Bolivia - National Mineral Exploration Fund Project

Document of FILE COPY The World Bank COPY FOR OFFICIAL USE ONLY Report No. P-2591 -BO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BOLIVIA FOR A NATIONAL MINERAL EXPLORATION FUND PROJECT June 14, 1979 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 Currency Unit = Bolivian Peso ($b) US$1 = $b. 20.00 $b. 1 = US$0.05 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS COMIBOL - Bolivian Mining Corporation (Corporacion Minera de Bolivia) GTZ - Gesellschaft fuer Technische Zusammenarbeit BRGM - Bureau de Recherches Geologiques et Minieres FISCAL YEAR January 1 to December 31  FOR OmCIAL USE ONLY BOLIVIA NATIONAL MINERAL EXPLORATION FUND PROJECT CREDIT AND PROJECT SUMMARY Borrower: The Republic of Bolivia Beneficiary: The National Mineral Exploration Fund Amount: US$7.5 million Terms: Standard Relending Terms: The proceeds of the credit would be onlent to the Furnd at 6.5% and 20 years, including 5 years of grace. Interest payments by the Fund to the Govern- menit would be limited to 2.5% during the grace period. The difference between 6.5% and 2.5% would be accumulated and repaid in equal installments, without interest, during the amortization period. Project Description: The objective of the project is to assist the Funad to develop into an efficient mineral explora- tion financing institution which would foster miineral exploration in Bolivia and thus facilitate (i) the expansion of mineral production and exports and (ii) reductions in mining costs. The project would comprise the Fund's 1979-82 operations program, and technical assistance to the Fund. The credit would finance the services of consultants and contrac- tors, and the acquisition of equipment. The major risk faced by the project is that not sufficient demand for Fund financing would develop, or that the deposits identified might not be expeditiously developed, because financial return may not be perceived as adequate by the mine owners at the time. Therefore, the success of the project will depend heavily on the Government taking the necessary measures to encourage investment in the sector. AnLother risk is that the Fund's management is untested in the contracting and evaluation of exploration work. Technical assistance to be provided under the project and under bilateral German financing is expected to strengthen the Fund. This document has a restricted dis,tribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Estimated Cost: US$ Millions Local Foreign Total Equipment - 1.23 1.23 General Survey Costs 0.70 - 0.70 Consulting and Service Contracts 5.64 1.41 7.05 Technical Assistance and Training - 0.78 0.78 Administrative Costs 1.29 - 1.29 Base Cost Estimate 7.63 3.42 11.05 Contingencies Physical 0.56 0.14 0.70 Price 3.25 0.92 4.17 Total Cost 11.44 4.48 15.92 Financing Plan: Equity US$ million % Government Contribution 4.30 26 Bilateral Assistance Gesellschaft fuer Technische Zusammenarbeit (Germany) 3.80 23 Bureau de Recherches Geologiques et Minieres (France) 0.50 3 Sub-total 8.6 52 Loans Government from Central Bank 0.40 2 from IDA credit 7.50 46 Sub-total 7.90 48 16.50 1/ 100 Estimated Disbursements: US$ Millions FY80 FY81 FY82 FY83 Annual 1.2 1.6 2.8 1.9 Cumulative 1.2 2.8 5.6 7.5 Rate of Return: The economic rate of return is expected to range from 18-25%. 1/ I;cludcs the finai.cing of iT t rest during project execution, amounting to USSO.53 million equivaleeat.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BOLIVIA FOR A NATIONAL MINERAL EXPLORATION FUND PROJECT 1. I submit the following report and recommendation on a proposed credit to the Republic of Bolivia for the equivalent of US$7.5 million on standard IDA terms to help finance the 1979-82 operations program of Bolivia's National Mineral Exploration Fund and technical assistance to the Fund. The proceeds of the credit would be relent to the Fund for 20 years, including 5 years of grace, with interest at 6.5% per annum. The project will also be financed by the Gesellschaft fuer Technische Zusammenarbeit, of Germany, and by the Bureau de Recherches Geologiques et Minieres, of France, for a total of US$4.3 million equivalent. PART I - THE ECONOMY Introduction- 2. A report entitled "Economic Memorandum on Bolivia" (No. 2195-BO), dated November 3, 1978, was distributed to the Executive Directors. Economic missions have visited Bolivia in October 1978 and March 1979 to review current developments and discuss policy measures with the Government. Country data sheets are attached as Annex I. Background 3. Despite the increasing importance of natural gas exports, as well as significant mineral deposits, Bolivia remains one of the poorest countries in South America. The majority of its population is engaged in traditional agriculture:; only a small part of the labor force is employed in the modern sector. The economic infrastructure is still primitive and the road and rail networks reach only a fraction of the country. Most of the population live in the inhospitable 3,000 to 4,000 m high plateau, the Altiplano, where physical conditions are harsh. 4. The 1952 revolution sought to put an end to the dual structure which had characterized Bolivia's economy since colonial times and to deprive the landowning and mining oligarchy of its economic base. This objective was partially achieved. Progress was made in eradicating feudal relations, dis- tributing the land and eliminating obstacles to social mobility, notably through an impressive effort in primary education. The agrarian reform and the nationa:Lization of large mines, however, were followed by falling produc- tion. GDP declined in the 1950s and did not recover to its pre-1952 level until 1961. During the subsequent decade, output increased steadily at an average annual rate of around 5%, providing for per capita income increases averaging 2.5% p.a. As a result, GNP per capita, which had fallen by 24% in the 1952-60 period, recovered to its 1952 level by 1970 and was more equally distributed. However, the momentum of economic growth was again lost in 1969/71, when political instability led to declining private investment and deteriorating public finances. The deterioration of public finances reflected a structura1 problem in the economy. Bolivia's public sector is proportionately  one of the largest in Soutlh America and a source of livelihood for a sizeable segment of the population. With scarce employment opportunities in the private sector, pressures to expand public employment proved difficult to resist. Large expenditures on wages and salaries, combined with a weak tax system, have limited the resources available for public investment. Moreover, the inability of the public sector to generate adequate savings limited its capacity to utilize available external capital assistance effectively. 5. From mid-1971 to mid-1978, political stability and the Government's encouragement of private sector investment raised hopes for a more rapid pace of economic development. In addition, during the early 1970s Bolivia's exports of petroleum increased considerably, and it was generally expected that this upward trend would continue in the future. Public investment and external lending decisions were largely based on this expectation which seemed reasonable at the time. The Government launched an ambitious public investment program financed largely through external borrowing, expecting to have no difficulty servicing the loans out of future petroleum revenues. Petroleum exports began to decline, however, in 1975, because of insufficient output in the face of rapidly rising internal demand. Through 1976 this decline was largely offset by increased exports of natural gas to Argentina, but in 1977 petroleum exports dropped to a point where current earnings from all hydro- carbon exports declined. At the end of 1978 petroleum exports came to a virtual halt. As a result, Bolivia has become even more dependent on exports of minerals, mainly of tin. 6. Since most of the ongoing public investment projects were initiated when petroleum prospects seemed favorable, they cannot now be stopped without economic loss. The Government has therefore tried to make up the export shortfall through additional external borrowing. As a consequence, Bolivia's public debt outstanding and disbursed increased rapidly; the end-1978 estimate is US$1.8 billion. As a result of increased borrowing from commercial banks and suppliers, the structure of the external debt has worsened; the grant element of new loans fell from 40% in 1974 to 16% in 1978. Recent Economic Performance and Prospects 7. The Bolivian economy is going through a very difficult phase. The overall public deficit has increased from about 1% of GDP in 1974 to 11-12% in 1978. The current account deficit of the balance of payments has widened from 5.3% of GDP in 1974 to 8.4% in 1978. 1/ During the last two years, the rate of GDP growth has been declining and the rate of inflation has been acceler- ating. According to the La Paz consumer price index (the only official price index in Bolivia), prices increased by 10% in 1978; estimates made by the Central Bank indicate an inflation rate of about 19% in that year. Indications are that the rate of inflation has been increasing further in 1979. The new Government is expected to take measures in order to bring the rate of inflation down to an average of about 15% over the next years, the same as the average during 1970-1977. 1/ These figures are but orders of magnitude because the statistics on "Ahich Jney are b;se *,ffer fron considerable error, but they are indi'oative of a -erioiF deterioration.  8. The service on external debt now absorbs about 30% of exports of goods and services. This ratio cannot be expected to improve during the next few years and will probably fluctuate around 35%, an undesirable figure for a country so dependent on a s:ingle export, tin, which is characterized by wide fluctuation in demand. The country's balance-of-payments prospects are not encouragingy for the immediate future. The volume of mineral exports has been stagnating and even with production-stimulating changes in mining taxes no sharp increase in volume is to be expected during 1979 and 1980. However, a more favorable environment for private mining enterprises, modernization investment in the Bolivian M4ining Corporation, and greater exploration efforts could bring about substantial increases in output and exports in the medium term. Non-traditional exports account for a small share of all exports and while encoulragement is also required in this area, favorable effects will only affect exports significantly in the longer term. 9. Bolivia's most promising export potential lies in natural gas. Exports to Argentina are expected to increase as additional pumps begin to operate on the pipeline dur:ing 1979. The construction of a natural gas pipe- line to Brazil could improve Bolivia's balance-of-payments position substan- tially. A letter of intent has been signed by the Bolivian and Brazilian Governments, laying down the principles regarding the pipeline. While further studies are required to prove the existence of sufficient gas reserves, once this is done the way would be open for an increase in total exports in the order of 2.-30% in the mid-1]980s. The petroleum situation is less clear; exports cannot be expected to resume on a substantial scale before additional reserves are confirmed. 10. In sum, while Bolivia's medium-term export prospects are moderately favorable if efforts are macle to promote them, it is difficult to see much scope for improvement during the next two to three years. The vagaries of international mineral prices will continue to have a decisive effect on the country's export earnings during that time. 11. The main internal cause of financial strain is the weak position of the principal state enterprises. Foremost among them is the State Petro- leum Corporation (YPFB), whose finances have been damaged by the Government policy to rnaintain domestic prices of petroleum products at a fraction of the world market level. Since YPFB is also one of the largest taxpayers in Bolivia, its financial weakness is reflected in Central Government revenue shortfalls. Other state corporations such as COMIBOL (which owns and operates the country's major mines) and ENAF (the State Smelting Corporation, which has embarked oni a large-scale investment effort) have large overall deficits caused by considerable investment expenditures, low productivity and/or inappropriate wage policies, rather than depressed prices. The financial situation of the railroads has deteriorated because of the severe damage resulting from the recent floods. As noted above, because many of the ongoing public secltor investments are already well advanced, it is unrealistic to expect a drastic decline in expenditure in less than two to three years; nor would such a decline be rational when many projects are expected to show satisfactory rates of return once they are completed. As on-going investment projects are gradually completed it should become possible to reduce the amounts spent and to bring public investment into line with the country's public sav:ings and export capacity.  - 4 - 12. A new Government is scheduled to take office in August 1979. The present administration considers itself a caretaker; this is the main reason why some of the remedial actions that the present financial situation requires have not been taken yet. The administration is fully aware of the seriousness of the situation and has outlined elements of a stabilization program aimed at reducing the public deficit, narrowing the balance-of-payments deficit on current account, and restricting external borrowing. The major measures contemplated are a much needed increase in the domestic price of petroleum products and a series of tax and tariff adjustments. For the reasons outlined and because of the temporary character of the present Government, significant improvement cannot be expected before late summer at the earliest. 13. Bolivia's creditworthiness for lending on conventional terms is limited at present. Priority should be given to projects in the hydrocarbon sector with a clearly identifiable effect on production for export. Because of the need to improve Bolivia's debt management--and the reluctance of commer- cial lenders to increase their exposure in the country--Bolivia will have to limit its foreign borrowing to priority projects and make maximum use of soft- term lending from international institutions and bilaterals to get through the difficult next two or three years. We are following economic developments very closely and are engaged in a detailed and frank dialogue with the Bolivian authorities with a view to assisting them during the difficult situation. PART II - BANK GROUP OPERATIONS IN BOLIVIA 14. Although Bolivia is an original member of the Bank, it did not obtain any Bank Group financing until 1964. Because of Bolivia's restricted capacity to service external debt, Bank Group financing was, except for a US$23.25 million Gas Pipeline loan, exclusively on IDA terms until Bolivia started to export small quantities of natural gas and petroleum. In view of promising prospects for rapid expansion, Bolivia was graduated from IDA in 1975. In 1978, however, it became apparent that the expectations of large petroleum exports, and with it dynamic economic development, would not materialize. Starting with the Ulla Ulla rural development project, financed in equal shares on Bank and IDA terms, Bolivia was made a blend country. Bolivia's economic situation has deteriorated significantly since then; petroleum production has declined and the country is expected to become a net importer in the near future. Development is still seriously constrained by the dual structure of the economy; a large part of the population continues to live in extreme poverty. Limited creditworthiness and low per capita income qualify Bolivia for IDA eligibility. To date, the Bank and IDA have approved 24 operations (11 credits and 13 loans) for Bolivia amounting to US$313.8 million, of which 8 have been fully disbursed. 15. Bank Group lending to Bolivia has assisted in the development of infrastructure and social sectors. In the agricultural sector (7 operations amounting to US$45.2 million), the Bank Group has helped the Government in the development of a viable livestock Industry, to increase agricultural production, to improve 1iving conditions on the Altiplano and to promote the Sevelov-mer-t ,f the a- a( _>ama industry; efforts to strengthen the Agricultural B-'Uia hv 'e n'e` w-W li-r, ted success. In the power sector, through :.