Nicaragua - Rivas Irrigation Project

FILE COPY RESTRICTED Report No. P - 31 1 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF NICARAGUA February 21, 1963  REPORT AND REC0U1MMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC CF INICARAGUA 1. I submit herewith the following report and recommendations on a proposed loan in an amount in various currencies equivalent to U.S.$2.6 million to the Republic of Nicaragua for the Rivas Irrigation Project. PART I - HISTORICAL 2. The Project, consisting of the irrigation of 9,000 ha. of land on the western shore of Lake Nicaragua, was first submitted to the Bank in 1958i. At that time it was not ready for financing because of lack of soil and cadastral surveys and lack of a legislative and administrative basis. 3. These shortcomings have since been corrected. Extensive surveys have been carried out, the feasibility of the Project has been properly established and plans have been drawn for an autonomous agency (the Empresa de Riego de Rivas, hermafter called Empresa) to operate this Project which will be the first public irrigation project in the country. In these steps the Government was assisted by an FAO expert, a consultant on irrigation law and Bnmk staff. 4. After a definitive appraisal by the Bank in May 1962 the Project was found ready for Bank financing. In September 1962 negotiations were held with the Government, represe;.eie by Mr. Alfredo Sacasa, llanager of the Instituto de Fomento Nacional, on the terms of a loan of U.S.,$2.6 million, subject to approval by the Board. Presentation of the proposed Loan to the Executive Directors was postponed pending the receipt of definite assurance that a majority of the farmers,who own land within the Project area,were pre- pared to particiDate in the Project and that their holdings would represent more tihan half of the Project area. This assurance has now been received. In January 1963, the law establishing the Empresa became effective. 4. If the proposed $2.6 million loan is approved, it would be the twelfth Bank loan in Nicaragua. It would increase the amount lent by the Bank to that country to about 138.1 million, net of cancellations. The loans made previously are;  -2- Amount Year of (in $ million Loan Borrower Purpose equivalents) 1951 Republic of Nicaragua Highway construction 3.50 1951 National Bank of Nic. Agriculture develop. 1.20 1951 Republic of Nicaragua Grain storage facil. 0.55 1953 Republic of Nicaragua Highway construction 3.50 1953 Republic of Nicaragua Elec. power develop. 0.45 1955 National Power Co. Elec. power develop. 7.10 1955 National Devel. Inst. Agricultural develop. 1.50 1955 National Devel. Inst. Elec. power devel. 0.40 1956 Corinto Port Authority Port construction 3.20 1956 National Power Co. Elec. power develop. 1.60 1960 National Power Co. Elec. power develop. 12.50 Total net of cancellations 35.50 of which has been repaid 12.00 Total now outstanding 23.50 Amount sold $1.90 of which has been repaid 1.80 .10 Net amount held by Bank 23J8O 1/ IDA has made a $3 million credit for the Managua Water Supply which is not yet effective. 1/ Includes 110.3 million out of the 1960 Loan to National Power Co. not yet di3bursed as of January 31, 1963. PART II - DESCRIPTION OF THE PROPOSED LOAN 5. The proposed Loan would have the following characteristics: Borrower! Republic of Nicaragua Amount: $2.6 million equivalent Amortization: By semi-annual payments commencing March 15, 1967 to retire the entire loan by March 15, 1988. Interest Rate: 5-L/2% per annum, including 1% commission. Commitment Charge: 3/4 of 1% per annum Purpose: To finance the foreign exchange cost of (a) development of irrigation in an area of about 9,0C0 hec-tares in-the-Department ofRivas; (b) related conatruction of about 65 km of 69 KV power transmission lines; and (c) improve- ment of existing roads and construction of new roads in the Project area, totalling about 90 km.  PART III - APPRAISAL OF THE PROPOSED LOAN Justification of the Project 6. A detailed appraisal of the Project (TO Report No. 276b) is attached (No. 1). 7. The main objective of the Project is to irrigate 9,000 ha. of land near the city of Rivas, utilizing water to be pumped from Lake Nicaragua. Climate, soils and topography make this area highly suitable for irrigated agriculture. The land which will be irrigated under the Project is owned by about 300 farmers; over two-thirds of irrigated land is in farms of less than 200 ha. 8. The Project area is at present being used mainly for grazing. Net increase in value of production upon completion of the Project is estimated at about cordobas 11 million ($1.8 million), and the annual net farm benefit would be about 23% of the proposed investment in the Project. Some $2 million worth of bananas, sesame and sugar will be exported from the Project area annually, representing an increase of 2.5% of Nicaragua's present export earnings. The farmers using the water will bear the total cost of the in- vestment as well as future operational costs. Organization and Management 9. The irrigation part of the Project would be constructed by the Empresa. It will be assisted by a consultant acceptable to the Bank, on terms and conditions satisfactory to the Bank. The Project will be operated by the ETpresa, which, in addition, will operate a demonstration and training farm and provide technical assistance to individual farmers. 10. The power transmission lines would be constructed, owned and operated by the Empresa Nacional de Luz y Fuerza (ENALUF). Power required for the pumps would be supplied by ENALUF largely from the Rio Tuma hydropower plant, a project also financed by the Bank. 11. The improvement of the access to farms in the Project area and the construction of new roads would be carried out by the Highway Department of the YMinisterio de Fomento y Obras Publicas. 12. Contracts for the construction of the intake and conveyance canals and the pump stations would be awarded on the basis of international competitive bidding. Construction of the distribution canals and laterals would be undertaken mostly by hand labor under a contract on a unit price basis with the Highway Department. On-farm distribution works would be designed and carried out by the Empresa with such assistance as each farmer could provide. Farmers would be charged with the cost of the Empresa's work on their indi- vidual farms. Land leveling would be undertaken directly by farmers with the assistance of the Empresa.  -h - Arrangements for Financing 13. Of the proposed Loan of $2.6 million, about $2.45 million would be relent by the Borrower to the Empresa and ENALUF on terms similar to those of the Bank Loan. The balance of $0.15 million would be used by the Govern- ment for the construction of feeder roads. The local currency cost of the irrigation works, about cordobas 14 million ($2.0 million) would be financed by a government loan to the Empresa on similar terms. ENALUF would be responsible for the local currency cost associated with the construction of the transmission line of cordobas 1 million ($0.14 million). The local costs for the construction and improvement of feeder roads and the establishment of the experimental and demonstration farm of cordobas 1.8 million ($0.28 million) would be met by government appropriation. The Banco Nacional de N4icaragua and the Instituto de Fomento Nacional would extend credit to farmers of the Project area on reasonable terms. Econonic Position 14. A report "The Current Economic Position and Prospects of Nicaragua" ( R621 - 72 ) was distributed on August 16, 1962. 150 Agriculture is the mainstay of the Nicaraguan economy, which obtains over half its export earnings from coffee and cotton. During the early 1950's, rising coffee prices and a large expansion in the production of cotton supported a rapid rate of economic growth. Exports increased from about $35 million in 1950 to $80 million in 1955, while the real Gross Domestic Product rose by 9.5% a year. After 1955, falling prices for coffee and cotton broughtan end to the period of prosperity, the growth of output slowed and per capita income declined slightly. 16. To correct these adverse trends, the Niicaraguan authorities from 1955 took steps towards a greater diversification of theeconomy. New infrastruc- ture investr,nts were made in highways and a new port, and in the expansion of electrical power capacity. In addition, the National Development In- stitute played an important role in laying the bases for today's cattle industry, for the development of new crops and the establishment of light industries. These efforts were supported by private investment, both domestic and foreign. 17. These investments brought about a rise in exports of meat, soluble coffee, and copper concentrates. New export products such as these, together with a higher volume of cotton exports, have raised the value of exports to the $84 million reached in 1962. This is an all-time peak for Nicaragua. The upward trend in exports should continue at a moderate pace during the next few years. 18. Growing exports in the last two years and the accompanying rise in imports also improved the Government's fiscal position, which is heavily dependent on import taxes. The improvement should enable the Government to  devote more domestic resources to the financing of high-priority development projects, thus helping to make more effective use of the external assistance being sought for development purposes. Prospects of Fulfillment of Obligations 19. The Empresa, although a new organization, should be able, with the assistance of consultants, to carry out the construction of the Project and should gain sufficient experience during this period to operate the Project as it is gradually completed. ENALUF is an experienced organization well- known to the Bank and should have no difficulty building the power lines and supplying the Project with power. The same applies to the Highway Department for its contribution to the Project. 20. Nicaragua's external public debt repayable in foreign currencies totalled $44.5 million as of September 8, 1962. Service on this debt reaches a pealk of S5.6 million in 1963, equivalent to about 5.3% of expected gross foreign exchange earnings in 1963. The fact that the Project is self- liquidating and the fact that it will provide additional foreign exchange for the country, should make it relatively easy for the Government to service the proposed Loan. The service of Nicaragua's foreign exchange obligations, including the service of the proposed Loan, does not impose an undue burden on the economy. PART IV - LEGAL INSTRUIENTS AND LEGAL AUTHORITY 21. Attached are drafts of: (a) Loan Agreement between the Bank and the Republic of Nicaragua (No. 2); (b) report of the Committee provided for in Article III, Section (iii) of the Articles of Agreement of the Bank (No. 3). 22. The Loan Agreement conforms generally to the pattern of loan agreements for projects of this nature. The following provisions may be of special interest: Section 5.01(c) stipulating that the Borrower shall make available or cause to be made available to farmers in the Project area credit on reasonable terms as needed to enable them to develop their farms under irrigation; Section s.o8 stipulating that the Borrower shall supply or make arrangements for the supply of electric power as and when required for the Project upon terms and conditions satisfactory to the Bank;  - 6 - Section 7.01 which establishes, as additional conditions of effective- ness, the appointment of a Board and Presidente-Gerente of the Empresa, the beginning of operations by the Empresa, the appointment of a Consultant and satisfactory arrangements for the financing of local currency costs of the Project. PART VI - COMPLIANCE WITH ARTICLES OF AGREEiXENT 23. I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank. PART VII - RECOvI@MENDATIONS 24. I recommend that the Bank make a loan to the Republic of Nicaragua in an amount in various currencies equivalent to $2.6 million with interest (inc.lding commission) at 5-1/2%per annum and on such other terms as are specified in the attached draft Loan Agreement, and that the Executive Directors adopt a Resolution to that effect in the form attached (No.4). George D. Woods .Jashington, D.C. February 21, 1963 -