Honduras - Second Port Project

RESTRICTED FILE CUP, Report No. P-961 This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR-RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESA NACIONAL PORTUARIA WITH THE GUARANTEE OF HONDURAS FOR A SECOND PORT PROJECT June 7, 1971  CURRENCY EQUIVALENTS US$ 1 = 2 Lempiras (L) 1 Lempira = US$ 0.50  INTERNATIONAL BANK FOR RECONSTRUCTION AND D-VEIOPEIET REPORT AND RZCO21ENDATTON OF THE PRESIDENT TO THE EXECUTIVEi DIRECTORS ON A PROPOSED LOANT TO ENPRESA NACIONAL PORTUARIA WITH THE GUARMTTEY OF HONDURAS FOR A SECOND PORT PROJECT 1. I submit the following report and recommendation on a proposed Bank loan of $6.0 million to the anpresa Nacional Portuaria (ENP) with the guarantee of the Republic of Honduras. This would be the second loan for a port project to Honduras; it would have a 20-year term, including four years of grace, with interest at 71 percent. It would be used to help finance port expansion and improvement in Puerto Cortes on the Atlantic coast, and construction of a deep-water facility at Henecan on the Pacific. 2. A summary of previous loans and credits to Honduras is at Annex I. The last economic report on Honduras (WH-.193a) was distributed to the Ececutive Directors in September 1969. An appraisal report on the proposed project is being distributed separately. Country data and a loan and project summary are contained in Annexes II and III. PART I - HISTORICAL 3. Honduras has received nine Bank loans totalling $52.1 million and five IDA credits for $24.0 million, both net of cancellations. Al- most one-half of this lending has been for highways and more than one- third for power. The only other operations have been a loan for ports (1966), similar to the one now under consideration, and a credit for livestock development (1970). The last loan and credit, for power, were signed in June 1970. The proposed loan is the only operation to be presented to the Executive Directors during the current fiscal year. Another loan, possibly of about $8 million, for a power project, should be ready for consideration in the next fiscal year, and preparatory work is also proceeding on another road project. 4. The execution of Bank assisted projects in Honduras has been fairly satisfactory in spite of an acute shortage of slklled personnel, which has resulted in heavy reliance on foreign consultants. The undis- bursed balance of effective loans/credits on April 30, 1971, was $19.6 million. WNhile three Bank-financed road projects have been satisfactorily completed, serious delays have occurred on the North Road project, which is being jointly financed by the Inter-American Development Bank (IDB) and the Bank Group (Credit 71-HO and Loan 400-HO made in 1965). These delays were mainly due to changes in alignment at the beginning and later on to the unusually heavy rains in 1968 and 1969, and the border conflict with El Salvador in July 1969. The project is now expected to show a cost over- run of about $1.5 million (about 7 percent of total appraised cost), main- ly because of damage resulting from severe weather conditions; the overrun will be covered by the Government. The credit is fully disbursed, and  disbursements of the loan are now proceeding normally, but it has been necessary to extend the closing date as a first step by six months (to June 30, 1971), and a further extension will be required. Disbursements on the livestock credit (Credit 179-HO) have been slow because of delay in appointing the project director. However, sub-loans are now being processed, and disbursements are expected to pick up shortly. The first port project was completed on schedule in 1970. The Rio Lindo power project (Credit 116-HO and Loan 541-HO) was inaugurated in May of this year, and the loan and credit should be completely disbursed before the closing date of December 31, 1971. 5. IFC has participated in two projects in Honduras. A total of about $0.4 million was invested in a leather tanning project in 1964 and 1966. The more important operation, in terms of its potential con- tribution to Honduras' long-term economic development, is a pilot pro- ject for a pulp and paper industry to utilize the wood resources of the Olancho Reserve. Capital required for the total project could be in the neighborhood of $150 million, including some $50 million for infra- structure. A pilot company, Compania Pino Celulosa de Centro America S.A. (COPIiTO), was established in June 1968, under the leadership of International Paper Company (IPCO), to investigate and possibly carry out the project. IFC authorized a share capital investment in COPINO of $0.05 million in September 1968 and another $0.05 million in Febru- ary 1970. For reasons in part extraneous to the project, IPCO discon- tinued its participation in COPIliO in Ilarch 1971, but at the request of the Honduran Government IFC has agreed to search for new partners. Major questions affecting the project, such as responsibility for infrastructure, forest administration, delimitation of the concession area and fiscal treatment, remain to be resolved in negotiation with the Honduran Government. PART II - THE ECONl'Oi4Y 6. - Although Honduras has been demonstrating a good development effort in recent years, it is still one of the poorest countries in the Western Hemisphere, with per capita GNP well below $300 and great defi- ciencies in economic and social infrastructure. Economic growth has been export-oriented and concentrated on bananas, with consequent vul- nerability to world market conditions, climatic hazards and decisions of foreign companies. Income distribution is probably less uneven than in the surrounding countries, but standards of education, health and housing are extremely low. The Government, aware for some time of the urgent need to modernize and diversify the economy and to provide bet- ter living conditions for the population, is trying to step up public investment to overcome the existing infrastructure deficiencies. An Aid Coordination Group, which held its inaugural meeting in Tegucigalpa in March 1970, was organized at the Government's initiative with Bank support in order to mobilize external assistance for the development program. A decision on the future of this Group will be made after the impending change of Administration. Presidential elections held in March have given a narrow edge to the ruling party, and a new President,  - 3 - Dr. Ramon Ernesto Cruz, was inaugurated on June 6. An understanding be- twieen the two main parties had been reached before the March elections to the effect that the opposition party would share in cabinet and other posts of authority. General understanding wJas also reached on broad in- vestment policy, and no major shift in government economic policies is to be expected. 7. The economic situation has deteriorated quite sharply during the past two years. The war with mL Salvador, the resulting disruption of foreign trade and severe hurricane damage in 1969 have slowed down economic growth, undermined investors' confidence, reduced public savings and depleted reserves of foreign exchange. Real GINP increased by about 4 percent in 1969 and 3 percent in 1970 (compared to an average of just over 5 percent in the 1960's). With population believed to be growing at around 31 percent a year, this means that per capita income has re- mained stationary since 1968. The value of comnmodity exports fell by 5 percent in 1969, as a result of the effect of the hurricane on banana output, and increased only marginally in 1970, while imports, stimulated by domestic credit and fiscal policies, increased substantially in 1970. In contrast with the sizeable accumulation of reserves during the 1960's, net international reserves fell by $4 million in 1969 and $14 million in 1970 to a level equivalent to only 15 days imports. 8. The economic difficulties have been aggravated by the crisis in the Central American Common Market (CACI4), the establishment of which had allowed rapid industrialization and growth in Central America during the 1960's. Since the war, there has been no trade between Honduras and Z1 Salvador, and intraregional trade which formerly moved by road through Honduras now has to be ferried across the Gulf of Fonseca. The difficulties in the CACI4 have origins which precede the Honduras-ZL Salvador war. For some time before that there had been mounting crit- icism by the poorer countries of the common market of what they regarded as the inequitable distribution of integration benefits. Honduras, in particular, complained that because of its trade deficit in the market it was transferring its banana earnings to its CAal partners in exchange for inferior industrial products on which it could not levy import taxes, thus eroding the tax base. 9. In January 1971 Honduras imposed duties on imports from CACM countries because of the failure to reach agreement on a "modus operandi" designed to revitalize the market and bring about a different distribu- tion of integration benefits. The other countries retaliated with trade restrictions against Honduran exports. Although Honduras and El Salvador have recently agreed to resume discussion of bilateral issues, the solu- tion of which should facilitate the restructuring of the CACM, the pre- sent difficulties are unlikely to be overcome quickly.  - 4 - 10. One major issue which must be tackled immediately by the new Administration is the sharp increase in the budget deficit of the Central Government (see Annex II) and the associated heavy use of Central Bank financing. The main reason for the rise in the budget deficit and the decline in public savings was a sharp rise in current expenditures stimulated by the war. Military expenditures, though relatively modest by international standards (an estimated 3 percent of GDP in 1970), have remained above the pre-war level; in addition, there has also been a substantial increase in current expenditures related to development. As public investment has climbed steadily from 2.5 percent of GDP in 1965 to over 6 percent in 1970, the domestic financing gap has widened substantially, in spite of a substantial increase in net external bor- rowing. The overall domestic credit expansion, both to the public and private sectors, was faster than the growth in banking system resources and substantially faster than GDP in the last two years (26.5 percent and 4.5 percent respectively), thus contributing to the reserve loss and to mild upward pressure on prices. 11. In considering the justification for the proposed Bank loan to ENP, account must be taken of the exceptional difficulties which the Honduran economy has encountered over the past two years as a result of the conflict with El Salvador, the 1969 hurricane and the CACM crisis. Some decline in public savings was inevitable in these circumstances, and with elections impending the Government was in a weak position to introduce new tax measures. The Bank and the IMF have for some months been discussing with the Government the need for revenue and expenditure measures to reestablish equilibrium. The IMF has recently approved a stand-by credit of $15 million, which calls for ceilings on central bank credit and foreign indebtedness and looks for a small recovery of inter- national reserves. A Bank economic mission will be visiting Honduras in October and will review the fiscal situation with the new Administration. Continued financial assistance from the external lending agencies is a vital factor in maintaining a vigorous public investment effort. The proposed port project moreover will not impose any additional strain on the Central Government budget, since local costs would be financed entirely from revenues generated by the port authority itself. 12. The external public debt of Honduras is still quite low, although it has doubled during the past five years. Most of the ex- ternal borrowing in recent years has taken place on concessional terms, including some assistance from IDA. Service on the external public debt absorbed only 3 percent of external earnings on current account in 1970 (Annex II). Assuming that the average terms of external borrow- ing are more or less the same as in the past, and assuming that 40 per- cent of public investment is financed in future from external sources (compared with 33 percent in 1968 and 35 percent in 1970), Honduras should be able to carry through a development program of the approximate magnitude envisaged by the 1969 Bank economic mission without increasing its external debt ratio above a moderate level of 7 percent in 1976. Honduras is therefore considered creditworthy for the proposed loan.  PART III - DEVELOPMNT PRIORITIES 13. Hondaras' long-run development hinges on its ability to improve and transform the economic structure, since prospects for traditional exports are not encouraging. Banana sales, which still account for over 40 percent of export earnings, are expected to be buoyant in the short term as rehabilitation and ongoing expansion plans are completed, but their expansion should level off at about 3.5 percent per annum after 1972, in line with limited world market possibilities. The past develop- ment of non-traditional exports, e.g. basic grains, wood products, manu- factured goods, has been based on the CACM. Provided that its present problems are resolved, the CACM will continue to be an important outlet for non-traditional exports, but Honduras also needs to make every effort to exploit its comparative advantages (e.g. for pulp and paper and other forestry products) in other markets. This requires that the present effort to modernize and diversify the economy be vigorously continued. The public investment program worked out in close consultation with the Bank and the Aid Coordination Group is an important element in such an effort. 14. Basic deficiencies in economic infrastructure, particularly transport, are one of the main reasons for Honduras' slow economic development. The North Road Project, to which reference was made in paragraph h above, will provide the country with its first all-weather modern surface transport link between the capital, Tegucigalpa, and the principal agricultural and industrial zone centered on San Pedro Sula. Completion of this road will greatly reduce internal transport costs and should do much to stimulate domestic and foreign trade. Additional port facilities on both the Atlantic and Pacific coasts will also be needed to support the expansion of an economy so heavily dependent on foreign trade. A study made by Bank staff of ports in the CACM region suggests that at the present stage of development there are few realistic possibilities for regional integration in this sector, and Honduras must therefore provide adequate facilities for its own trade. A better port on the Pacific coast is particularly important for the development of irrigated agriculture and forestry. 15. While assistance from the World Bank Group in the foreseeable future is likely to remain heavily concentrated in the power and trans- port sectors, the next Bank economic mission will look into other pos- sible sectors the development of which would contribute to the goal of diversifying the economy. The Central American Bank for Economic Integration will continue to finance transport infrait-ructure. USAID is mainly active in roads, land settlement and family planning, while IDB is assisting the Government in financing projects in transport, agriculture, health and housing. There is no higher priority for econ- omic development than education, and although USAID and IDB are both active in this sector, the Government has indicated an interest in obtaining assistance also from the World Bank Group. A UNESCO mission under the Cooperatdive Piogram will undertake a review of the sector during the summer.  - 6 - PART IV - THE PROJECT 16. Situated on the Caribbean, Puerto Cortes is the leading national port: it handled over 72 percent of total cargo in 1970, including 877,000 tons of dry cargo and 1,143,000 tons of petroleum. It is owned and operated by ENP and its existing modern facilities, including two wharves for general cargo and lumber, were constructed with assistance from Loan 463-HO. In addition, there is an old banana wharf and a privately-owned petroleum pier. Water depths are 12 meters or more in the approach area. 17. At present no deep-water port exists on the Hondaran Pacific coast. Goods have to betransshipped through lighterage facilities based on San Lorenzo and El PMuerto in the Gulf of Fonseca, iwith customs clear- ance for imports at the island of Anapala (see map at end). The operation is slow, and port facilities are inadequate to handle traffic which is steadily growing in line with expanding economic activity in the hinter- land. Some 10 percent of the country's total dry cargo trade now passes through Amapala-El Niuerto-San Lorenzo. Following a feasibility study, financed under Loan 463-HO, a suitable site for the development of a deep-water port was found at Henecan, about 3 km from San Lorenzo. 18. The project would provide improvements at Puerto Cortes, the construction of a new port at Henecan and technical services. At Puerto Cortes, where traffic has grown much faster than expected, the port is operating at mnaximum capacity. The expansion at this port would entail construction of two deep-water berths, a roll-on/roll-off ramp and a railroad yard, together with provision of a belt conveyor system for banana loading, a tug and other supporting facilities. The develop- ment at Henecan would consist of construction of two deep-water berths capable of handling ships with a draught of up to 7 meters, a transit shed and other facilities. 19. The pulp and paper project mentioned in paragraph 5 is likely to require special port facilities. Part of the funds provided under the proposed loan for consulting services might be used, with the approval of the Bank, to finance a study of the location of such facilities. 20. The total cost of the project is estimated at $9.8 million, with the Bank loan financing the estimated foreign exchange component of $6.o mi1lion. No disbursements are expected for expenditures incurred before the loan is signed. The local cost of $3.8 million would be met by ENP from its own resources. Procurement of goods and services to be financed by the loan would be through international competitive bid- ding. In estimating the foreign exchange component, it has been assumed that the main civil works contract would be won by a foreign contractor, since there are no Honduran firms specializing in this type of work. Construction of the project is likely to employ about 650 people when the work is at its peak, and continuing employment for about 500 people would be provided on completion of the project.  - 7 - 21. ENP, with the help of consultants,will be responsible for project execution. ENP is an autonomous institution established with Bank assistance in December 1965. It has so far been responsible only for Puerto Cortes, but the Government has undertaken to extend its authority to Henecan before the Henecan construction contract is signed. ENP is well managed and its financial position is strong. On the basis of present tariffs the financial rate of return on its net fixed assets would be expected to reach 11.7 percent in 1975 and to rise to 18.2 percent in 1978. ENP has agreed to consult with the Bank on the scope for a possible reduction in tariffs upon completion of the project. 22. Traffic forecasts at Puerto Cortes indicate an increase in total traffic from 2 million tons in 1970 to 3.5 million tons in 1980, with dry cargo rising from 0.9 million to 1.7 million tons. The new facilities would result in savings in ship-waiting time, avoidance of diversion, faster ship turnaround time, lower handling costs and other savings, achieving an internal economic rate of return estimated at about 40 percent. Traffic in the present lighterage complex on the Pacific totalled 177,000 tons in 1970, all dry cargo. With the new port at Henecan, this should rise to 372,000 tons in 1980. Lower cargo handling costs and ship-service time, and the reduction in cargo damage presently incurred by multiple handling, result in an estimated internal rate of return of 33 percent. PART V - LEGAL INSTRUEENTS AIND AUTHORITY 23. The draft Loan Agreement between the Bank and ENP, the draft Guarantee Agreement between the Republic of Honduras and the Bank, the Report of the Committee 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 draft Agreements contain provisions substantially similar to those in the Agreements for the first port loan. 24. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMNDATION 25. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 7, 1971 Washington, D. C.  Annex I HONDURAS STATEMENT OF BANK LOANS AND IDA CREDITS AT APRIL 30, 1971 Loan or Amount (U.S.$ million) Credit No. Year Borrower Purpose Bank IDA Undisbursed Five loans and two credits fully disbursed 24.5 11.9 - 400-Ho 1965 Rep. of Honduras Roads 6.o 1.3 495-HO 1967 Rep. of Honduras Roads 8.6 3.0 541-HO 1968 Rep. of Honduras ) Power 7.5 1.2 116-HO 1968 Rep. of Honduras ) 4.0 o.6 179-H0 1970 Rep. of Honduras Livestock 2.6 2.6 692-HO 1970 Rep. of Honduras )5.5 5.5 201-HO 1970 Rep. of Honduras ) power 5.5 5.4 Total (less cancellations) 52.1 24.0 of which has been repaid 9.8 Total now outstanding 42.3 Amount sold 2.5 of which has been repaid 1.9 o.6 Total now held by Bank and IDA 41.7 24.0 Total undisbursed 11.0 8.6 19.6 June 7, 1971  Annex II Page 1 of 3 HONDURAS: COUNTRY DATA Area 115.2 sq. km. Pop ation (1970) 2.53 million Rate of Exchange Lempiras 2 = US$1 I. ECONOMIC INDICATORS GNP, per capita (1970) (US$) 270 Prel. 1965 1968 1969 1L970 GNP, current market prices (L mn) 1,036 1,237 1,293 1,357 GDP, current factor cost (L mn) 945 1,167 1,212 1,279 Sector origin (percent) Agriculture 4D .5 37.6 35.7 :3-.9 Manafacturing 12.5 13.7 14.3 14.5 Commerce 14.3 13.9 13.9 13.8 Transport and communications 6.L4 6.4 6.3 6.3 Housing 6.7 7.6 7.9 8.1 Other 19.6 20.8 22.6 22.L4 Ratio to GNP (at current market prices) Gross domestic investment 16.1 13.4 20.1 22.1 Consumption 86.1 86.6 85.6 88.9 Gross national savings 14.9 13.7 14.3 1L1.1 Exports of goods and services 27.1 31.2 23.5 27.7 Imports of goods and services -26.8 -32.8 -31.7 -35.7 Net factor income payments - 2.5 - 3.4 - 2.5 - 3.0 Annual change (percent) GDP, constant factor cost 9.9 6.5 3.2 2.6 Money and quasi money 15.1 15.4 20.2 13.8 Total bank credit 22.1 10.8 27.6 24.2 Credit to private sector 29.2 13.5 23.1 16.3 Cons-umer prices: Tegucigalpa 3.2 4.4 2.7 2.1 San Pedro Sula 1.8 0.9 4.2 3.3 Central Government Finances (L mn) Current revenues 109.0 147.7 153.3 175.8 (% of GDP) (104.) (11.5) (11.6) (L2.6) Current expenditure 90.4 116.2 148.2 160.1 (% of GDP) ( 8.6) ( 9.1) (11.2) (114.) Curren' surplus 18.6 31.5 5.1 15.7 (% of GDP) ( 1.8) ( 2-4) ( 0-4) ( 1.2) Investment expenditure 16.0 40.5 54.4 62.1 (% o