Ecuador - Quito Power Expansion Project (revised)

R E S T R I C T E D FILE CopY Report No. P-143 This report was prepared for use within 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 a PROPOSED SECOND LOAN to the EMPRESA ELECTRICA QUITO, S.A. ECUADOR for A REVISED PROJECT FOR THE EXPANSION OF ITS POWER FACILITIES September 16, 1957  INTERIATIONAL BANK FOR RECONSTRUCTION AND DEVELOFMENT REPORT AND RECCMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SECOND LOAN TO THE FYPRESk ELECTRICA OUITO, S.A., ECUADOR, FOR A REVISED PROJECT FOR THE EXPANSION OF ITS POMNER FACILITIES 1. I submit herewith the following report and recommendations on a proposed second loan in an amount of various currencies equivalent to $5 million to the Empresa Electrica, Quito, S.A.. (hereinafter called the IEmpresa"t) to finance the import require- ments of a revised project for the expansion of its power facilities in Quito and the surrounding area. PI,RT I - HISTORICA-L 2. On March 29, 1956 the Bank made a loan (137 EC) of 45 million to the Empresa to finance the foreign exchange cost of expanding its electric power facilities by constructing a lb,1,80 kw hydroelectric plant and a 3,000 kw diesel plant, erecting transmission lines and substations, and enlarging and impro-ving the distribution system. The engineering consultants emnployed under the terms of the Loan Agreement found that the original cost estimates were low and also recomnended that changes be made in the project. Further studies led the engineering consultants to recommend to the Empresa that the hydroelectric plant be relocated at a new site which would permit substantially more power to be developed, that additional diesel generating capacity be installed, that the capacity of some of the transmission lines be increased, and the distribution system be expanded. 3. The estimated foreign exchange cost of the revised project exceeded by $5 million the amount of Loan 137 EC. The Empresa decided to carry out the recommendations of the consultants and requested the Eank to make a second loan to finance the additional foreign exchange costs of the revised project. !1. Negotiations began in Washington on September 4l. Mr. Ricardo Espinosa, the General Manager, and Mr. Vicente Jacome, Engineer, represented the Borrower. Dr. Carlos Eorales, Minister Counsellor of the Embassy represented the Government of Ecuador, the Guarantor. 5. The Bank has already made the following loans to Ecuador:  Year Loan Borrower Purpose Amount Principal disbursed No. (in million $) as of July 31, 1957 1954 94 EC Comite de Highway cons- 8.5 &,3,930,000 Vialidad truction in the Province of Guayas 1956 137EC Empresa Power 5.0 't92,000 Electrica Development Quito 6. If the loan proposed herein and the proposed loan of $1k.5 million for highway maintenance and construction are made they would increase the total amount of the Bank's loans in Ecuador to A33 million. PART II - DESCRIPTION OF THE PROPOSED LOAN 7. The proposed loan would finance the additional foreign exchange cost of a revised project for expanding the power facilities of the Empresa by constructing a hydroelectric plant and a diesel power plant, by erecting transmission lines and by expanding the present distribution system. Borrower: Empresa Electrica Quito, S.A. Guarantor: The Republic of Ecuador Amount: The equivalent in various currencies of .e5 million Term: The loan would be for a period of 20 years and amortized by semi-annual instal- ments from February 1, 1962 to August 1, 1977 Interest Rate: per cent per annum including 1% commission Commitment Charge: 3/bV per annum  Legal Instruments and Legal Authority 8. Attached is a draft Loan Agreement (No. 1) and a draft Guarantee Agreement (No. 2). Both agreements are in substantially the same form as the Agreements for Loan 137 EC (Ouito Power Project). 9. The Description of the Project, Schedule 2, describes the revised project which is to be carried out by the Empresa with the help of Loan 137 EC and with the proposed loan. Section 7.02 anends the Description of the Project set forth in Schedule 2 of Loan 137 EC to read as that set forth in Schedule 2 of the proposed Loan Agreement. Section 7.01 makes a default in the performance of the proposed loan a default in the performance of Loan 137 EC and Section (b) of Schedule 3 makes a default in the performance of Loan 137 EC a default in the peformance of the proposed loan. 10. The Guarantee Agreement is in substantially the same form as the Guarantee Agreement for Loan 137 EC. As in the case of the Bank's previous loans to Ecuador, the Central Bank will accept its obligations under the negative pledge clause by signing the Guarantee Agreement together with the Guarantor. 11. The Borrower is authorized to enter into the Loan Agreement pursuant to its Charter and the Guarantee of the Republic of Ecuador will be ratified by the National Congress. PART III - APPRAISAL OF THE PROPOSED LOA'1 12. A detailed appraisal of the Project, TO-151, is attached(No. 3). Justification of the Project 13. The original project comprised a llf,L80 kw hydroelectric plant, a 3,000 kw diesel plant, transmission lines and the expansion of the distribution system. The revised project would consist of a hydroelectric plant located at a new site to develop 20,000 kw, a 6,000 kw diesel plant, transmission lines of greater capacity than in the original project and the expansion of the distribution system to accommodate the increased generating power. lh. The capacity of the diesel power plant has been doubled in the revised project to alleviate the serious shortage of power which will be experienced during the period of construction of the hydro- electric power plant. This will be longer than that estimated for the original project. After the hydroelectric power plant comes into  operation, the diesel plant will be needed to act as a standby for peak loads and in emergencies when service from the hydroelectric power plants might be disrupted. 15. The new site for the hydroelectric plant is capable of developing hO,000 kw and provision will be made in the revised project whereby the second 20,000 kw can be developed by the installation of an additional penstock and generators at a later date. The forecast of power needs for the area showsthat the revised project should be able to take care of the needs of this area until 1962. When the second 20,000 kw of hydroelectric power is installed the needs of the area should be taken care of until 1967. 16. The cost of power under the revised project will be about the same as under the original project. When the second 20,000 kw of generating capacity is installed, however, the cost will be substantially lower. 17. The area served by the Empresa is one of the most important in Ecuador. Ouito is not only the capital city, but is also the center of one of Ecuador's main industrial regions. At present this area suffers from a severe lack of poaer. In the peak hours municipal water pumping is cut off and various sections of the citY have to be disconnected. No new loads can be accepted and industries have had to instal their own diesels which are costly and uneconomic. Even with the sever restrictions which are now imposed, all equipment is operated at heavy overloads which is technically most undesirable. liethod of Procurement 18. The Borrower intends to procure supplies and equipment and to let major contracts for construction, on the basis of international competitive bidding. Economic Situation 19. A report on the Current Economic Position and Prospects of Ecuador, WVH-58a, was distributed to the Executive Directors on July 29. Paragraphs 20 through 23 of my Report and Recommendations on the proposed loan to the Govermnent of Ecuador for Highway Maintenance and Construction summarize the economic situation against which this proposed loan can be considered.  - 5 - Prospects of Fulfillment of Obligations 20. The Empresa has, and intends to retain, the same competent end experienced management as it had when Loan 137 EC was made. It will continue to employ under terms satisfactory to the Bank the same consultants which have been advising the Enpresa since Loan 137 EC was made. 21. The cash subscriptions of the shareholders have been increased to cover the additional local expenditures necessitated by the revision of the project. These cash subscriptions, together with the profits generated by the company, should be adequate to cover local currency expenditures of the revised project during the construction period. 22. The LCunicipality of fluito which fixes the rates to be charged for electric power in the area has recently authorized the 3npresa to increase rates by 25%. The earnings of the Bmpresa under the new rate schedule should prove adequate to purchase at present rates the exchange needed to service Loan 137 EC and the proposed loan, as well as to establish adequate reserves and permit the payment of reasonable dividends to shareholders. Ecuador should be able to provide the exchange needed to service the proposed loan, in addition to that required for its other external obligations. PART IV - COPIMANCT WIHI APTICLES CF IGMERiEIE 23. The Report of the Cornittee provided for in Article III, Section L (iii) of the Articles of Agreement of the Bank is attached (No. 4). 24. I am satisfied that the proposed loan will comply with the Articles of Agreement of the Bank. PART V - RECQ4EETDATIONS 24. I recommend that the Hank make a loan in various currencies equivalent to US 15 million to Ehpresa Electrica Quito, S.A., with the guarantee of the Republic of Ecuador for a term of 20-years with interest including commission of % per annun and on such other terms as are specified in the form of the Loan and Guarantee Agreements and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 5). Eugene R. Black Wlashington, D.C. President September 12, 1957