Malagasy Republic - Second Highway Project

RESTRICTED Report No. P-645 FILE C0PY 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A BANK LOAN AND A DEVELOPMENT CREDIT TO THE MALAGASY REPUBLIC FOR A SECOND HIGHWAY PROJECT October 16, 1968  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT I NTERN;IZtrl N.. DBV1ELQP.IENT' .P,SOCI ATI ON REPORT AND RECO12-IEENDATIONS OF THE PRESIDENT ON A PROPOSED lOAN AND A PROPOSED CREDIT TO TIE NtALAGASY REPUBLIC 1. I submlt the folloi.ing report and reconmendations on a proposed operation consisting of a Bank loan, in an amTount in various currencies equivalent to $3.5 million, and an IDA credit, in an amount in various currencies equivalent to $L,5 million to the I.alagasy Republic to assist in financing a second highway project. PART I - BISTORICAL 2. The proposed operation would be the fourth operation of the Bank group in l4adagascar. In 1966, IDA made a $10.0 million credit tor the financing of a highway project consisting of the reconstruction of one section of road. In 1967, the Bank made a $L.8 million loan for education and early in 1963 made a technical assistance grant for a port study. A $2.8 million Bank loan for the financing of a livestock project is expected to be negotiated in the near future. The following is a sum.rary of the Bank loans and IDA credits as of September 30, 1968: Loan or Credit Year Borrower Purpose Arount (US $ million) 1:mber B_ank IDA Undisbursed 90MAG 1966 Malagasy Republic Road Project 10.0 8.8 51OMAG 1967 Malagasy Republic Education 4.8 b.6 L.8 10.0 Total (less cancellations) of which has been repaid to Bank and others Total now outstanding 4.8 A1mount sold : of which has been repaid - Total now held by Bank and 4-8 10.0 Total undisbursed h.6 8.8 13.4  - 2 - 3. In 1966 and 1967 the I;alagasy governient submitted various appli- cations to IDA for the financing of construction of several roads and bridges and of highway engineering and feasibility studies. NIissions fror the Bank's Perv,^anent '-iission in East Africa identified a project which later was a-praised by an IDA mission in February 1968. The project consisted of the construction of road. sections and bridges and of studies. Its estirmated cost was $13.0 million of which i.t was proposed that ID A would finance $9.0 million. Ilowever, due to the delays in the replenishment of IDA's resources, it was eventually proposed that the project be financed either with a $9.0 IDA credit subject to replerisBTent or writh a $L.5 million Bank loan and $b.5 million IDA credit immediately available. The alternative proposal was discussed with the delegation, headed by the IWinister of Equipment and Communications, which represented the goverrment at the negotiations held in September 1968. It was finally agreed (i) to delete the studies from the project and to have them financed by other sources and (ii) to finance the project wifth a $4.5 million credit and a $3.5 million loan. PART II - DESCRIPTION OF PROPOSED FINANCING L8. Bank Loan Borrower: The Malagasy Republic Amount: Equivalent, in vari.us currencies, to $3.5 million. Dtrpose: To help finance the construction of two road sections and three bridges together with the related super- visory engineering services. Arnortization: 30 years, including a 10 year period of grace, through semi-annual instalments beginning October 15, 1978 and ending October 1.5, 1998 Interest rate: 6-1/2% per annum Commitment charge:3/4 of 1% per amnum Econor,ic Rate of return : Between 8 and 16 percent for different parts of the project.  -3- 5. IDA credit Borrower: The Malagasy Republic Amount: Equivalent, in various currencies, to $b.5 million. Purpose: To help finance the construction of two road sec- tions and three bridges together with the related supervisory engineering services. Amortization: Over a period of 50 years, includin- 10 years of grace, beginning October 15, 1973 and ending April 15, 2018; each instalment up to and including the payment due on April 15, 1988, to be 1/2 percent, thereafter to be 1-1/2 percent of the principal amount. Service charge: 3/4 of 1% per annum. Economic rate Between 8 and 16 percent, for different parts of of return : the project. PART III - THE PROJECT 6. A report on the project, entitled "Second Highway Project - Malagasy Republic" (TO-667a) is attached. 7. The proposed project would consist of the construction and bituminous pavement of the Fanjakomandroso-Tsiromandidy road (55 km) in the Middle-West and Ambilobe-Ambanja road (9lKm) in the North-West, and of the construction of three major bridges. The total cost of the project is estimated at the equivalent of $11.5 million, with a foreign exchange component equivalent to $8.0 million which would be financed with the proposed Bank loan and IDA credit. Construction of the project would be carried out over a period of three years (1969-1971). Awarding of construction contracts would be on the basis of international competitive bidding and the use of engineering consultants for the supervision of the construction works would be under terms and conditions satisfactory to Bank/IDA. 8. Because of the large size of Madagascar, its rugged topography and its small, unevenly distributed population, the build-up of a road network adequate to the requirements of economic development has been a major problem for the government since independance. '. hi;-h level of investmre.nt has there- tore been concentrated on infrastructur6, but until twJo or three vears ~Guo rost of t1he projects were for the irproverent of trunk roads and wTere primarily based on non-econolic considerations. No consideration was paic to projects  which would have been a threat to the monopoly of the railway system. A new policy has now been worked out under a Program of Major Onerations according to which more emrhasis is to be placed on the development of -roductive sectors and more consideration is to be Daid to economic criteria in the implementation of transportation projects. The proposed project would follow the lines of this policy and would make a significant contri- bution to the modernization of the Malagasy road network as well as to the development of the agricultural sector. The construction of the Fanjakanandroso- Tsiromandidy road section would considerably irprove the connections between the capital city, Tananarive, and the most important cattle rarket of Tsiromandidy and the surrounding area where the Bank has been requested to finance a beef cattle development project. The Ambilobe-Ambanja road section serves an important agricultural aren for various export crops; it is also part of the future trunk road which is to link the nothern regions of Madagascar to Tananarive. One of the three bridges to be constructed under the project would be located at the southern end of this road section. The other two wiould be located on the eastern coast and would improve the con- nections between the port of Tamatave and its hinterland. 9. The rates of return of the construction works under the proposed project vary from 8 to 16 percent. PART IV - LEGAL INSTRWUENTS AtD AUTHORITY 10. Drafts are being distributed to the Executive Directors separately of: (i) the Loan Agreement between the Bank and the N`;alagasy Republic; (ii) the Development Credit Agreement between the Association and the Mlalagasy Republic. 11. The Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank and the recomnendations of the Comrittee provided foi in Article V, Section 1 (d) of the Articles of A3greement of the Association are also being distributed separately. 12. The followTing feature of the Loan Agreement is of particular interest: Section 2.03 (a) of the Loan Agreement provides that no withdrawal shall be made on account of exoenditures for the Project until the amount of the Credit shall be fully withdrawn or committed. Otherwise, the draft Loan and Credit Agreements conform generally to the pattern of agreements for similar highway projects. PART V - THE ECONQTMY 13. A report on "The Economy of the iIalagasy Republic" dated September 10, 1968 (No. AF-83) is being circulated to the Ececutive Directors separately. 1h. Madagascar is the third largest island in the world. Population dis- tribution is very uneven and the average density is low. Agriculture is the main sector of economic activity (about 1/3 of GDP) and exports are mostly agricultural, the main ones being coffee, rice, vanilla, sugar and meat  products. Industry (11% of GDP) is limited to a few plants producing some of the mass consumntion products and there are no major mineral resources. The internal transport system is an irs,nediment to economic development as connections between the various regions of the country are generally difficult. 15. The economic growth of the Malagasy Republic has been fairly slow and incomes per capita have been stationary in the recent years because of the slow growth of exports, the low rate of public investment concentrated in infrastructure and the disappointing development performance of the -priv!ate sector due to the small internal market. However, the government is seeking to give a new impetus to the economy by substantially increasing the amount of public investment. A Program of Major Operations has been prepared covering a number of large projects, most of which could start about 1970. Particular emphasis is to be placed on the development of agriculture, and, within this sector, on livestock development which, so far, has been neglected. 16. Due to the probable decline in grant aid, most of additional resources for investment would have to come from a higher level of foreign borrowing and from higher public savings. The present t% debt service ratio is quite modest and would permit borrowing on conventional terms. However, due to the country's poverty (GDP per inhabitant is $100) and the poor export prospects for the next five years, such borrowing should be limited and should be on terms including reasonably long grace periods. Most of the necessary external borrowing should therefore be on non-conventional terms. PART VI - CO14PLIANCE WETH ARTICLES OF AGREEIENT 17. I am satisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and the A3sociation.  PART VII - RECOMMENDATIONS 18. I recommend that the Executive Directors adopt the following reso- lutions: RESOLUTION No - Approval of a Loan to the Malagasy Republic in an amount equivalent to US $ 3,500,000. RESOLVED: THAT the Bank shall grant a loan to the V5alagasy Republic in an amount in various currencies equivalent to three million five hundred thousand dollars (US $3,500,000), to mature on and prior to October 15, 1998 to bear interest at the rate of six and a half nercent (6-1/2%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Second Highway Project) between the Malagasy Republic and the Bank, which has been presented to this meeting. RESOLUTION No Aoproval of a Development Credit to the Malagasy Republic in an amount equivalent to US $4,500,000. RESOLVED: THAT the Association shall grant a development credit to the Malagasy Republic in an amount in various currencies equivalent to four million five thousand dollars (US $L,500,000), to mature on and prior to April 15, 2018, to bear a service charge at the rate of three-fourths of one percent (3/b of 1%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Developnent Credit Agreement (Second Highway Project) betwieen the Malagasy Republic and the Association, which has been presented to this meeting. Robert S. McNamara President Attachment