= No. E 118 CONFIDENTIAL
~ETUR),'] ..... - ~j~(S~.:X:E po~t is restricted to those members of
REPO--'~,,'j (\~; :. I the'. stalff to whose work it directly relates. j V',f ' ' tI "
Public Disclosure Authorized • ONE '.t '" ___,_J
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
DEVELOPMENT PROGRAMMING Public Disclosure Authorized
with Special Reference to
CHn.E
November 13. 1950 Public Disclosure Authorized Public Disclosure Authorized
Economic Department Prepared by: Harold Larsen Jacques Torfs OONTENTS
FOI[h,'VVORI) • • • • • • • • • • • • • • • " • • • • • • • • • • • • 1
PROGB.8A:WIiING FOR CHILE ...... 2 (a) Definitions • • • • • • • • • • . . . . · ...... 2 (b) ProgrammingPossib11ities in Chile •• • • • • • • • • 4
(1) Introduction • • • • • • • • • • • • • • • • • • 4 (2) Development Programming • • • • • • • , • • •• 6
(3) Possible Oonsequences of a Program 0 • • • • • • 13
AlWEX I
SEOTOR PBOGBAMknJG IvJETHODS, illustrated from the Ohilean Energy Problem
ANNEX II
METHODS OF ESTABLISHING A lJEVELO:PlmlT ProGRAM liOBEiVORD
The Oreditworthiness study on Chile (No. #-116, dated November 13, 1950) point s out that the extent to which balanced investment will proceed in Chile 1s really a determining factor in our lending policy towards that country. The following paper does not aim at supporting a ready-made solution for Chile. Its purpose is rather to outline and exemplify what a satisfactory programming would really involve. It therefore includes:
(a) An outline of the fundamental requirements which a program
should fulfill to answer Ohile t s problems in the fields of produc-
tion, finance, and balance of p~ents.
(b) As Annex I an instance of the method which can be applied in one particular sector (fuel and power).
(c) As Annex II a discussion of the fundamental considerations
which arry person or organization should keep in mind when establish- lug or studying a program.
We feel that these papers could serve not only as a brief to who ever may discuss with Chile the particular problems of that country, but
also as a basis for further cooperation with Ot'!: ocher member countries
in program lending, and as a brief to our general survey missions.
Leonard l3" Rlst Economic Director PROGRA.:.Ji4ING FOR CHILE
(a) Definitions Program lending is designed to provide integrated support to de sirable and practicable economic development programs.. T.nereas project loans are eus tomarily concerned with specific underta:cing s, program lend ing views the economic development of a country as an interrelated whole, no part of which can be changed ~rithout affecting the over-all develop ment of the country.. Although individual loans would be linked to projects,
the loans as well as the projects derive their justification from the whole program which they support. Such lending considers every aspect of the nationJs economy, including any reasonable prospect of a post program ualance of payments position permitting loan service.
Development programming involves appraisals designed to ascertain the level and direction of practicable developmental investment, the
priorities among projects, and the associated economic policies best de signed to achieve desired results. Such appraisals can never be perfect, but they should take into account all available ir.i'ormation, and be made within a framework permitting results to be tested for consistency and expanded in detail as information improves.
There is always a development pattern in the sense that govern ment investment is already being m A -2- -3- Programming means that justification for that investment and those policies be based upon a complete picture of the economy in question enlightened by orderly arrangement of all relevant available informa tion. Such appraisal can be attempted at three levels, or in three stages, called in this paper IIsector analysis and programming~~ "inv8st ment programmings " ~nd "development programming." Each is improved if the next stage Crin be reached, but would be advantageous in itself .. Sector analysis is a combination of economic and technical ap praisal within a specific field important to development, such as trans port, fuel and power, or agriculture. This appraisal results only in a suggested sector investment program with sector priorities. The separate results are then brought together, and examined for inter-sector consistency, in order to work out a proposed investment program. Examination for inter-sector consistency would reveal, for ex ample, wnether road building was proposed into areas not scheduled for agricultural development, or whether the trans lort program suggested a change of railway traction not taken into account in the power program. ~velopment programming requires that total proposed investment be compared with available investment resources, either approximately, within a partial framework, or completely, within an over.... all framework, The approximate or partial approach 'would estimate resources in financial. terms by direc~ sources, domestic and foreign such as the budget, any A -4- private savings obtainable through bond sales, foreign loans, and so on, checked, where feasible, by estimates of real resources. rfhen the investment pr~gram has been revised as necessary to secure inter-sector consistency and comparability with total resources, it can be adopted. The difficulty v'lith the partial or approximate framework is, firstly, that the estimates of financial resources may themselves be in consistent 1,'[i th a stable economy, and secondly, that the method provides little guidance upon appropriate non-investment development policies. The final or over-all appraisal stage is reached when it is pos sible to brin~ the expected behavior of the economy, including investment activities, within the framework of national accounts. It then becomes possible to outline an over-all development program, including not only official and other investment but also the general economic policies best calculated to facilitate development. In the following paper, these ideas are expanded and illustrated with special reference to Chile, although the program outlined for Chile is not to be considered as an aetuB.I proposal. It is simply an illustra tion of the way the three stages of programming ~ould be applied to a specific country. (b) Programming Possibilities in Chile (1) Introduction Ever since the depression of the thirties, Chile has been seeking economic devel~pment in the face of instability and difficulties generated A -5- as much outside the country as within it. The permanent loss of nitrate markets, which in 1925-1929 represented 49% of total exports and in 191...5- 19~ o;-J,r 1/%:> coupled with a persistent failure of her terms of trade to recover pre-depression levels, seriously reduced the amount of imports earned by exports. It is one measure of the past progress of economic development and of the degree to which adjustment has proceeded that in 1929 Chile was importing 50% of all capital and consumption goods avail able in the country, and in 1949 only 27%. According to recent calculations by ECtA, between 1925-1929aanc. 1949, total Chilean production increased about 70% while population in creased 41%. Yet owing to the necessity of providing more exports t·:) ob tain imports, total available goods (production minus eA~orts plus imports) increased only 45% from 1925-1929 to 1949. Thus, on these figures, produc tivity increase was insufficient either to ease the external position or to secure any great increase in the standard of living during this twenty year period. VJhile short-term copper prospects are now good, the balance of payments is not likely to reach equilibrium Ul.le~s productivity can be improved. As regards foreign exchange availabilities, the future cannot offer better conditions than those enjoyed in 1946-1949, at the beginning of which Chile possessed large exchange resources and during which she received substantial foreign assistance. Now her exchange reserves are depleted and her creditworthiness is low. A -6- Internally, inflation has been severe, indicating a growth of money incomes greater than the increase of real production. It is pos- sible to argue that many causes contributed to this result, but a recent careful study by the IMF !I concluded that: "what can be said with certainty is that the development policy aggravated the internal inflationary conditions and created additional pressure upon the balance of payments by inducing larger capital good imports at the expense of the importation of consumer goods than would probably have been necessary." Sound development" implying a lasting improvement in the balance of payments and an escape from severe inflation, requires a larger in- crease of productivity and output than that secured in the past. It can hardly be doubted that proper development programming would speed the rate of productivity increase. By how much is another question; the amount m~ not be large if only Chilean resources are available, when the only feasible improvement is through re-allocation of resources and reduction of waste. Yet to secure permanent development, increase of future output should be significantly greater than population growth. It may be pos sible to ensure this if programming can be based not only upon Chilean resources but also upon an additional supplement £'l'om outside. If that supplement can be foreseen as a temporary req~irement, and if it were to . result in a permanent balance of payments improvement, it could be through rep~able loan funds. (2) Development Programming The first stage of programming is sector analysis. Annex I illus trates the methods and content of such work though it does not pu~port to V Report 01 the tiseion to Chile, August 25, 1950 - P. B8. A -7- provide a ftsolutionfl • VIi thin each sector, the results would represent an improvement upon piece-meal selection of projects as presented in the sequence of their completion of design; sector priorities would become more apparent. Nevertheless, as has already been said, sector results would be further improved if they are comp2red with each other and with reso~ces, first in an investment program and second, in an approximate or preferably a complete national account fre~ework. This paper cannot present a plausible investment program for Chile, since the component sector pro gra'11S are lacking. Attempt can be made, however, to illustrate the final of outlining a development program, by utilizing national inco~ne da1..;;. :::'F"fer-ri'1g to the Chilean economy. In order to illustrate the ideas involved, some simple projections have been prepared. Tney are coherent with what is known of the Chilean economy, but they in no sense represent a real basis for an actual program, since many of the variables, inherent in the potential program itself, are still unknown~ National accounts have been projected for the years 1953 and 1958. The year 1953 is intended to illustrate mid-transition of a five-year pro gram of coordinated and expanded investment, end the year 1958 to show a plausibly possible position after the five-year period. It is assQ'11ed that inflation tapers off to mid-program, and thereafter ceases, so that between 1953 and 1958 the projection is effectively in terms of real A -8- quantities rather than values. (Billion Pesos) 1953 1958 Gross National Expenditures ••••••••••• _•• ~ ••• a606~ __ ~~~~13309 __ ~~~15702 __ Government Expenditures: Current ••••••••••• -g;7 1300 1504 Capital ••••••••• 0. 2.7 503 10 0 3 Private Investment oO •••••••••••••••••••••• Q. 7.0 1107 701 Consumers' Expenditures ••••••••••••••••••••• 68.7 10501 124.4 Balance of Payments Current Account ••••••••• - OQ5 - 1 .. 2 0 The productivity assumption is basic, and cannot of course be ::nore than an assumption at present. Yet the projections are not 1.AJlreal- lsti.C" In the last ten years, productivity per capita in Chile is be- Li~;'-cd to have increased 1.2% per annum. The assumption made is that in a fh'o·-year program productivity increase per capita could become 1.4% by m:.d-program and 1.6% per annum in the last of the program and in sub- sequent periods. This means that while over the past ten years total output may have risen at a rate of 3% per annQ'U, it might be possible to increase this figure to 302% and finally to 3.4%. The rate of 3.2% per annum implies an increase of production of 17% over five years,!! of which 8.8% will be absorbed by popula.tion inc:::'eH"'g. If coordinated in- vestment is accompanied by efforts to improve technical and managerial practices this may be feasiJle. It is assumed for balance of payments Pl·'rposes that there is no expansion of exports, all output improvement going to domestic consumption. To the extent that export production actually increases, the ratio of imports to total available goods would rise without involving a change in aggregate available goods (assuming stable terms of trade). t1 Or 87% over 20 years, compared with the 70% estimated by ECLA for the past 20 years. A -9- The projection for 1953 is based first upon the assumption that new foreign loans of US$ 25 million annually are forthcomi.ng, so that net portfolio capital inflow is US$ 15.5 million, amortization of old debt being US$ 9.~ million. This finances a large balance of payments current account deficit arising from abnormal imports of capital equip- mente It is assumed that so far annual productivity increase per capita has improved to 1.4%. ?urthermore, some increase of Chilean prices (cost of living) is assumed up to 1953, but none thereaftero The result of this projection is that gross capital forI!1at~on rises from 11.2% to 1207% of gross national product. The particular f0rID 'ehe projected 1953 accounts take illustrat,~,S only one possible line of c,c .... elop:nent policies -- namely, that annual rise of consumer expendi- t'l:.83 is restrained to 1% per capita, and that most of the resulting domestic saving is assigned to private investment. The rationale be_ hind this is that a large part of Government investment will be financed by overseas borr~wing rather than domestic saving. One instrQ~8nt through which such a policy could be executed is a budget surplus and appropriate banking and credit policies. The implications within the fra'11ework of national accounts are shown in the following table, 11 which, highlights the variables significant for over-all development programming. 1/ 'Ihis' table groups gross national income and expenditures into differ - ent types of income receivers and spenders, sh~ving the role of Government, of private or business investment, and of foreign lending. It is derived from Table (1) at the end of this paper. A -10- 1948 1953 1958 Expend- Differ- Expend- Differ- Expend- Differ- itures Income enoe itures Income enee itures Income encs Private 68 0 7 106,,4 0 0 69.8 " 1~1 105.1 f 103 124.4 126 0 " 1 6 Business 700 40 0 - 3,,0 ll.7 5 .. 7 ... 6"G 7.1 5<>4 - 1",7 Government 12.,4 130 8 f 104 180 8 2202 t 3., 26~1 26~2 ,l 0,,1 Transfers - 100 -10 0 0 Oe4 0.4 {) 004 0 0 4 0 Foreign - O~, 0 f 0~5 - 1.,2 0 t 1.,2 - 0 0 0 Total 86()6 86 0 6 0 13309 13309 0 1,7.2 1,70 2 0 At the end of a period, actual national expenditures will always equ81 actual national income, because every actual expenditure even if financed by inflationary methods becomes part of someone's money incone. S-tabili ty requires that, at the beginning of a period, planned or expected expenditures should not exoeed expected incomes. This is the difference between 1948, and 1953 or 1958 in the fraluework balance of national accounts shown above. The year 1948 was one of instability. Neither 1953 nor 1958 should be, because expected expenditures are coherent with expected income. But they could become years of continued inflation if in 1953 (on the hypothetical figures given) budget surolus Was less than 305 billion pesos with business expenditures exceeding income by 6.0 billion, or if in 1958 business expenditures exceeded income by more than 1.7 billion pesos. Development programming should aim at a balance of expected national income and expected expenditures, change of any item requiring compensating change elsewhere. The decision to run a Goverrunent surplus of the magnitude shown permits, for example, high levels of private investment. If policy A -11- adopts larger Government expenditures with unchanged revenues and so re duces the budget surplus, credit policies should require reduction of business expenditures with restrictive effect upon private investment. There are similar credit policies consequenc~s if lower Government revenues permit higher consumer expenditures, although in this case there may be not, as before, a shift from private to public investment but rather an abs(llute reduction of investment due to lo'\'{er total savingso If total attempted national expenditures in one period exceed total expected income in that period, domestic inflation will result, lifting money income in the next period to the new level of lnoney expend itures without, however, necessarily adding anything to the flow of goods and serviceE", or real income. Import demand then rises, with renewed balance of payments difficulties. Informed development programming therefore requires some judgment as to the behavior of the items "private" and "foreign.)' and a selection of "government" with which "business" can be made consistent without undue str~ining of ordinary credit and similar policies. Once an acceptable development program has been agreed upon, official projects can then be engineered for execution, and their finance worked out in detail. They become the official or public investment pl~~. Finally, guided by national accounting as here described, the general policies of Government can be defined, the three key ones being fiscal, credit, and exchange and import controls. In the fiscal field, there is A -12- the level of revenues and the balance on the budget, both already incor porated in the balance of national accounts. In the credit field, there are considerations of the level of credit and of the purposes for which credit may be grantedc And, so long as exchange and import controls last, there are required decisions as to permitted imports, particularly private imports of capital equipmento It is not at all necessary that every activity in the economy be planned and closely controlledo Indirect controls can be adopted which while leaving full freedom to individual endeavor, would prov.l.de incentives towards programmed targets and discouragement to otherso For exruftple, suppose that a transportation program calls for the purchase of 5,000 trucks, 2,000 bu..'U;ls and 1,000 low-prices cars per year, in that order of priority. Nothing may prevent anyone from buying a deluxe car abroad. However, the potential purchasel? discovers that the tariff is exceedingly high, that exchange controls do not operate as fast for him as they ·will for the purchaser of a truck, that bank credit is unavailable ruld that the personal property tax on new deluxe cars is 5+,iffo On the other hand, an importer of a three-ton truck will discover that the tariff is low, ex change controls lenient, and credit available. In the course of execution of the program, close watch would be kept upon key economic indicators, such as the level of actual tax revenues, the ~lume and utilization of bank credit, actual import demands, and the movement of prices, all of which is information currently uprising out of A -13- existing statistical services. Should performance be differing materially from expectations, appropriate policy directives, particularly to credit and import controls, may be requiredQ If they are not issued and effective, some parts of the progra~ itself may require revision, particularly the implementation methods for the coming yeax. This of itself would not necessarily represent failure of the program, which should not be a planner's dream~ but a real assessment of the abilities of a countryts economy" (;) Possible Consequences of a Program It is assumed that as a result of a successful five-year develop ment program productivity is nOll'J rising to 1.6% per c api ta annually. A possible balance of 1958 national accounts has already been presented. The principal feature is that GO'lernment invest;nent expenditures are pre£ui!l~d to expand to replace foreign borrowing, so that budget surplus becomes small and private investment reverts to "normal" levels. It should be possible for Chile to permit real consumption to grow pari passu with productivity increase and maintain pre-program levels of capital formation without balance of payments pressures. She could maintain higher rates of capital formation if domestic consumption grew less rapidly, that is, from new domestic savings, still vdthout further foreign borrowing. It is, however, ass~~ed that there is no net capital outflow; in the particular projection used, direct investment is assumed to balance portfolio amortization. A -14- Balance of Payments Projections (Millions of TJS Dollars) 1948 Total current account receipts •••••••••••••• ~2~6~1______~~ ______Net Imports •••••••• 6...... 236 Investment income (non-mines) ...... 110 , Interest payments - bonds ¢~ •• o.uo.c •••••• o.o 2 IBRD-Exim: old debts ooo~ 2 new loans .""!J Other current account ••••••••••••••••••••••• -=3~2____ ~ __ ~ ______~~ __ Total current payments ••••••• 00...... _2~7~7______~~~ ______ Balance current account II ••••••• ~ ...... " -..;;:1~6______~~ __.....;..._ Capital movements IBRD-Exim - disbursement 0 •••••••••••••• .;. 17 runortization ••••• 0 ••••••••• 9 B~nded debt runortization 0 •••••••••••••• 3 Direct investment ••••••••••••••••••••••••••• .;. 16 Total capital movements •••••••••••••••• Compensatory finance ••••••••••••••••••• t , The balance of payments projections shown above are in essence extremely simple, showing little more than the arithmetical frrunevmrk of estimates requiring investigation and judgment before final commitment to a progrrun. The projection given assumes no increase whatever in current account receipts; this means that the whDle of production increase has gone intc domestic consumption and none into exports. Here the reduction of impvrts following a cessation of a loan-financed program is, firstly, the loan-financed equipment imports and secondly, the amount of additional interest payments arising from any prcgram loans. Only the second represents A -15- a possible reduction of consumption goods imports, presumably more than compensated by domestic output increase; indeed, if Chilean output of previously imported capital goods (such as steel) expands, there may be no reduction of consumption goodsimportso This, then, is the first balance of payments criterion; if there be no e:1.'Pansion of exports, will the program when executed reduce consump tion goods (or other) imports by the amount of additional interest payments due upon program loans, replacing former imports i~th new domestic produc tion without necessity for undue protection? If so, the program is creditworthy in the limiting case. It may well be possible to better results in increasing the total of goods available in Chile (output minus exports plus imports) by taking advantage of opportunities to increase exports, and in conseql1ence imports. This gives a second criterion, that if the endowment of resources in relation to the terms of overseas trade seen:sfavorable, a program may well incorporate growth of export production .... But the creditworthiness of a program does not necessarily depend upon export growth in a country like Chile where service payments represent a re latively smaller fraction of exchange receipts than many non-Latin American countries. The third criterion relates particularly to the immediate post program period. Could a net outflmv of capital be so quickly expected, that is, could Chile reasonably service a net amortization? The answer is aL~ost certainly no. The projection used assmnes that n~N direct investment balances A -16- amortization; if it did not, small loans approXimately equal to net amorti zation may be necessary for a period maintaining Chilean indebtedness unchanged. In actual practice, formulation of a develo~nent program for Chile will require not only knowledge of actual investment proposals, together with their costs and expected results (the sector programs), but also an initial determination of the general economic policies likely to be socially and politically acceptable to the Chilean people. VJith these as data, and not mere rough assumptions as made in the preceding example, it will be possible to bring together the outline of an investment and development program whose fOrTI1Ulation should not take long, since national income analysis is already proceeding in Chile. The outline can then act as the basis for further discussion in Chile and between Chile and the Bank. Such discussion would be short only if proposed Chilean policies are found compatible with a balanced development pro [ram, or if the Chileans shovr readiness to modify them to secure balance. A -17- Table 1 CHILE PROJECTION OF NPTIONAL ACCOUNTS (T.? CHILEANS) 1948-1958 ( Billion Pesos) 1948 1953 1958 GROSS NATIONAL EXPENDITURES ...... 86,,6 133 .. 9 157.2 Government Expenditures •••••••• 11.4 18.3 25.7 Current ~ ••••••• (8.7) (13.0) (15.4) Capital •••••••• (2.7) ( 5.3) (10.3) Private Investment ., •••••••••••• 7.0 11117 7,,1 Consumers Expenditures ••••••••• 68.7 105.1 124.4 Net Surplus Current •••••••••••• -0.5 -1.,2 o GROSS }ffiTIONAL PRODUCT ...... 86.6 13309 157.2 Depreciation 0 •••••••••••••••••• 2 .. 9 h.O 4.0 Indirect Taxes •••••••••• >•• o •••• 8.3 12.9 15.2 Subsidies (-) •••••••••••••••••• -0.6 o o National Income •••••••• 0 ••••••• 76.0 117.0 138.0 Transfers c-) ...... -0.4 -0.4 -0.4 Retained Earnings •••••••••••••• 101 1.7 104 Personal Income •••••••••••••••• 7503 115.7 13700 Income Tax ••••••••••• " •• ., •• " .. >•• 5.5 9.3 11.0 Disposable Income •••••••••••••• 69.8 106,,4 126.0 Private Savings •••• 0 ••••••••••• 1.1 le3 1.6 Consu~ers! Expenditures •••••••• 68.7 105.1 124.4 -18- A Table 2 CHILE RATIOS MID INDICES USED IN THE PROJECTION OF --r,lATIOlJAL PCCrUHTS PROll 194? to 1958 -, Ra~ Rate Rate 1940-1948 per 1948-1953 per 1953 ... 1958 per r1940-100j Year {I948-100) Ye2E, l1953-10'O) --Year National Income •••••••••••• 462 156,,0 ... ,..- 117.8 Prices (Cost of Living) ••• e· 369 134.0 0 100,,0 --0 Employment .•..•..•...... ~ .. 114 107% 108 .. 8 1.7% 108,,8 1,,7% Productivity - per capita •• 110 1.2% 107.1 1.4% 108 .. 2 1.6% Consumers' Expenditures •••• 448 153 0 0 118.0 Prices (Cost of Living) •••• 369 134,,0 100 .. 0 Population ••• 0 ...... " ...... 114 L7% 108~8 10808 1.7%° Real Consumption per capita • 107 0.857~ 105.0 108.2 1.6% 19&8 1953 1958 Direct Taxes (in percentage of National Income) ...... '" .. ' .. 7.3% 8.0% 8.0% Indirect Taxes (in percentage of National Income) ...... 11.0% 11.0% 11.0% Gross Capital Formatio~ (in percentage of Gross National Product) ••••••••••••••• ,•••••••••• • 11. 11.2% 12.7% 11.0% Private Gross Capital Formation (in percentage of Total Gross Capital Formation) •••••••••••• 72.0% 69.0% 6h.0% -19- A Table 3 CHILE PROJECTION OF CHILEAN BUDGETS 1948-1958 (Billion Pesos) 1948 1953 1958 RECEIPTS Direct Taxes •••••••••••••••••••••••••• 9.;' 1/ 11.0 1/ Indirect Taxes •••••••••••••••••••••••• 12.9 ~/ 15.2 2/ Revenues of Government Enterprise ••••• 1.2 1,4 - TOTAL ••••••••••••••••••••••••••••••••••• ,14.4 23.4 27.6 ~------~------~~------EXPENDITURES current ...... ~ •••••' ...... ' ••• ''! ••••• 8.7 15.4 4/ Capital ••••••••• e ...... 2.7 15.3 - Transfers •••• ,••••••••••••••• '••••• '••••• 0.4 0.4 ?/ Subsidies •••••••••••••••••••• "' ...... 0.6 Expenditures of Government Enter- prise ••••••••• ~ ...... 0.6 TOTAL ••••••••••••••.•••• " ••••••••••••••••. 13.0 1'.9 27.5 ~------~~------~~----- BALANCE (+) Surplus (~) Deficit · ... · · · · · ...... +l.4 +0.1 1/ 8% of National Income. 2/ 11% of National Income. 11 50% above 1948 • .!±I Reflects expected growth in National Income •. 21 Assumes maintenance of internal debt at past levels. -20.: A Table 4 CHILE PROJECTION OF BALANCE OF PAYlJ[ENTS (Hillions of US dollars) 1948 1953 1958 CURRENT ACCOUNT Sales of Large Hining Companies - Copper • ~ •• 210 187 2/ 187 2/ - Nitrate ••• 68 52 3/ 52 11 - Iron •••••• 7 7- 7 Minus - Imports with own Exchange ••••••••••• -40 -60 4/ -40 - Profits .~~o.o •••••• o •••••••• e ••••••• -66 -40 - -60 - Administrative Expenses ••••••••••••• -11 -10 -10 - Intercompany Capital Hovements ••• o.~ - 7 0 0 Net Sales (Disbursements in Chile) •••••••••• 161 136 136 Other Exports (f.oob o ) •••••••••••• e •••••••• 68 100 100 Other Current Receipts ~/ •••••••••••• e •••• 32 32 32 Total Receipts (Net) •••••••••••••••••••••••• 261 268 268 Imports c.i.f. (Gross) •••••••••••••••••••••• 276 294 5/ 249.5 2/ :Minus Imports of Hines ...... -40 ... 60 - -40 Net Imports (Chilean Account) ••••••••••••••• 236 234 209.5 Investment Income (Non-r.iines) ••••••••••••••• 5 10 13 Interest Payments - Old Debts (cons) ••••••• 2 4.5 L.5 - Old Debts (IBRD-Exim) •• 2 5 4 - New Debts ••••••••••••• 3 5 Other Current Payments ~ •••••••••••••••••• 32 32 32 Total Current payments .•••••••••• 0 ••••••••••• 277 28805 268 Balance Current Account ...... -16 -20.5 0 ------~------CAPITAL ACCOUNT Capi tal ?!Iovements IBRD and Exim - Old Loans ••••••••••••••••• +17 0 0 - New Loans ••••••••••••••••• +25 a Amortization - Old Loans •••••••••••••••••• -9 -5 -5 - New Loans ••, •••••••••••••••• 0 -5 Consolidated Debt Amortization •••••••••••• -3 -4.5 -4.5 Direct Investment ••••••••••••••••••••••••• +16 +5 +15 Compensatory Financing (Argentine Loan) ••••• +5 0 0 Foreign Exchange and Gold (- is increase) •• -10 0 0 ------~----- Balance Capital Account ••••••••••••••••••••• +16 +20.,5 +0.5 1/ Other current account items are assumed to balance over a period of years. 2/ 425,000 tons, or 935 million pounds at 20¢/lb. f.o.b. Chile. . . 3/ 1,750,000 tons, at US~? 30 per ton, f .o~b. Chile. 4/ Reflects new investment by Anaconda Copper. 21 Residual Figure. ANNEX I SECTOR PROGRAMMING METHODS illustrated from The Chilean Energy ProbJ.eI!l Prepared by Jacques Torfs In conStll tat ion with Carl Flesher ~neering Staff Loan Department OONTENTS Page FOR1'WOBD AND SUMlYlARY • • • • • • • • • •. • • • • • • .. • • • • • 1 1 ~ GEOG...B.iU'HlCAL LOCATIOH OF FU".t;1L BESOunCES AIID Ei\lERGY CONSULlERS · .. 2 2. EFFICIENCY n! TEE USE OF EQJJIFMENT • • • • • • " " fl. 4 3. CURBE1:lT PATTERJ.\J OF EJ.Jii.RGY CONSUMFTION · . ., . . . . · . . . 6 Coal. • . . . • " , . . • • • . · ...... • • 6 .El3.ectricity • • • • • • • • • • ...... 7 a) :Fuels • • • • • . • • • • . . . · . . . . . 7 b) Ownership •••••.• , . . . . . " . . . 7 fc) Power and Liquid Fuel s · ...... s g 4. ENERGY BEQJJIRE1iEi.ifTS IU 1955 •• . . . • • • • • • • · . . • • • Coal. • . . . . . • . • • • • • · . · . . • • ...... , 9 Oonsumption of Liquid :Fuels • • • • • • • • • • • · . . · . . 11 Electric Povrer. • • • • • • • • • • • • • • • • • • • • • • • 12 Pattern of Consumption of Energy in 1955. • • • • • • · . . . 13 5. ProSPECTS FOR EXPAlJSION OF FUEL SUPPLY lum SlJBSTlTUTION OF FUELS 14 Oil . , . . . • . . . • . . • • • . .. . • ...... , . • • • 14 Coal. . . • . . . !II • • .. • • • • • • • • • • • • • • • • • • 15 Hydro-electric Power Capacity • • • • • • • • •••• • * • • 20 Conversion of :Fuels in Electricity and Other Uses for Fuels in 1955 • • . • • • • • • • . • • • • • • 2l (a) Supply of Electricity • • • • • • • • • • • • · . ., . 21 (b) Uses of :Fuels • • • • • • • • • • • • • • .. . . . 23 6. TImS'1l,,;ENT PBOGRAM . . . · . · ...... 23 APPJill.WlX Table No" 1& Consumption of Fuels and Energy in 1948 2. ConsUIL:t;;tion of Fuels and Energy in 1955 3, Capacity of Power Plants and Output in 1948 40 Production and Consumption of Ooal 5. Output of Electric Power 6. Imports and Consumption of Liquid fuels 7. Product ion of P01J\i-er and Consumption of Fuel by Copper and Nitrate Mines 8. Oapacity of Power Plants in 1948 - l,·!ines 9. Capacity of Povrer Plants in 1948 - Industrl al 10. Capacity of Power Plants in 1948 - Public Utilities 11. Power Resources Santiago-Valparaiso Area in 1948 12. Energy Equi valenta of Major Fuels 13. Energy Program, 1955 This draft program is intended as an example of pos sible methods of sector programming and not as a presenta tion of reSUlts of actual programming. Assumptions have been made at many important points which in a real program would require e:xa.ct knowledge~ In particular, as stated on pagoe 19, the "solution" proposed in this paper hinges to a great extent upon the act~al cost of coal delivered in the north of Ollile. SUMMARY 1. Consumption of major forms of energ was 4051 billion kwh in 1948, 63% being supplied by electric power. In 1955, consumption m~ reach 6.67 billion kwh, demand for electric power being 4.19 billion kwh. 2. Expansion of fuel supply and instaJ.led power capacity is re- quired, and rna;y prove extremely expensive if improperlY planne4. Large resources in twdro-electric power are available, but they ere in general located outside the areas of greatest need. Output of major coal mines is declining, and coal transport outside coastal areas creates major traf fic problems. Diesel and fuel oil thus seem the most desirable and flexi ble fuels, but their actual or prospective domestic supply is small. 3, It is suggested that an investment of uS$ 67 million, of which US$ 45 million would be in foreign exchange. would meet tne e.Jq?ected 1955 demand for 2,,16 billion kwh of additional energy, provided full advantage is taken of possibilities for substitution between fuels, and provided all plants generating electricity are used efficiently. 4. The solution outlined in the following paper would also create direct foreign exchange savings estimated at approximatelyUS$ 10 million per year. I .... 1- SECTOR PROGBAIviMING idETHODS illustrated from The Chilean Energy Problem 1. Geographical Location of Fuel Resources an.d Ensrgyoonsumers The geography of Chile, a long and narrow eountI"J stretching be tween the 18th and 56th degrees of latitude, accounts for many of its energy problems. Northern Chile, between the 18th and 30th parallels, is a desert in which are located most of Chile1s mines, For this reason, the region accounts for about one-fifth of all energy requirements of Chile and more than two-fiftbs of its electrical power demand, but has no power resources at all. Central Ohile, between the 30th and the 42nd. parallels, is the populated. section of the cou.."ltry, accounting for most crops and indus trial production, four-fifths of the total demand for energy and three fifths of the demand for electricity.. Central Chile can be su.bdi vided into four economic areas; (1) The ~{orte Chico, It characterized by little rainfall and fertUe soil, and small energy resources, (2) '!lhe Nort:p.- Central area, comprising Santiago and Valparaiso, accounts for the greatest concentration of population in Chile, most of the industrial prqd.uction, and perhaps two-fiftbs of the consumption of electrical energy. Its only power resources are hydro..... electric plants which are, -2 .... I -3- however, unreliable in the dry seasons o (3) and (4) The Central and Southern areas of Central Chile account for most of the agricultural pro duction, about one-fifth of the consumption of electl'ic power, and possess large power resources in the form of coal and b¥d.ro-electrical energy. Southern Chile, from the 42nd degree to the 56th degree parallels, is a desolate area of forests and fjords of little econo~c interest ex cept for its large and still partially une:xplored reserves of coal, b¥cu"o electric power and liquid fuels. Of all potential energy resources, hydro-electric power is clearly the most abundant. Southern coal deposits ma:y have good prospects. Ex ploitation of liquid fuels is in its infancy. This picture points to Chile's fuel problem~ most of the energy is needed in Northern Chile or in the North-Central area of Central Chile where fuel supply is scarce. Even assuming that the three major forms of power supply could be substituted for each other, very large invest:nent in bwdro-electric plants and transmission lines would be needed to satisfy the requirement s of the North-Central area, while the possibilities of supplying the Northern desert with power derived from Bolivian lakes is relllOte. Coal can easily be made available to all coastal areas and indeed this seems at first sight the most logical w~ to expand power supply. However, transport of coal in inland areas causes very troublesome raU problems and coal cannot therefore be relied upon for the populated area I ... 4- of Chile. Liquid fuels can be transported by pipelines, and produce more energy per weight than coal. This would seem an ideal source of supply of power for all zones which cannot be reached by either coal or hydro electric energy. Oil production is, however, only in its first stages in Chile and pending considerable expansion of known reserves and refinery capacity, Chile is dependent upon costly imports. Furthermore, complete substitution between all fuels is not prac- ticable. Cars, trucks and busses must run on liquid fuels, ships cannot use electricity for bunker. Uevertheless. some is possible; thermal plants burning oil can be converted to coal, trolley busses can replace plain busses, and electric motors can replace internal combustion plants in factories. As will be shown in following chapters, the difficulties inherent to the peculiar economic geography of Chile can be reduced if full use is made of substitution between twes of fuels used for energy produc- 2. Efficiency in the Use of Equipment Assessment of fUel and energy problems requires computation of a national energy balance sheet. obtained by reducing volumes and weights of variou.s fuels annually consumed to a standard energy-unit such as the kwh. The usual conversion rates used in South America are: 1 kilogram coal =: 1 kwh 1 kilogram fuel or diesel oil - 1.4 kwh 1 kilogram gasoline - 2 kwh 1 -5- Underlying these conversion rates are assumptions regarding the thermal efficiency of plants transforming heat into energy.· As shown in Table 12, one kilogram of diesel 011 releases 11,000 calor;i.es. This amount if fully converted should be equivalent to 12.76 kwh of energy (see footnote, TaQle 12). To say that one kilogram of diesel oil releases only 1.4 kwh is to assume that the the:rmal efficiency of plants under considera tion is little more than ll~. The above conversion factors already imply very low efn clancy. as illustrated by a tentative computation of ratios in modern and efficient plants. Gross Net Calories Calories kwh per Thermal per kg per Kilogram Efficiency of Fuel Kilogram Diesel .... , ...... , . 11,000 35% 3,850 4.5 Fuel Oil (for steam plant). 11,000 25% 2,750 3.2 Coal •...... •...... , ...... 7,500 155b 1,125 1.3 However, direct records of fuel cons~~tion and power output in Chile show th~~ the performance of electric plants using coal or diesel fuel are be- luw even the South American norm. In particular, coal plants do not pro- d.l ce one-half of a kwh per kilogram of coal burned, because equipment ~s obsol~te and is used at a very low load factor. Table 1 gives some indication on the volumes of fuel used and kwh obtained in 1948. While direct records Y3re often available for electric I -6- power production, it was unfortunately impossible to obtain direct data on the efficiency of plants in the non-electrical sector. It was assumed, how- ever, that it at best would reach only the average efn ciency of plants producing electricity. In the special case of gasoline it proved necessary to adopt the commonly accepted standard as direct records were lacking, 3~ Current Pattern of Energy Consumption Table 1 presents a rough balance sheet of energy supply and uses in 1948. It indicates that coal, liquid fuels and hydro-electric power account for 25%, 45% and 30%, respectively, of all output of energy. Coal Table 4 shows that the railways, manufacturing industries and gas and electricity producer~ are the major users of coal. In 1946, the last year for which a full breakdown is available, they consumed one- fourth, one-fourth and one-sixth, respectively, of total gross output. The coal mines themselves used about one-eighth of all coal consumed, an 6xceedingly high figure. This is main1.y due to the very low efIi ciency of their coal-steam plants for electric power generation, producing only l/l.~ kwh per kilogram of coal. The Chilean Navy and Merchant Mar~ne also us.;) a large amount of coal. Coal exports, which never amount to more than 57b of the total gross production, are wholly foreign bunkers. Imports of coal are occasional • ...... ~-...... ':- ..~. - .. ------...... ,.------....- Y E.iectl"iu powor production by coat mines is excluded from this category. I -7- Electri c1 ty Table 3 classifies capacity and output of all power plants in Chile in broad categories, according to ownership, and nature of fuel used. While many of the figures shown are estimated, some general con clusions can be derived from the data so far available. (a) FUels.--Of the total output of electric power in Chile, one half originates from hydro-electric plants, 40~ from plants burning li quid fuels, and 10';6 from coal plants. The ~despread use of liquid fuels is explait ed by the fact that most of the important copper and nitrate mines are located in the north of the country, and cannot draw upon hydro-electric power supplieso Plants used by copper and nitrate mines in the north represent one-third of the total capacity installed in the country. Although hydro-electric resources are great, their development is relatively recent, and coal and liquid fuel plants in Central Chile (mostly under items "public utilities" and "industries" in Table 3) are used as stand-bys to large hydro units. This explains why the average load factor on hydro-electric power plants is very high while it is lOll! on thermal plants, except for those owned by mining companies. (b) Ow:nership.-Capacity of plants owned by mineJi is a little lezs than one-half of the total installed capacity of the country t while their output is a little more than one-half of the total electric pOtVer produced. t7hile public utilities own 39% of the total capacity ~ their energy supply in the last few years has obviously been inadequate to ------~------~ Copper, nitrates, iront coal. I -8- meet the requirements of industry f which has installed new generating plants to a. total of 1~~ of total oapaoity. This is rather unfortunate' beoause the load factor on industrial plants is olearly lower than on public utilities and some potential power supply is thus wasted. Indus try nevertheless purchases more power from public utUities than it generates for its own use. In 1946, one-third of all power generated by publio utUities wa$ "being used by industry and, of total power generated by public utilities and industry together~ industry was using approxi mately 45%. and gas and electrio services another 9%. so that only 1~5% of the electricity available from public utilities and in.dustrial plants Was being used for lighting, cooking and transportation .. (c) fower and Liquid Fue],s.-As sho\"!Il in Table 6, Chile imported about 10 millj,on barrels of liquid fuels in 1948~ '!'his is equivalent to about 1,400,000 tons of liquid fuels. Of this total, three-fourths was fuel and diesel oUt of which thermal power plants in the north were consuming 7ff/o. Of the remaining 30%. about 15% was used in the genera tion of electricity and 15% in other industrial uses. Aside from 1,040,000 tons thus used, Chile consumed 232,000 tons of gasoline,. 21,000 tons of min.e:ral oU, 30,000 tons of kerosene, and another 30,000 tons of miscel- lanecus petroleum products. Energy Requirements in 4. . 1955. A precise forecast of energy requirements in 1955 will obviously require close investigation on the spot. It is, however. possible to I -9- formulate an hypothesis as to what seems likely to happen, assuming that current trends in conS'llIllption are maintained and no steps taken to modify the general pattern of power supply and energy demand~ A breakdown has been made of the major energy uses (see Ta'bles 3 to 7) t and the probable behavior of each class of energy consumption studied separately. Coal Separate projections were made for eleven major types of coal consumption. The rate of growth in railway traffic bas been estimated at 3fp per year. Applying this growth to current coal consumption by the rail roads in 1946 (a very low figure) we can conclude that requirements in 1955 are likely to attain 682,000 tons. Ni trate mines t the Navy and the Merchant Marine and other users of coal have managed to reduce their consumption relative to pre-war years, possibly by substituting fuel oil for coal. Olrrent consumption seems to have stabilized and it is therefore assumed that requirements will not change greatly until the eqUipment still using coal is com pletely depreciated. Consumption of coal by "other mnes lt and metallurgical industries has decreased considerably since pre-war years and would be likeJJr to stabilize at 20,000 tons per year were it not for the fact that the new I -10 ;... steel mill at Concepcion ise~ected to require 300,000 tons of coal per year when in full operation. It is therefore assumed that the consu.rnp-. tion of coal by metallurgical industries in 1955 will attain 320,000 tons. The consumption of coal by manufacturing industries is increas ing and unless major technological changes or changes in the price structure of fuels occur, consumption of coal is expected to climb at the same rate as industrial production, or 3f3% per year. Consumption of coal by plants producing gas and electricity is also increasing. In 1946, 187,000 tons of coal produced 130 million cubic meters of gas and 128,000 tons of coal generated about 95 million kwh. In both cases conversion plants are extremely inefficient; the Santiago gas plant in particular burns about twice the amou..llt of coal necessary. I t cannot, however, De as sumed that even with a IleW gas plant total consumption will be much lo~er in 1955, for demand for gas increases at a fast pace. Output of electricity is also climbing at a uniform rate of ~ per year and more coal will be required for steam plants even if thermal efficien<¥ improves. In all, consumption may increase by 160,000 tons from 1946 to 1955. Exports of coal are small and imports occasional. For that reason it bas not been thought necessary to make particular hwPotbesis for the behavior of these two items in 1955. I -11 - Adding these estimated requirements,it seems that net coal con sumption could attain 2,445,000 tons in 1955 •. To this should be added probable consumpti6nof the mines pro per. In 1948 their estimated coal consultption for e1ectrici ty produc- tion was 160,000 tons. If power requirements of the mines increase pro,... portionately to non-mine coal consumption, their ovm coal consumption in 1955 would amount to about 200,000 tons. Additionally, we know that in 1948 about 60,000 tons of coal were distributed by the mines to their workers and employees. If coal mines manage to keep that level of con sumption constant, the gross output of coal corresponding to a net con sumption of 2044 million tons would be 207 million tons. Consumption of Liquid FUels Table 6 outlines major statistics on liquid fuel consumption since 1935 and presents their projection for the year 1955. Official data on ~orts of fuel oil and diesel oil are not coherent with offi cial data on consu.roption of fuel oil by copper mines a."t1d diesel oil by ni trate mines as summarized in Table 7. It was therefore decided to add these two items together pending proper interpretation of seemingly contradictor,y statistics. As shown in Table 6, total consumption of fuel and diesel oil in 1948 amounted to 1,044,000 tons. Of this total, 728,000 tons were I -12 - consume.d by mines, 163,000 tons by electric power pla.'1ts owned by public utilities or industries, and 153.000 tons by other users p Table 7 indicates how consumption of fuel oil by copper and ni trate mines was projected. The main assumptions in Table 7 are that promtction of copper will be at a relatively high level in 1955 and that nitrate output will remain at current levels. Tl~ only other hypotheses were that the number of kwh required to produce one kilogram of copper or nitrates and the thermal efficiency of power plants in copper and ni- trate mines would remain at the average prevailing between 1939 and 1946. Fuel and diesel oil producing electricity in plants not oivued by mines was projected on the assumption that its use would grow pro portionately to the demand for public utility povrer,at the rate of 9fffo per year. Gasoline demand, accord.ing to official. data, grew at an annual rate of 8~o from pre-war to post-war years. This rate was used for the computation of 1955 gasoline requirements, and was also tentatively ap plied to the projection of dema.nd for fuel and diesel oil for uses other than electric power generation (trucks, tractors, locomotives, etc.). Electric Power Table 5 ,'cscribes an estimate of electric power output growth I - 13 - from pre-war to post-war. and indica.tes probable levels of requirements in 1955- A forecast of power requirements by copper and nitrate mines in 1955 is made in Table 7. Power supplied by public utilities has climbed steadily at a rate of 9~ per year and demand in 1955 was com- puted on that basis, It was assumed that future increases in the power consumption of coal mines would be proportionate to increase in the gross output of coal. It was assumed that power produced in plants be..,. longing to industries would not greatly exceed the 19+8 level if expan- sion of public utility power capacity at a rate of 9~' per year occurs. This may be conservative for total industrial power consumption has in- creased greatly in the last few years and there is little doubt that the total demand for power generated by public utilities and by industries 1 . taken together grows at a rate above 9276 per year. Pattern of Consumption of Energy in 1955 The various projections described above are swmmarized in Table 2. In calculating to what extent higher demand for energy produced by cow., fuel, diesel oil. gasoline and hydro-electric plants would be reflected in increased demand for these fuels, slight adjustments have been made in the hypotheses regarding thermal efficiency. In particular, as new coal plants should be more efficient than old, a slight average increase • in thermal efficiency bas been assumed. I - 14- 5. Prospects for Expansion of Fuel Supply and Substitution of Fuels Oil Current imports of the main types of liquid fuels (diesel oil, fuel oil, gasoline) amount to 9.4 million barrels per year. Requirements in 1955 may reach 12.05 million barrels. Oil fields in the extreme south of Chile (Cerro Uanantiales), which have been explored systematically since 1942, now produce about 3,000 barrels of crude oil a day. This production is, however, currently sold to Uruguay, there being no refinery in Chile. Local production of crude should expand in the next f61l1 years, although annual output will probably not be much larger than 3.65 million barrels in 1955. This volume of crude exports would partially offset additional balance of payments pressures brought about by increase in refined products imports of 265 million barrels. Sayings in foreign exchange would, however, increase sizeably if all crude production were refined in a 10,000 barrels/day refinery near Santiago, a capacity which could absorb the forecast output of Chilean oil fields.. 'I'his plant "'fould cost approx:iJnately USf:? 25 million, of which :;;10 million would be in foreign currency, and would save at least US::; 7.2 million in foreign exchc:nge annually. rlere this achieved remaining import requirements would still be 8.3 million barrels per year, or about US~~17 million, a serious burden which should be reduced if at all feasible. I - 15- Substitution of locally produced alcohol for oil products may provide a partial answer to this problem. However, a substantial reduction in fuel imports could occur only if really significant departure be made from the present pattern; for instance by reducing the number of plants operated on liquid fuels. This possibility will be discussed in the following paragraphs dealing with coal resources. Coal The mines of Lota and Schwager, on Coronel Bay, are the major Chilean coal sources. They produce good coal, of metallurgical quality. Unfortunately, an investment of US~;J 12 million, of which US~ 8 million is in foreign currency, is required to maintain production at its current gross levels of about 2 million tons a year. Proven reserves of these two mines are not likely to last more than twenty years, and their exploitation is expensive. There are other coal fields in Chile. Some of them are situated in the South Central part of Chile, but the most promising deposits are a" Magellanes where strip minirtg is possible and which are already in exploitation on a very small scale. Although the Magel1anes fields are still to be proven, they offer great promise and seem to be the most attractive potential source of energy in Chile today_ It is believed that, with appropriate investment, by 1955 coal output of 3.8 million tons could be reached in Chile, originating as follows: J!illion Tons Lata and Schwager H;i.nes (metallurgical coal) ••• 2 Other mines, southern area of Chile ••••••••••• 0.3 Magellanes I,rines (semi... bituminous coal) • •.••.••• 1.5 I - 16 - It will be noted that no mention is made of the new fields currently ex plored by the Compania de Accro del Pacifico. It is believed that in the next seven to ten years proper husbanding of the potential output of the three fields enumerated above could provide enough from Lotals and ScroNager's production to cover the steel mills' total coal requirements. The new C.l•• p. fields should nevertheless be intensively studied; progressive depletion of Lota and Schwager will make a new source of metallurgical coal necessary after or during the next decade. ~'fe have seen in previous paragraphs that coal requirements in 1955 might reach 2.7 million tons, if all current trends are maintained. H~~ ever, by eliminating the most inefficient uses of Goal, they could be substantially reduced. Firstly, there is no reason why the Lota and Schwager mines burn 200,000 tons of coal a year, to obtain 50 million kwh when they are located within reach of the transmission line from the 86,000 kw Abanico hydroelectric plant which will have excess capacity for the next five years. Fiftym:DJicn kv'J'h "lOuld barely absorb 10,000 kl' Secondly, the Chilean Railways greatly need a change in motive powar. The introduction of 75 Diesel locomotives on the sector Santiago Chilean (proposed as an alternative to electrification in the Gibbs and Hill technical report to the IBRD) would solve the traffic problem ta~porarily, and would decrease the consumption of coal by 150,000 tons. A demand would, however, be created for 5o,o00 tons or 0.35 million barrels of diesel fuel. I - 17 - Thirdly, in 1948, coal burning electric power plants (outside coal mines) were consuming 130,000 tons, for a total capacity of 37,000 kw, and an output of 95 million kwh. It is estimated that of this total, only the Lagunda Verde plant, a thermal unital 22,500 kw; was at all efficient. The other plants, developing 14,500 kw, were located in areas within easy reach of hydro-electric plants to be built or completed (Jbanico and Cypresses). At least 50,000 tons of coal could be saved by closing down these inefficient thermal units. Potential savings in coal thus &~ount to: 000 tons Substitutes Electric plants coal mines •••. 200 ..... 10,000 leW' H.E. capacity Chilean Railways ••••••••••••• 125 .... 0.35 million barrels oil Public Utilities and Industrial 1/ Electric Plants ••••••••••••• 50 .•.. 7,000 kw H.E. capacity Total ••••••••••••••••••• --3~7~5~-;;.....;..;.-- ~ A higher load factor is ass~~ed. Coal requirements in 1955 would thus be reduced to about 2.33 million tons. On the other hand, about 3.8 million tons could be made available. Almost 1.5 million tons of coal could thus be released for substitution purposes. The characteristics of the fuel and pOYfer situation in Chile, as determined by geographical circumstances 1 are that: I - 18 - (1) Only the coastal areas and plants are easily accessible to coal supplies. (2) Power plants in the North cannot use hydro-electric power. (3) Reserves of metallurgical coal are not large, and, if possible, only non-metallurgical coal should be used for power production. 1rfith this in mind, the obvious disposition of a potential coal surplus of 1.5 million tons is the use of the magellanes deposits to supply electric plants in the North-Central zone of Chile and in Northern Chile. Th~6 involves t ...'TO separate operations: (a) It is believed that all thermal plants burning fuel oil j·n the north of Chile could, at little cost (US,5 0.7 million) be transformed into efficient coal-steam plants. Their est:i.mo.ted output in 1950, 850 rli;tlion kwh, 1.'Vould consume 850,000 tons of coal. This :would decrease i~ports of fuel oil by 500,000 tons, or 3.5, million barrels, or by more than US:',) 7 million. (b) The Campania Chilena de J:!,lectric:i.dad owns a very modern coa1- steam plant at Laguna Verde, near Valparaiso, Its capacity ~as 22,500 kw in 1948, 25,000 kw were added before 1950, and additional expansion by 50,000 kw is projected. The Laguna Verde plant is connected to a pier and has mechanical loading facilities. So far the Laguna Verde plant has taken coal from the central area; consumption in 1948 may have reached 80,000 tons, equivalent to about 65 million }cv,h. capacity expands by 50,000 kw (which would in'Tolve investment of US~/ 15 million of which US~ 10 I - 19 - million would be in foreign exchange), the output of Laguna Verde may reach 400 to 500 million l{Wh and coal consumption may attain 500,000 tons. This is again a case where potential f1age11anes supply could be used to gruat advantage. Consumption in the North and in the Laguna Verde plant in the South would take up 1.35 million tons or more of estimated surplus coal output.' The advantages would be firstly foreign exchange savings estimated at ~p7 million per year at least and secondly, the possibility of increasing power supply of the Santiago area without the large investment needed for expansion of hydro-electric resources. The proposal for conversion of the northern plants requires careful study, because its success depends primarily on the cost of coal delivered in the north of Chile. The annual fuel bill of the thermal plants used by the copper mines a,llounts to about ,7 million. 'l'his means that the price of Hagellanes coal delivered in the i~orth of Chile cannot exceed ~;·7 million for 800,000 tons, or ;?8.7 per ton. It may develop that the r:agellanes coal could be sold abroad, to Argentina or Uruguay, for example, at a higher price, in which case obviously the conversion of the plants should not be made and Chile should L~port oil and export coal. Transport of coal between Hage11anes and 'the North of Chile vTould create another problem" Assuming that c-4 ships of 15,000 tons capacity are bought as colliers, they could at 16 knots cover the distance between the coal mines and the northern harbors approximately 3,333 km, in 111 hours. I - 20 - Allowing tyro days for loading and unloading, two weeks will be required for the round trip, and the delivery per aollier would not be more than 400,000 tons of coal per year in the best conditions. Two 15,-000 ton colliers would therefore have to be bought or chartered., It can be calculated by the same method that one 7,500 ton collier would be needed to supply the Laguna Verde plant. Altogether the investment involved in the three colliers would amount to US~ 6.$ million; Surplus c-4' s cost ;:>1.5 million and their reconditioning ·;;>1 million; a 7,500 ton ship may cost :)1.5 million. Hydro-electric. Power Capacity, A siluple projection shows that the demand for power generated by hydro-electric installations may climb from 1.46 billion krrh in 1948 to 1/ 2.51 billion kwh in 195'-; Total demand for electricity"".rould, in the same period,- grow from 2.9 billion k:vh to 4.19 billion kwh (Tables 1 to 3). Scrapping of obsolete coal plants and their replacement by a 100,000 ~v installation at Laguna Verde would slightly affect the balance of power sources, resulting in a decrease in demand for hydro-proauced electricity, to 2.34 billion kwh in 1955. If the 1955 load factor on hydro-electric plants were the same as the 1948 (5,000 kwh per lGv), this demand would call for a 470,..000 k1!l capacity, or 210,000 kw above the total (including industries and mines) hydro capacity existing in 1948. The gap has already been filled or will be filled by plants installed by ENDESA and financed by the IBRD Y Consumption of the Braden Copper xIines, drawing on a hydro-electric plant is assumed to remai.n ("('It1f'lt.::mt·· I - 21 - or Eximbank, as follows: Kw Los M011es (IBRD) ••••••••••••••••• 16,000 Sauza1 (Exim) ••••••••••••••••••••• 75,000 Cipresses (IBRD) ••• , •••••••••••••• 52,000 Abanico II (Exim) ••••••••••••••••• 43,000 Pilmaiguen (Exim-IBRD) •••••••••••• 15,200 -Total •.•.•••.•••.•.•••.•.•• 201~2!JO Conversion of Fuels in Electricity and OUi'erUses for Fuels in 1955 He have seen that considerable savings are apparently possible through more intense exploitation of local resources, and substitution among types of fuel. It should now be tested whether the pattern of sup- ply and demand after these changes is coherent, i.e. that the total elec- tricity supply is not in fact reduced, and tha.t consumers of fuels other than electricity, such as ships, gas pJants, tractors, cars, trucks, etc., will be able to secure their requirements. (a) Supply of Electricity. - ... Total demand for electricity is likely to reach 4.19 billion kwh in 1955, as shown in Tables 2 and 13. 1/ This implies that total installed capacity should at least be 830,000 mv.- Mines would require 1.50 billion kwh, and if steam plants at the coal 2/ mines are scrapped, woula be short o.oh billion kwh. - Industries would require 0.) billion hlh, and if their inefficient diesel" steam and coal plants are scrapped or keptas stand-bys, would be short 0.07 billion kwh. Assuming no scrapping of plants owned by mines or industry, .forecast Y A load factor of 5~ooo hi<'a could prevail if all pla.nts ":ere operated efficiently. ~/ The load factor achieved QY thermal plant5 of copper and nitr.ate mines is higher than average. I - 22 - demand on public utilities in 1955 is 2.39 billion kwh.· If only efficient plants remain in operation in the industrial and mining sector,adciitiQna1 demand on public utilities would be 0.11 billion kwh, bringing total consumption of public util;i.ty power to 2.5 billion kwh, equivalent to 500,000 1(IJJ. In 1948, total public utility power capacity was 240,000 KH, as fo11ovfS : WJ Hydro-electric plants ••••••• 158,000 Fuel dil plants •• 0 •••••••••• 38,000 Diesel oil plants ••••••••••• lC,OOO Coal plants ••••••••••••••••• 33,000 If inefficient plants had been scrapped, or used as stand-bys, public ut;i.1;i.ty pO"Her capacity would have been reduced to 180,500 I~,", 158,000 hydro and 22,500 thermal. A gap of 320,000 1(101 should thus be bridged between efficient public utility plant capacity in 1948, and de sirable capacity in 1955 .. Even if hydro power capacity is increased by 200,000 Kiii, and coal plant capacity by 75,000 1\1'[ as now planned, a 55,000 KF! deficit is likely if inefficient plants be scrapped. rhis means that unless additional public utility investment is made, one-half of the plants which should otherwise be scrapped or kept as stand-bye (total capacity: 95,000 K(Y) must stUl be used full time.. Host of these plants burn either fuel oil, or coal, and accordingly there should be no major difficulties I - 23 - in converting the best of them to coal. Desirable output would be about 250 million ~(h, equivalent to 250,000 tons of coal. This additional amount of coal could be obtained from the ~agellanes mines, as has been indicated earlier in this paper. (b) Uses of FuelS. -- Since demand for fuels for other purposes than electric power production has been projected on the basis of current trends (with the exception of a partial shift from coal to diesel oil in railways), there is no reason to believe that fuel availabilities would not fit demand. I'"Ianufacturing industries may, however, wish to shift from coal to electric or Diesel power. It is unfortunately impossible to assess the probable nature and effect of the shifts Which could take place. r:hile it is not believed that the pattern presented in Table 13 would be radically modified, there should be a careful, on-the-spot study on the subject. 6. Investment Program The total investment required for the e~p~nsion and substitution program outlined in this Appendix amounts to US~~ 66 •.7 million, including foreign exchange expenditures of US;') 45.5 million ,. as follows: I - 24 - Million US $ Foreign Exchan~ Total -'" Coal ~ines expansion -- Lota and Scmvager. 8.0 12.0 Strip mining equipment -- i,IIagellanes coal . deposits ••••••••• ,.~.o...... 6.0 7.0 Three colliers (traffic Hagel1anes - Valparaiso - Tocopilla) ••••••••••••••••• 7.0 Conversion to coal of power plants operated on fuel (200,000 kN) ••••••••••••••• ••••• 0.5 0.7 Gas plant in Santiago .... ,. .. ., ...... 5.0 7.0 Petroleum refinery 10,000 bbls/day ••••••• 12.0 25.0 steam plant 50,000 ~N at Laguna Verde •••• ___ 7~.~0______1~5~.~0 __ Grand Total Investment ••••••••••••••••••• 45.5 66.7 ------~~-- Diesel electric locomotives, more trucks, cars, machines, etc., would obviously involve additional expense. However, they are not, pro- perly speaking, counted as investment for energy, as they would take place a~~y in the normal development of transport and industry. This investment of USij~ 66.1 million would enable Chile to produce an additional 2.16 billion kJlTh per year (see Tables 1, 2, 13). Here this increase in output obtained through expansion of plants consuming fuel or Diesel oil, fuel imports would increase by 1,550,000 tons (11 million bar rels) or US~;; 22 million per year - a balance of pa;yments burden which Chile can ill afford. I - 25 - To obtain the same expansion through increase of hydro-electric power capacity would require new installation of 435~OOO.KW, representing an investment of US::; 175 million, foreign exchange costs exceeding US::'; 87 million. \fere it possible to expand swiftly local oil or coal output, total costs of exploration, refining and necessary transportation might amount to US:.s 25 to 40 million in foreign exchange. Additionally, the conversion of existing plants using power and the construction of new thermal electric p~Ter plants would be needed, representing additional expenditures of about US::;, 75 million. Pending further investigation, the solution outlined in the table above seems by far the most economical. Direct annual foreign exchange savings are at least US~) 10 million, or more than necessary to meet service of a foreign loan to cover the exchange component of required investment. CHILE Table 1 COH'SUir,pTI01~ OF 7uELS .AIID EH2llGY Il'l 19h8 Total Consumption To~ Consumption Output of Other Uses of l!'uel€l of EnerR'Y Electric P..:::O-"\.''-''8;.::r___ _ . of Energx 000 Tons E(lUi va- ktvh per Billion k't-Ih per Bi llion 000 Tons Invh per Billion 000 Tons 1ents kilogram kwh kilo,eram hrh of ]'uel kilq;>:ra1ll of Fuel .-;;;;..:...:::.----'= kt'lh ._-- Coal 2,230 0., 1.11 0.48 0.14 290 0.5 0.97 1.9hO Fuel Oil 1.7 0.94 555 1,044 7.46 m barrels 1.42 1.48 1.1 0.18 161 Diesel Oil 1.1 0.36 328 Gasoline 232 1.93 m 2.0 0.46 2.0 0.46 232 barrels If¥dro-:cilectric 290 th Ki'l 1.46 1.46 Total 4.51 2.90 1.61 CHILE Table 2 COlTSUl,lPTION OF F1IillLS J.\~'JD :'ii::JIillGY IN 1955 Total Consumption Tot.:'1l Consumgtion Output of Other Uses of Fuels of Jiner.!?";'l Electric POltJer of EnAl'.'1';t: 000 Tons El1uiva- k1!Th per Billion Invh per Billion 000 Tons kuh per BilJion 000 Tons lents ldlcgram kwh ltilcp.:ram kwh of Fuel kilc,gram kuh of Fuel Ooal 2.7 0.62 1.67 0.62 0.23 371 0.62 1.LtLt 2.330 Fuel Oil 8.85 m 1.7 1.06 625 1.24 barrels 1.4 1.74 1.1 0.29 260 Diesel Oil 1.1 0.39 355 3.2 ra Gasoline 0.38 2.0 2.0 barrels 0.75 0.75 378 Hydro-Electric 500 2.51 2.51 th Kiv Total 6.67 4~19 2 .!~8 CHILE Table 3 CAPACITY OF POi'/ER PLANTS .t'U'lD OUTPUT IN 1948 Estimated breakdown per main category of plants (a) Million k1...rh. (b) Hundred kv,h per KW installed. (c) Thousand K"W' installed capacity ~bllc Utilities Industries Mines TotAl (a) (b) (e) (a) (b) (c) (a) (b) (c} (a) (b) (c) TOTAL 1166 48 239.8 268 34.5 78.0 lLt·71 48 305.8 2905 46., 623.6 Hydro-Electric 959 61 157.9 208 45 45.7 290 47 57.8 lL!57 56 261.4 Fuel Oil 96 25 38.0 33·0 20.0 16.5 820 53 1 .0 949 45 209 .. 5 Diesel Oil 27 25 10.5 7.5 20.0 3.6 313 45.5 7!J·.0 347.5 40 .1 Coal 84 25 33. 4 11.5 25·0 4.2 l~8 .0 25·0 19.0 lU3.5 25.0 56.6 Others 0 8.0 10.0 8.0 0 8 8.0 Sub-Total Thermal 207 25 81.9 60 19·5 32.3 1181 48.5 248.0 1448 39.5 362.2 CHILE Table ll- 11 PRODUCTION Al\)'j) CO:-:fSlli:iPTIOH OF COAL (Thousand Tons) ,-----_._----- Other Consumed Mines by 2/ an.d Gas! Output ~iines - Output Rail- j:Ji trate Heta1- Elec- Ex- Im- Gross (a) (b) (c) Net \,lays i:>1ines 1ur~ ivif,e:. tric.~ Navy Oth~r__ ports port.s 1937 1988 102 52 53 1786 494 124 58 335 259 349 193 13 o 1938 20ll l j- 107 41 56 1838 487 104 64 36l.!. 302 301 161 9 o 1939 1850 102 137 51 1651 458 33 59 312 306 287 211 4 o 191.10 1938 120 4 109 1740 461 15 64 370 30.5 262 204 14 220 1941 2060 122 5 104 1846 494 10 76 4-06 3.51 254 184 50 69 1942 2151 285 1921 527 26 67 3::4 420 273 209 86 17 1943 2265 262 2032 531 34 73 422 342 292 205 68 19 1944- 2279 259 2047 524 33 62 41t} 348 272 197 46 15 1945 2079 252 1851 535 33 49 462 290 217 154 t::5 1946 1966 246 1743 504 35 20 489 315 212 174 39 3 1947 2079 1849 15 32 1948 2234 160 --60-- 2015 34 92 1949 2076 1882 62 3 1955:31 2705 200 --60-- 2445 682 35 320 560 473 200 17.5 1/ Source for data 1937-1946: l:'ineria. Direccion General de 'i!stadistica. Chile. for data 1947-1949: Sinopsis 1949. Direccion General de Estadistica. Chile. 2:./ From 1937 to 1941: a - Consumed by mines. in process of coel production. b - Used in ships. c - Distributed to \.rorkers and employees of mines. After 1941: All tyn6s of consumption by mines are found under (8). JI See discussion in text of report. CHILE Table 5 OUTPUT OF ELECTRIC P01r8R (Million 1{1,,,rh) Thermal Plants Hydro-electric. Total O>.ltuut Outnut Plpnt!; Oui!:m.t Public Coal Sinali !I I-fines Utilities Mines Hines Industry Total r·lines Total i·anes Total tu ____ ~ ____ (1) (4) ~ ______i6L_ ill on (q) iJJll 1939 1047 1712 778 958 269 755 1940 1127 569 1790 888 1025 239 765 1941 1360 614 1935 1061 1090 299 844 19L~4 1402 729 104 2239 1080 1186 322 1053 1945 1407 89?rW 43 149 2360 1081 1195 326 1164 1946 1231 986 41 178 2393 100h 1303 227 1089 1947 1323 1084 2601 1047 1400 276 1201 i948 1378 1166 48 45 268 2905 1088 14h8 290 1458 1949 1191 1283 9.51 240 1955 1388 2225 70 45 300 4028 1096 292 Sources: For (1), (7), (9), "J.1ineriau and Table 7; for (2), Estadistica Chilena; for (3). uHineria"; for (4). de rived; for (5), Industries. for (6). (8), (10), Industries in Chile (~CLA). hi Totals do not necessaril;y- correspond to sum of (1) + (Z) + (3) + (4) + (5). JJ./ Often reported as 886 million k1t7h. '!hieh could be a mi sprint. CHILE Table 6 1/ UlPOI.. TS AND CONSUt4PTI02T OF 1I(~UID FUELS ---~-~ Fuel Oil Diesel Oil Total Fuel Breakdol;In of :&11e1 Gasoline i'llinera1 Oil (Crude) and and Diesel Oil (including Aviation) D1p.l"AJ Oil Con ~1lTnr.ti..D..n..-_ -----_.--"--_.. _._- 000 rJii1lion 000 Mllion 000 I,lines Others 000 000 IvIillioll ---.---000 Ei11ion Tons Barrels Tons ~:PI'lI"relfL_----'1:on~ ___ .QDO~.'L_ QOO Hecto Iit.ar..f!..- Tons B8rrflls Tons Bar.rBln 1935 330 2.359 50 .3.58 984 74 .617 10 72 1936 362 2.588 19 .136 880 66 ·552 9 6L~ 1937 634 4.533 37 .265 1027 77 .6l!4 12 86 1938 574 4.104 40 .236 1223 92 .767 12 86 1939 442 3.160 89 .645 531 435 96 1275 96 .800 12 86 1940 607 4.340 60 .429 667 514 1.53 IL!ll 106 .8P5 14 100 1941 762 5.449 45 .322 807 675 132 1647 124 1.033 17 122 1942 68l:' 4.898 57 .408 1382 104 .867 16 114 1943 794 5.676 83 .593 1232 92 .772 15 107 19114 677 4.841 1.;,4 .315 721 681 LtO 1172 F8 .735 15 107 1945 580 4.1lt7 92 .658 672 728 56 1334 100 .837 1Lt 100 1946 845 6.042 63 .486 913 688 225 2185 16l~ 1·371 14 100 1947 803 5.741 76 .543 8'19 700 179 2586 19Lt 1.621 21 1';0 1948 881 6.299 163 1.165 10lt4 728 31tfol 3089 232 1.936 21 15(;JJ 1949 838 5.991 105 .751 9h 'j 635 308 31128 257 2.1h 8 22 157 1955 1239 729 510 378 fJ In 1948. 16),000 ton.s 'VJere used by electric Source: Anuario de Comercio Exterior~ Chile. povler plant s, and 153,000 by other users. JJ In 1948, consumption of kerosene amounted to 11 The follo"Jing conversion factors ,'Jere used: about 29, oco ton. s, E'nd consUlTiPtion of other potr'ol(~:uw- products. to 42,CCC tons. ' :'1000 liters = 0.87 tons lOCO liters = 0.75 tons Fuel and Diesel Oil, '} 1 ton = 1136 liters Regl1lflr and J\via- - 1 bt'.rrel ::: 159 Iiters Heavy Oils : 1 ton ::: 7.1.5 barrels tion Gasoline ) 1 ton = 8.36 barrels ( 1 barrel = 159 liters { 1 ton = 1330 Iiters \" TAJ3LE 7. CHUB PEOJ)UCTIOl~ OF PO\!!iR AND COl~Sln1PTI02~ OF FUEL :BY GOP?~R p.lii;;LliITRATEj IvlINES sa,..", ~ a.._ t " - .,.. -.'-~------' j :ru~r ~:A11'}~ ._.. __ ]'O~j~ ___ ..' COPPJi1R s . - ~_·o . , .. --- - '"'CDr! .--.------r.-. t= r.-. 0 Q rl ;::: rl ~ 2'~~ . I 0 (!) u 0 (f.l til P I P; 0 rd· ;:! .p P; ~?~o1 ~£21 ((.l .p .... 'H \H .j e 00°0 .-\ .p((.l. +' r.-. . ~~ 0 r.> • ()O ()Cl <.l [~ p • .. ~--.:... , - "-,- """- ~-,,",-- .-. ,-' , l/ Maintenance of rate assumed. £) Braden Mines. Centre.l Chile. Output of power is Hydro-Electric. Assumed to be 26% of total from 1947 on, on basis performance of previous years. J./ Assumed. ~ 1 metric ton of liquid fuel = 7.15 barrels. CHIL3: Table 8 CAPACITY OF POv~R PLM~T3 IN 1948 filIliES (Thousand btl) --- Steam/Fuel SteAm/Cosl Diesel Hydro Tot8l ColID.!l!: (1) Chuq:uicamata 119 11Cl.O (2) Potrerillos 36 3·5 39.5 (3) El Teniente 5l. 51.0 Nitrates (1) Taracapa 12 12.0 (2) Tocopi11a (Lautaro Nitr) 17 1.1 18.1 (3) Antofagasta 17 17.0 (4) Addition to (2) in 1947 13 13.0 Coal --(1) Lota/Sch\"ager 15 15.0 (2) Arauco (Hafil) 4 4.0 Other Mines (1) Iron 7 7.0 (2) Others 8 2.2 10.2 155 19 74 57.8 305.8 CHILE Table 9 CAPACITY OF P\)\'lER PLANTS IN 19h8 INDUSTRIAL (Thousand levr) ------> SteAm/fuel Steem/Coal Diesel Hydro Total l Juan Soldado Cement s.i l,je1on Cement 2. 17·5 19.5 Papele s y Cartones 8.5 19.5 28-. Naeiona1 de Carburo 6. 6. Concepcion Area 0.7 1.0 1.7 Textiles (Chiouyante) 3·5 0.2 3.7 Peneo Sugar 0.7 0.7 Valdivia Area 0~7 1.7 2.4 Sugar Refinery Vina 8.0 8.0 16.5 4.2 3.6 45.7 78.011 11 Juan Soldado Pover Plant uses recuperated steam. CHILE Table 10 Cl~.PACITY 0]' POi'~,{ PL.Al~TS IU 19Lt 8 PUBLIC UTILITIES ( Thou sand b!) Steam/Fuel Steam/Coal Diesel --_._--BYdro Total Ariea 0.7 0.7 lQUi Total J8 33.4 10.5 157.9 239.8 Abbreviations: (E) Endesa (C.G.E.) Compania General de Eleetricidad. (C. Ch. E) Compania Chilena de E1ectricidad. (49) To be completed in 19L~9. KW capacity in paren thesis is not included in the total. CHILE Table 11 pm-lEE BESGURCES SANTIAGO-VALPARAISO .AP.EA HI 1948 (Thousand KVA) 1/ Thermfll Hy(1rg. Total 7li.0 157.0 Compania Chilena 54 .0 110.0 Industries 20.0 y (Thousand KV1) Total 66.6 141.3 Campania Chilena h8.l 98.3 Industries 18.5 J./ 43.0 1/ 11 Statements of don Raul Saez, at a meeting of the Ensineers Institute, Santiago, November 11, 1947. g/ Converted on basis 1 KII = 1 KVA X 0.9. J./ See Table CHILE Table 12 ENERGY liq:nVALENTS OF l"IAJOR FUELS Calories per Kilogram Solid Fuels Anthracite 7.800-8.300 Bi t'tJJuinous Coal 7.200-8.000 Lignittl 5.000-6,000 i'iood 3.300 Coke 7,000 Charcoal 6.700 Lir:,uid Fuels Bunker and Fuel Oil 11.000 Diesel Oil 11.000 Petrol 11.500 Gasoline 11,500 Alcool 5,')00 Benzol 10,000 Calories per Cubic Vietar Gaseous Fuels Gas 5.000 Natural Gas ILl ,000 ilater Gas 2.500 Relations between heat and ener~y: 1 kilo cal-orie ;: 4.180 joules = 4.180 ",atts ;: 4.18 K':! per second 1000 cal per sec = 4· .180 KW per second 4180 IGI per sec = 1.16 k",h If heat in fuels is fully converted, each 1000 calorie's in fuels should produce 1.16 k'l'rh. 860 calories = 1 l~lh. Ho,,!ever. thermal efficiency is usually lo",er. iih8n operation of plants le ac.e1uate it may be 30-35% for diesel plants. 20-25;~ for fuel 0.11 plants. 15-20;J for coal. etc. Extremely 10111 thermal efficiency factors prevail in Ohi18, CHILE Table 13 ENERGY PROGRAM, 1955 Total Consumption Total Consurrmtion Ol1tput of Other Uses of FUAls of Ener1';{ Electric Pmret' of Enet'a 000 Tons Equiva- kwh per Billion k'lvh per Billion 000 Tons ~."h per Billion 000 Tons lents kilQO't'em k",h kiloP't'p.m k"lh of FU.Al JdlCP'r~m kwh of Fne1 Coal 3·390 0.83 2.81 1.2 1.46 1,210 0.62 1.35 2.180 Fuel Oil 0.670 0.77 1.2 0.38 315 Diesel Oil 1.1 0·39 3.55 Gasoline 0.380 2.0 0.75 2.0 0.75 378 Hydro-Electric 470 th Kvl 2.}4 2.34 Total 6.67 h.19 2.48 Al~·jrEX II WillOns OF ESTABLISHIlTG A DEVELOPMENT PROGRAM Prepared by Harold Larsen CONTENTS Page 1. THE CON~..t!liiT OF A PROGRAM • • • • It • • • • • • • • , " • • • •. •. 1 (a) Program Lending ...... '. , . ,. . . . ~ . . 1 (b) Coordination of Resources and Investments • • • • • • 2 2. TH]l STRUCTURE OF A PROGRAlvl • ...... , . . ~ . . . . 5 (a) Sector Programming ••• '. '.. '. •• • • • • • • • •• 5 (b) Investment Programming • •• • • • •• • .. • • • • •• 6 (c) Development Programming • • • • .. • '. • -It • • • • .. II 10 ANNEX II METHODS OF ESTABLISHING A DEVELOPUENT PROORAH 1. The Content of a Program (a) Program Lending In a sense, progra~ lending is a logical result of a consistent and penetrating attempt to establish project priorities, including those projects not loan financed. Program lending could, in fact, select from among those projects finally incorporated into the investment segment of a development program those best suited to the type of loans contemplated. It would make little difference to the development program itself which projects were financed by foreign and which by domestic resources, within the total set for each by the program. The form of lending for actual pro jects is a means to an end, that end being implementation of a development program. The lender should therefore be as interested in the success of the projects which he is not financing as those which he is, for his action is based upon his acceptance of the program as a whole. He would not wish to see projects abandoned or others undertaken without good reason, nor similarly any capricious variation of economic policies. An essential of program lending is that before lending the general strategy and some of the tactics of development have been agreed with and accepted by the bor- rower. -1- II - 2 - Thus a foreign lender supporting a development program would wish to influence the use of any other foreign resources available to the bar rower, whether from other lenders ar from grants. The development progra.ll othervvise passes partially outside his appraisal and consent, upon which he bases his own lending. (b) Coordination of Resources and Investments Productivity increase, the goal of a development program, involves improvement in the economic and technical utilization of resources. Huch can be done along these lines with little or no investment, through appli cation of better technical knowledge and managerial ability. Obviously no opportunity for improvement in these fields should be neglected. Neverthe less, in most sectors productivity increase will also require improvement in the technical apparatus of production, which requires capital. Thus the investment problem is a large part of the production problem. j~any countries could undoubtedly better their performance in investment from their ovm resources through more careful choice of developnental projects and policies. The limitation of investment resources imposes selection among the requirements that can be met and the essence of good policy is that selection, and suitable selection, be made. This involves a conscious developmental program -- that is, a framework ,vithin which all proposed investment projects are brought together into relationship with the resources available for their execution, and those selected which promise greatest effect upon production. II -3- In a sense there is always a development pattern. Thc.t is to say" Government is already undertaking investment, and is already operati:lg policies which affect private investment and activity, through, for exam ple, credit and import controlso That investment and those policies constitute the present de facto program. But this is quite different from a development pro~am whose content, structure and implementation is explicitly and consciously examined in the light of the best available information and foresight be;fore resources are committed. That there is room for improvement in this respect in most countries can scarcely be questioned. Proper developmental programming involves neither the planning and control of every economic activity in the country nor the prior working out of details covering everything 4 strategy is clearly outlined but tactics become the day-by-day problems whose exact definition would be impossible in any program. The program sets objectives and broad routes as a policy directive covering not only the large non-recurrent investlilent decisions but also detailed administ.rative decisions already and continu ously being made. There are, however, two irreducible essentials. Firstly, the Government must adopt a public investment plan -- that is, must relate its ovvu investment expenditures in total to the capacity of the economy and of the budget, and in make-up to emergent developmental requirements. II - 4 - Failure in the first breeds inflation, and in the second, waste and slo-I'fed development; a crude example would be for all resources to be thrown into road building and none into power development. Secondly, the GoYern ment must weigh the effect upon private investment and production of those economic and financial policies which are already the duties and the 1veapons of Government. Taxation policies, banking and credit control policies, exchange and trade control policies should work to assist and not obstruct growth of the private economy. A development program necessarily covers a period sufficiently long for important projects to be finished as well as started I and for policies to show their influence. For this, one year is too short; four, five, or six years provide a more appropriate program period. It is then possible, for example, to provide for proper investment sequence. Pro jects may be lIDdertaken in the first year whose whole rationale derives from complementary projects to be started later in the program. In some cases initial projects may be largely wasted unless supported by subsequent investment. Roads may be built into an area programmed for irrigation; without the subsequent irrigation, the road investment is wasted. A development program is thus a consistent four-to-six-year strategy, covering broad objectives and methods. The execu.tive period, however, is annual. Upon adoption in year one, the program cannot define every measure required in year three. That will be reviewed late in year tr,'Vo. But what the program does do is describe the principles which should II -5- guide that review in order to achieve the objectives of year five. Imple mentation should be flexible while objectives are consistently maintained. 2. The Structure of a Program The ground work of programming is sector programming. The results of sector analysis are then brought together within bra broader frameY'forks, first, one permitting appraisal of investment consistency and coherence, and second, one clarifying the estimation of total suggested expenditures against expected resources. In the process of firming up a program, revi sion of sector objectives will be neoessary until finally a coherent fOl~U lation is reaohed which is consistent with best estLmate of available re sources, Without this, technically good sector programs could still add up to an unbalanced or inflationary development program. (a) Sector Programming • Analysis and programming of sector investment would be required primarily in the fields of transport, fuels and power, agricultlrre, and industry. Seotor programming will necessarily rely heavily upon technical and engineering analysis and costing, the economic cont~ibution assisting identification of desirable directions of growth. VJithin each sector" alternative routes to general objectives would be considered, those being selected which promise most efficiency for least cost. In the transport sector, for example, roads, railways, shipping and air transport are re lated to each other, in search of an integrated transport pattern likely to meet foreseeable future requirements. The probl~~ is not merely one of II -6- defining appropriate road constructi,on methods, or the improvement of railway traction. An example of a possible sector program for energy,'applicable to Chile, is attached to this paper as Annex I. This suggests, as a first approach, a power investment program of US$ 45.5 million in foreign exchange and US;,~ 2l~2 million equivalent in local currency. These pro posals should not, however, be adopted and acted upon until the suggestions for other sectors had been added to them, and the sectors compared with one another and the whole with expected resources in foreign exchange and domestic currency.: The result might well require drastic revision of first proposals. (b) Investment Programming The first fraw,EWfork within which the proposed sector progTams should be placed is that of an investment progra~, which is more than simply the sum of sector programs. The investment progra~ v;ill be detailed in that part which relates to Government investment (the public investment plan), being based upon technical and economic sector analysis, and much less detailed in that part relating to private investment, for which there may be no possibility of detailed sector work. Nevertheless, the invest."Jlent program should incorporate within its general totals the broad directions in which private investment is expected to flow during the period. In appraising a draft investment program, particularly that part which comprises the public investment plan,. there is, of course, required an inter-sector examination of the consistency of inmediate objectives. II - 7 - The transport program may ignore road building into areas scheduled for agricultural development; the power program may neglect a change of railway traction postulated in the transport program, or an expansion of industrial power use required by the industrial program. There are, however, certain additional considerations derivative from the principle that the ultimate objective is to stimulate maximum future production increase from present investment. These considerations to not necessarily determine the investment program, but they provide principles which may at times be useful in refining the program structure and in assigning project priorities. They may be called the complementarity, depth, and duration of investment, each being an economic rather than a technical aspect of best use of investment resources. Complementarity relates to the choice of investment projects in the sector programs. Some projects may be of such character that v'Then completed they liberate and stimulate other additional investment opportuni ties" while others, valuable as they may be in causing direct growth of production, have little indirect or secondary effects. Electric power in vestment may permit subsequent industrial investment; key industrial in vestment may encourage subsequent ancillary industrial investment in com plementary service industrieso The last two considerations, depth and duration, relate to the spread of investment resources over proposed sector projects; how many can be done? For given resources, the answer will depend upon hO"f much II - 8 - goes into eaoh project. Deep, or heavy, investment -- that is, invest ment in a productive process that will when completed use a large amount of capital equipment in relation to labor -- is not necessarily the most economically desirable. Clearly, if only heavy investment (llcapital intensive") projects are undertaken, available investment resor:rces will cover fewer projects than if same light investment (Hlabor intensive") projects are adapted. Fewer productive processes would be improved. Some projects, such as hydro-electric, are necessarily cap~tal intensive; other, particularly in agriculture, do not need to be to secure notable production increase. The depth of investment relates to the amount of capital equipment permanently allocated to the productive process llpon completion of invest ment. The duration of investment relates partly to the depth of investment, but mainly to the methods and hence the cost of carrying out that invest ment up to the point at which it comes into production. Irrigation or road projects may be built largely by hand, or by highly mechanized methods. Either may be cheaper in final cost, depending upon the cost and supply of labor and of machines respectively, but the labor intensive method will take longer, and hence probably involve smaller annual investment • . 1n the other hand, if all investment projects are of long duration before coming into production, final output increase is delayed, and this delay itself may increase the difficulties of maintaining investment levels. The development program may require certain expectations regarding growth of consumer good output in relation to personal incomes, expectations which II - 9 - must be coherent with the investment program, particularly with respect to investment duration. Conversely, the investment program must seek investment duration compatible with a self-consistent development program. Thus some projects may require to be short duration, yielding their output fruits quickly, and others long duration. In some cases the desirable duration period will govern the con struction method used in investment,·· and hence the annual investment cost. If quick increase of agricultural output is desirable, irrigation or other land ~nprovement may be carried out by highly mechanized methods. If longer duration be acceptable, more labor intensive methods might be adopted, particularly if there be surplus labor available in the district. Thus general considerations, relevant in constructing investment and de velopment programs, may upon occasion suggest some need for modification of sector progra~s, not only in their level or total, but in their structure. It should also be borne in mind fo~ some projects that first cost is less than total cost; investment in the project may be less than total social investment required to bring the p~oject to full fruition. Vlhen vleighing the broad alternatives, the latter should be considered a.s well as the former. For example, an irrigation project in a formerly uncultivated area involves not only the investment in irrigation construction (the pro ject) but also the subsequent requirements for farm capital and for 1Isocial overheadtl such as housing and some public services. It may be possible as an alternative to increase farm efficiency and output in already popu lated areas, where some farm and "social overhead" capital already exists, II - 10 - ....nus (" .I.!I1i·~ting small€. r total investment resources. (c) De'lelopment Pro~;ramming The final stage of development programming is reached when the investment progra.'1l is comparod with available resources to determine h,ther the proposed scale 0:" investment is within the capabilities of t_le economy, incl-lding any e::pected foreign assistance. In estimating available refour( es approxi.rnc: tion can be made by adding up expected fi~ancial availe:>ilities, estima'Ling each by direct source. Thus, for do:nes,!:,ic currer: JY, thEire is the amount that can be allocated to official investrc.ent fre n budgetary and 0 ther revenues, and there may be possibility of domestic t .)nd sales. In the private sector , it may be possible to reach appro.iimate estimate of private savings includinc reinvested earn ings of enierprise. For foreign exchange, the proportion of current earnings • ~hat could be devoted to imports can be estimated and the probable level of direct investment and foreign loans taken into aCcolli~t. Total pppa~ent available finance can then be compared with invesunent requir e:nents .. The financial approximation should, where possible, be supplemented an!. chedced by €sti.rnate of real resources, particularly in the field of rr ;mpower • In war-time Britain it w'as found that the ultimate limit to expansion of war production livas l'!lanpOHer shortage, with acute shortage of important skills; manpower budgeting was instituted, and found so useful in guiding general policies that it has been continued. :he same limits could operate much sooner in a countr~r attempting to speed its II - 11 - rate of economic development, where almost by definition modern productive skills are scarce. Estimates using the methods of manpower budgeting would thus provide useful cross-check upon the possibilities suggested by methods of financial estimate. The estimated availability of other Teal resources (for example, cement and steel) would also provide additional checko Such approximation is undoubtedly better than no attempt at all at total appraisalo nere every estimate accurate, the method would in fact be valid. The difficulty is that the estimates of financial sources may themselves be inconsistent. For example,. are the levels,of Government revenues and expenditures (upon which the estimate of budgetary investment resources is 'based) consistent with the prcbabl~ level of consumer expenditures (after direct taxation) in relation to expected domestic output of consumer goods plus consumer good imports? Is the last item consistent with expected exchange earnings minus the level of required equipment imports? If there be inconsistent estimates of such items, the program may involve inflation. In fact, precise and reliable answers to questions such as these are virtually impossible, partly because the statistical information iceally required is lacking or at best never sufficiently up-to-date. Nevertheless, some coherent tests are available. Just as in sector programming, projects are related to one another, and in investment pro gram.lling sector programs are brought together,. so in final development prograw~ing the financial estimates of resources are brought together into a relationship designed to reveal any obvious inconsistencies. The II - 12- framework within which this can be done most conveniently is that of the national accounts. To say that full, precise, and accurate national accounting should. precede development programming would be a counsel of unattainajle perfection. Nevertheless, it is precisely the attempt to visualize the behavior of national accounts as explicitly as possible that distinguishes development programming from the piece-meal and disjointed adoption of projects. In the fra1IleVlOrk of national accounting, significant economic magnitudes are brought together as in a balance sheet, and scrutinized for consistency. lIany trial balances, incorporating the changing evaluation of component elements would be necessary before one was finally reached to inform an1 guide action. An example of the function and method of national accounting in assisting development programming has been presented in the first section of this paper dealing with the possibilities in Chile.