Colombia - Third Yumbo Thermal Power and First Calima Hydropower Projects

R E S T R I C T E D Report No.P-222 FIE corY 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 THE PROPOSED LOAN TO CORPORACION AUTONOMA REGIONAL DEL CAUCA AND CENTRAL HIDROELECTRICA DEL RIO ANCHICAYA LIMITADA COLOMBIA April 25, 1960  INTERNATIOUAL BANK FCR RECO]iSTRUCTION AlID DEVELOPMETN' REPORT A1D RECOMAECDATIONS OF TBE PRESTDEIr TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CORPORACION AUTONOMA REGIONAL DEL CAUCA AND CENTRAL HIDROELECTRICA DEL RIO ANCHICAYA LIT21ITADA COLOMBIA 1. I submit the following report and recommendations on a proposed loan of an amount in various currencies equivalent to $25 million, to the Corporacion Autonoma Regional del Cauca (CVC) and Central Hidroelectrica del Rio Anchicaya Limitada (CHIDRAL) to finance the foreign exchange cost of expanding power generation, transmission and distribution facilities in the Cauca Valley. PART I: HISTORICAL 2. The Bank has made three loans to CHIDRAL: the first in November 1950 of $3.53 million (38 CO) to assist in financing the construction of a 24 NW hydroelectric plant at Anchicaya; the second in March 1955 of $4.5 million (113 CO) for the addition of a 20 14W generating unit at the Anchicaya hlydroelectric plant and the construction of a 12.5 I4W thermal generating plant at Yumbo; and the third in December 1958 of t2.8 million (215 CO) for the installation of a second 12.5 M4W thermal generating unit at Yumbo and improve- ment of the distribution system in the City of Cali. To date no loans have been made to CVC. 3. In December 1955 CVC asked the Bank to assist in financing the construction of a new hydroelectric plant on the Calima river. Because of the continued deterioration of Colombiats economic position, the Bank was obliged soon thereafter to defer active consideration of loans for this and other projects in Colombia. 4. As a result of remedial measures subsequently undertaken by the Government, Colombia's financial prospects had by mid-1958 improved sufficient'y to enable the Bank to resume active consideration of projects in Colombia. The Bank has since made loans for four projects in Colombia (see paragraph 6 below). v. In April 1959 CVC and CHIDRAL joined in making a request for a loan to finance the Calima hydroelectric project and for otlher facilities needed to provide adequate service to the region. In November 1959 a Bank mission visited Colombia to review the project and formal negotiations for the loan began in Washington on March 30, 1960. The Colombian Government was represented by Dr. Ignacio Mesa Salazar, Minister Counselor of the Colombian Embassy, and the borrowers by Dr. Bernardo Garces Cordoba, Executive Director of CVC, and Dr. Jose E. Otoya, Manager of CHIDRAL. 6. The proposed loan would increase the Bank's lending in Colombia from $148.2 million to $173.2 million, net of cancellations. The Bank has already maade the following loans to Colombia:  -2- Amount of Loan net of Year Purpose Cancellations 1949 Agricultural Machinery Project $ 4,925,411 '950 Anchicaya Hydroelectric Project 3,530,000 1950 La Insula Hydroelectric Project 2,600,000 1951 Highway Project 16,500,000 1951 Lebrija Hydroelectric Project 2,4o00,00o 1952 National Railroads Project 25,000,000 1953 Supplementary Highway Project 14,350,000 1954 Second Agricultural Machinery Project 5,000,000 1955 Anchicaya and Yumbo Power Project 4,500,000 1955 Railroad Extension Project 15,900,000 1956 Plan Vial I Project 16,500,000 1958 Yumbo Extension Power Project 2,800,000 1959 La Esmeralda Power Project 4,60o,ooo 1959 Guadalupe Hydroelectric Project 12,000,000 1960 Bogota Power Project 17,600,000 Total (net of cancellations) $ 148,205,441 of which has been repaid 33,651,441 Total now outstanding 114,554,oo000 A^mount Sold $6,163,80o of which has been repaid 6,868,800 1,295,000 Net amount now held by Bank $ 113,259,000 * Includes $39,536,599 million not yet disbursed 7. At present the Bank is considering four other projects in Colombia: the rehabilitation and expansion of the steel plant of Acerias Paz del Rio; the expansion of the power installations of the Empresas Publicas de Medellin; the purchase of additional rolling stock for the Colombian National Railroads; and highway construction. Loans for these projects may be made before the end of this calendar year. PART II: DESCRIPTION OF THE PROPOSED LOAN 6. Borrowers: Corporacion Autonoma Regional del Cauca (CVC) an autonomous regional organization responsible for the economic development of the Cauca Valley. Central Hidroelectrica del Rio Anchicaya Limitada (CHIDRAL), a cornoration of which the majority shareholder is CVC and the Departamento del Valle and the Munioipality of Cali are minority shorrhc)llers. The loan i-ould be made jointly to the two borro,Ter3.  - 3 - Cuarantor: Republic of Colombia Amount: The eQuivalent, in various currencies, of $25,000,000 Purpose: To finance the foreign exchange cost of: a third generating unit of 33 MH in the Yumbo thermal plant; constructing a 120 IMW hydro- electric plant at Calima with an installed capacity of 60 MW; and expanding the trans- mission and distribution facilities in the Cauca Valley. Amortization: 44 semi-annual instalments from November 15, 1963 to MIay 15, 1985. Interest Rate: 6% per annum Commitment Charge: 3/4% per annum Payment Dates: Nay 15 and November 15 PART III: LEGAL INSTRUMENTS AND LEGAL AUTHORITY 9. A draft Loan Agreement between the Bank and CVC and CHIDRAL (No.1) and a draft Guarantee Agreement between the Republic of Colombia and the Bank (No.2) are attached. 10. The Guarantee Agreement is in the usual form. 11. The Loan Agreement closely follows the usual form of Bank loan agreements wiith public utility undertakings. Provisions of special interest are: (a) Section 5.13, i ich limits the incurrence of additional debt by CHIDRAL. (b) Section 5.15, which obliges CVC to make arrangements, satisfactory to the Bank to provide CHIDRAL with funds required to carry out the Project if funds available to CHIDRAL become inadequate. In a letter (No.3) the Bank agrees that arrangements whereby such funds would be provided either in the form of subscriptions to the capital stock of CHIDRAL or as non-interest bearing and subordinated loans tiuld be satisfactory to the Bank. (c) Section 7.01 provides as a condition of effectiveness that all debts presently owed by CHIDRAL to CVC shall be converted into capital stock of CHIDRAL. In a letter (No.4) CVC and CHIDRAL agree to use their best efforts to strengthen CHIDRAL's financial position in order to meet by January 1, 1963, the test stated in the letter.  12. Execution of the Loan Agreement is being authorized by the Boards of Directors of both CVC and CHIDRAL. The (blombian Government has authority under a law enacted in 1959 to guarantee the proposed loan. PART IV: APPRAISAL OF TTE PROPOSED LOAN tJustification of the Project: 13. A detailed appraisal of the project (T.O.239b) is attached (Wo.5). 14. CHIDRAL at present serves the City of Cali (population about 468,ooo) and its immediate neighborhood. Cali is the industrial and commercial center of the Cauca Valley (used here to denote the area generally between Popayan and Cartago) and is experiencing a rapid growth of industry and population. Powver requirements in the Cali area have gro.m in recent years at a rate of about 16% per year and are expected to continue to increase at this rate over the next few years. About 60% of total power sales are to industrial and commercial consumers and important new industrial plants are now under construction. A substantial part of the new generating capacity provided by the project will be needed to permit CHIDRAL to serve the increasing load in Cali. 15. Outside of Cali there are a number of smaller towns and villages in th& Cauca Valley whose development is limited by their inability to obtain adeouate power from their small and comparatively high-cost generating facilities. The new transmission system, serving an area of some 4,500 square kilometers with a total poDulation of 1.3 million, would enable CHIDRAL to orovide power to most of the toTwns and villages in the Cauca Valley. Funds from the loan would be made available by the borrowers to such towns and villages to assist in financing the necessary exDansion in their distribution facilities. The new transmission system would also interconnect the CHIDRAL system with the power system of CHEC in ianizales (Department of Caldas) thus permitting an inter- change of power between these twfo systems. 16. Under the present circumstances the ccmbination of new thermal and new hydroelectric generating capacity to be provided by the project represents the most efficient next step in developing a balanced generating system for the region. It is to be noted that the civil works for Calima I will permit the subsequent installation of two additional units at a very low cost and that the regulating reservoir prepares the way for the subsequent construction of another bydro plant (Calima II) down-stream. Borrowers: 17. The Corporacion Autonoma Regional del Cauca (CVC) is an autonomous regional organization created by the Colombian Government by a law enacted in 1954 to develop the natural resources in the Departamento del Valle and the Departamento del Cauca. Its Board of Directors consists of the Iiinister of Development, the Governors of the Departamento del Valle and the Departamento del Cauca, two directors nominated by the President of the Republic and two directors representing various business, landoimer and engineering organizat'i ons. CVC is menaged by an Executive Director appointed by the Board. Its revenues are derived from the proceeds of taxes levied on real estate and alcoholic beverages in the Departamento del Valle.  18 The Central IIidroelectrica del Rio Anchicaya Limitada (CHIDRAL) was irncorporated in 1950. In 1958 CVC acquired the controlling interest (60%) in CHIDRAL which had previously been held by an agency of the Colombian Government. CVC appoints three members of the Board of Directors of CHIDRAL; two other mrembers represent the Departamento del Valle and the Municipality of Cali. The ooerations of CHIDRAL are directed by a Manager appointed by the Board of Directors. Execution of Project: 19. GHMIDRAL will construct and operate the extension to the Yumbo thermo- electric plant. CVC will be responsible for the construction of the Calima hydroelectric plant and upon completion will transfer the plant to CHIDRAL for oneration. The transmission lines will also be built by CVC and upon comple tion the main line (Part 3 of the Description of Project) will be transferred to and operated by CHIDRAL and the balance of the transmission system wlill be operated by the various municipalities under the supervision of CVC. The distribution system in the City of Cali wrill be improved and extended by the Empresas Municipales de Cali. The distribution systems in the town of Cartago and in the smaller towns and villages in the Cauca Valley wJill be extended and improved by the local authorities under the supervision of CVC. Arrangements for Financing: 20. The total cost of the project is estimated at the equivalent of $37 million. The foreign exchange requirements equivalent to $25 million would be covered by the proposed loan. Funds needed to cover the local currency costs of the two power plants are to be provided by CHIDRAL from earnings and from funds to be obtained from CVC either as equity contributions or non-interest bearing subordinated loans. CVC will also provide funds to cover the local currency costs of the transmission lines. Funds for the local currency costs of distribution facilities in the towns and villages will be provided both by the towns and villages and by CVC. Procurement: 21. The procedure followed by CHIDRAL in procuring equipment has been in accordance with sound public utility practice. All major pieces of equipment for the project are to be procured by CVC and CHIDRAL through international competition. Economic Situation: 22. A report on the "Current Economic Position and Prospects of Colombia' (IJH-92 A) was distributed to the Executive Directors on April 13, 1960. This report indicates that the Colombian Government has continued the sound economic policies instituted in 1957. Control of money supply and credit together with appropriate fiscal policies have resulted in greater internal stability, with prices rising only 6-7% during 1959 as against 12 in 1958. There has been a considerable improvement in the country's external accounts, reflected during 1959 in an increase of US$ 54 million in official gold and foreign exchange  - 6 - reserves. This increase occurred in spite of the lower price prevailing for coffee, which was compensated in part by a greater volume of coffee ex-orts, and notwithstanding substantial net repayments on the external debt. Investors ;ild creditors abroad have reacted favorably to Colombia's recovery by increasing the flow of private foreign investments and extending normal maturities for commercial credit granted to Colombian importers. These develop- ments account in large part for the strengthening of the peso, the external value of which rose from Col$ 8.23 per US dollar at the end of 1958 to its current value of Col$ 6.61. 23. The external public debt of Colombia as of June 1959 was U)S4 419 million. Debt service for 1960 amounts to US$ 88 million, of which US$ 68 million are for short-term private bank, supplier and balance of payments credits. The burden of debt service on estimated current exchange receipts for 1960 may be close to 15%. However, by 1963, when amortization of the proposed loan would begin, service on Colombia's existing external debt and the proposed loan would be less than 8% of estimated current exchange earnings. Prospects of Fulfilment of Obligations: 24. The project has been planned and is being supervised by experienced foreign and Colombian consultants, and should be efficiently executed. The management is qualified to carry out the construction of the proposed project and to operate the expanded power system. 25. The market prospects for the power to be produced by the project, the additional subscriptions of CVC to the share capital of CHDRAL, together with the rate and other financial covenants contained in the Loan Agreement, and supported by the undertaking contained in the letter attached as No.4, afford assurances that CVC and CHIDRAL will be able to provide the funds needed to cover the local currency cost of the project and to service the proposed loan. 26. The service of the loan together with Colombia's other foreign exchange obligations should not impose an undue burden on the Colombian economy. PART V: COMPLIANCE WITH ARTICLES OF AGREEiJENT 27. The report of the Committee provided for in Article 3, Section 4 (iii) of the Articles of Agreement of the Bank is attached (No.6). 28. I am satisfied that the proposed loan would comply with the Articles of Pgreement of the Bank. PART VI: RECONIMENDATIONS 29. I recommend that the Bank make a loan to the Corporacion Autonoma Regional del Cauca and Central Hidroelectrica del Rio Anchicaya Limitada with  - 7 - the guarantee of the Republic of Colombia in an amount, in various currencies, equivalent to $25 million for a total 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 the Executive Directors adopt a resolution to that effect in the form attached (No.7). W.ashington, D.C. W.A.B. Iliff, Vice President April 25, 1960 for Eugene R. Black President