RESTRICTED FILE COPY Report No. P-419 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 The report may not be published nor may it be quoted as representing their views.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 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN FOR ELECTRIC POWER EXPANSION TO EMPRESA NACIONAL DE ELECTRICIDAD S.A. AND CORPORACION DE FOMENTO DE LA PRODUCCION IN THE REPUBLIC OF CHILE January 26, 1965 INTERNATIO,NMTAL BANK FOR RECONSTRUCTION AND DEVELOPME.T REPORT AtD R, COMDST- .ATION OF THE PRESTDEVTT TO THE EXECUTIVE DIRECTORS ON'l A PROPOSED LOAN FOR ELECTRIC POWEF. EXPA.USIOTNJ TO EMPRIESA NACIONAL DE ELECTRICIDAD S.A. A\TD CORPORACION DE FOIvEiITO DE LA PRODUCCION IN THE, RElPUBLIC OF CHILE 1. I submit the following report and recommendations on a proposed loan in an amount in various currencies equivalent to US$ 4.4 million to Empresa Nacional de Electricidad S.A. (E\TDESA) and Corporacion de Fomento de la Produccion (CORFO) to finance the foreign exchange cost of an interim power program. PART I: INTRODUCTION 2. EUDESA was formed as a joint stock company in 1944 to plan electric power development in Chile and to provide facilities for meeting power requirem,ents which cannot be provided by other companies. Most of its stock is olned by CORFO, a Government Corporation established in 1939 to carry out the Government's development policies. Because of the requirements of Chilean. legislation all three Bank loans made in the past to Ei'DESA for power develop- ment were made jointly to ENDESA and CORFO as co-borrowers. 3. The first of these loans was a US$ 13.5 million loan made in 1948 to finance an early stage of ENDESA's program of power development which included the installation of 81.h MW of hydroelectric generating capacity and related facilities. The plants have all been in operation since 1955. Principal repayments to date total US) 9,787,000 and the entire loan is scheduled to be repaid by July 1, 1968. On November 1, 1956 the Bank made the second loan, equivalent to US'S 15 million for the expansion of ENDESA's hydroelectric generating capacity by 166 MIW^ in three hydroelectric plants and transmission facilities. All these plants have been in operation since 1962. Principal repayments to date amount to US$ 2,965,000 and the entire loan is scheduled to be repaid by October 15, 1976. 5. In December 1959 the Bank made the third loan amounting to US$ 32.5 million equivalent to assist in the financing of the construction of the 280 MW Rapel hydroelectric power plant and the 16 IW Huasco Steam Plant. Construction of these projects has been delayed about 18 months by the severe earthquake of 1960, by landslides and poor rock conditions, and by strikes. The Huasco project will be completed in 1965 and the Rapel project should be completed in 1967. Principal repayments to date amount to US" 400,000 and the entire loan is scheduled to be repaid by April 15, 1985. 6. Negotiations of the proosed loan took place in Washington with Mr. Renato Salazar representing ENDESA, Mr. Jose Zabala representing CORFO, and 14r. Vigorena of the Chilean Embassy representing the Government. 7. The Bank has already made tlhe following eleven loans to Chile. Amount Year Number Borrower Purpose (Equivalent in millions of US";") 1948 5 ENDESA and CORFO Power 13.5 1948 6 CORFO Agriculture 2.5 1951 49 CORFO Agriculture 0.9 1953 83 Papeles y Cartones Industry 20.0 and CORFO 1956 153 ENDESA and CORFO Power 15.0 1957 171 Schwager and Coal Mining 12.2 COi20 1957 172 Lota and CORFO Coal Mining 9.6 1959 244 EiNDESA and CORFO Pover 32.5 1961 287 Republic of Chile Road iviaintenance 6.0 1963 366 CORFO Agriculture 19.0 1963 367 CORFO Agriculture 5.0 Total net of cancellations 136.2 Of which has been repaid 28.2 Total now outstanding 108.0 Amount sold 4.9 Of wrhich has been re- paid -4.5 .4 Net amount now held by Bank 107.6" *Includes $ 48.2 not yet disbursed. - 3 - 8. Of the above loans delays in disbursement have been experienced orly on Loan 24L-CH, for the reasons explained in Paragraph 5 above; on Loans 171-CH and 172-CH, for reasons which were explained to the Executive Directors on June 5, 1964 on the occasion of the presentation of the Supple- mental Loan Agreement with the merged Lota-Schwager coal company; and on Loan 287-CH, on which disbursements were suspended by mutual agreement in early 1963 pending a formulation of a Master Maintenance Program, receipt of wlhich is still awaited. 9. IDA extended a credit (4-CH) in the amount of $ 19.0 million to the Republic of Chile in 1961 for highway construction. PART II: DESCPTPTION OF THE PROPOSED LOAN 10. The proposed loan would havre the following characteristics: Borrowers: Empresa Nacional de Electricidad S.A. and Corporacion de Fomento de la Produccion. Guarantor: Republic of Chile. Amount: The equivalent in various currencies of US$ 4.4 million. Purpose: To finance the foreign exchange cost of several small power plant extensions, transmission and distribution facilities, and system studies. Amortization: In 35 semi-annual installments beginning on April 15, 1968 and ending on April 15, L985. Interest Rate: 5 1-2. per annum. Payment Dates: April 15 and October L5. PART III: LEGAL INSTRTIMETNTS AND AUTHORITY 11. A draft Loan Agreement between the Bank and Ti1G_hA and CORFO and a draft Guarantee Agreement betwTeen the Republic of Chile and the Bank are being distributed to the Executive Directors separately. 12. The draft Loan Agreement is similar to the earlier agreements between the Bank and ENDESA and CORFO, with certain modifications in line with present Bank practice. The Guarantee Agreement is similar to previous Guarantee Agreements between the Republic of Chile and the Bank. PART UT: THE PROJECT Project Description 13. A detailed appraisal of the project (No. TO 4L5a) is attached (No. 1). - h - IL. Chile's power demand is concentrated in the central region where 91% of the population resides and wThere the mnajor po-wer facilities exist. ENQDESA is now planning its next major plant and system expansion and expects to submit feasibility reports to the Bank in L965 with a request for financing. 15. The proposed project constitutes an interim program designed mainly to provide additional power in areas outside the central region where public supply of electric power is now confined to a few widely separate towns, served by isolated systems mostLy without adequate generating capacity. Its main elements are: A. The addition of a 3.4 MH hydroelectric unit to increase the generating capacity in Antofagasta, the port serving the northern mineral producing region. B. The installation of a 5 WN gas turbine to increase the generating capacity in Punta Arenas, the southernmost town in Chile, where the discovery of oil in recent years has added to the economic prospects of the region. C. The installation of a submarine cable to connect the power system of the Island of Chiloe wiith that on the mainland. The Government plans to provide financial assistance to develop small industry on the island and the additional power will be required for this purpose. D. The first year of a three-year program of transmission and dist- ribution system expansion to meet requirements throughout Chile. E. The provision of imported equipment and the services of consultants, to improve administrative and accounting procedures and to enable EJDESA to investigate potential hydro and thermal sites for future development essential to mneet E-,DESArs forecast demand for power. Financing Arrangements 16. The total cost of the interim program would amount to about $ 10 million of which the Bank loan would finance the foreign exchange cost amounting to $ 4.4 million. The additional funds required for the completion of the program TwTould come from ENDESA's own resources and from equity contributions by CORFO whlzich has pledged to provide on this basis all additional funds required. ENDESA's Financial Situation 17. Since 1959, when the last Bank loan was made, ENDESA's financial situation has been wseak, with returns on investment declining to 3' in 1963. Although the regulatory agencies apnroved during the same five-year period increases which raised average tariffs by about 741%, this was insufficient to compensate ENDESA for inflationary cost increases and allow in addition an adequate return on its revalued rate base, as permitted under the existing Chilean Electricity Law. During the past year, however, the Government's attitude seems to have changed and rate increases averaging about 60% were put into effect which should bring EfPPESA's return on investment to about 5% by the end of 196h. Further iraprovements are to be expected during the period of the interim program, and both the borrowers and the Government have been advised that substantial progress in this area will be a prerequisite for the consideration of any further Bank loans for EiNDESA. Procurement 18. ENDESA has followed internationally competitive procedures acceptable to the Bank in connection writh the procurement of goods to be financed under the proposed loan. Economic situation 19. The economic position and prospects of Chile were discussed in detail in WH-127a of July 16, 1963 which has been circulated to the Executive Directors on a previous occasion. Significant developments since that report was prepared are summarized in an economic memorandum attached to this report (No. 2). 20. As the memorandum points out, Chile faces a difficult period during the next years, mainly on account of the very heavy debt burden, particularly in the next two years. Hovwever, in recomnending this loan I have been guided by recent developments and the programs and policies which the new Chilean Government has already initiated. These policies ofLer promise for a signi- ficant improvement in Chile's economic situation and particularly in its balance of payments. With respect to the most immediate difficulties, Chile has asked most of its principal creditors to consider a rescheduling of part of its obligations falling due in 1965 and in subsequent years. A first meeting of the creditor countries is scheduled to take place on January 27, 1965 in Paris. In addition, and even more importantly, the agreement reached betwTeen the Government and the copper companies to carry out sizeable invest- ments, should result in a substantial increase in export earnings which together with good prospects for other exports, would substantially strengthen Chile's economic position and prospects. At present, the only other Bank loan for Chile which is under active consideration is a small loan for vocational training facilities which I expect to present to the Executive Directors within the next few weeks. Any additional loan proposals will await the completion of a further review of Chile's econom.ic prospects and creditworthiness in the light of the actual arrangements for the rescheduling of Chile's external debt, copper investments, and the implementation of the new policies. -6- PART V: CO?SiPLTAMCE U14ITH THE ARTICLES OF A.F-_ E 21. I am satisfied that the proposed loan w-Tould comply with the Articles of Agreement of the Bank. PART VI: FZCOPIENDATION 22. I recommend that the E.xecutive Directors adopt the followring resolution: RESOLVED: THAT, the Bank shall grant a loan to Empresa Nacional de Electricidad S.A. and Corporacion de Fomento de la Produccion, to be guaranteed by the Republic of Chile, in an amount in various currencies equivalent to four million four hundred thousand United States dollars (us$ L,4OO,OO), to mature on and prior to April 15, 1985, to bear interest at the rate of five and one-half per cent (5 1-2%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Interim Pow^!er Program) between the Bank and Empresa Nacional de Electricidad S.A. and Corporacion de Fomento de la Produccion and the form of Guarantee Agreement (Interim Power Drogram) between the Republic of Chile and the Bank, which have been presented to this meeting. George D. Woods President Washington, D.C. January 26, 1965