Uganda - Second Highway Project

RESTRICTED Report No. P-741 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF UGANDA FOR A SECOND ROAD PROJECT September 11, 1969  INTERNATIONAL DEVELOPTDENT ASSOCIATION REPORT AND RECOMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOP1MENT CREDIT TO THE REPUBLIC OF UGANDA FOR A SECOND ROAD PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to US $11.6 million to the Republic of Uganda. PART I - HISTORICAL 2. Arising from the detailed engineering of more than 700 km. of roads for which financing was provided in the credit of $5.0 million for the first road project (Credit 108-UG) signed on July 28, 1967, Uganda requested the Association to help finance a further project to extend and develop the road system in Uganda. Financing was also sought for technical assistance to strengthen Uganda's Iiinistry of Works, Connnunications and Housing (MOW). A preappraisal mission from the Bank's Permanent Office ln East Africa visited Uganda in June 1968, which raised some important technical nroblems concerning the design standards proposed for the roads. These were resolved after further discussions with 110W and their consultants. The present aporaisal report was prepared after an updating appraisal mission visited Uganda in February 1969. 3. Forrmial negotiations took place in Washington in July. The Uganda delegation was led by the Honorable S.K. Nkutu, Minister of Works, Communications and Housing (IMOW) and included Plessrs. J.M.N. Zikusoka, Engineer-in-Chief, MOW; A. Ocaya, Commissioner for Economic Affairs, Ministry of Finance; A.Z. Hitimana, Chief Accountant, Treasury; S. Kisoro, Chief Technical Officer, Uganda Tea Growers Corporation; and W. Nyakabwa, Senior State Attorney. 4. This is the second road project proposed for IDA financing in Uganda and would be the fifth IDA credit to Uganda. Before independence, Uganda received a Bank loan of $8.4 million for power development which was guaranteed by the United Kingdom. The following is a sunnmary statement of the Bank loan and IDA credits to Uganda as of August 31, 1969.  -2- Amount (US $ million) No. Year Borro-wer Purpose Bank IDA Undisbursed 279-UG 1961 Uganda P Pojer 8. - 101-UG 1967 Uganda Education 10.0 7.1 108-UG 1967 Uganda Roads 5.0 4.1 109-UG 1967 Uganda Tea 3.h 2.2 130-UG 1968 Uganda Ranch Development 3.0 2.5 Total 8.4 of which has been repaid to the Bank and others 1.8 Total now outstanding 6 h Amount sold: 8.3 of which has been repaid 1.8 6.5 Total now held by Bank and IDA 0.1 21.7 Total undisbursed - 15.9 15.9 1/ Guaranteed by the United Kingdom 5. Disbursement of the Education credit (101-UG) has been slow because of some changes in designs of school buildings. Construction work has now gathered momentum and this is beginning to be reflected in disbursements. Wlith regard to the smallholder tea credit (109-UG), delays were encountered in the organisational phase, resulting in slow disbursements. These early difficulties have now been largely overcome and the rate of disbursements is improving. In the existing road credit (108-UG), disbursements have been very slow mainly because of staff shortages in the I-Iinistry of Works (HIOWI) which led to delays in project supervision and execution. The Mlinistry of Works is now concentrating on this project and with the technical assistance now being proposed to strengthen the HOW, the pace of disbursements will be speeded up. 6. In addition to the above loan and credits, the Bank has made four loans for Comnon Services in East Africa, one for railways and harbors, one for railwiays only, one for harbors only and one for telecommunications. All four loans are guaranteed jointly and severally by Kenya, Tanzania and Uganda with the United Kingdom also being guarantor for the first loan for railways and harbors. The following is a summary statement of these loans as of August 31, 1969.  -3- Amount (US $ million) No. Year Borrower Purpose Bank Undisbursed 110-EA 1955 East African Railways Railways 24.0 - Corporation 1/ 3/ 428-EA 1966 East African Railways Railways 32.4 3.9 Corporation 2/ 4/ 1966 East African Harbours Harbors 5.6 2.5 Corporation 2/ 4/ 483-EA 1967 East African Posts & Telecommunications 13.0 5.6 Telecommunications Corporation 2/ 4/ 638-EA 1969 East African Harbour Corporation V/ 5/ Harbors 35.0 35.0 Total (less cancellations) 110.0 of which has been repaid to the Bank and others 14.8 Total now outstanding 95.2 Amount sold: 23.3 of which has been repaid 14.7 9.1 Total now held by Bank -6.1 Total undisbursed 47.0 47.0 1/ Loan made originally to East Africa High Commission. 2/ Loan made original-ly to East African Common Services Authority 3/ Guaranteed jointly and severally by the United Kingdom, Kenya, Tanzania and Uganda. 4/ Guaranteed jointly and severally by Kenya, Tanzania and Uganda. 5/ Loan 638-EA was signed on August 25, 1969. 7. IFC has made one investment in Uganda in IIulco Textiles Limited in 1964. The investment totalled US $3.51 million equivalent of which $2.80 million was loan and $0.64 was equity with $70,000 as a standby commitment. As of August 31, 1969 $3.4 million had been disbursed. 8. An agricultural credit project initially for the development of tobacco cultivation has just been appraised in the field. Applications are also expected from Uganda in the near future for further projects concerning expansion of education and development of smallholder cultivation of tea.  9. Two other Community projects for Railways and Telecommunications are being processed for possible Bank lending and are expected to be pre- sented to the Executive Directors during the currentfiscal year. PART II - DESCRIPTION OF PROPOSED CREDIT 10. BORROIER: The Republic of Uganda AIOU1JT: US $11.6 million equivalent in various currencies. PURPOSE: To help finance the further development of the primary, secondary and agricultural roads system in Uganda. MAIiORTIZATION: In 50 years, including a ten-year period of grace through semi-annual installments of half of one percent from Mlarch 15, 1980 through September 15, 1989, and one and a half percent from Narch 15, 1990 through September 15, 2019. SERVICE CHARGE: 3/4 of 1' per annurn. ESTIiATED ECON1OMIC From 13 percent to 32 percent on individual PLETURN: roads. PART III - THE PROJECT 1'. An appraisal report entitled "Appraisal of a Second Highway Project - Uganda", No. PTR-26a dated August 25, 1969, is attached. The project consists of (i) the construction and reconstruction of (a) three primary roads totalling about 167 Im (b) three secondary roads totalling about 111 km (c) two feeder roads totalling about 57 km, and (d) three tea roads totalling about 330 kmi; (ii) consultants services for (a) the supervision of road construction under (i)(a) to (d) above; (b) a road investment and maintenance study; (c) detailed engineering of about 400 km. of primary, secondary and feeder roads; and  - 5 - (iii) technical assistance for staffing and training requirements of the MOE. 12. The roads to be constructed under this project have been engineered by consultants as part of the earlier road project financed by IDA credit 108-UG in 1967. The present project is a logical extension of IDA lending for road development in Uganda and is consistent with the aims of the Uganda Government to continue the expansion and upgrading of the country's road system to meet the needs of growing traffic and to facilitate agricul- tural development. 13. The estimated total cost of the project is $'16.6 million. The proposed credit of $11.6 million would cover the foreign exchange costs which are estimated at 70 percent of total costs. The estimates for the actual road construction and reconstruction which account for the major portion of the total cost are based on detailed engineering and are con- sidered reliable. 14. The road investment and maintenance study included in the project is mainly intended to eliminate the shortcomings in present planning and to identify investment priorities and the maintenance requirements of Uganda's roads system. The technical assistance scheme also included in the proposed project is intended to enable the :IOW to handle the increasing burden of planning, construction and maintenance work and to train Ugandans who can eventually take over executive positions. 15. Execution of the project will be the overall responsibility of the MOW, assisted by qualified consultants employed on terms and conditions satisfactory to the Association. Contracts for the construction works would be let on the basis of international bidding and the issuing of tenders will be staggered in order to avoid overloading the capacity of the HOW and of the contracting industry. .lthough the progress of the existing road project has not been as rapid as originally envisaged, the capacity of the MNW should improve substantially given the better planning and technical assistance provided for in the present project. PART IV - LEGAL IIJSTRUIEDITS AND AUTHORITY 16. The draft Development Credit Agreement between the Republic of Uganda and the Association, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Associa- tion and the text of a draft Resolution approving the proposed Credit are being distributed to the Executive Directors separately. 17. The draft Development Credit Agreement contains provisions normally used for other road projects of the Association.  - 6 - PART V - THE ECONOM1Y 18. An economic report entitled "Current Economic Position and Prospects of Uganda" (No. AE-2 dated June 9, 1969) was distributed to the Executive Directors under covering memorandum R69-1h5 of June 21x, 1969. This report also served as the basic documentation for the second meeting on Uganda of the Consultative Group for East Aifrica, held in Paris at the end of July this year. 19. The growth of Uganda's economy, which amounted to 5 percent a year during the period 1961-65, has since slmoed down to about 3 percent. Among the factors responsible for this are adverse weather, the decline in cotton output resulting from reduced acreage which, in turn, was the consequence of a much needed dowmnward adjustment of producer prices which the Government introduced in 1966, and delays in the preparation and execution of projects. It is expected, however, that the growJth rate will be significantly higher in 1969, owing to a recovery in cotton output and higher outputs of other cash crops and of the manufacturing and service sectors. 20. The management of Uganda's public finances has undergone a marked improvement since the inception of the Second Five-Year Plan in July 1966. Recurrent revenue has risen steadily as a result of new taxes and greater efficiency in tax collection. Although recurrent expenditure has also risen, a serious attempt has been made to curtail its grownth and sizeable recurrent surpluses have been achieved in recent years. In quest of further improvement, an Economy Cormmission is being appointed to review governmental expenditures and recommend methods of economizing particularly on those of a non-essential nature. The Government's domestic borrowing has been very successful. During the first two years of the Plan, domestic resources financed about 65 percent of the total development expenditure. 21. Although Uganda has been able to generate domestic resources on an increasing scale to finance investment, it appears likely that maintaining this trend will become more difficult, since the growth of government revenues will probably be somewhat lower in the iimnediate future. At the same time, recurrent expenditures will continue to rise, particularly as a resu'lt of the investment which has taken place during the past few years. Hence recurrent budget surpluses are likely to be lower and, despite the possibility of higher domestic borrowing, it may become more difficult to find resources for in-vestment; at the same time the capacity to under- take investment should increase as the Government's ability to prepare and execute projects improves. Consequently, Uganda's needs for external financial assistance are likely to increase.  - 7 - 22. At the end of 1968, Uganda's public debt (including, on a notional one-third basis, its liability for the debt of the East African Community organizations) amounted to $215.5 million. Estimated interest and amortization payments on the debt were $19.0 million. Debt service payments absorbed 7.7 percent of the estimated foreign exchange earnings amounting to $2h8.0 million. A fifteen-year projection of Uganda's debt service, which is included in the recent economic report, indicates that the debt service is quite sensitive both to the terms of lending and to variations in the growth of exports. In order to prevent an undesirable rise in the debt burden in the long run, the provision of a good proportion of aid on soft terms is justified. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 23. I am satisfied that the proposed credit will comply with the Articles of Agreement of the Association. PART VII - RECOM1IENDATION 2h. I recommend that the Executive Directors approve the proposed credit. Robert S. McNarara President Attachment September 11, 1969  UGANDA BASIC DATA Area: 91,076 sq. miles (land area 74,712 sq. miles) Population (1968): 8.13 million Rate of growth: 2.7% p.a. Population density (per sq. mile of land area): 109 Political status: Independent since October 9, 1962 Member of Commonwealth Gross National Product (1967): Sh 6,350 million ($890 million)-l GNP per capita (1967): Sh 800 ($112) Gross Domestic Product at current factor cost (1967): Sh 6,079 million ($850 million) Of which Monetary Product: Sh 4,539 million Non-monetary product: Sh 1,540 million Annual rate of growth (Constant 1964 prices): 1967 1962-67 Total GDP ?26 4-6 Monetary 2.5 4.8 Percent of total GDP (1967) 100 Agriculture, including crop processing 58 Industry 11 Transport and commerce 17 Other sectors 14 Percent of Monetary GNP at market prices: 1967 1962-67 Gross fixed capital formation 16.6 14.1 Gross national savings 15.2 15.2 Balance of payments current account -1.4 1.1 Net factor income payments 2.8 2.4 Government current revenue (fiscal years) 20.2 20.3 1/ Uganda's national income accounts are currently being revised; Sh 6,350 million is the mission'sestimate of the probable revised figure.  >.f.oney and credit Relationship to large monetary or customs area: iierober of East African C cnunity and the Sterling area. Since July 1968 associated with the European Economic Community. June 30, 1968 Rate of Chanige p.a. Sh million 1962-1967 Bank notes in circulation 335 Commercial bank deposits 820 +16% Demand 4h3 +10% Time and Saving 377 +26% Commercial bank credits 756 +12% Cost of living index + 3.2% 1967/68 Rate of Change p.a. Public sector operations (Sh million) 1962/63-1967/68 Central Government: Current revenue 973 +11.7% Current expenditure 870 + 9.5% Current surplus 103 Capital expenditure 273 +26.o% December 31 Average External public debt (US$ million) 1968 1962-67 Total debt outstanding 215.5 175.9 Uganda debt 1/ 148.6 108.4 One-third of EACSO debt- 66.9 67.5 1968 Total annual debt service 18.9 9.9 Uganda debt 8.1 5.4 One-third of EACSO debt 10.8 4.5 Debt service ratio, percent 7.7 4.9 Rate of Change p.a. Balance of payments (Sh million) 1968 1962-67 Merchandise exports 1,h87 +10.6 Merchandise imports 1,315 +11.8 Net invisibles 181 Of which net factor income payments -119 Balance on current account -9 Average 196B 1962-67 C-mmodity concentrat.ion of exports 65 A (^offee and cott',v,  fln>ic Eata (Continued) Aipril 30 1969 Gross foreign exchange reserves Sh million 350 Months' imports 3 IMF position (US$ million) Average 196h-68 Quota 32 29 Drawings _ External financial assistance (in thousands of US$) Average 1962-1967 1968 Commitments Disbursements Commitments Disbursements Total 17,985 10,344 8,112 8,391 Soft assistanceY/ 10,o87 6,29,112 7,032 Hard assistance 7,098 4,055 _ 1,359 Major donors IBRD/IDA 3,C67 816 3,000 1,336 Germany 1,689 864 - 2,033 U.K. 9,432 7,702 - 3,635 U.S.A. 1,075 854 4),950 1,180 U.S.S.R. 2,722 108 - 207 1/ Soft assistance is defined to include: (1) loans repayable in foreign currency with a maturity over 20 years and an interest rate not exceeding 3%, and (2) loans repayable in local currency.