Colombia - Railway Construction and Rehabilitation Project

No. P-40 RESTRICTED CIRCLATING COPY To BE RETURNED TO ARIVES DIYISION This report is restricted to use within the Bank.| FILE COPy INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA August 18, 1952 Loan Department  IThTEI8MATIONAL BANK FOR ThLCONSTRUCTION .4ND WPORT AIMf i-MCOVULflTD.`TIOYS OF THE PRESIDENIT TO TlM EXECUTIVE DIRECTORS CIT THE PROPOSED LOAN TO ITS REPUBLIC OF COLOIBIA 1. I subnit herewith a report and recommendations on the proposed loan of 72$ million to the Republic of Colombia for a railroad project. PART I - HISTORIICAL 2. The Ceneral Survey iiission, which was sponsored jointly by the Inter- national Eank and the Colombian Government, recomnended in its report, distributed to the ExecuLtive Directors of the Bank in October 1950, that careful examination should be made of the feasibility of construction of a railroad along the middle section of the lIagdalena 4Aver. The mission believed that the construction of this railroad wxould malke a-n important contribution toward solving the land transportation problemi of the country by linking existing railroad netwrorks and by replacing river transportation on part of the liaLdalena river whore navigation is subject to serious interruption in dry seasons. In addition, the report emphasized that measures should be talcen to reorganize the Colombian railroad system. 3. The Colombian wconomic Develop,ment Com,miittee, vwhich studied the report of the General Survey Hissionj reccommlended to the Government that, if technical and econowic studies of a iiagCdalena Valley railroad proved favorable, the project should be undertalken. The Cormmittee also made a nriaber of suggestions for reorganization of the railroads. Li. In October 1951, the Republic of Colombia, through the Colombian Ambassador in WJashington, made formal application to the Bank for a loan to help finance the construction of a lagdalena Valley railroad. Ho!ever, the Banik postponed final decision on the project until evidence of its economic justification was presented and until basic recommendations for thle reorganization of the system were available and could be discussed by the Lank and the Colomlbian Covernment, 5. In June 1952, the iladigan-Hyland Corporation, engineering consultants retained by the Eank and the Colombian Govezmment to carry out the necessary studies, presented evidence of the desirability of the project and its economic justification. At the same time, `iadigan-iHyland presented their basic recommendations for reorganization of the railroad system. 6. A revised application for a loan was presented to the Banlc in July 1952. At that time, the ianister of Public Worlks of Colombia asked that the Bank also consider including in the project centralized shop facilities in Bogota for repair and maintenance of rolling stock. Improvement of repair facilities had been given a hiLgh priority by the Ceineral Survey hission and the Sconomic Development Committee, and a preliminary plan had been prepared by consulting engineers.  -2- 7. After deciding that the project, including construction of new repair shops, was in principle suitable for Bank financing, the Bank on Aug!st 8 notified the Colombian Vlinister of Public Works that it was ready to begin loan negotiations. PART II - DESCRIPTION OF THE PROPOSED LOAN Borrower 8. The Borrower wJould be the Republic of Colombia, a member of the Bank. Amount 9. The loan wouild be in the amount of S25 million or its equivalent in other currencies. Purpose 10. The proceeds of the loan would be used to finance the foreign exchange cost of the project, which is an integral part of a program for reorganiza- tion of the Colombian National Railroads system and for the unification, expansion, rehabilitation and improvement of the existing lines. The total cost of the project is estimated at 'h9 million (122 million pesos), of which 2.24 million (60 million pesos) will be in local currency. The project pro- vides for the construction of approximately 373 kilometers (235 miles) of railroad along the Magdalena river and the construction of new central repair and maintenance facilities to be located at Bogota. 11. Various sections of construction will be undertaken simultaneously by competent cortracting finms under contracts with the lilinistry of Public Works. The project is scheduled for completion by late 1956. Terms 12, The loan would bear interest at the rate of 4-3/4%* per annum, including statutory coimiss on of 1%. 13. The commitment charae wiould be at 3/4 of 2,% and would accrue from the Effective Date of the Loan or 60 days fron the date of signature, wlichever is the earlier. 14. The loan wTould be for a term of 25 years, including a five year period of grace. It would be amortAzSdb equal semi-annual payments beginning 34+r 15, 1957, and ending 5, 1978, as set out in Schedule I of the proposed Loan Agreemenet.V 15. I consider the pzaposed schedule for the repayment of principal and the rate of interest and other charges on the proposed loan to be reasonable and appropriate.  - 3 - Legal Instruments and Legal Authority 16. Appendix I contains a draft of a Loan Agreement between the Republic of Colormbia and the Bank. The report of the Committee provided for in Article III, Section h(iii) of the Articles of Agreement of the Eank is attached as Appendix II. 17. Law 90 of December 16, 198, authorized borrowings from the Ban1 not in excess of "60,000,000.. That law was enacted by a Congress consisting of representatives of both the Liberal and Conservative Parties. The law contained a schedule of investment priorities which did not, however, include the Railroad Project. 18. Under the state of siege which has continued since the disturbances of April 1948, decrees having the force of lawr can be enacted by the executive power. The Highway Loan iwas authorized by that procedure. At the time of the Highway Loan Congress had not met since the beginning of the state of siege and no elections had been held. Since then elections have taken place, there have been two extraordinary sessions of Congress, and it is expected that a third will be called before the end of 1952.. The present Congress contains representatives of only the Conservative Party, as the Liberal Party abstained from the elections. Extraordinary sessions of Congress are, linited to consideration of the matters presented to them by the executive power, and up to the present time Congressional action has been confined to a few specified matters. All general legislation continues to be enacted through the decree procedure. 19. In light of the existing circumstances, and in order to make a furtiher examiination of the situation in Colombias the Bank has reserved the right to withhold its decision as to the procedure to be followed to authorize the execution of the Loan Agreement.. By a letter to be executed simultaneously witlh execution of the Loan Agreement, it will be agreed that the Borrower and the Bank shall agree as to the legal action to be taken to make the Loan Agreement effective, Special Provisions of the Loan Agreement 20. A condition of the Bank to participate in financing the project is the agreement of the Borrower to carzy out the program for the lNational Iailroads described in Schedule 2 of the draft Loan Agreement. That program includes not only physical rehabilitation and improvement of the existing railroad system, but also a thorough aciinistrative, operational and financial reorganization. The undertaking of the Borrower to complete the part of the program which includes rehabilitation and other physical improvements and acquisition of equipment, is subject to the future availability of foreign exchange. The estimated costs of the program, exclusive of the costs of the Banlc financed project, are set forth in Schedule 2 of the draft Loan Agreement. 21,. The reorganization measures in the program are based on the broad principles set forth in liadigan-Hyland's report of August 5, entitled "Basic Principles of Reor&anization 2nd RehabiUitation for the Colombian Ntational Railroads", agreed uipon by Colomb4a and the Bank. The report is attached as Appendix III.  22. The reorganization would provide specifically for the establishIment of an autonomous, non-political corporate body with adequate powers to operate the National Railroads System. A general manager and board of directors independent of political control would be appointed. The assets owned by the present railroad administration would be transferred to the new institution. 23. Arrangements wzould be made for the Government to relieve the present railroad administration of its funded debt (at present about 1;O million pesos). The new railroad administration would, therefore, start operations free of funded indebtedness. The Government's local currency contributions to the new corporation would be made as equity capital. The corporation is to pay the Government the local currency equivalent of service on the Bank's loan. 24. The Borrower is reouired to employ technical consultants satisfactory to the Eank, to ensure the effective implementation of the program. In addition to the customary progress reports, the Bank will be entitled to receive infonmation on the execution of the over-all program, including reports from the consultants employed by the Borrower. 25. The obligation of the Borrower to appropriate funds needed to cover local currency costs of the project, including a reserve for contingencies, is specifically provided in Section 5.08 of the draft Loan Agreemient. Local currency funds to enable the program to proceed are to be appropriated when needed. PART III - APPRAISAL OF'. THE PROPOSED LOAN 26. A Technical Report on the project to be financed by the Bank (L-173a) and a lReport on Recent Economic Developments in Colombia (E-232a) were circulated to the Executive Directors on August 11, 1952. Justification of the Project 27. Colombia has 2,900 kilometers of railroad lines, consisting mainly of twio separate networks. Over 2,000 kilometers are Nlational railroads, under the direction of the National Railroad Council, a branch of the National Government. The rest are owned by Departments or private interests. 28. The new railroad will provide a connecting link between Colombia's two main railroad networks and will allow uninterrupted railroad transportation between the Pacific port of Buenaventura and important centers in the interior. It wsill also provide reliable communication between the Caribbean Coast and the central part of Colombia by offering an alternative to river transportation on part of the lagdalena river where navigation is liable to seasonal interruption owjing to water conditions. The new repair shops would provide facilities for reconditioning of rolling stock now tied up in considerable quantities for long periods awaiting repair. This reconditioned equipment should reduce the future need for additional rolling stock for the entire National Railroads system, including the lIagdalena Valley railroad, 29, - IHIadigan-Hyland regard the project as a vital element in any reorganiza- tion aiming at satisfactory operation of the Colombian railroads. In the opinion of the Bank's staff, the project is technically sound. In addition  - 5 - to stimulating Colombian production and trade, the project is likely to pay its own way out of increased earnings of the National Railroads. Summary of the Economic Situation in Colombia 30. The economy of Colombia is making continued progress. In 1951 the output of both cement and petroleum increased by 12%, the consumption of electricity by 7%, and several important factories, power plants and irrigation projects were completed or well underway. Favorable cmp conditions by the end of 1951 lifted the agricultural output of that year much above the 1950 levels. All these trends have persisted in 1952. 31. The implementation of recormendations of the Economic Development Committee in the monetary and financial field brought about sound financial conditions. Commercial credits, money supply and the price level all remained throughout 1951 at their end of 1950 level. Foreign exchange and gold reserves increased, thQu&h most controls on foreign exchange trans- actions wtere eliminated. Private foreign capital was given full freedom to enter or leave the country. The budget in 1951 closed with a substantial surplus. 32. Some traders and industrialists experienced difficulties in adjusting themselves to the effects of the monetary stabilization. This, however, does not seem to have affected the general upward trend in output and income. The first months of 1952 were marked by renewal of credit expansion. The monetary authorities, assisted by the newily created Planning Office, are now taking appropriate remedial measures. 33. In 1951, the value of coffee and petroleum exports increased much above 1950 levels, raising total export values to $460 million. Short-term prospects for coffee and petroleum are excellent and long-term prospects good. 34. Throughout the period of reimbursement of the loan, Coloabia should be able to meet short to medium-term exchange emergencies. Its dependence on foreign foodstuffs, fuels and raw materials being relatively slight, many importa can be temporarily foregone in time of stress without damage to the economy. 35. The loan under consideration would raise the Goverrment and Government Guaranteed external debt of Colombia to US $251 million. Service of this debt should not present difficulties. The estimated annual debt service wTill be 5 to 7% of expected trade receipts (US 400-420 million) in the periods 1952 to 1953 and 1955 to 1958, and, on the basis of present debt schedules, will decline rapidly afterwards-. In 195h, repayment of a medium-teim cotton debt to the Eaport-Import Banlc will increase that year's service to US $43.5 million.  - 6 - The Political Situation 36. The political situation has remained unsettled since the disturbances of April 19h8, and there are still reports of violence in some areas of the country. Following the illness of President Laureano Gomez in mid-1951, Dr. Roberto Urdaneta, long a prominent leader among the Conservatives, became acting President. Although the state of siege remains in effect and political friction may increase at arny time, I do not believe that the present situation slhould prevent the Bank from making the proposed loan. Prospect of Fulfillment of Obligations 37. Both the General Survey M[ission and the Economic Development Committee stressed the need for improvement in the organization, operation and administration of the Colombbian railroads. The Colombian Government has evidenced its intention of following up the suggestions which were offered, and has obtained expert advice on improving the existing situation, The experts who have gone to Colombia have made detailed studies and the Government has taken steps to assure continued assistance in implementing tlhe measures uhich need to be taken. 38, The Colombian Government recoGnizes that the present situation of tle. railroads is unsatisfactory and has already taken initial steps toward correcting some of the physical defects and effectin[ a thorough reorgani- zation. The scope of the railr ad prograln and the measures to be adopted have been discussed and agreed upon by the Bankc and the Colombian Government. 39. Section 3.03 of the draft Loan Agreement provides that the construction contracts for carrying out the project are to be satisfactory to the Bank. 4o. The prospective international economic position of Colombia gives good assurance that the foreign exchange required to service the proposed loan would be available. PART IV - COMPLIANCE VJTH ARTICLES OF AGRWIEENT 41. I am satisfied that the proposed loan would comply with the requirements of the Articles of Agreement of the Bank. PANZ V - RECOIMMNDATIONS 42. I recommend that the Bank make a loan of $25 million to the Republic of Colombia for a term of 25 years at such rates and on such other terms as are specified in the draft Loan Agreement attached as Appendix I. Eugene RN Black Washington, D. C. August 18, 1952