Chile - Rio Elqui Groundwater Resources Project

RESTRICTED No. P-21 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the PROPOSED LOAN TO THE CORPORACION DE FOMENTO DE LA PRODUCCION to be guaranteed by THE REPUBLIC OF CHILE October 3, 1951 CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENt TO THE EXECUTIVE DIRECTORS CONCERNING THE PROPOSED LOAN TO THE CORPORACION DE FOMENTO DE LA PRODUCCION TO BE GUARANTEED BY THE REPUBLIC OF CHIDE 1. I submit the following report and recommendations on a proposed loan to the Corporacion de Fomento de la Produccion for a loan of US$ 1.3 million for the Rio Elqui Project. PART I - HISTORICAL 2. The original application for a loan to finance an irrigation project in the Rio Elqui Valley was presented to the Bank on June 18, 1950, by the Fomento Cortoration. It was based on the recommendations of the Frederick Snare Corporation for the first stage of the development of irrigation in the Rio Elqui Valley. The amount of the loan fequested was US$ 2,8 million, of which $1.9 million was to cover the cost of the imported equipment directly - pertaining to,the project and the balance of '0.9 million the,import of agri- cultural machinery. It was contemplated that the counterpart funds from the sale of the agricultural machinery would be used to cover the local currency cost of the project. 3. Under the date of August 13, 1951, the Fomento Corporation submitted a revised annlication in the amount of $1,25 million to cover the foreign exchange cost of the irrigation project. This revised application was based on a study made by Dr. Irving B4 Crosby4 a consulting geologist retained by the Bank. who made a reconnaissance field-investigation, and on other sources of information, 4. A formal loan application in the amount of US$ 1.3.million was sub- mitted on September 20. 1951. The increase of US$ 50,000 in the amount of the anplication represented adjustments in the estimated cost of the projects PART II - DESCRIPTION.OF PROFOSED LOAN Borrower 5. The Borrower would be the Corporacion de Fomento de la Producion,' a Chilean governmental corDoration organized in 1939 and entrusted with the task of aiding the economic development of the country. Fomento makes studies and plans for economic development, undertakes the execution of these plans directly or with the assistance of various private and public entities, and cooperates with or particinates in the activities of both pri- vate and public organizations to the extent that these activities fall within -2- the scope of its responsibilities. It is directed by a Council of 23.members presided over by the Minister of Economy and Commerce. Representation.on the Council is given to both Executive and Legislative branches of the Government as well as to public bodies, labor, agriculture.,industry.,.commerce and banking. Guarantor 6. The Guarantor would be The Republic of Chile, a member of the Bank. &mount 7. The loan would be in an amount of $1.3 million or its equivalent in other currencies, Purpose 8. The proceeds of the loan would be used to finance the foreign exchange cost of a three-year project for the exploration and possible utili- zation of the underground water resources of the Rio Elqui Valley. 9. The project would be divided into two phases: Phase One would consist of exploratory work to determine the amount of water which might be obtained by pumping in the valley of the Rio Elqui. This exploratory work would consist of (1) a geophysical survey to determine the volume of the water-bearing strata, (2) the drilling and pumping of a number of test,wells.in order to determine the rate at which water might be Withdrawn from its underground storage. and (3) tests to determine the rate at which the underground water flows. The withdrawal of funds for this phase would be conditiqnal upon the retention of technical consultants satisfactory to the Bank. Phase Two would consist of the installation of permanent pumps on the wells which, in Phase One, were found to produce quantities of water ade- quate for economical pumping and of the provision of electric power for the operation of the permanent pumps. The second .phase of the project would not be undertaken until the first phase had been sufficiently advanced to..rqmove all doubt as to the adequacy of the underground.water suDplies. 10. The total cost of the project is estimated as follows: Foreign Exchange Peso Total Phase Cost Cost Cost (All figures in U,S. Dollar Equivalents) One (Exploration) 885,000 445,000 1,330,000 Two (Operation) 500 235000 65000 1,300.000 680,000 1,980,000 -3- Interest, Commission and Commitment Charges 11. The loan would bear interest at the rate of 4 3/8% per annumi, including the statutory commission of 1%. The commitment charge would accrue from the effective date of the loan or 60 days from the date of the signature* whichever was the earlier. Amortization 12. The loan would be serviced by 14 approximately equal semi-annual payments of principal and interest commencing April 1, 1955, and ending October 1, 1961. If both phases of the project are completed. such semi- annual payments will amount to about $109,000; if Phase Two is not undertakent the size of the payments will be correspondingly reduced. 13. I consider that the proposed schedule for the repayment of principal, and the rate of interest and other charges in connection with the proposed loan are reasonable and appropriate to the project. Legal Instruments and Legal Authority 14. Appendix I contains final drafts of the following legal instruments to be executed to give effect to the proposed loan: A. A Loan Agreement between the Bank and Corporacion de Fomento de la Produccion. B. A Guarantee Agreement between The Republic of Chile and the Bank. 15. The Guarantee of The Republic of Chile would be given pursuant to Law No. 9298 of The Republic of Chile, effective January 29, 1949. PART III - APPRAISAL OF THE PROPOSED LOAN 16. The economic background against which the proposed loan is to be considered is set out in a study, "Economic Position of Chile" (Se.. Memo 708). dated August 28, 1951. 17. The technical aspects of the project to be financed by the proposed loan are discussed in a report, "Technical Report on Development of Ground- water Resources of the Rio Elqui Valley-in Chile"(Sec, Memo 705), dated August 20, 1951. Both documents have already been airculated to the Executive Directors. 18. Appendix II hereto contains the report of the Statutory Loan Com- mittee provided for in Article III, Section 4,.paragraph (iii) of the Articles of Agreement. -4.. Justification of the Loan 19. The increase of agricultural production in Chile'is regarded by the Chilean Government as a critical problem, the successful solution of which is essential for the country's economic development. Most of the nation's agri- cultural output is now produced in the central area of the country. The southern territories are mostly devoted to cattle raising.. In the provinces north of Santiago. agricultural production is relatively small and is mainly' confined to the irrigated river valleys. 20. At present the total area of land under irrigation in Chile is esti- mated at 1.3 million hectares. Of this, 1.1 million was originally financed by private organizations and about 200,000 hectares by the Government. Most of the land currently irrigated is located in the Central Valley. While the. irrigation systems are operated with reasonable efficiency, Bank technicians estimate that approximately 20% of the available water is currently wasted because the installations are not tended during the night, and maintenance is not up to standard in many cases. The administration and maintenance of the privately financed systems is the responsibility of the persons whose land is irrigated and charges are made for water consumed. The law requires that . governmentally financed systems be turned over to the land owners for adminis- tration under arrangements which will ensure that the governmentally invested funds are repaid. In practice, this has seldom been done and, because of political pressure, most governmentally financed systems have remained under government administration and no charge has been made for water. It is expected that the Joint Bank-FAQ Technical Mission, which has just returned from Chile, will suggest measures for improving present shortcomings. 21. In the.northern valleys of Chile, there is a substantial amount of irrigated 3And with an insufficient water supply and between 150,000 and 200,000 acres of good land which are not under cultivation at present. It is conservatively estimated that at least one-third--and probably much more-- of the latter could be irrigated with water from underground sources, If an adequate water sunply were available, the productivity of the presently cul- tivated lands could be greatly increased and the new lands could be brought into production. Chile's northern valleys could then be able to supply the important mining communities of the north with a substantial portion of the foodstuffs which they now have to import. 22. The Rio Elqui Valley, located about 400 cilometers north of Santiago. produces mainly hay, grains, pulses, vegetables, fruits and grapes for.wine.. There are in the valley about 50,600 acres of cultivable land most of which are now served by irrigation canals. Administration of the existing facili-P ties in this valley is efficient and little water is wasted. Nevertheless. due to the uncertainty of water supply. about 10,000 of these acres are not cultivated even in-good years. Records of the last 23 years show that in one year out of three on the average, and once for as many as five years in suedes- sion, the water available has been insufficient even for the 40,000 acres now under regular cultivation.. 23.. The eventual results of the proposed project cannot be determined until the exploratory work has been completed.. Upon completion of the pumping tests and other exploratory work, reasonable estimates of the amount of water available can be made. If the wells drilled for test pumping produce-the volume of water anticirated, they could be utilised to make up a part of the deficiency in the water sunply. It-is therefore proposed in Phase Two to install permanent pumping equipment to utilize the water available from the- wells proved up in Phase One. Since the water so obtained would be an assured additional sunply, it would permit the cultivation of about 5,000 additional acres annually.- However, in the opinion of all the geologists who have investigated the valley, the exploratory work should prove the existence. of extensive underground water resources. If it does so, the present defi- ciency of water on the entire 50,600 acres in the valley could be eliminated and perhaps up to 21,000 additional acres of land nearby.could be irrigated and brought under cultivation. To do so would require the installation of important works in addition to those included in the present project. 24. Although the increased production which would result from the suc- cessful completion of Phase Two would be substantial, that in itself should not be regarded as the sole justification of the project. 25. A substantial part of the exloratory equipment which would be used in the first phase of the project would have a useful life five times greater.. than the one year estimated for the completion of the first phase, and would be available thereafter for further exploratory work in Chile. The cost of this equipment should therefore be considered in relation to an exploratory project much larger in scope than the one now under consideration. 26. If the present project successfully proved the existence of large underground water resources in the Rio Elqui Valley, it would have provided a basis for determining accurately the cost and justification of a more exten-. sive irrigation project in this valley. It should also be noted that the conditions on the Rio Elqui are typical of the rivers in northern Chile. All have their sources in the snow fields of the Cordillera and fall to the sea within an average distance of about 150 kilometers. If the Rio Elqui project for underground water development were suoceesful, it would point the way to the development of other river valleys in northern Chile which, though arid, have rich soils and mild climates, thus assisting Chile to increase agricul- tural output. Summary of the Economic Situation 27. As indicated in the economic report, referred to in paragraph 16, the Chilean economic situation still causes concern both within and outside the country. Government deficit financing and bank credit expansion have continued to bring about a substantial increase in the money suMply which has not been matched by an increase of domestic production or by imports, which have been limited by foreign exchange availabilities. The Chilean authorities have shown themselves aware of these problems and have taken some steps which may facilitate their solution. 28, While no positive measures directly aiming at reducing monetary expansion have yet been taken, the Government has initiated other action which -6- may favorably affect production and investment. A Joint Bank-FAO group has recently returned from Chile, where it studied the practical possibilities for agricultural improvement, and is currently preparing its report. Further- more, the President of Chile has anpointed a high-level Committee of Govern- ment officials to advise upon development policies on the basis of technical and economic studies, while a new Planning Department has been established in the Pomento Corporation to prepare these studies in collaboration with other agencies. 29. Over the short term, prospects for copoer and nitrate exports-are good, although over the longer term only moderate growth of total exchange earnings can at present be expected. While Chile's present foreign debt appears to be relatively large, the pronosed loan is not of a magnitude which materially affects the problem of service. Furthermore, successful .completion of the project could assist in easing balance of payments pressures by facili- tating increase of agricultural production. Requests for additional loans, which may in total involve substantial amounts, are currently under considera- tion. The Bank staff is reviewing not only the technical aspects cf these projects, but also the consequences of large additional borrowing on the economy of Chile. iProspects of Fulfillment of Obligations 30, The local currency costs of the proposed project would be provided from the Budget of the Direccion General de Obras Publicas (DOP). They are estimated to amount to pesos 40.8 million (US$ 680,000), to be spent over a period of three years, from January 1952 until about the end of 1954. 31. Work on the exploratory and operational phases would be carried on by DOP through its irrigation division, which is in charge of the Governmentts irrigation program. In order to ensure that the work would be properly under- taken, the proposed Loan Agreement provides that Phase One of the work would be carried out with the assistance of technical experts satisfactory to the Bank. Fomento would render services such as purchasing the equipment, hiring the consultants, and giving such technical advice as might be required, and would provide the local currency for the timely completion of the project if adeduste funds for this purpose should not be available to DOP. The proposed Loan Agreement provides, as a condition of the effectiveness of the Loan, that Fomento would make with DOP arrangements satisfactory to the Bank for carrying out and completing the project in accordance with the provisions of the.Loan Agreement. The Government guarantee would cover the performance of Fomento's obligations under the Loan Agreement. 32. I am satisfied that there is a reasonable prospect that Fomento and the Guarantor would be in a position to meet their obligations-under-the pro- posed loan and that'in making this loan, the Bank would be acting prudently in the interest of The Republic of Chile and of the members of the Bank as a whole. -7- PART IV - COMPLIANCE WITH ARTICLES OF AGREENENT 33. I am satisfied that the pronosed.loan would comply with the Articles of Agreement of the Bank. I am also satisfied that in the prevailing circum- stances, Fomento would' be unable to obtain elsewhere a loan of the amount herein contemplated on reasonable terms. PART V - RECOMMENDATIONS 34. I recommend that the Bank at this time make to Corporation de Fomento de la Produccion a loan of US$ 1.3 million or the equivalent thereof in other currencies for a term of 10 years with interest (including commis- sion) at the rate of 4 3/8% per annum, and on such other terms as are specified in the draft Loan and Guarantee Agreements, Eugene R. Black October 3, 1951