-R E S T R I C T E D Report No. P-148 FRLE COPY This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE PROPOSED LOAN TO THE NATIONAL POWER CORPORATION OF THE PHILIPPINES November 12, 1957 INTERNATIONAL BANK FO.R TECONSTRUCTION AND DEVELOPMVENT REPORT AND REC012.4ENDXiTIONS OF THE PERSTDENT TO THE EXL?CUITIVE DIRECTGRS CONCERNING A -PIOPOSED LOAN TO THE N.-.TION-!AL POI-TER CO RPORATIONW Or THE H THITIPRINES 1. I submit the followqing Report and Recommendations on a proposed loan in various currencies equivalent to ~'21 million to the National Power Corporation of the Philippines for a hydroelectric project. PART I - HISTORICAL 2. During my visit to the Philippines in May of this year the Philippine authorities inquired whether the Bank would consider a loan for a hydroelectric project at Binga on the Agno River in Northern Luzon. I replied that the Bank would be ready to consider such a loan provided that it was satisfied that the Philippine economy could safely incur additional external debt of the amount proposed and provided that examination showed that the project was technically and financially sound and deserved high priority in the development plans of the country. 3. The Government made a formal application to the Bank for a loan to meet the foreign exchange requirements of the project at the beginning of June 1957. 4. A mission visited the Philippines in June and July to study the economic situation; and it concluded that the Philippines could safely incur the additional indebtedness proposed. A technical mission went to the Philippines in August to make an appraisal of the project and of the ability of the Natioral Power Corporation to carry it out efficiently. 5.. Further discussions were held in Wlashington at the beginning of October with representatives of the Governmllent and of the Corporation. Loan negotiations began on October 25 and were concluded on Novermber 7. The loan would be the Bank's first in the Philippinies. PART II - DESCPrIO1,N OF THE PRXOPOSED) LOAN Borrower 6. The Borrower would be the National Power Corporation, a government corporation established by Act of Congress in 1937, for the purpose of power developraent throughout the Philippines. Guarantor 7. The Guarantor would be the Republic of the Philippines, a member of the Bank. Amount 8. The loan would be in various currencies in an amount equivalent to .?21 million. -2- Purpose 9. The purpose of the loan would be to assist the National Power Corporation in carrying out a hydroelectric project at Binga on the Agno River in Northern Luzon. Amortization 10. The loan would be for 25 years and would be amortized by semi-annual payments beginning December 15, 1960 and calculated to retire the loan by its maturity on June 15, 1982. Interest .Rates, Commission and Commitment Charges 11. The rate of interest on the loan which would include the statutory commission of 1,% per annum would be 6%. The cormitment charge would be 3/4 of l and would begin to accrue 60 days after the date of the Loan Agreement. PART III - LEGAL INSTRLThJE7TJS AND LEGAL AtJTHORITY 12. Existing Philippine legislation (Republic Act No. 357, as amended) guthorizes the National Power Corporation to borrow from the Bank and authorizes the Government to guarantee any such loans. 13. Attached are drafts of the following documents relating to the loan: (a) Loan Agreement between the Bank and the National Power Corporation (Nio. 1); (b) Guarantee Akgreement between the Republic of the Philippines and the Bank (No. 2); (c) Report of the comittee provided for in Article III, Section h(iii) of the Articles of Agreement of the Bank (No. 3)> 14. The Loan and Guarantee Agreements are substantially similar to other agreements entered into by the Bank relating to projects of this type. The following provisions may be noted: (i) The National Power Corporation now owns a fertilizer plant on the Island of Mindanao. The Government intends that at some future time this plant should be transferred to private hands.. In the interim, however, it has been agreed that the Government will use its best efforts to obtain passage of legislation authorizing transfer of the fertilizer plant to another Government agency (See Loan Agreement, Section 5.08). Until such transfer can be effected, the National Pow-jer Corporation will segregate the accounts and operations of the fertilizer plant from its other activities, and it has given assurances that it ill at all times charge the fertilizer operation for the con- sumption of power at the rates which it wyould charge to a separate commercial enterprise of this kind; (ii) A standard for maintaining power rates is specified in the -3- Loan Agreement (see Loan Agreement, Section 5.09). More specifically, the National Power Corporation has given assurances that it will act as promptly as possible in the circumstances to achieve a level of revenues some 251 in excess of the present unsatisfactory one; (ii$ A debt limitation covenant is contained in Section 5.10 of the Loan Agreement. The Bank will agree that the provisions of the section shall not come into operation until July 1, 1959 unless in the interim a portion of the outstanding debt has been converted to equity; (iv) The National Power Corporation has outstanding a mortgage in favor of the Rehabilitation Finance Corporation, another Philippine Government corporation, to secure a debt the outstanding amount of which is approximately 800,000 pesos. The loan is for a 30-year period, expiring in 1977. The mortgage covers a plant of the National Power Corporation located at Caliraya but also contains a clause which makes the lien of the mortgage applicable automatically to all property thereafter acquired by the National Power Corporation. The National Power Corporation, as a condition of the effective date, will obtain a release of the after-acquired property provision of the mortgage so that the lien will thereafter be confined to the Caliraya plant (Loan Agreement, Sections 7.01(a) and 7.02(a)); (v) Under the terms of existing legislation the corporate life of the National Power Corporation will expire in January 1976. The Government intends to introduce legislation to extend the corporate life. It undertakes, in any event, either to extend the corporate life beyond the final maturity of the loan or to make arrangements satisfactory to the Bank for transfer of the operations, activities and obligations of the National Power Corporation to an entity satisfactory to the Bank (Guarantee Agreement, Section 3.06)_ If a satisfactory solution is not achieved, the Bank has the right to pre- mature the loan (Loan Agreement, Schedule 3, paragraphs (b) and (c)); and (vi) The guarantee of payment of principal, interest and other charges on the loan is in the usual form. However, in order to conform with the provisions of the authorizing legislation, the Government's guarantee of performance is limited to the performance of the covenants and agreements of the National Power Corporation in the territory of the Republic of the Philippines (Guarantee Agreement, Section 2.01). -4- PATaT IV - aPPRAISAL OF THE PROPOSED LOAN 15. A report (TO-156a) dated November 5, 1957 on the Binga hydroelectric project is attached (No. 4).. Justification of the Project 16. The project is the second of six planned for the development of the power potential of the Agno and Toboy Rivers, 110 to 1335 miles north of MYanila. The first project was the construction of a hydroelectric plant with an instal- led capacity of 75,000 kw at Ambuklao and was brought into service in December 1956. The Binga project will have a capacity of 100,000 kw and is already under construction. The project for which the Bank loan is proposed includes the constraction of transmission lines to Manila and to some provincial towns and mines. 17. The National Power Corporation will sell the power generated at kmbuklao and at Binga in bulk to industries and to privately oimed distribution companieE A large part of the supplies from these two plants will be sold to the Manila Electric Company, a subsidiary of the General Public Utilities Corporation of New York, which has considerable generating capacity of its own. 18. A power market study for the area covered by the Luzon grid system of which the Binga project will be part, indicates that load growth is likely to be rapid. Conservative estimates suggest that in addition to Binga further new plant with a capacity of about 300,000 kw will need to be installed over the next ten years. 19. A great part of this growth will be the result of increased demand in the Manila metropolitan area where industrialization is proceeding at a very rapid pace. The Government has assured the Bank that it will take steps to encourage power consumption in the provinces. Therefore, demand in these areas which are at present inadequately served is likely to grow rapidly. Economic Situation 20. The economic situation of the Philippines is reviewed in a report entitled "Economic Position and Prospects of the Philippines," (Mo. FE-3-b) dated November 7, 1957, which is attached (iTo. 5). 21. The Philippines has achieved a rapid rate of economic growth in the post-war period. Over the past decade, the real national product has increased at an average rate of about 7% annually. Since early 1955, however, this expansion has been accompanied by growing inflationary pressures and loss of foreign exchange reserves. Starting in 1953, the deflationary policies applied in 1950 were gradually reversed and replaced by measures to stimulate the rate of investment, particularly in manufacturing. ,Thile the resulting expansion has taken place along generally sound lin3s, it has been at a faster pace thar the foreign exchange resources of the economy can support. After having been maintained at about a level of 003O0 million for several years, reserves began to fall at the end of 1954. They declined to I;225 million by December 1956 and, in early October of this year, they were down to j'178 million, or about one-third of 1956 imports. 22. During recent months, measures have been taken to reduce the inflation- ary pressures and to halt the loss of reserves. The rediscount rate has been raised, controls on private credit and foreign exchange transactions have been tightened, and cuts have been made in government expenditure plans. Action to reduce government outlays further and to raise taxes is also being considered. The Government is resolved to take further action, if necessary, to stabilize the position. In the longer run, the prospects for continued economic growth and the maintenance of external balances are good provided that the government follows appropriate economic policies. The external public debt of the Philippines is now only H80 million and less than 3% of annual foreign exchange receipts will be required to meet the power service charges, Prospects of Fulfillment of Obligations 23. The management of the National Power Corporation is capable and has gained considerable experience through the execution of three major hydro- electric projects. It has employed qualified and experienced consultants, both Philippine and foreign, to assist in carrying out the project. There is every expectation, therefore, that the project will be executed in accordance with sound engineering practices. 24. The total cost of the project is expected to be the equivalent of about W53 million of which about 40% will be met from the proceeds of the Bank loan. In the past the National Power Corporation has for the most part raised the funds it has needed for capital works by the sale of bonds and it plans to meet the local currency costs of the Binga project in the same way. In any case, if there should be any difficulty in raising sufficient funds by the sale of bonds, the Guarantor has undertaken to makeavailable to the Corporation whatever amounts it may need to complete the project. 25.. The present level of revenues of the Corporation is unsatisfactory. The Corporation has undertaken to raise its rates so that before the Binga project is completed, its revenues will reach a level that would be considered in accordance with sound utility practice. This action and the expected rise in power consumption should ensure that by 1959/60 the Corporation's revenues will provide adequate coverage for its debts. 26. The external debt of the Philippines is small. During the next three years service on outstanding foreign debt will amount to less than 3%' of expected foreign exchange receipts and thereafter will be substantially reduced. The proposed loan of ;21 million should, therefore, be within its capacity to service without undue strain on its resources. Method of Procurement S7. A great part of the orders for the equipment needed for this project have already been placed. In accordance with the terms of its Charter the Corporation called for bids on an international basis and followed procedures in placing orders which are satisfactory to the Bank. Similar procedures will be followed in placing the remaining orders. -6- PART V - COM4PLIANCE WITH ARTICLES OF AGRELIENT 28. I am satisfied that the proposed loan complies w,ith the requirement of the Articles of A.greement of the Bank. PART VI - .TE'Y IL ViDATIONIS 29. I recommend that the Bank grant a loan to the National Power Corporation equivalent to '21 million for a period of 25 years at an interest rate of 6% per annur with the guarantee of the Government of the Republic of the Philippines and on such other terms and conditions as are specified in the Draft Loan and Guarantee Aigreements attached, and that the Executive Directors adopt a Resolution to that effect in the forri attached (iqo.. 6). A+ttachments Eugene R. Black Washington, 3.C. November 12, 1957.