Somalia - Highway Project

RESTRICTED FILE COPY Report No. P-409 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF SOMALIA FOR A ROAD PROJECT December 14, 1964  INTERNATIONAL DEVELOPME1U ASSOCIATION IEPORT AND RECOiNE-10DATIOIZ OF THE PRESIDENT TO THE EXECUTIWE DIRECTORS ON A PROPOSED DEvELOPT1ENT CREDIT TO TUE PEPUBLIC OF SOIriLIA FOR A ROAD PROJECT 1. I submit the following report and reco-maendatiors on a proposed development credit in the amount of $6.2 ridllion, or its equivalent in other currencies, to the Republic of Somalia to help finance a road project, PP'RT I - HTSTORICAL 2. In July 1963, the Goverlnment of Somalia reouestied the Association to assist in financing the construction of an a'.-iweather road from Afgoi to Baidoa (approximately 200 kms). An appraisal mission which visited Somalia in September 1964 concluded that the road had high economic priority. At the same time, the mission recommended that new road construction should not be undertaken before Somalia had taken action to set up an effective highwvay department, to equip it with the necessary m.aintenance facilities and machinery and to assure it of adequate skilled staff. The Government agreed with these conclusions; the proposed project would provide for their implementation. 3. The total estimated cost of the project is $1h4.2 million. It was recognized from the beginning that Somalia could make at best a very minor financial contribution. Since the financing reqvired wsas considerably more than could reasona'oly be made available from IDA funds for Somalia at this times, the Association, in full agreement with Somalia, sought partners in financing the protect. Both the European Development Fund (FED) of the European Economic CoTmmunity and the U.N. Special Fund (UNgSF) showed them- selves ready to join with the Association and negotiations among the various parties took place in Brussels in the middle of NovemDer. 4. The proposed IDA credit would be the first Bank/IDA lending to Somalia. PART II - DESCRIPTION OF THE PROPOSED CREDIT 5. The proposed credit would have the following characteristics: Borrower: Republic of Somalia Credit Amount: The equivalent, in various currencies, of $6.2 million.  -2 - Prose: To finance part of the construction cost of the Afgoi-Baidoa road (200 1kms) and a feeder road to Uanle Uen (20 kms)0 Terms and Amortization: 50 years with no amortization for the first ten years. Repayment to be in 80 ins tai2rrnents, 1/2 of lo of the principal amount to be repaid semi- annually beginning June 1, 1975. and ending December 1, 1984, and 1-1/2' semi-annually thereafter to December 1, 20Th Service Charge on Credit. 3/4 of 1% per annum on the amount with- drawm and outstanding, payable semi- annually. PART III - APPRAISAL OF THE PROPOSED PROJECT The Project 6. A report, "Appraisal of a Highway Project - Somaliall (TO-431a) is attached (No, 1). 7. The proposed project is conceived as a comprehensive approach to road problems in Somalia where road development is still at a very early stage. Although the Association is helping to finance only one part of the project. it would be prime coordinator in the technical control and super- vision of the whole operation. The project is made up as follows: Part A A.1): The construction of a 200-km two-lane, all-weather road from Afgoi to Baidoa and a 20-km feeder to Uanle Uen, The proposed road would be built to minimum design standards consistent with sound engineering practices. There is already a road from Mogadiscio, capital and principal port of Somalia, to Baidoa, center of a major agricultural region, but only the first 30 kms, up to Afgoi, are open to traffic the year round. The remaining 225 kms is little more than a poorly-aligned earth track which is im- passable to traffic during the rainy seasons. The project road would follow a technically more satisfactory alignment and would be about 25 km shorter. Since the new road would by-pass the important trading center of Uanle Uen, it is proposed to connect Uanle Uen to the main road by a 20-km  low-cost feeder road. The estimated cost of ccnstruction of the prcposed main road and feeder road is $8.0 million; to be financed as to $6.2 million by the proposed developmnent credit and as to $1e8 millicn frorn a proposed FED grant. FED has agreed that the construction coiitract would be awarded on the basis of fully international cornpotitive bidding, A.2): Final en__eerin and supervision of construction. The estimatedJ5ost-of about S0.6 mrllioli would be financed entirely by FED as a grant. F1i3D will make $0G3 million available imaediately out of technical assistance funds to allow final engineering work to start without delay, the balance becoming available in 3 to 4 months as part of a larger FED grant. Part B EquPppina the Highway Section. Maintenance equipment and other facilities of the Highway Section are wholly in- adequate and roads are very poorly maintained;, if maintained at all. To establish an effective highway organization within the Ministry of Public Works, it is proposed -o finance the purchase of maintenance equipment, to provide and equip field workshops, to raake available an initial stock of materials and spare parts and to build adequate headquarters offices. The estimated cost of $2.75 million would be financed entirely from the proposed FED grant. FED would consult with the Association in all technical aspects of this part of the project, but would follow its own procedures for disbursement and procurement (limited to countries in the Common Iarket). Part C Technical assistance in staffing and operation of the Highway Section for a period of 4-5 years by experts drawn from a consulting engineering firm, training of Somali engineers and road maintenance staff, feasibility studies of new roads and a study to coordinate transportation investment. The objective is to enable Somalia to derive full benefit from its road net- work and to plan rationally future investment in road and other modes of transportation. The estimated cost of this part of the project is $2085 million, of which the UNSF would finance $2,15 million and the Somali Government would contribute $0.7 million. The Bank would be the Executing Agency. 8. The proposed contribution of each of the four parties can be summarized as follows:  (I'S $ million equivalent) Part A Part B Part C Total Somalia _ - 0,70 0.70 UNS, - - 2.15 2.15 FED - Techrical Assistance 00 - - 0O3 Development Grant 2.1 2.75 4.85 IDA Credit 62 - 6.2 8,6 2^75 2,85 14,20 9. If the proposed development credit is approved, it is expected that a formal decision on the FED grant would be taken at the beginning of i^arch 1965 I'he UNTSFI' Governing Council is expected to consider the proposed technical assistance prograrm during its January 1965 meeting0 10. The project road would pass through the most important dry farming area of the country, The Governnuent gives deve'lopmnent of farming in the region high priority, particulary in view of the desirability of eliLminating the present need to import som.e 30,000 tons of cereals a year. Poor trainspor- tation facilities between Baidoa and its principal market, !ogadiscio, have tended to inhibit t'ne development of agricultural prcduction in the Baidoa region. l1. The economic benefits resulting from the new rcad wh-ch are most easily quantifiable, i.e., savings in vehicle onerating costs3 represent, on a conservative basis, a 7-8 return on the investment over tne life of the road, In addition, the expected stimulus to agricultural production, the possib:Le exploitation of mLineral resources on the line of the road, together with the administrative and social advantages which cannot be quantified, would provide significant additional benefits of the proposed investment, The Econonry 12. A report, "The Economy of Somalia" (AF-19a) was distributed to the Executive Directors on June 10, 196h4 There have been no significant changes in the economic position since that report was prepared. 13. Somalia continues to rely heavily on bananas, which br-ng in about $12 million a yearg or nearly half of all exports. Thie production of bananas has more than tripled within the last decade; production could be  increased still furthler without difficulty if markets allowed. At present bananas are- sold in Italy lnder prefereltial arrangements which are due to end in 1965. but it is understood that, if so requested by the Governn.nts o0f Somalia and Italy, the Common. Ma:'ket would favorably consider extending the present arrangements for a few niore years, During the last fewr years the c.i,f. price of Somali bananas landed in Ttalian ports has been reduced byv about 25%. The aovearrment is fo'lowing a vigorous prograim to reduce costo furthler by be'i;cr uce of fertilizers, efficient ir'igation,2 intro- duction of a new vari.e'y of bananas (which is less perishable), improve- munt in packaging, better road transportation and improvement in port facilities, The Govermcient is also exploring possible markets for bananas in the ?1iddle East, Another favorable trend in recent years has been the increase in e:-po.ts of livestock; from $4 million in 1958 to $6 million in 1260 and about $10 millJon in 1963. There is scope for furthler increase in the export of livestock) again mainly to iiddle Eastern countries. 14. Prospects for groundnuts, oil seeds, vegetables and citrus are being investigated under a UNSF project,, while EEC is financing an riagri- ciQtura. diversification study," Tentative conclusions point to thle nossibility that with modest improvements in marketing facilities, In farming techniques and in transportation facilities (the most important being the project road from Afgoi to Baidoa), Somalia should become self- sufficient in staple food within the next few years and begin to see a greater variety in its exports, i5. W.hereas the long-term prosuects for economic development are not d-iscouragingP Somalia faces considerable currenti difficulties. Somalia nas received external budget support for many years but since independence .he Government has mado strenuous efforts to increase domestic revenues and to hold increases in current expenditures within bounds. The current dcficit was reduced from $9 million in 1961 to $4 million in 1963 and is estimated at a little over $2 million in 196X) the new Government having xrastically pruned requests from individual 1iinistries. The Government .s also seriously considering revising the present tax structure and introducing new taxes. i6. Budget support from Italy for 1963 and 1964 has been delayed, but is now expected to be forthcoming beginning by Nlarch 1965c This has created R temporary budgetary gap of over $7 million, or almost one-third of domestic ;evenues and has led to a virtual depletion of free reserves and an increase Ln short-term foreign liabilities, in addition to a $407 million drawing from she II11F. There has been marked over-all expansion in bank credit to the t,overnment and the Government is considering applying to the IiF for a new stand-by. 17. Even on the most favorable assumptions, the budgetary and balance of payments situation will continue to be a major preoccupation of the Government for at least several years to come. It is evident that invest- ment finance should be in the form of grants or IDA-type credits.  - 6 - PART IV - IEGAL INSTRFTh.E\TS AND AUTHORITY 18. The draft Developmenlt Credit Agreement, which has been circulated separately to the Executive Directors along with the draft A.dministration Agreement between Somalia, the European Economic Co=mmunity and the Associ- ation, follows the gensral pattern of agreements for sim.ilar projects, except that: (a) The due execution and effectiveness of the Adminis- tration Agreement, and of the agreements between FED and Somalia and the UNSF and Somalia for financing, respectively, Parts Ael and B and Part C of the project, are made conditions for the effectiveness of the De- velopment Credit Agreement (Section 6.01, Development Crediv Agreement); (b) Any suspension of Somalia's right to utilize the fu-nds of FED or of the UNSF and any breach by it of the Administration Agreement are made events of default under Article 5.02 of the Development Credit Agreement. 19. The draft Administration Agreement provides the machinery for withdrawals for Part A.l, contains general covenants ensuring cooperation and exchanges of information among the three parties in respect of the entire project, and confirms that the Association would act as prime coordinator in dealing with Somalia. Since the financing provided by FED would be in the form of a grant, FED would retire from the project ornce its grant has been fully disbursed and its agreement with Somalia fully carried out (Section 5.01 of the draft Administration Agreement). PART V - COIIPLIANCE TJITH ARTICLES OF AG&EEIINT 20. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association, PART VI - RECOIMENDATIONS 21. I recommend that the Executive Directors adopt the following resolution: "RESOLVED: "That the Association shall grant a development credit to the Republic of Somalia in an amount in various currencies equivalent to six million two hundred thousand dollars ($6,200,000), to mature on or prior to December 1, 2014, to bear a service charge at the rate of three-fourths of one  - 7 - percent (3/4 of 1') per annum, and to be upon other terms and conditions substantielly in accordance with the terms and conditions set forth in the form of Development Credit Agreement (Road Project) between the Repub'lic of Somalia and the Interniational Development Association and in the form of Admiinistration Agreement (Road Project) between the Repub-lic o.l Soma'.ia, the European Ecoinomic Community and the International Development Association, which have been presented to this meeting."t Geor,ge D. Woods President Attachment Washington, D.C. December 14, 1964