Peru - Matucana Power Project

FILE COPY RESTRICTED Report No. P-564 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accurocy 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESAS ELECTRICAS ASOCIADAS FOR A POWER PROJECT WITH THE GUARANTEE OF THE REPUBLIC OF PERU August 25, 1967  REPORT AND RECOM4ENDATION OF THE PRESIDEN4T TO TIE EXEdCUTIVE DIRECTORS ON A PROPOSED LOAN TO &4P223AS ELECTRICAS ASOCIADAS FOR A POWIFR PRtOJECT ,JITH THE GUARANTEE OF TIHE IREPUBLIC OF PERU 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US17c5 million to Empresas Electricas Asociadas (Lima Light and Po-er Company). PART I - HIST1ORICAL 2. Empresas Electricas Asociadas has requested the Bank to help finance the expansion of its power generating facilities and related dis- tribution equipment. The Government of Peru is willing to guarantee the loan. The proposed loan would be the fourth to Enipresas. Previous loans were made in 1960, 1963 and 1966 for a total cf $lig million and were used to finance the expansion of Empresas' power generating capacity and dis- tribution network, 3. Negotiations took place in Washington July 31 through August 11. The Borrower was represented by Messre. N,,anuel Ugarteche, Aldo Bosselli and Francisco Svo2sik. The Government of Peru wJas represented by Dr. Carlos Gibson, Hinister Counsellor (Financial) in Washington. 4. The proposed loan would increase total Bank lending to Peru from $201.4 million to $218.9 million. The status of the previous loans as of July 31, 1967 is as follows: Loan Amount Undisbursed No. Year Borrov:e Purpose US$ millon; 1952-65 Various borrowers including the Republic Various 115,4 of Peru 208 PE 1958 Callao Port Authority Port 6.6 05 334 PE 1963 Peruvian Corporation Railways 13.2 0.4 373 PE 1964 Republic of Peru Port 3.1 0.1 418 PE 1965 Republic of Peru Irrigation 11.0 9.0 425 FE 1965 Republic of Peru Roads 33.0 27.6 446 FE 1966 Republic of Peru Port 9.1 7.1 464 PE 1966 Empresas Electricas Asociadas Power 10.9 5.7 Total (less cancellations) 201.4  -2- Amount Undlsbursed ~~ t5$ million) Total (less cancellation) 20104 of which has been repaid 38.1 Total now outstanding 163.3 Amount sold: 16.8 of wihich has been repaid 11.4 __4 Total now held by Bank 157.9 Total undisbursed 50o4 No IDA credits have been made to Peru. 5. With three exceptions, the loans to Peru are being disbursed sub- stantially on schedule. Considerable difficulties have delayed the Port of Callao expansion; these have finally been overcome and the proJect is expec- ted to be completed in 1968. The San Lorenzo Irrigation Project has also encountered difficulties, caused, among other things, by a shortfall in water supplies and a lack of continuity of management, The Bank is considering a proposal submitted by the Peruvians for reducing the project area. The re- habilitation program of the Peruvian Corporation is nowi almost complete and the loan almost disbursed, but the company is experiencing severe financial difficulties. Discussions are under way with the Borrower and the Gua;rantor in an attempt to secure an improvement in the Corporation's financial positicn. 6. IFC's gross commitments at June 30, 1967 amount to $8.6 million of which 'p5.0 million is held by the Corporation. Currently outstanding investments are in two cement companies, Cemento Andino app;^oximately $2.3 million and Cemento Pacasmayo $291,400; a fertilizer producer, Fertilizantes Sinteticos approximately $1.2 million, and a brick manufacturingf company Luren & Ladrillos $115,000. Presently urnder consideration are projects for a new fertilizer factory and for a chain of four hotels. PART II - DESCRIPTION OF THE PROPOSED LOAN 7. Borrower: Empresas Electricas Asociadas Guarantor: Republic of Peru Amount: $17.5 million Purpose: To help finance the expansion of the power generating facilities of the Borrower, and related distribution equipment.  -3- Terms of Amortization: 20 years including, a grace period of five years, First repayment date November 15, -972, last repa;meat date No-ember 15, 1992. Interest Rate: 6% Commitment Fee: 3/8 of 1% per annum. PART III - THE PROJECT 8. An appraisal report entitled tMatucena Power Project", is attached (TO-596a) 9. Empresas Electricas have to date been the exclusive supplier of power to the Lima metropolitan area which has the greatest concentration of population and industries in Peru. The company's service area has been increased several times, and now extends both north and south along the ccast from Lima and inland into the Sierra. The present capacity of the system is 485 MW. The demand for power in this area has been steadily increasing. Empresas' system demand has grown on the average by 10 percent annually during the past 20 years and at least comparable increases can be expected in the next several years. The Peruvian Government has initiated a large hydroelectric scheme on the Yfantaro river which is scheduled to supply power to the Lima area after 1973. To meet demand until then, a further expansicn of the Empresas' generating facilities is required. 10. Empresas Electricas was incorporated in Peru in 1910. At the end of 1966 it had about $37 million equivalent of common shares and $10 million of 8 percent preferred shares. It is controlled by a Swiss group holding about 32 percent of the stock. Ten percent is held by other investors outside Peru. The remaining 58 percent is held by over 3,000 Peruvian investors. The Electric Industry Law, which was enacted in 1955, allows privately-owned public utilities to adjust power rates so as to earn gross revenues sufficient to cover operating costs and give a return, in the case of large companies such as the Borrower, of up to 11.5 percent on the capital invested by the concessionaire. The Law has been applied effectively and the company's financial position is sound. The company's contribution to its expansion program from internal cash generation is 27.5 percent. This percentage is modest, but results from a relatively high dividend pay-out, which has enabled the company to raise new equity in the market from time to time. In April 1967, the company placed US$6-3 million of its preferred shares. Common share issues totalling over US$9 million equivalent are planned for the next three years. 11. The first two Bank loans helped Empresas to finance the expan- sion of the generating capacity needed to cope with the increase in power demand. The projects financed with the first and second loans (the Huinco hydro plant and the Marcapomacocha diversion) have been completed. The  - 4 - project helped by the third loan - expansion of inpresa.5' distribution network - is on schedule. Empresas now plains to expand further both generating and distr-.buting system capacity, in order to continue to be able to meet market requirements. 12. The project consists of the 120 MW Matucana hydroelectric power station on the Rio Rimac, a 220 KV double circuit steel tovwer transmission line about 80 km long froam the power station to Lima and associated sub- stations, and meters, communications equipment, distribution cables and other items for the expansion of the distribution system. The project is expected to be completed by December 31, 1971. 13, The proposed loan would be used to finance the foreign exchange cost of equipment, consulting services and interest during construction. All goods financed with the loan would be purchased in accordance with the Bank's normal standards of international competitive bidding. Peruvian firms would be permitted to participate in thne bidding and would be allowed a 15 percent preference in the evaluation of bids, but if they were successful, Empresas would use resources other than the Bankc loan to finance purchases from them. Civil works contracts for the prcJect (which would not be financed by the loan) are being awarded after competition among Peruvian contractors. Since local contractors have ample experience in the type of work involved, mainly tunnelling, and a substantial cost advantage, such contracts have not been attractive to foreign firms. 14. The total estimated cost of the project is $50.5 million of which $17.5 million would be provided by the Bank- and the balance generated within the company or obtained from sales of shares and debentures. The proposed loan, together with the $7.5 million that was not yet disbursed at January 1, 1967, of the 1966 loan would finance about 25 percent of Empresas' total investment expenditures in the period 1967-70. PART IV - LEGAL INSTRUMENTS AND AUTI14ORITY 15. The draft Loan Agreement between the Bank and Empresas Electricas Asociadas (Li-ma Light and Power Company), the draft Guarantee Agreement between the Republic of Peru and the Bank, the letter on rates and the Report of the Committee provided for in Article III, Section 4(ii) of the Articles of Agreement are being distributed to the Executive Directors separately. 16. Since the Borrower already has outstanding debentures, including debentures required by previous loan agreements, issued pursuant to an Indenture administered by a trustee, th.e Loan Agreement provides (Sections 4.01, 4.02 and 5.04) that the proposed Loan will be evidenced by additiona] debentures issued under the same Indenture. The Indenture establishes a first floating charge upon all tangible and intangible property of the Borrower and provides that additional debentures may be issued only if net income and net tangible assets tests have been met. The usual form of the Bankts negative pledge has been changed to accommodate it to existing liens permitted under the Indenture (Section 5.05).  17. The Loan Agreement contains no rate covenant because the Bank relies with respect to rates on Peruts Electrical Industry Law, The letter on rates sets forth the arrangements between the Guarantor and the Bank with respect to changes in said Law and Section 6.02(b) of the Loan Agreement provides that any material and adverse change in that Law is an event of default. 18. The public sale by the Borrower of 25 million Swiss franc deben- tures is a condition of effectiveness. This sale is part of a Financing Plan agreed with the Borrower during negotiations. PART V - ECONOMIC 19. Recent economic developments are described in the attached economic memorandum. In spite of the continued growth of production and exports in 1966, Peru has run into serious financial difficulties due essentially to a rapid increase in public expenditures, combined with a steady rise in private consumption and investment. Measures bad been ta"en towards the end of 1Q65 to restrain the grow