Colombia - Atlantic Railroad Equipment Project

R E S T R I C T E D R e p o r t N o. P-23 FILE COPY This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO FERROCARRILES NACIONALES DE COLOMBIA August 31, 1960  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO FERROCARRILES NACIONALES DE COLOIBIA 1. I submit the following report and recommendations on a proposed loan of an amount in various currencies equivalent to $5.h million to Ferrocarriles Nacionales de Colombia (Colombian National Railroads, CNR) to finance the foreign exchange cost of railroad equipment for use on the Atlantic Railroad. PART I: HISTORICAL 2. The Bank has made two loans totalling $40.9 million for the con- struction of a railroad between Puerto Salgar and Fundacion, and the rehabilitation of the existing line between Fundacion and the Caribbean port of Santa Marta. These connecting lines are known as the Atlantic Railroad. The first loan (68-CO), amounting to $25 million, was made to the Colombian Government in 1952 and the second loan (119-CO), amounting to $15.9 million, was made to CNR in June 1955. 3. In April 1960, the CNR requested the Bank to make a loan to fin- ance the foreign exchange cost of a five-year program for the complete dieselization of the entire CNR system. Pointing out that it would be premature to proceed with a project of this magnitude before completion of accounting studies now under way, the Bank offered instead to con- sider financing, as an interim project, motive power and rolling stock needed for operations on the Atlantic Railroad, which is expected to be opened for through traffic early in 1961. 4. Formal negotiations began in Washington on August 1, 1960. The Colombian Government was represented by Dr. Carlos Sanz de Santamaria, Colombian Ambassador, and Dr. Ignacio Mesa-Salazar, Minister Counsellor of the Colombian Embassy, and the borrower by Dr. Luciano Elejalde, Financial Sub-Manager of CNR. 5. The proposed loan would increase the Bankts lending in Colombia from $173.2 million to $178.6 million net of cancellations. The Bank has already made the following loans to Colombia: Amount of Loan net of Year Purpose Cancellations 1949 Agricultural Machinery Project $ 4,925,h41 1950 Anchicaya Hydroelectric Project 3,530,000 1950 La Insula Hydroelectric Project 2,600,000  -2 Amount of Loan net of Year Purpose Cancellations 1951 Highway Project $ 16,500,000 1951 Lebrija Hydroelectric Project 2,400,000 1952 National Railroads Project 25,000,000 1953 Supplementary Highway Project 14, 350,000 1954 Second Agricultural Machinery Project 5,000,000 1955 Anchicaya and Yumbo Power Project 4,500o,000 1955 Railroad Extension Project 1-,900,000 1956 Plan Vial I Project 16,500,000 1958 Yumbo Extension Power Project 2,800,000 1959 La Esmeralda Power Project 4, 600,000 1959 Guadalupe Hydroelectric Project 12,000,000 1960 Bogota Power Project 17,600,000 1960 Yumbo III - Calima I Power Project 25,ooo,ooo Total (net of cancellations) $173,205, h41 of which has been repaid 37,321,,441 Total now outstanding $135,884s000A Amount Sold $ 8,722,800 of which has been repaid 7,092,800 1,630,000 Net amount now held by Baik $134,254,000 A Includes $35.7 mil'ion not yet disbursed and $2h.3 million of loans not yet effective (net of sales). 6. At present the Bank is considering three other projects in Colombia: the rehabilitation and expansion of the steel plant of Acer- ias Paz del Rio; the expansion of the power installations of the Empresas Publicas de Medellin; and highway construction and maintenance. Loans for one or more of these projects may be made within the next six months. PART II: DESCRIPTION OF THE PROPOSED LOAN 7. Borrower: Ferrocarriles Nacionales de Colombia. Guarantor: Republic of Colombia.  - 3 - Amount: The equivalent, in various currencies, of $5,hoo,000. Purpose: To finance the foreign exchange cost of locomotives, rolling stock and shop equip- ment needed for operation of the Atlantic Railroad. Amortization: 28 semi-annual installments from May 1, 1962 to November 1, 1975. Interest Rate: 5 3/4% per annum. Commitment Charge: 3A4% per annum. Payment Dates: May 1 and November 1. PART III: LEGAL INSTRUMENTS AND LEGAL AUTHORITY 8. A draft Loan Agreement between the Bank and CNR (No. 1) and a draft Guarantee Agreement between the Republic of Colombia and the Bank (No. 2) are attached. 9. The Guarantee Agreement is in the usual form. 10. The Loan Agreement follows the usual form of Bank loan agreements with railroad enterprises. Under a separate agreement the Railroad is permitted, until December 31, 1961, to sell immovable properties, not used for carrying out its business, provided the net proceeds are used for capital expenditures or prepayment of long-term debt. I1. The report of the Committee provided for in Article 3, Section 4 (iii) of the Articles of Agreement of the Bank is attached (No. 3). 12. Execution of the Loan Agreement is being authorized by the Board of Directors of CNR. The Colombian Government has authority under Law 123 of 1959 to guarantee the proposed loan. PART IV: APPRAISAL OF THE PROPOSED LOAN Justification of the Project: 13. A detailed appraisal of the project (Report No. TO-252) is at- tached (No. 4). 14. The Atlantic Railroad is expected to be ready for commercial operation early in 1961. It will interconnect the western railroad systems (Medellin, Cali and the Pacific port of Buenaventura) and the central system (Bogota), and provide a direct rail link between the central region of Colombia and the Caribbean. By providing year-round transportation to a region hitherto dependent entirely upon river nav-  igation, which was inoperative for large parts of the year, the Atlantic Railroad is also stimulating development of the entire Magdalena Valley which, until construction of the railroad began, was principally virgin jungle. 15. The project will provide essential equipment needed for operating the Atlantic Railroad which is expected to become the principal source of earnings of the CNR in coming years. The proposed loan will provide interim assistance since, in order to complete the rehabilitation of its existing properties, the CNR will need to purchase additional equipment. It will be necessary, however, to complete a comprehensive survey of accounting, statistical and operating procedures before it will be pos- sible to make the necessary evaluation of the financial position and operating efficiency of the National Railroads and to appraise adequately the requirements for new equipment and the steps needed to improve the Railroads' financial position. Borrower: 16. The Ferrocarriles Nacionales de Colombia is an autonomous entity of which all capital stock is owned by the Government. Its five-man Board of Directors consist of the Niinister of Public Works, Chairman, with the other members appointed by the President of the Republic from lists submitted by groups representing trade and industry. CNR is managed by a General Manager appointed by the Board. 17. Available data indicate that although CNR's financial results have steadily improved since 1956, it is still operating at a loss. The vol- ume of traffic handled in recent years has increased substantially notwithstanding considerable improvernent in Colombia's highwav network and rapid development of bus and truck traffic. Further improvement in Cm's financial position is expected to result from the increase in tariffs which recently became effective and which the CNR expects will increase freight revenue by 30%. Arrangements for Financing: 18. The total cost of the project is estimated at $6.0 million equiv- alent. The foreign exchange requirements, equivalent to $5.4 million, would be covered by the proposed loan. 19. Funds to cover the local currency cost of the project (Colombian Pesos 4.4 million) will be provided by the Government. The Government is paying all of the peso costs of the construction of the Atlantic Rail- road, the amounts being credited to a Government capital account in the balance sheet of CNR. CNR has a contingent liability against its net earnings to repay these amounts, but these repayments are not due until after Loans 68-co and 119-CO have been fully amortized. Currently the Government is servicing both of these loans, the amounts paid for in- terest and principal also being credited to the Government capital ac- count.  -5- Procurement: 20. The CNR, with the assistance of its consultants, will procure the equipment on the basis of international competitive bidding. Economic Situation: 21. Colombia is continuing its policies of stabilization and reducing its external debt which were described in the report "Current Economic Position and Prospects of Colombia" (R 60-43, April 13, 1960). During the first half of this year, money supply showed a slight decline. Prices continued to increase but at a slower rate than last year. The Vovernment budget may again show a small surplus in 1960, but commercial bank credit is expected to increase as a result of changes in reserve requirements and a reduction in advance import deposits required. The increase in real output amounted to 5% in 1959, but in the first half of 1960 it was re- duced somewhat. 22. This year, largely because of an increase in payments for imports, gold and foreign exchange reserves are expected to decline somewhat below the December 1959 level of $224 million. In July 1960 reserves stood at $206 million. Earnings from coffee exports are expected to be about the same as last year but import registrations are running ahead of last year by about 15%. Last May the rate of exchange applicable to imports was moved from 6.40 to 6.70 pesos per dollar, and the rate of exchange for coffee and most other exports from 6.10 to 6.50 pesos per dollar. 23. Colombia's external debt on January 1, 1960 amounted to $404 mil- lion, of which $171 million are medium-term balance-of-payments credits. Most of the balance-of-payments credits are scheduled to be repaid over the next four to five years, and service payments on existing debt, which this year amount to $72 million, or approximately 12% of foreign exchange earnings, are scheduled to fall rapidly, declining to $52 million in 1964 and $26 million in 1966. Prospects of Fulfillment of Obligations: 24. The project has been planned and is being supervised by experi- enced consultants and should be efficiently executed. 25. Operation of the Atlantic Railroad will considerably increase the earning power of CNR. An accounting and statistical survey now under way should clarify the further steps which are needed to improve the financial position of CNR. In a letter attached as No. 5, CNR agrees to pursue tariff and operating policies necessary to strengthen its financial posi- tion. 26. The service of the loan, together with Colombia's other foreign exchange obligations, should not impose an undue burden on the Colombian economy.  - 6 - PART V: COMPLIANCE WITH ARTICLES OF AGREEMENT 27. I am satisfied that the proposed loan would comply with the Art- icles of Agreement of the Bank. PART VI: RECOMIENDATIONS 28. I recommend that the Bank make a loan to the Ferrocarriles Nacionales de Colombia with the guarantee of the Republic of Colombia in an amount, in various currencies, equivalent to $5cU million for a term of 15 years with interest (including commission) at 5 3/h% per an- num and on such other terms as are specified in the attached draft Loan and Guarantee Agreements, and the Executive Directors adopt a resolution to that effect in the form attached (No. 6). Washington, D.C. W.A.B. Iliff, Vice President August 31, 1960 for Eugene R. Black President