Colombia - CVC - Chidral Power Expansion Program Project

RESTRICTED FILE copy Report No. P-319 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 The report may not be published nor may it be quoted as representing their views. INTERNATIONAIE BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CORPORACION AUTONOMA REGIONAL DEL CAUCA AND CENTRAL HIDROELECTRICA DEL RIO ANCHICAYA LIMITADA COLOMBIA May 20, 1963  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMIT REPORT AND RECO-PT M-EDATIONS OF TH3 PRESIDENT TO TiH EXECUTIVE DIRECTORS ON A PROPOSRD LOAN TO CORPORAC ION AUTONOMA REGIONAL DEL CAUCA AND CENTRAL HIDROELECTRICA DTL RIO ANCHICAYA LIMITADA COLOIIBIA 1. I submit the following report and recommendations on a proposed loan of an amount in various currencies equivalent to 48.8 million to Corporacion Autonoma Regional del Cauca (CVC) and Central Hidroelectrica del Rio Anchicaya Limitada (CHIDRAL) to assist in financing their electric power expansion program. PART I: HISTORICAL 2. The Bank has already made four loans (for a total of 135.8 million) for power development in the Cauca Valley. The most recent loan, $25 mil- lion (Loan 255 CO), wade in May 1960 to CVC-CHIDRAL, was to assist in financing additions of 93 mw to their generating facilities (a new hydro- electric plant, Calina, including the first two 30 mw units of the four units for which the plant was designed, and one 33 mw addition to the Yumbo steam plant) and related transmission and distribution facilities. The addition at Yumbo was completed on schedule in the middle of 1962 and the first two units of Calima are expected to be completed in the second half of 1964. 3. In early 1962, CVC-CHIDBAL applied for a supplementary loan to finance the third and fourth generating units at Calima and certain other items in their power program. The project was reviewed in the field in March 1962 and, in view of the urgent need to place orders for the additional units, the Bank agreed in July, (R 62-54) to amend the description of the project in the May 1960 loan to permit down payments on these units to be made from that loan. Negotiations for the proposed loan began on April 3, 1963. The Government was represented by Dr. Ignacio Mesa, Minister Counselor of the Colombian Embassy. The Borrowers were represented by Dr. Bernardo Garces Cordoba, Executive Director of CVC. 4. The proposed loan would be the Bankts twenty-first in Colombia. It would increase the Bank's lending from 4270.1 million to b278.9 million net of cancellation. The status of previous Bank loans is as follows: As of April 30, 1963 ($ million) Total loans net of cancellationl/ 270.1 Of which has been repaid 55.3 Total now outstanding 214.8 Amount sold 12.0 Of which has been repaid 8.0 4.0 Net amount held by Bank 210.8 _i Including $87.9 million not yet disbursed.  5. Other loans for projects in Colombia which are likely to be pre- sented to the Executive Directors soon are: A loan of $30 million for the rehabilitation program of the National Railroads, a loan of 330 million to assist in financing the expansion program of the Paz del Rio steel mill, and a loan of $5 million for the expansion of the Cospique thermoelectric plant near Cartagena. We are also studying projects for the expansion of the hydro generating capacity of the CVC and Medellin power systems and the national telecommunications program. PART II: DESCRIPTION OF THE PROPOSED LOAN 6. The main features of the proposed loan are as follows: Borrowers: Corporacion Autonoma Regional del Cauca (CVC), an autonomous regional organization responsible for the economic development of the Cauca Valley, and Central Hidroelectrica del Rio Anchicaya Limitada (CHIDRAL), a corporation of which the majority shareholder is CVC and the minority shareholders are the Empresas Municipales of Cali and the Municipality of Cali. The loan would be made jointly to the two borrowers. Guarantor: The Republic of Colombia. Amount: The equivalent in various currencies of '$P.8 million. Purpose: To assist in financing the completion of the Calima I hyd-o station, transmission and distri- bution facilities, coal mining equipment and eng,ineering and power program planning studies. Interest Rate: 5 2 per annum. Commitment Charge: 3/4 of 1% per annum. Term and amortization: 20 years, including 3 years of grace. Semi- annual installments from February 15, 1966 to February 15, 1983. PART III: LEGAL INSTRUMENTS AND LEGAL AUTHORITY 7. A draft Loan Agreement between CVC-CHIDRAL and the Bank (No. 1) and a draft Guarantee Agreement between the Republic of Colombia and the Bank (No. 2) are attached. 8. The draft Guarantee Agreement is in the usual form.  - 3 - The draft Loan Agreement follows closely the previous Loan Agree- ment with CVC-CHIDRAL (255 CO). Provisions of special interest are: (a) Section 5.13 which limits the incurrence of additional debt by CHIDRAL; (b) Section 5.14 which contains a rate covenant which is amplified in a letter (No. 3); (c) Section 5.15 which obliges CVC to make arrangements satis- factory to the Bank to provide CHIDRAL with funds re- quired to carry out the project if funds available to CHIDRAL become inadequate; in a letter (No. 4) 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 would be satisfactory to the Bank. 10. Execution of the Loan Agreement has been authorized by the Boards of Directors of CVC and of CHIDRAL. In April 1962, the Colombian Congress enacted a law authorizing the Government to incur or guarantee new external debts up to $350 million for economic development and related purposes. Authorization to gu.arantee the proposed loan would be covered by this law. 11. The report of the Committee provided for in Article III, Section h (iii) of the Articles of Agreement of the Bank is attached (No. 5). PART IN: APPRAISAL OF THE PROPOSED LOAN 12. A detailed appraisal of the project is attached (No. 6). Justification of the Project 13. The CVC-CThDRAL system at present serves the Cauca Valley and adjacent areas from Cali to Cartago, a region with a rapidly-growing popu- lation (at present about 1.7 million of which 600,000 in Cali). The main activities in the area are manufacturing industry, centered in Cali, and commercial agriculture, both of which have expanded rapidly in the past several years. Indications are that this -rowth will continue. Between 1955 and 1962, peak load in Cali has increased at an average rate of 16% per annum. In recent years, system sales have also increased through progressive extension of the area served. 14. When the May 1960 loan was made, it was expected that only two of the four generating units for which the Calima I plant was designed would be needed by 196h, and that the third and fourth unit would not be needed until 1966-67. Consequently the amount of the loan was intended to finance only two units. However, power demand has grown faster than was expected so that all four units will need to be in operation by 1965. Down payments on all four units have been made from the May 1960 loan and the proposed loan would finance the completion of Calima I with four units. Installation of all four units at Calima I will bring the total CVC-CHmIDRAL  generating capacity to 255 mw. The cost of the additional kwo units, P2 million, is low in comparison with alternative solutions. 15. By providing the external financing required for completion of the Calima I plant, the proposed loan would set free in the liay 1960 loan $2.4 million originally allocated to the cost of Calima I (2 units) and not yet withdrawn. This amount would be used to capitalize interest during construction under that loan. At the time the May 1960 loan was made, it appeared that CVC-CHIDRAL could pay interest during construction with their own resources, including part of the nroceeds of a land tax. Since then, power demand has reouired that the construction program be advanced, while the land tax proceeds have fallen short of the projected levels. In the circumstances and in view of the steps CVC-CHIDRAL are taking to improve their financial position, financing this amount of interest during construction under the May 1960 loan is justified. 16. The project further includes: (a) Extension of the CVC-CHIDRAL transmission system to the Pacific port of Buenaventura to serve the system which the Colombian Government has recently purchased from American and Foreign Power Company and transferred to CVC. (b) Improvements in the Cali distribution system; for this purpose, $1 million of the loan would be relent to the Cali Municipal Tnterprise under subsidiary agreement similar to the one concluded in connection lith the May 1)60 loan. (G) New machinery to operate the tan coal mines CHIDRAL found it necessary to acquire and operate in order to ensure coal supplies for its Yumbo thermal station; (d) Detailed en.-ineering for the Calima II hydroelectric station dotn-strcam from Calima I, preliminary studies for the Salvaj-Ina hydroelectric project and general planning for the power system. The Calima II (200-240 mw) and Salvajina (about 270 mw) projects are expected to be the next steps in the expansion of the CVC system. About half of the allocation for studies and engineering (?12.1 million) wvould cover local currency expenditures. CVC makes extensive use of competent local engineers, and it is in the interest of developing countries as well as the Bank to encourage such use. (The 350 million loan to Empresa de Energia ZTlectrica de Bogota also covered local currency expenditures for engineering). 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 Minister of Development, the Governors of the Departamento del Valle and the Depar-  - v - tamento del Cauca, two directors nominated by the President of the Republic, and two directors representing various business, landowner and engineering organizations. CVC is managed 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 Hidroelectrica del Rio Anchicaya Limitada (CHIDRAL) was incorporated in 1950. In 1958 CVC acquired the controlling interest (6o%) in CHIDRAL which had Previously been held by an agency of the Colom- bian Government. Equity contrioutions from CVC to CHIDRAL are slowly in- creasing CVC participation which has now reached about 65%. CVC appoints three members of the Board of Directors of CHIDRAL; two other members re- present the Departamento del Valle and the Municipality of Cali. The operations of CHIDRAL are directed by a IManager appointed by the Board of Directors. 19. Both CVC and CHIDRAL are engaged in power activities: CVC is responsible for planning, engineering, construction, relations with the small distribution systems in the Cauca Valley, and direct operation of certain small systems; CHIDRAL is responsible for operation of large power plants and bulk selling to Empresas lQJunicipales de Cali and to CVC. During the loan negotiations, CVC agreed to seek ways and means of reorganizing the power activities of CVC and CHIDRAL, within the framework of the CVC unified development scheme, into a single operation under one organization and management which would be technically and financially responsible for all planninr of power installations, as i:ell as directly responsible for all planning of power development projects. It was agreed that such a reorgani- zation would require some tirme and CVC will be in consultation with the Bank as to the progress being imade. Arrangements for Financirng 20. The total cost of the project is estimated at the equivalent of $11.2 million of wnich $8.8 million would be covered by the proposed loan. (Total cost of construction of the Calima I project is $26.9 million of which $18.5 million would be covered under the May 1960 loan and the pro- posed loan). The local currency costs of the project (exclusive of $1 mil- lion for local costs of engineering services to be covered by the proposed loan) amount to $2.4 million equivalent and would be met from CVC-CHIDRAL's own resources. 21. CHIDRAL has noticied the Empresas Municipales de Cali (its princi- pal customer) of its intention to increase rates by 31% in August 1963 and has formally applied to the Superintendencia de Regulacion Economica for such an increase. Since its creation in 1960 the Superintendencia has promptly authorized rate increases requested by power entities and we ex- pect prompt favorable action on CHIDRAL's request. The rate increase is necessary to compensate for the cost increases associated with the recent devaluation, and to place CVC-CHIDRAL in a better position to finance part of the capital cost of the rapidly-expanding system. In connection with the proposed loan, CVC-CHIDRAL agree that they will maintain power rates so as to be able to finance with their own cash resources at least 10% of  investment in 1963-65, 20? in 1966-1)968 and 30% thereafter. In order to comply with this requirement, another rate increase wJould be probably necessary in 1966. On this basis, the rate of return on CHIDRAL's invest- ment would range between 12% and 15% in 1963-1970. Procurement 22. The procedure followed by CVC-CHIDRAL in procuring equipment has been in accordance with sound utility practice. The four units of Calima I have been procured through international competitive bidding. Other major pieces of equipment for the project will also be procured on the basis of international competitive bidding. Economic Situation 23. As indicated in Paragraph 5 of this memorandum, this is but the first of four loans which we expect soon to make to Colombia. A new economic report is being prepared and should be ready for distribution to the 7xecutive Directors before the end of May. In view of the size and character of this loan, and the importance to CVC-CHIDRAL of prompt action on our part, I propose that we act on this loan, although you will not have had an opportunity to study the new economic report, and defer a review of Colombia's economic position to the meeting in which we consider the pro- posed loan of $30 million for the Colombian Railroads. 24. This loan is for one of a Croup of high priority projects in the two-year program discussed at the meeting of the Consultative Group of Governments and lending agencies held under Bank auspices in January 1963. Sxternal financing of over $)h;O0 million over the next two years for the projects in the nrogram would still leave Colombia with a debt service ratio below 12% of foreign exchange earnings. Prospects of Fulfillment of Obligations 25. 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. 26. The market prospects for the power to be produced by the project, the additional subscriptions of CVC to the share capital of CHIDRAL, to- gether with the rate and other financial covenants contained in the Loan Agreement, 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. 27. The service of the loan, together with Colombia's other foreign exchange obligations, should not impose an undue burden on the Colombian economy.  - 7- PART V: CO-1IPTTIALC` ITH AR-TICLES OF AGRTiEaNT 28. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI: RBCO`NIE1.!DATIONS 29. I recommend that the Bank make a loan to the Corporacion Autonoma Regional del Cauca (CVC) and Central Hlidroelectrica del Rio Anchicaya Limi- tada (CHIDRAL) with the muarantee of the Republic of Colombia in an amount, in various currencies, equivalent to $8.8 million, for a total term of 20 years, with interest (including commission) at 5$p>' 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). As noted in Paragraph 15 above, we propose to reallocate $2.4 million of Loan 255 CO to finance interest during construction under that loan. George D. Woods President Washington, D.C. May 20, 1963