El Salvador - Feeder Roads Program and Complementary Project (Vol. 1 of 2) : Report and recommendation

R E S T R I C T E D R e p o rt N o. P - 183 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 REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF EL SALVADOR FOR A FEEDER ROAD PROGRAM AND COMPLEMENTARY PROIECTS December 24, 1958.   REPORT AND RECOTOMIDATIONS OF TIE PRESIDENT TO THE XECUTIVE DIRECTORS ON A PROPOSED L-OAN TO THRE PUEFBLIC OF EL SALVADOR FOR A FEEDER ROAD PROGRAM AND COMPLEShNTARY PROJECTS 1.. I submit herewith the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $5.0 million to the Republic of El Salvador to assist in fin- ancing a network of feeder roads, and some complementary projects to the Coastal Highway which was partly financed with the Bank's Loan 104-ES. PART I - HISTORICAL 2. In October 1954 the Bank made a loan of $11.1 million to help finance the construction of a 306-km highway from the Guatemalan 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 corollary would be the construction of a network of feeder roads. 3. Accordingly, the Government of El Salvador undertook the studies for the construction of the feeder roads in 1957. A Bank mission visited El Salvador to appraise the project in May l958. 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 Govern- ment was advised early in October that the Bank was ready to initiate negotiations. 4. Negotiations began in Washington on December 9, 1958, the Salvadorean Government being represented by Mr. Roberto Parker, the Minister of Public Works, and Dr. Hector David Castro, the Salvadorean Ambassador to the United States. 5. If the proposed loan is made, it would increase the total amount of Bank loans in El Salvador to $28.6 million equivalent. The Bank has already made the following loans to El Salvador: 0  .  - 2 Year Serial No. Purpose Amount of Loan 1949 22-ES Rio Lempa Power Project $12s545.OOO 1954 104-ES Coastal Highway Project l,41001000 Total********** . .................. $23$645,000 Amount ............ $ 1,250,000 Amount Repaid ...................... $ 1,295,000 Less Repayments to Third Parties ... 190009000 295,000 Net Amount Held by the Bank (includes - $632,165 undisbursed) ............................. $22,100,00O At present, the Bank is considering another loan of about $2.9 mil- lion to finance a further expansion of the Lempa Power Project. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. 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 Salvadorts Coastal Highway with the Pacific Highway 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-anaunl instalments, April 1963 to April 1974.  4  -3- Interest Rate 5 3/4 per cent. Commitment Charge 3/4 of 1% per annum. Pgyment Dates April 15 and October 15. PART III LEGAL INSTRUMENTS AM LEGAL AUTHORITY 7. 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 Bank's normal practice. 8. 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 2.02 (b) of the Loan Agreement provides, therefore, that no disbursements to finance the con- struction of the bridge and the extension of road thereto shall be effected until that international agreement has been completed. 9. 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 exclu- sively for the project, and that any amounts thus appropriated, if not completely expended 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 estinated at Al2.5 min- lion, the mini-mum appropriations required under the Loan Agreement have been limited to 9t12.0 million. This is due to the fact that the Government had already appropriated 0.5 million for the project in 1958. 10. Legislation has been passed authorizing the Government to borrow. Under Salvadorean law, the lean documents must also be ratified by the Salvadorean Congress. PART IV - APPRAISAL OF THE PROPOSED LOAN Justification of the Project 11. A detailed appraisal of the project (TO_191a) (No. 2) is attached. 12. During recent years, one of the principal objectives of the Governmentts economic development policy has been the increase and diversification of agricultural production through the opening  0  go 4 - 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 a- d dairy-farming if the neces- sary access is provided by an adequate network of roads. 13. The roads would not have important effects on coffee output. Hawever, it is estimated that substantial increases in agricultural production, mainly cotton, corn, rice, truck crops and meat pro- duction, will occur and -uhus agricultural production will be further diversified. Furthermore, higher exchange earnings would be obtained through additional exports, principally cotton, and some savings in foreign exchange could be achieved through a reduction in the re- latively high level of food imports. Also, by opening up the coastal plains, the pressure being exerted by El Salvadorts rapidly growing population upon available resources idll be alleviated. l4. It was agreed that the most appropriate layout for a network of roads in the Coastal area would consist of a main highway ex- tending from the Guatemalan border Vo the Honduran border (Coastal Highway), together with feeder roads, some of w1rich would provide connections with the Inter-Lmerican Kighway. Since work on the Coastal Highway is well advanced, the tine is now appropriate to commence construction on the feeder-road phase of the program. 15* 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. 16. Under the original arrangements for financing the Coastal Highway, the section between Comalapa and La Libertad was to be contructed 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 all along the coastal plain. Execution of the Project 17. 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  0  - 5 - 0 ~that the Highway Department will undertake, with its own forces, the construction of some minor roads whose total costtwill not exceed $700,000 equivalent. 18. Supervision of construction will be performed by consulting engineers with the exception of the section of the Coastal Highway between Ccmalapa and La Libertad which will be supervised by the Highway Department on a trial basis. All goods and services for the project will be obtained on the basis of international compet- itive bidding. All contractors and the consultants will have to be satisfactory to the Government and the Bank and their contracts will be on terms satisfactory to the Government and the Bank. Economic Situation 19. Since the last Economic Report (Sec M 58-21) was circulated on January 29, 1958$ no basic change has t.Aken place in the Salva- dorean 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 resulting 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. 20. In the long run, the favorable expectations outlined in the Economic Report still hold. The tendency towards a more diversi- fied 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 Fulfillment of Obligations 21. 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.  At or
I0  6 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 Salva- dorts debt servicing capacity. PART V - COMPLIANCE WITH THE ARTICLES OF AGRn4ENT 22. The report of the Committee provided for in Article III$ Section 4 (iii) of the Articles of Agreement of the Bank is attached (No. 3). I am satisfied that the proposed loan wMill caaply with the Articles of Agreement of the Bank, PART VI - RECOaMMENDATIONS 23. I recommend that the Bank make a loan in various currencies equivalent to $5,O000,000 to the Republic of El Salvador for a term of 15 years with interest (including commission) at 5 3/4 per cent per annum, and on such other tenns as are specified in the form of the Loan Agreement, and that the Executive Directors adopt a res- olution to that effect in the forn attached (No. 4). Eugene R. Black President Washington D. C. December 2Z, 1958