Sudan - Railways Development Project

RESTRICTED ReportN o. P-1,66 FIE COPY This report was prepared for use within 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 THE SUDAN for the DEVELOPMENT PROGRAM of the SUDAN RAILWAYS July 11, 1958 IlJTER:KATIONAL BANK FOR RiECONISTRIUCTION AND DEVELOPLENT RLPO-aT AND RECO4MENDATIONS OF THE P NESIDENT TO THE EXECUTIVE DIiECTOR0S CONC-LNING A P-POSED LOAN TO THE ALPUBLIC OF SUDAN 1. I submit herewith the following report and recommendations on a proposed loan in an amount in various currencies equivalent to 539 million to the Repub- lic.of the Sudan, to finance the foreign exchange costs of a part, correspond- ing approximately to the two-year period 1958-1960, of the development program of the Sudan Railways. PART I. HISTORICAL 2. The proposed loan will be the first to be made to the Sudan, which became a member of the Bank on September 5, 1957. 3. An economic mission which visited the Sudan in November/December, 1957, concluded that it "has the economic potential and capacity to sustain a very satisfactory rate of progress", and that the fields of irrigation, transport and possibly power deserve high priority in public investment programs. The Government requested Bank financing in the first two of these fields. The Bank sent a mission to appraise the :ailways Project in March/April, 1958, and has agreed to send an irrigation mission to the Sudan in the fall of this year, to examine the technical and economic aspects of the major works proposed in that field. h. The transportation mission based its appraisal on a proposed four-year (1958-62) development program of the Sudan Railways -- which have responsibility also for operating river transport, Port Sudan and certain hotel and catering services - contemplating total investments of nearly IS 30 million (equivalent to US$ 86 million), including a little over TS 23 million in foreign exchange. It was agreed between the mission and the Sudan Sailways and. Government that the Bank would consider for the present only the first two years of the proposed program, since the requirements for improvement and expansion in this period could readily be ascertained but there were not available sufficient data on which to base reliable estimates of traffic and investment requirements for the years after 1960. The Government and the mission also agreed on certain reductions or postponements of proposed investments for the 1958-60 period, in view of the country's current economic difficulties described in paragraph 21 below. The cost of the revised two-year program is estimated at LS 17.6 million, of which 1S 13.6 million (Us $.039 million) is in foreign exchange. 5. Negotiations opened in Washington on June 23, with Sayed Niamoun Beheiry, Deputy Permanent Under-Secretary of the Ninistry of Finance and Economics, representing the borrower; he was assisted by Sayeds Mohammed Fadl and Gasim Magdoub, the General Manager and Chief Accountant, respectively, of the Sudan iailways. - 2 - PART II. DESCdIPTION OF THE PROPOSED LOAN 6. The proposed loan would be used to finance the purchase of locomotives, rolling stock, rails and accessories, and a variety of eqiipment to improve the operating efficiency of the railway and river services,as well as the construction and equipment of berths at Port Sudan. Other particulars of the loan are: Borrower: The Republic of the Sudan Amount. Equivalent of $39 million in various currencies. Interest Rate: 5-3/W% per annum including 1% commission. Amortization.: 33 semi-annual instalments, July 1, 1962 to July 1, 1978. Commitment Charge: 3/4% per annum. Payment Dates: July 1 and January 1. PART III. LEGAL INSTRU.ENTS AND LEGAL AUTHORITY 7. Attached are a draft of a Loan Agreement betir!een the 3epublic of he Sudan and the Bank (iNo. 1), and the report of the Committee provided for in Article III, Section h(iii) of the Articles of Agreement (No. 2). 8. Section 5.08 of the loan Agreement, which provides that the Borrower shall consult the Bank prior to taking any action which might affect the nature or constitution of the Sudan Railvays as presently constituted or transfer operational responsibility from the Railways, is designed to provide for the likelihood that the Government will carry out its intention to constitute the Railways as a statutory corporation. The definition of the Sudan Railways (Section 1.02) similarly contemplates this possibility; t11_o7e covenants where reference is made to the Sudan Railways would thus ai.oly equally to such statutory corporation. 9. Ratification by the Parliament of the Sudan Yculd be a condition of the loan becoming effective. 10. In other respects the Loan Agreement is similar to recent Bank lcan agree- ments for railw:ay projects. PART IV. APPRAISAL O THE PROPOSED LOA1 11. A detailed appraisal of the project (TO-180a)is attached (No.3). Justification of the Project 12. The transport services operated by the Sudan Railw ys are of crucial importance to te country's economy. Almost all impo,rts and o:-rorts pass through Port Sudan, which is far distant from the prIncipal centers of produc- tion. Cotton produced in the Gezira, for example, must be moved some 580 miles - 3 - to port; gum arabic, another important product, 880 miles from the collection center of El Obeid; and imported manufactures corresponding distances in the opposite direction. The principal towns of the rainland areas in the South are served by a slow and complicated combination of rail and river transport, the latter seasonal in some cases, for distances of 1000-1500 miles to and from Port Sudan. Road communications are wholly inadequate, and the Railways (with their river services) have a virtual monopoly on the movement of goods. In view of the low cost of railway building and operation in the Sudan, and the fact that most of the traffic consists of long hauls of bulk commodities, the Sudan seems ideally suited to railway development. 13. The railway system now comprises 4275 track kilometers of 3'6" gauge. The river services operate on three stretches of the Nile and its tributaries, over 2400 kilometers throughout the year and on additional seasonal routes. Port Sudan is a modern installation, handling well over a million tons of import-export trade annually. All facilities are well maintained, but reqire expansion and modernization to meet the growing demands of the Sudanese economy. The Railways organization and standards of operational efficiency are good. 14. Railway traffic has increased over the past thirty years at a rate averaging 4.5%, and the upward trend has sharply increased since 1951. Existing facilities were inadequate to handle last year's volume of Eaipments; and vhile the current year will probably show some decline as a result of a poor cotton crop, the prospects are for a substantial further increase in 1959. 15. The present project includes the purchase of diesel locomotives, to initiate dieselization on the line between Atbara and Port Sudan, which has been a serious bottleneck; the purchase of additional rolling stock required to cope with the present (or immediately anticipated) demand; the improvement and expansion of railway shops and facilities; the substitution of 75-lb. for 50-1b. rail on some 400 km. of line; the construction of two railway extensions, to Nyala in the West and Wau in the South, using the replaced 50-lb. rail, to open up important zones of potential production; the construction and equipment of two new berths, and dredging for a third, at Port Sudan; and the purchase of equipment for improvement of the river services. These investments are considered to be soundly conceived and of high priority for Sudanese economic development. 16. The proceeds of the loan, as they are withdrawn, will be entered on the Railways' books as a Government advance, to be reimbursed by the Railways at the same time and in the same amount as the Government's payments (including principal, interest and other charges) to the Bank. As is indicated in the technical appraisal of the project, the Railways are expected to maintain a strong financial position in future years, with a net return of some 9-10% on total investment; thus there would remain a substantial margin over fixed charges, including service of the presently proposed loan. Method of Procurement 17. The Borrower intends to continue the use of competitive international bidding in the procurement of all major items of equipment and supplies, and for the award of contracts. Economic Situation 18. A report on "The Economy of the Sudan" (R 58-21) dated February 25, 1958, was circulated to the Executive Directors on March 7, 1958. It emphasized the rapid economic progress achieved by the Sudan in recent years and the favorable prospects for the country's long-term economic growth. The volume of its foreign trade has doubled since the years just before and just after the war. Agriculture and animal husbandry have shown striking advances, and manufacturing industry, although still of minor importance, has also expanded significantly. The area under irrigation has increased by about one-third since 1950, and further important irrigation projects are under way; it is likely that rainland cultivation also expanded substantially, although reliable data are lacking. 19. The Bank's mission estimated that real income in the monetized sector of the economy had risen at an annual rate of about 6% over the previous six years. The Government has followed a conservative financial policy and has mobilized much of the rise in output in the form of budget surpluses for investment in further development. 20. Sudan exports a large part of its output and imports nearly all its re- quirements of manufactures, fuel, timber and sugar. Cotton and cotton products account for about 70% of exports, and although there are some long-term prospects for greater diversification, cotton is likely to remain the mainstay of the economy; the country is well-suited to this crop and a 1qw-cost producer. 21. During 1957 falling world prices and an ill-advised marketing policy delayed the movement of a record crop of cotton. Although corrective pricing measures were taken at the end of the year, the lag in sales produced a 1957 trade deficit of ;S 14.9 million (compared with a surplus of LS 21.5 million in 1956) and a serious drain on the country's foreign exchange reserves. Moreover, in the current crop season, very adverse weather conditions caused infestation and resulted in the second smallest crop in the country's recent history; its export value is estimated at only 40% of last year's. The current problem is mitigated somewhat by the relatively large carryover from this previous crop; but it has been necessary for the Government to take drastic measures to reduce required payments of foreign exchange - including a sharp cut-back in projected development expenditures (for the second and third phases of the Managil irrigation project, in particular) and the imposition of import restrictions - in order to minimize the further reduction of its reserves. The Sudan's foreign exchange reserves totalled IS 38.6 million in April 1958; but after deducting the amounts required by law to be held as backing for the currency and the special account with Egypt, frozen for the present, foreign exchange holdings readily available for current payments amounted to only LS 13.2 million, or about 25% of average annual imports in the past three years. 22. However, a normal level of production in the next crop season, including the prospective increment from the first phase of the Managil project (expected in itself to be worth some AS 5 million), should permit substantial progress toward redressing this adverse economic situation. Prospects for Fulfilment of Obligations 23. The external debt of the Sudan amounted, at the end of 1957, to a little over LS 3 million, all owed in the United Kingdom, reqp iring average annual service payments of less than LS 400,000 over the next decade. Peak service charges on existing obligations plus the loan now under consideration, in the years following the proposed grace period, will be about $4.5 million a year, or some 2% of anticipated export earnings. Such charges should not impose an undue burden on Sudan's capacity to service external debt. PART V. COMPLIANCE WITH ARTICLES OF AGREEMENT 24. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank. PART VI. RECOMMENDATIONS 25. I recommend that the Bank make a loan to the Sudan in an amount in various currencies equivalent to $39 million for a term of 20 years a an interest rate of 5 3/8% per annum (including commission) and on such other terms as are specified in the Draft Loan Agreement attached, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 4). Eugene R. Black Attachments Washington, D.C. July 11, 1958