Philippines - Angat Hydroelectric Project

R E S T R I C T E D FILE COPY Report N0.P-265 This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL POWER CORPORATION OF THE PHILIPPINES FOR THE ANGAT PROJECT October 5, 1961  IETERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPHEnT REPORT AND RECCOlvuIENDATIONS OF THE PRESIDENT TO THE BEXCUTIVE DRECTORS ON A PROPOSED LOAN TO THE NATIONAL POW14M CORPORATION OF THE PHILIPPINES FOR THE ANGAT PROJECT 1. I submit the following report and recommendations on a proposed loan in various currencies equivalent to $34 million to the National Power Corporation (NPC) of the Philippines for the Angat Hydroelectric Project. PART I - HISTCRICAL 2. This project was first proposed to the Bank in 1958. Its considera- tion was delayed because the engineering studies for it had not been completed. NPC has also proposed for financing another hydroelectric project on the Island of Miindanao which will be considered later when the market for its power is firmly established. 3. The project was appraised in June-July 1960 by a Bank mission in the Philippines. To improve the cash position of NPC, the Government introduced legislation to convert NPC's bonded indebtedness into capital stock. This was enacted in May 1961. 4. Negotiations with representatives of-the Government and NPC were held in Wiashington in September 1961. 5. If the proposed loan is made, it would be the Bank's third loan to the Philippines and would increase the total amount lent by the Bank to about $61 million net of cancellations. Loans previously made are: Amount of Loan Year Borrower Purpose Net of Cancellations 1957 NPC Electric Power $18,500,000j 1961 Government Dredging $ 8,500,00W Total net of cancellations Q'27,000,O0O of which has been repaid $ ' 479,000 Total now outstanding $26,521,000 Amount sold $1,907,000 of which has been repaid $ 479,000 $ 1.428,000 Net amount held by Bank $25,o93,o0o y/ Original amount of loan S21 million. Undisbursed balance as of September 30, 1961 $784,000 2 Not yet effective.  - 2 - 6. A Bank mission visited the Philippines at the request of the Government from June to August of this year to conduct a comprehensive study of the Philippine economy and examine developmental priorities and prospects. The report of this mission is currently being prepared. PART II - DESCRIPTION OF THE FROPOSED LOAN 7. Borrower: The National Power Corporation of the Philippines. Guarantor: Republic of the Philippines. Amount: $p30.0 million equivalent Amortization: 44 semi-annual instalments from June 1, 1965 to December 1, 1986. Interest Rate: 5 3/4% per annum, including 1% commission. Commitment Charge: 3/4 of 1% per annum. Purpose: Expansion of the power system through the construction of a 2C6 Mi hydro station on the Angat River consisting of a dam, a spillway, turbine generators, transmission facilities to Mlanila, and all ancillary and control equipment for the completed installation. PART III - LEGAL INSTRUMENTS AND IEGAL AUTHORITY 8. Attached are drafts of the following documents: (a) Loan Agreement between the Bank and the -National Power Corporation (No. 1) (b) Guarantee Agreement between Republic of the Philippines and the Bank (No. 2) (c) Report of the Statutory Loan Committee as provided in Article III, Section 4 (iii) of the Articles of Agreement (No. 3) (d) A letter addressed to the Bank containing undertakings by the Guarantor and the Borrower regarding power rates (No. 4) (e) A letter addressed to the Bank from the Guarantor assuring the availability of specific funds as contribution towards the cost of the Project (No. 5)  - 3 - 9. The Loan and Guarantee Agreements conform generally to the pattern of loan and guarantee agreements for power loans to autonomous agencies of member countries. The Loan Agreement contains a general provision (Section 5.08) for the maintenance of rates at levels adequate to cover operating expenses, debt service and a reasonable contribution to the cost of future expansion. A corresponding provision appears in the Guarantee Agreement (Section 3.07). These undertakings are amplified in a letter from the Guarantor and the Borrower addressed to the Bank. Another provision of the Loan Agreement (Section 5.09) makes the Borrower's ability to incur new debt dependent on its present and prospective revenues being sufficient to cover 1.4 times its maximum future debt service. PART IV - APPRAISAL OF THE PROPOSED PROJECT 10. The project is described in the attached report "Appraisal of the Angat Hydroelectric Project of the National Power Corporation - Philippines" (No. 6). It consists of the construction of a dam on the Angat River at a point approximately 25 miles northeast of M4anila; a main power house; an auxiliary power house; turbine generators; transmission facilities and all ancillary control equipment. The completed installation would add a total peaking capacity of 206 iNW to NPC's Luzon grid. A dependable power output of 147 SiW would be available with the reservoir regime planned for the project. The energy output would be 673 million kwh annually. 11. The total cost of the project is estimated at P188.5 million (US $62.8 million equivalent) of which P102 million (US $34 million equivalent) is in foreign exchange. This estimate is realistic and reasonable. The National Waterworks and Sewerage Authority would contribute P21,5 million toward the cost of the project in exchange for water rights. The foreign exchange cost would be fully covered by the proposed loan while the remaining local currency requirements will be provided from government equity contributions, NPC?s own resources and local borrowings of about P15 million. 12. NPC is a government-owned Corporation with an authorized capital stock of P250 million. It was constituted by Act of Congress in 1936 and is governed by a Board of Directors appointed by the President of the Philippines. The Board in turn appoints the General IManager. NPC is charged with the development of the hydroelectric resources of the islands and with providing power facilities to meet the country's requirements. NPC has carried out the construction of the Binga Project (First Bank loan) satisfactorily and on schedule.  13. Through a contractual arrangement, NPC sells the bulk of the power from its major plants in Luzon to the Manila Electric Corporation (19ERALCO), formerly a subsidiary of the General Public Utilities Corporation of New York and currently being acquired by "The lMIeralco Securities Corporation", a Philippine investment group. NPC will sell most of the power from Angat to f4eralco which is NPC's principal customer. Meralco distributes power in the 14anila metropolitan area. 14. Before conversion of NPC's bonded debt into capital stock debt service coverage had dropped to an unsatisfactory level and would not have permitted further borrowing. This coverage was imlproved under the above- mentioned Act of Play 1961 which defers sinking fund and interest payments on certain debts until 1970, but the problem remains after 1970. Indeed, since present estimates indicate that the resumption of payments of sinking fund and interest would reduce debt service coverage to 1.2 and 1.3 times in 1971 and 1972 respectively, it has been necessary for the Bank to waive the debt limitation covenant under the existing Binga loan in order to enable NPC to enter the proposed loan agreement on the Angat project. It is estimated that NPC's earnings would give a return of 6.3% on net fixed assets in operation in 1962, increasing to 6.9% in 1965. This is considered barely adequate. However, the program for increasing power rates which was agreed upon during loan negotiations will improve the return on NPC's investment as well as raising post-1970 debt service coverage to a more satisfactory level. Justification of the Project 15. The project is needed to provide capacity required to meet the estimated increase in power demand in Luzon where industrialization, particularly in the Manila metropolitan area, is proceeding at a very rapid pace. It compares favorably with any alternative source of equivalent power that would satisfy this demand. A power market study for the grid system on this island, of which the Angat Project will be a part, indicates that the load growth rate is likely to be 11% per annum. Energy requirements are expected to increase from 1959 million kwh in 1960-61 to 5,874 million kwh in 1971-72 and during the same period, the system load is expected to increase from 380 MW to 1,206 MVW. NPC will supply an increasing proportion of the power and energy needed to meet this forecast. The project will also help provide for the increasing domestic water requirements of the Ilanila metropolitan area. 16. Year round irrigation of an area of approximately 27,000 hectares would also be made possible by the construction of a small re-regulating dam dotJmstream of Angat. The benefits have not been appraised, however, and no part of the cost of the project is apportioned to the potential irrigation feature since it is justifiable by its power benefits.  Economic Situation 17. The Bank economic mission referred to in paragraph 6 confirms earlier impressions that the Philippines should be able to maintain a rapid rate of growth similar to that achieved in the post war period. Foreign exchange earnings in the next several years are likely to grow at a slower rate than in the last five, but should pick up again in the second half of the decade. In any event, output for the domestic market can continue to be expanded at a rapid rate. Indeed, as indicated in the attached memorandum (No. 7) expansion in total output of around 6% seems necessary to sustain growth in per capita incomes and prevent increases in unemployment, in view of the explosive growth in population and labor force which the country is now experiencing. 18. In the past eighteen months economic activity has slowed down, and for the past nine months foreign exchange reserves have been declining. As of September 15, net reserves stood at $134 million (less than three months imports) as compared to $192 million in December 1960. These developments are due primarily to uncertainties and speculation associated with the transition to a freer exchange system which started in April 1960 and is expected to be completed sometime after the Presidential elections scheduled for N4ovember. Moreover, this being an election year, public spending has been increased and private credit policies have been eased. Because of these factors, reserves may well go down still further before the end of the year. Decisive action by the monetary authorities is necessary to reverse this trend. However, once the elections are over, it is expected that such action will be taken and that reserves will start to rise again. 19. Present Philippine external debt is now $310 million. An addi- tional $200 million in loans is likely to be negotiated from various sources in the course of the next twelve months - including the proposed Angat loan. Total service on this amount would reach a peak in 1965-66 of 8.5% of 1960 foreign exchange earnings, or somewhat less relative to the earnings projected for that period. Prospects for Fulfillment of Obligations 20. The project will be executed by NPC whose technical and operational staff have proven ability and have gained considerable experience through the execution of previous hydroelectric projects. The organization is fully capable of carrying out the project with the advice of consultants which have already been selected.  - 6 - 21. The market prospects in the area served by NPC, the measures taken by NPC and the Government, together with the rate and other financial covenants contained in the loan and guarantee agreements afford assurance that NPC will have adequate resources a) to cover the costs of the project other than those to be covered by the loan, and b) to meet all debt service requirements. 22. The service on existing Philippine external debt is not a serious burden on its foreign exchange earnings. In view of this and of favorable prospects for further export expansion and economic growth, the Philippines should be able to provide the additional service which would be imposed by this loan. Procurement 23. All major contracts for equipment and services will be awarded on the basis of international competitive bidding. PART V - COiIPLIANCE IJITH THE ARTICLES OF AGREEIv1ENT 24. I am satisfied that the proposed loan complies with the requirements of the Articles of Agreement of the Bank. PART VI - RECO0llENDATIONS 25. I recommend that the Bank grant a loan to the National Power Corporation of the Philippines in various currencies equivalent to $34 million for a term of 25 years including a grace period of 31- years at a rate of 5 3/4%, and on such other terms and conditions as are specified in the draft Loan Agreement attached, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 8). Washington, D.C. Eugene R. Black October 5, 1961.