Ecuador - Education Project

RESTRICTED FILE COA Y Report No. P-60 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF ECUADOR FOR AN EDUCATION PROJECT June 5, 1968  INTERNATIONAL DEVELOP1,2NT ASSOCIATION REPORT AND RECOI,MENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOP}1ENT CREDIT TO THE REPUBLIC OF ECUADOR FOR AN EDUCATION PROJECT 1. I submit herewith the following report and recommendation on a proposed credit in an amount in various currencies equivalent to $5. 1 million to the Republic of Ecuador. PART I - HISTORICAL 2. In October 1966, a UNESCO project identification mission, under the Bank/UNESCO cooperative program, collaborated with the Ecuadorian authorities in establishing priority educational needs. In July/August 1967, a Bank/UNESCO project preparation mission assisted Ecuador in +the elabora- tion of a project to expand and improve secondary education facilities. The request was submitted to IDA in August 1967 and the project was ap- praised in October 1967. Negotiations for the proposed credit took place in Washington on April 22 through April 26, 1968. The Government was represented by Ambassador Carlos M4antilla Ortega, Mr. Raul Paez (Technical Director of the Planning Board), Dr. Nelson Leon (Director, Ministry of Education), Mr. Jose Calero Viteri (Ministry of Education), Mr. Voltaire Torres (Ministry of Education) and Dr. Gonzalo Paredes (Embassy of Ecuador). 3. Since 1954, the Bank and IDA have made seven loans and one credit to Ecuador for a total of $66 million (net of cancellation). The proposed credit will increase the total Bank/IDA lending to Ecuador to $71.1 million. The following is a summary statement of Bank loans and IDA credits to Ecuador as of April 30, 1968:  -2- Loan/ Amount (US$ Million) Credit No. Year Borrower Purpose Bank IDA Undisbursed 94 EC 1954 Comite Ejecutivo de Vialidad del Guayas Roads 7.5 - - 137 EC 1956 Empresa Electrica Quito Power 5.0 - - 177 EC 1957 Empresa Electrica Quito Power 5.0 - - 176 EC 1957 Republic of Ecuador Roads 14.5 - - 212 EC 1958 Port Authority of Guayaquil Port 13.0 - - 379 EC 1964 Republic of Ecuador ) 9.0 - 2.9 ) Roads 51 EC 1964 Republic of Ecuador ) - 8.0 7.3 501 EC 1967 Republic of Ecuador Agri- culture 4.0 - 3.9 Total (less cancellations) 58.0 8.0 of which has been repaid to Bank and others 17.6 Total now outstanding 40.4 Amount sold: 1.5 of which has been repaid 0.9 0.6 Total now held by Bank and IDA 39.8 8.0 x Total undisbursed 6.8 7.3 14.1 4. IFC has one investment, made in 1965, of approximately $2 million equivalent in equity and debt of La Internacional, a major Ecuadorian textile firm. 5. A fisheries development loan of $5.2 million is expected to be submitted to the Executive Directors shortly.  PART II - DESCRIPTION OF THE PROPOSED CREIDIT 6. Borrower: Republic of Ecuador. Amount: The equivalent in various currencies of $5.1 million. Purpose: To assist in financing the canstruction, furnishing and equipment of 28 secondary schools and a technical assistance component to assure efficient operation of the project schools. Amortization: 50 years including 10 years period of grace, in semi-annual installments beginning August 1, 1978 and ending in February 1, 2018. Service Charge: 3/4 of 1 percent per annum on the principal amount of the Credit withdrawn and outstanding. PART III - THE PROJECT 7. A report entitled "Appraisal of an Education Project in Ecuador" (TO-624a) on the proposed project is attached. 8. The proposed project is part of a ten-year educational develop- ment plan initiated by the Government in 1964 which seeks to modernize the education and training system, particularly in regard to agricultural, technical and teacher education. 9. The project comprises construction, furnishing and equipment of 28 secondary schools and a technical assistance component to assure efficient operation of the project schools. The construction consists of: (a) extensions to four agricultural schools; (b) one new technical school and extensions to three others; (c) four new primary teacher-training schools and extension to one existing school; (d) eight new first cycle general secondary schools and extension to one existing school; and (e) three new schools offering both first and second cycle general secondary education; and also extensions to three existing schools of this type.  - 4 - 10. The major impact of the project is in increasing and improving the output of agricultural, technical and teacher-training schools. The 13 project schools of these types will provide 53 percent of the required additional needs in these fields. On the other hand, the 15 general secondary schools in the project account for only 7 percent of the estimated total annual output of secondary level graduates with an academic-oriented education. 11. In order to execute the project, a project unit would be estab- lished within the Ministry of Education. It would be headed by a project director and assisted by a project architect or engineer, an educator and an accountant. The Government would employ local architectural firm(s) to undertake the design and supervision of the construction work. Procurement of equipment, furniture and construction works will be made on the basis of international competitive bidding. 12. The estimated cost of the project is $10.2 million, of which 38 percent is for construction of teaching accommodation, 28 percent for furniture and equipment, 5 percent for dormitories, 5 percent for site development, 5 percent for project unit costs and professional fees, 3 percent for technical assistance, 1 percent for staff housing and 15 percent for contingencies. The foreign exchange component is estimated at $4.5 million or 44 percent of the estimated total cost of the project. I would consider it appropriate for the Association to finance one half of the cost of the project, leaving it to the Government to provide the other half and the necessary funds for the operation of the schools. The Association will finance about $0.6 million for local cost expenditures. This modest amount of local cost financing seems appropriate in the cir- cumstances of Ecuador. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 13. The Draft Development Credit Agreement between the Association and the Republic of Ecuador and the Recommendation of the Committee provided for in Article V, Section l(d), of the Articles of Agreement are being distributed to the Executive Directors separately. 14. The proposed Development Credit Agreement is in the form generally used for education projects, and there are no special features to this agreement. PART V - THE ECONOMY 15. Ecuador has a population of 5.5 million, with an income per head of $205, placing it among the poorer countries of the Western Hemisphere. Agriculture is the largest sector of the economy, accounting for 34 percent of gross domestic product. Manufacturing expanded rapidly during the 1960's in response to the official policy of incentives for industrial develop- ment and import substitution, and accounts at present for 17.5 percent of GDP. The rate of growth of GDP averaged 4.5 percent during the past decade.  Since population was growing at the rate of 3.3 percent a year, the rise in per capita income was little over 1 percent a year. Growth has been achieved within a framework of monetary stability, price increases averaging less than 3 percent per year during that period. 16. Ecuador's recent economic experience and prospects are analyzed in a report "Current Economic Position and Prospects of Ecuador" (WIH-181a) dated June 4, 1968, prepared by a mission which visited Ecuador earlier this year. The mission held discussions with the present administration which, following elections in June 1968, will be replaced next September by a new administration with a four-year term of office. The main conclusion of the report is that, given political stability there are good prospects for continued adequate performance in the next few years, although the balance of payments and fiscal outlook point to the need to adopt additional measures in the pursuit of objectives given priority by the authorities. The report identifies these measures as basically consisting in a prompt unification of the present dual exchange rate system and a containment of the rate of growth of the public sector's current expenditures. The former is needed to provide greater incentives to diversification of exports, at present heavily concentrated on a single commodity, bananas, with uncertain world market prospects. The latter is necessary in order to generate sufficient domestic resources for an expanded public investment program without any significant increase in the overall ratio of taxation, which, at 16.5 percent of GDP, is already relatively high. 17. External debt management has been good, and debt service payments in 1967 amounted to 5.5 percent of exports of goods and services. Ecuador has been receiving substantial amounts of external assistance on soft terms, and even with the additional borrowing that needs to be undertaken over the next few years, the debt service ratio should not rise above 8 percent by 1970. Ecuador can therefore be considered creditworthy for ad- ditional external lending. 18. However, over the longer run the country faces a difficult problem of export diversification. Noreover, per capita income is relatively low, and a long and sustained effort will be needed to raise the standard of living of the mass of the population to more adequate levels. These consi- derations justify Ecuador continuing to receive some external assistance on concessional terms. PART VI - COO'LIANCE IWITH ARTICLES OF AGREEMENT 19. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.  PART VII - RECOMMENDATION 20. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. IDA, Approval of a Development Credit to the Republic of Ecuador in an amount equivalent to US$5,100,000. RESOLVED: THAT the Association shall grant a development credit to the Republic of Ecuador in an amount in various currencies equivalent to five million one hundred thousand United States dollars (US$5,100,000) to mature on and prior to February 1, 2018, to bear a service charge at the rate of three-fourths of one percent (3/4 of 1d) 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 the Development Credit Agree- ment (Education Project) between the Republic of Ecuador and the Association, which has been presented to this meeting. Robert S. McNamara President Attachment Washington, D.C. June 5, 1968