Somalia - Highway (supplementary Credit) Project

RESTRICTED Report No. P-611 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 The report may not be published nor may it be quoted as representing their views.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 PROPOSED SUPPLEMENTARY CREDIT TO THE SOMALI REPUBLIC FOR A HIGHWAY CONSTRUCTION PROJECT June 12, 1968  INTERUqATIONAL DEVELOPMENT ASSOCIATION Report and Recommendation of the President to the Executive Directors on a Proposed Supplementary Credit to the Somali Republic for a Highwray Construction Project 1. I submit herewith the following report and recommendation on a proposed supplementary credit in an amount in various currencies equivalent to US $2.3 million to the Somali Republic to furnish a portion of the additional funds required to complete the construction of the Afgoi-Baidoa road. PART I - HISTORICAL 2. In March 1965, IDA made a credit to Somalia (7h-SO) for $6.2 million for financing a road project in participation with FED and UNDP. This credit is the only Bank Group lending to date in Somalia. The composition of the original financing of the project is tabulated below: Total IDA FED UNDP Somalia A. Afgoi-Baidoa Road 1) Construction 8.03(100%) 6.20(77.5%) 1.80(22.5%) 2) Engineering and supervision o.60 o.60 B. Maintenance Equipment and Highway Depart- ment Offices 2.75 2.75 C. Technical Assistance (Organization, staffing and operation of High- way Dept., technical training, feasibility studies for two roads and a reconnaissance study of Somalia's transportation invest- ment requirements.) 2.85 2.15 0.70 14.20(loo%) 6.20(44%) 5.15(36%) 2.15(15%) 0.70(5%) 3. Due to unforeseen difficulties in completing the approval of the contractual arrangements with the consulting engineers, a realignment of the road, and unsatisfactory progress by the consultants in design and specifications, it was not possible to invite bids for the construction  - 2 - of the Afgoi-Baidoa road until late March 1967. When the bids were opened in July, the lowest bid (from a consortium of German, British and Italian contractors) was for the equivalent of about US $10.5 million. A detailed review of bids and prices was then undertaken to determine whether any economies were possible to reduce the cost of construction. By extending the period of construction from 26 months to 36 months, by making certain modifications in bridge design, and omitting for the time being certain non- essential items (such as camel paths and watering holes, and grassing of side slopes) the cost was reduced to about $9.7 million. Any further cuts would reduce standards below the minimum necessary for the expected conditions of traffic. The inclusion of a 12% contingency allowance has brought the total cost of construction to $10.8 million, which is $2.8 million in excess of the costs as estimated in the appraisal report for the original credit (TO-431b, dated December 10, 1964). In addition, $300,000 more will be required for the supervision of construction. 4. Pursuant to Section 4.01(f) of the Credit Agreement, the Government of Somalia has the obligation to make available, at all times, funds and other resources that shall be required for carrying out the project. However, given the very strained financial situation of the Somali Govern- ment, it was considered unrealistic to expect the Government to provide more than $500,000 toward meeting the additional cost. FED informed IDA that it was unable to provide any additional funds, but that it would be prepared to cover the $300,000 additional costs of supervision by transferring this amount from the road maintenance equipment category. Fortunately, such a transfer would not impair Somalia's road maintenance efforts since facilities for renting equipment exist up to this value. 5. Under these circumstances and in order to avoid further delay in the award of the construction contract, the Association agreed to consider a supplementary credit of $2.3 million, which together with a $500,000 Government contribution, would cover the new estimate of road construction costs. Formal negotiations were concluded on this basis in Mogadiscio in the first half of June, 1968. 6. The proposed credit would be the second credit to Somalia and would increase the total IDA financing in Somalia to $8.5 million. Somalia has not received any financing from the Bank or IFC. As of May 31, 1968 no disbursements had been made under Credit 74-S0; the main construction contract was signed in early January 1968, mobilization is underway, and construction is expected to start in June/July 1968, after the end of the rainy season. 7. An appraisal report is being prepared regarding a $560,000 IDA credit for final engineering and technical assistance for the Port of Mogadiscio. This is the only other Somali project likely to be forthcoming this year. In late 1969 or early 1970, it is expected that a project for the construction of the port will be ready for consideration, and projects for further road construction and agricultural development are also possibi- lities for 1970.  -3- PART II - DESCRIPTION OF THE PROPOSED CREDIT - 8. Borrower: The Somali Republic Amount: $2.3 million equivalent in various currencies. Purpose: To meet part of the additional cost required for the construction of the Afgoi-Baidoa road, for which finance was provided previously by FED and by IDA (Credit 74-SO). Amortization: 50 years, including 10-year period of grace in semi-annual installments beginiing June 1, 1978, and ending December 1, 2018. Service Charge: 3/4 of 1% of the principal amount of the credit disbursed and outstanding. PART III - THE PROJECT 9. A report of the project entitled "Somalia - Appraisal of a Supple- mentary Credi-t for Highway Construction" (TO-655a) is attached. 10. The project will provide for the completion of construction of a two-lane bitumen surfaced road between Afgoi and Baidoa. The road will provide all-weather access to an area of considerable agricultural potential, the development of which is handicapped by inadequate access. The present road is closed to traffic, due to water logging, for two to four months per year. 11. The total cost of construction, including contingencies, is now estimated at $10.8 million. On the basis of the revised financial plan, IDA would finance $8.5 million, FED $1.8 million, and the Somali Government $500,000; any eventual savings would accrue to the benefit of IDA and Somalia in proportion to their respective contributions to the financing of the additional cost. In such an eventuality appropriate portion of the supple- mentary credit would be cancelled. Disbursements from the present credit would begin only after the amount available under Credit 74-SO has been fuilly withdrawn. The closing date under Credit 74-SO is being extended to December 31, 1970 and a closing date of December 31, 1971 is being set for the proposed Supplementary Credit. 12. Despite the increased cost, the road is expected to yield a return of about 10 per cent calculated on the basis of recent traffic estimates. This compares with the return of 8 per cent expected in 1965 when the project was first approved.  - 4 - PART IV - LEGAL INSTRUMENTS A1qD AUTHORITY 13. The Supplementary Development Credit Agreement between the Somali Republic and the Association and the Recommendation of the Committee pro- vided for in Article V, Section l(d) of the Articles of Agreement are being distributed to the Executive Directors separately. The agreement would incorporate by reference the covenants agreed under the first Credit Agree- ment for this project. 14. The development credit agreement will be submitted for ratification to the Parliament of Somalia before its effective date. PART V - THE ECONOMY 15. A report on "Current Economic Position and Prospects of Somalia" (AF-64a, dated October 2, 1967) was circulated to the Executive Directors on October 12, 1967 (R67-155). Somalia's economic performance has improved in the past few years. Production awd handling costs of bananas have been reduced with Government assistance and it is expected that the products will be competitive in the Italian market even when the trade preference there ceases. The exports of livestock and related products have shown a remark- able growith since 1960, and in 1966 surpassed that of bananas. Somalia has respected the fiscal and moneta-y commitments made under a series of IMF stand-by arrangements since 1964, when an excessive credit expansion had created balance of payments difficulties and a sharp fall in exchange reserves; by the end of 1966 both external and internal equilibrium were restored. Somalia is still dependent on budgetary support from Italy; however, in recent years this dependence has declined in percentage of budgetary expenditures. Expenditures on defense have so far been high, about one-third of the budget, but the recent improvement of relationships with Kenya and Ethiopia may reduce the pressure for such outlays. 16. The adjustment of the Somali economy to the closure of the Suez Canal has been much better than first expected. The first three months after the blocking of the Canal were difficult, but by October new shipping schedules were in effect and Somalia's international trade became normal. In the initial period of adjustment earnings were affected due to lower banana prices, but this difficulty was quickly overcome and foreign exchange earnings and Government revenue receipts were restored to their previous levels. Italy has agreed to extend its preferential treatment for Somali bananas until the end of 1969. The Somali banana exporters now charter bigger and faster ships which reach Italian markets by going around the Cape of Good Hope, taking only about two days more than the smaller and older ships took going through Suez. Shipping costs have not increased and the quality of delivered bananas has improved due to better refrigeration If the new ships continue to be used after the reopening of the Canal a reduction in unit freight costs is expected. Livestock exports are also doing well. The preliminary balance of payments for 1967 shows only a small deficit. Due to the favorable export developments and the effort of the Government to restrain expenditures, it is estimated that the budget deficit for 1967 did not exceed the originally expected level.  17. Somalia's poverty and economic performance justify further IDA assistance, and in view of her difficult financial situation the financing of a high proportion (90-100%) of project costs from external sources seems justified. PART VI - COMPLIANCE WITH ARTICLES OF AGREMEANT 18. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 19. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. IDA Approval of Development Credit to the Somali Republic in an amount equivalent to US $2,300,000 RESOLVED: THAT the Association shall grant a development credit to The Somali Republic in an amount in various currencies equivalent to Two Million Three Hundred Thousand United States dollars (US $2,300,000) to mature on and prior to December 1, 2018, 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 such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Development Credit Agreement (Road Project - Supplementary) between The Somali Republic and the Association which has been presented to this meeting. Robert S. McNamara President by J. Durke Knapp Attachment Washington, D.C. June 12, 1968