Nicaragua - Highway Extension Project

P. -52 g:IRmCLAIllG COPY V RESTRICTED JO BE RMBED TO ARCHIVES DIlON This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT .REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the PROPOSED LOANS TO NICARAGUA August 28, 1953  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPQRT AND RECOQMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE PROPOSED LOANS TO NICARAGUA 1. I submit herewith the following report and recommendations with regard to a request from the Government of Nicaragua for a $3,500,000 loan for highway construction and a '450,000 loan covering a Diesel power unit for installation in Nicaragua. PART I - HISTORICAL 2. In February 1953, the Bank was informed by the Embassy of Nicaragua that the Government intended to apply for loans to cover projects of highway construction and power development. A Bank mission visited Nicaragua between February 17 and March 18, 1953 to study these projects. 3. In view of the preliminary stage at which the mission found the power development project, the Bank recommended that the Government employ a consulting engineering firm to make a study of a thermal power development program for Managua and the central area and to present a report and project to the Government. This study is now being carried out by a firm chosen by the Government from a list supplied by the Bank, and the project may be presented to the Bank in the near future. In the meantime, the mission agreed to consider a small stop-gap project for the installation of an urgently needed 3,000 kw diesel unit in the Managua system. 4. Three loans have already been made to NicaraguaS Loan 44 Ni - June 7, 1951 - $1,200,000- farm machinery Loan 45 Ni - June 7, 1951 - $3,500,000 - highway construction Loan 52 Ni - October 29, 1951 - $550,000 - grain storage The performance on all three loans has beensatisfactory and a prepay- ment of $245,000 on Loan 44 Ni was made in April 1953, one year ahead of the first amortization payment due. 5. Negotiations on the highway and diesel unit projects were opened at the Bank on August 18, 1953. Representing Nicaragua were: Dr. Guillermo- Sevilla-Sacasa, Ambassador of Nicaragua, and Mr. Constantino Lacayo-Fiallos, Minister of Development and Public Works.  - 2 - PART II - DESCRIPTION OF THE PROPOSED LOANS A. Highway Construction Loan Borrower 6. The Borrower would be the Republic of Nicaragua, a member of the Bank. Purpose 7. The proceeds-of the loan would provide the Borrower with the foreign exchange required for the purchase of equipment and materials needed to construct 40 kilometers of new primary and 687 kilometers of new secondary roads. These roads represent a further step in the general highway development program of Nicaragua, which was initiated with the project financed by Loan 45 Ni. Present estimates indicate that the program will take about four years to complete. Amount 8. The loan would be in the amount of $3,500,000, most of which will be expended in U. S. dollars. This figure represents the foreign exchange cost of the project, the total cost of which is estimated at the equivalent of about $5,200,000. Terms 9. The loan would bear interest at the rate of 4 3/4% per annum, including the statutory commission of 1%. 10. The commitment charge would be 3/4 of 1% per annum and would accrue from the Effective Date of the Loan Agreement or from October 1, 1953, whichever would be the earlier. 11. Amortization would be by semi-annual payments of principal commenc- ing March 15, 1957, and calculated to retire the loan by maturity on September 15, 1963. 12. I consider that the proposed schedule for the repayment of prin- cipal, and the rate of interest and other charges in connection with the pro- posed loan are reasonable and appropriate. Legal Instruments 13. Appendix I contains a draft of a Loan Agreement between the Bank and the Republic of Nicaragua.  - 3 - Justification for the Loan 14. A detailed appraisal of the project (TO 19) is attached as Appendix IL. 15. As stated in Paragraph 7 above, this project represents a further step in carrying out a general highway development program in Nicaragua with which the Bank has been collaborating. It closely follows the rec- ommendations of the Resident Bank Mission Report presented to the Nicaraguan Government late in 1952. The preparatory work has been done by the Highway Department of the Nicaraguan Ministry of Public Works and, on the basis of the Bank's previous experience with the Highway Department and of the Bank missionts investigation of this particular project, it is believed that the project has been soundly conceived and will be competently carried out. With its accomplishment, all of the capitals of the Nicaraguan departments will be connected by primary highways to the two main trunk highways of the country, i. e. the North-South Inter-American Highway, and the East-West Rama Road terminating on the Caribbean coast. In addition, there will be a substantial network of secondary roads radiating from the departmental capitals to the most productive agricultural areas. The first phase of the general program has already made a contribution to the development of Nicaragua's economy which has exceeded expectations, and there is no doubt that the roads to be constructed under this project will have equally stimulating effects. 16. Appendix III contains the report of the Loan Committee provided for in Article III, Section 4, Paragraph (iii) of the Articles of Agreement. B. Power Loan Borrower 17. The Borrower would be the Republic of Nicaragua, a member of the Bank. Purpose 18. The purpose of the loan would be to provide foreign exchange for the acquisition of a 3,000 kw diesel unit and ancillary equipment to be installed in the Managua power system. Amount 19. The loan would be in the amount of $450,000. As the order for the diesel unit has already been placed with the Nordberg Manufacturing Company of Milwaukee, Wisconsin, the loan would include approximately .260,000 for payments made prior to the Effective Date on the contract which was signed on March 6, 1953.  Terms 20. The loan would bear interest at the rate of 4 3/4% per annum, including the statutory commission of 1%. 21. The commitment charge would be 3/4 of 1% per annum and would accrue from the Effective Date of the Loan Agreement or from October 1, 1953, whichever would be the earlier. 22. Amortization would be by semi-annual payments of principal commencing March 15, 1955, and calculated to retire the loan by maturity on September 15, 1963. 23. I consider that the proposed schedule for the repayment of principal and the rate of interest and other charges in connection with the proposed loan are reasonable and appropriate. Legal Instruments 24. Appendix IV contains a draft of a Loan Agreement between the Bank and the Republic of Nicara.ua. Justification for the Loan 25. A detailed appraisal of the project (TO 18 B) is attached as Appendix V. 26. Hydroelectric power is the ultimate goal of the Nicaraguan Government's power development program. Preliminary hydrological surveys are being carried out at present, under the direction of an expert supplied under the U. S. Government's program of technical assistance, with a view to deter- mining the most suitable sites for hydroelectric installations. It has been estimated, however, that ten years will elapse before the first hydroelectric plant can be put into operation. 27. In the meantime, to meet the ever growing industrial, commercial and domestic demands of Managua and the Central Area, the Government is pre- paring a steam plant project with the assistance of the Harza Engineering Company (see para. 3). This project would include the integration into one single system of the generating and distribution facilities of the Managua plants and those of the principal cities of the Central Avl. 28. A serious short-term problem, however, has developed in the Managua area where power has become very scarce. In order to ease the situa- tion, Nicaragua obtained an Export-Import Bank loan of i6O0,0o00 in 1951 to finance the acquisition of a 3,000 kw. Nordberg Diesel unit. This unit went into operation early in 1953, but the demand for power has developed so rapidly that it is already fully loaded and a new shortage has developed. Early in 1953 the Government decided to place an order for another Diesel unit identical with that financed under the Export-Import Bank loanp and the present loan is  - 5 - being sought to finance the purchase of this unit. If delivery follows the terms of the contract, the unit should be installed by the end of this year. 29. UD to the present, the Managua power company (wholly owned by the Government) has been run as a joint operation with the railroad, an arrangement which has had obvious disadvantages. In view of the expected expansion of power generating and distribution facilities, the President has decided to set up an autonomous electric power agency. As a first step, 6tyt&qtbilceeof the Bank, in March 1953 he separated the power company from the railroad company and put the power company under the administrative and technical direction of the Ministry of Development and Public Works. This is a very encouraging development and I have been given assurance that the management and policies of the power company will be reorganized and that concrete steps will be taken to expedite the setting up of the autonomous power agency. The Bank may be called upon as part of its program of techni- cal assistance to Nicaragua, to submit lists of utility experts (technical and administrative), from which the Government could select candidates to fill key positions in the new power agency. 30. Appendix VI contains the report of the Loan Committee provided for in Article III,Section 4,Paragraph (iii) of the Articles of Agreement. PART III - PROSPECT OF FUIFILUvENT OF FINANCIAL OBLIGATIONS 31. A survey of the economic developments in Nicaragua, since the loans made in 1951 (para. 4), is attached to this report (Appendix VII). Nicaragua's present foreign debt is small with $6.9 million equivalent out- standing at the end of June 1953. The government has concluded arrangements to repay its sterling loan of 1909 four years before its maturity and this will reduce the outstanding debt in October to $5.8 million. All of the external debt is scheduled for extinction in 1962. 32. Combined service on the present debt and the proposed Bank loans will reach a peak of $967,000 in 1955. This represents only 2.3% of the value of 1952 exports, excluding gold, and to less than 5% of the govern- ment's 1951/52 revenues. The proposed loans, taken together, would require a peak service of about $650,000 in 1957, which represents a moderate increase in existing annual service charges and would be within the countryts capacity to repay. 33. There has been marked improvement in the economic position of Nicaragua in the past two years. Exports (other than gold which returns only about $2 million annually to Nicaragua) have increased from $26.5 million in 1950 to $42.2 million in 1952. The acreage devoted to the principal cash crops, cotton, sesame, rice and sugar showed a striking increase in 1951/52 over the preceding year. Nicaragua'.s agricultural production has shown  - 6 - continually increasing strength and diversity. 34. Nicaragua has made a vigorous start on the five-year develop- ment program which was recommended by a special mission of the International Bank. Nicaragua has also introduced numerous administrative and fiscal reforms, recommended by the mission, including a National Economic Council, a National Development Institute, a development budget, a general income tax, and various other administrative changes in its public works and public utilities. 35. T:he new development budget of the current year reflects the serious effort being made by the country to utilize its own financial re- sources for development. Whereas less than $3 million equivalent was expended for development in 1951/52, this year's budget expenditures in this category wi'l be about $7 million equivalent. Although the new general income tax law will have been in operation for only six months of the prrj,ious fiscal year, it is estimaLted that direct taxation which yielded less than $400,000 equiva- lent in 1951 will attain $1.7 million equivalent this year and should go very much higher the following year. 36. In the light of the aboie considerations, it is my opinion that the Government of Nicaragua would be in position to meet its obligations under the proposed loans and that, in making these loans, the Banak would be acting prudently in the interest of the Republic of Nicaragua and of the members of the Bank as a whole. PART IV - COMIPLIANCE WITH THE ARTICLES OF AGRE7DENT 37. I am satisfied that the proposed loans would comply with the re-. quirements of the Articles of Agreement of the Bank. PART V - REQOC?NMDkTIONS 38. I recommend thet the Bank make to Nicaragua loans totalling $3,950,000 for the following projects: (i) $3,500,000 for highway construction (ii) $450,000 for a Diesel generating unit, the Borrower in each case to be the Gvr-rnment of N.caragua; the terms and conditions of such loans to be as s-pecif.ed in the Draft Loan Agreements attahced hereto. Eugene R. Black rY resident August 27, 1953