Nicaragua - Thermal Power Projects

R ESTR I CT E D FILE COPY R e po r t N o. P 89 This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on PROPOSED LOANS to EMPRESA NACIONAL DE LUZ Y FUERZA and INSTITUTO NACIONAL DE FOMENTO for THERMAL POWER AND POWER DISTRIBUTION PROJECTS in NICARAGUA June 30, 1955  INTERINJATIONAL BANK FOR RECONSTRUCTION AN\D DEVEIOPMENT REPORT AND RECO02lIENDATIONS OF THE2 PRESIDENT TO THE EXCUTIVE DIECTORS ON PROPOSED LOANS TO EMPRESA NAGCIONAL DE LUZ Y FUERZA AND INSTITUTO DE FOMENTO NACIONAL OF NIC=AGUiA 1. I submit the following report and recommendations on: (a) A proposed loan of 07,100,000 to Empresa Nacional de Luz y Fuerza, of Managua, Nicaragua, (sometimes hereafter referred to as "Empresal") to finance expansion of its generating, transmission and distri- bution facilities. (b) A proposed loan of h400,000 to Instituto de Fomento Nacional, of Nicaragua, (sometimes hereafter referred to as "Fomento"I) to be re-lent to small power distri- butors in towns near Managua to finance expansion of their distribution facilities. PART I - HISTORICAL 2. In September 1953 the Bank made a loan (82 Ni) of bO450,000 to finance the addition of a 3,000 kw diesel unit to the Managua power plant as a stop-gap measure. It was then agreed that, instead of adding small diesel units to meet recurring power shortages as they arose, the Nicaraguan Government should engage consultants to study prospective long-term needs and to prepare plans for providing the needed additional capacity in the most economic form. As several years would be needed to complete studies for hiydroelectric development, it was evident that substantial additional capacity, either steam or diesel, would have to be installed to meet demand in the interim. 3. Consultants engaged by the Nicaraguan Government in the fall of 1953 to make a preliminary study of an interim power program reconm,mended the installation of a steam plant in Managua and of transmission lines to outlying towns. A Bank mission visited Nicaragua in May - June 1954 to study the power situation in the light of these recomnendations. After considering the report of the mission, the management of the Bank informed the Govermaent that, while the program appeared in principle to be suitable for financing, it would, before entering into loar negotiations, wish to be satisfied that certain steps which it considered essential to the success of the program had been taken. These requirements may be summarized as follows: (a) The Government should establish an independent public corporation withi its own Board of Directors and proper organization and acninistration to own and operate the Managua power plant.  -2- (b) Competent consultants should be retained to design the project and to supervise construction and procurement. (c) The distributors in the outlying towns to be served by the proposed steam plant should indicate their willingness to purchase power and to expand their distribution systems with financial assistance, if necessary, from the Instituto de Fomento. (d) A National Power Commission should be set up to regulate rates and other aspects of the power industry. The Govern- ment should retain competent consultants to advise the Commission on rate-fixing. (e) The Government should continue to study possible hydro- electric development so that a decision could be taken by 1957 or early 1958 on t1he advisability of a hydroelectric project. The Executive Directors were so advised on September 10, 1954 (R-828). 4. TThe Government informed the Bank of its willingness to proceed on these lines, and by May 1955 the management of the Bank was satisfied that the requirements outlined above had been met. 5. Formal negotiations for a loan opened in Washington on June 1, 1955. Dr. Leon DeBayle, General Manager of the Pn--co Nacional de Nicaragua, represented the Government. In his capacity of President of the Board, Dr. DeBayle also represented the Emrpresa Nacional de Luz y Fuerza, which was also represented by its General Manager, Mr. Humberto Salvo. The Instituto de Fomento Nacional was represented by Mr. Alfredo Sacasa, its General Manager. Mr. Modesto Armijo, Minister of Public Wulorks, represented the National Power Commission, of wihich he is President. 6. If the proposed loans were made, they would increase the total amount of Bank loans to Nicaragua to 16,700,000. The Bank has already made the following loans to Nicaragua: Year Serial No. PurDose Amount 1951 44 NI Farm Machinery $1,200,000 (fully' disbursed by Dec. 31, 1953) 1951 45 NI First Higlway Project )3,500,000 ($2,358,131 disbursed as of June 22, 1955) 1951 52 NI Grain Storage e;; 550,000 (fully disbursed by Dec. 31, 1953) 1953 81 NI Second Highway Project i3,500,000 (;1,742,107 disbursed as of June 22, 1955) 1953 62 NI Diesel Power $ 45o,000 (fully disbursed by Feb. 28, 1955) Total - $9,200,000  - 3 - In addition to the loans now proposed, thie Banlc is currently considering a loan to the instituto de Fomento Nacional of about .l1,600,000 to assist in financing agricultural development. PART II - DESCRIPTION OF TH3 PLROPOSED LOANS Borrowers 7. The Borrowers would be: (a) Empresa Nacional de Luz y Fuerza, a recently established autonomnous corporation owned by the Govermnent. (b) Instituto de Foinento Nacional, an autonomous Government agency. 8. The Guarantor of both loans would be the Republic of Nicaragua, a member of the Bank. Amounts 9. The loans would be in the following amoun:'s: (a) To Bnpresa Nacional de Luz y Fuerza, p7,100,000 or its equivalent in other currencies. (b) To Instituto de Fomento Nacional, ;400,000 or its equiva- lent in other currencies. Purposes 10. (a) The loan -to Erpresa would be used to finance the foreign exchange costs of the construction of a 30,000 kw steam generating plant in Managua with transmission lines to about 15 outlying towns, and the expansion of distribution facilities in Managua. (b) Trie loan to Fomento would be re-lent to the power distributors in the 15 towns to finance the foreign exchange costs of expanding their facilities as necessary to be able to distribute the power they would purchase from Empresa. Both loans would cover interest and other loan charges during the period of construction.  - 4 - Interest, Commission and Commitment Charges 11. Both loans would bear interest at the rate of 4-3/4% per annum, including the statutory commissiorn of 1%. The commitment charge would be 3/4 of 1% per annum and would accrue from the effective dates of the Loan Agreements or a date 60 days after signature, whichever is the earlier. imortization 12. Both loans would be for a period of 20 years with a period of grace of about three years corresponding to the period required for the new facilities to be constructed and to come into full operation. They would be amortized by sermi-annual payments beginning October 1, 1956, and ending April 1, 1975, as set out in the amortization tables of the proposed Loan .-kgreements. Provision of Local Currency 13. The Government has assured the Bank that it will provide Emoresa with funds needed to finance the local currency costs in the form of advances made from budgetary appropriations. Interest and amortization on tlhse advances would be payable only out of earned surplus after all other obligations of 1hpresa, including those arising out of the Sank loan, had been met. The Government is prepared to makce available adrances of this type in an amiount of not less than the equivalent of about $3.1 million, the total local currency cost of the project. Empresa should not, however, need to avail itself of the whole of this amount, since earnings during the construction period, estimated at about ,600,000, would be re- invested in the project. 14. Fomento, in addition to relending to power distributors in outlying towns the proceeds of the proposed Bank loans of 4400,000, would also be prepared as necessary to make loans fromq its own funds to help them finance the local currency costs of the expansion of their facilities. Legal Instrunents and Legal Authority 15. There are attached drafts of: Loan lgree,ient between Empresa and the Bank (No. 1) and the corres7onding Guarantee aigreement (lio. 2) Loan A^.greement betwieen Fomento and the Bank (No. 3) and the corresponding Guarantee Agreement (',o. 4)  - 5 - 16. These agreements are substantially in the forms currently used by the Bank. The provisions of special interest are as follows: 1. Empresa Loan Agreement Section 5.04 would require Empresa to obtain the Bank's consent to long-term borrowing which would cause the debt-equity ratio to exceed 2:1. Equity would be defined so as to include advances of the kind which the Government would make to Empresa to meet the local currency costs of the pro7sct, since interest and amortization payments would be made only to the extent that surplus earnings were available. Section 5.07(c) would require Empresa to obtain the Bankts consent if it proposed to undertake any new project (other than for distribution) which would cost more than $300,000. Section 5.10 would require Empresa to take steps necessary to obtain appropriate rates. Section 7.01 would make the effectiveness of the Loan Agreement conditional on the completion of arrangements satisfactory to th-e Bank for local currency financing. Empresa Guarantee Agreement Section 2.03 would specify that advances made by the Government to provide funds for the local currency expenses of the project should be of the type described in Section 5.04 of the Loan Agreement. Section 3.07 would oblige the Government to ensure that Empresa was awarded appropriate rates. II. Fomento Loan Agreement Section 5.03 would require Fomento to consult the Bank before incurring external debt of more than one year's term. Section 7.01 would make the effectiveness of the Agreement conditional on the effectiveness of the Empresa Loan Agreement. The terms and conditions of loans made by Fomento to distributors, either out of the proceeds of the loan or from Fomentols Nicaraguan currency funds, wrould have to be satisfactory to the Bank in order to comply with Schedule 2 of the Loan Agreement. Fomento Guarantee Agreement Section 3.07 would oblige the Government to ensure that the distributors are awarded appropriate rates.  -6- Ratification The Loan Agreements would have to be ratified by the Boards of Directors of Empresa and Fomento respectively. The Guarantee Agreements would have to be ratified by the Nicaraguan Congress. 17. The reports of the Committee provided for in !,rticle III, Section 4 (iii) of the Articles of ^"greement of the Bank are attached ('os. 5 and 6) PART III - APPRAISAL OF THE PROPOSED LOANS 18. A detailed appraisal of the projects (T.O. 59-b) is attached (No. 7)h A report entitled "Current Economic Position and Prospects of Nicaragua" (W.H. 35-a) was distributed to the Executive Directors on February 15, 1955, (Secretary's Memorandum 1-201). Justification of the Projects 19. In recent years the Nicaraguan economy has been in a state of active expansion and the demand for power has been increasing steadily in Managua and the surrounding area, the chief ceniter of populati&n and economic activity. Generating and distributing capacity have not kept pace with this increase of demand, so that it has been necessary to apply load-limiting restrictions which have iniposed a curb oin the output and growth of the agricultural-processing and other industries of the area as well as on other uses of power. 20. Preliminary surveys indicate that Nicaragua has considerable potential hydroelectric capacity which may prove to be a more economic source of power. As yet, however, adequate records of water flow and other data needed for preparing a hydroelectric project are not available. Because of the time needed to extend these records and to plan and execute a hydroelectric project, hydroelectric power is unlikely to be available before 1962 or 1963. In the intervening period demand in the project area is estimated to increase at a rate of about 15 per annum so as to reach about 45,500 lcw. in 1963. The projects now proposed would barely meet this increase of demand. By 1958 it should be possible to determine whether hydroelectric development is technically and economically justified and to make plans to provide the additional capacity, thermal or hydro, that will be needed by 1963. 21.. The technical report contains financial projections which show that Enpresats income from its expanded sales should amply cover interest and asortization on the proposed loan and its other obligations.  - 7 - 22. The present projects would mark the transition of the power industry in Nicaragua from the stage of sraall diesel units installed on an ad hoc basis to meet recurring emergencies to that of developing an organize national network with facilities capable of satisfying an expanding market. I therefore attach inportance to the fact that the technical planning of the projects has been accormpanied by the establishment of the Enpresa Nacional de Luz y Fuerza to operate under a capable Board of Directors, and by the establis?aiaent of a National Power Comnmission which will regulate rates and other aspects of the power industry. In this way organizational and admiminstrative foundations are being laid which will support an eventual expansion of the power industry far beyond the scope of the present projects. Methods of Procurement 23. The purchase of all equipment for the projects, and the award of contracts for construction other than those for rninor operations which could best be performed by local contractors, would be subject to international competitive bidding. Economic Situation 24. The economiic report already distributed to the Executive Directors points out that continuation of the rapid economic growth which Nicaragua has experienced since 1949 will depend on how a nurmber of current probleras are solved. The credit expansion of recent years has caused a fall in foreign exchange reserves; current circumstances limit the possi- bility of increased earnings from coffee and cotton exports; subseantial investments in roads, ports, power and measures to check soil erosion are needed to facilitate increases of production; and t'he Government is faced with the need of strengthening its measures of fiscal reform and reviewing its investment program. 25. On the other hand, Nicaragua has good prospects for economic growth, and the institutional reforms and investments (including the Bank's loans) of recent years are beginning to be;r fruit. The report therefore concludes that, if the Government is successful in checking the inflationary trend of recent years, and over the longer run directs its investments well and maintains sound fiscal and monetary policies, Nicaragua could in the years to comne safely incur substantial additional external debt. 26. In transmitting this economic report to thle President of Nicaragua, I expressed some concern over the expansion of Wicaragua's external obligations in the forrn of medium-terra suppliers' credits. In his reply, the President indicated his awareness of this problem and his desire to avoid incurring such obligations on a scale which wiould jeopardize Nicaraguars prospects of obtaining long-term development loans.  This exchange of letters has already been distributed to the Executive Directors (R-874). Apart from current suppliers' credits, which are scheduled to be repaid by 1958, when amortization of the loans now proposed would begin, Nicaragua's external debt is low. Nicaragua should be able without difficulty to service the loans now proposed. Prospects of Fulfillment of Obligations Empresa 27. Under the supervision of the experienced sonsultants already engaged, the construction of the new facilities should not raise serious problems. The steps already taken to establish Empresa as an ailbcmaous corporation and to reorganize its administration should enable it to operate the new facilities efficiently. The setting up of a National Power Commission to regulate rates, and the Governmentts undertakings to provide local currency financing and to fix rates at adequate levels should enable Empresa to operate on a satisfactory financial basis, as indicated in the financial forecasts made in the technical report, and to provide the local currency needed at present exchange rates to purchase the foreign exchange needed to service the loans. Fomento 28. The power distributors in the 15 outlyinRg towns have already indicated in writing their willingness to buy pJ,er from the proposed steam plant and to undertake the necessary expansion of their distribution systems under the supervision of the consultants already retained by Empresa. As in the case of Empresa, the Government undertakes that adequate rates will be awarded. There is therefore good reason to believe that the necessary expansion will be efficiently carried out and that the distributors will be in a position to meet their obligations to Fomento. 29. Fomento has only been in operation since 1953, and it will be some years before it has attained a sufficient volume of loans in relation to administrative expenses to be able to dispense with Government financial assistance. The quality of its management and its emphasis on the combination of technical and financial assistance, however, give good reason to believe that it will progress along sound lines, and that the $400,000 loan now proposed will be satisfactorily administered and duly serviced. The Bank is currently considering a loan to Fomento of about 'Al,600,000 for agricultural projects which would greatly strengthen its operations.  -9- Guarantor 30. The two loans now recommended should, by helping to increase the output of manufacturing and agricultural processing industries, hav-e a beneficial effect upon the balance of payments. Since amortization is not scheduled to begin until 1958, wh;en Nicaragua's present medium term credits will have been paid off, Nicaragua should be able to make available without undue strain the foreign exchange required to meet the service of this loan in addition to its other obligations if resort to new suppliers' credits is kept within prudent limits. The Government's undertaking to appropriate the equivalent of about `P3 million over the next th,ree years to meet the local currency expenses of the Empresa project should not prove an undue burden on Government revenues which, for the fiscal year 1954-55, were estimated to yield the eauivalent of about 1gi33 million. PART IV - COMPLIANCE 1WITI ARTICLES OF AGREE MENT 31. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART V - RZOI2COMEIATIONS 32. I recommend that the Bank at this time make to Empresa Nacional de Luz y Fuerza (with the guarantee of the Republic of Nicaragua) a loan of 07,100,000 or the equivalent thereof in other currencies, and to Instituto de Fomento Nzcional (also with the guarantee of the Republic of Nicaragua) a loan of 6h400,000, or the equivalent thereof in other currencies, both loans to be for a term of 20 years, with interest (including commission) at the rate of 4 3/4% per annum, and on such other terms as are specified in the draft Loan and Guarantee A!greements attached herewith, and that the Executive Directors adopt resolutions to that effect in the form of the attached (No. 8 and 9). Eugene R. Black June 30, 1955