Honduras - Fifth Power Project

CIRCULATING COPY R ESTRICTED Report No. P-1089 TO BE RETURNED TO REPORTS DESK FIL'E COrmY This report is for official use only by the Bank Group and speciitcally authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK POR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF.THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESA NACIONAL DE ENERGIA ELECTRICA WITH THE GUARANTEE OF HONDURAS FOR A FIFTH POWER PROJECT June 12, 1972  CURRENCY EQUIVALENTS US$ 1.00 = 2.00 Lempiras (L) L 1 = $ 0.50  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESA NACIONAL DE ENERGIA ELECTRICA WITH THE GUARANTEE OF HONDURAS FOR A FIFTH POWER PROJECT 1. I submit the following report aind recommendation on a proposed loan to *Empresa Nacional de Energia El6ctrica (ENEE) with the guarantee of the Republic of Honduras for the equivalent of $12.3 million to help finance a power project. The loan would have a term of 24 years, including a four year grace period with interest at 7-1/4 percent per annuam. The proposed Loan and Guarantee Agreements incorporate certain changes, which are explained in paragraphs 37 and 38, in the Fourth Power Project financed under Loan 692-HO and Credit 201-HO. PART I - THE ECONOMY Recent Developments and Prospects 2. A report entitled "Current Economic Position and Prospects of Honduras" was distributed to the Executive Directors in September 1969. A recent report, based on the findings of an economic mission which visited Honduras in October and November 1971, will be available for distribution to the Executive Directors early in FY1973. The main recommendations of this report are the need to restore fiscal equilibrium, the urgency of Honduras' negotiating a reasonable basis for renewed full participation in the Central American Common Market (CACM), and the importance of policies to diversify the economy, especially through government action to encourage forestry. A country data sheet is attached as Annex II. 3. Honduras is a small open economy, heavily dependent on the export of bananas, although a modest degree of diversification has taken place in the last decade through the development of new export products such as meat, simple man- ufactures, cotton and tobacco. Its resources are rather limited. It consists mainly of the fertile coastal plain in the north, a few fertile valleys in the east, and extensive but largely unexploited natural pine forests. Known mineral deposists are not extensive; they include silver, lead and zinc, which have been exploited on a small scale for decades, and low-grade iron ore. Although the average population-to-land ratio is favorable, population has traditionally concentrated in the mountainous west, the poorest area of the country, and on the north coastal plain. In the future, as population pressure increases in these areas, heavy investment in physical infrastructure will be necessary to facilitate the population of areas further to the east. This process has already started as the road network was improved and expanded in recent years.  -.2 It. With a per capita income of $275 in 1971, Honduras is the poorest country in Central America. Growth has not been smooth: although real GDP rose at an average annual rate of 5.6 percent in the 1960's, much of this expansion took place in 1964-68, on the basis of substantial investment and subsequent large increases in output and export of bananas. Since then the economy has been in recession, per capita income has stagnated, and the bal- ance of payments has weakened considerably. Several factors have contrib- uted to the recession, including severe hurricane damage to banana and other crops in 1969, coinciding with the war between Honduras and El Salvador and the consequent reduction in private investment; the withdrawal by Honduras from the free trade arrangements of the Central American Common Market (CACM), a move which has adversely affected a number of export industries; and, finally, the weakening of banana export prices in 1971. 5. Relations with the other members of the CACM are important: the CACM absorbed Honduran exports of staples which have no ready market else- where, and it provided the additional markets necessary for the establish- ment of factories making textiles, clothing, chemicals and metal products. The Honduran authorities felt, however, that the benefits of CACM did not offset the higher cost of imports together with the revenue loss arising from regional free trade. The other members of CACM recognize the validity of Honduran complaints about past trading arrangements. A number of proposals have been informally discussed in the CACM, but so far no agreement has been reached between Honduras and the other coantries, partly because of the bor- der dispute with El Salvador. The delay in arriving at a formula for renewed trade relations between Honduras and the rest of Central America is adversely affecting Honduras' agriculture and industry. At the present time the Common Market Secretariat ('SIECA) is eompleting a study of possible arrangements to reestablish regional free trade. 6. During most of the 1960ts, the Government carried out many schemes essential for economic growth. Among the major achievements in this period were the establishment of a basic transport network connecting the main popu- lation centers, the provision of electric power and telecommunications ser- vices, and the doubling of primary school enrollment. Until 1968, there were no financial difficulties in carrying forward these schemes, mainly because of the fast growth of government revenues based on the introduction of a general sales tax and higher income tax rates in 1964, and larger tax payments by the banana companies. Since 1969, however, the public sector has experienced a sharp deterioration in its finances, initially because of defense and other emergency expenditures connected with the 1969 border war with El Salvador, and later because the normal growth of government current expenditures out- stripped that of current revenues. Public sector savings declined from an average of 2.7 percent of GDP in 1966-68 to 1.6 percent of GDP in 1969-71. In spite of this, the public sector maintained an impressive investment effort with the average investment ratio rising from 3.6 to 6.2 percent of GDP over the same period. A large increase in net foreign financing did not cover the overall public sector budget deficit, and the Central Bank was required to finance the gap, equivalent to about 1.5 percent of GDP in 1969-71.  -3- 7. The Honduran Government is at present preparing a development plan including a public investment.program for the next five years. The Bank's recent economic mission has analyzed the Government's draft investment pro- gram, which continues to stress investment in physical infrastructure, particularly transport awnd power, but also includes a substantial increase in investment in the social sectors such as education and water supply and in directly productive sectors, giving special emphasis to agricultural diversification. The implementation of such a program would result in an increase in public investment to about 8 percqnt of GDP in 1975-77. However, there may be a shortage of public savings. The fiscal gap which emerged in the last two years is manageable, but action on the revenue side will be required to maintain growth. The additional taxes required represent one percent on GDP in the coming year, with a second increase equivalent to an additional one percent of GDP two years later, as public investment proceeds faster. On such a basis, public savings could be expected to increase from their present level of 1.6 percent of GDP to over 3 percent in the mid-1970's, and the share of investment financed by these savings would be close to 40 percent compared to about one-third in recent years. 8. In the medium term, the Government must take the initiative to revitalize the economy, owing to the rather poor outlook for the major exports - bananas and coffee - which largely determine economic growth. The public investment program would thus be an important factor in giving momentum to the economy; in addition, the Government needs to stimulate private investment. The forestry sector offers the best opportunity for the medium-term diversification of production and exports. Honduras has the largest pine forests in Central America, and would have a market for pulp and paper prodacts in the requirements of the neighboring countries for cardboard boxes used in exporting bananas. Various institutional difficulties inhibit the prompt establishment of such an industry, but an imaginative approach, perhaps drawing together capital from other Central American countries, could help overcome some of these problems. External Finance 9. The external lending agencies have strongly supported public investment in Honduras. Outstainding external public debt, including debt repayable in local currency, increased from $32 million at the end of 1959 to $205 at the end of 1970. Honduras' major external creditor is the World Bank Group, which accounted for almost one half of external public debt outstanding - including undisbursed - repayable in foreign currency on December 31, 1970. Other. important creditors are USAID, the Inter- American Davelopment Bank (IDB) and the Central American Bank for Economic Integration (CABEI). USAID has financed education, health, feeder roads, water supply, and silo construction for an agricultural commodity price stabilization program, and it was also instrumental in the formation of a private industrial finance company. IDB has been involved in housing, education, water and sewerage and, to a lesser extent, highways. It also supports agricultural and industrial projects by means of general credit  lines to the publicly-owned development bank. The bulk of CABEI lending has been for projects with a regional impact in transportation, industry and telecommunications, but it has also financed housing. AID loans normally have been for a term of 40 years with interest of 2 - 3 percent, and most IDB loans have been from the Fund for Special Operations carrying 3-4 per- cent interest and terms ranging from 15 to 30 years. The terms of CABEI loans, which often finance 100 percent of the total cost of projects, have varied in accordance with CABEI's own source of financing, but they nor- mally have contained a substantial concessionary element. Lending commit- ments by the major external agencies active in Honduras are summarized in the table below: COMNETMENTS BY MAJOR OFFICIAL LENDING AGENCIES (Net of cancellations, at December 31, 1971) IBRD IDA AIDL IDB ' CABEI2 ($ million) TOTAL GROSS LENDING 58.1 24..0 51.3 76.4 7h.1 1950-65 25.9 11.9 26.7 27.2 8.1 1966-71 32.2 12.1 24.6 49.2 66.o of which was for: Transport 19.2 11.6 33.3 Power 13.0 9.5 4.3 Telecommunications 2.7 Education 9.0 7.6 Health 2.6 Housing 12.5 4.6 Agriculture 2.6 11.0 15.3 Industry 1.5 2.2 19.5 Other 0.5 1.6 j includes foreign exchange loans repayable in local currency. IDB and CABEI are expected to continue financing projects in the sectors which they have supported in the past. USAID, on the other hand, may concentrate its future lending in agriculture, depending on the results of an ongoing sector survey which it is financing. 10. Since its poverty and uncertain balance of payments prospects make it difficult for Honduras - one of the least developed countries in Latin America - to borrow substantial amounts on conventional terms, external agencies have extended financial assistance on fairly soft terms even though debt service, while it has risen significantly in the last few years, is still low. It would be desirable if future assistance could also be on concessionary terms and, accordingly, I hope to be able to present for your consideration an IDA credit to finance education during the next fiscal year.  -5- However, Honduras does have some margin for borrowing on conventional terms; assuming that the average terms of external borrowing were to remain more or less the same as in the past, the debt service ratio would rise to about 6.5 percent by the end of the decade. This would be within manageable limits for an econaay such as Honduras, which can therefore be regarded as creditworthy for the proposed loan. PART II - BANK GROUP OPERATIONS IN HONDURAS 11. Honduras has to date received ten Bank loans totalling $58.1 million and five IDA credits totalling $24.0 million, both net of cancel- lations, making a total of $82.1 million. At the end of April, the Bank and IDA held about $71 million, including $19 million not yet disbursed. The latest operation, a loan for ports, was signed in June 1971. The proposed loan is the only operation in Honduras to be presented for your consideration during the current fiscal year. 12. Execution of Bank Group financed projects has, on the whole, been satisfactory, although there have been delays in implementing a highway pro- ject and difficulties with a port loan. Annex I contains a summary state- ment of Bank loans and IDA credits as of April 30, 1972, as well as notes on the execution of ongoing projects. 13. Bank and IDA lending has been heavily concentrated on transport and power, where there are still substantial deficiencies to be made good. The first livestock development credit approved in 1970, however, marked the beginning of a major diversification in lending. The proposed lending program would support the priorities of the Government's investment plan, by continuing to strengthen physical infrastructure and giving increased emphasis to investment in social and directly productive sectors. 14. In transport this means continuing to assist the Government to complete highway links between the main regions of the country, but also assisting in the construction of a network of feeder and access roads to support agricultural development. Thus, a road project now under preparation would finance the construction of the first main highway to eastern Honduras as well as access roads in the area, potentially one of the most productive in the country. At the same time, the proposed loan and a further loan for power contemplated for FY197h, would have as a principal objective the pro- gressive integration of the power system of Honduras with the power systems of other Central American countries. Some assistance to the Government in its rural electrification program is also in prospect. 15. Over the past two years the Bank has been working closely with the Government to develop programs in education and agriculture. At the request of the Government, a UNESCO mission - under the Cooperative Program - has identified technical and vocational education, including teacher-training, as areas  -6- which have long been neglected and which deserve the highest priority. Dis- cussions are under way with the Government on a first education project to be financed by the Bank Group. The objective of lending for agriculture is to assist in diversifying the economy and developing competitive exports of high value products. A second livestock project, which is now under prepa- ration, would be broader in scope than the first, including financing for dairying, pig production and slaughterhouses, and a large component of technical assistance to train local technicians in livestock production and help small farmers to participate in the project. In irrigation, an IBRD/FAO mission has identified several possible projects for Bank financing but further preparation work is still needed. 16. IFC has participated in two projects in Honduras. A total of $378,000 was invested in a leather tanning project in 1964 and 1966. The more important operation, in terms of its potential contribution to Honduras' long-term economic development, is a pilot project for a pulp and paper industry to utilize the wood resources of the Olancho Reserve. A pilot company, Compaflia Celulosa de Centro America S.A. (COPINO;), was established in June 1968, under the leadership of International Paper Company (IPO), to investigate and possibly carry out a project. IFC invested $75,000 in COPINO in 1969 and 1970. After IPC discontinued its participation in COPINO in March 1971, the Government requested IFC's assistance in seeking a new technical partner and formulating a new financial plan for the project. Before taking further steps to promote the project, IFC is awaiting the outcome of a govern- ment sponsored proposal to rescind a provision in the recently enacted forestry law which in its present form would require majority ownership by the Government of any enterprise engaged in exploiting forest resources. Annex I contains a summary of IFC investments as of April 30, 1972. PART III - THE POWER SECTOR Background 17. Development of public electrical services in Honduras has lagged behind the rapidly growing needs of agriculture and industry, sectors which play an important role in the country's economic growth. Generation doubled in the past five years, but electricity is available only in a few parts of the country, and where available it is quite expensive. Annual electricity consumption of 116 kwh per capita is the lowest in Central America, where average consumption ranges from 124 kwh to 500 kwh per year in the other countries. 18. The Empresa Nacional de Energ{a Electrica (ENEE), a public enter- prise, supplies 85 percent of total electricity available for public supply, and serves approximately 60,000 customers. The United Fruit and Standard Fruit Companies own the largest private utilities, which account for another 13 percent of total electricity available; the remainder is supplied by local municipal systems. 19. The Bank Group has been associated with the development of the Hon- duran power sector since 1959; it was instrumental in building and improving ENEE, and with four loans and two credits totalling $32.8 million has  7- provided the bulk of financing required to implement ENEE's expansion plans. The Rio Lindo Hydroelectric Project (Third Power Project), which is sub- stantially ccmpleted, expanded substantially ENEE's hydroelectric generating capacity and distribution system. The Fourth Power Project, currently being implemented, will further strengthen the main system and extend it to several small cities in the northern and central zones. The Bank has also worked with ENEE in designing a rural electrification program, implementation of which is expected to start in 1974. A special fund has been set up to finance this program mainly with funds from the Government which will be derived from the spread between the terms of IDA Credit 201-HO (for the Fourth Power Project) and the terms on which the funds are relent to ENEE. 20. ENEE's main system serves the most heavily populated and industrial- ized section of the country, stretching from the San Pedro Sula area in the north to the capital city of Tegucigalpa in the central zone. The system presently consists of six power plants (two hydro, three diesel and one gas turbine) with an installed capacity of 105 MW and 274 km of transmission lines. In addition to its main system, ENEE operates 14 isolated diesel plants with a total installed capacity of 6.2 MW. 21. ENEE's sales are expected to increase by about 21 percent per year in 1971-76, compared to 16 percent during the past five years. The increase in the rate of growth of sales is mainly due to the expansion of ENEE's system into areas which at present do not receive electricity. Moreover, the unsatisfied demand for power in areas presently served remains high,and sales in these areas are expected to increase at an annual rate of 15 percent over the next five years. Industrial customers, which accounted for 54 percent of ENEE's sales in 1970, have requested more power from ENEE to replace their own inefficient captive plants, and new medium-sized factories under construction will further increase demand. Unsatisfied demand for residen- tial use is also high, with less than 15 percent of potential residential consumers being provided with electricity. The Honduras-Nicaragua Interconnection 22. The proposed project would be the first step in the coordinated development program of the Honduran and Nicaraguan power sectors based on interconnection and - in the longer run - in the integrated power development of the whole Central American region. The Bank is encouraging this strategy, and discussions of further interconnection links are currently under way between other Central American countries. 23. Honduras has abundant hydroelectric resources. The most attractive of its studied sites appears to be El Cajon on the Humuya River. The feasibi- lity study for this project has not been campleted, but preliminary findings indicate that a hydroelectric plant at El Caj6n, with an estimated capacity of about 450 MW, would generate about 1,300 GWH of low-cost energy yearly, and would have considerable flood control benefits in the Sula Valley, one of the richest agricultural zones in the country.  2h. Despite its rapid growth, the Honduran market is not expected to be large enough to justify construction of El Cajon until the mid-1980's. Neighboring Nicaragua, however, has a much larger market for electricity and is becoming increasingly dependent on expensive thermal generation because iden- tification of its major hydroelectric resources is in its early stages. 25. The Honduran and Nicaraguan utilities have therefore developed, with the assistance of the Bank, a combined program for development of their power sectors. The first stage includes construction of thermal power stations and extension of transmission lines in Honduras and Nicaragua, and interconnection of the. power systems of the two countries. A second stage includes construction of the El CaJ6n hydroelectric plant in Honduras, scheduled to be commissioned in 1978. Under the proposed program, Nicaragua would sell thermal power to Honduras from 1975 through 1977, an& Honduras would sell hydroelectric power to Nicaragua from 1978 onward. To provide for the exchange of power, the Honduran and Nicaraguan Governments have signed a treaty to record their agreement to interconnect their power systems and to. authorize the respective power agencies to take the necessary action. A contract for the sale of power by ENALUF (the Nicaraguan power agency) to ENEE during 1975-77 is expected to be aigned in June. PART IV - THE PROJECT 26. The project was appraised in the field in October 1971. Negotiations for the proposed loan were held in Washington in April 1972. ENEE was repre- sented by Messrs. Dalmiro Caballero, Manager, Luis Cosenza, Technical Assistant to the Manager and Cesar Batres, Legal Advisor. The Government. was represented by Mr. Roberto Galvez, Ambassador of Honduras to the United States. Project Description and Financing Plan 27. A report entitled "Appraisal of Fifth Power Project -t Honduras, Honduras-Nicaragua Interconnection, Empresa Nacional de Energia Electrica (ENEE)t? (PU-9oa, dated June 2, 1972)is being distributed separately. The main features of the loan and project are summarized in Annex III. 28. The Fifth Power Project includes, in addition to transmission and generating equipment needed to supply the rapidly growing damestic demand for energy in rural and urban areas, the Honduran portion of the interconnection between the power systems of Honduras and Nicaragua. It is closely related to the proposed Eighth Power Project in Nicaragua, which is also being pre- sented for your consideration today. The project consists of: a) installation of four 6MW diesel generating units at La Ceiba, an important city on the Caribbean Coast; b) construction of a 150 Im 230 kv transmission line from the capital city, Tegucigalpa, to a growing center in the south, Choluteca, and then to the Nicaraguan border, and substation equipment at Tegucigalpa and Choluteca;  -9- c) construction of a 47 km 138 kv transmission line from La Ceiba to the fertile Aguan Valley, now being colonized, installation of a substation at Coyoles, a terminal at la Ceiba, and construction of about 90 km of 34.5 kv subtransmi.ssion lines in the Aguan Valley; d) construction of about 150 km of 34.5 kv subtransmission lines and installation of substations to serve new areas; e) studies of hydroelectric power projects on the Rio Jicatuyo and conclusion of the feasibility study of the El Caj6n hydroelectric project; f) preliminary survey of hydroelectric resources in eastern Honduras, particularly on the Rio Patuca; and g) a training program for ENEE's staff. The project would be carried out during 1972-75. 29. The project is estimated to cost a total of $16.0 million equivalent; the proposed loan of $12.3 million would cover the foreign exchange cost of the project. The project is part of a much larger expansion program for 1972-78 which also includes completion of the Rio Lindo and Fourth Power Pro- jects, construction of El Caj6n Hydroelectric Project and associated transmis- sion lines, execution of the rural electrification program indicated above, and expansion of the existing distribution system, including acquisition of existing systems owned by other companies and municipalities. Total cost of the program is estimated at $138 million, about 35 percent of which is expected to be generated from within the enterprise, 8 percent from the loan proposed, 7 percent from already committed external loans, 47 percent from future borrowings for the next power project and the remaining 3 percent from the Central Bank and miscellaneous contributions. Project Entity 30. The &mpresa Nacional de Energia Electrica (ENEE) was established by law in 1957 as an autonomous authority wholly-owned by the Government, to be res- ponsible for developing and operating power facilities in Honduras. It is a well-managed utility. ENEE is governed by a five-member Board of Directors, including the Minister of Communications and Transport, the Minister of Natural Resources, and representatives of the Planning Council, the National Development Bank and the private sector. A General Manager, appointed by the Board, is responsible for all managerial and administrative functions. ENEE employs about 1,100 permanent workers. 31. With assistance from the Bank, ENEE's management and organization have improved greatly over the past ten years, but its engineering staff still needs strengthening. In order to assist ENEE in this task, the Bank has financed out of Loan 692-Ho and Credit 201-HO (Fourth Power Project) the hiring of engineers to train ENEE's staff, and would finance a training program for technical staff out of the proposed loan.  - 10 - Financial Position of the Borrower 32.. ENEE's financial position is sound and is expected to remain so. The rate of return on average net fixed assets in operation during the project period 1972-75 is. estimated to be over 12 percent. The Empresa has agreed to maintain a rate of return of no less than 10 percent during th,e term of the loan. ENEE's projected earnings and the rate of return should in,crease markedly in 1976 and 1977, when the need for cash to cover the local currency requirements of El Cajon will be greatest. 33. Despite heavy borrowing to finance its large expansion program, ENEE's debt/equity ratio, which is now 54/46, is expected to be a satisfactory 51/49 in 1978, thus lea,ving a fair margin for further borrowing. ENEE's debt service coverage by internal cash generation is also projected to, be satis- factory,ranging from 1.9 in 1972 to 2.4 in 1978. ENEE has agreed not to undertake any long-term debt without the Bank's prior appro,,v,>,unless net revenues cover it,, debt service at least 1.4 times. Procurement and Disbursement 34. Go6ds financed by the Bank would be procured through international competitive bidding. All bids will be evaluated on a c.i.f. basis. It is pro- posed that up to $250,000 be reimbursed to ENEE from the proposed loan for expenditures in respect of engineering services incurred between February 1, 1972 and the date of signing. Annex III summarizes the disbursement schedule for the proposed loan. Economic Justification 35. 'The project is technically sound and economically j,ustified. With interconnection, both Honduras and Nicaragua will be able to benefit from the use of low cost hydropower produced at El Cajon. In addition, interconnection would make it possible to interchange emergency power, and the combined re- serve requirements of the interconnected system would be lower than for inde- pendent systems. In the short term, moreover, ENEE, by purchasing power from Nicaragua, will avoid costly investments in additional thermal capacity and be able to place its less efficient diesels on stand-by, thus reducing invest- ment and operating costs. The interconnection program is the least-cost alternative for discount rates of up to 20 percent, as compared with the best independent program for the Honduran and Nicaraguan power systems. 36. - It is not possible to calculate the return on the diesel units to be installed at La Ceiba because they are designed to serve principally as stand-by units. They represent the least cost solution for providing ade- quate stand-by capacity for discount rates up to 31 percent. The extension of power supply to. the Aguan Valley is the least cost solution to meet the needs of the valley. The economic return of the line is about 17 percent, on the conservative assumption that the price paid for electricity by the consumers in the valley constitutes a minimum measure of economic benefits.  Changes in the Fourth Power Project (Loan 692-HO/Credit 201-HO) 37. Engineering studies carried out after the signing of the Loan and Credit Agreements suggested, partly because of the proposed interconnection with Nicaragua, a number of modifications in the design of the project. The principal changes consist of: a) Adding of a 138 kv loop around San Pedro Sula, the most important city in the north, and enlarging the North Sula substation in order to improve the reliability of supply in that area. b) Building an additional 138 kv substation and enlarging two other substations in the Tegucigalpa area to increase the reliability of its distribution system. c) Increasing the scope of the subtransmission system to meet current demands. d) Deleting the 60 klc 69 kv transmission line from Tegucigalpa to Choluteca in the south. This section is the first leg of the high voltage interconnection line (230 kv). The entire interconnection line will be financed out of the proceeds of the proposed loan, thus simplifying procurement procedures. e) Deleting the La Ceiba-Aguan Valley line, because of delays in concluding negotiations with the potential customers in the valley. The area will be supplied by a 138 kv line included in the proposed project. 38. The following table summarizes the proposed physical and financial changes in the Fourth Power Project. As shown below, these changes have not resulted in anyF change in the total cost'of'the p'6oJect and hence there will be no change in the amount of Loan 692-HO or Credit 201-HO. FOURTH POWER PROJECT (Loan 692-HO/Credit 201-HO) Cos,. ($million) Ori1ginal Proposed Original Propose 138 kv Transmission lines 227 km 263 km 1.9 1.6 69 kv Transmission lines 331 In 65 in 2.0 0.4 138 kv and 69 kv Transmission substations 108 MVA 189 MVA 2.5 4.9 Subtransmission lines 1814 In 220 lkm O.S 0.7 Subtransmission substations 20 MVA 30 MVA 0.2 0.3 Gas turbine 15 mw 15 mw 1.4 1.6  - 12 - FOURTH POWER PROJECT (Cont.) Communication and :mainte- nance equipment 0.3 0.3 Training 0.2 0.2 Feasibility and tariff studies 0o.1 0. Engineering and supervision 0.7 o.6 Unallocated 0.9 _ TOTAL 11.0 11.0 I believe these changes to be appropriate. The amendments to the agreement relating to Loan 692-HO and Credit 201-HO which become necessary are referred to below. PART V - LEGAL INSTRUMENTS AND AUTHORITY 39. The draft Loan Agreemient between the Bank and the Empresa Nacional de Energia El6ctrica, the draft Guarantee Agreement between the Republic of Hondu- ras and the Bank, the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a Resolution ap- proving the proposed loan are being distributed to the Executive Directors separately. 40. In addition, to effect the amendments in the Fourth Power Project (Loan No. 692-HO and IDA Credit No. 201-HO) as detailed in paragraphs 37-3b above: (a) Section 9.01 of the proposed Loan Agreement deletes paragraph (b) of Section 2.o4 of the Project Agree- ment (Fourth Power Project) between the Bank, the Association and ENEE, of June 24, 1970; and (b) Section 6.01 of the proposed Guarantee Agreement sets out the changes being made in the Project Description contained in Schedule 2 to the Loan Agreement (Fourth Power Project) between the Repuqblic of Honduras and the Bank, of June 24, 1970. By separate agreement with the Borrower, the Project Description in IDA Credit No. 201-HO is being amended to conform with such changes. 41. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 13 - PART VI - RECOMMENDATION 42. I recammend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments. June.12, 1972   ANNEX I Page.1 of 3 THE STATUS OF BANK GROUP OPERATIONS IN HONDURAS A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at April 30, 1972) $ million Loan or Amount (less aancellations) Credit No. Year Borrower P.urpose Bank IDA Undisbursed 135 1955 Government Roads 4.2 195 1958 Government Roads 5.5 226 1959 ENEE Power 1.h - 261 1960 ENEE Power 8.8 1 1961 Government Roads 8.1, - ),00 1965 Government Roads 6.o 0.5 71 1965 Government Roads 3.5 - )t63 1966 ENP Ports b. 6 - h95 1967 Government Roads 8.6 1.0 5)1,1 1968 Government Power 7.5 0.3 116 1968 Government Power 4.0 0.1 179 1970 Government Livestock development 2.6 2.2 692 1970 Government Power 5.5 5.5 201 1970 Government Power' 5.5 3.2 767 1971 ENP Ports 6.o 6.o Total 58.1 24.o 0 18.8 of which has been repaid 11.2 0.1 Total now outstanding 46.9 23.9 Amount sold 2.6 of which has been repaid 2.3 0.3 Total now held by Bank and IDA 46.6 23.9 Total undisbursed 13.3 5.5 18.8  ANNEX I Page 2 of 3 B. STATEMENT OF IFC INVES&RTS (as of April 30, 1972) Anount in $ million Year Obligor Type of Business Loans Squity Total 1964/66 Enpresa de Cartidos Tannery 0.29 0.08 0.37 Centroamericana S.A. (ECCASA) 1969/70 Compailia Pino Celu- Pulp and paper - 0.08 0.08 losa de Centro- amdrica (COPINO) Total gross commitments 0.29 0.16 0.h5 less cancellations, terminations, repayments and sales 0.22 0.02 0.24 Total coumitments now held by IFC 0.07 0.14 0.21 Total undisbursed  ANNEX I Page 3 of 3 C. PROJECTS IN EXECUTION POWER Rio Lindo Hydroelectric Project (Loan 541-HO/Credit i16-HO, signed in June 1966) - Construction work on the project is almost complete and the loan and credit should be fully disbursed by August 1972. Fourth Power Project (Loan 692-HO/Credit 201-HO, signed in June 1970) - Engineering studies carried out after the signing of the loan and credit suggested, partly because of the proposed interconnection with Nicaragua, a number of changes in the design of the project which made necessary amending the original project description. The amendments have been incorporated in the documents for the proposed loan. These changes have delayed bid preparation and project construction by about six months, but the project is still expected to be completed on schedule by June 30, 1974. TRANSPORTATION North Road Project (Loan 400-HO/Credit 71-HO, signed in February 1965) _ Project execution was delayed due to initial changes in alignment and unusually heavy rains in 1968 and 1969; construction work on the pro- ject is now virtually complete, but small disbursements on the loan are expected to continue through December 1972. Western Highway Paving Project (Loan 495-HO, signed in May 1967) - Construction work on the project has been substantially completed and the loan should be fully disbursed by August 1972. Second Port Project (Loan 767-HO, signed in June 1971) - Special problems have arisen in connection with this project. The ef- fective date of the loan was postponed three times for a total of six months, initially because of delays in presenting the loan documents to Congress and subsequently because, partly for political reasons related to the border issue with El Salvador, Congress expressed reservations about the portion of the project involving the development of a new port in the south of Honduras. The Government, the Port Authority and the Bank have agreed to postpone the decision to construct the southern port until further studies are completed. AGRICULTURE Livestock Development Project (Credit 179-HO, signed in March 1970) - The project is somewhat behind schedule,because of initial problems in organizing the project team and difficulties with project administration procedures due to lack of experience. Processing of sub-loans is now moving satisfactorily, but disbursements are still lagging, partly because of difficulties in obtaining clear titles to land, which are a condition for sub-loan signing.   ANNEX II Page 1 of' 4 HONDURAS BASIC DATA I. SIZE Area (square kilometers) .11,20 1960 1965 1969 1970 1971 Population (millions) 1.8 2.18 2.43 2.52 2.61 Annual growth rate () 32 3.3 2.8 3.5 3.5 Gi,IP (current market prices, $ mn.) 338 492 646 678 719 per capita ($) 183 226 266 269 275 II. ECOTOMIC INDICATORS GDP at constant factor cost (miillions of l966 lempira 710 926 1,174 1,228 1,271 Sector origin (W) 100 100 100 1'0 Agriculture, forestry, and fishing Ito 39 37 36 Mianufacturing 12 13 1l 1)t Construction 3 Comrmerce 15 15 13 14 Other 30 29 31 31 Annual Changes (%) 1961-65 1969 1970 1971 GDP at current market prices 8.2 3.1 5.4 6.0 Manufacturing value-added (constant factor cost) 7.6 10.9 h.9 n.a. Agriculture, forestry, and fishing value-added (constant factor cost) 5[9 -4.7 3.9 n.a. Exports, f.o.b. 13.3 -5.6 4.o 7.0 Imports, c.i.f. 12.5 - 18.4 -10.2 Total bankcina system credit of which: 14.5 28.1 24.7 1O.4 credit to public sector, net -10.0 272.6 23