Honduras - Western Highway Paving Project

RESTRICTED Report No. P-545 FILE COvY This report v.as 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF HONDURAS FOR THE WESTERN HIGHWAY PAVING PROJECT May 9, 1967  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOW1ENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF HOINDURAS FOR THE WESTERN HIGHWAY PAVITG PROJECT 1. I sublnit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $8.6 million to the Republic of Honduras to assist in the financing of the Western Highway Paving Project. PART I - HISTORICAL 2. The proposed project is the fifth highwray project to be financed in Honduras by the Bank and the Association. The first loan, made in 1955, helped finance a highway maintenance project and the subsequent two loans and two credits helped to finance construction of the North Road and the W4estern Highway, the latter to gravel surface standards. A request for a loan to pave the Western Highway was received in April 1966. An appraisal mission visited Honduras in June 1966. 3. Negotiations were held in Washington during the week of March 20, 1967. The Government was represented by Mr. Ricardo Midence, Ambassador to the United States, lMr. Pedro Garcia, Vice-Miinister of Communications and Public W4orks, and technical advisers from the Ministry of Communications and Public Works. 4. The proposed loan, the seventh to Honduras, would increase the Bank's total lending in Honduras to US$39.32 million (net of cancellations). IDA has granted twro credits totalling $12.10 million (net of cancellations). The following is the sumnary of Bank loans and IDA credits in Honduras, as of April 30, 1967: Amount (US$ million) Undis- No. Year Borrower PuLrpose Bank IDA bursed 135 1955 Republic of Honduras Highway Maintenance 4.2 _ 195 1958 Repubolic of Honduras Highway Construction 5.5 - 226 1959 Empresa Nacional de Energia Electrica Power (Interim Pro- ject) 1.4 - 261 1960 Empresa Nacional de Energia Electrica Power (Caflaveral Project) 8.8 - 1 1961 Republic of Honduras Western Highway Extension 8.6 O.A 400 1965 Republic of Honduras ) (6.0 6.0 71 1965 Republic of Honduras ) North Road ( 3a5 3,0 463 1966 Empresa Nacional Portuaria Port (Puerto Cortes) 4.8 _ 4.7 Total (less cancellations) 3&.7 12.1 l14.3 of which has been repaid 6"9 Total now outstanding 23,8 Amount sold 2.2 of which has been repaid 1.7 0.5 Total now held by Bank and IDA 23^3 12.1 Total undisbursed TI57 -77 1h.3  - 2 - 5. Four Bank loans have been completely disbursed. On the remainder, disbursements are generally proceeding satisfactorily. Construction work on the North Road project has been delayed. Most recent information on costs and savings has led the Governmentts consultants to recommend a new alignment. Their proposal has been accepted by the Bank and work on the project is now expected to proceed normally. 6. The Bank has one other project in an advanced stage of consideration in Honduras, a hydro-power project which should be ready for appraisal by the middle of this year. The financing required is estimated to be of the order of US$10 million. 7. As of April 30, 1967, IFC had one active investment in Honduras of $332,250 (loan outstanding and equity) in a tannery (Empresa de Curtidos Centro Americana S. A.). PART II - DESCRIPTION OF THE PROPOSED LOAN 8. BORRaJER: Republic of Honduras M4OUNT: The equivalent in various currencies of US$8.6 million PURPOSE: To assist in financing the reconstruc- tion of 37 kms. and bituminous surfac- ing of the entire length of the Western Highway and feasibility studies for further highway development. AMPORTIZATION: 20 years including a 5-year grace period; principal repayments semi- annually from February 1, 1972 to August 1, 1987 INTEREST RATE: 6 percent per annum COPJI.IITMENT CHARGE: 3/8 of one percent per annum PART III - THE PROJECT 9. An appraisal report entitled "Honduras - Appraisal of the Western Highway Paving Project" (TO-58h) on the proposed project is attached. 10. The zone of influence of the Western Highway stretches from the El Salvador border in the south along the Guatemala border in the west to the Caribbean coast in the north. Although this region covers only about 16 percent of Honduras' total area, it is the most heavily populated. It accounts for nearly 35 percent of the population; its population growth is higher than the national average. It produces more than 40 percent of the country's major agricultural commodities, 47 percent of its total industrial output and 26 percent of its total forest production.  - 3 - 11. The Western Highway is the main channel for trade between Honduras and El Salvador. The trade between the two countries was facilitated by the construction of the Western Highway to gravel surface standards in 196h, with the help of an IDA Credit. This paving project should further assist in the movement of traffic within the Western region and between Honduras and El Salvador. 12. The project would be executed by the Highway Department (Direccion General de Caminos) of the Ministry of Communications and Public Works. The design for the construction works have been prepared by engineering consul- tants who would also supervise the construction of the project. The key personnel of the Highway Department are well qualified and with the help of the consultants should be able to execute the project satisfactorily. 13. The project consists of the reconstruction of five sections of the Western Highway between Chamelecon and La Entrada, totalling about 37 kms. in length and the paving and bituminous surfacing of the WSestern Highway between Chamelecon and the border with the Republic of El Salvador, totalling about 247 kms. in length. The project also includes feasibility studies for feeder roads in the service a-ea of the Western Highway and for the recons- truction of the Tegucigalpa - Juticalpa Highway which now carries a substantial volume of traffic connected with exploitation of forest resources. 14. Total project costs are estimated at US$12.6 million equivalent. The amount of the loan of US$8.6 million represents the presently estimated foreign exchange cost component of the project. The balance would be provided by the Government. The Project is expected to be completed by mid-1971. 15. The project has high priority in the country's road development program. Paving the W4estern Highway will reduce transport costs and prevent a rapid rise in the cost of transport and road maintenance that would other- wise occur in the near future. The rate of economic return on the investment from savings in transport costs alone ranges from 11 percent to 25 percent for various sections according to traffic volumes and terrain, with an aver- age rate of return for the project of lh percent. This does not take into account some additional benefits which are not readily quantifiable such as time savings to both passenger and freight and closer national and regional integration. 16. All construction work under the'project will be carried out by con- tracts let on the basis of international competitive bidding. The road w'lork would be divided into sections and contractors will be allowed to bid for one or more of them thereby permitting participation by smaller local firms. Dis- bursements for construction work wfill be made on a percentage basis, Direct payments will be made for the foreign eAchange cost of consultants services. PART IV - LEGAL INSTRUMENTS ANID AUTHORITY 17, The draft Loan Agreement between the Republic of Honduras and the Banlc which contains the covenants normally included in highway projects and  -4 - the Report of the Committee provided for in Article III, Section (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 18. The loan documents will be submitted for approval to the National Congress of Honduras before the Effective Date. PART V - ThE ECONOMY 19. An economic report entitled "Current Economic Position and Prospects of Honduras" (WL{-158a) was distributed to the Executive Directors on May 20, 1966. It concluded that even with reasonable effort to increase public savings in the next few years, Honduras would need external financing for about 50 percent of its public investment program and that, to reach this level, Honduras would have to obtain external financing for some 70 to 80 percent of the cost of projects eligible for external financing. It also concluded that some portion of this assistance could appropriately be sought on concessionary terms. 20. The general background for this conclusion has not changed signifi- cantly since the last report was written. Honduras, with a gross national product per capita of approximately $220, remains the poorest of the Central American republics, and one of the poorest in the Western Hemisphere. The rate of economic expansion, which in 1960-65) averaged better than 6 percent per year, reached an impressive 10 percent in 1965 due to sharp gains in export earnings, principally bananas. However, growth is likely to level off at about 5 percent per year over the next few years because of the subs- tantial completion of expansion programs for bananas and the uncertain pros- pects for coffee, two crops that account for almost two thirds of the countryts export earnings. 210 After several years of declining public investment expenditures and gross foreign borrowing, the Government during 1966 became more active in initiating new projects, largely public infrastructure. The present outlook is for a more than doubling of past investment levels in the next few years. Compared with a total public investment in 1962-65 of approximately $75 million, total investment expenditures could reach about $160 million over the period 1967-1970, of which $89 million would be expected to come from existing and new external financing. Honduras should be able to finance a reasonable share of this enlarged program. Public revenues have increased faster than expenditures in each of the past five years, so that public savings after debt amortization could cover about 45 percent of the substan- tially stepped up public investment effort over the next few years, better than the 40 percent domestic financial contribution achieved in recent years. 22, The total external public debt of Honduras in mid-1966 amounted to US$61 million. Debt service payments in 1966 were US$3.5 million, equivalent to 2.8 percent of export earnings. If the new borrowing for suitable projects of about $85 million required to complete the financing plan for 1967-1970 were all obtained on conventional terms, debt service would be raised to $7e3 million or to 5 percent of export earnings likely in 1970 and to $12.4 million  or about 6.5 percent in 1975. Such a debt service burden would be a substan- tial increase in debt burden and relatively high for a country like Honduras which is poor and has uncertain export prospectse While the debt service burden is still such as to Justify substantial new borrowing on conventional terms, the Honduran Government may, appropriately, seek to borrow for some of its needs on concessional terms to alleviate the strains on domestic savings that the rapid rise in debt service would occasion. PART VI - COMPLIANCE WITH ARTICLES OF AGR$EMENT 23. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECCMMENDATION 24. I recommend that the Executive Directors adopt the following resolu- tion: RESOLUTION NO. Approval of a Loan to the Republic of Honduras (western Highway Paving Project) in an amount equivalent to US$8,600,000 RESOLVED: THAT the Bank shall grant a loan to the Republic of Honduras in an amount in various currencies equivalent to eight million six hundred thousand United States Dollars (US$8,600,000), to mature on and prior to August 1, 1987, to bear interest at the rate of six percent (6s<) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Western Highway Paving Project) between the Republic of Honduras and the Bank, wlhich has been presented to this meeting. George D0 Woods President by S. R~ Cope 1,a1av 9, 190(7