Argentina - Second Highway Project

RESTRICTED Report No. P-722 FILE COPY 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARGENTINE REPUBLIC FOR A SECOND ROAD PROJECT June 9, 1969  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEV1LOPNENT REPORT AND RECOIISTDATION OF THE PRESIDINT TO THE EXECUTIVE DIRE.CTORS ON A PROPOSED LOAN TO THE ARGENTINE REPUBLIC FOR A SECOND ROAD PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$25 million to The Argentine Republic for a second road project. PART I - HISTORICAL 2. On June 30, 1961, the Bank made a loan of $48.5 million for the construction and reconstruction of about 2,600 km of roads and the purchase of road maintenance equipment. The loan was made at a time when the Bank, acting as Executing Agency for the UN Special Fund, was supervising a long range study of transport in Argentina. 3. The execution of the 1961 road project was slow. Of the original amount, $16.5 million was cancelled in July 1965 and $1 million in August 1968, and the closing date was postponed several times. Beginning in 1965, steps were taken to improve the administration of the project. In recent years, performance by the National Highway Authority (Vialidad Nacional) has been satisfactory and the project, reduced in scope to about 1,900 km, was completed at the end of 1968. 4. In the spring of 1968, the Government asked the Bank to review the problems and requirements of the Argentine transport sector and, as a first step, consider financing some sections of national routes 3 and 7. After preliminary discussions, the Bank in September sent a mission to Argentina to study the transport sector, including transport coordination, progress by the railways in preparing a rehabilitation program, the status of highway investment planning and the organization and operations of Vialidad Nacional. In addition, the mission appraised for financing under the presently propcsed loan several sections of national routes 3, 7 and 251. 5. The transport mission concluded that (i) existing institutional arrangements did not permit the effective formulation, implementation and supervision of a well coordinated transport policy; a central body was needed to collect the necessary data, to elaborate common criteria for investment selection and pricing of transport services, and to act as a coordinator for the whole transport sector; (ii) while the management of the railways has considerably improved since 1966, their operations were still inefficient and a consistent rehabilitation and investment effort was needed over the next five years to eliminate the operating deficit and pro- vide an allowance for depreciation; and (iii) while the road system was  - 2 - generally sufficient for traffic requirements, it called for selective improvement, more efficient administration, planning of investment con- forming to economic priorities and better coordination of national and provincial road planning. The mission further recommended that, subject to progress in these fields, the road project appraised by it be consi- dered by the Bank for financ:ing. 6. After the findings of the transport mission had been discussed in Washington and Buenos Aires, negotiation of the proposed loan took place in Washington in late April and early hay .1969. The Government was repre- sented by Ingeniero Victor Santiago Mangonnet, Under-Secretary of Public Works and General Administrator of Vialidad Nacional, and Ingeniero Garcia Baldizone of Vialidad Nacional. 7. The following is a summary statement of the previous Benk loans to Argentina as of May 31, 1969: Loan Amount Undisbursed Number Year Borrower Purpose (US$ Million) 288 1961 The Argentine Republic Roads 30.9 - 308 1962 Servicios Electricos del Gran Buenos Aires S.A. (SEGBA) Power 93.h - 505 1967 The Argentine Republic Livestock 15.3 15.2 525 1968 Servicios Electricos del Gran Buenos Aires, S.A. (SEGBA) Power 55.0 36.2 577 1968 Hidroelectrica Norpatagonica S.A. (HIDRONOR) Power 82.0 77.3 Total (less cancellations) 276. of which has been repaid to Bank and others 19.2 Total now outstanding 257.4 Amount sold 5.5 of which has been repaid .9 h.6 Total now held by Bank 252.8 Total undisbursed 128.7 No IDA credits have been made to Argentina. IFC has made commitments to six companies in Argentina for a total of $16.7 million and the IFC Execu- tive Directors recently approved an additional investment amounting to $7 million. IFC presently holds $7.1 million of loans for its owqn account; of this $3 million is undisbursed.  - 3 - 8. After a period of preparation and organization, the credit program supported by the Bank's loan for livestock signed in July 1967 was launched in August 1968 and by the beginning of the March 1969 sowing season about 60 loans for ranch development had been approved. However, the Borrower has not yet requested disbursement by the Bank in respect of these loans. 9. In April 1969, a field appraisal was made of a transmission and distribution project of Servicios Electricos del Gran Buenos Aires, S.A. (SEGBA); this project may become a basis for a third Bank loan to SEGBA. A mission is scheduled to go to Argentina in the middle of June to review the progress of the railways in putting a rehabilitation program into effect and preparing a project for consideration by the Bank. PART II - DESCRITTION OF THE PROPOSED PROJECT 10. Borrower: The Argentine Republic. Amount: In various currencies equivalent to US$25 million. Purpose: To help finance improvement of 800 km of roads, plus retention of con- sulting services. Amortization: In 25 years, including a b-year period of grace, through semi-annual installments beginning September 15, 1973 and ending March 15, 1994. Interest Rate: 6-1/2% per annum. Commitment Charge: 3/4 of 1% per annum. PART III - THE PROJECT 11. A report entitled "Appraisal of a Second Highway Project, Argentina" (PTR-13a) is attached. 12. The role of Buenos Aires as the center of population, export trade, industry and commerce has determined the traffic pattern of Argentina. The capital city is the base of a well-developed transport system, the main parts of which are a railway network of about b2,000 km and a national and provincial primary road network of about 137,000 km. For many years, the railways have been losing traffic to roads and showing a large deficit due to inefficient operation, vast overstaffing, over-extended network and antiquated equipment. The Government and the railways are presently pre- paring a rehabilitation program designed to redimension the system to fit  - 4 - present traffic requirements, and to achieve financial equilibrium. As indicated in paragraph 9 above, the Bank may be in a position within some months to consider helping the railways to finance capital expenditures within the context of a rehabilitation program. 13. Given satisfactory Government policies and institutional im- provements in the transport sector, the presently proposed road project is expected to be the first of several transport projects to be financed by the Bank in Argentina in the next few years. Its main objective is to lay a firm foundation for sound planning of future development of the Argentine road system. The project would include a reconnaissance of the national and provincial primary road net-ork in order to identify priorities for road construction. The reconnaissance would cover those works in the current 1968-70 highway plan for which contracts have not been awarded or no funds allocated in the 1969 budget and may thus help prevent financing of lesser priority roads under the 1970 budget. The reconnaissance would be followed by feasibility studies of roads selected in its course as being of high priority. Detailed engineering would be carried out for those roads for which the feasibility studies reached favorable conclusions, and these roads might then provide a basis for subsequent Bank loans. 14. The reconnaissance should ensure a thorough preparation of a road investment program for 1971-75. In addition to agreeing to take due account of economic merits of roads in formulating future road construction programs (Loan Agreement, Section 5.09), the Government has expressed to the Bank its intention to move toward a system of allocation of road invest- ment funds which would give appropriate weight to economic priorities in channeling federal monies into provincial road construction. At present, funds for road investment are being allocated to the provinces on the basis of fixed formulae determined by law. VJhile Vialidad Nacional may make observations on the proposed use of these funds, it has no authority to decide how they should be used. 15. Rational road investment planning and efficient road administra- tion will be assisted by another part of the project which consists of the preparation of a nation-wide road inventory, the establishment of a traffic counting system for the primary road network, and the setting up of a cost accounting system for Vialidad Nacional. The acquisition of miscellaneous field and office equipment for these purposes is also in- cluded in the project. During the negotiation of the proposed loan, the Government indicated to the Bank its intention to reduce the excessive centralization of road administration by gradually transferring primary responsibility for maintenance and improvement of the national network from Vialidad Nacional to provincial road authorities, leaving Vialidad in charge of the planning and supervision of the national and provincial pri- mary road network. 16. Another part of the project is the formulation of recommendations in respect of transport coordination. The Government has recently decided to merge the Secretariats of Transport and of Public Works, and these are  - 5 - already headed by the same Secretary. The Government is also in the process of organizing a transport sector development office. Its staff would be reinforced, for a limited period of time, by two specialists for the purpose of initiating the coordination of road and railway investment programs and pricing policies. Supplied with adequate data on road conditions and traffic, and on road building and maintenance costs, the office should be in a position to formulate consistent policies aimed at providing the Argentine people with efficient, low-cost, transport services. 17. IDst of the proceeds of the proposed loan would be devoted to construction work for upgrading and paving about 800 km. of selected sections of routes 3, 7 and 251. The economic justification for upgrading and paving these road sections is described in the appraisal report. A return of 14 percent has been estimated for the investment in a section of route 7 and the San Antonio Oeste - Arroyo Verde section of route 3. The investments in the Uzcudum - Canadon Ferrais section of route 3 and in a section of route 251 are estimated to show a rate of return of 10 percent. 18. The cost of the project is estimated at $50 million equivalent. The proposed loan would cover 50 percent of road construction costs and the foreign exchange costs, estimated at 60 percent, nf the consultants who would supervise construction under the project and carry out feasibility and engineering studies for the 1971-75 road program. The Government would cover the balance of these costs and would pay the consultants who would identify road construction priorities for the 1971-75 program, compile a road inventory, establish a traffic counting system, set up cost accounting for Vialidad Nacional and work on transport coordination. The project should be completed in early 1972. Construction and purchase contracts would be let on the basis of international competitive bidding, except that individual items of specialized equipment being purchased in quantities not exceeding $10,000 equivalent would be procured in limited local bidding. 19. The foreign exchange component of road construction costs is estimated at 35 percent, so that my proposal would involve financing local expenditures equivalent to 15 percent of construction costs, or a total of $6 million. As indicated in the latest economic report (WH-191a, dated May 23, 1969), the scale of Argentina's gross external borrowing require- ments is such that the borrowing will have to include an element of local cost financing. Only about 8 percent of gross domestic investment in Argentina is accounted for by imports of capital goods and the direct foreign exchange component of most loans for specific projects is rela- tively small owing to the existence of fairly well developeA local capital goods industries. The Bank is therefore justified in financing some local costs on high-priority projects.  - 6 - PART IV - LEGATL INSTRUMENTS AND AUTHORITY 20. The draft Loan Agreement between The Argentine Republic and the Bank, the Report of the Comnmittee provided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of a Resolution approving the proposed loan are being distributed to the Executive Directors separately. The Agreement follows closely the form currently used for loans for road projects. PART V - THE ECONOMY 21. The report "Recent Economic Developments and Prospects of Argentina" (WH-191a) was distributed to the Executive Directors on June 3, 1969. The report concludes that in the light of the relatively favorable longer-term growth and balance of payments prospects and the remarkable success achieved thus far by the Government in carrying out its program of economic stabilization and reactivation of the economy, Argentina should be creditworthy for the substantial volume of additional lending it requires. 22. It is not yet possible to ascertain whether the political events of recent weeks will result in any significant modification of the economic program and particularly in the incomes policy. The fact that price increases have been small during recent months and that gross foreign exchange reserves constitute the equivalent of eight to nine months' imports, provides the Argentine authorities with a degree of flexibility in dealing with possible renewed wage and price pressures with their possible balnce of payments consequences. TW,hile the situation will, of course, merit close attention, there appears to be no reason at this time to modify the conclusions of the Bank's recent economic report. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 23. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMETDATIONS 24. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments Washington, D.C. June 9, 1969