Guatemala - Highway Construction and Maintenance Project

R E S T R I C T E D Report No. P 91 FILE COPY This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT IREPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to the REPUBLIC OF GUATEMALA for a HIGHWAY CONSTRUCTION AND MAINTENANCE PROJECT in GUATEMALA July 21, 1955  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPI5ENT REPORT AND RECOMNENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF GUATEl'AIA FOR A HIGIWAY CONSTRUCTION AND MAINTENANCE PROIECT 1. I submit the following report and recommendations on a proposed loan of $18.2:million to the Republic of Guatemala for a highway project. PART I - HISTORICAL 2. In 1950 a Bank mission made a general survey of the Guatemalan economy and recommended a development program which was published in 1951 under the title "The Economic Development of Guatemala." The report was accepted by the Government on the advice of a Citizens' Committee. The development projects subsequently carried out by the Government, however, deviated sharply from the mission's recommendations. 3. The fall of the Arbenz government in June/July 1954 brought about a revival in the Bank's relations with Guatemala which had been in abeyance since 1951. The new government headed by Col. Carlos Castillo Armas imme- diately indicated its desire to establish a close working relationship with the Bank. 4. Preliminary contacts were made at the meeting of the Bank's Gover- nors in 1954, as a result of which a Bank mission visited Guatemala in October/November 1954. This mission, beside making an appraisal of the economic situation of Guatemala, assisted the Goverrment to set up a National Economic Planning Council. At the same time arrangements were made for stationing a Bank representative in Guatemala to advise the Government on general economic and fiscal policies and to assist the National Economic Planning Council in preparing a 5-year development program. The resident representative arrived in Guatemala early this year and was joined by an assistant in June. 5. By March 1955 the Government, writh the assistance of consulting engineers, had prepared a highwray construction and maintenance program and requested the Bank to assist in financing it. A mission visited Guatemala to study the project which was found suitable for Bank financing. 6. Formal negotiations were held in W4ashington between June 20 and June 24 at which Mr. Jorge Arenales, Minister of Economy and Iabor, and lMr. Juan Luis Lizarralde, .iinister of Public .rorks, represented the Govern- ment of Guatemala. Thereafter the documents were considered and approved, with minor drafting changes, by the President of Guatemala. 7. The proposed loan would be the first Bank loan to Guatemala.  - 2 - PART II - DESCRIPTION OF THE PROPOSED LOAN Borrower 8. The Borrower wrould be the Republic of Guatermala, a member of the Bank. Amount 9. The loan would be in the amount of $18,200,000 or its equivalent in other currencies. Purpose 10. The proceeds of the loan would be used to finance the foreign exchange costs of equipment, machinery, materials and services required for: (a) completing the construction of a 300 km highway between Guatemala City and Puerto Barrios and Santo Tomas; (b) the construction of 135 km of highways to complete the Pacific Highway from the V.exican to the Salvadorean borders; (c) the execution of a 3-year program for improving the existing higlhways in Guatemala and facilities for high- way maintenance, including the reorganization of the 14iaintenance Division of the Highway Department, the establishment of central and regional workshops and the training abroad cf personnel of the Department. Interest. Comaission and Commitment Charges 11. The loan would bear interest at the rate of 4-5/8%'b Der ennum including the statutory conunission of 1%. The commiitment charge would be 3/4 of l per annum. Amortization 12. The loan would be for a period of 15 years with a period of grace of about 3-1/2 years corresponding to the e:;pected period of construction. It would be amortized by semi-annual payments beginning February 1, 1959 and ending August 1, 1970 as set out in Schedule I of the proposed Loan Agreement. Legal Instruments and Legal Authority 13. A draft Loan Agreement between the Republic of Guatemala and the Bank is attached (to. l). The following are points of special interest in the proposed Loan Agreementt  (a) Section 3.03 would require that the Borrower award all contracts on the Dasis of international competitive bidding and that all contracts (and subcontracts exceed- ing 100,000 quetzales) be satisfactory to the Bank; (b) Section 5.01(b) would require the Borrower to employ consultants mutually satisfactory to the Borrower and the Bank. The construction of the highwarys would be done by satisfactory contractors; (c) Section 5.09 would require the Borrower, during the construction period of the project, not to spend more than 1 million quetzales in any one fiscal year on the construction of new highways other than the Inter-Ameri- can and those included in the project; (d) Though the Borrower expects to be able to finance a part of the local cost of the project by the use of U.S. aid funds, the Borrower would undertake in Section 5.10 to provide funds as and when necessary to avoid delays in carrying out the project. 14. The report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank is attached (No. 2). PRT III - APPRAISAL CF THE PROPOSED LOAN 15. A detailed appraisal of the project (No. 3) has been distributed to the Executive Directors (R-887). Justification of the Projeot 16. Atlantic Highwax. There is at present no road between the produc- tive highlands of Guatemala and the Caribbean nort of Puerto Barrios through which most traffic must go. All such traffic is now dependent on a single track railroad owned by a private company which also controls and operates the port and gives preferential treatment, both with regard to rates and speed of movement, to banana shipment. Because of the difficult nature of the terrain, recurrent landslides frequently interrupt service for extended periods of time. The Atlantic Higlhway, the construction of which had been recommended by the 1950 survey mission, would relieve this situation by pro- viding a more secure connection with Puerto Barrios and the nearby newly built port of Santo Tomas which will shortly go into operation,  -4- 17. Though t'hae region imnediately surrounding the Atlantic Highway has limited agricultural development possibilities, there are areas potentially Within reach with great possibilities for the production of such export crops as rubber, cacao and coffee. 18. In the future the Atlantic Highway could also be an important artery for traffic between El Salvador, Honduras and the Caribbean. 19. Pacific Highiay. The region traversed by the Pacific Highway is first class agricultural land which has hardly been exploited. The Pacific Highway would follow approximately the juncture of the Piedmont, one of the largest coffee producing areas of Guatemala, and the Coastal Plain which is the most productive area in Guatemala for sugar cane, cotton, corn, cattle, etc. The benefits from increased production would be large and inmediately felt. 20. The Pacific Highway would also provide an alternative link between lMexico and the Littoral Highway of El Salvador, the construction of wyhich is being financed by a Bank loan (No. 104 ES). 21. M!aintenance. Inadequate and inefficient maintenance of both roads and road machinery has led to a -serious deterioration of the highway system and waste of equipment. Reorganization of the iYaintenance Division of the Highwray Department and the adoption of improved procedures should enable the organization to provide effective maintenance. Econoric Situation 22. A report on the current economic position and prospects of Guaterala was distribated to the Executive Directors on February 9, 1955 (Secretary's Memorandum No. 1-194). The report concluded that the eccnomic situation at the end of 1954 was fundamentally sound and that prospects for an expansion of production and private investment were good but that the economy was under- going some deflationary adjustments caused by a sharp curtailment of public expenditure, uncertainty as to the future of coffee prices, and the cautious attitude of the 'business community. 23. In the last six months, the transition from deficit financing under the previous administration to a balanced budget, and from record coffee prices to lower levels hcs been completed. The final accounts for the fiscal year 1954-55 are expected to show a small surplus, partly because of' a decrease in expenditures and partly because of the inrocition of new taxes. The float- ing debt which the Goverrment inherited from i's nredecessor has been liqui- dated and the retirement of the long-term debt is substantially ahead of schedule. Budgetary receipts for the newr fiscal year beginning on July 1 are estimated at Q 65 million, about Q 8 million lowier than in the previous year. This is largely the result of the smaller proceeds expected from the coffee export tax. United States aid, on the other hand, shou".d enable the Government to increase its expenditures, particularly for capital outlays, over end above the level of the fiscal year 1954-55.  - 5 - 24. The deflation cf the last few months, together with larger coffee exports (wuhich had been delayed by bad weather) has brought about a replenish- ment of foreign exchange reserves from a low of Q 34 million in mid-Novernber to Q 56 million at the end of May. Unless a further substantial decline in coffee prices occurs, the favorable reserve position and the scheduled fur- ther retirement of the public debt should permit a moderate expansion of bank credit, either to the private sector, or, if necessary, to goverrment or government-otmed credit institutions. The International Monetary Fund has been asked to advise the Guatemalan authorities on this problem and the related cuestion of a revision in banking legislation. The Fund mission ftb, to'arrive in d fa3!a 6h 4uiy 5 wi1M*rk cios`lywitW'-th6- Bank-s resi. dent representative. 25. The debt service of aprroxi:r tely two million dollars per year on the nroposed loan will not place an undue burden on the Guatemalan fiscal system, or on the balance of payments, and should leave a substantial margin for the service of other productive'loans. Prospects of Fulfillment of Obligations 26. Reliable consultants have been hired by the Guatemalan Government. The technical preparation of the project has been satisfactory and the out- look for its execution is favorable. 27. The economic benefits which can be exnected from the various phases of this project would fully justify the exrenditure. 28. I have every confidence that the Borrower should be able to meet its obligations. PART IV e CONPLIANCE I ITH THE ARTICLES OF AGREE1ENT 29. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART V - FECC14 LFDATIONS 30. I reco=mend that the Barik make to the Republic of Guatemala a loan in various currencies equivalent to $18.2 million for a term of 15 years, with interest (including commission) at the rate of 4-5/8% per annum and on such other terms as are specified in the draft Loan Agreement, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 4) Eugene R. Black Jily 21, 1955