FILE COPY BE ~~CIRCULATiNG COPYFILE COPY k^ulovlTm BE RETURNED TO REPORTS DESK

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Not For Public Use

Report No. P-1426-CR

REPORT AND RECOMMIENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

INSTITUTO COSTARRICENSE DE ELECTRICIDAD

WITH THE GUARANTEE OF

THE REPUBLIC OF COSTA RICA

FOR A

FOURTH TELECOMMUNICATIONS PROJECT

May 28, 1974

This report was prepared for official use only by the Bank Group. It may not be published, quotedor cited without Bank Group authorization. The Bank Group does not accept responsibility for theaccuracy or completeness of the report.

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CURRENCY AND EQUIVALENTS

Exchange Rate:US$1 = 8.60 colones (¢)¢1 = Us$0.1201,000 = US$11601 million = US$116,279

UNITS AND EQIUIVALENTS

1 kilometer (km) = 0.621 statute mile1 square kilometer (km2) = 0.39 square mile

ACRONYMS AND ABBREVIATIONS

CABEI - Central American Bank for Economic IntegrationCACM - Central Pmerican Common MarketCOMTELCA - Regional Technical Commission on Telecommunications in C. A.DEL - Direct Exchange Li- ".GENTEX - Public Automatic Telegraph ServiceICE - Instituto Costarrice!nse de ElectricidadIDB - Inter-American Development BankITU - International Telecommunications UnionMW - Megawatt = 1,000 kilowattsNES - National Electric SystemNTS - National Telecommunications SystemRACSA - Radiografica Costarricense S. A.SNE - Servicio Nacional de ElectricidadUHF - Ultra High FrequencyVFT - Voice Frequency TelegraphyVHF - Very High Frequency

Fiscal Year Ends December 31

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS CN A

PROPOSED LOAN TO INSTITUTO COSTARRICENSE DE ELECTRICIDADFOR A FOURTH TELECOMMUNICATIONS PROJECT

WITH THE GUARANTEE OF THE REPUBLIC OF COSTA RICA

1. I submit the following report and recommendation on a proposedloan to Instituto Costarricense de Electricidad (ICE), with the guaranteeof the Republic of Costa Rica, for the eouivalent of US$23.5 million to helpfinance a project for telecommunications. The loan would have a term of20 years, including 4 years of grace, with interest at 7V percent per annum.

PART I - THE ECONOMY

2. A report entitled "Economic Report of Costa Rica" (No. 360-CR)was distributed to the Executive Directors on March 15, 1974(R74-lOO). Annex Isummarizes the main economic and social indicators.

3. Costa Rica is a rare example among developing countries. Highper capita income growth has been achieved, while development benefits havenot concentrated in the upper strata of the population. A high level ofinvestment and booming banana and manufacturing exports allowed real outputto grow at over 6 percent yearly during the 1960's, while family planningefforts and rising educational and income levels contributed to a sharp de-cline in the population growth rate. Consequently, real per capita GNP grewby 35 percent during the decade to $590 in 1971.

4. Public sector policies have in the long run had a counter-cyclicaleffect on economic activity. Exports, which account for over one-fourth ofGDP and are still concentrated in a few agricultural products depending onfluctuating weather and world market conditions, are the main motor of privatesector activity. In periods of export shortfalls (such as 1971), expansionaryfiscal policies prevented a more drastic fall in output and employment. How-ever, in a very open economy, which does not restrict trade or capital move-ments, expansionary policies result in excessive demand pressures and lead toheavy import increases.

5. In 1972 a major tax reform, combined with a lower growth ofgovernment current expenditures,resulted in improved public sectorsavings. The public investment effort, which grew by over 50 percent in1971, expanded by another 35 percent in 1972, but higher savings permitteda modest reduction in the need for deficit financing. At the same timegrowth of credit to the private sector was reduced markedly from 1971levels. Buoyant exports in combination with a reduction in import growth

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(resulting from the less expansionary financial policies and gradual de-valuation of the exchange rate) resulted in a reduction in the resourcegap. During 1973 the export boom continued and private capital inflowsrose rapidly. Thus,the foreign resource gap continued to decrease andimpor't payment arrears, which had accumulated during 1971-72, were rapidlyeliminated. However, inflation increased steeply from an annual averageof only 5 percent in the 1966-71 period to over 16 percent in 1973. Partof the explanation for the change in internal price trends has been therecent rise in import prices, due to inflation abroad and the currencyrealignments. Nonetheless, monetary expansion must bear part of the re-sponsibility.

6. A 1974-78 National Development Plan, now being prepared, will havethe following major objectives: (a) an explicit employment policy; (b) aneven better income distribution; (c) further diversification of productionand exports; (d) improvement in the efficiency of the public sector; and (e)higher savings and investment levels. The Plan's emphasis on policies af-fecting employment is justified since the successful absorption of a rapidlygrowing labor force during the 1960's may decrease in the future unless ap-propriate measures are taken. Although Costa Rica's income distribution pro-file compares favorably with other Latin American countries, the Governmentis aware that the relative position of the poorest 20 percent of the populationhas improved little in recent decades and that urban-rural disparities remainlarge. During the 1960Qs considerable income redistribution appears to havetaken place from the top 5 percent group to the middle classes. In recentyears, much is being done to improve education and other social services inthe rural areas, and agricultural policy is being redesigned to emphasizeassistance to the small farmer. However, more could be done to improve land-holding patterns and reduce rural income disparities through a more vigorousland and income taxation policy.

7. Agriculture will remain the main sector in the economy. During thesixties Government policies emphasized the diversification of exports; coffee de-clined in relative importance while bananas and beef production alone accountedfor well over half of the increase in agricultural output. Future Governmentpolicies in the sector will be directed at achieving a better balance between thedevelopment of new export lines and improving the productivity of small farmers.

8. Industry expanded rapidly during the sixties mainly owing to thecreation of the CACM, generous fiscal incentives and the favorable economicconditions created by the boom of agricultural exports. In the short runprospects of industry will mainly depend on the growth of exports to CACMpartners exploiting the regional import substitution possibilities that stillremain. Over the longer run, industrial policy will have to promote indus-tries oriented to markets outside the CACM. During 1972-73 various measureshave been taken to achieve these objectives. The Government recently approvedan export promotion scheme granting fiscal incentives to non-traditional exportsmarketed outside the CACM and created an Industrial Development Corporation topromote and arrange financing for new industrial projects. At a regional leveland in an effort to revitalize the CACM, the Common Market Secretariat (SIECA)recently proposed major changes in the Common Market structure, which are now

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being reviewed by the five Governments. This revitalization of CACM,however, will depend partly upon the renewed full participation of Honduras,a step which in turn depends upon a political settlement between Honduras andEl Salvador. The most promising industrial export prospect in the long runis aluminum metal. A project now in preparation involves an aluminum producingcomplex with a yearly output of 250-300,000 tons, an 800 MW hydropower plant,and related infrastructure at a total cost of over US$700 million. Preliminaryschedules call for construction to start in 1975 and production in 1980.

9. The achievement of Costa Rica's development goals will be dependentupon the Costa Rican Government's ability to tackle the internal inflationproblem and increase the country's capacity to import. In the near futureinflationary pressures will continue to be strong. Import prices are expectedto grow rapidly mainly due to the recent sharp increase in petroleum pricesand higher rates of inflation in industrial countries. At the same timedomestic cost push inflation will rise due to the inevitable wage increaseswhich will probably, to a large extent, be passed on to prices. Prices ofbasic foodstuffs, which rose rapidly in 1971-73 because of a serious drought,might have stabilized in 1974 as supply recovered, but sharply increased ferti-.lizer costs may neutralize this effect. In the above scenario, Governmentfinancial policies will need to concentrate on limiting aggregate demand toreduce demand pull inflationary pressures and maintain a viable balance-of-payments position, while at the same time stimulating productive investmentto accelerate output growth. The growth of import volume will have to be lowerthan in the past, when imports grew substantially faster than output; thi3 willrequire a major effort to limit import demand. To allow for a sustained in-vestment performance, policies will need to concentrate on reducing the import;intensity of consumption and industrial production. Besides redesigning fiscalincentives to industry, a major ingredient to achieve this target will be themaintenance of a realistic exchange rate. In the last week of March, CostaRica devalued the colon by eliminating the dual exchange rate that had pre-vailed since 1971, and fixing the new dollar parity at ¢8.60. At the same time,effective April 15, 1974, the main Central American banana producers (CostaRica, Honduras, Nicaragua and Panama) imposed a $0.025 per pound export tax.Although it has not yet been clearly determined what impact this will haveon banana export volume, the resulting increased foreign exchange earningsin the short run will at least offset the additional cost of Costa Rica's pet-roleum imports (estimated at US$25 million in 1974).

10. Public direct investment, which increased from 3.9 percent of GUP in1960-62 to 7.6 percent in 1972, is projected to remain at over 7 percent of GIPthroughout the decade. The overall structure of public direct investment isnot expected to change markedly from that of previous years: 50-60 percentto physical infrastructure and 25-30 percent to the social sectors. ThePlan, however, expects to give more support to agriculture through directinfrastructure investment and increased credit lines.

11. To finance a high level of investment Costa Rica will have toachieve a marginal savings rate of 21-24 percent in 1973-60. While this isnot much above the already high average savings rate (lb percent of GDP in1971-72), it will present a major challenge in view of the slower growth ofexports projected for the decade. The key problem is public savings. The

economic report projected that unless appropriate measures were implemented,

public savings could be expected to fall to about one percent of GDP iLn 1978.

The recent large banana export tax mentioned above, and a 40 percent increase

in power tariffs implemented in April 1974 should improve markedly public

sector finances during the next twc years. Later in the decade, however,

additional tax and tariff measures will have to be implemented. At the same

time a concerted effort to control expenditure growth through improved budg-

etary practices and better public sector planning will be required.

12. The economic report projects that to finance the current account

balance-of-payments deficit would require that gross disbursements on medium-

and lonig-term loans to the public sector increase from $220 million in 1967-72

to around $460 million in 1973-78. The projected increase in the level of

long-term borrowing reflects the real growth of the economy, a rise in the

share of public investment in GDP, an increased reliance on long-term instead

of short-term borrowing to finance the current account deficit, as well as

some inflation. Expressed as a share of exports, however, the current account

deficit is projected to gradually decline and gross disbursements to remain

unchanged during the 1970's. If around three-quarters of new foreign loan

commitments are obtained at terms similar to those of the international

agencies, the debt service ratio will not rise above the present 10-11 percent.

During the 198 0's the projections show a further decrease ii the current

account deficit expressed as a share of both exports and GDP, and a similar

level of the debt service ratio as in the 1970's.

13. Apart from the Bank, external financing is provided principally by

USAID, the Inter-American Development Bank (IDB) and the Central American Bank

for Economic Integration (CABEI). USAID has been active mainly in agri-

culture, road maintenance and construction and health. IDB has been financing

mainly agricultural and industrial credit, water supply, housing, feeder

roads, rural electrification and vocational and agricultural education.

CABEI is active in financing projects which have a regional impact, princi-

pally in transport, industry and telecommunications. The past lending of

these agencies is summarized below (net of cancellations):

IBRD IDA AID IDB CABEI

Lending 1950-65 4t. 4.6 33.8 34.6 4-5

Lending 1966-73 77.8 - 40.8 54-9 53.7

Transport 17.1 _ 7.1 29.4

Power and Telecommunications 42.5 - - 3.8 4.8

Education 6.2 - - 4.9 -

Health - - 1.6 6.3 -

Housing - - - - 5.2

Agriculture 12.0 - 21.4 8.9 0.9

Industry - - 5.0 5.2 12.5

Others - - L 2.3 0-9

Total 125.5 4.6 84.6 89.5 58.2

(of which repayable inlocal currency) ( - ) ( - ) ( - ) (41.2) (n.aI.)

Includes 13.3 million disbursed in local currency.

PART II - BANK GROUP OPERATIONS

14. Costa Rica has to date received sixteen Bank loans and one IDAcredit, totalling US$130.0 million, net of cancellations. The last opera-tion, a loan for an education project, amounting to US$6.2 million, wassigned on June 25, 1973. Annex II contains a summary statement of Bankloans, IDA credits and IFC investments, as of April 30, 1974, and noteson the execution of ongoing projects.

15. Bank lending accounts at present for about 28.0 percent of thetotal public and publicly guaranteed debt and about 20.5 percent of thetotal debt service. By 1980, based on projections in the economic report,the Bank group share of the total public debt and public debt servicewill increase to 32.0 percent and 24.7 percent respectively.

16. In the past, Bank operations in Costa Rica have given emphasisprimarily to the development of infrastructure -- power, telecommunicationsand highways, which so far have received about 75 percent of total Bank lending.Daring the last few years the Bank has begun increasing its assistance toagriculture and has made a first loan for education. The Bank's current five-year plan is designed to respond to the Costa Rican development strategy inseveral different ways. Through proposed loans in agriculture and rural de-velopment and components of projects in education, power and telecommunications,we would help strengthen the Government's efforts to raise the productivityand empoyent capacity of the farming sector and to help reduce the incomeand welfare disparities between urban and rural areas. In our activities inthe rural sector, we will seek to coordinate closely with IDB and USAID notonly with a view of improving the effectiveness of lending by major externalagencies at the national level, but also to help assure that Government pro-grams are developed in a manner consistent with Central American priorities.In pursuit of these objectives in all five Central American countries, a jointIBRD, IDB and USAID agricultural and rural sector review has been organizedin cooperation with each of the Governments, and the first field survey (toHonduras) has recently been completed.

17. Given the vulnerability of Costa Rica's balance-of-payments, asecond major objective of our lending would be to assist in the Government'sprogram for increasing and diversifying exports of both farming and industrialorigin. Besides continued Bank assistance for development of the country'spower, telecommunications and transport systems, this approach will involvefurther emphasis in the selection of projects for financing on export-ori4nted agriculture and agroindustries. In addition, in order to helpexpand its exports, particularly those in which the products will have

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a substantial component of local value added, the bank is considering the

possibility of assisting in the financing of, and in mobilizing additional ex-

ternal resources for, a large hydro-electric project which is designed to

supply the power requirements of a proposed major aluminum complex. A third

major thrust of the Bank lending plan, exemplified by proposed lending in

power, telecommunications and education is to assist in Government efforts

to improve the efficiency and savings capacity of public sector infrastructure.

Aside from the telecommunications project now before you, the project whose

preparation is most advanced is an agricultural credit project which will provide

financing for livestock, crops and agroindustries as in two previous projects

of a similar nature, but which will also contain a substantial component for small

farmers. This project is planned to be presented to the Executive Directors in the

second half of 1974.

18. IFC has made an investment in Costa Rica ($0.6 million in 1966 to

Productos de Concreto, S.A.) which has been fully repaid. At present, IFC is

exploring the possibility of participating in the financing of the proposed

large-scale aluminum project.

PART III - TELECOMMUNICATIONS IN COSTA RICA

Development of the System

19. The major part of the telecommunications system in Costa Rica --

the local and long-distance telephone service -- is the responsibility of the

Instituto Costarricense de Electricidad (ICE). With the assistance of the

first of a series of Bank loans for telecommunications, ICE in 1966 installed

Costa Rica's first automatic exchange. Since that time ICE has expanded

its network to include 65,000 installed lines in all principal cities of the

country. At the end of 1973, Costa Rica had 2.16 telephones per 100 popu-

lation, the highest density in Central America, but demand continues to grow

rapidly. The most recent Bank loan (bOl-CR) signed in February 1972 provides

financing for a further expansi-on of the network (principally additional exchange

lines, expansion of trunk network capacity, extension of the system to rural areas

and training). The development of the National Telecommunications System (NTS)

and the Bank role in its financing, are illustrated in the following table:

Expansion Total Cost Bank Lending

Program ($ mil.) ($ milu) No. of lines

Stage I(1,066-70) 16.5 9.5 34,200

Stage II(1970-73) 12.5 6.5 30,100

Stage III(1972-76) 32.2 17.5 39,050

61.2 33.5 103,350

7-

20. One of the notable characteristics of the telecommunications sectorin Costa Rica has been a concentration of the facilities around the metro-politan area of the capital. The Stage III expansion seeks to offset this

by the extension of telephone services to about 600 smaller towns and villagesand the next stage expansion, to be supported by the proposed loan, will bemarked by further efforts in this direction. It has been recognized that oneof the most difficult problems related to the economic development of ruralareas is their isolation; it is expected that the expansion of the tele-communications system country-wide will help the rural econonm in realizingsubstantial benefits, by making possible better marketing of rural produceand more efficient distribution of rural inputs, as well as increasing theaccessibility and quality of social services.

21. Another recent development in the telecommunications sector is thetrend towards consolidation. In addition to the local and long-distanceservice, ICE now operates the Costa Rican section of the Central AmericanRegional Micro-wave Network (COMTELCA) and is also scheduled to start operatingthe National Telex/Gentex service this year. The Ministry of Interior presentlyoperates the Public Telegraph Service, but ICE will assume responsibilityfor this service Dy 1975. ICE has a 50 percent interest in the InternationalService and will take over the remaining 50 percent by 1977. With theseacquisitions ICE will control and manage virtually the entire telecommunica-tions sector in Costa Rica. In addition, by the end of the decade ICE isplanning to offer such services as data transmission, broadcast transmissionand ship-to-shore communication.

Regulatory Authority

22. The jurisdiction over ICE's telecommunications tariffs, technicalstandards and finances belongs to the Servicio Nacional de Electricidad (SNE),which is the principal regulatory authority for Costa Rican public utilities.SNE's decisions regarding tariff matters, however, are subject to reviewby the Government. The tariffs for telecommunications services provided byICE have not changed since 1966 and are at present comparable to those inother countries in the region. While the existing tariff level has beenadequate to support ICE's telecommunications expansion program up to now, atariff increase would be necessary to permit implementation of the expansionprogram through 1977.

Progress of Stage III Project

23. Implementation of the ongoing Stage III project (Loan 801-CR) isprogressing satisfactorily. Commitment of funds is running close to theoriginal timetable and some works are proceeding ahead of schedule. Dis-bursement of funds is somewhat behind schedule as a result mainly of (i)the need to revise a portion of the program to provide for additionalcapacity in the main trunk systems, a modification made necessary by an un-anticipated acceleration in the rate of traffic growth, and (ii) extended de-livery time for some equipment. The period of execution of the Stage IIIworks will partially overlap with the next stage (Stage IVA - 1974-77) ofexpansion of ICE's telecommunications section. Starting with Stage III, thedevelopment of NTS in fact has been based on a series of shorter-term rollingplans, which are best suited to the conditions of rapid growth of demand forservices and frequent new developments in the field of telecommunications.

PART IV - THE PROJECT

24. A report entitled "Appraisal of Fourth Telecommunications Projectof Instituto Costarricense de Electricidad (ICE) - Costa Rican (No. 417-CR ,dated May 21, 1974 ) is being distributed separately. The main features ofthe loan are summarized in Annex III. Following the review of the Stage IVfeasibility study with ICE in the fall of 1973, the project was appraised inNovember/December 1973. Negotiations were held in Washington from May

6 to lO, 1974. The ICE delegation was led by Ing. A. Murray, Vice-President of the Board of Directors; the Government was represented by theAmbassador to Washington, Lic. M.A. Lopez; SNE was represented by Dr. R.Vargas, Vice-Director.

Project Entity

25. ICE was established in 1949 as an autonomous agency of the Govern-ment to plan and carry out a coordinated program of electrification of thecountry. In 1963 it began exercising the additional responsibility of pro-viding telecommunications services in Costa Rica. Except for being obligedto pay for the operating costs of the regulatory agency (SNE), ICE is exemptfrom all taxes and is authorized to carry out its activities completely inde-pendently of the Government, except for the approval of tariffs and bondissues. ICE has a seven-member Board of Directors, one of whom is a memberof the Government. The other six non-Government members are also appointedby the Government for eight-year staggered terms. The general manager,appointed by the Board, is responsible for all managerial and admini-strative functions. The general manager is assisted by three deputymanagers (for power, telecommunications, and finance and administration).The existing managerial structure reflects the organizational changes whichICE has introduced in connection with the implementation of ongoing ThirdTelecommunications (Loan 801-CR) and Fourth Power (Loan 800-CR) projectsand which are designed to provide a decentralized organizational frameworkcompatible with substantial expansion of both the power and the telecommuni-cations sections of ICE. Unless the Bank otherwise agrees, ICE willmaintain the existing organizational separation of its telecommunicationsand power sections, including the separation of accounts as stipulatedin the Loan Agreement for Loan 801-CR. (Section 5.01 of the Loan Agreement.)

26. ICE's telecommunications section presently has 1,222 full-timeemployees, which corresponds to 18.7 employees per 1,000 telephones. Thisis considered a favorable ratio for a developing country, especially in viewof the fact that this section does much of its own installation work. Thestaff is judged to be well-trained and capable of good maintenance work.

27. ICE's other section -- Power -- has so far received four Bank loans(totalling about $38 million), and another loan for power has been requestedby ICE for FY75. In general, the development of ICE's power sectiou has beensatisfactory. Recently ICE experienced substantial delays and cost overrunsbecause of severe geological problems encountered in constructing a tunnel fora hydro-electric project, financing of which was assisted by the Bank (631-CR).The tunnel is now completed and the hydro plant will enter into operation bymid-1974.

Description of the Project

28. The proposed project ("Stage IVA") represents the first half(1974-1977) of ICE's 1974-80 Stage IV expansion plan and consists primarilyof: (i) expansion of the telephone network capacity by 56,300 exchangelines; (ii) expansion of the long-distance network capacity by 2,500 'trunkcircuits and expansion of the switching capacity by 3,200 circuits; (iii)expansion of the rural telephone system to serve 90 additional rural commu-nities; (iv) extension of the telex/gentex service outside the capital city;and (v) expansion of ICE's training program to provide about 12,500 man-weeksof training per year by 1977.

29. The primary purpose of the proposed expansion of ICE is: (i) toprevent congestion of the NTS by expanding the capacity of the local and long-distance network to handle existing demand; (ii) to help meet the demand fornew telecommunications services by providing additional facilities; (iii)to further extend telecommunications services to smaller communities andrural areas, a process begun under the Stage III project; and(iv)to maintain animequate level of investment in the training of technical and administrativeperscnnel which has so far proven to be one of the most important contributingfactors to the successful development of ICE's communications services.

Cost Estimates and Financing

30. The total cost of the project is estimated at US$50.8 millionequivalent, with a US$30.8 million (61 percent) foreign exchange component.The proposed Bank loan of US$23.5 million would cover 76 percent of foreignexchange costs or 46 percent of total costs. For the financing of the US$7.3million balance of the projectts foreign costs, ICE has obtained a commit-ment from CABEI for US$2.3 million (repayable in 15 years, including one yearof grace, at 8 percent interest), and is also negotiating loans from suppliersfor US$5.0 million (with average terms of about 6 years at 10 percent interest).All of the project's US$20.0 million equivalent local costs (39 percent oftotal costs) would be financed by ICE from internally generated cash.

Financial Position and Future Earnings of National Telecommunications System

31. The present financial situation of ICE's NTS is satisfactory. From1968 to 1973 it maintained a rate of return between 14 and 18 percent.During the same period NTS' revenues and operating income both increased bymore than 200 percent, while its net assets doubled. As a result of capi-talization of its earnings, its debt equity ratio improved from about

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72/78 in 1971 to 70/30 in 1973 and is expected to be about 63/37 by 1977.

During 1974-77 the current ratio will be at least 1.4:1. The Bank has so

far been NTS' principal creditor, holding by the end of 1972 about 70 percent

of NTS' long-term debt (61 percent of ICE's total long-term debt). EBy the

late '70's the Bank share of NT-S' long-term debt is expected to decline,

since it will be increasingly able to use other sources of long-term financing.

32. Since NTS rate base is presently considered inadequately valued,

particularly since the recent exchange rate unification, agreement has

been reached that by October 1, 1974 NTS assets will be revalued on the

basis of a method acceptable to the Bank. (Section 5.07 of the Loan Agree-

ment.)

33. In order to assure the viability of the above financial plan (para. 30).

ICE and the Government intend to raise NTS tariffs by at least 50 percent by

January 1, 1975. With this increase, ICE should be able to finance about 40 per-

cent of its 1974-77 telecommunications expansion program, secure necessary addi-

tions to working capital and maintain at least a 12 percent return on revaluted NTS

".ets. (SectioD '.05 of the Loan Agreement.) The above-mentioned rate ot return

has been agreed as the minimum rate of return for ICE's telecommunications section

and will be the same as agreed under the Loan Agreement for Loan 501-CR.

34. During project implementation the annual debt service coverage of

ICE's telecommunications section is expected to vary from 1.7 to 2.9. Loan

801-CR required that ICE obtain Bank approval for any long-term borrowing pro-

posed at a time when net revenues of the telecommunications section are less

than 1.5 times maximum long-term debt service requirements of that section

for any succeeding fiscal year. The same condition will be maintained in the

proposed loan agreement. (Section 5.04(a) of the Loan Agreement.) The loan

agreement for Loan 801-CR also required that the amount of ICE bonds redeemable

after 30 days' notice would not exceed 30 percent of the total amount of out-

standing ICE bonds. This covenant is repeated in the proposed loan agreement.

(Section 5.04(b) of the Loan Agreement.)

Financial Position and Future Earnings of National Electric System (NES)

35. Despite high rates of return (11-12 percent vs. the 9 percent re-

quired as a minimum by the loan agreements with the Bank) NES has had severe

cash difficulties in the past four years mainly because of cost overruns on

the Bank-financed Third Power Project. Medium-term financing has been used

to cover cost overruns, which had a heavy impact on the section's debt service

requirements. In March 1974 a 40 percent increase in power tariffs was

approved by the Government. This increase, plus a further expected increase of

at least 20 percent to compensate for exchange rate unification, should allow

NES to maintain a rate of return in excess of 9 percent (on properly valued

assets) and finance about 25 percent of its 1974-1978 expansion with inter-

nally generated cash. The annual debt service coverage would improve from

0.9 in 1974 to 2.1 in 1978. The debt/equity ratio would vary between 55/45

and 63/37 and its current ratio would remain above 1.8:1. At the end of 1972,

the Bank held about 57 percent of NES' long-term debt.

Special Assurahces

36. As in the case of previous loans, ICE has agreed to have its accounts

verified by independent auditors acceptable to the Bank. (Section 5.02 of

the Loan Agreement.)

37. In the past it has been noted that the amount of capitalized overhead

of ICE's administrative section has represented an arbitrary fixed percentage of

construction expenditures rather than the actual amount of administrative expen-

ditures devoted to construction. This may have led to misstatements of earnings.

To prevent this possibility in the future, ICE has agreed to retain an indDprn-dent public accounting or management consulting firm acceptable to the Bank toreview its pro cedures for distributing institutional costs and to implement the

recommended procedires after discussions with the Bank. (Section 4.02 of the

Loan Agreement.)

38. Previous Bank loans, in common with loans obtained from othersources, have been secured by mortgages on power and telecommunicationsproperties of ICE. The proposed loan would also be secured by new mortgages

or extension of the existing ones. ICE, however, is in the process of attemDt-ing to obtain a release of all liens on its assets held by third parties. IfICE is successful in securing such release, the Bank would release ICE of theIfieiseexecutedor to be executed in favor of the Bank. (Article VI of the LoanAgreement.)

39. In the past it has been noted that the Government and Government-owned public institutions have owed NTS up to one year's billings. It hasbeen agreed, therefore, that the Government will bring its accounts with ICE

up to date and keep them current. ( Section 3.u4 of the Guarantee Agreement.)

Project Execution

40. The project would be carried out by ICE over a four-year periodand is expected to be completed by December 1977. ICE's telecommunicationsstaff, assisted by manufacturers' engineers in the case of larger installations,will plan, engineer and install the equipment included in the project as ithas done satisfactorily in the past telecommunications projects. TheStage IVA expansion will call for doubling of ICE telecommunications staff

by 1977. However, the number of staff per number of installed lines willremain approximately at the present level. In order to facilitate absorptionof this increase, ICE will, as a part of the Stage IVA project, substnntinlly

expand its administrative and technical training program, which will receive

technical assistance from ITU and other sources.

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Procurement

41. Procurement of all equipment and materials to be financed by the

proposed loan would be subject to international competitive bidding in

accordance with the Bank's guidelines for procurement, except for some

switching and transmission equipment (amounting to about Us$4.o million) for

extending existing installations where direct compatibility is essential;

this equipment would be purchased directly from three suppliers with whom

the original contracts were placed as a result of international competitive

bidding under previous Bank loans. (Part A.2 of Schedule 4 to the Loan Agree-

ment.)

42. Because of long procurement lead time, it has been agreed that

ICE might enter into commitments before approval of the proposed loan for

goods with a value of some US$6.0 million, which includes a commitment of

US$1.8 million for direct purchases mentioned above. No retroactive financing

would be required.

43. Similar to previous loans to Costa Rica, in accordance with the

Central American Agreement, suppliers from Central American Common Market

(CACM) countries would receive a margin of preference of 15 percent of the

c.i.f. price or the CACM preferential tariff (which is 50 percent of the

applicable external tariff),whichever is lower. (Part B.2 of Schedule 4 to

the Loan Agreement.)

Disbursement

44. Disbursement under the loan would be for 100-percent of foreign expen-

ditures for imported equipment, 95 percent of the ex-factory costs of contracts

awarded to Costa Rican manufacturers, and the foreign exchange costs of consul-

tants' and training experts' services. Because of the ongoing nature of Costa

Rica's telecommunication expansion, any unused loan balance could be applied,

after consultation with the Bank, to the purchase of additional goods required

for Stage IVA expansion.

Economic Justification

45. The choice of the optimum design of the project was based on

present value studies of the capital and operating costs of engineering

alternatives of the larger works in the project (assuming a 20-year period

at a 14 percent discount rate). The proposed project represents the least-

cost solution to meet NTS' needs.

46. The projected financial rate of return on the project is 21 percent.

under the assumption that the revenues attributable to the project will be

increased so as to offset the increase in project operating costs caused by

inflation. No attempt was made to estimate the economic rate of return though

there is no doubt that it would exceed the financial rate of return because

(i) the prices charged for services do not adequately measure the full benefits

to subscribers, particularly those using telecommunications for business pur-

poses; (ii) the costs include the full costs of extending services to new

areas even though the full benefits do not include those to be obtained when

- 13 -

all potential subscribers in those areas are connected. The latter isparticularly true of the 90 smaller and rural communities outside the metro-politan area of the capital, which will be included in the country's commu-nications network during the implementation of the proposed project.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

47. The draft of the Loan Agreement between Instituto Costarricense deElectricidad and the Bank; the draft of the Guarantee Agreement between theRepublic of Costa Rica and the Bank; the Report of the Committee providedfor-in Article III, Section 4 (iii) of the Articles of Agreement of the Bank,and the text of a Resolution approving the proposed loan are being distributedto the Executive Directors separately. The draft Loan Agreement and GuaranteeAgreement conform to the normal pattern of loans for telecommunications projects.

48. I am satisfied that the proposed loan would comply with theArticles of Agreement of the Bank.

PART VI - RECOMMENDATION

49. I recommend that the Executive Directors approve the proposed loan.

Robert S. McNamaraPresident

Attachments

May 28, 1974

ANNEX I

Page 1 of 5 pagesW NTPy DATA - COSTA RI8A

ARU POPULATION 51T71.8 Lion (id-1971)Per of arab land

50,900 kM2?

SOCIAL DIDICATS<IRnecerence UompariSofls

Trinidad 'u

Cos" Rica Nicaragua Tobao Guat.la1970 1a70

Off MU CAITA US$ (ATLA S SI3) 56 4h 430 6"o 360

DEtDGRAPHICCruobirth rate (per thousand" 48 33 42 20 4fCruda death rate (per thand 9 7 14 0 14Infant mortality rate (per thousnd liwe births) 74 6(J 45 4G. 92 /aLf. expectancy at birth (3earn) 63 /b 67 52 07 54

oross reproduction rate 2 314 3.3 2.0 3.1Population growth rate a 3.8 3.3 2.9 2.1 3.1

Population growth rate - urban 4.2 4.7 4.1 4.. 214C

Age atructure (percent)0-3T 47 /o 47 47 41 41.

15-64 u9 7 48 50 tj5165 and ovor 4 7 5 3 4 3

Ds ndsncy ratio A 10 1.1 1.0 /c 1.3 1.0 /c

tJrban population as peroent of total (F-sily planning, NM. of accptors cu.l'1tivI (th-8s 4t; /a

No. of usare (% of married owan) -

SNPLOYhENTToteal lbor force (thousands) 408 /b 538 u24 3b3 1,403 If

Percentage employed in agriculture 49 7 1 43 53 20 65 7?

Percentago an.mployed 6.9 7; 4.0 /d 16.0 11.0 13.5 7F

INCOME DISTRIBUTIONPercent of national income roceived by highest 5% 31 In 23 I,

Percent or natinnal income roecived by highest 20% 6G 7Ti 51 7nPercent of national inme roeived by loweat 20% l 7n 5 7WPercent of national income received by lowest 40% 14 71 15 7i

DISTRIBUTION OF LAND OK&RSH1PS owned by top .t% or owner a% owned by smal,est 10% of oweere

HEALTH AND NUTRIT_ONPopulation per physician 2,200 1,810 1,670 2, 31 4,C3GPopulation per ursing person 1,21() / 1,060 4,690 310

Populatton per hospital bed 250 430 210 420 /a

Per capita calorie supply as % of requirements / 85 /h 97 95 98 82

Per capita protein supply, total (grass par day) /6 54 71 62 63 83 51Of which, animal and pulse 3C 7 T 35 31 314 13

Death rate 1-4 years /7 * 4 8.4 /i 1.9

EDUCATION*A .d /8 primary school enrollment ratio 100 84 /k 80 95 4t; /eAdjusted Z! secondary schoul enrollmnt ratio 27 a 26 71 13 49 )ITaYear. of schooling provided, first and s_cond level l1 11 1 1. 11

Vocational enrollment as % of asc. school enrollment 15 11 /a 8 /d ll 22 /aAdult literacy rate S 84 57 90 38 7i

HOUS3INOAverage No. of persons per room (urban) 1.3 /b 2 2.2 /b 1.9 /g.m

Percent of occupied units without piped water 32 /b ., 22 71 54 /e 70Access to electricity (as % of total population) - 30-Percent of #ural populatimn connected to electricity ' 4 /i

CONSUMPTIONRadio receivers per 1000 population 66 71 55 281 115 /a

Passenger cars per 1000 population 14 21 17 66 10

Electric power consumption (kkh p.c.) 385 /b 534 287 1,166 14°5

Newsprint consumption p.c. kg per year 3.1 4.7 1.9 5.9 1.5

Notes" Figures refer either to the latest periode or to aooount of environrmental tmPaeratures, body Yighte, and

the latest years. Latest periods refer in principle to distribution by age aid *sx of nationial populations.the years 1956-60 or 1966-70; the latest years in prin- / Protein standards (requirements) for all ecuntries as estab-ciple to 1960 and 1970. limhed by USDA Economli Reaearch Service provide for a minimum/ The Per Capita GNP estimate is at market prices for allowance of 60 gram. of total protein per day, und 20 grams of

yarn other than 1960,calculated by the bane conversion animal and pulae protein, of which 10 grama mhould be animaltechnique an the 1972 World Bank Atlas. protein. These standards are sowhat lower then thoae of 75

t Averoge number of daughters per wocan of reproductive gram of total protein and 23 grams of ani protein as an

ag'. average for the world, proposed by FLO in the Third World Food

L Population growth rates are for the decades ending in Survey.1960 snd 1970. a7 Some stadies have suggested that crude death rates of children

A Rotlo of under 15 and 65 end over age brackets to age 1 through 4 may be used as a first approximation index ofthose in labor force bracket of ages 15 through 64. malnutrition.FAO reference standards represent physiological re- L8 Percentage enrolled of correaponding population of school age

quirenents for normal activity end health, taking as defined for each oountry.

/o 1'-Y ,/F 9',; /c Rati of pop,lation under 15 a-d 65 and over age brackets to those in 15-64 bracket; /d 1967;

7i; 1 olj3; 7ir 197.o; 7- 1901; /h 19o1-o3; /i 1965; /, Includes overage students; /k 1971; l Urban only; 7m U.N

e.tim.te; /n Households.

R1 April 22, 1974

Page 2 of 5 pages

ECONOMIC INDICATORS

GROSS NATIONAL PRODUCT IN 1972 ANNUAL RATE OF GROWTH (%, constant prices)

US$ Mln. 1960-b5 1965-70 1971 1972

GNP at Market Prices 1049 100.0 4.9 7.9 5.8 5.2Gross Domestic Investment 295 28.1 9.5 8.1 16.3 6.oGross National Saving 204 19.h 56 7.0 1X 1'%'Current Account Balance -91 -8.7Exports of Goods, NFS 340 32.4 7.1 13.4 4.2 15.1Imports of Goods, NFS 415 39.6 8.4 9.4 7.5 3.3

OUTPUT, EMPLOYMENT ANDPRODUCTIVITY IN 1967

Value Added Emplovment V. A. Per WorkerUS$ Mln. %Mln. % %

Agriculture 159.7 23.8 0.209 46.2 764 51.4Industry 166.6 24.8 0.084 18.6 1983 133.5Services 344.9 51.4 0.159 35.2 2169 146.1

Total/Average671.2 100.0 .45 WI7o.o 14t0-00

GOVERNMENT FINANCEGeneral Government Central Government

(Colones Mln.) %of GDP (Colones Mln.) % Of GDP1972 1972 1969-71 1972 1972 196 T

Current Receipts 1603 20.7 19.3 1168 15.1 14.6Current Expenditure _1448 18.7 17.4 1 96 155 14.8Current Surplus 2.o 1.9 - 0.14 -0.2

Capital Expenditures 497 6.4 7.4 400 5.2 3.5External Assistance (net) 158 2.0 1.3 154 2.0 0.7

MONEY, CREDIT and PRICES 1965 1969 1970 1971 (Million colones outstanding end periodY

Money and Quasi Money 547 1354 1396 2001 2382Bank credit to Public Sector 1o6 150 75 1149 251Bank Credit to Private Sector 1170 1427 1657 2112 2366

(Percentages or Index Numbers)

Money and Quasi Money as % of GDP 21.4 23.9 22.3 28.8 30.8General Price Index (1966 = 100) *- 113.0 120.3 128.0 134.9

Annual percentage changes insGeneral Price Index 4.2 6.5 6.4 5.4Bank credit to Public Sector -29.6 -50.0 98.7 68.5Bank credit to Private Sector 7.5 16.1 27.5 12.0

NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the periodcovered.

1/ Sectoral distribution of labor forces not avaiiable for 1967.

not availablenot applicable

- nil or negligeable

00ONIOMIC DEVELOPMENT DATA1 1

Page 3 of 5 Pages(Amounts in millions of U2.5. dollarsT

Actuatl orjecteo?/ 1960- 1965 - 1969 - 193;- 16 17 17196 196 170 90i 19( 191 1970 9707197 19(6NATiONAL ACCO1~~~~~~~~~~~~~~~~~~~~~~~~E I U i~5T9S 17

NATIOMAI, ACCOUNTS3-Year Average at 1967- 1969 Prices & Exchange Pates Average Annual Growth Razes As Percent of GDYGross Domestic Product )0 609 652 090 115 136.2 (( .0 .09. 11. 2.Gains from Terms of Trade () 17 20 -13 -25 -27 -32 . -.1. -1.9 -2.6;Gross Domestic Income MTfl 507 BJ T=5 S5 75.2 6.6 5.2 6.1 T157.0 1r00.-0 107=.0

Import (incl. NeES) 135 201 315 400

858 573 8.3 9.51 7.6 6.7 26.5 37.5 65b.0Exports 11(import capacity) -116 -157 -259 -333 -370 -617 6.7 9.7 7.2 5.6 29,- 29.7 32.0Resource Gap 21 T~ 33- -` = 7~ 19.6 6.6 6.7 19.6 -TCi-. 4 7. TSTO)

Consumption Expenditures 602 508 691 8ool 901 1011 1-.6a 6.3 6.2 6.0 5,5.0 i2.4s 77.6Investment 11(incl. stocks) 92 155 21 292 370 659 9.9 8,1 8.7 10.0 19.6 29.9 35i.2

D-estic Savings 71 101 156 225 255 259 7.3 7.9 9.0 61.3~' 15.0 17.6 22.2National Savings 76 97 15.1 207 228 269i 9.9 7.9 6.5 6 .7 19.6 16.6 19.1

MERCHANDISE TRADE Annual Data at Current Prices As Percent of TotalI

Imoorts 2. 69 79 126 207 302 .. 11.9 16.5 19.7 .. 26.6 ~ 5.C,apia odIntermediate goods and fuels) . 78 137 1686 209 2395 11.9 12.1 6.3 .. 2.9 39.2

Consumption goods .. 9~ ~ ~~~~ ~~~6 103' 109 119 1731 .. 13.6 9.6 9.6 .. 6...±Total Merch. Emporta (elf) 110i =9 3719 742-1 77 07W 12.2 11.6 11.0 100.0 100.0 100.0

ExportsPrimary products (wm. fes . 92 178 252 260 230 .. 1.1 10.9 5.5 .. 77.1 96.6Fuels and related materialsof which: Petroleum

Manufactured goods 20 5 3 60 100 33.2 2. . 21. 13.7 16.2 . 22.9 33'.6Total March. Exports (fob) 3 -11-2 231 3722 3960- 6722 15.6 11.1 7 .2 100.0 TO- 100. 100.0Tourism and Border ETrace (net) - - 9 13 20 29 - - 16.7 26.0

Merchandise Trade Indices Average 196--69 100Export Price Index 109 109 105 109 113 117 0.7 -07 2.2 1.9Import Price Index 66 92 107 119 125, 129 2.3 3.1 3'. 1 2.0Termns of Trade Index 119 119 96 91 92 91 - -. Og -.

vALUE ADDED B3Y SECTOR Aomual Data at 19 67- 69 Prolces and ~Exchange REates Average Annual Growth Rates As Percent of Total

Agriculture 116 15.6 196 262 266 297 9.1 6.1 5.5 5.3 21-.6 23.1 22.3Industry and Minning 60 109 166 220 278 392 9.6 9.o 7.6 12.5 17.1 19.3 26.5OthoCr 273 352 f59 5hr,2 6.6 7.5 6.-5 6..1 ~ A. ff7.6 -4 .3Total rr 9 3 8590 1066 1163 1335~ 9.2 7.7 9.6 S.c 160.0 100.0 100.0

PUBLIC FINANJCE ___________

Cu-rrent Receipts 61 73 129 170 193 217 3.6 12.7 7.1 6.3 1.3.1 19.2 16.8Current Epniues 56 Si 125 176 196 221 7.6 9.1 8.6 6.2 12.0 lo.7 17.1

3deaySvngs 5 -8 5 - -3 -6 . . 1.1 -09 0.Other Pubhlic Sector 6 13 26 39 52 90 10.2 16.9 8. 6.6 1.7 3.3 3.-9Public Sector Investment

1/ 25 61 66 71 77 91 10.6 1.6 12.6 6.5 9.6 9.2 7.0

UTS $ millionCURRENT REPENDITUBE DETAILS Actual Prelic. Pot. Proj. DETAIL ON ~~At 1967-69 Pl and Eh An- Percent of Total

As % Total Current Expend.) 19 19 19 19 19 PURLIC SRCTOR / 16-72 T1- 7 1o69 1703Education .. . . . .IREST)9li'T PRO7GRAM 1Other Social Services . . . So,cial Sectors 37 7132Agriculture.. .

Other Economic Services .. 3.1.2Administration and Defense . . . . . Power 69 815 17 21__ther otherd?!mm 107 166 36 3Total Current Exoenditures Othr. .. 237

Total Expenditures 22 9T'7 10

SELECTED iNDICATOR.S 1960- 1969- 1970- 1973- PIACG(Calculated from 3-year averaged data) 1965 1970 1976 1978Average !COOPT- T 31-9 T TL T5b Public Sector Savings 116 161 39 166Import Elasticity 1.69 1.27 1.38 1.52 Domestic Rsrros,ing(net) 81 91 286llExginal Domestic Savings Rate 0.22 0.20 0353 0.23 Poreigs Borrowing (net) 97 20 -1 L0Marginal Nationial Savings Rate 0.15 0.19 0.312 0.17 Toial Financing 2972 3'93 100 10-0

I.AECP FORCE 6200 ~~~~~~~~~~~~~Total Labor Porce value Added Per Worker (19617 - 9 Prce Fxc RatsOLJTPifT PEP WORPEIP In millions * f Total 196 - 70 I JSDlas PeretoAvag193-(~19 137 1963 17 Growth Rate 19 63 1970 1963 19 70 Growth Pate

Agriculture 0.20 L. 6.8 5.. 68 .. 6.9Industry Mining & Const.r. 0.07 . 17.1 .. . SS . 126.3Service 0.11L . 36. .. 179$5 . 157.6 __Total rni 02W7 I= 7o 1700.0 701139 WYET 10.0 100.0f

sot applicable - nil or negligiblenot available 1,-les than half the

smallest usit sobose

1/ Sec footnote 1 on, page 3.2/ Includes aluminum smelting complex.3/ Includes 'inancial investneni, hut excludes; slurin~umnrorsent.

Page of 5 pages

:/DALA11CE OF PAYOINI,S EXTERNAL A3SISTANCE AND DEBT -

7.aincotts in nilliare of 1.5 dollars5atcurren r.prices)

Avg. AnnuaActual

t_ProJted k9-th 19 teM96 1970 - 19(1 =1 T1 '7WYp7 19761977 -T91r7 ~ 1972-197b5)-Y E ALANCE OF PAYMENTS

Export- (ncl . NF') 2 30 265 283. 3 7O b99 18 1b8 6 71 5;7 ;. S0- . ~~~~ ~~~~ ~~~~ ~~2717 350 389 Il.~ 766 57) 592 669 7117 11.0..- : *--7 - tt -> -1 7- / _ b 7 -7 -17d -10

Intecest 'net) 7 7 - 11 - 12 - I1) - 20 - 27 I -1 .itr-ctTI-tesrunt I--oe 9 - - 1 -16-t 10 _ tbocioco' RemIttance - 6 - 6 - 7 - r3 - -1D0Coronet It1-f-r1 ret) 8 6 6 9 10 1ilalucnuc r Curreno Accounts 7r- rmr rrr rllr r1_y1n -7TF -i_ -22Cc)v.tn Direct L--uonU-t 27 26 32 22 ,6 2t 62 82 113 72.0OficiaI Cupital Oo.ts 3 2 2 3

YinTtic vJT 1-rnsJ

n . -bur :erel _ 175 13 -18 -21 - -7 2 -y; -5. -1 9.9._ t 8 10 39 g 73 i; 1 2t 1 20 52.32liNAcr 1163. LoansE

[itobootoeronto .. .. .. .. .. .. .. ..

I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~At I

7 7C-it;) Tru:n-octio- -. i. 33 18 57 25 69b1 Act 1) 1912Chtn e in Net Re-e-oe - 18 12 - 12 - 4 DEBT AND DEBT SERVICE

Public Debt Oct. & Dimb-sod i22 123 176 1921RA1T1 AND LOA 1 COMMITMNgTSOfft-iul Grunt & -oct-l-ie " 8 1.S3 lo fotneot 00 P01110 D.bt 7 1 ' 7oRpoy-ento on Public Debt 18 21 2) 2111h:blic WNtET Lane

Tonal PNblic Dbt SInice 25 28 21 3iERD 19 1t - 37 Other Debt S-roico (reo)NDA - - Tot.al Dbt Snrvice (cot)IDE - 2 - -Otlo- Moultoiutecal 6 11 - 1 barden on Eroport jltr-nng; (S)ructrncceoto 8 21 1 1Sluppliora - 1 " 2 Prblic Debt bornion 1.6 1.0 9.91r:cuul aloot bi tutions 3- 7 2T 20 Tctal Debt 3-rric-'ocdts - - - TDSTDi-rct f-veet. I-c.Public I onO -.e.i. - - - -Total Pbio MA;.T Lo.r ib Sd 35 A-7 loncac) Torn. of Pubii Debt

Actual Dobt WOtetaading on Dc.. 31,1972 7ct. ae 9 Prior Yea 1LShD 5D1.a . t.3 .EXTIRNAL. T EBTDibred On3y Percent Amoo. as t Prior Yer DOhD 15 15.9 5.8 15.2World &0nk 55 2b 7IDA 5 2.6 5IbD Debt Out. & Ditbuo-ed 3, 36 07 76othI- tiltocul 25 13.1 as % Public Debt 0.D 27.1) 28.1 2i.2 28.6Go, rnntn 48 25.0 an % Public Debt bervice '5.6 1L.6 16.3 78.5lappliorn 15 7.8Fic-ocial lr:titotion- 35 1P.2 IDA Debt Oat. & isbur-ed h.6 7.6 1.6 L7.9Ronds 1 r.6 Pubilo Dobt r ' 5 3.1 1.9 2.7P0bli6 Debto -.-. i e 7.2 n S Public Debt Servoue " 1 ' °.2 0.2Tota2 Public Mi'I.T Debt 577

Other -MhT DebtoShort-tem- Debt (dib. on3y)

. trot applicable n etaf! ectioratobot avai ble - oil or negligible-ot available separately -- les. than hi1f thebut iocloded in t 1tal sm-1llet unit ehbew

1/ Tho o-oj-cti-s -oc1udnd cc -ages 2 anmnd3 f th 0 cig 97 a do rut rbe into account tl c on t prcI- to or 1 . o d to-00 bao.ulunoportt. Thc pcoj-cti-ns do, hoor--r, locLado t. o a l unin rucithop cr ple 1oi-ctdo to h cnontc.t.-3d _t an auot.2d ucst Or ) _.- . rntn)Ž-ybauuce_o-1-paym.cts unaiv2en, huotr:ec, tndicato tbat the higher pricen that arc n-pctod to --nallot- Co.c- Rica.i -00 exp-rts clot tle U-cc-otty - ± . tOoart likoly to conpoonato it 19711 aod 1975 fCo thc highrir iqtot p-cto of potrol-tm rnd utfc- c-mnodatlco

Page 5 of 5 pages

TRADE PAYMENTS AND CAPITAL FLOWS

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1968-72)

1970 1971 1972 US $ Mln %(Millions US $)

Exports of Goods, NFS 287.7 21 4 .1 339.5Imports of Goods, NFS 350.3 389.2 415.1Resource Gap (deficit = -) -5.6 -trj5.1 - Coffee 70 28.6

Bananas 72 29.4Interest Payments (net) -11.5 -11.9 -11i.5 Beef 22 9.0Workers' Remittances Sugar 11 L-5Other Factor Payments (net) - 3.8 - 1.2 -10. 4 Pharmaceuticals 6 2.4Net Transfers 5.9 6.7 8.1 All other commodities 6l 26.1Balance on Current Account -74.o -110.9 -91.4 Total 245 1O0O.

Direct Foreign Investment 26.3 22.0 22.0 EXTERNAL DEBT, DECEMBER 31, 1972Net MLT Borrowing 10.0 10.4 12.9

Disbursements 30.6 30.5 36.6 US $ MlnAmortization 20.6 20.1 23.7Subtotal 36.3 32.4 34.9 Public Debt, incl. guaranteed 275.0

Capital Grants - - - Non-Guaranteed Private DebtOther Capital (net) 27.4 90.3 62.0 Total outstanding & Disbursed 275.0Other items n.e.i - 1 -4 3 15 1/Increase in Reserves (+) -11.7 11.5 4.o DEBT SERVICE RATIO for 1972

Gross Reserves (end year) 28.7 43.0 59.5Net Reserves (end year) 26.0 37.5 41.5 Public Debt, incl. guaranteed 10.0

Non-Guaranteed Private DebtFuel and Related Materials Total outstanding & Disbursed T1To

Imports .. 15.8 20.0of which: Petroleum 15.1 19.1

Exports 1.8 0.7of which: Petroleum 1.8 0.7 IBRD/IDA LENDING I ao 1-LI, isi iorns JS)

2/ IBRD IDARATE OF EXCHANGE _

Outstanding & Disbursed 66.8 4.5Through March 1973 Undisbursed 35.1 -Outstanding incl. Undisbursed Io45Official Exchange Rate Free Exchange Rate

U5$1.00 = '06.6 U-3$1 . - ¢8.601 .00 = US$0.15 1.00 = Us$o.116

Since March 1973

US$1.00 = ¢8.6001.ou = US$0.116

1/ Sectoral distribution of labor forces not available for 1967.

2/ In June 1971 a dual exchange rate was introduced that remained in force until March 26, 1973.

not availablenot applicable

- nil or negligeable

Annex IIPage 1 of 3

THE STATUS OF BANK GROUP OPERATIONS IN COSTA RICA

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at April 30, 1974)

Loan or US$ millionCredit Amount (less cancellations)Number Year Borrower Purpose Bank IDA Undisbursed

Eleven loans and credits fully disbursed 69.2 4.6 --

664 1970 Costa Rica Roads 15.7 -- 5.6

800 1972 ICE Power 6.5 -- 1.2

801 1972 ICE Telecommunications 17.5 -- 12.9

827 1972 Banco Central Agriculture 9.0 -- 6.0

872 1973 Costa Rica Roads 1.4 -- 1)4

915 1973 Costa Rica Education 6.2 -- 6.2

Total 125.5 4.6 33.3

of which has been repaid 23.6 0.1

Total now outstanding 101.9 4.5

Amount sold 4.4 _of which has been repaid 3.5 0.9 --

Total now held by Bank and IDA l/ 101.0 4.5

Total undisbursed 33, - 333

l/ Prior to exchange adjustments

B. STATEMENT OF IFC INVESTMENTS (as at April 30, 1974)Amount in US$ Million

Year Obligor Iype of Business Loan Equity Total

96 Productos de Concreto, S.A. Concrete products 6 -- o.6

Total gross commitments o.6 -- o.6less cancellations, termi-nations, repayments and sales o.6 -- o.6

Total now held by IFC, fullydisbursed

Annex LL

Page 2 of 3

1/C. P!YOJECTS IN EXECUTION -

664 Siguirres-Limon Highway Project; US$15.7 Million Loan ofApril 2, 1970; Closing Date: December 31, 1975.

The project is proceeding satisfactorily, and the highwayis expected to be completed, about on schedule, by the endof 1974. The contract, as awarded, was about 30 percenthigher than the engineering estimate. The Government hasfinanced the additional costs out of its own resources. Sofar there have been no significant cost overruns duringconstruction, hence the cost to completion should approximatethe contract cost at the time of award.

800 Fourth Power Project; US$6.5 Million Loan of February 24, 1972;Closing Date: June 30, 1976.

After the initial delays in the installation of the two15 MW gas turbines, which are the principal components ofthe project, implementation has been proceeding on schedulewithout substantial cost overruns.

801 Third Telecommunications Project: US$17.5 Million Loan ofFkebruary 24, 1972; Closing Date: June 30, 1977.

The status of this project has been described in para. 23of this report.

827 Second Agricultural Credit Project: US$9.0 Million Loanof June 5, 1972: Closing Date: December 31 , 1976.

The project is progressing satisfactorily. The proceeds ofthe loan were committed by the end of the year 1973, one yearearlier than anticipated at the time of appraisal. TheCentral Bank,with Bank assistance, is preparing a third projectwith a substantial component for a small farmer credit program.

l/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report any problemswhich are being encountered, and the action being taken to remedy them.This should be read in this sense, and with the understanding that theydo not purport to present a balanced evaluation of strengths and weaknessesin project execution.

Annex IIPage 3 of 3

872 Highway Studies Project; Us$1.4 Million Loan. of December 28,1972; Closing Date: December 31, 1974.

The first phase of the project -- the feasibility study ofimprovement of the highway connections between San Jose-Siquirres and San Jose-Puerto Viejo -- has been completed.The second phase -- final engineering for the most attractivealignments -- was started in August 1973 and should be com-pleted by the end of 1974.

915 Education Project; US$6.2 Million Loan of June 25, 1973;Closing Date: December 31, 1978.

The project became effective December 27, 1973. There has beenabout a four months' delay in project implementation, causedprincipally by a delay in Congressional ratification of theloan agreement.

ANNF.X IIIPage 1 of 3

COSTA RICA FCURTH TELECOMMUNICATIONS PROJECT OF

INSTITUTO COSTARRICENSE DE ELECTRICIDAD (ICE)

LOAN AND PROJECT SSUMMARY

Borrower: ICE

Guarantor: Republic of Costa Rica

Amount: US$23.5 million equivalent

Terms: Payable in 20 years, with 4 years of grace, at 74percent per annum

ProjectDescription: The project consists of: -

a. expansion of the telephone network capacity totalling 56,300exchange lines, by adding 21,300 lines to 28 existing exchangesand installing 35,000 lines in 14 new exchanges, together withassociated expansion of cable network, distribution facilitiesand buildings to permit connection of an additional 36,300 DEL's;

b. expansion of long-distance network capacity by some 2,500 trunkcircuits,consisting of about 2,300 working circuits on existingand new microwave, coaxial and carrier cable systems and some200 circuits on existing and new VHF and UHF spur routes; extensionof existing trunk exchanges by 1,100 lines; and installation ofthree new trunk exchanges providing an additional capacity of2,100 lines;

c. expansion of the rural telephone system to cover an additional90 localities by use of open-wire lines, carrier and radio systemsof the long-distance network;

d. expansion of the telex/gentex exchange in San Jose by 250 linesand the national telex/gentex network by 80 new VFT channels; and

e. expansion of training facilities, employment of instructors andtechnical consultants,and purchase of training equipment.

Page 2 of 3

Estimated Cost: US$ (millions)Local Foreign Total

Land and building 2.18 1.04 3.22

Local telephone systems 3.81 14.71 18.52Long-distance systems 2.36 8.97 11.33Telegraph-telex systems 0.01 0.37 0.38

Training, consultantsand miscellaneous 1.70 0.97 2.67

Subtotal 10.06 26.06 36.12Contingencies - physical 0.46 1.16 1.62

- price 1.85 3.61 5.46

Total contingencies 2.31 4.77 7.08Engineering, administration,

and overhead 7.60 7.60

Total project cost 19.97 30.83 50.80

Financing Plan:(millions)

US$ Percentages

Net internal cash generation 19.97 39

Borrowings:

Proposed loans: IBRD 23.50CABEI 2.30

Other financing 5.03Total borrowings 30. 61Total sources 100

Estimated disbursements:(US$ million, IBRD fiscal years)

1975 1976 1977 1978Annual 6.2 6.o 4.5

Cumulative 6.8 13.0 19.0 23.5

ANNEX lIIPage 3 of 3

Procurement International competitive bidding for all equipmentArrangements: and materials financed by the proposed loan except for

some switching and transmission equipment (about US$4.omillion) to extend existing installations where directcompatibility is essential. In accordance with theCentral American Agreement on Fiscal Incentives forIndustrial Development, manufacturers from the CentralAmerican Common Market, including those in Costa Rica,would be allowed a regional preference of 15 percent ofthe c.i.f. price or 50 percent of the applicable externaltariff, whichever is lower.

Rate of Return: Internal Financial Rate of Return estimated at 21 percent.

Appraisal Report: 417-CR,dated May 21,1974

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