Transcript of joint meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, June 23, 1987 : Argentina - SEGBA V Power Distribution Project.

STRICTLY CONFIDENTIAL NM:nrn INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Tuesday, June 23, 1987 Washington, D.C. The meeting of the Executive Directors was convened at 10:01 a.m. in the Board Room, 1818 H Street, N.W., Washington, D.C., Mr. Barber B. Conable, Chairman, presiding. MILLER REPORTING CO .. INC. 507 C Street, N.E. Wa,hingron, D.C. 20002 (202) 546-6666  2 STRICTLY CONFIDENTIAL C O N T E N T S ITEM PAGE L I' L MILLER REPORTING CO •• INC. 507 C Street. N .E. Washington. D.C. 20002 (202) 546-6666  39 STRICTLY CONFIDENTIAL :l II L Item six is a memorandum and recommendation on a proposed loan in the amount of $276 million equivalent to SEGBA, with the guarantee of the Republic of Argentina, for the SEGBA V Power Distribution Project. Mr~ Nissenbaum of the LAC Region -- Mr. Nissenbaurn C' is a loan officer -- will introduce the proposal. Mr. Nissenbaum, you are recognized for that purpose. MR. NISSENBAUM: Thank you, sir. MILLER REPORTING CO., INC . 507 C Street. N .E. Washington, D.C. 20002 (202) 546-6666  40 STRICTLY CONFIDENTIAL Mr. Chairman and Members of the Board: The request for your approval of the proposed SEGBA loan provides an opportunity to inform the Board of the government's efforts to increase efficiency in Argentina's power sector. The government has recently completed a comprehensive energy plan directed, among others, to making better use of Argentina's natural gas and water resources, and reemphasizing the importance of power distribut~on and trans- mission investments. It integrates power and hydrocarbon plann n~ for the first time in Argentina. The government has adjusted the previous sector investment program in line with more realistic demand pro- jections than those which were previously in force, and has scaled down investments in generation projects. The Argentine authorities have segregated the func t ions of the national and provincial utilitie s in order to delineate responsibilities more clearly within the complex, fragmented power sector. In thi s conne ction, the governme nt has agree d to complete this year a diagnosis of the legal framework, org a nizat i on structu r e and e ff iciency of Ar gentina 's p ower companies . Thi s will contr i b ute t o t he program f or r efo r ms in the ma nagement o f stra t egi c s t a te ente rp rises under which MILLER REPORTING CO .. INC, 507 C Street, N.E. W ashington, D.C. 20002 (202) 5 46- 6666  41 STRICTLY CONFIDENTIAL the government will install a system of management by objective and better performance evaluation, while providing greater operational autonomy to and accountability by SEGBA and other parastatals. In addition, Mr. Chairman, if you will permit me, there has been some general interest in the status of Argentina's financing package for this year, and we would like to inform the Board, sir MR. CONABLE: I think that would be helpful, yes. MR. NISSENBAUM: -- that approximately 92 percent of the interested banks have indicated their commitment to II L the package. MR. CONABLE: That is 92 percent of the money, is it not, not of the interested banks? MR. NISSENBAUM: Yes, sir, of the money. I am sorry. And there has been conside rable interest by the banks involved in both the cofinancing features and the exit bonds. So it appears that a critical mass has been achieved. MR. CONABLE : That there is a critical ma s s already. Is that correct? L MR. NISSENBAUM: Yes, sir. MR. CONABLE : As I recall, sir, the r e is also reduced premium available for those who come in within another MILLER REPORTING CO .. INC. 507 C Street, N.E. Washington , D.C. 20002 (202) 546-6666  42 STRICTLY CONFIDENTIAL time frame, is there not, so that the passage of the first premium date does not mean that there are still not incentives for additional banks to come in? MR. NISSENBAUM: There are also those incentives. That is right. MR. CONABLE: Well, I thank you for giving that report. I know there has been quite a bit in the paper about it, but I know there is also concern about voluntary lenders' participation in a package like Argentina, following the -- is there any pattern relative to the national ide ntity of the banks involved? The American banks are participating widely as well as - - MR. NISSENBAUM: That is correct. MR o CONABLE: --European and Japanese? MR. NISSENBAUM: Yes. There is widespread American as well a s othe r inte rnational banks. MR. CONABLE: But they would be mostly the money cente r banks that would be participating at this p oint - - MR . NI SSENBAUM: Corre ct, sir. MR. CONABLE: carrying the bulk of the new mone y. As you know, there is not as muc h new mon ey i nvo l v e d in this as there is in the Mexican package, but nonetheless MILLER REPORTING CO .. INC. 507 C Screer, N.E. W ashington, D.C. 20002 (202) 546-6666  43 STRICTLY CONFIDENTIAL it has been watched with considerable interest. All right. Well, let's talk about the loan that is L before the Board. What questions are there about that? Mr. Crowe. MR. CROWE: Thank you, Mr. Chairman. We support this project. However, we are somewhat disappointed by what appears to be a lowering of the targets for electricity tariffs for SEGBA. In the power engineering project, which was approved by the Board in September last year, it was envisioned that the rate of return on revalued assets would rise to 8 percent in 1992. Here we have agreement on targets of 4 percent in 1991 and 1992, and 5 percent in 1993 and thereaf ter. We view 5 percent as acceptable as an interim target. However, over the longer term we think that electrici y companies should be achieving an 8 to 10 percent rate. Such a rate would make it more like ly that tariffs would be close to long-run marginal costs. Thank you. MR. CONABLE : Thank you, Mr. Crowe. C I wonder, Mr. Nissenbaum, would you please d eal with the issue of the level of the targets? MR. NISSENBAUM: Yes , sir. Could I please comment MILLER REPORTING CO., INC. 507 C Srrcei, N .E. Washington , D.C. 20002 (202) 546-6666  44 STRICTLY CONFIDENTIAL on that? It is true that SEGBA was unable to implement the level of tariff increases which we thought were in the cards and which we had agreements on under the Asarta (Phonetic) amendments which the Board approved last August and those ,, . which reflected in the power engineering project, which you had approved in September of this year (sic). However, I would like to point out, sir, that the rates of return are somewhat deceptive as an indication of the financial soundness and the financial condition of SEGBA as of the other Argentine power companies. You may have noticed that in the appraisal report we indicated, we reflected a chart showing that if SEGBA retained all of the revenues which it collected in its normal billings, the tariff plus the surcharges plus other fiscal elements, in fact even in 1986 its rate of return would have been 9.6 percent and that would rise to 18 percent by 1990. If you take that into consideration, as well as the fact that in the average Argentine tariffs are already at some thing like 95 percent of long-ra nge marginal costs and if you add to that the consideration that SEGBA's financia collections go to both -- contribute substantially to general reve nue s of not only the central government but also .th e MILLER REPORTING CO., INC . .l07 C Street, N .E. Washington. D.C. 20002 (202) 546- 6666  45 STRICTLY CONFIDENTIAL provinces and that a substantial part of these funds which are passed on by SEGBA contribute to generation requirements elsewhere in the power sector, bearing in mind that SEGBA does no generation investments, that in fact the rates of return give you a somewhat misleading impression of the status and of SEGBA's other very valuable role. MR. CONABLE: Thank you. Are there further questions or comments? Mr. Kantola. MR o KANTOLA: Thank you. Just a minor question referring to what we heard II L , in the general level concerning commercial banks' involvement in Argentina. I just wonder this commercial bank financial component in this particular project, would it be appropriate for me to ask from which -- I am not asking any specific names, but are there going to be European banks, American banks, Japanese banks? Can you give a general comment please? MR. NISSENBAUM: There has already been some interest displayed by the Export-Import Bank of Japan, notably through its untied facility, which is linked to World Bank-supported projects in the possibility of a contribution to help meet these small residual foreign exchang components of the project. Some of the other commercial MILLER REPORTING CO., INC. 507 C Street , N .E. Washington, D.C. 20002 (2 02 ) 546- 6666  46 STRICTLY CONFIDENTIAL bank credits would be raised from domestic sources. MR. CONABLE: Are there further questions? Mr. Arlman. MR. ARLMAN: Thank you, Mr. Chairman. One question and one point. While supporting earlier operations in this and other sectors in Argentina, I made mention, as the staff documents made mention, of a major investment dispute outstanding between OI].e of my countries and Argentina. And I am very happy to report that I understand that that investment dispute has been settled to the satisfaction of both sides, which I think is always a good thing to note. On the question that Mr. Kantola raised, commercial bank contribution in this project, I would be interested specifically in the maturity that these commercial banks would offer for project participation in a project like this. For the rest, I support the project proposal. MR. CONABLE: Mr. Nissenbaurn. MR. NISSENBAUM: We have no indication yet of what the terms would be from the domestic banks. However, the terms of the Export-Import Bank of Japan facility are quite close to World Bank terms. In fa ct, the interes t rate is linked, as I understand it, to the long-term Japanese MILLER REPORTING CO .. INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546- 6666  47 STRICTLY CONFIDENTIAL prime. MR. CONABLE: Are there further questions or L comments? Mr. Luschin, you look anguished. All right. Thank you, Mr. Luschin. MR. LUSCHIN: Thank you, Mr. President. No. I just wanted to follow up these two questions on the commercial banks. My understanding is that the commercial banks listed here are to a very large extent local commercial banks and also to a very limited extent foreign commercial banks. I' L., Now I am looking at the Schedule A of the document, and I draw this conclusion from the fact that the commercial banks are financing local funds to a very large extent and not foreign exchange funds. Thank you. MR. NISSENBAUM: Yes, it is only referring to the $10.9 million. MR. LUSCHIN: Yes. And, there f ore, I followed it up because I thought it might be a little bit irritating because a large part of the financing from commercial banks L. is really just local and not from foreign commercial banks. Th a nk you. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D .C. 20002 (202) 546-6666  48 STRICTLY CONFIDENTIAL MR.. CONABLE: Are there further questions or comments? (No response. ) MR. CONABLE: If not, the Directors approve the loan on the terms proposed. MILLER REPORTING CO .. INC . 507 C Street, N .E. Washington , D .C. 20002 (202) 546-6666