Honduras - Highway Maintenance Project

R E S T R I C T E D Re.port No. P.-102 This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to THE REPUBLIC OF HONDURAS for HIGHWAY MAINTENANCE December 14, 1955 Department of Operations Western Hemisphere  INTITINATIO!JAL BALNK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOIME11DATIONS OF iiE PRBSIDENT TO THE EXECUTIVE DIRECTCRS ON A ?ROPOSUD LOAN TO THE REPUBLIC OF HONDURAS FoR HIGITHWAY MAINTENAINCE 1. I submit the following report and recommendations on a proposed loan of lp4,200,000 to the Republic of Honduras to finance the foreign exchange costs of a highway maintenaice project. PART I - IIISTORICAL 2. Background information on the Bankts relations with Honduras is contained in memorandum R-923 which was distributed to you on October 21, 1955. After consultations on the constitutional issue discussed in R-923 a letter was addressed to tiie Chief of State of Honduras informing him that the Bank would be ready to consider a loan application from his Government to finance the foreign exchange costs of a highway maintenance program. The Government's application was received shortly thereafter. 3. His Excellencr Carlos Izaguirre, Honduran Ambassador in WVashington, and Messrs. Pedro Pineda IIadrid, Secretary of Economy and Finance, Roberto Ramirez, President of the Central Bank, Jorge Bueso, Secretary of the National Economic Council and Jorge hartinez, Under Secretary of the Ministry of Fomento were appointed by the Goveri-nent to negotiate the loan. Negotiations were initiated in 1.ashington on Noverber 23, 1955, and have been successfullyr completed. PART II - DESCRIPTION OF THE ?ROPOSI'D LOAN Bo rro-vier 4. The Borrower -would be the Republic of Honduras, a2 member of the Bank. Amount 5. The loan would be in the anolnt of $4.2 million or its equivalent in other currencies. Purpose 6. The proceeds of the loan would be u3ed to finance the foreign exchange costs of establishing, equipping and training a highway maintenance organization in HIonduras and of preparing preliminary studies for the re- habilitation and completion of the so-called lIorthern and ;'.estern Roads. Amortization 7. The loan would be for a period of 9 years with a two year period of grace. This term would be in line with other loans made by the Bank for highway maintenance. The two year period of grace corresponds to the period required to set up the maintenance organization and get the maintenance operation well under way.  Interest, Commission and Commitment Charges 8. The loan would bear interest at the rate of 4h per annum, including the statutory commission of 1%. The coriomitmrent charge would be 3/4 of 1%. per annum, and would accrue from the effective date of the loan agreement or a date 60 days after signature, whichever is the earlier. Legal Instruments and Legal Authority 9. There is attached a draft loan agreement between the Bank and the Republic of Honduras (No. 1). It has no unusual features. Hoiever, the following points may be of interest. The Borrower is to employ the services of consulting engineers mutually satisfactory to the Borrower and the Ban1c on terms and conditions mutually satisfactory to the Borrower and the Bank (Section 5.01(b)). Withdrawals from the loan account in respect of goods are to be made only after the con-sultants have recommended the use of such goods in the project (Section 2.02). 10. Before the Loan Agreement becomes effective, it is to be approved by the Consejo de L-stado of the Republic of Honduras. It is expected that this approval will be obta-ned Twjithout undue delay. PEAT III - A?FRAISAL OF TiE PROPOSED LOAN 11. A technical report on the project (T.O. 99-a) (No. 2) and a report on the "Economy of Honduras" (-;.H. 41-D) (No. 3) are attached. Justification of the Project 12. The lack of an adequate transportation system has been one of the main obstacles to the development of the Honduran economy. The topography of the country and poor tranLsportation facilities have left a large number of isolatea communities with little or no communication with eacn other and with thle outside iorld. 13. A Highway Department was established in the Ministry of Develop- ment about five years ago to assist in remnedying this situation. However, limited teclhnical and administra-tive personnel, the lack of all adequate organization and limited amuounts of equipment have impaired its efficient operation. Before any major construction can be undertaken, it will be necessary to develop an organization capable of carryin, out the work. Also it will be necessery to establish an efficient maintenance organiza- tion to preserve past and future investrments in the highway system. First priority, t7nerefore, has rightly been assigned by the Honduran Govern- rnent to the reorganization of the Highway Department and to the setting up of an adequate maintenance organization.  -3- 14. These purposes would be served by the loan now proposed. As improved maintenance of roads results in mnore reliable and cheaper trans- portation, production would be given an important stimulus and government revenues wiould increase. These benefits would greatly exceed the addition- a! costs of maintaining the roads to proper standards. 15. This initial operation would take about two years to complete and the equipment, materials and supplies would be limited to those that could be properly tiandled by the tighway Department during this reorganiza- tion period. Further investment in capital equipment would be necessary at a later date to meet the mainternance needs of the entire country. These investments should only be made after an organization has been established which is capalDle of handling the larger job. 16. The principal arteries of Honduras' highway network are: the so-called Inter-Oceanic Road co.nsisting of a southern branch from Tegucigalpa to the Pacific which has now been rebuilt; a northern branch (the "Northern Road") from Tegucigalpa to Puerto Cortes on the Caribbean Coast (370 Kms.) which has to be reconstructed; and the "Western Road" from San Pedro Sula to the Salvadorean border (270 Kms.), giving access to Honduras' populous western provinces, which has to be reconstructed and extended. As mentioned in paragraph 6 above, part of the funds under the proposed loan would be used to finance preliminary engineering surveys of the Northern and WTestern Roads. Execution of the Project 17. The project will be carried out by the Ministry of Development through its Highway Department with the assistance of consulting engineers who are now being engaged. The Government has funds available to meet the local currency costs up to June 30, 1956 and has undertaken to provide such funds as may be necessary in subsequent years to insure the prompt execution of the project. Economic Situation 18. The report on "The Economy of Honduras" describes the country's economic position and prospects. This report, completed in September 1955, concluded that the inflationary development induced by the floods and other adversities of the year 1954 had been checked and that former production and export levels were likely to be exceeded Tit+hin two years. Since the report was written, the Honduran economy has shown contilued signs of recovery and stability. The new corn crop comiing on the market in September, combined with the termination of monetary expansion, brought prices down sharply, and in October the cost of living index stood only 3% higher than a year earlier. During the period January - October 1955 the -overnment ran a surplus of 2 million lempiras compared with a deficit of 3 million lempiras in the sane perioc of 1954. Some deficit is likely to be incurred for the fiscal year ending June 1956, but the Government intends to prevent it from reaching proportions which could upset the present economic stability.  - 4 - 19. Recent events thus strengthen the mnain conclusion of the economic reoort, thlFt althougih H-onduras over the longer run is likely to find it difficult to achieve rapid economic growth, good fiscal and rnonetary policy and good development planning could enable a much higlier level of investment to be undertaren without placing undue strains upon the economy and the balance of payme.nts. These conditions, together -wlith ample foreign reserves and the absence of foreign debt, offer considerable scope for the absorption of external loans. 20. The events that brought Dr. Lozano into power in December of last year are dealt with in R-923. The administration has continued to enjoy popular support and poli-tical conditions have remainied stable during tne last ten months. The next few moniths wiill be marked by increasing political activity and pressures will no doubt be e-xerted to accelerate investrrients in new developpment projects. HTowever, there is no indication that the political situation is like'y to give rise to serious disturbances or to lead to any substartial deoarture from i,ondurasl traditional economic and financial conservatism. Prospects of Fulfillment of Obligations 21. The prooosed project has been soundly prepared and the Government's readiness to avail itself of the services of engineerin- consultants experienced in maintenance work gives good reason to believe that it will be carried out successfully. The Government should be able to provide the required local currency funds wJithout undue strain on 1tls budgetary resources. 22. The service of this loan wiould not impose a heavy burden on Honduras' budget, and the country's economic position and prospects give assurance that the foreign exchange required to service the proposed loan can be made available without undue strain to the economy. PERT IV - CO,-IiIANCL 11TH 1`J!TICIZS OF .AGRL'H7ENT 23. The report of the Cormittee provided for in Article III, Section 4 (iii) of the Articles of Agreerment of the Bank is attached (No. 4). 24. I an satisfied that the proposed loan w.7ould comply with the reouirernents of the Articles of A11greement of the Bank. P`i-2T V - RECOIUfLIED-'TIONS 25. I recommend that the Bank make a loan of 4.2 million, or the equivalent in other currencies, to the Republic of 1onduras on such terms and conditions as are specified in the attached draft Loan Agreement, and that the Executive Directors adopt a Resolution to that effect in the form of the attached (NLo. 5). Eugene R. Black Wxashington, D.C. December !4, 1955.