Jamaica - Power Project

RESTRICTED Report No. P-482 FILE COPY 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE JAMAICA PUBLIC SERVICE COMPANY, LIMITED May 27. 1966  INTERNATIONAL BANIK FOR RECONSTRUCTION ANiD DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOA1N TO THE JAi4AICA PUBLIC SERV:ICE COMPANY 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$22.0 million to the Jamaica Public Service Company, Limited (J.P.S,C.). PART I - HISTORICAL 2. Following the conclusion of protracted negotiations on a 25-year all island electricity licence, the J.P.S.C. and the Government of Jamaica approached the Bank in July 1965 for assistance in a power developrment project. A Bank mission visited Jamaica in October 1965 to appraise the project. 3. Formal negotiations for the proposed 'Loan were held in Washington from January 26 to February 4, 1966. Principal representat-ives in the negotiations were, for the Borrower, Mr. George C. King, President of J.P.S.C., and for the Government, Hr. Horace G. Barber, Under Secretary of Finance. 4. The following is a summary statement of the only Bank loan made to Jamaica so far as at April 30, 1966: Year Borrower Purpose Amount (US$ million) 1965 Jamaica Highways 5.5 Of which has been repaid 0.0 Amount now outstanding 5.5 Amount sold 0.3 Of which has been repaid 0.0 0.3 Amount now held by Bank 5.2 Amount undisbursed 5.5  - 2 - That no disbursements have been made under the loan is due to delay in the selection of foreign consultants; however, a U.S. consulting firm was en- gaged by the Government in April 1966 and project work is now under way. 5. A technical assistance grant of up to US$200,000 was made by the Bank to Jamaica in May 1965 to assist in a feasibility study of a proposed urban expressway in the city of Kingston. The Bank has also provided a consultant, since January 1965, to assist the Government in the identifica- tion and preparation of projects. 6. The Bank has presently under advanced consideration a request from the Government for assistance in the financing of a project for education. In addition the Government has indicated its desire to seek Bank assistance for telecommunications, water supply and sewerage, in- dustrial finance, highways, agriculture and fisheries. PART II - DESCRIPTIOMJ OF THIE PROPOSED LOA-T 7. The main characteristics of the proposed loan are as follows: Borrower: Jamaica Public Service Company, Limited Guarantor: Jamaica Amount: The equivalent in various currencies of US$22.0 million Purpose: To help finance a power project Amortization: In 33 semi-annual installments, beginning March 15, 1970, and ending March 15, 1986 Interest Rate: 6%O Commitment Charge: 3/8 of 1% PART III - TIHE PROJECT 8. An appraisal report entitled "Appraisal of the Development Program of the Jamaica Public Service Company, Limited" (TO-518a) on the proposed project is attached. 9. The J.P.S.C. is the principal public distributor of electricity in Jamaica with an installed generat ng capacity of 109 HNW and its entire system is interconnected except for a small diesel plant at Port Antonio. The only other public distributor is the Government Electricity Authority  - 3 - with a small diesel station in the parish of Westmoreland, which would be acquired by J.P.S.C. as a result of its all island licence. In addition to the foregoing, about 94 Ti4T of generating capacity have been installed by industrial users. 10. The J.P.S.C. is the operating subsidiary of Jamaica Public Service Limited (Canada), which at present owns all the former's voting shares. Stone and Webster, Incorporated (U.S.) owns 39 percernt of the voting shares of Jamaica Public Service Limited, which in effect gives it a controlling interest in J.P.S.C. The Government hopes to have Jamaican citizens own a major portion of the ordinary shares of the company and, as a condition to the granting of the all island licence, the Canadian parent company is required to phase out its holdings in the J.P.S.C. within 15 years. The licence requires that a substantial portion of the ordinary shares be made available to the citizens of Jamaica and further that within one year of the date of the licence the majority of the Board members of J.P.S.C. shall be citizens of Jamaica. The company is well managed and should continue to be well managed in the future. Under the terms of the proposed loan, the Bank will be consulted on any change in the chief executive of the company. 11. The project covers the first three and a half years of the J.P.S.C.'s ten-year development program. It consists of 99 It of additional steam generating capacity (one unit of 33 MH capacity and another of 66 MN capacity) in the Kingston area, 22 MW of diesel peaking plants and the expansion and interconnection of transmission and distribution facilities. The demand on J.P.S.C.'s interconnected system has increased at an average annual rate of 13.3 percent over the past five years and is expected to increase at an average annual rate of 13.5 percent during the next decade. The project represents the most economical means by which the J.P.S.C. can meet this growing demand. 12. The total cost of the project is estimated at about US$41 million, of which the foreign component of about US$22 million would be covered by the proposed loan. Of the balance of US$19 million, J.P.S.C.'s retained earnings are expected to cover US$15 million, and the remainder would be covered by bank overdraft financing and a small amount of share issues. 13. All major contracts for the project will be awarded on the basis of international competitive bidding. Contracts for the greater part of the 33 IM steam generating plant have already been awiarded in accordance with the procedure normally required by the Bank. Expenditures made for the project subsequent to January 1, 1966, will be covered by the loan. 14. By reducing dividends and curtailing capital expenditures the J.P.S.C. has maintained a sound financial position despite the fact that it has not been allowed to increase tariffs since 1962. The company's financial position is expected to remain sound. The ratio of debt, in- cluding the bank overdraft, to total capitalization will increase from 47.5 percent in 1965 to 57 percent in 1969 as a result of the project.  - h - 15. Tne Government hias just enacted legislation establishing a Public Utility Commission as an independent body to supervise the activities of public utility companies. The Commission will control the rates at which electricity is sold, set standards to be followed by the J.P.S.C. and ensure that J.P.S.C. complies with its obligations under the licence. The Commission is expected to be established within the next few months. PART IV - LEGAL IThSTRUNEiTS AEID AUTHORITY 16. The Draft Loan Agreement between the Bank and the J.P.S.C., the Draft Guarantee Agreement between Jamaica and the Bank, and the Report of the Committee provided for in Article III, Section h (iii) of the Articles of Agreement of the Bank are being distributed to tne Executive Directors separately. 17. The following points in tle Loan and Guarantee Agreements whi c are otherwise in the form followed in the case of power loans generalay, are of particular interest: (a) The loan will be secured by Debenture Stock issued pursuant to an existing Indenture by which the Borrower has mortgaged its property in favor of a Canadian trustee. Until the supplemental Indenture covering the issuance of the Debenture Stock is registered, the Borrower may not, unless otherwise agreed, with- draw more than US$750,000 equivalent from the loan account (Section 2.02 of Loan Agreement). (b) There are covenants (Section 5.14 of Loan Agreement and Section 3.07 of Guarantee Agreement) to maintain adequate rates for the sale of electricity, as pro- vided for in the Borrower's licence and the Act establishing the Public Utility Commission, which is supp'lemented by an undertaking on the part of the Guarantor that until the project is completed the rate of return allowed to the Borrower shall not fall below 9.5 percent unless otlherwise agreed with the Ba,ik, in order to help ensure the sound financing of the project. (c) A change in the Borrower's licence without the Bank's concurrence, a default under the Indenture, and the prematuring of any debt of the Borrower, are additional events of default under the loan (Section 6.02 of Loan Agreement). 18. The Government is authorized by law to sign the Guarantee Agreement. No further Parliamentary action is required to make the Loan Agreement and Guarantee Agreement effective. Signing of the loan will take place after the issuance of the all island licence which is expected within the next two weeks.  PART V - THE ECONOMY 19. A report (WH-154a) on the "Current Economic Position and Prospects of Jamaica" was distributed to the Executive Directors on December 30, 1965 (R65-198). The report commented favorably on Jamaica's recent economic performance and prospects for future growth and capacity to assume additional external debt, It noted that, while the Government had not yet defined all aspects of the public sector's financing plans for 1966 and 1967, these plans were being drawn up to be consistent with the preservation of Jamaica's growth momentum and financial stability. 20. Recent information on developments in 1965, which was not available at the time of the last report, is consistent with the above appraisal. Preliminary estimates indicate that the high rate of economic growth (7.5 percent per annum) which Jamaica experienced since mid-1963, continued in 1965 because of the booming tourist industry, and fairly rapid rises in agricultural and industrial production. Jamaica's balance of payments performance in 1965 improved in some respects over 1964. Merchandise imports increased only half as rapidly as gross domestic production and food imports declined somewhat. With a moderate rise in exports of goods and services (including tourism), the current account deficit remained at the 1964 level of about f13 million. This deficit was largely covered by the inflow of private capital and by official borrowing abroad, principally in the London market, where the Jamaican Government raised E3.15 million in June 1965. An imnportanit achievement was the successful public offering of a US$7.5 million bond issue in January 1966, Jamaica's first in New York since independence. 21. With regard to the public sector's financing plans, the authorities have decided to keep public investment expenditure at the already high 1965 level, but to reduce the recent rate of increase in current expenditures and to introduce new revenue measures in early 1967. These adjustments, together with presently planned approaches to the private markets abroad and increased borrowing from the official lending agencies should cover the financing requirements of the public sector. 22. On January 31, 1966 Jamaica's external public debt repayable in foreign currency totalled US$98.2 million, of which US$16.5 million was undisbursed. Since that date there has been no material change in Jamaicats external debt position. Annual service charges on this debt, which amount to US$9.3 million in 1966 and rise to US$10.3 million by 1970, account for about 3 percent of Jamaicats prospective earnings on current external account. In view of the relatively lowi level of these debt charges, Jamaica's favorable growth prospects and its Governmentts prudent financial management, Jamaica can be regarded as creditworthy for the proposed loan and the other external borrowing in prospect.  - 6 - PART VI - COMPLIANCE WITH ARTICIES OF AGREEIHNT 23. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMEIDATION 24. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to Jamaica Public Service Company Limited in the amount of the equivalent of US$22,000,000 to be guaranteed by Jamaica RESOLVED: THAT the Bank shall grant a loan to Jamaica Public Service Company,Limited, to be guaranteed by Jamaica, in an amount in various currencies equivalent to twenty-two million United States dollars (US$22,000,000), to mature on and prior to March 15, 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 (Jamaica Power Project) between the Bank and Jamaica Public Service Company Limited, and the form of Guarantee Agreement, (Jamaica Power Project) between Jamaica and the Bank, which have been presented to this meeting. Attachments George D. Woods President Washington D.C. May 27, 1966 by J. Burke Knapp Vice President