Uruguay - Highway Project

RESTRICTED Report No. P-296 FILE COPY This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLICA ORIENTAL DEL URUGUAY October! 8, 1962  INTERNATION1AL BANK FOR RECONSTRUCTION AND DEVELOPM4ENT REPORT AND RECOvENDATIONS OF TflE PRESIDENT TO THE EXECUTIVE DIRECTOPR ON A PROPOSED LOAN TO THE REPUBLICA ORIENTAL DEL URUGUAY I submit the following report and recommendations on a proposed loan in an amount in various currencies equivalent to $18"5 million, to the Republica Oriental del Uruguay to help finance the foreign exchange cost of a highway project. PART I - HISTORICAL 2. In January this year, the Uruguayan Government formally confirmed an earlier request that the Bank assist in financing part of its program for the betterment and expansion of its highway system. A Bank mission visited Uruguay in February 1962 to appraise the project and to review economic conditions and prospects. In discussions subsequently held in Uruguay, the Government accepted the conclusions of tile Mission about the size and character of the project. 3. Negotiations on the proposed loan were held in Washington in September with Mr. luis Giannattasio ivinister of Public Works, and Mr. Raul Ybarra, Comptroller General of Uruguay, representing the Borrower. L. The Bank has made four loans to Uruguay aggregating the equiva- lent of $71 million. As of September 30, 1962, their status was as follows: Amount (equivalent Year Borrower Purpose in millions of US$) 1950 Administracion General de las Power development and 33.0 Usinas Electricas y los Tele- telephones fonos del Estado (U.T.E.) 1955 U.T.E. Power development 5.5 1956 U.T.E. Baygorria hydro- 25.5 electric project 1959 Republica Oriental del Uruguay Livestock improvement 7.0 Total 71.0 of which has been repaid 15.0 Total now outstanding 56.o Amount sold 2.8 of which has been repaid 2.8 -- Net amount now held by Bank as of September 30, 1962 56.0 1/ 1/ Includes $5.9 million not yet disbursed.  5. No other loans to Uruguay are under immediate consideration in the Bank but we expect Administracion General de las Usinas Electricas y los Te'efoncs del Estado (U.T.E.) - the autonomous entity responsible for power and telephones in Uruguay - to present the next stage of its program for exparnding power facilities for Bank consideration early in 1963. PART II - DESCRIPTION OF THE PROPCSED LOAN 6. Borrower: Republica Oriental del Uruguay. Amount: The equivalent in various currencies of $18.5 million. Purpose: To help finance the foreign exchange cost of a) the improvement to higher standards of about 485 kms of National Route 5 between Progreso and Rivera; b) a program for improvement of the highway maintenance organization and its operations; and c) a highway planning study, Term and Amortization: 15 years; 22 semi-annual installments from March 1, 1967 to September 1, 1977. Interest Rate: 5-1/2 per cent per annum, including 1 per cent commission, Commitment Charge: 3/4 of 1 per cent per annum. Payment Dates: March 1 and September 1. PART III - TLEGTA4L INSTRUIENTS AND AUTHORIT'Y 7. Attached is a draft of the Loan Agreement between the Republica Oriental del Uruguay and the Bank (No. 1)e 8. The draft Agreement conforms generally to the pattern of agreements for projects of this kind. The proceeds of the Loan may be used to finance a) a percentage of the cost of construction of National Route 5 (Part A of the Project) calculated to represent the foreign exchange component of such cost and b) the direct foreign exchange cost of imported goods and services (Parts B, C, and D of the Project). No withdrawals shall be made on account of expenditures prior to January 1, 1962. 9. The Loan would not become effective until the Agreement has been ratified by the Congress of the Republic of Uruguay.  - 3 - 10 The Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank is attached (No. 2). PART IV - APPRAISAL OF THE PROPOSED LOAN ll. A detailed appraisal of the Project (TO 332-a) is attached (No. 3). 12. National Route 5 is the principal north-south highway of Uruguay. It goes from Montevideo, the capital of the country and its principal port, north through the center of Uruguay to the city of Rivera on the Brazilian border. Its service area includes more than a quarter of the country's land area and accounts for over one-third of Uruguay's livestock and agri- cultural production. Even in its present condition, it is an important international artery over which some of the products of southern Brazil - such as timber - are transported to the port of Montevideo for shipment to Argentina and other countries. 13. For most of its length, the highway has an unimproved surface and its southern sections are too narrow for the existing traffic volume. Much of it is impassable during the rainy season each year. The resulting high cost and uncertainty of road transport discourages the migration of capital and technical skills into the central and northern sections of Uruguay and is one of the principal causes of the stagnation in the agri- cultural and livestock industries of the area. 14. The proposed improvement of National Route 5 would assure year-round accessibility to this important section of Uruguay and sub- stantially reduce transport costs. By doing so it would not only stimulate the agricultural and livestock industries but also make possible a greater diversification of economic activity outside of Montevideo and the coastal zone. Computing the rate of return on the basis of reduced costs of transportation and maintenance, the investment in highway construction would yield an annual return of about 9% by 1966 and 13% by 1971. 15. Maintenance equipment and engineering assistance to be procured by the loan will enable the maintenance organization to introduce new and improved methods of maintenance and provide the basis for growth to meet the requirements of an expanded highway system. 16. Tho Highway Planning Study would provide a basis for preparing a long range program for investment in highways and assistance in the organiza- tion and operation of the Highway Department (including the establishment of a highway planning office).  -h 4 Cost Estimates and Sources of Funds 17. The estimated cost of the improvement of National Route 5 is about US$ 25.4 million, including contingencies for possible increases in quantities. The loan would finance the foreign exchange cost equivalent to US$ 14.4 million, the cost of imported maintenance equipment of about US$ 3 million, and the foreign exchange cost of engineering services for construction, maintenance, and for the highway planning study, amounting to US$ 1.1 million. 18. The local currency requirements would be provided by the Uruguayan Government. Under the Loan Agreement, the Government would commit itself to provide these funds and give priority to the Project over othler highway con- structior.0 Procurement and Execution 19. Construction work on the Project would be carried out under unit-price contracts awarded on the basis of international competitive bidding. The maintenance equipment would also be prWocured on the basis of international competitive bidding. 20. With the assistance of consulting engineers whom the Government has undertaken to employ, the Government should have no difficulty in organizing and carrying out the Project. PART V - THE ECONOMIC SITUATION 21. A Report (R 62-74) on the "Current Economic Position and Pros- pects of Uruguay" was distributed on August 23. It noted that Uruguay continues to be one of the most prosperous and stable countries in Latin America. In the late 1950s Uruguay went through difficult years. Bad financial management and unusually severe weather conditions led to stag- nation and later to an actual decline in production. Corrective measures taken by the Government at the end of 1959 have brought about a marked improvement in the financial climate and, by restoring incentives, have stimulated a recovery of production. The Uruguayan authorities are now initiating a public investment program to utilize the still sizeable potential for economic growth. 22. The trends toward price stability, balance of payments equi- librium and overall balance in public sector finances, as described in the report, have continued through the first nine months of 1962. There are still recurring problems which call for exercise of good financial management, especially in view of the recent history of import controls and rising prices, but the authorities seem to be dealing with these problems well. Excessive demand for imports of mainly consumer durables during the first few months of 1962 have been successfully curbed and the  balance of payments deficit for 1962 is likely to remain within manage- able proportions, The considerable liquidity that existed in the banking system during the earlier part of the year resulted in a continuing credit expansion to the private sector (net credit to the public sector continued to decline), which financed excessive imports and, during recent weeks, some capital flight. Measures taken in connection with the new stand-by agreement with the International Monetary Fund promise to be successful in curbing this credit expansion and the exchange reserve losses that have been associated with it. 23. Annual debt service on Uruguay's external public debt is not excessive. It requires approximately $12 million annually until 1970, equivalent to 7% of 1961 export earnings. With continued good economic and financial management, which should enable the country in the long run to realize its substantial growth potential, Uruguay can prudently assume additional debt to assist in financing high priority projects. PART VI - COMPLIANCE WITH THE ARTICLES OF AGREEIENT 24. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank, PART VII - RECOMMENDATIONS 25. I recommend that the Bank at this time make a loan to the Republica Oriental del Uruguay amounting in various currencies to the equivalent of $18.5 million for a term of 15 years with interest (including commission) at 5-1/2 per cent per annum, and on such other terms as are specified in the draft Loan Agreement attached hereto, and that the Executive Directors adopt a Resolution to that effect in the form attached (No, 4). Eugene R. Black President Attachments Washington, D.C. October 8, 1962