Burundi - Fourth Highway Project

Document of The World Bank FOR OMCIAL USE ONLY CR. /S2-3- ea Rept No. P-4007-BU REPORT AND RECoMmENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT EQUIVALENT TO SDR 18.9 MILLION TO THE REPUBLIC OF BURUNDI FOR A FOURTH HIGHWAY PROJECT . April 1, 1985 Thb documet has a restricted distrihutm and ,y be use by recipiemts only in the peWornce of their officia duties. its contets. may noet terwise he disclsed without World Dank auihorintlo.  CURRENCY EQUIVALENTS Currency Unit . Burundi Franc (FBu) US$0.0085 - PBU 1 US$1.00 - FBu 117 US$1.00 - 1.042 SDR WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet 1 kilometer (km) - 0.62 miles 1 square kilometer (km2) - 0.386 square miles (mi2) 1 ton (t) . 2,204 pounds (lb) FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS AB - Air Burundi ADB - African Development Bank BTA - Buru2dl Transport Association (STB) CBAT - Center for Basic and Advanced Tr-'-ning DAF - Department of Administration and Finance DDC - Department of Design and Control DW - Department of Works EDF - European Development Fund ERR - Economic Rate of Return FAC - French Bilateral Aid FRG - Federal Republic of Germany GDR - General Directorate of Roads CDT - General Directorate of Transport INTRACO - International Transport Company KfW - Bilateral Aid of the FRG MP - Ministry of Planning MPW - Ministry of Public Works, Energy and Mines MTT - Ministry of Transport and Telecommunications NLPW - National Laboratory of Public Works NR _ National Road (Primary Road) OPEC Organization of Petroleum Exporting Countries POB - Port of Bujumbura PPF - Project Preparation Facility PWS - Public Works School RGI - Road of General Interest (Secondary Road) TOB - Transport Office of Burundi (OTRABU) UNDP - United Nations Development Program USAID - United States Agency for International Development VOC - vehicle operating costs VPD - vehicles per day  FOR OFFICIAL USE ONLY Ci) BURUNDI FOURTH HIGHWAY PROJECT CREDIT AND PROJECT SUMHARY Borrower: Republic of Burundi Amount: SDR 18.9 million (US$18.1 million equivalent) Terms: Standard Project Description: Objectives: The project is designed to (a) improve the anteuance of the road network; (b) increase the capacity of the Ministry of Public Works to continue such maintenance; (c) train local personnel; and (d) improve the country's transport planning and management. Components: The project would support the road maintenance program to be implemented over a three-year period. The project would include strengthening/resurfacing of 11 km of paved roads; improvement/regravelling of 81 km of country roads; routine maintenance of the entire paved road network (744 km); maintenance of selected earth roads (about 1,100 kmn); improvement/maintenance of bridges; labor-intensive maintenance of the entire classified road network (about 2,900 km); training and technical assistance; and consultant services. Benefits: Reduction of road transport costs due to reduced vehicle * operating costs, deferred costly road construction and improved road safety. Risks: There are no major risks associated with the project. This document has a resticted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Estimated Cost: Local Foreig Total US$ million equivaTent I. StreMghtening/Resurfacing of Paved Roads (llkm) 0.3 1.4 1.7 II. Improvement/Regravelling of Earth Roads (81 km) 0.8 1.7 2.5 III. Maintenance of Paved Roads (744 km) 0.z 1.0 1.2 IV. Maintenance of Earth Roads TL, MU IM) 0.6 5.0 5.6 V. Maintenance of Bridges 0.3 1.4 1.7 VI. Labor-Intensive Maintenance (2,900 km5) 1.8 0.1 1.9 VII. Training (technical assistance and fellowships) 0.1 0.8 0.9 VIII.Consultant Services 0.3 2.4 2.7 IX. Project Preparation 0 0.9 0-9 Total Base Cost 4.4 14.7 19.1 Contin!gencies rnysiLca.l 0.2 1.4 1.6 Price 0.5 2.7 3.2 Sub-total 0.7 4.1 4.8 GRAND TOTAL 5.1 18.8 23.9 Total Project Cost Excluding Taxes 4.1 18.8 22.9  (iii) Financing Plan: Local Foreign Total -- t(US- million) - Proposed IDA Credit 18.1 18.1 D Belgium - 0.7 0.7 Goverment 4.1 - 4.1 Total Financing 4.1 18.8 22.9 Estimated IDA Disbursement: ---(US$ million)-- IDA Fir,.zal Year 1986 1987 1988 1989 Annual 3.3 6.2 7.1 1.5 Cumulative 3.3 9.5 16.6 18.1 Economic Rate of Return: 51 percent Appraisal Report: Report No. 5335-BU, dated April 2, 1985 Maps: IBRD 15268R1 IBRD 18509R e  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BURUNDI FOR A FOURTH HIGHWAY PROJECT 1. I submit the following report and recommendation un a proposed development credit to the Republic of Burundi for the equivalent of SDR 18.9 million (US$18.1 million) on standard IDA terms to help finance a Fourth Highway Project. PART I - THE ECONOMY 2. The last Country Economic Memorandum on Burundi (Report 4784BU) is dated December 26, 1984. The following section incorporates its findings and conclusions. Country data are provided in Annex I. Background 3. Burundi is a small, land-locked country in East-Central Africa. It covers a territory of 27,835 square kilometers (including its share in Lake Tanganyika), and has a population of 4.4 million inhabitants. With an estimated Gross National Product of IUS$240 per capita in 1983 it is one of the world's least developed countries. The overall literacy rate was about 25% in 1982, morbidity is high, and basic social infrastructures are still lacking. Limited natural resources, population pressure, scarcity of qualified and experienced manpower, and isolation from main trade routes, characterize this extremely poor country. 4. Nearly 95% of Burundi's population is rural, living on scattered homesteads. Bujumbura, the capital city, hcd about 165,000 inhabitants in 1982. Agriculture, mostly smallholders who grow subsistence crops and coffee, contributes about 60% of GDP at factor cost and 90% of merchandise exports. A few large farms grow sugarcane, tea and quinine. Other natural resources are scarce. Identified minerals include nickel, phosphate, petroleum, vanadium, some fluvial gold and calcium, but the economic justification for their exploitation is still uncertain. * Burundi's manufacturing sector is small, its growth being limited by the small size of the domestic market, the country's isolation from trade routes, vulnerability to disruptions in the external transport corridors, 'high transport costs, and the lack of skilled manpower. 5. The country is the second most densely populated country in Africa, with a density of 154 per km2. Population pressure has led to declining soil fertility, soil erosion and deforestation. Although  - 2 - agricultural statistLes are poor, there are indications that, in recent years, foodcrop production may have decliand ln per capita terms. Net population growth is projected at 2.7% p.a. during the current decade (in absence of migration, however, this growth would be higher; population could triple in thirty years). The implicatlons of thls rapid growth for health facilities, schools, employment and land availability are worrisome. IDA has emphasized the urgent need to initiate family planning programs. Although progress has been slow, the Government has recently acknowledged the problem, and a first family health project is being considered (para. 17). 6. The country has an extensive road network. Main roads are passable all year. There is an international airport at Bujumbura. Burundi, however, remains dependent for most of its imports and exports upon two transport routes to the Indian Ocean through neighboring countries. The Northern Route, by highway from Bujumbura to Mombasa, Kenya, via Rwanda and Uganda is 2,020 km. in length. This route suffers from poor road conditions, and cumbersome administrative border procedures. The Southern Route, by barge down Lake Tanganyika, then by railway to Dar-es-Salaam, is 1,425 km. It tends to be inefficient because of long delays in transhipment, and disruptions on the Tanzanian railway. 7. Transport charges on these routes add significantly to the landed cost of imports. The passage of goods through neighborlng countries is hindered by factors which are out of Burundi's control. Interruption of crucial supplies hinders project implementation and forces firms to hold large stocks of inputs and spare parts. In 1980, the Bank prepared a study of the external transport connections of Burundi and Rwanda. A more extensive study covering Burundi, Rwanda, Uganda and Eastern Zaire was carried out by UNCT-W. The fiadings and recommendations of these studies have assisted the countries and donor agencies to agree on action and priority investments. Several bilateral and multilateral meetings led, inter alia, to the Northern Corridor Transit Agreement which was concluded in Kampala in September 1984. The agreement will result in significant simplification of customs procedures at border crossings. On the Southern Route, a number of external donors have been financing improvements in physical facilities at the ports of Kigoma and Dar-es-Salaam. IDA is now preparing a report which will update and review the actions taken so far and will help to define priority policies and investments in regard to the international transport. Economic Developments: Goals and-Performance 8. In the mid-1970s, Burundi's economic situation benefitted from several favorable factors: (i) a new Government, headed by President Bagaza, took power in 1976, ending a period of political instability; (ii) the price of coffee in the international market tripled, resulting in substantial windfalU profits and accumulation of public savings; and (iii) the level of foreign aid to Burundi increased considerably, in support of the new regime's stated commitment to economic development. These  circumstances were considered a good omen for the Third Development Plan (1978-82), and expectations for an improvement in living conditions were therefore high. 9. The Third Development Plan (1978-82) included broad objectives such as the transformation of the economic structure; increased mobilization of resources for production; the reduction of poverty, together with improved income distribution; and increased access to education and health services. Performance during the Plan period was relatively good especially in comparison with most of the Sub-Saharan countries. On the average, real GDP at market prices rose by 3.1% per year, with gross domestic investment averaging about 13.5% of GDP, far above the 8.0% share of the previous five years. The public sector took the lead in the investment effort, accounting for 90% of the total. Foreign donors financed about 60% of investment expenditures. The growth in total value added was mainly due to the growth in the modern sector stimulated by public investment spending. The output of the subsistence sector which accounts for 85% of the population, grew more slowly than the population, widening the income gap between rural and urban dwellers. The investment program favored mostly the modern sector, and its effects on income and foreign exchange earnings were limited. Most of the projects were capital intensive and created few jobs; moreover, the protection extended to the new ventures made them inefficient and heavily dependent on imported materials, adding little to the country's foreign exchange earning capacity. 10. The financial situation, which had been kept under control during most of the 1970's, deteriorated rapidly at the turn of the decade. This was due to two main factors: (i) deterioration in the terms of trade - by 75% between 1977 and 1982 -- reflecting a decline in coffee prices and a doubling in import prices, which pushed the current account deficit to about 12Z of GDP; and (ii) insufficient and delayed response of the Government to the changing economic environment. To support the balance of payments, the Government relied mostly on a run-down of its reserves; it also increased restrictions on imports and on remittances of foreign exchange abroad. The Burundi Franc appreciated significantly with respect to the currencies of the major trade partners, reflecting the appreciation of the US dollar to which it was pegged. 11. These unfavorable developments had serious consequences for the budget. The terms-of-trade deterioration reduced import capacity and led to budgetary problems, as the Government's receipts from coffee exports fell dramatically, necessitating cutbacks in imports and public spending. These factors as well as the poor agricultural crops of 1982 led to a decline in income, which spread into 1983 and resulted in a significant slow down of economic activity. The consequence was a widening of the resource gap, depletion of reserves, and an accumulation of payment arrears in the Government accounts. 12. During the 1978-82 period, Burundi was able to receive external financing on very soft terms. Grant assistance was substantial. In addition, external public borrowing during the period carried an average interest rate of only 2.4% and an average maturity of 31 years including  - 4 - eight years of grace, implying a grant element of about 60%. Debt service remained, therefore, low -- at about 5Z of exports of goods and nonfactor services during 1978-82. Bank projections Ludicate, however, a rapid increase to about 20-25Z in 1985-8b due to the "bunching" of debt maturities. 13. The lesson of the Third Plan period is that Burundi must establish development priorities and select investment projects with great care. The linkage between macroeconomic planning and the selection of programs and projects needs to be iitproved. The private sector, nongovernmental organizations, and cooperatives must be enlisted to the maximum extent feasible to participate in the development effort. Sustained technical assistance will be needed for several years in order to strengthen the country's ability to identify, prepare, and carry out well-conceived plans and projects. 14. The year 1983 was the first year of the Fourth Development Plan (1983-87), which , as explained further below, incorporates an ambitious investment program of US$230 million per year (US$100 million more than what was achieved in the Third Plan Period). The Government tried to raise its revenues in order to be able to carry out this ambitious program. New tax measures were introduced, notably increases of 50 to 100% in the rates of the most important taxes - transaction tax, income tax and tax on beer consumption, which in the last years replaced coffee as the single most important source of government fiscal revenue. By mid-1983, however, there were signs of increasing financial stress. The Government tried to cope with the situation by attempting to reduce the investment budget by 45Z, but this proved difficult. While 80% of the investment planned for 1983 was actually implemented, this was obtained at a great cost: the public domestic debt increased substantially; unpaid obligations accumulated, representing (at end-1983) 30% of Government spending; and the overall budget deficit reached 5% of GDP. Economic growth, which had been negligible in 1982, remained marginal in 1983, with non-agricultural sectors registering an absolute decline. 15. In response to this difficult situation, the Government took a number of important actions. First, in November 1983, the FBu was delinked from the US dollar (to which itEhad been linked since 1976) and pegged to the SDR, with an implicit devaluation of about 30%. Second, in early 1984, the producer prices of the main export crops were raised to provide stronger incentives to producers. The coffee price was increased by 6%, the tea price by 36%, and the cotton price by 17Z. Third, in an attempt to balance the current budget, the Government increased the rates of the most important taxes (para. 13), froze public wages and salaries, improved the system of tax collection, and cut the recurrent subsidies to the para- statals. 16. According to preliminary and partial information, the year 1984 was another difficult year. Agriculture was adversely affected by the drought and foodcrop production may have fallen by as much as 5-6%. Cash crop production did not fare better: coffee production fell from a high of 36,000 tons in 1983 to 27,000 tons, offsetting the increase in the output of other cash crops, notably tea. The modern sector registered some real growth (owing to the partial liquidation of government arrears), but the  - 5 - poor performance of the primary sector caused total GDP to stagnate. On the financial side, both external and internal Imbalances were reduced somewhat. As a result of the 1983 devaluation, Burundi's trade balance improved. However, because of increased factor services payments and debt servicing charges, the total current account balance remained above 12X of GD". The public finance situation also improved. Revenues were about 20% higher than in 1983, reflecting (a) the impact of the devaluation on revenues from taxes on international trade; (b) reinforcement of tax * collection procedures; and (c) improvement in the economic activlty of the modern sector. Current expendltures were maintained at about the same level, in nominal terms, and capital outlays were reduced to their lowest level since 1979. As a result, the budgetary deficit was reduced from FBu6.5 billion to FBu3.4 billion (or from 5Z of GDP to 3%). Sectoral Developments and Issues 17. The very rapid population growth in a country which is already overpopulated represents the most threatening constraint on economic development which Burundi has to face (para. 5). The Government of Burundi recently announced its intention to adopt a program to reduce population growth and to establish, as a first step, an Interministerial Family Planning Committee. One of the first tasks of this Commission will be to plan and develop a population program. Fertility reduction will require a strengthening in the management and planning capacity of the Ministry of Health, an improvement in the delivery of basic health services, as well as an increase in public spending on health, which declined in real terms in the last five years. 18. In agriculture, the most important issues for future development relate to productivity increases (of foodcrops as well as export crops), soil protection, and erosion control. Food crop promotion is essential in order to feed the fast growing population. Better utilization of the country's traditional export crop potential and diversification into new export crops appears crucial because of limited possibilities for new export revenue earning activities. Priority areas in agriculture are therefore: promotion of applied research, in particular on food crops; strengthening and improvement of extension services; adequate and regular provision of inputs; initiation of immediate aud longer-term measures to protect the country's agricultural potential; and amelioration of organization and operations of the three main export crop subsectors (coffee, tea, and cotton), principally through improvement in the management of agricultural public enterprises and through adequate pricing policies. On the institutional side, further strengthening of agricultural planning, and of project preparation and monitoring capacity appears crucial in order to assure effective design and implementation of projects. The concept of Regional Development Companies, which the GovernmenL established to promote integrated rural development, weeds to be carefully reviewed in order to focus their activities on production and adapt their design to the country's needs and possibilities, in particular in terms of finances and human resources.  - 6 - 19. Manufacturing Industry. Industrialization is constrained by the limited natural resources, low productivity of the industrial labor force and the acute shortage of managers, as well as by the country's small market, the low purchasing power of its population, the country's land-locked position, and difficult transport conditions which increase t costs. Burundi does offer, however, certain advantages for industrial development: basic infrastructure is available in the major urban center at reasonable costs; the country's land-locked situation constitutes a natural protection for import substitution projects; and domestic finance is readily available to manufacturers. During the 1978-82 period, protectionist measures created a favorable climate for manufacturing expansion. Modern manufacturing value added grew at an average annual rate of nearly 10% in real terms, reaching about 5% of GDP in 1982. Most of this expansion has been oriented to the domestic market. Production remains typical of the first generation of import substitution, based on imported raw materials with exports limited to processed coffee, tea, cotton and a few other items. Capacity utilization is low because of the small size of the domestic market, high tariffs in neighboring countries, and high production costs. However, due to the monopolistic situation enjoyed by most firms and the "cost-plus" system of price control, the sector is profitable despite its inefficiencies. Since the mid-1970s, the Government has participated in a number of joint ventures with foreigr interests and established public enterprises to manage large industrial operations that the private sector had avoided because of their couplex management and large financial requirements. Host of these public enterprises have been created without an adequate financial structure and/or sufficient qualified personnel and are now a drain on the budget. The Government has recognized these problems and has taken some measures to deal with them. On the one hand, it has virtually eliminated recurrent subsidies to public enterprises. On the other, it has created a Public Enterprises Commission (CGEP) to design restructuring programs for public enterprises, sell off enterprises to private investors when possible, and phase out those unlikely to become viable. 20. Burundi faces a range of problems in the energy sector. The first and most important is the increasing scarcity of fuelvood and other traditional fuels on which almost all of Burundi's population depends for cooking and heating. AMother is the high cost of oil imports whose value rose by 450% between 1977 and 1982. Finally, only 2% of the population has access to electricity. The Government, with assistance from the UNDP/Bank energy management program and other donors has started to implement a program (i) to improve forestry sector management and policy; (ii) to reduce woodfuel demand by introducing more efficient firewood and charcoal cookstoves and kilns; (iii) to develop the use of peat as a substitute for wood, charcoal and petroleum products; (iv) to investigate alternative and contingency supply arrangements for oil-imports; and (v) to participate in the Ruzizi hydro-electric regional project, improve the transmission network and establish a strong unit for power planning. Exploratioa is also underway to assess the hydrocarboa potential of Burundi.  - 7 - 21. The Government has made a considerable effort to develop basic education and increase pzimary enrollments. Average percentages of capital and recurrent budgetary expenditures allocated to education are comparable to those of other African countries. However, the primary enrollment rate in public schools is only about 30X. Measures are therefore being taken to increase the share of resources which are devoted to basic education, through the adoption of cost saving measures at the secondary and university level, and to use these resources more effectively, in particular through the Introduction of double shifting, and upgrading of teacher training. The Ministry of Education is also providing assistance to improve the quality and scope of education given in private schools and adult social centers. The 1983-87 Fourth Plan 22. The Fourth Plan was presented at a Round Table meeting organized by the UN in February 1984. The Plan envisages real GDP (factor cost) growth of 3.7% per year between 1982 and 1987 and total investment of FBu107.2 billion (in constant 1981 prices), equivalent to about US$1,200 million. Barring an unforeseen and substantial improvement in coffee prices and a major inflow of fresh financial aid, achievement of the Fourth Plan objectives does not seem likely. Given tbe prospective resource availabilities, perhaps not more than 60% of the intended investment would be feasible. Even with such a shortfall, external donors would have to provide 80% of total financing. 23. The Fourth Plan anticipates that 30% of the investment financing will come from domestic sources (20X from the budget, 102 from bank credit and the private sector) and 70X from foreign aid. The outlook for increas