Colombia - Guadalupe Hydroelectric Project

RESTRICTE D FILEOPY Report N.P14 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 PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESAS PUBLICAS DE MEDELLIN COLOMBIA May 12, 1959  INTERILITIONAL BANK FOR RECONSTRUCTION A13 DE-EFLOPMENT REPORT AID RECOMIENDATIUNS OF THE PRESIDENT TO THE EXECUTIVE DWLECTGRS ON A PROPOSED LOANJ TO E1iPRESAS PUBlICAS DE IEDELLIN COLOMBIA 1. I submit the following report and recommendations on a proposed loan, of an amount in various currencies equivalent to $12.0 million, to Empresas Publicas de Medellin, Colombia (sometimes referred to belowv as EPI') to finance the construction of the Guadalupe hydroelectric project. PART I - HISTORICAL 2. The municipality of Medellin first approached the Bank for a loan to finance electric power expansion in October 195I4. At that time the municipal power enterprise was directly owned and operated by the municipality. In 1955, however, the municipality, authorized by national legislation, created by decree an independent legal entity called the Empresas Dublicas de Medellin in which the municipal undertakings responsible for power, water, telephones and sewage were brought together under a common management. 3. In September-October 1955, at the request of the Colombian Goverrnment, a Bank mission reviewed Colombia's investment priorities and external borrow- ing program. The mission included Guadalupe in a group of high priority proj- ects which it regarded as suitable for possible financing by the Bank. In my letter transmitting the mission's report to the Government, I indicated the projects which the Bank would be prepared to consider financing provided effec- tive steps were taken to improve Colombia's financial and economic situation. One of these was Guadalupe. However, in September 1956 the continued deteriora- tion of Colombia's economic position obliged the Bank to defer active considera- tion of these projects. 4. In the summer of 1958, as the result of remedial measures taken by the uovernment, Colombiats finar.cial prospects had improved sufficiently to enable the Bank to resume active consideration of projects on which it had been work- ing in 1956. Loans for twjo of these projects, the Yumbo Extension (CHKRAL) and La Esmeralda (CHEC), were signed in December 1958 and January 1959 respectively. 5. In October 1958 a Bank mission reviewed the Guadalupe project, which had progressed very slowily in the meantime through lack of financing. Formal nego- tiations for a loan began in Washington on April 7, 1959. The Colombian Govern- ment was represented by the Ambassador of Colombia in Washington, and the Borrower by its General Manager, Dr. Oscar Baquero. 6. The proposed loan for the Guadalupe project would increase the Bank's lending to Colombia from $118.6 million to $130.6 million, net of cancellations. The Bank has already made the following loans to Colombia:  2 - Year Serial No. Purpose Amount of Loan net of Cancella tions 1949 18 CO Agricultural Machinery Project 4, ,925,441 1950 38 Co Anchicaya Hydroelectric Project 3,530,000 1950 39 co La Insula Hydroelectric Project 2,600,000 1951 43 CO Highway Project 16,500,000 1951 54 CO Lebrija Hydroelectric Project 2,400,000 1952 68 C0 National Railroads Project 25,000,000 1953 84 CO Supplementary Highway Project lh, 350,000 1954 108 CO Second Agricultural Machinery Project 5,000,000 1955 113 CO Anchicaya and Yumbo Power Project 4,500,000 1955 119 CO Railroad Extension Project 15,900,000 1956 11L CO Plan Vial I Project 16,500,000 1958 215 CO Yumbo Extension Power Project 2,800,000 1959 217 CO La Esmeralda Power Project 4,600,o00 Total 118,605,h41 Of which has been repaid 28,280,LI41 Total now outstanding 90,325,000 Amount Sold ;, 7,372,800 Of which has been repaid 5,435,800 1,937,000 Net amount now held by Bank 8 88,388,000 7. The Bank also has under consideration a project for expanding Bogota's power facilities for which a loan of about $11 - 12 million might be made within the next six months. PART II - DESCRIPTION OF THE PROPJSED LOAN 8. The proposed Loan would have the following characteristics: Borrower: Empresas Publicas de Medellin, an autonomous agency whose four constituent "Empresas" provide power, water, telephone and sewage services in the Medellin area. Guarantor: Republic of Colombia Amount: The equivalent, in various currencies, of $12 million. Purpose: To finance the foreign exchange cost of con- structing two hydroelectric plants of total capacity 96 MW and related transmission and  - 3 - distribution facilities to serve the city of IMedellin and the surrounding area. Amortization: 44 semi-annual instalments from February 15, 1963 to August 15, 1984. Interest Rate: 6% Commitment Charge! 3/4% per annum Payment Dates! February 15 and August 15. PART III - LEGAL INSTRUMIENTS AID LEGAL AUTIHJRITY 9. A draft Loan Agreement between the Bank and EPM (No.1) and a draft Guarantee Agreement between the Republic of Colombia and the Bank (No.2) are attached. 10. The Guarantee Agreement is in the usual form. 11. In addition to the usual provisions, the Loan Agreement includes covenants designed to protect the Power Department against possible claims arising from debts incurred by other Departments. EPM4's Departments are to be operated separately and each Department's assets, revenues and expenditures are to be separately accounted for (Section 5.07 (c)). Use by the Ebrrower of revenues or assets of the Power Department to meet obligations of any other Department is an event of default (Section 6.02). In order not to interfere with the financial practices normally followed by the other Departments, the negative pledge would apply to the property and revenues of the Power Depart- ment, but only to the property of the other Departments and not to their revenues (Section 5.03 and paragraph (d) of Schedule 3). The Power Depart- ment may not incur additional debt if thereoy the proportion of long-term indebtedness to equity for that Department would exceed 60/40 (Section 5.09 (A)); no other Department may incur long-term indebtedness unless its revenues cover operating expenses and debt service and unless holders of such debt ex- plicitly forego any rights against the assets or revenues of the Power Depart- ment (Sections 5.09 (B) and 5.10). In a letter (No.3) EPI amplifies the rate covenant by agreeing to take steps to obtain power rates which would permit at least 30% of new investment in power to be financed from retained earnings. 12. Execution of the Loan Agreement has been authorized by EPM's Board of Directors. The President of the Republic of Colombia has promulgated a Law passed by Congress enabling the Government to guarantee the proposed loan. 13. The report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank is attached (No.4).  - 4 - PART IV - APPRAISAL JF THE PROP0SED LOAN Justification of the Project 14. A detailed appraisal of the project (T.O.203a) is attached (No.5). 15. Medellin (population 420,000) is the center of Colombia's textile industry. The area has experienced rapid growth of population and industry in recent years, but a shortage of public power supoly has forced industrial- ists to rely increasingly on their own pouer plants. Studies of the power market indicate that it is necessary to double the existing capacity of EPM, 136.5 Mti, by 1964, and to triple it by 1968. It is estimated that, given an adequate power supply, industrial demand would increase from its present pro- portion of less than one quarter of total demand to more than one-third in 1968. 16. The Dresent project is the first stage of a program to instal 246 MtW in hydroelectric plants on the Guadalupe and Nare rivers by 1964. It consists of the installation of 96 MW on the Guadalupe river, together with the con- struction of related transmission and distribution facilities. Owing to the unusually favorable site, its short distance from Medellin and low local con- struction and labor costs, the project is an exceptionally efficient means of providing additional capacity; the cost per installed kJ of the Guadalupe project compares favorably with that of a thermal plant. 17. EPH intends to ask the Pank to finance the Nare river development when the necessary preliminary studies have been completed. 0l150,000 to meet the foreign exchange costs of such studies would be included in the loan. Fiinancing Arrangements 18. The f !ancing of the project would come from the following sources, Pesos million Bank Loan (U.S.$12 million) 90.0 Retained earnings of Power Department 47.0 Loans from local banks 8.0 Total cost 145.0 The Power Department has earned substantial profits in recent years; in 1958 earnings were 11.3% of net fixed assets. On July 1, 1958 power rates were increased by 32,% and the rate-making authority has indicated its willingness to consider further increases. On this basis, it is estimated that EPM should, over the period of construction, be able not only to cover operating and other expenses, but also to contribute retained earnings amounting to 47 million pesos towards the costs of the project. Procurement 19. Orders totalling the equivalent of U.S. $2.5 million have already been placed on the basis of international bidding for penstocks, turbines,  valves, generators, transformers and control equipment. Contracts for equip- ment not yet ordered, and for the civil engineering works, would be awarded on the basis of international bidding. Economic Situation 20. The report "Current Economic Position and Prospects of Colombia" (R 59-19) indicated that, despite the coffee surplus and the fall in coffee prices, the Government had firmly maintained nolicies which had substantially reduced imports and slowed down credit expansion, and enabled Colombia to reduce external debt and to increase gold and foreign exchange reserves. It pointed out, hownever, that because of the strong inflationary pressures still remaining the stabilization program needed to be continued without relaxation and, if possible, intensified. Since the report was prepared, the Government has continued its stabilization policy. Gold and foreign exchange reserves have continued to increase and amounted to $186 million in mid-April, compared with $173 million in December 1958. 21. External debt service in 1959 will amount to $108 million, or 20.6%" of total foreign exchange earnings ($20 million on long term debt, 16 million on private bank and suppliers, credits, and $72 nillion on credits contracted to settle the commercial backlog). Much of the debt is of medium term, so that service on existing debt should decline to $73 million in 1961, and then fall rapidly to $35 million (or approximately 6% of projected foreign exchange earnings) in 1963, when full amortization of the loan iwould begin. Prospects of Fulfilment of Obligations 22. The project has been planned and is being supervised by experienced Colombian and foreign consultants, and should be efficiently executed. EPMi, which has a record of good management and sound operation in recent years, is taking steps to strengthen its technical staff and organization in order to be able to deal with the great expansion of its power capacity planned for the next few years. 23. The market prospects for the additional prower to be produced by the project, the increase of power rates already granted, and the willingness of the rate-making authority to consider further increases, together with the rate and debt limitation clauses in the Loan Agreemnent, afford assurance that EPM's revenues from power, in addition to financing the major part of the local currency costs, will be sufficient to provide the local currency equiva- lent of the foreign exchange necessary to se-vice the loan. The present sound financial condition of the other Departments, together with the covenants in the Loan Agreement designed to assure maintenance of this condition and to reinforce the financial insulation of the Power Deuartment from the others, give good reason to believe that the financial position of the Power Depart- rment will not be prejudiced by problems arising from the operations of the others. 24. The transfer of the debt service into foreign exchange, together with Colombia's other foreign exchange obligations, should not impose an undue burden on the Colombian economy.  -6- PART V - COMPLIANICE WITH ARTICLES OF AGREEMENT 25. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMT11ENDATIONS 26. I recomrnend that the Batk make a loan to Empresas Publicas de H4edellin, with the guarantee of the Republic of Colombia, in an amount in various currencies equivalent to $12 million for a total term of twqenty-five years with interest (including comrission) at 6% per annum and on such other terms as are specified in the attached draft Loan and Guarantee Agreenments, and that the Executive Directors adopt a Resolution to that effect in the form attached (INo.6). Davidson Sommers, Vice President for Eugene R. Black President Washington, D.C. May 12, 1959