Peru - Pacasmayo Cement Plant Project

R E STR I CT E D Report No. P 84 FILE COPY This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsigility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to the COMPANIA NACIONAL DE CEMENTO PORTLAND DEL NORTE S.A. for THE CONSTRUCTION OF A CEMENT PLANT at PACASMAYO, NORTHERN PERU April 13, 1955  TABLE OF EQUIVALENTS U.S.$ 1.00 = S/.20.00 S/. 1.00 = U.S.$0.05 s/.100,000 X u.S.$5,000 S/.1,000,000 - U.S.$50,000  INTERNATIONAL BAMK FCR RECONSTRUCTION AND DEVELOMENIT REPORT AND RECDO471MAM'TTONS OF THE PRESIDENT TO THE EXECUTIVE DIRJCTORS ON A PROPOSED LOAT TO TIE CMIPANIA WACIONAL DE C3,401TO PORTILAID DEL NORTE S.A., FOR TH3 CONSTRUCTfON OF A C9-ENT PLANT AT PACASIAYO, PERU 1. I submit herewith a report and recommendations on a proposed loan of $2.5 million to the Comeania Nacional de Cemento Portland del Norte, S.A. to finance the mnajor part of the foreign exchange cost of a cement plant to be located at Pacasmayo in Northern Peru, PART I - HISTORICAL 2. Officials of the company presented this project to the Bank early in 1952 and the Peruvian Ambassador at that time informed the Bank of his Government's interest in the project and its readiness to guarantee a loan from the Bank. Subsequently, Bank missions examined the project and their studies showed it to be satisfactory provided that further equity capital vwas obtained. Aecorclinginly, I sent a letter (See R-788) to the Company on April 23, 1954, stating that as soon as the total paid-in capital had been increased to 5O million soles, a sum equivalent to the amount of the proposed loan, I would expect to be in a position to recommend to the Executive Directors a loan for this project. 3. In January 1955 the company advised the Bank that it had succeeded in increasing its equity capital to this amount. In February a member of the Bank staff wfas in Peru and investigated the financial status of the company, as a result of which representatives were invited to come to Wiashington for loan negotiations. 4. These negotiations began on March 28 with Max Calderon Lynch (General Mianager) Jorge Grieve and Emilio Althaus representing the Borrower, and with the Peruvian Ambassador representing the Guarantor. 5. The proposed loan would be the sixth loan to be made to Peru and would bring the total to $31 million. All previous loans have been made to the Government of Peru or to a Governm9nt_ageMcy and are as follows: $4 million for improvement of the Port of Callao (57 PE of January 23, 1952); tvo loans totalling $3 million to increase SCIPA's agricultural machinery pools (67 PFE of July 8, 1952 and 98 PE of April 12, 1954); $5 million to expand medium and long-term lending facilities of the Banco de Fomento Agropecuario (lC5 PE of November 12, 1954); and $18 million for the Quiroz-Piura Project (Second Stage) to irrigate 50o,000 hectares of wasteland (114 PE of April 5, 1955). PART II - DESCRIPTION OF TIHE PROPOSED LOAN Borrower 6. The Borrower wvould be the Compania Nacional de Cemento Portland del Norte, S.A., a private Peruvian company.  - 2 - Guarantor 7. The Loan would be guaranteed by the Republic of Peru, a member of the Bank. Amount 8. The anount of the Loan would be $2.5 million or its equivalent in other currencies. Purpose 9. The proceeds of the Loan would be used to finance the major part of the foreign exchange cost of the construction of a cement plant in Northern Peru, including interest during construction. The plant would have an annual capacity of about 100,000 metric tons of Portland cement, and would include facilities for power generation. It should be ready for operation in about 2-1/2 years. Interest, Commission and Commitment Charges 10. The Loan would bear interest at the rate of 4-5/8% per annum, including the statutory commission of 1%. The commitment charge would be 3/4 of 1% per annum and would accrue from the Effective Date of the Loan Agreement or 60 days after the date of the Loan Agreement, whichever is earlier. Amortization 11.. The Loan would be for a period of 15 years. It wrould be amortized by semi-annual paynents beginning :liay 1, 1958 and ending M&ay 1, 1970, as set out in Schedule 1 of the proposed Loan Agreement. Legal Instruments and Legal Authority 12. Drafts of the Loan and Guarantee Agreements are attached as Appendices I and II. The Borrower is authorized to enter into the Loan Agreement pursuant to its charter. The Guarantee of the Republic of Peru *i.Il be. given pursuant. to Liaw 11636 of N1ovember 13, 1951, and the Government has by Supreme Decree authorized the Ministry of Finance to give this Guarantee. 13. Attention is drawn to the following special provisions of the Loan Agreement: Sections 5.05, 5.14, and 5.15 relate to the positive pledge which the Bank would take on the properties of the company. I believe it would be prudent to obtain such a pledge and this action is customary under Peruvian Law. Under Section 5.07 the Borrmrer undertakes not to sell or pledge any of its properties without the consent of the Bank. Section 5.01 provides that the Borrower will employ competent and experienced contractors and also a competent and experienced consulting engineer who would supervise the erection of the plant; Section 5.02 (b) requires the Borrower to employ an experienced and comapetent plant manager. The Borrower undertakes in Section 5.08 not to incur any long-term indebtedness if it would exceed its  - 3 . capital and surolus, and in Section 5.09 to pay cash dividends only out of accumulated net profit. In Section 5.03 the Borrower undertakes to call the unpaid portions of outstanding shares as and when funds are required to carry out the project. 14. The report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank is attached as Appendix III. PART III - APFRAISAL 0.' TIT MPRO,S LOAN 15. A detailed anpraisal of the Project (TO-17.b) is attached as Appendix IV. Justification of the Project 16. Cement has been in such dermiand in Peru in recent years that consumption has outstripped production and imports have increased sharply. The local cement plant at Lima has recently increased its capacity and another cement plant situated about 80 kilometers aiway at Chilca has just gone into production. The combined production of these two plants is, however, still unable to supply all of Peru's requirements. 17. The area which would normally be supplied by the proposed new plant is the coast of Northern Peru. This area is undergoing considerable agricultural and industrial development but has no cement plant to look after its increasing construction requirements. Accordingly, cement for this area must be either imported or brought from the i&ma area. Since imported cenent costs nearly twvice as much as cement produced locally, users naturally prefer Peruvian cement and as a consequence the local producers must resort to a form of rationing. Even if the two plants near Lima were expanded to take care of all of Peru's needs, cost of transportation to lXorthern Peru would increase the sales price in this area by a minimum of 20% to a maximtum of over 70%X, depending on the distance from Lima. Only a cement plant built in the Northern region can make cheap cement available to that area. 18. Substantial savings of foreign exchange for Peru should result once the plant comes into operation. The 100,000 metric tons of cement to be produced by the plant would save Peru about $3 million annually at present vrorld prices. 19. The company has sold a total of 50 million soles in equity capital. The largest shareholder, COSKANTA (Corporacion Comercial Sud Americana, 3.A.) now holds about two-thirds of the capital, although it was not the original sponsor of the enterurise. COSMANIA is controlled by Mauricio Hochschild. The Bank proposes to obtain a letter (attached as Appendix V) from Mauricio Hochschild's Panamanian Holding Company, guaranteeing COSMLANA's obligation to pay up any unpaid portions of the shares it has subscribed to in the cement company. The remainder of the shares have been subscribed to by over 100 Peruvian citizens,  - 4 - Economic Situation 20. I have nothing to add to the information on Peru's economic position which was contained in my report to you of MIarch 24, 1955 on the loan for the Quiroz-Piura Project (R-865). The Report indicated that both the external and domestic position of Peru had improved markedly in 1954 and that the loan proposed herein is well vithin Peru's capacity to service. 21. Bank representatives are now in Peru to discuss with the Government its future investment plans and to consider vfhat further projects in Peru might be suitable for Bankc financing. They will also take this occasion to reappraise the economic situation and review the country's creditworthiness for future loans. Method of Procurement 22. last year the Borrowver invited bids on an international basis for the design and erection of the plant and the supply of equipment and materials. Bids were received from eleven firms, seven from Europe, two from Japan and two from the United States. After discussions with the Bank the Borrowrer engaged a cement consultant to analyze the bids and make recommendations as to the best offer. The lowest bidder iwas the German firm IJ.LAG (Muhlenbau und Industrie, G.m.b.1O, Braunschweig. On the advice of the consultant, the Borrower accepted this bid and a contract is now being negotiated. Prospect of Fulfillment of Obligations 23. The company is managed by a Board of experienced Peruvian businessmen. So far as construction of the plant is concerned, the company plans to employ a firm with much experience in this kind of wvork, and has undertaken to employ a consultant to supervise the job. The equity capital of the company is sufficient to cover all of the local currency exoenditures, and all of the foreign exchange expenditures not covered by the proposed loan. Amortization payments are not scheduled to begin until May 1, 1958, by which time the project should have been in operation for a period of at least six months. 24. The plant should prove to be a commercial success. The company intends to sel cement at a considerably lower price than now obtains in the area for either domestic or imported cement, and even at this low-er price, the profits should cover the service of the Bank's loan about 2-1/2 times. The transfer of loan service into foreign exchange should impose no serious burden on Peru. PART IV - COMPLIANCE WIVTH ARTCILTS OF AOREJWfET 25. I am satisfied that the proposed Loan will comply with the  requirements of the Articles of Agreement of the Bank. PART V - RECJOIEDTDATIONS 26. I recommend that the Bank make a loan of $2.5 million, or the equivalent in other currencies, to the Compania Nacional de Cemento Portland del Norte, S.A. with the Guarantee of the Republic of Peru, on such terms and at such rates as specified in the attached draft Loan Agreement. Eugene R. Black Washington, D.C. April |I> 1955