Document of FILE COPY The World Bank \ Y FOR OFFICIAL USE ONLY Report No. P-3454-PO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$126.4 MILLION TO ELECTRICIDADE DE PORTUGAL, E. P. WITH THE GUARANTEE OF THE REPUBLIC OF PORTUGAL FOR A SEVENTH POWER PROJECT January 28, 1983 This document has a restricted distribution and may be used by recipients only in the their official duties. Its contents may not otherwise be disclosed without World Ban CURRENCY AND EQUIVALENTS Calendar Year 1982 August 1982 Currency Unit = Portuguese Escudo (Esc.) US$l = 79.98 Esc. US$1 = 81.4 Esc. 1 Esc. = US$0.0125 1 Esc. = US$0.0123 FISCAL YEAR January - December WEIGHTS AND MEASURES KV = Kilovolt; 1,000 Volts KWh = Kilowatt Hour MW = Megawatt; 1,000 Kilowatts MTOE = Million tons of oil equivalent TWh = 1,000,000,000 KWh ABBREVIATIONS CPE Companhia Portuguesa de Electricidade DGE Directorate General for Energy EDP Electricidade de Portugal, Empresa Publica EEC European Economic Community EIB European Investment Bank IMF International Monetary Fund LIBOR London Interbank Offer Rate MIEE Ministry of Industry, Energy and Exports PETROGAL Petroleos de Portugal PGP Petroquimica e Gas de Portugal TSF Thermal Support Fund FOR OFFICIAL USE ONLY PORTUGAL POWER PROJECT VII LOAN AND PROJECT SUMMARY Borrower: Electricidade de Portugal, E. P. (EDP) Guarantor: Republic of Portugal Amount: US$126.4 million equivalent, including the capitalized front-end fee. Terms: Repayable in 15 years, including three years of grace, at the standard variable interest rate; EDP to bear foreign exchange and interest risks. Project Description: The project consists of a three-year time slice of EDP's overall investment program. The object of the program is to meet, at least cost, EDP's forecast growth in demand while maintaining the required reliability of the system. The 1983-85 investment program includes; (i) construction of hydroplants which will eventually add 1460 MW to the system; (ii) completion of the second phase of an oil-fired thermal plant (2 x 250 MW), in- stallation of two combustion turbines (2 x 83 MW) at an existing plant, and work on the first phase of a coal-fired thermal plant (2 x 300 MW); (iii) construction of about 564 km of transmis- sion lines and about 12,500 km of medium- and low-voltage distribution lines, with associated transformer capacity of about 4,700 MVA; (iv) ex- pansion of testing and measurement facilities; (v) computer hardware and software, and a study for upgrading the accounting system; and (vi) study for the identification of possible nuclear plant sites. The major physical risks facing the project are those normally associated with construction of hydroelectric plants and EDP has taken measures to reduce these risks to a satisfactory level. The major institutional risks are those asso- ciated with EDP's ability to generate sufficient revenues and raise additional financing on ac- ceptable terms. Given EDP's past performance and safeguards included in the loan and guarantee agreements, these are considered acceptable. This document has a restricted distribution and rnay oe used by recipients only in the performance of their official duties. Its contents may not otherwise De disclosed without World Bank authorization. Estimated Costs; a/ US$ Million Equivalent Local Foreign b/ Total I. Generation: Hydro plants 169.1 83.6 252.7 Thermal plants 238.7 204.8 443.5 Subtotal 407.8 288.4 696.2 II. Transmission 67.8 35.3 103.1 III. Distribution 171.9 95.1 267.0 IV. Rehabilitation 37.1 20.6 58.0 V. Other 31.4 13.9 45.3 Subtotal 308.2 164.9 473.4 Base Cost 716.3 453.3 1,169.6 VI. Contingencies Physical 100.6 63.8 164.4 Price 332.6 82.7 415.3 Subtotal 433.2 146.5 579.7 TOTAL PROJECT COST 1,149.5 599.8 1,749.3 VII. Interest During Construction c/ 634.6 348.1 982.7 TOTAL 1,784.1 947.9 2,732.0 Financing Plan: US$ Million Equivalent Local b/ Foreign Total I. Borrowings: IBRD - 126.4 126.4 Foreign Borrowings - 786.2 786.2 Local Borrowings 1,035.6 - 1,035.6 Subtotal 1,035.6 912.6 1,948.2 II. Government Equity 30.5 - 30.5 III. Contributions and Participations 77.6 - 77.6 IV. EDP Internal Cash Generation and Reduction in Working Capital 675.7 - 675.7 TOTAL 1,819.4 912.6 2,732.0 a/ EDP is exempt from taxes on the importation of equipment and materials. b/ Includes indirect foreign exchange costs. c/ Includes front-end fee of $0.9 million on Bank loan. - 111 - Estimated Disbursements: US$ Million Equivalent FY1983 FY1984 FY1985 FY1986 FY1987 Annual 6.3 31.9 40.7 37.9 9.6 Cumulative 6.3 38.2 78.9 116.8 126.4 Economic Rate of Return: 10.3 percent Appraisal Report: No. 3805-PO, dated January 27, 1983 I INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO ELECTRICIDADE DE PORTUGAL, E. P. (EDP) FOR A SEVENTH POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to Electricidade de Portugal, E. P. (EDP) for the equivalent of US$126.4 mil- lion, including capitalized front-end fee, to help finance a seventh power project. The loan would have a term of 15 years, including 3 years grace, w:ith interest at the standard variable rate. PART I - THE ECONOMY 2, The latest economic report, entitled ""Policies for Industrial Restructuring" (No. 3804-PO,) was distributed to the Executive Directors in August 1982. Country data sheets are attached as Annex I. An updating eco- nomic report is being prepared for discussion with the Government. Backg round 3. The revolution of April 1974 and its aftermath radically trans- formed Portugal's economy. The banks, insurance companies, power companies, major transportation agencies and large industrial groups were nationalized. A comprehensive land reform was carried out in the central and southern parts of the country. Trade union activity was legalized and workers' rights safe- guarded. Minimum wages were established and restraints were put on the high- est salary levels. Prices were controlled. Unemployment and social security benefits were increased. Real wages and private consumption increased rapidly in the period to 1977, resulting in a significant improvement in in- come distribution. The Government also increased public expenditures and deficits (necessitating rapid monetary expansion) to meet the expectations of improved living standards which had been generated by the revolution. The general circumstances of the revolutionary period and its aftermath also generated a serious deterioration in the profitability and general financial position of the private sector. 4. A combination of adverse external factors, together with the struc- tural changes brought about by the revolution, resulted initially in a sharp deiterioration in the balance of payments. The period 1974-77 saw Portugal fighting a losing battle with the problems of maintaining private consumption and meeting the investment needs of the economy. A program of austerity mea- sures, including currency devaluations, was implemented in 1976 and 1977, but its impact was reduced by the continued rapid expansion of credit, mainly to finance the Government deficit. In early May 1978, the Government adopted a comprehensive program to reduce the balance of payments deficit and by 1979, the current account deficit was virtually at zero, export volumes rose by 29 percent while import volumes rose by only about 7 percent. In early 1980, the focus of policy shifted to the control of inflation, and a six percent - 2 - revaluation of the escudo was implemented in February. Together with con- tinued but weaker credit restraint and price controls, this helped to bring the inflation rate to a level of about 17 percent for the year. Recent Developments 5. The period since 1979 has seen the progressive deterioration of economic performance in most major aspects and especially in relation to the balance of payments. The growth rate of GDP, after having been lifted to 5.5 percent by expansionary policies in 1980, declined to less than 2 percent in 1981. Inflation, which reached 24 percent in 1979 and was brought back by administered price restraints to 17 percent in 1980, accelerated to about 25 percent by the end of 1981. The current account deficit rose to $1.2 billion in 1980 and to an estimated level of $2.7 billion (11 percent of GDP) in 1981. Three main sets of factors have contributed to this deterioration. They are: (i) a reaction of wages to their decline in real terms from 1977 onwards; (ii) a series of unfavorable exogenous factors including the 1980 oil price hike and the 1981 drought; and (iii) serious weaknesses in under- lying policies. This recent deterioration has left the economy less able to face up to the challenge and the fundamental structural changes necessitated by prospective EEC entry. 6. The policies pursued during the past four years have not made any real dent in unemployment (still over 8 percent), and the emphasis on short- run stabilization has also delayed the formulation of policies to address the serious structural problems which Portugal faces. Particularly important is the large dependence on imported energy; the rising dependence on food im- ports; a backward agricultural sector; an industrial sector, parts of which still require heavy protection in comparison with the EEC; an ill-defined attitude to public enterprises; and a weak tax structure. Despite rising confidence in Portugal's economic and political stability, private investment has been very disappointing in recent years (it even fell in real terms in 1979), and has certainly not been adequate given the very considerable in- vestment needs of the economy. A Strategy for the Eighties 7. The recent sharp deterioration in the balance of payments suggest that stabilization must once again dominate the formulation of economic policy. Growth rates on the order of 4 to 5 percent per annum, which were earlier thought to be possible, now seem to be inconsistent with the mainten- ance of reasonable stability in the balance of payments over the next three to four years. The dilemma which the Government now faces is to address the serious deterioration in the economic situation, while at the same time undertake structural changes. Stabilization policies will need to be pursued in a framework which is consistent with efforts to restructure industry, to encourage investment attuned to energy-saving and to improve the generally weak productivity performance of Portuguese agriculture. The main objective of these stabilization policies would be to reduce the balance of payments' current account deficit to more manageable levels, as well as deficits of the - 3 - Government budget and of the public enterprises, and to reduce inflation. Wlhile the Government has taken first steps by devaluing the escudo by 9.4 percent in mid-1982 and by initiating an investigation into the financial and economic situation of public enterprises, much more remains to be done. A combination of appropriate exchange rate policies, interest rate policies and fiscal policies will have to be implemented quickly in order to avoid a further deterioration of the economic situation. At the same time, if rea- sonable growth rates are to be achieved in spite of oil, food and other structural dependencies on the import side, Portugal will certainly require a rate of growth of visible exports significantly higher than the growth of world trade. Portugal will also need to retain policies which can maintain mrigrants' remittances at a high level. To achieve these objectives will require careful balancing on the part of the Government since the measures which could ensure a reasonable balance of payments position may, at the same time, discourage investment and slow the rate of growth. 8. As Portugal expects to join the EEC in the mid-eighties, the posi- tion defined above will require the country to fully exploit its potential comparative advantage. In the industrial sector this will mean emphasis on labor-intensive industries, both light industries, such as textiles and foot- wear, and heavier items, including electrical machinery and transport equip- ment. This will imply a substantial, and possibly painful, rehabilitation process in some cases (e.g., textiles). Although Portugal's industrial strategy must give priority to exports, the development of basic industry to supply the domestic market should also be pursued whenever adequate rates of return can be demonstrated. It will also be important to dismantle, or at least simplify, many of the complex Government interventions to which Portu- guese industries have become accustomed. These include the system of invest- ment incentives, the price control apparatus, the arrangements for export incentives, and extensive non-tariff barriers to trade. 9. Portugal's industrial strategy is also complicated by the fact that its wage advantage will be eroded as the country will be gradually integrated into the EEC and that intensified competition from the Far East will become a problem for some products in which Portugal may have a comparative advantage for the moment. The Government also faces the very difficult problems of improving labor mobility and devising better arrangements for controlling the evolution of public enterprises and their investment program. Neither of these problems permits an easy solution and both require the early definition of coherent and comprehensive programs. 10. In the case of agriculture, the adoption of EEC policies will raise prices to consumers but, at the same time, could cause a net flow of re- sources into agriculture. It will also change the relative profitability of vvarious agricultural commodities. Portugal needs to respond to the opportu- nity presented by EEC entry and thereby reduce the current very large trade deficit in agricultural commodities. The necessary response is to modernize and increase investment in the cultivation of fruits, off-season vegetables and, possibly, vegetable oils where the climate and early season confer a - 4- strong comparative advantage. Modernization in other more traditional agri- cultural crops is desirable even in the absence of EEC entry, but would also help to reduce the potential costs to the economy of EEC membership. 11. There are five main types of adjustment which Portugal will need to make to respond to the changed circumstances within the EEC for the agricul- ture sector. First, the allocation of agricultural resources will need to be adjusted to try to maximize the benefits to the sector of the EEC structure of administered price supports which are often radically different from those traditionally applied in Portugal (e.g., emphasis on extensive rather than intensive livestock production). Second, a major effort will be needed to raise production in those areas, and notably cereals, where the foreign ex- change implications of the EEC agricultural protection policy could be extremely severe. Third, complementary arrangements will be needed to reform the policies for the consumer subsidization of basic foodstuffs since contin- uation of present levels of consumer prices would involve a much increased budgetary outlay. Fourth, steps need to be taken to develop the institutions which will be necessary to take full advantage of EEC arrangements for sup- porting producers. A major example of this is the need to develop producers' associations and cooperatives, especially for fruits, to act as the vehicle for EEC purchases of surplus production. A related need is to develop EEC- consistent grading arrangements for fruits and wines so that potential ex- ports are not lost. Finally, arrangements need to be devised for the gradual dismantling of Portugal's present monopolistic marketing arrangements. 12. The last economy-wide planning exercise in Portugal was conducted in 1976, in the form of a proposed plan for 1977-80 which, however, was not implemented. Work has been underway for some time now to develop sector plans for the major sectors; draft plans for energy, agriculture and trans- port have been prepared. The challenge for Portuguese planners is to be highly selective in their program of public investment in support of these plans, at an acceptable cost in terms of scarce budgetary and other resources. In addition, it is extremely important to seek new institutional arrangements to streamline decision making as well as project preparation, implementation and supervision. As regards public enterprises themselves, there is a need to define a medium-term strategy which will differentiate between their social and economic objectives. For the moment, the development of these enterprises and external lending to them is significantly hindered by the fact that the economic cost of meeting social objectives is sometimes not taken into account by the Government. Subsidy, pricing and other policies towards public enterprises should be made in the light of a clear understand- ing of their consequences, with adequate and explicit provision made for any divergence. 13. The private sector is likely to be the major contributor to the economic growth rate foreseen for the 1980s and is expected to account for about 60 percent of the investment of the period. The very large increase in exports in 1979 is evidence of the gains that the private sector can make in major markets. However, private investment is still hindered by several fac- tors. Profitability, though rising in recent years, is still relatively low - 5 - by historical standards and is likely to be squeezed in the near future. Credit availability to the private sector is restricted by the continuing large public sector borrowing requirement, although in the absence of strong private sector demand, this has not been a major constraint in the past. Potential investors have considered current interest rates too high and the investment incentive schemes are essentially designed to mitigate the per- cebived high cost of capital for selected investments. Under the schemes, economic viability is a prerequisite for larger investments and an important factor in evaluating smaller ones. On the other hand, the new schemes pro- vide only modest additional encouragement to exports and are not well-target- ted; furthermore, they are potentially very costly to the Government. 14. Measures to improve the conditions in the agricultural sector are underway, but are slow in producing results. Credit needs to be expanded further and focussed on production-oriented investments. The mechanism and structure of agricultural lending rates needs to be rationalized to provide appropriate incentives for long-term investments. While increased on-farm investments are necessary, little will be achieved without substantial ad- vances on the technical side as well. The extension services of the Ministry of Agriculture, Commerce and Fisheries need to be upgraded, and their links to research and to the farmers need to be strengthened. Recent efforts to train agricultural manpower and the farmers themselves need to be intensified. External Assistance and Creditworthiness 15. Multilateral and bilateral agencies have responded well to Portu- gal's need for external assistance, both for balance of payments support and for long-term project loans. With gold as collateral, Banco de Portugal has obtained short-term loans for balance of payments support from the Bank forF International Settlements and European central banks. In addition, as of eMid 1981, total disbursed and outstanding IMF assistance to Portugal amounted tio about $60 million. The EEC, European Investment Bank (EIB), European Free Trade Association (EFTA), as well as bilateral agencies have committed signi- ficant funds to Portugal in emergency concessionary aid and for long-term projects. The Bank's contribution is summarized in Part II. In large part because of Portugal's gold reserve, the Government and major banks and com- panies are able to attract medium-term loans from consortia of commercial banks in the Eurocurrency market. Recent terms provided eight years repay- ment with interest rates as low as 0.4 percent over LIBOR. The Government's efforts to stimulate direct foreign investment have resulted in large commit- ments by Renault and by Ford and the promise of other substantial invest- ments. Portugal will however continue to require sizeable external inflows for the investment necessary to restructure its economy and finance its large external deficits. The multilateral lenders, and in particular, the World Bank and the EEC/EIB, will have to continue to play a vital role in helping Portugal meet its capital requirements. In this respect, the pre-accession aid proposed by the European Commission of about 275 million units of account will play a useful part. - 6 - 16. Portugal's public and publicly guaranteed medium- and long-term debt (disbursed and outstanding) rose from about $3.7 billion at end 1978 to about $6.6 billion at end 1981. Service payments on this debt, which amounted to only from 7.9 percent of exports of goods and services plus workers' remittances in 1978, almost doubled in percentage terms to reach an estimated 14.6 percent by the end of 1981. Preliminary figures for end-1981 from Banco de Portugal suggests a total outstanding debt of $10.2 billion (including $3.4 billion of short-term debt). The debt service ratio (MLT only) is expected to rise to over 20 percent by the middle of the decade. Although Portugal's total debt outstanding still remains at manageable levels, it needs careful monitoring, especially in view of the rapid buildup of short-term debt in 1980 and 1981. Given Portugal's gold reserves of about 22 million troy ounces, this seems a large but acceptable burden to carry. PART II - BANK GROUP OPERATIONS IN PORTUGAL 17. The first phase of Bank lending to Portugal, during the period 1963-66, was concentrated in the power sector, in line with Government priorities which reflected the power needs of a rapidly developing industrial sector. The events of the more recent past have created special problems; the transition to an open political system has revealed social and economic weaknesses which are unusual for a relatively high-income developing country. The Bank has responded to Portugal's needs by identifying, prepar- ing and financing projects, and through economic and sector work. 18. The proposed loan would finance the Bank's twenty-second project in Portugal, the seventeenth since the resumption of lending in 1976. Bank operations since 1976 involved two highway projects, three industrial finance projects, two education projects, as well as one project each for water supply, agricultural and fisheries credit, forestry, fertilizer moderniza- tion, mechanical industries, energy conservation and diversification, rural development, power, and petroleum exploration. Total Bank financial assist- ance since the resumption of lending amounts to $714 million, net of cancel- lations. 19. As of September 30, 1982, total disbursements from loans made since the resumption of lending in 1976 amounted to nearly $207 million. The 1976 Power loan and the 1977 First Banco de Fomento Nacional loan are fully dis- bursed and closed, and the other 1977 loan, Highways I, is fully committed. Looking at the 1978-1982 loans, projects involving direct lending to industry are progressing well and disbursing without major problems, and development finance company loans are proceeding satisfactorily. However, projects directly implemented by the administration, or largely controlled by it, are slow in execution and disbursement. The main reasons for this are admini- strative weaknesses, such as insufficient coordination, as well as limited experience in project preparation, implementation and supervision. As the result of a thorough bi-annual country implementation review, in close con- sultation with the implementing agencies and the Central Government authori- ties, some of these problems have been attenuated; others are currently being addressed by adjusting institutional components in project design. These across-the-board reviews have proved useful and should lead to improvements over time. Portugal's record on disbursements has lagged behind that of other countries in the Region, but has improved significantly in the last months. Annex II contains a summary statement of Bank loans and the IFC in- viestment as of September 30, 1982, and notes on the execution of ongoing projects. 20. In an intensive parallel effort at the macroeconomic and sectoral lievels, the Bank is assisting the Government in reviewing policy and manage- * ment issues. Economic missions and the discussion of their reports have pro- vided a basis for a review of policy at the macroeconomic level. Reviews of the water supply (together with WHO), education and agriculture sectors and of manufacturing export industries were carried out and discussed with the Government, and the corresponding reports distributed to the Executive Directors. The most recent in the series of economic reports, "Policies for Industrial Restructuring," was distributed to the Executive Directors in August 1982. A transport sector memorandum will be discussed with the Government shortly and a major agricultural sector survey will be initiated in FY83. 21. In the light of the economic and sector discussions mentioned above, agriculture and industry have been identified as areas of concentra- tion for Bank lending. The importance of developing the industrial sector cannot be overemphasized since this sector is expected to be the main force inl the Portuguese economy, to lead economic growth, continue the export ex- pansion which started in 1978, and to maintain competitiveness in the EEC in the years ahead. The main objectives of Bank lending to industry are struc- tural reform, export promotion, employment creation (or preservation) and promoting energy-saving investments. To address the needs of the agricul- tural sector, the Bank has assisted the Government in creating an agricul- tural credit institution and approved loans for a forestry project and an irntegrated rural development project. The trained manpower requirements of thie industrial and agricultural sectors, which constitute a serious bottle- neck, are being addressed through the FY78 and the FY80 Education loans. 22. The stabilization policies of 1977-1979, while initially contribut- ing to the improvement of the balance of payments, have not permitted imple- mentation of the development programs now urgently needed in many sectors. Heavy dependence on imported oil, a rapidly increasing oil bill, three years of drought and a recession in Portugal's export markets have again worsened the balance of payments outlook. If the restructuring needs of the economy are to be tackled seriously and the pressing deficiencies in the social sec- tors corrected, long-term external assistance will be needed to help Portugal. It is the World Bank's objective to contribute to these efforts and to provide advice on institutional reforms which are crucial for Portugal's long-term economic objectives. - 8 - PART III - THE ENERGY SECTOR Energy Resources 23. Portugal's domestic energy resources consist of hydropower, uranium, and small deposits of poor quality coal. Up to 1979, these domestic sources provided about 28 percent of the nation's total primary energy needs, with hydropower contributing about 20 percent. Due to three successive years of drought (1980-1982), the proportion of hydropower to the total has fallen precipitously and in 1981 amounted to only 11 percent. Of the total hydro- power potential of about 27 TWh per year, under average hydrological condi- tions, about half has been developed and another 10 percent is under con- struction. Proven recoverable reserves of poor quality coal are estimated at only 5 million tons, and lignite reserves are estimated at about 33 million tons. Uranium reserves, estimated at 8,200 tons in concentrates, would suf- fice to provide fuel for three 1,000 MW reactors for about 25 years. How- ever, the decision to construct nuclear plants in Portugal is yet to be taken. Portugal has good potential with regard to renewable resources such as biomass, particularly wood, and solar and wind energy. At present, how- ever, only wood serves as a significant source of energy, accounting for about 5 percent of total energy consumption. Production and consumption of fuelwood could be significantly increased, considering Portugal's existing and potential forestry resources, both through better use of forest residues and large-scale afforestation programs. Energy Supply and Consumption 24. Portugal's energy system was developed at a time when it had abun- dant access to cheap imported oil; its electricity generation system as well as its energy-intensive industries launched in the 1960s reflect this. Portugal is therefore heavily dependent on imported crude oil and petroleum products for meeting its demand for energy. In 1981, 83 percent of the total commercial energy supply was imported, primarily in the form of crude oil, petroleum products and some coal. Between 1973 and 1981, commercial energy consumption increased by about 5 percent per year, while the oil import bill increased from $100 million to about $2.4 billion. Per capita energy con- sumption increased by more than 50 percent in the 1970s; nonetheless, it remained relatively low at about 1,800 kilograms of coal equivalent in 1981, compared with 7,600 kilograms of coal equivalent for the industrial market economies. Total final energy consumption in 1981 amounted to 8.1 million tons oil equivalent (MTOE), of which industry (including refineries) accounted for about 50 percent, road transport for 28 percent, the power sec- tor for 8 percent; residential energy only accounted for about 13 percent of total energy consumption. Only about 88 percent of the total population has access to electricity and per capita electricity consumption remains among the lowest in Europe at about 1,440 kwh/capita. -9- Energy Pricing 25. The Government sets both retail and ex-refinery prices for major petroleum products. Ex-refinery prices are based on an import parity system tc encourage efficient domestic refinery operations. Retail prices of indi- vidual products have a two-tiered structure as is the pattern in many other middle-income developing countries. Petroleum products for private use, such as gasoline, are taxed heavily, while petroleum products used in key economic sectors such as industry and power, as well as in public transportation, are taxed less or, in some cases, were even subsidized in the past. Another ob- jective of the Government's pricing policy is to generate substantial tax revenues from petroleum products which are then channeled through the Fundo de Abastecimento (Supply Fund) to subsidize key agricultural and other com- modities. 26. Retail prices of gasoline have historically been among the highest in Europe, and their contribution to sector revenues is substantial. As of January 1983, the Government again raised the prices of petroleum products, including those for fuel oil and diesel, the prices of which had fallen to just below cif import prices in 1982, due to the steady devaluation of the escudo. The Government also recently revised its system for setting ex- refinery prices so as to better account for the financial costs associated with imports of crude oil. The price for electricity has been raised steadily over the last five years, averaging about 35 percent per year; electricity tariffs were raised in January 1983 by about 29 percent, includ- ing fuel adjustment provisions. Energy Plan and Policies 27. In response to the impact of rising petroleum prices and petroleum product imports on the balance of payments, the Government is formulating a comprehensive energy policy for the country. A detailed model of the energy sector, constructed by a joint team of Portuguese specialists and staff of the U.S. Department of Energy and being refined by the Directorate General of Energy (DGE), has provided two basic energy supply and demand scenarios as a basis for the draft National Energy Plan. The major goals and priorities of the proposed National Energy Plan are to: (a) develop economic domestic energy resources, including petroleum exploration and renewable energy development, particularly wood and solar energy; (b) diversify the sources of primary energy, particularly by replacing petroleum by other, less expensive, energy sup- plies; (c) promote energy conservation measures throughout the economy. The Government's overall target implies 10-15 percent energy savings across the board in the economy by 1990; and - 10 - (d) continue to price energy products correctly, to promote more efficient use of energy and domestic resoure- development. Sector Organization 28. The Ministry of Industry, Energy and Exports (MIEE) has jurisdic- tion over most energy-related matters. The DGE, at MIEE, is responsible for the formulation and implementation of energy policies, preparation of energy forecasts, review and coordination of investment plans, price setting, and the establishment of energy conservation measures. DGE also oversees the activities of the three state-owned companies, Petroleos de Portugal (PETROGAL), Petroquimica e Gas de Portugal (PGP), Electricidade de Portugal (EDP). PETROGAL is responsible for exploration for oil and gas, and imports, refines, distributes and markets about 80 percent of the petroleum products consumed. PGP manufactures town gas which it sells at bulk rates to EDP. The Power Subsector 29. During the last 38 years the power subsector has been undergoing a process of consolidation. By 1954, five companies were established with Government participation--four for hydro and thermal generation and the fifth for transmission; 14 large private companies were generating and distributing power in concession areas and 161 municipal and private undertakings were operating small local distribution systems. In 1969, Companhia Portuguesa de Electricidade (CPE) was formed with 52 percent Government participation by merging the four generation companies and the transmission company. In 1975, the Government nationalized CPE and the large private companies, and in 1976 created Electricidade de Portugal (EDP) by merging CPE and the nationalized private companies; to date 65 municipal and private undertakings were also integrated with EDP. Although the same law also decreed that all private and municipal distribution was to be integrated with EDP over time, due to strong opposition from many municipalities, the integration process did not advance as smoothly and rapidly as anticipated; 96 municipalities are still not inte- grated into EDP. EDP currently distributes about 73 percent of all publicly sold electricity, with the balance sold mainly by municipal undertakings. 30. The Government has recently inaugurated a new strategy for distri- bution which allows the municipalities to continue to distribute low voltage electricity, but only if they charge the uniform national tariffs established by the Government (see para. 34 below). Under the terms of a new decree law, municipal operations, or a consortium of municipal operations can, if they so choose, transfer their assets to EDP or to some other locally or regionally based public enterprise for operation. This transfer could be arranged either by the sale to EDP of the municipalities' distribution assets, or by granting a concession to EDP or to a locally or regionally based public enterprise, to distribute power in the area using the municipalities' assets; under the second alternative, the municipality would receive a rent payment, the level of which would be determined by the Ministry of Internal Admini- - 11 - stration and MIEE. This provision of compensation will also be applied retroactively to the municipalities which have already been integrated with E:DP. The financial terms of these transfers will be calculated taking into account any outstanding debts by the municipalities to EDP. The Government has also tightened up procedures for arbitrating any disputes about these claims. It is expected that nearly all of the remaining municipalities will integrate or arrange a concession with EDP. Through this process, EDP ex- piects to reduce the high level of arrears currently owed by municipalities (due to their practice of not charging customers at the full national tariff level and not paying EDP for the bulk electricity supply), and establish a sound basis for payment in the future. Organization of EDP 31. When EDP was incorporated, it faced a very difficult situation. The staff it had adopted, although experienced and qualified, was employed under conditions and salary scales that varied considerably. The reserve margin of the generating facilities was already low, and new additions under construction were insufficient to meet the forecast demand. The transmission and distribution systems were weak and overloaded and power interruptions frequent. Tariffs varied considerably from region to region and the politi- cally strong municipalities refused to make full payments to EDP for bulk electricity supplies. To make things still worse, hydrological conditions in the first year of EDP's existence hit a low level which can be expected to occur only once every 15 years. However, the young corporation lived up to the challenge extremely well. It initiated massive construction programs to catch up with the power needs of the country, standardized designs and uni- form working procedures, unified a considerable collection of employees' rights and privileges at the expense of sizeable increases in its wage bill, initroduced a uniform accounting and reporting system, and introduced a mar- ginal cost based tariff structure. EDP would have substantially complied with the revenue covenant agreed under Loan 1301-PO had severe drought condi- tions not occurred in three consecutive years 1980-82, a very rare occurrence. 32. EDP is managed by a General Council and a Board of Directors sup- ported by central staff departments for planning, engineering, and finance. Operations are conducted through six decentralized directorates, one for generation and transmission, one for equipment and four for distribution. The managers of these directorates form the Management Committee which con- trols and coordinates operations. Presently EDP is an extremely well managed entity; its administrative and technical staff are of high standard and cap- able of conducting the company's activities. Training is a built-in com- ponent in staff development programs. Four regional training centers are currently in operation, and a fifth one is under study. These centers pro- vide a wide spectrum of training which is considered adequate to meet the company's needs. 33. Electricity Supply and Demand. EDP's installed generating capacity is 4,671 MW, of which 2,622 MW are hydro, 1,715 MW steam turbines and 334 MW - 12 - combustion turbine. The transmission system operates at 400, 220 and 150 KV interconnecting the whole country and the Portuguese system with the European system. Between 1976 and 1981, peak demand increased at an average annual rate of about 7 percent, gross generation of electricity by about 6 percent, electricity sales by 7.5 percent, and number of consumers by 11 percent. The higher growth rate in the number of consumers is due to the integration of municipal companies with EDP. In 1981 industry accounted for about 59 per- cent of EDP's total sales, households and services accounted for 38 percent, transport for 2 percent, and agriculture for 1 percent. EDP has prepared several demand forecasts using various sophisticated programs, and has adopted a forecast which assumes that demand would grow on average by about 5 percent per annum between 1982 and 1990. Its investment program is geared accordingly. 34. Electricity Tariffs. Electricity tariffs charged to each customer class are proposed by EDP and approved by the Government. Up to mid-1982, these tariffs were set by the Government as the maximum tariffs that could be applied by any power distributor, and municipalities in many cases were charging their customers tariffs well below those set by the Government. In September 1982, the Government approved a new decree law which makes it man- datory that all power distributors charge the tariff levels set by the Government. The same decree law establishes a schedule for increasing muni- cipal tariffs lagging behind EDP's levels in August 1982, so that uniform tariffs will be attained throughout the country by 1985. 35. EDP's tariff structure is based on the principle of marginal costs, and is uniformly applied to its customers throughout the country, and have been increasing since 1976 at an average rate of 35 percent per year, repre- senting an annual increase of about 6 percent in real terms. In addition, EDP was allowed as of 1977 to levy a fuel adjustment charge to cover increases in the price of fuels occurring between tariff revisions. EDP's average tariff is estimated at about 78 percent of the average marginal cost of supply, and this percentage is expected to increase as tariffs continue to be raised in the future. 36. Electricity tariff levels are computed assuming average hydro- electric generation, based on a 30-year average of hydrological conditions. To alleviate the financial consequences resulting from wide variations between actual and average hydrological conditions, the Government created in 1960 a "Thermal Support Fund" (TSF) as a special fund administered through the accounting records kept by the separate generation companies. Operation of this fund is based on the premise that surplus revenue in years of above average hydroelectric generation should be set aside to cover the costs of extra thermal power production and imports of energy from abroad in years of drought. In 1976 when EDP was formed, the TSF was in deficit and with sub- sequent drought years of 1980-1982, the TSF was not in a position to provide the buffer to EDP's cash flow as it was intended. As a result, EDP was forced to borrow to meet its requirements. The TSF was restructured in an acceptable way in January 1983, to provide for (i) segregation of TSF - 13 - accounts from those of EDP, and (ii) imposition of a surcharge on tariffs whenever the accumulated TSF deficit and finance charges amount to 15 percent or more of EDP's annual revenue. The level of the surcharge would be set so that any deficits of the TSF would be fully recovered within no more than five years. The resolution also grants powers to the Minister of Industry, Energy and Exports to approve such surcharges, while in the past additions to tariffs (except the automatic fuel adjustment provision) had to be approved by the full Council of Ministers. In addition, the resolution provides a clear undertaking by the Government to make available, or cause to be made available, loans to the TSF, whenever its condition so requires. Bank Role in the Energy Sector 31. The Bank Group has made six loans for power in Portugal totalling $93.5 million. Five loans were made during the period 1963-1966, three to a thermal generating company and two for hydroelectric generation. The sixth loan was made in 1976 to finance part of EDP's 1976-1978 investment program. Al1 projects were successfully completed. A project completion report for the sixth project was prepared, which concluded that, thanks to excellent management, EDP achieved all of the objectives set at appraisal except for the self-financing objective; failure to achieve the self-financing objec- tives was due to droughts, and thus was beyond EDP's control. In preparation for the proposed project, EDP has taken steps to improve the functioning of the TSF to be better able to cope with such situations in the future. The Bank is also assisting with the modernization of the hydropower equipment industry under the Mechanical Industry Project (Loan 1875-PO). The Bank made a $20 million loan (Loan 2024-PO) to PETROGAL for petroleum exploration in 1981 and approved a $30 million loan to the Government in 1982 for an In- diustrial Energy Conservation and Diversification Project (Loan 2168-PO). Bank lending for energy in Portugal has not only provided investment funds for the projects and helped attract financing from other sources, but more importantly it has contributed to several major institutional changes; (i) establishment of EDP and its development into a sound utility; (ii) implementation of a revised rate structure for electricity taking into account marginal costs of supply, (iii) rationalization of petroleum product pricing, and (iv) launching of energy efficiency programs. Continuation of the Bank's involvement in the energy sector would assist Portugal in develop- ing further its indigenous energy resources and institutions, and carry for- ward these financial policy improvements. PART IV. THE PROJECT 38. EDP has developed a reasonable long-term forecast of energy and load requirements for the period 1980-2010. Completion of plants presently under construction would allow EDP to meet system demand up to 1986, with an average reserve capacity of about 10 percent. Additional capacity of about 1,050 MW would be required to meet demand through 1992. The least cost solu- tion for the additional capacity has been determined to be 450 MW of hydro and 600 of coal-fired thermal. EDP has designed an investment program for - 14 - the 1982-1986 period along these lines and is seeking financing for the 1983-1985 activities. The proposed project, which consists of the entire 1983-1985 investment program, was appraised by the Bank in July 1982. The project is described in detail in the Staff Appraisal Report entitled "Portugal: Power Project VII" (No.3805-PO, dated January 27, 1983), which is being distributed separately. Negotiations were held in Lisbon, Portugal in mid-December, 1982. The delegation from EDP and the Government was led by Eng. Ricardo da Cruz-Filipe and Dr. Antonio Labisa, respectively. The main features of the loan and Project are listed in the Loan and Project Summary and in Annex III. Project Objectives and Description 39. The object of the project is to meet, at least cost, EDP's forecast growth in demand while maintaining the required reliability of the system. The project includes all facilities under construction in January 1983 or to be started prior to the end of 1985. It involves work on the installation of new generating plants with related transmission and distribution facilities. Completion of hydroplants under construction during this period would event- ually add about 1459 MW (or about 31 percent) to the system. One oil-fired thermal plant (2 x 250 MW) would be completed and one (2 x 300 MW) coal-fired thermal plant would nearly be completed. Two combustion turbines (2 x 83 MW) would be installed at an existing thermal plant. About 564 km of transmis- sion lines and 12,500 km of medium and low-voltage distribution lines would be constructed, along with associated transformer capacity of about 4,700 MVA. The project would also provide facilities to connect 315,000 new cus- tomers. Miscellaneous additional works involve expansion of testing and mea- surement facilities, purchase of additional computer hardware and software, a study for upgrading the existing computerized accounting system, and a study for identification of possible nuclear plant sites. Project Cost and Financing 40. The estimated cost of the project, including contingencies and interest during construction, is $2,732 million, of which $948 million would be in foreign exchange. A physical contingency of 25 percent was applied to the hydro components, and 15 percent to the thermal components. Lower physi- cal contingencies of 10 percent were assumed for the transmission and distri- bution cost estimates due to the continuous nature of these works. Prices were calculated at end 1982 prices, and contingencies of 20 percent for 1983, 18 percent for 1984 and 16 percent for 1985 were applied to local costs, and 8 percent for 1983, 7.5 percent for 1984 and 7 percent for 1985 were applied to foreign costs. The contracts for the studies are being negotiated on a lump sum basis. 41. The proposed loan of $126.4 million equivalent would meet about 13 percent of the foreign exchange costs of EDP's 1983-1985 program (including interest during construction), or about 5 percent of total requirements. Financing for the project would be as follows: (i) foreign borrowings - 15 - about 33 percent; (ii) local borrowings about 38 percent; (iii) internal cash generation and decrease in working capital about 25 percent; and (iv) Govern- ment equity and customers about 4 percent. Financing of about $150 million has already been arranged from the European Investment Bank and from other foreign loan sources. Project Execution 42. The proposed Bank loan would be made to EDP. The project would be implemented under the supervision of EDP's well qualified and experienced engineering staff, and EDP will be responsible for all aspects of project execution, including installation and progress monitoring and reporting. Civil works for the Crestuma hydroplant should be completed by early 1983 and construction of gates, bulb units, etc., is progressing satisfactorily. Invitations for civil works pre-qualification for the Alto Lindoso and Torrao hydroplants and the general procurement notice for the equipment to be financed by the proposed loan were published in October 1981. Goods and ser- vices amounting to about 35 percent of the proposed loan amount have already been tendered under ICB. Detailed engineering designs for other civil works to be undertaken in 1984 and 1985 and most related bidding documents are ready. Contract awards and mobilization of contractors for civil works associated with the Alto Lindoso and Torrao hydroplants will take place in 1984. Terms of reference for the studies have been agreed and the contracts are being negotiated. Financial Performance of EDP 43. To achieve its financial objectives and to enhance its capacity to support its large investment program through self-financing and borrowing in the international markets, EDP has proposed and the Government has approved a series of regular tariff increases. The specific undertaking to contribute 30 percent of its average power construction requirements from internal cash generation was established as part of EDP's statutes and was recorded as part of the revenue covenant of Loan 1301-PO. Electricity tariffs between 1979 and 1981 were almost doubled allowing EDP to achieve a 37 percent level of cash generation in 1979. Due to subsequent severe drought conditions, EDP achieved only a 15 percent level of cash generation in 1980, minus 28 percent in 1981, and 3 percent in 1982. However, since the failure to achieve the agreed self-financing objective was due in large measure to circumstances be- yond EDP's control, and occurred despite substantial tariff increases which were considered to be the maximum possible at the time, the Bank has accepted EDP's performance as adequate. 44. Internal Cash Generation. The objective of attaining 30 percent self-financing continues to be appropriate, in view of the need to raise funds from the sector so as to minimize EDP's dependence on Government resources and to improve EDP's financial strength to support the necessary borrowing program. It is therefore proposed to build back up the level of internal cash generation, defined as the ratio of EDP's net cash contribution - 16 - to the average value of EDP's investment program in electric power facilities (mean of current and preceding year). EDP would attain a level of 10 percent internal cash generation in 1983, 20 percent in 1984, 25 percent in 1985, and 30 percent in 1986, and thereafter (Loan Agreement, Section 5.05(a)). The Government would take all measures to enable EDP to achieve these targets (Guarantee Agreement, Section 3.02). This implies increases in average revenue per kilowatt hour, including the effects of fuel adjustment charges and the surcharge for the TSF, equivalent to 48 percent in 1983, and 25 per- cent in 1984 and 1985. 45. Debt Limitation. Together with the internal cash generation requirement, a limitation on the debt/equity ratio of about 1.5 would keep EDP's assumption of long-term debt within acceptable limits and ensure an adequate cash flow for debt service and construction requirements. Except as agreed by the Bank, EDP would not incur any long-term debt if EDP's long-term debt, including the debt to be incurred, would exceed 1.5 times its equity capital (Loan Agreement, Section 5.04). 46. Municipal Arrears. The Government has put in place a satisfactory series of measures to establish a sound financial relationship between EDP and the municipalities, including means to pay municipal arrears which amounted to over $300 million or nine months of revenues as of December 31, 1981 (paras. 30 and 34 above). After a lead time to complete the processes now underway, EDP would ensure that its accounts receivable, commencing with fiscal year 1985, would at no time exceed the equivalent of three months' sales and the Government would take all measures necessary to enable EDP to meet this requirement (Loan Agreement, Section 5.06; Guarantee Agreement, Section 3.02). 47. Financing Plan. Given the large investment program involved, it is not feasible to have at this stage a financing plan with firm commitments over the entire project period. EDP has provided a satisfactory financing plan for 1983, which assumes foreign loans and export credit of about $170 million equivalent, suppliers' credits of about $50 million equivalent, local borrowings of about $250 million equivalent, local and foreign bond issues of about $95 million equivalent, and a draw down of about $28 million from the proposed Bank loan. EDP would provide by end-November of the years 1983 and 1984, its annual investment program and financing plan for the forthcoming year acceptable to the Bank; the financing plan shall include a phasing of projected borrowing activities which would lead to (i) firm commitments by June 30 from other sources of finance covering not less than 50 percent of the required borrowings for the year; and (ii) identification of those sources of finance from which the remaining balance of the borrowing program will be obtained (Loan Agreement, Section 3.07(a)(i)). An interim report on the implementation of the construction and investment program and the financ- ing plan for the current fiscal year, satisfactory to the Bank, would be pro- vided for each year of the project by July 31 of each year (Loan Agreement, Section 3.07(a) (ii)). The interim report would include a listing of the borrowings undertaken, or to be undertaken, the Government's explicit commit- - 1 7 - nnent for its annual contribution, and adjustments if needed to the construc- tion program. If, when preparing the interim reports on the implementation of the financing plans, it is determined that adequate funds to complete the previously planned annual construction program will not be available as originally planned, two options would be available: (i) the Government would provide or cause to be provided adequate funds on acceptable terms for pro- ject execution; or failing which (ii) EDP would adjust its annual construc- ition and investment programs in agreement with the Bank (Guarantee Agreement, Section 2.02). EDP's investment program is sufficiently large and diversi- * fied that EDP could reschedule without much disruption, leaving implementa- tion of the core program financed in part by the proposed loan on schedule. Accounting and Reporting 48. Because of the work involved in unifying the accounts of EDP's con- Stituent units, introduction of a new accounting system and the revaluation of assets, EDP's accounting work was delayed in the past and its audited accounts were submitted to the Bank about six to eight months late. This delay was being slowly reduced, but with the integration of many additional municipalities expected over the next two years, EDP's accounting work will likely continue to be subject to similar delays. As part of a phased program to improve the timely provision of audits, EDP would provide audited finan- cial reports, prepared by independent auditors acceptable to the Bank, within eight months after the close of the year for 1982, seven months for fiscal [983, six months for fiscal 1984, and five months for fiscal 1985 and there- after. EDP plans to computerize all detailed accounting records beginning 1985. 49. Monitoring System. A set of key indicators to monitor EDP's tech- nical and financial performance were developed and agreed under Loan 1301-PO. EDP would continue to implement this monitoring system (Loan Agreement, Sec- tion 4.06). Procurement- and Disbursement 50. Contracts for civil works and supply of equipment and materials to be financed by the proposed loan would be awarded on the basis of interna- tional bidding in accordance with the Bank Group guidelines for procurement. A preference of 15 percent of the c.i.f. bid price or the applicable duties, whichever is less, would be granted to Portuguese manufacturers of equip- ment. The proposed loan would be disbursed against an agreed list of goods composed of the following: specific portions of the civil works contracts for the hydroelectric plants of Alto Lindoso, Torrao and Crestuma; bulb units for Crestuma; and specified list of site construction equipment, equipment and materials related to transmission and distribution networks, measurement and testing equipment, and computer hardware and software. The procurement process was initiated in October 1981, and most of the tender documents and some of the bid evaluation reports have already been reviewed by the Bank. It is likely that some contracts associated with supply of site construction - 18 - and transmission and distribution equipment, the bulb units, and studies will be awarded before loan signature. Therefore, retroactive financing of up to $5 million is proposed. 51. The Bank loan would be disbursed as follows: (i) 75 percent of total expenditures for civil works associated with the Alto Lindoso, Torrao and Crestuma hydroelectric plants; (ii) 100 percent of foreign expenditures and of local expenditures (ex-factory) associated with the purchase of bulb units for the Crestuma plan; (iii) 100 percent of foreign expenditures and of local expenditures (ex-factory) for site construction equipment; (iv) 100 percent of foreign expenditures and of local expenditures (ex-factory) for the purchase of the agreed list of transmission and distribution equipment and materials; (v) 100 percent of the foreign cost of measurement and testing equipment, computer hardware and software and the consultant services; and (vi) interest and other charges on the loan accrued on or before November 14, 1986. Environmental Aspects 52. The Portuguese State Commission on Environment, which is respon- sible for ensuring that environmental factors are taken into account before projects are approved, has reviewed and approved the project works. In addi- tion to these Governmental measures, EDP is very conscious of the environ- mental impact and relocation issues created by its projects. Accordingly EDP conducts extensive and thorough studies of high standard and takes all neces- sary measures to restore the affected sectors and remunerate in an equitable way private parties affected by its projects. In view of the strict emission standards imposed by the Government on conventional steam plants and EDP's treatment of the issue in the past, no adverse environmental effects would be caused by the proposed project. The Portuguese and Spanish Governments have an agreement on the use of international waters and procedures to deal with issues relating to the project have been put in place. Risks 53. The major physical risks facing the proposed project are those nor- mally associated with the construction of hydroelectric plants. The measures taken by EDP to reduce these risks to the extent possible are satisfactory. In order to ascertain the safety of the dams to be constructed at Alto Lin- doso and Torrao, EDP would engage, by May 31, 1983, an independent panel of engineering experts, acceptable to the Bank, to review the design of these dams, including the proposed monitoring instrumentation and procedures, and conduct periodic reviews during their construction (Loan Agreement, Section 3.02(b) (i) and (ii)). EDP would provide to the Bank, not later than June 30, 1984, the specific monitoring and inspection programs for the Alto Lin- doso and Torrao dams and, at least one year before completion of these dams, a plan providing the specific measures to be taken to implement these pro- grams (Loan Agreement, Section 3.06). Another risk for the proposed project is that of unexpected delays in construction. In the past, project imple- - 19 - mentation has been somewhat delayed mostly due to procurement related pro- blems. During appraisal special attention was given to procurement issues to ensure that similar delays will not occur in the future. On the institu- tional side, the major risks are associated with EDP's financial performance which is affected by factors beyond the corporation's control. Provisions for adequate safeguards are included in the Loan and Guarantee Agreements (Loan Agreement, Sections 3.07, 5.05 and 5.06; Guarantee Agreement Sections 2.01, 2.02 and 3.02). Justification 54. The proposed project forms an integral part of EDP's least-cost program for meeting demand through 1986. The demand forecast reflects a rea- sonable forecast of economic growth. Due to the long lead time to introduce nuclear power, the least-cost calculation was restricted to choosing the optimal mix of hydroplants, oil-fired and coal-fired thermal plants and com- bustion turbines. The alternatives of coal-fired and oil-fired thermal plants were subjected to extensive sensitivity analyses and, under all likely cases, the coal-fired plants were shown to be the most cost-effective. 55. Since the project is part of EDP's overall expansion program, it was not possible to isolate the benefits attributable to it alone. As a result, the return on the whole investment program was calculated, and is taken as a proxy for the return on the project. The economic rate of return was calculated, based on the measurable economic benefits and costs, from the viewpoint of the economy as a whole. The economic rate of return, based on revised tariff levels, is estimated at 10.3 percent. If calculated on the basis of existing tariff levels, it would be about 6.8 percent. Sensitivity analysis was conducted by reducing the incremental generation of hydroplants to reflect output corresponding to critical dry years, and increasing simultaneously by the same amount the output of thermal plants. Under this assumption the rate of return falls to about 9.5 percent. This methodology of calculating the economic rate of return underestimates the actual return to the economy, since benefits to consumers may substantially exceed the regulated prices they are charged. PART V - LEGAL INSTRUMENTS AND AUTHORITY 56. The draft Loan Agreement between the Bank and Electricidade de Portugal, the draft Guarantee Agreement between the Republic of Portugal and the Bank, and the Report of the Committee provided for in Article III, Sec- tion 4(iii) of the Articles of Agreement, are being distributed to the Execu- tive Directors separately. 57. Special conditions of the project are listed in Section III of Annex III. There are no special conditions of effectiveness. - 20 - 58. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 59. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments January 28, 1983 Washington, D.C. - 21- ANNEX I Page 1 of 5 TABLE 3A PORTUGAL - SOCIAL INDICATORS DATA SHEET PORTUGAL REFERENCE GROUPS (WEIGHTED AVE9.AGES AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE) - TOTAL 92.1 MOST RECENT MIDDLE INCOME INDUSTRIALIZED AGRICULTURAL 40.8 1960 /b 1970 /b ESTIMATE /b EUROPE MARKET ECONOMIES GNP PER CAPITA (US$) 360.0 970.0 2370.0 2323.9 10328.2 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 460.1 921.5 1443.4 2107.4 7277.7 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 8826.0 8628.0 9836.0 URBAN POPULATION (PERCENT OF TOTAL) 22.5 26.2 30.6 47.9 78.0 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 11.5 STATIONARY POPULATION (MILLIONS) 13.5 YEAR STATIONARY POPULATION IS REACHED 2070 POPULATION DENSITY PER SQ. EM. 95.9 93.7 106.1 83.3 138.5 PER SQ. 10X. AGRICULTURAL LAND 182.4 200.7 239.2 155.4 509.7 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 29.2 28.4 26.7 31.1 22.7 15-64 YRS. 62.9 61.9 63.2 61.2 65.7 65 YRS. AND ABOVE 8.0 9.7 10.1 7.7 11.6 POPULATION GROWTH RATE (PERCENT) TOTAL 0.5/c -0.2/c 1.3 1.6 0.8 URBAN 2.1 1.3 2.9 3.5 1.4 CRUDE BIRTH RATE (PER THOUSAND) 24.1 19.9 18.2 23.6 14.5 CRUDE DEATH RATE (PER THOUSAND) 7.5 9.9 9.6 9.2 9.3 GROSS REPRODUCTION RATE 1.6 1.5 1.2 1.6 0.9 PAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. .. USERS (PERCFNT OF MARRIED WOMEN) .. .. FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 92.0 105.0 77.0 116.0 111.1 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 118.4 134.7 127.1/d 125.1 130.8 PROTEINS (GRAMS PER DAY) 80.1 92.8 84.1/d 92.7 97.1 OF WHICH ANDIAL AND NULSE 33.0 40.5 38.6/d 35.9 61.3 CHILD (AGES 1-4) MORTALITY RATE 9.0 4.3 2.3 9.2 0.5 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 63.3 67.1 70.8 67.6 73.8 INFANT MORTALITY RATE (PER THOUSAND) 81.0 52.7 35.1 65.1 11.3 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL 28.9 34.5 65.0/e IRBAN 82.1 .. 90.0/e RURAL 14.4 .. 56.0/e ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. URBAN .. .. RURAL .. .. POPULATION PER PHYSICIAN 1247.5 1057.9 698.0/d 1105.4 620.7 POPULATION PER NURSING PERSON 1421.8/f 1035.0 466.9/d 634.4 246.9 POPULATION PER HOSPITAL BED TOTAL 182.9 .. 187.4/d 286.8 122.0 URBAN 70.0/f 70.8 80.9/d 192.0 140.6 RURAL .. .. 4 ADMISSIONS PER HOSPITAL BED .. 9.8 13.5/d 20.0 17.7 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 3.9 3.7 URBAN 4.0 .. RURAL 3.9 .. AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 1.1 0.8 URBAN 1.0 .. .. RURAL 1.1 .. .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 40.5 64.2 .. URBAN 88.5 .. .. RURAL 27.4 .. .. - 22 - ANNEX I TABLE SA Page 2 of 5 PORTUGAL - SOCIAL INDICATORS DATA SHEET PORTUGAL REFERENCE GROUPS (WEIGHTED AVEB49ES - MOST RECENT ESTIMATE) W MOST RECENT MIDDLE INCOME INDUSTRIALIZED 1960 /b 1970 /b ESTIMATE /b EUROPE MARKET ECONOMIES EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL .. 98.0 117.0/d 102.9 101.7 MALE .. 99.0 119.0/d 107.1 103.9 FEMALE .. 96.0 115.0/A 99.0 103.6 SECONDARY: TOTAL .. 57.0 55.Old 60.2 88.4 MALE .. 63.0 54.0/d 66.4 83.4 FEMALE .. 51.0 56.O/d 54.0 84.2 VOCATIONAL ENROL. (Z OF SECONDARY) 46.4 33.6 16.5/d 31.6 18.2 PUPIL-TEACHER RATIO PRIMARY 34.0 33.6 19.1/d 25.8 20.3 SECONDARY 19.0 16.6 22.9/d 22.2 16.1 ADULT LITERACY RATE (PERCENT) 62.0 71.0 .. 75.9 98.9 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 17.9 63.9 108.3/3 51.0 338.4 RADIO RECEIVERS PER THOUSAND POPULATION 96.1 158.6 161.2 157.2 1021.7 TV RECEIVERS PER THOUSAND POPULATION 5.2 45.1 123.1 123.7 403.6 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 63.2 86.1 62.7 112.3 331.2 CINEMA ANNUAL ATTENDANCE PER CAPITA 3.0 3.0 3.5 4.0 3.6 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 3397.3 3386.7 3789.3 FEMALE (PERCENT) 17.9 24.8 25.9 36.6 36.0 AGRICULTURE (PERCENT) 44.1 33.3 24.0 38.7 6.2 INDUSTRY (PERCENT) 29.0 33.2 36.2 25.9 37.8 PARTICIPATION RATE (PERCENT) TOTAL 38.5 39.3 38.5 44.5 45.4 MALE 66.0 62.3 60.3 56.3 58.9 FEMALE 13.2 18.5 19.0 32.8 32.4 ECONOMIC DEPENDENCY RATIO 1.0 1.0 1.0 0.9 0.8 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. HIGHEST 20 PERCENT OF HOUSEHOLDS .. 56.1/h.i 56.3/h .. 43.0 LOWEST 20 PERCENT OF HOUSEHOLDS .. 6.2]hi 7.3/h, .. 5.5 LOWEST 40 PERCENT OF HOUSEHOLDS .. 20.6 21.41 .. 16.5 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. RURAL .. ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 480.0/d RURAL .. .. 480.0/d 406.6 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. RURAL .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1978 and 1980. /c Due to emigration population growth rate is lower than rate of natural increase; /d 1977; /e 1975; /f 1962; /S 1976; /h Highest 25% and lowest 25% and 50% of households; /i 1968; /. 1973-74. * The 1981 World Bank Atlas shows 1980 GNP per capita of $2350. August 1982 - 23 - ANNEX I DEFINTtION$ Oil SOCIAL. IgOICATOJ.S Page 3 of 5 NotCt; Aititogh the d.ta are d.anEC ff...ourc. g.nnreiy lodged th. -e anth-itti- end rlal,it ah.oid al. b. naad that they say notnoct nationai1y compara.ble oncas of Uth. tek of etngdrdi.ad difi"tan and ...ncepee ocad by different... conri-L.sI -11-eoing the date. VTh. dat ae.vo. Chai.... oseful Co de...ib. .o4.ee of ennitude. indfct.t trends, .nd -bcaiacranmJor differenc. betwee c....tCis.. Thet refernegou.a.I)t,: cutygr fth u,c ooutr, and2) a ..autr g.ouy with oeanhat higher ur-.g. iLcoe than the Cootnty groop of tesbJec onr ac fo C 0ghInco oil tt &tr'gCu-p ehr Middl. 1ocom norh Africaen tid Ps-t L ch.... becaoe of -troger ot otiua ffls.lcie. it therferensgopdt ta .nere.. ate poplaio weiSht atheti Caefor 0h iodIc....r and ehe onlY when ma-oity of Itheconraitagru ha. into Eor that Entto. Sinc the c- ge of conrisae h indicator. depends en the o-il.bhILty of data an I not ouifot.e,. cttlo. anat he ouoiaed in relating --atg. of Oeindica..tot o noher. rhea. arrge r onty oasfol in oePertng the uiu_ of 0. diofioatr et a II- emng the contry end ref.r....rope ojiA (thonsed eq.k..) Pouaion .t .. hortl hd -total.t -bn ond rural -P Ppulation (tota. Total - Totai striate ooa coteogLad ara end iniard ....ere; 1979 doto. "ran ad rurl) itidd Iyterreetn ubro opciha E.itloai-ttime of oRIcICtor1 area oced treporerily ornamoty syatlablo npbi.n rvt ees.adtetiOdheis n e forcros paue. ekt and kitchen fA.dea or to Ii. tahle; 1979 data. hebiliteto str.1 .Haspitais arC. oiihet p -raatiy staffed by n Iea.. oo.. phyeiclo- Zetbllabh-t.* prordid., pri-nciply oa-to- CHP PtR CdPITA (US$) GNlP P.r c.Pit. netimtaaO utn ektPrla. a-ticoear o Idlod byra hpti . phye. inclod healthy 190 and 1900da. ediai aieas nus. midwife, etc.)oInoffe Inpttnenoa datln and Pro-i4e a1haltd rang of m-dlc.i fEtilten For etata- ENERGY COMtSUMTbIONt PER CAP ITA A onc1 conmo-Pti.. ofcoarta o gy )coaiCC. Pic . .u e ... he-b hosPitais ol.1ds Atg rW cpifeea h-nPitaia, led iirlin petoleum osral gs,an bydr...-. ouc-o and gea_ raieic-ad ..taI hospitals, loca or tots hoepici and edicoi and naterity Cytoltyl it kilogram of coa IqLvlt peI aia 9.17.Ad17 center- Spotlaiod h.sPitul. nra Incided oiy ondr te.1 from hopil diide by the nmeof beds. yopL'LATION AND5 VITAL STATISTICS Total ftp.L.ti... gid-fY- ;tlhaaendn) - nf JulY 1; 1960. 1970, nO 1980 hoUSItG data. hoeruse Sins of Onusehoid (pnrmoet ner hotoashnid) - tonal. oban. an rurul- Urbn opooton(pecet f total) - tatl of utha . t tti..I popsianion; A n loaoi cnits o rou o inivdul .b ..r.i.ngq .ter differeot dnfiirin of orban oen map ffant Coatuh.illty of latu an thei main mal..tA hore ridger may or my s bthaincluded 10 amen coutries; l9b0. 1970. dn i9n0 date the ha... hoId for Cttiti poros yoynl..ion Protect Lben A-era ete ofntoe a om- C oti. rb-, . ad rua .. aor nm ,porianiJon inj ver 2000 - Cu'rran populatias p,ojeloes ara based on 1980 her ofL.roepe O I all urban, sad rane1 ....pied -anetional Itol poplaion by ge end nsn sd their atilyedfertility -atee. deeLine. -epantlrly. heellinge elada non-peroat nrttneud Projection paramter for ert1ity tseecoio o i.Pi .bmh leel aesse- utocupisd parts. iog lis. anpeCCrauCy enbiht nrean ith c..-try'. per c.Pit. 100055 Adoo... to ftntlio t' (rrcee of d- lInsf-toa,uban, and rural1 lenel. and femal lfe I tps,eey atabLietan at (7.5 yt.rot. Vhs para- To.v.tt.n. .d-ILioga nLIt aitr-ict in ilong.quarte.g as p...e..ug mae.frfrIltyot Lso hone three .eI.l asueLtgd dsL.. in of tona. _ree ad in dwslingn _eepetIlve e-tility a-Cording to -nte..1 sd pat family pla-nrg perforane loch c...ntryI teh tbtaalnn On f tbeaeioaoos.bistian cf. .. tala V.T and fertility Coebde for projention potpe. Adil-nen fnroL-so ation 'Itatnat -"cIuta - it a tuiny popletit. there ig no gnth niee Pimar nohnL - totuL. maLe nd fEmaL. - true Ctotl atadf l tbr -ieth rateiaequa to che death rate, and also the pgorn ra - Cnro1ent of si age. at the r. r ee oprrrgeo remp.ctiva neite cosat his Is atbietd only eftar fortLfY C-tss droliust C.P, Carnhoo-age populations; nomlyincludes chitdren eqO b-il lha rePlacement Inol f n -t r,prudnoio st.nfs ot deaertioyent itt, :dLuntad for difforet lengths of pr i-ary eaa lfor A nst epoce tsl eoly Te teiCeY Pop,ltl. ales L as c_Attlsrtoivraedetnernmntayocd15pret e.timet.d 00Ch tbeheel of rho proJatted Cherceteic fthe yn.Pnstc- nli_ na_ pupils ars below or abov ths ffi.iL1 aboof age. io toe Fant 20DD, and the -ta of deLine of fertility rate to .ePI...- Sondery scho-i - total, -eel and foesle - ComPuted nsahbre; er...dnry sen Inte. -ad-ctiourequ1reeatLnoa four Yesr of appr...d primary lEt..ruOitL.; V.er -COIusoY rotulatlon Le reanhed - The Year when ntatiomy pspultiion pr_ldes genera. ttio..el, or temhsrtann.imroia for pnDiin P U Yacn sIlL het-he. ou-u1y of 12 to 17 y.mne of ege; ttrrnnpnndannuote r mna Per on. km. - rid-Year peplation per sqorn kilnatet 1100 h..Ctates(of Voca.. nenolmet rorent o feoeamf -.fnaloa ..Ineini ctota fra.; 1960, 1970 ood 1979da.Itod Zenatol, ndut1id. r oher1 proeram hechp b tpeae lsdsped- yetso.km.aeroalota1lad - Comutedaeahave for gtticolt.rI. lsnd r-tlyore doatst fLsteeyintttO onY ; 1960. 1970 end 1979 data. ~P.ii-t!ssoht et - P"f.er. an etndt -: - Total-4 egdt eerelsd L. otpulaloti A-e Struotora. (r-er..t) - Children (0-14 yeere). -ekI g-... 115- Pr I,ar an mEno;drtY lers divIded by numbers of tehers in the 64 yearn.). and ratire (6S yanra an ovr) s peee s f ead-y.ar popo- ctrr-pondingi l. atn;1960. 1970, aId 1980 dsa dl ieaytt prcent) - ILiCtert adnit. (ebe to renCd end -I..) l'oPol-t-o Gronh Rata (neront) totu -A--Iua grnwh nets, of Ctota id- snpretn f tntsl adslt popal--e aged 15 ymarn and oref feat populaion for 19'0-6. 190-70 ned 1970-80. Porulatlot Gonth gatg Ins-n) - orb- - nA--I growt rates of orhen poo- CONSUMPTION lutlos fo 19)00. 160-70 and1970 1-Of... Panget Tare (p-r thonsed p.p.latioe) -P'..-ger cane comPrise -tr 1rue irt hte ne t196ea7d - Sano Ion birth. p-r thouod of nid-reroas-nta lame than, sigh pesn;ecua fuac..er n nopola.ti_; 1960. 19 70, ad 1900 data. sL irarY nie. Crode D.eth gate (ost thou ...d - dAbcu.l deaths per Chaua... of sid-Y..r 00db ecivre(rrtbhnunsnd rP2uaIsnII - kil types ofr. tor4a radio fnooi,;1960. 1970 i 1900 date. broadeestnoC elpulic per thonseed of population; enclnds Goos up-rd-oti.oa. ht- Aneten n5r. of daogbt-n oa silt hea in lIcensd _en_ver in -onsrie and inY_r sh.. rsienratine of .edi. hernoe r.pCodnotls period If shenperince prsn aesed tfo-nt-w It efc;dat o ratyent ma -Y t he tmpara.bie eLtos tiliy ros.;osuaty fvn-asr reraes ndin in 960 197. m 1990 me cootte bolished 1Lcnang TiiyPuhn -Acnos Atnoe (thons!Are A- ncI tnn of aocp.rtt TVtcCsm(e h-..Mr Pnu..tIIol - TVtennc Ear hrnndcss to of birth-rntro1 devices .Wda, a-nPc.. of osi lfamIly planning prnarn genra PuaiC per thensnd pupulaion; soluden alicane-d TV recivers randy Pleenine - le-r (cmn f -etd I..m.. PeCentag of rmaridi Loatranen in Y::re shar- itato f TV mete se in effct woe fchild-bssttoe age 115-44 yaare) she bs itth-oonsrnl dsi... to noesrare Clrcslatin- fear then-ead penlttio)- Sham the a-e-gsar allmeied wom in sae g gop. Wuaigo dIygnrlitrs eeee" eined asapen idic pulicatio derntd primerily to recrin Serlne,Iiscndrd rOn OD AND NU`rRTItN toI he detty' If It oppeea at Isea.t ZsarCime- :ieb.k Ine. of Pond Prndnotionn Carit. (1969-71.10 1.ira of per cepIt. -Ioe GInsm Onnl ACttsedann Pt Clante p.r fear - eand - the number of pronuntio f ltfond C_mdItisa. F- dntle sciade see..d and f se a_d ticle- sold during the year,.. incuing umse eta drive-in co- La on cain f 'ynn haste. Tomaditi.e hono pn.e-Y goode (e.g. -netossdmbil. _nitm. ineted of scgan) shich emstedible ondcoti ontint g. Coffee aed tasreeC. _iodedS. Aggr,at pru:duatls of sach oeuetry L. based on LAgOS FORCE -atlons acetgs podcer ric wights; 1961-65, 1970. and 1990 deta. Total Labor Port (th-nead.) - fu-oloil.y a.ttlo penense toclading Per capita suCry f1 uora (Crarest ofrqaetf -CamPutd fro armed forCe. and aepae n eldn nsene tdte t. noerIgy eqnlrelnnt f Fe lanfd sa.pplis svll- l inc-try peCept trrleg poPeletlon of etl uge. hafinittaei ain un r p.r dsp. Avoitabte suppis rp ,a omeU podotion, inperts las not poo...rbla; 196). 1970 and 1980 data. enot. ad oh"nge In afoo, net .nppllae eslod* semI feed. esedn, FemaI. (earnt) - tws tahoe f..ne. pe. etae f Ltuga iebar fare.. qnaotiels and is food P_so..L.e. end tI.-n L diafbtn. geur-Agri talan (P.-c) - labo.r forte isUam. f orLg retry atn anbt d mate -seetimagadby PAO besed os physiLagItal- -sd. fo- --Ime ati- ifsehing ee parceet.e of tntl labse torn.; 1960. 1970 and 1900o date. vIny andheathC osadeing sntrometal temparanur .hidy weightn. age I.duetr (nernet) - taher forteLi minge.%cegets. aoetrn and em istriLbnaio of pop.ti.tla. and 51105mg to peroet for nssa ansa sentri.lty. -ater end gee .e p.....t.gs of ftal labor fame-; houseold evel 196-65.1970 ou 1977 data. 960. 90edig aa erCano snl of O 1tei (ra": Ie day1) - Protein ostant of per ..pit. atocatght lets_s.tS) t ...a. maIn, and femei - P-rtioipetio or ne npply of food Per da.O apply at food L. defined es above. - notiityrs.t.. aratt.ted as total, male, and f mal labo tome a qurmnefor all oontien .atblished by USDA prootd. for sleim percentages of tonal, main and female pop1atin ofalt ages respe-Ively; alteene of 'hI grm f ton-l prneI. per day ned 20 area- ofenm nd 1960.1970,. ad 1900 duts. Thee are based o 1 pantioipatia rotan pus Lri., of ohich 10 gra hbald he anima pestein. Theme stn-fletting aesen enntcn ofthe - uapl.tion, od lute time trend.A ard. a lo- than then. of 75 Sr-a of tnt1 protin end 23 gra of feeeti. a are tram ntionl nrns aimal protein . an -0 g. Eor the aild. propo..ed by FAO) J. the ThIld Ec-ooml ysedo tyStin-"It.o nf ppeletien ordr IS an hi and os OnvldrotASuc.ny; 1614 0,190 an i9t7 date. ttmhtLlbor fnrc. Poecet rrten ut fo animal and roles - Prain supply of f.sd do ri_ed from a_ll and p.1... In SCam per dy; 1961465, 1970 an 1977 da. INCOME ISiTRIBtUTIfON ChildCae 1-0 bet hate (tsr tJuanend) - dA--I daathe per thatead InWrrtg fPlaetcm lbob In cah1 d id - harelve yo riost agearop -4roas,to children i. thi. as. grop; for mas developin con pret I I%inhest 20 ecn.pn t2 prnen. and Porest 40P pret Vriea oata derived fo lif. tbe;1960. 90edtg at,o nahis HEALTH POVERTY TARGET GROUPS -ids toPet-Incy attrt A,at) -Arrge voter of rests of lifs r-elicia The olan aimte are very appro..mate m s .,f povery lreIn1 athlth (.97.19) en 90 deli an hd h- Iney Ltdcth c-nid.rshe atia Inat ItCt c hae pe th-nod) - Ann,-l deacha of infanna under on yanr Esriatd Abenlote P-yrtY Inco L Levl (US et. tia -r-nIt Acteas to Oaf Otd (p.rC..t of P.rian1ol -totl o .rb.. and ruru - on- ounr IClooa1 d.dqnst dire plu .. ....tia1 noe-food yaquirsant inou her of Ppeol nl, urban, and rural) with .......ableacs no afe afodal.. vetorso.Pp lioluaetree ted outface nete . rontreata ho ... ononteinne Etimled Rslative Pnoertt Incom Levn1 (0S$ cn- capita) -urban oO ur.rl eater snob s that from prtnc sd hbr!heles. sPrigs ned. saiaY wells as toalreut povatty inom Isol L.....on-hir' fanneprctt peooae f their reapectlt p.pul.ti.es. In anaranara public p.r I--a-o of che country. Urb.. 1-o1I detod frmC h rurs1 cf tino - danpotI .oot. no1 t mra tha 20 senrs utr e bones soy be. l Ithadnimntfr one cost of tlintg in uhnb aea. resoslnosaol 19610 tIet the h -n- -wlf. or sesora of Chr hounehld and rural P.-Prn of ptpulattoe (uhn end itel) h r 'aeout doco hav to sped - di -rooet.nst Por f rho dayL nfetCcler the p.nr". Numr of Pple (totol, urban. end rura) nerved by ocret dlpoolo pnrntgso the ir ta poncspoIti-tle f-.r.t disposal sa-y .inldo teC% letn an di.possl. -ih on sient rstm e Of hIese Cte and onst-met- by nntr-hnrn sy-te or h.s - of pit priti*. end ii- Ponoinnin osr Physician - ?.,.Iltiandividad by tu-i- of prentising rhyac- tI-sel end oct1 ha. lis"iu cLr ulified from a medloal nobool et .eivrit, sh tct._.d. anltsd Pro)eni..n Departee Pneinto re SrensPer ot - Poptclagio divided hy numbe ofMatigny 1982 male' and femal grdeeaaa einn_ vUre.paintnean ntrin esitlete . n.. ..prtc1.r - - 24. - -. 24 -ANNEX I Page 4 of 5 ECONOMIC DEVELOPMENT DATA (Am0oants in Millions of US Dollars) Actual Annual Growth Rate (%) Share of GDF at 1980 Actual Est. Market Prices (Current Prices) L$i=Lsc. 50.062) 1975 1976 1977 1978 1979 1980 1981 1960 1970 1975 1980 NA,IJbNAc AGclU,Nei ,uco, D.i-oxtic Prod-ct a/ 24,077 -4.3 6.9 5.6 3.2 4.5 5.5 1.4 100.0 100.0 100.0 100.0 A,ri.ultur- 2,781 -6.5 -1.5 -10.0 4.0 9.0 3.0 -5.0 22.7 16.2 14.2 11.S i-ousty 8,122 -9.5 4.6 9.5 3.2 5.0 6.0 1.5 34.5 30.4 31.1 33.7 S4rviccs 11,033 -0.2 9.8 6.0 2.8 3.3 5.8 4.5 35.4 43.2 45.7 45.8 .o ovsupticie ci 21,486 0.3 4.1 2.5 1.1 1.8 4.8 3.5 87.8 83.3 96.2 89.1 ,r-ox l-sestmint 6,043 -45.3 29.7 34.7 -4.7 -2.1 12.1 6.1 18.5 23.5 16.4 25.1 .xports uf GNFS 6,768 -15.6 0 5.9 14.6 27.3 8.2 -3.4 16.6 23.4 19.7 28.1 Mrportx .c UNFS 10,228 -25.3 3.4 12.0 -1.8 7.8 9.6 3.8 22.9 30.2 32.2 42.5 (7r-s -Natcul S-icigs 1,984 -61.9 58.3 55.3 17.2 27.5 7.7 -16.7 16.7 25.5 3.8 8.2 Prices ,Lce of lotiatiui (Ionsuner Price loden) 16.1 16.3 26.0 19.3 24.3 17.0 20.0 txculalige Rate c/ 25.55 30.22 38.28 43.94 48.92 50.06 61.5 Msxct-.ANDLlot IlhADt Annual Growth Rates at Constant 1970 Prices As Percent of Total 1970 1975 1980 Impurts 8,786 -23.1 18.0 12.8 -2.1 6.7 9.0 3.1 100.0 100.0 I00.0 ijec 1b7 -20.9 19.7 -7.5 -3.1 16.9 8.7 4.6 11.0 16.6 9.3 wcllrr cunscoor (oods 534 -26.5 10.9 -23.9 -9.7 4.1 10.9 5.2 9.3 8.3 6.1 retrolcum Products 2,189 -7.5 6.7 -1.5 10.6 15.3 2.5 1.6 9.5 16.4 24.3 Iocerneaiate Goods 3,292 -23.9 28.8 19.4 -3.5 3.3 10.9 1.8 41.5 36.8 37.5 upitu Dooas 2,004 -27.5 18.4 26.7 -5.8 3.6 11.0 5.9 28.6 21.9 22.8 LEpurts 4,86 -16.0 4.3 4.1 11.1 29.3 7.1 3.9 100.0 100.0 100.0 Agriculturc and Fuood 553 -0.3 17.8 1.3 3.6 15.3 -1.0 -10.0 20.9 16.8 12.1 Woco, Gork, Paper and Pulp 813 -17.8 28.0 -3.8 3.3 28.2 17.3 -10.0 16.1 15.9 17.7 lcxtiies as.d Cletuing 1,154 -18.4 -b.7 -0.5 22.1 26.2 -8.0 0.0 26.4 27.3 25.2 Petroleum Prodcots 288 ) -17.1 0.5 11.0 9.6 33.6 50.0 -8.0 - 6.3 itlier Nanui-ctures 1,778 ) 13.0 1.0 36.7 40.0 38.8 MERChANDlSE TRADE INDIGES 1975=100 Export Price Index 100.0 107.1 145.1 179.0 229.1 315.7 95.9 Import Price Index 100.0 111.4 143.9 177.5 240.0 381.0 102.5 lerms ot Trade Index 100.0 96.1 100.8 100.8 95.5 82.9 93.6 Current Prices (Billion Escudos) As Percent of GDP at Market Prices Est. P1UbL64 FPNANGL 1975 1976 1977 1978 1979 1980 1981 '.rrent Receipts 93.2 127.1 173.6 212.2 264.3 361.8 450.2 24.8 27.2 27.9 27.2 26.9 30.0 31.2 Current Expenditures 102.6 153.3 182.1 238.5 302.2 407.0 524.6 22.6 32.8 29.3 30.6 30.7 33.8 36.4 -urrent Surplus/Deficit (-) of the State -9.4 -26.2 -8.5 -26.3 -37.9 -45.2 -74.4 -2.5 -5.6 -J.3 -3.4 -3.9 -3.8 -5.2 apstal Expenditures (Net) 12.4 19.3 34.5 39.1 42.7 64.8 69.2 4.4 5.0 6.0 5.0 4.3 5.9 5.4 Net Pinancing Requcrenents 21.8 45.5 43.0 65.4 80.6 110.0 143.6 5.8 9.7 8.0 8.4 8.2 9.1 9.9 Financiog Needs 17.4 48.9 44.7 75.8 97.1 131.1 162.5 4.6 10.4 7.2 9.7 9.9 10.9 11.3 beDt A-ortizatioo 4.4 -3.4 -1.7 -10.4 -16.5 -21.1 d/ -40.4 1.2 0.7 0.7 1.3 1.7 1.7 2.7 LABOR FORCE TOTAL LABOR FORCE e/ In Thousands Percent of Total Anneal Ext. Est. Growth Rate(%) 1977 1978 1979 1980 1981 1977 1978 1979 1980 1981 1979-80 Agriculture 1,263 1,187 1,174 1,158 1,090 33.4 31.8 30.9 29.9 27.3 -1.4 lndustry 1,250 1,283 1,330 1,382 1,446 33.0 34.4 35.1 35.6 36.3 +3.9 Services 1,269 1,259 1,290 1,337 1,450 33.6 33.8 34.0 34.5 36.4 +3.6 Total 3,782 3,729 3,794 3,877 3,986 100.0 10D.0 100.0 100.0 100.0 2.3 a! At market prices. Sectoral components are expressed at factor costs and will not axd due to exclusion of net indirect taxes end subsidies. b/ Statistical discrepancy is includea in the consumption data. c/ Exchange rate at end 1981 US$I=Exc. 65.0. d/ Estimated. e/ Total employed labor force excluding workers abroad and unemployed. (0340G) - 25 - ANNEX I Page 5 of 5 BALANCE OF PAYMENTS AND EXTERNAL ASSISTANCE AND DEBT (Amounts in Millions of US Dollars at Current Prices) Ac tualIE Bat. tLt4MARY OF BALAhl.C: OF PAYM4 NTS 1973 1974 1975 197b 1977 1978 1979 1980 1981 Exports (F.0.8.1 1843 2238 1936 1790 2001 2379 3550 4575 4228 Lspurts (F.O.B.) 2745 4277 3606 3965 4533 4787 6182 8781 9280 -roa Brdal-aoe (X-M) -902 -2039 -1670 -2175 -2532 -2408 -2632 -4206 -5052 Net los-Factor Services 67 -74 -170 54 82 276 541 568 417 1o-rise Receipts (Gross) (550) (513) (360) (327) (403) (592) (942) (1148) Resource -Blance -835 -2113 -1839 -2121-2450 -2132 -2091 -3638 -4635 hrt ivusstrent Iocome a/ 86 129 -14 -133 -179 -329 -437 -617 -899 Net Tracsfcers b/ 1097 1111 1037 964 1134 1635 2476 2997 2824 00.05cre cal csurrc or Account J41 -873 -817 -1290 -1495 -826 -52 -1258 -2710 lirect Fcreigl Lnvestmoet 110 109 122 51 52 56 59 100 - ,lic-g-s is Oft-cial Liquid coreug' Exchasge Reserves I- = Ilocceaso) -345 554 688 128 359 -103 -68 58 190 OLciccul Reserves -ross bLos Year c/ 2839 23j5 1534 1301 1391 1880 1951 1815 ot -01-c: uold 11b3 1193 1136 1125 1025 1009 1020 1020 '' Forc-go ussau-ge 1641 1125 390 166 366 871 931 795 Actual Est . GkAN'T ANID LOAN GGMMllMENTS DEBT AND DEBT SERVICE d/ 1975 1976 1977 1978 1979 198C 1981 Utrlsla, Gr[ats a-d Gralt-ike - 3 - - - - Total Debt Outstanding and Disbursed - Pobls- obLI Loa-s Public Debt Only 1060 1343 2185 3699 4998 5625 5712 e/ LBRD - ' 36 74 131 143 134 Isterest on Public Debt 37 41 78 149 311 45C 641 IDA e- - - - - - Rpayments on Public Debt 75 102 140 257 417 538 60b JLto-r Mlotilateral I 4 123 87 86 69 96 Total Public Debt Service 112 143 218 406 728 988 1247 -overasests 7 71 124 314 915 237 91 S.pplcers 207 55 41 62 53 1 106 Pfblic Debt Service Ratio 3.0 4.1 5.4 7.9 9.5 10.2 14.6 FPisauccI Markrts 74 ' 91 388 396 744 700 659 Pusli as Loans u. - Total Pablc M&LIS Loans 51 460 224 712 933 1929 11.50 1086 Average Terms of Public Debt (Grant Element) 9.1 11.1 12.9 4.5 -2.8 0.4 - Debt Outstanding Dcber 31, 1981 Interest us Public Debt Y 7.6 6.3 6.8 7.6 7.5 8.1 9.7 EXIERNAL DLBT Disbursed Only Percent IoRD 132 2.1 Anorticatios as % Priur IDA - - Year Public DOND 9.6 10.4 11.8 10.4 10.8 UOtM. Maltilaterac 338 5.3 IBRD Debt Outstanding Csvarsrsects IRsiureral Loans) 1316 20.6 and Disb -rsed 39.0 35.6 32.2 36.1 63.1 109.4 132.0 cappluerL- Erecdts 347 5.4 IBRD DObD as Y Public Debt Fssascial Institat-o-s 3519 56.0 Outstanding and Disbursed 3.7 2.7 1.5 1.0 1.3 1.9 2.5 Total Pabllc and Pabllcly Guaranteed Debt 5712 eI 89.4 IBRD Debt Service as Y istal Publ-c ass Private HbLT Debt f/ 6-802 100.0 Public Debt Service 5.7 4.3 3.1 1.9 1.8 2.0 2.1 a/ Largely Interest payments. b/ Largely wsrkers. remittances. / Gola, Llatiosal Valuation: Special Drawing Rights, 35 per fine tray ounce and converted to US dollars. December 1980 stock of 22.13 million ounces would give about $9 billion, valued at $400 per ounce. a! DeSt serv-ce as a ratio of earnings from esports, non-factor services and workers' remittances. e/ Estim-to for publc debt and publicly guarasteed debt ($5712) based on Treasury data processed by the World Bank Debt Reporting System. fl Estimate from the Bank of Portugal; includes $220 million of private non-goaranteed debt. Not available. Earope, Middle East and North Africa Regio- November 19, 1982 (340G) - 26 - ANNEX II Page 1 of 5 STATEMENT OF BANK GROUP OPERATIONS IN PORTUGAL As of September 30, 1982 ($ million) A. STATEMENT OF BANK LOANS Loan Amount (less cancellation) No. Year Borrower Purpose Bank Undisbursed Six loans for power development and one for industrial finance fully disbursed 139.5 - 1334 1977 Republic of Portugal Highways 24.0 6.1 1541 1978 Republic of Portugal Water Supply 40.0 30.1 1559 1978 Republic of Portugal Education I 21.0 18.9 1603 1978 Republic of Portugal Agricultural Credit 70.0 69.0 1649 1979 Quimica de Portugal E.P. Fertilizer Industry 58.0 11.7 1700 1979 Republic of Portugal Highways II 40.0 36.1 1701 1979 Republic of Portugal Small and Medium Industry 45.0 33.8 1793 1980 Republic of Portugal Education II 40.0 39.9 1853 1980 Republic of Portugal Forestry 50.0 41.3 1874 1980 COMETNA a/ Mechanical Industry 33.4 27.7 1875 1980 SOREFAME a! Mechanical Industry 9.6 3.6 1942 1981 Second Banco de Fomento Development Nacional Finance 100.0 90.6 2024 1981 PETROGAL Petroleum Exploration 20.0 17.3 TOTAL 690.5 b/ 426.1 b/ of which has been repaid 72.9 TOTAL now outstanding 618.6 Amount sold 2.6 of which has been repaid 2.5 0.1 TOTAL now held by Bank c/ 618.5 TOTAL undisbursed 426.1 B. STATEMENT OF IFC INVESTMENTS Year Obligor Type of Business Loan Equity Total 1981 SPI Sociedade Portuguesa Development Finance 10.0 1.5 11.5 de Investimentos Company a/ Loans to two companies under the same project. b/ Excludes $4 million of 1432-PO for BFN I and $1 million of 1875-PO for SOREFAME, which were cancelled, as well as the $30 million Energy Conser- vation and Diversification and the $51 million Tras-os-Montes Rural De- velopment projects which were approved by the Executive Directors in June 1982 but not yet signed. c/ Prior to exchange adjustment. - 27 - ANNEX II Page 2 of 5 C. PROJECTS IN EXECUTION 1/ Loan No. 1334 - Highways I Project; $24.0 Million Loan of March 3, 1977; Effectiveness Date: July 8, 1977; Revised Closing Date: September 30, 1983. Despite start-up delays in procuring equipment, appointing consul- tants, and preparing subprojects, all aspects of the project are now pro- gressing satisfactorily. The road rehabilitation components and the pro- curement of equipment are expected to be completed by June 30, 1983. The national transport plan and the highway master plan are substantially com- pleted. The first engineers have completed their overseas post-graduate training. The closing date was revised for the second time to September 30, 1983. Loan 1541 - Lisbon Region Water Supply Project; $40.0 Million Loan of June 6, 1978; Effectiveness Date; January 19, 1979; Closing Date: June 30, 1983. The main physical component of the project, a 90 km transmission pipeline, is progressing although with considerable delays, as is work on the related pumping stations which is also behind schedule. A feasibility study of water supply and sewerage in the Porto Region has been completed. Steps have been taken to clear up the municipal arrears and some improvement has been made. A new Board for EPAL was appointed in January 1982, which has made major improvements in EPAL's financial management. Tariffs were increased in March 1982 by about 45 percent on average. The investment pro- gram was tailored to concentrate on the project works. Due to delays in contracting, a two year extension of the closing date is likely to be requested. Loan 1559 - Education Project; $21.0 Million Loan of June 6, 1978; Effectiveness Date; September 6, 1978; Revised Closing Date: December 31, 1982. Architectural designs for all project institutions, including management training centers, are now underway; construction of the voca- tional training centers has been completed and the centers are operational. 1/ These notes are designed to inform the Executive Directors regarding the porgress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 28 - ANNEX II Page 3 of 5 Equipment procurement lists have been approved and most draft contracts negotiated, but all are not yet signed. Technical assistance is being recruited on schedule; studies have been substantially completed. The clos- ing date has already been extended by one year to December 31, 1982 and if implementation continues to progress satisfactorily, a further extension will be considered. Loan 1603 - Agricultural and Fisheries Credit Project; $70.0 Million Loan of September 28, 1978; Effectiveness Date: April 30, 1980; Closing Date: June 30, 1984. Progress in implementation of the agricultural credit component remains slow. Excess liquidities in the banking system have so far sharply limited recourse to IFADAP refinancing. The Government is preparing a pro- posal for restructuring the project, to streamline the credit approval system, expand the project area, adjust the interest rate structure to esta- blish a constant interest rate over the life of the subloans and increase short term rates above medium- and long-term rates, and eliminate other credit facilities from the area which offer different terms. It is likely that a large portion of the loan could not be utilized by the current closing date, and may be cancelled. Loan 1649 - Fertilizer Modernization Project; $58.0 Million Loan of March 14, 1979; Effectiveness Date: June 1, 1979; Closing Date: June 30, 1983. Physical project implementation is progressing satisfactorily, about three months behind schedule, with the urea plant already commissioned and the Alverga nitric acid plant undergoing start-up tests. Procurement of Bank-financed equipment is completed and the corresponding loan funds are fully committed. The fertilizer study has been completed. Although the fer- tilizer operations show some profit, Quimigal continues to experience finan- cial problems, especially in non-fertilizer operations, and its position is under review by the Bank. Loan 1700 - Second Highway Project; $40 Million Loan of July 27, 1979; Effectiveness Date: November 13, 1979; Closing Date: June 30, 1984. After a slow start, progress on rehabilitation works is now pro- gressing. Twenty-eight of the 60 road sections to be rehabilitated are under construction. Training programs are under preparation. Budgetary con- straints have delayed project implementation, which is now nearly two years behind schedule. The Government is taking measures to relieve the budgetary constraints. - 29 - ANNEX II Page 4 of 5 Loan 1701 - Small- and Medium-Scale Industry Development Project; $45 Million Loan of June 27, 1979, Effectiyeness Date. August 29, 1980; Closing, Date: December31, 1983. A substantial amount of the SMI credit line has been committed. Participating banks have shown renewed interest in the credit line, due mainly to the Central Bank taking steps to facilitate its use. A revision in the rental policy of the Public Enterprise for Industrial Estates (EPPI) has been made to ensure better returns on investment; however, EPPI is experienc- ing delays in budget support and construction works; the Government is likely to reallocate funds from EPPI to the SMI credit line. The technology study and procurement on other technology items are progressing well. The textile study has been completed, but the Government has decided to abandon the export promotion study. An extension of the closing date is likely to be requested. Loain 1793 - Second Education P~roject;_ $410 Mil~lion Loan of Apryil1, 1980_; Effectiveness Date: July 10, 1980; Closing Date. December 31, 1984. The Project Coordination Group has been established, and equipment procurement is progressing well. Inter-ministerial working committees are working well which should improve implementation of the civil works components. Curricula and syllabi are either completed or under development. Implementation of the technical assistance program is on schedule. Loan 1853 - Forestry Project; $50 Million Loan of October 2, 1980; Effective- neiss Date: March 2_ 1981_ Closing Date: September 30, 1986. The Project Coordination Unit has been established and is working effectively. Satisfactory progress is being made on the acquisition of land and the afforestation program. Equipment for the 1981-1983 afforestation seasons has been procured and delivered. Despite initial delays, the techni- cal assistance program is now going well. The Agricultural and Fisheries Credit Fund (IFADAP) is gearing up to process subloans to cooperatives and/or associations of private forest owners soon. Extension workers are still needed for the forest extension service so that specific investment projects can be prepared. Loans 1874 and 1875 - Mechanical Industries Project; $33.4 Million Loan to ,COMETNA and $9.6 Million Loan to SOREFAME of October 2, 1980; Effectiveness date: December 29, 1980; Closing Date; December 31, 1983. Physical implementation of the COMETNA project is progressing well after a six-month delay due mainly to a change in site location. Site pre- paration is now nearly complete; contracts have been awarded for civil works, - 30 - ANNEX II Page 5 of 5 and buildings and procurement are progressing well. Mechanical completion is expected by August 1983. Physical implementation of the SOREFAME project is progresing well and should be mechanically completed by the end of 1982; all equipment packages have been procured and the management study has been com- pleted. Due to lower than expected equipment prices and favorable exchange rates, project costs were lower than expected; at SOREFAME's request, $1 mil- lion of the Bank loan has been cancelled. The engineering industries sub- sector study has been delayed and should be completed by early 1983. Techni- cal assistance components are proceeding. Loan 1942 - Second Banco de Fomento Nacional Project; $100 Million Loan of March 27, 1981; Effectiveness Date: June 16, 1981; Closing Date: June 30, 1985. Appraisal of subprojects and commitments are underway; however, BFN's portfolio and arrears position remain a problem and are deteriorating. The export promotion plan is underway, but the targets may be jeopardized because of the unfavorable global economic climate. An in-depth view of BFN's operations is scheduled for October 1982. Loan 2024 - Petroleum Exploration Project; $20 Million Loan of September 2, 1981; Effectiveness Date: March 1, 1982; Closing Date: June 30, 1983. Project implementation is progressing satisfactorily. Data acqui- sition for the two seismic surveys is complete and the surveys should be com- pleted by October 1982. Drilling of the first well has commenced; the loca- tion of the second well has been agreed and that of the third exploratory well should be agreed by November 1982. The first phase of the geochemical study has been completed and the heavy oil study is expected to be completed by the end of October 1982. Consumer prices for petroleum products have been adjusted regularly; the ex-refinery prices have also recently been adjusted to reflect some of the financial costs incurred in importing crude oil. PETROGAL's financial situation is becoming very serious; Petrogal lost money in 1982 and the Supply Fund arrears, which built up in 1982 due to the sub- sidy policy of the Government for diesel and fuel oil, have not been paid. - 31 - ANNEX III Page 1 of 2 PORTUGAL SEVENTH POWER PROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken by the country to prepare About two years the project: (b) Agency which prepared the project: Electricidade de Portugal (EDP) (c) Date of first presentation to the Bank, November 1980 and date of first Bank mission to con- and sider the project: October 1981 (d) Date of departure of appraisal mission; July 1982 (e) Date of negotiations: December 15-16, 1982 (f) Planned date of effectiveness: April, 1983 Section II: Special Bank Implementation Actions The Bank would review and approve annual construction and financing plans (para. 47). Section III: Special Conditions 1. Undertakings of the Government are; (a) The Government to take all measures necessary to enable EDP to achieve the internal cash generation targets of 10 percent in 1983, 20 percent in 1984, 25 percent in 1985, and 30 percent in 1986 (para. 44); (b) The Government to take all actions necessary to enable EDP, after December 31, 1985, to manage its accounts receivable from munici- palities so that at no time they exceed the equivalent of three months' sales (para. 46); and - 32 - ANNEX III Page 2 of 2 (c) The Government to provide, or cause to be provided, adequate funds for project execution or else cause EDP to scale down its invest- ment program, in agreement with the Bank, to the level that can be financed (para. 47). 2. Undertakings of EDP are: (a) EDP to achieve internal cash generation targets of 10 percent in 1983, 20 percent in 1984, 25 percent in 1985, and 30 percent in 1986 (para. 44); (b) EDP not to incur any long-term debt, except as agreed by the Bank, if its long-term debt, including the debt to be incurred, would exceed 1.5 times its equity capital (para. 45); (c) EDP to provide by end-November of each year, commencing Novem- ber 30, 1983, its annual construction and financing plans for the forthcoming year (para. 47); (d) EDP to provide an interim report satisfactory to the Bank, on the implementation of the annual financing plans by July 31 of each year (para. 47); (e) The interim report would include a listing of borrowings undertaken, and to be undertaken, the Government's explicit commitment for its annual contribution, and adjustments if needed to the construction program (para. 47); and (f) EDP to arrange by May 31, 1983, for an independent panel of engineering experts, acceptable to the Bank, to review the design of the dams at Alto Lindoso and Torrao and conduct periodic reviews during their construction (para. 53). 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