Nicaragua - Thermal Power Project (supplement)

FILE~~~~~ Co R E K I C T E U FILE COPJ! Report No. P 120 This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SUPPLEMENTARY LOAN TO EMPRESA NACIONAL DE LUZ Y FUERZA OF NICARAGUA November 6, 1956  INTERNr'ATIOl'!AL BANK FOR RjZCOWSTRUCTION AND DEVELOPMENT REPORT AND R7C3TnR0JNDA'TICNS OF THE ?RESIDENT TO THE EXECUTIVE DIRECTORS 01\1 A PROPOSED SUPPIMENT'RY LOAN TO EMPRESA N,CT OWA L DE LUZ Y FUERZA CF NICARAGUA 1. I submit the folloxiing report and recomiendations on a proposed supplementary loan of `1,600,000 to Eapresa Nacional de Luz y Fuerza of Managua, Nicaragua (sometimes hereinafter referred to as "Empresal) to provide the additional foreign exchange now known to be needed for the project for which Loan 121 NI was made. PART I - HISTORICAL 2. On July 3, 1955 the Bank made a loan (121iI) of ;,~7,100,000 to Empresa to finance the foreign exchange costs of the construction of a 30,000 kw steam generating plant in Managua with transmission 'Lines to about 15 outlying towns and the expansion of distribution facilities in managua. The loan, which is guaranteed by the Republic of Nicaragua, became effective on October 8, 1955. 3. on J:me 22, 1956, Dr. Leon DeBayle and Mr. Humberto Salvo, Chairman of the Board and General Manager of Empresa respectively, informed tlhe management that the bids received indicated th?t the foreign exchange costs of the project would exceed the amount of the Bank loan and requested the Bank to make a supplementary loan to cover The excess. The borrower was reluctant to conclude the awarding cf contracts for the project until assured of its ability to finance the foreign e-change costs. 4. The matter wias brought to the attention of the Executive Directors (Secretary's Memorandum 1-447 of July 16, 1956) who were also informed that, if they had no objections, I proposed to inform the Empresa that the Bank was prepared in principle to make a supplementar-y loan to finance the additional foreign exchange costs of the project once they had been satisfactorily determined. In the absence of objections from the Executive Directors, the Enpresa was so advised. 5. If the proposed loan is made, total Bank, loans to iNicaragua would amount to ',!23.0 million. PART II - DESCRIPTION OF THE PROPOSED LOAN Borrower 6. The Borrower would be the Empresa Nacional de Luz y Fuerza of Nicaragua.  Guarantor 7. The Guarantor would be the Republic of Nicaragua, a member of the Bank. Viount 8. The loan wvould be in the amount of ,1, 600,000 or its equivalent in other currencies. Purpose 9. The loan would provide the additional foreign exchange required for carrying out the project under Loan 121 N1I. kAortization 10. The loan wiould be for a period of 15 years end would be amortized by semi-annual payments beginning October 1, 1959 and ending April 1, 1971 as set out in Schedule 1 of the proposed Loan Agreement. The term of Loan 121 NI is 20 years but the Borrowrer has requested that this loan be for a period of 15 years so that the rate of interest on the two loans would be the same. Interest, Coruniision and Commitment Charges 11. The loan would bear interest at the rate of 4-3/4 percent per annum, ircluding the statutory ccmmission of 1 percent. The cormmitment charge would be 3/h of 1 percent per annum and would accrue fromr the effective date of the Loan Agreement or a date 60 days after signature, whichever is the earlier. Legal Instruments and Authority 12. Drafts of Loan and Guarantee A-reements are attached as No. 1 and No. 2 respectively and, with the exception of the term of thne loan, follow closely those governing Loan 121NI. 13. The Loan and Guarantee Agreements would have to be ratified by the Empresa's Board of Directors and by the Nicaraguan Congress respectively. 14. The Report of the Comm.ittee provided for in Article III, Section 4 (iii) of the A\rticles of iAgreement of the Bank is attached (o10. 3).  PART III - APPRTISAL OF THE PROPOSED LOAN Justification of the Loan 15. The justification of the project was given in my report and recommendations to you on Loan 121 NI (P-89). 16. Contracts have now been awarded for all parts of the project. On the basis of these contracts and new estimates made by the consulting engineers, the total cost remains about the same but the foreign exchange needed for the project, with adequate provision for contingencies and spare parts, exceeds by A1.6 million the $7.1 million provided under Loan 121 NI. The revised costs of the project, in U.S. dollar equivalents, are as follows: Item Foreign Local Total Exchange Currency Cost (thousands of U.S. dollars) Steam power plant 5,530 1,392 $ 6,922 Distribution system, Managua 880 170 1,050 Transmission lines 2,290 390 2,680 Total $ 8,700 $ 1,952 $ 10,652 17. The company continues to be in sound financial condition and will be able to assume the additional debt burden. The company's sales of electricity in 1955 exceeded those of the previous year by l8c (4.4 million kwh) and its profits exceeded those of the previous year by 38%. Financial projections prepared at the time Loan 121 NI was made show that income from future sales should amply cover interest and amortization after allowing for the service on the loan now proposed. Progress on the Project 18. The progress on the project to date has been satisfactory. Actual construction on the power plant foundations and building started in May 1956. The first 15,000 kw unit is scheduled to be ready for commercial operation in March 1958, and the second 15,000 kw unit by the end of August 1958. The distribution system in Managua is scheduled to be completed before the end of 1957, and the transmission lines by mid-February 1958. These schedules are reasonable and unless delays caused by strikes, or other causes beyond the control of the contractors interfere, the work should be completed as scheduled.  - h - 19. Since Loan 121 NI vwas made, the Empresa has taken steps to strengthen its management and technical personnel. Engineers experienced in the operation and maintenance of a steam power plant, transmission lines and distribution systems have been engaged. An expert accountant has been added to the staff of the company and is revising the accounting system. Economic Situation 20. A report on Nicaragua's economic position and prospects (W.H.35a, dated February 11, 1955) was transmitted to the Executive Directors on February 15, 1955 (Secretary's Memorandum No. 1-201). Since that report was written, Nicaragua has experienced serious crop failures due to heavy rains, with a resulting reduction of export earnings in 1956. Crop prospects for the 1956/7 season are good. The authorities are restraining import demand by increasing the prior deposit for imports and by bank credit restrictions. Both money supply and domestic prices have been declining. 21. Recent events have not changed the conclusion that the prospects for Nicaragua's continued economic growth remain basically sound. The only significant changes in Nicaragua's external debt since February 1955 have been loans granted by IBRD for power, ports and agriculture. It should be well within the capacity of Nicaragua to service the proposed loan in addition to its other obligations. Prospects of Fulfillment of Obligations 22. For the reasons mentioned above and those contained in my report and recommendations to you on Loan 121 NI (P-89) I believe that the Government of Nicaragua and Empresa will be in a position to meet their obligations under the proposed loan.  PART IV - COiIPLI-ANCE f'ITH -ARTICLES OF AGREEI'ENT 2j. I am satisfied that the proposed loan would comply with the A\rticles of Agreement of the Bank. PART V - LC.-EC iii:DATIOiUS 21; I recomriend thlat the Bank at this time make to Empresa Nacional de Luz y Fuerza (with the guarantce of the Government of the Republic of Nicaragua) a loan of ;,1.6 million or the equivalent thereof in other currencies for a term of 15 years with interest (including commission) at the rate of 4-3/4 percent per annum, and on such other terms as are specified in the -draft Supplemental Loan and Guarantee Agreements attached hereto and that the Executive Directors adopt a resolution in the form of the attached (No. 4). Euge.ne R. Black November 6, 1956