Honduras - Canaveral Hydroelectric Project

R E S T R I C T E D FILE COPY R epo rt- N o. P-228 This report was prepared for use within the Bank. It must not be published nor may it be quoted as reprosenting the Bank's views. The Bank assumes no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESA NACIONAL DE ENERGIA ELECTRICA IN HONDURAS June 20, 1960  INTERLNATIONAL BANK FCR RECONSTRUCTION AND D07ELOPMNT REPORT AND RECOIWMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OM A PROPOSED LOAN TO THE EMPRFSA NACIONAL BE ENERGI _ELECTRIvA_HONDURAS 1. I submit the folloving report and recommendations on a proposed loan of an amount in various currencies equivalent to $8.8 million to Empresa Nacional de Energia Electrica (ENEE) to help finance the foreign exchange cost of the Canaveral Hydroelectric Project in Honduras (the first stage of the Lake Yojoa-Rio Lindo Hydrcelectric Development). PART I - HISTORICAL 2. The Honduran Government has long considered the lake Yojoa-Rio Lindo Hydroelectric Development to be important for the economic growth of the country. As early as 1955, at the Bank's suggestion, the Government engaged consulting engineers to make preliminary studies of the technical feasibility of the Lake Yojoa-Rio Lindo development and to assess the power market. In 1957, the Government established an autonomous entity, the Empresa Nacional de Energia Electrica (ENEE) for the purpose of developing electric power service in the country. 3. An initial engineering report was presented to the Bank in the summer of 1957. Later in 1957, the Honduran Government requested the Bank to assist in financing key projects of its 1958-62 investment program including the proposed hydroelectric project. In the light of subsequent examination of the prospective power market, and of the problem of financing a project of this magnitude along with other important phases of the investment program, it was decided that, bofore embarking upon the hydroelectric project, ENEE should, as an initerim program, improve distribution facilities and increase diesel generating capacity in Tegucigalpa. 4. In May 1959, the Bank made a loan to ENEE of $1.45 million (No. 226-HO) to help finance the Interim Power Project, and assist in financing further engineering and survey work in connection with the Caniaveral Project. The execution of the Interim Power Project is progressing on schedule and the diesel units are expected to be in operation in August 1960.  5, During the fall of 1959, studies of the Project and of the power market were brought up to date by the Consultants. In Febnrary 1960, a Bank Mission made a field investigation cf the project. Negotiations for the proposed loan began in W4ashington on May 16, ].960. ENEE was represented by Mr. Luis Bogran F., Manager, and the Government by Mr. Jorge Bueso Arias, Minister of Finance. 6. The proposed loan would increase the Bankts lending in Honduras to $19.95 million equivalent. The Bank has made the following loans in Honduras Amount Loan No. Borrower Purpose (e2uiv in USJj) 135 HO Republic of Honduras Highway Maintenance $ 4,200,000 195 HO Republic of Honduras Highway Construction 5,5CO,CCO and Improvement 226 HO Empresa Nacional de Electric Power 1,450,000 Energia Electrica Development TOTAL: $ 11,150,0CO Of which has been repaid 1,515C00 Total now outstanding 9,635,0co Amount sold $1,294,CC0 Of which has been repaid S72 000 422,0C0 Net amount now held by Bank 9,213,000 * * Includes $4,996,746 not yet disbursed  -3- PART II - DESCRIPTION! OF Tn. PROPOSED LOAN 7. PURPOSE: Construction of: (a) a power house at Caraveral equipped with two generating units rated at 13,500 KW each, together with all necessary civil engineering works; and (b) transmission lines and substations to serve the Tegucigalpa, San Pedro Sula and Puerto Cortes areas. BORROVIER: Empresa Nacional de Energia Electrica (ENEE). GUARANTOR: The Republic of Honduras. AlOUNT: The equivalent in various currencies of $8.8 million. AMORTIZTTION: 43 semi-annual instalments from May 1964 to May 1985. INTEREST RATE: 6 percent per annum, including commission. COMI1ITIIENT CHARGE: 3/4 of 1 percent per annum. PAYIMENT DATES: May 1 and November 1. PART III - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 8. Attached are a draft Loan Agreement between ENEE and the Bank (No.1) and a draft Guarantee Agreement between the Republic of Honduras and the Bank (No.2). Both follow the general form of those relating to the earlier loan to ENEE. 9. The following provisions of the Loan Agreement are of special interest : (i) Section 5.01(a) and (b) - providing that the Manager (Gerente) of the Borrower is to be mutually satisfactory to the Borrower and the Bank and that the Borrower is to employ engineering consultants and contractors satisfactory to the Bank;  - 4 - (ii) Section .08 - stipulating a debt-equity limitation. The Bank would agree to waive this requirement during the years 1962, 1963 and 1964 provided that the Borrower agrees not to incur during those years, without the Bank's consent, long-term indebtedness other than that incurred to finance the balance of the Project; (iii) Section 5.09 - containing a rate covenant similar to the one agreed upon under the earlier loan. Section 3.06 of the Guarantee Agreement contains a corresponding provision. The covenant would be supplemented by an agreement on the part of the Borrower and Guarantor that clause (c) of the covenant would call for financing from surplus about 20%o of planned investment during 1959-63 and about 40% of investment thereafter. (iv) Section 7.01 - providing that the making of satisfactory arrangements for the balance of the required financing would be an additional condition of effectiveness. (v) Section 6.02 - making the loss by the Borrower of its right to obtain funds under the financing referred to in Article VII, or a prematuring of such financing by reason of the Borrower's default, an event of default. 10. Under existing legislation, ENEE has authority to borrow and the Government to guarantee the Loan. However, the Guarantee Agreement would be ratified by the Honduran legislature before becoming effective. 11. The report of the Committee provided for in Article III, Section 4, (iii), of the Articles of Agreement of the Bank is attached (No.3).  PART IV - APPRAISAL OF THF PROPOSED LOAN Jastification of the Project 12. The appraisal of the Project (TOD Report No. 246a) is attached (No.4). 13. The demand for power in Honduras has been growing at a rapid rate despite the fact that power rates have been among the highest in the Western Hemisphere. ENEE sales of electric energy in Tegucigalpa in the last five years have increased at an average rate of about 19% per year. It has been conservatively estimated that the rate of growth of power demand in the future market area will be about 9% per year. 14. Electric power generation in the area to be served by the Project is based at present mainly on the operation of a fairly large number of diesel installations. Construction and operation of such plants is inherently costly because of their small size and the high cost of diesel fuel in Honduras. 15. The Canaveral Project would replace the present small installations by a centralized hydroelectric power system capable of being economically expanded in successive future stages in order to meet the growth of power demand. The ultimate capacity of the system is estimated at 160 MW. The transmission lines would permit the new plant to supplv energy to the Tegucigalpa, San Pedro Sula and Puerto Cortes areas, the principal urban centers in Honduras, and would provide for the expansion of the service area in the future. 16. Present ENEE energy rates are very high. From the outset the Cafiaveral Project would supply energy at a lower cost than that of present sources of supply and this cost would further decrease as the later stages of development were carried out. The Project would thus permit the 'Lowering of rates, which, nevertheless, would be maintained at a level sufficient to finance from cash generation a substantial part of the investment required for the further development of the hydroelectric system. Arrangements for Financing 17. The total cost of the Project is estimated at the equivalent of $14.75 million. Foreign currency requirements (except interest during construction) of $9.0 million would be financed by the proposed Bank Loan ($8.8 million) and by applying $200,0CO from Bank Loan No.226-HO to cover preconstruction engineering expenses of the present Project. Of the balance, $2.95 million equivalent would be provided by ENEE from earnings and $2.8 million equivalent would come from a loan which ENEE expects to obtain from the U.S. Development Loan Fund.  -.6- Procurement 18. Procedures followed by ENEE in procuring equipment have been in accordance with sound utility practice. Contracts for civil works, and procurement of goods in excess of agreed amounts, will be awarded on the basis of international competitive bidding. ENEE's Management and Financial Position 19. The general organization of ENEE as set forth in its Charter is satisfactory. With assistance from engineering consultants, the management and the technical staff are capable of carrying out the Project. The present financial position of ENEE is sound and earnings are expected to provide an adequate return on its net fixed assets in operation after the Project is completed. Economic Situation 20. A report on the Economic Position and Prospects of Honduras (R 60-60) was distributed on May 27, 1960. Real income per head has been increasing in recent years at an average annual rate of about 1%. In 1958 lower export earnings from bananas and coffee, and spending by the Government beyond its revenues, caused difficulties, and led to a sharp loss of foreigni exchange reserves. Early in 1959, in cooperation with the International Monetary Fund, which made available a standby credit, the Honduran authorities undertook a stabilization program. The performance of this program during 1959 was satisfactory and foreign exchanae reserves increased somewhat. A new standby agreement with the IMTP was concluded in March 196C, and the Honduran authorities plan to continue to carry out the corrective measures introduced last year and to adopt additional measures, if necessary. 21. Growth prospects of the Honduran economy appear reasonabl-y good, With political stability and with an adequate level of private and public investment, the outlook is that national income will continue Lo grow at a rate slightly higher than that of population growth, and that Honduran exports may be expected to increase at 3% annually, or at roughly the same rate as during the 1950's. 22. The external debt of Honduras repayable in foreign exchange with US $16.4'million equivalent on December 31, 1959. Debt service payments in 1960 amount to US $2.6 million and to Us $2.9 million in 1961, declining repidly thereafter. These payments represent approx- irmately 4% of estimated foreign exchange earnings in 1960 and in 1961. By 1964, when amortization of the proposed loan would begin, service on existing debt and on the proposed loan would represent 3% of 1960 exchange earnings.  - 7 - Prospects of Fulfillment of Obligations 23. The Project has been prepared by ENEE with the assistance of engineering consultants who are being retained to supervise its construction. The estimated earnings of ENEE during the period of construction, together with the proposed loan from the Development Loan Fund would be sufficient to cover the costs of the Project other than those to be covered by the proposed Bank loan. Following completion of the Project, earnings should be sufficient to enable ENEE to service its obligations, including the proposed loans from the Bank and the Development Loan Fund. Honduras should be able to provide the foreign exchange required to service the Bank loan in addition to its other external obligations. PART V - COMPLIANCE WITH ARTICLES OF AGREEMENT 24. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 25. I recommend that the Bank make a loan to the Empresa Nacional de Energia Electrica with the guarantee of the Republic of Honduras in an amount in various currencies equivalent to $8.8 million for a term of 25 years with interest (including commission) at 6% per annum and on such other terms as are specified in the attached draft Loan and Guarantee Agreements and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 5). Eugene R. Black Washington, D. C. June 20, 1960