Colombia - Yumbo Steam Plant Extension Project

FILE RS TRICTED Report No. P - 181 CIRCULATIENG COPY TO BE RETURiNED TO AIRCWsvES DIVYSION This report was prepared for use within 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 PRESI-DENT TO THE EXECUTIVE DIRECTORS ON THE PROPOSED LOAN TO THE CENTRA-L HIDROELECTRICA DEL RIO ANCHICAYA LTDA. CALI, COLOMBIA FOR THE EXTENSION OF THE YUMBO STEAM PLANT December 5, 1958.   REPORT tND RECO14'4ENA I ONS OF THE PRlESI DENT TO TIR EXECUTIVE DiRECTORS ON A PROPOSED LOANT TO THE CENTRPL HIDROELECTRICA DEL RIO ANCHICAYA, LTDA. OF CALI, COL01lIA 1. I submit the following report and recommendations on a proposed loan of 82.8 million or its equivalent in other currencies to the Central Hidroelectrica del Rio Anchiccya, Ltda., Cali, Colombia (CHIDRAL) to finance the erection of a 10,000 kw. unit at CHIDRLLTs steam plant at Yunbo. PART I - HISTORICAL 2. A loan of A3.53 million (38Co) was made to CHIDR1L in November, 1950 to finance the construction of a 24,000 kw. hydro electric plant at Anchicaya. A second loan for $4.5 million (113CO) was made in March 1955 to finance the addition of a 20,000 kw. hydro electric unit at the Anchicaya plant and also the construction of a 10,000 kw. thermal unit and the civil works for a second 10,000 kw. unit. The reouest for this second thermal unit was made by CHIfDRAL in October, 1955. 3. A Bank lMission visited Cali for an appraisal of the project in February and Earcn 1956. However, in October 1956 the company was advised that the Bank could not proceed with discussion for a proposed loan since the Bank was suspending active consideration of further loans for Drojects in Colombia, due to the deteriorating financial position of the country. 4. In April of this year, following the efforts to restore financial sta-.bility made by Colombials new Government, the Bank decided to consider making further loans to Colombia. It was later agreed w,rith the ColombiT,Government that the assistance of the Bank could best be given in the electric power field. In the meantime, CHIDRAL, without the assistence of the Bank, had only been able to make slow progress with the second thermal unit at Yumbo. 5. A Mission reviewed the project in June and July 1958 and nego- tiations for the proposed loan began in Washington on November 6, 1958, the Colomlbian Government being represented by Ambassador Jose Gutierrez and the Borrower by Dr. Jose Otoya, General Manager of CHIDRAL. 6. If the proposed loan were made it would increase the Bank's lending to Colaabia from A111.2 million to 1l114 million net of cancellations. The Bank has already made the following loans to Colombia:  -2- Amount of Loan Year Serial No. Purpose net of Cancellations 1949 18cO Agricultural Machinery Project $ ,925,441 1950 38co Anchicaya Hydroelectric Project 3,530,000 1950 39co La Insula Hydroelectric Project 2,600,000 1951 43co Highway Project 16,500,000 1951 54co Lebrija Hydroelectric Project 2,400,000 1952 68cO National Railroads Froject 25,000,000 1953 84co Supplementary Highwzay Project 14,350,000 19514 108CO Second Agricultural Machinery Project 5,000,000 1955 113CO Anchicaya and Yumbo Power Project 14,500,000 1955 119C0 Railroad Extension Project 15,900,000 1956 144co Plan Vial I Project 16,500,000 Total $ 111,205,141 Amount Sold 7,092,800 104,112,641 Amount Repaid $ 25,022,141 Less Repayments to Third Parties 5,435,800 19,586,641 Net Amount held by Bank $ 84,526,000 7. At present the Bank is considering two further loans to Colombia, both for expansion in the electric power field. The first is for $4.6 million to the Central Hidroelectrica de Caldas Ltda. and the second, for $12 million, to the -kmpresas Publicas de Mledellin. 8. PART II - DESCRIPTION OF THE PROPOSED LOAN Purpose The Loan would finance the foreign exchange cost of installing a second 10,000 kw unit at the Yumbo steam plant, enlarging the transmission substations at Yumbo and in Cali, expanding the distribution system in the city of Cali, purchasing and installing a dredge to retard the silting in the Anchicaya Reservoir, and the cost of miscellaneous studies, services and items of equipment and a preliminary study for the further expansion of the Yumbo steam plant. Borrower Central Hidroelectrica del Rio Anchicaya Ltda., a private campany. The majority shareholder is the Cauca Valley Corporation, an autonomous regional development agency. The other two shareholders are the Government of the Department of Valle, and the Municipality of Cali.  Guarantor Pepublic of Colombia Amount The equivalent, in various currencies, of $2.8 million. Amortization 37 semi annual instalments, March 1961 to March 1979. Interest Rate 5.3/4 per cent Commitment Charge 3/4 per cent per annun Payment Dates Mar ch 15 and September 15. PART III - LEGAL INSIRUMENTS AI7D LEGAL AUTHORITY 9. The draft Loan Agreement between the Bank and CIIDRAL (No.1) and a draft Guarantee Agreement between the ReDublic of Colombia and the Bank (No.2) are attached. The Guarantee Agreement is in standard form. The Loan Agreement is also in standard fonm. Except for Sections 5.1i, 5.15 and 7.01, the Sections are substantially the same as in the second Loan to CHIDRAL (No.113C0). The Loan Agreement contemplates the relending by CEDRAL of $550,0oo from the proceeds of the proposed Loan to the Eknpresas Municipales de Cali for the expansion of the distribution facilities in the City of Cali. Accordingly, Sections 5.14 and 5.15 provide that the subsidiary Loan Agreement between CHIDRAL and the Empresas Mlunicipales and its principal, the Municipality of Cali, shall be satisfactory to the Bank and may not in future be changed without the consent of the Bank. 10. Section 7.01 sets out the following Conditions of Effectiveness: (a) Debts owed by CIIIDRAL to the Fondo de Stabilizacion and the Banco de la Republica shall have been discharged. (See paragraph 17 below). (b) The subsidiary Loan Agreement referred to above shall have been executed in a form satisfactory to the Bank. (c) CBIDRAL shall have submitted evidence to the Bank of an appropriate increase in its rates. 11. Execution of the Loan Agreement will be authorized at a meeting of CHIDRAL shareholders. The Congress has passed legislation to enable the Government to guarantee the proposed Loan. The President is expected to take the necessary executive action in the next few days. 12. The report of the Committee provided for in Article IIT, Section (iii) of the Articles of Agreement of the Bank is attached (No.3).  PART IV - APPRAISAL OF THE PROPOSED LOAN Justification of the Project 13. A detailed appraisal of the project (TOD 195a) is attached (No.4). IL4. CHIDRAL serves the southern city of Cali and its immediate neigh- borhood, which is witnessing a rapid rate of industrialization and growth in population. Demand for power has grown steadily in the past years and the largest increase has been in the industrial and cammercial sectors, which now represent about 60% of sales. The TOD report estimates that the additional peaking capacity to be provided by the second Yumbo thermal unit of 10,000 kw. to be financed by the proposed Loan will be absorbed within two or three years. 15. The estimated costj per kwh installed and the estimated operating costs compare favorably with other projects of this kind and size. There are ample supplies of coal in the neighborhood and CHLDRAI, after making tests for the most satisfactory type, will enter into long-term contracts with the suppliers. 16. To make an adequate distribution of the energy to be produced by the new thermal unit, it will be necessary to exypand the distribution sys- tem which even now is overloaded. The principal consuming centre is the City of Cali and its distribution facilities are owned by the Empresas l1unicipales de Cali, an agency of the liunicipality of Cali. The Empresas IFunicipales is not in a position to provide all the funds necessary for this purpose. Consequently an amount of A550,000 from the proceeds of the proposed Loan will be re-4ent by CHIDRAL to the Empresas 11unicipales on terms and conditions satisfactory to the Bank. 17. Most of CHIDRAL's present capacity is generated by the hydroelec- tric plant on the Anchicaya river. Its reservoir for weekly regulation has been silting up and its active storage would be greatly reduced within a few years unless measures were taken to stop or at least retard further silting. One debris-retaining barrier is at present being built by CHIDRPL on one of the tributaries of the Anchicaya river, but a recent consultantts report indicates that additional barriers should be built. Furthermore, the Report recommends the installation of a suction dredge and auxiliary equipment for the removal of silt and debris in the reser- voir itself for which an amount of U.S. 4OO,OOO has been allowed for in the proposed Loan. Arrangements for Local Financin 18. CHIDRAL has continued to make capital expenditures on the project. At the same time the peso depreciated, tripling the service of the company's foreign debt and the cost of operations continued to increase without a coarpensatory increase in rates. As a result, CHIDRAL has acciuxulated  short-term debt of about 10 million pesos ($1.4 million). Before the Loan becones effective, arranaements are to be made to discharge about 80% of this debt, representing the portion owed to the Government. In order that CnTuDRAL may be in 2 position in the future to cover its operating expenses, meet its debt service and retain a surplus to finance new investment, the Bank considers that the company requires an average increase in its rates of not less than 30% and has so informed CHEDRAL and the Government. An application for an increase in rates based on a stuldy being prepared by CHIDRAL's consultants ,will be presented to the Govern- ment shortly, and an appropriate increase is to be approved before the Loan becomes effective. In these events, CHIDRAL should have no difficulty in providing the local currency costs of the project of about 2.3 million pesos (O300,000) from its own resources. The local currency cost of expanding the distribution system in Cali, which will amount to 600,000 pesos (e80,000) will be the obligation of the Municipality of Cali and the Enpresas Municipales. Procurement 19. The proposed second thermal unit at Yumxbo would be a replica of the first unit. The orders for the major equipment of the second unit have already been placed with manufacturers who supplied the first unit on the basis of price options stipulated in their contracts for the first unit. Contracts for the first unit were awarded after analysis of bids made on an international scale. Procurement of other equipment, such as the dredge and equipment and material for the expansion of the distribution system, will be on the basis of international bidding. Economic Situation 20. A report on Colombia's Economic Position and Prospects (R.58-81) was transmitted to the Executive Directors on July 23, 1958. This report nointed out that the outlook for the Colombi2n economy had im- proved as a result of the reversal in monetary and foreign exchange policies put into effect since May 1957. However, over the next few years the expected relatively low coffee export earnings and the heavy external debt service payments would require that imports be continued at a reduced level. The report concluded that if Colombia continued sound financial and fiscal policies, the inherent strength of the economy and the fall in the level of scheduled service on external debt after 1961 would provide some margin for long-term external borrowing to finance high priority development requirements. Developments since July have not changed these conclusions. The authorities have continued their restrictive private credit policy although they are permitting some expansion in productive agricultural loans. Imports have been maintained at a reduced level and gold and foreign exchange reserves have increased in recent months to about &U60 million (compared with $120 million earlier in the year). Moreover, the budget defiait in 1958 has been kept smaller than last yearts level and the efforts to restore balance to the public sector are continuing.  Zl. The principal financial problem for the Colombian economy is the financing of the coffee export surplus. This has been mainly responsible for the continuing increase in the money supply which in September 1958 was 19% above the level in September 1957. Over the next twelve months, Colombia will have an export surplus of about 1.8 million bags of coffee. Under present arrangements about 70% of this surplus will be retained or financed without adding an inflationary pressure, leaving some 57O,000 bags wihich will probably require Central Bank financing of about 150 million pesos, equivalent to 5% of the money supply. Under these circumn- stances, continued efforts will be needed to curb the expansion of bank 6ntditifotsother purposes if Colcmbia is to maintain monetary stability. 22. Colombia's coffee export earnings in 1959 are expected to remain at this year's level of about $325 million, and total export earnings at about 8M25 million. Provided present policies are continued, foreign exchange eamrings in the next few years should enable Colombia to satisiy its import needs for raw materials and essential consumer goods and, in addition, to import some capital zoods to support a moderate amount of new investment in agriculture and manufacturing industry. Prospects of Fulfilment of Obligations 23. The project has been planned and is being supervised by experienced consultants and it should therefore be efficiently executed. The rate increase wihich C