Chile - First Loan Administration Report on the Bank Loans to Chile

ETURN To REPORTS DESK WH-13a FILE CulPY This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT FIRST LOAN ADMINISTRATION REPORT ON THE FeLTIfil T BANK'S LOANS TO CHILE MRCHIVES/YECOR.P CENTER U. S. LL{ATIQP - November 23, 1953 Department of Operations Western Hemisphere  CURRENCY EQUIVALENTS U.S. $1 = 110 Pesos 1 Peso = U.S. $0.001 1 million Pesos . U.S. $9,O91  CHILE First Loan Administration Report TADLL OF CONTENTS INTRODUCTION PART ONFE Loan of 413 ,50OOOO to Corporacion de Fomento de la Produce on and Empresa Nacional de Electricidad, S.A. (Endesa Project) I NE;GOTIATIONS .II THE LOAM III THE BORRCAE-'RS IV THE PROJECT V CHAANGES IN THE PhOJECT VI PR OGRLESS OF THE PROJECTS VII MANWAGRlENT OF THE PROJECT VIII LOCAL CURRENCY POSITION OF li EESA PART 1T0 Loan of ,2,500,000 to Corporacion de Fomento de la Produccion (Auricultural Mvachinery Project) I NEGOTIATIONS II THE LOAN III THE PROJECT IV OPERATION OF THE PROJECT v USE OF COUNiTERPART FUNDS VI EFFECTS OF THE LOAN PART THREE Loan of 4;,300,000 to Corporacion de Fonento de la Produccion (Rio Elqui Project) I NEGOTIATIONS II THE LOAN III THE PROJECT TV PROGRESS OF THE PROJECT PART FOUR Relations with the Borrowers and Guarantor  PART FIVE Relations between the Bank and the Republic of Chile I CHIILAN ENABLING LLGISLATION II JOINT W CORKING PARTY III JOINT BANK-FAO AGRICULTURAL SURVEY MISSION PART SlIX Economic Position of Chile  C H I L L FIRST LOAti ADMINISTRATION REPORT INTxODUCTION 1. This report deals with the following loans: $13,5cO0,00 20-year L-l/2O loan of Mlarch 25, 1918, to Corporacion de Fomento de la Produccion and Empresa N;acional de Electricidad S.A. for the development of Chilean electric power and water resources (5 CH Endesa Project). $ 2,500,000 7-year 3-3/4% loan of Mlarch 25, 19h8, to the Corporacion de Fomento de la Produccion for the purchase and importa- tion into Chile of agricultural machinery (6 CH Agri- cultural iMIachinery Project). 4 1,300,000 10-year 1-3/8% loan of October 10, 1951, to the Corporacion de Fomento de la Produccion for the exploration and use for irrigation of underground water resources of the Rio Elqui valley in Chile (49 CH Rio Elqui Project). These loans total $17,300,000. of this amount 4,Jl978,150 had been disbursed or committed as of October 31, 1953, and repayments of principal totalled ..,2,046,000. 2. The report does not cover the '20 million loan to the Compania ilanufacturera de Fapeles y Cartones and the Corporacion de Fomento for a paper and pulp project. This loan was signed on September 10, 1953, and is not yet effective. PAfLT OiC Loan of 4'13,500,000 to Corporacion de Fomento de la Produccion and Enpresa ?Nacional de Electricidad, S.A. (Endesa Project) I. NEGOTIATIONS 3. On September 30, 1946, the Corporacion de Fomento de la Produccion and the Chilean State Railways applied to the Bank for a loan of $40,000,000 to finance the foreign exchange costs of various projects in the fields of electric power, forest industries, railway electrification, urban and suburban trans- portation and port mechanization. On November 21, 1947, the original appli- cation was amended to include an additional 45,000,000 for the purchase and importation into Chile of agricultural machinery. These applications were supported by the Chilean Government. 4. The Bank concluded that projects for power and agriculture had a high priority and after prolonged negotiations, made two loans on March 25, 194q, -- one for the development of electric power and water resources and the other for the importation of agricultural machinery and equipnent. (For a report on this latter loan, see PART TJO, paragraph 31 below).  -2- II. TIE LOAN 5. The loan of J13,50,O000, or its equivalent in other currencies, of March 25, 192Ls (Endesa Project) was made to the Corporacion de Fomento de la Produccion and its subsidiary Empresa Nacional de Electricidad S.A. (Endesa) as co-borrowers. The Loan Agreement was signed subject to the guarantee of the Chilean Government. Legislation authorizing the Government to give its guarantee was not enacted until January 19, 19LS, and the guarantee wvas given on U,arch 23, 19LJ9. The loan became effective on April 7, 191$. 6. ThLe loan is for twenty years, and semi-annual amortization payments, calculated to retire it by July 1, 1968, began on July 1, 1953. The Closing Date was originally fixed at April 1, 1951 and has since been extended to lecember 31., 1954. 7. Interest is at the rate of 4-1/2,*; per annum (including the statutory i% commission). On the undisbursed balance of the loan a commitment fee is payable which, since August 15, 1950, has been at the rate of 3/1CP per annum. 8. The original agreement provided that full interest should be paid on amounts firmly comnitted by the Bank to third parties. On June 21, 1950, in line with a change in its general policy in this regard, the Bank agreed to reduce this fee by a credit equivalent to the annual rate of discount on US Treasury bills. On February 21, 1951, the Bank made a further reduction by agreeing with the borrowers to a flat charge of 1/2 of 1%. 9. Payments of interest, conmission, and comLmitment charge have been made as due. 10. As of October 31, 1953, )l1,5 63,092 of the loan had been disbursed. In addition, the Bank had irrevocably agreed to pay to third parties the sum of i128,3t0 from the undisbursed balance of the loan. Therefore, as of that same date, the balance of the loan account not yet disbursed or committed totalled 81,3OJ,560. 11. The geographical distribution of purchases out of the loan procGeds up to October v 1, 1953, was as followvs: Value of Purchases Country (In Thousands, J US equivalent) U.S.A. 7,34 U.K. 320 Canada 37 Central & South America 195 Europe 3,6b5 Far East 32 11,563  -3- III. THE BORRai!ERS Corporacion de Fomento de la Produccion (Fomento) 12. Fomento, a government corporation, established by legislation in 1939, is largely responsible for carrying out the Government's development policies. It is directed by a council of 23 members presided over by the Minister of coonomy and Commerce. Representation on the council is given to the executive and legislative branches of the government and to labor, agriculture, industry, commerce and banking. It has a considerable degree of autonomy. 13. Fomento may foster development either by undertaking production itself, by lending to individual enterprises or to development banks, or by purchasing stock in either existing or specially created companies. lb. Funds are derived from government appropriations, from the income and sale of its investments, or from borrowing. Fomento submits its budget annually to Congress in order to obtain the government appropriations normally required to make up the difference between total cash requirements and funds available. Empresa Nacional de Electricidad S.A. (Endesa) 15. Endesa was organized by Fomento as an autonomous corporation for the specific task of carrying out Fomentots electrification program. Nearly all its common stock and most of its preferred stock is held by Fomento. The balance is held by private interests. 16. All substantive powers are vested in the Board of Directors who are appointed by the shareholders. In effect therefore the Board members are appointed by Fomento. The formal structure of Endesa, and the powers of its managemernt are similar to those of coamercial firms. The ordinary business of Endesa is conducted by a Managing Director appointed by the Board and responsible to them. Its budget is incorporated in the general budget of Fomento and submitted annually to Congress. 17. Endesa possesses a competent organization and engineering staff well quali- fied to carry out Chile's electrification program. IV. THE PROJECT 18. Chiile's potential hydroelectric capacity has been estimated at a total of 6 million kw. At the end of 19L2, when Fomento formulated its power expansion program, the country's total installed capacity for the generation of electric power amounted to approximately 50,000 kw, of which only lb5,000 kw was hydro power. 19. Fomento, through Endesa, prepared a program of electrification based on an estimate that the over-all demand for power in the country would increase by a cumulative 8$ per annum from 19b2 to 1255. The progran was divided into twlo phases. 20. The first phase involved an increase of 196,000 kw by 191t8, thus raising the total installed capacity to 61X6,000 kw. Of this increase, 128,000 kw were installed by Endesa, the rest by private companies.  21. The second phase of the program involves an increase of approxiimately 3hC,CCcO kw of installed capacity by 1955. 01 this increase, 250jCC0 kw was to be installed by Endesa of which approximately 86,000 kw is being financed with the assistance of the Bank loan. 22. The proceeds of the Bank loan are being used to purchase equipnent, supplies and services required for the developnent or expansion of four electric power projects and for incidental irrigation. 23. The project, as originally designed, falls under the folloring nDain headingrs: (a) Copiapo Diesel Electric Plant., Replacenent of a 151 k- JDiesel Unit by a new unit of 585 kw at the Copiapo Plant in northern Chile. (b) LOS Uolles Hydroelectric Plant. Construction of a hydro plant wit& a generatiTg capacity of 1,OG kw to serve an area about 1400 k:n north of Santiago, and the ereetion of six slubstations and connecting transmission lines. (c) Los Cipreses Hydroelectric Plant. Construction of a hydro-electric plant tc- serve Santiazo and the surrounding areas, generatinEg capacity planned originally at 5j,000 vkw. The project included construction of sixteenrsub- stations and 490 kmi of transmission lines. (d) Pilclaiquen Hydroelectric Plant., Installaticn of a fourth unit, capacity lO,700 kw at the Pilmaiq&en Plant (previous capacity 13,500 kw) in the south central region of Chile. (e) Seccnrdary electrical distribution lines and Egu'rent. Installation of approxiaately 500 km of electrical distribution lines ad necessary equip- ment to provide for the distribution of electric power to rural consumers in the territory served by the Ios Liolles and tos Cipreses plant%. (f) Mechanical Irrigaton Equi pnent. Installation of 2,000 H.P. in electric motors, vwater pxrnps, and other irrigation eiuipient to utilise exce5s capacity during off-peak hours from plants in the central region of Chile. It is planned to irrigate in this way an area of at least 4,00D hectares. (g) Construction equipent. Importation of construction equipment required for several engineering works for the above mentioned projects. After completion of the projects, the construction equipuent may be used in Chile for other purposes. V. CHANGES IN THE TPhJECT 24. There have been a number of changes in the project since the Loan Agreement was signed. hese modifications were the result either of newer market studies or changes in design as engineering wovrk on the project projwesse&. The result of the changes has been to expand the original scope of the project without overrunning the amount of the Bank loan. 25. The changes may be sumarized as followesz  (i) Los Molles Rydroelectric Plant The modification here involved changing the locations of two sub- stations from those originally planned, and corresponding changes in the transmission system. (ii) Los Cipreses Hydroelectric Plant As a result of detailed surveys and new market studies, five changes were made in this project: (a) The original plan was to install a h-unit plant with total capacity of 108,000 kw, of which the first two units (capacity 54,000 kw) were to be financed out of the Bank loan. However, after a more realistic appraisal of the water supply this plan was changed in favor of a 3-unit plant, of which two units (capacity 58,900 khr) were to be financed by the Bank and one (capacity 29,450 kw) from other sources; (b) Surveys by engineering geologists resulted in a decision to raise the height of the dam by 10 meters to ensure a greater supply of water. This would permit a considerable increase in the output of electric power with only a slight increase in cost; {c) The transmission system was enlarged so as to be better adapted to satisfy future power requirements in Santiago and the Cipreses area& The total length of,transmission lines to be erected under the revised plan id 690 ]1 as against 490 ham in the original proposal; (d) As the proposed electrification program of the Chilean 14ational Railways did not develop, a number of switch stations and sub- stations were no longer required and were accordingly eliminated from the project; (e) In July, 1952, the Bank agreed to permit Endesa to utilize the unused balance of the Loan Account to finance the foreign exchange costs of constructing a 250 km interconnecting transmission line between the Los Cipreses and Abanico systems which serve the Santiago and Concepcion areas respectively. The Abanico system is the principal source of power for the steel mill, coal mines and other important industries in the growing industrial area of Concepcion. Intercommunication of the two systems will accordingly provide a more efficient operation and assured con-. tinuity of power for this region and for Santiago. (iii) Secondary Electrical Distribution Lines and Equipent The principal changes were to increase the total of lines to be built from 500 to 2080 km and to add the Pilmaiquen area to the project, whereas the original description of the project covered only the Los Molles and Los Cipreses area.  - 6 - VI. PROGRESS OF TEN PROJECTS 26. The representatives of the Ban!: have made periodic visits to Chile to inspect the progress being made on the projects. Since the bepinning of 1950, satisfactory reports have been received regularly on the four principal loan- financed projects. 27. The present status of the various projects is as follows: (a) Copiapo Diesel Electric Plant. This plant was completed according to schedule and started operations in April, 1950. The new installation is operating as a base load unit with the old plant retained to provide power during peak loads. (b) Los Holles Hydroelectric Plant. Oving partly to revisions in the design of the project and partly to interruptions on account of periods of bad weather, the construction schedule for the Los Molles plant had to be extended. The project was completed and went into commercial operation in December 1952. (c) Los Cipreses Hydroelectric Plant. Wlork on the project is proceeding normially. Although the plant could possibly be completed by December 1953, it is not expected to go into commercial operation until about April 1954, when the transmission line to the Santiago area will be completed. (d) Filtmaiquen Hydroelectric Plant. The fourth unit was instafled in the fall of 1950 and has been in commercial operation since that time. (e) Secondary Electrical Distribution Lines and Equipment. The rural electrification project in the Los Molles and Los Cipreses areas has not progressed as quickly as had been expected. WSlork was very slow in getting started and the formation of distribution service organizations has been much more difficult than was anticipated in these areas. Bank representatives have stressed to Endesa thie tiportance of completing this phase of the prooram. Out of the total of 2080 km, about 75l have now been built. (f) M4echanical Irrigation Equiprent. Execution of this part of the project has been delayed pending completion of the irrigation studies being undertaken by Fomento and Endesa, Wiithdrawals are now beginning to be made for drilling equipnent. VII. IMANAGfENT OF THE PROJECT 28. Since work on the loan-financed projects began, Endesats organization and functions have expanded considerably and a number of changes have been made which have contributed to the greater efficiency of its operations. 29. Endesa has exercised considerable economy in its use of the loan funds, and has been successful in substituting equipment of Chilean manufacture for a number of items which it originally expected to have to purchase from abroad. As a result of the savings thus achieved, End esa will be able to finance the foreign exchange costs of extending the original project, linking the Abanico and Los Cipreses power systems and expanding the distribution systems, (see Section 25 (ii) (e) and (iii) above) without either overrunning the Bank loan or.cutting dbwn on purchases of other equipment.  -7- VIII. LOCAL CGUEPRJY POSITION OF BiHJESA )O. :ndctsa., in o-,arritg znt i1s construction r.gram is very agely d^eyBndettt t azmntal areropaticn 7rnc u-e xaaa aailablae S.,y Eonentc. Fcm.e. rin its turn, depends upon annu-al approriations fror. tne &overrzent. Ear.ly ir the hicTory of the Baer pro-rani, it becane apparent that 7-niesa's local currency position -was tight. Thia situation rwas broiht about by the inflationary conditions in Chile and has been more or less constant througxholut the ertixe construction pericd of the Bank program. Ps a result, Erdesa has been conpelled on occasions to rescrt to short-tern borrowing fro Banks in azniciaation of the Governnent appropriatacns whrLich have not always beenri nade available on tlue. Despite the difficult short-terms financial positionr with which Zndesa has constanttly been faced dnxing thie past three years, there have been no indications until mid 1952 of the Bank's program haviNg been helc up through lack of funds. 51ring 1952 -Tor:k vmas deferred on Los Gi.ireses and the pilacing cf orders for copper for the tranimisEion lines and su- stations for the Los C4preses project delayed owing to lack of funds. As a result, while the pOwer plant at Las Cipreses cot2o still pcsaibly be completed by the end of 1953, the transaxtssion lines and substations wrill not be tomoLeted tntil April c-r Aay. 195b  -d- PART W 0 Loan of 52,500,000 to Corporacion de Fomento de la Produccion (Agricultural i4achinery Project) I. NEOTIATIONZ For infonnation on tbis subject, see paragraphs 3 anrd I above. II. THE LOAN 31. The Loan Agreement for the ;2,50O0000 loan to the Corporacion de Fomento for the purchase of agricultural machinery was signed on [larch 25, 19L8, together with the Endesa Loan. The guarantee of the Chilean Goverrnment was given on March 23, 19t9, after the Chilean Congress had finally enacted the necessary legislation. The loan became effective Apr3l 7, 19L9. The Closing Date was January 1, 1950. 32. The loan is for seven years, and amortization paymeents, cal- culated to retire it in semi-annual installments by January 1, 1955, began on July 1, 1950. Interest is at the rate of 3 3/iS per anntm (including the statutory 1? comission). 33. Fayments of principal, interest, conmission and connitrent charges have been made as due. Aa of OctoDer 31st, 19S53, payments of principal had amounted to 1,7lL,000. Paynents in respect of interest and other charges have been met as due. Prinoipal For a/c IBRD 4 51,:0Q For a/c holder of bonds sold 1,I96,000 -.: 17 COD 3t. Withdrawals frm the loan Account were comnpleted shortly before the Closing Date. 3S. Disbirs.ements were all made in U.S. dellars as the nachinery was purchased in the lnited States. Disbursements were all, in the form of reimbursements to the Borrower for payments previously made to the suppliers. 36. In the Loan Agreement, the Bank agreed to reimburse Pomento for expenditures made by them before the Effective Date but subsequent to June 1, 19t8, up to the amount of $1 million. In viewr of the long period inter- vening between the signing of the loan and the enactment of legislation authorizing the Government to give its gAarantee, considerable progress had been made on the project before the loan was declared effective. The Bank accord- ingly agreed on January 27, 1949, to Fomento's reqaust to remove the liTnt on reii.abursements. Reimbursements for such payments amounted to 4,s9610993.10. 37. At June 30, 1953, the Bark had sold with its guarantee, bonds of the Borrower to the amount of l,5 7b5P,O0,DO of which l1,196,000 have now been retired.  -9- 1I. TZE PROJECT 38. The project consisted of a program for the purchase and importation by Fonento of agricultural machinery to increase the productivity of Chilean agriculture. 39. It was part of a large-scale program of agricultural mechanization initiated by Fomento imediately after the war years, in order to offset shortages of local production of foodstuffs resulting from under utilization of arable land. The first stages of the program had already been financed by the Export-Import Bank. 140. The nachinery to be imported included tractors, threshing machinery, harvesters, ploughing machines, land clearing and earth moving equipment and irrigation equipnent. LI. The project provided that the machinery should be used or disposed of by Fomento under either of the followivng plans: A. Sale Plan - Miachinery allocated to this plan was to be sold by Fomento to farners either directly or through distributors representing Fomento. Contracts for the sale of the machinery could provide that all or part of the payment be made in Chilean currency, that payments could be made in installuents over a maximum period of six years and that bpurchasers could be asked for security. B.Service Plan -Fomento was to retain title to machinery utilized under this plan and to establish equipment pools. The machinery was to be operated by trained employees of Fomento and its services sold to farmers for paynent in Chilean currency. L2. The Loan Agreement gave Fomento complete discretion to transfer any part of the machinery from one of the above plans to the ether. IV. OPERATION OF TUEt FROJC.,CT 1;3. The machinery imported by Fomento out of the proceeds of the lean was all distributed to farmers, and none retained for employiment in equipment pools. 64. Owing to the progress made in Fomento's agricultural machinery program since the initial consultations with the Bank, a number of changes were made in the origimal List of Goods in December, 191&, before the Loan had become effective. The most significant was an increase in the amount allocated to the category "Threshers and HarvestersT" (from 4280,00 to s8OQ,O). Other categories including transportation equipment, were correspondingly reduced, and irrigation equipment was completely eliminated. In June 1949, after 805, of the Loan had been disbursed, the List of Goods was again changed at the request of the Borrower to permit an increase in the number of threshers and harvesters. 45. Bank representatives visiting Chile arranged that Fomento should sub- mit to the Bank detailed reports on the sale of the equipment financed under the Loan. Reports wvere accordingly furnished showing the name and location  -10- of the purchasing farmer and the terms of the sale. !16. Analysis of the reports shows that of the '$2.5 million of the loan account, roughly $2 million was spent on tractors (629 units) and another :Zl million on threshers and harvesters. The remainder was spent on ploughs and miscellaneous agricultural equipnent. Part of the equipment was sold for cash and part on credit. In the case of credit sales, 35% of the selling price had to be paid in cash; the balance of 65Z was covered by loans running from one to three years at an interest rate of 6% per annum. ?. Representatives of the Bank have visited farms using loan-financed equipment. They found that farmers were making good use of the equipment and were trying to keep it in good repair. There is, however, an increasing shortage of spare parts. V. USE OF COUNTLPART FUNDS 48. The Loan Agreement originally provided that the local currency proceeds from the sale of loan-financed equipment (or services) could be used only for the importation of more agricultural m-achinery. Some of the counterpjart was accordingly employed for this purpose. However, on July 15, 19L49, the Bank agreed to Fomentols request to amend the Loan Agreement to enable counterpart funds to be used to pay part of the local currency costs of certain irrigation studies being carried out by the Frederick Snare Corporation. These funds were used to defray part of the costs of the studies made byr Frederick Snare Corporation on the Rio Elqui Nilahlue and the La Faloma projects. The counter- part funds have been used satisfactorily,. VI. EFYFLCTS OF ThE LDAN 49. It is not possible to describe the effects of the Bank financed agri- cultural machinery project in any detail, largely because it was itself part of a larger program of general agricultural mechanization covering the whole country. That program has made considerable progress in the post-war yearn. The number of tractors in use and the supply of tractor-drawn equignent in Chile is increasing steadily. According to recent esstimates, tractors are now used on about one-third of the area under cultivation (includ- ing pastures) and furnish one-fourth of the total haulage power used in agriculture. 50. The Bank loan contributed materially to this result. The total stock of agricultural tractors in Chile at the end of 1952 was about 8,800, of which 629 were financed by the IBM) loan. These latLer were all imported during 1949 and correspond to about three-fifths of the country's average annual import of tractors during the years 1916 through 19148. The loan also covered both one-third of the total tractor-drawn equipment imported during 1919, and self-propelled harvesting units and additional equipment to enable Chile to utilize more fully the existing agricultural notive pcrner. 51. The program of agricultural mechanization is continuing, with decreasing direct participation by Fomento. Up to 1949, about one-half the agricultural machinery and equipnent purchased by farms were imported under the auspices of Fomento. Early in 1I95, private dealers were granted preferential exchange and import licensitg privileges for imports of agricultural machinery and in 1952, they were granted tenporary exemptions from customs duties. With the increase of private participation in the program, Fomento scaled down its  -11- own imports. However, with the new exchange law of July 7, 1953, private importers are subject to the new single rate of . zn 110 pesos, while Fomento for the present continues to use the preferential rates of <l = 31, & 60 pesos. Fomento's function, however, of extending credit to farmers for machinery purchased has continued to expand. In 1952, Fomento made sales to farmers totalling bhb,2h6,000 pesos, of which 288,760,000 pesos were on credit. 52. The effects of this agricultural mechanization are not readily assess- able in tenns of annual crop yields, owing to climate and other influences which affect agricultural production from year to year. However, it can be said that the chief benefits to be derived from mechanization under Chilean conditions are twofold. The first is more intensive use of land on existing farmfis. According to available statistics, the under-utilization of farm lands is now less than in the census year 1935-36 but there is still considerable scope for improvenent. The second advantage is increased stability of production, resulting from speedy and timely farm operations. This is particularly important in the grain growing areas of south central Chile where clinatic conditions cause wide variations from year to year in the periods of good weather for sowing and harvesting.  - 12 - PART THREE Loan of $1,300,000 to Corporacion de Fomento de la Produccion (Rio Elqui Project) I. NEGOTIATIONS 53. In June, 1950, Fomento applied to the Bank for a loan to finance an irrigation project in the Rio Elqui Valley, in the north central part of Chile. The project represented the first stage of a plan recommended by the Frederick Snare Corporation to develop the groundwater resources of the Rio Elqui Valley. The amount of the loan requested was US $2.8 million and included $0.9 million for agricultural machinery. It was contemplated that the counterpart funds from the sale of this agricultural machinery would be used to cover the local currency cost of the project. 54. The Bank suggested as a first step that further studies be made to determine the method of water exploration to be followed, and engaged a consulting geologist for the purpose. In August 1951, Fomento submitted a revised application based on his findings. A formal loan application was submitted in September 1951, for the amount of US $1.3 million to cover the foreign exchange costs of an irrigation project including both explora- tory work and subsequent operational wrork. The loan was signed on October 10, 1951, with $885,000 being allocated to the first (exploratory) phase and $415,000 to the second (operational) phase of the project. II. THE LOAN 55. The Rio Elqui loan is for ten years and bears interest at the rate of 4-3/8% per annum (including the statutory 1% commission). Amortization pay- ments calculated to retire the loan in semi-annual installments by October 1, 1961, will begin on April 1, 1955. The loan became effective February 15, 1952. The closing date is December 31, 1954. The loan is guaranteed by the Government of Chile. 56. In Nay 1952, the Bank agreed to reimburse Fomento for purchases made prior to the Effective Date up to the amount of US $165,000. 57. As at October 31, 1953, disbursements had been made under the loan account for the amount of US $795.,710. Payment of interest and other charges have been made as due. III. THE PROJECT 58. Increased production of food is one of Chile's most pressing needs. At the present time agricultural production in the river valleys of northern Chile is severely limited by the unreliability of the flow of surface water. The Government has accordingly been sponsoring investigations to determine the availability of underground water. With an assured and adequate water supplyj yields of presently cultivated lands could be increased and an additional 150-200,000 acres of good land could be put into production. 59. The purpose of the present project is to measure the underground water resources of the Rio Slqui Valley and to begin to utilize them for irrigation purposes. The Rio Elqui Valley, about 400 kilometers north of Santiago, has about 70,000 acres of cultivable land. A large part of this area is already  - 13 - served by irrigation canals. Nevertheless, owing to the uncertainty of the water supply, about 20% of the total irrigated area is not at present cultivated, and water is frequently insufficient for the remaining area under cultivation. 60. Phase 1 of the project consists of determining the amount of water whick might-be obtained by pumping in the Rio Elqui Valley. This explora- tory work consists of - (a) a geophysical survey to determine the volume of the water- bearing strata, (b) the drilling and pumping of a number of test wells in order to determine the rate at wthich water might be withdrawm from its underground storage, and (c) tests to determine the rate at which underground water flows through the strata. 61. Phase 2 of the project will consist of the installation of permanent electric pumps on the wells which in Phase 1 were found to produce ade- quate quantities of water for economical pumping, and the provision of powzer-generating and transmission facilities for the operation of the pumps. This Phase will not be undertaken unless work during Phase 1 has proved the existence of adequate underground water resources. 62. The project is in the nature of a pilot undertaking. According to the original expectations, subject to the actual findings of Phase 1, the completion of Phase 2 would be sufficient only to irrigate adequately the land already under cultivation in the area and to permit the cultivation of about 5,000 additional acres. Howiever, geologists believed that the exploratory work might prove the existence of much more extensive under- ground water resources. If this proved to be true, the project would point the way to assuring the full water requirements of the Rio Elqui Valley and to a much larger development of irrigation and agriculture in this and other similar river valleys in northern Chile. 63. Work on both phases of the project is being carried out by the Chilean Department of Public Works (DOP) through its Irrigation Division which is in charge of the Government's irrigation program. In order to ensure that the work was properly executed, it was agreed between the Bank and Fomento, the Borrower, that Phase 1 of the work be carried out with the assistance of technical experts satisfactory to the Bank. Fomento was responsible for the purchasing of the equipment, hiring of consultants, and giving such technical advice as might be required, and was to provide the local currency required to complete the project on tiajie if adequate funds for this purpose Should not be available to fDOP. An arrangement, satisfactory to the Bank, betwreen Fomento and DOP for the execution of the project in accordance with the provisions of the Loan Agreement was made a condition of the effectiveness of the loan. IV. PROGRESS OF THE PROJECT 64. All the equipment required for Phase 1 of the project has now been delivered, Owing to modifications in the type of some of the drilling  - 14 - equipment required, the Bank agreed in i4ay 1952 to amend the List of Goods so as to increase the amount allocated for drilling equipment from $361,000 to $556,ooo. This change was accompanied by the removal of the amount allocated for contingencies for Phase 1 and by reductions in the allowances for consultants' fees and in sundry other categories. 65. The required expert technical personnel from abroad engaged by Fomento included three members of the staff of the U.S. Bureau of Reclamation, who served as Engineering Geologist, Consultant on Operations, and Seismological Equipment Operator, respectively, and experts in well-drilling and in the interpretation of seismograph recordings. As part of their function, these experts trained Chilean personnel. 66. Progress on the project has been slower than anticipated, partly on account of delays in the arrival of necessary materials and equipment from the United States, and partly on account of unforeseen difficulties en- countered in drilling. By the end of I4ay 1953 the entire seismic survey had been completed. By November 1, there remained only two wells still to be tested, It is expected that the entire drilling and testing will be completed by December 1953. However, not until the data thus obtained have been interpreted will it be possible to determine the extent to which the water resources of the Rio Elqui Valley can be developed. The report of the technical experts engaged in this study is e,pected to be ready by March 1954. 67. Progress reports prepared by the Department of Public Works and sub- mitted to the Bank, through Fomento, are being sent in regularly and are prepared with excellent care and detail.  -15- PARJT FOUR ELLATIONS W;ITH THE BORRO:i$RS Ai) GUAfRANTOR 68. Relations between the Bank and Fomento have been uniformly smooth and satisfactory. Fomento has consistently and promptly supplied all information requested and has afforded every facility to Bank officials visiting loan- financed projects in Chile. 69. Fomento, on its own behalf and on behalf of the Guarantor, has always acted in full accordance with the consultation provisions of the Loan Agreements and has been prompt in advising the Bank of any proposals to assume new debt obligations and of changes in its credit position and of that of the Republic of Chile.  -16- PART FIVE RELATIONS SEThriEEIU BAtN AND THE REPUBLIC CF CILL I. CHUIEAi ENaBLIDG LEGISLATIO& 79. All the flank loans to Chile have been mrade wuder law 9296 enacted by the Chilean Congress in January 19h9. This law authorizes the Government to guarantee external loans contracted by Fomento or by thie State Railways with the International Bank, Export-Import Bank, other credit institutions or foreign suppliers up to the agj;regate amount of U.S. 'lOQ million, or the equivalent in other currencies. 1I. JOIETiWORKING PPRTY 7,1. In the course of MLr. Black's visit to Chile in 1arch, 1951, cfficitals of Fomento discussed wvith him the work of their recently established Planning Departnent. Ur. 3lack suggested that the Governmenjt should send economists and engineers to wlashington to discuss the techniques and principles of development programming and investwent. 72.. A Joint Working Party of ftilan officiat and revrsontutilvo of t lhe -Bank:- accordiglyn rvt in Woshtagtor in A`-kril, 1951. The VTiiEAn represo;ntotives con- rAtotd of tLo heads of the .cnninrg and Finance Dopartents of Fomnento, the head of Fnonto' New- York Office, and the h>ad of the Transport Division of - the Mini-istry of ?ublic Works- The nettinrs,,uhich last6d over a Reriod of three rreeks, vere concerned with the criteria and techniques applicable to the draft- ing of an econormic develoruent program. No attempt vras made to dravw up an ac ual proL-ram for Chile.- III. JOINT BANK FAO A(2.ICULTUPAL SURVEY MISSION 73. Amcng the topics covered by -Mr. Black and the President of Chile in their discussions of March, 1951, was the country's need to expand food production. Mr. Black emphasized that the Bank would be unable to -undertake any agricultural investment in Chile before an adequate survey had been made of the country's agricul2ural problems and resuireents. _t was accordingly arranged that the Bank, in cooperation with the Food and Agriculture Organization, should organize a group of experts to undertake an analysis of the country's agricultural problews and policies, and in con- sultation with the Government, make recomendations for a 5.-? year program of agricultural developyent. It was agreed that the mission should consist of a Chief of Mission, an agricultural economist, and an agricultural engineer. A transportation econonist was added later. 7$ The mission arrived in Chile at the end of Hay, 1951, and spent three months in the country. They worked in close cooperation rith the Chilean Government, which assigned several experts to work continuously with them, and they were joined from time to time by additional specialists in various fields from the technical assistance missions in Chile of the Food and Agriculture Crganization and the Institute of Inter-American Affairs. 7$. In order to deternine the order of mnagnitude and the general direction of the desirable increase in agricultuiral production, the mission worked out) and used as a basis of their studies, an estimated food balance sheet for Chile for 1960. The mnission concentrated on working out a realistic long- term program of agricultural developnent but did not attept to prepare  -17- detailed plans for individual projects. Special attention was given to the private and public investment, both foreign and domestic, that would be needed to carry out the agricultural program and to the relationship of the investment program for agriculture to other sectors of economic development. 76. The final report of the mission vwas presented to the Bank on November 1t, 1952, and to the Chilean Government on December 1) 1952. The Government set up a "Committee of Agricultural Development" to study the report and to prepare a progran of agricultural development based on the recommendations of the Mission.  -18- PART SIX Economic Position of Chile j72. During the period of World War II the economy of Chile expanded steadily and real production increased by about one-third. With the end of the `Yar this growth ceased, and from 19J6 to 1950, production remained fairly constant. As the population continued to increase and the labor force to expand, this period was marked by a decline in real output per capita and in real income per employee. After 1950, however, there was the stimulus of a sudden rise in copper prices with the outbreak of the Korean 'W-ar and production began once again to increase. Inproved terms of trade permnitted increased imports of capital goods, which in turn reflected a rise in the level of investment. In recent years imported capital goods have accounted for over LOY of the country's total gross capital formation. 7a. A further factor which undoubtedly contributed greatly to the recent expansion of national output has been the increased availability of electric power. By 1952, production of electric power had increased 75% over the level of 19)4; installed capacity (excluding that of the large mining companies) was up 70%. This additional power has made it possible both to provide existing industries with the power they need and to reduce the backlog of industrial demand which has been a serious drag on the rate of economic growth. Even with this improvement, power shortages are still acute. "Voluntary" rationing implemented by fines for exceeding quotas, has brought about a shift to kerosene for residential heating, adding an additional burden to the country's balance of payments. On the other hand, the new electric power production has modified somewhat the pattern of Chile's energy consumption. In 1917, for example, electric power accounted for only 16% of all energy, but has now risen to 22%. This compares with 52% for coal and 25% oil. If as a result of Endesals power program, Chile's installed hydro capacity continues to increase, it is likely that more substitutions of power for coal and oil may follow. This will satisfy the new demand for power that can be expected to accompany industrial growth. In addition, it may possibly result in some relief to the country's balance of payments. 79. The small increase that has taken place in Chilean agricultural output over the last ten years has been due almost entirely to the increase in the size of the total agricultural labor force. Productivity per worker has not increased at all, nor has per capita real tfrm income. VWhen this stagnation in farm income is coupled with the normal attractions of urban employment, there is an increased tendency for labor to migrate to the towns. If this stagnation continues, it may induce existing capital also to transfer from the farm to urban investment. Its effect on Chilean industrial production also is restrictive, as stagnant farm income means a continuance of a limited market for the output of Chilean industry. ao. Although some of Chile's agricultural problems are institutional, such as the land tenure system, the two principal reasons for the stagnation of recent years have been financial, namely, the ever continuing inflation and the maintenance of an obsolete pattern of exchange rates. The situation has been further aggravated by a system of price controls on domestic agricultural production. One familiar consequence of inflation, namely, diversion of new investment away from productive undertakings, is conspicuous in the case of agriculture, Although agriculture has averaged 18% of real national income  -19- over the last decade, it received only 9% of Chile's gross investment. in terms of net investxqent, the share of agriculture has been negligible if ntzt indeed negative. Tae maintenance of an artificial exchange rate has hampered agricultural output by facilitating the importation of foodstuffs at a price lower than the cost of producing, transporting and zarketing domestic products. The coTaestic price controls on such basic coan3odities as meat anrc wheat have kept their prices abnormally lowr in the past fifteen years. 81. In vievw of the retiarding effect wfhich these factors have had upon total -)roduction, it is important to review recent developments in Chile aied a improving the situation. First and foremost, the present administration has been developing a well-rounded program designed to check the rate of inflation and eventually to restore some stability in the fiscal and monetary field. Mleasures have been enacted to check the expansion of bank credit and to place a ceiling upon government expenditures wghich have been the most active cause of inflation in recent years. An evaluation of the specSfic policies ctuzrently being attempted is set out in the last report ori 'Chile's Economic Position and Prospects"r, (WH9a) dated &eptenber 2, 1953. If the administration is successful in checking inflatior., one of the principal causes for the movement of labor and capital orawy from agriculture will be remedied. B2. The second main factor leadine to the current stagnation of agriculture, namely, the maintenance of an obsolete exchande rate, has now been eliminated. Chile nas now officially devalued its currency from its old par of 31 pesos to 310 pesos per U.w$ which new rate is tc te used for all Lmports instead of the multiplicity of rates in operati3n hithertc. IThis unification of th:e exchange rate will eliminate the price advantage which imports had heretofore enjoyed in competition with Ghilean products. The elimination of the preferential iLmpOrt rate may also induce the Chilean price control autlhorities to fix more realistic prices for domestic products. Active steps are nowF also being taken to develop agricultural processing industries, suchi as sugar beets, which have hitherto been quite impracticable because of the import subsidies available to imported cane sugar. 1 The e-avernrent stabilization program also envisages a change in the banking structure which will be 40o the advantage of agriculture as we-ell as to other sectors of economy. The Caja de Credito Agrario has been a principal source of agricu2tura2 credit, but with very limited rescurces. This is now being absorbed into the new Banco del Estado in order to channel more savings funds into medium-term loans for the improvement of agriculture and industry instead o