Guatemala - Jurun - Marinala Hydroelectric Project

RESTRICTED Report No. P-523 FIL E Ctun,P I 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN FOR A POWER PROJECT TO THE INSTITUTO NACIONAL DE ELECTRIFICACION IN GUATEMALA January 12, 1967  I17TEINATIONAL BANIK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE INSTITUTO NACIONAL DE ELECTRIFICACION, GUATEAdLA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$15.0 million to the Instituto Nacional de Electrificacion (INDE). PART I - HISTORICAL 2. The Bank has had only one lending operation in Guatemala in the form of a $18.2 million loan, made in 1955, for highway construction and maintenance. Since that time, lending has been blocked for more than 11 years as a result of the failure of successive Guatemalan governments to take steps towards the settlement of a dispute regarding three out- standing sterling bond issues, even after the Guatemalan courts had ruled in favor of the bondholders. 3. In early March 1965, a request for the financing of the power project was presented to the Bank by the military Government then in office. The project was appraised in May-June 1965 on the understanding that although the Bank was willing to proceed with steps preliminary to a resumption of Bank lending, it would stop short of signing a loan agreement until the debt issue was resolved satisfactorily. In Plarch 1966, the outlook for a final settlement appeared reasonably good and the Bank invited negotiators to come to hshington on the condition that the Government would first recognize the debt, in accordance with the findings of the Guatemalan courts. In late March, the Bank was informed that the Government could not do this, and the Government withdrew its loan request. 4. On July 1, 1966, a new civilian Government took office as a result of the elections for both the Presidency and the Congress which had taken place in early lMarch 1966. Shortly afterwards, the Government decided to recognize by an "acuerdo gubernativo" the validity of the outstanding balance of the sterling debt. The Bank of Guatemala was instructed to act as the Governmentfs fiscal agent for the implementation of the debt settlement. Subsequently, final arrangements for the debt settlement were worked out in Europe between representatives of the Bank of Guatemala and of the bondholders and various European banks. 5. At the time the new Government took steps to settle the sterling debt it re-submitted the request for the financing of the proposed power project. The project was reappraised and the information on it updated in August 1966. Negotiations commenced in Washington on November 14, 1966. INDE was represented by Mr. Rolando Castillo Contoux, General Manager and lMlr. Ramon Lopez Rivera, Technical Adviser. Representing the Government of Guatemala as Guarantor were Dr. Alberto Fuentes Mohr, Minister of Finance and Public Credit and Mr. Gert Rosenthal, Adviser to the Finance Minister. 6. As will be seen from Paragraph 108 of the Appraisal Report attached, certain conditions remain to be satisfied before the Bank would be prepared to sign the Loan Agreement and Guarantee Agreement. However, in view of the  special circumstances in this case, I have agreed with the Guatemalan Govern- ment to seek your approval of the loan documents at this time and to defer signing the loan documents until the necessary conditions are fulfilled, it being understood that the interest rate on the loan would be the Bankts standard rate prevailing at that time. 7. The proposed loan to INDE of $15 million would bring the Bankts total lending to Guatemala to $33.2 million, The following is a summary statement of the only Bank loan to Guatemala as of December 31, 1966. Year Borrower Purpose US$ Million 1955 Republic of Guatemala Roads 18.2 of which has been repaid 11.0 Total now outstanding 7.2 Amount sold 2.2 of which has been repaid 2.0 0.2 Total now held by Bank (fully disbursed) 7.0 PART II - DESCRIPTION OF THE PROPOSED LOAN 8. BORROr)ER: Instituto Nacional de Electrifi- cacion (IIDE). GUARANTOR: Republic of Guatemala. AMOUNT: The equivalent in various currencies of US$15.0 million. PURPOSE: Construction of the Jurun-Marinala Hydroelectric Scheme of 60 MW capacity; installation of a 15 MW gas turbine generator and a 5 MW diesel generating plant; construction of associated transmission lines; management and engineering services. AMORTIZATION: 25 years, including a grace period of four years; principal repayments semi-annually from July 1, 1971 through July 1, 1992. INT=E-ST RATE: Standard rate prevailing at time of signing. COIU TTENT CHARGE: 3/8 of 1 percent per annum.  - 3 - PART III - THR PROJECT 9. An appraisal report entitled "Guatemala - The Instituto Nacional de Electrificacion - The Jurun-Marinala Hydroelectric Scheme, Associated Transmission Lines, and Other Generating Facilities" (No.TO-527A) on the proposed project is attached. 1Ot The power industry in Guatemala dates back to 1896 when electricity was first supplied to the City of Guatemala. In 1922 a 50-year concession was granted to Empresa Electrica de Guatemala (EEG), a subsidiary of the American and Foreign Power Company. EEG, with an installed capacity of about 65 MW', is at present the main supplier of power to the most populated Central Region. However, the development of all future electric power generating plants has now been entrusted by law to INDE. EEG will, however, remain the principal distributor of power generated by INDE in the Central Region. The project which the proposed loan would help finance would increase INDEts present generating capacity from about 25 Mw to about 105 Wi,,,T. ill INDE, which would be responsible for the execution of the project, is an autonomous Government agency created in 1959 for the purpose of developing Guatemalats electric power resources. Its chief executive is the General Manager. He attends all Board meetings and carries out his responsibilities in accordance with policies determined by the Board. INDEts Board consists of eight directors, all professional men, appointed by the Chief of Government through the Minister of Communications and Public W4orks. With the assistance of consultants, which it has agreed to retain, INDE's present organization should be able to execute the project satisfactorily. 12. The project proposed for Bank financing consists of (i) the cons- truction of the 60 MW Jurun-IMarinala hydroelectric station and a 138 kv transmission line, about 50 kilometers in length, to transmit power generated at Escuintla and Jurun-Marinala to Guatemala City; (ii) the installation of a second 15 MW gas turbine generator at Escuintla and a 5 MW diesel gener- ating plant at Puerto Matias de Galvez and (iii) consultantst services. 13. The proposed loan of $15.0 million would cover the foreign exchange costs of the project, the total cost of which is estimated at $23.5 million, including interest during construction. INDEts total requirements of funds during the 4 years required for the construction of the project would be about $50.8 million. INDE would provide about $8.3 million from its own resources, the Government would contribute about $7.3 million, EEG, through its water rights agreement with INDE, would provide about $6.0 million and the balance of about $14.2 million representing the foreign exchange costs of INDEts second stage power development program, the feasibility of which is still to be established, would be the subject of an additional external loan. 1h. The project ranks high in priority in the countryts economic develop- ment plans. Power requirements in the Central Region which will be met by the project, have increased at the rate of about 14 percent between 1960 and 1964. About 40 percent of the increased demand was accounted for by  - 4 - residential consumption, and about one-third by industrial users. For the period 196h-1972, a load growth of 12 percent annually is forecast. The project is an important part of the program to meet this growth in power requirements in the most populated area of the country. 15. Bids for the main project items were received at the end of July, 1966 and the majority of contracts are expected to be awarded in early 1967. International competitive bidding procedures were followed for all these contracts. 16. By the time the proposed project is completed in 1970, INDE's present net fixed assets in operation would have trebled. With the help of Government contributions to its equity and increasing revenues from its expanding operations, INDE should be able to finance its expansion program and earn a reasonable rate of return. INDE is expected to earn a rate of return on its average net fixed assets in operation of 9.1 percent in 1967 rising to 9.5 percent in 1970 when the proposed project should be coming into operation and to 10.1 percent in 1971. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 17. The draft Loan Agreement between the Bank and INDE, the draft Guarantee Agreement between the Republic of Guatemala and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, are being distributed to the Executive Directors separately. These draft agreements are in the usual form for similar projects. 18. These agreements would be signed only after the conditions set forth in paragraph 108 of the Appraisal Report attached hereto have been fulfilled. PART V - THE ECONOMY 19. The most recent economic report on Guatemala (WSH-1h8, dated April 29, 1965), which was distributed to the Executive Directors on May 4, 1965, concluded that Guatemala's economic performance had improved since 1962, that the authorities had made some efforts to strengthen the Government's fiscal position and that the country was in a position to borrow substantial amounts from abroad to finance its investment programs. Economic developments in 1965 and 1966 substantially confirmed these findings. The attached economic memorandum concludes that in view of Guatemala's good long-term growth potential and of the additional tax measures put into effect by the new Government at the end of 1966, Guate- mala can be considered creditworthy for the $80 million of new external financing which would be required during the next two years or so to support the presently envisaged public investment program.  - 5 - PART VI - COI4PLIANCE WITH TIHE ARTICLES OF AGREEHIENT 20, I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMEUDATION 21. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to Instituto Nacional de Electrificacion in an amount equivalent to US$15,000,000 to be guaranteed by Republic of Guatemala RESOLVED: THIAT a loan is hereby authorized to be made to Instituto NTacional de Electrificacion to be guaranteed by Republic of Guatemala, in an amount in various currencies equivalent to fifteen million United States dollars (U.S. $15,000,000), to mature on and prior to July 1, 1992, to bear interest at the rate generally applicable to new Bank loans of tlhe same maturity at the time the agreement providing for the loan is signed, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Power Project) between the Bank and Instituto Nacional de Electrificacion, and the form of Guarantee Agreement (Power Project) between Republic of Guatemala and the Bank, which have been presented to this meeting. George D. Woods President Attachments Washington, D.C. January 12, 1967