FILE COPY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEINT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY RESTRICTED Report No. P-720 This report was prepared for use within the Bank and its affliated 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 The report may not be published nor may It be quoted as representing their views.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 DEVELOPMEINT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE C. V. G. ELECTRIFICACION DEL CARONI, C.A. (EDELCA) IN VENEZUELA June 11, 1969

2 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPI4ENT REPORT AND RECONkENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO C.V.G. ELECTRIFICACION DEL CARONI, C.A. (EDELCA) IN VENEZUELA FOR GURI POWERHOUSE EXTENSION 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$31 million to C.V.G. Electrificacion del Caroni, C.A. (EDELCA). PART I - HISTORICAL 2. The Bank has previously made two loans to EDELCA for power development. The first one (353-VE) was made in 1963 in an amount of $85 million, for construction of the initial stage of Guri Hydroelectric Project, including three generating units. There has been some delay in the completion of the project: the general contractor experienced certain technical and financial difficulties, additional excavation was needed, work fell behind schedule, and additional equipment had to be moved on-si.te. A revised schedule of completion was drawn up, and the Closing Date extended from March 31, 1968, to September 30, The first of the three units was brought into operation in November 1968, and a second unit in April The last unit is expected to be operational in July A second loan (i482-ve) of $15 million was made in January 1967 to help finance the extra-high-voltage transmission line, substations, and related facilities required for transmitting power from EDELCA's Guri plant to the major market areas of northern Venezuela. The project is proceeding well, and is expected to be completed in the third quarter of this year as originally scheduled. 4. In addition to these two, a third loan in the power sector (391-VE) was made in 1964 in the amount of $14 million to Compania Anonima de Acministracion y Fomento Electrico (CADAFE) to finance the foreign exchange costs of a transmission project to integrate two of CADAFE's major service areas, and interconnect them with the EDELCA hydroelectric plants. The Government has undertaken to bring about frequency unification between the government systems and La Electricidad, the major private producer located in Caracas; and a long-term power sales agreement has been entered into between EDELCA, CADAFE and La Electricidad. The Bank's lending fcr power in Venezuela has thus aimed at a coordinated development of this sector. 5. Project appraisal was completed in December 1968, and negotiations for the proposed loan took place at the Bank in February EDELCA was represented by its President, General Rafael Alfonzo Ravard,

3 - 2 - and other members of that organization. Dr. Jose DaLucca, Director, Department of Public Credit, Ministry of Finance, represented the Government of Venezuela as the Guarantor. 6. Under Venezuelan laws the Government cannot enter into loan or guarantee agreements with the Bank without specific prior authorization from the Venezuelan Congress. Legislation covering the present loan is now before the Congress and its approval is expected shortly; this loan proposal will be placed on the agenda for consideration by the Executive Directors as soon as the legislation is completed. 7. The following is a summary statement of Bank loans to Venezuela, as of May 31, 1969: Loan Amount (US$ Million) No. Year Borrower Bank Undisbursed Republic of Venezuela Expressways EDELCA Electric Power Republic of Venezuela Highways CADAFE Power Transnission CANTV Telecommunications INOS Water Supply EDELCA Electric Power Total (net of cancellations) of which has been repaid to Bank and others 11.8 Total now outstanding Amount sold 14.1 of which has been repaid Total now held by Bank Total undisbursed In addition to the difficulties experienced in the completion of the first EDELCA power project (Loan 353-VE) already mentioned, difficulties have been encountered in the execution of the projects covered by Loans 390-VE and 444-VE. These have already been commented upon in my Report and Recommendation of Nay 26, 1969, to the Executive Directors in connection with the Third Highway Project in Venezuela (P-706). 9. A loan of $20 million for the above-mentioned Highway Project was presented to the Executive Directors on June 10, As of March 31, 1969, IFC held net investments (lcan and equity) in Venezuela totalling US$9.2 million.

4 - 3 - PART II - DESCRIPTION OF THE PROPOSED LOAN 11. Borrower: C.V.G. Electrificacion del Caroni, C.A. (EDELCA) Guarantor: Amount: Purpose: Amortization: Interest Rate: Republic of Venezuela. The equivalent in various currencies of US$31 million. To finance the foreign exchange cost of extending the powerhouse structure of Guri Hydroelectric Project. In 20 years, including a five-year grace period, through semi-annual instal1-ments from June 1, 1974, to June 15, /2 percent per annum. Commitment Charge: 3/4 of one percent per annum 0 Economic Rate of Return: percent. PMRT III - THE PROJECT 12. A detailed description of the project is given in the attached report entitled "Appraisal of Guri Powerhouse Extension" (PU- 6 a). 13. As already mentioned, the first stage of Guri with its three units is nearing completion. The project now proposed for Bank financing would include civil works to extend the powerhouse to ten units, and the installation of unit 4 complete and of embedded parts for units 5 to 10. It would also provide for consulting services for engineering and supervision during procurement and construction. The basic powerhouse construction would be completed during Unit 4, the first in the expansion program, would come into service in 1973; the remaining six units would be erected one each year commencing in The resulting power capacity would meet the market forecast for Guri through The project would be executed by EDELCA, a wholly-owned subsidiary of Corporacion Venezolana de Guayana (C.V.G.) which is an autonomous government agency responsible for developing the Guayana region located in southeasterm Venezuela. EDELCA was created in 1963 to take over the electric power activities of C.V.G. Over the years its staff have received extensive training and experience in the designing, construction, and operation of power facilities. It is considered capable of executing the project with only limited assistance from consultants.

5 15. EDELCA has retained the services of Harza Engineering Company International (U.S.A.) throughout the designing and construction of Guri. It intends to continue the arrangement, which has worked satisfactorily, in connection with the expansion program. The general contract for civil works will be awarded on the basis of international competitive bidding in accordance with Bank policies; the electro-mechanical equipment will be similarly procured. 16. The total cost of the project is estimated at US$57 million equivalent: this includes civil works, equipment, contingencies and consulting services, but excludes interest during construction. The proposed loan would finance the foreign exchange costs of the civil works contract and equipment as well as the consultants' services. EDELCA would cover local costs out of its own cash generation plus new capital contributions from the Government. 17. The project is technically sound and economically justified. The additional investment in the powerhouse and units Nos. 4 to 10 would yield an internal rate of return of percent. This calculation is based on a productive life of only 20 years for the facilities; the actual life is likely to be longer. Operation of EDELCA's net plant as a whole is expected to yield a financial rate of return of 8 percent and over, beginning On project grounds a term of 25 years would be justified for this loan; however, in view of Venezuela's generally favorable economic position and relatively small external debt, a term of 20 years is proposed, including a grace period of 5 years. PART IV - LEGAL INSTRUIENTS AND AUTHORITY 19. The draft Loan Agreement between the Bank and EDELCA, the draft Guarantee Agreement between the Republic of Venezuela and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of a Resolution approving the proposed loan are being distributed to the Executive Directors separately. 20. The draft Agreements contain provisions generally used in such projects. PART V - THE ECONOINY 21. A memorandum of May 26, 1969, entitled "Recent Economic Developments in Venezuela" was distributed to the Executive Directors on May 29, 1969, in connection with the Third Highway Project. I also commented on the salient aspects of the economy in my Report and Recommendation on that project, concluding as follows:

6 "Therefore, in sum, while it is difficult at this stage to forecast Venezuela's overall requirements of external financing in the absence of a public sector investment program for the coming years, these are expected to be not inconsiderable; at the same time there is evidence of steady economic grovfth and a move towards diversification; and there remains a significant margin for additional borrowing on conventional terms." PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 22. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENIATION 23. I recommend that the Executive Directors approve the proposed loan. Attachments Washington, D.C. June 11, 1969 Robert S. McNamara President