Uruguay - Reports upon Uruguay

 COl'lFIDENTIAL REPORTS UPOU URUGUAY A. unUGUAYAJ:.T EXTE5l:JAL CREDIT B. .APPRA.ISJ'.L OF TM DEVELOH:IENT FROJECTS ECONOMIC TIEPARTMENT IBRD December 27, 1948 {Jrnend~td 9-d n. 3, lt:t~'l  CONTENTS A. URUGUAYAN EXTIR~·TAL CREDIT Pa~e Surr~ary and Conclusions i I. Gold and Foreign I~change Holdings 1 II. Balance of Payments Structure 4 (a) Dollar Receipts and Payments 4 (b) European Receipts and Payments 6 (c) External rebt 8 III. Balance of Payments Prospects 15 IV, Relevant Domestic Policies 17 (a) Trade 17 (b) Exchane;e Harkets 19 (c) Devaluation 20 (d) Fiscal and Banking 22 (e) Internal Debt 23 V. The United States t1arket for Uruguayan ~',:oo1 24 B. APPPJUSAL OF DEV:ElOP~·\E~TT P::OJECTS Surr~ary 26 VI. Description of Projects 29 VII. Power Program 30 VIII. Telephone Pro gram 38 IX. Resume of Costs - Imports & Domestic 41 x. Financial Position of UTE 43 XI. Annex I 47  SUlvllvJ.ARY AliD CONCLUSIONS The following summary of main conclusions is suggested: (1) From the point of view of dollar credits, Uruguay ls at present a one-crop (wool) economy, until EUropean currencies be- came convertible. (2) Wool export prices and. quantities have in the past varied widely, but may not be so variable in the future. Present prospects are for a favorable long-term rruarket for Urug~an wool in the United States. (3) Available Uruguayan dollars are diminished by present intra-Latin American trade, and are vulnerable to additional losses tbrough Uruguayan exchange markets. Her external credit is therefore partly dependent on continued skill in external financial management. (4) Devaluation of the external value of the Uruguayan peso is probable within the life of a long-term loan, If properly judged, devaluation of itself "!Ould not affect external credit worthiness; it ,l'lOu.ld, however, modify the income-expenses struc- ture of an autonomous entity such as UTE. (5) From the point of view of Uruguay and of Europe, it would be advantageous if Europe were in a position to supply required capital equipment on current trading account (against present  Uruguayan trading surpluses with Europe). A dollar loan operation to finance the whole foreseen costs of the projects mBlf not be necessary. As a relatively developed country U:ru.guay sr1ows much of the economic complexity of an advanced economy. A conjuncture of ur..favo Table external circumstances and ill-judged internal policies could occasion serious difficulties~ There is nothing, however, to indicate that such C' o "'~ u "c:ju rc. I is any more probable in Uru.guay than elsewhere. Her present dif:tl cul ties are largely those of the post-war world, and her :record in handling them is favorable .. -ii-  .... ,. ,. + + + ,,. +,. + + ,.. + + + ,,. A T L ~4 .LV T I c )6. --;. + + + ,.. URUGUAY POLITICAL MAP .$CALE or MILES 0 c E L'-1 _lv r===i'!~ 7il ===r6o SCALE Qr KILOMETERS fF 2!!> !10 7!> 10o CAPITALS Of" DEPARTMENTS ......... . .......• +_ + + ,.. OTHER IMPORTANT CITIES AND TOWNS ........0 INTERNATIONAL BOUNDARIES..... - - - - DEPARTMENTAL BOUNDARIES........ - - - - - ,.;· ,,. United Sta.te:s ?4. ,. w TanFf' Commission-D<>c. 19'1i  A. URUGUAYAN BXTltBNAL CREDIT ·I~ . GOLD .AliD FOREIGN EXCHANGE HOLDIHGS The ti'vo following tables show the growth of Uruguayan gold and foreign exchange holdings dua·ing the war and their movement in detail during 1948. It is apparent that the Uruguayan authorities have followed a policy of cor.verting surplus exchange holdings into gold held in the first instance overseas. Tnis practice represents a hedge against devaluation of overseas currencies, particularly U.S. dollars. Of total gold holdings, ho,r:ever, a large part is immobilized in the Issue Depart- ment of the Banco de la Republica as reserve agai~st bank notes issued. The increase in this item from 1938 to 1947 was some US$ 60 million. Thus, although on aggregate figures total holdings have not declined markedly ... f . . c.c •• since their war peak, a ·i i f I ~ gold and exchange is declining more rapidly. This is particularly apparent in the d.etailed figures for 1948. The dollar exchange indebtedness shotvn for July, August and September is secured against gold held overseas, and the net figure of gold overseas •'..free..·' ho \ d tl'\ "\ S and dollar indebtedness represents/\hard currency ·sa RibS, The greater part of the apparently adequate exchange reserves ill held in the form of ,gold :i mrr'"bi U.zed as a reserve against note issue, and in -1-  -2- Banco de la Republica Gold and Exchange Holdings (millions of US$ - 31 December) English Banco de la Republica Payments Overseas Banking ( fiot4} E..1Cehange Agreement Gold Issue Dept. Depto Total (sterling) Cash 1938 - 5.. 01 nil 5.83 13.. 21 53.42 67.45 1939 1.27 nil 6.84 14.12 53.42 75.65 1940 1.81 2.84 20.26 16.66 53.42 94.99 1941 3.,46 8.37 29.84 16.66 53.42 1ll. 75 1942 - 9.. 10 11 .. 65 19.31 16.66 53.42 91.94 1943 27.52 31Q15 30.69 16.66 73 .. 46 179.48 1944 19 .. 48 53ol0 66.64 16.66 73.46 229o34 1945 1..27 61.70 94 .. 54 1.6.66 83 .. 46 257.63 r 6,.. 1946 91.63 a) 69.46 lo. o · ll3.46 291.21 1947 22.64 57-79 47.79 16.66 113.46 254.93 ·--~---·~·· a) Included in "exchangelf.  - 3- Banco de la Republica Gold and Exchange Holdings, 1948 (millions of US$ - end of month) January June July AUgust Sept. Gold overseas 59.34 52"81 47o80 36,78 30.74 Dollars a) a) -13.93 -14.. 08 -16.15 59.34 52.81 33'l87 22.70 14.59 Payments agreements b) a) 17.74 18.95 17.87 19.99 Blocked sterling 57.79 54.97 54 . 97 54.97 54.97 Argentine pesos a) a) a) a) - 2.96 Other 22.97 - 7.32 .,. 1.07 - 3o39 - 0.53 Total overseas gold and exchange 140.10 118.20 lo6. 72 92.15 86 .. 06 Gold in Banco de la Republica: Banking Dept. - cash reserve 16.66 16.66 16 .. 66 16.66 16.66 Issue :J:ept. 133.46 133~46 133.46 133.46 133,,46 Total 270.22 268.32 256.84 242,27 236.18 a) Included in other. b) Principally France and Italy.  -4- II. BAL.AHOE OF PAYMENTS STRUCTURE (a) Dollar Receipts and Payments The movement of exchange reserves indicates that Uruguay is experiencing difficulty in securing sufficient dollar receipts to cover her dollar payments. This arises principally from the non-convertibility of European currencies simultaneously with impaired European export ability, and is aggravated by settlement of intra-Latin American balances in dollarso The aggregate Western Hemisphere trade deficit in 1947 was US$ 96o54 million, of which US$ 35.86 million was with the United States (as shown in the table, next page). The balance of payments deficit on 71. current account was smaller, being estimated at some US$ . . million, thanks to current earnings on invisible account, principally Argentine tourism, This hard ClJ.rrency current account deficit was approximately covered in 1947 by currency conversions from other areas (US$ 14 million), by draw down of gold and dollar reserves (US$ 24.9 million) t and by capi- tal inflow (US$ 31 million -- mainly from other Latin American R~ublics, notably Argentina), The trading acco~~t position for the first 8 months of 1948 shows a substantially improved position, partly through increase of exports (total Western Hemisphere increased US$ 24c93 million in January- August 19l-+8 over J:,muary-August 1947) and partly through reduction of  -5- 10·~1 imports (imports from Western Hemisphere declined US$ £1 million for the same periods). The principal export improvement was with the United States, the 8 months increase 1948 over 1947 being US$ 16.51 million. Overwhelmingly the principal export to the United States is wool. ln the crop year 1947-48, the United States took 98,612 bales of wool, being 64 per cent of wool exports by bulk in that period, and oompared with 675 bales during the depression ;p. :f.Jl'S 1931-32. No other UIUouuayan export enjoys any substant iel United States market, and Uruguay's external credit in dollars is thus dependent to important extent upon r.'ool prices and export volumes. a) Commodity Trade Balances (millions of US$) January to August 1947 1948 1947 1948 actual (on 8 months rate) U.S.A. -33.42 - 4.,60 -35 .. 86 - 6~90 Rest of Western -31.51 -24 .. 53 -60.68 -36.79 Hemisphere -64.93 -29.13 -96.54 -43.69 Europe t33.83 f23Q54 .f44.17 /-35-31 Rest of World f 0.21 f 0.14 f 0.43 .... 0.21 Total -30.89 - 5.45 -52o72 - 8.17 a) Excluding import of monetary gold. U.S. dollars are used in settlement of intra-Latin American balances and in consequence the strain on Uruguayan dollar earnings is  .... 6- increased, since she is in aggregate trading account deficit with La.tin America as well as with the United States. This strain may become severe and unavoidable in the event of cereal crop failures or drought. ln 1943 wheat imports were necessary; currently Uruguay is experiencing a shortage of fresh meat necessitating heavy purchases in the Argentine. Tourism, particularly from the Argentine, is an off-setting current account item against trading account deficits. Currently, however, the Argentine has prohibited sale of exchange to tourists, and negotiations are proceeding ?Jhich may result in a special tourist rate for the Uru.guayan peso. Diminution of receipts of foreign exchange on account of tourism would make Uruguay's hard currency problem sorilewhat more difficult, and tourism is vulnerable to economic recessiono (b) EUropean Receipts and Payments Uruguay is traditionally in both trading and current accou..'lt surplus with EUrope. The stable cornmodi ties of export to Europe are meat and hides. In 1947, wool (exported principally to the United States) was 44 per cent of total exports, meat 16 per centt hides 13 per cent, agri- cultural products 36 per cent, ,w,ith other exports only 6 per cent of the total. In 1947 :.Ilurope took about t1vo-thirds of the agricultural products exported, an unusually high proportion.. Before the war this item was of small size in Uruguayan trade with Europe. In 1947, Uruguay enjoyed a surplus on current account T'.'i th the world outside the Western Hemisphere of about US$ 31 million equivalent. This diminished the ~estern Hemisphere deficit to give an over-all current  -7- !'f. tj account deficit of US$ ~ million in 1947. In 1948, Urug,.lay 1 s global trade deficit may well be quite small, as indicated in an earlier tablec If European currencies were converti- ble, therefore, her hard currency difficulties \-:ould shrink to readily manageable proportions. Lacking convertibility, a recovery of Europem1 export abilities, enabling Urug,.lay without sensible loss in terms of import qualities or prices to switch from United States import sources, would similarly irtq)rove her position. In the meantime, it is relevant to any proposed loan that there is in fact an export surplus in terms of inconvertible cun·encies. If the inconvertible currency so earned could be used for imports of any or all of required equipment,~ that equipment would be obtained 1Jirithout entering into long-term indebtedness and without decreasing present consumption goods imports. To the extent that long-term hard currency indebtedness is thus reduced or avoided, future import availabilities from the present hard cur- rency areas are increased annually by the amount of debt service escaped dur- ing the life of the loano Simult~~eously, the European position is improved pro rata with the new equipment exports. Europe experienced difficulty in 1947 in covering its current account deficit with Uruguay; .. , .:.rl.llion the area provided US$ '.1)1, in gold and dollars and received US$ 8 million in short-term credits from Uruguay under trading agreements, Provided that Europe can in fact supply any of the equipment required by Uru.guay, it !J That is, assuming such equipment is available from E•1rr>pean sources for export to Uruguay rather than elsewhere.  - 7 a- Uruguay - Balance of Payments (thousands of dollars) 1946 1947 A.. RECEIPTS 1. Cun::~;n.;,; l\.ccount a) .hixports 152,764 162,503 Uncontrolled Exports 11,900 164,664 16~000 178,503 ~~ Interest and Dividends 1~700 11677 Tourism 15,368 21,524 d) Other Services 10,607 27,675 ~_.,284 32,485 Total Current Account 192,339 210,988 2. Capital Movement? a~ Short-term 1 1,885 b Long-term 10~000 .· lO..!QOO 28~000 29,885 202,339 24o,873 ~. PAYlmTS 1. Current Account a) Imports 148:453 216J4o6 Uncontrolled Imports 7o36£ 155?813 ~e_oo 226,206 b) Interest and Pividends 109756 8v~ c) Tourism 5~952 6~ d) Other Services 8~238 _24!~1+6 9,422 24,174 180,759 250,380 2. Capital Account1/ a) S..Y).ort-term 16,534 8~331 b) Amortization of external public debt 1,864 1,995 c) Nationalization of public utility enterprise 18~398 z.31o . 17 9636 Total Payments 199~157 268,016 C.,. BALANCES Current Transactions f 11,580 - 39.3~2 Capital Movements 81398 f 12~2Lt9 Net Balance f 3,182 - 27,143 D. SUMMARY Net Balances gJ f a,l82 - 27,143 Net changes in monetary reserves . f ~764 •. 24,94o Errors and omissions 1,582 1- 2;203 y Mainly changes in Bank's resources abroad~ '§ Only goldo  -8- would seem desirable from the point of view of both Uruguay and Europe that she should do so perhaps without any loan operation. The following table shows Uruguayan balances upon current trade with some principal European countries. Favorable Trade Balances with Principal European Countries {000 US$) Jano to Aug. 1946 1947 1948 Britain 21,66o 2,112 481 Australia 1,342 1,547 New Zealand 172 130 442 British India - 1,807 - 2,318 - 3,794 Southern Ireland 912 1,643 465 Germany 428 791 2,519 Belgium 937 5,747 5,788 Czechoslovakia 1,031 430 422 Denmark 1,697 1,473 31 France 7,453 5,697 413 Holland 7,072 ll,4o8 8,682 Italy 3,481 - 3.683 3,581 Poland 206 4,358 1,284 Sweden 3,171 5,966 n.a. Swi tzerlend 2,034 2,700 2,095 Yugoslavia 2 3,151 836 (c) External Debt The total debt outstanding at the end of 1948 is estimated to amount to about $126 million on wl'.ich annual principal payments of $4,748,000 and interest p~ents of $4,542.000, totalipg $~.290,000, are called for. This rate of payment continues through 1953, the years that this study covers~ About 60 per cent of these service pa;yments are re- quired in sterling and the remainder in u.s. dollars.  -9- Amount Amount Outstanding Outstanding 1947 1947 1n currency EXPressed of issue in $ Bonds Assented to Readjustment Plan Republic of Uruguay, External Readjustment, 3-1/~, 1/1/84 $ 569,500 $ 569,500 Republic of Uru~, External Readjustment, 4-1/2%, 2/1/78 $ 5,213,000 5,213,000 Republic of Uruguay, External Readjustment, 4-1/8%, 5/1/79 $36,052,500 36,052,500 Republic of Uruguey1 External Conversion, 4-1/8%, 5/1/79 $ 1,524,4oo 1,524,400 Republic of Uruguay, External Conversion, 4=5/16, 12/1/78 $ 2,o41, 700 2,041,700 Republic of Uruguay, External Consolidated, 3-1/2%, 8/1/99 ~11,847 ,130 47,727,348 Republic of Uruguay, External Conversion Gold, 3~1/~p, 1/1/79 (a) .;. 3,208,165 12~924,414 Republic of Uruguay, External 3-1/2%, J./1/79 {a) .t, 764,867 3,081,343 Republic of Uruguay, External 3-1/'c/o, 1/1/78 ~ 728,16o 2,933,465 Republic of Uruguay, External 3-1/ ~/o. 1/1/78 ~ 412,380 1,661,314 City of Montevideo, External 3-1/ 2Jb, 1961 ~ 368,078 1,482,839 $115,211,823 Bonds Non-4\,ssented to Readjustment Plan (b) Republic of Uruguay, External Gold, 5%, 7/1/52 $ 417,000 417,000 Republic of Uruguay, External Sinking Fund, 6%, 5/1/64 $ 268,000 268,000 Republic of Uruguay, External Sinking Fund, &f&, 5/l/6o $ 386,000 386,000 Republic of Uruguay, External Sinking fund, 8%, 8/1/46 $ 266,500 266,500 City of Montevideo, External Sinking Fund, 7%, 6/1/52 $ 125,500 125,500 City of Montevideo, External Sinking Fund (Series A) , 6%, ll/1/59 . $ 74,000 74,000 $ 1,537,000 Export-Import Bank Outstanding 6/30/48 Unutilized 6/30/48 $ 13,971,334 $130,720,157 (a) .Also payable in French francs. (b) It is assumed that these ~ill assent to the Readjustment Plan.  Export-Import Bank Loans to Uruguay- June 30, 1948 Num- Int.,. Credit .~thorized Cancellations Amount Principal ber erest Terms Purpose Date .Amount and Disbursed . Outstanding Rate Expirations 331 4% PAyable in Materials,. equipment, 4/22/42 12,.000,000 - ll,3o4.732.86 ll,3o4, 732.86 15 .rears semi-a:rmualJy; services- begin June RIONE for 15, 1951 Rincon del Bonete Electric Project 0 ..... 345 4% Payable in Roads, 2/2/43 20,000,000 17,705,000 2,295,000.00 1,915,200.00 ll years bridges, semi- am.ual.ly; airfields, begin !iUg. etc. (Pub- 15, 1948 lie Works) 333 4% Payable in Printing 4/22/4?. 85,000 6,125 78,875.00 56,133.83 15 years Press- ssmi-am~ R. Hoe & begin June Co., Inc. 15, 1951 32,085,000 17,711,125 13,599,732.86 13,276,066.69  - 11 - Uruguay's External Debt and Service Payments (000 omitted Dollar Bonds: 1948 1949 - 1950 1951 - 1952 - 1953 Assented Bonds Amount Outstanding 44,772 43,426 42;010 4o,52o 38,952 37,302 Principal Payment 1,077 1,133 1,192 1,254 1,320 1,388 Interest Payment 1,866 1,810 1,751 1,689 1,623 1,555 Total Payment 2,943 2,943 2,9h3 2!943 2,9h3 2,943 l)Non-assented Bonds Amount Outstanding --r,'570 1,570 1,555 1,529 1,5o8 1,485 Principal Payment 16 16 17 18 19 Interest Payw_ent 65 63 62 60 Total Payment 81 79 79 70 79 FJ.~Dort-Imuo:rt Bank ·/ - 2)Utilized Portion Anount Outstanding 11,995 13,128 12,945 12,761 11,824 io,886 Principal Payment 437 184 184 937 937 937 Interest Pa~~ent 296 331 326 317 293 269 Total Pa;yr:ent 733 515 510 1,254 1,230 1,206 J)Unutilized Portion Amount Outstanding 3h8 69$ 695 649 603 Principal Payment 46 46 46 Interest Payment 14 28 28 26 24 Total ?ayn1ents 1u 28 74 72 70 Total Dollar Debt Amount OUtstanding 58,337 58,472 57,200 55,5os ~2,933 5o,276 Principal Payment 1,514 1,333 1,392 2,25h 2,321 2,390 Interest Payment 2,162 2,220 2,168 2,096 2,003 1,908 Total Pa:yment 3,676 3,553 3,560 4,350 4,324 4,298 Sterling Bonds bAmount Outstanding 16,893 15,890 lh,843 13, T~9 12,675 11,592 '~;,Principal Payment 803 838 875 860 866 904 ~Interest Payment 591 556 519 481 444 406 I:.Total Payment 1,394 1,39h lz.394 1,341 1,)10 1,310 $Ar:toil..YJ.t Outstanding 68,o37 63,997 59,780 55,374 51,049 46,687 $Principal Payment 3,234 3,375 3,52h 3,t!64 3,us8 3,641 $Interest uayment 2,380 2,239 2,090 1,937 1,788 1,635 '!;Total Pa~rrn.ent 5,614 5,614 I 5z614 5l40l J),276 5,276 Grand Total Naount Outstanding 126,374 122,469 116;980 110,879 103,982 96,963 Principal Paynent 4,748 u, 708 tJ.,916 5, 718 5,809 6,031 Interest PaJ~ent 1,' 51-+2 h,459 4,258 )+,033 3,791 3,543 Total Payment 9,290 9,167 9,174 9,751 9,600 9,574 1) It is assumed that all these Y:ill assent to the Re-adjustment Plan. 2) Based on the arrrount outsta!1din13 as of 6/30/hB. Ho•"ever, the 1948 payment covers the full year. 3) Unutilized portion as of 6/30~. However, between 7/1/hB anl 8/31/h8 $118,274.64 of this had been dra'Vffi down. It is assumed that the vrhole unutilized portion will be dra1m do'V'm, one-half in the remainder of 191+8 and one-half in 1949. (See ~ - page 12. )  -12- Note (from page 11): These calculations do not include interest and amortization payments on the British-owned Uruguayan railroads' debt. A final ~reement between U1ugu~ and a cornmi ttee repre- senting these railroads has settled on~7,150,000 (nominal worth over .U5 million) as a purchase price for all of the British- o,rned railroads and their securities. These funds are being allo- cated to the security-holders now and the Uruguayan Government will have complete Oii'.lllership of the railroads. Since these roads are being purchased out of large sterling balances, no future ex- ternal debt charges will result. Uruguay's foreign borrowing commenced in 1871 when Uruguay con- tracted a ~3, 500,000, 6 per cent loan. The service on this debt was sus- pended in 1876. An agreement** reached with the creditors in 1878 pro- vided (l) for the issuance of Interest Bonds in respect to the four unpaid coupons, amounting to ;,371,52Q. bearing interest at 1.25 per cent per annum, and (2) for the reduction in the interest rate on the 1871 loan to 3-1/2 per cent for a period of five years, after which full payment of 6 per cent was to be resumed. The Government, in 1891, was again unable to meet interest on its external debt including the 5's of 1883 (which had been issued partly in exchange for the 6ts of 1871) and the 6•s of 1888 and 1891. A new Consolidation Loan was issued bearing interest at the rate of 3-1/2 per cent per annum. In 1915 the sinking fund on the coun- try Is debt ?las suspended and in the follOV''ing year an agreement was reached whereby the suspension was to be prolonged until one year after the close of World War I. With respect to the 3-l/2 per cent loan of 1891, it was stipulated that, if the custoos receipts exceeded 17,000,000 pesos in any year, the surplus up to 1 per cent of the debt should be devoted to replacing the amounts unpaid during the period of such suspen- sions. In spite of these provisions, payments were not resumed until 1921-22, while certain differences with respect to the 3-1/2 per cent ** Negotiated settlement.  - 13- l Jflll were adjusted in 1924 and accepted by the Government early in 1925. Between 1915 and 1930, dollar bond.s were issued totaling $67,757,000, including $11,171,000 bonds of the City of M.ontt?video. In I:ecember 1931 sinking fund payments on the external Republic debt were suspended and from October, 1933 through 1937 interest payments on all external loans were made at the rate of 3-1/2 per cent per annum.** lhllar Bond Exchange Offer. On September 20, 1937 an offer*• was made to holders of external 5's of 1915, due 1952, 25-year s.f. 8's of 1921, due 1946, external s.f. 6r s of 1926, due 196o and external s.f. 61s of 1930, due 1964, to exchange their bonds for new readjustment bonds, par for par, interest rates from 5, 6 and 8 per cent to 3-1/2, 2-3/4 - 4-1/8 and 4 - 4-1/2 per cent. l'.Iaturities of the new loans are 1978-79 and 1984.•• At the end of 1947 over 97 per cent of the holders had accepted the offer. The offer is open until further notice~ The City of Montevideo dollar bonds were defaulted on in 1932. Conversion into peso bonds was authorized in 1935 and $6,415,000 dollar bonds were converted. In 1938 holders of the $3,986,500 outstanding dol- lar bonds were offered the new Conversion Bonds of the Republic, with interest arrears computed at 3-1/2 per cent to be satisfied by the is- suance of the Conversion bonds, scrip and cash,** About 95 per cent had accepted this offer to the end of 1947. ** Negotiated settlement. ••• First offer unilateral action - cl~ed favorably for bonill10lders through a negotiated settlement.  -14- Sterling Debt Adjustment. The adjustment of the sterling debt • offered** January 1939, contained the following provisions: (1) Interest on the 3-1/2 per cent 1691 bonds was continued at the old 3-1/2 per cent contractual rate with a sinking fund of 1/4 per cent on the amount then outstanding; (2) Interest on the 5 per cent 1896, 1914 and 1919 was to be reduced to 3-1/2 per cent, end a cash bonus of 1 per cent per annum to be paid for five years on assenting bonds. Sinking fund of 10 per cent was established on 5's of 1896 and the other two loans to have a cumula- tive sinking fund of 1 per cent per annum for five years thereafter at 1-1/2 per cent per annum on amount then outstt.eding; and (3) Interest on the 6 per cent City of Montevideo sterling issue to be reduced to 3-1/2 per cent, a cash bonus of 1 per cent per annum for five years to be paid on assenting l:onds; 1-1/2 per cent sinking fund semi-annually and the assented bonds to become a direct obligation of the Urugu~an Government. Franc Debt Adjustment. The offer made for readjllstment on the franc issues W1;,s about the same as the sterling program outlined above. ** Negotiated settlement.  -15 - III. BALANCE OF PAY!IENTS PROSPECTS Present indications are that the 1948 Balance of Payments will be eased cor:1Pared with 1947, both over-all and in its hard-currency com- ponent. This improvement is partly due to improvement of export proceeds as well as to tighter import control. Longer-range balance of oa~~ents prospects are incapable of exact evaluation. The staple exports of wool, meat and hides are not susceptible of any quick increase of volume; in a long-run, volume could a/ be increased.- There is, ho1•rever, sone danc;er that a pastoral expansion vrhich purely at the expense of agricultural land v:ould lead to cereal imports. The future of prices for the staple e~Jorts does not depend to any important extent upon Uruguay. As a primary produce exporter, she is vulnerable to price declines j_nduced by econoJ;1ic recession, and in a favorable position in the event of vYar. Over a decade, it is possible that neY•r eJ<.-ports vtill Cievelop, along the lines of industrialization of oroducts now exported raw. There would seem to be onportunity for this in wool and hides, for example. Such industrialization of present exports and development of new exports (for examnle, butter and cheese, edible vegetable oils) may in a long period make a sensible difference to export proceeds. An invisible which may increasingly earn dollars and Euro- pean currencies is tourism; the Urucuayan 11 f{iviera 11 may become a summer resort of the Tveal thy of the Northern Hemisphere (who nould thus avoid the northern winter) as well as for Argentinians. a7 Effective wool export volmnes could be relatively quickly increased oy improvement of shearing methods, and ·wool grading.  - 16- Expectations regardi!1g the future of private capital 11 imports 11 are necessarily tenuous. The bulk of such import of capital in the recent past seems to be refugee in character rather than direct investment generating income. tmether such refugee capital will continue to flow in or will soon seek repatriation depends mainly upon conditions outside Uruguay. Over the next decade, there will probably be development of industries and rural production in replacement of present imports. Exam- ples would be development of bydro-electric power to reduce fuel importa- tion, increase of sugar areas, a more stable resolution of the wheat-fresh meat dilemma, and grcwth of consumer goods industries. This does not necessarily involve, however, a reduction of aggregate import demands; as national income rises, new and additional import requirements will emerge. Nevertheless, an ill¥'Jort control of given severity may in the future impact less upon present necessities of life. Unless steps were tcken to control all exchu:nge transactions, a balance of payments loss could in the future emerge suddenly and severely through attempted repatriation of refugee capital now held in more or less liquid form, in bank accounts, urban land investment and the like. Loss of confidence in the relative stability of the Uruguayan peso could induce this very suddenly, a circumstance providing some justification for heavy Central Bank gold holdings regularly published. Recovery of political and economic stability in other countries (for example, the Argentine) would probably induce slower, but insistent pressure of capital rep.:/:riaJ.:;~,on.  -17- The eA~ectations outlined in the previous section may be modified by changes in certain domestic Uruguayan policies. Of these the most important are those affecting commodity trade, the exchange markets, the external value of the Uruguayan peso, a~d internal budge~ tary and banking policies. (a) Trade Since the beginning of the depression in the 30's Uruguayan trade policy has been to endeavor to balance cormnodity trade bi-later- ally countr~r by country. This objective she has never comnletel7 achieved, particularly in relation to the principal '"estern Hemisphere countries. In the calendar year 191.+ 7 she ex')erienced a trade defid.t with the United States (US~~ 35.9 million), Arc;entina (US'~ 22.0 million), Brazil (us~:; 16.4 million) and Peru (US:~ 10.8 million). This policy of bi-lateral trading balance endeavors to direct Ae.f.letf- exports to and control imports from 1 q I countr'.es. Trading policy regarding exports operates through the exchange controls. The proceeds of all exports, which cannot be nade i'fi thout license, are required to be surrendered to the Banco de la Republica. hxport licenses to surplus areas are not granted for corr~odities in de- -fypts of mand in deficit areas. NewAexports are encouraged by a preferential exchange rate system; the oroceeds of staple exports are purchased at a  -18 - rate of Pesos 1.519 to the US$, and for other occasional or non-staple exports buying rates are 1.70, 1.78 and 1.88 to the US$. Examples of products receiving the hie:hest rate are cheese, perfumed soap, fruits and veeetables. It is hoped by this method of exchange premiu.."'Il above basic rate to encourage new and additional exports. Import controls, on the other hand, do not operate through differential exchange rates, but by quantitative and individual licen- sing; no imports may be cleared vd.thout license. The Banco de la Republica determines in each period what quota of exchange is available for ioport purposes in each currency, the size of the quota depending on export realizations in that currency, acquisitions that currency from other sources, and official requirements for na~nnents on account of debt services, diplomatic services, etc. The quota having been thus cetermined, its utilization in detail is entrusted to an ad-hoc body knm,.rn as the Export and Import Control Conrnission. This Co'1I!lission appears to operate efficiently, and to have succeeded in excluding os- tentatious consumntion goods, Thus 'Jolicies have been developed, together "Vi th a bureaucracy experienced in administering them, sufficiently rigorous and at the same time flexible, to ensure that vc.'luable exchange is applied in accordance with an official interpretation of priority of urgencies. There is no indication of any nresent intention of to modify this structure of trade control.  -19 - (b) Exchange Markets Alongside this system of licensing all ex-ports and imports, there exists complete freedom of e:zchange transactions on other than trading account. There are, in fact, three distinct foreign exchange markets in Uruguay. The first, the official or directed raarket, is in the hands of the Banco de la Republica. It receives the proceeds of all cor.~~odity exports, and provides the exchange for all commodity imports, toe;ether with the exchan7,e for official invisibles, such as debt service. The second, or bank-free market, onerates at rates fractionally above the directed market selling rate of 1.90. Its receipts arise from transfers on invisible account which are voluntarily brought to it, and its payments are for invisibles. For some time the bank-free narket was snpnorted by the P,anco de la Republica, IYhich undertook to cover any sales of exchange made l>y the bank-free market. This suoport, hoi"rever, is at present with- dra..,vn, and it woulcl appear that currently the bank-free r.1arket is very small. At present the bulk of pr~vate transactions on account of invisibles are handled by the parallel market. This is a completely free and legal market of private brokers. Both buying and selling rates in the narallel market are now so high above those in the bank-free market that all sales of exchange are made to it, .:md consequently purchasers do not find free exchange available elsev.rhere. The existence of this parallel market offers an opportunity  -20- for loss of exchange to neighboring countries, in particular the Argentine. Provided, however, that the parallel market does not receive any banking support j its rates can rise to levels which will restrict demand to avail- able supply. If a situation should develop in which seemingly high rates were ineffective in reducing the pressure of demand from neighboring coun- tries upon limited Uruguayan exchange resources, the Uruguayan authorities would have no alternative other than acceptance of still higher free market rates (leading to expectation of devaluation) or the suppression of the free market. They are reluctant at present to suppress or control the parallel market, in the belief that its existence encourages capital inflow. an item of considerable present importance in attaining balance of p~'Tilent equili- brium. While 11he existence of a parallel rnarket is unlikely of it self to encourage additional capital infloV~r from the UP..ited States, !d it has done so and may continue to do so from other Latin .America..'1. republics with whom, as was pointed out in the last section, Uruguay experiences heavy trade deficits" It is, however, cont irruously tru.e that ill-·judged ba."lking inter- vention on the parallel market is capable of occasioning rapid and heavy loss of banking exchange resourceso (c) Devaluation Official devaluation of the external value of the Uruguayan peso during the period of an IBRD loan is quite probable. In fact, Uruguay has so far refrained from declaring an official par value for Any inflow from the United States would be direct j_;:v8c::;J:rl::,ri; ·.·JJ.:!er than refugee in character., Freedom to transfer earning;:; :;hr.cvgh tj.10 pu-allel market may somewhat encourage direct investment4  -21 - her currency in a desire to retain freedom to devaluate. Uruguay con- siders that, since her principal competitor in export markets is the Argentine, a countrywhich not a member of the International Honetary Fund, an Argentinian devaluation would necessitate correspondingly un- restricted Uruguayan action. So long, however, as a sellers' market endures for wool, meat and hides (the principal export commodities in question) no valid economic justification for this view is available. In a sellers' l:'arket vrorld prices for wool, meat and hides nill in the short run be unaffected by variation of domestic currency equivalent of those Drices (unless there are hea1ry stocks v·rhich have been vri.thheld in the expectation of devalu- ation). For export cor.rr:~odi ties concerned the increased dor::e stic profits of exporters cannot result in any quick increase in the volune of current production. Devaluation, even in a period of sellers' markets, may sign- ificantly encourage the export of non-staple commodities, but the resulting increase in foreign exchange earnines is unlikely to be immediately sign- ificant; the differential buying rates favorable to occasional Urugu.ayan exports already operate in this direction as a partial devaluation. Should in a later period the structure of international demand and suooly for the staple Uruguayan exports so chanpe that the warl{et for those exports becomes a buyers t r;larket, then Uruguay would be oblit;ed to follow any Argentine devaluation. From the point of view of external cred.i t ''!Orthiness, the im- portant aspects of devaluation are the effect of that steD ~1pon exchange  22 ... receipts, and the impact of devaluation upon certain domestic costs. Regarding the first aspect IBRD would probably be justified in vi.evving a Uruguayan desire to retain adequate freedom to devaluate with sympatl1y. The principal short-term importance of the second aspect is that certain budgetary costs would imr.Jediately be increased, principally ~hose per- taining to the domestic currency equivalent of debt service, If a loan were made to an autonomous entity such as UTE, devaluation would iwne- diately increase the domestic currency costs of ~hat entity. In ti1e case of UTE, principal i terns \'~ould be on account of imported fuel and on account of debt serviceo If UTE were prevented from modifying its rate structure quickly upon devaluation its individual financial position would tlru.s be impaired by devaluation .. Devaluation would affect the internal budgetary position directly through the increased domestic currency cost of overseas debt service. This item was 6 per cent of ordinary budget expenditures in 1946, and any additional budgetary h·u.rden on this account would thus be proportionatel;;r small. Exchange "profits n resulting froJn the existence of multi::ple exchange rates amounted to 34 million pesos in 1947. Introduction of a unitary exchange rate system would eliminate these ''profi ts 11 , which represented 14 per cent of disclosed treasury receipts in 1947. The exchange 11 profi ts 11 fund is, however, not included in the general budget i  - 22 a- the largest expenditure from the exchange fund is an account of cost of living subsidies, whose removal might be possible simultaneously with adoption of a unitary exchange rate. {d) Fi seal and Banking There has become established a tradition of integrity of internal finance corresponding to the record of integrity in external debt services. The Central budget is normally balanced, and wartime budget deficits were financed by issue of long-term Government stocko There is no indication of any present intention or desire on the part of Government to embark upon deficit Government finance. The banking system is well integrated proviciing both opportuni- ties for private saving and adequate credit opportunities for urban and rural production. The Banco de la Republica, in its capacity as Central Bank, has endeavored to restrain the dolliestic increase of money supply resulting from favorable war-time balance of payments. There is at pre- sent an awareness of the dangers of heavy credit inflationo  -23 - So far as can be judged at present, an adverse change of external factors ir!Ipacting on the Uruguayan economy is unlikely to occasion seriously unsound domestic fiscal or banking processes. This may not remain continuously true if the adverse external changes were sufficiently severe to arouse public discontent. (e) Internal Debt At December,. 1947 total internal Government debt issued was Pesos 579.5 million, with Pesos 77.4 million authorized, but not issued. Gross budgetary charges in 1947 were Pesos 39.87 million; of this, Pesos 6.49 million were refunded to the Treasury by the Autonomous Entities on whose behalf the bonds v;ere issued, leaving a net budgetary burden of Pesos 33.39 million~ Adding to this the domestic currency equivalent of external debt service, the budgetary cost of total debt service was Pesos 4h.98 million in 1947, an a.raount equal to 1)er cent of total budsetary ex- penditures. A very considerable &~ount of internal Govern~ent bonds are held by Govern~ent agencies and Autonomous Entities. Ficures have been obtained showing that on June 30, 1948, of a total internal debt issued at the date of Pesos 589 ..03 million, Pesos 339.38 million (58 ner cent) was held by Government agencies, Autonomous Entities, and banking savings institutions. It has been explained to the l.{ission that transactions in these official holdtngs are made through the Stock ':xchance, a circum- stance which renders that institution's statistics of dealings in Govern- ment bonds misleading as an indication of nrivate trading in and absorp- tion of Government internal bonds.  - 24 - V. THE UNITFD STATES NARKBT FOR URUGUAYAlJ 'VTOOL A study has been made on this topic by the Ar.ricultural Section of the Economic J:;epartment, where a full copy is available. The following are the summary and conclusions: 1. Urur.uayan wool, durinG the nast five years, has produced an average of ltO uer cent of the country 1 s export value. 2. Sheep nur:~'::lers in Urucuay have been increasinc; since pre-war years, but are stiJ_l belovr the level of 1908. Could raise more and should with e;reater efficiency in nroduction through improved grasses, better breeding and handling of sheep, 3. The type of sheep raised in Uruguay is a dual purpose (meat and wool) type. This is the proper type for Uruguay to as it produces meat and mediun grade v;ool. They should not try to specialize in the fine wool types as wool t;ypes are poor ffieat producers and the average spread in price between fine wool and medium wool is not sufficient to offset the financial loss fro:n meat. 4. The larr;est proportj_on of wool consumed in the United 8tates is imported. 5. The bif'cest client for Uruguay's wool is the United States. 6. Of the total wool consumed in the United States at present, the largest nroportion of the crade produced in Urueuay.  - 25 - 1. Uruguay exports 81 per cent of its best grades of wool to the United States. 8. Uruguayan wools command a e;ood orice in the United States market, but would command a higher price if graded to official grades and standards, such as the "United Kingdom Count System11 • Prices in the marl-::et for particular ungraded lots is the price paid for the lovrest grade of vrool in the lot. 9. Prices for Uruguayan wool in the United States 1·:-ill de- cline along with other prices. ?rices for wool 1rdll not, hov~rever, decline in the same pattern in the future as they after the first vrorld war. 10. In general, Uruguay should enjoy a favorable, long-term market for her wool in the United States. 11. There is much that Uruguay can do to help herself in increasing her income from the wool she now '[)roduces as well as increasing her wool output. Specifically, Uruguay should: a) Set up and sell her wool by an officially recor::nized system of grades. b) In·:prove her method of handling sheep by dogs and less man-handling. Ean-handlinr; sheep injures the fleece as well as meat. c) Encourage mechanical shearing of sheen rather than hand clipping. d) Impraye pasture conditions by growing imp:::-oved grasses. e) Inprove her strains of cross-bred sheep through a breeding program from 56's v:rools to 60's.  - 26- AHALYSIS OF DEVELOPN:ENT PROJECTS Sill1HARY The Uruguayan Government reouested a loan of $35.8 million be made to Administracion General de les Usinas :aectrica.s y los Telefonos del .Bstaclo, an autonomous government-o1·•ned comp~ny, commonly kno•·-n e.s UTE, to finance the im'J)ortl'l.tion of materials and equi ument for the exuension of its electric ,o,~er production and distribution and for the exPansion of its telephone service. Of the total, ~'29.4 million '···ould be for PO'·•er and $6.4 for telephones. In 1948 UTE employed 8,329 persons, sold 440 million kwh of elec- tricity, and served 63,088 telephone subscribers, It had a gross income of 32.3 million pesos of "'hich p,bout 80;'6 was from sales of energy. The book value of its assets at the end of 1947 '•'es 64.3 million uesos of •·hich 44.5 million pesos rePresented fixed assets. UTE operated t•··o therma.l DOi•'er nlants in Nontevideo \,rith a total effective installed canaci ty of 75,000 hr, 48 small independent diesel pm·•er stations in the interior i•dth a combined capacity of 23,027 h• and received power from a. large hydro-electric po~·er stpt:i.on kno'·'n a.s Rincon del :Bonate, 145 miles north of Hontevideo, constructed and operated by another Government-m·ned agency known as Rione. The first PO•·rer delivered to UTE from this project ,.,as in December 1945 •·hen the first of its four .32,000 kva. units started to operate. At the end of 19L1.8 t•··o of the four units 1··ere in full operHtion and t•··o •·rere under test. It is expected that all four units ,,rill be in oper?.tion before the end of 19L1-9, bringing the capacity of the ulant to 128,000 kva. The total cost of the Rincon project, '''hich l1ras started in 1937, including t•,ro 150,000 volt transmission lines to Iviontevideo substations etc., 'l'!as 107 • .3 million pesos of '··hich 33.3 million pesos "~I'J_s interest during construction. The high interest durin~S construction  27- 'l>ras the result of delays occasioned by the ~·rar. When the Rincon project is finally completed about June 1949 1 t v•ill be tal:en over by UTE 1.•·hich 1••ill assume its debt service. The demand for DO'•'er, which in 1947 ,.re.s 58% inclustrial 1 hrts gro1·'!l more ra"Jidly than UTE has been able to exDand its f~cili ties to sup1Jly it a:1d, a.s a conseauence, there 1•·as in 1948 a large backlog of unse.tisfied demand both in Hontevideo and in the Interior ,,•hich 1·•as increasing daily. The demand in the Interior, however, is expected to increase more rP.nidly than in Hontevideo because; (a) of the very lo,., per capita rate of consump- tion (40 kwh Per year vs 387 b·h per year in Hontevideo, 2132 b;h in the u.s. and 839 brh in the U.K.) and, (b) because for the first time in Uruguay! s history pm.rer using industries had an opportunity to obtain in the interior rates equal to those in Iv,ontevideo as a result of the institution of uni- form rates throughout the country in 1946. These ra.tes represented reduc- tions in the local interior rates of 20 to 78%. To sup·;ly the demand for the immediate future and to serve the interior more economically and efficiently, U'I'E proposes, 1-li th the nroceeds of the I:BRD loan, to install an additional 100,000 k,., of thermal capacity in Ivlontevideo, construct additional transmission lines to bring into the Rincon-i:ontevideo system many localities nm.r served by small, expensive diesel plants '·•hich use imported fuel and to ex-:.>and its netl<•ork in r~Iontevideo in order to suPPly gree.ter loads to industry. These im,,rovements are estill'.ated to cost 55.9 million pesos ($29.4 million) for imPorted materials and 17.8 million pesos for domestic labor and materials, According to UTE 1 s estimates the firm capacity of the Rincon- lviontevideo system "'ill be exceeded in 1950. IJ:'he ne''' thermal units esti..... mated to be completed in 1951 1••ill be able to meet the ne1•' demands until  28 - 1956 after 1••hich ne1•' installations '1-<ill be required. At the end of 1948 UTE 1·•as handling 654,000 local and 10.000 long distance telephone calls daily. Its trunk lines and central stations ''rere overloaded, its neh·ork in the interior '•·as not cross-connected at many points, its facilities for servicing internP.tional cells, principally 1-d th Argentina, ,.rere in.adeq_ue.te and there '·'e.s a lar<;e 1•'aiting list of nrosnective subscribers estimated to increP.se from 63,000 in 1948 to 108,000 in 1952. To supuly the required services, it 1-dll be necessary for UTE to increase the number and c~1naci ties of its e:xchanges and to install ne1•1 cables, wiring. teleuhone sets and accessory a-oryaratus, The estimated cost of these improvements is 14,2 million uesos of which ,2 million Pesos ($6,1+42,000) v.•ould be for imported equi:.>ment and materials. Bids had been received. on about one--third of the total import program for both PO\•>er and telephones (for deli very in the ueriod 1949-1952), and contracts had been awarded on bids totaling ?.8 million pesos, but no payment had ·been made in 1948. The engineering estimates of both the anticipated incree,ae in demand and the cost of the necessa.ry installations to meet the demand ap!)ee.r to be based on careful studies by competent technicians ancl apnear reliable. An analysis of UTE 1 s projected earnings for the 10-year ueriod., 1949-1958 indicates that interest and an1ortization che.rges would be earned a minimum of 1.4 times on all UTE debts including the requested I:Bf'ill loan 'dthout an increP.se in the 1948 rate structure .. If increases in rptes should be necessary such incre2ses could be made effective by a decree of the President of the Republic ,,Ji thout prior Parliamentary action,  - 29- VI. DEVELOPHEHT ?ROJECTS The Uruguayan Government requested a loan be mp<de to Adminis- tracion General de l9.s usinas Electricas y los Telefonos del Estado, e.n autonomous government agency, commonly kno1•'!1 as UTE, for acouisi tion of the material and equipment necessary to be imported for the expansion of its electric po-vrer production and distribution and for the expans:i.on of its telephone service. It also Dresented for the future consider~:ttion of the IBRD projects for the amplificBtion of port facilities and services ~:md the rehabilitation of its railroads. The amoun.t of the loan desired for D01•'er end tele1Jhones and the imnort requirements of the other hro nrojects 1•'ere: ?ro.iect Amt. inU.S. Dollars A. Pm··er '29, 441' 000 Telephone 6,442, 000 235,883,000 B. Port facilities and services 1),200,000 c. roads 10,600,000 As projects B and C t·rere presented only for study en<i nossible future consideration, they will not be discussed in detail in this renort. UTE is an autonomous government agency ,..hich operates the ;Jm··er and telenhone facilities of Uruguay,l/ It has a ~oard of Directors of five members, including the President, all appointed by the ?resident of the Republic "'i th the consent of the Senate. , Under the President of the UJ'E are three managers - Ivlanager of Po'··er, lie.nager of Teleohone, and Eanager of Administration. These managers and other employees of UTE are not l/ The l~:w• authorizing the Government to acauire the D01·'er facilities v·as ]Jassed in 1912 e.nd the lB.'•' authorizing the acquisition of the telenhone systems v•as passed in 1931.  - 30- politically appointed. In November 1948, UTE employed a total of 8,329 persons, of ,,rhich 4,754 v•rere emnloyed by the PoNer Division, 2,307 by the Telephone Division and 1,268 by the Administrative Division. ro~cept for two years, 1942 and 1943, 1·rhen nm••er s11les were severely restricted and expenses, particularly of fuels, rose sharply, UTE has sho1•rn nrofi ts con- sistently since its inception in 1912. Its annual income in pesosl/ from all sources in 1947 1·ras 27.1 million pesos of 1·rhich 21.3 million pesos ,.ras from the sale of po1·•er and 5.8 million pesos '••as from teleryhone services. The estimated income for 19h8 is 32.3 million pesos. The increase in in- come in 1948 (based on 10 months records) over 1947 results from a combina- tion of incre;::csed sales of nm··er t'lnd teleryhone service Rnd increased PO"~>rer and telenhone rates. To meet increasing costs of labor, fuels and materials, UTE in July 194:3 incree.sed its DO'•'er rates about 23» ?) and its telel)hone rates from 4.00 to 5.00 ~esos ner instrunent per month for residences e~d set a limit of 300 free cE~lls per month above •·:hich a chnr.e;e of 3 centesi- mos per ce.ll ,.rould be made. Other telephone rates ,.,.ere increr>secl propor- tionately. VII. Power Program UTE operates t1tro thermal plants in ilontevideo '·ri th a total !} Exchange rate: 1.90 ~ one u.s. dollar. ?J Examples of incree.sed monthly ra.tes in pesos - Old. rate Ne1•.• rate Residences ... 1 to lQ kPh. o.o6 0.07 For industry - 1 to 4000 k1··h. 0.055 0.065 4001 to 10,000 k"rh 0.05 0.06 10,001 to 20,000 ~··h 0.045 0.55 20,001 to 50,000 kwh 0.04 0.05  - Jl- installed capacity o:ri~inally of 90,000 kva (nresent effective cauacity 75,000 b•) and 48 small indeuendent lJ01••er stations in the interior ~>'hich consist principally of diesel po,·•ered generators varying from 50 to 3300 br. Their combined totel cana.ci ty is 23,027 b•. These sta.tions are not interconnected ,.rf th each other or ~··i th the Hontevideo steam no1~·er stations at present. In addition to distributing P01·:er from the thermal 1)lants in Hontevideo UTE receives po,·•er for distribution in Lontevicleo and vicinity from the lar,~e hydro-electric station, kno'.•'n a.s Rincon del Bonete, con- structed on the Rio Negro 145 miles north of Hontevideo. The first oo,·•er delivered to ilontevideo from this project >·ras in December 1945. A total of 322,455 consumers l!rere served in 1948, of '•'hich 227,338 '''ere in llontevideo a.nd 95,115 i·•ere in the interior. In Eovember 1948, h:o of the four generators of 32,000 kva ca.pa- city installed in Rincon were in opera.tion. flhe other t1··o generators "''ere under test and '''ere e::rnected to be 1JU.t in operation ee.rly in 1949. ~lhen all four generators are in operl"_tion and the synchronous concensers Bre inst~lled, the capa.ci ty of Rincon idll be 128,000 kva. (about 115,000 kv ;.··i th a Pov•er f?ctor of 90;6). It is exPected thl'lt the installation of the condensers "'ill be completed late in 1949. Rincon '''1?$ connected in lro-,rember 1948 '1-ri th i'lontevideo by one 150,000 volt transmission line. The second 150,000 volt trl'lnsmission line oaralleling one in use has been constructed and will be utilized by the end of 19L'·8. UTE ;..rill acouire m·nerPhi u of Rincon after its completion about June 1949, but at present this uro,iect is under the jurisdiction of RIOJ)U:, a Government agency established to complete the construction of the project after the German syndicate ,,•hich started its construction in 1937 '''<"'.s eliminated by the ,,~ar. UTE nays the employees oper~tting the generfl.tors a.nd accessory eoui nment but RIO~TE employs all construction personnel. As the po,,rer station of Rincon is  - )2- practica.lly completed, no funds for this nroject '''ere included in the loan reQuested. The urinci:aal economic justification for the construction of the hydro-electric nroject ~·r~=:ts the savings in foreign exchan~e to be made by the reduction in the imnortations of coP1 and fuel oil a.nd also the elimina- tion of Uruguay 1 s absolute deuendence on imnorted fuels for the seneration of electricity. As there are no indigenous fuels nroduced in Uruguay, not even "rood, the country '''as forced to burn ;re.in for a ~·.•hile during the l·rar \>!hen access to imported fuels ~··as cut off. The total cost of Rincon '•'aS 107.3 million pesos, of ,,,hich 33.3 million pesos ,.,as interest during con- struction (1••hich extended over a period of about 12 years because of the 1•rar) and other financial ex11enses. Since 1935 there has been a steady increase in the amount of energy sold both in hontevideo s.nd. i~ the interior, 1•'i th the exception of the years 1942 and 1943 ,.rhen the sa.le of ~ooNer ,.,as severely restricted by lack of fuel. ~he table belov? sho,··s the trend of sales of energy since 1935 and the projected demand until 1952. Energ;y: Se-les :&n:d Pea.'k:: Load~ Year Hillions kHh Hill ions brh lUllions k"•h Hontevideo sys- i tontevideo interior total tern neak l ond k"r 1935 12?.J lJ.J lh0.6 52,700 1936 1)8.0 15.1 153.1 51,600 1937 156.2 16.6 172.8 58,100 1938 176.4 20.2 196.6 60,100 1939 190.6 21.9 212.5 64,000 1940 219.0 24.1 243.1 65,300 1941 235.3 25.7 261.0 73,800 1942 226.3 ?:.6.4 252.? 66,300 1943 208,5 .5 235.0 51,300 1944 246.2 28.8 275.0 64,300 1945 273.9 31.8 ;os.? 74,500 1946 30).4 37.5 ]LW.9 83,000 1947 320.7 49.3 370.0 89,000 1948 (est.) 380.7 59.1 439.8 102,000 ?rejected demand 1949 402.6 ?1.0 4?~.6 115,000 1950 450.9 85,2 531.1 152,000 1951 505.0 102.2 60?.2 168,000 1952 565.6 122.? 638.3 182,000  - 33- Since 1937 the pm·rer system in Lontevideo and vicinity has been "'orking practically 1··ithout reserve. In other 1•!ords, the liontevideo system has been supPlying demanos in excess of its firm capacity for over ten years. Even 'd th the four 32,000 kva hydro-senera.tors in service, the firm caua- city of the system "'ill be exceeded in 1951. 11 The table Energy Sales and ?eak :I;Joads 11 sho•·.•s an actual increase in energy consumption in the four years from 1944 to 19ti8 of 55~ in i ontevideo and 105~ in the interior on the average. The demand in the interior is exryected to continue to increase at a more rauid rate than in Hontevideo (a) because of the verc lot•r uer capite. rate of consumntion nm.r existing in the interior (40 b·h per yef'.r vs. 387 k1··h Per yee.r in lvlontevideo 1./) and (b) because reduced uniform rates, instituted in 1946 throughout the interior, renresenting reductions ran~ing from 20) to 781 and replacing rates varying in scale from locality to loct'tli ty, 'brou5~ht forth an immediate demand for increased service throughout the interior which continues to gro>-I pa.rticularly in the larger, more industrialized comnuni ties. (Sales of pm··er in the interior actually increased 32.1? from 19Ll..6 to 1947.) Hontevideo a.lso received in 1946 a reduction in rates ranging from 18% to 24% de:oending on the type of consumer. Prior to the rate increase in July 1948, the income from the sales of energy based on sales to all consumers averaged about centesimos per b·h. The 1948 rate increase ,,,ill probably result in the sales averaging about 6-~ centE'simos per brh. This compares with an average uer canita consumntion in 1947 of 2,132 b~h in the U,.S.A; 1,433 b•h in LUYembourg; 339 b·h in the U.K.; 736 b•h in :Belgium, and 4/~.o b•h in the lretherlands.  -34- In order to serve the anticiuated loads in the interior more economically and to keep 1)ace Ni th the groving demand 1/ an. exPansion program has been formulated bv UTE which provides for construction of transmission lines eastward and ,,,est1·'ard from and along the Rincon - Montevideo axis, interconnecting nl.llllerous communi ties ~·ri th the hydro and thermal plants in those two places; the constructing of 100,000 br additional thermal ca.Pacity inHontevideo; the increa.se of capacity in certain communi ties in the interior Partially by ne,•.r eouipment and partially by the transfer of plants from communities to be served by the ne1•' transmission lines; the conversion of ten 1)lants from DC to AC current; the inst~:tllation of a 30 b' net and increPsing the 6.3 kv alld 220 v nets in Hontevideo; the Durchase of additional meters and acces- ~ory equipment for increasing coaDections ~nd the purchase of additional trucks and passenger cars for inc reP sed maintenance ,,,ork. The existing transmission lines and the proposed circuits are sho~·'ll on tbe accompanying map. The total cost of this program in pesos and the cost of the l/ In :J:.iovember 1948 UTE could not se:rve 1.50 customers Ni th demands of 50 b· and a.bove reauiring a totn1 load of 23 1 324 b' because of lack of facilities. From January 1, 1946, to Hov. 1948, UTE had connected 120 customers 1·ri th demands of 50 br ?nd above comprising a. load tota.lling 21,128 kw and many of these demands \•rere only partially filled.  Thousands of kw 850 KEY -- Maximum load of the system including the projected lines ........... Maximum load of the system without projected lines 800 XXXXXXXXlXll Maximum disposable power of the Montevideo-Rincon system -·-·-·- Maximum power of the entire system including the power of the installations in the various localities of the interior 1------- I - - til- 750 0000000000 Firm power of Montevideo-Rincon system --- --- c--- 700 ------ Firm power of entire system 1-------- +---- 650 ~ ------ 600 \ 550 I \ ,------ \ ll 500 0 Q) "t:l ·:;; ' f-g Q) \U 450 :!: -c: c: 0 j \ 400 c. \~ \~ Ci .., E J c: '- Q) \ 350 - f--- :E ------- ------- c: 0 ·u; 0 c: J "' ... ·er- 0 f----·~ 300 "' c: Q) "' 8. f-·- ·-· -·- ·- ·-· ·- f- t- ..~ ..J# E! i >< "k" \ ~ •\ 1- "t:l LIJ uxxx xxxxxx XlXXXX xxxxx x:nxxx XX ... UXXl "2 g Nr-0 I ---- 250 i ~ ~~ .., I' "' lj -- :::1 z .s "t:l-e 0 c: --- 1--- ~4o• 0 C:::~ ... 0000 00000 0000< 00000 t;.oooo 00()0 i-- a:: 1--- 0 1- i--ii 200 . .., -·--·- ~-' ~ "t:l .£: c: z c: .... - r<>V » k r.f) i " a::. :0 .... :::1 .. .. . :_ 150 r - - - ~-~-- 1-·-· -·-·-·-· :e .= -g XkXXIi t\1 XXXXXX XXXIX . i.... .. .II 1:. tC I 50 v ·.... ooloc oo!Jl.. ...,V' V' .!! OODO< I 00 100 RINCON DEL BONETE-MONTEVIDEO 50 1--·- ~ V'- V' ·-· -· ·- ·-· 1-·- ·- v --- "' A A M--rr A_ C'~ 1---- SYSTEM MAXIMUM LOAD AND DISPOSABLE POWER 50 0 '"'!'"' i"''i/ 1955 '56 '57 '64 UTE Nov. 3,1948 ,1965 1·s6 , '67 l'68 l'69 rl970 0 '58 '59 1960 •s1 1 ·s21·s3 1934 '35 '36 '37 '38 '39 1940 '41 '42 '43 '44 1945 '46 '47 '48 149 1950 '51 '52 '53 '54 YEARS NOTE: FIRM POWER MONTEVIDEO PRIOR TO CONSTRUCTION OF RINCON  - J5- Prouosed Pm·•er Program Cost in Pesos ImRorts Total h'ork in Hontevideo 100,000 br thermal station 17,000,000 20,000,000 E:{nansion of JO b• 6. 3 kw and 200 v nets 11,000,000 14,780,000 itieters, accessory equipment, laborator.y equinment, etc. 2, 7}3,000 ],870,000 Work in the interior 1vestern Circuit 13,000,000 17,201,000 Eastern Circuit J,6oo,ooo 4,855,000 Central Circuit 1,400,000 1,855,000 Conversion of stations to AC 3,700,000 5,70'),000 Increase in power 3,000,000 4,000,000 I-Ii scellaneous Vehicles 500,000 500,000 Hydroelectric studies _L_OOO,OOO 55,938,000 73,761,000 (u.s. dollar eouiv?1ents s 29,l.J·41,000 36,800,000) The relatively small difference betveen the cost of imtJorts a.nd total costs results from the f~::ct thf!t UTE 1 s specifications cB.ll for the successful bidder to include in addition of the cost of the eauipment the cost of supervision, engineering and all materials except snecified local materials and labor. Even with the insta1la.tion of the ne1•r 100,000 br stee.m nlant in iiontevideo the engineers of UTE estimA.te that the firm ca.Pa.ci ty of the i'iontevideo-Rincon system ,,,ill be exceeded in 19.54 and by 1957 the maximum ce.paci ty of the system v·ill be inadem.1ate for the estimated load. This is sho1.<m on the attached chart, ,.;hich indicates the anticipated load and the firm and ma~imum capacities available. The firm capacity in 191,.3 '':as estimated at 110 1 000 k'''• This  - .36- capacity ~~·as based on 2 of the 32,000 kva units at Rincon being in opera.tion 'Iori th a minimum level in the reservoir and "'ri th one 25,000 kw thermal unit of the 75,000 k1·· total thermal capacity in 11ontevideo being out of service. Ui th a ma..ximum level in the reservoir ( ~··hich· actually existed in 1948) and all thermal units in operation, the maximum caner city of the system ,,ras 135,000 br. Late in 1949 or early 1950 when all 4 generators are operating at Rincon '·•i th the synchronous condensers installed and the second transmission line of 150,000 volts is in service. it is estimated that the firm capacity of Hontevideo-Rincon system '·•ill be 128,000 k'\>J, This estimate is based on 78,000 brat Rincon 1•rith a miminum level in the reservoir and 50,000 k1•' thermal capacity in operation in Iiontevideo. The maximum capacity in 1950 based on 4 hydro units being in opere.tion at Rincon 1•'i th the ma:.-;imum level in the reservoir and all steam units in OPeration at hontevideo is estimated ~t 173,000 kw. These estimates take into accotmt the P01··er factor a.t the generP.ting Plants and transmission losses of about 11 percent. The firm and maJ~imum capacities of the Hontevid.eo-Rincon system '••ould increase to 208 .ooo b• and 27.3,000 br, respectively. 1•rith the addition of the 100,000 b• thermal unit in i•Jontevideo by the end of 19§1. The total capac! ty in the whole country in 1951 1•rould be a>bout 290.000 kv• with all the small diesel units in the interior added. The consum'Jtion of energy in 1947 by various types of users in Montevideo and in the interior is shm·'!l in the follo1·•ing table. Industry wa;3 the largest consumer in Hontevideo, but in the interior residF.ntial and commercial users still consumed the largest amount of energy.  37- Consumption of Energy in 1947 (thousands of I<_,,h) Residential & Commercial Industr;t ii[uniciJ2al Govt. Other Total rJ!ontevideo 84,841 197,962 11,571 261277 136 320,78? Interior 21.637 17,321 5.208 5.036 28 49,":l00 Total 106,478 215,353 16,779 31,)13 164 370,087 Percentage of Consumntion b;;t: Class of User hontevideo 26.4 61.7 3.6 8.2 100 Interior 4J.9 35-3 10.6 10.2 100 Total 28.8 4.5 8.5 100 Since the cloE:e of the ,,rar UTE has been forced by its inability to exuend its PO'•'er :sene rating and tra.nsmission fPcili ties quickly to suuul;r only pertially the increased reaui rement s of its old industrial consumers and has had to defer connecting ne 1·' loEds. As a conse(luence 1t has on its books today a large backlog of demand, Particularly in the interior '''here new transmission circuits are Proposed. In Montevideo the demend is also increasing ra:oidly because of t'·'O factors: (1) neN consumers and (2) an increasing load fa.ctor. From 1937 to 1947 the load factor (percentage of use of facilities} increa.sed from 38.01 percent to 53.91 percent. The estimates of the future demand A.Ppear to be reasone.>.l:le, lf 'I'hey were basect U1Jon the a-'11ticipati on of a rather sharD increase in sales as soon as additional power becomes available to meet the pent up demand and then a rather conserve.ti ve annual rate of increase of 7% for Eontevideo and 11% for the interior until 1./ In 1958 the uer cauita. consumT')tion for the entire country is esti- mated at 392 kNh, This is very lo"' by u.s. or Euronerm standHrds.  - )8- 1958 and 10~ thereafter. Annex I gives the details of assUinptions on ,,rhich the estimates of future demand ,.•ere based. In general, it may be said that the engineering estima.tes both of the anticipated demand and the cost of the necessar-<J installations to meet the demand "rere based on careful studies by competent tech- nicians and are reliable. About one-third of the estimated cost of the program is based on actual bids for delivery in the next three years and the remainder on 1948 prices ,,ri th adequate f\llovances for contingen- cies. VIII. TELT::PHOHB PROGRAH At the close of the year 1948 UTE had obtained, under the po1··er granted it by the Lfl.l•' of 1931 1 a com-olete mono~)oly of telephone service in Bontevideo and uractica1ly a complete monopol,r in the Interior. Three small net,,•orks continued to oue:rl":l,te by negative consent, in the to•'!ls of Dolores, Durazno end S::>randi 0el Yi, but ne!Soti8tions for their ac- quisition 1·rere in progress. In l'Tovember 1948, 2, 307 nersons '··ere emnloyed in the oper«?tion of teleDhone services, 1,12) in Hontevideo and 1,184 in the interior. ~·he system included 271 central stations, 13,710 l:ilo- meters of pole lines and 354,942 kilometers of '•'ire. An average of 65), 911 loca,l and 10,082 long distance messages 1•Iere handled daily in 1948. The follo1dng t11ble sho··s the number of UTE telephones in service in I1iontevideo and in the interior from 19)7 to 1948 - end the nrojected. demand for service until 1952~  ART IGAS ~TELEPHONE -" TRUNK LINES CABEU..OS lj Existing and Proposed RIVERA W.E N '\ \ '\ \ \ \ \ SALTO \,,.. COL. lTAPEBI s ......., ' ', RIVERA ', ' ', '\\ ''\ \ t \ . PAY SAN DU TACUAREMBO ' I' I \ \ \ CERRO LARGO NEGRO ··········] ~\~-/·· ··· ... ;v /· '···..... ·, SARANDI O(L Yl .••·· ••• ) J ( ROCHA L -=Existing trunk lines ---=Proposed trunk lines ··-·=Trunk lines to be reconstructed PLATA •=Central stations Nov. 3,1948  ..,. 39- Number of Subscribers Hontevideo Interior Total 1937 25,351 818 26,169 1938 27,115 1,133 28,248 1939 28,060 1,239 29,299 1940 )0,393 1,651 32,oL;-4 1941 32,779 1,665 34,444 1942 34,223 1,808 36,031 1943 J4,976 1,879 36,855 1944 35,941 2,125 38,066 1945 37,224 4,911 42,135 1946 41,551 12,529 54,080 1947 41-+-,222 15,760 59,982 ?rejected DemBnd 1948 4-5,752 17,336 63,088 1949 53,000 19,336 72,336 1950 63,000 21,082 84,082 1951 73,000 23,142 96,142 1952 83,000 25,407 108,407 The increase in the number of install.<l,tions since the end of the war would have been much greater except for the fact that UTE was not able to supply the service. In October 1948 there was a backlog of over 17,000 subscribers in liontevideo alone. The expansion of the telephone system in Hontevideo under construction at the end of 1948 ~as estimated to take care of some 11,000 of these subscribers, but the demand increPses daily. The construction work since the end of the 1••ar has not been a,ble to keep DHce vri th the ne1,r aunlice.t:l.ons. Equi ument and materials have been difficult to obtain. Some of the equipment now being install eel. in Montevideo 1·•as contracted for in 1945. The trun11:: lines to the interior of Uruguay are inadequgte to meet demands upon them and the net is not cross-connected a.t many Points (see attached map). · This results in circuitous routing of many ce1ls and  - 40- inefficiency in the service. Uruguay is directly connected by telephone ~"'i th Argentina and Brazil. The majority of the international telephone calls are made ,,Ji th Argentina. The line to Euenos Aires is extremely overloaded, most calls requiring about four hours to get through except at off-peak times. In order to supply the service required in .!Viontevideo, in the interior, and ,,,i th the neighboring countries of Argentina and Brazil, it "'ill be necessary to increase the number of exchanges, cables, 'lrii•ing, telephone sets a..Tld accessory apparatus and, in addition, to provide ne~·r trunk lines cross-conneGting and sup-rylementing the existing net1••ork in the interior, to replace some lines, end install one automatic system e.t Baldonado. Plans for providing these improvements have been forTLulated by UTE and are estimated at the cost of 14,150,400 pesos, of l••hich 12,240,000 pesos 1••ould be required for imnorted eaui!)ment Rnd materials. The accom- panying map sho1•rs the existing and nronosed lines, The eli vision of costs betHeen Hontevideo and the interior 1•rould be: Imnorts Domillk Total Hontevideo 8.341. 720 1.190.529 9.5)2.251 Interior J.897.68o 720.470 4.618.150 The items to be imported are: Cost of Imports Item for Hontevideo in nesos Exchange and accessory equipment 3,286,720 Cables to provide for 100,000 connections 1,800,000 Trunk, secondary and tertiary lines 1,950,000 Telephone sets and other apparatus 1,305,000 For the Interior Automatic exchange for l·ialdonado 985,000 Ne"' trunk lines 2,685,000 Rene"ral of trunk lines 52,680 Trunks, tools, measuring equipment 175,000 Sub-total 12,239,400 Cost of local labor, materials, etc., including land 1' 911,000 Grand total 14,150,400  - 41! - IX. RESLJJIIE A resume of the cost of the um·rer and telephone urograms Dro- posed by UTE, broken do,,n according to anticipated exnendi tures by years, 1949 l25Q 12.il 1..2.2£ TOTAL (thousands of Uruguayan Pesos) Imnort Costs Po,·•er 9,442.0 30,928.0 11,:318.0 4,250.0 55,938.0 Telephones 4, 524.4 _2,214ll 2,500.9 12, 239t4 TOTAL IHPORTS 13,966.4 36,142.1 13,818.9 4,250.0 68,177.4 U.s. Dollar Equivalents (in thousands) (7.351) (19,022) (7' 273) (2,231) (35,883) Domestic Costs Po1·'er 1,611.0 5,076.0 10,386.0 750.0 17.823.0 Telephones 960.0 637 .. 3 313.7 1,911,0 TOTAL DOEJJSTIC COSTS 2, 571.0 5,713.3 10,699.7 750.0 19,734.0 GRA.rD TOT.4 16.537!5 4lt8SS.4 24t 51826 5.000_A §2~11.4 Bids have been recPived on 21.8 million pesos (about 32 per cent) of the total import nrogram of 68.2 million pesos for both po"l-•er ~nd telephones and invitation8 to bid are being prenared on the remainder. Deli very dates cover the neriod 1949 to 1952. Contracts have been a'''arded on materials and eouipment anounting to 7.8 million pesos, but no payments had been nade on these contra.cts in 1948. An analysis of the bids received (including the ?.8 million pesos in contracts aNarded) sho,.rs that 82.4% of payments would be required in u.s. dollars, 9.3% in pounds sterling, 4.2% in s,,,iss francs, 3.1% in :Belgian francs and 1.0% in Swedish crm·•ns,  -42- The only table available shm·'ing a breakdm·rn of the countries bidding a.nd the currencies in which they required payment ,,ras the one covering ?.81.5.879 pesos of materials and equipment actually contracted. This table indicated that of the eleven countries ,,,hich participated in bidding, only five submitted bids in their domestic currencies. The remainder required payment in dolla.rs. T,,,o of the cou."ltries submitting domestic currency bids, ho,•rever, (S,.reden, Belgium) reauired uartial -pay-- ment in dollars, The breakdo1·rn of the bids t~rere l Bidding Coun t :ry:. Currency Amount United States Dollars 1 .. 817.391 Great Brita.in Pounds 11.5. 293 S1•ri t zerland Francs 680.337 St,reden CrO'•T!lS 366.324 II Dollars 137.616 Belgium Francs 8J389.618 II Dollars 1.52.537 France II 404.321 Chile " 67,908 II Czechoslovakia 6.937 l:Tetherlands II 17.190 Italy II 581.288 Brazil II 13.818 A rece;oi tulation of the above te.ble by currencies, ueso equivalents and percent of each currency follm.rs: ,({ Currenci)': Amount Peso :Equivalent ~ u.s. Dollars 3,199,006 6.078.111 7?.8 Pounds 115,293 882,252 11.8 Swiss Francs 680,337 299,569 3.8 ST.<redish Crowns 366,324 193,338 2.5 Belgian Francs 8,389,618 ]621602 4.6 ?,815,879  - 4·3- X. FIJJAHCL>\L POSITIOF OF UTE UTE, being a governnent agency, is nrimarily concerned ,.,i th providing electrical energy and telephone service at the loFest noesible cost to the consumer consistent l•'ith its obligations to co-ver its entire cost of operations, including debt service, snecified uayments in lieu of taxes required by la'·' to the Government, and other acti vi t1 es, and annual bonuses to its employees. The payments reouired by la,·• and the bonuses 1./ to the employees, ho"•ever, are payable only if there is a net urofi t after interest and amortization. Strictly spe!?.king, therefore UTE 1 s financial structure and financial operations are not exactly comparable to a privately m•med utility, although its accounting nrocedures and nolicies regarding depreciation of its structures and equipment a-ppear, in general, to be comparable Nith those employed. in orivate utility compcmies in the u.s. An analysis of the data submitted to the Eank by UTE indicates that the overall financial position of the enterprise at the close of 1947 '~>'as not particularly favorable. As of December 31, 1947, the book value of UTEI s assets •··as about 64.3 million pesos, excluding suspense items. Of this amount, 41J.5 million pesos renresented fixed assets, including 1··orks under construction. I1.s of the same dete, the capitalization of UT3 "ras 46.4 million 2/ Pesos, represented by long-term debt of 18.3 million Desos - and accumu- lated nrofits of 28,1 million nesos. (The latter fi::;ure ,,·ould normally 1/ In 1947 bonuses to employees amounted to 52 per cent of net profits after interest and amortiza.tion. ?J While the service of its bonds is a nrimary oblig?.tion of UTE, all UTE bonds are ~eneral obligations of the Government.  ,_ - 4~?- be equity capital in a private company.) The pronortion of funded debt (J9%) to total capitalization is very conservative for an electric utility. However, this ratio will not be so favorable after UTE acquires 01,'11ership of the hydroelectric project, Rincon del Bonete, in June 1949, and. the financing of the presently proposed expansion progrem is consummated. The net '''orking ca1Ji t~l position of UTE at the end of 1947 '•:as ,,,eak. It vra.s difficult to segregate the various current accounts, but the most favorable estimate '•10Uld indic?te that current assets tote.led 19.8 million uesos "rhHe current liabilities '''ere in the neighborhood of 18 million pesos. Of total current assets, cash r:.md equi va.len t totaled only 0.7 million nesos. The indice_ted current '''orking capital ratio of 1.1 to 1 is not a very adeauate margin and should be corrected. This coulcl. be accomplished either by funding ? uortion of the short-term indebtedness, or by relieving UTE during the next fe1•' years of the necessity of contributing a portion of its profits to the Governrent and to its personnel, or a com- bination of both procedures. Annual operating earnings of the enterurise during the uast decade have shm•'n wide fluctua.tions, ranging from a loss in excess of 2.0 million pesos after deureciation in 194J to a net profit of 5. 2 million pesos in 1946.. Net income after depreciation in the 1•rar yee,rs 1942 and 1943, 1111hen po1•rer sales '~>:ere restricted, ,.,11.s insufficient to cover interest reauirements on outstanding debt. Earnings sh01··ed marked imProvement in the im.mediately succeeding years a.ncl interest charges were earned 7.2 times in 1946. A drop in ee.rnings in 1947 reduced interest coverage to 3.6 times (after deprecietion) in that year. Estimates for 1948 indicate some recovery in e1:1.rnings a.fter denreciP.tion, due to a reduction in the amount allocated for denreciation. Interest in 1948 is estimated to be covered 4.1 times, In order to shot•r its ability to supnort the reauested I.BP.JJ loan, UTE has projected its earnings for the 10-year period 1949-1958 assuming: (a) the 1948 rate structure; (b) the incorporation of Rincon into UTE's capital structure; (c) a substantial increase in the comnany 1 s nlant financed partially by the requested IBRD loan, equivalent to 68.2 million pesos, and partially by an additional domestic bond issue of JO million pesos, From ananalysis of the projected earnings it appears that interest charges after depreciation Hould be earned a minimum of 1,8 times during the 10-year period, Interest a.nd amortization charges would be earned a minimum of 1.4 times before e.llo,,·ances for depreci:c.tion and 1. 2 times after provision for depreciation reserves, The details of this analysis are shoHn in the attached table. The indicated coverage, ,,•hile by no means generous, apuears to be adequate for r-m electric utility ,,•hich includes substanthtl investments in hydroelectric not.:er ulants, On the basis of the foregoing analysis it aupears tha.t the operations of UTE ~'oul.d, '·'i thout a rate increase, be caPable of carrying the additional debt service incident to an IBBD loan equivalent to 68.2 million Pesos (U.S.$35.8 million) and the a.ddi tional domestic bond issue required, although the margin of safety 1•rould not be large, If increases in po,,•er or telephone rates should be necessary to cover future increases in o-perating costs (or a devaluation of the peao) such increases can be made effective by presidential decree 1a.ri thout the necessity of Parliamentary action, Because the cost of imported fuel oil is such a large item in  - 46 - UTE 1 s operating cost (17~ to 27%), a devaluation of the peso •·•auld immediately cause a rise in this exnense <1irectly pronortional to the amount of the devaluation. An analysis of the net ea.rnings after deprecia- tion and totB~ debt service (including amortization) in the Period 1949-58 indice,tes ths.t in one ye9r, 1954 1 there would be practically no margin to absorb such an additional exnense '''i thout an increase in rates, unless the payments to the Government or bonuses to the employees •·•ere reduced accordingly. In the other years the margins are such that incret>,ses in fuel costs from 20 to 70% could be absorbed. Similarly, increases in personnel costs, ,,rhich range from 57 to 65 per cent of operating costs, could not be absorbed in 1954 1 but the margin in other years •·rould be sufficient to permit personnel costs to increase .~ to 22/b •·d thout e~fecting rates, government p~y~ents or bonuses.  -A&'- . :i;I. For the purpose of estimating the future demand for increased p01''er, the country ~·ras divided into 7 zones. ':"hey vere: 1. i;iontevideo exclusive of street raih•ays. 2. Street raih·~ws of iiontevideo. 3. The 1·festern Circuit 4. The Eastern Circuit 5. The Central Circuit 6. The Control Lines (which includes the existing lines extendi~; north~,rard from Hontevideo). 7. The Interior ~~··hich included the remainder of the country not covered. by the other zones). For Eontevideo careful studies ,,•ere made of the trend of in- crease in demand in the recent past. This, teken together 1·•ith the back- log of demand on the books in 1948 and the probt>ble additional loads• formed a basis for an estimate of the load anticipated in 1950 t·•hic.h '~<'M 17% larger than in 1948. From 1950 ont·•arc1.s an annual increaf!e of 7% ~·ras assumed. This long~time trend 1-.•as statisticD,lly determined from studies of the tend of increase from 1914 to 1947. Ho increase in llemand from the street raihr~,ys was anticinated from 1948 to 1950. After 1950 the estimates of lo~:td vere based on the plans of the Government....oNned street ra.ih•a,ys to increase its services, principally through electrically operated buses. For the other Zones the estimates "''ere based on studies of each load center. For the \'!estern circuit, for example, loads in 10 communities  - 4.8- were analysed. At each an increase of 20 percent a year during 1948 and 1949 ~,~as assumed. To this 1•ras added .QM ~ of the probable future load on the books on Sept. 1, 1948, to determine the total load in 1950. From 1950 om•ard.s an annual increase of 11;& 1.ras assumed. Only one half of the load on the books in Sept. 1948 1•'as added because it '•'as assumed that some of the load 1•~ould be connected during 1948 and 1949. The energy consumption '•'as determined by ap;:>lying varying load factors at each locality, '?he table beloN gives the actual consumption per caui tel, from 1936 to 1948 and the estimated consumption to 1958. Entire Year Interior l Iontevideo 1 Country 1936 12 287 100 1938 16 315 114 1946 26 337 134 1948 39 387 168 1950 87 435 219 1952 107 4?0 246 1954 136 512 285 1956 177 562 333 1958 231 620 392  PRELIMINARY ANALYSIS OF EAP..NINGS AND IJEIBT SERVICE COVEP.AGE OF ADMilUSTRACION GENERAL DE LAS USUWS ELECTRICOS OF LOS TFJ"J.EFONOS DEL ESTADO (UTE) 1939-48 and Projections for 1949-58 (Uruguayan Peso Figures in Thousands) Energy Telephones Gross Operating Depreciation Net Income Availap~e In teres~ Debt J.l To tal ~"b:!; , Times Interest Earnedll Times Total De~ Sales Number of Revenues Expenses for Debt Service11 ChargesY Amortization Service~~ (before depr.) (after depr.) Service Earned: (millions Subscribers (before depr.) (after depr.) (before depr.) (after depr.) KWH) 1939 212 29,299 15,360 9,615 2,332 5,745 3,413 876 1940 243 32,044 16,994 11,253 2,437 5,741 3.304 6.80 1941 261 :;4,444 18,153 14,150 4,003 1,520 721 5.55 2.11 1942 253 36,031 18,277 16,097 2,576 2,180 777 2.81 1943 235 36.855 19,112 18,629 2,504 483 0.61 ?·O~ 799 1944 275 38,066 21,587 17,712 2,674 3.875 1,201 772 5.02 1.56 1945 306 42,135 23.3:37 17,776 2,503 723 7.69 4.23 1946 341 54,080 26,096 18,112 2,759 726 11.00 7.20 1947 370 59,982 27,100 21,723 2,693 2,684 742 3.62 1948!±/ 440 63,088 32,260 26,948 1,450 5,312 3,862 938 275 1,213 4.12 4.38 1949 474 72,336 39,130 25,808 1,485 13.332 11,837 3,971 800 4,771 2.98 2.79 2.48 1950 536 84,082 44,200 27,701 1,580 16,499 14,919 7,589 1,225 8,814 2.17 1.97 1.87 1.69 1951 607 96,142 50,000 29,289 1,700 20,711 19,011 8,949 2,807 11,756 2.31 2.12 1.76 1.62 1952 688 108,407 53,800 32,939 3,225 20,861 17,636 9,590 2,875 12,465 2.18 1.84 1.67 1953 725 58,000 35.737 3,350 22,263 18,913 9,671 2,890 12,561 2.30 1.96 1.77 1954 762 63,493 40,799 3,378 22,694 19,316 9,396 6,389 15.785 2.42 2.06 1.44 1.22 1955 835 69,115 44,603 3,407 24,512 21,105 9,117 6,419 15,536 2.69 2.32 1.58 1.36 1956 917 75,406 48,848 3.435 26,558 23,123 8,838 6,449 15,287 2.62 1.74 1957 1,007 82,135 53.559 3,464 28,576 25,112 8,558 6,479 15,037 2.93 1.90 1.67 1958 1,106 88,851 58,863 29.988 26,496 8,279 6,509 14,788 3.20 2.03 1.79 1/ ~efore legal contributions and workersl bonuses, which are payable from the net profits of the enterprise after all expenses, including debt service. Y (a) For period June 30, 1949 to December 31, 1958, includes interest charges on debt of Rincon, on requested IBRD loan and other debt. (In the data submitted to the Bank, interest charges on the Rincon debt are shown as operating expenses of UTE.) {b) Projected interest charges for years 1949-58 as reported to the Bank by UTE fail to allow ful~ foT reductions in interest due to debt amortization. Consequently, interest charges during these years are overstated, but the margin of error is not large. J.l Data for period 1939-47 not available from information on hand. Figures for period June 30, 1949 to December 31, 1958, include amortization requirements on Rincon debt, (which are shown as operating expenses of UTE in data furnished the Bank), and amortization on the proposed IBRD loan and other debt. W Estimated. Prepared by: G. Lincoln Sandelin Loan Department December, 1948