Sierra Leone - First Highway Project

lFILE @PY RESTRICTED Report No. P-865 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 The report moy not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED DEVELOPMENT CREDIT TO SIERRA LEONE FOR A ROAD PROJECT October 14, 1970   INTE7JATIONAL BANK FOR REMONSTRUCTICN AND DEVETOPIINJT INTERNATIONAL DEVELOPH4NT ASSOCIATION REPORT AND RECOMlN DATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED DEVELORPNET CREDIT TO SIEMRA LEONE FOR A ROAD PROJECT 1. I submit the following recommendation on a proposed loan in an amount in various currencies equivalent to US$3.7 million and a proposed development credit in an amount in various currencies equivalent to US$3.5 million to Sierra Leone to assist in financing a road project. PART I - HISTORICAL 2. In 1966, the United Nations Development Program (UNDP) agreed to help finance a Land Transport Survey of Sierra Leone. The Survey for which the Dank acted as Executing Agency recommended the closing of the Sierra Leone Railway and an extensive program of road construction and improved road maintenance. The Government has accepted the recommenda- tion to phase out the railway and has formulated a Five Year Road Develop- ment Program (1971-1975) for construction and maintenance of highways along the lines indicated by the Land Transport Survey. The Survey gave priority to the construction of three sections of the country's main trunk highway between Freetown and Kenema (Freetomn-Waterloo, Taiama-Bo and Bo-Kenema), and a section of the highway into the interior (Lunsar- Mlakeni-Matotoka). The financing of the Taiama-Bo and Lunsar-Makeni roads has already been arranged by bilateral assistance from the United Kingdom and the Federal Republic of Germany. 3. The proposed loan and credit would help finance construction of the section Bo-Kenema. Feasibility and engineering studies included in the project and to be completed in 1972 would prepare for the con- struction of the Freetown-Waterloo road for which the Government has re- quested Bank Group assistance. 4. The proposed project was appraised by a mission which visited Sierra Leone in February and March 1970. Negotiations were held in Washington in August 1970. The Sierra Leone negotiating team was led by Dr. M.S. Forna, ivilnister of Finance, and included representatives from the Ministries of Public Wztorks and Development and the Bank of Sierra Leone. 5. The folloming is a summary statement of Bank loans and the IDA credit to Sierra Leone as at August 31, 1970:  2- Loan or Credit Amount in US$ million Number Year Borrower Purpose Bank IDA Undisbursed 388-SL 1964 Sierra Leone Power 3.8 Electricity Corporation 553-SL 1968 Sierra Leone Power 3.9 2.1 Electricity Corporation 170-SL 1970 Sierra Leone Education 3.0 3.0 Total 7.7 3.0 of which has been repaid to Bank and others 0.5 Total now outstanding 7.2 Amount sold 0.5 of which has been repaid to Bank and others 0.2 0.3 Total now held by Bank and IDA 6.9 3.0 Total undisbursed 2.1 3.0 5.1 6. The second power expansion project has experienced difficulties and is behind schedule owing to serious labor unrest in 1969, the resigna- tion of the General Manager and the depletion of senior staff. An ex- perienced expatriate, selected with the Bank's approval, has recently taken over as General Manager of the Electricity Corporation. Labor re- lations appear to be improving and steps to speed up implementation of the project have been initiated. Further progress on the project will be closely followed. 7. A project involving rice and cocoa is in preparation and is ex- pected to be presented for the consideration of the Executive Directors early in the next fiscal year. PART II - DESCRIPTION OF THE PROPOSED LOAN A-D CREDIT 8. Borrower: Sierra Leone. Amount: Various currencies equivalent to US$3.7 from the Bank and US",3.5 million fron the Association.  -3 - Purpose: To finance the foreign exchange costs of (a) the construction of the Bo- Kenema highway (b) mechanical equip- ment for highway maintenance and (c) consultants' services. Amortization: (a) Bank loan in 22 years, including a h-year period of grace, through semi- annual payments beginning April 1, 1975 and ending October 1, 1992. (b) Development credit in 50 years, including a 10-year period of grace, through semi-annual installments of 1/2 of 1 percent from April 1, 1981 through October 1, 1990 and of 1-1/2 percent from April 1, 1991 through October 1, 2020. Interest Rate (Loan): 7-1/4 percent per annum. Service Charge (Credit): 3/4 of 1 percent per annum. Commitment Charge (Loan): 3/4 of 1 percent per annum. Estimated Economic Return of the Project 24 percent. PART III - THE PROJECT 9. An appraisal report entitled "Appraisal of a First Highway Project Sierra Leone"l (PTR-58a)on the proposed project is attached. 10. Although Sierra Leone has about five thousand miles of roads only three hundred miles are paved. The standards of even these paved roads is low and the gravel roads are often no more than improved natural tracks. The road network has developed haphazardly and is in many cases deficient for the traffic carried. 11. The transport needs of the country will have to be met by the creation of an efficient and reliable road transport system and in the coming years Government intends to concentrate its efforts on developing certain high priority highways and on carrying out proper maintenance of existing roads which have been neglected for a number of years. The Five Year Road Development Program (1971-75), designed to meet these re- quirements, will form a major part of the Government's overall invest- ment program in these years. WJith the external assistance already ar- ranged for and likely to be forthcoming, the local currency required for financing the Road Development Program should be within the financial capacity of the country.  - 4 - 12. The proposed project would consist of two parts. Part I would include (a) construction of the Bo-Kenema road (43 miles); (b) detailed engineering of the Bo-Kenema and part of the Freetown-Waterloo roads (rural section); and (c) purchase of equipment for highway maintenance. Part II would consist of (d) feasibility studies to be followed by de- tailed engineering (if found justified) of 5 miles of the urban section of the Freetown-Waterloo road; and (e) technical assistance for the Ministry of Works. 13. The estimated total cost of the project is US$11.4 million equivalent, of which US$8.2 million equivalent would represent the esti- mated foreign exchange cost. The proposed Bank Group lending of US$7.2 million would finance the foreign exchange cost of Part I of the project. This will include a maximum amount of Us$350,000 for retroactive financing of detailed engineering of the Bo-Kenema and Freetown-Waterloo roads. The Bank Group agreed in 1968 that the Government could proceed with this detailed engineering in order to accelerate the preparation of these road projects UNDP has agreed in principle to finance the foreign exchange cost of Part II of the project, estimated at US$1.0 million, as well as a small portion of local currency expenditure. Pending approval of the UN Governing Council, expected in June 1971, UNDP has agreed to make an advance allocation to enable the project to proceed. 14. The largest part of the project -- the proposed Bo-Kenema road -- would be the last section to be completed of the country's main trunk highway between Freetown and Kenema. Bo and Kenema are the second and third largest towns in Sierra Leone; both are important administrative and commercial centers. The road would serve an area populated by about 500,000 people, which is an important diamond mining center and which produces nearly all the country's cocoa and coffee exports, and 20 percent of palm kernel exports as well as some timber for domestic use. 15. Until about a decade ago the Sierra Leone Railroad played an important part in moving people and goods within the country. Since 1950 it has not covered operating costs and in recent years the Government has been subsidizing it at about US$1.2 million per year. It has outlived its useful economic life and ought to have been phased out years ago. The present Government has now taken the politically unpopular decision to do so. It proposes to terminate railway operations by 1972. 16. The I4;nistry of Works will be in overall charge of the adminis- tration and execution of the project and will carry it out with the assistance of contractors and consultants acceptable to the Bank Group. The Government would undertake to follow the Bank's Guidelines for Pro- curement. Construction will be carried out under contracts awarded on the basis of international competitive bidding and maintenance equipment will be purchased on the basis of international tenders. The project is expected to be completed in about three years and the disbursement would take about .our years.  - 5 - 17. The estimated economic return on construction of the Bo-Kenema road is 21 percent. The economic return on the maintenance program is estimated at 31 percent. The weighted average economic return on the project would be about 24 percent. PART IV - LEGAL DITSTRTATm TS AND AUTHORITY 18. The draft Loan Agreement and the draft Development Credit Agreement between Sierra Leone and respectively the Bank and the Associa- tion, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank and the Recommendation of the Committee provided for in Article IVT Section 1 (d) of the Articles of Agreement of the Association, and the texts of two Resolutions respect- ively approving the proposed Loan and the proposed Development Credit, are being distributed to the EXecutive Directors separately. The draft Agreements conform substantially to the pattern of those used for projects of this kind. PART V - THE ECONOMY 19. A2i report entitled "The Current Economic Position and Prospects of Sierra Leone (Aw-2ca), is being circulated to the -Executive Directors separately. It concluded that the economy of Sierra Leone has experienced a considerable recovery in the past two years following a financial crisis in the second half of 1966 which had been precipitated by an ambitious investment program heavily financed by suppl 1erst credits and the depletion of foreign exchange reserves. The basis for the recovery was laid by the successful implementation of a stabilization program put into effect in collaboration with the IMF, and was stimulated by a diamond export boom and the devaluation of the Leone in November 1967. 20. Mlainly as a result of the export boom, the balance of payments showed considerable improvements in the past two years and net foreign exchange reserves rose from USD76 million at the end of December 1967 to about US,$O million at the end of May 1970. Restraint in current govern- ment expenditures in the past few years and a considerable increase in revenues from custom duties produced a record current account surplus in the budget of about 15 percent of current revenues in 1968/69 and 18 per- cent in 1969/70. This compares with a negligible surplus or a deficit in previous years. The improvement in the budgetary position enabled the Government to reduce its indebtedness to the banking system and raise its development expenditure which the stabilization program had curtailed. 21. In December 1969, the Government announced its intention to enter as a majority partner in the four foreign-owned mining companies operat- ing in Sierra Leone. Negotiations with the diamond company, the largest of these, wfas completed last month. It was agreed that the Government would acquire 51 percent of the company's shares and that compensation, the amount of which has been agreed upon, be paid out of future dividends  - 6 - in fixed and equal installments over a period of eight years. It was also agreed that day-to-day operations of the company would remain under the former management. Agreement with the other foreign mining companies is expected to follow the same pattern. 22. On the basis of the stabilization and improvements of the economy in the past twfo years, the Government is now giving increased attention to the acceleration of development, with agriculture and trans- portation being the priority sectors. Given continued sound budgetary and investment policies, GNP in constant prices may be expected to grow au an average annual rate of 3 to 4 percent. Such a growth rate would require that public investment expand at about 10 percent a year. Even with continued sound budgetary policies, public savings may be expected to finance only about 20 percent of projected public investment. It is estimated that gross external assistance of about US$20 million a year on the average will be needed in the coming five years to help finance priority projects in the public sector. 23. Following discussions with the Government on key economic policy issues in connection with the economic report last July, the Prime M4inister of Sierra Leone has confirmed to the Bank his Govern- ment's intention to continue the sound policies of the past three years, particularly with regard to restraining current expeniditures, raising government revenues, encouraging exports and keeping short and medium- term suppliers' credits within strict limits. These policies should assure improved growth prospects. 24. The improvement in the balance of payments, domestic output and public savings in the past two years has strengthened the credit- worthiness of Sierra Leone. External debt service payments amounted to about 7.5 percent of export earnings in 1969, and there is some margin for contracting additional external debt.on conventional terms. Hoiwver, the present poverty of Sierra Leone and the prospects of relatively slow export growth suggest that Sierra Leone will continue to need substantial capital inflow for a long period, and the resulting external debt would become very burdensome within a short time if it were all to be incurred on conventional terms. I therefore consider it reasonable and prudent for the Bank Group to provide part of its financing for Sierra Leone in the form of IDA credits. PART VI - COMPIAI'ICE WITH ARTICLES OF AGREEMENT 25. I am satisfied that the proposed loan and development credit would comply with the Articles of Agreement of the Bank and the Association.  - 7 - PART VII - 1ECOMMEDATION 26. I recommend that the Executive Directors approve the proposed loan and credit. Robert S. McNamara President by J. Burke Knapp Attachments October 14, 1970 Washington, D. C.  ANNE BASIC DATA Area 27,925 square miles Population (1970) Total 2.5 million Rate of growth 1.8 percent Political Status Independent (1961) Gross National Product (1968/69) at current market prices Le 315.7 million at constant 1963/64 prices Le 285.4 million per capita Le 126.3 million average annual rate of growth (1963/64-1968/69): at current market prices 8.4 percent at constant market prices 6.3 percent Gross Domestic Product (1968/69) at current market prices Le 323.7 million at constant 1963/64 prices Le 292.7 million at factor cost Le 290.8 million average annual rate of growth (1963/64-1968/69): at current market prices 8.4 percent at constant market prices 6.3 percent Net Factor Income from Abroad (1968/69) Le -8.0 million Industrial Origin of GDP (1968/69, Percentage Mlstribution) Agriculture 35.5 Mining 15.6 Manufacturing 5.6 Construction 4.1 Electricity, Gas, Water and Sanitary Services 0.8 Transport, Storage and Communication 7.9 Wholesale and Retail Trade 15.2 Other 15.3 Investment and Saving as Percentages of GDP (1968/69) Gross domestic investment 13.0 percent Gross domestic saving 15.4 percent Resource surplus 2.4 percent  -2 - End of Period Monetary Survey (in million Leones) 1967 1968 1969 1970 (May) Money supply 22.5 27.9 31.8 33.3 Quasi money 9.1 11.6 19.1 15.1 Foreign assets of the Banking system (net) 8.3 19.6 27.5 30.3 Domestic credit: 22.6 20.7 18.9 19.9 to the government (net) (7.1) (4.6) (2.0) (2.9) to the private sector (15.5) (16.1) (16.9) (17.0) 1967 1968 1969 (2nd quarter) Consumer Price Index (Freetown) 127.5 129.2 134.2 Balance of Pavments (in million 1967 1968 1969 US dollars) Exports (f.o.b.) $68.6 $92.9 $105.1 of which: diamonds (41.0) (56-3) (73-4) Imports (c.i.f.) 87.9 88.9 108.5 Trade balance -19.3 +L.O -3.- Services (net) -11.3 -10.2 -10.7 Transfer payments (net) 2.0 3.6 4.3 Current account balance -28.6 -2.6 -9.8 Public capital inflow (net) 12.2 7.9 2.3 Private capital inflow (net) 8.3 9.6 16.3 Net increase in reserves +6.0 +15.8 +11.0 Foreign Exchange Reserves (net in million US dollars) End of Period 1967 968 _19 1970 (May) Bank of Sierra Leone I797 '275 35.7 -7 Total including net DIF position 6.3 22.3 33.3 39.6 External Public Debt Outstanding Including Undisbursed (end of 1969) $61.1 million Debt service ratio (1969) 7.4 percent Central Government Finances (in million Leones) 1967/68 1968/69 1969/70 1970/71 (actual) (actual) (rev.est) (budget) Current revenue 38.9 51.1 54.0 51.0 Current expenditure 31.1 32.8 36.3 38.7 Debt service charges 7.7 9.5 8.5 7.6 central government savings +0.1 +8.8 +9.2 +4.7 Development expenditure 7.9 10.8 11.7 13.2 Over-all deficit -7.8 -2.0 -2.5 -8.5 Rate of Exchange: Leone (Le) 1.00 = US$ 1.20 October 14, 1970.