Peru - Power Distribution Project

RESTR I CTED Report No. P - 499 FILE COPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO EMPRESAS ELECTRICAS ASOCIADAS FOR A POWER DISTRIBUTION PROJECT WITH THE GUARANTEE OF THE REPUBLIC OF PERU August 3, 1966  REPORT AND RECO1",aDATION OF TH3 PRESIDZNT TO THE4 =XCUTIVE DIRECTORS ON A PROPOS2D LOAN TO MIPRESAS ELICTRICAS ASOCID0AS FOR A\ PO- R DIST..IBUTION F?.OJ3CT NFITTH THE GOU10LANTEE OF TH3 REPUBLIC OF PERU 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to USL1O million to Empresas Electricas Asociadas (Lima Light and Power Company). PARIT I - HISTORICAL 2. Empresas Electricas Asociadas has requested the Bank to help finance the expansion of its pow,rer transmission and distribution network durin, 1966-1968. The Government of Peru is willing to act as Guarantor. The proposed loan would be the third one made to Empresas. The previous loans were made in 1960 and 1963 for a total of -,39 million and were used to finance the expansion of 3mpresas power generating capacity and of its distribution netwiork. 3. Negotiations took place in Wlashington July 7 through July 15. The Borrower was represented by Mlessrs. Manuel Ugarteche and Aldo Bosselli. The Government of Peru was represented by Dr. Carlos Gibson, Financial Minister in Washington. 4. The proposed loan would increase total Bank lending to Peru from :1191.4 million to '201.4 million. The status of the previous loans as of June 30, 1966, is as follows: Year Borrower Purpose Amount (US,3 million) Bank Undisbursed 1952-60 Various borrowiers Various 69.9 -- including the Republic of Peru 1958 Callao Port Authority Port 6.6 1.5 1960 Republic of Peru Roads 5.5 0.8 1961 Republic of Peru Roads 10.0 0.1 1963 Empresas Electricas Asociadas Power 15.0 1.0 1963 Peruvian Corporation Railways 13.3 2.4 1064 Republic of Peru Port 3.1 1.3 1965 Republic of Peru Irrigation 11.0 10.5 1965 Republic of Peru Roads 33.0 32.9 1965 Banco A!gropecuario Agriculture 15.0 6.5 1966 Republic of Peru Port 9.1 9.1 Total (less cancellations) 191.h  -2- mnount (US"' million) Banlk Undisbursed Total (less cancellations) 1091.h of which has been repaid 23.8 Total now outstanding 167.6 Amount sold: 15.2 of which has been repaid 9.1 6.1 Total now held by Bank 161.5 Total undisbursed 66.1 No IDA credits have been made to Peru. 5. The San Lorenzo Project financed with Loan )418 PE hlad a slow start owing to the change of management but disbursement has begun. The situation is being followed closely. The quality of work under the Aguaytia - Pucallpa road Loan (271 PE) has been satisfactory; but terrain, weather, and, more recently, shortages of equipment have caused delays. The Port of Callao Project (Loan 208 PE), which had been seriously delayed by administrative and physical difficulties, is now on schedule. The Bank has been requested to finance a further expansion of the Port of Callao and an appraisal mission is scheduled for August 1966. The Peruvian Corporation (Loan 334 PE) is experiencin- lower operating costs as a result of its investment program; but its financial situation con- tinues to be weak. 6. Several Bank loans are under consideration for Peru. One, for an education project, is being appraised; another, for livestock develop- ment in the Amazon iegion (the Selva), has been identified by an FAO mission. Several road studies are well advanced and a loan for road con- struction may be ready for consideration in 1967. Other possibilities are a loan to increase the power generation capacity of Impresas and a loan for irrigation on the coast. PAtRT II - DESCRIPTION OF TEU PROPOSED LOAN 7. Borroaer: Empresas Electricas Asociadas Guarantor: llepublic of Peru Amount: i10 million Purpose: To help finance the expansion of the transmission and distribution system of the Borrower.  - 3 - Terms of Amortization: 20 years including a grace period of three years. Payment dates of June 1 and December 1. First and last re- payments, December 1, 1960 and December 1, 1 986. Interest Rate: Six percent per anaw:-m. Commitment Feet 3/8 of 1 percent per annum. PART 1II - TL_I1 PROJECT 8. An appraisal report of the project is attached (TO-47). 9. Empresas is a company incorporated in Peru in 19105 At the end of 1965 it had about Si32 millicn equioaThat of common shares and 'P10 million of 8e percent preferred sbzares. It is controlled by a Swiss group holdina about 38 percent of the cormen stock. Teri percent is held bny other investors outuside Peru. The remaining 52 percent is held by some 3,000 Peruvian investors. In 1955, a Concession-law was enacted in Peru to allow private public utilities to adjast, power rates so as to earn groas revenues sufficierit to cover operating costs and give a return in the case of large companies such as the Borrower, of up to 11.5 percent on the capital invested by the concessionaire. The law has been effectively applied and the companys finarcial positiot. is sound. The company's contribution to its expansion prog7ram from i-vitsrnal cash generation is 21 percent. This percentage is low; but it results fron a relat'vely hih dividerd pay--out, which has enabled the c=pany to maintain a gfood market for its shares. FKrther sha-re issues, totalling approximately (S million, are planned for the next two years. 10. The area served by the comipany includes Lima which has the greatest concentration of population and inedustries in Peru. The cor- pany's original service area has been increased several ti2Mtes from 515 km2 in 1962 to 1840 km2 at present. Further increases to the north and south have been autlhorized by the Government and these will bri.n, the total area served by, fupresas to 2850 ian2. 11. In addition to this -eographical e-pansion of the market, thle demand for poder per user has been increasinr,. flpresast systen demiand has had an average annual growth of 10 percent durin, the past 20 years and indications are that at least comparable increases can be expected in the next several years. 12. The two previous Bank loans have greatly helped Empresas to finance the expansion of the generating capacity naeded to cope wjith the increase in power derrand, The first project (Huinco T and Mdarcapoanacocha I) has been completed while the second (Hquinco II) is about 90 percent finished. Znpresast present plan is to raise the capacity of the  transmission and distribution network to the level required by the market and by the companyls available generating capacity (h35 MTW or 85 percent of generating capacity of the private sector, excluding captive plants). 13. The project consists of (a) lines and substations ranging from 225 volt to 220 KV; (b) meters and other equipment for new connections; and (c) radio equipment. The total cost is $22.0 million of which $10.0 million, or about 45 percent, is in foreign exchange. The amount of the proposed loan would cover the foreign exchange component of the project. The balance of $12.0 million will be financed by Enpresas with funds generated from operations, from the sale of stock on the market, and from customers' contributions for service connections. 14. Apart from some equipment amounting to approximately 5 percent of the total project cost, international competitive bidding will be used for all equipment where such procurement is appropriate. Thie exception arises from the fact that some equipment, mainly transformers, is manufac- tured in Peru, using a large portion of imported parts but behind a sub- stantial tariff barrier. It seems clear that in practice only local competition will prevail for this equipment. The loan documents, however, contain a provision whereby loan funds could be used to finance the purclase of this locally produced equipment provided procurement were on the basis of international bidding and provided for purposes of bid com- parison a preference margin not exceeding 15 percent were used. P.ART IV - LErGAL INSTRUMMUTS AND AUTHORITY 15. The Draft Loan Agreement between the Bank and Empresas Electricas Asociadas (Lima Light and Power Company), the Draft Guarantee Agreement between the Riepublic of Peru and the Bank, the Letter re Rates and the Report of a Committee provided for under Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 16. Since the Borrower already has outstanding debentures, including debentures required by previous loan agreements, issued pursuant to an Indenture administered by a trustee, the Loan Agreement provides (Sections 4.01, 4.02 and 5.O) that the proposed Loan will be evidenced by additional debentures issued under the same Indenture. The Indenture establishes a first floating charge upon all tangible and intangible property of the Borrower and provides that additional debentures may be issued only if net income and net tangible assets tests have been met. The usual form of the Bank's negative pledge covenant has been changed to accomrmodate it to existing liens permitted under the Indenture (Section 5.05). 17. The Loan Agreement contains no rate covenant because the Bank relies with respect to rates on Peru's Electrical Industry Law. The Letter re Rates sets forth the arrangements between the Guarantor and the Bank with respect to changes in said law.  - 5 - PART V - THE ECONOMY 18. An Economic Report entitled "An Alppraisal of the 1966-1967 Public Investment Program of Peru" (TWH-155a) was distributed to the Executive Directors on January 19, 1966; and a memorandum reviewing developments to June 1966 (vw-166) is being distributed separately. 19. In 1965 the economy continued its vigorous expansion. GDP grew by 4.5 percent while real investment increased by close to 30 percent and imports by over one-fourth. Since exports remained unchanged during this period, the balance of payments would have come under strong pressures but for the sharp increase that took place in capital inflows, particularly into the public sector. 20. The economy during 1965 was characterized by strong inflation- ary pressures, reflected in a 15 percent price increase. The Government became aware of the dangers of these developments during the second half of the year and action was taken by the monetary authority at various times during 1965 to limit expansion of monetary demand. By the end of the year marked restraints in public finances were also introduced. As a result of these measures inflationary pressures slowed down considerably in early 1966. Prices during the first four months of 1966 rose by 3 percent as against 10 percent during the same period in 1965. These actions taken by the Government have also restored confidence in the private sector. Moreover, favorable export prices, particularly in copper and fishmeal, have been important elements in permitting the Peruvian authorities to maintain an exchange rate that has not been altered since 1958. 21. Over the past two years the Government has had some success in tackling the underlying problems of unequal income and unequal property distribution. In the interior the Government has been increasingly active through a road building program to accelerate the opening up of new lands on the eastern slopes of the Andes. Civic action programs have supplemented these infrastructure activities. Moreover, with confidence reestablished in the private sector, significant plans for increasing production capaci- ties in the mining sector are foreseeable. These investments in turn strengthen export prospects during a period which is likely to be character- ized by some declines in export prices. The prospects for further sub- stantial economic growth, considerably above population growth, are good if the Government continues to pursue its announced development policies. 22. Progress toward coordinated planning in Peru has been slow. However, the Peruvian authorities have recently given more emphasis to a coordinated approach in determining investment priorities. This is reflected in a four-year development program which is scheduled to be published in August 1966. Related to this investment program, the Peruvian authorities have carefully screened their external borrowing plans and presented a borrowing program of US$550 million for 1966-1967 to a meeting in Paris on July 21-22, 1966, where a Consultative Group for Peru was established. It is hoped that the Group will facilitate the co- ordination of this borrowing program and ensure finance for worthwhile projects.  - 6 - 23. Service payments on external public (and publicly guaranteed private) debt amotunted, according to the original schedules, to about 11 percent of export earnings in 1965. Peru appears creditwrorthy for substantial newT borrowing such as is reflected in the external borrowing program of $550 million for 1966-1967 presented to the recent meeting in Paris. This program included the proposed loan to Enpresas. Provided lending for the program is forthcoming on terms recommended by the Bank, the ratio of debt service to prospective exports may reach 16 percent by 1970. This is heavy; but it is tolerable given the substantial decline after 1970 in the service of the debt presently outstanding and also the longer-term prospects of Peruvian exports. PERT VI - COMPLIANCE WITH ARTICLES OF AGREITEN 24. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECORIENDATION 25. I recommend that the Executive Directors adopt the following resolution: RESOLUTICW NO, Approval of Loan to Empresas Eleotriras Asociadas (Lima Light and Power C22pany) in an amounit equivalent to US$li,OCO,OO to be guaranteed by the Republic of Peru. RESOLVED: TIAT the Bank shall grant a loan to Empresas Electricas Asociadas (Lima Light and Power Company) to be guaranteed by the Republic of Peru, in an amount in various currencies equivalent to ten million United States dollars (US$io,OOO,OOO), to mature on and prior to December 1, 1986, to bear interest at the rate of 6 percent (6%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Power Distribution Project) between the Bank and Empresas Electricas Asociadas (Lima Light and Power Company), and the form of Guarantee Agreement (Power Distribution Project) between the Republic of Peru and the Bank, which have been presented to this meeting. George D. !Joods President by J. Burke Knapp Attachment Washington, D.C. August 3, 1966