Philippines - Fourth Power Project

stV RESTRICTED %tI~V~ y5 gtY Report No. P-531 This report was prepored 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 The report may not be published nor may it be quoted as representing their views.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 T HE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL POWER CORPORATION OF THE PHILIPPINES March 2Z, 1967  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THIE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL POWE CORPORATION IN THE PHILIPPINES 1. I submit the following report and recommendation on a proposed loan in an amount, in various currencies, equivalent to US$12 million to the National Power Corporation in the Philippines for a Fburth Power Project. PART I - HISTORICAL 2. The Bank has made three loans to the National Power Corporation (NPC). The first, US$21 million, later reduced to US$18.4 million (183-PH), was made in 1957 for the Binga Hydroelectric Project in Northern Luzon. The second, US$34 million (297-PH), was made in 1961 for the Angat Hydro- electric Project near Yanila, and the third, US$3.7 million (325-PH) was made in 1962 for the expansion of the Maria Cristina Hydro-Station on Mindanao Island. The Binga project was completed successfully in 1960. The Angat and Maria Cristina projects are still under construction. 3. NPC has applied for a loan of US$12 million to cover the foreign exchange costs of a 75MW thermal power station to be built on Bataan peninsula across the bay from Manila, and of a 50MW extension (unit 4) to the existing Maria Cristina hydro-power station on Mlindanao. The total cost of the two plant additions would be about US$22 million, including interest charges during the construction period. 4. The project has taken a long time to work out. A first appraisal in February 1964 indicated that a decision in regard to the proposed thermal plant could not be taken until the expansion plans of the Manila Electric Company (MERALCO) were settled and that the power market on Mindanao did not appear to be expanding rapidly enough to justify immediate installation of the fourth unit at Maria Cristina. The uncertainty in regard to MERALCO's plans was removed in July 1964 after it obtained a 30-year extension of its license. Further visits to Manila and discussions with NPC led in the fall of 1965 to the conclusion that the fourth unit at Maria Cristina was justified by the growing industrial load. Negotiations were then held in June 1966 with a delegation headed by the Honorable Andres V. Castillo, Governor of the Central Bank of the Philippines, and Mr. J. Lahoz, the General Manager of NPC. 5. However, the Bank was in the meantime becoming increasingly concerned about the unsatisfactory progress of other Bank-financed projecte in the public sector, the uncertainty concerning the availability of adequate peso funds for them, and the lack of evidence that the Government was making a determined effort to inprove on past performance. The project was therefore not presented to the Executive Directors and the Government of the Philippines w.as informed that consideration of further lending in the public sector (including the presentation of the present project) would  be dependent upon the findings of an economic mission in October/November specifically in regard to improvements in the execution of public sector projects. The mission's report (No. AS-120, distributed to the Executive Directors on January 27, 1967) confirms that there has been some improve- ment and that the Government is making serious efforts to overcome past deficiencies in overall performance. 6. By that time, however, revised financial forecasts had been received from NPC which showed lower revenue forecasts than had previously been assumed. The Bank also learnt of a major leak in the Angat Dam which, if not closed promptly, could delay plant operations and thereby reduce NPC's earnings and increase construction cost. A mission therefore visited Manila in January 1967; its findings and information received subsequently show that the leak has been sealed and that NPC, with the help of funds the Government has undertaken to provide, will be able to meet its financial commitments. In addition, as a safeguard against unexpected shortfalls in earnings, assurances have been obtained from Government that it will assist NPC, if necessary, during the fiscal years 1966/67 and 1967/68 to meet its financing plan. 7. If approved, this will be the Bank's tenth loan to the Philippines, and will increase the total amount lent to US$146.7 million net of cancellations. The following is a summary statement of Bank loans to the Philippines as at February 28, 1967.  3- Amount (less Undis- Loan Cancellations) bursed Year No. Borrower Purpose (US$ millionF 1957 183 National Power Corp. Power - Binga 18.4 0 1961 290 Republic of the Phil. Dredging 7.4 0 1961 297 National Power Corp. Power - Angat 34.0 3.3 1962 325 National Power Corp. Power - Maria Cristina 3.7 .9 1963 331 Phil. National Bank. Relending to the Private Developm.ent Corp. of the Phil. (PDCP) 15.0 3.0 1964 386 National Waterworks Manila Water Supply & Sewerage Authority (N\WSA) 20.2 15.6 1964 393 Republic of the Education (University Philippines of the Phil. - College of Agriculture) 6.0 5.5 1965 432 Central Bank of the Agriculture 5.o 4.2 Philippines 1966 467 Phil. National Bank Relending to the Private Development Corp. of the Philippines (PDCP) 25.0 24.6 Total net of cancellations 134.7 of which repaid 7.6 Total outstanding 127.1 Amount sold 10.1 of which has been repaid 5.5 4.6 Net amount held by Bank 122.5 Total undisbursed 77.1  - 4 - 8. IFC's loans and investments in the Philippines consist of an equity investment of P800,000 (equivalent to $205,000) in the Private Development Corporation of the Philippines and an equity investment of $14 million equivalent and a loan of $8 million in the Manila Electric Company. NTo IDA credits have been made to the Philippines. 9. As noted above, the new administration has brought about some improvements in the administration of Bank-financed projects. Recently arrangements were made to provide the peso funds required to complement the loan funds for two on-going Bank projects. 10. The Dredging Project of 1961 (Loan No. 290-PH) has been a disappointment but improvements have been evident of late. All flcating equipment has now been procured but the operation and maintenance of the fleet had been unsatisfactory until recently. The Government is taking steps to remedy the situation. A contract to construct the slipway was not awarded until late 1965 and work is progressing slowly. The undisbursed balance was cancelled. 11. The Angat Power Project of 1961 (Loan No. 297-PH) is expected to be completed early in 1968, about 3 years after the originally scheduled date. The start of this project was delayed because contracts were not awarded on time and construction was seriously delayed by typhoon damage in 1963 and 1964 and major cave-ins in June 1905 which led to the replacement of the main civil works contractor. In late 1966 leakage occurred around one of the gates of the diversion tunnel but the situation is now under control, the leakage having been permanently sealed. 12. Thle Maria Cristina Hydro Project of 1962 (Loan No. 325-PH) was scheduled for completion in late 1964; the delay in completion is mainly due to problems experienced with the local contractor. The project is now estimated to be in operation within the first half of 1967. The delay has not had serious consequences for the power supply of the area because some important industrial loads did not materialize as scheduled. 13. The National lWaterworks and Sewerage Authority (NWSA) Project of 1964 (Loan No. 386-PH) has been delayed about one year owing to slowness in awarding civil works contracts, poor contractor performance and litigation over the principal pipe contracts. One civil works contract has been terrj- nated and re-awarded to a new contractor. Another civil works contract has been renegotiated to give NWSA more control over the contractor's operations. Some of the principal supply contracts have recently been let. 14. No other projects have yet reached the appraisal stage. Discussions on general lending policy took place between Bank representatives and the Philippine authorities in late February early March this year. The Philippine authorities were informed that the Bank would not be prepared to consider lending beyond this proposed project unless measures were taken to raise taxes to a satisfactory level and remedy other deficiencies (referred to in Part V, The Economy) and there was evidence of substantial improvement in the performance of the public sector.  PART II- DESCRIPTION OF THE PROJECT Borrower: National Power Corporation. Guarantor: Republic of the Philippines. Amount: The equivalent in various currencies of US$12 million. Purpose: Construction of a thermal power station on Bataan Peninsula with a capacity of 75BM; and the installation of 501.OU^ generating capacity to supplement facilities at the Maria Cristina hydro-station in Northern Mindanao, including control works on Lake Lanao. Amortization: 20 years including 3