Malawi - Third Highway Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2182-MAI REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE ENTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MALAWI FOR A THIRD HIGHWAY PROJECT December 7, 1977 This document has a resricted distidbuton and may be used by eciplents only In the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authoriation.  CURRENCY EQUIVALENTS Currency Unit = Malawi Kwacha (MK) US$1.00 M MK 0.89 MK 1.00 US$1.12 MK 1,000 = US$1,120 MK 1,000,000 = US$1,120,000 WEIGHTS AND MEASURES 1 foot (ft) = 0.305 meters (m) 1 mile (mi) = 1.609 kilometers (km) 2 1 square mile (sq mi) = 2.590 square kilometers (km ) 1 ton (t) = 0.907 metric tons (m ton) GLOSSARY OF ABBREVIATIONS DEVPOL - Government's Statement of Development Policies MWS - Ministry of Works and Supplies GOVERNMENT'S FISCAL YEAR April 1 - March 31  FOR OFFICIAL USE ONLY MALAWI THIRD HIGHWAY PROJECT Credit and Project Summary Borrower: Republic of Malawi Beneficiary: Ministry of Works and Supplies Amount: US$10.5 million equivalent Terms: Standard Project Description: The objective of the project is to assist the Government in the general strategy of developing the northern half of the country, particularly-the Mzimba area where several rural development projects have been initiated or planned. Specifically the project consists of: (a) Construction of the Kasungu-Jenda road (about 53 miles) to two-lane bituminous surfaced standard; and strengthening of three short sections (total- ing 12 miles) of the Zomba-Lilongwe road; (b) Consulting services for the supervision of the construction works, the strengthening of the Zomba- Lilongwe road and for the feasibility and possibly engineering studies of the Jenda-Mzuzu road. Consultant Engineering consultants have been retained for finaliza- Services: tion of design, preparation of tender documents, evaluation of tenders and supervision of construction of the Kasungu- Jenda road (about 88 man-months). Engineering consultants will be retained to carry out the feasibility and engineering studies of the Jenda Mzuzu road (about 110 man-months). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be discseod without World Bank authorization.  Estimated Project Cost and Financing Plan Description --------------US$ Million------------- Local Cost Foreign Cost Total Cost I. Construction Kasungu-Jenda 3.80 5.25 9.05 II. Strengthening of sections of Zomba-Lilongwe 0.48 1.12 1.60 III. Consulting Services (i) Supervision of I 0.09 0.36 0.45 (ii) Supervision of II 0.01 0.07 0.08 (iii) Feasibility and Eng. studies 0.11 0.45 0.56 IV. Contingencies (a) Physical: 10 percent 0.45 0.72 1.17 (b) Expected price increase 0.87 1.31 2.18 Total Project Cost 5.81 9.28 15.09 (Total Project Cost excluding taxes and duties) 4.98 9.28 14.26 The financing of the project would be as follows: --------------US$ Million------- -- Percent of Local Cost Foreign Cost Total Cost Total Cost IDA 2.65 7.85 10.50 74 OPEC Special Fund 0.37 1.43 1.80 12 Government 1.96 - _1.96 14 Total 4.98 9.28 14.26 100 Estimated Disbursements: US$ MILLION Bank FY 1978 1979 1980 1981 Annual 1.8 3.6 4.7 0.4 Cumulative 1.8 5.4 10.1 10.5 Rate of Return: 14 percent Staff Appraisal No. 1607a-MA, dated December 7, 1977 Report: Eastern Africa Projects Department Eastern Africa Region MAP: No. IBRD 12857  INTERNITIONAL DEVELOPMENT ASSOCIATION REPORT AND RFCOMMENDATION OF THE PRESIDENT TO TH1 EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO TIIE NEPUBLIC OF MALAWI FOR A _ IRD HIGHWAY PROJECT 1. I submit the folLowiig report and recommendation on a proposed cre it to the Republic of M4ala !i for the equivalent of US$10.5 million on staidard IDA terms to help finance a Third Highway Project. The OPEC Special Fund is expected to cofinaice the project with a loan to Malawi of up to US$1.8 million for a period of 20 years, including about 5 years of grace, at an interest rate of 0.75 p rce t per annum. PA1T I - THE ECONOMY 2. A report entitle "2 morandum on the Economy of Malawi" (Report No. 1677a-MAI) dated September 30, 1977 was circulated to the Executive Directors on October 10, 1977. Country data sheets are provided in Annex I. 3. At Independence in 1,64, Malawi was the poorest of the three terri- tories of the former Central African Federation. With a population of 5.2 million and a land area of about 36,400 square miles, its population density with 143 inhabitants per squar, mile of land area is in the middle range of African countries. Its main assets are moderately fertile soils, good water resources and a climate favorable to crop production. Unlike its neighbors, Malawi has no substantial mineral resources. Forests constitute the main, essentially untapped, resource which could be exploited on a significant scale in the future. At Independence, the tax base was very narrow, government revenues had to be supplemented with British budgetary aid to support the admi:iistration, and prospects for economic development were generally regarded as bleak. 4. Measured against the country's natural endowments, progress since 1964 has been remarkable. Between 1964 and 1976, GDP at constant prices grew at an average annual rate of 6.5 percent, domestic investment and savings increased rapidly, and government finances have improved sufficiently to eliminate the need for budgetary aid. Agriculture, which dominates the economy and contributed 46 percent of GDP in 1976, has been directed towards export markets by encouraging cash crop estates production and integrated rural development schemes. Diversification has also been promoted. In addition, rapid industrial development (the share of industry rose from 9 percent of GDP in 1964 to 12 percent in 1976) has significantly broadened the economic base. Despite this economic improvement, however, Malawi still has a GNP per capita of only US$140 and is listed by the United Nations among the world's poorest countries.  5. Malawi's success has been the result of realistic and purposeful planning by the Government. In 1971, a Statement of Development Policies (DEVPOL) was published, which provides a general framework within which the Government operates a three-year rolling plan. DEVPOL contains guidelines for major economic targets up to 1980 and states the main socio-economic objectives, among which are: (a) to raise living standards and productivity in rural areas; (b) to achieve an average annual growth of GDP of 8 percent through the parallel development of smallholder output, estate agriculture and industry; (c) to promote a more balanced regional development; and (d) to develop local initiatives and a gradual increase of local participation in the economy. 6. Within the public sector investment program, agriculture will receive 19 percent, public utilities 17 percent, and social services 15 percent. The transportation sector will receive about 35 percent, although between now and 1980 the proportion is expected to be temporarily higher (46 percent) because of the concentration of several lumpy investments in those years. Malawi has an effective administration which has been quite successful in preparing and implementing development projects. 7. DEVPOL recognizes the important role of private investment in de- velopment which, it is anticipated, will account for about half of total fixed capital formation over the 1971-1980 period. The Government also recognizes the role of a healthy private sector in generating foreign exchange and savings needed to sustain other elements of the development strategy, and has adopted policies which are intended to attract foreign investors and to ensure a continued high growth of the private sector. Trade and payments policies are liberal, profits moderately taxed and wages are held down to favor labor-intensive estates and industries. The modern private sector has been the leader in economic growth. The output of estate agriculture increased by 10 percent a year in real terms over the past decade, and indus- trial production rose by 13 percent annually. 8. In 1969 (the last year for which reliable income data are available) income distribution was relatively favorable. The poorest 40 percent of households received 15 percent of incomes; the highest 20 percent received 53 percent and the highest 5 percent received 30 percent. These figures compared well with those of other developing countries. Since then, the rapid de- velopment of the modern private sector has probably led to a more skewed situation. 9. To offset the adverse distributional effect of the growth of the modern private sector, the Government has directed its agricultural invest- ment program towards the smallholders. However, the Government recognized only recently the importance of sufficiently remunerative producer prices and, after keeping them for a long time at levels which were low compared to international levels and apparently too low to provide a sufficient incentive to higher production, increased them substantially. Indirectly, wage and price policies have reduced the gap between wage earners and subsistence farmers.  - 3 - Over the past seven years, real wages have fallen somewhat, while the real earnings of smallholders have risen. Keeping a firm check on wage increases has also resulted in higher wage employment which has increased by 8 percent a year on the average since 1968. 10. Owing to its fast rate of population increase, estimated at 2.6 per- cent annually, the population pressure in some areas is heavy in relation to arable land. While recognizing the existence of this problem, the Govern- ment has been reluctant to introduce population control policies and intends to rely instead on balanced regional development policies that would encourage the movement of population to the less densely populated areas. Only about 10 percent of the total population live in urban areas. However, because of the diversification of the economy, urban population is rapidly increasing by more than 10 percent per annum, in line with the expansion of wage employment opportunities in the non-agricultural sectors. 11. Since about 90 percent of the population live in rural areas, rural development is a primary social and economic objective. At the moment, the majority of farmers are smallholders on the fringe of the market economy. Their staple crop is almost exclusively maize and their principal cash crops are tobacco and groundnuts. Until now, the principal instrument for increas- ing smallholder productivity has been relatively intensive integrated devel- opment projects in specific areas, which at the moment reach about 25 percent of the rural population. 12. In spite of the Government's efforts, however, the production from the traditional agricultural sector has lagged behind that of the estate sector. Although firm figures are lacking, indications are that the produc- tion from the traditional sector has not increased by much more than 3 per- cent a year over the past decade. The Government is concerned about this relatively slow growth and is preparing a country-wide approach to rural development, which would be a departure from the previous approach in that it would primarily concentrate on the provision of farm inputs and exten- sion services with less emphasis on infrastructure. This new approach - the National Rural Development Program - is to become the Government's chief vehicle for smallholder development. 13. The country's performance in generating and using domestic resources has been impressive. Investment in fixed assets grew from 9 percent of GDP in 1964 to 22 percent in 1976. Domestic savings, which were virtually nil in 1964, financed 64 percent of total investment in 1976. The Government skill- fully managed its budget and undertook to stabilize private savings. From 1964 to 1976, recurrent revenues grew by 14 percent a year on the average, while the annual increase in recurrent expenditures was kept down to 9 percent. The domestic contribution to the financing of government development expendi- tures, which was negative in 1964, increased to 27 percent in 1976. Last year, the budgetary situation became somewhat tighter. Despite the infla- tionary pressures, the increase in recurrent expenditures was moderate, but current receipts grew little as a result of declining receipts of import  - 4 - duties. Meanwhile, development expenditures expanded sharply, in part in real terms, but also because of substantial cost increases. As these increases could not be fully met by disbursements from foreign loans and grants, a greater recourse to domestic financial resources took place, mainly through borrowing from the banking system. Late in the year, the Government took measures to restore the equilibrium; credit restrictions were imposed, and interest rates were raised. In April 1977, together with a restrained ex- penditure budget, a number of tax measures were announced to increase revenues. Preliminary indications are that these measures are taking effect. 14. In 1975 and 1976, Malawi's balance of payments deteriorated. Inter- national reserves declined by US$56 million, down to US$26 million at the end of 1976, equivalent to 1.5 months of imports. Net foreign assets decreased even more steeply during this two year period, from US$76 million to minus US$26 million. Surprisingly, the trade balance improved in real terms during these two years, since exports continued to grow while imports remained at about the same level. The deterioration in the balance of payments has to be attributed to three other factors: First, Malawi's terms-of-trade deteriorated by about 10 percent between 1973 and 1976, with an accumulative negative effect of about US$40 million. Second, the suspension, in April 1974, of organized recruitment of migrant workers for South Africa caused remittances of those workers to decline from about US$35 million in 1975 to probably not more than US$5 million in 1976. Third, capital outflows may have been substan- tial in 1975 and 1976. This was reportedly due to the unsettled political situation in the Southern African region, which caused exporters abroad to insist on shorter payment periods. In support of the Government's stabili- zation program, the IMF has granted Malawi a first tranche standby credit equivalent to US$6.3 million. In 1977, Malawi's export prices have increased sharply, particularly those for tea and tobacco. Also, the Government is attempting to step-up borrowing from abroad. International reserves have once again started to rise and reached a level of US$67 million by the end of August. 15. The expansion of the Government's investment programs has been assisted by increased public capital inflows on very concessionary terms. The net contribution from foreign official sources to the financing of public investment increased from US$17 million in 1967 to about US$45 million in 1976, of which US$11 million were in grant form. The sources of public capital inflow have gradually been diversified. At Independence, Britain was virtually the only source; but by 1976, the British contributions had declined to about 40 percent. International organizations, especially IDA, provided about 40 percent, and the remainder came from a variety of bilateral sources, notably Canada and the USA. 16. Malawi's longer-term prospects for economic growth, external trade, and payments are relatively favorable. Its agricultural products have gener- ally found ready markets, particularly in the UK and more recently in the USA. Malawi's associate membership in the EEC offers good export prospects. With the substantial expansion of sugar production that is about to get under way, total merchandise exports in real terms can be expected to continue to grow  - 5 - at about 8 percent a year until 1982. By that time, Malawi's terms of trade should still be some 5 percent more favorable than in 1976. With the con- tinuing increase in public investment, external capital assistance will also have to be increased. Malawi's need for gross official capital inflow is estimated to grow from some US$80 million in 1977 to about US$125 million in 1982. Malawi is likely to continue to receive substantial amounts of assist- ance in the form of grants, particularly from the European Development Fund. However, it might not be realistic to assume that, in the future, the average terms of lending will remain as favorable as in the past. The average grant element of new commitments of official assistance (loans and grants combined) was almost 80 percent in 1971-1975. If this percentage were to fall to 50 percent by 1985, Malawi's public debt service obligations, which were almost 7 percent of export earnings in 1976, would still remain below 10 percent of export earnings by 1985. This indicates that although Malawi may borrow limited amounts on conventional terms, the bulk of assistance should continue to be on IDA terms. External capital requirements will continue to be in excess of the foreign exchange component of project costs and external as- sistance should, therefore, also cover some local costs in appropriate cases. 17. At the beginning of 1977, Malawi's external public debt totaled US$343 million, of which US$258 million had been disbursed. Debt service in 1976 amounted to US$12.7 million, equivalent to about 6 percent of foreign exchange earnings. At the beginning of 1977, IDA's share in Malawi's dis- bursed debt was 28.5 percent and servicing of IDA credits accounted for 3.2 percent of total debt services. As Malawi's need for external capital is expected to grow over the next years, the Government may encounter greater difficulty in borrowing on terms as soft as those it has received in the past. PART II - BANK GROUP OPERATIONS IN MALAWI 18. Malawi has to date received fifteen IDA credits amounting to US$111.7 million equivalent and three Bank loans totaling US$26.2 million, of which two on Third Window terms. Of the total Bank Group assistance, US$51.8 million (37 percent) were allocated to agriculture, US$37.8 million (27 percent) to power development, US$17.9 million (13 percent) to education, US$22.0 million (16 percent) to road development and the balance of US$9.0 million (7 percent) to water supply and to finance preparation of a planned pulp mill at Viphya. The first Bank loan to Malawi was made on Third Window terms in June 1976 and the first standard Bank loan in April 1977. IFC's first investment in Malawi was made in February 1976 with a loan of US$6 million for a textile mill. A second IFC loan of US$9.0 million for a sugar development scheme was made in April 1977. Subject to further review of information available on the sector, IFC might consider a third loan to Malawi to help finance the operations of medium-sized tobacco estates. A summary statement of Bank Group operations in Malawi as of September 30, 1977, is given in Annex II which also contains notes on the execution of ongoing projects. Project implementation is generally satisfactory.  -6- 19. Bank Group operations in Malawi will continue to emphasize rural development but importance will also be attached to infrastructure develop- ment (power, water supply and roads) and education. In agriculture, the Bank Group is presently assisting the Government in devising a 20-year National Rural Development Program, for which financial assistance is expected to be recommended following the recent appraisal of the project. We are also considering further assistance to help consolidate two previously IDA-financed agriculture schemes in the Shire Valley. The project was appraised last August and is expected to be negotiated later this fiscal year. In education, a sector study was recently carried out jointly by UNESCO and the Bank, and we would expect it to lead to further Bank Group financing in the sector. With regard to water supply, a WHO/Bank mission visited Malawi in early November to assess the conditions in the sector and possibly carry out preliminary project identification work. In the industrial sector, the Government is currently preparing a DFC project for which we expect to recommend financial as- sistance. A small-scale enterprises component will be included in the project to provide managerial and financial assistance to small local businesses. The recent appraisal mission is preparing its report. Finally, the Bank Group is also assisting the Government in the preparation of a major pulp development project, whose total cost has been estimated at over US$300 million equiva- lent. Bank financial assistance for this project would be considered if suitable external guarantees can be obtained. PART III - THE TRANSPORT SECTOR IN MALAWI The Transport System 20. Malawi is a long, narrow, landlocked country located in the Great African Rift Valley. The main features of Malawi's transport system in- clude a road network which is fairly well developed south of Lilongwe but undeveloped in the northern half of the country; a rail system in the southern half of the country which is used mainly for export-import and transit traffic; lake transport which serves the north and compensates to some extent for the undeveloped land transport links; and air transport which is dominated by international passenger traffic. 21. Road Transport. Malawi has some 6,800 miles of roads of which about 1,000 miles are paved, 370 miles are engineered gravel standard and the remain- der consists of earth roads and tracks. Road density is 184 miles per 1,000 square miles which is average for East African countries. However, the low quality of most of the network results in high transport costs. Up to 1,880 miles of main roads serve to connect the major cities and towns, and 1,520 miles of secondary roads provide a link between smaller centers. The network also includes 3,140 miles of district roads serving as feeder roads and 290 miles of various roads serving particular towns and agricultural estates. In addition, the country has about 1,700 miles of unclassified feeder and crop extraction roads within several Bank Group-financed agricultural development projects as well as several thousand miles of undesignated earth tracks.  - 7 - 22. In 1976, the road transport fleet totaled about 29,600 vehicles or six vehicles per 1,000 inhabitants. The fleet includes 10,200 passenger cars, 300 buses and 10,800 goods vehicles, with the balance made up of 3,600 motor- cycles and 4,700 other vehicles (mostly trailers). During the 1967-1976 period, the growth of the total fleet averaged 6 percent, with goods vehicles growing faster than passenger cars. However, more than two thirds of the goods vehicles have less than a three-ton carrying capacity and only 3 percent of the goods fleet have more than a ten-ton capacity. In the last two years, the number of trailers has almost doubled in Malawi and truck-trailer com- binations are common on the main routes. Reflecting the general pattern of economic development to date, 75 percent of the vehicles are registered in the Southern Region. 23. Road transport, now dominated by small operators, remains sub- stantially unregulated. Though the Ministry of Transport and Communications (MTC) prescribes freight rates and passenger fares, there is nonetheless considerable undercutting of freight rates. Vehicle dimensions and weight regulations are adequate but enforcement by the Ministry of Transport and Communications, and the national police has until recently been somewhat lax. Road failures may have been caused by overweight vehicles. Under the agree- ment for the Second Highway Project, the Government has taken a number of corrective steps in consultation with the Association, including the in- stallation of three weighbridges and improvement in the enforcement of the existing vehicle and axle load regulations. 24. Rail Transport. The rail network comprises the railway line from Salima in the Central Region through Blantyre to the Southern border (277 miles) where it connects with the Mozambican line leading to the port of Beira on the Indian Ocean; and a branch line (63 miles) offering an alterna- tive route to the sea from Nkaya to Nayuci where it connects with the Mozambican line to the port of Nacala. In addition, a westward extension from Salima to the capital city of Lilongwe, financed by a grant from the Canadian Government, is nearing completion and operations will commence early next year. The Canadian Government has also agreed to finance on a grant basis a further extension westward from Lilongwe through Mchinji to the Zambian border. In 1975, the railway carried about 1.4 million tons of freight and about 1.2 million passengers. 25. Lake Transport. Freight and passenger transport on Lake Malawi is provided by Lake Services Ltd., a subsidiary of Malawi Railways, and principally serves the remote northern areas of the country. Traffic volumes are relatively light, amounting to only 35,000 tons of freight and some 148,000 passengers in 1975. At present about 70 percent of the traffic is northbound, originating at Chipoka which is served by the railway, but this pattern is likely to change gradually as the northern region develops. 26. Air transport. Air transport within Malawi is far less developed than the other modes of transportation. Only four airports at Chileka (Blantyre), Lilongwe, Mzuzu and Karonga receive scheduled flights. Only Chileka airport can accommodate long range jet aircraft; it serves as the  - 8 - country's international airport. In 1975, Chileka accounted for over 80 percent of Malawi's recorded passenger movements totaling about 327,000 passengers. The Government will build a second international airport at Lilongwe to be financed with commercial borrowings and financial assistance from the African Development Fund. The total cost of the project is estimated at US$50 million. Air Malawi, a Government-owned airline, provides interna- tional services as well as all scheduled domestic flights. Six foreign airlines also provide international services, and two local companies and Air Malawi share the market for unscheduled domestic services. Transport Policy and Coordination 27. Malawi's present transport policy outlined in the Statement of Development Policies has a three-fold objective: (i) improve the administra- tive, social and economic integration of the country by linking all three regions with reliable all-weather connections; (ii) support the country's rural development efforts by improving access roads to the rural areas; and (iii) provide within Malawi efficient links with transport routes leading to seaports on the Indian Ocean for exports and imports. 28. To this end, the Government is undertaking a major transport de- velopment program for which numerous studies have been made or are in pro- gress. Significant investments are now underway or planned in all the modes of transport. Because of the concentration of several lumpy investments, the transport sector is expected to account for 46 percent of planned expenditures over the next three years, representing a substantial increase over the 25 percent share during 1971-1975. When these investments are completed, the transport share of Government's capital expenditures is expected to revert to its previous average. 29. The responsibility for coordinating the transport investment plans rests with the Economic Planning Division of the Office of the President and Cabinet, which reviews proposals put forward annually by the ministries concerned, notably the Ministry of Works and Supplies for roads, and Ministry of Transport and Communications for all other modes. However, mainly due to staff constraints at the Economic Planning Division, effective coordina- tion of transport has been lacking and the different transport modes have been developing almost independently. Modal development has tended to be complementary rather than competitive, but recent experience with rail investment and possible future competition between road and lake transport, suggest that a closer analysis of intermodal trade-offs is now required. A recently completed National Transport Study financed by UK provides a useful starting point for such analysis, and the Economic Planning Division is gradually improving its capacity in this respect. Moreover, the recent recruitment of a local economist by the Ministry of Works and Supplies will relieve the Division of projects preparation work and enable it to concentrate more on intermodal issues. 30. The Government exercises considerable control over transport through its ownership of major carriers such as Air Malawi and Malawi Railways, in- cluding the latter's two subsidiaries, Lake Services Ltd. and Road Motor  - 9 - Services Ltd., a large trucking company. All these companies are under the jurisdiction of the Ministry of Transport and Communications (MTC) which is also responsible for regulating private carriers, including those in road transport. Road Administration, Planning and Financing 31. The Ministry of Works and Supplies (MWS) is responsible for all classified roads with the exception of the district roads which are the responsibility of the District Councils. The Ministry of Works and Supplies has three divisional offices in the country for field operations but planning and overall supervision are handled by headquarters staff in Lilongwe. The Ministry has a Plant and Vehicle Hire Organization with workshops in all regions and a central workshop in Blantyre for major repairs. Equipment availability is satisfactory. District roads have been largely neglected due to inadequate resources of the District Councils, but a District Roads Improvement and Maintenance Program has been initiated under the IDA-assisted Second Highway Project. 32. Reflecting the Government's general strategy to promote development in the Central and Northern regions, about two thirds of current and planned road construction projects are in those regions. The road south from Karonga through Chiweta to Rumphi is now under construction and work on the next section south to Mzuzu is due to start next year with financing from the African Development Bank. When these works and the Lilongwe-Kasungu road are completed, the main north-south spine road will be completed, except for the Kasungu-Jenda and Jenda-Mzuzu sections which will be constructed and studied respectively under the proposed project. Other major ongoing or planned works in the central and northern regions include improvements to the lakeshore road between Nkata Bay and Nkotakota, and the completion of the USAID-financed Lilongwe-Mchinji road. 33. Road users contribute to Government revenue through taxes and duties on fuel, lubricants, vehicles and spare parts, and through licence and registration fees. Duties on vehicles range from 10 percent for buses and trucks, to 40 percent for luxury cars. There is an 18 percent surtax on fuel and all vehicles except large trucks and buses. In the 1975/76 fiscal year, total revenue from road users amounted to about US$8 million equivalent, whereas during the same period total expenditures for administer- ing and maintaining the road network totaled less than US$3 million equivalent. Thus, road usage taxation can be regarded as making a significant contri- bution to the government budget. Highway recurrent expenditures are financed from the general budget while the cost of capital development is largely met with grants and credits from bilateral and multilateral aid programs. Con- struction expenditures have averaged about US$9.4 million equivalent annually over the past four years. MWS maintenance costs have increased from US$0.6 million equivalent in 1971 to about US$2 million in 1976/77. The funds are sufficient to ensure adequate maintenance of the bitumen and gravel roads, but increased allocations will be required for earth roads, particularly as responsibility for some 1,680 miles of such roads constructed under agri- cultural projects is being transferred to MWS over the next three years.  - 10 - However, the Government has agreed to exchange views from time to time with the Association about its program for maintenance of such roads, including the financing of the program (draft Development Credit Agreement, Section 4.06). Road design, construction and maintenance 34. MWS has a well staffed Design Department, consisting of 62 engineers, technicians and surveyors with a well equipped laboratory for material and soil testing. The Department is primarily engaged in design of structures and water supply facilities. It only carries out preliminary investigations and minor road and bridge designs and relies on engineering consultants for major road projects. 35. The construction of major projects is executed by contractors and supervised by MWS's Road Department or by consulting engineers acting as its representatives. The award of contracts follows suitable prequalification and tendering procedures and most contracts are let on a unit-price basis. In recent years, MWS has undertaken several force account road construction projects for about US$2.8 million equivalent annually and the work performed under such schemes has been generally satisfactory. Main road construction is not labor-intensive, although the construction of culverts, drains and structural excavation absorbs substantial labor inputs. Labor-intensive methods are however being introduced on a trial basis in the District Roads Improvement and Maintenance Program. There is a developing local contracting industry in Malawi, which is fully employed on buildings, small structures and estate roads. While local contractors are capable of carrying out the works included in the extension of the Program, they lack the capacity for major road works which are undertaken by foreign contractors. Payment pro- cedures are prompt and MWS's experience in dealing with the contractors has been satisfactory. 36. The Regional Divisions of the MWS are responsible for the mainte- nance of classified roads with the exception of the district roads. Mainte- nance operations are largely mechanized but manual labor is also used for routine operations. The Ministry's Road Department rents the maintenance equipment from the Plant and Vehicle Hire Organization which, since its creation in 1971, has been responsible for procuring and maintaining all Government-owned equipment and vehicles. The Plant and Vehicle Hire Organi- zation charges rental fees based on the cost of purchasing and maintaining the equipment. Equipment availability and utilization are satisfactory. 37. As noted above, district roads have been neglected, but a District Roads Improvement and Maintenance Program was initiated in 1974 under the IDA-financed Second Highway Project. Under a pilot scheme, an improvement and maintenance unit was established in Kasungu district. Most of the work to date has been executed by using light equipment but the unit has recently begun experimenting with more labor-intensive techniques. It is already clear that the scheme is successful and consultants have been engaged to prepare an extension of the Program to other districts based on the experience gained.  - 11 - The consultant's recommendations are expected to be available shortly where- upon detailed plans will be discussed and agreed between the Government and IDA. It is proposed to finance the extension of the program under the Second Highway Project (ref. paragraph 39 of this Report). Training 38. The Government has an active program for selecting, educating and training nationals for professional positions, but the program presently yields too few qualified personnel, mainly because of scarcity of qualified candidates. Training for such positions is being provided under bilateral aid, mainly British and Canadian, and UNDP grants; such training opportunities are more than adequate for the supply of suitably qualified trainees. More- over, the Malawi Polytechnic is developing its capacity in this area, and the need to send engineers abroad for training will gradually diminish except for post-graduate training. Good progress has been made in training lower echelon personnel such as road supervisors, foremen, equipment operators and mechanics. This training is conducted in the Ministry's fully localized Training Branch in Zomba. Availability of such personnel is adequate and the capacity of the Training Branch is satisfactory to keep pace with demand. Previous Bank Group Involvement 39. The Bank Group has been involved in the transport sector of Malawi since 1966 when Credit S-2-MAI was made to help finance detailed engineering of the Zomba-Lilongwe road (180 miles). The First Highway Project with a US$11.5 million IDA credit was approved in 1968 and comprised the recon- struction and paving of that road as well as various studies. The Audit Report (No. 946 of December 15, 1975) concluded that the project objectives were achieved. Agricultural projects in the Shire Valley, Lilongwe and Karonga areas have also routinely included the construction of feeder and crop extraction roads. 40. The Second Highway Project, financed by Credit 523-MAI of 1974 with US$10.0 million, helped reconstruct the Lilongwe-Kasungu road (73.3 miles) and initiated a pilot scheme for the improvement and maintenance of district roads in the Kasungu district. The project, though slightly behind the original schedule, is proceeding well. Savings in construction costs of at least US$3.0 million are currently expected and it is proposed that these be used to finance the extension of the District Roads Maintenance and Improvement Program. The main reason for the substantial savings is that at the time of appraisal, there were uncertainties about the suitability of the material proposed for use as base course for the road pavement. As a result, a pro- vision of US$2.3 million was included in the estimates to cover the cost of providing a cement-stabilized base, should the need arise. The President's Report (paragraph 28) pointed out that if the available material proved suitable when placed on the road, cement stabilization would be omitted, and savings in construction costs might be realized. The Development Credit Agreement also provided that the Government would consult with the Association before deciding on the type of base course to be used. During construction, suitable material was found to be available and consequently no cement-based stabilization was necessary.  - 12 - PART IV - THE PROJECT Introduction 41. A report entitled "Malawi-Appraisal of a Third Highway Project", (No. 1607a-MAI dated December 7, 1977) is being circulated separately. A credit and project summary appears at the beginning of this report and a sup- plementary project data sheet is given in Annex III. The project was prepared by consultants and appraised by an IDA mission in March 1977. Negotiations were held in Washington, D.C. from September 12 to September 16, 1977. The Malawi delegation was led by the Financial Secretary. Project Objective and Description 42. The objective of the project is to assist the Government in the general strategy of developing the northern half of the country, particularly the Mzimba area where several rural development projects have been initiated or planned. Specifically the project consists of: (a) construction of the Kasungu-Jenda road (about 53 miles) to two-lane bituminous surfaced standard and the strength- ening of three short sections on the Zomba-Lilongwe road for a total length of about 12 miles; and (b) consulting services for the supervision of the road construction, the strengthening of sections of the Zomba-Lilongwe road, and for the feasibility and possibly engineering studies of the Jenda-Mzuzu road. 43. The Kasungu-Jenda section forms part of the south-north spine road which runs through most of the major centers from the Mozambique border in the south to Chitipa on the Zambian border in the north. Currently, drain- age on that section is poor, resulting in occasional road closures during the rainy season, and the existing earth and gravel road surface is rough and costly to maintain. Under the project, the road will be constructed to two-lane bituminous surfaced standard and the alignment improved. Two short sections of the Zomba-Lilongwe road financed under the First Highway Project and another short section adjoining this road are showing signs of serious structural deterioration. The traffic flow has been considerably heavier in both volume and weight than expected at appraisal. The project will provide for the strengthening of the pavement by asphaltic concrete overlays. Project Cost and Financing 44. The total estimated cost of the proposed project is US$14.3 million net of taxes, including a foreign exchange component of US$9.3 million, or 65  - 13 - percent of total project cost. The proposed IDA credit of US$10.5 million would cover 74 percent of total project cost net of taxes. The OPEC Special Fund is expected to provide additional financing up to US$1.8 million equiva- lent by way of a loan to Malawi for 20 years including about 5 years of grace at an interest rate of 0.75 percent per annum. The IDA credit and OPEC Special Fund loan would together cover the foreign exchange component and about 60 percent of local cost. The remainder of the project cost (14 percent of the total net cost) would be financed by the Government. Cofinancing arrangements were worked out between the three participants last September. Under these arrangements, the IDA contribution would be applied towards the construction costs of the Kasungu-Jenda road and all consulting services, except those related to the strengthening works. The OPEC Special Fund Loan would be applied towards the cost of strengthening the damaged sections on the Zomba-Lilongwe road and its supervision. Detailed costs are as follows: Description --------------US$ Million------------- Local Cost Foreign Cost Total Cost I. Construction of Kasungu-Jenda 3.80 5.25 9.05 II. Strengthening of sections of Zomba-Lilongwe 0.48 1.12 1.60 III. Consulting Services (i) Supervision of I 0.09 0.36 0.45 (ii) Supervision of II 0.01 0.07 0.08 (iii) Feasibility and Eng. studies 0.11 0.45 0.56 IV. Contingencies (a) Physical: 10 percent 0.45 0.72 1.17 (b) Expected price increase 0.87 1.31 2.18 Total Project Cost 5.81 9.28 15.09 (Total Project Cost excluding taxes and duties) 4.98 9.28 14.26 The financing of the project would be as follows: