World Bank Document

RESTRICTED FILE COPY Report No. P-459 Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized REPORT AND RECOMMENDATION OF T HE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A Public Disclosure Authorized PROPOSED LOAN TO THE COMPANIA ANONIMA NAGIONAL TELEFONOS DE VENEZUELA November 22, 1965 Public Disclosure Authorized INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PRESIDENT'S REPORT AND RECOMMENDATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA 1.*I submit the following report and recommendation with regard to a proposed loan in an amount in various currencies equivalent to US$37 million to the Compania Anonima Nacional Telefonos de Venezuela (CAN2rV). PART I: HISTORICAL 2. In early 1963, the Government of the Republic of Venezuela requested the Bank to consider a loan to assist in financing the foreign exchange costs required to carry out the five-year program for the expansion and improvement of its national and international telephone and telex services. An appraisal mission visited Venezuela as early as Sep- tember, 1963, but further consideration of the project was delayed by several changes in personnel, both in the Ministry of Communications and in CANTV, following the presidential election in December, 1963. It is only recently that a new telecommunications law was adopted, the CANTV statutes revised, and a new Board of Directors of CANTV approved. 3. Upon completion of these steps to the satisfaction of the Bank, negotiations on the proposed loan began in Washington on September 23, 1965. CANTV was represented by Mr. Jorge Armand, President of CANTV; the Government was represented by Mr. Isidro Morales, Director General of the Ministry of Communications, and by Mr. Carlos Perez de la Cova, Minister- Counselor of the Venezuelan Embassy in Washington. 4. The proposed loan to CANTV of $37 million would bring the Bank's total lending to Venezuela to $211 million. A recommendation for a loan of $21.3 million to the Instituto Nacional de Obras Sanitarias (INOS) for the improvement and expansion of the Caracas Metropolitan Water Supply System, is expected to be presented to the Executive Directors in the near future. The status of previous Bank loans, as of October 31, 1965, is summarized below: -2- US$ million Original Year Borrower Purpose Amount Undisbursed 1961 Republic of Venezuela Express Highways 45.o 13.6 1963 EDELCA Electric Power 85.0 61.1 1964 Republic of Venezuela Highways 30.0 30.0 1964 CADAFE Power Transmission 14.0 4.9 Total (net of cancellations) 174.0 of which has been repaid Total now outstanding 174.0 Amount sold 9.3 of which has been repaid - 9.3 Total now held by Bank 164.7 Total Undisbursed 109.6 5. Delays in disbursements have been experienced with the following loans: (i) Loan 306-VE (Expressways): Construction of the project is proceeding satisfactorily, but some of the works are still under way and disbursements have been delayed by the Government's slow procedures in making withdrawal applications. The Bank has requested t-he Minister of Finance to take up this matter with appropriate Government agencies with a view to speeding uip procedures so that disbursements from the Loan Account will more accurately re- flect the progress in execution of the project. (ii) Loan 390-VE (Second Highway Loan): There have been no disbursements on this loan. More than 20 per cent of the project has been completed and construction is approximately on schedule. However, the engineering consulting firm selected to supervise the project was unable, until recently, to certify payments documents because of the Government's long delay in approving the consultant's contract. The contract has now been approved and signed, and a disbursement of about $5 million has been requested. - 3 - PART II: DESCRIPTION OF THE PROPOSED LOAN 6. BORROWER: Compafia Anonima Nacional Telefonos de Venezuela (CANTV). GUARANTOR: Republic of Venezuela. AMOUNT: The equivalent in various currencies of US$37 million PURPOSE: To help finance the foreign exchange cost of the 1965-1968 program to expand and improve the national and international telephone and telex services of Venezuela. AMORTIZATION: 16 years (including 4 years of grace); 25 semi-annual repayments beginning on Septem- ber 1, 1969. INTEREST RATE: 5-1/2 per cent per annum. COMMITMENT CHARGE: 3/8 of 1 per cent per annum. PART III: THE PROJECT 7. An Appraisal of the project (No. TO-484a)is attached. 8. The project proposed for Bank financing would consist of A. Approximately 107,000 lines of automatic exchange equipment and related facilities. (Of these, only 53,000 lines would be financed out of the proceeds of the proposed Loan.) B. Approximately 3h8,ooo kilometers of long-distance circuits, provided by means of the installation of car- rier equipment, cables, radio and open-wire circuits. C. Installation of direct long-distance dialing equipment between 29 cities. D. A submarine cable between Venezuela and St. Thomas, Virgin Islands, where it would connect with an existing submarine cable to provide telecommunications facilities with the U.S.A. (CANTV is to acquire an inde- feasible right of use in the existing north section of the cable.) -h - E. Telex switching facilities for approximately 1,200 lines. F. A headquarters building in Caracas. G. Consultants for review of the CANTV1 s rate structure, planning its future expansion and improving operating methods. The project is expected to be completed by June 30, 1968. 9. The project forms part of an expansion program being carried out over the period 1965 - 1968. The total cost of this program is estimated at the equivalent of US$100 million, including interest during construction and contingencies. Foreign exchange costs are estimated at US$54 million, of which US$37 million would be covered by the proposed Bank loan. The balance of the funds required would be obtained from CANTVIs internal cash generation, supplier credits, Government con- tributions and from a private placement in the U.S.A. to finance CANTVis share in the north portion of the submarine cable. 10. With the exception of consultantts services and some minor items, which for technical reasons must be purchased on a negotiated basis, goodsto be financed out of the proceeds of the proposed loan would be through international competitive bidding. 11. Six foreign consultants have assisted in the preparation of the CANTV expansion program. Consultants have also assisted writh organiza- tional changes and new operating procedures introduced to increase effi- ciency and to improve service. Consultants will continue to assist CANTV on large equipment contracts and also to carry out rate studies and their implementation. 12. There is an urgent need for the presently planned expansion of telecommunication facilities in Venezuela. Operations in the main cen- ters, particularly in Caracas, are at present characterized by overload- ing with resulting excessive delays and poor service to all classes of customers. Caracas, which had about 99,000 main subscribers' lines in service at the end of 1964, has over 30,000 pending applications. Other cities have a similar proportion of pending applications to lines in service. The need for better long-distance facilities is underscored by the fact that governmental agencies and private firms have found it necessary to install their own radio systems to meet the urgent need for communica- tion. Continued high cost facilities of this type would be made unneces- sary by the proposed new public installations. 13. CANTV has been operating since 1930 and provides virtually all public telephone service in Venezuela. It also provides the public telex service for Venezuela. It now operates under the basic telecommunication - 5 - law of July 29, 19h0, and a series of subsequent laws and decrees, the latest of which is the law of July 6, 1965, reorganizing telecommunications services. 14. All of the common shares of CAKTV are owned by the Government, the Minister of Communications holding and voting these shares. CANTV has agreed to retire its outstanding privately held 6,925 shares of preferred stock, representing about 2 percent of the total capital shares in the company and agreements have already been reached with the holders of 5,055 preferred shares. 15. On July 30, 1965, the shareholders approved the appointment of a new President of CANTV and the enlargement and certain changes in the membership of the company's Board of Directors. The management, engineering staff and middle levels of supervision are reasonably experienced and appear qualified to undertake the program of expansion and improvement of the telecommunications system. 16. CANTV and the Government have agreed that CANTV's tariffs would at be adjusted so that, after completion of the project, CANTV would earn least an 8% return on net plant in service. It is estimated that this rate would be achieved beginning in 1969. CANTV has also agreed that no dividends will be declared or paid on its common shares other than dividends payable in such shares, during the period of construction of the project (Section 5.08 of the Loan Agreement). The company will also restrict borrowing during this period to borrowing for the project; and thereafter it will not incur debt unless its net revenues for a specified period amount to not less than twice the maximum debt service requirement for any succeeding fiscal year on all debt, including the debt to be incurred with the proposed loan (Section 5.07).

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