INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FLE c y Report RESTRICTED No. P-808 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 The report may not be published nor may it be quoted as representing their views.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 THE PROPOSED LOAN TO CENTRAL ELETRICA DE FURNAS S.A. WITH THE GUARANTEE OF THE GOVERNMENT OF BRAZIL May 6, 1970

2 Ii' TTWATIJONTAL BiANX FOR RECONSTRUCTION 1-NDUIMT.ELOPMENT REPORT AND RECONIEMNDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE PROPOSED LOAN TO CENTRAL ELETRICA DE FURNAS S. A. W4ITH THE GUARANTEE OF THE GOVERMAENT OF BRAZIL 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $80 million to Central. Eletrica de Furnas S. A. (Furnas) with the guarantee of the Government of Brazil. PART I - HISTORICAL 2. The Bank has had a long and close association with the electric power sector in Brazil dating back to Since then 21 loans totalling $541 million have been made. The proposed loan would be the fifth to Furnas. Furnas received its first Bank loan, $73 million for the construction of the original Furnas hydroelectric project (211-BR), in 1958, shortly after its establishment. The company's second major project, the Estreito hydroelectric plant, was financed by Bank loans totalling $96 million ( BR) granted in 1965 and In 1968, Furnas received a fourth loan of $22.3 million (565 BR) for the construction of the Porto Colombia hydroelectric project. All of the projects included transmission lines. The first two plants are now in service, the Estreito plant having begun operation on schedule last year. Work on the Porto Colombia project is proceeding satisfactorily. 3. Electric power projects financed by the Bank in Brazil in recent years have been selected on the basis of comprehensive studies of market requirements and investment priorities in the major consuming regions. A long-term study of the power market in the south-central region served by Furnas, which accounts for 80% of national power consumption, was completed in December 1967 and a similar study of the southern region was completed early this year. The Bank acted as executing agent for these studies, which were financed by UNDP. The Marimbondo site, downstream on the Rio Grande from the projects now under construction with Bank financing, was recommended in the UNDP study of the south-central region as the next project site suitable for large-scale low-cost power development. Last year, the growth prospects of the south-central power market were re-studied by Eletrobras, the holding company which controls the operations of the federally owned utilities. This study confirmed the need for the prompt construction of the M4arimbondo project to meet the expected growth of demand after The Brazilian electric power sector has made impressive progress in recent years in carrying out the investments necessary to meet the rapid growth of the power market. Increasing emphasis has been placed on overall sector planning and the government has formulated an investment and financin; program for the years The program is based on the projected growth in demand of more than 12% per year in the markets served by the major power utilities. To meet this, installed capacity would have to be increased over

3 the period by 7300 Mw. The total cost of the investments to meet the growth of demand would be about $3.6 billion. About 75% of this would be financed from domestic resources, consisting mainly of funds generated within the sector from the power ccnpanies' earnings and user taxes. The bulk of the external capital inflow required by the sector during the period is available from loans already made by the Bank, the Inter-American Develcpment Bank and other lenders. However, while the projects presently underm2y will enable the power sector to meet the projected growth of demand through. the mid-70's, a number of major new projects will have to be initiated during the years immediately ahead in order to meet Brazil's power requirements during the latter part of the decade. The major new generation and transmission projects to be initiated during under the investment prograq would require fresh external loan commitments totalling some $750 million. 5. The Brazilian authorities propose to seek long term external financing only for the cost of equipment and material for major generation and transmission projects. In the last few years the Brazilian electrical goods industry has developed rapidly. With the 15% margin of preference allowed on Bank projects, it is now in a position to supply about 40-50% of the value of equipment required for generation and transmission projects. Increasingly, the foreign exchange expenditures of the Brazilian power sector are shiftinc from the import of finished goods to the import of raw materials and partly manufactured components. During discussions on the financing program for the power sector, the Bank and the Brazilian government felt that for large projects, such as Marimbondo, joint financing by the Bank and bilateral lenders was a suitable way of combining bilateral financing, normally available only for foreign procurement, and Bank financing which, considering the special Brazilian circumstances, has been available for domestic procurement as well. In addition, joint financing of electric power projects will release additional Bank funds for use in sectors such as Transport and Agriculture where projects are often not suitable for bilateral financing. The project was discussed at a meeting in Paris on March 11 and 12 of representatives of the Bank, Belgium, Canada, France, Germany, Italy, Japan, Sweden, Switzerland, the United Kingdom and the United States and agreement was reached on the attached memorandum on the joint financing of the Marimbondo project. 6. The project was appraised by a mission which visited Brazil in October/November 1969 and negotiations for the proposed loan were held on April 14, Furnas was represented by Mr. John Cotrim, President, Mr. Sergio Menezes, Financial Director and Mr. Sergio Almeida, Chief Legal Counsel. The government was represented by Mr. Jaime Alipio de Barros, General Counsel of the Ministry of Finance. 7. The proposed loan would be the 29th Bank loan to Brazil, including the loan for the Second Highway Construction Project approved by the Executive Directors on March 31 and scheduled for signing later this month. It would increase the total of Bank loans to Brazil to $838 million (net of cancellations, but including the $100 million highway loan). The following is a summary statement of Bank loans to Brazil as of March 31, 1970:

4 -3- Loan Amount less No. Year Borrower Purpose Cancellations Undisbursed (US$ million Loans fully disbursed Central Eletrica de Furnas - Estreito I Power Centrais Eletricas de Sao Paulo - Xavantes Power Centrais Eletricas de Minas Gerais Power Central Eletrica de Furnas - Estreito II Power Cia.Brasileira de Energia Eletrica Power Cia. Forca e Luz do Parana Power Cia. Paulista de Forca e Luz Power Cia. Forca e Luz de Minas Gerais Power Brazil Livestock Cia. Minera de Alumino- Aluminum Alcominas manufacture Central Eletrica de Furnas Power Central Eletrica de Minas Gerais Power Brazil Roads * 1970 Banco do Nordeste do Brasil Industry Total (less cancellations) 658.o of which has been repaid to Bank and others: Total now outstanding Amount sold 10.3 of which has been repaid Total now held by Bank Total undisbursed * Not yet effective.

5 8. The table shows that substantial amounts are as yet undisbursed, even on the power loans made in This is due to a number of factors. Some of these reflect certain characteristics of our power loans to Brazil, and tneir effects on disbursements must be regarded as normal. A second group of factors consists of delays in the physical execution of several projects during the early stages of construction. As regards the first group, Bank loans for electric power projects have been made for the purch-e! of equipment and materials. In most cases delivery and installation is scheduled only when the civil works are substantially completed. Moreover, a common feature of contracts between the Brazilian power companies and suppliers of equipment and material is that progress payments are not provided for. The combined result of these two factors is a bunching of disbursements of Bank funds near the closing dates. Finally, there were substantial savings in some of the loans because prices realized in international ccmpetitive bidding were considerably lower than initially expected. The Executive Directors have already approved the utilization of some of the savings in respect of loans 403/474 BR and 404 BR for additional works related to the projects. Additional savings are expected on these and other loans made in 1965 and The physical execution of the projects was initially delayed in the cases of power loans 404 BR, 442 BR and BR. You were advised of the reason for the delay in the Xavantes project (404 BR) last December when you approved my proposal of a 2-year extension of the closing date and amenament of the project to include an additional transmission line to be financed out of savings realized in procurement. Unexpected foundation difficulties with the Jaguara project (Loan 442 BR) delayed construction for about a year; the project is now moving on schedule and ccnpletion is expected by mid Implementation of the four power distribution loans ( BR) was initial.iv slowed by organizational and administrative difficulties encountered by the borrowers. Project management has now improved and rapid progress has been made in committing loan funds which should soon be reflected in the accelerated pace of disbursements. Progress on all other power loans has been on schedule. 10. The table also reflects delays in disbursements on the 1968 loan for highway construction (567 BR) and the 1967 loan for livestock (516 BR). As regards the former, difficulties were encountered in awarding contracts, but disbursements began in February of this year and are expected to continue regularly from now on. As regards the latter, action has recently been taken to remedy certain deficiencies that had arisen in project management, but utilization of the loan by farmers is still being delayed by difficulties regarding the terms of sub-loans. This matter is under active discussion with the Brazilian authorities. 11. IFC has made investments in 11 companies for a total of $ million (net of cancellations). The following is a summary of the IFC investments in Brazil as of March 31, 1970:

6 -5- Amount Undisbursed ($ million) Investments fully disbursed 32.8 Investments not fully disbursed Investments not yet effective Total (net of cancellations) 49.6 of which has been repaid to the Corporation Amount sold 11.0 Total now held by Corporation 34.4 Undisbursed Projects suitable for future Bank lending in the fields of electric power, transport, agriculture, education, industry, iron ore export and water supply are presently being prepared in cooperation with the Government and potential private borrowers. PART II - DESCRIPTION OF THE PROPOSED LOAN 13. Borrower: Central Eletrica de Furnas S.A. Guarantor: Brazil Amount: Equivalent in various currencies of US $80 millinn. Purpose: Amortization: Interest Rate: Commitment Charge: To help finance the Marimbondo hydroelectruc plant and associated transmission facilities; additional generating units for the Furnas plant; and technical, training and management improvement services and related equiyment. In 30 years, including 7½ years of grace, through semi-annual installments beginning September 1, 1977 and ending March 1, percent. 3/4 of one percent.

7 - 6 - PART III - THE PROJECT 14. An appraisal report entitled "Appraisal of the Marimbondo Hydroelectric Plant and Transmission Lines and Other Generating Equipment" (PU-41) is attached. 15. The Marimbondo hydroelectric plant, with an installed capacity of 1,h00 Mw, is the largest power project in the Government's investment programri. The project to be financed by -the proposed loan consists of the Marimbondo hydroelectric plant and approximately 1,400 km of 500 kv and other transmission lines connecting Marimbondo to Rio de Janeiro, plus the installation of two additional 150 Mw turbo-generator units (Nos. 7 & 8) at the existing Furnas hydroelectric plant. The total cost of the project, estimated on the basis of Furnas' recent construction and procurement experience, is $287 million of which $161 million would be for the Marimbondo plant, $111 million for the transmission system, $9 million for Furnas units 7 & 8, and $6 million for related engineering and consulting services. The cost per kw of the Marimbcndo plant and transmission system is under $200, which can be considered very lowcost hydroelectric power, especially when taking into account the fact that part of the transmission system will serve other plants as well. 16. The Marimbondo project will be constructed and operated by Furnas, which is the largest of the federal power companies. Furnas sells power in bulk under long term contracts to the private and state companies which distribute electricity to final consumers in Sao Paulo, Rio de Janeiro, and other major consuming centers in the south-central region. Furnas is now operating generating plants with a combined installed capacity of about 2,000 Mw. With the completion of the generating plants now under construction, and with Marimbondo in operation, the company will have a total capacity of about 5,000 Mw in In 1969 Furnas' energy sales rose to the 10 billion kwh level, with gross operating revenue increasing correspondingly to the equivalent of about $93 million. Brazilian government tariff regulations and rate making procedures have worked well in recent years to assure power companies a reasonable rate of return. Furnas is technically and financially well managed and has demonstrated its ability to carry out Bank-financed projects efficiently. 17. As in the case of all recent Bank-financed electric power projects in Brazil, external finance is being sought only for materials and equipment to be procured in international competitive bidding, estimated to cost approximately $100 million (including contingencies), and for the foreign exchange cost of engineering and consulting services. External financing is not proposed for civil works or for interest during construction. At the Paris meeting on joint financing it was agreed that the Bank and the participating countries would each finance 50 percent of the eligible orders placed in these countries, while the Bank would finance 100 percent of the orders placed in Brazil (or other countries not providing finance) and any "small" orders not eligible for joint financing. Brazilian manufacturers of electrical and mechanical equipment would participate in international competitive bidding with a 15 percent margin of preference. A review of Furnas' recent procurement experience on Bank-financed projects indicates that Brazilian manufactur;rs

8 - 8 - make its best efforts to obtain and utilize the joint loans for the Project. Section 2.08 provides for the adjustment of the amortization schedule so that the combined repayments of principal on the proposed Bank loan and the joint loans would, insofar as practicable, not exceed the repayments that would have been necessary had the full external financing been provided by the Bank, but without reducing any principal installment due the Bank below $100,000 or extending the final amortization date of the Bank loan. Section 6.02 (a) provides for the right of the Bank to premature the proposed Bank loan if any of the joint loans has been prematured. PART V - THE ECONOMY 22. The most recent economic report on Brazil (WH-195a) was issued in December 1969 and concluded that Brazil's economic performance in recent years was satisfactory and that Brazil was creditworthy for substantial amounts of external borrowing. These findings have been confirmed by a new economic mission which visited Brazil in April of this year and which is now preparing its report. 23. Total output grew by 8% in 1968 and 9% in 1969, spearheaded by a vigorous expansion of industrial production. Export earnings rose by 14% in 1968 and by as much as 23% in Increased earnings from coffee and the other main traditional exports (sugar, cocoa and cotton) accounted for less than one half of the 1969 gain; the balance came from a wide range of non-traditional industrial and agricultural products as well as from mining. Treasury budget receipts rose in real terms by 12% in 1969 while the increase in expenditures was held to less than 6 percent. The extra-budgetary accounts of the government showed a substantial surplus in 1969, with the result that the public sector indebtedness to the banking system declined. Prices have continued to increase, under the impact of expansion of credit to the private sector and accumulation of exchange reserves; the general price index rose by 20% in 1969 compared to 25% in The impact on the balance of payments of the price increase was neutralized by the flexible exchange rate policy which was introduced in August The current account deficit fell from $455 million in 1968 to $151 million in The outlook for further expansion of output and exports is favorable. The rate of investment has increased; the change in the world coffee market will enable Brazil to dispose of the earlier accumulated surpluses at favorable prices; and the responsiveness of non-traditional exports to the new exchange rate policy and other export incentives promises a substantial diversification of the structure of production and exports at a high rate of growth. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 25. I an satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.

9 - 9 - PART VII - RECOMMENDATION 26. I recommend that the Executive Directors approve the proposed loan. Robert McNamara President Attachment

10 RESTRICTED MEMORANDUM ON JOINT FINANCING OF THE MARIMBONDO HYDROELECTRIC PROJECT IN BRAZIL I. Project to be covered A. This memorandum applies to the external financing of the following project: Marimbondo Hydroelectric Project 106 Estimated external financing (US$ Million equivalent) B. The International Bank for Reconstruction and Development (the Bank) is ready to consider the provision of up to $80 million of this financing if agreement can be reached with potential joint lenders on a mutually-acceptable basis for joint financing. II. General Formula for Joint Financing A. The formula for provision of external financing of the imported goods required for the project and eligible for joint financing would be 50 percent by the Bank and 50 percent by the supplying country. This financing formula would only apply to individual orders for imported goods of at least $200,000, aggregating at least $1 million in any one supplying country. B. All countries with prospects of obtaining significant orders under the above formula would indicate their willingness to join in its financing as a precondition for proceeding with joint financing of the project. C. The term to maturity of joint loans would be no less than 10 years from delivery of the goods. For this purpose, the date of delivery in respect of each individual contract will be deemed to be the expected date of completed installation at site, as determined by the Bank, but in any case this date will not be later than 18 months from the contractual date of the shipment of the goods. An appropriate grace period wil). be added taking into account the foregoing in cases where maturity is calculated from date of signature. The interest rate and other charges would be no higher than the most favorable rate and charges which the country otherwise provides with respect to long-term commercial export credit. The goods to be imported for the project would be procured on the basis of international competitive bidding in accordance with the practices usually followed for Bank projects, without reference to credit terms including interest rates and amortization schedules.

11 - 2 III. The Role of the Bank A. The Bank will appraise the project and,provided it conforms to the Bank's standards, will recommlend to its Executive Directors a loan to cover its share of the financing of imported goods under the formula outlined in II. A. B. In order to facilitate the arrangements to be made by the joint lenders, the Bank will advise thern on the progress of its own project appraisal, and of the status of procurement and award of contracts. C. Every effort will be made to make the Bank loan effective simultaneously with the joint loans. However, the Bank will consider making its loan effective in advance of the effectiveness of joint loans should this be justified by the circumstances of the case. D. In order to ensure that the total financial plan which emerges is appropriate to the project and the financial position of the Borrower, the Bank is prepared, within limits, to adjust the amortization schedule of its loan to the schedules of joint loans, so that the total annual amortization payments required of the Borrower would be reasonably approximate to those which would be required if the entire amounts had been provided by the Bank. E. The Bank will also be prepared to include in its Loan Agreement a provision stipulating that prematuring of a joint loan because of a default would give the Bank the right to declare a default under the Bank loan. F. The Bank will notify joint lenders in cases of ary Brazilian request for substantial additions to or deletion from the list of equipment and materials for the program and give them an opportunity to comment before agreeing to them. IV. The role of other Joint Lenders A. Upon receipt of notification from the Bank, joint lenders will promptly enter into loan negotiations with the Borrower in Brazil. B. Every effort will be made to declare joint loans effective simultaneously with the Bank's loan, but the Bank, as indicated in III. C. above, may decide to make the Bank loan effective in advance of the effectiveness of joint loans. C. If a joint lender finds it necessary to place a ceiling on the amount of financing to be made available, it will be prepared seriously

12 - 3 - to consider increasing this amnount in case the flow of orders calls for additional financing by it under the joint financing formula. The Bank will consider the effect of such a ceiling, and aft'.r consultation with irterested joint lenders, will advise whether such ceiling wo'4ld, in the Bank's judgmen+t, be adequate in relation to the orders likely to be obtained. May 6, 1970