Honduras - North Road Project

RESTRICTED IHE COD7 Report No.P-417 This report was prepared for use within the Bank ond 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 The report may not be published nor may it be quoted as representing their views.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 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND PROPOSED CREDIT TO THE REPUBLIC OF HONDURAS FOR ROAD CONSTRUCTION January 19, 1965  INTERMATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEDIT INTERNATIONAL DEVEL0PFivNT ASSOCIATION REPORT ANID RECOIMENDATION OF TIE PRESIDE11T TO THE EXECUTIVE DIRECTORS OHi A PROPOSED LOAN AND PROPOSED DEVELOMENT CREDIT TO TTiE REEPUBLIC OF HONDURAS FOR ROAD CONSTPLUCTTION 1. I submit the following report and recommendation on a proposed Loan from the Bank in an amount in various currencies equivalent to $6 million and on a proposed Development Credit from the International Development Association in various currencies equivalent to $3.5 million, both to the Reoublic of Honduras, to assist in the financing of the construction of the North Road. PART I - BACKGROUND 2. For the past ten years the Republic of Honduras has engaged in the construction of the basic road network of the country for which it received considerable external financial assistance, mainly from the Bank and the Association. The Bank made two loans, in 1955 and 1958, totaling $9.7 million to build or reconstruct about 115 miles of road, to build 21 new bridges and to conduct engineering surveys for future road construction. Both projects are now completed, even though the execution of the 1958 loan was delayed because of the failure of a contractor. In 196i the Association made a Credit of $9 million to help construct a 60 mile extension of the Western Highway to establish direct road communications between the port of Puerto Cortes on the Atlantic coast of Honduras and El Salvador, to construct feeder roads in the western part of the country and to carry out a highway planning survey. Road construction was completed on schedule at a cost substantially less than the original estimates and on July 28, 196h the Bank agreed that the undisbursed amount be used for improvement of another section of the Wlestern Highway, which is now one of the most important economic arteries of the country. The highway planning survey, carried out by the Stanford Research Institute, was completed at the end of 1962 and indicated that the highest priority should be given to the construction of the North Road connecting Tegucigalpa, the capital, with Puerto Cortes, the main port of the country. 3. In fact a 72 km. section of the North Road between Puerto Cortes and Bufalo - where the Western Highway meets the existin- road fronm Puerto Cortes to Tegucigalpa - was constructed to s;odern standards under the first Bank loan to Honduras. By the end of 1963, the Government decided to speed up construction of the road and to improve immediately to adequate stand-rds out of its own resources two more sectioLns totaling 60 lms from Toeucigalpa  -2 - to Rlo del Hombre and from Bufalo to Potrerillos, while engineering studies for the rest of the road were carried out under a Technical Assistance grant from the Inter-American Development Bank. In September 1964 a mission visited Honduras and found that (a) the improvements financed by the Government were being carried out in conformity with sound engineering practices and to satisfactory standards; and (b) the construction of the 202 I(n section between Rio del Hombre and Potrerillos and the construction of a large bridge over the Ulua River would be suitable for Bank financing. 4. Negotiations began on January 7, 1965 in Washington with a Honduran mission consisting of Mr. Edgardo Dur.as, Minister of Economy and Finance, Mr. Luis Bogran Fortin, Minister of Public Works and Communications and Mr. Roberto Ramirez, President of the Central Bank. With the agreement of the Government of Honduras, representatives of tne Inter-Ameri can Develop- ment Bank, which is prepared in principle to contribute to the financing of the project, were invited to attend the negotiations witvh a view to ensuring proper coordination between both lending agencies and speeding up the pro- cedure. 5. The proposed loan would increase the Bark's lending in Honduras to $25.9 million equivalent. The present status of previous Bank loans is as follows: Amount of Loan Year Purpose (net of cancellations) (U.S.$ millions) 1955 Roads 4.2 1958 Roads 5.5 1959 Power 1.4 1960 Power 8.8 Total net of cancellations 19.9 of which has been repaid 5.5 Total now outstanding 1J.4 Amount sold 1.6 of which has been repaid 1.h .2 Net amount hield by Bank at December 31, 1964 14.2 1/ including undisbursed amount 44.2 million.  -3- 6. The Development Credit would increase the Association's lending in Honduras to $12.5 million equivalent. Tile only previous De--elopment Credit to the Government, in the amount of $9 million, was signed in l'lay 1961 to help finance road construction and maintenance as well as a highway planning survey. 7. T.cTo other projects of major importance for the economic development of the country, namely t'he expanoion of the p,ort facilities in ?uerto Cortes and the construction of a nei 'hydroelectric plant are under active consideration for Bank loans of about `4.1 million and -9 million resDectIvely. PART II - D3SCRIPTION CF TIHE PROPOSED LO.UN AND DETELOPFEDIT CREDIT 3. The oroposed Loan and Development Credit would 'ave the fol otJing characteristics: Loan Develop;aent Credit Borrower: The Republic or Honduras Amount: The equivalent in various currencies of .6.o million 5 3- million Purpose: To heln finance a 2C2 km. section of the North Road linking Tegucigalpa, the capital, and Puerto Cortes, the main port,and the construction of a large bridge. Amortization: semi-annual instalments from April 1, 19071 from April 1, 1975 through April 1,1990 through Gc&.l, 201L' Interest rate: 5-1/20 per annum Service charge: 3/4 of 1, per annurn Commit-ment charge: 3/8 of 1, per annum Payment dates: April 1 and October 1  - 4 - PART III - THE PROJECT 9. A report entitled "Appraisal of the North Road Project" (TO-454a) is attached. 10. The project consists of the construction of a two-lane bituminous surfaced road totaling about 202 kms in length and a bridge with its accesses over the Ulua River and the provision of associated engineering services. 11. The North Road has been given the highest priority both in the National and Central American regional highway investment program. One- third of Honduras' total population live in its zone of influence, where the main cities and most of the country's manufacturing and processing facilities are located, as well as about one quarter of the country's total farm area, Out of the total number of motor vehicles registered in Hon- duras, about 75% are in the project's zone of influence. The North Road will replace a narrow winding gravel road. Assuming a reasonable annual rate of increase in road traffic, the design of the road would ensure adequate capacity to accommodate future traffic subject to certain rela- tively minor improvements of the pavement to be made in due course. A 20% rate of return on the investment has been calculated on the conserva- tive assumption that the economic life of the project would be limited to 20 years. This leaves aside benefits which cannot readily be expressed in monetary terms such as substantial saving in time for both passengers and freight, better access to excellent agricultural land and forests and better integration of the northern and southern parts of the country. 12. The total cost of the project is estimated at the equivalent of $23.6 million of which about 60% represents foreign exchange expenditure. The Bank and the Association would together provide $905 million and the Inter-American Development Bank has confirmned that it is prepared in principle to contribute an equal amount. IADB financing would include $8 million from its Fund for Special Operations - i.e. 4% per annum rate of interest and repayment in local currency within 25 years. IADB loan documents are scheduled to be signed in February. The remaining $14.6 million would be provided by the Government from budgetary resources. 13. In addition to its contribution to the project the Government, as noted in paragraph 3 above, is providing about $2.3 million equivalent out of its own resources for the improvement to satisfactory standards of two additional sections of the North Road. The Government also agreed during the negotiations to raise the annual allocation for highway maintenance to about U.S.$2 million equivalent, one-third more than in recent years. 14. The project has been soundly planned with the assistance of competent consultants. Construction will be under the general responsibility of the Highway Department of the Ministry of Public Works and Communications and  - 5 - arrangements are such as to assure that the project will be properly carried out. Unit price contracts twill be at-arded on the basis of international competitive bidding. PART IV - LEGAL IFSTRUIENTS AITD AU,FORITTY 15. The Loan and Credit Agreements wlhichl are being circulated to the Executive Directors separately conform to the customary pattern for projects of this type. 16. The following provisions are of special interest: i) Section 2.03 of the Loan Agreement provides that no withdrawals shall be made from the Loan Account unless and until all amounts under the Credit Agreement s,nall have been disbursed or cancelled. ii) Section 5.05 of the Loan Agreemert specifies the mini.,um annual contribution which the Borrower undertakes to appropriate for tihe purposes of the Project and provides that any amount undis- bursed during the specific year shall be transferred to a special account in the Banco Central de Honduras to be disbursed in subsequent years for the purposes of the Project. iii) Section 5.06 of the Loan Agreement provides t}at the Borrower shall give priority to the Project in the allocation of highway funds and resources and, until the Project is carried out, shall not undertake any highway construction project or program of such magnitude as may adversely affect the execution of the Project. iv) Section 2.04 of the Credit Agreement provides that the charge for any special commitment shall be 1/2 of 1% per annum rather than 3/4 of l16, per annum which has up to now been the practice. v) Section 4.01 of the Credit Agreement incorporates by reference certain pertinent covenants contained in the Loan Agreement and Section 4.02 limits the duration of some of these covenants to the term of the Bank Loan. vi) The effectiveness of the loan documents of the three lending agencies involved (the Bank, the Association and the Inter- American Development Bank) will be interdependent. The Credit Agreement shall not be made effective until the Loan Agreement is declared effective and the Loan Agreement will not be declared effective until the IADB Loan Agreements have been entered into  on terms and conditions satisfactory to the Bank and all conditions precedent to the effectiveness of the IADB Agreements are fulfilled. ( See Section 7.01 of Loan Agreement and Section 6.01 of Credit Agreement). vii) Section 5.12 of the Loan Agreement provides that if the Borrower sha'l prepay any part of the IADB Loans or the IDA Credit, it shall simultaneously prepay a proportionate cmount of the Bank Loan. In addition, the Loan Agreement modifies Section 5.02 of the Loan Regulations in giving the Bank the right to suspend, or in certain cases to pre-mature, the Loan upon the occurrence of certain events specified Ln either the IDA Credit or IADB Agreements. The Credit Agreement modifies Section 5.02 of the Credit Regulations in a similar fashion. 17. The Loan and Credit Agreements will be presented for ratification by the Constituent Assembly which will be elected on February l1. PART V - THE ECONO1;Y 18. The report entitled "Current Economic Position and Prospects of Honduras" (II-132a dated January 17, i96L) was distributed to the Executive Directors on January 23, 196ll. This report drew attention to the fact that, while the efforts developed since l157 by the Authorities to provide the economy of the countrJ with some of its basic infrastructure require- ments have now begun to pay off, Honduras is still the least developed of the Central American countries, both in terms of natural and human resources. Since 1962 the GNP at constant prices has been growing at an encouraging rate of about 5 annually. The grow^.th was paced by the recovery of banana exports in 1962, but since then a rapid growth has taken place in lesse- exports (such as coffee and cotton), industrial production and production of staple foods for domestic consumption and export. 19. The Honduran Governmenti has for several years followed a conservative fiscal policy and increases in expenditures have been largely limited to high priority uses, such as education. At the same time, however, the share of GNP taken in taxation has remained lo0T (about 9-l0'' of GNP). Conscious of this sluggishness, the Government at the end of 1963 introduced new tax measures which should lead, on the basis of nine months' data, to a 17 to 20% increase in revenues in 1964, and are likely to make tax revenues more responsive to the growth of the economy in future years. In the immediate years ahead, hovever, the expected increase in current ex- penditures, particularly education, will probably take up most of this rise in revenues. Thus, while in the longer run the public sector should be able to finance a growtring proportion of its investment requirements out of the country's own resources, the amount of public savings available for investment is not likely to expand very fast.  - 7 - 20. Its relatively low le-vel of external debt and prospective economic growth should enable Honduras to finance a significant part of its ex- ternal capital requirements on conventional terms. But if all of these requirements were supplied on such terms, debt service would r se steeply by 1967-1968. Borrowing on this basis would be imprudent in v evi of the uncertain outlook for exiports, except for bananas where substantial increases seem to be assured. Hence, taidng into consideration Honduras' much improved fiscal effort, it seems reasonable that some part of the financing of the proposed project be provided in the form of an ID;- credit. As noted in paragraph 7 above, the twvo other projects which are under consideration are expected to be financed by Bank loans. PART VI - CO0IPLIANCE WITI1 TmE ARTICT.S OF AGREEiENT 21. I am satisfied that the proposed Loan and Development Credit would comply with the Articles of Agreement of thie Bank and of the Association respectively. PART VII - RECOMEYDffTIOJ 22. I recommend that: (a) The- Executive Directors of tCe Bank adopt the following resolution: RESOLTVED: THAT the Bank shall grant a loan to the Republic of Honduras in an amount in various currencies equivalent to six million United States dollars (U.S.