Colombia - Second Guadalupe Hydroelectric Project

R E S T R I C T E D FILE COPY R e p o r t N o. P-Z4< This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEN1 REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESAS PUBLICAS DE MEDELLIN IN THE REPUBLIC OF COLOMBIA May 3, 1961  INTERNATIONAL BAN4K FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOIMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A FROPOSED LOAN TO ElYFRESAS PUBLICAS DE MEDELLIN COLOMBIA 1. I submit the following report and recommendations on a proposed loan, of an amount in various currencies equivalent to $22 million, to Empresas Publicas de Medellin, Colombia (EPM) to finance the foreign exchange cost of the second stage of the Guadalupe hydroelectric project. PART I - HISTORICAL 2. In January 1959 the Bank made a loan to EPM of $12 million to finance the foreign exchange cost of 98 Y,W hydroelectric installations on the Guadalupe river and related transmission and distribution facili- ties. This was the first stage of a program extending through 1968 for developing the hydroelectric potential of the Guadalupe and Nare rivers near lledellin. 3. Engineering studies completed in the spring of 1960 indicated that EPM could increase generating capacity at the Guadalupe site by 138 NW and that this would be the quickest and most economic way of providing additional power to the Medellin area. Subsequently, EPMI applied for a loan to finance the foreign exchange cost of this project. 4. A Bank mission reviewed the project during November and December 1960. Formal negotiations for a loan began in Washington on March 29, 1961. The Colombian Government was represented by Dr. Carlos Sanz de Santamaria, Colombian Ambassador, and Dr. Ignacio Mesa-Salazar, Minister Counsellor of the Colombian Embassy, and the Borrower by lIr. Luis Echavarria, General Manager, and Mr. Javier Mesa, Technical Manager of Empresas. 5. The proposed loan would increase the Bank's lending in Colombia from WM78.6 million to $200.6 million net of cancellations. The Bank has already made the following loans to Colombia:  -2- Amount of Loan net of Year Purpose Cancellations 1949 Agricultural Machinery Project $ 4,925,4b1 195n Anchicaya Hydroelectric Project 3,530,000 1950 La Insula Hydroelectric Project 2,600,000 1951 Highway Project 16,500,000 1951 Lebrija Hydroelectric Project 2,400,000 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 4,600,000 1959 Guadalupe Hydroelectric Project 12,000,000 1960) Bogota Power Proj-.^.t 17,600,000 1960 Yumbo III - Calima Power Project 25,000,000 1960 Atlantic Railroad Equipment Project 5,1400,OCO Total (net of cancellations) $178,605,4h1 of which has been repaid 42,9c55,441 Total now outstanding $136,550,000 A Amount sold $9,584,800 of which has been repaid 7,135,800 2, 49,000 Net amount now held by Bank $134,101,000 /1 Includes $55.5 million not yet disbursed as of March 31, 1961. 6. At present the Bank is considering additional projects in the fields of transportation, power and industry. Loans or Development Credits for one or more of these projects may be made by the Bank or IDA within the next six months. PART II - DESCRIPTION OF THE PROPOSED LOAN 7. The proposed loan would have the following characteristics: Borrower: Empresas Publicas de Medellin, an autonomous agency whose four constituent departments provide power, water, telephone and sewerage services in the Medellin area.  - 3 - Guarantor: Republic of Colombia. Amount: The equivalent, in various currencies, of $22 million. Purpose: To finance (i) the foreign exchange cost of the second stage of the Guadalupe hydroelectric power project, including the addition of three 40 MW generating units at the Guadalupe III power plant, the second 18 S'W generating unit at the Troneras power plant, construction of the Miraflores dam and storage reservoir, and related transmission and distribu- tion facilities; and (ii) supplementary foreign exchange expenditures for the first stage of the Guadalupe project (Loan 225-co). Amortization: 40 semi-annual installments from March 1, 1966. Interes't 'rate: 5-3/4% per annum Commitment Charge: 3/4 of 1 per cent per annum. Payment Dates: March 1 and September 1. PART III - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 8. A draft Loan Agreement between the Bank and EPM (No. 1) and a draft Guarantee Agreement between the Republic of Colombia and the Bank (No. 2) are attached. 9. The Guarantee Agreement is in the usual form. 10. The following covenants on, and letters supplementing, the Loan Agreement are of special interest: (a) Covenants /e.g. Sections 5.07(c); 5.10; and 6.02(a)7 designed to protect the Power Department against possible claims arising from debts incurred by other Departments of the Empresa, and to assure that the operations and accounts of each Department are separately maintained. Section 5.09(b) specifies that EPM's Departments (other than the Power Department) will not incur long-term indebtedness unless their revenues are sufficient to cover operating expenses and debt service. These covenants follow closely those of Loan 225-Co.  (b) Supplementing the rate covenant in Section 5.11, EPM in a letter (No. 3): (i) affirms that at present power rates are at a level which will enable it to finance from cash generated internally about 40% of the funds needed for new investment in power during the construction period 1961-65; and (ii) agrees that rates should be maintained at a level which will permit EPM to finance this percentage of investient from cash generated internally but that after 1965 the matter will be reviewed from time to time and the percentage may be varied in the light of existing circumstances by agreement between EPM and the Bank. (c) Supplementing Seetion 5,07, EPM undertakes in a letter (No. 4) to consult the Bank before EPM's Board of Directors introduces any modification in its statutes, and to inform the Bank of proposed amendments in national and municipal legislation and decrees affecting the statutes or the status and operations of EPM. 11. Execution of the Loan Agreement has been authorized by EPMPs Board of Directors. The Government of the Republic of Colombia is authorized to guarantee the proposed loan under existing legislation. 12. The report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank is attached (No. 5). PART IV - APPRAISAL OF THE PROPOSED LOAN Justification of the Project 13. An appraisal of the project (TO 272b) is attached (No. 6). 14. M4edellin is the center of a rapidly expanding manufacturing indus- try (particularly textiles and metalworking). In the past two decades the population of the metropolitan area serviced by EPM (now 8h3,OOO) has increased at an average rate of more than 6% per annum. The market area will soon be enlarged by EPM interconnecting with and selling power to the Electrificadora de Antioquia, a power company serving the Department of Antioquia. 15. For years the expansion of manufacturing in the region has been hindered by a shortage of power and at present residential power is being rationed. Power shortages are expected to continue until mid-1962 when installation of the second 40 YMW generating unit financed by Loan 225-CO is scheduled to be completed. Market studies indicate that the new  generating facilities to be financed by the proposed loan will be needed as soon as their construction can be completed and that EPM must further expand its facilities before 1968. 16. Because the project adds 138 MW of hydro generating capacity to facilities already under construction, the cost of civil works is rela- tively small. This factor, combined with an unusually favorable site located but a short distance from Medellin, makes the project an excep- tionally efficient means of providing this amount of additional capacity. The cost per installed kw is about the same as that of an alternative thermal plant. Borrower 17. The Empresas Publicas de Medellin is an autonomous enterprise established in 1955 by the City of Medellin. Policy is controlled by the Board of Directors, which consists of the Mayor of Medellin, Chairman, two members selected by and from the City Council, and four members appointed by the Mayor from names suggested by the Central Bank and various private organizations, 18. EPM has four departments: electric power, water, telephones, and sewage. The enterprise has a record of good management. Since the previous Bank loan was made, the Power Department's technical staff and organization have been strengthened. EPM is applying for a loan of about $6 million from the Inter-American Development Bank to help finance the expansion program of the Water Department. Financing Arrangements 19. Power rates were increased by 32% in 1958 and by 33% in 1960. It is estimated that with rates at present levels the Power Department will be able not only to cover operating and other expenses but also to pro- vide from cash generated internally approximately 40% of its total investment expenditures during the period of construction 1961-65. During this 5-year period, the return on net fixed assets in operation is estimated to average about 10%. Of the total cost of the project amounting to Pesos 207.4 million ($29.6 million), the foreign exchange costs of Pesos 154 million would be covered by the proposed loan, and the domestic currency costs of Pesos 53.4 million by internal cash generation. Procurement 20. EPM, with the assistance of its consultants, will award contracts for equipment and civil engineering works on the basis of international competitive bidding. Economic Situation 21. The economic situation of Colombia, as described in the report "Current Economic Position and Prospects of Colombia" (R 61-11 which was distributed on February 1, 1961), is on the whole satisfactory. For several years now the authorities have adhered  - 6 - to policies under wnich Colombia has been able to repay a substantial part of the medium-term external indebtedness outstanding at the end of 1957, and to control inflationary pressures while sustaining a satis- factory rate of economic growth. The tight foreign exchange situation, caused by lower coffee export earnings and the heavy external debt repay- ment burden, is nevertheless acting as a restraining factor upon the pace of economic growth. This situation is expected to prevail for some years to come and requires of the authorities special care in managing the country's fiscal and monetary affairs and policies designed to strengthen the balance of payments position. 22. Pressures for a relaxation of credit restrictions have tended to increase as the stabilization program advanced and recently the Govern- ment took steps to permit some expansion of credit to the private sector. However, the Colombian authorities can be expected to maintain control over the situation and to prevent undue expansion. Conditions in the private sector, as well as the Governmentts investment plans, augur well for continuation of Co.oilbia's favorable rate of economic growth, which is being helped by long-term external credits for high priority projects. 23. At the end of 1959 the total external debt of Colombia amounted to $OL04 million. During 1960 Colombia repaid $54 million of external deb-., mostly medium-term, and contracted $48 million in new long-term loans from the Bank. In September the Eximbank authorized $45 million and the Development Loan Fund $25 million in credits to Colombia. We understand that these credits are to finance construction of secondary and feeder roads and "social" projects, but their specific terms and uses have not yet been negotiated. 24. Service on existing external debt (excluding the U.S. credit au- thorizations) is about 12% of projected current exchange earnings in 1961. This percentage drops to slightly over 10% by 1962, and to 4% in 1966 when full amortization of the proposed loan would start. However, Colombia will need to borrow substantial amounts in the years immediately ahead in order to carry out high priority projects needed to provide a basis for continuation of a satisfactory rate of economic growth. Even if such loans are predominantly long-term and borrowing is only for high priority projects, the level of debt service will continue to be high in relation to foreign exchange earnings. Prospects of Fulfillment of Obligations 25. The project has been planned and is being supervised by experi- enced Colombian and foreign consultants, and should be efficiently executed. The sound financial position of EPM4, its achievements to date and the commitments made in the loan documents give reason to believe that it will be able to provide funds to cover the local currency cost of the project and to purchase the foreign exchange needed to service the proposed loan. Colombia should, without undue strain, be able to make available the foreign exchange required to meet the service on the proposed loan, in addition to its other obligations.  - 7 - PART V - COMPLIANCE WITH ARTICLES OF AGREEMENT 26. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECONNENDATIONS 27. I recommend that the Bank make a loan to Empresas Publicas de Medellin, with the guarantee of the Republic of Colombia, in an amount in various currencies equivalent to $22 million for a total term of twenty- five years with interest (including commission) at 5-3/4% per annum and on such other terms as are specified in the attached draft Loan and Guar- antee Agreements, and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 7). Washington, D.C. W.A.B. Iliff, Vice President May 3, 1961 for Eugene R. Black President