Haiti - Highway Maintenance Project

R E S T R I C T E D Report No. P-106 FILE COPY 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 HAITI FOR A HIGHWAY MAINTENANCE PROJECT April 26, 1956  INJTERN.TIOA.L BOTNK FOR RECONSTRUICTION AND DEVELOPIMENT REPORT AND RECO.IENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OIF HAITI 1. I submit the following report and recommendations on a proposed loan of $2,600,000 to the Republic of Haiti to finance a highway maintenance program. PART I - HISTORICAL 2. Haiti beca.me a member of the Bank in September 1953. A Bank mission visited Haiti in April 1954 to study the economy and the Governmentts development program. At that time, however, the Government was engaged in negotiations with some private U.S. banks for public works financing on a scale which, if realized, would have left the Bank very little scope for effective operations. 3. In October 1954 the Haitian Government informed the Bank thpt these negotiations had failed, and asked the Bank to consider financing highway, power, port, railroad and water supply projects. In reply, the Bank agreed to send a mission which would give primary attention to highway development. This mission visited Haiti in November-December 1954. Further discussions, based on the mission's findings, took place between the Bank and the Haitian Government in M4arch 1955, when it was agreed that, before undertaking new highway construction, Haiti shmild strengthen its highway maintenance organization. An understanding was also reached on the general principles on which Haiti would base the planning, execution and financing of its public works program (see my letter to the President o2 Haiti dated April 21, 1955, circulated with R-874). 4. In this letter, I informed the Government that, on the basis of these understandings, the management of the Bank would be prepared to negotiate a loan to finance the foreign exchange costs of setting up an adequate highway maintenance organization as soon as satisfactory cost estimates had been prepared. 5. The Haitian Government retained the services of a firm of engineering consultants to make a preliminary study of the highway maintenance project and to prepare cost estimates. The consultants' report was endorsed by the Government and presented to the Bank in October 1955. 6.. Formal negotiations for a loan began in lZashington on November 1, 1955. The Haitian Government was represented by M. Jacques Leger, Ambassador of Haiti in Washington, and by M. Raoul St. Lo, Minister of Public WATorks. The consider- ation of the resulting draft loan agreement by the Haitian Government was interrupted by the illness of the Minister of Finance, and final agreement was not reached until M1arch-April 1956, when Bank representatives visited Haiti to discuss the points which remained outstanding.  PART II - DESCRITP? ON OF TH. PROPOSED LOAN Borrow7er 7i. The Borrower would be the Republic of Haiti, a member of the Bank. Amount 8. The loan would be in the amount of $2,600,000 or its equivalent in other currencies. Purpose 9. The loan would be used to finance imported equipment, materials and services needed to carry out a three-year program for (a) the reorganization and expansion of the Maintenance Section of the Highway Service of the Public Works Department and (b) the rehabilitation, repair and maintenance of about 1,160 kilometers of primary and secondary roads. Interest, Commission and Commitment Charges 10. The loan would bear interest at the rate of 41h, per annum, including the statutory commission of 1. The commitment charge would be 3/ of 1 per annum and would accrue from the effective date of the loan or a date 60 days after signature, whichever is the earlier. Amortization 11. The loan would be for a period of 10 years, with a period of grace of three years corresponding to the period required to carry out the maintenance program. It would be amortized by semi-annual payments beginning July 1, 1959, and ending January 1, 1967, as set out in the amortization table of the proposed Loan Agreement. Legal Instruments and Legal Authority There is attached a draft Loan Agreement between the Republic of Haiti and the Bank (No.1). This agreement would have to be ratified by the Haitian Legislature. It is substantially in the form currently used by the Bank; pro- vjjisions of special interest are as follows: Section 5i.04 which provides for the supervision of the project by engineering consultants satisfactory to the Borrower and the Bank, and Section 7.01, which makes the employment of such consultants one of the conditions for the effectiveness of the Agreement; Section 5.02(b), which provides for consultation between the Borrower and the Bank on proposals by the Borrovfer to incur substantial external debt for public w.orks financing or for other purposes;  -3- Section 5.o8, which requires the Borrower to obtain the 3ank's agreenent before undertaking new projects for the construction or reconstruction of highways; and the preamble, in particular the fifth 1vhezbas" clause which repeats in substance the assurances regarding the Bank's interest in further Haitian highway projects which were contained in my letter to President 1Magloire dated April 21, 1955. 13. It is our view, with which the Haitian Government has expressed its agreement, that it would be inadvisable for Haiti to undertake further major road construction until the maintenance division has demonstrated that it will be able to tak-e care of the existing netwvork, Section 5.o8 of the Loan Agreement would give the Bank a decisive voice in any problems arising in this connection. 14h The report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank is attached (No.2). PART III - APFRPISAL OF THE PROPOSED LOAN 15. A detailed appraisal of the project (T.O.77-c) and a report entitled "Recent Economic Developments in Haiti" (Oi.H.h5-a)are attached herevrith (Nos. 3 and h respectively). Justification of the Project 16. Haiti is a predominantly agricultural country, and an adequate road network is essential if agricultural produce is to be efficiently marketed. The recent expansion of tourism also creates a demand for good road communications. Unfortunately, although large sums have been spent during the last twenty years on road construction and maintenance, most of the Haitian highways are in a very aiisatisfactory condition. Construction has often been entrusted, without acequate competition or supervision, to foreign contractors willing to offer _^edit terms. The resulting roads have in general been ill-designed, poorly exKecuted, and costly; furthermore, their adequate maintenance has been beyond the capacity of the Highw-ay Service. To remedy this situation the Government must develop an adequately staffed and organized highvray organization. The rroject,would,by setting up an efficient maintenance section within the Highway Sszvice, constitute the first stage of such a program. After satisfactory completion of this stage, further steps could be taken to put the Service in a position to exercise proper supervision over contracted construction work, and eventually to take over much of this work. Method of Procurement 17. The purchase of all equipment for the project would be subject to international competitive bidding.  Economic Situation 11&'. The accompanmAing economic report points out that, in the current year, Haiti is faced with serious balance of payments and budgetary difficulties arising partly from the severe damage due to the October 1954 hurricane and partly from imprudent short term public works financing, Despite grant aid from the United States, the Government is faced vwith the necessity of restricting expenditures drastically if a serious deficit is to be avoided. There are indications that its efforts in this direction are meeting with some success. 19. Over the longer run, Haiti will also have to exercise careful financial discipline. For many years the economy has shown little capacity for growth, and increased incomes in recent years have been due mainly to higher coffee prices rather than to increased output. A very high proportion of public invest- ment in recent years has been in a single irrigation and flood control project which has turned out to be far more costly than originally expected and which will take many years to exert its full effect on production. More encouraging factors are the notable increase of tourism in recent years, and the prospects for exploitation of sizable deposits of bauxite and copper. 20. In view of Haitits narrowr economic margins, it is particularly important that vwasteful investments should be avoided. In recent years a number of contractor-financed public works projects have been open to criticism from this point of view. The Government has expressed its belief that the closer relations with the Bank which the proposed loan would initiate would strengthen its power to resist unsatisfactory proposals of this kind. Prospects of Fulfilment of Obligations 21. The loan now recommended should, by facilitating the marketing of agricultural produce and offering additional facilities to tourists, have a bene- ficial effect on Haiti's balance of payments. The full rate of service on the loan, which in view of the 3-year grace period would not be attained until 1960, would amount to about h400,000 annually, and would bring the total service on Haiti's present external obligations outstanding in that year to $3.4 million, or 7, of expected exchange receipts. Provided that Haiti carefully controls its resort to short and medium-term credits, it should be able to make available without undue strain the foreign exchange required to meet the service of this loan in addition to its other obligations. The Government's undertaking to appropriate the equivalent of about $1.4 million spread over the next three years to meet local currency expenses should not prove an undue burden on Government revenues which, for the fiscal year 1954-55, yielded the equivalent of about 1529 million. PART IV - COIAPLIANCE VIITH ARTICLES OF AGREE?MENT 22. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank*  PART V - RECONFINDATTONS 23. I recommend that the Bank at this time make to the Republic of Haiti a loan of $2.6 million or the equivalent thereof in other currencies, for a term of 10 years, with interest (including commission) at the rate of 42% per annum, and on such other terms as are specified in the draft Loan Agreement atta.ched herewith, and that the Executive Directors adopt a resolution to this effect in the form of the attached (No.5). Eugene R. Black April 26, 1956.