Bolivia - Third ENDE Power Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1288a-BO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BOLIVIA FOR A THIRD ENDE POWER PROJECT August 29, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.   REPORT AND RECOMMINDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BOLIVIA FOR A THIRD ENDE POWER PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Republic of Bolivia for the equivalent of US$6 million on standard IDA terms, to help finance a third project for the expansion of the services of Empresa Nacional de Electricidad S. A. (ENDE). Most of the credit proceeds would be relent to ENDE for 20 years, including 3 years of grace, with interest at 7-1/4 percent per annum; $80,000 would be made available to Direccion Nacional de Electricidad (DINE). PART I - THE ECONOMY Introduction 2. An economic report entitled "Current Economic Position and Pros- pects of Bolivia" (WH-213a, dated November 9, 1972) was distributed to the Executive Directors on November 20, 1972 (R72-254). Subsequent economic developments, particularly those related to the financial reform. program introduced in October 1972, were reviewed by an economic mission in March 1973. A summary of Country Basic Data is attached as Annex I. Background 3. Bolivia is the least-developed country in South America. The majority of the economically active population is engaged in low-productivity pursuits in agriculture, handicrafts and services, while the export sector -- mining, petroleum and cotton -- accounts for a small fraction of the gain- fully occupied. Two-thirds of Bolivia's five million inhabitants are Amerindian, only one-half of whom speak Spanish, the official language. Most of the country's population is concentrated on the Altiplano, a barren plateau at 10 to 15 thousand feet between the Western and Eastern ranges of the Andes, while the tropical plains, which account for almost two-thirds of Bolivia's territory, are sparsely inhabited by one-seventh of the coun- try's population. The rugged topography of much of the country and the low population density of the rest, make communications difficult and costly. GNP per capita is estimated at almost US$200 but because of the harshness of the environment, the regional income disparities and the skewed income distribution, living standards of most of the population are at subsistence levels.  - 2 - 4. The 1952 revolution sought to put an end to the dual economic structure -- a narrow modern mineral export sector and a broad traditional agricultural subsistence sector -- which characterized Bolivia's economy since colonial times. The revolution sought to deprive the landowning and mining oligarchy of its economic base and substitute for its rule that of a new and strong middle class. It also stressed the need for reinvestment of mining nrofits to foster economic development and integrate the Indian peasants into the nm-arket economy. These objectives have been only partially achieved. Despite the great social achievements in eradicating feudal relations in the country-side, distributing the land among the peasants and eliminating the warst obstacles to social and economic mobility, the power vacuum left by the destruction of the oligarchy led to political instability. In the economic sphere, the agrarian reform and the nationalization of large mines were followed by sharp declines in agricultural, mining and manufacturing production. GDP declined in the 1950's and did not recover to its pre-1952 level until 1961. Since then, output has been increasing steadily, but its growth has been barely sufficient to keep up with population growth in the lS50's and 1960's. As a result, GNP per capita is now about the same as at the time of 1952 revolution, although pcssibly somewhat better distributed. 5. CGrowth momentum was appreciably accelerated in the late 1960's as a result of substantial increases in private and public investment ard satisfactoryexport performance especially in the petroleum sector. At the turn of the decade, however, the momentum was lost because of political instability accormpanied by deteriorating public finances. Private investment fell as a result of a crisis of corfidence and p-ablic -nvestment was unable to fil1 the shortfall due to lack of financial resources. The deterioration of public finances reflected a structural flaw in the economy. Since the expropriations carried out in 1952, Bolivia's public sector became proportionately one of the largest in So-ath America and a source of livelihood for a sizeable segment of the po-pulation. Welith the scarcity of e&aployment opportunities in the private sector, pressures to ex- nd the ranks of public servants proved difficult to resist. Large expenditures on wages and salaries by the Government and tUhe state enterprises, combined with a weak and poorly administered tax systen, left few rescu:rces for public investment. Moreover, the inability ci' the public sector to generate an adequate volume of savings, limi;ed the Government's capacity to utilize external assistance. The gravity of this situation was further accentuated during 1969-71 as a result of increased hiring of personnel and substantial real earnings' increases in the public sector.  -3- 6. The growth pattern of the Bolivian economy since 1965 reveals serious structural weaknesses which resulted in the absorption of manpower in low productivity activities, in increased open unemployment, and in an unfavorable income distribution. If the growth of the gas and petroleum industry is excluded, the goods-producing sectors grew at a rate barely above that of population in spite of the rapid expansion of cotton and other commercial agriculture in the tropical plains. Although the services sector was pressured into absorbing a good deal of the urban unemployed, and some growth occurred also irn the labor force employed by the goods producing sectors, employment opportunities continued to trail the growth of the labor force. As a consequence, on a country- wide basis, open unemployment increased from 14 percent in 1965 to some 17 percent in 1971. 7. The rapid growth of the predominantly urban services sectors and the slow growth of non-commercial agricultural output, together with a deterioration in the terms of trade of the agricultural sector, contributed to a reduction in incomes of the poorest sections of the community. This group includes most of the 70 percent of Bolivians earning their living from agriculture. These tendencies towards more unequal income distribution were further aggravated by an increasing polarization of economic activity in the tropical plains. As a result of the rapid growth of gas and petroleum production and of commercial agriculture, the per capita income differential between the plains and the Altiplano increased from 21 percent in 1965 to 42 percent in 1970 in favor of the plains. Because of the smaller population of the plains -- some 1 percent of Bolivia's total -- and its less egalitarian income distribution, this shift in regional income shares damaged the overall national income distribution pattern which in 1968 was considerably worse than that of Latin America as a whole; although average per capita income in Bolivia was one-third of the Latin American average, income of the lowest Bolivian quintile was only one-fifth of the sane population group in Latin America. Recent Developments 8. Coming to power in August 1971, President Banzer's Government faced the urgent need to stimulate investment and provide jobs for the urban unemployed. The new Administration encouraged private investment by introducing favorable legislation, settling nationalization claims and providing very large increases in credit to the private sector. These expansionary policies were successful in achieving an upsurge in private investment and in bolstering the rate of economic growth to 7.1 percent in 1972. They also resulted, however, in a large budgetary deficit and heavy losses of international reserves. To redress the foreign exchange position and improve the budgetary situation, the Government introduced in October 1972 a "Stabilization and Development Plan". The Plan included the following measures: a reduction in the par value of the peso from  -4 - $bll.8& to $b20.00 per US dollar; the introduction of a 20 percent tax on the value of traditional exports and a 15 percent tax on non-traditional exports; a 5 percent tax on the revaluation of corporate assets resulting from the devaluation of the peso; a general wage increase of $bl35 per month, to be followed by a one-year wage freeze; and a freeze on residential rents. Government current revenues which averaged 13 percent of GEP in 1971-72 were expected to increase to 20 percent in 1973, mainly as a result of the imposition of new export taxes. The transfer of resources from consuirmption tto savings was to be achieved through a reduction on the average by 10 percent in real wages. The flat nominal salary increase provided for in the Plan ensured that the brunt of this reduction would be borne by the better paid wage and salary earners. 9. Wh-le the Plan's results have not been as successful as envisaged, they have been orn the whole positive. Largely because of US Government- and IMF prograum support, the Plan's effect on the foreign exchange position has been favorable, with the Central Bank's foreign exchange reserves increasing from US$19-5 million at the end of Septernber 1972 to US$46.4 million at the end of June 1973. And although the Treasury's current revenues are not expected to meet the Plan's targets, they are likely to increase to 15-16 percent in the current year, as compared with 13 percent in 1972. 10. The fiscal outlook beyond this year is far from favorable unless more lasting fiscal improvements are introduzced. The Govermnent recognizes thiis and is currently considering proposals of a tax reform coiiaission nrepa-red by an OILS technical assistance teamr of fiscal experts, for a reform of Bolivia's structure of taxation. A reasonable objective for the reform. of the tax system would be to raise public sector savings from an annual average of 3.7 percent of GDP during 1965-71 to 6 percent during 1973-77. This level of public savings would make it possible, allowing for some internal borrowing, to cover some three-fourths of an increased public investment program, averaging 10.5 percent of GDP over the period. Tnis level of capital formation (which would be consistent with GDP grcwth of between 6) and 7 percent per annum during 1973-77) should, if achieved, help Bolivia accelerate greatly its process of development and render it easier to achieve a more equitable distribution oLf the benefits of growth. External Assistance Requireents 1'. Sc e .US$63 million of the public investment program of about U S$ 0b - ion annually during 1973-77 are expected to boe suitable for exter:al :ar~a.icang. The foreign exchange component of these projects is likely to be some two-thirds of total costs or about US$44 million a.nnually. lEowever, to carry oUt its investment activities and meet amortization payrents, the puablic sector would require a gross annual average inflow of U$&51 million. Thus, if external lenders were to li_mit thsei- financing to the foreign exchange costs of the proJects suit- able :or external financing, they would not fully cover the public sectorts external capital --requirerents. To fill the remaining gap of US$7 million, it -will be necessary that external lenders permit about 15 percent of their oa is to be used to meet local currency costs.  12. To sustain an annual growth of GDP by 6 or 7 percent, gross external capital inflows into the public and private sectors combined will have to average some U$68 million in 1973-77 as compared with us$42 million in 1965-71. Provided public sector savings increase in line with the above targets, Bolivia's public sector may reasonably expect to obtain an average of U$51 million annually during 1973-77 from undisbursed loan balances and new loans from multilateral and bilateral agencies. The remaining U$17 million may be expected to come in the form of suppliers' credits and from private investors. Should this pattern of external financing materialize, Bolivia's outstanding external public debt would increase slowly, from US$596 million in 1972 to US$640 million in 1977. The annual debt service burden, however, is expected to fall from 20 percent of exports of goods and non-factor services in 1972 to about 15 percent in 1977, mainly on account of Boliviats favorable export prospects: earnings from exports may well reach about US$330 million by 1977, up by some 40 percent from the 1972 level. Bolivia's export pros- pects may be further enhanced by the success which the Government is having in attracting foreign risk capital for oil and gas exploration. 13. The Bolivian Government has made considerable efforts in the past two years to remedy the precarious fiscal situation although the results have fallen short of expectations. Provided additional fiscal measures are implemented promptly, they would justify external financial assistance of the magnitude indicated above. In the meantime, given Bolivia's great poverty, its recently improved performance, as well as its lack of creditworthiness for Bank borrowing, IDA is justified in making the proposed credit. PART II - THE BANK GROUP'S ROLE IN BOLIVIA Introduction 14. Bolivia is an original member of the Bank but did not receive arny Bank Group resources until 1964. Bank Group assistance to Bolivia has had to take account of the country's difficult budgetary position and its limited capacity to service external debt. Except for a Bank loan to help finance an "enclave" project, lending to Bolivia has been in the form of IDA credits. Until the end of 1972, Bank Group financing was limited to those projects which made no call on the Government's budget for domestic contribution. However, following the adoption by the Government of the Stabilization and Development Plan, IDA made in December 1972 a $8 million credit in support of the rehabilitation program of the Bolivian Railways which was dependent upon the Government finances. Because of the narrow scope for private investment, the first IFC investment was made in 1973 only. Status of Bank Group Operations 15. A summary statement of Bank Group operations is attached as Annex II. Up to now, the sectoral distribution of lending has been fairly limited. In addition to the railway credit mentioned above, IDA has made three credits for power generation and distribution ($22.4 million), and three for livestock development ($10.2 million). The one and only Bank loan ($23.25 million)  helped finance the construction of a pipeline to transmnit natural gas for export. 16. The first lending operation in Bolivia benefitted the electric oower sector. It consisted of two DA credits made in 1964 for a total of $15 million. ENDE, the newly- established, Government-owned power company, received $10 million to build. the Corani hydroelectric plant and trans- missioon and distribution facilities. The old-established, privately-owne( 3o1ivian Power Cormany, Ltd. (BPC) received the other $5 million to bu-l d the Chururaoui hlydroelectric plant and some transmission lines. Both projects were executed efficiently and completed on time. In 1969, a $7.4 million credit -w,as made to assist ENDE in constructing the Santa Isabel hydroelectric plant. Tnis project had experienced delay-s and cost overruns, but has now been comlleted and -will still show a satisfactory econormc rate of return. Th 1967, !DA made its first credit of $2 million for livestock development in the Beni regicn. The proceeds, together with a contributioll from Banco Agricola de Bolivia, supported a credit program for beef ranchers and related technical services. The money was taken up rapidly and IDA followed -an with a second credit of $1.4 million in 1970. In June 1971, IDA lent 3^6.8 million for a third livestock project, consisting of credit programs for beef ranchers in. the Beni region and small sheep ranchers on the Altiplano, and of some processing facilities. To help finance the first stage (1973-1974) of the Government's plan for the technical and financial rehabilitation of the Bolivian Railways, an IDA credit of $8 million was trade available in Decemiber 1972. The plan is being implemented with the support o: UNDP-f-inanced technical assistance. 17. h.e ornly Bank ope-.ation in Bolivia has been ti-e $23.25 mil'lion loan on July 1969 to Compania Yacibol Bogoc Transportadores (YABOG) Lor the con- struCtion of a gas nipeline frcm the oil and gas fields around Santa Cruz to the Argentine border. This loan was renegotiated in 1971, in the afterrath cf the nationalization of the field installations formerly run by a subsidiary of Gu!1 Oil Cor0oration. The project wias coirpleted in April 1972. Since then, abo-at 15G million cubic feet of natural g.s per day (6 - 7 percent more than orininaly,v nlanned) has been delivered to Argentina, bringing in some 51i-l