Costa Rica - Third Telecommunications and Fourth Power Projects

FILE copy RESTRICTED Report No. PU-77a Th1 report is for ofricial use only by the Bank Group and specifically authorized organizations or persons. It nuy not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF POWER AND TELECOMMUNICATIONS PROJECTS OF THE INSTITUTO COSTARRICENSE DE ELECTRICIDAD (ICE) COSTA RICA January 19, 1972 Public Utilities Projects Department  CURRENCY EQUIVALENTS US$1 = 6.65 Colones (0) 01 - US$0.15 01,000 - US$150 01 million u US$150,376 UNITS AND MEASURES kW = kilowatt MW = Megawatt - 1,000 kW kWh - kilowatt hour GWh = Gigawatt hour = 1 million kWh kV = kilovolt kVA = kilovolt - ampere .VA = Megavolt - ampere = 1,000 kVA m = meter - 3.28 feet km = kilometer - 0.62 mile km2 = square kilometer - 0.39 square mile FISCAL YEAR January 1 to December 31 LIST OF ABBREVIATIONS AND ACRONIYMS USED IN THE REPORT CABEI - Central American Bank for Economic Integration CACM - Central American Common Market CNFL - Compania Nacional de Fuerza y Luz CCHTELCA - Regional Technical Commission on Telecommunications in Central America DEL - Direct Exchange Line GDP - Gross Domestic Product HF - High Frequency ICE - Instituto Costarricense de Electricidad IDB - Inter-American Development Bank ITU - International Telecommunications Union PCM - Pulse Code Modulation (Telephone Carrier System) RADIOGRAFICA - Radiografica Costarricense S.A.,, San Jose SNE - Servicio Nacional de Electricidad STD - Subscriber Trunk Dialing (long distance and interurban) UHF - Ultra High Frequency (radio system) USAID - United States Agency for International Development VHF - Very High Frequency (radio system)  COSTA RICA INSTITUTO COSTARRICENSE DE ELECTRICIDAD APPRAISAL OF POWER AND TELECOMMUNICATIONS PROJECTS - TABLE OF CONTENTS * Page No. SUMMARY AND CONCLUSIONS ...*.......*...................... i - ii 1. INTRODUCTION ...................1 2. THE ECONOMIC SETTING ............... 2 General . ......2 Power and Telecommunications Development 2 3. THE POWER SECTOR ................... 3 Sector Organization 3 Existing Facilities 3 Generation and Sales 4 Sector Program . Tariffs ...........h Suggested Sector Study . 4. THE TELECOMMUNICATIONS SECTOR 5 Sector Organization 5....... ........... . .............. . Existing Facilities ....... ...... *... . 5 Tariffs . .-oo-oo.. . . ....... 6 5. THE BORROWER - ICE ... .7 Corporate Structure. 7 Management Studies 7...... ....7 Delegation of Authority ........... 8 Power: Organization, Management and Staff ...8 Telecommunications: Organization, Management and Staff 8 This report is based on the findings of a mission composed of Messrs. A. Bouhaouala, J. Brown, I.A. Newstead and E. Wessels, which visited Costa Rica in May/June 1971.  Page No. 6. THE PMJER PROJECT . ............... . . ...... . ................. 1 0 1971-75 Expansion Program .. .... ......... ....... ... . .. .. 10 The Project . ............................................... 11 Cost Estimate ............... .......-....00 ............ 11 Procurement ....... ... .................................. 12 Disbursements . ............ ....... 0............................ 12 Project Execution .... .... .. ........... ............ .. .. .. . .... 12 7. JUSTIFICATION OF THE POWER PROJECT ......................... 14 Load Forecast . ...................................... 0......... 14 Least-Cost Solution .. ............ ......................... . 14 Benefits of the Project ........ ...... . .0 .................. 15 Internal Financial Rate of Return ........... ............... 15 8. THE TELECOMMUNICATIONS PROJECT ......... . ............................. . 16 The Program ....................... .. .. . 16 The Project .................. .............................. 16 Cost Estimate ............O-*................................... 17 Contingencies . ................................................ 18 Procurement . ................................................. 18 Ditsbursements ........... .................................... 18 Project Execution . ................ ........ . ............... .19 9. JUSTIFICATION OF THE TELECOMMUNICATIONS PROJECT ............ 20 MIarket Demand .... .............................. ....... 20 Least-Cost Solution ............... .. ........... .. ....... 21 Internal Financial Rate of Return ............. 22 10. FINANCES 23 Summary of ICE's Finances ..... ................... 23 Accounts and Audit .............. .. . * ............................ 23 Present Financial Position ........... ................................ 23 Past Earnings ...................... .. ...... 24 Past Earnings - Power ......... ........ .... ...................... 24 Past Earnings - Telecommunications ....... .................... 25 Financing Plan - Power . .................................... . 25 Financing Plan - Telecommunications ........................ 26 Financing Plan- ICE .............................................. 26 Future Operating Results - Power ........................... 28 Future Operating Results - Telecommunications .............. 28 ICE's Future Financial Position ............................ 29 Security ................. ....................... 30 11. AGREEMENS REACHED AND HCONKENDATIONS ............. O.* ...- 31  ANNEXES 1. Power Project - Installed Generating Capacity as of December 31, 1969 2. Power Project - Rio Macho-Tapanti and Cachi Hydro-Power Developments 3. Power Project - Power Sector Study, Outline Terms of Reference 4. Telecommunications Project - Telephone Exchange Capacity 5. Telecommunications Project - Telecommunications Tariffs 6. ICE - Organization and Management Studies, Outline Terms of Reference 7. Power Project - Proposed Transmission Facilities 8. Power Project - Cost Estimate 9. Power Project - Estimated Schedule of Disbursements 10. Power Project - Interconnected System, Actual and Forecast Energy Sales and Generation 11. Power Project - Interconnected System, Peak Demand and Installed Capacity 12. Power Project - Interconnected System, Capability of the System to Meet Dry Season Energy Requirements 13. Power Project - Interconnected System, Dry Season Energy Requirements and Expected Generation 14. Power Project - Internal Financial Rate of Return 9 15. Telecommunications Project - Investment Program 16. Telecommunications Project - Items for Bank Financing 17. Telecommunications Project - Estimated Schedule of Disbursements 18. Telecommunications Project - Telephone Growth - Demand 19. Telecommunications Project - Internal Financial Rate of Return 20. ICE - Audited Balance Sheets 1966-1970 21. ICE - Audited Income and Expenditure Statements 1966-1970 22. Power Project - Actual and Forecast Income and Expenditure 1969-1978  23. Telecommunications Project - Actual and Forecast Income and Expenditure 1969-1978 24. Power Project - Forecast Sources and Applications of Funds 1971-1978 25. Telecommunications Project - Forecast Sources and Applications of Funds 1971-1978 26. ICE - Consolidated Sources and Applications of Funds 1971-1978 27. ICE - Projected Balance Sheets 1970-1978 28. ICE - Notes on Financial Statements MAPS Power - Interconnected System Telecommunications - Long Distance Network .  COSTA RICA INSTITUTO COSTARRICENSE DE ELECTRICIDAD APPRAISAL OF POWER AND TEIECOMMUNICATIONS PROJECTS SUMMARY AND CONCLUSIONS i. Instituto Costarricense de Electricidad (ICE), a Government- owned entity that operates most of the power and telecommunications facilities in Costa Rica, has requested Bank loans to help finance its next stages of development. Loans of US$6.5 million for power and US$17.5 million for telecommunications are proposed. These would finance nearly all the direct foreign exchange costs together with local costs as indicated in paragraph iv below. ii. To meet the demand of the growing industrial sector, ICE previous- ly obtained three Bank loans totalling US$33.3 million for the development of hydropower projects. Projects financed by the first two loans have been completed but in the third loan, the Rio Macho-Tapanti scheme is seriously behind schedule due to tunnelling difficulties. In order to avoid load shedding during the dry season in 1974 and thereafter, ICE has had to bring forward the installation of its next step of thermal generation capacity and some associated works. These form the basis of the power project, consisting of a gas turbine power station of about 30 NW at San Antonio, a diesel power station of about 3 NW at Limon, power transmission facil- ities, engineering services, and organization and management studies. The project cost is estimated at US$8.3 million. iii. The development of a modern telecommunication system in Costa Rica began in 1965 and has been financed with the aid of two Bank loans totalling US$16 million. The project now proposed for Bank financing is ICE's further development program for 1972-76. It includes the expansion of the telephone network by 25,000 lines, extension of long distance facilities, establishment of telex services, modernization of the telegraph service, and engineering studies. The total project cost is estimated at US$32.2 million. iv. Procurement for both projects would be by international competi- tive bidding, except for purchases of up to US$2.9 million for telecommuni- cations equipment to extend existing installations where direct compatibility is essential. Local preference would be allowed on items from Central American Common Market countries including Costa Rica. Purchases in Costa Rica financed by the Bank loan would not exceed US$0.5 million for power and US$1.5 million for telecommunications. Retroactive financing of up to us$o.6 million will be required to cover costs ICE has had to incur on the power project.  - ii - v. Both power and telecommunications operations are well run within the organizational constraints, but the nature and growth of the two sectors have brought about a need for studies on organization and management to ensure future efficiency. It has been agreed that consult- ants will be engaged to undertake studies of the power sector and ICE's internal organization and management. vi. About 32% of the funds required for power and 53% of those for telecommunications are expected to be generated internally during the project periods. ICE's financial performance has shown a remarkable improvement since the previous loans were made. The financial position is sound and the debt service coverage should improve from 1.6 times in 1971 to 1.9 in 1976. vii. The internal financial rates of return of the power and tele- communications projects are about 9% and 23% respectively. viii. With the assurances indicated in Section 11, the two projects are suitable for Bank loans of US$6.5 million equivalent for power and US$17.5 million equivalent for telecommunications, each for a term of 20 years including a 4-1/2 year grace period for the power loan and a 5-1/2 year grace period for the telecommunications loan.  COSTA RICA INSTITUTO COSTARRICENSE DE ELECTRICIDAD APPRAISAL OF POWER AND TELECOMMUNICATIONS PROJECTS 1. INTRODUCTION 1.01 This report covers the appraisal of power and telecommunications development projects of the Instituto Costarricense de Electricidad (ICE). The power project includes a gas turbine power station of about 30 MW at San Antonio to provide dry season energy for the Interconnected System, a diesel power station of about 3 MW for the port of Limon, power trans- mission facilities, engineering services, and organization and management studies. The telecommunications project covers the expansion of the tele- phone network capacity, extension of service to rural areas, modernization of telegraphs, establishment of a small telex network, and engineering studies. 1.02 The estimated costs are US$8.3 million for the power project and US$32.2 million for the telecommunications project. Together they form 30% of ICE's total program for the years 1972-1976. The proposed Bank loans of US$6.5 million for power and US$17.5 million for telecommunications would finance the foreign exchange costs of the two projects including the costs of possible locally awarded contracts of about US$0.5 million equiv- alent for power and US$1.5 million equivalent for telecommunications. The remaining costs of the projects would be financed from ICE's internal resources and the sale of ICE's bonds in Costa Rica. 1.03 The borrower would be ICE, to which the Bank has made four loans totalling US$49.3 million. The first loan (276-CR for US$8.8 million) was made in 1961 for the first stage of Rio Macho hydroelectric development and the Colima diesel station. The second loan (346-CR for US$22 million) was made in 1963; US$12.5 million financed the first stage of the Cachi hydro- electric station and associated transmission lines, and US$9.5 million financed the establishment of an initial telephone network capacity of 35,000 lines and long distance facilities. All works under the first two loans have been completed. In July 1969, Loan 631-CR for US$12 million was made for the Rio Macho-Tapanti and Cachi second-stage power projects, and Loan 632-CR for US$6.5 million was made for the second-stage expansion of the telecommunications network by 22,500 lines with associated long distance facilities. Construction of these two projects is still under way. Because of delay on the Rio Macho-Tapanti project, it has become necessary to advance by one year the installation of about 30 MW of thermal generating capacity under the proposed new power loan. The second-stage telecommunications expansion targets have been increased to cater for increased demand, and progress is on schedule to the new targets. 1.04 The projects are the logical and most economic next steps in the expansion of Costa Rica's power and telecommunications systems to meet the increasing demand for electricity and telephone service. 1.05 A mission composed of Messrs. A. Bouhaouala, J. Brown, I.A. Newstead and E. Wessels visited Costa Rica in May/June 1971 to appraise the projects. This report is based on the mission's findings.  -2- 2. THE ECONOMIC SETTING General 2.01 Costa Rica, some 51,000 km2 in area and located in the narrow southern part of Central America between Nicaragua and Panama is a moun- tainous country except along the Caribbean and Pacific coasts. The population, now about 1.8 million, has doubled over the past 20 years; however the growth rate declined from 4.0% to 2.8% per annum during the sixties. Two-thirds of the people live in the central highlands in an area of 9,200 km2, where elevations range from 500 to 1.,500 meters and the climate is mild throughout the year, in contrast with the tropical climate of the coastal plains. There are only two seasons - a wet season, normally June through December, and a dry season from January through May. 2.02 Costa Rica achieved remarkable economic growth in the 1960's, especially in the last five years. The GDP in real terms increased annually by 6.8% during the decade and is expected to continue growing at that rate. But because of the rapid population growth, the annual per capita GDP increased by only 3.2% in the 1960's, reaching about US$504 in 1969. Over the past decade the economy has been stable with price increases of about 3% per annu. While the economy is still based on agriculture (24.6% of GDP in 1969), the contribution of the industrial sector to GDP increased from 17.1% in 1960 to 19.6% in 1969. Power and Telecommunications Development 2.03 With a per capita power generation of 506 kWh and total installed capacity of 237 MW, Costa Rica's power system is the most highly developed in Central America including Panama (without the Canal Zone). Nevertheless, further power development and increased reliability are required in order to sustain the growth of the industrial sector. 2.04 The teleconuunications system is making a valuable contribution to the infrastructure for economic growth. It does so by facilitating the flow of business information within San Jose, the country's capital and largest city, and by linking together the capital metropolitan area, the provincial centers of agriculture and industry, and the Pacific and Caribbean ports. The telephone density in Costa Rica is 3.3 telephones per hundred population, compared with an average of 2.8 for the Central American and Caribbean countries.  - 3 - 3. THE POWER SECTOR Sector Organization 3.01 Costa Rica's power supply industry is regulated by the Electric Service Law, enacted in 19h1 and administered by Servicio Nacional de Electricidad (SNE). Subject to the approval of Congress, SNE awards concessions for the generation and distribution of electricity; it also regulates tariffs, subject to ministerial approval, and controls standards of service. 3.02 Although it is a generally accepted view that power utilities are natural monopolies, the Electric Service Law stipulates that they should not be so considered in Costa Rica, and consequently the power market is shared by 57 public utilities and 120 auto-producers (1969 figures). Most of the public utilities are owned either by the Government or municipalities; however, this does not prevent some of them from compet- ing with one another. Some towns have two distribution systems running down the same streets, and customers switch back and forth from one utility to another, depending on the tariffs offered by the competing utilities. 3.03 Instituto Costarricense de Electricidad (ICE), owned by the Government, and Compania Nacional de Fuerza y Luz (CNFL), a subsidiary of ICE, are the two largest power utilities in the country (generation figures are given for ICE and CNFL in paragraph 3.07 below). ICE pur- chased 92.3% of CNFL's stock in 1968, but the two utilities have conti- nued to operate as separate entities. A complete merger could be expect- ed to result in savings on investments, and management and operating expenses as well as economies of scale. Existing Facilities 3.04 At the end of 1969 the total instaled capacity of Costa Rica was 237 MW (180 MW hydro, 45 MW diesel and 12 MW steam), with the public utilities operating 214 MW and the auto-producers the remaining 24 MW. This capacity was installed at 201 power stations, only four of which had a capacity of 20 MW or more (see Annex 1). 3.05 About 92% (195 MW) of the public utilities' capacity is in the central zone, an area served by a power system belonging to 15 public utilities including ICE and CNFL. This system, which is known as the Interconnected System (see Power Map), extends from Turrialba on the eastern slope of the central highlands to Puntarenas on the Pacific coast and the town of Abangares in Guanacaste province. The rest of the country is served by small, isolated diesel and hydro plants with an aggregate capacity of 19 MW. 3.06 At the end of 1970, ICE had an installed capacity of 157 MW, 124 Icn of 138 kV transmission lines, 321 km of 34.5 kV lines and 399 km of primary distribution lines of various voltages. Except for three outlying systems at Limon, Liberia and Santa Cruz, all of ICE's  -4 - facilities are concentrated in the highland region around San Jose and form the major part of the Interconnected System. Annex 1 lists ICE's power stations and Annex 2 describes its most important hydroelectric developments: Rio Macho-Tapanti and Cachi. Generation and Sales 3.07 From 1962 to 1969, total annual generation by the public utili- ties increased at a rate of about 9% per year, from 468 GWh to 846 GWh. In 1969, 94% of the total generation or 798 GWh was generated in the Interconnected System. ICE generated 66% (522 GWh), CNFL 25% (202 GWh) and the small entities 9% (74 GWh) of the total for the Interconnected System. 3.08 In 1970, ICE generated 643 GWh and purchased 3 GWh from other utilities. ICE sold 61% (393 GWh) of its energy to CNFL; 11% (71 GWh) to other utilities; and 22% (143 GWh) to some 23,000 direct customers through its own distribution systems. System losses, which were low because most of the energy was sold in bulk, were 6% (39 GWh). Sector Program 3.09 Probably because of the number and size of the power utilities no national sector program is prepared. ICE is in charge of planning the expansion of the Interconnected System, but the small utilities sometimes make additions to it despite ICE's opposition. Tariffs 3.10 The Electric Service Law states that tariffs shall cover the cost of the service, including a fair compensation for the use of capital. 3.11 The tariffs have some unusual features. The average rate (US