Document of

FILE COPYE The World Bank

FOR OFFICIAL USE ONLY

Report No. P-1846-Po

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

ELECTRICIDADE DE PORTUGAL -- EMPRESA PUB

WITH THE GUARANTEE OF

THE REPUBLIC OF PORTUGAL

FOR A

SIXTH POWER PROJECT

June 8, 1976

This document has a restricted distribution and may be used by recipients only In the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Escudo (Esc)Esc 1 = 100 centavosEsc 1 = US$0.04Esc 25 = US$1.00Esc 1,000 = US$40.00Esc 1,000,000 = US$40,000

WEIGHTS AND MEASURES

kW = kilowattMW = 1,000 kilowattskWh = kilowatt hourGWh (Gigawatt hour) = 1,000,000 kWhkV (kilovolt) = 1,000 voltskVA = kilovolt ampereMVA = 1,000 kVA1 Kilocalorie (kcal) = 3,968 British thermal units (Btu)1 kilogram (kg) = 1,000 grams (gm) = 2.205 pounds1 ton (metric: 1,000 kg) = 0.984 long ton1 meter (m) = 3.281 feet1 kilometer (km) = 1,000 meters = 0.624 mil1 square kilometer (km2) = 0.386 square mile

GLOSSARY OF ABBREVIATIONS

EdP = Electricidade de Portugal-Empresa PublicaCPE = Companhia Portuguesa de Electricidade, S.A.R.L.EIB = European Investment Bank

FISCAL YEAR

January 1 to December 31

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT TO THEEXECUTIVE DIRECTORS ON A PROPOSED LOAN TO

ELECTRICIDADE DE PORTUGAL - EMPRESA PUBLICA, WITH THEGUARANTEE OF THE REPUBLIC OF PORTUGAL

1. I submit the following report and recommendation on a proposedloan to the Electricidade de Portugal - Empresa Publica (EdP), with theguarantee of the Republic of Portugal, for the equivalent of $36 million tohelp finance an electric power project. The loan would have a term of 15years, including 3 years of grace, with interest-at 8.85 percent per annum.

PART I - THE ECONOMY

2. An economic report entitled, "Current Economic Situation and Pros-pects of Portugal," (No. 730a-PO) was distributed to the Executive Directorson July 1, 1975. Discussions on economic policies were held in Portugal inFebruary and May 1976. The outcome of these is reflected below. Country datasheets are attached as Annex I.

Past Performance

3. During the pre-revolution decade ending in 1973, Portugal's GDPincreased at an average rate of 7.2 percent per annum, with industry and con-struction growing at an annual rate of 10 percent, services at 6.7 percentand agriculture at less than 1 percent. However, the fast growing modernindustrial sector was unable to absorb the large pool of the unemployed inrural areas. In addition, neglect of the agricultural base and heavy in-volvement in colonial wars induced an exodus of Portuguese to the industrialcountries of Western Europe. This eliminated open unemployment at home butit also drained the country of valuable human resources. By 1974, emigrantstotaled over one million, or the equivalent of one third of Portugal's presentlabor force.

4. The impressive gains of the Portuguese economy in output were sus-tained by the efficient use and relatively high rate of investment averagingsome 18-20 percent of GDP. The thrust of development strategy in the pre-revolution period generally emphasized industrialization, transport, and con-

struction, with relatively little attention paid to the structural weaknessesand inefficiency of the agriculture and education sectors. The developmentprocess took'place within an economic and social structure based largely onprivate enterprise. The Government's low interest rate policy, together withheavy protection of domestic producers and easy access to credit, fostered pri-vate local and foreign investments. The outward linkages of the multinationalfirms based in Portugal, together with low domestic wages, encouraged exports.In addition, low domestic prices and political stability stimulated tourismand remittances from Portuguese abroad on a large and increasing scale. Up

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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to 1974 the budgetary position remained sound and the balance of paymentsshowed substantial surpluses, with accumulated foreign exchange reservesreaching the high level of $1.7 billion at end 1973, and a stock of goldof about 27.8 million ounces (see para. 7 below).

Recent Developments

5. The Revolution of April 25, 1974 transformed the institutionaland ownership structure of the Portuguese economy, and caused major changesin the Government's political and economic philosophy, with Portugal shift-ing from a dictatorship to a social democracy.4 Following the Revolution,key sectors were nationalized through a series of governmental decrees (i.e.,banking and insurance; major industries, such as steel, cement, chemicals,tobacco; public services, such as transport, communications, and electricpower). As a result, almost the whole financial system and a majority ofthe basic industries and services sectors are now under government control.These measures, however, did not affect foreign investments, which weregenerally excluded from nationalization decrees.

6. The social unrest and political uncertainties characterized by fivechanges in governments, together with slack in the OECD economies depressedthe country's overall level of economic activities. There was a serious de-celeration in the rate of growth of real GDP, domestic investment and exportsduring 1974 compared to previous years and the declining trends became evenmore pronounced in 1975. Real GDP is estimated to have dropped by 3 percentin the latter year while unemployment (exacerbated by the influx of refugees,estimated to number over 300,000, from overseas territories and demobilizationof armed forces prompted by the decolonization decisions of the Government --but not mitigated by the usual emigration) reached about 9 percent by end1975. Domestic consumption, which had risen substantially in 1974 under theimpact of massive wage increases, remained at high levels in 1975 and reducednational savings to low levels.

7. A high level of imports, in part due to price increases for oiland most other commodities, together with a steep fall in the value of ex-ports (about 14 percent in 1975) as well as reduced earnings from tourismand worker's remittances (lower by 27 percent and 14 percent respectively in1975 compared to 1974), resulted in heavy deficits in the balance of payments.Despite an import surcharge of 20 to 30 percent, the current account deficitis estimated at about $860 million in 1975. To a considerable extent the re-duction in foreign exchange earnings reflects the economic depression inPortugal's major trading partners in Western Europe; almost two-thirds ofPortuguese exports went to the European Communities (EC) and European FreeTrade Association (EFTA) countries. The terms of trade also deteriorated byabout 10 percent during 1975. The balance of payments has been affected bypolitical uncertainties, supply constraints, and reduced competitiveness ofPortuguese exports under the impact of wage-cost increases which were notoffset by exchange rate adjustments. The balance of payments deficits in1974-75 drained the foreign exchange reserves which declined by $1.3 billion

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during the two years, gross reserves reaching about $400 million at the end of1975, equivalent to one month of imports. This led to a serious shortage ofliquid foreign exchange. However, following a sale of 128,000 ounces in Decem-ber 1975 there still remains a gold stock of about 27.7 million ounces valuedat $3.5 billion at current market prices. This gold stock serves as a safetynet which Portugal is using gradually as collateral for borrowing purposes(see para 16 below).

8. As a result of reduced economic activity, higher government pay-ments for subsidized commodities, salary increases for civil servants, andunexpected expenditures on refugees, the Government budget deficit rosesharply from 0.5 billion dollars in 1974 to over 1.2 billion dollars in 1975.This occurred in spite of a drastic reduction of 42 percent in military ex-penditures. However, the rate of inflation declined from 25 percent in 1974to 15 percent in 1975, mainly due to reduced investment demand, decelerationin the rate of wage increases and restrictive monetary conditions.

9. Despite the deterioration in the general economic situation, no sub-stantial damage has been done to the traditional economic institutions such asbanks, insurance companies and government departments, all of which continueto operate effectively. Although social tension and strikes marked the firsttwo years of the revolution, there is a remarkable degree of management con-tinuity in production, financial, and technical departments of public andsemi-public enterprises. Furthermore, the workers' committees, created inearly 1975, have progressively established a viable relationship with manage-ment. In addition, some new institutions (e.g., Institute for State Partici-pation, a holding company for government-controlled enterprises, and theInstitute for the Support of Small and Medium Industries), relying on theprivate sector talent, have been created to support the government's moredirect role in the economy. In spite of the number of governmental reshuf-fles, the social and reformist thrust of the revolution remained intact. Allcabinets have shown a strong orientation towards correcting past imbalancesand have emphasized the need for land reform and nationalization. However,political instability did not allow time for setting the foundations of landreform, organizing the nationalized sector, or defining the role of theprivate sector. It was only over the last eight months that a systematicprogram for economic recovery was initiated.

Government's Action Program

10. The present Government has launched an action program which laysthe basis for economic and financial rehabilitation. This program focusesmainly on the following three crucial issues: (i) austerity in consumptionand increase in savings; (ii) revival of investment and genetation of employ-ment; and (iii) increase in exports.

11. Important steps to implement the program have already been taken.The Government has imposed heavy sales taxes, subjecting most commodities toa tax ranging from 10 to 40 percent and almost doubling the tax on new carsand some alcoholic beverages. Other measures included: a continuation ofthe May 1975 import surcharges at 20 and 30 percent, covering almost half of

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imports; taxes on income from urban property were increased from the previous12 percent rate up to 20 percent; and taxes on income from agriculture wereraised from 10 to 15 percent. These measures were reinforced with substan-tial increases over the past year in consumer prices (e.g. gasoline and fueloil by 35 to 55 percent, public transport by 20 to 60 percent, telephones by40 percent, postal rates by 40 percent, cement by 28 percent, and electricityby about 24 percent). These measures, together with a continuation of acautious wage policy, are likely to contain consumption and augment savings.

12. Simultaneously, efforts are being made to increase investmentwhich will enlarge GDP and employment. The 1976 budgetary allocation for de-velopment expenditure is 70 percent above the 1975 level, with emphasis onlower-income housing and urban development, transport, communications, powerdevelopment and rural electrification. Also, investment in the industrialsector (of which the major part is now under government control) is beingstimulated and a National Development Fund is being established to providefinancial support for nationalized industries.

13. Negotiations are also under way with EC and EFTA to obtain tradeconcessions for Portuguese exports. Special credit facilities and other pro-motional activities for exporters are being introduced. Efforts are beingmade to expand exports to Eastern European and OPEC countries. To inducelarger remittances from migrant workers, preferential accounts have been per-mitted with exchange guarantees and free convertibility.

Prospects for Growth

14. The social and economic implications of the Government measuresare likely to be serious for the Portuguese people. Some shortages may de-velop, but the Government is prepared to control prices of essential commodi-ties and even ration them if need be. The years 1976, and perhaps 1977, willbe very difficult years. A planned reduction in the balance of payments andbudgetary deficits, and revival of investment, employment and growth in theeconomy will require additional measures and more sacrifices. Under the im-pact of the present measures, however, some growth of GDP and improvement inother areas is expected in 1976. Investment activity in the manufacturingsector as well as construction of housing and other civil works would pick up.The Government has already started a comprehensive review of the financialsituation and investment needs (currently estimated at over $2 billion perannum) of the nationalized enterprises and initiated technical work on thepreparation of a three to four year development plan. It has also authorizedcompletion of a petrochemical complex, expansion of steel production, and de-velopment of natural resources like pyrites and salt. These projects willbe carried out in collaboration with foreign investors or with suppliercredits. To encourage foreign participation the Government issued a foreigninvestment code in April 1976, and is studying the possibility of joining theInternational Centre for Settlement of Investment Disputes. In light of therecent Parliamentary and forthcoming Presidential elections, it is anticipatedthat the economic stabilization measures of the last eight months will be pur-sued and reenforced by the new cabinet to be installed in early July.

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Creditworthiness

15. Portugal's medium and long-term external public debt (includingundisbursed) at end September 1975 amounted to $831 million 1/. About 70percent of the total ($566 million) was direct Government debt, a large partof which ($332 million or 40 percent of total external public debt) wasincurred for the construction of the Cabora Bassa Dam in Mozambique. Debtguaranteed by the Government totalled $265 million, of which about $40 mil-lion represented loans from the World Bank. The remaining guaranteed debtswere owed mostly by large public and private corporations, such as airlines,railways, electric companies, postal administration, Lisbon municipality andthe National Development Bank. Debt service payments for 1975 were estimatedat $158 million or the equivalent of 5.5 percent of gross foreign exchangeearnings in that year. The amount of non-guaranteed private debt is esti-mated at about $550 million.

16. In order to mitigate the foreign exchange shortage the Governmentis currently mobilizing external capital, both for balance of payments supportand long-term project loans. With gold as a collateral, Portugal obtained, inearly 1975, $250 million from the Bank for International Settlements and inJanuary 1976, $250 million from the Federal Republic of Germany's Central Bankand $50 million from the Swiss National Bank. Furthermore, the IMF, inDecember 1975, granted $85.6 million from the oil facility and an additional$49.0 million in March 1976. In October 1975 the European Communities made acommitment of $187 million to be disbursed as long-term emergency project aidthrough the European Investment Bank. Of this about $56.5 million has alreadybeen committed for a power loan to the Comphania Portuguesa de Electricidadeand a development finance loan to the National Development Bank. For EIBassistance beyond 1977 discussions on a five year financial protocol are under-way. Approximately $200 million are available from the US AID for the currentand the next calendar year. The Federal Republic of Germany announced in late1975 $27 million for project financing. The European Free Trade Associationapproved in April 1976 about $100 million in financial assistance for thepromotion of medium- and small-sized industries. Portugal also expects toobtain bilateral aid from the United Kingdom, the Netherlands, Norway, andJapan. Finally, most of the major trading partners of Portugal providedsubstantial export credits through export financing agencies in their coun-tries in the course of 1975, and it is expected that some larger invest-ment needs would be financed by supplier credits.

17. As the government program gathers momentum, it will help to over-come the liquidity squeeze and strengthen the country's economic viability andits creditworthiness. It can be assumed that it will take several years toeliminate the external deficits and that, in the meantime, Portugal will have

1/ Medium- and long-term loans reported by the Ministry of Finance butexcluding a short-term loan of $250 million from the Bank for Inter-national Settlement against which gold was used-as collateral.

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to borrow abroad on a substantial scale. However, even conservative assump-tions concerning export growth and credit terms show that the country's debtservice ratio is unlikely to go much beyond 10 percent. In light of thesefacts and efforts already made and in view of the prospects for growth andexport earnings, Portugal can be considered creditworthy for Bank lending.

PART II - BANK GROUP OPERATIONS IN PORTUGAL

18. There have been five previous loans to Portugal, totalling US$57.5million equivalent, all for assisting the power sector. Three thermal powerloans were made to Empresa Termoelectrica Portuguesa (ETP) and two hydropowerloans to Hidro-Electrica do Douro (HED). In December 1969 these companieswere merged to form a Government controlled (52 percent) entity, the CompanhiaPortuguesa de Electricidade (CPE). CPE, along with fourteen distribution com-panies, was nationalized on April 16, 1975. All projects were successfullycompleted and are now in operation. Annex II contains a summary statement ofBank loans as of April 30, 1976.

19. After the approval in FY66 of the last power loan, no more loanswere made to Portugal primarily because of the failure of the Government tomount an effective development effort. In October 1974, the new PortugueseAdministration requested a resumption of Bank activities to provide support,both financial and technical, for the establishment and implementation of asound development program. For the first time in decades, emphasis was placedon Portugal's own development, coupled with significant reductions in defenseand overseas expenditures.

20. To respond positively to the Portuguese request, the task of theBank was initially to establish a workable relationship with the country,build up a data base through successive economic and policy discussions, andattempt to understand, quantify, and evaluate the changes in Government poli-cies as analyzed in Part I of this report. Furthermore, the Bank had to con-sider carefully how it could assist in the mobilization of the required ex-ternal development capital, through direct lending and by acting as a catalystfor other sources of funds. In the longer term, a Bank lending program shouldhelp in stimulating structural reforms in sectors suffering from major distor-tions (e.g., transportation), assist in strengthening the economic foundation,and encourage a more equitable income distribution through special attentionto the low-income groups and less developed regions. While Portugal enjoys arelatively high GNP per capita ($1410 1/ for the year 1973 according to the

1/ After remaining virtually stationary in 1971-74, resident population isestimated to have increased by 3.8 percent in 1975 and GNP, in realterms, has declined by about 3 percent. Consequently, real GNP percapita for 1975 would show a substantial decline for that year.

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1975 Atlas) it remains one of the least developed countries in Europe with alegacy of very serious social and economic problems, including a highly unevenincome distribution, both among persons and regions.

21. While some uncertainties remain with respect to Government policiesthe measures that have been taken over the last eight months are encouraging.The proposed sixth loan in the power sector would help meet immediate require-ments and may encourage additional external financing. Also under considera-tion is a loan for a highway project to help finance a rehabilitation and main-tenance program, including new road construction and advisory and trainingservices to the road and railways agencies as well as to the Ministry ofTransportation. This second project, as the one proposed in this report,would have a rapid disbursement schedules and would help alleviate the coun-try's shortage of foreign exchange, and thereby contribute to the recovery andstabilization programs currently underway.

22. In the longer term, the Portuguese authorities recognize that con-siderable investigation and preparation are required to redress the decadesof neglect experienced by sectors of the economy such as agriculture and edu-cation. It is difficult at this stage for the Bank to indicate in detail howit will be able to bring its technical expertise to bear on Portugal's futuredevelopment. The agricultural sector should certainly receive emphasis inany proposed program since past Governments have long overlooked this vitalsector. Strengthening of agricultural credit institutions, promotion of ruraldevelopment schemes, and, to the extent possible, advice and assistance in theorganization of land reform could be areas where Bank resources might be de-ployed, to bring about the largest possible impact. These long-term opera-tions could be preceded, if feasible, by Bank assistance to a high prioritysector in the present Government program, namely: financial support tomedium-sized industries through assistance to a development financing insti-tution. Furthermore, the economic dialogue initiated in early 1975, andcontinually reenforced by periodic missions, will continue. In addition,following recent discussions, sector review missions are scheduled withinthe next six months in water supply, agriculture, education, and tourism.

23. In short the Bank is making an attempt to respond to a unique sit-uation in which years of neglect of development objectives have been followedby basic changes in political and economic policies. Although it will taketime to develop a program which effectively responds to this situation, thesectors noted above could provide the framework within which a pipeline ofimportant development projects could be built up.

PART III - THE ELECTRIC POWER SECTOR

Power and Energy Resources

24. Portugal is one of the smaller European countries in area and, ona per capita basis, consumes one of the lowest amounts of electrical energyin Europe (1314 kWh per capita in 1974). Historically the nation has been

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primarily dependent on hydropower as its main indigenous energy resource.Existing plants have a capability of about 8,290 GWh per annum in an averageyear and plants under construction will have an average output of 2,520 GWhper annum. Of the remaining hydro potential, however, only about 3,500 GWhper annum could be economically developed. Since hydrological and geomor-phological conditions are not favorable for electricity production, Portugalhas had to supplement hydropower increasingly in recent years (especially dryyears such as 1975 and, to date, 1976) with thermal plants primarily usingimported oil. In addition, purchases of power from Spain have offset varia-tions in hydropower production. Studies are under way to utilize uraniumoxide deposits through a proposed nuclear power facility of about 670 MW. Inview of the scarcity of other indigenous energy resources this would be theonly way to limit the dependence on imported oil for thermal generation.

Power Expansion

25. During the period of the power sector investment program (1976-86)the maximum demand for power is forecast to increase by about 140 percent from2,020 MW in 1975 to 4,905 MW in 1986. This would imply an annual growth ratein sales of electricity of 8.8 percent to 1980 and 7.9 percent thereafter.Much of the increased demand will occur in domestic use, as a result of im-provements in the general standard of living and further extension of ruralelectrifica tion. Still, the industrial and commercial share of consumption,though declining relatively, will remain dominant (67 percent in 1975, 62percent in 1986). Without adequate supplies of electric power, a resumptionof momentum in industrial growth as well as development in agriculture andtransport will not be possible.

26. Faced with few options and limited prospects for further naturalresource development it is important that the investment program emphasizethe full use of internal resources to provide a long-term supply of reasonablypriced power. Generating capacity existing or under construction will suf-fice to meet projected requirements through 1979. Detailed studies are beingcarried out to determine the least-cost expansion program. They indicatethat part of the requirements could be economically met by installing addi-tional hydropower plants but that these would have to be supplemented by 1982with further thermal generating capacity through an oil-fired plant, since anuclear station could not be installed by that date.

27. After 1982 additional thermal capacity will be required and thechoice has to be made between an oil-fired and nuclear plant. The costs ofthe programs based on these alternatives have been compared, the main vari-ables being capital costs, fuel costs, and load growth. The nuclear programhas the lowest present value of costs up to a discount rate of 13.8 percentcompared with an opportunity cost of capital of around 10 percent, indicat-ing that it is the least cost program. The former Planning Department ofComphania Portuguesa de Electricidade (CPE) now incorporated in the new entityElectricidade de Portugal-Empresa Publica (EdP) has well qualified staff withextensive experience of power system planning. Computer models are used forpreparing 20-year development studies and medium-term investment plans, withregular revisions, especially to simulate alternative developments of the

power system in order to determine the least cost program. With this plan-ning base the expansion plans for the sector will be continually reviewed andsubjected to an examination of the alternatives as conditions change.

Organization

28. During the last thirty years the power sector has been undergoinga process of consolidation. According to a 1944 law, all new generating andtransmission facilities were to be developed by companies formed with Govern-ment help. Accordingly, five companies were established between 1945 and1954, four for hydro and thermal generation and the fifth for nationwidetransmission. The Government owned considerable stock in these companiesand had a major role in determining the policies followed by each of them.Government fixed the rates for electricity supply, apportioned revenues, ap-pointed about a third of the Directors, and approved the appointment of thechairmen and chief executives of all these companies. Thus, most of the sec-tor has had a quasi-public character for a long time.

29. The Bank, through its previous loans to two of the four generatingcompanies, has encouraged the consolidation of the sector for efficient andcoordinated development. In 1969 the four generating companies and thenationwide transmission company were merged into CPE with a 52 percent Govern-ment participation.

30. The nationalization decree of April 16, 1975 took the consolidationof the sector a step further. CPE and the fourteen distribution companiesserving different regions were thereby to be merged and on July 1, 1976 powergeneration, transmission and distribution will come under the control of oneentity. The nationalization decree also revoked the charter authorizing theElectra del Lima Company to operate the Lindoso hydro generating and transmis-sion scheme. All facilities are to be taken over by the State upon agreementbetween the Government and the company. Lastly, the decree set up a Reorgani-zation Commission, initially to recommend the structure of the new entity(EdP) and thereafter to oversee its absorption of the remaining municipalelectricity distribution enterprises.

31. With-respect to the nationalized holdings, the decree recognizedthe obligation of the State to properly compensate all shareholders. In thecase of the takeover of the assets of Electra del Lima (noted above), thenegotiations for compensation are currently underway. Regarding all share-holders of CPE and the fourteen distribution companies, the Government hasadvised the Bank that first, the shareholders have registered theit ownershipto permit the State to evaluate its obligations; and second, the Council ofMinisters is considering proposals to compensate by means of treasury bonds,payments of which for the foreign shareholders (approximately 9 percent ofthe total) 1/, could be convertible into foreign exchange. Final approval

1/ Although firms in several sectors were nationalized, foreign holdingswere only affected in the power sector (see para. 5).

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of the scheme, however, must be given by the Legislative Assembly which will

only convene in July. The procedure is in accordance with the new constitu-

tion, which came into effect on April 25, 1976. The Executive Directors will

be advised of progress in this area in connection with the next loan proposed

for Portugal.

32. EdP will become operative as an autonomous national company under a

charter approved by the Council of Ministers in May. It will actually become

a legal entity and start operations on July 1, 1976. The structure of EdP

would consist of a central management, while the nationalized enterprisescontinue to operate in their present form. The advantages of such a structure

are that it eliminates unnecessary disruption which could result from theimposition of a completely new organizational structure on all the constituent

units. Although EdP's charter does not grant it full autonomy in day-to-dayoperations, the Bank has been advised that the Government intends that in

actual practice EdP would have such operational autonomy. The operatingprocedures, however, will be developed as the entity begins to function.

33. In its relations with the Government, EdP would be administrativelyresponsible to the Ministry of Industry and Technology. To insure coordina-tion within the sector, representatives of technical ministries and theMinistry of Finance are appointed to the governing Board of Directors.

Before nationalization these government departments were responsible forvarious aspects of the power sector.

Financing

34. In the past the major part of the capital required for developmentwas secured in the Portuguese and European capital markets through the initia-

tive of the respective enterprises. This capital was raised annually, as re-quired, on a cash flow rather than a project basis. Consequently, financialplanning relied on ready access to sources of funds. Since the revolution of

April 25, 1974, however, the capital market within Portugal has significantlydiminished and only recently has it shown signs of renewed activity with thereopening of the Stock Exchange. The Government dominates the internal market

and will play a key role in future financing of the sector. Because the dif-

ferent constituent units now forming EdP have maintained contacts with finan-

cial institutions throughout Europe, EdP will be in a better position to ob-

tain loans and suppliers' credits as appropriate. These continued externalcontacts have helped provide about $90 million in 1975 and about $64 million

in the first half of 1976. With financial support from the EIB and the World

Bank, it is hoped that other lenders will also show an interest in Portugal.

Furthermore, the domestic capital market, and especially the banking system

has the capacity to support the investment program and it is expected to be

the major supplier of funds. Negotiations are near completion for a 1.75

billion escudo ($70 million, equivalent) loan from the Caixa Geral de

Depositos and the National Development Bank, both major institutions in the

banking sector.

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PART IV - THE PROJECT

35. The project is the 1976-78 tranche of the power sector investmentprogram for the period 1976-1986. The object of the program is to providethe least costly electric power supply to meet future requirements through anintegrated power sector handling production, transmission and distribution ofelectrical energy throughout the country. The project is summarized in AnnexIII and described in detail in the Appraisal Report entitled "Appraisal ofSixth Power Project -- Portugal", dated June 8, 1976 (995-PO) which isbeing distributed separately to the Executive Directors. This project wasappraised in September-October 1975 and negotiations took place in M4ay 1976.The Portuguese Delegation was led by the Secretary of State for Energy andMines, Mr. Marques Vidiera, and includedIrepresentatives of the Ministry ofFinance, the Reorganization Commission ou the Ministry of Industry andTechnology aftd the CPE.

Project Description

36. The 1976-78 tranche of the investment program is an ambitious under-taking involving work on new generating facilities (about 3300 MW of new ca-pacity) with related transmission and distribution facilities. The increasein generating capacity consists of hydroelectric power (48 percent), conven-tional thermal power (33 percent) and nuclear power (19 percent). This in-vestment program would assist in providing Portugal with ample energy to supplythe industrial and domestic market growth projected for the years 1976-86. Itwould also permit EdP to engage in mutually advantageous power exchanges withother European countries via the 400-kV transmission line between Portugal andSpain to be constructed as part of the project to improve the existing inter-connections. As a result the Portuguese power sector will be able to installand operate large generating units economically. In addition, the internaltransmission lines and associated substations included in the project willimprove the transmission grid within Portugal and assist the efforts forcomplete rural electrification.

Project Execution

37. The proposed Bank loan would be made to EdP as soon as it comes intobeing. In the implementation of its investment program, EdP would need to con-centrate on both construction of particular facilities and development of policiesdesigned to ensure uniform and efficient operations. Although this task will bedifficult, the past performance of the power sector in the construction and oper-ation of power facilities has been satisfactory as demonstrated by the imple-mentation and operation of hydro and thermal projects. Through association withother European power companies and consulting firms, the experience lacking innuclear plant construction and operation can be secured.

38. Among the'responsibilities facing EdP, other than construction,are several important objectives necessary to ensure the maintenance of man-agement standards and efficient plant utilization. Included in these objec-tives are: (1) rationalization of electricity tariffs; (2) introduction of

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uniform wage and salary policies; (3) standardization of accounting systems

and operating regulations; and (4) development of a system to monitor tech-

nical and financial performance. Each of these objectives, as detailed be-

low, will contribute to satisfactory sector development in the future.

39. The rates presently in use by the fourteen distribution entities

vary widely. These and the rates of CPE need to be rationalized. They will

require proper restructuring to be consistent with national energy policies.

Consequently, rationalized tariffs taking into account marginal costs of sup-

ply would be introduced and implementation begun by December 31, 1977 (Sec-

tion 5.05, Loan Agreement).

40. Wage policies differ widely among the enterprises now merged into

EdP. To achieve uniformity and promote the retention of qualified and expe-

rienced personnel, EdP will need to initiate an early review of wage policies.

The impact of the likely wage increases for those on the lower scales would be

somewhat reduced for EdP by the fact that the highest paid staff viz. those in

CPE and the distribution enterprise serving the Lisbon area, will represent

about 60 percent of the total EdP staff.

41. Essential to the management of EdP is the immediate development of

standardized accounting practices throughout the new company; the provision

for depreciation of assets; and the establishment of a management information

system. The accounting changes are to be implemented by January 1, 1978

(Section 5.01, Loan Agreement); the depreciation rates will apply to the

financial statements commencing with 1977 (Section 5.03, Loan Agreement);

and EdP will develop by December 31, 1977 key indicators for monitoring EdP's

technical and financial performance (Section 4.06, Loan Agreement).

42. The power sector has always benefited from very satisfactory assis-

tance of consultants. Foreign engineering consultants have been used in the

preparation of designs for thermal power plants and transmission lines. It is

required that for preparation of bid documents, evaluation of bids and con-

struction supervision, EdP will continue to employ consultants with satisfac-

tory qualifications, experience and conditions of employment.

Project Cost and Financing

43. The estimated cost of the first tranche of the investment program

is $1,124 million, of which the foreign exchange component is $380 million

(see Annex III). Physical contingencies are estimated on average at 10 per-

cent of overall cost of the three year program, and price contingencies have

been calculated by compounding at estimated annual rates of increase ranging

from 14 and 12 percent for local costs in 1976 and 1977-78 to 10 and 8 percent

for foreign expenditures.

44. The proposed Bank-loan of $36 million, equivalent, would be disbursed

against an agreed list of goods which is composed of. equipment and materials

related to generation, transmission, and distribution activities-included

in the 1976-78 tranche. The proposed loan amounts to about 9 percent of the

- 13 -

foreign expenditures for 1976-78 and 3 percent of the total project cost (ex-cluding interest during construction). Financing for the project, in additionto the proposed Bank loan, is to be composed of a combination of internal cashgeneration and Government equity participation and loans amounting to about 31percent and other loans and suppliers credits for the remaining 66 percent.

Financial Aspects

45. Under the earlier Bank loans to the sector, the borrowers agreed togenerate internally at least 10 percent of their yearly construction require-ments. This was met by the borrowers consistently through 1974. BecauseCPE's rates to the distributing companies remained unaltered from 1966 through1974, the self-financing level of the combined enterprises now forming EdPdecreased from 27 percent in 1973 to 10 percent in 1974. The rate of returnon average net fixed assets in service, dropped from around 8 percent in 1973,to under 6 percent in 1974 and slightly above 1 percent in 1975. The unsatis-factory performance in 1974 is partly explained by substantial salary adjust-ments in 1974 (about 33 percent increase in wage bill) and, to a lesser ex-tent, the increased cost of imported oil. The poor performance in 1975 wasdue to the absence of any load growth because of general recession and un-settled conditions in the country, a dry year restricting hydro productionand necessitating increased thermal generation and a four-fold increase inthe cost of power imports from outside the country, and a 25 percent averagesalary increase in October 1975. Although in 1976, sales are expected to riseabout 6 percent, hydrological conditions are worse than in 1975 requiringgreater thermal generation and imports of nearly 13 percent of total energyrequirements from France. The full impact of the 25 percent salary increaseis also felt in this year. As a result, gross income is expected to fallshort of operating expenses before interest by 16 percent.

46. The financial covenant under the proposed loan requires a cashgeneration sufficient to finance a reasonable proportion of the Borrower'saverage cost of investment in power facilities in the current year and pre-ceding year (Section 5.02 Loan Agreement). Since EdP is newly establishedsuch flexibility will permit the Borrower to set a realsitic schedule forimproving the percentage financed internally over the coming years. Therecent 24 percent rate increase approved in May is a step toward improving theinternally financed portion of the development plan. The Bank understandsthat it is the Government's intention that EdP will generate an internal cashflow of about 30 percent of their average investment requirements in 1978 and1979 by the year 1979. This is a reasonable objective.

47. The financial forecasts are based on estimated power demand and as-sume no adverse effect from the expected rate increases. The Governmentagreed to provide funds for the implementation of the Project in 1976-78 inthe event EdP cannot raise these funds (Section 2.02 Guarantee Agreement).

48. The other financing sources for the project are domestic banks,suppliers credits, and foreign banks. It is assumed that 54 percent of therequired financing would come mainly from national lending institutions and

- 14 -

suppliers credits (see para. 34). Out of $187 million of emergency aid fromthe EC, noted in paragraph 16, the EIB approved in April 1976 a $40 millionloan to supplement power sector expenditures during the project period.Portugal also expects the new power company to obtain financing credits fromabroad. In order that EdP's incurrence of debt liability may be kept underreview, EdP will seek the Bank's prior approval for any borrowing if as aresult the long-term indebtedness of the Borrower will exceed 1.5 times thesum of the Borrowers' equity capital and surplus existing on the date of suchincurrence (Section 5.04, Loan Agreement).

Procurement and Disbursement

49. Contracts for equipment and supplies would be awarded on the basisof international competitive bidding in accordance with the Bank's "Guide-lines for Procurement". A preference of 15 percent or applicable duties,whichever is less, would be granted to Portuguese manufacturers who partic-ipate. Foreign suppliers are expected to win contracts totalling at least$19 million equivalent. Assuming that Portuguese suppliers win all othercontracts under ICB procedures, this would imply additional foreign exchangeexpenditure of well over $21 million. The total foreign exchange componentof the list of goods would thus amount to at least $40 million equivalent.

50. The Bank loan would be disbursed against 100 percent of foreign ex-penditure for imported equipment and materials or 100 percent of ex-factorycosts of locally manufactured goods. We would expect disbursements to beginin the last quarter of 1976 and be completed by June 30, 1979 or within twoand one-half years after loan effectiveness.

Environment

51. Within Portugal, a State Commission on Environment is responsiblefor ensuring that environmental factors are taken into consideration beforeprojects are approved. All technical ministries are represented on thisCommission. The Commission is preparing detailed legislation to provide forstronger controls in the future. In view of this and since (i) hydroelectricplants are subject to strict licensing procedures; (ii) conventional steamplants are mainly fueled by imported fuel oil and pose no environmentalproblems with enforcement of air emission standards; and (iii) the possiblenuclear power plant would be subject to international environmental standards,no adverse environmental effects would be caused by the proposed project.

Audit

52. Under the loan agreement, the EdP would have its accounts auditedannually by independent auditors satisfactory to the Bank and submit to theBank the audited financial statements and the audit report within four monthsafter the close of each fiscal year (Section 5.06 Loan Agreement).

- 15 -

Justification

53. As part of the long range (1976-1986) development program this proj-ect would contribute directly to meeting the demand growth expected during theperiod 1976-1986. The trend growth rate of electricity consumption since 1964has been 8.4 percent per annum, and of system maximum demand, 9.6 percent perannum. The forecast demand is based on an estimated 8.2 percent per annumaverage growth rate of sales and assumes that economic recovery will startduring 1976. Assuming the recovery is delayed somewhat an alternative fore-cast results in an average growth rate of about 7.8 percent per annum.

54. Since the project forms only a portion of the overall 1976-86 powerexpansion investment program, it was not possible to calculate the rate of re-turn on the project in isolation from the total program. The return on thewhole program was therefore estimated, using incremental revenues plus costsavings attributable to the program as an approximate measure of the benefits,and adjusting the financial costs for taxes, internal transfers and shadowpricing of unskilled labor to obtain the corresponding cost stream. Assumingrate increases used in the financial projections, which are not expected tosignificantly affect demand, the return would be at least 8.3 percent.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

55. The draft Loan Agreement between the Bank and the Electricidade dePortugal - Empresa Publica the draft Guarantee Agreement between the Republicof Portugal and the Bank, and the Report of the Committee provided for inArticle III, Section 4 (iii) of the Articles of Agreement and the text of adraft resolution approving the proposed loan are being distributed to theExecutive Directors separately.

56. Provisions of the Loan Agreement of special interest were notedin paragraphs 39, 41, 46 and 48.

57. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI - RECOMMENDATIONS

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

Robert S. McNamaraPresident

AttachmentsJune 8, 1976

ANNEX I

TA8.1 3*POAtUSAL - SOCI(tL INDICATORS 09rA SHEET

LAND AREA (THOU RIZO - - - --1-PORTUGAL REFERENCE COUNTRIES (1970)

TOTAL 92.1 MOST RECENTARAaLE *- 1960 19T0 ESYINATE GREECE ITALY U. K.*

GNP PER CAPITA (USS) 370.0 940.0 1410.0 1290.0 1950.0 2450.0

POPULATION AND VITAL STATISTICS........... .................... _ .

POPULATION (IID-YR. MILLION) 9.0 9.1 9.0 8.8 !3.6 55.4

POPULATION DENSITYp-R SOUARE KN. 96.0 93.0 98.0 67.0 178.O '28.0PER SQUAR- KF. ARABLE LAND

VITAL STATISTICSCRUOE BIRTH RATE PER THOUSAN) 24.2 18.t 19.1 16.5 16.8 16.3CRUDE DEATH RAtE PER THOUSAN1 10.8 10.1 10.6 8.4 9.7 11.8INFANT MORTALITY RATE C/THOU) 78.0 58.0 45.0 29.6 29.6 18.4LIFE EXPECTANCY AT BIRTH (TR$) 64.0 j 6r.0 69.0 70.4 71.9 71.6GROSS REPRODUCTION RATE 1.6 1.5 1.5 1.0 1.3 1.3

POPULATION GROWTH RATE *X)TOTAL 0.5 0.1 0.0 0.6 0.8 0.6URBAN .. .. .. 2.6 .. 0.5

JR84N POPULATION (I OF TOTAL) 23.0 37.o .. 51.0 . . 8.0

AGE STRUCTURE (PERCENT)O T1 14 YtARS 29.2 28.5 28.1 24.9 24.4 25.61 T3 64 YEARS 62.8 61.8 61.9 64.0 65.2 63.465 YEARS AND OVER 8.0 9.r 10.0 11.1 10.4 11.0

AGE DEPENDENCY RATIO 0.6 0.6 0.6 0.6 0.5 0.6ECOVOMIC DEPENDENCY RATIO 1.1 1.1 1.1/a .. 0.9/a 0.8/.

FAMILY PLANNINGACEPTORS CCURJLATIVE. THOU) .. .. .. ..

USERS CX OF MAPRIED WOMEN) .. .. .. ..

ENPLO3(ENT..........

TOTAL LABOR FORCE CTHOUSAND) 1400.0 3200.0/a I100.o/b .. 19600.0 25600.0LABOR :ORCE IN A.RICJLTURE (I) 42.0 31.577 2 .IN .. 19.0 J.0/b

UNE"PL3YED CI Or LABOR FORCE) .. .. .. .. 3.1 o7

1NCOR- OISTRIBUTION

r OF PVIVATE INC1HE RECoD BY-HIGHEST SX OF POPULATION .. .. .. .. .. 11.7/dHIGHEST 201 Of POPJLATION .. .. .. .. .. 0. 3/dLOWEST 20X Of POPULATION .. .. .. .. .. 6.6/dLOWEST 4o0 Or POPULATION .. .. .. .. .. 18.5/d

OISTRIBUTION OF LAND OWNERSHIP.... __..._ .. _..................

I OWNED BY TOP 1)t OF OWNERS .. .. ..

I OWNE) BY SMALLEST 0to DANERS .. .. .. ..

HEALTH AND NUTRITIIN

POPULATION PER PHYSICIAN IZOO.0/b 1100.0 1020.0 620.0 510.0 820.0

POPJLATION PER NURSING PERSON 1420.07S 00O.O/ 930.0 140.0 4TO0./b 310.O/e

POPULATION PER HOSPITAL BED 190.0 7 160.0 160.0 160.0 90.07 iio. o7f

PER CAPITA SOPPLY OFCALO0IES (X OF REQUIREMENTS) 1O0.O 118.0 118.0 116.0 126.0 125.0PROTEIN (GRAMS PER DAY) 77.0 85.0 85.0 99.0 100.0 90.0

-O WHICH ANIMAL AND PULSE 15.0/c 40.0 *- 52.0/a 42.0 S.O

DEATH RATE C/THOU) AGES 1-4 .. .. 3.2 .- 1.0 0.7

EOJCATION

AOJUSTED ENROLLMENT RATIOPRIMARY SCHOOL 87.0 95.0 *- 109.0 107.0 110.0SECONDARY SCHOOL 16.0 65.0 *- 60.0 !9.0 72.0

YEARS JF SCHOOLING PROVIDED(FIRST AND SEClND LEVEL) 13.0 3.0 1 -.0 12.0 11.0 13.0

VOCATIONAL ENROLtLENTCt O- SECONDARY) 46.0 32.0 30.0 20.0 26.0 5.0

AOULT LITERACY RATE CX) 62.0 6S.0 *- 87.0 .. 9T.0

HOJ Sl1G

PERSONS PER B0OH (AVERAGE) 1.0 .. .. .. .. 0.6/bOCCUPIEO ONELLINiS WITHOUT

PIPED WATEV CI) 710Ld * .. .. ..

ACCESS TO ELECTRICITYCt 0-- ALL DWELLINGS) 41.0 85.0 ..

RURAL OWELLINGS CONNECTEDTO ELECTRICITY CE) 27.0 .. .. ..

CON SJMPTION

RADIO RECEIVERS (PER THOU POP) 95.0 142.0 176.0 111.0 218.0 621.0

PASSENGER CARS (PER THOU POP) 18.0 5r.0 71.0 26.0 190.0 218.0

ELECTRICITY CKAH/TR PER CAP) 406.0 857.0 1026.0 1072.0 2266.0 4473.0NEWSPRINT ICR/YR PER CAP) 2.5 4.6 3.B 1.6 5.5 27.7

S NT D E IN........ ............... ON RSEr NOTES AND OEFINITIObIS ON REVERSE

NOr'S ~~~~~~~~~~~~~~Page 2 of 4 pages

lonies. othemwise noted, data for 1960 refer to any year between 1959 and 1961, for 1970 between 1968 and 1970, and for Meet Recent Estimate between 1971 and 1973.

*sThe United Kingdom has been selected as an objective country because It seems likely that, should Portugal manage to attain the level of per capita incomof the U.K., the etructure of the Portugueseeaconomy would ehow similarities vith that of the U.K. which is highly dependent on foreign trade.

PORTUGAL 1960 /a 1959-62; /b 1962; /c 1960-62; /d Inside only.

1970 /a Portugal continental only; /b Including midwives.

MOST RECENT ESTIKATh: /a Ratio of population under 15 and 65 and mver to total labor force; /b Portugal continental only.

GREECE 1970 /5 1967.

ITALY 1970 /a Retio of populationt under 15 and 65 end over to total labor force; lb Noepital personnel; /c tncluding rural hospitala andmedical centers.

UNITED KI)RDOM 1970 /a Ratio of population under 15 and 65 end over to total labor force; /b 1966; /c Regiatered unemployed; /d H ....holde;_____________ - 7e Personnel in gwovmernt services only; /f Governmsent hospital establiatssnts.

62 March 4, 1976

DEFINITIONS OP SOCIiL INDICATOR.S

Leand Area (thou km~ Population per nursing parson - Population divided by nssber of practi-Toa Total aurface area camprieiog land area end inland waters. cing masle end female graduate nurses, 'trained' or 'certified' nurses,

ArCble - got re.ee. se timate of land ares used tamporarily or permanencly end auxiliary personnel with training or experience.for cultivation, pastures, market and kitchen g5edess or to lie follow. Population per hospital baed - Populatimn divided by number of hospital

beda available in public sand private general sod specialized hospi-CNP per capita (US$) - GNP percapita estimsates at market prices. celcu- tel end rehabilitation centers; excludes nursing hones and establish-

lated by same conversion method as World Rank Atlas (19 72-74 basis). ments for custodial and preventive care.Per capita supply of calories (7. of requiremente) - Conputed from

Population and vital statistics energy equivalent of mat food aupplies available in country perPopulation (mid-yr. millio) - As of July first: if not available, average capita per day; available supplies comprise dometic production ,

of two end-year estimates, imports lame exports, end changes in, stock; net supplies excludeanimal fead, seeds, quantities used in food processing and loasse

Population density - per square he - Mid-year population per square kilo- in distribution; requiremeents were estimated by FAO based on physi-meter (100 hectares) of total area. ologica1 needs for normal activity end health considering environ-

Population density - per square km of arable land - Computed as above for mental temperature, body weights, age and sex distributions ofarable loand only. population, and allowing 107. for waste at household level.

Par capita supply of protein (aroam per day) - Protein content of pervital statistic, capita net supply of fond per day; net supply of feud is defined aoCrude birth rate per thousand - innual live births per thousand of mid- above; requirements for all countries established by U1DA Econm ic

year population; usually five-year averages ending in 1960, 1970 and Research Semvicee provide for a minimu allowance of 60 gram of1975 for developing countries, total protein per day, and 20 grams of animal and pulse protein, of

Crude death rate par thousand - Annual deaths per thousand of mid-year which 10 grams should be animal protein; these standards are lowerpopulation; usually five-year averages ending in 1960, 1970 and 1975 than those of 75 grsm of total protein and 23 grams of animal pro-for developing sooutries. teim as an average for the world, proposed by FAO in the Third World

Infant mortality rate (/thou) - Annual deaths of infants under one year Food Survey.of age per thousand live births. Per capita protein supply from animal and pulse - Protein supply of food

Life expectancy at birth (yra) - %verage number of years of life remain- derived from animals and pulses in grams per day.ing at birth; usually five-year averages ending in 1960, 1910O and Death rate (/th.u) agtes 1-4 - An-Ia deaths per thousand in age group 1-41975 for developing -outries. years, to children in this age group; suggested as an indicator of

Gross repeoduction rate - Average number of live daughters a woman will malnutrition.bear in her normal reproductive period if ash experiences present age-specific fertility rates; usually five-year averages ending in 1960, Education1970 and 1975 for developing countries. Adjusted enrollment ratio - primary school - Enrollment of all ages as

Population growth rate (7.) -total - Compound annual growth rates of mid- percent age of primary school-age population; includes children agedyear population for 1950-60, 1960-70, and 1960 to most recent year. 6-11 years but adjusted for different lengths of primary education;

Population growth rate (7.1 - urban - Computed like growth rate of total for countries with universal education, enrollment may exceed 1001populstion; different definitions of urban areas may affect conpara- since som pupils are below or above the official enhool age.hbibity of data among countries. Adjusted enrollment ratio - secondary school - Computed so above; second-

urbee poml.tion (7. of total) - Ratio of urban to total population; sry education requires at least four years of approved primary inotruc-different definitions of urban areas nay affect ccomparsbility of data tion; provides general, vocational or teac.her training instructions foramong countries, pupils of 12 to 17 years of age; correspond ence courses are generally

Age structure (Percent) - Children (0-14 years), working-age (15-64 years), excluded.and retired (65 years and over) as percentages of mid-year population. Years of schooling provided (first and second! levels) - Total years of

Age dependency ratio - Ratio of population under 15 and 65 and over to schooling: at aecondary leval, vocational Instruntion may be partiallythose of ages 15 through 66. or completely excluded.

Econmic dependency ratio - Ratio of population under 15 and 65 and over Vocational enrollment (7. of secondary) - Vocational institutions includeto the labor force in age group of 15-64 years. technical, indus trial or other progrems which operate independently

Family Pl.nninj - acceptors (cumutative, thou) - Cuesulstive number of or as departments of secondary institutions.acceptors of birth-control devices under auspicas of national family Adult literacy rate (7.) - Literate adults (able to read and write) asplanning program since inception, percentage of total adult population aged 15 yearn and over.

Femily planning - users (7. of married women) - Percentages of marriedwomen of child-bearing age (15-44 years) who use birth-control devices Huijto all married women in same age group. Persons per womn (average) - Average number of permson per rome in occupied

conventional dwellings in urban areas; dwellings exclude non-permanentEmployment structures and unoccupied parts.Total labor force (thousand) - Econoically active persona, including Occupied dwellings without piped water (7.) - Occupied conventional dwell-

seined forces end unemployed but excluding houawives, students, aet.; mugs in urban end rural areas without inside or outside piped waterdefinitions in various countries are not conparable. facilities as percentage of all occupiod dwellings.

Labor force in agriculture (7.) - Agricultural labor force (in farming, Access to electricity (7. of all dwellings) - Conventional dwellings withforestry, hunting and fishing) as percentage oftotal labor force, electricity in living quarters as percent of total dwellings in urban

Unemployed (7. of labor force) - Unemployed are usually defined as persona and rural areas.who are able and willing to take a job, out of a job on a given day, Rural dwellings connected to electricity (7.) - Computed as above forremained out of a job, and seeking work for a specified minimum rural dwellings only.period not exceeding one week; may not be comparable between countriesdus to different definitions of unemployed and source of data, e.g., Coisaumptionemployment office statistics, sample surveys, compulsory unmeployment Radio receivers (per thou pop) - All types of receivers for radio broad-dossurance. casts to general public per thousand of population; excludes un-

licensed receivers in countries and in years when registration ofIncome, distribution - Percentage of private incons (both in cash and radio sets was in effect; data for recent years may not be comparable

kind) received by riahest 57., richest 207., poorest 207., end poorest since most countries abolished licensing.407. of population. Faseseer cars (per thou pop) - Passenger cars comprise motor car seating

lass than eight persons; excludes ambulances, hearses and militaryDistribution of land ownsership - Percentages of land owned by wealthiest vehicles.

107. and poorest 107. of land owners. Electricity (kwh/yr per cap) - Annual consuption of industrial, com-mercial, public and private electricity in kilowatt hours per capita,

Health and Nutrition generally based on production date, without allowance for losses inPopulation per physician - Population divided by number of practicing grids but allowing for imports and exports of electricity.

physicians qualified fron a ondieal school at university level. Newsprint (kg/yr per cop) - Per capita annual consumption in kilogrmemestimated fron doneetic production plus net imports of newsprint.

COUNTRY DATA - PORTIGAL

Page 3 of 4 pages

AREA POPULATION DENSITY

92,072 km2 9.01 million (end-197 4) 93 per km2

Natural growth: 0.8 p.a.Actual growth;1960-7 4 : - nil

POPULATION CHARACTERISTICS 1971. HEALTHCrude Birth Rate (per 1,000) 18.8 Population per physician 896Crude Death Rate (per 1,000) 11.1 Population per hospital bed 160Infant Mortality (per 1,000 live births) 50

NUTRITION (1970) EDUCATION (1973)Per capita calorie intake as % of requirements 118 Adult literacy rate % 65Per capita protein intake (grams per day) 85 Primary school enrollment 7 100

LAND OWNERSHIP (1968)(in % of total) Owners Land holding

up to 4 ha. 78 154-50 ha. 21 34over 50 ha. 1 51

GROSS NATIONAL PRODUCT IN 1975- ANNUAL RATES OF GROWTH (%. constant prices)-(current prices and current pacKage rate) 7!

US$ Mln. % 1963-73 1972 1973 1974 1975

GNP at Market Prices 15,601 100 7.9 9.6 10.3 2.8 -5Private and Public Consumption 14,961 96 7.3 7.4 10.8 8.8 5.2Gross National Saving 641 4 11.4 19.1 8.2 -21.4 -65.5Gross Domestic Investment 1,502 10 9.2 15.1 11.9 9.8 -58.0Current Account Deficit 877 6 -- --

Exports of Goods and NFS 2,826 18 10.8 9.9 8.4 -11.8 -20.7Imports of Goods and NFS 4,607 30 11.7 9.5 10.6 9.3 -24.6

GDP at Factor Cost 13,514 100 7.2 9.8 11.1 5.4 - 2.7of which:Agriculture 2,402 18 0.8 3.8 5.9 3.1 0.3Industry 5,786 43 10.0 13.0 13.9 5.5 - 5.9Services 5,326 39 6.7 8.4 9.6 6.1 Nil

LABOR FORCE AND PRODUCTIVITY IN 1974

Labor Force V. A. Per Worker1,000 % us 7 %

Agriculture 852 28 2,578 61Industry 1,054 35 5,500 130Services 1 144 37 423 1

Total/Average 3,050 100 4,223 100

2/GOVERNMENT FINANCE-

(billion escudos) 1971 1972 1973 14 1975 f 1975 1976

Current Receipts 36.9 41.6 48.4 57.2 61.0 (16.3) 70.7Current Expenditures 32.2 35.0 42.1 57.1 65.2 (17.5) 66.0

of which: defense 15.3 15.4 17.8 23.2 20.3 ( 5.4) 16.9education 3.3 4.5 5.8 8.4 14.1 (3.8) 17.6

Current Surplus/Deficit 4.7 6.6 6.3 0.1 - 4.2 (-1.1) 4.7Capital Expenditure 6.2 7.8 8.5 12.9 26.2 ( 7.0) 37.5Overall Deficit -1.5 -1.2 -2.2 *12.8 - 30.4 (-8.1) -32.8

1/ In 1963 prices for the period 1963-73 and in 1970 prices for other years. The base for National Income serieshas been shifted from 1963 to 1970 and the detailed now series covers the period 19'1 to 19'5 only.

2/ Including supply fund excel' 1976.

P/ Provisional

COUNTRY DATA - PORTUGAL (Cont'd)

Page 4 of 4 pages

MONEY, CREDIT. WAGES AND PRICESEnd 1975 Annual Percentage Increasebil. escudos 1972 1973 1974 1975

Money and Quasi-money 390 20.6 23.4 13.6 14.3

of .hich: currency 111 13.1 6.0 82.5 58.6

sight deposits 119 19.5 35.3 -11.0 6.2

time deposits 160 25.2 15.9 17.7 Nil

Bank Credit 358 24.0 30.1 21.8 19.5of which: private sector 315 23.0 32.6 17.7 9.0

public sector 43 49.1 -23.6 ---- 207.0

Wages (Lisbon) 8.5 11.8 32.3 18.7

Wholesale Prices (Lisbon) 5.9 11.1 28.2 14.5

Consumer Prices (Lisbon) 10.7 12.9 25.1 15.2

BALANCE OF PAYMENTS MERCHANDISE EXPORTS. 1974

1971 1972 1973 1974 1975 US$ Million Percent

(------ -US$ Million -------Agricultural and Forestry Products 600 27

Exports, fob 987.8 1,225.7 1,739.0 2,192.1 1,886.8 Textiles and Footwear 636 29

Imports, fob of 1,638.3 1,981,7 2,756.4 -4,175.5 3,518.1 Machinery and Equipment

which: crude oil (cif) 97.4 99.1 129.7 531.3 580.6 (Chemical and Paper Products 207 14

Trade Deficit -650.5 -756.0 -1,017.4 -1,983.4 -1,631.3 utners 4312 19

Trade Deficit 4~~~~~~~~~~~~~~~~~~~~~~~~~~2192~ 190Tourism, Receipts 212.2 260.6 320.2 513.2 373.4 Toa2,192 Other NFS, net -121.7 -77.1 -239,2 -587.6 -534.6 ota

Factor Income, net 678.3 895.4 1,183.6 1,243.2 915.9 L DEBT.September, 1975

Current Balance 118.3 322,9 247.2 -814.6 -876.6 (Including UndLsbursed)

MLT Capital, net 83.4 29,4 -52. 196.8 el -173.0 eublic Debt US5831 million

of which: direct invest- 656. Debt Service Payments, 1975-/ US$158 million

loans 41.7 -36,7 -109.4 Debt Service Ratio, 1979-/ 5.5 percent

ST Capital and Error and -35.5e 90.6 (goods, NFS and FS)

omissions 156.5 7.3 190.5506 (o a F n S

Changes in Net Reserves -358.3 -355.9 -385.1 653.3 959.0 IBRD LENDING. December 31. 1974

(- = increase)Official Reserves, Gross US$ ml.End of year 1,864.3 2,322.9 2,950,9 2,255.0)l 1534.0

of which: gold 973.9 1,053.2 1,240.4 1,212.1 1136.0 Total Loans Outstanding and Disbursed 57.5

exchange 890.4 1,269.7 1,710.5 1,042.9 390.0 Principal Repayments 15.4exchang 890.4 ,269.7 ,710.5 ,042.9Effective Loana Held by Bank 42.1

RATES OF EXCHANGE

Through Dec. 1971 US$1.00 = Esc. 28.75Jan. 1972 - Feb. 1973 US$1.00 = Esc. 27.25Feb. 1973 - Jan. 1974 US$1.00 = Esc. 24.67

The exchange rate has been floating since January 22. 1974The average rate during 1974 and 1975 was US$1.00 -Esc. 25.41 and Esc. 25.44 respectively

e/ Estimate

May 25, 1976EMENA Region

ANNEX II

THE STATUS OF BANK GROUP OPERATIONS IN PORTUGAL

A. Statement of Bank Loans (as of April 30, 1976)

$ MillionAmount (less cancellations)Bank Undisbursed

Five loans for power development 57.5 -0-of which has been repaid 19.3

Total now outstanding 38.2

Amount sold 2.2of which has been repaid 2.1 .1

Total now held by Bank a/ 38.1

Total undisbursed -0-

B. Statement of IFC Investments (as at April 30, 1976)

N O N E

C. Projects in Execution

N O N E

a/ Prior to exchange adjustment.

ANNEX IIIPage 1

PORTUGAL SIXTH POWER PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Electricidade de Portugal - Empresa Publica

Guarantor: Republic of Portugal

Amount: $36 million, equivalent

Terms: 15 years, including 3 years of grace, at 8.85% perannum

Project Description: The Project consists of the Borrower's investmentprogram for the years 1976 through 1978, whichincludes all facilities under construction onJanuary 1, 1976 or the construction of which isto be started by December 31, 1978.

Estimated Cost: Item Foreign Local Total($ million)

Generation 104 369 473Transmission 9 140 149Distribution 18 147 165Rural Electrification - 49 49Engineering & Studies 4 6 10Physical & Price

Contingencies 37 241 278

172 /1 952 1124

/1 Direct costs only: The foreign exchange component of equip-ment and materials purchased locally is about $208 million,therefore the total estimated foreign exchange costs of theproject is about $380 million.

Financing: US$ million PercentEquivalent of Total

EdP's Own Resources 6 1Government 341 30IBRD Loan 36 3EIB Loan 40 4Other Foreign Loans & SuppliersCredits 96 8

Local Loans 605 541,124 100

ANNEX IIIPage 2

EstimatedDisbursements: Fiscal Year Annual Cumulative

($ millions)

FY1977 13 13FY1978 16 29FY1979 7 36

Procurement All contracts (except for consulting services)Arrangements: to be awarded on the basis of international com-

petitive bidding consistent with the Bank Group's"Guidelines for Procurement" and the list of goodsagreed to for the project. A preference of 15percent or applicable duties, whichever is less,would be granted to Portuguese manufacturers whoparticipate.

Rate of Return: 8.3 percent.

Consultants: About 45 man-years for assistance with engineeringand studies related to the 1976-78 development pro-gram, if needed.

Estimated Completion Date: June 30, 1979

Appraisal Report: 995-PO dated June 8, 1976.

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