Colombia - Nare Hydroelectric Project

RESTRICTED FILE COPY Report No. P-362 Fri'LE COPY 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 The report may not be published nor may it be quoted as representing their views. INTIERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS, OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESAS PUBLICAS DE MEDELLIN COLOMBIA January 28, 1964  vIRTERNATIOHAL BAN4K FOR RECONSTRUCTION AND DEVELOPIENT REPORT AND RECOM)NIDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRSCTORS ON A PROPOSED LOAN TO E2PRESAS PUBLICAS DE MEDELLIN COLOMBIA 1. I submit the following report and recommendations on a pro- posed loan of an amount in various currencies equivalent to $15 millinn to Empresas Publicas de Medellin (EPM) to finance the foreign exchange cost of the first stage of the Nare hydroelectric projecto PART I: HISTORICAL 2. The Bank has made two loans totalling $34 million for hydw.- electric power development in the iedellin area. The first loan of $12 million (225 CO) made in May 1959 helped to finance the instalJation of 96 mw of new generating capacity on the Ouadalupe River plus related , facilities. A total of 50 mw; was installed in the second half of 1962, and the last 16 mw will be installed in mid-1964. 3. The second loan of $22 million (282 CO) made in May 1961 helped to finance the installation of an additional 138 mw of generating capa- city on the Guadalupe River plus related facilities. All four units are expected to be installed by the end of 1965. 4e The next step of EPM's power program is the first stage of the Ware River development. This project has been studied since early 1961. The formal loan request was made in March 1963 and the project was re- viewed in the field in June 1963. Formal negotiations for a loan began in Washington on December 11, 1963. The Colombian Government was repre- sented by Dr. Luis Fernando Echavarria, Minister Counselor of the Colombian Embassy and the Borrower by Dr. Alejandro Uribe Escobar, General Manager; Dr. Hernan Puerta Perez, Board Iiember; and Mr. John Arango, Financial Director of EPM. 5. The proposed loan would be the Bank's 25th in Colombia. It would increase the total of Bank loans to Colombia from $343.9 million to $388.9 million net of cancellations. The status of previous Bank loans may be briefly summarized as follows:  -2- As of December 31, 1963 ($ million) Loans (net of cancellations) prior to 1960 130e68 Since January 1, 1960: Jan0 60 - 246 - Empresa de Energia Electrica de Bogota 17060 May 6o - 255 - CVC and CHITRAL 25e00 Sept.60 - 267 - Ferrocarriles Nacionales de Colombia 5 .4O May 61 - 282 - Empresas Publicas de Medellin 22.00 Aug. 61 - 295 - Government (Roads) 19.50 May 62 - 313 - Empresa de Energia Electrica de Bogota 50,00 June 63 - 339 - CVC and CHIDRAI, 8.80 343 - Ferrocarriles Nacionales de Colombia 30.00 345 - Acerias Paz del Rio, S.A. 30.00 July 63 - 3h7 - Electrificadora de Bolivar, S.A. 5.00 Total loans (net of cancellations) 343.90 of which has been repaid 61.30 Total outstanding 282.60 Amount sold 13.7 of which has been repaid 8.9 4.80 Net amount held by Bank 277,885/ I/ Including $132.1 million undisbursed of which about $1U0 million relate to loans made since 1960 for which disbursements are about on schedule. The remaining $32 million relate principally to the following three loans on which there have been delays of more than a few months : Loan 225 CO (Roads) primarily because of poor organization of the Ministry of Public Works; Loan 282 CO (Empresas Publicas de Mledellin), due mainly to unex- pected difficulties encountered during construction; and Loan 255 CO (CVC & CHIDRAL), due in part to a long strike against the main contractor.  6. IDA has made one credit of $19.5 million to Colombia for the National Highway Program jointly with a Bank loan (295 CO) for the same project. As in the case of the Bank loan for highways, disbursements on the credit have been slow ($6.3 million, as of December 31, 1963). 7. A Bank Mission has recently been in Colombia to update bir economic report and review the status of Colombia's investment programn Although the report of the Plission has not yet been completed, its major findings are the basis for the economic conclusions set forth below (para. 19 - 27). No other projects are likely to be ready for con- sideration before the findings of the Milssion have been presented to the Executive Directors. PART II: DESCRIPTION OF THE PROPOSED LOAN 8. The main features of the proposed loan are as follows: Borrower: Empresas Publicas de M4edellin (EPM), an Xatonomous agency with four independent departments providing power, water, telephone and sewerage services to the Nledellin area. Guarantor: Republic of Colombia Amount: The equivalent in various currencies of $15 million. Purpose: To finance the foreign exchange cost of the first stage of the Nare Hydroelectric Power Project. Interest Rate: 51 per annum. Commitment Charge: 3/4 of 1% per annum. Term and Amortization: 35 years, including 5 years of grace. Semi-annual installments from April 15, 1969 to April 15, 1999. PART III: APPRAISAL OF THE PROPOSED LOAN 9. A detailed appraisal of the project is attached (No. 1). Project Description 10. The Ware I project comprises the civil works of a hydroelec- tric plant designed for four 66 mw units and the installation of the first two units and related transmission and distribution facilities. The third and fourth units are not part of the project and would be in- stalled later as needed. The site can be further developed to provide for the installation of an additional four or five 66 mw units when such an expansion is justified.  -a - Justification of the Project 11. The main part of EPM's service area is the city of Medellin which is one of the fast growing industrial centers in Colombia, with an annual population growth of 6.2% in recent years. Population growth and industrial development are expected to continue at hiigh rates, and will raise the demand for EPM's power. Additional increases in demand are also likely to come from the progressive extension of the area served by EPM's distribution network and from the interconnection of that network with those of the other two main power companies in Colombia. The fare I project is needed to assure that the growing demand can be satisfied. 12. The proposed project is the best of four alternative hydro- electric developments which were investigated. The proposed project was also compared with alternatives substituting hydroelectric capacity par- tially or totally by steam capacity. These studies showed that the in- cremental annual return on the additional investment needed for the Nare project, as compared with the next best steam alternative, is about 12%. With a return of this order of magnitude, the Nare project is unques- tionably the best which could be selected at the present time to satisfy the needs of the EPM service area. 13. Bank loans of about $145 million have helped finance power pro- jects in Bogota, Cali and Medellin, the three largest cities with the three main power systems in Colombia. In the past the systems have ex- paiided individually, with local power resources being used for local markets. However, in view of the size to which the three systems have grown by now, it has become imperative to study the advantages of inter- connection between them. This study is advanced enough by now to indi- cate that the Nare I project is justified whether the interconnection is realized or not, and that it would be well suited to meet the needs of the proposed interconnected system which is expected to be realized within the next four years. Borrower 14. The EPM is an autonomous enterprise established in 1955 by the city of Medellin. Its Board of Directors consists of the Mayor of Nledellin, Chairman, two members selected by and from the City Council, and four mem- bers appointed by the lMayor from names suggested by the Central Bank and, various private organizations. EPM has four departments: electric power, water, telephone and sewage. The enterprise has a record of good manage- ment. All of EPM's departments are profitable. The water department of EPM has received a loan from IDB for financing its program and the sewage department is expecting a loan from the USAID. As stipulated in the exis- ting Loan Agreements and in the proposed one (Section 6.02) revenues or assets of the Power Department shall not be used to meet obligations of any other department.  - 5 Financing Arrangements 15, The rate of return on assets in operation in the Power Depart- ment is in the neighborhood of 20% (except in years when new big invest- ments are put into service). Power rates have been raised three times since 1958, the last being an increase of about 70% in April 1963. Des- pite these increases EPM is presently experiencing a cash shortage which is likely to last for the next two years. It stems primarily from EPH's large investment needs and from the fact that a sizeable portion of the April 1963 rate increase was nullified by the rapid price rise in Colombia followsing the devaluation of the peso in late 1962. EPM expects to be able to make another rate increase of 25% in 1965; with such increase EPM is likely to be financing more than 40% of its investment expendi- tures during 196h-68 from cash generated internally. To help meet the present temporary cash shortage, EPM has ob- tained a credit of Ps.6 million from USAID and a line of credit of Ps.20 million from Corporacion Financiera Nacional (CFN) of Nedellin. It is expected that the line of credit from CFN will not be used if negotia- tions now under way between EPM and USAID are successfully completed next year for an additional credit of Ps.15 million. Procurement 17. EP14, with the assistance of its consultant, is awarding con- tracts for equipment and civil engineering works on the basis of inter- national competitive bidding. A $4 million contract for initial civil works has already been placed with an American-Canadian contractor. In- ternational competitive bidding will be the basis for awarding all other important contracts. Economic Situation 184 Colombiats economic situation was last reviewed in the report "Current Economic Position and Prospects of Colombia", (WH-126a) which was distributed on June 18, 1963. The report paid special attention to the credit, fiscal and foreign exchange measures which the Government took in late 1962 in order to lay the financial basis for its develop- ment program. 12. The Colombian economy continued to expand in 1963; gross pro- duct increased by 4U last year and 5% per annum in 1961 and 1962. The increase was especially marked in manufacturing production but there was some slowdonm in agricultural production. The Valencia Government, in office since August 1962, has maintained a favorable climate for private investment. Investment was encouraged through the operations of the Private Investment Fund. Increasing capital expenditures are being undertaken by petroleum companies.  - 6- 2 z In the public sector the Government established overall finan- cial balance in 1963. Through a substantial increase in revenues -- about 45% in current terms or 20-25t in real terms -- and by severely restricting investment expenditures, the National Government was able to avoid Central Bank support of the budget; in the previous two years the Central Bank financing of the budget amounted to more than 900 mil- lion pesos. Public enterprises were permitted to follow flexible price and tariff policies and were, on the whole, in a relatively strong posi- tion to carry out their own investment plans. 21. The Colombian balance of payments continues to be under pressure. Receipts from exports other than coffee have not increased as rapidly as had been expected in the development plan. At the same time, demand for imports has been strong as a result of rising incomes and a relatively high rate of investment. The foreign exchange problem has been aggravated by an outflow of private capital. The balance of payments deficit has been financed mainly by drawingscn the IM' and US loans in support of the development plan. Gross foreign exchange reserves of the Central Bank were about $106 million at the end of 1963. 22. The effectiveness of the November 1962 exchange rate adjust- ment in restraining imports was largely offset by price advances in the course of 1963. The Government is continuing to restrict imports withiin - the limits of available foreign exchange resources through direct controls, giving top priority to raw materials and intermediate products and lower priority to capital goods. 23. This year the Government intends to maintain the balance in public finances which it achieved in 1963. Through strict tax adminis- tration public revenue is likely to grow apace with the increase in money income. Some addition to revenue will result from new taxes in- troduced under special authority in late 1963. Public investment financed by the National Government will continue to be restricted, particularly in the social sector. The Government has thus far been successful in avoiding another round of wage increases, but whether it i1ll be suecess- ful in stabilizing domestic prices will largely depend on a reduction in the pace of private credit expansion which has been rather large in recent months. Export earnings are expected to increase in 196h, partly as a result of the recent strengthening of coffee prices; foreign ex- change resources will also be strengthened by rising disbursements of ex- ternal credits. However, there will be a continued need to maintain rather strict direct controls to keep import demand within available re- sources. 2Lb By concentrating expenditures on projects of high development priority, the Government has been providing a strong foundation for a further growth of the Colombian economy. Growth prospects are enhanced by a favorable resource base, a relatively high level of domestic savings and a favorable private investment climate. With the rapid growth of manufacturing industry and large-scale commercial agriculture, Colombia  - 7 - is becoming more diversified and should be able to increase gradually its exports. Prospects for continued growth are favorable, although export growth is likely to lag behind overall economic growth. 25. Since the Bank convened the first meeting of a Consultative Group in January 1963, Colombia has received about $160 million in ex- ternal credits for high priority projects. The Government is restricting external borrowing to high priority projects within its development program. Such projects are estimated to require about $180 million per annum in new external credits during 1964 and 1965. 26. Colombia's external debt is estimated at about $700 million, of which $137 million is scheduled to be repaid in 1964 and 1965 (parti- cularly privately placed and Export-Import Bank credits). [See tables- 1 and 2 attached;7 Total external debt service amounts to $100 million, or about 16% of estimated export earnings in 1964. Service on existing debt declines rapidly after 1965, fialing to $46 million, or 5% of export earnings in 1969 when the first amortization payment on the proposed loan falls due. However, in view of the relatively large external credit re- quirements of Colombiats development program, it is likely that for some years to come external debt service will not decline but remain at the present rather high level. On the basis of the favorable outlook for growth and its sound record of overall financial and external credit manage- ment, Colombia continues to be creditworthy for additional external credits, including the proposed loan. In view of the relatively sluggish export outlook it is desirable that part of the new external credits be extended on very long terms. PART IV: LEGAL INSTRUIENTS AND LEGAL AUTHORITY 27. A draft Loan Agreement between the Bank and EPM (No. 2) and a draft Guarantee Agreement between the Republic of Colombia and the Bank (No. 3) are attached. 28. The draft Guarantee Agreement is in the usual form. 29. The draft Loan Agreement follows closely the previous Loan Agreement with EPM. Provisions of special interest are: (a) Covenants F e.g. Sections 5.07(c); 5.10; 5.11; and 6.02_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; (b) Section 5.11 containing a rate covenant which is anplified in a letter (No. 4).  -8- 30. 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 V: COMPLIANCE WITH ARTICLES OF AGRBEEMENT 31. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Banke PART VI: RECOTIMENDATIONS 32. I recommend that the Bank make a loan to Empresas Publicas de M4edellin, with the guarantee of the Republic of Colombia, in an amount in various currencies, equivalent to $45 million, for a total term of thirty-five years, with interest (including commission) at 52-% per an- num, 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. 6). 'With regard to the period of amortization7 the attached Appraisal Report states that the project is suitable for a term of 35 years; such an extended term is also rendered desirable by the economic position of the country, in- cluding in particular the heavy burden of external debt and the prospec- tive need for large external borrowing, George D, Woods President Washington; D. C. January 28 1964  Table 1: COLOMBIA - EXTERNAL PUBLIC DEBT OUTSTA7TMING INCLUDING UNDISBUiSED AS OF JUIE 30, 1963 WITH MAJOR REPORTED ADDITIONS JULY 1 - DECEMBER 31, 1963 Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) Debt outstanding June 30, 1963 Major reported additions Loans with July 1 - Item Net of Including terms of December 31, undisbursed undisbursed i-5 years /1 1963 TOTAL EXTERNAL PUBLIC DEBT 486,552 715,253 56,932 30,000 Publicly-issued bonds 43,190 43,190 - Privately-placed debt /2 78,834 114,304 56,932 _ IBRD loans 176,185 281,201 - 5,000 IDA credits 4,085 19-500 - IDB loans 2,905 13,080 - 25,000 U.S. Government loans 181 453 243,978 - _ Export-Import Bank TTTNS 112,526 - Agency for Inter- national Develop- ment 69,809 131,450 - /1 Including undisbursed. Consists of those debts reported by Colombia as having term of 1-5 years from date of contract. /2 In addition information has been received that suppliers' credits were approved during 1963 to the value of $14.55 million. Statistics Division IERD-Economic Staff January 8, 1964  Table 2: COLO1;BIA - ESTIMATED CONTRACTUAL SERVICE PAYMENTS ON EXTERNAL PUBLIC DEBT OUTSTANDING INCLUDING UNDISRURSED AS OF JUNE 30, 1963 WITH MIAJOR UEPORTED ADDITIONS JULY 1 - DFC1FCMER 31, 1963 /i Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) Total debt outstanding Total Payments during year Total Service payments by Category_of debt Year plus un- Publicly Privately uS disbursed Amorti- In- issued placed P3RTD IDA Govt IDB January 1 zation terest Total bonds debt loans Credits loans loans 1963 /2 715,215 82,468 24,095 106o,563 3,898 51,649 17,008 44 33,818 146 1964 - 698,949 75,982 23,762 99,744 3,598 41,293 1x6656 101 37,004 792 1965 621,991 61,053 23,141 84,194 3,898 23,930 19,895 146 34,950 1,345 1966 560,025 4,403 21,902 66,305 3,893 12,349 24,191 16 23,268 2,453 1967 514,785 39,452 20,495 59,9,7 3,898 9,689 25,337 146 16,463 4,414 1968 474,563 35,629 18,789 54,88 3,898 6,738 27,092 146 11,807 4,737 1969 438,237 28,318 17,263 45,581 3,,89 2,674 28,535 146 5,742 4,586 1970 409,297 28,233 15,987 44,220 4,986 432 285369 146 5,853 4,434 1971 380,557 24,694 14,739 39,433 1,898 258 26,949 244 5,807 4,277 1972 355,443 24,336 13,603 37,939 2,183 250 25,605 340 5,595 3,966 1973 330,723 27,144 12,422 39,566 1,632 242 25,435 339 8,221 3,724 1974 303,222 27,902 11,207 39,109 1,632 183 25,269 337 5,101 3,57 1975 274,994 28,639 9,927 38,566 1,632 56 24,915 336 8,177 3,450 1976 246,060 28,396 8,612 37,008 1,632 23,,987 334 8,039 3,016 1977 217,402 25,459 7,145 32,604 1,632 21,281 333 6,465 2,893 /1 Includes service on all debts shown in Table 1 prepared January 8, 1964 except publicly-issued bonds with $38,000 outstanding at June 30, 1963 /2 Figure shown as outstanding is for June 30, 1963; payments are full year 1963. Statistics Divi1sion IBED - Economic Staff January 8, 1964