Haiti - Third Highway Project

CIRCULATtNG COPY Y(J0.C~~ 10 mBE.RETURNED TO REPORTS.DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION For Exclusive Use of Bank Group Staff CONFIDENTIAL Report No. P-1409a-HA REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF HAITI FOR A THIRD HIGHWAY PROJECT May 6, 1974 The confidentiality of this report must be strictly observed. It was prepared for exclusive use of the Bank Group Staff. It may not be published, quoted or cited without Bank Group authorization.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. To be returned to Reports Desk immediately after'use  RATE OF EXCHANGE Currency Unit = Gourde (G) US$ = G 5.00 G 1 = US$0.20 G 1 million = US$200,000 FISCAL YEAR October 1 - September 30  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMIENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF HAITI FOR A THIRD HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Republic of Haiti for the equivalent of US$10.0 million on standard IDA terms to help finance a project for the rehabili- tation of the Northern Road. PART I - THE ECCNOMY 2. The most recent economic report on Haiti, Report No. 410-HA entitled "Current Economic Position and Prospects of Haiti" was issued on May 1, 1974. Its main findings are summarized below and available social and economic data are presented in Annex I. 3. Haiti is the only country in the Western Hemisphere included in the U.N. list of 25 least developed nations. GNP per capita in 1972 stood at about US$120. An infant mortality rate of about 200 per thousand live births, low nutrition standards (malnutrition and gastro-enteric diseases account for over half the deaths in the country) and an illiteracy rate of 80 to 90 percent of the adult population indicate the low living standards of the population. 4o In spite of a rugged terrain, basically hostile to agriculture, about 80 percent of Haiti's 4.5 million people live in the rural areas at close to subsistence standards. Agriculture accounts for nearly half of GDP and about 60 percent of Haiti's merchandise exports, among which coffee occupies a leading place. Excessive fragmentation of land and lack of extension and credit services have prevented introduction of modern agricultural techniques which are required to raise agricultural incomes. The remaining 20 percent of the population is distributed between the capital, Port-au-Prince (about 12 percent) and numerous provincial cities and towns (about 8 percent), only ore of which, Cap Haitien, has over 50,000 inhabitants. 5. Economic growth and social progress have been hampered by periods of political instability which did not permit the development of an adequate technical and physical infrastructure, as well as by a poor natural resource endowment. Inadequate maintenance has reduced the efficiency of the very limited irrigation network, while population pressures have led to uncontrolled cultivation, soil exhaustion and erosion which have further reduced the productivity of scarce land  -2- resources. Transvort and communications between Port-au-Prince and the interior are difficult. The lack of an adequate transport infrastruc- t-ure hns impeded the commercialization of agricultural output while deficient communications between the capital and the interior have led to the excessive concentration of economic activity in Port-au-Prince. Fovwer generation capacity is also well below the Latin American average 6esp-Ate recent investments in hydroelectric generation facilities. Haiti has no large known mineral resources except for some deposits of bauxite, which is exported in small quantities for processing abroad, and deposits of' iinite whose economic value has not yet been determined. A copper m.ining operation- was closed down last year as efforts to discover new deposits proved unfruitful. 6. President Jean-Claude Duvalier, who assumed office April 1971, has continued to ease political tensions and to improve the investment climate. In marked contrast to the previous decade when GDP nearly stagnated, Haiti has enjoyed relatively rapid, though unbalanced, economic growth in the last five years. Expansion of small-scale manufacturing and assembly operations, tourism and construction have led to average annual increases of GDP of about 4 percent. These activities have contributed noticeably to improving economic conditions in Port-au-Prince. Emloyment in assembly operations, for example, increased from 10,000 in 1971 to 25,000 in 1973. Agriculture, however, conti- nues to show little dynamism. 7. Tost of the initiative leading to the current economic expan- s-i on has come from the domestic and foreign business conmnunities. Savings deposits in the banking system increased from 2.5 to over h percent of GCP between 1971 and 1573, as three foreign banks opened subsidiaries in Port-au-Prince between 1971 and 1973. A fourth is expected to do so in the near fu-ture. A privately owned Haitian bank also began operations in 1973. Although recent growth was achieved with little fixed invest- MIert (except for housing construction), execution of several major invest- ment protects in the industrial sector is already under way. The role of the public sector has been limited and achievement o' sistalned and bnlanced growth will require higher public development oualc-s thin in the ppst. The priorities for public expenditures are pa.ri. iIear: firstly, the development of infrastructure facilities (ra-isport, power-, water supply and telecomnunications); and secondly, inensures to increase agricultural productivity. The recent Bank economic in 'ss.Jo i prepared a public expenditure program for 1975-79 which is in line wi t.h the Government s views. The program forecasts development expenditure renuiremnents in 1975-79 to average about US$46 million per year. This ccmpares with actual development expenditures of only US$14 million per year in the 1969-72 period. By 1980 the proposed level of development expenditures would reach 4.5 percent of GDP as compared to 3.2 percent in 172. It is estimated that this level of expenditures will be neces- sar-y to permit real GDP growth of about 5.0 percent yearly.  -3- *. The successf'ul execution of' such a program presupposes a subs- tantial increase in the flow of external,assistance. In the period 1. 71 -/ ynet external ol'ficial lending financed only about 5 percent oi development outlays. On the basis of disbursements of already ccrm- mitt,ed loans and of' the likely forthcoming additional external financing, it is reasonable to expect that official lending agencies will finance about ),5 percent of' development expenditures in the period 1975-79. To achieve the required level of disbursements, commitment levels are expected to average between US`25 and US$30 million per year. Also, technical assistance grants and private donations are expected to con- tinue linancing an important, albeit declining, shere of development outlays, abolit 23 percent in 1 575-80 as compared to 44 percent in 1 71-73. 1C. It is estimated that government revenues and internal borrowing would finance 32 percent of development expenditures in 1975-79, as compared to 51 percent during 1971-73. Although a smaller share, in absolute terms expenditures for development financed by government revenues will rise from US$7 million per year in 1971-73 to US$15 million per year in 1975-79. The substantial reinforcement of the development budget (the major part of which comprises local counterpart funds for projects financed by official lending agencies) would require either: (a-)a reallocatfon of funds presently used for non-development expendituires; (b) a reduction of current expen- ditures; or (c) an increase in the tax burden. The first alternative is o-b far the most desirable. A reduiction in current expenditures could lead to further deterioration of public social services and of mainten- Pnce of public works, while the overall tax ratio of' 12 percent of GDP is already high considering that a substantial share of income is gene- rated in the non-monetized economy and that the per capita income level is low. Appropriate revenue measures slhould be aimed at increasing the progres- siveness of the tax structure rather than at raising the overall tax burden. ii. The Government has already recognized the need to improve the progress veness of the tax structure. In August 1573, the specific tax on ccd'fee which contributed to reducing producer incentives by absorbing .- large share of export proceeds when international prices were low was replaced by a progressive ad valorem levy. The Government also lowered lzaxes on several food products and medicines while it raised import duties on certain luxury goods. More measures in this direction, includi ng the institution of' an urban property tax based on current land values, better income tax administration and higher marginal il'come tax rates, are still required. 12. The continuation of current growth trends is likely to have a manor impact on the balance of payments. Rising domestic demand and lagging output of coffee and sugar have offset rapid growth in exports  of bauxite, and, to a lesser degree, essential oils so that even with higher export prices total merchandise exports in current terms have increased since 1968 by only 6.5 percent per annum. In contrast, demand generated by rising urban incomes caused merchandise inports to grow at over 15 percent annually during the same period. Receipts fram tourism have to some extent offset the imbalance in the trends of merchandise trade but the high import content of tourist, consumption has also con- tributed to import growth. Given that, at least in the short term, domestic demand for coffee and sugar should continue to rise and that production problems are not likely to be overcome quickly, the resource gap is expected to widen. 13. As there has been little net foreign borrowing for the past tern years, the debt service ratio is low (about 6 percent in 1972). The bulk of debt servicing requirements are related to a small number oJ relatively large debts0 Servicing of the debt to suppliers for power generators, and to the U.S., for agricultural projects executed between 1949 and 1963, represented over i] percent of all debt service obligations in 1972. Haiti's total debt cutstanding, repayable in foreign currencies, was estimated to be US$72 million at the end of S73. If, as exqected, all significant borrowing by the public sector takes place on concessionary- terms, no debt servicing problems are likely to arise. 1it. The direct impact of higher petroleum prices on the balance of payments should not be severe. Imports of petroleum products accounted for only 4 percent of total imports of goods and services in 19'72. S-ince other categories of imports are expected to rise rapidly, higher petroleum prices should bring imports of petroleum products to 6 percert. of imports of goods and services ain 1974. This increment should not constitute a major problem given adecuate import manegement which w'Il be recuired in any case to contain the growth of non-essential imports. PART II - BANK GROUP OPERATIONS IN HAITI 1. In the past, Bank Group lending to Haiti has been limited to a US$2.6 million Bank loan (1l1 HA) in 7156 for highway rehabilitation 2nd imaintenance and a US$350,000 IDA credit (32 HA) for highway mainten- ance in 1962. The 1956 loan was made for a project consisting of the organization of maintenance services and the rehabilitation of approxi- mately 1,200 km of roads. Though execution of the project was delayed by political interference, it did result in the creation of a Maintenance Service, in some improvement of the road system in the central and northern parts of the country and in the establishment of maintenance facilities in the four northern districts of the country. The 1962 credit was an interim measure designed to preserve the results of the Bank-financed project at a time when conditions in the country did not warrant proceeding with a previously envisaged second road maintenance and rehabilitation project. There was no further Bank Group lending to Haiti after 1962 because Govermnent policies throughout the 1960's were not conducive either to  the preparation or to the successful implementation of development projects. The 1956 Bank loan was fully repaid in July 1972. Annex II contains a summary statement of Bank loans and IDA credits as of February 28, 1974. 16. The proposed credit would mark the resumption of IDA lending to Haiti. Such lending would enable the World Bank Group to support the efforts of the present Government to sustain the economic recovery which started in 1968 and to extend its benefits to the rural population. We propose to emphasize sectoral planning and institution-building, initially in the transportation and power sectors which are major bottlenecks to development. At the same time, we intend to pursue our dialogue with the Government on measures to improve the allocation of public sector revenues. 17. The IDB has made loans in Haiti for agricultural and indus- trial credit, rural education, improvement of Port-au-Prince t8 water supply and port facilities and for road construction. AID has provided assistance for Haiti 's malaria eradication program, for community develop- ment and for the strengthening of the national highway maintenance service. The Federal Republic of Germany is providing financial and technical assistance for a regional rural development scheme. French Government assistance has until now concentrated on the improvement of secondary and technical education. Table 1: LOAN COMMM"NTS TO HAITI, 1950-73 ($ million) IBRD/IDA IDB AID Lending 1950-65 2_ L Lending 1966-73 - 40L.4 Agriculture - 0.7 5.2 Industrial Credit -.6 4_ Transport 3.0 32.2 3.4 Education - 1.3 - Water and Sewerage _ 7.5 - 3.0 46_38.6 2/ Includes an agricultural credit component.  - 6 - lb. In defining a strategy for our future lending to Haiti we must take into account two major constraints. The first is the institu- tional and technical weakness that renders sectoral planning, and project preparation and execution of above-average difficulty in Haiti. We are attempting to deal with this problem by maintaining a close relationship with .the L'NDP which has an active technical assistance program :In Haiti. The UNDP provided financing for the consultants who prepared the feasibi- lity ,3tudy and detailed engineering for the proposed highway project. Espec-ially close follow up will also be required to ensure successful execution of projects. 19. The second constraint is the availability of counterpart funds. This constraint could become increasingly important as Haiti's ability to prepare projects suitable for external assistance improves. As indicated in paragraph 10 supra, a progressive reallocation of government revenues to development outlays will be necessary. 20. In the light of the above-mentioned constraints and of the present and prospective roles of other official lending agencies, we believe that the effectiveness of Bank Group action in Haiti will be enhanced by concentration of IDA lending on a few key sectors. In transportation, the Government has indicated that it will seek IDA finan- cing for completion of the Northern Road reconstruction, to be begun under the proposed project, and for the construction of a highway linking Port- au-Prince to Cap Haitien through the Central Plateau. The feasibility studies for the proposed project indicate that the reconstruction of the entire Northern Road is economically justified. We expect to submit to the Executive Directors in the near future another project comprising the remaining sections of the Road, subject to satisfactory performance in project execution and maintenance by the Government. As regards selection of other transportation projects, we expect to be guided by the results of the sector survey which is to be carried out as part of the proposed pro- ject. The survey will give special attention to the feasibility of invest- ments in rural feeder roads. 21. An adequate supply of power is necessary to ensure the con- tinued expansion of the urban sector which must play an important role in absorbing the rural population surpluses that cannot be gainfully employed in agriculture. The UNDP is financing the investigation of lignite deposits with a view to their possible utilization for a thermal plant. The Government has requested IDA to consider financing such a plant or any other economically viable alternative to meet the capital's power requirements after 1976. 22. We are in the process of defining the direction of possible IDA lending for rural development and education. Projects in these areas would be designed to raise the productivity and social standards of the predominantly rural population. Bank staff participated in an IDB/FAO Mission that was in Haiti in mid-1973 to survey the major problems affecting the agricultural sector and to identify agricultural  - 7 - and rural development projects suitable for financing by official lend- ing agencies. The mission identified several potential projects whose preparation is now being discussed with the Government. As far as education is concerned, an IDB/UNESCO Mission will shortly proceed to Haiti to carry out a sector survey and to identify projects suitable for financing by external agencies. Under an agreement between the two Banks, the findings of that Mission will be made available to the Association for follow-up action and eventual project preparation. 23. The Bank Group's share in Haiti's publicly-guaranteed external debt outstanding and disbursed amounted to about 1 percent at the end of 1972. The Bank Group's share of external public debt service during 1972 was about 2 percent. Its share of outstanding publicly-guaranteed external debt could rise to about 45 percent by the end of the 1970's; its share of external public debt service would be of the order of 10 percent. 2L. There have been no IFC operatiorsin Haiti and none are being considered at this time. PART III - THE TRANSPORT SECTOR Background 25. Most merchandise in Haiti is carried by road. This is due mainly to the relatively short overland distances between centers of production,. consumption, imports, and exports. Coastal shipping is negligible, because the coastline is disproportionately long in rela- tion to the area of the country and volume of traffic. The main road network consists of four highways: (a) the Northern Road between Port-au-Prince and Cap Haitien, following the coast up to Gonaives; (b) the Southern Road between Port-au-Prince and Les Cayes on the Southern Peninsula; (c) the Central Road, which links Port-au-Prince to Cap Haitien through the Central Plateau (Hinche area); and (d) the Northwestern Road linking Gonaives to Port-de-Paix. These are all in very poor condition. 26. The main ports equipped for loading ocean-going vessels are Port-au-Prince and Cap Haitien. The port of Port-au-Prince - which handles more than 90 percent, by weight, of imports - is being moder- nized and enlarged with the assistance of a 1972 IDB loan. Interna- tional air transport of passengers and freight has recently undergone rapid development; the international airport of Port-au-Prince is capable of handling jet aircraft in all weather conditions and servi- cing passengers and cargo as well. Because of the low income levels in Haiti, domestic air traffic is growing much more slowly. Haiti has no railway system; and one does not appear warranted in view of the relatively short distances over which bulk cargoes are transported.  - 8- Transpo-t Policy and Coordination 27. The National Council of Development and Planning (CONADEP) is formally responsible for all planning, including that of the transport sector, while the Ministry of Public Works, Transport and Communications (TPTC) has been responsible only for the implementation of national transport policy. This system has not functioned satisfactorily and has resulted in `,he selection of transportation projects without an evalua- tion of intra-sectoral priorities and without benefit of basic data relating to user charges and traffic flows. Another problem has been inadequate coordination between TPTC and public agencies such as the National Road Maintenance Service (SEPRRN), the Port Authority of Port-au-Prince (APPP) and the Airport Authority of Port-au-Prince (AAPP). 28. The Government recognizes that CONADEP should emphasize inter- sectoral planning and inter-agency coordination and that the responsibi- lity for intra-sectoral planning should increasingly rest with functional ministries such as TPTC. Technical assistance would be provided under the proposed project to help in the reorganization of TPTC and in the establish- ment within TPTC of a Planning Unit. The Government would agree to establish such a Unit by December 31, 1975 (Section 4.02 of the draft Credit Agreement) and to start, not later than December 31, 1974, a transport survey which will define future intra-sectoral investment priorities (Section 3.05(b) of the draft Credit Agreement). As the IDB, USAID), other bilateral assis- tance and the Association are involved or are expected to be involved in the development of the transport sector, a strengthening of the coordina- tion among those agencies is also required. The Government has indicated that it intends to schedule regular meetingswith IDA, IDB and the relevant bilateral agencies on matters of common interest relating to the transport sector. 'hLn_.Hwghwa- Sabsector 29. The road network tota.s slightly more than 3,000 km, only ten percent of which are paved. There has been no major highway construc- tiori since the mid-1 50's and during the last decade the road network deteriorated cGnsiderably due to the almost complete lack of' mainten- ance. Nievertheless, the total vehicle fleet increased at an average rate of 7 percent per year between 1966 and 1971. The 1973 tota.l was es'i-nda ed at 21,000 vehicles. Vehicle density is about four vehicles per 1,00G0 inhabitants, one of the lowest in the hemisphere. The vehicle fleet is heavilya concentrated around Port-au-Prince, where arprox- mately 80 percent of it is registered. Individual owner-drivers predon.fr.ate, although there are a few commerci2l tracking companies. High,hway transport has so far not, been regulated in Haiti. The Govern- ment has agreed to adopt vehicle control legislation to cover the whole national road network not later than December 31, 1976 (Section 4.05 of the draft Credit Agreement). The Government has also agreed to take the first steps in the establishment of a system of collection of data on  - 9 - the transport sector on a regular basis (Section 4.04 of the draft Credit Agreenent). 30. Highway expenditures are financed from the general budget, the development budget and from external sources. For example, highway administration expenses are funded from the general budget, whereas highway maintenance and construction are financed separately from the proceeds of taxes on fuel, which are earmarked to the Road Maintenance and Road Construction Funds. External agencies are expected to assume a large share of the financing for the development of this sector; in 1973, the Government signed a US$3.7 million loan with USAID for a national highway maintenance program, and a US$22.2 million loan with IDB for the reconstruction of the Southern Road. The Government is presently seeking French bilateral assistance for the reconstruction of the Port-au-Prince-Jacmel Road, in the southern part of the country. 31. The TPTC is responsible for highway administration, engineer- irig, and construction works. Under the IDB loan for the Southern Road, the Government has agreed to set up a Coordinating Unit within the TPTC for the execution and supervision of the Southern Road project. Upon its establishment, this Coordinating Unit will also be charged with the execution and supervision of the proposed project, as well as of future major highway projects. 32. There are about four local firms capable of executing small construction works, but none of them has had any experience in highway or bridge construction. At this stage of development of the local cons- truction industry, only a gradual approach to its strengthening appears to be feasible. The proposed project includes a technical assistance conponent for local civil works contractors which would consist mainly of on-the-job training. Road Maintenance 33. SEPRRN, the road maintenance service, is under the technical supervision of TPTC, although its finances are controlled by the Central Bank. The national maintenance program which is being financed with USAID assistance includes technical assistance for training of SEPRRN's staff, for rehabilitation of maintenance shops and reconditioning of existing equipment, and for the purchase of new equipment. The loan agreement between the Government and USAID gives priority to the maintenance of the Northern and Southern Roads. Intensive consultation and cooperation among the Government, USAID and the Association will be required to ensure that the maintenance of those existing paved sections along the Northern Road, not included in the proposed project, will commence as soon as practicable. 34. In addition to its general maintenance obligations (Section 4.03 of the draft Credit Agreement), the Government would agree to carry out the maintenance of the sections of the Northern Road not included in the proposed project in accordance with a specified maintenance plan. The  - 1'} - Government and the Association would define such standards in an exchange of letters. This special concern for maintenance is due to the fact that in the past, lack of adequate maintenance has been res- ponsible for the deplorable conditions of the roads. PART IV - THE PROJECT 35. A Report entitled "Haiti-Appraisal of a Third Highway Project" (No. 382-RA) dated May 6 , 1974, is being distributed separately. The main features of the credit and project are summarized in Annex III. Feasibility and detailed engineering studies were carried out in 1973 by the French consultant firm Ingeroute, under a UNDP-financed project with the Bank as Executing Agency. The project was appraised in the field in September 1973. Negotiations for the proposed credit were held in Washington in April 1974. The Government was represented by Messrs. Emmanuel Bros, Minister of Finance and Economic Affairs; Pierre Petit, Minister of Transport, Public Works and Comr.unications; Leon Mirambeau, Vice President of the National Bank, and Frank Bastien, Attorney in the Ministry of Finance and Economic Affairs. Project Description 36. The project consists of the following: (a) Civil Works on the Northern Road: Reconstruction would comprise seven sections totalling about 150 km of the 249 km Northern Road. These sections represent the most urgent works, and comprise notably a cri- tical section close to Port-au-Prince, the portion of the road that traverses the agricultural Plain of the Artibonite, as well as the northern section of the road (Plaisance-Cap Haitien). The project also includes the reconstruction of a major bridge over the Estere River, in the Artibonite Valley, which partially collapsed in 1973. The remaining sections of the road will be serviceable year round for another few years provided adequate maintenance is performed. (b) Technical Assistance In order to achieve the above-mentioned objectives, technical assistance would be provided under the proposed project in three general areas as follows: (i) transport planning; carrying out of a transport survey, which will define fature investment opportunities for the sector; and training of local personnel, especially in the field of transport economics;  (ii) advisory services for the reorganization of TPTC: a public works administration and management expert will be attached to ,he Chief Engineer of TPTC, to advise him on the ongoing re-organization of the Ministry, and subsequently, to assist him in the implementation of the reorganization, including the establishment of the Plan- ning Unit; and (iii) local civil works contractors: on-the-job training to improve the technical and management capabilities of local civil works contractors; this assistance would cover two major aspects: (a) manage- ment, cost accounting and financial programming and analysis; and (b) construction engineering techniques. Project Execution 37. The execution of the proposed project, which would take about two years, would be the responsibility of the TPTC. Labor-intensive methods were carefully considered during project preparation, but since the major items of work involved - earthwork and pavement work - are not generally appropriate for execution by labor-intensive methods, normal equipment usage has been envisaged in the design. The reconstruction of the Estere Bridge, for which retroactive financing is recommended under the proposed credit, started in February 1974 and is expected to be completed by the end of the year. All other civil works are expected to be in progress by the fourth quarter of 1974. The terms and conditions of the employment of consultants and technical assistants would be acceptable to the Association. Cost Estimates and Financing 38. The total cost of the project is estimated at US$13.3 million, including contingency allowances. A detailed breakdown of costs is given in Annex III. The proposed credit of US$10.0 million would finance the estimated foreign exchange component of the project. Local costs estima- ted at US$3.3 million will be borne by the Government. It is expected that these resources will come mainly from the fuel taxes referred to in para. 30 (Road Construction Fund). Any supplementary financing required to complete the project would be met from a special fund established to meet counterpart requirements (Matching Fund) and from general Government revenues. 39. The Government is seeking UNDP financing for the $600,000 technical assistance component now included in the IDA credit. Should UNDP financing be forthcoming, the $600,000 would be reallocated to cover the cost of additional civil works on the Northern Road. This procedure is recommended in view of the fact that feasibility studies and detailed  - 12 - engineering have been carried out for the entire Northern Road and indicate satisfactory economic rates of return in the reconstruction of all sections. 40. Experience in the bidding for the reconstruction of the Estere Bridge (in which the lowest evaluated bid - subsequently accepted - was some 80 percent higher than the consultants' estimate) indicates that the consultarnts could not adequately quantify the risk and difficulty of working in a country where no major road construction work, involving foreign contractors, has taken place for the last 20 years. As the reconstruction of the Estere Bridge is a relatively small work, the bids may not be indicative of the market response to the-larger work represented by the reconstruction of the seven road sections. However, a special risk contingency equivalent to 20 percent of the basic cost estimates for civil works is included in the cost estimates. Although the latter contingency was arrived at without use of statistical risk analysis (since no maior civil works contracts were let in recent years in Haiti) it should, together with the normal provisions for contingencies, ensure the financing of the project. Should the risk of a cost overrun not materialize or materialize only partially, the balance of the amount included in the loan for this purpose would be transferred to the finan- cing of additional civil works for the reasons mentioned in the preceding paragraph. 41. A physical contingency of 10 percent has been added to cons- truction costs to cover possible increases in quantities. A further contingency has been added to allow for cost increases due to price escalation during the period of execution of the project (including petroleum price increases) at annual rates varying between 8 and 12 percent for the foreign component of civil works, at annual rates of between 7 and 11 percent for the foreign currency cost of all consulting services including supervision and technical assistance, and at 10 per- cent per annum for the local currency cost of civil works and consulting services. Procur-ement and Disbursement 42. Civil works contracts would be let on the basis of inter- national competitive bidding in accordance with Bank guidelines. The works would be divided into three lots (estimated cost Us$0.8, US$2.9 and US$3.1 million without contingencies). Bidders would have the opportunity to bid for any combination of the lots, including the total package. Pre- qualification of contractors was completed in March 1974, and bids were called for in April 1974. Consultant services for supervision and tech- nical assistance will be provided on terms and conditions acceptable to the Association.  - 13 - 43. The credit would be used to cover the foreign exchange cost of consultants services and technical assistance, 100 percent of the direct foreign exchange costs and 20 percent of local costs of civil works contracts. The latter percentage corresponds to the estimated indirect foreign exchange component of civil works contracts in this project. It is proposed that up to Us$hoo,000 be reimbursed to the Government from the proposed credit for expenditures in respect of the reconstruc- tion of the Estere Bridge incurred between January 1, 1974 and the date of signing. It is also proposed that up to US$100,000 be reimbursed to the Government from the proposed credit for expenditures in respect of consultants services incurred between January 1, 1974 and the date of signing. Annex III includes the disbursement schedule for the proposed credit. Economic Benefits 44. The estimated economic rate of return on the civil works as a whole is about 25 percent, with the various sections ranging between 12 percent and 30 percent. Benefits and costs were discounted over the period 1974 through 1996, including the two-year construction period and the 20-year economic life of the project. Quantifiable benefits associated with the proposed reconstruction of the most urgent civil works along the Northern Road consist of savings in vehicle operating costs and reduced maintenance costs of the highway. 45. Important indirect benefits are also expected in addition to quantifiable benefits. Unlike the present situation, the passage of vehicles over the entire length of the road would be possible even during the rainy seasons. Cap Haitien, the country's second largest town would be permanently linked to the rest of the country, and to Port-au-Prince in particular. The project road serves two of the most important agricultural areas of the country. The proposed rehabilitation would thus represent an essential element for the successful implementation of present agricultural development plans in the Artibonite Valley and in the Gonaives area. 46. The proposed technical assistance component is expected to bring about substantial institutional improvements in the transport sec- tor and a clearer view of future intra-sectoral investment priorities. PART V - LEGAL INSTRUMENTS AND AUTHORITY 47. The draft Development Credit Agreement between the Association and the Republic of Haiti, the Recommendation of the Committee provided for in Article V, Section l(d), of the Articles of Agreement and the text of a draft resolution approving the proposed credit are being dis- tributed to the Executive Directors separately. 48. Features of the Credit Agreement of special interest are referred to in paragraphs 28, 29 and 34 of this Report.  - 1 - 49. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMEAT ION 50. I recommend that the Extecutive Directors approve the proposed credit. Robert S. McNaxnara President May 6, 1974  ANN EX I Pta 1 of 3 pge ODUD AA- -MDM 2T,-;35 Io 2 /ae Tdfl ion (nid-19fl) 493 per Crf aabia imaa k haiti UP PER CAPA 93# (ATLAS BASIS) /I 120 La 110 /d 260 /4 230