El Salvador - Fourth Power Project

FILE COPY ~ ~RESTRICTED FEE copy Report No. P-324 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE COMISION EJECUTIVA HIDROELECTRICA DEL RIO LEMPA IN THE REPUBLIC OF EL SALVADOR June 7, 1963  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPf;ENT REPORT AND RECONIMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OM A PPOPOSED LOAN TC) THE COMISION EJECUTIVA HIDROELECTRICA DEL RIO LI4PA IN THE REPUBLIC OF EL SALVIDOR 1. I submit the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $6.0 million to the Corqisi6n Ejecutiva Hidroelectrica del Rio Lempa (CEL), an autonomous agen- cy of the Government of El Salvador, to help finance the fcreign exchange cost of its power expansion program for 1963-65. PART I - HISTORICAL 2. CEL was founded in 1945 for the purpose of developing and supply- ing electric nower in El Salvador. The proposed loan would be the fcurth Bank loan to CEL. The first loan in the amount of US $12.5 million was made in 1949 to help finance the construction of the Guayabo hydroelectric plant on the Rio Lempa, with an initial installation of two units of 15 IMW each. The second loan in the amount of $3 million was made in 1959 to finance the plant's fourth unit of the same capacity (the third having been installed, in the meantime, with CEL's own funds). The third loan in the amount of $3.8 million was made in 1960 to help finance the construction of the Guajoyo hydroelectric plant with a caoacity of 15 1MW. This project is now under construction and is scheduled for completion in October 1963. 3. The proposed project constitutes the next stage in CEL's power program, as recommended by CEL's consulting engineers. It would add a fur- ther 43 MtW to the CEL system, thus providing sufficient peaking and gener- ating capacity until about 1968. 4. A Bank mission visited El Salvador in late February 1963 to ap- praise the project, and negotiations for the proposed loan began on May 8, 1963 in Washington. The Government was represented by Mr. Armando Interia- no, Minister Counselor of the Embassy of El Salvador in Wlashington; CEL was represented by Mr. Enrique Lima, its Executive Director. 5. The proposed loan would increase the Bank's lending in El Salva- dor to $41,485,000 equivalent. The Bank has already made the following loans in El Salvador:  2 Year Amount 1/ of Borrower Purpose (equivalent in Loan _ U.S. $ million) 1949 CEL Electric power 12.5 development 1954 Republic of El Salvador Coastal highway project 11,1 1959 Republic of El Salvador Highway construction 5.0 1959 CEL Electric power 3.0 development 1960 CEL Electric power 3.8 development Total (net of cancellations and refundings) 35.2 2/ of which has been repaid 9-6 Total now outstanding 25.6 Amount sold 1.6 of which has been repaid 1.4 0.2 Net amount now held by Bank 25.4 6. In addition to the proposed loan to CEL, the Bank also has under consideration a request for a loan of about $9 million to finance expansion of telecommunication facilities in El Salvador. 7. IDA has extended one development credit to El Salvador, in the amount of $8 million, signed in November 1962, to help finance a highway project. The credit became effective in April 1963 and the project is now under way. PART IT - DESCRIFTION OF THE PROPOSED LOAN 8. The proposed loan would have the following characteristics: Borrower: Comisi6n Ejecutiva Hidroel6ctrica del Rio Lempa, an auton- omous agency of the Government. 1 As of April 30, 1963. 2./ Includes $2.4 million not yet disbursed.  - 3 - Guarantor: Republic of El Salvador. Amount: The equivalent, in various currencies, of $6 million. Pur-ose: To help finance the foreign exchange cost of the addition of a fifth generating unit of about 18 Wil capacity at the Guayabo hydroelectric Dlant; the construction at the port of Acajutla of a new thermal plant of about 25 4W capacity; and the construction of a transmission line of about 36 km, connecting the thermal plant with the CEL transmission network. Amortization: 35 semi-annual installments beginning October 15, 1966 and ending October 15, 1983. Interest Rate: 5-1/2% per annum. CommitmSenChare2: 3/4 of 1% ner annum. Payment Dates: April 15 and October 15. PhRT III -. APPRAISAL OF THE PROPOSED PROJECT Justification of the Project 9. A detailed appraisal of the Project (TO-360 a) is attached (No. 1). 10. El Salvador is by far the most densely populated of the Central American republics, with a population density of over 310 per square mile. Its economy is still predominantly agricultural, coffee being the main crop accounting for more than 47% of total exports in 196'o2 and cotton following with 26%. However, industries have been developing raoidly during recent years, industrial production having grown by about 30% since 1959; in- dustrial consumption of power accounted for about 38% of total power con- sumed in 1961. The country's strong entrepreneurial class, and the recent organization of the Central American Economic Union, give El Salvador good prospects for rapid further industrial growth. 11. The peak demand on the CEL system, which supnlies the bulk of the power consumed in El Salvador, has increased at the average rate of 12% per annum during 1959-62. The normal rate of increase in power consumption during the next ten years is estimated to be at least the same. Further- more there will be a transfer to the CEL system of certain industrial loads of significant magnitude, such as those of an oil refinery, a ferti- lizer plant and port facilities at Acajutla, and a cement plant at Metapan, at the time the thermal plant at Acajutla is completed. The fifth unit at the Guayabo plant would supply peaking capacity and wet season energy; the thermal plant at Acajutla would provide additional peaking capacity and energy during the dry season to firm un the hydroelectric system. The pro- posed additions are the most economic means of meeting the system's growth in demnand. Additional capacity will again be recuired by the beginning of 1968.  - 4 - GEL's Financial Position and Financial Arrangements for the Project 12. From its establishment until 1958 CEL had financially difficult times, due to a variety of reasons. Since that date, however, CEL has con- tinued to show profits, and during 1960-62, it was able to finance from in- ternal cash generation, after meeting all debt service payments, about 24,' of total construction expenditures. During 1963-65 its self-financing would amount to 34% of new construction, and its debt/equity ratio is esti- mated to improve from 65/35 to 58/42. 13. The total cost of the proposed project is estimated at the equiva- lent of about 410 million. The foreign currency component, including in- terest during construction, is about $8 million, of which 16 million would be covered by the p-oposed Bank loan. The balance would be financed from CEL's internal generation of cash. Execution of the Project 14. The organization of CEL is adequate and its management well quali- fied to carry out the project. Two experienced consulting firms have been engaged to design the project and supervise the construction. All contracts for the project will be awarded on the basis of international competitive bidding. PART IV - LEGAL INSTRU4ENITS 15. Drafts of Loan and Guarantee Agreements are attached (No.2 and No. 3). Both follow closely the lines of those for the last loan to CEL. 16. The following provisions of the draft Loan Agreement are of special interest: (i) Section 5.08, supplemented by Section 3.C6 of the Guarantee Agreenent, contains a rate covenant providing that revenues should be sufficient to cover operating expenses and de-bt service and to create a surplus for financing a reasoipable portion of planned expansion. Both the Borrower and t'ie Guarantor stated that on the basis of present estimates, re- turn of 9/% on the fixed assets in operation in the system would create sufficient funds for that purpose. If such return should apy,ear irsufficient, the necessary steps would be taken to adjust elec;ricity rates. Draft let.ters from the Borrower and the Guarantor are attached (Mo. 4 and j\j0* 5). (ii) Section 5.09 contains a limitation on borrowing similar to that in the earlier loan, namely that without the Bank's consent the Borrower may not incur debt unless its revenues, with certain adjustments, would be at least 1.5 times maximum future debt service, including that on the debt to be incurred. 17. The report of the Committee provided for in Article III, Section 4, (iii) of the Articles of Agreement of the Bank is attached (NTo. 6).  - 5 - PART V - THE ECONOIY 18. A report, "The Current Economic Position and Prospects of El Sal- vador" (See i: 62-71) was distributed on April 11, 1962. 19. The data that have since become available for 1962, indicate that economic conditions have imoroved ccnsiderably. The country's exports rose to $136 million, which was just short of the all-time high of 1957, when coffee prices were close to record levels. This sharp increase in exnorts took place despite a $6 million drop in coffee sales, which was more than made up by increases in the export of cotton, shrimp, and other items. Foreign exchange reserves rose to $23 million at the end of 1962, up $10 million from a year earlier. This improvement in the reserve position is due largely to an imDrovement in the capital account, as the rise in exports was matched by a growth in imports. The reduction in capital outflow and a significant caoital inflow reflect the restoration of political stability and the success of the stabilization program. 20. The fiscal Derformance also improved in 1962, as the cash deficit was reduced from 24 million colones ($9.6 million) in 1961 to 11 million colones ($4.4 million). This was the result of a 6 million colones increase in revenues and 5 million colones reduction in expenditures. A number of tax measures for raising additional revenue are under active consideration and are expected to be enacted this year. 21. Industrial production increased by about 20' in 1962, and plans are going forward for further expanding industrial capacity. A number of nrojects are being jointly financed by local and private foreign capital. The favourable trends in the economry are expected to continue in the years ahead. 22. El Salvador's external public debt totalled '$51.3 million at the end of 1962. Peak service payments on this debt are $6.6 million in 1964, or about 5% of 1962 export receipts. The present loan, together with the contemplated telecommunications loan, would raise the service payments above this amount only in 1966; thereafter they will fall well below that amount. The Alliance for Progress loans now being considered for El Salvador are all likely to be made on soft terms and will not appreciably increase debt service in the next decade. In view of the relatively moderate projected debt service burden and the generally favourable economic trends, the serv- icing of the two IBRD loans should be within El Salvador's capacity. Prosnects of Fulfillment of Obli-ations 23. According to present estimates CEL will have sufficient earnings to finance the costs of the project not covered by the proposed loan and to service its obligations, including the proposed loan. Also, El Salvador should be able to provide without difficulty the foreign exchange needed to finance that part of the foreign exchange cost of the project which is not covered by the loan, and to service the proposed loan, in addition to its other external obligations.  - 6 - PART VI - COINIPLIANCE WITH ARTICLES OF AGRErTENT 24. I am satisfied that the proposed loan would comply with the Ar- ticles of Agreement of the Bank. PART VII - RECOISIENDATIIONS 25. I recommend that the Bank make a loan to the Comisi6n Ejecutiva Hidroel6ctrica del Rio Lempa with the guarantee of the Republic of El Sal- vador in an amount in various currencies equivalent to $6.0 million with interest (including commission) at 5-1/2% 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.7). George D. Woods President Washington, D.C. June 7, 1963