R E S T R I C T E D. Report No.P 81

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized This document was prepared for internal use in 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. R E S T R I C T E D Report No.P 81 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the PROPOSED LOAN to the CENTRAL HIDROELECTRICA DEL RIO ANCHICAYA, LIMITADA OF CALI, COLOMBIA FOR A HYDROELECTRIC AND THERMAL POWER PROJECT March 17, 1955

2 INTERN'TIONAL BA-C FOR RECONSTUCTION AND DEVELOPIMENT REPORT AND RECOiEWNDATIONS OF THE, PRESIDENT TO THE EXECUTIVE airjzctors ON A PROPOSED LOAN TO VHE CENTIRAL HIDROELECTRICA DEL RJIC AN3HICAYA LIITADA OF CALIL COLOMJBIA, FOR A HYDRO- ELECTRIC AND THERMAL poiue PROJECT 1. I submit herewith the following report and recommendations on a proposed loan of $.5 million to the Central Hidroelectrica del Rio Ahchicaya, Limitada (Chidral), of Cali, Colombia for a hydroelectric and thermal power project. PART I - HISTORICAL 2. On November 2, 1950 the Bank made a loan of $3,530,OO0 to Chidral (38co) to cover most of the foreign exchange cost of a hydroelectric plant on the Anchicaya river to supply power to the city of Cali. The project consisted of two units having a total capacity of 24,0oo kw., as well as transmission lines and substations. The Colombian Government guaranteed the loan. 3. Technical difficulties were experienced during construction which resulted in a considerable delay in the completion of the project., However,. recent progress has been satisfactory and the project is now nearing completion. It will be placed in service by the middle of The total cost of the project, according to latest estimates, amounts to about 43 million pesos ( million), 4. Loan 38Co has been fully disbursed. Repayment of the loan began in May 1954 and should be completed by November Principal repayments to date have totalled $148, In addition to the two units described in.paragraph 2 above, the Chidral system includes several small Diesel and hyidroelectric plants. having an aggregate generating capability of about 11,000 kvr.: These plants are now operated by the Municipality of Cali, but will soon be turned over to Chidral. Chidral will then be the only supplier of electric power to Cali; while the Municipality of Cali will remain the owner and operator of the-distribution facilities. 6. To meet the constantly and heavily increasing demand for power in the Cali area, the Company applied for a second loan of irl5 million in April 1954 to cover the foreign exchange cost of an expansion program... This covers additional generating capacity in the form of a third hydroelectric unit and a new thermal plant Bank consideration of a loan for the new project was delayed several months pending approval of the expansion plans by the National Electrification Mission composed of Electricite de France and Gibbs and Hill of New York, which has recently completed a survey of Colombian power requirements on behalf of the Government,

3 -2-8. Formal negotiations for the loan opened in1lwashington on February 28, If the proposed loan is made, the total amount of Bank loans to Colombia will be the equivalent of million, net of dancellations. Bank has already made the follovwing loahs to Colombiai The $5.0 million 7-year 31% loan of August 19, 1949 to CAja de Credito Agrario, Industrial y Minero for agricultural machineryk reduced at request of borrower on April 2, 1951 to $4.9 million, which had been disbursed by February 1951e $3.5 million 20-year 4% loan of-november 2, 1950 to Central Hidroelectrica del Rio Anchicaya, Limitada, for power development. Fully disbursed by March $2.6 million 20-year 4% loan of December 28, 1950 to Central Hidroelectrica de Caldas, Limitada, for power development. Fully disbursed by July $16.5 million 10-year 3 7/8% loan of April 10, 1951 for highway construction and rehabilitation, $2.4 million 20-.year 41% loan of November 13, 1951 to Central Hidroelectrica del Rio Lebrija, Limitadap for power development. Fully disbursed by July $25.0 million 25-year 4 3/4% loan of August 26, 1952 for construction of the Magdalena Valley Railroad and central repair shops. $14.4 million 10-year 4 3A4% loan of September 10, 1953 for highway rehabilitation and maintenance. $5.0 million 7-year 4 1/4% loan of December 29, 1954 to Caja de Credito Agrario, Industrial y Minero for agricultural machinery. Total $74.3 million, net of cancellations. PART II - DESCRIPTION OF THE PROPOSED LOAN Borrower 10. The Borrower would again be the Central Hidroelectrica del Rio Anchicaya, Limitada, of Cali, Colombia. The Company was organized and established in 1950 under Colombian Law as a commercial company of limited liability. The National Government is the majority stockholder, with the remaining shares being held by the Department of Calle del Cauca and the Municipality of Cali. Guarantor 11. The Guarantor would be the Republic of Colombia, a member of the Bank,

4 - 3 - Anount 12. The loan would be in an amount in various currencies equivalent to $4.5 million. Purpose 13. The proceeds of the loan would be used to provide the Borrower with the foreign currency required for (a) the expansion of the Anchicaya plant by the installation of a third hydroelectric unit of 20,000 kw., (b) the construction of a thermal plant at Yumbo with an installed capacity of 12',500 kw., and (c) the expansion of substations. At the same time, the Municipality of Cali will purchase and contribute as additional equity to the enterprise a fourth hydroelectric unit identical to the third unit of Anchicayao Thlis additional unit, which will cost 6510,000 will be used primarily as a spare, 14. The-cost for the expansion program, including the fourth unit, is estimated at about 18.5 million pesos ($7.4 million) of which 12.5 million pesos would be in foreign exchange ($5 million, of which the Bank loan would cover $4.5 million) The completion of the expansion of the hydroelectric plant is scheduled for November 1956, the completion of the steam plant for the end of W(ith the addition of these additional generating facilities the total generating capacity of the Chidral system will be 67,500 kw. Interest, Commission and Commitment Charges 16. The loan would bear interest at the rate of 4 3/% per annum, including the statutory commission of l1. The commitment charge would be 3/ of 15 per annum, and would accrue from the Effective Date of the Loan Agreement or sixty days after the Loan Agreement is signed, vwhichever is earlier. Amortization 17. The Loan, like the first Loan to Chidral) wvould be for a period of 20 years; it would include a period of grace until January 15, Ihe loan would be amortized by approximately equal semi-annual principal and interest payments of $198,000 beginning January 15, 1959 and ending July 15, 1975 as set out in Schedule 1 of the proposed Loan Agreement. Legal Instruments and Legal Authority 18. Drafts of the Loan and Guarantee Agreements are attached as Appendix 1 and "ppendix 2, respectively. They are substantially similar to the agreements executed in connection with the first loan to Chidral. The following provisions are of special interest. 19. The Loan Agreement (Section 5.13) and the Guarantee Agreement (Section 3.07) require that rates charged for power shall be sufficient to cover service on outstanding debt and operating expenses and to leave a

5 reasonable surplus to finance new investment.~ This covenant has been included because the Bank believes that future expansions should normally be borne at least in part by electric power consumers. 20. In order to assure that the electrical distribution system of the Mlunicipality of Cali will be expanded sufficiently to carry all the energy to be generated by Chidral, before the loan becomes effective Chidral is to obtain satisfactory assurances from the iunicipality concerning its construction plans (Section 7.01 of the Loan Agreement). In addition, if it later appears that the Municipality lacks funds to complete expansion of the distribution system in a timely manners the Colombian Government undertakes to provide any necessary funds (Section 2.02(b) of the Guarantee Agreement). 21. Chidral has sufficient powers under existing laws and its own charter to enter into the Loan Agreement and to carry out the project. Under the Colombian Constitution, congressional action would normally be required for authorization or ratification of the Guarantee Agreement. The President of Colombia, acting under authority of the Constitution, is governing the country under a state of siege, and it is unlikely that Congress will be called in the near futuree Execution of the Guarantee Agreement will therefore be authorized or ratified by an extraordinary decree of the Executive Power issued under the state of siege declared pursuant to Article 121 of the Colombian Constitution. In the opinion of Colombian counsel for the Bank and of the Office of the General Counsel, authorization or ratification in this manner will be proper. 22. The report of the Committee provided for in Article III Section 4(iii) of the Articles of Agreement is attached as Appendix 3. PJ5RT III - APPRAISAL OF TIE PROPOSED LOAN 23. A detailed appraisal of the Project (T.0.72b) is attached as Appendix 4. Justification of the Project 24. Cali, one of the principal industrial centers of Colombia, is located in the Upper Cauca Valleys a region with great agricultural and industrial potentialities. It is the fastest growing city of Colombia. The population has grown from about 100,000 in 1938 to 250,000 in 1951, and now approaches 360,000. During recent years the Cali area has attracted attention as the scene of a rapidly increasing industrial expansion, with many manufacturing plants establishing in the area. This development has been the more noteworthy sinco for years Cali has been suffering from inadequate power supply. Many new industrial and residential customers have been unable to purchase power, and an increasing backlog of demand has been building. 25. The facilities which will come into operation by mid-1955 will not long meet the increasing requirements for power. The further expansion of the Chidral system is therefore essential to meet the demand to be expected during the years

6 - 5 - Method of Procurement 26. The equipment required to carry out the project is being acquired on the basis of international bidding. Chidral has retained Syndibel of Belgium as consulting engineers and construction supervisors. Contractors will be selected from among firms having qualifications satisfactory to both Chidral and Syndibel. Economic Situation 27. A report on the Economy of Colombia ('JT.H.33a), distributed to the Executive Directors on November 4, 1954, showed that the economy had made great strides in recent years in output, investment, exports and foreign reserves. Although coffee prices had risen sharply in the first half of 1954, official policies had restrained what might have been a highly inflationary situation. In the past few years almost all government expenditures, including capital expenditures, have been met from current revenues and public finance has not generally added to inflationary pressures. 28. The report mentioned the fall in spot prices of Manizales coffee in August 1954 to just over 70 cents a pound from a peak of 91 cents in March i954, and took into account further reductions. Since August, prices have fallen as low as 52 cents and at present are around 60 cents. Reserves of foreign exchange declined during August, September ahd October and the Colombian Government took steps to discourage imports and stimulate the movement of coffee exports. At the same time the Central Bank restricted the foreign exchange available for importers, thus causing some accumulation of commercial arrears,. In order to pay off these arrears while Lnintaining foreign exchange reserves of at least 4)200 million (equivalent to about three and a half months' imports at the 1954 rate), Colombia bought '25 million from the International Mionetary Fund on December Wfhile arrears were being liquidated, coffee prices declined further in February and reserves of foreign exchange fell somevwhat below $200 million. The authorities promptly introduced further mneasures. Imports have now been classified into five groups which are taxed by 3c, 10%, 30%0, 80% and 100% respectively, and there is also a group of prohibited imports. The exchange rate for coffee exports has been raised from 2.38 to 2.50 pesos per dollar - a move which had been intended but postponed in Deposits which importers have to make before securing licenses vary from 20% to 60% over the five groups of imports. It is too early to observe the effects of these measures to reduce imports; but it is clear that the possibility of a further fall in coffee prices calls for continued vigilance by the Colombian authorities to avoid a serious drain on their foreign reserves. Reports from Colombia indicate that the Government has taken over responsibility for a minimum coffee prices formerly administered by the Coffee Federation. The short-term balance of payments will depend not only on imports and the export price for coffees but also on the extent to which the administration of minimum prices leads to the accumulation of coffee stocks in Colombia. 30. The conclusion of the economic report, which remains unchanged by recent events, is that, on the basis of its natural resources and the progress

7 -6- already made, Colombia t s prospects for further economic advance are good. The report pointed out also that the external public debt is not excessive, on reasonable'export assumptionss, and that it would be justifiable for a country with the'economic record and prospects of Colombia to assume a greater burden of external debt. The new loan proposed would be within Colombiats capacity to service, Prospects of Fulfillment of Obligations 31. The management of the Company appears competent and capable of satisfactory execution of the project and operation of the facilities upon completion. Although Chidral has experienced past difficulties in obtaining local funds when-required, present estimates indicate that the Company should be able to maintain a sound financial position. Revenues expected to accrue after the Anchicaya plant starts operations in mid-l195 will enable the Company to repay promptly its existing medium-term local currency loans and to provide for adequate working capital and reserves. The Company should have no difficulty in providing the local currency needed to purchase the amounts of foreign exchange required to service the Loan, and these amounts should be within Colombia's capacity to provide.- PART IV - COMPLIANCE WITH THE ARTICLES OF AGREEIENT 32. I am satisfied that the proposed loan would comply with the requirements of the Articles of Agreement of the Bank. PART V - RECOM1VNDATION 33. I recommend that the Bank make to the Central Hidroelectrica del Rio Anchicaya Ltda., with the guarantee of the Republic of Colombia, a loan of $4.5 million, or the equivalent thereof in other currencies, for a term of 20 years, with interest (including.commission) at the rate of 4 3/4% per annum, and on such other terms as are specified in the draft Loan and Guarantee Agreements attached herewith as Appendix 1 and 2, respectively. Washington March 17, 1955 Eugene R. Black