Colombia - Fourth Highway Project

R E S T R I C T E D CIRCULATING COPY .TO BiE RETURNED TO ARCVES D1ISIN R e p o r t N o. P 261 P (IDA) 5 This report was prepared for use within the Bank and the Association. It may not be published nor may it be quoted as representing their views. The Bank and the Association accept no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT FILE COPY TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF COLOMBIA FOR A ROAD PROJECT August 7, 1961  INTERNATIONAL BANE FOR RECONSTRUCTION AND DEVELOPIMENT INTERNATIONTAL DEVELOPHIENT ASSOCIATION REPORT AND RECO11)dIENDATIANS Of THE PiUESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSPD LOAN AND A PROPOSED DEVELOPM1TNT CREDIT TO THE REPUBLIC OF ''OLO"IMBIA FOR A ROAD PROJECT 1. I submit herewith the following report and recommendations on a proposed Loan from the Bank in an amount in various currencies equivalent to 9.5 million and a proposed Development Credit from the Association in an amount in various currencies equivalent to '19.5 million, both to the Republic of Colombia to help finance a highway construction and main- tenance project. PART I - HISTORICAL 20 The Bank has already made three loans totalling $47.4 million in C,lombia to finance the foreign exchange costs of highway construction, rehabilitation and maintenance. The first of 16.5 rrillion, made in April 1951, covered a three-year emergency project consisting of the re- cob-struction of about 2,900 km of existing roads, the construction of about 155 km of new roads, and some maintenance requirements. The second of ",414.35 million was made in September 1953 to finance completion of the original project, with some minor changes and additions, to h.igher stand- ards; A3.1 million of this loan was to assist in establislhment of a compre- hensive maintenance program and purchase of maintenance equipment. The third of <16.5 million was made in June 1956 to cover increased costs of completion to higher standards of the original Bank project and to cover the cost of 60 km of new roads. 3. The periodic need for supplemental financing to complete the roads in previous Bank projects had its origin in the emergency basis on which the road program was started. This led to commitments which, it has be- come clear in retrospect, did not provide the means for adequately executing the program, even though the program did give a great im=etus to the Colombian economy. Sufficient time was not taken to make detailed studies of traffic forecasts and to prepare adequate plans and specifica- tions. As the program proceeded the volume of traffic increased more sharply than had been foreseen. This made necessary higher design standards and additions to the highway system. Supervision of the work by the Ministry of Public Works was inadequate. Changes in design standards were made on a piecemeal basis often resulting in low standard work which subsequently had to be redone. Furthermore, the unprecedented size of the work, the exceptionally difficult terrain and often inclement weather led to long delays and large cost increases.  4. In 1959 and 1960 the Bank discussed with the Government its request for financing to complete the highways being financed by the 3ank, to con- struct several new complementary trunk roads, to prepare a road mainten- ance program, and to purchase maintenance equipment. In January 1961 the Government engaged consultants to prepare a road construction and maintenance program, including detailed studies on engineering design, costs and priorities. A preliminary report was completed in May 1961. 5. Negotiations began on July 13, 1961. The Government was represented by Dr. Carlos Sanz de Santaniaria, Colombian Ambassador in W,lashington, and Dr. Ignacio Mesa, Minister Counsellor, Dr. Humberto Valencia Garcia and Dr. Miguel A. Paz of the Ministry of Public W,orks, and Dr. Luciano Elejalde, New York representative of the Ministry of Public Works. 6. The proposed Credit would be the first financing by the Association in Colombia. 7. The proposed Loan would increase the Bankts lending from $200.6 million to .,;220.1 million. The 3ank has already made the following loans to Colombia. Amount of Loan Net of Year Purpose Cancellations 1949 Agricultural Machinery Project $ 4,925,441 1950 Anchicaya Hydroelectric Project 3,530,000 1950 La Insula Hydroelectric Project 2,600,0co 1951 Highway Project 16,500,C000 1951 Lebrija Hydroelectric Project 2,boo,000 1952 National Railroads Projects 25,000,000 1953 Supplementary Highway Project 14,350,000 1954 Second Agricultural Miachinery Project 5,000,000 1955 Anchicaya and Yumbo Power Project 4X500X000 1955 Railroad Extension Project 15,900,000 1956 Plan Vial I Project 16,500,000 1958 Yumbo Extension Power Project 2,800,08 0 1959 La Esmeralda Power Project 4,600,000 1959 Guadalupe Hydroelectric Project 12,000,000 1960 Bogota Power Project 17,600,0O0 1960 Yumbo III - Calima Power Project 25,0c0,000 1960 Atlantic Railroad Equipment Project 5,,4000,oc 1961 Guddalupe Hydroelectric Project (Second Stage) 22,C00,000 Total (net of cancellations) $200,605,,441 of which has been repaid 45,761 ,4l Total now outstanding $154,64415-00 Amount sold $9,584,800 of which has been repaid 7,135,800 2,4h9,000 Net amount held by Bank as of June 30, 1961 $152,395,000 1/ Includes $50.0 million not yet disbursed as of June 30, 1961.  - 3 - 8, The Bank has at present under consideration additional projects in the fieldis of agriculture, industry, electric power and railroad rehabilitation. PART II - DESCRIPTION OF THE 7RrOPOSED LOAN; AND DEVELOPMENT CREDIT 9. The proposed Loan and the proposed Credit would have the following characteristics: Borrower: Retublic of Colombia, Lcan Amount: Equivalent in various currencies to $19.5 million. Credit Amount: Equivalent in various currencies to 1l9.5 million. Purpose: To assist in financing construction and betterment of about 1,275 km of roads and bridges, related engineering services, and design of 500 km comple- mentary roads; preparation ofaroad maintenance program and purchase of maintenance equipment. S7.6 million of the Bank Loan would be for the maintenance program; and the balance of the Loan and all of the Development Credit, for construction and engineering design. Term and Amorti- zat:'on of Loan: 15 years; 23 semi-annual payments starting Sep- tember 15, 1965 and ending September 15, 1976. Term and Amorti- zetion of Credit: 50 y-ars; 80 semi-annual repayments of the nrin- cipal, 1/2% of principal amount to be repaid semi- annually beginning December 1, 1971 and ending June 1, 1981 and 1-l/25 semi-annually beginning December 1, 1981 and ending June 1, 2011. Interest Rate on Loan: 5-3/4% per annum, including 1% per annum commission. Cormnitment Charge on Loan: 3/4 of 1% per annum.. Service Charge on Credit: 3/4 of 1% per annum on the amount disbursed and outstanding, payable semi-annually. PART III - LE.-AL INSTRUMENTS AND AUTHORITY 10. Attached are a draft Loan Agreement (No. 1) and a draft Development Credit Agreement (No. 2) together with a draft Disbursement Agreement between the Bank, the AssociatiDn and the Borrower (No. 3). 11. The draft Loan and Credit Agreements follow in substance the normal pattern of agreements for projects of this kind. The following provisions are of special interest:  (a) Section 2.03 (a) (i) of the Loan Agreement and Section 2.03 (a) of the Development Credit Agreement entitle the Borrower to withdraw from the Loan Account and from the Credit Account percentages of the amounts expended by the Borrower for goods required for carrying out Part A (construction part) of the Project. Those percentages are set forth in the Disbursement Agreement. (b) Section 7.01 of the Loan Agreement provides, as a condition of effectiveness, that the Borrower shall have entered into a contract with a firm of engineering consultants satisfactory to the Baik. 12. The Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association are attached (Nos. 4 and 5). PART IV - APPRAISAL OF THE PROPOSED LA N AND DEVELOPMENT CREDIT 137 A detailed appraisal (TO No. 292b/TO (IDA) 8b) of the Project is attached (No. 6). The Project 14. Mountainous terrain has made transportation difficulties one of the principal obstacles to Colombia's economic development. The 1950 report of the general survey mission, organized by the Bank, gave considerable emphasis to the need for investment in transportation and recommended the first national highway plan as well as the construction of part of the Atlantic Railroad. rItith the assistance of the Bank's highway loans and eypenditure of a considerable part o the Government's own investment re- sources, major portions of a national trunk road system have now been com- nleted and construction of other high-priority sections is under way. The new highways have given considerable impetus to Colombia's economic growth both by interconnecting principal markets and production centers and by accelerating development of several agricultural regions. Important bene- fits are also expected to be derived from the completion of the Atlantic Railroad which was opened for through traffic in July. 15. The development of Colombia's transportation system has now reached a new stage in which considerable further invrestments are necessary for: (EL) completion of the high-priority sections of the national trunk road system, most of which are already under construction; (b) construction of a system of secondary roads feeding into the trunk roads and the new Atlantic Railroad; (c) rehabilitation of traction, rolling stock and other properties of the Colombian National fRailroads. A general transportation survey group, organized and financed with assistance of the Bank, is now preparing a coordinated program for investment in all sectors of transporta tion for the next ten years.  16. The Project envisages the completion of most of the highways in- cluded in the Bank's third highway loan, to the paving stage. The most important of these roads is the maain north-south link from the Caribbean port of Cartagena to Mledellin and Cali. The Project also includes cunstr12c- tion of eight new roads; al.l but one are conplementary to or extensionis of those previously financed. 17. The preparation of a comprehensive maintenance program and purchase of maintenance equipment have become necessary as a result of the deteriora- tion irL maintenance practices durAng recent years. Moreover, owing to tne substantial increase in the lengLh of roads to be maintained, there has been a consid.erable increase in maintenance equipment ruquirement's which the Government is unab'e to cover with its oiwrn resources. Completion of the roads under the new constructirn program would further increase the length of roads to be maintainec. The funds to be mnade ava'lable from the proposed Bank Loan would enable the Government to purchase maintenance equipment now needed, 18. The total cost of the Project is estimated at '>98.8 million, of which ii39 million is in foreign exchange0 Cost estimates have been pre- pa.ed with the assistance of competent consultants and are considered re3listic. lThe National Government would covenant that it will make funds available for the local currency cost of the Project. 19. The Ministry of Public Works, withi the assistance of its consultants, should be able properly to carry out the Project. Engineering designs are being prepared with the assistance of consultants who are also being retained to assist the M4inistry in supervision of construction and preparation and supervision of the maintenance program. 20.. With the exception of certain force-account contracts to be con- tinued to completion, a'll constructior contracts will be of the u.mit-price type. All construction contracts will be au-arC.ed and equipment .?urchases will be made on the basis of international co,rpetitive bidding0 Economic Position 21. A report, "Current Economic Position and Prospects of Colombia", (No. IIH-102a), was distributed on February 1, 1961. 22. Since 1957 the Govern;ment has been making a major effort to stabilize the economy. 'this stabilization effort has been successful despite a fall in coffee prices. In less than four years a more than *'i250 million backlog of commercial debt has been rcuaid and the total external debt, which in 1957 was $)670 million, has been reduced to '`,'374 million.  - 6 - 23. While Colombian authorities have been able to restore internal and external equilibrium, they have not yet succeeded in bringing about a return to previous high rates of economic growth. Over the past five years the economy has grown at the rate of only 3.5%, compared with more than 6% per annum during the first postwar decade. In 1959 the growth rate was excep- tionally high but the favorable rate was not maintained in 1960. With population growing at about 2.8% annually, the margin for improvenment in per capita income has been small in recent years. 24. The Government wants to direct its policies to an increase in national product of about 5% per year, wihile at the same time maintaining financial stability. This means a per capita improvement of slightly over 2% per year, a relatively modest objective which would result in doubling present per capita income (about '250) in anproximately 30 years. Attainment of this objective is dependent upon substantial external financial support, particularly since balanlce of pa,rments prospects are no-t favorable. World coffee prices, rather than recovering in the foreseeaole future, may well decline further. As a result, despite measures being taken to promote ex- ports of products other than coffee, total current foreign exchange earnings will increase bDut slowly. Thus the prospective level of foreign exchange earnings is not sufficient to finance a level of imports compatible with an adequate rate of growth. In these circumstances, the balance of payments situation is expected to be tight and will require a continuation of the policy of monetary restraint. In the absence of external credits for both the private and the public sectors, investments would have to be curtailed to a level which would not permit satisfactory growth. 25. The Gove-rnmentls goal of accelerated growtah requires a sub- stantial increase in pu-olic investment. The Government has prepared a four- year plan which would raise public investment from its present level of L.LI0 of GNP to about 8% in 1964. Over 70% of public investment would be financed with the country's own resources, thus requiring a considerable fiscal effort. Even so the public investment program, togethfler with invest- ment by autonomous agencies, would require external borrowing, either directly by the uovernment or with its guarantee, of approximately ~'l125 million a year over the next four years. Since over this period Colomhia wiLL repay approximately ;5O million a rear on its presently outstanding obligations, the actual net public borrowing would amount to about ,75 mil- lion a year or 10 to 12%of total gross domestic investment.; 26. During 1961 Colombia is devoting nearly O7L million (12.3% of current exchange earnings) to service its external obligations. Service payments on the currently outstanding debt will, of course, decline in the next few years, but gross external borrowing in the neighborhood of `125 million a year on conventional terms would more than compensate for the decline and wouLd maintain the present proportion of service payments to projected foreign exchange earnings, even if most of this amount were obtained on a long-term basis. Annual debt service on these assumptions would continue for manyr years to represent about 12% of foreign exchange earnings.  -7- 27. Colombia's noteworthy performance in handling its external debt in recent years might be taken as an indication that such a level of debt service, although burdensome, might prove to be manageable. Colombia does indeed have substantial creditworthiness for additional conventional loans but in view of its balance of payments prospects, rendered especially difficult by the oontinued uncertainty in the outlook for coffee, I would not consider it unreasonable to provide some part of Colombia's external capital requirements on special terms. A blend of assistance from the Association w:ith loans from the Bank, would therefore be appropriate and justified. PART V - COYMPLIANCE WIJTH ARTICLES OF AGrREEMENT 28. I an satisfied that the proposed Loan and the proposed Development Credit comply respectively with the Articles of Agreementcf the Bank and of the Association. PART VI - RECOMIEHI\DATIONS 29. I recommend that: (a) The Bank make a Loan to the Republic of Colombia in an amount in various currencies equivalent to $19.5 million for a term of 15 years, at an interest rate of 5 3/4% per annum (including commission) and on such other terms as are specified in the attached draft Loan Agreement and that the Executive Directors of the Bank adopt a Resolution to that effect in theform attached (No. 7); and (b) The Association make available to the Republic of Colombia a Development Credit in an amount in various currencies equivalent to $19.5 million for a term of 50 years, with a 10-year grace period, bearing a service charge of 3/4 of 1% per annum on the amount disbursed and outstand- ing and on such other terms as are specified in the attached draft Develop- ment Credit Ag;reement, and that the Executive Directors of the Association adopt a Resolution to that effect in the form attached (No. 8)., Washington, D.C. Eugene R. Black August 7, 1961 Attachments (8)