Cameroon - Doula and Yaounde Water Supply Project

RESTR I CTED FlnL COPY Report No. P-692 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 The report may not be published nor may it be quoted as representing their views.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 SOCIETE NATIONALE DES EAUX DU CAMEROUN FOR A WATER SUPPLY PROJECT TO BE GUARANTEED BY THE FEDERAL REPUBLIC OF CAMEROON April 24, 1969   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMkENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE SOCIETE NATIONALE DES EAUX DU CAMEROUN FOR A WATER SUPPLY PROJECT TO BE GUARANTEED BY THE FEDERAL REPUBLIC OF CAMEROON 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$5.0 million to the Societe Nationale des Eaux du Cameroun (SNEC) to assist in financing a water supply project in Douala and Yaounde. The project would be financed jointly with the Caisse Centrale de Cooperation Economique (CCCE). The loan would be guaranteed by the Federal Government of Cameroon. PART I - HISTORICAL 2. The Federal Government of Cameroon is a federation of the states of East and West Cameroon, and was established in October 1961. East Cameroon, a former French-administered trust territory, gained independence in 1960 as the Republic of Cameroon. West Cameroon, the former United Kingdom trust territory of Southern Cameroons, joined the newly independent Republic of Cameroon as a result of a plebiscite in 1961. The Federal Republic of Cam- eroon became a member of the Bank in 1963 and of IDA in 1964. 3. The Government asked the Bank to assist in financing a water supply project in Yaounde in 1966. Bank reconnaisance missions visited the country in 1966 and 1967 and found the project promising but suggested that the ex- pansion of water supply facilities in Douala should be included in the project. The Bank also recommended improvements in the management and organizational structure of the water supply agencies in Cameroon. Following these recom- mendations the Government established the Societe Nationale des Eaux du Cameroun in July 1967. Engineering studies at both Yaounde and Douala were completed in 1968 and two Bank missions appraised the project in March and October 1968. Negotiations with the CCCE and with a delegation of SNEC and the Cameroon Government led by Mr. Joseph N. Ovono, Ambassador of Cameroon were completed in Washington on April 1, 1969.  4. The following is a summary statement of Bank loans and IDA credits to Cameroon as of March 31, 1969: Amount ($ million) Loan or Credit Undis- Number Year Borrower Purose Bank IDA bursed 100 CM 1967 Cameroon CAMDEV - U.0 8.0 490 CM 1967 CAMDEV CAMDEV 7.0 - 6.9 S3 CM 1968 Cameroon Roads - o.6 0.4 593 CM 1969 SOPAME Oil Palm 7.9 - 7.9 Total now held by Bank and IDA 14.9 11.6 Total undisbursed 14.8 8.4 23.2 *Not yet effective. 5. In July 1964 the Executive Directors approved two Bank technical assistance grants of US$200,000 and US$100,000 for feasibility studies of road and agricultural projects. The Bank and IDA have under consideration an education project and a road project, the latter being prepared under the US$0.55 million credit approved in 1968. PART II - DESCRIPTION OF PROPOSED LOAN 6. The Project Purpose: The development of the Douala and Yaounde water supply system; Estimated return: Douala sub-project 22 percent Yaounde sub-project 13 percent 7. The Bank Loan Borrower: Societe Nationale des Eaux du Cameroun (SNEC) Guarantor: The Federal Republic of Cameroon Amount: US$5.0 million equivalent in various currencies Amortization: In 20 years including a three-year period of grace, through semi-annual installments be- ginning June 15, 1972 and ending June 15, 1989. Interest rate: 6 1/2 percent Commitment Charge: 3/4 of one percent  - 3 - 8. Caisse Centrale de Cooperation Economigue loan Borrower: Societe Nationale des Eaux du Cameroun (SNEC) Amount: US$1.6 million equivalent in French francs. Amortization: In 15 years including a three-year period of grace. Interest rate: 4 1/4 percent. PART III - THE PROJECT 9. A report (PU-10a) entitled "Appraisal of the Douala and Yaounde Water Supply Project - Cameroon" is attached. Douala and Yaounde are the two largest cities in Cameroon, the first is the main seaport and industrial center and the latter is the Federal Capital. Their populations were about 240,000 and 140,000 respectively in 1968. SNEC has the monopoly of water supply in these two cities and in nine secondary centers under concession agreements with the Government. 10. SNEC is a public corporation with a share capital of CFAF 100 mil- lion. Its shareholders are the Cameroon Government (22%), CCCE (11%) and Electricite du Cameroun (EDC) (67%). Present arrangements provide for co- ordination between SNEC and EDC so as to reduce overheads and to permit SNEC to benefit from EDC's highly competent management. 11. The demand for water in both Yaounde and Douala is rising rapidly because of rising population and increased industrial use, especially in Douala. The project would provide for doubling of water supply facilities in the two cities which are at present unable to meet demand during the dry season. The Douala sub-project provides for expansion of production facili- ties, and additional reservoirs and distribution lines. At Yaounde the project would include the construction of an earth dam creating a reservoir of 5 mil- lion cubic meters capacity, a new treatment plant and pumping station and a transmission main to carry the water to the city, as well as additional stor- age and distribution facilities. The project is expected to be completed in two years. 12. All contracts for construction and procurement of equipment will be let in accordance with the Bank's procedures for international competitive bidding, the cost being estimated at $5.1 million. Engineering and super- vision is estimated at $0.4 million and contingencies $0.9 million. The project would be financed as follovs:  $ million Bank CCC SNEC Civil works, equipment and engineering services and contingencies: of which $4.7 million is estimated to be foreign 4.7 1.6 0.1 Working capital - - 0.3 Interest during construction 0.3 - - 5.0 1.6 0.4 The Cameroon Government will provide land for the reservoir at Yaounde, the value of which is not included in the cost estimate. Cameroon has also un- dertaken to insure the prompt payment of amounts due to SNEC by itself and the municipalities, and foregoes receipts of duties on goods imported for SNEC's investments. It is proposed to reimburse out of the Bank loan past expenditures made since January 1, 1969 for engineering work in an amount which is not expected to exceed $50,000. The Bank and CCCE have agreed upon disbursement procedures and consultation on matters arising during the life of the CCCE loan. 13. The Bank loan itself would not exceed the foreign exchange costs of the project but since it would be disbursed pari passu with the CCCE loan it could be deemed to cover in part some of the local currency expenditure. This would be justified in. the light of Cameroon's overall need for external capital as described in paragraph 20 below, and the importance of providing adequate finance for this high priority project. 14. During 1969-71 SNEC will also invest about $3 million, most of which is for extension of the distribution networks not included in the project. As a result of its investment program SNEC is expected to be in a strong financial position by 1973: the projected rate of return on net plant em- ployed, is above 10 percent assuming that current rate policies will be con- tinued, and the cover for the service of debt is expected to be more than adequate. The borrower has agreed to maintain a minimum return on net plant employed of 10%, subject to review with the Bank, and minimum cover of 1.5 times maximum debt service requirements. The incremental rates of return on the investments to be made under the project are 22% in Douala, 13% in Yaounde.  PART IV - LEGAL INSTRUMENTS AND AUTHORITY 15. Copies of the following documents are being distributed to the Executive Directors separately: (i) the draft Loan Agreement between the Bank and the Societe Nationale des Eaux du Cameroun; (ii) the draft Guarantee Agreement between the Federal Republic of Cameroon and the Bank; (iii) the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank; and (iv) the text of a Resolution approving this loan. 16. The following features of the draft Loan and Guarantee Agreements are of particular interest: (i) The Borrower will set water charges at rates suf- ficient to ensure after completion of the Project an annual return on net fixed assets in operation of not less than 10%, subject to review with the Bank. (Section 5.07 of the Loan Agreement). The Borrower will also maintain minimum cover of 1.5 times maxi- mum debt service requirements (Section 5.09 of the Loan Agreement). (ii) During the period of construction the Borrower's investments are limited to specified amounts, unless the Bank agrees otherwise (Section 5.08 of the Loan Agreement). (iii) Various aspects of the joint financing are reflected in certain provisions of the Loan Agreement, such as: (i) Section 2.03 regarding withdrawals from the Loan Account; (ii) Section 5.11 concerning repay- ment in advance of maturity of the CCCE Loan; (iii) Sections 6.02 and 6.03 authorizing the Bank to require immediate repayment of the Loan if CCCE requires im- mediate repayment of its Loan, or to suspend disburse- ments on the Loan if the Borrower's right to withdraw amounts under the CCCE Loan is suspended or cancelled; and (iv) Section 7.01(a) making the effectiveness of the Loan conditional upon the CCCE Loan. (iv) The Guarantee Agreement follows the general pattern of the Bank's guarantee agreements; however, in addition, the Guarantor undertakes (Section 3.08) to ensure the payment to SNEC of all past due water charges owed by it or any of its political subdivisions.  - 6 - PART V - THE ECONOMY 17. An economic report entitled "Current Economic Position and Prospects of the Republic of Cameroon" (AF-79a dated August 8, 1968) was circulated to the Executive Directors on September 4, 1968 (R68-171). The conclusions of this report remain valid. 18. Since 1959 real. GOP has increased by about 5 percent per year. Agriculture which still employs three-quarters of the working population accounts for 37 percent of GDP, providing most of the food stuffs which can be economically produced in Cameroon and 70 percent of exports. Manufacturing has progressed rapidly during the past few years as has the tertiary sector. The main physical bottleneck to the growth of the economy is the transportation system: roads and railways are in a poor state of repair and more attention should be paid to building feeder roads. Public services in the urban centers are also inadequate. 19. The Government's management of fiscal and economic affairs has been generally good taking into account the difficulties arising from inde- pendence, the establishment of the federation between two differing regions and the progressive elimination of preferences for Cameroon products in the French market. Even after the terminstion of French budgetary support in 1965, Cameroon continued to have a fairly stable financial situation except in 1967 when credit to the private sector expanded rapidly resulting in a sudden increase in imports. The consequent decline in foreign exchange re- serves was, however, reversed in early 1968. Good fiscal performance is reflected by budgetary savings amounting to about US$16 million in 1967-68, or 10 percent of current receipts. 20. The second five-year development plan (July 1966 to June 1971) describes the Government's long-term development strategy. Gross domestic product is expected to double by 1980 as a result of increasing the rate of investment from 10 percent to i6 percent distributed equally between the private and public sectors. The sectoral allocation of investment is sound. The plan includes a substantial allocation for investment in transport, parti- cularly for the completion of the Trans-Cameroon Railway. During 1967-71 Cameroon can be expected to finance Almost two thirds of its gross domestic investment from its owv resources. Public savings, however, which have in- creased greatly since the early sixties, are unlikely to contribute more than 27 percent over the next three years to the public investments warranted by the country's increasing absorptive capacity. As a result, total external capital requirements will exceed the foreign exchange component of projects suitable for external financing, thus requiring some degree of local cost financing. 21. Cameroon is regarded as eligible for assistance from IDA because of low incomes and limited savings capacity, despite the efforts which are being made by the country to mobilize domestic resources for economic devel- opment. On the other hand, the volume of external debt is Btill moderate, and the country may be regarded as creditworthy for some additional borrowing on conventional terms, including the proposed loan.  - 7 - PART VI- COMPLIANCE WITH ARTICLES OF AGREEMENT 22. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 23. I recomend that the Executive Directors approve the proposed loan. Robert S. McNam ra President by J. Burke Knapp Attachment April 24, 1969