Nicaragua - Sixth Power Project

RESTRICTED Report No. P-483 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 The report may not be published nor may it be quoted as representing their views. INTBRNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN FOR THE SIXTH POWER PROJECT TO THE EMPRESA NACIONAL DE LUZ Y FUERZA (ENALUF) IN NICARAGUA June 1, 1966  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PRESIDENT'S REPORT AND RECOMMENDATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESA NACIONAL DE LUZ Y FUERZA, NICARAGUA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$5.0 million to the Em- presa Nacional de Luz y Fuerza (ENALUF). PART I: HISTORICAL 2. In late 1965 the Empresa Nacional de Luz y Fuerza requested the Bank to consider a loan for the expansion of its generating and transmission fa- cilities. Preliminary discussions on the project had taken place in Wash- ington at various times during 1965 between ENALUF representatives and Bank staff. The project was appraised in January 1966. Negotiations on the proposed loan took place in Washington on May 5 and 6. ENALUF was repre- sented in the negotiations by Dr. Raskosky, Chairman of the Board; Mr. Estrada, a member of the Board; Dr. Montiel, General Manager, and Mr. Salinas, Deputy General Manager. Representing the Government of Nicaragua as Guarantor was Mr. Escoto, the Embassy's Counselor for Economic Affairs. 3. Since 1953 the Bank has made five loans for power totalling US$22.05 million to Nicaragua, of which US$h82,000 remained undisbursed at the end of April 1966. This amount is required for payments in 1966 to suppliers on completion of guarantee periods. Three of the Bank loans were to ENALUF and two to the Government, but the latter loans totalled only $850,000. At the end of April 1966, $4.4 million had been repaid on all power loans. The projects for which previous loans were made have all been successfully com- pleted. 4. The proposed loan to ENALUF of $5.0 million would bring the Bank's total lending (less cancellations) to Nicaragua to $h4075 million. Follow- ing is a summary statement of Bank loans and IDA credits to Nicaragua as of April 30 1966: Amount (US*, million) Un- Year Borrower Purpose Bank IDA disbursed 1951 Republic of Nicaragua Roads 3.5 00 1951 Republic of Nicaragua Grain Silos 0.55 0.0 1951 Banco Nacional Agriculture 1.2 0.0 1953 Republic of Nicaragua Roads 3.5 0O0 1953 Republic of Nicaragua Power 045 0.0 1955 INFONAC Agriculture 1.5 0.0 1955 ENALUF Power 7.1 0.0 1955 INFONAC Power 0.4 0.0 1956 Autoridad Portuaria de Corinto Port 3.2 0.0 Continued..  -2- Continuation.. Amount (US$ million) Un- Year Borrower Purpose Bank IDA disbursed 1956 ENALUF Power 1.6 0.0 1960 ENALUF Power 12.5 o.48 1962 Republic of Nicaragua Water Supply 3.0 0.0 1963 Republic of Nicaragua Irrigation 0.25~- 014 Total (less cancellations) 35.75 3.0 of which has been repaid 15.61 Total now outstanding 20.14 Amount sold: 2.24 of which has been repaid 2.1 Oolh Total now held by Bank and IDA 20.0 3.0 = = Total undisbursed 0.62 0.0 0.62 1/ As the Executive Directors were recently informed (see R66-41), this loan is being cancelled except for an amount of about $103,00000 already disbursed and a further amount of $150,000.00 to be allocated for a program of studies and experimentation. PART II: DESCRIPTION OF THE PROPOSED LOAN 5. BORROWER: Empresa Nacional de Luz y Fuerza (ENALUF) GUARANTOR: Republic of Nicaragua M4OUNT: The equivalent in various currencies of US$5.0 million. PURPOSE: Installation at Chinandega of a 15 MT gas turbine powered generating set; construction of transmission lines;  -3- installation of new suitable substations and strengthening of distribution lines; construction of a new headquarters building; engineering and management services. AMORTIZATION: 20 years with a three-year grace period; principal repayments semi-annually from April 1, 1969 through April 1, 1986 INTEREST RATE: 6 percent per annum COMMITIaENT CHARGE: 3/8 of 1 percent per annum PART III: THE PROJECT 6. A report entitled "Appraisal of the Sixth Power Project" (No.TO-530a) is attached. 7. Gross generation of the power system administered by ENALUF, which comprises almost the entire public power supply for the country, has increased rapidly over the last years. From 50 million kwh in 1958, it rose to 238 million kwh in 1965, representing an average annual rate of growth of about 25 percent. The system peak demand increased during this same period from about 10 MW to 48 ITP1. Gross power and energy requirements are expected to increase at an average rate of about 11 percent per annum during the next seven years. On this basis, the peak demand will increase to about 100 MW:. and gross energy generation to 500 million kwh by 1972. 8. ENALUF, which is to execute the project, is an autonomous public corporation with a Board of four appointed by the President of Nicaragua. The Chairman of the Board serves in a full-time capacity. ENALUF's management has demonstrated, especially during the construction period of the Rio Tuma hydroelectric project which the Bank helped finance with a $12.5 million loan (259-NI) made in 1960, that it is capable of carrying out the project. The present generating capacity of ENALUFts system includes 50 MTJ of hydro, 30 NIW of steam and about 13 11iW of Diesel capacity. The company serves the major population centers in Nicaragua through an integrated transmission network, but it also operates a number of smaller isolated systems. 9. The project consists of: A. The installation at Chinandega of a 15,000 kw gas turbine powered generating set. B. (i) The construction of transmission lines at 138 kv between Sebaco and Leon and between Managua and Tipitapa, and transmission lines at 69 kv between Managua and Asososca and between Chinandega and Corinto, including the procurement of line con- struction and maintenance equipment.  - 4 - (ii) The installation of new suitable substations and the modification of existing substations at the line terminals and the strengthening of distribution lines. C. The construction of a new headquarters building. D. Engineering and management services. 10. In view of the need to meet peak load requirements and the mainte- nance of a prudent reserve, present generating capaci-ty would become in- adequate in the heavily populated Western Zone by 1967 without the creation of an additional 15 H-1J generating capacity. Both hydro and thermal power sources were evaluated as possible alternatives for meeting the peaking power problem. The hydro alternative proved far too costly for such a purpose, and a possible small steam power source, while more attractive than the hydro alternative, did not fit well with the expected developments of the system. A gas turbine was therefore deemed to be the most economical solution. 11. The total cost of the project, including contingencies and engincer- ing, is the equivalent of ',7.3 million. The Bank loan of $5.0 million would cover the foreign exchange costs. The cost estimates are reasonable and are based on firm contracts for the main items of equipment included in the project, 12. The decision to install a 15 IMW gas turbine was taken by ENIALUF and accepted by the Bank in late 1965, Bids were called in December of that year, and a contract was awarded in February 1966. The Bank is satisfied that international cormpetitive bidding procedures have been complied with. Both the gas turbine and engineering contracts have been signed, and bids for most of the transmission line materials and substation equipment have been awarded. Each step in the procurement, from the preparation of speci- fications to the contract award, was reviewed and approved by the Bank before being finalized by ENALUF. Disbursements would take place during the three-year period 1966 through 1968. 13. ENALUF's financial position is satisfactory, due to adequate rates, rapid growth in power sales and competent management. Returns on average net fixed assets in operation were 13 percent and 16 percent in 1963 and 1964 respectively. It is therefore expected that ENALUF will have no problem in generating the cash required to continue the financing of its investment program and to meet all other financial requirements. PART IV: LEGAL INSTRUMENTS AND AUTHORITY l4. The Draft toan Agreement between the Banc and ENALUF, the Draft Guarantee Agreement between the Republic of Nicaragua and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, are being distributed to the Executive Directors separately.  - 5 - 15. These Draft Agreements do not significantly differ from agreements for similar projects. PART V: THE ECONaY 16.- The most recent economic report on Nicaragua (14H-135A, dated April 24, 196h), which was distributed to the Executive Directors at the time, concluded that Nicaragua's favorable growth prospects, its sound management of develop- ment financing and low external debt service ratio made it creditworthy for additional external loans on conventional terms to finance its external cap- ital requirements for some years to curme. The improvement since 1961 in the economic position of Nicaragua, noted in the last report, has continued through 1965. The attached economic memorandum concludes that the mainte- - nance of an ample margin of creditworthiness for additional external borrow- ing on conventional terms continues to be assured. PART VI: CCMPLIANCE WITH THE ARTICLES OF AGREEMENT 17. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII: RECOMENDATION 18. I recommend that the Executive Directors adopt the following reso- lution: RESOLUTION NO. Approval of Loan to Empresa Nacional de Luz y Fuerza in the amount of the equivalent of US$ 5,000,000 to be gua'ranteed by the Republic of Nicaragua RESOLVED: TILkT the Banlk shall grant a loan to the Empresa Nacional de Luz y Fuerza, to be guaranteed by the Republic of Nicaragua, in an amount in various currencies equivalent to five million United States dollars (US$ 5,000,000), to mature on and prior to April 1, 1986, to bear interest at the rate of six percent (6%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Sixth Power Project) between the Bank and the Empresa Nacional de Luz y Fuerza and the form of Guarantee Agreement (Sixth Power Project) between the Republic of Nicaragua and the Bank, which have been presented to this meeting. George D. Woods President Attachments Washington, D.C. June 1, 1966