Honduras - Fourth Power Project

RESTR I CTED Report No. P-833 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF HONDURAS FOR A FOURTH POWER PROJECT June 2, 1970  INTETWATIONAL DANK FOR RECONSTRUCTION AND DEVELOPMENT INTTMNATIONAL DEVELOPME14T ASSOCIATION REPORT AMD RECOMMENDATION OF THE P'RESIDETT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF HONDURAS FOR A FOURTH POWER PROJECT 1. I submit the following report and recommendation on a proposed loan from the Bank in an amount in various currencies equivalent to US$565 million and on a proposed development credit from the Association in ein amount in various currencies equivalent to US$5.5 million, to the Republic of Honduras. PART I - HISTORICAL 2. The proposed project was submitted to Bank/IDA in 1969 and was appraised in February 1970. Nlegotiations took place in 1Washington on N4ay 18 through May 20, 1970. The Borrower was represented by Mr. Roberto Galvez, Ambassador of Honduras in '!ashington, and Enpresa Nacional de Energia Electrica (ENEE), by Messrs. Eduardo Mendieta (member of the Board), Ernesto Crespo (General M4anager) and Cesar Batres (Legal Adviser). 3. The proposed lending, constituting the ninth loan and fifth credit to Honduras, would bring the total of Bank/IDA lending to US',76.4 million (net of cancellations), US"32.7 million of which would be for the power sector. Total loans now amount to USV46.9 million, and total IDA credits to US'18.5 million. The following is a summary statement of Bank loans and IDA credits to Honduras as of April 30, 1970. Loan or Amount (UST million) Credit Year Borrower Purpose Bank IDA Undisbursed Number 4 loans and 2 credits 1955-65 20.0 11.9 Loan 400 1965 Republic of Honduras Roads 6.0 - 3.0 Loan 463 1966 Empresa Nacional Portuaria Ports 4.8 - 1.1 Loan 495 1967 Republic of Honduras Roads 8.6 - 6.1 Loan 541 1968 Republic of Honduras Power 7.5 - 4.1  -2- Loan or Amount (US$ million) Credit Year Borrower Purpose Bank IDn Undisbursed Number Credit 116 1968 Republic of Honduras Power - 4.0 2.1 Credit 179 1970 Republic of Honduras Livestock 2.6 2.6 Total (less cancellations) 46.9 18.5 of which has been repaid to Bank and others 9.0 Total now outstanding 37.9 Amount sold 2.6 of which has been ropaid 1.8 0.8 Total now held by Bank and IDA -7 -3T 18_ Total undisbursed 14.3 4.7 19.0 4. A total of UStl9.0 million remains to be disbursed on four loans and two credits, of which Credit 179 has not yet become effective. Disbursements are proceeding satisfactorily on the remainder, following initial delays in two cases. Construction work on the North Road Project (Credit 71-HO/Loan 400-HO made in 1965) was held back until 1968 because the Government's consultants recommended a new alignment on the basis of information that became available after approval of the loan and credit, and the Bank agreed to the change only in 1967. The cr_3dit portion has now been fully disbursed. From the outset, delays were also encountered on the Western Highway Paving Project (Loan 495-HO). The call for bids for construction works was held up by about one year because of delay in engaging the supervisory consultants, but work has been proceed- ing satisfactorily since then. 5. In April 1964, IFC approved an investment in Empresa de Curtidos Centro Americana S.A. (ECCASA) consisting of a loan of UStO.3 million equivalent and a share subscription of US"o.o6 million; an addi- tional equity investment of US50.03 million equivalent was approved in April 1966. IFC has also been engaged in a pilot project for a pulp and paper plant near La Ceiba, which would require some US$85 million in capital, excluding infrastructure. In August 1968, the Corporation authorized investment of up to USto.05 million in the share capital of Compania Pina Celulosa de Centro America S.A. (COPINO), established in February 1969 to investigate and possibly carry out the pulp and paper project. A second authorization of a like amount was made in January 1970. A decision as to whether or not to proceed with the full-scale project is expected late this year, and if it is positive, IFC may con- sider further investment in both loan and equity.  -3- 6. A number of projects in transport, power, algriculture and education are being prepared for consideration by the Bank Group. Of these, a port project should be ready for presentation to the Executive Directors in the fiscal year 1971. PART II - DESCRIPTION OF THE PROPOSED LOAN AND DEVELOPMENT CREDIT 7. Borrower: The Republic of Honduras. Beneficiary: Fhpresa Nacional de Energia Electrica (ENEE). Amount: Various currencies equivalent to us i5.5 million from the Bank and US$5.5 million from IDA. Purpose: To cover the foreign exchange cost of transmission lines and substations; a 15 Pt'J gas turbine plant; a training program for ETEE's staff; and certain tech- nical studies. Amortization: (a) Bank loan in 20 years, in- cluding a 4-year period of grace, through semi-annual payments begin- ning December 1, 1974 and ending June 1, 1990. (b) IDA credit in 50 years, in- cluding a 10-year period of grace, through semi-annual installments of 1/2 of 1 percent from December 1, 1980 through June 1, 1990 and 1-1/2 percent from December 1, 1990 through June 1, 2020. Interest Rate (Loan): 7 percent per annum. Service Charge (Credit): 3/4 of 1 percent per annum. Commitment Charge (Loan): 3/4 of 1 percent per annum. Relending Terms: The proceeds of both the loan and credit to be relent to ENEE for 20 years including a 4-year period of grace, at the same rate of interest as on the Bank loan. ENEE would carry the exchange risk.  - 4 - PART III - THE PROJECT 8. An appraisal report entitled "Appraisal of the Fourth Power Project" (PU-42a)is attached. It points out that less than 20 percent of the population of Honduras are supplied with electricity, and that Honduras' annual electrical generation of 104 WH per capita is the lowest in Central America. Most of the power for the public is supplied by ENEE, which provides about 86 percent of the total electricity gener- ated and owns over 73 percent of the 82 M1T of total installed capacity. ENEE's electricity production has increased six-fold during the last six years, reflecting a rate of economic growth of about 7 percent a year, increased urbanization, and, most of all, the substantial backlog in demand for power. Further increases in production will be possible when the Bank-financed 40 IM Rio Lindo hydroelectric station commences operations at the end of this year. 9. The project is part of ENEE's USM54 million five-year develop- ment program for the period 1970-74. By expanding ENEE's interconnected system, the project would extend the availability of electricity beyond the few zones already served to areas of growing economic importance now being inadequately supplied from isolated small generating plants. The connection from Rio Lindo to the Sula Valley and the Atlantic coast with a 138 kV line would supply power for the agricultural and industrial needs of a fertile and economically active area. Other important 69 kV connections would be from San Pedro Sula, the country's largest indus- trial town, to the port of Puerto Cortes; from the port of La Ceiba to the Aguan Valley, as yet relatively undeveloped, where promising agri- cultural schemes are already or soon to be under way; and from the capital of Tegucigalpa to the southern zone, which is slated to receive some priority in national development. The project would also include installation of a 15 MW gas turbine in Tegucigalpa, a training program, feasibility studies on hydro projects and a tariff study. 10. The total cost of the project is estimated at US$14.8 mil lion, with a foreign exchange cost of US$1. million which would be met by the proposed loan and credit. Procurement of goods and services would be on the basis of international competitive bidding. Disbursements would be made for the CIF cost of imported equipment and materials and for the foreign currency cost of consultants' services and training. The credit would be disbursed first. 11. ENEE, which would be responsible for the execution of the project, is a government-owned corporation engaged solely in generating and distributing power. It has successfully implemented two Bank loans for the expansion of its facilities, and is now engaged in the execution of the Rio Lindo Project with Bank/IDA financing. To meet future require- ments, feasibility studies for exploiting the hydro potential of the Humuya River are also being financed under that project. At the Bank's suggestion, ENEE hired consultants to assist it in improving its manage- ment and organization. Their services have resulted in marked progress in ENEE's administration. However, further improvements are required on the technical side. Consequently, the proposed loan and credit provide  for further strengthening of the engineering staff. ENEE's management is satisfactory, and with the assistance of the consultants, and the additional engineers to be provided under the project, is considered competent to carry out the project and operate the new facilities. 12. EMEE's financial position is satisfactory. It has undertaken to establish tariffs that would ensure a return on net fixed assets in operation of at least 10 percent per annum. It wzill be required to retain for reinvestment in its power facilities all of its earnings from its power services until the project is completed (Section 4.04(b) of the Project Agreement). It has also agreed not to incur any debt unless max- imum debt service requirements in any subsequent year are covered at least 1.4 times (Section 4.06(a)). PARlT IV - LEGAL DJSTRUMENTS AND AUTHOBRITY 13. The draft Loan Agreement and the draft 'evelopment Credit Agreement between the .