Cameroon - Third Highway Project

FILE COPY Doumunlof The World Bank FOR OFFICIAl. tiSE ONLY Reporl No. P-2189-CM REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPNENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UNITED REPUBLIC OF CAMEROON FOR A THIRD HIGHWAY PROJECT January 18, 1978 This document has a restricted distribution and mas be used hs recipients onIN in the perrormance of their official duties. Its contents may not otherwise he disclosed withoul World Bank authorization.  UNITED REPUBLIC OF CAMEROON THIRD HIGHWAY PROJECT CURRENCY EQUIVALENTS CURRENCY UNIT CFA Franc (CFAF) US$1 CFAF 245 1/ CFAF 1,000 US$4.1 CFAF 1,000,000 US$4,082 1/ Floating exchange rate. ABBREVIATIONS PCU Planning and Coordination Unit, Ministry of Transport FISCAL YEAR July 1 to June 30  FOR OFFICIAL USE ONLY UNITED REPUBLIC OF CAMEROON THIRD HIGHWAY PROJECT Loan and Project Summary Borrower: United Republic of Cameroon Amount: US$16.5 million IBRD Loan Terms: 20 years, including 5 years of grace at annual interest rate of 7.45 percent. Project Description: The proposed project is designed to reduce transport costs on the south-north Transcameroonian rail/road route and to improve overall transport planning and coordination. It consists of: (a) reconstruction of the Garoua-Figuil road (95 km) to two- lane paved standards; and (b) technical assistance and fellow- ships to strengthen the planning and coordination capacity of the Ministry of Transport. The proposed project would improve land transport facilities for the external trade of Northern Cameroon and Chad, and form an important part of the overall development effort for Northern Cameroon by serving agricultural, industrial and administrative centers. It would also assist in better allocating scarce resources in the transport sector. The risk that the main project benefits would not materialize due to cost increases is minimal, since the reconstruction contract has already been awarded and work is starting. Estimated Cost: Project c'osts, net of US$3.7 million equivalent in taxes, is estimated at US$21.6 million, of which about US$16.5 million (76 percent) is foreign exchange. Contingencies total US$3.5 million, with physical contingencies nine percent and price contingencies ten percent of base cost: This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization  % of Project Local 1/ Foreign Total Costs -------US$ Thousands------- Reconstruction of Garoua- Figuil road 3,826 12,435 16,261 75 Reconstruction Supervision 387 1,095 1,482 7 Technical Assistance and Fellowships for Transport Planning 66 262 328 2 Contingencies 813 2,636 3.449 16 Total Project Cost 5,092 16,428 21,520 100 (Rounded) (5,100) (16,500) (21,600) 1/ Excluding taxes and duties. Financing Plan: Local Foreign Total % --------US$ Millions------- IBRD --- 16.5 16.5 76 Government 5.1 --- 5.1 24 TOTAL 5.1 16.5 21.6 100 Estimated Disbursement of Bank Loan: Bank Fiscal Year 1978 1979 1980 1981 1982 --------------US$ Thousands------------- Annual 5,200 7,500 3,100 600 100 Cumulative 5,200 12,700 15,800 16,400 16,500 Rate of Return: The road reconstruction would have an estimated economic return of 20 percent, based on vehicle operating costs' savings. Other unquantified benefits are savings in transit time for passengers and the elimination of waiting time' for truck traffic due to temporary road closings. Appraisal Report: There is no separate appraisal report. Reconstruction of the Garoua-Figuil road was originally appraised in 1973 (see Report No. 180-CM, Appraisal of a Second Highway Project, Cameroon, June 11, 1973).  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UNITED REPUBLIC OF CAMEROON FOR A THIRD HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed loan for the equivalent of US$16.5 million to the United Republic of Cameroon to help finance the proposed Third Highway Project. The Bank loan would have a term of twenty years, including five years of grace, with interest at 7.45 percent per annum. PART I - THE ECONOMY 2. A report, "Proposals for a Medium-Term Public Development Program, A Special Study, Cameroon" (No. 1097a-CM), was distributed to the Executive Directors on May 11, 1976. The findings of an economic mission which visited Cameroon in October-November 1976 are incorporated below. The mission's report is being reviewed by the Government. Annex I provides basic country data. Economic Potential 3. Cameroon hag a population of about 7.6 million (1976) and covers an area of 475,000 km . The country's natural resources are considerable and varied, but not always easily accessible. Soils and climatic conditions permit cultivation of a wide range of crops, and the forest areas of the Southeast contain large untapped timber resources. The North holds promis- ing potential for livestock development. The main opportunities for develop- ment in Cameroon lie in the expansion of agricultural production, including forestry, and the processing of agricultural and forestry products for ex- port. Offshore oil and gas exploration has yielded modest results. Trade transportation and transit services are other important economic activities. Cameroon's main economic centers are separated by vast underpopulated areas; furthermore the country's transport facilities also serve landlocked Chad. As a result, a large port and inland transport infrastructure are essential for promoting agriculture, forestry and industry, and strengthening Cameroon's role as a regional trade center.  -2- Past Performance 4. During the Second Plan period (1966-1971), GDP increased at a high rate of 7.6 percent per annum. However, during the Third Plan period (1971- 1976), output grew at only 2.5 percent per annum partly because of the drought which affected the North of Cameroon in 1972 and 1973 and the impact of world- wide recession and unfavorable terms of trade, partly because of serious dif- ficulties in maintaining and expanding Cameroon's main tree crops which have been compounded by the failure of producer prices to keep up with those of competing food cash crops and inputs, and partly because of the limited size, early saturation, and slow expansion of the domestic market for import sub- stituting manufactures. Terms of trade improved during 1966-1971 but dete- riorated during 1971-1976. As a result, gross domestic income increased faster than GDP at 8.3 percent per annum during 1966-1971, but grew only by 2.4 percent per annum during 1971-1976. Population growth is estimated at about 1.8 percent per annum in the 1960's, about 1.9 percent until the mid- 1970's and about 2.3 percent from 1975-1980. Per capita GNP reached about US$300 in 1976. 5. During the 1960's, a confluence of a number of favorable factors led to the high growth of output and income. Agriculture, accounting for about one-third of GDP, increased at a rate of 5.5 percent per annum during 1966-1971. Most agricultural crops (except cotton, rubber, millet/sorghum), livestock, fishing and forestry experienced high growth rates, thanks to favorable supply and demand conditions such as high domestic income growth, favorable producer prices, and rapid economic expansion abroad. For example, during the 1960's although Cameroon already faced the problem of the increas- ing age of its cocoa and coffee trees, supply was still able to increase reflecting the high amount of new plantings during the 1950's and early 1960's. In addition, the Government was able to maintain adequate cocoa producer prices even when export prices dropped thanks to the reserves built up earlier in the cocoa stabilization fund. Manufacturing and mining, account- ing for 11 percent of GDP, increased at 10 percent per annum during 1966-1971 due mainly to the rapid development of import substitution industries, partic- ularly manufactured consumer goods, facilitated by the high rate of domestic income growth and the availability of foreign exchange for the purchase of inputs and intermediate goods. The high rate of expansion of productive activities was accompanied by the rapid growth of construction activities, public administration and other services. 6. In contrast, during the Third Plan period, a number of external and internal factors led to a much reduced growth in output and income. Agricultural growth declined to only 3.6 percent per annum, influenced par- ticularly by commercial crops (1.3 percent per annum, or less than one-tenth of the preceding rate). On the other hand, production of the main subsis- tence food crops expanded at about 6 percent per annum reflecting increasing demand and high prices for such crops in urban areas. Growth of commercial forestry production declined sharply due to reduced Western European demand, lower domestic construction activities, and some transportation bottlenecks, while the drought cut growth in livestock production (mainly cattle in  - 3 - the north) from 7.2 percent to 3.3 percent per annum. Cocoa and Arabica cof- fee, accounting for about 55 percent of commercial crops, actually decreased, mainly because of the failure of cocoa producer prices to keep up with those of competing food cash crops, the termination of the fertilizer subsidy pro- gram for Arabica coffee with the end of the supporting foreign assistance, the increasing age of cocoa and coffee trees, unfavorable climatic condi- tions in some years, and inadequate Government services to counter the black pod disease of the cocoa trees. For the other main commercial crops, the declining trend in cotton experienced in the earlier Plan period was reversed in large part through the efforts of SODECOTON, a specialized public enter- prise; reversal from decline to growth in rubber and an acceleration in growth of oil palm were facilitated by two plantation projects assisted by the World Bank Group and other co-donors. Growth in manufacturing slowed, following the first wave of import substitution, and with rising costs and expanded claims on available public revenues, real growth in public administration was also reduced below the 1966-1971 rate. Construction actually declined during 1971- 1976 and with a deceleration in exports, near stagnation in imports and the low growth in real income throughout the economy, other services (mainly trade and transport) increased only at one percent per annum. Investment and Savings 7. During the Second Plan period, the investment rate, including increases in stocks, exceeded 16 percent of GDP, and gross domestic savings and gross national savings were respectively 13.4 and 12.6 percent of GDP. Foreign resources financed about 33 percent of investment during this period. During the Third Plan period, despite slow income growth, the investment rate increased to 18.1 percent of GDP, as the share of public investment increased to almost 70 percent of total fixed investment. Gross domestic savings and gross national savings rose to 16.4 and 13.9 percent of GDP, but debt service increased by 60 percent. External resources therefore continued to finance about one-third of total investment during this period. This substantial improvement in savings during 1971-1976 was due to a drastic reduction in the real growth of consumption, particularly private consumption, to less than 2 percent per annum from 9 percent per annum during 1966-1971. One of the prices paid for the substantial improvement in savings was, however, a limita- tion on farmer's earnings in tree crops, which provided inadequate incentives to induce farmers to obtain more output from the existing stock and to do sufficient treatment and new plantings to maintain and expand production capacity. The maintenance of a high investment rate during a period of low output growth resulted in an apparent reduction in efficiency of investment. Some reduction in capital productivity was also attributable to investments, such as oil exploration, which would lead to production only a number of years later, investment in transport infrastructure (about 20 percent of total investment) which would result in increased output through the years, and social infrastructure investments which would likely increase welfare more rapidly than output. During this period there was considerable progress in the development of high level human skills. For example, the number of physicians increased by more than 50 percent (decreasing the population per physician rate to about 20,000), dentists more than doubled and pharmacists increased by more than 5 times.  -4- Public Finance and Balance of Payments 8. Budgetary revenue was respectively 16.6 and 17.2 percent of GDP during 1966-1971 and 1971-1976, while gross public savings after debt ser- vice in total public investment declined from about 39 percent in 1966-1971 to about 36 percent in 1971-1976. The balance of payments was not a major constraint until recent years. However, imports increased rapidly in 1975 and 1976 as a result of worldwide inflation and heavy public development expenditure, especially in capital goods. At the same time, agricultural exports declined, particularly exports of cocoa and timber, causing sizeable current account deficits. The bulk of the current account deficits was fi- nanced by net capital inflows but a substantial drawdown of international reserves was also made in 1975. Therefore, net official international re- serves decreased from more than 2 months in 1974 to less than one month of imports in 1975. In 1977, exports recovered substantially (by 35 percent) but imports also increased (by 28.5 percent) because of economic recovery and expanded investment. Gross official international reserves were rebuilt in 1976 and 1977, in part by the use of IMF credit (Oil Facilities and Com- pensatory Financing), but net official international reserves continued to be less than one month of imports in 1977. This was a low level by inter- national standards but still acceptable considering Cameroon's membership in the Central African Monetary Union. Development Issues and Prospects 9. Cameroon's main medium and long term potential lies in the devel- opment through both industrial plantations and smallholders of a diversified agricultural sector, comprising export crops and domestic food crops to feed the growing urban population and replace imports, particularly of grains. Implementation of such a strategy depends on an appropriate mix of public intervention and support and price and policy measures to stimulate private initiative; net financial returns to the public sector are more difficult to capture than in a less diversified foreign trade-oriented strategy. Factors which complicate the agricultural development effort further in Cameroon are the extensive dispersion of its main economic and population centers separated by vast underpopulated areas, its regional and institu- tional diversity, the competition between export and cash food crops, for the dwindling agricultural labor in some parts of the country, the dependence of a substantial part of public revenue and savings on cocoa and coffee, and the limited availability of skilled agricultural agents and administrators. Through its technical assistance and education projects and through its normal project work, the World Bank Group is supporting Cameroon's effort in manpower training and development in public services in agriculture, as well as other sectors. In industry the Government has moved to channel more financial resources for investment directly through the public sector, in addition to the indirect support provided by tax incentive and other meas- ures, which have been in existence for many years. The Government has actively participated in a World Bank Group study of the manufacturing sector whose results will help to identify bottlenecks and opportunities to develop existing as well as new industrial activities.  - 5 - 10. In the medium term, GDP growth will accelerate substantially because of recovery of cocoa, Robusta coffee and logs spurred by high international commodity prices, further expansion in most other commercial and food crops, increase in manufacturing and mining production. and rapid growth in construc- tion activities and services resulting from expanded investment activities and rapid income growth. The outlook for considerable agricultural growth during 1976-1981 is based on the maintenance of cocoa output at near the previous peak level for a number of years, recovery for Robusta coffee, con- tinuing expansion for Arabica coffee, cotton, rubber, oil palm and most other commercial and food crops and livestock production, and continuing recovery then further expansion of commercial forestry production. This projection is also based on the assessment of the medium-term outlook for Cameroon's exports, projects under implementation, and certain policy alternatives. Continuing growth of manufacturing production from existing and expanded facilities, particularly in food, beverages and construction materials, and new mining and manufacturing output of crude oil, sugar, paper pulp and other products, are projected to result in a marked improvement in manufacturing and mining growth during 1976-1981. With high growth in productive and in- vestment activities, construction and services are also expected to increase at a high rate. 11. Long-term growth in the 1980's is projected to be somewhat con- strained because the expected high investment rate during 1976-1981 is not likely to be sustainable due to worsening terms of trade, at least through the 1980's, and the necessity of prudent debt management to maintain the country's long-term capacity to borrow. Growth prospects will be impor- tantly influenced by the extent to which Cameroon succeeds in the diffi- cult task of maintaining and expanding the country's main traditional ex- port crops, cocoa and coffee, and the large-scale development of still unexploited forestry resources. Results of studies on the forestry poten- tial, forestry sector development policy, investment plans and transport requirements, many of which are parts of World Bank Group projects, will support the latter development. In addition, there are still uncertain in- dications for the exploitation of iron ore, but with heavy investment re- quirements, and long lead times to establish commercially viable export operations, production could probably not begin until the end of the 1980's. Fourth Development Plan (1976-1981) 12. Cameroon is implementing its Fourth Economic and Social Develop- ment Plan. Private investment is included in the Plan, and is encouraged, under Government guidelines, to expand production capacity in agriculture, forestry, mining and manufacturing. A part of financing of private invest- ment activities, however, will be publicly guaranteed borrowing. The Plan investment program of some US$3.1 billion (in 1974/75 prices) is about 80 percent higher in real terms than the estimated level achieved during the last Plan period and almost triples previous Plan expenditure in nominal terms. The Plan gives greater emphasis to agricultural development (about 16 percent of total investment), power (11 percent, mainly the Song Loulou  hydroelectric scheme), manufacturing and mining (22 percent with a substan- tial part in oil exploitation, refining and storage), transport infrastruc- ture (26 percent), urban development and low-cost housing (7 percent) and social infrastructure (7 percent). Public investment is expected to account for 73 percent of total investment. However, because of the high dependence of public revenues and savings on cocoa and coffee prices, which are projected to decline substantially from their record levels in the last three years (1979-81) of the Fourth Plan while import prices are expected to continue their inexorable rise, and of the need for adequate producer prices to pro- vide sufficient incentives for production and new plantings to farmers, and because of the need to keep supplementary borrowing at commercial terms at prudent levels to maintain Cameroon's long-term capacity to borrow, public investment should be reduced by 10-20 percent from the planned level. The investment rate during the Fourth Plan period would then be about 22 percent of GDP, and total investment in current prices would be US$3.4-3.7 billion or about US$690-740 million per year. Financial Prospects and Creditworthiness 13. In the first two years of the Fourth Plan period (July 1976-June 1978), thanks to favorable terms of trade, public savings after debt service would finance about 65 percent of total public investment. However, in the last three years (July 1978-June 1981), public savings after debt service are projected to finance only about 30 percent of total public investment and this share of domestic public financing is likely to continue in the longer run. Cameroon will thus have to rely increasingly on external financing for the bulk of its public investment, and foreign official lenders should con- tinue to finance a high proportion of total project costs of externally fi- nanced projects, including local costs in appropriate cases. An increasing reliance on foreign borrowing during a period of deteriorating terms of trade will require careful external debt management. Cameroon continues to be creditworthy for World Bank financing on the basis of its ability to maintain and improve productivity in the utilization of the country's resources in the medium-term and its potential in the long-term to further diversify the econ- omy by developing still unexploited resources. On the reasonable assumption that at least 50 percent of foreign public capital will be on concessionary terms, the foreign debt service ratio, 5.9 percent of export earnings in 1976, could be maintained below 13 percent by 1983. PART II - BANK GROUP OPERATIONS IN CAMEROON 14. The Bank Group's commitments in Cameroon now amount to US$309.6 million and cover twenty-four projects: ten in agriculture, eight in transportation, three in education, one in public utilities, one small- and medium-scale enterprise project, and one technical assistance project. Transportation represents the largest share (44 percent) of our past commit- ments followed by agriculture (38 percent). Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of November 30, 1977 and includes notes on ongoing projects. Although delays and setbacks  - 7 - have been occasionally encountered in the execution of projects, the Govern- ment has consistently shown willingness to collaborate with the Bank in find- ing solutions to such problems. 15. For the future, the Bank Group's strategy is to support the Gov- ernment in its effort to increase agricultural production, including export- oriented crops, and in the process create productive employment in rural areas; to upgrade and improve the operation and maintenance of the country's infrastructure; to stimulate investment by local entrepreneurs and increase employment in urban areas; and to increase the efficiency of Cameroon's institutions. 16. Bank Group assistance to Cameroon supports the priority the Gov- ernment rightly attaches to the regional distribution of agricultural devel- opment and to a sound balance between improving conditions in the traditional sector and promoting plantation agriculture, including smallholder schemes. Thus we have helped the Government create an effective and well-managed plan- tation sector by financing oil palm and rubber plantations in the south and west. At the same time, we have helped promote smallholder rice irrigation in the north. The ongoing cocoa project is helping to modernize cocoa grow- ing by smallholders and to raise rural productivity in areas south and west of the capital. The rubber project approved in June 1975 is helping develop the southwest coastal region. Rural development projects in populated but poor regions are being established with the assistance of the Bank. The Plaine des M'Bo Rural Development Project, which was approved by the Board in February 1977, is helping to finance studies and three-year trial activities required before a full-scale rural development program can be launched. The Rural Development Fund Project is designed to help the Government establish the machinery for processing and implementing small-scale rural development schemes. The Second SOCAPALM Project approved in March 1977 and the Second CAMDEV Project, approved in December 1977, are follow-ups to successful oil palm projects (SOCAPALM I and CAMDEV I) and are a first step in promoting smallholder oil palm plantations in Cameroon. A rice project in the north, which is a follow-up to the successful SEMRY I project, was very recently presented to the Board. Field appraisals for the Western Highlands and ZAPI Rural Development Projects have been completed and these projects are sched- uled to be presented to the Board during FY78. Besides promoting much needed foodstuffs' production, increased Bank Group lending for agriculture will support the Government's effort to focus on rural development in order to improve income distribution and to achieve a better balance in regional de- velopment. 17. Recognizing the crucial importance of transportation to economic growth in Cameroon and in neighboring countries, the Government has devoted the largest portion of public investment to this sector. The Bank Group, together with bilateral institutions, has substantially aided development of adequate transport facilities. The First and Second Highway Projects were designed to help complete the country's basic trunk road system. The latter project encountered severe cost overruns which were partly alleviated by a Supplementary Credit approved in March 1976, as well as by the elimina- tion of the reconstruction of the Garoua-Figuil section from the project.  - 8 - The Second Railway Project of 1974 has focused on track improvement and expansion of the equipment needed to maintain and augment the railway's over- all carrying capacity. Given projected sharp traffic increases, and the backlog of required investments, substantial capital outlays are still nec- essary, particularly for the expansion of the port of Douala, which is being assisted by a Bank loan and IDA credit and for some related facilities such as a railway station and marshalling yard to be built outside the port area. An engineering loan, approved in May 1976, will help complete the engineer- ing of this station and marshalling yard. A study of the improvements re- quired in the Douala-Yaounde transport corridor, which was financed under a Bank project and designed to help determine an economically optimal invest- ment strategy for this corridor, has led to a proposed investment package that is being discussed between the Government and a number of aid-giving agencies, including the Bank. Future road investments should place greater emphasis on road maintenance and on developing the network of feeder and farm access roads. Our future operations in the road sector have been planned accordingly. The Feeder Roads Project approved on November 15, 1977 will establish institutions for feeder roads maintenance, in addition to providing the necessary resources for a feeder road program to support high priority agricultural/rural develop- ment projects. The proposed Fourth Highway project which is currently under preparation will concentrate on road maintenance and rehabilitation. In other sectors, the Small-and Medium-Scale Enterprise Project, approved in 1975, focuses mainly on developing local entrepreneurship. A Third Education Proj- ect, approved in April 1976, places special emphasis on rural education and training. 18. In all our projects we include, as needed, training, technical assistance, and other provisions necessary for strengthening institutions and improving sector policies. The Technical Assistance Project, approved in June 1977, will help strengthen Government services in several key min- istries involved in investment planning, policy analysis and project pro- cessing. In addition, through our economic work we will continue to advise the authorities, at their request, on development questions in general, and on specific matters such as economic management, problems of industrial development, and manpower development. To help achieve the Government s priorities and to support our future lending, the Bank's strategy will re- quire continuing emphasis on strengthening the institutional framework, par- ticularly concerning sector planning and project preparation and implementa- tion in transportation and rural and urban development. 19. During the second half of the sixties, overall disbursements of external aid to Cameroon amounted to about US$40-45 million a year. While at the beginning of this period 65 percent of aid funds were grants, the proportion of loans slowly increased. A major part of external assistance was provided by France and was concentrated in infrastructure and productive sectors. The European Development Fund and European Investment Bank directed their lending mainly to agriculture, with infrastructure in second place. Bank and IDA disbursements were small during this period. From 1972 to 1976 overall disbursements of foreign aid increased to about US$90 million with one-fifth as grants. The Bank and IDA share of these inflows amounted to  - 9 - about 23 percent. Our lending to Cameroon has been closely coordinated with other donors; in twelve of our twenty-four projects, joint or parallel co- financing arrangements have been made. 20. Public debt outstanding and disbursed as of December 31, 1976 amounted to US$529.3 million and is projected to reach US$2.1 billion in 1983. Public debt service as a proportion of export earnings amounted to 5.9 percent in 1976 and is projected to reach 12.4 percent in 1983. At that time annual foreign aid disbursements may be over US$400 million with only 7 percent con- sisting of grants. At end-1976 IBRD debt accounted for 10.9 percent of Cam- eroon's public debt outstanding and disbursed, and 11.4 percent of its public debt service. IDA credits accounted for 12.8 percent of public debt outstand- ing and 1.1 percent of public debt service. The Bank and IDA are expected to account for about 22 percent of total public debt and 13 percent of public debt service in 1983. 21. In October 1974, Cameroon became IFC's 100th member. IFC's first operation in Cameroon, a US$450,000 underwriting to bring domestic share- holders into a previously wholly foreign-owned shoe manufacturing company, was approved in May 1975. In September 1976, the IFC Board approved an equity investment of nearly US$900,000 in a foreign-owned rubber estate (SAFACAM). The investment will assist in the rehabilitation and diversi- fication of an existing estate, producing rubber for export and palm oil for the domestic market. The operation will also facilitate participation by domestic shareholders. On November 29, 1977 the Board approved a third opera- tion consisting of an investment of up to US$125,000 in the share capital of a promotional company for maize development. PART III - THE SECTOR Infrastructure 22. Cameroon's transport system consists of about 58,000 km of roads, 1,170 km of railway, one main port, two auxilliary ports and a river port. Air transport is served by one international airport and 13 domestic air- ports. The main transport system which is export-import oriented is focused on Douala, the commercial center, which has both a deep-water port and an international airport. Links to the rest of the country are provided along two principal corridors - the Transcameroon rail/road route and the north- south Douala-Bafoussam-Foumban axis. Emphasis on transport development to date has been on modernizing the main system. However, rehabilitation of secondary roads and feeder roads are now planned or in the early stages of implementation. The port of Douala is currently being expanded with Bank assistance. The Road Network 23. The road network in Cameroon totals about 58,000 km of which about 2,000 km are paved. The primary and secondary road networks total about  - 10 - 17,000 km, the remaining 41,000 km being rural and feeder roads. Although the road system is extensive, many trunk roads were built more than twenty years ago and standards are inadequate to accommodate current traffic, e.g. the Yaounde-Douala road and the Yaounde-Bafoussam road. Many roads are impassable during part of the rainy season. As a result, trucking costs are high. Some of the most important roads, which are part of the Transcameroon route and the Douala-Bafoussam-Foumban axis, have recently been or are being reconstructed to paved standards. The rest of the primary and secondary roads, although generally adequate in extent and distribution for the country's economic needs, are mostly in poor condition due to inadequate maintenance. To correct this shortcoming, a five-year road maintenance program is being prepared by the Government for which Bank financing will be sought. The recently approved Feeder Roads Project is designed to improve and maintain the feeder roads network in three Bank agricultural/rural development projects and to build the institutional framework for the development and maintenance of the feeder road network. Transport Investments 24. The transport investment plan contained in the five-year economic plan is a consolidation of the programs prepared by each ministry responsible for a specific transport mode. Transport investment under the Third Plan amounted to CFAF 99 billion (US$404 million) expressed in constant 1975/76 francs, or about 20 percent of total public investment. Foreign credits covered 60 percent of the cost of transport projects. The target set for transport investment in the Fourth Plan is CFAF 137 billion (US$559 million), about 20 percent of the overall Plan investment. However, because of the dependency on foreign financing and given considerable cost escalation, the number of transport projects which may be realized by 1981 is likely to be reduced. Establishing transport priorities and strengthening the planning effort is therefore an immediate necessity. The Department of Highways has separate budgets for road construction and for road maintenance. In 1977-78 the investment budget for road construction amounted to CFAF 15.2 billion (US$62.0 million) and the road maintenance budget amounted to CFAF 2.8 billion (US$11.4 million). The maintenance budget will be increased under the pro- posed five-year maintenance program. Transport Sector Management 25. The Ministry of Economic Affairs and Planning, the Ministry of Equipment and Housing, and the Ministry of Transport, which are all concerned in varying degrees with planning and processing of transport projects, lack adequate staff to deal with Cameroon's pressing transport needs. The Ministry of Transport, created in 1970, has overall responsibility for sector policy, planning and coordination, and for screening transport projects prepared by other Ministries. From the beginning, the Ministry has been handicapped by a shortage of qualified personnel, and its planning activities have remained limited. Attempts to reinforce the organization and machinery for transport planning and policy-making and for project preparation and execution, had only limited success in the past. The Bank has had a continuing dialogue with the  - 11 - Government on the need for strengthening transport sector management. Partly as a result of this a Planning and Coordination Unit has been created within the Ministry of Transport and technical assistance experts are being recruited under the Technical Assistance Project to strengthen the capabilities of the Ministries of Economic Affairs and Planning and of Transport. Further measures required for reinforcing transport planning and coordination and ensuring the integration of transport and other sectoral planning are being discussed between the Government and the Bank. 26. The Department of Highways within the Ministry of Equipment and Housing is in charge of road planning, construction and maintenance, but has no specific planning unit. However, one transport economist was provided under the Second Highway Project, and preliminary discussions have been held with the Government concerning the creation of a road planning unit. The Second Highway Project also provides the services of two expatriate engi- neers to the Department of Highways. PART IV - THE PROJECT Introduction 27. The project is based on data collected and analyzed by Cameroon Government staff with the assistance of consultants. A Bank mission appraised the project in October/November 1977. Negotiations were held on January 10, 1978 in Yaounde. Background 28. Preinvestment studies for the Garoua-Figuil road were included in the First Highway Project (Loan 663/Credit 180-CM of March 1970) as part of the Garoua-Figuil-Mora road. The studies were satisfactorily completed in October 1973. Reconstruction of the Garoua-Figuil-Mora road was included in the Second Highway Project (Loan 935/Credit 429-CM of September 1973), as well as reconstruction of two other roads and consultants' services (see Report No. 180-CM, Appraisal of a Second Highway Project, Cameroon, June 11, 1973). As a result of the extraordinary rise in world prices for road con- struction, which started at the end of 1973, the total cost of the Second Highway Project doubled. To help cover this cost overrun, the Bank Group made a Supplementary Credit in 1976 of US$15.0 million. The Government tripled the amount of its participation and agreed to postpone reconstruc- tion of the Garoua-Figuil road, which was deleted from the project. 29. The Second Highway Project also includes an overall road maintenance study to prepare a five-year maintenance program which was expected to be one of the main components of the present project. Execution of this study by the consultants has been very slow. The consultants issued a revised First Phase Report in September 1977, and the five-year maintenance program was pre- appraised in October 1977. However, there are still several gaps in the preparation of this program, which will be filled under the Second Phase  - 12 - of the study, started in November 1977. Since the Government is eager to pro- ceed with reconstruction of the Garoua-Figuil road under the advantageous terms now available (see para. 36 below), and completing preparation of the maintenance program would unduly delay the project, the maintenance program was transferred to the proposed Fourth Highway Project, scheduled for FY79, which would focus on: (a) maintenance of the primary and secondary road networks; (b) rehabilitation of major gravel roads; (c) control of vehicle loads; (d) promotion of the domestic contracting industry; and (e) improvement of road transport planning. 30. The necessity of improving overall transport planning and co- ordination was identified during preparation of the First Highway Project. Strengthening transport sector institutions has proved slow. The main con- clusion of the Project Performance Audit Report for the First Highway Project (No. 1574, April 19, 1977) is that further effort in transport coordination and strengthening is required. Project Objectives 31. The objectives of this project are to reduce transport costs on the south-north Transcameroon rail/road route by reconstructing its last unimproved road section, and to improve transport planning and coordination by strengthening the planning capacity of the Ministry of Transport. Project Description 32. The project consists of: (a) reconstruction of the Garoua-Figuil road (95 km) to two- lane paved standards; and (b) technical assistance and fellowships to strengthen the transport planning and coordination unit (PCU) within the Ministry of Transport. 33. The Garoua-Figuil road (95 km) is the only unimproved road section of the Transcameroon route. The road runs from south to north across a gen- erally flat region. The existing road was paved in the late fifties to two- lane standards. The contractor, however, went bankrupt before completing pavement of about 20 km which remained gravelled. The road is deteriorating rapidly, in spite of regular routine maintenance. On a gradually increasing number of sections, where pavement failure is too advanced to allow mainte- nance, the Department of Highways is temporarily returning the road surface to gravel. 34. Reconstruction would comprise complete rehabilitation of the drain- age system, reconstruction of four bridges, improvement of the vertical and/or horizontal alignment on limited sections, widening of the roadway where nec- essary and overall strengthening and reconstruction of the existing pavement. Three long and narrow one-lane bridges, which need only minor repairs, would be kept. Consultants would assist the Government in supervising the recon- struction.  - 13 - 35. The Technical Assistance Project (Credit 673-CM of June 1977) pro- vides for a transport economist to reinforce the PCU for three years. This expert will play a major role in stimulating PCU's work and coordinating it with that of other Government agencies. Furthermore, the terms of reference of the PCU were agreed during negotiations. The proposed Third Highway proj- ect would provide for a second economist/statistician for three years to assist in improving basic data collection and analysis. The proposed proj- ect would also provide for two one-year fellowships to give complementary training abroad to PCU professionals existing or to be hired, and two three- month fellowships to their supervisors, the Director of Transport and his deputy. Procurement 36. In November 1974, after international competitive bidding, under the Second Highway Project, the lowest evaluated bidder, contractor Wayss und Freytag (Germany), was awarded the contract to reconstruct the Figuil- Mora road and was also awarded the contract for the Garoua-Figuil road, but, because of the project cost overruns, the Government never gave the order to proceed with the works. In October 1977, the contractor offered to reactivate his old contract with a five percent reduction on the original bid price -- plus price escalation -- provided work could start immediately. The contrac- tor satisfactorily completed reconstruction of the Figuil-Mora road in July 1977 and expected to benefit from the continuity of working on the Garoua- Figuil section during the 1977-78 dry season. The contractor's original bid was about 50 percent below that of the second lowest bidder in 1974. It is most likely that a new call for bids would result in substantially higher prices. In addition to the five percent discount offered by the contractor, the Government and the appraisal mission estimated that if work started im- mediately, instead of during the 1978-79 dry season after a new call for bids, another ten percent of project costs would be saved due to lower price esca- lation. To take advantage of this low price, the Government accepted the contractor's proposal. The Bank finds these arrangements satisfactory. 37. The Government has awarded the contract for reconstruction supervi- sion to joint venture Lamarre Valois/Ingeroute (Canada/France) who carried out the preinvestment studies and satisfactorily supervised reconstruction of the Figuil-Mora road. The consultant who would provide technical assistance to the Ministry of Transport would be employed under terms of reference and conditions satisfactory to the Bank (Section 3.03 (b) of the draft Loan Agree- ment). Execution 38. The Ministry of Economic Affairs and Planning would have overall responsibility for project execution. However, detailed execution would be through the Ministry of Equipment and Housing (through its Department of High- ways) for road reconstruction, and through the Ministry of Transport for strengthening of transport planning.  - 14 - 39. The reconstruction works would start in January 1978, and last until July 1979. Technical assistance to the Ministry of Transport would start at end-1978 and last three years. Fellowships would be awarded for the 1978-79 academic year. The project would be completed in four years (January 1978 to end-1981). Project Cost and Financing 40. Project costs, net of taxes and duties, are estimated at US$21.6 million, with a foreign exchange cost of US$16.5 million (76 percent). The reconstruction cost of the Garoua-Figuil road is based on the lowest evaluated bid received in April 1974, including the contractor's rebate of five percent. A contingency allowance of ten percent has been added to allow for increases in quantities. The reconstruction cost per km (including contingencies, but excluding supervision costs) amounts to US$188,000 net of taxes and super- vision in January 1978 prices. The cost of reconstruction supervision amounts to about eight percent of that of the reconstruction works. Price contingen- cies, amounting to nine percent, have been calculated for the road reconstruc- tion by applying the estimated variation of local and foreign parameters to the price escalation formula of the contractor's contract. Other price contin- gencies are estimated in accordance with expected international price trends. The proposed loan of US$16.5 million would finance the project's entire for- eign cost. The Government would provide all local costs (US$8.8 million, including US$3.7 million of taxes and duties). 41. Retroactive financing not exceeding US$300,000 is recommended for the foreign cost payment of the consultants' advance for supervision of the Garoua-Figuil road reconstruction. Reconstruction works would start in January 1978, but the contractor has agreed to prefinance the works and accept deferment of payments until the Bank loan becomes effective. For these payments, which are limited to the contractor's advance and correspond to a foreign cost of about US$2.0 million (12 percent of total Bank financ- ing), the rebate would be reduced by the contractor from 5 to 2 percent. Disbursements 42. The loan would be disbursed to cover: (a) 65 percent of total cost of civil works, including taxes, (representing the estimated foreign exchange component): US$12.5 million; (b) 100 percent of foreign exchange costs of engineering consultants' services: US$1.1 million; and (c) 100 percent of foreign exchange costs of technical assistance and fellowships: US$0.3 million. US$2.6 million would be unallocated. Disbursements would be fully documented. An estimated schedule of disbursement is in Annex IV.  - 15 - Project Benefits and Justification 43. The project road is the center link in a trunk road serving local and inter-regional trade of the 2.2 million people of northern Cameroon. A number of agricultural projects for northern Cameroon are being carried out by the Bank and the other foreign donors. The current project would form an important part of the overall regional development effort, serving directly the economic and administrative center of Garoua, the agricultural marketing town of Pitoa, and the expanding cement industry of Figuil. Cotton is the main crop being transported on the project road. Ongoing agricultural and settlement schemes will, however, stimulate transport demand for other agricultural products. As a link in the Transcameroon route, the project road carries the major portion of Chadian imports and exports. In 1976-77, 67 percent of Chadian imports (excluding petroleum) went through Douala. Of the Chadian cotton exports, 59 percent or 38,000 tons went through Cameroon, part of which was trans-shipped to river barges at Garoua. Despite the poor condition of the existing road, average daily traffic in 1977 was about 480 vehicles. Traffic on the Garoua-Pitoa section (17 km) was estimated at about 900 vehicles per day, while traffic on the Pitoa-Figuil section (78 km) was about 385 vehicles. Trucks constituted 31 percent of traffic composition on the Garoua-Pitoa section and 43 percent of traffic on the Pitoa-Figuil sec- tion. During the 1972-77 period, heavy truck-trailers and tractor-trailers increased significantly their share of freight transport. 44. Quantified benefits consist of savings in vehicle operating costs and savings in road maintenance costs. Savings in transit time for passen- gers have not been quantified. Another non-quantified benefit is the elimi- nation of waiting time for truck traffic due to temporary road closings. Routine maintenance cost is estimated at CFAF 208,000 per km. The cost of resurfacing every fourth year is estimated at CFAF 2.2 million per km. 45. The economic rate of return is estimated at 20 percent based on a 20-year economic life. The first year return is estimated at 16 percent for the Garoua-Pitoa section and 15 percent for the Pitoa-Figuil section. The rate of return is based on an overall traffic growth rate of 8 percent, with a 2 percent higher than average increase in heavy truck traffic for the first ten years. This projection takes into account the accelerated economic development in the northern part of Cameroon as well as recent traffic trends. With a traffic growth rate lowered to 7 percent for the first 10 years and 5 percent for the following decade for all classes of traffic, the rate of re- turn would be 18 percent. The latter growth rates were used during appraisal of the project road in 1973, when the rate of return was found to be 17 per- cent. Although construction costs have more than doubled, benefits have increased through higher savings in vehicle operating costs and augmented traffic in the first year after road construction. 46. Bank experience with highway construction in Cameroon has demon- strated that the two most serious problems are construction delays and cost overruns. For the reconstruction of the Garoua-Figuil road, both of these problems seem minimized, because the contractor is already in the field  - 16 - and the contract has been awarded. However, if routine and periodic mainte- nance costs included in the economic analysis should increase by 20 percent, and at the same time benefits should decline by 20 percent, the economic rate of the project would still be 15 percent. There are no special risks involved in this project which is the center link of a trunk road with an established average daily traffic of about 500 vehicles prior to reconstruction. 47. Benefits from reconstructing this center link in the northern axis road amplifies the benefits from the entire road investment under the previous Bank projects. The savings to the economy of northern Cameroon from reduction in transport cost will permeate the rural economy through a growing volume of cash transactions. As an integral part of the develop- ment effort for northern Cameroon, the project is thus expected to benefit a population of more than two million people and, in addition, at least one million people in neighboring parts of Chad. PART V - LEGAL INSTRUMENTS AND AUTHORITY 48. The draft Loan Agreement between the United Republic of Cameroon and the Bank and the Report of the Committee provided in Article III, Sec- tion 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 49. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 50. I recommend the Executive Directors approve the proposed loan. Robert S. McNamara President by J. Burke Knapp Attachments January 18, 1978  - 17 - ANNEX I Page 1 of 4 pages TABLE 3A CAMEROON - SOCIAL INDICATORS DATA SHEET LANO AREA (THOU KM2) ------------------ CAMEROON ** REFERENCE COUNTRIES (1970) TOTAL 47 .4 MOST RECENT AGRIC. 15 .4 1960 1970 ESTIMATE GHANA IVORY COAST MALAYSIA ----------------------