Cameroon - Fifth Highway Project

Document of The World Bank FILE COpy FOR OFFICIAL USE ONLY Report No. P-3333-CM REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UNITED REPUBLIC OF CAMEROON FOR THE FIFTH HIGHWAY PROJECT May 26, 1982 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 disclosed without World Bank authorization. I  UNITED REPUBLIC OF CAMEROON FIFTH HIGHWAY PROJECT CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) US$1 = CFAF 270 a/ CFAF 1 million = US$3,703 a/ Floating exchange rate. The CFA Franc (CFAF) is tied to the French Franc (FF) at the ratio of FF 1 to CFAF 50. ABBREVIATIONS AND ACRONYMS AfDB - African Development Bank BADEA - Arab Bank for Economic Development in Africa EDF - European Development Fund FAC - Fonds d'Aide et de Cooperation (France) LABOGENIE - National Civil Works Laboratory MINEQ - Ministry of Equipment MINT - Ministry of Transportation NCEEP - National Civil Engineering Equipment Pool NPA - Cameroon National Port Authority REGIFERCAM - National Railroad Company of Cameroon FISCAL YEAR July 1 - June 30  FOR OFFICIAL USE ONLY UNITED REPUBLIC OF CAMEROON FIFTH HIGHWAY PROJECT LOAN AND PROJECT SUMMARY Borrower: > United Republic of Cameroon Beneficiary: Ministry of Equipment Amount: US$70 million, including capitalized front-end fee of US$1 million Terms: 20 years including a five year grace period at an annual interest rate of 11.6 percent Co-financiers: Canada, Netherlands, consortium of Kuwait Fund/Islamic Bank/Abu Dhabi Fund Project Description: The project is designed to assist the Government in the construction of the Edea-Yaounde section of the Douala-Yaounde road; other objectives are to provide technical assistance to improve the management of the transport sector, and to help prepare a national transport plan and future projects. The project, to be implemented over a five-year period, would consist of the following main components: (i) construction of the Edea-Yaounde section (181 km) of the Douala-Yaounde road (246 km); (ii) supervision of construction of the Edea-Yaounde section; (iii) technical assistance to the Ministry of Equipment and the Ministry of Transport and fellowships for Cameroonian staff; (iv) strengthening of the National Civil Works Laboratory including provision of technical assistance and fellow- ships; and (v) pre-investment studies to improve national transport planning and maintenance of the paved road network. Benefits and Risks: The proposed road construction would provide a reliable all-weather access in the transport corridor linking the principal economic centers of the country. Principal quanti- fiable benefits consist of vehicle operating cost savings for road users. Unquantified benefits include time savings and improved traffic conditions resulting in increased economic 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 disclosed without World Bank authorization.  - ii - incentives and private sector activities. The project would also help improve transport planning and management. The project has no major or unusual risks except that the imple- mentation of the technical assistance components could be delayed. To minimize this risk, planning and preparation for this component was advanced during project preparation by agreeing on terms of reference and early recruitment of consultants, and implementation will be closely monitored. Estimated Costs: US$ million Foreign Local Total 1. Construction 113.7 33.8 147.5 2. Supervision of lots 6-9 8.1 2.0 10.1 3. Technical assistance and fellowships 2.8 0.6 3.4 4. Strengthening of Civil Works Laboratory 4.2 1.1 5.3 5. Pre-investment studies 2.4 0.6 3.0 Total base cost 131.2 38.1 169.3 Physical contingencies 11.7 3.5 15.2 Price contingencies 26.6 7.7 34.3 Cost (net of taxes) 169.5 49.3 218.8 Front End Fee on Bank Loan 1.0 - 1.0 Total Financing Required 170.5 49.3 219.8 Financing Plan: a/ US$ million Foreign Local Total IBRD 70.0 - 70.0 Canada 16.4 - 16.4 Consortium of Kuwait Fund/Islamic Bank/Abu-Dhabi Fund 31.4 - 31.4 Netherlands 43.7 - 43.7 Cameroon 9.0 49.3 58.3 170.5 49.3 219.8 a/ Financing plan of the Edea-Yaounde Section (Section II) of the Douala-Yaounde road. Details of foreign financing of the Douala-Edea Section (I) are contained in Annex IV.  - iii - Estimated Disbursements from the IBRD loan: US$ million FY83 FY84 FY85 FY86 FY87 Annual 14.0 12.0 16.0 18.0 10.0 Cumulative 14.0 26.0 42.0 60.0 70.0 Rate of Return: 24 percent Staff Appraisal Report: Report No. 3473-CM dated May 21, 1982 Maps: IBRD 15470 - Transport Network IBRD 15471R - Douala-Edea-Yaounde Road   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UNITED REPUBLIC OF CAMEROON FOR THE FIFTH HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed loan to the United Republic of Cameroon for the equivalent of US$70 million with a term of 20 years including five years of grace at an interest rate of 11.6 percent a year to help finance the Fifth Highway Project. The proposed project will be co-financed in parallel as follows: Canada, US$16.4 million equivalent; Netherlands, US$43.7 million equivalent; consortium of Kuwait and Abu-Dhabi Funds and Islamic Bank, US$31.4 million equivalent. Annex IV provides more detailed data on co-financing including lending terms. PART I - THE ECONOMY 1/ 2. A report entitled "United Republic of Cameroon--Economic Memorandum" (No. 2877-CM), was distributed to the Executive Directors on April 30, 1980. Since then two economic missions have visited Cameroon, as well as a number of sector review missions. The findings of these missions are incorporated in the following paragraphs. Annex I provides basic country data. Background 3. Cameroon was a federation from the time it gained independence in 1960, until the United Republic, which unified the anglophone western and francophone eastern parts of the country, was formed in 1972. The Government has concentrated on fostering a sense of national unity among the different parts of the country: the sparsely populated eastern region, the relatively small but densely populated western part of the country, the sahelian zone in the north with Muslim traditions, and the southern tropical regions. 4. Cameroon has a population of 8.4 million (1980) and covers an area of 475,000 km2. It is one of Africa-s most diversified countries, with a wide range of climatic zones, ecological conditions, population densities, ethnic groups and traditional cultures. Its main opportunities for develop- ment lie in the expansion of agricultural, livestock, and forestry production; the exploitation of energy and mineral resources; and the processing of agricultural, forestry and mineral products for domestic consumption and export. Cameroon became an oil producer in 1978 and is believed to have exported about 4 million tons of crude petroleum in 1981. Further increases in crude petroleum production are expected. In 1981, Cameroon began producing refined petroleum products. The country also has unexploited gas potential. 1/ The text of this section is substantially the same as in the President-s Report for the Oil Palm and Rubber Consolidation Project which was distributed to the Executive Directors on May 10, 1982.  - 2 - 5. Cameroon's main economic centers are separated by large areas of low population density and the country's port facilities and transport network also serve landlocked Chad and the Central African Republic. Adequate port and trunk transportation systems are essential for promoting agriculture, forestry and industry, and for strengthening internal and international communications. With the growth of industry, transportation, construction and services, Cameroon is becoming increasingly urbanized. About 30 percent of the population now live in towns, with the heaviest concentrations in Douala the major port and industrial center, and Yaounde the capital. 6. Cameroon subscribes to a philosophy of planned liberalism, and the country's economic development has been pursued within a five-year invest- ment planning framework. The Fourth Plan period ended in June, 1981, and the Fifth Plan is now in effect. Cameroon's development and macro-economic policies have been rather cautious, with the result that, while until the late 70's growth has not been exceptionally rapid, the country has enjoyed noteworthy economic stability. 7. Growth. Over the past fifteen years Cameroon has experienced gradually accelerating rates of output and population growth. The real GDP growth rate during the Second Plan Period (1966-71) averaged 4.2 percent; in the Third (1971-76), it rose to 4.5 percent; and in the Fourth (1976-81), it is estimated provisionally at 8.1 percent. Population growth in the three periods was about 1.8, 1.9 and 2.3 percent a year respectively. Per capita GNP rose between 1966 and 1980 at an annual rate of about 3.1 percent. 8. Within the overall pattern of accelerating growth, there was some unevenness in the performance of key productive sectors from one planning period to another. During the Third Plan in particular, both agriculture and manufacturing experienced periods of slowdown, although services grew strongly. Contributing to the agricultural slowdown were decreases in the output of two major export crops--cocoa and arabica coffee--related to declines in producer prices compared with food prices, and to the termination of a fertilizer subsidy program for arabica coffee. Forestry output dropped towards the end of the period because of reduced Western European demand and some transporta- tion bottlenecks. Growth of the manufacturing and mining sector slowed as a result of the declining momentum of import substitution activities, which had produced rapid increases in manufacturing output during the Second Plan years, and deteriorating terms of trade. The acceleration in growth during the Fourth Plan was helped by rapidly rising construction output, reflecting sharply higher levels of investment, by recovery in cocoa and robusta coffee production, as farmers responded to higher producer prices, and by recovery in forestry output. Since 1978, the start-up of oil production has contributed significantly to aggregate growth. 9. Investment and Savings. Underlying the longer term rise in GDP growth have been rising proportions of investment. The investment/GDP ratio averaged over 15 percent during the Second Plan, about 19 percent during the Third, and close to 24 percent during 1976-80. Investment priorities have shifted over time. The First Plan emphasized directly productive projects  (53 percent), and the Second, infrastructure and social projects (58 percent). During 1976-80, directly productive activities were again favored (63 percent), with heavy emphasis on manufacturing, mining and energy (52 percent). Despite the rising investment/GDP ratios, the mobilization of domestic savings more than kept pace, due largely to increased public savings. Gross domestic savings rose from about 84 percent of total investment under the Second and Third Plans to about 87 percent during 1976-79. After allowing for net factor service and current transfers and the amortization of foreign medium- and long-term loans, reliance on foreign financing fell from about 33 percent of total investment during the Second Plan to about 30 percent during 1976-79. 10. Public Finance. Budgetary revenues amounted to about 15 percent of GDP during the Second and Third Plans and increased slightly during 1976-79. Public savings after debt service declined from about 39 percent of total public investment during the First Plan to about 36 percent during the Second; however, it rebounded to 55 percent during 1976-79, thanks to substantial contributions from the agricultural export stabilization funds. 11. Balance of Payments. Overall, the balance of payments has not posed particular problems, apart from some short-term deterioration during the 1974-76 period. In 1977-80, exports rose substantially (at an average annual rate of 26 percent) but imports also increased (at an average annual rate of 20 percent) because of more rapid economic growth and higher investment. International reserves were rebuilt in 1976-80, in part by the use of IMF credits, rising in 1980 to a gross level equivalent to about seven weeks of imports and to a net level of about five weeks. This was low by international standards, although still acceptable given Cameroons membership in the Central African Monetary Union. Development Prospects and Issues 12. Short- and Medium-term Developments. Oil production is bringing with it significant changes in the Cameroonian economy. Historically, Cameroon has been dependent on the export of agricultural products for the bulk (72 percent in 1977/78) of its export earnings. Cocoa and coffee alone accounted for 53 percent of the value of 1977/78 exports. However, oil exports which represented about 1 percent of total exports in 1977/78, are estimated at about 28 percent in 1979/80, with the share of agricultural products dropping to close to 50 percent. Exports of oil have continued to rise sharply in 1980/81, further reducing the proportional importance of agricultural exports; this trend is expected to persist for at least two more years. 13. The outlook for agricultural and industrial growth in absolute terms during 1980-86 is nonetheless quite favorable. Agricultural growth expectations are based on some increase in cocoa output above 110,000 tons; recovery of robusta coffee; continuing expansion for arabica coffee; in- creased production of most food and other crops, as well as livestock; and expansion of forestry production. Growth of industrial and mining production is expected to result from existing and expanded manufacturing facilities  - 4 - (particularly those for food, beverages and construction materials), from some new industrial projects and from new mining ventures. An impact on the structure of the economy is expected from the Fifth Development Plan invest- ment program (1981-86). The proposed investment/GDP ratio under the Fifth Plan is 23 percent. The investment program stresses support to agriculture and expansion of the supply of technical and professional manpower, while energy, mining and industry are to receive diminished emphasis. 14. Longer-Term Developments. Cameroon's promising potential in areas outside agriculture implies a longer-term structural shift towards a more diversified industrial base. Agriculture will play a critical but less dominant role, and a shift in priorities towards increased food production for the growing urban population appears probable. The rate at which agricultural productivity increases will be a crucial determinant of the pace of economic development, and will call for an appropriate mix of public intervention and private initiative. External Borrowing and Creditworthiness 15. Total debt outstanding and disbursed rose from US$514 million at the end of 1976 to US$1.9 billion at the end of 1981. Debt service payments rose from US$39 million in 1976 to US$132 million in 1979, while exports increased from US$757 million to about US$1.7 billion during the same period. Notwith- standing a hardening of average loan terms in the 1970s, Cameroon's debt service ratio was still less than 10 percent at the end of 1979, and is projected to stay in the 12 to 14 percent range throughout the present decade. Borrowing on non-concessionary terms is expected to account for about two- thirds of total new commitments, and average terms are expected to harden during the period. Because of higher debt service payments, projected net disbursements will probably be less than in the past but, with Cameroon's favorable export and savings prospects, are expected to be sufficient to allow an investment rate above 25 percent of GDP, as well as the restoration of a strong foreign reserve position. PART II - BANK GROUP OPERATIONS IN CAMEROON 16. Bank and IDA commitments in Cameroon as of March 31, 1982 amounted to US$625.4 million and covered 39 projects: 18 in agriculture, 11 in trans- portation, 3 in education, 3 in public utilities, 2 small- and medium-scale enterprise projects and 2 technical assistance projects. Transport and agriculture each account for about 40 percent of these commitments. IFC has invested in five enterprises, with total net loan and equity commitments of US$12.7 million. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1982, including notes on the execution of ongoing projects. Although delays and setbacks have occasionally been encountered in implementation, the Government has consistently shown willingness to collaborate with the Bank in finding solutions to such problems.  In the past, Cameroon's disbursement rate compared very favorably with that of most other countries. Recently, however, performance has deteriorated somewhat, which appears to be partly symptomatic of administrative difficul- ties that have become apparent, notably in the central procurement agency. Several steps, including the provision of technical support to expedite procurement procedures, are under consideration to improve the situation. 17. The Bank's initial investment strategy in Cameroon was to support the Government's development efforts in three main directions: (i) strength- ening and extending the road and rail trunk systems; (ii) raising agricultural output and exports; and (iii) providing assistance to education. Through 1975, apart from one water supply project, Bank lending was concentrated entirely in the transport, agriculture and education sectors. Since 1975, lending has become more diversified, extending into other areas including development of small- and medium-scale enterprises and technical assistance. 18. For the future, projects are being prepared in agriculture to extend rural development efforts and strengthen agricultural research, and to rehabilitate and expand existing infrastructure in transport. Additional education and technical assistance projects are also planned, as well as further SME, urban and water supply/sewerage projects. The Bank has carried out sector studies in forestry, energy, industry and telecommunications, and additional projects in these areas have been tentatively identified. Thus, the trend towards further sectoral diversification of Bank lending, reflecting the growing complexity of Cameroon's development needs, will continue. 19. In addition to lending operations, the Bank will expand its program of economic and sector work, develop the planning and provision of technical assistance, and broaden its economic dialogue with the Government. In the short- and medium-term, this dialogue is expected to cover the pace and pattern of oil and gas development; the size and composition of the investment program; the role of the private and public sectors; technical and other skilled manpower constraints; training needs; improvements in the Government administration; development priorities for export and food crops; and poten- tial bottlenecks in infrastructure. The dialogue on longer-term issues would center on basic agricultural and industrial development policies. An agricul- tural sector study is being prepared and will be discussed with the Government shortly. Regarding industry, the Bank has recently completed a comprehensive study of industrialization and the system of incentives, which has been discussed with the Government and has led to the provision of technical assistance to strengthen the Government's capabilities for industrial policy analysis and reformulation. Issues for continued dialogue are the objectives, economic performance and accountability of public enterprises. Donor Activities 20. Disbursements of official development assistance during the second half of the 1960s amounted to about US$45.0 million a year, mostly in the form of grants. France provided most of the assistance, which was concentrated in  - 6 - infrastructure and some productive sectors. EDF and EIB directed most of their assistance to agriculture and infrastructure. Bank and IDA disbursements were small during this period. In the 1970s, foreign aid has increased to about US$90 million a year, with only one-fifth in the form of grants. Bank and IDA financing amounted to about 23 percent of total disbursements. Bank Group lending to Cameroon has been closely coordinated with that of other donors; in 18 of the 39 Bank projects, joint or parallel financing was arranged and expanded cofinancing is being actively sought for several projects under consideration. 21. Cameroon is now borrowing increasingly from private sources; such borrowing rose to over 40 percent of external financing in 1975-79, compared with only 11 percent in 1967-69. Public debt outstanding and disbursed as of December 31, 1980, amounted to US$2.0 billion, 7.6 percent of which in the form of Bank loans and 7.3 percent in IDA credits. Bank loans accounted for 9.2 percent of public debt service and IDA credits for 0.9 percent. By 1985, Bank loans and IDA credits are projected to account for about 26 percent of debt outstanding and about 14 percent of debt service. PART III - THE TRANSPORT SECTOR Transport System 22. Cameroon's transport system is import/export oriented. The focal point of the network is Douala, the country's principal commercial center, main seaport, and site of the principal international airport. The main transport arteries are the Transcameroon corridor to the North (Douala-Edea- Yaounde-Chad border) and the axis to the West (Douala-Bafoussam-Foumban). An efficient transport system is important for the country's economic development and regional integration, as well as for the growing transit traffic to and from the landlocked neighboring countries Chad and the Central African Republic. 23. The transport system consists of some 65,000 km of roads; 1,070 km of railway; one principal and two secondary seaports; one seasonal river port; and two international and 13 smaller domestic airports. Road transport is the dominant mode. The road network comprises about 2,400 km of paved roads, 30,000 km of gravel and earth roads and some 32,000 km of unclassified earth tracks. The density of the road network varies considerably throughout the country, with concentration in the economically active and more populated areas. Paved roads represent only 4 percent of the network, but carry nearly 50 percent of the road traffic. Overall, the classified network's growth of about 6 percent per year since 1972 reflects the Government's priority for developing the road subsector as an important factor of economic development particularly for the agricultural sector. The condition of the network varies from good to poor. Unpaved or partly paved roads are frequently impassable during the rainy season, causing severe disruptions in communication and economic activity.  - 7 - 24. The railway is operated by REGIFERCAM, an autonomous state agency. Financially, REGIFERCAM is operating at a loss but steps are being taken to solve operational and managerial problems. External donors are financing the track realignment between Douala and Yaounde as well as the purchase of locomotives and rolling stock. However, realignment of the last section of the track between Edea-Maloume is still subject to a determination of its economic feasibility. The large investments involved would make debt servicing critical for the railway without giving it a competitive edge over road transport when the construction of the Douala-Yaounde road is completed by 1985. Consequently, the Government and the Bank agreed under the ongoing Fourth Railway Project (Loan 1734, US$27 million, and Credit 936, US$20 million of August 23, 1979) that the Edea-Maloume section would be realigned only if it was economically justified. Construction of the proposed road will result in some traffic diversion from rail to road. However, such a diversion has already been taken into account in the preparation of the Fourth Railway Project. Additionally, the Railway Project provides for measures to improve REGIFERCAM's operation, marketing, tariffs and finances as well as studies to review the pricing and regulatory environment of freight transport with the objective of attaining a competitive mechanism for the allocation and distri- bution of freight in the corridor. 25. Douala, the principal port, handles 90 percent of Cameroon's foreign and transit trade, with an annual turnover of 2.5 million tons. The Cameroon National Port Authority operates the port at a profit. The port's capacity has been expanded to about 6 million tons in view of rapid traffic growth at an average annual rate of 8.5 percent between 1972-79. The substantially completed Second Port Project (Loan 1321/Credit 657, US$25 million, 1976) assisted in the capacity expansion and port reorganization. A Third Port Project is being prepared aimed primarily at increasing productivity through the extension of the industrial berth for clinker handling, and transfer of fruit shipments to general cargo facilities. Transport Planning 26. The Government's principal objectives in the transport sector are to promote regional integration and foreign trade, improve access to agricultural areas and facilitate the marketing of foodcrop production. The Fourth Develop- ment Plan (1976-1981) called for transport investment of some US$900 million or an increase of about one-third in real terms over the preceding Plan. While the proportion of transport investment was reduced from over 50 percent to 35 percent of total public capital outlays, its realization was still to a large extent dependent upon foreign financing. Also, the absorptive capacity in the transport sector is limited and actual investments lag behind planned levels. 27. The Ministry of Transport and the Ministry of Equipment are the principal Government agencies in charge of the planning and implementation of transport projects. However, their staffing is limited both in nlmbers and in their capacity to prepare and evaluate more complex investment pro- grams. In the ongoing dialogue between the Government and the Bank on sector  - 8 - policies, steps are being taken to improve transport planning. MINT has created a Planning and Coordination unit which is being upgraded to increase the Ministry's capacity to carry out more complex sector planning. Under Bank-financed projects consultants have provided technical assistance and training to help improve coordination and planning of transport activities. Under the Third Highway project a Bank-financed economist helped MINT to conduct a comprehensive origin-destination study. Another economist, financed under the First Technical Cooperation Project, advised MINT on general planning, policy and coordination matters. MINEQ has created a Road Planning Unit and REGIFERCAM is improving its operational and planning capacity. These measures are designed to help improve efficiency and pro- ductivity of the transport sector. Although the Government has in the past been slow to initiate changes in the planning mechanism, it has come to recognize the increasing complexity of transport investment alternatives and the need for improved and more comprehensive planning. It has, therefore, requested assistance from the Bank, as part of the proposed project, to carry out an overall transport sector survey. The transport survey would provide longer-term perspectives on key sector issues such as intermodal choice, policy formulation, investment criteria and resource allocation. Road Subsector 28. While the Ministry of Transport has overall responsibilities for transport sector management, the Ministry of Equipment is principally in charge of planning, construction and maintenance of the road network. In the past, the Government has concentrated its effort on building and rehabili- tating paved roads, actively supported by Bank Group operations. The completed First Highway Project included construction of the Ngaoundere-Garoua and Tiko-Victoria roads to paved standards and the preparation of preinvestment studies. Completion of the Ngaoundere-Garoua road was delayed by two years because of technical difficulties in particular insufficient drainage; this resulted in cost overrun that was financed by the Government and supplementary Bank financing. As explained in the Project Performance Audit Report, part of the delays was also attributable to poor coordination among various agencies responsible for implementation of the various project components. The Audit Report therefore recommended close monitoring of road conditions and careful maintenance of the road, as well as a better coordination of transport activi- ties. The Second and Third Highway Projects helped finance construction of several priority roads to paved standards. The project completion report concluded that the impact of cost increases on the economic benefits was largely offset by higher than originally projected traffic. Therefore, the re-estimated rates of return for the two projects of 20 percent were essentially the same as projected during appraisal. The completion report noted that progress in institution building has been slow as compared to the considerable physical improvements in the transport system during the last decade. Technical assistance under the ongoing Fourth and proposed Fifth Highway Projects is aimed at improving project coordination and institution building. The Fourth Highway Project comprises mainly strengthening of institutions and training for road maintenance, maintenance of about 17,000 km and rehabilitation of 1,700 km of unpaved roads, technical assistance to the domestic construction industry and preinvestment studies for the proposed  - 9 - Fifth Project and for evacuation roads for forestry production. Project implementation is now in its second year and proceeding satisfactorily. An ongoing Feeder Roads project includes a construction program for some 2,200 km of feeder roads. The Government is preparing a modified program to be approved by the Bank, reflecting increases in construction costs and delays in project execution. 29. Road traffic growth during the 1970s is estimated to be around 11 percent a year or about twice the average GDP growth. However, paved roads linking significant economic and population centers have historically experienced even higher growth rates as confirmed by recently completed Bank projects in Cameroon. The country's road transport industry, which is subject to a minimum of regulation, is competitive and provides basic services in line with expanding domestic demand. The Government issued a revised Highway Code in 1979 restricting axle loads; it reviews tariffs periodically and is con- sidering legislation to improve safety further and to control overloading. 30. During the 1970s road investment was predominantly financed by loans from foreign sources accounting for about half of total outlays of the sub-sector. The Government's contribution amounted to about 35 percent and the remainder was funded by local authorities. The Fourth Development Plan called for road investments of US$390 million or 43 percent of total transport investments. Current expenditure for road maintenance in the 1970s remained virtually unchanged in real terms, but outlays per kilometer decreased because of the expansion of the road network. Recently the Government has taken steps, however, to reverse this trend and the road maintenance budget is now adequate. Under the ongoing Fourth Highway Project, funding for maintenance operations has increased, and a reclassification of the network has been completed that should provide a more rational basis for the evaluation of needs and priori- ties as well as the allocation of resources. Under the proposed Fifth project studies will be undertaken to evaluate future maintenance needs for the paved road network. Road user charges in general are quite high, and estimated total outlays accounted for only about 70 percent of revenues during the last decade. Principal sources for road user charges are taxes and duties on vehicles, spare parts and tires. The other major source of revenue is tax on fuel which averaged CFAF 52/litre for gasoline and CFAF 36/litre for diesel, representing an overall average taxation rate of nearly 50 percent. These taxes generated about US$70 million in 1979. The Government plans to review tariff and taxation policies, within the framework of the national transport sector survey to be financed under the proposed project, with a view to implementing more appropriate road user charges. 31. Due to difficult topographic, geotechnical, and climatic conditions, the quality and price of construction works, timely project implementation, and the lack of qualified local firms, the Government generally prefers capital-intensive methods for the construction of large paved trunk roads. A study financed under the Fourth Highway Project has been prepared with the help of consultants to review the status and comparative advantage of domestic contractors, and their potential for further development. Based on the recommendations of the study, the Government has started to upgrade the local  - 10 - construction industry including provision of easier access to credit under more favorable conditions, improved training, and award of small size Govern- ment contracts. The first Small and Medium Scale Enterprise (SME) Project and the ongoing Second SME Project provide financial and technical support for the Government's promotion efforts in support of local construction and building material firms. PART IV - THE PROJECT Background 32. The construction of the Douala-Yaounde road has been a high priority project of the Government. The existing road is in poor condition and virtu- ally closed to traffic during the rainy season causing severe disruptions in communication and economic activities. Even in the dry season, the road is in poor condition and is difficult to maintain given the heavy traffic which calls for a paved surface. Construction of a paved road including realignment would reduce the length of the existing road from 288 km to 246 km. When the road is opened to traffic by 1986, about 1,700 vehicles a day are expected to use it. The proposed road is designed to serve as the main trunk road of the country, linking Cameroon's principal port of Douala with the industrial center of Edea and the nation's capital of Yaounde. The project was prepared by consultants financed in part under the ongoing Fourth Highway Project. 33. During project preparation, the general layout and design standards of the road have been extensively discussed with the Government. Initially, the Government intended to construct a limited access four-lane divided high- way with separate grade intersections and a design speed of 120 km/h. In view of the current and projected traffic flows in the Douala-Yaounde transport corridor, a full-fledged expressway was not justified since traffic needs would be adequately served for an extended period by a two-lane paved road with appropriate standards. The Government, assisted by the Bank, reviewed various technical options and related financing requirements; it progressively agreed to consider design standards and financing schemes that would avoid over-dimensioned facilities and costly investments and an excessive burden on the country's financial position. In response to the Bank's suggestion, the Government finally selected the two-lane paved road option as retained under the project. Current traffic estimates suggest an upgrading of the road to a divided highway would be justified only by the year 2000. 34. Based on appropriate design standards and related investment cost of the Douala-Yaounde road, the Government was able to atttract a large number of co-financing agencies thus limiting expensive contractor financing. The Government asked the Bank to play a leading role in mobilizing foreign finan- cing from diversified sources. Three co-donors' conferences were held to put together the financing plan involving 12 co-lenders including four Arab funds. A special feature of the financing scheme for such an infrastructure investment is that some co-financing could be mobilized from private sources at market rates combined with public funds on concessionary terms.  35. Recognizing the existence of institutional bottlenecks and limita- tions on the sector's absorptive capacity, the Government also requested an extension of urgently needed further technical assistance and the inclusion of pre-investment studies. These project components were designed to improve in particular efficiency in sector planning and management, and to lay the groundwork for a comprehensive maintenance program for paved roads commensurate with the growing needs of the network. These components of the proposed project will, in part, follow up on the recently completed nationwide origin/ destination road survey, and complement ongoing maintenance operations for unpaved roads under previous Bank projects. 36. An appraisal mission visited Cameroon in October/November 1980 and brief follow-up visits took place during 1981 to refine technical data and update financing arrangements. Negotiations were held in Washington from March 25-29, 1982. At that time the Government had completed the bidding procedure for the Bank-financed lot and reliable cost estimates were avail- able. The Cameroonian delegation was led by H. E. Paul Pondi, Ambassador to the United States. The Staff Appraisal Report No. 3473-CM is being circulated separately. Project Objectives and Description 37. The project would assist the Government in constructing the Edea- Yaounde section of the Douala-Yaounde road. It would also provide urgently needed technical assistance to improve project preparation, coordination, and implementation in the sector, and to strengthen institutions. Finally, the project would help prepare a national transport survey and future projects. Specifically, the proposed project would consist of: (i) construction of the Edea-Yaounde Section (181 km) of the Douala- Yaounde road (246 km); (ii) supervision of construction of the Edea-Yaounde section; (iii) 19 staff-years of technical assistance to the Ministries of Equip- ment and Transportation and fellowships for Cameroonian staff; (iv) strengthening of Labogenie, the National Civil Works Laboratory including nine staff-years of technical assistance and fellowships; and (v) two pre-investment studies consisting of the preparation of a national transportation survey and the evaluation of the paved road network. Implementation 38. The Ministry of Equipment (MINEQ) will have overall responsibility for project execution. However, the Ministry of Transport (MINT) will be responsible for the preparation of the transport survey and the technical  - 12 - assistance assigned to it. MINEQ will be assisted by consultants in project implementation. The project will take about five years to complete; it is expected to start in July 1982 and to be completed by December 1986. Road Construction and Supervision 39. For technical and financing purposes, the Government divided the Douala-Edea-Yaounde road into two sections: Section I from Douala-Edea (65 km) comprises lots 1 to 5; Section II from Edea-Yaounde (181 km) consists of lots 6 to 9. The Bank would finance construction of lot 7 (65 km) which represents 36 percent of the length of Section II. The road will have a pavement 7.4 m wide with 2 m shoulders and a design speed of 80 km per hour. The design standards for lot 7 and all other lots are based on a consultant's study financed under the Fourth Highway Project. They are consistent with the standards for Section I and other paved roads in Cameroon, and are appropriate for the projected traffic. During negotiations, the Government agreed to have all lots in Section I of the project under contract by December 31, 1982, and to inform the Bank of any proposed modification of design standards or extension of contract deadlines (Section 4.03(b) and (c) of the draft Loan Agreement). 40. To permit better coordination of road construction, the Government, with the consent of co-donors, has requested the Bank to finance the super- vision of construction of all four lots of Section II. Supervisory consultants for lot 8 which is already under construction, have been appointed and recruit- ment for other consultants is underway. The appointment of all consultants for supervision of construction of Section II would be a special condition of loan effectiveness (Section 6.01(a) of the draft Loan Agreement). Technical Assistance 41. To increase MINEQ's capacity to process construction contracts including supervision of consultants, and to improve its efficiency, technical assistance is urgently needed. A team of three engineers will therefore be provided to the Highways Department of MINEQ for four years. The appointment of qualified consultants and the nomination of counterparts would be a special condition of loan effectiveness (Section 6.01(b) of the draft Loan Agreement). The project will also provide 24 staff-years of fellowships to staff of the Highways Department to help maintain and upgrade the quality of personnel. 42. The Government has expressed its intention to also upgrade and expand its planning capacity by strengthening MINT's planning and coordination unit. The unit will have increased responsibilities for transport planning, policy formulation and coordination. The project would, therefore, provide for five staff-years of consultants to support MINT's expanded role and for two additional staff-years of specialized short-term experts in accordance with an agreed work program. At negotiations, assurances were obtained that the Government will appoint qualified counterparts for the specialists before their arrival (Section 3.02(a) and (b) of the draft Loan Agreement).  - 13 - Strengthening of Labogenie 43. To assist Labogenie with the first phase of its long-term expan- sion program, the project would provide for new buildings since existing laboratory and office facilities are too small and inefficient. Nine staff- years of technical assistance, eight one-year fellowships and urgently needed laboratory equipment would also be financed under the project. At negotia- tions assurances were obtained that the Government will prepare the list of laboratory equipment not later than June 30, 1983 (Section 3.08 of the draft Loan Agreement). Procurement for laboratory equipment will be subject to the substantial completion of new laboratory buildings (Section 3.09 (b) of the draft Loan Agreement). Pre-investment Studies 44. National Transport Survey. Following the completion of the origin- destination survey financed under the Third Highway Project, MINT intends to prepare a national transport survey to strengthen investment and sector planning, and to improve policy formulation and implementation. The project will provide for nine staff-years of consultants to help carry out the transport survey. The Bank and the Government have agreed on the terms of reference for the experts and the Government is now recruiting consultants. Assurances have been obtained that the Government will discuss the results and recommendations of the survey with the Bank (Section 3.10 of the draft Loan Agreement). 45. Paved Road Survey. The ongoing Fourth Highway Project addresses the maintenance of laterite roads and routine maintenance of paved roads. The expanding road network and the increasing traffic necessitate the development of a maintenance policy for paved roads. The project would provide 12 staff- years of consultants to evaluate the road network, including laboratory testing in collaboration with Labogenie. The proposed study will recommend an optimum strategy for periodic maintenance, define the useful life of paved roads and determine when and to what standards existing paved roads should be rehabili- tated or reconstructed. Cost and Financing 46. Total cost for the construction of the Douala-Yaounde road, net of taxes, is estimated at US$316.1 million, i.e.: Section I (Lots 1-5, from Douala-Edea): $124.0 million; and Section II (Lots 6-9, from Edea-Yaounde): US$192.1 million. Foreign sources, including the Bank, will provide US$245.4 million or 78 percent of total cost. External financing for Section I will be provided by a consortium of the African Development Bank and the Arab Bank for Economic Development in Africa (US$21.8 million equivalent), the European Development Fund (US$7 million), France (US$70.4 million), and the Netherlands (US$6.3 million). Annex IV provides data on co-financing including lending terms. To realize the economic benefits of the project construction com- ponents consisting of Section II of the Douala-Yaounde road, it is essential that Section I on which construction has already started, be completed at about the same time (para. 39).  - 14 - 47. The total cost of the project, net of taxes, is estimated at US$218.8 million consisting of US$192.1 million for construction of Section II and US$26.7 million for non-construction project components such as technical assistance and preinvestment studies. Foreign exchange cost is estimated at about US$169.5 million or 77 percent of total cost. The proposed Bank loan will finance the foreign exchange costs of the construction of lot 7 and of the other (non-construction) project components, as well as the front end fee. The Government has exempted all contracts for construction, consultants, and technical assistance from taxes. Project costs are based on January 1982 prices and for the road construction on actual bid prices. Physical contin- gencies are estimated at 10 percent for the construction works and equipment procurement of Labogenie, and price contingencies at an average rate of about 8 percent a year. The proposed loan would allow for up to US$1.5 million of retroactive financing for expenditures incurred after February 1, 1982 for urgently needed supervision of construction works and for technical assistance to MINEQ. The loan would provide for a total of 70 staff-years for construc- tion supervision and 49 staff-years for technical assistance and studies at an average cost of US$12,000 per staff-month. These unit costs are in line with prevailing billing rates of consulting firms operating in Cameroon. 48. The proposed Bank loan of US$70 million would account for 32 percent of total project cost and 41 percent of the foreign exchange cost of the project. Various co-lenders would participate in project funding through parallel financing as follows: Canada (US$16.4 million equivalent for lot 9); Netherlands (US$43.7 million for lot 8); and a consortium of the Kuwait Fund, Islamic Bank and Abu Dhabi Fund (US$31.4 million in total, for lot 6). Thus, together with the proposed Bank loan of US$70 million, external financing would cover 95 percent of the project's foreign exchange component or 74 percent of total cost net of taxes. A special condition of loan effectiveness would be that all conditions precedent to the effectiveness of the loans of the co-financiers be fulfilled (Section 6.01(c) of the draft Loan Agreement). The Government would cover the remaining foreign costs of US$9.0 million, all local cost amounting to US$49.3 million equivalent, and would forego all taxes through a general tax exemption for this project. Procurement and Disbursement 49. The contracts for the construction of lot 7 as well as the purchase of the major items of laboratory equipment would be awarded on the basis of international competitive bidding. However,. laboratory equipment items not exceeding US$10,000 each or US$300,000 in total may be procured through limited international tendering on the basis of offers from at least three suppliers. Bids for lot 7 were opened and evaluated before negotiations. Construction of lots 6, 8, and 9, to be funded under parallel financing, will be carried out by contractors on terms and conditions and in accordance with procurement procedures acceptable to the co-lenders concerned. Contracts for building construction amounting to approximately US$2 million will, be awarded on the basis of local competitive bidding procedures, which are satisfactory. Consultants would be selected and recruited following Bank guidelines and appointed on terms acceptable to the Bank.  - 15 - 50. The Bank loan would be disbursed over five years to cover the following expenditures: (i) 77 percent of total cost of civil works; (ii) 80 percent of total cost of consultants and technical assistance; (iii) 90 percent of total cost of fellowships; and (iv) 100 percent of foreign cost of equipment. US$15.8 million would be unallocated. All disbursement applications would be fully documented. Project Benefits and Justification 51. The project is expected to have widespread beneficiaries since it would reduce transport operating costs and provide a reliable year-round all-weather access in the country's most important economic corridor linking the three principal economic centers. As the transport industry is competi- tive, most of the transport cost savings to road users are expected to be passed on to consumers in the form of lower prices and improved supply of goods, and to farmers through more favorable farm gate prices. Unquantifiable benefits of the project would include time savings and improved quality of traffic conditions resulting in increased economic incentives and private sector activities. The project would also help improve transport planning and management. 52. The overall economic rate of return is estimated at 24 percent. Sensitivity tests show that even in the event of a combined 20 percent cost increase and a 20 percent decrease of road user savings, the rate of return would still be 18 percent. Risks 53. Apart from possible quantity variations, the works have few tech- nical risks as they are based on sound engineering principles and normal road construction practices, and would be supervised by competent consultants. There is a risk that the technical assistance component may not achieve its objectives in time due to slow implementation. To minimize this risk, planning and preparation for this component was advanced during project preparation by agreeing on terms of reference and early recruitment of con- sultants, and implementation will be closely monitored. PART V - LEGAL INSTRUMENTS AND AUTHORITY 54. The draft Loan Agreement between the United Republic of Cameroon and the Bank and the Recommendation of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank, are being distributed to the Executive Directors separately. 55. Special conditions of the draft Loan Agreement are listed in Section III of Annex III.  - 16 - 56. Special conditions of loan effectiveness would be that consultants be appointed to: (i) supervise construction of lots 6-9 (para. 40); and (ii) assist the Ministry of Equipment, and that counterparts be nominated (para. 41); and that all conditions precedent to the effectiveness of the loans of the co-financiers be fulfilled (para. 48). 57. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 58. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President by Moeen Qureshi. Attachments Washington D.C., May 26, 1982  1 '7 - MANEX I Page 1 of 7 TASLE 3A CAiERON - SUCIAL INOICATDRS DATA SHEET CAlEMWUN IEIERENCE GROUPS (WEIHTED AVE CES &MD AKEA (THOUSAND Sq. K1M.) - M05T RECENT ESTIHATE) TuTAL 475.4 llDST RECENT MIDDLE INCOME MIDDLE LNCOME ACRICULTDRAL 156.9 1960 J_ 1970 b ESTIMATE L AFRICA SOUTH OF SAHARA LATIN AMERICA * CARIS8EAN GOT FER CAPITA (USS) 140.0 230.0 560. 0 i 794.2 1616.2 IEYCY CONSUMPTION PER CAPITA (RLWUAAS OF LWAL EQUIVALENT) 86.9 111.3 147.5 707.5 1324.1 7UPULATIUN AND VITAL STATISTICS PUPULATIUN, MID-YEAR (THOUSANDS) 5680.7 6781.3 8245.0