Guatemala - Guacalate Power Project

R ESTR I CTED FILE COPY xJReport No. P-609 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 The report may not be published nor may it be quoted as representing their views.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 INSTITUTO NACIONAL DE ELECTRIFICACION GUATEMALA June 6, 1968  INTERNATIONAL BANK FOR RECONSTRUCTION AiD DEVELOPIVENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INSTITUTO NACIONAL DE ELECTRIFICACION, GUATEWMLA 1. I submit the followsing report and recommendation on a proposed loan in an amount in various currencies equivalent to US$7.0 million to the Instituto Nacional de Electrificacion (INDE). PART I - HISTORICAL 2. The proposed project is the second power project for which finan- cial assistance would be given to INDE, an autonomous Government corpora- tion responsible for promoting electric power development in Guatemala. The first loan, made in 1967, helped finance the Jur'un-Marinalg hydro- electric project and included in it was an amount to finance consultant's services for the feasibility studies for the proposed steam-electric power station. This project was appraised in October 1967 and negotiations took place in Washington on May 15 through May 21, 1968. INDE was represented by Mr. Manlio Giracca, President, Mr. Roland Castillo Contoux, General Manager and Mr. Jorge Lemus, Loan Officer. Representing the Government of Guatemala as Guarantor were Mr. Jose Luis Samayoa, Disbursements Officer and Mr. Gert Rosenthal, specially designated by the Finance Minister to assist in the negotiation. 3. The proposed loan, the third made for Guatemala, would increase the Bank's total lending to Guatemala to US$40.2 million (net of cancel- ations). IDA has not made any credits to Guatemala. The followring is a summary statement of Bank loans to Guatemala as of April 30, 1968: US$ Million Loan or Credit Year Borrower Purpose Bank Undisbursed Number 124 1955 Republic of Guatemala Roads 18.2 - 487 1967 INDE Power 15.0 12.7 Total (less cancellations) 33.2 of which has been rapaid to Bank and others 13.5 Total now outstanding 19.7 Amount sold 2.8 of which has been repaid 2.1 0.7 Total now held by Bank 19.0 Total undisbursed 12.7  4. IFC made one investment of US$200,000 in a flour mill in Guatemala, of which it sold $134,000 and the balance was repaid to the Corporation. 5. An education project has been appraised and we expect to present a loan for it to the Executive Directors in the near future. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. Borrower: Instituto Nacional de Electrificaci6n (INDE). Guarantor: Republic of Guatemala. Amount: The equivalent in various currencies of US$7.0 million. Purpose: To assist in financing a 33 MW steam-electric power station at the Guacalate plant site and in completing the studies for the Atitlan Hydroelectric Scheme. Amortization: Principal repayments semi-annually from January 1, 1972 to July 1, 1991. Interest Rate: 6-1/4 percent per annum. Commitment Charge: 3/4 of 1 percent per annum. PART III - THE PROJECT 7. An appraisal report entitled "Instituto Nacional de Electrificacion - Guacalate Power Project (TO-625a) is attached. 8. Guatemala's power market is organized into Central, Eastern, Western and Atlantic regions. Guatemala City is the load center of the Central Region, which accounts for about 80 percent of total consumption in the country. Although the development of all future electric power generating plans has been entrusted by law to INDE, the Empresa Electrica de Guatemala (EEG), a private company operating under a 50-year concession granted in 1922, is the principal distributor of power generated by INDE in the Central Region. The project which the proposed loan would help finance would increase INDE's present generating capacity from about 50 MW to about 83 4W. 9. INDE, which would be responsible for the execution of the project, is an autonomous Government agency created in 1959 for the purpose of developing Guatemala's electric power resources. Its chief executive is the General Manager, who carries out his responsibilities in accordance  with policies determined by a Board of Directors consisting of eight professional men appointed by the Chief of Government through the Minister of Communications and Public Works. With the assistance of consultants, which it has agreed to retain, INDE's present organization should be able to execute the project satisfactorily. 10. The project proposed for Bank finance consists of (a) the con- struction of a steam electric generating station with one unit of about 33 NW at the Guacalate generating steam plant site and all ancillary installations; and (b) consultant's services for site investigations, pre-investment studies and design of the first stage of the Atitl.an. Hydroelectric Project. 11. Total project cost is estimated at US$8.9 million, including interest during construction. The foreign exchange component is estimated at US$7.0 million which would be covered by the proposed Bank loan. The balance representing the local currency cost would be covered by INDE's retained earnings and by Government contributions. 12. The project ranks high in priority in the country's economic development plans. The load in the Central Region has grown at a rate of about 13 percent annually in recent years. For the period 1968-71, this rate of growth is expected to continue, and the project is an important part of the program to meet these needs. Even assuming that the Jurun- Marinala hydroelectric project and the proposed Guacalate power project come into service in 1970, INDE's power reserve position will still be unsatisfactory until the contemplated hydroelectric project at Lake Atitlan is put into service. 13. Contracts for all work other than consultants' services financed by the proposed loan would be awarded on the basis of international can- petitive bidding. Consultants' services would be cbtained in accordance with conventional procedures as approved by the Bank. Disbursements would be for the foreign currency costs of imported equipment and services only. Expenditures prior to the date of the loan would not be eligible for reimbursement. 14. INDE's financial position is satisfactory. It is expected to earn a rate of return on its average net fixed assets in operation of at least 10 percent from 1968 through 1972. With the help of Government contributions to its equity and increasing revenues from its expanding operations, INDE should be able to finance about 20 percent of its large capital requirements during the next few years.  - 4 - PART IV - LEGAL INSTRUMENTS AND AUTHORITY 15. The draft Loan Agreement between INDE and the Bank, the draft Guarantee Agreement betueen the Republic of Guatemala and the Bank, which contain the covenants normally utilized for power projects, as well as the Report of the Committee provided for in Article III Section 4 (iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. PART V - THE ECONOMY 16. Guatemalats economy has been almost stagnant in the last several years. An average annual growth rate of about 4.4 percent combined with a population increase of 3.1 percent annually in the same period to keep per capita income growth at an average of only 1.I percent per annum during 1960-67. The last Bank report on Guatemala (WH-178b, May 6, 1968) clearly identified the main problems of Guatemala's economy and the main issues of investment, financial and balance of payments policies confronting the authorities. Political instability prevented expansion of the country' s exports in the earlier years of this decade, when external market conditions for its principal crops were favorable. In 1967 weakening coffee and cotton prices and production problems in cotton resulted in severe reduction of total exports. Estimates for 1968 indicate exports still slightly below the level reached in 1966. 17. Government finances followed the same pattern as general economic growth. Total revenues declined in the early years of this decade, increased substantially in 1964 and 1965 and remained stagnant in the last two years. Public savings net of amortization have been insufficient to support an adequate public investment level. The constitutional government, which took office in July 1966, faced with serious problems of public order and distrust from the conservative classes and the army, has followed a gradualistic approach in which the preservation of parliamentary rule is a basic consideration, and its economic policies have been rather timid. 18. The Government has nevertheless succeeded in raising somewhat public investments, negotiating substantial amounts of long-term development loans and arresting the rapid growth of non-developmental current expendi- tures and short-term borrowing abroad. The Bank's mission that visited the country last April was satisfied that the Government has maintained the investment program and the financing plan for 1968 contained in the budget prepared by the previous Minister of Finance, which had been approved by Congress. The budget reduces current expenditures by 10 percent from the previous level and increases revenues by about $10 million. Public savings net of amortization, although still low, will be about $8 million, compared to negative savings of nearly $4 million in 1967. The rest of  the local financing of the 1968 investment program will be provided by internal borrowing approximately equal to the amount of internal debt amortization. New short and medium term external borrowing will be only $1 million, compared with $15 million in each of the previous two years. 19. The authorities are aware that these efforts are still in- adequate to meet the country's problems and needs. As recent political developments have considerably strengthened the Government's position, it is freer now than at any time before to adopt more vigorous economic measures. It seems likely that it will adopt some fiscal measures at present being discussed at the regional level, particularly a surcharge on imports, which would significantly increase fiscal revenues and make possible the implementation of its public investment program, including several important projects being considered by the Bank. 20. Guatemala's external debt service ratio, which reached 8 percent in 1967, should decline slightly in 1967-70. The additional long-term borrowing abroad now envisaged will not have any significant effect on debt servicing until the 1970's and even then the increase in the ratio will be small. The new measures to produce additional revenues and to raise public savings will be needed, however, to support the contemplated increase in public investment in 1969 and 1970 even if external financing is provided on favorable cost-sharing basis. PART VI - COMPLIANCE WITH ARTICLES OF AGRERaENT 21. I am satisfied that the proposed loan would canply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATIONS 22. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to Instituto Nacional de Electrificacion in an amount equivalent to US$7,000,000 to be guaranteed by Republic of Guatemala. RESOLVED; THAT the Bank shall grant a loan to Instituto Nacional de Electrificaci6n to be guaranteed by Republic of Guatemala, in an amount in various currencies equivalent to seven million United States dollars  - 6 - (US$7,000,000), to mature on and prior to July 1, 1991, to bear interest at the rate of six and one-fourth percent (6-1/4%) 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 (Guacalate Power Project) between the Bank and Instituto Nacional de Electrificacion, and the form of Guarantee Agreement (Guacalate Power Project) between Republic of Guatemala and the Bank, which have been presented to this meeting. Robert S. McNamara President by J. Burke Knapp Attachments Washington, D. C. June 6, 1968