Ecuador - Quito Power Expansion Project

'FILE CO?Y R EST R I CTE D Report No. P-104 This document was prepared for internal us.e 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 the PROPOSED LOAN to the EMPRESA ELECTRICA QUITO, S..A. FOR EXPANSION OF ITS ELECTRIC POWER FACILITIES IN QUITO, ECUADOR March 9, 1956  INTRINATIONAL BAUK FCP REcOlNSThuc I'OP iAID DEV71CHOPiTiT R:PORiT A11D R MCOI4'-iliATIY1'S OF THT 1-PRr.SIDTPT TO TH,. 77'7CUITIE DIRECTORS ON" A PROPOSf7D LOAV TO TT-TF EHP.SA YLLICTRICA QUITO, S.A. FOR TIar DCPAPSIO11 Or ITS EL-LTRIO Pa?FIR PACIMTIRS II rIUITO, 'CTJADOR. 1. I submit herewrith tlhe follo,4nc report and recommendations on a prooosed loan in an anount equiAvalent to @k5 million to the .7mrresa Ulectrica Quito, S.A. to finance the foreign exchange cost of expanding its electric power facilities wshich serve the canital city of Ecuador and the surrounding area. PART I - THISTOPTICAL 2. The project was examined byr a Bank mission which visited Ecuador in SePtember, 1S53. Subsequently, the Bank informed the hunicioality of Quito and the Government that the project anneared to be a well-planned. and necessary addition to the 'unicipality's existin,7 electric power facilities, The followinp steps were stated to be nrerequisites to loan negotiations: a) A review of the engineering studies by engineering consultants satisfactory, to the Bank, b) The establishment of a senarate entity with its omn financial status to o'im and operate the undbrtakin7 (which was then orbrated as a - department of the iiunicipslity), c) Satisfactory arrangements to provide the finds to cover the local currency costs of the project. 3, All these stens have now been taken. A review of the Fmnresats engineering studies was made by engineering cor.saltants satisfactory to the Bank and forwarded to us on August 31, 1955. A new comnany was established in Seotember 1955 with a charter satisfactory to the Pank. The arrannerments made to cover the local currency costs of the oroject are described in paragranh 11. 4. N'!egotiations for the oronosed loan began in !Washington on January 23, 1956 with Pr. Richard Espinosa, the General ,anager, and 1,r. Vincente Jacome, Assistant :fngineering Director, renresenting the Porrower. Negotiations on the Guarantee Agreement were o?ened, with Dr, .B.enjamin Peralta representing the Guarantor, on February 28. The oroDosed loan w^rould be the second Rank loan to Icuador, a loan of t8.5 million having been made to the Comite Ejecutivo de Vialidad de la Provincia del Guayas on February 10, 1954 for the development of highwzays in the Province of Guayas,  PART II - DF5iCRTPTIOI' OF T,Ir PFROPOSED LOAN Borrowrer 5. The Borrower would be the 1Enpresa Blectrica Ouito S.A., a corporation established *mder the laws of Ec2uador in Ser.tember, 1'55 to operate electric powfer facilities which were formnrrly owned hy the Municipalit of Quito. Guarantor 6. The loan would be guaranteed by the Republic of Ecuador, a mermber of the Bank. Amount 7. The loan wouild be in an amount in various currencies equivalent to US A5 million. Purpose 8. The proceeds of the loan would be used to finance the foreign exchange costs of exrpanding the present poower facilities (12 080 kw) of the - presa Electrica Quito, S.A., by constructing a 1h,80 kwT hydroelectric plant and a 3,000 i,h diesel nlant, by erecting7 transmission lines, by constructing substations, and br expanding and modernizing the present distribution system. The loan %would also cover interest and other loan charges during the period of construction. The oroject should be comnleted in about three years. Interest, Cormmission and Commitment Charges 9. The loan would bear interest at the rate of 4 3/4% per annum, including the statutor-y cormission of 1). The commitment charge would be at the rate of /of 1% per annum and would accrue from. the effective date of The Loan Agreement or 60 days after the date of the Loan Agreement, whichever is earlier. Amortization 10. The loan wouLd be for a period of 20 years. It vould be amiortized by semi-annual p-ayments beginning August 1, 1959 and ending February 1, 1976, as set forth in Schedule 1 of the proposed Loan Agreement. Provision of Local Currency 11. The ilunicipalwtr which organized the Empresa Electrica Quito,' .A. is receiving a majority of the stock in the new connany in Tayment for the existing nower facilities which the Municipality turned over to the new Company. Two public Social Security Agencies, which are also particiuating in the new company, are subscribing cash for their shares. These sub- scriptions, together with the orofits of the company during the neriod of  -3- construction, should be amnle to cover the local cost of the proposed rnrovect. Ioreover, oine of t..ese Agernces, the' Caja de Pensiones, has informally indicated its wi.llingness to orovide additional fumds if needed. The completion of satisfactorv formal arrangements to obtain additional funds if needed is a condition of efrectiveness of the pronosed loan, Legal lnstruments anid Legal Authority 12, Drafts of the Loan and Guarantee Agreements are attached (bos. 1 and 2). The Borrower is authorized to enter into the Loan Agreement pursuant to its charter, The guarantee of the Renublic of E.cuador will be ratified by the Nzational Congress. 13. To establish a legal basis for subsidiary agreements between the Bank and the ForrowJer regarding methods of nrocurement, Section 3.01 of the Loan Agreement has been modi-fied by inserting tlhe words "and the methods and procedures for the procurement Or slch goods'! in the second sentence. Otherwise, the Loan Agreement contains no features which are not customary in this type of loan. 14. The Cuarantee Agreement is in the same form as the Guarantee Agreement signed with the Covernrnent of Ecuador in connection wdith the loan to the Comite de Vialidad (94 EL), exceot that the latter contained a covenant requiring the Guarantor to provide local currency, should the funds available to the rBorrower prove inadequate to cover.the local cost of the nroject. 15, The report of the Con-r,ittee nrovided for in Article TII, Section U iii) of the Articles of Agreement of the ,ai-n is attached (Po. 3). PART III - APTPRAIFAL C0 T!B4 PROPOS77 LOAN 16. A detailed anpraisal or the nroject (T.O. 102-a) is attached (No. [0 Justi'ication of the Project 17. The Rapresa sunolies electric sower to the City of 9'uito and adjoining suburbs with a oopulation estimated at 225,000. This area is one of the main industrial regions of Ecuador and is the seat of a variety of industries including r.Ecuador's main industry, textile manufacture. It is also the center of -the fast-growing pharmaceutical industry