Bolivia - Second ENDE Power Project

RESTRICTED Report No. P-681 FILE..COPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF BOLIVIA FOR A POWER PROJECT April 8, 1969  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF BOLIVIA FOR A POWER PRO'JECT 1. I submit the following report and recommendation on a proposed development credit in various currencies equivalent to US$7.4 million to the Republic of Bolivia for the Santa Isabel hydroelectric project. PART I - HISTORICAL 2. In 1964, IDA made two credits to Bolivia for power development: one, amounting to $10 million, to finance, jointly with the Inter- American Development Bank (IDB), the 27 1iW Corani hydroelectric project of the government-owned Empresa Nacional de Electricidad S.A. (ENDE) then being established; the second, for $5 million, for the 11 MW Chururaqui hydroelectric project of the Bolivian Power Company, Ltd. (BPC), a Canadian company. The proceeds of the first credit were made available to ENDE as a capital contribution. The proceeds of the second were relent to BPC and service payments by BPC accrue to ENDE as an additional capital contribution by the Government. 3. The Corani plant was to meet immediate power requirements and be followed by another plant at the Santa Isabel site; the Corani reser- voir and other civil works would also serve Santa Isabel. In 1967, the Government asked IDA and IDB to help finance the construction of Santa Isabel. Tripartite discussions started that year, with a view to a joint financing on the pattern of the 1964 Corani operation. However, in early 1968, it became clear that current procurement procedures of the two lending agencies would make it impracticable jointly to finance a single project. The Bolivians, therefore, requested IDA to assist Santa Isabel, while they requested IDB to help finance thermal generation, transmission and distribution at Sucre and Potosi in ENDE's southern system. IDA and IDB would thus be financing separate projects in ENDE's 1969-72 expansion project. 4. ENDE's program was examined and the Santa Isabel project appraised in Bolivia in July/August 1968. Negotiations took place in Washington in December 1968, and January and February 1969. The Bolivian Ambassador to the United States, Col. Julio Sanjines Goytia, and the Under-Secretary of Economy, Mr. Willy Vargas, represented the Government. ENDE was represented by its General Manager, Ing. Roberts Capriles. IDA is the only member of the W4orld Bank group that has provided finance to Bolivia. The status of the provious credits, as of February. 28, 1969, is as follows:  -2- Credit ( US$ million) Number Year Borrower Purpose Amount Undisbursed 61 1964 Republic of Bolivia Power 10.0 0.9 62 1964 Republic of Bolivia Power 5.0 - 107 1967 Republic of Bolivia Livestock 2.0 1.6 Total 17.0 2__ 6. The Bank is presently considering a loan to Compania Yacibol Bogoc Transportadores (YABOG), owned by the Government petroleum enter- prise (YPFB) and the Bolivian Gulf Oil Company, for a pipeline to transmit natural gas from the fields near Santa Cruz to the Argentine border at Yacuiba. In July 1968, Gas del Estado of Argentina signed a 20-year purchase contract with the owners of YABOG. 7. A mission organized under the UNESCO/IBRD cooperative program will visit Bolivia in the next few months to assist in preparing a secondary education and teacher training project for financing by IDA. The Government has also asked that IDA consider projects in the transport sector. PART II - DESCRIPTION OF THE PROPOSED DEVELOPMENT CREDIT 8. Borrower: Republic of Bolivia Beneficiaries: Empresa Nacional de Electricidad S.A. Direccion Nacional de Electricidad (DINE). Amount: In various currencies equivalent to US$7.h million. Purpose: Construction of the Santa Isabel hydro- electric plant, and provision of consulting services to DINE. Amortization: In 50 years, including 10 year period of grace, through semi-annual installments of 1/2 of 1% from June 15, 1979 through December 15, 1988 and of 1 1/2% from June 15, 1989 through December 15, 2018. Service Charge: 3/4 of 1% per annum. Relending Terms: The Borrower will relend $7,340,000 of the development credit to ENDE for 30 years, including l years of grace, at an interest rate of 6 1/2%. The balance of $60,000 will be relent to DINE for consulting services.  PART III - THE PROJECT 9. A report entitled "Appraisal of Santa Isabel Project, Empresa Nacional de Electricidad S.A. (ENDE)" (PU-3a) is attached. 10. In the early sixties, BPC, servicing La Paz and the government- owned Comibol mines around Oruro, was the only important source of public electricity supply in Bolivia. The 1964 credits were instrumental in organizing a modern power sector. The credit documents provided for establishment of ENDE to service the town of Cochabamba and the mines around Oruro, and for interconnection between ENDE and BPC to pool their power resources to assure better supply to Comibol; for adequate return on the capital invested by ENDE and BPC; for the settlement of Government debt to BPC resulting from the nationalization of the Oruro telephone system and failure to pay electricity bills in full; and for setting up the Direccion Nacional de Electricidad (DINE) to regulate the electricity industry, including power rates, throughout the country. By the beginning of 1968, the Bolivian power sector had an installed generating capacity of about 220OW, of which two-thirds was hydroelectric and one-third thermal. Public electricity supply was assured by BPC (851,H), ENDE (35MW) and several small systems (21MW). The remainder (78MW) represented the installed capacity of captive plants, some of which were operated by government-owned entities and some by private enterprises. 11. The Corani and Chururaqui plants were completed on time, putting an end to power shortages. Construction of Corani cost about $400,000 less than estimated and this made it possible to allocate some credit proceeds for the preparation of the Santa Isabel project, and for transmission and distribution extensi6ns ; the balance of the credit is now expected to be drawn down by June 30, 1970. ENDE is a going concern, in sound financial condition, headed by a competent and experienced general manager. Power rates in La Paz were raised in 1966; BPC has recently presented an application for a further increase. DINE is exercising its functions as a regulatory agency satisfactorily, but suffers from too much supervision and has difficulties in recruiting and retaining qualified staff. The Government has put into effect an Electricity Code, which provides a uniform basis for the operation and regulation of the electricity industry. This was done by executive decree but the Government has under- taken to take all necessary steps to have the Code enacted by the Congress prior to September 30, 1971. In implementing the Code, DINE issued several resolutions enforcing the interconnection of the EIDE and BPC systems in the Cochabamba-Oruro area and determining the conditions of power supply to Comibol; the two companies have agreed to render service in accordance with these resolutions. In March 1969, the Government and BPC agreed on arrangements for the settlement, over a period of about 7 years, of the Government's debt to BPC at present equivalent to about $820,000.  - 4 - 12. ENDE's expansion program for 1969-72 consists of investment in generation, transmission and distribution in the Cochabamba-Oruro system, at Sucre-Botosi in the south, and at Santa Cruz in the east. It also includes various studies looking to future development. The program is estimated to cost about $31 million equivalent, to be financed from internal cash generation, capital contributions by the Government representing the counterpart of the 1964 IDA credits, a $6.3 million U.S. AID loan already obtained for the Santa Cruz project, and borrowings from IDA and IDB. ENDE would cover from its own resources 31% of its financial requirements during the period of the program, the rest being covered by external borrowing. No call will be made on the Government's ordinary budget. 13. The Santa Isabel project is the largest single project in the expansion program. It would be located about 45 miles northeast of Cochabamba and would consist of a 34 Mi hydroelectric plant using tailrace water from the Corani plant, a h mile transmission line to connect at the Corani substation to the existing power system, and engineering services. The project would also include consulting services for DINE, for a limited period of time, to provide specialized assistance in the carrying out of its regulatory functions. The estimated completion date of Santa Isabel is March 31, 1972. 14. The average increase in sales of electricity in the Cochabamba- Oruro system in the next few years is expected to be about 12% per annum and power generated by Santa Isabel will be required by 1972. Santa Isabel has been found to be the lowest cost solution for meeting the demand so long as the cost of capital is less than 15%. 15. Santa Isabel is expected to cost about $10.5 million equivalent. Of this, 70% would be in foreign exchange and the rest in pesos. To cover the foreign exchange cost, the Government would relend to ENDE $7.34 million of the proceeds of the IDA credit on terms given in paragraph 8 above. Civil works and equipment contracts financed by the credit proceeds will be awarded on the basis of international competitive bidding. The local cost of Santa Isabel would be met from ENDE's own resources. The balance of the credit, $60,000, would be relent to DINE to cover the foreign exchange cost of consulting services. 16. ENDE should have no difficulty in servicing the loan made to it by the Government. The Electricity Code provides for rates to produce revenues sufficient to cover operating expenses, including adequate maintenance and depreciation, and to yield an average annual return of 9% on the investment. An obligation to maintain rates yielding this return is contained in the draft Credit and Project Agreements. The Project Agreement also limits ENDE's indebtedness by providing that the estimated maximum future debt service should be covered at least 1.5 times by net consolidated revenues in the twelve consecutive months preceding the incurrence of new debt.  - 5 - 17. Following the appraisal of the Sucre-Potosi project, the IDB Board of Directors is expected to consider in late April a proposal for a loan of $9.9 million to the Republic of Bolivia, consisting of (i) $5.6 million for ENDE's generation and distribution facilities at Sucre, a transmission line to Potosi,and various studies; and (ii) $4.3 million for a natural gas pipeline, to be owned by YPFB, from the Monteagudo field to Sucre. IDB would provide $8.7 million from its Special Operations Fund and $1.2 million from U.K. funds administered by it. In examining ENDE's expansion program and processing the two projects, IDA and IDB staffs have cooperated closely. PART IV - LEGAL INSTRUNENTS AND AUTHORITY 18. The draft Credit Agreement between Republic of Bolivia and IDA, the draft Project Agreement between IDA and ENDE, the .RQcommendation of the Committee provided for in Article V, Section l(d) of Articles of Agreement of IDA and the text of a Resolution approving the proposed credit are being distributed to the Executive Directors separately. 19. The draft Agreements follow the usual pattern of World Bank group lending for power projects. In addition to the matters referred to in paragraphs 15 and 16 above, they provide that IDA may suspend disbursement and premature the credit in certain events, including in particular a default by ENDE under the Project Agreement or the Corani Project Agreement of 196h, and any material amendment to the Electricity Code which adversely affected the execution of Santa Isabel, the purposes of the credit, the financial condition of power enterprises operating in Bolivia, and DINE. PART V - THE ECONOMY 20. A report on "Current Economic Situation and Prospects of Bolivia" (WH-189a) was distributed to the Executive Directors on February 14, 1969. The report concluded that economic performance - measured by increases in real output, savings, investment and public sector revenues - had improved significantly in the past decade. Never- theless., the continuing dependence on tin and other minerals whose market prospects are not good, will limit the savings potential of the economy and keep the budget, the development program and the balance of payments under pressure. If growth is to continue at the present rate of 5% per year, Bolivia will need substantial capital inflow and, if the balance of payments is to remain manageable, most external borrowing will have to be on concessional terms.  - 6 - 21. Bolivia has not been maintaining payments on its external dollar bonds during the past three years, but in recent months it has reached agreemenit with the bondholders on a new schedule of debt service, and payments are scheduled to be initiated in the near future. Bolivia has also reached a settlement with the former British owners of the nationalized Bolivian railways. A problem which has still not been entirely resolved stems from the nationalization of the Bolivian mining properties in 1952. Substantial compensation payments, based on a provisional valuation of assets, were made to the former owners between 1953 and 1961, but no payments have been made since. The situation re- garding the beneficial ownership of the various companies involved, the nationality of their owners, and the extent to which claims are still being asserted, is complicated and obscure. I do not consider that this matter should deter action by the Association on the present proposal. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 22. I am satisfied that the proposed development credit would comply with the Articles of Agreement of IDA. PART VII - RECOMENDhTION 23. I recommend that the Executive Directors approve the proposed development credit. Attachments Robert S. McNamara President Washing ton, D.C. April 5, 1969