Madagascar - Highway Project

RESTRICTED Report No. P-495 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A DEVELOPMENT CREDIT FOR A ROAD PROJECT TO THE MALAGASY REPUBLIC July 15, 1966  INTERNATIONAL DEv7MOPNENT ASSOCIATION REPORT AND RECOTIMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A DEVELOPi=NT CREDIT FOR A ROAD PROJECT TO THE V1ALAGASY REPUBLIC 1. I submit the following report and recommendation on a proposed credit, in an amount in various currencies equivalent to $10 million to the Malagasy Republic, to assist in financing a road project. PART I - HISTORICAL 2. The proposed credit would be the first IDA operation in the Malagasy Republic. The country became independent in June 1960 and joined the Bank and IDA in September 1963. 3. In July 1964 the Malagasy government asked the Association to consider financing the reconstruction of two sections of the Tananarive- Hlajunga road. A preliminary appraisal in January-February 1965 indi- cated good possibilities for a sound project. The government then under- took to complete the final engineering studies to provide the more reliable cost estimate on which the appraisal report is based. Negotia- tions for the proposed credit were completed in Nlashington on April 22, 1966. The government was represented by a delegation headed by the Planning Comissioner. On June 2L, 1966 a law was passed authorizing the government to borrow from the Association the proposed amount. 4. A $4.1 million Bank loan for an education project is also under consideration. Negotiations will start when the government has acquired most of the land required for the project. PART II - DESCRIPTION OF THE PROPOSED CREDIT Borrower The Malagasy Republic Amount Equivalent in various currencies to $10 million. Purpose To finance a) the engineering, reconstruction and aspbalt paving, and supervision of construction of two sections totalling 160 kms of the National Road No. 4 linking Tananarive and Majunga; b) Economic feasibility studies and final engineering of a section of 13 kms of the National Road No. 4 including a bridge over the Betsiboka River.  Amortization The development credit would be for a period of 50 years with no amortization for 10 years. One half of one percent of the principal amount would be payable semi-annually from October 15, 1976 to April 15, 1986, and one half percent semi-annually from October 15, 1986 to April 15, 2016. Service charge 3/4 of 1% per annum on the principal amount of the credit disbursed and outstanding. PART III - THE PROJECT 5. A report on the project "Appraisal of a highway reconstruc- tion project" (To-508 b) is attached. The proposed project has high priority in the government's highway program. It would greatly im- prove road transport on one of the most important roads in Madagascar, linking Tananarive, the capital, with lNajunga, the second largest port. Savings on transportation costs and maintenance expenditures wlould together yield a return on the investment estimated at about 11 per cent. The road passes through important agricultural regions and sub- stantial benefits from agricultural development should also be derived from the project. 6. The project is estimated to cost $12.8 million equivalent. If the project were carried out by foreign contractors, the estimated foreign exchange component would be $10 million; if carried out wholly by locally-based contractors, the foreign exchange component would be $8.7 million. Although a credit for $10 million would represent some 78% of the total project cost, I do not believe that we should finance less than the foreign exchange cost in a country like Madagascar and I consider that the government should be covered against the possibility of the higher figure. More generally, although 78% is a high propor- tion of the total cost of this particular project, the government is financing out of domestic resources about one-third of its total current road program and about one-quarter of its total current public invest- ment program. 7. Construction of the project would be carried out over a period of three years 1966-69. The proposed credit would also reimburse expend- itures incurred by the government since June 1965 to complete the final engineering studies. Contracts would be submitted to international competitive bidding. 8. Road maintenance in MIalagasy has been unsatisfactory in the past due to insufficient budgetary allocations. However, they have been increased appreciably in the recent years and the government has undertaken to increase them further in the light of the recommenda- tions of a study which is now being carried out by consultants.  - 3 - PART IV - LEGAL INSTRUEWlfTS AND AUTHORITY 9. The draft Development Credit Agreement between the Malagasy Republic and the Association and the Report of the Committee provided for in Article 5, section 1 (d) of the Articles of Agreement are being distributed to the Executive Directors separately. 10. The draft Agreement conforms generally to the pattern of development credit agreements for projects of this type. Howqever, certain obligations of the Borrower (other than those regarding re- payment of the credit) have been limited to the duration of the Agree- ment or the estimated life of the Project (25 years), whichever shall be the earlier (Section 6.03). PART V - THE ECONOMY 11. A report on the economy of the Malagasy Republic was dis- tributed to the Executive Directors on July 11, 1966. 12. Hala.gasy faces development problems familiar to many African countries; rapid population growth, a prospective decline in export prices, limited natural resources, and a small domestic market. 13. Economic growth has been slow in the past 10 years as a result of poor weather, a fairly low level of investment and diffi- culties associated with the transition to independence. 1h. In the next five years Mialagasy should be able to increase the pace of its development. Political conditions are stable. Gov- ernment financial policies have been sound, and in the past two or three years private investors have begun to respond well to new incentives offered by the Government, notably in industry. 15. Accelerated growth will also require more public investrment. A neTew development program has just been started, with high priority being given to transport and agriculture. While it might not prove possible for the Government to achieve its full target for the expansion of public investment, a significant increase should be feasible if adequate foreign assistance continues to be forthcoming. As such assistance mill very probably be required for a number of years, it will be desirable for the bulk of it to be on soft terms to take account of the still limited savings of the Malagasy economy and in order to prevent an esca- lation of the debt service burden, wThich is fairly low at present.  PART VI - C0i,PLIANCE NITH ARTICLES OF AGREAIENT 16. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VII - RECOP20IIDATION 17. I recommend that the Executive Directors adopt the following Resolution. RESOLUTION NO. Approval of a Development Credit to the 1.alagasy Republic (Highway Reconstruction Project) in an amount equivalent to U.S. dollars 10 million) RESOLVED: THAT the Association shall grant a development credit to the lialagasy Republic in an amount in various currencies equiv- alent to ten million dollars ($10,000,000), to mature on and prior to April 15, 2016, to bear a service charge at the rate of three fourth.s of one per cent (3/4 of 1%) per annum, and to be upon other terms and conditions set forth in the form of Development Credit Agreement (Road Project) betwTeen the lialagasy Republic and the Association which.has been presented to thi.s meeting. Attachment liashington, D.C. George D. WJoods July 1 , 1966 President