El Salvador - Feeder Roads Program and Complementary Project (Vol. 2 of 2) : Memorandum

l - 1Sl A E S T R I C T E D FIL CGPY This report was prepared for use within 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 MEMORANDUM ON A LOAN OF $5,000,000 TO THE REPUBLIC OF EL SALVADOR FOR A FEEDER ROAD PROGRAM AND COMPLEMENTARY PROJECTS December 24, 1958.   MEMORANDUM ON A LCAN OF $5,00,0OO TO THE REPUBLIC OF EL SALVADOR FOR A FEEDER ROAD PROGRAM AND COMPLEMENTARY PROJECTS PART I - HISTORICAL 1. In October 1954, the Bank made a loan of $11.1 million to help finance the construction of a 306 km highway from the Guate- malan to the Honduran border along El Salvadorts Pacific coast. Despite some delays in the construction of certain sections a large part of the highway is already being used and is beginning to open up a large and fertile part of the country, hitherto not accessible to agricultural development. It was recognized from the outset that, to obtain the full economic impact of the highway, a necessary corol- lary would be the construction of a network of feeder roads. 2. Accordingly, the Government of El Salvador undertook the studies for the construction of the feeder roads in 1957e A Bank mission visited El Salvador to appraise the project in May 1958. As a result of this visit some revisions in the project were made and the final studies were submitted to the Bank in July. The Government was advised early in October that the Bank was ready to initiate negotiations. 3. Negotiations began in Washington on December 9, 1958, the Salva- dorean Government being represented by Mr. Roberto Parker, the Ninister of Public Works, and Dr. Hector David Castro. the Salvadorean Ambassa- dor to the United States. 4. If the proposed loan is made it would increase the total amount of Bank loans in El Salvador to $28.6 million equivalent. PART II - DESCRIPTION OF THE PROPOSED LOAN .5. Purpose The loan would finance the foreign exchange costs of the construction of a network of feeder roads and three complementary projects to the Coastal Highway as follows: a) The construction of a bridge across the Rio de Paz connecting El Salvador's Coastal Highway with the Pacific High- way of Guatemala; b) The extension of the Coastal Highway to the site of the bridge;  c) The paving of the section of the Coastal Highway between Comalapa and La Libertad. Borrower The Republic of El Salvador Amount The equivalent, in various currencies,of $5.0 million. Amortization 23 semi-annual instalments, April 1963 to April 1974. Interest Rate 5 3/4 per cent Commitment Charge 3/h of 1% per annum. Payment Dates April 15 and October 15. PART III - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 6. A draft loan agreement between the Bank and the Republic of El Salvador is attached (No. 1). There is no significant departure in the Loan Agreement from the Bankts normal practice. 7. Agreement on the construction of the bridge over the Rio de Paz has been reached, in principle, between Guatemala and El Salvador. However, this agreement is still to be ratified by the Guatemalan Congress. Section 2*r02(b) of the Loan Agreement provides, therefore, that no disbursements to finance the construction of the bridge and the extension of road thereto shall be effected until that international agreement has been completed. 80 Section 5.08 of the Loan Agreement provides that the local currency cost of the project would be met by an appropriation from the national budget to be set aside in a special fund exclusively for the project, and that any amounts thus appropriated if not completely ex- pended in one calendar year shall be carried over to the next calendar year or years. It should be noted that although the local currency costs have been estimated at 9 12.5 million, the minimum appropriations required under the Loan Agreement have been limited to 9 12. million. This is due to the fact that the Government had already appropriated 9 .5 million for the project in 1958. 9g Legislation has been passed authorizing the Government to borrow. Under Salvadorean.law, the loan documents must also be ratified by the Salvadorean Congress.  PART IV - APPRAISAL OF THE PROPOSED LOAN Justification of the Project 10. A detailed appraisal of the project (TO-191a) (No. 2) is attached. Ul. During recent years, one of the principal objectives of the Government's economic development policy has been the increase and diversification of agricultural production through the opening up of new and under-utilized land. Among the last remaining areas in the country with unused agricultural potential are the plains along the Pacific Coast. Investigations have shown that this area, which has been practically inaccessible, would be suitable for crop cultivation, livestock raising and dairy farming if the necessary access is pro- vided by an adequate network of roads. 12. The roads would not have important effects on coffee output. However, it is estimated that substantial increases in agricultural production, mainly cotton, corn, rice, truck crops and meat production, will occur and thus agricultural production will. be further diversified. Furthermore, higher exchange earnings would be obtained through ad- ditional exports, principally cotton, and some savings in foreign exchange could be achieved through a reduction in the relatively high level of food imports. Also, by opening up the coastal plains, the pressure being exerted by El Salvador's rapidly growing population upon available resources will be alleviated. 13. It was agreed that the most appropriate layout for a network of roads in the Coastal area would consist of a main highway extending from the Guatemalan border to the Honduran border (Coastal Highway) together with feeder roads, some of which would provide connections with the Inter-American Highway. Since work on the Coastal Highway is well advanced, the time is now appr6priate to commence construction on the feeder road phase of the program. 14. Construction of the Rio de Paz bridge and the extension of the Coastal Highway to the site of that bridge are two necessary complements to that highway. They will link it with the Guatemalan Pacific Highway and will thus provide an important connection for through traffic between Guatemala, El Salvador and Honduras. 15. Under the original arrangements for financing the Coastal High- way the section between Comalapa and La Iibertad was to be constructed by the Government with its own funds. However, the Government was not able to complete that section, contrary to its expectations. While earthwork and structures on this section have been finished, the base and pavement remain to be constructed. This work will have to be  carried out to provide a uniform and continuous facility al1 along the coastal plain. Execution of the Project 16. Design work for the roads will be carried out by the Highway Department subject to review by consulting engineers. The structures however, will be fully designed by the consulting engineers. Con- struction will be carried out by contractors although it is possible that the Highway Department will undertake, with its own forces, the construction of some minor roads whose total cost will not exceed $700,000 equivalent. 17. Supervision of construction will be performed by consulting engineers with the exception of the section of the Coastal Highway between Comalapa and La Libertad which wilL be supervised by the Highway Department on a trial basis. All goods and services for the project will be obtained on the basis of international competitive bidding. All contractors and the consultants will have to be satisfactory to the Government and the Bank and their contracts will be on terms satisfactory to the Government arl the Bank. Economic Situation 18. Since the last economic report (Sec M 58-21) was circulated on January 29, 1958 no basic change has taken place in the Salvadorean economy. Final figures for 1957 indicate that an increase in the volume of coffee exports was more than sufficient to offset the fall in prices, and the total value of exports increased by 23% over the 1956 level. In 1958, a decline in the value of exports and the re- sulting loss in tax receipts is producing a government deficit, the first which the Salvadorean Government has incurred for many years. Consequently, there will be some loss of exchange over the year. Reserves are, however, reasonably adequate (about 35% of annual imports) and should remain so provided the Government does not delay too long in adjusting its budget to the lower level of coffee prices. 19. In the long run, the favorable expectations outlined in the Economic Report still hold. The tendency towards a more diversified economy, the development of import substitutes and the shift from less to more productive industries have placed the economy in a good position to offset unfavorable world market developments in the country's main export, coffee. In view of the investment of the past few years in the coffee sector, production and exports of coffee will continue to expand for some time and an increasing portion will be marketed in a processed form. The opening up of new lands suitable for cotton as well as food crops is expected to provide for increased agricultural growth.  Prospects for Fulfilment of Obligations 20. The Highway Department is well organized and its experience with the Coastal Highway has increased its competence to complete the new project. It is making the necessary arrangements to cover local currency expenditures and to carry out the project efficiently. Service on El Salvadorts existing external debt is low and at its peak will not exceed 4% of prospective export earnings. The service on the proposed loan is well within the margin of El Salvador's debt servicing capacity. Washington, D.C. Eugene R. Black December 24, 1958 President