Malawi - Fifth Highway Project

Document of The World Bank FOR OMCIAL USE ONLY CR. 12-A Rq.t No. P-3656-MAI REPORT AMD OF THE PRESIDENT OF THE ITE I AA1 FOR RECANSTnUCINN AND TINTER ONA DE VEL:OPEN ASSOCIATION ON A PROPOSED CREDIT OF SDR 12.4 MILIO PROPOSED DM& SPECIAL FD OF SDR 13.1 MILLION AiD PROPOSED LOAN OF US$18 MILION TO THE REPUBLIC OF M&LAI FOR A FIFIE HICW" PROJECT NOVEMB 14, 1983 This doc_mnt bas s restricted ditribution and may be used by recipients only in the performanee of their official dudes. Its cotents may not othrwLse be discloed without World Bank authorization.  CURmRCY EQUrVALENT Currexcy Units MaLswi Kwacha (K) and Tambala SDRI 1.00 = 1 1_32105 US$1.00 =K 1_5 MK 1_00 JSS.80 VEIGETS AND IEASURES 1 foot (ft) 0_305 meters (a) I mile (mi) 1_609 kilometers (km) 1 square ile (Cni2) = 2.590 square kilometers (km2) I ton (t) 0.907 netric tons (a ton) (As the Malawian Kwacha is officially valued in relation to a basket of the currencies of Mbalawi's trading partners. the USdollar/Ialawian Kuacha exchange rate is subject to change_ Conversions in thin report were made at US$1.00 IK 1.25. GLOSSARY OF ABBREVIATIONS AfDB African Development Bank DRIMP District Roads Improvement and Maintenance Program EDF European Development Fund EPD - Economic Planning Division (Office of the President and Cabinet) ERR Economic Rate of Return MTC Ministry of Transport and Communications Bus Ministry of Works and Supplies NRDP National Rural Development Program ODA Overseas Development Administration PVRO Plant and Vehicle Hire Organization TANZAM Tanzaniar-ZambLa Highway TANZAiRA T lanzania-Zambia Railway GOVERNMENT OF MALAWI FISCAL YEAR April 1 - Harch 31  FOR OFFICIAL USE ONLY REPUBLIC OF MALAWI FIFTH HIGHWAY PROJECT CREDIT/SPECIAL FUND CREDIT/LOAN AND PROJECT SUMMARY BORROWER: Republic of Malawi . AMOUNT: A development credit of SDR 12.4 million (US$13.1 million equivalent), a Special Fund credit of SDR 13.1 million (US$13.8 million equivalent) and a loan of US$18 million. including front-end fee. TERMS: The credit and Special Fund credit would be on standard terms. The lan would be for a term of 20 years, including five years of grace. at the standard variable interest rate. PROJECr The proposed project would assist Malawi in further DESCRIPTION: achieving a balanced pattern of economic and social growth by extending the District Roads Improvement and Maintenance Program (DRIMP) nationwide, continuing to provide for improvements of main and secondary roads, upgrading of an important section of the North-South road to a paved standard. and financing a transport systems study of the northern access route linking Malawi and the Tanzania/Zambia corridor. The proposed project would also strengthen transport planning and the management capabilities of the Ministry of Works and Supplies (MWS). Specifically, it would finance: (i) completing the third and last phase of DRIMP; (ii) a four-year maintenance and rehabilitation program for the main and secondary road networks; (iii) constructing a two-lane bituminous road between the Luwawa Turnoff and Champhoyo; (iv) providing weigh bridges and vehicles for axle load control; (v) furniture, training aids and equipment for the MWS' new training center in Lilongwe; and (vi) providing consultant services and training. Extension of DRIMP to the remaining districts will enable rural people throughout Malawi to benefit from improved access to markets, supplies and public services. The road maintenance component will improve road conditions on the major routes, thus reducing transport costs and enhancing the reliability of transport. The reduced transport costs, would benefit farmers, shippers and consumers. Significant benefits are to be derived from the institutional strengthening of the I This document has a restricted distribution and may be used by recipients only in the peuformanc of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - District councils and the planning capabilities of the Economic Planning Division (EPD) and the Ministry of Transport and Communications (HTC). The 50 km road construction component will help redress regional imbalances by completing the paving of an important part of the North-South road linking the more developed Central and Southern Regions with the less developed Northern Region. It would help provide landlocked Malawi with an alternative international routing through Tanzania for its exports and imports. The economic analysis therefore estimates the project's benefits if the remaining 93 kms of road to the Tanzanian border were to be paved and international traffic develop. The only concern associated with the road construction component is that the northern access route may not become available for international traffic if the Malavi and Tanzania Governments fail to reach final agreement on constructing the road link between the two countries. However, significant progress is being made by the two countries, and such a link has the backing of the nine member Southern African Development Coordination Conference.  - iii - Estimated Costs US$ Millions Local Foreign Total DRIMP III 8.19 5.63 13.82 Road Maintenance 8.54 22.22 30.76 Road Construction 3.05 8.16 11.21 Axle Load Control 0.05 0.20 0.25 Lilongwe Training Center 0.02 0.16 0.18 Consultancy Services 1.33 5.05 6.38 Sub-Total 21.18 41.42 62.60 Physical Contingencies 2.12 4.14 6.26 Price Contingencies 8.48 6.67 15.15 Sub-Total 10.60 10.81 21.41 TOTAL PROJECT COST 31.78 52.23 84.01 Front-end Fee on Bank Loan 0.05 0.05 TOTAL FINANCING REQUIRED 31.78 52.28 84.06 TOTAL NET OF TAXES AND DUTIES 26.23 52.28 78.51 Financing Plan IDA/Bank 4.96 26.12 31.08 IL'A Special Fund 1.85 11.97 13.82 AfDB 1.81 14.19 16.00 Government of Malawi 17.61 - 17.61 Total Net of Taxes and Duties 26.23 52.28 78.51 Estimated Disbursements of IDA and IDA Special Fund Credits and IBRD Loan (IDA/IBRD FIscal Year). US$ Million 84 85 86 87 88 89 90 Annual 0.4 13.5 10.2 9.1 5.8 3.7 2.1 Cumulative 0.4 13.9 24.1 33.3 39.1 42.9 44.9 Rate of Return: 62 percent on road maintenance component. at least 12 percent on the district roads and the road construction component. Appraisal Report: Report No. 4603-MAI, November 14, 1983 Map: IBRD 17178 Transport Network  INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT AND LOAN TO THE REPUBLIC OF MALAWI FOR A FIFTH HIGHWAYS PROJECT . 1. I submit the following report and recommendation on a proposed * credit for SDR 12.4 million (US$13.1 million equivalent), a Special Fund credit of SDR 13.1 million (US$13.8 million equivalent) and a proposed loan for Us$18 million to the Republic of Malawi to help finance a Fifth Highways Project. The credit and Special Fund credit would be on standard IDA terms. The loan would be repaid over 20 years including five years of grace, at the standard variable interest rate. The African Development Bank (AfDB) would provide parallel financing of 15 million units of account (US$16.0 million equivalent). The loan would be repaid over 20 years including five year's grace, at an interest rate of 9.5 percent. PART I - THE ECONOMY 2. A report entitled "Malawi: Growth and Structural Change, A Basic Report (Report No. 3082a-MAI) dated February 8, 1982, was circulated to the Executive Directors on March 9, 1982. Annexes to the report were distributed on June 26, 1981. Annex I contains the basic country data. 3. Malawi is a small (118,500 sq km), densely-populated (about six million people in 1981) landlocked country in southeastern Africa. Its main assets are moderately fertile soils, good water resources and a cli- mate favorable to crop production. Unlike its neighbors, Malawi has no known substantial mineral resources. 4. Although Malawi has a GNP per capita of only US$210 and has been identified by the United Nations as one of the world's poorest countries, its progress since independence, measured against its natural resources, has been significant. GDP at constant prices grew at an average annual rate of 6 percent between 1964 and 1979. During the same period, real growth of estate agriculture and manufacturing exceeded 10 percent per annum and export volume grew at 4.5 percent per annum. A steadily increasing investment rate (rising from 9 percent of GDP at independence to 33 percent in 1979) has been supported by heavy inflows of official and private external capital as well as by a significant increase in domestic savings (from virtually nil in 1964 to 14 percent of GDP in 1979).  - 2 - 5. Malawi's development success has been due largely to the realis- tic and purposeful policies of the Government. Public investment has been intended primarily to support private initiative in the directly productive sectors by providing infrastructure, public utilities and support ser- vices. The Government has emphasized smallholder agriculture, as about 90 percent of the population lives in the rural areas and depends on agri- culture for its livelihood. The Government has thus undertaken a number of integrated rural development projects and, in the late 1970s, embarked on the National Rural Development Program (NRDP), an ambitious 20-year program for extending services to smallholders countrywide. The Government's decision to emphasize directly productive sectors and infrastructure has resulted in relatively slower development of social services. Over the past 10 years, 7 percent of the Government's development budget has been spent on health, education and community development, compared to 22 percent on natural resources and 39 percent on communications. 6. Malawi's economy is heavily dependent on three primary commodity exports (tea, sugar and tobacco) and is highly vulnerable to international price fluctuations. Since 1974, there have been periodic balance of payments problems of increasing severity due primarily to (a) rapid escalation in import prices, particularly of fuel and intermediate and capital goods; (b) cyclical swings in export prices of tobacco, sugar and tea: and (c) significantly higher costs of transport for exports and imports owing to rising ocean freight charges, port congestion in H4ozambique, and disruptions of overland transport. 7. While the Government successfully steered the economy through balance of payments crises in the past, the deterioration in the balance of payments since 1978 has been less manageable. For reasons mostly outside Malawi's control, the deficits in both the trade and non-factor services grew rapidly until 1980. Between 1977-80 Malawi's terms of trade fell by 40 percent. While export prices declined by 16 percent (due mainly to falling tea and tobacco prices), import prices rose by 39 percent, partly because of the steep increase in prices of petroleum products. The petroleum import bill more than doubled, raising its share in total imports from 8.5 percent in 1977 to almost 11 percent in 1980. In recent years (1980, 1981), agricultural production suffered from recurring drought, reducing export volumes and necessitating large imports of maize, a commodity in which Malawi had been self-sufficient during most of the 1970s. Finally, disruptions of the rail transport system through Mozambique have forced Malawi to use more costly alternative routes as principal means of transport for exports and imports (para. 17). As a result of these developments Malawi's current account deficit deteriorated sharply. From an annual average of about 8-9 percent of GDP in the mid- 1970s, it rose to 18 percent in 1978 and 24 percent in 1979 before falling to 18 percent in 1980 and a 12 percent in 1981. Capital inflows did not cover current accounts deficits and foreign exchange reserves fell from the equivalent of over five months of imports to less than two months between 1977-81.  - 3 - 8. Malawi's fiscal position has also seriously deteriorated. From independence through 1977/78, government expenditures and revenues expanded roughly in line with the increases in GDP, and deficits rarely exceeded 8-9 percent of GDP. In the past four years, expenditure growth has outstripped the increase in revenues and the share of government deficits in GDP averaged 15.6 percent in 1978/79-81/82. The underlying cause of these deficits was the increase in government expenditure to around 35 percent of GDP compared to an average 26 percent for the previous six years. Increases in domestic borrowing, mainly from the monetary system, and in foreign borrowing, partly on commercial terms, were required to finance the rising budget deficits. Inflationary pressures grew and prices rose at an average rate of almost 14 percent per annum between 1979 and 1981. 9. Because of the Government's limited ability to mobilize resources, the appreciable expansion of Malawi's development program over the past decade has been financed in large part by increased public capital inflows. The net contribution from foreign official sources to the financing of public investment increased from US$17 million in FY68, to about US$105 million in FY82, of which about US$48 million were grants. I1owever, borrowing on commercial terms accounted for about 50 percent of total borrowing from 1979-81. 10. By the end of 1982, Malawi's external public debt outstanding and disbursed totalled US$700 million. In late 1982 Malawi rescheduled both its official and commercial debts. Otherwise its debt servicing, including repayments to the IMF, would have amounted to over US$130 million, equivalent to over 40 percent of exports of goods and services. This compares to a level of about 10 percent in the mid-1970s. As commercial borrowing increased, average terms of borrowing have hardened in recent years. The average grant element of external loans is now 40 percent compared with 80 percent during 1971-75. 11. The Government and the IMF agreed to a new standby program for SDR 22 million in August 1982. A first phase of a multi-year stabilization effort, the program aims at reducing both the balance of payments current account deficit and the budgetary deficit. As part of the program, the Government devalued the kwacha against the SDR by 15 percent in April 1982. The other performance criteria involve phased ceilings on net domestic assets of the banking system and on net credit to the Government and a limit on government external commercial borrowing. The standby was implemented satisfactorily, and the Government and the IMF have recently concluded a new multi-year program, and an Extended Fund Facility which begins this fall. As part of the Extended Fund Facility, the Government devalued the kwacha against the SDR by 12 percent in September 1983.  -4- 12. These short-term measures are complemented by a mediumrterm structural adjustment program on which the Government embarked in 1981. The program's principal objectives are to diversify Malawi's export base, encourage efficient import substitution, adjust income policies, improve the public sector's financial performance and strengthen economic planning and monitoring. The Bank's first structural adjustment loan for US$45 million was made in June 1981. After initial difficulties, good progress was made in implementing the Government's adjustment program: additional funds were allocated to the agricultural sector, agricultural prices were adjusted, public utility tariffs increased and the budget for 1982/83 was trimmed with sufficient resources provided for major development sectors. The second tranche was released in April 1982. However, during 1982 the country's efforts were set back by increased disruption of the traditional transport routes and continued depressed demand for Malawi's export products. Nevertheless, the country was able to reduce its current account deficit to 11 percent of GDP, reduce the budgetary deficit for 1982/83 to 9.4 percent of GDP, and meet its IMF standby ceilings. GDP growth was 3.0 percent, largely due to 6.2 percent increase in output from agriculture, following a period of no growth in 1980 and 1981. The industrial sector contracted by 3.7 percent. Malawi's economic performance and creditworthiness are expected to improve in the medium term if the structural adjustment program is implemented successfully. Within three to five years the country should be able to reach sustainable levels of current account and budgetary deficits while still achieving an acceptable growth rate. While external borrowing is expected to remain high to make up for the shortages in domestic funds to finance Malawi's development program (in FY82, domestic contribution to capital expenditures was only 27 percent), export growth is expected to average about 14 percent a year in nominal terms during thee next five years. This would reduce the debt service ratio to an average of 25 percent over the period. PART II - BANK GROUP OPERATIONS IN MALAWI 13. Over the past 17 years, Malawi has received 28 IDA credits totalling around US$325 million and seven Bank loans totalling US$75 million of which two were on third window terms. Of the Bank Group assistance, some US$121 million (30 percent) was for agriculture, US$107 million (27 percent) for education, US$65.0 million (16.3 percent) for roads, US$45.0 million (11.2 percent) for structural adjustment, US$38.0 million (9.8 percent) for power development, US$7.0 million (1.7 percent) for a health project, US$3.0 million (0.8 percent) for a development finance company (INDEBANK), and the balance of US$13.0 million (3.2 percent) for water supply, technical assistance and to finance feasibility studies for the proposed wood industries project. The first Bank loan to Malawi was made on third window terms in June 1976 and the first standard Bank loan in April 1977. The most recent operations were a US$5.0 million equivalent credit for a smallholder fertilizer project and another US$6.8  million credit for a health project. The fertilizer project was part of the Bank Group's Special Action Program for Africa involving both the use of a revolving fund and increased sector lending. 14. IFC's investment in Malawi consists of a loan of US$10.8 million for a textile mill, another of US$9.9 million for a sugar mill, a US$0.6 million equity investment in INDEBANK and a US$2.0 million loan to Malawi Motels Limited for tourism. A US$262,000 equity and a loan of US$1.7 million for the production of ethanol from molasses were approved in July 1980. Project implementation has been generally satisfactory. However, due to depresed world sugar prices and difficulty of transporting sugar to world markets, the Dwangwa Sugar Corporation is experiencing financial difficulties and IFC and other project lenders have agreed to a rescheduling of the finances of the company. Malawi Hotels Limited is in critical financial condition due to reduced business traffic, weak managem--t and low tariffs. IFC is assisting the Board of Malawi Hotels to obtain higher tariffs from Government and to attract new management to the company. A Summary Statement of Bank Group Operations is provided in Annex II. 15. During the next five years, Bank Group assistance to Malawi will continue to be closely tailored to help Malawi restructure its economy, especially to help improve agricultural productivity and the efficiency and effectiveness of public and private enterprises. Towards this end, a second structural adjustment operation and related technical assistance credit is planned for FY84. It is expected to continue to improve the incentives for smallholders, increase efficiency in the productive sectors, better mobilize and manage resources and improve institutions. Further investments in agriculture, transport, education, health and housing are contemplated as well as a wood processing project and a second line of credit to Indebank. The Bank Group's economic and sector work will build on the previous studies (basic economic report, sector work on energy, health and NRDP, etc.) by focusing on five high priority areas which will over the medium term, help Malawi improve its economic performance: (a) agricultural productivity; (b) public sector management: (c) external transport; (d) industrial productivity; and (e) development of Malawi's human resource potential by addressing the problems of population growth and the cost effectiveness of the social sectors. Based on the findings of the Fifth Highways appraisal and recent supervision missions, a Transport Sector Report is being prepared by the Eastern Africa Transport Division. The report will assess the impact of the transport crisis on Malawi's economy, the Government's short and medium term options for overcoming the burden of the transit limitations, and the Bank's future role in the sector. It will be finalized later this fiscal year after being reviewed with Government.  -6- Disbursements 16. Disbursements of the Bank Group loans and credits in Malawi generally have kept close to schedule and compare favorably with other countries in the region and even on a Bank-wide basis. During the period FY80-82, the disbursement rate on loans and credits to Malawi (excluding the effect of non-project lending) averaged about 26 percent per annum, significantly higher than the Eastern Africa Regional average of 17.8 percent and the Bankwide average of about 21 percent. In FY83, the disbursement rate for Malawi was about 29 percent, again significantly higher than the Eastern Africa Regional average of 20.7 percent and the Bankwide average of 21 percent. Only one project--the USS7.0 million Blantyre Water Supply Project--is appreciably behind schedule due to the late delivery and installation of electrical and mechanical equipment for the pumping stations. However, deliveries have been expedited and the improvement in disbursements over the past several months should continue. As of September 30, 1983, disbursements on this project totalled US$5.9 million. PART III The Transport System 17. Malawi's major transport arteries include 13,300 km of road network which is fairly well developed south of the capital, Lilongwe, but less extensive in the northern half of the country; a 680 km rail system in the southern half of the country which is used mainly for export-import traffic; lake transport which links the north with the central area and compensates to some extent for the limited land transport links; and air transport service which is provided at four airports. As a landlocked country, Malawi has always had to depend on external transport routes to reach the sea. Traditionally, almost all exports and imports have moved by rail on two lines through Mozambique to the ports of Beira and Nacala. However, frequent disruptions in service caused by insurgent attacks along the 360 km rail link between Beira and Malawi combined with the deteriorating condition of the line, have effectively reduced the transport capacity to a fraction of its former level. Similarly, the 600 km rail line to Nacala is in extremelv poor condition leading to interruptions of traffic and problems with importing essential materials. During the second half of 1982 the transport problems reached crisis proportions. Traffic flow through the port of Beira, normally constituting 65 percent of Malawi's external trade, came to a virtual standstill. Over 65,000 tons of fertilizer destined for Malawi was stranded at the time of greatest need and petroleum supplies and other essential imports were sharply reduced. Exports of tea and tobacco were also delayed or rerouted and 54,000 tons of sugar could not be exported. As a result of these problems, most export/import traffic has been diverted to alternative routes by rail/road and, in times of emergency, by air, via South Africa and Zambia at greatly increased costs. The economic cost to Malawi of these events mostly in lost foreign exchange, has been estimated by the Economic Planning Division  (EPD) at around US$12 million in 1982 and an estimated US$30 million in 1983 of which around US$22 million alone are losses because of increased transport costs. The estimated indirect costs to the agricultural and agro-industrial sectors are much larger. Some shipments have been diverted through Dar-es-Salaam via the Tanzania-Zambia railway to Lusaka, but both this and the South African routing depend on the use of 600 km of road transport between the Malawi/Zambia border at Mchinji and Lusaka which is in itself more expensive than the traditional routes to the sea via Beira and Macala. Prospects for an early resolution to the underlying political problem in Mozambique are not bright and the railway and port rehabilitation programs prepared by the South African Development Coordination Conference Transport Secretariat for the Beira and Nacala lines will require four to five years to complete once work actually begins. 18. Road transport dominates Malawi's domestic transport although the topography in parts of the country makes provision and maintenance of transport facilities difficult and costly. Approximately 2800 km of main roads (about 1800 bituminous paved) connect principal cities and towns, and about 2700 km of secondary roads (about 200 km bituminous paved) link smaller centers to main roads. There are also about 5000 km of district feeder roads and another 2700 km of roads serving individual towns and agricultural estates. Over 85 percent of the paved and improved roads are located in the southern half of the country reflecting the regional imbalances. Major construction of paved roads during the past few years has been concentrated on about 1100 km north-south spine road linking the three regions of Mhalawi. When ongoing projects are completed in 1984, some 1005 km of that road will have been paved (para. 29). Improvements are also being made to other main and secondary roads. Some 1100 km of the long neglected district roads were improved under the first phase of the District Roads Improvement and Maintenance Program (DRIMP) and some 2400 km are being covered under the program's second phase. 19. In 1982 the vehicle fleet totalled about 29,000 or 4.5 vehicles per 1000 inhabitants which is about average for East Africa but less than half of Kenya's vehicles per capita. Overall the fleet has been growing at an average rate of 3 percent per annum. Truck transport F ices are provided mainly by small operators and are regulated by the Road Traffic Commissioner in the Ministry of Transport and Communications (MTC) through the issuance of licences. Vehicle dimension and weight regulations are adequate and enforcement of the regulations by the MTC and the National Police has improved considerably during the past few years partly as a result of a covenant agreed under the second highway project. The proposed project will provide further assistance to expand and enforce the vehicle weight regulations (para. 35). Transport Policy and Coordination 20. Since the beginning of the seventies, Malawi's transport policy has had three broad objectives: (a) to improve the administrative and socio-economic integration of the country by linking the Northern, Central and Southern Regions with reliable all weather connections; (b) to support  - 8 - rural development by improving access to rural areas; and (c) to provide efficient lInks with transport routes to Indian Ocean seaports for exports and imports. Progress has been made towards achieving these objectives despite the difficulties experienced in transit services through Mozambique. The proposed project would complete the paving of the North-South road to Karonga except for a final 45 km section. Concerned over the vulnerability of its principal access route to continued disruption, the Government has acted quickly to try to lessen the impact of the continuation of the transit difficulties, mostly by diverting traffic through ports in South Africa because they are easily accessible, reliable and offer service incentives. NTC's Planning Unit has been strengthened to deal with the transport emergency and a number of studies of alternative routings were initiated or completed. One of the most important was financed by the European Development Fund (EDF). After examining the future changes in the composition and direction of trade, the EDF study recommended that the Government give high priority to developing the northern transport access route to the Tanzania-Zambia (TANZAM) highway, the Tanzania-Zambia (TAZARA) railway and the port of Dar-es-Salaam. This routing is potentially cheaper in time and cost than the South African alternative.11 The proposed project includes funds for a transport system study of the northern access route which would include the new road link between Malawi and the TAZARAJTANZAM corridor. The planning and construction of such a link and the efficient use of the international route will require close cooperation between the Malawi and Tanzanian Governments (para. 37). The transport systems study would, inter alia, assess the viability of the split between transport modes in both countries including the availability of truck and railway capacity; customs procedures and facilities. The Malawi and Tanzania Governments have already reached agreement on an action pirogram on steps to be taken to open up the proposed route. Terms of reference and a short list of consultants for the transport systems study were agreed on during negotiations. The study is expected to start in May 1984 and be completed in early 1985. 21. Investment in the transport sector has been high during the last four years, representing an average of 34 percent of total capital expenditures. A large part of this was for the railway extensions and the construction of the Lilongwe International Airport. In accordance with the 1/ The following is a comparison of alternative routes: Length Transport Cost per ton Route (km) (NR) Lilongwe to Durban via Lusaka 2,835 207 Lilongwe to Dar-es-Salaam via Lusaka 2,630 192 Lilongwe to Dar-es-Salaam via Karonga 1,500 109  high priority assigned to the transport sector, the Government plans to allocate around 30 percent of its total capital investment over the next three years (1983/84-85/86) to continue to improve regional road links and road maintenance, to extend the feeder road network to handle a larger volume of agricultural output and to improve external links through continued investment in the railway and completing the 93 kms of unpaved section of the North-South road. This level of public investment is reasonable in terms of the overall level of financing and the sub-sectoral allocations (highways 80 percent of expenditures followed by rail (10 percent) and air (10 percent)). The Government has included in its investment plan proposals to pave the Champhoyo-Mbowe section and to construct the Karonga-Ibanda road, the two missing- links in the northern access route. The investment plan was reviewed during negotiations. During negotiations, agreement was reached that Government would, by January 31 in each fiscal year during the carrying out of the project. review with the Association its proposed transport investment program for the foilowing fiscal year (Section 3.07 of the draft Development Credit Agreement). 22. Responsibility for coordinating transport investments is vested in the Economic Planning Division (EPD) in the office of the President and Cabinet which annually reviews both road plasw of the Ministry of Works and Supplies (MWS) and development plans of the MTC for all other transport modes. In the past, effective coordination of transport investment has been lacking due to staffing constraints and limited intersectoral planning. Consequently, the various transport modes have been developing without adequate coordination. The Bank Group's fourth highway project has assisted the Government in strengthening its transport planning and coordination capability by financing the services of a transport economist planner attached to EPD as well as the overseas training for local staff. This technical assistance is helping the Government establish an adequate system of transport planning and on-the-job training for Malawian professional staff. The Government has requested a continuation under the proposed project of this support to the Transport Planning Unit of EPD to assist in transport investment planning. Road Administration and Training 23. The MWS, through its Roads Department, is responsible for all classified roads (main and secondary) while the district councils have primary responsibility for district roads. MWS is also gradually taking over responsibility for maintaining the 2000 km of feeder roads being constructed under various agricultural development projects; these roads in turn become the responsibility of the district councils as they develop their road maintenance capability. In addition, the Ministry of Forestry and Natural Resources is responsible for 1600 km of forestry and national park roads and tracks. The organizational structure of the MWS and its Roads Department is adequate. MWS has three major functional units at headquarters in Lilongwe: Administration (including financing), Engineering and Development (largely planning). The Roads Department within the Engineering Unit has recently increased its number of professional posts to 25, in accordance with the need for the increased emphasis on road  - 10 - maintenance and planning. The regional offices are headed by a civil engineer and are responsible for road construction and other works. The regional offices are supported by 4 branch offices, 14 district depots and 48 subdlstrict depots for road maintenance. 24. Altogether MWS has about 100 professional staff and about 400 subprofessional and supervisory staff and about 1300 other salaried staff. Up to the late 1970's, localization of MWS proceeded slowly but satisfactorily. Of the 50 most senior posts filled by expatriates in 1980, 23 are now filled by Malawians and only seven of the Road Department's 17 professional staff are expatriates. The present salaried staff of about 1800 includes only 67 expatriates compared with 105 in 1980. Since 1978, the Overseas Development Administration (ODA) has been steadily reducing its financial assistance for expatriate staff in MWS. The reduced number of technical experts combined with the accelerated rate of localization have imposed an increasing burden on MMS's capacity to plan and supervise the expanded road maintenance and DRIMP programs. Additional technical support is required to strengthen the management of these operations in this important transitional period (para. 37). 25. The Coveroment places high priority on training and educating nationals for professional positions and is slowly filling the posts currently held by expatriates. However, the program has not fulfilled the high demand for Malawians as quickly as possible due to difficulties of competing with the private s-ctor. Much of the professional training is provided abroad through externally funded programs (ODA, European Economic Community, etc.) which to date have provided sufficient training opportunities for suitably qualified candidates. In the meantime, the Malawi Polytechnic has been developing its technical training capabilities. Substantial progress has been achieved in training of artisans for implementing road maintenance and construction programs. In Lilongwe, MWS is building a new training center, which will ultimately replace the training program in Zomba. The Fourth Highway project is assisting in financing the facilities required for the center and the proposed project will support its furnishing and equipping (para. 36). The new training center is expected to begin limited operation in early 1984. Maintenance 26. Responsibility for maintaining the main and secondary roads systems rests at the headquarters level with the Roads Department and at the regional level with three regional divisions of the MWS. The divisions have a small but well trained cadre of maintenance personnel which utilizes mechanized technology for periodic maintenance while routine maintenance is basically labor-intensive. Equipment is rented by the Roads Department from a plant and vehicle hire organization (also under MWS), which procures and maintains all government-owned equipment and vehicles. Rental rates are reasonable, and equipment availability and utilization rates are among the best in sub-Saharan Africa, although the trend has been deteriorating in recent years (para. 37).  - 11 - 27. Road users contribute to government revenue through taxes and duties on fuel, lubricants, vehicles and spare parts, and through licences and registration fees.21 For FY81, total revenue from road users amounted to US$59.0 million equivalent. The present cost of administering and maintaining the road network including the Road Traffic Commission's office, amounts to some USS6.5 mi;lion. Road user taxes, therefore, contribute substantially to the government budget. In the past, Malawi has adequately maintained its roads system while allocating around 10 percent of its annual highway budget for maintenance. In the late 1970s, however, maintenance provisions did not keep pace with inflation and the growth and wear of the road network. Recognizing the need for increased budgetary support, the Government in 1982/83 increased by more than 50 percent the level of funding for maintenance of main and secondary and roads improved under DRIMP. To provide a better basis for future allocations, it commissioned a comprehensive study of the medium-term road maintenance needs of the classified network of main and secondary roads and the technical, financial and manpower resources required to meet those needs. The IDA-financed consultant study recommended that budget allocations for improved routine and periodic maintenance be further increased, equipment availability improved and management of the Plant and Vehicle Hire Organization (PVHO) strengthened. The consultants also drew up a program for rehabilitation of around 660 km of paved roads and 1733 km of gravel and earth roads. Based on the consultant's findings, the Government and the Bank agreed on a slightly scaled down five-year maintenance program with the budgetary allocations for regular maintenance increased. During negotiations, agreement was reached on the maintenance allocations for FY84185. They will be increased by three percent in real terms to MK7.5 million. A general understanding was also reached that this allocation would be further increased by five percent in real terms in FY85/86 through FY87/88 (para. 33). 28. In the early 1970's the roads maintained by the District Councils were largely neglected. To provide a basis for establishing adequate road maintenance organizations in all of the country's 24 districts, a pilot DRIMP was begun in the Kasungu District in 1974 under the IDA-financed Second Highway Project. The scheme led to the successful establishment r;f an improvement and maintenance unit responsible for all maintenance operations in the district and its training of road staff and foremen; subsequently three other districts were added. Altogether, 1,100 km of district roads were improved to a minimum all-weather standard. Thus far, 2/ At the time of appraisal, the pump price of gasoline was US$.80 per liter and US$.79 per liter for diesell equivalent irport prices are US$.35 and US$.35, respectively. The normal duty on gasoline is US$.20 per liter on gasoline and on diesel, US$.17 per liter; in addition, in 1979 during a period of fuel shortage in Malawi, an added fuel levy of around US$.13 per liter was imposed on gasoline and diesel. This levy is still in force, although the supply of fuel is back to normal.  - 12 - DRIMP has demonstrated that labor-intensive construction techniques are cost-effective for low standard district and feeder roads. The fourth highway project is extending the program to nine more districts (another 2,400 km of roads) and the proposed project to the remaining eleven (1900 km). The MWS supervises maintenance operations in each district during the first three years and then turns the facilities and staff over to the Coulcils. The Government supplements the Councils' limited revenues to cover recurrent maintenance costs. IDA is assisting Government by financing, on a declining basis, the incremental portion of the recurrent maintenance costs during the project period. This assistance will continue under the proposed project. Previous Bank Group Involvement 29. The Bank Group's involvement in Malawi's highway subsector dates back to 1966 when credit S-2 MAL was made to help finance detailed engineering design of the Zomba-Lilongwe road (290 km). The first highway project (IDA credit 112-MAL: US$11.5 million), approved in 1968, provided for the construction of the Zomba-Lilongwe road and the financing of studies on road transport licensing and road/rail coordination. The Performance Audit Report on the project indicated that the objectives of the project were achieved. Although implementation of road construction fell one year behind schedule, the internal rate of return was conservatively re-evaluated at 13 percent, against 12 percent at appraisal, and traffic generation was 50 percent greater than projected. The second highway project (credit 523-MAL: US$10.0 million) of 1974 assisted construction of the Lilongwe - Kasungu road (113 km) and initiated the DRIMP pilot scheme. The main road component was completed behind schedule due to slow progress on construction by the contractor. Substantial cost savings were realized, however, on the construction component (cement stabilization proved unnecessary) and were used to finance the extension of the first phase of DRIMP into three other districts. The project achieved its institutional objectives of strengthening the Roads Department of the MWS. According to the Project Completion Report, the economic rate of return of the project is now estimated at 23 percent compared with 14 percent at appraisal. The third highway project financed (US$10.5 million credit 758-MAI of 1977)for the construction of the Kasungu-Jenda road (85 km) and a feasibility study and detailed engineering design of the Jenda-Mzuzu road. The Kasungu-Jenda road construction was completed in June 1980, six months behind schedule. Fuel shortages due to the transport problems in Mozambique hindered its completion. The Project Completion Report indicates that the physical components of the project were carried out satisfactorily. However, due to the general deterioration in Malawi's economy in recent years, the economic return of the project is now estimated at 8 percent compared with 14 percent at appraisal. With the increased traffic generated by linking Halawi to the Tazara corridor, the traffic flows and rate of return are expected to improve significantly. The fourth highway project (credit 1099-MAL, US$33.0 million) financed the: construction of the two-lane bituminous paved road between Jenda and Luwawa Turnoff (32 km), and Mbowe and Ekwendeni (37 km) and improvement of the  - 13 - existing road between Luwawa Turnoff and Mbowe (95 km) to a low gravel standard; the second phase of DRIMP; consulting services and training; provision of minor road maintenance equipment; and facilities in Lilongwe for training semi-skilled MWS personnel. The maintenance study is complete and implementation of all the other improvements is well underway. PART IV - THE PROJECT Background 30. The proposed project was prepared by the Malawi Government with the assistance of consultants and the Association/Bank. The project was identified in May 1981 and appraised in February/March and June/July 1983. A report entitled -Fifth Highway Project-Staff Appraisal Report-, No. 4603-MAI, dated November 14, 1983, is being distributed separately. Negotiations were held in Washington on October 27, 1983. The Malawi delegation was led by Mr. C.L. Mphande. Principal Secretary, in the Ministry of Finance. Annex III provides supplementary project data. The AfDB participated as observers to these negotiations. Project Objectives and Description 31. The proposed project would assist the Government in further achieving a balanced pattern of economic and social growth by: continuing to improve the maintenance of main and secondary roads and the district roads, thereby facilitating a more equitable distribution of income between rural and urban areas; promoting the general development of the economic potential of the northern half of the country by upgrading to paved standard an important section of the principal North-South road; and strengthening transport planning capacities of EPD and the MTC. It would also provide the technical assistance necessary to complete a transport systems study of the northern access route to the Indian Ocean. The project would assist the Government to reach these objectives by: (a) completing the third and last phase of DRIMP; (b) financing a four-year maintenance program for the main and secondary road networks; (c) constructing a two-lane bituminous road between the Luwava Turnoff and Champhoyo (50 km); (d) providing weighbridges and vehicles for axle load control; (e) financing furniture, training aids and equipment for the MWS's new training center in Lilongwe; and (f) providing consultant services and training.  - 14 - Detailed Features The Third Phase of DRIMP 32. The project would extend the first and second phases of DRIMP to the remaining 11 districts of the country. Selection of the roads for improvement and planning for maintenance units in these districts were carried out by consultants, Scott, Wilson, Kirkpatrick and Partners (UK). The project would provide for establishing and equipping of maintenance units in each district, including a depot, housing for key staff and staff training, and improvement of some 1,900 km of district roads. An extension of MWS headquarters to accommodate the new rural roads division would also be constructed. The work program for establishing the maintenance units and the roads to be improved for the first year agreed at negotiations. Agreement was also reached that for subsequent years, the Government, not later than four months before the beginning of each fiscal year, would furnish to the Association for its concurrence, the proposed work program for that fiscal year until completion of this maintenance component (Section 3.01(b) of the draft Development Credit Agreement). Th" third phase of DRIMP also would assist the Government in meetius Lne maintenance needs of the District Councils by financing on a declining basis the incremental costs for district road maintenance (para. 43). During negotiations, agreement was reached that the Government would make available to the District Councils, on a grant basis, the funds necessary to maintain the roads in the districts covered under DRIMP, to the extent the resources available to the Councils for this purpose from their own resources are not sufficient. The system of assistance and the overall levels needed throughout the project period were agreed with Government during negotiations. The Government would review with the Association, not later than four months before the beginning of each fiscal year, the specific amounts to be made available to the District Councils for this purpose during such year (Section 3.01(b) of the draft Development Credit Agreement). This represents a continuation of past practice under DRIMP's second phase when Government began supplementing the Council's revenues available for road maintenance. Maintenance of Main and Secondary Roads 33. The proposed project would finance the following high priority maintenance activities: Ci) equipment (including spares and workshop tools and equipment) for routine and periodic maintenance; (ii) single bituminous surface resealing of about 400 km of paved roads; (iii) rehabilitating about 70 km of paved roads; and (iv) rehabilitating/improving road formation and drainage on over 1,700 km of gravel and earth roads, spot regravelling about 1,200 km and full regravelling of around 430 km. Agreement has been reached on the rehabilitation program for FY84/85, namely that the MI road through Lilongwe (13.5 km) would be substantially completed before the end of March 1985 as would the M8, Chikwawa-Ngabu-M19 junction be one quarter complete by that date. Detailed engineering and tender documents have been completed for these sections. During  - 15 - negotiations, agreement was reached that the Government would make available to the MWS the funds necessary for maintaining the main and secondary roads, and no later than four months before the beginning of each fiscal year until the completion of the project, review with the Association the amounts to be made available during the fiscal year (Section 3-01(b) of the draft Development Credit Agreement). Road Construction Construction of the Main North-South Road 34. The proposed project would finance the construction to a paved standard of the 50 km Luwawa Turnoff to Champhoyo section of the main North-South road. Construction of this section would leave a gap of only some 45 km of unpaved road out of a distance of some 1,100 km between Bangula in the deep south to Karonga in the far north. The detailed engineering for this section was completed in July 1983. financed by a Project Preparation Facility advance. The linking of the Northern Region with the more developed Central and Southern Regions would help redress the regional inbalances by ensuring the timely availability of agricultural inputs and the regular collection of crops. Moreover, the exploitation of the Viphya forests which adjoin the road section to be paved under the project should lead to increased traffic levels in the late 1980's (para. 45). The Government has developed a wood industries project (sawmilling and manufacturing particle board) to utilize around 10 percent of the Viphya wood resources. The project (appraised in October/November 1983) will help meet Malawi's demand for timber, assist in developing the furniture making subsector and Einance prefeasibility studies to develop other projects (charcoal, turnpentine and small-scale paper) to utilize the balance of the Viphya forests. Axle Load Control 35. To improve and expand MTC's operation of the three existing permanent weigh bridges and to operate them on a 24 hour basis. the proposed project includes the construction of 6 staff houses, purchase of around 5 mobile weigh bridges, and about 5 pick-up vehicles for control patrols. The vehicles will be used to expand the enforcement of axle load limits and other vehicle regulations. MTC is presently training an adequate number of staff to carry out this enlarged enforcement program. Training Center at Lilongwe 36. The construction of a new training center in Lilougwe. including staff houses, classrooms, and dormitories, was financed under the fourth highways project. The proposed project provides for equipping and furnishing the center as well as supplying the needed teaching aides. The center is expected to begin training in 1984.  - 16 - Consulting Services and Training 37. The proposed project would include consulting services to: (a) assist MWS in preparing and carrying out the third and last phase of DRIMP (50 man-months); (b) design the rehabilitation works for paved roads in the second and subsequent years of the maintenance program and supervise the work carried out by contractors (78 man-months); (c) prepare and implement the expanded routine and periodic maintenance program and the force account works of resealing of paved roads and the rehabilitation of earth and gravel roads included in the maintenance program (220 man-months); (d) complete the design and supervise the road construction from Luwawa Turnoff to Champhoyo, (120 man-months); (e) prepare future transport projects including detailed engineering for the Champhoyo-Mbowe road (45 man-months); (f) strengthen further EPD's Transport Planning Unit's capacity including staff training (24 man-months); (g) complete the transport systems study of the proposed alternative route to the North including the TANZAM/TAZARA corridor to Dar-es-Salaam and the preliminary design of recommended infrastructure (50 man-months); and (h) strengthening of equipment fleet management (36 man-months) through improvements in management systems, financing, equipment maintenance and replacement within PVHO, and determination of those equipment services which might more economically be obtained from the private sector. The project would also provide assistance (25 man-months) to strengthen the capacity of the MTC's Planning Unit to monitor conditions on the existing import/export routes and to take appropriate action. The Government has already selected a consultant who was previously financed by UNDP and USAID. During negotiations, agreement was reached that: (a) the Government would consult the Association/Bank on the recommendations of the transport systems study before proceeding with the detailed engineering studies of the required infrastructure (Section 3.03 of the draft Development Credit Agreement); and (b) the selection of the consultants to provide technical assistance to MWS for the road maintenance component would be completed as a condition of effectiveness of the loan/credit (Section 6.01(c) of the draft Development Credit Agreement). Project Cost and Financing 38. The total project cost including taxes and duties and front end fee, is estimated at US$84.1 million of which US$52.3 million or 62 percent, would be foreign exchange costs (costs estimates based on October 1983 prices). An allowance of 10 percent for physical contingencies has been added to the base cost. Price contingencies for foreign exchange costs of 8 percent for 1983, 7.5 percent for 1984, 7 percent for 1985, and 6 percent thereafter have been included in the total costs, as have contingency allowances of 15 percent for 1983 and 1984, 14 percent for 1985, 13 percent for 1986 and 12 percent for 1987 for local cost escalation. Details of project costs are included in the Credit/Loan Project Summary.  - 17 - 39. The proposed IDA credit of SDR 12.4 million (US$13.1 million equivalent) and IDA special credit of SDR 13.1 million (US$13.8 million equivalent), and Bank loan of US$18.0 million, would finance around 57 percent of total project costs net of taxes and duties, including 73 percent of foreign exchange costs of US$38.1 million and 26 percent (US$6.8 million) of the local costs. The Bank loan would also finance the front-end fee. The African Development Bank (AfDB) would provide a parallel loan of US$16 million equivalent (15 million units of account) to finance road maintenance equipment and construction including consultant supervision of the Luwawa Turnoff-Champhoyo road. All conditions precedent to the signing of the AFDB loan will need to be fulfilled as a condition of effectiveness of the IDA credit (Section 6.01 of the draft Development Credit Agreement). The Government would provide the remaining 22 percent (US$17.6 million) of project costs, or 17 percent (US$13.8 million) if financial assistance can be secured for the last two years of the resealing program. During negotiations, agreement was reached that the Government would provide all additional funds necessary to complete the project or have identified alternative sources of financing of US$3.8 million for the last two years of the resealing program (Section 3.01(a) of the draft Development Credit Agreement). ODA is providing new equipment for the resealing units in 1983-84. It might finance the materials and operating expenses for the resealing program during the last two years. Procurement and Disbursement 40. MWS will be responsible for project execution apart from the components for axle load control and technical assistance to RTC's Planning Unit, for which MTC will be responsible, and the study of the northern access route and the technical assistance for transport planning for which EPD will be responsible. These agencies are fully capable of implementing their respective components. Road construction, costing some US$12.9 million (net of taxes and duties), will be tendered under unit price contracts awarded after international competitive bidding (ICB) in accordance with guidelines of AfDB. The rehabilitation work on paved roads, costing some US$11.9 million, will also be awarded under unit price contracts after ICB, in accordance with Bank Group guidelines. However, proceeds provided under the IDA Special Fund credit for this component may only be used to finance expenditures for goods produced in, or services supplied from, eligible Special Fund countries. 41. Contracts for construction of depots including housing for the third phase of DRIMP and extension of MWS headquarters (US$2.1 million), and housing for axle load control (US$0.1 million) due to their small sizes and widely dispersed locations, will be awarded on the basis of local competitive bidding satisfactory to the Association or by force account if the local contractors are unavailable. Resealing of some 400 km of paved roads (US$7.7 million) will be carried out by force account to provide a minimum capacity for resealing in MWS. The rehabilitation works on earth and gravel roads (US$11.7 million), because of their small size and scattered locations, would gnerally be suited for implementation by force  - 18 - account. However, the Government intends to create an opportunity for further developing the local construction industry and has grouped about 30 percent of the work into small packages suitable for local contractors. The remaining 70 percent of the program will be carried out by force account. Design and supervision of road construction and overlays for paved rehabilitation as well as technical assistance for the road maintenance program, the third phase of DRIMP, the northern access route systems study and the preparation of future projects will be carried out by consultants employed under terms and conditions acceptable to the Association in accordance with Bank guidelines (Section 3.02 of the draft Development Credit Agreement). Approximately 650 man-months of consultant services estimated to cost US$6.4 million are required at an average cost of about US$10,000 per month for salaries, international travel and subsistence. They also include about 50 man-months for overseas training and fellowships at an average cost of around US$2,000. 42. Tools, furniture and other diverse minor items for the Lilongwe Training Center (US$0.2 million) and for axle load control (US$0.3 million) will be procured through local shopping. To maintain standardization and interchangeability of equipment and spare parts, road maintenance equipment for the new district maintenance units under the third phase of DRIMP (US$1.l million including some US$0.2 million for equipment to strengthen the existing improvement units) would be obtained either from manufacturers supplying such items to the previous phases of DRIMP, by extending existing contracts if still in effect at the time of Credit/Loan signing, or by local shopping. Other maintenance equipment, including spares, for main and secondary roads as well as for rehabilitation of gravel and earth roads (about US$6.3 million) will be procured following international competitive bidding in accordance with Bank Group guidelines and AfDB guidelines. All documentation for equipment procurement under international competitive bidding financed by the Bank Group would be subject to review prior to issuance of tenders. Bidding packages for civil works estimated to cost US$500,000 or more (that is about 50 percent of the total Bank Group-financed civil works to be procured under competitive bidding) would be subject to the Bank Group's prior review of bidding documents. The bidding packages estimated to cost less than US$500,000 equivalent and all other contract documentation will not be routinely reviewed but MWS will maintain copies of bid evaluations and final contracts which will be subject to spot review by Bank Grour supervision missions. 43. Proceeds from the proposed credit would be disbursed on the following basis: (i) 90 percent of expenditures on civil works under the third phase of DRIMP for district road improvements and depots, housing and MWS headquarters extension; (ii) 80 percent of total expenditures for civil works for main and secondary roads in the rehabilitation program for paved roads and for earth and gravel roads; (iii) 90 percent of expenditures on civil works for housing for the axle load control; (iv) 100 percent of foreign expenditures and 90 percent of local expenditures for equipment, vehicles and spare parts; (v) 100 percent of foreign expenditures and 90 percent of local expenditures for weighbridges and associated equipment,  - 19 - and imported items to be provided for the Lilongwe training center; (vi) 90 percent of total expenditure for locally produced items to be provided for the Lilongwe training centre; (vii) 100 percent of foreign expenditures and 50 percent of local expenditures for consultants services; and (viii) for incremental maintenance expenditures on district roads for each district being brought into the maintenance program subsequent to completion of road improvements: 75 percent of incremental costs during the first year of maintenance: 50 percent during the second year of maintenance; and 25 percent during the third year. The declining IDA financing of the incremental cost of maintenance would be matched to government's financial assistance to the District Councils. The AfDB loan would finance 80 percent of total expenditures for the construction of the Luwawa Turnoff-Champhoyo road, 90 percent of of total expenditures on consulting services for construction supervision,and 100 percent of foreign and 90 percent of local expenditures for maintenance equipment (vehicles and graders) including spare parts. All Bank/IDA disbursements will be fully documented except for expenditure under force account for certain civil works which will be made against statements of expenditure, to be issued by the technical assistance consultants. A schedule of estimated disbursements is provided in the Credit/Loan and Project Summary. Project Accounts and Reports 44. Separate accounts for the project would be maintained by MWS for each component. During negotiations, agreement would be reached that these accounts would be audited by the Auditor General or other independent auditors acceptable to the Association and the audit report furnished to the Association not later than six months after the end of the fiscal year (Section 4.01(c) of the draft Development Credit Agreement). Agreement would also be reached that the Government would monitor progress of the project and not later than six months after the closing date, would prepare and submit to the Association, a full report evaluating the project (Section 3.04(d) of the draft Development Credit Agreement). During negotiations, the specific progress reporting requirements will be discussed and agreed.  - 20 - Benefits and Risks 45. The proposed project would yield considerable benefit to the Malawi economy. District roads to be improved under the project have economic rates of return of at least 12 percent. The road maintenance component of the project will have an economic return of 62 percent. It is expected that the savings in vehicle operating costs and time will be passed on as lower freight rates to the shippers and receivers of freight. Extension of DRIMP to the remaining districts will enable rural people throughout Malawi to benefit from improved access to markets, supplies and public services. Paving of the 50 km section of the North-South road between Luwawa Turnoff and Champhoyo will yield an ERR of 12 percent for domestic traffic only including a modest growth in transport attributable to the wood products industry. Since the justification of constructing the Luwawa Turnoff-Champhoyo section would be enhanced by the transport of export/import traffic over the road using the port of Dar-es-Salaam, the economic analysis considers the economic impact of building not only this section but also the adjacent section between Champhoyo and Mbowe and the linkage between Karonga and Ibanda in the North, which would be required for export/import traffic to move on the international route. Based on this analysis, construction of the 50 km Luwawa Turnoff and Champhoyo road would yield an ERR of 29 percent. 46. The principal concern associated with the road construction component is that the international route via Karonga and Dar-es-Salaam may not become available for Malawi's international traffic. However, since good progress has been made by Malawi and Tanzania in agreeing on an action program for development of the route, it is unlikely this route will not b: established. Its development is quite consistent with the objectives of the Southern Africa Development Coordination Conference of which both Malawi and Tanzania are members. It is unlikely that the transport problems in Mozambique will be solved quickly. The deterioration of facilities on both the Beira and Nacala rail lines are so severe that, even with ample financing, several years would be required after political stability is achieved to resume satisfactory operations. Overall, it appears prudent for Malawi to undertake the proposed investments in the new international route to avoid potentially heavy economic penalties in the years ahead; completion of this link may be seen as an investment in insurance against the contingency of continued disruption of the Mozambique route. In any case, the additional work on the North-South route will enhance regional integration in Malawi. 47. A risk for both DRIMP III and the maintenance program is the possibility that Government's financial resources for maintenance of both the national and district road networks may be inadequate. To minimize this risk, agreement was reached on government financing of maintenance costs (paras. 32 and 33). The Bank will help cushion the burden on Government by financing incremental maintenance costs for DRIMP on a declining basis.  - 21 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 48. The draft Development Credit Agreement between the Republic of Malawi and tle Association, the Special Fund Credit Agreement between the Republic of Nalawi and the Association as Administrator of the Special Fund, and the draft Loan Agreement between the Republic of Malawi and the Bank, as well as the Recommendation and Report of the committees provided for in Article V, Section 1 {d) of the Articles of Agreement of the Association and in Article III, Section 4 (iii) of the Articles of Agreement of the Bank are being distributed separately. 49. Special conditions of the project are listed in Section III of Annex III. All conditions precedent to effectiveness of the AfDB loan agreement and the selection by Malawi of consultants to provide technical assistance to MWS for the road maintenance component would be conditions of effectiveness of the Development Credit Agreement (Section 3.03 and 6.01 of the draft Development Credit Agreement). 50. I am satisfied that the proposed credit and proposed loan comply with the Articles of the Association and the Bank and the proposed Special Fund Credit complies with Resolution No. IDA 82-6 of the Association. 51. I recommend that the Executive Directors approve the proposed IDA Credit, proposed IDA Special Credit and Loan. A.W. Clausen President Attachments By Ernest Stern Washington, D.C. November 14, 1983  BEST COPY AVAILABLE ANNE I -22 - Page I of 6 r x B L E 3J rALAUI - SOCIAL ISOLCATORS DATA TA E MALAaI REPEBESX GRUPS (hELUilTD AVERAES) la nDslb C(sr fAbEC ESMtAEE) /b - 19bf!t O..' 511 ;AFRICA S. OF SAAitA AFRICA S_ OF SAELABA ADJUSTED LXRDWtEST MAnXS PRDtAAT: TOTAL 35.> b62.u b3.9 97_2 .MIALE- 45._0 *3.0 7j_0 103.1 FLMVALL . Zb_U 5L_u 5u._ S