Uruguay - Baygorria Hydroelectric Power Project

R E S T R I C T E D FILE COPY R e p o r t N o. P 116 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 LOAN TO THE ADMINISTRACION GENERAL.DE LAS USINAS ELECTRICAS Y LOS TELEFONOS DEL ESTADO (U.T.E.) FOR A POWER PROJECT IN URUGUAY October 2, 1956  INTERNATIONAL BAqK FOR REC ONSTrUCTION AND DEVELOPiENT REPORT AND RECOii1EiNDATIONS OF THE PRESIDENT TO TIfe; EXECUTIVE DIRECTORS ON A. PROPOSED LOAN TO ADiINISTRACION GENERAL DE LAS UJSINAS ELECTRICAS Y LOS TELEFOITOS DEL ESTADO I1N THE REPUBLIC OF URtUGUY 1. I submit herewith the following report and recommendations on a proposed loan in an amount equivalent to $25.5 million to the Administra- cion General de las Usinas Electricas y los Telefonos del Estado (U.T.E.) to finance the foreign exchange cost of expanding its electric power facilities. PART I - HIS'TORICAL 2. On August 25, 1950, the Bank made a loan of 433 million (equivalent) to U.T.E. (30 UR) to cover most of the foreign exchange cost of a 4-year progran of reconstructing and expanding the electric power and telephone facilities of U.T.E. The loan has been entirely disbursed and the project completed except for a few minor items. Repayment of the loan began in February 19v5 and. is scheduled to be completed by August 1974. Principal repayments to date total '3,30O,000. 3. To meet the constantly and heavily increasing demand for power, U.T.E. in 1953 asked the Bank to assist in financing further important additions to its generating and transmaission capacity including the installation of an additional 50,000 kw thermal unit at !hIontevideo, and the construction or a hydroelectric plant at Rincon de Baygorria on the Rio Negro. On the basis of the recolmmendations of the Bank2 mission which examined the pro4ects, I advised the Uruguayan Governmrent in Decem'oer 1953 that I would be prepared to recomnend the Bank's partici- pation in financing the foreign exchange component in an amount equiva- lent to about $30 million of a progran for power expansion. 4. On August 29, 1955, the Bank made a loan of $5.5 million to U.T.E. (132 UR) to finance the foreign exchange cost of the additional 50,000 kw thermal capacity at Montevideo. As of August 31, 1956, $2,657,000 was still available in the loan account. These funds should be disbursed by December 31, 1957. Repayment of the loan will begin on May 1, 1958, ending in h4ay 1975. 5. Negotiations for the proposed loan began in Washington on July 2, 1956, with Mr. Pedro P. Rivero, Manager of the Finance Division, and Hr. Jost Z. Gil, Sub-lMIanager of Power Plants Expansion, representing the Borrower. Negotiations on the Guarantee Agreement were opened, with Hr. Washington P. BermUdez, Charge d'Affaires of the Ulruguayan Embassy in Washington, representing the Guarantor, on August 2. The proposed loan would be the third Bank loan to 'Jruguay and to U.T.h. and would bring the total lent to $64 million.  - 2 - 6. The only other loan under active consideration by the Bank is one in the amoumt of $6-8 maillion for the develorment of the livestock in- dustry. At the present time, the Uruguayan Parliament is considering a Project of Law which would set up the organization of this program. PART II - DESCRIPTION OF THE PROPOSED LOAN Brrower 7. The Borrower wfould be the Administracion General de las Usinas Electricas y los Telefonos del Estado (U.T.E.), an autonomous government agency having the exclusive right to provide electric energy and telephone service in Uruguay. It was created in 1912 as an electric light and power enterprise and in 1931 it was given the authority to operate the telephone services of the country. Guarantor 8. The Guarantor would be the Republica Oriental del Uruguay, a member of the Bank. Amount 9. The loan would be in an amount in various currencies equivalent to $25.5 million. Disbursements would be principally in Deutschemarks, and in smiller amounts of Swedish kronor, Swiss fraancs and other curren- cies yet to be determined. Purpose 10. The proceeds of the loan would be used to finance laost of the foreign exchange costs of empanding the present power facilities (285,5oo kw installed and 53,000 ktv under construction) of U.T.E. by constructing a 103,000 kw hydroelectric plart at Rincon de Baygorria on the Rio Negro, by erecting tranUmission lines, and by constructing a collector system which would improve primary distribution in iHontevideo. A small part of the proceeds of the loan would be used to mechanize U.T.E.s accounting system. The project should be completed in about 5 years. 11. The total cost of the project is estimated to be about the equivalent of U.S. $58 million of wqhich $29.9 million would be in foreign exchange including interest during construction of 34.4 million. Interest during construction will not be financed under the proposed loan except to the extent that the foreign exchange cost of the project should prove to be lower than estimated. Interest, Commission and Commitment Charges 12. The loan would bear interest at 5% per annum. This includes the statutory commission of 1%. The comnitment charge would be 3/4 of 1% per amnum and would accrue from the effective date of the Loan Agreement or 60 days after the date of the Loan Agreerment, whichever is earlier.  - 3 - Amortization 13. The loan would be for a period of 25 years. It would be amortized by semiannual payments beginning October 15, 1961, and ending October 15, 1981, as set forth in Schedule 1 of the proposed Loan Agreement. Legal Instruments and Legal Authority 1. Drafts of the Loan and Guarantee Agreements are attached (Nos. 1 and 2). The Borrower is authorized to enter into the Loan Agreement pur- suant to its charter. Execution of the Loan and Guarantee Agreements must be ratified by the National Assembly of Uruguay before the Agreements can become effective. 15. The Loan and Guarantee Agreemrents are substantially similar to other agreements entered into by the 3ank for similar projects. The following points may be of special interest: (a) in accordance with Uruguayan practice, any bond issues which might be necessary to help defray the local costs of the project would be issued by the Government, which would be liable for their payment, but U.T.E. would be liable to reimburse the Goverranent for amounts expended to service the obligations. The proposed Loan and Guarantee Agreements contain provisions whereby the Government will to the extent necessary give prior_ty to the issuance of such bonds in the local market. In addi- tion the Govrernment agrees to defer collections on loans made directly by the GoverBnent to U.T.E., or on account of the service of indebtedness which the Government has incurred on U.T.E.ts behalf, whenever funds may be needed by U.T.E. to carry out the project or to meet any of its other obligations. Arrangements are to be made from time to time to fund or capitalize any such deferred payments (Loan Agreement, Section 5.10 and Guarantee Agreement, Section 2.02). (b) To avoid problems arising under the Uruguayan Constitution with reference to autonomous agencies and political subdivisions, the negative pledge clause in the Guarantee Agreement (Section 3.01) contains provi- sions similar to those of the previous Uruguayan Guarantee Agreement (Loan No. 132 UR). If for constitutional reasons, the Guarantor should be unable to make the negative pledge provisions effective with respect to such agerncies and political subdivisions, it will then grant to the Bank an equivalent lien satisfactory to the Bank. The Banco de la Republica Oriental del Uruguay, however, is subject to the provisions of the clause without benefit of the equivalent lien exception. Liens given by political subdivisions and their agencies on property in Uruguay or on local currency revenues and receipts under arrangements which contain no provisions which would result in priority in the allocation or realization of foreign exchange are excepted from operation of the negative pledge.  i6. Also attached (Nos. 3 and 4) are drafts of two letters addressed to the Bank, one from the Government and one from U.T.E., which indicate thlat both the Government and U.T.E. expect to continue the practice of permitting U.T.E.'s earnings to be used in its business, particularly to finance expansion. These letters also indicate the intention of the Goverrnment and of J.T.E. to take whatever action may be needed (but not including Goverinment subsidies) to enable U.T.E. to maintain a level of operating revenues adequate to cover all operating expenses, taxes and financial charges and to maintain a sound financial condition. 17. The report of the Commaittee provided for ir, Article III) Section 4 (iii) of the Articles of Agreement, is also attached (No. 5). PART III - APPRAISAL OF THE PROPOSED LOAON 18. A detailed appraisal of the project (T.O. 120 is attached (No. 6). Justification of the Project 1