Uruguay - Power and Telephone Expansion Project

Lr- ADo u p- No.P7 FILE OPY RESTRICTED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE ADMINISTRACION GENERAL DE LAS USINAS ELECTRICAS Y LOS TELEFONOS DEL ESTADO (U.T.E.) LOAN APPLICATION tUARANTEED BY THE REPUBLIC OF URUGUAY August 17, 1950 I__ __ __ _ |  INTERNATOYiAL BANK FOR RECONSTVJCflOZ AND DELJOR2!ENT REPORT AND RECOMMENDATIONS OF THEE PRESIDENT TO TRE EXrCUTIVE DIRECTORS CONCFRNThO TIVr PROPOSED LOAN TO AD!JISTRAC10N GENERAL DF LAS UNINAS IELCTRICAS Y LOS TFLEFONOS DEL ESTADO (U. T. E.) 1. I submit the following report and recommendations with regard to an application from the Administracion General de las Usinas Electricas y lns Telefonos del Estado (U.T.E.) for a loan not to exceed US.$33 million for the expansion of Uruguay's electric power and telephone systems. Any reduction in the total amount of the loan by reason of a decrease in the foreign exchange cost of the projects will be applied pro rata to the respective maturities to be set forth in the Amortization Schedule to the Loan Agreement, except to the extent that bonds shall previously have been delivered to the Bank. PART I - Historical 2. During the Board of Governor's mebting in September, 19L8, the Uruguayan delegation advsised the Bank that its Government wished to obtain financial assistance, in the approximate amount of US$65.9 million, for the following development projects: (i) FEpansion of the country's electric power and telephone systems, (ii) Rehabilitation of railways, (iii) Development of the Port of Montevideo, and (iv) Development of certain unspecified privately-owned industries which the Government regarded as of primary importance in the Uruguayan economy. 3. Three Bank missions werze sent to Uruguay. The first (October - December 1948) was headed by the Loan DirectorX,,the second (February-March 1949), which included outside engineering consultants, was headed by Mr. Clee, and the third (February-March 1950) by ir. Anderson. 4e At the time of the Loan Director's visit, it was agreed that, for the time being the Bank would investigate the possibilities of financing only the electric power and telephone expansion programs to be carried out by U.T.E., and that consideration of the Qther projects in any detail would be deferred. 5. On 11 Miay 1949 the President'of the Bank informed the Uruguayan Minister of Finance that the Bank was prepared to enter into negotiations for a loan to finance this project and asked the Uruguayan authorities to send representatives to Washington. It was only in March 1950 that loan negotia- tions were commenced in Montevideo with His Excellency Alberto Dominguez- Campora, the Uruguayan Ambassador to the United States, who was appointed by his government as the official negotiator0 These negotiations were resumed in Washington in early June. PART TI - Description of Proposed Loan Borrower 6. The Borrower would be the Administracion General de las Usinas Electricas y los Telefonos del Estado (UoT.E), an .utonomous government agency having the exclusive right to provide electric energy and telephone  -2- service in Uruguay. It was created in 1912 as an electric light and power enterprise and in 1931 it was given the authority to operate the telephone services of the country. Guarantor 7. The Guarantor would be the Republica Oriental del Uruguay, a memuber of the Bank. Amount 8. The loan would be in an amount not to exceed US";g33.0 million or its equivalent in other currencies. Purpose 9. (a) The proceeds of the loan would be used to finance the foreign exchange costs of a 4-5 year program of reconstructing and expanding the electric power and telephone facilities of U.T.E. (b) The electric power program includes the increase in the effective thermal generating capacity in Montevideo from 50,000 kw to 100,000 kw; the installation of approximately 18,000 kw of additional diesel generating capacity in the Interior as well as the conversion of a number of plants in the Interior from D.C. to A.C. current. It also includes the construction of 538 miles of high tension transmission lines; the expansion of the distribution systems both in Montevideo and in the Interior; and an increase in automotive equipment in order to operate and maintain the expanded power system. (c) The telephone program provides for an increase in the number of telephone exchanges, cables, telephone sets and accessory apparatus, as well as for the construction of new toll lines cross-connecting and supplementing the existing network in the Interior and the installation of some automatic offices. About 28,000 new telephones, representing an increase of roughly 40% in the number of instruments in use, will be installed under the program. 10. The total cost of the expansion program is estimated as follows: Foreign Exchange Local Currency Expenditure Expenditure Total Cost (in .S. Dollars) Power 26,388,000 10,179,000 36,567,000 Telephone 6,612,000 1,821,000 8,433,000 TQtal 33,000,000 12,000,000 45,000,OO0 The bulk of the foreign exchange expenditures would probably be made in the United States. 11. The Borrower would be reimbursed for all foreign exchange experditures made after December 31, 1948 for goods and services to be included in the projects.  Interest, Commission and Commitment Charges 12. The loan would bear interest at the rate of 4-1/4% per annum including the statutory commission of 1%. The commitment charge would accrue from the effective date of the loan or three months from the date of signature, whichever is the earlier, Amortization 13. The loan would be amortized by equal semi-annual principal payments commencing February 15, 1955 and ending August 15, 1974, 14. I consider that the proposed schedule for the repayment of principal and the rate of interest and other charges in connection with the proposed loan are reasonable and appropriate to the project. Legal Instruments and Legal Authority 15. Drafts of the following legal instruments to be executed to give effect to the proposed loan were distributed to the Board on August 16, 1950 (R-370): (a) the Loan Agreemenit bet*een the Bank and the Administracion General de'las Usihas Electricas y los Telefonos del'Estado, (b) the Guarantee Agreement between the Bank and Republica Oriental del Uruguay and (c) letters explaining various provisions of both agreements. Also distributed was a memorandum setting forth the major differences from the Bank's usual forms of Loan and Guarantee Agreements. 16. Both the Loan and Guarantee Agreements must be ratified by the Uruguayan Parliament before they can become effective. PART III - Appraisal of the Proposed Loan 17. The economic background against which the proposed loan is to be considered was set out in a paper,, "Report on the Economy of Uruguay", (Secretary's Memo-50h, which was circulated to the Board on iiay 6, 1949. A supplementary economic report (Secretary's IMemo-586), was circulated to the Board on August 16, 1950. 18. An appraisal of the project to be financed by the proposed loan was discussed in a report entitled "Appraisal of Power and Telephone Expansion Projects of Administracion General de las Usinas Electricas y los Telefonos del Estado (U.T,E.), Uruguay", (R-361), circulated to the Board on August 3, 1950. This report also analyses the structure and the financial condition of U.T.E. 19. Appendix I, hereto, contains the report of the Statutory Loan Committee provided for in Article III, Section 4, Paragraph (iii) of the Articles of Agreement. Justification for the Loan 20. The need for additional power both in Montevideo and in the Interior of Uruguay stems from the fact that during the war U.T.E. was unable to expand its facilities and a large unsatisfied demand development. MAinor expansions in the postwar period have been inadequate to satisfy the pent-up demand or to  cope with the normal annual increase in consumption which, since 1914, has amounted to 8% compounded annually in Mlontevideo and about 12% in the Interior. 21. Completion of the project to be financed partially with the proposed Bank loan would provide Uruguay with a reasonably efficient power system which should, on the basis of existing rate schedules and costs, show an operating profit and should provide an adequate power supply until further expansion now planned is undertaken. 22. The present power program is economically justified as it will encourage the expansion and modernization of Uruguay's industries, particularly in the Interior; it should reduce production costs in existing industries, encourage new industries, and make possible more rural electrification. 23. Expansion of both local and long distance telephone services in Uruguay is also urgently needed, as Uruguay has already reached a stage of development where good communications fall into the category of necessities rather than luxuries. The existing systems, both in Montevideo and in the Interior, are heavily overloaded and the Interior networkc is not cross- connected at many points resulting in serious inefficiencies in service. From a financial point of view, the revenues from telephone service contribute substantially to U.T.E.'s profits and thus, in effect, make possible the maintenance of low rates for electricity. 2h. In the opinion Qf the Bank's engineers, both the electric power and telephone projects are technically sound. Summary of Economic Situation 25. Uruguay's economic development is well under vray. There is a substantial and grovwing middle class and little individual poverty. 26. Politically, Uruguay appears to be stable. Parliamentary and democratic political procedures are generally respected, and universal suffrage and complete religious liberty are established. Since the turn of the century the Government has followed a policy of enacting progressive social legislation. Free and universal education operates from the elementary school through the university, the percentage of literacy being as high as in any other country in the WTestern Hemisphere. 27. The medium-term market outlook for Uruguay's principal exports, wool, meat and meat products, appears reasonably good. Wool, the principal dollar earner, accounted for about 33% and meat and meat products for 24% of total exports in 1949. The comparable figures for 1948 were 37% and 25% respect- ively. 28. The geographical pattern of trade during 19h9 showed increased dependence on European sources of supply for imports. A policy of encouraging imports from non-dollar sources is followved,with. the reeult that European sources nc-w predominate for automotive supplies and for many other categories.  -5- 29. Uruguay reported budgetary surpluses since 1946. However, substantial increases in the internal debt have occurred in recent years; the proceeds of these new issues were used principally for capital expenditures not included in the regular budget. 30. As a result of sound banking and conservative state fiscal policies, the increase in the money supply has been small by comparison with other Wlestern Hemisphere countries6 The money supply reached a peak level of 614.6 million pesos in Mlarch 1950, but declined to 604.8 million pesos at the end of April. These figures compare with 561.6 million pesos at the close of 1948 and 502.8 million at the end of 1947-. 31. The Uruguayan cost of living index stood at 183 at the close of last April (1937 - 100). The indicated increase is less than that of most other countries in the Western Hemisphere. The index was fairly stable during 1947-49; the annual averages for these years were 177, 180 and 189 respec- tively. 32. The financing of continued economic development does not present for Uruguay domestic problems as untractable as those often encountered in underdeveloped countries. Reflecting and sustaining the country's present stage of development, there is a good flow of voluntary domestic savings channelled through public and private financial institutions. Present problems are qualitative, concerning best productive use of savings, rather than quantitative, arising from absolute inadequacies of savings. Prospects of Fulfillment of Obligations 33. The local currency costs, estimated at 22.8 million pesos, of the proposed electric power and telephone programs will be covered partly from U.T.E.'s own earnings during the construction period, but principally by the use of a part of the proceeds of a 30 million peso bond issue recently authorized by Parliament. These sources alone should prov4de a comfortable margin for contirngencies and for other purposes. However, as further assurance that construction of the project will not be unduly delayed by any lack of peso funds, the proposed Loan and Guarantee Agreements provide that the Government of Uruguay will make available such funds as might be needed to comp'.ete the projects. The Government will also guarantee the performance of all other obligations undertaken by UIT.E. under the Loan Agreement. 34. A deficit of US$10 million in Uruguay's 1948 balance of payments was substantially due to a deficit in trade. In 1949 the balance of payments deficit reached US$25 million. A trade surplus of US$16 million was offset by the utilization of the equivalent of US$51.4 million of blocked sterling balances for the purchase of British-ovmed railways and waterworks. 35. Uruguay's payments on its external debt were the equivalent of US$6.9 million in 1949. Service requirements on the country's presert external indebtedness rise to a peak of US67.7 million in 1951 and decline gradually each year thereafter. Of the 1949 service payments, about $3.6 million were payable in U.S. dollars and the equivalent of '3.2 million in pounds sterling. The dollar payments amounted to about 4.8% of Uruguay's 1949 exports to the dollar area and total service payments were only 3.4% of total 1949 exports. Uruguay's annual debt service charges do not impose a serious burden on its balance of payments.  -6- 36. The total annual charges on the proposed Bank loan would reach a maximum of about $3.1 million in 1955. The annual debt service requirements (including the service of the proposed loan) would represent at their peak a little more than 5% of Uruguay's 1949 exports. 37. I am satisfied that there is a reasonable prospect that UJT.E. and the Guarantor will be in a position to meet their obligations under the proposed loan and that in making this loan the Bank will be acting prudently in the interest of the Republica Oriental del Uruguay and of the members of the Bank as a whole, PART IV - Compliance with Articles of Agreement 38. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank. I am also satisfied that, in the prevailing market circumstances, U.T.E. would be unable to obtain elsewhere a loan of the amount herein contemplated on reasonable terms. PART V - Recommendations 39. I recommend that the Bank at this time make to the Administracion General de las Usinas Electricas y los Telefonos del Estado a loan of up to U$ 33 million or its equivalent for a term of 24 years with interest (including Qommission) and commitment charge at such rates and on such other terms as are specified in the draft Loan and Guarantee Agreements. /sl Eugene R. Black Eugene R. Black Washington, D.C. August 16, 1950  Appendix I STATUTORY LOAN COi0712ITTEE REPORT To: The President, International Bank for Reconstruction and Development Report of Loan Committee under Article III, Section 4 (iii), of the krticles of Agree- ment on the proposed Loan to Administracion General de las Usinas Electricas y los Tele- fonos del Estado. The undersigned Committee, constituted under Artiole V, Section 7, of the Articles of Agreement of International Bank for Reconstruction and Development (hereinafter called the Bank) hereby submits its report pursuant to Article III, Section 4 (iii), of said Articles in respect of the proposal that the Bank grant to Administracion General de las Usinas Electricas y los Telefonos del Estado (hereinafter called the Borrowier) a loan in the principal amount of ,p'33,000,000. The purpose of said loan is to finance foreign exchange expenditures on account of a,construction program to be carried out by the Borrower for the expansion of its electric power generating, transmission and distributing facilities and telephone installations in Uruguay. 1. The Committee has carefully studied the merits of the proposal to grant such a loan and the purposes to which the proceeds of the loan are to be applied. 2. The Committee is of the opinion that the projects toward the financing of which the proceeds of such loan are to be applied come within the purposes of the Bank as set forth in Article I of said Articles of Agreement and that the said projects are designed to promote the development of the productive facilities and resurces of Republica  - 2 - Oriental del Uruguay and are in the interests of Republica Oriental del Uruguay and of the members of the Bank as a whole. 3. Accordingly, the Committee finds that said projects merit the financial assistance of the Bank and hereby recommends said projects for such assistance. COlM TTEE R. L. Garner W. A. B. Iliff A. F. Luxford H. E. Riley J. EBurke Knapp Dated at WIashington, D. C. August , 1950.  (DRAFT) RESOLUTION NO. Approval of recommendations of the President that the Bank grant a loan to Administracion General de las Usinas Electricas y lo Telefonos del Estado, to be guaranteed by Republica Oriental del Uruguay, in the amount of $33 million; authoriza- tion to President or Vice President or Loan Director or Treasurer to execute Loan and Guarantee Aereements, and other documents relating thereto. RESOLVED: 1. THAT the Executive Directors hereby approve the recommenda- tions of the President dated August 16, 1950, that the Bank grant a loan to Qdministracion General de las Usinas Electricas y los Telefonos del Estado (hereinafter called UTE), to be guaranteed by Republica Oriental del Uruguay, in the principal amount of $W33 million (or the equivalent thereof in currencies other than dollars), maturing on and prior to August 15, 1974, in accordance with the amortization table set forth in Schedule 1 to the form of loan agreement between the Bank and UTE which has been presented to the Executive Directors with such recommendations, with interest (in- cluding commission), and commitment charge at the rates specified in the said form of Loan Agreement, and upon such other terms and conditions as are contained in said form of Loan Agreement between the Bank and UTE and in the form of Guarantee Agreement between Republica Oriental del Uruguay and the Bank which have been presented to the Executive Directors with such recommendations; 2. TH4T the rate of commission to be charged in connection with said loan shall be 1% per annum of the principal amount of said loan from time to time outstanding; that said commission shall  be included as part of the interest and service charge on said loan and shall be payable semi-annually on the dates for the pay- ment of said interest and service charge; and that the amount of said commission so paid to the Bank shall be set aside in the special reserve as provided in Section 6 of Article IV of the Articles of Agreement of the Bank; 3. THAT the form, terms and conditions of the said forms of Loan Agreement and Guarantee Agreement be, and they hereby are, approved; and 4. THAT the President or Vice President or Loan Director or Treasurer of the Bank be, and each of them hereby is, author zed in the name and on behalf of the Bank (a) to execute and to deliver a Loan Agreement with TJTE substantially in the form of the said form of Loan Agreement presented to the Executive Directors, with such changes therein as they or any of them shall approve, the execution of said Loan Agreement by any of said officers to be conclusive evidence of his approval of any such changes; (b) to execute and to deliver with Republica Oriental del Uruguay a Guarantee Agreement substantially in the form of the Guarantee Agreement presented to th3 Executive Directors, with such changes therein as they or any of them shall approve, the execution of said Agreement by any of said officers to be conclusive evidence of such approval of any such changes; and (c) to take any and all such other action and execute and deliver any and all such other dootiments as they or any of them shall deem necessary or proper in the premises and in order to carry fully into effect the purposes of this Resolution.