program and is already discharging these functionsfor the IDB financed activities which form part of the project. The activities to be financed under the IBRD loan will utilizeexisting implementation arrangements to ensure that the Bank, IDB, and other sources of financial and technical support areclosely coordinated during project implementation. The UTPP will be responsible for execution of project activities. Thesectoral institutions such as ERSP, MINSA, IRHE, IDAAN, will be responsible for defining and developing workprograms, substantive oversight of consultants and management of training activities.

The UTPP will also be responsible for administration of project funds, monitoring and reporting, and contractingprocedures. To facilitate timely procurement of technical assistance and payment of consultants financed under the loan,the Government will contract with and directly finance the UNDP as procurement agent. The UNDP is currently carryingout this function in a satisfactory manner for the IDB-funded activities which form part of this project. Such anarrangement will help ensure consistent and timely implementation of closely related elements of the restructuring programand will facilitate uniform reporting on project activities and expenditures.


Project coordination: The UTPP is responsible for ensuring the activities and actions of the sectoral agencies areconsistent with sectoral and administrative policy in terms of content, timing and procedure. In this regard, the UTPP willreach agreement with the sectoral agencies on the content of work, tenns of reference, identification of consultants and/orconsulting services including the preparation of short lists, publication of notices, evaluation of proposals, ensuringparticipation of relevant sectoral institutions in the assignment, auditing of contracts as well as reporting requirements toMIPPE, IBRD and 1DB. Such agreement has already been concluded for the majority of activities to be undertaken over thenext 12 months. The Project Implementation Plan (PIP) which has been found satisfactory by the Bank, describes thecoordination procedures. The latter have already been put in place and are working satisfactorily.

Accounting, financial reporting and auditing arrangements: During project preparation, UTPP's accounting, internalcontrols, staffing, and reporting capabilities were reviewed by Bank financial management staff and found to be adequate.The: required systems are in place and functioning well. The UTPP is in the process of completing the computerization of itsfinancial monitoring systems. This work will be completed within the first half of 1998. Project accounts will be maintainedby UTPP. It will maintain records and accounts which reflect, in accordance with standard accounting practices, theoperations, resources, and expenditures for each project activity. The accounts will be prepared monthly and consolidatedannually to provide a single financial statement for the project as a whole which reflects expenditures by component,activity, disbursement category, and source of funds. The UTPP will retain the necessary supporting documentation, to bemacle available to Bank missions and independent auditors as required. Project records and accounts, including the SOEs,will be audited annually in accordance with appropriate accounting principles consistently applied by auditors acceptable tothe Bank, with terms of reference for auditors and reports approved by the Bank. The Bank's Financial Accounting,Reporting, and Auditing Handbook (FARAH) published in January 1995, will be used by the auditors in accordance withthe IBank's existing guidelines. Audit reports will be furnished to the Bank within four months after close of theGovernment's fiscal year.

Monitoring and evaluation arrangements: Monitoring of project implementation will be undertaken by UJTPP, in itscapacity as coordinator of the restructuring programs. Success in achieving the benefits described in Section 3 above willbe monitored by responsible agencies in the sector such as the regulatory agency, MINSA and UTPP. The Bank willparticipate in monitoring project implementation through supervision missions. Starting on October 31, 1998, UTPP willprovide to the Bank an annual plan of work. In addition, UTPP will provide to the Bank twice yearly reviews of progressover the prior six months, commencing July 31, 1998. Annual reviews of the project will commence in July 1999.Block 2: Project Rationale5. CAS objective supported by the Document number and date of latest CAS discussion: Report 13846-PAN,project February 7, 1995

The CAS stresses the importance of reviving sustainable growth through efficient resource use and private investment. Akey element of this strategy is improving the efficiency of public service provision and increasing the coverage of basicinfrastructure services. The proposed project would support the creation of an enabling environment for mobilizing privatesector participation to expand service coverage and quality and the implementation of a legal and regulatory frameworkwhich fosters efficiency in provision and resource conservation. The project would also strengthen key policy-making andregulatory bodies charged with overseeing these sectors.

6. Main sector issues and Government strategy:The Government has concluded that inadequate provision of key infrastructure services has hindered economic growth andefforts to improve quality of life among large sectors of the population. In the case of water and sanitation, servicedeficiencies have also been a major contributor to environmental deterioration. The government now seeks to redress thesedeficiencies through mobilization of private sector management expertise and capital, introduction of competition wherefeasible, and redefinition of the government's role and functions from that of service provider to regulator and policy maker.

Electricity Sector: In the electricity sector, the state-owned utility, IRHE, has been unable to efficiently meet the growingdemand for electricity service. Rural coverage levels are extremely low at 50%, while urban areas fare better with


approximately 85% service coverage. Plant availability is low (42% of thermal), system losses are high (23%), and theorganization is overstaffed by international standards (82 customers/employee). While average retail tariffs are adequateand high relative to the economic costs of service (USc 1 1/kWh), IRHE's financial solvency has been undermined bytransfers to Government in order to finance the general budget. Similarly, its operational autonomy and commercialattributes have been circumscribed by a host of procurement, fund management, and staffing restrictions common to allgovernment agencies. IRHE's statutory monopoly, lack of commercial autonomy and conflicts of interest stemming frominternal policy making, service regulation, and public expenditure management, has led to growing operating inefficienciesand inadequate service.

Water Sector: Provision of water and sewerage service for all but the smallest communities has been vested in a stateowned monopoly, IDAAN. Official estimates report nominal coverage at 80% and 50% for urban areas and 50% and 20%in rural areas, while the actual access to services is probably less than the coverage figures suggest. Though IDAAN hasbeen relatively successful in increasing water production, management of and investment in distribution systems is poor,with unaccounted-for-water (UFW) estimated at 45%. As a consequence, the water quality is inconsistent and water servicein many areas is characterized by low pressure and rationing. Treatment of residual flows is virtually non existent withwaste water discharged directly in watersheds, riverine and marine areas. This has contributed to environmentaldegradation, most notably the Bay of Panama. Tariffs are a bit low by international standards (US$.35/m), andapproximately 30% of users are charged rates at half that level by virtue of their classification as "social sector" customers.Less than half of potential tariff revenue is billed or collected. As a consequence, IDAAN has increasingly relied on directgovernment transfers to finance not only investment, but also a portion of its operating expenditures.

Telecommunications Sector: Until 1997, all basic telephony services were provided by the state ownedtelecommunications enterprise, INTEL. Coverage of basic services is low ( 11 lines/100 persons), given the prominent roleof information-intensive industries in the economy such as financial services, trade, and shipping. Service quality has alsobeen deficient: it has generally taken months to install a new line, weeks to repair faults, and more than half of the fewexisting public telephones were in service at any given time. Moreover, INTEL did not provide cellular or other potentiallyprofitable data services in spite of the rapid growth in demand for the full spectrum of telecommunications services. As aconsequence, many business enterprises were compelled to provide services themselves, at very high cost. The inability ofINTEL to effectively service the growing demand for telecommunications services has largely been due to the budgetary andmanagement constraints characteristic of state owned enterprises and restrictions on market entry which inhibitedcompetition and innovation.

Past Reform Efforts:Since the early 1 990s, the Government has sought to improve efficiency of service provision in the electricity, water andtelecommunications sectors by seeking to strengthen the relevant parastatal's operational and financial performance and byencouraging private sector participation. However, the limited modifications in legislation and administrative proceduresenacted in pursuit of this goal did not establish industry structures or a regulatory framework conducive to securing privateparticipation, nor did it introduce competitive forces and improving the utilities' performance: private participation wasrestricted to new capacity and, in the case of electricity, its allowed share of system capacity was capped; tariff policies didnot reflect economic nor financial considerations; and environmental provisions were vague and confusing. As aconsequence, several fundamental problems were not dealt with: (1) the utilities themselves remained responsible for allaspects of system operations on the one hand, and policy and planning on the other; (2) all existing facilities and serviceswere to remain with the utilities; (3) IRHE and IDAAN were to assume all market risk for purchases from power/watertreatment plants; and (4) operators' rights and obligations in the provision of services remained vague, with their definitionleft to the utility's discretion. These shortcomings have precluded the introduction of meaningful competition and thelikelihood that private participation, if indeed it were to materialize, would significantly improve sectoral efficiency. Theforegoing largely explains the absence until recently of a single IPP, private water treatment plant, or cellular service inPanama despite repeated efforts since early 1991 to attract private participation.


Recent Actions and Government Strategy:The current administration has pursued a far-reaching infrastructure sector reform strategy, recognizing the inadequacies ofprior efforts and the priority placed on reorienting and redimensioning the public sector's role in the economy andredirecting public spending toward the social sectors. This strategy was developed through a lengthy process ofconsultation with industry, government agencies, organized labor, and the public at large, and has been codified in sectorallegislation, enacted in late 1995 and early 1996. The legal framework now in place requires the separation of policy,regulatory, and operating functions and the establishment of a transparent regulatory framework to be applied impartially topublic and private operators. Toward this end, the Government established a financially autonomous and administrativelyindependent agency (ERSP) responsible for regulating the provision of public services (telecoms, electricity and water),granting concessions and licenses, verifying service quality and environmental compliance, setting tariffs for regulatedsegments of the market, promoting competition, and applying sanctions and penalties for non-compliance.

Policy and planning functions are now vested in an Energy Policy Commission in the electricity sector, and in MINSA inthe water and sanitation sector. The state owned utilities are to be disaggregated and responsibility and control of themajority of services transferred to the private sector via sale of majority shares or through long-termn concessionarrangements. Approximately 5% of shares have been reserved for the existing utilities' labor force and the remainder maybe sold on the local market. As such, the privatization process in the infrastructure sectors, in combination with ongoingmodernization of banking and securities legislation and other financial sector reforms, is expected to contribute to thedevelopment of local capital markets. The labor force's rights and privileges are also established in the legislation withrespect to collective bargaining, transfer of equipment to workers to establish their own service companies, and enhancedtransitory severance and retirement benefits. The legislation also contains specific provisions and principles for extendingservice to rural areas, granting subsidies to the poorest segments of the population, and encouraging efficient andsustainable use of natural resources. Increased coverage and service across income groups will be achieved throughuniversal service targets, direct subsidies and tariff reform. No new legislation is required to implement the reform programfor the infrastructure sectors.

In the electricity sector, IRHE will be broken up into independent companies: three distribution, three to four generation,and one transmission/system operations entity. The enterprise restructuring work and key regulatory studies are underway.The distribution and thermal generation companies will be privatized over the next two years. Over time, other companieswill be divested and the system of supply contracts between generators and the system operator will evolve into a real timewholesale power market. In the interim, large consumers will be permitted to contract directly with the generatingcompanies for capacity and energy for which regulations requiring non-discriminatory access to the transmission anddistribution networks will be put in place this year. With the creation of the Energy Policy Commission, Panama will have apublic policy body responsible for indicative systems planning, coordination of various elements of energy policy,promoting new private investment, energy conservation, and fuel marketing and diversification. Responsibility for ruralelectrification will be transferred to a semi-autonomous agency, the Oficina de Electrificaci6n Rural, which will facilitatethe implementation of demand driven and private sector led projects.

In the water and sanitation sector, IDAAN is to be disaggregated into 2-3 companies. Responsibility for service to theurban and peri-urban areas of Panama Metro, Chiriqui, and the Central Provinces will be transferred to the private sectorvia auction of majority shares or competitively awarded concessions. Water production and treatment facilities in the canalzone are to be incorporated into the system within the next two years. Detailed analysis of engineering, financial, andeconomic parameters for the delineation of the new water companies has begun and will be completed by February 1998.histallations and services in rural areas currently under MINSA's jurisdiction will be reconstituted under decentralizedcooperative or municipal arrangements, which likewise will be structured to facilitate private sector participation. Strategyand programming decisions on these and other elements of sector policy are the responsibility of MINSA, which will bereorganized and strengthened to effectively take on these functions.

In the telecommunications sector, the government has already established a regulatory framework designed to attractprivate capital and management expertise, foster competition, and provide for orderly development of its radio frequencies.


In early 1996, the first cellular services license was granted to a consortium led by Bell South. In mid 1997, 49% of theshares of INTEL, and managerial control was awarded to Cable and Wireless, netting US$ 650 million in proceeds andUS$500 million in investment commitments over the next 5 years. The majority of remaining shares are to be placed withprivate investors in a subsequent tranche. In addition, during the past year a number of concessions and licenses have beengranted to providers of value added, data, trunking, and satellite services. Prices for these services are determined by theoperators under a fully competitive regime. Work is continuing on refining outstanding components of the regulatoryframework governing interconnection, concessionaire compliance with service targets, development of monitoring andinformation systems, and dispute resolution procedures.

7. Sector issues to be addressed by the project and strategic choices:The principal strategic choice embodied in the Government's reform program is that addressing the long-standing problemsof poor service provision will require comprehensive restructuring of the utilities sectors. In particular, the roles andfunctions of Government have been redefined to permit the introduction of private sector participation in the electricity,water supply, and telecommunications sectors within a policy, regulatory and institutional framework which will providestrong incentives to improve service efficiency, quality and coverage. In each of these sectors, the Government has enactedan adequate legal framework for fostering private sector participation. The task is now to implement it. The project willprovide assistance for the following: restructuring and delineating the new companies; preparation for private participationincluding systems characterization, asset valuation, design of bidding documents and sale facilitation; elaboration ofregulatory instruments and directives; carrying out of environmental audits; and establishing environmental standards. Itwill also provide ongoing support to the regulatory and policy-making bodies in preparation for their newly definedresponsibilities. The latter is deemed critical to providing a stable, supportive environment in which both public and privateservice can operate efficiently. Lastly, the project will support several activities directed at enhancing the scope forindividuals, communities, and interest groups to have a voice in the privatization process and in the provision ofinfrastructure services.

Coordination with the IDB is an important element of the project strategy. IDB is already providing both investmentfinancing and technical assistance to the Government for the reform program. Relations are good and agreement wasreached on the allocation of funding responsibilities for various aspects of the infrastructure reform program, and on thecontent and timing of key activities. Close collaboration in this area will ensure a coordinated policy dialogue, conformityin the approaches of both institutions, and coherent and timely implementation. Implementation arrangements for theproject are designed to ensure close coordination and effective implementation: the two multilateral institutions will employthe same organizational arrangements, reporting requirements, and monitoring systems.

8. Project alternatives considered and reasons for rejection

The Government and Bank considered three options for providing assistance in implementing the Government'sinfrastructure reform program. First, an investment loan (power transmission reinforcement) with a TA component wasdeemed undesirable given the time required to adequately prepare and appraise the investment component, the uncertaintyregarding specific policies and regulations for transmission services, and the immediate need for substantial support forenterprise restructuring, policy and regulatory work. Second, a partial risk guarantee for one or more of the new companiesto be privatized was deemed a low priority because the substantial technical support required prior to and followingconcession award could not readily be provided in the context of a guarantee operation. Finally, a technical assistanceoperation was judged to be the most appropriate instrument as it provides the timely support that the Government'sschedule for implementing the reforms requires.

Decisions were also taken on how to provide the technical assistance vis a vis the IDB. Rather than the World Bank fundingall activities in a particular sector and the IDB all those in another, it was agreed that both institutions would financeselected activities in each. This approach was chosen because available IDB commitments are not sufficient to cover thesupport requirements in the three sectors, and the Bank's worldwide experience in infrastructure privatization could bebetter utilized if it were to support key activities in each of them.

Project Appraisal Document Page 8Countiy: Panama Project Title: Utilities Restructuring Technical Assistance Project

9. Major related projects financed by the Bank and/or other development agencies.Sector issue Project Latest Form 590

Ratings(Bank-financed projects

only)IP DO

Bank-financedConsolidating trade reforms, competition policy, and Economic Recovery Loan IV (undercivil service reforms preparationStrengthening public finances/more efficient public Economic Recovery Loanexpenditure, trade and pricing reforms III(completed)Enhance country creditwortiiness Debt and Debt Service Reduction Loan

(completed)Improving health status through education and Rural Health Project S Simproved water supply.

Poverty alleviation - social and economic Fondo de Emergencia Social (recentlyinfrastructure effective)Other development agenciesDevelopment of regulatory frameworks and support IDB - Cooperaci6n Tecnica en Apoyofor privatization activities (cofinancing present WB al Proceso de Reestructuraci6n deloan) Infraestructura Basica (PRIBA,

FOMIN)Support for enterprise restructuring IDAAN IDB - Pr6stamo en Apoyo a la(cofinancing present WB loan) and minor public Reestructuraci6n del IDAANinvestments to ensure continuity of service (PREIDAAN)Enviromnental management IDB - Strategic Planning for

_____________________________________ Environmental Management10. Lessons learned and reflected in the project design:The design of this project draws on lessons learned in the delivery of technical assistance and in support of privatization inmany countries, including Panama. The most crucial are: sustained government ownership and commitment; flexible projectdesign; and regular supervision accompanied by substantive policy dialogue. Each of these are key features of the project(see 8 and 11). In addition, adequate preparation and coordination arrangements are important for ensuring timelyimplementation. Terns of reference for work to be carried out during the initial phase of the project have been prepared andincorporated into the project implementation plan. Similarly, coordination and oversight arrangements have been put inplace, which ensure consistent treatment of regulatory and privatization issues while assigning day to day activity executionto sectoral agencies.

11. Indications of borrower commitment and ownership:The strength of the Government's commitment to restructuring the infrastructure sectors and introducing private sectorparticipation is demonstrated by:

* enactment of comprehensive sectoral reform legislation for the electricity, water, and telecommunications sectors in early1996 following broad consultation with line agencies, industry, labor unions, and the public at large;* establishment of an autonomous entity to regulate provision of these services and its timely mid-1996 start-up;* successful negotiation with labor unions on terms of employment, severance and retraining policies;* establishment of statutory commissions to ensure transparency in the privatization process; and,* successful privatization of telecoms (telephone services and cellular), ports (Balboa, Cristobal, Manzanillo), transport(three highways), and power generation (80MW).


The breadth of commitment throughout the Government is extensive including the line ministries as well as the heads ofIRBE, IDAAN, and INTEL. No additional legislation is required to implement the restructuring program for theinfrastructure sectors.

12. Value added of Bank support:The Government of Panama values the Bank's worldwide experience in infrastructure privatization and modernization, notonly in terms of sector specific issues, but also for overall coordination of such programs. The Bank's presence may alsoserve to lend international credibility to the process, which may foster more competitive bidding and hence most efficientlyimprove the provision of key infrastructure services.

Block 3: Summary Project Assessments

13. Economic Assessment [] Cost-Benefit Analysis : NPV=US$ [] Cost Effectiveness [x] Other(see Annex 4): million; ERR= % Analysis: FiscalFiscal impact: The restructuring program is expected to have a significant, positive impact. Four dimensions of fiscalanalysis are presented in Annex 4; magnitude of expected sales proceeds, disposition of sales proceeds and debt servicesavings, liquidation of pension liabilities/severance payments, and transfers (taxes, dividends and subsidies).14. Financial Assessment (see Annex 5) NPV=US$ million; FRR= %Individual transactions will have a detailed financial assessment prepared by investment bankers or financial advisors.15. Technical Assessment: NA16. Institutional Assessment:Executing agencies: The long-term sustainability of the reform process requires effective operation of motivated, professionalregulatory and policy-making institutions. The sectoral legislation provides for the clear separation of Government's roles inpolicy/planning, regulation, and service provision, and defines the scope, functions, and powers of each. MIPPE/UTPP, theexecuting agency and principal policy institution, possesses considerable project execution experience including design andinitial implementation activities of the privatization program over the past year. The multi-sectoral regulator, established bylaw in late 1995, enjoys a high degree of financial autonomy and operational independence, a prerequisite for instillingcredibility and transparency in the exercise of its functions. The regulator has attracted 30 experienced professionals whoreceive remuneration at several times the civil service standard. The institution has performed well over the past year, issuingmany of the regulations required for the telecoms and electricity sectors. This work has been judged to be of high quality interms of its clarity and balance. For the three sectoral policy institutions in the water and electricity sectors (MINSA, CPE,and Oficina de Electrificaci6n Rural), qualified senior officials have been appointed. Organizational studies, to be completedin early 1998, will define work program priorities, resource requirements, and training needs.

While considerable organizational capacity and a sound legal framework are in place, successful sector restructuring andprivate participation in the utilities sectors will present increasing demands for policy-making and regulation. In conjunctionwith the technical assistance provided under the project, independent evaluations to assess institutional performance will beconducted bi-annually. In addition, the performance of the executing agency, MIPPE, will be a key focus of Bank supervisionmissions.

Project management: The project management structure and personnel, in place for the past year, have provided the necessarydegree of coordination among regulatory, policy making, and operating agencies. To avoid delays associated withprocurement of technical assistance and payment to consultants, the UNDP is being contracted to provide procurement agentservices. The executing agency has the capacity to handle some of the initial contracts, and a contract with the UNDP will besigned within 3 months of loan effectiveness.17. Social Assessment:The Government and labor unions agreed to policies and administrative procedures regarding rehiring and severanceconditions for existing labor force of INTEL, IRHE and IDAAN prior to passage of legislation last year (and are codified insuch legislation). Retraining programs for workers choosing early retirement form part of the project. New collectivebargaining agreements are to be negotiated after the new companies are formed and are to be ratified within 12 monthsthereafter.


18. Environmental Assessment:i. Environmental issues: Major: There are no major environmental impacts.

Other: (a) the existence of guidelines and capacity to incorporate enviromnental andsocial concerns into indicative planning; (b) the adequacy of existing service and systemenvironmental guidelines to monitor compliance; (c) the existence of environmentalliabilities that could effect proposed private sector participation; and, (d) the adequacyof measures to ensure citizen/community participation during program implementation.

ii. Environmental category: [B]

iii. Justification/Rationale for category rating: The Project will provide technical assistance in the process ofreforming the water and waste water, energy and telecommunications sectors and concessioning or privatizingfacilities in these sectors. The Project does not finance infrastructure investment and therefore will not have a directimpact on the environment.

v. Proposed actions: Sector legislation explicitly recognizes the environmental costs of service provision and therecovery of such cost through tariffs, and incorporates environmental concerns in sector policy, planning, regulation,and contractual arrangements with the public and private sector. Sector Policy and Planning: the project willsupport systems characterization work in the water sector, ongoing support to the Energy Policy Commission insector planning, resource conservation and renewable energy development, and support to MINSA for policy,planning, and monitoring for water and wastewater services. Regulation: The project will finance studies leading tothe formalization and updating of environmental standards for the electricity sector, water and waste water qualityand service standards, consolidation of the institutional framework, and training and equipment for key institutions.Privatization: The contractual documentation for share sale/concession of the electricity and water companies are toreflect the environmental protection and mitigation requirements as articulated in the environmental standards andguidelines and service standards to be issued by the Regulator (ERSP). Environmental audits will be undertaken ofinstallations to be privatized. Public Consultation:: The project will finance studies leading to issuance of regulatorydirectives on consultation and dispute resolution as well as on rights and obligations of clients in the water andelectricity sectors. It will also provide ongoing support to the regulator to develop and strengthen oversightcapabilities in these and other areas of regulatory jurisdiction. Community Participation: The development ofpolicies and programs to expand service provision in rural areas will be supported by community participation inplanning, financing, and management of facilities.

During project preparation, TORs have been prepared for environmental audits of installations to be privatized. Ahigh-level inter-agency coordinating group, led by ERSP and INRENARE, has been formed to oversee thepreparation of enviromnental audits, review and revise as necessary environmental standards and procedures foroversight of compliance. Studies underpinning the issuance of service, quality, and environmental standards, audits,and initial support for institutional strengthening will be carried out during the first year of implementation.

19. Participatory Approach: Identification/Preparation Implementation OperationBeneficiaries/community groups con con con

Intermediary NGOs is con conAcademic institutions col col con

Other donors col col conOther

20. Sustainability:By supporting the implementation of a comprehensive program for restructuring the major infrastructure sectors and the

implementation of the privatization process, the project will enhance the likelihood that private participation will foster the


anticipated gains in economic welfare and growth. The project's emphasis on the design and execution of appropriateregulations and policies prior to privatization and support for public institutions which will influence the operatingenvironment subsequent to the transfer of control to the private sector will be crucial to ensuring the sustainability of thereforms. Panama's sovereign credit rating (BB+ 12/97) reflects a widely held perception of macroeconomic stability andsound economic management. Lastly, the ongoing dialogue on further strengthening macroeconomic management and countrycreditworthiness should enhance the attractiveness of the Panama and the infrastructure sectors in particular as a destinationfor significant private investment.

21. Critical Risks (see fourth column of Annex 1):Project outputs to development objectives

Risk Risk Risk Minimization MeasureRatinz

Project outputs to development objectivesThe regulatory and policy agencies may be low Legislation creating autonomous regulator in place, funding forunable to attract or retain qualified staff . which is independent of general budget and whose salary scales

are well above civil service norms. For policy agencies,organizational studies will define resource requirements based onwhich budgetary requirements will be established.

Limited investor interest in privatization and low Design of regulatory frameworks and program of activeconcession opportunities. promotion and consultation with private sector will form basis

for elaboration of contractual arrangements. Both of theseelements will reduce risk of political interference and fosterappropriate risk sharing between the private sector, government,and consumers.

Political support for privatization weakens moderate Track record of commitment to implement privatization programduring electoral period (late 1998-mid 1999). which enjoys strong support among legislature, labor unions, and

interest groups. Preparation for privatization on schedule withkey facilities to be sold during the second half of 1998. Theprogram of public consultation and promotion is underway andwill be expanded over the next 12 months.

Project components to outputsDelays in hiring consultants low Use of procurement agent

Counterpart funds not available low Project has strong government support. Counterpart funds forcurrent year more than adequate and those for next year clearlyidentified.

Poor coordination among tasks and low GOP/WB/IDB agreement on content/timing of project activities,components common coordination and implementation arrangements, and

joint supervision. Bank supervision to be adequately resourced.Overall Risk Rating moderate


22. Possible Controversial Aspects:Water sector legislation mandates that cross-subsidies are to be avoided. This may necessitate tariff increases for certaincustomer classes and/or subsidies to be paid out of the general budget. The project will support analysis of demandcharacteristics of various customer classes as a basis for dimensioning service standards, performance targets, as well as thetariff regime.

Feasibility of the proposed mixed stock water company as modality for private sector participation in Panama Metro requiresvalidation and refinement. Project will support analysis of alternative risk sharing arrangements and investor/marketperceptions prior to finalizing contracuala documentation for bidding.

Block 4: Main Loan Conditions

23. Effectiveness Conditionsnone24. Other:Standard cross default in event of cancellation of TA activities financed under IDB's PRIBA, FOMIN, & PREIDAANprojects which provide support for Government's reform program for the infrastructure sectorsBlock 5: Compliance with Bank Policies

[xI This project complies with all applicable Bank policies.

Task Jo Halpern Country Manager: DomnnaDowsett-Coirolo

ANNEXES

Annex 1Panama Utilities Restructuring Technical Assistance Project

Design Summary

Narrative Sununary Key Performance Indicators Monitoring and Critical Assumptions andSupervision Risks

CAS ObjectiveSupport revival of sustainable Widespread acknowledgment Sound macroeconomicgrowth by modernizing the that quality and coverage of managementprovision of infrastructure services services have improved

Public expenditures Resources freed fromredirected toward the social infrastructure sectorssectors redeployed in social

programsProject Development ObjectivesTo enhance the efficiency of Timely issuance of regulatory Regulatory directives Concessions andprovision, improve the quality and directives privatizations successfullyexpand coverage of infrastructure transactedservices by providing an enablingenvironment for mobilizing private Favorable assessment from Financial appraisal by Sectoral and transactionsector expertise and capital on a financial conmmunity and investment banks and specific frameworkscompetitive basis, within an potential operators on entities financial consultants provide incentives forappropriate policy and regulatory to be privatized efficiency and investmentframework.

Political commitment toAdequate performance by key Bi-annual impartial even handedsectoral institutions in their independent review of regulatory oversightpolicy, planning, and regulator and sectoral maintainedregulatory roles agency performance

Project Outputs1. Electricity Sector: develop 1.1 Formulate key Evaluation studies Regulatory and policyframework for privatization of policies/programs in energy and "Prospectiva" making agencies capableIRHE, increased competition for or sector (renewables, nat.gas of hiring and retainingin the market, strengthen policy dev., energy conservation, skilled, capable staff andand regulatory oversight rural elec.) operate with requisitecapabilities, refocus rural degree of autonomy andelectrification program 1.2 Prepare regulations Draft regulations transparency

governing all economicaspects of service provision. No deterioration in

investors perceptions of1.3 Define new industry Draft regulations and broader enablingstructure, grid code and vesting contracts environment, sovereignconunercial arrangements. and country credit risk.

1.4 Define bid parameters Bidding andand prepare documentation contractual documentsfor sale of electricitycompanies

1.5 Key staff of CPE and Semi-annual reportsERSP have received adequatetraining and support.

2. Water/Sanitation Sector: 2.1 Define key risk allocation Evaluation reportsDevelop framework for parameters forprivatization of IDAAN, sale/concession of new waterexpansion of drainage and companiessanitation services, strengthenpolicy and oversight functions, 2.2 restructure IDAAN and Draft legal anddevelop rural water prepare entities for financial documentssupply/sanitation program. privatization for new companies

2.3 Preparation of Draft regulationsappropnate tariff, water andwastewater quality andservice standards regulations

2.4 Key staff of MINSA and Semi-annual reportsERSP have received adequatetraining and support

2.5 Develop key polices and Evaluation reportsprograms for water sector(subsidies, standards, ruralservice delivery)

3. Telecommunications sector: 3.1 Develop radio spectrum Installation ifDevelop capacity of regulator to management system equipmentmanage radio frequencies in amanner which promotes 3.2 Develop monitoring Draft regulationscompetition. systems and elaborate

procedures for license award,oversight, and disputeresolution

3.3 ERSP staff have received Semi-annual reportsadequate training andsupport

4. Multisectoral: Foster consensus 4.1 Issuance of CLICAC publications Broad political supportfor privatization, define guidelines/benchmarks for for private sectorenviromnental liabilities of water/electricity conservation participation maintainedexisting installations to be during period leading upprivatized, build capacity for 4.2 public support gauged Survey results to presidential elections,environmental oversight, through opinion surveys mid-1999.strengthen project managementcapabilities 4.3 environmental audits Evaluation reports

completed and environmental and draft standardsstandards and guidelinesprepared.

4.4 Planned (PIP) versus Semi-annual reportsactual project performanceindicators

Project Components Inputs1. Electricity Sector: Technical 1. Total cost US$10.1 million Semi-annual Timely contracting ofAssistance and training to: implementation consultants and otherrestructure and privatize IRHE; reports servicesdevelop regulations and oversee Quarterlycompliance; support systems disbursement data Close coordinationplanning, transmission among tasks andreinforcement, and operations; components is maintainedestablish CPE and Oficina de Elec.Rural Consultants are well

supervised2. Water/Sanitation Sector: 2. Total cost US$ 24.8 Semi-annual Counterpart funds areTechnical assistance and training million implementation availableto delineate new companies and reportsestablish risk allocation Quarterlyframework; prepare entities for disbursement aataprivatization; develop requiredregulations; prepare watershedand drainage master plans;strengthen key policy making andregulatory institutions (MINSA &ERSP); formulate sectoralpolicies; and develop sustainablerural water supply programs.

3. Telecommunications sector: 3. Total cost US$ 3.0 Semi-annualTechnical assistance, equipment, implementationand training to establish a radio reportsspectrum management system; and Quarterlyto strengthen the capacity of the disbursement dataregulator to license/concessionnew services and operators,monitor compliance, and manageresolution of disputes betweenoperators.

4. Multisectoral: Technical 4. Total cost US$ 3.7 million Semi-annualassistance, training, and implementationequipment to: carry out public reportsinformation and investment Quarterlypromotion dissemination; conduct disbursement dataenvironmental audits and reviewenvironmental standards andassessment p1ocedures; review oflegal framework governing wateruse rights; technical assistance foradditional privatizationrequirements and cross sectoralissues; and project management(support for implementing unit,external audit, procurement agent)


Detailed Project Description

Project Component 1 - US$10.12 millionElectricity

As noted in Section 6 of the PAD, in February 1997 legislation reforming the power sector wasenacted. The work program to be financed under this component will support implementation of thereforms contained in the legislation. The project includes assistance for the three principal elements ofthe sector reform program: (a) assistance in the unbundling of IRHE and in the privatization of theresulting companies; (b) support for the regulatory function, including assistance durmg the post-privatization period; and, (c) the establishment and strengthening of policy institutions.

IRHE is to be disaggregated into eight companies (four generation companies-three hydro and onethermal; three distribution companies and one transmission company, initially to be state-owned).Financial projections to assess the viability of the new companies, elaboration of the grid code(technical rules that will allow for integrated operation of the new companies), as well as draftconcession and vesting contracts are under preparation and will be ready by the end of 1997. This willbe followed by actual separation and vesting of the companies as commercial enterprises, which will becompleted in early 1998. The privatization advisor will then assist in the sale, beginning withdistribution companies which are to be sold during the last half of 1998. The generation companieswould be sold subsequently, beginning with the thermal generation company and then proceeding withthe three hydroelectric companies.

Most of the regulations and procedures needed by the Ente Regulador are under preparation and will becompleted by the first quarter 1998. These include regulations pertaining to the Electricity Law,tariffs, wholesale market (rules for the operation of generating companies' facilities and commercialarrangements), and technical standards applicable to generation, transmission and distribution services.Additional regulatory work will cover the rights and obligations of consumers, the review of theconcession contracts and guidelines for new IPPs.

Support for the establishment of policy-setting institutions targets the Comisi6n de Politica Energeticaand the Oficina de Electrificaci6n Rural. The Executive Director of the Comisi6n has already beenappointed and agreement reached on terms of reference for consultants to assist in the establishment ofthe Comisi6n. The work program for the establishment and initial operation of the Oficina deElectrificaci6n Rural has also been prepared. Subsequent work will focus on studies that bothinstitutions must undertake to discharge their responsibilities. For the Comisi6n, these studies includedemand projections for energy, background work for modernizing the policy framework for trade andmarketing of fuels, developing renewable sources of energy and for the importation of natural gas fromColombia, and energy efficiency and conservation. Studies undertaken with the Oficina deElectrificaci6n Rural will center on the implementation of a rural electrification program that is demanddriven and private sector led.

Assistance will also be provided after privatization takes place. The Bank will finance the training ofEnte Regulador staff, as well as at least two years of advisory support dealing with regulatoryoversight. Once the new transnission company is corporatized, the IDB will provide partial financingfor the necessary generation and transmission expansion studies.

The project will therefore fund the following activities under this component (baseline estimateexcluding contingencies; amounts in thousands of US$):Sub-Component Bank IDB GoPSupport for the unbundling and privatization of IRHE

Unbundling and vesting of new companies 150 1,140Sale of new companies 2,000

Support for the Regulatory functionOn-going studies 1,059Additional studies 375Assistance post-privatization 500

Support for Policy-setting institutionsSupport to MIPPE for coordination of the process 250Support to Comisi6n de Politica Energetica

Organization, MIS and training 550Studies (demand projection, natural resources, coal 1,100and gas, fuel distribution, energy conservation)

Support to Oficina de Electrificaci6n RuralOrganization and training 350Studies (policy issues & project feasibility) 450

Support for the Transmission Company (post corporatization) 2,200TOTAL 3,725 3,259 3,140

Project Component 2 - US$24.84 millionWater/Sanitation

As with the electricity sector, in February 1997 the Congress approved legislation that made sweepingchanges in the sector which provided the legal basis and defined key policies for incorporation ofprivate sector participation in the sector. The project includes assistance to support the four principalelements of this program: (a) segregation and privatization of IDAAN; (b) development andstrengthening of the regulatory function in ERSP; (c) strengthening of oversight, policy and planningcapacity in MINSA; and, (d) a worker's severance plan.

For the more urbanized areas of Panama, the installations currently under the control of IDAAN are tobe disaggregated into three companies which will be established under commercial statutes. A sectorcharacterization study is underway to provide technical, financial, and commercial information on thesystems to be transferred to the private sector. This work will define the geographic coverage of thenew companies and will dimension key contractual parameters such as service expansion and qualitytargets which will inform the key regulatory studies. It will also provide the basis for the followingenterprise restructuring activities: (i) preparation of audited financial statements; (ii) restructuringIDAAN into three new water companies (Panama-Metro, Central Provinces and Chiriqui), anddefinition of organization and operating statutes; (iii) identification of and measures to allocate andmitigate risks, as perceived by potential investors and the government, and their incorporation intocontractual documentation; and, (iv) preparation of bidding documentation, concession agreements,and sale facilitation.

ERSP has been created and properly staffed in recent months. Its regulatory functions will bestrengthened through assistance for the issuance of the reglamento for Law 2/1997 and for thepreparation of specific norms and procedures regarding the tariff regime, technical characteristics ofthe systems, rights and obligations of users of WS&S services, and model contracts. In addition to thissupport, under a separate contract, Coopers and Lybrand is providing organizational and capacitybuilding services to the new entity.

The strengthening of the oversight and policy development capacity of MINSA includes: (i) consultantservices for restructuring MINSA's current organization to allow it to better undertake the new rolesassigned in the sector reform legislation (expected to be completed by mid- 1998); (ii) designing andestablishing an information system, including basic laboratory equipment for water quality monitoringand an information management system, building on the information system being developed under thecharacterization study; (iii) consultant services for the characterization of rural water services and thedevelopment of sector policies and programs for assistance to rural communities; (iv) developingpolicies for service expansion to low-income populations through adequate and transparent subsidyinstruments; (v) developing the regulatory and policy framework for solid, hazardous and dangerousvvastes; and (vi) training. The project will also support the strengthening of the planning and policymaking capacity and the development of an enabling environment for private sector participation, byproviding assistance for studies, designs, training and equipment for a watershed management and adrainage master plan for the Panama Metro region, and for IDAAN's management of selectedinvestrnents during the transitional period leading up to private provision of services in Panama Metro.

Prior to passage of sectoral legislation, government and labor reached agreement as to the terms andconditions of labor redeployment. Reductions in staffing levels are to take place before privatizationand severance payments, to be financed from the general budget, are estimated to be on the order ofUS$10 million. Details as to terms of severance payments, timing and form are codified in legislation.

The project will fund the following activities under this component (baseline estimates excludingcontingencies, amounts in thousands of US$).

Suib Component Bank IDB GoPSegregation and Privatization of IDAAN

Audited financial statements 250Legal corporatization and restructuring 990Sale/concession preparation/facilitation 1,000Finalizing labor agreements, and retraining 280IDAAN management and investment plan 3012Characterization and Risk Studies 200

Regulatory FunctionTariff system norms and procedures 450Technical characteristics of water system 425Client nights and obligations 150Model Contracts 130

Policy Formulation, Planning & Institutional StrengtheningRegulations, Restructuring and Information System for MhINSA 1,350 200Technical assistance, coordination and training 400Characterization of rural water services and policy development 1,000Watershed and drainage master plan -Bay of Panama 3,300 300Regulatory and policy framework for solid and hazardous and 1,200dangerous wastesPolicy for subsidies and service to the poor 200

Workers Severance Plan 10,000TOTAL 2,750 11,787 10,300

Project Component 3 - US$3.0 millionTelecommunications

The new legal and regulatory framework for the telecommunications sector has been in place for morethan a year. The regulatory entity, established in early 1996, has accomplished a great deal since thattime. It has overseen privatization of INTEL and concessioning of cellular band A services; issuedbasic regulations governing the telecommunications sector which provide for competition in mostservices (basic telephony being the exception where five year exclusivity was provided); and, grantedconcessions for cellular and licenses for a host of other telecommunications services. Over the nextseveral years, the work of the regulator will grow to encompass not only licensing new providers, butalso managing the radio frequency spectrum, dealing with complex interconnection issues in a multi-carrier environment, and overseeing compliance of concessionaires, particularly INTEL which willenjoy substantial market power over the next three years. To build the institutional capacity necessaryto effectively undertake these functions, the project will provide support in two areas: establishment ofa modem system for managing radio spectrum and strengthening the capacity of the regulator to fostercompetition and oversee compliance.

As of today ERSP estimates that there are near 12,000 radio-frequencies in use in Panama. The newregulatory framework requires ERSP to manage the granting of licenses for radio-frequencies, controlits proper use, solve the interferences disputes, and sanction users for illegal use of the radio-frequencies. The Project will support the establishment of an integrated Radio Spectrum MonitoringSystem that would allow the ERSP to monitor the use of the Spectrum in the major urbanconcentrations, where the majority of radio emitters are located. Support will also be provided for aSpectrum Management and Administration System (SMAS), to allow the ERSP to manage the radiofrequency spectrum and to carry out the administrative tasks of the allocation, recording, notification,cancellation, billing of frequency licenses, and other functions required to comply with Panamanianlaw. The feasibility work for the frequency management system was completed last May and detailedengineering will be completed before the end of 1997.

Training and technical assistance for the ERSP telecommunications group will focus on the exercise ofeconomic regulation as related to oversight of concession compliance with expansion and quality ofservice obligations, auctions, interconnection policy, and resolution of disputes among operators. It willalso encompass training in operation of the Radio Spectrum Monitoring System, maintenance ofstations and the control center, surveillance procedures, and radio interference location and resolutionWith the assistance of Coopers and Lybrand, the ERSP is preparing a detailed assessment oforganizational requirements and human resource needs as a basis for elaborating the technicalassistance program.

The project will therefore fund the following activities under this component (baseline estimatesexcluding contingencies; amounts in thousands of US$):

Sub-Component Bank IDB GoPSpectrum Management System 1,700 500Consulting Services 500Training 300TOTAL 2,500 500

Project Component 4 - US$3.65 millionMulti-sectoral

TFhere are several aspects of the restructuring and privatization program common to the electricity andwater sectors, as well as those which are required to ensure effective implementation of the projectitself. These include environmental management, public information and education programs, projectmanagement (including auditing and training), and additional privatization needs.

Environmental management will comprise support for the following activities: (i) undertakingenvironmental audits of existing installations to be privatized in the water and electricity sectors; (ii)ongoing support to the environmental coordinating group, led by the MIPPE with the support of ERSPand INRENARE, who will ensure that enviromnental concerns are adequately incorporated into theregulatory, policy making and planning activities of the respective sectoral privatization programs; and,(ni) review of current arrangements governing the allocation and security of water use rights inPanama. The environmental coordinating group has begun work on selecting water quality andemission standards, which will underpin the mitigation plans developed in the course of theenvironmental audits. The group will prepare annual work programs beginning January 1, 1998 whichwill be the basis for defining yearly technical assistance and training requirements. Terms of referencehave been prepared for the environmental audits to be undertaken during the first half of 1998.

The education and information programs would seek to: (i) better understand the concerns of varioussegments of the population with respect to the privatization program, to then be reflected in programdesign and execution; (ii) support the efforts of the CLICAC to foster conservation and efficient use ofelectricity and water, as well as inform the consumers of their rights and responsibilities; and (iii)provide information to foster private participation.

Given the nature of privatization programs, it can be expected that unanticipated needs will beencountered in terms of new issues to address or studies to execute. Experience shows that flexibilitymust be a key feature of these programs, and therefore US$1 million has been allocated under thccncept of "additional privatization needs".

Finally, with respect to project management, the program will provide funding for the services of aprocurement agent, external auditors and strengthening MIPPE, the principal executing agency.

The project will therefore fund the following activities under this component (baseline estimateexcluding contingencies; amounts in thousands of US$):

Sub-Component Bank IDB GoPEnviromnental Management

Environmental audits 600Environmental oversight 300Water use rights 200

Education and Information Program 600Other Privatization Activities 1000Project Management

Procurement agent 48 352External audit 200Support to the executing agency 100 150 100

TOTAL 3,048 150 452


Estimated Project Costs(in US$ million)

Proiect ComDonent Local Foreign Total

Electricity SectorUnbundling and Privatization of IRHE 0.66 2.63 3.29Regulatory Function 0.29 1.64 1.93Policy Formulation, Planning and Institutional Strengthening 0.41 2.30 2.70Transmission company 0.66 1.54 2.20

Water SectorSegregation and Privatization of IDAAN 1.15 4.59 5.73Regulatory Function 0.17 0.98 1.16Policy Formulation, Planning and Institutional Strengthening 1.19 6.76 7.95Worker's severance payments 10.00 - 10.00

Telecommunications SectorRadio Spectrum Management 0.50 1.70 2.20Regulatory Function 0.08 0.72 0.80

Multisectoral ActivitiesEnvironmental Management 0.22 0.88 1.10Education and information campaign 0.48 0.12 0.60Other Privatization Activity 0.15 0.85 1.00Project administration 0.85 0.10 0.95

Total Baseline Cost 16.81 24.81 41.61

Physical Contingencies 0.03 0.09 0.11Price Contingencies 0.83 1.25 2.08

Total Proiect Cost 17.66 26.14 43.80

Proiect FinancinaGovernment 12.23 2.91 15.14IBRD 2.26 10.44 12.70IDB 3.17 12.79 15.96

Total 17.67 26.13 43.80


Fiscal Impact Calculations

Although not a primary objective of the restructuring and privatization program, substantial positivefiscal impacts are anticipated with most of the proceeds of privatization being dedicated to publicinvestment in infrastructure and the social sectors, as established in government policy and legislation.

Privatization Revenues.

The majority of revenues from privatization will come from the share sales in both thetelecommunications and electricity sectors. In 1997, 49% of INTEL shares were purchased by Cableand Wireless for US$652 million. The 1997 concession to Bell South for Cellular Band A serviceyielded US$76 million, and Cable and Wireless paid the same amount for Cellular Band B service.Numerous smaller concessions have also been granted for telecommunications frequency type B, whichyielded approximately US$1 million last year and are expected to yield a similar amount over the nexttwo to three years.

In the electricity sector, three distribution companies and five generation companies are expected to sellat least half their shares for a minimum of US$500 million. This estimate is based on their book valueand sale free of debt. At this stage, there has not been a market-based valuation of the companies,which would take into account investors' forecasts of potential profits considering the strength ofcompetition, the state of current assets, the initial commercial and vesting contracts for sale/purchaseof power, and the tariff regime.

In the water sector, IDAAN will be broken up into three companies and transferred to private controlvia share sale or concession. The Water Sector Reform Law, Law 2/97, stipulates proceeds fromprivatization of water and sewerage services will be used to capitalize the same companies. As such,proceeds from the water sector privatization will not generate revenues to the treasury.

Use of Privatization Proceeds for Social Investment

An important underlying rationale for the restructuring program is to free up budgetary resources andredirect public spending toward social programs. This goal has been explicitly spelled out ingovernment policy and legislation.' By law, privatization receipts are to be deposited in the FondoFiduciario, from which the interest earnings are to be used to finance social and infrastructureinvestment. It is expected that over US$1,300 million in privatization proceeds from the telecom andelectricity sectors will have been deposited in the Fondo Fiduciario by the year 2000. The investmentstrategy and return on Fondo deposits has to date been conservative (5% to 5.5%). Assuming the samepattem of return will continue, the US$1,300 million is expected to yield for US$500 million forinvestment over the next eight years. Given the country's development needs and priorities set out bythe government, it is assumed that were it not for the resources provided by the Fondo Fiduciario, thegovemment would instead finance the US$500 million in social and infrastructure investment throughsovereign debt on standard terms for US-dollar denominated bonds, and would pay around US$120

' See Desarrollo Social Con Eficiencia Economica 1997-1999 (Resoluci6n de Gabinete No. 222 de 19 deseptiembre 1997), Gaceta Oficial No. 23,393 de 7 de octubre de 1997 and Law 20/95 which creates the FondoFiduciario para el Desarrollo.

million in interest on this amount over the same period. The imputed cost of interest payments avoidedis based on average terms for government bonds.2

Cost of Severance Payments

Some reduction in work-force will be required as part of the restructuring and privatization program.Enhanced transitory severance and retirement benefits have been agreed with labor and established inlegislation. The GOP has provided the following estimates of the cost of severance packages: i)INTEL - US$54 million was paid out of sale proceeds; ii) IRHE - US$58 million to be paid in 50%stock and 50% cash; iii) IDAAN - US$10 million to be financed out of the general budget. While theseamounts are significant, they represent less than 14% of expected proceeds.

Net Impact of Transfers, Taxes and Dividends

The GOP currently receives transfers from IRHE, as it did from INTEL before privatization. Over thelast three years, transfers from IRHE averaged US$50.5 million per year. During 1994-1996, INTELtransfers to the central government averaged US$124 million per year. While privatization willpreclude this source of government revenue, it will be offset by corporate taxes to be levied on theprivatized companies and dividend payments to the government from shares remaining under publicownership. In the case of INTEL alone, tax receipts for the second half of 1997 are estimated atUS$42.5 million, and taxes and dividend payments for 1998 are estimated at US$89 million.Estimates of future tax receipts and dividends of privatized entities in the electricity sector areconservatively estimated on the order of US$75 million per annum.

IDAAN is currently dependent on government transfers to cover debt service and a portion of itsoperating costs. Over the last three years, these transfers averaged US$3.2 million per year. Waterservice concessions are expected to eliminate this drain on the government budget. Under privateservice operators, the government will provide subsidies to the poorest segments of the population;however, the subsidy program is expected to be less costly than prior goverrnent programs. Savingswill result from the efficiency gains from private service delivery and improved design of the programfor service delivery to poor (supported under this project). Presently, 30% of users are classified as"social sector" customers and charged half the standard water tariff. Given that the urban poverty rateis 21%/63, it is likely that "social sector" customers include middle and upper income households. Moreefficient management will reduce the number of misclassified "social sector" customers. Furthersavings will result from adaptation of innovative and cost-effective service delivery models being testedin the region. The new companies under private operation will also pay corporate and other budgetarytaxes and dividends to the government for publicly held shares.

2 September 1997, the government issued 30 year Global Bonds at 87/8%.3 People in Absolute Poverty (percentage 1980-1990), World Resources, A Guide to the Global Environment,The Urban Environment, 1996-1997, Oxford University Press, 1996, p.15 1.


Financial Summary(US$ rnillions)

Implementation PeriodFY98 FY99 FY00 FY01 Total

Project Costs

Investment Costs 6.59 22.80 8.11 6.30 43.80

Financing Sources (% of

total project costs)

IBRD (US$ millions) 1.73 5.10 3.74 2.13 12.70

% of Total Investment Costs for FY 26% 22% 46% 34% 29%

IDB (US$ millions) 3.13 4.86 3.92 4.05 15.96


Government (UJS$ millions) 1.73 12.84 0.45 0.12 15.14


Total 6.59 22.80 8.11 6.30 43.80


Procurement and Disbursement Arrangements

Procurement

Procurement of consultants would be done according to the provisions of the "Selection andEmployment of Consultants by World Bank Borrowers" (January 1997) and of goods according to theprovisions of the "Guidelines for Procurement under IBRD Loans" (January 1995, revised in Januaryand August 1996). For complex time-based assignments and for contracts based on a lump sum price,such contracts will be based upon the standard form of contract for consultant's services issued by theBank, with such modifications thereto as shall have been agreed by the Bank. Where no relevantstandard contract documents have been issued by the Bank, other standard forms acceptable to theBank shall be used. As noted in the project description, a procurement agent would be hired toexpedite project implementation. These services of this agent would be paid by the Government ofPanama with its own funds.

Table A of this section shows the project costs by procurement arrangements. Internationalcompetitive bidding procedures (ICB) shall be used for the purchase of equipment under the project,with contracts for goods where practicable being group into bid packages of US$250,000 or more.Goods estimated to cost the equivalent of US$50,000 or more, but less than the equivalent ofUS$250,000 per contract, may be procured using National Competitive Bidding (NCB), up to anaggregate amount of US$1,000,000. Goods estimated to cost less than the equivalent of US$50,000per contract may be procured through national or international shopping, up to an aggregate amount ofUS$750,000. For consultants, prior review will be needed for the terms of reference only for contractsbelow the equivalent of US$100,000 for firms and below US$50,000 for individuals. Contracts overthe equivalent of US$200,000 will be subject to review by the Bank of the Borrower's technicalevaluation of proposals, prior to the opening of the economic proposals. Consultant's services may beprocured, where appropriate, using the following options: Quality and Cost Based (QCBS), QualityBased (QBS), Selection of Consultants Qualifications (CQ), up to an aggregate amount of theequivalent of US$1,500,000 and by contracting with individual consultants, up to an aggregate amountequivalent to US$1,500,000. Requirements of prior review of other contracts for consulting servicesare summarized in Table B.

Disbursement

The Government, through UTPP, will request an initial disbursement to be deposited with theprocurement agent to cover expenditures for a period not to exceed six months. The procurement agentwill make payments directly to consultants and suppliers. Expenditures for individual contracts ofgoods and services, for which prior review by the Bank is not required, will be disbursed againstStatement of Expenditures (SOEs). For expenditures claimed on the basis of Statement ofExpenditures all records evidencing such information must be retained by UTPP until at least one yearafter the Bank has received the audit report for the fiscal year in which the last withdrawal from theLoan Account is made. Full documentation for all contracts requiring Bank's prior review will besubmitted. Applications for withdrawals will be prepared by UTPP and submitted to the Bank.Subsequent payments to the procurement agent would be based upon regular presentation ofexpenditures made by UNDP, as covered by the agreed procurement plan. Disbursements,representing mainly expenditures under short-term technical assistance, will be made over a period offour years, the average for technical assistance projects in the Latin American and Caribbean region.

Since the program has already commenced, retroactive financing not to exceed US$600,000 (5% of theloan amount) would be applied to finance eligible expenditures made after December 1, 1997 but nomore than a year before loan signing.

Since a PPF was approved for this program for a total of US$1,648,000, the amount disbursed at themoment that the Loan becomes effective will be charged against the Loan and all then outstandingdisbursements will be subsequently made from the Loan. In a few cases, contracts not financed underthe PPF will have to be processed prior to retaining the procurement agent. In these cases, the biddingprocess would be conducted directly by the implementing agency and disbursement would be madedirectly by the Bank to the contractors, at the request of UTPP.

The allocation of loan proceeds is provided in Table C of this section.

Table A: Project Costs by Procurement Arrangements(in US$million equivalent)

Total CostExpenditure Category Procurement Method (including

ICB NCB Other NBF contingencies)1. Consultant services 28.41 28.41and related expenses (9.31) (9.31)

2. Goods and equipment 2.42 2.42(1.87) (1.87)

3. Training 1.58 1.58(1.26) (1.26)

4. Project Management 0.89 0.89(0.26) (0.26)

5. Worker's severancepayments 10.50 10.50

Total 43.80(12.70)

Note:Amounts to be financed by the Loan are shown in parentheses

NBF: Not Bank FinancedOther: For the portion to be Bank financed, consultant services employed in accordancewith Bank Guidelines.Consultant services may be procured using the following techniques: Quality and CostBased (QCBS), Quality Based (QBS), Selection based on Consultants Qualifications(CQ), up to an aggregate amount of US$1,500,000 and by contracting with individualconsultants, up to an aggregate amount of US$1,500,000.

Table B: Thresholds for Procurement Methods and Prior Review

Expenditure Contract Value Procurement Contracts SubjectCategory (Threshold) Method to Prior Review

1. Goods >=US$250,000 ICB AllUS$50,000 to US$250,000 NCB First 2 contracts<US$50,000 Shopping None

2. Services

Finns >=US$200,000 QCBS/QBS/CQ All, including priorreview of Borrower'stechnical evaluation ofproposals.

>=US$100,000 QCBS/QBS/CQ All

<US$100,000 QCBS/QBS/CQ TORs only

Individuals >=50,000 Individual All<50,000 Individual TORs only

Table C: Allocation of Loan Proceeds

Expenditure Category Amount Financing Percentage

1. Consultant servicesand related expenses 7.66 100%

2. Goods and equipment 1.87 100% of foreignexpenditures(ex-factorycost); and 90% of otheritems procured locally

3. Training 1.26 100%

4. Project Management 0.26 100%

5. Refunding of PPF 1.65

Total 12.70

Table D: Procurement Categories for Consulting Studies

Note: QCBS: Quality and Cost Based System; QBS: Quality Based System; CQ: Selection onConsultants Qualifications; I: Individual Consultants.

Project Component: Electricity

Support for the Energy Policy Commission:Rules and regulations to implement the Electricity Law: US$150,000 IAssistance in coordination of restructuring: US$100,000 IAssistance in organization: US$150,000 QCBS/QBS/IEnergy demand projection and policy options: US$250,000 QCBSOptions for development/use of coal and Colombian natural gas: US$400,000 QCBSOptions to develop natural resources in the context of Law: US$150,000 QCBS/CQ/ICommercialization and distribution of petroleum-based fuels: US$200,000 QCBSCQ/1Energy efficiency and conservation: US$100,000 QC/IDevelopment of MIS and data bank: US$200,000 QCBSTraining: US$200,000 CQ/ISupport for the Regulatory Agency:Study to define rights and obligations of consumers: US$175,000 QCBS/IReview of concession contracts prepared by others: US$100,000 CQ/IPost privatization support: US$300,000 QBS/IAssistance in preparing tender documents to contract new capacity: US$100,000 CQ/ITraining: US$200,000 CQ/ISupport to the Rural Electrification Office:Assistance in organization: US$150,000 QCBSStudies to define policies and programming: US$150,000 QCBS\IFeasibility studies for selected projects: US$300,000 QCBSTraining: US$200,000 CQ/I

Project Component: Water

Support for MIPPE:Risk and Private Participation Study: US$200,000 QCBS/QBS/IStudy to define a subsidy policy: US$200,000 QCBS/QBS/I

Support for MINSA:Characterization study for the rural areas: US$500,000 QCBSOrganization of the rural water directorate: US$150,000 CQ/IStudy to define policies, including planning, investment,and development strategies: US$400,000 QCBSDevelopment of MIS: US$300,000 QCBSReal-time support of the supervision of water quality standards: US$500,000 QCBSOptions for Private Participation in rural water provision: US$300,000 QCBSTraining: US$200,000 CQ/I

Project Component: Telecommunications

Ongoing support in economic regulation: US$500,000 QBS/ITraining: US$300,000 CQ/I

Project Component: Multisectoral Activities

Environmental audits: US$600,000 QCBSAnalysis of water rights/use legislation: US$200,000 QCBS/QBSDevelopment of environmental and social policy/standards: US$300,000 QCBSEducation and information campaign: US$600,000 QCBS/IProcurement agent: US$48,000 CQExtemal auditing: US$200,000 QBSTraining: US$100,000 CQ/IOther privatization activity: US$1,000,000 QCBS/QBS


Environmental Framework

IntroductionThe reform program addresses enviromnental impacts from past and ongoing public enterprises, aswell as broad concems for environmental management of private service delivery. Building on theexisting environmental framework, the proposed project will address environmental issues that span allbasic infrastructure sectors. The program will specifically support the following environmentalmanagement activities: (i) the strengthening and restructuring of institutions to meet new policy,normative and oversight responsibilities; (ii) the review and updating, as necessary, of environmentalnorms (in particular, water quality and discharge norms for sewage and contaminating sludge); (iii) theidentification and evaluation of environment conditions of installations to be privatized, as well as plansto mitigate negative impacts; (iv) the increasing of capacity for coordination in environmentalmanagement.

Institutional Capacity for Environmental ManagementSince the mid-1980s, the GOP has built legal and institutional capacity for environmental management.Long standing provisions include the 1986 establishment of the Instituto Nacional de RecursosNaturales Renovables (INRENARE) to orient and direct environmental protection and conservationactivities, and the 1983 creation of the Comisi6n Nacional de Medio Ambiente (CONAMA), whichservices as a policy making and coordinating body within the Ministry of Planning and EconomicPolicy (MIPPE). The recently created regulatory entity, ERSP, and the sectoral agencies also possesdedicated enviromnental units, which have been operating for the past two to six years. These unitshave received training and support from IDB, USAID and GOP.

Sector Planning and Regulatory AuthorityPrior to the enactment of reform legislation (1996-97), IRHE and IDAAN functioned as policy makers,regulators and service providers. Reform legislation transferred these planning and oversightresponsibilities to independent bodies. In the electricity sector, Law 6/97 assigns policy and planningauthority to the Energy Policy Commission, and in the case of the water sector, Law 2/97 vests theMinistry of Health (MINSA) with these responsibilities. Importantly, the 1997 sector legislationdirects the policy making and plaming bodies to promote sustainable development and restoration ofthe natural resource base. The World Bank will finance consulting services to develop MINSApolicies and promotion of water and wastewater services, and to support to the Energy PolicyCommission through studies of renewable resource development and promotion of energy savings andefficient use.

Regulatory authority has been established distinct from policy setting and service delivery bodies. Inthe electricity sector, ERSP is responsible for establishing and verifying sector service quality norms aswell as overseeing compliance with environmental standards. MINSA will set water quality, discharge,technical and service standards, and as prior to recent legislation, will monitor compliance with waterquality and discharge standards. ERSP, in coordination with MINSA, will oversee compliance withwater quality and service standards. The World Bank will provide support to strengthen the capacityof ERSP and MINSA and will finance the development of monitoring and information systems forwater and waste water service provision.

Environmental NormsExisting nonrs governing water and electricity service delivery provide for a minimum ofenvironmental protection. The Sanitary Code and the Norms Commission set standards for potablewater and sewer discharge, all of which have been officially adopted by MINSA. The ElectricitySector Law 6/97 provides for transitory norms for ambient air quality, based on WHO guidelines, untilspecific environmental protection norms are formalized. A 1993 IDB/UNDP financed study identifiedemissions and noise norms for IRHE based on best practices around the world. Since that timne, IRHEhas voluntarily adopted these standards.

The IDB FOMIN project will provide support to the Ente Regulador to formalize these technical normsfor air as well as water quality, and service standards. The IDB PRIBA project will provide supportfor the review and formalization of norms for effluent discharge, sludge and service quality. Inaddition, IDB PREIDAAN will support the preparation of a Wastewater Drainage Master Plan for thePanama Bay and a Watershed Protection Plan for the Panama City Metropolitan Area.

Environmental Impact Assessment and Environmental AuditsThe 1994 Law 30 requires ELAs on all projects and human activities that effect the natural environmentand vests INRENARE with responsibility for review and compliance. The implementing regulation ofLaw 30 provides guidelines and procedures for EIA preparation, review and enforcement. The pendingEnvironmental Framework Law and its implementing regulations provide the proposed newenvironmental authority, Autoridad Nacional del Ambiente (ANA, which would absorb oversightfunctions of INRENARE), with the responsibility for oversight of environmental management acrosssectors. The IDB is supporting the implementation of the new legislation, including accompanyingregulations and institutional strengthening of INRENARE. Until the new environmental law comesinto effect, sector reform legislation assigns ERSP responsibility for oversight and compliance withenvironmental norms.

The World Bank will support the preparation of the environmental audits that will identify and evaluatethe environmental conditions of installations to be transferred to the private sector. The contractualdocumentation for share sale/concession of the new electricity and water companies are to reflect theenvironmental protection and mitigation requirements as articulated in the environmental and servicenorms already in place, in those to be issued by ERSP, and in the environmental audits.

Institutional CoordinationWhile the above described institutions and legal framework together form the basis for soundenvironmental protection, the framework has several weakness, namely the dispersion ofresponsibilities and competencies across institutions, lack of inter-institutional coordination, andincreasing charges assigned to incipient entities. In recognition of these weaknesses, MIPPE, with thesupport of ERSP and INRENARE, is leading an environmental coordinating group to assure consistentincorporation of environmental considerations throughout the privatization process. Group participantsinclude the executing agencies, MINSA, IRHE and CONAMA. Specifically, the group's objectivesare to: i) review existing and develop as necessary environmental norms which will regulate water andelectricity services; ii) identify and assign responsibility for environmental liabilities associated withservice delivery; and iii) improve the institutional capacity to monitor and enforce environmental normsand compliance and mitigation agreements. Several activities financed by this project, in addition toother international assistance and GOP support, will facilitate the achievement of these objectives.Specific activities, institutional responsibilities and support are outlined below.

Environmental Coordinating Grou Action PlanActivity Responsible Entity Time and Support RequirementsSelection of technical norms for ERSP Jan. - March 1998potable water, wastewater and air IDB/ FOMIN Technical norms foremissions air and water $383,000

IDB/PRIBA Revision and updateof discharge norms $175,000

Environmental Audits carried out ERSP, MIPPE, INRENARE March - Oct. 1998by consultant, directed by WB/ CT $700,000coordinating group

Allocation of responsibilities for ERSP, MIPPE May. - Dec. 1998environmental liabilities identified Various short-term consultanciesin the audits and development of a $100,000mitigation action plan

Incorporation of action plan into ERSP with the Investment Bank June 1998 - July 1999bidding documents, Responsibility transferred ANA Various short-term consultanciesconcession/license agreements and when functioning $100,000other contractual documents onservice deliveryMonitoring of envirommental ERSP Nov. 1998 -Feb. 1999mitigation agreements Responsibility transferred ANA WB/CT Support and training to

when functioning ERSP after disaggregation ofIRHE/IDAAN $500,000WB/CT MINSA monitoringsystem $500,000IDB - Strategic Planning forEnvironmental Management$600,000

Analysis of Existing Water MIPPE, ERSP, INRENARE Oct. 1998-Jan. 1999Resource Legislation WB/CT $100,000

Adoption of Envirornental MIPPE, ERSP, INRENARE Present - Dec. 1998Framework Law regulation and IDB - Strategic Planning foraccompanying norms Environmental Management

$600,000Development and adoption of MIPPE, ERSP, INRENARE March 1998 - Dec. 2000additional norms identified during WB/CT $300,000restructuring process


Project Processing Budget and Schedule

A. Project Budget (US$000) Planned Actual(At final PCD stage)

180 120

B. Project Schedule Planned Actual(At final PCD stage)

Time taken to prepare the project (months) 11 9First Bank mission (identification) 3/10/1997 3/10/1997Appraisal mission departure 12/1/1997 12/1/1997Negotiations 12/3/1997 12/3/1997Planned Date of Effectiveness 4/30/1997

Prepared by: Ministerio de Planificaci6n y Politica Econ6nica-Unidad Tecnica de Politicas P(iblicas

Preparation assistance: The following work has been undertaken or will be prior to loan signingPHRD Grant: Water sector characterization studyPPF: Electricity Sector: Organizational studies for CPE, Of. de Elec. Rural. Water Sector: Risk mitigationanalysis, subsidy policy, organizational study for MINSA. Multi-sectoral: enviromnental audits, educationand information programsOther: Electricity: Power Sector Restructuring Plan. Water: Modalities for Private Sector Participation,Action Plan-Implementation Strategy for Water Sector. Telecommunications: Reglamento ofTelecommunications law, feasibility study for radio spectrum management system, Multisectoral: Analysisof organizational and human resource requirements of ERSP

Bank staff who worked on the project included:Jonathan Halpern, LCSFP -Task Manager, Electricity and Water SectorsLuis Cosenza, LCSFP -Electricity SectorManuel Dussan, IENPD -Electricity SectorManuel Marino, TWUWS - Water Sector, EnvironmentAnna Welienstein, LCSFP -Environment, EconomistEloy Vidal, IENTI - TelecommunicationsDavid Varela, LEGLA - Country LawyerLivio Pino -Financial ManagementAdan Cajina - ProcurementMichael Fowler -Disbursement


Documents in Project File

Water Sector1. Modalities for PSP in Water/Sanitation Sector2. Action Plan - Implementation Strategy for Water Sector3. Decreto Ley 2 de 7 de enero de 1997, Por el Cual Se Dicta el Marco Regulatorio e Institucional Para

la Prestaci6n de los Servicios de Agua Potable y Alcantarillado Sanitario4. Estados Financieros, 1996 y 1995, IDAAN5. Informe Estadistico, 1996 y 1995, IDAAN6. Revisi6n de la Estrategia de Participaci6n del Sector Privado para el Sub-sector de Agua y

Alcantarillado, de marzo 1997

Electricity Sector7. Ley 6 de 3 de febrero de 1997, Por la Cual Se Dicta el Marco Regulatorio e Institucional Para la

Prestaci6n de Servicio Publico de Electricidad8. Informe Ejecutivo, enero -junio de 1997, Instituto de Recursos Hidraulicas y Electrificaci6n9. Reglamento Interno del Instituto de Recursos Hidraulicas y Electrificaci6n, de 5 de julio de 1985.10. Informe Ejecutivo, IRHE 199611. Informe Ejecutivo, IRHE 199512. Informe Estadistico, IRHE 199613. Estados Financieros, 1996 y 1995, IRHE

Telecom Sector14. Ley No. 31, de 8 de febrero de 1996, Por la Cual se Dictan Normas para la Regulaci6n de las

Telecomunicaciones en la Repuiblica de Panama.15. Ley 17, de 9 de julio de 1991, Por la Cual se Modifican los Articulos 8, 10, 11 de la Ley No. 14 de 29

de julio de 1987, el Artiuclo 2 de la Ley No 36 de 17 de octubre de 1980 y se Dictan DisposicionesSobre la Telefonia M6vil Celular

16. Ley No 43, 21 de julio de 1995, Por el Cual se Modifican Articulos de la Ley 17 de 1991 y se DictanOtras Disposiciones

17. Feasibility Study - Spectrum Management System18. Estados Financieros, 1995, INTEL19. Informe Estadistico, 1995, INTEL

Environmental20. La Salud Ambiental en Centroamerica. Una Visi6n de Futuro en el Marco de la Integraci6n21. Ley 30 de diciembre de 1994. Por la cual se reforma el Articulo 7 de la Ley No. 1 de 3 de febrero de

199422. Decreto Ejecutivo de 1997 (Propuesta), Por Medio del Cual Se Reglamenta la Ley No 30 de 30 de

diciembre de 1994 y se Dictan Otras Medidas.23. Proyecto de Ley de 1997, Por la Cual Se Dicta la Ley General de Ambiente de la Repuiblica de

PanamA24. Ley 1, de febrero de 1994, Por la Cual Se Establece la Legislaci6n Forestal en la Republica de

Panama, y se Dictan Otras Disposiciones25. Reglamentaciones de Instituto Nacional de Recursos Naturales Renovables (INRENARE), 03-9626. Normas Ambientales en el Sector Electrico, Normas de Emisi6n o Descargas para Centrales

Tdrmicas, IRHE, julio 199727. CONAMA: Antecedentes y Situaci6n Actual28. Decreto 29, de 3 de agosto de 1983, Por el Cual Se Crea una Comisi6n y se Adoptan Otras Medidas29. Decreto 31, de 12 de agosto de 1985, Por el Cual se Modifica el Decreto No 29 de 3 de Agosto de

1983.

30. Decreto No. 43, de 29 de noviembre de 1983, Por el Cual se Modifica y Adiciona de Decreto No 36 de3 de agosto de 1983.

31. (Listado de) Documentos, Informes/Estudios Realizados por CONAMA32. Reestructuraci6n y Fortalecimiento de CONAMA Propuesta

General33 Project Implementation Plan34. UNDP Program Agreement35. Desarrollo Social con Eficiencia Econ6mica, 1997-1999 (Resoluci6n de Gabinete No. 222 de 19 de

septiembre de 1997), Gaceta Oficial No. 23,393 de 7 de octubre de 1997.36. Ley 26, de 29 de enero de 1996, Por la cual se crea el Ente Regulador de los Servicios Publicos37. Ley 20, de 15 de mayo de 1995, Por la Cual Se Crea el Fondo Fiduciario para el Desarrollo38. Ministerio de Hacienda y Tesoro, Decreto Ejecutivo No. 31, de 5 de febrero de 1996, Por el Cual se

Reglamenta la Ley No. 20 de 15 de mayo de 1995 que Crea el Fondo Fiduciario para el Desarrollo39. Decreto Ley 1, de 7 de enero de 1997, Por Medio del Cual se Modifican los Articulos 2 y 3 de la Ley

20 de 15 de mayo de 1995, Por la Cual se Crea el Fondo Fiduciario para el Desarrollo40. Ley No 29, de 1 de febrero de 1996, Por la Cual se Dictan Normas Sobre la Defensa de la Comptencia

y se Adoptan Otras Medidas.41. Revision Sustantiva, Proyecto PAN/97/003, Cooperaci6n Tecnica de Apoyo al Programa Sectorial De

Reforma de Los Sectores de Infraestructura Basica, octubre 1997.


Statement of Loans and Credits

A. Statement of Bank Loans & IDA Credits in Panama(In US Dollar Millions)

Ln/Cr FiscalNumber Year Borrower Purpose Bank IDA Undis-

bursed

Number of Closed Loans/Credits: 34

3686 1994 Rep. of Panama Roads Rehabilitation 60.00 0.00 32.583841 1995 Rep. of Panama RuralHealth 25.00 0.00 20.823994 1996 Rep. of Panama Education Sector 35.00 0.00 31.214191 1997 Rep. of Panama FES 28.00 0.00 28.004158 1997 Rep. of Panama RuralPov. &Nat. Res. 22.50 0.00 22.50

B. Panama - Statement of IFC's Committed and Disbursed Portfolio (as of 30-Sep-97)(In US Dollar Millions)

Committed DisbursedIFC IFC

FY Company Loan Equit Quasi Partic Loan Equity Quasi PartiApproval y c

1993 Continental-PAN 1.36 0.00 0.00 0.00 1.36 0.00 0.00 0.001995 Manzanillo 23.56 0.00 0.00 32.33 23.56 0.00 0.00 32.33

Total Portfolio: 24.92 0.00 0.00 32.33 24.92 0.00 0.00 32.33

Approvals Pending Commitment

Loan Eauit Quasi Partic1997 BANCO 25.00 0.00 0.00 0.00

GENERAL

Total Pending 25.00 0.00 0.00 0.00Commitment:


Panama at a glance 8128197

afin Lower.POUEt and SOCIAL America niddle-

Panama &canb. 1ncol 'Developmentdlamond-

Populaion mid-1996 (Mfftiosf) Z7 48S t,125GNP per capita 996 (US$) 3,040 3,710 t,75 Life expectancyGNP 1996 tbions iJSS) 8 1 1,799 1,967

Average annuat growtvi 199040

Popu)atlon (e)1. l7 14 Leborl fore 4) 1. 127 4 GNP ) Gros

Most fecent estimate (lateslyearavaiable since 1989) capita enrollmrnt

Poverty headmnt Index tp ofpopuition)Urban poulation (% ofttWapOutdafOr) 6S 74 56Lfeexpectancyat birth (ySees) 73 89 67Infant mortality (per 1,00 live bbrhs) 2 37 41 Access to safe waterChild malnutrition f/e of OhIblren uiderS) 7Access tp safe water ("A ofpopulahonj 82 80 78Ilitercy (f of ppulaifor age +) a 9 1iGrosspnmwy yenrollment M fsctooh-aqe popu1ation) 106 110 104 -Panama

Male .. .. 105 Lower-middle-income groupFemale .. .. 10

KEY ECONOMIC RATIOS and LOG4-TERM TRENDS

1975 1s8s 1s3s 4296

GOP (idlbons lUS$) 1.8 4-9 79 8.2 Econom Ic ratloeGross domestic investmentGG DP , .. 251 23 6 Openness of economyEXports o goods and sericesGOP . . 37. 37.8

osst omestic saveigsKo3P 100.0 .. 24.1 23.8Gross nabonal savin,4sl0 P . .. 21. 220

Current account balancelGDP . -34 -1 6InterestpoymentlGDP 2z 6.1 50 24 Samngs InvestmentTotal detabGDP 50.5 962 908 75.7Total debt senceexports .. .. 24.5 15.0Ptesent vafue of debVGDP .1 .. t03.6Present value of debttexports . . 208 0 Indebtedness

197646 198641 1995 1996 1997405(average annual growth) - PanamaGDP 5,3 30 1.8 Z5 4.6 Lower-middle-ncomegroupGNP per capita 2.5 0,6 -t.4 1.8 4.7Eqortsofgoodseandserdces ,, 35 -27 4.2 48

STRUCTURE of the ECONOMY1975 1986 1995 1996

(° of GDP) Growth rates of output and Investment (%)Agriculture 83 8 2 400-Industry 141 13 5 30o-

Manufacturing 9 9 9 7 2DDoServmces 77 6 78 3 IOD m

Private consumption 60 8 621 .10e 91 92 93 S4 95 s8General government consumpton 151 141 GDI GDPImports of goods and services 38 8 37 6

1975-85 1986-96 1995 1996(average annual growth) Growth rates of exports and Imports (%)Agriculture 2 9 31 1 1 35Industry 95 13 -16 30

Manufactunng 6 8 0 2 07 25Services 34 16 3 8 20

Private consumption 4 7 -4 2 6 0General government consumpton -t 9 4 6 1 6Gross domestic investment 21t0 18 2 -3 5 .s 01 02 02 04 55 0Imports of goods and services 81 5 2 1 0Gross national product 48 2 5 0 4 33 P *

Note 1996 data are preliminary estmates Figures in italics are for years other than those specifiedThe diamonds show four key indicators in the country (in bold) comDared vwth its income-group average If data are missing, the diamond veilbe incomplete

Panama

PRICES and GOVERNMENT FINANCE1975 1985 1995 1996

Domestic prices Inflation (%)(XO change) SConsumer pnces 5 9 0 8 2 3Implicit GDP deflator 10 2 2 5 0 5 1 7 4

Govemment finance 2(56 of GDP) oCurrent revenue 291 27 6 91 92 93 94 9s 9gCurrent budget balance 3 5 4 2Overall surplus/deficit 0 2 04 G4P def CPI

TRADE1975 1985 1995 1996

(mililons US$) £xport and Import levels (mill. USS)Total exports (fob) 743 761 2w

Bananas 190 184Sugar 18 23 ZD.Manufactures

Total imports (cif) 1,980 2,076 wMFood 238 255Fuel and energy 317 352 wo

CapitalI goods 604 624 _________________

Exportpriceindex(1987=100) 116 136 90 91 92 93 94 9s 9s

Importpriceindex(1987=100) 164 165 Exporls o bnportsTerms of trade (1987=100) 71 82

BALANCE of PAYMENTS1975 1995 1995 1996

(millions US$) Current account balance to GDP ratio (%)Exports of goods and services 2,990 3,117Imports of goods and serces 3,071 3,103Resource balance -81 14 *-

Net Factor income -343 -300 2-Net current transfers 154 153

Current account balance, 90 t2 92 93 94 9| 9Sbefore official capital transfers -269 -132 2

Financing items (net) 484 382Changes in net reserves -215 -250 4-

Memo:.Reserves including gold (mill US$) 34 98 786 1,036Conversion rate (local/US$) 1 0 1 0 1 0 1 0

EXTERNAL DEBT and RESOURCE FLOWS1975 1985 1995 1996

(m/llions US$) Composition of total debt, 1996 (mill USS)Total debt outstanding and disbursed 932 4,759 7,180 6,320

IBRD 65 310 175 199 A CIDA a 0 0 0 G 199 109 D

Total debt sermce 73 469 734 467 1513 54IBRD 5 43 58 44 EIDA 0 0 0 0 654

Compositon of net resource flowsOfficial grants 11 26 1583 157 6Official creditors 70 58 -69 -190Private creditors 143 6 -11 82Foreign direct investment 8 59 124 275Portfolio equity 0 0 18 0 F

3298World Bank program

Commitments 24 51 25 65 A-IBRD E-BilateralDisbursements 26 26 3 69 8-IDA D-Othermultlatal F-PnvatePnncipal repayments 1 21 43 31 C - IMF G -Short-termNet flows 25 6 -40 37Interest payments 4 23 15 12Net transfers 21 -17 -55 25

Development Economics 8/28/97

M-\LA2\LA21NJHALPERN\PAD\PAD-PAN6.DOCDecember 22, 1997