Transcript of meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, October 16, 1979 : Argentina - Yacyreta Hydroelectric Project

1 STRICTLY CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Tuesday, October 1 6, 1979 Washington, D. C. The meeting of the Executive Directors of the Bank and IDA convened at 10:30 a.m., in the Board Room, 1818 H Street, Northwest, Mr. Robert S. McNamara, presiding. STRICTLY CONFIDENTIAL 2 C O N T E N T S AGENDA ITEM PAGE STRICTLY CONFIDENTIAL 3 P R O C E E D I N G S We come, then, to the first project proposal, a proposed loan in the amount ofl210 million dollars equivalent to the Argentine Republic for a hydroelectric project. I will ask Mr. Linder to present this to us. MR. LINDER: Mr. Chairman, members of the Board, in the context of the present worldwide concern for increasing the use of renewable energy and decreasing the use of oil, a method for achieving this goal is the pooling of energy sources between countries. A number of examples can be given of projects aiming at this objective which are already built, under construction,  j! 4 STRICTLY CONFIDENTIAL or being studied in South and Central America, such as the electrical interconnection between Honduras and Nicaragua which pools the total generating capacity of both countries to help out in situations of deficit in either one, and the interconnection between Costa Rica and Nicaragua, to be built shortly, which will save oil in Nicaragua by using available secondary hydroelectric energy from Costa Rica. In both cases, the Bank encouraged the countries involved to carry out these interconnections and has provided financial as well as technical assistance to implement these projects. A study currently being carried out by ECLA for the Central American isthmus is examining the benefits of elec- trical interconnection to that region. In South America, binational cooperation to date is mostly on large scale hydroelectric power generation. The hydroelectric power projects of Itaipu under construction, between Brazil and Paraguay, to become the largest single power station in the world, and Salta Grande, nearing completion, between Argentina and Uruguay, demonstrate that the cooperation between two countries makes possible the pooling of renewable energy resources with benefits for the two countries. The hydroelectric power plants of Garabi and STRICTLY CONFIDENTIAL 5 Roncador on the Uruguay River, between Brazil and Argentina, and the Corpus hydroelect~ic plant downstream from Itaipu on the Parana River between Paraguay and Argentina, all currently being studied by the countries involved, are further examples of this type of binational endeavors. The binational Yacyreta Hydroelectric Project, between Argentina and Paraguay, which is under consideration by you today, is another such project. It is a 2,700 megawatt hydroelectric power plant on the Parana River in a region where the river forms the boundary between both countries. The project will provide baseload electric energy for Argentina from 1986 onwards and will benefit Paraguay through the compensation payments made by Argentina for using Paraguay's part of the project's energy production and for the flooding of Paraguayan territory. The project in addition will significantly improve i ~avigation on the Parana River, will open up important 1lrrigation possibilities in both countries and will serve as a I I ·.~atalyst for regional integration by providing improved 1 ransport facilities in the region. i I\ An important component of the project is the l~esettlement of about 33,000 people who will be affected by Ii~he flooding caused by the reservoir, and the relocation of I' I STRICTLY CONFIDENTIAL 6 important related infrastructure works. Both countries recognize the importance of this component and with assistance of both the Bank and IDB, are taking the right steps in pre- paring resettlement/relocation programs so that the people to be resettled will not be adversely affected. In fact, i t is expected that in the majority of cases, their living standards will improve. Adequate precau- tions will be taken so that the project does not cause any adverse environmental impact. This is the first time that the Bank has been involved in a binational project of such magnitude in Latin merica. Our involvement, and that of the Inter-American Development Bank, during the past three years, has contributed i~ important ways to reaching satisfactory decisions on project design and on procurement policies. Thus the two Banks together have already helped to ensure that the project will be carried out economically and efficiently. It is obvious that projects involving more than one national government are subject to particular difficulties of negotiations; the presence of the two multi-lateral banks as served to smooth out differences and bring about agreement. Finally, the Bank and IDB financing, although small 11 Jin relation to the cost of the project, have been catalytic in mobilizing a large amount of export credits on very I !favorable terms from major equipment manufacturing countries  7 STRICTLY CONFIDENTIAL and a large participation of the international commercial banking community, thereby enabling Yacyreta to have a viable and attractive financing plan. Thank you. MR. McNAMARA: Thank you. May I have your questions and comments? Mr. Mayobre? MR. MAYOBRE: Thank you, Mr. Chairman. I would like to commend the staff and the management for the Bank's participation in this project. The Yacyreta Project presents a number of characteristics that makes i t an important step in the development of the countries involved. The magnitude of the project is itself eloquent. The involvement of the governments in financing it justify the importance that is attributed to the utilization of the i i hydroe lee tr ica 1 po ten tia 1 of the region. II This is especially important in a time in which 1 Jmuch is said about energy po 1 ic ies and energy plans and in I lwhich the issue of energy is often narrowed down to the problems of oil. Moreover, the binational character.'of the project points in the direction of a collaboration among developing rlcountries which has been insufficiently explored. I STRICTLY CONFIDENTIAL 8 The wide participation of foreign countries in the financing of the project via export credits and the involvement both of the Bank and IDB shows that significant projects can be carried out when there is a real spirit of cooperation. In this sense, Yacyreta is a very good example of how cofinancing can be fruitful. It is also an outstanding example of how the Bank can be useful to member countries while playing a relatively minor role in the financing of the project. Indeed, the Bank is playing an important role in one of the most important development projects of Latin America in the last years, without committing a large amount of its financial resources. In this case, more than the resources committeo by the ? which amounted to less than 6 percent of the total project cost, the contribution of the Bank lies in helping to bring together a considerable number of partici- pants and in providing its technical expertise in areas in which it has a vast experience. Projects like this one, which have a real impact on the economic prospects of a country--in this case, more than one country--could help to maintain the reputation of the Bank as an institution which provides assistance to developing /countries in key areas according to the specific needs and 11 ,, I, ij I  'I STRICTLY CONFIDENTIAL 9 possibilities of each one of them. Thank you. MR. McNAMARA: Thank you, sir. Mr. Hanfland? MR. HANFLAND: Thank you, Mr. Chairman. I fully support this project, which is an important contribution to the development of this region and for the energy supply in Argentina and Uruguay. I would like, however, to mention one point. This is the resettlement of the 33,000 people. I notice that the Bank has been actively involved in the resettlement planning, and I have no doubt that everything has been done so far to take care of the affected people and to protect their legal rights. And I feel reassured on this point by the staff presentations I h. ij t J.S morning. ii :1 I would, however, urge the Bank to monitor this I resettlement program as it advances very closely, for the Bank has a certain responsibility here, and this program has to be 1 carried through satisfactorily for the Bank. I thin];., Mr. Chairman, that this is a sensitive point and we should follow up on this. MR. McNAMARA: I fully agree with you on that. I !think it is very clear that there is a heavy responsibility 1! 11 11  i I I STRICTLY CONFIDENTIAL 10 there. The Board has indicated its interest in resettlement before, and we recognize that, and we will surely monitor it. Mr. Bahamonde? I MR. BAHAMONDE: Thank you, Mr. Chairman. I ! This chair supports this project, and I would like to! I also associate myself with Mr. Mayobre's comments. I ! I Our only concern relates to some of what we believe I I I are important aspects of the relocation and resettlement progra~ envisaged for this project. My authorities are very much aware of the initiatives undertaken by the Bank on Yacyreta in order to provide for the resettlement and compensation of the 33,000 people who will be directly affected by this project and we welcome this. I However, varied iriform~tion'±s given in the project I, 1/documen ts on the degree of participation of the affected 11 I/population. We would like therefore to know if these people I have been consulted on this matter and what has been their reaction and deg~ee of participation in the evaluation and design of the resettlement program. Our second concern refers to the question of alternative sources of employment for some of these people, which is one of the aspects of the resettlement plan that !seems at first sight rather weak. According to Annex A of the STRICTLY CONFIDENTIAL 11 I appraisal report, approximately 222 brickyards will have to cease operations because the flooding of the reservoir will cover the clay soil on the banks of the Parana River used by these enterprises to make bricks and tiles. My authorities would like to know specifically how many jobs would be affected by the closing of this local industry and what alternative source of employment is foreseen for the people currently employed by these brickyards. Page 54, Para. i.19 of the Appraisal Report, points out that the city of Carmen del Parana, on the ? side, will suffer a substantial reduction in its employment level because of this project, unless, quote, "special measures are adopted", unquote. The same observation is repeated in Paragraph 121, this time referring to the loss of 570 commercial establishments in some rural areas of Paraguay. We would appreciate, therefore, information on these special measures and programs, as well as reassurance that these are considered an integral part of the relocation and resettlement plan. Finally, Mr. Chairman, this chair strongly supports the special Bank implementation action outlined on page 36 of the President's report, namely, that Bank missions, at two or three-month intervals, will be undertaken to ensure that a  12 STRICTLY CONFIDENTIAL satisfactory resettlement program will be implemented. Judging from our own experience, we believe this program to be an important and integral aspect of this project and welcome, kherefore, the Bank's intention to ensure a successful implementation. Thank you. MR. McNAMARA: Thank you. Mr. Linder, first, to what extent have the individual to be resettled been consulted, and what has been their reactio? MR. LINDER: Mr. Chairman, I would like to call upon Ms. de Regt to answer these questions. MR. McNAMARA: Surely. MS. de REGT: The binational entity Yacyreta now has established a relocation unit and is in the process, through its team of social workers at the moment, to establish contact with each individual family and consult them on their preferences as to type of house and location and where they want to be resettled. w~~ I / v( MR. McNAMARA: ~ - h a v e been the reactions so far? MS. de REGT: The reaction so far has been positive, I in the sense that the people appreciate getting the informationl I on the project and that their concerns are being answered by i the government.  11 i STRICTLY CONFIDENTIAL 13 MR. McNAMARA: What will be the alternative sources of employment, particularly for these brickyard displaced individuals? MS. de REGT: The project itself will provide for 7,000 to 8,000 jobs, and Yacyreta is planning training programs to make sure that the local population will get preferences in hiring and will get as many of these newly- created jobs as possible. The situation of the brickmakers is a bit special. Paraguay has just concluded a study in which i t shows that i t is technically and economically feasible to continue excavating the clay and continue the brickmaking industry. Argentina is studying this particular study to see whether i t is also applicable to their situation. MR. McNAMARA: Thank you very much. I. Are there other questions? Yes, Mrs. Parent? MRS. PARENT: Thank you, Mr. President. We fully support this project. I want to just speak about a technical point. I have noticed that the conditions of the Bank loan are a little bit unusual. While the amount is limited to slightly less than 10 percent of the local cost, the grace period is long, and term of credit is STRICTLY CONFIDENTIAL 14 short. Could we have some explanation about that choice which makes the Bank financing less attractive than other public sources of financing? MR. McNAMARA: Yes. Mr. Lerdau, would you comment? MR. LERDAU: Yes, Mr. Chairman. Two points; one refers to the grace period, and the other one to the maturity. IAs far as the maturity is concerned, we are following the /policy put by the Board with respect to maturity for countries in Argentina's income category. The grace period that would correspond to this policy normally would actually be three years, but given the long construction period of the project, i t seemed impossible to apply a grace period of only three years. It would have involved repaying the loan long before not only the loan was I disbursed, but also before any revenues were generated from I the project. i So, as has been done in some other cases, the grace period was stretched while the maturity period was kept at the normal level. MR. McNAMARA: Normal to the Argentine, or countries in the Argentine category, under the present policy of the Bank 1 I of shortening maturities, because of capital limitations, and i t is that policy which we would expect to discuss changes in  15 STRICTLY CONFIDENTIAL with the Board if and when the capital structure is changed. Are there other questions with respect to this? Mr. Looijen? MR. LOOIJEN: Mr. Chairman, I too support the project which we have been waiting for already quite a long time, I think. It is a good example, as has been said by previous speakers, of regional cooperation. There is a lucky sharing of the burden by the IDB, and also, i t is an energy program, which think at the moment is very important. I only have a few remarks to make on Paragraph 71, hich deals with the procurement question. I have been ondering a bit about the last sentence of that paragraph, hich says, "All other contracts for goods and services with a alue above $500,000 will be awarded on the basis of local ompetitive bidding ... ," which gives the impression that verything under $500,000 won't be bid for at all, or will be one by shopping--probably that is a kind of misunderstanding. But I have more a question of principle as to the rocedure which is being followed whereby Yacyreta would require idders to finance all major construction equipment with a unit rice above $100,000 for a civil works contract with export redit, because that might very well limit the possibility or bidding under this contract, especially for smaller STRICTLY CONFIDENTIAL 16 countries, and even developing countries. What is asked, as a matter of fact is--it is not so in this case, but everyone is free to bid ~or the contract in this case, but there is an extra condition that you put on the table the amount of credit for the construction equipment. And that may be all right for large countries which have the possibility for export credit insurance and export credits as such, but it may be much more difficult for those countries who do not have those~facilities. And this kind of system, if we are going to follow it further in the future, might exclude a number of countries from competing for a World Bank contract, and certainly, the eveloping countries, which do not have the possibility to ive these kinds of credit facilities. So perhaps in this case, it will not play a role. I l~o not know how the preselection is being--and which countries- ~rom which countries the companies come which have been i treselected and whether those countries are prepared to provide 'fhe necessary facilities for the future contractors--for robable future contractors--to get the export credit facilities ! o perhaps in this case, it does not really play a role anymore. ut I think i t is a dangerous way to follow, and we should look t this procedure more carefully, I think. MR. McNAMARA: Thank you. STRICTLY CONFIDENTIAL 17 Mr. Linder, first, what is to be done with the contracts under $500,000? MR. LINDER: Those refer to purely local contracts of smaller--roads and ? and stuff like that-- MR. McNAMARA: I think Mr. Looijen is right; we could have rephrased it. MR. LINDER: It does not refer anything to contracts that the Bank finances. MR. McNAMARA: Secondly, with respect to the require- ment that the bidders finance major construction equipment above $100,000 with export credits, will that not penalize deve ing country bidders or bidders from small countries with inadequate export credit facilities? MR. LINDER: We studied this matter very carefully, and we reached the conclusion that by giving a limit of $100,000 per unit price for each type of heavy construction I equipment on the one hand, and on the other hand, taking into [l account that 15 countries have offered export credit, that I basically those 15 countries are the only ones capable of producing this kind of machinery. For construction equipment below unit cost of $100,000, the bidders will be free to select or not to select export credit to their advantage. So we do not feel, in this particular case, at least, that there is any problem.  18 STRICTLY CONFIDENTIAL MR. McNAMARA: Mr. van der Tak, what are your thoughts with respect to this case and the application of similar provisions in other cases? MR. VAN DER TAK: Mr. Chairman, this particular case, as Mr. Linder says, was looked at very carefully, whether it might potentially exclude certain suppliers that might participate in the bidding for this equipment. But apparently, there are no countries that produce the heavy equipment, large items of equipment, that are involved here, except countries also willing to come up with supplieri' credit. So in this case, there is really no argument at all. For the smaller equipment, as Mr, Linder says, the option is open to either bid with suppliers' credits or without suppliers' credits. More generally, I think Mr. Looijen has a point, that I II if we did this all across the board, then there might well be I cases where, in fact, certain countries that could have participated in the bidding are excluded if we insisted on this arrangement. But I don't think we have done that, as far as my memory goes. MR. McNAMARA: Yes. And not only I don't think we have done it, but I don't think we will or should do it. I I think Mr. Looijen is absolutely right on that -- and not only I! from the point of view of the supplying country or the firm in II I STRICTLY CONFIDENTIAL 19 the supplying country, but also from the point of view of the country in which the project is located, because we want to extend the competition as much as possible and get the maximum impact of competitiveness on price. Mr. Looijen? MR. LOOIJEN: Just one more remark--I thank you for this assurance as a matter of fact--but one more remark as to Mr. van der Tak's comment. He seems to assume that the country where the I contract comes from will also be the country which provides the equipment. It may very well be that the country buys the I . equipment somewhere else. Why should, say, a Dutch contractor II always limit its equipment to Dutch equipment? It may buy 'I I, it from Germany, or probably, i t will buy i t somewhere else. II MR. McNAMARA: Mr. van der Tak? 1· MR. VAN DER TAK: There may be some misunderstanding of what the arrangement is, or Mil Lobijen ma~ have mi~unde~~ ~toad it. I think that wh~t·is ab stake here is not the I nationality of the firm, of the contracting firm, but in fact, the countries that supply the equipment. Since there are only a certain number of countries that supply this equipment, i t is their suppliers' credit that is at stake. The actual construction firm might be from quite a different STRICTLY CONFIDENTIAL 20 nationality. Mr. Looijen will correct me if I am wrong in the arrangement. MR. McNAMARA: Are there other questions? MR. LOOIJEN: I understood that it was the contractor which bids for the civil works contract, so they are moving in all that. And that firm has to provide also the equipment, or pays for the equipment--or is that not the case? Maybe I misunderstood, but that is what I read from this paragraph. MR. LINDER: Maybe it is not clearly expressed, but the idea is that the prequalified contractors are at liberty to buy this heavy construction equipment from any of the 15 countries that have offered export credits. We even feel that not all the '; 15 countries that have offered export credit are in a condition to su~ply this equipment. Just to give you an example, if an Italian contractor wants to buy American equipment, that is perfectly acceptable. He can buy American, German, Italian, Japanese. He does not have to buy Italian equipment. I hope that clarifies it. MR. McNAMARA: Are there other questions or comments? (No response.) MR. McNAMARA: If not, we will proceed with it, and turn, then--I beg your pardon. Ms. Bradley? STRICTLY CONFIDENTIAL 21 MS. BRADLEY: Thank you. I have been instructed by my government to abstain on this project, and I would like to be so recorded. MR. McNAMARA: We will do so.