Public Disclosure Authorized
Public Disclosure Authorized
RESTRICTED
Report No. P-531
stV
y5 gtY
%tI~V~
This report was prepored 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not be published nor may it be quoted as representing their views.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
Public Disclosure Authorized
REPORT AND RECOMMENDATION
OF T HE
PRESIDENT
TO THE
EXECUTIVE DIRECTORS
ON A
PROPOSED LOAN
Public Disclosure Authorized
TO
THE NATIONAL POWER CORPORATION
OF THE PHILIPPINES
March 2Z,
1967
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
REPORT AND RECOMMENDATION OF THE PRESIDENT
TO THIE EXECUTIVE DIRECTORS ON A
PROPOSED LOAN TO THE NATIONAL POWE CORPORATION
IN THE PHILIPPINES
I submit the following report and recommendation on a proposed
1.
loan in an amount, in various currencies, equivalent to US$12 million to
the National Power Corporation in the Philippines for a Fburth Power Project.
PART I - HISTORICAL
The Bank has made three loans to the National Power Corporation
2.
(NPC). The first, US$21 million, later reduced to US$18.4 million (183-PH),
was made in 1957 for the Binga Hydroelectric Project in Northern Luzon.
The second, US$34 million (297-PH), was made in 1961 for the Angat Hydroelectric Project near Yanila, and the third, US$3.7 million (325-PH) was made
in 1962 for the expansion of the Maria Cristina Hydro-Station on Mindanao
The Angat
Island. The Binga project was completed successfully in 1960.
construction.
under
still
are
projects
and Maria Cristina
NPC has applied for a loan of US$12 million to cover the foreign
3.
exchange costs of a 75MW thermal power station to be built on Bataan
peninsula across the bay from Manila, and of a 50MW extension (unit 4) to
the existing Maria Cristina hydro-power station on Mlindanao. The total
cost of the two plant additions would be about US$22 million, including
interest charges during the construction period.
The project has taken a long time to work out. A first appraisal
4.
in February 1964 indicated that a decision in regard to the proposed thermal
plant could not be taken until the expansion plans of the Manila Electric
Company (MERALCO) were settled and that the power market on Mindanao did not
appear to be expanding rapidly enough to justify immediate installation of
the fourth unit at Maria Cristina. The uncertainty in regard to MERALCO's
plans was removed in July 1964 after it obtained a 30-year extension of its
Further visits to Manila and discussions with NPC led in the
license.
fall of 1965 to the conclusion that the fourth unit at Maria Cristina was
justified by the growing industrial load. Negotiations were then held in
June 1966 with a delegation headed by the Honorable Andres V. Castillo,
Governor of the Central Bank of the Philippines, and Mr. J. Lahoz, the
General Manager of NPC.
However, the Bank was in the meantime becoming increasingly
5.
concerned about the unsatisfactory progress of other Bank-financed projecte
in the public sector, the uncertainty concerning the availability of
adequate peso funds for them, and the lack of evidence that the Government
was making a determined effort to inprove on past performance. The project
was therefore not presented to the Executive Directors and the Government
of the Philippines w.as informed that consideration of further lending in
the public sector (including the presentation of the present project) would
be dependent upon the findings of an economic mission in October/November
specifically in regard to improvements in the execution of public sector
projects. The mission's report (No. AS-120, distributed to the Executive
Directors on January 27, 1967) confirms that there has been some improvement and that the Government is making serious efforts to overcome past
deficiencies in overall performance.
By that time, however, revised financial forecasts had been
6.
received from NPC which showed lower revenue forecasts than had
previously been assumed. The Bank also learnt of a major leak in the
Angat Dam which, if not closed promptly, could delay plant operations
and thereby reduce NPC's earnings and increase construction cost. A
mission therefore visited Manila in January 1967; its findings and
information received subsequently show that the leak has been sealed
and that NPC, with the help of funds the Government has undertaken to
provide, will be able to meet its financial commitments. In addition,
as a safeguard against unexpected shortfalls in earnings, assurances
have been obtained from Government that it will assist NPC, if necessary,
during the fiscal years 1966/67 and 1967/68 to meet its financing plan.
If approved, this will be the Bank's tenth loan to the
7.
Philippines, and will increase the total amount lent to US$146.7 million
net of cancellations. The following is a summary statement of Bank loans
to the Philippines as at February 28, 1967.
3(less UndisCancellations) bursed
(US$ millionF
Amount
Year
Loan
No.
1957
1961
1961
1962
1963
183
290
297
325
331
National Power Corp.
Republic of the Phil.
National Power Corp.
National Power Corp.
Phil. National Bank.
1964
386
1964
393
National Waterworks
& Sewerage Authority
Republic of the
Philippines
1965
432
1966
467
Borrower
Central Bank of the
Philippines
Phil. National Bank
Purpose
Power - Binga
Dredging
Power - Angat
Power - Maria Cristina
Relending to the Private
Developm.ent Corp. of
the Phil. (PDCP)
Manila Water Supply
(N\WSA)
Education (University
of the Phil. - College
of Agriculture)
Agriculture
Relending to the Private
Development Corp. of the
Philippines (PDCP)
18.4
7.4
34.0
3.7
0
0
3.3
.9
15.0
3.0
20.2
15.6
6.0
5.5
5.o
4.2
25.0
24.6
Total net of cancellations
of which repaid
134.7
7.6
Total outstanding
127.1
Amount sold
of which has been repaid
Net amount held by Bank
Total undisbursed
10.1
5.5
4.6
122.5
77.1
- 4 IFC's loans and investments in the Philippines consist of an
8.
equity investment of P800,000 (equivalent to $205,000) in the Private
Development Corporation of the Philippines and an equity investment of
$14 million equivalent and a loan of $8 million in the Manila Electric
Company. NTo IDA credits have been made to the Philippines.
As noted above, the new administration has brought about some
9.
improvements in the administration of Bank-financed projects. Recently
arrangements were made to provide the peso funds required to complement
the loan funds for two on-going Bank projects.
The Dredging Project of 1961 (Loan No. 290-PH) has been a
10.
disappointment but improvements have been evident of late. All flcating
equipment has now been procured but the operation and maintenance of the
fleet had been unsatisfactory until recently. The Government is taking
steps to remedy the situation. A contract to construct the slipway was not
awarded until late 1965 and work is progressing slowly. The undisbursed
balance was cancelled.
The Angat Power Project of 1961 (Loan No. 297-PH) is expected to
11.
be completed early in 1968, about 3 years after the originally scheduled
date. The start of this project was delayed because contracts were not
awarded on time and construction was seriously delayed by typhoon damage in
1963 and 1964 and major cave-ins in June 1905 which led to the replacement
of the main civil works contractor. In late 1966 leakage occurred around
one of the gates of the diversion tunnel but the situation is now under
control, the leakage having been permanently sealed.
Thle Maria Cristina Hydro Project of 1962 (Loan No. 325-PH) was
12.
scheduled for completion in late 1964; the delay in completion is mainly due
to problems experienced with the local contractor. The project is now
estimated to be in operation within the first half of 1967. The delay has
not had serious consequences for the power supply of the area because some
important industrial loads did not materialize as scheduled.
The National lWaterworks and Sewerage Authority (NWSA) Project of
13.
1964 (Loan No. 386-PH) has been delayed about one year owing to slowness in
awarding civil works contracts, poor contractor performance and litigation
over the principal pipe contracts. One civil works contract has been terrjnated and re-awarded to a new contractor. Another civil works contract has
been renegotiated to give NWSA more control over the contractor's operations.
Some of the principal supply contracts have recently been let.
No other projects have yet reached the appraisal stage.
14.
Discussions on general lending policy took place between Bank representatives
and the Philippine authorities in late February early March this year.
The Philippine authorities were informed that the Bank would not be prepared
to consider lending beyond this proposed project unless measures were
taken to raise taxes to a satisfactory level and remedy other deficiencies
(referred to in Part V, The Economy) and there was evidence of substantial
improvement in the performance of the public sector.
PART II-
DESCRIPTION OF THE PROJECT
Borrower:
National Power Corporation.
Guarantor:
Republic of the Philippines.
Amount:
The equivalent in various currencies
of US$12 million.
Purpose:
Construction of a thermal power station
on Bataan Peninsula with a capacity
of 75BM; and the installation of 501.OU^
generating capacity to supplement
facilities at the Maria Cristina
hydro-station in Northern Mindanao,
including control works on Lake Lanao.
Amortization:
20 years including 3½z years of grace;
semi-annual installments from
December 1, 1970 to June 1, 1987.
Interest:
6% per annum.
Commitment Charge:
3/8 of 1% per annum.
PART III
15.
-
THE PROJECT
A detailed appraisal of the Project
(TO-512b)is attached (No. 1).
NPC is a goverrment-owned corporation responsible for the
16.
generation and supply of power throughout the Philippines and with a
particular responsibility for the development of hydro-electric resources.
However, generation and distribution of power in the greater Manila area,
the country's largest and fastest growing load center, is undertaken by
There is also a considerable number
the Manila Electric Conpany (I4ERALCO).
of small companies operating under franchises which empower them to supply
electricity to meet the needs of particular towns. Thus NPC's sales are
generally confined to the wholesale level, particularly to 1hEALCO and
many of the smaller companies.
NPC's construction program, in addition to the completion of the
17.
Angat Dam and the Maria Cristina hydro-electric plant in Yifndanao (see
paragraphs 11 and 12 above) comprises the Bataan Thermal Plant and the
fourth unit for the Maria Cristina Hydro Plant, the constituent components
of the proposed project and transmission facilities.
The 75FMW Bataan Thermal Plant will be built at a site near the
18.
Esso Bataan Refinery, from which high viscosity fuel (pitch) would be pumped
direct to the plant. The site is large enough for future plant expansion
-6a
and foundation conditions are good. NPC and Esso have negotiated
an
boiler"
the
"to
long-term fuel contract for the delivery of fuel
of
case
the
in
used
be
advantageous feature for NPC. Bunker C oil would
would
tank
storage
interruption of the normal fuel supply, and a 24-hour
be provided.
The plant layout and cost estimates were prepared by NPC's
19.
Electroconsult will be retained
consultants, Electroconsult of Milan, Italy.
to carry out the detailed design, bid evaluation and engineering supervision
of construction. Responsibility for initial start-up of the plant and
training of NPC personnel will also rest with the consultant.
The plant, excluding contingencies, is estimated to cost US$154
20.
Contingency provisions of about 10% on civil works,
per KW installed.
and
equipment and its erection have been included in the cost estimates,
of
basis
the
on
procured
be
will
are considered adequate. All equipment
international competitive bidding.
The Maria Cristina Station. The Maria Cristina hydro plant now
21.
extended
serves a largely industrial area; and transmission lines are being
existing
of
expansions
from
Ioad growth should result
to nearby towns.
industrial enterprises, in particular a steel mill, and the establishment
of low
of new enterprises in the area attracted to it by the availability
cost power.
The total cost of the additions to the Mindanao system now proposed
22.
for
would be about US$7.86 million, including foreign exchange requirements
Contingency
imported machinery and equipment of about US$2.17 million.
included.
provisions of about 20% on civil works and 10% on equipment are
Equipment to be imported was purchased on the basis of international
as of
competitive bidding during the past year. No payments were required
expenditures
the end of 1966 and no reimbursements are contemplated for
made prior to the approval of the proposed loan.
Of the total construction expenditures over the four fiscal years
23.
ending June 1970, 80o will be met from loans, about 3% from capital receipts
and about 17% from NPC's internal cash generation.
The work at Mindanao is expected to be completed in 1968 and that
24.
The total cost of the Bataan Plant and the works in
in Bataan in 1970.
Mindanao, excluding interest during construction, will be about US$20.5
The
million including foreign exchange costs of about US$11.0 million.
and
proposed loan of US$12 million will cover the foreign exchange costs
interest charges on the Bank loan during the construction period.
NPC and the Government have agreed to maintain rates sufficient
25.
operation
to provide a return of not less than 8% on revalued fixed assets in
assets
fixed
its
revaluing
in
help
to
and to retain management consultants
The
procedures.
operating
and
organization
the
in
and to recommend changes
debt/equity
present debt limitation covenant will be continued. NPCIs forecast
capitalNPCIs
to
ratio will remain at about 50/50 provided that an amendment
of the
46
paragraph
ization act would be passed prior to 1970 as explained in
amendment.
appraisal report; the. Government has undertaken to support this
All these arrangements form an acceptable basis for a loan.
- 7 PART IV - LEGAL INSTRUM'ENTS AND AUTHORITY
The following documents are being distributed to the Executive
26.
Directors separately: the draft Loan Agreement between the Bank and the
National Power Corporation, the draft Guarantee Agreement between the
Republic of the Philippines and the Bank, and the Report of the Conmmittee
provided for in Article III Section h (iii) of the Articles of Agreement.
The draft Loan and Guarantee Agreements conform generally to the pattern
of loan and guarantee agreements for loans to autonomous agencies for power
projects, and follow closely the corresponding agreements covering the
Bankt s three previous loans to NPC.
Section 5.09 of the draft Loan Agreement requires that rates for
27.
the sale of electricity be maintained at levels, after covering operating
expenses, to produce a reasonable annual return on NPC's net fixed assets
in operation. By Section 3.07 of the draft Guarantee Agreement the Guarantor
would grant NPC rates at levels sufficient to meet these requirements. These
provisions on rates are different from those included in the documents of
the three previous loans to NPC. The covenant limiting NPC's power to
incur new debt (Section 5.10) is substantially the same as that used for
previous loans to NPC. Article VI of the Loan Agreement modifies the three
previous Loan Agreements with NPC by substituting the new rate covenant
and the re-worded debt-limitation covenant for the corresponding provision
of those Agreements.
PART V - THE ECONOMY
The Philippine economy has long suffered from lack of financial
28.
resources in the public sector and shortcomings in their utilization owing
to administrative weaknesses. There have been no substantial new taxes
since 1959, and meanwhile, the Special Import Tax expired under the terms
of the U.S.-Philippine Trade Agreement, and the large profits on exchange
operations ended with the unification of the exchange rate in November 1965.
NIational revenue as a percentage of GNP declined from about 11% in 1962/63 to
about 9% in 1965/66. This is lower than most other developing countries
of cozparable income levels. Since current government expenditures remained
relatively stable at around 10% of GNP, the amount available as public
savings for development has been minimal. The portion of total investment
undertaken by the public sector in the Philippines is only about 15%, much
smaller than in most other countries with similar requirements for
infra-structure and other public investments. Roads, other transportation
media, and irrigation facilities have not only failed to keep pace with the
requirements of the private sector during miost of the last decade but have
actually deteriorated in absolute terms. An exception is the power sector
where necessary expansion has been financed by foreign and domestic borrowing
and some net operating income has been generated.
The Philippines is rich in resources and has a dynamic private
29.
sector which has responded very well to the devaluation of the peso in 1962.
Exports have grown at about 10% annually and for the first time in many
years the Philippines had a surplus of commodity exports over imports in 1966.
- 8 There is a substantial potential for further improvement in the balance of
payments. Economic growth, which reached 7% of GNP in the 1950's, fell to
an average of less than 5% during the last four years. The performance of
domestically oriented agriculture has been particularly disappointing.
However, an upturn in both agricultural and industrial production occurred
in 1966.
In respect of general economic performance, the economy has failed
30.
to meet the targets projected by the Bank mission of 1962. That mission
felt that a growth rate of 6% was well within the capability of the econormy.
W4hile savings has grown much faster than National Income, investment has
lagged and the economy has not evidenced an adequate capacity to attract
and utilize foreign capital, and there has been a net capital outflow of
considerable proportions during the last four years. Ibnetary management
has been generally conservative and reasonable financial stability has
prevailed.
Thus, while the economr has not achieved the progress it might
31.
have in recent years, this period has been one of adjustment to the removal
of controls over foreign transactions and to a new exchange rate. The
strength shown by the export sector throughout this period is reassuring.
Therefore, wihile economic performance has been mixed, basic policy measures
have been taken that should lead to more rapid growth along sounder lines
than during the period of import control preceeding 1962.
The new administration of President Marcos, which came to power
32.
1966, has attacked the economic problems of the nation on several
January
in
short-run fiscal policy has been directed towards the containIts
fronts.
in current government expenditures by the reduction of
increases
of
ment
surplus personnel and by improving revenue collections. Reorganizations
have been effected in the crucial revenue collecting agencies, and internal
revenue and customs collections for the first seven months of the current
fiscal year (ending June 30, 1967) were up by nearly 20% over the same
period of last year. This compares with only a 3.6% increase in 1965/66.
Bqually important is the improved administration of customs where rampant
smuggling was not only depleting government revenues but also exposing
domestic industry to more external competition than is contemplated by the
Government's tariff policy. Another notable event has been the development
of a market outside the banking system for Treasury bills and medium-term
bonds. The anticipation of larger revenue collections and curtailment of
increases in current expenditures made it possible for the Central Bank to
relax credit restraints to the private sector in January of last year.
However, an upward trend in private credit occurred only toward the end of
the year. Bank credit to the Government rose only moderately - much less
than in the two preceding years. There was a very marked improvement in
foreign exchange reserves primarily as a result of favorable exports which
rose by much more than imports. Reserves went up from about $90 million
at the end of 1965 to around $200 million at the end of August 1966. There
was a decline thereafter to about $150 million at the end of the year. This
is equivalent to about two months' imports.
-9While recent increases in internal revenue and customs collections
33
savings are sti1l
have improved the fiscal situation, revenues and government
is conceded
This
effort.
development
inadequate for a satisfactory public
revenue
and
Bank
the
with
by the Philippine Administration in discussions
Philippine
the
of
session
measures have been introduced in the current
of the Government if
Congress which would substantially improve the finances
Whether the
collection.
revenue
supplemented by measures to further improve
present
the
in
approval
proposed revenue measures will win congressional
session remains uncertain.
in
Owing to the relatively large proportion of medium-term debt
31h.
which
debt,
the total external public debt, the service ratio on existing external
public
at present is about 9.3%, will decrease rapidly. Total
of annual
third
a
debt is now about $440 million or slightly more than
and its foreign
foreign exchange receipts. The basic strength of the econormy
service
can
trade prospects support the conclusion that the Philippines
terms.
substantial additional foreign borrowings on conventional
PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT
I am satisfied that the proposed loan would comply with the
35.
Articles of Agreement of the Bank.
PART VII - RECOMENDATION
I recommend that the Executive Directors adopt the following
36.
resolution:
RESOLUTION NO.
Approval of Loan to National Power Corporation (Fourth
Power Project) in an amount equivalent to US$12,000,000
to be guaranteed by Republic of the Philippines.
RESOLVED:
THAT the Bank shall grant a loan to the National Power Corporation
to be guaranteed by the Republic of the Philippines, in an
United
amount in various currencies equivalent to twelve million
to
prior
States dollars (US$12,000,000), to mature on and
(6%)
June 1, 1987, to bear interest at the rate of six percent
as
conditions
per annum, and to be upon such other terms and
shall be substantially in accordance with the terms and
conditions set forth in the form of Loan Agreement (Fburth Power
Project) between the Bank and the National Power Corporation,
and the form of Guarantee Agreement (Fourth Power Project)
between the Republic of the Philippines and the Bank, which
have been presented to this meeting.
Attachment
Washington, D.C.
March 22, 1967
George D. Wbods
President