Chile - Second Highway Maintenance Project

RESTRICTED FILE COPY Report No. P-632 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF CHILE FOR THE SECOND HIGHWAY MAINTENANCE PROJECT August 28, 1968  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPTIENT REPORT AND RECO14'ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF CHILE FOR THE SECOND HIGHWAY MAI-ITENANCE PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$11.6 million to the Republic of Chile. PART I - HISTORICAL 2. In June 1961 IDA made a credit of US$19 million for the improve- ment of roads in southern Chile and the Bank made a loan of US$6 million for highway maintenance. Both projects ran into difficulties largely be- cause of poor organization and management of the Highway Department (Vialidad) in the Ministry of Public WJorks, and in 1963 disbursements were suspended. After considerable effort by the Bank during the ensuing three years, Vialidad's organization improved and the highway maintenance project was completed in mid-1967. The road improvement project had to be revised and reduced in scope in 1967 and divided into two parts: one financed by the Chilean Government and the other by IDA. The IDA financed part was completed in the same year and the small balance remaining un- disbursed will be cancelled. 3. This financing of highway maintenance and improvement was part of a comprehensive effort by the Bank to help the transportation system of Chile. In June 1965 the Bank made a technical assistance grant of US$210,000 for the preparation of a coordinated highway program and high- way feasibility studies. In October 1965, a mission organized by the Bank and consisting of three French railroad experts visited Chile to study the operations, organization and management of Chilean State Rail- roads. On the basis of the mission's recommendations, a UNDP technical assistance grant of US$911,000 for a study of the railway organization and operations was approved, with the Bank as executing agency. This study, now under way, is closely related to the Chilean Government's plans for coordination of all modes of transport. 4. The Bank loan now proposed would help finance a continuation of the road maintenance program, which had been financed in part by a Bank loan made in June 1961, which is referred to in paragraph 2 above. Appraisal was completed in May 1968 and negotiations of the proposed loan took place at the Bank in July 1968. TLhe Chilean Government wias repre- sented by 1Mr. Luis Erazo, Director of Vialidad, which will be responsible for the execution of the project. Mr. Erazo was assisted by Mr. Jorge Burr, Minister-Counselor of the Chilean Imbassy in Washington.  5. The following is a sunmary statement of Bank loans and IDA credits to Chile as of July 31, 1968: Loan/ Amount (US$ Million) Credit Undis- No. Year Borrower Purpose Bank IDA bursed Loans fully disbursed 116.4 4 1961 R9epublic of Chile Roads 19.0 0.1 366 1963 CORFO Livestock 19.0 9.7 367 1963 GORFO Yieat & lilk Plants 3.7 2.0 431 1965 CORFO Vocational Training 2.7 0.7 479 1966 EiDESA/ORFO Power 60.0 5-.3 Total (less cancellations) 201.8 19.0 66.8 of which has been repaid to Bank and others 47.4 Total now outstanding 154.4 Amount sold 6.3 of which has been repaid 5.1 1.2 Total now held by Bank and IDA 153.2 19.0 Total undisbursed 66.7 0.1 66.8 6. In addition to the difficulties encountered in the execution of the highway projects already mentioned, two Bank loans for agriculture have presented problems. The loan of US$19 million to CORFO for livestock (366-CH) made in 1963 was initially disbursed only slowly because of lack of proper organization, credit policies and disbursement procedures: subsequently some changes were made and the rate of disbursement improved. The present Closing Date is December 31, 1968 and the disposition of the unused balance will be reviewed later this year. The loan of US$5.0 mil- lion for meat and milk plants (307-CH), also made to CORFO in 1963, en- countered difficulties: in 1966 the Closing Date was postponed to December 31, 1968 and US$1.3 million of the loan was cancelled in May 1967. Construction is now proceeding satisfactorily and should be com- pleted by the revised Closing Date. 7. The Bank has received new loan requests from 1hile for two education projects, a port project and a road construction project. During 1968, Bank missions visited Chile to assist, together with UNESCO representatives, in the preparation of one of the education projecLs, and to appraise a proposed port project.  8. IFC has made 8 investments in 4 enterprises in Chile, totalling US$10.3 million. PART II - DESCRIPTION OF TIHE PRlOPOSED LOAN 9. Borrower: Republic of Chile. Amount: The equivalent in various currencies of US$11.6 million. Purpose: To assist in financing the capital ex- penditures of a 4-year highway main- tenance program, including the acquisi- tion of maintenance, workshop and other equipment, and to provide consulting and advisory services. Amortization: In 20 years, including a 5-year grace period, *through semi-annual installments from October 1, 1973 to October 1, 1988. Interest Rate: 6-1/2 percent. Commitment Charge: 3/4 of one percent. PARiT III - THliE PROJECT 10. A detailed description of the project is given in the attached appraisal report entitled "Appraisal of a Second Highway Maintenance Project" (TO-659a). 11. The proposed project would provide for the continued improve- ment of maintenance operations, the purchase of additional maintenance, shop and other equipment, the extension and improvement of workshops, and the training of personnel. It would also cover extensive consulting services to supervise the maintenance program, to continue the supervi- sion of road improvement and to prepare a new highway construction pro- gram, including carrying out or updating feasibility studies of thirteen roads (about 610 km) and preparing detailed engineering and bidding documents for those roads which are justified for construction starting in 1969-1970. 12. The project would be executed by Vialidad, which is the most important of the seven branches of the Ministry of Public Works and Transport. In addition to designing and constructing the national high- way system, Vialidad is responsible for its maintenance. The highway maintenance functions are carried out almost exclusively with Vialidad's own forces. Vialidad's personnel are, in general, competent, but the  organization has been understaffed, largely because salaries in the public administration are lower than in private industry. The present management of Vialidad is conducting an active recruitment and training programn to overcome this deficiency. 13. An important part of the project, though minor in cost, would be the advisory services to the INinistry of Public 1Iorks and Transport on transport coordination and investment planning. For this purpose, the rLinistry would engage a qualified expert for about 1 months to provide advice and recommendations on establishing an effective sectorial planning office and on improving transport policies and planning which would involve all modes of transport. The expert would also define the scope of a much-needed transport survey, with particular emphasis on those areas where additional detailed studies are required, including the preparation of a five-year investment plan for the transport sector. The Bank will assist the itLLnistry in selecting a highly qualified expert and in drawing up terms of reference for his services. 14. The total estimated cost of the four-year maintenance program would amount to US$148 million equivalent, of which US$17 million would represent the estimated capital expenditures, and US$131 million equiva- lent the recurrent local currency cost. The proposed Bank loan would finance part of the foreign exchange component of the capital cost of the highway maintenance program, in the amount of US$1C0.2 million. The Government would finance the balance of the capital expenditures and all recurrent costs. The remaining US$1.4 million of the proposed Bank loan would cover the foreign exchange cost of the other consulting services. The Government has agreed to review withl the Bank, in advance and on an annual basis, the amounts proposed as the budgetary allocation for the four-year highway maintenance program, in order to ensure adequate financing for the proposed project. 15. The highway maintenance, workshop and other equipment for the proposed project nould be procured on the basis of international competi- tive bidding, in accordance with the Bank's procurement policies. The consulting services for supervision of the highway maintenance program are being performed by Internaational Engineering Company, an American firm which, under an amended contract with the Chilean Government, will continue the functions performed under the first Bank loan for highway maintenance. The same firm will continue to supervise the Govermnent- financed part of the road improvement project referred to in paragraph 2. A German engineering consulting firm, Xaver Dorsch Ingenieur Gesellschaft, which was engaged by the Chilean Government in November 1967 to ensure comp'letion of feasibility studies and detailed engineering for construc- tion to begin in mid-1969, is assisting in the preparation of the new highway construction program. It is proposed that retroactive financing of expenditures from November 1, 1967, be pernitted for this purpose. The amount of such financing is expected to be about US-380,000 equiva- lent.  - 5 - i6. On the basis of conservatively estimated savings in vehicle operating costs alone, the rates of economic return on the highway maintenance program would range between 12 and 45 percent, depending on the types of roads. 17. Although the economic life of the maintenance equipment to be procured under the program might indicate a shorter term, I consider the proposed term of 2C years, including a 5-year grace period, justified in view of Chile's balance of payments prospects and external debt situation. PART IV - LBGAL ITST2UiIENTS AND AUTHORITY 18. The draft Loan Agreement between the Republic of Chile and the Bank and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 19. The draft Loan Agreement contains provisions generally used in highway maintenance projects. PART V - THE ECONOMIY 20. An economic report entitled "Economic Position and Prospects of Chile" (NH-186) is being distributed separately. 21. In looking at the Chilean economy, a distinction must be made between the near-term prospects for the economy, ihich are relatively unfavorable for a variety of reasons, including a serious drought, and the outlook for the period after 1970, when Chile's creditworthiness should be substantially improved by the expansion of copper exports and other industrial investments now under way. 22. The performance of the Chilean economy in the recent past has been mixed. There is little doubt that the Government's stabilization efforts, initiated in 1965, have failed in their main objective, primarily because the Government has been unable to resist pressures for higher in- comes and further general increases in public expenditures. Another un- favorable factor has been the environment in which the private sector, both in industry and agriculture, has been operating, partially as a result of the Government's credit, incomes and tax policies. On the balance of payments side, the short-term outlook is clouded because of the current decline in copper prices. On the positive side, the Govern- ment is to be given credit for the copper expansiQn program, for the extension of primary and secondary education, for impressive tax efforts and for skillful management of the balance of payments through adherence to flexible exchange rate policies, sound debt management and controls over domestic credit.  - 6 - 23. For the near-term, under the shadow of the forthcoming elections, it is probably unrealistic to assume that the Government will have suf- ficient political support to reverse the trend of the past two years and enable it to make significant headway towards renewed stabilization. There is indeed a real danger that an acceleration of inflation would put strong pressures on Chile's balance of payments which might be compounded by a decline in copper prices. Nevertheless, although it will be diffi- cult for the Government to enforce restrictive incomes and expenditure policies, there are fair prospects that Chile's economic performance will not deteriorate further. As the economic report points out, much will depend on what the Government. manages to do in key areas such as exchange rate policy, external debt management, incomes policy, public expenditures and policies affecting the private sector, particularly agriculture. 24. For the medium and longer-term, the outlook is more favorable. The copper expansion program and other industrial investments which already have been initiated should appreciably contribute to improved production and exports. Chile is carrying a very substantial burden of external debt (public debt service amounts to 2C percent of external re- ceipts on current account this year), but if the Government is reasonably successful in its management of the econormy, and particularly of the balance of payments and the structure of external debt, Chile should be able in the early 1970's to carry a higher external debt than at present. PART VI - COMVPLIANCE WITH ARTICLES OF AGREEMENT 25. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOENDATION 26. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of a Loan to the Republic of Chile in an amount equivalent to US$11,600,OOO for the Second Highway MIain- tenance Project RESOLVED: THAT the Bank shall grant a loan to the Republic of Chile in an amount in various currencies equivalent to eleven million six hundred thousand United States Dollars (US$11,600,000), to mature on and prior  to October 1, 1988, to bear interest at the rate of six and one-half percent (6-1/2% ) per annum, and to be upon such other terms and condi- tions as shall be substantially in accordance with the terms and con- ditions set forth in the form of Loan Agreement (Second Highway Main- tenance Project) between the Republic of Chile and the Bank, which has been presented to this meeting. Robert S. McNamara President by J. Burke Knapp Attachment Vlashington, D.C. August 28, 1968