Somalia - Second Highway Project

CIRCULATING COPY RESTRICTED ToOBE ED~4~IY DESK Report No. P-1010 P.--,,,f;jNj_,_s.<.Sr~- rb w-~ FIIL. E C o 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 It may not be published, quoted or cited without Bank Group authorization.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 DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT - TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE SOMALI DEMOCRATIC REPUBLIC FOR A SECOND HIGHWAY PROJECT January 5, 1972   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE SOMALI DEMOCRATIC REPUBLIC FOR A SECOND HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Somali Democratic Republic for the equivalent of US$9.6 million on standard IDA terms to help finance a second highway project. PART I - THE ECONOMY 2. A report entitled "Economic Development Prospects in Somaliall (AE-1D) was distributed to the Executive Directors on January 15, 1971. A Country Data Sheet is attached at Annex II. 3. Somalia is one of the poorest countries in Africa, with a largely undeveloped economy based almost wholly on agriculture, princi- pally the production of livestock. Most of the Somali people depend upon livestock and subsistence crop production for their livelihood, and incomes are very low. The potential for economic growth is limited by a paucity of natural resources, by the limited technical and administrative capacity of government and by a transport network which is inadequate for the economy's needs. While there are few reliable indications, the economy has probably grown at a modest pace over the last few years. From 1966 to 1970, for instance, the total value of exports increased at an average annual rate of just over 4 percent. 4. Both the former Italian Somaliland and British Somaliland, which united to form Somalia, were heavily dependent on external aid to balance their budgets and since independence Somalia has had to look to external aid to finance part of its recurrent expenditures as well as the whole of its capital requirements. From 1960 to 1969, external assistance for current and capital expenditures amounted to almost $40O million, of which about two-thirds consisted of grants and much of the remainder of loans on concessionary terms. Italy was the largest aid donor ($112 million) andthe main source of budget support, followed by the USA ($70 million), the Soviet Union ($53 million), and the Federal Republic of Germany ($30 million). The main source of multilateral aid has been the European Economic Community ($27 million) and the UNDP has had a sizeable program of technical assistance. 5. The present government, which took over in October 1969, is making considerable efforts to face up to the double problems of eliminating the dependence of the current budget on external aid and at the same time pro- moting development. By the exercise of strict discipline in financial  -2- management, it has made good progress with the former problem through additional taxation and improved collection and the budget may well have been close to balance in the fiscal year just ended. 6. The Government's proposals for economic development are expressed in a Development Plan, issued last July, covering the period 1971-73. This was the first occasion on which the government had focussed serious atten- tion on its investment priorities. The Plan envisaged a total investment of some $150 million, of which about 35 percent has been allocated to trans- port and communications, 22 percent to agriculture, including livestock development, 12 percent to water resources, 9 percent to industry and the remainder to other sectors. The substantial allocation to transport reflects both the necessity to improve the transport system and the cost of doing so in a large, sparsely populated country. 7,. Investment on the scale envisaged would represent a large increase over recent years and the extent to which the planned investments can be carried out within the period envisaged depends partly on the absorptive. capacity of the economy and partly on the external assistance which can be obtained. The shortage of experienced persomnel in Somalia makes it diffi- cult to accelerate the preparation and execution of development projects and only in the transport sector is the plan based on substantial project preparation. As to the availabilityof finance, the plan proposes that 20 percent of the necessary investment be provided from domestic sources. Since the government has first to eliminate the budget deficit and has to meet the additional recurrent costs connected with any increased investment a contribution to development on this scale is a commendable if ambitious target. 8. In any event, it is clear that a substantial volume of external assistance over a prolonged period will be necessary if any significant development is to take place. Furthermore, although Somalia's present external debt is not high - it amounted at the end of 1970 to about $105 million equivalent, with debt service equivalent to 6 percent of foreign exchange earnings - the tight budgetary situation indicates that as much aid as possible should be on concessionary terms. Moreover, in financing any sizeable investment, external lenders will have to cover a high pro- portion of the cost of the projects which they finance, and if high priority projects are to be carried out, this usually implies a need to finance a considerable proportion of the local expenditures.  -3- PART II - IDA LENDING 9. There have been no loans by the Bank or IFC operations. Since 1965 there have been four IDA credits totalling US$12.35 million. A summary statement of these credits as of November 30, 1971 is attached as Annex I. 10. The two credits for the First Highway Project, No. 74-so of $6.2 million in 1965 and the supplementary credit, No. 123-SO of $2.3 mil- lion in 1968, helped finance the detailed engineering and construction of the 216 km Afgoi-Baidoa road, highway maintenance and workshop equipment, a technical assistance program to staff the Highway Department, a transport survey, feasibility and engineering studies. The project was financed jointly with the European Development Fund (FED) and the UNDP which provided $5.15 million and $3.02 million respectively. Construction of the road started only in 1968, following delays in the final engineering and prepa- ration of tenders, and the subsequent need to arrange additional financing to cover construction cost increases caused in part by the Middle East war and the closing of the Suez Canal. Once construction began, the work pro- gressed according to schedule and was completed in March 1971. Problems have arisen with road maintenance, stenning in large part from inadequate provisions by the Government of funds for highway maintenance and the diver- sion of equipment to uses outside the project, subjects that were thoroughly discussed in the course of negotiations for the proposed Second Highway Project (see paragraph 23 below). 11. The 1969 port development credit (S5-so) financed consulting ser- vices for detailed engineering studies of a new port of Mogadiscio and the introduction of modern accounting services for the Somali Pbrts Authority (SPA) in preparation for constructing a new port. Issues concerning the management of the port authority, the implementation of the new accounting system, together with the need to revise traffic forecasts in the light of the continued closure of the Suez Canal, delayed appraisal of the con- struction project until the end of 1971. The appraisal mission was joined by a representative of the FED, which has confirmed its willingness in principle to join with IDA in financing the project. Credit proposals should be ready for consideration in the course of FY 1973. 12. The 1971 education project (No. 247-St), which is designed to improve the quality of education and achieve economies through consoli- dating existing institutions, is in its initial stages. Legal problems delayed effectiveness and there have subsequently been difficulties in com- pleting project staffing. These are receiving close attention. 13. Considerable efforts have been made by staff from headquarters and the Permanent Mission in Eastern Africa to identify and help prepare viable projects in agriculture and livestock, which are the productive sectors of undoubted priority, but the lack of basic data, and of experience and research findings applicable to Somali conditions have made for slow progress. Nevertheless it is hoped that proposals for a livestock project can also be brought before the Executive Directors in FY 1973.  -14- 14. The proposed Second Highway Project would be the third Bank Group operation with the African Development Bank (AfDB), the first being the parallel financing with IDA of the Tedzani power project in Malawi in 1970 (Credit No. 178) and the second the financing-with IFC and other in- vestors, of the Panafrican Paper Mills project in Kenya, also in 1970. On this occasion, as described in Parts III and IV below, IDA and the AfDB would enter into a joint financing arrangement. The project was appraised by a mission to Somalia in December 1970 which was joined by a representative of the AfDB. Negotiations took place in Washington in July 1971. The Somali delegation was led by Mr. Ibrahim Megag Samater, the then Secretary for Finance. The AfDB was represented by a delegation led by Mr. M. Dugan, Deputy Director Operations. The unusually long inter- val between the conclusion of negotiations and the presentation of the proposed credit to Executive Directors was to allow for bids to be obtained for the road construction contract, in order to provide a firm basis for the cost estimates and avoid the problem of cost overruns encountered with the First Highway Project. PART III - THE PROJECT 15. Somalia's transport system (see map attached) is in the early stage of development, and many areas are inaccessible tS motor vehicles for much of the year. In a country of about 640,000 km there are only about 900 km of asphalt paved roads, of which 300 km are in need of in- tensive repair and maintenance, 1,000 km of gravel roads, and about 15,000 km of earth trails and tracks. There are no railways. Somalia is begin- ning to develop internal air transport services to connect its scattered urban areas with Mogadiscio, the country's only jet airport. Four ports handle practically all of Somalia's ocean transport: Berbera in the north, Mogadiscio and Merca in the center and Kisimaio in the south. Of these only Berbera and Kisimaio are modern, deep water ports. In Mogadiscio and Merca ships anchor in the open sea and all loading and unloading is done by lighterage. The density of cargo and passenger flows in all modes is light. 16. An analysis of transport investment needs by consultants under the First Highway Project confirmed the priority of concentrating attention on raising the standard of the existing road system to provide adequate communications within the generally widely separated economic and popu- lation centers of Somalia. This study formed the basis for the Government's request for Bank Group assistance in financing a Second Highway Project designed to meet the principal needs of the Northwest Region. The detailed engineering of the road was prepared by consultants financed by UNDP and the African Development Bank (AfDB), with the Bank as executing agency. 17. A report entitled "Appraisal of a Second Highway Project, Somalia" (PTR-81a) is being distributed separately. A Credit and Project Summary is at Annex III. The project consists of:  (a) the construction of a two-lane paved highway from Hargeisa, the main city in the north, to the new deep water port at Berbera on the Gulf of Aden (about 158 km); (b) consulting services for (i) assistance in the prequalification of contractors, evaluation of contract bids and the award of contracts for the highway; (ii) supervision of construction of the highway; (iii) preparation of a feasibility study of a road between Hargeisa and Borama (140 km) with a spur to Tug Wajale (20 km) on the Ethiopian border and subsequent detailed engineering should the road prove to be technically feasible and economically justified; and (iv) technical assistance in transport planning. The Project would be implemented over a three-year period under the overal1 supervision of the Ministry of Public Works through its Civil Engineering Department (CED). 18. Although the Hargeisa-Berbera route is the main transport axis of the northern region of Somalia, and one of the most important road links in the entire country, it is at present basically a desert track, rough and dusty, with poor alignment and drainage. The predominant economic activity in the region served by the road is raising livestock, Somalia's main ex- port. Of total animal exports in 1968, valued at $18 million, 66 percent moved along the route of the proposed project road and through the port of Berbera. The Hargeisa-Borama road and spur to Tug Wajale, the subject of the feasibility study, would serve the most fertile areas in the northern region and complete the route from the coast to the Ethiopian border It could in time become the main import and export route of a 5,000 km2 area in the Ogaden Province in Ethiopia where a number of agricultural and animal raising programs are being planned. 19. The project is estimated to cost $10.6 million equivalent, net of taxes, with a foreign exchange component of $7.7 million, about 70 percent. This estimate is based on the lowest bid received under international competitive bidding in accordance with the Bank/IDA Guidelines and takes account of the recent exchange rate adjustments. The construction contract would not be awarded until the proposed credit, if approved, is signed, but retroactive financing under the credit is required for about $20,000 to cover the cost of consultant work since May 1, 1971 on the preparation of tender documents and evaluation of bids. The cost estimates for the various consulting services required are based on actual proposals or the costs of similar work carried out under the First Highway Project. 20. The most likely estimate of the internal economic return for the project is 19 percent. The benefits would be derived from road user savings and from reductions in loss of weight and death of livestock during trans- port to Berbera. Improved quality of cattle delivered to ships is moreover of great importance if Somalia is to retain and extend the markets for her livestock.  - 6 - 21. The project would be financed by the proposed IDA credit of $9.6 million, covering $7.0 million of foreign exchange expenditures and $2.6 million of local expenditures, and an AfDB loan of $1.0 million, covering $0.7 million in foreign exchange expenditures and $0.3 million of local expenditures. The IDA credit and AfDB loan would be disbursed approximately in the proportion of 9:1 against expenditures under the single construction contract and the consultant services for pre-contract work, construction supervision, studies and assistance in transport plan- ning. The National Bank of Somalia would establish and operate a project revolving fund for contract payments under similar arrangements that have worked satisfactorily under the First Highway Project. 22. AfDB's participation in this project could only be through a conventional loan carrying 7 percent interest (including one percent commission) and repayable over 20 years after 5 years of grace. Since Somalia is not in a position to service more than a very limited amount of such finance, it is appropriate that AfDB's participation be small. The justification of IDA's financing 90 percent of total project cost and the need for the whole of the project to be financed from external sources is discussed in paragraph 8. 23. Reference has already been made to problems arising under the First Highway Project from inadequate allocations of funds for road maintenance. The Government has given undertakings that So. Sh. 6.4 million ($0.9 million) would be allocated to road maintenance in 1972, this amount to be increased progressively each year to So. Sh. 7.4 million ($1.1 million) by 1975. These amounts would represent a substantial in- crease over current levels. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 24. The draft Joint Financing Agreement between the Somali Demo- cratic Republic, the African Development Bank and the Association; the draft Development Credit Agreement between the Somali Democratic Republic and the Association, the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement; and the text of a resolution approving the proposed Credit are being distributed to the Executive Directors separately. In addition, a draft Administrative Letter from the Association to the African Development Bank is being distributed. 25. The format of the Agreements is arranged so that all covenants which are of common interest to the Association and the African Development Bank are contained in the Joint Financing Agreement. The Development Credit Agreement and the African Development Bank's Loan Agreement contain only the financial terms and those covenants that are of interest to only one of the lenders, while incorporating by reference the covenants contained in the Joint Financing Agreement. In all other respects the contents of the various Agreements conform substantially to the pattern of Agreemonts ined for highway projects, taking aocount of the existence of the joint financing by the Association and the African Development Bank.  -7 - 26. The fulfillment of the conditions precedent to the first dis- bursement under the African Development Bank's Loan Agreement, the due authorization and ratification of the execution and delivery of the Joint Financing Agreement and fulfillment of the conditions precedent to the effectiveness of that agreement or the right to make withdrawals there- under, the enactment of legislation to assure the allocation for highway maintenance of So. Sh. 6.4 million for FY 1972 and the establishment of a project revolving fund would be conditions of effectiveness in the Devel- opment Credit Agreement. 27. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART V - RECOMNENDATION 28. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachment Washington, D.C. January 5, 1972.   ANNEX I STATEMENT OF IDA CREDITS TO SOMALIA AT NOVEMBER 30, 1971 (US $ million) No. Year Borrower Purpose Amount Undisbursed 74-so 1965 Somalia Highway (Afgoi- 6.20 - Baidoa Road) 123-SO 1968 Somalia Highway - Supple- 2.30 0.31 mentary (Afgoi- Baidoa Road) S5-SO 1969 Somalia Port of Mogadiscio o.55 0.05 (Engineering and Accounting Services) 247-SO 1971 Somalia Education 3.30 3.30 Total 12.35 3.66   ANNEX II SOMALIA Country Data Currency and Exchange Rate: The basic monetary unit is the Somali shilling, which was at par with the shillings used in Kenya, Tanzania and Uganda, before the recent currency adjustments. Somalia's decision to maintain the value of its currency implies the following exchange rates: Sh.1 = US$0.152 US$1 = Sh.6.579 Area: 637,000 square kilometers (246,000 square miles) Population: 1971 estimate - 2.8 million Rate of growth - approximately 2.5 percent Population density - 4.4 per square kilometer Political Status: Independent Republic since July 1960; associate member of the European Economic Community; applicant for membership of the East African Economic Community. Gross Domestic Product and National Income: Somalia has no national accounts. Livestock and subsistence crop production contribute the largest proportion of national income. Per capita income is estimated to be about US$60. Money and Credit: Sh. Million Annual Growth Rate 1963 1966 1970 1063-70 Total money supply 197.9 2.0 314.2 6.8% Domestic credit: to Government 34.3 48.4 58.0 7.8% to Private Sector 90.9 181.0 182.0 10.4% Prices: No comprehensive price indices are available for Somalia. The cost of living index for Mogadiscio, however, rose ten percent for the period 1966-1570.  ANNEX II -2- Public Sector Operations: Sh. Milion 1963 1966 1970 Ordinary government revenues 13-3.6 234.3 76.t4 Ordinary government expen(litures 189.2 257.3 309.3 Budget deficit 45.4 23.0 2.9 Budget deficit as % of government expenditures 24.0% 8.9% 0.9% External Public Debt: Debt outstanding December 31, 1970 US$105.2 million Debt service payments (1970) US$ 2.7 million Debt service ratio (as % of foreign exchange earning) 5.9 percent Balance of Payments: Sh. Million 1963 -69M- 1970 Merchandise exports f.o.b. 199 216 227 Merchandise imports c.i.f. 315 319 326 Net services -40 3 -19 Net transfers 105 71 95 Balance on current account -C1 -:75 - 1963 1966 1970 June 1971 Foreign assets (net) T9:F 677 109.5 16b.2 Concentration of Exports: Percentage of Exports 1963 170 Bananas -45- 26 Live animals and hides and skins 46 60 IMF Position: US$ Million Quota 19.0 SDR's 2.6 Drawings outstanding (December 1971) nil External Assistance, 1960-1969: US$ Million Grants 239.7 Loans 147.9 Major Donors: MultrTTateral: US$ Million UN 24.3 IDA 8.5 EEC 27.3  ANNEX II Major Donors: (Continued) Bilateral: US$ Million Italy 112.4L U.S.A. 70.9 U.S.S.R. 53.1 Federal Republic of Germany 29.2   ANNEX III SOMALIA CREDIT AND PROJECT SUMMARY Borrower: Somali Democratic Republic Amount: US$9.6 million equivalent. The proposed credit would cover 90% of the total cost, including about US$2.6 million of local currency financing. Amortization: In 50 years including a 10-year grace period through semi-annual installments of i of 1% from June 1, 1982 through December 1, 1991 and of 1W from June 1, 1992 through December 1, 2021. Service Charge: 3/4 of 1% per annum. fE21e t: SECOND HIGHWAY PROJECT Construction of a 158 km all-weather surfaced high- way from Hargeisa to Berbera and consulting services for, (i) assistance in the prequalification of contractors, evaluation of contract bids and the award of contract for the civil works; (ii) super- vision of construction; (iii) preparation of a feasibility study and, if it confirms the technical and economic feasibility, subsequent detailed engineering of the Hargeisa-Borama highway (about 140 km) with a spur to Tug Wajale (about 20 km); and (iv) technical assistance in transport planning. Project Entity: The Civil Engineering Department (CED) of the Ministry of Public Works would. be responsible for the execution of the proposed project. Cost of Project: (US $ millions) Local Foreign Total Construction of the Hargeisa-Berbera Road 2.35 5.45 7.80 Supervision of construction 0.05 0.50 0.55 Feasibility Study and Detailed Engineering 0.05 o.60 o.65 Technical Assistance in Transportation Planning 0.01 0.05 0.06 Contingencies 0.44 1.10 1.54 TOTAL PROJECT COST 2.90 7.70 10.60  ANNEX III -2- Financing: (US $ million equivalent) Local Foreign Total IDA Credit 2.6 7.0 9.6 ADB Loan 0.3 0.7 1.0 2.9 7.7 10.6 Procurement Construction would be by-contract awarded after Procedures: international,competitive bidding in accordance with Bank/IDA, guldelines., Estimated FY72 FY73 F'7iI FY75 Disbursements: 1.8 3.1 3.7. 1.0 Rate of.'Return:: Economic r,ates o6Z return of- the project road. (based upon sensitive: analyszes) estimated to be between 15%, and 23%. Bes't.,estimate 1.9%. Appraisal Report: Report No. PTR-81a, January 5, 1.972 Transportation Pr,ojects Department  44 45 502 PEOPLE'S REP OF SOUTHERN YEMEN 8 edo~~~~ -12'F. T. A. I. 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Au2\eg MOGAD~~~~~~~~~~~~ISHU __Biturninous surfaced, goodrcondition 44 48* esunolGravel/earth surfaced roads JANUA4Y tn'o iSED // 3helombo20First H0oiHh rc uJ j ' ' --' X . s C g 7/ ~~~~~~~~~~~~~~~~~~~~~~~~~~ - -- - Fecsibdiiy studies a detoled engineering 4\>1 g //Brovo ~~~~~~~~~~~~~~~~~~~~~~Second Highway Project: AfmdL E i Geb/ ............... .....Feasibility study L,bfodui 4. / :Motn ports ot r B g 9)cy /~~~imom Z== RIC t- Rivers Ot i 2 ncic~~~1 Somalia 7 _ -Intern ational boundaries | d~~~~~~~~~; Tho .0 bonoi wn on thl, r..p do rot ?O 1 i. y nd.--1ond . .. orCl:pt.- by th. 01 50 1 IO 200 \~~~~~~~~~ ~ ~~~~~~~~~~~~~~~~~~~ Sp"\ / , 1,00 150 2,00 250 3?O \ / ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~KILOMETERS JANUARY 1972 IR 281