Angola - Infrastructure Rehabilitation Engineering Project

Dociumt of -- The World Bank FOR OmCUL USE ONLY t-'1LCRU :C7Hh COPY R tep No. P-5529-ANG ki:Xe-. r N.-. V- 55l;::94-A.NU. TIy> : ( i1- ALUVAI'EZ. C/ X;4 31,, J724 3/ AlI:-;1N MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 28.3 MILLION TO THE PEOPLE'S REPUBLIC OF ANGOLA FOR AN INFRASTRUCTURE REHABILITATION ENGINEERING PROJECT JUNE 20h 1991 This documehatas * resicted ditsibuion and may be and by recpiens only In the peonmne of their oidalues cIotnsts may not oterwie be disclosed witho World Bank athodzation.  CURRENCY EQUIVALENT (as of March 31, 1991) Currency Unit - New Kwanza (NKa) Official Rates USS 1.00 8 NRa 60.0 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter (m) 8 3.2808 feet (ft) 1 kilometer (km) a 0.6214 miles (mi) 1 metric ton (tonnes) 8 1.023 short tons GLOSSARY OF ABBREVIATIONS AfDB Q African Development Bank CFB O Benguela Railway Company CFL Luanda Railway Company CPM Mocamedes Railway Company DANIDA = Danish International Development Agency DNA N National Directorate of Waters DNCF - National Directorate for Railways. MINTEC DNMMP National Directorate for Merchant Marine and Ports, MINTEC DNOE Q National Directorate for Engineering Works, MINCONS DPOE Q Provincial Directorate for Engineering Works DTM 8 Directed Track Maintenance EEC European Economic Community ERAS G National Water and Sanitation Company EPAL 8 Luanda Provincial Water Company ERR Economic Rate of Return ETP 8 Public Transport Company FINIDA - Finnish International Development Agency GOA Q Government of Angola GPL Luanda Provincial Government HDM 8 Highway Design and Maintenance Model ICB International Competitive Bidding INE Angolan National Statistical Institute iNEA Angolan Highway Institute, MINCONS INP - National Institute for Physical Planning, MINPLAN IRI - International Roughness Index LPTS - Luanda Port Transport System MINCONS 8 Ministry of Public Vorks and Urban Developmentl! I/Formerly the Ministry of Construction MINFIN - Ministry of Finance MINPLAN Ministry of Planning MINTEC - Ministry of Transport and Communications - - man-mnorthe Musseques = Human Settlements on the Fringes of Urban Areas N.A. Not Applicable NBHN R National Basic Highway Network NORAD 8 Norwegian Agency for Development Cooperation NPTS Namibe Port Transport System ODA Overseas Development Administration (U.K.) p.a. = per annum PER - Public Expenditure Review PIP - Priority Igvastment Program PPF - Project Preparation Facility PRE - Economic Recovery Program (1989-1990) SADOC - Southern Africa Development Coordination Conference SATTC 8 Southern Africa Transport and Telecommunications Commission TA a Technical Assistance TEU - Twenty-foot equivalent units TOR T Terms of Reference UICL - Urban Infrastructure of the City of Luanda UNCTAD - United Nations Conference on Trade and Development UNDP - United Nations Development Programme VOC - Vehicle Operating Cost VPD * Vehicles Per Day  10OR 0ICIL USE ONLY PEOPLE'S REPUBLIC OF -ANGOL INFRAETRUCTURB REHABILITATION (;0DIBERING IRE) PROJECT Table of Contents Credit and Project Summary ..... ........... 1 Part I - COUNTRY POLICIES ANDT BANK GROUP ASSISTANCE STRATEGY 1 Background . . . . . . . . . . a . . . . . . . . . Economic* Financial and Social Perfonmance . . . . . . . . 2 Attempts at Economic Refom . . . . . .......... 4 Recent Political Developments ........ ... ... . 6 Central Development Issues and Prospects . . . . . . . . . 7 Bank Group Country Assistance Strategy and Operations . . . 8 art II - THE CRDIT . . . . . . . . . . . . . . . . 11 Rationale for IDA Involvement. . . .9.. ..... e . 0 * * # 12 Project Objective ................... 12 Project D uscription ...o . . . .a .* . $ 12 Project Cost and Tfimetable . . . . . . . . . . . . . . . . 13 Agreemets dt................ 13 Aenefits . . . . . . . . . . . . . . . . . . . . . . . . 13 Risks . . . . . . . . . . . . . .............. 14 Er.virorntal Aspects .................. 14 Recomendation . . .. . . . ........... 14 SCHEDULS A. Summary Project Cost and FinSUcing Plan . . . . . . . . 15 B. Procurement Hethods and Disbursements .. . . . 16 C. Timetable of Key Project Processing Events . . . 18 D. Status of Bank Group Operations in Angola . . . 19 This document has a stcd disibution and may be ued by reipients only in theperforMINre of their offial dutie its contents may not othrwe be dilosd without Wodd ank authorization.  TECHNICAL JNNE TO Tog DllRAMM OP THE . . . . 20 overviewr .... * 21 Detailed Pro,1ect Descrfption A.1. Project Components a. The Namibe Transport System (i) Port of Namibe . . . . . . . . . . . . . 23 (ii) Caminho de Ferro de Mocamedes (CPM) . . . . 29 b. The National Basic Highway Network . . . . . . . 37 c. The Luanda Transport System (M) Port of Luanda . . . . . . . . . . . . . . 43 (ii) Caminho de Ferro de Luanda (CFL) . . . . . 50 d. Urban Infrastructure (i) Water Supply, Sewerage, Storm Drainage and Solid Wastes Disposal of Luanda . . . . . . 58 (ii) Land Use Strategy Plan and Musseque Upgrading . . . . . . . . . . . . . . . . . 63 A.2 Technical Assistance and Training . . . . . . . . . . 68 A.3 Detailed Estlmated CostedCoat....... 70 Prolect Administration and ImDleaentation R.1 Procurement and Disbursement Arrangements . . . . * . 72 B.2 Environmental Aspects . . . . . . . .. . . . . . ... .. 75 B.3 Project Execution . . . . . . . . . . . . . . . . . . 77 B,b fuporvision Plan . . . . .. .. * . . . .. . . . . . . 82 3.5 Implementatio Plan ................. . 84 Map IBRD #22945  PEOPLE' S REPUBLIC OF ANGOLA INFRASTRUCTURE REHABILITATION ENGINEERING PROJECT CREDIT AND PROJECT SUMMARY Borrower: People's Republic of Angola Beneficiaries: The Ministry of Planning, the Ministry of Transport and Communications, the Ministry of Public Vorks and Urban Development, the State Secretariat for Energy and Water, and the Luanda Provincial Government. Amount: SDR 28.3 million (USS 37.7 million equivalent) Termst Standard IDA terms, with 35 years maturity Onlendinx Terms: Standard IDA Financing Plans Local Foreign Total a of Total (US&million) Government 4.8 - 4.8 11.3 IDA - 37.7 37.7 88.7 Total 4.8 37.7 42.5 100.0 mm- mm Economic Rate of Return: Not Applicable Staff Appraisal: None Mao: IBRDt 22945  oW tEl ITEAONL DEVELOUDIT ASSOCIATQON TO TM mEECUTIE DIRCSRS ON A PROPOSED CREDIT tO ANGOLA _10A AN IMMALUMMUR REULITATIOK ETNINEERIif CREDIT 1. The following memorandum and recommendation on a proposed engineering credit to Angola for SDR 28.3 million (US$ 37.7 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 35 years maturity. It would help to finance an engineering technical assistance project. Part I of the present document describes the country's policies and the Bank's assistance strategy. It draws upon the latest Country Brief for Angola, which was distributed to the Executive Directors in January 1991, as well as an Introductory Economic Review (Report No. 7283-ANG) which was distributed to the Executive Directors in June 1990. Part II describes the credit, the rationale for IDA involvement, project objectives, agreements reached and the risks of the operation. PAR? I - COUNTRY POLICIES AND UANR GROUP ASSISTANCE STRA5DGY Backaround 2. Angola, with a population of about 10 million, growing at an annual rate of about 2.8 perceAt, is one of the richest countries in Africa in terms of natural resource endowment (e.g., oil, diamoads, and fertile land). At the same time, its economy is one of the most distorted of the continent.- Since independence in 1975, the country has developed an economy highly dependent on income from oil. Available statistics on Angola are poor and should be treated with caution. GNP per capita, which is estimated at US$620 in 1989, is closely linked to oil prices. The oil sector represents about half of the GDP. In 1991, oil export earnings were about US$3 billion, or about US$300 per capita. The oil industry, developed as an enclave, has grown rapidly since 1975, and by early 1991, oil production reached about 460,000 barrels per day. By contrast, the non-oil sector's performance has been poor since independence. It is estimated that non-oil sector's output growth per capita has been negative since the early 1980's. Angola, which was an important net exporter of agricultural products before independence, has in recent years been increasingly dependent on food imports (and food aid) to supply its urban population. The capacity utilization of existing and the development of new manufacturing industries has been severely affected by the lack of inputs, spare parts and maintenance services, as well as by a distorted policy environment. S. The Government's failure to revive the economy after independence is largely explained by three factorsi (i) a fifteen-year old civil war, which has made much of the countryside too insecure for agricultural production and transport, has required heavy military expenditures (contributing to chronically large fiscal deficits, despite substantial revenues from oil), and has destroyed a substantial part of the economic and social infrastructures (ii) unusually severe hbman resource constraints, due  -2- to the massive exodus of Portuguese settlers at independence; and (iii) misguided economic policies which have created a highly distorted system with a formal economy (largely public) managed by administrative controls, and a large parallel economy (mostly private). Ebconomic. Financial and Social Performance 4. Since independence, the Angolan economy has been ravaged by a long and costly civil war and by severe distortions commonly observed in centrally- planned economies. The fall of domestic production and agricultural exports that occurred after independence was primarily caused by the destruction of the country's stock of human and physical capital, and aggravated by macroeconomic policies which favored consumption. In response to adverse domestic conditions and external shocks which reduced the country's resources, the Government resorted to rigid price controls and a system of administratively allocated foreign exchange, instead of appropriate price policies (exchange rate adjustments, corrections in relative prices) and fiscal adjustments. An expansionary monetary policy maintained the level of domestic consumption, mostly in the urban areas, at the expense of investments to Increase the productive base of the economy. 5. In many cases, official prices have not been changed since independence, and the few price adjustments which have taken place have been very modest when compared with increases in the nominal purchasing power of the population. As a consequence of these pricing policies, the domestic production of many goods has been discouraged, relative prices have been severely distorted, waste in the consumption of some goods has been stimulated, and wide gaps have appeared between the demand and the supply of practically all goods and services. The exchange rate, which has been pegged to the US$. was unchanged at 29.92 Kx per USS between 1975 and March 1991, when it was adjusted to 60.00 NKx per US$. Exchange rates prevailing in the parallel market have, however, sometimes been as high as a hundred times the 6fficial rate. In the absence of adequate adjustments, the exchange rate became overvalued and excess demand for foreign exchange was curtailed through administrative controls. As a result of these nolicies and the hostilities, investment in the non-oil sector droppel substantially, traditional agricultural exports practically disappeared, non-oil domestic output per capita declined, and the country became almost exclusively dependent on oil and diamond exports for its foreign exchange earnings. la.o To compensate for the shrinking d-m "'ic fnon-oil) production per capita, growing imports financed by oil income supplied the country with consumption goods. Government policies encouraged consumption through widespread consumer price subsidies, the accumulation of sizeable fiscal deficits and a system of remuneration 'in kind" to Government personnel. More specifically, to protect the purchasing power of workers in the formal sector, particularly civil servants, the Government introduced a system of 'buying rightss in official shops (supplied with imported consumer goods) in partial lieu of cash payments of wages. Through this system, a relatively small portion of the population has access to the bulk of the country's imported consumer goods, at prices that are substantially below those prevailing in the parallel market. Government employees, in turn, trade part of these goods in the parallel market for food and consumption goods which are unavailable in official shops (e.g., vegetables, fish, etc).  - 3 - Manufacturing enterprises also sell part of their producrion at low prices to their own ewployees, who also trade on the parallel narket. 7. Lack of financial discipline is a serious problem at all levels of public administration and enterprises. A growing part of the formal economy has been financed through oil revenues, which in recent years have provided over 80 percent of government income. In spite of the rapid growth of oil revenues since 1986, the budget has consistently been in deficit as non-oil revenue declined continuously, while expenditures remained at high levels. A large share of government expenditure, including most of the military expenditure, is outside the budget. It is estimated that military expenditures represer.' about 25 percent of GDP. In 1988-90, the overall budget deficit (including extra budgetary expenditure) was on average equivalent to about one quarter of GDP at official ices. However, the underlying deficit valued at more realistic prices i stimated to be lower (about 12 percent). 8. Throughout the post-independence period, an accommodating monetary policy fully monetized the country's sizeable fiscal deficits. As a result, a growing excess liquidity rapidly emerged but its inflationary lmpact did not show up in the official price indices because of the administratively controlled official prices. These policies led to the emergence of widespread parallel marketss price differentials between the official and parallel markets rapidly attained 2,0002 to 10,0002. This, in turn, reinforced the existing incentives to divert resources from the official to the parallel economy. Money substitutes (such as imported beer) and barter took On an increasing role in internal trade, further complicating the management of monetary policy. Annual inflation in the parallel market is estimated to have reached three-digit levels during 1987-90. 9. Foreign and domestic trade have been hampered by rigid and pervasive Government regulations and restrictions. There is a predominance of inefficient public enterprises, not only in manufacturing, but also in foreign trade, wholesaling, and in the retail network. Although there are some private ent, -rises, their role in providing competition to the public sector is weak, because of the administrative allocation of imports and fixed profit margins imposed by the Government. Agricultural production has been particularly affected by the war, the shortcomings of the trade system, and the disappearance of bush traders. In the earlier period of its economic history, when the country was not engulfed in armed conflicts, bush traders had played an important role in the marketing and distribution system by pro-iding consumer goods in exchange for agricultural products. 10. Angola's external debt at end-1989 is estimated at over US$7 billion (including US$1 billion in interest arrears), of which about US$3.5 billion was owed to the Soviet Union, US$2.8 billion to Paris Club and other Western creditors (mainly Brazil and Portugal), and the remainder to Eastern European countries and Cuba. External debt represents about 100 percent of GDP. About one-third of the total debt is military. In June 1989. the Soviet Union rescheduled its loans on favorable terms (10 yeaz.s and 3 percent), including arrears and maturities falling due through 1990. In July 1989, the Paris Club rescheduled almost US$0.5 billion in arrears and maturities falling due through September 1990; the other Western creditors rescheduled their own debt on the same terms, The remaining maturity profile  - 4 - is unfa:orable, with payments bunched over the period 1991-93. Thus, scheduled debt service would absorb about one-third of projected exports of goods and services in 1991-93. Assuming further Soviet rescheduling at terms comparable to those of 1989, and "Toronto terms" for Western creditors, overall debt-servicing capacity of the existing debt could be sufficient to handle the flow of debt-service payments in the medium term, without compromising the long-term debt profile of the country. However, the problem of arrsars will in itself require an orderly resolution. Given the above, Angola's capacity to service additional debt at non-concessional terms is very limited. 11. The social conditions prevailing in Angola are poor by African standards. This is the combined result of the civil war, inappropriate policies, rapid migration to the cities and emigration of skilled manpower. Life expectancy at birth has been estimated at 44 years, the izifant mortality rate is 288 per thousand, less than 30 percent of the population has access to health services and safe water, and despite the Government's achievements in the field of education, the adult literacy rate is still 41 percent. Disparity in social conditions among various regions are substantial, as a result of the war-induced destruction. Poverty in the rural areas is acute. In addition to the stagnation in economic activity, the main contributing factors for rural poverty are: the interruption of normal links to the cities , the drastic decline of inter-regional trade, lack of incentive goods, and the lack of access to social services. 12. These factors particularly affect women, considering their predominant involvement in agricultural activities, and their greater relative need for social services. Nevertheless, womelln access to basic educational opportunities has been expanded and the current level of literacy among women, although still low at 33 percent, is substantially higher than in earlier years. Also, the Government has adopted a more meritocratic approach to the assignment of responsibilities by gender than is the case in most other Sub-Saharan African countries. Vomen figure prominently in the civil service, including in high-level positions. Atteunts at Econoic Reform 13. Recognizing that Angola's economic distortions and imbalances are due in large part to inapDropriate economic policies, the Government announced in 1987 an ambitious program of Economic and Financial Restructuring (SEP). The basic objectives of the program were to stabilize the economy and Improve production incentives by adjusting price levels (including the exchange rate) in the formal economy. The proposed reforms, had they been implemented, would have constituted a major departure from the way the economy had been managed and included: Ci) a limited adjustment of the exchange rate, which would have still left a wide margin between the official and the parallel exchange rates; (ii) a reduction in the budget deficit, and a corresponding reduction in inflationary financing; (iii) a program for restructuring public enterprises through divesture and liquidation; (iv) reform of the financial sector by encouraging the establishment of comuercial banks and ensuring greater availability of credit to the private sector; and (v) limiting price controls to only selected essential goods.  v 5 - 14. Whlile ths overall direction of proposed reforms was appropriate, the measures generally did not go far enough to address the main structural distortions, notably in the area of the exchange rate. In any event, with the exception of a more accommodating attitude towards parallel market activities, there has been little progress to date in implementing the program. Since 1988, several laws were audpted that attempted to provide a broad framework for structural refonm, but most of them have not been applied. A new package of measures, including a 100 percent devaluation, combined with wage increases and price liberalization was announced in early 1990 as part of a New Action Plan. The exchange rate adjustment, however, was postponed for over a year and the decontrol of most prices is yet to be implemented. 15. A recent 'currency reform' in September 1990 (creation of a new currency aid tight limits on convertibility from the old currency) temporarily brought down the prices on the pArallel market. Hovever, this attempt to reduce excess liquidity proved unsustainable. The experience with this 'reform" further undermined the public's already shaky confidence in the Government's management of the economy. Inflation is accelerating and the gap between official and parallel exchange rates is widening to the range which existed prior to the 'currency reform". Yet another attempt to put forth a more consistent and comprehensive set of stabilization measures was made recently as part of the annual plan for 1991. While reaffirming the Government's coumitment to adjustment and reform, this plan still does not represent the kind of comprehensive and credible package of reforms which would be needed to address the fundamental economic distortions of the Angolan economy. For example, the 100 percent devaluation implemented in Marrch 1991, is insufficient to address the substantial overvaluation of the New Kwanza. 16. The absence of concrete and coherent economic reform measures to date may be attributed to various factors, including3 (i) the Government's preoccupation with the war and, more recently, with an intensifying peace process (see paras. 18 and 19); (ti) the strong vested interests in the existing system; (iii) the uncertainty with regard to the political impact of reforms; and (iv) weaknesses in economic management, especlally the limited capacity for designing and executing detailed action programs within a consistent macroeconomic framework, and the inadequate coordination between the principal actors in the policy making process. 17. A table summarizing Angola's economic performAnce since 1986 is presented below. As has already been noted, however, it is based on statistical information whose accuracy is suspect. After decades of warfare, it is highly likely, for instance, that the data for the non-oil sector is misleadingly high. Strengthening the statistical bass is one of the objectives of the Economic Management and Capacity Building Project presented to the Board on June 19, 1991.  - 6 - anvilo Seleted EconoMIc Indicatoro .... .... . _ - .. (se.) (Pr