Mali - Fifth Highway Project

Document of The World Bank FOR OFFiCIAL USE ONLY Rqeprt No. P-3941-MLI REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 50.7 MILLION TO THE REPUBLIC OF MALI FOR THE FIFTH HIGHWAY PROJECT August 27, 1985 This document has a sslbeted distribuom and msy be ued by recipients only in the pedoenmace of their offii dus Its contnts may nd otherwise be disclosed without World Bak authorization.  CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) US$ 1.0 = CFAF 460 US$0.959 = SDR 1.0 GOVERNMENT OF MALI FISCAL YEAR January 1 - December 31 SYSTEM OF WEIGHTS AND MEASURES (METRIC) 1 meter (m) 2 = 3.28 feet (ft) 1 square meter (! ) = 10.76 square feet (sq ft) 1 cubic meter (m ) = 35.3 cubic feet (cu ft) I kilometer (km) 2 0.62 mile (mi) I square kilometer (km ) = 0.39 square mile (sq mi) 1 metric ton (t) = 2,205 pounds (lb) ABBREVIAONS AND ACRONCM6 Engl sh French adt average daily traffic traffic journalier moyen AfDF African Development Fund Fond Africain de Developpement CFM Mali Railway Cpany Cheffdn de Fer du Mali CPTP Public Works Training Center Centre de Perfectionnrment des Travaux Publics DEC;P General Studies & Prograuming Division Division des Etudes Generales et des Programmes DElr Technical Studies and Works Division Division des Etudes Techiques et des Travaux DNIbP National PDrectorate of Public korks Direction Nationale des Travauc Publics ERR Fconloic Rate of Return Taux de rentabilite econmique FAC French Bilateral Aid Agency Fonds d'Aide et de Cooperation ICB International Campetitive Bidding Appel a la concurrence internationale LCB Local Ccmpetitive Bidding Appel a la concurrence locale iLT=P Ministry of Transport & Public Wbrks Ministere des Transports et des Travaux Publics ONT National Transport Office Office National des Transports PCS Postal Checking System Systeme des cheques postaux SDC Swiss Development Cooperation Cooperation Suisse pour le Developpement SMIP Public Works Fquipment Service Service du Materiel des Travaux Publics SRR Road Strengthening Service Service de Renforcement des Routes STN Regravell3ng Maintenance Unit Service des Travaux Neufs Cooperatives des Transporteurs Routiers du Mahli  FOR OFFICIAL USE ONLY MALI FIFTH HIGHWAY PROJECT CREDIT AND PROJECT SUMMARY Borrower: The Republic of Mali Credit Amount: SDR 50.7 million (US$48.6 million equivalent) Terms: Standard Project The project would support: (i) maintenance of the priority Description: road network; (ii) a growing involvement of the local private construction and mechanical industries in road maintenance operations; (iii) development of a reduced but more efficient capacity of force account works; (iv) the introduction of measures ensuring full financing of recurrent road mainte- nance costs from local sources; (v) a balanced allocation of resources to road investments and maintenance and continued and expanded institutional development of the road transport subsector; and (vi) increased efficiency of the country's transport industry. The project would provide funding for spare parts, fuel, construction materials and labor, as well as for new equipment, consultants services and civil works, to carry out a road maintenance and rehabilitation program, an institution strengthening program, and reconstruction of the Bamako-Bougouni road (160 km). Project The project would improve the efficiency of road maintenance Benefits and and rehabilitation activities and, by reducing the cost of Risk: vehicle operation, would benefit road users and reduce the price of road transported goods. The project would also bring about institutional benefits which would have the effect of maintaining other benefits after project completion. The main risks stem from the possibility of a decreased maintenance effort as a result of insufficient local funds and/or of a diversion of these funds for other purposes. However, since the Government has established a timetable for revenue raising measures for the Road Fund, and implementation of these measures would be closely monitored, project risks are considered reasonably small. This document has a restricted distribution and mnay be used by recipients only in the performance of their offucial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Summary Project Cost Estimate (US$ Million) Estimated Costs a1: Local Foreign Total --~ --(US$ Million) - 1. Road Maintenance and Rehabilitation Program (a) Routine Road Maintenance 5.2 4.6 9.8 (b) Periodic Maintenance & Rehab. 4.1 14.0 18.1 (c) Overhaul & Renewal of equipment 0.6 3.5 4.1 2. Institution Strengthening and Technical Assistance (a) Reorganization & Tech. Assistance 0.8 3.6 4.4 (b) Tratning 0.3 1.1 1.4 3. Reconstruction of Bamako-Bougouni 4.0 16.1 20.1 Base Cost 15.0 42.9 57.9 Physical Contingencies 0.8 3.2 4.0 Price Contingencies 2.9 8.6 11.5 Total Project Cost 18.7 54.7 73.4 Financing Plan Local Foreign Total - - - (US$ Million) Organization IDA 7.1 41.5 48.6 African Development Fund 1.0 9.8 10.8 Swiss Development Cooperation 1.0 3.0 4.0 French Bilateral Aid Agency (FAC) 0.1 0.4 0.5 Government 9.5 -- 9.5 TOTAL 18.7 54.7 73.4 a/ not all taxes and duties are exempt under the project; a total of US$5.5 million equivalent in taxes will be financed by Government and are included in local costs (US$18.7 million equivalent). Estimated IDA Disbursements IDA Fiscal Year FY86 FY87 FY88 FY89 FY90 FY91 ------ (US$ Million) Annual 3.3 8.1 11.3 12.2 9.4 4.3 Cumulative 3.3 11.4 22.7 34.9 44.3 48.6 Economic Rate of Return ERR exceeds 12% for any individual road and overall exceeds 50% for the Road Maintenance and Rehabilitation Program portion of the project. The overall ERR for Reconstruction of the Bamako-Bougouni road is 28%. Statf Appraisal Report: Report No. 5315-MLI, dated June 28, 1985. Map: IBRD 18705 WAPTI June. 1985  - 1 - INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MALI FOR THE FIFTH T' iWAY PROJECT 1. I submit the following report and recommendation on a proposed development credit of SDR 50.7 million (US$48.6 million) on standard IDA terms to the Republic of Mali to help finance the proposed Fifth Highway Project. The Project will be cofinanced by a credit of about US$10.8 million equivalent from the African Development Fund (AfDF) and by grants of US$4.0 million equivalent from the Swiss Development Cooperation (SDC) and of US$0.5 million equivalent from the French Bilateral Aid Agency (FAC). The AfDF credit is expected to be on terms of 0.75 percent interest per year, for a period of 50 years, including a 10-year grace period. PART I - THE ECONOMY 2. The last full economic reports on Mali, entitled "Economic Memorandum on Mali" (3200-MLI) and "Mali-Special Economic Study--Planning Institutions and the 1974-78 Plant' (3333-MLI), were distributed to the Executive Directors on June 30, 1981. The following paragraphs update the information in these reports and are based on the findings of recent World Bank and IMF economic missions. Annex I gives country data. Background 3. Landlocked in Africa's Sahelian belt, most of Mali's 1.2 million square kilometers is desert; only one-fourth is arable, and even this is subject to the climatic vagaries of the semi-arid tropics. Over the last 15 years, average rainfall and length of growing season have significantly diminished. Annual rainfall in some areas reaches 1,400 mm but is much lower in most agricultural areas. Soils are shallow, lateritic, poor in phosphates, and easily eroded. Agricultural technology is rudimentary, with low crop yields and livestock offtake. Thus, Mali's 7 million people are among the poorest in the world, with 1983 per capita income of only US$160 and life expectancy at birth of only 45 years. Overall, the country's potential for long term growth is severely limited by harsh resource constraints. Developments in the 1960s and 1970s 4. In order to promote growth and alleviate poverty, the first post-colonial Government (1960-68) intervened extensively in the economy through numerous public enterprises in key sectors (trade, transport, utilities, various industries) and through the institution of strong price controls, leading to rationing, forced sales and domestic trade  - 2 - controls. Despite these policies, relatively favorable climatic conditions during this period allowed GDP per capita to grow at 0.9 percent per year in constant prices. Nevertheless, most macroeconomic aggregates (including the budget deficit, the current account balance and external debt) deteriorated rapidly. By 1967 the situation had become untenable. The Government embarked hesitantly on a long-term restructuring program aimed at restoring financial and economic equilibrium. 5. The present Government, which came to power in 1968, gradually began to introduce a series of modest economic reforms aimed at liberalizing trade, restructuring public enterprises and promoting agriculture. Initially, however, even these modest efforts were frustrated by exogenous difficulties. Drought depressed agricultural production to its nadir in 1972 and 1973; and, oil prices for Mali increased by almost 200 percent in the 1970s. However, conditions improved somewhat during the second half of the 1970s. Good rains and newly built irrigation networks raised grain output from about 800 thousand tons in 1972-73 to over 1,200 thousand tons in 1978-79. Cotton cultivation expanded, from 66 thousand hectares in 1974 to 119 thousand hectares in 1979. Both investment and consumption were sustained by high inflows of official development assistance, which quintupled between 1972 and 1980. Thus. GDP per capita registered a 3.6 percent growth rate from 1974 to 1980. 6. Despite these improved conditions, the Government's budgetary position continued to deteriorate through the late 1970s, reflecting a combination of ill-conceived policy measures which thwarted even its modest reform efforts, and continuing excessive government intervention in the economy. Restrictions on civil service recruitment were relaxed, and the roster of public employees shot up by almost 50 percent between 1975 and 1980. Between 1976 and 1980, scholarship payments for higher education doubled. A number of costly public investment projects with dubious justification and several equally questionable new public enterprises were launched. In an effort to insulate the population from inflation, public enterprises were forced to operate with very low (or even negative) profit margins; consequently the sector's deficits rose significantly. The combined effects of these policies were reflected in dramatic increases in the consolidated budgetary deficit, and, in turn, in foreign indebtedness, such that by 1980 total medium and long term external public debt equalled 75 percent of GDP. Further economic reforms were clearly warranted. Progress Since the Early 1980s 7. Since the early 1980s, the Government has more firmly committed itself to a program of structural reform to counteract mounting disequilibria arising from excess consumption and uneconomic investments. A number of measures have been introduced aimed at substantial reductions in budgetary deficits, operating losses of public enterprises, and public sector arrears (both foreign and domestic). In addition, other reforms have beern introduced to improve resource  allocation; these include market liberalization for a number of products, improved farmer price incentives, greater emphasis on rehabilitation and maintenance of existing capital stock, and fewer, but more efficient public investments. The Government's progress in many of these policy areas has been especially creditable given the severe adverse effects on production and incomes resulting from drought conditions in recent years. 8. The donor community has responded very positively in support of Mali's progress toward structural reform. Arrangements for Mali's entry into the West African Monetary Union (WAMU), which included substantial financial aid and debt consolidation from France, were completed in June 1984. In addition, a detailed stabilization program was initiated under two IMF Standby Programs - the first in May 1982, for SDR 30.4 million, and the second in December 1983, for SDR 40.5 million, and negotiations for a third, for SDR 22.9 million, were completed in August 1985. In close cooperation with the IMF, IDA has also actively supported Mali's restructuring efforts. In 1982, IDA approved the Economic Management and Training (EMT) project which provided technical assistance and training to the civil service cadre to improve its planning, management, and policy formulation capabilities. This laid the basis for subsequent additional policy reforms addressing cotton pricing and revenues, educational expenditures, grains trade, public enterprises, and cost recovery for roads maintenance, which are being assisted through other IDA lending operations. 9. As a result of these policy initiatives, there was significant progress in the area of financial stabilization. The first and second IMF programs were well-implemented, and their performance criteria achieved. The consolidated fiscal deficit was reduced from 4.4 percent of GDP in 1980 to 1.9 percent in 1984, and the share of personnel costs in central government expenditures declined. Moreover, 1984 saw the reduction of treasurv arrears and a significant reduction in public enterprises' operating losses and excessive employment levels. However, in recent months there appears to have been some deterioration in Mali's public finances. Against this background, negotiations were completed in August 1985 for a third Standby program focussing on further liberalization of price controls, adjustment of numerous controlled prices, reforms in the public enterprise sector, and further limitations on the share of civil service costs in central Government expenditures. 10. Resource allocation is a second area in which substantial progress has been achieved. Traditionally, the Government had sought to impose strict control over both prices and marketing of many consumer products. Recently, however, it has been more willing to permit the interplay of market forces. Government policy now favors liberalization of both domestic and foreign trade. In particular, the marketing of groundnuts, along with the bulk of products handled by the state trading company (SOMIEX), as well as pharmaceuticals and medical services have all been legally opened to private traders. Marketing and pricing arrangements for cotton and coarse food grains have also been substantially improved. The Government has announced its intention to  - 4 - liberalize paddy and rice marketing by the 1986/87 season; but the details of how this will be achieved, and particularly how this will be reflected in pricing policies, must still be worked out. II. As for public resource allocation, budgetarv expenditures increasingly emphasize rehabilitation and improved operation and maintenance of existing capital stock rather than investment in new facilities, especially in irrigation, roads, and public enterprises. Nevertheless, it is too early to judge the extent to which the criteria for public investment programming have improved since certain questionable projects are apparently still being considered. There is much scope for improvement in the Government's investment planning and evaluation capability. 12. Despite the important policy improvements discussed above, many macroeconomic indicators have been depressed since 1980, with recent trends worsening. Average annual GDP growth in constant prices has been stagnant and, recently, negative. As a result of two consecutive years of severe drought between 1982/83 and 1984/85 (with the last one the worst in Mali's history), production of cereals declined by more than 25 'ercent, as a result of which cereal iniports in 1984, both aid and commercial, reached a record 320,000 tons (aJmost 50 kilograms per capita). Moreover, significant livestock losses and destocking occurred in 1984. Despite buoyant cotton exports, rising imports of foodstuffs (largely necessitated by the drought) have caused the 1984 current account deficit to remain at 18.7% of GDP (6.2% of GDP including grants); this percentage has remained approximately stable since 1981. The outlook for 1985 is not encouraging. Cereal imports are expected to remain as high as their 1984 levels, while agricultural exports, especially cotton, are likely to decline. Little or no growth in GDP is projected for 1985. Economic and Financial Policy Issues 13. If the Malian economy is to achieve its financial and economic stabilization objectives, policy reforms must be broadened and deepened in three priority areas: public finances, economic regulation, and investment efficiency. 14. Public Finances. Despite recent remedial efforts, public finances remain weak and external budgetary assistance has been necessary to support current operations. Continued fiscal austerity by both Government and public enterprises is imperative if financial disequilibria are to be kept to manageable levels. To safeguard the substantial progress already achieved, Government must resist any pressures to expand its intervention in the economy, and make a concerted effort to reduce subsidies and excessive personnel outlays. Operation and maintenance costs should be funded insofar as possible by cost recovery measures, although in Mali this will be limited by the poverty of beneficiaries and the frequently long lead time before benefits can be realized. In addition to containing future  expenditures, efforts to increase revenues will also have to be intensified. 15. Regulation and Incentives. The Government has clearly indicated its commitment to reducing its intervention in economic affairs, especially in the areas of price controls and trade restr