Malawi - Highway Project

RESTRICTED FILE COPY Report No. P-58 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 The report may not be published nor may it be quoted as representing their views.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 PRES IDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF MALAWI FOR A HIGHWAY PROJECT January 22, 1968  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF MALAWTI FOR A HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed highway credit in an amount in various currencies equivalent to US $11.5 million to the Republic of Malawi. PART I - HISTORICAL 2. In February 1965, the Government applied for an IDA Credit to help finance the improvement of the country's principal north-south road between Lilongwe, a major agricultural center in the Central Region of Malawi, and Zomba, the national capital in the Southern Region. Assist- ance was requested also for the reconstruction of the primary road west from Lilongwe to the Zambian border. The application was based on a 1964 transport survey financed by USAID and on the feasibility studies carried out by the Ministry of Works and Supplies. 3. In response to this application, IDA extended, in October 1966, a US $490,000 equivalent highway engineering Credit (S2-MAI; Report TO-533a dated September 6, 1966) to help finance the detailed engineering by consultants of the Zomba-Lilongwe road (180 miles) and the review by the consultants of the design of the Lilongwe-Zambia border road (78 miles) which is being carried out by the Malawi Roads Department. 4. An MA project appraisal mission visited Malawi in April 1967, when detailed engineering of the Zomba-Lilongwe road by the consultants had been virtually completed. The proposed project which resulted there- from covers the Zomba-Lilongwe road only. The Lilongwe-Zambian border road has not been included at this stage, since detailed engineering is not complete and the preliminary cost estimates by the consultants con- firmed the Association's initial doubts as to the economic justification of improving this road at this time. 5. Formal negotiations took place in Washington in October 1967. The borrower was represented by The Honorable John Tembo, Minister of Finance, Mr. K. J. Barnes, Secretary to the Treasury, Mr. G. Richards, Commissioner of Works, and other representatives from the Treasury and the Ministry of Development and Planning. 6. Previous IDA lending in Malawi consisted of (i) the US $490,000 equivalent highway engineering credit (S2-MAI) mentioned above, of which $169,000 was undisbursed as of December 31, 1967; unpaid expenditures under the engineering credit will be disbursed against the proposed high- way credit; and (ii) a US $6.3 million equivalent credit for an education  project (102-H'AI signed May 4, 1967) which is in the design stage and for which disbursements are not scheduled until later this year. 7. I am submitting simultaneously separate proposals for a US $6 million equivalent credit to help finance the Lilongwe Agricultural Development Project, and a US $3.7 million equivalent credit for the Shire Valley Agricultural Development Project. No further credit proposals are expected to be submitted to the Executive Directors in the near future; a power project might be next in line, possibly in the second half of 1968. 8. There have been no IFC investments in Malawi. PART II - DESCRIPTION OF THE PROPOSED CREDIT 9. Borrower: The Republic of Malawi Purpose: To help finance (a) the reconstruction and bituminous paving of the 180 miles Zomba-Lilongwe highway; (b) the engin- eering supervision thereof; (c) a study of Malawi's road transport regulations and road-rail coordination; and (d) the refunding of'the highway engineering credit (S2-MAI) of October 4, 1966. Amount: Various currencies equivalent to US $11.5 million (including $490,000 for the refunding of Credit S2-MAI). Amortization: 50 years, including a 10-year period of grace, in semi-annual installments, beginning on April 1, 1978 and ending on October 1, 2017. Service Charge: 3/4 of 1% per annum. PART III - THE PROJECT 10. A report on the proposed project,entitled "Appraisal of a Highway Project - Malawi" (TO-599a of January 12, 1968), is attached. 11. Malawi's internal transport system consists of about 6,200 miles of roads, 290 miles of rail, water transport on Lake Malawi, and a network of light aircraft services. Malawi's sole practicable outlet to the sea is by rail south to Beira (Mozambique) on the Indian Ocean  - 3 - 355 miles from Blantyre-Limbe. Less than 300 miles of roads are paved, most of them only to single lane, and some 400 miles are gravel surfaced. The rest of the network consists of earth roads and tracks. Past deve- lopment of Malawi's road system principally followed the requirement of connecting population and production centers by a network of low- standard, low-cost primary roads. Only a few roads have properly designed alignments and pavement. The system is unbalanced in favor of primary trunk roads as compared with lower-class rural roads. Improvement of the primary road system is required and is overdue in some specific cases, such as sections of the proposed project road. Lower-class roads of minimum standard are also required throughout the established agricultural areas of the country, now served only by a limited mileage of tracks. 12. The main item in the project is the reconstruction and bitumi- nous paving of Malawi's most important road, between Zomba and Lilongwe. Except for a small section near Zomba which has a single lane of bitumi- nous paving, the road is either gravel surfaced or earth road. Under the proposed project, it will be reconstructed to higher standards, in- cluding two-lane bituminous paving. In view of the heavy traffic demand, the proposed improvement of the road is of high priority. Construction will be by contract awarded on the basis of international competitive bidding. Supervision of construction will be performed by consultants. 13. Consulting services for a study of road licensing regulations have been included in the proposed project to promote better competit- ion, and thereby decrease road transport costs. To a certain extent, road carrier licensing is, at present, assisting to protect the high- cost operations of certain sections of the state-owned Malawi Railways system. The consultants study will, therefore, also consider economic coordination between road and rail transport. 14. The refunding of the US $490,000 equivalent engineering credit S2-MAI is proposed in accordance with the Association's policies for the financing of detailed engineering. Credit S2-MAI has provided the detailed designs and cost estimates on which the present construction project is based. 15. The cost of the project is estimated at about US $13.7 million equivalent, including the refunding of Credit S2-MAI. The estimate in- cludes an additional contingency provision which allows for cost variations as a possible result of the recent devaluation of the I4alawi pound. The foreign exchange component of construction is estimated at $9.1 million or 73 percent. The proposed credit of US $11.5 million equivalent would cover 84 percent of the currently estimated total construction cost and the foreign exchange component of the consultants' services (excluding the refunding). In view of Malawi's extreme poverty, its exceptionally heavy dependence upon external resources to finance development, the generally satisfactory efforts the Government is making in managing its resources, I believe that IDA would be justified in financing the proposed proportion of total cost. 16. Completion of the proposed project is expected by the end of 1970. Bids received for two road sections have led to the award by the  - 4 - Government, on November 30, 1967, of a contract to a joint venture of a local and foreign firm. To postpone the award,which has been made on the basis of international competitive bidding in accordance with the Association's procurement requirements, would have resulted in a delay of project implementation by one year because of climatic conditions. Therefore, provision has been made in the Draft Credit Agreement to reimburse Government for project expenditures after December 1, 1967. Bids for the remaining two road sections have also been received and awards are likely to be made soon. 17. The directly quantifiable benefits from the improvement of the Zomba-Lilongwe road would be the reduced cost of vehicle operation and, on a smaller scale, savings in road maintenance costs. Based on projec- tions for normal traffic, that is, making no allowance for an increase in traffic due to extraordinary transit shipments from Zambia, these benefits would yield an annual economic rate of return of about 12% on the investment. This is judged satisfactory, and there would be other benefits which cannot be readily expressed in monetary terms, such as time savings and greater transport reliability for both passengers and freight. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 18. The draft Development Credit Agreement between the Association and the Republic of Malawi and the Report of the Committee, provided for in Article V, Section l(d) of the Articles of Agreement, are being dis- tributed to the Executive Directors separately. 19. A provision is made in the draft Development Credit Agreement regarding the refunding of the Highway Engineering Credit (Section 2.03(a)). Apart from the refunding provision, the draft Development Credit Agreement follows the general pattern of other agreements used for highway projects. PART V - THE ECONOMY 20. A report entitled, "Current Economic Position and Prospects of Malawi" (No. AF-68a), was distributed to the Executive Directors on November 22, 1967. Since its Independence in 1964, Malawi's performance in expanding output and investment has been impressive. After a stagnant period in the early 1960's, there has been a very substantial increase in production over the past three years, and fixed investment reached a peak of 17 % of GDP in 1966 as compared with 10% in 1964. However, despite the recent growth in per capita income, the level still remains among the lowest in the world at around $55 per head in 1967. 21. Moreover, public savings are still negative, and overall savings quite low. Prior to Independence, the Government's deficit on current account was met by the former Central African Federation, and, since then, by the United Kingdom. Malawi has made substantial progress in reducing this deficit, largely through increasing revenues. The  - 5 - Government has been able to mobilize a modest amount of local resources for development purposes from the surplus of enterprises and local borrowings. However, over the past two years, there has been a substantial use of foreign assets. In 1966, this was principally due to extensive borrowings from the banking system for development purposes, while in 1967, the main problem was losses incurred by the Farmers M4arketing Board, as the result of unexpected price declines and weaknesses in quality control. As a result of their experience in 1966-67, the Malawi authorities have now taken acticn to contain local borrowings, and to improve their marketing arrangements. Moreover, the decision to devalue the Malawi pound in November 1967, which was taken primarily in order to maintain the level of British financial aid in Malawi currency, will also substantially improve the savings position of the Marketing Board. As a result of these actions, Malawi's performance in public finance should show a substantial improve- ment in 1968. 22. Malawi's main potential for growth lies in agriculture,where the volume of commercial output has grown by about 6 percent annually over the past decade, with a marked acceleration in recent years. There are also reasonable prospects for development of manufacturing and transit trade. The public sector development program for 1968-70 places heavy emphasis on increasing agricultural production and improving communications. While actual expenditures are not likely to reach the ambitious targets set in the Government's tentative plans, a substantial increase does seem likely over past levels, with a probable average of around