Report and Recommendations of the President to the Executive Directors on a Proposed Development Credit to Basutoland for a Road Project

RESTRICTED Report No P-466 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Bank and its affiliated organizations They do not accept responsibility for its accuracy or completeness The report may not be published nor may it be quoted as representing their views INTERNATIONAL DEVELOPMENT ASSOCIATIO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO BASUTOLAND FOR A ROAD PROJECT January 21, 1966 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO BASUTOLAND FOR A ROAD PROJECT 1. I submit the following report and recommendation on a proposed development credit in an amount in various currencies equivalent to $4.1 million to Basutoland. PART I - HISTORICAL 2. Basutoland is one of three United Kingdom dependencies in southern Africa (Basutoland, Bechuanaland and Swaziland). It has been granted a limited form of internal self-government, with responsibility for defense, external affairs, internal security, finance and the civil service being reserved to the British Resident Commissioner. Elections were held in April 1965, and the more conservative National Party, which advocates a policy of cooperation with South Africa, won a majority in the Legislature. Basutoland is expected to become independent in 1966. 3. In 1959 an Economic Survey Mission, headed by Professor Chandler Morse and organized in consultation with the Bank, visited the three de- pendencies and made recommendations concerning their economic development. Following these recommendations, the United Kingdom Government in 1961 requested assistance from IDA for a number of projects in the dependencies, and an IDA mission subsequently made a visit to study plans for road improve- ments. A credit of $2.8 million for a road project in Swaziland was made in March 1962 and was followed by a credit of $3.6 million to Bechuanaland in August 1964 for the same purpose. 4. The Basutoland Government first submitted its road project at the beginning of 1961. The IDA mission which visited Basutoland in 1961 found that the proposal represented a long-term program rather than a specific project. Working out an acceptable project necessitated three separate visits of Bank staff to Basutoland and it was only in February 1965 that negotiations with representatives of the Government of Basutoland for the proposed credit were concluded. Since then the credit has been delayed by the need to obtain the approval of the new Basutoland legis- lature which was elected in April. The proposed credit would be the Association's first operation in Basutoland. PART II - DESCRIPTION OF THE PROPOSED CREDIT 5. Borrower: Basutoland Amount: The equivalent in various currencies of $4.1 million. Purpose: To help finance the construction and reconstruction of a 77-mile section of the main North-South road and one feeder road 17 miles long. Amortization: The development credit would be for a period of 50 years with no amortization for 10 years. One half of one per cent of the principal amount would be payable semi-annually on January 1 and July 1 from January 1, 1976 to July 1, 1985 and one and one-half percent semi-annually thereafter to July 1, 2015. Service Charge: Three-quarters of one per cent per annum on the principal amount of the credit disbursed and outstanding. PART III - THE ECONOMY 6. A report on "The Economy of Basutoland" (EA-149a of August 6, 1965) was circulated to the Executive Directors on August 18, 1965. 7. Basutoland, land locked within the Republic of South Africa, has a population of 930,000 of which approximately one-fifth normally works in South Africa. It is among the poorest countries in Africa, with a per capita income estimated at about $60. The main economic activities are animal husbandry (sheep and goats) and subsistence agriculture. Exports (wool and mohair) have not increased during the last decade, and with generally poor and over-exploited soils in difficult terrain, agricultural output has declined. Social customs and systems of land tenure have hindered the introduction of technical improvements and modern management in both animal husbandry and agriculture. 8. Basutoland is part of the monetary and customs area of South Africa and the currency in use is the South African Rand. It does not, therefore, have a balance of payments position distinct from that of South Africa. Basutoland receives substantial financial assistance from the United Kingdom for both current and capital expenditures. Without this assistance the country would not only be unable to carry out its development program but could not support its present administrative services. While the new government has not yet formulated a development plan, the emphasis in government development spending in recent years has been on measures to control erosion, on infrastructure (particularly roads), on secondary and university education, and on technical training for farmers. 9. No great improvements can be expected in Basutoland's economy during the next few years. Dependence on external assistance is likely to continue. The United Kingdom has, therefore, provided certain assuran- ces concerning future financial support and the availability of foreign currencies to service the credit. Considering both Basutoland's inability to service debt on conventional terms and the poverty of its people, I con- sider it appropriate to provide assistance to Basutoland and to make this assistance available on IDA terms. PART IV - THE PROJECT. 10. A detailed appraisal of the project (TO-44a) is attached. 11. The proposed project consists of the engineering, construction and reconstruction of (a) a 77-mile section of the main North-South road which parallels Basutoland's western border and (b) one feeder road 17 miles long. The Morse mission of 1959 gave the highest priority to raising the most heavily traveled main roads in the territory to fully graveled all-weather standards, being convinced that reduced transport costs and savings in maintenance expenditures would fully justify the investment. In order, however, to obtain the full benefit of the invest- ment in main roads, feeder roads also needed to be improved. 12. The agricultural area affected by the project is estimated at about 450,000 acres, somewhat less than one-half of Basutolandts arable acreage. Yields are relatively low, and to improve them the Government is providing extension services and technical training, and has set up a "progressive farmers" movement to demonstrate the benefits of improved techniques. Better road connections and reduced transport costs would be important in providing farmers and livestock owners with easier access to markets, and would help to stimulate the transition from subsistence to market agriculture. In view, however, of the difficulty of measuring the potential benefits in agriculture itself, no allowance for that was made in calculating the cost/benefit ratio of the proposed project. 13. Measured by reduced vehicle-operating and road maintenance costs alone, the investment in the reconstruction of the main North- South road is estimated to yield 10 per cent, while the investment in the reconstruction of the feeder road is expected to yield 12 per cent. . The estimated cost savings are based on forecasts of traffic growth which are believed to be reasonable, but if the growth of traffic is estimated to be only half that assumed, the yield on the investment would be about 6 per cent and 7 per cent respectively. With the additional (but unquantified) agricultural and administrative benefits, theae returnscould be regarded as adequate. 14. The cost of the project is estimated to be the equivalent of U.S. $ 5.4 million. Of this total $ 4.1 million (somewhat less than the expenditures expected to be incurrred outside Basutoland) would come from the proposed credit and the remainder would be provided by the Government of Basutoland from its own budget, from a United Kingdom Exchequer loan, arfd from United Kingdom Colonial Development and Welfare funds. The credit would be disbursed as a percentage of expenditures on the project. 15. The design and supervision of construction of the main road would be carried out by consultants while the staff of the Public Works Department would be responsible for the feeder road. Construction of the paved part of the main road (67 miles) would be carried out by con- tractors selected on the basis of international competitive bidding. The Public Works Department would execute the remaining works with its own forces. PART V - LEGAL INSTRUMENTS AND AUTHORITY 16. The draft Development Credit Agreement between Basutoland and the Association, a draft letter from the United Kingdom on financial assistance to Basutoland for the project and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 17. The Development Credit Agreement modifies the Development Credit Regulations No. 1 to take account of the fact that the Borrower is a de- pendent territory of a member, and by adding a new event of suspension, viz. the occurence of a change in the nature and constitution of the Borrower which shall make it improbable that the Borrower will be able to perform its obligations under the Agreement (Section 1.02(e)). In other respects the draft Agreement conforms generally to the pattern of development credit agreements for projects of this type. Since the proposed Agreement was negotiated in early 1965, it does not incorporate the procedure subse- quently adopted whereby credit agreements will terminate if they are not made effective by a specified date unless the Association establishes a later date for that purpose. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 18. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VII - RECO MENDATION 19. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Credit to Basutoland (Road Project) in an amount equivalent to U.S. $4,100,000 RESOLVED: THAT the Association shall grant a development credit to Basutoland in an amount in various currencies equiva-. lent to four million one hundred thousand United States dollars (U.S. $4,100,000) to mature on and prior to July 1, 2015, to bear a service charge at the rate of three-fourths of one per cent (3/4 of 1%) per annum, and to be upon other terms and conditions substantially in accordance with the terms and conditions set forth in the form of Development Credit Agreement (Road Project) between Basutoland and the Association which has been presented to this meeting. George D. Woods President Attachment Washington, D. C. January 21, 1966