Honduras - Nispero Power Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2403-HO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESA NACIONAL DE ENERGIA ELECTRICA WITH THE GUARANTEE OF THE REPUBLIC OF HONDURAS FOR THE NISPERO POWER PROJECT November 1, 1978 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS L2.00 (lempiras) = US$1.00 L1.00 US$0.50 L1,000,000 = US$500,000 UNITS AND MEASURES kW - kilowatt mW - megawatt - 1,000 kW kWh = kilowatt-hour GWh = gigawatt-hour = 1,000,000 kWh kV = kilovolt ABBREVIATIONS CABEI - Central American Bank for Economic Integration COHDEFOR - Corporacion Hondurena de Desarrollo Forestal (Forestry Development Corporation) CONSUPLANE - Consejo Superior de Planificacion Economica (National Planning Council) E.NALUF - Empresa Nacional de Luz y Fuerza (Nicaragua's National Power Company) ENEE - Empresa Nacional de Energia Electrica (National Electrical Energy Company) FIV - Venezuelan Investment Fund IDB - Inter-American Development Bank USAID - United States Agency for International Development FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY HONDURAS NISPERO POWER PROJECT LOAN AND PROJECT SUMMARY Borrower: Empresa Nacional de Energia Electrica (ENEE) Guarantor: Republic of Honduras Amount: US$30.5 million Terms: Payable in 20 years, including 5 years of grace at 7.35% interest per annum. Project Description: The objectives of the project are to meet Honduran power load requirements which will exceed present generating capacity by 1980, to strengthen ENEE's management and planning capacity and to improve energy sector organization and planning. The project comprises the construction of the 22.5 MW Nispero hydroelectric plant, and the 30 MW Puerto Cortes diesel plant; studies of energy sector organization and ENEE's management system and organization, a national electrification master plan, preparation of a hydropower inventory updating, a prefeasibility study of the Piedras Amarillas hydro project, and a training program for ENEE. The project faces no special risks except for the complex geology of the Nispero hydro component site and the possibility of limited international contractor interest in this component because of its small size. This document has a restricted distribution and may be used by recipients only in the performance of their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost: US$ (millions) Local Foreign Total Nispero hydro power plant 5.5 10.8 16.3 Puerto Cortes diesel plant 1.9 13.1 15.0 69 kV line to Puerto Cortes plant 0.1 0.1 0.2 Distribution expansion 1980-81 1.9 2.3 4.2 Studies 0.4 1.3 1.7 Training 0.1 0.3 0.4 Engineering and administration 1.7 2.5 4.2 Total Costs 11.6 30.4 42.0 Contingencies: Physical 1.4 3.3 4.7 Price 1.4 3.0 4.4 Subtotal 14.4 36.7 51.1 Special price contingency 1/ 0.5 1.4 1.9 Subtotal 14.9 38.1 53.0 Interest during construction - 5.0 5.0 Financing Requirements 14.9 43.1 58.0 Financing Plan: US$ (millions) Bank - 30.5 30.5 CABEI _ 3.5 3.5 Suppliers Credit - 6.7 6.7 ENEE 14.9 2.4 17.3 Total 14.9 43.1 58.0 Estimated Disbursements: ---- US$ million by Fiscal Year ---- Bank FY 1979 1980 1981 1982 1983 Annual 7.7 10.2 9.1 2.6 0.9 Cumulative 7.7 17.9 27.0 29.6 30.5 Rate of Return: 9 percent Appraisal Report: Report No. 2074a-HO dated October 17, 1978. 1/ To cover projected higher cost of Nispero component in case of lack of contractor interest.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESA NACIONAL DE ENERGIA ELECTRICA WITH THE GUARANTEE OF THE REPUBLIC OF HONDURAS FOR THE NISPERO POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to the Empresa Nacional de Energia Electrica with the Guarantee of the Republic of Honduras for the equivalent of US$30.5 million for the Nispero Power Project. The loan would have a term of 20 years, including a grace period of 5 years, with interest at 7.35 percent per annum. PART I - THE ECONOMY 11 2. A report entitled "Memorandum on Recent Economic Development and Prospects of Honduras" (1856-HO) was distributed to the Executive Directors on January 10, 1978. The main findings of the Report are summarized below. Country data sheets are attached as Annex I. Long-term Development Trends 3. The long-term growth rate of the Honduran economy has been exceed- ingly low. Between 1950 and 1975, real per capita GNP grew by only 1 percent a year. Honduras' per capita GNP in 1977, US$450, is one of the lowest levels in the Western Hemisphere. Honduras' poverty is also evident from a variety of indicators. Malnutrition is severe: about three-quarters of pre-school children are believed to suffer from protein and caloric deficiencies, and infant mortality is estimated at 118 per thousand live births. It is estimated that roughly 60 percent of the population has no access to piped water and about 80 percent lives without any form of sanitary waste disposal. Furthermore, these are country averages which conceal substantial regional disparities, as living conditions in the rural areas, which account for about two-thirds of the population, are much poorer than in the cities. 4. A major reason for Honduras' poor growth performance has been the continued dependence of the economy on the production and export of a few agricultural commodities, especially bananas, whose prices depend on a fluctuating world market situation and whose output may be greatly influenced by domestic weather conditions. The latter was dramatically illustrated when extensive destruction of the banana plantations by Hurricane Fifi in 1974 reduced the volume of bananas exported in 1975 to about one-half the level of 1973 and contributed to a drop in per capita income of about 3 percent. 1/ This section is substantially unchanged from the section on the economy in the President's Report for the Guayape Regional Development Project (P-2320-HO) dated May 4, 1978.  - 2 - 5. There are many reasons for the continued dominance of bananas in the Honduran economy. Known mineral deposits are not extensive. A serious lack of basic infrastructure and deficient development policies in the past have left Honduras' agricultural resources underutilized. In addition, the mountainous topography of the country has made the expansion of the road network slow and costly. There has been progress, however, since 1960, and major achievements include the establishment of a basic transportation net- work connecting the main population centers, and a considerable expansion of electric power service. 6. Much land suitable for agriculture is still available, and the country has sizeable forest resources, but agricultural output only grew at about 2 percent yearly between 1950 and 1975. Uneven land distribution and deficient credit, technical services and development programs have kept agricultural growth far below its potential. 7. Manufacturing industry, which is highly concentrated in the cities of San Pedro Sula and Tegucigalpa, now accounts for about 16 percent of GDP and provides employment to about 10 percent of the labor force. During the 1960s, the manufacturing sector grew at a low annual rate (3.8 percent) owing to the small size of the domestic market, the lack of infrastructure, and the inability of domestic firms to take advantage of the opportunities offered by the Central American Common Market. Manufacturing growth, however, almost doubled in the 1970s (during 1970-76, real value added grew at an annual rate of 7 percent) because of the increase in both domestic and foreign demand and the consequent expansion and modernization of existing and new plants. Government Development Efforts 8. Since 1972, development efforts have increased substantially and several measures have been taken to lay the basis for the current improved economic outlook over the longer term. A land reform program which began in December 1972 aims at greatly improving land utilization as well as increasing the income and employment of the poorest peasants through the transfer of unutilized or poorly utilized land from large landowners to landless rural families. Another major policy development was the national- ization of timber rights in January 1974. A new forestry law established guidelines for private sector participation in forestry development and created the Corporacion Hondurena de Desarrollo Forestal (COHDEFOR). COHDEFOR is in charge of all forest industry policies and activities, and is expected to exploit forest resources more rationally, increase lumber exports, and provide more employment for rural Hondurans. The third major achievement was an improvement in Government planning and executing capacity, particularly in infrastructure, which has resulted in a substantial increase in public fixed investment from 3.3 percent of GDP in 1972 to 6.6 percent in 1974 and a record 8 percent in 1977. The Government has also made an effort to increase investment in the social and productive sectors and strengthern public finances through tax reforms and better tax administration. A 1975 tax reform made the tax on coffee exports an ad-valorem tax with marginal rates ranging from  1J p i.uuc , Li p E epunding on coffee prices, substituted a 3 percent value added tax for the sales tax, and raised the tax rates on beer, cigarettes and liquor. ReceLnt Econemic Deuelopments 9. vae nEuras was adversely affected by one of the worst hurricanes in its history in 19-4, it also had to contend with the oil price rise of that year and the later OECD recession. As a result, during 1974-75, total GDP remained almost stagnant, severe balance of payments difficulties arose and the country's savings capacity was seriously reduced. Import prices grew almost three times as rapidly as export prices, and the terms of trade deteriorated by about one-fifth. The resource gap, which was equal to about 1 percent of GDP during 1972-73, averaged 11.6 percent during 1974-75. The rise in consumer prices, which had averaged 2.7 percent a year between 1966 and 1973, accelerated to 13 percent in 1974 before declining to 8 percent in 197T. 10. A high level of public investment, the gradual recovery of banana production and the doubling of coffee export prices were the major factors responsible for as im-provement of the economic situation in 1976. Real GDP grew at about 6.6 percent and the price level increased by only 5 percent. Merchandise export earnings grew by about 32 percent in current terms over 1975, about half of it as a result of higher coffee prices. Government tax revenues increased from 10.8 percent of GDP in 1972-73 to 12.8 percent in 1976 and, while there was a substantial increase in public current expenditures, public savings were estimated at 2.7 percent of GDP in 1976 compared to an average 2.2 percent in 1972-73. However, as investment expenditures for hurricanie reconstruction and development purposes were stepped up considerably, the oLv;ra'l de ficit of the Central Government increased from 2.5 percent of GDP ir. 19i( to i.9 percent in 1976. 11. Ir. 197, economic expansion continued with real GDP growth estimated at 8 percent, duet mainly to the expansion of export volumes (about 30 percent in current prices` and public investment (about 17 percent), and to a doubling of coffee) prices from the 1976 level. The rate of inflation accelerated to 8.6 percent owiog no higher liquidity brought about by coffee sales, rising import ,ntices and poor domestic crops of basic grains. The balance of payments had a accoa. ncoint deficit of US$121 million, above the US$109 recorded in 197b, d , tl dlmo the rapid increase of imports, and the retention of coffee sale6 in tIn s