Colombia - Highway Project (revised)

Llv, j - P-54 RESTRICTED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPME.NT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECIUTIVE DIRECTORS onthe PROPOSED LOAN to the REPUBLIC OF COLOMBIA September 2, 1953  REPORT AND RECO1rENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA 1. I submit herewith the report and recommendations on the proposed loan of $14.35 million to the Republic of Colombia for a highway project. PART I - HISTORICAL 2. On April 10, 1951, the Bank made a loan of $16.5 million for a three year emergency highway project for the rehabilitation of Colombia's principal highways. The undertaking of such a project had been strongly urged by the General Survey liission which visited Colombia in 1949 as well as by the Colombian Economic Development Committee, which studied the report of the General Survey iEssion and made recommendations to the Government for carrying out a development plan. The project included some 3,061 kilometers of highways. Five (later reduced to four) foreign contractors began work late in 1951, and progress has been generally satisfactory. The Bank has had a highway engineer consultant stationed in Colombia who has advised and assisted the Ministry of Public Works and reported to the Bank about the progress of the work. 3. The consultant some time ago reported that the contractors were running into unexpected difficulties because of the difficult terrain and the lack of sufficient heavy equipment to meet the problems en- countered, particularly in slide removal. The consultant advised the Bank that, if the entire project was to be completed, the contractors would either have to make a drastic reduction in engineering standards or obtain a substantial increase in dollar and peso funds. He there- fore recommended that the Bank consider a supplemental loan for the purchase of the necessary additional equipment. Accordingly, in April 1953 a Bank Mission went to Colombia to review the status of the project, to consider suggested changes and to discuss with the Ministry of Public Works plans for completion of the project, including possible provision of supplementary financing. In June, there was a change of governments in Colombia and in August another Bank mission visited Colombia to dis- cuss the proposed loan with the new Minister of Public Works. The present Government has indicated its intention to carry out the project in substantially the form agreed upon with the previous Administrationa A comprehensive long-range program for the maintenance of the national highway system has been agreed upon and forms an important part of the revised project. pART II. DESCRIPTION OF THE PROPOSED LOAN Borrower 4. The Borrower would be the Republic of Colombia, a member of the Bank. Amount 5. The loan would be in the amount of $14.35 million or its equiva- lent in other currencies.  - 2 - Purpose 6. The proceeds of the loan would be used to finance foreign exchange costs required to: (a) complete the original project.with some minor changes and additions, to ade4uate standards (b) increase the percentage of roads to be paved (c) establish a comprehensive maintenance program for the entire national highway system. Loan funds would be used to purchase additional construction equipment and materials, and maintenance and shop equipment, and to pay for foreign personnel to direct the plans of the maintenance program and to assist in carrying it out. The Maintenance program provides for a complete reorganization of the maintenance section in the Ministry of Public Works, an adequate permanent staff, and for an initial period of at least two years, an experienced provisional director of maintenance and eight maintenance engineering consultants from abroad. The program also defines detailed standards of highway maintenance procedures and per- formance, sets up amnual maintenance budgets for capital and current expenditures in 1954, 1955 and 1956, and provides safeguards for main- tenance funds against diversion to other uses. In addition, the program calls for acquisition of an adequate stock of maintenance and repair equipment by the maintenance organization, a system of field repair shops and a job training program for equipment operators, mechanics and shop foremen. 7. Total cost of the emergency project was originally estimated at 103.6 million pesos, including the peso equivalent of the $16.5 million loan granted in April 1951. Revised estimates indicate that the total cost of the revised project would be 274.6 million pesos, of which the $30.9 million foreign exchange cost would be equivalent to 77.1 million pesos. 8. The total additional dollar cost for completing the project and increasing the amount of paving to over 80% of the total length of the highways (the original Loan had provided for paving of 15% of the total mileage) would amount to $11 * 25 million. * Mor. thah half of. the increased dollar cost ($5.9 million) is for construction and paving equipment and spare parts; of the balance, $1.$5 million is for materials, $1.9 million for administration, $1.4 million for contractorts fees and $0.5 million for contingencies, 9. The project was originally scheduled for completion by mid-1954, Due to delays in equipment deliveries, frequent mountain slides and the added time needed to pave more of the roads, it is now expected that the revised project will be completed by the end of 1955.  - 3 - Terms 10. The loan would bear interest at the rate of e1 per cent per annum including a statutory commission of 1%. Commitment clharge would be at 3/4 of 1% and would accrue from the Fffective Date of the loan or 60 days 6fter the loan agreement is signed, whichever is the earlier, 11. The loan would be for a term of ten years, including a two-year period of grace. It would be amortized by equal semi-annual payments, beginning May 15, 1956 and ending November 15, 1963, as set out in Schedule 1 of the proposed Loan Agreement. 12. I consider the proposed schedule for the repayment of principal and the rate of interest and other changes of the proposed loan to be reasonable and appropriate. Legal Instruments and Legal Authority 13. Appendix I contains a draft of a Loan Agreement between the Republic of Colombia and the Bank. The Agreement incorporates Loan Regulations No. 3, dated October 15, 1952, and follows the general pattern. It contains specific covenants designed to assure (a) that Colombia's highway construction resources will be concentrated on the construction program financed by the Bank and (b) that adequate financ- ing, supplementary to the Loan and to the first highway Loan, will be provided by Colombia for that program and for the establishment and continuance of a permanent maintenance program for Colombiats national highway system. 14. The Loan Agreement will not become effective until (a) the Colombian Congress has approved the Agreement and the Project and the setting up and continuance of the maintenance program and (b) an additional 30. 4llioYi pesos has been appropriated for the highway construction programpvhich the Bank is helping to finance.  -4- PART III. APPRAISAL OF THE PROPOSED LOAN 15. A technical report summarizing and appraising the project to be financed by the Bank is attached as appendix II. Justification of the Project 16. In my report and recommendations on the original highway loan to Colombia (Document P-17p dated April 5, 1951), I pointed out the great importance of highways to Colombia. Experience gained since the granting of the first loan, together with increased knowledge of construction standards appropriate for the amount of equipment required to meet construction schedules and standards, and the amount and kind of paving needed, show that additional equipment and materials are required to complete the original project, with some minor changes, to adequate construction and paving standards by the end of 1955. 17. Lasting benefits from a highway construction program can be realized only if there is proper maintenance. Colombia now lacks an adequate maintenance program for its national highway system. Such a program is provided for in the proposed loan which would finance a substantial part of the foreign exchange costs of shop and field maintenance equipment for setting up such a program, and the salaries of foreign experts to assist and train Colombians in the initial years. A copy of Miaintenance Document No. 1 of the Ministry of Public Works of Colombia, describing the maintenance program is attached as appendix III. 18. The economic benefits to Colombia which are to be expected as a result of the loan are set forth in the technical report. These benefits justify the making of the loan. Summary of the Economic Situation 19. The economic background against which the proposed loan may be considered is presented in the Economic Report attached as appendix IV. 20. Economic progress is continuing in Colombia. Industry has recovered from a short lived recession in 1951 and is expanding in all sectors. Agricultural production, although developing more slowly, is nevertheless increasing. Although credit has expanded, the cost of living has barely risen over the past two and a half years. The new Government is committed to continue policies of monetary stabilization. 21. The foreign exchange position is favorable. Colombia achieved a trade surplus of $41 million in 1951 and $56 million in 1952, and with the pr. spect of a good coffee crop in 1952/3 and the continuance of high export prine  should again realize a sizeable export surplus in 1953. At the same time, monetary stabilization and import controls havakept imports to within reasonable limits. 22. Colombia is investing heavily in projects to develop basic services such as transportation, power, irrigation and public facilities and in pro- jects for the domestic production of industrial materials, such as steel, coal, sulphur, and wood and paper products, which are now imported. When these projects are completed, they will provide the basis for new industries, benefiting the balance of payments position by import replacement and to some extent by new export possibilities. 2Y. Full service upon the proposed loan of $14.35 million would involve annual service payments of A2.2 million commencing in 1956, raising total service in that year to 4'31,5 million. Peak service on present debt is $31.6 million in 1955; the proposed loan therefore does not involve a net addition to peak service levels, which correspond to 6.8% of 1952 exnorts and 1.3% of 1952 national income.