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Folder Title: Spottswood, P. E. - Articles and Speeches (1960 - 1968) - 1v

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Compressed Air & Hydraulics, London August 1960

Capital Requirements The theme of the 1960 World Power Conference

was "Methods for Solving Power Shortage Problems," and while the engineers can put forward solutions to almost any technical problem of providing power supply on any scale and in any part of the world, there still remains the problem of finding the money to pay for it. Thus the a er by Mr. A. D: Spotts­wood, of the In ernat10na aiik fo Reconstruction

evelopment, could be regarded as a key paper in e discussions at Madrid. He first gave some very large figures showing that the estimated cost in 1958 prices of the power facilities of the world in existence in 1958 amounted to the equivalent of $79,000 million with an additional $110,000 million for transmission and distribution facilities. Of the 354 million kW (ex­cluding industry-owned generating facilitjes) jnstalled in 1958, about 233 million kW were of the thermal type, and about 121 million were hydro plant.

Mr. Spot~wood gave these figures as all: indication of the order of magnitude of the world's capital re­quirements for additional electric power. He laid down the plain truth that whatever the mechanism of financ­ing of new development the money must eventually come either from within the enterprise (of generating electric power), through depreciation charges and re­tained earnings, or from external sources either private

. or public, domestic or foreign. He mentioned many countries as having adequate capital markets, but in other countries where expansion of power facilities depended ort allotments from Government budaets, "only meagre amounts could generally be made ayail­able and in consequence expansion lags, the utilities are unable to keep up with the deffiilnd, load curtail­ment follows and poor service results." He went on to say that "if countries with non-existent or limited

· capital markets and limited ability to borrow abroad should not depend on Government budgets for their funds for expansion {and in most countries this should be their goal in the reasonably near future), then how is the capital to be obtained? The answer is that a very substantial part of it should be earned by the utilities themselves through adequate charges to the

·consumers of electricity." He thought that an ade­quate revenue should cover all operating, maintenance and administrative expenses. taxes, interest and ade­quate depreciation charges, as well as creating a surplus that could be made available to repay all loans (insofar as the periodic amortisation payments thereon are not covered by depreciation), and in addi­tion to set aside an amount sufficient to cover a reason­able part of the cost of future expansion.

The question was. what was "a reasonable part"? Mr. Spottswood thought that up to 50% of the cost of expansion programmes at least should be financed

. , from internal sources. He chastised those who had set power rates too low, and included among them were many of the large power corporations of the world. "The idea is often expressed. with sincere con­viction by many people, that low power rates, even if it is necessary to subsidise them, are required for

_ industrial development. This is simply not so." Figures were given to show that the cost of electricity in in­dustry was only about 1·1% to 1·7% of the cost of output of the industry concerned. " If the cost of elec­tricity is such a small proportion of the cost of pro­duction and value of output. it is difficult to support the argument that an increase of 10, 20 or even 30% would seriously affect the cost of industrial produc­tion Qr inhibit its development. The lack of an ade­quate power supply would, however, deter industrial development."

The paper showed that the World Bank, which is owned by 68 countries of the world. has already loaned the equivalent of $1,460 million for electric power in 29 of these countries . .It has enough capital to .continue this work, and stands ready to make addi­tional loans for good power projects in its member countries. But the projects proposed must be tech­nically sound and the company or agency must demonstrate that he can maintain a sound financial position and ·has good management.

These down-to-earth sentiments might have exer­cised a sobering influence on the engineers who, in the best of good faith, a~vocated extensive advanced thermal and nuclear power projects at the World Power Conference; but there is no doubt that the hydro-electric engineers ·hearing this cold financial assessment of the soundness of power projects, need not fear that any of their projects would fail to pass

. the stringent requirements of financiers for sound economic planning.

Water Power, London August 1960

International Bank Project~ Possible Openings for United Kingdom Industry

Information has been received of the following projects in which the International Bank for Reconstruc­tion and Development is understood to be interested. Since some of the projects are in the early stages of consideration the information is necessarily somewhat tentative and general in character. It is thought, however, that firms will wish to have as early an intimation of contemplated developments as possible, so as to have the opportunity of participating in any scheme that may ultimately be initiated.

·Chile It is reported that a Bank mission is visiting Chile to

review the situation arising from the recent earthquake disaster.

Uganda It is reported that a general survey mission is being

organised by the Bank, which is expected to arrive in Uganda at the end of September

El Salvador Negotiations on a proposed loan for the Guajoyo .

hydro-electric project have been opened. It is now , understood that draft documents have been prepared and it is expected that the Rio Lempa Commission (CEL) will be in a posftion· to present the proposal to the Bank shortly. ·

India It is reported that the Bank has approved loans of

$210,000 (equivalent) to Adarsh Chemicals and Ferti­lisers, Ltd.; $215,000 (equivalent) to Wallace Flour Mills Co., Ltd.; and $420,000 (equivalent) to Indian Organic Chemicals, Ltd., out of the $10,000,000 (equivalent) loan made by them to the Industrial Credit and Invest­ment Corp. of India (ICICI) in March 1955. The Bank has noW approved credits for 13 projects under this loan to the value of $8,500,000.

Ethiopia It is reported that an approach has been made by the

Development Bank of Ethiopia to the International Bank for a loan of $2,000,000 (equivalent) and subse­quently the proposed visit of an international bank mission to Addis Ababa. The recently appointed managing director of the Development Bank of Ethiopia has visited the Bank for further discussions on the proposed loan.

It is understood that the International Bank has approved a loan of $300,000 (equivalent) for' a new fibre bag factory project in Asmara out of the $2,000,000 (equivalent) loan made to the Development Bank of Ethiopia in September 1950. · The Bank has now approved credits for 21 projects under ti¥s loan which has now been completely committed.

Kenya . In Export Service Bulletin 63/60 of May 27, 1960, the

International Bank loan of $5,600,000 (equivalent) to the Government of Kenya for the development of African agriculture and roads in the territory was reported in detail. It is now understood that the Govern­ment of Kenya have submitted an application for a further loan for a similar project with the pnmary purpose of settling African farmers in the Kenya Highlands to increa.se ~gricultural productivity in that area.

Water Power, London . September 1960

Rio Tuma Project, Nicaragua THE World Bank has approved a loan equivalent to $12·5 million for the expansion of electric power supplies in Nicaragua. The loan will help to finance . the construction of the Rio TuiQ.a hydro-electric power project which includes a 50 MW power plant and a 75-mile transmission line to bring power to the capital, Managua, and smaller towns en route. The new power project will more than double the capacity

· of the power network serving Managua and the main towns of. Nicaragua.

The loan has been made to the Empresa Nacional de Luz y Fuerza, an autonomous entity of the Gov-

. ernment. Empresa owns and operates the only trans­mission system in Nicaragua and serves nearly 70% of the urban population. The company itself distri­butes power retail in Managua and sells it wholesale to municipal and private power companies for distri­bution in other towns.

The basis of the hydro-electric scheme now to be undertaken is the diversion of water from the area of heavy rainfall caused by the trade winds in the Eastern part of Nicaragua across the Continental Divide into the drier Western Region and to utilise water flowing down the steeper slopes towards the Pacific for hydro-electric power generation; this will provide energy in the more densely populated West­ern parts of the country. The project for which the

. Bank's loan was made consists of the construction of a dam on the upper Rio Tuma creating a reserVoir with a gross storage capacity of 410 million cu. m. The water will then be diverted to the Pacific side of the Continental Divide to supply a power station in the valley of the Rio Viejo.

This is the fifth loan made by the Bank for the improvement and expansiqn f Nicaragua's power system.

The Guardian, Manchester August 19, 1960

·. US to · lend Ghana $30m. for Volta , riv~r project

. . . WASHINGTON, AuGUST {8. . The United . States hru; ·condi·: ·

tionally agreed to provide the 9~ana Governmen-t with $30 mlll1ons tOwards finan,cing the Volta river . p,oject, • . -: · · ~· State Department said today

that the agreement was · coildition~J 1

on the Ghana- Government reachiDC I " a s'atisfactory arran.l(ement !• · .. with. the owners of a proposed aluminium plant to be constructed near bY' -~d the additional · ft.n~nclDC ·· .IQr the $164 mill.Uons project. . . · · .··. "I

u·nited States officials said -tl1at ~ no. · decision had yet been ta~..ti_i1'0' 'bOW'·· the $30 mU.I:ions::. 'tnigb.t ·•'Qe-'· mad~ ~aUable·· to the. Ghanalan;~Oov~ ment, ·but they said .'tt wa,u~d""»r~tbly· be i:Q th~ !orin of .-. loan: .ilt -i.S...p9t' ~wn whether thtft~World ;Baa . ·bfJ..i aareed· to f!,nap~ :~· :·~f.pi~~el:l~

The Mining Journal, London August 19, 1960

1 FINANCE FOR THE . VOLTA PROJECI'

Engineering, News-Record, New York July 14, 1960

Big Job at Suez HEADLINES ABOUT THE SuEz CANAL usually relate to dis­crimination against ships carrying cargo to or from Israel, which tends to obscure some of the good things about this great waterway. Not only is the United Arab Re­public operating it effectively, but its program of improve­ments is larger in scale and speedier in schedule than the earlier ones of the old Suez Canal Co.

As described by the UAR's Canal Authority in its last annual report, just out, the program would seem to rate as one of the world's notable construction jobs. And as befitting a great international waterway, there · is a dis­tinct international flavor to the undertaking.

Planning and administration stem from the engineers and officers of the Authority. The World Bank has . loaned $56.5 million to cover the --forei'gn-cur~encies · required. Several Dutch firms, a Belgian firm and a U.S. combine have large dredging contracts. And the U.S. Army Engineers rented the Authority ·,its huge hopper dredge, Essayons, and its crew for a period of six months last year.

Under French-British ownership, seven improvement programs were carried out (1876 to 1954), and the eighth · was under way when the UAR took possession. Its purpose was to widen and deepen the canal, thus in­creasing its wet cross sectional area from 13,000 to 16,200 sq ft. This work is continuing, but in the mean­time the Authority has begun a ninth program involv­ing a further increase to 19,500 sq ft. Called the Nasser program, it also envisions the eventual doubling of the canal for its full length.

An idea of the magnitude of the present work-finish­ing the eighth program and the first stage of the ninth­is. furnished by the volume of dredging work involved, 110 million cu yd, to be completed in a three-year period. This ·is nearly 75% of the total dredged during t4e 78 years of the previous seven improvement programs, ex­clusive of maintenance dredging.

The work requires the largest fleet of dredges ever assell).bled-three big ones owned by the U.S. contrac­tors (Atlantic Gulf & Pacific, Standard Dredging, and Hawaiian Dredging) , four of Europe's largest, seven smaller ones owned by the Authority, and the U.S. Essayons, . which alone moved 10 million cu yd before . she returned home. To the dredging work must also be added over 8 million cu yd of dry excavation and 27 miles of new mas·onry bank revetment, as well as other improvement work including the construction of a large floating drydock for ship repairs.

The Suez Ca.nal, both for its current activity and for the large and continuous volume of work to come, represents a construction job worthy of world attention. It is first of all a tribute to the technical competence of UAR engineers. But it also .testifies to that country's willingness to work constructively w_ith private business interests in the_ Western nations. Indeed, the big con­struction job at Suez may be most significant for the contribution it can make to casing world tensions.

Negotiations in London arid the U.S. regarding the provision of finance for

1 the £60,000,000 ·Volta hydro-electric I project in Ghana are understood to have been successfully concluded. Mr. K. A. Gbedemah, the Ghanaian Finance~ Minister, ~tated in Wa,hington last week . that the U.S. Government and the World Bank had offered loans which

·Electrical Journal, London August 19, 1960

· should now enable this project to go ahead. He added that Ghana was seek-· ing loa.rrs for approximately half the cost of the project. Mr. Gbedemah has since held talks in London with the Chancellor of the Exchequer, Mr. Selwyn Lloyd. The upshot seems to be that the British \ and U.S. Governments and the World Rank have agreed to provide, between ,,. them, credits totalling £30,000,000. The remainder will be ound by the Ghana Government from its own resources.

It still remains to conclude Ghana's negotiations with the international con­sortium of aluminium producers formed under Kaiser's auspices to .consider the possibility of using the hydro - electric power for the conversion of bauxite into alumina. Prospects for a successful out-~ come of these negotia tions are regarded with optimism.

'Volta Plan Credits Agreed ?

NEGOTIATIONS in London and the U.S. about the provision of finance for the £60 million Volta hydro-electric project in Ghana are understood to have reached a successful conclusion.

Mr Gbedemah, the Ghana Finance Minbter, bad talks with Mr Selwyn lloyd, Chance'lor of the Exchequer, on TueSday. He had previously discussed the. finandna of the project with members of the U.S. AdmJnl!ltration s.nit officials of the World Bank. -- · · f th

It is believed that the British ·and te.nders ~or . th~ construction o e u s Governments and the World dam, which .18 likt:IY to t~kt: about five B~nk have agreed to provide credits . years to build, will be InVIted before totalling £30 million for the Volta tpe year-end. project. The remainder will be found by the Ghana Government from its own resources.

An announcement setting- -~ut in detail the results of these negoti~tions is to be made by Dr Nkrumah in

....Accra, _H~ _is . expe~ted to say that

Director, London October 1960

Electricity~s £40~090 million question

Where will the vast capital sum needed in the next ten years for new

electricity supply plant come from ? And who wili make the plant ? These

are the only real problems in an i1tdustry that has no fears about the

future demand for its product

BY H. M. SYKES

IN THE SAFE WORLD of electricity supply this year's conferences have once again confirmed the inexorable rate of rise of demand, almost everywhere in the world : seven per cent per annum, which means a doubling of demand every ten years.

As each year's statistics are patiently piled on top of the last, now reaching a pile dating back to 1900, there is to be seen the pointing finger of the world electrical power demand, shooting upward. Neither hot nor cold wars, or economic depressions, or political twists and turns have more than a passing effect, soon smoothed out, as the curve rockets upward.

Saturation is the only fear. In S•Jme Swedish cities, for example, the upper middle-class homes of the apart­ment type are now so well equipped with every elec­trical device that it is difficult to see that any significant further demands for current are likely: but this state applies to only an almost microscopic fraction of the world's population, and to industry it does not apply at all.

At the World Power Conference, in Madrid, with 1,356 of the world's leading engineers present, no one feared any sort of slowing down in the world demand for electricity. There is always a carrot to hold before the donkey's nose: the consumption of electricity per head of the population is four times as great in the U.S.A. as it is in the U.S.S.R. In Britain, we are tenth in the world table of electricity users; and with an average use for every member of the population of about 1,800 units each year, we can have before us, if we wish, the target of the American way of life which needs for each person about 4,000 units of electrical energy every year. With only 7 50 units a year now attributable to each citizen of Italy, and 1,200 to every Frenchman, these countries may see our steadily rising consumption as a barometer-figure of a better way of life and a more efficient industry, and so increase not only their per

capita consumption, but increase also the relative rate at which their demand rises.

Enormous quantities of plant will be needed to meet this "doubling-in-ten-years," and the first question that exercised the minds of many engineers and power economists at the Madrid conference was: who pays~ In many countries the -capital requirements for elec­tricity supply will become the largest figures in the national budget.

Already, in Britain, the supply authorities in England and Wales alone have reached the very large figure of £303,500,000 a year invested in new capital equipment. In the world as a whol·~, a paper presented to the World Power Conference by the International Bank for

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Reconstruction and Developm~..nt showed that in the n~td~~~a~no.less' flla~£40,000 million will be needed for expenditure on new electricity supply plant.

The Bank's paper castigated many electricity supply authorities on the grounds that they did not charge enough for their product. Too many of them, it seemed, relied on doled-out amounts from government budgets. As the paper said: ''W-hen expansion of power facilities depends on allotments from government budgets, only meagre amounts can generally be made available: con­sequently, expansion lags, the utilities are unable to keep up with the demand, load curtailment follows and poor service results .... But the fact remains that a steadily expanding supply of electric energy is a reqaisite of economic growth in all developing countries today ... the idea that low power rates, even if it is necessary to subsidise them, are required for industrial development. This is simply not so." All power authori­ties should charge rates that allow for about 50 per cent of their expansion programmes to be financed from internal sources.

If power costs rise, for the sound reasons expressed in the International Bank's paper at the World Power

onue UlpLtrrnanque, October 1960

rarts

Les • • rgan1sat1ons et financieres

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I' • econom1ques I

Banque mondiale : prets a Israel et a Ia Colombie emprunt en Suisse ·...cililk

L A Banque internationale pour la port d'Asdod dont est actuellement res- ae Ia p roauction a·energie electrique reconstruction et le developpe- ponsable le ministere des transports et de !'agriculture.

ment a approuve, le 9 septembre der- · et communications. Des ingenieu!s can­nier, !'octroi d'un pret de 27.5 mil- I seils surveilleront les travaux en colla­lions de dollars a l'Etat d'Israel. Ce boration avec les autorites israeliennes, pret servira a financer la construe- et les contrats pour les traval!-x de tion et l'equipement d'un ' port const ruction et l'achat du matenel se­abrite, en eau profonde, situe a ront passes sur appel d'offres inter­Asdod, sur les bords de la Mediterra- national. nee. Les travaux seront termines en Le coflt total du projet represente la 1955 et le nouveau port pourra alors contre-valeur de 54,7 millions de dollars. traiter 900 000 tonnes de marchand\- Le pret de la Banque fou!nira les de­ses par an. Ces installations permet- vises necessaires et couvnra une par­trout a l'Etat d'Israel de fermer les tie de depenses en monnaie locale ; le ports de dechargement de Tel-Aviv reliquat sera finance par le gouverne-et de Jaffa, de decongestionner le port ment israelien. . d'Hai:fa et de faire plus facilement Le pret est consenti pour une duree face aux besoins de son commerce exte- d.~ vingt-cinq ans et porte interet a rieur, qui se developpe a une cadence 5,'-15 % l 'an, y compris la commission

1

rapide. de % affectee a la reserve Speciale de La plus grande partie du trafic mari- la :aanque. L'amortissement commen­

time israelien passe par les ports me- cera en aoflt 1965. Israel prendra s~s diterraneens d'Ha'ifa, de Tel-Aviv et de , dispQ!iitions pour reserver une- J?art1e Jaffa. Haifa, qui est actuellement le des r~enus ~u port pour couvnr les seul port israelien en eau profonde, charges relatiVes au pret. assure tout le trafic passagers et 85 % du trafic marchandises, qui s 'est chif- * * * fre en 1959 a 3 millions de tonnes. I Le port est particulierement sur- _ 1n•autre part, le 20 septembre, la charge pendant les mois d'hiver ; .Hanque mopdiale a decide de preter c'est en effet par Ha'ifa que sont ex- !'equivalent de 5,4 millions de dollars pecties les agrumes, principal pro- a . la Colombie pour aider ce pays a duit exportable de l'Etat d'IsraiH ; equiper les neuveaux chemins de fer en outre, le mauvais temps inter- Atlantic. Une fois achevee cette voie rompt les dechargements a Tel-Av·v fern~e reliera entre eux les differents et a Jaffa, dont le trafic est detourne reseaux colombiens et constituera le sur Half a. Tous les ports israeli ens premier . moyen de communication ra­sont actuellement exploites au maxi- pide et sur entre les ports de !'ocean mum; etant donne le coflt qu'im- Atlantique, le centre de la Colombie et pliquerait cette operation et la den- le Pacifique. Les fonds de la. Banque site des constructions dans l'arriere- permettront de financer les achats de pays, il ne saurait etre question de locomotives, de materiel roulant et les agrandir vers l'interieur. d'equipement <rentretien.

La pression a laquelle les ports sont Quatre banqties privees participent a soumis va en s'accentuant. On pre- ce pret, sans 1a garantie de la Banque voit que le volume des cargaisons se- mondiale, pour un mon~~nt global de ches, qui est d'environ 4,7 millions 512 000 dollars en titres, representant de tonnes par an au total, augmen- .Ies quatre :r;>remiers remboursements en tera de plus de la moitie d'ici 1965. entier et une partie du cinquieme, qui Les exportations d'agrumes, de po- viennent a· echeance entre Je 1 ~r mai tasse, de phosphate et de prpduits 1962 et le 1 e r mai 1964. Les banques manufactures ainsi que les importa- suivantes participent a ce pr~t : Conti­tions de produits siderurgiques, de nental Illinois National Bank and bois, de pate a papier et de cereales Trust Company de Chicago, Brown

-constitueront la majeure partie de ce Brothers Harriman and Co., Chemical

. * *

Emprunt en Suisse.- Une emission d'obligations de la Banque internatio­nale pour la reconstruction et le de­veloppement libellee en francs suis­ses, a ete offerte sur le marche suisse le 23 septembre par - un groupe d'im­portantes banques suisses. Les banques offraient, au pair, 60 millions de francs suisses (soit environ 14 _millions de dollars) d 'obligations 4 % a quinze aus. Tout comme a !'occasion de preceden­tes offres d'obligations de la Banque mondiale sur le ma rche suisse, !'Union de banques r.uisses, la Societe de ban­que suisse et le Credit suisse se trou­vent en t ete des souscriptetirs.

La nouvelle emission, denommee « Emprunt en francs suisses 4 % de 1960 » est datee du 15 octobre 1960 et viendra a echeance Ie 15 octobre 1975. Il n'y aura pas de fonds d'amortisse­ment, et les obligations ne pourront etre remboursees avant dix ans. A par­tir du 15 octobre 1970 la Banque mon­diale pourra rembourser !'emission en­tierement ou en partie a n'importe quelle date fixee pour le paiement des interets - avec un preavis de qua­rante_-cinq jours en cas de rembour­sement partie! et de trois mois en cas de remboursement integral. Les interets seront payables annuellement le 15 octobre, et le premier versement viendra a echeance le 15 octobre 1961. L'emission sera cotee sur les Bourses de Zurich, Bale, Geneve, Berne et Lausanne.

C'est la neuvieme emission lancee par la Banque mondiale sur le mar­che suisse. En outre, cette derniere a e:ffectue trois placements prives en Suisse. Compte tenu de !'emission ac­tuelle, la totalite d'obligations et de bons de la Banque mondiale libelles en francs suibSes en circulation se verra portee a 690 millions de francs suisses (soit environ 160 millions de dollars) . • . .

trafic supplementaire. Bank New York Trust Company et Aide financiere a l'Inde. - Les Le nouveau port d'Asdod po ura as- Grace National Bank de New-York. echanges de vues preliminaires sur

surer un trafic deux fois plus impor- ' Le pret est consenti a la Societe na- raide a apporter a l'Inde dans le ca­tant que Tel-Aviv et Jaffa, sans en- ti_onale des chemins d_e fer de Colom- dre de son tr_oisie~e plan quinquennal combrement ni retard et a un moin- b1e (C.N.R.), orgamsme autonome ont eu lieu a Par1s le 12 septembre, dre prix pour les marchandises cree en 1954 par le gouvernemene a.fin I sous l'egide de la Banque mondiale. comme p~ur les navires. Situe a une d'exploiter pour son propre compte ~s Outre cet organisme, les gouverne­trentaine de kilometres de Tel-Aviv, chemins de ~~r ?u pays. La creation ments de la Republique fecterale d'Al­dans une region d'acces relativement du C.N.R. s_mtegr~ut . dans un pro. 11emagne, du Canada, des Etats-Unis, facile et se pretant a. la mise en va- gramme de reorgamsatwn de la struc- du Japon et du Royaume-Uni etaient leur, le port sera relie par la .route 1 t~re a:~ministrative, .operat ionnelle et I representes ala ~eunion. Le Fonds mo­et le chemin de fer aux prinCipaux fmanctere des chemms de fer et de I netaire intemat10nal et le gouverne­centres de production actuellement r~m~se en etat des .-voies e~istantes ruent italien y avaient envoye des desservis par Tel-Aviv et Jaffa. Asdod am~1 . que des autres mstallatwns fer- ol),servateu~s: . sera un port en eau profonde qui com- roviaires. l..es partiCipants ont passe en revue prendra un bassin protege par des Jusqu'a present la principale voie la situation economique et financiere brise-lames avec des jetees s 'avan<;ant de communication pour le comme~ce aetuelle de l'Inde; ils ont examine le~ parallelement dans Ia zone des eaux entre _le centre du pays et la cote mont~nts d'aide supplementaire qm abritees Les travaux se feront par atlantique, et entre le nord et le sud seront necessaires pour l'exercice en trancheS, Ja seconde tranche ne de- du pays, etait 1~ g!and fle~v:e Magda- cours (derniere annee du second plan), vant etre mise en train que lorsque lena, avec ses d~f~erentes llB:Isons rou- et ont entrepris une etude preliminaire l'accroissement du trafic le justifiera. tiere~ et ferroy1a1re~. L.'amen.ag~ment des besQins relatifs au troisieme plan, Des 1963, le port devrait e~re en me- du reseau ~erre avait deja fatt 1 o?jet dont 1!'1- mise en reuvre commencera sur de traiter les agrumes, et i1 sera d~ deux prets de la Ban9~e mond1ale, en avnl 1961. en pleine activite des 1965. d un montant de 40,9 m1lllons de dol- C'etait Ia troisieme fois que Ies re-

Le pret de la Banque servira a finan- la.rs, en 1952 e~ en 1955. , • pr~sentants de la Banque et de ~er-cer la premiere tranche de travaux, On pense mamten~IJ-t que _des le de- tams gouvernements se reunissa1ent qui sera achevee au debut de 1965. but de 1961 Ia . totall~e du reseau st:ra pour discuter de l'aide finariciere a cette tranche comporte Ia construe- ouverte a la ~uculatwn. Les chemtns OQtroyer ~ l'Inde aftn de faciliter son tion de brise-lames (d'une longueur to- de fer Atlantlc permettront non seu- developpement economique. tale de 3 kilometres environ), le dra- lement d 'assurer Ies tr~ns~orts entre ,. *,. gage des bassins du port a la prof on- le centre ~e la C<?lombu~ ~t Ies. ports deur necessaire pout recevoir des na- de l'Atla~t1que ma1s auss1 de relier les vires de haute mer ; des jetees d'une lll.e;q.es. ~xtsta.ntes •. a~sura:n~ ainsi une longueur suffisante pour recevoir cinq I ;1rculat1on ferrov1a1re mm~errompue

1r ' 1 f . i f e t ~ntre (luatre des grandes Vllles : Bo-nav es a a OlS, une vo e ~rr e e lgota, Cali, Medellin et Bucaramanga. u~e route d9:ns la zone P?rtuatre elle- Les chemins de fer offriront en outre meme, une llg!le de che~I? de_ fer re- ~es possibilites de culture et de peu­liant le port a .une cax:rl_ere sttuee a lement aux jungles tropicales autre­l'exterieur, plusteurs . batiments pour fois tres peu habitees de la vallee de l'entreposage . tempora.tre des agrum~s lla Magdalena. et autres marchandises en transit, I T - -..Af- llo lo "Donnn<> .. ~.. n~nco-nH

- Les Conseils des gou1'erneurs de la

f~~~!tt~~?d:~z~ ~~ f!~tte fi~;~~~l~: internationale ont tenu leur assemblee annuelle a Washington du 26 au 30 sep-

. tembre. On trouvera dans le prochain numero du Moncle diplomatique le contenu essentiel dea exposes qui y ont ete presentes par les presidents de cha­que institution. En l'-J~bsence de M. Eu­gene B. Black, presitlent de Za Banque '"""'-AJ,..f,. -••~ -.-.t.A.,... A~ -nl,nd44J ~t'~e't

Conference, will industry be seriously affected '? The paper sho·wed that on the average the cost of electricity in Europe is only l ·l per cent of the total value of output. " If the cost of electricity is such a small pro­portion of the value of output, it is difficult to support the argument that an increase of 10, 20 or even 30 per cent would seriously affect the cost of industrial pro­duction or even inhibit its development. The lack of an adequate power supply would, however, deter indus­trial development."

The strictly engineering papers presented to the conference held that there have been enormous increases in the efficiency of generation of power by burning coal or oil. Again, doubling the size of generating units has been found to reduce the capital cost per kilowatt by 20 per cent. In the water power field, in spite of apparent exhaustion of new projects in some countries, further surveying, coupled with technical progress (particu­larly in the field of relatively small economic generating units), had made available a new and very large but still finite amount of water power.

Sir Christopher Hinton, chairman , of the Central

Left: New supplies of water power are constantly being brought into use; one of the latest is at Las Picadas, Spain

Below: Giant testing stations like this one at Fontenay, near Paris, prepare the way for still more complex electrical links- between cities, regions and countries

Electricity Generating Board, made an official apologia for early errors in harnessing nuclear power. Forecasts as to when it would becorne competitive with conven­tionally produced power had been falsified for three reasons: too high a credit for the plutonium by­product; world increases in interest rates; and a remark­ably rapid improvement in the efficiency of conven­tional generating stations. Nevertheless, he felt sure that nuclear power would be an economic forn1 of sup­plementing the world's power resources.

There was, at the Madrid World Power Conference, a marked cooling in the warmth with which atomic energy has been regarded in power engineering circles in recent years. The general view was that splitting the atom on a commercial scale had now been proved thoroughly practicable, but this method of generating power must now compete on commercial terms with the coal-fired steam station, the gas turbine, the diesel engine or with any other means of making electricity available.

Skimming north over Spain's flashy rivers, with their uncertain hydro-electric potential, to Paris, one found the International Conference on Large Electric Systems ready for the next steps in transmitting yet more power over longer and longer distances.

The ability of an electric power line to transmit large blocks of power depends largely on the voltage, or

' 1

pn'l"l'lll'C. and at prc:mnt in the world as a. whole the highe:-;t pressure used iR 500,000 volts in the U.S.~.lt .

In ~weden, \Vest Germany and :France the 400,000 volt lt'n.'l is used, and this will soon be employed in Britain, where the highest voltage_ is now 275,000 volts for the super grid. At the Paris conference, th~rc was talk of ;)00,000 volts for Britain, and of 750,000 volts as the next world step. The alternative system for that at prcsent used-the three-phase alternating curr~nt

system-is to employ high voltage direct current, as planned for the cross-Channel power cable, to be com­pleted next year. This method, alre.ady used in Sweden to couple-in the island of Gotland to the mainland hydro power, p.nd in Russia·, is gaining ground.

ALL Tins EVIDENCE of buoyancy on the electrical front lead~ to the second question: wlw is to make all the plant that 1rill be needed? For some ~f the answers, we return to this country, to Bournemouth, to the British Electrical Power Convention.

Under the presidency of Lord Chandos, Britain's manufacturers and electricity suppliers met this sum­mer to view "The New Horizon." The prospect could perhaps be best expressed by a quotation from a paper by l\Ir. H. G. Nelson, n1anaging director of The English Electric Company. Britain's manufacturers of electrical equipment form one of the country's largest industries, employing 750,000 people: but it seen1s there are too many separate units. Mr. Nelson said: "Companies will he faced with the problen1 that the increasing size of lt.hc many] individual units will mean that there is not enough business to support the number of com­panies previously operating in the field; and this will dictate some serious re-thinking on the structure of the industry. The ~igh costs of development will also limit the nun1ber of design teams that can be supported.''

:Mr. Nelson reinforced these remarks by saying: "The direct play of free competition in the classical sense is no longer realistic, and if there is to be a reasonable assurance of continuity of employment for workpeople and staff and of continuity of savings to meet the high cost of the capital investment and development needed, there n1ust be a tendency to move towards various alternative solutions-collaboration between competing manufacturers on price, price negotiation between a customer and a chosen supplier, or the amalgamation of companies into larger groups."

Lord Chandos expressed the same views, when he said: "I think we must all consciously try to build up amongst the leading manufacturers more mutual con­Arl~nce .... 'Ve should not he accused of having half a :.: ~~ :~ 1: -:: :-::.~~·-.,~ :-. : · ·v~pa ; "'. i~ P~..:i · -1.hli~hmcnts, using perhaps

twice the Hcce:;sar·y technical effort, in order to pw-1h out the frontiers of our l<nowlcdge in relation to sorne part of the elect rical industry. \Vc should a.t least aim, and I repeat it, as a matter of confidence, to try to get one or two. I admit that thiH iH going to lead to some very uncomfortable luncheon parties, at which competitors will sit down and will wait to sec whether their host drinks the wine before they start drinking it themse]ves. We shall not, however, he judged to he industrial statesmen un]ess we arc willing to meet with our competitors."

Mr. E. V. Small, Gf Associated Electrical Industries Export (speaking on behalf of all electrical manufac­turers), told the Power Convention that prohlems of finding the money to fi nance the huge export contracts, with their long-tern1 credits, was a major headache. "The electrical manufacturer is in effect turned into a finance broker, for which he is il1-equipped. ~Iany firms, prepared and able to match their technical skill and manufacturing ability against- all ~omers, find them­selves bogged down and floundering in a mire of money problems quite outside of their sphere, and in 1nany cases this causes them to lose heart and to fall out of the export race."

1\Ir. Small also advocated a form of collaboration, if Britain is to secure at least her fair share of the glittering prizes which electrical demands the world over can offer to all electrical manufacturers. He proposed greater use of group contracting-"The formation of a gronp of complementary manufacturers and contractors through the medium of a company or partnership for the purpose of tendering for and securing a contract for the ~xecution of an engineering project overseas."

Local 1nanufacture of products designed in Britain but n1ade or as~embled in factories established by the parent companies in overseas territories was also strongly advocated by 1\'Ir. Small. But, he went on, "\Ve tnust at all ct>sts retain our leading position in research and development to enable us to be one jump ahead always of current design and practice, and to be ready and willing to sell our knowledge, . seeing that the time is fast passing when . we can trade successfully and solely in the products produced in this country as the result of our research and manufacturing ability."

The confident men who set out this year to talk over the electrical future came back cautiously optimistic: the demand for their product (whether it is electricity or plant to make electricity) is there, more surely than any other industry can forecast. But who pays for it and who makes it is not so certain. Unless British private industry finds these answers, son1e governments n1ay be forced to supply their own answers-which may not please anyone very much.

CAPITAL FOR ELECTRIC ENERGY REQUIREHENTS

BY A. D. Spottswood

Chief, Public Utilities Division

International Bank for Reconstruction and Development

The subject of the 1960 Sectional Meeting of the World Bower

Conference, 11Methods for Solving Power Shortage Problems", is most

timely and appropriate, especially in the field of electric power where

the world is faced with the enormous problem of more than doubling the

existing electric power facilities in the next decade in order to prevent

a power shortage.ll In the introduction of the pamphlet sent out by the

Spanish National Committee outlining the subjects to be discussed there

is the observation that among the first problems to be dealt with during

the initial stages of the economic development of a country are generally

t hose of the availability of investment capital and qualified manpower.

This paper deals with the methods of raising capital for the electric

power industry~ This industry plays an important part in the economic

development of all countries.

What is the magnitude of the car:i tal requirement of the electric

power industry in the next decade? The point of departure is the estimated

cost i n 1958 prices of the power facilities in existence in 1958. According

to statistics published by the United Nations, the total generating capacity

installed in public utilities in all countries of the world in 1958 amounted

1/ In the more industrialized countries, with the exception of Russia, the rate of increase in demand has been between 6% and 8% in recent years. In Russia and the less developed countries, the rate of increase has been even greater; consequently, doubling of capacity in 10 years probably understates the rate of increase.

- 2 -

to about 354 million kilowatts.!/ Of this, about 233 million kilowatts

were thermal capacity and about 121 million kilowatts were hydro. The

cost of these facilities, if they were to be built in 1958, is estimated

to be about the equivalent of ~~79,000 million. If to this is added the

cost of transmission and distribution facilities required, the cost

becomes about '';1~110,000 million. This is the order of magnitude of the

capital requirements of the world for additional electric power facilities

for the next decade.

From what sources will it be possible to obtain this amount of

capital? The mechanisms of financing will vary from country to country,

but eventually it must come either from within the enterprise through

depreciation charges and retained earnings or from external sources either

private or public, domestic or foreign. In those relatively few countries

with highly developed capital markets a large part will undoubtedly come

from the long-term borrowings of private funds. In cases where enterprises

are privately owned, equity capital may also be an important source. In

countries where access to private capital is limited or non-existent be­

cause of the lack of a domestic capital market and the unattractiveness

to foreign investors, the government is frequently a source of investment

funds. In all cases self-financing is potentially an important source~

In the U.S.A. in recent years about 45% to 50% of the new capital

expenditures of the investor-owned power companies (which comprise about

76% of the generating facilities) have come from long-term borrowing,

15% to 20% from equity investments (shares) and about 35% from "self­

financing" through depreciation reserves and retained ea.rnings. In the

United Kingdom, where power facilities are government-owned, about 42%

!( This excludes industr,Y-owned generating facilities.

- 3 -

of new capital expenditures have been for the past decade self-financed

through depreciation and retained earnings. During the next six years

the Electricity Council plans to provide from similar sources 48% of its

gross capital expenditures.

The countries considered as having clearly adequate capital

markets at present include most of Western Europe, the United Kingdom,

the United States, Canada, Japan and Australia. In the 16 countries in

this group, the total capacity of the public utility generating plants

in 1958 was about 265 million kilowatts.

In the U.S.S.R., Eastern Europe and the l'Tainland of China the

generating capacity totalled about 51 million kilowatts in 1958. The

remaining 38 million kilowatts were in countries having no organized

capital markets or capital markets of limited size. This includes all

of the countries in South and Central .America, most of Africa, the f-uddle

East, Southeast Asia and the Islands of the Pacific, except Japan and

Australia. In some of these countries the market mechanisms exist but

the amounts of savings available are insufficient to satisfy the needs

of the electric power industry and all the other capital requirements.

In these countries pm~er production and transmission facilities are, with

a few exceptions, governm3nt or municipally owned and in many instances

the distribution facilities are also publicly owned. In a few countries

the electric power utilities are operated by one of the ministries as a

department of the government, but the trend has been t~Jards ownership

by governments through semi-autonomous or independent agencies. These

independent agencies are generally empowered to borrot-1 money for expansion.

Some have access to limited capital markets or to government pension

funds but in some countries there is no capital market at all and pension

- 4-

funds are not available. Faced with a lack of capital market or a re­

stricted capital market and l'rith a limited ability to borrow abroad,

the government utilities generally turn to the government budget. It

is difficult to visualize how the various government budgets, which are

usually severely strained or unbalanced, can be expected to allot more

than a small part of the $15,000 million required for expansion of power

facilities in these developing countries over the next decade, especially

since in rapidly expanding economies the calls on government budgets for

non-revenue producing items such as roads, schools, hospitals and other

developmental activities are far more than can be reasonably met. Some

governments, h~gever, have attempted in the past to finance the expansion

of both power and developmental needs by borrmiing from their central

Banks or by printing money to obtain the necessary funds in excess of

those normally available. This inevitably leads to inflation and cis­

astrous consequences.

When expansion of power facilities depends on allotments from

government budgets, only meager amounts can generally be made available;

consequently, expansion lags, the utilities are unable to keep up with

the demand, load curtailment follows and poor service results. Even

the small amounts allotted from the budget are provided at the expense

of some other important need. But the fact remains that a steadily

expanding supply of electric energy is a requisite of economic growth

in all developing countries today. The enonnous amount of capital

required for this essential service must be found. If countries with

non-existent or limited capital markets and limited ability to borrow

abroad should not depend on government budgets for their funds for

expansion (and in most countries this should be their goal in the

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reasonably near future) then how is the capital to be obtained? The

answer is that a very substantial part of it should be earned by the

utilities themselves through adequate charges to the consumers of

electricity.

It is surprising in most cases how small in absolute terms the

increases in rates need to be to provide annually the funds which will

inevitably be needed to sustain future growth. Sometimes the percentage

figures appear large. When starting from a lmv- base (generally artif­

icially low) such percentage figures are misleading. However, it may

be well to define in specific terms what constitutes an "adequate" rate.

An adequate rate should provide revenues sufficient to:

(a) cover all operating, maintenance and administrative

expenses, taxes, interest and adequate depreciation

charges;

(b) create a surplus out of which sui table provision can

be made to repay all loans insofar as the periodic

amortization payments thereon are not covered by de­

preciation and in addition to set aside an amount

sufficient to cover a reasonable part of the cost of

future expansion.

One might ask what is a reasonable part of the cost of future

expansion? No single figure or percentage can be given in answer to

this question as much depends on the existing capital structure of the

enterprise, the size of the expansion program in relation to the exist­

ing facilities, the size of the market for power and many other factors.

Action by borrowers from the VJorld Bank which had, as of December 1959,

- 6 -

loaned the equivalent of over $1,460million for power facilities in 29

countries of the world, gives an indication of what has happened in these

countries. These borrowers have set their rates sufficiently high to

finance from 20% to 50% of the cost of their expansion programs from

internal sources.

This may appear to some a high figure, but what are the alter­

natives: One is power financed from the government budget resulting in

less money for schools, roads and other developmental needs. Another

is a general tax increase which would enable the government budget to

provide funds for both power and developmental needs, but this, for

political reasons, is rarely if ever possible. Another is continuing

with inadequate rates and the consequent lack of money for expansion

resulting in continuously overloaded systems with frequent outages, no

additional power when it is needed and the necessity for each industry

of any size to provide its own power at much greater cost than from a

central system and in addition, restrictions on the use of power for such

desirable needs as air conditioning and cooking.

The idea is often expressed with sincere conviction by many

people that low power rates, even if it is necessary to subsidize them,

are required for industrial development. This is simply not so. With

the exception of a few pawer intensive industries such as aluminium,

certain other special metals and chemicals, the establishment of the

industries which are likely to be contemplated for the less developed

parts of the world is not dependent on the price of electricity. The

important factor is the availability of power, not how much is charged

for it. But, the argument continues, would not the "adequate rates"

- 7 -

make the charges for electricity higher in the less developed countries

than in the U.S.A. and Europe? Perhaps they would, but it is difficult

to generalize because conditions in the U.S.A. and Europe are not com-

parable with conditions in less industrialized countries. However, if

the following hard facts of life are taken into consideration it is clear

that p~1er rates should be higher (and certainly no lower, although

they sometimes are)!/than those in the U.S.A. and Europe given comparable

sites. First, almost all less developed countries must import most of

the electrical and mechanica.l equipment necessary for power plants and

also the construction equipment required to build them and in many

countries there are import duties on such equipment - some as high as 40% -

even though the equipment is to be owned by government agencies. Ocean

freight plus import duties make the landed cost of the equipment higher

than in the manufacturing countries. Second, the cost of construction

is no lower and is often higher in the less developed countries.

Although unit labor rates are lower in these countries, labor is fre-

quently inexperienced and more is required. It is also less mechanized.

Third, there are the unexpected delays, same of them purely bureaucratic,

that inevitably occur and frequently add a year or more to the construction

period. This is expensive, but in many countries the value of time is

not appreciated and there is little sense of urgency to get on with the

1/ For example, residential consumers in Mexico City; Rio de Janeiro, and Sao Paulo, Brazil; Colombo, Ceylon; Quito, Ecuador; Santiago, Chile; Bogota and. Medellin, Colombia pay less for 100 kilowatt hours than similar consumers in Boston, Baltimore, Chicago, New Orleans or San Francisco in the U.S.A.

- 8 -

job. While life-long habits and attitudes cannot be expected to change

rapidly, nevertheless they add to the expense of construction. Fourth,

interest paid on borrowed money for the projects, and especially on local

currency, is relatively high; generally the terms of the loans in local

currency are short, making amortization payments high. Fifth, trained

operating personnel is frequently not available in many countries. Local

personnel has to be trained and often supplemented with personnel from

abroad. The number of operating personnel per kilowatt installed is

generally much greater in the less developed countries and especially in

government-operated plants, consequently, labor costs of operation are

no lower than in the industrialized countries despite lower wage and

salary rates. And it should be emphasized that the utilities in the less

developed countries cannot expect to attract and hold capable engineers

and operators, even their own nationals - and especially the younger

ones - by paying the low government salary and wage scales. Ways must

be found to pay salaries and wages competitive with privately owned in­

dustry in the area. Sixth, maintenance costs are higher because spare

parts, which must bear ocean freight, cost more and skilled maintenance

workers are not generally available in adequate numbers.

While all of the above points do not apply in all developing

countries, many of them do and they will add up to higher production

costs for some time to came. It follows then that rates charged for

electricity should usually be somewhat higher in the less developed

countries just to cover higher production costs but often managers of

the utilities are not allowed to keep their tariffs at levels to cover

- 9 -

all legitimate costs, much less to show a reasonable return on the invest­

ment from which funds for expansion might be made availaOle. This is

true of government-owned as well as investor-owned utilities. If those

in authority would weigh the costs to the economy in real terms of holding

electric power rates down to artificially low levels, they would realize

that the resulting lack of an adequate power supply and poor service are

much more costly to the economy than the increases required to provide

adequate rates. This applies particularly to the industrial sector of

the economy. In most industries the cost of purchased electricity con­

stitutes a relatively small part of the total value of ths output. A

recent OEEC report which surveyed a wide range of major industries

showed that on the average the cost of electricity :iri Europe is only 1.1%

of the total value of output. Figures for the u.s.A. show about the

same results. In Mexico a similar study showed that electricity costs

were 1.2% of the value of output. The Nexican study also shol-red that

electric power averaged only 1.7% of the cost of production. The per­

centages ranged from 3.8% tn the paper industry to 1% in textiles.

With the cost of electricity being such a small proportion of the cost

of production and value of output, it is difficult to support the

argument that an increase of 10, 20 or even 30% would seriously affect

the cost of industrial production or inhibit its development. A lack

of an adequate power supply would, however, deter industrial development.

Then what about the residential consumer? The anm1er here is

that the burden can be distributed by the tariff schedules so that those

most able to pay will carry the larger share•

- 10 -

Of course, those who are in the electric power industry know

that no consumer will ever admit that his rates are reasonable and he

will always complain whenever his rates are increased. The fact remains,

however, that in Europe, the U.S.A. and in many of the less developed

countries the prices paid for electricity have increased substantially

less than other items included in the cost of living indices; and in

terms of pre-war prices they have actually declined.

In view of the ever present tendency for prices to rise through­

out most of the world today, it is extremely important that .electric

power utilities be permitted to adjust their tariffs promptly when their

costs of providing service increase; and the adjustments to cover

increases in cost of fuel or salaries and wages preferably should be

automatic. There should also be periodic reviews for adjustments to

cover other increases in costs of fixed assets, including the replacement

of existing equipment with more expensive equipment, and also to revalue

facilities or adjust depreciation rates. Obviously a reasonable rate of

return or a reasonable depreciation rate if applied to the book value of

facilities acquired 20 to 25 years ago or even less, cannot be expected

to provide adequate funds for expansion or replacement.

When utilities have been able to provide a good percentage of

their capital needs from their o~m resources, they have usually been able

to borrow the remainder of their requirements on reasonable terms, pro­

vided the projects they propose were sound, the company or agency had

demonstrated that it could maintain a sound financial condition and had

good management.

- 11 -

One source of funds for many of the countries with limited or

no capital markets is, of course, the 'VITorld Bank. In the past the Bank

has not hesitated to assist in financing good power projects where sound

financial policies have prevailed both on the part of the prospective

borrower and the · government concerned. It can be expected that the Bank

will be able to find the necessary capital to continue its financial

assistance for good power projects in its 68 member countries.

At the end of 1959 the Bank had made nearly 250 loans to borrowers

in 50 countries. Despite the variety of its borrm~ers, the Bank has not

had a single default since it began operations in 1946.

At the beginning of the current year, the money amount of the

Bank's loan conuni tments was about $4,600 million. Actual disbursements

on these loans had reached almost ~~3, .500 million. · Most of the Bank's

loanable funds have been raised in the money markets of the world. Sub­

scriptions to the Bank 1 s share ca.pi tal by member governments accounted

for ~~1 ,140 million; most of the rest had been raised from other investors,

who either bought the Bank's own bonds or bought parts of loans from the

Bank's portfolio. Public offerings of the Bank's bonds had been made in

the United States, Canada, the United Kingdom, Germany, Switzerland,

Belgium and the Netherlands; and investors in 40 other countries had bought

the Bank 1 s bonds at one time or another. Other investors also bought

parts of same 160 loans made by the Bank; their purchases amounted to

more than :i~500 million.

In addition to encouraging these participations in its lending

operations, the Bank has in recent years been pursuing a policy of com­

bining with the United States investment market by arranging to make a

- 12 ...

loan coincide with an approach by the borrower to the capital market for

additional funds generally for the same project. In the last fiscal year

there were five such joint operations in which Austria, Denma.rk, Italy,

Japan and the Union of South Africa borrowed $250 million. The Bank

loans supplied $100 million, the European Investment Bank lent ~:~20

million and the U.s. capital market provided $130 million. This technique,

which the Bank welcomes, enables it to devote more of its resources to

the needs of its members who cannot receive accommodation in the capital

markets.

With the probability of the International Development Association

caning into being by the end of 1960 or early 1961, the Bank will have at

its disposal an additional $1,000 million in various currencies whiCh it

will be able to lend for good projects to member countries whose credit

standing might not enable them to qualify for loans under the presently

established criteria or the Bank.

world.

Speech to

.tJ1tiDAL GOBPF11ElJCE of THE ASSOCIATION OF ~~GEMENT CONSULTANTS

Statler - Hilton Hotel New York City May 28, 1965.

The business of the Bank is financing development throughout the free

When we began making loans in our less-developed member countries

18 years ago, we at once discovered the importance which management plays

in the success of the projects 'tvhich we finance.

The Bank makes loans only for sou_~d projects; we do not finance money for

trade; we do not provide budget support or;anything that smacks of milita~

usefullness. We loan money mainly for rather expensive things such as

power plants, railroads, roads, ports, pipelines, irrigation projects,

industrial plants,agriculture, water supply and, recently, educational

facilities. In short, what we primarily lend for has been termed by some

as "infrastructure 11 •

Although we can and do make loans to private enterprise, most of

our borrowers are governments who are new to the business of government

and are trying to govern in an orderly fashion populations which are

becoming increasingly aroused against a life of poverty. This may seem

an improbable set of conditions under which to do much business in these

chaotic times, but we have been successful.

The Bank to date has made loans totalling over $8~ billion in

74 different countries. Its affiliate, the International Development

Association, has granted credits totalling just over $1 billion and our

other affiliate, International Finance Corporation, has made total

commitments of over $130 million. All but a half billion dollars of these

2

loans and credits have been for development; the half billion was loaned

for reconstruction purposes in Europe during the early years of our

operations. Up to date we have not had a single default on any of the

loans or credits which we have madeQ I believe you 1dll agree that

this is a rather unusual record and speaks well for the quality of the

loans which we have made.

We get the money which we lend almost exclusively now from

private investors in the free world who either buy our bonds or participate

in our lending operations in one way or another. These investors are

willing to buy our bonds because, if you will examine our Balance Sheet,

you will quickly see that the Bank is not a charitable organization.

The Bank lends money at a reasonable rate of interest and it makes a

profit;, so does our affiliate, International Finance Corporation~ which

invests in joint ventures and does stock underwritings with private

enterprises around the world. Our other affiliate, International Develop­(IDA)

ment Association¥however, is not intended to make a profit~ IDA grants

credits for ve~J long terms - up to 50 years - free of interest, although

there is a small service charge. Its clients are those countries which

are members of the Bank which cannot afford sufficient borrowing on

conventional terms. The money for IDA lending is provided by a number

of industrial nations as a part of their foreign aid programso When

the funds are released they cease to have any national identity and IDA

lends the funds in accordance -vtith its best judgment. The resources of

IDA are replenished from time to time by grants from the industrialized

nations " If these nations do not see fit to continue to replenish IDA

funds, it will cease to exist.

3

From the point of vieH of a development banker, the most di!.ricult

problem by far in giving effective help to the developing nations is the

problem of promoting the right economic and financial operations. This

broad terminology includes insistence on good management as well as a wide

range of other factors which vary from country to country but could include

checks on inflationary pressures, changes in laws and regulatory practises

which would allow public utilities to pay their m~ way and set aside out of

revenues something towards their expansion and to many other things which we

consider essential to make our loans sound and to promote effective develop-

ment in the borrowing countries. Each of our loan agreements contains

conditions of one sort or another; conditions designed as much to protect

our borrowers as ourselves. Our borrowers have readily accepted these

conditions, partly because they know we have no axe to grind but mostly

because our borrowers have agreed that the conditions are necessar.y for the

effective use of our money. Every loan has posed special problems of

adapting knowledge and experience to special environments and special problems.

But all have reflected, I think, the facts of economic life which must be

faced if a developing society is to escape poverty in these times. Let me

emphasize that we would have to do these things - to ask these conditions -

on whatever tenns we 1-1ere supplying financing. The difference bet1v-een money

effective assistance and 'bo strings attached" /is not the difference bet"tveen a

loan and a grant; it is the difference between an insistence on sound

financial and economic policies and no such insistence.

Quite frequently some of the conditions we include in our loan

agreements concern strengthening of the management of the borrowing agency.

Often some of the emerging countries lack trained management personnel and

4

in suah instances it is necessary for these countries to engage management

consultants to assist in establishing sound managerial and accounting

procedures. But, let me hasten to add that the Bank does not recorr~end

any consultants to its borrowers. I am sure you will understand the reasons

for this when I tell you that the Bank has in its files, brochur·es and

experience records of some 1800 consulting firms from all ever the vJorld.

About 250 of these firms offer management services; nearly 150 of these

are United States firms, the remainder are principally from European

countries.

If the Ba~ ~ere to recommend, say, five or six fi1~ to one of

our borrowers, all the others not on the list who might feel qualifj.ed

would reasonably ask why they were not included; but if we gave our

borrowers a list of 100 to 150 names, this would be of no use to them.

It is our policy, therefore, to ask our borrowers to submit to us a list

of the names of the consultants v1hom they wish to employ and we vdll give

our opinion as to suitability of those suggested. We reserve the right to

have consultants satisfactory to the Bank when they are employed by our

borrowers on projects which we finance.

power.

In other words, v1e have a veto

The brochures which we have in our files were sent to us

voluntarily by the various consulting firms throughout the world. We are

ver.y happy to have the information about consulting firms in our files

because whenever -vre are asked by our borrowers to consider a finn, we first

look in our files to find in which field the consultants consider themselves

qualified. r"-e are also happy to have other pertinent information which

will help us decide Hhether the firm can do the job.. It is therefore

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essential that the information in our files be kept up-to-date. We do

not, however, just depend on the information in brochures. If information

we have indicates that the firm is qualified for the job in question, we

follow up as a rule by asking for further detailed information, such as,

the amount of work the firm currently has in progress, the names and

qualifications of the people who might be assigned to the job and its

experience in foreign work. But, let me add here that the submission of a

brochure to the Bank and our placing this brochure in our files does not

in any way imply approval of the firm. In other words, while the

brochures are ver,y helpful, the fact that a firmr.s brochure is on file

with the Bank should not be used, as a few fir.ms have tried to use it, to

imply that this listing indicates approval. We have no approved list.

1rhen studies are paid for by the Bank from its own resources,

or when the Bank acts as executing agent for studies financed by the U.N.

Special Fund, the Bank selects the consultant. These consultants, however,

are predominently engineering consultants; management consultants, of course,

are used when required but generally in the operational phase of the project.

Although engineering consultants are usually retained by our

borrowers in connection with most of our projects, I do not wish to leave

the impression that management consultants are, as a rule, also engaged.

They are not. Their employment depends on special circumstances. Many

of our projects, such as roads, agricultural projects, school construction,

land clearance, far.m improvement, and the like, are undertaken by government

departments. vfuile we sometimes insist on str~ngthening these departments

this is generally done by the addition of experienced personnel to their

staffs rather than through employment of firms. Management consultants

are more often employed when new organizations are required or existing

ones need reorganizing or streamlining.

6 if requested

trvnen our borro1-1ers employ consultants, we will assist themjin

preparing Terms of Reference for the consultants and also the contract

documents. We try to see to it that the consultant is given proper

responsibilities to ena!.Jle him to work effectively and in a professional

manner.

In selecting consultants, either management consultants,

engineering consultants or any other type of .consultant, we suggest to

our borrowers that they obtain perhaps from embassies or other sources in

their countries, the names of fir.ms with experience in the particular

field in which they desire assistance. After they have ascertained from

the Bank which among those they have listed would, in our opinion, be

suitable they should ask for proposals from these firms based on ver.y

clear terms of reference. The consulting fir.m should set forth in its

proposal, in response to the terms of reference, its analysis of the

problem and its general plan for the best solution. The fir.m's proposal

should include the names and backgrounds of the personnel to be employed

in the field, the leadership to be given by the senior staff, with some

indication how much time the senior staff will spend in supetv.ision and

in the field. The proposal should also contain a resume of the firm's

experience, particularly its experience abroad, and its facilities for

handling the particular job. ~~e try to impress upon our borrowers that

selection of consultants should not be based solely upon the price charged

for its services; in fact, we suggest that they should first ask for

proposals exclusive of any financial ter.ms.

When proposals without financial ter.ms have been received, we

suggast careful study of the proposals by a few senior members of the

borrower's organization, working independently and then comparing results of

7

their studies. After the proposals have been ranked in the order of

priority, we suggest that financial terms be requested from, say, the

top threeo Tald.ng all factors into consideration, including prices to

be charged for services, we urge our borrowers to invite the leading

candidate for discussion and try to reach an agreement on fir~ancial terms.

If these can be agreed upon then a contract can be drawn up. This

procedure is followed by the Bank in selecting its consultants.

however.~~ that it is not always followed by our borrowers.

I regret,

There are many problems connected 11ith doing work in the under­

developed world and it is not easy work. There are, for instance,

difficulties in language, customs and traditions; difficult climatic

conditions and sometimes poor accommodations. The conditions under which

you must work are so different from those with which you are familiar in

the United States, that it would be wise before any of you venture into

this field, to make a careful study of problems which you might face in

working abroad. Above all, you should send abroad only top notch personnel.

I would like also to say at this point that the Bank is not a

ver,y good source from which to find work abroad. In other words, we

cannot tell you which countries are planning to ask us for a loan or credit

and our dealings with our borrowers after they have requested a loan or credit

are confidential. Therefore, it is up to each individual fir.m to find

business abroad through whatever sources it has at its command. What I

have said may sound somewhat discouraging to management consultants but I

do not wish to leave the impression that there is not a field for your

services in the developing world; definitely there is; I believe the need

for your services will increase because many of the developing nations are

8

beginning to realize their lack of management personnel and are desperately

seeking to overcome this lack until such time as their own citizens can be

trained to undertake managerial posts.

It has been our experience that the lack of managerial capacity

is a crucial factor in the ability of the developing nations to absorb

financial aid, In other words, it is not the lack of money which limits

development, it is more the lack of trained manpower to staff organizations

to construct and manage projects - or in some cases - to administer

government departments.

Our basic principle is that, before financing any revenue-producing

project, such as a public utility or an industry, the Bank must be satisfied

that the management provided for the project is capable of assuming the

responsibilities inherent in runn:i.ng the type of enterprise being financed.

The extent of these responsibilities will vary with the nature of the

project (running a cement plant is obviously less complex than running a

steel mill), but the manner in which they are discharged will always be

important to the success of the project.

I1anagement covers far more than mere technical supervision of a

plant.o Management must deal with financing problems, supply, budgetary and

cost control, production planning, quality control, sales promotion, personnel

policy, labor relations and many other nontechnical matters. Besides its

more specific responsibilities, management must ·furnish centralized direction

and initiative for the whole enterprise; in short, it must run the business.

Hence, a key problem of any organization is to provide management with

adequate authority and incentives. The successes achieved by the system of

private enterprise in the most advanced industrial countries are due in large

part to the fact that this system has provided an effective incentive.

9

vJhen a loan is requested by an established public uti-lity or

industrial enterprise, the quality of the management can be assessed by looking

at the company's past record. Inadequacies in management will normally be

reflected in operating results over a period of years. But when a loan is

proposed for a new enterprise this evidence is unavailable. The Bank must

then try to judge in advance the adequacy of the contemplated management

arrangements. This is far from an easy task, even when the proposed borrower

is a private companye

When the proposed borrower is a government-owned public utility or

industrial concern, still more care must be exercised. There is normally

reason to fear that the management of government-owned enterprise may be

inadequate for either or both of two reasons:

(a) The management is apt to lack incentive to exercise initiative

and to keep operations at maximum efficiency; and

(b) the government, being government and having objectives other

than the commercial success of a particular enterprise, may

subordinate the interests of the enterprise to extraneous

considerations and may therefore interfere with management's

independence by exerting political influence on appointments

or policies.

In view of the above considerations, the Bank will normally not

finance industrial enterprises, however meritorious in themselves, in which a

member government is the sole or majority stockholder unless it is satisfied:

(a) That private capital is not available to do the job, and this

for no fault of the government;

(b) That the government's participation viill not have an undue

deterrent effect upon the expansion of private initiative and

enterprise in the same or other fields;

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(c) That, in the light of the circumstances (which may vary

materially from case to case), the management arrangements

vest an effective degree of independence, responsibility

and initiative in the persons or organization actually in

charge; and

(d) That the persons or organization selected to manage the

enterprise are qualified for the job.

Our whole experience in the World Bank leads us to believe

that when the objective is clear and understood by all parties~ when the

project has been thoroughly analyzed and its contribution to the economy

is appreciated, a community of interest can be created around the right

policies an1 objectives. .And it does not require a "band of saints

with degrees in economics", as one commentator has envisioned the

requirements for constructive development lending, but it does require

hard work.

A. D. Spottswood, Special Adviser, International Bank for Reconstruction and Development.

Lecture at Graduate School of U.S. Department of Agriculture Course on Power Systems Engineering

May 9, 196B en

PnvJer Systems Abroad By A. D. Spottswood, P.E.

Power systems abroad, the subject assigned to me, is a bit broad,

but it becomes more manageable if it can be discussed by regions. To this

end I have grouped the countries of the t-Jorld into 3 regions: (a) the

industrial or developed countries, (b) the less developed countries and

(c) the Communist countries, but I shall talk mostly about (b), the less

developed countries and their problems.

The first group are: the U.S.A., Canada, most of Hestern Europe, Japan,

South Africa, Australia and NevJ Zealand. These countries had 543,096 r'lN

installed in 1965, the last year for which Federal Potver Commission figures i

are available.

The second group includes Africa (less South Africa), Asia (less Japan),

Central and South .America, the West Indies, a fev.J European countries and

numerous islands in the Pacific. They had an i.."'lstailec; capacity of 59,139 !vlt-1

in 1965.

The Communist countries include the U.S.S.R., Eastern Europe, China,

Cuba, North Korea and North Vietnam. The installed capacity in these countries

was 168,030 r-iW in 1965.

You know tnore than I about the power systems in the developed countries

and probably just as much as I about ,the systems in the Communist countries.

So I shall first give you some background on the less developed countries -

some of their problems and the difficulties they face - something about the

VJorld Bank and how it works - and then a description of a rather detailed

study which the Bank made of an interesting power system in lrJest Pakistan

and its probable growth until 1985.

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First, a little about economic development in the less developed part

·~ o( the 't-1orld in Hhich the average per capita consumption of electricity Has

160 lc.:li in 196S compared with 3, 743 kwh for the developed countries in the

same ysar.

In the last 15 or 20 years ue have beard a great deal about economic

development and vJe are inclined to tl~':.nk of :tt as sbmething relatively ne'tv ..

Of course, we . have had development and economic growth for a lo.n~ time·'

certaL"'lly for l?S years in this country and perhaps for 200 or 250 years in

Western Europe, but it did not go under the narne of development. It used to

be called "progress." Howe1mr, progress 1-Jas confined to the oountries of

Hestern Europe and to the countriE 1:s which the League of Natior1s used to call

i the "countries of recent settlement'1 - meaning the United States, Canada,

Australia, South Africa and perhaps such places as Argentina. It is difficult

to find in the literature of. the 19th century any indication that economic

development such as that 't-Ihich occurrtl~d in He stern Europe, in the United

States and other countries · of "recent settlementu \-Jould be something also to

be expected in the 11 colonial territories 11 or in other less developed parts

of the world. In those dc:.ys it .v.Jas taken for granted that economic grm.vth or

"progress" was to be expected only in vJhc:.t \·Je now call the Hast and that for

the rest of the world t.t'1e normal trmy of lii.'e vJOuld continu8 to be stag:nation

or very little g~owth.

Since then things have changed - and especially· in the past 20 years .

Now economic development is taking place all over the vJorld. Not evenly, t<)

be sure, but. significantly. Dr. John Adler, Sen:.. or Economist, Eco.nom..-tc

Department of the llorld Bank h<-ts estimated that in the past 15 years the

economies of all the less developed countries of the world (exclusive of

the countries behind the Iron Curtain) have been growing on the nverage of .

something like 4 percent per year, with some areas reaching s'!.s percent.

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What is ~"le significance of this in human terns? hlhnt it means :_s that

in the last 17 to 20 yearn the total income of the underdeveloped world has

just about doubled. This is a major accomplisrJ!Tlent of the era in which tve

live. We don 1 t always realize that this is taking pl3.ce, because lve con-

stantly read in the newspapers and magazines about the difficulties here

and there, about one country running out of foreign exchange and [In other h<,.v-

ing political upheavals and so on. But after all is said anu done, what has

happened still adtis up tb a very large accomplishment. It is some~1ing that

has changed the economic history of the world. The momentum of this develop­

ment cannot any longer be consj.dered a temporary thing, as it is very un1ikel~r

that the developing nations will ever return to stagnation and lo11g periods of

no growth.

I/3 a rate of development 4 percent or 5\ percent a reasonable one? Before

this question ca~ be answered, we must examine the figures a little more closely.

First, we must consider ·the extent to which growth of population offsets the

economic development which has taken place. Population growth in the under-,

developed parts of the world includ;i.ng Latin k~erica i .n the past 1) year s ,

has been at a rate of about 2 perce.nt or perhaps a. little bit more in recent

years. In 196.5, the population il1crease in Latin i'Jnerica l·Jas 3 percent and

it is approaching this in other underdeveloped areas. As a conseque.nce the

rate of growth of per capita i .ncdme in the less developed areas has been in

the order of 1 to ~2 percent.

Is this rate of growth reasonable? Can it be considered adequate for

people in these countries? The answer is a matter of judgment as to how fast

it is possible to advance the economies of the developing .nations. But what

do the people of these countries feel when their family income ~ocs up by

1, 1]-j or ·2~·2 percent per year? Lets look at it from the point of view of

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hovJ long it takes .a family or a social class or group to double its income.

Any compound interest table will shot-J you that a 1 percent rate of growth

would d()Uble family income at approximately 70 years, that. is almost t hree

generations. This, I subhdt, is not a reasonable length of time for people

to wait for improvement in their living conditions.

What then t.Jould be reasonable? Here again is a matter of judgment but

something in the order of ~~ percent might be a more reasonable standard be-

cause it means that the per capita income doubles vJi thin 28 years, a period

which is well within the life span of one generation. It would mean tha t on

the whole the people affected t.Jould be twice as well off as their parents and

four times as well off as their grandt:'arents.

This might be considered a fairly reasonable rate of growth. Has this

been achieved? For most of the underdeveloped world, the answer is no. It

has been achieved in many places and others have come close to it, but on the

average this rate of growth has not been achieved. ·1my has this not happened

I l

or \vhy did it not start 50 or morei Jrears ago? Obviously, the people of these

\ countries have at last be~1n to realize that perhaps they can free t~emselves

from a way of life which doomed them to stagnation and poverty. They have

had glimpses of what other nations have achieved and they are no longer

satisfied with the status quo. The assistance given to the less developed

areas by the United States and others 'during the pas t 20 years hns give n

these nations a hope for a better life.

This assistance translated ·into capital movements 1 ·::.:1a ·~ is, support to

these economies through grants 2nd loans from all sour ces, might be examined.

These capital movements as estimated by the Organization for Economic Co-

operation and Development have, in recent years, added up to . something like

8!2 to 9 billion dollars per year. These figures include al l public and

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private loans and grants, from all sources in the developed countries,

to the less developed parts of the world (he:te again these figures refer

only to capital movements within the free world).

The figure of $9,000,000,000 is quite impressive but if it is related

to the total gross . national pr~duct of the more advanced countries 'tvhich

have provided these ftmds it amounts to something less th&~ one percent of

their bombined gross national product. From tJle point of view of the re-

cipient countries, however, · this contribution has been a major factor in

the availability of capital for development purposes. In order to appreciate

its significance, these contributions must be looked at in the context of

the resources of the recipient countries. The total investment in develop-

ment in these countries including their own funds has been probably in the

order of $25,ooo,ooo,ooo to $30,ooo,ooo,ooo per· year. This figure is, of

course, approximate, partly since (it is made up of many natio~al figures

l \vhich have to be translated into ;jollars at some rather questionable ex-

' change rates, but it r8presents a reasonable order of magnitude of t:ne total

investment of these developing nations. If the flow of foreign assistance in

the broad sense of 8':;2 billion dollars annually is related to the total develop-

ment invesbnent, it is clear that ap~roximately 1/3 of the investment resources

of the underdeveloped world ha\"B come from the advanced countries. If it had

not been for this flow of assistance, it is obvious that very little incre2se

in the per capita income of these countries would have taken place; this may

be an overstate.::nent but there is a lot of truth in it. It should not be

o·Jerlooked that, after an; 70 percent of the capital formation for develop-

ment expenditures has come from the resources of the developing nations.

This is quite an achievement when it must be remembered that mobilization

of capital in these countries is difficult and the people are inexperienced.

- 6 -

These developing nations, t.o-v;cvor, are faci:Jg a major problem and

their hope of achieving satisfactory growth rates is (by no moans certain

and it cCl!lnot be taken for gra.rJted that growth lvould continue without ex-

ternal i-Lssistance. In many underdeveloped. countries, the agricultural sector

has been lagging beltind probably because many of the nations have focus sed

upon industrial development a.nd developrne11t of agricultural commodities

for export. In many underdeveloped countries, the agricultural production

for domestic consumptior1 is smaller on ·a per capita basis than it · was 10 to

15 years ago. The eagerness of the less developed nations for industrial-

ization has led them sometimes into making unsound investments. In most of

the underdeveloped world, :imports /re necessary for ·~ools, equipment and

materials required not only .for industrial development but for what tl1e

economists call "infrastructure", that is, roads, railroads, ports, power

plants, water supply, irrigation and so forth - the kind of investment in

which the World Bank is very much concerned. Imports require foreign ~x-1 I

change and the underdeveloped countrie$ 1 foreign exchange proceeds from

exports and other sources have not kept pace with the growth of the economies

of these countries. This is clearly shown in all of the trade statistics.

These statistics show that in the last 20 years, world trade has expanded as

it has never before, but they also shm-J that most of the expansion has occur-

red in trade between the advanced countries and from advanced countries to

the underdeveloped countries, while exports from the undel'developed co·untries

have not risen significantly, according to Dr. Adler.

Why? To some extent, the underdev-eloped countries have not man2.ged

their affairs as efficiently as they might have. But even if some .of the

blame is put on them, it is clear that the problem facing them is one over

which the developing countries have little or no control. Dr~ Adler points

·.

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out that by looking at statistics it is easy to' see that the commodities

which the .nderdeveloped cou~trie~ have to sell, and on which : they depend

in a la!·ge measlire to obtain fore,lgn exchange, have not baen purchased in

inc~easing volume by the more advanced countries. In other words, the

demand of these commodities does not rise very fast. Look at coffee;

look at cocoa; look at natural rubber; look at basic food stuffs and

industrial raw materials and you find that th,~se commodities are con.3tantly

under pressure. Some of these commodities are under pressure because more

an9 more synthetic substitutes have come into the picture cu1d because the

more advanced countries themselves have managed to produc~ some of these

commodities more cheaply than they can be imported.

Because of the slotv growth of export earnings, many of the under­

developed countries are now facing serious debt problems. In the early

post-war years, underdeveloped co".lntries found it was relatively easy to

get loans and private investment from advanced coui)tries. These loans and

investma~ts were made in the expectation that they would generat~ develop­

ment rapidly and that export earnings. would keep pace with the higher

imports. Unfortunately, this has not bean the case.

Over the nsxt three or four years, some of tbE!se developing counti·ies

face the prospect of having to set aside something like 25 percent of the

foreign exchange earnings to meet their debt service oblig[ltions. Clearly,

this is not a comfortable position for these countries to be in for three

reasons.

In the first place, the debt service reduces the amount of c2pital in­

now which is available for developnent. It has been estimated that debt

service of the less developed countries currently amounts to about

~3,000,000,000 per annum and it is ipcreasing every year. In the second

...

- 8 -

place, these countries h.:1ve to tigl:ten their belts and fore eo imports of

equipment which are essential to tl~eir development, and forego imports of

raw materials, because of lack of ~~~oreign excha.'1ge, to such an extent that

their existing industries can operate at only a fraction of their capacities ..

Thirdly, under these conditions, it becomes inadvlsable for these countries

to incur further debts particularly if these debts are on so-called con­

ventional terms.

I believe it is generally agreed that the electric power i .ndustry

plays a very important part in the economic development of all countries.

TI1e wide difference in the per capita consumption of electricity in the

developed and less developed countries, lvhich I cited a moment ago, tends to

substantiate this. There were, for exa.rnple, 21 countries in Africa in 'tvhich

the per capita consumption was below 50 kwh in 196.5. In 10 of these, the

consumption per capita w&s 10 kwh or less in 1965.

Given that the eA.'}lansion of electric po't.Jer facilities must accompany

economic development, what is the magnitude of the capital requirements for

the less developed countries in the decade 196.5-1975? You will recall

that I said that in 1965 the less developed countries had a little over

59,000 r1W of installed capacity. About 23,000 l\iH was in hydro and 36,000 }1t'l

was in thermal facilities. In the period 1960-1965, the expansion of the

power facilities in these countries has averaged about 10 percent annually.

If this continues, it t-Iill mean that their installed capacity t·Jill. double

in less than 10 years. To be conservative, I have assUined that the grotvth

rates will slow dcwn to about 7 percent annually. Tl~s will require doubling

the 1965 installed capacity by 1975 - in otl1er words, a total capacity in

the order of 122,000 Nt'f in 197.5, of which 46,000 f"JtJ might be hydro and 76,000

i"ltrl might be thermal. Hhat is this going to cost? I have roughly estimated

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that the cost at today' s prices will rant:;e nomc.:tr~he:;.--\3 between $10 and $13

billion. If to tl1is is added the cost of transrrjssion and distribution,

the total might be between $17 and $25 billion - a staggering figure.

Well over hall of this will be imported materials and equipment. \fuere

will the mQney come from?

The mechanisms of fir1ancine will vary from country to country, but

eventually it must come either from wi.thin the enterprise throue;h depreciation

charges and retained earnings or from external sources either private or publ ic,

domestic or foreign. In countries where access to private capital is limited

or nonexistent because of the lack of a domestic capital market and the un­

attractiveness to foreign investo~s, the government is frequen ;tly a source

of investment funds. In all cases, self-financing is potentially an important

source. In the less developed countries power production and transmission

facilities are, with a few exceptions, government or municipally owned and

in most instances the distribution facilities are also publicly O\med.

Faced with a lack of capital market or a restricted capital market and

with a limited ability to borrow abroad, the government utilities generally

turn to the government budget. It is di.fficul t to visualize ho-v1 the various

government budgets, which are usually severely strained or unbalanced, can

be expected to allot more than a small part of the billions required for

expansion of power facilities in these developing countries over the next

decade. When expansion of povJer facilities depends on allotments from go\"Br~1-

ment budgets, only meager ar.1ounts can generally be made avililable .J co.nsequentl~r,

expansion lags, the utilities are unable to keep up with the dem.:l.nd, load

curtailment follows and poor service results. :~~ven the small .amounts allotted

from the budget are provided at the expense of some other important need.

- 10 -

But the fact remz.ins thn.t a steu.dily expandin r5 supply of electric energy

is a requisite of econor.~ic growth in all developing countries today. The

enorm0us amount of capital required for this essential service must be

found. If countries with nonexistent or limited capital markets and

limited ability to borrow abroad ,should not depend on government budgets I

for their funds for expansion, how then is the capital to be obtainE:d?

The ansHer, we believe, is that a very shbstantial part of it sl10uld be The anst-Jer, l'r.; 'l ·lieve l • .;:" 1 • . - 11 T

, '-' '"' '- J J ' u.l ,Jal I > earned by the utili ties thems1.;l ves throt:tgh adequate cnarges to the consune::-s earned by t 1..., ,ti ~i tic._ l I . , , ~ ~ r •

of electricity. This, of course, is the normal practice he-re., but it is ' of electric:..ty 11J~ s _,. -. 1 r 1 . . 1 .

not generally accepted in~ the ·iess developed courit:rf:Les. c.. ~ 'l"(. ' t'ut J. t. _,

not general~" c. r ~~~ c. l "'~~ . ._ .~ J _ , m It may be well to define J.n specific_, terms what constitutes an "adequate It 11 "' ; .L 1 .; ,;_ r ·' 1 •

rate • II An adequate rate ShOUld provide reVODUSS SUff:i..cient to: • ll) "BULl

rate.; :..n • • ~·= J r ... !)' (a) cover all operating, maintenance and administrative (a) CC• L • r _, 1 J• ~ ,

expensas, troces, interest and adequate depreciation e

fU' t ... H p cc-~ ion charges;

create a surplus out of which suitable provision can ~ ·e ") , _, .

be made to repay all loans insofar as the periodic ~'

amortization payments thereon are not covered by : ~

depreciation and, in addition, to set aside an amount J (

sufficient to cover a reasonable part of 'the cost 'of

future expansion • .1. '

One might ask what is a reasonable part of the cost of future ex-'""1~ ~~~l, C._,'\. 1 -1 , J. ,_, I

pans ion? No single figure or percentage can be given in ans-wer to this ;an~ion: 'r) .. J ':)" c~ ~ .f

question as much- depenCis on tlie existing capi tal '.istructure or the enterprise, cuo.::.;..~01 a~ n rl r

the size of the expansion program in relation to the existing taciliiies} c the ~i~ t:.. ' '14} ") ~ the size of the market for pOl:.-Ier 1 and many other .factors. Some of the

,.,ho si .. c o:: v.1 • I l( !1. ; v

- 11 -

less developed countries 1 potver cotrtpanies have bee.n allowed to set their

rates hj_gh enough to finrJlce from 30 to 50 percent of their expansion

programs, and when they do this, they have found that they can borrow

on a long-term basis, the rema}nder. This applies to companies in those

countries which are making goo;j progress and have stable governments and

to a company or agency which has demonstrated that it ca11 maiiltain a sound

fi&aucial condition and also has good management - or is willing to strengthen

its management. These, broadly speaking, ate the conditions under which the

Bank makes loans to power companies in the less developed countries.

As at December 31, 1967, the Bank had made loans totaling about

10.8 billion. P.. little over 1/3 of this amount, $3.6 billion, was for

' electric power which, incidentally, is the largest single category of

. Bank loans. In addition, the Bank's affiliate, IDA (which I will explain

later) has made credits of $108.2 million for power. The d:~stribution

of these loans and credits throughout the world is interesting. By far

the largTst par~ of these funds, some $1,652 million, has gone to South

and Central America (including Mexico). Only one country there had a per

capita consumption of less than 100 kwh. The average 'tv as 430 kwh al11Jually.

The other regions in "l.vhich the Bank and IDA financed po~1er facilities and

the amounts in each were: Europe - $617 million; Hiddle East and North

Africa - $62 million; the remai11der of Africa . - $}i23 million; Asia - ~i>791

million and Australia - $182 million. Nost of the loans in Asia were to

India, Pakistan, Thailand and Nalc:ysia .•

Our past President has described the Bank and its affiliates in

this manner:

- 12 -

The World Bank Group is a cluster of three institutions. At the

center is the Bank itself'. It is ,the World Bank - the only thing of its

kind. Our members, shareholder gc}vernments, are spread over the world;

our financial resources come from all over the world; we finance projects

in all quarters of the world; ~ur Executive Directors, officers and staff

are from all parts of the world.

The Bank is now 21 years old, and has lent some $10 billj_on (of

which more than $3 billion has been repaid or sold to other investors), i

} I

mo.stly in develo·ping countries. Its loans are long tel'm, at more or less

conventional rates of interest, for projects of high economic priority.

About a third of its lending has been for electric power development, a

third for the delvelopment of transportation, and the rest for agriculture ,

· industry and education.

Flanking the Bank on one side is the International Development Associ-

ation, engaged in the same kind of business, but on much easier conditions

of repayment. IDA, as we call the Association for short, lends to the

poorest countries in the Bank' s membership - those not able to borrow and f j

service 6n conventional terms all the capital they can effectively use for

development. So far, most of its financing has been done in Asia; and more

than 70 percent of its $1.6 billion of commitments have been made there.

The purposes of IDA's lending reflect same of the most pressing problems

of these client countries: the Association has been particularly active

in financing agricultural and educational projects.

Flanking the Bank on the other side is its other affiliate, the

International Finance Corporation, or IFC. IFC works exclusively in the

private sector. It does several things the Bank does not do: it makes

- 13 -

loans to private borrowers without government guarantee; it invests in <

share capital; and it underwrites offerings .br placements ()f securities

by new or expanding enterprises. IFC operat.es in countries with a reason-

ably high level of savings and know-how; and about ~lf its $241 million

of commit.ztl~nts are for enterprises in Latin America. (I have for distri-

bution small phamphlets which will give you more detailed information

about the Bank, IDA and IFC). i

The Horld Bank Group has fina'nced the installa·tion of about 22 million

kilowatts of power facilities in v~rious parts of the world and has also

financed thousands of miles of transmission and distribution lines ru1d

associated electrical equipmen·S. Before the Bank made loans for these

facilities, they were carefully appraised by engineers on our staff and I

am not aware of a white elephant anywhere. l·Jhile our engineers appraise

power projects to make sure they are technically sound and provide a

sui table basis for loans or credits, they do not undertake any enginee·r-

ing work for our borrowers or make any engineering studies for them.

Before the Bank considers a loan for a project, it expects to receive

a feasibility report containing the essential information about the

' project and these reports are ~sually prepared by consultants retained

by our borrowers. In a typical case, our engineers, after reviewing

the feasibility report, visit the site of the project, discuss it with

the prospective borrowers and then with the assistance of financial

analysts prepare an appraisal report in which recommendations are made

concerning the amount of the loan and any special conditions that should

be satisfied before the loan is signed. Negotiations with the borrower

follow and. if successful the loan goes to our Board of Directors for approval.

- 14 -

If approved, a Loan Agreement is signed and the borrower, after satisfy­,

ing certain legal requirements, can begin l-Ii thdrawing from the loan.

In addition to making loans, the Bank renders to its members a

wide variety of services, ranging from full scale economic surveys to

advice on projec·c. identification. The Bank also maintains a staff

college, the Economic Developm\3nt Institute, which provides senior

officials from the less developed countries with a concentrated course

in economic management. In addition, the Bank acts as the Administrator

of th~ Indus Basin Development FUnd and the Nam Ngum Development Fund

in Laos.

The development of the Indus Basin is an enormous undertaking. It is

estimated to cost about $2 billion. (The Nam Ngum - a dam on a tributary

of the Mekong of that name - will cost about $30 million.)

The Bank became involved in the Indus Development when it was asked

to use its good offices to help settle the water rights dispute between

India and Pakistan following the partition of the sub-continent in 1948. !

The boundary between the tt-JO cou::1tries was drawn primarily to separate

the population along religious lines. The three western tributaries of

the Indus, which for centuries had provided water for a large part of the

irrigation system in West Pillcistan, were largely in Indian territory and

the Indians stated their intention to divert these waters to their own use.

A decade of negotiations between the two new countries, in which the Bank

played a prominent part, led eventually to the signature of the Indus Water

Treaty of 1960 l-vhich provided for the peaceful division of the waters of

the river system. The Treaty contained an agreement tl1at there would be

a 10-year transitional period at the end of which Pakistan would have the

- 15 -

right to the full use of the Indus itself and its two western tributaries,

the Jhelmn and the Chenab, while India would be entitled to divert al l

flows of the eastern tributaries, the Ravi, the Beas ar.d. the Sutle j to

its ovm use. i.

The engineering concept on which the Treaty was based was a system

of enormous link canals for transferring water from the~ Indus, and to a

le~ser ex~nt from the Jhelum and the Chenab, to meet the irrigation

requirements of those portions of 1nlest Pakistan which had hitherto been

served by the rivers made available to India. To provide funds for this

plan an ll.lternational agreement was signed simultaneously with the Treaty I

to establish the Indus Basin Development Fund and the lVorld Bank vJas

designated as an Administrator of the Fund. Parties to the agreement were

_ Australia·, Canada, Germany, New Zealand, Pakistan, the United Kingdom, the

United States and the Bank.

The Indus is one of the major rivers of the world. Its source -:is in

the Himalaya mountains. Its length from its source to its mouth, as it f

empties into the Arabian Sea, is some 1,800 miles. The irrigation system

of the Indus Basin cor.unands 33 million acres of which "24 million acres are

irrigated annually. It is the largest single integrated irrigation system

in the world. Until 1967 their s~stem was fed from run-of-river flows.

The Indus Basin Development, envisioned under the provisions of the Indus

Water Treaty, consists of the construction of two large storage dams, eight

inter-river link canals, five barrages to divert the water into the canals,

one gated syphon and the remodeling and enlarging of three existing li.nk

canals. The link canals will have a total length of 366 miles and will

require the excavation of about 355 million cubic yards. One of the t\-JO I

- 16 -

storage dams, the Nangla dam located on the Jhelum, was completed at the

end of 1967. The dam and associated djJ~es contain 140 million cubic yards.

(The Fort Peck darn in the U.S.A. con1:.ains 125 million cubic y~ards.) The

Tarbela dam, to be constructed on th~ Indus, will contain 180 million

cu·oic yards. It is scheduled for completion in 1976. This gives you

an idea of the size of the Indus Basin Development. All of these works,

with the exception of the Tarbela dam, vJill ·be completed by the end of 1970.

The original amounts pledged to the Indus Fund proved to be insuffi­

cient. In the latter half of 1963, the Bank obtained assurances of additional

contributions to the Fund. The supplemental fund agreement included the

provision that a detailed survey of the basic water and pot·mr resources of

West Pakistan be undertaken to identify the most practicable means of

. developing these res~urces in keeping with the needs of the Pakistan economy.

It was to be sufficiently detaile,:i to assist the Pakistan Government in

fo:nnulating a sound program for the systematic exploi tatlon of the wa·ter and

power resources of West Pakistan a11d the Bank vJas assigned the job of

carrying out this survey.

To assist with the study of the pm·mr resources and their orderly

development, the Bank retained Stone & Webster International as consultants.

Before giving you the details on the studies and the system that 'lrJas devised,

a brief description of the structure of \v·est Pakistan's povmr system would

be helpful.

West Pakist.9D is served by four regional povmr systems t-vhich are

not at present interconnected. The total installed capacity in the systems

was 8.52 IVM in 1965, but the firm ca.pacity "tvas about 6.50 HH. These systems

serve the follot-ving areas, which have a total population of 51.2 million.

- 17 -

They are shown on the map which you have.

1. The North - An extensi ,;,e area tied together by a 132 kv grid _;

it contains all the hydroelectric capacity in the province

and has a capability at the maximum hydro output of approxi­

mately 522 lvJ.Vj.

2. The Upper Sind in Hhich there are gas fields which at present

are not extensively utilized :or generation of electricity.

The installation in this area is only 50 ~ftr.

3. The LO\-Jer Sind which has both gas•fired steam and gas turbine

plants ~ith a combined capacity of about 30 l'1W.

4. Karachi, West Pakistan's largest city and largest sea port

and industrial center. The installed capacity here is about

250 MW.

The two important markets, therefore, are in the North and in Khrachi.

The Upper Sind's market for power may grow if, as proposed, fairly large

fertilizer plants are located in the area to use the gas resources. Tho

Lower Sind will be or has already been interconnected with Karachi and

the two areas can be considered as one market.

TI1e bulk of the power facilities in the North and in the Sind are

owned and operated by the West Pald.stan Hater and Power IX3velopment Authority

(l·JAPDA), an autonomous government agency. Karachi is served by the Karachi

Electric Supply Corporation (KESC), a stock company in which the government

holds a controlling interest.

About 41.5 percent of the consumption of electricity in 1965 was for

industrial use, 15.4 percent residential and commercial, 16.9 percent for

agricultural pumpL~g and 6.8 percent for street lighting and other uses.

- 18 -

This adds up to 80.6 percent of total net generation, the remaining

19.4 percent consists o£ losses and theft. The growth of sales in the

past five years has been very rapid. In the Northern area sales grew

about 25 percent per year and in Karachi, the growth was about 18 percent

per year.

Stor:e & Webster prepared a detailed 20·.~year energy forecast £or each

of the four main power markets which I have described. They projected

the requirements of electric energy ~ each market under several different

headings - industrial, residential, bommercial, agricultural and others.

They then assigned appropriate hours of use to each category in order to

determine the peak demands. I I

It might be argued that 20 years is too long a time to forecast

power loads because of tl1e great uncertainty which surrounds projections

more than 5 or 6 years in the future. However, because Tarbela dam will

take 8 or 9 years to build and because generating capacity and tran~i-

mission ~ines during the next few years will soon become part of an

interconnected system dominated by Tarbela, which Tt-Jill have an ulitmate

installed capacity of 2,100 M1~, 20 years seem the minimum requirement

for decision-making.

In the forecasts, the total net electric energy requirements to

be supplied by utiliti~s were expected to increase from slightly under

3.4 billion kwh in 1965 to about 28.4 billion kwh in 198.5. The average

annual rate of increase over the 20-year period "L-Jould be about 10.6

percent. The peak loads on the utility systems was expected to increase

from 65 3 f.flti in 1965 to 5, 3 30 HvJ in 198 5.

- 19 -

In 1965, about 73 percent of the total utility geri1eration was

consumed in the North and 21 p~rcent in Karachi. By 1985, the Northern

Grid is expected to consume 53· percent of the total and Karachi 33 percent. (

The patte1"Tl in 198.5 reflects the expected continued rai>id growth of industry

in the South in the vicinity of Karachi.

In the winter of 1966/67 - and before the two Mangla power units of

100 Mtv each came on the line in July 1967 - the Northern Grid was confronted

with a sefious power crisis resulting from a reduction in the capabilities

of the existing hydro plants during the dry season, which extends from I

mid-October through April and early May, and also from mishap~ at the Main

thermal station. The estimated peak demand ·was 520 Mtv net but only 400 !1t.J

could be met. The lower Sind system t..Jas also overloaded due to the failure

of a boiler in a new 1.5 ~1t~ steam unit. About 10 t1t~ of the demand co'uld not

be met here. This is relatively small in absolute terms but it was about

25 percent of the total. The deficits were overcome in the Fall of 1967

and in March 1968, for the first time in years, there were no shortages

on any of the systems. .

The rate of growth in consumption and demand on the utility systems

was expected to be greater in the first decade than in the later periods,

consequently the buildup of the capacity and the amount of investment in

the planned generation, transmission and distribution had to be accelerated

in the first 5-year period.

Stone & l'Jebster proposed a program of generation and transmission to

meet the power requirements of West Pakistan as indicated by their fore-

casts. You will recall tl1at consumption was expected to increase from

3.4 billion kwh to 28.4 billion kwh and demand from 653 Mtv to 5,330 MW

in the 20-year period 196.5-1985.

- 20 -

Stone & llebster envisaged that all of the generating equipment to

be installed by the West Pakistan public utilities between 1965-1985

would be in either hydro-electric plants or gas fired-thermal pl&~ts ,

except that an allowance was made for the 125 Ml-J nuclear plant already

I contracted for by the Pakistan Atbrnic Energy Commission. It is scheduled

for completion in the early 1970s and would supply power to Karachi. The

hydro-electric installations reconunended by Stone & Webster would have a

firm capacity ultimately of about 1,450 Ht-J, including two additional 40 f!IuJ

units in the existing Warsak plant, eight 100 NW units at Nangl::t and twelve

175 MW units at Tarbela. The thermal development would consist of ne\-J ga3-

fired plants at the gas field in the upper Sind near Hari, vJi th a total

capacity of about 1,500 Mtrl and about l,hOO ~ltrJ on gas-fired plants at

Karachi. Substantial seasonal exchange of energy was envisaged, with

hydro energy being sent South to tl1e Sind and Karachi in the summer flood

months and early winter ~-Jhen the reservoirs 't~ere nearly full. Thermal !

energy generated at Nari would be sent South to Karachi in most mo.nths

of the year and to the Northern Grid in the Spring when the reservoirs

were at the minimum levels. This program was recolThllended after Stone &

we·bster considered a number of alternatives including various nwnbers

of units at Nangla and Tar bela and various phasings of their introduction.

Different drawdown levels and reservoir release patterns at Hangla and

alternative transmission patterns Here also considered. tJest Palcist2n,

with Stone & Webster's program, t-Jould have a power sys tern with a capacity

of 5,557 H\iT at the time of minimum hydro capability in Hay 1985 to satisfy

a demand of about 5,000 MW. The total population in 1985 is expected to

be 88.2 million.

- 21 -

The Power Supply Program finally proposed by the Bank differs in

a number of respects f~om the program proposed by Stone & Webster. The

differences arise for a number of reasons. Betv1een the time that the

power consul t2.nts completed their report and the ti."Tle the Bank Group

completed its evaluation of t~1e consultants' program, the estimate of

recoverable gas reserves at Hari was reduced from 5 trillion cubic feet

to about 1.8 trillion cubic feet.. Other factors were: different dra\ildot~n

levels at Nangla and different release pattern~ at. Mangla and TarLela

p~oposed to confonn with the requirements of the irrigation system. The

Bnnk Group also envisioned different scheduling of the hydro units at

Wcirsak ar)d Mangla and also different scheduling of the installation of

the ).30 kv transmission lines between the Northern Grid, the thennal plants

· at l1ari, and Karachi. Following the installation of 12 hydro units at

Tarbela in 1981-82 the Bank Group scheduled the installation of some large

size nuclear plants at Karachi. Almost all of the changes proposed were

tested and examined with the aid of a computer model which the Bank Group

used to simulate the operation of the power system for tl1e 20-year planning

period .•

In Ol"der to identify the net pot-Jer benefits of Tarbela, Stone & Webster

prepared an alternative program excluding Tarbela from the system. The .

present worth of this alternativci at an 8 percent discount rate of the

cost {both capital and operating) amounted to about $80 million more than

the present worth of the cost ot the prog\'"am including Tarbcla. The cost

of the program with Tarbela excluded the cost of the dam and reservoir

structures as these were charged to irrigation. By use of the computer

model it was found that the net power benefits of Tarbela were not very

- 22 -

sensitive to changes in assumptions regarding the vru.ue of foreign

exchange but they were very sensitive to changes in assumptions regard-,

ing the price of thermal fuel.

The Bank Group also considered programs with and ~dthout inter-

connection and "-"'ith differe.nt amounts of thermal development at the 1'-Iari

gas field. It fo·i.l.nd that there would be a significc:mt advantage in having

an interconnected system. These included a ~aving in reserves, a saving

in fuel and a saving in construction of pipe lines for gas transmission

to Karachi. Altogether there were about 17 different strategies tested

by the co~puter model. The total amount of generating capacity included

in the Bank's program was substantially the same as in Stone & Webster's

but the timing of installations differed and about 800 r-iVJ of nuclear power

was introduced into'"' the system. The timing of various sections of the

380 kv transmission lu1es also differed from that proposed by Stone & Webster.

In the period 1960-1965 investments in power in West Pakistan accounted

for 5.7 percent of the total development expenditures. In the period

1966-1970 the expenditures required for power will have to more tl1an double

expenditures in the previous 5 years and larger and larger amounts will

have to be allocated to power each year to keep pace with the increasing

demand for pot-Jer. Fortunately, 1-Jest Pa~istan has a good base on which to

build and in W.APDA a good organization to carry o.n the work.

11ashington, D. C. Nay 9, 1968