El Salvador - Fifth Power Project

RESTRICTED FILE ~COPY Report No. D 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF. EL SALVADOR FOR A FIFTH POWER PROJECT December 2. 1970  INTERNATIONAL DEVELOPIviENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMET CREDIT TO THE REPUBLIC OF EL SALVADOR FOR A FIFTH POWER PROJECT 1. I submit the following report and recommendation on a pro- posed development credit from the Association in an amount in various currencies equivalent to Us$5.6 million to the Republic of El Salvador. PART I - HISTORICAL 2. The proposed project was submitted to IDA in January 1970 and was appraised in June/July 1970. Negotiations took place in Washington on November 9 through November 13, 1970. The Borrower was represented by Mr. Alfredo Noyola, Vice-Minister of Economy, and iMr. Manuel Arce, Deputy-Secretary of the Planning Council, and the Comision Hidroelectrica del Rio Lempa (CEL) by Mr. Max Homberger, Director, and Mr. Enrique Lima, General Manager. 3. The proposed lending would bring total Bank/IDA lending (net of cancellations) to US$71.5 million, consisting of nine loans and two credits, of which US$30.3 million would be for the power sector. Total loans now amount to US$57.9 million with one IDA credit of US$8.0 mil- lion. The following is a summary statement of Bank loans and IDA credits to El Salvador as of October 31, 1970. Loarn or Amount (US$ millionJ Credit Year Borrower Purpose Bank IDA Undis- Nwnber bursed 7 loans and 1 credit 1949-1963 50.2 8.0 Loan 521 1967 Republic of El Salvador Roads 2.8 - 1.9 Loan 609 1969 Republic of El Salvador Education 4.9 4.8 Total (less cancellations) 57.9 8.o of which has been repaid to Bank and others 26.5 Total now outstanding 31.4 Amount sold: 3.9 of which has been repaid 3.6 0.3 Total now held by Bank and IDA 31.1 8.0 Total undisbursed 6.7 6.7  -2- 4. A total of US$6.7 million remains to be disbursed on two loans. The 1inal stages of construction on a highway project for which a supplementary loan was made in December 1967 (Loan 521-ES) have been delayed by changes in the project, adverse weather condi- tions and the war with Honduras. The project is now progressing sat- isfactorily with about 70 percent of the work completed; howlever, some postponement of the present Closing Date (June 30, 1971) may have to be considered. An education loan (Loan 609-ES of June 11, 1969) has been slow in starting because of institutional difficulties steming from poor coordination within the education sector and inexperience in international bidding procedures. Budgetary pressures in the immediate post-war period also held back work on this project. These difficul- ties have now been overcome, and bids for the first phase of construc- tion have been received. Meanwhile, however, the Government has de- cided to restructure thie country's education system, and this will require further changes in the project wihich are at present being exam- ined. If the suggested changes seem appropriate, the Executive Direc- tors will be invited to consider them. 5. On January 21, 1969, the IFC approved an investment in Hoteles de Centro America, S.A., consisting of a loan of US$0.6 million and a share subscription of US$0.3 million, for the construction of a hotel. A second project in the tourist sector, which was under dis- cussion eighteen months ago, has since been dropped. 6. A number of projects are being prepared for consideration by the Bank, including projects in telecommunications, highways and irrigation. The telecommunications project should be ready for pre- sentation to the Executive Directors before the end of the current fiscal year. 7. A claim of around US$250,000 in respect of certain debts owed by the Salvador Railway Company arose when the Company's assets were transferred to the Republic of El Salvador in 1962. During the past two years discussions have been proceeding between representatives of the bondholders, the Government of El Salvador, and the Government of the United Kingdom with a view to a settlement of the claim that would call for payment by the Salvadorans in government bonds, and an early agreement now appears to be in prospect. PART II - DESCRIPTION OF THE PROPOSED DEVELOPMENJT CREDIT 8. Borrower: The Republic of El Salvador. Beneficiary: Comision Ejecutiva Hidroelectrica del Rio Leipa (CEL). Amount: Various currencies equivalent to US$5.6 million.  -3- Purpose: To cover the foreign exchange cost of a 33 M;W gas turbine plant (two 16.5 Y,J units) at Soyapango; and a 115 kV transmission line 115 kilometers long. Amortization: In 50 years, including a 10 year period of grace, through semi-annual installments of 1/2 of one percent from April 15, 1981 through October 15, 1990 and 1-1/2 per- cent from April 15, 1991 through October 15, 2020. Service Charge: 3/4 of one percent per annum. Relending Terms: The proceeds of the credit to be relent to CEL for 20 years including a 2-1/2 year period of grace, at a rate of interest of 7-1/4 percent. CEL would carry the exchange risk. PART III - THE PROJECT 9. An appraisal report entitled "Appraisal of the Fifth Power Project" (PU-55a)is attached. It points out that per capita energy consumption in El Salvador is 153 kN1h per year, slightly below the Central American average, and that only 23 percent of the population (roughly in line with the regional average) has access to electrical service. CEL provides about 86 percent of all electricity generated in the country (620 GWh in 1969) and owns over 80 percent of -total in- stalled capacity. The company's electricity production has grown at an average rate of 11.3 percent over the period 1959-1969, reflecting the rapid rate of economic growth, increased urbanization and the sub- stantial backlog in demand for power. 10. The project is part of CEL's tentative development program through 1976. This program will not be finalized until priorities have been established, which will require further studies during the next two years, including the conclusion of a survey of E1 Salvador's geo- thermal resources which is being carried out with UNDP assistance. The Bank, in 1969, expressed its "special interest" in this survey. What- ever the outcome of the studies, the project is a firm part of the dev- elopment program. The gas turbine plant is essential to ensure provi- sion of adequate stand-by capacity in the system particularly for the capital city of San Salvador, which is also the dominant industrial, commercial and financial center. The 115 kV transmission line connect- ing San Rafael Cedros and San Miguel will represent a considerable and needed improvement over the present 69/46 kV lines that supply the eastern part of the country. 11. The total cost of the project is estimated at US$7.0 million, with a foreign exchange cost of US$5.6 million which would be met by the proposed credit. Procurement of goods and services would be on the  basis of international competitive bidding. Disbursements would be made for the CIF cost of imported equipment and materials and for the foreign currency cost of consultants' services. 12. CEL, which would be responsible for the execution of the pro- ject, is a government-owned corporation engaged almost entirely in the generation of power, with only minor distribution activity. Retail dis- tribution of electricity in El Salvador is almost entirely carried out by privately owned companies, the largest of which is the Compania de Alumbrado Electrico de San Salvador (CAESS), which operates in the capi- tal San Salvador and its environs. CEL has successfully implemented four Bank-financed projects for power expansion, its management is sound and, with some continued consultantst assistance in major plan- ning and project supervision, the company is fully capable of execu- ting the project and operating the neu facilities. 13. CEL's financial position is satisfactory. It has undertaken to maintain tariffs that would ensure a return on net fixed assets in operation of at least 9 percent per annum (Section 4.03 of the Project Agreement). It has also agreed not to incur any long-term debt unless its net revenue for the previous year is at least 1.5 times the maxLraun. debt service requirements of any subsequent year (Section 4.04). 14. CEL proposes *to pass on the results of its increasing effi- ciency by lowering its wholesale tariff by about 5 percent in early 1971. Part of this reduction would be retained by the distributing agencies and the balance would be passed on to the ultimate consumer mainly through a reduction in the industrial tariff. The details of implementing the proposed wholesale tariff reduction are under discussion between the Gov- ernment, CEL and the distribution companies. PART IV - LEGAL INSTRUhIENTS AND AUTHORITY 15. The draft Development Credit Agreement between the Republic of El Salvador and the Association and the draft Project Agreement be- tween the Association and CEL, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association, and the text of a Resolution approving the proposed Development Credit, are being distributed to the Executive Directors separately. the draft Agreements conform substantially to the pattern of those used for projects of this kind. Before signing the Credit Agreement, the Government has to be authorized to do so by the National Assembly. The Agreement subsequently requires ratification by the National Assembly. PART V - THE ECONOIvIY 16. A basic data sheet is annexed and an economic memorandum is being distributed separately. The report on "Economic Development and Prospects of Central America" (WH-170a dated June 5, 1967) concluded  - 5 - that El Salvador's economy was faced with a period of deceleration of growth and balance of payments and credit restraints, and that the Gov- ernment had to strengthen its financial. position and expand investment expenditures to counteract the contractionary tencdencies and lay the basis for sustained growth in future years. The "Memorandum on Recent Economic Development and Prospects of El Salvador" attached to the President's Report to the Executive Directors of Play 21, 1969 (P-70M) for the presentation of Loan 609-ES (Education) observed that in 1967 and 1968 the rate of GDP growth did, in fact, substantially decrease, and that a policy of credit restraint was followed in order to avoid balance of payments deterioration. The Government introduced during the period new revenue measures; these were insufficient, however, to prevent a drop in government savings, and public investment dropped considerably instead of increasing as planned. 17. In the first six months of 1969 El Salvador's economy gave signs of recovering, but the disruption of trade that followed the conflict with Honduras in July severely hit El Salvador's exports to the Central American Common Market. Higher cotton and coffee exports made up for only part of the losses in Central American trade, and the growth rate of GDP remained low. Public investment increased moderately in 1969, but the fiscal burden arising from assistance to refugees and military expenditures prevented a further increase of public investment in 1970. The present economic memorandwm observes that El Salvador must still resolve fiscal and institutional problems of the public sec- tor as a key condition for sustaining an accelerated development effort; but it also notes that fiscal and legislative measures introduced during the last few months have laid the basis for a new step forward. With external debt service currently representing less than 4 percent of foreign exchange earnings and with adequate foreign exchange reserves, El Salvador is in a position to contract some additional foreign debts on conventional terms. However, El Salvador is a poor country with heavy population pressures and without great natural resources. Its problems have been accentuated by the repercussions of the 1969 con- flict. In these circumstances some external assistance on concessional terms is justified. PART VI - CO2PLIANCE 1TITH ARTICLES OF AGREEfENT 18. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.  - 6 - PART VII - RECOIIMENDATION 19. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President December 2, 1970 Washington, D. C.  EL SALVADOR AINNEX BASIC DATA A rea and p jylation Lrea 8,260 sq. miles l'opoulation (mid-1969) -1/ 3.4 million Annual rate of pop-alation incre4se (1961-1969) 3.7 percent Population density (mid-1969) 4/ 410 per sq. mrtile G;'Pe r capit 969 US$279 ri f GDP (1969) (percent) ,Agriculture 25 Manufacturing 20 Construction 3 Transport and communications 5 Governnent 8 Other 39 Ratios to GT? (1969) Exports of goods mind services 23.8 Imports of goods and services 27.1 Central government rcvenue:3 10.8 Cenlt,ral govorninent expcnditures 12.9 External public debt (end of year) 10.6 Savings 8.5 Investment f1l.8 Money and quasi-money (end of year) 27.4 Annual chan;-es in econo,mic indi.cators Average 3965-67 1963 1906 Real GDP per capita 2.2 -0.1 -0.5 rteal GDP 6.O 3.6 L4.2 GDP at current prices 5.8 3,8 3.9 Domestic expenditure (at current prices) 5.9 2.1 4.5 Investment (1.0) (-21.8) (9.8) Consumption (6.9) (6.1) (3.9) GDP deflator -0.2 0.2 -0.3 Cost of living 0.3 2.6 -0.2 Wholesale prices -o.6 0.2 -1).3 Cent,ral government reveniles 2.4 2.b 10.1 Central government expenditures 3.0 5.2 26.3 Money and quasi-money 4.3 4.? 9.3 Money (2-7) (0h7) (0 9 Quasi-money (5.7) (3-'7) (9-6) Net domestic bankl assets ' 6.1 3.4 15.1 Credit to public sector (net) (1.2) (2.1) (11.2) Credit to private sector (5.6) (2.0) ( 7.3) Merchandise exports (f.o.b.) 5.9 2.2 -1t.7 Mlerchandise imports (c.i.f.) 5.4 -3.4 -3.3 j During the second half cf 19G9 about 70,000 migrants returned frcm Hondulras / In relationl to the stock cf money and quasi-money at the beginning of the period.