Bolivia - Power Projects

RESTRICTED Report No. p-390 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON TWO PROPOSED DEVELOPMENT CREDITS TO THE REPUBLIC OF BOLIVIA July 13, 1964 tltidt~ ~~~ b -160  REPORT M UD BECO'EICM.=TTNS OF THE PFESIDENT TO THE EXECUTIVE DIRECTUP'S ON TWIO PROPOSED DEVLLOFICENT C-.LDTTS TO THE PF:PUBLIC OF BOLIVILA 1. I submit the following report and recommendations on two proposed Development Credits in various currencies, equivalent to $10 million and $5 million respectively, to the Republic of Bolivia. These credits will help finance the construction of the Corani and the Chururaqui hydroelectric projects. PART I - HISTORICAL 2. Although Bolivia is one of the Bank's original members, the first discussions leading to Bank/IDA operations in Bolivia only began in 1961, after an irnterim agreement was reached between the Bolivian Government and its foreign bondholders on the settle- ments of outstandirg bonded debt in default, and after service pa-y ments on this debt had been resumed. 3. The Bank's first action in Bolivia was to finance a study of the reorganization of the government-owned railroad system, SOFEREAIL was selected to conduct the study, and submitted a final report in May, 1962. The Government has officially accepted the recomrmendations of the report, T.rhich relate primarily to a consoli- dation of the rolling stock facilities and administration of the several existing separate systems. Though no major steps have as yet been taken to implement these recommendations, arrangements have since been made writh the U.S. and U.K. for management assistance to the most important railroad, the Antofagasta-Bolivia Railroad. 4. In November, 1962, an IDA mission visited Bolivia to make a preliminary study of the electric powTer sector, for which financ- ing had been requested by the Bolivian Government, and concluded that the Cormni and Chururaqui projects seemed prima facie suitable for IDA financing. However, the mission also concluded that to achieve a permanent solution of Bolivia's powJer problem, the Bolivian Governrment would have to take stops to organize properly the entire power sector, whiich would involve anong other things negotiating an agreement with the Bolivian Power Company (BPC) about the areas to be served by that Company and Enipresa Nacional de Electricidad (ENDE), the newly created Government-owned power company, and about rates and other matters relating to the future financial position of the Company. Discussiclls to this end were initiated and continued at intervals over twelve months in JIashington and La Paz, and final agreement between BPC and the Government was reached on December 13, 1963. The more important features of the Agreement are described in  _2- Section IV of the attached Appraisal Report (No. 1). 5. The appraisal of the projects was carried out in two phases. An IDA mission ap-raised the projects in April, 1963. In the spring of 1964, the conclusions of the field appraisal mission were review.Ted w.iith representatives of the Bolivian Government and the Bolivian Pcwer Company in the light of the steps that had been taken by the Government to organize the power sector and the Gove-n- ment's overall power investment and financing plans. 6. Negotiations began in Washington on June 15, 1964 ar.d were substantially concluded by June 19. The Bolivian Government was represented by Ambassador Sanchez de Lo7,ada, Ing. Adolf o Linares - President of the Corporacion Boliviana de Fomento (CBF), Ing. Roberto Capriles - Director of the Empresa Nacional de Electricidad (ENIDE), and Dr. Carlos Aguirre - Legal Advisor. The BPC was represented by Mr. John Kazakoff -Vice President of BPC, and Mr. Fredrick Flynn - Legal Advisor. 7. The proposed Credits would be the first Bank,t/IDA financing in Bolivia. There are no other Ban-/IDA projects under consideration at this time. PALRT II - DESCRIPTION OF HE PROPOSED CIREDITS o. The main characteristics of the Credits would be as follows: Purpose: a) (Corani. Project) - to help finance the Corani hydroelectric plant, associated trars'.-ission and distri- bution facilities and related engi- neering services; b) (Chururaqui Project) - to finance the foreign exchange cost of the Chururaqui hydroelectric plant and associated transmission ard distri- bution facilities. BorrowTer: Republic of Bolivia. Amount: a) (Corani Project) - the equivalent in various currencies of $10 million. b) (Chururaqui Project) - the equivalent in var-ous currencies of $'5 nillicn.  -3 - Maturity: 50 years, including ten yeaxs of grace. Repayment to be in 80 semi-annual in- stalLments: 1/2 of' 1% of the principal amount to be repaid sem,i-armually begin- ning November 1, 1971h and ending May 1, 2014; 1-1/2% semi-annually thereafter to 2013, Service Charge: Three-quarters of 1% per year on the prin- cipal amount of the credit withdrawn and outstanding. Parment Dates: NvIay 1 and November 1. Beneficiaries: (Corani Project) - Corporacion Boliviana de Fomento initially; later, Empresa Nacional cle Electricidad (ENDE) (( see para. 19 below)). (Chururaqui Project) - Bolivian Power Company. Principal Features of Siibsidiary Loan a) (Corani Project) - Government would con- Agreements: tribute proceeds of' credit to EIDE as equity. b) (Chururaqui Project) - Government will charge interest at 5-1/2% per year; principal would be repayable in semi- annual installments beginning December 3.1, 1967 ard ending June 30, 1993.  PART III - APPRAISAL OF TIE PROPOSED CREDITS 9. A detailed appraisal of the Projects (TO 426) is attached (No. 1 ). Introduction 10. At present the only important public electric service is provided by Bolivian Power Company (B?C), owned by U.S. and Canadian interests, which serves the capital city of La Paz and provides 66% of the power requirements for the Govermnent- owned CONIBOL mines in the Oruro area. BPC has been operating in Bolivia since 1925. The next important power source is the Government-owned mining company's (COAIBOL) plants in the mines, which provide 33% of the power requirements for those mines and their workers' camps. The rest of the country, which consists of a numiber of small towns, is served by isolated diesel plants. most of which are in poor condition and inadequate to meet local power demands. -11. BPC has been unable to expand its power Lacilities since 1956 due to a lack of tariff adjustments to meet the severe inflation which has taken place since that time. Con- sequently there is severe power rationing in La Paz and the additional power required to meet the planned development of the mines is not available. 12. The Government oroposes to remedy the po;wer deficiency by initiating a large power expansion program.. To establish the appropriate conditions for such a program, it wiul establish a regulatory agency (DINE) for the entire power sector, with authority to approve tariffs. It has also passed the basic legislation creating Empresa Nacional de Electricidad (ENDE), an autonomous public power company with responsibility for pro- viding power facilities in all areas outside that served by BPC. The proposed IDA credits will provide the financing to enable the Government to initiate its power program. The new institu- tional framework should allow both the private and newly created public power entities to work together to serve the public in their resPective service areas on an efficient and sound financial basis. 13. The first step towards reorganizing the power sector was taken last year when the Government made an agreement with BPC and authorized preliminary tariff increases to enable the company to start generating the cash needed to meet the local currency costs of' new construction.  The Projects 14. Ghururaqui:- The most important immediate requirement for power facilities is in La Paz. The IDA credit for US $5 million will be relent to BPC by the Government to finance the foreign exchange costs of the first unit in the Chururaqui hydro plant of 11 MW, which BFC has started constructing in the Zongo Valley below the existing series of BPC plants now serving the capital city; the credit will also finance the foreign exchange costs of the transmission and distribution system expansion needed to deliver the new power to customers and improve the efficiency of BPC's system. The Chururaqui plant is the most economical next step in power plant expansion to serve this area. The first unit will provide enough power to eliminate the present deficiency; however, a second unit will be needed to meet in- creased demand immediately after the first unit goes into service. 15, Corani: - In the rest of the country, the most important immediate power needs are in the COKIBOL mines and for the ton of Cochabamba. 16. The COMIBOL mines are the biggest potential earner of foreign exchange and are an imiportant factor in Bolivia's internal economy, being the largest single employer of labor. These mines have been under a joint Inter-American Developrent Bank (IDB), Agency for International Development (AID) and German Governmc-nt sponsored rehabilitation program since 1962, which contemplates a US 037 million investment in new equipment and other improvements to the mines. It is essential that power be available about 1966 or 1967 to serve these new facilities. 17. The town of Cochabamba is in an important agricultural area, and because of its favorable climate and altitude (about 6,000 feet above sea level) is a potential center for light industry. The development of this area has been held back during the past few years because of a lack of power. 18. These two important power markets will be served by the construction of the 27 NW Corani hydroelectric power plant and reservoir, and a transmission line which will connect the new plant with the town of Cochabamba, and also the mines at Catavi. 19. The Government proposes to make Corporacion Boliviana de Fomento (CBF) responsible for starting the Corani project, and to gradually build up ENDE which will then take over from CBF. The works, and the initial establishment of ENDE, will be financed by the US 310 million IDA credit, a US $3.5 million  _6_ IDB loan and a Government contribution of US :?2 million eqouivalent. 20. The project is feasible and is the most economical next step of power plant expansion in this area. It will meet the demands for power described above but, as in the case of La Paz, it will also only be a first step and will have to be followed immediately by further expansion. 21. ENDE will also be responsible for power development in the other small towns. It expects to obtain financing from AID for these works when detailed plans are available for study.  -7- PART IV - LEGAL INSTU-MiNTS AN1D AUTHORITY 22. Attached are two draft Deverlooment Credit .Agreements with the r'I.epublic of Bolivia (Nos.2&3); and two related draft Project Agreements between the Association and Corporacion Boliviana de Fomento on the one hand (No. 4 ), and between the Association and Bolivian Power Company Limited on the other (No. 5 ). Also attached is a draft Memorandum of Understanding bet.een the Association and the Titer-American Dev-elopment Bank in connection with the ENDE Power Project (No. 6 ). 23. The draft Agreements follow in substance the normal pattern of agreements for projects of this kind. The following provisions are of special interest; a) In Section 4.05 of the ENDE Credit Agreement, the Borrower undertakes to establish ENDE as a sociedad anonima not later than January 1, 1965. b) In Section h).06 of the EN'DE Credit Agreement, the Borrower undertakes to organize DINE as a regulatory authority resnonsible for approving power tariffs. c) The effectiveness of the Credit Agreements and the related Aroject Agreements and the agreement that the Borrower is entering with the Inter-American Developrment Bank are all conditional on each other (Section 6.01 of the ENDE Credit Agreement). Addi- tional events of default have been stipulated in both Credit Agreements to ,ive the Association the right to susDend, or, in certain cases, prermature, the Credits (Sections 5.02 of the EDDE and BPC Credit Agreements). d) Sections 2.08, 2.09 and 2.10 of the ENDE Project Agreement provide for the transfer to ENDE not later than January 1, 1965 of certain assets, rights and obligations of CEF, including CBF rights and obligations under the relative Project Agreement and the Inter-American Development Bank Loan Agree- ment, and for the conditions upon which such trans- fer should be made. e) The Subsidiary Loan Agreement referred to in Sec~ tion 3.01 of the BPC Credit Agreement is to be signed concurrently with the Development Credit and Project Agreements and contains provisions assuring the life of the loan to BPC in the event of a suspension or prematuring of the Credit(s) to Bolivia for a cause not connected with BPC.  _ 8 - 24. The Memorandum of Understanding sets forth the basic principles to be follo;ued by the Atssociation and the Inter- American Development Bank in the administration of their respective agreenents and includes, inter alia, provisions relating to coordinating matters of common interest including exchange of informtation and constiltation between the Parties and the principles and procedures to be applied for disburse- mients and for procurement. The Borrower has been consulted about the proposed collaboration and aooroves the principles set forth in the memorandum and its Annexes. 25. The Recommendations of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are attached (No. 7). PART V - THE ECONOM4IC SITUATION ANM PROSPECTS OF BOLIVIA 26. A report on the Current Economic Position and Pros- pects of Bolivia (WH-138(a)) is attached (No. 8). 27. Since its revolution in 1957 Bolivia has been passing through difficult years of political change and social reform. The Governmentts financial position has been weak and has required continuing external assistance for both current and investment expenditures. Prod.uction of tin, Bolivia's leading export, has suffered severely from labor and management diffi- culties in COMIBOL, the state-owned mining company. Investment and business activity in the private sector were adversely affected by the political changes in the wake of the 1957 revolution. 28. In recent years (1961-1963) GDP has increased at a somewhat higher rate than in immediately preceding years, The Government's financial position also improved as revenue increased faster than expenditures. Since mid-1963 there have also been some signs of improvement in the labor situation at COMIBOL. 29. Externally there has been an increase in the current account deficit as imports of foreign financed equipment and imports of PL 480 wheat have increased considerably faster than export earnings, although both the volume and prices of mineral exports have tended to rise. The larger deficits have been financed through increased drawings on US aid, particularly on US loans. 30. Boliviats export prospects depend, in the near term, on the speed with which COM1IBOL's production can be improved and, over the longer term, on wTorld market prospects, especially for tin. In the years immediately ahead Bolivia should be able to maintain export earnings at the 1963 level ($72 million) or increase them slightly above this level,  -9- 31. Bolivia's external nublic debt amounted to $218 million as of December 31, 1963, and total debt service is scheduled at about $14 million in 1964 rising to about $18 million in 1967 (see Annex). These service payments would amount to about 19% and 25% of prospective export earning in the two years respectively. 32. In view of the relatively high level of debt service, the limited prospects for substantial increases in foreign exchange earnings and for substantially narrowing the gap between savings and Boliviats investment requirements, the bulk of external financing for Boliviats investment requirements should be on special terms. In these circunstances Bolivia should make every effort to increase public savings and to utilize external resources for projects which will most effectively strengthen Bolivia's economic position. PART VI . COMPLIANCE WITH ARTICLES OF AGREEMNT 33. I am satisfied that the proposed Develoorxnent Credit would comply with the Articles of Agreement of the Association, PART VII _ RECOM1JEINDATIONS 34. I recommend that the Association make available two Development Credits to the Republic of Bolivia in the amount in various currencies to $10 million and $5 million a service charge of 3/4 of 1% per annum, and on such other terms as are specified in the draft Development Credit Agreements, and that the Executive Directors adopt resolutions to that effect in the form attached (Nos. 9 & 10). George D. Woods President Attachments Washington, D. C. By: S. R. Cope July 13, l964-  TABLE 1: BOLIVIA - External Public Debt Outstanding Including Undisbursed as of December 31, 1963 with Major Reported Additions January 1 - March lb, Y6 Debt Repayable in Foreign Currencies (In thousands of U.S. dollar equivalents) Debt outstanding Major reported December 31, 1963 additions Item Net of Including January 1 - undisbursed undisbursed March 18, 1964 TOTAL EXTERiNAL PUBLIC DEBT 180 566 217,614 2 30 Publicly-issued bonds : 61,906 61,906 - Privately-placed debt 27,607 32,087 50 IDB loans 7,125 11,730 - U.S. Governmrent loans 33,938 60,552 - Export-Inport Bank 21,234 21,302 - AID 12,,704 39,250 Loans from other Western Govts. 49,962 51 311 2,880 Argentina 750 07 Brazil 182 182 West Germany 1,993 2.^001 2,880 United Kingdom 706 742 Loan from Czechoslovakia 28 28 1/ Excludes debt arising from the nationalization of the mines, which took place in 1953. 2 This bond issue is the result of a 1958 settlement on 4 defaulted issues: $ 2,400,000 6% 1917-1940 $ 29,000,000 8/ 1922-1947 $ 14,000,000 7% 1927-1958 $ 23,000,000 7% 1928-1969 In 1958, the principal amount of old bonds outstanding was $56,278,000. Under the settlement, bonds were stamped to indicate a new principal amount equal to 110% of the original amount, the additional 10% being in full payment of un- paid interest. Starting the second half of 1957, interest was to be paid on the stamped bonds upon surrender of coupons at a rate of 1,' per annum through 1959; 1-1/2%o per annum in 1960 and 1961; 2,t per annum the first half of 1962; and 3;. per annumn t'hereafter. A cumulative sinking fund of 1/2% per annum for the years 1962 to 1966 was to be provided. The sinking fund thereafter was to be 1/' per annum based on the amount of $56,278,000. Bolivia defaulted on certain interest payments in 1960, and on all interest payments in 1961. In 1962 and 1963 partial payments were made, and on May 25, 1964 she announced that two coupons of each bond would be paid in 1964 and the extension of the period for exchange of non-assented bonds to June 30, 1969. Source: IBRD - Economic Staff  TABLE 2: BOLIVIA - Estimated Contractual Service Payments on External Public Debt Outstandin Including Undisbursed as of December 1, 963 with Major ReportedAdditions January 1 - March lb, 19 Debt Repayable in Foreign Currencies (In thousands of U.S. dollar equivalents) Debt out- standing Payments during year Public- Pri- U.S. Government Other Year plus un- Amorti- In- Total ly- vately- IDB Tt Export- AID Govern- disbursed zation terest issued placed Loans Import ments January 1 Bonds Debt Bank 1964 217,614 9,979 3,969 13,948 844 7,777 180 3,845 3,221 624 1,282 1965 210,565 11,465 4,373 15,838 i,686 8,210 816 3,445 2,560 885 1,669 1966 198,233 13,906 4,442 18,348 1,970 7,390 1,130 4,194 2,491 1,703 3,664 1967 183,379 9,375 4,299 13,6714 1,970 2,886 1,137 4,093 2,422 1,671 3,588 1968 172,942 9,171 3,954 13,125 1,970 2,343 1,099 3,998 2,353 1,645 3,715 1969 162,580 10,244 3,825 14i,069 1,970 2,230 2,276 3,966 2,283 1,683 3,627 1970 151,004 12,081 3,426 15,507 2,251 1,68LI 2,193 3,867 2,215 1,652 5,512 1971 136,586 9,693 2,961 12,654 2,251 872 2,117 3,851 2,143 1,708 3,563 1972 124,277 7,664 2,550 10,214 2,251 499 1,392 2,876 2,075 801 3,196 1973 113,682 7,260 2,213 9,473 2,251 477 1,181 2,549 2,005 544 3,015 1974 103,140 6,534 1,885 8,419 2,251 454 3,189 1,933 1,256 2,525 1975 92,931 4,368 1,592 5,960 2,251 1,244 1,244 2,1465 1976 84,447 5,333 1,355 6.688 2,251 1,238 1,238 3,199 1977 74,503 5,517 1,077 6,594 2,251 1,228 1,228 3,115 1978 47,425 3,796 455 4,251 1,220 1,220 3,031 S5urcs: IBMD Economic Staff.